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Pacific Financial Corporation Earnings Increase 7% to $1.1 Million for 1Q15 from 1Q14

ABERDEEN, Wash., April 28, 2015 (GLOBE NEWSWIRE) -- Pacific Financial Corporation (OTCQB:PFLC), the holding company for Bank of the Pacific today reported profits of $1.1 million for the first quarter of 2015, up 7% compared to $1.0 million for the first quarter a year ago. Profitability was propelled by strong loan growth, ongoing enhancements in credit quality, lower funding costs and an improved net interest margin. All results are unaudited.

"In the first quarter of 2015, we generated good loan growth, increased our deposit base, expanded our net interest margin and reduced our nonperforming assets," said Dennis A. Long, President & Chief Executive Officer of Pacific Financial Corporation. "The strength of the Western Washington and Oregon markets we serve is fueling the growth of our loan and deposit portfolios, and we are optimistic for the outlook for this year.

"Today, we filed with the Securities and Exchange Commission (SEC) to deregister Pacific Financial's common stock. After much research and deliberation, the Board of Directors unanimously decided to take this action because deregistering our stock will reduce the legal, accounting and administration costs associated with being an SEC reporting company," Long continued. "The advantages and benefits of deregistration for smaller companies, such as ours, far outweigh the benefits of being an SEC registrant. We estimate that we will ultimately save or eliminate in excess of $250,000 annually. In addition, this change will save hours of time and effort for both the board and the management team, which will allow us to devote more time to strategic initiatives dedicated to building our bank and serving our customers. Our shares will continue to trade on the OTCQB exchange under its existing stock symbol PFLC, and we will continue to provide full financial information to our shareholders every quarter."

First Quarter 2015 Highlights (as of, or for the period ended March 31, 2015, except as noted):

  • Basic earnings per share (EPS) were $0.11 for both the first quarter of 2015 and the fourth quarter of 2014, and increased 10% from $0.10 for the first quarter of 2014.
  • Net interest income grew 2% to $6.9 million for the first quarter of 2015, compared to $6.8 million for the fourth quarter of 2014, and grew 6% from $6.6 million for the first quarter a year ago.
  • Net interest margin (NIM) expanded 14 basis points to 4.15% from 4.01% in the preceding quarter and declined 12 basis points compared to 4.27% for the first quarter of 2014. The expansion in NIM reflects greater levels of higher yielding loans. First quarter 2014 included one-time collection of interest from non-accrual loans.
  • Total assets increased 2% to $762.1 million at March 31, 2015, compared to $744.8 million at December 31, 2014, and 6% from $717.4 million at March 31, 2014.
  • Gross loans increased 2% to $572.8 million at March 31, 2015, compared to $563.1 million at December 31, 2014, and grew 11% from $518.6 million at March 31, 2014.
  • Nonperforming assets (NPAs) declined to $8.0 million, or 1.05% of total assets, at March 31, 2015, compared to $10.1 million, or 1.36% of total assets in the preceding quarter, and $9.7 million, or 1.35% of total assets at March 31, 2014.
  • Classified loans remained unchanged at $18.8 million, or 3.27% of gross loans, at March 31, 2015. Classified loans totaled $18.7 million, or 3.31% of gross loans at December 31, 2014, compared to $16.8 million, or 3.23% of gross loans at March 31, 2014.
  • Net charge-offs totaled $129,000 for the first quarter 2015, compared to $2,000 in the preceding quarter and $71,000 for first quarter 2014. The ratio of loans on accruing status 30 – 89 days delinquent to total loans remained low at 0.12%, at March 31, 2015, compared to 0.23% for the preceding quarter and 0.15% for March 31, 2014.
  • Allowance for loan losses ("ALLL") was 1.44% of gross loans at March 31, 2015, compared to 1.48% of gross loans at December 31, 2014, and 1.59% of gross loans at March 31, 2014. The decline in ALLL from the year ago quarter reflects the general improvement in credit metrics.
  • The average cost of deposits and borrowings fell 1 basis point to 0.31% from the 0.32% in fourth quarter 2014, and dropped 3 basis points from 0.34% in first quarter 2014.
  • Capital levels exceeded regulatory requirements for a well-capitalized financial institution, with a total risk-based capital ratio of 13.28%, a tier 1 leverage ratio of 10.01% and a common equity tier 1 ratio of 9.91% at quarter end.

"Our loan growth remained strong at 10% year-over-year and 2% on a linked quarter basis," said Denise Portmann, President & Chief Executive Officer of Bank of the Pacific. "In fact, total loan and commitment growth continued to be an area of strength for the bank, highlighted by our commercial and agricultural, and commercial real estate loans generated in Western Washington and Oregon, which accounted for over 60% of our loan portfolio.

"We are currently upgrading our web-based banking platform to provide a uniform user experience across all access channels to our customers," added Portmann. "Embracing this technology also supports our commitment to offering multiple ways our customers can use our bank at their convenience."

OPERATING RESULTS

Net interest income increased 2% from the linked quarter and grew 6% from the year ago quarter. "Our first quarter results are affected by a number of seasonal factors, particularly the slowdown of the tourism business in our coastal communities in Western Washington and Oregon during the winter and spring months. As our franchise becomes more diverse geographically, we expect less seasonal impact on our financial results," said Douglas N. Biddle, EVP & Chief Financial Officer. "In addition, this quarter has two fewer days of interest accruals than the previous quarter, impacting net interest income and other related performance metrics."

Net interest income for first quarter 2015 increased from the fourth quarter 2014 and from the first quarter in the prior year. This increase was primarily due to the growth in earning assets. Changes in the balance sheet mix also contributed to increases in net interest income during the period. Loan balances increased due to production generated predominately within the Company's primary market area of Western Washington and Oregon. Investment securities and fed funds sold continued to decline as a proportion of the balance sheet in first quarter 2015 due to the strong loan demand during the period. Funding costs declined further due to the shift in mix toward non-interest bearing and lower-cost deposits. As a result, the net interest margin improved during the quarter. Non-interest income was virtually unchanged from fourth quarter 2014, but up significantly from first quarter in the prior year. This was primarily from an increase in income associated with residential real estate lending due to stronger residential real estate sales and recent increase in refinancing activity in our markets.

PACIFIC FINANCIAL CORPORATION
CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands, except per share data)
(UNAUDITED)
ASSETS
Sequential Year over
March 31, December 31, March 31, Quarter Year
2015 2014 2014 % Change % Change
Cash and cash equivalents:
Cash and due from banks $ 15,321 $ 14,782 $ 15,747 4% -3%
Interest-bearing deposits in banks 12,282 16,255 19,872 -24% -38%
Total cash and cash equivalents 27,603 31,037 35,619 -11% -23%
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 2,865 2,896 2,985 -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 $91,982, 86,907 and $95,966) 93,194 87,440 95,129 7% -2%
Investment securities held-to-maturity, at amortized cost
(fair value of $1,832, $1,852 and $2,128) 1,815 1,829 2,110 -1% -14%
Total investment securities 95,009 89,269 97,239 6% -2%
Loans held-for-sale 10,780 5,786 7,997 86% 35%
Loans, net of deferred loan fees 572,783 563,099 518,552 2% 10%
Allowance for loan losses (8,254) (8,353) (8,288) -1% 0%
Loans, net 564,529 554,746 510,264 2% 11%
Premises and equipment, net of accumulated depreciation and amortization 16,165 16,303 16,706 -1% -3%
Other real estate owned and foreclosed assets 1,124 999 2,386 13% -53%
Accrued interest receivable 2,524 2,348 2,423 7% 4%
Cash surrender value of life insurance 18,863 18,742 18,349 1% 3%
Goodwill 12,168 12,168 12,168 0% 0%
Other intangible assets 1,430 1,439 1,471 -1% -3%
Other assets 5,309 5,347 7,106 -1% -25%
TOTAL ASSETS $ 762,096 $ 744,807 $ 717,440 2% 6%
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
Deposits:
Demand $ 167,264 $ 165,760 $ 152,916 1% 9%
Interest-bearing demand and savings 374,429 354,611 342,008 6% 9%
Time deposits 115,419 118,683 125,532 -3% -8%
Total deposits 657,112 639,054 620,456 3% 6%
Accrued interest payable 140 145 166 -3% -16%
Long-term borrowings 11,416 11,453 10,000 0% 14%
Junior subordinated debentures 13,403 13,403 13,403 0% 0%
Other liabilities 5,888 8,269 4,820 -29% 22%
Total liabilities 687,959 672,324 648,845 2% 6%
Preferred Stock, par value none
5,000,000 shares authorized, none outstanding -- -- -- 0% 0%
Common Stock, par value $1
25,000,000 shares authorized, 10,380,492 shares issued and outstanding at 03/31/2015, 10,371,460 at 12/31/2014, and 10,182,083 at 03/31/2014 10,380 10,371 10,182 0% 2%
Additional paid-in-capital 43,056 42,991 41,852 0% 3%
Retained earnings 20,352 19,256 17,535 6% 16%
Accumulated other comprehensive income (loss) 349 (135) (974) 359% 136%
Total shareholders' equity 74,137 72,483 68,595 2% 8%
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 762,096 $ 744,807 $ 717,440 2% 6%
PACIFIC FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in Thousands, Except per Share Data)
(UNAUDITED)
For the Three Months Ended Sequential Year over
March 31, December 31, March 31, Quarter Year
2015 2014 2014 % Change % Change
INTEREST AND DIVIDEND INCOME
Loans $ 6,923 $ 6,805 $ 6,495 2% 7%
Deposits in banks and federal funds sold 20 26 21 -23% -5%
Securities available for sale:
Taxable 301 287 337 5% -11%
Tax-exempt 166 166 207 0% -20%
Securities held to maturity:
Taxable 2 2 2 0% 0%
Tax-exempt 19 19 22 0% -14%
FHLB & PCBB dividends 1 31 1 -97% 0%
Total interest and dividend income 7,432 7,336 7,085 1% 5%
INTEREST EXPENSE
Deposits:
Interest-bearing demand and savings 151 166 141 -9% 7%
Time 242 252 276 -4% -12%
Long-term borrowings 56 57 53 -2% 6%
Junior subordinated debentures 60 61 60 -2% 0%
Total interest expense 509 536 530 -5% -4%
Net interest income 6,923 6,800 6,555 2% 6%
LOAN LOSS PROVISION 30 100 -- -70% 100%
Net interest income after loan loss provision 6,893 6,700 6,555 3% 5%
NON-INTEREST INCOME
Service charges on deposit accounts 426 450 435 -5% -2%
Net (loss) on sale of other real estate owned (6) (28) (36) 79% 83%
Net gains from sales of loans 954 970 628 -2% 52%
Net gains on sales of securities available for sale -- -- 52 0% -100%
Net other-than-temporary impairment -- -- (45) 0% 100%
Earnings on bank owned life insurance 121 126 111 -4% 9%
Other operating income 478 503 463 -5% 3%
Total non-interest income 1,973 2,021 1,608 -2% 23%
NON-INTEREST EXPENSE
Salaries and employee benefits 4,578 4,494 4,055 2% 13%
Occupancy 522 512 506 2% 3%
Equipment 267 274 252 -3% 6%
Data processing 513 509 468 1% 10%
Professional services 168 108 196 56% -14%
Other real estate owned write-downs 31 -- 12 100% 158%
Other real estate owned operating costs 17 48 61 -65% -72%
State taxes 102 103 97 -1% 5%
FDIC and state assessments 133 110 134 21% -1%
Other non-interest expense 1,153 969 1,049 19% 10%
Total non-interest expense 7,484 7,127 6,830 5% 10%
INCOME BEFORE PROVISION FOR INCOME TAXES 1,382 1,594 1,333 -13% 4%
PROVISION FOR INCOME TAXES 286 473 305 -40% -6%
Effective Tax Rate 20.69% 29.67% 22.88%
NET INCOME APPLICABLE TO COMMON SHAREHOLDERS $ 1,096 $ 1,121 $ 1,028 -2% 7%
EARNINGS PER COMMON SHARE:
BASIC $ 0.11 $ 0.11 $ 0.10 0% 10%
DILUTED $ 0.10 $ 0.11 $ 0.10 -9% 0%
WEIGHTED AVERAGE SHARES OUTSTANDING:
BASIC 10,373,563 10,369,417 10,182,083
DILUTED 10,505,901 10,459,808 10,272,341

Noninterest Income

Noninterest income for first quarter 2015 was slightly lower compared to fourth quarter 2014, but up significantly from first quarter 2014. Service charge income on deposit accounts declined slightly, along with other miscellaneous sources of fee income, due to seasonal declines in economic activity. Gains on sale of residential mortgage loans were unchanged compared to the linked quarter, but up significantly when compared to first quarter 2014. This was due to recent increases in residential real estate sales from continued improvement in the local economy. Refinancing activity also increased as a result of the recent decline in interest rates. In addition, gains on sales of securities were taken in the first quarter of 2014 for the purpose of adjusting the mix of securities to mitigate the impact of potential changes in market rates on the value of the portfolio. A small OTTI impairment charge was expensed during first quarter 2014 to reflect a reduction in fair value of a private-label CMO investment security.

Noninterest income
(Unaudited)
(Dollars in Thousands)
For The Three Months Ended
March 31,
2015
December 31,
2014
$ Change % Change March 31,
2014
$ Change % Change
Service charges on deposit accounts $ 426 $ 450 $ (24) -5% $ 435 $ (9) -2%
Net (loss) on sale of other real estate owned (6) (28) 22 79% (36) 30 83%
Net gains from sales of loans 954 970 (16) -2% 628 326 52%
Net gains on sales of securities available for sale -- -- -- 0% 52 (52) -100%
Net other-than-temporary impairment -- -- -- 0% (45) 45 100%
Earnings on bank owned life insurance 121 126 (5) -4% 111 10 9%
Other operating income
Fee income 439 405 34 8% 364 75 21%
Annuity sales income 32 81 (49) -60% 82 (50) -61%
Other non-interest income 7 17 (10) -59% 17 (10) -59%
Total non-interest income $ 1,973 $ 2,021 $ (48) -2% $ 1,608 $ 365 23%

Noninterest Expense

Noninterest expense for the three months ended March 31, 2015 was up compared to fourth quarter 2014. These increases were primarily due to annual increases in salary and health benefit plan expenses and other noninterest expense related to establishment of a reserve for unfunded commitments of $120,000. Professional services expenses increased due to a $70,000 one-time adjustment to accruals in fourth quarter 2014 related to an expected reduction in fees due to a change in external auditors. Noninterest expense for first quarter 2015 also increased versus the three months ended March 31, 2014. This increase was primarily due to additional salary and benefit expense associated with the opening of our Salem, OR loan production office in the current quarter, increased commissions paid to residential real estate mortgage lenders reflecting higher production volume, and annual merit increases in salary and health benefit plan expenses.

Noninterest expense
(Unaudited)
(Dollars in Thousands)
For The Three Months Ended
March 31,
2015
December 31,
2014
$ Change % Change March 31,
2014
$ Change % Change
Salaries and employee benefits $ 4,578 $ 4,494 $ 84 2% $ 4,055 $ 523 13%
Occupancy 522 512 10 2% 506 16 3%
Equipment 267 274 (7) -3% 252 15 6%
Data processing 513 509 4 1% 468 45 10%
Professional services 168 108 60 56% 196 (28) -14%
Other real estate owned write-downs 31 -- 31 100% 12 19 158%
Other real estate owned operating costs 17 48 (31) -65% 61 (44) -72%
State taxes 102 103 (1) -1% 97 5 5%
FDIC and state assessments 133 110 23 21% 134 (1) -1%
Other non-interest expense:
Director fees 71 79 (8) -10% 56 15 27%
Communication 61 53 8 15% 37 24 65%
Advertising 96 104 (8) -8% 78 18 23%
Professional liability insurance 22 20 2 10% 23 (1) -4%
Amortization 83 95 (12) -13% 95 (12) -13%
Other non-interest expense 820 618 202 33% 760 60 8%
Total non-interest expense $ 7,484 $ 7,127 $ 357 5% $ 6,830 $ 654 10%

Income Taxes

The Company recorded an income tax provision for the three months ended March 31, 2015, December 31, 2014, and March 31, 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.

As of March 31, 2015, the Company maintained a deferred tax asset balance of $2.9 million. The Company believes it will be fully utilized in the normal course of business, thus no valuation allowance is maintained against this asset.

LIQUIDITY

Cash and Cash Equivalents and Investment Securities
(Unaudited)
(Dollars in Thousands)
March 31, 2015 % of Total December 31, 2014 % of Total $ Change % Change March 31, 2014 % of Total $ Change % Change
Cash and due from banks $ 15,321 11% $ 14,782 12% $ 539 4% $ 15,747 11% $ (426) -3%
Cash equivalents:
Interest-bearing deposits 12,282 10% 16,255 13% (3,973) -24% 19,872 15% (7,590) -38%
Interest-bearing certificates of deposit 2,727 2% 2,727 2% -- 0% 2,727 2% -- 0%
Total cash equivalents and certificate of deposits 30,330 23% 33,764 27% (3,434) -10% 38,346 28% (8,016) -21%
Investment securities:
Collateralized mortgage obligations: agency issued 42,108 34% 38,767 31% 3,341 9% 37,567 27% 4,541 12%
Collateralized mortgage obligations: non-agency issued 504 0% 527 0% (23) -4% 1,974 1% (1,470) -74%
Mortgage-backed securities: agency issued 12,136 9% 12,322 10% (186) -2% 13,182 10% (1,046) -8%
U.S. Government and agency securities 10,114 8% 8,056 6% 2,058 26% 9,828 7% 286 3%
State and municipal securities 30,147 23% 29,597 23% 550 2% 34,688 25% (4,541) -13%
FHLB Stock, at cost 2,865 2% 2,896 2% (31) -1% 2,985 2% (120) -4%
Pacific Coast Bankers' Bank stock, at cost 1,000 1% 1,000 1% -- 0% -- 0% 1,000 100%
Total investment securities 98,874 77% 93,165 73% 5,709 6% 100,224 72% (1,350) -1%
Total cash equivalents and investment securities $ 129,204 100% $ 126,929 100% $ 2,275 2% $ 138,570 100% $ (9,366) -7%
Total cash equivalents and investment securities as a % of total assets 17% 17% 19%

Liquidity remains strong based on the current level of combined cash equivalents and investment securities. In an effort to support our net interest income and margin, we reduced the cash equivalent portion of our liquidity holdings, while increasing the portion held in investment securities, since December 31, 2014, primarily through the purchase of U.S. government agency and government guaranteed mortgage-backed securities. The purchases were primarily of 10 and 15-year fully amortized U.S. agency mortgage-backed securities, for which we expect to have limited extension risk. We also purchased municipal securities rated AA or better with maturities generally ranging from 5 to 15 years during this period. The expected modified duration (adjusted for calls, consensus pre-payment speeds and rate adjustment dates) of the investment portfolio was 4.1 years at March 31, 2015, 4.1 years at December 31, 2014 and 4.2 years at March 31, 2014.

LOANS

Loans by category
(Unaudited) March 31, % of December 31 % of $ March 31, % of $
(Dollars in Thousands) 2015 Gross Loans 2014 Gross Loans Change % Change 2014 Gross Loans Change % Change
Commercial and agricultural $ 119,095 20% $ 120,517 22% $ (1,422) -1% $ 101,971 20% $ 17,124 17%
Real estate:
Construction and development 28,831 5% 26,711 5% 2,120 8% 30,765 6% (1,934) -6%
Residential 1-4 family 91,865 16% 92,965 16% (1,100) -1% 89,244 17% 2,621 3%
Multi-family 20,287 4% 18,541 3% 1,746 9% 18,982 4% 1,305 7%
Commercial real estate --- owner occupied 130,486 23% 125,632 22% 4,854 4% 112,771 22% 17,715 16%
Commercial real estate --- non owner occupied 116,095 20% 117,137 21% (1,042) -1% 119,803 23% (3,708) -3%
Farmland 21,898 4% 22,245 4% (347) -2% 22,940 4% (1,042) -5%
Consumer 45,411 8% 40,565 7% 4,846 12% 23,156 4% 22,255 96%
Gross loans 573,968 100% 564,313 100% 9,655 2% 519,632 100% 54,336 10%
Less: allowance for loan losses (8,254) (8,353) 99 (8,288) 34
Less: deferred fees (1,185) (1,214) 29 (1,080) (105)
Loans, net $ 564,529 $ 554,746 $ 9,783 $ 510,264 $ 54,265

Loan portfolio growth continues to be well diversified, with higher balances in most lending categories. The recent loan growth was generated predominately within our Western Washington and Oregon markets. The portfolio does include $33.2 million in purchased government-guaranteed commercial and commercial real estate loans. In addition, the portfolio contains $34.6 million in indirect consumer loans to finance luxury and classic cars as a part of a strategy to diversify the loan portfolio. These loans are to individuals with high credit scores and have exhibited very low loss experience to date. The Company manages new loan origination volume using concentration limits that establish maximum exposure levels by designated industry segment, real estate product types, geography, and single borrower limits.

DEPOSITS

Deposits
(Unaudited)
(Dollars in Thousands) March 31,
2015
Percent of
Total
December 31,
2014
Percent of
Total
$ Change March 31,
2014
Percent of
Total
$ Change
Interest-bearing demand and money market $ 291,083 44% $ 274,614 42% $ 16,469 $ 263,953 42% $ 27,130
Savings 83,346 13% 79,997 13% 3,349 78,055 13% 5,291
Time deposits 115,419 18% 118,683 19% (3,264) 125,532 20% (10,113)
Total interest-bearing deposits 489,848 75% 473,294 74% 16,554 467,540 75% 22,308
Non-interest bearing demand 167,264 25% 165,760 26% 1,504 152,916 25% 14,348
Total deposits $ 657,112 100% $ 639,054 100% $ 18,058 $ 620,456 100% $ 36,656

Total deposits grew during first quarter 2015, a trend that continued from recent quarters. The current increase is due to recent success in acquiring business deposit relationships in conjunction with the growth in lending achieved over the past year. Time deposits declined as a percentage of total deposits in the most recent quarter versus the linked quarter and the like quarter last year. The combination of our efforts to reduce higher-cost time deposits through lowering interest rates paid and offering non-insured deposit products, when appropriate, has reduced the average rate paid on total deposits in first quarter 2015 from fourth quarter 2014 and the like quarter in 2014.

Total brokered deposits were $21.8 million at March 31, 2015, which included $1.4 million via reciprocal deposit arrangements. In addition, the Company's funding structure contains $11.4 million in borrowings from the Federal Home Loan Bank. "We view the prudent use of brokered deposits and borrowings to be an appropriate funding tool to support interest rate risk mitigation strategies," Douglas Biddle, Executive Vice President and Chief Financial Officer of Bank of the Pacific added.

CAPITAL

Pacific Financial Corporation, and its subsidiary Bank of the Pacific, met the thresholds to be considered "Well-Capitalized" under published regulatory standards for total risk-based capital, Tier 1 risk-based capital, Tier 1 common equity and Tier 1 leverage capital at March 31, 2015. Capital ratios have reduced slightly as compared to the linked quarter and the first quarter of 2014, primarily due to the successful execution of the Company's growth strategy and shift in the balance sheet mix to higher risk-weighted assets, such as loans.

The Federal Deposit Insurance Corporation ("FDIC") has established minimum requirements for capital adequacy for state non-member banks under the Basel III capital framework. The Bank is required to comply with the new framework . On April 9, 2015, The Board of Governors of the Federal Reserve System ("Federal Reserve") issued a final rule to amend the Small Bank Holding Company Policy Statement. With this amendment, small bank holding companies, including Pacific Financial Corporation, will not be subject to Basel III capital rules. For illustrative purposes, Basel III framework capital ratios are displayed below for both the Company and the Bank. For more information on these topics and Basel III, see the discussions under the subheadings "Capital Adequacy" in the section "Business" included in Item 1 of the Company's 2014 Form 10-K.

The total risk based capital ratios of the Company include $13.4 million of junior subordinated debentures, all of which qualified as Tier 1 capital at March 31, 2015, under guidance issued by the Federal Reserve. As provided in the Dodd-Frank Act, the Company expects to continue to rely on these junior subordinated debentures as part of its regulatory capital.

The following table summarizes the capital measures of the Company and the Bank, respectively, at the dates listed below.

March 31,
2015
December 31,
2014
Change March 31,
2014
Change Regulatory Minimum
to be "Well
Capitalized"*
greater than or equal to
Pacific Financial Corporation
Actual amount
Total risk-based capital ratio 13.28% 13.61% (0.33) 13.88% (0.60) 10.5%
Tier 1 risk-based capital ratio 12.02% 12.36% (0.34) 12.62% (0.60) 8.5%
Common equity tier 1 ratio 9.91% n/a n/a n/a n/a 7.0%
Leverage ratio 10.01% 9.80% 0.21 10.02% (0.01) 5.0%
Tangible common equity ratio 8.09% 8.05% 0.04 7.81% 0.28 n/a
Bank of the Pacific
Total risk-based capital ratio 13.21% 13.52% (0.31) 13.93% (0.72) 10.5%
Tier 1 risk-based capital ratio 11.96% 12.27% (0.31) 12.67% (0.71) 8.5%
Common equity tier 1 ratio 11.96% n/a n/a n/a n/a 7.0%
Leverage ratio 9.96% 9.73% 0.23 9.99% (0.03) 5.0%
*: Includes Basel III Capital Conservation Buffer
PACIFIC FINANCIAL CORPORATION
(Dollars in Thousands, Except per Share Data)
(UNAUDITED)
For the Three Months Ended
March 31, December 31, March 31,
2015 2014 2014
Operations Data
Net interest income $ 6,923 $ 6,800 $ 6,555
Provision for credit losses 30 100 --
Non-interest income 1,973 2,021 1,608
Non-interest expense 7,484 7,127 6,830
Provision for income taxes 286 473 305
Net income $ 1,096 $ 1,121 $ 1,028
Net income per share:
Basic(1) $ 0.11 $ 0.11 $ 0.10
Diluted(1) 0.10 0.11 0.10
Performance Ratios
Efficiency ratio(2) 84.13% 80.80% 83.67%
Return on average assets, annualized 0.59% 0.59% 0.59%
Return on average equity, annualized 6.05% 5.98% 6.12%
Balance Sheet Data
Total assets $ 762,096 $ 744,807 $ 717,440
Loans, net 564,529 554,746 510,264
Total deposits 657,112 639,054 620,456
Total borrowings 24,819 24,856 23,403
Shareholders' equity 74,137 72,483 68,595
Book value per share(3) 7.14 6.99 6.74
Tangible book value per share(4) 5.83 5.68 5.91
Equity to assets ratio 9.73% 9.73% 9.56%
Asset Quality Ratios
Nonperforming loans to total loans 1.20% 1.62% 1.41%
Allowance for loan losses to total loans 1.44% 1.48% 1.59%
Allowance for loan losses to nonperforming loans 119.62% 91.54% 114.43%
Nonperforming assets to total assets 1.05% 1.36% 1.35%
(1) Net interest income divided by average shares outstanding
(2) Non-interest expense divided by the sum of net interest income and non-interest income
(3) Shareholder equity divided by shares outstanding
(4) Shareholder equity less intangibles divided by shares outstanding

Net Interest Margin

Net interest margin for first quarter 2015 increased as compared to fourth quarter and first quarter 2014, predominantly due to a shift in the mix of earning assets toward higher-yielding loans. The margin was also favorably impacted by the lower cost of interest bearing liabilities, as previously discussed. The growth in the proportion of noninterest bearing deposits over the past several quarters has supported the improvement in net interest margin as well. In first quarter 2014, loan yields and net interest margin were each enhanced by 7 basis points due to the collection of $108,000 in non-accrual interest. In addition to this one-time recapture of interest in 2014, we have been able to sustain loan yields while growing the loan portfolio. The improvement in yields on investment securities also contributed to the increase in net interest margin between the periods, partially due to the decline in amortization expense associated with the decrease in prepayment speeds of mortgage-backed securities during the current period. In addition, we reduced the proportion of lower yielding cash-equivalent investments and increased the proportion of relatively higher-yielding federal government guaranteed and municipal securities during the first quarter of 2015 when compared to the fourth quarter 2014, as noted above.

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.

(Dollars in Thousands) (Unaudited)
Average Interest Earning Balances: For the Three Months Ended
March 31, 2015 December 31, 2014 March 31, 2014
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 $ 10 1.49% $ 2,727 $ 11 1.60% $ 2,727 $ 11 1.64%
Interest bearing deposits in banks 17,857 10 0.23% 26,735 15 0.22% 17,954 11 0.25%
Investments - taxable 66,924 305 1.85% 66,466 320 1.91% 67,695 339 2.03%
Investments - nontaxable 28,525 279 3.97% 28,427 280 3.91% 32,770 347 4.29%
Gross loans (1) 567,788 6,911 4.94% 554,886 6,787 4.85% 511,200 6,492 5.15%
Loans held for sale 6,735 57 3.43% 7,306 66 3.58% 5,436 49 3.66%
Total interest earning assets 690,556 7,572 4.45% 686,547 7,479 4.32% 637,782 7,249 4.61%
Cash and due from banks 13,585 13,483 11,989
Bank premises and equipment (net) 16,314 16,414 16,806
Other real estate owned 1,059 1,063 2,565
Deferred fees (1,169) (1,172) (1,137)
Allowance for loan losses (8,387) (8,306) (8,388)
Other assets 40,808 40,142 41,129
Total assets $ 752,766 $ 748,171 $ 700,746
LIABILITIES AND SHAREHOLDERS' EQUITY:
Interest-bearing deposits $ 363,696 $ 151 0.17% $ 351,653 $ 166 0.19% $ 336,201 $ 141 0.17%
Time deposits 116,985 242 0.84% 118,624 252 0.84% 126,841 276 0.88%
FHLB borrowings 11,446 56 1.98% 11,466 57 1.97% 10,000 53 2.15%
Junior subordinated debentures 13,403 60 1.82% 13,403 61 1.81% 13,403 60 1.82%
Total interest bearing liabilities 505,530 509 0.41% 495,146 536 0.43% 486,445 530 0.44%
Non-interest-bearing deposits 167,391 172,002 140,980
Other liabilities 6,382 6,655 5,196
Equity 73,463 74,368 68,125
Total liabilities and shareholders' equity $ 752,766 $ 748,171 $ 700,746
Net interest income (3) $ 7,063 $ 6,943 $ 6,719
Net interest spread 4.04% 3.89% 4.17%
2.00% 2.37%
Average yield on earning assets (2) (3) 4.45% 4.32% 4.61%
Interest expense to earning assets 0.30% 0.31% 0.34%
Net interest income to earning assets (2) (3) 4.15% 4.01% 4.27%
Average yield on investments (4) 2.11% 2.00% 2.37%
Cost of average interest bearing deposits 0.33% 0.35% 0.37%
Cost of average borrowings 1.89% 1.88% 1.96%
Cost of average total deposits and borrowings 0.31% 0.32% 0.34%
Cost of average interest bearing liabilities 0.41% 0.43% 0.44%
Reconciliation of Non-GAAP measure:
Tax Equivalent Net Interest Income
Net interest income $ 6,923 $ 6,800 $ 6,555
Tax equivalent adjustment for municipal loan interest 45 48 46
Tax equivalent adjustment for municipal bond interest 95 95 118
Tax equivalent net interest income $ 7,063 $ 6,943 $ 6,719
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 $6.9 million at 03/31/15, $8.7 million at 12/31/2014, and $7.3 million for 03/31/2014 are included in the average loan balances.
(2) Loan interest income includes loan fee income of $219,000, $196,000, and $149,000 for the three months ended 03/31/2015, 12/31/2014, and 03/31/2014, 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 $140,000, $143,000, and $164,000 for the three months ended March 31, 2015, December 31, 2014, and March 31, 2014, respectively.
(4) Includes certificate of deposits, deposits in banks, and investments.
For the Three Months Ended For the Three Months Ended
March 31, 2015 vs. December 31, 2014 March 31, 2015 vs. March 31, 2014
Increase (Decrease) Due To Increase (Decrease) Due To
(Dollars in Thousands) (Unaudited) Net Net
Volume Rate Change Volume Rate Change
ASSETS:
Interest bearing certificate of deposit $ -- $ (1) $ (1) $ -- $ (1) $ (1)
Interest bearing deposits in banks (5) -- (5) -- (1) (1)
Investments - taxable 2 (17) (15) (4) (30) (34)
Investments - nontaxable 1 (2) (1) (45) (23) (68)
Gross loans 154 (30) 124 719 (300) 419
Loans held for sale (5) (4) (9) 12 (4) 8
Total interest earning assets $ 147 $ (54) $ 93 $ 682 $ (359) $ 323
LIABILITIES AND SHAREHOLDERS' EQUITY:
Interest-bearing deposits $ 6 $ (21) $ (15) $ 12 $ (2) $ 10
Time deposits (3) (7) (10) (21) (13) (34)
FHLB borrowings -- (1) (1) 8 (5) 3
Long-term borrowings -- (1) (1) -- -- --
Total interest bearing liabilities 3 (30) (27) (1) (20) (21)
Net increase (decrease) in net interest income $ 144 $ (24) $ 120 $ 683 $ (339) $ 344
SUMMARY AVERAGE BALANCE SHEETS
(Unaudited)
(Dollars in Thousands)
Averages for the Three Months Ended March 31, December 31, March 31,
2015 2014 $ Change % Change 2014 $ Change % Change
Assets:
Cash and due from banks $ 13,585 $ 13,483 $ 102 1% $ 11,989 $ 1,596 13%
Interest-bearing deposits in banks 17,857 26,735 (8,878) -33% 17,954 (97) -1%
Interest bearing certificate of deposit 2,727 2,727 -- 0% 2,727 0 0%
Investment securities 95,449 94,893 556 1% 100,465 (5,016) -5%
Loans, net of deferred loan fees 573,354 561,020 12,334 2% 515,499 57,855 11%
Allowance for loan losses (8,387) (8,306) (81) 1% (8,388) 1 0%
Net loans 564,967 552,714 12,253 2% 507,111 57,856 11%
Other assets 58,181 57,619 562 1% 60,500 (2,319) -4%
Total assets $ 752,766 $ 748,171 $ 4,595 1% $ 700,746 $ 52,020 7%
Liabilities:
Total deposits $ 648,072 $ 642,279 $ 5,793 1% $ 604,022 $ 44,050 7%
Borrowings 24,849 24,869 (20) 0% 23,403 1,446 6%
Other liabilities 6,382 6,655 (273) -4% 5,196 1,186 23%
Total liabilities 679,303 673,803 5,500 1% 632,621 46,682 7%
Equity:
Common equity 73,463 74,368 (905) -1% 68,125 5,338 8%
Total equity 73,463 74,368 (905) -1% 68,125 5,338 8%
Total liabilities and shareholders' equity $ 752,766 $ 748,171 $ 4,595 1% $ 700,746 $ 52,020 7%

ASSET QUALITY

At March 31, 2015, classified loans remained unchanged as compared to December 31, 2014, but increased as compared to March 31, 2014. This increase is primarily due to the downgrade of a commercial and commercial real estate relationship totaling $4.8 million in second quarter 2014. Nonperforming loans have continued to decline and are centered primarily in commercial real estate. Total 30-89 days delinquencies remain below 0.50%, mirroring the improvement in overall credit quality.

At March 31, 2015, total nonperforming assets were down compared to December 31, 2014 and March 31, 2014. Nonperforming assets also declined during this period in terms of percentage of total assets. Reductions in nonperforming assets continued primarily through sales of OREO, as write-downs were minimal during the period as compared to March 31, 2014. Nonperforming assets as of March 31, 2014, include a $1.8 million commercial real estate loan supported 100% by a government guarantee.

Adversely classified loans and securities
(Unaudited)
(Dollars in Thousands)
March 31,
2015
December
31, 2014
$
Change
%
Change
March 31,
2014
$
Change
%
Change
Rated substandard or worse, but not impaired $ 9,265 $ 7,368 $ 1,897 26% $ 6,842 $ 2,423 35%
Impaired 9,489 11,311 (1,822) -16% 9,952 (463) -5%
Total adversely classified loans¹ $ 18,754 $ 18,679 $ 75 0% $ 16,794 $ 1,960 12%
Total investment securities² $ 194 $ 199 $ (5) -3% $ 1,751 $ (1,557) -89%
Gross loans (excluding deferred loan fees) $ 573,968 $ 564,313 $ 9,655 2% $ 519,632 $ 54,336 10%
Adversely classified loans to gross loans 3.27% 3.31% 3.23%
Allowance for loan losses $ 8,254 $ 8,353 $ (99) -1% $ 8,288 $ (34) 0%
Allowance for loan losses as a percentage of adversely classified loans 44.01% 44.72% 49.35%
Allowance for loan losses to total impaired loans 86.98% 73.85% 83.28%
Adversely classified loans and securities to total assets 2.49% 2.53% 2.58%
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 03/31/2015 and 12/31/2014 and three private label CMOs as of 03/31/2014.
30-89 Days Past Due by type
(Dollars in Thousands)
March 31, 2015 % of Category December 31, 2014 % of Category $ Change % Change March 31, 2014 % of Category $ Change % Change
Commercial and agricultural $ 253 35.9% $ -- 0.0% $ 253 100% $ 32 4.1% $ 221 691%
Real estate:
Construction and development -- 0.0% 18 2.1% (18) -100% -- 0.0% -- 0%
Residential 1-4 family 442 62.7% 605 71.9% (163) -27% 180 23.1% 262 146%
Multi-family -- 0.0% -- 0.0% -- 0% -- 0.0% -- 0%
Commercial real estate -- owner occupied -- 0.0% -- 0.0% -- 0% 309 39.6% (309) -100%
Commercial real estate -- non owner occupied -- 0.0% -- 0.0% -- 0% 251 32.2% (251) -100%
Farmland -- 0.0% 46 5.5% (46) -100% -- 0.0% -- 0%
Total real estate $ 442 $ 669 $ (227) -34% $ 740 $ (298)
Consumer 10 1.4% 172 20.5% (162) -94% 8 1.0% 2 25%
Total loans 30-89 days past due, not in nonaccrual status $ 705 100.0% $ 841 100.0% $ (136) -16% $ 780 100.0% $ (75) -10%
Delinquent loans to total loans, not in nonaccrual status 0.12% 0.23% 0.15%
Non-performing assets
(Unaudited)
(Dollars in Thousands) March 31,
2015
December 31,
2014
$ Change % Change March 31,
2014
$ Change % Change
Loans on nonaccrual status $ 6,900 $ 8,716 $ (1,816) -21% $ 7,296 $ (396) -5%
Loans past due greater than 90 days but not on nonaccrual status -- 409 (409) -100% -- -- 0%
Total non-performing loans 6,900 9,125 (2,225) -24% 7,296 (396) -5%
Other real estate owned and foreclosed assets 1,124 999 125 13% 2,386 (1,262) -53%
Total nonperforming assets $ 8,024 $ 10,124 $ (2,100) -21% $ 9,682 $ (1,658) -17%
Percentage of nonperforming assets to total assets 1.05% 1.36% 1.35%

OREO property disposition activities continued during first quarter 2015, while the level of additional real estate properties taken into the OREO portfolio continued to be nominal. During first quarter 2015, the Company sold one OREO property with a book value of $90,000. OREO valuation adjustments continue to be minimal. The largest balances in the OREO portfolio at the end of the quarter were attributable to commercial properties, followed by residential properties, all of which are located within our market area.

Other real estate owned and foreclosed assets
(Unaudited)
(Dollars in Thousands)
For the Three Months Ended March 31, 2015 % of Category December 31, 2014 % of Category $ Change % Change March 31, 2014 % of Category $ Change % Change
Other real estate owned, beginning of period $ 999 90% $ 1,210 121% $ (211) -17% $ 2,771 117% $ (1,772) -64%
Transfers from outstanding loans 219 19% -- 0% 219 100% 111 5% 108 97%
Proceeds from sales (57) -5% (183) -18% 126 -69% (448) -19% 391 -87%
Net (loss) on sales (6) -1% (28) -3% 22 -79% (36) -2% 30 -83%
Impairment charges (31) -3% -- 0% (31) -100% (12) -1% (19) 158%
Total other real estate owned $ 1,124 100% $ 999 100% $ 125 13% $ 2,386 100% $ (1,262) -53%
Other real estate owned and foreclosed assets by type
(Unaudited)
(Dollars in Thousands)
March 31, 2015 # of Properties December 31, 2014 # of Properties $ Change % Change March 31, 2014 # of Properties $ Change % Change
Construction, Land Dev & Other Land $ 32 1 $ 35 1 $ (3) -9% $ 60 3 $ (28) -47%
1-4 Family Residential Properties 219 2 -- -- 219 0% 789 7 (570) -72%
Nonfarm Nonresidential Properties 873 2 964 3 (91) -9% 1,537 8 (664) -43%
Total OREO by type $ 1,124 5 $ 999 4 $ 125 13% $ 2,386 18 $ (1,262) -53%

ALLOWANCE FOR LOAN LOSSES

The allowance for loan losses continues to decline in concert with the general trend of reduced levels of classified loans, loan delinquencies and other relevant credit metrics. With the reduction in net charge-offs, changes in the loan portfolio composition over the past several years and overall improvement in credit quality, loss factors used in estimates to establish reserve levels have declined commensurately. Provision expense was made to the allowance for loan losses in first quarter 2015 and fourth quarter 2014 commensurate with the loan portfolio growth experienced during those periods. This included $120,000 expensed as other noninterest expense to establish a separate reserve for unfunded commitments, much of which had already been incorporated into the Company's allowance for loan losses valuation methodology. No provision expense was incurred in first quarter 2014.

For the quarter ended March 31, 2015, total net loan charge-offs were up slightly compared to the quarters ended December 31, 2014 and March 31, 2014, respectively. The charge-offs incurred in the current period were centered in various residential real estate and consumer loan relationships, none of which were of notable size. The ratio of net loan charge-offs to average gross loans (annualized) for the current quarter is modest, continuing the recent trends from previous quarters.

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

Allowance for Loan Losses
(Unaudited)
(Dollars in Thousands)
For the Three Months Ended March 31,
2015
December
31, 2014
$ Change %
Change
March 31,
2014
$ Change %
Change
Gross loans outstanding at end of period $ 573,968 $ 564,313 $ 9,655 2% $ 519,632 $ 54,336 10%
Average loans outstanding, gross $ 567,788 $ 554,886 $ 12,902 2% $ 511,200 $ 56,588 11%
Allowance for loan losses, beginning of period $ 8,353 $ 8,255 $ 98 1% $ 8,359 $ (6) 0%
Charge-offs
Commercial -- -- -- 0% (17) 17 -100%
Commercial Real Estate (8) (10) 2 -20% (7) (1) 14%
Residential Real Estate (86) (24) (62) 258% (40) (46) 115%
Consumer (64) (20) (44) 220% (18) (46) 256%
Total charge-offs (158) (54) (104) 193% (82) (76) 93%
Recoveries
Commercial 6 2 4 200% 1 5 500%
Commercial Real Estate 3 44 (41) -93% 5 (2) -40%
Residential Real Estate 9 5 4 80% 4 5 125%
Consumer 11 1 10 1,000% 1 10 1,000%
Total recoveries 29 52 (23) -44% 11 18 164%
Net charge-offs (129) (2) (127) 6,350% (71) (58) 82%
Provision charged to income 30 100 (70) -70% -- 30 100%
Allowance for loan losses, end of period $ 8,254 $ 8,353 $ (99) -1% $ 8,288 $ (34) 0%
Ratio of net loans charged-off to average gross loans outstanding, annualized 0.09% 0.00% 0.09% 100% 0.06% 0.03% 50%
Ratio of allowance for loan losses to gross loans outstanding 1.44% 1.48% -0.04% -3% 1.59% -0.15% -9%

ABOUT PACIFIC FINANCIAL CORPORATION

Pacific Financial Corporation of Aberdeen, Washington, is the bank holding company for Bank of the Pacific, a state chartered and federally insured commercial bank. Bank of the Pacific offers banking products and services to small-to-medium sized businesses and professionals in western Washington and Oregon. As of March 31, 2015, the Company had total assets of $762 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 ("Company") and its wholly-owned subsidiary, Bank of the Pacific ("Bank"). These forward-looking statements are subject to risks and uncertainties that could cause actual events or results to differ materially from those projected, anticipated or implied. These risks and uncertainties include various risks associated with growing the Bank and expanding the services it provides, successfully completing and integrating the acquisition of new branches and development of new business lines and markets, competition in the marketplace, general economic conditions, changes in interest rates, extensive and evolving regulation of the banking industry, and many other risks described in the Company's filings with the Securities and Exchange Commission. The most significant of these uncertainties are described in the Company's Annual Report on Form 10-K and subsequent Quarterly Reports on Form 10-Q, which readers of this release are encouraged to review. We undertake no obligation to update or revise any forward-looking statement. Readers of this release are cautioned not to put undue reliance on forward-looking statements.

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