News Column

Pacific Financial Corporation Profits Increase 36% in Second Quarter 2014 and 20% in First Half of 2014

July 28, 2014

ABERDEEN, Wash., July 28, 2014 (GLOBE NEWSWIRE) -- Pacific Financial Corporation(OTCQB:PFLC), the holding company for Bank of the Pacific today reported profits increased 36% to $1.4 million, or $0.14 per share, for the second quarter of 2014, compared to $1.0 million, or $0.10 per share for the first quarter of 2014, and grew 5% from $1.3 million, or $0.13 per share for the second quarter a year ago. For the first six months of 2014, profits increased 20% to $2.4 million, or $0.24 per share, from $2.0 million, or $0.20 per share, for the like period in 2013. Fueling profitability in 2014 was robust loan growth, strong net interest margin and solid credit quality. In the year ago periods, earnings were impacted by a credit to the provision for losses of $450,000, and a one-time conversion cost of $395,000 for the branches purchased from Sterling Savings Bank. All results are unaudited.

"We are in our fifth year of consecutive profitability, and our second quarter results continue to demonstrate the fundamental strength of our franchise," said Dennis A. Long, President & Chief Executive Officer, Pacific Financial Corporation. "Once again, we delivered strong performance across key metrics. Loan growth was vigorous, with total loans growing 16% year-over-year and 6% on a linked quarter basis. Credit quality also continued to improve with nonperforming assets declining 47% year-over-year, and down 24% from the preceding quarter. We will continue to build on our franchise and our commitment to serving our customers and communities while creating value for our shareholders."

"As part of our continuing expansion plans, we received regulatory approval in May to convert our loan production office in Vancouver, Washington, into a full-service commercial banking center. We expect this commercial banking center to be operational in the third quarter of 2014." The banking center will complement Bank of Pacific's 19 full-service branches in Washington and Oregon, and the two loan production offices in DuPont and Burlington, Washington.

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

• Earnings per share (EPS) increased 40% to $0.14, compared to $0.10 in first quarter 2014, and grew 8% from $0.13 in second quarter 2013. Year-to-date, EPS increased 20% to $0.24, from $0.20 for the first half of 2013.

 • Net interest income grew $241,000, or 4%, to $6.8 million, compared to $6.6 million in first quarter 2014, and grew $844,000, or 14%, from $6.0 million in second quarter 2013. For the six months of 2014, net interest income increased $1.8 million, or 16%, to $13.4 million, from $11.5 million for the like period in 2013. 

 • Net interest margin (NIM) remained stable at 4.28%, compared to 4.27% for the preceding quarter, and improved 19 basis points from 4.09% for second quarter 2013. Year-to-date, net interest margin expanded 22 basis points to 4.27%, compared to 4.05% for the first half of 2013.

 • Gross loans increased 6% to $547.3 million, up from $518.6 million at March 31, 2014, and grew 15% from $474.6 million a year ago.   

 • Nonperforming assets declined to $7.4 million, or 1.03% of total assets, down from $9.7 million, or 1.35% of total assets, at March 31, 2014 and $13.8 million, or 2.01% of total assets a year ago. 

 • Classified loans decreased to $16.0 million, or 2.91% of gross loans, from $16.8 million, or 3.23% of gross loans, at March 31, 2014, and dropped from $17.0 million, or 3.59% of gross loans at June 30, 2013.

 • Net charge-offs totaled $73,000, compared to $71,000 in first quarter 2014 and $64,000 in net recoveries for second quarter 2013. Year-to-date, net charge-offs were $144,000, compared to net recoveries of $54,000 for the first half of 2013.

 • Capital levels exceeded regulatory requirements for a well-capitalized financial institution, with a total risk-based capital ratio of 13.50% and a leverage ratio of 9.83%, at quarter end.

"We are expanding our real estate lending services into our branches. Our customers now have a one-stop-shop for all of their banking needs with the added convenience of applying for a mortgage loan at many of our local branches," said Denise Portmann, President and Chief Executive Officer of Bank of the Pacific. "More and more of our branch staff are being certified as real estate lending specialists in order to meet the increasing financial needs of our customers. As our customers establish that one-on-one relationship with their local banker, we expect to grow customer relationships, as well as gain new customers and market share."

"We are making excellent progress in further reducing credit resolution costs, primarily due to sustained improvements in asset quality," added Portman. "The addition of veteran loan teams over the past several years is contributing to our strong loan growth, which has driven net interest income up 14% and net interest margin up 19 basis points from year ago. At the same time, we are prudently managing our expenses and, together with our earnings growth, our efficiency ratio is improving."

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

• Successfully establishing loan production offices in Clark, Skagit and Thurston Counties, Washington.

 • Receiving regulatory approval to convert our Vancouver, WA loan production office into a full-service commercial banking center.

 • Reducing non-accrual loans and other-real-estate-owned, resulting in a further reduction in nonperforming assets.

 • Certifying additional banking professionals to provide home mortgages throughout our branch network to meet the increasing banking needs of our customers.

OPERATING RESULTS

Net Interest Income

Net interest income for the quarter and six month ended June 30, 2014 increased from the quarter and six month ended June, 30, 2013. This increase was primarily due to the growth in earning assets. Changes in the balance sheet mix also contributed to increases in net interest income during these periods. Loan balances increased due to the production generated predominately within the Company's primary market area of Western Washington. Investment securities and federal funds sold declined as a proportion of the balance sheet, due to the strong loan demand during the past several quarters. Funding costs remained low due to the shift in mix toward non-interest bearing and lower-cost deposits, and continued historically low interest rates. As a result, the net interest margin improved.

Net interest income for the current quarter increased from the quarter ended March 31, 2014 primarily for the same reasons noted above. However, funding costs were unchanged when comparing the periods. Given the lengthy period of very low interest rates over the past several years, additional reductions in funding costs are becoming more difficult to achieve. This is primarily because certificates of deposit renewing during the most recent quarters are receiving rates as low as those granted at previous renewals.

Certain reclassifications have been made to the March 31, 2014 and June 30, 2013 financial table presentations to conform to current year presentations. These reclassifications have no effect on previously reported net income per share.

INCOME STATEMENT OVERVIEW
 
(Unaudited)
(Dollars in Thousands, Except for Loss per Share Data)
  For the Three

Months Ended

June 30, 2014
For the Three

Months Ended

March 31, 2014
$ Change %

Change
For the Three

Months Ended

June 30, 2013
$ Change %

Change
               
Interest and dividend income  $ 7,337  $ 7,085  $ 252 4%  $ 6,600  $ 737 11%
Interest expense 541 530 11 2% 648 (107) -17%
Net interest income 6,796 6,555 241 4% 5,952 844 14%
Loan loss provision 100  -- 100 100% (450) 550 -122%
Non-interest income 2,176 1,608 568 35% 3,175 (999) -31%
Non-interest expense 7,066 6,830 236 3% 7,872 (806) -10%
INCOME BEFORE PROVISION FOR INCOME TAXES 1,806 1,333 473 35% 1,705 101 6%
PROVISION FOR INCOME TAXES 403 305 98 32% 373 30 8%
               
NET INCOME  $ 1,403  $ 1,028  $ 375 36%  $ 1,332  $ 71 5%
               
INCOME PER COMMON SHARE:              
BASIC (1)  $ 0.14  $ 0.10  $ 0.04 40%  $ 0.13  $ 0.01 8%
DILUTED (1)  $ 0.14  $ 0.10  $ 0.04 40%  $ 0.13  $ 0.01 8%
               
Average common shares outstanding - basic (1)  10,189,386  10,182,083  7,303.00 0%  10,121,853  67,533 1%
Average common shares outstanding - diluted (1)  10,275,628  10,272,341  3,287.00 0%  10,182,524  93,104 1%
               
               
  For the Six

Months Ended

June 30, 2014
For the Six

Months Ended

June 30, 2013
$ Change %

Change
     
               
Interest and dividend income  $ 14,422 12,871 1,551 12%      
Interest expense 1,071 1,337 (266) -20%      
Net interest income 13,351 11,534 1,817 16%      
Loan loss provision 100 (450) 550 100%      
Non-interest income 3,784 5,801 (2,017) -35%      
Non-interest expense 13,896 15,291 (1,395) -9%      
INCOME BEFORE PROVISION FOR INCOME TAXES 3,139 2,494 645 26%      
PROVISION FOR INCOME TAXES 708 461 247 54%      
               
NET INCOME  $ 2,431 2,033 398 20%      
               
INCOME PER COMMON SHARE:              
BASIC (1)  $ 0.24  0.20  0.04 20%      
DILUTED (1)  $ 0.24  0.20  0.04 20%      
               
Average common shares outstanding - basic (1)  10,185,755  10,121,853  63,902 1%      
Average common shares outstanding - diluted (1)  10,273,994  10,172,356  101,638 1%      


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

Reconciliation of Non-GAAP Measure:
Non-GAAP Operating Income
(Dollars in Thousands)
For The Three Months EndedJune 30,

2014
March 31, 

2014
$ Change %

Change
June 30,

2013
$ Change %

Change
               
Net income$ 1,403     $ 1,028     $ 375 36%     $ 1,332     $ 71 5%
Provision for loan losses 100  --  100 100% (450) 550 -122%
Other real estate owned write-downs 54 12 42 350% 108 (54) -50%
Other real estate owned operating costs 30 61 (31) -51% 125 (95) -76%
Provision for income taxes 403 305 98 32% 373 30 8%
Pre-tax, pre-credit cost operating income     $ 1,990     $ 1,406     $ 584 42%     $ 1,488     $ 502 34%
               
               
For The Six Months EndedJune 30,

2014
June 30, 

2013
$ Change %

Change
     
               
Net income     $ 2,431     $ 2,033     $ 398 20%      
Provision for loan losses 100 (450) 550 -122%      
Other real estate owned write-downs 66 460 (394) -86%      
Other real estate owned operating costs 91 209 (118) -56%      
Provision for income taxes 708 461 247 54%      
Pre-tax, pre-credit cost operating income     $ 3,396     $ 2,713     $ 683 25%      
               
Reconciliation of Non-GAAP Measure:
Tax Equivalent Net Income
(Dollars in Thousands)
For the Three Months endedJune 30,

2014
March 31,

2014
$ Change %

Change
June 30,

2013
$ Change %

Change
               
Net interest income$ 6,796     $ 6,555     $ 241 4%     $ 5,952     $ 844 14%
Tax equivalent adjustment for municipal loan interest 46 46  --  0% 60 (14) -23%
Tax equivalent adjustment for municipal bond interest 120 118 2 2% 135 (15) -11%
Tax equivalent net interest income 6,962 6,719 243 4% 6,147 815 13%
Provision for loan losses 100  --  100 100% (450) 550 -122%
Non-interest income 2,176 1,608 568 35% 3,175 (999) -31%
Non-interest expense 7,066 6,830 236 3% 7,872 (806) -10%
Provision for income taxes 403 305 98 32% 373 30 8%
Tax equivalent net income 1,569 1,192 377 32% 1,527 42 3%
Accumulative tax adjustment (166) (164) (2) 1% (195) 29 -15%
Common stock dividends  --   --   --  0%  --   --  0%
Net income     $ 1,403     $ 1,028     $ 377 37%     $ 1,332     $ 71 5%
               
               
For the Six Months endedJune 30,

2014
June 30,

2013
$ Change %

Change
     
               
Net interest income     $ 13,351     $ 11,534     $ 1,817 16%      
Tax equivalent adjustment for municipal loan interest 92 117 (25) -21%      
Tax equivalent adjustment for municipal bond interest 238 272 (34) -13%      
Tax equivalent net interest income 13,681 11,923 1,758 15%      
Provision for loan losses 100 (450) 550 100%      
Non-interest income 3,784 5,801 (2,017) -35%      
Non-interest expense 13,896 15,291 (1,395) -9%      
Provision for income taxes 708 461 247 54%      
Tax equivalent net income 2,761 2,422 339 14%      
Accumulative tax adjustment (330) (389) 59 -15%      
Common stock dividends  --   --   --  0%      
Net income     $ 2,431     $ 2,033     $ 398 20%      
*Pre-tax, pre-credit cost operating income and tax equivalent net income are non-GAAP financial measures. Non-GAAP financial measures have inherent limitations and are not required to be uniformly applied. Management believes that presentation of these non-GAAP financial measures provides useful information that is frequently used by shareholders and analysts in the evaluation of financial institutions. Non-GAAP financial measures have limitations as analytical tools and should not be considered in isolation or as a substitute for information reported in accordance with GAAP.


Noninterest Income

Noninterest income for the second quarter 2014 was up compared to the first quarter 2014, but down significantly from second quarter 2013, driven primarily by changes in gains from sales of loans and securities available for sale, as described in further detail below. Service charges on deposit accounts grew during the current quarter due to an increase in new deposit relationships as a result of the acquisition of three branches from Sterling Savings Bank completed in the second quarter of 2013. Losses on sale of other real estate owned (OREO) were higher in the current period as compared to the most recent quarter and were in contrast to a small gain in second quarter in 2013. This was primarily due to a larger volume of sales in the current quarter as compared to the prior periods. A small OTTI impairment charge was taken in both first quarter 2014 and second quarter 2013 to reflect a reduction in fair value of a private-label CMO investment security. 

Gains on sale of residential mortgage loans and related fee income rose in second quarter 2014 compared to first quarter 2014, but was below second quarter 2013. The recent rebound in home purchases throughout many of our markets is fueling new residential mortgage originations, but were not sufficient to offset the high volumes of both purchase and refinancing activity generated in 2013. In addition, net gains on sales of securities available for sale were taken in first quarter 2014 and second quarter 2013 for the purpose of adjusting the mix of securities to mitigate the impact of changes in market rates on the value of the portfolio.   

Noninterest income for the six months ended June 30, 2014 was down as compared to the same period in 2013, impacted by the decline in gains on sale of residential mortgage loans and securities available for sale and increase in losses on sale of OREO, as noted above.

Noninterest income
(Unaudited)
(Dollars in Thousands)
               
For The Three Months Ended
 June 30,

2014
March 31,

2014
$ Change % ChangeJune 30,

2013
$ Change % Change
               
Service charges on deposit accounts$ 474     $ 435     $ 39 9.0%     $ 431     $ 43 10%
Net (loss) on sale of other real estate owned (57) (36) (21) 58.3% 45 (102) -227%
Net gains from sales of loans 968 627 341 54.4% 1,669 (701) -42%
Net gains on sales of securities available for sale (2) 52 (54) -103.8% 329 (331) -101%
Net other-than-temporary impairment (net of $0, $15, and $3, respectively recognized other comprehensive income before taxes) (3) (45) 42 100.0% (34) 31 -91%
Earnings on bank owned life insurance 140 111 29 26.1% 116 24 21%
Other operating income              
Fee income 442 364 78 21.4% 504 (62) -12%
Income from other real estate owned 17 11 6 54.5% 14 3 21%
Other non-interest income 197 89 108 121.3% 101 96 95%
Total non-interest income     $ 2,176     $ 1,608     $ 568 35.3%     $ 3,175     $ (999) -31%
               
               
For The Six Months Ended
 June 30,

2014
June 30,

2013
$ Change % Change      
               
Service charges on deposit accounts     $ 909     $ 841     $ 68 8.1%      
Net (loss) on sale of other real estate owned (93) 25 (118) -472.0%      
Net gains from sales of loans 1,596 3,178 (1,582) -49.8%      
Net gains on sales of securities available for sale 50 387 (337) -87.1%      
Net other-than-temporary impairment (net of $15, and $3, respectively recognized other comprehensive income before taxes) (48) (34) (14) 41.2%      
Earnings on bank owned life insurance 251 237 14 5.9%      
Other operating income              
Fee income 806 970 (164) -16.9%      
Income from other real estate owned 28 29 (1) -3.4%      
Other non-interest income 285 168 117 69.6%      
Total non-interest income     $ 3,784     $ 5,801     $ (2,017) -34.8%      


Noninterest Expense

Noninterest expense for the three months ended June 30, 2014 increased compared to the three months ended March 31, 2014. This was primarily due to increases in commissions expense associated with recent growth in real estate mortgage purchase lending activity and bonus accruals related to other incentive compensation plans. This increase was partially offset by decreases in OREO write-downs and expenses and professional service costs associated with the reduction of non-performing assets.  

Noninterest expense for second quarter 2014 declined versus the quarter ended June 30, 2013. This was primarily due to a decrease of $471,000 in personnel costs associated with the reduction in staff initiated in first quarter 2014 commensurate with the decline in residential mortgage loan refinance activity referred to above. Also, in second quarter 2013 the Bank incurred one-time expenses of $395,000 in conversion costs associated with the acquisition of three branches from Sterling Savings Bank in June 2013. Total costs associated with OREO and related third-party loan expenses also decreased due to the decline in OREO balances and stabilization in real estate valuations. This was partially offset by an increase in occupancy and equipment expense primarily associated with the Sterling branch acquisitions and the opening of the Warrenton, OR branch in October 2013. Noninterest expense for the six months ended June 30, 2014 was down as compared to the same period in 2013, primarily related to lower residential real estate mortgage personnel costs, OREO write-downs and expenses and one-time costs associated with the Sterling branch acquisitions, as noted above.

Noninterest expense
(Unaudited)
(Dollars in Thousands)
               
For The Three Months Ended
 June 30,

2014
March 31, 

2014
$ Change % ChangeJune 30,

2013
$ Change % Change
               
Salaries and employee benefits$ 4,283     $ 4,055     $ 228 6%     $ 4,499     $ (216) -5%
Occupancy 504 506 (2) 0% 452 52 12%
Equipment 263 252 11 4% 195 68 35%
Data processing 462 433 29 7% 809 (347) -43%
Professional services 201 185 16 9% 236 (35) -15%
Other real estate owned write-downs 54 12 42 350% 108 (54) -50%
Other real estate owned operating costs 30 61 (31) -51% 125 (95) -76%
State taxes 107 97 10 10% 133 (26) -20%
FDIC and state assessments 129 134 (5) -4% 130 (1) -1%
Other non-interest expense:              
Director fees 72 56 16 29% 70 2 3%
Communication 53 37 16 43% 42 11 26%
Advertising 76 78 (2) -3% 68 8 12%
Professional liability insurance 19 23 (4) -17% 23 (4) -17%
Amortization 98 95 3 3% 98 0 0%
Other non-interest expense 715 806 -91 -11% 884 (169) -19%
Total non-interest expense     $ 7,066     $ 6,830     $ 236 3%     $ 7,872     $ (806) -10%
               
               
For The Six Months Ended
 June 30,

2014
June 30, 

2013
$ Change % Change      
               
Salaries and employee benefits     $ 8,338     $ 8,885     $ (547) -6%      
Occupancy 1,010 865 145 17%      
Equipment 515 386 129 33%      
Data processing 895 1,239 (344) -28%      
Professional services 386 498 (112) -22%      
Other real estate owned write-downs 66 460 (394) -86%      
Other real estate owned operating costs 91 209 (118) -56%      
State taxes 204 250 (46) -18%      
FDIC and state assessments 263 266 (3) -1%      
Other non-interest expense:              
Director fees 128 115 13 11%      
Communication 90 88 2 2%      
Advertising 154 146 8 5%      
Professional liability insurance 41 46 (5) -11%      
Amortization 192 195 (3) -2%      
Other non-interest expense 1,523 1,643 (120) -7%      
Total non-interest expense     $ 13,896     $ 15,291     $ (1,395) -9%      


Income Taxes

The Company recorded an income tax provision for the three months ended June 30, 2014, March 31, 2014 and June 30, 2013. The amount of the provision for each period was commensurate with the estimated tax liability associated with the net income earned during the period.

As of June 30, 2014, the Company maintained a deferred tax asset balance of $4.1 million. The Company believes it will be fully utilized in the normal course of business, thus no valuation allowance is maintained against this asset.

SUMMARY BALANCE SHEET OVERVIEW
               
(Unaudited)
(Dollars in Thousands)
 June 30,March 31,  June 30,  
  2014 2014 $ Change Change 2013 $ Change Change
Assets:              
Cash and cash equivalents$ 17,694     $ 35,619     $ (17,925) -50%     $ 54,243     $ (36,549) -67%
Interest-bearing certificates of deposit 2,727 2,727 0 0% 2,235 492 22%
Federal Home Loan Bank stock, at cost 2,956 2,985 (29) -1% 3,069 (113) -4%
Investment securities 90,583 97,239 (6,656) -7% 89,551 1,032 1%
               
Loans held-for-sale 7,632 7,997 (365) -5% 10,855 (3,223) -30%
               
Gross loans, net of deferred fees 547,283 518,552 28,731 6% 474,580 72,703 15%
Allowance for loan losses (8,315) (8,288) (27) 0% (8,962) 647 -7%
Net loans 538,968 510,264 28,704 6% 465,618 73,350 16%
               
Other assets 58,912 60,609 (1,697) -3% 60,763 (1,851) -3%
Total assets     $ 719,472     $ 717,440     $ 2,032 0%     $ 686,334     $ 33,138 5%
               
Liabilities and shareholders' equity              
Total deposits     $ 619,301     $ 620,456     $ (1,155) 0%     $ 591,147     $ 28,154 5%
Accrued interest payable 151 166 (15) -9% 185 (34) -18%
Borrowings 23,743 23,403 340 1% 23,403 340 1%
Other liabilities 5,417 4,820 597 12% 4,750 667 14%
Shareholders' equity 70,860 68,595 2,265 3% 66,849 4,011 6%
Total liabilities and shareholders' equity     $ 719,472     $ 717,440     $ 2,032 0%     $ 686,334     $ 33,138 5%
 
Cash and Cash Equivalents and Investment Securities
(Unaudited)
(Dollars in Thousands)
  June 30, 

2014
% of

Total
March 31,

2014
% of

Total
$ Change % Change June 30, 

2013
% of

Total
$ Change % Change
                     
Cash and due from banks$ 17,455 15%$ 15,747 11%$ 1,708 11%$ 18,158 12%$ (703) -4%
Cash equivalents:                    
Interest-bearing deposits 239 0% 19,872 14% (19,633) -99% 36,085 24% (35,846) -99%
Interest-bearing certificates of deposit 2,727 2% 2,727 2%  --  0% 2,235 1% 492 22%
Total cash equivalents 20,421 18% 38,346 28% (17,925) -47% 56,478 38% (36,057) -64%
                     
Investment securities:                    
Collateralized mortgage obligations: agency issued 38,822 34% 37,567 27% 1,255 3% 30,085 20% 8,737 29%
Collateralized mortgage obligations: non-agency issued 604 1% 1,974 1% (1,370) -69% 2,349 2% (1,745) -74%
Mortgage-backed securities: agency issued 12,059 11% 13,182 10% (1,123) -9% 12,038 8% 21 0%
U.S. Government and agency securities 8,721 8% 9,828 7% (1,107) -11% 8,874 6% (153) -2%
State and municipal securities 30,377 27% 34,688 25% (4,311) -12% 33,635 23% (3,258) -10%
Corporate bonds  --  0%  --  0%  --  0% 2,570 2% (2,570) -100%
FHLB Stock 2,956 3% 2,985 2% (29) -1% 3,069 2% (113) -4%
Total investment securities 93,539 82% 100,224 72% (6,685) -7% 92,620 62% 919 1%
                     
Total cash equivalents and investment securities$ 113,960 100%$ 138,570 100%$ (24,610) -18%$ 149,098 100%$ (35,138) -24%
                     
Total cash equivalents and investment securities as a % of total assets   16%   19%       22%    
 
Investment securities and interest-bearing certificates of deposit
(Unaudited)
(Dollars in Thousands)
For the Three Months Ended June 30, 

2014
March 31,

2014
$ Change  % Change  June 30, 

2013
$ Change  % Change 
               
Balance beginning of period$ 102,951     $ 104,016     $ (1,065) -1%     $ 82,624     $ 20,327 25%
Principal purchases 3,806 5,741 (1,935) -34% 24,688 (20,882) -85%
Proceeds from sales (8,979) (4,849) (4,130) 85% (2,987) (5,992) 201%
Principal paydowns, maturities, and calls (2,144) (2,259) 115 -5% (6,568) 4,424 -67%
Gains on sales of securities 159 62 97 156% 329 (170) -52%
Losses on sales of securities (161) (10) (151) 1510%  -- (161) 100%
OTTI loss writedown (3) (45) 42 -93% (51) 48 -94%
Change in unrealized gains (loss) before tax 903 555 348 63% (2,840) 3,743 -132%
Amortization and accretion of discounts and premiums (266) (260) (6) 2% (340) 74 -22%
Total investment portfolio     $ 96,266     $ 102,951     $ (6,685) -6%     $ 94,855     $ 1,411 1%


Liquidity remains strong based on the current level of combined cash equivalents and investment securities. We also have unsecured lines of credit totaling $16.0 million with correspondent banks, all of which is currently available. In addition, we have a secured borrowing facility with the Federal Home Loan Bank of Seattle of $143.4 million, of which $10.3 million is currently outstanding. In an effort to enhance our net interest income and margin, we reduced our cash equivalents and investment securities portfolio to fund loan growth. The expected modified duration (adjusted for calls, consensus pre-payment speeds and rate adjustment dates) of the investment portfolio was 4.5 years at June 30, 2014, 4.2 years at March 31, 2014 and 4.4 years at June 30, 2013.

LOANS

Loans by category
(Unaudited)June 30, % ofMarch 31, % of $  June 30, % of $  
(Dollars in Thousands) 2014 Gross Loans 2014 Gross Loans Change  % Change  2013 Gross Loans Change  % Change 
                     
Commercial and agricultural$ 109,368 20%     $ 101,971 20%     $ 7,397 7%     $ 89,894 19%     $ 19,474 22%
Real estate:                    
Construction and development 32,071 6% 30,765 6% 1,306 4% 25,804 6% 6,267 24%
Residential 1-4 family 90,549 17% 89,244 17% 1,305 1% 83,896 18% 6,653 8%
Multi-family 20,110 4% 18,982 4% 1,128 6% 13,978 3% 6,132 44%
Commercial real estate -- owner occupied 117,203 22% 112,771 22% 4,432 4% 112,148 24% 5,055 5%
Commercial real estate -- non owner occupied 124,929 23% 119,803 23% 5,126 4% 109,323 23% 15,606 14%
Farmland 23,900 4% 22,940 4% 960 4% 24,717 5% (817) -3%
Consumer 30,241 6% 23,156 5% 7,085 31% 15,841 3% 14,400 91%
Gross loans 548,371   519,632   28,739 6% 475,601   72,770 15%
Less: allowance for loan losses (8,315) -2% (8,288) -2% (27) 0% (8,962) -2% 647 -7%
Less: deferred fees (1,088) 0% (1,080) 0% (8) 1% (1,021) 0% (67) 7%
Loans, net     $ 538,968       $ 510,264       $ 28,704 6%     $ 465,618       $ 73,350 16%


Loan portfolio growth continues to be well diversified, with higher balances in all lending categories. The recent loan growth was generated predominately within our Washington and Oregon markets. The portfolio includes $37.5 million in purchased government-guaranteed commercial and commercial real estate loans. In addition, the portfolio contains $20.7 million in indirect consumer loans to individuals with high credit scores to finance luxury and classic cars as a part of a strategy to diversify the loan portfolio.

Our ability to continue loan growth will be dependent on many factors, including the effects of competition, economic conditions in our markets, retention of key personnel and valued customers, and our ability to close loans in the pipeline.  The Company manages new loan origination volume using concentration limits that establish maximum exposure levels by designated industry segment, real estate product types, geography, and single borrower limits.

DEPOSITS

Deposits
(Unaudited)
(Dollars in Thousands)June 30, 2014 Percent of

Total
March 31,

2014
Percent of

Total
$ ChangeJune 30, 2013 Percent of

Total
$ Change
                 
Interest-bearing demand and money market$ 268,480 43.4%     $ 263,953 42.5%     $ 4,527     $ 259,956 44.0%     $ 8,524
Savings 74,336 12.0% 78,055 12.6% (3,719) 64,360 10.9% 9,976
Time deposits 119,531 19.3% 125,532 20.2% (6,001) 141,246 23.9% (21,715)
Total interest-bearing deposits 462,347 74.7% 467,540 75.4% (5,193) 465,562 78.8% (3,215)
Non-interest bearing demand 156,954 25.3% 152,916 24.6% 4,038 125,585 21.2% 31,369
Total deposits     $ 619,301 100.0%     $ 620,456 100.0%     $ (1,155)     $ 591,147 100.0%     $ 28,154


Total deposits were virtually unchanged at June 30, 2014 versus first quarter of this year and up 5% from the second quarter a year ago. Non-interest bearing, interest bearing demand and money market deposits continued to grow. This increase is due recent success in acquiring business deposit relationships in conjunction with the growth in lending achieved over the past year and the deposits obtained in the Sterling acquisition last year.   Time deposits continued to decline as a percentage of total deposits. 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 second quarter 2014 from second quarter in 2013.

Total brokered deposits were $22.9 million at June 30, 2014, which included $2.9 million via reciprocal deposit arrangements. This compares to $24.2 million and $24.6 million at March 31, 2014 and June 30, 2013, respectively. In addition, the Company's funding structure contains $10.0 million in borrowings from the Federal Home Loan Bank. Doug Biddle, Executive Vice President and Chief Financial Officer, observed, "We view 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, met the thresholds to be considered "Well-Capitalized" under published regulatory standards for total risk-based capital, Tier 1 risk-based capital and Tier 1 leverage capital at June 30, 2014. Capital ratios decreased slightly as compared to the linked quarter and the second quarter of 2013, primarily due to the successful execution of the Company's growth strategy and shift in the balance sheet mix to higher risk-weighted 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 2013 Form 10-K. The following table summarizes the capital measures of the Company and the Bank, respectively, at the dates listed below.

The total risk based capital ratios of the Company include $13.4 million of junior subordinated debentures, all of which qualified as Tier 1 capital at June 30, 2014, under guidance issued by the Federal Reserve. As provided in the Dodd-Frank Act, the Company expects to continue to rely on these junior subordinated debentures as part of its regulatory capital.

  June 30, 

2014
March 31,

2014
Change June 30, 

2013
Change Regulatory Minimum

to be "Adequately

Capitalized"
Regulatory

Minimum to be

"Well Capitalized"
            greater than or equal to greater than or equal to
Pacific Financial Corporation              
Total risk-based capital ratio 13.50% 13.88%  (0.38) 15.24%  (1.74) 8%      n/a
Tier 1 risk-based capital ratio 12.25% 12.62%  (0.37) 13.98%  (1.73) 4%      n/a
Leverage ratio 9.83% 10.02%  (0.19) 10.44%  (0.61) 4%      n/a
Tangible common equity ratio 8.11% 7.81%  0.30 7.90%  0.21 n/a      n/a
               
Bank of the Pacific              
Total risk-based capital ratio 13.73% 13.93%  (0.20) 15.21%  (1.48) 8% 10%
Tier 1 risk-based capital ratio 12.48% 12.67%  (0.19) 13.96%  (1.48) 4% 6%
Leverage ratio 10.01% 9.99%  0.02 10.42%  (0.41) 4% 5%
 
FINANCIAL PERFORMANCE OVERVIEW
(Unaudited)
(Dollars in Thousands, Except per Share Data)
           
For The Three Months Ended
  June 30, 

2014
March 31,

2014
Change June 30, 

2013
Change
Selective quarterly performance ratios          
Return on average assets, annualized 0.79% 0.59%  0.20 0.81%  (0.02)
Return on average equity, annualized 8.04% 6.12%  1.92 7.83%  0.21
Efficiency ratio (1) 78.76% 83.67%  (4.91) 86.25%  (7.49)
           
Share and per share information          
Average common shares outstanding - basic  10,189,386  10,182,083  7,303  10,121,853  67,533
Average common shares outstanding - diluted  10,275,628  10,272,341  3,287  10,182,524  93,104
Basic income per common share  0.14  0.10  0.04  0.13  0.01
Diluted income per common share  0.14  0.10  0.04  0.13  0.01
Book value per common share (2)  6.95  6.74  0.21  6.60  0.35
Tangible book value per common share (3)  5.62  5.34  0.28  5.10  0.52
           
For The Six Months Ended
  June 30, 

2014
June 30, 

2013
Change    
Selective quarterly performance ratios          
Return on average assets, annualized 0.69% 0.63%  0.06    
Return on average equity, annualized 7.10% 6.05%  1.05    
Efficiency ratio (1) 81.10% 88.21%  (7.11)    
           
Share and per share information          
Average common shares outstanding - basic  10,185,755  10,121,853  63,902    
Average common shares outstanding - diluted  10,273,994  10,172,356  101,638    
Basic income per common share  0.24  0.20  0.04    
Diluted income per common share  0.24  0.20  0.04    
Book value per common share (2)  6.96  6.60  0.36    
Tangible book value per common share (3)  5.62  5.10  0.52    
           
(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
  June 30, 

2014
March 31,

2014
Change June 30, 

2013
Change
Selective quarterly performance ratios          
Yield on average gross loans (1) 5.04% 5.13%  (0.09) 5.17%  (0.13)
Yield on average investment securities (1) 2.54% 2.37%  0.17 1.91%  0.63
Cost of average interest bearing deposits 0.37% 0.37%  --  0.48%  (0.11)
Cost of average borrowings 1.90% 1.96%  (0.06) 1.99%  (0.09)
Cost of average total deposits and borrowings 0.34% 0.34%  --  0.44%  (0.10)
Cost of average interest-bearing liabilities 0.44% 0.44%  --  0.55%  (0.11)
           
Yield on average interest-earning assets 4.61% 4.61%  --  4.53%  0.08
Cost of average interest-bearing liabilities 0.44% 0.44%  --  0.55%  (0.11)
Net interest spread 4.17% 4.17%  --  3.98%  0.19
           
Net interest margin (1) 4.28% 4.27%  0.01 4.09%  0.19
           
For The Six Months Ended
  June 30, 

2014
June 30, 

2013
Change    
Selective quarterly performance ratios          
Yield on average gross loans (1) 5.09% 5.14%  (0.05)    
Yield on average investment securities (1) 2.45% 1.91%  0.54    
Cost of average interest bearing deposits 0.37% 0.50%  (0.13)    
Cost of average borrowings 1.93% 2.04%  (0.11)    
Cost of average total deposits and borrowings 0.34% 0.46%  (0.12)    
Cost of average interest-bearing liabilities 0.44% 0.58%  (0.14)    
           
Yield on average interest-earning assets 4.61% 4.51%  0.10    
Cost of average interest-bearing liabilities 0.44% 0.58%  (0.14)    
Net interest spread 4.17% 3.93%  0.24    
           
Net interest margin (1) 4.27% 4.05%  0.22    
           
(1) Tax-exempt income has been adjusted to a tax equivalent basis at a 34% rate.


Net Interest Margin

Net interest margin remained virtually unchanged as compared to first quarter 2014, as improvement in investment securities yields offset slight declines in loan yields.   Improvements in yields on investment securities were partially due to the decline in amortization expense associated with the decrease in prepayment speeds of mortgage-backed securities. Loan yield declines resulted from increased competition for high quality borrowing relationships in the marketplace. Net interest margin improved when compared to second 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 several quarters has supported the improvement in net interest margin as well. In second quarter 2014, loan yields and net interest margin were enhanced by 9 and 7 basis points, respectively, due to the collection of $115,000 in non-accrual interest during the current period. A similar enhancement to loan yields occurred in first quarter 2014 due to the collection of $108,000 in non-accrual interest. There was no similar collection of non-accrual interest during the corresponding periods in 2013.

The improvement in yields on investment securities also enhanced net interest margin between the six months ending June 30, 2014 and the same period in 2013. This was partially due to the decline in amortization expense associated with the decrease in prepayment speeds of mortgage-backed securities between the two periods. 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.

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
 June 30, 2014March 31, 2014June 30, 2013
  Average

Balance
Interest

Income or

Expense
Average

Yields or

Rates
Average

Balance
Interest

Income or

Expense
Average

Yields or

Rates
Average

Balance
Interest

Income or

Expense
Average

Yields or

Rates
(Dollars in 000's)                  
ASSETS:                  
Interest bearing certificate of deposit$ 2,727     $ 10 1.47%     $ 2,727     $ 10 1.49%     $ 2,235     $ 7 1.21%
Interest bearing deposits in banks 12,552 9 0.29% 17,954 12 0.27% 29,544 17 0.23%
Investments - taxable 65,964 343 2.09% 67,695 339 2.03% 51,990 145 1.12%
Investments - nontaxable 31,607 352 4.47% 32,770 347 4.29% 34,857 397 4.57%
Gross loans (1) 532,490 6,718 5.06% 511,200 6,492 5.15% 474,403 6,149 5.20%
Loans held for sale 7,685 71 3.71% 5,436 49 3.66% 9,170 80 3.50%
Total interest earning assets 653,025 7,503 4.61% 637,782 7,249 4.61% 602,199 6,795 4.53%
Cash and due from banks 13,135     11,989     11,321    
Bank premises and equipment (net) 16,703     16,806     15,499    
Other real estate owned 2,088     2,565     3,776    
Deferred fees (1,068)     (1,137)     (1,032)    
Allowance for loan losses (8,271)     (8,388)     (9,375)    
Other assets 40,705     41,129     40,666    
Total assets     $ 716,317         $ 700,746         $ 663,054    
                   
LIABILITIES AND SHAREHOLDERS' EQUITY:                  
                   
Interest-bearing deposits     $ 345,116 140 0.16%     $ 336,201 141 0.17%     $ 312,459 181 0.23%
Time deposits 122,134 290 0.95% 126,841 276 0.88% 135,107 351 1.04%
FHLB borrowings 10,000 60 2.41% 10,000 53 2.15% 10,000 62 2.49%
Short term borrowings 6  --  0.00%  --   --  0.00%  --   --  0.00%
Junior subordinated debentures 13,403 51 1.53% 13,403 60 1.82% 13,403 54 1.62%
Total interest bearing liabilities 490,659 541 0.44% 486,445 530 0.44% 470,969 648 0.55%
Non-interest-bearing deposits 150,776     140,980     119,499    
Other liabilities 4,928     5,196     4,316    
Equity 69,954     68,125     68,270    
Total liabilities and shareholders' equity     $ 716,317         $ 700,746         $ 663,054    
                   
Net interest income (3)       $ 6,962         $ 6,719         $ 6,147  
Net interest spread     4.17%   243 4.17%   815 3.98%
                   
Average yield on earning assets (2) (3)     4.61%     4.61%     4.53%
Interest expense to earning assets     0.19%     0.19%     0.24%
Net interest income to earning assets (2) (3)     4.28%     4.27%     4.09%
                   
Reconciliation of Non-GAAP measure:                  
Tax Equivalent Net Interest Income                  
                   
Net interest income       $ 6,796         $ 6,555         $ 5,952  
Tax equivalent adjustment for municipal loan interest   46     46     60  
Tax equivalent adjustment for municipal bond interest   120     118     135  
Tax equivalent net interest income       $ 6,962         $ 6,719         $ 6,147  
                   
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 $6.4 million at 06/30/14, $7.3 million at 03/31/2014, and $10.4 million for 06/30/2013 are included in the average loan balances.
(2) Loan interest income includes loan fee income of $180,000, $149,000, and $131,000 for the three months ended 06/30/2014, 03/31/2014, and 06/30/2013, respectively.
(3) Tax-exempt income has been adjusted to a tax equivalent basis at a 34% effective rate. The amount of such adjustment was an addition to recorded pre-tax income of $166,000, $164,000, and $195,000 for the three months ended June 30, 2014, March 31, 2014, and June 30, 2013, respectively.
     
  For the Three Months Ended For the Three Months Ended
   June 30, 2014 vs. March 31, 2014   June 30, 2014 vs. June 30, 2013 
   Increase (Decrease) Due To   Increase (Decrease) Due To 
(Dollars in 000's)      Net       Net 
   Volume   Rate   Change   Volume   Rate   Change 
 ASSETS:             
Interest bearing certificate of deposit $ --       $ --      $ --      $ 1     $ 2     $ 3
Interest bearing deposits in banks (4) 1 (3) (10) 2 (8)
Investments - taxable (9) 13 4 39 159 198
Investments - nontaxable (12) 17 5 (37) (8) (45)
Gross loans 273 (47) 226 753 (184) 569
Loans held for sale 21 1 22 (13) 4 (9)
Total interest earning assets     $ 269     $ (15)     $ 254     $ 733     $ (25)     $ 708
             
LIABILITIES AND SHAREHOLDERS' EQUITY:            
Interest-bearing deposits     $ 4     $ (5)     $ (1)     $ 19     $ (60)     $ (41)
Time deposits (10) 24 14 (34) (27) (61)
FHLB borrowings  --  7 7  --  (2) (2)
Short-term borrowings  --   --   --   --   --   -- 
Long-term borrowings  --  (9) (9)  --  (3) (3)
Total interest bearing liabilities (6) 17 11 (15) (92) (107)
 Net increase (decrease) in net interest income      $ 275     $ (32)     $ 243     $ 748     $ 67     $ 815
   
Average Interest Earning Balances: For the Six Months Ended
 June 30, 2014June 30, 2013
  Average

Balance
Interest

Income or

Expense
Average

Yields or

Rates
Average

Balance
Interest

Income or

Expense
Average

Yields or

Rates
(Dollars in 000's)            
ASSETS:            
Interest bearing certificate of deposit$ 2,727     $ 21 1.55%     $ 2,536     $ 14 1.11%
Interest bearing deposits in banks 15,238 19 0.25% 32,629 37 0.23%
Investments - taxable 66,825 682 2.06% 46,747 250 1.08%
Investments - nontaxable 32,185 700 4.39% 34,319 800 4.70%
Gross loans (1) 521,904 13,210 5.10% 465,727 11,982 5.19%
Loans held for sale 6,567 120 3.68% 11,268 177 3.17%
Total interest earning assets 645,446 14,752 4.61% 593,226 13,260 4.51%
Cash and due from banks 12,565     11,028    
Bank premises and equipment (net) 16,755     15,231    
Other real estate owned 2,325     4,095    
Deferred fees (1,104)     (989)    
Allowance for loan losses (8,330)     (9,371)    
Other assets 40,917     40,910    
Total assets     $ 708,574         $ 654,130    
             
LIABILITIES AND SHAREHOLDERS' EQUITY:            
             
Interest-bearing deposits     $ 340,683 281 0.17%     $ 306,297 381 0.25%
Time deposits 124,475 566 0.92% 135,898 718 1.07%
FHLB borrowings 10,000 120 2.42% 10,099 124 2.48%
Short term borrowings 3  --  0.00%  --   --  0.00%
Junior subordinated debentures 13,403 104 1.56% 13,403 114 1.72%
Total interest bearing liabilities 488,564 1,071 0.44% 465,697 1,337 0.58%
Non-interest-bearing deposits 145,905     116,240    
Other liabilities 5,060     4,413    
Equity 69,045     67,780    
Total liabilities and shareholders' equity     $ 708,574         $ 654,130    
             
Net interest income (3)       $ 13,681         $ 11,923  
Net interest spread     4.17%   1,758 3.93%
             
Average yield on earning assets (2) (3)     4.61%     4.51%
Interest expense to earning assets     0.33%     0.45%
Net interest income to earning assets (2) (3)     4.27%     4.05%
             
Reconciliation of Non-GAAP measure:            
Tax Equivalent Net Interest Income            
             
Net interest income       $ 13,351         $ 11,534  
Tax equivalent adjustment for municipal loan interest   92     117  
Tax equivalent adjustment for municipal bond interest   238     272  
Tax equivalent net interest income       $ 13,681         $ 11,923  
             
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 $6.4 million at 06/30/14 and $10.4 million for 06/30/2013 are included in the average loan balances.
(2) Loan interest income includes loan fee income of $330,000 and $226,000 for the six months ended 06/30/2014 and 06/30/2013, respectively.
(3) Tax-exempt income has been adjusted to a tax equivalent basis at a 34% effective rate. The amount of such adjustment was an addition to recorded pre-tax income of $330,000 and $389,000 for the six months ended June 30, 2014 and June 30, 2013, respectively. 
   
  For the Six Months Ended
   June 30, 2014 vs. June 30, 2013 
   Increase (Decrease) Due To 
(Dollars in 000's)      Net 
   Volume   Rate   Change 
ASSETS:       
Interest bearing certificate of deposit$ 1     $ 6     $ 7
Interest bearing deposits in banks (20) 2 (18)
Investments - taxable 108 324 432
Investments - nontaxable (50) (50) (100)
Gross loans 1,446 (218) 1,228
Loans held for sale (74) 17 (57)
Total interest earning assets     $ 1,411     $ 81     $ 1,492
       
LIABILITIES AND SHAREHOLDERS' EQUITY:      
Interest-bearing deposits     $ 43     $ (143)     $ (100)
Time deposits (61) (91) (152)
FHLB borrowings (1) (3) (4)
Short-term borrowings  --   --   -- 
Long-term borrowings  --  (10) (10)
Total interest bearing liabilities (19) (247) (266)
 Net increase (decrease) in net interest income      $ 1,430     $ 328     $ 1,758
 
SUMMARY AVERAGE BALANCE SHEETS
               
(Unaudited)
(Dollars in Thousands)
Averages for the Three Months EndedJune 30,March 31,    June 30,    
  2014 2014 $ Change  % Change  2013 $ Change  % Change 
Assets:              
Cash and due from banks$ 13,135     $ 11,989     $ 1,146 10%     $ 11,321     $ 1,814 16%
Interest-bearing deposits in banks 12,552 17,954 (5,402) -30% 29,544 (16,992) -58%
Interest bearing certificate of deposit 2,727 2,727 0 0% 2,235 492 22%
Investment securities 97,571 100,465 (2,894) -3% 86,847 10,724 12%
               
Loans, net of deferred loan fees 539,106 515,499 23,607 5% 482,541 56,565 12%
Allowance for loan losses (8,271) (8,388) 117 -1% (9,375) 1,104 -12%
Net loans 530,835 507,111 23,724 5% 473,166 57,669 12%
               
Other assets 59,497 60,500 (1,003) -2% 59,941 (444) -1%
Total assets     $ 716,317     $ 700,746     $ 15,571 2%     $ 663,054     $ 53,263 8%
               
Liabilities:              
Total deposits     $ 618,026     $ 604,022     $ 14,004 2%     $ 567,065     $ 50,961 9%
Borrowings 23,409 23,403 6 0% 23,403 6 0%
Other liabilities 4,928 5,196 (268) -5% 4,316 612 14%
Total liabilities 646,363 632,621 13,742 2% 594,784 51,579 9%
               
Equity:              
Common equity 69,954 68,125 1,829 3% 68,270 1,684 2%
Total equity 69,954 68,125 1,829 3% 68,270 1,684 2%
               
Total liabilities and shareholders' equity     $ 716,317     $ 700,746     $ 15,571 2%     $ 663,054     $ 53,263 8%
               
               
Averages for the Six Months EndedJune 30,June 30,          
  2014 2013 $ Change  % Change       
Assets:              
Cash and due from banks     $ 12,565     $ 11,028     $ 1,537 14%      
Interest-bearing deposits in banks 15,238 32,629 (17,391) -53%      
Interest bearing certificate of deposit 2,727 2,536 191 8%      
Investment securities 99,010 81,066 17,944 22%      
               
Loans, net of deferred loan fees 527,367 476,006 51,361 11%      
Allowance for loan losses (8,330) (9,371) 1,041 -11%      
Net loans 519,037 466,635 52,402 11%      
               
Other assets 59,997 60,236 (239) 0%      
Total assets     $ 708,574     $ 654,130     $ 54,444 8%      
               
Liabilities:              
Total deposits     $ 611,063     $ 558,435     $ 52,628 9%      
Borrowings 23,406 23,502 (96) 0%      
Other liabilities 5,060 4,413 647 15%      
Total liabilities 639,529 586,350 53,179 9%      
               
Equity:              
Common equity 69,045 67,780 1,265 2%      
Total equity 69,045 67,780 1,265 2%      
               
Total liabilities and shareholders' equity     $ 708,574     $ 654,130     $ 54,444 8%      
               


ASSET QUALITY

At June 30, 2014, total classified loans declined in dollars and as a percentage of total loans as compared to March 31, 2014, and June 30, 2013.   Nonperforming loans consist primarily of commercial real estate loans. Total loans on accruing status 30-89 days past due also continue to remain below 0.50% of gross loans, mirroring the improvement in overall credit quality noted previously. "We monitor delinquencies, defined as loans on accruing status 30-89 days past due, as an indicator of future adversely classified loans," Biddle continued.  

At June 30, 2014, total nonperforming loans were also down compared to March 31, 2014 and June 30, 2013. Nonperforming assets also declined during this period in terms of total outstanding loans and as a percentage of total assets. This was primarily due to the payoff of a $1.8 million non-accrual commercial real estate loan during the current quarter, which was partially offset by the placement on non-accrual of a $1.2 million commercial real estate loan relationship. Reductions in nonperforming assets were also achieved through sales of OREO, as write-downs were minimal during the current period.

Adversely classified loans
(Unaudited)
(Dollars in Thousands)
 June 30,

2014
March 31,

2014


Change
%

Change
June 30,

2013


Change
%

Change
               
Rated substandard or worse, but not impaired$ 6,938$ 6,842$ 96 1%$ 4,113$ 2,825 69%
Impaired 9,025 9,952 (927) -9% 12,859 (3,834) -30%
Total adversely classified loans*$ 15,963$ 16,794$ (831) -5%$ 16,972$ (1,009) -6%
               
Gross loans$ 548,371$ 519,632$ 28,739 6%$ 472,186$ 76,185 16%
Adversely classified loans to gross loans 2.91% 3.23% -0.32%   3.59% -0.68%  
Allowance for loan losses$ 8,315$ 8,288$ 27 0%$ 9,348$ (1,033) -11%
Allowance for loan losses as a percentage of adversely classified loans 52.09% 49.35% 2.74%   55.08% -2.99%  
Allowance for loan losses to total impaired loans 92.13% 83.28% 8.85%   72.70% 19.43%  
               
* Adversely classified loans are defined as loans having a well-defined weakness or weaknesses related to the borrower's financial capacity or to pledged collateral that may jeopardize the repayment of the debt. They are characterized by the possibility that the Bank may sustain some loss if the deficiencies giving rise to the substandard classification are not corrected. Note that any loans internally rated worse than substandard are included in the impaired loan totals. 
 
30-89 DPD by type
(Unaudited)
(Dollars in Thousands)
                     
 June 30,

2014
% of

Category
March 31,

2014
% of

Category
$ Change  % Change June 30,

2013
% of

Category
$ Change  % Change 
                     
Commercial and agricultural$ 23 16.5%     $ 32 4.1%     $ (9) -28%     $ 355 11.8%     $ (332) -94%
Real estate:                    
Construction and development  --  0.0%  --  0.0%  --  0%  --  0.0%  --  0%
Residential 1-4 family 53 38.1% 180 23.1% (127) -71% 517 17.2% (464) -90%
Multi-family  --  0.0%  --  0.0%  --  0%  --  0.0%  --  0%
Commercial real estate -- owner occupied  --  0.0% 309 39.6% (309) -100% 314 10.4% (314) -100%
Commercial real estate -- non owner occupied  --  0.0% 251 32.2% (251) -100% 1,745 58.1% (1,745) -100%
Farmland  --     --  0.0%  --  0% 55 1.8% (55) -100%
Total real estate     $ 53       $ 740       $ (687) -93%     $ 2,631       $ (2,578)  
                         
Consumer 63 45.3% 8 1.0% 55 688% 20 0.7% 43 215%
Total loans 30-89 days past due, not in nonaccrual status     $ 139 100.0%     $ 780 100.0%     $ (641) -82%     $ 3,006 100.0%     $ (2,867) -95%
                     
Delinquent loans to total loans, not in nonaccrual status 0.03%   0.15%       0.66%      
 
Non-performing assets
(Unaudited)
(Dollars in Thousands)June 30,

2014
March 31,

2014
$ Change  % Change June 30,

2013
$ Change  % Change 
Loans on nonaccrual status$ 6,388$ 7,296$ (908) -12%$ 10,368$ (3,980) -38%
Loans past due greater than 90 days but not on nonaccrual status  --   --   --     --   --   
Total non-performing loans 6,388 7,296 (908) -12% 10,368 (3,980) -38%
Other real estate owned and foreclosed assets 991 2,386 (1,395) -58% 3,451 (2,460) -71%
Total nonperforming assets$ 7,379$ 9,682$ (2,303) -24%$ 13,819$ (6,440) -47%
               
Percentage of nonperforming assets to total assets 1.03% 1.35%     2.01%    


OREO declined during the second quarter 2014, and year-over year. Additional real estate properties taken into the OREO portfolio during the quarter was modest. OREO properties sold with a larger book value in the quarter compared to prior periods. OREO valuation adjustments continued to be minimal. At June 30, 2014, the OREO portfolio consisted of 10 properties, down in number and balance from both the first quarter 2014 and second quarter 2013. The largest balances in the OREO portfolio at the end of the quarter were attributable to commercial properties, followed by residential properties, all of which are located within our market area.

Other real estate owned and foreclosed assets
(Unaudited)
(Dollars in Thousands)
For the Three Months EndedJune 30,

2014
% of

Category
March 31,

2014
% of

Category
$ Change  % Change June 30,

2013
% of

Category
$ Change  % Change 
Other real estate owned, beginning of period$ 2,386 240.8%     $ 2,771 116.1%     $ (385) -14%     $ 4,148 120.2%     $ (1,762) -42%
Transfers from outstanding loans 206 20.8% 111 4.7% 95 86%  --  0.0% 206 100%
Improvements and other additions  --  0.0%  --  0.0%  --  0%  --  0.0%  --  0%
Proceeds from sales (1,490) -150.4% (448) -18.8% (1,042) 233% (634) -18.4% (856) 135%
Net gain (loss) on sales (57) -5.8% (36) -1.5% (21) 58% 45 1.3% (102) -227%
Impairment charges (54) -5.4% (12) -0.5% (42) 350% (108) -3.1% 54 -50%
Total other real estate owned     $ 991 100.0%     $ 2,386 100.0%     $ (1,395) -58%     $ 3,451 100.0%     $ (2,460) -71%
                     
For the Six Months EndedJune 30,

2014
% of

Category
June 30, 

2013
% of

Category
$ Change  % Change         
Other real estate owned, beginning of period     $ 2,771 279.6%     $ 4,678 135.6%     $ (1,907) -41%        
Transfers from outstanding loans 317 32.0% 209 6.1% 108 52%        
Improvements and other additions  --  0.0%  --  0.0%  --  0%        
Proceeds from sales (1,938) -195.6% (1,001) -29.0% (937) 94%        
Net gain (loss) on sales (93) -9.4% 25 0.7% (118) -472%        
Impairment charges (66) -6.7% (460) -13.3% 394 -86%        
Total other real estate owned     $ 991 100.0%     $ 3,451 100.0%     $ (2,460) -71%        
 
Other real estate owned and foreclosed assets by type
(Unaudited)
(Dollars in Thousands)
 June 30,

2014
# of

Properties
March 31,

2014
# of

Properties
$ Change % ChangeJune 30,

2013
# of

Properties
$ Change % Change
                     
Construction, Land Dev & Other Land$ 46  2$ 60  3$ (14) -23%$ 1,041  8$ (995) -96%
1-4 Family Residential Properties 317  4 789  7 (472) -60% 570  4 (253) -44%
Nonfarm Nonresidential Properties 628  4 1,537  8 (909) -59% 1,840  11 (1,212) -66%
Total OREO by type$ 991  10$ 2,386  18$ (1,395) -58%$ 3,451  23$ (2,460) -71%


ALLOWANCE FOR LOAN LOSSES

The allowance for loan losses continues to decline in relation to total loans in concert with the general trend of reduced levels of classified loans, loan delinquencies and other relevant credit metrics. With the reduction in delinquencies, 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. A provision was made to the allowance for loan losses in second quarter 2014 corresponding to recent growth in the loan portfolio, as compared to no provision in the linked quarter and a reverse provision in second quarter 2013. 

For the quarter ended June 30, 2014, total net loan charge-offs were unchanged compared to the quarter ended March 31, 2014, but up versus the quarter ended June 30, 2013. The charge-offs incurred in the second quarter 2014 were primarily centered in one commercial real estate loan, which was written down $371,000 due to an impairment of the collateral securing the loan. This was partially offset by a $337,000 recovery resulting from the pay off of a $1.8 million commercial real estate loan.   The ratio of net loan charge-offs to average gross loans (annualized) for the current quarter was unchanged compared to the linked quarter, but up slightly compared to the second quarter one year ago. 

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

Allowance for Loan Losses
(Unaudited)
(Dollars in Thousands)
For the Three Months EndedJune 30,

2014
March 31,

2014


Change
 %

Change 
June 30,

2013


Change
 %

Change 
               
Gross loans outstanding at end of period$ 548,371     $ 519,632     $ 28,739 6%     $ 475,601     $ 72,770 15%
Average loans outstanding, gross     $ 532,490     $ 511,200     $ 21,290 4%     $ 474,403     $ 58,087 12%
Allowance for loan losses, beginning of period     $ 8,288     $ 8,359     $ (71) -1%     $ 9,348     $ (1,060) -11%
Commercial (9) (17) 8 -47%  --  (9) -100%
Commercial Real Estate (389) (7) (382) 5457% (42) (347) 826%
Residential Real Estate (4) (40) 36 -90% (61) 57 -93%
Consumer (29) (18) (11) 61% (49) 20 -41%
Total charge-offs (431) (82) (349) 426% (152) (279) 184%
Commercial 1 1 0 0% 5 (4) -80%
Commercial Real Estate 347 5 342 6840% 209 138 66%
Residential Real Estate 9 4 5 125% 2 7 350%
Consumer 1 1  --  0%  --  1 100%
Total recoveries 358 11 347 3155% 216 142 66%
Net charge-offs  (73) (71) (2) 3% 64 (137) -214%
Provision charged to income 100  --  100 100% (450) 550 -122%
Allowance for loan losses, end of period     $ 8,315     $ 8,288     $ 27 0%     $ 8,962     $ (647) -7%
Ratio of net loans charged-off to average gross loans outstanding, annualized 0.05% 0.06% -0.01% -17% -0.05% 0.10% -200%
Ratio of allowance for loan losses to gross loans outstanding 1.52% 1.59% -0.07% -4% 1.88% -0.36% -19%
               
               
For the Six Months EndedJune 30,

2014
June 30,

2013


Change
 %

Change 
     
               
Gross loans outstanding at end of period     $ 519,632     $ 472,186     $ 47,446 10%      
Average loans outstanding, gross     $ 511,200     $ 456,954     $ 54,246 12%      
Allowance for loan losses, beginning of period     $ 8,359     $ 9,358     $ (999) -11%      
Commercial (26)  --  (26) -100%      
Commercial Real Estate (396) (47) (349) 743%      
Residential Real Estate (44) (71) 27 -38%      
Consumer (47) (60) 13 -22%      
Total charge-offs (513) (178) (335) 188%      
Commercial 2 15 (13) -87%      
Commercial Real Estate 352 214 138 64%      
Residential Real Estate 13 2 11 550%      
Consumer 2 1 1 100%      
Total recoveries 369 232 137 59%      
Net charge-offs  (144) 54 (198) -367%      
Provision charged to income 100 (450) 550 100%      
Allowance for loan losses, end of period     $ 8,315     $ 8,962     $ (647) -7%      
Ratio of net loans charged-off to average gross loans outstanding, annualized 0.00% 0.00% 0.00% 0%      
Ratio of allowance for loan losses to gross loans outstanding 1.60% 1.90% -0.30% -16%      


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 June 30, 2014, the Company had total assets of $719 million and operated sixteen branches in the communities of Grays Harbor, Pacific, Whatcom, Skagit and Wahkiakum counties in the State of Washington, and three branches in Clatsop County, Oregon. The Company also operates loan production offices in the communities of Vancouver, DuPont and Burlington in Washington. Visit the Company's website at www.bankofthepacific.com.   Member FDIC.

Cautions Concerning Forward-Looking Statements

This press release contains statements that constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and other laws, including all statements in this release that are not historical facts or that relate to future plans or events or projected results of Pacific Financial Corporation and its wholly-owned subsidiary, Bank of the Pacific. These forward-looking statements are subject to risks and uncertainties that could cause actual events or results to differ materially from those projected, anticipated or implied. These risks and uncertainties include various risks associated with growing the Bank and expanding the services it provides, successfully completing and integrating the acquisition of new branches and development of new business lines and markets, competition in the marketplace, general economic conditions, changes in interest rates, extensive and evolving regulation of the banking industry, and many other risks described in the Company's filings with the Securities and Exchange Commission. The most significant of these uncertainties are described in the Company's Annual Report on Form 10-K for the year ended December 31, 2013, which readers of this release are encouraged to review. We undertake no obligation to update or revise any forward-looking statement. Readers of this release are cautioned not to put undue reliance on forward-looking statements.

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

Source: Pacific Financial Corporation


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