UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549
                                    FORM 10-K
/X/ Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act
    of 1934
                 For the fiscal year ended December 31, 2003; 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. [ ]

Indicate  by check mark  whether  the  Registrant  is an  accelerated  filer (as
defined by Exchange Act Rule 12b-2). Yes [ ] No [X ]

The  aggregate  market value of the common stock held by  non-affiliates  of the
registrant at June 30, 2003 was $59,176,189.

The number of shares  outstanding of the  registrant's  common stock,  $1.00 par
value as of February 29, 2004, was 3,159,712 shares.

                      DOCUMENTS INCORPORATED BY REFERENCE

Portions of the registrant's Proxy Statement filed in connection with its annual
meeting of shareholders to be held April 28, 2004 are  incorporated by reference
into Part III of this Form 10-K.

                                      -1-

<PAGE>


                          PACIFIC FINANCIAL CORPORATION
                 ANNUAL REPORT ON FORM 10-K FOR THE FISCAL YEAR
                             ENDED DECEMBER 31, 2003

                                TABLE OF CONTENTS
PART I                                                                      Page


     Item  1.    Business                                                     4

     Item  2.    Properties                                                   14

     Item  3.    Legal Proceedings                                            14

     Item  4.    Submission of Matters to a Vote of Security Holders          14

PART II
     Item  5.    Market for Registrant's Common Equity and Related
                 Stockholder Matters                                          14

     Item  6.    Selected Financial Data                                      15

     Item  7.    Management's Discussion and Analysis of Financial
                 Condition and Results of Operations                          16

     Item  7A.   Quantitative and Qualitative Disclosures About Market Risk   31

     Item  8.    Financial Statements and Supplementary Data                  33

     Item  9.    Changes in and Disagreements with Accountants on Accounting
                 and Financial Disclosure                                     33

     Item  9A.   Controls and Procedures                                      33

PART III
     Item  10.   Directors and Executive Officers of the Registrant           33

     Item  11.   Executive Compensation                                       34

     Item  12.   Security Ownership of Certain Beneficial Owners and
                 Management And Related Stockholder Matters                   34

     Item  13.   Certain Relationships and Related Transactions               34

     Item  14.   Principal Accountant Fees and Services                       34

PART IV
     Item  15.   Exhibits, Financial Statement Schedules, and Reports on
                 Form 8-K                                                     35

SIGNATURES                                                                    36

                                      -2-

<PAGE>

                                     PART I

Forward Looking Information

This document contains forward-looking  statements that are subject to risks and
uncertainties.  These statements are based on the beliefs and assumptions of our
management,  and on  information  currently  available to them.  Forward-looking
statements  include the  information  concerning our possible  future results of
operations  set forth under  "Management's  Discussion and Analysis of Financial
Condition and Results of Operations" and statements  preceded by, followed by or
that include the words "believes," "expects," "anticipates," "intends," "plans,"
"estimates" or similar expressions.

      Any  forward-looking  statements  in this  document  are  subject to risks
relating to, among other things, the following:

            1. competitive   pressures  among  depository  and  other  financial
      institutions  that may impede our ability to attract and retain borrowers,
      depositors and other customers,  retain our key employees, and/or maintain
      our interest margins and fee income;

            2. changes in the interest rate  environment that may reduce margins
      and demand for our products and services;

            3. our proposed acquisition of BNW Bancorp Inc. that may be dilutive
      to  earnings  per share if we do not  realize  expected  cost  savings  or
      successfully integrate BNW Bancorp into the Company in a timely manner and
      without significant customer or employee disruptions or losses;

            4. our  growth  strategy,   particularly  if  accomplished   through
      acquisitions,  which may not be successful if we fail to accurately assess
      market  opportunities,   asset  quality,  anticipated  cost  savings,  and
      transaction  costs,  or  experience   significant  difficulty  integrating
      acquired businesses or assets or opening new branches or similar offices;

            5. general economic or business conditions,  either nationally or in
      the state or regions in which we do business,  that may be less  favorable
      than expected, resulting in, among other things, a deterioration in credit
      quality,  including as a result of lower prices in the real estate market,
      or a reduced demand for credit;

            6. decreases in real estate  prices that may reduce the value of our
      security for some loans; and

            7. a lack of  liquidity  in the market for our common stock that may
      make it difficult or impossible  for you to liquidate  your  investment in
      our stock or lead to distortions in the market price of our stock.

      Our management  believes the  forward-looking  statements are  reasonable;
however, you should not place undue reliance on them. Forward-looking statements
are not  guarantees  of  performance.  They  involve  risks,  uncertainties  and
assumptions.  Many of the factors  that will  determine  our future  results and
share  value are beyond our  ability to control  or  predict.  We  undertake  no
obligation to update forward-looking statements.

                                      -3-

<PAGE>

ITEM 1.  Business

Pacific  Financial  Corporation (the Company or Pacific) is a financial  holding
company headquartered in Aberdeen,  Washington.  The Company owns one bank, Bank
of the  Pacific  (sometimes  referred  to as the  Bank),  which  is  located  in
Washington.  The  Company  conducts  its  banking  business  through 10 branches
located in communities  throughout  Grays Harbor  County,  Pacific  County,  and
Wahkiakum  County in  Southwest  Washington.  The Company  also  operates a loan
production  office in Gearhart,  OR. At December 31, 2003, the Company had total
consolidated  assets of $306.7  million,  loans of $199.7  million,  deposits of
$260.8 million and total shareholders'  equity of $25.6 million. The Company was
incorporated  in the State of  Washington  on February 12,  1997,  pursuant to a
holding company  reorganization  of the Bank.  Although a reporting company with
the Securities and Exchange  Commission (SEC), the Company's stock is not listed
on any exchange or quoted actively on any stock market.

Effective  February 27,  2004,  the Company  completed  the  acquisition  of BNW
Bancorp,  Inc. (BNW) in a merger in which each share of BNW common stock held by
BNW  shareholders was converted into the right to receive 0.85 shares of Pacific
common  stock,  resulting  in the issuance of 636,673  shares of Pacific  stock.
Simultaneous  with  the  merger  of BNW  into  Pacific,  BNW's  subsidiary  Bank
NorthWest was merged into Bank of the Pacific.  The merger will be accounted for
as a purchase transaction.

BNW, through its operating subsidiary Bank NorthWest, operated five locations in
Whatcom County, Washington, including its largest city, Bellingham,  Washington.
At December 31,  2003,  BNW had total assets of  approximately  $104.6  million,
total  loans  receivable  of  approximately  $94.1  million,  total  deposits of
approximately $88.6 million and total  shareholders'  equity of approximately $7
million.

The Company  does not  anticipate  significant  changes in products and services
offered to customers of Bank of the Pacific following the merger, but it will be
able to offer higher  lending limits to its  customers,  particularly  those who
were formerly BNW customers.

Pacific's  filings  with the SEC,  including  its  annual  report on Form  10-K,
quarterly  reports  on Form  10-Q,  periodic  current  reports  on Form  8-K and
amendments to these reports, are available free of charge through links from our
website    at    http://www.thebankofpacific.com    to   the   SEC's   site   at
http://www.sec.gov, as soon as reasonably practicable after filing with the SEC.
You may also access our filings  with the SEC directly  from the Edgar  database
found on the  SEC's  website.  By  making  reference  to our  website  above and
elsewhere in this report,  we do not intend to incorporate all information  from
our site into this report.

The Bank

Bank of the Pacific  was  organized  in 1978 and opened for  business in 1979 to
meet the need for a regional  community  bank with local  interests to serve the
small to medium-sized  local businesses and  professionals in the coastal region
of Western  Washington.  Services offered by the Bank include  commercial loans,
agriculture loans,  installment loans, real estate loans,  residential  mortgage
loans and personal and business deposit products.

The Bank  originates  loans  primarily in its local  markets.  Its  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.

                                      -4-

<PAGE>

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.

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 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 provides 24 hour online banking to its customers with access to account
balances and transaction  histories,  plus an electronic  check register to make
account  management  and  reconciliation  simple.  The online  banking system is
compatible with budgeting  software like Intuit's Quicken or Microsoft's  Money.
In addition,  the online banking system  includes the ability to transfer funds,
make loan payments,  reorder checks,  and request statement  reprints,  provides
loan  calculators  and  allows for e-mail  exchanges  with The Bank.  Also for a
nominal fee,  customers can request stop payments and pay an unlimited number of
bills online.  These services along with rate information and other  information
can be accessed through the Bank's website at http://www.thebankofpacific.com.

The Bank's  deposits are insured by the Federal  Deposit  Insurance  Corporation
(FDIC) up to applicable  legal limits under the Bank Insurance Fund. The Bank is
a member of the Federal Home Loan Bank (FHLB) and is regulated by the Washington
Department  of Financial  Institutions,  Division of Banks  (Division),  and the
FDIC.

Competition

Competition in the banking  industry is significant  and has  intensified as the
regulatory environment has grown more permissive. Banks face a growing number of
competitors  and greater degree of competition  with respect to the provision of
banking  services and the attracting of deposits.  The Company competes in Grays
Harbor County with well-established  thrifts which are headquartered in the area
along with branches of large banks and with  headquarters  outside the area. The
Company competes with well-established  small community banks, branches of large
banks,  thrifts and credit unions in Pacific and Wahkiakum Counties in the state
of  Washington  and Clatsop  County in the state of Oregon.  Other  non-bank and
non-depository  institutions can be expected to increase  competition further as
they offer bank type products.

As a result of its  acquisition of BNW in February  2004, the Company  entered a
new market in Whatcom County,  Washington,  including the Bellingham  area. This
market is very  competitive  and  includes  large  regional  and  super-regional
financial  institutions that do not have a significant presence in the Company's
historical  market areas.  The Company  believes its newest  territory  provides
opportunities  for expansion,  but in pursuing that expansion it expects to face
greater competitive challenges than it faces in its historical market area.

The  adoption  of the  Gramm-Leach-Bliley  Act of 1999 (the  Financial  Services
Modernization  Act)  eliminated  many  of  the  barriers  to  affiliation  among
providers  of  financial  services  and  further  opened  the  door to  business
combinations  involving  banks,  insurance  companies,  securities  or brokerage
firms, and others.  This regulatory  change has led to further  consolidation in
the  financial  services  industry and the  creation of financial  conglomerates
which frequently offer multiple financial services,  including deposit

                                      -5-

<PAGE>

services,  brokerage and others.  When combined with technological  developments
such as the  Internet  that have  reduced  barriers to entry faced by  companies
physically located outside the Company's market area, changes in the market have
resulted  in  increased  competition  and can be  expected  to result in further
increases in competition in the future.

Although  it cannot  guarantee  that it will  continue to do so, the Company has
been able to maintain a  competitive  advantage in its  historical  markets 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  Company's  directors,  management  believes the Company can
continue to compete effectively.

According to the Market Share Report  compiled by the FDIC, as of June 30, 2003,
the Company  held a deposit  market share of 26.9% in Pacific  County,  47.1% in
Wahkiakum County and 17.3% in Grays Harbor County.

Employees

As of December 31, 2003,  the Bank employed 95 full time  equivalent  employees.
The Bank  acquired 52  additional  employees in the merger with BNW completed in
February 2004. Management believes relations with its employees are good.

                           SUPERVISION AND REGULATION

The  following  is a general  description  of 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 or regulations,  may have in the
future.

                                   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 the Bank.

Bank Holding Company Regulation

In general,  the BHCA  limits a bank  holding  company to owning or  controlling
banks and engaging in other banking-related  activities.  Bank holding companies
must obtain  approval of the Federal  Reserve 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.

                                      -6-

<PAGE>

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 Federal
Reserve,  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 approval
of the Federal Reserve 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.

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.

Financial Services Modernization Act

On November 12, 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.  "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.

The law and related regulations also:

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

                                      -7-

<PAGE>

    * provided  an enhanced  framework  for  protecting  the privacy of consumer
      information; and

    * modified  the  laws   governing  the   implementation   of  the  Community
      Reinvestment Act.

The Company does not believe that the Financial  Services  Modernization Act has
had a material effect on its operations in the near-term. However, to the extent
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.

During  2000,  the  federal  banking  regulations  adopted  certain  privacy and
information security  requirements.  Adopted rules require,  among other things,
disclosure of privacy  policies to consumers and  implementation  of information
security  programs  designed to identify  and assess the risks that may threaten
customer  information.  In addition,  as part of each institution's  information
security, it must develop a written plan to manage and control risks to consumer
information,  and implement, test and adjust the plan on a continuing basis. The
Company believes that it is in compliance with the guidelines and that they will
not adversely affect its operations.

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 was effective on April 1, 2001. The regulation  requires
oral and written  disclosure  before the  completion of the sale of an insurance
product that such product:

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

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

    * involves certain investment risks, including the possible loss of value.

The  depository  institution  may not  condition  an  extension of credit on the
consumer's  purchase  of an  insurance  product or annuity  from the  depository
institution. The rule also addresses cross marketing and referral fees.

USA Patriot Act of 2001

On October 26, 2001, President Bush signed the Uniting and Strengthening America
by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism (USA
Patriot  Act) of 2001.  Among other  things,  the USA Patriot Act (1)  prohibits
banks from providing correspondent accounts directly to foreign shell banks; (2)
imposes due  diligence  requirements  on banks  opening or holding  accounts for
foreign  financial  institutions  or wealthy foreign  individuals;  (3) requires
financial institutions to establish an anti-money-laundering compliance program,
and (4)  eliminates  civil  liability for persons who file  suspicious  activity
reports.  The USA Patriot Act also increases  governmental powers to investigate
terrorism,   including  expanded  government  access  to  account  records.  The
Department  of the  Treasury  is  empowered  to  administer  and  make  rules to
implement  the act. We do not believe that  compliance  with the USA Patriot Act
has had a material effect on our business and operations.

                                      -8-

<PAGE>

Sarbanes-Oxley Act of 2002

The  Sarbanes-Oxley  Act of 2002 was  adopted  in  response  to public  concerns
regarding  corporate  accountability  in connection  with the recent  accounting
scandals at various large publicly traded companies. The stated goals of the act
are to increase corporate responsibility,  to provide for enhanced penalties for
accounting  and auditing  improprieties  at publicly  traded  companies,  and to
protect  investors  by  improving  the  accuracy  and  reliability  of corporate
disclosures  pursuant to the securities laws. The  Sarbanes-Oxley  Act generally
applies to all companies such as the Company that file periodic reports with the
SEC under the Securities Exchange Act of 1934, as amended (Exchange Act).

The  Sarbanes-Oxley  Act includes  additional  disclosure  requirements  and new
corporate  governance  rules, and has resulted in significant  rulemaking by the
SEC and the securities exchanges relating to corporate governance,  independence
of  board  members,  internal  control  over  financial  reporting,   disclosure
controls,  and other matters. Most rulemaking  initiatives were completed by the
close of 2003.  Sarbanes-Oxley  represents  significant  federal  involvement in
matters  traditionally left to state regulatory systems,  such as the regulation
of  the  accounting  profession,  and  to  state  corporate  law,  such  as  the
relationship  between a board of directors and management and between a board of
directors and its committees.

The  Sarbanes-Oxley  Act  addresses,   among  other  matters,  (1)  board  audit
committees;  (2)  certification  of Exchange Act reports by the chief  executive
officer and the chief financial officer;  (3) the forfeiture of bonuses or other
incentive-based  compensation  and securities  trading  profits by directors and
executive officers in the twelve-month  period following initial  publication of
any financial  statements  that later  require  restatement;  (4)  disclosure of
off-balance sheet transactions; (5) expedited reporting of stock transactions by
insiders;  (6) disclosure of whether an issuer has a code of ethics, and changes
or  waivers of such  code;  (7) the  formation  of a Public  Company  Accounting
Oversight Board; (8) auditor independence;  and (9) increased criminal penalties
for violations of securities laws.

We believe the  Sarbanes-Oxley  Act has resulted in  increases in our  reporting
expenses and audit and audit related costs; nonetheless,  we do not believe that
the Act has had or will  have a  material  adverse  effect on our  business  and
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.  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  to be on terms
substantially  the  same,  or at  least  as  favorable  to  the  institution  or
subsidiary, as those provided to a non-affiliate.  Regulation W, which collected
many existing  interpretations  of provisions of the Federal Reserve Act, became
effective in April 2003. The regulation  restricts  loans,  asset  purchases and
other transactions between a depository institution and its affiliated entities.

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  shareholders,  and  their  related
interests;  and (3) prohibits management personnel from serving as a director or
in other  management  positions  with another  financial

                                      -9-

<PAGE>

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.

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 an FDIC insured  state-chartered bank, is subject to regulation and
examination  by the FDIC and the  Department  of Financial  Institutions  of 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.

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.  In connection  with the FDIC's  assessment of the record of
financial   institutions   under  the  CRA,  it  assigns  a  rating  of  either,
"outstanding,"    "satisfactory,"    "needs   to   improve,"   or   "substantial
noncompliance"  following  an  examination.  The Bank  received  a CRA rating of
"outstanding" during its most recent examination.

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

                                      -10-

<PAGE>

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 or 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 administered by the FDIC. All insured
banks are required to pay semi-annual  deposit insurance premium  assessments to
the FDIC.

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 insurance  fund.
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.  The Bank  presently  qualifies  for the lowest
premium level.

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.

                                      -11-

<PAGE>

Under applicable  restrictions,  as of December 31, 2003, the Bank could declare
dividends totaling $4,579,000 without obtaining prior regulatory approval.

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. 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  had a 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.


                                      -12-

<PAGE>

ITEM 2.  Properties

The Company's  administrative offices are located in Aberdeen,  Washington.  The
building  located at 300 East Market  Street is owned by the Bank and houses the
main branch and the  administrative  and operations  offices of the Bank and the
Company.  The Bank completed  construction and occupied the building in December
of 1979.

Pacific  owns the land and  buildings  occupied  by its nine  branches  in Grays
Harbor,  Pacific  and  Wahkiakum  Counties,  as  well  as  its  data  processing
operations in Long Beach, Washington.  Four of the five branches acquired in the
merger with BNW operate in leased  facilities,  and the Everson,  WA branch land
and building is owned.

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, 2003.  The net book value of the  Company's  premises and equipment
was $3.9 million at that date.

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 business. Management believes that
there are no threatened or pending  proceedings  against the Company or the Bank
which, if determined adversely,  would have a material effect on its business or
financial condition.

In addition,  a lawsuit was filed in Wahkiakum County Superior Court against the
Bank, which seeks damages for soil contamination.  The subject property was sold
by the Bank to the plaintiff  several years ago.  Plaintiff now alleges that the
property was  contaminated  by petroleum  products  that seeped from an adjacent
parcel  owned by the Bank.  The adjacent  parcel had been a service  station and
garage  for  many  years  prior to its  acquisition  by the  Bank.  The Bank has
completed  remediation of the contaminated  soil. The levels of contamination of
the property  were  minimal.  Based on  information  known to management at this
time,  the  Company  does not  believe  that this  litigation  will  result in a
material  adverse  effect on the  Company's  results of  operations or financial
condition.

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
2003.




                                      -13-

<PAGE>

PART II

ITEM 5. Market for Registrant's Common Equity and Related Stockholder Matters

The  Company's  common  stock is not  listed  on any  exchange  or traded on the
over-the-counter  market,  and as of January 1, 2004, no broker made a market in
the stock.  Trading in our stock has been very limited, and 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  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>
<CAPTION>

                                           2003                                   2002
                   Shares Traded      High       Low    Shares Traded       High        Low
<S>                    <C>         <C>       <C>            <C>         <C>        <C>
First Quarter          5,887       $  27.00  $  24.75       7,399       $  25.00   $  23.50

Second Quarter        21,945       $  30.00  $  28.00       9,265       $  23.75   $  22.50

Third Quarter          4,110       $  31.00  $  30.00      36,554       $  24.50   $  21.50

Fourth Quarter         1,865       $  33.50  $  31.00      10,106       $  25.00   $  23.75

</TABLE>

As of December 31, 2003, there were  approximately 920 shareholders of record of
the Company's common stock.

The  Company's  Board of  Directors  declared  dividends  on its common stock in
December   2003  and  2002  in  the  amounts  per  share  of  $1.40  and  $1.35,
respectively.  The Board of  Directors  has adopted a dividend  policy  which is
reviewed  annually.  There can be no  assurance  the  Company  will  continue to
increase its dividend or declare and pay dividends at historical rates.

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.  Under  applicable
restrictions, as of December 31, 2003, the Bank could declare dividends totaling
$4,579,000 without obtaining prior regulatory approval.

                                      -14-

<PAGE>

ITEM 6.  Selected Financial Data

The following table sets forth certain selected  consolidated  financial data of
the Company at and for the years ended December 31:


<TABLE>
<CAPTION>
                                  2003      2002       2001       2000      1999
                               -------------------------------------------------
                                        ($ in thousands, except per share data)
Operations Data
<S>                          <C>        <C>        <C>        <C>        <C>
Net interest income          $  12,541  $  11,788  $  11,572  $  11,675  $  11,430
Provision for credit losses         --        954        580        635         60
Noninterest income               1,846      2,059      1,529      1,217      1,255
Noninterest expense              7,945      7,414      7,193      7,530      7,011
Provision for income taxes       1,863      1,563      1,521      1,424      1,692
Net income                       4,579      3,916      3,807      3,303      3,922
Net income per share:
Basic                             1.82       1.57       1.53       1.33       1.60(1)
Diluted                           1.79       1.56       1.52       1.31       1.59(1)

Dividends declared               3,530      3,392      3,289      3,204      3,105
Dividends declared per share      1.40       1.35       1.32       1.28       1.25(1)
Dividends paid ratio                77%        87%        86%        97%        79%
(1)   Restated to reflect the 5 for 1 stock split effected in July 2000.

Performance Ratios
Net interest margin               4.75%      5.05%      5.16%      5.14%      5.10%
Efficiency ratio                 55.22%     53.54%     54.90%     58.41%     55.27%
Return on average assets          1.61%      1.54%      1.55%      1.34%      1.64%
Return on average equity         17.10%     15.81%     15.57%     14.95%     17.26%

Balance Sheet Data
Total assets                 $ 306,715    268,534    243,617    253,313    242,189
Loans, net                     197,500    183,031    174,495    175,142    150,734
Total deposits                 260,800    225,254    214,644    213,511    206,139
Other borrowings                14,500     12,800         --     11,358      9,675
Shareholders' equity            25,650     24,683     23,514     22,743     21,438
Book value per share             10.17       9.82       9.44       9.09       8.63(1)
Equity to assets ratio            8.36%      9.19%      9.65%      8.98%      8.85%
(1)   Restated to reflect the 5 for 1 stock split effected in July 2000.

Asset Quality Ratios
Nonperforming loans to total loans .27%      1.00%      .71%       1.93%       .21%

Allowance for loan losses
  to total loans                  1.12%      1.33%      1.19%      1.14%      1.26%
Allowance for loan losses
  to nonperforming loans        411.40%    132.67%    168.18%     59.24%    612.69%
Nonperforming assets to
  total assets                     .18%       .69%       .51%      1.35%       .13%

</TABLE>


                                      -15-

<PAGE>

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

The following  discussion  should be read in conjunction with Pacific's  audited
consolidated  financial statements and related notes appearing elsewhere in this
report.  In  addition,  please  refer  to  Pacific's  forward-looking  statement
disclosure included on the first page of this report.

RESULTS OF OPERATIONS

Years ended December 31, 2003, 2002, and 2001

General.  The Company's  net income for 2003 was  $4,579,000,  a 16.9%  increase
compared to  $3,916,000  in 2002,  and an increase of 20.3% from  $3,807,000  in
2001. Basic earnings per share were $1.82,  $1.57, and $1.53 for 2003, 2002, and
2001,  respectively.  Return on average  assets was 1.61%,  1.54%,  and 1.55% in
2003, 2002, and 2001, respectively. Return on average equity was 17.10%, 15.81%,
and 15.57%,  respectively,  in 2003, 2002, and 2001. The increased  earnings for
the current year are primarily a result of the absence of a provision for credit
losses  due to  improvement  in  nonperforming  loans,  coupled  with  increased
interest income and a decrease in interest expense.

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, 2003.
<TABLE>
<CAPTION>

                                        Increase                      Increase
                                       (Decrease)                    (Decrease)
(Dollars in thousands)           2003    Amount        %       2002    Amount      %       2001
-----------------------------------------------------------------------------------------------
<S>                           <C>          <C>        <C>    <C>      <C>       <C>     <C>
Interest income               $15,949      $170       1.1    $15,779  $(2,323)  (12.8)  $18,102
Interest expense                3,408      (583)    (14.6)     3,991   (2,539)  (38.9)    6,530
Net interest income            12,541       753       6.4     11,788      216     1.9    11,572
Provision for credit losses        --      (954)   (100.0)       954      374    64.5       580
Net interest income after
  provision for credit losses  12,541     1,707      15.8     10,834     (158)   (1.4)   10,992
Other operating income          1,846      (213)    (10.3)     2,059      530    34.7    1,529
Other operating expense         7,945       531       7.2      7,414      221     3.1     7,193
Income before income taxes      6,442       963      17.6      5,479      151     2.8     5,328
Income taxes                    1,863       300      19.2      1,563       42     2.8     1,521
Net income                      4,579       663      16.9      3,916      109     2.9     3,807
</TABLE>


                                      -16-

<PAGE>

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.

<TABLE>
<CAPTION>


                                                                       Year Ended December 31,
                                                 2003                            2002                            2001

                                                Interest                        Interest                        Interest
                                  Average       Income       Avg    Average     Income      Avg     Average      Income        Avg
                                  Balance      (Expense)    Rate    Balance    (Expense)   Rate     Balance     (Expense)      Rate

Assets     (dollars in thousands)
  Earning assets:
<S>                              <C>           <C>          <C>    <C>         <C>         <C>     <C>         <C>             <C>
     Loans                       $188,267      $  13,381*   7.11%  $178,765    $  13,212*  7.39%   $170,628    $  15,032*      8.81%
     Investment Securities:
       Taxable                     48,206          1,738    3.61%    32,991        1,541   4.67%     27,360        1,638       5.99%
       Tax-Exempt                  14,721          1,050*   7.13%    14,510        1,165*  8.03%     15,042        1,225*      8.14
     Total investment
       securities                  62,927          2,788    4.43%    47,501        2,706   5.70%     42,402        2,863       6.75
     Federal Home Loan Bank Stock     887             49    5.52%     3,102          186   6.01%      3,657          251      6.86%
     Federal funds sold and
       deposits in banks           11,855            118    1.00%     5,644          107   1.90%     11,339          410       3.61
Total earning assets/interest
  income                         $263,936      $  16,336    6.18%  $235,013    $  16,211   6.90%   $228,026    $  18,556       8.14%
  Cash and due from banks           7,930                             8,331                           8,448
  Bank premises and equipment
     (net)                          3,780                             3,930                           4,104
  Other assets                     10,448                             9,552                           6,822
  Allowance for credit losses      (2,357)                           (2,515)                         (1,912)
  Total assets                   $283,737                          $254,310                        $245,488
                                 ========                          ========                        ========

Liabilities and Shareholders' Equity
  Interest bearing liabilities:
     Deposits:
       Savings and interest-
         bearing demand          $112,129      $    (827)    .74%  $104,111    $  (1,080)  1.04%   $105,846    $  (2,395)      2.26
           Time                    86,634         (2,096)   2.42%    79,664       (2,667)  3.35%     75,819       (3,945)      5.20
     Total deposits              $198,763         (2,923)   1.47%   183,775       (3,747)  2.04%    181,665       (6,340)      3.49
     Short-term  borrowings            --             --      --        174           (4)  2.48%      3,065         (190)      6.20
     Long-term borrowings          14,071           (485)   3.45%     6,548         (240)  3.67%         --         ----       ----
Total interest-bearing liabilities/
  Interest expense               $212,834      $  (3,408)   1.60%  $190,497    $  (3,991)  2.10%   $184,730    $  (6,530)      3.53
Demand deposits                    42,864                            36,180                          33,419
Other liabilities                   1,253                             2,867                           2,888
Shareholders' equity               26,786                            24,766                          24,451
Total liabilities and shareholders'
  equity                         $283,737                          $254,310                        $245,488
                                 ========                          ========                        ========
Net interest income                            $  12,928*                      $  12,220*                      $  12,026*
                                               =========                       =========                          ======
Net interest income as a percentage of
  average earning assets
         Interest income                                    6.18%                          6.90%                               8.14%
         Interest expense                                   1.29%                          1.72%                               2.86%
         Net interest income                                4.89%                          5.18%                               5.28%
                                                            ====                           ====                                ====
         * Tax equivalent basis - 34% tax rate used

</TABLE>

Nonaccrual loans are included in "loans."

Interest income on loans include loan fees of $1,003,182, $778,605, and $708,270
in 2003, 2002, and 2001, respectively.

For purposes of computing the average yield,  the Company used  historical  cost
balances which do not give effect to changes in fair value that are reflected as
a component of shareholders' equity.

                                      -17-

<PAGE>


Net interest income  increased 6.4% to $12,541,000 in 2003 compared to 2002. The
increase is primarily  the result of no provision  for credit  losses during the
year  reflecting  an  improvement  in the quality of the credit  portfolio.  The
Company's interest income increased 1.1% to $15,949,000 in 2003 from $15,779,000
in 2002.  This  increase is due to the  increased  balances in interest  bearing
deposits  in banks,  fed funds  sold,  securities  and loans.  Although  average
earning  assets  balances  increased,  the continued  overall  decline in market
interest  rates  resulted  in a  reduction  in  average  interest  rates for all
interest earning categories.  However,  lower interest rates also led to a 14.6%
decrease in interest  expense to $3,408,000  in 2003,  compared to $3,991,000 in
2002.  Net interest  income  decreased  1.4% to  $10,834,000 in 2002 compared to
2001.  The  decrease  is  primarily  the  result of a  decreased  interest  rate
environment  in addition to an increase of $374,000 in the  provision for credit
losses during 2002. The Company's interest income decreased 12.8% to $15,779,000
in 2002 from  $18,102,000  in 2001. The decrease was  substantially  offset by a
38.9%  decrease in interest  expense from  $6,530,000  in 2001 to  $3,991,000 in
2002.

The Company's average loan portfolio increased $9,502,000, or 5.3%, from yearend
2002 to yearend 2003, and increased $8,137,000,  or 4.8%, from 2001 to 2002. The
growth in 2003 is primarily  due to the opening of a loan  production  office on
August 1, 2003 in  Gearhart,  Oregon.  A large  portion  of the  Company's  loan
portfolio rates are tied to variable rate indexes.  Given the unprecedented drop
in rates  experienced in both years 2001 and 2002 and the continued low interest
rate  environment,  the  decrease  in  rates  overshadowed  the  growth  in  the
portfolio, causing a further decline in the average interest rates earned.

The Company's average investment  portfolio increased  $15,426,000 or 32.5% from
2002. These investments were invested in various long-term  investment products,
resulting  in an increase in earnings  on the  investment  portfolio  due to the
change in yield earned on long-term  products versus  short-term  products.  The
Company's average investment portfolio increased $5,099,000, or 12%, during 2002
from 2001. The changes in 2002 were  primarily  during the third quarter of 2002
and were in U.S. Government mortgage backed securities.

The Company's  average  deposits  increased  $14,988,000  or 8.2% from 2002, and
increased  $2,110,000  or 1.2% in 2002 from  2001.  The  primary  reason for the
increase in 2003 is due to an increase of  $16,357,000  in the Company's  N.O.W.
checking  accounts  and an increase of  $10,177,000  in money  market  accounts.
Management  attributes the deposit growth to its targeted  marketing program and
to consumer uncertainty regarding alternative investment options. Along with the
increase  in average  deposits,  the  Company  was able to reprice  its  deposit
offerings to current market rates, yielding a decrease in interest expense.

The Company  increased  its average  borrowings  during  2003 by  $7,523,000  or
114.9%.  These borrowings consist of advances from the Federal Home Loan Bank of
Seattle. The proceeds were used to fund loan growth and for investment purposes.
The Company increased its average borrowings during 2002 by $6,548,000 or 100%.

Net interest  margins were 4.75%,  5.05%, and 5.16% for the years ended December
31, 2003, 2002, and 2001, respectively.

                                      -18-

<PAGE>

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>
<CAPTION>

                                    2003 compared to 2002               2002 compared to 2001
                                 -------------------------           --------------------------

                                 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                            $687     $(518)     $169          $690     $(2,510)  $(1,820)
Securities:
   Taxable                          602      (405)      197           301        (398)      (97)
   Tax-exempt                        17      (132)     (115)          (43)        (17)      (60)
    Total securities                619      (537)       82           258        (415)     (157)
Federal Home Loan Bank Stock       (123)      (14)     (137)          (35)        (30)      (65)
  Fed funds sold and
  interest bearing deposits
    in other banks                   79       (68)       11          (156)       (147)     (303)
Total interest earning assets     1,262    (1,137)      125           757      (3,102)   (2,345)

Interest paid on:
  Savings and interest bearing
  demand deposits                   (78)      331       253           39       1,276     1,315
  Time deposits                    (218)      789       571          (191)      1,469     1,278
  Other borrowings                 (254)       13      (241)         (157)        103       (54)
Total interest bearing liabilities (550)    1,133       583          (309)      2,848     2,539

Change in net interest income       712        (4)      708           448        (254)     (194)

</TABLE>

Non-Interest Income.  Non-interest income was $1,846,000 for 2003, a decrease of
$213,000 or 10.3% from 2002 when it totaled  $2,059,000.  The 2002 amount was an
increase of $530,000 or 34.7% compared to the 2001 total of $1,529,000.

In 2003,  service  charges on deposit  accounts  decreased  $42,000 or 3.9% to a
total of  $1,027,000  compared  to  $1,069,000  in 2002.  The 2002  total was up
$241,000 or 29.1% compared to the 2001 total of $828,000. During the second half
of 2001, a new  customer  overdraft  protection  program was  implemented  which
contributed to the increase in service  charges on deposit  accounts during both
2001 and 2002. The decrease in 2003 was attributed to system changes  related to
commercial deposit relationships in which one month's charges were not assessed.

Income from  sources  other than  service  charges on deposit  accounts  totaled
$819,000 in 2003, a decrease of $171,000 from 2002, or 17.3%. The primary reason
for the decrease was income and gains on sale from foreclosed real estate, which
decreased  $266,000.  The Company sold several foreclosed real estate properties
in 2002 that recognized  gains.  Other major  components of non-interest  income
were mortgage  broker fees,  gain on sale of loans and bank owned life insurance
income. Income from other sources for 2002 was $990,000, an increase of $289,000
or 41.2% compared to 2001, primarily due to collecting operating revenues from a
motel that was brought into  foreclosed real estate and earnings from bank owned
life insurance.

                                      -19-

<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, 2003.

<TABLE>
<CAPTION>

                                                  Increase                       Increase
                                                 (Decrease)                     (Decrease)
                                                 ----------                     ----------
(Dollars in thousands)                   2003      Amount      %         2002     Amount     %      2001
------------------------------------------------------------------------------------------------------------

<S>                                    <C>         <C>      <C>        <C>         <C>      <C>       <C>
Service charges on deposit accounts    $1,027      $(42)    (3.9%)     $1,069      $241     29.1%     $828
Mortgage broker fees                      101        98    326.7%           3       (29)   (90.6%)      32
Income from and gains on sale of
    foreclosed real estate                 26      (266)   (91.1%)        292       153    110.1%      139
Net gains from sales of loans              34        34    100.0%          --        --       --        --
Net gain on sale of securities              4         4    100.0%          --        --       --        --
Earnings on bank owned life insurance     328       (22)    (6.3%)        350       183    109.6%      167
Other operating income                    326       (19)    (5.5%)        345       (18)    (4.9%)     363

Total non-interest income               1,846      (213)   (10.3%)      2,059       530     34.7%    1,529

</TABLE>

Non-Interest  Expense.  Total  non-interest  expense in 2003 was $7,945,000,  an
increase  of  $531,000  or  7.2%   compared  to  $7,414,000  in  2002.  In  2002
non-interest expense increased $221,000 or 3.1% compared to $7,193,000 in 2001.

Salary  and  employee  benefits  increased  by  $568,000,  or 13.5%,  in 2003 to
$4,764,000 and increased by $138,000,  or 3.4%, in 2002 compared to 2001. Salary
and benefits  increased  primarily due to a larger employee base in 2003, as the
Company opened a loan production  office during the year and increased  staffing
levels in other areas, in addition to normal merit increases.

Occupancy and equipment  expense decreased $19,000 or 1.9% in 2003 and increased
$21,000  or 2.2% in 2002.  The  decrease  in 2003 was due to  reduced  equipment
depreciation expenses. The 2002 increase was the result of costs associated with
maintenance of buildings and equipment.

State  taxes paid in 2003  totaled  $69,000,  a decrease  of  $137,000  or 66.5%
compared  to  2002.  This  was  the  result  of a tax  refund  pertaining  to an
application filed by the Company with the Washington State Department of Revenue
for overpayment of business and occupation tax. State taxes decreased $21,000 in
2002 or 9.3% compared to 2001.

Data  processing  expense  increased  $37,000  or 13.8%  compared  to 2002,  and
increased $54,000 or 25.2% in 2002 compared to 2001. The increases are primarily
due to costs associated with the opening of the loan production office and costs
related to  continued  enhancement  of the  Company's  technology  and  security
systems.

Other  expense  increased  $82,000 or 4.7% in 2003  compared  to an  increase of
$29,000 or 1.7% in 2002 over 2001.  The  increase  in 2003 is due  primarily  to
increased  advertising  and  marketing  expenses,  as the Company  embarked on a
direct  marketing  program  and  implemented  a community  oriented  advertising
program. The increase in 2002 is related primarily to an increase in advertising
expense of $30,000,  professional  fees of $35,000 and data processing  costs of
$47,000, which offset decreases in legal expense of $33,000,  travel expenses of
$10,000 and loan collection expense of $22,000.


                                      -20-
<PAGE>

The following table represents the principal  categories of non-interest expense
for each of the years in the three-year period ended December 31, 2003.


<TABLE>
<CAPTION>

                                                  Increase                          Increase
                                                 (Decrease)                        (Decrease)
                                                 ----------                        ----------
(Dollars in thousands)                   2003      Amount       %        2002       Amount      %      2001
--------------------------------------------------------------------------------------------------------------
<S>                                    <C>     <C>          <C>       <C>            <C>         <C>    <C>
Salaries and employee benefits         $4,764    $  568     13.5%      $4,196    $  138      3.4%   $4,058
Occupancy and equipment                   965       (19)    (1.9%)        984        21      2.2%      963
State taxes                                69      (137)   (66.5%)        206       (21)    (9.3%)     227
Data processing                           305        37     13.8%         268        54     25.2%      214
Other expense                           1,842        82      4.7%       1,760        29      1.7%    1,731

Total non-interest expense             $7,945    $  531      7.2%      $7,414    $  221      3.1%   $7,193
                                       ======    ======     ====       ======    ======     ====    ======
</TABLE>


CRITICAL ACCOUNTING POLICY

The Company's  consolidated financial statements are prepared in accordance with
accounting  principles  generally accepted in the United States of America.  The
financial  information  contained  within these  statements is, to a significant
extent,  financial  information  that is based on  approximate  measures  of the
financial effects of transactions and events that have already  occurred.  Based
on its  evaluation  of  accounting  policies  that  involve the most complex and
subjective  decisions  and  assessments,  management  has  identified  its  most
critical  accounting  policy as related to the allowance for credit losses.  The
Company's  allowance for credit loss methodology  incorporates a variety of risk
considerations,  both quantitative and qualitative, in establishing an allowance
for credit losses that  management  believes is  appropriate  at each  reporting
date.  Quantitative  factors include the Company's  historical loss  experience,
delinquency and charge-off trends,  collateral values,  changes in nonperforming
loans,  and  other  factors.   Quantitative   factors  also  incorporate   known
information about individual loans, including borrowers' sensitivity to interest
rate movements.  Qualitative factors include the general economic environment in
the Company's  markets,  including economic  conditions and, in particular,  the
state of  certain  industries.  Size and  complexity  of  individual  credits in
relation to loan structure,  existing loan policies and pace of portfolio growth
are other  qualitative  factors that are considered in the  methodology.  As the
Company adds new products and increases the complexity of its loan portfolio, it
intends to enhance its methodology  accordingly.  A materially  different amount
could be  reported  for the  provision  for credit  losses in the  statement  of
operations to change the allowance for credit losses if management's  assessment
of the above factors were different. This discussion and analysis should be read
in conjunction  with the Company's  financial  statements  and the  accompanying
notes presented  elsewhere  herein,  as well as the portion of this Management's
Discussion and Analysis section entitled  "Lending - Allowance and Provision for
Credit Losses".  Although  management believes the levels of the allowance as of
both December 31, 2003 and 2002 were  adequate to absorb losses  inherent in the
loan portfolio, a decline in local economic conditions,  or other factors, could
result in increasing losses that cannot reasonably be predicted at this time.

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.

                                      -21-
<PAGE>

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, 2003 and differences between them
for the maturity or repricing periods indicated.

<TABLE>
<CAPTION>

                                                      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                                     $ 78,261    $ 43,407       $ 78,070      $199,738
Investment securities                       27,136      21,652         16,673        65,461
Fed Funds and interest
  bearing balances with banks               20,392          --             --        20,392
Federal Home Loan Bank Stock                    --          --            915           915
Total interest earning assets             $125,789    $ 65,059       $ 95,658      $286,506

Interest bearing liabilities
Interest bearing demand deposits          $ 47,388    $     --       $     --      $ 47,388
Savings deposits                            84,105          --             --        84,105
Time deposits                               59,040      26,405             --        85,445
Long term borrowings                         2,000       6,500          6,000        14,500
Total interest bearing liabilities        $192,533    $ 32,905       $  6,000      $231,438


Net interest rate sensitivity GAP         $(66,744)   $ 32,154       $ 89,658      $ 55,068
Cumulative interest rate sensitivity GAP              $(34,590)      $ 55,068      $ 55,068
Cumulative interest rate sensitivity GAP
 as a % of earning assets                                (12.1%)         19.2%         19.2%

</TABLE>

                                      -22-

<PAGE>

The  following  table shows the dollar amount of interest  sensitive  assets and
interest sensitive  liabilities at December 31, 2002 and difference between them
for the maturity or repricing periods indicated.

<TABLE>
<CAPTION>


                                                      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                                     $ 70,081    $ 45,383       $ 70,326    $185,790
Investment securities                       23,856      18,445         20,291      62,592
Fed Funds and interest
  bearing balances with banks                  373          --             --         373
Federal Home Loan Bank Stock                    --          --            866         866
Total interest earning assets             $ 94,310    $ 63,828       $ 91,483    $249,621

Interest bearing liabilities

Interest bearing demand deposits          $ 31,030    $     --       $     --    $ 31,030
Savings deposits                            72,163          --             --      72,163
Time deposits                               71,441      10,536             --      81,977
Short term borrowings                        1,800           0             --       1,800
Long term borrowings                            --       5,000          6,000      11,000
Total interest bearing liabilities        $176,434    $ 15,536       $  6,000    $197,970


Net interest rate sensitivity GAP         $(82,124)   $ 48,292       $ 85,483    $ 51,651
Cumulative interest rate sensitivity GAP              $ 33,832)      $ 51,651      51,651
Cumulative interest rate sensitivity GAP
 as a % of earning assets                               (13.6%)          20.7%       20.7%

</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.

                                      -22-

<PAGE>


INVESTMENT PORTFOLIO

The Company's  investment  securities  portfolio increased  $2,869,000,  or 4.6%
during 2003 to  $65,461,000 at year end from  $62,592,000  in 2002,  which was a
$25,974,000  increase  over 2001.  The  changes in 2003 were  primarily  in U.S.
Government  agency mortgaged backed  securities.  Based on the low interest rate
environment during 2002, the Bank borrowed long term funds from the Federal Home
Loan Bank of Seattle totaling  $7,000,000 and purchased U.S.  Government  agency
mortgage backed  securities.  The transaction  resulted in a yield spread of 195
basis points.

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

HELD TO MATURITY

(dollars in thousands)                             2003        2002         2001
--------------------------------------------------------------------------------
U.S. Agencies securities                        $ 2,944     $ 6,611      $   -0-
Obligations of states and political subdivisions  5,044       3,751        4,945

     Total                                      $ 7,988     $10,362      $ 4,945

AVAILABLE FOR SALE

U.S. Agencies securities                         18,030      19,164        6,872
Obligations of states and political subdivisions 14,751      12,098       11,713
Other securities                                 24,692      20,968       13,088


     Total                                      $57,473     $52,230      $31,673

The following table presents the maturities of investment securities at December
31, 2003.  Taxable  equivalent values are used in calculating  yields assuming a
tax rate of 34%.

<TABLE>
<CAPTION>

HELD TO MATURITY

                                                      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. Agency securities                     $    --      $    --        $    --          $ 2,944    $ 2,944
  Weighted average yield                        --           --             --             4.05%
Obligations of states and political
  subdivisions                             $   449      $ 1,598        $   964          $ 2,033    $ 5,044
  Weighted average yield                      4.01%        4.15%          7.14%            7.06%

     Total                                 $   449      $ 1,598        $   964          $ 4,977    $ 7,988

AVAILABLE FOR SALE

U.S. Agency securities                     $ 1,620      $   498        $ 3,220          $12,692    $18,030
  Weighted average yield                      5.63%        2.62%          3.56%            3.97%
Obligations of states and political
  subdivisions                             $ 2,226      $ 7,663        $ 3,126          $ 1,736    $14,751
  Weighted average yield                      7.23%        6.61%          6.53%            6.60%
Other securities                           $20,459      $ 3,134        $ 1,099                0    $24,692
  Weighted average yield                      2.35%        5.83%          4.06%               0

     Total                                 $24,305      $11,295        $ 7,445          $14,428    $57,473

</TABLE>

                                      -23-
<PAGE>

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.

(dollars in thousands)            2003       2002      2001      2000       1999
                                  ----       ----      ----      ----       ----
Commercial                    $ 64,344   $ 69,794  $ 72,427  $ 68,827   $ 56,198
Real Estate Construction        11,894      9,697     6,554     6,118      3,325
Real Estate Mortgage           117,940    101,151    91,714    96,334     88,905
Installment                      4,625      4,114     4,941     4,612      3,379
Credit cards and overdrafts        935      1,034       968     1,277        857
     Total                    $199,738   $185,790  $176,604  $177,168   $152,664


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, 2003.

<TABLE>
<CAPTION>
                                                     Due after
                                      Due in one    one through   Due after
(dollars in thousands)               year or less   five years    five year      Total
                                     ------------   -----------  ----------   --------
<S>                                      <C>         <C>         <C>          <C>
Commercial                               $ 38,964    $ 13,648    $ 11,732     $ 64,344
Real estate construction                    7,967         726       3,201       11,894
     Total                               $ 46,931    $ 14,374    $ 14,933     $ 76,238


Total loans maturing after one year with
  Predetermined interest rates (fixed)               $ 27,484    $115,665     $143,149
  Floating or adjustable rates (variable)              13,323       2,358       15,681
     Total
                                                     $ 40,807    $118,023     $158,830
</TABLE>


At December 31, 2003, 39.2% of the total 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)       2003       2002        2001       2000         1999
--------------------------------------------------------------------------------
Non-accrual loans           $ 465     $1,864      $1,254     $3,128        $ 175
Accruing loans past due
  90 days or more              --          2          79        292          140
Restructured loans             --         --          --         --            0
Foreclosed real estate owned   98        686       1,040         --          177

                                      -24-

<PAGE>

Non-accrual  loans decreased  approximately  $1,399,000 to $465,000 in 2003 from
2002. The total is net of  charge-offs  based on  management's  estimate of fair
market value or the result of appraisals.  The properties consist of real estate
and commercial  real estate  properties.  During 2003,  sales of foreclosed real
estate owned totaled $1,363,000.  At December 31, 2003, the balance remaining in
foreclosed  real estate  owned  totaled  $98,000.  Non-accrual  loans  decreased
$1,874,000 to $1,254,000 at year-end 2001 after increasing to $3,128,000 in 2000
from $175,000 in 1999. The increase in non-accrual loans experienced in 2000 was
attributable to the decline in the regional and national economies and the local
agriculture  economy.  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 $37,000 for 2003, $118,000 for 2002, $75,000 for 2001, $168,000
for 2000 and $10,000 for 1999.  Interest income recognized on impaired loans for
2003 was  $19,000,  for  2002 was  $13,000,  for 2001 was  $2,000,  for 2000 was
$31,000, and for 1999 was $11,000.

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, 2003,  loans secured
by real estate  totaled  $129,834,000,  which  represents  65% of the total loan
portfolio.  Real estate construction loans comprised $11,894,000 of that amount,
while real estate loans secured by residential  properties totaled  $26,615,000.
As a result of these  concentrations of loans, 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%.

Allowance  and  Provision  for Credit  Losses.  The  allowance for credit losses
reflects  management's  current estimate of the amount required to absorb losses
on existing loans and commitments to extend credit.  Loans deemed  uncollectible
are charged  against and reduce the  allowance.  Periodically,  a provision  for
credit losses is charged to current  expense.  This  provision acts to replenish
the  allowance  for credit  losses and to maintain the allowance at a level that
management  deems  adequate.  There is no precise method of predicting  specific
loan  losses or amounts  that  ultimately  may be charged off on segments of the
loan portfolio. The determination that a loan may become uncollectible, in whole
or in part,  is a matter of judgment.  Similarly,  the adequacy of the allowance
for credit  losses can be  determined  only on a  judgmental  basis,  after full
review,  including (a)  consideration  of economic  conditions and the effect on
particular  industries  and  specific  borrowers;  (b) a  review  of  borrowers'
financial  data,  together with industry data, the  competitive  situation,  the
borrowers'   management   capabilities  and  other  factors;  (c)  a  continuing
evaluation of the loan portfolio,  including  monitoring by lending officers and
staff credit  personnel of all loans which are  identified as being of less than
acceptable quality; (d) an in-depth appraisal,  on a monthly basis, of all loans
judged  to  present a  possibility  of loss  (if,  as a result  of such  monthly
appraisals,  the loan is judged to be not fully collectible,  the carrying value
of the loan is  reduced  to that  portion  considered  collectible);  and (e) an
evaluation of the underlying  collateral for secured lending,  including the use
of independent  appraisals of real estate  properties  securing  loans. A formal
analysis of the adequacy of the allowance is conducted quarterly and is reviewed
by the Board of  Directors.  Based on this  analysis,  management  considers the
allowance for credit losses to be adequate.

Periodic  provisions  for loan losses are made to  maintain  the  allowance  for
credit losses at an appropriate  level.  The provisions are based on an analysis
of various factors  including  historical  loss experience  based on volumes and
types of loans,  volumes  and trends in  delinquencies  and  non-accrual  loans,
trends in portfolio volume,  results of internal and independent external credit
reviews, and anticipated economic conditions.

                                      -25-

<PAGE>

Transactions  in the  allowance  for  credit  losses  for the five  years  ended
December 31, 2003 are as follows:

(dollars in thousands)           2003      2002      2001      2000      1999
--------------------------------------------------------------------------------
Balance at beginning of year   $2,473    $2,109    $2,026    $1,930    $1,864
Charge-offs:
  Commercial                       17       131       170       554       114
  Real estate loans               239       461       366        --        --
  Credit card                       6        16        13         6        13
  Installment                       3        24        15         8         7
    Total charge-of            $  265    $  632    $  564    $  568    $  134

Recoveries:
  Commercial                   $    5    $   11    $   54    $   15    $  23
  Real estate loans                23        28        12       110
  Credit card                       1         2        --        --         6
  Installment                       1         1        13         2         1
    Total recoveries           $   30    $   42    $   67    $   29    $  140


Net charge-offs (recoveries)      235       590       497       539        (6)
Provision for credit losses         0       954       580       635        60
Balance at end of year         $2,238    $2,473    $2,109    $ 2,026   $1,930

Ratio of net charge-offs (recoveries)
  to average loans outstanding    .12%      .33%      .29%      .33%       --


The allowance for credit losses was $2,238,000 at year-end  2003,  compared with
$2,473,000  at year-end  2002,  a decrease of  $235,000 or 9.5%.  The  aggregate
decrease  resulted  from the net  charge-offs  totaling  $235,000  in 2003.  The
decreased  level of allowance for credit losses was primarily due to improvement
in the quality of the loan portfolio and decreased loss factors  utilized in the
allowance  for  loan  loss  analysis.  Changes  in the  composition  of the loan
portfolio  included a 7.8%  decrease  in  commercial  loans,  while real  estate
construction  and real estate  mortgage loans  increased  39.3%.  Estimated loss
factors used in the allowance for credit loss analysis are established  based in
part on historic charge-off data by loan category and economic conditions. Based
on the trends in historical  charge-offs analysis,  the loss factors used in the
allowance  for credit loss analysis for  commercial  loans and real estate loans
were increased during the year ended December 31, 2003.

Based on the methodology  used for credit loss analysis,  management  deemed the
allowance  for credit  losses of $2,238,000 at December 31, 2003 (1.12% of total
loans outstanding and 411.40% of  non-performing  loans) adequate to provide for
estimated  losses based on an evaluation of known and inherent risks in the loan
portfolio at that date.

In May 1993,  the Financial  Accounting  Standards  Board (FASB) issued SFAS No.
114,  "Accounting  by Creditors  for  Impairment of a Loan" and in October 1996,
issued SFAS No. 118,  "Accounting  by Creditors for Impairment of a Loan--Income
Recognition  Disclosures,  an amendment to SFAS No. 114".  The Company  measures
impaired  loans  based  on the  present  value of  expected  future  cash  flows
discounted at the loan's effective  interest rate or, as a practical  expedient,
at the loan's observable market price or the fair market value of the collateral
if the  loan is  collateral  dependent.  The  Company  excludes  loans  that are
currently  measured  at fair  value or at the lower of cost or fair  value,  and
certain large groups of smaller balance  homogeneous loans that are collectively
measured for impairment.  The Company's Board of Directors  approved a change in
definition of impaired  loans during 2003.  Impaired loans now include all loans
in non-accrual status over $5,000 and loans in excess of $1,000,000 that meet at
least watch status risk  characteristics.

                                      -26-

<PAGE>

The following table summarizes the Bank's impaired loans at December 31:

<TABLE>
<CAPTION>

(dollars in thousands)                           2003        2002     2001     2000    1999
-------------------------------------------------------------------------------------------
<S>                                           <C>         <C>      <C>      <C>      <C>
Total Impaired Loans                          $11,147     $ 2,314  $ 1,662  $ 3,128  $  175
Total Impaired Loans with Valuation Allowance     123          18    1,180    1,114      --
Valuation Allowance related to Impaired Loans      23           2      143      412      --
</TABLE>

No allocation of the  allowance for credit losses was  considered  necessary for
the remaining  impaired loans. The balance of the allowance for credit losses in
excess of these specific reserves is available to absorb losses from all loans.

It is the Company's  policy to charge-off  any loan or portion of a loan that is
deemed  uncollectible  in the ordinary course of business.  The entire allowance
for  credit  losses is  available  to absorb  such  charge-  offs.  The  Company
allocates its  allowance for credit losses  primarily on the basis of historical
data.  Based  on  certain  characteristics  of  the  portfolio,  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>
<CAPTION>

                                          % of                % of              % of                % of                 % of
                                2003     Total      2002     Total     2001     Total     2000     Total       1999     Total
(Dollars in thousands)        Reserve    Loans    Reserve    Loans   Reserve    Loans    Reserve   Loans     Reserve    Loans
-----------------------------------------------------------------------------------------------------------------------------

<S>                            <C>          <C>      <C>        <C>  <C>          <C>   <C>           <C>    <C>           <C>
Commercial loans               $  764       32%      967        37%  $  548       41%   $  689        39%    $  720        37%
Real estate loans               1,399       65%   $1,406        60%   1,413       56%    1,256        58%     1,153        60%
Consumer loans                     75        3%      100         3%     148        3%       81         3%        58         3%

Total allowance                $2,238      100%   $2,473       100%  $2,109      100%   $2,026       100%    $1,930       100%

Ratio of allowance for credit
  losses to loans outstanding
  at end of year                 1.12%              1.33%              1.19%              1.14%                1.26%

</TABLE>

The  table  indicates  a  decrease  of  $203,000  in the  allowance  related  to
commercial  loans from  December  31, 2002 to December  31,  2003, a decrease of
$7,000  relating to real  estate  loans,  and a decrease  of $25,000  related to
consumer  loans.  There was an increase of $419,000  from  December  31, 2001 to
December 31, 2002 in the allowance related to commercial loans, which was offset
by decreases of $7,000 in real estate loans and $48,000 in consumer loans during
the same period.

                                      -27-

<PAGE>


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 Company has succeeded in growing its deposit base over the last
three years  despite  increasing  competition  for deposits in our markets.  The
Company  believes  that it has  benefited  from its local  identity and superior
customer service. Attracting deposits remains integral to the Company's business
as it is the primary  source of funds for loans and a major  decline in deposits
or failure to attract  deposits  in the future  could have an adverse  effect on
operations.

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>
<CAPTION>
(dollars in thousands)               2003      RATE       2002      RATE        2001     RATE
---------------------------------------------------------------------------------------------

<S>                              <C>           <C>    <C>           <C>     <C>          <C>
Demand deposits                  $ 42,864      0.00%  $ 36,180      0.00%   $ 33,419     0.00%
Interest bearing demand deposits   33,251       .42%    29,137       .76%     26,949     2.09%
Savings deposits                   78,878       .87%    74,974      1.15%     78,897     2.32%
Time deposits                      86,634      2.42%    79,664      3.35%     75,819     5.20%

     Total                       $241,627      1.20%  $219,955      1.70%   $215,084     3.49%
</TABLE>


Maturities  of  time  certificates  of  deposit  as of  December  31,  2003  are
summarized as follows:

                                    Under          Over
(dollars in thousands)            $100,000       $100,000          Total
                                  ---------      ---------       --------
3 months or less                  $ 9,030        $11,866         $20,895
Over 3 through 6 months             7,453          8,201          15,654
Over 6 through 12 months           11,788         10,702          22,490
Over 12 months                     13,566         12,839          26,405
     Total                         41,837         43,608          85,445


SHORT-TERM BORROWINGS

The following is information  regarding the Company's short-term  borrowings for
the years ended December 31, 2003, 2002 and 2001.

(dollars in thousands)                                  2003      2002      2001
--------------------------------------------------------------------------------
Amount outstanding at end of period                        $--  $1,800   $   --
Weighted average interest rate thereon                      0%    1.35%       0%
Maximum amount outstanding at any month end during period  $--  $2,790   $7,580
Average amounts outstanding during the period               --     174      963
Weighted average interest rate during period                0%     2.48%   5.68%

                                      -28-

<PAGE>

CONTRACTUAL OBLIGATIONS

The following is  information  regarding the  Company's  long-term  obligations,
which consists of borrowings from the Federal Home Loan Bank, for the year ended
December 31, 2003.

                                              Payments due by Period
                                              ----------------------
                                        Less than    1-3     3-5     More than
                                Total    1  year    years   years     5 years
                                -----   ---------   -----   -----    ---------

Contractual obligations
------------------------------------------------------------------------------
Other Long-term Liabilities   $14,500      2,000    3,000   9,500           0


<TABLE>
<CAPTION>

KEY FINANCIAL RATIOS

Year ended December 31,                 2003      2002      2001       2000      1999
                                        ----      ----      ----       ----      ----

<S>                                     <C>       <C>       <C>        <C>       <C>
Return on average assets                1.61%     1.54%     1.55%      1.34%     1.64%
Return on average equity               17.10%    15.81%    15.57%     14.95%    17.26%
Average equity to average assets ratio  9.44%     9.74%     9.96%      8.96%     9.49%
Dividend payout ratio                     77%       87%       86%        97%       79%
</TABLE>

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 ensure  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 of
Seattle 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.

Management  expects to  continue  to rely on  customer  deposits  as the primary
source  of  liquidity,  but may  also  obtain  liquidity  from  maturity  of its
investment  securities,  sale of securities  currently  available for sale,  net
income,  and other  borrowings.  Although deposit balances have shown historical
growth,  deposit  habits  of  customers  may be  influenced  by  changes  in the
financial  services  industry,  interest rates  available on other  investments,
general economic conditions,  consumer confidence,  and competition.  Borrowings
may be used on a short-term basis to compensate for reductions in deposits,  but
are  generally  not  considered  a  long  term  solution  to  liquidity  issues.
Therefore,  reductions in deposits could adversely affect the Company's  results
of operations.

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  sources for obtaining
capital are additional stock sales and retained  earnings.  Total  shareholders'
equity  averaged  $26,786,000  in 2003,  compared  to  $24,766,000  in 2002,  an
increase of 8.2%,  and  $24,451,000  in 2001,  an increase of 10.7%  compared to
2000.

                                     -29-

<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, 2003 and 2002.


                                                                  Capital
                                                                 Adequacy
                                      Actual                     Purposes
(dollars in  thousands)               Amount     Ratio      Amount        Ratio
--------------------------------------------------------------------------------
December 31, 2003
Tier 1 capital (to average  assets)  $25,093      8.46%    $11,864         4.00%
Tier 1 capital (to  risk-weighted     25,093     11.56%      8,686         4.00%
 assets)
Total capital (to risk-weighted       27,331     12.59%     17,372         8.00%
 assets)


December 31, 2002
Tier 1 capital (to average assets)   $23,966      8.92%    $10,753         4.00%
Tier 1 capital (to risk-weighted      23,966     11.73%      8,172         4.00%
  assets)
Total capital (to risk-weighted       26,457     12.95%     16,344         8.00%
  assets)

OTHER EVENTS

On October 22, 2003, the Company announced the signing of a definitive agreement
for the acquisition of BNW Bancorp,  Inc. ("BNW") by merger.  Upon completion of
the  transaction  on  Februaruy  27,  2004,  each share of BNW common  stock was
converted  into the right to receive 0.85 shares of the Company's  common stock,
resulting  in the  issuance of  approximately  636,673 of the  Company's  common
stock.  Simultaneous with the merger of BNW into Pacific,  BNW's subsidiary Bank
NorthWest was merged into Bank of the Pacific.

As a result  of the  merger  of BNW into  Pacific,  the  Company  had  assets of
approximately  $407  million,   deposits  of  approximately  $339  million,  and
shareholders  equity of approximately $44 million, at February 29, 2004. BNW had
net  interest  income  of  $4,822,622,  noninterest  income of  $1,259,821,  and
noninterest  expense of $5,078,774  for fiscal year 2003.  There is no assurance
that the five  branches  acquired  from BNW in the merger will  achieve  similar
results in 2004, or future years.

                                      -30-

<PAGE>

ITEM 7A. Quantitative and Qualitative Disclosures 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 30% of the Company's
loans have interest rates that 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 rate changes.  The assumptions and
description  of the  process  used to  manage  interest  rate  risk  is  further
discussed in the Asset and Liability  Management  section.  The following  table
discloses the balances of financial  instruments held by the Company,  including
the fair value as of December 31, 2003.

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, 2003.
Fair values are  estimated in  accordance  with  generally  accepted  accounting
principles as disclosed in the financial statements.

<TABLE>
<CAPTION>

                                                Expected Maturity

Year ended December 31, 2003                                                                     there                    Fair
(dollars in thousands)                      2004       2005      2006       2007       2008      after        Total       Value
-------------------------------------------------------------------------------------------------------------------------------
Financial Assets
  Cash and cash equivalents
<S>                                      <C>                                                    <C>        <C>
      Non-interest bearing               $ 9,280         --        --         --         --         --     $  9,280    $  9,280
      Interest bearing deposits in banks $15,392         --        --         --         --         --     $ 15,392    $ 15,392
      Weighted average interest rate        1.24%
  Federal funds sold
      Fixed rate                         $ 5,000         --        --         --         --         --     $  5,000    $  5,000
      Weighted average interest rate         .90%
  Securities available for sale
      Fixed rate                         $ 3,846    $ 4,156   $ 3,188    $   984    $ 1,151    $21,308     $ 34,633    $ 34,633
      Weighted average interest rate        6.33%      6.03%     4.27%      3.92%      4.28%      3.48%
      Adjustable rate                    $20,459         --        --         --         --    $ 2,381     $ 22,840    $ 22,840
      Weighted average interest rate        2.35%                                      2.19%
  Securities held to maturity
      Fixed rate                         $   449         --   $    56    $   854    $   688    $ 5,941     $  7,988    $  8,097
      Weighted average interest rate        3.02%                4.50%      2.50%      2.90%      3.71%
  Loans receivable
      Fixed rate                         $35,250    $ 5,484   $ 9,120     $8,528    $ 6,769    $75,299     $140,450    $141,161
      Weighted average interest rate        6.49%      7.78%     6.94%      7.20%      7.04%      7.06%
      Adjustable rate                    $43,207    $   399   $ 5,686    $ 1,744    $ 5,894    $ 2,358     $ 59,288    $ 59,288
      Weighted average interest rate        5.27%      3.53%     5.97%      7.08%      5.23%      6.08%
  Federal Home Loan Bank stock           $   915         --        --         --         --         --     $    915    $    915
      Weighted average interest rate        5.52%

                                      -31-

<PAGE>

                                                Expected Maturity
Year ended December 31, 2002                                                                     there                     Fair
(dollars in thousands)                      2004       2005      2006       2007       2008      after        Total        Value
--------------------------------------------------------------------------------------------------------------------------------
Financial Liabilities
  Non-interest bearing deposits          $ 6,579    $ 9,321   $ 6,990    $ 4,194    $ 3,355    $13,423     $ 43,862     $ 43,862
  Interest bearing checking accounts     $ 7,108    $10,070   $ 7,552    $ 5,664    $ 3,399    $13,595     $ 47,388     $ 47,388
      Weighted average interest rate         .54%       .54%      .54%       .54%       .54%       .54%
  Money Market accounts                  $ 4,770    $ 6,756   $ 5,067    $ 3,801    $ 2,280    $ 9,123     $ 31,797     $ 31,797
      Weighted average interest rate         .86%       .86%      .86%       .86%       .86%       .86%
  Savings accounts                       $ 7,846    $11,115   $ 8,336    $ 5,002    $ 4,002    $16,007     $ 52,308     $ 52,308
      Weighted average interest rate         .80%       .80%      .80%       .80%       .80%       .80%
  Certificates of deposit
      Fixed rate                         $56,274    $ 8,319   $ 2,007    $ 3,318    $ 5,584         --     $ 75,502     $ 76,218
      Weighted average interest rate        1.61%      2.13%     2.97%      4.66%      3.91%
      Variable rate                      $ 9,943         --        --         --         --         --     $  9,943     $  9,943
      Weighted average interest rate        3.31%
  Borrowings
      Fixed rate                         $ 2,000    $ 2,000   $ 1,000         --    $ 3,500    $ 6,000     $ 14,500     $ 12,905
      Weighted average interest rate        3.20%      4.41%     3.48%                 2.94%      3.49%
</TABLE>

As illustrated in the tables above, our balance sheet is currently  sensitive to
decreasing  interest rates,  meaning that more interest bearing assets mature or
re-price  than  interest  earning  liabilities.  Therefore,  if  our  asset  and
liability mix were to remain unchanged, and there was a decrease in market rates
of  interest,  the Company  would  expect that its net income would be adversely
affected.  In contrast, an increasing interest rate environment would positively
affect such income.  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 15 of this report.

ITEM  9.  Changes  in and  disagreements  with  accountants  on  accounting  and
financial disclosure

Not applicable.

ITEM 9A.  Controls and Procedures

Pacific's  disclosure  controls  and  procedures  are  designed  to ensure  that
information  the Company must disclose in its reports  filed or submitted  under
the Exchange Act is recorded,  processed,  summarized,  and reported on a timely
basis.  Our  management  has  evaluated,  with the  participation  and under the
supervision of our chief  executive  officer (CEO) and chief  financial  officer
(CFO), the  effectiveness of our disclosure  controls and procedures (as defined
in Rules  13a-15(e)  and  15d-15(e)  of the  Exchange  Act) as of the end of the
period covered by this report.  Based on this  evaluation,  our CEO and CFO have

                                     -32-

<PAGE>

concluded  that,  as  of  such  date,  the  Company's  disclosure  controls  and
procedures are effective in ensuring that  information  relating to the Company,
including  its  consolidated  subsidiaries,  required to be disclosed in reports
that it files under the Exchange Act is (1) recorded, processed,  summarized and
reported within the time periods specified in the SEC's rules and forms, and (2)
accumulated and  communicated  to our management,  including our CEO and CFO, as
appropriate to allow timely decisions regarding required disclosures.

No change in Pacific's internal control over financial reporting occurred during
our last fiscal quarter that has materially affected, or is reasonably likely to
materially affect, the Company's internal control over financial reporting.

                                    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  2004 Proxy Statement for its annual meeting of
shareholders  to be held on April 28,  2004  ("2004  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 into this report by reference.

The Board of  Directors  adopted a Code of Ethics  for the  Company's  executive
officers that requires the Company's  officers to maintain the highest standards
of  professional  conduct.  A copy of the Code of  Ethics  is  available  on the
Company's Web site  www.thebankofpacific.com  under the link called  Stockholder
Information and President's Letter.

The  Company  has  a  separately   designated  Audit  Committee  established  in
accordance  with  Section  3(a)(58)(A)  of the Exchange  Act.  The  committee is
composed of Directors Duane E. Hagstrom,  Gary C. Forcum, Robert Hall, Ed Ketel,
Randy Rognlin,  Walter Westling and David Woodland,  each of whom is independent
as that term is used in Item 7(d)(3)(iv) of Schedule 14A under the Exchange Act.
In determining  independence of board members,  the Company's board of directors
has  applied  the  definition  of  independence  found  in  the  Nasdaq  listing
standards.

The Company's  Board of Directors has determined that Duane E. Hagstrom and Gary
Forcum are audit  committee  financial  experts as defined in Item 401(h) of the
SEC's Regulation S-K. Directors Hagstrom and Forcum are independent as that term
is used in Item 7(d)(3)(iv) of Schedule 14A.

ITEM 11.  Executive Compensation

Information   concerning  executive  compensation  requested  by  this  item  is
contained in the  registrant's  2004 Proxy  Statement  in the sections  entitled
"DIRECTOR  COMPENSATION"  and "EXECUTIVE  COMPENSATION"  (not  including  "Audit
Committee Report," "Report of the Compensation Committee" and "Stock Performance
Graph"), and is incorporated into this report by reference.

ITEM 12.  Security  Ownership of Certain  Beneficial  Owners and  Management and
Related Stockholder Matters

Information  concerning  security  ownership  of certain  beneficial  owners and
management  requested by this item is contained in the  registrant's  2004 Proxy
Statement in the section  entitled  "MANAGEMENT - Security  Ownership of Certain
Beneficial  Owners and  Management,"  and is  incorporated  into this  report by
reference.

                                      -33-

<PAGE>

Equity  Compensation Plan Information.  The following table summarizes share and
exercise price information about the Company's equity  compensation  plans as of
December 31, 2003.

<TABLE>
<CAPTION>


                                                (a)                    (b)                        (c)
                                         Number of securities   Weighted-average           Number remaining
                                          to be issued upon      exercise price          available for future
                                            exercise of           of outstanding          issuance under equity
                                        outstanding options,    options, warrants          compensation plans
                                         warrants and rights       and rights             (excluding securities
                                                                                        reflected in column (a)
      Plan Category
      -------------                     --------------------    -----------------       ------------------------
<S>                                            <C>                   <C>                        <C>
Equity compensation plans approved
by security holders:                           232,950               $23.25                     296,500

Equity compensation plans not approved
by security holders:                                --                   --                          --

Total                                          232,950               $23.25                     296,500
                                               =======               ======                     =======

</TABLE>

ITEM 13.  Certain Relationships and Related Transactions

Information  concerning certain relationships and related transactions requested
by this item is  contained  in the  registrant's  2004  Proxy  Statement  in the
section entitled  "Compensation  Committee Interlocks and Insider Participation"
and is incorporated into this report by reference.

ITEM 14.  Principal Accountant Fees and Services

Information  concerning  fees paid to our  accountants  required by this item is
included  under  the  heading   "AUDITORS  -  Fees  Paid  to  Auditors"  in  the
registrant's  2004  Proxy  Statement  and is  incorporated  into this  report by
reference.

                                     Part IV

ITEM 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K

(a)   (1)  The following financial statements are filed below:
                  Independent Auditor's Report
                  Consolidated Balance Sheets
                  Consolidated Statements of Income
                  Consolidated Statements of Shareholders' Equity
                  Consolidated Statements of Cash Flows

                                      -34-

<PAGE>

McGladrey & Pullen, LLP is a member firm of RSM International -
an affiliation of separate and independent legal entities.



                          Independent Auditor's Report



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, 2003 and 2002, and the
related consolidated  statements of income,  shareholders' equity and cash flows
for each of the  three  years in the  period  ended  December  31,  2003.  These
financial  statements are the  responsibility of the Company's  management.  Our
responsibility  is to express an opinion on these financial  statements based on
our audits.

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

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


/s/ McGladrey & Pullen, LLP
Tacoma, Washington
January 30, 2004


                                      -35-
<PAGE>

Consolidated Balance Sheets
--------------------------------------------------------------------------------
(Dollars in Thousands)

Pacific Financial Corporation and Subsidiary
December 31, 2003 and 2002

<TABLE>
<CAPTION>

                                                                  2003         2002

Assets
<S>                                                           <C>          <C>
   Cash and due from banks                                      $  9,280     $  8,473
   Interest bearing deposits in banks                             15,392          373
   Federal funds sold                                              5,000           --
   Securities available for sale                                  57,473       52,230
   Securities held to maturity (market value $8,097 and $10,414)   7,988       10,362
   Federal Home Loan Bank stock, at cost                             915          866
   Loans held for sale                                                --          286

   Loans                                                         199,738      185,504
   Allowance for credit losses                                     2,238        2,473
   Loans - net                                                   197,500      183,031

   Premises and equipment                                          3,967        3,850
   Foreclosed real estate                                             98          686
   Accrued interest receivable                                     1,275        1,493
   Cash surrender value of life insurance                          6,193        5,898
   Other assets                                                    1,634          986

   Total assets                                                 $306,715     $268,534


Liabilities and Shareholders' Equity

Liabilities
   Deposits:
     Demand, non-interest bearing                                 43,862     $ 40,084
     Savings and interest-bearing demand                         131,493      103,193
     Time, interest-bearing                                       85,445       81,977
   Total deposits                                                260,800      225,254

   Accrued interest payable                                          234          318
   Short-term borrowings                                              --        1,800
   Long-term borrowings                                           14,500       11,000
   Other liabilities                                               5,531        5,479

   Total liabilities                                             281,065      243,851

Commitments and Contingencies                                         --           --

Shareholders' Equity
   Common stock (par value $1); authorized:  25,000,000 shares;
     issued and outstanding:  2003 - 2,521,539 shares;             2,522        2,513
     2002 - 2,512,659 shares
   Additional paid-in capital                                     10,005        9,839
   Retained earnings                                              12,663       11,614
   Accumulated other comprehensive income                            460          717
   Total shareholders' equity                                     25,650       24,683

   Total liabilities and shareholders' equity                   $306,715     $268,534

</TABLE>

See notes to consolidated financial statements.

                                      -36-
<PAGE>

Consolidated Statements of Income
--------------------------------------------------------------------------------
(Dollars in Thousands, Except Per Share Amounts)

Pacific Financial Corporation and Subsidiary
Years Ended December 31, 2003, 2002 and 2001

<TABLE>
<CAPTION>

                                                                 2003          2002         2001

Interest Income
<S>                                                           <C>           <C>          <C>
   Loans                                                      $13,350       $13,175      $14,994
   Federal funds sold and deposits in banks                       118           107          410
   Securities available for sale:
     Taxable                                                    1,570         1,401        1,638
     Tax-exempt                                                   484           501          545
   Securities held to maturity:
     Taxable                                                      168           139           --
     Tax-exempt                                                   210           270          264
   Federal Home Loan Bank stock dividends                          49           186          251
   Total interest income                                       15,949        15,779       18,102
                                                               ======        ======       ======
Interest Expense
   Deposits                                                     2,923         3,747        6,340
   Short-term borrowings                                           --             4          190
   Long-term borrowings                                           485           240           --
   Total interest expense                                       3,408         3,991        6,530
                                                               ======        ======       ======

   Net interest income                                         12,541        11,788       11,572
                                                               ======        ======       ======

Provision for Credit Losses                                        --           954          580

   Net interest income after provision for credit losses       12,541        10,834       10,992
                                                               ======        ======       ======

Non-Interest Income
   Service charges on deposit accounts                          1,027         1,069          828
   Mortgage broker fees                                           101             3           32
   Income from and gains on sale of foreclosed real estate         26           292          139
   Net gains from sales of loans                                   34            --           --
   Net gains on sales of securities available for sale              4            --           --
   Earnings on bank owned life insurance                          328           350          167
   Other operating income                                         326           345          363
   Total non-interest income                                    1,846         2,059        1,529
                                                               ======        ======       ======
Non-Interest Expense
   Salaries and employee benefits                               4,764         4,196        4,058
   Occupancy                                                      433           419          409
   Equipment                                                      532           565          554
   State taxes                                                     69           206          227
   Data processing                                                305           268          214
   Other                                                        1,842         1,760        1,731
   Total non-interest expense                                   7,945         7,414        7,193
                                                               ======        ======       ======

   Income before income taxes                                   6,442         5,479        5,328
                                                               ======        ======       ======

Income Taxes                                                    1,863         1,563        1,521

   Net income                                                 $ 4,579       $ 3,916      $ 3,807
                                                               ======        ======       ======


Earnings Per Share
   Basic                                                      $  1.82       $  1.57      $  1.53
   Diluted                                                       1.79          1.56         1.52

</TABLE>

See notes to consolidated financial statements.

                                      -37-

<PAGE>

Consolidated Statements of Shareholders' Equity
--------------------------------------------------------------------------------
(Dollars in Thousands)

Pacific Financial Corporation and Subsidiary
Years Ended December 31, 2003, 2002 and 2001


<TABLE>
<CAPTION>

                                                                                                   Accumulated
                                        Shares of                     Additional                      Other
                                        Common          Common        Paid-in        Retained     Comprehensive
                                        Stock           Stock         Capital        Earnings     Income (Loss)     Total


<S>                 <C> <C>             <C>            <C>             <C>            <C>             <C>         <C>
Balance at December 31, 2000            2,503,130      $ 2,503         $ 9,859        $10,572         ($191)      $22,743

Comprehensive income:
   Net income                                  --           --              --          3,807            --         3,807
   Other comprehensive income,
     net of tax:
       Change in fair value of
         securities available for sale         --           --              --             --           599           599

   Comprehensive income                                                                                             4,406

Stock options exercised                    12,750           13             150             --            --           163
Repurchase of common stock                (24,281)         (24)           (486)            --            --          (510)
Issuance of common stock                       30           --               1             --            --             1
Cash dividends declared
   ($1.32 per share)                           --           --              --         (3,289)           --        (3,289)

   Balance at December 31, 2001         2,491,629        2,492           9,524         11,090           408        23,514
                                        =========       ======          ======         ======           ===        ======
Comprehensive income:
   Net income                                  --           --              --          3,916            --         3,916
   Other comprehensive income,
     net of tax:
       Change in fair value of
         securities available for sale         --           --              --             --           309           309

   Comprehensive income                                                                                             4,225

Stock options exercised                    21,000           21             275             --            --           296
Issuance of common stock                       30          ---               1             --            --             1
Cash dividends declared
   ($1.35 per share)                           --           --             ---         (3,392)           --        (3,392)
Tax benefit from exercise of
   stock options                               --           --              39             --            --            39

   Balance at December 31, 2002         2,512,659        2,513           9,839         11,614           717         24,683
                                        =========       ======          ======         ======           ===        ======

Comprehensive income:
   Net income                                  --           --              --          4,579            --         4,579
   Other comprehensive income,
     net of tax:
       Change in fair value of
         securities available for sale         --           --              --             --          (257)         (257)

   Comprehensive income                                                                                             4,322
                                                                                                                    =====

Stock options exercised                     8,850            9             165             --            --           174
Issuance of common stock                       30           --               1             --            --             1
Cash dividends declared
   ($1.40 per share)                           --           --              --         (3,530)           --        (3,530)

   Balance at December 31, 2003         2,521,539      $ 2,522         $10,005        $12,663          $460       $25,650
                                        =========       ======          ======         ======           ===        ======
</TABLE>

See notes to consolidated financial statements.


                                      -38-
<PAGE>


Consolidated Statements of Cash Flows
--------------------------------------------------------------------------------
(Dollars in Thousands)

Pacific Financial Corporation and Subsidiary
Years Ended December 31, 2003, 2002 and 2001


<TABLE>
<CAPTION>

                                                                         2003         2002        2001

Cash Flows from Operating Activities
<S>                                                                  <C>          <C>          <C>
   Net income                                                        $  4,579     $  3,916     $ 3,807
   Adjustments to reconcile net income to net cash
     provided by operating activities:
       Depreciation and amortization                                      404         433          423
       Provision for credit losses                                         --          954         580
       Deferred income tax (benefit)                                     (144)         (82)        225
       Originations of loans held for sale                                 --         (548)         --
       Proceeds from sales of loans held for sale                         286          262          --
       Stock dividends received                                           (49)        (186)       (251)
       Gain on sales of loans                                             (34)          --          --
       Gain on sale of securities available for sale                       (4)          --          --
       Gain on sales of foreclosed real estate                            (10)        (178)         --
       Loss on sale of premises and equipment                              11           --          --
       Earnings on bank owned life insurance                             (328)        (350)       (167)
       (Increase) decrease in interest receivable                         218          (88)        897
       Decrease in interest payable                                       (84)        (123)       (338)
       Write-down of foreclosed real estate                               173          420          18
       Other - net                                                        (49)         929        (748)
   Net cash provided by operating activities                            4,969        5,359       4,446
                                                                       ======       ======      ======

Cash Flows from Investing Activities
   Net (increase) decrease in interest bearing deposits in banks      (15,019)       1,095        (988)
   Net (increase) decrease in federal funds sold                       (5,000)       3,505      (2,935)
   Activity in securities available for sale:
     Sales                                                              2,994           --      10,694
     Maturities, prepayments and calls                                 12,343       14,109      36,987
     Purchases                                                        (21,275)     (34,338)    (24,828)
   Activity in securities held to maturity:
     Maturities                                                         3,919        3,481         190
     Purchases                                                         (1,654)      (8,920)     (1,123)
   Federal Home Loan Bank stock redemption                                 --        3,133          --
   Proceeds from sales of SBA loan pools                                2,006           --       1,407
   Increase in loans made to customers, net of principal collections  (16,709)     (10,046)     (5,165)

   Purchases of premises and equipment                                   (511)        (261)       (509)
   Proceeds from sales of premises and equipment                            2           --          50
   Additions to foreclosed real estate                                    (21)          --          --
   Proceeds from sales of foreclosed real estate                          734          707         161
   Purchase of bank owned life insurance                                   --           --      (3,000)
   Net cash provided by (used in) investing activities                (38,191)     (27,535)     10,941
                                                                       ======       ======      ======

(continued)

See notes to consolidated financial statements.

                                      -39-

<PAGE>


Consolidated Statements of Cash Flows
--------------------------------------------------------------------------------
(concluded) (Dollars in Thousands)

Pacific Financial Corporation and Subsidiary
Years Ended December 31, 2003, 2002 and 2001


                                                                         2003         2002        2001

Cash Flows from Financing Activities
   Net increase in deposits                                           $35,546      $10,610     $ 1,133
   Net increase (decrease) in short-term borrowings                    (1,800)       1,800     (11,358)
   Proceeds from issuance of long-term debt                             3,500       11,000       3,000
   Repayments of long-term debt                                            --           --      (3,000)
   Common stock issued                                                    175          297         164
   Cash dividends paid                                                 (3,392)      (3,289)     (3,204)
   Repurchase of common stock and fractional shares                        --           --        (510)
   Net cash provided by (used in) financing activities                 34,029       20,418     (13,775)
                                                                       ======       ======      ======

   Net change in cash and due from banks                                  807       (1,758)      1,612
                                                                       ======       ======      ======
Cash and Due from Banks
   Beginning of year                                                    8,473       10,231       8,619

   End of year                                                        $ 9,280      $ 8,473     $10,231
                                                                       ======       ======      ======

Supplemental Disclosures of Cash Flow Information
   Interest paid                                                      $ 3,492      $ 4,114     $ 6,868
   Income taxes paid                                                    2,087        1,260       1,375

Supplemental Disclosures of Non-Cash Investing Activities
   Fair value adjustment of securities available for sale, net of tax $   257      $  309      $   599
   Transfer of loans to foreclosed real estate                          1,127        1,198       1,733
   Financed sales of foreclosed real estate                               839          629         514
   Reclassification of loan receivable to securities available for sale    --           --       2,636

</TABLE>









See notes to consolidated financial statements.

                                      -40-
<PAGE>

Notes to Consolidated Financial Statements
--------------------------------------------------------------------------------

Pacific Financial Corporation and Subsidiary
December 31, 2003 and 2002

Note 1 - Summary of Significant Accounting Policies

Principles of Consolidation

The consolidated  financial statements include the accounts of Pacific Financial
Corporation  (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  located in Grays  Harbor,  Pacific and
Wahkiakum  Counties  in western  Washington  and one loan  production  office in
Clatsop County Oregon. The Bank provides loan and deposit services to customers,
who are  predominately  small- and  middle-market  businesses and  middle-income
individuals in western Washington and Oregon.

Consolidated Financial Statement Presentation

The  consolidated  financial  statements  have been prepared in accordance  with
accounting  principles  generally  accepted in the United  States of America and
practices within the banking industry. The preparation of consolidated financial
statements 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,  with no change to net income
or  shareholders'  equity,  to  conform  to the 2003  presentation.  All  dollar
amounts, except per share information, are stated in thousands.

Securities Available for Sale

Securities  available  for sale consist of debt  securities,  marketable  equity
securities  and  mutual  funds that the Bank  intends to hold for an  indefinite
period,  but  not  necessarily  to  maturity.  Such  securities  may be  sold to
implement the Bank's  asset/liability  management  strategies and in response to
changes in interest rates and similar factors. 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)

                                      -41-

<PAGE>

Notes to Consolidated Financial Statements
--------------------------------------------------------------------------------

Pacific Financial Corporation and Subsidiary
December 31, 2003 and 2002


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  held to  maturity  and
available  for sale 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.

Federal Home Loan Bank Stock

The  Company,  as a member  of the  Federal  Home Loan Bank  (FHLB)  system,  is
required  to maintain an  investment  in capital  stock of the FHLB in an amount
equal to the greater of 1% of its outstanding  home loans or 5% of advances from
the FHLB.  The recorded  amount of FHLB stock equals its fair value  because the
shares can only be redeemed by the FHLB at the $100 per share par value.

Loans Held for Sale

Mortgage loans  originated for sale in the  foreseeable  future in the secondary
market are carried at the lower of  aggregate  cost or estimated  market  value.
Gains and losses on sales of loans are  recognized  at  settlement  date and are
determined by the  difference  between the sales proceeds and the carrying value
of the loans.  All sales are made without  recourse.  Net unrealized  losses are
recognized through a valuation allowance established by charges to income.

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
management's 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 on
a cash-basis method, until the loans qualify for return to accrual status. Loans
are  returned  to  accrual  status  when  all  principal  and  interest  amounts
contractually  due are  brought  current  and  future  payments  are  reasonably
assured.  The interest on these loans is accounted for on the cash-basis method,
until qualifying for return to accrual.


(continued)


                                      -42-
<PAGE>

Notes to Consolidated Financial Statements
--------------------------------------------------------------------------------

Pacific Financial Corporation and Subsidiary
December 31, 2003 and 2002


Note 1 - Summary of Significant Accounting Policies (continued)

Allowance for Credit Losses

The allowance  for credit losses is maintained at a level  sufficient to provide
for probable  credit losses based on evaluating  known and inherent risks in the
loan  portfolio.  The allowance is provided based upon  management's  continuing
analysis of the pertinent factors  underlying the quality of the loan portfolio.
These factors include changes in the size and composition of the loan portfolio,
delinquency levels,  actual loan loss experience,  current economic  conditions,
and detailed analysis of individual loans for which full  collectibility may not
be assured. The detailed analysis includes techniques to estimate the fair value
of loan  collateral  and the  existence  of  potential  alternative  sources  of
repayment.   The  allowance  consists  of  specific,   general  and  unallocated
components.  The  specific  component  relates to loans that are  classified  as
either doubtful,  substandard or special  mention.  For such loans that are also
classified as impaired,  an allowance is established  when the  discounted  cash
flows (or collateral  value or observable  market price) of the impaired loan is
lower  than the  carrying  value of that  loan.  The  general  component  covers
non-classified  loans and is based on historical  loss  experience  adjusted for
qualitative   factors.   An   unallocated   component  is  maintained  to  cover
uncertainties  that could affect  management's  estimate of probable losses. The
unallocated  component  of the  allowance  reflects  the  margin of  imprecision
inherent in the underlying  assumptions used in the methodologies for estimating
specific  and  general  losses  in the  portfolio.  The  appropriateness  of the
allowance  for losses on loans is estimated  based upon these factors and trends
identified by  management  at the time  consolidated  financial  statements  are
prepared.

When available  information confirms that specific loans or portions thereof are
uncollectible,  identified  amounts are charged 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  demonstrated  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.

In accordance  with SFAS No. 114,  Accounting  by Creditors for  Impairment of a
Loan,  and SFAS No. 118,  an  amendment  of SFAS No.  114, a loan is  considered
impaired  when it is  probable  that a creditor  will be unable to  collect  all
amounts  (principal and interest) due according to the contractual  terms of the
loan agreement.  Smaller balance homogenous loans, such as residential  mortgage
loans and consumer loans, are collectively  evaluated for potential loss. When a
loan has been  identified  as being  impaired,  the amount of the  impairment is
measured by using discounted cash flows, except when, as a practical  expedient,
the current  fair value of the  collateral,  reduced by costs to sell,  is used.
When the  measurement of the impaired loan is less than the recorded  investment
in the loan including accrued interest,  an impairment is recognized by creating
or adjusting an allocation of the allowance for loan losses.

A  provision  for credit  losses is charged  against  income and is added to the
allowance  for  credit  losses  based  on  quarterly  assessments  of  the  loan
portfolio.  The  allowance  for  credit  losses is  allocated  to  certain  loan
categories based on the relative risk characteristics, asset classifications and
actual loss experience of the loan portfolio. While management has allocated the
allowance for credit losses to various loan portfolio segments, the allowance is
general in nature and is available for the loan portfolio in its entirety.

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  in the  consolidated  financial
statements.  In  addition,  regulatory  agencies,  as an integral  part of their
examination process, periodically review the Bank's allowance for credit losses,
and may  require  the Bank to make  additions  to the  allowance  based on their
judgment about information available to them at the time of their examinations.


(continued)

                                      -43-

<PAGE>

Notes to Consolidated Financial Statements
--------------------------------------------------------------------------------

Pacific Financial Corporation and Subsidiary
December 31, 2003 and 2002


Note 1 - Summary of Significant Accounting Policies (continued)

Premises and Equipment

Premises and equipment are stated at cost less accumulated  depreciation,  which
is computed on the  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  lower  of cost or 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. Any subsequent reductions in carrying values,
and  revenue and  expense  from the  operations  of  properties,  are charged to
operations.

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.

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.  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.


(continued)



                                      -44-




<PAGE>

Notes to Consolidated Financial Statements
--------------------------------------------------------------------------------

Pacific Financial Corporation and Subsidiary
December 31, 2003 and 2002

Note 1 - Summary of Significant Accounting Policies (continued)

Stock-Based Compensation

At December 31, 2003, the Company has three  stock-based  employee  compensation
plans, which are described more fully in Note 14. The Company accounts for those
plans under the recognition and measurement principles of APB No. 25, Accounting
for Stock Issued to  Employees,  and related  interpretations.  Accordingly,  no
stock-based compensation cost is reflected in net income, as all options granted
under  those  plans  had an  exercise  price  equal to the  market  value of the
underlying  common stock on the date of grant.  The  following  illustrates  the
effect on net income and  earnings per share if the Company had applied the fair
value  recognition  provisions  of SFAS  No.  123,  Accounting  for  Stock-Based
Compensation,  to stock-based compensation awards for the effects of all options
granted on or after January 1, 1995 for the years ended December 31:

<TABLE>
<CAPTION>

                                                           2003         2002          2001

<S>                                                      <C>          <C>           <C>
Net income, as reported                                  $4,579       $3,916        $3,807
Less total stock-based compensation expense determined
   under fair value method for all qualifying awards,        86           93            10
    net of tax

   Pro forma net income                                  $4,493       $3,823        $3,797
                                                          =====        =====         =====
Earnings Per Share
   Basic:
     As reported                                         $ 1.82       $ 1.57        $ 1.53
     Pro forma                                             1.79         1.54          1.52
   Diluted:
     As reported                                           1.79         1.56          1.52
     Pro forma                                             1.76         1.53          1.50

</TABLE>

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 consolidated  financial
statements:

      Cash,  Interest  Bearing  Deposits at Other  Financial  Institutions,  and
      Federal Funds Sold
      The carrying amounts of cash, interest bearing deposits at other financial
      institutions, and federal funds sold approximate their fair value.

      Securities  Available  for Sale  and  Held to  Maturity
      Fair values for securities are based on quoted market prices.

(continued)


                                      -45-

<PAGE>

Notes to Consolidated Financial Statements
--------------------------------------------------------------------------------

Pacific Financial Corporation and Subsidiary
December 31, 2003 and 2002

Note 1 - Summary of Significant Accounting Policies (continued)

Fair Values of Financial Instruments (concluded)

      Federal Home Loan Bank Stock
      The carrying value of Federal Home Loan Bank stock  approximates  its fair
      value.

      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
      analysis,  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.

      Deposit Liabilities
      The fair value of deposits with no stated maturity date is included at the
      amount  payable on demand.  Fair  values  for fixed rate  certificates  of
      deposit are estimated  using a discounted cash flow  calculation  based on
      interest rates currently 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 Bank's current incremental  borrowing rates for
      similar types of borrowing arrangements.

      Long-Term Borrowings

      The fair values of the Bank's  long-term  borrowings  are estimated  using
      discounted  cash flow analyses based on the Bank's  incremental  borrowing
      rates for similar types of borrowing arrangements.

      Accrued Interest
      The carrying amounts of accrued interest approximate their fair values.

      Off-Balance-Sheet Instruments
      The fair value of  commitments  to extend  credit and  standby  letters of
      credit  was  estimated  using the fees  currently  charged  to enter  into
      similar  agreements,  taking  into  account  the  remaining  terms  of the
      agreements and the present  creditworthiness  of the customers.  Since the
      majority of the Bank's  off-balance-sheet  instruments  consist of non-fee
      producing,  variable-rate commitments, the Bank has determined they do not
      have a distinguishable fair value.


(continued)


                                      -46-
<PAGE>

Notes to Consolidated Financial Statements
--------------------------------------------------------------------------------

Pacific Financial Corporation and Subsidiary
December 31, 2003 and 2002


Note 1 - Summary of Significant Accounting Policies (concluded)

Cash Equivalents and Cash Flows

The Company  considers  all amounts  included in the balance sheet caption "Cash
and due from  banks" to be cash  equivalents.  Cash flows from  loans,  interest
bearing  deposits in banks,  federal  funds  sold,  short-term  borrowings,  and
deposits are reported net.

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  excludes  dilution  and is computed by dividing  net
income by the weighted  average  number of common  shares  outstanding.  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

Accounting principles generally require that recognized revenue, expenses, gains
and losses be  included in net income.  Although  certain  changes in assets and
liabilities,  such as unrealized  gains and losses on  securities  available for
sale,  are  reported  as a  separate  component  of the  equity  section  of the
consolidated  balance sheets,  such items, along with net income, are components
of comprehensive  income.  Gains and losses on securities available for sale are
reclassified  to net income as the gains or losses are realized upon sale of the
securities.  Other-than-temporary  impairment  charges are  reclassified  to net
income at the time of the charge.

Recent Accounting Pronouncements

The  Financial   Accounting  Standards  Board  has  issued  Statement  No.  149,
Amendments  of Statement  No. 133 on Derivative  Instruments  and Hedging.  This
Statement amends and clarifies financial accounting and reporting for derivative
instruments,   including  certain  derivative   instruments  embedded  in  other
contracts, and for hedging activities under Statement No. 133. The Statement was
effective  for  contracts  entered into or modified  after June 30, 2003 and for
hedging  relationships  designated  after June 30, 2003.  Implementation  of the
Statement on July 1, 2003 did not have a significant  impact on the consolidated
financial statements.

The Financial Accounting Standards Board has issued Statement No.150, Accounting
for Certain Financial  Instruments with  Characteristics of both Liabilities and
Equity.  This Statement  establishes  standards for how an issuer classifies and
measures certain financial  instruments with characteristics of both liabilities
and equity,  and requires that certain  freestanding  financial  instruments  be
reported as liabilities on the consolidated balance sheets. For the Company, the
Statement  is  effective  for the  fiscal  year  beginning  January  1, 2005 and
implementation is not expected to have a significant  impact on the consolidated
financial statements.


                                      -47-
<PAGE>

Notes to Consolidated Financial Statements
--------------------------------------------------------------------------------

Pacific Financial Corporation and Subsidiary
December 31, 2003 and 2002


Note 2 - Restricted Assets

Federal  Reserve  Board  regulations  require  that the Bank  maintains  certain
minimum  reserve  balances in cash and on deposit with the Federal Reserve Bank,
based on a percentage of deposits.  The average  amount of such balances for the
years ended December 31, 2003 and 2002 were approximately $650.


Note 3 - Securities

Investment securities have been classified according to management's intent. The
carrying amounts of securities and their approximate fair values are as follows:

<TABLE>
<CAPTION>

                                                                  Gross       Gross
                                                    Amortized   Unrealized  Unrealized     Fair
                                                      Cost        Gains       Losses       Value

Securities Available for Sale

December 31, 2003
<S>                                                 <C>          <C>           <C>      <C>
   U.S. Treasury and Government agency securities   $ 1,738      $   81        $ --     $ 1,819

   Obligations of states and political subdivisions  14,239         600          88      14,751
   Mortgage-backed securities                        16,121         181          91      16,211
   Corporate bonds                                    4,122         122          11       4,233
   Mutual funds                                      20,556         ---          97      20,459

                                                    $56,776      $  984        $287     $57,473
                                                     ======       =====         ===      ======

December 31, 2002
   U.S. Treasury and Government agency securities   $ 2,165      $  142        $ --     $ 2,307

   Obligations of states and political subdivisions  11,502         609          13      12,098
   Mortgage-backed securities                        16,669         215          27      16,857
   Corporate bonds                                    5,979         127           7       6,099
   Mutual funds                                      14,828          47           6      14,869

                                                    $51,143      $1,140        $ 53     $52,230
                                                     ======       =====         ===      ======
Securities Held to Maturity

December 31, 2003
   State and municipal securities                   $ 5,044      $   75        $ 20     $ 5,099
   Mortgage-backed securities                         2,944          54          --       2,998

                                                     ======       =====         ===      ======

December 31, 2002
   State and municipal securities                   $ 3,751      $   39        $ 28     $ 3,762
   Mortgage-backed securities                         6,611          41          --       6,652

                                                    $10,362      $   80        $ 28     $10,414
                                                     ======       =====         ===      ======
</TABLE>

(continued)


                                      -48-
<PAGE>

Notes to Consolidated Financial Statements
--------------------------------------------------------------------------------

Pacific Financial Corporation and Subsidiary
December 31, 2003 and 2002


Note 3 - Securities (concluded)

Unrealized losses and fair value,  aggregated by investment  category and length
of time that  individual  securities  have been in  continuous  unrealized  loss
position, as of December 31, 2003 are summarized as follows:

<TABLE>
<CAPTION>

                                 Less than   12 Months       More than   12 Months      Total
                                   Fair      Unrealized        Fair      Unrealized     Fair     Unrealized
                                   Value        Loss           Value        Loss        Value       Loss


Available for Sale
   Obligations of states and
<S>                               <C>           <C>          <C>            <C>       <C>           <C>
     political subdivisions       $1,546        $ 88         $    --        $ --      $ 1,546       $ 88
   Mortgage-backed securities      3,375          67           2,942          24        6,317         91
   Corporate bonds                 1,094          11             ---         ---       1,094          11
   Mutual funds                    3,855          44          16,604          53       20,459         97

   Total                          $9,870        $210         $19,546        $ 77      $29,416       $287
                                   =====         ===          ======         ===       ======        ===
Held to Maturity
   State and municipal securities $  374        $ 16         $   912        $  4      $ 1,286       $ 20
                                   =====         ===          ======         ===       ======        ===
</TABLE>

For all the above investment securities, the unrealized losses are generally due
to changes in interest rates and, as such, are considered to be temporary by the
Company.

The  contractual  maturities  of  investment  securities  held to  maturity  and
available for sale at December 31, 2003 are as follows:

<TABLE>
<CAPTION>
                                      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            $  449        $  456       $ 2,659      $ 2,733
Due from one year to five years     1,598         1,614         9,032        9,478
Due from five to ten years            964         1,011         5,263        5,437
Due after ten years                 2,033         2,018         3,145        3,155
Mortgage-backed securities          2,944         2,998        16,121       16,211
Mutual funds                           --            --        20,556       20,459

    Total                          $7,988        $8,097       $56,776      $57,473
                                    =====         =====        ======       ======
</TABLE>


Gross gains  realized on sales of securities  were $9 and gross losses  realized
were $5 in 2003. There were no sales of securities in 2002 and 2001.

Securities carried at approximately  $18,691 at December 31, 2003 and $25,622 at
December  31, 2002 were pledged to secure  public  deposits,  borrowings  at the
Federal Home Loan Bank of Seattle,  for other purposes  required or permitted by
law.


                                      -49-
<PAGE>

Notes to Consolidated Financial Statements
--------------------------------------------------------------------------------

Pacific Financial Corporation and Subsidiary
December 31, 2003 and 2002


Note 4 - Loans

Loans at December 31 consist of the following:

<TABLE>
<CAPTION>

                                                                 2003         2002

<S>                                              <C>           <C>          <C>
Commercial and agricultural                                  $ 64,344     $ 69,794
Real estate:
  Construction                                                 11,894        9,697
  Residential 1-4 family                                       24,418       28,085
  Multi-family                                                  2,197        1,574
  Commercial                                                   85,933       65,336
  Farmland                                                      5,268        5,870
Consumer                                                        5,684        5,148

                                                             $199,738     $185,504
                                                              =======      =======

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

                                                   2003          2002         2001

Balance at beginning of year                     $2,473        $2,109       $2,026
Provision for credit losses                          --           954          580

Charge-offs                                        (265)         (632)        (564)
Recoveries                                           30            42           67
   Net charge-offs                                 (235)         (590)        (497)

   Balance at end of year                        $2,238        $2,473       $2,109
                                                  =====         =====        =====

Following is a summary of information pertaining to impaired loans:

                                                   2003         2002           2001

December 31
   Impaired loans without a valuation allowance  $  342        $2,296       $  482
   Impaired loans with a valuation allowance        123            18        1,180

   Total impaired loans                          $  465        $2,314       $1,662
                                                  =====         =====        =====

   Valuation allowance related to impaired loans $   23        $    2       $  143
                                                  =====         =====        =====

Years Ended December 31
   Average investment in impaired loans          $1,412        $2,390       $1,262
   Interest income recognized on a cash basis on
   impaired loans                                    12            13            2
</TABLE>


(continued)

                                      -50-
<PAGE>

Notes to Consolidated Financial Statements
--------------------------------------------------------------------------------

Pacific Financial Corporation and Subsidiary
December 31, 2003 and 2002


Note 4 - Loans (concluded)

At December 31, 2003,  there were no  commitments  to lend  additional  funds to
borrowers  whose loans have been modified.  There were no loans 90 days and over
past due and still accruing interest at December 31, 2003 and 2002.

Certain  related  parties  of  the  Company,  principally  directors  and  their
associates,  were loan customers of the Bank in the ordinary  course of business
during 2003 and 2002.  Total loans  outstanding at December 31, 2003 and 2002 to
key officers and directors  were $6,483 and $5,698,  respectively.  During 2003,
new loans of $7,646 were made, and repayments  totaled  $6,861.  In management's
opinion,  these  loans  and  transactions  were on the same  terms as those  for
comparable loans and transactions with non-related  parties. No loans to related
parties were on non-accrual, past due or restructured at December 31, 2003.


Note 5 - Premises and Equipment

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

                                                               2003         2002

Land                                                       $  1,125     $  1,125
Premises                                                      4,309        3,992
Equipment, furniture and fixtures                             4,122        4,074
                                                              9,556        9,191
Less accumulated depreciation and amortization                5,589        5,341

   Total premises and equipment                            $  3,967     $  3,850
                                                            =======      =======


Note 6 - Deposits

The composition of deposits at December 31 is as follows:

                                                               2003         2002

Demand deposits, non-interest bearing                      $ 43,862     $ 40,084
NOW and money market accounts                                79,185       52,651
Savings deposits                                             52,308       50,542
Time certificates, $100,000 or more                          43,608       35,086
Other time certificates                                      41,837       46,891

   Total                                                   $260,800     $225,254
                                                            =======      =======


(continued)

                                      -51-
<PAGE>

Notes to Consolidated Financial Statements
--------------------------------------------------------------------------------

Pacific Financial Corporation and Subsidiary
December 31, 2003 and 2002


Note 6 - Deposits (concluded)

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

   2004                                                                 $59,040
   2005                                                                  15,463
   2006                                                                   2,041
   2007                                                                   3,318
   2008                                                                   5,583

                                                                        $85,445


Note 7 - Long-Term Borrowings

Long-term  borrowings at December 31, 2003  represent  advances from the Federal
Home Loan Bank bearing  interest at 2.78% to 4.41% and maturing in various years
as follows: 2004 - $2,000; 2005 - $2,000; 2006 - $1,000; 2008 - $3,500; and 2009
- $6,000. The Bank has pledged $29,727 of securities and loans as collateral for
these borrowings and short-term borrowings at December 31, 2003.


Note 8 - Income Taxes

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

                                                 2003          2002         2001

Current                                        $1,719        $1,645       $1,296
Deferred (benefit)                                144           (82)         225

   Total income taxes                          $1,863        $1,563       $1,521
                                                =====         =====        =====

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

                                                               2003         2002

Deferred Tax Assets
   Allowance for credit losses                               $  634       $  730
   Deferred compensation                                        159          161
   Other                                                         12            8
   Total deferred tax assets                                    805          899
                                                                ===          ===

(continued)

                                      -52-

<PAGE>

Notes to Consolidated Financial Statements
--------------------------------------------------------------------------------

Pacific Financial Corporation and Subsidiary
December 31, 2003 and 2002


Note 8 - Income Taxes (concluded)

                                                              2003          2002

Deferred Tax liabilities
   Unrealized gain on securities available for sale         $  237       $  369
   Depreciation                                                167          119
   Deferred revenue                                            886          884
   Total deferred tax liabilities                            1,290        1,372
                                                             =====        =====

   Net deferred tax liabilities                            ($  485)     ($  473)
                                                             =====        =====

Net  deferred  tax  liabilities  are  included  in  other   liabilities  on  the
consolidated balance sheets.

The following is a  reconciliation  between the statutory and effective  federal
income tax rate for the years ended December 31:

<TABLE>
<CAPTION>

                                     2003                   2002                  2001

                                              Percent               Percent                 Percent
                                             of Pre-tax            of Pre-tax              of Pre-tax
                                   Amount     Income      Amount    Income      Amount       Income

<S>                                <C>          <C>       <C>         <C>       <C>            <C>
Income tax at statutory rate       $2,255       35.0%     $1,918      35.0%     $1,865         35.0%
Adjustments resulting from:
   Tax-exempt income                 (232)      (3.6)       (276)     (5.0)       (272)        (5.1)
   Net earnings on life insurance
     policies                        (103)      (1.6)       (111)     (2.0)        (26)         (.5)
   Other                              (57)       (.9)         32        .5         (46)         (.8)

   Total income tax expense        $1,863       28.9%     $1,563      28.5%     $1,521         28.6%
                                    =====       ====       =====      ====       =====         ====
</TABLE>


Note 9 - 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  $602,  $435  and  $355 in  2003,  2002  and  2001,
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 $129,
$126 and $115 for 2003, 2002 and 2001, respectively.

(continued)

                                      -53-


<PAGE>

Notes to Consolidated Financial Statements
--------------------------------------------------------------------------------

Pacific Financial Corporation and Subsidiary
December 31, 2003 and 2002


Note 9 - Employee Benefits (concluded)

Director and Employee Deferred Compensation Plans

The Company 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 Company,  the ten-year  anniversary  of the  participant's  participation
date, or at the discretion of the Company.  There are currently two participants
in the plans. Total deferrals plus earnings were $105, $110 and $304 at December
31, 2003,  2002 and 2001,  respectively.  There is no expense to the Company for
this plan.

The  directors  of a bank  acquired by the Company in 1999  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,  the Bank  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 $2,819 and $2,700 at
December  31,  2003 and 2002,  respectively.  In 2003,  2002 and  2001,  the net
(benefit)/cost recorded from these plans, including the cost of the related life
insurance, was ($271), ($315) and ($104), respectively. Both of these plans were
fully funded and frozen as of September 30, 2000. Plan  participants  were given
the  option to  either  remain in the plan  until  reaching  the age of 70 or to
receive a lump-sum  distribution.  Participants  electing  to remain in the plan
will receive  annual  payments over a ten-year  period upon reaching 70 years of
age.

Qualified Non-Contributory Defined Benefit Plan

The  Company  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.  Final funding of the plan did not
occur  until  2001  upon  receipt  of plan  administrator  distribution  totals.
Contributions of $149 were made in 2001.

Non-Qualified Deferred Compensation Plan

The Company has a  non-qualified  deferred  compensation  plan to cover selected
employees.  Its annual  contributions to the plan totaled $6, $6 and $8 in 2003,
2002 and 2001, respectively. Covered employees may also contribute to the plan.









                                      -54-


<PAGE>

Notes to Consolidated Financial Statements
--------------------------------------------------------------------------------

Pacific Financial Corporation and Subsidiary
December 31, 2003 and 2002


Note 10 - 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 on the consolidated balance sheets.

The Bank's 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 Bank's
commitments at December 31 is as follows:

                                                              2003         2002

Commitments to extend credit                               $44,044      $23,638
Standby letters of credit                                    2,715        2,326

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
Bank's  experience has been that  approximately 67% of loan commitments is drawn
upon by customers.  The Bank evaluates  each  customer's  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 management's 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
$17,200, none of which was used at December 31, 2003. In addition,  the Bank has
a credit line with the Federal Home Loan Bank of Seattle totaling 20% of assets,
$14,500  of  which  was  used  at  December  31,  2003.   These  borrowings  are
collateralized under blanket pledge and custody 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.


                                      -55-
<PAGE>

Notes to Consolidated Financial Statements
--------------------------------------------------------------------------------

Pacific Financial Corporation and Subsidiary
December 31, 2003 and 2002

Note 11 - Significant Concentrations of Credit Risk

Most of the Bank's 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 state banking  regulations to 20% of
the Bank's  shareholder's  equity,  excluding  accumulated  other  comprehensive
income  (loss).  As of December  31, 2003 the Bank's  loans to  companies in the
hotel\motel  industry totaled $33,323 or 16% of total loans.  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 $4.25 million.


Note 12 - Stock Options

The Company's three stock  incentive plans provide for granting  incentive stock
options,  as defined under current tax laws, to key personnel and under the plan
adopted in 2000,  options not  qualified  for  favorable tax treatment and other
types of stock based awards.  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,  and no additional  grants will be made under these
two plans. The plan adopted in 2000, authorizes the issuance of up to a total of
500,000  shares,  (296,500 shares are available for grant at December 31, 2003).
Under the 2000 plan, options either become  exercisable  ratably over five years
or vest  fully  five  years  from the date of grant.  Under the 2000  plan,  the
Company  may  grant  up to  75,000  options  for its  common  stock  to a single
individual in a calendar year.

The fair value of each option grant is estimated on the date of grant, based on
the Black-Scholes option pricing model and using the following weighted-average
assumptions:

                                              2003           2002          2001

Dividend yield                               5.31%          5.67%         5.76%
Expected life                             10 years       10 years      10 years
Risk-free interest rate                      4.38%          5.49%         4.93%
Expected volatility                         17.73%         18.99%        19.13%

The  weighted  average  fair value of options  granted  during 2003 and 2002 was
$2.86 and $3.03, respectively.

The Black-Scholes  model used by the Company to calculate option values, as well
as other currently accepted option valuation models,  were developed to estimate
the fair value of freely tradable,  fully  transferable  options without vesting
restrictions, which significantly differ from the Company's stock option awards.
These models also require highly subjective assumptions,  including future stock
price  volatility  and expected time until  exercise,  which greatly  affect the
calculated  values.  Accordingly,  management  believes that this model does not
necessarily provide a reliable single measure of the fair value of the Company's
option awards.

(continued)

                                      -56-


<PAGE>

Notes to Consolidated Financial Statements
--------------------------------------------------------------------------------

Pacific Financial Corporation and Subsidiary
December 31, 2003 and 2002


Note 12 - Stock Options (concluded)

A summary of the status of the  Company's  stock option plans as of December 31,
2003,  2002 and 2001,  and changes  during the years ending on those  dates,  is
presented below:

<TABLE>
<CAPTION>

                                     2003                2002                   2001


                                            Weighted               Weighted                Weighted
                                            Average                Average                 Average
                                            Exercise               Exercise                Exercise
                                   Shares    Price      Shares       Price     Shares       Price

<S>                               <C>       <C>       <C>           <C>        <C>         <C>
Outstanding at beginning of year  179,796   $22.26    184,300       $21.19     74,550      $18.21
Granted                            62,004    25.61     23,996        23.34    126,000       22.22
Exercised                          (8,850)   19.65    (21,000)       14.09    (12,750)      12.82
Forfeited                              --       --     (7,500)       22.22     (3,500)      25.63

   Outstanding at end of year     232,950   $23.25    179,796       $22.26    184,300      $21.19

Exercisable at end of year         76,999   $22.06     53,300       $21.08     32,165      $14.40
</TABLE>

The following information summarizes information about stock options outstanding
and exercisable at December 31, 2003:

                                 Weighted
                                 Average        Weighted                Weighted
  Range of                       Remaining      Average                 Average
  Exercise          Number       Contractual    Exercise   Number       Exercise
   Prices           Outstanding  Life (Years)   Price      Exercisable   Price

  $15.29            13,550        3              $15.29    13,550        $15.29
   22.22 - 24.00   153,650        7               22.55    47,449         22.33
   25.00            35,500        9               25.00        --         25.00
   27.00            20,250        6               27.00    16,000         27.00
   31.00            10,000        9               31.00        --         31.00

                   232,950                                 76,999
                   =======                                 ======









                                      -57-


<PAGE>

Notes to Consolidated Financial Statements
--------------------------------------------------------------------------------

Pacific Financial Corporation and Subsidiary
December 31, 2003 and 2002

Note 13 - 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  Company's  consolidated  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  Bank's   assets,   liabilities   and  certain
off-balance-sheet items as calculated under regulatory accounting practices. The
Bank's 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, 2003, the most recent  notification from the Bank's 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 institution's category.

The Company and the Bank's actual capital  amounts and ratios are also presented
in the table.  Management believes, as of December 31, 2003, the Company and the
Bank meet all capital requirements to which they are subject.

<TABLE>
<CAPTION>


                                                                                To be Well Capitalized
                                                                                     Under Prompt
                                                                                      Corrective
                                                                Capital           Adequacy Action
                                               Actual          Purposes               Provisions
                                               Amount   Ratio    Amount   Ratio         Amount       Ratio


December 31, 2003
   Tier 1 capital (to average assets):
<S>                                            <C>       <C>     <C>       <C>         <C>            <C>
     Consolidated                             $25,190    8.49%  $11,864    4.00%           N/A         N/A
     Bank                                      24,651    8.31    11,864    4.00        $14,830        5.00%
   Tier 1 capital (to risk-weighted assets):
     Consolidated                              25,190   11.62     8,675    4.00            N/A         N/A
     Bank                                      24,651   11.37     8,675    4.00         13,012        6.00
   Total capital (to risk-weighted assets):
     Consolidated                              27,428   12.65    17,350    8.00            N/A         N/A
     Bank                                      26,889   12.40    17,350    8.00         21,687       10.00
</TABLE>


(continued)


                                      -58-


<PAGE>

Notes to Consolidated Financial Statements
--------------------------------------------------------------------------------

Pacific Financial Corporation and Subsidiary
December 31, 2003 and 2002

Note 13 - Regulatory Matters (concluded)

<TABLE>
<CAPTION>


                                                                                To be Well Capitalized
                                                                                     Under Prompt
                                                                                      Corrective
                                                                Capital           Adequacy Action
                                               Actual          Purposes               Provisions
                                               Amount   Ratio    Amount   Ratio         Amount       Ratio



December 31, 2002
   Tier 1 capital (to average assets):
<S>                                            <C>       <C>     <C>       <C>         <C>            <C>
     Consolidated                             $23,966    8.92%  $10,753    4.00%           N/A         N/A
     Bank                                      23,832    8.87    10,753    4.00        $13,441        5.00%
   Tier 1 capital (to risk-weighted assets):
     Consolidated                              23,966   11.73     8,172    4.00            N/A         N/A
     Bank                                      23,832   11.67     8,171    4.00         12,257        6.00
   Total capital (to risk-weighted assets):
     Consolidated                              26,457   12.95    16,344    8.00            N/A         N/A
     Bank                                      26,323   12.89    16,342    8.00         20,428       10.00

</TABLE>

Note 14 - Comprehensive Income

Net unrealized gains and losses include,  net of tax, $254 of unrealized  losses
arising  during 2003,  $309 of unrealized  gains arising during 2003 and $599 of
unrealized gains arising during 2002, less  reclassification  adjustments of $3,
$0 and $0 for gains included in net income in 2003, 2002 and 2001, respectively,
as follows:

<TABLE>
<CAPTION>
                                                                 Before-      Tax
                                                                  Tax        Benefit     Net-of-Tax
                                                                 Amount     (Expense)     Amount

2003
<S>                                                               <C>           <C>        <C>
   Unrealized holding losses arising during the year              ($384)        $130       ($254)
   Reclassification adjustments for gains realized in net income     (4)           1          (3)

   Net unrealized losses                                          ($388)        $131       ($257)
                                                                    ===          ===         ===

2002
   Unrealized holding losses arising during the year               $467        ($158)       $309
   Reclassification adjustments for gains realized in net income     --           --          --

   Net unrealized gains                                            $467        ($158)       $309
                                                                    ===          ===         ===

2001
   Unrealized holding losses arising during the year               $908        ($309)       $599
   Reclassification adjustments for gains realized in net income     --           --          --

   Net unrealized gains                                            $908        ($309)       $599
                                                                    ===          ===         ===
</TABLE>




                                      -59-


<PAGE>

Notes to Consolidated Financial Statements
--------------------------------------------------------------------------------

Pacific Financial Corporation and Subsidiary
December 31, 2003 and 2002

Note 15 - Fair Values of Financial Instruments

The estimated fair values of the Company's financial  instruments at December 31
are as follows:

<TABLE>
<CAPTION>

                                      2003                        2002
                                    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  $ 29,672      $ 29,672      $  8,846     $  8,846
   Securities available for sale      57,473        57,473        52,230       52,230
   Securities held to maturity         7,988         8,097        10,362       10,414
   Federal Home Loan Bank stock          915           915           866          866
   Loans receivable, net             197,500       200,449       183,031      188,247
   Loans held for sale                    --            --           286          286
   Accrued interest receivable         1,275         1,275         1,493        1,493

Financial Liabilities
   Deposits                         $260,800      $261,516      $225,254     $226,146
   Short-term borrowings                  --            --         1,800        1,800
   Long-term borrowings               14,500        14,319        11,000       11,105
   Accrued interest payable              234           234           318          318

</TABLE>

The Bank assumes  interest rate risk (the risk that general interest rate levels
will change) as a result of its normal operations.  As a result, the fair values
of the Bank's financial instruments will change when interest rate levels change
and that change may either be favorable or unfavorable  to the Bank.  Management
attempts to match  maturities of assets and  liabilities to the extent  believed
necessary to minimize  interest rate risk.  However,  borrowers  with fixed rate
obligations  are less  likely to prepay in a rising  rate  environment  and more
likely to prepay in a falling rate environment.  Conversely,  depositors who are
receiving  fixed rates are more likely to withdraw  funds  before  maturity in a
rising rate environment and less likely to do so in a falling rate  environment.
Management monitors rates and maturities of assets and liabilities, and attempts
to minimize interest rate risk by adjusting terms of new loans, and deposits and
by investing in securities with terms that mitigate the Bank's overall  interest
rate risk.







                                      -60-


<PAGE>

Notes to Consolidated Financial Statements
--------------------------------------------------------------------------------

Pacific Financial Corporation and Subsidiary
December 31, 2003 and 2002


Note 16 - Earnings Per Share Disclosures

Following is information regarding the calculation of basic and diluted earnings
per share for the years indicated.

                                     Net Income        Shares          Per Share
                                     (Numerator)    (Denominator)       Amount

Year Ended December 31, 2003
   Basic earnings per share:
     Net income                         $4,579        2,512,844           $1.82
   Effect of dilutive securities:
     Options                                --           47,003            (.03)
   Diluted earnings per share:
     Net income                         $4,579        2,559,847           $1.79

Year Ended December 31, 2002
   Basic earnings per share:
     Net income                         $3,916        2,492,526           $1.57
   Effect of dilutive securities:
     Options                                --           17,869            (.01)
   Diluted earnings per share:
     Net income                         $3,916        2,510,395           $1.56

Year Ended December 31, 2001
   Basic earnings per share:
     Net income                         $3,807        2,491,426           $1.53
   Effect of dilutive securities:
     Options                                --           19,736            (.01)
   Diluted earnings per share:
     Net income                         $3,807        2,511,162           $1.52

The number of shares  shown for  "options" is the number of  incremental  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.










                                      -61-


<PAGE>

Notes to Consolidated Financial Statements
--------------------------------------------------------------------------------

Pacific Financial Corporation and Subsidiary
December 31, 2003 and 2002


Note 17 - Condensed Financial Information - Parent Company Only

Condensed Balance Sheets - December 31

<TABLE>
<CAPTION>
                                                                            2003          2002

Assets
<S>                                                        <C>           <C>          <C>
   Cash                                                                  $ 3,699      $ 3,467
   Investment in the Bank                                                 25,208       24,549
   Due from the Bank                                                          89           59
   Other assets                                                              184           --
   Total assets                                                          $29,180      $28,075
                                                                          ======       ======

Liabilities and Shareholders' Equity
   Dividends payable                                                     $ 3,530      $ 3,392
   Shareholders' equity                                                   25,650       24,683

   Total liabilities and shareholders' equity                            $29,180      $28,075
                                                                          ======       ======
Condensed Statements of Income - Years Ended December 31

                                                              2003          2002         2001

Dividend Income from the Bank                              $ 3,729       $ 3,200      $ 3,670

Expenses                                                       (96)          (59)         (69)

   Income before income tax benefit                          3,633         3,141        3,601
                                                            ======        ======       ======

Income Tax Benefit                                              30            20           23

   Income before equity in undistributed income of the Bank  3,663         3,161        3,624
                                                            ======        ======       ======


Equity in Undistributed Income of the Bank                     916           755          183

   Net income                                              $ 4,579       $ 3,916      $ 3,807
                                                            ======        ======       ======


(continued)


                                      -62-


<PAGE>

Notes to Consolidated Financial Statements
--------------------------------------------------------------------------------

Pacific Financial Corporation and Subsidiary
December 31, 2003 and 2002


Note 17 - Condensed Financial Information - Parent Company Only (concluded)

Condensed Statements of Cash Flows - Years Ended December 31

                                                              2003          2002         2001

Operating Activities
   Net income                                              $ 4,579       $ 3,916      $ 3,807
   Adjustments to reconcile net income to
     net cash provided by operating activities:
       Equity in undistributed income of subsidiary           (916)         (755)        (183)
       Other - net                                            (214)          (19)          (1)
   Net cash provided by operating activities                 3,449         3,142        3,623
                                                             =====        ======       ======

Investing Activities
   Increase in amounts due from the Bank                        --            --        3,178
                                                                                       ======
Financing Activities
   Common stock issued                                         175           297          164
   Dividends paid                                           (3,392)       (3,289)      (3,204)
   Repurchase of common stock and fractional shares             --            --         (510)
   Net cash used in financing activities                    (3,217)       (2,992)      (3,550)
                                                             =====        ======       ======

   Net increase in cash                                        232           150        3,251
                                                             =====        ======       ======

Cash
   Beginning of year                                         3,467         3,317           66

   End of year                                             $ 3,699       $ 3,467      $ 3,317
                                                             =====        ======       ======

</TABLE>












                                      -63-


<PAGE>

Notes to Consolidated Financial Statements
--------------------------------------------------------------------------------

Pacific Financial Corporation and Subsidiary
December 31, 2003 and 2002


Note 18 - Subsequent Event

On October 22, 2003, the Company announced the signing of a definitive agreement
for the  acquisition  of BNW Bancorp,  Inc. by merger.  Upon  completion  of the
transaction, each share of BNW Bancorp, Inc. common stock will be converted into
the right to receive 0.85 shares of the Company's common stock. The Company will
issue  approximately  610,240  shares  of its own  stock to  acquire  all of BNW
Bancorp, Inc.'s outstanding shares at an exchange ratio of 0.85 of the Company's
shares. The merger, which has been unanimously approved by the directors of both
companies,  is  subject  to  certain  conditions,   including  approval  of  the
shareholders  of BNW  Bancorp,  Inc.  and  shareholders  of the  Company and the
receipt of  regulatory  approval.  The merger is expected to be completed in the
first  quarter of 2004.  BNW Bancorp,  Inc.  will merge into  Pacific  Financial
Corporation,  immediately followed by the merger of Bank Northwest, a subsidiary
of BNW Bancorp,  Inc.,  into Bank of the Pacific.  After the merger the combined
organization  will have  assets  of  approximately  $407  million,  deposits  of
approximately  $339  million,  and  shareholders'  equity of  approximately  $44
million.


Note 19 - Quarterly Data (Unaudited)

                                 First          Second       Third       Fourth
                                 Quarter        Quarter      Quarter     Quarter

Year Ended December 31, 2003

Interest income                  $3,922        $3,991        $3,982      $4,054
Interest expense                    899           896           824         789
   Net interest income            3,023         3,095         3,158       3,265
                                  =====         =====         =====       =====

Provision for credit losses          --            --            --          --

Non-interest income                 444           457           539         406

Non-interest expenses             1,910         1,931         2,003       2,101

   Income before income taxes     1,557         1,621         1,694       1,570
                                  =====         =====         =====       =====

Income taxes                        445           470           500         448

   Net income                    $1,112        $1,151        $1,194      $1,122
                                  =====         =====         =====       =====

Earnings per common share:
  Basic                          $  .44        $  .46        $  .48      $  .44
  Diluted                           .44           .45           .47         .43
(continued)

                                      -64-


<PAGE>

Notes to Consolidated Financial Statements
--------------------------------------------------------------------------------

Pacific Financial Corporation and Subsidiary
December 31, 2003 and 2002


Note 19 - Quarterly Data (Unaudited) (concluded)

                                 First         Second        Third       Fourth
                                 Quarter       Quarter       Quarter     Quarter

Year Ended December 31, 2002

Interest income                  $3,880        $3,930        $3,942      $4,027
Interest expense                    971           981         1,046         993
   Net interest income            2,909         2,949         2,896       3,034
                                  =====         =====         =====       =====

Provision for credit losses         954            --            --          --

Non-interest income                 454           704           477         424

Non-interest expenses             1,819         1,873         1,848       1,874

   Income before income taxes       590         1,780         1,525       1,584
                                  =====         =====         =====       =====

Income taxes                        182           534           452         395

   Net income                    $  408        $1,246        $1,073      $1,189
                                  =====         =====         =====       =====

Earnings per common share:
  Basic                          $  .16        $  .50        $  .43      $  .48
  Diluted                           .16           .50           .43         .47





                                      -65-



<PAGE>


                  Notes to Consolidated Financial Statements

(a) (2) Schedules: None

(a) (3) Exhibits: See Exhibit Index immediately following the signature page.

(b)  Reports on Form 8-K:  During the three  months  ended  December  31,  2003,
Pacific filed the following current reports on Form 8-K:

        *  Report on Form 8-K dated October 22, 2003, reporting that the Company
        had entered into an Agreement and Plan of Merger dated October 22, 2003,
        governing the terms and conditions under which BNW Bancorp,  Inc., would
        be  merged  into  Pacific  and Bank  NorthWest,  BNW  Bancorp's  banking
        subsidiary, would be merged into the Bank of the Pacific; and

        *  Report on Form 8-K dated December 19, 2003,  reporting that Pacific's
        board of  directors  had  declared  a cash  dividend  of $1.40 per share
        payable to shareholders of record as of December 31, 2003.

                                      -66-
<PAGE>

SIGNATURES

Pursuant to the  requirements of Section 13 or 15(d) of the Securities  Exchange
Act of 1934,  the  registrant  has duly  caused  this report to be signed on its
behalf by the undersigned,  thereunto duly authorized, on the 19th day of March,
2004.


                                             PACIFIC FINANCIAL CORPORATION
                                                   (Registrant)

/s/ Dennis A. Long                      /s/ John Van Dijk
------------------------------------    ----------------------------------------
Dennis A. Long, President and CEO       John Van Dijk, Executive Vice President,
                                        Treasurer (CFO) and Secretary

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 and
in the capacities indicated, on the 19th day of March, 2004.

Principal Executive Officer and         Principal Financial and Accounting
Director                                Officer

/s/ Dennis A. Long                      /s/ John Van Dijk
----------------------------------      ----------------------------------------
Dennis A. Long, President and CEO       John Van Dijk, Treasurer (CFO)
and Director                            Principal Financial and Accounting
Principal Executive Officer             Officer

Remaining 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

/s/ Susan C. Freese                     /s/ Randy W. Rognlin
----------------------------------      ----------------------------------------
Susan C. Freese                         Randy W. Rognlin

/s/ Randy Rust                          /s/ Edwin Ketel
----------------------------------      ----------------------------------------
Randy Rust                              Edwin Ketel

/s/ Douglas M. Schermer
----------------------------------      ----------------------------------------
Douglas M. Schermer                     John R. Ferlin

                                        /s/ Stewart L. Thomas
----------------------------------      ----------------------------------------
G. Dennis Archer                        Stewart L. Thomas


                                      -67-

<PAGE>


                                  Exhibit Index

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

2.1             Agreement  and  Plan  of  Merger  between  the  Company  and BNW
                Bancorp, Inc. dated as of October 22, 2003(1)
3.1             Restated Articles of Incorporation (2)
3.2             Bylaws (3)
10              Executive   Compensation   Plans  and   Arrangements  and  Other
                Management Contracts
10.1            Employment Agreement with Dennis A. Long dated January 27, 2004
10.2            Employment  Agreement  with John Van Dijk dated  January 2, 2003
                (4)
10.3            Employment  Agreement with Bruce D. MacNaughton dated January 2,
                2003 (4)
10.4            Bank of the Pacific Incentive Stock Option Plan (5)
10.5            The Bank of Grays Harbor Incentive Stock Option Plan (5)
10.6            2000 Stock Incentive Compensation Plan (6)
10.7            Bonus Program for Officers (6)
10.8            The Bank of Grays Harbor Employee Deferred Compensation Plan (7)
21              Subsidiaries  of  Registrant  - Bank of the  Pacific,  organized
                under Washington law
23              Consent of McGladrey & Pullen, LLP, Independent Auditors
31.1            Certification  of  Chief  Executive  Officer  Pursuant  to  Rule
                13a-14(a)
31.2            Certification  of  Chief  Financial  Officer  Pursuant  to  Rule
                13a-14(a)
32              Certification Pursuant to 18 U.S.C. 1350
99              Description of common stock of the Company (8)

(1) Incorporated by reference to Exhibit 99.1 to the Company's current report on
Form 8-K dated October 22, 2003.

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

(3) 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)

(4)  Incorporated by reference to Exhibits 10.2 and 10.3 to the Company's Annual
Report on Form 10-K for the year ended December 31, 2002.

(5)  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.

(6)  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.

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<PAGE>

(7) Incorporated by reference to Exhibit 10.10 to the Company's Annual Report on
Form 10-K for the year ended December 31, 2000.

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







                                      -69-