Pacific Financial Corporation Earnings Increase 47% to $1.03 Million for 1Q14 from 1Q13

ABERDEEN, Wash., April 23, 2014 (GLOBE NEWSWIRE) -- Pacific Financial Corporation (OTCQB:PFLC), the holding company for Bank of the Pacific today reported profits of $1.03 million for the first quarter of 2014, up 30% compared to $789,000 for the fourth quarter of 2013, and increased 47% from $701,000 from the first quarter a year ago. Profitability was propelled by strong loan growth, ongoing enhancements in credit quality, lower funding costs and an improved net interest margin. All results are unaudited.

First Quarter 2014 Highlights (as of, or for the period ended March 31, 2014, except as noted):

  • Earnings per share (EPS) increased 25% to $0.10 for the first quarter of 2014, compared to $0.08 for the fourth quarter of 2013, and grew 43% from $0.07 for the first quarter of 2013.
  • Net interest income grew 5% to $6.6 million for the first quarter of 2014, compared to $6.3 million for the fourth quarter of 2013, and grew 17% from $5.6 million for the first quarter a year ago.
  • Net interest margin (NIM) expanded 29 basis points to 4.27% from 3.98% in the preceding quarter and improved 26 basis points compared to 4.01% for the first quarter of 2013. The expansion in NIM reflects higher yielding loan assets and the collection of interest from non-accrual loans.
  • Total assets increased to $717.4 million at March 31, 2014, compared to $705.0 million at December 31, 2013, and $664.3 million at March 31, 2013.
  • Gross loans increased 3% to $526.5 million at March 31, 2014, compared to $512.4 million at December 31, 2013 and grew 9% from $483.1 million at March 31, 2013.
  • Nonperforming assets declined to $9.7 million, or 1.35% of total assets, at March 31, 2014, compared to $10.0 million, or 1.42% of total assets in the preceding quarter, and $17.3 million, or 2.61% of total assets at March 31, 2013. Classified loans increased to $16.8 million, or 3.23% of gross loans, at March 31, 2014, due to the downgrade of two commercial real estate loans totaling $4.3 million. Classified loans totaled $12.8 million, or 2.52% of gross loans at December 31, 2013, compared to $21.7 million at March 31, 2013.
  • Net charge-offs totaled $71,000 for the first quarter 2014, compared to $446,000 in the preceding quarter and $10,000 for first quarter 2013. The ratio of loans on accruing status 30 - 89 days delinquent to total loans remained low at 0.15%, at March 31, 2014, compared to 0.28% for the preceding quarter and 0.27% for March 31, 2013.
  • Allowance for loan losses ("ALL") was 1.60% of gross loans at March 31, 2014, compared to 1.65% of gross loans, at December 31, 2013, and 1.98% of gross loan at March 31, 2013. The decline in ALL from the year ago quarter reflects the general improvement in credit metrics.
  • Reflecting the improving mix of deposits, the average cost of deposits and borrowings fell 2 basis points to 0.44%, from the 0.46% in fourth quarter 2013, and dropped 17 basis points from 0.61% in first quarter 2013.
  • Capital levels exceeded regulatory requirements for a well-capitalized financial institution, with a total risk-based capital ratio of 13.88% and a leverage ratio of 10.02%, at quarter end.

"After delivering four consecutive years of profitability, we are delighted to start 2014 with another successful quarter. Our results demonstrate the core earnings power of our franchise and the value inherent in the financial solutions we bring to our customers here in Western Washington and Oregon," said Dennis A. Long, President & Chief Executive Officers, Pacific Financial Corporation. "At the same time, the disruption caused by recent banking mergers in our marketplace continues to provide opportunities to attract both experienced bankers and new business clients. In support of these efforts, we have applied to convert our Vancouver, WA loan production office to a full-service branch."

"Our recent adoption of mobile deposit confirms our dedication to providing convenience and expanded access to banking services to our customers," said Denise Portmann, President and Chief Executive Officer of Bank of the Pacific. "Embracing this technology also supports our commitment to growing our deposit franchise with core checking accounts. At the same time, we continue to dedicate resources to enhancing systems designed to protect our customers' proprietary information.

"Asset quality continues to improve from year ago levels, allowing us to reduce our credit resolution costs. As a result, we are focusing more of our energies towards loan production," Portmann explained. "Our capital base remains strong and capable of supporting our prudent growth plans. We view this growth as a primary means to more efficiently use our existing infrastructure. In a related matter, we have reduced personnel costs in concert with the decline in residential real estate lending over the last several quarters."

Management continues to execute strategies to build on a platform for sustainable profitability. Recent accomplishments include:

  • Implemented an established succession plan with the appointment of Denise Portmann as President & CEO of Bank of the Pacific and Director of Pacific Financial Corporation; hired seasoned financial executive, Douglas N. Biddle as Chief Financial Officer of Bank of the Pacific, and appointed highly-respected business leader Lori Reece to the Board Directors of Pacific Financial Corporation.
  • Added experienced and well-respected commercial banking professionals in the Whatcom and Clark Counties, WA markets.
  • Applied for regulatory approval to convert our Vancouver, WA loan production office to a full-service branch.
  • Expanded convenience and technology to our customers through the unveiling of mobile deposit via smart phone.
  • Achieved sustained reductions in other-real-estate-owned, resulting in continued declines in nonperforming assets to total assets.
  • Reduced personnel costs associated with residential mortgage lending activities commensurate with the decline in this business line.

OPERATING RESULTS

Net interest income for first quarter 2014 increased from the fourth quarter 2013 and the first quarter in the prior year. This increase was primarily due to the growth in earning assets. Changes in the balance sheet mix also contributed to increases in net interest income during these periods. Loan balances increased due to the production generated predominately within the Company's primary market area of Western Washington. Investment securities and fed funds sold declined as a proportion of the balance sheet in first quarter 2014, due to the strong loan demand during the past two quarters. Funding costs declined further due to the shift in mix toward non-interest bearing and lower-cost deposits. As a result, the net interest margin improved during the quarter. Non-interest income continued to decrease, primarily due to the reduction in income associated with residential real estate lending. Correspondingly, non-interest expenses declined compared to the first quarter of 2013, mainly as a result of a reduction in personnel costs related to the residential real estate lending.

Certain reclassifications have been made to the December 31, 2013 and March 31, 2013 financial table presentations to conform to current year presentations. These reclassifications have no effect on previously reported net income per share.

INCOME STATEMENT OVERVIEW
(Unaudited)
(Dollars in Thousands, Except for Loss per Share Data)
For the Three
Months Ended
March 31, 2014
For the Three
Months Ended
December 31, 2013
$ Change %
Change
For the Three
Months Ended
March 31, 2013
$ Change %
Change
Interest and dividend income $ 7,085 $ 6,814 $ 271 4% $ 6,271 $ 814 13%
Interest expense 530 563 (33) -6% 689 (159) -23%
Net interest income 6,555 6,251 304 5% 5,582 973 17%
Loan loss provision -- -- -- -- --
Non-interest income 1,608 1,922 (314) -16% 2,626 (1,018) -39%
Non-interest expense 6,830 7,122 (292) -4% 7,419 (589) -8%
INCOME BEFORE PROVISION FOR INCOME TAXES 1,333 1,051 282 27% 789 544 69%
PROVISION FOR INCOME TAXES 305 262 43 16% 88 217 247%
NET INCOME $ 1,028 $ 789 $ 239 30% $ 701 $ 327 47%
INCOME PER COMMON SHARE:
BASIC (1) $ 0.10 $ 0.08 $ 0.02 25% $ 0.07 $ 0.03 43%
DILUTED (1) $ 0.10 $ 0.08 $ 0.02 25% $ 0.07 $ 0.03 43%
Average common shares outstanding - basic (1)
Average common shares outstanding - diluted (1)

The following table provides the reconciliation of net income to pre-tax, pre-credit operating income (non-GAAP) for the periods presented:

Reconciliation of Non-GAAP Measure:
Non-GAAP Operating Income
(Dollars in Thousands)
For The Three Months Ended March 31,
2014
December 31,
2013
$ Change %
Change
March 31,
2013
$ Change %
Change
Net income $ 1,028 $ 789 $ 239 30% $ 701 $ 327 47%
Provision for loan losses -- -- -- 0% -- -- 0%
Other real estate owned write-downs 12 310 (298) -96% 352 (340) -97%
Other real estate owned operating costs 61 132 (71) -54% 84 (23) -27%
Provision for income taxes 305 262 43 16% 88 217 247%
Pre-tax, pre-credit cost operating income $ 1,406 $ 1,493 $ (87) -6% $ 1,225 $ 181 15%
Reconciliation of Non-GAAP Measure:
Tax Equivalent and Non Taxable Net Income
(Dollars in Thousands)
For the Three Months ended March 31,
2014
December 31,
2013
$ Change %
Change
March 31,
2013
$ Change %
Change
Net interest income $ 6,555 $ 6,251 $ 304 5% $ 5,582 $ 973 17%
Tax equivalent adjustment for municipal loan interest 46 47 (1) -2% 57 (11) -19%
Tax equivalent adjustment for municipal bond interest 118 121 (3) -2% 137 (19) -14%
Tax equivalent net interest income 6,719 6,419 300 5% 5,776 943 16%
Provision for loan losses -- -- -- 0% -- -- 0%
Non-interest income 1,608 1,922 (314) -16% 2,626 (1,018) -39%
Non-interest expense 6,830 7,122 (292) -4% 7,419 (589) -8%
Provision for income taxes 305 262 43 16% 88 217 247%
Tax equivalent net income 1,192 957 235 25% 895 297 33%
Accumulative tax adjustment (164) (168) 4 -2% (194) 30 -15%
Common stock dividends -- -- -- 0% -- -- 0%
Net income $ 1,028 $ 789 $ 235 30% $ 701 $ 327 47%
Non-GAAP financial measures have inherent limitations, are not required to be uniformly applied, and are not audited.
Management believes that presentation of this non-GAAP financial measure provides useful information frequently used by shareholders in the evaluation of a company.

Non-GAAP financial measures have inherent limitations, are not required to be uniformly applied, and are not audited. Management believes that presentation of these non-GAAP financial measures provide useful information frequently used by shareholders in the evaluation of a company. Non-GAAP financial measures have limitations as analytical tools and should not be considered in isolation or as a substitute for analyses of results as reported under GAAP.

Noninterest Income

Noninterest income for the first quarter 2014 was down compared to the fourth quarter 2013 and first quarter 2013. Service charge income on deposit accounts remained relatively unchanged during these periods. Gains on sale of residential mortgage loans and related fee income continued to decline with the significant pullback in mortgage activity due to the rapid rise in interest rates beginning in mid-2013. In addition, gains on sales of securities were taken in the first quarter of 2014 and 2013 for the purpose of adjusting the mix of securities to mitigate the impact of changes in market rates on the value of the portfolio. A small OTTI impairment charge was expensed during first quarter 2014 to reflect a reduction in fair value of a private-label CMO investment security.

Noninterest income
(Unaudited)
(Dollars in Thousands)
For The Three Months Ended
March 31,
2014
December 31,
2013
$ Change % Change March 31,
2013
$ Change % Change
Service charges on deposit accounts $ 435 $ 451 $ (16) -3.5% $ 410 $ 25 6%
Net (loss) on sale of other real estate owned (36) (3) (33) 1100.0% (20) (16) 80%
Net gains from sales of loans 628 865 (237) -27.4% 1,509 (881) -58%
Net gains on sales of securities available for sale 52 4 48 1200.0% 58 (6) -10%
Net other-than-temporary impairment (net of $15, $0, and $0, respectively recognized other comprehensive income before taxes) (45) -- (45) -100.0% -- (45) -100.0%
Earnings on bank owned life insurance 111 94 17 18.1% 121 (10) -8%
Other operating income
Fee income 364 419 (55) 466 (102) -22%
Income from other real estate owned 11 16 (5) 15 (4) -27%
Other non-interest income 88 77 11 14.3% 67 21 31%
Total non-interest income $ 1,608 $ 1,923 $ (315) -16.4% $ 2,626 $ (1,018) -39%

Noninterest Expense

Noninterest expense for the three months ended March 31, 2014, declined compared to fourth quarter 2013, primarily due to decreases in OREO write-downs and expenses and professional service costs associated with credit resolution activities. These declines were partially offset by increases in payroll taxes normally experienced at the beginning of a calendar year and annual salary increases granted during the quarter. In addition, other noninterest expense grew primarily due to one-time costs associated with internet banking upgrades. Noninterest expense for first quarter 2014 also declined versus the quarter ended March 31, 2013. This decrease was primarily due to a reduction of $471,000 in personnel costs associated with the decline in residential real estate loan activity referred to above. Total costs associated with OREO and related third-party loan expenses also decreased due to the decline in OREO balances and stabilization in real estate valuations. This was partially offset by an increase in occupancy and equipment expense primarily associated with the acquisition of three branches from Sterling Savings Bank in June 2013 and the opening of the Warrenton, OR branch in October 2013.

Noninterest expense
(Unaudited)
(Dollars in Thousands)
For The Three Months Ended
March 31,
2014
December 31,
2013
$ Change % Change March 31,
2013
$ Change % Change
Salaries and employee benefits $ 4,055 $ 4,030 $ 25 1% $ 4,386 $ (331) -8%
Occupancy 506 501 5 1% 413 93 23%
Equipment 252 241 11 5% 191 61 32%
Data processing 433 444 (11) -2% 430 3 1%
Professional services 185 209 (24) -11% 262 (77) -29%
Other real estate owned write-downs 12 310 (298) -96% 352 (340) -97%
Other real estate owned operating costs 61 132 (71) -54% 84 (23) -27%
State taxes 103 103 0 0% 123 (20) -16%
FDIC assessments 128 133 (5) -4% 130 (2) -2%
Other non-interest expense:
Director fees 56 60 (4) -7% 45 11 24%
Communication 37 43 (6) -14% 47 (10) -21%
Advertising 78 95 (17) -18% 78 0 0%
Professional liability insurance 23 22 1 5% 23 0 0%
Amortization 95 104 (9) -9% 96 (1) -1%
Other non-interest expense 806 694 112 16% 759 47 6%
Total non-interest expense $ 6,830 $ 7,121 $ (291) -4% $ 7,419 $ (589) -8%

Income Taxes

The Company recorded an income tax provision for the three months ended March 31, 2014, December 31, 2013, and March 31, 2013. The amount of the provision for each period was commensurate with the estimated tax liability associated with the net income earned during the period.

As of March 31, 2014, the Company maintained a deferred tax asset balance of $4.1 million. The Company believes it will be fully utilized in the normal course of business, thus no valuation allowance is maintained against this asset.

SUMMARY BALANCE SHEET OVERVIEW
(Unaudited)
(Dollars in Thousands)
March 31, December 31, % March 31, %
2014 2013 $ Change Change 2013 $ Change Change
Assets:
Cash and cash equivalents $ 35,619 $ 35,948 $ (329) -1% $ 46,908 $ (11,289) -24%
Interest-bearing certificates of deposit 2,727 2,727 0 0% 2,235 492 22%
Federal Home Loan Bank stock, at cost 2,985 3,013 (28) -1% 3,098 (113) -4%
Investment securities 97,239 98,276 (1,037) -1% 77,291 19,948 26%
Mortgage loans held-for-sale 7,997 7,765 232 3% 11,937 (3,940) -33%
Gross loans, net of deferred fees 518,552 504,666 13,886 3% 471,171 47,381 10%
Allowance for loan losses (8,288) (8,359) 71 -1% (9,348) 1,060 -11%
Net loans 510,264 496,307 13,957 3% 461,823 48,441 10%
Other assets 60,609 61,003 (394) -1% 60,977 (368) -1%
Total assets $ 717,440 $ 705,039 $ 12,401 2% $ 664,269 $ 53,171 8%
Liabilities and shareholders' equity
Total deposits $ 620,456 $ 607,347 $ 13,109 2% $ 569,195 $ 51,261 9%
Accrued interest payable 166 167 (1) -1% 205 (39) -19%
Borrowings 23,403 23,403 0 0% 23,403 0 0%
Other liabilities 4,820 6,985 (2,165) -31% 4,128 692 17%
Shareholders' equity 68,595 67,137 1,458 2% 67,338 1,257 2%
Total liabilities and shareholders' equity $ 717,440 $ 705,039 $ 12,401 2% $ 664,269 $ 53,171 8%
Cash and Cash Equivalents and Investment Securities
(Unaudited)
(Dollars in Thousands)
March 31,
2014
% of
Total
December 31,
2013
% of
Total
$ Change % Change March 31,
2013
% of
Total
$ Change % Change
Cash and due from banks $ 15,747 11% $ 12,214 9% $ 3,533 29% $ 11,088 9% $ 4,659 42%
Cash equivalents:
Interest-bearing deposits 19,872 14% 23,734 17% (3,862) -16% 35,820 28% (15,948) -45%
Interest-bearing certificates of deposit 2,727 2% 2,727 2% -- 0% 2,235 2% 492 22%
Total cash equivalents 38,346 28% 38,675 28% (329) -1% 49,143 38% (10,797) -22%
Investment securities:
Collateralized mortgage obligations: agency issued 37,567 27% 38,791 28% (1,224) -3% 20,007 15% 17,560 45%
Collateralized mortgage obligations: non-agency issued 1,974 1% 2,011 1% (37) -2% 2,440 2% (466) -23%
Mortgage-backed securities: agency issued 13,182 10% 13,548 10% (366) -3% 8,861 7% 4,321 32%
U.S. Government and agency securities 9,828 7% 8,811 6% 1,017 12% 5,956 5% 3,872 44%
State and municipal securities 34,688 25% 34,133 24% 555 2% 37,440 29% (2,752) -8%
Corporate bonds -- 0% 982 1% (982) -100% 2,587 2% (2,587) -263%
FHLB Stock 2,985 2% 3,013 2% (28) -1% 3,098 2% (113) -4%
Total investment securities 100,224 72% 101,289 72% (1,065) -1% 80,389 62% 19,835 25%
Total cash equivalents and investment securities $ 138,570 100% $ 139,964 100% $ (1,394) -1% $ 129,532 100% $ 9,038 7%
Total cash equivalents and investment securities as a % of total assets 19% 20% 19%
Investment securities and interest-bearing certificates of deposit
(Unaudited)
(Dollars in Thousands)
For the Three Months Ended March 31,
2014
December 31,
2013
$ Change % Change March 31,
2013
$ Change % Change
Balance beginning of period $ 104,016 $ 98,905 $ 5,111 5% $ 73,404 $ 30,612 42%
Principal purchases 5,741 9,879 (4,138) -42% 13,681 (7,940) -58%
Proceeds from sales (4,849) (595) (4,254) 715% (1,171) (3,678) 314%
Principal paydowns, maturities, and calls (2,259) (3,310) 1,051 -32% (2,941) 682 -23%
Gains on sales of securities 62 4 58 1450% 58 4 7%
Losses on sales of securities (10) -- (10) 100% -- (10) 100%
OTTI loss writedown (45) -- (45) 100% -- (45) 100%
Change in unrealized gains (loss) before tax 555 (576) 1,131 -196% (195) 750 -385%
Amortization and accretion of discounts and premiums (260) (291) 31 -11% (212) (48) 23%
Total investment portfolio $ 102,951 $ 104,016 $ (1,065) -1% $ 82,624 $ 20,327 25%

Liquidity remains strong based on the current level of combined cash equivalents and investment securities. In an effort to support our net interest income and margin, we reduced our cash equivalent balances, while increasing our investment securities portfolio, since March 31, 2013, primarily through the purchase of U.S. government agency and government guaranteed mortgage-backed securities. The purchases were primarily of 10 and 15-year fully amortized U.S. agency mortgage-backed securities, for which we expect to have limited extension risk. We also purchased municipal securities rated AA or better with maturities generally ranging from 5 to 15 years during this period. The expected modified duration (adjusted for calls, consensus pre-payment speeds and rate adjustment dates) of the investment portfolio was 4.2 years at March 31, 2014, 4.2 years at December 31, 2013 and 4.1 years at March 31, 2013.

LOANS

Loans by category
(Unaudited) March 31, % of December 31, % of $ March 31, % of $
(Dollars in Thousands) 2014 Gross Loans 2014 Gross Loans Change % Change 2013 Gross Loans Change % Change
Commercial and agricultural $ 101,971 20% $ 104,111 21% $ (2,140) -2% $ 96,642 21% $ 5,329 6%
Real estate:
Construction and development 30,765 6% 29,096 6% 1,669 6% 32,496 7% (1,731) -5%
Residential 1-4 family 89,244 17% 87,762 18% 1,482 2% 77,771 17% 11,473 15%
Multi-family 18,982 4% 17,520 4% 1,462 8% 10,150 2% 8,832 87%
Commercial real estate -- owner occupied 112,771 22% 105,594 21% 7,177 7% 109,682 24% 3,089 3%
Commercial real estate -- non owner occupied 119,803 23% 117,294 24% 2,509 2% 109,676 24% 10,127 9%
Farmland 22,940 4% 23,698 5% (758) -3% 23,746 5% (806) -3%
Consumer 23,156 5% 20,728 4% 2,428 12% 12,023 3% 11,133 93%
Gross loans 519,632 505,803 13,829 3% 472,186 47,446 10%
Less: allowance for loan losses (8,288) -2% (8,359) -2% 71 -1% (9,348) -2% 1,060 -11%
Less: deferred fees (1,080) 0% (1,137) 0% 57 -5% (1,015) 0% (65) 6%
Loans, net $ 510,264 $ 496,307 $ 13,957 3% $ 461,823 $ 48,441 10%

Loan portfolio growth continues to be well diversified, with higher balances in most lending categories, with the exception of construction and development and farmland. The recent loan growth was generated predominately within our Western Washington market. The portfolio does include $36.2 million in purchased government-guaranteed commercial and commercial real estate loans. In addition, the portfolio contains $14.1 million in indirect consumer loans to finance luxury and classic cars as a part of a strategy to diversify the loan portfolio. These loans are to individuals with high credit scores and have exhibited very low loss experience.

"Interest and fees earned on our loan portfolio are our primary source of revenue," said Doug Biddle, Executive Vice President and Chief Financial Officer. "Our ability to achieve loan growth will be dependent on many factors, including the effects of competition, economic conditions in our markets, retention of key personnel and valued customers, and our ability to close loans in the pipeline." The Company manages new loan origination volume using concentration limits that establish maximum exposure levels by designated industry segment, real estate product types, geography, and single borrower limits.

DEPOSITS

Deposits
(Unaudited)
(Dollars in Thousands) March 31,
2014
Percent of
Total
December 31,
2013
Percent of
Total
$ Change March 31,
2013
Percent of
Total
$ Change
Interest-bearing demand and money market $ 263,953 42.5% $ 262,848 43.3% $ 1,105 $ 242,931 42.7% $ 21,022
Savings 78,055 12.6% 73,412 12.1% 4,643 64,360 11.3% 13,695
Time deposits 125,532 20.2% 126,059 20.8% (527) 133,037 23.4% (7,505)
Total interest-bearing deposits 467,540 75.4% 462,319 76.1% 5,221 440,328 77.4% 27,212
Non-interest bearing demand 152,916 24.6% 145,028 23.9% 7,888 128,867 22.6% 24,049
Total deposits $ 620,456 100.0% $ 607,347 100.0% $ 13,109 $ 569,195 100.0% $ 51,261

Total deposits grew during first quarter 2014, a trend that continued from recent quarters. This increase is due to recent success in acquiring business deposit relationships in conjunction with the growth in lending achieved over the past year. Time deposits declined as a percentage of total deposits in the most recent quarter versus the linked quarter and the like quarter last year. The combination of our efforts to reduce higher-cost time deposits through lowering interest rates paid and offering non-insured deposit products, when appropriate, has reduced the average rate paid on total deposits in first quarter 2014 from fourth quarter 2013 and the like quarter in 2013.

Total brokered deposits were $24.2 million at March 31, 2014, which included $3.3 million via reciprocal deposit arrangements. In addition, the Company's funding structure contains $10.0 million in borrowings from the Federal Home Loan Bank. "We view the prudent use of brokered deposits and borrowings to be an appropriate funding tool to support interest rate risk mitigation strategies," Biddle added.

CAPITAL

Pacific Financial Corporation, and its subsidiary Bank of the Pacific, met the thresholds to be considered "Well-Capitalized" under published regulatory standards for total risk-based capital, Tier 1 risk-based capital and Tier 1 leverage capital at March 31, 2014. Capital ratios have reduced slightly as compared to the linked quarter and the first quarter of 2013, primarily due to the successful execution of the Company's growth strategy and shift in the balance sheet mix to higher risk-weighted assets, such as loans.

The Board of Governors of the Federal Reserve System ("Federal Reserve") and the FDIC have established minimum requirements for capital adequacy for bank holding companies and state non-member banks. For more information on these topics and the proposed Basel III capital framework, see the discussions under the subheadings "Capital Adequacy" in the section "Business" included in Item 1, of the Company's 2013 Form 10-K. The following table summarizes the capital measures of the Company and the Bank, respectively, at the dates listed below:

The total risk based capital ratios of the Company include $13.4 million of junior subordinated debentures, all of which qualified as Tier 1 capital at March 31, 2014, under guidance issued by the Federal Reserve. As provided in the Dodd-Frank Act, the Company expects to continue to rely on these junior subordinated debentures as part of its regulatory capital.

March 31,
2014
December 31,
2013
Change March 31,
2013
Change Regulatory Minimum
to be "Adequately
Capitalized"
Regulatory
Minimum to be
"Well Capitalized"
greater than or equal to greater than or equal to
Pacific Financial Corporation
Total risk-based capital ratio 13.88% 14.11% (0.23) 15.57% (1.69) 8%
Tier 1 risk-based capital ratio 12.62% 12.85% (0.23) 14.31% (1.69) 4%
Leverage ratio 10.02% 9.83% 0.19 10.69% (0.67) 4%
Bank of the Pacific
Total risk-based capital ratio 13.93% 14.03% (0.10) 15.60% (1.67) 8% 10%
Tier 1 risk-based capital ratio 12.67% 12.78% (0.11) 14.34% (1.67) 4% 6%
Leverage ratio 9.99% 9.77% 0.22 10.71% (0.72) 4% 5%
FINANCIAL PERFORMANCE OVERVIEW
(Unaudited)
(Dollars in Thousands, Except per Share Data)
For The Three Months Ended
March 31,
2014
December 31,
2013
Change March 31,
2013
Change
Selective quarterly performance ratios
Return on average assets, annualized 0.59% 0.45% 0.14 0.44% 0.15
Return on average equity, annualized 6.12% 4.53% 1.59 4.23% 1.89
Efficiency ratio (1) 83.67% 87.14% (3.47) 90.39% (6.72)
Share and per share information
Average common shares outstanding - basic 10,182,083 10,121,738 60,345 10,121,853 60,230
Average common shares outstanding - diluted 10,272,341 10,189,888 82,453 10,162,075 110,266
Basic income per common share 0.10 0.08 0.02 0.07 0.03
Diluted income per common share 0.10 0.08 0.02 0.07 0.03
Book value per common share (2) 6.74 6.63 0.11 6.65 0.09
Tangible book value per common share (3) 5.34 5.38 (0.04) 5.33 0.01
(1) Non-interest expense divided by net interest income plus non-interest income.
(2) Book value is calculated as the total common equity divided by the period ending number of common shares outstanding.
(3) Tangible book value is calculated as the total common equity less total intangible assets and liabilities divided by the period ending number of common shares outstanding.
NET INTEREST MARGIN
(Annualized, tax-equivalent basis)
(Unaudited)
For The Three Months Ended
March 31,
2014
December 31,
2013
Change March 31,
2013
Change
Selective quarterly performance ratios
Yield on average gross loans (1) 5.13% 4.97% 0.16 5.11% 0.02
Yield on average investment securities (1) 2.37% 2.00% 0.37 1.91% 0.46
Cost of average interest bearing deposits 0.37% 0.39% (0.02) 0.53% (0.16)
Cost of average borrowings 1.96% 1.95% 0.01 2.11% (0.15)
Cost of average total deposits and borrowings 0.34% 0.36% (0.02) 0.49% (0.15)
Cost of average interest-bearing liabilities 0.44% 0.46% (0.02) 0.61% (0.17)
Yield on average interest-earning assets 4.61% 4.33% 0.28 4.49% 0.12
Cost of average interest-bearing liabilities 0.44% 0.46% (0.02) 0.61% (0.17)
Net interest spread 4.17% 3.87% 0.30 3.88% 0.29
Net interest margin (1) 4.27% 3.98% 0.29 4.01% 0.26
(1) Tax-exempt income has been adjusted to a tax equivalent basis at a 34% rate.

Net Interest Margin

Net interest margin for first quarter 2014 increased as compared to fourth quarter and first quarter 2013, predominantly due to a shift in the mix of earning assets toward higher-yielding loans. The margin was also favorably impacted by the lower cost of interest bearing liabilities, as previously discussed. The growth in the proportion of noninterest bearing deposits over the past several quarters has supported the improvement in net interest margin, as well. In first quarter 2014, loan yields and net interest margin were enhanced by 7 basis points, respectively due to the collection of a net of $108,000 in non-accrual interest. Despite this one-time recapture of interest, we have been able to sustain loan yields while growing the loan portfolio. The improvement in yields on investment securities also contributed to the increase in net interest margin between the periods, partially due to the decline in amortization expense associated with the decrease in prepayment speeds of mortgage-backed securities during the current period. In addition, we reduced the proportion of lower yielding cash-equivalent investments and increased the proportion of relatively higher-yielding federal government guaranteed and municipal securities, as noted above.

For the Three Months Ended
March 31, 2014 December 31, 2013 March 31, 2013
Average
Balance
Interest
Income or
Expense
Average
Yields or
Rates
Average
Balance
Interest
Income or
Expense
Average
Yields or
Rates
Average
Balance
Interest
Income or
Expense
Average
Yields or
Rates
(Dollars in 000's)
ASSETS:
Interest earning balances due from banks $ 3,042 $ 1 0.13% $ 2,641 $ 1 0.15% $ 3,188 $ 1 0.13%
Federal funds sold 17,639 21 0.48% 33,765 29 0.34% 35,401 29 0.33%
Investments - taxable 67,961 339 2.02% 67,914 307 1.79% 43,101 104 0.98%
Investments - nontaxable 32,504 347 4.33% 32,698 355 4.31% 32,119 403 5.09%
Gross loans (1) 511,200 6,492 5.15% 494,134 6,228 5.00% 456,954 5,833 5.18%
Loans held for sale 5,436 49 3.66% 8,091 63 3.09% 13,390 97 2.94%
Total interest earning assets 637,782 7,249 4.61% 639,243 6,983 4.33% 584,153 6,467 4.49%
Allowance for loan losses (8,388) (8,612) (9,367)
Other assets 72,489 73,453 71,230
Total assets $ 701,883 $ 704,084 $ 646,016
LIABILITIES AND SHAREHOLDERS' EQUITY:
Interest-bearing deposits $ 336,201 141 0.17% $ 329,217 153 0.18% $ 300,065 199 0.27%
Time deposits 126,841 276 0.88% 131,245 295 0.89% 136,663 367 1.09%
FHLB borrowings 10,000 53 2.15% 10,000 54 2.14% 10,200 61 2.43%
Junior subordinated debentures 13,403 60 1.82% 13,403 61 1.81% 13,403 62 1.88%
Total interest bearing liabilities 486,445 530 0.44% 483,865 563 0.46% 460,331 689 0.61%
Non-interest-bearing deposits 140,980 145,092 112,945
Other liabilities 5,196 4,963 4,510
Equity 68,125 69,051 67,284
Total liabilities and shareholders' equity $ 700,746 $ 702,971 $ 645,070
Net interest income (3) $ 6,719 $ 6,420 $ 5,778
Net interest spread 4.17% 299 3.87% 941 3.88%
Average yield on earning assets (2) (3) 4.61% 4.33% 4.49%
Interest expense to earning assets 0.19% 0.20% 0.27%
Net interest income to earning assets (2) (3) 4.27% 3.98% 4.01%
Reconciliation of Non-GAAP measure:
Tax Equivalent Net Interest Income
Net interest income $ 6,555 $ 6,251 $ 5,582
Tax equivalent adjustment for municipal loan interest 46 47 57
Tax equivalent adjustment for municipal bond interest 118 121 137
Tax equivalent net interest income $ 6,719 $ 6,419 $ 5,776
Non-GAAP financial measures have inherent limitations, are not required to be uniformly applied, and are not audited.
Management believes that presentation of this non-GAAP measure provides useful information frequently used by shareholders in the evaluation of a company.
Non-GAAP financial measures have limitations as analytical tools and should not be considered in isolation or as a substitute for analyses of results as reported under GAAP.
(1) Non-accrual loans of approximately $7.3 million at 3/31/14, $7.2 million at 12/31/2013, $13.1 million for 3/31/2013 are included in the average loan balances.
(2) Loan interest income includes loan fee income of $149,000, $151,000, and $95,000 for the three months ended 3/31/2014, 12/31/2013, and 3/31/2013, respectively.
(3) Tax-exempt income has been adjusted to a tax equivalent basis at a 34% effective rate. The amount of such adjustment was an addition to recorded pre-tax income of $164,000, $168,000, and $194,000 for the three months ended March 31, 2014, December 31, 2013, and March 31, 2013, respectively.
For the Three Months Ended For the Three Months Ended
` March 31, 2014 vs. December 31, 2013 March 31, 2014 vs. March 31, 2013
Increase (Decrease) Due To Increase (Decrease) Due To
(Dollars in 000's) Net Net
Volume Rate Change Volume Rate Change
ASSETS:
Interest earning balances due from banks $ -- $ -- $ -- $ -- $ -- $ --
Federal funds sold (14) 6 (8) (14) 6 (8)
Investments - taxable -- 32 32 60 175 235
Investments - nontaxable (2) (6) (8) 5 (61) (56)
Gross loans 210 54 264 693 (34) 659
Loans held for sale (20) 6 (14) (58) 10 (48)
Total interest earning assets $ 174 $ 92 $ 266 $ 686 $ 96 $ 782
LIABILITIES AND SHAREHOLDERS' EQUITY:
Interest-bearing deposits $ 3 $ (15) $ (12) $ 24 $ (82) $ (58)
Time deposits (10) (9) (19) (26) (65) (91)
Short-term borrowings -- (1) (1) (1) (7) (8)
Long-term borrowings -- (1) (1) 0 (2) (2)
Total interest bearing liabilities (7) (26) (33) (3) (156) (159)
Net increase (decrease) in net interest income $ 181 $ 118 $ 299 $ 689 $ 252 $ 941
SUMMARY AVERAGE BALANCE SHEETS
(Unaudited)
(Dollars in Thousands)
Averages for the Three Months Ended March 31, December 31, March 31,
2014 2013 $ Change % Change 2013 $ Change % Change
Assets:
Cash and due from banks $ 11,989 $ 12,105 $ (116) -1% $ 10,732 $ 1,257 12%
Interest-bearing due from banks 315 343 (28) -8% 347 (32) -9%
Federal funds sold 17,639 33,765 35,401
Investment securities 103,192 102,910 282 0% 78,061 25,131 32%
Loans, net of deferred loan fees 515,499 501,112 14,387 3% 469,398 46,101 10%
Allowance for loan losses (8,388) (8,612) 224 -3% (9,367) 979 -10%
Net loans 507,111 492,500 14,611 3% 460,031 47,080 10%
Other assets 60,500 61,348 (848) -1% 60,498 2 0%
Total assets $ 700,746 $ 702,971 $ (2,225) 0% $ 645,070 $ 55,676 9%
Liabilities:
Total deposits $ 604,022 $ 605,554 $ (1,532) 0% $ 549,673 $ 54,349 10%
Borrowings 23,403 23,403 0 0% 23,603 (200) -1%
Other liabilities 5,196 4,963 233 5% 4,510 686 15%
Total liabilities 632,621 633,920 (1,299) 0% 577,786 54,835 9%
Equity:
Common equity 68,125 69,051 (926) -1% 67,284 841 1%
Total equity 68,125 69,051 (926) -1% 67,284 841 1%
Total liabilities and shareholders' equity $ 700,746 $ 702,971 $ (2,225) 0% $ 645,070 $ 55,676 9%

ASSET QUALITY

At March 31, 2014, classified loans increased by $4.0 million, to $16.8 million, or 3.23% of gross loans, at March 31, 2014, primarily due to the downgrade of two commercial real estate relationships totaling $4.3 million. Classified loans totaled $16.8 million, or 3.23% of gross loans, at March 31, 2014, compared to $12.8 million, or 2.52% of gross loans, for the fourth quarter of 2013, and remained below $21.7 million, or 4.59% of gross loans for the first quarter of 2013. Nonperforming loans have continued to be primarily in the commercial real estate loan category.

"We monitor delinquencies, defined as loans on accruing status 30-89 days past due, as an indicator of future nonperforming assets," Biddle continued. Total 30-89 days delinquencies also continue to remain below 0.50%, mirroring the improvement in overall credit quality noted previously.

At March 31, 2014, total nonperforming assets were down compared to December 31, 2013 and March 31, 2013. Nonperforming assets also declined during this period in terms of percentage of total assets. The amount of additions to nonperforming loans in the current period of approximately $508,000 were virtually offset by pay offs and charge-offs during the period. As such, nonperforming loans remained relatively unchanged in the current quarter as compared to the linked quarter, but were below levels at March 31, 2013. Reductions in nonperforming assets continued primarily through sales of OREO, as write-downs were minimal during the period. Nonperforming assets include an $1.8 million commercial real estate loan supported 100% by a government guarantee.

Adversely classified loans
(Unaudited)
(Dollars in Thousands)
March 31,
2014
December 31,
2013
$
Change
%
Change
March 31,
2013
$
Change
%
Change
Rated substandard or worse $ 6,842 $ 2,842 $ 4,000 141% $ 3,539 $ 3,303 93%
Impaired 9,952 9,922 30 0% 18,155 (8,203) -45%
Total adversely classified loans* $ 16,794 $ 12,764 $ 4,030 32% $ 21,694 $ (4,900) -23%
Gross loans $ 519,632 $ 505,803 $ 13,829 3% $ 472,186 $ 47,446 10%
Adversely classified loans to gross loans 3.23% 2.52% 0.71% 4.59% -1.36%
Allowance for loan losses $ 8,288 $ 8,359 $ (71) -1% $ 9,348 $ (1,060) -11%
Allowance for loan losses as a percentage of adversely classified loans 49.35% 65.49% -16.14% 43.09% 6.26%
Allowance for loan losses to total impaired loans 83.28% 29.75% 53.53% 51.49% 31.79%
* Adversely classified loans are defined as loans having a well-defined weakness or weaknesses related to the borrower's financial capacity or to pledged collateral that may jeopardize the repayment of the debt. They are characterized by the possibility that the Bank may sustain some loss if the deficiencies giving rise to the substandard classification are not corrected. Note that any loans internally rated worse than substandard are included in the impaired loan totals.
30-89 DPD by type
(Unaudited)
(Dollars in Thousands)
March 31,
2014
% of
Category
December 31,
2013
% of
Category
$ Change % Change March 31,
2013
% of
Category
$ Change % Change
Commercial and agricultural $ 32 4.1% $ 14 1.0% $ 18 129% $ 130 10.5% $ (98) -75%
Real estate:
Construction and development -- 0.0% -- 0.0% -- 0% -- 0.0% -- 0%
Residential 1-4 family 180 23.1% 333 24.0% (153) -46% 255 20.6% (75) -29%
Multi-family -- 0.0% -- 0.0% -- 0% -- 0.0% -- 0%
Commercial real estate -- owner occupied 309 39.6% -- 0.0% 309 100% 614 49.7% (305) -50%
Commercial real estate -- non owner occupied 251 32.2% -- 0.0% 251 100% -- 0.0% -- 0%
Farmland -- 875 62.9% (875) -100% 224 18.1% 0 0%
Total real estate $ 740 $ 1,208 $ (468) -39% $ 1,093 $ 0
Consumer 8 1.0% 168 12.1% -160 -95% 13 1.1% -5 -38%
Total loans 30-89 days past due, not in nonaccrual status $ 780 100.0% $ 1,390 100.0% $ -610 -44% $ 1,236 100.0% $ -456 -37%
Delinquent loans to total loans, not in nonaccrual status 0.15% 0.28% 0.27%
Non-performing assets
(Unaudited)
(Dollars in Thousands) March 31,
2014
December 31,
2013
$ Change % Change March 31,
2013
$ Change % Change
Loans on nonaccrual status $ 7,296 $ 7,243 $ 53 1% $ 13,170 $ -5,874 -45%
Loans past due greater than 90 days but not on nonaccrual status -- -- -- -- --
Total non-performing loans 7,296 7,243 53 1% 13,170 -5,874 -45%
Other real estate owned and foreclosed assets 2,386 2,771 -385 -14% 4,148 -1,762 -42%
Total nonperforming assets $ 9,682 $ 10,014 $ -332 -3% $ 17,318 $ -7,636 -44%
Percentage of nonperforming assets to total assets 1.35% 1.42% 2.61%

OREO property disposition activities continued during first quarter 2014, while the level of additional real estate properties taken into the OREO portfolio continued to decline. During first quarter 2014, the Company sold OREO properties with a book value of $448,000, but recorded OREO valuation adjustments lower than that of prior quarters. At March 31, 2014, the OREO portfolio consisted of 18 properties, down in number and balance from both the fourth and first quarters of 2013. The largest balances in the OREO portfolio at the end of the quarter were attributable to commercial properties, followed by residential properties, all of which are located within our market area.

Other real estate owned and foreclosed assets
(Unaudited)
(Dollars in Thousands)
For the Three Months Ended March 31,
2014
% of
Category
December 31,
2013
% of
Category
$ Change % Change March 31,
2013
% of
Category
$ Change % Change
Other real estate owned, beginning of period $ 2,771 116.1% $ 4,334 156.4% $ (1,563) -36% $ 4,678 112.8% $ (1,907) -41%
Transfers from outstanding loans 111 4.7% 140 5.1% (29) -21% 209 5.0% (98) -47%
Improvements and other additions -- 0.0% -- 0.0% -- 0% -- 0.0% -- 0%
Proceeds from sales (448) -18.8% (1,415) -51.1% 967 -68% (367) -8.8% (81) 22%
Net gain (loss) on sales (36) -1.5% (3) -0.1% (33) 1100% (20) -0.5% (16) 80%
Impairment charges (12) -0.5% (285) -10.3% 273 -96% (352) -8.5% 340 -97%
Total other real estate owned $ 2,386 100.0% $ 2,771 100.0% $ (385) -14% $ 4,148 100.0% $ (1,762) -42%
Other real estate owned and foreclosed assets by type
(Unaudited)
(Dollars in Thousands)
March 31,
2014
# of
Properties
December 31,
2013
# of
Properties
$ Change % Change March 31,
2013
# of
Properties
$ Change % Change
Construction, Land Dev & Other Land $ 60 3 $ 121 4 $ (61) -50% $ 1,409 9 $ (1,349) -96%
Farmland -- -- -- -- -- 0% -- -- -- 0%
1-4 Family Residential Properties 789 7 788 5 1 0% 690 6 99 14%
Nonfarm Nonresidential Properties 1,537 8 1,862 11 (325) -17% 2,049 12 (512) -25%
Total OREO by type $ 2,386 18 $ 2,771 20 $ (385) -14% $ 4,148 27 $ (1,762) -42%

ALLOWANCE FOR LOAN LOSSES

The allowance for loan losses continues to decline in concert with the general trend of reduced levels of classified loans, loan delinquencies and other relevant credit metrics. With the reduction in net charge-offs, changes in the loan portfolio composition over the past several years and overall improvement in credit quality, loss factors used in estimates to establish reserve levels have declined commensurately. As such, no provision was made to the allowance for loan losses in first quarter 2014, fourth quarter 2013 or first quarter 2013.

For the quarter ended March 31, 2014, total net loan charge-offs were down compared to the quarter ended December 31, 2013, but up slightly versus the quarter ended March 31, 2013. The charge-offs incurred in the fourth quarter 2013 were primarily centered in three residential real estate relationships. Two of these charge-offs were home equity lines of credit totaling $181,000 to unrelated individuals. The other charge-off relationship included two loans totaling $128,300. The ratio of net loan charge-offs to average gross loans (annualized) for the current quarter was down compared to the linked quarter, but up slightly compared to the first quarter one year ago.

The overall risk profile of the loan portfolio continues to improve, as stated above. However, the trend of future provision for loan losses will depend primarily on economic conditions, growth in the loan portfolio, level of adversely-classified assets, and changes in collateral values.

Allowance for Loan Losses
(Unaudited)
(Dollars in Thousands)
For the Three Months Ended March 31,
2014
December 31,
2013
$
Change
%
Change
March 31,
2013
$
Change
%
Change
Gross loans outstanding at end of period $ 519,632 $ 505,803 $ 13,829 3% $ 472,186 $ 47,446 10%
Average loans outstanding, gross $ 511,200 $ 494,134 $ 17,066 3% $ 456,954 $ 54,246 12%
Allowance for loan losses, beginning of period $ 8,359 $ 8,806 $ (447) -5% $ 9,358 $ (999) -11%
Commercial (17) (91) 74 -81% -- (17) 100%
Commercial Real Estate (7) (7) (5)
Residential Real Estate (40) (358) 318 -89% (10) (30) 300%
Consumer (18) (9) (9) 100% (11) (7) 64%
Total charge-offs (82) (465) 383 -82% (26) (56) 215%
Commercial 1 1 0 0% 10 (9) -90%
Commercial Real Estate 5 6 (1) -17% 5 0 0%
Residential Real Estate 4 10 (6) -60% -- 4 100%
Consumer 1 1 0 0% 1 0 0%
Total recoveries 11 18 (7) -39% 16 (5) -31%
Net charge-offs (71) (447) 376 -84% (10) (61) 610%
Provision charged to income -- -- -- 0% -- -- .
Allowance for loan losses, end of period $ 8,288 $ 8,359 $ (71) -1% $ 9,348 $ (1,060) -11%
Ratio of net loans charged-off to average gross loans outstanding, annualized 0.06% 0.36% -0.30% -83% 0.01% 0.05% 500%
Ratio of allowance for loan losses to gross loans outstanding 1.59% 1.65% -0.06% -4% 1.98% -0.39% -20%

ABOUT PACIFIC FINANCIAL CORPORATION

Pacific Financial Corporation of Aberdeen, Washington, is the bank holding company for Bank of the Pacific, a state chartered and federally insured commercial bank. Bank of the Pacific offers banking products and services to small-to-medium sized businesses and professionals in western Washington and Oregon. As of March 31, 2014, the Company had total assets of $717.4 million and operated sixteen branches in the communities of Grays Harbor, Pacific, Whatcom, Skagit and Wahkiakum counties in the State of Washington, and three branches in Clatsop County, Oregon. The Company also operates loan production offices in the communities of Vancouver, Dupont and Burlington in Washington. Visit the Company's website at www.bankofthepacific.com. Member FDIC.

Cautions Concerning Forward-Looking Statements

This press release contains statements that constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and other laws, including all statements in this release that are not historical facts or that relate to future plans or events or projected results of Pacific Financial Corporation ("Company") and its wholly-owned subsidiary, Bank of the Pacific ("Bank"). These forward-looking statements are subject to risks and uncertainties that could cause actual events or results to differ materially from those projected, anticipated or implied. These risks and uncertainties include various risks associated with growing the Bank and expanding the services it provides, successfully completing and integrating the acquisition of new branches and development of new business lines and markets, competition in the marketplace, general economic conditions, changes in interest rates, extensive and evolving regulation of the banking industry, and many other risks described in the Company's filings with the Securities and Exchange Commission. The most significant of these uncertainties are described in the Company's Annual Report on Form 10-K and subsequent Quarterly Reports on Form 10-Q, which readers of this release are encouraged to review. We undertake no obligation to update or revise any forward-looking statement. Readers of this release are cautioned not to put undue reliance on forward-looking statements.

CONTACT: DENNIS LONG, PRESIDENT & CEO DENISE PORTMANN, PRESIDENT & CEO DOUGLAS BIDDLE, EVP & CFO 360.537.4061 The Cereghino Group IR CONTACT: 206-388-5785Source:Pacific Financial Corporation