** **

**U.S. SECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

 

**Form 10-KSB**

 

**(Mark One)**

 
| **ý** | **ANNUAL  REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934** |
|------------|-------------------------------------------------------------------------------------|
|       | **For the fiscal year ended December  31, 2001**                                    |

 
| **o**                                 | **TRANSITION  REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934**                                                                                                                                                                                                                                                               |
|---------------------------------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                  | **For the transition period from                         to                 ** **        ** |
|                                  |                                                                                                                                                                                                                                                                                                                                                  |
| **Commission  File Number 000-32385** |

 

**Pacifica Bancorp, Inc.**

(Name of small businessissuer in its charter)

 

| **Washington**                                                                                                                                              |   | **91-2094365**                           |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|------------------------------------------|
| (State or other  jurisdiction of incorp3oration or organization)                                                                                            |   | (I.R.S. Employer  Identification Number) |
|                                                                                                                                                        |   |                                     |
| **Skyline  Tower, 10900 NE 4th Street, Suite 200, Bellevue, WA 98004**                                                                                      |
| (Address of principal  executive  offices)                 (Zip  Code) |
|                                                                                                                                                        |   |                                     |
| Issuer’s Telephone  Number: **(425) 637-1188**                                                                                                         |
|                                                                                                                                                        |
| Securities Registered  Pursuant to Section 12(b) of the Act: **None**                                                                                       |
|                                                                                                                                                        |
| Securities Registered  Pursuant to Section 12(g) of the Act:                                                                                                |
|                                                                                                                                                        |
| **Common  Stock**                                                                                                                                           |
| (Title of class)                                                                                                                                            |

 

Check whether the issuer (1) filed all reports required to be filed bySection 13 or 15(d) of the Exchange Act during the past 12 months (or for suchshorter period that the registrant was required to file such reports), and (2)has been subject to such filing requirements for the past 90 days. Yes ýNo o

 

Check if disclosure of delinquent filers in response to Item 405 ofRegulation S-B is not contained in this form, and no disclosure will becontained, to the best of registrant’s knowledge, in definitive proxy orinformation statements incorporated by reference in Part III of this Form10-KSB or any amendment to this Form 10-KSB. ý

 

The issuer’s revenue for fiscal year 2001 was $15,193,000.

 

The aggregate market value of common stock held by non-affiliates ofregistrant at March 1, 2002 was $16,080,000.

 

The number of shares of registrant’s common stock outstanding at March1, 2002 was 3,260,368.

 

Documents incorporated by reference and parts of Form 10-KSB into whichincorporated:

 

Registrant’s definitive Proxy Statement Dated March 25, 2002                    Part III, except all or part of Item 9 andItem 13, as indicated.

 

 

**Table ofContents**

 
| **Part I**                             |
|----------------------------------------|
|                                   | Item 1 | Business |
|                                   | Item 2 | Properties |
|                                   | Item 3 | Legal proceedings |
|                                   | Item  4 | Submission  of matters to a vote of security holders |
|                                   |   |   |
| **Part II**                            |
|                                   | Item  5 | Market  for Common Equity and Related Stockholder Matters |
|                                   | Item  6 | Management’s  Discussion and Analysis of Financial Condition and Results of  Operations |
|                                   | Item 7 | Financial Statements |
|                                   |   | Independent Auditor’s  Report |
|                                   |   | Balance Sheet |
|                                   |   | Statement of  Operations |
|                                   |   | Statement  of Changes in Stockholders’ Equity |
|                                   |   | Statement of Cash  Flows |
|                                   |   | Notes to  Financial Statements |
|                                   | Item  8 | Changes  in and Disagreements with Accountants |
|                                   |   |   |
| **Part III**                           |
|                                   | Item  9 | Directors and Executive  Officers, Promoters and Control Persons; Compliance with Section 16(a)  of the Exchange Act |
|                                   |   |   |
|                                   | Item 10 | Executive Compensation |
|                                   | Item  11 | Security  Ownership of Certain Beneficial Owners and Management |
|                                   | Item  12 | Certain  Relationships and Related Transactions |
|                                   | Item 13 | Exhibits and  Reports on Form 8-K |
|                                   |   |   |
| **Form 10-KSB Cross-Reference  Index** |

 

 

NOTE:    This annual report serves as the Bank’sannual disclosure statement under requirements of the Federal Deposit InsuranceCorporation (FDIC). This statement has not been reviewed, or confirmed foraccuracy or relevance, by the FDIC.

 

i

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**PART I**

** **

**ITEM 1.  DESCRIPTION OF BUSINESS**

** **

**General**

** **

Pacifica Bancorp, Inc. (“Pacifica” or the “Company”) is a bank holdingcompany with two subsidiaries, Pacifica Bank (the “Bank”) and Pacifica MortgageCompany (“Pacifica Mortgage”).  TheCompany was organized under the laws of the State of Washington in October 2000and is headquartered in Bellevue, Washington.

 

At a special shareholders’ meeting held on December 14, 2000,shareholders of the Bank voted for the Plan and Agreement of Reorganization(the “Plan”) to reorganize the Bank as a wholly-owned subsidiary of a bankholding company, including a two-for-one stock split.  Upon the approval of the Federal Reserve Bank of San Franciscoand the Washington State Department of Financial Institutions, Division ofBanks (the “Department”), the Plan became effective on January 1, 2001 and theCompany became the Bank’s parent company. Upon reorganization, the Bank became a wholly-owned subsidiary of theCompany and each outstanding whole share of Bank common stock was exchanged fortwo shares of the Company’s common stock. Pacifica Mortgage Company, a wholly-owned subsidiary of the holdingcompany, was formed on January 18, 2001 and offers a variety of residentialloan options to the residents of our service area.

 

The Bank is a Washington state-chartered commercial bank, the depositsof which are insured by the Federal Deposit Insurance Corporation (the“FDIC”).  The Bank commenced bankingoperations in October 1998.

 

The Company offers a full range of commercial banking services.  Pacifica’s marketing strategy and generalbusiness plan are similar to strategies that have proven successful in similarsituations involving new banks organized in the Pacific Northwest during thelast several years.  Pacifica targetssmall to mid-sized businesses, professionals, various Asian communities andcompanies doing business in Asia for commercial banking services because itbelieves that these groups may be currently under-served by other financialinstitutions.

 

Pacifica’s mission is to exceed customer, shareholder and communityexpectations in dedication, professionalism and innovation.  The Company constantly reviews products andservices in order to provide its customers more service options and betterquality.  We successfully launched ournew Internet online banking service in December 2001 and Online Bill Payservice is expected to be available to customers in the second quarter of2002.  In addition, recent bankinglegislation allows affiliations among securities, insurance, banking and otherfinancial companies and provides for the creation of financial holdingcompanies and financial subsidiaries. If an appropriate opportunity ispresented, Pacifica may elect to become a financial holding company.  Further growth through branch expansion oracquisition into other geographic and product line markets may also beconsidered as new opportunities arise. Currently Pacifica is not eligible forfinancial holding company status owing to its current regulatory status asdescribed in “Regulation and Supervision” below.

** **

The Company opened a branch office in Seattlein December 2001 and the opening was well received by the localcommunities.  This allows Pacifica toexpand its network and better service our customers in Seattle’s industrial anddowntown areas as well as the international district.  New branches do not generally become profitable for a period oftime after opening.

 

Effective July 1, 2001, Mr. Lawrence Fagan, former Executive VicePresident and Chief Lending Officer and Director, left the Company to pursueother endeavors.  Upon Mr. Fagan’sresignation, the Company entered into a severance agreement with him.  The duties and responsibilities of the ChiefLending Officer have been reorganized. Ms. Emily Yeh, Senior Vice President, and Mr. Larry Houk, recentlypromoted to

 

2

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Senior Vice President, have been appointed team leaders in charge ofloan production.  Both leaders reportdirectly to the Chief Executive Officer, Mr. Jeffery Low.  In addition, the Company hired Mr. RobRobinson, Senior Vice President and Chief Loan Quality Officer.  Mr. Robinson has over twenty years ofexperience in the area of Loan Administration and he works with Ms. CarmenMalsbury, Senior Vice President and Chief Credit Officer to improve our creditadministration.  In September, the Boardof Directors unanimously approved the promotion of Mr. John Huddleston toExecutive Vice President, Chief Financial Officer and Chief OperatingOfficer.  Mr. Huddleston has been aSenior Vice President and Chief Financial Officer of Pacifica sinceinception.  Mr. Huddleston has over20 years experience in the banking and financial management industry.

 

**Market Area**

 

The primary market area from which we attract the majority of ourcustomers is King County, Washington. Pacifica has its main office in thecentral business district of Bellevue, Washington, located approximately 10miles from Seattle, and a newly opened branch office in downtown Seattle. Wealso attract customers from the greater Bellevue area, the greater Seattle areaand from communities along the I-5 corridor from Everett to Tacoma,Washington.  Pacifica’s market area hasundergone significant business diversification, and the regional economy hasexperienced strong growth and stability in recent years.  However, the regional economy slowednoticeably during 2001, with a number of large employers including Boeing, thelargest employer in the Pacific Northwest, announcing layoffs or otherworkforce reductions. The full extent and effects of this economic slowdownwill not be fully known for some time.

 

**Competition**

 

The Company operates in a highly competitive environment, competing fordeposits, loans and other financial services with both banking institutions andnon-financial institutions.  Competitionamong financial institutions in Pacifica’s primary market area is diverse andthe strongest competition comes from commercial banks, savings banks, savingsand loan associations, and brokerage firms.

 

The offices of major banks have competitive advantages over Pacifica inthat they have high public visibility and are able to maintain advertising andmarketing activity on a much larger scale than Pacifica.  Since single borrower lending limits imposedby law are dependent upon the capital of a banking institution, the branches oflarger banks with substantial capital bases will also be at an advantage with respectto loan applications which exceed Pacifica’s legal lending limits.  However, these larger institutions generallyappear to serve a different customer base than that targeted by Pacifica, thusPacifica believes that it may be able to compete effectively for business basedupon Pacifica’s marketing plan.

 

Our management expects the number of start-up community banks toincrease because of the specialized service that such banks offer to potentialcustomers.  This phenomenon may resultin significant challenges to existing banks, including Pacifica, to maintainthe competitive level of their products and services.

 

In order to compete with the other financial institutions in itsprimary market area, Pacifica uses, whenever possible, the flexibility that isaccorded by being a locally-owned and managed community bank.  Pacifica emphasizes personal, professional,responsive, accessible, international, flexible, and innovative service.  Loan and consumer banking products andservices are packaged so that Pacifica’s loan, deposit and fee structures arecompetitive with the rest of the industry.

 

Management believes bank competition may change dramatically over thenext several years as the major regional banks continue to consolidate, whichmeans that these large financial institutions may provide incentives for theircustomers to rely less on personal types of service and instead promote the useof electronic banking.  We see internetbanking as another medium of service in addition to the traditional face-to-faceapproach.  We believe the effective useof technology is an important tool in leveling competition.  Management plans to use internet banking tobuild on our strengths, personal approach, flexibility and convenience.

 

3

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We will continue to experience increased competition from non-bankingcompanies especially in light of the recent changes in federal banking lawsthat eliminate certain barriers between banking and commercial firms.

 

**Employees**

 

At December 31, 2001, the Company employed 63 full-time equivalentemployees.  Pacifica provides a varietyof employment benefits and considers relations with its employees to be good.

 

**Regulationand Supervision**

* *

***General***

 

The Company is a bank holding company within the meaning of the BankHolding Company Act of 1956 (“BHC Act”) registered with and subject toexamination by the Board of Governors of the Federal Reserve System (the“FRB”).  The Bank is a Washingtonstate-chartered commercial bank and is subject to examination, supervision, andregulation by the Department.  The FDICinsures the Bank’s deposits and in that capacity also regulates the Bank.

 

Banking is a highly regulated industry.  Pacifica’s earnings and activities are affected by legislation,by actions of the FRB, the Department, the FDIC and other regulators, and bylocal legislative and administrative bodies and decisions of courts inWashington State.  That legislation andregulation does or may in the future:

 

•           limit Pacifica’s ability to pay dividends,

 

•           impose additional requirements on themaking, enforcement, and collection of consumer loans,

 

•              limit or expand Pacifica’spermissible activities, including Pacifica’s ability to sell mutualfunds and other uninsured investment products to customers,

 

•              limit the finance charges or otherfees or charges Pacifica can earn in such activities,

 

•              increase  Pacifica’s cost of doingbusiness by changing the laws and regulations governing the operations andtaxation of banks and other financial institutions, or otherwise,

 

•              affect the competitive balance between banks and other financial andnon-financial institutions, or

 

•              further regulate banking andfinancial services.

 

The likelihood of any such changes and their impact on us areimpossible to predict. There can be no assurance whether any such legislationor regulation will place additional limitations on Pacifica’s operations oradversely affect Pacifica’s earnings. The earnings of Pacifica are also affected by general economicconditions and the conduct of monetary policy by the U.S. government.

* *

***SupervisoryDirective***

** **

As the result of a recent examination by the FDIC and the Department,the regulators informed us that they expect to issue a supervisory directive toaddress a number of issues related to our growth and loan quality.  We expect the supervisory directive will,among other things:

 

•           temporarily limit theBank’s ability to pay dividends other than those necessary to service existingholding company debt (which in turn would limit the Company’s ability to paydividends);

 

4

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•           temporarily limit the Bank’s maximum assetsize;

 

•           require our Tier 1Leverage Capital ratio to be maintained at a level that would be typicallyrequired for a de novo bank (a newly chartered bank with less than three yearsof operations), and

 

•           require the Bank to reduce classified loansby a specified amount before December 31, 2002

 

We expect that these limitations will reduce our ability to grow as wepreviously had planned, and the regulators have informed us that thesupervisory directive would remain in place until we have met the requirementsof the directive, including but not limited to reduction of classified loans asstated above.

* *

***Recent ReformLegislation***

 

Congress enacted major federal financial institution legislation in1999.  Among other things, thelegislation allows certain affiliations among securities, insurance, bankingand other financial companies and provides for the creation of financial holdingcompanies and financial subsidiaries.

* *

***AffiliateTransactions***

 

Federal law imposes certain restrictions on transactions betweeninsured depository institutions and their nonbank subsidiaries.  With certain exceptions, federal law alsoimposes limitations on, and requires collateral for, extensions of credit byinsured depository institutions to their nonbank affiliates.  As an insured depository institution, theBank is subject to these restrictions and limitations.

* *

***Branching andInterstate Acquisitions***

 

Federal law allows (a) banks in states that do not prohibitout-of-state mergers to merge with the approval of the appropriate federalbanking agency, and (b) state banks to establish de novo branches out of theirstate if such branching is expressly permitted by the other state.

* *

***Banking Activities***

 

Federal and Washington state law and regulations govern the Bank’sminimum capital requirements, required reserves against deposits, investments,loans (including loans to directors, officers and principal shareholders),legal lending limits, mergers and consolidations, borrowings, payment ofdividends, establishment of branches and other aspects of its operations.  The Department and the FDIC also haveextensive authority to prohibit banks under their supervision from engaging inwhat they consider to be unsafe and unsound practices.

* *

***Capital AdequacyRequirements***

 

The FDIC has adopted regulations establishing minimum requirements forthe capital adequacy of insured banks, which address both risk-based capitaland leverage capital. See “Management’s Discussion and Analysis of FinancialCondition and Results of Operations — Capital.”  The FRB has also established capital adequacy requirements forbank holding companies, similar to those for banks.

* *

***Reports andExaminations***

 

Pacifica is required to file periodic reports with the FDIC, the FRB,and the Department and is subject to periodic examinations and evaluations bythose regulatory authorities. These examinations must be conducted every 12months, except that the FDIC may examine certain well-capitalized banks every18 months.  It is the policy of theDepartment to conduct joint examinations with the FDIC whenever possible.

* *

***Priority of Claims***

 

In the liquidation or other resolution of a failed insured depositoryinstitution, deposits in offices and certain claims for administrative expensesand employee compensation are afforded a priority over other general

 

5

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 unsecured claims, includingnon-deposit claims.  Such prioritycreditors would include the FDIC, which succeeds to the position of insureddepositors.

* *

***SecuritiesReporting***

 

Pacifica is subject to the information, proxy solicitation, insidertrading restrictions and other requirements of the Securities Exchange Act of1934.  Prior to December 31, 2000, theBank filed recurring reports under the Securities Exchange Act with the FDIC’sRegistration, Disclosure and Securities Information Unit, and after that date,all recurring reports relating to Pacifica Bancorp Inc. are filed with the Securitiesand Exchange Commission and are available on the SEC’s EDGAR database athttp://www.sec.gov.

 

**ITEM 2.DESCRIPTION OF PROPERTY**

 

Pacifica’s main office, where its banking and mortgage operations andadministrative functions are carried on, is located in the Skyline Tower, at10900 NE 4th Street, Bellevue, Washington 98004, in the centralbusiness district of Bellevue. Pacifica’s Seattle office, where its banking and mortgage operationsreside, is located at 705 5th Avenue South, Seattle, Washington 98104.  Pacifica currently leases approximately26,643 square feet for operations of the Bank and Pacifica Mortgage Company,and plans to rent additional space as appropriate to accommodate internalgrowth.

 

**ITEM 3. LEGAL PROCEEDINGS**

 

Pacifica from time to time may be a party to routine litigationincidental to its business.  Pacifica isnot currently a party to any litigation, the adverse determination of whichwould be likely to have a material adverse effect upon Pacifica’s businessoperations or assets.

 

**ITEM 4.SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS**

 

None.

 

6

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**PART II**

 

**ITEM 5.MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS**

 

**Initial Offering; Holding CompanyReorganization**

 

From June 1998 through January 1999, the Bank sold and issued1,507,064 shares of common stock in connection with its initial unregisteredoffering. Effective January 1, 2001, each share of the Bank’s common stock wasexchanged for two shares of the Company’s common stock pursuant to the plan ofreorganization that provided for the formation of Pacifica and thereorganization of the Bank into a holding company structure.  Also effective on January 1, 2001 the Bankbecame a wholly-owned subsidiary of the Company. Upon closing of thereorganization, the Company had 3,258,208 shares of common stock outstanding.

 

**Market for Common Equity**

 

Pacifica’s stock is restricted and is not listed on any exchange ortraded on the over-the-counter market. No broker makes a market in Pacifica’s common stock, and sales areminimal.  Due to the limited informationavailable, the following price information may not accurately reflect theactual market value of Pacifica’s shares. The following are the high and low sales prices for Pacifica’s stockbetween individual investors, for transactions known to Pacifica, during 2001and 2000 as adjusted for the two-for-one stock split effected in connectionwith the reorganization on January 1, 2001.

 
|           |   | **2001** | **2000**   | ** ** |
|----------------|--------|----------|------------|------------|
|           |   | **High** | ** ** | **Low**    | ** ** | **High** |   | **Low** | ** ** |
| First quarter  |   | $        | 10.00      |       | $ | 9.25 |   | $ | 9.25 |   | $ | 9.20 |   |
| Second quarter |   | 10.00    |       | 10.50      |   | 9.25 |   | 9.13 |   |
| Third quarter  |   | 11.05    |       | 9.00       |   | 9.25 |   | 9.25 |   |
| Fourth quarter |   | 11.00    |       | 8.00       |   | 10.00 |   | 8.00 |   |
|                |        |          |            |            |  |  |  |  |  |  |  |  |  |

 
| **Years  Ended December 31** |   |
|------------------------------|--------|
|                         |   | **2001** |   |   |   | **2000** |   |   |   |
| Total shares  traded         |   | 121,707 | (1) |   |   | 82,960 | (2) |   |   |

 

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(1)                                  Exclusiveof the exercise of stock options by existing and former employees totaling43,080 shares at $5.00 per share.

 

(2)           Exclusiveof the exercise of stock options by existing and former employees totaling21,440 shares at $5.00 per 

share, as adjusted for the two-for-one stock split,during the year.

 

As of December 31, 2001 there were approximately 576 shareholders ofrecord of Pacifica common stock.  Sinceyear-end 2001, a single shareholder, directly or indirectly, purchased 74,064shares at prices ranging from $5.50 to $6.00 per share.

** **

**Dividends**

 

Federal and applicable state banking laws and regulations limit theBank’s ability to pay dividends to the Company, and as a result, those laws andregulations indirectly limit the Company’s ability to pay dividends toshareholders.  On January 30, 2001, theCompany adopted a dividend policy that provides that the Board of Directorswill declare dividends only if the Company is considered to have adequatecapital and strong earnings.  TheCompany plans to retain earnings to support planned growth over the near termand does not anticipate paying dividends in the foreseeable future.  As discussed in “Description of Business -Regulation and Supervision” above, we expect the FDIC and the Department willrequire us to enter into a supervisory

 

7

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directive that will, among other things, limit the Bank’s ability topay dividends to the Company, with the result that the Company will be unableto pay dividends to shareholders.

 

**Stock Option Plans**

 

In order to attract and retain highly qualified personnel, the Companyhas adopted the Bank’s Employee Stock Option Plan (the “Option Plan”), whichwas approved by the Bank’s shareholders in 1998 and by Pacifica’s shareholdersin April 2001.  At the time of approval,1,000,000 shares of common stock (adjusted for the 2-for-1 split as a result ofthe reorganization effective January 1, 2001) were reserved for issuance underthe Option Plan.  Upon closing of thereorganization, each outstanding and unexercised option to purchase one shareof the Bank’s common stock was converted to an option to purchase two shares ofthe Company’s common stock, on substantially the same terms as the Option Plan.  Also in connection with the reorganization,the Option Plan was amended to cover issuances of future options by theCompany, and otherwise continues in form and substance similar to the OptionPlan as in effect before the reorganization. The Option Plan is administered by the Board of Directors of Pacifica(or a committee thereof).  The Board ofDirectors recently approved an amendment to the Option Plan, which, if approvedby shareholders, would increase the total number of shares available for issuanceunder the Option plan by 200,000 to 1,200,000. The proposed amendment has beenincluded in Pacifica’s proxy materials for the 2002 Annual Meeting ofShareholders.

 

**ITEM 6.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OFOPERATIONS**

* *

*The following discussion and analysis should be read in conjunctionwith the Financial Statements and Notes thereto presented elsewhere in thisreport.*

** **

**The following discussion includes “forward-looking statements” as thatterm is defined in the Private Securities Litigation Reform Act of 1995.  Forward-looking statements are based onmanagement’s beliefs and assumptions based on currently available information,and we have not undertaken to update these statements except as required by theSecurities Exchange Act of 1934, as amended, and the rules promulgatedthereunder.  Other than statements ofhistorical fact regarding our financial position, business strategies andmanagement’s plans and objectives for future operations are forward-lookingstatements.  When used in this report,the words “anticipate,” “believe,” “estimate,” “expect,” and “intend” and wordsor phrases of similar meaning, as they relate to Pacifica or management, areintended to help identify forward-looking statements.  Although we believe that management’s expectations as reflectedin forward-looking statements are reasonable, we cannot assure readers thatthose expectations will prove to be correct. Forward-looking statements are subject to various risks anduncertainties that may cause our actual results to differ materially andadversely from our expectations as indicated in the forward-lookingstatements.  These risks anduncertainties include our ability to maintain or expand our market share or netinterest margins, and to implement our marketing and growth strategies.  Further, actual results may be affected byour ability to compete on price and other factors with other financialinstitutions; customer acceptance of new products and services; the regulatoryenvironment in which we operate; and general trends in the local, regional andnational banking industry,****and the events ofSeptember 11, 2001 and its aftermath, asthose factors `relate to our cost of funds and return on assets.  In addition, there are risks inherent in thebanking industry relating to collectibility of loans and changes in interestrates.  Many of these risks, as well asother risks that may have a material adverse impact on our operations andbusiness, are identified in our other filings with the FDIC and the SEC.  However, you should be aware that thesefactors are not an exhaustive list, and you should not assume these are theonly factors that may cause our actual results to differ from our expectations.**

 

**Overview**

** **

**Note:**  *Theholding company reorganization was effected January 1, 2001.  Financial information prior to January 1,2001 represents Bank operations only.*

 

During the Bank’s third full year of operation, management focused oncredit quality and overall growth.  AtDecember 31, 2001, Pacifica had assets of $171.4 million, an increase of 24%from December 31, 2000.  This increasewas primarily attributable to the increase in investments and interest-bearingcash.

 

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 Stockholders’ equity was $11.8million at December 31, 2001 and $15.6 at December 31, 2000, with the declineprimarily attributable to a $4.6 million addition to our loan loss reserve anda $2.5 million charge-off on a single credit relationship.  We also repurchased 40,920 shares of theCompany’s common stock from a single shareholder for a total of $452,000.  Net loans decreased 2% to $102.3 million atDecember 31, 2001 from $104.5 million at December 31, 2000.  Securities increased by 88% to $33.2 millionat December 31, 2001 from $17.7 million at December 31, 2000.  Management also focused on deposit growth inan effort to gain market share and support overall growth objectives.  Deposits increased from $120.4 million atDecember 31, 2000 to $156.0 million at year-end 2001, an increase of $35.6million, or 30%, during 2001.

 

Return on average assets (ROA) was (1.84%) for the year 2001, 0.79% for2000, and (1.12%) for 1999.  Return onaverage stockholders’ equity (ROE) was (19.53%) for 2001, 6.15% for 2000 and(5.58%) for 1999.  The Bank’s averageequity to average assets ratio was 9.41%, 12.91% and 20.09%, respectively, for2001, 2000 and 1999.  The variousperformance ratios were negatively affected by the ($2.97) million loss in2001.  Additionally, as discussed in“Description of Business–Regulation and Supervision” above, the Company isexpected to become subject to a supervisory directive, which may limit ourability to grow in certain areas, such as total asset size.  Management has prepared actions plans,formed an Asset Quality Committee, and has taken other steps to improve creditquality, monitor capital ratios, maximize earnings, and promote stability.  We expect our rate of growth to slow fromthe high rate experienced in the first three years of operations, and our focusto shift to improving asset quality and increasing earnings.

 

***Results of Operations***

 

Pacifica’s results of operations depend to a large degree on its netinterest income.  Net interest income isthe difference between interest income, principally from loan and investmentsecurities portfolios, and interest expense, primarily on customer deposits andborrowings.  Changes in net interestincome are influenced by the level and relative mix of interest-earning assetsand interest-bearing liabilities. Interest income and expense are affected significantly by generaleconomic conditions, particularly changes in market interest rates, and bygovernment policies and the actions of regulatory authorities.

 

Pacifica also generates non-interest income, primarily through mortgage loan commissions, service charges,fees and other sources.  The primarycomponents of Pacifica’s operating expenses are compensation and employeebenefits expense, and occupancy expense.

 

Pacifica reported a net loss of $(2.97) million,or $(0.91) per share for 2001, compared to a net income of $878,000, or$0.24 per diluted share for 2000, and a net loss of $(731,000), or $(0.24) perdiluted share for 1999.  Earning assetsand the corresponding total interest income continued to grow during 2001.  Despite the significant gains on sale ofsecurities and derivatives, net income for the year 2001 decreased from2000.  The decrease was due primarily to(i) declining interest rates combined with relatively high costs for deposits,(ii) charge-off of an impaired credit and significant increases in our LoanLoss Reserve and, (iii) losses resulting from the formation and early stageoperations of Pacifica Mortgage.

*** ***

***Net Interest Income***

 

Net interest income is the difference between total interest income andtotal interest expense.  Changes in netinterest income are affected by several factors, including changes in averagebalances of earning assets and interest-bearing liabilities, changes in rateson earning assets and rates paid for interest-bearing liabilities, and thelevel of noninterest-bearing deposits and stockholders’ equity.  As Pacifica’s balance sheet grows, itslarger asset base has generated more total interest income.  Loans are the highest-yielding component ofPacifica’s earning assets.  Sinceinception, Pacifica has experienced strong loan demand.  Loans averaged 71% of Pacifica’s totalinterest-earning assets during 2001, compared to 77% during 2000.  Pacifica does not expect the yield spread tochange significantly as a result of the Pacifica Mortgage operation since itcurrently originates primarily single-family mortgage loans and the loans arebrokered to other servicing agents.  Therevenue source for Pacifica Mortgage is presently fee income only.

 

9

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Our summary average balancesheet and net interest income data for the periods are as follows:

 
|                                                     |   | **2001**                   |    | **2000**                  |   |
|----------------------------------------------------------|--------|----------------------------|---------|---------------------------|--------|
|                                                     |   | **Average  Balance**       |    | **Interest  Earned/Paid** |   | **Rate/  Yield** |   | **Average  Balance** |   | **Interest  Earned/paid** |   | **Rate/  Yield** |   |
|                                                     |   | **(Dollars in thousands)** |    |
| ASSETS                                                   |   |                       |    |
| Interest-earning assets                                  |   |                       |    |                      |   |   |   |   |   |   |   |   |   |
| Loans                                                    |   |                       |    |                      |   |   |   |   |   |   |   |   |   |
| Commercial                                               |   | $                          | 46,248  |                      | $      | 3,736 |   | 8.08 | % | $ | 32,147 |   | $ | 3,651 |   | 11.36 | % |
| Real estate                                              |   | 62,639                     |    | 5,588                     |   | 8.92 | % | 48,218 |   | 4,439 |   | 9.21 | % |
| Consumer                                                 |   | 3,442                      |    | 242                       |   | 7.02 | % | 2,868 |   | 252 |   | 8.79 | % |
| Total loans                                              |   | 112,329                    |    | 9,566                     |   | 8.52 | % | 83,233 |   | 8,342 |   | 10.02 | % |
| Fees on loans                                            |   | (479                       | )       | 643                       |   |   |   | (373 | ) | 478 |   |   |   |
| Total loans, net of fees                                 |   | 111,850                    |    | 10,209                    |   | 9.13 | % | 82,860 |   | 8,820 |   | 10.64 | % |
|                                                     |   |                       |    |                      |   |   |   |   |   |   |   |   |   |
| Investments                                              |   |                       |    |                      |   |   |   |   |   |   |   |   |   |
| Taxable                                                  |   | 23,749                     |    | 1,243                     |   | 5.23 | % | 12,150 |   | 843 |   | 6.94 | % |
| Tax-exempt                                               |   | —                     |    | —                    |   | — |   | — |   | — |   | — |   |
| Total investments                                        |   | 23,749                     |    | 1,243                     |   | 5.23 | % | 12,150 |   | 843 |   | 6.94 | % |
|                                                     |   |                       |    |                      |   |   |   |   |   |   |   |   |   |
| Interest-earning deposits with banks                     |   | 18,546                     |    | 704                       |   | 3.80 | % | 8,472 |   | 529 |   | 6.24 | % |
| Federal funds sold                                       |   | 3,354                      |    | 133                       |   | 3.97 | % | 3,343 |   | 209 |   | 6.25 | % |
| Federal Home Loan Bank stock                             |   | 261                        |    | 18                        |   | 6.85 | % | 245 |   | 17 |   | 6.94 | % |
| Cash equivalent and FHLB stock                           |   | 22,161                     |    | 855                       |   | 3.86 | % | 12,060 |   | 755 |   | 6.26 | % |
|                                                     |   |                       |    |                      |   |   |   |   |   |   |   |   |   |
| Total interest-earning assets                            |   | 157,760                    |    | 12,307                    |   | 7.80 | % | 107,070 |   | $ | 10,418 |   | 9.73 | % |
|                                                     |   |                       |    |                      |   |   |   |   |   |   |   |   |   |
| Noninterest-earning assets                               |   |                       |    |                      |   |   |   |   |   |   |   |   |   |
| Cash and due from banks                                  |   | 3,000                      |    |                      |   |   |   | 2,646 |   |   |   |   |   |
| Premises and equipment, net of depreciation              |   | 1,257                      |    |                      |   |   |   | 1,175 |   |   |   |   |   |
| Other, less allowance for loan losses                    |   | (694                       | )       |                      |   |   |   | (202 | ) |   |   |   |   |
| Total noninterest-earning assets                         |   | 3,563                      |    |                      |   |   |   | 3,619 |   |   |   |   |   |
|                                                     |   |                       |    |                      |   |   |   |   |   |   |   |   |   |
| TOTAL ASSETS                                             |   | $                          | 161,323 |                      |   |   |   |   | $ | 110,689 |   |   |   |   |   |
|                                                     |   |                       |    |                      |   |   |   |   |   |   |   |   |   |
| LIABILITIES AND STOCKHOLDERS' EQUITY                     |   |                       |    |                      |   |   |   |   |   |   |   |   |   |
| Interest-bearing liabilities                             |   |                       |    |                      |   |   |   |   |   |   |   |   |   |
| Deposits                                                 |   |                       |    |                      |   |   |   |   |   |   |   |   |   |
| NOW, savings and money market accounts                   |   | $                          | 35,421  |                      | $      | 1,261 |   | 3.56 | % | $ | 29,638 |   | $ | 1,358 |   | 4.58 | % |
| Time deposits < $100,000                              |   | 16,667                     |    | 988                       |   | 5.93 | % | 8,255 |   | 520 |   | 6.30 | % |
| Time deposits 3 $100,000                            |   | 79,669                     |    | 4,744                     |   | 5.95 | % | 47,837 |   | 3,050 |   | 6.38 | % |
| Total interest-bearing deposits                          |   | 131,757                    |    | 6,993                     |   | 5.31 | % | 85,730 |   | 4,928 |   | 5.75 | % |
|                                                     |   |                       |    |                      |   |   |   |   |   |   |   |   |   |
| Other short-term borrowed funds                          |   | 580                        |    | 28                        |   | 4.83 | % | 65 |   | 5 |   | 7.69 | % |
| Total interest-bearing liabilities                       |   | 132,337                    |    | 7,021                     |   | 5.31 | % | 85,795 |   | 4,933 |   | 5.75 | % |
|                                                     |   |                       |    |                      |   |   |   |   |   |   |   |   |   |
| Noninterest-bearing liabilities                          |   |                       |    |                      |   |   |   |   |   |   |   |   |   |
| Demand deposits                                          |   | 11,250                     |    |                      |   |   |   | 9,301 | % |   |   |   |   |
| Other liabilities                                        |   | 2,557                      |    |                      |   |   |   | 1,306 | % |   |   |   |   |
|                                                     |   | 13,807                     |    |                      |   |   |   | 10,607 | % |   |   |   |   |
|                                                     |   |                       |    |                      |   |   |   |   |   |   |   |   |   |
| Stockholders' equity                                     |   | 15,179                     |    |                      |   |   |   | 14,287 |   |   |   |   |   |
|                                                     |   |                       |    |                      |   |   |   |   |   |   |   |   |   |
| TOTAL LIABILITIES AND EQUITY                             |   | $                          | 161,323 |                      |   |   |   |   | $ | 110,6894 |   |   |   |   |   |
|                                                     |   |                       |    |                      |   |   |   |   |   |   |   |   |   |
| Net interest income and net interest spread              |   |                       |    | $                         | 5,286  |   | 2.50 | % |   |   | $ | 5,485 |   | 3.98 | % |
| Net interest margin (net interest income/earning assets) |   |                       |    |                      |   | 3.35 | % |   |   |   |   | 5.12 | % |

 

10

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Net interest income beforeprovision for loan losses for the year 2001 decreased by $199,000, or 4%, to$5.3 million, compared to an increase of $2.9 million, or 113% in 2000.  Thedecrease in net interest income in 2001 reflects the impact of rate changes onprime-based loans and the lag in repricing of time certificates ofdeposit.  On a dollar-for-dollar basis,interest-earning assets increased more than interest-bearing liabilities during2001.  Compared with 2000, averageinterest-earning assets increased approximately $50.7 million, or 47%, to$161.3 million while average interest-bearing liabilities increased $46.5million, or 54%, to $132.3 million.   Theincrease in net interest income in 2000 reflects significant growth inPacifica’s interest-earning assets, in particular loans and investments, andthe rise in interest rates during 2000. Compared with 1999, average earning assets increased approximately $44.9million, or 72%, to $107 million while average interest-bearing liabilitiesincreased $39.8 million, or 86%, to $85.8 million in 2000.  In light of the supervisory directive asdiscussed under “Description of Business–Regulation and Supervision”, we willlimit asset growth in 2002.  Given theoverall rate environment, we expect net interest income to increase during2002.

 

Net interest margin (netinterest income divided by average earning assets) was 3.35% in 2001, comparedwith 5.12% in 2000. The average yield on earning assets decreased to 7.80%during 2001 from 9.73% in 2000. Meanwhile, the average cost of interest-bearing liabilities for 2001decreased to 5.31% from 5.75% in 2000.

 

The decrease in net interest margin is primarily dueto the 475 basis point decline during 2001 in short-term interest rates, andthe fact that our interest-earning assets have been repricing more quickly thanour interest-bearing liabilities. During 2001, Pacifica lowered its cost ofdeposits, however, the effect of the lowering of deposits cost will lag theeffect of reduced loan yields.  AtDecember 31, 2001, Pacifica had $103.7million in time certificates of deposits.  Approximately $34.7 million of those timecertificates of deposit are expected to reprice in the first quarter of 2002,which management believes will have a positive impact on our net interestmargin for subsequent financial quarters.

** **

To a large extent, the assetyields and cost of funds reflect the level of interest rates as set by theFederal Reserve Board and the competitive nature of the financial servicesindustry.  Currently, Pacifica’s assetstend to track the prime rate and reprice more quickly than itsliabilities.  Therefore, net interestmargin usually increases in a rising interest rate environment.  In contrast, Pacifica may experiencedecreasing net interest income as a result of “rate squeeze” caused by thissame principle in periods of falling interest rates, as it is now.  Management continually monitors Pacifica’smix of interest-earning assets and interest-bearing liabilities to maintain anappropriate balance.

 

Average loans (net of deferred loan fees) wereapproximately $111.9 million in 2001, up $29 million from $82.9 million in2000. Loans grew at a faster pace during the first half of the year.  Due to the amount of loan payoffs and slowergrowth in new loan originations during the last quarter of 2001, net loans asof year-end 2001 were approximately the same as year-end 2000, yet the averagebalance for the year was higher.  Theyield on the loan portfolio (net of deferred loan fees) averaged 9.13% in 2001,compared to 10.64% in 2000.  The decreasein loan yield is consistent with the drop in interest rates.  Meanwhile, ourdeposits tend to reprice slower than our loans. During 2001, average interest-bearing deposits were $131.8 million, anincrease of $46 million compared to 2000. During 2001, average interest-bearing deposits were $85.7million, an increase of $39.8 million compared to 1999.  The cost of interest-bearing deposits decreased from 5.75% for 2000 to 5.31%for 2001.

 

Income on investments, interest-earning deposits,Federal Home Loan Bank stock and federal funds sold totaled $2.1 million in2001, an increase of $501,000, or 31%, when compared to 2000.  The Yield on investments was 5.23% for 2001,as compared to 6.94% for 2000.

 

11

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*Rate/VolumeAnalysis**. *Thedollar amounts of interest income and interest expense fluctuate depending uponchanges in interest rates and upon changes in amounts (volume) of Pacifica’sinterest-earning assets and interest-bearing liabilities.  Changes attributable to (i) changes involume (changes in average outstanding balances multiplied by the priorperiod’s rate), (ii) changes in rate (changes in average interest ratemultiplied by the prior period’s volume), and (iii) changes in rate/volume(changes in rate times the change in volume that were allocated proportionatelyto the changes in volume and the changes in rate) were as follows:

 
|                                     |   | **2001 vs. 2000**                |   | **2000 vs. 1999**       |   |
|------------------------------------------|--------|----------------------------------|--------|-------------------------|--------|
|                                     |   | **Increase/(decrease) due   to** |   | **Total********Change** |   | **Increase/(decrease) due  to** |   | **Total********Change** |   |
|                                     |   | **Volume**                       |   | **Rate**                |   |   | **Volume** |   | **Rate** |   |   |
|                                     |   | **(Dollars in thousands)**       |   |
| Interest income                          |   |                             |   |                    |   |   |   |   |   |   |   |   |   |
| Loans                                    |   |                             |   |                    |   |   |   |   |   |   |   |   |   |
| Commercial                               |   | $                                | 1,323  |                    | $      | (1,238 | ) | $ | 85 |   | $ | 1,819 |   | $ | 418 |   | $ | 2,237 |   |
| Real estate                              |   | 1,290                            |   | (141                    | )      | 1,149 |   | 2,432 |   | 78 |   | 2,510 |   |
| Consumer                                 |   | 45                               |   | (55                     | )      | (10 | ) | 75 |   | 29 |   | 104 |   |
| Interest income - loans (excluding fees) |   | 2,658                            |   | (1,434                  | )      | 1,224 |   | 4,326 |   | 525 |   | 4,851 |   |
| Fees on loans                            |   | —                           |   | 165                     |   | 165 |   | 80 |   | 235 |   | 315 |   |
| Interest income - loans (including fees) |   | 2,658                            |   | (1,270                  | )      | 1,389 |   | 4,406 |   | 760 |   | 5,166 |   |
|                                     |   |                             |   |                    |   |   |   |   |   |   |   |   |   |
| Investments                              |   |                             |   |                    |   |   |   |   |   |   |   |   |   |
| Taxable                                  |   | 648                              |   | (248                    | )      | 400 |   | 463 |   | 76 |   | 539 |   |
| Tax-exempt                               |   | —                           |   | —                  |   | — |   | — |   | — |   | — |   |
| Total interest income - investments      |   | 648                              |   | (248                    | )      | 400 |   | 463 |   | 76 |   | 539 |   |
|                                     |   |                             |   |                    |   |   |   |   |   |   |   |   |   |
| Interest-earning deposits with banks     |   | 444                              |   | (269                    | )      | 175 |   | 521 |   | 1 |   | 522 |   |
| Federal funds sold                       |   | 1                                |   | (77                     | )      | (76 | ) | (855 | ) | 177 |   | (678 | ) |
| Federal Home Loan Bank stock             |   | 2                                |   | —                  |   | 2 |   | 14 |   | — |   | 14 |   |
|                                     |   | 446                              |   | (346                    | )      | 101 |   | (320 | ) | 178 |   | (142 | ) |
| Total interest income                    |   | 3,752                            |   | (1,863                  | )      | 1,889 |   | 4,549 |   | 1,014 |   | 5,563 |   |
|                                     |   |                             |   |                    |   |   |   |   |   |   |   |   |   |
| Interest expense                         |   |                             |   |                    |   |   |   |   |   |   |   |   |   |
| Deposits                                 |   |                             |   |                    |   |   |   |   |   |   |   |   |   |
| NOW, savings and money market accounts   |   | 237                              |   | (335                    | )      | (97 | ) | 577 |   | 63 |   | 640 |   |
| Time Deposits <$100,000               |   | 500                              |   | (32                     | )      | 468 |   | 329 |   | 39 |   | 368 |   |
| Time deposits 3 $100,000            |   | 1,908                            |   | (213                    | )      | 1,694 |   | 1,351 |   | 292 |   | 1,643 |   |
| Total interest expense on deposits       |   | 2,645                            |   | (581                    | )      | 2,065 |   | 2,257 |   | 394 |   | 2,651 |   |
|                                     |   |                             |   |                    |   |   |   |   |   |   |   |   |   |
| Other borrowed funds                     |   | 35                               |   | (11                     | )      | 24 |   | — |   | 4 |   | 4 |   |
| Total interest expense                   |   | 2,680                            |   | (592                    | )      | 2,088 |   | 2,257 |   | 398 |   | 2,655 |   |
|                                     |   |                             |   |                    |   |   |   |   |   |   |   |   |   |
| Net interest income                      |   | $                                | 1,072  |                    | $      | (1,271 | ) | $ | (199 | ) | $ | 2,292 |   | $ | 616 |   | $ | 2,908 |   |

 

***Noninterest Income***

 

Noninterest income increased by $2.5 million, or 595% in 2001, comparedto an increase of $174,000, or 73% in 2000. The increase in 2001 was due primarily to the $1.7 million gains on thesale of investment securities and derivatives. A new source of othernoninterest income during 2001 was the loan commissions, discount and rebateincome from Pacifica Mortgage, which totaled $652,000 for 2001.  International banking services and other feeincome also increased as a result of the successful expansion of the variousPacifica services and the increase in transaction volume.

 

12

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The following table presents a breakdown of various components ofPacifica’s noninterest income for 2001, 2000 and 1999.

 
|                                        |   | **Years Ended December 31,** |   |
|---------------------------------------------|--------|------------------------------|--------|
|                                        |   | **2001**                     |   | **Change** |   | **2000** |   | **Change** |   | **1999** |   |
|                                        |   | **(Dollars in thousands)**   |   |
| Gain on  sale of securities and derivatives |   | $                            | 1,732  |   | $ | 1,732 |   | $ | — |   | $ | — |   | $ | — |   |
| Residential  mortgage loan fee income       |   | 652                          |   | 652 |   | — |   | — |   | — |   |
| International  trade finance fees           |   | 207                          |   | 4 |   | 203 |   | 120 |   | 83 |   |
| Service  fees                               |   | 102                          |   | 50 |   | 52 |   | 35 |   | 17 |   |
| Overdraft  fees                             |   | 76                           |   | 29 |   | 47 |   | 20 |   | 27 |   |
| Credit  card fees                           |   | 43                           |   | 7 |   | 36 |   | 20 |   | 16 |   |
| ATM fees                                    |   | 14                           |   | (4 | ) | 18 |   | (3 | ) | 21 |   |
| Other fee  income                           |   | 60                           |   | 1 |   | 59 |   | (18 | ) | 77 |   |
|                                        |   | $                            | 2,886  |   | $ | 2,471 |   | $ | 415 |   | $ | 174 |   | $ | 241 |   |

 

***Noninterest Expense***

 

Noninterest expense increased $2.2 million, or 51%, in 2001, and $1.3million, or 44%, in 2000.  The increaseresulted primarily from the additional personnel costs, occupancy expense andother expenses associated with Pacifica’s growth and the formation andoperations of Pacifica Mortgage.

 

Set forth below is a schedule showing additional detail concerningincreases in the Company’s noninterest expense for 2001, 2000 and 1999:

 
|                                        |   | **Years Ended December 31,** |   |
|---------------------------------------------|--------|------------------------------|--------|
|                                        |   | **2001**                     |   | **Change** |   | **2000** |   | **Change** |   | **1999** |   |
|                                        |   | **(Dollars in thousands)**   |   |
| Compensation and  employee benefits         |   | $                            | 3,979  |   | $ | 1,261 |   | $ | 2,718 |   | $ | 929 |   | $ | 1,789 |   |
| Loan origination  costs                     |   | (241                         | )      | 32 |   | (273 | ) | (31 | ) | (242 | ) |
| Net compensation  and employee benefits     |   | 3,738                        |   | 1,293 |   | 2,445 |   | 898 |   | 1,547 |   |
|                                        |   |                         |   |   |   |   |   |   |   |   |   |
| Occupancy  expense                          |   | 977                          |   | 385 |   | 592 |   | 22 |   | 570 |   |
| Professional  services                      |   | 328                          |   | 135 |   | 193 |   | 122 |   | 71 |   |
| B&O taxes                               |   | 185                          |   | 21 |   | 164 |   | 86 |   | 78 |   |
| Loan collection  expense                    |   | 156                          |   | 156 |   | — |   | — |   | — |   |
| Office supplies,  stationary and printing   |   | 146                          |   | 40 |   | 106 |   | 22 |   | 84 |   |
| Advertising,  marketing and bank promotions |   | 120                          |   | 22 |   | 98 |   | 29 |   | 69 |   |
| Travel and  entertainment                   |   | 112                          |   | (16 | ) | 128 |   | 30 |   | 98 |   |
| Director fees                               |   | 106                          |   | 2 |   | 104 |   | 83 |   | 21 |   |
| Couriers,  postage and mail service         |   | 92                           |   | 15 |   | 77 |   | 26 |   | 51 |   |
| Data processing                             |   | 86                           |   | (5 | ) | 91 |   | 12 |   | 79 |   |
| Telephone and  data communications          |   | 78                           |   | 21 |   | 57 |   | 16 |   | 41 |   |
| Other expenses                              |   | 371                          |   | 121 |   | 250 |   | (41 | ) | 291 |   |
| Total  noninterest expense                  |   | $                            | 6,495  |   | $ | 2,190 |   | $ | 4,305 |   | $ | 1,305 |   | $ | 3,000 |   |

 

Salaries and employee benefits expenses were approximately $3.7 millionin 2001, compared to $2.4 million in 2000 and $1.5 million in 1999.  The increase was primarily a result of thegrowth in the number of employees. Pacifica had 63 full-time equivalent employees at December 31, 2001,compared with 40 and 29 full-time equivalent employees at December 31, 2000 and1999, respectively.

 

13

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Occupancy and equipment expense was $977,000 in 2001, $592,000 in 2000and $570,000 in 1999, an increase of $385,000, or 65% in 2000 and $22,000, or4%, in 2000.  The increase in occupancyand equipment expense was due primarily to the increase in building leaseexpense.  Pacifica leased additionaloffice space in March and August of 2001,and June 2000.  With the newoffice in Seattle, we expect the occupancy and equipment expense to increase in2002.

 

Total expenses, other than compensation and employee benefits andoccupancy expense, increased $512,000 in 2001 and $385,000 in 2000.  The increase is due primarily to our rapidgrowth and the reorganization costsassociated with the formation of the holding company and Pacifica MortgageCompany.

** **

**Analysis of Financial Condition**

*** ***

***InvestmentActivities***

 

Pacifica’s investment portfolio is an importantsource of liquidity and interest income. The Company’s total investment portfolio includes Federal Home Loan Bankof Seattle (“FHLB”) stock, available-for-sale securities, and time certificateswith other banks.  The Company had noheld-to-maturity or trading securities. All securities are classified as available-for-sale and are carried atfair value.  Securities are used bymanagement as part of its asset/liability management strategy and may be soldin response to interest rate changes or significant prepayment risk.

 

The Company’s total investment portfolio increased by $14.8 million, or76%, from $19.5 million at year-end 2000 to $34.3 million at year-end2001.  Pacifica is a stockholder in theFederal Home Loan Bank of Seattle (“FHLB”). As of December 31, 2001 and 2000, Pacifica owned FHLB stock of $273,000and $255,000, respectively. Available-for-sale securities were $33.2 million and $17.7 million atDecember 31, 2001 and 2000, respectively. Purchases totaled $95.4 million while maturities and principal paydownstotaled $80.2 million.  As of December31, 2001, U.S. government agency securities comprised 77% of the securitiesportfolio, with mortgage-backed securities at 23%.  During 2001, the Company soldavailable-for-sale securities of approximately $66.9 million and realized gainsof $969,000.  For further information oninvestments securities, see Note 2 to the consolidated financial statements.

*** ***

***Lending Activities***

* *

*Loan Portfolio Composition**.*Pacificaoriginates a wide variety of loans to small and medium-sized businesses andindividuals.  The following table setsforth the loan portfolio composition by type of loan at the dates indicated:

 
|                             |   | **December 31,**           |    |
|----------------------------------|--------|----------------------------|---------|
|                             |   |                       |    | **%****of** |   |   |   | **%****of** |   |
|                             |   | **2001**                   |    | **Total** |   | **2000** |   | **Total** |   |
|                             |   | **(Dollars in thousands)** |    |
| Commercial and  industrial loans |   | $                          | 41,673  |   | 39 | % | $ | 46,161 |   | 35 | % |
| Real estate -  construction      |   | 26,071                     |    | 25 | % | 23,173 |   | 24 | % |
| Real estate -  mortgage          |   | 35,864                     |    | 34 | % | 33,441 |   | 37 | % |
| Consumer and  other              |   | 2,665                      |    | 3 | % | 3,519 |   | 4 | % |
|                             |   | 106,273                    |    | 100 | % | 106,294 |   | 100 | % |
| Less deferred  loan fees         |   | (395                       | )       | 0 | % | (472 | ) | 0 | % |
| Total loans                      |   | $                          | 105,878 |   | 100 | % | $ | 105,822 |   | 100 | % |

 

At December 31, 2001, total loans increased by $56,000 to $105.9million from $105.8 million at year-end 2000. Real estate construction and real estate mortgage loans were thecategories that contributed to the majority of the increase.  Real estate construction loans increased$2.9 million, or 13%; real estate mortgage loans increased $2.4 million, or 7%;commercial loans decreased $4.5 million, or 10%; while consumer and other loansdecreased $854,000, or 24%.  Loanbalances remained flat due to the amount of repayments

 

14

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approximated the amount of new originations.  Funding for the growth in loans in 2001 came from an increase ininterest-bearing liabilities and from noninterest-bearing sources of funds.

 

Pacifica’s commercial loan portfolio includes loans to businesses inthe manufacturing, wholesale, retail, service, agricultural, and constructionindustries, primarily located in King County. As of December 31, 2001, there was no significant concentration of loansto any particular group of customers engaged in similar activities and havingsimilar economic characteristics. However, due to the limited scope of Pacifica’s primary market area, asubstantial geographic concentration of credit risk exists and, as a result,localized economic downturns can be expected to have a more pronounced effecton Pacifica than they might with a similar but more geographically diversifiedbusiness.

 

***Asset Quality***

** **

*Nonperforming Assets**.*Nonperformingloans include nonaccrual loans, restructured loans, and loans 90 days or morepast due.  Pacifica’s policy generallyis to place loans on a nonaccrual basis when, in management’s judgment, thecollateral value and the financial condition of the borrower do not justify accruinginterest as an income item. Interest previously recorded but not deemedcollectible is reversed and charged against current income.  Interest income on these loans is thenrecognized when collected. Restructured loans are loans for which the contractualinterest rate has been reduced or other concessions are granted to the borrowerbecause of deterioration in the financial condition of the borrower resultingin the borrower’s inability to meet the original contractual terms of theloans. At December 31, 2001 and 2000, the Company had nonperforming loans of$478,000 and $22,000, respectively, . The Bank had no nonperforming loans at December 31, 1999.

 

Potential problem loans are loans that are performing and are notnonaccrual, past due, or restructured, but about which there are significantdoubts about the borrower’s ability to comply with the present repayment termsin the future and which later may be included in nonaccrual, past due, orrestructured loans.  At December 31,2001, we had $7.8 million in potential problem loans, including $3.6 million inimpaired loans (see Note 3 to the Consolidated Financial Statements).  $1.7 million included in potential problemloans and impaired loans at December 31, 2001 have been moved to nonaccrualstatus subsequent to year-end.

 

The following table sets forth, at the dates indicated, informationwith respect to potential problem loans and nonperforming loans of the Company:

 
|                                                  |   | **December 31,**           |   |
|-------------------------------------------------------|--------|----------------------------|--------|
|                                                  |   | **2001**                   |   | **2000** |   | **1999** |   |
|                                                  |   | **(Dollars in thousands)** |   |
| Potential  problem loans                              |   | $                          | 7,849  |   | $ | — |   | $ | — |   |
|                                                  |   |                       |   |   |   |   |   |
| Nonperforming  loans:                                 |   |                       |   |   |   |   |   |
| Nonaccrual loans                                      |   | $                          | 478    |   | $ | — |   | $ | — |   |
| Restructured  loans                                   |   | —                     |   | — |   | — |   |
| Accruing loans  90 days or more past due              |   | —                     |   | 22 |   | — |   |
| Total  nonperforming loans                            |   | 478                        |   | 22 |   | — |   |
| Other real estate  owned                              |   | —                     |   | — |   | — |   |
| Total  nonperforming assets                           |   | $                          | 478    |   | $ | 22 |   | $ | — |   |
|                                                  |   |                       |   |   |   |   |   |
| Nonperforming  loans as a percentage of total loans   |   | 0.45                       | %      | 0.02 | % | 0.00 | % |
| Nonperforming  assets as a percentage of total assets |   | 0.28                       | %      | 0.02 | % | 0.00 | % |

 

15

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*Analysis of Provision and Allowancefor Loan Losses**.*

 

The allowance for loan losses is established to absorb potential loanlosses inherent in a loan portfolio. The allowance is increased by a provision for loan losses, and reducedby loans charged off (net of recoveries). The provision for loan losses is charged directly against earnings inthe corresponding period.  On thebalance sheet, the loan loss reserve is applied against gross loans to arriveat net loans outstanding.  If a loan ischarged off, the charge-off reduces net loans on the balance sheet only to theextent the charge-off exceeds the established reserve; from the incomestatement perspective, the charge-off in excess of the reserve ordinarily ischarged against operating revenues.

 

Management reviews and evaluates the appropriate level of the allowancefor loan losses and determines the provision on a monthly basis.  The evaluation by management includesconsideration of changes in the nature and volume of the portfolio as well ascommitments and standby letters of credit, overall portfolio quality, past loanloss experience, peer bank experience, loan concentrations, specific problemloans, internal and external credit examination results, and the currenteconomic conditions that may affect borrowers’ ability to pay.  Management monitors delinquenciesclosely.  Loan loss reserve calculationsand delinquencies are reported to the Board of Directors and the Bank LoanCommittee at least monthly.  In addition,regulatory agencies, as an integral part of their examination process,periodically review the estimated losses on loans.  Such agencies may require Pacifica to increase the allowance forloan losses based on their judgment about information available to them at thetime of their examination.

 

The relatively young age of Pacifica’s loan portfolio makes itdifficult to determine the degree of loss that ultimately may reside in itsloan portfolio.  Management has madeprovisions for loan losses aimed at maintaining a reasonable reserve againstoutstanding loans while the portfolio is in its early growth stage.

 

While management believes that it uses the best information availableto determine the allowance for loan losses, unforeseen market conditions could resultin adjustments to the allowance for loan losses, and net income could besignificantly affected, if circumstances differ substantially from theassumptions used in making the final determination.

 

Pacifica’s loan loss analysis procedure emphasizes early detection ofloan losses.  During 2001, the Companydowngraded a $2.2 million credit relationship (net of the $444,000participation sold) to nonaccrual status. The Company charged off $1.1 million on this credit in May 2001.  In addition, in October 2001, the Companyrepurchased the $444,000 participation previously sold to an independentbank.  The Company took an additionalcharge-off of $1.4 million on the remaining outstanding portion of this loan inSeptember 2001, bringing the balance on this credit to zero.  The Company’s allowance for loan losses wassignificantly increased through additional provisions since year-end 2000.  A total of $4.6 million has been added tothe loan loss reserve during 2001. Management believes the current level of allowance for loan losses isadequate to provide against the potential loss that resides in the loanportfolio, and that the problems with this credit are unique to the specificborrower.

 

In October 2001, the Company filed a bond claim of approximately $2.5million with its insurance company in connection with the impaired creditreferred to above.  It is uncertainwhether the Company will be able to collect any of this claim from theinsurance company.

 

In light of the charged-off credit and to guard against the perceivedweakening economy, the Company has hired independent loan reviewers to examineour loan portfolio.  Management hasfollowed up on recommendations of the reviewers and enhanced creditadministration.  In addition, theCompany hired an experienced Credit Quality Officer in April 2001 to furtherstrengthen credit administration.

 

At December 31, 2001, the allowance for loan losses was $3.5 million,or 3.33% of total loans, compared to $1.3 million, or 1.23% of total loans, atDecember 31, 2000. The $2.2 million increase from year-end 2000 includesadditional provisions to the allowance for loan losses of $4.6 million,charge-offs of $2.6 million, and a recovery of $141,000.  The increase in the provision for loan losswas based upon management’s

 

16

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assessment of changing general economic conditions and the Company’sloan portfolio.  During the fourthquarter, the Company experienced increased deterioration in its loan portfoliobrought about in part by the weakening local economy.  In anticipation of the continued softening of the local economyand its impact on the Company, the Company increased its loan loss reserve byan additional $1.5 million.  Managementbelieves the current balance of the allowance for loan losses is adequate toprovide against current potential loss. We anticipate that additional increases to the allowance for loan lossesmay continue during 2002, particularly as we address the effects of thesupervisory directive and as we evaluate the general strength of the local andregional economy.

 

Partially offsetting this negative impact on earnings from theadditional provisions are gains resulting from the sale of securities and thesale of interest rate swaps.  During2001, gains of approximately $969,000 were realized from the sale of securitiesand gains of $763,000 were realized from the sale of interest rate swaps.

 

The following table shows the allocation of the allowance for loanlosses at December 31, 2001 and 2000:

 
|                             |   | **December 31,**           |   |
|----------------------------------|--------|----------------------------|--------|
|                             |   | **2001**                   |   | **2000** |   |
|                             |   | **$****  Amount**     |   | **%** |   | **$****  Amount** |   | **%** |   |
|                             |   | **(Dollars in thousands)** |   |
| Balance  applicable to:          |   |                       |   |
| Commercial and  industrial loans |   | $                          | 1,906  |   | 54 | % | $ | 575 |   | 44 | % |
| Real  estate–construction   |   | 576                        |   | 16 | % | 287 |   | 22 | % |
| Real  estate–mortgage       |   | 1,021                      |   | 29 | % | 405 |   | 31 | % |
| Consumer and  other              |   | 27                         |   | 1 | % | 39 |   | 3 | % |
| Total                            |   | $                          | 3,530  |   | 100 | % | $ | 1,306 |   | 100 | % |

 

The following table provides an analysis of Pacifica’s allowance forloan losses: 

 
|                                                           |   | **December 31,**           |       |
|----------------------------------------------------------------|--------|----------------------------|------------|
|                                                           |   | **2001**                   | ** ** | **2000** | ** ** | **1999** | ** ** |
|                                                           |   | **(Dollars in thousands)** |       |
| Total loans                                                    |   | $                          | 105,878    |   | $ | 105,822 |   | $ | 58,859 |   |
| Average loans                                                  |   | 111,850                    |       | 82,860 |   | 39,043 |   |
|                                                           |   |                       |       |   |   |   |   |
| Balance of  allowance for loans losses  at beginning of period |   | $                          | 1,306      |   | $ | 589 |   | $ | 40 |   |
| Charge-offs:                                                   |   |                       |       |   |   |   |   |
| Commercial loans                                               |   | (2,559                     | )          | — |   | — |   |
| Recoveries:                                                    |   |                       |       |   |   |   |   |
| Commercial Loans                                               |   | 141                        |       | — |   | — |   |
| Net charge-offs                                                |   | (2,418                     | )          | — |   | — |   |
| Provision  charged to expense                                  |   | 4,642                      |       | 717 |   | 549 |   |
| Balance of  allowance for loan losses at end of period         |   | $                          | 3,530      |   | $ | 1,306 |   | $ | 589 |   |
|                                                           |   |                       |       |   |   |   |   |
| Net charge-off  to average loans outstanding                   |   | 2.16                       | %          | 0.00 | % | 0.00 | % |
| Allowance as a  percentage of total loans                      |   | 3.33                       | %          | 1.23 | % | 1.00 | % |
| Allowance as a  percentage of nonperforming loans              |   | 738                        | %          | 6016 | % | N/A |   |

 

*Maturities and Sensitivities ofLoans to Changes in Interest Rate**. *For information on the aggregate contractual maturities ofloans as of December 31, 2001 and the amounts of variable and fixed rate loansthat mature after one year, see Note 3 of the consolidated financialstatements.

 

17

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***Premises andEquipment***

 

During 2001, fixed assets increased by $934,000.  The net change included purchases of $1.3million and depreciation expenses of $390,000. Such expenditures included the remodeling costs for the Seattle officeand additional office spaces in the Bellevue office, and additionalexpenditures for furniture, equipment and software. The Company’s capitalexpenditures are expected to slow down in 2002.

 

***Liquidity andSources of Funds***

 

The primary function of asset/liability management is to ensureadequate liquidity and maintain an appropriate balance between interestsensitive earning assets and liabilities. Liquidity management focuses on Pacifica’s ability to meet the financialdemands of depositors, creditors and borrowers.  Pacifica actively manages the levels, types and maturities ofearning assets in relation to the funding sources available to ensure thatadequate funding will be available at all times. Management believes thatPacifica’s liquidity is adequate to meet operating and funding requirements.

 

Pacifica’s primary sources of new funds are customer deposits.  These funds, together with loan repayments,retained earnings, equity, and other borrowed funds are used to make loans, toacquire investment securities and other assets, and to fund continuingoperations. Pacifica also may use advances from the Federal Home Loan Bank andborrowings at correspondent banks to meet short-term liquidity needs.

 

***Deposit****s*

 

Pacifica offers various types of depositaccounts, including checking, savings, money market accounts and a variety ofcertificate of deposit accounts. Total deposits increased 30% to $156 millionat December 31, 2001, compared to $120.4 million at December 31, 2000.  Pacifica seeks to attract deposits in itsprimary market area by pricing its products competitively and deliveringquality service.

 

Time deposits accounted for 73% of the total interest-bearing depositsat December 31, 2001, and 71% at December 31, 2000.  Money market deposits made up 23% of the total interest-bearingdeposits at December 31, 2001 and 2000. NOW accounts made up 4% and 6% of theinterest-bearing deposits at December 31, 2001 and 2000, respectively.

 

Noninterest-bearing deposits were $13.2 million at December 31, 2001,an increase of $4.2 million, or 47% compared to year-end 2000.  During the same period, interest-bearingdeposits increased $31.4 million, or 28%, to $142.8 million, with the growthbeing attributable to time deposits and money market deposits.  During the year 2001, money market accountsincreased $7.6 million to $33.3 million, time deposits increased $24.8 millionto $103.7 million, while NOW accounts decreased $1.1 million to $5.6 million.

 

The following table sets forth the average balances outstanding andaverage interest rates for each major category of our deposits for the periodsindicated:

 
|                                 |   | **Years ended December 31,** |    |
|--------------------------------------|--------|------------------------------|---------|
|                                 |   | **2001**                     |    | **2000** |   |
|                                 |   | **Average  balances**        |    | **Average  yield** |   | **Average  balances** |   | **Average  yield** |   |
|                                 |   | **(Dollars in thousands)**   |    |
| Interest-bearing  demand accounts    |   | $                            | 5,396   |   | 2.87 | % | $ | 4,821 |   | 2.74 | % |
| Money market  accounts               |   | 29,836                       |    | 3.69 | % | 24,706 |   | 4.95 | % |
| Savings accounts                     |   | 189                          |    | 2.73 | % | 111 |   | 3.75 | % |
| Certificates of  deposit             |   | 96,336                       |    | 5.95 | % | 56,092 |   | 6.36 | % |
| Total  interest-bearing accounts     |   | 131,757                      |    | 5.31 | % | 85,730 |   | 5.75 | % |
| Noninterest-bearing  demand accounts |   | 11,249                       |    | — |   | 9,301 |   | — |   |
| Total average  deposits              |   | $                            | 143,007 |   | 4.89 | % | $ | 95,031 |   | 5.19 | % |

 

18

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The only deposit category with stated maturity dates is certificates ofdeposit.  At December 31, 2001, Pacificahad $103.7 million in certificates of deposit. Approximately 98.2% of Pacifica’s certificates of deposits renewautomatically at maturity, unless otherwise directed by the customer.

 

The following table sets forth the amounts and maturities ofcertificates of deposit with balances of $100,000 or more at December 31, 2001:

 
|                    |   | **December 31,  2001**     |   |
|-------------------------|--------|----------------------------|--------|
|                    |   | **(Dollars in thousands)** |   |
| Remaining  maturity:    |   |                       |   |
| Less than three  months |   | 29,064                     |   |
| Three to six  months    |   | 15,344                     |   |
| Six to twelve  months   |   | 36,411                     |   |
| Over twelve  months     |   | 6,162                      |   |
|                    |   | $                          | 86,981 |   |
|                         |        |                            |        |  |

 

***Borrowings***

 

At December 31, 2001 and December 31, 2000, Pacifica had demand notesissued to the U.S. Treasury in the amount of $247,000 and $376,000,respectively, representing the Treasury Tax and Loan note balance.  Pacifica obtained a $3 million one-yearrevolving line of credit with an independent third party bank in September2001.  The line of credit iscollateralized by the Company’s Pacifica Bank stock.  Interest on this line is at the bank’s prime rate plus 0.75% andis paid quarterly. Borrowings under this line of credit totaled $1.1 million atDecember 31, 2001.

* *

***Capital***

 

Pacifica’s stockholders’ equity at December 31, 2001 was $11.8 million,compared with $15.6 million at year-end 2000. Shareholders’ equity was 7% and 11% of total assets at December 31, 2001and 2000, respectively.

 

The primary reasons for the decrease in the Company’s stockholders’equity since year-end 2000 were the net loss for the year, a repurchase of theCompany’s common stock and a decrease in accumulated other comprehensiveincome.  The increase in accumulateddeficit is due primarily to a net loss of $2.97 million in 2001.  During 2001, Pacifica employees exercised43,080 shares of stock options, which increased the common stock by$216,000.  In September 2001, theCompany made an isolated repurchase of 40,920 shares of its outstanding commonstock at a purchase price of $452,000, or $11.05 per share, from a shareholder.  Accumulated other comprehensive income was$108,000 as of December 31, 2001, a decrease of $628,000 compared toaccumulated other comprehensive income of $736,000 at year-end 2000.  The decrease represents a reduction of$348,000 in unrealized gains on available-for-sale securities and a decrease of$280,000 in unrealized gains on cash flow hedge, net of tax effect.

 

Pacifica and the Bank are subject to minimum capital requirements underbanking regulations for bank holding companies and banks.  Under the risk-based capital guidelines,risk percentages are assigned to various categories of assets and off balancesheet items to calculate a risk-adjusted capital ratio.  Tier I capital generally consists of commonshareholders’ equity (which does not include unrealized gains and losses onsecurities), less goodwill and certain identifiable intangible assets, whileTier II capital also includes the allowance for loan losses and subordinateddebt, both subject to certain limitations. The leverage capital guidelines require banks to maintain a minimumratio of Tier I capital to average total adjusted assets (“leverage ratio”) of4%.

 

The FDIC may establish higher minimum requirements if, for example, abank has previously received special attention or has a high susceptibility tointerest rate risk.  The supervisorydirective discussed in “Description of Business - Regulation and Supervision”is expected to require our Tier 1 Leverage Capital ratio to be maintained at alevel that would be typically required for a de novo bank (a newly charteredbank with less than three years of operations). Banks with capital ratios belowthe required minimum are subject

 

19

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to certain administrative actions, including the termination of depositinsurance upon notice and hearing or a temporary suspension of insurancewithout a hearing in the event the institution has no tangible capital.

 

The FDIC has established qualifications necessary to be classified as awell-capitalized bank, primarily for assignment of FDIC insurance premiumrates. Pacifica’s capital ratios exceeded the regulatory capital requirementsand qualified as “well-capitalized” at December 31, 2001 and 2000.

 

See Note 8 of the consolidated financial statements for information onthe current regulatory requirements for capital ratios that are applicable tothe Company and the Bank, and their respective capital ratios at December 31,2001 and 2000.

 

**Asset/Liability Management**

 

Pacifica maintains an asset/liabilitymanagement policy that provides guidelines for controlling exposure to interestrate risk.  The guidelines directmanagement to assess the impact of changes in interest rates upon both earningsand capital.  The guidelines further providethat in the event of an increase in interest rate risk beyond preestablishedlimits, management will consider steps to reduce interest rate risk toacceptable levels.

 

The analysis of an institution’s interestrate gap (the difference between the repricing of interest-earning assets andinterest-bearing liabilities during a given period of time) is one standardtool for the measurement of the exposure to interest rate risk.  Pacifica believes that because interest rategap analysis does not address all factors that can affect earnings performance,it should be used in conjunction with other methods of evaluating interest raterisk.

 

The following table sets forth the estimatedmaturity or repricing, and the resulting interest rate gap of Pacifica’sinterest-earning assets and interest-bearing liabilities at December 31,2001.  The amounts in the table arederived from Pacifica’s internal data and are based upon regulatory reportingformats.  Therefore, they may not beconsistent with financial information appearing elsewhere in this report thathas been prepared in accordance with generally accepted accountingprinciples.  The amounts could besignificantly affected by external factors such as changes in prepaymentassumptions, early withdrawal of deposits and competition.   For example:

 

•                                          although certain assets and liabilities mayhave similar maturities or periods to repricing, they may react differently tochanges in market interest rates;

 

•                                          the interest rates on certain types of assetsand liabilities may fluctuate in advance of changes in market interest rates,while other types may lag behind changes in market interest rates;

 

•                                          certain assets have features which restrictchanges in the interest rates of such assets both on a short-term basis andover the lives of such assets;

 

•                                          in the event of a change in market interest rates,prepayment and early withdrawal levels could deviate significantly from thoseassumed in calculating the tables; and

 

•                                          the ability of many borrowers to servicetheir adjustable-rate debt may decrease in the event of a substantial increasein market interest rates.

 

20

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|                                          |   | **December 31, 2001  Estimated Maturity or Repricing** |    |
|-----------------------------------------------|--------|--------------------------------------------------------|---------|
|                                          |   | **0-3  months**                                        |    | **4-12  months** |   | **1-5  years** |   | **Thereafter** |   | **Total** |   |
|                                          |   | **(Dollars in thousands)**                             |    |
| Interest-earning  assets                      |   |                                                   |    |   |   |   |   |   |   |   |   |
| Interest-earning  deposits                    |   | $                                                      | 26,354  |   | $ | — |   | $ | — |   | $ | — |   | $ | 26,354 |   |
| Federal funds  sold                           |   | 3,300                                                  |    | — |   | — |   | — |   | 3,300 |   |
| Investment  securities                        |   | 24,584                                                 |    | 3,087 |   | 4,695 |   | 811 |   | 33,177 |   |
| Loans                                         |   | 61,445                                                 |    | 21,928 |   | 20,540 |   | 1,965 |   | 105,878 |   |
| Total  interest-earning assets                |   | $                                                      | 115,683 |   | $ | 25,015 |   | $ | 25,235 |   | $ | 2,776 |   | $ | 168,709 |   |
| Percent of total  interest-earning assets     |   | 68.57                                                  | %       | 14.83 | % | 14.96 | % | 1.65 | % | 100.00 | % |
|                                          |   |                                                   |    |   |   |   |   |   |   |   |   |
| Interest-bearing  liabilities                 |   |                                                   |    |   |   |   |   |   |   |   |   |
| Deposits                                      |   |                                                   |    |   |   |   |   |   |   |   |   |
| NOW, savings and  money market accounts       |   | $                                                      | 39,124  |   | $ | — |   | $ | — |   | $ | — |   | $ | 39,124 |   |
| Time deposits                                 |   | 34,659                                                 |    | 61,376 |   | 7,623 |   | — |   | 103,658 |   |
| Other short-term  borrowed funds              |   | 247                                                    |    | 1,071 |   | — |   | — |   | 1,318 |   |
| Total  interest-bearing liabilities           |   | $                                                      | 74,030  |   | $ | 62,447 |   | $ | 7,623 |   | $ | — |   | $ | 144,100 |   |
| Percent of total  interest-earning assets     |   | 43.88                                                  | %       | 37.01 | % | 4.52 | % | 0.00 | % | 85.41 | % |
|                                          |   |                                                   |    |   |   |   |   |   |   |   |   |
| Rate Sensitivity  Gap                         |   | $                                                      | 41,653  |   | $ | (37,432 | ) | $ | 17,612 |   | $ | 2,776 |   | $ | 24,609 |   |
| Cumulative rate  sensitivity gap              |   | 41,653                                                 |    | 4,221 |   | 21,833 |   | 24,609 |   | — |   |
| Cumulative gap as  percentage of total assets |   | 24.31                                                  | %       | 2.46 | % | 12.74 | % | 14.36 | % | — |   |
| Total assets                                  |   |                                                   |    |   |   |   |   |   |   | 171,364 |   |

 

***Interest Rate Swaps***

 

As part of its asset/liability management,Pacifica uses interest rate swaps to hedge interest rate exposure on a portion ofits variable-rate loans.  During October2000, Pacifica entered into two interest rate swap agreements in the notionalamount of $10 million each with the objective of stabilizing cash flows, andaccordingly, net interest income, over time. Under the swap agreements, Pacifica receives a fixed rate of interest ona semi-annual basis, and pays an adjustable rate on a quarterly basis.  During April 2001, the Company sold theinterest rate swaps and realized a gain of $763,000.  Total net interest income on the swaps recognized in 2001was$57,000.  As of December 31, 2001 and2000, the accumulated unrealized gains on the cash flow hedge (net of incometaxes) were $0 and $280,000, respectively, which is included in the balance ofaccumulated other comprehensive income. See Note 14 in the consolidated financial statements.

 

***Interest RateSensitivity on Net Interest Income***

 

A number of measures are used to monitor and manage interest rate risk,including income simulations and interest sensitivity (gap) analyses.  An income simulation model is the primarytool used to assess the direction and magnitude of changes in net interestincome resulting from changes in interest rates.  Key assumptions in the model include prepayment speeds onmortgage-related assets, cash flows and maturities of other investmentsecurities, loan and deposit volumes and pricing.  These assumptions are inherently uncertain and, as a result, themodel cannot precisely estimate net interest income or precisely predict theimpact of higher or lower interest rates on net interest income.  Actual results will differ from simulatedresults due to timing, magnitude and frequency of interest rate changes andchanges in market conditions and management strategies, among otherfactors.  If interest rates graduallydecrease or increase, respectively, from current rates by 100 basis points overa twelve-month period, then Pacifica would expect:

 

•                                          adecrease in net interest income of $186,000 if rates decrease, and an increasein net interest income of $160,000 if rates increase, based on the results ofthe simulation model as of December 31, 2001, and

 

21

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•                                          adecrease or an increase in net interest income of $259,000 based on the resultsof the simulation model as of December 31, 2000, corresponding with a 100 basispoint change of the same direction.

 

**Effects of Inflation and ChangingPrices**

 

The primary impact of inflation on our operations is increasedoperating costs.  Unlike most industrialcompanies, virtually all the assets and liabilities of a financial institutionare monetary in nature.  As a result,interest rates generally have a more significant impact on a financialinstitution’s performance than the effects of general levels of inflation.  Although interest rates do not necessarilymove in the same direction or to the same extent as the prices of goods andservices, increases in inflation generally have resulted in increased interestrates.

 

**New Accounting Pronouncements**

 

See Note 19 of  the consolidatedfinancial statements.

 

**ITEM 7.  FINANCIAL STATEMENTS**

 

22

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**MOSS ADAMS LLP**

 

*Certified Public Accountants*

 

**Independent Auditor’s Report**

 

To the Board of Directors and Stockholders

Pacifica Bancorp, Inc.

 

We have audited the accompanying consolidated balance sheet of PacificaBancorp, Inc. and Subsidiaries (the “Company”) as of December 31, 2001 and2000, and the related consolidated statements of operations, changes instockholders’ equity and cash flows for each of the three years in the periodsended December 31, 2001, 2000 and 1999. These financial statements are theresponsibility of the Company’s management. Our responsibility is to express anopinion on these financial statements based on our audits.

 

We conducted our audits in accordance with auditing standards generallyaccepted in the United States of America. Those standards require that we planand perform the audit to obtain reasonable assurance about whether thefinancial statements are free of material misstatement. An audit includesexamining, on a test basis, evidence supporting the amounts and disclosures inthe financial statements. An audit also includes assessing the accountingprinciples used and significant estimates made by management, as well asevaluating the overall financial statement presentation. We believe that ouraudits provide a reasonable basis for our opinion.

 

In our opinion, the consolidated financial statements referred to abovepresent fairly, in all material respects, the financial position of PacificaBancorp, Inc. and Subsidiaries as of December 31, 2001 and 2000, and theresults of their operations and cash flows for each of the three years in theperiods ended December 31, 2001, 2000 and 1999, in conformity withaccounting principles generally accepted in the United States of America.

 
| /s/ MOSS ADAMS llp     |   |
|------------------------|--------|
|                   |
| Bellingham, Washington |
| February 1, 2002  |

 

23

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**PACIFICABANCORP, INC.**

**CONSOLIDATED BALANCE SHEET**

**DECEMBER31, 2001 AND 2000**

 
|                                                                                                                                                          |   | **2001**           |    | **2000** |   |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------------------|---------|----------|--------|
|                                                                                                                                                          |   | **(In Thousands)** |    |
| **ASSETS**                                                                                                                                                    |   |               |    |     |   |
| **CASH  AND CASH EQUIVALENTS**                                                                                                                                |   |               |    |     |   |
| Cash and due  from banks                                                                                                                                      |   | $                  | 2,559   |     | $      | 3,548 |   |
| Interest bearing  cash                                                                                                                                        |   | 25,497             |    | 5,791    |   |
| Federal funds  sold                                                                                                                                           |   | 3,300              |    | 3,090    |   |
| Total cash and  cash equivalents                                                                                                                              |   | 31,356             |    | 12,429   |   |
|                                                                                                                                                          |   |               |    |     |   |
| **INVESTMENTS**                                                                                                                                               |   |               |    |     |   |
| Interest bearing  deposits in other banks                                                                                                                     |   | 857                |    | 1,557    |   |
| Securities  available-for-sale, at fair value                                                                                                                 |   | 33,177             |    | 17,661   |   |
| Federal Home  Loan Bank stock, at cost                                                                                                                        |   | 273                |    | 255      |   |
| Total  investments                                                                                                                                            |   | 34,307             |    | 19,473   |   |
|                                                                                                                                                          |   |               |    |     |   |
| **LOANS**                                                                                                                                                     |   | 105,878            |    | 105,822  |   |
| Less allowance  for loan losses                                                                                                                               |   | (3,530             | )       | (1,306   | )      |
| Total loans, net                                                                                                                                              |   | 102,348            |    | 104,516  |   |
|                                                                                                                                                          |   |               |    |     |   |
| **OTHER  ASSETS**                                                                                                                                             |   |               |    |     |   |
| Bank premises  and equipment, net                                                                                                                             |   | 2,126              |    | 1,192    |   |
| Accrued interest  receivable                                                                                                                                  |   | 994                |    | 959      |   |
| Other                                                                                                                                                         |   | 233                |    | 81       |   |
| Total other  Assets                                                                                                                                           |   | 3,353              |    | 2,232    |   |
| **TOTAL  ASSESTS**                                                                                                                                            |   | $                  | 171,364 |     | $      | 138,650 |   |
|                                                                                                                                                          |   |               |    |     |   |
| **LIABILITIES AND STOCKHOLDERS’  EQUITY**                                                                                                                |   |               |    |     |   |
|                                                                                                                                                          |   |               |    |     |   |
| **DEPOSITS**                                                                                                                                                  |   |               |    |     |   |
| Noninterest-bearing                                                                                                                                           |   | $                  | 13,187  |     | $      | 8,995 |   |
| Interest-bearing                                                                                                                                              |   | 142,782            |    | 111,416  |   |
| Total deposits                                                                                                                                                |   | 155,969            |    | 120,411  |   |
|                                                                                                                                                          |   |               |    |     |   |
| **OTHER  LIABILITIES**                                                                                                                                        |   |               |    |     |   |
| Accrued interest  payable                                                                                                                                     |   | 1,983              |    | 1,712    |   |
| Other accrued  liabilities                                                                                                                                    |   | 297                |    | 525      |   |
| Other borrowings                                                                                                                                              |   | 1,318              |    | 376      |   |
| Total other  liabilities                                                                                                                                      |   | 3,598              |    | 2,613    |   |
| Total  liabilities                                                                                                                                            |   | 159,567            |    | 123,024  |   |
|                                                                                                                                                          |   |               |    |     |   |
| **STOCKHOLDERS’  EQUITY**                                                                                                                                |   |               |    |     |   |
| Preferred stock,  $-0-par value, 3,000,000 shares  authorized; none issued                                                                                    |   | —             |    | —   |   |
|                                                                                                                                                          |   |               |    |     |   |
| Common stock, $0  par value, 10,000,000 shares authorized, 3,260,368 and 1,629,104 shares  issued and outstanding at December 31, 2001 and 2000, respectively |   | 16,054             |    | 8,145    |   |
| Capital surplus                                                                                                                                               |   | —             |    | 8,145    |   |
| Undivided  profits (accumulated deficit)                                                                                                                      |   | (4,365             | )       | (1,400   | )      |
| Accumulated  other comprehensive income, net of tax                                                                                                           |   | 108                |    | 736      |   |
| Total  stockholders’ equity                                                                                                                              |   | 11,797             |    | 15,626   |   |
| **TOTAL  LIABILITIES AND STOCKHOLDERS’ EQUITY**                                                                                                          |   | $                  | 171,364 |     | $      | 138,650 |   |

 

*See accompanying notes to thesefinancial statements.*

 

24

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**PACIFICABANCORP, INC.**

**CONSOLIDATED STATEMENT OF OPERATIONS**

**FOR THEYEARS ENDED DECEMBER 31, 2001, 2000 AND 1999**

 
|                                               |   | **2001**                                         |   | **2000**  |   | **1999**  |   |
|----------------------------------------------------|--------|--------------------------------------------------|--------|-----------|--------|-----------|--------|
|                                               |   | **(In Thousands, except for per share amounts)** |   |
| **INTEREST**                                       |   |                                             |   |      |   |      |   |
| Loans, including  fees                             |   | $                                                | 10,209 |      | $      | 8,820     |   | $ | 3,653 |   |
| Investments and  interest-bearing deposits         |   | 1,965                                            |   | 1,388     |   | 313       |   |
| Federal funds  sold                                |   | 133                                              |   | 210       |   | 888       |   |
| Total interest  income                             |   | 12,307                                           |   | 10,418    |   | 4,854     |   |
|                                               |   |                                             |   |      |   |      |   |
| **INTEREST  EXPENSE**                              |   |                                             |   |      |   |      |   |
| Deposits                                           |   | 6,993                                            |   | 4,928     |   | 2,277     |   |
| Other borrowings                                   |   | 28                                               |   | 5         |   | —    |   |
| Total interest  expense                            |   | 7,021                                            |   | 4,933     |   | 2,277     |   |
| **NET  INTEREST INCOME**                           |   | 5,286                                            |   | 5,485     |   | 2,577     |   |
| **PROVISION  FOR LOAN LOSSES**                     |   | 4,642                                            |   | 717       |   | 548       |   |
|                                               |   |                                             |   |      |   |      |   |
| **NET  INTEREST INCOME AFTER**                     |   |                                             |   |      |   |      |   |
| **PROVISION  FOR LOAN LOSSES**                     |   | 644                                              |   | 4,768     |   | 2,029     |   |
|                                               |   |                                             |   |      |   |      |   |
| **NONINTEREST  INCOME**                            |   |                                             |   |      |   |      |   |
| Loan commissions  and related income               |   | 652                                              |   | _         |   | —    |   |
| Service fees                                       |   | 102                                              |   | 52        |   | 17        |   |
| Net gain on sale  of derivatives                   |   | 763                                              |   | _         |   | —    |   |
| Net gain on sale  of investments                   |   | 969                                              |   | _         |   | —    |   |
| Other income                                       |   | 400                                              |   | 363       |   | 223       |   |
| Total  noninterest income                          |   | 2,886                                            |   | 415       |   | 240       |   |
|                                               |   |                                             |   |      |   |      |   |
| **NONINTEREST  EXPENSES**                          |   |                                             |   |      |   |      |   |
| Salaries and  employee benefits                    |   | 3,738                                            |   | 2,445     |   | 1,547     |   |
| Occupancy and  equipment                           |   | 977                                              |   | 592       |   | 570       |   |
| Professional  services                             |   | 328                                              |   | 198       |   | 71        |   |
| State business  taxes                              |   | 185                                              |   | 64        |   | 78        |   |
| Loan collection                                    |   | 156                                              |   | —    |   | —    |   |
| Other expenses                                     |   | 1,111                                            |   | 906       |   | 734       |   |
| Total  noninterest expenses                        |   | 6,495                                            |   | 4,305     |   | 3,000     |   |
|                                               |   |                                             |   |      |   |      |   |
| **INCOME  (LOSS) BEFORE INCOME TAXES**             |   | (2,965                                           | )      | 878       |   | (731      | )      |
| **INCOME  TAXES**                                  |   | —                                           |   | —    |   | —    |   |
| **NET  INCOME (LOSS)**                             |   | $                                                | (2,965 | )         | $      | 878       |   | $ | (731 | ) |
|                                               |   |                                             |   |      |   |      |   |
| **NET INCOME (LOSS) PER SHARE OF  COMMON STOCK**   |   |                                             |   |      |   |      |   |
| Basic                                              |   | $                                                | (0.91  | )         | $      | 0.27      |   | $ | (0.24 | ) |
| Diluted                                            |   | $                                                | (0.91  | )         | $      | 0.24      |   | $ | (0.24 | ) |
|                                               |   |                                             |   |      |   |      |   |
| **WEIGHTED AVERAGE NUMBER OF SHARES  OUTSTANDING** |   |                                             |   |      |   |      |   |
| Basic                                              |   | 3,265,961                                        |   | 3,233,264 |   | 3,045,926 |   |
| Diluted                                            |   | 3,265,961                                        |   | 3,607,867 |   | 3,045,926 |   |

 

*See accompanying notes to thesefinancial statements.*

 

25

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**PACIFICABANCORP, INC.**

**CONSOLIDATED STATEMENT OF CHANGES INSTOCKHOLDERS’ EQUITY**

**FOR THEYEARS ENDED DECEMBER 31, 2001, 2000 AND 1999**

 
|                                                                                                |   | **Common Stock**   |   | **Capital  Surplus** |    | **Undivided  Profits********(Accumulated  Deficit)** |    | **Accumulated  Other  Comprehen-sive  Income (Loss)  Net of Tax** |    | **Total  Stokholders'  Equity** |    | **Compre-hensive  Income (Loss)** |    |
|-----------------------------------------------------------------------------------------------------|--------|--------------------|--------|----------------------|---------|------------------------------------------------------|---------|-------------------------------------------------------------------|---------|---------------------------------|---------|-----------------------------------|---------|
| **Shares**                                                                                          |   | **Amount**         |
|                                                                                                |   | **(In Thousands)** |   |
| **BALANCE**,  December 31,1998                                                                      |   | 1,348,119          |   | $                    | 6,741   |                                                 | 3,455   |                                                              | $       | 1,738                           |    | $                                 | —  |   | $ | 11,934 |   |   |   |
| Comprehensive  income (loss)                                                                        |   |               |   |                 |    |                                                 |    |                                                              |    |                            |    |                              |    |   |   |
| Net income  (loss)                                                                                  |   |               |   |                 |    |                                                 |    | (731                                                              | )       |                            |    | (731                              | )       | $ | (731 | ) |
| Other  comprehensive income (loss)                                                                  |   |               |   |                 |    |                                                 |    |                                                              |    |                            |    |                              |    |   |   |
| Change in  unrealized gains (loses) on available-for-sale securities, net of tax effects  of $(17)  |   |               |   |                 |    |                                                 |    |                                                              |    | (33                             | )  | (33                               | )  | (33 | ) |
| Total  comprehensive income (loss)                                                                  |   |               |   |                 |    |                                                 |    |                                                              |    |                            |    |                              |    | $ | (764 | ) |
| Common stock  issued                                                                                |   | 258,945            |   | 1,294                |    | 1,295                                                |    |                                                              |    |                            |    | 2,589                             |    |   |   |
| Stock options  exercised                                                                            |   | 600                |   | 3                    |    | 3                                                    |    |                                                              |    |                            |    | 6                                 |    |   |   |
|                                                                                                |   |               |   |                 |    |                                                 |    |                                                              |    |                            |    |                              |    |   |   |
| **BALANCE**,  December 31, 1999                                                                     |   | 1,607,664          |   | 8,038                |    | 4,753                                                |    | 1,007                                                             |    | (33                             | )  | 13,765                            |    |   |   |
| Comprehensive  income                                                                               |   |               |   |                 |    |                                                 |    |                                                              |    |                            |    |                              |    |   |   |
| Net income                                                                                          |   |               |   |                 |    |                                                 |    | 878                                                               |    |                            |    | 878                               |    | $ | 878 |   |
| Other  comprehensive income                                                                         |   |               |   |                 |    |                                                 |    |                                                              |    |                            |    |                              |    |   |   |
| Change in  unrealized gains on available-for-sale securities, net of tax effects of $252            |   |               |   |                 |    |                                                 |    |                                                              |    | 489                             |    | 489                               |    | 489 |   |
| Change in  unrealized gains on cash flow hedge, net of tax effect of $144                           |   |               |   |                 |    |                                                 |    |                                                              |    | 280                             |    | 280                               |    | 280 |   |
| Total  comprehensive income                                                                         |   |               |   |                 |    |                                                 |    |                                                              |    |                            |    |                              |    | $ | 1,647 |   |
| Transfer from  undivided profits to capital surplus (Note 8)                                        |   |               |   |                 |    | 3,285                                                |    | (3,285                                                            | )  |                            |    | —                            |    |   |   |
| Stock options  exercised                                                                            |   | 21,440             |   | 107                  |    | 107                                                  |    |                                                              |    |                            |    | 214                               |    |   |   |
|                                                                                                |   |               |   |                 |    |                                                 |    |                                                              |    |                            |    |                              |    |   |   |
| **BALANCE**,  December 31, 2000                                                                     |   | 1,629,104          |   | 8,145                |    | 8,145                                                |    | (1,400                                                            | )  | 736                             |    | 15,626                            |    |   |   |
| Comprehensive  income                                                                               |   |               |   |                 |    |                                                 |    |                                                              |    |                            |    |                              |    |   |   |
| Net income  (loss)                                                                                  |   |               |   |                 |    |                                                 |    | (2,965                                                            | )  |                            |    | (2,965                            | )  | $ | (2,965 | ) |
| Other  comprehensive income                                                                         |   |               |   |                 |    |                                                 |    |                                                              |    |                            |    |                              |    |   |   |
| Change in  unrealized gains (losses) on available-for-sale securities, net of tax effect  of ($179) |   |               |   |                 |    |                                                 |    |                                                              |    | (348                            | )  | (348                              | )  | (348 | ) |
| Change in  unrealized gains (losses) on cash flow hedge net of tax effects of ($145)                |   |               |   |                 |    |                                                 |    |                                                              |    | (280                            | )  | (280                              | )  | (280 | ) |
| Total  comprehensive income (loss)                                                                  |   |               |   |                 |    |                                                 |    |                                                              |    |                            |    |                              |    | $ | (3,593 | ) |
| Common stock  split (2-for-1, $0 par value)                                                         |   | 1,629,104          |   | 8,145                |    | (8,145                                               | )  |                                                              |    |                            |    | —                            |    |   |   |
| Common stock  retired                                                                               |   | (40,920            | )      | (452                 | )  |                                                 |    |                                                              |    |                            |    | (452                              | )  |   |   |
| Stock options  exercised                                                                            |   | 43,080             |   | 216                  |    |                                                 |    |                                                              |    |                            |    | 216                               |    |   |   |
| BALANCE,  December 31, 2001                                                                         |   | 3,260,368          |   | $                    | 16,054  |                                                 | $       | —                                                            |    | $                               | (4,365  | )                                 | $       | 108 |   | $ | 11,797 |   |   |   |
|                                                                                                     |        |                    |        |                      |         |                                                      |         |                                                                   |         |                                 |         |                                   |         |  |  |  |  |  |  |  |  |

 

*See accompanying notes to thesefinancial statements.*

 

26

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**PACIFICABANCORP, INC.**

**CONSOLIDATED STATEMENT OF CASH FLOWS**

**FOR THEYEARS ENDED DECEMBER 31, 2001, 2000 AND 1999**

 

Increase(Decrease) In Cash

 
|                                                                                     |   | **2001**           |   | **2000** |   | **1999** |   |
|------------------------------------------------------------------------------------------|--------|--------------------|--------|----------|--------|----------|--------|
|                                                                                     |   | **(In Thousands)** |   |
| **CASH  FLOWS FROM OPERATING ACTIVITIES**                                                |   |               |   |     |   |     |   |
| Net income  (loss)                                                                       |   | $                  | (2,965 | )        | $      | 878      |   | $ | (731 | ) |
| *Adjustments  to reconcile net income to net cash flows from operating activities*       |   |               |   |     |   |     |   |
| Provision for  loan losses                                                               |   | 4,642              |   | 717      |   | 548      |   |
| Net amortization  (accretion) of securities                                              |   | 97                 |   | (93      | )      | (65      | )      |
| Realized  (gain)/loss on sale of available for sale securities, net                      |   | (969               | )      | —   |   | 1        |   |
| Realized  (gain)/loss on sale of derivates                                               |   | (763               | )      | —   |   | —   |   |
| Federal Home  Loan Bank stock dividends                                                  |   | (18                | )      | (16      | )      | —   |   |
| Depreciation                                                                             |   | 390                |   | 268      |   | 282      |   |
| *Changes  in operating assets and liabilities*                                           |   |               |   |     |   |     |   |
| Interest  receivable                                                                     |   | (35                | )      | (579     | )      | (315     | )      |
| Other assets                                                                             |   | (152               | )      | (21      | )      | 88       |   |
| Interest payable                                                                         |   | 271                |   | 1,099    |   | 532      |   |
| Other  liabilities, net                                                                  |   | 95                 |   | 6        |   | (3       | )      |
| Net cash flows  from operating activities                                                |   | 593                |   | 2,259    |   | 337      |   |
|                                                                                     |   |               |   |     |   |     |   |
| **CASH  FLOWS FROM INVESTING ACTIVITES**                                                 |   |               |   |     |   |     |   |
| Net change in  interest-bearing deposits in banks                                        |   | 700                |   | (953     | )      | (604     | )      |
| Purchases of  available-for-sale investment securities                                   |   | (95,412            | )      | (14,287  | )      | (16,610  | )      |
| Proceeds from  sales, maturities and principal payments of available-for-sale securities |   | 80,242             |   | 9,037    |   | 14,284   |   |
| Proceeds from  sale of derivatives                                                       |   | 763                |   | —   |   | —   |   |
| Net change in  loans made to customers                                                   |   | (2,898             | )      | (46,539  | )      | (48,845  | )      |
| Purchases of  Federal Home Loan Bank stock                                               |   | —             |   | —   |   | (239     | )      |
| Additions to  premises and equipment                                                     |   | (1,324             | )      | (254     | )      | (358     | )      |
| Net cash flows  from investing activities                                                |   | (17,929            | )      | (52,996  | )      | (52,372  | )      |
|                                                                                     |   |               |   |     |   |     |   |
| **CASH  FLOWS FROM FINANCING ACTIVITIES**                                                |   |               |   |     |   |     |   |
| Increase  (decrease) in non interest-bearing deposits                                    |   | 4,191              |   | (13      | )      | 6,563    |   |
| Increase in  interest-bearing deposits                                                   |   | 31,366             |   | 48,724   |   | 38,510   |   |
| Increase in  other borrowings                                                            |   | 942                |   | 376      |   | —   |   |
| Repurchase of  common stock                                                              |   | (452               | )      | —   |   | (524     | )      |
| Proceeds from  issuance of common stock                                                  |   | 216                |   | 214      |   | 2,595    |   |
| Net cash flows  from financing activities                                                |   | 36,263             |   | 49,301   |   | 47,144   |   |
| **NET  CHANGE IN CASH AND CASH EQUIVALENTS**                                             |   | 18,927             |   | (1,436   | )      | (4,891   | )      |
| **CASH  AND CASH EQUIVALENTS,** beginning of year                                        |   | 12,429             |   | 13,865   |   | 18,756   |   |
| **CASH  AND CASH EQUIVALENTS,** end of year                                              |   | $                  | 31,356 |     | $      | 12,429   |   | 13,865 |   |
| **SUPPLEMENTAL  DISCLOSURE OF CASH FLOW INFORMATION**                                    |   |               |   |     |   |     |   |
| Cash paid during  the period for interest                                                |   | $                  | 6,750  |     | $      | 3,834    |   | $ | 1,745 |   |
| Cash paid during  the period for income taxes                                            |   | $                  | 100    |     | $      | —   |   | $ | — |   |

 

*See accompanying notes to thesefinancial statements.*

 

27

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** **

**PACIFICABANCORP, INC.**

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS**

**DECEMBER31, 2001, 2000 AND 1999**

** **

**NOTE 1 - ORGANIZATION AND SUMMARY OFSIGNIFICANT ACCOUNTING POLICIES**

*** ***

***Nature ofOperations -***Pacifica Bancorp, Inc.*********(the“Company”), through its wholly-owned subsidiaries, Pacifica Bank (the “Bank”),***andPacifica Mortgage Company provides a full range of commercial and mortgage lendingservices as well as banking services to individuals and small-to-medium sizedbusinesses through its offices in Bellevue and Seattle, Washington. The Companyis subject to significant competition from other financial institutions. TheCompany is also subject to the regulations of certain Federal and State ofWashington agencies and undergoes periodic examinations by those regulatoryauthorities.

*** ***

***Plan ofReorganization -*** In October 2000, PacificaBancorp, Inc. was formed. On January 1, 2001 under a plan ofreorganization, Pacifica Bancorp, Inc. became the parent company of PacificaBank by issuing 3,258,208 shares of common stock in exchange for alloutstanding shares of Pacific Bank stock (1,629,104 shares) using a 2-for-1ratio (stock split). On January 18, 2001, the Company created an additionalwholly-owned subsidiary, Pacifica Mortgage Company.

*** ***

***Principles ofConsolidation -*** For the year endedDecember 31, 2001, the consolidated financial statements include theaccounts of Pacifica Bancorp, Inc., and its wholly-owned subsidiaries, PacificaBank and Pacifica Mortgage Company. All material intercompany balances andtransactions have been eliminated. For the years ended December 31, 2000 and1999 the statements include Pacifica Bank only.

*** ***

***Financial StatementPresentation and Use of Estimates -*** The financialstatements have been prepared in accordance with accounting principlesgenerally accepted in the United States of America and reporting practicesapplicable to the banking industry. In preparing the financial statements,management is required to make estimates and assumptions that affect thereported amounts of assets and liabilities, as of the date of the balancesheet, and revenues and expenses for the period. Actual results could differfrom estimated amounts. Material estimates that are particularly susceptible tosignificant change relate to the determination of the allowance for loan lossesand the valuation of real estate acquired in connection with foreclosure or insatisfaction of loans.

*** ***

***Cash and CashEquivalents -*** For purposes of reporting cashflows, cash and cash equivalents include cash on hand, amounts due from banksand federal funds sold. Generally, federal funds are purchased and sold forone-day periods. Investments in federal funds sold are made with major banks asapproved by the Board of Directors.

 

The Company maintains cash balances at several banks.Accounts at each institution are insured by the Federal Deposit InsuranceCorporation up to $100,000.

 

Interest bearing cash represents funds on deposit in ademand account with the Federal Home Loan Bank of Seattle in the amount of$25.5 million and $5.8 million as of December 31, 2001 and 2000,respectively.

 

Included in cash and due from banks are legallyreserved amounts which are required to be maintained on an average basis in theform of cash and balances due from the Federal Reserve Bank and other banks.Average reserve requirements approximate $262,000 and $215,000 for the yearsended December 31, 2001 and 2000, respectively.

*** ***

***Interest******-bearing Deposits in Other Banks -***Interest-bearing deposits in banks mature within one year and are carried atcost.

 

28

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***Investments -***The Company’s investments are classified into one of three categories: (1)held-to-maturity, (2) available-for-sale, or (3) trading. Investment securitiesare categorized as held-to-maturity when the Company has the positive intentand ability to hold those securities to maturity. Securities which areheld-to-maturity are stated at cost and adjusted for amortization of premiumsand accretion of discounts which are recognized as adjustments to interestincome.

 

Investment securities categorized asavailable-for-sale are generally held for investment purposes (to maturity),although unanticipated future events may result in the sale of some securities.Available-for-sale securities are recorded at estimated fair value, with thenet unrealized gain or loss (net of the related tax effect) reported as “othercomprehensive income (loss)” within the statement of stockholders’ equity.Realized gains or losses on dispositions are based on the net proceeds and theadjusted carrying amount of securities sold, using the specific identificationmethod.

 

Declines in the fair value of individualheld-to-maturity and available-for-sale securities below their cost that areother than temporary are recognized by write-downs of the individual securitiesto their fair value. Such write-downs would be included in earnings as realizedlosses.

 

Premiums and discounts are recognized in interestincome using the interest method over the period to maturity.

 

The Company had no held-to-maturity or tradingsecurities at December 31, 2001 and 2000.

*** ***

***Federal HomeLoan Bank Stock -*** The Bank’s investment in FederalHome Loan Bank (the “FHLB”) stock is carried at par value ($100 per share),which reasonably approximates its fair value. As a member of the FHLB system,the Bank is required to maintain a minimum level of investment in FHLB stockbased on specific percentages of outstanding FHLB advances. The Bank mayrequest redemption at par value of any stock in excess of the amount the Bankis required to hold. Stock redemptions are at the discretion of the FHLB.

*** ***

***Loans Held forSale****-*Loansoriginated and intended for sale in secondary markets are carried at the lowerof cost or estimated market value in the aggregate. Net unrealized losses arerecognized through a valuation allowance by charges to income. Gains or losseson the sale of such loans are based on the specific identification method.There were no loans held for sale at December 31, 2001 and 2000.

*** ***

***Loans Receivable-*****Loansreceivable that management has the intent and ability to hold for theforeseeable future or until maturity or pay-off are reported at theiroutstanding principal adjusted for any charge-offs, the allowance for loanlosses, and any deferred fees or costs on originated loans and unamortizedpremiums or discounts on purchased loans.

 

Interest income is accrued on the unpaid principalbalance. Loan origination fees and certain direct origination costs arecapitalized and recognized as an adjustment of the related loan using theinterest method.

 

The Company considers loans impaired when it isprobable the Company will not be able to collect all amounts as scheduled undera loan agreement. Impaired loans are measured based on the present value ofexpected future cash flows, discounted at the loan’s effective interest rate,or, as a practical expedient, at the loan’s observable market price or the fairvalue of the collateral if the loan is collateral dependent. Changes in thesevalues will be reflected in income and as adjustments to the allowance forpossible loan losses.

*** ***

***29***

----

*** ***

The accrual of interest on impaired loans isdiscontinued when, in management’s opinion, the borrower may be unable to meetpayments as they become due. When interest accrual is discontinued, all unpaidaccrued interest is reversed. Interest income is subsequently recognized onlyto the extent cash payments are received, or payment is considered certain.

*** ***

***Allowance forLoan Losses -*** The allowance for loan losses isestablished as losses are estimated to have occurred through a provision forloan losses charged to earnings. Loan losses are charged against the allowancewhen management believes the uncollectibility of a loan balance is confirmed.Subsequent recoveries, if any, are credited to the allowance.

 

The allowance for loan losses is evaluated on aregular basis by management and is based upon management’s periodic review ofthe collectibility of the loans in light of historical experience, the natureand volume of the loan portfolio, adverse situations that may affect theborrower’s ability to repay, estimated value of any underlying collateral andprevailing economic conditions. This evaluation is inherently subjective as itrequires estimates that are susceptible to significant revision as moreinformation becomes available. Additionally, loans are subject to examinationsby state and federal regulators, who, based upon their judgment, may requirethe Company to make additional provisions or adjustments to its allowance forloan losses.

*** ***

***Bank Premisesand Equipment -***Company premises and equipment arestated at cost and depreciated using the straight-line method over theestimated useful lives of the related assets, which range from three to tenyears. Total depreciation expense was $390,000, $268,000 and $282,000 in 2001,2000 and 1999, respectively.

*** ***

***Income Taxes -*****Deferred tax assets and liabilities arereflected at currently enacted income tax rates applicable to the period inwhich the deferred tax assets or liabilities are expected to be realized orsettled. As changes in tax laws or rates are enacted, deferred tax assets andliabilities are adjusted through the provision for income taxes. Deferred taxesresult from temporary differences in the recognition of certain income andexpense amounts between the Bank’s financial statements and its tax returns.The principal items giving rise to these differences include depreciation,investment income and loan loss reserves. Because of unused net operatinglosses and preopening expenses and uncertainty surrounding their use, theCompany has not recognized a tax provision within the statement of income.

*** ***

***FinancialInstruments - (1) Credit Related Financial Instruments.***Inthe ordinary course of business, the Company has entered into off-balance-sheetfinancial instruments consisting of commitments to extend credit, commercialletters of credit, and standby letters of credit. Such financial instrumentsare recorded in the financial statements when they are funded or related feesare incurred or received.

*** ***

***(2) DerivativeFinancial Instruments.*** The Company adoptedStatement of Financial Accounting Standards (SFAS) No. 133, *Accounting for Derivative Instruments and Hedging Activities*,as amended by SFAS No. 138, effective October 1, 2000. SFASNo. 133, as amended, requires that all derivative instruments be recordedon the balance sheet at their fair value. Changes in fair value of derivativesare recorded each period in current earnings or other comprehensive income,depending on whether a derivative is designated and qualifies for hedgeaccounting and, if it does, the type of hedge transaction.

 

30

----

 

For a qualifying ****cash flowhedge**** transaction in which the Company is hedging a forecasted transaction or the variability of cash flows to be receivedor paid related to a recognized asset or liability, changes in the fair value of a derivative thatis highly effective as, and that is designated and qualifies as, a cash-flowhedge are recorded in other comprehensive income, until earnings are affectedby the variability of cash flows. The ineffective portion of all hedgeswill be recognized in current-period earnings.

 

The Company formallydocuments all relationships between hedging instruments and hedged items, aswell as its risk-management objective and strategy for undertaking varioushedge transactions. This process includes linking all derivatives that aredesignated as cash-flow hedges to specific assets and/or liabilities on thebalance sheet. The Company also formally assesses, both at the hedge’sinception and on an ongoing basis, whether the derivatives that are used inhedging transactions are highly effective in offsetting changes in cash flowsof hedged items. When it is determined that a derivative is not highlyeffective as a hedge or that it has ceased to be a highly effective hedge, theCompany discontinues hedge accounting prospectively when (1) it is determined that the derivative is nolonger effective in offsetting changes in the cash flows of a hedged item; (2) the derivative expires or is sold,terminated, or exercised; or (3)management determines that designation of the derivative as a hedge instrumentis no longer appropriate. In these situations where hedge accounting isdiscontinued, the derivative will be carried at its fair value on the balancesheet, with changes in its fair value recognized in current-period earnings.All gains or losses that were accumulated in other comprehensive income will berecognized immediately in earnings upon the discontinuance of hedge accounting.

*** ***

***AdvertisingCosts -*** The Company expenses advertising costs asthey are incurred. Total advertising expenses were $76,000, $59,000 and $59,000in 2001, 2000 and 1999, respectively.

*** ***

***Stock OptionPlans -*****TheCompany recognizes the financial effects of stock options in accordance withAccounting Principles Board Opinion No. 25, *Accountingfor Stock Issued to Employees* (APB 25). Generally, stock options areissued at a price equal to the fair value of the Company’s stock as of thegrant date. Under APB 25, options issued in this manner do not result in therecognition of employee compensation in the Company’s financial statements.Disclosures required by Statement of Financial Accounting StandardsNo. 123, *Accounting For Stock-BasedCompensation*, are provided in Note 9.

*** ***

***Earnings PerShare -*** Basic earnings (loss) per share amountsare computed based on the weighted average number of shares outstanding duringthe period after giving retroactive effect to the stock split at time ofreorganization. Diluted earnings per share are computed by determining thenumber of additional shares that are deemed outstanding due to stock optionsunder the treasury stock method. Information concerning additional shares thatmay be dilutive, consisting of stock options, is contained in Note 16.

*** ***

***Reclassifications-*** Certain amounts in the prior year’s financialstatements have been reclassified to conform to the 2001 presentation.

 

31

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**NOTE 2 - INVESTMENT SECURITIES**

 

Carrying amounts and approximate fair values of investmentsecurities are summarized as follows:
|                             |   | **2001**            |      |
|----------------------------------|--------|---------------------|-----------|
|                             |   | **Amortized  Cost** |      | **Gross Unrealized** |   | **Estimated  Fair Value** |   |
|                             |   |                | **Gains** |   | **Losses** |   |   |
|                             |   | **(In Thousands)**  |      |
| *Available-for-Sale  Securities* |   |                |      |   |   |   |   |   |   |
| U.S. Government  agencies        |   | $                   | 25,597    |   | $ | 76 |   | $ | — |   | $ | 25,673 |   |
| Mortgage-backed  securities      |   | $                   | 7,416     |   | 88 |   | — |   | 7,504 |   |
| **TOTAL  INVESTMENT SECURITIES** |   | $                   | 33,013    |   | $ | 164 |   | $ | — |   | $ | 33,177 |   |

 
|                             |   | **2000**            |      |
|----------------------------------|--------|---------------------|-----------|
|                             |   | **Amortized  Cost** |      | **Gross Unrealized** |   | **Estimated  Fair Value** |   |
|                             |   |                | **Gains** |   | **Losses** |   |   |
|                             |   | **(In Thousands)**  |      |
| *Available-for  Sale Securities* |   |                |      |   |   |   |   |   |   |
| U.S. Government  agencies        |   | $                   | 8,647     |   | $ | 482 |   | $ | — |   | $ | 9,129 |   |
| Mortgage-backed  securities      |   | 5,355               |      | 120 |   | — |   | 5,475 |   |
| Corporate debt  securities       |   | 2,969               |      | 88 |   | — |   | 3,057 |   |
| **TOTAL  INVESTMENT SECURITIES** |   | $                   | 16,971    |   | $ | 690 |   | $ | — |   | $ | 17,661 |   |

 

The amortized cost and estimated fair value ofinvestment securities at December 31, 2001 by contractual or expectedmaturity are shown below. Expected maturities will differ from contractualmaturities because borrowers may have the right to call or prepay obligationswith or without call or prepayment penalties. The maturities reported formortgage-backed securities are based on contractual maturities and principalamortization.

 
|                            |   | **2001**                          |   | **2000**                          |   |
|---------------------------------|--------|-----------------------------------|--------|-----------------------------------|--------|
|                            |   | **Available-For-Sale Securities** |   | **Available-For-Sale Securities** |   |
|                            |   | **Amortized  Cost**               |   | **Estimated  Fair  Value**        |   | **Weighted  Average  Yield** |   | **Amortized  Cost** |   | **Estimated  Fair  Value** |   | **Weighted  Average  Yield** |   |
|                            |   | **(In Thousands)**                |   |
| U.S. Government  agencies       |   |                              |   |                              |   |   |   |   |   |   |   |   |   |
| One year or less                |   | $                                 | 17,163 |                              | $      | 17,251 |   | 4.45 | % | $ | 1,997 |   | $ | 1,998 |   | 6.29 | % |
| Over 1 year  through 5 years    |   | 1,434                             |   | 1,421                             |   | 4.81 |   | 100 |   | 101 |   | 6.75 |   |
| After 5 years  through 10 years |   | 7,000                             |   | 7,000                             |   | 3.15 |   | 1,442 |   | 1,531 |   | 7.24 |   |
| Over 10 years                   |   | —                            |   | —                            |   | — |   | 5,108 |   | 5,499 |   | 7.78 |   |
| Mortgage-backed  securities     |   |                              |   |                              |   |   |   |   |   |   |   |   |   |
| One year or less                |   | 2,592                             |   | 2,613                             |   | 5.23 |   | 111 |   | 109 |   | 2.92 |   |
| Over 1 year  through 5 years    |   | 4,824                             |   | 4,892                             |   | 3.25 |   | 546 |   | 546 |   | 6.43 |   |
| After 5 years  through 10 years |   | —                            |   | —                            |   | — |   | 1,090 |   | 1,107 |   | 7.06 |   |
| Over 10 years                   |   | —                            |   | —                            |   | — |   | 3,608 |   | 3,713 |   | 7.49 |   |
| Corporate debt  securities      |   |                              |   |                              |   |   |   |   |   |   |   |   |   |
| Over 1 year  through 5 years    |   | —                            |   | —                            |   | — |   | 969 |   | 991 |   | 7.45 |   |
| After 5 years  through 10 years |   | —                            |   | —                            |   | — |   | 2,000 |   | 2,066 |   | 7.00 |   |
|                            |   | $                                 | 33,013 |                              | $      | 33,177 |   | 4.08 | % | $ | 16,971 |   | $ | 17,661 |   | 7.26 | % |

 

32

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Proceeds from sales of investments and gross realizedgains and losses on investment sales were as follows for the years endedDecember 31, 2001 and 2000:

 
|                                           |   | **2001**           |   | **2000** |   |
|------------------------------------------------|--------|--------------------|--------|----------|--------|
|                                           |   | **(In Thousands)** |   |
| Proceeds from  sales of investments            |   | $                  | 66,860 |     | $      | 9,037 |   |
| Gross gains  realized on sales of investments  |   | $                  | 974    |     | $      | 690 |   |
| Gross losses  realized on sales of investments |   | $                  | 5      |     | $      | — |   |

 

Investment securities with a fair value ofapproximately $15.9 million and $14.0 million as of December 31, 2001 and2000 were pledged to secure U.S. government and public deposits, and for otherpurposes as required by law.

 

**NOTE 3 - LOANS**

 

The major classifications of loans at December 31 aresummarized as follows:

 
|                        |   | **2001**           |    | **2000** |   |
|-----------------------------|--------|--------------------|---------|----------|--------|
|                        |   | **(In Thousands)** |    |
| Commercial                  |   | $                  | 41,673  |     | $      | 46,161 |   |
| Real estate -  construction |   | 26,071             |    | 23,173   |   |
| Real estate -  mortgage     |   | 35,864             |    | 33,441   |   |
| Consumer and  other         |   | 2,665              |    | 3,519    |   |
|                        |   | 106,273            |    | 106,294  |   |
| Less deferred  loan fees    |   | (395               | )       | (472     | )      |
| Total loans                 |   | $                  | 105,878 |     | $      | 105,822 |   |

 

Contractual maturities of loans as ofDecember 31, 2001 are shown below. Expected maturities will differ fromcontractual maturities because borrowers may have the right to prepay loanswith or without prepayment penalties.

 
|                        |   | **Within One  Year** |   | **One to Five  Years** |   | **After Five  Years** |   | **Total** |   |
|-----------------------------|--------|----------------------|--------|------------------------|--------|-----------------------|--------|-----------|--------|
|                        |   | **(In Thousands)**   |   |
| Contractual  Maturities     |   |                 |   |                   |   |                  |   |      |   |
| Commercial                  |   | $                    | 33,342 |                   | $      | 7,835                 |   | $         | 496    |   | $ | 41,673 |   |
| Real estate -  construction |   | 22,129               |   | 2,415                  |   | 1,527                 |   | 26,071    |   |
| Real estate -  mortgage     |   | 3,754                |   | 26,776                 |   | 5,334                 |   | 35,864    |   |
| Consumer and  other         |   | 1,560                |   | 1,105                  |   | —                |   | 2,665     |   |
| Total                       |   | $                    | 60,785 |                   | $      | 38,131                |   | $         | 7,357  |   | $ | 106,273 |   |

 

Variable interest rate loans maturing after one yearare $14.9 million and $16.8 million at December 31, 2001 and 2000,respectively, and fixed interest rate loans maturing after one year are $30.6million and $22.9 million, respectively, as of such dates. Variable rate loanstypically do not contain interest rate floors and caps.

 

33

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The allowance for loan losses at December 31 andchanges during the period are as follows:

 
|                                                    |   | **2001**           |    | **2000** |   | **1999** |   |
|---------------------------------------------------------|--------|--------------------|---------|----------|--------|----------|--------|
|                                                    |   | **(In Thousands)** |    |
| Balance,  beginning of year                             |   | $                  | 1,306   |     | $      | 589      |   | $ | 41 |   |
| Charge-offs                                             |   | (2,559             | )  | —   |   | —   |   |
| Recoveries                                              |   | 141                |    | —   |   | —   |   |
| Provision charged  to operating expenses for loan loses |   | 4,642              |    | 717      |   | 548      |   |
| Balance, end of  year                                   |   | $                  | 3,530   |     | $      | 1,306    |   | $ | 589 |   |

 

A summary of impaired loans is as follows:

 
|                                                               |   | **2001**           |   | **2000** |   | **1999** |   |
|--------------------------------------------------------------------|--------|--------------------|--------|----------|--------|----------|--------|
|                                                               |   | **(In Thousands)** |   |
| Impaired loans                                                     |   | $                  | 4,028  |     | $      | —   |   | $ | — |   |
| Average balance  of impaired loans                                 |   | $                  | 8,274  |     | $      | —   |   | $ | — |   |
| Allowance for  loan losses related to impaired loans               |   | $                  | 850    |     | $      | —   |   | $ | — |   |
| Nonaccruing  loans                                                 |   | $                  | 2,161  |     | $      | —   |   | $ | — |   |
| Interest income  collected on impaired loans and nonaccruing loans |   | $                  | 556    |     | $      | —   |   | $ | — |   |

 

Subsequent to year end, $1.7 million of loansclassified as impaired at December 31, 2001 were reclassified tononaccrual status.

 

A summary of past due loans follows:

 
|               |   | **30 to 89 Days  Past Due and  Still Accruing** |   | **90 Days or  More Past  Due and  Still Accruing** |   |
|--------------------|--------|-------------------------------------------------|--------|----------------------------------------------------|--------|
|               |   | **(In Thousands)**                              |
| December 31,  2001 |   | $                                               | 2,804  |                                               | $      | — |   |
| December 31,  2000 |   | $                                               | 244    |                                               | $      | 22 |   |

 

34

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**NOTE 4 - BANK PREMISES AND EQUIPMENT**

 

Bank premises and equipment at December 31 areclassified as follows:

 
|                                            |   | **2001**           |    | **2000** |    |
|-------------------------------------------------|--------|--------------------|---------|----------|---------|
|                                            |   | **(In Thousands)** |    |
| Leasehold  improvements                         |   | $                  | 1,299   |     | 547     |   |
| Furniture and  fixture                          |   | 677                |    | 397      |    |
| Office equipment                                |   | 276                |    | 204      |    |
| Computer  software                              |   | 385                |    | 279      |    |
| Computer  equipment                             |   | 460                |    | 346      |    |
|                                            |   | 3,097              |    | 1,773    |    |
| Less accumulated  depreciation and amortization |   | (971               | )  | (581     | )  |
|                                            |   | $                  | 2,126   |     | $       | 1,192 |   |
|                                                 |        |                    |         |          |         |  |  |

 

**NOTE 5 - DEPOSITS**

 

Deposits as of December 31 consisted of the following:

 
|                                                      |   | **2001**           |    | **2000** |   |
|-----------------------------------------------------------|--------|--------------------|---------|----------|--------|
|                                                      |   | **(In Thousands)** |    |
| Savings accounts                                          |   | $                  | 227     |     | $      | 158 |   |
| Certificates of  deposit under $100,000                   |   | 16,677             |    | 12,448   |   |
| Certificate of  deposit equal to or greater than $100,000 |   | 86,981             |    | 66,401   |   |
| Demand accounts                                           |   |               |    |     |   |
| Noninterest-bearing                                       |   | 13,187             |    | 8,995    |   |
| Interest-bearing                                          |   | 5,570              |    | 6,710    |   |
| Money market  accounts                                    |   | 33,327             |    | 25,699   |   |
|                                                      |   | $                  | 155,969 |     | $      | 120,411 |   |

 

At December 31, 2001, scheduled maturities ofcertificates of deposit are as follows:

 
| **Year  Ending**  |   |               |    |
|-------------------|--------|--------------------|---------|
| **December,  31** |   | **(In Thousands)** |    |
| 2002              |   | $                  | 96,035  |   |
| 2003              |   | 7,578              |    |
| 2004              |   | 45                 |    |
|              |   | $                  | 103,658 |   |

 

35

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**NOTE 6 - BORROWED FUNDS**

 

At December 31, 2001 and 2000, the Company had demandnotes issued to the U.S. Treasury in the amount of $247,000 and $376,000,respectively, representing the Treasury Tax and Loan note balance and iscollateralized by a $1.0 million pledged security.

 

The Company obtained a $3 million one-year revolvingline of credit with a bank in September 2001. The line of credit iscollateralized by the Bank’s stock and subject to certain restrictive covenantsincluding, among others, requirements with regards to capital ratios, loan lossreserve ratios and lender’s prior approval on certain transactions. Interest onthis line is at the bank’s prime rate plus 0.75% and is paid quarterly.Borrowings under this line of credit totaled $1.07 million at December 31,2001.

 

**NOTE 7 - INCOME TAXES**

 

A reconciliation of the effective income tax rate withthe federal statutory tax rate is as follows:

 
|                                               |   | **2001**           |    | **2000** |    | **1999**   |    |
|----------------------------------------------------|--------|--------------------|---------|----------|---------|------------|---------|
|                                               |   | **Amount**         |    | **Rate** |    | **Amount** |    | **Rate** |   | **Amount** |   | **Rate** |   |
|                                               |   | **(In Thousands)** |    |
| Income tax  provision at statutory rate            |   | $                  | (1,008  | )        | (34.0   | )%         | $       | 298 |   | 34.0 | % | $ | (249 | ) | (34.0 | )% |
| Increase  (decrease) in tax resulting   from:      |   |               |    |     |    |       |    |   |   |   |   |   |   |
| Tax-exempt  interest                               |   | (18                | )  | (0.6     | )  | (66        | )  | (8.0 | )  | — |   | — |   |
| Non-qualified  stock options                       |   | (38                | )  | (1.3     | )  | (55        | )  | (6.0 | )  | — |   | — |   |
| Disallowed  expenses                               |   | 17                 |    | 0.6      |    | 26         |    | 3.0 |   | — |   | — |   |
| Other                                              |   | 12                 |    | 0.4      |    | (16        | )  | (1.0 | )  | — |   | — |   |
| Benefit not  recognized due to valuation allowance |   | 1,035              |    | 34.9     |    | (187       | )  | (22.0 | )  | 249 |   | 34.0 |   |
|                                               |   | $                  | —  |     | —  | %     | $       | — |   | — | %  | $ | — |   | — | %  |

 

Total deferred tax assets and liabilities as ofDecember 31 are as follows:

 
|                                                                                                 |   | **2001**           |    | **2000** |    |
|------------------------------------------------------------------------------------------------------|--------|--------------------|---------|----------|---------|
|                                                                                                 |   | **(In Thousands)** |    |
| Deferred Tax  Assets                                                                                 |   |               |    |     |    |
| Unamortized  preopening expenditures                                                                 |   | $                  | 146     |     | $       | 195 |   |
| Net operating loss  carryforward                                                                     |   | 232                |    | 176      |    |
| Allowance for possible  loan losses in excess of tax reserves                                        |   | 1,303              |    | 278      |    |
| Other deferred tax  assets                                                                           |   | 30                 |    | 27       |    |
| Total deferred  assets                                                                               |   | 1,711              |    | 676      |    |
|                                                                                                 |   |               |    |     |    |
| Deferred Tax  Liabilities                                                                            |   |               |    |     |    |
| Deferred loan fees for  tax purposes in excess of deferred  amounts for financial reporting purposes |   | (54                | )  | (59      | )  |
| Tax effect of  unrealized gains on available-for-sale securities                                     |   | (55                | )  | (235     | )  |
| Other deferred tax  liabilities                                                                      |   | (54                | )  | (50      | )  |
| Total deferred  liabilities                                                                          |   | (163               | )  | (344     | )  |
| Net deferred tax  assets                                                                             |   | 1,548              |    | 332      |    |
| Less valuation  allowance on net deferred tax assets                                                 |   | (1,603             | )  | (567     | )  |
| Net deferred tax  liabilities                                                                        |   | $                  | (55     | )        | $       | (235 | ) |

 

36

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The Company has not recognized a net deferred taxasset due to the uncertainty surrounding their ultimate value to the Company,and accordingly, management has reduced net deferred tax assets by a valuationallowance.

 

The Company has net operating loss carryforwardstotaling $682,000 that may be utilized to offset future federal taxable income.Net operating loss carryforwards will expire as follows:

 

| **Year  Ending  December 31,** |   | **(In Thousands)** |   |
|--------------------------------|--------|--------------------|--------|
| 2019                           |   | $                  | 540    |   |
| 2021                           |   | 142                |   |
|                           |   | $                  | 682    |   |

 

**NOTE 8 - STOCKHOLDERS’ EQUITY**

 

***Allocation of Common Stock Proceeds —***The Bank, as required by state regulation, allocated a portion of the proceedsreceived from common stock to undivided profits to allow for anticipated lossesincurred during the initial operating periods. Effective December 31,2000, the Bank transferred the proceeds allocated to undivided profits back tosurplus.

 

In addition to the 10,000,000 shares of common stockauthorized, the Company is authorized to issue up to 3,000,000 shares of no parvalue preferred stock. The Board of Directors has the authority to determinethe rights and privileges to be granted to holders of preferred stock.

*** ***

***RegulatoryCapital -***The Company on a consolidated basis andthe Bank are subject to various regulatory capital requirements administered bythe federal banking agencies. Failure to meet minimum capital requirements caninitiate certain mandatory—and possibly additional discretionary—actions byregulators that, if undertaken, could have a direct material effect on thefinancial statements. Under capital adequacy guidelines and the regulatoryframework for prompt corrective action, the Company and Bank must meet specificcapital guidelines that involve quantitative measures of assets, liabilities,and certain off-balance-sheet items as calculated under regulatory accountingpractices. The capital amounts and classifications are also subject toqualitative judgments by the regulators about components, risk weightings, andother factors.

 

As of December 31, 2001, the most recentnotification from the Federal Deposit Insurance Corporation categorized theBank as well capitalized under the regulatory framework for prompt correctiveaction. To be categorized as well capitalized, the Bank must maintain minimumtotal risk-based, Tier I risk-based and Tier I leverage ratios as setforth in the table. As described in the last section of this footnote,management anticipates a supervisory directive will modify the required capitalamounts of the Bank to a specified level.

 

Quantitative measures established by regulation toensure capital adequacy require the Company and Bank to maintain minimumamounts and ratios (set forth in the table below) of total and Tier I capital(as defined in the regulations) to risk-weighted assets (as defined), and ofTier I (as defined) capital to average assets (as defined).

 

The Company’s and the Bank’s actual capital amountsand ratios are also presented in the table.

 

37

----

 
|                      |   | **Actual**                 |   | **For Capital********Adequacy Purposes** |   | **To Be Well********Capitalized Under********Prompt Corrective********Action Provisions** |   |
|---------------------------|--------|----------------------------|--------|------------------------------------------|--------|-------------------------------------------------------------------------------------------|--------|
|                      |   | **Amount**                 |   | **Ratio**                                |   | **Amount**                                                                                |   | **Ratio** |   | **Amount** |   | **Ratio** |   |
|                      |   | **(Amounts In Thousands)** |   |
| As of December 31, 2001   |   |                       |   |                                     |   |                                                                                      |   |   |   |   |   |   |   |
| Total Capital             |   |                       |   |                                     |   |                                                                                      |   |   |   |   |   |   |   |
| (to Risk-Weighted Assets) |   |                       |   |                                     |   |                                                                                      |   |   |   |   |   |   |   |
| Consolidated              |   | $                          | 13,198 |                                     | 11.09  | %                                                                                         | $      | 9,682 |   | >8.00 | % | $ | 12,103 |   | >10.00 | % |
| Pacifica Bank             |   | $                          | 13,590 |                                     | 11.45  | %                                                                                         | $      | 9,498 |   | >8.00 | % | $ | 11,873 |   | >10.00 | % |
| Tier I Risk-Based Capital |   |                       |   |                                     |   |                                                                                      |   |   |   |   |   |   |   |
| (to Risk-Weighted Assets) |   |                       |   |                                     |   |                                                                                      |   |   |   |   |   |   |   |
| Consolidated              |   | $                          | 11,689 |                                     | 9.82   | %                                                                                         | $      | 4,841 |   | >4.00 | % | $ | 7,262 |   | >6.00 | % |
| Pacifica Bank             |   | $                          | 12,081 |                                     | 10.18  | %                                                                                         | $      | 4,749 |   | >4.00 | % | $ | 7,124 |   | >6.00 | % |
| Tier I Leverage Capital   |   |                       |   |                                     |   |                                                                                      |   |   |   |   |   |   |   |
| (to Average Assets)       |   |                       |   |                                     |   |                                                                                      |   |   |   |   |   |   |   |
| Consolidated              |   | $                          | 11,689 |                                     | 6.82   | %                                                                                         | $      | 6,855 |   | >4.00 | % | $ | 10,283 |   | >5.00 | % |
| Pacifica Bank             |   | $                          | 12,081 |                                     | 7.06   | %                                                                                         | $      | 6,847 |   | >4.00 | % | $ | 10,270 |   | >5.00 | % |
| As of December 31, 2000   |   |                       |   |                                     |   |                                                                                      |   |   |   |   |   |   |   |
| Total Captial             |   |                       |   |                                     |   |                                                                                      |   |   |   |   |   |   |   |
| (to Risk-Weighted Assets) |   | $                          | 16,197 |                                     | 13.05  | %                                                                                         | $      | 9,926 |   | >8.00 | % | $ | 12,407 |   | >10.00 | % |
| Tier I Capital            |   |                       |   |                                     |   |                                                                                      |   |   |   |   |   |   |   |
| (to Risk-Weighted Assets) |   | $                          | 14,891 |                                     | 12.00  | %                                                                                         | $      | 4,963 |   | >4.00 | % | $ | 7,444 |   | >6.00 | % |
| Tier I Capital            |   |                       |   |                                     |   |                                                                                      |   |   |   |   |   |   |   |
| (to Average Assets)       |   | $                          | 14,891 |                                     | 11.45  | %                                                                                         | $      | 5,202 |   | >4.00 | % | $ | 6,503 |   | >5.00 | % |

 

In November 2001, the State and FDIC performed ajoint safety and soundness examination on the Bank for the period endedSeptember 30, 2001. The regulators have indicated that certain concernswill require Board of Director action. A Supervisory Directive is expected tobe issued but as of the date of this report the directive has not beenreceived. However, based upon preliminary discussions with the regulators, itis expected that Pacifica will agree to the following actions:

 

•                       temporarilylimit the Bank’s ability to pay dividends (which in turn would limit theCompany’s ability to pay dividends);

 

•                       temporarilylimit the Bank’s maximum asset size;

 

•                       require theBank’s Tier 1 Leverage Capital ratio to be maintained at a level that would betypically required for a de novo bank (a newly chartered bank with less thanthree years of operations);

 

•                       reduceclassified loans by a specific amount before December 31, 2002.

 

**NOTE 9 - STOCK PURCHASE AGREEMENT ANDOPTION PLAN**

*** ***

***Stock OptionPlan -*** The Company has a 1998 Employee StockOption Plan (the “Plan”), which provides for nonqualified stock options fornon-officer directors and incentive stock options for officers and employeesfor a maximum of 1,000,000 as restated, shares of authorized common stock.Pursuant to the Plan, the Company has awarded options to officers, employeesand directors at prices no less than fair market value at date of grant. Optionsgenerally vest and become exercisable in incremental percentages over fiveyears from the grant date and expire after ten years, while certain optionsvest over three years.

 

38

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Pro forma information regarding net income is requiredby the Statement of Financial Accounting Standards No. 123, *Accounting for Stock-Based Compensation*. The proforma information recognizes as compensation, the value of stock optionsgranted using an option valuation model known as the Black-Scholes model. Thefair value for options issued in 2001, 2000 and 1999 is estimated at $287,000,$244,000 and $218,000, respectively.

 

The following assumptions were used to estimate thefair value of the options:

 
|                                      |   | **2001**             |   | **2000**             |   | **1999**             |   |
|-------------------------------------------|--------|----------------------|--------|----------------------|--------|----------------------|--------|
|                                      |   | **(5 Year Vesting)** |   | **(5 Year Vesting)** |   | **(5 Year Vesting)** |   |
| Weighted Average  risk-free interest rate |   | 5.03                 | %      | 6.13                 | %      | 5.30                 | %      |
| Dividend yield  rate                      |   | 0.00                 | %      | 0.00                 | %      | 0.00                 | %      |
| Price volatility                          |   | 0.00                 | %      | 0.00                 | %      | 0.00                 | %      |
| Weighted Average  expected                |   |                 |   |                 |   |                 |   |
| life of options                           |   | 10 Years             |   | 10 Years             |   | 10 Years             |   |

 

Management believes that the assumptions used in theoption pricing model are highly subjective and represent only one estimate ofpossible value, as there is no active market for the options granted. The fairvalue of the options granted in 2001, 2000 and 1999 are allocated to pro formaearnings over the vesting period of the options. The pro forma effect on theCompany’s earnings as a result of options issued in 2001, 2000 and 1999 is asfollows:

 
|                                                     |   | **2001  (Pro Forms)**                           |    | **2000  (Pro Forms)** |    | **1999  (Pro Forms)** |   |
|----------------------------------------------------------|--------|-------------------------------------------------|---------|-----------------------|---------|-----------------------|--------|
|                                                     |   | **In Thousands, except for per share amounts)** |    |
| Net income(loss)  from Company operations                |   | $                                               | (2,965  | )                     | $       | 878                   |   | $ | (731 | ) |
| Additional  compensation for fair value of stock options |   | (450                                            | )  | (410                  | )  | (361                  | )      |
| Pro forma net  income(loss) from Company operations      |   | $                                               | (3,415  | )                     | $       | 468                   |   | $ | (1,092 | ) |
|                                                     |   |                                            |    |                  |    |                  |   |
| Earnings(loss)  per share                                |   |                                            |    |                  |    |                  |   |
| Basic                                                    |   |                                            |    |                  |    |                  |   |
| As reported                                              |   | $                                               | (0.91   | )                     | $       | 0.27                  |   | $ | (0.24 | ) |
| Pro forma                                                |   | $                                               | (1.05   | )                     | $       | 0.14                  |   | $ | (0.36 | ) |
| Diluted                                                  |   |                                            |    |                  |    |                  |   |
| As reported                                              |   | $                                               | (0.91   | )                     | $       | 0.24                  |   | $ | (0.24 | ) |
| Pro forma                                                |   | $                                               | (1.05   | )                     | $       | 0.13                  |   | $ | (0.36 | ) |

 

The remaining unrecognized compensation for fair valueof stock options was $763,000, $926,000 and $1,091,000 as of December 31,2001, 2000 and 1999, respectively.

 

39

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**NOTE 9 — STOCK PURCHASE AGREEMENT ANDOPTION PLAN**(Continued)

 

Stock option transactions were:

 
|                           |   | **Options  available  for Grant** |   | **Granted  Options for  common  Stock** |   | **Weighted**

**Average  Exercise Price  of Shares  Under Plan** |   |
|--------------------------------|--------|-----------------------------------|--------|-----------------------------------------|--------|------------------------------------------------------------------|--------|
| **BALANCE**,  December 31,1998 |   | 81,400                            |   | 818,600                                 |   | $                                                                | 5.00   |   |
|                           |   |                              |   |                                    |   |                                                             |   |   |
| Authorized                     |   | —                            |   | —                                  |   | $                                                                | — |   |
| Granted                        |   | (91,000                           | )      | 91,000                                  |   | $                                                                | 5.81   |   |
| Exercised                      |   | —                            |   | (1,200.0                                | )      | $                                                                | 5.00   |   |
| Expired/Forfeited              |   | 11,800                            |   | (11,800                                 | )      | $                                                                | 5.00   |   |
| **BALANCE**,  December 31,1999 |   | 2,200                             |   | 896,600                                 |   | $                                                                | 5.08   |   |
|                           |   |                              |   |                                    |   |                                                             |   |
| Authorized                     |   | 100,000                           |   | —                                  |   | $                                                                | — |   |
| Granted                        |   | (109,880                          | )      | 109,880                                 |   | $                                                                | 9.32   |   |
| Exercised                      |   | —                            |   | (42,880                                 | )      | $                                                                | 5.00   |   |
| Expired/Forfeited              |   | 73,480                            |   | (73,480                                 | )      | $                                                                | 5.00   |   |
| **BALANCE**,  December 31,2000 |   | 65,800                            |   | 890,120                                 |   | $                                                                | 5.52   |   |
|                           |   |                              |   |                                    |   |                                                             |   |
| Authorized                     |   | —                            |   | —                                  |   | $                                                                | — |   |
| Granted                        |   | (114,668                          | )      | 114,668                                 |   | $                                                                | 10.26  |   |
| Exercised                      |   | —                            |   | (43,080                                 | )      | $                                                                | 5.00   |   |
| Expired/Forfeited              |   | 60,820                            |   | (60,820                                 | )      | $                                                                | 7.74   |   |
| **BALANCE**,  December 31,2001 |   | 11,952                            |   | 900,888                                 |   | $                                                                | 6.00   |   |

 

The following table summarizes information concerningcurrently outstanding and exercisable options:

 
| **Options Outstanding**        |   | **Options Exercisable** |   |
|--------------------------------|--------|-------------------------|--------|
| **Range of  Exercise  Prices** |   | **Number  Outstanding** |   | **Weighted  Average  Remaining  Contractual  Life** |   | **Weighted  Average  Exercise  Price** |   | **Number  Exercisable** |   | **Weighted  Average  Exercise  Price** |   |
| $5—$8.5                   |   | 729,440                 |   | 6.51 years |   | $ | 5.08 |   | 395,920 |   | $ | 5.06 |   |
| $9.25—$9.5                |   | 63,080                  |   | 8.25 years |   | $ | 9.25 |   | 12,616 |   | $ | 9.25 |   |
| $10—$11                   |   | 108,368                 |   | 9.51 years |   | $ | 10.26 |   | 0 |   | n/a |   |

 

**NOTE 10 — EMPLOYEE BENEFIT PLAN**

 

Effective January 1, 1999, the Company adopted a401(k) Plan (the “Plan”). All regular full-time and part-time employees areeligible to participate in the Plan. Participation in the Plan begins on thefirst day of the month following the date of hire. Plan participants maycontribute up to 15% of their compensation subject to certain limits based onfederal tax laws. The Company makes matching contributions equal to 100% of anemployee’s contribution, up to 4% of his/her compensation. Matchingcontributions are vested immediately. Total 401(k) matching contributiontotaled $92,000, $78,000 and $-0- during 2001, 2000 and 1999, respectively.

 

40

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**NOTE 11 — LEASE COMMITMENTS**

** **

***Operating Lease Commitments****—* The Company leases its office premisesfor its operations. The Bellevue office space lease was entered into in 1998and was amended in 2000. The lease expires on August 31, 2007. The Company has,at its option the right to renew the lease for two additional five-year termsat rates to be mutually determined. Monthly rent for the first 24 months, the25th to 36th months, the 37th to 60thmonths, the 61st to 84th months and the last 24 months is$23,459, $32,216, $33,455, $34,694, and $35,933, respectively. During March2001 and September 2001, the Company entered into new lease agreements foradditional spaces in Bellevue. The two new lease agreements expire on April 30,2003 and June 30, 2002, respectively, and calls for monthly rent of $6,252 and$4,054, respectively. The Company also entered into a lease agreement for theSeattle office space in June 2001. The Seattle lease agreement expires on April29, 2011. Monthly rent for the first 63 months and the 64th to 124thmonths is $15,178 and $16,666, respectively. Rental expense charged tooperations was $489,000, $268,000 and $242,000 for the years ended December 31,2001, 2000 and 1999, respectively.

 
| **Year  Ending  December 31,** |   | **(In Thousands)** |   |
|--------------------------------|--------|--------------------|--------|
| 2002                           |   | $                  | 683    |   |
| 2003                           |   | 614                |   |
| 2004                           |   | 598                |   |
| 2005                           |   | 573                |   |
| 2006                           |   | 581                |   |
| Thereafter                     |   | 1,154              |   |
|                           |   | $                  | 4,203  |   |

 

**NOTE 12 — RELATED PARTY TRANSACTIONS**

 

Certain directors, executive officers and principalstockholders are Bank customers, and have had banking transactions with theBank. All loans and commitments included in such transactions were made incompliance with applicable laws on substantially the same terms (includinginterest rates and collateral) as those prevailing at the time for comparabletransactions with other persons and do not involve more than the normal risk ofcollectibility or present any other unfavorable features.

 

The aggregate balances and activity are as follows:

 
|                        |   | **2001**           |   | **2000** |   | **1999** |   |
|-----------------------------|--------|--------------------|--------|----------|--------|----------|--------|
|                        |   | **(In Thousands)** |   |
| Balance,  beginning of year |   | $                  | 1,416  |     | $      | 1,716    |   | $ | 156 |   |
| New loans or  advances      |   | 1,297              |   | 2,077    |   | 2,632    |   |
| Repayments                  |   | (1,846             | )      | (2,377   | )      | (1,072   | )      |
| Balance, end of  year       |   | $                  | 867    |     | $      | 1,416    |   | $ | 1,716 |   |
| Interest earnd  on loans    |   | $                  | 76     |     | $      | 158      |   | $ | 112 |   |

 

Deposits from related parties totaled $1.7 million,$3.2 million and $2.5 million at December 31, 2001, 2000 and 1999,respectively.

 

41

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**NOTE 13 — SIGNIFICANT GROUPCONCENTRATIONS OF CREDIT RISK**

 

Most of the Company’s business activity is withcustomers located within King County. The Company originates commercial, realestate and consumer loans. Generally, loans are secured by accounts receivable,inventory, deposit accounts, personal property or real estate. Rights tocollateral vary and are legally documented to the extent practicable. Althoughthe Company has a diversified loan portfolio, local economic conditions may affectborrowers’ ability to meet the stated repayment terms.

 

The distribution of commitments to extend creditapproximates the distribution of loans outstanding. Commercial and standbyletters of credit were granted primarily to commercial borrowers. The Company,as a matter of policy, does not currently extend credit in excess of $2,500,000to any single borrower or group of related borrowers.

 

**NOTE 14 — FINANCIAL INSTRUMENTS**

 

The Company is a party to financial instruments withoff-balance-sheet risk in the normal course of business to meet the financingneeds of its customers and to reduce its own exposure to fluctuations ininterest rates. These financial instruments include commitments to extendcredit, standby letters of credit and financial guarantees. Those instrumentsinvolve, to varying degrees, elements of credit and interest-rate risk inexcess of the amount recognized in the balance sheet. The contract or notionalamounts of those instruments reflect the extent of the Company’s involvement inparticular classes of financial instruments.

 

The Company’s exposure to credit loss in the event ofnonperformance by the other party to the financial instrument for commitmentsto extend credit, standby letters of credit, and financial guarantees writtenis represented by the contractual notional amount of those instruments. TheCompany uses the same credit policies in making commitments and conditionalobligations as it does for on-balance-sheet instruments.

 

*Commitmentsto Extend Credit, Standby Letters of Credit and Financial Guarantees —*Commitmentsto extend credit are agreements to lend to a customer as long as there is noviolation of any condition established in the contract. Commitments generallyhave fixed expiration dates or other termination clauses and may requirepayment of a fee. Since many of the commitments are expected to expire withoutbeing drawn upon, the total commitment amounts do not necessarily representfuture cash requirements. The Company’s experience has been that approximately80 percent of loan commitments are drawn upon by customers. The Companyevaluates each customer’s creditworthiness on a case-by-case basis. The amountof collateral obtained, if it is deemed necessary by the Company upon extensionof credit, is based on management’s credit evaluation of the counterparty.Collateral held varies but may include accounts receivable, inventory,property, plant, and equipment, and commercial and residential real estateproperties.

 

Standby letters of credit and financial guarantees writtenare conditional commitments issued by the Company to guarantee the performanceof a customer to a third party. Those guarantees are primarily issued tosupport public and private borrowing arrangements, including commercial paper,bond financing, and similar transactions. The credit risk involved in issuingletters of credit is essentially the same as that involved in extending loanfacilities to customers. The Company maintains various levels of collateralsupporting those commitments for which collateral is deemed necessary.

 

The Company has not been required to perform on anyfinancial guarantees. The Company has not incurred any losses on itscommitments in 2001 and 2000.

 

42

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*Derivative Instruments**and Hedging Activities —*Aspart of the Company’s asset/liability management, the Company uses interestrate swaps to hedge interest rate exposure. Interest rate swaps are contractsin which a series of interest rate flows in a single currency are exchangedover a prescribed period. The notional amounts are amounts on whichcalculations of payments are based. Notional amounts do not represent directcredit exposure. Direct credit exposure is limited to the net differencebetween the calculated amounts to be received and paid, if any.

 

During October 2000, the Bank entered into one $10million notional amount of two-year and another $10 million notional amount offive-year interest rate swap agreements with the objective of stabilizing cashflows, and accordingly, net interest income, over time. The swaps were intendedto hedge a portion of the Bank’s variable loans. The swap agreements providedfor the Bank to receive a fixed rate of interest and pay an adjustable rate.The swaps were accounted for as cash flow hedges under SFAS No. 133 and 138.The swaps are deemed to be effective and all changes in the fair value of thehedge are recorded in other comprehensive income with no impact on the incomestatement for any ineffective portion. DuringApril 2001, the Company sold the interest rate swaps and realized a gain of$763,000. As of December 31,2001 and 2000, the accumulated unrealized gains on the cash flow hedge (net ofincome taxes) were $-0- and $280,000, respectively, which is included in thebalance of accumulated other comprehensive income.

 

The periodic settlement of the swaps results in thereclassifying into earnings the gains or losses that are reported inaccumulated comprehensive income. No gain or loss was reclassified as earningsin year 2000. Total interest income onthe swaps recognized during 2001were $57,000.

 

The Company minimizes thecredit risk in derivative instruments by entering into transactions withhigh-quality counterparties that are reviewed and approved by management.

 

A summary of the notional amounts of the Company’sfinancial instruments with off-balance sheet risk at December 31, 2001 follows:

 
|                                      |   | **Notional  Amount** |   |
|-------------------------------------------|--------|----------------------|--------|
|                                      |   | **(In Thousands)**   |   |
| Commitments to  extend credit             |   | $                    | 23,923 |   |
| Commercial and  standby letters of credit |   | 2,773                |   |
|                                      |   | $                    | 26,696 |   |

 

43

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**NOTE 15 — DISCLOSURE ABOUT FAIR VALUEOF FINANCIAL INSTRUMENTS**

 

FASB Statement No. 107, *Disclosures About Fair Value of Financial Instruments*,requires disclosure of fair value information about financial instruments,whether or not recognized in the balance sheet, for which it is practicable toestimate that value. In cases where quoted market prices are not available,fair values are based on estimates using present value or other valuation techniques.Those techniques are significantly affected by the assumptions used, includingthe discount rate and estimates of future cash flows. In that regard, the fairvalue estimates cannot be substantiated by comparison to independent marketsand, in many cases, could not be realized in immediate settlement on theinstrument. Accordingly, the aggregate fair value amounts presented do notrepresent the underlying value of the Bank.

 

The following methods and assumptions were used by theCompany in estimating its fair value disclosures for financial instruments:

 

*Cash,Due From Banks, Federal Funds Sold**and Interest Bearing Deposits*— The carrying value amountsreported in the balance sheet for cash and short-term instruments approximatethose assets’ fair values.

 

*InvestmentSecurities* — Fair values for investment securities are basedon quoted market prices, where available. If quoted market values are notavailable, fair values are based on quoted market prices of comparableinstruments.

 

Federal*Home LoanBank Stock*— The carrying value of Federal Home Loan Bank stockapproximates fair value based on the redemption provisions of the Federal HomeLoan Bank.

 

*Loans*— For variable-rate loans that reprice frequently and with no significantchange in credit risk, fair values are based on carrying values. The fairvalues of fixed-rate commercial, real estate mortgage, installment, and otherloans are estimated using discounted cash flow analysis, using interest ratescurrently being offered for loans with similar terms to borrowers of similarcredit quality. The carrying amount of accrued interest approximates its fairvalue.

 

*Accrualand Trade Accounts*— Due to their short-term nature, thecarrying value of accruals and trade accounts is considered to approximate fairvalue.

 

*Off-Balance-SheetInstruments* — The Company’s off-balance-sheet instrumentsinclude unfunded commitments to extend credit and standby letters of credit.The fair value of these instruments is not considered practicable to estimatebecause of the lack of quoted market price and the inability to estimate fairvalue without incurring excessive costs. The estimated fair value of interestrate swaps are based upon calculations of the net present value of projectedcash flows. Because interest rate swaps are carried at estimated fair value,carrying value and estimated fair value are the same.

 

*DepositLiabilities* — The estimated fair values disclosed for demanddeposits are equal to their carrying amounts, including savings, money marketand NOW accounts. Fair values for fixed-rate time deposits are estimated usinga discounted cash flow analysis that applies interest rates currently beingoffered on certificates to a schedule of aggregated expected maturities on timedeposits. The carrying amount of interest payable approximates its fair value.

 

*CapitalLease Obligations* — The carrying amounts of capital leaseobligations are considered to approximate their fair values, based uponevaluation of the terms contained in the agreements.

 

44

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The carrying amounts and estimated fair values of theCompany’s financial instruments at December 31, 2001 and 2000 are as follows:

** **
|                                                |   | **2001**             | ** ** | **2000**       | ** ** |
|-----------------------------------------------------|--------|----------------------|------------|----------------|------------|
|                                                |   | **Carrying  Amount** | ** ** | **Fair Value** | ** ** | **Carrying  Amount** | ** ** | **Fair Value** | ** ** |
|                                                |   | **(In Thousands)**   |       |
| *Financial  Assets*                                 |   |                 |       |           |       |   |   |   |   |
| Cash and due  from banks                            |   | $                    | 28,056     |           | $          | 28,056 |   | $ | 9,339 |   | $ | 9,339 |   |
| Federal funds  sold                                 |   | 3,300                |       | 3,300          |       | 3,090 |   | 3,090 |   |
| Interest bearing  deposits                          |   | 857                  |       | 857            |       | 1,557 |   | 1,557 |   |
| Investment  securities                              |   | 331,177              |       | 331,177        |       | 17,661 |   | 17,661 |   |
| Federal Home  Loan Bank stock                       |   | 273                  |       | 273            |       | 255 |   | 255 |   |
| Loans, including  fair value of  interest rate swap |   | 102,348              |       | 103,355        |       | 104,516 |   | 102,009 |   |
| Accrued interest  receivable                        |   | 994                  |       | 994            |       | 959 |   | 959 |   |
|                                                |   |                 |       |           |       |   |   |   |   |
| *Financial  Liabilities*                            |   |                 |       |           |       |   |   |   |   |
| Demand and  savings deposits                        |   | 52,311               |       | 52,311         |       | 41,562 |   | 41,562 |   |
| Time deposits                                       |   | 103,658              |       | 103,658        |       | 78,849 |   | 78,849 |   |
| Other accrued  liabilities                          |   | 297                  |       | 297            |       | 525 |   | 525 |   |
| Accrued interest  payable                           |   | 1,983                |       | 1,983          |       | 1,712 |   | 1,712 |   |
| Other borrowings                                    |   | 1,318                |       | 1,318          |       | 376 |   | 376 |   |
|                                                     |        |                      |            |                |            |  |  |  |  |  |  |  |  |

 

**NOTE 16 — EARNINGS PER SHARE**

 

The numerators and denominators of basic and dilutedearnings (loss) per share are as follows:

 
|                                                             |   | **2001**                                         |         | **2000**  | ** ** | **1999**   | ** ** |
|------------------------------------------------------------------|--------|--------------------------------------------------|--------------|-----------|------------|------------|------------|
|                                                             |   | **(In Thousands, except for per share amounts)** | ** **   |
| Net income(loss)  (numerator)                                    |   | $                                                |  (2,965 | )         | $          |  878  |       | $ |  (731 | ) |
| Shares used in  the calculation (denominator)                    |   |                                             |         |      |       |       |       |
| Weighted average  shares outstanding                             |   | 3,265,961                                        |         | 3,233,264 |       | 3,045,926  |       |
| Effect of  dilutive stock options and warrants                   |   | —                                           |         | 374603    |       | —     |       |
| Diluted shares                                                   |   | 3,265,961                                        |         | 3,607,867 |       | 3,045,926  |       |
| Basic carnings  (loss) per share  (adjusted for stock splits)    |   | $                                                |  (0.91  | )         | $          |  0.27 |       | $ |  (0.24 | ) |
| Diluted earnings  (loss) per share  (adjusted for stock saplits) |   | $                                                |  (0.91  | )         | $          |  0.24 |       | $ |  (0.24 | ) |

 

45

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**NOTE 17 — ACCUMULATED OTHERCOMPREHENSIVE INCOME**

 

Other comprehensive income and accumulated othercomprehensive income consist of the following:

 
|                                                                                  |   | **2001**               |   |
|---------------------------------------------------------------------------------------|--------|------------------------|--------|
|                                                                                  |   | **Before-Tax  amount** |   | **Tax (Expense)  or Benefit** |   | **Net-of-Tax  Amount** |   |
|                                                                                  |   | **(In Thousands)**     |   |
| Balance,December  31, 2000                                                            |   | $                      | 1,115  |   | $ | 379 |   | $ | 736 |   |
| Unrealized gains  on avaliable-for-sale securities  arising during the current period |   | 442                    |   | 150 |   | 292 |   |
| Less:  reclassification adjustment for gains realized  in net income                  |   | 969                    |   | 329 |   | 640 |   |
| Net unrealized  losses on available-for-sale securities                               |   | (527                   | )      | (179 | ) | (348 | ) |
| Unrealized gains  on cash flow hedge  arising during the current period               |   | 338                    |   | 114 |   | 224 |   |
| Less:  reclassification adjustment for gains realized  in net income                  |   | 763                    |   | 259 |   | 504 |   |
| Net unrealized  losses on cash flow hedge                                             |   | (425                   | )      | (145 | ) | (280 | ) |
| Accumulated  other comprehensive income                                               |   | $                      | 163    |   | $ | 55 |   | $ | 108 |   |

 

**NOTE 18 — PARENT COMPANY (ONLY)FINANCIAL INFORMATION**

 
|                                             |   | **2001**           |   |
|--------------------------------------------------|--------|--------------------|--------|
|                                             |   | **(In Thousands)** |   |
| Condensed balance sheet at December 31:          |   |               |   |
| Cash and due  from banks                         |   | $                  | 415    |   |
| Investments in  subsidiaries                     |   | 11,932             |   |
| Due from related  nonbank company                |   | 538                |   |
| Total assets                                     |   | $                  | 12,885 |   |
|                                             |   |               |   |
| Short-term  borrowings                           |   | $                  | 1,071  |   |
| Other  liabilities                               |   | 17                 |   |
| Total  liabilities                               |   | $                  | 1,088  |   |
| Stockholders’  equity                       |   | 11,797             |   |
| Total  liabilities and stockholders’ equity |   | $                  | 12,885 |   |

 

46

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Condensed statement of operations for the year endedDecember 31, 2001:

 
|                                               |   | **2001**           |   |
|----------------------------------------------------|--------|--------------------|--------|
|                                               |   | **(In Thousands)** |   |
| Income                                             |   |               |   |
| Interest                                           |   | $                  | 10     |   |
| Other income                                       |   | 4                  |   |
| Total income                                       |   | 14                 |   |
|                                               |   |               |   |
| Expenses                                           |   |               |   |
| Interest                                           |   | 18                 |   |
| Other                                              |   | 35                 |   |
| Total expenses                                     |   | 53                 |   |
|                                               |   |               |   |
| Loss before  recognition of losses in subsidiaries |   | (39                | )      |
| Recognition of  subsidiaries’ losses          |   | (2,926             | )      |
| Net loss                                           |   | $                  | (2,965 | ) |

 

Condensed statement of cash flows for the year ended December 31, 2001:

 
|                                                                           |   | **2001**           |   |
|--------------------------------------------------------------------------------|--------|--------------------|--------|
|                                                                           |   | **(In Thousands)** |   |
| Cash flows from  operating activities                                          |   |               |   |
| Net loss                                                                       |   | $                  | (2,965 | ) |
| Adnustments to  reconcile net loss to net cash flows from operating activities |   |               |   |
| Losses in subsidiaries                                                         |   | 2926               |   |
| Net change in  other liabilities                                               |   | 17                 |   |
| Net cash flows  from operating activities                                      |   | (22                | )      |
| Cash flows from  investing activities                                          |   |               |   |
| Return of  investment from bank subsidiary                                     |   | 150                |   |
| Contribution of  capital-nonbank subsidiary                                    |   | (10                | )      |
| Increase inadvances  to nonbank subsidiary                                     |   | (538               | )      |
| Net cash flows  from investment activities                                     |   | (398               | )      |
| Cash flows from  financing activities                                          |   |               |   |
| Proceeds from  borrowings                                                      |   | 1,071              |   |
| Proceeds from  exercise of stock options                                       |   | 216                |   |
| Repurchase of  common stock                                                    |   | (452               | )      |
| Net cash flows  from financing activities                                      |   | 835                |   |
| Net change in  cash                                                            |   | 415                |   |
| Cash, beginning  of year                                                       |   | —             |   |
| Cash, end of  year                                                             |   | $                  | 415    |   |

 

47

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**NOTE 19 — NEW ACCOUNTINGPRONOUNCEMENTS**

 

In June 2001, the Financial Accounting Standards Boardissued Statement of Financial Accounting Standards (“SFAS”) No. 141 entitled *Business Combinations*and SFAS No. 142entitled *Goodwill and Other IntangibleAssets*. These statements establish accounting for intangible assetsupon and subsequent to acquisition. This standard applies to all businesscombinations initiated after June 30, 2001 and is effective for fiscal yearsbeginning after December 15, 2001. The Company is currently evaluating theimpact that this statement will have on our financial position and results ofoperations, however we do not expect such impact to be material

 

In June 2001, the Financial Accounting Standards Boardissued Statement of Financial Accounting Standards (“SFAS”) No. 143 entitled *Accounting for Asset Retirement Obligations*.This statement establishes the accounting and reporting for obligationsassociated with the retirement of tangible long-lived assets and the associatedasset retirement costs. This standard is effective for fiscal years beginningafter June 15, 2002. The Company is currently evaluating the impact that thisstatement will have on our financial position and results of operations,however we do not expect such impact to be material.

 

In August 2001, the Financial Accounting StandardsBoard issued Statement of Financial Accounting Standards (“SFAS”) No. 144entitled *Accounting for the Impairment orDisposal of Long-Lived Assets*. This statement supercedes SFAS No.121 and establishes financial accounting and reporting requirements for theimpairment and disposal of long-lived assets. This standard is effective forfiscal years beginning after December 15, 2001. The Company is currentlyevaluating the impact that this statement will have on our financial positionand results of operations, however we do not expect such impact to be material.

 

**NOTE 20 — SELECTED QUARTERLYFINANCIAL DATA (UNAUDITED)**

 
|                                                           |   | **Year Ended December 31, 2001**                 |       |
|----------------------------------------------------------------|--------|--------------------------------------------------|------------|
|                                                           |   | **1st Quarter**                                  | ** ** | **2nd Quarter** | ** ** | **3rd Quarter** | ** ** | **4th Quarter** | ** ** |
|                                                           |   | **(In Thousands, except for per share amounts)** |       |
| Interest income                                                |   | $                                                | 3,312      |   | $ | 3,178 |   | $ | 3,079 |   | $ | 2,738 |   |
| Interest expense                                               |   | 1,807                                            |       | 1,860 |   | 1835 |   | 1,519 |   |
| Net interest  income                                           |   | 1,505                                            |       | 1,318 |   | 1,244 |   | 1,219 |   |
| Provision for  loan losses                                     |   | 844                                              |       | 950 |   | 1,459 |   | 1,389 |   |
| Other income                                                   |   | 601                                              |       | 1,481 |   | 238 |   | 566 |   |
| Other expenses                                                 |   | 1,433                                            |       | 1,430 |   | 1,556 |   | 2,076 |   |
| Income (loss)  before income tax                               |   | (171                                             | )          | 419 |   | (1,533 | ) | (1680 | ) |
| Federal income  tax                                            |   | —                                           |       | — |   | — |   | — |   |
| Net income  (loss)                                             |   | $                                                | (171       | ) | $ | 419 |   | $ | (1,533 | ) | $ | (1,680 | ) |
|                                                           |   |                                             |       |   |   |   |   |   |   |
| Basic earnings  (loss) per share  (adjusted for stock splits)  |   | $                                                | (0.05      | ) | $ | 0.13 |   | $ | (0.47 | ) | $ | (0.52 | ) |
|                                                           |   |                                             |       |   |   |   |   |   |   |
| Diluted earnings  (loss)per share  (adjusted for stock splits) |   | $                                                | (0.05      | ) | $ | 0.11 |   | $ | (0.47 ) | $ | (0.52 | ) |

 

48

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|                                                    |   | **Year Ended December 31, 2000**                 |       |
|---------------------------------------------------------|--------|--------------------------------------------------|------------|
|                                                    |   | **1st Quarter**                                  | ** ** | **2nd Quarter** | ** ** | **3rd Quarter** | ** ** | **4th Quarter** | ** ** |
|                                                    |   | **(In Thousands, except for per share amounts)** |       |
| Interest income                                         |   | $                                                | 2,001      |   | $ | 2,446 |   | $ | 2,808 |   | $ | 3,163 |   |
| Interest expense                                        |   | 872                                              |       | 1,107 |   | 1,358 |   | 1,597 |   |
| Net interest  income                                    |   | 1,129                                            |       | 1,339 |   | 1,450 |   | 1,566 |   |
| Provision for  loan losses                              |   | 137                                              |       | 149 |   | 165 |   | 265 |   |
| Other income                                            |   | 79                                               |       | 97 |   | 117 |   | 122 |   |
| Other expenses                                          |   | 980                                              |       | 1,101 |   | 1,062 |   | 1,162 |   |
| Income before  income tax                               |   | 91                                               |       | 186 |   | 340 |   | 261 |   |
| Federal income  tax                                     |   | —                                           |       | — |   | — |   | — |   |
| Net income                                              |   | $                                                | 91         |   | $ | 186 |   | $ | 340 |   | $ | 261 |   |
|                                                    |   |                                             |       |   |   |   |   |   |   |
| Basic earnings  per share (adjusted for   stock splits) |   | $                                                | 0.03       |   | $ | 0.06 |   | $ | 0.11 |   | $ | 0.08 |   |
|                                                    |   |                                             |       |   |   |   |   |   |   |
| Diluted earnings  per share (adjusted forstock splits)  |   | $                                                | 0.03       |   | $ | 0.05 |   | $ | 0.10 |   | $ | 0.07 |   |
|                                                    |

 

49

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**ITEM 8. CHANGES IN AND DISAGREEMENTSWITH ACCOUNTANTS**

 

None.

 

**PART III**

 

The information required by Part III of this Form 10-KSB, except forItem 9 with regard to Executive Officers, and all of Item 13, is incorporatedby reference to the definitive proxy statement for Pacifica’s Annual Meeting ofShareholders to be held on May 28, 2002 (the “Proxy Statement”). The ProxyStatement is expected to be sent to shareholders along with this Annual Reportand Form 10-KSB beginning on or about March 28, 2002 and will concurrently befiled with the Securities Exchange Commission on Schedule 14A.

 

**ITEM9. EXECUTIVE OFFICERS**

** **
| **Name**           |   | **Age** |   | **Position/Title**                                                              |   | **Has Served the  Bank/Company  Since** |
|--------------------|--------|---------|--------|---------------------------------------------------------------------------------|--------|-----------------------------------------|
| Jeffery C. Low     |   | 48      |   | Chairman, President and Chief  Executive Officer                                |   | 1997                                    |
|               |   |    |   |                                                                            |   |                                    |
| John D. Huddleston |   | 48      |   | Executive Vice President, Chief  Financial Officer and Chief  Operating Officer |   | 1998                                    |

 

**Jeffery C. Low.**  Mr.Low has been President and Chief Executive Officer of the Company and PacificaBank since their respective inceptions. He has over 18 years’ experience in the banking industry.  More recently, he served as Vice Presidentof Commercial Banking for Enterprise Bank, Bellevue, Washington and itssuccessor Western Bank, a division of Washington Mutual Bank, from 1991 to1997. Mr. Low received BA and MBA degrees from the University of Puget Sound.

 

**John D. Huddleston.**  Mr. Huddleston has been a Senior VicePresident and Chief Financial Officer of the Company and Pacifica Bank sincetheir respective inceptions and was promoted to the position of Executive VicePresident, Chief Financial Officer, and Chief Operating Officer in 2001.  Prior to joining Pacifica, he was ManagingPartner for JCH Development, a real estate development and investment group inYelm, Washington from 1986 to 1998.  Mr.Huddleston has over 20 years experience in the banking and financial managementindustry.  Mr. Huddleston holds a BS inBusiness Administration, with an emphasis in Accounting, from the University ofPuget Sound.

 

**ITEM 10.EXECUTIVE COMPENSATION**

 

See “Form 10-KSB Cross-Reference Index”.

 

**ITEM 11. SECURITY OWNERSHIP OFCERTAIN BENEFICIAL OWNERS AND MANAGEMENT**

 

See “Form 10-KSB Cross-Reference Index”.

 

50

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**ITEM 12.CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS**

** **

See “Form 10-KSB Cross-Reference Index”.

 

**ITEM 13. EXHIBITS AND REPORTS ON FORM8-K**

 

**Exhibits**

 
| **Exhibit  No.** |   | **Description**                                                                                                                                                                                                                                                                                                                                                                  |
|------------------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 3.1              |   | Articles of Incorporation(1)                                                                                                                                                                                                                                                                                                                                                     |
| 3.2              |   | Bylaws(1)                                                                                                                                                                                                                                                                                                                                                                        |
| 4.1              |   | Form of Stock Certificate(1)                                                                                                                                                                                                                                                                                                                                                     |
| 10.1             |   | Employee Stock Option Plan(3)                                                                                                                                                                                                                                                                                                                                                    |
| 10.2             |   | Office Lease between Registrant, as Tenant, and The  Trustees under the Will and of the Estate of James Campbell, Deceased, as  Landlord, dated March 31, 1998; as amended by the First Amendment to Lease  dated May 1, 1998, Second Amendment to Lease dated June 12, 1998, Third  Amendment to Lease dated May 28, 1999, and Fourth Amendment to Lease dated  May 24, 2000(1) |
| 10.3             |   | Fifth Amendment to Lease dated October 19, 2000(2)                                                                                                                                                                                                                                                                                                                               |
| 10.4             |   | Data Processing Services Agreement between  Registrant and Fiserv Solutions, Inc. effective September 27, 2001(4)                                                                                                                                                                                                                                                                |
| 10.5             |   | Plan and Agreement of Reorganization between the  Registrant and Pacifica Bank dated as of October 2, 2000(1)                                                                                                                                                                                                                                                                    |
| 10.6             |   | Office Sublease Agreement, between Registrant, as  Subtenant, and Amazon.com Holdings, Inc., as Sublandlord, dated June 6,  2001(4)                                                                                                                                                                                                                                              |
| 11.              |   | Computation of basic and diluted earnings per  share(4)                                                                                                                                                                                                                                                                                                                          |
| 21.              |   | Subsidiaries                                                                                                                                                                                                                                                                                                                                                                     |
|             |   | Pacifica Bank                                                                                                                                                                                                                                                                                                                                                                    |
|             |   | Pacifica  Mortgage Company                                                                                                                                                                                                                                                                                                                                                       |
| 23.              |   | Consent of Moss Adams LLP(4)                                                                                                                                                                                                                                                                                                                                                     |
| 24.              |   | Power of attorney(4)                                                                                                                                                                                                                                                                                                                                                             |

 

----

(1)                        Incorporatedby reference to the Company’s Form 8-A, filed with the SEC on February 26,2001.

(2)                        Incorporatedby reference to the Company’s Form 10-KSB for the fiscal year ending December31, 2000.

(3)                        Incorporatedby reference to the Company’s Form S-8, filed with the SEC on September 4,2001.

(4)                        Filed withthis Form 10-KSB.

 

**Reports on Form 8-K**

 

Pacifica did not file any reports on Form 8-K during the fourth quarterof 2001.

 

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**FORM 10-KSB CROSS-REFERENCE INDEX**

 

This Annual Report and Form 10-KSB and the Company’s definitive ProxyStatement for its 2002 Annual Meeting of Shareholders, together contain therequirements of the accounting profession and the Securities and ExchangeCommission, including a comprehensive explanation of 2001 results.

 
|             |   |                                                                                                              |   |            |   | **Proxy**     |
|------------------|--------|-------------------------------------------------------------------------------------------------------------------|--------|-----------------|--------|---------------|
|             |   |                                                                                                              |   | **Annual**      |   | **Statement** |
|             |   |                                                                                                              |   | **Report Page** |   | **Page**      |
| **Form  10-KSB** |   | **Caption**                                                                                                       |   | **Number**      |   | **Number**    |
| **Part 1**       |   |                                                                                                              |   |            |   |          |
| Item 1           |   | Business                                                                                                          |   | 6-10            |   | -             |
| Item 2           |   | Properties                                                                                                        |   | 10              |   | -             |
| Item 3           |   | Legal Proceedings                                                                                                 |   | 10              |   | -             |
| Item  4          |   | Submission  of Matters to a Vote of Security Holders                                                              |   | 10              |   | -             |
|             |   |                                                                                                              |   |            |   |          |
| **Part II**      |   |                                                                                                              |   |            |   |          |
| Item  5          |   | Market  for the Registrant’s Common Stock and Related Stockholder Matters                                    |   | 11-12           |   | -             |
| Item  6          |   | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                       |   | 12-26           |   | -             |
| Item 7           |   | Financial Statements and  Supplementary Data                                                                      |   | 26-53           |   | -             |
| Item  8          |   | Changes  in and Disagreements with Accountants on Accounting and Financial Disclosure                             |   | 54              |   | -             |
|             |   |                                                                                                              |   |            |   |          |
| **Part III**     |   |                                                                                                              |   |            |   |          |
| Item 9           |   | Directors, Executive  Officers, Promoters and Control Persons; Compliance With Section 16(a) of the  Exchange Act |   | 54              |   | 5-6,9         |
| Item 10          |   | Executive Compensation                                                                                            |   | 54              |   | 7-8,10        |
| Item  11         |   | Security  Ownership of Certain Beneficial Owners and Management                                                   |   | 54              |   | 4             |
| Item  12         |   | Certain  Relationships and Related Transactions                                                                   |   | 55              |   | 10            |
| Item 13          |   | Exhibits and  Reports on Form 8-K                                                                                 |   | 55              |   | -             |

 

None of the foregoing incorporation by reference shall include theinformation referred to in Item 402 (a)(7) of Regulation S-B.

 

52

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***SIGNATURE***

 

Pursuant to the requirements of Section 13 or 15(d) of the SecuritiesExchange Act of 1934, the Company has duly caused this report to be signed onits behalf by the undersigned, thereunto duly authorized, on the 25 of March2002.

 
|   | PACIFICA BANCORP, INC. |
|--------|------------------------|
|   |                   |   |
|   | By                     | /s/ Jeffery C.  Low |
|   |                   | Jeffery C. Low  Chairman, President and  Chief Executive Officer |

 

Pursuant to the requirements of the Securities Exchange Act of 1934,this report has been signed below by the following persons on behalf of theCompany and in the capacities indicated, on the 25 of March 2002.

 
|   | Principal Executive Officer: |
|--------|------------------------------|
|   |                         |   |
|   | By                           | /s/ Jeffery C.  Low |
|   |                         | Jeffery C. Low  Chairman, President and  Chief Executive Officer |

 
|   | Principal Financial Officer: |
|--------|------------------------------|
|   |                         |   |
|   | By                           | /s/ John D.  Huddleston |
|   |                         | John D. Huddleston  Executive Vice President,  Chief Financial Officer and  Chief Operating Officer |

 

I, Jeffery C. Low, pursuant to a power of attorney which is being filedwith the Annual Report on Form 10-KSB, has signed this report on March 12, 2002as attorney in fact for the following directors who constitute the Board.

 

| Yi-Heng Lee         |   | Lyle K. Snyder         |
|---------------------|--------|------------------------|
| Mark P. Levy        |   | Fannie Kuei-Fang  Tsai |
| Robert E.  Peterson |   | Mark W. Weber          |
| George J. Pool      |   | Edwin R. Young         |

 
|   | /s/ Jeffery C.  Low              |   |   |
|--------|----------------------------------|--------|--------|
|   | Jeffery C. Low  Attorney-in-fact |   |   |

 

53

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**Pacifica Bancorp, Inc.  and Pacifica Bank Boards of Directors**

 

| Yi-Heng Lee               |   | Lyle K. Snyder         |
|---------------------------|--------|------------------------|
| Mark P. Levy              |   | Fannie Kuei-Fang  Tsai |
| Jeffery C. Low,  Chairman |   | Mark W. Weber          |
| Robert E.  Peterson       |   | Edwin R. Young         |
| George J. Pool            |   |                   |

 

**Officers**

 
| Jeffery C. Low      |   | President and Chief Executive Officer  Pacifica Bancorp, Inc. and Pacifica Bank                                              |
|---------------------|--------|------------------------------------------------------------------------------------------------------------------------------|
|                |   |                                                                                                                         |
| John D.  Huddleston |   | Executive Vice President , Chief Financial Officer  &  Chief Operating Officer  Pacifica Bancorp, Inc. and Pacifica Bank |
|                |   |                                                                                                                         |
| Paul F. Farris      |   | Secretary of Pacifica Bancorp, Inc. and Pacifica  Bank  Senior Vice President/Cashier of Pacifica Bank                       |
|                |   |                                                                                                                         |
| Katty Chow          |   | Senior Vice President /Manager, Private Banking  Pacifica Bank                                                               |
|                |   |                                                                                                                         |
| Emily Yeh           |   | Senior Vice President /Manager, International  Banking  Pacifica Bank                                                        |
|                |   |                                                                                                                         |
| Carmen L.  Malsbury |   | Senior Vice President /Chief Credit Officer  Pacifica Bank                                                                   |
|                |   |                                                                                                                         |
| Rob L. Robinson     |   | Senior Vice President /Chief Loan Quality Officer  Pacifica Bank                                                             |
|                |   |                                                                                                                         |
| Robert W. Rea       |   | President of Pacifica Mortgage Company                                                                                       |
|                |   |                                                                                                                         |
| Debora  Kilpatrick  |   | Senior Vice President of Pacifica Mortgage Company                                                                           |

 
| **Legal Counsel**                                                                                   |   | **Auditor**                                                                       |
|-----------------------------------------------------------------------------------------------------|--------|-----------------------------------------------------------------------------------|
| Davis Wright Tremaine LLP  2600 Century Square  1501 Fourth Avenue  Seattle, WA 98101  206-622-3150 |   | Moss Adams LLP  2200 Rimland Drive  Suite 300  Bellingham, WA 98225  360-676-1920 |

 
| **Transfer Agent and Registrar**                              |   | **Information  Requests**                                                                                                       |
|---------------------------------------------------------------|--------|---------------------------------------------------------------------------------------------------------------------------------|
| Pacifica Bank10900 NE 4th Street, Suite 200Bellevue, WA 98004 |   | Written requests should  be mailed to:Corporate SecretaryPacifica Bancorp, Inc.10900 NE 4th Street, Suite 200Bellevue, WA 98004 |

 

**Annual Shareholders’ Meeting**

Tuesday, May 28, 2002

9th Floor Conference Room of the Skyline Tower at 10900 NE 4thStreet, Bellevue, WA 98004

 

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