10-Q

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 September 30, 2007

OR

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ____________ to ____________

Commission File Number 000-29829

PACIFIC FINANCIAL CORPORATION

(Exact name of registrant as specified in its charter)

Washington (State or other jurisdiction of incorporation or organization) 91-1815009 (IRS Employer Identification No.)

1101 S. Boone Street

Aberdeen, Washington 98520-5244

(360) 533-8870

(Address, including zip code, and telephone number,

including area code, of Registrant's principal executive offices)

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:

Yes x No o

Indicate by check mark whether the registrant is a large accelerated filer, accelerated filer or non-accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

Large accelerated filer oAccelerated Filer xNon-accelerated filer o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x

The number of shares of the issuer's common stock, par value $1.00 per share, outstanding as of October 31, 2007, was 6,612,445 shares.

TABLE OF CONTENTS

PART I	FINANCIAL INFORMATION	3
ITEM 1.	FINANCIAL STATEMENTS	3
	CONDENSED CONSOLIDATED BALANCE SHEETS SEPTEMBER 30, 2007 AND DECEMBER 31, 2006	3
	CONDENSED CONSOLIDATED STATEMENTS OF INCOME THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2007 AND 2006	4
	CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS NINE MONTHS ENDED SEPTEMBER 30, 2007 AND 2006	5
	CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY NINE MONTHS ENDED SEPTEMBER 30, 2007 AND 2006	6
	NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS	7
ITEM 2.	MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	13
ITEM 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	21
ITEM 4.	CONTROLS AND PROCEDURES	21
PART II	OTHER INFORMATION	21
ITEM 1.	LEGAL PROCEEDINGS	22
ITEM 1A.	RISK FACTORS	22
ITEM 2.	UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS	22
ITEM 3.	DEFAULTS UPON SENIOR SECURITIES	22
ITEM 4.	SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS	22
ITEM 5.	OTHER INFORMATION	22
ITEM 6.	EXHIBITS	22
	SIGNATURES	22

PART I – FINANCIAL INFORMATION

ITEM 1 – FINANCIAL STATEMENTS

PACIFIC FINANCIAL CORPORATION

Condensed Consolidated Balance Sheets

September 30, 2007 and December 31, 2006

(Dollars in thousands) (Unaudited)

	September 30, 2007			December 31, 2006
Assets
Cash and due from banks	$	16,611		$	14,964
Interest bearing balances with banks		2,881			5,479
Federal funds sold		7,920			20,345
Investment securities available for sale		42,388			36,608
Investment securities held-to-maturity		5,073			6,104
Federal Home Loan Bank stock, at cost		1,858			1,858
Loans held for sale		17,927			14,368
Loans		435,857			424,801
Allowance for credit losses		4,959			4,033
Loans, net		430,898			420,768
Premises and equipment		13,550			11,537
Accrued interest receivable		3,365			3,006
Cash surrender value of life insurance		9,963			9,714
Goodwill		11,282			11,282
Other intangible assets		1,764			1,871
Other assets		2,998			4,480
Total assets	$	568,478		$	562,384
Liabilities and Shareholders' Equity
Deposits:
Non-interest bearing	$	93,956		$	91,657
Interest-bearing		378,539			375,184
Total deposits		472,495			466,841
Accrued interest payable		1,310			1,415
Secured borrowings		1,548			1,906
Long-term borrowings		21,500			21,500
Junior subordinated debentures		13,403			13,403
Other liabilities		3,607			8,335
Total liabilities		513,863			513,400
Commitments and Contingencies (Note 6)
Shareholders' Equity
Common Stock (par value $1); 25,000,000 shares authorized; 6,581,445 shares issued and outstanding at September 30, 2007 and 6,524,407 at December 31, 2006		6,581			6,524
Additional paid-in capital		26,898			26,047
Retained earnings		21,462			16,731
Accumulated other comprehensive loss		(326	)		(318	)
Total shareholders' equity		54,615			48,984
Total liabilities and shareholders' equity	$	568,478		$	562,384

See notes to condensed consolidated financial statements.

3

PACIFIC FINANCIAL CORPORATION

Condensed Consolidated Statements of Income

Three and nine months ended September 30, 2007 and 2006

(Dollars in thousands, except per share data)

(Unaudited)

	Three Months Ended September 30,					Nine Months Ended September 30,
	2007		2006			2007			2006
Interest and dividend income
Loans	$	9,574	$	8,905		$	28,661		$	24,883
Investment securities and FHLB dividends		507		432			1,478			1,169
Deposits with banks and federal funds sold		250		428			349			602
Total interest and dividend income		10,331		9,765			30,488			26,654
Interest Expense
Deposits		3,566		3,042			10,127			7,630
Other borrowings		434		468			1,712			1,237
Total interest expense		4,000		3,510			11,839			8,867
Net Interest Income		6,331		6,255			18,649			17,787
Provision for credit losses		60		550			422			550
Net interest income after provision for credit losses		6,271		5,705			18,227			17,237
Non-interest Income
Service charges on deposits		374		347			1,106			1,103
Gain on sales of loans		422		535			1,377			1,421
Loss on sale of investments available for sale		—		—			(20	)		—
Gain on sale of foreclosed real estate		—		—			—			5
Loss on sale of premises and equipment		—		(5	)		(18	)		(3	)
Other operating income		267		214			713			600
Total non-interest income		1,063		1,091			3,158			3,126
Non-interest Expense
Salaries and employee benefits		3,065		2,758			8,983			7,908
Occupancy and equipment		644		610			1,858			1,763
Other		1,308		1,268			4,180			3,745
Total non-interest expense		5,017		4,636			15,021			13,416
Income before income taxes		2,317		2,160			6,364			6,947
Provision for income taxes		686		617			1,633			2,069
Net Income	$	1,631	$	1,543		$	4,731		$	4,878
Comprehensive Income	$	1,904	$	1,673		$	4,723		$	4,778
Earnings per common share:
Basic	$	0.25	$	0.24		$	0.72		$	0. 75
Diluted		0.24		0.23			0.71			0.74
Weighted Average shares outstanding:
Basic		6,581,445		6,480,362			6,572,195			6,479,645
Diluted		6,667,559		6,589,900			6,672,034			6,580,766

See notes to condensed consolidated financial statements.

4

PACIFIC FINANCIAL CORPORATION

Condensed Consolidated Statements of Cash Flows

Nine months ended September 30, 2007 and 2006

(Dollars in thousands)

(Unaudited)

	2007			2006
OPERATING ACTIVITIES
Net income	$	4,731		$	4,878
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for credit losses		422			550
Depreciation and amortization		1,060			928
Origination of loans held for sale		(98,848	)		(73,506	)
Proceeds of loans held for sale		96,651			77,028
Gain on sales of loans		(1,362	)		(1,421	)
Loss on sale of investments available for sale		20			—
Gain on sale of foreclosed real estate		—			(5	)
Loss on sale of premises and equipment		18			3
Increase in accrued interest receivable		(359	)		(440	)
Increase (decrease) in accrued interest payable		(105	)		625
Other, net		1,455			(1,483	)
Net cash provided by operating activities		3,683			7,157
INVESTING ACTIVITIES
Net (increase) decrease in federal funds sold		12,425			(31,485	)
Net (increase) decrease in interest bearing balances with banks		2,598			(5,119	)
Purchase of securities available for sale		(12,752	)		(7,261	)
Proceeds from maturities of investments held to maturity		201			253
Proceeds from sales of securities available for sale		805			—
Proceeds from maturities of securities available for sale		6,922			1,608
Proceeds from sales of government guaranteed loans		301			—
Net increase in loans		(10,862	)		(7,410	)
Proceeds from sales of foreclosed real estate		—			42
Additions to premises and equipment		(3,061	)		(2,040	)
Proceeds from sales of premises and equipment		190			4
Deposit assumption and transfer		—			(1,268	)
Net cash used in investing activities		(3,233	)		(52,676	)
FINANCING ACTIVITIES
Net increase in deposits		5,654			53,109
Net decrease in short-term borrowings		—			(3,985	)
Net decrease in secured borrowings		(358	)		(229	)
Proceeds from issuance of long-term borrowings		—			2,000
Repayments of long-term borrowings		—			(5,000	)
Proceeds from junior subordinated debentures		—			8,248
Issuance of common stock		794			243
Payment of cash dividends		(4,893	)		(4,719	)
Net cash provided by financing activities		1,197			49,667
Net increase in cash and due from banks		1,647			4,148
Cash and due from Banks
Beginning of period		14,964			11,223
End of period	$	16,611		$	15,371
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash payments for:
Interest	$	11,944		$	8,242
Income taxes		1,525			1,667
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING ACTIVITIES
Change in fair value of securities available for sale, net of tax	$	(8	)	$	(100	)
Transfer of securities held to maturity to available for sale		825			—

See notes to condensed consolidated financial statements.

5

PACIFIC FINANCIAL CORPORATION

Condensed Consolidated Statements of Shareholders' Equity

Nine months ended September 30, 2007 and 2006

(Dollars in thousands)

(Unaudited)

	Common Stock		Additional Paid-in Capital		Retained Earnings		Accumulated Other Comprehensive Loss			Total
Balance January 1, 2006	$	6,464	$	25,386	$	15,073		($323	)	$	46,600
Other comprehensive income:
Net income						4,878					4,878
Change in fair value of securities available for sale, net								(100	)		(100	)
Comprehensive income											4,778
Issuance of common stock		16		227							243
Stock compensation expense				23							23
Balance September 30, 2006	$	6,480	$	25,636	$	19,951		($423	)	$	51,644
Balance January 1, 2007	$	6,524	$	26,047	$	16,731		($318	)	$	48,984
Other comprehensive income:
Net income						4,731					4,731
Change in fair value of securities available for sale, net								(8	)		(8	)
Comprehensive income											4,723
Issuance of common stock		25		395							420
Stock options exercised		32		342							374
Stock compensation expense				66							66
Tax benefit from exercise of stock options				48							48
Balance September 30, 2007	$	6,581	$	26,898	$	21,462		($326	)	$	54,615

See notes to condensed consolidated financial statements.

6

PACIFIC FINANCIAL CORPORATION

Notes to Condensed Consolidated Financial Statements

(Unaudited)

Note 1 – Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared by Pacific Financial Corporation ("Pacific" or the "Company") in accordance with accounting principles generally accepted in the United States of America for interim financial information and with instructions to Form 10-Q. Accordingly, these financial statements do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. In the opinion of management, adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the nine months ended September 30, 2007, are not necessarily indicative of the results anticipated for the year ending December 31, 2007. Certain information and footnote disclosures included in the Company's consolidated financial statements for the year ended December 31, 2006, have been condensed or omitted from this report. Accordingly, these statements should be read in conjunction with the financial statements and notes thereto included in the Company's Annual Report on Form 10-K for the year ended December 31, 2006 (the “2006 10-K”).

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates.

All dollar amounts in tables and in the text of these notes, except earnings per share and per share information, are stated in thousands.

Note 2 – Earnings per Share

The following table illustrates the computation of basic and diluted earnings per share.

	Three Months Ended September 30,				Nine Months Ended September 30,
	2007		2006		2007		2006
Basic:
Net income	$	1,631,000	$	1,543,000	$	4,731,000	$	4,878,000
Weighted average shares outstanding		6,581,445		6,480,362		6,572,195		6,479,645
Basic earnings per share	$	0.25	$	0.24	$	0.72	$	0.75
Diluted:
Net income	$	1,631,000	$	1,543,000	$	4,731,000	$	4,878,000
Weighted average shares outstanding		6,581,445		6,480,362		6,572,195		6,479,645
Effect of dilutive stock options		86,114		109,538		99,839		101,120
Weighted average shares outstanding assuming dilution		6,667,559		6,589,900		6,672,034		6,580,766
Diluted earnings per share	$	0.24	$	0.23	$	0.71	$	0.74

7

As of September 30, 2007 and 2006, there were 130,450 and 252,600 shares, respectively, subject to outstanding options to acquire common stock with exercise prices in excess of the current market value. These shares are not included in the table above, as exercise of these options would not be dilutive to shareholders.

Note 3 – Investment Securities

Investment securities consist principally of short and intermediate term debt instruments issued by the U.S. Treasury, other U.S. government agencies, state and local government units, and other corporations.

	Amortized Cost		Unrealized Gains		Unrealized Losses		Fair Value
Securities Held to Maturity
September 30, 2007
Mortgage-backed securities	$	805	$	—	$	7	$	798
State and municipal securities		4,268		36		13		4,291
Total	$	5,073	$	36	$	20	$	5,089

December 31, 2006
Mortgage-backed securities	$	949	$	—	$	6	$	943
State and municipal securities		5,155		38		35		5,158
Total	$	6,104	$	38	$	41	$	6,101

Securities Available for Sale
September 30, 2007
U.S. Government securities	$	4,842	$	32	$	12	$	4,862
State and municipal securities		15,593		67		173		15,487
Mortgage-backed securities		17,870		18		261		17,627
Corporate securities		1,536		--		27		1,509
Mutual funds		3,041		--		138		2,903
Total	$	42,882	$	117	$	611	$	42,388

December 31, 2006
U.S. Government securities	$	8,346	$	22	$	57	$	8,311
State and municipal securities		13,719		69		169		13,619
Mortgage-backed securities		10,434		27		229		10,232
Corporate securities		1,550		—		38		1,512
Mutual funds		3,041		—		107		2,934
Total	$	37,090	$	118	$	600	$	36,608

8

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 management. The Company has the ability and intent to hold securities with a stated maturity until the value recovers. Based on management’s evaluation and intent, none of the unrealized losses are considered other-than-temporary. The Company regularly reviews its investment portfolio to determine whether any of its securities are other-than-temporarily impaired. In addition to accounting and regulatory guidance, to determine whether a security is other-than-temporarily impaired, the Company considers the duration and amount of each unrealized loss, the financial condition of the issuer, and the prospects for a change in market or net asset value within a reasonable period of time. We also consider that the contractual cash flows of certain mortgage backed securities are guaranteed by an agency of the United States Government.

In 2007, the Bank transferred $825 in municipal bonds from held to maturity to available for sale as a result of significant deterioration in the credit quality of the bond issuer. The bonds were subsequently sold and the Bank realized a loss on the sale of $20.

Note 4 – Allowance for Credit Losses

	Three Months Ended September 30,						Nine Months Ended September 30,						Twelve Months Ended Ended December 31,
	2007			2006			2007			2006			2006
Balance at beginning of period	$	4,475		$	5,233		$	4,033		$	5,296		$	5,296
Provision for credit losses		60			550			422			550			625
Charge-offs		(26	)		(1,838	)		(74	)		(1,942	)		(1,945	)
Recoveries		450			9			578			50			57
Net (charge-offs) recoveries		424			(1,829	)		504			(1,892	)		(1,888	)
Balance at end of period	$	4,959		$	3,954		$	4,959		$	3,954		$	4,033

Note 5 – Stock Based Compensation

Prior to January 1, 2006, the Company accounted for stock option plans under the recognition and measurement principles of Accounting Principles Bulletin (“APB”) Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations. No stock-based employee compensation cost was reflected in net income for previous awards, as all options granted under the plans had an exercise price equal to the market value of the underlying common stock on the date of grant.

Effective January 1, 2006, the Company adopted Statement of Financial Accounting Standards (“SFAS”) No. 123R, Share-Based Payment, which requires measurement of compensation cost for all stock-based awards based on the grant date fair value and recognition of compensation cost over the service period of stock-based awards. The Company has adopted SFAS No. 123R using the modified prospective method, which provides for no restatement of prior periods and no cumulative adjustment to equity accounts. It also provides for expense recognition for both new and existing unvested stock-based awards. Stock-based compensation expense during the nine months ended September 30, 2007 and 2006 was $66 and $23 ($44 and $15 net of tax), respectively. Future compensation expense for unvested awards outstanding as of September 30, 2007 is estimated to be $175 recognized over a weighted average period of 2.7 years. Cash received from the exercise of stock options during the nine months ended September 30, 2007 and 2006 totaled $374 and $10, respectively.

9

The fair value of stock options granted during the nine months ended September 30, 2007 and 2006 is determined using the Black-Scholes option pricing model based on assumptions noted in the following table. Expected volatility is based on historical volatility of the Company’s common stock. The expected term of stock options granted is based on the simplified method, which is the simple average between contractual term and vesting period. The risk-free rate is based on the expected term of stock options and the applicable U.S. Treasury yield in effect at the time of grant.

Grant period ended	Expected Life		Risk Free Interest Rate			Expected Volatility			Dividend Yield			Average Fair Value
September 30, 2007		6.5 years		4.83	%		15.65	%		4.75	%	$	1.86
September 30, 2006		6.5 years		4.97	%		16.53	%		4.83	%	$	1.88

A summary of stock option activity under the stock option plans as of September 30, 2007 and 2006, and changes during the nine months then ended are presented below:

	Shares			Weighted  Average  Exercise Price		Weighted  Average  Remaining  Contractual  Term ( Years)		Aggregate  Intrinsic  Value
September 30, 2007
Outstanding beginning of period		699,729		$	13.70
Granted		77,250			15.79
Exercised		(32,026	)		11.69
Forfeited		(94,100	)		16.60
Expired		(1,700	)		5.88
Outstanding end of period		649,153		$	13.65		5.7	$	1,038
Exercisable end of period		492,895		$	13.28		5.2	$	971
September 30, 2006
Outstanding beginning of period		687,674		$	13.28
Granted		57,000			15.13
Exercised		(900	)		11.11
Forfeited		—			—
Outstanding end of period		743,774		$	13.43		6.2	$	3,253
Exercisable end of period		615,968		$	13.34		5.9	$	2,750

10

A summary of the status of the Company’s nonvested options as of September 30, 2007 and 2006 and changes during the nine months then ended are presented below:

	2007					2006
	Shares			Weighted  Average Fair  Value		Shares			Weighted  Average Fair  Value
Non-vested beginning of period		129,206		$	2.37		144,006		$	2.00
Granted		77,250			1.86		57,000			1.82
Vested		(32,898	)		2.61		(73,200	)		1.27
Forfeited		(17,300	)		2.02		—			—
Non-vested end of period		156,258		$	2.10		127,806		$	2.36

The total intrinsic value of stock options exercised during the nine months ended September 30, 2007 and 2006 was $161 and $4, respectively.

Note 6 - Commitments and Contingencies

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 results of operations or financial position of the Company.

Note 7 - Recent Accounting Pronouncements

In July 2006, the Financial Accounting Standards Board (“FASB”) issued Interpretation No. 48, Accounting for Uncertainty in Income Taxes (“FIN 48”) - an Interpretation of FASB Statement No. 109, Accounting for Income Taxes. FIN 48 prescribes a comprehensive model for how a company should recognize, measure, present, and disclose in its financial statements uncertain tax positions that it has taken or expects to take on a tax return. FIN 48 was effective as of the beginning of the Company’s 2007 fiscal year. The cumulative effect, if any, of applying FIN 48 is to be reported as an adjustment to the opening balance of retained earnings in the year of adoption. The adoption of FIN 48 on January 1, 2007 did not have a material effect on the Company’s consolidated financial statements.

In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements, which establishes a framework for reporting fair value and expands disclosures about fair value measurements. SFAS No. 157 becomes effective for the Company on January 1, 2008. The Company is currently evaluating the impact of this standard on its consolidated financial statements.

In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities, which is effective for fiscal years beginning after November 15, 2007. Early adoption is permitted as of the beginning of a fiscal year that begins on or before November 15, 2007, provided the entity also elects to apply the provisions of SFAS No. 157. SFAS No. 159 permits entities to choose to measure financial assets and liabilities at fair value. The election to measure a financial asset or liability at fair value can be made on an instrument-by-instrument basis and is irrevocable. The difference between carrying value and fair value at the election date is recorded as a transition adjustment to opening retained earnings. Subsequent changes in fair value are recognized in earnings. The Company did not early adopt SFAS No. 159, and is currently assessing the impact the adoption of the standard will have on its consolidated financial statements.

11

Note 8 - Subsequent Event

Subsequent to September 30, 2007, the Company entered into Executive Supplemental Compensation Agreements with member of senior management. Simultaneously, the Company purchased $5,000 in bank owned life insurance to fund certain future retirement payments or death benefits under the agreements.

12

ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

A Warning About Forward-Looking Information

This document contains forward-looking statements that are subject to risks and uncertainties. These statements are based on the present 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 described in our 2006 10-K, as well as 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 key employees, and maintain our interest margins and fee income;

2.changes in the interest rate environment that may reduce margins or decrease the value of our securities;

3.our growth strategy which may not be successful if we fail to accurately assess market opportunities, anticipated capital requirements, or the quality of assets, or if we fail to adequately control expenses;

4.general economic or business conditions, either nationally or in the regions in which we do business, that may be less favorable than expected, resulting in, among other things, a deterioration in credit quality, a reduced demand for credit, or decreases in the value of real estate that is the collateral for many of our loans; and

5.a lack of liquidity in the market for our common stock 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 in this report 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.

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Overview

The Company is a bank holding company headquartered in Aberdeen, Washington. The Company's wholly-owned subsidiary, The Bank of the Pacific (the “Bank”), is a state chartered bank, also located in Washington. The Company also has two wholly-owned subsidiary trusts known as PFC Statutory Trust I and II (the “Trusts”) that were formed December 2005 and May 2006, respectively, in connection with the issuance of pooled trust preferred securities. The Company was incorporated in the state of Washington on February 12, 1997, pursuant to a holding company reorganization of the Bank.

The Company conducts its banking business through the Bank, which operates 18 branches located in communities in Grays Harbor, Pacific, Whatcom, Skagit and Wahkiakum counties in the state of Washington and one in Clatsop County, Oregon. In addition, the Bank has entered into construction contracts to relocate its Barkley and Ferndale, Washington branches to new facilities and has announced plans to open a new branch in Warrenton, Oregon in 2008.

The Bank provides loan and deposit services to customers who are predominantly small and middle-market businesses and middle-income individuals. The Bank is currently in the process of evaluating additional cash management products to include merchant remote deposit capture; introduction of this product is expected in the second quarter of 2008. A business investment sweep account was rolled out during the second quarter of 2007, with balances growing to $16 million as of September 30, 2007. While these products are expected to have a minor impact on revenue and expense in 2007, the Bank anticipates that the new products will enhance its ability to attract, grow and retain core deposit relationships.

Critical Accounting Policies

Critical accounting policies are discussed in the 2006 10-K under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operation - Critical Accounting Policies.” There have not been any material changes in our critical accounting policies and estimates relating to our allowance for credit losses as compared to that contained in the 2006 10-K.

Recent Accounting Pronouncements

Please see Note 7 of the Company's Notes to Condensed Consolidated Financial Statements above for a discussion of recent accounting pronouncements and the likely effect on the Company.

Results of Operations

Net income. For the three months ended September 30, 2007, Pacific's net income was $1,631,000 compared to $1,543,000 for the same period in 2006. The increase in net income for the three month period is due primarily to a decline in loan loss provision expense. For the nine months ended September 30, 2007, net income was $4,731,000 compared to $4,878,000 for the same period in 2006. The decrease in net income for the nine month period resulted primarily from increases in staffing and benefits expenses of $1,075,000 over the same period in 2006. Return on average equity for the nine months ended September 30, 2007 and 2006, was 9.2% and 10.0%, respectively.

Net interest income. For the three and nine months ended September 30, 2007, we experienced compression in our net interest margin when compared to the same period in 2006. This compression resulted from an increasing reliance on higher cost deposits and borrowings to fund loan growth. Net interest income for the three and nine months ended September 30, 2007 increased $76,000, or 1.22%, and $862,000, or 4.85%, respectively, compared to the same periods in 2006. The increase is primarily related to the increase in interest income as a result of greater average balances of interest earning assets. See the table below and the accompanying discussion for further information on interest income and expense. The net interest margin (net interest income divided by average earning assets) decreased to 4.88% for the nine months ended September 30, 2007 from 5.09% for the same period last year. The decline in net interest margin is due primarily to an increase in the average cost of funds from 3.17% for the nine months ended September 30, 2006 to 3.81% for the current nine-month period. The Company’s average cost of funds had been steadily increasing for the past several quarters due to competitive pressures and rising interest rates; however, it remained flat for the quarter ending September 30, 2007.

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The Federal Reserve Board heavily influences market interest rates, including deposit and loan rates offered by many financial institutions. The Company’s loan portfolio is significantly affected by changes in the prime interest rate, and similarly, our deposits are affected by changes in the federal funds rate. These particular rates remained unchanged for approximately 15 months until the Federal Reserve Board decreased the federal funds rate during the third quarter of 2007 50 basis points to 4.75%. As a result of this rate cut, the national prime rate decreased 50 basis points to 7.75% as well. These rates were subsequently decreased an additional 25 basis points on October 31^st of this year.

The following table sets forth information with regard to average balances of interest earning assets and interest bearing liabilities and the resultant yields or cost, net interest income, and the net interest margin on a tax equivalent basis. Loans held for sale and non-accrual loans are included in total loans.

Nine Months Ended September 30,

				2007									2006
				Interest									Interest
(dollars in thousands)	Average			Income			Avg			Average			Income			Avg
	Balance			(Expense)			Rate			Balance			(Expense)			Rate
Interest Earning Assets
Loans (1)	$	455,395		$	28,784*			8.43	%	$	411,084		$	24,961*			8.10	%
Taxable securities		25,165			948			5.02			21,505			686			4.25
Tax-exempt securities		17,550			798*			6.06			16,113			732*			6.06
Federal Home Loan Bank Stock		1,858			3			.22			1,858			—			—
Interest earning balances with banks		9,086			349			5.12			15,766			602			5.09
Total interest earning assets	$	509,054		$	30,882			8.09	%	$	466,326		$	26,981			7.71	%
Cash and due from banks		12,229									12,095
Bank premises and equipment (net)		12,900									10,981
Other assets		28,542									25,947
Allowance for credit losses		(4,489	)								(5,252	)
Total assets	$	558,236								$	510,097
Interest Bearing Liabilities
Savings and interest bearing demand	$	192,146		$	(3,756	)		2.61	%	$	196,078		$	(3,348	)		2.28	%
Time deposits		177,604			(6,371	)		4.78			141,494			(4,282	)		4.04
Total deposits		369,750			(10,127	)		3.65			337,572			(7,630	)		3.01
Short-term borrowings		7,834			(324	)		5.51			1,843			(74	)		5.35
Long-term borrowings		21,500			(619	)		3.84			23,629			(660	)		3.72
Secured borrowings		1,548			(84	)		7.24			2,035			(106	)		6.95
Junior subordinated debentures		13,403			(685	)		6.81			8,237			(397	)		6.43
Total borrowings		44,285			(1,712	)		5.15			35,744			(1,237	)		4.61
Total interest-bearing liabilities	$	414,035		$	(11,839	)		3.81	%	$	373,316		$	(8,867	)		3.17	%
Demand deposits		87,483									83,998
Other liabilities		5,025									3,828
Shareholders’ equity		51,693									48,955
Total liabilities and shareholders’ equity	$	558,236								$	510,097
Net interest income				$	19,043*								$	18,114*
Net interest spread								4.99	%								5.18	%
Net interest margin								4.88	%								5.09	%
Tax equivalent adjustment				$	394*								$	327*

* Tax equivalent basis – 34% tax rate used

(1) Interest income on loans includes loan fees of $1,451 and $1,087 in 2007 and 2006, respectively.

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Interest and dividend income for the three and nine months ended September 30, 2007 increased $566,000, or 5.80%, and $3,834,000, or 14.38%, respectively compared to the same periods in 2006. Growth in average loan balances and higher amortized loan fees contributed to increased net interest income. Loans averaged $455.4 million with an average yield of 8.43% for the nine months ended September 30, 2007 compared to average loans of $411.1 million with an average yield of 8.10% for the same period in 2006.

Interest expense for the three and nine months ended September 30, 2007 increased $490,000, or 13.96%, and $2,972,000 or 33.52%, respectively, compared to the same periods in 2006. The increase is primarily attributable to rate increases on interest-bearing deposits, additional expense related to $8 million in junior subordinated debentures issued in May 2006 and an increased volume of short-term borrowings (primarily wholesale repurchase agreements). The Company began utilizing wholesale repurchase agreements as an additional funding source in the first quarter of 2007, but due to the Company’s favorable liquidity position, the balances were paid off in August 2007. Average interest-bearing deposit balances for the nine months ended September 30, 2007 and 2006 were $369.8 million and $337.6 million, respectively, with an average cost of 3.65% and 3.01%, respectively. Affected by a flat yield curve for most of 2007, net interest spread declined to 4.99% in the third quarter of 2007 from 5.18% in the third quarter of 2006.

Average secured borrowings for the nine months ended September 30, 2007 and 2006 were $1,548,000 and $2,035,000, respectively. The secured borrowings represent borrowings collateralized by participation interests in loans originated by the Company. Average long and short term borrowings for the nine months ended September 30, 2007 were $29,334,000 with an average cost of 4.29% compared to $25,472,000 with an average cost of 3.84% for the same period in 2006.

Provision and allowance for credit losses. The allowance for credit losses reflects management's current estimate of the amount required to absorb losses on loans based on factors present as of the end of the period.  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 in order to maintain the allowance at a level that management deems adequate.

There is no precise method of predicting specific credit losses or amounts that ultimately may be charged off. 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 is a matter of judgment that requires consideration of many factors, including (a) 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 analysis, on a monthly basis, of all loans judged to present a possibility of loss (if, as a result of such monthly analysis, 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. An analysis of the adequacy of the allowance is conducted by management quarterly and is reviewed by the board of directors. Based on this analysis, management considers the allowance for credit losses to be adequate at September 30, 2007.

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Periodic provisions for credit 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. For additional information, please see the discussion under the heading "Critical Accounting Policy" in Item 7 of our 2006 10-K.

During the three and nine months ended September 30, 2007, provision for credit losses totaled $60,000 and $422,000, respectively, compared to $550,000 for each of the same periods in 2006. For the nine months ended September 30, 2007, net recoveries were $504,000 compared to net charge-offs of $1,892,000 for the same period in 2006. See non-performing assets below for discussion regarding 2007 recoveries. Net charge-offs for the twelve months ended December 31, 2006 were $1,888,000. The Bank recorded a single charge-off of $1,827,000 during the third quarter of 2006 that was attributable to one borrower. The ratio of net recoveries / (charge-offs) to average loans outstanding for the three months ended September 30, 2007 and 2006 was 0.09% and (0.44)%, respectively, and 0.11% and (0.46)% for the nine months ended September 30, 2007 and 2006, respectively.

At September 30, 2007, the allowance for credit losses was $4,959,000 compared to $4,033,000 at December 31, 2006, and $3,954,000 at September 30, 2006. The increase from September 30, 2006 is attributable to increased loan loss provision of $422,000 during the nine months ended September 30, 2007 and the single recovery discussed below. The ratio of the allowance for credit losses to total loans outstanding (including loans held for sale) was 1.09%, 0.92% and 0.96%, at September 30, 2007, December 31, 2006, and September 30, 2006, respectively.

Non-performing assets and foreclosed real estate owned. Non-performing assets totaled $3,202,000 at September 30, 2007. This represents 0.71% of total loans (including loans held for sale), compared to $7,711,000, or 1.76%, at December 31, 2006, and $6,698,000, or 1.64%, at September 30, 2006. Non-accrual loans totaled $621,000, $7,335,000 and $6,698,000 at September 30, 2007, December 31, 2006 and September 30, 2006, respectively. Non-accrual loans at December 31, 2006 and September 30, 2006 related primarily to one borrower involved in the forest products industry. These loans were partially guaranteed by the United States Department of Agriculture (“USDA”). The significant improvement in non-accrual loans outstanding from 2006 to 2007 resulted primarily from the collection of the guaranteed portion of these loans from the USDA. During the nine months ended September 30, 2007, the Company received $3,804,000 from the USDA and another $2,547,000 from the liquidation of collateral for these loans, resulting in a net recovery of $559,000 for amounts previously charged-off.

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ANALYSIS OF NON-PERFORMING ASSETS
	September 30  2007		December 31, 2006		September 30, 2006
(in thousands)
Accruing loans past due 90 days or more	$	2,581	$	376	$	—
Non-accrual loans		621		7,335		6,698
Foreclosed real estate		—		—		—
TOTAL	$	3,202	$	7,711	$	6,698

Subsequent to September 30, 2007, $2,083,000 of the $2,581,000 in accruing loans past due 90 days or more were renewed and are currently performing as specified in the applicable loan agreements.

Non-interest income and expense. Non-interest income for the three months ended September 30, 2007 decreased $28,000 or 2.57%, compared to the same period in 2006. For the nine months ended September 30, 2007, non-interest income increased $32,000, compared to the same period in 2006. Gain on sales of loans, the largest component of non-interest income, totaled $422,000 and $535,000 for the three months ended September 30, 2007 and 2006, respectively, and totaled $1,377,000 and $1,421,000 for the nine months ended September 30, 2007 and 2006, respectively. The decrease for both the three and nine month period is due to the slowing housing market that has led to decreased mortgage activity and fewer mortgages available for re-sale into secondary markets. Management expects mortgage banking volume to continue to trend downward slightly for the rest of 2007. The Company does not engage in sub-prime lending activities.

Additionally, during the nine months ended September 30, 2007, the Company recorded other operating income of $44,000 from interest received from the Internal Revenue Service on an amended tax return for the 2003 and 2004 tax years.

Non-interest expense for the three and nine months ended September 30, 2007 increased $381,000 and $1,605,000, respectively, compared to the same periods in 2006. Increased staffing, benefits, occupancy, and data processing expenses were the major contributing factors to increased non-interest expense, as well as expenses relating to a settlement of an employment contract dispute in the first quarter of 2007. Full time equivalent employees at September 30, 2007 were 215 compared to 204 at September 30, 2006. In order to improve processing time, efficiency, technology capabilities and support future growth of the company, management has recently decided to outsource its core operating system and convert from an in-house environment to a service bureau, which is expected to occur in the second quarter of 2008.

Income taxes. The federal income tax provision for the three and nine months ended September 30, 2007 was $686,000 and $1,633,000, respectively, an increase of $69,000 and a decrease of $436,000 compared to the same periods in 2006. The effective tax rate for the three and nine months ended September 30, 2007 was 29.6% and 25.7%, respectively. In 2007, the Company filed amended tax returns for the 2003 and 2004 tax years in order to capture a previously unrecognized net operating loss benefit from the BNW Bancorp Inc. acquisition. This resulted in a $215,000 favorable tax adjustment recorded during the first quarter.

Financial Condition

Assets. Total assets were $568,478,000 at September 30, 2007, an increase of $6,094,000, or 1.08%, over year-end 2006. Loans, including loans held for sale, were $453,784,000 at September 30, 2007, an increase of $14,615,000, or 3.33%, over year-end 2006. The increase in the portfolio was a result of the purchase of $22 million in loans that are fully guaranteed by U.S. government agencies. Of this amount, approximately $16 million are real estate loans, with the remaining $6 million being commercial loans. These loans are all variable rate loans, some of which include prepayment penalties. Excluding the purchase of loans previously mentioned, loan balances are down in 2007 due to softer loan demand in our markets. Additionally, the Bank has a planned exit strategy in place due to loan size and complexity for approximately $25 million in loans, of which we anticipate a significant amount will exit the portfolio before year end.

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Loans. Interest and fees earned on our loan portfolio is our primary source of revenue. Loans represented 80% of total assets as of September 30, 2007, compared to 78% at December 31, 2006 and 76% at September 30, 2006. The majority of the Company’s loan portfolio is comprised of commercial and industrial loans and real estate loans. The commercial and industrial loans are a diverse group of loans to small, medium, and large businesses for purposes ranging from working capital needs to term financing of equipment. The Company emphasizes commercial real estate and construction and land development loans. Our commercial real estate portfolio generally consists of a wide cross-section of retail, small office, warehouse, and industrial type properties. A substantial number of these properties are owner-occupied. Loan to value ratios for the Company’s commercial real estate loans generally do not exceed 80% and debt service ratios are generally 125% or better. While we have significant balances within this lending category, we believe that our lending policies and underwriting standards are sufficient to minimize risk even if there were to be a downturn in the commercial real estate market. During the third quarter of 2007, the Company further strengthened its underwriting criteria for advance rates on raw land loans, land development loans, residential lots, spec construction for condominiums and all construction loans. It is our strategic plan to continue to emphasize growth in commercial and small business loans. We believe this will be a key contributor to growing more low cost deposits. Additionally, we are currently in the process of automating our consumer loan approval procedures. We anticipate this system will expedite the loan approval process and reduce overhead, while increasing consumer loan balances, including installment and credit cards categories

Loan detail by category, including loans held for sale, as of September 30, 2007 and December 31, 2006 follows (in thousands):

	September 30, 2007			December 31, 2006
Commercial and industrial	$	110,179		$	108,614
Agricultural		15,340			24,229
Real estate mortgage		93,624			91,598
Real estate construction		87,988			87,063
Real estate commercial		137,587			117,608
Installment		7,100			8,150
Credit cards and other		2,575			2,508
Less unearned income		(609	)		(601	)
Total Loans		453,784			439,169
Allowance for credit losses		(4,959	)		(4,033	)
Net Loans	$	448,825		$	435,136

Deposits.Total deposits were $472,495,000 at September 30, 2007, an increase of $5,654,000, or 1.21%, compared to December 31, 2006. Management expects our deposit balances to remain relatively flat for the rest of 2007. This is consistent with the cyclical pattern of our deposits for our tourist heavy locations in which balances have typically reached their highest point in the third quarter of the year. Competitive pressures from banks in our market areas with strained liquidity positions may also slow our deposit growth. In the long-term we anticipate continued growth in our core deposits through both the addition of new customers and our current client base. We have established and expanded a branch system to serve our consumer and business depositors. In addition, management’s strategy for funding asset growth is to make use of brokered and other wholesale deposits on an as-needed basis.

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Liquidity. Adequate liquidity is available to accommodate fluctuations in deposit levels, fund operations, provide for customer credit needs, and meet obligations and commitments on a timely basis. The Bank’s primary sources of funds are customer deposits, maturities of investment securities, sales of securities available for sale, loan sales, loan repayments, net income, and other borrowings. When necessary, liquidity can be increased by taking advances available from credit available to the Bank. The Bank maintains credit facilities with correspondent banks totaling $43,500,000, none of which were used at September 30, 2007. In addition, the Bank has a credit line with the Federal Home Loan Bank of Seattle for up to 20% of assets, of which $21,500,000 was used at September 30, 2007. For its funds, the Company relies on dividends from the Bank and proceeds from the issuance of trust preferred securities, both of which are used for various corporate purposes, including dividends.

At September 30, 2007, two wholly-owned subsidiary grantor trusts established by the Company had issued and outstanding $13,403,000 of trust preferred securities. For additional information regarding trust preferred securities, see the 2006 10-K under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Liquidity”.

Capital. Total shareholders' equity was $54,615,000 at September 30, 2007, an increase of $5,631,000, or 11.5%, compared to December 31, 2006. The Federal Reserve and the Federal Deposit Insurance Commission have established minimum guidelines that mandate risk-based capital requirements for bank holding companies and member banks. Under the guidelines, risk percentages are assigned to various categories of assets and off-balance sheet items to calculate a risk-adjusted capital ratio. Regulatory minimum risk-based capital guidelines require Tier 1 capital to risk-weighted assets of 4% and total capital to risk-weighted assets of 8%. The Company’s Tier 1 and Total Risk Based Capital ratios were 12.59% and 13.73%, respectively, at September 30, 2007 compared with 11.03% and 11.94%, respectively at December 31, 2006.

Additionally, to qualify as “well-capitalized”, the Bank must have a Tier 1 risk based capital ratio of at least 6%, total risk based capital of at least 10%, and a leverage ratio of a least 5%. The Bank qualified as “well-capitalized” at September 30, 2007.

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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Interest rate, credit, and operations risks are the most significant market risks that affect the Company's performance. The Company relies on loan review, prudent loan underwriting standards, and an adequate allowance for possible credit losses to mitigate credit risk.

An asset/liability management simulation model is used to measure interest rate risk. The model produces regulatory oriented measurements of interest rate risk exposure. The model quantifies interest rate risk by simulating forecasted net interest income over a 12-month time period under various interest rate scenarios, as well as monitoring the change in the present value of equity under the same rate scenarios. The present value of equity is defined as the difference between the market value of assets less current liabilities. By measuring the change in the present value of equity under various rate scenarios, management is able to identify interest rate risk that may not be evident from changes in forecasted net interest income.

The Company is currently asset sensitive, meaning that interest earning assets mature or re-price more quickly than interest-bearing liabilities in a given period. Therefore, a significant increase in market rates of interest could improve net interest income. Conversely, a decreasing rate environment may adversely affect net interest income.

It should be noted that the simulation model does not take into account future management actions that could be undertaken should actual market rates change during the year. Also, the simulation model results are not exact measures of the Company's actual interest rate risk. They are only indicators of rate risk exposure based on assumptions produced in a simplified modeling environment designed to heighten sensitivity to changes in interest rates. The rate risk exposure results of the simulation model typically are greater than the Company's actual rate risk. That is due to the conservative modeling environment, which generally depicts a worst-case situation. Management has assessed the results of the simulation reports as of September 30, 2007 and believes that there has been no material change since December 31, 2006.

ITEM 4. CONTROLS AND PROCEDURES

The Company's disclosure controls and procedures are designed to ensure that information the Company must disclose in its reports filed or submitted under the Securities Exchange Act of 1934 ("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 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 the Company'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.

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PART II – OTHER INFORMATION

ITEM 1.LEGAL PROCEEDINGS

Not applicable.

ITEM 1A.RISK FACTORS

There has been no material change from the risk factors previously reported in the 2006 10-K.

ITEM 2.UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

None.

ITEM 3.DEFAULTS UPON SENIOR SECURITIES

None.

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

None.

ITEM 5.OTHER INFORMATION

None.

ITEM 6.EXHIBITS

See Exhibit Index immediately following signatures below.

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 FINANCIAL CORPORATION
DATED: November 9, 2007		By:	/s/ Dennis A. Long
			Dennis A. Long
			Chief Executive Officer
		By:	/s/ Denise Portmann
			Denise Portmann
			Chief Financial Officer

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EXHIBIT INDEX

EXHIBIT NO.	EXHIBIT
10.1	Executive Supplemental Compensation Agreement effective as of January 1, 2007, between the Bank of the Pacific and Dennis A. Long.
10.2	Executive Supplemental Compensation Agreement effective as of January 1, 2007, between the Bank of the Pacific and John G. Van Dijk.
10.3	Executive Supplemental Compensation Agreement effective as of January 1, 2007, between the Bank of the Pacific and Bruce D. MacNaughton.
10.4	Executive Supplemental Compensation Agreement effective as of January 1, 2007, between the Bank of the Pacific and Denise J. Portmann.
31.1	Certification of CEO under Rule 13a - 14(a) of the Exchange Act.
31.2	Certification of CFO under Rule 13a - 14(a) of the Exchange Act.
32	Certification of CEO and CFO under 18 U.S.C. Section 1350.

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EX-10.1

EXECUTIVE SUPPLEMENTAL COMPENSATION AGREEMENT

This Executive Supplemental Compensation Agreement (hereinafter “Agreement”) is made and entered into effective as of January 1, 2007 by and between Bank of the Pacific, with its principal offices located in the Aberdeen, Washington ("the Bank" or “Employer”) and, Dennis A. Long, an individual residing in the State of Washington ("the Executive").

RECITALS

WHEREAS, the Executive is an employee of the Employer, serving since April 9, 1997,

WHEREAS, the Employer desires to establish a compensation benefit program as a fringe benefit for executive officers of the Employer in order to attract and retain individuals with extensive and valuable experience in the banking industry;

WHEREAS, the Executive's experience and knowledge of the affairs of the Employer and the banking industry are extensive and valuable;

WHEREAS, it is deemed to be in the best interests of the Employer to provide the Executive with certain fringe benefits, on the terms and conditions set forth herein, in order to reasonably induce the Executive to remain in the Employer's employment; and

WHEREAS, the Executive and the Employer wish to specify in writing the terms and conditions upon which this additional compensatory incentive will be provided to the Executive;

NOW, THEREFORE, in consideration of the services to be performed by the Executive in the future, as well as the mutual promises and covenants contained herein, the Executive and the Employer agree as follows:

AGREEMENT

1.Terms and Definitions.

1.1Accrued Liability Balance. For the purposes of this Agreement, means the liability that should be accrued by the Company, under Generally Accepted Accounting Principles (“GAAP”), for the Company’s obligation to the Executive under this Agreement, by applying Accounting Principles Board Opinion Number 12 (“APB 12”) as amended by Statement of Financial Accounting Standards Number 106 (“FAS 106”) and the Discount Rate. Any one of a variety of amortization methods may be used to determine the Accrual Balance. However, once chosen, the method must be consistently applied.

1.2Administrator. The Bank shall be the "Administrator" and, solely for the purposes of ERISA as defined in paragraph 1.9 below, the "fiduciary" of this Agreement where a fiduciary is required by ERISA.

-1-

1.3Applicable Percentage. The term “Applicable Percentage” is the percentage of the Executive Benefit to which Executive shall be entitled based on (a) the date on which the Executive Separates From Service or Terminates Employment with the Bank or (b) the greater of fifty percent (50%) or the actual Applicable Percentage, as stipulated herein for certain described events (such as Involuntary Termination within two years following a Change in Control, or the Executive's Disability). Subject to the forgoing, the Applicable Percentage shall be as follows:

DATE OF SEPARATION FROM SERVICE	APPLICABLE PERCENTAGE
January 1, 2007-December 31, 2009		0	%
January 1, 2010-December 31, 2010		30	%
January 1, 2011-December 31, 2011		40	%
January 1, 2012-December 31, 2012		50	%
January 1, 2013-December 31, 2013		60	%
January 1, 2014-December 31, 2014		70	%
January 1, 2015-December 31, 2015		80	%
January 1, 2016-December 31, 2016		90	%
January 1, 2017 and beyond:		100	%

1.4 Beneficiary. Beneficiary (ies)” shall refer to the person, persons or entity designated in writing by the Executive on forms provided by the Administrator to receive the benefits payable under this Agreement/Plan. An Executive may change his Beneficiary from time to time, so long as permissible, by filing a new written designation with the Administrator, and such designation shall be effective upon receipt by the Administrator. If an Executive has not validly designated a beneficiary, or if a designated Beneficiary predeceases the Executive, then any benefit owed pursuant to this plan Agreement shall be made to Executive’s estate.

1.5Board of Directors. The Board of Directors shall mean the Board of Directors for The Bank, hereinafter “the Board”.

1.6Change in Control. For the purpose of this Agreement, a Change in Control means the occurrence of any of the following events:

A.A Change in the Ownership of a Corporation. A change in the ownership of a corporation occurs on the date that any one person or persons acting as a group (as defined in IRC 409A), acquires ownership of stock of the corporation that, together with stock held by such person or group, constitutes more than fifty percent (50%) of the total fair market value or total voting power of the stock of such corporation. The acquisition of additional stock by the same person or group is not considered to cause a change in the ownership of the corporation.

B. Change in the Effective Control of a Corporation. A change in the effective control of the corporation shall be deemed to occur on either of the following dates:

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(i) The date any one person, or persons acting as a group acquires (or has acquired during the twelve (12) month period ending on the date of the most recent acquisition by such person or group) ownership of stock of the corporation possessing thirty percent (30%) or more of the total voting power of the stock of such corporation; or

(ii) The date a majority of members of the corporation’s board of directors is replaced during any twelve (12) month period by directors whose appointment or election is not endorsed by a majority of the members of the corporation’s board of directors before the date of the appointment or election.

C. Change in the Ownership of a Substantial Portion of a Corporation’s Assets. A change in the ownership of a substantial portion of a corporation’s assets shall be deemed to occur on the date that any one person or group acquires (or has acquired during the twelve (12) month period ending on the date of the most recent acquisition by such person or persons) assets from the corporation that have a total gross fair market value equal to or more than forty percent (40%) of the total gross fair market value of all of the assets of the corporation immediately before such acquisition or acquisitions. No Change in Control shall result if the assets are transferred to certain entities controlled directly or indirectly by the shareholders of the transferring corporation.

1.7The Code. The "Code" shall mean the Internal Revenue Code of 1986, as amended (the “Code").

1.8Disability/Disabled. For the purposes of this Agreement, Executive will be considered Disabled if:

(A) The Executive is unable to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment that can be expected to result in death or can be expected to last for a continuous period of not less than twelve (12) months; or

(B) The Executive is, by reason of any medically determinable physical or mental impairment that can be expected to result in death or can be expected to last for a continuous period of not less than twelve (12) months, receiving income replacement benefits for a period of not less than three (3) months under an accident and health plan covering employees of the Employee’s employer.

The determination of whether an Executive is Disabled shall be determined by a physician mutually agreed on by the parties subject to the provisions of IRC 409A.

1.9Early Retirement Date/ Early Retirement Age. The term “Early Retirement Date” shall mean Retirement (as defined below) of the Executive at anytime prior to the attainment of age Sixty-Eight (68) after the attainment of age Sixty-Five (65).

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1.10Effective Date. The term "Effective Date" shall mean the date first written above.

1.11ERISA. The term "ERISA" shall mean the Employee Retirement Income Security Act of 1974, as amended.

1.12Executive Benefit. The term "Executive Benefit” shall mean the annual benefit amounts determined pursuant to Paragraphs 1 through 4 (including sub-paragraphs, as applicable), subject to forfeiture, reduction or adjustment as (a) required under the other provisions of this Agreement; (b) required by reason of the lawful order of any regulatory agency or body having jurisdiction over the Employer; or (c) required in order for the Employer to comply with any and all applicable state and federal laws, including, but not limited to, income, employment and disability income tax laws (e.g., FICA, FUTA, SDI).

Subject to the forgoing, in the event the Executive obtains an Applicable Percentage of one hundred percent (100%), then the annual Executive Benefit paid by the Bank to the Employee pursuant to this Agreement shall be the lesser of forty percent (40%) of the average of the Executive’s three final years of base salary or an amount equal to One Hundred Thirty Three Thousand Five Hundred Twenty Dollars ($133,520.00). This Executive Benefit shall be paid in twelve (12) substantially equal monthly installments, for a period of fifteen (15) years (180 months).

1.13Involuntary Separation From Service. In accordance with IRC 409A, the term “Involuntary Separation from Service” shall mean a Separation From Service due to the independent exercise of the unilateral authority of the Bank to terminate the Executive’s services, other than due to the Executive’s implicit or explicit request, where the Executive was willing and able to continue performing services.

1.14IRC 409A. The term “IRC 409A” shall refer to the final regulations issued by the IRS and the Treasury Department under Section 409A of the Code.

1.15Normal Retirement Date Normal Retirement Age . The term "Normal Retirement Date" shall mean the Retirement (as defined below) of the Executive on or after the attainment of age Sixty-Eight (68).

1.16Retirement. The Term "Retirement" or "Retires" shall refer to the date on which the Executive voluntarily Separates From Service (other than due to a Termination for Cause) on or after attaining the Early or Normal Retirement Age.

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1.17Separation From Service/ Termination of Employment. The terms Separation From Service (Separates From Service) and Termination of Employment shall be used interchangeably for the purposes of this Agreement and shall be interpreted in accordance with the provisions of IRC 409A. Whether a termination of employment has occurred is determined based on whether the facts and circumstances indicate that the Bank and the Executive reasonably anticipate that no further services will be performed after a certain date or that the level of bona fide services the employee will perform after such date (whether as an employee or as an independent contractor) will permanently decrease to no more than twenty (20%) percent of the average level of bona fide services performed (as an employee or an independent contractor) over the immediately preceding 36-month period (or the full period of services to the employer if the employee has been providing services to the employer less than 36 months). There shall be no Separation From Service while the Executive is on military leave, sick leave or other bona fide leave of absence, as long as such leave does not exceed six months, or if longer, so long as the individual retains a right to re-employment with the service recipient under an applicable statute or by contract.

1.18Specified Employee. The term “Specified Employee” means an employee who, as of the date of the employee’s Separation from Service, is a key employee of an employer of which any stock is publicly traded on an established securities market or otherwise. An employee is a key employee if the employee meets the requirements of section 416(i)(1)(A)(i), (ii), or (iii) (applied in accordance with the regulations thereunder and disregarding section 416(i)(5)) at any time during the twelve (12) month period ending on a specified employee identification date. If Executive is a key employee as of a specified employee identification date, then Executive shall be treated as a key employee for the entire twelve (12) month period beginning on the specified employee effective date.

1.19Termination for Cause. The term “Termination for Cause” shall mean a written termination of Employment of the Executive by the Employer, adopted in advance by resolution of a majority of the Board of Directors of the Employer (the “Resolution”), for any one or more of the following reasons, which reasons shall be cited in the Resolution and presented promptly to the Executive:

(a) the Executive’s willful and material breach of duty in the course of his Employment, such breach having a material adverse effect on the Bank;

(b)the Executive's willful violation of any laws, rules or regulations of any regulatory agency or governmental authority having jurisdiction over the Employer, or of any Bank policies or resolutions adopted by the Board of Directors of the Bank, which violation has a material adverse effect on the Bank;

(c)the Executive is convicted of any felony or a crime involving moral turpitude or commits a fraudulent or dishonest act, which conviction or act has a material adverse effect on the Bank;

1.20 Termination for Good Reason. For the purposes of this Agreement, a voluntary termination by the Executive within two (2) years following a Change in Control Event shall be deemed “for Good Reason” if one or more of the following conditions arise without the consent of the Executive:

(A) A material diminution in the Executive’s base compensation;

(B) A material diminution in the Executive’s authority, duties, or responsibilities;

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(C) A material diminution in the authority, duties, or responsibilities of the supervisor to whom the Executive is required to report, including a requirement that an Executive report to a corporate officer or employee instead of reporting directly to the board of directors of a corporation (or similar governing body with respect to an entity other than a corporation);

(D) A material diminution in the budget over which the Executive retains authority;

(E) A material change in the geographic location at which the Executive must perform the services;

(F) Any other action or inaction that constitutes a material breach by the Employer of the agreement under which the Executive provides services.

2.Scope, Purpose and Effect.

2.1Contract of Employment. Although this Agreement is intended to provide the Executive with an additional incentive to remain in the employ of the Employer, this Agreement shall not be deemed to constitute a contract of employment between the Executive and the Employer nor shall any provision of this Agreement restrict or expand the right of the Employer to terminate the Executive's employment. This Agreement shall have no impact or effect upon any separate written Employment Agreement which the Executive may have with the Employer, it being the parties' intention and agreement that unless this Agreement is specifically referenced in said Employment Agreement (or any modification thereto), this Agreement (and the Employer's obligations hereunder) shall stand separate and apart and shall have no effect on or be affected by, the terms and provisions of said Employment Agreement.

2.2Fringe Benefit. The benefits provided by this Agreement are granted by the Bank as a fringe benefit to the Executive and are not a part of any salary reduction plan or any arrangement deferring a bonus or a salary increase. The Executive has no option to take any current payments or bonus in lieu of the benefits provided by this Agreement.

2.3Prohibited Payments.Notwithstanding anything in this Agreement to the contrary, if any payment made under this Agreement is a “golden parachute payment” as defined in Section 28(k) of the Federal Deposit Insurance Act (12 U.S.C. section 1828(k) and Part 359 of the Rules and Regulations of the Federal Deposit Insurance Corporation (collectively, the “FDIC Rules”) or is otherwise prohibited, restricted or subject to the prior approval of a Bank Regulator, no payment shall be made hereunder without complying with said FDIC Rules.

3.Delay in Payments for Specified Employee in the Event of a Separation From Service.

In the case of any Employee who is a Specified Employee as of the date of a Separation from Service, then a payment conditioned upon a Separation from Service may not be made before the date that is six (6) months after the date of Separation from Service (or, if earlier than the end of the six-month period, the date of death of the Specified Employee).

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In the event payments to which the Executive would otherwise be entitled during the first six (6) months are subject to this six (6) month delay in payment, then such payments shall be accumulated and paid on the first day of the seventh month following the date of Separation from Service. Payments will then continue thereafter as called for pursuant to the terms of this Agreement.

4.Executive Benefit Payments Upon Retirement.

4.1Payments Commence Upon Early Retirement Date . In the event the Executive elects to Retire on a date which constitutes an Early Retirement Date, as defined in herein, then the Executive shall be entitled to be paid the Applicable Percentage of the Executive Benefit, as corresponds with the date of his Retirement. Payments shall commence on the first day of the month following the month in which the Executive Retires and shall continue for a period of one hundred and eighty (180) months.

4.2Payments Commence Upon Normal Retirement. In the event the Executive remains in the continuous employment of the Bank until attaining at least the Normal Retirement Age, then the Executive shall be entitled to be paid a one hundred percent (100%) Applicable Percentage of the Executive Benefit. Payments shall commence on the first day of the month following the month in which the Executive Retires and shall continue for a period of one hundred and eighty (180) months.

4.3Payments in the Event of the Executive’s Death After Retirement. Upon the death of the Executive after electing Early or Normal Retirement, then Executive’s designated Beneficiary shall be paid the remainder of any unpaid or outstanding Executive Benefit payments. The payments shall commence no later than thirty (30) days after Executive’s death and shall continue until the total one hundred and eighty (180) payments have been made.

5.Payments in the Event Executive’s Employment Terminates Prior to Retirement. As indicated above, the Employer reserves the right to terminate the Executive's employment, with or without Cause but subject to any written employment agreement which may then exist, at any time prior to the Executive's Retirement. In the event that the Executive’s Employment Terminates before Executive qualifies for Early or Normal Retirement (other than by reason of a termination for Cause), then this Agreement shall terminate upon the date of such Termination of Employment; provided, however, that the Executive shall be entitled to the following benefits as may be applicable depending upon the circumstances surrounding the Termination:

           5.1 Payments in the Event Disability Occurs Prior to Early or Normal Retirement. In the event the Executive becomes Disabled while actively employed by the Bank at any time after the Effective Date of this Agreement but prior to Early or Normal Retirement, then Executive shall be entitled to be paid the Accrued Liability Balance in lump sum within thirty (30) days after the determination of Disability.

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                               5.2Payments in the Event of the Executive’s Death prior to Retirement. Upon the death of the Executive prior to electing Early or Normal Retirement, then Executive’s designated Beneficiary shall be paid death benefit in the amount of One Hundred Thirty Three Thousand Five Hundred Twenty Dollars ($133,520.00) per year. The payments shall commence no later than thirty (30) days after Executive’s death. These payments shall be made in twelve (12) substantially equal monthly installments, for a period of fifteen (15) years (180 months).

5.3Termination Without Cause. If the Executive's employment is terminated by the Employer without cause prior to qualifying for Early or Normal Retirement, and such termination is not subject to the provisions of paragraph 5.5 below, then the Executive shall be entitled to be paid the Applicable Percentage of the Executive Benefit, in substantially equal monthly installments on the first day of each month, beginning with the month following the month in which the Executive attains the Normal Retirement Age.

5.4Voluntary Termination by the Executive. In the event the Executive voluntarily Terminates Employment with the Bank prior to qualifying for Early or Normal Retirement, then the Executive Benefit shall be determined in accordance with the following:

(A) If the Applicable Percentage is one hundred percent (100%), the Executive shall be entitled to be paid the Applicable Percentage of the Executive Benefit, in substantially equal monthly installments on the first day of each month, beginning with the month following the month in which the Executive attains the Normal Retirement Age.

(B) If the Executive voluntarily Terminates Employment with the Bank prior to the date specified in Paragraph 1.3 which corresponds to an Applicable Percentage of one hundred percent (100%), and such termination is not subject to the provisions of paragraph 5.5 below, the Executive shall forfeit any and all rights and benefits he may have under the terms of this Agreement and shall have no right to be paid any of the amounts which would otherwise be due or paid to the Executive by the Bank pursuant to the terms of this Agreement.

5.5Involuntary Termination Within Two Years Following a Change in Control. .In the event the Executive is Involuntarily Terminated within two (2) years following a Change in Control Event, or in the event the Executive Terminates for Good Reason within two (2) years following a Change in Control Event, then Executive shall be entitled to receive the greater of the actual Applicable Percentage as of the termination date or 50% of the Executive Benefit. This benefit payment shall commence on the first day of each month, beginning with the month following the month in which the Executive attains the Normal Retirement Age.

6.Termination for Cause. The Executive agrees that if his employment with the Bank is terminated at any time "for Cause," as defined herein, he shall forfeit any and all rights and benefits he may have under the terms of this Agreement and shall have no right to be paid any of the amounts which would otherwise be due or paid to the Executive by the Bank pursuant to the terms of this Agreement. Furthermore, this forfeiture in the event of a termination For Cause shall occur regardless of whether Executive has attained the Early or Normal Retirement Age, and for as long as Executive remains employed by the Bank.

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7.Change in Time or Form of Payment. The date on which distributions are to commence may be postponed by amendment provided the following conditions are satisfied (and in accordance with IRC 409A):

(A) The election to defer or postpone payment may not take effect until at least twelve (12) months after the date on which the election is made;

(B) The payment with respect to which such election is made must be deferred for a period of not less than five (5) years from the date such payment would otherwise have been paid.

(C) Any election relating to a payment to be made a specified time or pursuant to a fixed schedule must be made at least twelve (12) months before the date the payment is scheduled to be paid .

8.Right To Determine Funding Methods. The Bank reserves the right to determine, in its sole and absolute discretion, whether, to what extent and by what method, if any, to provide for the payment of the amounts which may be payable to the Executive, under the terms of this Agreement. In the event that the Bank elects to fund this Agreement, in whole or in part, through the use of life insurance or annuities, or both, the Bank shall determine the ownership and beneficial interests of any such policy of life insurance or annuity. The Bank further reserves the right, in its sole and absolute discretion, to terminate any such policy, and any other devise used to fund its obligations under this Agreement, at any time, in whole or in part. The Executive shall have no right, title or interest in or to any funding source or amount utilized by the Bank pursuant to this Agreement, and any such funding source or amount shall not constitute security for the performance of the Bank's obligations pursuant to this Agreement. In connection with the foregoing, the Executive agrees to execute such documents and undergo such medical examinations or tests which the Bank may request and which may be reasonably necessary to facilitate any funding for this Agreement including, without limitation, the Bank's acquisition of any policy of insurance or annuity.

9.Administrative and Claims Provision.

9.1 Named Fiduciary and Plan Administrator.The “Named Fiduciary and Plan Administrator” of this executive plan shall be the Bank until its resignation or removal by the Board of Directors. As Named Fiduciary and Plan Administrator, the Bank shall be responsible for the management, control and administration of this executive plan. The Named Fiduciary may delegate to others certain aspects of the management and operation responsibilities of the plan, including employment of advisors and the delegation of ministerial duties to qualified individuals.

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9.2 Claims Procedure. In the event a dispute arises over the benefits under this executive plan and benefits are not paid to the Executive (or to the Executive’s beneficiary[ies], if applicable) and such claimants feel they are entitled to receive such benefits, then a written claim must be made to the Named Fiduciary and Plan Administrator named above within forty-five (45) days from the date payments are refused. The Named Fiduciary and Plan Administrator shall review the written claim and if the claim is denied, in whole or in part, they shall provide in writing within forty-five (45) days of receipt of such claim the specific reasons for such denial, reference to the provision of the plan agreement upon which the denial is based and any additional material or information necessary to perfect the claim. Such written notice shall further indicate the additional steps to be taken by claimants if further review of the claim denial is desired. Any decision by the Bank denying a claim by the Executive for benefits under this Agreement shall be stated in writing and delivered or mailed, via registered or certified mail, to the Executive, the Executive's spouse or the Executive's beneficiaries, as the case may be. Furthermore, a claim shall be deemed denied if the Named Fiduciary and Plan Administrator fail to take any action within the aforesaid forty-five (45) day period.

If claimants desire a second review, they shall notify the Named Fiduciary and Plan Administrator in writing within forty-five (45) days of the first claim denial. Claimants may review this Executive Plan or any documents relating thereto and submit any written issues and comments they may feel appropriate. In their sole discretion, the Named Fiduciary and Plan Administrator shall then review the second claim and provide a written decision within forty-five (45) days of receipt of such claim. This decision shall likewise state the specific reasons for the decision and shall include reference to specific provisions of the plan agreement upon which the decision is based.

9.3 Arbitration of Disputes. All claims, disputes and other matters in question arising out of or relating to this Agreement or the breach or interpretation thereof, other than those matters which are to be determined by the Bank in its sole and absolute discretion, shall be resolved by binding arbitration before a representative member, selected by the mutual agreement of the parties, of the Judicial Arbitration and Mediation Services, Inc. ("JAMS"), located in Seattle, Washington. Notice of the demand for arbitration shall be filed in writing with the other party to this Agreement and with JAMS. In no event shall the demand for arbitration be made after the date when institution of legal or equitable proceedings based on such claim, dispute or other matter in question would be barred by the applicable statute of limitations. The arbitration shall be subject to such rules of procedure used or established by JAMS. Any award rendered by JAMS shall be final and binding upon the parties, and as applicable, their respective heirs, beneficiaries, legal representatives, agents, successors and assigns, and may be entered in any court having jurisdiction thereof. Any arbitration hereunder shall be conducted in Aberdeen, Washington, unless otherwise agreed to by the parties.

9.4 Attorneys' Fees. In the event of any arbitration or litigation concerning any controversy, claim or dispute between the parties hereto, arising out of or relating to this Agreement or the breach hereof, or the interpretation hereof, (a) each party shall pay his own attorneys’ arbitration fees incurred (pursuant to paragraph 9.3); (b) the prevailing party shall be entitled to recover from the other party reasonable expenses, attorneys' fees and costs incurred in the enforcement or collection of any judgment or award rendered. The "prevailing party" means any party (one party or both parties, as the case may be) determined by the arbitrator(s) or court to be entitled to money payments from the other, not necessarily the party in whose favor a judgment is rendered.

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10.Status as an Unsecured General Creditor and Rabbi Trust. Notwithstanding anything contained herein to the contrary: (i) the Executive shall have no legal or equitable rights, interests or claims in or to any specific property or assets of the Employer as a result of this Agreement; (ii) none of the Bank’s assets shall be held in or under any trust for the benefit of the Executive or held in any way as security for the fulfillment of the obligations of the Bank under this Agreement; (iii) all of the Bank’s assets shall be and remain the general unpledged and unrestricted assets of the Bank; (iv) the Bank’s obligation under this Agreement shall be that of an unfunded and unsecured promise by the Bank to pay money in the future; and (v) the Executive shall be an unsecured general creditor with respect to any benefits which may be payable under the terms of this Agreement.

Notwithstanding subparagraphs (i) through (v) above, the Bank and the Executive acknowledge and agree that, in the event of a Change in Control, upon request of the Executive, or in the Bank’s discretion if the Executive does not so request and the Bank nonetheless deems it appropriate, the Bank shall establish, not later than the effective date of the Change in Control, a Rabbi Trust or multiple Rabbi Trusts (the "Trust" or "Trusts") upon such terms and conditions as the Bank, in its sole discretion, deems appropriate and in compliance with applicable provisions of the Code, in order to permit the Bank to make contributions and/or transfer assets to the Trust or Trusts to discharge its obligations pursuant to this Agreement. The principal of the Trust or Trusts and any earnings thereon shall be held separate and apart from other funds of the Bank to be used exclusively for discharge of the Bank’s obligations pursuant to this Agreement and shall continue to be subject to the claims of the Bank’s general creditors until paid to the Executive in such manner and at such times as specified in this Agreement.

11.Miscellaneous.

11.1Opportunity To Consult With Independent Advisors. The Executive acknowledges that he has been afforded the opportunity to consult with independent advisors of his choosing including, without limitation, accountants or tax advisors and counsel regarding both the benefits granted to him under the terms of this Agreement and the (i) terms and conditions which may affect the Executive's right to these benefits and (ii) personal tax effects of such benefits including, without limitation, the effects of any federal or state taxes, Section 280G of the Code, and any other taxes, costs, expenses or liabilities whatsoever related to such benefits, which in any of the foregoing instances the Executive acknowledges and agrees shall be the sole responsibility of the Executive notwithstanding any other term or provision of this Agreement. The Executive further acknowledges and agrees that the Bank shall have no liability whatsoever related to any such personal tax effects or other personal costs, expenses, or liabilities applicable to the Executive and further specifically waives any right for himself or herself, and his or her heirs, beneficiaries, legal representatives, agents, successor and assign to claim or assert liability on the part of the Bank related to the matters described above in this paragraph 11.1. The Executive further acknowledges that he has read, understands and consents to all of the terms and conditions of this Agreement, and that he enters into this Agreement with a full understanding of its terms and conditions.

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11.2Notice. Any notice required or permitted of either the Executive or the Bank under this Agreement shall be deemed to have been duly given, if by personal delivery, upon the date received by the party or its authorized representative; if by facsimile, upon transmission to a telephone number previously provided by the party to whom the facsimile is transmitted as reflected in the records of the party transmitting the facsimile and upon reasonable confirmation of such transmission; and if by mail, on the third day after mailing via U.S. first class mail, registered or certified, postage prepaid and return receipt requested, and addressed to the party at the address given below for the receipt of notices, or such changed address as may be requested in writing by a party.

If to the Bank:	Bank of the Pacific
	Attention: President and CEO
	300 East Market Street
	98520
If to the Executive:	Dennis A. Long
	208 W. 9th Street
	Aberdeen, WA 98520

11.3Assignment. The Executive shall have no power or right to transfer, assign, anticipate, hypothecate, modify or otherwise encumber any part or all of the amounts payable hereunder, nor, prior to payment in accordance with the terms of this Agreement, shall any portion of such amounts be: (i) subject to seizure by any creditor of the Executive, by a proceeding at law or in equity, for the payment of any debts, judgments, alimony or separate maintenance obligations which may be owed by the Executive; or (ii) transferable by operation of law in the event of bankruptcy, insolvency or otherwise. Any such attempted assignment or transfer shall be void.

11.4IRS Section 280G Issues. If all or any portion of the amounts payable to the Executive under this Agreement, either alone or together with other payments which the Executive has the right to receive from the Employer, constitute "excess parachute payments" within the meaning of Section 280G of the Internal Revenue Code of 1986, as amended (the "Code"), that are subject to the excise tax imposed by Section 4999 of the Code (or similar tax and/or assessment), Executive shall be responsible for the payment of such excise tax and Employer (and its successor) shall be responsible for any loss of deductibility related thereto; provided, however, that Employer and Executive shall cooperate with each other and use all reasonable efforts to minimize to the fullest extent possible the amount of excise tax imposed by Section 4999 of the Code. If, at a later date, it is determined (pursuant to final regulations or published rulings of the Internal Revenue Service, final judgment of a court of competent jurisdiction, or otherwise) that the amount of excise taxes payable by the Executive is greater than the amount initially so determined, then the Executive shall pay an amount equal to the sum of such additional excise taxes and any interest, fines and penalties resulting from such underpayment. The determination of the amount of any such excise taxes shall be made by the independent accounting firm employed by the Employer immediately prior to the change in control or such other independent accounting firm or advisor as may be mutually agreeable to Employer and Executive in the exercise of their reasonable good faith judgment.

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11.5Binding Effect/Merger or Reorganization. This Agreement shall be binding upon and inure to the benefit of the Executive and the Bank. Accordingly, the Bank shall not merge or consolidate into or with another corporation, or reorganize or sell substantially all of its assets to another corporation, firm or person, unless and until such succeeding or continuing corporation, firm or person agrees to assume and discharge the obligations of the Bank under this Agreement. In the alternative, the Holding Company may agree to assume and discharge the obligation of the Bank under this Agreement. Upon the occurrence of such event, the term "Bank" as used in this Agreement shall be deemed to refer to such surviving or successor firm, person, entity or corporation, or the Holding Company, as the case may be.

11.6Nonwaiver. The failure of either party to enforce at any time or for any period of time any one or more of the terms or conditions of this Agreement shall not be a waiver of such term(s) or condition(s) or of that party's right thereafter to enforce each and every term and condition of this Agreement.

11.7Partial Invalidity. If any terms, provision, covenant, or condition of this Agreement is determined by an arbitrator or a court, as the case may be, to be invalid, void, or unenforceable, such determination shall not render any other term, provision, covenant or condition invalid, void or unenforceable, and the Agreement shall remain in full force and effect notwithstanding such partial invalidity.

11.8Entire Agreement. This Agreement supersedes any and all other agreements, either oral or in writing, between the parties with respect to the subject matter of this Agreement and contains all of the covenants and agreements between the parties with respect thereto. Each party to this Agreement acknowledges that no other representations, inducements, promises, or agreements, oral or otherwise, have been made by any party, or anyone acting on behalf of any party, which are not set forth herein, and that no other agreement, statement, or promise not contained in this Agreement shall be valid or binding on either party.

11.9Modifications. Any modification of this Agreement shall be effective only if it is in writing and signed by each party or such party's authorized representative, and only to the extent that it is compliant with all applicable codes and statutes, including but not limited to IRS Code Section 409A.

11.10Paragraph Headings. The paragraph headings used in this Agreement are included solely for the convenience of the parties and shall not affect or be used in connection with the interpretation of this Agreement.

11.11No Strict Construction. The language used in this Agreement shall be deemed to be the language chosen by the parties hereto to express their mutual intent, and no rule of strict construction will be applied against any person.

11.12Governing Law. The laws of the State of Washington, other than those laws denominated choice of law rules, and where applicable, the rules and regulations of the Board of Governors of the Federal Reserve System, Federal Deposit Insurance Corporation, Office of the Comptroller of the Currency, or any other regulatory agency or governmental authority having jurisdiction over the Bank or the Holding Company, shall govern the validity, interpretation, construction and effect of this Agreement.

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IN WITNESS WHEREOF, the Bank and the Executive have executed this Agreement on the date first above-written in the City of Aberdeen, Washington.

BANK		EXECUTIVE
By:	/s/ Dennis Archer	/s/ Dennis A. Long
Dennis Archer		Dennis A. Long
Vice Chairman of the Board of Directors
Chairman of the Compensation Committee

Date: 11/6/2007 Date: 10/23/2007

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BENEFICIARY DESIGNATION FORM

FOR THE EXECUTIVE SUPPLEMENTAL COMPENSATION AGREEMENT

PRIMARY DESIGNATION

(You may refer to the beneficiary designation information prior to completion of this form.)

A.Person(s) as a Primary Designation:

(Please indicate the percentage for each beneficiary.)

Name___________________________________ Relationship___________________ / _______%

Address:_________________________________________________________________________

(Street)(City)(State)(Zip)

Name___________________________________ Relationship___________________ / _______%

Address:_________________________________________________________________________

(Street)(City)(State)(Zip)

Name___________________________________ Relationship___________________ / _______%

Address:_________________________________________________________________________

(Street)(City)(State)(Zip)

Name___________________________________ Relationship___________________ / _______%

Address:_________________________________________________________________________

(Street)(City)(State)(Zip)

B.Estate as a Primary Designation:

My Primary Beneficiary is The Estate of ______________________________________ as set forth in the last will and testament dated the _____ day of _____________, _____ and any codicils thereto.

C.Trust as a Primary Designation:

Name of the Trust: ____________________________________________________________

Execution Date of the Trust: _____ / _____ / _________

Name of the Trustee: __________________________________________________________

Beneficiary(ies) of the Trust (please indicate the percentage for each beneficiary):

___________________________________________________________________________

___________________________________________________________________________

Is this an Irrevocable Life Insurance Trust? ________ Yes ________ No

(If yes and this designation is for a Split Dollar agreement, an Assignment of Rights form should be completed.)

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II. SECONDARY (CONTINGENT) DESIGNATION

A. Person(s) as a Secondary (Contingent) Designation:

    (Please indicate the percentage for each beneficiary.)

Name___________________________________ Relationship___________________ / _______%

Address:_______________________________________________________________________

(Street)(City)(State)(Zip)

Name___________________________________ Relationship___________________ / _______%

Address:_______________________________________________________________________

(Street)(City)(State)(Zip)

Name___________________________________ Relationship___________________ / _______%

Address:_______________________________________________________________________

(Street)(City)(State)(Zip)

Name___________________________________ Relationship___________________ / _______%

Address:_______________________________________________________________________

(Street)(City)(State)(Zip)

B. Estate as a Secondary (Contingent) Designation:

My Secondary Beneficiary is The Estate of _____________________________________ as set forth in my last will and testament dated the _____ day of ___________, _____ and any codicils thereto.

C.Trust as a Secondary (Contingent) Designation:

Name of the Trust: ____________________________________________________________

Execution Date of the Trust: _____ / _____ / _________

Name of the Trustee: __________________________________________________________

Beneficiary(ies) of the Trust (please indicate the percentage for each beneficiary):

___________________________________________________________________________

___________________________________________________________________________

All sums payable under the Executive Supplemental Compensation Agreement by reason of my death shall be paid to the Primary Beneficiary(ies), if he or she survives me, and if no Primary Beneficiary(ies) shall survive me, then to the Secondary (Contingent) Beneficiary(ies). This beneficiary designation is valid until the participant notifies the bank in writing.

Insured Date 

NOTE*** IF YOU RESIDE IN A COMMUNITY PROPERTY STATE (ARIZONA, CALIFORNIA, IDAHO, LOUISIANA, NEVADA, NEW MEXICO, TEXAS, WASHINGTON OR WISCONSIN), AND YOU ARE DESIGNATING A BENEFICIARY OTHER THAN YOUR SPOUSE, THEN YOUR SPOUSE MUST ALSO SIGN THE BENEFICIARY DESIGNATION FORM.

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I am aware that my spouse, the above named Insured has designated someone other than me to be the beneficiary and waive any rights I may have to the proceeds of such insurance under applicable community property laws. I understand that this consent and waiver supersedes any prior spousal consent or waiver under this plan.

Spouse Signature:______________________________Date:_________________

Witness (other than insured) : ___________________________

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EX-10.2

EXECUTIVE SUPPLEMENTAL COMPENSATION AGREEMENT

This Executive Supplemental Compensation Agreement (hereinafter “Agreement”) is made and entered into effective as of January 1, 2007 by and between Bank of the Pacific, with its principal offices located in the Aberdeen, Washington ("the Bank" or “Employer”) and, John G. Van Dijk, an individual residing in the State of Washington ("the Executive").

RECITALS

WHEREAS, the Executive is an employee of the Employer, serving since May 1996,

WHEREAS, the Employer desires to establish a compensation benefit program as a fringe benefit for executive officers of the Employer in order to attract and retain individuals with extensive and valuable experience in the banking industry;

WHEREAS, the Executive's experience and knowledge of the affairs of the Employer and the banking industry are extensive and valuable;

WHEREAS, it is deemed to be in the best interests of the Employer to provide the Executive with certain fringe benefits, on the terms and conditions set forth herein, in order to reasonably induce the Executive to remain in the Employer's employment; and

WHEREAS, the Executive and the Employer wish to specify in writing the terms and conditions upon which this additional compensatory incentive will be provided to the Executive;

NOW, THEREFORE, in consideration of the services to be performed by the Executive in the future, as well as the mutual promises and covenants contained herein, the Executive and the Employer agree as follows:

AGREEMENT

1.Terms and Definitions.

1.1Accrued Liability Balance. For the purposes of this Agreement, means the liability that should be accrued by the Company, under Generally Accepted Accounting Principles (“GAAP”), for the Company’s obligation to the Executive under this Agreement, by applying Accounting Principles Board Opinion Number 12 (“APB 12”) as amended by Statement of Financial Accounting Standards Number 106 (“FAS 106”) and the Discount Rate. Any one of a variety of amortization methods may be used to determine the Accrual Balance. However, once chosen, the method must be consistently applied.

1.2Administrator. The Bank shall be the "Administrator" and, solely for the purposes of ERISA as defined in paragraph 1.9 below, the "fiduciary" of this Agreement where a fiduciary is required by ERISA.

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1.3Applicable Percentage. The term “Applicable Percentage” is the percentage of the Executive Benefit to which Executive shall be entitled based on (a) the date on which the Executive Separates From Service or Terminates Employment with the Bank or (b) the greater of fifty percent (50%) or the actual Applicable Percentage, as stipulated herein for certain described events (such as Involuntary Termination within two years following a Change in Control, or the Executive's Disability). Subject to the forgoing, the Applicable Percentage shall be as follows:

DATE OF SEPARATION FROM SERVICE	APPLICABLE PERCENTAGE
January 1, 2007-December 31, 2009	0	%
January 1, 2010-December 31, 2010	30	%
January 1, 2011-December 31, 2011	40	%
January 1, 2012-December 31, 2012	50	%
January 1, 2013-December 31, 2013	60	%
January 1, 2014-December 31, 2014	70	%
January 1, 2015-December 31, 2015	80	%
January 1, 2016-December 31, 2016	90	%
January 1, 2017 and beyond:	100	%

1.4 Beneficiary. Beneficiary (ies)” shall refer to the person, persons or entity designated in writing by the Executive on forms provided by the Administrator to receive the benefits payable under this Agreement/Plan. An Executive may change his Beneficiary from time to time, so long as permissible, by filing a new written designation with the Administrator, and such designation shall be effective upon receipt by the Administrator. If an Executive has not validly designated a beneficiary, or if a designated Beneficiary predeceases the Executive, then any benefit owed pursuant to this plan Agreement shall be made to Executive’s estate.

1.5Board of Directors. The Board of Directors shall mean the Board of Directors for The Bank, hereinafter “the Board”.

1.6Change in Control. For the purpose of this Agreement, a Change in Control means the occurrence of any of the following events:

A.A Change in the Ownership of a Corporation. A change in the ownership of a corporation occurs on the date that any one person or persons acting as a group (as defined in IRC 409A), acquires ownership of stock of the corporation that, together with stock held by such person or group, constitutes more than fifty percent (50%) of the total fair market value or total voting power of the stock of such corporation. The acquisition of additional stock by the same person or group is not considered to cause a change in the ownership of the corporation.

B. Change in the Effective Control of a Corporation. A change in the effective control of the corporation shall be deemed to occur on either of the following dates:

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(i) The date any one person, or persons acting as a group acquires (or has acquired during the twelve (12) month period ending on the date of the most recent acquisition by such person or group) ownership of stock of the corporation possessing thirty percent (30%) or more of the total voting power of the stock of such corporation; or

(ii) The date a majority of members of the corporation’s board of directors is replaced during any twelve (12) month period by directors whose appointment or election is not endorsed by a majority of the members of the corporation’s board of directors before the date of the appointment or election.

C. Change in the Ownership of a Substantial Portion of a Corporation’s Assets. A change in the ownership of a substantial portion of a corporation’s assets shall be deemed to occur on the date that any one person or group acquires (or has acquired during the twelve (12) month period ending on the date of the most recent acquisition by such person or persons) assets from the corporation that have a total gross fair market value equal to or more than forty percent (40%) of the total gross fair market value of all of the assets of the corporation immediately before such acquisition or acquisitions. No Change in Control shall result if the assets are transferred to certain entities controlled directly or indirectly by the shareholders of the transferring corporation.

1.7The Code. The "Code" shall mean the Internal Revenue Code of 1986, as amended (the “Code").

1.8Disability/Disabled. For the purposes of this Agreement, Executive will be considered Disabled if:

(A) The Executive is unable to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment that can be expected to result in death or can be expected to last for a continuous period of not less than twelve (12) months; or

(B) The Executive is, by reason of any medically determinable physical or mental impairment that can be expected to result in death or can be expected to last for a continuous period of not less than twelve (12) months, receiving income replacement benefits for a period of not less than three (3) months under an accident and health plan covering employees of the Employee’s employer.

The determination of whether an Executive is Disabled shall be determined by a physician mutually agreed on by the parties subject to the provisions of IRC 409A.

1.9Early Retirement Date/ Early Retirement Age. The term “Early Retirement Date” shall mean Retirement (as defined below) of the Executive at anytime prior to the attainment of age Sixty-Nine (69) after the attainment of age Sixty Five (65).

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1.10Effective Date. The term "Effective Date" shall mean the date first written above.

1.11ERISA. The term "ERISA" shall mean the Employee Retirement Income Security Act of 1974, as amended.

1.12Executive Benefit. The term "Executive Benefit” shall mean the annual benefit amounts determined pursuant to Paragraphs 1 through 4 (including sub-paragraphs, as applicable), subject to forfeiture, reduction or adjustment as (a) required under the other provisions of this Agreement; (b) required by reason of the lawful order of any regulatory agency or body having jurisdiction over the Employer; or (c) required in order for the Employer to comply with any and all applicable state and federal laws, including, but not limited to, income, employment and disability income tax laws (e.g., FICA, FUTA, SDI).

Subject to the forgoing, in the event the Executive obtains an Applicable Percentage of one hundred percent (100%), then the annual Executive Benefit paid by the Bank to the Employee pursuant to this Agreement shall be the lesser of forty percent (40%) of the average of the Executive’s three final years of base salary or an amount equal to Ninety Three Thousand One Hundred Fifty Four Dollars ($93,154.00). This Executive Benefit shall be paid in twelve (12) substantially equal monthly installments, for a period of fifteen (15) years (180 months).

1.13Involuntary Separation From Service. In accordance with IRC 409A, the term “Involuntary Separation from Service” shall mean a Separation From Service due to the independent exercise of the unilateral authority of the Bank to terminate the Executive’s services, other than due to the Executive’s implicit or explicit request, where the Executive was willing and able to continue performing services.

1.14IRC 409A. The term “IRC 409A” shall refer to the final regulations issued by the IRS and the Treasury Department under Section 409A of the Code.

1.15Normal Retirement Date Normal Retirement Age . The term "Normal Retirement Date" shall mean the Retirement (as defined below) of the Executive on or after the attainment of age Sixty-Nine (69)

1.16Retirement. The Term "Retirement" or "Retires" shall refer to the date on which the Executive voluntarily Separates From Service (other than due to a Termination for Cause) on or after attaining the Early or Normal Retirement Age.

1.17Separation From Service/ Termination of Employment. The terms Separation From Service (Separates From Service) and Termination of Employment shall be used interchangeably for the purposes of this Agreement and shall be interpreted in accordance with the provisions of IRC 409A. Whether a termination of employment has occurred is determined based on whether the facts and circumstances indicate that the Bank and the Executive reasonably anticipate that no further services will be performed after a certain date or that the level of bona fide services the employee will perform after such date (whether as an employee or as an independent contractor) will permanently decrease to no more than twenty (20%) percent of the average level of bona fide services performed (as an employee or an independent contractor) over the immediately preceding 36-month period (or the full period of services to the employer if the employee has been providing services to the employer less than 36 months). There shall be no Separation From Service while the Executive is on military leave, sick leave or other bona fide leave of absence, as long as such leave does not exceed six months, or if longer, so long as the individual retains a right to re-employment with the service recipient under an applicable statute or by contract.

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1.18Specified Employee. The term “Specified Employee” means an employee who, as of the date of the employee’s Separation from Service, is a key employee of an employer of which any stock is publicly traded on an established securities market or otherwise. An employee is a key employee if the employee meets the requirements of section 416(i)(1)(A)(i), (ii), or (iii) (applied in accordance with the regulations thereunder and disregarding section 416(i)(5)) at any time during the twelve (12) month period ending on a specified employee identification date. If Executive is a key employee as of a specified employee identification date, then Executive shall be treated as a key employee for the entire twelve (12) month period beginning on the specified employee effective date.

1.19Termination for Cause. The term “Termination for Cause” shall mean a written termination of Employment of the Executive by the Employer, adopted in advance by resolution of a majority of the Board of Directors of the Employer (the “Resolution”), for any one or more of the following reasons, which reasons shall be cited in the Resolution and presented promptly to the Executive:

(a) the Executive’s willful and material breach of duty in the course of his Employment, such breach having a material adverse effect on the Bank;

(b) the Executive's willful violation of any laws, rules or regulations of any regulatory agency or governmental authority having jurisdiction over the Employer, or of any Bank policies or resolutions adopted by the Board of Directors of the Bank, which violation has a material adverse effect on the Bank;

(c)the Executive is convicted of any felony or a crime involving moral turpitude or commits a fraudulent or dishonest act, which conviction or act has a material adverse effect on the Bank;

1.20 Termination for Good Reason. For the purposes of this Agreement, a voluntary termination by the Executive within two (2) years following a Change in Control Event shall be deemed “for Good Reason” if one or more of the following conditions arise without the consent of the Executive:

(A) A material diminution in the Executive’s base compensation;

(B) A material diminution in the Executive’s authority, duties, or responsibilities;

(C) A material diminution in the authority, duties, or responsibilities of the supervisor to whom the Executive is required to report, including a requirement that an Executive report to a corporate officer or employee instead of reporting directly to the board of directors of a corporation (or similar governing body with respect to an entity other than a corporation);

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(D) A material diminution in the budget over which the Executive retains authority;

(E) A material change in the geographic location at which the Executive must perform the services;

(F) Any other action or inaction that constitutes a material breach by the Employer of the agreement under which the Executive provides services.

2.Scope, Purpose and Effect.

2.1Contract of Employment. Although this Agreement is intended to provide the Executive with an additional incentive to remain in the employ of the Employer, this Agreement shall not be deemed to constitute a contract of employment between the Executive and the Employer nor shall any provision of this Agreement restrict or expand the right of the Employer to terminate the Executive's employment. This Agreement shall have no impact or effect upon any separate written Employment Agreement which the Executive may have with the Employer, it being the parties' intention and agreement that unless this Agreement is specifically referenced in said Employment Agreement (or any modification thereto), this Agreement (and the Employer's obligations hereunder) shall stand separate and apart and shall have no effect on or be affected by, the terms and provisions of said Employment Agreement.

2.2Fringe Benefit. The benefits provided by this Agreement are granted by the Bank as a fringe benefit to the Executive and are not a part of any salary reduction plan or any arrangement deferring a bonus or a salary increase. The Executive has no option to take any current payments or bonus in lieu of the benefits provided by this Agreement.

2.3Prohibited Payments.Notwithstanding anything in this Agreement to the contrary, if any payment made under this Agreement is a “golden parachute payment” as defined in Section 28(k) of the Federal Deposit Insurance Act (12 U.S.C. section 1828(k) and Part 359 of the Rules and Regulations of the Federal Deposit Insurance Corporation (collectively, the “FDIC Rules”) or is otherwise prohibited, restricted or subject to the prior approval of a Bank Regulator, no payment shall be made hereunder without complying with said FDIC Rules.

3.Delay in Payments for Specified Employee in the Event of a Separation From Service.

In the case of any Employee who is a Specified Employee as of the date of a Separation from Service, then a payment conditioned upon a Separation from Service may not be made before the date that is six (6) months after the date of Separation from Service (or, if earlier than the end of the six-month period, the date of death of the Specified Employee).

In the event payments to which the Executive would otherwise be entitled during the first six (6) months are subject to this six (6) month delay in payment, then such payments shall be accumulated and paid on the first day of the seventh month following the date of Separation from Service. Payments will then continue thereafter as called for pursuant to the terms of this Agreement.

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4.Executive Benefit Payments Upon Retirement.

4.1Payments Commence Upon Early Retirement Date . In the event the Executive elects to Retire on a date which constitutes an Early Retirement Date, as defined in herein, then the Executive shall be entitled to be paid the Applicable Percentage of the Executive Benefit, as corresponds with the date of his Retirement. Payments shall commence on the first day of the month following the month in which the Executive Retires and shall continue for a period of one hundred and eighty (180) months.

4.2Payments Commence Upon Normal Retirement. In the event the Executive remains in the continuous employment of the Bank until attaining at least the Normal Retirement Age, then the Executive shall be entitled to be paid a one hundred percent (100%) Applicable Percentage of the Executive Benefit. Payments shall commence on the first day of the month following the month in which the Executive Retires and shall continue for a period of one hundred and eighty (180) months.

4.3Payments in the Event of the Executive’s Death After Retirement. Upon the death of the Executive after electing Early or Normal Retirement, then Executive’s designated Beneficiary shall be paid the remainder of any unpaid or outstanding Executive Benefit payments. The payments shall commence no later than thirty (30) days after Executive’s death and shall continue until the total one hundred and eighty (180) payments have been made.

5.Payments in the Event Executive’s Employment Terminates Prior to Retirement. As indicated above, the Employer reserves the right to terminate the Executive's employment, with or without Cause but subject to any written employment agreement which may then exist, at any time prior to the Executive's Retirement. In the event that the Executive’s Employment Terminates before Executive qualifies for Early or Normal Retirement (other than by reason of a termination for Cause), then this Agreement shall terminate upon the date of such Termination of Employment; provided, however, that the Executive shall be entitled to the following benefits as may be applicable depending upon the circumstances surrounding the Termination:

5.1 Payments in the Event Disability Occurs Prior to Early or Normal Retirement. In the event the Executive becomes Disabled while actively employed by the Bank at any time after the Effective Date of this Agreement but prior to Early or Normal Retirement, then Executive shall be entitled to be paid the Accrued Liability Balance in lump sum within thirty (30) days after the determination of Disability.

5.2Payments in the Event of the Executive’s Death prior to Retirement. Upon the death of the Executive prior to electing Early or Normal Retirement, then Executive’s designated Beneficiary shall be paid death benefit in the amount of Ninety Three Thousand One Hundred Fifty Four Dollars ($93,154.00) per year. The payments shall commence no later than thirty (30) days after Executive’s death. These payments shall be made in twelve (12) substantially equal monthly installments, for a period of fifteen (15) years (180 months).

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5.3Termination Without Cause. If the Executive's employment is terminated by the Employer without cause prior to qualifying for Early or Normal Retirement, and such termination is not subject to the provisions of paragraph 5.5 below, then the Executive shall be entitled to be paid the Applicable Percentage of the Executive Benefit, in substantially equal monthly installments on the first day of each month, beginning with the month following the month in which the Executive attains the Normal Retirement Age.

5.4Voluntary Termination by the Executive. In the event the Executive voluntarily Terminates Employment with the Bank prior to qualifying for Early or Normal Retirement, then the Executive Benefit shall be determined in accordance with the following:

(A) If the Applicable Percentage is one hundred percent (100%), the Executive shall be entitled to be paid the Applicable Percentage of the Executive Benefit, in substantially equal monthly installments on the first day of each month, beginning with the month following the month in which the Executive attains the Normal Retirement Age.

(B) If the Executive voluntarily Terminates Employment with the Bank prior to the date specified in Paragraph 1.3 which corresponds to an Applicable Percentage of one hundred percent (100%), and such termination is not subject to the provisions of paragraph 5.5 below, the Executive shall forfeit any and all rights and benefits he may have under the terms of this Agreement and shall have no right to be paid any of the amounts which would otherwise be due or paid to the Executive by the Bank pursuant to the terms of this Agreement.

5.5Involuntary Termination Within Two Years Following a Change in Control. .In the event the Executive is Involuntarily Terminated within two (2) years following a Change in Control Event, or in the event the Executive Terminates for Good Reason within two (2) years following a Change in Control Event, then Executive shall be entitled to receive the greater of the actual Applicable Percentage as of the termination date or 50% of the Executive Benefit. This benefit payment shall commence on the first day of each month, beginning with the month following the month in which the Executive attains the Normal Retirement Age.

6.Termination for Cause. The Executive agrees that if his employment with the Bank is terminated at any time "for Cause," as defined herein, he shall forfeit any and all rights and benefits he may have under the terms of this Agreement and shall have no right to be paid any of the amounts which would otherwise be due or paid to the Executive by the Bank pursuant to the terms of this Agreement. Furthermore, this forfeiture in the event of a termination For Cause shall occur regardless of whether Executive has attained the Early or Normal Retirement Age, and for as long as Executive remains employed by the Bank.

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7.Change in Time or Form of Payment. The date on which distributions are to commence may be postponed by amendment provided the following conditions are satisfied (and in accordance with IRC 409A):

(A) The election to defer or postpone payment may not take effect until at least twelve (12) months after the date on which the election is made;

(B) The payment with respect to which such election is made must be deferred for a period of not less than five (5) years from the date such payment would otherwise have been paid.

(C) Any election relating to a payment to be made a specified time or pursuant to a fixed schedule must be made at least twelve (12) months before the date the payment is scheduled to be paid .

8.Right To Determine Funding Methods. The Bank reserves the right to determine, in its sole and absolute discretion, whether, to what extent and by what method, if any, to provide for the payment of the amounts which may be payable to the Executive, under the terms of this Agreement. In the event that the Bank elects to fund this Agreement, in whole or in part, through the use of life insurance or annuities, or both, the Bank shall determine the ownership and beneficial interests of any such policy of life insurance or annuity. The Bank further reserves the right, in its sole and absolute discretion, to terminate any such policy, and any other devise used to fund its obligations under this Agreement, at any time, in whole or in part. The Executive shall have no right, title or interest in or to any funding source or amount utilized by the Bank pursuant to this Agreement, and any such funding source or amount shall not constitute security for the performance of the Bank's obligations pursuant to this Agreement. In connection with the foregoing, the Executive agrees to execute such documents and undergo such medical examinations or tests which the Bank may request and which may be reasonably necessary to facilitate any funding for this Agreement including, without limitation, the Bank's acquisition of any policy of insurance or annuity.

9.Administrative and Claims Provision.

9.1 Named Fiduciary and Plan Administrator.The “Named Fiduciary and Plan Administrator” of this executive plan shall be the Bank until its resignation or removal by the Board of Directors. As Named Fiduciary and Plan Administrator, the Bank shall be responsible for the management, control and administration of this executive plan. The Named Fiduciary may delegate to others certain aspects of the management and operation responsibilities of the plan, including employment of advisors and the delegation of ministerial duties to qualified individuals.

9.2 Claims Procedure. In the event a dispute arises over the benefits under this executive plan and benefits are not paid to the Executive (or to the Executive’s beneficiary[ies], if applicable) and such claimants feel they are entitled to receive such benefits, then a written claim must be made to the Named Fiduciary and Plan Administrator named above within forty-five (45) days from the date payments are refused. The Named Fiduciary and Plan Administrator shall review the written claim and if the claim is denied, in whole or in part, they shall provide in writing within forty-five (45) days of receipt of such claim the specific reasons for such denial, reference to the provision of the plan agreement upon which the denial is based and any additional material or information necessary to perfect the claim. Such written notice shall further indicate the additional steps to be taken by claimants if further review of the claim denial is desired. Any decision by the Bank denying a claim by the Executive for benefits under this Agreement shall be stated in writing and delivered or mailed, via registered or certified mail, to the Executive, the Executive's spouse or the Executive's beneficiaries, as the case may be. Furthermore, a claim shall be deemed denied if the Named Fiduciary and Plan Administrator fail to take any action within the aforesaid forty-five (45) day period.

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If claimants desire a second review, they shall notify the Named Fiduciary and Plan Administrator in writing within forty-five (45) days of the first claim denial. Claimants may review this Executive Plan or any documents relating thereto and submit any written issues and comments they may feel appropriate. In their sole discretion, the Named Fiduciary and Plan Administrator shall then review the second claim and provide a written decision within forty-five (45) days of receipt of such claim. This decision shall likewise state the specific reasons for the decision and shall include reference to specific provisions of the plan agreement upon which the decision is based.

9.3 Arbitration of Disputes. All claims, disputes and other matters in question arising out of or relating to this Agreement or the breach or interpretation thereof, other than those matters which are to be determined by the Bank in its sole and absolute discretion, shall be resolved by binding arbitration before a representative member, selected by the mutual agreement of the parties, of the Judicial Arbitration and Mediation Services, Inc. ("JAMS"), located in Seattle, Washington. Notice of the demand for arbitration shall be filed in writing with the other party to this Agreement and with JAMS. In no event shall the demand for arbitration be made after the date when institution of legal or equitable proceedings based on such claim, dispute or other matter in question would be barred by the applicable statute of limitations. The arbitration shall be subject to such rules of procedure used or established by JAMS. Any award rendered by JAMS shall be final and binding upon the parties, and as applicable, their respective heirs, beneficiaries, legal representatives, agents, successors and assigns, and may be entered in any court having jurisdiction thereof. Any arbitration hereunder shall be conducted in Aberdeen, Washington, unless otherwise agreed to by the parties.

9.4 Attorneys' Fees. In the event of any arbitration or litigation concerning any controversy, claim or dispute between the parties hereto, arising out of or relating to this Agreement or the breach hereof, or the interpretation hereof, (a) each party shall pay his own attorneys’ arbitration fees incurred (pursuant to paragraph 9.3); (b) the prevailing party shall be entitled to recover from the other party reasonable expenses, attorneys' fees and costs incurred in the enforcement or collection of any judgment or award rendered. The "prevailing party" means any party (one party or both parties, as the case may be) determined by the arbitrator(s) or court to be entitled to money payments from the other, not necessarily the party in whose favor a judgment is rendered.

10.Status as an Unsecured General Creditor and Rabbi Trust. Notwithstanding anything contained herein to the contrary: (i) the Executive shall have no legal or equitable rights, interests or claims in or to any specific property or assets of the Employer as a result of this Agreement; (ii) none of the Bank’s assets shall be held in or under any trust for the benefit of the Executive or held in any way as security for the fulfillment of the obligations of the Bank under this Agreement; (iii) all of the Bank’s assets shall be and remain the general unpledged and unrestricted assets of the Bank; (iv) the Bank’s obligation under this Agreement shall be that of an unfunded and unsecured promise by the Bank to pay money in the future; and (v) the Executive shall be an unsecured general creditor with respect to any benefits which may be payable under the terms of this Agreement.

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Notwithstanding subparagraphs (i) through (v) above, the Bank and the Executive acknowledge and agree that, in the event of a Change in Control, upon request of the Executive, or in the Bank’s discretion if the Executive does not so request and the Bank nonetheless deems it appropriate, the Bank shall establish, not later than the effective date of the Change in Control, a Rabbi Trust or multiple Rabbi Trusts (the "Trust" or "Trusts") upon such terms and conditions as the Bank, in its sole discretion, deems appropriate and in compliance with applicable provisions of the Code, in order to permit the Bank to make contributions and/or transfer assets to the Trust or Trusts to discharge its obligations pursuant to this Agreement. The principal of the Trust or Trusts and any earnings thereon shall be held separate and apart from other funds of the Bank to be used exclusively for discharge of the Bank’s obligations pursuant to this Agreement and shall continue to be subject to the claims of the Bank’s general creditors until paid to the Executive in such manner and at such times as specified in this Agreement.

11.Miscellaneous.

11.1Opportunity To Consult With Independent Advisors. The Executive acknowledges that he has been afforded the opportunity to consult with independent advisors of his choosing including, without limitation, accountants or tax advisors and counsel regarding both the benefits granted to him under the terms of this Agreement and the (i) terms and conditions which may affect the Executive's right to these benefits and (ii) personal tax effects of such benefits including, without limitation, the effects of any federal or state taxes, Section 280G of the Code, and any other taxes, costs, expenses or liabilities whatsoever related to such benefits, which in any of the foregoing instances the Executive acknowledges and agrees shall be the sole responsibility of the Executive notwithstanding any other term or provision of this Agreement. The Executive further acknowledges and agrees that the Bank shall have no liability whatsoever related to any such personal tax effects or other personal costs, expenses, or liabilities applicable to the Executive and further specifically waives any right for himself or herself, and his or her heirs, beneficiaries, legal representatives, agents, successor and assign to claim or assert liability on the part of the Bank related to the matters described above in this paragraph 11.1. The Executive further acknowledges that he has read, understands and consents to all of the terms and conditions of this Agreement, and that he enters into this Agreement with a full understanding of its terms and conditions.

11.2Notice. Any notice required or permitted of either the Executive or the Bank under this Agreement shall be deemed to have been duly given, if by personal delivery, upon the date received by the party or its authorized representative; if by facsimile, upon transmission to a telephone number previously provided by the party to whom the facsimile is transmitted as reflected in the records of the party transmitting the facsimile and upon reasonable confirmation of such transmission; and if by mail, on the third day after mailing via U.S. first class mail, registered or certified, postage prepaid and return receipt requested, and addressed to the party at the address given below for the receipt of notices, or such changed address as may be requested in writing by a party.

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If to the Bank:Bank of the Pacific

Attention: President and CEO

300 East Market Street

98520

If to the Executive: John G. Van Dijk

57 Clemons Road #51

Montesano, WA 98520

11.3Assignment. The Executive shall have no power or right to transfer, assign, anticipate, hypothecate, modify or otherwise encumber any part or all of the amounts payable hereunder, nor, prior to payment in accordance with the terms of this Agreement, shall any portion of such amounts be: (i) subject to seizure by any creditor of the Executive, by a proceeding at law or in equity, for the payment of any debts, judgments, alimony or separate maintenance obligations which may be owed by the Executive; or (ii) transferable by operation of law in the event of bankruptcy, insolvency or otherwise. Any such attempted assignment or transfer shall be void.

11.4IRS Section 280G Issues. If all or any portion of the amounts payable to the Executive under this Agreement, either alone or together with other payments which the Executive has the right to receive from the Employer, constitute "excess parachute payments" within the meaning of Section 280G of the Internal Revenue Code of 1986, as amended (the "Code"), that are subject to the excise tax imposed by Section 4999 of the Code (or similar tax and/or assessment), Executive shall be responsible for the payment of such excise tax and Employer (and its successor) shall be responsible for any loss of deductibility related thereto; provided, however, that Employer and Executive shall cooperate with each other and use all reasonable efforts to minimize to the fullest extent possible the amount of excise tax imposed by Section 4999 of the Code. If, at a later date, it is determined (pursuant to final regulations or published rulings of the Internal Revenue Service, final judgment of a court of competent jurisdiction, or otherwise) that the amount of excise taxes payable by the Executive is greater than the amount initially so determined, then the Executive shall pay an amount equal to the sum of such additional excise taxes and any interest, fines and penalties resulting from such underpayment. The determination of the amount of any such excise taxes shall be made by the independent accounting firm employed by the Employer immediately prior to the change in control or such other independent accounting firm or advisor as may be mutually agreeable to Employer and Executive in the exercise of their reasonable good faith judgment.

11.5Binding Effect/Merger or Reorganization. This Agreement shall be binding upon and inure to the benefit of the Executive and the Bank. Accordingly, the Bank shall not merge or consolidate into or with another corporation, or reorganize or sell substantially all of its assets to another corporation, firm or person, unless and until such succeeding or continuing corporation, firm or person agrees to assume and discharge the obligations of the Bank under this Agreement. In the alternative, the Holding Company may agree to assume and discharge the obligation of the Bank under this Agreement. Upon the occurrence of such event, the term "Bank" as used in this Agreement shall be deemed to refer to such surviving or successor firm, person, entity or corporation, or the Holding Company, as the case may be.

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11.6Nonwaiver. The failure of either party to enforce at any time or for any period of time any one or more of the terms or conditions of this Agreement shall not be a waiver of such term(s) or condition(s) or of that party's right thereafter to enforce each and every term and condition of this Agreement.

11.7Partial Invalidity. If any terms, provision, covenant, or condition of this Agreement is determined by an arbitrator or a court, as the case may be, to be invalid, void, or unenforceable, such determination shall not render any other term, provision, covenant or condition invalid, void or unenforceable, and the Agreement shall remain in full force and effect notwithstanding such partial invalidity.

11.8Entire Agreement. This Agreement supersedes any and all other agreements, either oral or in writing, between the parties with respect to the subject matter of this Agreement and contains all of the covenants and agreements between the parties with respect thereto. Each party to this Agreement acknowledges that no other representations, inducements, promises, or agreements, oral or otherwise, have been made by any party, or anyone acting on behalf of any party, which are not set forth herein, and that no other agreement, statement, or promise not contained in this Agreement shall be valid or binding on either party.

11.9Modifications. Any modification of this Agreement shall be effective only if it is in writing and signed by each party or such party's authorized representative, and only to the extent that it is compliant with all applicable codes and statutes, including but not limited to IRS Code Section 409A.

11.10Paragraph Headings. The paragraph headings used in this Agreement are included solely for the convenience of the parties and shall not affect or be used in connection with the interpretation of this Agreement.

11.11No Strict Construction. The language used in this Agreement shall be deemed to be the language chosen by the parties hereto to express their mutual intent, and no rule of strict construction will be applied against any person.

11.12Governing Law. The laws of the State of Washington, other than those laws denominated choice of law rules, and where applicable, the rules and regulations of the Board of Governors of the Federal Reserve System, Federal Deposit Insurance Corporation, Office of the Comptroller of the Currency, or any other regulatory agency or governmental authority having jurisdiction over the Bank or the Holding Company, shall govern the validity, interpretation, construction and effect of this Agreement.

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IN WITNESS WHEREOF, the Bank and the Executive have executed this Agreement on the date first above-written in the City of Aberdeen, Washington.

BANK		EXECUTIVE
By:	/s/ Dennis Archer	/s/ John G. Van Dijk
	Dennis Archer	John G. Van Dijk
	Vice Chairman of the Board of Directors
	Chairman of the Compensation Committee
Date: 11/6/2007		Date: 11/2/2007

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BENEFICIARY DESIGNATION FORM

FOR THE EXECUTIVE SUPPLEMENTAL COMPENSATION AGREEMENT

PRIMARY DESIGNATION

(You may refer to the beneficiary designation information prior to completion of this form.)

A. Person(s) as a Primary Designation:

     (Please indicate the percentage for each beneficiary.)

Name___________________________________ Relationship___________________ / _______%

Address:_______________________________________________________________________

(Street)(City)(State)(Zip)

Name___________________________________ Relationship___________________ / _______%

Address:_______________________________________________________________________

(Street)(City)(State)(Zip)

Name___________________________________ Relationship___________________ / _______%

Address:_______________________________________________________________________

(Street)(City)(State)(Zip)

Name___________________________________ Relationship___________________ / _______%

Address:_______________________________________________________________________

(Street)(City)(State)(Zip)

B. Estate as a Primary Designation:

My Primary Beneficiary is The Estate of ______________________________________ as set forth in the last will and testament dated the _____ day of _____________, _____ and any codicils thereto.

C. Trust as a Primary Designation:

Name of the Trust: ____________________________________________________________

Execution Date of the Trust: _____ / _____ / _________

Name of the Trustee: __________________________________________________________

Beneficiary(ies) of the Trust (please indicate the percentage for each beneficiary):

___________________________________________________________________________

___________________________________________________________________________

Is this an Irrevocable Life Insurance Trust? ________ Yes ________ No

(If yes and this designation is for a Split Dollar agreement, an Assignment of Rights form should be completed.)

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II. SECONDARY (CONTINGENT) DESIGNATION

A. Person(s) as a Secondary (Contingent) Designation:

     (Please indicate the percentage for each beneficiary.)

Name___________________________________ Relationship___________________ / _______%

Address:_______________________________________________________________________

(Street)(City)(State)(Zip)

Name___________________________________ Relationship___________________ / _______%

Address:_______________________________________________________________________

(Street)(City)(State)(Zip)

Name___________________________________ Relationship___________________ / _______%

Address:_______________________________________________________________________

(Street)(City)(State)(Zip)

Name___________________________________ Relationship___________________ / _______%

Address:_______________________________________________________________________

(Street)(City)(State)(Zip)

B. Estate as a Secondary (Contingent) Designation:

My Secondary Beneficiary is The Estate of _____________________________________ as set forth in my last will and testament dated the _____ day of ___________, _____ and any codicils thereto.

C. Trust as a Secondary (Contingent) Designation:

Name of the Trust: ____________________________________________________________

Execution Date of the Trust: _____ / _____ / _________

Name of the Trustee: __________________________________________________________

Beneficiary(ies) of the Trust (please indicate the percentage for each beneficiary):

___________________________________________________________________________

___________________________________________________________________________

All sums payable under the Executive Supplemental Compensation Agreement by reason of my death shall be paid to the Primary Beneficiary(ies), if he or she survives me, and if no Primary Beneficiary(ies) shall survive me, then to the Secondary (Contingent) Beneficiary(ies). This beneficiary designation is valid until the participant notifies the bank in writing.

Insured  Date 

NOTE*** IF YOU RESIDE IN A COMMUNITY PROPERTY STATE (ARIZONA, CALIFORNIA, IDAHO, LOUISIANA, NEVADA, NEW MEXICO, TEXAS, WASHINGTON OR WISCONSIN), AND YOU ARE DESIGNATING A BENEFICIARY OTHER THAN YOUR SPOUSE, THEN YOUR SPOUSE MUST ALSO SIGN THE BENEFICIARY DESIGNATION FORM.

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I am aware that my spouse, the above named Insured has designated someone other than me to be the beneficiary and waive any rights I may have to the proceeds of such insurance under applicable community property laws. I understand that this consent and waiver supersedes any prior spousal consent or waiver under this plan.

Spouse Signature:______________________________Date:_________________

Witness (other than insured) : ___________________________

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EX-10.3

EXECUTIVE SUPPLEMENTAL COMPENSATION AGREEMENT

This Executive Supplemental Compensation Agreement (hereinafter “Agreement”) is made and entered into effective as of January 1, 2007 by and between Bank of the Pacific, with its principal offices located in the Aberdeen, Washington ("the Bank" or “Employer”) and, Bruce D. MacNaughton, an individual residing in the State of Washington ("the Executive").

RECITALS

WHEREAS, the Executive is an employee of the Employer, serving since January 2002,

WHEREAS, the Employer desires to establish a compensation benefit program as a fringe benefit for executive officers of the Employer in order to attract and retain individuals with extensive and valuable experience in the banking industry;

WHEREAS, the Executive's experience and knowledge of the affairs of the Employer and the banking industry are extensive and valuable;

WHEREAS, it is deemed to be in the best interests of the Employer to provide the Executive with certain fringe benefits, on the terms and conditions set forth herein, in order to reasonably induce the Executive to remain in the Employer's employment; and

WHEREAS, the Executive and the Employer wish to specify in writing the terms and conditions upon which this additional compensatory incentive will be provided to the Executive;

NOW, THEREFORE, in consideration of the services to be performed by the Executive in the future, as well as the mutual promises and covenants contained herein, the Executive and the Employer agree as follows:

AGREEMENT

1.Terms and Definitions.

1.1Accrued Liability Balance. For the purposes of this Agreement, means the liability that should be accrued by the Company, under Generally Accepted Accounting Principles (“GAAP”), for the Company’s obligation to the Executive under this Agreement, by applying Accounting Principles Board Opinion Number 12 (“APB 12”) as amended by Statement of Financial Accounting Standards Number 106 (“FAS 106”) and the Discount Rate. Any one of a variety of amortization methods may be used to determine the Accrual Balance. However, once chosen, the method must be consistently applied.

1.2Administrator. The Bank shall be the "Administrator" and, solely for the purposes of ERISA as defined in paragraph 1.9 below, the "fiduciary" of this Agreement where a fiduciary is required by ERISA.

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1.3Applicable Percentage. The term “Applicable Percentage” is the percentage of the Executive Benefit to which Executive shall be entitled based on (a) the date on which the Executive Separates From Service or Terminates Employment with the Bank or (b) the greater of fifty percent (50%) or the actual Applicable Percentage, as stipulated herein for certain described events (such as Involuntary Termination within two years following a Change in Control, or the Executive's Disability). Subject to the forgoing, the Applicable Percentage shall be as follows:

DATE OF SEPARATION FROM SERVICE	APPLICABLE PERCENTAGE
January 1, 2007-December 31, 2009		0	%
January 1, 2010-December 31, 2010		30	%
January 1, 2011-December 31, 2011		40	%
January 1, 2012-December 31, 2012		50	%
January 1, 2013-December 31, 2013		60	%
January 1, 2014-December 31, 2014		70	%
January 1, 2015-December 31, 2015		80	%
January 1, 2016-December 31, 2016		90	%
January 1, 2017 and beyond:		100	%

1.4 Beneficiary. Beneficiary (ies)” shall refer to the person, persons or entity designated in writing by the Executive on forms provided by the Administrator to receive the benefits payable under this Agreement/Plan. An Executive may change his Beneficiary from time to time, by filing a new written designation with the Administrator, and such designation shall be effective upon receipt by the Administrator. If an Executive has not validly designated a beneficiary, or if a designated Beneficiary predeceases the Executive, then any benefit owed pursuant to this plan Agreement shall be made to Executive’s estate.

1.5Board of Directors. The Board of Directors shall mean the Board of Directors for The Bank, hereinafter “the Board”.

1.6Change in Control. For the purpose of this Agreement, a Change in Control means the occurrence of any of the following events:

A.A Change in the Ownership of a Corporation. A change in the ownership of a corporation occurs on the date that any one person or persons acting as a group (as defined in IRC 409A), acquires ownership of stock of the corporation that, together with stock held by such person or group, constitutes more than fifty percent (50%) of the total fair market value or total voting power of the stock of such corporation. The acquisition of additional stock by the same person or group is not considered to cause a change in the ownership of the corporation.

B. Change in the Effective Control of a Corporation. A change in the effective control of the corporation shall be deemed to occur on either of the following dates:

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(i) The date any one person, or persons acting as a group acquires (or has acquired during the twelve (12) month period ending on the date of the most recent acquisition by such person or group) ownership of stock of the corporation possessing thirty percent (30%) or more of the total voting power of the stock of such corporation; or

(ii) The date a majority of members of the corporation’s board of directors is replaced during any twelve (12) month period by directors whose appointment or election is not endorsed by a majority of the members of the corporation’s board of directors before the date of the appointment or election.

C. Change in the Ownership of a Substantial Portion of a Corporation’s Assets. A change in the ownership of a substantial portion of a corporation’s assets shall be deemed to occur on the date that any one person or group acquires (or has acquired during the twelve (12) month period ending on the date of the most recent acquisition by such person or persons) assets from the corporation that have a total gross fair market value equal to or more than forty percent (40%) of the total gross fair market value of all of the assets of the corporation immediately before such acquisition or acquisitions. No Change in Control shall result if the assets are transferred to certain entities controlled directly or indirectly by the shareholders of the transferring corporation.

1.7The Code. The "Code" shall mean the Internal Revenue Code of 1986, as amended (the “Code").

1.8Disability/Disabled. For the purposes of this Agreement, Executive will be considered Disabled if:

(A) The Executive is unable to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment that can be expected to result in death or can be expected to last for a continuous period of not less than twelve (12) months; or

(B) The Executive is, by reason of any medically determinable physical or mental impairment that can be expected to result in death or can be expected to last for a continuous period of not less than twelve (12) months, receiving income replacement benefits for a period of not less than three (3) months under an accident and health plan covering employees of the Employee’s employer.

The determination of whether an Executive is Disabled shall be determined by a physician mutually agreed on by the parties subject to the provisions of IRC 409A.

1.9Effective Date. The term "Effective Date" shall mean the date first written above.

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1.10ERISA. The term "ERISA" shall mean the Employee Retirement Income Security Act of 1974, as amended.

1.11Executive Benefit. The term "Executive Benefit” shall mean the annual benefit amounts determined pursuant to Paragraphs 1 through 4 (including sub-paragraphs, as applicable), subject to forfeiture, reduction or adjustment as (a) required under the other provisions of this Agreement; (b) required by reason of the lawful order of any regulatory agency or body having jurisdiction over the Employer; or (c) required in order for the Employer to comply with any and all applicable state and federal laws, including, but not limited to, income, employment and disability income tax laws (e.g., FICA, FUTA, SDI).

Subject to the forgoing, in the event the Executive obtains an Applicable Percentage of one hundred percent (100%), then the annual Executive Benefit paid by the Bank to the Employee pursuant to this Agreement shall be the lesser of forty percent (40%) of the average of the Executive’s three final years of base salary or an amount equal to Ninety Two Thousand Four Hundred Thirty Two Dollars ($92,432.00). This Executive Benefit shall be paid in twelve (12) substantially equal monthly installments, for a period of fifteen (15) years (180 months).

1.12Involuntary Separation From Service. In accordance with IRC 409A, the term “Involuntary Separation from Service” shall mean a Separation From Service due to the independent exercise of the unilateral authority of the Bank to terminate the Executive’s services, other than due to the Executive’s implicit or explicit request, where the Executive was willing and able to continue performing services.

1.13IRC 409A. The term “IRC 409A” shall refer to the final regulations issued by the IRS and the Treasury Department under Section 409A of the Code.

 1.14Normal Retirement Date Normal Retirement Age . The term "Normal Retirement Date" shall mean the Retirement (as defined below) of the Executive on or after the attainment of age Sixty Five (65).

1.15Retirement. The Term "Retirement" or "Retires" shall refer to the date on which the Executive voluntarily Separates From Service (other than due to a Termination for Cause) on or after attaining the Normal Retirement Age.

1.16Separation From Service/ Termination of Employment. The terms Separation From Service (Separates From Service) and Termination of Employment shall be used interchangeably for the purposes of this Agreement and shall be interpreted in accordance with the provisions of IRC 409A. Whether a termination of employment has occurred is determined based on whether the facts and circumstances indicate that the Bank and the Executive reasonably anticipate that no further services will be performed after a certain date or that the level of bona fide services the employee will perform after such date (whether as an employee or as an independent contractor) will permanently decrease to no more than twenty (20%) percent of the average level of bona fide services performed (as an employee or an independent contractor) over the immediately preceding 36-month period (or the full period of services to the employer if the employee has been providing services to the employer less than 36 months). There shall be no Separation From Service while the Executive is on military leave, sick leave or other bona fide leave of absence, as long as such leave does not exceed six months, or if longer, so long as the individual retains a right to re-employment with the service recipient under an applicable statute or by contract.

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1.17Specified Employee. The term “Specified Employee” means an employee who, as of the date of the employee’s Separation from Service, is a key employee of an employer of which any stock is publicly traded on an established securities market or otherwise. An employee is a key employee if the employee meets the requirements of section 416(i)(1)(A)(i), (ii), or (iii) (applied in accordance with the regulations thereunder and disregarding section 416(i)(5)) at any time during the twelve (12) month period ending on a specified employee identification date. If Executive is a key employee as of a specified employee identification date, then Executive shall be treated as a key employee for the entire twelve (12) month period beginning on the specified employee effective date.

1.18Termination for Cause. The term “Termination for Cause” shall mean a written termination of Employment of the Executive by the Employer, adopted in advance by resolution of a majority of the Board of Directors of the Employer (the “Resolution”), for any one or more of the following reasons, which reasons shall be cited in the Resolution and presented promptly to the Executive:

(a) the Executive’s willful and material breach of duty in the course of his Employment, such breach having a material adverse effect on the Bank;

(b)the Executive's willful violation of any laws, rules or regulations of any regulatory agency or governmental authority having jurisdiction over the Employer, or of any Bank policies or resolutions adopted by the Board of Directors of the Bank, which violation has a material adverse effect on the Bank;

(c)the Executive is convicted of any felony or a crime involving moral turpitude or commits a fraudulent or dishonest act, which conviction or act has a material adverse effect on the Bank;

1.19 Termination for Good Reason. For the purposes of this Agreement, a voluntary termination by the Executive within two (2) years following a Change in Control Event shall be deemed “for Good Reason” if one or more of the following conditions arise without the consent of the Executive:

(A) A material diminution in the Executive’s base compensation;

(B) A material diminution in the Executive’s authority, duties, or responsibilities;

(C) A material diminution in the authority, duties, or responsibilities of the supervisor to whom the Executive is required to report, including a requirement that an Executive report to a corporate officer or employee instead of reporting directly to the board of directors of a corporation (or similar governing body with respect to an entity other than a corporation);

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(D) A material diminution in the budget over which the Executive retains authority;

(E) A material change in the geographic location at which the Executive must perform the services;

(F) Any other action or inaction that constitutes a material breach by the Employer of the agreement under which the Executive provides services.

2.Scope, Purpose and Effect.

2.1Contract of Employment. Although this Agreement is intended to provide the Executive with an additional incentive to remain in the employ of the Employer, this Agreement shall not be deemed to constitute a contract of employment between the Executive and the Employer nor shall any provision of this Agreement restrict or expand the right of the Employer to terminate the Executive's employment. This Agreement shall have no impact or effect upon any separate written Employment Agreement which the Executive may have with the Employer, it being the parties' intention and agreement that unless this Agreement is specifically referenced in said Employment Agreement (or any modification thereto), this Agreement (and the Employer's obligations hereunder) shall stand separate and apart and shall have no effect on or be affected by, the terms and provisions of said Employment Agreement.

2.2Fringe Benefit. The benefits provided by this Agreement are granted by the Bank as a fringe benefit to the Executive and are not a part of any salary reduction plan or any arrangement deferring a bonus or a salary increase. The Executive has no option to take any current payments or bonus in lieu of the benefits provided by this Agreement.

2.3Prohibited Payments.Notwithstanding anything in this Agreement to the contrary, if any payment made under this Agreement is a “golden parachute payment” as defined in Section 28(k) of the Federal Deposit Insurance Act (12 U.S.C. section 1828(k) and Part 359 of the Rules and Regulations of the Federal Deposit Insurance Corporation (collectively, the “FDIC Rules”) or is otherwise prohibited, restricted or subject to the prior approval of a Bank Regulator, no payment shall be made hereunder without complying with said FDIC Rules.

3.Delay in Payments for Specified Employee in the Event of a Separation From Service.

In the case of any Employee who is a Specified Employee as of the date of a Separation from Service, then a payment conditioned upon a Separation from Service may not be made before the date that is six (6) months after the date of Separation from Service (or, if earlier than the end of the six-month period, the date of death of the Specified Employee).

In the event payments to which the Executive would otherwise be entitled during the first six (6) months are subject to this six (6) month delay in payment, then such payments shall be accumulated and paid on the first day of the seventh month following the date of Separation from Service. Payments will then continue thereafter as called for pursuant to the terms of this Agreement.

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4.Executive Benefit Payments Upon Retirement.

4.1Payments Commence Upon Normal Retirement. In the event the Executive remains in the continuous employment of the Bank until attaining at least the Normal Retirement Age, then the Executive shall be entitled to be paid a one hundred percent (100%) Applicable Percentage of the Executive Benefit. Payments shall commence on the first day of the month following the month in which the Executive Retires and shall continue for a period of one hundred and eighty (180) months.

4.2Payments in the Event of the Executive’s Death After Retirement. Upon the death of the Executive after Normal Retirement, then Executive’s designated Beneficiary shall be paid the remainder of any unpaid or outstanding Executive Benefit payments. The payments shall commence no later than thirty (30) days after Executive’s death and shall continue until the total one hundred and eighty (180) payments have been made.

5.Payments in the Event Executive’s Employment Terminates Prior to Retirement. As indicated above, the Employer reserves the right to terminate the Executive's employment, with or without Cause but subject to any written employment agreement which may then exist, at any time prior to the Executive's Retirement. In the event that the Executive’s Employment Terminates before Executive qualifies for Normal Retirement (other than by reason of a termination for Cause), then this Agreement shall terminate upon the date of such Termination of Employment; provided, however, that the Executive shall be entitled to the following benefits as may be applicable depending upon the circumstances surrounding the Termination:

5.1 Payments in the Event Disability Occurs Prior to Normal Retirement. In the event the Executive becomes Disabled while actively employed by the Bank at any time after the Effective Date of this Agreement but prior to Normal Retirement, then Executive shall be entitled to be paid the Accrued Liability Balance in lump sum within thirty (30) days after the determination of Disability.

5.2Payments in the Event of the Executive’s Death prior to Retirement. Upon the death of the Executive prior to electing Normal Retirement, then Executive’s designated Beneficiary shall be paid death benefit in the amount of Ninety Two Thousand Four Hundred Thirty Two Dollars ($92,432.00) per year. The payments shall commence no later than thirty (30) days after Executive’s death. These payments shall be made in twelve (12) substantially equal monthly installments, for a period of fifteen (15) years (180 months).

5.3Termination Without Cause. If the Executive's employment is terminated by the Employer without cause prior to qualifying for Normal Retirement, and such termination is not subject to the provisions of paragraph 5.5 below, then the Executive shall be entitled to be paid the Applicable Percentage of the Executive Benefit, in substantially equal monthly installments on the first day of each month, beginning with the month following the month in which the Executive attains the Normal Retirement Age.

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5.4Voluntary Termination by the Executive. In the event the Executive voluntarily Terminates Employment with the Bank prior to qualifying for Normal Retirement, then the Executive Benefit shall be determined in accordance with the following:

(A) If the Applicable Percentage is one hundred percent (100%), the Executive shall be entitled to be paid the Applicable Percentage of the Executive Benefit, in substantially equal monthly installments on the first day of each month, beginning with the month following the month in which the Executive attains the Normal Retirement Age.

(B) If the Executive voluntarily Terminates Employment with the Bank prior to the date specified in Paragraph 1.3 which corresponds to an Applicable Percentage of one hundred percent (100%), and such termination is not subject to the provisions of paragraph 5.5 below, the Executive shall forfeit any and all rights and benefits he may have under the terms of this Agreement and shall have no right to be paid any of the amounts which would otherwise be due or paid to the Executive by the Bank pursuant to the terms of this Agreement.

5.5Involuntary Termination Within Two Years Following a Change in Control. In the event the Executive is Involuntarily Terminated within two (2) years following a Change in Control Event, or in the event the Executive Terminates for Good Reason within two (2) years following a Change in Control Event, then Executive shall be entitled to receive the greater of the actual Applicable Percentage as of the termination date or 50% of the Executive Benefit. This benefit payment shall commence on the first day of each month, beginning with the month following the month in which the Executive attains the Normal Retirement Age.

6.Termination for Cause. The Executive agrees that if his employment with the Bank is terminated at any time "for Cause," as defined herein, he shall forfeit any and all rights and benefits he may have under the terms of this Agreement and shall have no right to be paid any of the amounts which would otherwise be due or paid to the Executive by the Bank pursuant to the terms of this Agreement. Furthermore, this forfeiture in the event of a termination For Cause shall occur regardless of whether Executive has attained the Normal Retirement Age, and for as long as Executive remains employed by the Bank.

7.Change in Time or Form of Payment. The date on which distributions are to commence may be postponed by amendment provided the following conditions are satisfied (and in accordance with IRC 409A):

(A) The election to defer or postpone payment may not take effect until at least twelve (12) months after the date on which the election is made;

(B) The payment with respect to which such election is made must be deferred for a period of not less than five (5) years from the date such payment would otherwise have been paid.

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(C) Any election relating to a payment to be made a specified time or pursuant to a fixed schedule must be made at least twelve (12) months before the date the payment is scheduled to be paid .

8.Right To Determine Funding Methods. The Bank reserves the right to determine, in its sole and absolute discretion, whether, to what extent and by what method, if any, to provide for the payment of the amounts which may be payable to the Executive, under the terms of this Agreement. In the event that the Bank elects to fund this Agreement, in whole or in part, through the use of life insurance or annuities, or both, the Bank shall determine the ownership and beneficial interests of any such policy of life insurance or annuity. The Bank further reserves the right, in its sole and absolute discretion, to terminate any such policy, and any other devise used to fund its obligations under this Agreement, at any time, in whole or in part. The Executive shall have no right, title or interest in or to any funding source or amount utilized by the Bank pursuant to this Agreement, and any such funding source or amount shall not constitute security for the performance of the Bank's obligations pursuant to this Agreement. In connection with the foregoing, the Executive agrees to execute such documents and undergo such medical examinations or tests which the Bank may request and which may be reasonably necessary to facilitate any funding for this Agreement including, without limitation, the Bank's acquisition of any policy of insurance or annuity.

9.Administrative and Claims Provision.

9.1 Named Fiduciary and Plan Administrator.The “Named Fiduciary and Plan Administrator” of this executive plan shall be the Bank until its resignation or removal by the Board of Directors. As Named Fiduciary and Plan Administrator, the Bank shall be responsible for the management, control and administration of this executive plan. The Named Fiduciary may delegate to others certain aspects of the management and operation responsibilities of the plan, including employment of advisors and the delegation of ministerial duties to qualified individuals.

9.2 Claims Procedure. In the event a dispute arises over the benefits under this executive plan and benefits are not paid to the Executive (or to the Executive’s beneficiary[ies], if applicable) and such claimants feel they are entitled to receive such benefits, then a written claim must be made to the Named Fiduciary and Plan Administrator named above within forty-five (45) days from the date payments are refused. The Named Fiduciary and Plan Administrator shall review the written claim and if the claim is denied, in whole or in part, they shall provide in writing within forty-five (45) days of receipt of such claim the specific reasons for such denial, reference to the provision of the plan agreement upon which the denial is based and any additional material or information necessary to perfect the claim. Such written notice shall further indicate the additional steps to be taken by claimants if further review of the claim denial is desired. Any decision by the Bank denying a claim by the Executive for benefits under this Agreement shall be stated in writing and delivered or mailed, via registered or certified mail, to the Executive, the Executive's spouse or the Executive's beneficiaries, as the case may be. Furthermore, a claim shall be deemed denied if the Named Fiduciary and Plan Administrator fail to take any action within the aforesaid forty-five (45) day period.

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If claimants desire a second review, they shall notify the Named Fiduciary and Plan Administrator in writing within forty-five (45) days of the first claim denial. Claimants may review this Executive Plan or any documents relating thereto and submit any written issues and comments they may feel appropriate. In their sole discretion, the Named Fiduciary and Plan Administrator shall then review the second claim and provide a written decision within forty-five (45) days of receipt of such claim. This decision shall likewise state the specific reasons for the decision and shall include reference to specific provisions of the plan agreement upon which the decision is based.

9.3 Arbitration of Disputes. All claims, disputes and other matters in question arising out of or relating to this Agreement or the breach or interpretation thereof, other than those matters which are to be determined by the Bank in its sole and absolute discretion, shall be resolved by binding arbitration before a representative member, selected by the mutual agreement of the parties, of the Judicial Arbitration and Mediation Services, Inc. ("JAMS"), located in Seattle, Washington. Notice of the demand for arbitration shall be filed in writing with the other party to this Agreement and with JAMS. In no event shall the demand for arbitration be made after the date when institution of legal or equitable proceedings based on such claim, dispute or other matter in question would be barred by the applicable statute of limitations. The arbitration shall be subject to such rules of procedure used or established by JAMS. Any award rendered by JAMS shall be final and binding upon the parties, and as applicable, their respective heirs, beneficiaries, legal representatives, agents, successors and assigns, and may be entered in any court having jurisdiction thereof. Any arbitration hereunder shall be conducted in Aberdeen, Washington, unless otherwise agreed to by the parties.

9.4 Attorneys' Fees. In the event of any arbitration or litigation concerning any controversy, claim or dispute between the parties hereto, arising out of or relating to this Agreement or the breach hereof, or the interpretation hereof, (a) each party shall pay his own attorneys’ arbitration fees incurred (pursuant to paragraph 9.3); (b) the prevailing party shall be entitled to recover from the other party reasonable expenses, attorneys' fees and costs incurred in the enforcement or collection of any judgment or award rendered. The "prevailing party" means any party (one party or both parties, as the case may be) determined by the arbitrator(s) or court to be entitled to money payments from the other, not necessarily the party in whose favor a judgment is rendered.

10.Status as an Unsecured General Creditor and Rabbi Trust. Notwithstanding anything contained herein to the contrary: (i) the Executive shall have no legal or equitable rights, interests or claims in or to any specific property or assets of the Employer as a result of this Agreement; (ii) none of the Bank’s assets shall be held in or under any trust for the benefit of the Executive or held in any way as security for the fulfillment of the obligations of the Bank under this Agreement; (iii) all of the Bank’s assets shall be and remain the general unpledged and unrestricted assets of the Bank; (iv) the Bank’s obligation under this Agreement shall be that of an unfunded and unsecured promise by the Bank to pay money in the future; and (v) the Executive shall be an unsecured general creditor with respect to any benefits which may be payable under the terms of this Agreement.

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Notwithstanding subparagraphs (i) through (v) above, the Bank and the Executive acknowledge and agree that, in the event of a Change in Control, upon request of the Executive, or in the Bank’s discretion if the Executive does not so request and the Bank nonetheless deems it appropriate, the Bank shall establish, not later than the effective date of the Change in Control, a Rabbi Trust or multiple Rabbi Trusts (the "Trust" or "Trusts") upon such terms and conditions as the Bank, in its sole discretion, deems appropriate and in compliance with applicable provisions of the Code, in order to permit the Bank to make contributions and/or transfer assets to the Trust or Trusts to discharge its obligations pursuant to this Agreement. The principal of the Trust or Trusts and any earnings thereon shall be held separate and apart from other funds of the Bank to be used exclusively for discharge of the Bank’s obligations pursuant to this Agreement and shall continue to be subject to the claims of the Bank’s general creditors until paid to the Executive in such manner and at such times as specified in this Agreement.

11.Miscellaneous.

11.1Opportunity To Consult With Independent Advisors. The Executive acknowledges that he has been afforded the opportunity to consult with independent advisors of his choosing including, without limitation, accountants or tax advisors and counsel regarding both the benefits granted to him under the terms of this Agreement and the (i) terms and conditions which may affect the Executive's right to these benefits and (ii) personal tax effects of such benefits including, without limitation, the effects of any federal or state taxes, Section 280G of the Code, and any other taxes, costs, expenses or liabilities whatsoever related to such benefits, which in any of the foregoing instances the Executive acknowledges and agrees shall be the sole responsibility of the Executive notwithstanding any other term or provision of this Agreement. The Executive further acknowledges and agrees that the Bank shall have no liability whatsoever related to any such personal tax effects or other personal costs, expenses, or liabilities applicable to the Executive and further specifically waives any right for himself or herself, and his or her heirs, beneficiaries, legal representatives, agents, successor and assign to claim or assert liability on the part of the Bank related to the matters described above in this paragraph 11.1. The Executive further acknowledges that he has read, understands and consents to all of the terms and conditions of this Agreement, and that he enters into this Agreement with a full understanding of its terms and conditions.

11.2Notice. Any notice required or permitted of either the Executive or the Bank under this Agreement shall be deemed to have been duly given, if by personal delivery, upon the date received by the party or its authorized representative; if by facsimile, upon transmission to a telephone number previously provided by the party to whom the facsimile is transmitted as reflected in the records of the party transmitting the facsimile and upon reasonable confirmation of such transmission; and if by mail, on the third day after mailing via U.S. first class mail, registered or certified, postage prepaid and return receipt requested, and addressed to the party at the address given below for the receipt of notices, or such changed address as may be requested in writing by a party.

If to the Bank:	Bank of the Pacific
	Attention: President and CEO
	300 East Market Street
	98520

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If to the Executive:	Bruce D. MacNaughton
	1515 Harborview Drive
	Aberdeen, WA 98520

11.3Assignment. The Executive shall have no power or right to transfer, assign, anticipate, hypothecate, modify or otherwise encumber any part or all of the amounts payable hereunder, nor, prior to payment in accordance with the terms of this Agreement, shall any portion of such amounts be: (i) subject to seizure by any creditor of the Executive, by a proceeding at law or in equity, for the payment of any debts, judgments, alimony or separate maintenance obligations which may be owed by the Executive; or (ii) transferable by operation of law in the event of bankruptcy, insolvency or otherwise. Any such attempted assignment or transfer shall be void.

11.4IRS Section 280G Issues. If all or any portion of the amounts payable to the Executive under this Agreement, either alone or together with other payments which the Executive has the right to receive from the Employer, constitute "excess parachute payments" within the meaning of Section 280G of the Internal Revenue Code of 1986, as amended (the "Code"), that are subject to the excise tax imposed by Section 4999 of the Code (or similar tax and/or assessment), Executive shall be responsible for the payment of such excise tax and Employer (and its successor) shall be responsible for any loss of deductibility related thereto; provided, however, that Employer and Executive shall cooperate with each other and use all reasonable efforts to minimize to the fullest extent possible the amount of excise tax imposed by Section 4999 of the Code. If, at a later date, it is determined (pursuant to final regulations or published rulings of the Internal Revenue Service, final judgment of a court of competent jurisdiction, or otherwise) that the amount of excise taxes payable by the Executive is greater than the amount initially so determined, then the Executive shall pay an amount equal to the sum of such additional excise taxes and any interest, fines and penalties resulting from such underpayment. The determination of the amount of any such excise taxes shall be made by the independent accounting firm employed by the Employer immediately prior to the change in control or such other independent accounting firm or advisor as may be mutually agreeable to Employer and Executive in the exercise of their reasonable good faith judgment.

11.5Binding Effect/Merger or Reorganization. This Agreement shall be binding upon and inure to the benefit of the Executive and the Bank. Accordingly, the Bank shall not merge or consolidate into or with another corporation, or reorganize or sell substantially all of its assets to another corporation, firm or person, unless and until such succeeding or continuing corporation, firm or person agrees to assume and discharge the obligations of the Bank under this Agreement. In the alternative, the Holding Company may agree to assume and discharge the obligation of the Bank under this Agreement. Upon the occurrence of such event, the term "Bank" as used in this Agreement shall be deemed to refer to such surviving or successor firm, person, entity or corporation, or the Holding Company, as the case may be.

11.6Nonwaiver. The failure of either party to enforce at any time or for any period of time any one or more of the terms or conditions of this Agreement shall not be a waiver of such term(s) or condition(s) or of that party's right thereafter to enforce each and every term and condition of this Agreement.

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11.7Partial Invalidity. If any terms, provision, covenant, or condition of this Agreement is determined by an arbitrator or a court, as the case may be, to be invalid, void, or unenforceable, such determination shall not render any other term, provision, covenant or condition invalid, void or unenforceable, and the Agreement shall remain in full force and effect notwithstanding such partial invalidity.

11.8Entire Agreement. This Agreement supersedes any and all other agreements, either oral or in writing, between the parties with respect to the subject matter of this Agreement and contains all of the covenants and agreements between the parties with respect thereto. Each party to this Agreement acknowledges that no other representations, inducements, promises, or agreements, oral or otherwise, have been made by any party, or anyone acting on behalf of any party, which are not set forth herein, and that no other agreement, statement, or promise not contained in this Agreement shall be valid or binding on either party.

11.9Modifications. Any modification of this Agreement shall be effective only if it is in writing and signed by each party or such party's authorized representative, and only to the extent that it is compliant with all applicable codes and statutes, including but not limited to IRS Code Section 409A.

11.10Paragraph Headings. The paragraph headings used in this Agreement are included solely for the convenience of the parties and shall not affect or be used in connection with the interpretation of this Agreement.

11.11No Strict Construction. The language used in this Agreement shall be deemed to be the language chosen by the parties hereto to express their mutual intent, and no rule of strict construction will be applied against any person.

11.12Governing Law. The laws of the State of Washington, other than those laws denominated choice of law rules, and where applicable, the rules and regulations of the Board of Governors of the Federal Reserve System, Federal Deposit Insurance Corporation, Office of the Comptroller of the Currency, or any other regulatory agency or governmental authority having jurisdiction over the Bank or the Holding Company, shall govern the validity, interpretation, construction and effect of this Agreement.

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IN WITNESS WHEREOF, the Bank and the Executive have executed this Agreement on the date first above-written in the City of Aberdeen, Washington.

BANK		EXECUTIVE
By:	/s/ Dennis Archer	/s/ Bruce D. MacNaughton
	Dennis Archer	Bruce D. MacNaughton
	Vice Chairman of the Board of Directors
	Chairman of the Compensation Committee
	Date: 11/6/2007	Date: 11/9/2007

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BENEFICIARY DESIGNATION FORM

FOR THE EXECUTIVE SUPPLEMENTAL COMPENSATION
AGREEMENT

PRIMARY DESIGNATION

(You may refer to the beneficiary designation information prior to completion of this form.)

A. Person(s) as a Primary Designation:

     (Please indicate the percentage for each beneficiary.)

Name___________________________________ Relationship___________________ / _______%

Address:_______________________________________________________________________

(Street)(City)(State)(Zip)

Name___________________________________ Relationship___________________ / _______%

Address:_______________________________________________________________________

(Street)(City)(State)(Zip)

Name___________________________________ Relationship___________________ / _______%

Address:_______________________________________________________________________

(Street)(City)(State)(Zip)

Name___________________________________ Relationship___________________ / _______%

Address:_______________________________________________________________________

(Street)(City)(State)(Zip)

B. Estate as a Primary Designation:

My Primary Beneficiary is The Estate of ______________________________________ as set forth in the last will and testament dated the _____ day of _____________, _____ and any codicils thereto.

C. Trust as a Primary Designation:

Name of the Trust: ____________________________________________________________

Execution Date of the Trust: _____ / _____ / _________

Name of the Trustee: __________________________________________________________

Beneficiary(ies) of the Trust (please indicate the percentage for each beneficiary):

___________________________________________________________________________

___________________________________________________________________________

Is this an Irrevocable Life Insurance Trust? ________ Yes ________ No

(If yes and this designation is for a Split Dollar agreement, an Assignment of Rights form should be completed.)

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II. SECONDARY (CONTINGENT) DESIGNATION

A. Person(s) as a Secondary (Contingent) Designation:

     (Please indicate the percentage for each beneficiary.)

Name___________________________________ Relationship___________________ / _______%

Address:_______________________________________________________________________

(Street)(City)(State)(Zip)

Name___________________________________ Relationship___________________ / _______%

Address:_______________________________________________________________________

(Street)(City)(State)(Zip)

Name___________________________________ Relationship___________________ / _______%

Address:_______________________________________________________________________

(Street)(City)(State)(Zip)

Name___________________________________ Relationship___________________ / _______%

Address:_______________________________________________________________________

(Street)(City)(State)(Zip)

B. Estate as a Secondary (Contingent) Designation:

My Secondary Beneficiary is The Estate of _____________________________________ as set forth in my last will and testament dated the _____ day of ___________, _____ and any codicils thereto.

C. Trust as a Secondary (Contingent) Designation:

Name of the Trust: ____________________________________________________________

Execution Date of the Trust: _____ / _____ / _________

Name of the Trustee: __________________________________________________________

Beneficiary(ies) of the Trust (please indicate the percentage for each beneficiary):

___________________________________________________________________________

___________________________________________________________________________

All sums payable under the Executive Supplemental Compensation Agreement by reason of my death shall be paid to the Primary Beneficiary(ies), if he or she survives me, and if no Primary Beneficiary(ies) shall survive me, then to the Secondary (Contingent) Beneficiary(ies). This beneficiary designation is valid until the participant notifies the bank in writing.

Insured Date 

NOTE*** IF YOU RESIDE IN A COMMUNITY PROPERTY STATE (ARIZONA, CALIFORNIA, IDAHO, LOUISIANA, NEVADA, NEW MEXICO, TEXAS, WASHINGTON OR WISCONSIN), AND YOU ARE DESIGNATING A BENEFICIARY OTHER THAN YOUR SPOUSE, THEN YOUR SPOUSE MUST ALSO SIGN THE BENEFICIARY DESIGNATION FORM.

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I am aware that my spouse, the above named Insured has designated someone other than me to be the beneficiary and waive any rights I may have to the proceeds of such insurance under applicable community property laws. I understand that this consent and waiver supersedes any prior spousal consent or waiver under this plan.

Spouse Signature:______________________________Date:_________________

Witness (other than insured) : ___________________________

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EX-10.4

EXECUTIVE SUPPLEMENTAL COMPENSATION AGREEMENT

This Executive Supplemental Compensation Agreement (hereinafter “Agreement”) is made and entered into effective as of January 1, 2007 by and between Bank of the Pacific, with its principal offices located in the Aberdeen, Washington ("the Bank" or “Employer”) and, Denise J. Portmann, an individual residing in the State of Washington ("the Executive").

RECITALS

WHEREAS, the Executive is an employee of the Employer, serving since February 2001,

WHEREAS, the Employer desires to establish a compensation benefit program as a fringe benefit for executive officers of the Employer in order to attract and retain individuals with extensive and valuable experience in the banking industry;

WHEREAS, the Executive's experience and knowledge of the affairs of the Employer and the banking industry are extensive and valuable;

WHEREAS, it is deemed to be in the best interests of the Employer to provide the Executive with certain fringe benefits, on the terms and conditions set forth herein, in order to reasonably induce the Executive to remain in the Employer's employment; and

WHEREAS, the Executive and the Employer wish to specify in writing the terms and conditions upon which this additional compensatory incentive will be provided to the Executive;

NOW, THEREFORE, in consideration of the services to be performed by the Executive in the future, as well as the mutual promises and covenants contained herein, the Executive and the Employer agree as follows:

AGREEMENT

1.Terms and Definitions.

1.1Accrued Liability Balance. For the purposes of this Agreement, means the liability that should be accrued by the Company, under Generally Accepted Accounting Principles (“GAAP”), for the Company’s obligation to the Executive under this Agreement, by applying Accounting Principles Board Opinion Number 12 (“APB 12”) as amended by Statement of Financial Accounting Standards Number 106 (“FAS 106”) and the Discount Rate. Any one of a variety of amortization methods may be used to determine the Accrual Balance. However, once chosen, the method must be consistently applied.

1.2Administrator. The Bank shall be the "Administrator" and, solely for the purposes of ERISA as defined in paragraph 1.9 below, the "fiduciary" of this Agreement where a fiduciary is required by ERISA.

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1.3Applicable Percentage. The term “Applicable Percentage” is the percentage of the Executive Benefit to which Executive shall be entitled based on (a) the date on which the Executive Separates From Service or Terminates Employment with the Bank or (b) the greater of fifty percent (50%) or the actual Applicable Percentage, as stipulated herein for certain described events (such as Involuntary Termination within two years following a Change in Control, or the Executive's Disability). Subject to the forgoing, the Applicable Percentage shall be as follows:

DATE OF SEPARATION FROM SERVICE	APPLICABLE PERCENTAGE
January 1, 2007-December 31, 2009		0	%
January 1, 2010-December 31, 2010		30	%
January 1, 2011-December 31, 2011		40	%
January 1, 2012-December 31, 2012		50	%
January 1, 2013-December 31, 2013		60	%
January 1, 2014-December 31, 2014		70	%
January 1, 2015-December 31, 2015		80	%
January 1, 2016-December 31, 2016		90	%
January 1, 2017 and beyond:		100	%

1.4 Beneficiary. Beneficiary (ies)” shall refer to the person, persons or entity designated in writing by the Executive on forms provided by the Administrator to receive the benefits payable under this Agreement/Plan. An Executive may change his Beneficiary from time to time, so long as permissible, by filing a new written designation with the Administrator, and such designation shall be effective upon receipt by the Administrator. If an Executive has not validly designated a beneficiary, or if a designated Beneficiary predeceases the Executive, then any benefit owed pursuant to this plan Agreement shall be made to Executive’s estate.

1.5Board of Directors. The Board of Directors shall mean the Board of Directors for The Bank, hereinafter “the Board”.

1.6Change in Control. For the purpose of this Agreement, a Change in Control means the occurrence of any of the following events:

A.A Change in the Ownership of a Corporation. A change in the ownership of a corporation occurs on the date that any one person or persons acting as a group (as defined in IRC 409A), acquires ownership of stock of the corporation that, together with stock held by such person or group, constitutes more than fifty percent (50%) of the total fair market value or total voting power of the stock of such corporation. The acquisition of additional stock by the same person or group is not considered to cause a change in the ownership of the corporation.

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B. Change in the Effective Control of a Corporation. A change in the effective control of the corporation shall be deemed to occur on either of the following dates:

(i) The date any one person, or persons acting as a group acquires (or has acquired during the twelve (12) month period ending on the date of the most recent acquisition by such person or group) ownership of stock of the corporation possessing thirty percent (30%) or more of the total voting power of the stock of such corporation; or

(ii) The date a majority of members of the corporation’s board of directors is replaced during any twelve (12) month period by directors whose appointment or election is not endorsed by a majority of the members of the corporation’s board of directors before the date of the appointment or election.

C. Change in the Ownership of a Substantial Portion of a Corporation’s Assets. A change in the ownership of a substantial portion of a corporation’s assets shall be deemed to occur on the date that any one person or group acquires (or has acquired during the twelve (12) month period ending on the date of the most recent acquisition by such person or persons) assets from the corporation that have a total gross fair market value equal to or more than forty percent (40%) of the total gross fair market value of all of the assets of the corporation immediately before such acquisition or acquisitions. No Change in Control shall result if the assets are transferred to certain entities controlled directly or indirectly by the shareholders of the transferring corporation.

1.7The Code. The "Code" shall mean the Internal Revenue Code of 1986, as amended (the “Code").

1.8Disability/Disabled. For the purposes of this Agreement, Executive will be considered Disabled if:

(A) The Executive is unable to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment that can be expected to result in death or can be expected to last for a continuous period of not less than twelve (12) months; or

(B) The Executive is, by reason of any medically determinable physical or mental impairment that can be expected to result in death or can be expected to last for a continuous period of not less than twelve (12) months, receiving income replacement benefits for a period of not less than three (3) months under an accident and health plan covering employees of the Employee’s employer.

The determination of whether an Executive is Disabled shall be determined by a physician mutually agreed on by the parties subject to the provisions of IRC 409A.

1.9Effective Date. The term "Effective Date" shall mean the date first written above.

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1.10ERISA. The term "ERISA" shall mean the Employee Retirement Income Security Act of 1974, as amended.

1.11Executive Benefit. The term "Executive Benefit” shall mean the annual benefit amounts determined pursuant to Paragraphs 1 through 4 (including sub-paragraphs, as applicable), subject to forfeiture, reduction or adjustment as (a) required under the other provisions of this Agreement; (b) required by reason of the lawful order of any regulatory agency or body having jurisdiction over the Employer; or (c) required in order for the Employer to comply with any and all applicable state and federal laws, including, but not limited to, income, employment and disability income tax laws (e.g., FICA, FUTA, SDI).

Subject to the forgoing, in the event the Executive obtains an Applicable Percentage of one hundred percent (100%), then the annual Executive Benefit paid by the Bank to the Employee pursuant to this Agreement shall be the lesser of forty percent (40%) of the average of the Executive’s three final years of base salary or an amount equal to One Hundred Thirty Nine Thousand Four Hundred Nine Dollars ($139,409.00). This Executive Benefit shall be paid in twelve (12) substantially equal monthly installments, for a period of fifteen (15) years (180 months).

1.12Involuntary Separation From Service. In accordance with IRC 409A, the term “Involuntary Separation from Service” shall mean a Separation From Service due to the independent exercise of the unilateral authority of the Bank to terminate the Executive’s services, other than due to the Executive’s implicit or explicit request, where the Executive was willing and able to continue performing services.

1.13IRC 409A. The term “IRC 409A” shall refer to the final regulations issued by the IRS and the Treasury Department under Section 409A of the Code.

1.14Normal Retirement Date Normal Retirement Age . The term "Normal Retirement Date" shall mean the Retirement (as defined below) of the Executive on or after the attainment of age Fifty-Five (55).

1.15Retirement. The Term "Retirement" or "Retires" shall refer to the date on which the Executive voluntarily Separates From Service (other than due to a Termination for Cause) on or after attaining the Normal Retirement Age.

1.17Separation From Service/ Termination of Employment. The terms Separation From Service (Separates From Service) and Termination of Employment shall be used interchangeably for the purposes of this Agreement and shall be interpreted in accordance with the provisions of IRC 409A. Whether a termination of employment has occurred is determined based on whether the facts and circumstances indicate that the Bank and the Executive reasonably anticipate that no further services will be performed after a certain date or that the level of bona fide services the employee will perform after such date (whether as an employee or as an independent contractor) will permanently decrease to no more than twenty (20%) percent of the average level of bona fide services performed (as an employee or an independent contractor) over the immediately preceding 36-month period (or the full period of services to the employer if the employee has been providing services to the employer less than 36 months). There shall be no Separation From Service while the Executive is on military leave, sick leave or other bona fide leave of absence, as long as such leave does not exceed six months, or if longer, so long as the individual retains a right to re-employment with the service recipient under an applicable statute or by contract.

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1.18Specified Employee. The term “Specified Employee” means an employee who, as of the date of the employee’s Separation from Service, is a key employee of an employer of which any stock is publicly traded on an established securities market or otherwise. An employee is a key employee if the employee meets the requirements of section 416(i)(1)(A)(i), (ii), or (iii) (applied in accordance with the regulations thereunder and disregarding section 416(i)(5)) at any time during the twelve (12) month period ending on a specified employee identification date. If Executive is a key employee as of a specified employee identification date, then Executive shall be treated as a key employee for the entire twelve (12) month period beginning on the specified employee effective date.

1.19Termination for Cause. The term “Termination for Cause” shall mean a written termination of Employment of the Executive by the Employer, adopted in advance by resolution of a majority of the Board of Directors of the Employer (the “Resolution”), for any one or more of the following reasons, which reasons shall be cited in the Resolution and presented promptly to the Executive:

(a) the Executive’s willful and material breach of duty in the course of his Employment, such breach having a material adverse effect on the Bank;

(b)the Executive's willful violation of any laws, rules or regulations of any regulatory agency or governmental authority having jurisdiction over the Employer, or of any Bank policies or resolutions adopted by the Board of Directors of the Bank, which violation has a material adverse effect on the Bank;

(c)the Executive is convicted of any felony or a crime involving moral turpitude or commits a fraudulent or dishonest act, which conviction or act has a material adverse effect on the Bank;

1.20 Termination for Good Reason. For the purposes of this Agreement, a voluntary termination by the Executive within two (2) years following a Change in Control Event shall be deemed “for Good Reason” if one or more of the following conditions arise without the consent of the Executive:

(A) A material diminution in the Executive’s base compensation;

(B) A material diminution in the Executive’s authority, duties, or responsibilities;

(C) A material diminution in the authority, duties, or responsibilities of the supervisor to whom the Executive is required to report, including a requirement that an Executive report to a corporate officer or employee instead of reporting directly to the board of directors of a corporation (or similar governing body with respect to an entity other than a corporation);

(D) A material diminution in the budget over which the Executive retains authority;

(E) A material change in the geographic location at which the Executive must perform the services;

(F) Any other action or inaction that constitutes a material breach by the Employer of the agreement under which the Executive provides services.

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2.Scope, Purpose and Effect.

2.1Contract of Employment. Although this Agreement is intended to provide the Executive with an additional incentive to remain in the employ of the Employer, this Agreement shall not be deemed to constitute a contract of employment between the Executive and the Employer nor shall any provision of this Agreement restrict or expand the right of the Employer to terminate the Executive's employment. This Agreement shall have no impact or effect upon any separate written Employment Agreement which the Executive may have with the Employer, it being the parties' intention and agreement that unless this Agreement is specifically referenced in said Employment Agreement (or any modification thereto), this Agreement (and the Employer's obligations hereunder) shall stand separate and apart and shall have no effect on or be affected by, the terms and provisions of said Employment Agreement.

2.2Fringe Benefit. The benefits provided by this Agreement are granted by the Bank as a fringe benefit to the Executive and are not a part of any salary reduction plan or any arrangement deferring a bonus or a salary increase. The Executive has no option to take any current payments or bonus in lieu of the benefits provided by this Agreement.

2.3Prohibited Payments.Notwithstanding anything in this Agreement to the contrary, if any payment made under this Agreement is a “golden parachute payment” as defined in Section 28(k) of the Federal Deposit Insurance Act (12 U.S.C. section 1828(k) and Part 359 of the Rules and Regulations of the Federal Deposit Insurance Corporation (collectively, the “FDIC Rules”) or is otherwise prohibited, restricted or subject to the prior approval of a Bank Regulator, no payment shall be made hereunder without complying with said FDIC Rules.

3.Delay in Payments for Specified Employee in the Event of a Separation From Service.

In the case of any Employee who is a Specified Employee as of the date of a Separation from Service, then a payment conditioned upon a Separation from Service may not be made before the date that is six (6) months after the date of Separation from Service (or, if earlier than the end of the six-month period, the date of death of the Specified Employee).

In the event payments to which the Executive would otherwise be entitled during the first six (6) months are subject to this six (6) month delay in payment, then such payments shall be accumulated and paid on the first day of the seventh month following the date of Separation from Service. Payments will then continue thereafter as called for pursuant to the terms of this Agreement.

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4.Executive Benefit Payments Upon Retirement.

4.1Payments Commence Upon Normal Retirement. In the event the Executive remains in the continuous employment of the Bank until attaining at least the Normal Retirement Age, then the Executive shall be entitled to be paid a one hundred percent (100%) Applicable Percentage of the Executive Benefit. Payments shall commence on the first day of the month following the month in which the Executive Retires and shall continue for a period of one hundred and eighty (180) months.

4.2Payments in the Event of the Executive’s Death After Retirement. Upon the death of the Executive after Normal Retirement, then Executive’s designated Beneficiary shall be paid the remainder of any unpaid or outstanding Executive Benefit payments. The payments shall commence no later than thirty (30) days after Executive’s death and shall continue until the total one hundred and eighty (180) payments have been made.

5.Payments in the Event Executive’s Employment Terminates Prior to Retirement. As indicated above, the Employer reserves the right to terminate the Executive's employment, with or without Cause but subject to any written employment agreement which may then exist, at any time prior to the Executive's Retirement. In the event that the Executive’s Employment Terminates before Executive qualifies for Normal Retirement (other than by reason of a termination for Cause), then this Agreement shall terminate upon the date of such Termination of Employment; provided, however, that the Executive shall be entitled to the following benefits as may be applicable depending upon the circumstances surrounding the Termination:

5.1 Payments in the Event Disability Occurs Prior to Normal Retirement. In the event the Executive becomes Disabled while actively employed by the Bank at any time after the Effective Date of this Agreement but prior to Normal Retirement, then Executive shall be entitled to be paid the Accrued Liability Balance in lump sum within thirty (30) days after the determination of Disability.

5.2Payments in the Event of the Executive’s Death prior to Retirement. Upon the death of the Executive prior to electing Normal Retirement, then Executive’s designated Beneficiary shall be paid death benefit in the amount of One Hundred Thirty Nine Thousand Four Hundred Nine Dollars ($139,409.00) per year. The payments shall commence no later than thirty (30) days after Executive’s death. These payments shall be made in twelve (12) substantially equal monthly installments, for a period of fifteen (15) years (180 months).

5.3Termination Without Cause. If the Executive's employment is terminated by the Employer without cause prior to qualifying for Normal Retirement, and such termination is not subject to the provisions of paragraph 5.5 below, then the Executive shall be entitled to be paid the Applicable Percentage of the Executive Benefit, in substantially equal monthly installments on the first day of each month, beginning with the month following the month in which the Executive attains the Normal Retirement Age.

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5.4Voluntary Termination by the Executive. In the event the Executive voluntarily Terminates Employment with the Bank prior to qualifying for Normal Retirement, then the Executive Benefit shall be determined in accordance with the following:

  (A) If the Applicable Percentage is one hundred percent (100%), the Executive shall be entitled to be paid the Applicable Percentage of the Executive Benefit, in substantially equal monthly installments on the first day of each month, beginning with the month following the month in which the Executive attains the Normal Retirement Age.

  (B) If the Executive voluntarily Terminates Employment with the Bank prior to the date specified in Paragraph 1.3 which corresponds to an Applicable Percentage of one hundred percent (100%), and such termination is not subject to the provisions of paragraph 5.5 below, the Executive shall forfeit any and all rights and benefits he may have under the terms of this Agreement and shall have no right to be paid any of the amounts which would otherwise be due or paid to the Executive by the Bank pursuant to the terms of this Agreement.

5.5Involuntary Termination Within Two Years Following a Change in Control. In the event the Executive is Involuntarily Terminated within two (2) years following a Change in Control Event, or in the event the Executive Terminates for Good Reason within two (2) years following a Change in Control Event, then Executive shall be entitled to receive the greater of the actual Applicable Percentage as of the termination date or 50% of the Executive Benefit. This benefit payment shall commence on the first day of each month, beginning with the month following the month in which the Executive attains the Normal Retirement Age.

6.Termination for Cause. The Executive agrees that if his employment with the Bank is terminated at any time "for Cause," as defined herein, he shall forfeit any and all rights and benefits he may have under the terms of this Agreement and shall have no right to be paid any of the amounts which would otherwise be due or paid to the Executive by the Bank pursuant to the terms of this Agreement. Furthermore, this forfeiture in the event of a termination For Cause shall occur regardless of whether Executive has attained the Normal Retirement Age, and for as long as Executive remains employed by the Bank.

7.Change in Time or Form of Payment. The date on which distributions are to commence may be postponed by amendment provided the following conditions are satisfied (and in accordance with IRC 409A):

(A) The election to defer or postpone payment may not take effect until at least twelve (12) months after the date on which the election is made;

(B) The payment with respect to which such election is made must be deferred for a period of not less than five (5) years from the date such payment would otherwise have been paid.

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(C) Any election relating to a payment to be made a specified time or pursuant to a fixed schedule must be made at least twelve (12) months before the date the payment is scheduled to be paid .

8.Right To Determine Funding Methods. The Bank reserves the right to determine, in its sole and absolute discretion, whether, to what extent and by what method, if any, to provide for the payment of the amounts which may be payable to the Executive, under the terms of this Agreement. In the event that the Bank elects to fund this Agreement, in whole or in part, through the use of life insurance or annuities, or both, the Bank shall determine the ownership and beneficial interests of any such policy of life insurance or annuity. The Bank further reserves the right, in its sole and absolute discretion, to terminate any such policy, and any other devise used to fund its obligations under this Agreement, at any time, in whole or in part. The Executive shall have no right, title or interest in or to any funding source or amount utilized by the Bank pursuant to this Agreement, and any such funding source or amount shall not constitute security for the performance of the Bank's obligations pursuant to this Agreement. In connection with the foregoing, the Executive agrees to execute such documents and undergo such medical examinations or tests which the Bank may request and which may be reasonably necessary to facilitate any funding for this Agreement including, without limitation, the Bank's acquisition of any policy of insurance or annuity.

9.Administrative and Claims Provision.

9.1 Named Fiduciary and Plan Administrator.The “Named Fiduciary and Plan Administrator” of this executive plan shall be the Bank until its resignation or removal by the Board of Directors. As Named Fiduciary and Plan Administrator, the Bank shall be responsible for the management, control and administration of this executive plan. The Named Fiduciary may delegate to others certain aspects of the management and operation responsibilities of the plan, including employment of advisors and the delegation of ministerial duties to qualified individuals.

9.2 Claims Procedure. In the event a dispute arises over the benefits under this executive plan and benefits are not paid to the Executive (or to the Executive’s beneficiary[ies], if applicable) and such claimants feel they are entitled to receive such benefits, then a written claim must be made to the Named Fiduciary and Plan Administrator named above within forty-five (45) days from the date payments are refused. The Named Fiduciary and Plan Administrator shall review the written claim and if the claim is denied, in whole or in part, they shall provide in writing within forty-five (45) days of receipt of such claim the specific reasons for such denial, reference to the provision of the plan agreement upon which the denial is based and any additional material or information necessary to perfect the claim. Such written notice shall further indicate the additional steps to be taken by claimants if further review of the claim denial is desired. Any decision by the Bank denying a claim by the Executive for benefits under this Agreement shall be stated in writing and delivered or mailed, via registered or certified mail, to the Executive, the Executive's spouse or the Executive's beneficiaries, as the case may be. Furthermore, a claim shall be deemed denied if the Named Fiduciary and Plan Administrator fail to take any action within the aforesaid forty-five (45) day period.

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If claimants desire a second review, they shall notify the Named Fiduciary and Plan Administrator in writing within forty-five (45) days of the first claim denial. Claimants may review this Executive Plan or any documents relating thereto and submit any written issues and comments they may feel appropriate. In their sole discretion, the Named Fiduciary and Plan Administrator shall then review the second claim and provide a written decision within forty-five (45) days of receipt of such claim. This decision shall likewise state the specific reasons for the decision and shall include reference to specific provisions of the plan agreement upon which the decision is based.

9.3 Arbitration of Disputes. All claims, disputes and other matters in question arising out of or relating to this Agreement or the breach or interpretation thereof, other than those matters which are to be determined by the Bank in its sole and absolute discretion, shall be resolved by binding arbitration before a representative member, selected by the mutual agreement of the parties, of the Judicial Arbitration and Mediation Services, Inc. ("JAMS"), located in Seattle, Washington. Notice of the demand for arbitration shall be filed in writing with the other party to this Agreement and with JAMS. In no event shall the demand for arbitration be made after the date when institution of legal or equitable proceedings based on such claim, dispute or other matter in question would be barred by the applicable statute of limitations. The arbitration shall be subject to such rules of procedure used or established by JAMS. Any award rendered by JAMS shall be final and binding upon the parties, and as applicable, their respective heirs, beneficiaries, legal representatives, agents, successors and assigns, and may be entered in any court having jurisdiction thereof. Any arbitration hereunder shall be conducted in Aberdeen, Washington, unless otherwise agreed to by the parties.

9.4 Attorneys' Fees. In the event of any arbitration or litigation concerning any controversy, claim or dispute between the parties hereto, arising out of or relating to this Agreement or the breach hereof, or the interpretation hereof, (a) each party shall pay his own attorneys’ arbitration fees incurred (pursuant to paragraph 9.3); (b) the prevailing party shall be entitled to recover from the other party reasonable expenses, attorneys' fees and costs incurred in the enforcement or collection of any judgment or award rendered. The "prevailing party" means any party (one party or both parties, as the case may be) determined by the arbitrator(s) or court to be entitled to money payments from the other, not necessarily the party in whose favor a judgment is rendered.

10.Status as an Unsecured General Creditor and Rabbi Trust. Notwithstanding anything contained herein to the contrary: (i) the Executive shall have no legal or equitable rights, interests or claims in or to any specific property or assets of the Employer as a result of this Agreement; (ii) none of the Bank’s assets shall be held in or under any trust for the benefit of the Executive or held in any way as security for the fulfillment of the obligations of the Bank under this Agreement; (iii) all of the Bank’s assets shall be and remain the general unpledged and unrestricted assets of the Bank; (iv) the Bank’s obligation under this Agreement shall be that of an unfunded and unsecured promise by the Bank to pay money in the future; and (v) the Executive shall be an unsecured general creditor with respect to any benefits which may be payable under the terms of this Agreement.

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Notwithstanding subparagraphs (i) through (v) above, the Bank and the Executive acknowledge and agree that, in the event of a Change in Control, upon request of the Executive, or in the Bank’s discretion if the Executive does not so request and the Bank nonetheless deems it appropriate, the Bank shall establish, not later than the effective date of the Change in Control, a Rabbi Trust or multiple Rabbi Trusts (the "Trust" or "Trusts") upon such terms and conditions as the Bank, in its sole discretion, deems appropriate and in compliance with applicable provisions of the Code, in order to permit the Bank to make contributions and/or transfer assets to the Trust or Trusts to discharge its obligations pursuant to this Agreement. The principal of the Trust or Trusts and any earnings thereon shall be held separate and apart from other funds of the Bank to be used exclusively for discharge of the Bank’s obligations pursuant to this Agreement and shall continue to be subject to the claims of the Bank’s general creditors until paid to the Executive in such manner and at such times as specified in this Agreement.

11.Miscellaneous.

11.1Opportunity To Consult With Independent Advisors. The Executive acknowledges that he has been afforded the opportunity to consult with independent advisors of his choosing including, without limitation, accountants or tax advisors and counsel regarding both the benefits granted to him under the terms of this Agreement and the (i) terms and conditions which may affect the Executive's right to these benefits and (ii) personal tax effects of such benefits including, without limitation, the effects of any federal or state taxes, Section 280G of the Code, and any other taxes, costs, expenses or liabilities whatsoever related to such benefits, which in any of the foregoing instances the Executive acknowledges and agrees shall be the sole responsibility of the Executive notwithstanding any other term or provision of this Agreement. The Executive further acknowledges and agrees that the Bank shall have no liability whatsoever related to any such personal tax effects or other personal costs, expenses, or liabilities applicable to the Executive and further specifically waives any right for himself or herself, and his or her heirs, beneficiaries, legal representatives, agents, successor and assign to claim or assert liability on the part of the Bank related to the matters described above in this paragraph 11.1. The Executive further acknowledges that he has read, understands and consents to all of the terms and conditions of this Agreement, and that he enters into this Agreement with a full understanding of its terms and conditions.

11.2Notice. Any notice required or permitted of either the Executive or the Bank under this Agreement shall be deemed to have been duly given, if by personal delivery, upon the date received by the party or its authorized representative; if by facsimile, upon transmission to a telephone number previously provided by the party to whom the facsimile is transmitted as reflected in the records of the party transmitting the facsimile and upon reasonable confirmation of such transmission; and if by mail, on the third day after mailing via U.S. first class mail, registered or certified, postage prepaid and return receipt requested, and addressed to the party at the address given below for the receipt of notices, or such changed address as may be requested in writing by a party.

If to the Bank:	Bank of the Pacific
	Attention: President and CEO
	300 East Market Street
	98520
If to the Executive:	Denise J. Portmann
	2012 State Route 6
	Raymond, WA 98577

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11.3Assignment. The Executive shall have no power or right to transfer, assign, anticipate, hypothecate, modify or otherwise encumber any part or all of the amounts payable hereunder, nor, prior to payment in accordance with the terms of this Agreement, shall any portion of such amounts be: (i) subject to seizure by any creditor of the Executive, by a proceeding at law or in equity, for the payment of any debts, judgments, alimony or separate maintenance obligations which may be owed by the Executive; or (ii) transferable by operation of law in the event of bankruptcy, insolvency or otherwise. Any such attempted assignment or transfer shall be void.

11.4IRS Section 280G Issues. If all or any portion of the amounts payable to the Executive under this Agreement, either alone or together with other payments which the Executive has the right to receive from the Employer, constitute "excess parachute payments" within the meaning of Section 280G of the Internal Revenue Code of 1986, as amended (the "Code"), that are subject to the excise tax imposed by Section 4999 of the Code (or similar tax and/or assessment), Executive shall be responsible for the payment of such excise tax and Employer (and its successor) shall be responsible for any loss of deductibility related thereto; provided, however, that Employer and Executive shall cooperate with each other and use all reasonable efforts to minimize to the fullest extent possible the amount of excise tax imposed by Section 4999 of the Code. If, at a later date, it is determined (pursuant to final regulations or published rulings of the Internal Revenue Service, final judgment of a court of competent jurisdiction, or otherwise) that the amount of excise taxes payable by the Executive is greater than the amount initially so determined, then the Executive shall pay an amount equal to the sum of such additional excise taxes and any interest, fines and penalties resulting from such underpayment. The determination of the amount of any such excise taxes shall be made by the independent accounting firm employed by the Employer immediately prior to the change in control or such other independent accounting firm or advisor as may be mutually agreeable to Employer and Executive in the exercise of their reasonable good faith judgment.

11.5Binding Effect/Merger or Reorganization. This Agreement shall be binding upon and inure to the benefit of the Executive and the Bank. Accordingly, the Bank shall not merge or consolidate into or with another corporation, or reorganize or sell substantially all of its assets to another corporation, firm or person, unless and until such succeeding or continuing corporation, firm or person agrees to assume and discharge the obligations of the Bank under this Agreement. In the alternative, the Holding Company may agree to assume and discharge the obligation of the Bank under this Agreement. Upon the occurrence of such event, the term "Bank" as used in this Agreement shall be deemed to refer to such surviving or successor firm, person, entity or corporation, or the Holding Company, as the case may be.

11.6Nonwaiver. The failure of either party to enforce at any time or for any period of time any one or more of the terms or conditions of this Agreement shall not be a waiver of such term(s) or condition(s) or of that party's right thereafter to enforce each and every term and condition of this Agreement.

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11.7Partial Invalidity. If any terms, provision, covenant, or condition of this Agreement is determined by an arbitrator or a court, as the case may be, to be invalid, void, or unenforceable, such determination shall not render any other term, provision, covenant or condition invalid, void or unenforceable, and the Agreement shall remain in full force and effect notwithstanding such partial invalidity.

11.8Entire Agreement. This Agreement supersedes any and all other agreements, either oral or in writing, between the parties with respect to the subject matter of this Agreement and contains all of the covenants and agreements between the parties with respect thereto. Each party to this Agreement acknowledges that no other representations, inducements, promises, or agreements, oral or otherwise, have been made by any party, or anyone acting on behalf of any party, which are not set forth herein, and that no other agreement, statement, or promise not contained in this Agreement shall be valid or binding on either party.

11.9Modifications. Any modification of this Agreement shall be effective only if it is in writing and signed by each party or such party's authorized representative, and only to the extent that it is compliant with all applicable codes and statutes, including but not limited to IRS Code Section 409A.

11.10Paragraph Headings. The paragraph headings used in this Agreement are included solely for the convenience of the parties and shall not affect or be used in connection with the interpretation of this Agreement.

11.11No Strict Construction. The language used in this Agreement shall be deemed to be the language chosen by the parties hereto to express their mutual intent, and no rule of strict construction will be applied against any person.

11.12Governing Law. The laws of the State of Washington, other than those laws denominated choice of law rules, and where applicable, the rules and regulations of the Board of Governors of the Federal Reserve System, Federal Deposit Insurance Corporation, Office of the Comptroller of the Currency, or any other regulatory agency or governmental authority having jurisdiction over the Bank or the Holding Company, shall govern the validity, interpretation, construction and effect of this Agreement.

IN WITNESS WHEREOF, the Bank and the Executive have executed this Agreement on the date first above-written in the City of Aberdeen, Washington.

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BANK		EXECUTIVE
By:	/s/ Dennis Archer	/s/ Denise J. Portmann
Dennis Archer		Denise J. Portmann
Vice Chairman of the Board of Directors
Chairman of the Compensation Committee

Date: 11/6/2007 Date: 10/9/2007

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BENEFICIARY DESIGNATION FORM

FOR THE EXECUTIVE SUPPLEMENTAL COMPENSATION AGREEMENT

PRIMARY DESIGNATION

(You may refer to the beneficiary designation information prior to completion of this form.)

A. Person(s) as a Primary Designation:

 (Please indicate the percentage for each beneficiary.)

Name___________________________________ Relationship___________________ / _______%

Address:_______________________________________________________________________

(Street)(City)(State)(Zip)

Name___________________________________ Relationship___________________ / _______%

Address:_______________________________________________________________________

(Street)(City)(State)(Zip)

Name___________________________________ Relationship___________________ / _______%

Address:_______________________________________________________________________

(Street)(City)(State)(Zip)

Name___________________________________ Relationship___________________ / _______%

Address:_______________________________________________________________________

(Street)(City)(State)(Zip)

B.Estate as a Primary Designation:

My Primary Beneficiary is The Estate of ______________________________________ as set forth in the last will and testament dated the _____ day of _____________, _____ and any codicils thereto.

C.Trust as a Primary Designation:

Name of the Trust: ____________________________________________________________

Execution Date of the Trust: _____ / _____ / _________

Name of the Trustee: __________________________________________________________

Beneficiary(ies) of the Trust (please indicate the percentage for each beneficiary):

___________________________________________________________________________

___________________________________________________________________________

Is this an Irrevocable Life Insurance Trust? ________ Yes ________ No

(If yes and this designation is for a Split Dollar agreement, an Assignment of Rights form should be completed.)

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II. SECONDARY (CONTINGENT) DESIGNATION

A.Person(s) as a Secondary (Contingent) Designation:

 (Please indicate the percentage for each beneficiary.)

Name___________________________________ Relationship___________________ / _______%

Address:_______________________________________________________________________

(Street)(City)(State)(Zip)

Name___________________________________ Relationship___________________ / _______%

Address:_______________________________________________________________________

(Street)(City)(State)(Zip)

Name___________________________________ Relationship___________________ / _______%

Address:_______________________________________________________________________

(Street)(City)(State)(Zip)

Name___________________________________ Relationship___________________ / _______%

Address:_______________________________________________________________________

(Street)(City)(State)(Zip)

B.Estate as a Secondary (Contingent) Designation:

My Secondary Beneficiary is The Estate of _____________________________________ as set forth in my last will and testament dated the _____ day of ___________, _____ and any codicils thereto.

C.Trust as a Secondary (Contingent) Designation:

Name of the Trust: ____________________________________________________________

Execution Date of the Trust: _____ / _____ / _________

Name of the Trustee: __________________________________________________________

Beneficiary(ies) of the Trust (please indicate the percentage for each beneficiary):

___________________________________________________________________________

___________________________________________________________________________

All sums payable under the Executive Supplemental Compensation Agreement by reason of my death shall be paid to the Primary Beneficiary(ies), if he or she survives me, and if no Primary Beneficiary(ies) shall survive me, then to the Secondary (Contingent) Beneficiary(ies). This beneficiary designation is valid until the participant notifies the bank in writing.

Insured Date

NOTE*** IF YOU RESIDE IN A COMMUNITY PROPERTY STATE (ARIZONA, CALIFORNIA, IDAHO, LOUISIANA, NEVADA, NEW MEXICO, TEXAS, WASHINGTON OR WISCONSIN), AND YOU ARE DESIGNATING A BENEFICIARY OTHER THAN YOUR SPOUSE, THEN YOUR SPOUSE MUST ALSO SIGN THE BENEFICIARY DESIGNATION FORM.

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I am aware that my spouse, the above named Insured has designated someone other than me to be the beneficiary and waive any rights I may have to the proceeds of such insurance under applicable community property laws. I understand that this consent and waiver supersedes any prior spousal consent or waiver under this plan.

Spouse Signature: Date:

Witness (other than insured) :

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EX-31.1

Exhibit 31.1

CERTIFICATION OF CHIEF EXECUTIVE OFFICER

UNDER RULE 13a-14(a)

I, Dennis A. Long, certify that:

1) I have reviewed this quarterly report on Form 10-Q of Pacific Financial Corporation;

2) Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3) Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4) The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and we have:

a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Designed such internal control over financial reporting, or cause such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most-recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting.

5) The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions):

a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

Date: November 9, 2007	/s/ Dennis A. Long
	Dennis A. Long
	Chief Executive Officer

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EX-31.2

Exhibit 31.2

CERTIFICATION OF CHIEF FINANCIAL OFFICER

UNDER RULE 13a-14(a)

I, Denise Portmann, certify that:

1) I have reviewed this quarterly report on Form 10-Q of Pacific Financial Corporation;

2) Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3) Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4) The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and we have:

a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Designed such internal control over financial reporting, or cause such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most-recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting.

5) The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions):

a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

Date: November 9, 2007
	/s/ Denise Portmann
	Denise Portmann
	Chief Financial Officer

1

EX-32.

Exhibit 32

CERTIFICATIONS UNDER 18 U.S.C. ss.1350

The undersigned certify, pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to ss. 906 of the Sarbanes-Oxley Act of 2002, that the Quarterly Report on Form 10-Q of Pacific Financial Corporation for the quarter ended September 30, 2007, fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, and the information contained therein fairly presents, in all material respects, the financial condition and results of operations of Pacific Financial Corporation.

/s/ Dennis A. Long	/s/ Denise Portmann
Dennis A. Long	Denise Portmann
Chief Executive Officer	Chief Financial Officer
November 9, 2007	November 9, 2007

1