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Pacific Financial Corporation Profits Increase 51% Year-Over-Year

ABERDEEN, Wash., Oct. 29, 2014 (GLOBE NEWSWIRE) -- Pacific Financial Corporation (OTCQB:PFLC), the holding company for Bank of the Pacific, today reported net profits increased 51% to $1.4 million, or $0.13 per share, for the third quarter of 2014, compared to $909,000, or $0.09 per share, for the third quarter of 2013. Earnings for the third quarter of 2014 were impacted by increased tax expenses, reflecting a reduction in non-taxable income for the period. Second quarter 2014 earnings were $1.4 million, or $0.14 per share. For the nine months of 2014 net profits increased 29% to $3.8 million, or $0.37 per share, from $2.9 million, or $0.29 per share, for the like period in 2013. Fueling profitability in 2014 was robust loan growth, strong net interest margin and solid credit quality. In 2013, earnings were impacted by a credit to the provision for losses of $450,000, offset by a one-time cost of $395,000 relating to the conversion of three branches purchased from Sterling Savings Bank. All results are unaudited.

"We reported solid profitability this quarter delivering strong performance across key metrics. Profit drivers were growth in loans and increasing core deposits, a strong net interest margin and further enhancements in credit quality," said Dennis A. Long, President and Chief Executive Officer. "Our diversified loan portfolio increased 14%, while non-interest bearing deposits grew 17% from a year ago. In addition nonperforming assets declined 47% from the third quarter of 2013. In the second quarter this year, we announced the expansion of our Vancouver loan production office into a full-service commercial banking center. This is validation of the momentum we are building in this market."

Third Quarter 2014 Highlights (as of, or for the period ended September 30, 2014, except as noted):

  • Year-to-date, EPS increased 28% to $0.37, from $0.29 for the same period in 2013. Earnings per share (EPS) declined by 7% to $0.13, compared to $0.14 in second quarter 2014, primarily due more shares outstanding reflecting the exercise of warrants during the quarter. EPS grew 44% from $0.09 in third quarter 2013.
  • Net interest income increased $86,000, or 1%, to $6.9 million, compared to $6.8 million in second quarter 2014, and grew $867,000, or 14%, from $6.0 million in third quarter 2013. For the first nine months of 2014, net interest income increased $2.7 million, or 15%, to $20.2 million, from $17.5 million for the like period in 2013.
  • Net interest margin (NIM) was 4.13%, compared to 4.28% for the preceding quarter, and 3.88% for third quarter 2013. Year-to-date, net interest margin expanded 23 basis points to 4.22%, compared to 3.99% for the first nine months of 2013.
  • Gross loans grew 13% to $552.1 million, from $486.7 million at September 30, 2013 and increased by $4.8 million, or 1% from $547.3 million at June 30, 2014.
  • Nonperforming assets declined to $6.4 million, or 0.86% of total assets, down from $7.4 million, or 1.03% of total assets, at June 30, 2014 and $12.4 million, or 1.73% of total assets at September 30, 2013.
  • Classified loans increased to $18.4 million, or 3.33% of gross loans, up from $16.0 million, or 2.91% of gross loans, at June 30, 2014, and $13.7 million, or 2.82% of gross loans at September 30, 2013.
  • Net charge-offs totaled $160,000, compared to $73,000 in second quarter 2014 and $156,000 for third quarter 2013. Year-to-date, net charge-offs were $304,000, compared to $102,000 for the first nine months of 2013.
  • Capital levels exceeded regulatory requirements for a well-capitalized financial institution, with a total risk-based capital ratio of 14.06% and a leverage ratio of 10.09% at quarter end.

"We are encouraged by the recent activity in home purchases in the quarter, which has fueled new residential mortgage originations," said Denise Portmann, President and Chief Executive Officer of Bank of the Pacific. "We are also expanding our customized lending offerings to meet the needs of customers whose residence does not conform to secondary-market requirements. With our wide-range of innovative products and services, and a talented and motivated team of exceptional people, we are well positioned to continue to deepen and grow customer relationships, as well as bring in new customers and grow our market share."

OPERATING RESULTS

Net Interest Income

Net interest income for the quarter and nine months ended September 30, 2014, increased from the quarter and nine months ended September 30, 2013. This increase was primarily due to the growth in earning assets, along with changes in the balance sheet mix. Loan balances increased due to the production generated predominately in Western Washington. Investment securities and federal funds sold decreased as a proportion of the balance sheet, due to the strong loan demand during the past several quarters. Funding costs remained low due to the shift in mix toward non-interest bearing and lower-cost deposits, and continued historically low interest rates.

Net interest income for the current quarter increased from the second quarter of 2014, reflecting higher loan balances and lower levels of investments. While funding costs declined slightly when comparing the periods, given the lengthy period of very low interest rates over the past several years, additional reductions in funding costs are becoming more difficult to achieve, as renewing certificates of deposit are receiving rates that are similar to those granted at previous renewals.

INCOME STATEMENT OVERVIEW
(Unaudited)
(Dollars in Thousands, Except for Income per Share Data)
For the Three
Months Ended
September 30, 2014
For the Three
Months Ended
June 30, 2014
$ Change %
Change
For the Three
Months Ended
September 30, 2013
$ Change %
Change
Interest and dividend income $ 7,400 $ 7,337 $ 63 1% $ 6,605 $ 795 12%
Interest expense 518 541 (23) -4% 590 (72) -12%
Net interest income 6,882 6,796 86 1% 6,015 867 14%
Loan loss provision 100 100 -- 0% -- 100 100%
Non-interest income 2,274 2,176 98 5% 2,232 42 2%
Non-interest expense 7,133 7,066 67 1% 7,089 44 1%
INCOME BEFORE PROVISION FOR INCOME TAXES 1,923 1,806 117 6% 1,158 765 66%
PROVISION FOR INCOME TAXES 549 403 146 36% 249 300 120%
NET INCOME $ 1,374 $ 1,403 $ (29) -2% $ 909 $ 465 51%
INCOME PER COMMON SHARE:
BASIC (1) $ 0.13 $ 0.14 $ (0.01) -7% $ 0.09 $ 0.04 44%
DILUTED (2) $ 0.13 $ 0.14 $ (0.01) -7% $ 0.09 $ 0.04 44%
Average common shares outstanding - basic (1) 10,281,745 10,189,386 92,359 1% 10,121,853 159,892 2%
Average common shares outstanding - diluted (2) 10,379,166 10,275,628 103,538 1% 10,194,826 184,340 2%
For the Nine
Months Ended
September 30, 2014
For the Nine
Months Ended
September 30, 2013
$ Change %
Change
Interest and dividend income $ 21,821 19,476 2,345 12%
Interest expense 1,589 1,927 (338) -18%
Net interest income 20,232 17,549 2,683 15%
Loan loss provision 200 (450) 650 -144%
Non-interest income 6,058 8,033 (1,975) -25%
Non-interest expense 21,028 22,380 (1,352) -6%
INCOME BEFORE PROVISION FOR INCOME TAXES 5,062 3,652 1,410 39%
PROVISION FOR INCOME TAXES 1,257 710 547 77%
NET INCOME $ 3,805 2,942 863 29%
INCOME PER COMMON SHARE:
BASIC (1) $ 0.37 0.29 0.08 28%
DILUTED (2) $ 0.37 0.29 0.08 28%
Average common shares outstanding - basic (1) 10,218,103 10,121,853 96,250 1%
Average common shares outstanding - diluted (2) 10,309,436 10,179,928 129,508 1%

The following tables provide reconciliations of net income to pre-tax, pre-credit cost operating income and to tax equivalent net income (each non-GAAP financial measures) for the periods presented:

Reconciliation of Non-GAAP Measure:
Non-GAAP Operating Income
(Dollars in Thousands)
For The Three Months Ended September
30, 2014
June 30, 2014 $ Change %
Change
September
30, 2013
$ Change %
Change
Net income $ 1,374 $ 1,403 $ (29) -2% $ 909 $ 465 51%
Provision for loan losses 100 100 0 0% -- 100 100%
Other real estate owned write-downs 1 54 (53) -98% 176 (175) -99%
Other real estate owned operating costs 100 30 70 233% 67 33 49%
Provision for income taxes 549 403 146 36% 249 300 120%
Pre-tax, pre-credit cost operating income* $ 2,124 $ 1,990 $ 134 7% $ 1,401 $ 723 52%
For The Nine Months Ended September
30, 2014
September 30,
2013
$ Change %
Change
Net income $ 3,805 $ 2,942 $ 863 29%
Provision for loan losses 200 (450) 650 -144%
Other real estate owned write-downs 67 636 (569) -89%
Other real estate owned operating costs 191 276 (85) -31%
Provision for income taxes 1,257 710 547 77%
Pre-tax, pre-credit cost operating income* $ 5,520 $ 4,114 $ 1,406 34%
Reconciliation of Non-GAAP Measure:
Tax Equivalent Income
(Dollars in Thousands)
For the Three Months ended September
30, 2014
June 30,
2014
$ Change %
Change
September
30, 2013
$ Change %
Change
Net interest income $ 6,882 $ 6,796 $ 86 1% $ 6,015 $ 867 14%
Tax equivalent adjustment for municipal loan interest 45 46 (1) -2% 46 (1) -2%
Tax equivalent adjustment for municipal bond interest 94 120 (26) -22% 121 (27) -22%
Tax equivalent net interest income 7,021 6,962 59 1% 6,182 839 14%
Provision for loan losses 100 100 -- 0% -- 100 100%
Non-interest income 2,274 2,176 98 5% 2,232 42 2%
Non-interest expense 7,133 7,066 67 1% 7,089 44 1%
Tax equivalent income before income taxes* 2,062 1,972 90 5% 1,325 737 56%
Provision for income taxes 549 403 146 36% 249 300 120%
Accumulative tax adjustment (139) (166) 27 -16% (167) 28 -17%
Common stock dividends -- -- -- 0% -- -- 0%
Net income $ 1,374 $ 1,403 $ (29) -2% $ 909 $ 465 51%
For the Nine Months ended September
30, 2014
September
30, 2013
$ Change %
Change
Net interest income $ 20,232 $ 17,549 $ 2,683 15%
Tax equivalent adjustment for municipal loan interest 138 163 (25) -15%
Tax equivalent adjustment for municipal bond interest 332 392 (60) -15%
Tax equivalent net interest income 20,702 18,104 2,598 14%
Provision for loan losses 200 (450) 650 -144%
Non-interest income 6,058 8,033 (1,975) -25%
Non-interest expense 21,028 22,380 (1,352) -6%
Tax equivalent income before income taxes* 5,532 4,207 1,325 31%
Provision for income taxes 1,257 710 547 77%
Accumulative tax adjustment (470) (555) 85 -15%
Common stock dividends -- -- -- 0%
Net income $ 3,805 $ 2,942 $ 863 29%
*Pre-tax, pre-credit cost operating income and tax equivalent net income are non-GAAP financial measures. Non-GAAP financial measures have inherent limitations and are not required to be uniformly applied. Management believes that presentation of these non-GAAP financial measures provides useful information that is frequently used by shareholders and analysts in the evaluation of financial institutions. Non-GAAP financial measures have limitations as analytical tools and should not be considered in isolation or as a substitute for information reported in accordance with GAAP.

Noninterest Income

Noninterest income for third quarter 2014 grew compared to both the preceding and year ago quarters, reflecting increases in gains from sales of loans. In addition, fee income from annuity sales increased in the current quarter compared to the second quarter of 2013, but was down slightly from the prior quarter due to seasonal factors. "Our annuity products are proving to be popular with our customers," added Portmann. "Annuities provide an attractive alternative investment for our customers, given the current low interest rate environment. To accommodate the increased demand for these products, we are expanding the number of branch personnel who are licensed to offer annuity products. Our customers now have access to these additional investment options at many of our local branches." Losses on sale of other real estate owned (OREO) were higher in the current period as compared to the prior quarter and were in contrast to a small gain in third quarter in 2013, reflecting a more aggressive approach to pricing in order to reduce the levels of foreclosed assets.

Gains on sale of residential mortgage loans and related fee income rose in third quarter 2014 compared to second quarter 2014, and was similar to that earned in third quarter 2013. Portmann continued, "The recent rebound in home purchases throughout many of our markets is fueling new residential mortgage originations. In addition, we locked in gains on our securities available for sale portfolio in third quarter 2014 and third quarter 2013 improving the mix of securities in the portfolio and to reduce interest rate risk."

Noninterest income for the first nine months of 2014 was down from the same period in 2013, reflecting the declines in gains on sale of residential mortgage loans due to the slowdown in refinancing activity in 2013 and higher losses on sale of OREO.

Noninterest income
(Unaudited)
(Dollars in Thousands)
For The Three Months Ended
September
30, 2014
June 30,
2014
$ Change % Change September
30, 2013
$ Change % Change
Service charges on deposit accounts $ 450 $ 474 $ (24) -5% $ 440 $ 10 2%
Net (loss) on sale of other real estate owned (85) (57) (28) 49% 18 (103) -572%
Net gains from sales of loans 1,120 968 152 16% 1,128 (8) -1%
Net gains on sales of securities available for sale 38 (2) 40 -2000% 14 24 171%
Net other-than-temporary impairment (net of $0, $0, and $7, respectively recognized other comprehensive income before taxes) -- (3) 3 -100% (4) 4 -100%
Earnings on bank owned life insurance 127 140 (13) -9% 105 22 21%
Other operating income
Fee income 498 442 56 13% 421 77 18%
Income from other real estate owned 6 17 (11) -65% 22 (16) -73%
Other non-interest income 120 197 (77) -39% 88 32 36%
Total non-interest income $ 2,274 $ 2,176 $ 98 5% $ 2,232 $ 42 2%
For The Nine Months Ended
September
30, 2014
September
30, 2013
$ Change % Change
Service charges on deposit accounts $ 1,359 $ 1,281 $ 78 6%
Net (loss) on sale of other real estate owned (179) 43 (222) -516%
Net gains from sales of loans 2,717 4,306 (1,589) -37%
Net gains on sales of securities available for sale 88 401 (313) -78%
Net other-than-temporary impairment (net of $15, and $2, respectively recognized other comprehensive income before taxes) (48) (38) (10) 26%
Earnings on bank owned life insurance 378 342 36 11%
Other operating income
Fee income 1,304 1,392 (88) -6%
Income from other real estate owned 34 51 (17) -33%
Other non-interest income 405 255 150 59%
Total non-interest income $ 6,058 $ 8,033 $ (1,975) -25%

Noninterest Expense

Noninterest expense for third quarter of 2014 was virtually unchanged as compared to the second quarter of 2014. Decreases in OREO write-downs were offset by increased operating costs associated with acquisitions into OREO during the current quarter.

Noninterest expense for third quarter 2014 was virtually unchanged compared to the year ago quarter. Salary and benefits expense increased with the addition of loan production personnel and branch staff for the new branch that opened in the fourth quarter of 2013. Total costs associated with OREO and related third-party loan expenses decreased due to the decline in OREO balances and stabilization of valuations. Other non-interest expenses also declined primarily due to a decrease in loan origination and appraisal expense associated with a decline in mortgage origination activity.

Noninterest expense for the first nine months of 2014 was down as compared to the same period in 2013, because of the $471,000 savings generated from reduction in mortgage lending staff initiated in first quarter 2014 prompted by the decline in residential mortgage loan refinance activity. Also, in second quarter 2013 the Bank incurred one-time expenses of $395,000 in data processing conversion costs for three branches from Sterling Savings Bank acquired in June 2013. In addition, OREO write-downs and expenses and loan origination and appraisal expense were down as compared to the prior period for reasons noted above.

Noninterest expense
(Unaudited)
(Dollars in Thousands)
For The Three Months Ended
September
30, 2014
June 30,
2014
$ Change % Change September
30, 2013
$ Change % Change
Salaries and employee benefits $ 4,286 $ 4,283 $ 3 0% $ 4,098 $ 188 5%
Occupancy 483 504 (21) -4% 473 10 2%
Equipment 261 263 (2) -1% 233 28 12%
Data processing 492 462 30 6% 449 43 10%
Professional services 220 201 19 9% 198 22 11%
Other real estate owned write-downs 1 54 (53) -98% 176 (175) -99%
Other real estate owned operating costs 100 30 70 233% 67 33 49%
State taxes 110 107 3 3% 110 0 0%
FDIC and state assessments 119 129 (10) -8% 129 (10) -8%
Other non-interest expense:
Director fees 80 72 8 11% 48 32 67%
Communication 65 53 12 23% 42 23 55%
Advertising 73 76 (3) -4% 76 (3) -4%
Professional liability insurance 24 19 5 26% 21 3 14%
Amortization 99 98 1 1% 116 (17) -15%
Other non-interest expense 720 715 5 1% 853 (133) -16%
Total non-interest expense $ 7,133 $ 7,066 $ 67 1% $ 7,089 $ 44 1%
For The Nine Months Ended
September
30, 2014
September
30, 2013
$ Change % Change
Salaries and employee benefits $ 12,624 $ 12,983 $ (359) -3%
Occupancy 1,494 1,338 156 12%
Equipment 775 619 156 25%
Data processing 1,387 1,688 (301) -18%
Professional services 606 696 (90) -13%
Other real estate owned write-downs 67 636 (569) -89%
Other real estate owned operating costs 191 276 (85) -31%
State taxes 314 360 (46) -13%
FDIC and state assessments 381 395 (14) -4%
Other non-interest expense:
Director fees 208 164 44 27%
Communication 155 130 25 19%
Advertising 227 222 5 2%
Professional liability insurance 65 67 (2) -3%
Amortization 291 311 (20) -6%
Other non-interest expense 2,243 2,495 (252) -10%
Total non-interest expense $ 21,028 $ 22,380 $ (1,352) -6%

Income Taxes

The Company recorded an income tax provision for the three months ended September 30, 2014, June 30, 2014 and September 30, 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 September 30, 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)
September June % September %
30, 2014 30, 2014 $ Change Change 30, 2013 $ Change Change
Assets:
Cash and cash equivalents $ 40,781 $ 17,694 $ 23,087 130% $ 69,657 $ (28,876) -41%
Interest-bearing certificates of deposit 2,727 2,727 0 0% 1,735 992 57%
Federal Home Loan Bank stock, at cost 2,926 2,956 (30) -1% 3,041 (115) -4%
Pacific Coast Bankers' Bank stock, at cost 1,000 0 1,000 -- 0 1,000 --
Investment securities 91,185 90,583 602 1% 94,129 (2,944) -3%
Loans held-for-sale 8,161 7,632 529 7% 7,266 895 12%
Gross loans, net of deferred fees 552,140 547,283 4,857 1% 486,700 65,440 13%
Allowance for loan losses (8,255) (8,315) 60 -1% (8,806) 551 -6%
Net loans 543,885 538,968 4,917 1% 477,894 65,991 14%
Other assets 58,382 58,912 (530) -1% 62,026 (3,644) -6%
Total assets $ 749,047 $ 719,472 $ 29,575 4% $ 715,748 $ 33,299 5%
Liabilities and shareholders' equity
Total deposits $ 644,004 $ 619,301 $ 24,703 4% $ 618,918 $ 25,086 4%
Accrued interest payable 141 151 (10) -7% 182 (41) -23%
Borrowings 24,894 23,743 1,151 5% 23,403 1,491 6%
Other liabilities 6,751 5,417 1,334 25% 4,909 1,842 38%
Shareholders' equity 73,257 70,860 2,397 3% 68,336 4,921 7%
Total liabilities and shareholders' equity $ 749,047 $ 719,472 $ 29,575 4% $ 715,748 $ 33,299 5%
Cash and Cash Equivalents and Investment Securities
(Unaudited)
(Dollars in Thousands)
September
30, 2014
% of
Total
June
30, 2014
% of
Total
$ Change % Change September
30, 2013
% of
Total
$ Change % Change
Cash and due from banks $ 15,284 11% $ 17,455 15% $ (2,171) -12% $ 15,494 9% $ (210) -1%
Cash equivalents:
Interest-bearing deposits 25,497 18% 239 0% 25,258 10568% 54,163 32% (28,666) -53%
Interest-bearing certificates of deposit 2,727 2% 2,727 2% -- 0% 1,735 1% 992 57%
Total cash equivalents and certificate of deposits 43,508 31% 20,421 18% 23,087 113% 71,392 42% (27,884) -39%
Investment securities:
Collateralized mortgage obligations: agency issued 40,039 29% 38,822 34% 1,217 3% 34,482 20% 5,557 16%
Collateralized mortgage obligations: non-agency issued 579 0% 604 1% (25) -4% 2,179 1% (1,600) -73%
Mortgage-backed securities: agency issued 12,630 9% 12,059 11% 571 5% 12,972 8% (342) -3%
U.S. Government and agency securities 8,655 6% 8,721 8% (66) -1% 8,859 5% (204) -2%
State and municipal securities 29,282 21% 30,377 27% (1,095) -4% 35,042 21% (5,760) -16%
Corporate bonds -- 0% -- 0% -- 0% 595 0% (595) -100%
FHLB Stock 2,926 2% 2,956 3% (30) -1% 3,041 2% (115) -4%
Pacific Coast Bankers' Bank stock, at cost 1,000 1% -- 0% 1,000 100% -- 0% 1,000 100%
Total investment securities 95,111 69% 93,539 82% 1,572 2% 97,170 58% (2,059) -2%
Total cash equivalents and investment securities $ 138,619 100% $ 113,960 100% $ 24,659 22% $ 168,562 100% $ (29,943) -18%
Total cash equivalents and investment securities as a % of total assets 19% 16% 24%
Investment securities and interest-bearing certificates of deposit
(Unaudited)
(Dollars in Thousands)
For the Three Months Ended September
30, 2014
June 30,
2014
$ Change % Change September
30, 2013
$ Change % Change
Balance beginning of period $ 96,266 $ 102,951 $ (6,685) -6% $ 94,855 $ 1,411 1%
Principal purchases 7,482 3,806 3,676 97% 10,772 (3,290) -31%
Proceeds from sales (3,927) (8,979) 5,052 -56% (3,067) (860) 28%
Principal paydowns, maturities, and calls (1,673) (2,144) 471 -22% (4,266) 2,593 -61%
Gains on sales of securities 94 159 (65) -41% 57 37 65%
Losses on sales of securities (56) (161) 105 -65% (43) (13) 30%
OTTI loss writedown -- (3) 3 -100% 13 (13) -100%
Change in unrealized gains (loss) before tax (64) 903 (967) -107% 770 (834) -108%
Amortization and accretion of discounts and premiums (284) (266) (18) 7% (186) (98) 53%
Total investment portfolio $ 97,838 $ 96,266 $ 1,572 2% $ 98,905 $ (1,067) -1%

Liquidity remains strong based on the current levels of cash equivalents and investment securities. "We also have unsecured lines of credit totaling $16.0 million with correspondent banks, all of which are currently available. In addition, we have a secured borrowing facility with the Federal Home Loan Bank of Seattle of $143.8 million, of which $11.5 million is currently outstanding," said Douglas Biddle, Executive Vice President and Chief Financial Officer. "In an effort to fund pending loan demand, we increased our cash equivalents during the current quarter. In addition, we initiated some restructuring of the investment portfolio to reduce the impact of interest rate risk on securities valuation, resulting in a lowering of portfolio yields." The expected modified duration (adjusted for calls, consensus pre-payment speeds and rate adjustment dates) of the investment portfolio was 4.3 years at September 30, 2014, 4.5 years at June 30, 2014 and 4.4 years at September 30, 2013.

LOANS

Loans by category
(Unaudited) September 30, % of June 30, % of $ September % of $
(Dollars in Thousands) 2014 Gross Loans 2014 Gross Loans Change % Change 30, 2013 Gross Loans Change % Change
Commercial and agricultural $ 112,873 21% $ 109,368 20% $ 3,505 3% $ 94,471 20% $ 18,402 19%
Real estate:
Construction and development 25,419 5% 32,071 6% (6,652) -21% 29,538 6% (4,119) -14%
Residential 1-4 family 94,101 17% 90,549 17% 3,552 4% 85,625 18% 8,476 10%
Multi-family 20,554 4% 20,110 4% 444 2% 13,846 3% 6,708 48%
Commercial real estate -- owner occupied 122,090 22% 117,203 22% 4,887 4% 106,670 22% 15,420 14%
Commercial real estate -- non owner occupied 120,569 22% 124,929 23% (4,360) -3% 115,290 24% 5,279 5%
Farmland 22,926 4% 23,900 4% (974) -4% 24,002 5% (1,076) -4%
Consumer 34,787 6% 30,241 6% 4,546 15% 18,366 4% 16,421 89%
Gross loans 553,319 548,371 4,948 1% 487,808 65,511 13%
Less: allowance for loan losses (8,255) -2% (8,315) -2% 60 -1% (8,806) -2% 551 -6%
Less: deferred fees (1,179) 0% (1,088) 0% (91) 8% (1,108) 0% (71) 6%
Loans, net $ 543,885 $ 538,968 $ 4,917 1% $ 477,894 $ 65,991 14%

Loan portfolio growth continues to be well diversified and generated predominately within our Washington and Oregon markets. This is despite a payoff of a $5.7 million non-owner occupied commercial real estate relationship during the current quarter. The portfolio includes $36.3 million in purchased government-guaranteed commercial and commercial real estate loans. In addition, the loan portfolio contains $25.3 million in indirect consumer loans to individuals with high credit scores to finance luxury and classic cars as a part of a strategy to diversify the loan portfolio.

Our ability to continue loan growth will be dependent upon 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) September 30,
2014
Percent of
Total
June 30,
2014
Percent of
Total
$ Change September 30,
2013
Percent of
Total
$ Change
Interest-bearing demand and money market $ 266,863 41.4% $ 268,480 43.4% $ (1,617) $ 253,895 41.0% $ 12,968
Savings 76,661 11.9% 74,336 12.0% 2,325 72,880 11.8% 3,781
Time deposits 118,221 18.4% 119,531 19.3% (1,310) 135,979 22.0% (17,758)
Total interest-bearing deposits 461,745 71.7% 462,347 74.7% (602) 462,754 74.8% (1,009)
Non-interest bearing demand 182,259 28.3% 156,954 25.3% 25,305 156,164 25.2% 26,095
Total deposits $ 644,004 100.0% $ 619,301 100.0% $ 24,703 $ 618,918 100.0% $ 25,086

Total deposits were up at September 30, 2014, compared to the second quarter of this year and the third quarter a year ago. Non-interest bearing deposits grew due to seasonal inflows associated with increased business activity in our local markets with economies focused on summer tourism. Recent success in acquiring business deposit relationships in conjunction with the growth in lending achieved over the past year has also contributed to deposit growth. The combination of our efforts to reduce higher-cost time deposits through lowering interest rates paid and offering non-insured deposit products, when appropriate, reduced the average rate paid on total deposits in third quarter 2014 from third quarter in 2013.

Total brokered deposits were $22.6 million at September 30, 2014, which included $2.5 million via reciprocal deposit arrangements. This compares to $22.9 million and $24.1 million at June 30, 2014 and September 30, 2013, respectively. The Company views the prudent use of brokered deposits and borrowings to be an appropriate funding tool to support interest rate risk mitigation strategies.

CAPITAL

Pacific Financial Corporation, and its subsidiary Bank of the Pacific, continue to meet the thresholds to be considered "well-capitalized" under regulatory requirements. Capital ratios increased slightly as compared to the prior quarter primarily due to earnings retention. Also, $1.2 million of additional capital was supplied via the exercise at a price of $6.50 per share of warrants to purchase 185,000 shares of common stock originally issued in conjunction with a private capital raise conducted in 2009. In general, capital ratios declined from September 30, 2013 due to the successful execution of the Company's growth strategy and shift in the balance sheet mix to higher risk-weighted loan assets. However, the tangible common equity ratio grew due to the additional capital supplied via exercise of warrants, as previously mentioned.

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, see the discussions under the subheading "Capital Adequacy" in the section "Business" included in Item 1, of the Company's Annual Report on Form 10-K for the year ended December 31, 2013, as filed with the Securities and Exchange Commission. 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 September 30, 2014, under guidance issued by the Federal Reserve. The Company expects to continue to rely on these junior subordinated debentures as part of its regulatory capital.

September 30,
2014
June 30,
2014
Change September
30, 2013
Change Regulatory Minimum
to be "Well
Capitalized"
greater than or equal to
Pacific Financial Corporation
Total risk-based capital ratio 14.09% 13.76% 0.33 14.84% (0.75) 10%
Tier 1 risk-based capital ratio 12.83% 12.51% 0.32 13.59% (0.76) 6%
Leverage ratio 10.09% 10.04% 0.05 10.04% 0.05 5%
Tangible common equity ratio 8.11% 8.11% -- 7.79% 0.32 n/a
Bank of the Pacific
Total risk-based capital ratio 13.87% 13.73% 0.14 14.85% (0.98) 10%
Tier 1 risk-based capital ratio 12.61% 12.48% 0.13 13.59% (0.98) 6%
Leverage ratio 9.91% 10.01% (0.10) 10.04% (0.13) 5%
FINANCIAL PERFORMANCE OVERVIEW
(Unaudited)
(Dollars in Thousands, Except per Share Data)
For The Three Months Ended
September
30, 2014
June 30,
2014
Change September
30, 2013
Change
Selective quarterly performance ratios
Return on average assets, annualized 0.74% 0.79% (0.05) 0.52% 0.22
Return on average equity, annualized 7.55% 8.04% (0.49) 5.33% 2.22
Efficiency ratio (1) 77.91% 78.76% (0.85) 85.96% (8.05)
Share and per share information
Average common shares outstanding - basic 10,281,745 10,189,386 92,359 10,121,853 159,892
Average common shares outstanding - diluted 10,379,166 10,275,628 103,538 10,194,826 184,340
Basic income per common share 0.13 0.14 (0.01) 0.09 0.04
Diluted income per common share 0.13 0.14 (0.01) 0.09 0.04
Book value per common share (2) 7.07 6.94 0.13 6.75 0.32
Tangible book value per common share (3) 5.75 5.60 0.15 5.46 0.29
For The Nine Months Ended
September
30, 2014
September
30, 2013
Change
Selective quarterly performance ratios
Return on average assets, annualized 0.71% 0.59% 0.12
Return on average equity, annualized 7.26% 5.81% 1.45
Efficiency ratio (1) 79.98% 87.48% (7.50)
Share and per share information
Average common shares outstanding - basic 10,218,103 10,121,853 96,250
Average common shares outstanding - diluted 10,309,436 10,179,928 129,508
Basic income per common share 0.37 0.29 0.08
Diluted income per common share 0.37 0.29 0.08
(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
September
30, 2014
June
30, 2014
Change September
30, 2013
Change
Selective quarterly performance ratios
Yield on average gross loans (1) 4.95% 5.04% (0.09) 4.99% (0.04)
Yield on average investment securities (1) 2.02% 2.54% (0.52) 1.70% 0.32
Cost of average interest bearing deposits 0.34% 0.37% (0.03) 0.41% (0.07)
Cost of average borrowings 1.83% 1.90% (0.07) 1.97% (0.14)
Cost of average total deposits and borrowings 0.31% 0.34% (0.03) 0.38% (0.07)
Cost of average interest-bearing liabilities 0.42% 0.44% (0.02) 0.48% (0.06)
Yield on average interest-earning assets 4.44% 4.61% (0.17) 4.25% 0.19
Cost of average interest-bearing liabilities 0.42% 0.44% (0.02) 0.48% (0.06)
Net interest spread 4.02% 4.17% (0.15) 3.77% 0.25
Net interest margin (1) 4.13% 4.28% (0.15) 3.88% 0.25
For The Nine Months Ended
September
30, 2014
September
30, 2013
Change
Selective quarterly performance ratios
Yield on average gross loans (1) 5.04% 5.09% (0.05)
Yield on average investment securities (1) 2.30% 1.83% 0.47
Cost of average interest bearing deposits 0.36% 0.47% (0.11)
Cost of average borrowings 1.90% 2.02% (0.12)
Cost of average total deposits and borrowings 0.33% 0.43% (0.10)
Cost of average interest-bearing liabilities 0.43% 0.55% (0.12)
Yield on average interest-earning assets 4.55% 4.42% 0.13
Cost of average interest-bearing liabilities 0.43% 0.55% (0.12)
Net interest spread 4.12% 3.87% 0.25
Net interest margin (1) 4.22% 3.99% 0.23
(1) Tax-exempt income has been adjusted to a tax equivalent basis at a 34% rate.

Net Interest Margin

Net interest margin declined compared to second quarter of 2014, as reductions in investment securities and loan yields offset declines in deposit costs. Declines in yields on investment securities were primarily due to portfolio restructuring. Loan yield declines resulted from increased competition for high quality borrowing relationships in the marketplace. Net interest margin improved when compared to third quarter of 2013, predominantly due to a shift in the mix of earning assets toward higher-yielding loans and the lower cost of interest bearing liabilities. 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 second quarter 2014, loan yields and net interest margin were enhanced by 9 and 7 basis points, respectively, due to the collection of $115,000 in non-accrual interest during the current period. There was no similar collection of non-accrual interest during the corresponding periods in 2013.

The improvement in yields on investment securities also enhanced net interest margin between the nine months ending September 30, 2014 and the same period in 2013. This was primarily the result of reducing the proportion of lower yielding cash-equivalent investments to fund loan growth and increasing the proportion of relatively higher-yielding federal government guaranteed mortgage-backed securities.

The following tables set 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.

Average Interest Earning Balances: For the Three Months Ended
September 30, 2014 June 30, 2014 September 30, 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 Thousands)
ASSETS:
Interest bearing certificate of deposit $ 2,727 $ 11 1.60% $ 2,727 $ 10 1.47% $ 1,871 $ 6 1.27%
Interest bearing deposits in banks 23,928 14 0.23% 12,552 9 0.29% 46,665 29 0.25%
Investments - taxable 63,751 298 1.85% 65,964 343 2.09% 61,924 221 1.42%
Investments - nontaxable 27,646 277 3.98% 31,607 352 4.47% 32,058 355 4.39%
Gross loans (1) 549,280 6,870 4.96% 532,490 6,718 5.06% 483,459 6,090 5.00%
Loans held for sale 7,068 69 3.87% 7,685 71 3.71% 6,642 72 4.30%
Total interest earning assets 674,400 7,539 4.44% 653,025 7,503 4.61% 632,619 6,773 4.25%
Cash and due from banks 14,169 13,135 12,362
Bank premises and equipment (net) 16,615 16,703 16,167
Other real estate owned 940 2,088 4,070
Deferred fees (1,113) (1,068) (1,045)
Allowance for loan losses (8,342) (8,271) (8,917)
Other assets 40,757 40,705 40,955
Total assets $ 737,426 $ 716,317 $ 696,211
LIABILITIES AND SHAREHOLDERS' EQUITY:
Interest-bearing deposits $ 343,204 134 0.15% $ 345,116 140 0.16% $ 322,606 167 0.21%
Time deposits 120,515 269 0.89% 122,134 290 0.95% 138,762 307 0.88%
FHLB borrowings 10,878 61 2.22% 10,000 60 2.41% 10,000 62 2.46%
Short term borrowings 587 -- 0.00% 6 -- 0.00% -- -- 0.00%
Junior subordinated debentures 13,403 54 1.60% 13,403 51 1.53% 13,403 54 1.60%
Total interest bearing liabilities 488,587 518 0.42% 490,659 541 0.44% 484,771 590 0.48%
Non-interest-bearing deposits 170,560 150,776 138,875
Other liabilities 6,055 4,928 4,957
Equity 72,224 69,954 67,608
Total liabilities and shareholders' equity $ 737,426 $ 716,317 $ 696,211
Net interest income (3) $ 7,021 $ 6,962 $ 6,183
Net interest spread 4.02% 4.17% 3.77%
Average yield on investments 2.02% 2.54% 1.70%
Average yield on earning assets (2) (3) 4.44% 4.61% 4.25%
Interest expense to earning assets 0.31% 0.33% 0.37%
Net interest income to earning assets (2) (3) 4.13% 4.28% 3.88%
Reconciliation of Non-GAAP measure:
Tax Equivalent Net Interest Income
Net interest income $ 6,882 $ 6,796 $ 6,015
Tax equivalent adjustment for municipal loan interest 45 46 46
Tax equivalent adjustment for municipal bond interest 94 120 121
Tax equivalent net interest income $ 7,021 $ 6,962 $ 6,182
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 $4.8 million at 09/30/14, $6.4 million at 06/30/2014, and $7.8 million for 09/30/2013 are included in the average loan balances.
(2) Loan interest income includes loan fee income of $152,000, $180,000, and $169,000 for the three months ended 09/30/2014, 06/30/2014, and 09/30/2013, 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 $139,000, $166,000, and $167,000 for the three months ended September 30, 2014, June 30, 2014, and September 30, 2013, respectively.
For the Three Months Ended For the Three Months Ended
September 30, 2014 vs. June 30, 2014 September 30, 2014 vs. September 30, 2013
Increase (Decrease) Due To Increase (Decrease) Due To
(Dollars in Thousands) Net Net
Volume Rate Change Volume Rate Change
ASSETS:
Interest bearing certificate of deposit $ -- $ 1 $ 1 $ 3 $ 2 $ 5
Interest bearing deposits in banks 8 (3) 5 (14) (1) (15)
Investments - taxable (12) (33) (45) 6 71 77
Investments - nontaxable (44) (31) (75) (48) (30) (78)
Gross loans 212 (60) 152 821 (41) 780
Loans held for sale (6) 4 (2) 5 (8) (3)
Total interest earning assets $ 158 $ (122) $ 36 $ 773 $ (7) $ 766
LIABILITIES AND SHAREHOLDERS' EQUITY:
Interest-bearing deposits $ (1) $ (5) $ (6) $ 11 $ (44) $ (33)
Time deposits (4) (17) (21) (40) 2 (38)
FHLB borrowings 5 (4) 1 5 (6) (1)
Short-term borrowings -- -- -- -- -- --
Long-term borrowings -- 3 3 -- -- --
Total interest bearing liabilities 0 (23) (23) (24) (48) (72)
Net increase (decrease) in net interest income $ 158 $ (99) $ 59 $ 797 $ 41 $ 838
Average Interest Earning Balances: For the Nine Months Ended
September 30, 2014 September 30, 2013
Average
Balance
Interest
Income or
Expense
Average
Yields or
Rates
Average
Balance
Interest
Income or
Expense
Average
Yields or
Rates
(Dollars in Thousands)
ASSETS:
Interest bearing certificate of deposit $ 2,727 $ 31 1.52% $ 2,312 $ 20 1.16%
Interest bearing deposits in banks 18,167 33 0.24% 37,359 66 0.24%
Investments - taxable 65,789 980 1.99% 51,861 472 1.22%
Investments - nontaxable 30,656 977 4.26% 33,557 1,153 4.59%
Gross loans (1) 531,517 20,081 5.05% 471,702 18,071 5.12%
Loans held for sale 6,348 189 3.98% 9,709 249 3.43%
Total interest earning assets 655,204 22,291 4.55% 606,500 20,031 4.42%
Cash and due from banks 13,106 11,478
Bank premises and equipment (net) 16,707 15,547
Other real estate owned 1,858 4,086
Deferred fees (1,106) (1,008)
Allowance for loan losses (8,334) (9,218)
Other assets 40,862 40,925
Total assets $ 718,297 $ 668,310
LIABILITIES AND SHAREHOLDERS' EQUITY:
Interest-bearing deposits $ 341,533 415 0.16% $ 311,792 547 0.23%
Time deposits 123,140 835 0.91% 136,863 1,026 1.00%
FHLB borrowings 10,296 181 2.35% 10,066 186 2.47%
Short term borrowings 200 -- 0.00% -- -- 0.00%
Junior subordinated debentures 13,403 158 1.58% 13,403 168 1.68%
Total interest bearing liabilities 488,572 1,589 0.43% 472,124 1,927 0.55%
Non-interest-bearing deposits 154,213 123,868
Other liabilities 5,396 4,596
Equity 70,116 67,722
Total liabilities and shareholders' equity $ 718,297 $ 668,310
Net interest income (3) $ 20,702 $ 18,104
Net interest spread 4.12% 3.87%
Average yield on investments 2.30% 1.83%
Average yield on earning assets (2) (3) 4.55% 4.42%
Interest expense to earning assets 0.33% 0.43%
Net interest income to earning assets (2) (3) 4.22% 3.99%
Reconciliation of Non-GAAP measure:
Tax Equivalent Net Interest Income
Net interest income $ 20,232 $ 17,549
Tax equivalent adjustment for municipal loan interest 138 163
Tax equivalent adjustment for municipal bond interest 332 392
Tax equivalent net interest income $ 20,702 $ 18,104
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 $4.8 million at 09/30/14 and $7.8 million for 09/30/2013 are included in the average loan balances.
(2) Loan interest income includes loan fee income of $482,000 and $396,000 for the nine months ended 09/30/2014 and 09/30/2013, 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 $470,000 and $555,000 for the nine months ended September 30, 2014 and September 30, 2013, respectively.
For the Nine Months Ended
September 30, 2014 vs. September 30, 2013
Increase (Decrease) Due To
(Dollars in Thousands) Net
Volume Rate Change
ASSETS:
Interest bearing certificate of deposit $ 2 $ 9 $ 11
Interest bearing deposits in banks (23) (10) (33)
Investments - taxable 84 424 508
Investments - nontaxable (66) (110) (176)
Gross loans 1,519 491 2,010
Loans held for sale (57) (3) (60)
Total interest earning assets $ 1,459 $ 801 $ 2,260
LIABILITIES AND SHAREHOLDERS' EQUITY:
Interest-bearing deposits $ 34 $ (166) $ (132)
Time deposits (68) (123) (191)
FHLB borrowings 3 (8) (5)
Short-term borrowings -- -- --
Long-term borrowings -- (10) (10)
Total interest bearing liabilities (31) (307) (338)
Net increase (decrease) in net interest income $ 1,490 $ 1,108 $ 2,598
SUMMARY AVERAGE BALANCE SHEETS
(Unaudited)
(Dollars in Thousands)
Averages for the Three Months Ended September 30, June 30, September 30,
2014 2014 $ Change % Change 2013 $ Change % Change
Assets:
Cash and due from banks $ 14,169 $ 13,135 $ 1,034 8% $ 12,362 $ 1,807 15%
Interest-bearing deposits in banks 23,928 12,552 11,376 91% 46,665 (22,737) -49%
Interest bearing certificate of deposit 2,727 2,727 0 0% 1,871 856 46%
Investment securities 91,397 97,571 (6,174) -6% 93,982 (2,585) -3%
Loans, net of deferred loan fees 555,235 539,106 16,129 3% 489,056 66,179 14%
Allowance for loan losses (8,342) (8,271) (71) 1% (8,917) 575 -6%
Net loans 546,893 530,835 16,058 3% 480,139 66,754 14%
Other assets 58,312 59,497 (1,185) -2% 61,191 (2,879) -5%
Total assets $ 737,426 $ 716,317 $ 21,109 3% $ 696,210 $ 41,216 6%
Liabilities:
Total deposits $ 634,279 $ 618,026 $ 16,253 3% $ 600,242 $ 34,037 6%
Borrowings 24,868 23,409 1,459 6% 23,403 1,465 6%
Other liabilities 6,055 4,928 1,127 23% 4,957 1,098 22%
Total liabilities 665,202 646,363 18,839 3% 628,602 36,600 6%
Equity:
Common equity 72,224 69,954 2,270 3% 67,608 4,616 7%
Total equity 72,224 69,954 2,270 3% 67,608 4,616 7%
Total liabilities and shareholders' equity $ 737,426 $ 716,317 $ 21,109 3% $ 696,210 $ 41,216 6%
Averages for the Nine Months Ended September 30, September 30,
2014 2013 $ Change % Change
Assets:
Cash and due from banks $ 13,106 $ 11,478 $ 1,628 14%
Interest-bearing deposits in banks 18,167 37,359 (19,192) -51%
Interest bearing certificate of deposit 2,727 2,312 415 18%
Investment securities 96,445 85,418 11,027 13%
Loans, net of deferred loan fees 536,759 480,404 56,355 12%
Allowance for loan losses (8,334) (9,218) 884 -10%
Net loans 528,425 471,186 57,239 12%
Other assets 59,427 60,557 (1,130) -2%
Total assets $ 718,297 $ 668,310 $ 49,987 7%
Liabilities:
Total deposits $ 618,886 $ 572,523 $ 46,363 8%
Borrowings 23,899 23,469 430 2%
Other liabilities 5,396 4,596 800 17%
Total liabilities 648,181 600,588 47,593 8%
Equity:
Common equity 70,116 67,722 2,394 4%
Total equity 70,116 67,722 2,394 4%
Total liabilities and shareholders' equity $ 718,297 $ 668,310 $ 49,987 7%

ASSET QUALITY

At September 30, 2014, total adversely classified loans increased in dollars and as a percentage of gross loans from the preceding and year ago quarters. This is the result of designating a $4.7 million commercial and commercial real estate relationship as adversely classified during the current quarter. Total loans on accruing status 30-89 days past due continue to remain below 1.00% of gross loans, mirroring the improvement in overall credit quality noted previously. Past due loans increased in the current period primarily from a $2.6 million commercial real estate relationship scheduled to be paid off. We monitor delinquencies, defined as loans on accruing status 30-89 days past due, as an indicator of future adversely classified loans.

At September 30, 2014, total nonperforming loans were down compared to June 30, 2014 and September 30, 2013. Nonperforming assets also declined during this period as a percentage of total assets, despite the increase in OREO during the current quarter. This was primarily due to the payoff of a $1.0 million non-accrual commercial real estate loan during the current quarter. Nonperforming loans consist primarily of commercial real estate loans.

Adversely classified loans
(Unaudited)
(Dollars in Thousands)
September
30, 2014
June 30,
2014
$
Change
%
Change
September
30, 2013
$
Change
%
Change
Rated substandard or worse, but not impaired $ 11,020 $ 6,938 $ 4,082 59% $ 3,365 $ 7,655 227%
Impaired 7,429 9,025 (1,596) -18% 10,383 (2,954) -28%
Total adversely classified loans* $ 18,449 $ 15,963 $ 2,486 16% $ 13,748 4,701 34%
Gross loans $ 553,319 $ 548,371 $ 4,948 1% $ 487,808 $ 65,511 13%
Adversely classified loans to gross loans 3.33% 2.91% 0.42% 2.82% 0.51%
Allowance for loan losses $ 8,255 $ 8,315 $ (60) -1% $ 8,806 $ (551) -6%
Allowance for loan losses as a percentage of adversely classified loans 44.74% 52.09% -7.35% 64.05% -19.31%
Allowance for loan losses to total impaired loans 111.12% 92.13% 18.99% 84.81% 26.31%
* 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 Days Past Due by type
(Unaudited)
(Dollars in Thousands)
September
30, 2014
% of
Category
June 30,
2014
% of
Category
$ Change % Change September
30, 2013
% of
Category
$ Change % Change
Commercial and agricultural $ 7 0.2% $ 23 16.5% $ (16) -70% $ 52 6.7% $ (45) -87%
Real estate:
Construction and development 0.0% -- 0.0% -- 0% -- 0.0% -- 0%
Residential 1-4 family 251 8.7% 53 38.1% 198 374% 590 76.5% (339) -57%
Multi-family 0.0% -- 0.0% -- 0% -- 0.0% -- 0%
Commercial real estate -- owner occupied 0.0% 0 0.0% 0 0% 87 11.3% (87) -100%
Commercial real estate -- non owner occupied 2,612 90.9% 0 0.0% 2,612 100% -- 0.0% 2,612 100%
Farmland -- -- 0.0% -- 0% 37 4.8% (37) -100%
Total real estate $ 2,863 $ 53 $ 2,810 5302% $ 714 $ 2,149
Consumer 2 0.1% 63 45.3% (61) -97% 5 0.6% (3) -60%
Total loans 30-89 days past due, not in nonaccrual status $ 2,872 100.0% $ 139 100.0% $ 2,733 1966% $ 771 100.0% $ 2,101 273%
Delinquent loans to total loans, not in nonaccrual status 0.60% 0.03% 0.17%
Non-performing assets
(Unaudited)
(Dollars in Thousands) September
30, 2014
June 30,
2014
$ Change % Change September
30, 2013
$ Change % Change
Loans on nonaccrual status $ 4,811 $ 6,388 $ (1,577) -25% $ 7,829 $ (3,018) -39%
Loans past due greater than 90 days but not on nonaccrual status 409 -- 409 100% 221 188 85%
Total non-performing loans 5,220 6,388 (1,168) -18% 8,050 (2,830) -35%
Other real estate owned and foreclosed assets 1,210 991 219 22% 4,334 (3,124) -72%
Total nonperforming assets $ 6,430 $ 7,379 $ (949) -13% $ 12,384 $ (5,954) -48%
Percentage of nonperforming assets to total assets 0.86% 1.03% 1.73%

OREO increased during third quarter 2014, but declined significantly year-over-year. One commercial income property was taken into the OREO portfolio during the quarter. OREO valuation adjustments continued to be minimal. At September 30, 2014, the OREO portfolio consisted of 7 properties, down from both second quarter 2014 and third quarter 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 September 30,
2014
% of
Category
June 30,
2014
% of
Category
$ Change % Change September 30,
2013
% of
Category
$ Change % Change
Other real estate owned, beginning of period $ 991 81.9% $ 2,386 240.8% $ (1,395) -58% $ 3,451 79.6% $ (2,460) -71%
Transfers from outstanding loans 525 43.4% 206 20.8% 319 155% 1,382 31.9% (857) -62%
Improvements and other additions -- 0.0% -- 0.0% -- 0% -- 0.0% -- 0%
Proceeds from sales (219) -18.1% (1,490) -150.4% 1,271 -85% (341) -7.9% 122 -36%
Net gain (loss) on sales (86) -7.1% (57) -5.8% (29) 51% 18 0.4% (104) -578%
Impairment charges (1) -0.1% (54) -5.4% 53 -98% (176) -4.1% 175 -99%
Total other real estate owned $ 1,210 100.0% $ 991 100.0% $ 219 22% $ 4,334 100.0% $ (3,124) -72%
For the Nine Months Ended September 30,
2014
% of
Category
September 30,
2013
% of
Category
$ Change % Change
Other real estate owned, beginning of period $ 2,771 229.0% $ 4,678 107.9% $ (1,907) -41%
Transfers from outstanding loans 842 69.6% 1,591 36.7% (749) -47%
Improvements and other additions -- 0.0% -- 0.0% -- 0%
Proceeds from sales (2,157) -178.3% (1,342) -31.0% (815) 61%
Net gain (loss) on sales (179) -14.8% 43 1.0% (222) -516%
Impairment charges (67) -5.5% (636) -14.7% 569 -89%
Total other real estate owned $ 1,210 100.0% $ 4,334 100.0% $ (3,124) -72%
Other real estate owned and foreclosed assets by type
(Unaudited)
(Dollars in Thousands)
September
30, 2014
# of
Properties
June 30,
2014
# of
Properties
$ Change % Change September
30, 2013
# of
Properties
$ Change % Change
Construction, Land Dev & Other Land $ 35 1 $ 46 2 $ (11) -24% $ 787 7 $ (752) -96%
1-4 Family Residential Properties 86 2 317 4 (231) -73% 868 6 (782) -90%
Nonfarm Nonresidential Properties 1,089 4 628 4 461 73% 2,679 13 (1,590) -59%
Total OREO by type $ 1,210 7 $ 991 10 $ 219 22% $ 4,334 26 $ (3,124) -72%

ALLOWANCE FOR LOAN LOSSES

The allowance for loan losses continues to decline in relation to total loans in concert with the general trend of improvement in relevant credit metrics. As such, loss factors used in estimates to establish reserve levels have declined commensurately. A provision was made to the allowance for loan losses in the current and prior quarter, corresponding to recent growth in the loan portfolio. No provision was made in third quarter 2013.

For the quarter ended September 30, 2014, total net loan charge-offs were up compared to the quarter ended June 30, 2014, but virtually unchanged versus the quarter ended September 30, 2013. The charge-offs incurred in the third quarter 2014 were primarily centered in one commercial real estate loan, which was written down $127,000 prior to transfer to OREO. The ratio of net loan charge-offs to average gross loans (annualized) for the current quarter was up compared to the prior quarter, but unchanged from the third quarter one year ago.

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 September
30, 2014
June 30,
2014
$
Change
%
Change
September
30, 2013
$
Change
%
Change
Gross loans outstanding at end of period $ 553,319 $ 548,371 $ 4,948 1% $ 487,808 $ 65,511 13%
Average loans outstanding, gross $ 549,280 $ 532,490 $ 16,790 3% $ 483,459 $ 65,821 14%
Allowance for loan losses, beginning of period $ 8,315 $ 8,288 $ 27 0% $ 8,962 $ (647) -7%
Commercial 0 (9) 9 -100% (40) 40 -100%
Commercial Real Estate (126) (389) 263 -68% (37) (89) 241%
Residential Real Estate (61) (4) (57) 1425% (29) (32) 110%
Consumer (12) (29) 17 -59% (79) 67 -85%
Total charge-offs (199) (431) 232 -54% (185) (14) 8%
Commercial 7 1 6 600% 20 (13) -65%
Commercial Real Estate 28 347 (319) -92% 5 23 460%
Residential Real Estate 3 9 (6) -67% 3 0 0%
Consumer 1 1 -- 0% 1 0 0%
Total recoveries 39 358 (319) -89% 29 10 34%
Net charge-offs (160) (73) (87) 119% (156) (4) 3%
Provision charged to income 100 100 0 0% -- 100 100%
Allowance for loan losses, end of period $ 8,255 $ 8,315 $ (60) -1% $ 8,806 $ (551) -6%
Ratio of net loans charged-off to average gross loans outstanding, annualized 0.12% 0.05% 0.07% 140% 0.13% -0.01% -8%
Ratio of allowance for loan losses to gross loans outstanding 1.49% 1.52% -0.03% -2% 1.81% -0.32% -18%
For the Nine Months Ended September
30, 2014
September
30, 2013
$
Change
%
Change
Gross loans outstanding at end of period $ 553,319 $ 487,808 $ 65,511 13%
Average loans outstanding, gross $ 531,517 $ 471,702 $ 59,815 13%
Allowance for loan losses, beginning of period $ 8,359 $ 9,358 $ (999) -11%
Commercial (26) (40) 14 -35%
Commercial Real Estate (509) (83) (426) 513%
Residential Real Estate (67) (95) 28 -29%
Consumer (110) (145) 35 -24%
Total charge-offs (712) (363) (349) 96%
Commercial 9 35 (26) -74%
Commercial Real Estate 380 220 160 73%
Residential Real Estate 16 4 12 300%
Consumer 3 2 1 50%
Total recoveries 408 261 147 56%
Net charge-offs (304) (102) (202) 198%
Provision charged to income 200 (450) 650 -144%
Allowance for loan losses, end of period $ 8,255 $ 8,806 $ (551) -6%
Ratio of net loans charged-off to average gross loans outstanding, annualized 0.08% 0.03% 0.05% 167%
Ratio of allowance for loan losses to gross loans outstanding 1.49% 1.81% -0.32% -18%

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 September 30, 2014, the Company had total assets of $749 million and operated seventeen branches in the communities of Grays Harbor, Pacific, Whatcom, Skagit, Clark 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 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 and its wholly-owned subsidiary, Bank of the Pacific. 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 for the year ended December 31, 2013, 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