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U.S. SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



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Form 10-K



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(Mark One)



|x | Annual report under Section 13 or 15(d) of the Securities Exchange Act of 1934
|- | ------------------------------------------------------------------------------



For the fiscal year ended December 31, 2003



| ̈ | 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



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Pacifica Bancorp, Inc.

(Exact name of registrant as specified in its charter)



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|                                                               |  |                                        
|-------------------------------------------------------------- |  | ---------------------------------------
|Washington                                                     |  | 91-2094365                             
|(State or other jurisdiction of incorporation or organization) |  | (I.R.S. Employer Identification Number)



Skyline Tower, 10900
NE 4thStreet, Suite 200, Bellevue, WA 98004

(Address of principal executive offices) (Zip Code)



Registrant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)



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Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past
12 months (or for such shorter 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  x    No ̈



Indicate by check mark if disclosure of delinquent filers in response to Item 405 of Regulation S-K (17 C.F.R. 229.405) is not contained
herein, and will not be contained, to the best of registrants knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form
10-K.    Yes ̈No  x



Indicate by check mark if the registrant is an accelerated filer within the meaning of Rule
12b-2 promulgated under the Securities Exchange Act of 1934.    Yes ̈No  x



The aggregate market value of common stock held
by non-affiliates of registrant at June 30, 2003 was $13,694,000 based upon the most recent known sale price of the registrants common stock. The registrants securities are not listed on a national securities exchange nor are sale, bid
or ask information recorded by any automated quotation system.



The number of
shares of registrants common stock outstanding at March 1, 2004 was 3,235,008.



Documents incorporated by reference and parts of Form 10-K into which incorporated:



Registrants definitive Proxy Statement Dated March 2, 2004 Part III, except part of Item 10, as indicated. The Personnel Committee Report on Executive Compensation and the Audit Committee Report contained in the
Proxy Statement are not incorporated into this Form 10-K.



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##### Table of Contents

TABLE OF CONTENTS



SELECTED
FINANCIAL DATA



MESSAGE
TO OUR SHAREHOLDERS



COMPANY PROFILE



FORM 10-K



|                                |  |                                                                                       |  |   
|------------------------------- |  | ------------------------------------------------------------------------------------- |  | --
|Part I                          |  |                                                                                       |  |   
|Item 1                          |  | Business                                                                              |  | 1 
|Item 2                          |  | Properties                                                                            |  | 6 
|Item 3                          |  | Legal Proceedings                                                                     |  | 6 
|Item 4                          |  | Submission of Matters to a Vote of Security Holders                                   |  | 7 
|                                |  |                                                                                      
|Part II                         |  |                                                                                       |  |   
|Item 5                          |  | Market for Registrants Common Equity and Related Stockholder Matters                 |  | 8 
|Item 6                          |  | Selected Financial Data                                                               |  | 9 
|Item 7                          |  | Managements Discussion and Analysis of Financial Condition and Results of Operations |  | 9 
|Item 7A                         |  | Quantitative and Qualitative Disclosures About Market Risk                            |  | 26
|Item 8                          |  | Financial Statements and Supplementary Data                                           |  |   
|                                |  | Independent Auditors Report                                                          |  | 28
|                                |  | Balance Sheet                                                                         |  | 29
|                                |  | Statement of Income                                                                   |  | 30
|                                |  | Statement of Changes in Stockholders Equity                                          |  | 31
|                                |  | Statement of Cash Flows                                                               |  | 32
|                                |  | Notes to Financial Statements                                                         |  | 33
|Item 9                          |  | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure  |  | 56
|Item 9A                         |  | Controls and Procedures                                                               |  | 56
|                                |  |                                                                                      
|Part III                        |  |                                                                                       |  |   
|Item 10                         |  | Directors and Executive Officers of the Registrant                                    |  | 56
|Item 11                         |  | Executive Compensation                                                                |  | 57
|Item 12                         |  | Security Ownership of Certain Beneficial Owners and Management                        |  | 57
|Item 13                         |  | Certain Relationships and Related Transactions                                        |  | 57
|Item 14                         |  | Principal Accounting Fees and Services                                                |  | 57
|                                |  |                                                                                      
|Part IV                         |  |                                                                                       |  |   
|Item 15                         |  | Exhibits, Financial Statement Schedules, and Reports on Form 8-K                      |  | 58
|                                | 
|FORM 10-K CROSS-REFERENCE INDEX |  | 59                                                                                   



|NOTE: | This annual report serves as the Banks annual disclosure statement under requirements of the Federal Deposit Insurance Corporation (FDIC). This statement has not been
reviewed, or confirmed for accuracy or relevance, by the FDIC.
|----- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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##### Table of Contents

The following table presents certain selected balance sheet and income statement data, as well as
certain key financial ratios, for the five full years that the Company has been in operation. Certain income and expense items for 2002 and 2001 have been adjusted to reflect the closure of the Companys subsidiary, Pacifica Mortgage Company,
during 2003. Income and expenses for Pacifica Mortgage Company are reported as Loss from Discontinued Operations.



PACIFICA BANCORP, INC.

FIVE-YEAR
SUMMARY OF SELECTED FINANCIAL DATA



|                                                            |  |      |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |        |  
|----------------------------------------------------------- |  | ---- | ------- | - | ---- | - | ------- | ---- |  | - | ------- | - |  | ---- | ------- | - |  | - | ------ | -
|(Dollars in thousands, except ratios and per share amounts) |  | 2003 |         |   | 2002 |   |         | 2001 |  |   | 2000    |   |  | 1999 |        
|Statement of Operations Data                                |  |      |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |        |  
|Net interest income                                         |  | $    | 6,735   |   |      | $ | 5,900   |      |  | $ | 5,286   |   |  | $    | 5,485   |   |  | $ | 2,577  |  
|Provision for loan losses                                   |  |      | (900    | ) |      |   | (603    | )    |  |   | 4,642   |   |  |      | 717     |   |  |   | 548    |  
|Non-interest income                                         |  |      | 823     |   |      |   | 566     |      |  |   | 2,234   |   |  |      | 415     |   |  |   | 240    |  
|Non-interest expense                                        |  |      | 7,092   |   |      |   | 6,508   |      |  |   | 5,576   |   |  |      | 4,305   |   |  |   | 3,000  |  
|Net income (loss) available to shareholders                 |  |      | 1,178   |   |      |   | 94      |      |  |   | (2,965  | ) |  |      | 878     |   |  |   | (731   | )
|Per Share                                                   |  |      |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |        |  
|Net income (loss)basic                                     |  | $    | 0.36    |   |      | $ | 0.03    |      |  | $ | (0.91   | ) |  | $    | 0.27    |   |  | $ | (0.24  | )
|Net income (loss)diluted                                   |  |      | 0.36    |   |      |   | 0.03    |      |  |   | (0.91   | ) |  |      | 0.24    |   |  |   | (0.24  | )
|Book value                                                  |  |      | 3.87    |   |      |   | 3.73    |      |  |   | 3.62    |   |  |      | 4.80    |   |  |   | 4.28   |  
|Averages                                                    |  |      |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |        |  
|Total assets                                                |  | $    | 155,881 |   |      | $ | 161,972 |      |  | $ | 161,323 |   |  | $    | 110,689 |   |  | $ | 65,215 |  
|Earning assets                                              |  |      | 151,211 |   |      |   | 159,558 |      |  |   | 157,760 |   |  |      | 107,070 |   |  |   | 62,147 |  
|Loans, net of deferred loan fees                            |  |      | 108,663 |   |      |   | 109,757 |      |  |   | 111,850 |   |  |      | 82,860  |   |  |   | 39,043 |  
|Securities                                                  |  |      | 25,347  |   |      |   | 22,253  |      |  |   | 23,749  |   |  |      | 12,150  |   |  |   | 5,309  |  
|Deposits                                                    |  |      | 137,632 |   |      |   | 146,405 |      |  |   | 143,007 |   |  |      | 95,031  |   |  |   | 51,547 |  
|Shareholders equity                                        |  |      | 12,514  |   |      |   | 11,739  |      |  |   | 15,179  |   |  |      | 14,287  |   |  |   | 13,103 |  
|Financial Ratios                                            |  |      |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |        |  
|Net interest margin                                         |  |      | 4.45    | % |      |   | 3.71    | %    |  |   | 3.35    | % |  |      | 5.12    | % |  |   | 4.15   | %
|Return on average assets                                    |  |      | 0.76    | % |      |   | 0.06    | %    |  |   | -1.84   | % |  |      | 0.79    | % |  |   | -1.12  | %
|Return on average equity                                    |  |      | 9.41    | % |      |   | 0.80    | %    |  |   | -19.53  | % |  |      | 6.15    | % |  |   | -5.58  | %
|Efficiency ratio                                            |  |      | 93.83   | % |      |   | 100.65  | %    |  |   | 74.15   | % |  |      | 72.97   | % |  |   | 106.50 | %
|Average equity to average assets                            |  |      | 8.03    | % |      |   | 7.25    | %    |  |   | 9.41    | % |  |      | 12.91   | % |  |   | 20.09  | %
|Balance Sheet Data                                          |  |      |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |        |  
|Total assets                                                |  | $    | 161,869 |   |      | $ | 164,688 |      |  | $ | 171,364 |   |  | $    | 138,650 |   |  | $ | 86,203 |  
|Loans                                                       |  |      | 116,770 |   |      |   | 109,735 |      |  |   | 105,878 |   |  |      | 105,822 |   |  |   | 58,859 |  
|Allowance for loan losses                                   |  |      | 2,230   |   |      |   | 2,919   |      |  |   | 3,530   |   |  |      | 1,306   |   |  |   | 589    |  
|Available for sale securities                               |  |      | 27,360  |   |      |   | 22,518  |      |  |   | 33,177  |   |  |      | 17,661  |   |  |   | 11,577 |  
|Deposits                                                    |  |      | 133,712 |   |      |   | 148,320 |      |  |   | 155,969 |   |  |      | 120,411 |   |  |   | 71,701 |  
|Shareholders equity                                        |  |      | 12,614  |   |      |   | 12,176  |      |  |   | 11,797  |   |  |      | 15,626  |   |  |   | 13,765 |  
|Nonperforming Assets                                        |  |      |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |        |  
|Nonperforming assets                                        |  | $    |        |   |      | $ | 214     |      |  | $ | 478     |   |  | $    | 22      |   |  | $ |       |  
|Net loan chargeoffs/(recoveries)                            |  |      | (211    | ) |      |   | 8       |      |  |   | 2,418   |   |  |      |        |   |  |   |       |  
|Capital Ratios                                              |  |      |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |        |  
|Leverage ratio                                              |  |      | 8.27    | % |      |   | 7.81    | %    |  |   | 6.82    | % |  |      | 11.45   | % |  |   | 16.56  | %
|Tier 1 risk-based capital ratio                             |  |      | 9.80    | % |      |   | 9.47    | %    |  |   | 9.82    | % |  |      | 12.00   | % |  |   | 17.67  | %
|Total risk-based capital ratio                              |  |      | 11.06   | % |      |   | 11.98   | %    |  |   | 11.09   | % |  |      | 13.05   | % |  |   | 18.42  | %



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PART I



The following discussion includes forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, (the
Exchange Act). Forward-looking statements are based on managements beliefs and assumptions based on currently available information, and we have not undertaken to update these statements except as required by the Exchange Act, and
the rules promulgated thereunder. Other than statements of historical fact regarding our financial position, business strategies and managements plans and objectives for future operations are forward-looking statements. When used in this
report, the words anticipate, believe, estimate, expect, and intend and words or phrases of similar meaning, as they relate to Pacifica or management, are intended to help identify
forward-looking statements. Although we believe that managements expectations as reflected in forward-looking statements are reasonable, we cannot assure readers that those expectations will prove to be correct. Forward-looking statements are
subject to various risks and uncertainties that may cause our actual results to differ materially and adversely from our expectations as indicated in the forward-looking statements and these variations may be both material and adverse. These risks
and uncertainties include the fact that we are operating under specific regulatory limitations that limit our ability to grow our business and may require us to take measures that reduce our profitability and may adversely impact our financial
condition. We also face risks associated with the geographic concentration of our customers, our ability to maintain or expand our market share or net interest margins, and competitive and economic issues that impact our ability to implement our
marketing and growth strategies. Further, actual results may be affected by our ability to compete on price and other factors with other financial institutions; customer acceptance of new products and services; the regulatory environment in which we
operate; and general trends in the local, regional and national banking industry as those factors relate to our cost of funds and return on assets. In addition, there are risks inherent in the banking industry relating to collectibility of loans and
changes in interest rates. Many of these risks, as well as other risks that may have a material adverse impact on our operations and business, are identified in our other filings with the FDIC and those identified from time to time in our filing
with the SEC. However, you should be aware that these factors are not an exhaustive list, and you should not assume these are the only factors that may cause our actual results to differ from our expectations. In addition you should note that we do
not intend to update any of the forward-looking statements or the uncertainties that may adversely impacted those statements.



ITEM 1. BUSINESS



General



Pacifica Bancorp, Inc. (Pacifica or the Company)
is a bank holding company for its wholly owned subsidiary, Pacifica Bank (the Bank). The Company was organized under the laws of the State of Washington in October 2000 and is headquartered in Bellevue, Washington. Effective March 31,
2003, the Company ceased operations of its wholly owned subsidiary Pacifica Mortgage Company (Pacifica Mortgage or the Mortgage Company).



The Bank commenced banking operations in October 1998. 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 bank holding company, including a two-for-one stock split. Upon the approval of the Federal Reserve Bank of
San Francisco and the Washington State Department of Financial Institutions, Division of Banks (the Department), the Plan became effective on January 1, 2001 and the Company became the Banks parent company. Upon reorganization, the
Bank became a wholly-owned subsidiary of the Company and each outstanding whole share of Bank common stock was exchanged for two shares of the Companys common stock. Financial and operational data for dates and periods ending before the
reorganization reflect only the financial information and business operations of the Company. As a wholly-owned subsidiary, Pacifica Mortgage Company was formed on January 18, 2001, and offered a variety of residential loan options to the residents
of our service area The Company undertook a major restructuring of Pacifica Mortgage in the third quarter of 2002. The restructuring did not sufficiently improve profitability of the Mortgage Company, and as a result, the Company closed the Mortgage
Company effective March 31, 2003, and processed residual transactions throughout the rest of the year. The Company currently provides mortgage services via referrals to correspondent banks to generate fee income and serve our customers efficiently.



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Our Internet website address is http://www.pacificabank.com. Our Securities Exchange Act reports are
available free of charge on our Internet website. Our reports can also be obtained through the Securities and Exchange Commissions (the SEC) EDGAR database at http://www.sec.gov. The contents of our Internet website are not
incorporated into this report or into any other communication delivered to security holders or furnished to the SEC.



The Bank is a Washington state-chartered commercial bank, the deposits of which are insured by the Federal Deposit Insurance Corporation (the FDIC).



The Company offers a full range of commercial banking services primarily to
customers in the Bellevue and Seattle, Washington business districts. Pacificas marketing strategy and general business plan are similar to strategies that have proven successful in similar situations involving new banks organized in the
Pacific Northwest during the last several years. Pacifica targets small to mid-sized businesses, professionals, various Asian communities and companies doing business in Asia for commercial banking services because we believe these groups may be
currently under-served by other financial institutions.



Pacificas goal
is to exceed customer, shareholder and community expectations in dedication, professionalism and innovation. Management constantly reviews our products and services and those of our competitors in order to provide customers more service options and
better quality. We successfully launched our Internet online banking service in December 2001, Cash Management service in May 2002, Online Bill Pay service in September 2002, and Visa Debit Card service in October 2003.



The Company opened a branch office in Seattle in December 2001 and managements
assessment is that the opening was well received by the local community. This allows Pacifica to expand our network and better service our customers in Seattles industrial and downtown areas as well as the international district. New branches
do not generally become profitable for a period of time after opening, and our experience in Seattle has been no exception to this principle. The Seattle Office has made satisfactory progress since its opening and during 2003 achieved its first year
of positive earnings.



The Board of Directors and Management developed a
Five-Year Strategic Plan (the Strategic Plan) in the second quarter of 2003, which is designed to strengthen the Companys financial performance and thereby increase shareholder value. As a result of implementing the strategies, we have made
solid progress during 2003. We experienced a significant reduction in classified assets, an improvement in overall asset quality, an increase in net interest margin and improved financial results for the year.



During 2003, we have taken the following measures to improve asset quality while increasing
earnings and enhancing overall efficiency:



| |  | Restructured our lending team and added two experienced loan officers to help generate more new loans;
| | - | ------------------------------------------------------------------------------------------------------



| |  | Strengthened our credit administration function and improved our overall loan quality;
| | - | --------------------------------------------------------------------------------------



| |  | Took various measures to cut operating costs;
| | - | ---------------------------------------------



| |  | Continued to monitor our staffing needs closely and adjust job functions to increase overall productivity and efficiency;
| | - | -------------------------------------------------------------------------------------------------------------------------



| |  | Formed a Funds Management Committee consisting of executive management and members from credit administration, lending, operations and private banking to analyze the asset/liability
management strategies of the Company, including the continuing evaluation of pricing for loans and deposits;
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Continued to enhance international services.
| | - | --------------------------------------------



During the second quarter of 2003, we sublet the office space previously occupied by the Mortgage Company and consolidated the Banks office space as well, to help
reduce occupancy expenses. During the third quarter and fourth quarter of 2003, the Bank borrowed from the Federal Home Loan Bank (FHLB) to effectively fix a portion of the Companys funding costs for asset/liability management purposes. In
addition, the Company obtained a line of credit from a correspondent bank and used a portion of the line to retire its outstanding Series A-1 Perpetual Preferred Stock (the Perpetual Preferred) and A-2 Five-Year



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Cumulative Mandatory Redeemable Preferred Stock (the Limited Life Preferred) effective December 29, 2003 and September 30, 2003, respectively.
Replacing the preferred stock with a lower cost borrowing is expected to significantly reduce the Companys cost of capital. See additional discussions on borrowings and redemption of Preferred Stock under Managements Discussion and
Analysis of Financial Condition and Results off Operations.



Given our focus on
improving asset quality, increasing earnings and enhancing overall efficiency, as well as the requirements and restrictions imposed by the supervisory directive under which we are operating (as discussed beginning at page 5 below), we expect our
current asset size to increase only slightly during 2004. Due to the slow loan demand resulting from a still weak economy and our anticipated loan payoffs, we expect our rate of loan growth to continue to be slower than the rates we experienced in
the first three years of operations. We also plan to decrease the amount of time certificate deposits and utilize more of the other sources of borrowings to continue to reduce our cost of funds. The Company continues to look at various other ways to
increase income and cut operational expenses in order to improve overall efficiency without losing our focus on customer service, regulatory compliance and credit quality.



Pacifica Bancorp, Inc. and Pacifica Bank Board of Directors and Officers



See inside cover of the annual report.



Market Area



The primary market area from which we attract the majority of our customers is King County, Washington. Pacifica has its main office in the
central business district of Bellevue, Washington, located approximately 10 miles east of Seattle, with a branch office in downtown Seattle. We also attract customers from the greater Bellevue area, the greater Seattle area and from communities
along the I-5 corridor from Everett to Olympia, Washington. Pacificas market area has undergone significant business diversification, and the regional economy experienced strong growth and stability during the 1990s, fueled largely by the
technology and aerospace sectors. However, the regional economy slowed noticeably during 2001, with a number of large employers, including Boeing, the largest employer in the Pacific Northwest, announcing layoffs and other workforce reductions.
During 2002, Pacificas market area continued to feel the effects of the countrys overall economic slowdown, which appears to have been particularly pronounced in the Pacific Northwest, including unemployment levels above the national
average. During 2003, the region experienced slow growth and recovery and management expects that to continue into 2004.



Competition



The Company operates in a highly competitive environment, competing for deposits, loans and other financial services with both banking and non-financial institutions. Competition among financial institutions in
Pacificas primary market area is diverse, with the strongest competition coming from commercial banks, savings banks, savings and loan associations and brokerage firms.



Our banking competitors include national and super-regional banks, as well as a number of regional and community banks. Major banks have
competitive advantages over Pacifica in that they have high public visibility and are able to maintain advertising and marketing activity on a much larger scale than Pacifica. Since single borrower lending limits imposed by law are dependent upon
the capital of a banking institution, the branches of larger banks with substantial capital bases are also at an advantage with respect to loan applications that exceed Pacificas legal lending limit. However, these larger institutions
generally serve a different customer base than that targeted by Pacifica, thus management believes we can compete effectively based upon our marketing plan, which targets small businesses, professionals and consumers who demand better service and
more personalized products than larger institutions are willing to provide to small customers.



Owing in part to this phenomenon, our management expects the number of start-up community banks to increase because of the specialized service that such banks offer to potential customers. This shift likely will
result in significant challenges to existing banks, including Pacifica, to maintain a competitive level. Further, an increase in competition with community banks will require us to focus carefully on customer service while maintaining asset mixes
and interest rates to maintain growth.



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



Management believes bank competition may change dramatically over the next several years as the major regional banks continue to consolidate. Large financial institutions
may provide incentives for their customers to rely less on personal service and more on electronic banking. We see internet banking as another medium of service in addition to the traditional face-to-face approach. We believe the effective use of
technology is an important competitive tool and plan to continue using internet banking to build on our strengths, without sacrificing a personal approach and convenience.



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



Employees



At December 31, 2003, the Company employed 48
full-time employees. None of our employees are represented by a collective bargaining group. Management considers its relationship with employees to be satisfactory.



Regulation and Supervision



General



The Company is a bank holding company within the meaning of the Bank Holding Company Act of 1956 (BHC Act) registered with and subject to examination by the Board of Governors of the Federal Reserve System
(the FRB). The Bank is a Washington state-chartered commercial bank and is subject to examination, supervision and regulation by the Department and by the FDIC, which insures the Banks deposits.



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 by local legislative and administrative bodies and decisions of courts in Washington State. That legislation and regulation, as well as the supervisory
directive discussed below, do and will continue in the future to:



| |  | limit Pacificas ability to pay dividends;
| | - | ------------------------------------------



| |  | impose additional requirements on the making, enforcement and collection of consumer loans;
| | - | -------------------------------------------------------------------------------------------



| |  | limit or expand Pacificas permissible activities, including Pacificas ability to sell mutual funds and other uninsured investment products to customers;
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | limit the finance charges or other fees or charges Pacifica can earn in such activities;
| | - | ----------------------------------------------------------------------------------------



| |  | increase Pacificas cost of doing business by changing the laws and regulations governing the operations and taxation of banks and other financial institutions;
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | affect the competitive balance between banks and other financial and non-financial institutions; or
| | - | ---------------------------------------------------------------------------------------------------



| |  | further regulate banking and financial services.
| | - | ------------------------------------------------



The likelihood of any such changes and their impact on us are impossible to predict. There can be no assurance whether any legislation or regulation will place additional
limitations on Pacificas operations or



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adversely affect Pacificas earnings. The earnings of Pacifica are also affected by general economic conditions and the conduct of monetary policy by
the U.S. government.



Supervisory Directive



As a result of a September 2001 examination by the FDIC and the Washington State Department
of Financial Institutions, Division of Banks (the Department), the Bank became subject to a Supervisory Directive dated March 27, 2002. In response to the Supervisory Directive, management prepared action plans, formed an Asset Quality
Committee, and took other steps to improve credit quality, improve capital ratios, increase earnings and promote stability during 2002.



The FDIC and the State conducted a joint examination in late 2002 and acknowledged improvement in the condition of the Bank. The regulators determined that the Bank
should continue to remain subject to a revised supervisory directive. As a result, the March 27, 2002 Supervisory Directive was revised effective February 25, 2003.



The FDIC and the State conducted a joint examination in November 2003 and again acknowledged the progress the Bank has made. The regulators
determined that the Bank should remain subject to a supervisory directive at least until the next regulatory examination. As a result, effective February 24, 2004, a Supervisory Directive (Directive) was issued that modified and replaced
the previous two supervisory directives issued on March 27, 2002 and February 25, 2003, respectively. Our business plan and operating budget have us on target for meeting the objectives set forth in the supervisory directive. As of December 31,
2003, the Bank has reduced by 86% the amount of its classified assets that the FDIC had identified as of September 30, 2002, which exceeded the target of a 50% reduction as set forth in the Supervisory Directive for year-end 2003. The Bank
maintained the well-capitalized designation as delineated by FDIC regulations. Its Tier 1 Leverage Capital ratio was 9.94% as of December 31, 2003, which surpassed the 8% minimum level required.



The revised Directive addressed a number of issues related to the Banks growth,
earnings, and capital, by:



| |  | temporarily limiting the Banks ability to declare or pay dividends, which will limit the Companys ability to derive income from that subsidiary;
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------



| |  | temporarily limiting the Banks maximum asset size to $180 million;
| | - | -------------------------------------------------------------------



| |  | requiring the Banks Tier I Leverage Capital ratio to be maintained at 8% or greater and maintain a well-capitalized designation as defined by FDIC regulations; and
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | requiring the Bank to discuss certain growth, earnings and capital augmentation strategies in its strategic and capital plans and continuously monitor its progress in achieving its
goals.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



We do not expect the limitations of the Supervisory
Directive to reduce our ability to achieve our plan for 2004.



Recent
Reform Legislation



Congress enacted major federal financial
institution legislation in 1999. Among other things, the legislation allows certain affiliations among securities, insurance, banking and other financial companies and provides for the creation of financial holding companies and financial
subsidiaries.



Affiliate Transactions



Federal law imposes certain restrictions on transactions between insured depository
institutions and their nonbank subsidiaries. With certain exceptions, federal law also imposes limitations on, and requires collateral for, extensions of credit by insured depository institutions to their nonbank affiliates. As an insured depository
institution, the Bank is subject to these restrictions and limitations.



Branching and Interstate Acquisitions



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



5



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##### Table of Contents

Banking Activities



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



Capital Adequacy Requirements



The FDIC has adopted regulations establishing minimum requirements for the capital adequacy of insured banks which address both risk-based capital and leverage capital.
See Managements Discussion and Analysis of Financial Condition and Results of Operations  Capital. The FRB has also established capital adequacy requirements for bank holding companies similar to those for banks.



Reports and Examinations



Pacifica is required to file periodic reports with the FDIC, the FRB and the Department and
is subject to periodic examinations and evaluations by those regulatory authorities. These examinations must be conducted every 12 months, except that the FDIC may examine certain well-capitalized banks every 18 months. It is the policy of the
Department to conduct joint examinations with the FDIC whenever possible.



Priority of Claims



In the liquidation or other
resolution of a failed insured depository institution, deposits in offices and certain claims for administrative expenses and employee compensation are afforded a priority over other general unsecured claims, including non-deposit claims. Such
priority creditors would include the FDIC, which succeeds to the position of insured depositors.



Securities Reporting



Pacifica
is subject to the information, proxy solicitation, insider trading restrictions and other requirements of the Securities Exchange Act of 1934. Prior to December 31, 2000, the Bank filed recurring reports under the Securities Exchange Act with the
FDICs Registration, Disclosure and Securities Information Unit. After that date, all recurring reports relating to Pacifica Bancorp Inc. are filed with the Securities and Exchange Commission and are available on the SECs EDGAR database
at http://www.sec.gov.



USA Patriot Act of 2001



Under the USA Patriot Act of 2001, adopted by the U.S. Congress on
October 26, 2001 to combat terrorism, FDIC insured banks and commercial banks will be required to increase their due diligence efforts for correspondent accounts and private banking customers. The USA Patriot Act requires the Bank to engage in
additional record keeping or reporting, requiring identification of owners of accounts, or of the customers of foreign banks with accounts, and restricting or prohibiting certain correspondent accounts.



ITEM 2. PROPERTIES



Pacificas banking
operations and administrative functions are carried on at its main office, located in the Skyline Tower, 10900 NE 4thStreet, Bellevue, Washington 98004, in the central business district of Bellevue. Pacificas Seattle Office is located at 705 5thAvenue South, Seattle, Washington 98104. Pacifica currently leases approximately 21,648 square feet for operations of the Bank and does not plan to rent additional space during 2004.



ITEM 3. LEGAL PROCEEDINGS



From time to time,
Pacifica may be a party to routine litigation incidental to its business. Pacifica is not currently a party to any litigation, the adverse determination of which would be likely to have a material adverse effect upon its business operations or
assets.



6



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##### Table of Contents

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



NONE.



7



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##### Table of Contents

PART II



ITEM 5. MARKET FOR REGISTRANTS COMMON EQUITY AND RELATED STOCKHOLDER MATTERS



Market for Common Equity



Pacificas stock is not listed on any exchange or quoted on any inter-dealer quotation system or traded on an over-the-counter market. We have not been notified that
any broker makes a market in Pacificas common stock, and sales are minimal. Due to the limited information available, the following price information may not accurately reflect the actual market value of Pacificas shares. The following
are the high and low sale prices for Pacificas stock sold between individual investors in transactions known to Pacifica, during 2003, 2002 and 2001.



|               |  |                          |      |      |   |      |  |     |      |      |   |      |  |   |       |  |   |      
|-------------- |  | ------------------------ | ---- | ---- | - | ---- |  | --- | ---- | ---- | - | ---- |  | - | ----- |  | - | -----
|               |  | Years Ended December 31,
|               |  | 2003                     |      | 2002 |   | 2001
|               |  | High                     |      | Low  |   | High |  | Low |      | High |   | Low 
|First quarter  |  | $                        | 5.15 |      | $ | 4.00 |  | $   | 6.00 |      | $ | 5.50 |  | $ | 10.00 |  | $ | 9.25 
|Second quarter |  |                          | 5.00 |      |   | 4.00 |  |     | 8.00 |      |   | 5.00 |  |   | 10.00 |  |   | 10.50
|Third quarter  |  |                          | 4.75 |      |   | 3.90 |  |     | 6.50 |      |   | 6.25 |  |   | 11.05 |  |   | 9.00 
|Fourth quarter |  |                          | 5.25 |      |   | 4.80 |  |     | 5.10 |      |   | 4.75 |  |   | 11.00 |  |   | 8.00 



|                    |  |         |     |  |         |  |         |    
|------------------- |  | ------- | --- |  | ------- |  | ------- | ---
|                    |  | 2003    |     |  | 2002    |  | 2001    |    
|Total shares traded |  | 132,655 | (1) |  | 197,864 |  | 121,701 | (2)

---

|(1) | Exclusive of the exercise of stock options by existing and former employees totaling 7,000 shares at $5.00 per share.
|--- | ---------------------------------------------------------------------------------------------------------------------

|(2) | Exclusive of the exercise of stock options by existing and former employees totaling 43,080 shares at $5.00 per share.
|--- | ----------------------------------------------------------------------------------------------------------------------



As of December 31, 2003, Pacificas common stock was held of record by approximately 521
shareholders, a number that does not include beneficial owners who hold shares in street name.



Dividends



Federal and applicable state banking laws and regulations limit the Banks ability to pay dividends to the Company, and as a result, those laws and regulations indirectly limit the Companys ability to meet
its expenses or to pay dividends to shareholders. On January 30, 2001, the Company adopted a dividend policy that provides that the Board of Directors will declare dividends only if the Company is considered to have adequate capital and adequate
earnings. The Company plans to retain earnings to support planned growth over the near term and does not anticipate paying dividends in the foreseeable future. As discussed in Description of Business - Regulation and Supervision, we
presently are operating under a supervisory directive that, among other things, limits the Banks ability to pay dividends to the Company which in turn limits the Companys ability to pay dividends to shareholders.



Stock Option Plans



In order to attract and retain highly qualified personnel, the Company adopted the Banks Employee Stock Option Plan (the Option
Plan), which was approved by the Banks shareholders in 1998 and by Pacificas shareholders in April 2001. At the time of approval, 1,000,000 shares of common stock (adjusted for the 2-for-1 split as a result of the reorganization
effective January 1, 2001) were reserved for issuance under the Option Plan. Upon closing of the reorganization, each outstanding and unexercised option to purchase one share of the Banks common stock was converted to an option to purchase two
shares of the 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 the Company, and otherwise continues in
form and substance similar to the Option Plan in effect before the reorganization. The Option Plan is administered by the Board of Directors of Pacifica (or a committee thereof). At the 2002 Annual Meeting of Shareholders, Pacifica shareholders
approved an amendment to the Option Plan, to increase the total number of shares available for issuance under the Option plan by 200,000 to 1,200,000.



8



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##### Table of Contents

Stock Repurchase Program



On October 28, 2003, the Board of Directors adopted a Stock Repurchase Program, authorizing the Company to repurchase up to 5 percent, or approximately 162,000 shares,
of the outstanding shares of its common stock from shareholders that have expressed an interest in selling their Pacifica common stock. The purpose of the program is to provide shareholders with a means to sell their shares of Company common stock
at a fair price, to achieve some degree of liquidity for the Companys common stock and to accumulate shares of common stock that can be used in connection with the Companys equity based compensation plans without further dilution of
common shareholders equity. Since the beginning of the program, the Company has repurchased 34,360 shares in 2003 with prices ranging from $5.00 to $5.25 per share. The Stock Repurchase Program expired on December 15, 2003, and any additional
stock repurchases are subject to prior board approval.



ITEM 6. SELECTED FINANCIAL DATA



See inside cover
of this Annual Report for a tabular presentation of selected audited consolidated financial data for each full year that Pacifica has been in operation. The historical operating results are not necessarily indicative of the results to be expected
for any other period. The data set forth in the table should be read in conjunction with Managements Discussion and Analysis of Financial Condition and Results of Operations and the Companys consolidated financial statements
and related notes, included elsewhere in this Annual Report. Note also that data presented for dates and periods ending prior to the holding company reorganization reflect only the financial condition, results of operation and other financial
information concerning the Bank.



ITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS



The following discussion and analysis should be read in conjunction with the Financial Statements and Notes thereto presented elsewhere in this report.



Overview



Note. As a result of the closure of Pacifica Mortgage Company effective March 31, 2003, operating results for
Pacifica Mortgage were reported as Loss from Discontinued Operations for the year ended December 31, 2003. Income and expenses items related to Pacifica Mortgage for 2002 and 2001 were adjusted to conform to the 2003 presentation.



During our fifth full year of operation, we continue to focus on improving
asset quality, increasing earnings and growing capital. As a result, our rate of growth slowed from the rates experienced in the first three years of operations. Total assets were $161.9 million at December 31, 2003, a decrease of 2% from $164.7
million at December 31, 2002. This decrease was primarily attributable to the decreases in cash and federal funds sold resulting from a reduction in deposits. Gross loans were $116.8 million at December 31, 2003, an increase of 6% compared to $109.7
million at the end of 2002. Securities increased 22% to $27.4 million at year-end 2003, from $22.5 million at the end of 2002. Deposits decreased from $148.3 million at December 31, 2002 to $133.7 million at year-end 2003, a decrease of $14.6
million, or 10%, during 2003. This reduction is due in part to the relatively poor prevailing interest rate environment and the general economic conditions facing our customers, and in part to our efforts to improve the interest margin, monitor our
asset size and increase our loan-to-deposit ratio by reducing our time deposits. Pacifica reported net income available to shareholders of $1.2 million, or $0.36 per diluted share for 2003, up $1.1 million, or 1153%, from net income available to
common shareholders of $94,000, or $0.03 per share in 2002. The Company transferred $900,000 of its excess loan loss reserve into earnings during 2003 as compared to $603,000 in 2002. The reduction of the allowance for loan losses resulted from
higher than anticipated net recoveries on previously charged off loans and a significant improvement in our asset quality and is discussed in more detail below under Analysis of Provision and Allowance for Loan Losses. Exclusive of the
transfers from the allowance for loan losses, our operating results would have shown a net income of $278,000, or $0.09 per diluted share for 2003 and a net loss of ($495,000) or ($0.15) per share for 2002. This performance compares with a loss of
($2.97) million in 2001. Shareholders equity increased to $12.6



9



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##### Table of Contents

million at the end of 2003 from $12.2 million at December 31, 2002. Our capital ratios are at levels above the federal
regulatory criteria for well-capitalized institutions. Since inception, the decline of our capital and various other ratios were primarily the result of a ($2.97) million net loss in 2001.



Return on average assets (ROA) was 0.78% for the year 2003, 0.07% for 2002, and (1.84%) for
2001. Return on average stockholders equity (ROE) was 9.66% for the year 2003, 0.92% for 2002, and (19.53%) for 2001. The Banks average equity to average assets ratio was 8.03%, 7.25%, and 9.41%, respectively, for 2003, 2002, and 2001.
The improvements in ROA and ROE were due primarily to the net income we had in 2003 and 2002, while the various performance ratios were negatively affected by the ($2.97) million loss in 2001. The loss in 2001 significantly increased the average
balance of the accumulated deficits for 2002, which lowered the average equity balance for 2002. Therefore, our average equity to average assets ratio was much lower in 2002 as compared to 2001. We expect our rate of growth to slow from the rates we
experienced in the first three years of operations and our focus continues to be on improving asset quality, increasing earnings and enhancing overall efficiency.



Results of Operations



Pacificas results of operations depend to a large degree on its net interest income. Net interest income is the difference between interest income, principally from
loan and investment securities portfolios, and interest expense, primarily on customer deposits and borrowings. Changes in net interest income are influenced by the level and relative mix of interest-earning assets and interest-bearing liabilities.
Interest income and expense are affected significantly by general economic conditions, particularly changes in market interest rates, and by government policies and the actions of regulatory authorities.



Pacifica also generates non-interest income, primarily through service charges, international
service fees and other sources. The primary components of Pacificas operating expenses are compensation and employee benefits expenses, and occupancy expense.



Pacifica reported net income of $1.2 million, or $0.36 per diluted share for 2003, compared to a net income of $94,000 or $.03 per diluted
share for 2002, and a net loss of $(2.97) million, or $(0.91) per diluted share for 2001. The improvement was due primarily to a higher net interest margin resulting from a lower cost of funds, an increase in non-interest income, and a decrease in
losses from discontinued operations. The increase in net income for 2003 as compared to 2002 is particularly significant due to the impact of the transfer of excess funds from the allowance for loan losses into earnings. Specifically, $900,000 of
excess funds from the allowance for loan losses was transferred to earnings during 2003 while $603,000 of excess funds from the allowance for loan losses was transferred to earnings in 2002. Net income excluding the transfer of excess loan loss
reserve to earnings was $278,000 for 2003, up $773,000 from ($495,000) for the same period of 2002. See below under Analysis of Provision and Allowance for Loan Losses for a discussion of the changes in the allowance during 2003 and
2002. During 2003, net interest margin increased to 4.45%, as compared to 3.71% for the same period of 2002, up 74 basis points. Earning assets and interest-bearing liabilities both decreased during 2003 while the corresponding yields decreased
slightly on earning assets and substantially on interest-bearing liabilities. Results of operations for the year 2003 significantly improved from 2002 and 2001.



Net Interest Income



Net interest income is the difference between total interest income and total interest expense. Changes in net interest income are affected by several factors, including
changes in average balances of earning assets and interest-bearing liabilities, changes in rates on earning assets and rates paid for interest-bearing liabilities, and the level of noninterest-bearing deposits and stockholders equity. Loans
are the highest-yielding component of Pacificas earning assets. Loans averaged 72% of Pacificas total interest-earning assets during 2003, compared to 69% during 2002.



10



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##### Table of Contents

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



|                                                         |  |                 |         |   |                      |   |             |  |      |                 |  |   |                      |   |             |   |        |  |      |  
|-------------------------------------------------------- |  | --------------- | ------- | - | -------------------- | - | ----------- |  | ---- | --------------- |  | - | -------------------- | - | ----------- | - | ------ |  | ---- | -
|(Dollars in thousands)                                   |  | 2003            |         |   | 2002                 |  
|                                                         |  | Average Balance |         |   | Interest Earned/Paid |   | Rate/ Yield |  |      | Average Balance |  |   | Interest Earned/Paid |   | Rate/ Yield |  
|ASSETS                                                   |  |                 |         |   |                      |   |             |  |      |                 |  |   |                      |   |             |   |        |  |      |  
|Interest-earning assets                                  |  |                 |         |   |                      |   |             |  |      |                 |  |   |                      |   |             |   |        |  |      |  
|Loans                                                    |  |                 |         |   |                      |   |             |  |      |                 |  |   |                      |   |             |   |        |  |      |  
|Commercial                                               |  | $               | 34,056  |   |                      | $ | 2,190       |  | 6.43 | %               |  | $ | 42,773               |   |             | $ | 2,836  |  | 6.63 | %
|Real estate                                              |  |                 | 73,913  |   |                      |   | 5,346       |  | 7.23 | %               |  |   | 65,634               |   |             |   | 5,103  |  | 7.77 | %
|Consumer                                                 |  |                 | 1,169   |   |                      |   | 67          |  | 5.73 | %               |  |   | 1,757                |   |             |   | 101    |  | 5.75 | %
|                                                         |  |                 |         |   |                      |   |             |  |      |                 |  |   |                      |   |             |   |        |  |      |  
|Total loans                                              |  |                 | 109,138 |   |                      |   | 7,603       |  | 6.97 | %               |  |   | 110,164              |   |             |   | 8,040  |  | 7.30 | %
|Fees on loans                                            |  |                 | (475    | ) |                      |   | 382         |  |      |                 |  |   | (407                 | ) |             |   | 567    |  |      |  
|                                                         |  |                 |         |   |                      |   |             |  |      |                 |  |   |                      |   |             |   |        |  |      |  
|Total loans, net of fees                                 |  |                 | 108,663 |   |                      |   | 7,985       |  | 7.35 | %               |  |   | 109,757              |   |             |   | 8,607  |  | 7.84 | %
|Receivable                                               |  |                 | 401     |   |                      |   |            |  | 0.00 | %               |  |   | 321                  |   |             |   |       |  | 0.00 | %
|Investments                                              |  |                 |         |   |                      |   |             |  |      |                 |  |   |                      |   |             |   |        |  |      |  
|Taxable                                                  |  |                 |         |   |                      |   |             |  |      |                 |  |   |                      |   |             |   |        |  |      |  
|Agencies                                                 |  |                 | 15,188  |   |                      |   | 924         |  | 6.08 | %               |  |   | 13,877               |   |             |   | 671    |  | 4.84 | %
|Mortgage backed                                          |  |                 | 3,021   |   |                      |   | 73          |  | 2.42 | %               |  |   | 7,456                |   |             |   | 328    |  | 4.40 | %
|Corporate                                                |  |                 | 7,138   |   |                      |   | 374         |  | 5.24 | %               |  |   | 935                  |   |             |   | 65     |  | 6.95 | %
|Tax-exempt                                               |  |                 |        |   |                      |   |            |  |     |                 |  |   |                     |   |             |   |       |  |     |  
|                                                         |  |                 |         |   |                      |   |             |  |      |                 |  |   |                      |   |             |   |        |  |      |  
|Total investments                                        |  |                 | 25,347  |   |                      |   | 1,371       |  | 5.41 | %               |  |   | 22,268               |   |             |   | 1,064  |  | 4.78 | %
|                                                         |  |                 |         |   |                      |   |             |  |      |                 |  |   |                      |   |             |   |        |  |      |  
|Interest-earning deposits with banks                     |  |                 | 7,094   |   |                      |   | 82          |  | 1.16 | %               |  |   | 22,636               |   |             |   | 374    |  | 1.65 | %
|Federal funds sold                                       |  |                 | 9,450   |   |                      |   | 105         |  | 1.11 | %               |  |   | 4,001                |   |             |   | 62     |  | 1.55 | %
|Correspondent Bank Stock                                 |  |                 | 256     |   |                      |   | 11          |  | 4.30 | %               |  |   | 238                  |   |             |   | 14     |  | 6.01 | %
|                                                         |  |                 |         |   |                      |   |             |  |      |                 |  |   |                      |   |             |   |        |  |      |  
|Cash equivalent and FHLB stock                           |  |                 | 16,800  |   |                      |   | 198         |  | 1.18 | %               |  |   | 26,875               |   |             |   | 451    |  | 1.68 | %
|                                                         |  |                 |         |   |                      |   |             |  |      |                 |  |   |                      |   |             |   |        |  |      |  
|Total interest-earning assets                            |  |                 | 151,211 |   |                      |   | 9,554       |  | 6.32 | %               |  |   | 159,221              |   |             |   | 10,121 |  | 6.36 | %
|                                                         |  |                 |         |   |                      |   |             |  |      |                 |  |   |                      |   |             |   |        |  |      |  
|Noninterest-earning assets                               |  |                 |         |   |                      |   |             |  |      |                 |  |   |                      |   |             |   |        |  |      |  
|Cash and due from banks                                  |  |                 | 2,337   |   |                      |   |             |  |      |                 |  |   | 2,769                |   |             |   |        |  |      |  
|Premises and equipment, net of depreciation              |  |                 | 2,396   |   |                      |   |             |  |      |                 |  |   | 2,579                |   |             |   |        |  |      |  
|Other, less allowance for loan losses                    |  |                 | (63     | ) |                      |   |             |  |      |                 |  |   | (2,590               | ) |             |   |        |  |      |  
|                                                         |  |                 |         |   |                      |   |             |  |      |                 |  |   |                      |   |             |   |        |  |      |  
|Total noninterest-earning assets                         |  |                 | 4,670   |   |                      |   |             |  |      |                 |  |   | 2,758                |   |             |   |        |  |      |  
|                                                         |  |                 |         |   |                      |   |             |  |      |                 |  |   |                      |   |             |   |        |  |      |  
|TOTAL ASSETS                                             |  | $               | 155,881 |   |                      |   |             |  |      |                 |  | $ | 161,979              |   |             |   |        |  |      |  
|                                                         |  |                 |         |   |                      |   |             |  |      |                 |  |   |                      |   |             |   |        |  |      |  
|LIABILITIES AND STOCKHOLDERS EQUITY                     |  |                 |         |   |                      |   |             |  |      |                 |  |   |                      |   |             |   |        |  |      |  
|Interest-bearing liabilities                             |  |                 |         |   |                      |   |             |  |      |                 |  |   |                      |   |             |   |        |  |      |  
|Deposits                                                 |  |                 |         |   |                      |   |             |  |      |                 |  |   |                      |   |             |   |        |  |      |  
|NOW, savings and money market accounts                   |  | $               | 40,423  |   |                      | $ | 500         |  | 1.24 | %               |  | $ | 40,606               |   |             | $ | 785    |  | 1.93 | %
|Time deposits < $100,000                                 |  |                 | 14,789  |   |                      |   | 358         |  | 2.42 | %               |  |   | 15,530               |   |             |   | 547    |  | 3.52 | %
|Time deposits3$100,000                                   |  |                 | 69,079  |   |                      |   | 1,777       |  | 2.57 | %               |  |   | 77,394               |   |             |   | 2,812  |  | 3.63 | %
|                                                         |  |                 |         |   |                      |   |             |  |      |                 |  |   |                      |   |             |   |        |  |      |  
|Total interest-bearing deposits                          |  |                 | 124,291 |   |                      |   | 2,635       |  | 2.12 | %               |  |   | 133,530              |   |             |   | 4,144  |  | 3.10 | %
|                                                         |  |                 |         |   |                      |   |             |  |      |                 |  |   |                      |   |             |   |        |  |      |  
|Other short-term borrowed funds                          |  |                 | 2,974   |   |                      |   | 69          |  | 2.32 | %               |  |   | 1,345                |   |             |   | 3      |  | 0.22 | %
|Mandatory redeemable preferred stock                     |  |                 | 1,490   |   |                      |   | 115         |  | 7.72 | %               |  |   | 841                  |   |             |   | 74     |  | 8.80 | %
|                                                         |  |                 |         |   |                      |   |             |  |      |                 |  |   |                      |   |             |   |        |  |      |  
|Total interest-bearing liabilities                       |  |                 | 128,755 |   |                      |   | 2,819       |  | 2.19 | %               |  |   | 135,716              |   |             |   | 4,221  |  | 3.11 | %
|                                                         |  |                 |         |   |                      |   |             |  |      |                 |  |   |                      |   |             |   |        |  |      |  
|Noninterest-bearing liabilities                          |  |                 |         |   |                      |   |             |  |      |                 |  |   |                      |   |             |   |        |  |      |  
|Demand deposits                                          |  |                 | 13,342  |   |                      |   |             |  |      |                 |  |   | 12,875               |   |             |   |        |  |      |  
|Other liabilities                                        |  |                 | 1,270   |   |                      |   |             |  |      |                 |  |   | 1,648                |   |             |   |        |  |      |  
|                                                         |  |                 |         |   |                      |   |             |  |      |                 |  |   |                      |   |             |   |        |  |      |  
|                                                         |  |                 | 14,612  |   |                      |   |             |  |      |                 |  |   | 14,523               |   |             |   |        |  |      |  
|                                                         |  |                 |         |   |                      |   |             |  |      |                 |  |   |                      |   |             |   |        |  |      |  
|Stockholders equity                                     |  |                 | 12,514  |   |                      |   |             |  |      |                 |  |   | 11,740               |   |             |   |        |  |      |  
|                                                         |  |                 |         |   |                      |   |             |  |      |                 |  |   |                      |   |             |   |        |  |      |  
|TOTAL LIABILITIES AND EQUITY                             |  | $               | 155,881 |   |                      |   |             |  |      |                 |  | $ | 161,979              |   |             |   |        |  |      |  
|                                                         |  |                 |         |   |                      |   |             |  |      |                 |  |   |                      |   |             |   |        |  |      |  
|Net interest income and net interest spread              |  |                 |         |   |                      | $ | 6,735       |  | 4.13 | %               |  |   |                      |   |             | $ | 5,900  |  | 3.25 | %
|                                                         |  |                 |         |   |                      |   |             |  |      |                 |  |   |                      |   |             |   |        |  |      |  
|Net interest margin (net interest income/earning assets) |  |                 |         |   |                      |   |             |  | 4.45 | %               |  |   |                      |   |             |   |        |  | 3.71 | %
|                                                         |  |                 |         |   |                      |   |             |  |      |                 |  |   |                      |   |             |   |        |  |      |  



Net interest income before provision
for loan losses for the year 2003 increased by $835,000, or 14%, to $6.7 million, compared to an increase of $614,000, or 12% to $5.9 million in 2002. The increase in net interest income in 2003 reflects the effect of the repricing of time
certificates of deposit to a lower average rate over time coupled with a decrease in average interest-bearing liabilities and a balance sheet shift from cash equivalents to loans and investments. On a dollar-for-dollar basis, interest-earning assets
decreased



11



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more than interest-bearing liabilities but on a percentage basis, interest-earning assets decreased slower than
interest-bearing liabilities during 2003. Compared with 2002, average interest-earning assets decreased approximately $8.0 million, or 5%, to $151.2 million while average interest-bearing liabilities decreased $7.0 million, or 5.1%, to $128.8
million. Due primarily to the smaller earning asset balances in 2003 as compared to 2002, total interest income for 2003 decreased $567,000, or 5.6%, from 2002. Meanwhile, the repricing of time certificates and the decline in average
interest-bearing liabilities allowed us to lower our cost of funds. Total interest expense for 2003 decreased $1.4 million, or 33%, as compared to 2002. The increase in net interest income in 2002 reflects the impact of the repricing of time
certificates to lower levels. On both dollar-for-dollar basis and percentage basis, interest-earning assets increased slower than interest-bearing liabilities during 2002. Compared with 2001, average interest-earning assets increased approximately
$1.5 million, or 1%, to $159.2 million while average interest-bearing liabilities increased $3.3 million, or 2%, to $135.6 million. Due to the lower yield on interest-earning assets in 2002 as compared to 2001, total interest income for 2002
decreased $2.2 million, or 18%, from 2001. Meanwhile, the repricing of time certificates allowed us to lower our cost of funds. Total interest expense for 2002 decreased $2.7 million, or 39%, as compared to 2001. Given the current rate environment
and the anticipated shift in the balance sheet from cash and investments into loans, we expect net interest margin and net interest income to increase during 2004.



Net interest margin (net interest income divided by average earning assets) was 4.45% in 2003, compared with 3.71% in 2002. The increase in
net interest margin reflects the positive effect of our efforts to lower the cost of deposits and the decrease in average interest bearing liabilities. The average yield on earning assets decreased slightly to 6.32% during 2003 from 6.36% in 2002.
Meanwhile, the average cost of interest-bearing liabilities for 2003 decreased significantly to 2.19% from 3.11% in 2002.



The minimal decrease in average yield on interest-earning assets is particularly noteworthy due to the 25 basis point decline in short-term interest rates in 2003. Our
interest-earning assets have been repricing less quickly than our interest-bearing liabilities which effectively lowered the cost of deposits more than it reduced loan yields. Increased yields on investments helped to limit the decline in yields on
other earning assets. Over the course of 2002 and 2003, Pacifica has significantly lowered its cost of deposits, resulting in a positive impact on our net interest margin.At December 31, 2003, Pacifica had $76.3 million in time certificates
of deposits. During 2003, Pacifica replaced certain interest-bearing deposits with borrowings. At December 31, 2003, Pacifica had outstanding borrowings in the amount of $14.3 million of which $7.5 million have the potential of repricing during 2004
which could impact the Companys cost of funds. See additional information under the borrowings section.



To a large extent, the asset yields and cost of funds reflect the level of interest rates as set by the Federal Reserve Board and the competitive nature of the financial
services industry. Typically, Pacificas assets have tended to track the prime rate and reprice more quickly than its liabilities in the past. However, due to historically low interest rates, borrowers have been increasingly interested in our
fixed rate products which places the Company in a liability sensitive position. Therefore, net interest margin could experience a squeeze in a rising interest rate environment. In contrast, Pacifica may experience increasing net interest
income caused by this same principle in periods of falling interest rates, before the repricing of interest-earning assets catches up with the repricing of interest-bearing liabilities. Management continually monitors Pacificas mix of
interest-earning assets and interest-bearing liabilities to maintain an appropriate balance. We also maintain programs to set floors on our loans to protect our interest earnings in times of a downward rate cycle; however, these floors can have a
lagging effect in an increasing rate cycle which can cause a squeeze on our net interest margin as rates increase.



Average loans (net of deferred loan fees) were approximately $108.7 million in 2003, down $1.1 million from $109.8 million in 2002. Due to significant loan growth
during the fourth quarter of 2003, total loans (net of deferred loan fees) as of year-end 2003 increased by 7% as compared to year-end 2002, yet the average balance for the year declined. The yield on the loan portfolio (net of deferred loan fees)
averaged 7.35% in 2003, compared to 7.84% in 2002. The decrease in loan yield is consistent with the drop in interest rates and the particularly large amount of refinancing activity Pacifica experienced during 2003. During 2003, average
interest-bearing deposits were $124.3 million, a decrease of $9.2 million compared to 2002. The cost of interest-bearing deposits decreased from 3.10% for 2002 to 2.12% for 2003.



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Income on investments, interest-earning deposits, Federal Home Loan Bank stock and federal funds sold totaled $1.57
million in 2003, an increase of $54,000, or 3.5%, when compared to 2002. The yield on investments was 5.41% for 2003, as compared to 4.78% for 2002.



Rate/Volume Analysis.The dollar amounts of interest income and interest expense fluctuate depending upon changes in interest rates and upon changes in
amounts (volume) of Pacificas interest-earning assets and interest-bearing liabilities. Changes attributable to: (i) changes in volume (changes in average outstanding balances multiplied by the prior periods rate); (ii) changes in rate
(changes in average interest rate multiplied by the prior periods volume); and (iii) changes in rate/volume (changes in rate times the change in volume that were allocated proportionately to the changes in volume and the changes in rate) were
as follows:



|                                         |  |                           |      |   |              |   |        |                           |        |   |              |      |  |   |      |   |  |   |        |   |  |   |        |  
|---------------------------------------- |  | ------------------------- | ---- | - | ------------ | - | ------ | ------------------------- | ------ | - | ------------ | ---- |  | - | ---- | - |  | - | ------ | - |  | - | ------ | -
|                                         |  | 2003 vs 2002              |      |   | 2002 vs 2001 |  
|                                         |  | Increase/(decrease)due to |      |   | Total Change |   |        | Increase/(decrease)due to |        |   | Total Change |     
|(Dollars in thousands)                   |  | Volume                    |      |   | Rate         |   |        |                           | Volume |   |              | Rate |  |  
|Interest income                          |  |                           |      |   |              |   |        |                           |        |   |              |      |  |   |      |   |  |   |        |   |  |   |        |  
|Loans(1)                                 |  |                           |      |   |              |   |        |                           |        |   |              |      |  |   |      |   |  |   |        |   |  |   |        |  
|Commercial                               |  | $                         | (563 | ) |              | $ | (83    | )                         |        | $ | (646         | )    |  | $ | (266 | ) |  | $ | (634   | ) |  | $ | (900   | )
|Real estate                              |  |                           | 615  |   |              |   | (372   | )                         |        |   | 243          |      |  |   | 258  |   |  |   | (743   | ) |  |   | (485   | )
|Consumer                                 |  |                           | (34  | ) |              |   | (0     | )                         |        |   | (34          | )    |  |   | (103 | ) |  |   | (38    | ) |  |   | (141   | )
|                                         |  |                           |      |   |              |   |        |                           |        |   |              |      |  |   |      |   |  |   |        |   |  |   |        |  
|Interest income - loans (excluding fees) |  |                           | 18   |   |              |   | (455   | )                         |        |   | (437         | )    |  |   | (111 | ) |  |   | (1,415 | ) |  |   | (1,526 | )
|Fees on loans                            |  |                           | (185 | ) |              |   |       |                           |        |   | (185         | )    |  |   | (77  | ) |  |   |       |   |  |   | (77    | )
|                                         |  |                           |      |   |              |   |        |                           |        |   |              |      |  |   |      |   |  |   |        |   |  |   |        |  
|Interest income - loans (including fees) |  |                           | 18   |   |              |   | (640   | )                         |        |   | (622         | )    |  |   | (111 | ) |  |   | (1,492 | ) |  |   | (1,603 | )
|Investments                              |  |                           |      |   |              |   |        |                           |        |   |              |      |  |   |      |   |  |   |        |   |  |   |        |  
|Taxable                                  |  |                           |      |   |              |   |        |                           |        |   |              |      |  |   |      |   |  |   |        |   |  |   |        |  
|Agencies                                 |  |                           | 68   |   |              |   | 185    |                           |        |   | 253          |      |  |   | (60  | ) |  |   | (63    | ) |  |   | (123   | )
|Mortgage backed                          |  |                           | (145 | ) |              |   | (110   | )                         |        |   | (255         | )    |  |   | 16   |   |  |   | (27    | ) |  |   | (11    | )
|Corporate                                |  |                           | 329  |   |              |   | (20    | )                         |        |   | 309          |      |  |   | (44  | ) |  |   | (1     | ) |  |   | (45    | )
|Tax-exempt                               |  |                           |     |   |              |   |       |                           |        |   |             |      |  |   |     |   |  |   |       |   |  |   |       |  
|                                         |  |                           |      |   |              |   |        |                           |        |   |              |      |  |   |      |   |  |   |        |   |  |   |        |  
|Total interest income - investments      |  |                           | 252  |   |              |   | 55     |                           |        |   | 307          |      |  |   | (88  | ) |  |   | (91    | ) |  |   | (179   | )
|Interest-earning deposits with banks     |  |                           | (203 | ) |              |   | (89    | )                         |        |   | (292         | )    |  |   | 131  |   |  |   | (460   | ) |  |   | (330   | )
|Federal funds sold                       |  |                           | 65   |   |              |   | (22    | )                         |        |   | 43           |      |  |   | 22   |   |  |   | (93    | ) |  |   | (71    | )
|Federal Home Loan Bank stock             |  |                           | (3   | ) |              |   |       |                           |        |   | (3           | )    |  |   | (4   | ) |  |   |       |   |  |   | (4     | )
|Interest income-other                    |  |                           | (1   | ) |              |   | 1      |                           |        |   |             |      |  |   | (1   | ) |  |   | 1      |   |  |   |       |  
|                                         |  |                           |      |   |              |   |        |                           |        |   |              |      |  |   |      |   |  |   |        |   |  |   |        |  
|Interest income - other                  |  |                           | (142 | ) |              |   | (110   | )                         |        |   | (253         | )    |  |   | 148  |   |  |   | (552   | ) |  |   | (404   | )
|                                         |  |                           |      |   |              |   |        |                           |        |   |              |      |  |   |      |   |  |   |        |   |  |   |        |  
|Total interest income                    |  |                           | 127  |   |              |   | (694   | )                         |        |   | (567         | )    |  |   | (38  | ) |  |   | (2,148 | ) |  |   | (2,186 | )
|Interest expense                         |  |                           |      |   |              |   |        |                           |        |   |              |      |  |   |      |   |  |   |        |   |  |   |        |  
|Deposits                                 |  |                           |      |   |              |   |        |                           |        |   |              |      |  |   |      |   |  |   |        |   |  |   |        |  
|NOW, savings and money market accounts   |  |                           | (4   | ) |              |   | (282   | )                         |        |   | (285         | )    |  |   | 164  |   |  |   | (640   | ) |  |   | (476   | )
|Time Deposits <$100,000                  |  |                           | (25  | ) |              |   | (164   | )                         |        |   | (189         | )    |  |   | (63  | ) |  |   | (378   | ) |  |   | (441   | )
|Time deposits3$100,000                   |  |                           | (278 | ) |              |   | (757   | )                         |        |   | (1,035       | )    |  |   | (132 | ) |  |   | (1,800 | ) |  |   | (1,932 | )
|                                         |  |                           |      |   |              |   |        |                           |        |   |              |      |  |   |      |   |  |   |        |   |  |   |        |  
|Total interest expense on deposits       |  |                           | (307 | ) |              |   | (1,202 | )                         |        |   | (1,509       | )    |  |   | (31  | ) |  |   | (2,817 | ) |  |   | (2,849 | )
|Other borrowed funds                     |  |                           | 4    |   |              |   | 62     |                           |        |   | 66           |      |  |   | 37   |   |  |   | (62    | ) |  |   | (25    | )
|Mandatory redeemable preferred stock     |  |                           | 57   |   |              |   | (16    | )                         |        |   | 41           |      |  |   |     |   |  |   | 74     |   |  |   | 74     |  
|                                         |  |                           |      |   |              |   |        |                           |        |   |              |      |  |   |      |   |  |   |        |   |  |   |        |  
|Total interest expense                   |  |                           | (303 | ) |              |   | (1,099 | )                         |        |   | (1,402       | )    |  |   | 6    |   |  |   | (2,805 | ) |  |   | (2,800 | )
|                                         |  |                           |      |   |              |   |        |                           |        |   |              |      |  |   |      |   |  |   |        |   |  |   |        |  
|Net interest income                      |  | $                         | 430  |   |              | $ | 405    |                           |        | $ | 835          |      |  | $ | (43  | ) |  | $ | 657    |   |  | $ | 614    |  
|                                         |  |                           |      |   |              |   |        |                           |        |   |              |      |  |   |      |   |  |   |        |   |  |   |        |  

---

|(1) | Loans include nonaccrual loans, but unpaid interest on nonaccrual loans has not been included for purposes of determining interest income.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------



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Noninterest Income



Noninterest income increased by $257,000, or 45%, to $823,000 in 2003, compared with $566,000 for the same period in 2002. The increase was
due primarily to the $159,000 of gains on sold and called investment securities during 2003. International banking service fee income increased as well. During the latter part of the second quarter of 2003, the Bank purchased $3 million of Bank
Owned Life Insurance (BOLI), a cash value life insurance policy which appreciates in value over time. The BOLI was purchased in order to offset the cost of existing employee benefit programs. The increase in value in the BOLI is accounted for as
noninterest income and contributed to the increase in the Companys noninterest income for 2003.



The following table presents a breakdown of various components of Pacificas noninterest income for 2003, 2002 and 2001.



|                                           |  |                          |     |        |   |     |      |  |        |     |  |      |        |   |  |   |      
|------------------------------------------ |  | ------------------------ | --- | ------ | - | --- | ---- |  | ------ | --- |  | ---- | ------ | - |  | - | -----
|                                           |  | Years Ended December 31,
|(Dollars in thousands)                     |  | 2003                     |     | Change |   |     | 2002 |  | Change |     |  | 2001
|International trade finance fees           |  | $                        | 269 |        | $ | 19  |      |  | $      | 250 |  | $    | 22     |   |  | $ | 228  
|Gain on sale of securities and derivatives |  |                          | 159 |        |   | 116 |      |  |        | 43  |  |      | (1,689 | ) |  |   | 1,732
|Service fees                               |  |                          | 152 |        |   | 35  |      |  |        | 117 |  |      | 15     |   |  |   | 102  
|Bank owned life insurance appreciation     |  |                          | 87  |        |   | 87  |      |  |        |    |  |      |       |   |  |   |     
|Other fee income                           |  |                          | 87  |        |   | 23  |      |  |        | 64  |  |      | (16    | ) |  |   | 80   
|Overdraft fees                             |  |                          | 47  |        |   | (26 | )    |  |        | 73  |  |      | (3     | ) |  |   | 76   
|Wire transfer fees                         |  |                          | 22  |        |   | 3   |      |  |        | 19  |  |      | 3      |   |  |   | 16   
|                                           |  |                          |     |        |   |     |      |  |        |     |  |      |        |   |  |   |      
|                                           |  | $                        | 823 |        | $ | 257 |      |  | $      | 566 |  | $    | (1,668 | ) |  | $ | 2,234
|                                           |  |                          |     |        |   |     |      |  |        |     |  |      |        |   |  |   |      



Noninterest Expense



Noninterest expense increased $584,000, or 9%, in 2003, and $932,000,
or 17%, in 2002. The increase resulted primarily from the additional personnel costs, occupancy expense, losses related to the Companys office space consolidation, losses from impaired assets resulting from the closure of Pacifica Mortgage,
and other expenses.



Set forth below is a schedule showing additional detail
concerning changes in the Companys noninterest expense for 2003, 2002 and 2001:



|                                                         |  |                          |       |   |        |   |     |      |  |   |        |   |  |      |      |   |  |   |       |  
|-------------------------------------------------------- |  | ------------------------ | ----- | - | ------ | - | --- | ---- |  | - | ------ | - |  | ---- | ---- | - |  | - | ----- | -
|                                                         |  | Years Ended December 31, |      
|(Dollars in thousands)                                   |  | 2003                     |       |   | Change |   |     | 2002 |  |   | Change |   |  | 2001 |     
|Compensation and employee benefits                       |  | $                        | 4,154 |   |        | $ | 139 |      |  | $ | 4,015  |   |  | $    | 664  |   |  | $ | 3,351 |  
|Loan origination costs                                   |  |                          | (341  | ) |        |   | 4   |      |  |   | (345   | ) |  |      | (104 | ) |  |   | (241  | )
|                                                         |  |                          |       |   |        |   |     |      |  |   |        |   |  |      |      |   |  |   |       |  
|Net compensation and employee benefits                   |  |                          | 3,813 |   |        |   | 143 |      |  |   | 3,670  |   |  |      | 560  |   |  |   | 3,110 |  
|Occupancy expense                                        |  |                          | 1,298 |   |        |   | 196 |      |  |   | 1,102  |   |  |      | 216  |   |  |   | 886   |  
|Professional services                                    |  |                          | 272   |   |        |   | (46 | )    |  |   | 318    |   |  |      | 6    |   |  |   | 312   |  
|Other expenses                                           |  |                          | 233   |   |        |   | 179 |      |  |   | 54     |   |  |      | (29  | ) |  |   | 83    |  
|FDIC assessment                                          |  |                          | 167   |   |        |   | 23  |      |  |   | 144    |   |  |      | 121  |   |  |   | 23    |  
|Data processing                                          |  |                          | 162   |   |        |   | (17 | )    |  |   | 179    |   |  |      | 93   |   |  |   | 86    |  
|B&O taxes                                                |  |                          | 156   |   |        |   | (36 | )    |  |   | 192    |   |  |      | 7    |   |  |   | 185   |  
|Loan collection expense                                  |  |                          | 153   |   |        |   | (5  | )    |  |   | 158    |   |  |      | 2    |   |  |   | 156   |  
|Losses from impaired assets                              |  |                          | 130   |   |        |   | 130 |      |  |   |       |   |  |      |     |   |  |   |      |  
|Loss from disposal of assets and lease termination costs |  |                          | 108   |   |        |   | 108 |      |  |   |       |   |  |      |     |   |  |   |      |  
|Insurance expense                                        |  |                          | 107   |   |        |   | 41  |      |  |   | 66     |   |  |      | 29   |   |  |   | 37    |  
|Director fees                                            |  |                          | 91    |   |        |   | (37 | )    |  |   | 128    |   |  |      | 22   |   |  |   | 106   |  
|Telephone and data communications                        |  |                          | 81    |   |        |   | (28 | )    |  |   | 109    |   |  |      | 31   |   |  |   | 78    |  
|Couriers, postage and mail service                       |  |                          | 78    |   |        |   | (14 | )    |  |   | 92     |   |  |      |     |   |  |   | 92    |  
|Office supplies, stationary and printing                 |  |                          | 72    |   |        |   | (37 | )    |  |   | 109    |   |  |      | (37  | ) |  |   | 146   |  
|State assessment                                         |  |                          | 67    |   |        |   | 38  |      |  |   | 29     |   |  |      | (15  | ) |  |   | 44    |  
|Advertising, marketing and bank promotions               |  |                          | 67    |   |        |   | 2   |      |  |   | 65     |   |  |      | (55  | ) |  |   | 120   |  
|Travel and entertainment                                 |  |                          | 37    |   |        |   | (56 | )    |  |   | 93     |   |  |      | (19  | ) |  |   | 112   |  
|                                                         |  |                          |       |   |        |   |     |      |  |   |        |   |  |      |      |   |  |   |       |  
|Total noninterest expense                                |  | $                        | 7,092 |   |        | $ | 584 |      |  | $ | 6,508  |   |  | $    | 932  |   |  | $ | 5,576 |  
|                                                         |  |                          |       |   |        |   |     |      |  |   |        |   |  |      |      |   |  |   |       |  



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Salaries and employee benefits expenses were approximately $4.1 million in 2003, compared to $4.0 million in 2002 and
$3.3 million in 2001. The increase in 2003 was due primarily to the employee bonus and incentive programs which totaled $390,000 in 2003 compared to $46,000 in 2002. The Company achieved its goals as set out for the year and the Board of Directors
approved an employee bonus of approximately $288,000 for year 2003, which was accrued at year-end and paid out in January 2004. We anticipate the salary expense to increase slightly during 2004 as we plan to add more loan production staff. The
increase in 2002 as compared to 2001 was due primarily to certain severance payments to former employees, and the growth in the number of employees during the year. Pacificas average number of employees was 49 for the year 2003, compared with
50 and 45 for 2002 and 2001, respectively.



Occupancy and equipment expense was
$1.3 million in 2003, $1.1 million in 2002 and $886,000 in 2001. The increase in 2003 is primarily due to the higher building lease expense and the depreciation expense on fixed assets and computer software. The Company sublet the Mortgage Company
facility to a third party effective June 1, 2003. The current sublease agreement is a month-to-month lease with a monthly rent of $4,000 and expired on December 31, 2003. At December 31, 2003, this sublease agreement was extended at the previous
rate of $4,000 until April 2004. In addition, the Bank consolidated its office space and entered into an agreement effective August 1, 2003, to sublease surplus office space for the remaining term of the lease. This sublease agreement has an average
monthly rent of $4,645 and expires on September 1, 2007. The increase in occupancy and equipment expense during 2002 as compared to 2001 was due primarily to the increase in building lease expense. Pacifica leased additional office space in March
and August of 2001, and June 2000. Lease expense for our Seattle Office, which was opened in December 2001, accounted for the majority of the lease expense increase in 2002.



The Company incurred miscellaneous losses of $108,000 during 2003 resulting from the above-mentioned subleases and disposal of the furniture
previously occupied by the Bank office. As part of the sublease of the Bank space, the Company sold its furniture associated with the sublease space to the lessee at a loss of $10,000. The Company implemented the Financial Accounting Standards
Statement No. 146, Accounting for Costs Associated with Exit or Disposal Activities. The standard requires companies to recognize costs associated with exit or disposal activities when they are incurred rather than at the date of a commitment
to an exit or disposal plan. As a result, the Company also recognized a lease termination cost of $98,000, representing the sublease income shortfalls as compared to the lease payment the Company is liable for. The associated accretion expense will
be recognized monthly for the remainder of the lease term and will reduce the Companys future occupancy expense.



Upon the closure of its wholly owned subsidiary Pacifica Mortgage, leasehold improvements and furniture for the Mortgage Company space were transferred to the Bancorp and
the other fixed assets which can be utilized by the Bank were transferred from the Bancorp to the Bank as a capital contribution. The Company deemed the leasehold improvement and furniture items impaired and wrote off the assets in 2003 according to
FASB No. 144 and 147 which are related to accounting for the impairment or disposal of long-lived assets. Impairment amount totaled approximately $130,000, representing net book value of the assets being written off.



Financial Condition



Investment Activities



Pacificas investment portfolio is an important source of liquidity and interest income. The Companys total investment portfolio includes Federal Home Loan
Bank of Seattle (FHLB) stock, available-for-sale securities, time certificates with other banks, and a nominal amount of correspondent bank stock. The Company had no held-to-maturity or trading securities. All securities are classified
as available-for-sale and are carried at fair value. Securities are used by management as part of its asset/liability management strategy and may be sold in response to interest rate changes or significant prepayment risk.



The Companys total investment portfolio increased by $4.9 million, or 21%, from $23.3
million at year-end 2002 to $28.2 million at year-end 2003. The investment portfolio during 2003 was a portfolio of higher yield, to help offset slow loan demand. The Company moved funds out of cash and into investments and



15



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##### Table of Contents

loans as part of the effort to increase the net interest margin. Pacifica is a stockholder in the Federal Home Loan Bank
of Seattle (FHLB). As of December 31, 2003 and 2002, Pacifica owned FHLB stock of $454,000 and $133,000, respectively. Pacifica also owned $100,000 stock in a bankers bank that has no readily available market price and
is carried at cost. Available-for-sale securities were $27.4 million and $22.5 million at December 31, 2003 and 2002, respectively. As of December 31, 2003, U.S. government agency securities comprised 69% of the securities portfolio, with
mortgage-backed securities at 14% and Corporate debt securities at 17%. Purchases totaled $38.2 million while maturities, calls and principal paydowns totaled $25.6 million. During 2003, the Company sold available-for-sale securities of
approximately $7.4 million and had called securities totaling $21.1 million realized gains of $159,000. Pacifica realized gains from both called securities that were originally purchased at a discount and from sold securities. Gains from sold and
called securities were $80,000 and $79,000, respectively, for 2003. For further information on investments securities, see Note 2 to the consolidated financial statements.



Lending Activities



Loan Portfolio Composition.Pacifica originates a wide variety of loans to small and medium-sized businesses and individuals. The following table sets forth
the loan portfolio composition by type of loan at the dates indicated:



|                                |  |              |         |   |            |     |   |      |   |         |            |  |     |  
|------------------------------- |  | ------------ | ------- | - | ---------- | --- | - | ---- | - | ------- | ---------- |  | --- | -
|                                |  | December 31, |        
|(Dollars in thousands)          |  | 2003         |         |   | % of Total |     |   | 2002 |   |         | % of Total | 
|Commercial and industrial loans |  | $            | 33,106  |   |            | 28  | % |      | $ | 38,594  |            |  | 35  | %
|Real estate - construction      |  |              | 24,137  |   |            | 21  | % |      |   | 23,112  |            |  | 21  | %
|Real estate - mortgage          |  |              | 59,069  |   |            | 50  | % |      |   | 47,477  |            |  | 43  | %
|Consumer and other              |  |              | 1,049   |   |            | 1   | % |      |   | 957     |            |  | 1   | %
|                                |  |              |         |   |            |     |   |      |   |         |            |  |     |  
|                                |  |              | 117,361 |   |            | 101 | % |      |   | 110,140 |            |  | 100 | %
|Less deferred loan fees         |  |              | (591    | ) |            | -1  | % |      |   | (405    | )          |  | 0   | %
|                                |  |              |         |   |            |     |   |      |   |         |            |  |     |  
|Total loans                     |  | $            | 116,770 |   |            | 100 | % |      | $ | 109,735 |            |  | 100 | %
|                                |  |              |         |   |            |     |   |      |   |         |            |  |     |  



At December 31, 2003, total loans
increased by $7.1 million to $116.8 million from $109.7 million at year-end 2002. Real estate mortgage loans, construction loans, and consumer and other loans contributed to the increase, commercial and industrial loans decreased due to loan
maturities and payoffs. Commercial and residential real estate mortgage loans increased $11.6 million, or 24%; real estate construction loans increased $1.0 million, or 4%; consumer and other loans increased $92,000, or 10%, while commercial loans
decreased $5.5 million, or 14%. Funding for the growth in loans in 2003 came primarily from the deployment of the excess liquidity which resided in interest-bearing cash and federal funds sold.



Pacificas commercial loan portfolio includes loans to businesses in the manufacturing,
wholesale, retail, service, agricultural and construction industries, primarily located in King County. As of December 31, 2003, there was no significant concentration of loans to any particular group of customers engaged in similar activities and
having similar economic characteristics. However, due to the limited scope of Pacificas primary market area, a substantial geographic concentration of credit risk exists and, as a result, localized economic downturns can be expected to have a
more pronounced effect on Pacifica than they might with a similar but more geographically diversified business.



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Asset Quality



Nonperforming Assets.Nonperforming loans include nonaccrual loans, restructured loans, and loans 90 days or more past due. Pacificas policy generally
is to place loans on a nonaccrual basis when, in managements judgment, the collateral value and the financial condition of the borrower do not justify accruing interest as an income item. Interest previously recorded but not deemed collectible
is reversed and charged against current income. Interest income on these loans is then recognized when collected. Restructured loans are loans for which the contractual interest rate has been reduced or other concessions are granted to the borrower
because of deterioration in the financial condition of the borrower resulting in the borrowers inability to meet the original contractual terms of the loans. At December 31, 2003, the Company had no nonperforming loans, representing a
reduction of 100% from $214,000 at year-end 2002. Nonperforming loans are also considered impaired loans (see Note 3 to the Consolidated Financial Statements). The Company considers loans impaired when it is probable the Company will not be able to
collect all amounts as scheduled under a loan agreement. The Company had $674,000 of impaired loans as of December 31, 2003. The impaired loan balance is made up of one loan which is currently in compliance with the terms of the loan but with which
management has concerns about an adequate source of repayment. At December 31, 2003, the Company had specific reserves for this loan of $489,000 and collateral of approximately $185,000. The $214,000 balance at year-end 2002 consisted of two loans;
both were paid off in 2003.



Potential problem loans are loans that are
performing and are not nonaccrual, past due, or restructured, but about which there are significant doubts about the borrowers ability to comply with the present repayment terms in the future and which later may be included in nonaccrual, past
due, or restructured loans. We had $943,000 in potential problem loans at December 31, 2003, compared to $4.3 million at year-end 2002, a reduction of $3.6 million, or 79%. Problem loans at year-end 2002 were either paid off/paid down or upgraded
during 2003. We made significant improvement in 2003 as we strengthened our credit administration, implemented strategies to improve asset quality and achieve workout plans with our customers. The Company will continue to focus on asset quality with
the goal of reducing potential problem loans to a minimum.



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



|                                                     |  |              |      |   |      |   |       |      |  |   |       |  
|---------------------------------------------------- |  | ------------ | ---- | - | ---- | - | ----- | ---- |  | - | ----- | -
|                                                     |  | December 31, |     
|(Dollars in thousands)                               |  | 2003         |      |   | 2002 |   |       | 2001 | 
|Potential problem loans                              |  | $            | 943  |   |      | $ | 4,289 |      |  | $ | 7,849 |  
|Nonperforming loans:                                 |  |              |      |   |      |   |       |      |  |   |       |  
|Nonaccrual loans                                     |  | $            |     |   |      | $ | 110   |      |  | $ | 478   |  
|Restructured loans                                   |  |              |     |   |      |   |      |      |  | $ |      |  
|Accruing loans 90 days or more past due              |  |              |     |   |      |   | 104   |      |  | $ |      |  
|                                                     |  |              |      |   |      |   |       |      |  |   |       |  
|Total nonperforming loans                            |  |              |     |   |      |   | 214   |      |  |   | 478   |  
|Other real estate owned                              |  |              |     |   |      |   |      |      |  |   |      |  
|                                                     |  |              |      |   |      |   |       |      |  |   |       |  
|Total nonperforming assets                           |  | $            |     |   |      | $ | 214   |      |  | $ | 478   |  
|                                                     |  |              |      |   |      |   |       |      |  |   |       |  
|Nonperforming loans as a percentage of total loans   |  |              | 0.00 | % |      |   | 0.18  | %    |  |   | 0.45  | %
|Nonperforming assets as a percentage of total assets |  |              | 0.00 | % |      |   | 0.12  | %    |  |   | 0.28  | %



Other Real Estate Owned



Other real estate owned (OREO) is carried at the lesser of book value or
market value. The costs related to completion, repair, maintenance, or other costs of such properties, are generally expensed with any gains or inadvertent shortfalls from the ultimate sale of OREO being shown as other income or expense.



As of December 31, 2003, OREO assets consisted of one property, which are two residential
lots located in Madras, Oregon. The Company obtained this property in 2003 as a result of the Banks foreclosure on



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collateral of a previously charged off loan. This property is being activity marketed and is currently booked at $1.



Subsequent to December 31, 2003, Pacifica sold this OREO property for approximately $20,000.
The sale was finalized in February 2004 with net proceeds to the bank of approximately $17,000 which will be treated as a recovery on a previously charged off loans and thus added back to the allowance for loan loss reserve account.



Analysis of Provision and Allowance for Loan Losses.



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



Management reviews and evaluates the appropriate level of the allowance for loan losses and determines the provision on a monthly basis. The evaluation by management
includes consideration of changes in the nature and volume of the portfolio as well as commitments and standby letters of credit, overall portfolio quality, past loan loss experience, peer bank experience, loan concentrations, specific problem
loans, internal and external credit examination results, and the current economic conditions that may affect borrowers ability to pay. Management monitors delinquencies closely. Loan loss reserve calculations and delinquencies are reported to
the Board of Directors and the Bank Loan Committee at least quarterly. 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 for loan losses based on their judgment about information available to them at the time of their examination. Management has made provisions for loan losses aimed at maintaining a reasonable reserve against outstanding loans.



While management believes that it uses the best information available to
determine the allowance for loan losses, unforeseen market conditions could result in adjustments to the allowance for loan losses, and net income could be significantly affected if circumstances differ substantially from the assumptions used in
making the determination.



Pacificas loan loss analysis procedure
emphasizes early detection of loan losses. The Company significantly increased its allowance for loan losses through additional provisions during 2001, and no additions to the allowance for loan losses were made during 2002. During 2002, we achieved
significantly greater net recoveries on charged-off loans than expected, including a large insurance settlement, and significantly reduced the amount of our classified assets. We continued to improve our asset quality and reduce the amount of
classified assets during 2003. No additions to the allowance for loan losses were made during 2002 or 2003 except for recoveries from previously charged off loans. During 2003, we charged off two loans in the aggregate amount of $287,000 and
received recoveries of $498,000. At December 31, 2003, the allowance for loan losses was $2.23 million, or 1.91% of total loans, compared to $2.92 million, or 2.67% of the total loans, at December 31, 2002. The $689,000 decrease from year-end 2002
represents net recoveries from previously charged off loans of $211,000 and the transfer of excess funds of $900,000 from the allowance for loan loss reserve account into earnings. The significant improvement in asset quality during 2003 has reduced
the reserve requirement for our loan portfolio. Management believes the current balance of the allowance for loan losses is adequate to provide against current potential losses that are reasonably likely in light of our current loan portfolio and
existing expected economic conditions. We anticipate that additions to the allowance for loan losses in 2004, if any, would be minimal, particularly as we address our moderate loan growth and continue to focus on improving our asset quality.



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##### Table of Contents

The following table shows the allocation of the allowance for loan losses at December 31, 2003 and 2002:



|                                |  |              |       |   |      |   |          |   |       |  |     |  
|------------------------------- |  | ------------ | ----- | - | ---- | - | -------- | - | ----- |  | --- | -
|                                |  | December 31, |      
|(Dollars in thousands)          |  | 2003         |       |   | 2002 |  
|                                |  | $ Amount     |       | % |      |   | $ Amount |   | %     | 
|Balance applicable to:          |  |              |       |   |      |   |          |   |       |  |     |  
|Commercial and industrial loans |  | $            | 1,169 |   | 52   | % |          | $ | 1,624 |  | 56  | %
|Real estate - construction      |  |              | 349   |   | 16   | % |          |   | 24    |  | 1   | %
|Real estate - mortgage          |  |              | 705   |   | 32   | % |          |   | 510   |  | 17  | %
|Consumer and other              |  |              | 7     |   | 0    | % |          |   | 761   |  | 26  | %
|                                |  |              |       |   |      |   |          |   |       |  |     |  
|Total                           |  | $            | 2,230 |   | 100  | % |          | $ | 2,919 |  | 100 | %
|                                |  |              |       |   |      |   |          |   |       |  |     |  



The following table provides an
analysis of Pacificas allowance for loan losses for the fiscal years ending December 31, 2003, 2002, and 2001:



|                                                             |  |              |         |   |      |   |         |      |  |   |         |  
|------------------------------------------------------------ |  | ------------ | ------- | - | ---- | - | ------- | ---- |  | - | ------- | -
|                                                             |  | December 31, |        
|(Dollars in thousands)                                       |  | 2003         |         |   | 2002 |   |         | 2001 | 
|Total loans                                                  |  | $            | 116,770 |   |      | $ | 109,735 |      |  | $ | 105,878 |  
|Average loans                                                |  |              | 108,663 |   |      |   | 109,757 |      |  |   | 111,850 |  
|                                                             |  |              |        
|Balance of allowance for loans losses at beginning of period |  | $            | 2,919   |   |      | $ | 3,530   |      |  | $ | 1,306   |  
|Charge-offs:                                                 |  |              |         |   |      |   |         |      |  |   |         |  
|Commercial loans                                             |  |              | (287    | ) |      |   | (2,141  | )    |  |   | (2,559  | )
|Recoveries:                                                  |  |              |         |   |      |   |         |      |  |   |         |  
|Commercial loans                                             |  |              | 498     |   |      |   | 2,133   |      |  |   | 141     |  
|                                                             |  |              |         |   |      |   |         |      |  |   |         |  
|Net (charge-offs)/recoveries                                 |  |              | 211     |   |      |   | (8      | )    |  |   | (2,418  | )
|Provision/(recovery) charged to expense                      |  |              | (900    | ) |      |   | (603    | )    |  |   | 4,642   |  
|                                                             |  |              |         |   |      |   |         |      |  |   |         |  
|Balance of allowance for loan losses at end of period        |  | $            | 2,230   |   |      | $ | 2,919   |      |  | $ | 3,530   |  
|                                                             |  |              |         |   |      |   |         |      |  |   |         |  
|Net charge-off/(recovery) to average loans outstanding       |  |              | -0.19   | % |      |   | 0.01    | %    |  |   | 2.16    | %
|Allowance as a percentage of total loans                     |  |              | 1.91    | % |      |   | 2.66    | %    |  |   | 3.33    | %
|Allowance as a percentage of nonperforming loans             |  |              | N/A     |   |      |   | 1364    | %    |  |   | 738     | %



Maturities and Sensitivities of
Loans to Changes in Interest Rate.For information on the aggregate contractual maturities of loans as of December 31, 2003 and the amounts of variable and fixed rate loans that mature after one year, see Note 3 of the consolidated financial
statements.



Premises and Equipment



During 2003, fixed assets decreased by $590,000. The net change included purchases of
$38,000, proceeds from the sale of equipment of $8,000, losses from the sale of fixed assets of $10,000, depreciation expenses of $480,000 and losses from impaired assets of $130,000. There were no significant capital expenditures during 2003.



Deposits



Pacifica offers various types of deposit accounts, including checking, savings, money market
accounts and a variety of certificate of deposit accounts. Total deposits decreased $14.6 million, or 10%, to $133.7 million at December 31, 2003, compared to $148.3 million at December 31, 2002. Pacifica seeks to attract deposits in its primary
market area by pricing its products competitively and delivering quality service.



Time deposits accounted for 64% of the total interest-bearing deposits at December 31, 2003, and 66% at December 31, 2002. Money market deposits made up 29% and 23% of the total interest-bearing deposits at December 31, 2003 and 2002,
respectively. NOW accounts made up 6% and 11% of the interest-bearing deposits at December 31, 2003 and 2002, respectively.



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Noninterest-bearing deposits were $14.8 million at December 31, 2003, an increase of $885,000, or 6% compared to year-end
2002. During the same period, interest-bearing deposits decreased $15.5 million, or 12%, to $118.9 million, with the decrease being attributable to time deposits and NOW accounts. During the year 2003, time deposits decreased $11.9 million to $76.3
million, of which $9.8 million was the decrease in jumbo time certificates. Money market accounts increased $3.8 million to $34.9 million, while NOW accounts decreased $7.7 million to $7.0 million.



The following table sets forth the average balances outstanding and average interest rates
for each major category of our deposits for the periods indicated:



|                                    |  |                          |         |              |      |   |                 |   |              |  |      |  
|----------------------------------- |  | ------------------------ | ------- | ------------ | ---- | - | --------------- | - | ------------ |  | ---- | -
|                                    |  | Years ended December 31, |        
|                                    |  | 2003                     |         |              | 2002 |  
|(Dollars in thousands)              |  | Averagebalances          |         | Averageyield |      |   | Averagebalances |   | Averageyield | 
|Interest-bearing demand accounts    |  | $                        | 6,608   |              | 0.45 | % |                 | $ | 5,350        |  | 1.04 | %
|Money market accounts               |  |                          | 33,398  |              | 1.39 | % |                 |   | 34,905       |  | 2.07 | %
|Savings accounts                    |  |                          | 417     |              | 1.17 | % |                 |   | 351          |  | 1.47 | %
|Certificates of deposit             |  |                          | 83,868  |              | 2.55 | % |                 |   | 92,924       |  | 3.62 | %
|                                    |  |                          |         |              |      |   |                 |   |              |  |      |  
|Total interest-bearing accounts     |  |                          | 124,291 |              | 2.12 | % |                 |   | 133,530      |  | 3.10 | %
|Noninterest-bearing demand accounts |  |                          | 13,341  |              |     |   |                 |   | 12,875       |  |     |  
|                                    |  |                          |         |              |      |   |                 |   |              |  |      |  
|Total average deposits              |  | $                        | 137,632 |              | 1.91 | % |                 | $ | 146,405      |  | 2.83 | %
|                                    |  |                          |         |              |      |   |                 |   |              |  |      |  



The only deposit category with stated
maturity dates is certificates of deposit. At December 31, 2003, Pacifica had $76.3 million in certificates of deposit. Approximately all of Pacificas certificates of deposits renew automatically at maturity, unless otherwise directed by the
customer.



The following table sets forth the amounts and maturities of
certificates of deposit with balances of $100,000 or more at December 31, 2003:



Borrowings



At December 31, 2003 and December 31, 2002,
Pacifica had liabilities to the U.S. Treasury in the amount of $6,000 and $163,000, respectively, representing Treasury Tax and Loan balances.



In addition, Pacifica obtained a $3.5 million line of credit through one of our correspondent banks in September 2003, of which $2.35 million was used to redeem all of
the Companys outstanding Limited Life Preferred stock and Perpetual Preferred stock on September 30, and December 29, 2003, respectively. An additional $150,000 of this line was used to pay dividends on the preferred stock and to cover other
expenses associated with the holding company. Under accounting principles generally accepted in the United States of America and the reporting guidelines of the Federal Reserve Board, the Companys Limited Life Preferred stock was accounted for
as subordinated debt, while the Companys Perpetual Preferred stock was accounted for as equity. The Company previously had a line of credit that was used primarily to fund the Mortgage Companys warehouse mortgage line which had been
paid-off subsequent to the closure of Pacifica Mortgage Company. The current line of credit is collateralized by the Companys Pacifica Bank stock and subject to certain restrictive covenants including, among others, requirements with regards
to capital ratios, ROA, loan loss reserve ratios and lenders prior approval on certain transactions.



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##### Table of Contents

As of December 31, 2003, the Company was in compliance with its covenants. Interest on this loan is at the lenders prime rate plus 0.50% and is paid
quarterly. The Limited Life Preferred paid the equivalent of the current U.S. 30-year Treasury Bond yield + 300 basis points while the Perpetual Preferred paid the equivalent of the current U.S. 30-year Treasury Bond yield + 400. Repurchasing the
Companys Limited Life Preferred and Perpetual Preferred stock has allowed for a current savings of approximately 300 and 400 basis points, respectively, as of December 31, 2003.



At December 31, 2003, the Company had additional short-term funding sources available totaling $29.6 million with variable interest rates
and collateralized by $22.9 million of investment securities. There were $11.8 million and $0 outstanding under these agreements as of December 31, 2003 and 2002, respectively. Of the $11.8 million outstanding, $9.8 million was attributed to Federal
Home Loan Bank (FHLB) advances while $2 million represented the purchase of Federal Funds. We anticipate additional borrowings to total between $3-5 million during 2004 to fund our loan growth and replace a portion of the Companys time
certificates of deposit.



Capital



Pacificas shareholders equity at December 31, 2003 was $12.6 million, compared
with $12.2 million at year-end 2002. Shareholders equity was 8% and 7% of total assets at December 31, 2003 and 2002, respectively.



The primary reason for the increase in the Companys shareholders equity since December 31, 2002 was the net income for the year of $1.2 million. The Company
repurchased its Perpetual Preferred stock of $350,000 and repurchased $175,000 of common stock, both decreased the Companys shareholders equity but not enough to offset the net income of $1.2 million. The accumulated deficit decreased
from $4.3 million at year-end 2002 to $3.1 million as of year-end 2003 due primarily to a net income of $1.2 million. Accumulated other comprehensive income decreased by $250,000 to $(207,000) as of December 31, 2003 from $43,000 at December 31,
2002, due to a decrease in unrealized gains on available-for-sale securities, net of tax effect.



Preferred Stock



The Company is
authorized to issue up to 3,000,000 shares of no par value preferred stock. The Board of Directors has the authority to determine the rights and privileges to be granted to holders of preferred stock. At December 31, 2003, there was no preferred
stock outstanding.



In June 2002, the Company commenced an offering of up to
8,000 shares of its Series A Preferred Stock, designated as a combination of Series A-1 Perpetual Cumulative Preferred Stock (the Perpetual Preferred) and Series A-2 Five-Year Cumulative Mandatory Redeemable Preferred Stock (the
Limited Life Preferred). The Series A Preferred Stock was offered at $1,000 per share, in a private placement to accredited investors, sophisticated investors, and non-U.S. persons. The Perpetual Preferred paid an initial annual cash
dividend of 9.8% adjusted bi-annually to the equivalent of the current U.S. 30-year Treasury Bond yield + 400 basis points. The Limited Life Preferred paid an initial annual cash dividend of 8.8% adjusted bi-annually to the equivalent of the current
U.S. 30-year Treasury Bond yield + 300 basis points. The first bi-annual adjustment occurred on January 1, 2003, based on a current U.S. 30-year Treasury Bond yield of 4.78%. The Series A Preferred Stock shareholders are entitled to receive a
liquidation amount equal to the original purchase price, plus any accrued but unpaid dividends. The Series A Preferred Stock is non-voting, except for certain matters relating to the Companys Articles of Incorporation. The Limited Life
Preferred is accounted for as subordinated debt while the Perpetual Preferred is accounted for as equity capital.



During 2002, the Company received subscriptions totaling $2.35 million from the offering of its Series A Preferred Stock: $350,000 in sales of its Perpetual Preferred and
$2 million in Limited Life Preferred. The proceeds of the Series A Preferred Stock offering were applied to increase the Banks capital and to pay down the outstanding advances on the Companys commercial line of credit.



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On July 1, 2003, the Company paid out its first annual dividend payments, which had been accruing since the issuance date
through June 30, 2003. Dividends on A-1 Preferred Stock and A-2 Preferred Stock totaled $29,000 and $151,000, respectively.



On September 30, 2003, the Company redeemed the outstanding balance of the Limited Life Preferred Stock in entirety with proceeds from a $2 million borrowing from a
correspondent bank. See additional discussion under Borrowings.



On
December 29, 2003, the Company redeemed the outstanding balance of the Perpetual Preferred stock in entirety with proceeds from a $350,000 borrowing from a correspondent bank. See additional discussion under Borrowings.



Contractual Obligations and Commitments



The following table sets forth Pacificas long-term contractual obligations:



|                        |  |       |        |                         |   |           |  |           |       |            |   |       |  |   |    
|----------------------- |  | ----- | ------ | ----------------------- | - | --------- |  | --------- | ----- | ---------- | - | ----- |  | - | ---
|                        |  |       |        | Payments Due Per Period
|(Dollars in Thousands)  |  | Total |        | Less than 1 year        |   | 1-3 years |  | 3-5 years |       | Thereafter
|Debt                    |  | $     | 14,320 |                         | $ | 5,506     |  | $         | 7,508 |            | $ | 1,306 |  | $ |   
|Fixed interest on debt1 |  |       | 421    |                         |   | 164       |  |           | 228   |            |   | 30    |  |   |   
|Operating leases        |  |       | 3,061  |                         |   | 621       |  |           | 1,272 |            |   | 702   |  |   | 466
|                        |  |       |        |                         |   |           |  |           |       |            |   |       |  |   |    
|Total                   |  | $     | 17,802 |                         | $ | 6,291     |  | $         | 9,008 |            | $ | 2,038 |  | $ | 466
|                        |  |       |        |                         |   |           |  |           |       |            |   |       |  |   |    

---

|(1) | Amount excludes interest expense on adjustable rate debt.
|--- | ---------------------------------------------------------



At December 31, 2003, the Companys obligations related to debt totaled $14.3 million to be paid over the next 4 years. Included in this amount is an amortizing
advance which we will pay-down monthly over a four year period. The weighted-average interest rate related to the long-term debt is 2.48%. See additional discussion under the borrowing section.



The Company also has operating leases comprised of leases for office space. See additional
discussion under Note 11 of the financial statements.



Off-Balance Sheet
Commitments



Standby letters of credit, commercial letters of credit
and financial guarantees written are conditional commitments issued by the Company to guarantee the performance of a customer to a third party or payment by a customer to a third party. Those guarantees are primarily issued in international trade or
to support public and private borrowing arrangements, including commercial paper, bond financing, and similar transactions. Except for certain long-term guarantees, the majority of guarantees expire in one year. The credit risk involved in issuing
letters of credit is essentially the same as that involved in extending loan facilities to customers. Collateral supporting those commitments, for which collateral is deemed necessary, generally amounts to one hundred percent of the commitment
amount at December 31, 2003. The Company routinely charges a fee for these credit facilities. The Company has not been required to perform on any financial guarantees.



|                                         |  |       |        |                                            |   |           |  |           |       |            |   |     |  |   |    
|---------------------------------------- |  | ----- | ------ | ------------------------------------------ | - | --------- |  | --------- | ----- | ---------- | - | --- |  | - | ---
|                                         |  |       |        | Amount of Commitment Expiration Per Period
|                                         |  | Total |        | Less than 1 year                           |   | 1-3 years |  | 3-5 years |       | Thereafter
|Off-Balance Sheet Commitments            |  |       |        |                                            |   |           |  |           |       |            |   |     |  |   |    
|Commitments to extend credit             |  | $     | 29,968 |                                            | $ | 24,972    |  | $         | 4,343 |            | $ | 293 |  | $ | 360
|Commercial and standby letters of credit |  |       | 1,368  |                                            |   | 1,274     |  |           | 94    |            |   |    |  |   |   
|                                         |  |       |        |                                            |   |           |  |           |       |            |   |     |  |   |    
|Total                                    |  | $     | 31,336 |                                            | $ | 26,246    |  | $         | 4,437 |            | $ | 293 |  | $ | 360
|                                         |  |       |        |                                            |   |           |  |           |       |            |   |     |  |   |    



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Liquidity and Capital Resources



The primary function of asset/liability management is to ensure adequate liquidity and maintain an appropriate balance between interest
sensitive earning assets and liabilities. Liquidity management focuses on Pacificas ability to meet the financial demands of depositors, creditors and borrowers. Pacifica actively manages the levels, types and maturities of earning assets in
relation to the funding sources available to ensure that adequate funding will be available at all times. Management believes that Pacifica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, to acquire investment securities and other assets and to fund continuing operations. The primary source of demands on our capital are customer demand
for withdrawal of deposits and borrowers demands that we advance funds against unfunded lending commitments. Our total unfunded lending commitments at December 31, 2003 were $30 million, and we do not expect all of these loans to be fully
drawn upon at any one time. Pacifica also may use advances from the Federal Home Loan Bank and borrowings at correspondent banks to meet short-term liquidity needs. At December 31, 2003 we had unused credit lines totaling $17.8 million. Certain
borrowings have collateral requirements and are subject to availability of funds. In addition to the borrowing lines, Pacifica has the ability to accept time certificates from the state of Washingtons Time Certificate of Deposit (TCD) program.
These time certificates are 10% collateralized by investment securities and are subject to availability and certain capital requirements.



Cash. Cash and cash equivalents at December 31, 2003 totaled $13.1 million, down 56% from $29.7 million at year-end 2002.



Cash from (used by) Operating Activities.Net cash used by operating
activities totaled $772,000 in 2003, down from net cash used by operating activities of $2.1 million in the same period of 2002. This use of funds was caused primarily by the $1.7 million net cash used to purchase other assets of which included the
$3 million purchase of BOLI (see additional discussion under Noninterest Income). Meanwhile, net cash used to pay accrued interest declined significantly due to the lower cost of funds in 2003 as compared to 2002.



Cash from (used by) Investing Activities.Net cash used by investing
activities was $12 million during 2003, as compared to net cash provided by investing activities of $6.1 million in 2002. Net funding for new loans and investments in 2003 primarily came from the Companys excess liquidity. During 2002, new
loans were funded by sales, pay downs and maturities of securities. The Company experienced much less activity related to the sales of investment securities during 2003 compared to 2002.



Cash from (used by) Financing Activities.In 2003, net cash used by financial activities totaled $3.8 million, down
from net cash used by financing activities of $5.6 million in 2002. This decline in cash used by financing activities was a result of an increase in borrowings of $13.3 million to offset the decrease in deposits of $15.5 million and the repurchase
of the Companys preferred stock of $2.35 million (for additional information see discussion under Borrowings). In 2002, cash used by financing activities came mainly from the decrease in interest-bearing deposits of $8.4 million.



Effects of Inflation and Changing Prices



The primary impact of inflation on our operations is increased operating costs. Unlike most
industrial companies, virtually all the assets and liabilities of a financial institution are monetary in nature. As a result, interest rates generally have a more significant impact on a financial institutions performance than the effects of
general levels of inflation. Although interest rates do not necessarily move in the same direction or to the same extent as the prices of goods and services, increases in inflation generally have resulted in increased interest rates.



New Accounting Pronouncements



See Note 18 on page 53 of this report.



Factors That May Impact Our Financial Condition and Results of Operations



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In addition to the other information contained in this report, one or more of the following risks may affect our
business, financial condition and results of operations, and in some cases these effects could be material and adverse. Readers are cautioned that the factors described here are not an exhaustive list of potential occurrences or conditions that may
have an adverse impact. Instead, we are subject to the general risks facing banking and financial services businesses and to other unforeseen risks that, alone or in combination with one or more potential events described below, may cause us to fall
short of our expected performance.



We are operating under regulatory orders
that limit our ability to grow our business, to extend and maintain loans, and to respond with as much flexibility as other financial institutions



On March 27, 2002 we became subject to a supervisory directive issued by the Director of the Washington Department of Financial Institutions. That directive was amended
(as so amended, the Directive) as of February 25, 2003 and February 24, 2004 as currently amended, the Directive imposes certain capital requirements and places various limitations on our operations, including:



| |  | temporarily limiting the Banks ability to declare or pay dividends, which will limit the Companys ability to derive income from that subsidiary;
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------



| |  | temporarily limiting the Banks maximum asset size to $180 million;
| | - | -------------------------------------------------------------------



| |  | requiring the Banks Tier I Leverage Capital ratio to be maintained at 8% or greater and maintain a well-capitalized designation as defined by FDIC regulations; and
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | requiring the Bank to discuss certain growth, earnings and capital augmentation strategies in its strategic and capital plans and continuously monitor its progress in achieving its
goals.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



The Directive will stay in place at least until the next
examination date which we anticipate to be during the fourth quarter of 2004. Failure to comply with the Directive would cause continued restriction of our growth, among other penalties.



Our markets are geographically concentrated and regional economic factors that impact our markets will affect our business more than they
might a bank holding company with more diverse markets.



Our market is
located almost exclusively in the Seattle and Bellevue, Washington, business districts. Our customers are directly and indirectly dependent upon the economies of these areas and upon the technology, manufacturing, aerospace and tourism industries,
which are the primary employers and revenue sources in our markets. National, regional, and local economic factors that affect these industries will have a disproportionately negative impact on our customers. Localized economic declines will thus
adversely impact our customers, and in exacerbated circumstances may increase the rate at which our borrowers default on their loans. The Boeing Company, the largest employer in our market area, has undergone extensive personnel reductions and
production cutbacks over the last decade, and these trends have been exacerbated since the terrorist attacks of September 11, 2001. Adverse events also have characterized the technology sector since early 2000. As a result, the Puget Sound economy
has suffered disproportionately in comparison to the more generalized economic downturn experienced nationally in recent years, and we expect these trends will continue to effect our borrowers and our depositors. Additionally, the vast majority of
our loans are secured by real and personal property located in this same region, and continuing or worsening economic conditions in this area could make it more difficult for us to realize full value on the collateral that secures our loans. A
deterioration in economic and business conditions in our market areas, particularly in the technology and aerospace sectors, could have a material adverse impact on the quality of our loan portfolio and the demand for our products and services,
which in turn may have a material adverse effect on our results of operations. Further, a downturn in the national economy might further exacerbate local economic conditions. The extent of the future impact of these events on economic and business
conditions cannot be predicted.



Our earnings depend upon the spread between
the interest rate we receive on loans and securities and the interest rates we pay on deposits and borrowings if interest rates shift our business may be impacted more severely than would be experienced in a diversified business.



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##### Table of Contents

Our earnings are impacted by changing interest rates. Changes in interest rates affect the demand for new loans, the
credit profile of existing loans, the rates received on loans and securities, and rates paid on deposits and borrowings. The relationship between the rates received on loans and securities and the rates paid on deposits and borrowings is known as
interest rate spread. Given our current volume and mix of interest-bearing liabilities and interest-earning assets, our interest rate spread could be expected to decrease during times of rising interest rates and, conversely, to increase during
times of falling interest rates. This shift in our interest rate exposure is largely contributable to the current low interest rate environment in which many borrowers preferred fixed rate loans instead of prime based or other adjustable rate
products. Exposure to interest rate risk is managed by monitoring the re-pricing frequency of the Banks rate-sensitive assets and rate-sensitive liabilities over any given period. Although we believe our current level of interest rate
sensitivity is reasonable, significant fluctuations in interest rates may have an adverse affect on our business, financial condition and results of operations.



Our business is heavily regulated and the creation of additional regulations may negatively affect our operations.



We are subject to government regulation that could limit or restrict our activities, which
could, whether or not in connection with the Directive, adversely impact our operations. The financial services industry is regulated extensively. Federal and state regulation is designed primarily to protect the deposit insurance funds and
consumers, and not to benefit our stockholders. These regulations can sometimes impose significant limitations on our operations. In addition, these regulations are constantly evolving and may change significantly over time. Significant new laws or
changes in existing laws or repeal of existing laws may cause our results to differ materially. Further, federal monetary policy, particularly as implemented through the Federal Reserve System, significantly affects credit conditions for us.



In our intensely competitive markets many of our competitors offer similar
services, which could impair our ability to attract new customers and retain existing customers.



The financial services business in our market areas is highly competitive. It is becoming increasingly competitive due to changes in regulation, technological advances, and the accelerating pace of consolidation among
financial services providers. We face competition both in attracting deposits and in making loans, and our competitors include more traditional financial services companies such as national and super-regional banks, community banks and credit
unions, as well as more recent competitors such as investment companies, mortgage companies, insurance firms and brokerage firms. We compete for customers principally through the interest rates we pay on deposits and the interest rates and loan fees
we charge on loans, and while we target customers who seek the efficiency and quality of services we provide, that level of service limits our ability to compete on price while continuing to operate profitably. Increasing levels of competition in
the banking and financial services industries may reduce our market share or cause the prices we charge for our services to fall. Our results may differ in future periods depending upon the nature or level of competition.



Our earnings depend to a large extent upon the ability of our borrowers to repay their
loans and our inability to manage this credit risk would negatively affect our business.



A source of risk arises from the possibility that losses will be sustained if a significant number of our borrowers, guarantors and related parties fail to perform in accordance with the terms of their loans. We have
adopted underwriting and credit monitoring procedures and credit policies, including the establishment and review of the allowance for loan losses, that management believes are appropriate to minimize this risk by assessing the likelihood of
nonperformance, tracking loan performance and diversifying our credit portfolio. These policies and procedures, however, may not prevent unexpected losses that could materially affect our results of operations, and the Directive noted, among other
things, that our previous credit administration procedures may have been inadequate. We have therefore been required to adopt measures to address regulatory concerns, and if these measures are not sufficient, we may face additional regulatory action
or may experience additional loan charge-offs or reserves.



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##### Table of Contents

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK



Our results of operations depend substantially on our net interest income. Like most financial institutions, our interest income and cost of funds are affected by general economic conditions and by competition, and in
addition, our community banking focus makes our results of operations particularly dependent on the Washington economy.



The purpose of asset/liability management is to provide stable net interest income growth by protecting our earnings from undue interest rate risk, which arises from
volatile interest rates and changes in the balance sheet mix, and by managing the risk/return relationships between liquidity, interest rate risk, market risk, and capital adequacy. We maintain an asset/liability management policy that provides
guidelines for controlling exposure to interest rate risk by setting a target range and minimum for the net interest margin and running simulation models under different interest rate scenarios to measure the risk to earnings over the next 12-month
period.



In order to control interest rate risk in a rising interest rate
environment, our philosophy is to lengthen the average maturity of our liabilities through term advances and offering longer-term time certificates of deposit and emphasize the pricing of new loans on a floating rate basis, when possible, in order
to achieve a more asset sensitive position, therefore, allowing quicker repricings and maximizing net interest margin. Conversely, in a declining interest rate environment, our philosophy is to lengthen the average maturity of the investment
portfolio and emphasize fixed rate loans, thereby becoming more liability sensitive. In each case, the goal is to exceed our targeted net interest margin range without exceeding earnings risk parameters.



The excess of our interest-earning assets over interest-bearing liabilities has generally
been invested in securities, primarily securities issued by governmental agencies. The securities portfolio contributes to our profits and plays an important part in the overall interest rate management. The primary tool used to manage interest rate
risk is determination of mix, maturity and repricing characteristics of the loan portfolios. The loan and securities portfolios must be used in combination with management of deposits and borrowing liabilities and other asset/liability techniques to
actively manage the applicable components of the balance sheet. In doing so, we estimate our future needs, taking into consideration historical periods of high loan demand and low deposit balances, estimated loan and deposit increases, and estimated
interest rate changes.



Although analysis of interest rate gap (the difference
between the repricing of interest-earning assets and interest-bearing liabilities during a given period of time) is one standard tool for the measurement of exposure to interest rate risk, we believe that because interest rate gap analysis does not
address all factors that can affect earnings performance, such as early withdrawal of time deposits and prepayment of loans, it should not be used as the primary indictor of exposure to interest rate risk and the related volatility of net interest
income in a changing interest rate environment. Interest rate gap analysis is primarily a measure of liquidity based upon the amount of change in principal amounts of assets and liabilities outstanding, as opposed to a measure of changes in the
overall net interest margin.



The following table sets forth the estimated
maturity or repricing, and the resulting interest rate gap, of our interest-earning assets and interest-bearing liabilities at December 31, 2003. The amounts in the table are derived from internal data based upon regulatory reporting formats and,
therefore, may not be wholly consistent with financial information appearing elsewhere in the audited financial statements that have been prepared in accordance with generally accepted accounting principles. The amounts shown below could also be
significantly affected by external factors such as changes in prepayment assumptions, early withdrawals of deposits and competition.



26



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|                                             |  |                                                   |        |   |             |   |         |           |  |   |            |   |  |       |        |   |  |   |         |  
|-------------------------------------------- |  | ------------------------------------------------- | ------ | - | ----------- | - | ------- | --------- |  | - | ---------- | - |  | ----- | ------ | - |  | - | ------- | -
|                                             |  | December 31, 2003 Estimated Maturity or Repricing |       
|(Dollars in thousands)                       |  | 0-3 months                                        |        |   | 4-12 months |   |         | 1-5 years |  |   | Thereafter |   |  | Total |       
|Interest-earning assets                      |  |                                                   |        |   |             |   |         |           |  |   |            |   |  |       |        |   |  |   |         |  
|Interest-earning deposits                    |  | $                                                 | 5,010  |   |             | $ | 257     |           |  | $ |           |   |  | $     |       |   |  | $ | 5,267   |  
|Federal funds sold                           |  |                                                   | 4,425  |   |             |   |        |           |  |   |           |   |  |       |       |   |  |   | 4,425   |  
|Investment securities                        |  |                                                   | 4,170  |   |             |   | 2,572   |           |  |   | 3,863      |   |  |       | 16,755 |   |  |   | 27,360  |  
|Loans                                        |  |                                                   | 55,378 |   |             |   | 8,374   |           |  |   | 49,811     |   |  |       | 3,798  |   |  |   | 117,361 |  
|                                             |  |                                                   |        |   |             |   |         |           |  |   |            |   |  |       |        |   |  |   |         |  
|Total interest-earning assets                |  | $                                                 | 68,983 |   |             | $ | 11,203  |           |  | $ | 53,674     |   |  | $     | 20,553 |   |  | $ | 154,413 |  
|                                             |  |                                                   |        |   |             |   |         |           |  |   |            |   |  |       |        |   |  |   |         |  
|Percent of total interest-earning assets     |  |                                                   | 44.67  | % |             |   | 7.26    | %         |  |   | 34.76      | % |  |       | 13.31  | % |  |   | 100.00  | %
|                                             |  |                                                   |        |   |             |   |         |           |  |   |            |   |  |       |        |   |  |   |         |  
|Interest-bearing liabilities                 |  |                                                   |        |   |             |   |         |           |  |   |            |   |  |       |        |   |  |   |         |  
|Deposits                                     |  |                                                   |        |   |             |   |         |           |  |   |            |   |  |       |        |   |  |   |         |  
|NOW, savings and money market accounts       |  | $                                                 | 42,547 |   |             | $ |        |           |  |   |            |   |  | $     |       |   |  | $ | 42,547  |  
|Time deposits                                |  |                                                   | 28,083 |   |             |   | 44,522  |           |  |   | 3,714      |   |  |       |       |   |  |   | 76,319  |  
|Other short-term borrowed funds              |  |                                                   | 7,640  |   |             |   | 378     |           |  |   | 6,302      |   |  |       |       |   |  |   | 14,320  |  
|                                             |  |                                                   |        |   |             |   |         |           |  |   |            |   |  |       |        |   |  |   |         |  
|Total interest-bearing liabilities           |  | $                                                 | 78,270 |   |             | $ | 44,900  |           |  | $ | 10,016     |   |  | $     |       |   |  | $ | 133,186 |  
|                                             |  |                                                   |        |   |             |   |         |           |  |   |            |   |  |       |        |   |  |   |         |  
|Percent of total interest-earning assets     |  |                                                   | 50.69  | % |             |   | 29.08   | %         |  |   | 6.49       | % |  |       | 0.00   | % |  |   | 86.25   | %
|                                             |  |                                                   |        |   |             |   |         |           |  |   |            |   |  |       |        |   |  |   |         |  
|Rate Sensitivity Gap                         |  | $                                                 | (9,287 | ) |             | $ | (33,697 | )         |  | $ | 43,658     |   |  | $     | 20,553 |   |  | $ | 21,227  |  
|Cumulative rate sensitivity gap              |  | $                                                 | (9,287 | ) |             | $ | (42,984 | )         |  | $ | 674        |   |  | $     | 21,227 |   |  | $ |        |  
|Cumulative gap as percentage of total assets |  |                                                   | -5.74  | % |             |   | -26.55  | %         |  |   | 0.42       | % |  |       | 13.11  | % |  |   |        |  
|Total assets                                 |  |                                                   |        |   |             |   |         |           |  |   |            |   |  |       |        |   |  | $ | 161,869 |  



As stated previously, certain
shortcomings, including those described below, are inherent in the method of analysis presented in the foregoing table. For example, although certain assets and liabilities may have similar maturities or periods to repricing, they may react in
different degrees to changes in market interest rates. Also, the interest rates on certain types of assets and liabilities may fluctuate in advance of changes in market interest rates, while interest rates on other types may lag behind changes in
market interest rates. Additionally, certain assets have features, which restrict changes in their interest rates, both on a short-term basis and over the lives of the assets. Further, in the event of a change in market interest rates, prepayment
and early withdrawal levels could deviate significantly from those assumed in calculating the tables as can the relationship of rates between different loan and deposit categories. Moreover, the ability of many borrowers to service their
adjustable-rate debt may decrease in the event of an increase in market interest rates.



We utilize a simulation model to monitor and manage interest rate risk within parameters established by our internal policy. The model projects the impact of a 100 basis point increase and a 100 basis point decrease, from prevailing
interest rates, on the balance sheet over a period of 12 months. Generalized assumptions are made on how investment securities, classes of loans and various deposit products might respond to the interest rate changes. These assumptions are
inherently uncertain, and as a result, the model cannot precisely estimate net interest income nor precisely predict the impact of higher or lower interest rates on net interest income. Actual results would differ from simulated results due to
factors such as timing, magnitude and frequency of rate changes, customer reaction to rate changes, changes in market conditions and management strategies, among other factors.



Based on the results of the simulation models at December 31, 2003, we expect a decrease in net interest income of $135,000 and an increase
of $291,000 in net interest income over a 12-month period, if interest rates increased or decreased a gradual 100 basis points, respectively.



ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA



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LOGO

---



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 Pacifica Bancorp, Inc. and Subsidiary (the Company) as of December 31, 2003 and 2002, and the related consolidated statements of income, changes in stockholders equity and cash flows for
each of the three years in the periods ended December 31, 2003, 2002 and 2001. These financial statements are the responsibility of the Companys management. Our responsibility is to express an opinion on these financial statements based on our
audits.



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



In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Pacifica Bancorp, Inc. and Subsidiary as of December 31, 2003 and 2002 and
the results of their operations and cash flows for each of the three years in the periods ended December 31, 2003, 2002 and 2001, in conformity with accounting principles generally accepted in the United States of America.



LOGO



Bellingham,
Washington

February 27, 2004



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PACIFICA BANCORP, INC.

CONSOLIDATED BALANCE SHEET

DECEMBER 31, 2003
AND 2002

---



|                                                                                                                                                                               |  |                   |         |   |                   |   |         |  
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ |  | ----------------- | ------- | - | ----------------- | - | ------- | -
|(Dollars in thousands)                                                                                                                                                         |  | December 31, 2003 |         |   | December 31, 2002 |  
|ASSETS                                                                                                                                                                         |  |                   |         |   |                   |   |         |  
|Cash and due from banks                                                                                                                                                        |  | $                 | 3,658   |   |                   | $ | 3,144   |  
|Interest-bearing cash                                                                                                                                                          |  |                   | 5,010   |   |                   |   | 13,489  |  
|Federal funds sold                                                                                                                                                             |  |                   | 4,425   |   |                   |   | 13,080  |  
|                                                                                                                                                                               |  |                   |         |   |                   |   |         |  
|Total cash and cash equivalents                                                                                                                                                |  |                   | 13,093  |   |                   |   | 29,713  |  
|Interest-bearing deposits in banks                                                                                                                                             |  |                   | 257     |   |                   |   | 657     |  
|Securities available-for-sale, at fair value                                                                                                                                   |  |                   | 27,360  |   |                   |   | 22,518  |  
|Correspondent bank stock, at cost                                                                                                                                              |  |                   | 554     |   |                   |   | 133     |  
|                                                                                                                                                                               |  |                   |         |   |                   |   |         |  
|Total investments                                                                                                                                                              |  |                   | 28,171  |   |                   |   | 23,308  |  
|Loans                                                                                                                                                                          |  |                   | 116,770 |   |                   |   | 109,735 |  
|Less allowance for loan losses                                                                                                                                                 |  |                   | (2,230  | ) |                   |   | (2,919  | )
|                                                                                                                                                                               |  |                   |         |   |                   |   |         |  
|Total loans, net                                                                                                                                                               |  |                   | 114,540 |   |                   |   | 106,816 |  
|Bank premises and equipment, net                                                                                                                                               |  |                   | 2,019   |   |                   |   | 2,609   |  
|Accrued interest receivable                                                                                                                                                    |  |                   | 762     |   |                   |   | 778     |  
|Other                                                                                                                                                                          |  |                   | 3,284   |   |                   |   | 1,464   |  
|                                                                                                                                                                               |  |                   |         |   |                   |   |         |  
|Total other assets                                                                                                                                                             |  |                   | 6,065   |   |                   |   | 4,851   |  
|                                                                                                                                                                               |  |                   |         |   |                   |   |         |  
|TOTAL ASSETS                                                                                                                                                                   |  | $                 | 161,869 |   |                   | $ | 164,688 |  
|                                                                                                                                                                               |  |                   |         |   |                   |   |         |  
|LIABILITIES AND STOCKHOLDERS EQUITY                                                                                                                                           |  |                   |         |   |                   |   |         |  
|Deposits                                                                                                                                                                       |  |                   |         |   |                   |   |         |  
|Noninterest-bearing                                                                                                                                                            |  | $                 | 14,846  |   |                   | $ | 13,961  |  
|Interest-bearing                                                                                                                                                               |  |                   | 118,866 |   |                   |   | 134,359 |  
|                                                                                                                                                                               |  |                   |         |   |                   |   |         |  
|Total deposits                                                                                                                                                                 |  |                   | 133,712 |   |                   |   | 148,320 |  
|Accrued interest payable                                                                                                                                                       |  |                   | 615     |   |                   |   | 948     |  
|Other accrued liabilities                                                                                                                                                      |  |                   | 608     |   |                   |   | 272     |  
|Other borrowings                                                                                                                                                               |  |                   | 14,320  |   |                   |   | 972     |  
|                                                                                                                                                                               |  |                   |         |   |                   |   |         |  
|Total other liabilities                                                                                                                                                        |  |                   | 15,543  |   |                   |   | 2,192   |  
|Mandatory redeemable preferred stock                                                                                                                                           |  |                   |        |   |                   |   | 2,000   |  
|                                                                                                                                                                               |  |                   |         |   |                   |   |         |  
|Total liabilities                                                                                                                                                              |  |                   | 149,255 |   |                   |   | 152,512 |  
|                                                                                                                                                                               |  |                   |         |   |                   |   |         |  
|STOCKHOLDERS EQUITY                                                                                                                                                           |  |                   |         |   |                   |   |         |  
|Preferred stock, no par value, 3,000,000 shares authorized; no shares issued and outstanding at December 31, 2003 and 2,350 shares issued and
outstanding at December 31, 2002 |  |                   |        |   |                   |   | 350     |  
|Common stock, no par value, 10,000,000 shares authorized, 3,233,008 and 3,260,368 shares issued and outstanding at December 31, 2003 and
December 31, 2002, respectively       |  |                   | 15,914  |   |                   |   | 16,054  |  
|Accumulated deficit                                                                                                                                                            |  |                   | (3,093  | ) |                   |   | (4,271  | )
|Accumulated other comprehensive income (loss), net of tax                                                                                                                      |  |                   | (207    | ) |                   |   | 43      |  
|                                                                                                                                                                               |  |                   |         |   |                   |   |         |  
|Total stockholders equity                                                                                                                                                     |  |                   | 12,614  |   |                   |   | 12,176  |  
|                                                                                                                                                                               |  |                   |         |   |                   |   |         |  
|TOTAL LIABILITIES AND STOCKHOLDERS EQUITY                                                                                                                                     |  | $                 | 161,869 |   |                   | $ | 164,688 |  
|                                                                                                                                                                               |  |                   |         |   |                   |   |         |  



See accompanying notes to these
consolidated financial statements.



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PACIFICA BANCORP, INC.

CONSOLIDATED STATEMENT OF INCOME

FOR THE YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001

---



|                                                                      |  |                                                      |           |   |      |   |           |      |  |   |           |  
|--------------------------------------------------------------------- |  | ---------------------------------------------------- | --------- | - | ---- | - | --------- | ---- |  | - | --------- | -
|                                                                      |  | (Dollars in Thousands, except for per share amounts) |          
|                                                                      |  | 2003                                                 |           |   | 2002 |   |           | 2001 | 
|INTEREST                                                              |  |                                                      |           |   |      |   |           |      |  |   |           |  
|Loans, including fees                                                 |  | $                                                    | 7,985     |   |      | $ | 8,607     |      |  | $ | 10,209    |  
|Investments and interest-bearing deposits                             |  |                                                      | 1,464     |   |      |   | 1,452     |      |  |   | 1,965     |  
|Federal funds sold                                                    |  |                                                      | 105       |   |      |   | 62        |      |  |   | 133       |  
|                                                                      |  |                                                      |           |   |      |   |           |      |  |   |           |  
|Total interest income                                                 |  |                                                      | 9,554     |   |      |   | 10,121    |      |  |   | 12,307    |  
|                                                                      |  |                                                      |           |   |      |   |           |      |  |   |           |  
|INTEREST EXPENSE                                                      |  |                                                      |           |   |      |   |           |      |  |   |           |  
|Deposits                                                              |  |                                                      | 2,635     |   |      |   | 4,144     |      |  |   | 6,993     |  
|Borrowings                                                            |  |                                                      | 69        |   |      |   | 3         |      |  |   | 28        |  
|Mandatory redeemable preferred stock                                  |  |                                                      | 115       |   |      |   | 74        |      |  |   |          |  
|                                                                      |  |                                                      |           |   |      |   |           |      |  |   |           |  
|Total interest expense                                                |  |                                                      | 2,819     |   |      |   | 4,221     |      |  |   | 7,021     |  
|                                                                      |  |                                                      |           |   |      |   |           |      |  |   |           |  
|NET INTEREST INCOME                                                   |  |                                                      | 6,735     |   |      |   | 5,900     |      |  |   | 5,286     |  
|PROVISION/(RECOVERY) FOR LOAN LOSSES                                  |  |                                                      | (900      | ) |      |   | (603      | )    |  |   | 4,642     |  
|                                                                      |  |                                                      |           |   |      |   |           |      |  |   |           |  
|NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES                   |  |                                                      | 7,635     |   |      |   | 6,503     |      |  |   | 644       |  
|                                                                      |  |                                                      |           |   |      |   |           |      |  |   |           |  
|NONINTEREST INCOME                                                    |  |                                                      |           |   |      |   |           |      |  |   |           |  
|Service fees                                                          |  |                                                      | 152       |   |      |   | 117       |      |  |   | 102       |  
|Foreign trade fees                                                    |  |                                                      | 269       |   |      |   | 250       |      |  |   | 228       |  
|Other income                                                          |  |                                                      | 243       |   |      |   | 156       |      |  |   | 172       |  
|Net gain on sale of investments                                       |  |                                                      | 159       |   |      |   | 43        |      |  |   | 969       |  
|Previously unrealized gains on derivatives reclassified into earnings |  |                                                      |          |   |      |   |          |      |  |   | 280       |  
|Net gain on sale of derivatives                                       |  |                                                      |          |   |      |   |          |      |  |   | 483       |  
|                                                                      |  |                                                      |           |   |      |   |           |      |  |   |           |  
|Total noninterest income                                              |  |                                                      | 823       |   |      |   | 566       |      |  |   | 2,234     |  
|                                                                      |  |                                                      |           |   |      |   |           |      |  |   |           |  
|NONINTEREST EXPENSES                                                  |  |                                                      |           |   |      |   |           |      |  |   |           |  
|Salaries and employee benefits                                        |  |                                                      | 3,813     |   |      |   | 3,670     |      |  |   | 3,110     |  
|Occupancy and equipment                                               |  |                                                      | 1,298     |   |      |   | 1,102     |      |  |   | 886       |  
|Professional services                                                 |  |                                                      | 272       |   |      |   | 318       |      |  |   | 312       |  
|State business taxes                                                  |  |                                                      | 156       |   |      |   | 192       |      |  |   | 185       |  
|Data processing                                                       |  |                                                      | 162       |   |      |   | 179       |      |  |   | 86        |  
|Loan collection                                                       |  |                                                      | 153       |   |      |   | 158       |      |  |   | 156       |  
|FDIC assessment                                                       |  |                                                      | 167       |   |      |   | 144       |      |  |   | 23        |  
|Insurance expense                                                     |  |                                                      | 107       |   |      |   | 66        |      |  |   | 37        |  
|Loss on impaired assets                                               |  |                                                      | 130       |   |      |   |          |      |  |   |          |  
|Loss on disposal of equipment and lease termination cost              |  |                                                      | 108       |   |      |   |          |      |  |   |          |  
|Other expenses                                                        |  |                                                      | 726       |   |      |   | 679       |      |  |   | 781       |  
|                                                                      |  |                                                      |           |   |      |   |           |      |  |   |           |  
|Total noninterest expenses                                            |  |                                                      | 7,092     |   |      |   | 6,508     |      |  |   | 5,576     |  
|                                                                      |  |                                                      |           |   |      |   |           |      |  |   |           |  
|INCOME (LOSS) FROM CONTINUING OPERATIONS                              |  |                                                      | 1,366     |   |      |   | 561       |      |  |   | (2,698    | )
|Loss from discontinued operations                                     |  |                                                      | (157      | ) |      |   | (453      | )    |  |   | (267      | )
|                                                                      |  |                                                      |           |   |      |   |           |      |  |   |           |  
|NET INCOME (LOSS)                                                     |  |                                                      | 1,209     |   |      |   | 108       |      |  |   | (2,965    | )
|Less perpetual preferred stock dividends                              |  |                                                      | (31       | ) |      |   | (14       | )    |  |   |          |  
|                                                                      |  |                                                      |           |   |      |   |           |      |  |   |           |  
|NET INCOME (LOSS) AVAILABLE TO COMMON SHAREHOLDERS                    |  | $                                                    | 1,178     |   |      | $ | 94        |      |  | $ | (2,965    | )
|                                                                      |  |                                                      |           |   |      |   |           |      |  |   |           |  
|NET INCOME (LOSS) PER SHAREAVAILABLE TO COMMON SHAREHOLDERS           |  |                                                      |           |   |      |   |           |      |  |   |           |  
|Basic                                                                 |  | $                                                    | 0.36      |   |      | $ | 0.03      |      |  | $ | (0.91     | )
|                                                                      |  |                                                      |           |   |      |   |           |      |  |   |           |  
|Diluted                                                               |  | $                                                    | 0.36      |   |      | $ | 0.03      |      |  | $ | (0.91     | )
|                                                                      |  |                                                      |           |   |      |   |           |      |  |   |           |  
|WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING                         |  |                                                      |           |   |      |   |           |      |  |   |           |  
|Basic                                                                 |  |                                                      | 3,259,147 |   |      |   | 3,260,368 |      |  |   | 3,265,961 |  
|                                                                      |  |                                                      |           |   |      |   |           |      |  |   |           |  
|Diluted                                                               |  |                                                      | 3,263,196 |   |      |   | 3,319,275 |      |  |   | 3,265,961 |  
|                                                                      |  |                                                      |           |   |      |   |           |      |  |   |           |  



See accompanying notes to these
consolidated financial statements.



30



---

##### Table of Contents

PACIFICA BANCORP, INC.

CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS EQUITY

FOR THE YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001

---



|                                                                                                   |  |                |   |  |              |      |   |                 |           |   |                                         |   |        |                                                         |  |   |                            |   |  |                             |        |   |  |   |      |   |  |   |        |   |  |   |        |  
|-------------------------------------------------------------------------------------------------- |  | -------------- | - |  | ------------ | ---- | - | --------------- | --------- | - | --------------------------------------- | - | ------ | ------------------------------------------------------- |  | - | -------------------------- | - |  | --------------------------- | ------ | - |  | - | ---- | - |  | - | ------ | - |  | - | ------ | -
|                                                                                                   |  | PreferredStock |   |  | Common Stock |      |   | Capital Surplus |           |   | Retained Earnings (Accumulated Deficit) |   |        | AccumulatedOther Comprehensive Income (Loss) Net of Tax |  |   | Total Stockholders Equity |   |  | Comprehensive Income (Loss) |       
|(In Thousands)                                                                                     |  | Shares         |   |  | Amount       |      |   | Shares          |           |   | Amount                                  |   |        |                                                         |  |   |                           
|BALANCE, December 31, 2000                                                                         |  |                |   |  |              |      |   |                 | 1,629,104 |   |                                         | $ | 8,145  |                                                         |  | $ | 8,145                      |   |  | $                           | (1,400 | ) |  | $ | 736  |   |  | $ | 15,626 |   |  |   |        |  
|Comprehensive income                                                                               |  |                |   |  |              |      |   |                 |           |   |                                         |   |        |                                                         |  |   |                            |   |  |                             |        |   |  |   |      |   |  |   |        |   |  |   |        |  
|Net loss                                                                                           |  |                |   |  |              |      |   |                 |           |   |                                         |   |        |                                                         |  |   |                            |   |  |                             | (2,965 | ) |  |   |      |   |  |   | (2,965 | ) |  | $ | (2,965 | )
|Other comprehensive income                                                                         |  |                |   |  |              |      |   |                 |           |   |                                         |   |        |                                                         |  |   |                            |   |  |                             |        |   |  |   |      |   |  |   |        |   |  |   |        |  
|Change in unrealized gains (losses) on available-for-sale securities, net of tax effects 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 |   |  |   |        |  
|Comprehensive income                                                                               |  |                |   |  |              |      |   |                 |           |   |                                         |   |        |                                                         |  |   |                            |   |  |                             |        |   |  |   |      |   |  |   |        |   |  |   |        |  
|Net income                                                                                         |  |                |   |  |              |      |   |                 |           |   |                                         |   |        |                                                         |  |   |                            |   |  |                             | 108    |   |  |   |      |   |  |   | 108    |   |  | $ | 108    |  
|Other comprehensive income                                                                         |  |                |   |  |              |      |   |                 |           |   |                                         |   |        |                                                         |  |   |                            |   |  |                             |        |   |  |   |      |   |  |   |        |   |  |   |        |  
|Change in unrealized gains (losses) on available-for-sale securities, net of tax effects of ($33)  |  |                |   |  |              |      |   |                 |           |   |                                         |   |        |                                                         |  |   |                            |   |  |                             |        |   |  |   | (65  | ) |  |   | (65    | ) |  |   | (65    | )
|                                                                                                   |  |                |   |  |              |      |   |                 |           |   |                                         |   |        |                                                         |  |   |                            |   |  |                             |        |   |  |   |      |   |  |   |        |   |  |   |        |  
|Total comprehensive income (loss)                                                                  |  |                |   |  |              |      |   |                 |           |   |                                         |   |        |                                                         |  |   |                            |   |  |                             |        |   |  |   |      |   |  |   |        |   |  | $ | 43     |  
|                                                                                                   |  |                |   |  |              |      |   |                 |           |   |                                         |   |        |                                                         |  |   |                            |   |  |                             |        |   |  |   |      |   |  |   |        |   |  |   |        |  
|Preferred stock issued                                                                             |  | 350            |   |  | $            | 350  |   |                 |           |   |                                         |   |        |                                                         |  |   |                            |   |  |                             |        |   |  |   |      |   |  |   | 350    |   |  |   |        |  
|Preferred stock dividends accrued                                                                  |  |               |   |  |              |     |   |                 |          |   |                                         |   |       |                                                         |  |   |                           |   |  |                             | (14    | ) |  |   |     |   |  |   | (14    | ) |  |   |        |  
|                                                                                                   |  |                |   |  |              |      |   |                 |           |   |                                         |   |        |                                                         |  |   |                            |   |  |                             |        |   |  |   |      |   |  |   |        |   |  |   |        |  
|BALANCE, December 31, 2002                                                                         |  | 350            |   |  |              | 350  |   |                 | 3,260,368 |   |                                         |   | 16,054 |                                                         |  |   |                           |   |  |                             | (4,271 | ) |  |   | 43   |   |  |   | 12,176 |   |  |   |        |  
|                                                                                                   |  |                |   |  |              |      |   |                 |           |   |                                         |   |        |                                                         |  |   |                            |   |  |                             |        |   |  |   |      |   |  |   |        |   |  |   |        |  
|Comprehensive income                                                                               |  |                |   |  |              |      |   |                 |           |   |                                         |   |        |                                                         |  |   |                            |   |  |                             |        |   |  |   |      |   |  |   |        |   |  |   |        |  
|Net income                                                                                         |  |                |   |  |              |      |   |                 |           |   |                                         |   |        |                                                         |  |   |                            |   |  |                             | 1,209  |   |  |   |      |   |  |   | 1,209  |   |  | $ | 1,209  |  
|Other comprehensive income                                                                         |  |                |   |  |              |      |   |                 |           |   |                                         |   |        |                                                         |  |   |                            |   |  |                             |        |   |  |   |      |   |  |   |        |   |  |   |        |  
|Change in unrealized gains (losses) on available-for-sale securities, net of tax effects of ($129) |  |                |   |  |              |      |   |                 |           |   |                                         |   |        |                                                         |  |   |                            |   |  |                             |        |   |  |   | (250 | ) |  |   | (250   | ) |  |   | (250   | )
|                                                                                                   |  |                |   |  |              |      |   |                 |           |   |                                         |   |        |                                                         |  |   |                            |   |  |                             |        |   |  |   |      |   |  |   |        |   |  |   |        |  
|Total comprehensive income (loss)                                                                  |  |                |   |  |              |      |   |                 |           |   |                                         |   |        |                                                         |  |   |                            |   |  |                             |        |   |  |   |      |   |  |   |        |   |  | $ | 959    |  
|                                                                                                   |  |                |   |  |              |      |   |                 |           |   |                                         |   |        |                                                         |  |   |                            |   |  |                             |        |   |  |   |      |   |  |   |        |   |  |   |        |  
|Common stock repurchased                                                                           |  |                |   |  |              |      |   |                 | (34,360   | ) |                                         |   | (175   | )                                                       |  |   |                           |   |  |                             |        |   |  |   |      |   |  |   | (175   | ) |  |   |        |  
|Stock options exercised                                                                            |  |                |   |  |              |      |   |                 | 7,000     |   |                                         |   | 35     |                                                         |  |   |                            |   |  |                             |        |   |  |   |      |   |  |   | 35     |   |  |   |        |  
|Preferred stock repurchased                                                                        |  | (350           | ) |  |              | (350 | ) |                 |           |   |                                         |   |        |                                                         |  |   |                            |   |  |                             |        |   |  |   |      |   |  |   | (350   | ) |  |   |        |  
|Preferred stock dividends accrued and paid                                                         |  |               |   |  |              |     |   |                 |          |   |                                         |   |       |                                                         |  |   |                           |   |  |                             | (31    | ) |  |   |     |   |  |   | (31    | ) |  |   |        |  
|                                                                                                   |  |                |   |  |              |      |   |                 |           |   |                                         |   |        |                                                         |  |   |                            |   |  |                             |        |   |  |   |      |   |  |   |        |   |  |   |        |  
|BALANCE, December 31, 2003                                                                         |  |               |   |  | $            |     |   |                 | 3,233,008 |   |                                         | $ | 15,914 |                                                         |  | $ |                           |   |  | $                           | (3,093 | ) |  | $ | (207 | ) |  | $ | 12,614 |   |  |   |        |  
|                                                                                                   |  |                |   |  |              |      |   |                 |           |   |                                         |   |        |                                                         |  |   |                            |   |  |                             |        |   |  |   |      |   |  |   |        |   |  |   |        |  



See accompanying notes to these
consolidated financial statements.



31



---

##### Table of Contents

PACIFICA BANCORP, INC.

CONSOLIDATED STATEMENT OF CASH FLOWS

FOR THE YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001

---



Increase (Decrease) In Cash



|                                                                                         |  |                |         |   |      |   |         |      |  |   |         |  
|---------------------------------------------------------------------------------------- |  | -------------- | ------- | - | ---- | - | ------- | ---- |  | - | ------- | -
|                                                                                         |  | (In Thousands) |        
|                                                                                         |  | 2003           |         |   | 2002 |   |         | 2001 | 
|CASH FLOWS FROM OPERATING ACTIVITIES                                                     |  |                |         |   |      |   |         |      |  |   |         |  
|Net income (loss)                                                                        |  | $              | 1,209   |   |      | $ | 108     |      |  | $ | (2,965  | )
|Adjustments to reconcile net income (loss) to net cash flows from operating activities   |  |                |         |   |      |   |         |      |  |   |         |  
|Provision for loan losses                                                                |  |                | (900    | ) |      |   | (603    | )    |  |   | 4,642   |  
|Net amortization (accretion) of securities                                               |  |                | 125     |   |      |   | 48      |      |  |   | 97      |  
|Realized gain on sale of available-for-sale securities, net                              |  |                | (159    | ) |      |   | (43     | )    |  |   | (969    | )
|Realized gain on sale of derivatives                                                     |  |                |        |   |      |   |        |      |  |   | (763    | )
|Loss on sale of fixed assets                                                             |  |                | 10      |   |      |   |        |      |  |   |        |  
|Impairment provision - bank premises                                                     |  |                | 130     |   |      |   |        |      |  |   |        |  
|Correspondent bank stock dividends                                                       |  |                | (10     | ) |      |   | (14     | )    |  |   | (18     | )
|Depreciation                                                                             |  |                | 480     |   |      |   | 472     |      |  |   | 390     |  
|Changes in operating assets and liabilities                                              |  |                |         |   |      |   |         |      |  |   |         |  
|Accrued interest receivable                                                              |  |                | 16      |   |      |   | 216     |      |  |   | (35     | )
|Other assets                                                                             |  |                | (1,713  | ) |      |   | (1,231  | )    |  |   | (152    | )
|Accrued interest payable                                                                 |  |                | (333    | ) |      |   | (1,035  | )    |  |   | 271     |  
|Other liabilities, net                                                                   |  |                | 373     |   |      |   | (6      | )    |  |   | 95      |  
|                                                                                         |  |                |         |   |      |   |         |      |  |   |         |  
|Net cash flows from (used by) operating activities                                       |  |                | (772    | ) |      |   | (2,088  | )    |  |   | 593     |  
|                                                                                         |  |                |         |   |      |   |         |      |  |   |         |  
|CASH FLOWS FROM INVESTING ACTIVITIES                                                     |  |                |         |   |      |   |         |      |  |   |         |  
|Net change in interest-bearing deposits in banks                                         |  |                | 400     |   |      |   | 200     |      |  |   | 700     |  
|Purchases of available-for-sale investment securities                                    |  |                | (38,152 | ) |      |   | (46,664 | )    |  |   | (95,412 | )
|Proceeds from sales, maturities and principal payments of available-for- sale securities |  |                | 32,964  |   |      |   | 57,220  |      |  |   | 80,242  |  
|Proceeds from sale of derivatives                                                        |  |                |        |   |      |   |        |      |  |   | 763     |  
|Purchases of correspondent bank stock                                                    |  |                | (413    | ) |      |   |        |      |  |   |        |  
|Net change in loans                                                                      |  |                | (6,824  | ) |      |   | (3,865  | )    |  |   | (2,898  | )
|Redemption of Federal Home Loan Bank stock                                               |  |                | 2       |   |      |   | 154     |      |  |   |        |  
|Proceeds from disposal of premises and equipment                                         |  |                |        |   |      |   | 8       |      |  |   |        |  
|(Additions) to premises and equipment                                                    |  |                | (30     | ) |      |   | (963    | )    |  |   | (1,324  | )
|                                                                                         |  |                |         |   |      |   |         |      |  |   |         |  
|Net cash flows from (used by) investing activities                                       |  |                | (12,053 | ) |      |   | 6,090   |      |  |   | (17,929 | )
|                                                                                         |  |                |         |   |      |   |         |      |  |   |         |  
|CASH FLOWS FROM FINANCING ACTIVITIES                                                     |  |                |         |   |      |   |         |      |  |   |         |  
|Increase in noninterest-bearing deposits                                                 |  |                | 885     |   |      |   | 774     |      |  |   | 4,191   |  
|Increase (decrease) in interest-bearing deposits                                         |  |                | (15,493 | ) |      |   | (8,423  | )    |  |   | 31,366  |  
|Increase (decrease) in other borrowings                                                  |  |                | 13,348  |   |      |   | (346    | )    |  |   | 942     |  
|Repurchase of common stock                                                               |  |                | (175    | ) |      |   |        |      |  |   | (452    | )
|Proceeds from issuance of mandatory redeemable preferred stock                           |  |                |        |   |      |   | 2,000   |      |  |   |        |  
|Proceeds from issuance of preferred stock                                                |  |                |        |   |      |   | 350     |      |  |   |        |  
|Proceeds from exercise of stock options                                                  |  |                | 35      |   |      |   |        |      |  |   | 216     |  
|Dividends of perpetual preferred stock                                                   |  |                | (45     | ) |      |   |        |      |  |   |        |  
|Redemption of mandatory redeemable preferred stock                                       |  |                | (2,000  | ) |      |   |        |      |  |   |        |  
|Redemption of perpetual preferred stock                                                  |  |                | (350    | ) |      |   |        |      |  |   |        |  
|                                                                                         |  |                |         |   |      |   |         |      |  |   |         |  
|Net cash flows from (used by) financing activities                                       |  |                | (3,795  | ) |      |   | (5,645  | )    |  |   | 36,263  |  
|                                                                                         |  |                |         |   |      |   |         |      |  |   |         |  
|NET CHANGE IN CASH AND CASH EQUIVALENTS                                                  |  |                | (16,620 | ) |      |   | (1,643  | )    |  |   | 18,927  |  
|CASH AND CASH EQUIVALENTS,beginning of year                                              |  |                | 29,713  |   |      |   | 31,356  |      |  |   | 12,429  |  
|                                                                                         |  |                |         |   |      |   |         |      |  |   |         |  
|CASH AND CASH EQUIVALENTS,end of year                                                    |  | $              | 13,093  |   |      | $ | 29,713  |      |  | $ | 31,356  |  
|                                                                                         |  |                |         |   |      |   |         |      |  |   |         |  
|SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION                                         |  |                |         |   |      |   |         |      |  |   |         |  
|Cash paid during the period for interest                                                 |  | $              | 3,152   |   |      | $ | 5,256   |      |  | $ | 6,750   |  
|                                                                                         |  |                |         |   |      |   |         |      |  |   |         |  
|Cash paid (tax refund) during the period for income taxes                                |  | $              |        |   |      | $ | (100    | )    |  | $ | 100     |  
|                                                                                         |  |                |         |   |      |   |         |      |  |   |         |  
|Dividends on perpetual preferred stock to be paid                                        |  | $              |        |   |      | $ | 14      |      |  | $ |        |  
|                                                                                         |  |                |         |   |      |   |         |      |  |   |         |  



See accompanying notes to these
consolidated financial statements.



32



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##### Table of Contents

PACIFICA BANCORP, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2003, 2002 AND 2001

---



NOTE 1  ORGANIZATION AND
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES



Nature of Operations  Pacifica Bancorp, Inc. (the Company), through its wholly-owned subsidiary, Pacifica Bank (the
Bank) provides a full range of commercial and mortgage lending services as well as banking services to individuals and small-to-medium sized businesses through its offices in Bellevue and Seattle, Washington. The Company is subject to
significant competition from other financial institutions. The Company is also subject to the regulations of certain Federal and State of Washington agencies and undergoes periodic examinations by those regulatory authorities.



Plan of Reorganization  In October 2000, Pacifica Bancorp, Inc.
was formed. On January 1, 2001 under a plan of reorganization, Pacifica Bancorp, Inc. became the parent company of Pacifica Bank by issuing 3,258,208 shares of common stock in exchange for all outstanding shares of Pacifica Bank stock (1,629,104
shares) using a 2-for-1 ratio (stock split). On January 18, 2001, the Company created an additional wholly-owned subsidiary, Pacifica Mortgage Company. Effective March 31, 2003, the Company ceased operations of its wholly owned subsidiary Pacifica
Mortgage Company (Pacifica Mortgage or the Mortgage Company). The Company processed residual transactions throughout the second and third quarters of 2003. The Company currently provides mortgage services via referrals to
correspondent banks to generate fee income and serve our customers efficiently.



Principles of Consolidation  For the years ended December 31, 2003, 2002 and 2001, the consolidated financial statements include the accounts of Pacifica Bancorp, Inc., and its wholly-owned subsidiary, Pacifica
Bank. Due to the closure of Pacifica Mortgage effective March 31, 2003, operating results for Pacifica Mortgage were reported as loss from discontinued operations for the year ended December 31, 2003. All material intercompany balances
and transactions have been eliminated. For the year ended December 31, 2000 the financial statements include Pacifica Bank only.



Financial Statement Presentation and Use of Estimates  The financial statements have been prepared in accordance with accounting principles
generally accepted in the United States of America and reporting practices applicable to the banking industry. In preparing the financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets
and liabilities, as of the date of the balance sheet, and revenues and expenses for the period. Actual results could differ from estimated amounts. Material estimates that are particularly susceptible to significant change relate to the
determination of the allowance for loan losses and the valuation of real estate acquired in connection with foreclosure or in satisfaction of loans.



Cash and Cash Equivalents  For purposes of reporting cash flows, cash and cash equivalents include cash on hand, amounts due from banks and
federal funds sold. Generally, federal funds are purchased and sold for one-day periods. Investments in federal funds sold are made with major banks as approved by the Board of Directors.



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



Interest bearing cash represents funds on deposit in a demand
account with the Federal Home Loan Bank of Seattle in the amount of $5 million and $13.5 million as of December 31, 2003 and 2002, respectively.



33



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##### Table of Contents

PACIFICA BANCORP, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2003, 2002 AND 2001

---



NOTE 1  ORGANIZATION AND SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES(Continued)



Included in cash and due from banks are legally reserved amounts which are required to be maintained on an average basis in the form of cash and balances due from the
Federal Reserve Bank and other banks. Average reserve requirements approximate $200,000 for the years ended December 31, 2003 and 2002, respectively.



Interest-bearing Deposits in Banks  Interest-bearing deposits in banks mature within one year and are carried at cost.



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



Investment securities categorized as available-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 the net unrealized gain or loss (net of the related tax effect) reported as other comprehensive income (loss) within the statement of
stockholders equity. Realized gains or losses on dispositions are based on the net proceeds and the adjusted carrying amount of securities sold, using the specific identification method.



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



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



The Company had no held-to-maturity or trading securities
at December 31, 2003 and 2002.



Federal Home Loan Bank Stock
 The Banks investment in Federal Home 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 stock based on specific percentages of outstanding FHLB advances. The Bank may request redemption at par value of any stock in excess of the amount the Bank is required to hold. Stock redemptions are at the
discretion of the FHLB. At December 31, 2003, Pacifica Bank owned approximately $454,000 of FHLB stock.



Correspondent Bank Stock  The Banks investment in correspondent bank stock is carried at cost ($200 per share), which reasonably approximates its fair value. The $100,000 investment in
correspondent bank stock represents an investment in common stock of a Bankers Bank of which Pacifica is a member. These shares are not traded on any exchanges and have no readily available market price. Any additional purchases of
correspondent bank stock would be minimal.



Loans Held for
Sale  Loans originated and intended for sale in secondary markets are carried at the lower of cost or estimated market value in the aggregate. Net unrealized losses are recognized through a valuation allowance by charges to income.
Gains or losses on the sale of such loans are based on the specific identification method. There were no loans held for sale at December 31, 2003 and 2002.



34



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##### Table of Contents

PACIFICA BANCORP, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2003, 2002 AND 2001

---



NOTE 1  ORGANIZATION AND SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES(Continued)



Loans Receivable  Loans receivable that management has the intent and ability to hold for the foreseeable future or until maturity or pay-off are
reported at their outstanding principal adjusted for any charge-offs, the allowance for loan losses, and any deferred fees or costs on originated loans and unamortized premiums or discounts on purchased loans.



Interest income is accrued on the unpaid principal balance. Loan origination fees and certain
direct origination costs are capitalized and recognized as an adjustment of the related loan using the interest method.



The Company considers loans impaired when it is probable the Company will not be able to collect all amounts as scheduled under a loan agreement. Impaired loans are
measured based on the present value of expected 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 fair value of the collateral if the loan is
collateral dependent. Changes in these values will be reflected in income and as adjustments to the allowance for possible loan losses.



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



The Companys policy is to place loans on a nonaccrual basis when, in managements
judgment, the collateral value and the financial condition of the borrower do not justify accruing interest as an income item. Interest previously recorded but not deemed collectible is reversed and charged against current income. Interest income on
these loans is then recognized when collected.



Allowance for Loan
Losses  The allowance for loan losses is established as losses are estimated to have occurred through a provision for loan losses charged to earnings. Loan losses are charged against the allowance when 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 a regular basis by management and is based upon managements periodic review of the collectibility of the loans in light of historical experience, the nature and
volume of the loan portfolio, adverse situations that may affect the borrowers ability to repay, estimated value of any underlying collateral and prevailing economic conditions. This evaluation is inherently subjective as it requires estimates
that are susceptible to significant revision as more information becomes available. Additionally, loans are subject to examinations by state and federal regulators, who, based upon their judgment, may require the Company to make additional
provisions or adjustments to its allowance for loan losses.



Bank
Premises and Equipment  Company premises and equipment are stated at cost and depreciated using the straight-line method over the estimated useful lives of the related assets, which range from three to ten years. Total depreciation
expense was $480,000, $472,000 and $390,000 at December 31, 2003, 2002, and 2001, respectively.



35



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##### Table of Contents

PACIFICA BANCORP, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2003, 2002 AND 2001

---



NOTE 1  ORGANIZATION AND SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES(Continued)



Income Taxes  Deferred tax assets and liabilities are reflected at currently enacted income tax rates applicable to the period in which the deferred
tax assets or liabilities are expected to be realized or settled. As changes in tax laws or rates are enacted, deferred tax assets and liabilities are adjusted through the provision for income taxes. Deferred taxes result from temporary differences
in the recognition of certain income and expense 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 operating losses and preopening expenses and uncertainty surrounding their use, the Company has not recognized a tax provision within the statement of income.



Gain and Loss on Sale of Loans  Gains and losses on sales of loans are recognized when loans are considered sold to
investors. The gain or loss is determined by the difference between expected sales proceeds and the carrying value of the loans. Such carrying costs include principal advanced and related costs of origination, less loan and discount fees collected.



Financial InstrumentsCredit Related Financial Instruments
 In the ordinary course of business, the Company has entered into off-balance-sheet financial instruments consisting of commitments to extend credit, commercial letters of credit, and standby letters of credit. Such financial instruments are
recorded in the financial statements when they are funded or related fees are incurred or received.



Advertising Costs  The Company expenses advertising costs as they are incurred. Total advertising expenses were $48,000, $34,000 and $76,000 in 2003, 2002, and 2001, respectively.



Stock Option Plans  The Company recognizes the financial effects of stock
options under the intrinsic value method in accordance with Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees (APB 25). Generally, stock options are issued at a price equal to the fair value of the
Companys stock as of the grant date. Under APB 25, options issued in this manner do not result in the recognition of employee compensation in the Companys financial statements. Disclosures required by Statement of Financial Accounting
Standards No. 123, Accounting For Stock-Based Compensation, are as follows. The pro forma information recognizes as compensation, the value of stock options granted using an option valuation model known as the Black-Scholes model. The
estimated fair value for options issued in 2003, 2002, and 2001 is estimated at $350,000, $244,000 and $287,000, respectively.



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



|                                          |  |                  |   |  |                  |   |  |                  |  
|----------------------------------------- |  | ---------------- | - |  | ---------------- | - |  | ---------------- | -
|                                          |  | 2003             |   |  | 2002             |   |  | 2001             |  
|                                          |  | (5 Year Vesting) |   |  | (5 Year Vesting) |   |  | (5 Year Vesting) |  
|Weighted average risk-free interest rate  |  | 3.75             | % |  | 4.35             |   |  | 5.03             |  
|Dividend yield rate                       |  | 0.00             | % |  | 0.00             | % |  | 0.00             | %
|Price volatility                          |  | 31.06            | % |  | 67.34            |   |  | 0.00             | %
|Weighted average expected life of options |  | 10 Years         |   |  | 10 Years         |   |  | 10 Years         |  



36



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##### Table of Contents

PACIFICA BANCORP, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2003, 2002 AND 2001

---



NOTE 1  ORGANIZATION AND SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES(Continued)



Management believes that the assumptions used in the option pricing model are highly subjective and represent only one estimate of possible value, as there is no active
market for the options granted. The fair value of the options granted in 2003, 2002, and 2001 are allocated to pro forma earnings over the vesting period of the options. The pro forma effect on the Companys earnings as a result of options
issued in 2003, 2002, and 2001 is as follows:



|                                                             |  |                                              |       |   |                 |   |       |                 |  |   |        |  
|------------------------------------------------------------ |  | -------------------------------------------- | ----- | - | --------------- | - | ----- | --------------- |  | - | ------ | -
|                                                             |  | (In Thousands, except for per share amounts) |      
|                                                             |  | 2003(Pro Forma)                              |       |   | 2002(Pro Forma) |   |       | 2001(Pro Forma) | 
|Net income (loss) from Company operations                    |  | $                                            | 1,209 |   |                 | $ | 108   |                 |  | $ | (2,965 | )
|Less accrued perpetual preferred stock dividends             |  |                                              | (31   | ) |                 |   | (14   | )               |  |   |       |  
|                                                             |  |                                              |       |   |                 |   |       |                 |  |   |        |  
|Net income (loss) available to common shareholders           |  |                                              | 1,178 |   |                 |   | 94    |                 |  |   | (2,965 | )
|Additional compensation for fair value of stock options      |  |                                              | (188  | ) |                 |   | (309  | )               |  |   | (450   | )
|                                                             |  |                                              |       |   |                 |   |       |                 |  |   |        |  
|Pro forma net income (loss) from Company operations          |  | $                                            | 990   |   |                 | $ | (215  | )               |  | $ | (3,415 | )
|                                                             |  |                                              |       |   |                 |   |       |                 |  |   |        |  
|Net income (loss) per share available to common shareholders |  |                                              |       |   |                 |   |       |                 |  |   |        |  
|Basic                                                        |  |                                              |       |   |                 |   |       |                 |  |   |        |  
|As reported                                                  |  | $                                            | 0.36  |   |                 | $ | 0.03  |                 |  | $ | (0.91  | )
|                                                             |  |                                              |       |   |                 |   |       |                 |  |   |        |  
|Pro forma                                                    |  | $                                            | 0.30  |   |                 | $ | (0.07 | )               |  | $ | (1.05  | )
|                                                             |  |                                              |       |   |                 |   |       |                 |  |   |        |  
|Diluted                                                      |  |                                              |       |   |                 |   |       |                 |  |   |        |  
|As reported                                                  |  | $                                            | 0.36  |   |                 | $ | 0.03  |                 |  | $ | (0.91  | )
|                                                             |  |                                              |       |   |                 |   |       |                 |  |   |        |  
|Pro forma                                                    |  | $                                            | 0.30  |   |                 | $ | (0.07 | )               |  | $ | (1.05  | )
|                                                             |  |                                              |       |   |                 |   |       |                 |  |   |        |  



The remaining unrecognized
compensation for fair value of stock options was $276,000, $421,000 and $763,000 as of December 31, 2003, 2002 and 2001, respectively.



Net Income (Loss) Per Share Available to Common Shareholders  Basic earnings (loss) per share amounts are computed based on the weighted average
number of shares outstanding during the period after giving retroactive effect to the stock split at time of reorganization. Diluted earnings per share are computed by determining the number of additional shares that are deemed outstanding due to
stock options under the treasury stock method. Information concerning additional shares that may be dilutive, consisting of stock options, is contained in Note 16.



Segments  Pursuant to Statement of Financial Accounting Standards (SFAS) No. 131, Disclosure about Segments of an
Enterprise and Related Information, the Company has evaluated the requirements of this standard and has identified no reportable segments: Pacifica Bank is the sole wholly-owned subsidiary of Pacifica Bancorp, Inc. Disclosures required by this
standard have not been included in the financial statements. For information related to the Parent Companys financial statements see Note 17.



Reclassifications  Certain amounts in the prior years financial statements have been reclassified to conform to the 2003 presentation.



37



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##### Table of Contents

PACIFICA BANCORP, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2003, 2002 AND 2001

---



NOTE 2  INVESTMENT SECURITIES



Carrying amounts and approximate fair values of investment securities are summarized as
follows:



|                              |  |                |        |                      |   |                                         |  |   |                                           |   |  |                    |    |   |  |   |       
|----------------------------- |  | -------------- | ------ | -------------------- | - | --------------------------------------- |  | - | ----------------------------------------- | - |  | ------------------ | -- | - |  | - | ------
|                              |  | (In Thousands)
|                              |  | 2003          
|                              |  | AmortizedCost  |        | GrossUnrealizedGains |   | GrossUnrealizedLossesLess Than12 Months |  |   | GrossUnrealizedLossesGreaterThan 12Months |   |  | EstimatedFairValue
|Available-for-Sale Securities |  |                |        |                      |   |                                         |  |   |                                           |   |  |                    |    |   |  |   |       
|U.S. Government agencies      |  | $              | 19,158 |                      | $ |                                        |  | $ | (340                                      | ) |  | $                  |   |   |  | $ | 18,818
|Mortgage-backed securities    |  |                | 3,995  |                      |   |                                        |  |   | (95                                       | ) |  |                    | (2 | ) |  |   | 3,898 
|Corporate debt securities     |  |                | 4,521  |                      |   | 123                                     |  |   |                                          |   |  |                    |   |   |  |   | 4,644 
|                              |  |                |        |                      |   |                                         |  |   |                                           |   |  |                    |    |   |  |   |       
|TOTAL INVESTMENT SECURITIES   |  | $              | 27,674 |                      | $ | 123                                     |  | $ | (435                                      | ) |  | $                  | (2 | ) |  | $ | 27,360
|                              |  |                |        |                      |   |                                         |  |   |                                           |   |  |                    |    |   |  |   |       



Certain investment securities shown
above currently have fair values less than amortized cost and therefore contain unrealized losses. The Company has evaluated these securities and has determined that the decline in value is temporary and is related to the change in market interest
rates since purchase. The decline in value is not related to any company or industry specific event. There are approximately 14 investment securities with unrealized losses. The Company anticipates full recovery of amortized cost with respect to
these securities at maturity or sooner in the event of a more favorable market interest rate environment.



|                               |  |                               |        |                    |                               |                        |  |      |                |  |                      |        |                        |   |        |  |      |  
|------------------------------ |  | ----------------------------- | ------ | ------------------ | ----------------------------- | ---------------------- |  | ---- | -------------- |  | -------------------- | ------ | ---------------------- | - | ------ |  | ---- | -
|                               |  | (In Thousands)                |       
|                               |  | December 31, 2003             |        |                    | December 31, 2002             |                       
|                               |  | Available-For-Sale Securities |        |                    | Available-For-Sale Securities |                       
|                               |  | AmortizedCost                 |        | EstimatedFairValue |                               | Weighted Average Yield |  |      | Amortized Cost |  | Estimated Fair Value |        | Weighted Average Yield |  
|U.S. Government agencies       |  |                               |        |                    |                               |                        |  |      |                |  |                      |        |                        |   |        |  |      |  
|One year or less               |  | $                             |       |                    | $                             |                       |  |     | %              |  | $                    | 14,956 |                        | $ | 14,993 |  | 5.43 | %
|Over 1 year through 5 years    |  |                               | 988    |                    |                               | 984                    |  | 3.61 |                |  |                      |       |                        |   |       |  |     |  
|After 5 years through 10 years |  |                               | 4,970  |                    |                               | 4,880                  |  | 6.34 |                |  |                      |       |                        |   |       |  |     |  
|Over 10 years                  |  |                               | 13,200 |                    |                               | 12,953                 |  | 6.13 |                |  |                      |       |                        |   |       |  |     |  
|Mortgage-backed securities     |  |                               |        |                    |                               |                        |  |      |                |  |                      |        |                        |   |        |  |      |  
|One year or less               |  |                               | 199    |                    |                               | 196                    |  | 5.05 |                |  |                      |       |                        |   |       |  |     |  
|Over 1 year through 5 years    |  |                               | 1,856  |                    |                               | 1,806                  |  | 4.83 |                |  |                      | 789    |                        |   | 789    |  | 4.38 |  
|After 5 years through 10 years |  |                               | 1,940  |                    |                               | 1,896                  |  | 3.89 |                |  |                      |       |                        |   |       |  |     |  
|Over 10 years                  |  |                               |       |                    |                               |                       |  |     |                |  |                      |       |                        |   |       |  |     |  
|Corporate debt securities      |  |                               |        |                    |                               |                        |  |      |                |  |                      |        |                        |   |        |  |      |  
|One year or less               |  |                               | 3,522  |                    |                               | 3,572                  |  | 4.96 |                |  |                      | 2,206  |                        |   | 2,210  |  | 4.75 |  
|Over 1 year through 5 years    |  |                               | 999    |                    |                               | 1,073                  |  | 6.15 |                |  |                      | 4,500  |                        |   | 4,526  |  | 6.60 |  
|After 5 years through 10 years |  |                               |       |                    |                               |                       |  |     |                |  |                      |       |                        |   |       |  |     |  
|                               |  |                               |        |                    |                               |                        |  |      |                |  |                      |        |                        |   |        |  |      |  
|                               |  | $                             | 27,674 |                    | $                             | 27,360                 |  | 5.68 | %              |  | $                    | 22,451 |                        | $ | 22,518 |  | 5.09 | %
|                               |  |                               |        |                    |                               |                        |  |      |                |  |                      |        |                        |   |        |  |      |  



38



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##### Table of Contents

PACIFICA BANCORP, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2003, 2002 AND 2001

---



NOTE 2  INVESTMENT SECURITIES(Continued)



Proceeds from sales of investments and gross realized gains and losses on
investment sales were as follows for the years ended December 31, 2003 and 2002.



|                                              |  |                |        |      |   |       
|--------------------------------------------- |  | -------------- | ------ | ---- | - | ------
|                                              |  | (In Thousands)
|                                              |  | 2003           |        | 2002
|Proceeds from sales and called investments    |  | $              | 28,473 |      | $ | 29,590
|                                              |  |                |        |      |   |       
|Gross gains realized on sales of investments  |  | $              | 179    |      | $ | 73    
|                                              |  |                |        |      |   |       
|Gross losses realized on sales of investments |  | $              | 20     |      | $ | 30    
|                                              |  |                |        |      |   |       



Investment securities with a fair
value of approximately $22.7 and $15.9 million as of December 31, 2003 and 2002, respectively, were pledged to secure U.S. government and public deposits, and for other purposes as required by law.



NOTE 3  LOANS



The major classifications of loans at December 31 are summarized as follows:



|                           |  |                |         |   |      |   |         |      |  |   |         |  
|-------------------------- |  | -------------- | ------- | - | ---- | - | ------- | ---- |  | - | ------- | -
|                           |  | (In Thousands) |        
|                           |  | 2003           |         |   | 2002 |   |         | 2001 | 
|Commercial                 |  | $              | 33,106  |   |      | $ | 38,594  |      |  | $ | 41,673  |  
|Real estate  construction |  |                | 24,137  |   |      |   | 23,112  |      |  |   | 26,071  |  
|Real estate  mortgage     |  |                | 59,069  |   |      |   | 47,477  |      |  |   | 35,864  |  
|Consumer and other         |  |                | 1,049   |   |      |   | 957     |      |  |   | 2,665   |  
|                           |  |                |         |   |      |   |         |      |  |   |         |  
|                           |  |                | 117,361 |   |      |   | 110,140 |      |  |   | 106,273 |  
|Less deferred loan fees    |  |                | (591    | ) |      |   | (405    | )    |  |   | (395    | )
|                           |  |                |         |   |      |   |         |      |  |   |         |  
|Total loans                |  | $              | 116,770 |   |      | $ | 109,735 |      |  | $ | 105,878 |  
|                           |  |                |         |   |      |   |         |      |  |   |         |  



Contractual maturities of loans as of
December 31, 2003, are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to prepay loans with or without prepayment penalties.



|                           |  |                |       |                  |   |                 |  |       |        |  |   |        
|-------------------------- |  | -------------- | ----- | ---------------- | - | --------------- |  | ----- | ------ |  | - | -------
|                           |  | (In Thousands)
|                           |  | Within OneYear |       | One to FiveYears |   | After FiveYears |  | Total
|Contractual Maturities     |  |                |       |                  |   |                 |  |       |        |  |   |        
|Commercial                 |  | $              | 414   |                  | $ | 24,075          |  | $     | 8,617  |  | $ | 33,106 
|Real estate  construction |  |                | 2,718 |                  |   | 21,299          |  |       | 120    |  |   | 24,137 
|Real estate  mortgage     |  |                |      |                  |   | 18,999          |  |       | 40,070 |  |   | 59,069 
|Consumer and other         |  |                | 2     |                  |   | 1,016           |  |       | 31     |  |   | 1,049  
|                           |  |                |       |                  |   |                 |  |       |        |  |   |        
|Total                      |  | $              | 3,134 |                  | $ | 65,389          |  | $     | 48,838 |  | $ | 117,361
|                           |  |                |       |                  |   |                 |  |       |        |  |   |        



Variable interest rate loans maturing
after one year are $76.3 million and $17.0 million at December 31, 2003 and 2002, respectively, and fixed interest rate loans maturing after one year are $37.9 million and $32.6 million, respectively, as of such dates.



39



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##### Table of Contents

PACIFICA BANCORP, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2003, 2002 AND 2001

---



NOTE 3  LOANS(Continued)



The Bank initiated interest rate floors on certain variable rate loans during 2002 and
throughout 2003, ranging from approximately 5.5% to 7.0% depending on maturity of the loans. The Bank does not offer interest rate caps on its variable rate loans.



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



|                                                                   |  |                |       |   |      |   |        |      |  |   |        |  
|------------------------------------------------------------------ |  | -------------- | ----- | - | ---- | - | ------ | ---- |  | - | ------ | -
|                                                                   |  | (In Thousands) |      
|                                                                   |  | 2003           |       |   | 2002 |   |        | 2001 | 
|Balance, beginning of year                                         |  | $              | 2,919 |   |      | $ | 3,530  |      |  | $ | 1,306  |  
|Charge-offs                                                        |  |                | (287  | ) |      |   | (2,141 | )    |  |   | (2,559 | )
|Recoveries                                                         |  |                | 498   |   |      |   | 2,133  |      |  |   | 141    |  
|Provision (credited) charged to operating expenses for loan losses |  |                | (900  | ) |      |   | (603   | )    |  |   | 4,642  |  
|                                                                   |  |                |       |   |      |   |        |      |  |   |        |  
|Balance, end of year                                               |  | $              | 2,230 |   |      | $ | 2,919  |      |  | $ | 3,530  |  
|                                                                   |  |                |       |   |      |   |        |      |  |   |        |  



A summary of impaired
loans is as follows:



|                                                                  |  |                |       |      |   |       |  |   |      
|----------------------------------------------------------------- |  | -------------- | ----- | ---- | - | ----- |  | - | -----
|                                                                  |  | (In Thousands)
|                                                                  |  | 2003           |       | 2002 |   | 2001 
|Impaired loans                                                    |  | $              | 674   |      | $ | 110   |  | $ | 4,028
|                                                                  |  |                |       |      |   |       |  |   |      
|Average balance of impaired loans                                 |  | $              | 1,389 |      | $ | 6,490 |  | $ | 8,274
|                                                                  |  |                |       |      |   |       |  |   |      
|Allowance for loan losses related to impaired loans               |  | $              | 489   |      | $ | 1     |  | $ | 850  
|                                                                  |  |                |       |      |   |       |  |   |      
|Nonaccruing loans                                                 |  | $              |      |      | $ | 110   |  | $ | 2,161
|                                                                  |  |                |       |      |   |       |  |   |      
|Interest income collected on impaired loans and nonaccruing loans |  | $              | 91    |      | $ | 418   |  | $ | 556  
|                                                                  |  |                |       |      |   |       |  |   |      



The Company had $674,000 of impaired
loans as of December 31, 2003. Impaired loans are made up of one loan which is currently in compliance with the terms of the loan but with which management has concerns about an adequate source of repayment. At December 31, 2003, the Company had
specific reserves for this loan of $489,000 and collateral comprising of real-estate with a value of $185,000.



A summary of past due loans follows:



|                  |  |                                           |       |                                             |   |    
|----------------- |  | ----------------------------------------- | ----- | ------------------------------------------- | - | ---
|                  |  | (In Thousands)                           
|                  |  | 30 to 89 Days Past Due and Still Accruing |       | 90 Days or More Past Due and Still Accruing
|December 31, 2003 |  | $                                         | 884   |                                             | $ |   
|                  |  |                                           |       |                                             |   |    
|December 31, 2002 |  | $                                         | 2,364 |                                             | $ | 104
|                  |  |                                           |       |                                             |   |    
|December 31, 2001 |  | $                                         | 2,804 |                                             | $ |   
|                  |  |                                           |       |                                             |   |    



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##### Table of Contents

PACIFICA BANCORP, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2003, 2002 AND 2001

---



Note 4  Bank Premises and Equipment



Bank premises and equipment at December 31 are classified as follows:



|                                               |  |                |        |   |      |   |        |  
|---------------------------------------------- |  | -------------- | ------ | - | ---- | - | ------ | -
|                                               |  | (In Thousands) |       
|                                               |  | 2003           |        |   | 2002 |  
|Leasehold improvements                         |  | $              | 1,707  |   |      | $ | 1,705  |  
|Furniture and fixtures                         |  |                | 934    |   |      |   | 950    |  
|Office equipment                               |  |                | 309    |   |      |   | 304    |  
|Computer software                              |  |                | 563    |   |      |   | 553    |  
|Computer equipment                             |  |                | 568    |   |      |   | 539    |  
|                                               |  |                |        |   |      |   |        |  
|                                               |  |                | 4,081  |   |      |   | 4,051  |  
|Less accumulated depreciation and amortization |  |                | (2,062 | ) |      |   | (1,442 | )
|                                               |  |                |        |   |      |   |        |  
|                                               |  | $              | 2,019  |   |      | $ | 2,609  |  
|                                               |  |                |        |   |      |   |        |  



NOTE 5 
DEPOSITS



Deposits as of December 31 consisted of the
following:



|                                                          |  |                |         |      |   |        
|--------------------------------------------------------- |  | -------------- | ------- | ---- | - | -------
|                                                          |  | (In Thousands)
|                                                          |  | 2003           |         | 2002
|Savings accounts                                          |  | $              | 603     |      | $ | 312    
|Certificates of deposit under $100,000                    |  |                | 13,397  |      |   | 15,455 
|Certificates of deposit equal to or greater than $100,000 |  |                | 62,922  |      |   | 72,721 
|Demand accounts                                           |  |                |         |      |   |        
|Noninterest-bearing                                       |  |                | 14,846  |      |   | 13,961 
|Interest-bearing                                          |  |                | 6,997   |      |   | 14,738 
|Money market accounts                                     |  |                | 34,947  |      |   | 31,133 
|                                                          |  |                |         |      |   |        
|                                                          |  | $              | 133,712 |      | $ | 148,320
|                                                          |  |                |         |      |   |        



At December 31, 2003,
scheduled maturities of certificates of deposit are as follows:



|                         |  |                |       
|------------------------ |  | -------------- | ------
|Year Ending December 31, |  | (In Thousands)
|2004                     |  | $              | 72,605
|2005                     |  |                | 3,267 
|2006                     |  |                | 397   
|2007                     |  |                |      
|2008                     |  |                | 50    
|                         |  |                |       
|                         |  | $              | 76,319
|                         |  |                |       





41



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##### Table of Contents

PACIFICA BANCORP, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2003, 2002 AND 2001

---



NOTE 6  OTHER BORROWINGS



At December 31, 2003 and 2002, Pacifica had liabilities to the U.S. Treasury in the amount
of $6,000 and $163,000, respectively, representing the Treasury Tax and Loan note balance and is collateralized by a $113,000 and $171,000 pledged security, respectively.



The Company renewed a $3 million, one-year revolving line of credit with a bank in November 2002 which was replaced in September 2003. The
new revolving line of credit is a $3.5 million line with an 18 month term. The line of credit matures in March of 2005 and is collateralized by the Banks stock and subject to certain restrictive covenants including, among others, requirements
with regards to capital ratios, loan loss reserve ratios and lenders prior approval on certain transactions. The Company was in compliance with all of these covenants at December 31, 2003. Interest on this line is at the banks prime rate
plus 0.50% and is paid quarterly. Borrowings under these lines of credit totaled $2.5 million and $809,000 at December 31, 2003 and 2002, respectively. The Company used the new line of credit to repurchase all outstanding preferred stock.



At December 31, 2003, the Company had additional short-term funding sources
available totaling $29.6 million with variable interest rates and collateralized by $22.9 million of investment securities. There were $9.8 million outstanding under these agreements as of December 31, 2003.



At December 31, 2003, the Company had additional short-term funding sources available
totaling $15.9 million with variable interest rates up to 1.63% and collateralized by $15.7 million of investment securities. There were no borrowings outstanding under these agreements as of December 31, 2003.



NOTE 7  INCOME TAXES



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



|                                                      |  |                |      |   |      |       |   |        |   |     |      |  |       |        |  |   |        |   |  |       |   
|----------------------------------------------------- |  | -------------- | ---- | - | ---- | ----- | - | ------ | - | --- | ---- |  | ----- | ------ |  | - | ------ | - |  | ----- | --
|                                                      |  | (In Thousands) |     
|                                                      |  | 2003           |      |   | 2002 |       |   | 2001   |  
|                                                      |  | Amount         |      |   | Rate |       |   | Amount |   |     | Rate |  |       | Amount |  |   | Rate   |  
|Income tax provision at statutory rate                |  | $              | 411  |   |      | 34.0  | % |        | $ | 37  |      |  | 34.0  | %      |  | $ | (1,008 | ) |  | (34.0 | )%
|Increase (decrease) in tax resulting from:            |  |                |      |   |      |       |   |        |   |     |      |  |       |        |  |   |        |   |  |       |   
|Tax-exempt interest                                   |  |                |     |   |      |      |   |        |   |    |      |  |      |        |  |   | (18    | ) |  | (0.6  | ) 
|Non-qualified stock options                           |  |                | (1   | ) |      |      |   |        |   |    |      |  |      |        |  |   | (38    | ) |  | (1.3  | ) 
|Increase in cash surrender value of life insurance    |  |                | (30  | ) |      | (2.4  | ) |        |   |    |      |  |      |        |  |   |       |   |  |      |   
|Disallowed expenses                                   |  |                | 5    |   |      | 0.4   |   |        |   | 25  |      |  | 23.0  |        |  |   | 17     |   |  | 0.6   |   
|Other                                                 |  |                | (5   | ) |      | (0.4  | ) |        |   | (26 | )    |  | (24.0 | )      |  |   | 12     |   |  | 0.4   |   
|Adjustments to deferred tax asset valuation allowance |  |                | (381 | ) |      | (31.0 | ) |        |   | (36 | )    |  | (33.0 | )      |  |   | 1,035  |   |  | 34.9  |   
|                                                      |  |                |      |   |      |       |   |        |   |     |      |  |       |        |  |   |        |   |  |       |   
|                                                      |  | $              |     |   |      |      | % |        | $ |    |      |  |      | %      |  | $ |       |   |  |      | % 
|                                                      |  |                |      |   |      |       |   |        |   |     |      |  |       |        |  |   |        |   |  |       |   





42



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##### Table of Contents

PACIFICA BANCORP, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2003, 2002 AND 2001

---



NOTE 7  INCOME TAXES(Continued)



Total deferred tax assets and liabilities as of December 31, 2003 are as follows:



|                                                                                                   |  |                |        |   |      |   |        |  
|-------------------------------------------------------------------------------------------------- |  | -------------- | ------ | - | ---- | - | ------ | -
|                                                                                                   |  | (In Thousands) |       
|                                                                                                   |  | 2003           |        |   | 2002 |  
|Deferred Tax Assets                                                                                |  |                |        |   |      |   |        |  
|Unamortized preopening expenditures                                                                |  | $              | 4      |   |      | $ | 65     |  
|Net operating loss carryforward                                                                    |  |                | 761    |   |      |   | 1,066  |  
|Allowance for possible loan losses in excess of tax reserves                                       |  |                | 552    |   |      |   | 736    |  
|Other deferred tax assets                                                                          |  |                | 22     |   |      |   | 26     |  
|                                                                                                   |  |                |        |   |      |   |        |  
|Total deferred assets                                                                              |  |                | 1,339  |   |      |   | 1,893  |  
|                                                                                                   |  |               
|Deferred Tax Liabilities                                                                           |  |                |        |   |      |   |        |  
|Deferred loan fees for tax purposes in excess of deferred amounts for financial reporting purposes |  |                | (87    | ) |      |   | (77    | )
|Tax effect of unrealized gains on available-for-sale securities                                    |  |                | (107   | ) |      |   | (22    | )
|Bank premises and equipment                                                                        |  |                | (23    | ) |      |   | (163   | )
|Other deferred tax liabilities                                                                     |  |                | (42    | ) |      |   | (86    | )
|                                                                                                   |  |                |        |   |      |   |        |  
|Total deferred liabilities                                                                         |  |                | (259   | ) |      |   | (348   | )
|                                                                                                   |  |                |        |   |      |   |        |  
|Net deferred tax asset                                                                             |  |                | 1,080  |   |      |   | 1,545  |  
|Less valuation allowance on net deferred tax asset                                                 |  |                | (1,187 | ) |      |   | (1,567 | )
|                                                                                                   |  |                |        |   |      |   |        |  
|Net deferred tax liability                                                                         |  | $              | (107   | ) |      | $ | (22    | )
|                                                                                                   |  |                |        |   |      |   |        |  



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



The Company has net operating loss carryforwards totaling $2,240,000 that may be utilized to offset future federal taxable income. Net
operating loss carryforwards will expire as follows:



|                         |  |                |      
|------------------------ |  | -------------- | -----
|Year Ending December 31, |  | (In Thousands)
|2018                     |  | $              |     
|2019                     |  |                |     
|2021                     |  |                | 345  
|2022                     |  |                | 1,895
|                         |  |                |      
|                         |  | $              | 2,240
|                         |  |                |      



NOTE 8 
STOCKHOLDERS EQUITY



Regulatory
Capital  The Company on a consolidated basis and the Bank are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain
mandatoryand possibly additional discretionaryactions by regulators that, if undertaken, could have a direct material effect on the financial statements. Under capital adequacy guidelines and the regulatory framework for prompt
corrective action, the Company and Bank must meet specific capital guidelines that involve quantitative measures of assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. The capital amounts and
classifications are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.





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PACIFICA BANCORP, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2003, 2002 AND 2001

---



NOTE 8  STOCKHOLDERS EQUITY
(Continued)



As of December 31, 2003, the most recent notification from the
Federal Deposit Insurance Corporation categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized, the Bank must maintain minimum total risk-based, Tier I risk-based and
Tier I leverage ratios as set forth in the table.



Quantitative measures
established by regulation to ensure capital adequacy require the Company and Bank to maintain minimum amounts 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 of Tier I (as defined) capital to average assets (as defined).



The
Companys and the Banks actual capital amounts and ratios are also presented in the table.



|                                |  |                        |        |       |                              |   |        |                                                                  |        |       |  |      |        |  |   |        |   |  |       |  
|------------------------------- |  | ---------------------- | ------ | ----- | ---------------------------- | - | ------ | ---------------------------------------------------------------- | ------ | ----- |  | ---- | ------ |  | - | ------ | - |  | ----- | -
|                                |  | (Amounts In Thousands) |       
|                                |  | Actual                 |        |       | For Capital AdequacyPurposes |   |        | To Be Well Capitalized Under Prompt Corrective Action Provisions |       
|                                |  | Amount                 |        | Ratio |                              |   | Amount |                                                                  |        | Ratio |  |      | Amount |  |   | Ratio  |  
|As of December 31, 2003         |  |                        |        |       |                              |   |        |                                                                  |        |       |  |      |        |  |   |        |   |  |       |  
|                                |  |                        |        |       |                              |  
|Total Risk-based Capital Ratio  |  |                        |        |       |                              |   |        |                                                                  |        |       |  |      |        |  |   |        |   |  |       |  
|Consolidated                    |  | $                      | 14,463 |       | 11.06                        | % |        | $                                                                | 10,461 | 3     |  | 8.00 | %      |  | $ | 13,077 | 3 |  | 10.00 | %
|Pacifica Bank                   |  | $                      | 17,028 |       | 13.02                        | % |        | $                                                                | 10,463 | 3     |  | 8.00 | %      |  | $ | 13,078 | 3 |  | 10.00 | %
|Tier I Risk-based Capital Ratio |  |                        |        |       |                              |   |        |                                                                  |        |       |  |      |        |  |   |        |   |  |       |  
|Consolidated                    |  | $                      | 12,821 |       | 9.80                         | % |        | $                                                                | 5,233  | 3     |  | 4.00 | %      |  | $ | 7,850  | 3 |  | 6.00  | %
|Pacifica Bank                   |  | $                      | 15,386 |       | 11.77                        | % |        | $                                                                | 5,229  | 3     |  | 4.00 | %      |  | $ | 7,843  | 3 |  | 6.00  | %
|Tier I Leverage Ratio           |  |                        |        |       |                              |   |        |                                                                  |        |       |  |      |        |  |   |        |   |  |       |  
|Consolidated                    |  | $                      | 12,821 |       | 8.27                         | % |        | $                                                                | 6,201  | 3     |  | 4.00 | %      |  | $ | 7,752  | 3 |  | 5.00  | %
|Pacifica Bank                   |  | $                      | 15,386 |       | 9.94                         | % |        | $                                                                | 6,192  | 3     |  | 4.00 | %      |  | $ | 7,739  | 3 |  | 5.00  | %
|As of December 31, 2002         |  |                        |        |       |                              |   |        |                                                                  |        |       |  |      |        |  |   |        |   |  |       |  
|                                |  |                        |        |       |                              |  
|Total Risk-based Captial Ratio  |  |                        |        |       |                              |   |        |                                                                  |        |       |  |      |        |  |   |        |   |  |       |  
|Consolidated                    |  | $                      | 15,350 |       | 11.98                        | % |        | $                                                                | 10,248 | 3     |  | 8.00 | %      |  | $ | 12,810 | 3 |  | 10.00 | %
|Pacifica Bank                   |  | $                      | 15,196 |       | 11.99                        | % |        | $                                                                | 10,138 | 3     |  | 8.00 | %      |  | $ | 12,673 | 3 |  | 10.00 | %
|Tier I Risk-based Capital Ratio |  |                        |        |       |                              |   |        |                                                                  |        |       |  |      |        |  |   |        |   |  |       |  
|Consolidated                    |  | $                      | 12.132 |       | 9.47                         | % |        | $                                                                | 5,124  | 3     |  | 4.00 | %      |  | $ | 7,686  | 3 |  | 6.00  | %
|Pacifica Bank                   |  | $                      | 13,595 |       | 10.73                        | % |        | $                                                                | 5,069  | 3     |  | 4.00 | %      |  | $ | 7,604  | 3 |  | 6.00  | %
|Tier I Leverage Ratio           |  |                        |        |       |                              |   |        |                                                                  |        |       |  |      |        |  |   |        |   |  |       |  
|Consolidated                    |  | $                      | 12,132 |       | 7.81                         | % |        | $                                                                | 6,215  | 3     |  | 4.00 | %      |  | $ | 7,769  | 3 |  | 5.00  | %
|Pacifica Bank                   |  | $                      | 13,595 |       | 8.80                         | % |        | $                                                                | 6,181  | 3     |  | 4.00 | %      |  | $ | 7,726  | 3 |  | 5.00  | %



Directive  As a
result of the September 2001 examination by the FDIC and the Washington State Department of Financial Institutions, Division of Banks (the Department), the Bank is subject to a Directive (the Directive) dated March 27, 2002.
Management prepared action plans, formed an Asset Quality Committee, and took other steps to improve credit quality, monitor capital ratios, maximize earnings, and promote stability during 2002. The Bank successfully met substantially all of the
requirements set forth in the Directive, including the requirements as to the Tier 1 Leverage Capital ratio and the level of classified assets that needed to be met by December 31, 2002.



The FDIC and the Department conducted a joint examination in late 2002 and acknowledged improvement in the condition of the Bank. The
regulators determined that the Bank should remain subject to a supervisory directive at least until the next regulatory examination. As a result, the Bank became subject to a revised Supervisory Directive (the Directive) dated February
25, 2003.



44



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##### Table of Contents

PACIFICA BANCORP, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2003, 2002 AND 2001

---



NOTE 8  STOCKHOLDERS EQUITY(Continued)



The FDIC and the State conducted a joint examination in November 2003 and
again acknowledged the progress the Bank has made. The regulators determined that the Bank should continue to remain subject to a revised supervisory directive at least until the next regulatory examination. As a result, effective February 24, 2004,
a Supervisory Directive (Directive) was issued that modified and replaced the previous two supervisory directives issued on March 27, 2002 and February 25, 2003, respectively.



The revised Directive addresses a number of issues related to the Banks growth, earnings, and capital, by:



| |  | temporarily limiting the Banks ability to declare or pay dividends;
| | - | --------------------------------------------------------------------



| |  | temporarily limiting the Banks maximum asset size to $180 million;
| | - | -------------------------------------------------------------------



| |  | requiring the Banks Tier 1 Leverage Capital ratio to be maintained at 8% or greater; and maintain a well-capitalized designation as defined by FDIC regulations;
and
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 1. | requiring the Bank to discuss certain growth, earnings and capital augmentation strategies in its strategic and capital plans and continuously monitor its progress in achieving its
goals.
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



The regulators have informed us that the Supervisory will
remain in place until we have met its requirements. The Board of Directors and management fully expect to be in compliance with the Directive throughout the year.



Preferred Stock  The Company is authorized to issue up to 3,000,000 shares of no par value preferred stock. The
Board of Directors has the authority to determine the rights and privileges to be granted to holders of preferred stock. In June 2002, the Company commenced an offering of up to 8,000 shares of its Series A Preferred Stock, designated as a
combination of Series A-1 Perpetual Cumulative Preferred Stock (the Perpetual Preferred) and Series A-2 Five-Year Cumulative Mandatory Redeemable Preferred Stock (the Limited Life Preferred). The Series A Preferred Stock was
offered at $1,000 per share, in a private placement to accredited investors, sophisticated investors, and non-U.S. persons. The Perpetual Preferred pays an initial annual cash dividend of 9.8% adjusted bi-annually to the equivalent of the current
U.S. 30-year Treasury Bond yield plus 400 basis points. The Limited Life Preferred pays an initial annual cash dividend of 8.8% adjusted bi-annually to the equivalent of the current U.S. 30-year Treasury Bond yield plus 300 basis points. The first
bi-annual adjustment occurred on January 1, 2003, based on a current U.S. 30-year Treasury Bond yield of 4.78%. The Series A Preferred Stock is entitled to receive a liquidation amount equal to the original purchase price, plus any accrued but
unpaid dividends. The Series A Preferred Stock is non-voting, except for certain matters relating to the Companys Articles of Incorporation. The Limited Life Preferred is accounted for as subordinated debt while the Perpetual Preferred is
accounted for as equity capital.



During 2002, the Company received
subscriptions totaling $2.35 million from the offering of its Series A Preferred Stock: $350,000 in sales of its Perpetual Preferred and $2 million in Limited Life Preferred. The proceeds of the Series A Preferred Stock offering were applied to
increase the Banks capital and to pay down the outstanding advances on the Companys commercial line of credit.



On July 1, 2003, the Company paid out its first annual dividend payments, which had been accruing since the issuance date through June 30, 2003. Dividends on A-1
Preferred Stock and A-2 Preferred Stock totaled $29,000 and $151,000, respectively.



45



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##### Table of Contents

PACIFICA BANCORP, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2003, 2002 AND 2001

---



NOTE 8  STOCKHOLDERS EQUITY(Continued)



On September 30, 2003, the Company redeemed the outstanding balance of
the Limited Life Preferred Stock in entirety with proceeds from a $2 million borrowing from a correspondent bank. On December 29, 2003, the Company redeemed the outstanding balance of the Perpetual Preferred in entirety with proceeds from a $350,000
borrowing from a correspondent bank. The Company also paid accrued dividends on the Limited Life Preferred Stock and the Perpetual Preferred Stock in the amounts of $15,000 and $38,000, respectively. The Company no longer has any outstanding
preferred stock. See additional discussion under Other Borrowings.



NOTE 9  STOCK OPTION PLAN



Stock Option Plan  The Company has a 1998 Employee Stock Option Plan (the Plan), which provides for nonqualified stock options for non-officer directors and incentive stock options for
officers and employees for a maximum of 1,200,000 as restated, shares of authorized common stock. Pursuant to the Plan, the Company has awarded options to officers, employees and directors at prices no less than fair market value at the date of
grant. Options generally vest and become exercisable in incremental percentages over five years from the grant date and expire after ten years, while certain options vest over three years.



During 2003, the Company granted 151,489 options to purchase shares, including 40,000 to
outside Directors at $4.73 per share with a vesting period of three years, 51,939 at $5.10 per share to certain existing employees whose option price was in excess of $8.25 per share with vesting periods to be simultaneous with their original
grants, and 59,550 to new hires at various prices with a vesting period of five years. Prices for the options granted during the year range from $3.90 to $5.10. All options were offered at fair market prices at the time of the grant.



Stock option transactions were:



|                           |  |                             |   |  |                                  |   |  |                                                      |      
|-------------------------- |  | --------------------------- | - |  | -------------------------------- | - |  | ---------------------------------------------------- | -----
|                           |  | Options Available for Grant |   |  | Granted Options for Common Stock |   |  | Weighted Average Exercise Price of Shares Under Plan
|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 
|Authorized                 |  | 200,000                     |   |  |                                 |   |  |                                                      |     
|Granted                    |  | (113,550                    | ) |  | 113,550                          |   |  |                                                      | 6.91 
|Exercised                  |  |                            |   |  |                                 |   |  |                                                      |     
|Expired/Forfeited          |  | 160,870                     |   |  | (160,870                         | ) |  |                                                      | 6.85 
|                           |  |                             |   |  |                                  |   |  |                                                      |      
|BALANCE, December 31, 2002 |  | 259,272                     |   |  | 853,568                          |   |  |                                                      | 5.94 
|Authorized                 |  |                            |   |  |                                 |   |  |                                                      |     
|Granted                    |  | (151,489                    | ) |  | 151,489                          |   |  |                                                      | 4.69 
|Exercised                  |  |                            |   |  | (7,000                           | ) |  |                                                      | 5.00 
|Expired/Forfeited          |  | 234,850                     |   |  | (234,850                         | ) |  |                                                      | 6.49 
|                           |  |                             |   |  |                                  |   |  |                                                      |      
|BALANCE, December 31, 2003 |  | 342,633                     |   |  | 763,207                          |   |  | $                                                    | 5.79 
|                           |  |                             |   |  |                                  |   |  |                                                      |      





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PACIFICA BANCORP, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2003, 2002 AND 2001

---



NOTE 9  STOCK OPTION PLAN(Continued)



The following table summarizes information concerning currently
outstanding and exercisable options:



|                         |  |                     |  |                                         |  |                              |       |                   |         |                              |   |      
|------------------------ |  | ------------------- |  | --------------------------------------- |  | ---------------------------- | ----- | ----------------- | ------- | ---------------------------- | - | -----
|Options Outstanding      |  | Options Exercisable
|Range of Exercise Prices |  | NumberOutstanding   |  | WeightedAverageRemainingContractualLife |  | WeightedAverageExercisePrice |       | NumberExercisable |         | WeightedAverageExercisePrice
|$3.9-$4.8                |  | 80,850              |  | 9.43 years                              |  | $                            | 4.38  |                   |        |                              | $ |     
|$5-$8.5                  |  | 558,159             |  | 5.29 years                              |  | $                            | 5.00  |                   | 470,158 |                              | $ | 5.04 
|$9.25-$9.5               |  | 58,680              |  | 6.25 years                              |  | $                            | 9.25  |                   | 35,208  |                              | $ | 9.25 
|$10-$11                  |  | 65,518              |  | 7.68 years                              |  | $                            | 10.22 |                   | 24,368  |                              | $ | 10.24



NOTE 10 
EMPLOYEE BENEFIT PLAN



All
regular full-time and part-time employees are eligible to participate in the Companys 401(k) Plan (the Plan). Participation in the Plan begins on the first day of the month following the date of hire. Plan participants may
contribute up to 15% of their compensation subject to certain limits based on federal tax laws. The Company makes matching contributions equal to 100% of an employees contribution, up to 4% of his/her compensation. Matching contributions are
vested immediately for employees hired prior to May 2002 and over a three year vesting period for employees hired on or after May 1, 2002, with 25% vesting after one year of employment, 50% vesting after two years, and 100% vesting after three
years. Total 401(k) matching contributions totaled $103,000, $126,000 and $92,000 during 2003, 2002, and 2001, respectively.



NOTE 11  LEASE COMMITMENTS



Operating Lease Commitments The Company leases its office premises for its operations. The Bellevue office space
lease was entered into in 1998 and was amended in 2000, 2001, 2002 and 2003. The lease expires on August 31, 2007. The Company has, at its option the right to renew the lease for two additional five-year terms at rates to be mutually determined. The
Company also entered into a lease agreement for the Seattle office space in June 2001. The Seattle lease agreement expires on April 29, 2011. Rental expense charged to operations was $685,000, $676,000 and $489,000 for the years ended 2003, 2002 and
2001, respectively. The Company has also sublet certain leased premises through September 2007 at an average monthly rental of $4,645. Future monthly rent for the leased space is detailed in the table below:



|                         |  |                |      
|------------------------ |  | -------------- | -----
|Year Ending December 31, |  | (In Thousands)
|2004                     |  | $              | 621  
|2005                     |  |                | 625  
|2006                     |  |                | 647  
|2007                     |  |                | 502  
|2008                     |  |                | 200  
|Thereafter               |  |                | 466  
|                         |  |                |      
|                         |  | $              | 3,061
|                         |  |                |      



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PACIFICA BANCORP, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2003, 2002 AND 2001

---



NOTE 12  RELATED PARTY TRANSACTIONS



Certain directors, executive officers and principal stockholders are Bank
customers, and have had banking transactions with the Bank. All loans and commitments included in such transactions were made in compliance with applicable laws on substantially the same terms (including interest rates and collateral) as those
prevailing at the time for comparable transactions with other persons and do not involve more than the normal risk of collectibility or present any other unfavorable features.



The aggregate balances and activity are as follows:



|                           |  |                |        |   |      |   |      |      |  |   |        |  
|-------------------------- |  | -------------- | ------ | - | ---- | - | ---- | ---- |  | - | ------ | -
|                           |  | (In Thousands) |       
|                           |  | 2003           |        |   | 2002 |   |      | 2001 | 
|Balance, beginning of year |  | $              | 741    |   |      | $ | 867  |      |  | $ | 1,416  |  
|                           |  |                |       
|New loans or advances      |  |                | 816    |   |      |   | 825  |      |  |   | 1,297  |  
|                           |  |                |       
|Repayments                 |  |                | (1,133 | ) |      |   | (951 | )    |  |   | (1,846 | )
|                           |  |                |        |   |      |   |      |      |  |   |        |  
|Balance, end of year       |  | $              | 424    |   |      | $ | 741  |      |  | $ | 867    |  
|                           |  |                |        |   |      |   |      |      |  |   |        |  
|Interest earned on loans   |  | $              | 25     |   |      | $ | 46   |      |  | $ | 76     |  
|                           |  |                |        |   |      |   |      |      |  |   |        |  



Deposits from related parties totaled
$1.2 million and $739,000 at December 31, 2003 and 2002, respectively.



NOTE 13  SIGNIFICANT GROUP CONCENTRATIONS OF CREDIT RISK



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



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



NOTE 14  FINANCIAL INSTRUMENTS



The Company is a party to financial instruments with off-balance-sheet risk in the normal
course of business to meet the financing needs of its customers and to reduce its own exposure to fluctuations in interest rates. These financial instruments include commitments to extend credit, standby letters of credit and financial guarantees.
Those instruments involve, to varying degrees, elements of credit and interest-rate risk in excess of the amount recognized in the balance sheet. The contract or notional amounts of those instruments reflect the extent of the Companys
involvement in particular classes of financial instruments.



The Companys
exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit, standby letters of credit, and financial guarantees written is represented by the contractual notional amount of
those instruments. The Company uses the same credit policies in making commitments and conditional obligations as it does for on-balance-sheet instruments.



48



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PACIFICA BANCORP, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2003, 2002 AND 2001

---



NOTE 14  FINANCIAL INSTRUMENTS(Continued)



Commitments to Extend Credit, Standby Letters of Credit and Financial
Guarantees Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and
may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Company evaluates each customers
creditworthiness on a case-by-case basis. The amount of collateral obtained, if it is deemed necessary by the Company upon extension of 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 estate properties.



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



The Company has not been required to perform on any financial guarantees. The Company has not incurred any losses on its commitments in 2003
and 2002.



Derivative Instruments and Hedging Activities As part
of the Companys asset/liability management, the Company may use interest rate swaps to hedge interest rate exposure. Interest rate swaps are contracts in which a series of interest rate flows in a single currency are exchanged over a
prescribed period. The notional amounts are amounts on which calculations of payments are based. Notional amounts do not represent direct credit exposure. Direct credit exposure is limited to the net difference between the calculated amounts to be
received and paid, if any.



During October 2000, the Bank entered into one $10
million notional amount of two-year and another $10 million notional amount of five-year interest rate swap agreements with the objective of stabilizing cash flows, and accordingly, net interest income, over time. The swaps were intended to hedge a
portion of the Banks variable loans. The swap agreements provided for 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 were deemed
to be effective and all changes in the fair value of the hedge were recorded in other comprehensive income with no impact on the income statement for any ineffective portion. During April 2001, the Company sold the interest rate swaps and realized a
gain of $763,000. No interest rate swap contracts were entered into subsequent to the settlement of contracts in April 2001.



The Company minimizes the credit risk in derivative instruments by entering into transactions with high-quality counterparties that are reviewed and approved by
management.



A summary of the notional amounts of the Companys financial
instruments with off-balance sheet risk at December 31, 2003 follows:



|                                         |  |                                |       
|---------------------------------------- |  | ------------------------------ | ------
|                                         |  | Notional Amount (In Thousands)
|Commitments to extend credit             |  | $                              | 29,968
|                                         | 
|Commercial and standby letters of credit |  |                                | 1,368 
|                                         |  |                                |       
|                                         |  | $                              | 31,336
|                                         |  |                                |       





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PACIFICA BANCORP, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2003, 2002 AND 2001

---



NOTE 15  DISCLOSURE ABOUT FAIR
VALUE OF 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 to estimate 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, including the discount rate and estimates of future cash flows. In that regard, the fair value estimates cannot be substantiated by comparison to independent markets and, in many cases, could not be realized in immediate settlement
on the instrument. Accordingly, the aggregate fair value amounts presented do not represent the underlying value of the Bank.



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



Cash, Due From Banks, Federal Funds Soldand Interest Bearing Deposits
The carrying value amounts reported in the balance sheet for cash and short-term instruments approximate those assets fair values.



Investment Securities  Fair values for investment securities are based on quoted market prices, where available. If quoted market values are not available,
fair values are based on quoted market prices of comparable instruments.



Correspondent Bank Stock Correspondent Bank Stock includes both Federal Home Loan Bank stock and Bankers Bank stock. The carrying value of Federal Home Loan Bank stock approximates fair value based on the redemption
provisions of the Federal Home Loan Bank. The carrying value of Bankers Bank stock are based on the cost or amortized value due to the limited market for this type of stock. Banks are the primary shareholders of Bankers Bank stock.



Loans  For variable-rate loans that reprice frequently and with
no significant change in credit risk, fair values are based on carrying values. The fair values of fixed-rate commercial, real estate mortgage, installment, and other loans are estimated using discounted cash flow analysis, using interest rates
currently being offered for loans with similar terms to borrowers of similar credit quality. The carrying amount of accrued interest approximates its fair value.



Accrued Interest Due to their short-term nature, the carrying value of accrued interest is considered to approximate fair
value.



Off-Balance-Sheet Instruments  The Companys
off-balance-sheet instruments include unfunded commitments to extend credit, standby letters of credit, and financial guarantees. The fair value of these instruments is not considered practicable to estimate because of the lack of quoted market
price and the inability to estimate fair value without incurring excessive costs.



Deposit Liabilities  The estimated fair values disclosed for demand deposits are equal to their carrying amounts, including savings, money market and NOW accounts. Fair values for fixed-rate time deposits
are estimated using a discounted cash flow analysis that applies interest rates currently being offered on certificates to a schedule of aggregated expected maturities on time deposits. The carrying amount of interest payable approximates its fair
value.



Other Borrowings  The carrying amount of the other
borrowings is considered a reasonable estimate of their fair value due to the short-term nature of the advances.



Mandatory Redeemable Preferred Stock  The carrying amount of mandatory redeemable preferred stock is considered a reasonable estimate of their fair value due
to semi-annual repricing provisions.



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PACIFICA BANCORP, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2003, 2002 AND 2001

---



NOTE 15  DISCLOSURE ABOUT FAIR
VALUE OF FINANCIAL INSTRUMENTS (Continued)



The carrying amounts and estimated fair values of the Companys financial instruments at December 31, 2003 and 2002, are as follows:



|                                          |  |                 |         |            |   |                 |  |            |         |  |   |        
|----------------------------------------- |  | --------------- | ------- | ---------- | - | --------------- |  | ---------- | ------- |  | - | -------
|                                          |  | (In Thousands) 
|                                          |  | 2003            |         | 2002      
|                                          |  | Carrying Amount |         | Fair Value |   | Carrying Amount |  | Fair Value
|Financial Assets                          |  |                 |         |            |   |                 |  |            |         |  |   |        
|Cash and due from banks                   |  | $               | 8,668   |            | $ | 8,668           |  | $          | 16,633  |  | $ | 16,633 
|Federal funds sold                        |  |                 | 4,425   |            |   | 4,425           |  |            | 13,080  |  |   | 13,080 
|Interest bearing deposits                 |  |                 | 257     |            |   | 257             |  |            | 657     |  |   | 657    
|Investment securities                     |  |                 | 27,360  |            |   | 27,360          |  |            | 22,518  |  |   | 22,518 
|Correspondent Bank stock                  |  |                 | 554     |            |   | 554             |  |            | 133     |  |   | 133    
|Loans                                     |  |                 | 114,540 |            |   | 117,224         |  |            | 106,816 |  |   | 107,287
|Accrued interest receivable               |  |                 | 762     |            |   | 762             |  |            | 778     |  |   | 778    
|                                          |  |                 |         |           
|Financial Liabilities                     |  |                 |         |            |   |                 |  |            |         |  |   |        
|Demand, money market and savings deposits |  |                 | 57,393  |            |   | 52,540          |  |            | 60,144  |  |   | 60,144 
|Time deposits                             |  |                 | 76,319  |            |   | 75,688          |  |            | 88,176  |  |   | 87,062 
|Accrued interest payable                  |  |                 | 615     |            |   | 615             |  |            | 948     |  |   | 948    
|Other borrowings                          |  |                 | 14,320  |            |   | 13,371          |  |            | 972     |  |   | 972    
|Mandatory redeemable preferred stock      |  |                 |        |            |   |                |  |            | 2,000   |  |   | 2,000  
|Perpetual preferred stock                 |  |                 |        |            |   |                |  |            | 350     |  |   | 350    



NOTE 16 
EARNINGS PER SHARE



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



|                                                             |  |                                                      |           |   |      |   |           |      |  |   |           |  
|------------------------------------------------------------ |  | ---------------------------------------------------- | --------- | - | ---- | - | --------- | ---- |  | - | --------- | -
|                                                             |  | (Dollars in Thousands, except for per share amounts) |          
|                                                             |  | 2003                                                 |           |   | 2002 |   |           | 2001 | 
|Net income (loss) (numerator)                                |  | $                                                    | 1,209     |   |      | $ | 108       |      |  | $ | (2,965    | )
|Less accrued perpetual preferred stock dividends             |  |                                                      | (31       | ) |      |   | (14       | )    |  |   |          |  
|                                                             |  |                                                      |           |   |      |   |           |      |  |   |           |  
|Net income (loss) available to common shareholders           |  | $                                                    | 1,178     |   |      | $ | 94        |      |  | $ | (2,965    | )
|                                                             |  |                                                      |           |   |      |   |           |      |  |   |           |  
|Shares used in the calculation (denominator)                 |  |                                                      |           |   |      |   |           |      |  |   |           |  
|Weighted average shares outstanding                          |  |                                                      | 3,259,147 |   |      |   | 3,260,368 |      |  |   | 3,265,961 |  
|Effect of dilutive stock options                             |  |                                                      | 4,049     |   |      |   | 58,907    |      |  |   |          |  
|                                                             |  |                                                      |           |   |      |   |           |      |  |   |           |  
|Diluted shares                                               |  |                                                      | 3,263,196 |   |      |   | 3,319,275 |      |  |   | 3,265,961 |  
|                                                             |  |                                                      |           |   |      |   |           |      |  |   |           |  
|Net income (loss) per share available to common shareholders |  |                                                      |           |   |      |   |           |      |  |   |           |  
|                                                             |  |                                                      |          
|Basic                                                        |  |                                                      |           |   |      |   |           |      |  |   |           |  
|                                                             |  |                                                      |          
|(adjusted for stock splits effective January 1, 2001)        |  | $                                                    | 0.36      |   |      | $ | 0.03      |      |  | $ | (0.91     | )
|                                                             |  |                                                      |           |   |      |   |           |      |  |   |           |  
|Diluted                                                      |  |                                                      |           |   |      |   |           |      |  |   |           |  
|                                                             |  |                                                      |          
|(adjusted for stock splits effective January 1, 2001)        |  |                                                      | 0.36      |   |      | $ | 0.03      |      |  | $ | (0.91     | )
|                                                             |  |                                                      |           |   |      |   |           |      |  |   |           |  



At December 31, 2003, 2002, and 2001,
there were options to purchase 763,207, 836,568, and 445,060 shares of common stock outstanding. As of December 31, 2003, 2002, and 2001, options of 0, 176,448, and 12,000 were antidilutive and therefore not included in the computation of diluted
net income (loss) per share available to common shareholders.



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PACIFICA BANCORP, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2003, 2002 AND 2001

---



NOTE 17  PARENT COMPANY (ONLY)
FINANCIAL INFORMATION



|                                           |  |                |        |      |   |       
|------------------------------------------ |  | -------------- | ------ | ---- | - | ------
|                                           |  | (In Thousands)
|                                           |  | 2003           |        | 2002
|Condensed balance sheet at December 31:    |  |                |        |      |   |       
|Cash and due from banks                    |  | $              | 4      |      | $ | 24    
|Investments in subsidiaries                |  |                | 15,178 |      |   | 13,928
|Due from related nonbank company           |  |                |       |      |   | 1,113 
|Other assets                               |  |                | 14     |      |   | 12    
|                                           |  |                |        |      |   |       
|Total assets                               |  | $              | 15,196 |      | $ | 15,077
|                                           |  |                |        |      |   |       
|Accrued interest                           |  | $              | 4      |      | $ | 78    
|Borrowings                                 |  |                | 2,508  |      |   | 809   
|Other liabilities                          |  |                | 70     |      |   | 14    
|                                           |  |                |        |      |   |       
|Total other liabilities                    |  |                | 2,582  |      |   | 901   
|Mandatory redeemable preferred stock       |  |                |       |      |   | 2,000 
|                                           |  |                |        |      |   |       
|Total liabilities                          |  |                | 2,582  |      |   | 2,901 
|                                           |  |                |        |      |   |       
|Stockholders equity                       |  |                | 12,614 |      |   | 12,176
|                                           |  |                |        |      |   |       
|Total liabilities and stockholders equity |  | $              | 15,196 |      | $ | 15,077
|                                           |  |                |        |      |   |       



Condensed statement of operations for
the years ended December 31:



|                                                           |  |                |       |   |      |   |      |  
|---------------------------------------------------------- |  | -------------- | ----- | - | ---- | - | ---- | -
|                                                           |  | (In Thousands) |      
|                                                           |  | 2003           |       |   | 2002 |  
|Income                                                     |  |                |       |   |      |   |      |  
|Interest                                                   |  | $              | 1     |   |      | $ | 59   |  
|Other income                                               |  |                | 154   |   |      |   | 179  |  
|Dividend from subsidiary                                   |  |                |      |   |      |   | 75   |  
|                                                           |  |                |       |   |      |   |      |  
|Total income                                               |  |                | 155   |   |      |   | 313  |  
|                                                           |  |                |       |   |      |   |      |  
|Expenses                                                   |  |                |       |   |      |   |      |  
|Interest                                                   |  |                | 138   |   |      |   | 133  |  
|Professional services                                      |  |                | 153   |   |      |   | 182  |  
|Loss from impaired assets                                  |  |                | 130   |   |      |   |     |  
|Other                                                      |  |                | 133   |   |      |   | 30   |  
|                                                           |  |                |       |   |      |   |      |  
|Total expenses                                             |  |                | 554   |   |      |   | 345  |  
|                                                           |  |                |       |   |      |   |      |  
|Loss before equity in undistributed income of subsidiaries |  |                | (399  | ) |      |   | (32  | )
|Equity in undistributed income of subsidiaries             |  |                | 1,765 |   |      |   | 593  |  
|                                                           |  |                |       |   |      |   |      |  
|Net income (loss) from continuing operations               |  |                | 1,366 |   |      |   | 561  |  
|                                                           |  |                |       |   |      |   |      |  
|Less loss from discontinued operations                     |  |                | (157  | ) |      |   | (453 | )
|                                                           |  |                |       |   |      |   |      |  
|Net income (loss)                                          |  |                | 1,209 |   |      |   | 108  |  
|                                                           |  |                |       |   |      |   |      |  
|Less accrued perpetual preferred stock dividends           |  |                | (31   | ) |      |   | (14  | )
|                                                           |  |                |       |   |      |   |      |  
|Net income (loss) available to common shareholders         |  | $              | 1,178 |   |      | $ | 94   |  
|                                                           |  |                |       |   |      |   |      |  





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PACIFICA BANCORP, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2003, 2002 AND 2001

---



NOTE 17  PARENT COMPANY (ONLY)
FINANCIAL INFORMATION (Continued)



Condensed statement of cash flows for the years ended December 31:



|                                                                                       |  |                |        |   |      |   |        |  
|-------------------------------------------------------------------------------------- |  | -------------- | ------ | - | ---- | - | ------ | -
|                                                                                       |  | (In Thousands) |       
|                                                                                       |  | 2003           |        |   | 2002 |  
|Cash flows from operating activities                                                   |  |                |        |   |      |   |        |  
|Net income (loss)                                                                      |  | $              | 1,209  |   |      | $ | 108    |  
|Adjustments to reconcile net income (loss) to net cash flows from operating activities |  |                |        |   |      |   |        |  
|Equity in undistributed income (loss) of subsidiaries                                  |  |                | (1,765 | ) |      |   | (140   | )
|Net change in other assets                                                             |  |                | (2     | ) |      |   | (12    | )
|Net change in other liabilities                                                        |  |                | (4     | ) |      |   | 60     |  
|                                                                                       |  |                |        |   |      |   |        |  
|Net cash flows from operating activities                                               |  |                | (562   | ) |      |   | 16     |  
|                                                                                       |  |                |        |   |      |   |        |  
|Cash flows from investing activities                                                   |  |                |        |   |      |   |        |  
|Contribution of capital  bank subsidiary                                              |  |                | (26    | ) |      |   | (920   | )
|Proceeds from liquidation of nonbank subsidiary                                        |  |                | 290    |   |      |   |       |  
|Contribution of capital  nonbank subsidiary                                           |  |                |       |   |      |   | (1,000 | )
|Increase in advances to nonbank subsidiary                                             |  |                | 1,113  |   |      |   | (575   | )
|                                                                                       |  |                |        |   |      |   |        |  
|Net cash flows from investing activities                                               |  |                | 1,377  |   |      |   | (2,495 | )
|                                                                                       |  |                |        |   |      |   |        |  
|Cash flows from financing activities                                                   |  |                |        |   |      |   |        |  
|Proceeds from borrowings                                                               |  |                | 5,612  |   |      |   | 1,949  |  
|Repayment of borrowings                                                                |  |                | (3,913 | ) |      |   | (2,211 | )
|Proceeds from issuance of mandatory redeemable preferred stock                         |  |                |       |   |      |   | 2,000  |  
|Redemption of mandatory redeemable preferred stock                                     |  |                | (2,000 | ) |      |   |       |  
|Proceeds from issuance of perpetual preferred stock                                    |  |                |       |   |      |   | 350    |  
|Redemption of perpetual preferred stock                                                |  |                | (350   | ) |      |   |       |  
|Payment of preferred stock dividends                                                   |  |                | (44    | ) |      |   |       |  
|Proceeds from exercise of stock options                                                |  |                | 35     |   |      |   |       |  
|Repurchase of common stock                                                             |  |                | (175   | ) |      |   |       |  
|                                                                                       |  |                |        |   |      |   |        |  
|Net cash flows from financing activities                                               |  |                | (835   | ) |      |   | 2,088  |  
|                                                                                       |  |                |        |   |      |   |        |  
|Net change in cash                                                                     |  |                | (20    | ) |      |   | (391   | )
|Cash, beginning of year                                                                |  |                | 24     |   |      |   | 415    |  
|                                                                                       |  |                |        |   |      |   |        |  
|Cash, end of year                                                                      |  | $              | 4      |   |      | $ | 24     |  
|                                                                                       |  |                |        |   |      |   |        |  



NOTE 18 
NEW ACCOUNTING PRONOUNCEMENTS



In January 2003, the FASB issued Interpretation No. 46, Consolidation of Variable Interest Entities (VIE). It defined a VIE as a corporation, partnership, trust, or any other legal structure used for the business purpose that either,
a) does not have equity investors with voting rights or, b) has equity investors that do not provide sufficient financial resources for the entity to support its activities. This interpretation will require a VIE to be consolidated or deconsolidated
by a company if that company is subject to a majority of the risk of loss from the VIEs activities or entitled to receive a majority of the entitys residual return. The provisions of interpretation No. 46 are required to be applied
immediately to VIEs created after January 31, 2003. The Company does not have any VIE and accordingly the implementation of the Interpretation did not result in an impact on its financial position or results of operations.





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PACIFICA BANCORP, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2003, 2002 AND 2001

---



NOTE 19  SELECTED QUARTERLY FINANCIAL
DATA



|                                                             |  |                                              |       |   |             |   |       |             |  |   |             |   |  |   |       |  
|------------------------------------------------------------ |  | -------------------------------------------- | ----- | - | ----------- | - | ----- | ----------- |  | - | ----------- | - |  | - | ----- | -
|                                                             |  | (In Thousands, except for per share amounts) |      
|                                                             |  | Year Ended December 31, 2003                 |      
|                                                             |  | 1st Quarter                                  |       |   | 2nd Quarter |   |       | 3rd Quarter |  |   | 4th Quarter |  
|Interest income                                              |  | $                                            | 2,367 |   |             | $ | 2,360 |             |  | $ | 2,385       |   |  | $ | 2,442 |  
|Interest expense                                             |  |                                              | 802   |   |             |   | 742   |             |  |   | 683         |   |  |   | 592   |  
|                                                             |  |                                              |       |   |             |   |       |             |  |   |             |   |  |   |       |  
|Net interest income                                          |  |                                              | 1,565 |   |             |   | 1,618 |             |  |   | 1,702       |   |  |   | 1,850 |  
|Provision for loan losses                                    |  |                                              |      |   |             |   | (90   | )           |  |   |            |   |  |   | (810  | )
|Other income                                                 |  |                                              | 201   |   |             |   | 227   |             |  |   | 184         |   |  |   | 211   |  
|Other expenses                                               |  |                                              | 1,535 |   |             |   | 1,717 |             |  |   | 1,660       |   |  |   | 2,180 |  
|                                                             |  |                                              |       |   |             |   |       |             |  |   |             |   |  |   |       |  
|Income before loss from discontinued operations              |  |                                              | 231   |   |             |   | 218   |             |  |   | 226         |   |  |   | 691   |  
|Loss from discontinued operations                            |  |                                              | (125  | ) |             |   | (23   | )           |  |   | (9          | ) |  |   |      |  
|                                                             |  |                                              |       |   |             |   |       |             |  |   |             |   |  |   |       |  
|Income before income taxes                                   |  |                                              | 106   |   |             |   | 195   |             |  |   | 217         |   |  |   | 691   |  
|Income taxes                                                 |  |                                              |      |   |             |   |      |             |  |   |            |   |  |   |      |  
|                                                             |  |                                              |       |   |             |   |       |             |  |   |             |   |  |   |       |  
|Net income (loss)                                            |  |                                              | 106   |   |             |   | 195   |             |  |   | 217         |   |  |   | 691   |  
|Less accrued perpetual preferred stock dividends             |  |                                              | (8    | ) |             |   | (8    | )           |  |   | (7          | ) |  |   | (8    | )
|                                                             |  |                                              |       |   |             |   |       |             |  |   |             |   |  |   |       |  
|Net income (loss) available to common shareholders           |  | $                                            | 98    |   |             | $ | 187   |             |  | $ | 210         |   |  | $ | 683   |  
|                                                             |  |                                              |       |   |             |   |       |             |  |   |             |   |  |   |       |  
|Net income (loss) per share available to common shareholders |  |                                              |       |   |             |   |       |             |  |   |             |   |  |   |       |  
|Basic                                                        |  | $                                            | 0.03  |   |             | $ | 0.06  |             |  | $ | 0.06        |   |  | $ | 0.21  |  
|                                                             |  |                                              |       |   |             |   |       |             |  |   |             |   |  |   |       |  
|Diluted                                                      |  | $                                            | 0.03  |   |             | $ | 0.06  |             |  | $ | 0.06        |   |  | $ | 0.21  |  
|                                                             |  |                                              |       |   |             |   |       |             |  |   |             |   |  |   |       |  
|                                                             | 
|                                                             |  | (In Thousands, except for per share amounts) |      
|                                                             |  | Year Ended December 31, 2002                 |      
|                                                             |  | 1st Quarter                                  |       |   | 2nd Quarter |   |       | 3rd Quarter |  |   | 4th Quarter |  
|Interest income                                              |  | $                                            | 2,465 |   |             | $ | 2,609 |             |  | $ | 2,457       |   |  | $ | 2,590 |  
|Interest expense                                             |  |                                              | 1,227 |   |             |   | 1,106 |             |  |   | 1,028       |   |  |   | 860   |  
|                                                             |  |                                              |       |   |             |   |       |             |  |   |             |   |  |   |       |  
|Net interest income                                          |  |                                              | 1,238 |   |             |   | 1,503 |             |  |   | 1,429       |   |  |   | 1,730 |  
|Provision for loan losses                                    |  |                                              |      |   |             |   | (500  | )           |  |   | (103        | ) |  |   |      |  
|Other income                                                 |  |                                              | 125   |   |             |   | 159   |             |  |   | 157         |   |  |   | 125   |  
|Other expenses                                               |  |                                              | 1,534 |   |             |   | 1,577 |             |  |   | 1,757       |   |  |   | 1,640 |  
|                                                             |  |                                              |       |   |             |   |       |             |  |   |             |   |  |   |       |  
|Income before loss from discontinued operations              |  |                                              | (171  | ) |             |   | 585   |             |  |   | (68         | ) |  |   | 215   |  
|Loss from discontinued operations                            |  |                                              | (88   | ) |             |   | (104  | )           |  |   | (97         | ) |  |   | (164  | )
|                                                             |  |                                              |       |   |             |   |       |             |  |   |             |   |  |   |       |  
|Income before income taxes                                   |  |                                              | (259  | ) |             |   | 481   |             |  |   | (165        | ) |  |   | 51    |  
|Income taxes                                                 |  |                                              |      |   |             |   |      |             |  |   |            |   |  |   |      |  
|                                                             |  |                                              |       |   |             |   |       |             |  |   |             |   |  |   |       |  
|Net income (loss)                                            |  |                                              | (259  | ) |             |   | 481   |             |  |   | (165        | ) |  |   | 51    |  
|Less accrued perpetual preferred stock dividends             |  |                                              |      |   |             |   |      |             |  |   | (4          | ) |  |   | (10   | )
|                                                             |  |                                              |       |   |             |   |       |             |  |   |             |   |  |   |       |  
|Net income (loss) available to common shareholders           |  | $                                            | (259  | ) |             | $ | 481   |             |  | $ | (169        | ) |  | $ | 41    |  
|                                                             |  |                                              |       |   |             |   |       |             |  |   |             |   |  |   |       |  
|Net income (loss) per share available to common shareholders |  |                                              |       |   |             |   |       |             |  |   |             |   |  |   |       |  
|Basic                                                        |  | $                                            | (0.08 | ) |             | $ | 0.15  |             |  | $ | (0.05       | ) |  | $ | 0.01  |  
|                                                             |  |                                              |       |   |             |   |       |             |  |   |             |   |  |   |       |  
|Diluted                                                      |  | $                                            | (0.08 | ) |             | $ | 0.14  |             |  | $ | (0.05       | ) |  | $ | 0.01  |  
|                                                             |  |                                              |       |   |             |   |       |             |  |   |             |   |  |   |       |  



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PACIFICA BANCORP, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2003, 2002 AND 2001

---



NOTE 20  SIGNIFICANT FOURTH QUARTER
ACCOUNTING ADJUSTMENTS



During 2003, we
charged off two loans in the aggregate amount of $287,000 and received recoveries of $498,000. At December 31, 2003, the allowance for loan losses was $2.23 million, or 1.91% of total loans, compared to $2.92 million, or 2.67% of the total loans, at
December 31, 2002. The $689,000 decrease from year-end 2002 represents net recoveries from previously charged off loans of $211,000 and the transfer of excess funds of $900,000 from the allowance for loan loss reserve account into earnings. The
majority of this transfer occurred during the fourth quarter of 2003 in the amount of $810,000. The significant improvement in asset quality during 2003 has reduced the reserve requirement for our loan portfolio. Management believes the current
balance of the allowance for loan losses is adequate to provide against current potential losses that are reasonably likely in light of our current loan portfolio and existing, expected economic conditions.



The Company incurred miscellaneous losses of $108,000 during 2003 resulting from the lease
termination losses from the subleases and the disposal of the furniture previously occupied by the Bank office. As part of the sublease of the Bank space, the Company sold its furniture associated with the sublease space to the lessee at a loss of
$10,000. The Company implemented the Financial Accounting Standards Boards Statement No. 146, Accounting for Costs Associated with Exit or Disposal Activities. The standard requires companies to recognize costs associated with exit or
disposal activities when they are incurred rather than at the date of a commitment to an exit or disposal plan. As a result, the Company recognized a lease termination cost of $98,000 during the fourth quarter, representing the sublease income
shortfalls as compared to the lease payment the Company is liable for. The associated accretion expense will be recognized monthly for the remainder of the lease term and will reduce the Companys future occupancy expense.



Upon the closure of its wholly owned subsidiary, Pacifica Mortgage, leasehold improvements
and furniture for the Mortgage Company space were transferred to the Bancorp. Fixed assets which can be utilized by the Bank were then transferred from the Bancorp to the Bank as a capital contribution. The Company deemed the leasehold improvements
and furniture items impaired and wrote off the assets in the fourth quarter of 2003 according to FASB No. 144 and 147 which are related to accounting for the impairment or disposal of long-lived assets. Impairment totaled approximately $130,000,
representing the net book value of the assets being written off.





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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE



None.



ITEM 9A. CONTROLS AND PROCEDURES



The
Companys management, including the Chief Executive Officer and the Chief Financial Officer, are responsible for establishing and maintaining disclosure controls and procedures for the Company and its subsidiaries. Management has designed such
controls to ensure that all material information relating to the Company and its subsidiaries is made known to them by others within the organization. Management evaluated the Companys disclosure controls and procedures (as defined in Rule
13a-14(c) under the Securities Exchange Act of 1934) as of the end of the period covered by this annual report. Based on the evaluation, the Chief Executive Officer and the Chief Financial Officer concluded that the Companys disclosure
controls and procedures are functioning properly and effectively. There is no significant deficiencies or material weaknesses with the controls and procedures that required modification. There were no significant changes in the Companys
internal controls that could significantly affect its disclosure controls and procedures since the date of the evaluation.



PART III



The information required by Part III of this Form 10-K, except the part of Item 10 requiring a description of executive officers which description is provided below, and all of Item 14, is incorporated by reference to
the definitive proxy statement for Pacificas Annual Meeting of Shareholders to be held on April 27, 2004. (the Proxy Statement). The Proxy Statement is expected to be sent to shareholders along with this Annual Report and Form 10-K
beginning on or about March 5, 2004 and will concurrently be filed with the Securities Exchange Commission on Schedule 14A. The Personnel Committee Report on Compensation and the Audit Committee Report contained in the Proxy Statement are not
incorporated by reference into this Form 10-K.



ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT



Certain portions to the response to this item are incorporated by reference to Pacificas Proxy Statement for the annual meeting of shareholders scheduled for April 27, 2004.



|                   |  |     |  |                                                                               |  |                                
|------------------ |  | --- |  | ----------------------------------------------------------------------------- |  | -------------------------------
|Name               |  | Age |  | Position/Title                                                                |  | Has Served theBank/CompanySince
|John A. Kennedy    |  | 63  |  | President, Chief Executive Officer and Director                               |  | 2002                           
|                   |  |     | 
|John D. Huddleston |  | 50  |  | Executive Vice President, Chief Financial Officer and Chief Operating Officer |  | 1998                           



John A. Kennedy. In September
2002, Mr. Kennedy joined the Company as the Chief Executive Officer and President of the Company and the Bank. He currently serves as a Director of the Company and the Bank. He previously served as a director of the Bank between 1998 and 2000, until
resigning to take an executive position with HomeStreet Bank in their business banking division in 2000. His career has included senior positions with Bank of America, United California Bank (predecessor to First Interstate), Bank of Scotland (New
York office), and the Manager and SVP of Hong Kong and Shanghai Banks Seattle Office for over thirteen years. In addition, from 1997 to 2000, he served as Executive Director of the World Trade Center of Tacoma. He has also served as the board
chairman of the Washington State International Trade Fair, and as a board member on the Washington Council of International Trade, the





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World Trade Center of Tacoma, and the Washington State China Relations Council. He has also served as an advisory board
member at North Seattle Community College and Pacific Lutheran Universitys China studies program. He holds a bachelors degree in Economics from the University of Oregon.



John D. Huddleston. Mr. Huddleston has been a Senior Vice President and Chief Financial Officer of the Company and Pacifica Bank
since their respective inceptions and was promoted to the position of Executive Vice President, Chief Financial Officer, and Chief Operating Officer in 2001. Prior to joining Pacifica, he was Managing Partner for JCH Development, a real estate
development and investment group in Yelm, Washington from 1986 to 1998. He served as Vice President and Manager of the Asset Liability Department of the United Bank from 1980 to 1986. Mr. Huddleston has over 25 years experience in the banking and
financial management industry. Mr. Huddleston holds a BS in Business Administration, with an emphasis in Accounting, from the University of Puget Sound.



ITEM 11. EXECUTIVE COMPENSATION



The response to
this item is incorporated by reference to Pacificas Proxy Statement for the annual meeting of shareholders scheduled for April 27, 2004.



No performance graph is included in Pacificas Proxy Statement because the Companys Common Stock is not publicly traded.



ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT



The response to this item is incorporated by reference to Pacificas Proxy Statement for the annual meeting of shareholders scheduled to be held April 27, 2004.



ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS



The response to this item is incorporated by reference to Pacificas Statement for the annual meeting of shareholders scheduled to be held April 27, 2004, under the caption.



ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES



The response to this item is incorporated by reference to Pacificas Proxy Statement for the annual meeting of shareholders scheduled to be held April 27, 2004.



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PART IV



ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K



Exhibits



|            |  |                                                                                                                                                                                                                                                                                                                                                                            
|----------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |  | Description                                                                                                                                                                                                                                                                                                                                                                
|3.1         |  | Articles of Incorporation(1)                                                                                                                                                                                                                                                                                                                                               
|            | 
|3.2         |  | Bylaws(1)                                                                                                                                                                                                                                                                                                                                                                  
|            | 
|3.3         |  | Amendment No. 1 to the Bylaws(6)                                                                                                                                                                                                                                                                                                                                           
|            | 
|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 the Registrant, as Subtenant, and Amazon.com Holdings, Inc., as Sublandlord, dated June 6, 2001(4)                                                                                                                                                                                                                                      
|            | 
|10.7        |  | Sixth Amendment to Lease dated October 15, 2002(6)                                                                                                                                                                                                                                                                                                                         
|            | 
|10.8        |  | Low resignation agreement(5)                                                                                                                                                                                                                                                                                                                                               
|            | 
|11.         |  | Computation of basic and diluted earnings per share.(7)                                                                                                                                                                                                                                                                                                                    
|            | 
|14.         |  | Code of ethics(7)                                                                                                                                                                                                                                                                                                                                                          
|            | 
|21.         |  | Subsidiary: Pacifica Bank                                                                                                                                                                                                                                                                                                                                                  
|            | 
|23.         |  | Consent of Moss Adams LLP.(7)                                                                                                                                                                                                                                                                                                                                              
|            | 
|24.         |  | Power of attorney(7)                                                                                                                                                                                                                                                                                                                                                       
|            | 
|31.         |  | Certification of Chief Executive Officer and Chief Financial Officer under Section 302 of the Sarbanes-Oxley Act of 2002(7)                                                                                                                                                                                                                                                
|            | 
|32.         |  | Certification of Chief Executive Officer and Chief Financial Officer under Section 906 of the Sarbanes-Oxley Act of 2002(7)                                                                                                                                                                                                                                                

---

|(1) | Incorporated by reference to the Companys Form 8-A, filed with the SEC on February 26, 2001.
|--- | ---------------------------------------------------------------------------------------------

|(2) | Incorporated by reference to the Companys Form 10-KSB for the fiscal year ending December 31, 2000.
|--- | ----------------------------------------------------------------------------------------------------

|(3) | Incorporated by reference to the Companys Form S-8, filed with the SEC on September 4, 2001.
|--- | ---------------------------------------------------------------------------------------------

|(4) | Incorporated by reference to the Companys Form 10-KSB for the fiscal year ending December 31, 2001.
|--- | ----------------------------------------------------------------------------------------------------

|(5) | Incorporated by reference to the Companys Form 10-Q for the quarter ended September 30, 2002.
|--- | ----------------------------------------------------------------------------------------------

|(6) | Incorporated by reference to the Companys Form 10-K for the fiscal year ending December 31, 2002.
|--- | --------------------------------------------------------------------------------------------------

|(7) | Filed with this Form 10-K.
|--- | --------------------------



Reports on Form 8-K



Pacifica did not file any reports on Form 8-K during the fourth quarter of 2003.



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FORM 10-K CROSS-REFERENCE INDEX



This Annual
Report and Form 10-K and the Companys definitive Proxy Statement for its 2004 Annual Meeting of Shareholders, together contain the requirements of the accounting profession and the Securities and Exchange Commission, including a comprehensive
explanation of 2003 results.



|          |  |                                                                                       |  |                          |  |                          
|--------- |  | ------------------------------------------------------------------------------------- |  | ------------------------ |  | -------------------------
|Form 10-K |  | Caption                                                                               |  | Annual ReportPage Number |  | ProxyStatement PageNumber
|Part 1    |  |                                                                                       |  |                          |  |                          
|Item 1    |  | Business                                                                              |  | 1-7,Inside Cover         |  | -                        
|Item 2    |  | Properties                                                                            |  | 6                        |  | -                        
|Item 3    |  | Legal Proceedings                                                                     |  | 6                        |  |                          
|Item 4    |  | Submission of Matters to a Vote of Security Holders                                   |  | 7                        |  | -                        
|          |  |                                                                                       | 
|Part II   |  |                                                                                       |  |                          |  |                          
|Item 5    |  | Market for the Registrants Common Equity and Related Stockholder Matters             |  | 8-9                      |  | -                        
|Item 6    |  | Selected Financial Data                                                               |  | 9                        |  |                          
|Item 7    |  | Managements Discussion and Analysis of Financial Condition and Results of Operations |  | 9-25                     |  | -                        
|Item 7A   |  | Quantitative and Qualitative Disclosures about Market Risk                            |  | 26-27                    |  |                          
|Item 8    |  | Financial Statements and Supplementary Data                                           |  | 27-55                    |  | -                        
|Item 9    |  | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure  |  | 56                       |  | -                        
|Item 9A   |  | Controls and Procedures                                                               |  | 56                       |  |                          
|          |  |                                                                                       | 
|Part III  |  |                                                                                       |  |                          |  |                          
|Item 10   |  | Directors and Executive Officers of the Registrant                                    |  | 56                       |  | 6-9                      
|Item 11   |  | Executive Compensation                                                                |  | 57                       |  | 10-15                    
|Item 12   |  | Security Ownership of Certain Beneficial Owners and Management                        |  | 57                       |  | 4-5                      
|Item 13   |  | Certain Relationships and Related Transactions                                        |  | 57                       |  | 18                       
|Item 14   |  | Controls Principal Accounting Fees and Procedures Services                            |  | 57                       |  |                          
|          |  |                                                                                       | 
|Part IV   |  |                                                                                       |  |                          |  |                          
|Item 15   |  | Exhibits, Financial Statement Schedules, and Reports on Form 8-K                      |  | 58                       |  | -                        



None of the foregoing incorporation by
reference shall include the Personnel Report on Executive Compensation and the Audit Committee Report contained in the Companys Proxy Statement.



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SIGNATURE



Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Company has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized, on the 5th of March 2004.



Principal Executive OfficerBy

/s/ John A. KennedyJohn A. KennedyPresident andChief Executive OfficerPrincipal Financial Officer:By

/s/ John D. HuddlestonJohn D. HuddlestonExecutive Vice President,Chief Financial Officer andChief Operating Officer




I, John A. Kennedy, pursuant to
a power of attorney which is being filed with the Annual Report on Form 10-K, have signed this report on March 5, 2004 as attorney in fact for the following directors who constitute the Board.



|                         |  |                      
|------------------------ |  | ---------------------
|Lyle K. Snyder, Chairman |  | George J. Pool       
|Yi-Heng Lee              |  | Fannie Kuei-Fang Tsai
|Mark P. Levy             |  | Mark W. Weber        
|Robert E. Peterson       |  | Edwin R. Young       
|                         | 
|/s/ John A. Kennedy      |  |                      
|John A. Kennedy          |  |                      
|Attorney-in-fact         |  |