SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                    FORM 10-K405
(Mark One)
/X/  Annual report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934

                 For the fiscal year ended December 31, 2000 or
                                -----------------

/  /  Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934

                        Commission file number 000-29829

                          PACIFIC FINANCIAL CORPORATION
             (Exact Name of Registrant as specified in its Charter)


        WASHINGTON                                       91-1815009
(State or Other Jurisdiction                   (IRS Employer Identification No.)
of Incorporation or Organization)

                             300 EAST MARKET STREET
                         ABERDEEN, WASHINGTON 98520-5244
               (Address of Principal Executive Offices) (Zip Code)

       Registrant's telephone number, including area code: (360) 533-8870

           Securities Registered Pursuant to Section 12(b) of the Act:

                                      None
                                      ----

           Securities Registered Pursuant to Section 12(g) of the Act:

                     Common Stock, par value $1.00 per share

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  preceding 12 months (or for such shorter  periods that the  Registrant  was
required to file such  reports),  and (2) has been subject to such  requirements
for the past 90 days.
                               Yes__X___ No______

Indicate by check mark if disclosure of delinquent  filers  pursuant to Item 405
of Regulation  S-K is not contained  herein,  and will not be contained,  to the
best  of  the  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 [ X ]

The  aggregate  market value of the voting stock held by  non-affiliates  of the
registrant as of February 28, 2001 was $54,811,960.

As of February 28, 2001,  there were issued and outstanding  2,503,130 shares of
the Registrant's Common Stock.

                                      -1-
<PAGE>

                       DOCUMENTS INCORPORATED BY REFERENCE

PART III of Form 10-K - The definitive Proxy Statement filed with the Securities
and Exchange  Commission in connection  with  Registrant's  annual meeting to be
held April 18, 2001 (only portions of which are incorporated by reference).

                                      -2-
<PAGE>


                          PACIFIC FINANCIAL CORPORATION
                 ANNUAL REPORT ON FORM 10-K FOR THE FISCAL YEAR
                             ENDED DECEMBER 31, 2000

                                TABLE OF CONTENTS

PART I
                                                                         Page

            Item  1.    Business                                           4

            Item  2.    Properties                                        12

            Item  3.    Legal Proceedings                                 12

            Item  4.    Submission of Matters to a Vote of
                         Security Holders                                 12

PART  II
            Item  5.    Market for Registrant's Common Equity
                         and Related Stockholder Matters                  13

            Item  6.    Selected Financial Data                           14

            Item  7.    Management's Discussion and Analysis of
                         Financial Condition and Results of Operations    15

            Item  7A. Quantitative and Qualitative Disclosure
                         About Market Risk                                26

            Item  8.    Financial Statements and Supplementary Data       28

            Item  9.    Changes in and Disagreements with Accountants
                         on Accounting And Financial Disclosure           28

PART  III
            Item  10.  Directors and Executive Officers of
                        the Registrant                                    28

            Item  11.  Executive Compensation                             28

            Item  12.  Security Ownership of Certain Beneficial
                        Owners and Management                             28

            Item  13.  Certain Relationships and Related Transactions     28

PART  IV
            Item  14.  Exhibits, Financial Statement Schedules,
                        and Reports on Form 8-K                           29

SIGNATURES                                                                30

                                      -3-
<PAGE>

                                     PART I

ITEM 1.  BUSINESS

Pacific  Financial  Corporation  (the  Company) is a financial  holding  company
headquartered  in Aberdeen,  Washington.  The Company owns one bank, Bank of the
Pacific (Pacific or the Bank), which is located in Washington. The Company owned
two banks  until  November  8, 2000.  Effective  that date,  Bank of the Pacific
merged  with and into The Bank of Grays  Harbor  as the  surviving  corporation,
operating under the name Bank of the Pacific.  The Company  conducts its banking
business through 10 branches  located in communities  throughout three Southwest
Washington  Counties.  An S-4  Registration  Statement  was  filed  with the SEC
pursuant  to the merger of equals of Pacific  Financial  Corporation  and Harbor
Bancorp,  Inc. which became  effective on December 15, 1999.  Under the terms of
the merger agreement  governing the transaction,  Pacific Financial  Corporation
was merged with and into Harbor Bancorp,  Inc., with Harbor Bancorp, Inc. as the
surviving  corporation,  operating under the name Pacific Financial Corporation.
Shares of Pacific Financial  Corporation common stock were converted into shares
of the combined  corporation  (Harbor Bancorp) common stock at the rate of 0.785
shares of combined  corporation common stock for each share of Pacific Financial
Corporation  common  stock,  with cash being paid in lieu of issuing  fractional
shares. The transaction was accounted for as a pooling-of-interests. At December
31, 2000, the Company had total consolidated assets of $253.3 million,  loans of
$177.2 million,  and deposits of $213.5 million. The Company was incorporated in
the State of  Washington  on February  12, 1997,  pursuant to a holding  company
reorganization of The Bank of Grays Harbor.  Although an SEC reporting  company,
the Company's stock is not listed on any exchange.

Forward Looking Information

Discussions of certain matters  contained in this Annual Report on Form 10-K may
constitute  forward-looking  statements  with the  meaning of Section 27A of the
Securities Act of 1933, as amended,  and Section 21F of the Securities  Exchange
Act of 1934, as amended (the "Exchange Act") and, as such, may involve risks and
uncertainties.  These  forward-looking  statements  may relate to,  among  other
things,  economic conditions in the market areas in which the Bank operates, the
adequacy of the Bank's loan loss reserves,  potential changes in interest rates,
and the competitive  environment  facing the Bank. The Company's actual results,
performance and achievements may differ materially from the results, performance
and achievements expressed or implied in such forward-looking statements.

The Bank

Effective  November 8, 2000,  The Bank of Grays  Harbor Bank changed its name to
Bank of the Pacific as the result of the merger as discussed previously. Bank of
the Pacific was  organized  in 1978 and opened for  business in 1979 to meet the
need for a local  community  bank  with  local  interests  to serve the small to
medium-sized  local  businesses  and  professionals.   Pacific  has  ten  branch
locations situated in Grays Harbor County, Pacific County, and Wahkiakum County.
Services offered by the Bank include  commercial loans,  installment loans, real
estate loans, and personal and business deposit products.

The Bank  originates  loans  primarily in its local  markets.  The  underwriting
policies focus on assessment of each borrower's ability to service and repay the
debt, and the  availability  of collateral  that can be used to secure the loan.
Depending  on the nature of the borrower and the purpose and amount of the loan,
the Bank's loans may be secured by a variety of collateral,  including  business
assets, real estate, and personal assets.

The Bank's  commercial  and  agricultural  loans  consist  primarily  of secured
revolving  operating lines of credit and business term loans,  some of which may
be  partially  guaranteed  by the  Small  Business  Administration  or the  U.S.
Department of Agriculture.

                                      -4-
<PAGE>

Consumer installment loans and other loans represent a small percentage of total
outstanding  loans and include home equity loans,  auto loans,  boat loans,  and
personal lines of credit.

The Bank's primary  sources of deposits are from  individuals  and businesses in
its local markets.  A concerted  effort has been made to attract deposits in the
local market areas through competitive pricing and delivery of quality products.
These products include demand accounts,  negotiable order of withdrawal  ("NOW")
accounts, money market investment accounts, savings accounts, and time deposits.
The Bank  traditionally  has not sought brokered deposits and does not intend to
do so in the future.

The Bank  operates  under the banking  laws of the State of  Washington  and the
rules and regulations of the Federal Deposit Insurance Corporation ("FDIC").

Competition

Competition in the banking  industry is  significant  and has  intensified  with
interest  rate  deregulation.  The Company  competes in Grays Harbor County with
well-established thrifts which are headquartered in the area along with branches
of large banks and small community banks with headquarters outside the area. The
Company  competes  with  well-established  branches of large banks,  thrifts and
credit  unions  in  Pacific  and   Wahkiakum   Counties.   Other   non-bank  and
non-depository  institutions can be expected to increase  competition further as
they offer bank type products.

Although  it cannot  guarantee  that it will  continue to do so, the Company has
been able to  maintain a  competitive  advantage  as a result of its status as a
local  institution,  offering products and services tailored to the needs of the
community.  Further,  because of the  extensive  experience of management in its
market  area  and  the  business  contacts  of  management  and  the  directors,
management believes the Company can continue to compete effectively.

According to the Market Share Report compiled by the Federal  Deposit  Insurance
Corporation,  as of June 30, 1999,  the Company  held a deposit  market share of
33.9% in Pacific County, and a 16.1% share in Grays Harbor County.

Employees

As of December 31, 2000,  the Bank employed 84 full time  equivalent  employees.
Management believes relations with its employees are good.


                           SUPERVISION AND REGULATION

      The  following  generally  refers  to  certain  significant  statutes  and
regulations  affecting  the  banking  industry.   This  regulation  is  intended
primarily  for the  protection  of  depositors  and not for the  benefit  of the
Company's shareholders.  The following discussion is intended to provide a brief
summary  and,  therefore,  is not  complete and is qualified by the statutes and
regulations  referenced.  Changes in applicable  laws or regulations  may have a
material effect on the business and prospects of the Company.  The operations of
the Company may also be affected by changes in the policies of banking and other
government  regulators.  The  Company  cannot  accurately  predict the nature or
extent of the  effects on its  business  and  earnings  that  fiscal or monetary
policies, or new federal or state laws, may have in the future.


                                      -5-
<PAGE>


                                   The Company
General

      As a financial holding company, the Company is subject to the Bank Holding
Company  Act of 1956 as amended,  ("BHCA")  which  places the Company  under the
supervision  of the  Board of  Governors  of the  Federal  Reserve  System  (the
"Federal  Reserve").  The  Company  must file  annual  reports  with the Federal
Reserve and must provide it with such additional  information as it may require.
In  addition,  the Federal  Reserve  periodically  examines  the Company and its
subsidiaries, including the Bank.

Bank Holding Company Regulation

      In  general,  the  BHCA  limits  bank  a  holding  company  to  owning  or
controlling banks and engaging in other banking-related activities. Bank holding
companies  must obtain the Federal  Resserve  approval  before they: (1) acquire
direct or indirect  ownership  or control of any voting  shares of any bank that
results in total ownership or control,  directly or indirectly,  of more than 5%
of the voting shares of such bank;  (2) merge or  consolidate  with another bank
holding company; or (3) acquire  substantially all of the assets of another bank
or bank holding company.

      Control of Nonbanks.  With certain  exceptions,  the BHCA  prohibits  bank
holding companies from acquiring direct or indirect ownership or control of more
than 5% of the voting shares in any company that is not a bank or a bank holding
company  unless the  Federal  Reserve  determines  that the  activities  of such
company are incidental or closely related to the business of banking.  If a bank
holding company is well-capitalized  and meets certain criteria specified by the
FRB, it may engage de novo in certain permissible  nonbanking activities without
prior Federal Reserve approval.

      Control Transactions.  The Change in Bank Control Act of 1978, as amended,
requires a person (or group of persons acting in concert) acquiring "control" of
a bank  holding  company to provide  the  Federal  Reserve  with 60 days'  prior
written notice of the proposed  acquisition.  Following  receipt of this notice,
the Federal Reserve has 60 days within which to issue a notice  disapproving the
proposed acquisition, but the Federal Reserve may extend this time period for up
to another 30 days. An  acquisition  may be completed  before  expiration of the
disapproval  period if the Federal  Reserve  issues written notice of its intent
not to disapprove the  transaction.  In addition,  any "company" must obtain the
Federal  Reserve  approval  before  acquiring 25% (5% if the "company" is a bank
holding  company)  or more of the  outstanding  shares  or  otherwise  obtaining
control over the Company.

Financial Services Modernization Act

On  November  12,  1999,  the  Gramm-Leach-Bliley  Act of 1999  (the  "Financial
Services  Modernization  Act") was  signed  into  law.  The  Financial  Services
Modernization Act repeals the two affiliation  provisions of the  Glass-Steagall
Act:  Section 20, which  restricted the  affiliation  of Federal  Reserve member
banks with firms "engaged principally" in specified securities  activities;  and
Section 32, which restricts officer,  director, or employee interlocks between a
member  bank  and  any  company  or  person  "primarily  engaged"  in  specified
securities  activities.  In addition,  the Financial Services  Modernization Act
contains  provisions  that  expressly  preempt  any  state law  restricting  the
establishment of financial  affiliations,  primarily  related to insurance.  The
general  effect of the law is to establish a  comprehensive  framework to permit
affiliations among commercial banks, insurance companies,  securities firms, and
other  financial  service  providers by revising and  expanding the bank holding
company  framework to permit a holding  company system to engage in a full range
of  financial  activities  through a new  entity  known as a  financial  holding
company.

The Company received approval to become a financial holding company during 2000.
Bank  holding  companies  that elect to become a financial  holding  company may
affiliate  with  securities  firms and  insurance  companies and engage in other
activities  that are financial in nature or are incidental or  complementary  to
activities that are financial in nature.

                                      -6-
<PAGE>

"Financial in nature" activities include securities  underwriting,  dealing, and
market  marking,  sponsoring  mutual funds and investment  companies,  insurance
underwriting  and agency,  merchant  banking,  and  activities  that the Federal
Reserve, in consultation with the Secretary of Treasury, determines from time to
time to be so closely related to banking or managing or controlling  banks as to
be a proper incident thereto.

In December  2000,  the Federal  Reserve  approved an interim rule  defining the
three categories of activities  financial in nature or incidental to a financial
activity:

o     lending,   exchanging,    transferring,   investing   for   others,   or
      safeguarding financial assets other than money or securities;

o     providing any device or other  instrumentality for transferring money or
      other financial assets; or

o     arranging,  effecting or  facilitating  financial  transactions  for the
      account of third parties.

The law also:

o     broadens  the  activities  that  may be  conducted  by  national  banks,
      banking  subsidiaries  of bank holding  companies,  and their  financial
      subsidiaries;

o     provides an enhanced  framework for  protecting  the privacy of consumer
      information;

o     adopts a number of provisions related to the  capitalization,  membership,
      corporate governance, and other measures designed to modernize the Federal
      Home Loan Bank system;

o     modifies  the  laws  governing  the   implementation  of  the  Community
      Reinvestment Act; and

o     addresses a variety of other legal and  regulatory  issues  affecting both
      day-to-day operations and long-term activities of financial institutions.

The Company does not believe that the Financial Services  Modernization Act will
have a material adverse effect on its operations in the near-term.  However,  to
the extend that the legislation  permits banks,  securities firms, and insurance
companies to affiliate,  the financial  services industry may experience further
consolidation.  The Financial Services Modernization Act is intended to grant to
community  banks  certain  powers as a matter of right that larger  institutions
have accumulated on an ad hoc basis. Nevertheless, this legislation may have the
result of  increasing  the amount of  competition  that the  Company  faces from
larger  institutions  and other types of companies  with  substantially  greater
resources  than the Company and offering a wider  variety of financial  products
than the Bank currently offers.

Privacy Rules. Under the Financial  Services  Modernization Act, federal banking
regulators  are required to adopt rules that will limit the ability of banks and
other financial  institutions to disclose non-public information about consumers
to nonaffiliated  third parties.  These  limitations will require  disclosure of
privacy policies to consumers and, in some  circumstances,  will allow consumers
to prevent disclosure of certain personal  information to a nonaffiliated  third
party.  Federal banking regulators issued final rules on May 10, 2000.  Pursuant
to the rules, financial institutions must provide:

o     Initial notices to customers about their privacy policies,  describing the
      conditions under which they may disclose nonpublic personal information to
      nonaffiliated third parties and affiliates;

o     Annual notices of their privacy policies to current customers; and

o     A  reasonable  method  for  customers  to  "opt  out"  of  disclosures  to
      nonaffiliated third parties.

                                      -7-
<PAGE>

The rules were  effective  November 13, 2000,  but  compliance is optional until
July 1, 2001. These privacy  provisions will affect how consumer  information is
transmitted  through  diversified  financial  companies  and conveyed to outside
vendors.  The Company  believes the  compliance  with the privacy rules will not
adversely affect its operations.

Insurance  products.  In  December  2000  pursuant  to the  requirements  of the
Financial  Services  Modernization  Act, the federal bank and thrift  regulatory
agencies adopted consumer protection rules for the sale of insurance products by
depository institutions. The rule is effective on April 1, 2001.
 The final rule applies to any  depository  institution  or any person  selling,
soliciting,  advertising,  or  offering  insurance  products or  annuities  to a
consumer at an office of the  institution or on behalf of the  institution.  The
regulation  requires oral and written  disclosure  before the  completion of the
sale of an insurance product that such product:

o     is  not a  deposit  or  other  obligation  of,  or  guaranteed  by,  the
      depository institution or its affiliate;

o     is not  insured by the FDIC or any other  agency of the  United  States,
      the depository institution or its affiliated; and

o     has certain risks of investment, including the possible loss of value.

The  depository  institution  may not  condition  as  extension of credit on the
consumer's  purchase  of an  insurance  product or annuity  from the  depository
institution or from any of its affiliates, or on the consumer's agreement not to
obtain, or a prohibition on the consumer from obtaining, an insurance product or
annuity from an unaffiliated entity.  Furthermore,  to the extent practicable, a
depository   institution  must  keep  insurance  and  annuity  sales  activities
physically  segregated  from the  areas  where  retail  deposits  are  routinely
accepted from the general  public.  Finally,  the rule addresses cross marketing
and referral fees.

Information   Security.   In  January  2000,  the  banking   agencies  adopted
guidelines  requiring  financial  institutions  to  establish  an  information
security program to:

o     identify and assess the risks that may threaten customer information;

o     develop a written plan containing  policies and procedures to manage and
      control these risks;

o     implement and test the plan; and

o     adjust  the  plan  on  a  continuing  basis  to  account  for  changes  in
      technology,  the  sensitivity  of  customer  information  and  internal or
      external threats to information security.

Each  institution may implement a security  program  appropriate to its size and
complexity  and the  nature  and scope of its  operations.  The  guidelines  are
effective July 1, 2001. The Company believes that compliance with the guidelines
will not adversely affect its operations.

Transactions with Affiliates

      The Company and the Bank are deemed  affiliates  within the meaning of the
Federal Reserve Act, and transactions  between affiliates are subject to certain
restrictions.  Accordingly,  the Company and the Bank must comply with  Sections
23A and 23B of the Federal Reserve Act.

                                      -8-
<PAGE>


Generally,  Sections  23A and 23B (1)  limit  the  extent  to which a  financial
institution or its  subsidiaries  may engage in "covered  transactions"  with an
affiliate,  as defined, to an amount equal to 10% of such institution's  capital
and surplus and an aggregate limit on all such  transactions with all affiliates
to an amount  equal to 20% of such  capital  and  surplus,  and (2)  require all
transactions with an affiliate,  whether or not "covered transactions," to be on
terms  substantially  the same, or at least as favorable to the  institution  or
subsidiary, as those provided to a non-affiliate. The term "covered transaction"
includes the making of loans,  purchase of assets,  issuance of a guarantee  and
other similar types of transactions.

Regulation of Management

      Federal  law (1) sets forth the  circumstances  under  which  officers  or
directors of a financial institution may be removed by the institution's federal
supervisory  agency;  (2) places  restraints on lending by an institution to its
executive  officers,  directors,   principal  stockholders,  and  their  related
interests;  and (3) prohibits management personnel from serving as a director or
in other  management  positions  with another  financial  institution  which has
assets  exceeding a specified  amount or which has an office  within a specified
geographic area.

Tie-In Arrangements

      The Company and the Bank cannot engage in certain tie-in  arrangements  in
connection with any extension of credit, sale or lease of property or furnishing
of services.  For example, with certain exceptions,  neither the Company nor the
Bank may  condition  an  extension  of credit  to a  customer  on  either  (1) a
requirement that the customer obtain  additional  services provided by it or (2)
an agreement by the customer to refrain from  obtaining  other  services  from a
competitor.

      The Federal Reserve has adopted  amendments to its anti-tying  rules that:
(1) removed  Federal  Reserve-imposed  anti-tying  restrictions  on bank holding
companies and their non-bank  subsidiaries;  (2) allow banks greater flexibility
to package products with their affiliates;  and (3) establish a safe harbor from
the tying restrictions for certain foreign  transactions.  These amendments were
designed to enhance  competition in banking and nonbanking products and to allow
banks and their  affiliates  to provide more  efficient,  lower cost services to
their customers.

Source of Strength Requirements

             Under Federal Reserve  policy,  the Company is expected to act as a
source of financial  and  managerial  strength to the Bank.  This means that the
Company is required to commit, as necessary,  resources to support the Bank. Any
capital loans made by the Company to the Bank would be  subordinate  in priority
to deposits and to certain other indebtedness of the Bank.

State Law Restrictions

      As a  Washington  business  corporation,  the  Company  may be  subject to
certain  limitations and  restrictions as provided under  applicable  Washington
corporate law. In addition, Washington banking law restricts and governs certain
activities of the Bank.

                                    The Bank
General

      The Bank,  as a non-Fed  member FDIC  insured  institution,  is subject to
regulation and examination by the FDIC and the State of Washington.  The federal
laws that  apply to the Bank  regulate,  among  other  things,  the scope of its
business,  its  investments,  its reserves against  deposits,  the timing of the
availability  of deposited funds and the nature and amount of and collateral for
loans.

                                      -9-
<PAGE>

      CRA.  The  Community  Reinvestment  Act  (the  "CRA")  requires  that,  in
connection   with   examinations   of   financial   institutions   within  their
jurisdiction,  the FDIC  evaluate the record of the  financial  institutions  in
meeting the credit needs of their local communities,  including low and moderate
income  neighborhoods,  consistent  with the safe and sound  operation  of those
banks.  These factors are also considered in evaluating  mergers,  acquisitions,
and applications to open a branch or facility.

      Insider   Credit   Transactions.   Banks  are  also   subject  to  certain
restrictions  imposed by the  Federal  Reserve  Act on  extensions  of credit to
executive officers, directors,  principal shareholders, or any related interests
of such persons. Extensions of credit (i) must be made on substantially the same
terms,  including interest rates and collateral,  and follow credit underwriting
procedures  that are not less  stringent  than those  prevailing at the time for
comparable  transactions  with  persons  not  covered  above  and  who  are  not
employees;  and (ii) must not involve  more than the normal risk of repayment or
present other unfavorable features.
 Banks are also subject to certain lending limits and restrictions on overdrafts
to such persons.  A violation of these restrictions may result in the assessment
of  substantial  civil  monetary  penalties on the affected bank or any officer,
director,  employee,  agent, or other person participating in the conduct of the
affairs of that bank,  the  imposition  of a cease and desist  order,  and other
regulatory sanctions.

      FDICIA. Under the Federal Deposit Insurance Corporation Improvement Act of
1991  ("FDICIA"),  each federal  banking agency has  prescribed,  by regulation,
noncapital safety and soundness  standards for institutions under its authority.
These standards cover internal controls, information systems, and internal audit
systems, loan documentation,  credit underwriting, interest rate exposure, asset
growth,  compensation,  fees and benefits, such other operational and managerial
standards as the agency  determines to be  appropriate,  and standards for asset
quality,  earnings and stock valuation. An institution which fails to meet these
standards  must develop a plan  acceptable to the agency,  specifying  the steps
that the  institution  will  take to meet the  standards.  Failure  to submit or
implement  such a plan may  subject the  institution  to  regulatory  sanctions.
Management believes that the Bank meets all such standards, and therefore,  does
not believe that these regulatory standards will materially affect the Company's
business operations.

Interstate Banking and Branching

      The Riegle-Neal  Interstate  Banking and Branching  Efficiency Act of 1994
(the "Interstate Act") permits nationwide interstate banking and branching under
certain   circumstances.   This  legislation   generally  authorizes  interstate
branching and relaxes federal law restrictions on interstate banking. Currently,
bank  holding  companies  may  purchase  banks in any state,  and states may not
prohibit such purchases.  Additionally,  banks are permitted to merge with banks
in other  states as long as the home  state of neither  merging  bank has "opted
out."  The  Interstate  Act  requires   regulators  to  consult  with  community
organizations before permitting an interstate institution to close a branch in a
low-income area.

      With regard to interstate  bank mergers,  Washington has "opted in" to the
Interstate  Act and  allows  in-state  banks to merge  with  out-of-state  banks
subject to certain aging requirements.  Washington law generally  authorizes the
acquisition  of an in-state bank by an  out-of-state  bank through merger with a
Washington financial institution that has been in existence for at least 5 years
prior to the acquisition. With regard to interstate bank branching, out-of-state
banks that do not already  operate a branch in  Washington  may not establish de
novo  branches in  Washington  or establish  and operate a branch by acquiring a
branch in Washington.  Under FDIC  regulations,  banks are prohibited from using
their  interstate  branches  primarily  for  deposit  production.  The  FDIC has
accordingly implemented a loan-to-deposit ratio screen to ensure compliance with
this prohibition.

Deposit Insurance

      The  deposits of the Bank are  currently  insured to a maximum of $100,000
per depositor through the Bank Insurance Fund ("BIF")  administered by the FDIC.
All insured  banks are required to pay  semi-annual  deposit  insurance  premium
assessments to the FDIC.

                                      -10-
<PAGE>


      FDICIA included provisions to reform the Federal deposit insurance system,
including the  implementation of risk-based deposit insurance  premiums.  FDICIA
also  permits  the  FDIC to  make  special  assessments  on  insured  depository
institutions  in  amounts  determined  by the  FDIC to be  necessary  to give it
adequate  assessment income to repay amounts borrowed from the U.S. Treasury and
other sources,  or for any other purpose the FDIC deems necessary.  The FDIC has
implemented a risk-based insurance premium system under which banks are assessed
insurance  premiums  based on how much risk they present to the BIF.  Banks with
higher  levels of capital and a low degree of  supervisory  concern are assessed
lower  premiums  than banks with lower  levels of capital or a higher  degree of
supervisory concern.

Dividends

      The principal source of the Company's cash revenues is dividends  received
from the Bank. The payment of dividends is subject to government regulation,  in
that regulatory  authorities may prohibit banks and bank holding  companies from
paying  dividends in a manner that would constitute an unsafe or unsound banking
practice.  In addition,  a bank may not pay cash dividends if that payment could
reduce the amount of its capital below that necessary to meet minimum applicable
regulatory  capital  requirements.  Other  than the laws and  regulations  noted
above, which apply to all banks and bank holding companies,  neither the Company
nor the Bank are  currently  subject  to any  regulatory  restrictions  on their
dividends.

Capital Adequacy

      Federal bank regulatory  agencies use capital  adequacy  guidelines in the
examination and regulation of bank holding companies and banks. If capital falls
below  minimum  guideline  levels,  the  holding  company  or bank may be denied
approval to acquire or establish  additional banks or non-bank  businesses or to
open new facilities.

      The FDIC and Federal Reserve use risk-based  capital  guidelines for banks
and bank holding companies. These are designed to make such capital requirements
more  sensitive to  differences  in risk  profiles  among banks and bank holding
companies,   to  account  for   off-balance   sheet  exposure  and  to  minimize
disincentives for holding liquid assets.  Assets and off-balance sheet items are
assigned to broad risk categories,  each with appropriate weights. The resulting
capital ratios represent capital as a percentage of total  risk-weighted  assets
and  off-balance  sheet items.  The  guidelines  are  minimums,  and the Federal
Reserve  has  noted  that  bank  holding  companies  contemplating   significant
expansion  programs  should not allow expansion to diminish their capital ratios
and should maintain ratios well in excess of the minimum. The current guidelines
require all bank holding companies and  federally-regulated  banks to maintain a
minimum risk-based total capital ratio equal to 8%, of which at least 4% must be
Tier I  capital.  Tier I capital  for bank  holding  companies  includes  common
shareholders' equity,  certain qualifying perpetual preferred stock and minority
interests in equity  accounts of  consolidated  subsidiaries,  less  intangibles
except as described above and accumulated other comprehensive income (loss).

      The Federal Reserve also employs a leverage ratio, which is Tier I capital
as a percentage of total assets less intangibles,  to be used as a supplement to
risk-based  guidelines.  The  principal  objective of the  leverage  ratio is to
constrain  the maximum  degree to which a bank holding  company may leverage its
equity capital base. The Federal  Reserve  requires a minimum  leverage ratio of
3%.  However,  for all but the most highly rated bank holding  companies and for
bank  holding  companies  seeking  to expand,  the  Federal  Reserve  expects an
additional cushion of at least 1% to 2%.

      FDICIA created a statutory framework of supervisory actions indexed to the
capital level of the individual  institution.  Under regulations  adopted by the
FDIC, an institution is assigned to one of five capital categories  depending on
its total  risk-based  capital  ratio,  Tier I  risk-based  capital  ratio,  and
leverage ratio, together with certain subjective factors.

                                      -11-
<PAGE>

 Institutions  which  are  deemed  to be  "undercapitalized"  depending  on  the
category to which they are assigned are subject to certain mandatory supervisory
corrective actions. The Company does not believe that these regulations have any
material effect on its operations.

Effects of Government Monetary Policy

      The  earnings  and growth of the Company are  affected not only by general
economic conditions, but also by the fiscal and monetary policies of the federal
government,  particularly the Federal Reserve.  The Federal Reserve can and does
implement  national  monetary policy for such purposes as curbing  inflation and
combating  recession,   but  its  open  market  operations  in  U.S.  government
securities,  control of the discount  rate  applicable  to  borrowings  from the
Federal  Reserve,  and  establishment  of reserve  requirements  against certain
deposits, influence the growth of bank loans, investments and deposits, and also
affect  interest  rates  charged  on loans or paid on  deposits.  The nature and
impact of future  changes in monetary  policies  and their impact on the Company
and the Bank cannot be predicted with certainty.

ITEM 2.  PROPERTIES

The Company's  administrative offices are located in Aberdeen,  Washington.  The
building at 300 East Market  Street is owned by Bank of the Pacific,  which also
houses the main branch and the  administrative and operations offices of Bank of
the Pacific and Pacific Financial  Corporation.  The Bank completed construction
and  occupied  the  building  in December  of 1979.  There are nine  branches in
addition to the main office owned by Pacific.

Pacific owns the building and land occupied by the Hoquiam branch,  the land and
building housing the Ocean Shores branch,  and the land and building occupied by
the Pacific  Beach branch.  Pacific also owns the land and building  occupied by
the Montesano  branch.  Pacific owns the land and building located at 1007 South
Pacific Highway, Long Beach, Washington, which houses the Long Beach branch. The
building also houses the data processing operations of Pacific. Pacific owns the
land and buildings  occupied by the Ocean Park Office in Ocean Park,  the Ilwaco
Office in Ilwaco,  the Naselle  Office in Naselle,  and the Cathlamet  Office in
Cathlamet.

In addition to the land and buildings owned by Pacific,  it also owns all of its
furniture,  fixtures and  equipment  including  data  processing  equipment.  At
December 31, 2000,  the net book value of the  Company's  premises and equipment
was $4.1 million.

ITEM 3.  LEGAL PROCEEDINGS

The  Company  and the  Bank  from  time to  time  are  party  to  various  legal
proceedings  arising  in the  ordinary  course  of  their  business.  Management
believes that there are no threatened or pending  procedures against the Company
or the Bank which, if determined adversely,  would have a material effect on its
business or financial position.

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

No matters were submitted to a vote of security holders in the fourth quarter of
2000.

                                      -12-
<PAGE>


                                     PART II

ITEM 5.  MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SECURITY HOLDERS
MATTERS

No broker  makes a market in the  Company's  common  stock,  and trading has not
otherwise been extensive.  The trades that have occurred cannot be characterized
as amounting to an established public trading market. The Company's common stock
is traded by  individuals  on a personal basis and is not listed on any exchange
or traded on the  over-the-counter  market, and the prices reported reflect only
the transactions known to Company  management.  Because only limited information
is available,  the following data may not  accurately  reflect the actual market
value of the Company's  common stock. The following data includes trades between
individual investors, as reported to the Company as its own transfer agent.

<TABLE>
                                     2000                               1999
              Shares Traded    High        Low    Shares Traded   High        Low

<S>               <C>         <C>         <C>         <C>      <C>         <C>
First Quarter     4,915       $  29       $  26       5,975    $  26(1)    $  24(1)

Second Quarter   12,040       $  28       $  25      17,905    $  27(1)    $  26(1)

Third Quarter     7,575       $  26       $  24       1,000    $  27(1)    $  27(1)

Fourth Quarter    8,359       $  24       $  21         410    $  28(1)    $  27(1)
</TABLE>
(1) Restated to reflect the 5-for-1 stock split effected in July 2000.

As of December 31, 2000, there were  approximately 850 stockholders of record of
the Company's common stock.

In April 2000,  the Board of  Directors  approved a  five-for-one  common  stock
split,  payable July 15, 2000 to  shareholders  of record on June 15,  2000.  In
addition,  the number of authorized  shares of common stock were  increased from
5,000,000 shares to 25,000,000  shares.  Common stock and surplus as at December
31, 2000 have been adjusted to reflect the  five-for-one  common stock split. In
addition, all per share information and the average number of shares outstanding
shown in this report have been retroactively  adjusted to show the effect of the
stock split.

 The  Company's  Board of  Directors  declared  dividends on its common stock in
December   2000  and  1999  in  the  amounts  per  share  of  $1.28  and  $1.25,
respectively.  The Board of Directors  have  adopted a dividend  policy which is
reviewed annually.

Payment of dividends is subject to regulatory limitations. Under federal banking
law,  the payment of dividends by the Company and the Bank is subject to capital
adequacy  requirements  established by the Federal  Reserve and the FDIC.  Under
Washington general corporate law as it applies to the Company,  no cash dividend
may be declared or paid if, after giving effect to the dividend,  the Company is
insolvent  or its  liabilities  exceed its assets.  Payment of  dividends on the
Common  Stock is also  affected by  statutory  limitations,  which  restrict the
ability of the Bank to pay upstream  dividends to the Company.  Under Washington
banking law as it applies to the Bank, no dividend may be declared or paid in an
amount greater than net profits then available,  and after a portion of such net
profits  have been added to the surplus  funds of the Bank.  As of December  31,
2000, the Bank could have declared $3,454,000 in the aggregate without obtaining
prior regulatory approval.

                                      -13-
<PAGE>

ITEM 6.  SELECTED FINANCIAL DATA

The  financial  data  presented in this report have been restated to reflect the
merger,  as  discussed in item 1 of this report,  which was  accounted  for as a
pooling of  interests  transaction.  The  following  table  sets  forth  certain
selected  consolidated  financial data of the Company at and for the years ended
December 31:
                                2000     1999      1998      1997        1996
                                ---------------------------------------------
                                 ($ in thousands, except per share data)
OPERATIONS DATA
Net interest income           11,675    11,430    11,100    10,692      9,817
Provision for credit losses      635        60       110       142        172
Noninterest income             1,217     1,255     1,281     1,149      1,072

Noninterest expense            7,530     7,011     6,687     6,188      5,575
Provision for income taxes     1,424     1,692     1,590     1,643      1,493

Net income                     3,303     3,922     3,994     3,868      3,649
Net income per share:
Basic                          1.33      1.60(1)   1.64(1)   1.59(1)    1.51(1)
Diluted                        1.32      1.59      1.61      1.58       1.50
(1)   Restated to reflect the 5-for-1 stock split effected in July 2000.

Dividends declared             3,204     3,105     2,379     2,118      1,895
Dividends paid ratio             97%       79%       60%       55%         52%

PERFORMANCE RATIOS
Net interest margin            5.06%     5.10%     5.37%     5.90%       5.86%
Efficiency ratio              58.40%    55.27%    54.01%    52.26%      51.20%
Return on average assets       1.34%     1.64%     1.80%     1.99%       2.04%
Return on average equity      14.95%    17.26%    18.57%    19.70%      20.79%

BALANCE SHEET DATA
Total assets               $253,313   242,189   236,364   208,551     191,512
Loans, net                  175,142   150,734   145,416   141,780     135,835
Total deposits              213,511   206,139   210,650   178,726     170,697
Short-term borrowings        11,358     9,675        86     6,625         172
Shareholders' equity         22,743    21,438    21,485    19,657      17,829

Book value per share           9.09      8.63(1)   8.79(1)  8.07(1)      7.36(1)
Equity to assets ratio       8.98%      8.85%      9.09%    9.43%        9.31%
(1) Restated to reflect the 5-for-1 stock split effected in July 2000.

ASSET QUALITY RATIOS
Nonperforming loans to
 total loans                 1.93%      0.21%       0.01%       0.29%    0.04%
Allowance for loan losses
 to total loans              1.14%      1.26%       1.27%       1.35%    1.33%
Allowance for loan losses
  to nonperforming loans    59.24%    612.69%   12426.67%     459.00% 3316.36%
Nonperforming assets to
  total assets               1.35%      0.13%       0.06%       0.22%    0.03%

As  discussed  in Item 1 and Item 7 of this  report,  merger  expenses  totaling
approximately $506,000 negatively affected financial results for the fiscal year
ended December 31, 2000.

                                      -14-
<PAGE>

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

RESULTS OF OPERATIONS

Years ended December 31, 2000, 1999, and 1998

GENERAL.  The Company's  net income for 2000 was  $3,303,000,  a 15.8%  decrease
compared to $3,922,000 in 1999, and a decrease of 17.3% over $3,994,000 in 1998.
Basic earnings per share were $1.33,  $1.60, and $1.64 for 2000, 1999, and 1998,
respectively. Return on average assets was 1.34%, 1.64%, and 1.80% in 2000, 1999
and 1998, respectively.  Return on average equity was 14.95%, 17.26% and 18.57%,
respectively, in 2000, 1999 and 1998.

As described in more detail in Item I of this  report,  the Company  completed a
merger of equals with Pacific Financial  Corporation,  which became effective on
December  15,  1999.  Under  the terms of the  merger  agreement  governing  the
transaction,  Pacific  Financial  Corporation  was merged  with and into  Harbor
Bancorp, Inc., with Harbor Bancorp, Inc. as the surviving corporation, operating
under the name Pacific Financial Corporation.  The transaction was accounted for
as a pooling-of-interests. In addition, Bank of the Pacific merged with and into
The Bank of Grays Harbor  during the fourth  quarter of 2000.  The Bank of Grays
Harbor as the  surviving  corporation  changed its name to Bank of the  Pacific.
Nonrecurring costs associated with the merger of the bank totaled  approximately
$506,000 during 2000 which was a significant factor  contributing to the decline
in net income in 2000.  These one time merger  expenses  reduced  earnings by 13
cents per share. Such merger costs in 1999 totaled $349,000 or 9 cents a share.

The following table presents condensed consolidated statements of income for the
Company for each of the years in the three-year period ended December 31, 2000.
<TABLE>
                                          INCREASE                     INCREASE
                                         (DECREASE)                   (DECREASE)

<S>                               <C>                           <C>                      <C>
(Dollars in thousands)            2000    AMOUNT     %          1999   AMOUNT      %     1998
------------------------------------------------------------------------------------------------
Interest income                $20,272    $1,918     10.4    $18,354     $402      2.2   $17,952
Interest expense                 8,597     1,673     24.2      6,924       72      1.1     6,852
Net interest income             11,675       245      2.2     11,430      330      3.0    11,100
Provision for credit losses        635       575    958.3         60      (50)   (45.5)      110
Net interest income after
  provision for credit losses   11,040      (330)    (2.9)    11,370      380      3.5    10,990
Other operating income           1,217       (38)    (3.0)     1,255      (26)    (2.03)   1,281
Other operating expense          7,530       519      7.4      7,011      324      4.8     6,687
Income before income taxes       4,727      (887)   (15.8)     5,614       30       .5     5,584
Income taxes                     1,424      (268)   (15.8)     1,692      102      6.4     1,590
Net income                       3,303      (619)   (15.8)     3,922      (72)    (1.8)    3,994
</TABLE>

Net Interest  Income.  The Company derives the majority of its earnings from net
--------------------
interest  income,  which is the  difference  between  interest  income earned on
interest  earning  assets and  interest  expense  incurred on  interest  bearing
liabilities.  The following table sets forth  information with regard to average
balances of the interest earning assets and interest bearing liabilities and the
resultant yields or cost, net interest income, and the net interest margin.

                                      -15-
<PAGE>

<TABLE>
                                                Year Ended December 31,
                                  2000                       1999                      1998
                                  ----                       ----                      ----
                                 INTEREST                   INTEREST                  INTEREST
                             AVERAGE  INCOME    AVG     AVERAGE  INCOME   AVG      AVERAGE  INCOME   AVG
                             BALANCE (EXPENSE)  RATE    BALANCE (EXPENSE) RATE     BALANCE (EXPENSE) RATE
                             ----------------------------------------------------------------------------
(Dollars in thousands)
ASSETS

  Earning assets:
<S>                          <C>       <C>      <C>      <C>      <C>      <C>      <C>      <C>      <C>
     Loans                   $165,834  16,500*  9.95%    147,689  14,129*  9.57%    145,493  14,427*  9.92%
     Investment Securities:
       Taxable                 49,307   2,812   5.70%     51,439   2,987   5.81      31,587   1,925   6.09
       Tax-Exempt              13,187   1,344* 10.19%     14,333   1,114*  7.77      14,994   1,172*  7.82
     Total Investment
       securities              62,494   4,156   6.65%     65,772   4,101   6.24      46,581   3,097   6.65
     Federal funds sold and
       deposits in banks        2,258     148   6.55%     10,476     570   5.44      14,760     877   5.94

TOTAL EARNING ASSETS/INTEREST
  INCOME                     $230,586  20,804   9.02%    223,937  18,800   8.40%    206,834  18,401   8.90%
  Cash and due from banks       8,784                      8,599                      6,511
  Bank premises and equipment
     (net)                      3,728                      3,596                      3,786
  Other assets                  5,447                      5,303                      6,555
  Allowance for credit losses  (1,997)                    (1,922)                    (1,863)
  TOTAL ASSETS               $246,548                    239,513                    221,823

LIABILITIES AND SHAREHOLDERS' EQUITY
  Interest bearing liabilities:
     Deposits:
       Savings and interest-
         bearing demand      $109,266   (4,483) 4.10%    112,452  (3,435)  3.05     103,163   (3,207)  3.11
           Time                68,516   (3,537) 5.16%     65,524  (3,277)  5.00      61,657   (3,379)  5.48
     Total deposits           177,782   (8,020) 4.51%    177,976  (6,712)  3.77     164,820   (6,586)  4.00
     Other borrowings           8,876     (577) 6.50%      4,091    (212)  5.18       4,505     (266)  5.90

TOTAL INTEREST-BEARING LIABILITIES/
  INTEREST EXPENSE           $186,658   (8,597) 4.61%    182,067  (6,924)  3.80%    169,325   (6,852)  4.05
Demand deposits                34,343                     32,921                     28,707
Other liabilities               3,457                      1,804                      2,287
Shareholders' equity           22,090                     22,721                     21,504
TOTAL LIABILITIES AND SHAREHOLDERS'
  EQUITY                     $246,548                    239,513                    221,823

NET INTEREST INCOME            12,207                     11,876                     11,549

NET INTEREST INCOME AS A PERCENTAGE OF
  AVERAGE EARNING ASSETS
         Interest income                        9.02%                      8.40%                       8.90%
         Interest expense                       3.73%                      3.10%                       3.31%

NET INTEREST INCOME                             5.29%                      5.30%                       5.59%

O     TAX EQUIVALENT BASIS
</TABLE>
Nonaccrual loans are included in "loans."

                                      -16-
<PAGE>

Net interest income  increased 2.1% to $11,675,000 in 2000 compared to 1999. The
increase is primarily the result of increased loan volume.  This also caused the
increase in yields on earning assets.

 The following  table presents  changes in net interest  income  attributable to
changes  in  volume  or rate.  Changes  not  solely  due to  volume  or rate are
allocated to volume and rate based on the absolute values of each.
<TABLE>
                                   2000 COMPARED TO 1999          1999 COMPARED TO 1998
                                   ---------------------          ---------------------
                                INCREASE (DECREASE) DUE TO      INCREASE (DECREASE) DUE TO
(Dollars in thousands)            VOLUME     RATE    NET        VOLUME      RATE      NET
                                  ------     ----    ---        ------      ----      ---
Interest earned on:
<S>                               <C>        <C>   <C>          <C>        <C>      <C>
  Loans                           $1,788     $583  $2,371       $215       $(513)   $(298)
Securities:
   Taxable                          (122)     (53)   (175)     1,132         (70)   1,062
   Tax-exempt                        (95)     325     230        (21)        (37)     (58)
    Total securities                (217)     272      55      1,111        (107)   1,004
  Fed funds sold and
  interest bearing deposits
    in other banks                  (520)      98    (422)      (238)        (69)    (307)
Total interest earning assets      1,051      953   2,004      1,088        (689)     399

Interest paid on:
  Savings and interest bearing
 demand deposits                    (100)   1,148   1,048        285         (57)     228
  Time deposits                      152      108     260        204        (306)    (102)
  Short term borrowings              300       65     365        (23)        (31)     (54)
Total interest bearing liabilities   352    1,321   1,673        466        (394)      72

Change in net interest income        699     (368)    331        622        (295)     327
</TABLE>

Non-Interest  Income.  Non-interest income was $1,217,000 for 2000, down $38,000
--------------------
or 3.1% from 1999 when it totaled $1,255,000.  The 1999 amount was a decrease of
$26,000 or 2.0%  compared  to the 1998  total of  $1,281,000.  In 2000,  service
charges on deposit  accounts  decreased  $68,000 or 9.1% to a total of  $677,000
compared  to  $745,000  in 1999.  The 1999 total was up $60,000 or 8.8% over the
1998 total of $685,000.

From time to time loans are sold, but it is the general  practice of the Company
that loans are originated for the portfolio and are held.  Gain on sale of loans
is not looked to as a regular source of non-interest  income.  In 2000 a loss of
$7,000  was  realized  from  the sale of  loans:  in 1999 a loss of  $3,000  was
realized  from the sale of  loans,  and 1998  reflected  a gain on sale of loans
totaling $17,000.

Other  operating  income  totaled  $547,000 in 2000, an increase of $34,000 from
1999, or 6.6%. The primary reason for the increase was the gain on sale of other
real estate owned which totaled  $32,000.  Other  operating  income for 1999 was
$513,000,  a  decrease  of $66,000  or 11.4%  compared  to 1998 as the result of
decreased revenue received from loan servicing fees, mortgage  origination fees,
fees on loans originated for others, and check cashing fees.

                                      -17-
<PAGE>


The following table represents the principal  categories of non-interest  income
for each of the years in the three-year period ended December 31, 2000.
<TABLE>
                                        INCREASE                INCREASE
                                       (DECREASE)              (DECREASE)
(Dollars in thousands)         2000     AMOUNT     %    1999    AMOUNT     %      1998
--------------------------------------------------------------------------------------
Service charges on
<S>                         <C>         <C>     <C>     <C>       <C>    <C>      <C>
    deposit accounts        $   677     $(68)   (9.0%)  $745      $60    8.8%     $685
Gain (loss) on sale of loans     (7)       4   133.3%     (3)     (20)(118.0%)      17
Other operating income          547       34     6.6%    513      (66) (12.6%)     579

Total non-interest income   $ 1,217      (38)   (3.1%) 1,255      (26)  (2.3%)   1,281
</TABLE>

Non-Interest  Expense.  Total non-interest expense was $7,530,000 an increase of
---------------------
$519,000 or 7.4% compared to $7,011,000  in 1999. In 1999  non-interest  expense
increased $324,000 or 4.8% compared to $6,687,000 in 1998.

Salary and employee  benefits  increased by  $264,000,  or 6.8%,  in 2000 and by
$170,000,  or 4.6%, in 1999.  The primary  reason for the increase in 2000 was a
merger  related  one-time  charge of $265,000.  The charge was to fund a defined
benefit  retirement plan which was terminated on December 31, 2000. The increase
in 1999 is  attributable  primarily  to  increased  bonuses  and  merit  raises.
Employee  benefit  increases  during 1999 totaled  $70,000  compared to 1998, in
large part due to medical insurance premiums, which increased $42,000, or 22.5%.

Occupancy  and  equipment  expense  increased  $126,000  or  12.5%  in 2000  and
decreased  $9,000 or .9% in 1999.  In 2000,  one-time  merger  expenses  totaled
$124,000.  This was the  result of writing  down data  processing  equipment  no
longer in  service  at one of the  merged  banks due to  converting  to a single
system for both banks.

Other  expense  increased  $129,000  or 6.0% in 2000  compared to an increase of
$163,000  or 8.3% in 1999  over  1998.  Non-recurring  merger  expenses  totaled
approximately  $117,000  during 2000 and  $349,000 in 1999.  The merger  related
expenses include charge-off of prepaid maintenance contracts for data processing
services,  costs associated with directors retirement plans, accounting fees and
legal fees.  Non-recurring  merger expenses during 1999 related to the merger of
the holding companies as noted in item 1.

The following table represents the principal  categories of non-interest expense
for each of the years in the three-year period ended December 31, 2000.
<TABLE>
                                        INCREASE                INCREASE
                                       (DECREASE)              (DECREASE)
(Dollars in thousands)         2000    AMOUNT     %    1999    AMOUNT     %      1998
-------------------------------------------------------------------------------------
<S>                            <C>     <C>      <C>   <C>      <C>      <C>    <C>
Salaries and employee benefits $4,135  $264     6.8%  $3,871   $170     4.6%   $3,701
Occupancy and equipment         1,139   126    12.5%   1,013     (9)    (.9%)   1,022
Other expense                   2,256   129     6.0%   2,127    163     8.3%    1,964

Total non-interest expense     $7,530   519     7.4%   7,011    324     4.8%    6,687
</TABLE>

                                      -18-
<PAGE>

ASSET AND LIABILITY MANAGEMENT

The largest component of the Company's earnings is net interest income. Interest
income  and  interest  expense  are  affected  by general  economic  conditions,
competition  in the  market  place,  market  interest  rates and  repricing  and
maturity  characteristics  of the Company's assets and liabilities.  Exposure to
interest rate risk is primarily a function of  differences  between the maturity
and repricing schedules of assets (principally loans and investment  securities)
and liabilities (principally deposits).  Assets and liabilities are described as
interest  sensitive  for a given  period of time when they mature or can reprice
within that  period.  The  difference  between the amount of interest  sensitive
assets  and  interest  sensitive  liabilities  is  referred  to as the  interest
sensitive  "GAP" for any given  period.  The  "GAP"  may be either  positive  or
negative. If positive,  more assets reprice than liabilities.  If negative,  the
reverse is true.

Certain  shortcomings are inherent in the interest  sensitivity  "GAP" method of
analysis.  Complexities  such as  prepayment  risk  and  customer  responses  to
interest  rate  changes  are not  taken  into  account  in the  "GAP"  analysis.
Accordingly,  management also utilizes a net interest income simulation model to
measure interest rate sensitivity.  Simulation  modeling gives a broader view of
net  interest  income  variability,  by providing  various  rate shock  exposure
estimates.  Management  regularly  reviews the interest  rate risk  position and
provides measurement reports to the Board of Directors.

The  following  table shows the dollar amount of interest  sensitive  assets and
interest sensitive liabilities at December 31, 2000 and differences between them
for the maturity or repricing periods indicated.

                                              DUE AFTER
                               DUE IN ONE    ONE THROUGH   DUE AFTER
(Dollars in thousands)        YEAR OR LESS   FIVE YEARS    FIVE YEARS     TOTAL
-------------------------------------------------------------------------------
INTEREST EARNING ASSETS
Loans                            97,464       27,174       52,530        177,168
Investment securities            15,506       26,871       16,257         58,634
Fed Funds and interest
  bearing balances with banks     1,050        -0-          -0-            1,050
Total interest earning assets   114,020       54,045       68,787        236,852

INTEREST BEARING LIABILITIES
Interest bearing demand
  deposits                       24,125        -0-          -0-           24,125
Savings deposits                 76,018        -0-          -0-           76,018
Time deposits                    75,349        5,509        -0-           80,858
Short term borrowings            11,358        -0-          -0-           11,358
Total interest bearing
  liabilities                   186,850        5,509        -0-          192,359

Net interest rate
  sensitivity GAP               (72,830)      48,536       68,787         44,493

                                      -19-
<PAGE>


The  following  table shows the dollar amount of interest  sensitive  assets and
interest sensitive  liabilities at December 31, 1999 and difference between them
for the maturity or repricing periods indicated.
<TABLE>
                                              DUE AFTER
                               DUE IN ONE    ONE THROUGH     DUE AFTER
(DOLLARS IN THOUSANDS)         YEAR OR LESS  FIVE YEARS       FIVE YEARS          TOTAL
---------------------------------------------------------------------------------------

Interest earning assets
<S>                            <C>             <C>             <C>              <C>
Loans                          $80,096         24,961          47,607           152,664
Investment securities           15,242         32,824          19,174            67,240
Fed Funds and interest
  bearing balances with banks    1,744          -0-             -0-               1,744
Total interest earning assets   97,082         57,785          66,781           221,648

Interest bearing liabilities
Interest bearing demand
  deposits                      27,689          -0-             -0-              27,689
Savings deposits                77,142          -0-             -0-              77,142
Time deposits                   50,344         16,605           -0-              66,949
Short term borrowings            9,675          -0-             -0-               9,675
Total interest bearing
  liabilities                  164,850         16,644           -0-             181,455

Net interest rate
  sensitivity GAP             $(67,768)        41,141          66,781            40,193
</TABLE>

Effects of Changing Prices.  The results of operations and financial  conditions
--------------------------
presented  in this  report are based on  historical  cost  information,  and are
unadjusted  for the effects of inflation.  Since the assets and  liabilities  of
financial  institutions are primarily monetary in nature, the performance of the
Company  is  affected  more by  changes in  interest  rates  than by  inflation.
Interest rates generally  increase as the rate of inflation  increases,  but the
magnitude of the change in rates may not be the same.

The  effects  of  inflation  on  financial   institutions  is  normally  not  as
significant as its influence on businesses  which have investments in plants and
inventories.  During periods of high inflation there are normally  corresponding
increases  in  the  money  supply,  and  financial  institutions  will  normally
experience  above-average growth in assets,  loans and deposits.  Inflation does
increase  the price of goods and  services,  and  therefore  operating  expenses
increase during inflationary periods.

INVESTMENT PORTFOLIO

The Company's  investment  securities portfolio decreased  $8,606,000,  or 12.8%
during 2000 to  $58,634,000 at year end from  $67,240,000  in 1999,  which was a
$12,390,000  increase over 1998.  The changes in 2000 and 1999 were primarily in
U.S. Government agency securities and other securities.

The carrying values of investment  securities at December 31 in each of the last
three years are as follows:

(DOLLARS IN THOUSANDS)                   2000              1999            1998
-------------------------------------------------------------------------------
Treasury securities                      $500              $997           $996
U.S. Agencies securities               27,613            33,655         25,996
Obligations of states and
  political subdivisions               13,554            14,291         13,639
Other securities                       13,405            14,957         11,319
FHLB Stock                              3,562             3,340          2,900
     Total                             58,634            67,240         54,850

                                      -20-
<PAGE>

The following table presents the maturities of investment securities at December
31, 2000.  Taxable  equivalent values are used in calculating  yields assuming a
tax rate of 34%.
<TABLE>
                                              DUE AFTER    DUE AFTER
                               DUE IN ONE    ONE THROUGH FIVE THROUGH  DUE AFTER
(DOLLARS IN THOUSANDS)        YEAR OR LESS   FIVE YEARS    TEN YEARS   TEN YEARS  TOTAL
---------------------------------------------------------------------------------------

<S>                           <C>               <C>          <C>         <C>       <C>
U.S. Treasury securities      $   500           -0-          -0-         -0-        500
  Weighted average yield         5.37%          -0-          -0-         -0-
U.S. Agency securities        $ 5,989          13,007       5,604       3,013    27,611
  Weighted average yield         5.17%           6.14%       6.19%       8.34%
Obligations of states and political
  subdivisions                $ 1,375           5,570       5,450       1,159    13,554
  Weighted average yield         7.17%           6.75%       6.47%       6.81%
Other securities              $ 4,080           8,294       1,031        -0-     13,405
  Weighted average yield         5.97%           6.32%       6.13%       -0-
FHLB stock                    $ 3,562           -0-          -0-         -0-      3,562
  Weighted average yield         6.50%          -0-          -0-         -0-
     Total                    $15,506          26,871      12,085       4,172    58,634
</TABLE>
LENDING

General.  The  Company's  policy is to  originate  loans  primarily in its local
-------
markets.  Depending  on the  purpose of the loan,  the loans may be secured by a
variety of collateral,  including  business  assets,  real estate,  and personal
assets.

  The following table sets forth the composition of the Company's loan portfolio
at December 31 in each of the past five years.
<TABLE>

(DOLLARS IN THOUSANDS)          2000        1999        1998        1997        1996
------------------------------------------------------------------------------------

<S>                           <C>          <C>         <C>         <C>         <C>
Commercial                    $68,827      56,198      48,455      44,815      42,129
Real Estate Construction        6,118       3,325       4,929       4,258       3,618
Real Estate Mortgage           96,334      88,905      90,027      90,631      87,791
Installment                     4,612       3,379       3,104       3,276       3,414
Credit cards and overdrafts     1,277         857         764         747         707
     Total                  $ 177,168     152,664     147,280     143,727     137,659
</TABLE>

Loan Maturities and Sensitivity in Interest Rates.  The following table presents
-------------------------------------------------
information  related to maturity  distribution  and interest rate sensitivity of
commercial and real estate  construction loans  outstanding,  based on scheduled
repayments at December 31, 2000.

                                               DUE AFTER
                                DUE IN ONE    ONE THROUGH   DUE AFTER
(DOLLARS IN THOUSANDS)         YEAR OR LESS   FIVE YEARS   FIVE YEARS    TOTAL
-------------------------------------------------------------------------------

Commercial                      $27,949         26,498       14,380      68,827
Real estate construction          4,330            590        1,198       6,118
   Total                        $32,279         27,088       15,578      74,945

                                      -21-
<PAGE>

Total loans maturing after one year with
  Predetermined interest rates (fixed)       $  38,810       88,818     127,628
  Floating or adjustable rates (variable)        9,389           -0-      9,389
     Total                                   $  48,199       88,818     134,017

At December 31, 2000, 49.8% of the loan portfolio presented above was due in one
year or less.

Risk  Elements.  Risk elements  include  accruing  loans past due ninety days or
--------------
more,  non-accrual  loans,  and loans  which have been  restructured  to provide
reduction  or  deferral  of interest  or  principal  for reasons  related to the
debtor's  financial  difficulties.  The  Company's  policy for placing  loans on
non-accrual  status is based upon management's  evaluation of the ability of the
borrower  to meet both  principal  and  interest  payments  as they  become due.
Generally,  loans with interest or principal  payments  which are ninety or more
days past due are placed on non-accrual, unless they are well-secured and in the
process of collection, and the interest accrual is reversed against income.

The following table presents  information  related to the Company's  non-accrual
loans and other  non-performing  assets at  December 31 in each of the last five
years.

(DOLLARS IN THOUSANDS)   2000        1999       1998        1997         1996
-------------------------------------------------------------------------------

Non-accrual loans      $ 3,128        175         15         422           55
Accruing loans past due
  90 days or more      $   292        140          4         184          341
Restructured loans           0          0          0           0            0

Non-accrual  loans  increased $2.9 million in 2000 from 1999 primarily due to an
increase in non-accrual real estate loans and commercial  loans.  During 2000, a
loan  totaling  $1,154,000  secured by an  agricultural  property  was placed on
non-accrual  status.  Later  in  the  year,  management  deemed  it  prudent  to
charge-off  $524,000  of the loan  balance as further  analysis  concluded  that
sufficient  cash flow was not available to meet the original  obligations of the
borrower. Management is currently in negotiations with the borrower to determine
its capacity to continue as a going  concern or if  foreclosure  is the ultimate
solution.  Further,  $1,919,000 of  commercial  real estate loans were placed in
non-accrual  status during 2000.  Management  has either  initiated  foreclosure
proceedings  on  these  properties,  or is  aware of  pending  sales or  outside
refinancing  activity involving certain properties.  Non-accrual loans increased
$160,000 to $175,000 at year-end  1999 after  declining to $15,000 in 1998,  and
increasing  to  $422,000  in 1997  from  $55,000  in 1996.  Interest  income  on
non-accrual  loans that would have been  recorded  had those loans  performed in
accordance  with their initial terms,  as of December 31, was $168,000 for 2000,
$10,000  for 1999,  $20,000  for 1998,  $45,000  for 1997,  and $2,000 for 1996.
Interest income recognized on impaired loans for 2000 was $31,000,  for 1999 was
$11,000, and was none for 1998, 1997, and 1996.

There are  $292,000  of loans  which are ninety  days or more past due and still
accruing at year-end  2000. Of those loans,  $103,000 are secured by real estate
and  are  adequately   collateralized.   It  is  management's  opinion  that  if
foreclosure and sale of collateral is necessary, no loss will be incurred.

Loan Concentrations. The Company has credit risk exposure related to real estate
-------------------
loans.  The Company makes real estate loans for construction and loans for other
purposes which are secured by real estate. At December 31, 2000 loans secured by
real  estate  totaled  $102,452,000,  which  represents  57.8% of the total loan
portfolio.  Real estate construction loans comprised  $6,118,000 of that amount,
while real estate loans secured by residential  properties totaled  $35,106,000.
The ultimate  collectibility  of the loan portfolio is susceptible to changes in
economic  and market  conditions  in the  Company's  market  areas.  The Company
generally  requires  collateral  on all  real  estate  exposures  and  typically
maintains loan-to-value ratios of no greater than 80%.

                                      -22-
<PAGE>

Summary of Loan Loss  Experience.  The following  table presents data related to
--------------------------------
the  aggregate  allowance  for credit losses and net charge offs for each of the
years in the five-year period ended December 31, 2000.
<TABLE>
(DOLLARS IN THOUSANDS)          2000        1999        1998        1997        1996
------------------------------------------------------------------------------------

<S>                           <C>          <C>         <C>         <C>         <C>
Balance at beginning of year  $1,930       1,864       1,937       1,824       1,624
Charge-offs:
  Commercial                     554         114           9           5          28
  Real estate loans                            0         194           0           0
  Credit card                      6          13          18          20          22
  Installment                      8           7           0          16          12
    Total charge-offs         $  568         134         221          41          62

Recoveries:
  Commercial                    $ 15          23          34           7          80
  Real estate loans               12         110           0           0           0
  Credit card                      0           6           3           2           6
  Installment                      2           1           1           3           4
    Total recoveries            $ 29         140          38          12          90

Net charge-offs (recoveries)     539          (6)        183          29         (28)
Provision for credit losses      635          60         110         142         172
Balance at end of year        $2,026       1,930       1,864       1,937       1,824
Ratio of net charge-offs (recoveries)
  To average loans outstanding   .33%        --          .13%        .02%       (.02%)
</TABLE>

The allowance for credit losses was $2,026,000 at year-end  2000,  compared with
$1,930,000 at year-end 1999. The aggregate  increase resulted from the provision
of $635,000  and  charge-offs  in 2000.  The  allowance  for credit  losses as a
percentage  of total  loans  outstanding  at year-end  2000 was 1.14%,  which in
management  opinion is adequate and  reasonable  in  comparison to the Company's
credit risk experience.

The  allowance  for credit  losses  during 1999  increased  $66,000  compared to
year-end 1998. The total  allowance for credit losses was $1,930,000 at year-end
1999 and $1,864,000 in 1998. The aggregate  increase  during 1999 was the result
of the provision of $60,000 and net recoveries  from previous  charge-offs.  The
allowance  decreased in 1998 from the provision of $110,000 and net  charge-offs
of $183,000.  The  allowance  for credit  losses as a percentage  of total loans
outstanding was 1.26% at year-end 1999 and 1.27% in 1998.

The  allowance for credit  losses at year-end  1997 was  $1,937,000  compared to
$1,824,000  in 1996.  The net  charge-offs  were  $29,000  in 1997  compared  to
recoveries of $28,000 during 1996. Provisions for credit losses were $142,000 in
1997 and $172,000 in 1996.  The  allowance  for credit losses as a percentage of
total loans outstanding at year-end 1997 was 1.35% and 1.33% in 1996.

Provision and Allowance for Credit  Losses.  The Company  provided  $635,000 for
------------------------------------------
credit  losses  during  2000  compared  to  $60,000 in 1999,  $110,000  in 1998,
$142,000  in 1997  and  $172,000  in 1996.  The  provisions  are made to  insure
adequate reserves for potential losses.  The provision for credit losses charged
to operating income is based on historical loss experience,  volume and types of
loans,  trends in  delinquencies  and  non-accrual  loans.  Further  analysis is
performed  regarding  trends  in  portfolio  volume,  results  of  internal  and
independent  external credit reviews, and anticipated economic conditions in the
Company's  market  area.  The Company  determines  the adequacy of its loan loss
reserves  through a formula  applying  risk  factors  to  outstanding  loans and
certain  unused  commitments,  in each case based on the internal  risk grade of
those loans or commitments.

                                      -23-
<PAGE>

The Company's  allowance further  incorporates the results of measuring impaired
loans as  provided in  Statement  of  Financial  Accounting  Standards  No. 114,
"Accounting  by Creditors  for  Impairment of a Loan" and Statement of Financial
Accounting  Standards No. 118, "Accounting by Creditors for Impairment of a Loan
- Income Recognition and Disclosure."

Based on certain characteristics of the loan portfolio,  potential losses can be
anticipated  for  major  loan  categories.  The  following  table  presents  the
allocation of the  allowance  for credit losses among the major loan  categories
based primarily on their historical net charge off experience and other business
considerations at December 31 in each of the last five years.
<TABLE>
                                % OF             % OF            % OF            % OF            % OF
                        2000    TOTAL    1999    TOTAL   1998    TOTAL   1997    TOTAL   1996    TOTAL
(DOLLARS IN THOUSANDS) RESERVE  RESERVE  RESERVE RESERVE RESERVE RESERVE RESERVE RESERVE RESERVE RESERVE

<S>                   <C>        <C>      <C>     <C>    <C>      <C>     <C>     <C>    <C>      <C>
Commercial loans     $  689      34%   $  720     37%  $  710     38%   $  798    41%  $  605     33%
Real estate loans     1,256      62%    1,153     60%   1,091     58%    1,089    56%   1,165     64%
Consumer loans           81       4%       58      3%      63      4%       50     3%      54      3%

Total allowance      $2,026     100%   $1,930    100%  $1,864    100%   $1,937   100%  $1,824    100%

Ratio of allowance for credit
  losses to loans outstanding
  At end of year       1.14%             1.26%           1.27%            1.35%          1.33%
</TABLE>
DEPOSITS

The Company's primary source of funds has historically been customer deposits. A
variety of deposit  products  are  offered to  attract  customer  deposits.  The
products  include  non-interest  bearing demand  accounts,  negotiable  order of
withdrawal (NOW) accounts, savings accounts, and time deposits. Interest-bearing
accounts earn interest at rates established by management,  based on competitive
market factors and the need to increase or decrease  certain types of maturities
of deposits.

The following  table sets forth the average  balances for each major category of
deposits  and the  weighted  average  interest  rate paid for  deposits  for the
periods indicated.
<TABLE>
(DOLLARS IN THOUSANDS)          2000     RATE     1999     RATE     1998     RATE
---------------------------------------------------------------------------------
<S>                          <C>         <C>    <C>        <C>    <C>        <C>

Demand deposits              $34,343     0.00%  $32,921    0.00%  $28,707    0.00%
Interest bearing demand
 deposits                     26,416     2.51%   31,980    2.51%   38,495    2.41%
Savings deposits              82,850     3.65%   80,472    3.67%   64,668    3.35%
Time deposits                 68,516     5.16%   65,524    5.00%   61,657    5.48%

     Total                  $212,125     3.78% $210,897    3.18% $194,074    3.39%

</TABLE>

                                      -24-
<PAGE>


Maturities  of  time  certificates  of  deposit  as of  December  31,  2000  are
summarized as follows:

                                  UNDER             OVER
                                $100,000          $100,000            TOTAL
                                --------          --------            -----
3 months or less                  10,546            14,921           25,467
Over 3 through 6 months           16,895             5,919           22,814
Over 6 through 12 months          18,745             8,323           27,068
Over 12 months                     4,010             1,499            5,509
     Total                        50,196            30,662           80,858

SHORT-TERM BORROWINGS

The following is information  regarding the Company's short-term  borrowings for
the years ended December 31, 2000, 1999 and 1998.

(DOLLARS IN THOUSANDS)                          2000          1999         1998
-------------------------------------------------------------------------------

Amount outstanding at end of period          $11,358        $9,675          $86
Weighted average interest rate thereon          6.39%         5.18%        5.15%
Maximum amount outstanding at any month
 end during period                           $11,358       $11,375       $2,550
Average amounts outstanding during the period  9,036         4,091        4,505
Weighted average interest rate during period    6.39%         5.18%        5.90%

KEY FINANCIAL RATIOS

YEAR ENDED DECEMBER 31,     2000        1999        1998        1997       1996
-------------------------------------------------------------------------------

Return on average assets    1.34%       1.64%       1.80%       1.99%      2.04%
Return on average equity   14.95%      17.26%      18.57%      19.70%     20.79%
Average equity to average
 assets ratio               8.96%       9.49%       9.69%      10.09%      9.82%
Dividend payout ratio         97%         79%         60%         55%        52%

LIQUIDITY AND CAPITAL RESOURCES

Liquidity.  The primary  concern of depositors,  creditors and regulators is the
---------
Company's   ability  to  have  sufficient  funds  readily   available  to  repay
liabilities as they mature.  In order to insure  adequate funds are available at
all times,  the Company  monitors and projects the amount of funds required on a
daily basis.  Through the Bank, the Company obtains funds from its customer base
which provides a stable source of "core" demand and consumer deposits.
Other sources are available with  borrowings from the Federal Home Loan Bank and
correspondent banks.  Liquidity requirements can also be met through disposition
of short-term assets. In management's opinion, the Company maintains an adequate
level of liquid assets,  consisting of cash and due from banks, interest bearing
deposits  with  banks,  and  federal  funds sold to support  the daily cash flow
requirements.

Capital.  The Company  endeavors to maintain equity capital at an adequate level
-------
to support and promote  investor  confidence.  The Company conducts its business
through  the Bank.  Thus,  the Company  needs to be able to provide  capital and
financing to the Bank should the need arise.  The primary  source for  obtaining
capital is through  additional stock sales.  Total  shareholder  equity averaged
$22,090,000  in 2000 compared to  $22,721,000  in 1999, a decrease of 2.8%,  and
$21,504,000 in 1998, an increase of 5.7% over 1999.

                                      -25-
<PAGE>

The Company's Board of Directors considers financial results,  growth plans, and
anticipated  capital needs in formulating  its dividend  policy.  The payment of
dividends is subject to adequate  financial results of the Bank, and limitations
imposed by law and governmental regulations.

The Federal Reserve has established  guidelines that mandate  risk-based capital
requirements for bank holding companies.  Under the guidelines, one of four risk
weights  is  applied  to  balance  sheet  assets,  each with  different  capital
requirements based on the credit risk of the asset. The Company's capital ratios
include the assets of the Bank on a  consolidated  basis in accordance  with the
requirements of the Federal Reserve.  The Company's capital ratios have exceeded
the minimum  required to be classified  "well  capitalized" for each of the past
three years.

The following  table sets forth the minimum  required  capital ratios and actual
ratios for December 31, 2000, 1999, and 1998.
                                                                CAPITAL
                                                                ADEQUACY
                                     ACTUAL                     PURPOSES
(DOLLARS IN THOUSANDS)               AMOUNT    RATIO    AMOUNT          RATIO
------------------------------------------------------------------------------
December 31, 2000
Tier 1 capital (to average assets)  $22,934    9.19%    $9,986         4.00%
Tier 1 capital (to risk-weighted     22,934   12.05%     7,613         4.00%
  assets)
Total capital (to risk-weighted      24,960   13.11%    15,226         8.00%
  assets)

December 31, 1999
Tier 1 capital (to average assets)   22,390    9.28%     9,646         4.00%
Tier 1 capital (to risk-weighted     22,390   12.93%     6,929         4.00%
  assets)
Total capital (to risk-weighted      24,320   14.04%    13,857         8.00%
  assets)

December 31, 1998
Tier 1 capital (to average assets)  $21,117    9.03%    $9,313         4.00%
Tier 1 capital (to risk-weighted     21,117   12.63%     6,686         4.00%
  assets)
Total capital (to risk-weighted      22,981   13.75%    13,372         8.00%
  assets)

ITEM 7A.  QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

The Company's  results of operations  are largely  dependent upon its ability to
manage  interest  rate risk.  Management  considers  interest  rate risk to be a
significant  market  risk that  could have a  material  effect on the  Company's
financial  condition and results of  operations.  The Company does not currently
use  derivatives to manage market and interest rate risks.  All of the Company's
transactions are denominated in U.S. dollars. Approximately 45% of the Company's
loans have interest rates which float with the Company's  reference rate.  Fixed
rate loans generally are made with a term of five years or less.

In the Asset and Liability  section of the Management's  Discussion and Analysis
in  Item 7 is a table  presenting  estimated  maturity  or  pricing  information
indicating  the Company's  exposure to interest  changes.  The  assumptions  and
description  of the  process  used to  manage  interest  rate  risk  is  further
discussed in the Asset and Liability section.  The following table discloses the
balances of the  financial  instruments  including the fair value as of December
31, 2000.


                                      -26-
<PAGE>

The expected maturities are disclosed based on contractual schedules.  Principal
repayments are not considered. The expected maturities for financial liabilities
with no stated maturity  reflect  estimated  future roll-off rates. The roll-off
rates for non-interest bearing deposits, interest bearing demand deposits, money
market accounts,  and savings deposits are 15%, 25%, 25% and 20%,  respectively.
The interest rates  disclosed are based on rates in effect at December 31, 2000.
Fair values are used in accordance with generally accepted accounting principles
as disclosed in the financial statements.
<TABLE>
                                                   EXPECTED MATURITY
Year ended December 31, 2000                                               THERE             FAIR
(dollars in thousands)           2001      2002     2003   2004    2005    AFTER   TOTAL     VALUE
--------------------------------------------------------------------------------------------------
FINANCIAL ASSETS
  Cash and cash equivalents
<S>                             <C>       <C>      <C>    <C>     <C>      <C>     <C>      <C>
      Non-interest bearing      $8,619    ----     ----   ----    ----     ----      8,619  8,619
      Interest bearing
        deposits in banks          480    ----     ----   ----    ----     ----        480    480
      Weighted average
        interest rate             5.23%
  Federal funds sold
      Fixed rate                   570    ----     ----   ----    ----     ----        570    570
      Weighted average
        interest rate             6.68%
  Securities available for sale
      Fixed rate                11,944   4,850    6,013   10,405  5,603   14,881  53,696   53,696
      Weighted average
        interest rate             5.35%   5.96%    6.26%    6.03%  6.08%    5.01%
  Securities held to maturity
      Fixed rate                     3      29       15       86  ----     1,243   1,376    1,376
      Weighted average
        interest rate             6.03%   5.88%    6.50%    5.56% ----      6.59%
  Loans receivable
      Fixed rate                12,168   1,597    5,745    4,499  6,549   53,618  84,176   84,409
      Weighted average
        interest rate             9.36%   9.65%    8.65%    8.92%  8.61%    8.40%
      Adjustable rate           60,818   9,839    3,847    9,131  9,357    ----   92,992   92,992
      Weighted average
        interest rate            10.46%  11.23%   10.68%    9.29%  8.56%   ----
  Federal Home Loan Bank stock   3,562    ----     ----   ----      ----   ----    3,562    3,562
      Weighted average
        interest rate             6.50%
</TABLE>
<TABLE>
                                                   EXPECTED MATURITY

Year ended December 31, 2000                                               THERE         FAIR
(dollars in thousands)           2001      2002     2003   2004    2005    AFTER   TOTAL VALUE
----------------------------------------------------------------------------------------------
FINANCIAL LIABILITIES
  Non-interest bearing
<S>                             <C>      <C>      <C>      <C>    <C>     <C>     <C>      <C>
   deposits                     $4,877   4,145    3,523    2,995  2,545   14,425  32,510   32,510
  Interest bearing checking
   accounts                      6,036   4,527    3,395    2,546  1,910    5,729  24,143   24,143
      Weighted average
   interest rate                  1.68%   1.68%    1.68%    1.68%  1.68%    1.68%
  Money Market accounts          5,476   4,107    3,081    2,310  1,733    5,198  21,905   21,905
      Weighted average
   interest rate                  1.49%   1.49%    1.49%    1.49%  1.49%    1.49%
  Savings accounts              10,819   8,655    6,924    5,539  4,432   18,536  54,095   54,095
      Weighted average
   interest rate                  2.49%   2.49%    2.49%    2.49%  2.49%    2.49%
  Certificates of deposit
      Fixed rate                74,183   4,036    1,024      127     97    ----   79,467   79,638
      Weighted average
   interest rate                  5.99%   6.12%    5.53%    4.79%  5.30%
      Variable rate              1,166     225     ----   ----      ----   ----    1,391    1,391
      Weighted average
   interest rate                  6.10%   5.95%
  FHLB advances and other borrowings
      Fixed rate                11,358    ----     ----   ----    ----   ----     11,358   11,358
      Weighted average
   interest rate                  6.82%
</TABLE>
                                      -27-
<PAGE>

While  the table  presented  above  provides  information  about  the  Company's
interest  sensitivity,  it does not predict the trends of future  earnings.  For
this  reason,  financial  modeling is used to forecast  earnings  under  varying
interest rate projections.  While this process assists in managing interest rate
risk,  it  does  require  significant  assumptions  for the  projection  of loan
prepayments,  loan  origination  volumes and liability  funding sources that may
prove to be inaccurate.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Information required for this item is included in Item 14 of this report.

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

None.

                                    PART III

ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

Information  concerning  directors and executive officers requested by this item
is contained in the registrant's  2001 Proxy Statement in the sections  entitled
"MANAGEMENT-Certain   Executive   Officers,"  "Proposal  No.  1  -  Election  of
Directors,"  and  "Compliance  with Section  16(a) of the  Exchange  Act" and is
incorporated by reference herein.

ITEM 11.  EXECUTIVE COMPENSATION

Information   concerning  executive  compensation  requested  by  this  item  is
contained in the  registrant's  2001 Proxy  Statement  in the sections  entitled
"DIRECTORS'  COMPENSATION" and "EXECUTIVE  COMPENSATION" (not  including " Audit
Committee   Report"   and  "Report  of  the  Compensation  Committee"),  and  is
incorporated by reference herein.

ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

Information  concerning  security  ownership  of certain  beneficial  owners and
management  requested by this item is contained in the  registrant's  2001 Proxy
Statement in the section  entitled  "MANAGEMENT - Security  Ownership of Certain
Beneficial Owners and Management," and is incorporated by reference herein.

ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Information  concerning certain relationships and related transactions requested
by this item is  contained  in the  registrant's  2001  Proxy  Statement  in the
section entitled  "Compensation  Committee Interlocks and Insider Participation"
and is incorporated by reference herein.

                                      -28-
<PAGE>


                                     PART IV

ITEM 14.  EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K

(a)      (1) The following financial statements are filed herewith following the
         signature page of this report:
                   Independent Auditor's Report
                   Consolidated Balance Sheets
                   Consolidated Statements of Income
                   Consolidated Statements of Stockholders' Equity
                   Consolidated Statements of Cash Flows
                   Notes to Consolidated Financial Statements

(a)      (2)  Schedules:  None

(a)      (3)  Exhibits

         EXHIBIT NO.      EXHIBIT
         ----------       -------

         3.1   Restated Articles of Incorporation (1)
         3.2   Bylaws (2)
         10    Executive Compensation Plans and Arrangements and Other
               Management Contracts
         10.1  Employment Agreement for Robert J. Worrell (3)
         10.2  First Amendment of Employment Agreement for Robert
               J. Worrell (3)
         10.3  Employment Agreement for Dennis A. Long (3)
         10.4  Employment Agreement for Wayne D. Gale (3)
         10.5  Employment Agreement for John Van Dijk (3)
         10.6  Bank of the Pacific Incentive Stock Option Plan (4)
         10.7  The Bank of Grays Harbor Inventive Stock Option
               Plan (4)
         10.8  2000 Stock Incentive Compensation Plan (5)
         10.9  Bonus Program for Officers (5)
         10.10 The Bank of Grays Harbor Employee Deferred Compensation Plan
         21    Subsidiaries of Registrant - Bank of the Pacific,
               organized under Washington law
         23    Consent of Knight Vale & Gregory PLLC, Independent Auditors
         99    Description of common stock of the Company (6)

         (1)   Incorporated by reference to Exhibit 3.2. to the Company's
               Quarterly Report on Form 10-Q for the quarter ended
               June 30,2000.

         (2)   Incorporated by reference to Exhibit 2b to Form 8-A filed by
               the  Company  and  declared   effective  on  March  7,  2000
               (Registration No. 000-29329).

         (3)   Incorporated  by reference to Exhibits 10.2,  10.2.1,  10.3,
               10.4,  and 10.6 of the  Registration  Statement  on Form S-4
               filed by the Company and declared  effective on November 10,
               1999 (Registration No. 333-86687).

         (4)   Incorporated  by reference to Exhibits  10.7 and 10.8 to the
               Company's  Annual  Report  on Form  10-K for the year  ended
               December 31, 1999.

         (5)   Incorporated  by reference to Exhibits  10.1 and 10.2 to the
               Company's  Quarterly  Report  on Form  10-Q for the  quarter
               ended March 31, 2000.

         (6)   Incorporated  by  reference  to Exhibit 99 to the  Company's
               Quarterly   Report  on  Form  10-Q  for  the  quarter  ended
               September 30, 2000.

(a)(4) Form 8-K: A report on Form 8-K was filed on December 20,  2000,  to
       report the declaration of a cash dividend under Item 5.


                                      -29-
<PAGE>

SIGNATURES

Pursuant to the  requirements  of Section 13 or 15(d) of the  Exchange  Act, the
registrant  caused  this  report to be signed on its behalf by the  undersigned,
thereunto duly authorized on the 21st day of March, 2001.


                                             PACIFIC FINANCIAL CORPORATION
                                               (Registrant)



/s/ Robert J. Worrell                        /s/ Dennis A. Long
-------------------------                    ----------------------------
Robert J. Worrell, Chief Executive Officer   Dennis A. Long, President




Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the  following  persons on behalf of the  registrant in
the capacities indicated, on the 21st of March, 2001.

Principal Executive Officer           Principal Financial and Accounting Officer



/s/ Dennis A. Long                    /s/ John Van Dijk
-------------------------             --------------------------------
Dennis A. Long,                       John Van Dijk,
President and Director                Treasurer(Chief Financial Officer)


Remaining Board of Directors


/s/ Joseph A. Malik                   /s/ Sidney R. Snyder
-------------------------             --------------------------------
Joseph A. Malik,                      Sidney R. Snyder
(Chairman of the Board)


/s/ Gary C. Forcum                    /s/ Duane E. Hagstrom
-------------------------             --------------------------------
Gary C. Forcum                        Duane E. Hagstrom


/s/ Walter L. Westling                /s/ Robert A. Hall
-------------------------             --------------------------------
Walter L. Westling                    Robert A. Hall


/s/ David L. Woodland                 /s/ Robert J. Worrell
-------------------------             --------------------------------
David L. Woodland                     Robert J. Worrell



                                      -31-
<PAGE>
Independent Auditors Report

January 26, 2001


Board of Directors
Pacific Financial Corporation
Aberdeen, Washington


We  have  audited  the  accompanying  consolidated  balance  sheets  of  Pacific
Financial  Corporation  and Subsidiary as of December 31, 2000 and 1999, and the
related  consolidated  statements of income,  shareholders equity and cash flows
for each of the  three  years in the  period  ended  December  31,  2000.  These
consolidated  financial  statements  are  the  responsibility  of  the Company's
management.  Our  responsibility is to express an opinion on these  consolidated
financial statements based on our audits.

We  conducted  our  audits  in  accordance  with  generally   accepted  auditing
standards.  Those standards require that we plan and perform the audit to obtain
reasonable  assurance about whether the  consolidated  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 Pacific Financial
Corporation  and Subsidiary as of December 31, 2000 and 1999, and the results of
their  operations and their cash flows for each of the three years in the period
ended  December 31, 2000,  in  conformity  with  generally  accepted  accounting
principles.

Our  audits  were  made for the  purpose  of  forming  an  opinion  on the basic
consolidated   financial   statements  taken  as  a  whole.  The   supplementary
information  is  presented  for  purposes  of  additional  analysis and is not a
required part of the basic consolidated financial statements.  The supplementary
information has been subjected to the auditing  procedures applied in the audits
of the basic consolidated  financial  statements and, in our opinion,  is fairly
stated in all material respects in relation to the basic consolidated  financial
statements taken as a whole


/s/ Knight Vale & Gregory PLLC
KNIGHT VALE & GREGORY PLLC


<PAGE>

Consolidated Balance Sheets
------------------------------------------------------------------------------
Pacific Financial Corporation and Subsidiary
December 31, 2000 and 1999
(Dollars in Thousands)
<TABLE>
                                                       2000           1999
                                                       ----           ----

Assets
<S>                                                <C>            <C>
   Cash and due from banks                         $   8,619      $  13,080
   Interest bearing deposits in banks                    480          1,744
   Federal funds sold                                    570            - -
   Securities available for sale                      57,258         65,625
   Securities held to maturity
     (market value $1,376 and $1,615)                  1,376          1,615

   Loans                                             177,168        152,664
   Allowance for credit losses                         2,026          1,930
   Loans - net                                       175,142        150,734

   Premises and equipment                              4,122          3,510
   Foreclosed real estate                                - -            177
   Accrued interest receivable                         2,302          2,004
   Cash surrender value of life insurance              2,435          2,330
   Other assets                                        1,009          1,370
                                                    --------       --------
   Total assets                                     $253,313       $242,189


Liabilities and Shareholders Equity

Liabilities
   Deposits:
     Demand                                         $ 32,510       $ 34,359
     Savings and interest-bearing demand             100,143        104,831
     Time                                             80,858         66,949
   Total deposits                                    213,511        206,139

   Accrued interest payable                              779            549
   Short-term borrowings                              11,358          9,675
   Other liabilities                                   4,922          4,388
                                                    --------       --------

   Total liabilities                                 230,570        220,751

Commitments and Contingencies                            - -

Shareholders Equity
   Common stock (par value $1); authorized:  25,000,000 shares;
     issued and outstanding:  2000 - 2,503,130 shares; 1999 - 496,770
     shares 2,503 497

   Surplus                                             9,859         11,420
   Retained earnings                                  10,572         10,473
   Accumulated other comprehensive loss                 (191)          (952)
   Total shareholders equity                          22,743         21,438
                                                    --------       --------
   Total liabilities and shareholders equity        $253,313       $242,189
</TABLE>

See notes to consolidated financial statements.

                                      F-1
<PAGE>



Consolidated Statements of Income
------------------------------------------------------------------------------
Pacific Financial Corporation and Subsidiary
Years Ended December 31, 2000, 1999 and 1998
(Dollars in Thousands, Except Per Share Amounts)
                                                 2000        1999         1998
                                                 ----        ----         ----

Interest Income
   Loans                                        $16,425    $14,062      $14,366
   Federal funds sold and deposits in banks         148        570          877
   Securities available for sale:
     Taxable                                      2,812      2,767        1,925
     Tax exempt                                     789        847          663
   Securities held to maturity - tax exempt          98        108          121
                                                 ------     ------       ------
   Total interest income                         20,272     18,354       17,952

Interest Expense
   Deposits                                       8,020      6,712        6,586
   Short-term borrowings                            577        212          266
                                                 ------     ------       ------
   Total interest expense                         8,597      6,924        6,852

   Net interest income                           11,675     11,430       11,100

Provision for Credit Losses                         635         60          110

Net interest income after provision
   for credit losses                             11,040     11,370       10,990

Non-Interest Income
   Service charges on deposit accounts              677        745          685
   Mortgage loan origination fees                     9         36           35
   Net gain on sales of securities
    available for sale                              - -          9           17
   Other operating income                           531        465          544
                                                 ------     ------       ------
   Total non-interest income                      1,217      1,255        1,281

Non-Interest Expense
   Salaries                                       3,182      3,250        3,150
   Employee benefits                                953        621          551
   Occupancy                                        388        367          379
   Equipment                                        751        646          643
   State taxes                                      228        235          242
   Other                                          2,028      1,892        1,722
                                                 ------     ------       ------
   Total non-interest expense                     7,530      7,011        6,687
                                                 ------     ------       ------
   Income before income taxes                     4,727      5,614        5,584

Income Taxes                                      1,424      1,692        1,590
                                                 ------     ------       ------
   Net income                                  $  3,303   $  3,922     $  3,994


Earnings Per Share
   Basic                                          $1.33      $1.60        $1.64
   Diluted                                         1.32       1.59         1.61

See notes to consolidated financial statements.

                                      F-2

<PAGE>

Consolidated Statements of Shareholders Equity
------------------------------------------------------------------------------
Pacific Financial Corporation and Subsidiary
Years Ended December 31, 2000, 1999 and 1998
(Dollars in Thousands)
<TABLE>
                                                                                     Accumulated
                                    Shares of                                        Other
                                    Common       Common                Retained      Comprehensive
                                    Stock        Stock      Surplus    Earnings      Income (Loss)     Total
                                    ---------    ------     -------    --------      -------------     -----

<S>                <C>                <C>        <C>        <C>        <C>           <C>             <C>
Balance at January 1, 1998            487,267    $  487     $10,875    $  8,041      $   254         $19,657
                                     --------    ------     -------    --------      -------         -------
Comprehensive income:
   Net income                             - -       - -         - -       3,994         - -            3,994
   Other comprehensive income,
     net of tax:
       Change in fair value of
         securities available for sale    - -       - -         - -         - -          114             114

   Comprehensive income                                                                                4,108

Stock options exercised                 1,678         2          95         - -          - -              97
Sale of common stock                       24       - -           2         - -          - -               2
Dividends on common stock
   ($.97 per share)                       - -       - -         - -      (2,379)         - -          (2,379)
                                      --------    ------     -------    --------      -------         -------
   Balance at December 31, 1998       488,969       489      10,972       9,656          368          21,485

Comprehensive income:
   Net income                             - -       - -         - -       3,922          - -           3,922
   Other comprehensive loss,
     net of tax:
       Change in fair value of
         securities available for sale    - -       - -         - -         - -       (1,320)         (1,320)

   Comprehensive income                                                                                2,602

Stock options exercised                 8,000         8         472         - -          - -             480
Repurchase of common stock
   fractional shares                     (199)      - -         (24)        - -          - -             (24)
Dividends on common stock
   ($1.25 per share)                      - -       - -         - -      (3,105)         - -          (3,105)
                                      --------    ------     -------    --------      -------         ------
   Balance at December 31, 1999       496,770       497      11,420      10,473         (952)         21,438

Comprehensive income:
   Net income                             - -       - -         - -       3,303          - -           3,303
   Other comprehensive income,
     net of tax:
       Change in fair value of
         securities available for sale    - -       - -         - -         - -          761             761
                                                                                                      ------
   Comprehensive income                                                                                4,064

5-for-1 stock split                 1,987,110     1,987      (1,987)        - -          - -             - -
Stock options exercised                 2,750         3          30         - -          - -              33
Stock purchase of branch site          16,500        16         396         - -          - -             412
Dividends on common stock
   ($1.28 per share)                      - -       - -         - -      (3,204)         - -          (3,204)
                                    ---------    ------     -------    --------      -------         -------
   Balance at December 31, 2000     2,503,130    $2,503    $  9,859     $10,572      ($  191)        $22,743
</TABLE>

See notes to consolidated financial statements.

                                      F-3

<PAGE>

Consolidated Statements of Cash Flows
------------------------------------------------------------------------------
Pacific Financial Corporation and Subsidiary
Years Ended December 31, 2000, 1999 and 1998
(Dollars in Thousands)
<TABLE>
                                                           2000          1999        1998
                                                           ----          ----        ----
Cash Flows from Operating Activities
<S>                                                    <C>           <C>         <C>
   Net income                                          $  3,303      $  3,922    $  3,994
   Adjustments to reconcile net income to net cash
     provided by operating activities:
       Depreciation and amortization                        568           496         518
       Provision for credit losses                          635            60         110
       Deferred income tax                                  (73)          (34)         17
       Stock dividends received                            (222)         (172)       (211)
       Gain on sales of securities available for sale       - -            (9)        (17)
       Gain (loss) on sales of foreclosed real estate       (32)            2          21
       Increase in interest receivable                     (298)         (140)       (224)
       Increase in interest payable                         230            66          73
       Other - net                                          477          (229)       (437)
                                                        -------        ------      ------
   Net cash provided by operating activities              4,588         3,962       3,844

Cash Flows from Investing Activities
   Net decrease in interest bearing deposits in banks     1,264         4,645         236
   Net (increase) decrease in federal funds sold           (570)       12,595      (7,900)
   Activity in securities available for sale:
     Sales                                                  - -        1,478          - -
     Maturities, prepayments and calls                   12,062       27,560       26,823
     Purchases                                           (2,423)     (43,322)     (41,974)
   Activity in securities held to maturity:
     Maturities                                             239          210          365
     Purchases                                              - -         (100)        (295)
   Proceeds from sales of loans                           1,293          468        2,657
   Increase in loans made to customers, net
     of principal collections                           (26,133)      (5,921)      (6,645)
   Purchases of premises and equipment                     (764)        (310)        (214)
   Proceeds from sales of foreclosed real estate            - -           26          151
                                                        -------        ------      ------
   Net cash used in investing activities                (15,032)      (2,671)     (26,796)

Cash Flows from Financing Activities
   Net increase (decrease) in deposits                    7,372       (4,511)      31,924
   Net increase (decrease) in short-term borrowings       1,683        9,589       (6,539)
   Common stock issued                                       33          480           99
   Cash dividends paid                                   (3,105)      (2,379)      (2,118)
   Repurchase of common stock fractional shares             - -          (24)         - -
                                                        -------        ------      ------
   Net cash provided by financing activities              5,983        3,155       23,366

   Net change in cash and due from banks                 (4,461)       4,446          414

Cash and Due from Banks
   Beginning of year                                     13,080        8,634        8,220
                                                        -------        ------      ------
   End of year                                         $  8,619      $13,080     $  8,634

Supplemental Disclosures of Cash Flow Information
<S>                                                     <C>          <C>          <C>
   Interest paid                                        $8,367       $6,858       $6,779
   Income taxes paid                                     1,247        1,750        1,640

Supplemental Disclosures of Non-Cash Investing Activities
   Fair value adjustment of securities available
   for sale, net of tax                                 $  761      ($1,320)      $  114
   Transfer of loans to foreclosed real estate              26           74          274
   Stock purchase of branch site                           412          - -          - -
   Financed sales of foreclosed real estate                235          - -          - -
</TABLE>

See notes to consolidated financial statements.

                                      F-4

<PAGE>
Notes to Consolidated Financial Statements
--------------------------------------------------------------------------------
Pacific Financial Corporation and Subsidiary
December 31, 2000 and 1999


NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

PRINCIPLES OF CONSOLIDATION

The consolidated  financial statements include the accounts of Pacific Financial
Corporation  (formerly Harbor Bancorp,  Inc.) (the Company) and its wholly owned
subsidiary,  The Bank of the Pacific (the Bank).  All  significant  intercompany
transactions and balances have been eliminated.

NATURE OF OPERATIONS

The Company is a holding company which operates primarily through its subsidiary
bank.  The Bank  operates ten branches in Grays  Harbor,  Pacific and  Wahkiakum
Counties.  The Banks primary source of revenue is providing  loans to customers,
who are  predominately  small- and  middle-market  businesses and  middle-income
individuals. The Banks primary sources of funds are deposits from customers.

CONSOLIDATED FINANCIAL STATEMENT PRESENTATION

The  consolidated  financial  statements  have been prepared in accordance  with
generally  accepted  accounting  principles  and  practices  within the  banking
industry.  The  preparation of consolidated  financial  statements in conformity
with  generally  accepted  accounting  principles  requires  management  to make
estimates  and  assumptions  that  affect  the  reported  amounts  of assets and
liabilities,  and the disclosure of contingent assets and liabilities, as of the
date of the balance  sheet,  and the  reported  amounts of revenues and expenses
during the reporting  period.  Actual results could differ from those estimates.
Material  estimates that are particularly  susceptible to significant  change in
the near term relate to the determination of the allowance for credit losses and
the valuation of foreclosed real estate and deferred tax assets.

Certain  prior  year  amounts  have been  reclassified  to  conform  to the 2000
presentation.  All dollar amounts,  except per share information,  are stated in
thousands.

SECURITIES AVAILABLE FOR SALE

Securities  available for sale consist of debt  securities  which may be sold to
implement the Banks  asset/liability  management  strategies  and in response to
changes in interest rates and similar  factors,  and certain equity  securities.
Securities  available for sale are reported at fair value.  Unrealized gains and
losses,  net of the related deferred tax effect, are reported as a net amount in
a  separate  component  of  shareholders'   equity  entitled  accumulated  other
comprehensive  income (loss).  Realized gains and losses on securities available
for sale, determined using the specific  identification  method, are included in
earnings.  Amortization of premiums and accretion of discounts are recognized in
interest income over the period to maturity.


(continued)

                                      F-5


<PAGE>

Notes to Consolidated Financial Statements
--------------------------------------------------------------------------------
Pacific Financial Corporation and Subsidiary
December 31, 2000 and 1999


NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

SECURITIES HELD TO MATURITY

Debt  securities  for which the Company has the  positive  intent and ability to
hold to maturity are reported at cost, adjusted for amortization of premiums and
accretion of discounts,  which are recognized in interest income over the period
to maturity.

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

LOANS

Loans are stated at the amount of unpaid principal,  reduced by an allowance for
credit losses.  Interest on loans is accrued daily based on the principal amount
outstanding.

Generally the accrual of interest on loans is discontinued  when, in managements
opinion,  the borrower may be unable to meet payments as they become due or when
they are past due 90 days as to either  principal or  interest,  unless they are
well  secured  and in the  process  of  collection.  When  interest  accrual  is
discontinued, all unpaid accrued interest is reversed against current income. If
management determines that the ultimate collectibility of principal is in doubt,
cash receipts on nonaccrual loans are applied to reduce the principal balance.

ALLOWANCE FOR CREDIT LOSSES

The allowance for credit losses is maintained at a level considered  adequate to
provide for estimated losses based on evaluating known and inherent risks in the
loan portfolio.  The allowance is reduced by loans charged off, and increased by
provisions  charged to earnings and recoveries on loans previously  charged off.
The allowance is based on management's periodic evaluation of factors underlying
the quality of the loan portfolio, including changes in the size and composition
of the loan portfolio, the estimated value of any underlying collateral,  actual
loan loss experience,  current  economic  conditions,  and detailed  analysis of
individual  loans  for  which  full  collectibility  may  not be  assured.  This
evaluation  is  inherently   subjective  as  it  requires   estimates  that  are
susceptible to significant revision as more information becomes available.

When available  information confirms that specific loans or portions thereof are
uncollectible,  these  amounts are charged off against the  allowance for credit
losses.  The existence of some or all of the following  criteria will  generally
confirm that a loss has been incurred: the loan is significantly  delinquent and
the borrower has not  evidenced the ability or intent to bring the loan current;
the Bank has no  recourse  to the  borrower,  or if it does,  the  borrower  has
insufficient  assets  to pay the  debt;  the  estimated  fair  value of the loan
collateral is significantly below the current loan balance,  and there is little
or no near-term prospect for improvement.

(continued)
                                      F-6
<PAGE>

Notes to Consolidated Financial Statements
--------------------------------------------------------------------------------
Pacific Financial Corporation and Subsidiary
December 31, 2000 and 1999

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

ALLOWANCE FOR CREDIT LOSSES (CONCLUDED)

When management determines that it is probable that a borrower will be unable to
repay all amounts due  according to the terms of the loan  agreement,  including
scheduled interest payments, the loan is considered impaired. Factors considered
by management in  determining  impairment  include  payment  status,  collateral
value,  and the  probability  of  collecting  scheduled  principal  and interest
payments  when due.  Loans  that  experience  insignificant  payment  delays and
payment  shortfalls  are  generally  not  classified  as  impaired.   Management
determines  the  significance  of payment  delays and  payment  shortfalls  on a
case-by-case   basis,   taking  into  consideration  all  of  the  circumstances
surrounding  the loan and the borrower,  including the length of the delay,  the
reasons for the delay,  the borrowers  prior payment  record,  and the amount of
shortfall  in  relation  to the  principal  and  interest  owed.  The  amount of
impairment is measured based on the present value of expected  future cash flows
discounted at the loans  effective  interest rate or, when the primary source of
repayment  is  provided  by real  estate  collateral,  at the fair  value of the
collateral less estimated selling costs.

The  ultimate  recovery of all loans is  susceptible  to future  market  factors
beyond the Bank's  control.  These  factors  may result in losses or  recoveries
differing significantly from those provided for in the financial statements.

PREMISES AND EQUIPMENT

Premises and equipment are stated at cost less accumulated  depreciation,  which
is computed on a  straight-line  method over the  estimated  useful lives of the
assets.  Leasehold  improvements  are amortized over the terms of the respective
leases or the  estimated  useful lives of the  improvements,  whichever is less.
Gains or losses on dispositions are reflected in earnings.

FORECLOSED REAL ESTATE

Real estate properties  acquired through,  or in lieu of,  foreclosure are to be
sold and are  initially  recorded  at the  fair  value  of the  properties  less
estimated  costs  of  disposal.  Any  write-down  to fair  value  at the time of
transfer  to other real  estate  owned is charged  to the  allowance  for credit
losses.  Properties are evaluated  regularly to ensure that the recorded amounts
are supported by their  current fair values,  and that  valuation  allowances to
reduce the carrying  amounts to fair value less  estimated  costs to dispose are
recorded as necessary.  Additions to or reductions from valuation allowances are
recorded in income.

TRANSFERS OF FINANCIAL ASSETS

Transfers of financial  assets are  accounted for as sales when control over the
assets has been  surrendered.  Control over  transferred  assets is deemed to be
surrendered  when (1) the  assets  have been  isolated  from the  Bank,  (2) the
transferee  obtains the right (free of conditions  that constrain it from taking
advantage of that right) to pledge or exchange the transferred  assets,  and (3)
the Bank does not maintain effective control over the transferred assets through
an agreement to repurchase them before their maturity.

(continued)
                                      F-7

<PAGE>
Notes to Consolidated Financial Statements
--------------------------------------------------------------------------------
Pacific Financial Corporation and Subsidiary
December 31, 2000 and 1999


NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

INCOME TAXES

Deferred  tax  assets  and  liabilities  result  from  differences  between  the
financial   statement   carrying  amounts  and  the  tax  bases  of  assets  and
liabilities,  and 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.  The  deferred  tax  provision  represents  the  difference
between the net deferred tax  asset/liability  at the  beginning  and end of the
year.  As  changes  in tax laws or rates are  enacted,  deferred  tax assets and
liabilities are adjusted through the provision for income taxes.

The Bank provides for income taxes  separately and remits to the Company amounts
currently due.

STOCK-BASED COMPENSATION

The Company  accounts for  stock-based  awards to employees  using the intrinsic
value method,  in  accordance  with APB No. 25,  Accounting  for Stock Issued to
Employees.  Accordingly,  no  compensation  expense has been  recognized  in the
financial statements for employee stock arrangements.  However, the required pro
forma  disclosures of the effects of all options  granted on or after January 1,
1995  have  been  provided  in  accordance  with SFAS No.  123,  Accounting  for
Stock-Based Compensation.

FAIR VALUES OF FINANCIAL INSTRUMENTS

The following methods and assumptions were used by the Company in estimating the
fair values of financial instruments disclosed in these financial statements:

      CASH AND SHORT-TERM INSTRUMENTS
      The  carrying  amounts of  cash  and  short-term  instruments  approximate
      their fair value.

      SECURITIES AVAILABLE FOR SALE AND HELD TO MATURITY
      Fair values  for  securities,  excluding restricted equity securities, are
      based  on  quoted  market  prices.  The  carrying   values  of  restricted
      equity securities approximate fair values.

      LOANS
      For  variable rate loans  that reprice  frequently and have no significant
      change  in credit risk,  fair  values are based on carrying  values.  Fair
      values for fixed rate  loans  are  estimated  using  discounted  cash flow
      analyses,  using  interest rates  currently  being  offered for loans with
      similar  terms  to borrowers of similar  credit  quality.  Fair  values of
      loans  held for sale are based on  their  estimated  market  prices.  Fair
      values for  impaired  loans  are  estimated  using   discounted  cash flow
      analyses or underlying collateral values, where applicable.


(continued)

                                      F-8

<PAGE>
Notes to Consolidated Financial Statements
--------------------------------------------------------------------------------
Pacific Financial Corporation and Subsidiary
December 31, 2000 and 1999


NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

FAIR VALUES OF FINANCIAL INSTRUMENTS (CONCLUDED)

      DEPOSITS
      The fair values  disclosed for  demand deposits are, by definition,  equal
      to the  amount  payable on  demand at the  reporting  date (that is, their
      carrying   amounts).  The carrying  amounts  of variable rate,  fixed term
      money  market  accounts and  certificates  of  deposit  approximate  their
      fair   values  at  the  reporting   date.  Fair  values  for   fixed  rate
      certificates   of deposit  are  estimated  using a   discounted  cash flow
      calculation  based  on interest rates  currently being  offered on similar
      certificates.

      SHORT-TERM BORROWINGS
      The carrying  amounts  of  federal funds  purchased  and other  short-term
      borrowings  maturing  within 90  days approximate their fair values.  Fair
      values of  other  short-term  borrowings are  estimated  using  discounted
      cash flow  analyses  based on  the  Banks  current  incremental  borrowing
      rates for similar types of borrowing arrangements.

CASH AND CASH EQUIVALENTS

The Company  considers  all  amounts  included  in  the balance  sheets  caption
Cash and due from banks to be cash equivalents.

The Company  maintains  balances in  depository  institution  accounts which, at
times,  may exceed  federally  insured limits.  The Company  has not experienced
any losses in such accounts.

EARNINGS PER SHARE

Basic  earnings  per  share   exclude  dilution and are computed by dividing net
income  by the   weighted  average  number of common   shares  outstanding.  The
diluted  earnings per share reflect the potential  dilution  that could occur if
common  shares  were  issued  pursuant  to the  exercise  of  options  under the
Company's stock option plans.

COMPREHENSIVE INCOME

The  Company  applies  Statement of  Financial  Accounting   Standards  No. 130,
Reporting  Comprehensive   Income (SFAS No. 130), which  requires that an entity
report and  display   comprehensive  income in a  financial   statement  that is
displayed   with   the  same   prominence   as   other   financial   statements.
Comprehensive  income  is  defined  as  the  change  in   equity  of a  business
enterprise   during  a   period  from   transactions   and   other   events  and
circumstances  from  non-owner  sources.  It   includes  all  changes  in equity
during  a period  except  those   resulting  from  investments  by   owners  and
distributions  to  owners.  With regard to the  Company,   comprehensive  income
includes  the  net income  reported in the  statement of  income and any changes
in fair  value of  securities  available  for sale,  reported  as a component of
shareholders equity.

(continued)
                                      F-9

<PAGE>
Notes to Consolidated Financial Statements
--------------------------------------------------------------------------------
Pacific Financial Corporation and Subsidiary
December 31, 2000 and 1999


NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONCLUDED)

RECENT ACCOUNTING PRONOUNCEMENTS

In June 1998,  the  Financial  Accounting  Standards  Board issued SFAS No. 133,
Accounting for Derivative  Instruments  and Hedging  Activities.  This statement
establishes  accounting  and  reporting  standards for  derivative  instruments,
including   certain   derivative   instruments   embedded  in  other   contracts
(collectively  referred  to as  derivatives)  and  for  hedging  activities.  It
requires  that  an  entity   recognize  all  derivatives  as  either  assets  or
liabilities  in its balance sheet and measure those  instruments  at fair value.
Under  this  statement,  an entity  that  elects to apply  hedge  accounting  is
required to establish  at the  inception of the hedge the method it will use for
assessing  the  effectiveness  of the  hedging  derivative  and the  measurement
approach for determining the ineffective aspect of the hedge. Those methods must
be consistent  with the entitys  approach to managing  risk.  This  statement is
effective for all fiscal years beginning after June 15, 2000. The Company had no
derivatives  as of December 31, 2000, nor does the Company engage in any hedging
activities.  The Company does not  anticipate  that the adoption of SFAS No. 133
will have a material effect on its financial position or results of operations.


NOTE 2 - BUSINESS COMBINATION

On December 15, 1999, Harbor Bancorp,  Inc. effected a business combination with
Pacific Financial  Corporation by exchanging  230,389 shares of its common stock
for all of the common stock of Pacific Financial Corporation, a one-bank holding
company based in Long Beach, Washington.  The combination was accounted for as a
pooling of interests and, accordingly,  all prior financial statements have been
restated to include Pacific Financial Corporation.  Following the merger, Harbor
Bancorp, Inc. changed its name to Pacific Financial  Corporation.  From the date
of the merger through November 7, 2000, the Companys two subsidiaries,  The Bank
of Grays Harbor and Bank of the Pacific, operated as separate banks. On November
8, 2000, the two subsidiary banks were merged into one bank, operating under the
name, The Bank of the Pacific.


NOTE 3 - RESTRICTED ASSETS

Federal  Reserve  Board  regulations  require  that the Bank  maintains  certain
minimum  reserve  balances on deposit with the Federal Reserve Bank. The average
amounts of such  balances  for the years ended  December  31, 2000 and 1999 were
approximately $2,575 and $1,396, respectively.


                                      F-10


<PAGE>
Notes to Consolidated Financial Statements
--------------------------------------------------------------------------------
Pacific Financial Corporation and Subsidiary
December 31, 2000 and 1999

NOTE 4 - DEBT AND EQUITY SECURITIES

Debt and equity securities have been classified according to managements intent.
The  carrying  amounts of  securities  and their  approximate  fair value are as
follows:
<TABLE>
                                                        Gross          Gross
                                           Amortized    Unrealized     Unrealized   Fair
                                           Cost         Gains          Losses       Value
                                           ---------    ----------     ----------   ------
Securities Available for Sale

December 31, 2000
   U.S. Treasury and Government
<S>                                        <C>          <C>            <C>         <C>
     agency securities                     $  28,324    $      18      $    229    $28,113
   Obligations of states and
     political subdivisions                   12,110          122            54     12,178
   Corporate bonds                            13,552           18           165     13,405
   Federal Home Loan Bank stock                3,562          - -           - -      3,562
                                           ---------    ----------     ----------   ------
                                           $  57,548    $     158      $    448    $57,258

December 31, 1999
   U.S. Treasury and Government
    agency securities                      $  35,597    $       5      $    950    $34,652
   Obligations of states and
    political subdivisions                    12,750           95           169     12,676
   Corporate bonds                            15,383          - -           426     14,957
   Federal Home Loan Bank stock                3,340          - -           - -      3,340
                                           ---------    ----------     ----------   ------
                                           $  67,070    $     100      $  1,545    $65,625

Securities Held to Maturity

December 31, 2000
   State and municipal securities          $   1,376    $     - -      $    - -    $ 1,376

December 31, 1999
   State and municipal securities          $   1,615    $     - -      $    - -    $ 1,615
</TABLE>

(continued)

                                      F-11
<PAGE>
Notes to Consolidated Financial Statements
--------------------------------------------------------------------------------
Pacific Financial Corporation and Subsidiary
December 31, 2000 and 1999


NOTE 4 - DEBT AND EQUITY SECURITIES (CONCLUDED)

The  contractual  maturities of debt securities held to maturity and available
for sale at December 31, 2000 are as follows:
<TABLE>
                                        Held to Maturity            Available for Sale

                                        Amortized     Fair          Amortized    Fair
                                        Cost          Value         Cost         Value
                                        -------------------         ------------------
<S>                                    <C>          <C>            <C>          <C>
Due in one year or less                $     4      $     4        $11,975      $11,940
Due from one year to five years            130          130         26,893       26,741
Due from five to ten years                 821          821         11,381       11,264
Due after ten years                        421          421            740          738
Mortgage-backed securities                 - -          - -          2,997        3,013
                                        ------       ------         ------       ------
    Total                              $ 1,376      $ 1,376        $53,986      $53,696
</TABLE>

Securities  carried at approximately  $11,401 at December 31, 2000 and $14,385
at December  31, 1999 were  pledged to secure  public  deposits  and for other
purposes required or permitted by law.

NOTE 5 - LOANS

Loans at December 31 consist of the following:
<TABLE>
                                                         2000            1999
                                                       --------        --------
<S>                                                   <C>             <C>
Commercial and agricultural                           $  68,827       $  56,198
Real estate:
   Construction                                           6,118           3,325
   Residential 1-4 family                                31,611          29,526
   Multi-family                                           3,495           6,847
   Commercial                                            59,236          50,448
   Farmland                                               1,992           2,084
Consumer                                                  5,889           4,236

</TABLE>
                                                       $177,168         $152,664
(continued)
                                      F-12


<PAGE>
Notes to Consolidated Financial Statements
--------------------------------------------------------------------------------
Pacific Financial Corporation and Subsidiary
December 31, 2000 and 1999

NOTE 5 - LOANS (CONCLUDED)

Changes in the  allowance  for credit  losses for the years ended  December 31
are as follows:

                                              2000         1999          1998
                                             ------       ------        ------
Balance at beginning of year                 $1,930       $1,864        $1,937
Provision for credit losses                     635           60           110

Charge-offs                                    (568)        (134)         (221)
Recoveries                                       29          140            38
   Net (charge-offs) recoveries                (539)           6          (183)
                                             ------       ------        ------
   Balance at end of year                    $2,026       $1,930        $1,864

Following is a summary of information pertaining to impaired loans:

                                              2000         1999          1998
                                             ------       ------        ------
December 31
   Impaired loans without a
     valuation allowance                     $2,014       $  175        $   15
   Impaired loans with a
     valuation allowance                      1,114          - -           - -

   Total impaired loans                      $3,128       $  175        $   15

   Valuation allowance related
     to impaired loans                       $  412       $  - -        $  - -

Years Ended December 31
   Average investment in
     impaired loans                          $3,425       $   59        $  552
   Interest income recognized
     on a cash basis on impaired loans           31           11           - -

At December 31, 2000,  there were no  commitments  to lend  additional  funds to
borrowers  whose loans have been  modified.  Loans 90 days and over past due and
still  accruing  interest  totaled  $292 and $140 at December 31, 2000 and 1999,
respectively.

Certain related parties of the Bank, principally directors and their associates,
were loan customers of the Bank in the ordinary  course of business  during 2000
and 1999. Total loans  outstanding at December 31, 2000 and 1999 to key officers
and directors  were $2,581 and $1,882,  respectively.  During 2000, new loans of
$2,154 were made, and repayments totaled $1,455.



                                      F-13
<PAGE>
Notes to Consolidated Financial Statements
--------------------------------------------------------------------------------
Pacific Financial Corporation and Subsidiary
December 31, 2000 and 1999

NOTE 6 - PREMISES AND EQUIPMENT

The components of premises and equipment at December 31 are as follows:

                                                     2000               1999
                                                    ------             ------
Land                                                $1,125            $   712
Premises                                             3,733              3,662
Equipment, furniture and fixtures                    4,297              3,609
                                                     9,155              7,983
Less accumulated depreciation                        5,033              4,473
                                                    ------             ------
   Total premises and equipment                     $4,122             $3,510

The  Company had a  three-year  lease for the  property  on which the  Montesano
Branch is located.  The lease  agreement  contained  an option to  purchase  the
property at any time prior to the  expiration  of the lease for 16,500 shares of
the Company's stock. The purchase  option was exercised in 2000.  Rental expense
under  this  lease was $5,  $12 and $12 for 2000,  1999 and 1998,  respectively,
which is included in occupancy expenses.


NOTE 7 - DEPOSITS

The aggregate  amount of  certificates of deposit with balances in excess of one
hundred thousand dollars was  approximately  $30,662 and $19,513 at December 31,
2000 and 1999, respectively.

Scheduled  maturities of certificates of deposit are as follows for future years
ending December 31:

   2001                                                          $75,349
   2002                                                            4,261
   2003                                                            1,024
   2004                                                              127
   2005 and thereafter                                                97
                                                                  ------
                                                                 $80,858

NOTE 8 - SHORT-TERM BORROWINGS

Short-term  borrowings  generally  mature  within  one to four  days  from the
transaction date.  Information  concerning short-term borrowings is summarized
as follows for the years ended December 31:

                                                       2000               1999
                                                      ------             ------

Average balance during the year                      $ 9,036             $4,091
Average interest rate during the year                  6.39%              5.18%
Maximum month-end balance during the year            $11,358             $9,675
Balance outstanding at year-end                      $11,358             $9,675
Average interest rate at year-end                      6.39%               5.59%



                                      F-14


<PAGE>
Notes to Consolidated Financial Statements
--------------------------------------------------------------------------------
Pacific Financial Corporation and Subsidiary
December 31, 2000 and 1999


NOTE 9 - INCOME TAXES

Income taxes are comprised of the following for the years ended December 31:

                                             2000          1999          1998
                                            ------        ------        ------
Current                                     $1,505        $1,726        $1,573
Deferred (benefit)                             (81)          (34)           17
                                            ------        ------        ------
   Total income taxes                       $1,424        $1,692        $1,590

The tax  effects  of  temporary  differences  that  give  rise to  significant
portions of deferred tax assets and liabilities at December 31 are:

                                                           2000         1999
                                                          ------       ------
Deferred Tax Assets
   Allowance for credit losses                            $  597       $  530
   Deferred compensation                                     247          243
   Unrealized loss on securities available for sale           98          494
   Other                                                     164          - -
                                                          ------       ------
   Total deferred tax assets                               1,106        1,267

Deferred Tax liabilities
   Depreciation                                               37           50
   Deferred revenue                                          933          766
                                                          ------       ------
   Total deferred tax liabilities                            970          816

   Net deferred tax assets                                $  136       $  451

The following is a reconciliation  between the statutory and effective federal
income tax rate for the years ended December 31:
<TABLE>
                           2000                    1999                  1998
                          ------------------      -----------------     ------------------
                                     Percent                Percent                Percent
                                     of Pre-tax             of Pre-tax             of Pre-tax
                          Amount     Income        Amount   Income       Amount    Income

Income tax at
<S>                       <C>          <C>         <C>          <C>      <C>        <C>
  statutory rate          $1,607       34.0%       $1,909       34.0%    $1,899     34.0%
Adjustments resulting
  from:
   Tax-exempt income        (236)      (5.0)         (261)      (4.6)      (251)    (4.5)
   Net earnings on
    life insurance policies  (36)       (.7)          (35)       (.6)       (28)     (.5)
   Non-deductible
    merger costs             - -        - -           106        1.9        - -      - -
   Other                      89        1.9           (27)       (.6)       (30)     (.5)
                           -----      -----        ------       -----     -----     -----
   Total income
    tax expense           $1,424      30.2%        $1,692       30.1%    $1,590     28.5%

</TABLE>

                                      F-15
<PAGE>
Notes to Consolidated Financial Statements
--------------------------------------------------------------------------------
Pacific Financial Corporation and Subsidiary
December 31, 2000 and 1999


NOTE 10 - EMPLOYEE BENEFITS

INCENTIVE COMPENSATION PLAN

The Bank has a plan that provides incentive compensation to key employees if the
Bank meets certain performance  criteria  established by the Board of Directors.
The  cost of this  plan  was  $490,  $622  and  $599 in  2000,  1999  and  1998,
respectively.

401(K) PLANS

The Bank has  established a 401(k) profit  sharing plan for those  employees who
meet the eligibility  requirements set forth in the plan. Eligible employees may
contribute up to 15% of their compensation.  Matching  contributions by the Bank
are at the discretion of the Board of Directors.  Contributions totaled $94, $95
and $90 for 2000, 1999 and 1998, respectively.

DIRECTOR AND EMPLOYEE DEFERRED COMPENSATION PLANS

The Bank has director and employee deferred  compensation plans. Under the terms
of the plans, a director or employee may participate upon approval by the Board.
The  participant  may  then  elect  to defer a  portion  of his or her  earnings
(directors  fees or salary) as  designated  at the  beginning of each plan year.
Payments begin upon retirement, termination, death or permanent disability, sale
of the Bank, the ten-year anniversary of the participants participation date, or
at the  discretion  of the Bank.  There are currently  two  participants  in the
plans.  Total  deferrals plus earnings were $297,  $327 and $132 at December 31,
2000, 1999 and 1998, respectively.

In 1997,  the Board of Bank of the  Pacific  adopted two  deferred  compensation
plans for directors -- one plan  providing  retirement  income  benefits for all
directors  and the other,  a deferred  compensation  plan,  covering  only those
directors  who have chosen to  participate  in the plan. At the time of adopting
these plans, Bank of the Pacific purchased life insurance  policies on directors
participating  in both plans  which may be used to fund  payments  to them under
these plans.  Cash surrender  values on these policies were $2,435 and $2,330 at
December  31,  2000 and 1999,  respectively.  In 2000,  1999 and  1998,  the net
(benefit)/cost recorded from these plans, including the cost of the related life
insurance,  was $30, ($3) and $15, respectively.  Both of these plans were fully
funded and frozen as of September 30, 2000. Plan  participants  will be paid out
starting in 2001.

QUALIFIED NON-CONTRIBUTORY DEFINED BENEFIT PLAN

The  Bank   maintained  a   non-contributory   defined   benefit  plan  covering
substantially all employees of the former Bank of the Pacific,  which was frozen
and terminated on December 31, 2000. The Bank made annual  contributions  to the
plan equal to the amount  accrued for pension  expenses,  which were invested in
shares of registered  investment  companies.  Contributions  of $312, $33 and $2
were made in 2000, 1999 and 1998, respectively.

NON-QUALIFIED DEFERRED COMPENSATION PLAN

The Bank has a  non-qualified  deferred  compensation  plan to cover  selected
employees.  Its annual  contributions  to the plan totaled $22, $19 and $18 in
2000, 1999 and 1998,  respectively.  Covered  employees may also contribute to
the plan.  The plan was terminated in early 2001.

                                      F-16


<PAGE>
Notes to Consolidated Financial Statements
--------------------------------------------------------------------------------
Pacific Financial Corporation and Subsidiary
December 31, 2000 and 1999


NOTE 11 - COMMITMENTS AND CONTINGENCIES

The Bank is party to financial  instruments with  off-balance-sheet  risk in the
normal course of business to meet the financing needs of their customers.  These
financial  instruments  include commitments to extend credit and standby letters
of credit, and involve, to varying degrees, elements of credit risk in excess of
the amount recognized in the balance sheets.

The Banks  exposure to credit loss in the event of  nonperformance  by the other
party to the financial  instrument for  commitments to extend credit and standby
letters of credit is represented by the contractual amount of those instruments.
The Bank uses the same credit  policies in making  commitments  and  conditional
obligations as they do for on-balance-sheet  instruments. A summary of the Banks
commitments at December 31 is as follows:

                                                         2000             1999
                                                        ------           ------
Commitments to extend credit                           $14,473          $18,573
Standby letters of credit                                1,763            1,795

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.  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
Banks  experience has been that  approximately  67% of loan commitments is drawn
upon by customers.  The Bank  evaluates  each  customers  creditworthiness  on a
case-by-case  basis. The amount of collateral  obtained,  if deemed necessary by
the Bank upon extension of credit, is based on managements  credit evaluation of
the  party.  Collateral  held  varies,  but  may  include  accounts  receivable,
inventory, property and equipment, residential real estate, and income-producing
commercial properties.

Standby  letters of credit  are  conditional  commitments  issued by the Bank to
guarantee the performance of a customer to a third party.  Those  guarantees are
primarily  issued to support  public and  private  borrowing  arrangements.  The
credit risk  involved in issuing  letters of credit is  essentially  the same as
that involved in extending loan facilities to customers.  Collateral held varies
as specified above, and is required in instances where the Bank deems necessary.

Certain executive officers have entered into employment  contracts with the Bank
which provide for contingent payments subject to future events.

The Bank has agreements  with  commercial  banks for lines of credit  totaling
$5,600,  none of which was used at December  31, 2000.  In addition,  the Bank
has a credit  line with the  Federal  Home Loan Bank  totaling  10% of assets,
$11,175  of  which  was used at  December  31,  2000.  These  borrowings  were
collateralized under blanket pledge agreements.

Because  of the  nature of its  activities,  the  Company  is subject to various
pending and  threatened  legal  actions  which arise in the  ordinary  course of
business.  In the opinion of management,  liabilities arising from these claims,
if any,  will  not have a  material  effect  on the  financial  position  of the
Company.

                                      F-17


<PAGE>
Notes to Consolidated Financial Statements
--------------------------------------------------------------------------------
Pacific Financial Corporation and Subsidiary
December 31, 2000 and 1999


NOTE 12 - SIGNIFICANT CONCENTRATIONS OF CREDIT RISK

Most of the Banks business activity is with customers and governmental  entities
located in the State of Washington, including investments in state and municipal
securities. Loans are generally limited by federal and state banking regulations
to  20%  of  the  Banks  shareholders   equity,   excluding   accumulated  other
comprehensive income (loss). Standby letters of credit were granted primarily to
commercial  borrowers.  The Bank,  as a matter of practice,  generally  does not
extend  credit to any  single  borrower  or group of  borrowers  in excess of $4
million.


NOTE 13 - STOCK OPTIONS

At December 31, 2000, the Company has three stock-based  option plans, which are
described   below.   The  Company   applies  APB  Opinion  No.  25  and  related
interpretations in accounting for these plans. Accordingly, no compensation cost
has been recognized for the plans. Had compensation cost for the Company's stock
option  plans been  determined  based on the fair  value at the grant  dates for
awards  granted since December 31, 1994 under these plans,  consistent  with the
method of SFAS No. 123,  the  Company's net income and  earnings per share would
have been reduced to these pro forma amounts:

                                              2000          1999        1998
                                             ------        ------      ------
Net income:
   As reported                               $3,303        $3,922      $3,994
   Pro forma                                  3,268         3,914       3,988

Earnings per share:
   Basic:
     As reported                              $1.33        $ 1.60      $ 1.64
     Pro forma                                 1.32          1.60        1.64
   Diluted:
     As reported                               1.32          1.59        1.61
     Pro forma                                 1.30          1.58        1.61

The Company's three incentive  stock option plans provide for granting incentive
stock options,  as defined under current tax laws, to key  personnel.  Under the
first  plan,  options  are  exercisable  90 days from the date of  grant.  These
options  terminate if not exercised  within ten years from the date of grant. If
after six years from the date of grant fewer than 20% of the  options  have been
exercised,  they will expire at a rate of 20%  annually.  Under the second plan,
the options are  exercisable  one year from the date of grant,  at a rate of 10%
annually.  Options terminate if not exercised when they become available.  Under
the third plan, options become exercisable four years from the grant date. These
options  terminate if not exercised  between the sixth and the tenth years. Upon
reaching the sixth year from the date of grant,  if less than 20% of the options
have been  exercised,  at least 20% of the options must be  exercised  within 90
days,  and 20% of the options must be exercised  every  anniversary  thereafter.
Under the plans,  the Company may grant up to 25,000  shares of its common stock
to certain key employees.

(continued)
                                      F-18
<PAGE>
Notes to Consolidated Financial Statements
--------------------------------------------------------------------------------
Pacific Financial Corporation and Subsidiary
December 31, 2000 and 1999


NOTE 13 - STOCK OPTION PLANS (CONCLUDED)

The fair  value of each  option  granted  in 1999 was  estimated  on the date of
grant,  based on the Black-Scholes  option pricing model and using the following
weighted-average assumptions.

Dividend yield                                                          4.63%
Expected life                                                           10 years
Risk-free interest rate                                                 6.6%

The weighted average fair value of options granted during 1999 was $2.87.

A summary of the status of the  Company's  stock option plans as of December 31,
2000,  1999 and 1998,  and changes  during the years ending on those  dates,  is
presented below:
<TABLE>
                            2000                  1999                1998
                                      Weighted            Weighted            Weighted
                                      Average             Average             Average
                                      Exercise            Exercise            Exercise
                           Shares     Price      Shares   Price      Shares   Price
                           ------     --------   ------   --------   ------   --------
Outstanding at beginning
<S>                        <C>         <C>       <C>      <C>        <C>      <C>
   of year                 78,550      $18.13    93,550   $13.14     101,940  $13.02
Granted                       - -         - -    25,000    27.00         - -     - -
Exercised                  (2,750)      12.00   (40,000)   12.00      (8,390)  11.62
Forfeited                  (1,250)      27.00       - -      - -         - -     - -
                           ------      ------    ------    -----     -------   -----
Outstanding at end
   of year                 74,550       18.21    78,550    18.13      93,550   13.14

Exercisable at
   end of year             34,030                13,390                 - -
</TABLE>

The following information summarizes information about stock options outstanding
and exercisable at December 31, 2000:

                                                  Weighted
                                                  Average
                                                  Remaining
              Exercise        Number              Contractual        Number
              Price           Outstanding         Life (Years)       Exercisable
              --------        -----------         ------------       -----------

             $12.00              4,750                4                 4,750
              13.00              7,500                5                17,500
              14.40              5,000                6                   - -
              15.29             23,550                6                11,780
              27.00             23,750                9                   - -


                                      F-19

<PAGE>
Notes to Consolidated Financial Statements
--------------------------------------------------------------------------------
Pacific Financial Corporation and Subsidiary
December 31, 2000 and 1999


NOTE 14 - STOCK TRANSACTIONS

In June  2000,  the Board of  Directors  effected  a  5-for-1  stock  split.  In
addition,  stockholders  approved an increase in the number of authorized common
shares from 1,000,000 to 25,000,000.

Per share  information  for the current and prior  periods has been  adjusted to
reflect the effect of the stock split.


NOTE 15 - REGULATORY MATTERS

The Company 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 Companys  financial  statements.  Under capital  adequacy
guidelines on the regulatory  framework for prompt corrective  action,  the Bank
must  meet  specific  capital  adequacy  guidelines  that  involve  quantitative
measures of the Banks assets, liabilities and certain off-balance-sheet items as
calculated   under   regulatory   accounting   practices.   The  Banks   capital
classification is also subject to qualitative  judgments by the regulators about
components, risk weightings and other factors.

Quantitative  measures  established  by  regulation to ensure  capital  adequacy
require the Company  and the Bank to  maintain  minimum  amounts and ratios (set
forth in the table below) of Tier 1 capital (as defined in the  regulations)  to
total  average  assets  (as  defined),  and  minimum  ratios of Tier 1 and total
capital (as defined) to risk-weighted assets (as defined).

As of December 31, 2000, the most recent  notification  from the Banks regulator
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 1 risk-based, and Tier 1 leverage ratios
as set  forth in the  table.  There  are no  conditions  or  events  since  that
notification that management believes have changed the institutions category.

The Company and the Banks actual  capital  amounts and ratios are also presented
in the table.  Management believes,  as of December 31, 2000, the Bank meets all
capital requirements to which they are subject.

<TABLE>
                                                                         To be  Well Capitalized
                                                                         Under Prompt
                                                  Capital Adequacy       Corrective Action
                                 Actual           Purposes               Provisions
                                 Amount   Ratio   Amount      Ratio      Amount          Ratio
                                 ------   -----   ------      -----      ----------      -----
December 31, 2000
   Tier 1 capital
    (to average assets):
<S>                             <C>       <C>     <C>          <C>         <C>            <C>
     Consolidated               $22,934   9.19%   $  9,986     4.00%       N/A            N/A
     Bank                        22,895   9.17       9,986     4.00        $12,482        5.00%
   Tier 1 capital
    (to risk-weighted assets):
     Consolidated                22,934  12.05       7,613     4.00        N/A            N/A
     Bank                        22,895  12.35       7,413     4.00         11,120        6.00
   Total capital
    (to risk-weighted assets):
     Consolidated                24,960  13.11      15,226     8.00        N/A            N/A
     Bank                        24,921  13.45      14,827     8.00         18,533       10.00
</TABLE>

(continued)
                                      F-20

<PAGE>
Notes to Consolidated Financial Statements
--------------------------------------------------------------------------------
Pacific Financial Corporation and Subsidiary
December 31, 2000 and 1999


NOTE 15 - REGULATORY MATTERS (CONCLUDED)
<TABLE>
                                                                         To be  Well Capitalized
                                                                         Under Prompt
                                                  Capital Adequacy       Corrective Action
                                 Actual           Purposes               Provisions
                                 Amount   Ratio   Amount      Ratio      Amount          Ratio
                                 ------   -----   ------      -----      ----------      -----
December 31, 1999
   Tier 1 capital
   (to average assets):
<S>                             <C>       <C>     <C>          <C>
     Consolidated               $22,390   9.28%   $  9,646     4.00%       N/A            N/A
     Bank                        22,304   9.25       9,644     4.00        $12,055        5.00%
   Tier 1 capital
   (to risk-weighted assets):
     Consolidated                22,390  12.93       6,929     4.00        N/A            N/A
     Bank                        22,304  12.88       6,929     4.00        10,393         6.00
   Total capital
   (to risk-weighted assets):
     Consolidated                24,320  14.04      13,857     8.00        N/A            N/A
     Bank                        24,234  13.99      13,857     8.00        17,322       10.00
</TABLE>

Restrictions on Retained Earnings

The Bank is  restricted  from paying  dividends to the Company in an amount that
would violate the most restrictive  capital requirement shown above. At December
31, 2000, there were no regulatory  dividend  restrictions on the Banks retained
earnings.


NOTE 16 - FAIR VALUES OF FINANCIAL INSTRUMENTS

The estimated fair values of the Companys  financial  instruments at December 31
are as follows:
<TABLE>
                                          2000                        1999
                                          -----------------           -----------------
                                          Carrying     Fair           Carrying     Fair
                                          Amount       Value          Amount       Value

Financial Assets
   Cash and due from banks,
     interest-bearing deposits with
<S>                                       <C>         <C>            <C>         <C>
     banks, and federal funds sold        $  9,669    $ 9,669        $  14,824   $ 14,824
   Securities available for sale            57,258     57,258           65,625     65,625
   Securities held to maturity               1,376      1,376            1,615      1,615
   Loans receivable                        175,142    175,375          150,734    149,368

Financial Liabilities
   Deposits                               $213,511   $213,682        $ 206,139   $206,156
   Short-term borrowings                    11,358     11,358            9,675      9,675
</TABLE>
                                      F-21

<PAGE>
Notes to Consolidated Financial Statements
--------------------------------------------------------------------------------
Pacific Financial Corporation and Subsidiary
December 31, 2000 and 1999

NOTE 17 - EARNINGS PER SHARE DISCLOSURES

Following is information regarding the calculation of basic and diluted earnings
per share for the years indicated.
<TABLE>
                                           Net Income     Shares            Per Share
                                           (Numerator)    (Denominator)     Amount
                                           ----------     ------------      ---------
Year Ended December 31, 2000
   Basic earnings per share:
<S>                                           <C>           <C>                <C>
     Net income                               $3,303        2,492,326          $1.33
   Effect of dilutive securities:
     Options                                     - -           23,507           (.01)
   Diluted earnings per share:
     Net income                               $3,303        2,515,833          $1.32

Year Ended December 31, 1999
   Basic earnings per share:
     Net income                               $3,922        2,447,729          $1.60
   Effect of dilutive securities:
     Options                                     - -           23,783           (.01)
   Diluted earnings per share:
     Net income                               $3,922        2,471,512          $1.59

Year Ended December 31, 1998
   Basic earnings per share:
     Net income                               $3,994        2,437,914          $1.64
   Effect of dilutive securities:
     Options                                     - -           38,978           (.03)
   Diluted earnings per share:
     Net income                               $3,994        2,476,892          $1.61
</TABLE>

The number of shares  shown for options is the number of  incrementional  shares
that would  result  from the  exercise  of options  and use of the  proceeds  to
repurchase shares at the average market price during the year.


                                      F-22

<PAGE>
Notes to Consolidated Financial Statements
--------------------------------------------------------------------------------
Pacific Financial Corporation and Subsidiary
December 31, 2000 and 1999


NOTE 18 - CONDENSED FINANCIAL INFORMATION - PARENT COMPANY ONLY

Condensed Balance Sheets - December 31

                                                           2000         1999
                                                          ------       ------
Assets
   Cash                                                  $    66      $  1,751
   Investment in the Bank                                 22,703        21,352
   Due from the Bank                                       3,200         1,406
   Federal income tax receivable                             - -            34

   Total assets                                          $25,969      $ 24,543


Liabilities and Shareholders Equity
   Dividends payable                                     $ 3,204      $  3,105
   Federal income tax payable                                 22           - -
   Shareholders equity                                    22,743        21,438

   Total liabilities and shareholders equity             $25,969       $24,543


Condensed Statements of Income - Years Ended December 31

                                                2000         1999        1998
                                               ------       ------      ------
Dividend income from the Bank                  $3,275       $3,010      $2,450

Expenses                                         (151)        (377)        (81)

Equity in undistributed income of subsidiary      179        1,289       1,625

   Net income                                  $3,303       $3,922      $3,994

(continued)

                                      F-23

<PAGE>
Notes to Consolidated Financial Statements
--------------------------------------------------------------------------------
Pacific Financial Corporation and Subsidiary
December 31, 2000 and 1999

NOTE 18 - CONDENSED FINANCIAL INFORMATION - PARENT COMPANY ONLY (CONCLUDED)

Condensed Statements of Cash Flows - Years Ended December 31
<TABLE>
                                                    2000          1999       1998
                                                   ------        ------     ------
Operating Activities
<S>                                                <C>           <C>        <C>
   Net income                                      $3,303        $3,922     $3,994
   Adjustments to reconcile net income to
     net cash provided by operating activities:
       Equity in undistributed income of subsidiary  (179)       (1,289)    (1,625)
       Other - net                                     57            20        (62)
                                                    -----         -----      -----
   Net cash provided by operating activities        3,181         2,653      2,307

Investing Activities
   Investment in subsidiary                           - -           - -        (90)
   Increase in due from the Bank                   (1,794)          - -        - -
                                                    -----         -----      -----
   Net cash used in investing activities           (1,794)          - -        (90)

Financing Activities
   Net proceeds from exercise of
   stock options and bonuses                           33           480         99
   Dividends paid                                  (3,105)       (2,379)    (2,118)
   Repurchase of common stock                         - -           (24)       - -
   Net cash used in financing activities           (3,072)       (1,923)    (2,019)
                                                    -----         -----      -----
   Net increase (decrease) in cash                 (1,685)          730        198

Cash
   Beginning of year                                1,751         1,021        823
                                                    -----         -----      -----
   End of year                                  $      66        $1,751     $1,021
</TABLE>

                                      F-24

<PAGE>

Consolidated Average Balances and Net Interest Income
------------------------------------------------------------------------------
(Dollars in Thousands)

Pacific Financial Corporation
Years Ended December 31, 2000, 1999 and 1998
<TABLE>
                               2000                               1999                                1998
                             -------------------------------    -------------------------------     --------------------------------
                                        Interest                           Interest                            Interest
                               Average  Income     Average      Average    Income     Average       Average    Income       Average
                               Balance  (Expense)  Rate         Balance    (Expense)  Rate          Balance    (Expense)    Rate

Assets
   Earning assets:
<S>                            <C>      <C>          <C>        <C>          <C>        <C>
     Loans                     $165,834  $16,500*     9.95%      $147,689   $14,129*   9.57%        $145,493    $14,427*      9.92%
     Investment securities:
       Taxable                   49,307    2,812      5.70         51,439     2,987    5.81           31,587      1,925       6.09
       Tax-exempt                13,187    1,344*    10.19         14,333     1,114*   7.77           14,994      1,172*      7.82
                               --------  -------     -----       --------   -------    ----          -------
   Total investment securities   62,494    4,156      6.65         65,772     4,101    6.24           46,581      3,097       6.65
     Federal funds sold and
       deposits in banks          2,258      148      6.55         10,476       570    5.44           14,760        877       5.94
                               --------  -------     -----       --------   -------    ----          -------      ------      -----
   Total earning assets/
       interest income          230,586   20,804      9.02%       223,937    18,800    8.40%         206,834     18,401       8.90%

   Cash and due from banks        8,784                             8,599                              6,511     (3,207)      3.11%
   Premises and equipment (net)   3,728                             3,596                              3,786     (3,379)      5.48
   Other assets                   5,447                             5,303                              6,555     (6,586)      4.00
   Allowance for credit losses   (1,997)                           (1,922)                            (1,863)      (266)      5.90%
                                -------                           -------                            -------     ------       -----
   Total assets                $246,548                          $239,513                           $221,823                  4.05%

Liabilities and Shareholders Equity
   Interest bearing liabilities:
     Deposits:
       Savings and interest-bearing
         demand                $109,266   (4,483)     4.10%      $112,452    (3,435)   3.05%        $103,163
       Time                      68,516   (3,537)     5.16         65,524    (3,277)   5.00           61,657
                               --------   -------     -----       --------   -------   ----
   Total deposits               177,782   (8,020)     4.51        177,976    (6,712)   3.77          164,820
     Other borrowings             8,876     (577)     6.50          4,091      (212)   5.18            4,505
                               --------   -------     -----       --------   -------   ----
   Total interest-bearing
     liabilities/
     interest expense           186,658   (8,597)     4.61%       182,067    (6,924)   3.80%         169,325

   Demand deposits               34,343                            32,921                             28,707
   Other liabilities              3,457                             1,804                              2,287
   Shareholders equity           22,090                            22,721                             21,504
                                -------                           -------                           --------
   Total liabilities and
   shareholders equity         $246,548                          $239,513                           $221,823

   Net interest income          $12,207                           $11,876                                        11,549

Net Interest Income as a Percentage
  of Average Earning Assets
   Interest income                                    9.02%                            8.40%                                  8.90%
   Interest expense                                   3.73                             3.10                                   3.31
                                                      -----                            -----                                  -----
   Net interest income                                5.29%                            5.30%                                  5.59%

</TABLE>

*  Tax equivalent basis
                                      F-25