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Pacific Financial Corporation Earnings Increase 32% for Full Year 2014; Earns $4.9 Million in 2014 and $1.1 Million in Fourth Quarter of 2014

ABERDEEN, Wash., Feb. 2, 2015 (GLOBE NEWSWIRE) -- Pacific Financial Corporation (OTCQB:PFLC), the holding company for Bank of the Pacific, today reported that 2014 net income increased 32% to $4.9 million, or $0.48 per share, from $3.7 million, or $0.37 per share, in 2013. Fourth quarter 2014 net income increased 42% to $1.1 million, or $0.11 per share, from $789,000, or $0.08 per share for the fourth quarter a year ago. All results for 2014 are unaudited.

Current year results reflect a reduction in gain on sale of residential real estate loans, due to a decline in refinancing activity, as compared to 2013. Prior year earnings were positively impacted by a credit to the provision for losses of $450,000 and gains on sale of investment securities of $405,000, partially offset by a one-time cost of $615,000 relating to the conversion of three branches purchased from Sterling Savings Bank.

"We delivered solid earnings in 2014 generated by a strong momentum in loan production, steady net interest margin and reduction in operating costs, especially OREO expenses," said Dennis A. Long, President and Chief Executive Officer, Pacific Financial Corporation. "Our diversified loan portfolio grew 12%, while non-interest bearing deposits increased 14% from a year ago. Our recently converted Vancouver full-service commercial banking center is already well above our breakeven hurdle, thanks to our dedicated employees who are effectively building business relationships in this vibrant market."

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

  • Net interest income increased 14% to $27.0 million for 2014, compared to $23.8 million for 2013. Net interest income increased 9% to $6.8 million for the current quarter, compared to $6.3 million for the fourth quarter a year ago and declined slightly from $6.9 million for the third quarter 2014.
  • Net interest margin expanded 17 basis points to 4.17% for 2014, from 4.00% for 2013. Net interest margin was 4.01% for fourth quarter 2014, compared to 4.13% for the preceding quarter, and 3.98% for fourth quarter 2013.
  • Overall operating (noninterest) expenses declined 5% in 2014 from 2013 reflecting reductions in OREO expenses and the previously mentioned one-time conversion costs in 2013. Expenses were flat in the fourth quarter 2014 compared to both the preceding and year ago quarters, resulting in greater operating efficiencies.
  • Gross loans increased 12% to $563.1 million, compared to $504.7 million at December 31, 2013, and grew 2% from $552.1 million at September 30, 2014.
  • Noninterest-bearing deposits were $165.8 million at December 31, 2014, compared to $145.0 million at year end 2013, and $182.3 million at September 30, 2013.
  • Nonperforming assets totaled $10.1 million, or 1.36% of total assets at December 31, 2014, compared to $10.0 million, or 1.42% of total assets at December 31, 2013, and $6.4 million, or 0.86% of total assets at September 30, 2014.
  • For the full year, net charge-offs were $306,000, compared to $549,000 for 2013. Net charge-offs declined substantially to $2,000 in the current quarter, from $447,000 for the fourth quarter 2013, and $160,000 for the third quarter 2014.
  • The company declared an annual cash dividend of $0.21 per share, a 5% increase from 2013. Capital levels exceeded regulatory requirements for a well-capitalized financial institution, with a total risk-based capital ratio of 13.60% and a leverage ratio of 9.81% at December 31, 2014.

"We are excited to build on our financial performance for 2014 by announcing our entry into the Salem, Oregon market with a team of experienced and respected commercial lenders led by Dan Ebert," said Denise Portmann, President and Chief Executive Officer of Bank of the Pacific. "As the state capital, Salem is a home to a dynamic business community including a number of world class wineries located in the region. This new team will complement our continued efforts to broaden and grow new and existing customer relationships throughout all the markets we serve."

OPERATING RESULTS

PACIFIC FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in Thousands, Except per Share Data)
For the Quarter Ended Sequential Year over
December 31, September 30, December 31, Quarter Year
2014 2014 2013 % Change % Change
INTEREST AND DIVIDEND INCOME
Loans $ 6,805 $ 6,894 $ 6,243 -1% 9%
Deposits in banks and federal funds sold 26 24 29 8% -10%
Securities available for sale:
Taxable 287 296 305 -3% -6%
Tax-exempt 166 164 211 1% -21%
Securities held to maturity:
Taxable 2 2 2 0% 0%
Tax-exempt 19 19 23 0% -17%
FHLB & PCBB dividends 31 1 1 3000% 3000%
Total interest and dividend income 7,336 7,400 6,814 -1% 8%
INTEREST EXPENSE
Deposits:
Interest-bearing demand and savings 166 134 153 24% 8%
Time 252 269 295 -6% -15%
Short-term borrowings -- 1 9 -100% -100%
Long-term borrowings 57 53 45 8% 27%
Junior subordinated debentures 61 61 61 0% 0%
Total interest expense 536 518 563 3% -5%
Net interest income 6,800 6,882 6,251 -1% 9%
LOAN LOSS PROVISION 100 100 -- 0% 0%
Net interest income after loan loss provision 6,700 6,782 6,251 -1% 7%
NON-INTEREST INCOME
Service charges on deposit accounts 450 450 450 0% 0%
Net loss on sale of other real estate owned (28) (85) (3) -67% 833%
Net gains from sales of loans 970 1,120 865 -13% 12%
Net gains on sales of securities available for sale -- 38 4 -100% -100%
Net other-than-temporary impairment -- -- 1 100% -100%
Earnings on bank owned life insurance 126 127 110 -1% 15%
Other operating income 503 624 495 -19% 2%
Total non-interest income 2,021 2,274 1,922 -11% 5%
NON-INTEREST EXPENSE
Salaries and employee benefits 4,494 4,286 4,030 5% 12%
Occupancy 512 483 501 6% 2%
Equipment 274 261 241 5% 14%
Data processing 509 534 478 -5% 6%
Professional services 108 230 217 -53% -50%
Other real estate owned write-downs -- 1 310 -100% -100%
Other real estate owned operating costs 48 100 132 -52% -64%
State taxes 103 110 98 -6% 5%
FDIC and state assessments 110 119 140 -8% -21%
Other non-interest expense 969 1,009 975 -4% -1%
Total non-interest expense 7,127 7,133 7,122 0% 0%
INCOME BEFORE PROVISION FOR INCOME TAXES 1,594 1,923 1,051 -17% 52%
PROVISION FOR INCOME TAXES 473 549 262 -14% 81%
Effective Tax Rate 29.67% 28.55% 24.93% 4% 19%
NET INCOME APPLICABLE TO COMMON SHAREHOLDERS $ 1,121 $ 1,374 $ 789 -18% 42%
EARNINGS PER COMMON SHARE:
BASIC $ 0.11 $ 0.13 $ 0.08
DILUTED $ 0.11 $ 0.13 $ 0.08
WEIGHTED AVERAGE SHARES OUTSTANDING:
BASIC 10,369,417 10,281,745 10,129,331
DILUTED 10,459,808 10,379,166 10,219,443
PACIFIC FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in Thousands, Except per Share Data)
For the Year Ended One
December 31, December 31, Year
2014 2013 % Change
INTEREST AND DIVIDEND INCOME
Loans $ 26,937 $ 24,401 10%
Deposits in banks and federal funds sold 89 114 -22%
Securities available for sale:
Taxable 1,261 769 64%
Tax-exempt 749 798 -6%
Securities held to maturity:
Taxable 8 10 -20%
Tax-exempt 81 198 -59%
FHLB & PCBB dividends 33 2 1550%
Total interest and dividend income 29,158 26,292 11%
INTEREST EXPENSE
Deposits:
Interest-bearing demand and savings 581 700 -17%
Time 1,087 1,322 -18%
Short-term borrowings 1 9 -89%
Long-term borrowings 215 214 0%
Secured borrowings -- -- 0%
Junior subordinated debentures 241 247 -2%
Total interest expense 2,125 2,492 -15%
Net interest income 27,033 23,800 14%
LOAN LOSS PROVISION (RECAPTURE) 300 (450) -167%
Net interest income after loan loss provision (recapture) 26,733 24,250 10%
NON-INTEREST INCOME
Service charges on deposit accounts 1,809 1,731 5%
Net loss on sale of other real estate owned (207) 40 -618%
Net gains from sales of loans 3,686 5,171 -29%
Net gains on sales of securities available for sale 88 405 -78%
Net other-than-temporary impairment (48) (37) 30%
Earnings on bank owned life insurance 505 452 12%
Other operating income 2,246 2,193 2%
Total non-interest income 8,079 9,955 -19%
NON-INTEREST EXPENSE
Salaries and employee benefits 17,118 17,013 1%
Occupancy 2,006 1,839 9%
Equipment 1,050 860 22%
Data processing 2,009 2,268 -11%
Professional services 745 935 -20%
Other real estate owned write-downs 67 946 -93%
Other real estate owned operating costs 238 408 -42%
State taxes 417 458 -9%
FDIC and state assessments 491 535 -8%
Other non-interest expense 4,014 4,240 -5%
Total non-interest expense 28,155 29,502 -5%
INCOME BEFORE PROVISION FOR INCOME TAXES 6,657 4,703 42%
PROVISION FOR INCOME TAXES 1,730 972 78%
Effective Tax Rate 25.99% 20.67% 26%
NET INCOME APPLICABLE TO COMMON SHAREHOLDERS $ 4,927 $ 3,731 32%
EARNINGS PER COMMON SHARE:
BASIC $ 0.48 $ 0.37
DILUTED $ 0.48 $ 0.37
WEIGHTED AVERAGE SHARES OUTSTANDING:
BASIC 10,256,242 10,121,738
DILUTED 10,347,338 10,189,888
PACIFIC FINANCIAL CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands, except per share data)
Sequential Year over
December 31, September 30, December 31, Quarter Year
2014 2014 2013 % Change % Change
ASSETS
Cash and cash equivalents:
Cash and due from banks $ 14,782 $ 15,284 $ 12,214 -3% 21%
Interest-bearing deposits in banks 16,255 25,497 23,734 -36% -32%
Total cash and cash equivalents 31,037 40,781 35,948 -24% -14%
Interest-bearing certificates of deposit (original maturities greater than 90 days) 2,727 2,727 2,727 0% 0%
Federal Home Loan Bank stock, at cost 2,896 2,926 3,013 -1% -4%
Pacific Coast Bankers' Bank stock, at cost 1,000 1,000 -- 0% 100%
Investment securities:
Investment securities available-for-sale, at fair market value
(amortized cost of $86,907, 89,326 and $97,536) 87,440 89,328 96,144 -2% -9%
Investment securities held-to-maturity, at amortized cost
(fair value of $1,852, $1,874 and $2,158) 1,829 1,857 2,132 -2% -14%
Total investment securities 89,269 91,185 98,276 -2% -9%
Loans held-for-sale 5,786 8,161 7,765 -29% -25%
Loans, net of deferred loan fees 563,099 552,140 504,666 2% 12%
Allowance for loan losses (8,353) (8,255) (8,359) 1% 0%
Loans, net 554,746 543,885 496,307 2% 12%
Premises and equipment, net of accumulated depreciation and amortization 16,303 16,460 16,790 -1% -3%
Other real estate owned and foreclosed assets 999 1,210 2,771 -17% -64%
Accrued interest receivable 2,348 2,337 2,307 0% 2%
Cash surrender value of life insurance 18,742 18,615 18,237 1% 3%
Goodwill 12,168 12,168 12,168 0% 0%
Other intangible assets 1,439 1,449 1,481 -1% -3%
Other assets 6,073 6,143 7,249 -1% -16%
TOTAL ASSETS $ 745,533 $ 749,047 $ 705,039 0% 6%
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
Deposits:
Demand $ 165,760 $ 182,259 $ 145,028 -9% 14%
Interest-bearing demand and savings 354,611 343,524 336,260 3% 5%
Time deposits 118,683 118,221 126,059 0% -6%
Total deposits 639,054 644,004 607,347 -1% 5%
Accrued interest payable 145 141 167 3% -13%
Short-term borrowings -- -- -- 0% 0%
Long-term borrowings 11,453 11,491 10,000 0% 15%
Junior subordinated debentures 13,403 13,403 13,403 0% 0%
Other liabilities 8,844 6,751 6,985 31% 27%
Total liabilities 672,899 675,790 637,902 0% 5%
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY
Preferred Stock, par value none
5,000,000 shares authorized, none outstanding
Common Stock, par value $1
25,000,000 shares authorized, 10,371,460, 10,367,460 and 10,182,083 shares
issued and outstanding at 12/31/2014, 09/30/2014, and 12/31/2013, respectively 10,371 10,367 10,182 0% 2%
Additional paid-in-capital 42,991 42,940 41,817 0% 3%
Retained earnings 19,256 20,312 16,507 -5% 17%
Accumulated other comprehensive income/(loss) 16 (362) (1,369) -104% -101%
Total shareholders' equity 72,634 73,257 67,137 -1% 8%
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 745,533 $ 749,047 $ 705,039 0% 6%

Net Interest Income

Net interest income for the quarter and twelve months ended December 31, 2014 increased from the quarter and twelve months ended December 31, 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 our Washington and Oregon markets. Investment securities and federal funds sold decreased as a proportion of the balance sheet, due to the strong loan demand during the current year. Funding costs have declined over the year due to the shift in mix toward non-interest bearing demand and lower-cost deposits, and continued historically low interest rates.

Net interest income for the current quarter decreased from the third quarter of 2014, primarily reflecting lower loan yields due to increased competition in our markets, despite higher loan balances. Interest expense was virtually unchanged between the quarters, 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
December 31, 2014
For the Three
Months Ended
September 30, 2014


$ Change


% Change
For the Three
Months Ended
December 31, 2013


$ Change


% Change
Interest and dividend income $ 7,336 $ 7,400 $ (64) -1% $ 6,814 $ 522 8%
Interest expense 536 518 18 3% 563 (27) -5%
Net interest income 6,800 6,882 (82) -1% 6,251 549 9%
Loan loss provision 100 100 -- 0% -- 100 100%
Non-interest income 2,021 2,274 (253) -11% 1,922 99 5%
Non-interest expense 7,127 7,133 (6) 0% 7,122 5 0%
INCOME BEFORE PROVISION FOR INCOME TAXES 1,594 1,923 (329) -17% 1,051 543 52%
PROVISION FOR INCOME TAXES 473 549 (76) -14% 262 211 81%
NET INCOME $ 1,121 $ 1,374 $ (253) -18% $ 789 $ 332 42%
INCOME PER COMMON SHARE:
BASIC (1) $ 0.11 $ 0.13 $ (0.02) -15% $ 0.08 $ 0.03 38%
DILUTED (2) $ 0.11 $ 0.13 $ (0.02) -15% $ 0.08 $ 0.03 38%
Average common shares outstanding - basic (1) 10,369,417 10,281,745 87,672 1% 10,129,331 240,086 2%
Average common shares outstanding - diluted (2) 10,459,808 10,379,166 80,642 1% 10,219,443 240,365 2%
For the Twelve
Months Ended
December 31, 2014
For the Twelve
Months Ended
December 31, 2013


$ Change


% Change
Interest and dividend income $ 29,158 26,292 2,866 11%
Interest expense 2,125 2,492 (367) -15%
Net interest income 27,033 23,800 3,233 14%
Loan loss provision 300 (450) 750 -167%
Non-interest income 8,079 9,955 (1,876) -19%
Non-interest expense 28,155 29,502 (1,347) -5%
INCOME BEFORE PROVISION FOR INCOME TAXES 6,657 4,703 1,954 42%
PROVISION FOR INCOME TAXES 1,730 972 758 78%
NET INCOME $ 4,927 3,731 1,196 32%
INCOME PER COMMON SHARE:
BASIC (1) $ 0.48 0.37 0.11 30%
DILUTED (2) $ 0.48 0.37 0.11 30%
Average common shares outstanding - basic (1) 10,256,242 10,121,738 134,504 1%
Average common shares outstanding - diluted (2) 10,347,338 10,189,888 157,450 2%

Noninterest Income

Noninterest income for fourth quarter 2014 fell compared to the preceding quarter, primarily due to seasonal declines in residential real estate loan production and annuity sales. Noninterest income was up compared to the year ago quarter primarily as a result of a $140,000 gain on sale of government guaranteed loans in the current quarter. In addition, fee income from annuity sales increased in the current quarter compared to the fourth quarter of 2013. "Our annuity products continue to be attractive to our customers", added Portmann. "Annuities provide a viable alternative investment for our customers, given the current low interest rate environment. By 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 lower in the current period as compared to the prior quarter, reflecting a decline in such holdings. This is in contrast to an increase compared to fourth quarter in 2013, reflecting a more aggressive approach to liquidation in the current quarter in order to reduce the levels of foreclosed assets.

Noninterest income for 2014 was down from 2013, reflecting the declines in gains on sale of residential mortgage loans due to the reduction in refinancing activity beginning in the latter half of 2013, declines in gains on sale of securities and higher losses on sale of OREO due to a more aggressive approach to reducing these assets.

Noninterest income
(Unaudited)
(Dollars in Thousands)
For The Three Months Ended
December 31,
2014
September 30,
2014

$ Change

% Change
December 31,
2013

$ Change

% Change
Service charges on deposit accounts $ 450 $ 450 $ -- 0% $ 450 $ -- 0%
Net (loss) on sale of other real estate owned (28) (85) 57 -67% (3) (25) 833%
Net gains from sales of loans 970 1,120 (150) -13% 865 105 12%
Net gains on sales of securities available for sale -- 38 (38) -100% 4 (4) -100%
Net other-than-temporary impairment -- -- -- 0% 1 (1) -100%
Earnings on bank owned life insurance 126 127 (1) -1% 110 16 15%
Other operating income
Fee income 405 498 (93) -19% 419 (14) -3%
Annuity sales income 81 111 (30) -27% 71 10 14%
Other non-interest income 17 15 2 13% 5 12 240%
Total non-interest income $ 2,021 $ 2,274 $ (253) -11% $ 1,922 $ 99 5%
For The Twelve Months Ended
December 31,
2014
December 31,
2013

$ Change

% Change
Service charges on deposit accounts $ 1,809 $ 1,731 $ 78 5%
Net gain (loss) on sale of other real estate owned (207) 40 (247) -618%
Net gains from sales of loans 3,686 5,171 (1,485) -29%
Net gains on sales of securities available for sale 88 405 (317) -78%
Net other-than-temporary impairment (48) (37) (11) 30%
Earnings on bank owned life insurance 505 452 53 12%
Other operating income
Fee income 1,709 1,811 (102) -6%
Annuity sales income 464 320 144 45%
Other non-interest income 73 62 11 18%
Total non-interest income $ 8,079 $ 9,955 $ (1,876) -19%

Noninterest Expense

Noninterest expense for fourth quarter 2014 was virtually unchanged as compared to third quarter 2014 and the year ago quarter. Increases in personnel expense related to the the addition of loan production personnel and branch staff for a new branch that opened in the fourth quarter of 2013 were partially offset by $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. Decreases in OREO operating costs and reduction in professional services expenses associated with a change in external audit firms earlier in the year also contributed to a decline in expenses. Total costs associated with OREO and related third-party loan expenses decreased due to the decline in OREO balances and stabilization of collateral valuations.

Noninterest expense for 2014 was down as compared to 2013 for reasons noted above. Also, the Bank incurred one-time expenses of $615,000 related to the acquisition of three branches from Sterling Savings Bank in June 2013. In addition, OREO write-downs and expenses and professional services expense were down as compared to the prior period for reasons noted above.

Noninterest expense
(Unaudited)
(Dollars in Thousands)
For The Three Months Ended
December 31,
2014
September 30,
2014

$ Change

% Change
December 31,
2013

$ Change

% Change
Salaries and employee benefits $ 4,494 $ 4,286 $ 208 5% $ 4,030 $ 464 12%
Occupancy 512 483 29 6% 501 11 2%
Equipment 274 261 13 5% 241 33 14%
Data processing 509 534 (25) -5% 478 31 6%
Professional services 108 230 (122) -53% 217 (109) -50%
Other real estate owned write-downs -- 1 (1) -100% 310 (310) -100%
Other real estate owned operating costs 48 100 (52) -52% 132 (84) -64%
State taxes 103 110 (7) -6% 98 5 5%
FDIC and state assessments 110 119 (9) -8% 140 (30) -21%
Other non-interest expense:
Director fees 79 80 (1) -1% 60 19 32%
Communication 53 65 (12) -18% 42 11 26%
Advertising 104 73 31 42% 94 10 11%
Professional liability insurance 20 24 (4) -17% 22 (2) -9%
Amortization 95 99 (4) -4% 104 (9) -9%
Other non-interest expense 618 668 (50) -7% 653 (35) -5%
Total non-interest expense $ 7,127 $ 7,133 $ (6) 0% $ 7,122 $ 5 0%
For The Twelve Months Ended
December 31,
2014
December 31,
2013

$ Change

% Change
Salaries and employee benefits $ 17,118 $ 17,013 $ 105 1%
Occupancy 2,006 1,839 167 9%
Equipment 1,050 860 190 22%
Data processing 2,009 2,268 (259) -11%
Professional services 745 935 (190) -20%
Other real estate owned write-downs 67 946 (879) -93%
Other real estate owned operating costs 238 408 (170) -42%
State taxes 417 458 (41) -9%
FDIC and state assessments 491 535 (44) -8%
Other non-interest expense:
Director fees 287 224 63 28%
Communication 209 172 37 22%
Advertising 331 316 15 5%
Professional liability insurance 85 90 (5) -6%
Amortization 385 415 (30) -7%
Other non-interest expense 2,717 3,023 (306) -10%
Total non-interest expense $ 28,155 $ 29,502 $ (1,347) -5%

Income Taxes

The Company recorded an income tax provision for the three and twelve months ended December 31, 2014 of $473,000 and $1.7 million, respectively. This compares to a provision for the three and twelve months ended December 31, 2013 of $262,000 and $972,000, respectively. The increase in the effective tax rate is primarily due to a decline in non-taxable income as a result of the growth in loans as a proportion of earning assets during 2014. The amount of the provision for each period was commensurate with the estimated tax liability associated with the net income earned during the period.

SUMMARY BALANCE SHEET OVERVIEW
(Unaudited)
(Dollars in Thousands)
December September % December %
31, 2014 30, 2014 $ Change Change 31, 2013 $ Change Change
Assets:
Cash and cash equivalents $ 31,037 $ 40,781 $ (9,744) -24% $ 35,948 $ (4,911) -14%
Interest-bearing certificates of deposit 2,727 2,727 -- 0% 2,727 -- 0%
Federal Home Loan Bank stock, at cost 2,896 2,926 (30) -1% 3,013 (117) -4%
Pacific Coast Bankers' Bank stock, at cost 1,000 1,000 -- 0% -- 1,000 100%
Investment securities 89,269 91,185 (1,916) -2% 98,276 (9,007) -9%
Loans held-for-sale 5,786 8,161 (2,375) -29% 7,765 (1,979) -25%
Gross loans, net of deferred fees 563,099 552,140 10,959 2% 504,666 58,433 12%
Allowance for loan losses (8,353) (8,255) (98) 1% (8,359) 6 0%
Net loans 554,746 543,885 10,861 2% 496,307 58,439 12%
Other assets 58,072 58,382 (310) -1% 61,003 (2,931) -5%
Total assets $ 745,533 $ 749,047 $ (3,514) 0% $ 705,039 $ 40,494 6%
Liabilities and shareholders' equity
Total deposits $ 639,054 $ 644,004 $ (4,950) -1% $ 607,347 $ 31,707 5%
Accrued interest payable 145 141 4 3% 167 (22) -13%
Borrowings 24,856 24,894 (38) 0% 23,403 1,453 6%
Other liabilities 8,844 6,751 2,093 31% 6,985 1,859 27%
Shareholders' equity 72,634 73,257 (623) -1% 67,137 5,497 8%
Total liabilities and shareholders' equity $ 745,533 $ 749,047 $ (3,514) 0% $ 705,039 $ 40,494 6%
Cash and Cash Equivalents and Investment Securities
(Unaudited)
(Dollars in Thousands)
December 31, 2014 % of Total September 30, 2014 % of Total $
Change
% Change December 31, 2013 % of Total $
Change
% Change
Cash and due from banks $ 14,782 12% $ 15,284 11% $ (502) -3% $ 12,214 9% $ 2,568 21%
Cash equivalents:
Interest-bearing deposits 16,255 13% 25,497 18% (9,242) -36% 23,734 17% (7,479) -32%
Interest-bearing certificates of deposit 2,727 2% 2,727 2% -- 0% 2,727 2% -- 0%
Total cash equivalents and certificate of deposits 33,764 27% 43,508 31% (9,744) -22% 38,675 28% (4,911) -13%
Investment securities:
Collateralized mortgage obligations: agency issued 38,767 31% 40,039 30% (1,272) -3% 38,791 28% (24) 0%
Collateralized mortgage obligations: non-agency issued 527 0% 579 0% (52) -9% 2,011 1% (1,484) -74%
Mortgage-backed securities: agency issued 12,322 10% 12,630 9% (308) -2% 13,548 10% (1,226) -9%
U.S. Government and agency securities 8,056 6% 8,655 6% (599) -7% 8,811 6% (755) -9%
State and municipal securities 29,597 23% 29,282 21% 315 1% 34,133 24% (4,536) -13%
Corporate bonds -- 0% -- 0% -- 0% 982 1% (982) -100%
FHLB Stock, at cost 2,896 2% 2,926 2% (30) -1% 3,013 2% (117) -4%
Pacific Coast Bankers' Bank stock, at cost 1,000 1% 1,000 1% -- 0% -- 0% 1,000 100%
Total investment securities 93,165 73% 95,111 69% (1,946) -2% 101,289 72% (8,124) -8%
Total cash equivalents and investment securities $ 126,929 100% $ 138,619 100% $ (11,690) -8% $ 139,964 100% $ (13,035) -9%
Total cash equivalents and investment securities as a % of total assets 17% 19% 20%
Investment securities
(Unaudited)
(Dollars in Thousands)
For the Three Months Ended December 31,
2014
September 30,
2014

$ Change

% Change
December 31,
2013

$ Change

% Change
Balance beginning of period $ 95,111 $ 93,539 $ 1,572 2% $ 96,178 $ (1,067) -1%
Principal purchases 1,182 7,482 (6,300) -84% 9,879 (8,697) -88%
Proceeds from sales -- (3,927) 3,927 -100% (595) 595 -100%
Principal paydowns, maturities, and calls (3,348) (1,673) (1,675) 100% (3,310) (38) 1%
Gains on sales of securities -- 94 (94) -100% 4 (4) -100%
Losses on sales of securities -- (56) 56 -100% -- -- 0%
OTTI loss writedown -- -- -- 0% -- -- 0%
Change in unrealized gains (loss) before tax 529 (64) 593 -927% (576) 1,105 -192%
Amortization and accretion of discounts and premiums (309) (284) (25) 9% (291) (18) 6%
Total investment securities $ 93,165 $ 95,111 $ (1,946) -2% $ 101,289 $ (8,124) -8%

Liquidity remains strong based on the current levels of cash equivalents and investment securities. The expected modified duration (adjusted for calls, consensus pre-payment speeds and rate adjustment dates) of the investment portfolio was 4.1 years at December 31, 2014, 4.3 years at September 30, 2014 and 4.2 years at December 31, 2013.

"While we decreased our cash equivalents during the current quarter to fund loan growth and seasonal declines in demand deposits, we maintain a secured borrowing facility with the Federal Home Loan Bank of Seattle of $140.8 million, of which $11.4 million is currently outstanding. We also have unsecured lines of credit totaling $16.0 million with correspondent banks, all of which are currently available," said Douglas N. Biddle, Executive Vice President and Chief Financial Officer.

LOANS

Loans by category
(Unaudited) % of % of % of
(Dollars in Thousands) December 31, 2014 Gross Loans September, 30, 2014 Gross Loans $
Change
% Change December 31, 2013 Gross Loans $
Change
% Change
Commercial and agricultural $ 120,517 21% $ 112,873 20% $ 7,644 7% $ 104,111 21% $ 16,406 16%
Real estate:
Construction and development 26,711 5% 25,419 5% 1,292 5% 29,096 6% (2,385) -8%
Residential 1-4 family 92,965 16% 94,101 17% (1,136) -1% 87,762 17% 5,203 6%
Multi-family 18,541 3% 20,554 4% (2,013) -10% 17,520 3% 1,021 6%
Commercial real estate -- owner occupied 125,632 23% 122,090 22% 3,542 3% 105,594 21% 20,038 19%
Commercial real estate -- non owner occupied 117,137 21% 120,569 22% (3,432) -3% 117,294 23% (157) 0%
Farmland 22,245 4% 22,926 4% (681) -3% 23,698 5% (1,453) -6%
Consumer 40,565 7% 34,787 6% 5,778 17% 20,728 4% 19,837 96%
Gross loans 564,313 100% 553,319 100% 10,994 2% 505,803 100% 58,510 12%
Less: allowance for loan losses (8,353) (8,255) (98) (8,359) 6
Less: deferred fees (1,214) (1,179) (35) (1,137) (77)
Loans, net $ 554,746 $ 543,885 $ 10,861 $ 496,307 $ 58,439

Loan portfolio growth continues to be well diversified and generated predominately within our Washington and Oregon markets. This includes the sale of $3.6 million in purchased government-guaranteed commercial and commercial real estate loans during the quarter, which currently total $32.7 million. In addition, the loan portfolio contains $30.8 million in indirect consumer loans to individuals 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) December 31, 2014 Percent of Total September 30, 2014 Percent of Total $ Change December 31, 2013 Percent of Total $ Change
Interest-bearing demand and money market $ 274,614 42% $ 266,863 42% $ 7,751 $ 262,848 43% $ 11,766
Savings 79,997 13% 76,661 12% 3,336 73,412 12% 6,585
Time deposits 118,683 19% 118,221 18% 462 126,059 21% (7,376)
Total interest-bearing deposits 473,294 74% 461,745 72% 11,549 462,319 76% 10,975
Non-interest bearing demand 165,760 26% 182,259 28% (16,499) 145,028 24% 20,732
Total deposits $ 639,054 100% $ 644,004 100% $ (4,950) $ 607,347 100% $ 31,707

Total deposits were down at December 31, 2014, compared to previous quarter, but up compared to the same quarter a year ago. Non-interest bearing deposits declined in the current quarter due to seasonal outflows associated with decreased 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 mitigated the impact of such seasonal factors. 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 fourth quarter 2014 from fourth quarter in 2013.

Total brokered deposits were $22.4 million at December 31, 2014, which included $2.3 million via reciprocal deposit arrangements. This compares to $22.6 million and $21.6 million at September 30, 2014 and December 31, 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 satisfy the requirements to qualify as "well-capitalized" under regulatory guidelines. Capital ratios decreased slightly as compared to the prior quarter primarily due to asset growth and the declaration of a cash dividend of $2.2 million, or $0.21 per share, in fourth quarter 2014. Capital growth is provided primarily through earnings retention. Also, $1.2 million of additional capital was supplied in the prior quarter 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 December 31, 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.

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 December 31, 2014 and 2013, 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.


December 31,
2014

September 30,
2014


Change

December 31,
2013


Change
Regulatory Minimum
to be "Well
Capitalized"
greater than or equal to
Pacific Financial Corporation
Actual amount
Total risk-based capital ratio 13.60% 14.09% (0.49) 14.11% (0.51) 10%
Tier 1 risk-based capital ratio 12.35% 12.83% (0.48) 12.85% (0.50) 6%
Leverage ratio 9.81% 10.09% (0.28) 9.83% (0.02) 5%
Tangible common equity ratio 8.06% 8.11% (0.05) 7.74% 0.32 n/a
Bank of the Pacific
Total risk-based capital ratio 13.52% 13.87% (0.35) 14.03% (0.51) 10%
Tier 1 risk-based capital ratio 12.27% 12.61% (0.34) 12.78% (0.51) 6%
Leverage ratio 9.73% 9.91% (0.18) 9.77% (0.04) 5%
FINANCIAL PERFORMANCE OVERVIEW
(Unaudited)
(Dollars in Thousands, Except per Share Data)
For The Three Months Ended
December 31,
2014
September 30,
2014

Change
December 31,
2013

Change
Selective performance ratios
Return on average assets, annualized 0.59% 0.74% (0.15) 0.45% 0.14
Return on average equity, annualized 5.98% 7.55% (1.57) 4.53% 1.45
Efficiency ratio (1) 80.80% 77.91% 2.89 87.14% (6.34)
Share and per share information
Average common shares outstanding - basic 10,369,417 10,281,745 87,672 10,129,331 240,086
Average common shares outstanding - diluted 10,459,808 10,379,166 80,642 10,219,443 240,365
Basic income per common share 0.11 0.13 (0.02) 0.08 0.03
Diluted income per common share 0.11 0.13 (0.02) 0.08 0.03
Book value per common share (2) 7.00 7.07 (0.07) 6.60 0.40
Tangible book value per common share (3) 5.69 5.75 (0.06) 5.26 0.43
For The Twelve Months Ended
December 31,
2014
December 31,
2013

Change
Selective performance ratios
Return on average assets, annualized 0.68% 0.55% 0.13
Return on average equity, annualized 6.92% 5.48% 1.44
Efficiency ratio (1) 80.19% 87.40% (7.21)
Share and per share information
Average common shares outstanding - basic 10,256,242 10,121,738 134,504
Average common shares outstanding - diluted 10,347,338 10,189,888 157,450
Basic income per common share 0.48 0.37 0.11
Diluted income per common share 0.48 0.37 0.11
(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
December 31,
2014
September 30,
2014

Change
December 31,
2013

Change
Selective performance ratios
Yield on average gross loans (1) (2) 4.84% 4.95% (0.11) 4.97% (0.13)
Yield on average investment securities (1) 2.00% 2.02% (0.02) 2.00% --
Cost of average interest bearing deposits 0.35% 0.34% 0.01 0.39% (0.04)
Cost of average borrowings 1.88% 1.83% 0.05 1.80% 0.08
Cost of average total deposits and borrowings 0.32% 0.31% 0.01 0.36% (0.04)
Cost of average interest-bearing liabilities 0.43% 0.42% 0.01 0.46% (0.03)
Yield on average interest-earning assets 4.32% 4.44% (0.12) 4.33% (0.01)
Cost of average interest-bearing liabilities 0.43% 0.42% 0.01 0.46% (0.03)
Net interest spread 3.89% 4.02% (0.13) 3.87% 0.02
Net interest margin (1) 4.01% 4.13% (0.12) 3.98% 0.03
For The Twelve Months Ended
December 31,
2014
December 31,
2013

Change
Selective performance ratios
Yield on average gross loans (1) (2) 4.99% 5.06% (0.07)
Yield on average investment securities (1) 2.22% 1.87% 0.35
Cost of average interest bearing deposits 0.36% 0.45% (0.09)
Cost of average borrowings 1.89% 1.97% (0.08)
Cost of average total deposits and borrowings 0.33% 0.41% (0.08)
Cost of average interest-bearing liabilities 0.43% 0.52% (0.09)
Yield on average interest-earning assets 4.49% 4.39% 0.10
Cost of average interest-bearing liabilities 0.43% 0.52% (0.09)
Net interest spread 4.06% 3.87% 0.19
Net interest margin (1) 4.17% 4.00% 0.17
(1) Tax-exempt income has been adjusted to a tax equivalent basis at a 34% rate.
(2) Includes loans held for sale

Net Interest Margin

Net interest margin for the current quarter declined compared to third quarter 2014, primarily due to reductions in yields on investment securities and loans. Declines in yields on investment securities were primarily due to portfolio restructuring to reduce duration for interest rate risk management purposes. Loan yield declines primarily resulted from increased competition for high quality borrowing relationships in the marketplace. In addition, approximately $60,000 in interest income was reversed in fourth quarter 2014 due to the placement of two loan relationships totaling $4.3 million on non-accrual. As a result, loan yields and net interest margin were reduced by 5 and 4 basis points, respectively, for the quarter. Net interest margin improved when compared to fourth quarter 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 year has supported the improvement in net interest margin as well. The improvement in yields on investment securities also enhanced net interest margin for the twelve months ending December 31, 2014 as compared to the same period in 2013. This was primarily the result of redeploying lower yielding cash-equivalents into 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
December 31, 2014 September 30, 2014 December 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 Thousands)
ASSETS:
Interest bearing certificate of deposit $ 2,727 $ 11 1.60% $ 2,727 $ 11 1.60% $ 2,298 $ 9 1.55%
Interest bearing deposits in banks 26,735 15 0.22% 23,928 13 0.22% 34,108 20 0.23%
Investments - taxable 66,466 320 1.91% 63,751 298 1.85% 67,565 308 1.81%
Investments - nontaxable 28,427 280 3.91% 27,646 278 3.99% 33,047 355 4.26%
Gross loans (1) 554,886 6,787 4.85% 549,280 6,871 4.96% 494,136 6,227 5.00%
Loans held for sale 7,306 66 3.58% 7,068 69 3.87% 8,091 63 3.09%
Total interest earning assets 686,547 7,479 4.32% 674,400 7,540 4.44% 639,245 6,982 4.33%
Cash and due from banks 13,483 14,169 12,105
Bank premises and equipment (net) 16,414 16,615 16,676
Other real estate owned 1,063 940 3,861
Deferred fees (1,172) (1,113) (1,114)
Allowance for loan losses (8,306) (8,342) (8,612)
Other assets 40,142 40,757 40,810
Total assets $ 748,171 $ 737,426 $ 702,971
LIABILITIES AND SHAREHOLDERS' EQUITY:
Interest-bearing deposits $ 351,653 $ 166 0.19% $ 343,204 $ 134 0.15% $ 329,218 $ 153 0.18%
Time deposits 118,624 252 0.84% 120,515 269 0.89% 131,245 295 0.89%
FHLB borrowings 11,466 57 1.97% 10,878 61 2.22% 10,000 54 2.14%
Short term borrowings -- -- 0.00% 587 -- 0.00% -- -- 0.00%
Junior subordinated debentures 13,403 61 1.81% 13,403 54 1.60% 13,403 61 1.81%
Total interest bearing liabilities 495,146 536 0.43% 488,587 518 0.42% 483,866 563 0.46%
Non-interest-bearing deposits 172,002 170,560 145,092
Other liabilities 6,655 6,055 4,962
Equity 74,368 72,224 69,051
Total liabilities and shareholders' equity $ 748,171 $ 737,426 $ 702,971
Net interest income (3) $ 6,943 $ 7,022 $ 6,419
Net interest spread 3.89% 4.02% 3.87%
Average yield on investments 2.00% 2.02% 2.00%
Average yield on earning assets (2) (3) 4.32% 4.44% 4.33%
Interest expense to earning assets 0.32% 0.30% 0.35%
Net interest income to earning assets (2) (3) 4.01% 4.13% 3.98%
Reconciliation of Non-GAAP measure:
Tax Equivalent Net Interest Income
Net interest income $ 6,800 $ 6,882 $ 6,251
Tax equivalent adjustment for municipal loan interest 48 46 47
Tax equivalent adjustment for municipal bond interest 95 94 121
Tax equivalent net interest income $ 6,943 $ 7,022 $ 6,419
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 $8.7 million at 12/31/14, $4.8 million at 09/30/2014, and $7.2 million for 12/31/2013 are included in the average loan balances.
(2) Loan interest income includes loan fee income of $196,000, $152,000, and $151,000 for the three months ended 12/31/2014, 09/30/2014, and 12/31/2013, 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 $143,000, $140,000, and $168,000 for the three months ended December 31, 2014, September 30, 2014, and December 31, 2013, respectively.
For the Three Months Ended For the Three Months Ended
December 31, 2014 vs. September 30, 2014 December 31, 2014 vs. December 31, 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 $ -- $ -- $ -- $ 2 $ -- $ 2
Interest bearing deposits in banks 2 -- 2 (4) (1) (5)
Investments - taxable 13 9 22 (5) 17 12
Investments - nontaxable 8 (6) 2 (50) (25) (75)
Gross loans 70 (154) (84) 766 (206) 560
Loans held for sale 2 (5) (3) (6) 9 3
Total interest earning assets $ 95 $ (156) $ (61) $ 703 $ (206) $ 497
LIABILITIES AND SHAREHOLDERS' EQUITY:
Interest-bearing deposits $ 3 $ 29 $ 32 $ 10 $ 3 $ 13
Time deposits (4) (13) (17) (28) (15) (43)
FHLB borrowings 3 (7) (4) 8 (5) 3
Short-term borrowings -- -- -- -- -- --
Long-term borrowings -- 7 7 -- -- --
Total interest bearing liabilities 2 16 18 (10) (17) (27)
Net increase (decrease) in net interest income $ 93 $ (172) $ (79) $ 713 $ (189) $ 524
Average Interest Earning Balances: For the Twelve Months Ended
December 31, 2014 December 31, 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 $ 42 1.54% $ 2,309 $ 29 1.26%
Interest bearing deposits in banks 20,326 47 0.23% 36,540 85 0.23%
Investments - taxable 65,960 1,302 1.97% 55,820 779 1.40%
Investments - nontaxable 30,094 1,258 4.18% 33,428 1,508 4.51%
Gross loans (1) 536,971 26,871 5.00% 477,356 24,303 5.09%
Loans held for sale 7,026 255 3.63% 9,302 312 3.35%
Total interest earning assets 663,104 29,775 4.49% 614,755 27,016 4.39%
Cash and due from banks 13,201 11,636
Bank premises and equipment (net) 16,633 15,831
Other real estate owned 1,658 4,030
Deferred fees (1,123) (1,035)
Allowance for loan losses (8,327) (9,065)
Other assets 40,681 40,894
Total assets $ 725,827 $ 677,046
LIABILITIES AND SHAREHOLDERS' EQUITY:
Interest-bearing deposits $ 344,084 $ 581 0.17% $ 316,184 $ 700 0.22%
Time deposits 122,002 1,087 0.89% 135,447 1,320 0.97%
FHLB borrowings 10,591 215 2.03% 10,049 223 2.22%
Short term borrowings 150 1 0.67% -- -- 0.00%
Junior subordinated debentures 13,403 241 1.80% 13,403 247 1.84%
Total interest bearing liabilities 490,230 2,125 0.43% 475,083 2,490 0.52%
Non-interest-bearing deposits 158,697 129,218
Other liabilities 5,712 4,688
Equity 71,188 68,057
Total liabilities and shareholders' equity $ 725,827 $ 677,046
Net interest income (3) $ 27,650 $ 24,526
Net interest spread 4.06% 3.87%
Average yield on investments 2.22% 1.87%
Average yield on earning assets (2) (3) 4.49% 4.39%
Interest expense to earning assets 0.33% 0.42%
Net interest income to earning assets (2) (3) 4.17% 4.00%
Reconciliation of Non-GAAP measure:
Tax Equivalent Net Interest Income
Net interest income $ 27,033 $ 23,800
Tax equivalent adjustment for municipal loan interest 189 213
Tax equivalent adjustment for municipal bond interest 428 513
Tax equivalent net interest income $ 27,650 $ 24,526
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 $8.7 million at 12/31/14 and $7.2 million for 12/31/2013 are included in the average loan balances.
(2) Loan interest income includes loan fee income of $679,000 and $547,000 for the twelve months ended 12/31/2014 and 12/31/2013, 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 $617,000 and $726,000 for the twelve months ended December 31, 2014 and December 31, 2013, respectively.
For the Twelve Months Ended
` December 31, 2014 vs. December 31, 2013
Increase (Decrease) Due To
(Dollars in Thousands) Net
Volume Rate Change
ASSETS:
Interest bearing certificate of deposit $ 5 $ 8 $ 13
Interest bearing deposits in banks (37) (1) (38)
Investments - taxable 142 381 523
Investments - nontaxable (150) (100) (250)
Gross loans 3,034 (466) 2,568
Loans held for sale (76) 19 (57)
Total interest earning assets $ 2,918 $ (159) $ 2,759
LIABILITIES AND SHAREHOLDERS' EQUITY:
Interest-bearing deposits $ 61 $ (180) $ (119)
Time deposits (130) (103) (233)
FHLB borrowings 12 (20) (8)
Short-term borrowings -- 1 1
Long-term borrowings -- (6) (6)
Total interest bearing liabilities (57) (308) (365)
Net increase (decrease) in net interest income $ 2,975 $ 149 $ 3,124
SUMMARY AVERAGE BALANCE SHEETS
(Unaudited)
(Dollars in Thousands)
Averages for the Three Months Ended December September December
31, 2014 30, 2014 $ Change % Change 31, 2013 $ Change % Change
Assets:
Cash and due from banks $ 13,483 $ 14,169 $ (686) -5% $ 12,105 $ 1,378 11%
Interest-bearing deposits in banks 26,735 23,928 2,807 12% 34,108 (7,373) -22%
Interest bearing certificate of deposit 2,727 2,727 -- 0% 2,298 429 19%
Investment securities 94,893 91,397 3,496 4% 100,612 (5,719) -6%
Loans, net of deferred loan fees 561,020 555,235 5,785 1% 501,113 59,907 12%
Allowance for loan losses (8,306) (8,342) 36 0% (8,612) 306 -4%
Net loans 552,714 546,893 5,821 1% 492,501 60,213 12%
Other assets 57,619 58,312 (693) -1% 61,347 (3,728) -6%
Total assets $ 748,171 $ 737,426 $ 10,745 1% $ 702,971 $ 45,200 6%
Liabilities:
Total deposits $ 642,279 $ 634,279 $ 8,000 1% $ 605,555 $ 36,724 6%
Borrowings 24,869 24,868 1 0% 23,403 1,466 6%
Other liabilities 6,655 6,055 600 10% 4,962 1,693 34%
Total liabilities 673,803 665,202 8,601 1% 633,920 39,883 6%
Equity:
Common equity 74,368 72,224 2,144 3% 69,051 5,317 8%
Total equity 74,368 72,224 2,144 3% 69,051 5,317 8%
Total liabilities and shareholders' equity $ 748,171 $ 737,426 $ 10,745 1% $ 702,971 $ 45,200 6%
Averages for the Twelve Months Ended December December
31, 2014 31, 2013 $ Change % Change
Assets:
Cash and due from banks $ 13,201 $ 11,636 $ 1,565 13%
Interest-bearing deposits in banks 20,326 36,540 (16,214) -44%
Interest bearing certificate of deposit 2,727 2,309 418 18%
Investment securities 96,054 89,248 6,806 8%
Loans, net of deferred loan fees 542,874 485,623 57,251 12%
Allowance for loan losses (8,327) (9,065) 738 -8%
Net loans 534,547 476,558 57,989 12%
Other assets 58,972 60,755 (1,783) -3%
Total assets $ 725,827 $ 677,046 $ 48,781 7%
Liabilities:
Total deposits $ 624,783 $ 580,849 $ 43,934 8%
Borrowings 24,144 23,452 692 3%
Other liabilities 5,712 4,688 1,024 22%
Total liabilities 654,639 608,989 45,650 7%
Equity:
Common equity 71,188 68,057 3,131 5%
Total equity 71,188 68,057 3,131 5%
Total liabilities and shareholders' equity $ 725,827 $ 677,046 $ 48,781 7%

ASSET QUALITY

At December 31, 2014, total adversely classified loans remained virtually unchanged in dollars and as a percentage of gross loans from the preceding quarter. During this period, $4.3 million in commercial real estate loans were placed on nonaccrual status. The collateral value supporting these loans is considered sufficient to mitigate any potential losses, for which specific reserves have already been established. One of these relationships, a $1.7 million loan secured by income-producing commercial real estate, is paid current as to principal and interest. Total loans on accruing status 30-89 days past due continue to remain below 1.00% of gross loans. We monitor delinquencies, defined as loans on accruing status 30-89 days past due, as an indicator of future adversely classified loans. In addition, one private label collateralized mortgage obligation security with a balance of $199,000 as of December 31, 2014 is adversely classified. This security is current as to its scheduled principal and interest payments.

Due to the loans placed on nonaccrual in the current quarter, total nonperforming loans were up as of December 31, 2014 as compared to September 30, 2014 and December 31, 2014. As a result, total nonperforming assets also increased in dollars and as a percentage of total assets, despite the decrease in OREO during the periods. Nonperforming loans consist primarily of commercial real estate loans.

Adversely classified loans and securities
(Unaudited)
(Dollars in Thousands)
December 31,
2014
September 30,
2014

$ Change

% Change
December 31,
2013

$ Change

% Change
Rated substandard or worse, but not impaired $ 7,368 $ 11,020 $ (3,652) -33% $ 2,842 $ 4,526 159%
Impaired 11,311 7,429 3,882 52% 9,922 1,389 14%
Total adversely classified loans1 $ 18,679 $ 18,449 $ 230 1% $ 12,764 $ 5,915 46%
Total investment securities2 $ 199 $ 228 $ (29) -13% $ 1,834 $ (1,635) -89%
Gross loans (excluding deferred loan fees) $ 564,313 $ 553,319 $ 10,994 2% $ 505,803 $ 58,510 12%
Adversely classified loans to gross loans 3.31% 3.33% -0.02% 2.52% 0.79%
Allowance for loan losses $ 8,353 $ 8,255 $ 98 1% $ 8,359 $ (6) 0%
Allowance for loan losses as a percentage of adversely classified loans 44.72% 44.74% -0.02% 65.49% -20.77%
Allowance for loan losses to total impaired loans 73.85% 111.12% -37.27% 84.25% -10.40%
Adversely classified loans and securities to total assets 2.53% 2.49% 0.04% 2% 2.07% 0.46% 22%
1Adversely 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.
2Adversely classified investment securities consist of one private label collateralized mortgage obligation (CMO) as of 12/31/2014 and 09/30/2014 and four private label CMOs as of 12/31/2013.
30-89 Days Past Due by type
(Dollars in Thousands)
December 31, 2014 % of Category September 30, 2014 % of Category $ Change % Change December 31, 2013 % of Category $ Change % Change
Commercial and agricultural $ -- 0.0% $ 7 0.2% $ (7) -100% $ 14 1.0% $ (14) -100%
Real estate:
Construction and development 18 2.1% -- 0.0% 18 100% -- 0.0% 18 100%
Residential 1-4 family 605 71.9% 251 8.7% 354 141% 333 24.0% 272 82%
Multi-family -- 0.0% -- 0.0% -- 0% -- 0.0% -- 0%
Commercial real estate --- owner occupied -- 0.0% -- 0.0% -- 0% -- 0.0% -- 0%
Commercial real estate --- non owner occupied -- 0.0% 2,612 91.0% (2,612) -100% -- 0.0% -- 0%
Farmland 46 5.5% -- 0.0% 46 100% 875 62.9% (829) -95%
Total real estate $ 669 $ 2,863 $ (2,194) -77% $ 1,208 $ (539)
Consumer 172 20.5% $ 2 0.1% 170 8500% 168 12.1% 4 2%
Total loans 30-89 days past due, not in nonaccrual status $ 841 100.0% $ 2,872 100.0% $ (2,031) -71% $ 1,390 100.0% $ (549) -39%
Delinquent loans to total loans, not in nonaccrual status 0.23% 0.60% 0.28%
Non-performing assets
(Unaudited)
(Dollars in Thousands) December 31, 2014 September 30, 2014 $ Change % Change December 31, 2013 $ Change % Change
Loans on nonaccrual status $ 8,716 $ 4,811 $ 3,905 81% $ 7,243 $ 1,473 20%
Loans past due greater than 90 days but not on nonaccrual status 409 409 -- 0% -- 409 --
Total non-performing loans 9,125 5,220 3,905 75% 7,243 1,882 26%
Other real estate owned and foreclosed assets 999 1,210 (211) -17% 2,771 (1,772) -64%
Total nonperforming assets $ 10,124 $ 6,430 $ 3,694 57% $ 10,014 $ 110 1%
Percentage of nonperforming assets to total assets 1.36% 0.86% 1.42%

OREO decreased during fourth quarter 2014 and year-over-year, due to continued liquidation of these assets. OREO valuation adjustments continued to be minimal. At December 31, 2014, the OREO portfolio consisted of 4 properties, down from both third quarter 2014 and fourth quarter 2013. The largest balances in the OREO portfolio at the end of the quarter were attributable to commercial 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 December 31, 2014 % of Category September 30, 2014 % of Category $ Change % Change December 31, 2013 % of Category $ Change % Change
Other real estate owned, beginning of period $ 1,210 121% $ 991 82% $ 219 22% $ 4,334 156% $ (3,124) -72%
Transfers from outstanding loans -- 0% 525 43% (525) -100% 140 5% (140) -100%
Improvements and other additions -- 0% -- 0% -- 0% -- 0% -- 0%
Proceeds from sales (183) -18% (219) -18% 36 -16% (1,415) -51% 1,232 -87%
Net gain (loss) on sales (28) -3% (86) -7% 58 -67% (3) 0% (25) 833%
Impairment charges -- 0% (1) 0% 1 -100% (285) -10% 285 -100%
Total other real estate owned $ 999 100% $ 1,210 100% $ (211) -17% $ 2,771 100% $ (1,772) -64%
For the Twelve Months Ended December 31, 2014 % of Category December 31, 2013 % of Category $ Change % Change
Other real estate owned, beginning of period $ 2,771 277% $ 4,678 169% $ (1,907) -41%
Transfers from outstanding loans 842 84% 1,731 62% (889) -51%
Improvements and other additions -- 0% -- 0% -- 0%
Proceeds from sales (2,340) -234% (2,757) -99% 417 -15%
Net gain (loss) on sales (207) -21% 40 1% (247) -618%
Impairment charges (67) -6% (921) -33% 854 -93%
Total other real estate owned $ 999 100% $ 2,771 100% $ (1,772) -64%
Other real estate owned and foreclosed assets by type
(Unaudited)
(Dollars in Thousands)
December 31, 2014 # of Properties September 30, 2014 # of Properties $ Change % Change December 31, 2013 # of Properties $ Change % Change
Construction, Land Dev & Other Land $ 35 1 $ 35 1 $ -- 0% $ 121 4 $ (86) -71%
1-4 Family Residential Properties -- -- 86 2 (86) -100% 788 5 (788) -100%
Nonfarm Nonresidential Properties 964 3 1,089 4 (125) -11% 1,862 11 (898) -48%
Total OREO by type $ 999 4 $ 1,210 7 $ (211) -17% $ 2,771 20 $ (1,772) -64%

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 charge offs and delinquencies after incorporating loss potential of adversely classified loans. 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 fourth quarter 2013.

For the quarter ended December 31, 2014, total net loan charge-offs fell compared to the quarter ended September 30, 2014 and the quarter ended December 31, 2013. The charge-offs incurred in the fourth quarter 2014 were primarily centered in various residential real estate and consumer loans. As a result, the ratio of net loan charge-offs to average gross loans (annualized) for the current quarter was down compared to both the prior quarter and the same 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
(Dollars in Thousands)
For the Three Months Ended December 31, 2014 September 30, 2014 $
Change
% Change December 31, 2013 $
Change
% Change
Gross loans outstanding at end of period $ 564,313 $ 553,319 $ 10,994 2% $ 505,803 $ 58,510 12%
Average loans outstanding, gross $ 554,886 $ 549,280 $ 5,606 1% $ 494,136 $ 60,750 12%
Allowance for loan losses, beginning of period $ 8,255 $ 8,315 $ (60) -1% $ 8,806 $ (551) -6%
Commercial -- -- -- 0% (91) 91 -100%
Commercial Real Estate (10) (127) 117 -92% (7) (3) 43%
Residential Real Estate (24) (61) 37 -61% (358) 334 -93%
Consumer (20) (12) (8) 67% (9) (11) 122%
Total charge-offs (54) (200) 146 -73% (465) 411 -88%
Commercial 2 7 (5) -71% 1 1 100%
Commercial Real Estate 44 29 15 52% 6 38 633%
Residential Real Estate 5 4 1 25% 10 (5) -50%
Consumer 1 -- 1 100% 1 -- 0%
Total recoveries 52 40 12 30% 18 34 189%
Net charge-offs (2) (160) 158 -99% (447) 445 -100%
Provision charged to income 100 100 -- 0% -- 100 100%
Allowance for loan losses, end of period $ 8,353 $ 8,255 $ 98 1% $ 8,359 $ (6) 0%
Ratio of net loans charged-off to average gross loans outstanding, annualized 0.00% 0.12% -0.12% -100% 0.36% -0.36% -100%
Ratio of allowance for loan losses to gross loans outstanding 1.48% 1.49% -0.01% -1% 1.65% -0.17% -10%
For the Twelve Months Ended December 31, 2014 December 31, 2013 $
Change
% Change
Gross loans outstanding at end of period $ 564,313 $ 505,803 $ 58,510 12%
Average loans outstanding, gross $ 536,971 $ 477,356 $ 59,615 12%
Allowance for loan losses, beginning of period $ 8,359 $ 9,358 $ (999) -11%
Commercial (26) (131) 105 -80%
Commercial Real Estate (533) (90) (443) 492%
Residential Real Estate (129) (453) 324 -72%
Consumer (79) (154) 75 -49%
Total charge-offs (767) (828) 61 -7%
Commercial 11 36 (25) -69%
Commercial Real Estate 425 226 199 88%
Residential Real Estate 22 14 8 57%
Consumer 3 3 -- 0%
Total recoveries 461 279 182 65%
Net charge-offs (306) (549) 243 -44%
Provision charged to income 300 (450) 750 -167%
Allowance for loan losses, end of period $ 8,353 $ 8,359 $ (6) 0%
Ratio of net loans charged-off to average gross loans outstanding, annualized 0.06% 0.12% -0.06% -50%
Ratio of allowance for loan losses to gross loans outstanding 1.48% 1.65% -0.17% -10%

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 December 31, 2014, the Company had total assets of $746 million and operates 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 and Salem, Oregon. 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 risks and 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