10-Q 1 pacsec-10q.txt QUARTERLY REPORT UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ______________________ Form 10-Q (Mark One) [ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended January 31, 2002 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGEACT OF 1934 For the transition period from _______________ to _______________ Commission file number 0-6673 PACIFIC SECURITY FINANCIAL, INC. -------------------------------- (Exact name of registrant as specified in its charter) Washington 91-0669906 ---------- ---------- (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 10 North Post Street 325 Peyton Building Spokane, Washington 99201 (509) 444-7700 ------------------------- -------------- (Address of principal executive offices) (Registrant's telephone number, including area code) 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 period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. [ X ] Yes [ ] No PACIFIC SECURITY FINANCIAL, INC. FORM 10-Q QUARTERLY REPORT Table of Contents _________________ CONSOLIDATED FINANCIAL STATEMENTS Consolidated balance sheet 1-2 Consolidated statement of operations 3 Consolidated statement of comprehensive income (loss) 4 Consolidated statement of cash flows 5-7 Notes to unaudited financial statements 8-9 Item 2. Management's discussion and analysis of financial condition and results of operations Financial condition and liquidity 10 Results of operations 11-12 Item 3. Qualitative and quantitative disclosures about market risk 13 Item 5. Other information 13 Signatures 14 PACIFIC SECURITY FINANCIAL, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET -------------------------------------------------------------------------------- ASSETS

~~October~~January 31, July 31, ~~2001~~2002 2001 ----~~-------~~ ----~~-------~~ ASSETS Cash and cash equivalents Unrestricted $ ~~368~~255,~~709~~522 $ 619,642 Restricted -- 19,480 ----------- ----------- ~~368~~255,~~709~~522 639,122 ----------- ----------- Receivables Contracts, mortgages, finance notes, and loans receivable, net Related parties ~~182~~178,~~793~~007 186,846 Unrelated 2931,~~230~~182,~~464~~665 25,580,270 ----------- ----------- 2931,~~413~~360,~~257~~672 25,767,116 Accrued interest ~~198~~245,~~095~~008 282,616 Other 2943,~~214~~602 121,319 ----------- ----------- 2931,~~640~~649,~~566~~282 26,171,051 ----------- ----------- Investment in rental properties, net 13,~~538~~165,~~259~~536 17,990,836 ----------- ----------- Other investments Property held for sale and development 3,~~543~~305,~~250~~656 3,635,184 ----------- ----------- Other assets Vehicles and equipment, net 6975,~~518~~437 62,732 Prepaid and other, net ~~209~~186,~~769~~766 251,053 Taxes -- 4,681 ----------- ----------- ~~279~~262,~~287~~203 318,466 ----------- ----------- TOTAL ASSETS $4748,~~370~~638,~~071~~199 $48,754,659 ~~-----------~~=========== ~~-----------~~===========

1 -------------------------------------------------------------------------------- PACIFIC SECURITY FINANCIAL, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET -------------------------------------------------------------------------------- LIABILITIES AND STOCKHOLDERS' EQUITY

~~October~~January 31, July 31, ~~2001~~2002 2001 ----~~-------~~ ----~~-------~~ LIABILITIES Notes payable to banks $2022,~~342~~448,~~433~~318 $23,487,255 Installment contracts, mortgage notes, and notes payable Related parties 7264,~~958~~205 85,898 Unrelated 6,~~103~~016,~~610~~498 5,971,044 Debenture bonds 109,~~125~~947,~~811~~726 10,166,644 Accrued expenses and other liabilities Related parties ~~226~~131,~~760~~124 153,078 Unrelated ~~703~~646,~~883~~674 782,798 Income taxes ~~20,~~319 -- Deferred income taxes 1,~~167~~021,~~445~~801 604,870 ----------- ----------- 3840,~~763~~276,~~219~~665 41,251,587 ----------- ----------- COMMITMENTS AND CONTINGENCIES (Note 2) STOCKHOLDERS' EQUITY Preferred stock Class A preferred stock, $100 par value, authorized 20,000 shares; issued and outstanding 3,000 shares 300,000 300,000 Preferred stock, authorized 10,000,000 no par value shares; no shares issued and outstanding -- -- Common stock Original class, authorized 2,500,000 no par value shares; $3 stated value; issued and outstanding, 1,104,116 and 1,110,385 shares 3,~~312~~311,~~348~~886 3,331,154 Class B, authorized 30,000 no par value shares; no shares issued and outstanding -- -- Additional paid-in capital 1,830,941 1,830,941 Retained earnings 32,~~163~~918,~~563~~707 2,040,977 ----------- ----------- Total stockholders' equity 8,~~606~~361,~~852~~534 7,503,072 ----------- ----------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $4748,~~370~~638,~~071~~199 $48,754,659 ~~-----------~~=========== ~~-----------~~===========

See accompanying notes. 2 -------------------------------------------------------------------------------- PACIFIC SECURITY FINANCIAL, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF OPERATIONS --------------------------------------------------------------------------------

Three Months Ended ~~October~~January 31, Six Months Ended January 31, ---------------------------- --------------------------- 2002 2001 ~~2000~~2002 2001 ---------------------------- --------------------------- Income Rental $ ~~592~~334,~~465~~941 $ ~~690~~661,~~915~~259 $ 927,406 $ 1,352,174 Interest, including loan fees of $~~276~~244,~~274~~777 and $~~208~~277,~~196~~285 ~~936,195~~and ~~832~~$521,~~571~~051 ~~Amortization~~and of$485,481 ~~discounts~~814,993 on1,073,726 ~~real~~1,751,188 ~~estate contracts -- 3~~1,~~692~~909,989 Gain (loss) on sale of real estate 2(155,~~145~~769) (6,~~587~~793) --1,989,818 (6,793) Other, net 82,~~998~~259 910,~~412~~506 11,257 19,918 ----------- ----------- 3----------- ----------- 996,~~683,245~~424 1,~~536~~738,~~590~~698 4,679,669 3,275,288 ----------- ----------- ----------- ----------- Expense Rental operations Depreciation and amortization ~~174~~127,~~411~~823 194,~~777~~968 302,234 389,745 Interest ~~120~~117,~~666~~753 ~~150~~143,~~082~~234 238,419 293,316 Other ~~235~~168,~~493~~127 259,~~057~~696 403,620 518,753 ----------- ----------- ~~530~~----------- ----------- 413,~~570~~703 ~~603~~597,~~916~~898 944,273 1,201,814 Interest, net of amount capitalized ~~542~~496,~~357~~809 ~~577~~695,~~273~~141 1,039,166 1,272,414 Salaries and commissions ~~397~~225,~~924~~306 ~~213~~236,~~764~~781 623,230 450,545 General and administrative ~~175~~137,~~631~~427 ~~182~~131,~~532~~668 313,058 314,200 Depreciation and amortization 11,~~602~~473 10,~~525~~774 23,075 21,299 Provision for loan loss ~~297~~82,~~000~~207 -- 379,207 -- ----------- ----------- ----------- ----------- 1,~~955~~366,~~084~~925 1,~~588~~672,~~010~~262 3,322,009 3,260,272 ----------- ----------- ----------- ----------- Income (loss) before income tax (benefit) provision (370,501) 66,436 1,~~728~~357,~~161~~660 ~~(51~~15,~~420)~~016 Income tax (benefit) provision ~~587,575~~ (17125,~~483~~644) 22,589 461,931 5,106 ----------- ----------- ~~NET INCOME (LOSS) $ 1,140,586 $ (33,937)~~ ----------- ----------- NET INCOME (LOSS) $ (244,857) $ 43,847 $ 895,729 $ 9,910 =========== =========== =========== =========== Net income per common share ~~basic~~basis and diluted $ 1(0.0322) $ 0.3504 ~~-----------~~$ ~~-----------~~0.81 ~~Weighted~~$ 0.01 =========== =========== =========== =========== Weighted-average common shares outstanding basic and diluted 1,~~106~~104,~~581~~096 1,~~138~~135,~~094~~812 ~~-----------~~1,105,336 ~~-----------~~1,136,953 =========== =========== =========== ===========

3 -------------------------------------------------------------------------------- PACIFIC SECURITY FINANCIAL, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (LOSS) --------------------------------------------------------------------------------

Three Months Ended ~~October~~January 31, Six Months Ended January 31, ---------------------------- --------------------------- 2002 2001 ~~2000~~2002 2001 ---------------------------- --------------------------- Net income (loss) $1 (244,~~140~~857) $ 43,~~586~~847 $ ~~(33~~895,~~937)~~729 $ 9,910 ----------- ----------- ----------- ----------- Other comprehensive income (loss) before income taxes 1(244,~~140~~857) 43,~~586~~847 ~~(33~~895,~~937)~~729 9,910 ----------- ----------- ~~COMPREHENSIVE INCOME (LOSS) $1,140,586 $ (33,937)~~ ----------- ----------- COMPREHENSIVE INCOME (LOSS) $ (244,857) $ 43,847 $ 895,729 $ 9,910 =========== =========== =========== ===========

See accompanying notes. 4 -------------------------------------------------------------------------------- PACIFIC SECURITY FINANCIAL, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CASH FLOWS --------------------------------------------------------------------------------

~~Three~~Six Months Ended ~~October~~January 31, -------------------------------- 2002 2001 ~~2000~~ ----------- ------------------- CASH FLOWS FROM OPERATING ACTIVITIES Cash received from rentals and other $ ~~734~~1,~~853~~079,101 $ ~~611~~1,~~329~~330,765 Interest received 1,~~020~~788,~~716~~796 ~~780~~1,~~218~~837,353 Cash paid to suppliers and employees (~~770~~1,~~832~~395,701) (~~735~~1,~~681~~311,716) Interest paid, net of amounts capitalized (~~572~~1,~~972~~065,574) (~~569~~1,~~009~~224,029) Income taxes paid --(40,000) (~~250~~270,000) ------------ ------------ Net cash provided (used) by operating activities ~~411~~366,~~765~~622 ~~(163~~362,~~143)~~373 ------------ ------------ CASH FLOWS FROM INVESTING ACTIVITIES ~~Net~~Proceeds ~~proceeds~~from sales of securities -- 41,724 Proceeds from sales of real estate ~~548~~and fixed assets 520,~~502~~216 --61,437 Collections on contracts, mortgages, finance notes, and loans receivable 78,~~170~~784,~~828~~851 4,~~614~~792,~~664~~010 ~~Origination~~Investment ~~of loans receivable and investment~~ in contracts, mortgages, notes, and ~~finance~~loans ~~notes~~receivable (48,~~903~~018,~~020~~334) (511,~~232~~979,~~028~~423) Additions to rental properties, property held for sale, property under development, vehicles, and equipment (~~255~~439,~~356~~816) (~~582~~997,~~904~~970) Change in restricted investments and cash equivalents (19,480) (~~129~~369) ------------ ------------ Net cash provided (used) by investing activities 2827,~~541,474~~437 (18,~~200~~082,~~397~~591) ------------ ------------

5 -------------------------------------------------------------------------------- PACIFIC SECURITY FINANCIAL, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CASH FLOWS --------------------------------------------------------------------------------

~~Three~~Six Months Ended ~~October~~January 31, ---------------------------- 2002 2001 ---- ~~2001 2000~~ ----------- ------------- CASH FLOWS FROM FINANCING ACTIVITIES Net borrowings under line of credit agreements $(31,~~144~~043,~~821~~870) $ 18,~~627~~040,~~411~~720 Proceeds from installment contracts, mortgage notes, and notes payable ~~240~~200,~~606~~000 20910,~~000~~013 Payments on installment contracts, mortgage notes, and notes payable (~~120~~176,~~981~~239) (~~163~~910,~~339~~422) Proceeds from sales of debenture bonds ~~506~~22,800 51112,~~467~~447 Redemption of debenture bonds (~~162~~543,~~156~~081) (~~206~~330,~~573~~390) Purchase and retirement of ~~treasury~~common stock (1819,~~806~~269) (329,~~125~~340) Payment of dividends on preferred stock (18,000) (18,000) ----------- ----------- Net cash provided (used) by financing activities (31,~~223~~577,~~652~~659) 17,~~307~~775,~~841~~028 ----------- ----------- NET CHANGE IN CASH AND CASH EQUIVALENTS (~~270~~383,~~413~~600) ~~(55~~54,~~699)~~810 Cash and cash equivalents, beginning of year 639,122 442,208 ----------- ----------- Cash and cash equivalents, end of year $ ~~368~~255,~~709~~522 $ ~~386~~497,~~509~~018 ~~-----------~~=========== ~~-----------~~===========

6 -------------------------------------------------------------------------------- PACIFIC SECURITY FINANCIAL, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CASH FLOWS --------------------------------------------------------------------------------

~~Three~~Six Months Ended ~~October~~January 31, ---------------------------- 2002 2001 ---- ~~2001 2000~~ ----------- ------------- RECONCILIATION OF NET INCOME ~~(LOSS)~~ TO NET CASH PROVIDED BY ~~(USED IN)~~ OPERATING ACTIVITIES Net income ~~(loss)~~ $ 1895,~~140,586~~730 $ ~~(33~~9,~~937)~~910 Adjustments to reconcile net income ~~(loss)~~ to net cash provided ~~(used)~~ by operating activities: Depreciation and amortization ~~186~~325,~~013~~309 ~~205~~411,~~302~~044 Deferred income tax ~~provision~~benefit ~~562~~416,~~575~~931 --(41,700) Deferred financing income realized -- (36,~~692~~920) Interest accrued on debenture bonds ~~120~~301,~~818~~363 ~~126~~279,~~841~~079 (Gain) loss on sales of real estate (21,~~145~~989,~~587~~818) --6,793 Provision for loan loss ~~297~~379,~~000~~207 -- Change in assets and liabilities: Accrued interest receivable 8437,~~521~~608 (5265,~~353~~715) Prepaid expenses, ~~net 35~~57,~~034~~787 25(9,~~792~~346) Accrued expense ~~and other liabilities 13,700~~ (50139,~~988~~145) 35,038 Income taxes (receivable) payable 255,000 (~~267~~223,~~483~~194) Other, net 9282,~~105~~651 (~~112~~32,~~625~~616) ----------- ----------- NET CASH PROVIDED ~~(USED)~~ BY OPERATING ACTIVITIES $ ~~411~~372,~~765~~623 $ ~~(163~~362,~~143)~~373 ~~-----------~~=========== ~~-----------~~=========== SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES Company financed sale of property $ 56,~~970~~679,~~284~~280 $ -- ~~-----------~~=========== =========== Property held for sale and development acquired in satisfaction for defaulted loan receivable $ --~~---------~~ $ 1,065,804 =========== =========== Impairment of real estate owned against provision for loan ~~losses~~loss $ 60,000 $ -- ~~-----------~~=========== ~~-----------~~===========

See accompanying notes. 7 -------------------------------------------------------------------------------- PACIFIC SECURITY FINANCIAL, INC. NOTES TO UNAUDITED FINANCIAL STATEMENTS -------------------------------------------------------------------------------- NOTE 1 - BASIS OF PRESENTATION The consolidated financial statements include the accounts of Pacific Security Financial, Inc. and its subsidiaries (the Company). In the opinion of the Company, the accompanying unaudited consolidated financial statements contain all adjustments (consisting of only normal recurring adjustments) necessary to present fairly the Company's financial position, results of operations, and cash flows for the periods presented. These consolidated financial statements should be read in conjunction with the consolidated financial statements and the related disclosures contained in the Company's annual report on Form 10-K for the year ended July 31, 2001, filed with the Securities and Exchange Commission. The results of operations for the six months ended January 31, 2002, are not necessarily indicative of the results to be expected for the full year. NOTE 2 - BUSINESS SEGMENT REPORTING Information about the Company's separate continuing business segments as of and for the six months ended January 31, 2002 and 2001, is as follows:

Real Estate, Commercial Rental, anand Lending Receivables Operations Operations Total ------------ ------------ ------------------------------------ ~~2001~~2002 Revenue $ ~~838~~1,~~617~~494,316 $ 23,~~844~~185,~~628~~353 $ 34,~~683~~679,~~245~~669 Income from operations ~~162~~306,~~049~~390 1,~~566~~051,~~112~~270 1,~~728~~357,~~161~~660 Identifiable assets, net 2022,~~767~~113,~~944~~353 26,~~602~~524,~~127~~846 4748,~~370~~638,~~071~~199 Depreciation and amortization 12,~~242~~485 ~~184~~322,~~771~~824 ~~186~~325,~~013~~309 Capital expenditures 2740,~~231~~414 ~~228~~399,~~125~~402 ~~255~~439,~~356~~816 ~~2000~~2001 Revenue ~~743,051~~$ ~~793~~1,~~539~~712,934 $ 1,~~536~~562,~~590~~354 $ 3,275,288 Income from operations ~~231~~544,~~921~~495 (~~283~~529,~~341~~479) ~~(51~~15,~~420)~~016 Identifiable assets, net 1723,~~516~~308,~~295~~591 24,~~982~~941,~~375~~965 4248,~~498~~250,~~670~~556 Depreciation and amortization ~~603~~1,376 ~~204~~409,~~699~~668 ~~205~~411,~~302~~044 Capital expenditures 910,~~346~~655 ~~573~~987,~~558~~315 ~~582~~997,~~904~~970

8 -------------------------------------------------------------------------------- PACIFIC SECURITY FINANCIAL, INC. NOTES TO UNAUDITED FINANCIAL STATEMENTS -------------------------------------------------------------------------------- NOTE 2 - BUSINESS SEGMENT REPORTING (CONTINUED) The Company has determined that its reportable business segments are those that are based on its method of disaggregated internal reporting. The Company's reportable business segments are its commercial loan origination business and its rental and receivable operations. Its commercial loan origination business, operated as Cornerstone Realty Advisors, Inc., originates commercial construction loans throughout the western United States. The rental and receivable operations represent the selling and leasing of real properties and the financing of contracts and loans collateralized by real estate. Some unallocated general corporate expense items are part of the rental and receivable segment reporting. 9 -------------------------------------------------------------------------------- PACIFIC SECURITY FINANCIAL, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS -------------------------------------------------------------------------------- ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FINANCIAL CONDITION AND LIQUIDITY: At January 31, 2002, the Company had total stockholders' equity of approximately $8,362,000 and a total liabilities to equity ratio of 4.8 to 1, which decreased from 5.5 to 1 at July 31, 2001. During the quarter, the Company's primary sources of funds were approximately $8,785,000 in real estate contract and loan collections, $520,000 in net proceeds from the sales of real estate, and approximately $366,000 from operating activities. The primary uses of funds were approximately $8,018,000 for investments in contracts and loans receivable, approximately $1,540,000 for net debt reduction, and $440,000 for property improvements. The Company's sources of liquidity traditionally have included the issuance of debentures under the auspices of the Washington State Securities Division of the Department of Financial Institutions and borrowings from various bank lenders. These sources of liquidity are limited either by the Washington State Securities Division who has capped the amount of debentures the Company may sell or by the individual banks through debt equity ratio covenants included in the lines of credit loan agreements. An additional source of liquidity is the sale of participation interests in certain loans originated by the Company. The total of these non-recourse participations was $4,720,000 at January 31, 2002, and $6,686,000 at July 31, 2001. At January 31, 2002, available funds under its lines of credit and other banking agreements totaled $25,052,000 of which $22,448,318 was outstanding. The remaining unused portions of the lines of credit are fully available to the Company to meet operational needs. Additionally, the Company anticipates that cash flows from operations will be sufficient to provide for the retirement of maturing debentures and mortgage obligations. 10 -------------------------------------------------------------------------------- PACIFIC SECURITY FINANCIAL, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS -------------------------------------------------------------------------------- RESULTS OF OPERATIONS (THREE MONTHS): The Company's net loss for the quarter ended January 31, 2002, was approximately $245,000 compared with net income of approximately $44,000 for the quarter ended January 31, 2001. The change was primarily attributable to a $156,000 pre-tax loss on sales of real estate in the quarter ended January 31, 2002, an increase of $82,000 in the provision for loan losses, and a reduction of $142,000 in net rental income. Rental income decreased by approximately $326,000 (49.3%) to approximately $335,000 in the quarter ended January 31, 2002, from approximately $661,000 in 2001. This decrease primarily resulted from reduced rents from properties sold during the year and increased vacancies. Rental property expenses were approximately $184,000 (30.8%) lower in 2002 than for the comparable six months in 2001. This decrease was due to decreased interest expense of $25,481 (17.7%), decreased operating expense of $91,569 (35.2%), and decreased depreciation of $67,145 (34.4%). Salaries and commissions were approximately $11,000 (4.6%) lower for the quarter ended January 31, 2002, than the comparable three months in 2001 due to lower commissions paid in 2002. Interest income and amortized discount decreased approximately $259,000 (24.0%) for the three months ended January 31, 2002, compared with the similar period in 2001 as the variable interest rate on contracts and loans receivable decreased during the period and interest on some past due loans went to nonaccrual status. General and administrative expense increased approximately $6,000 (4.6%) for the three months ended January 31, 2002, compared with the same period in 2001. Interest expense, exclusive of interest on debt associated with rental properties, net of amounts capitalized, decreased approximately $198,000 (28.5%) in the first quarter of 2002 compared with the same 2001 period primarily due to the decrease in the rate of interest charged on bank borrowings tied to prime. The Company's effective income tax rate as a percentage of income (loss) before federal income tax was approximately 34.0% in 2002 and 2001. RESULTS OF OPERATIONS (SIX MONTHS): The Company's net income for the six months ended January 31, 2002, was approximately $896,000 compared with net income of approximately $10,000 for the six months ended January 31, 2001. The increase was primarily attributable to approximately $1,990,000 in gain on sales of real estate in 2002 compared to a loss of $7,000 in 2001, which was partially offset by a decrease of $167,000 in net rental income and increase of $379,000 in the provision for loan losses. 11 -------------------------------------------------------------------------------- PACIFIC SECURITY FINANCIAL, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS -------------------------------------------------------------------------------- Rental income decreased approximately $425,000 (31.4%) in the six months ended January 31, 2002, from 2001. This primarily resulted from decreased rents due to sales of rental properties, including an apartment complex and an office building in October 2001. Rental property expense was approximately $258,000 (21.4%) lower in 2002 than for the comparable six months in 2001. This resulted from decreased operating expense of $115,133 (22.1%), decreased interest expense of $54,897 (18.7%), and a decrease in depreciation of $87,511 (22.4%). Interest income and amortized discount was approximately $159,000 (8.3%) less for the six months ended January 31, 2002, compared with the similar period in 2001 as interest earned on the average outstanding balance in contracts and notes receivable decreased during the period, primarily due to lower interest rates and fewer new loans originated by Cornerstone Realty Advisors. Salaries and commissions were approximately $173,000 (38.4%) higher in the six months ended January 31, 2002, than for the comparable six months in 2001, primarily because of bonuses paid to Company officers in the current fiscal year. Interest expense, exclusive of interest on debt associated with rental properties, net of amounts capitalized, was approximately $233,000 (18.3%) less in 2002 than in 2001 primarily due to a decrease in interest rates on borrowings tied to bank prime rates. The Company's effective income tax rate as a percentage of income before federal income tax was approximately 34.0% in 2002 and 2001. 12 -------------------------------------------------------------------------------- PACIFIC SECURITY FINANCIAL, INC. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK -------------------------------------------------------------------------------- ITEM 3. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK The Company does not believe that there has been a material change in its market risk since the end of its last fiscal year. PART II. OTHER INFORMATION ITEMS 1, 2, 3, 4, AND 6 - NOT APPLICABLE ITEM 5. OTHER INFORMATION At a special meeting of the Board of Directors on March 7, 2002, David L. Guthrie was elected Chairman of the Board, replacing Wayne E. Guthrie who retained the title Chairman of the Board Emeritus. 13 -------------------------------------------------------------------------------- PACIFIC SECURITY FINANCIAL, INC. SIGNATURES -------------------------------------------------------------------------------- Pursuant to the requirements 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: Pacific Security Financial, Inc. /s/ David L. Guthrie --------------------------------- David L. Guthrie President/Chief Executive Officer March 15, 2002 /s/ Donald J. Migliuri --------------------------------- Donald J. Migliuri Secretary-Treasurer March 15, 2002 14 --------------------------------------------------------------------------------

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