Exhibit 99.1

 

 

 

Pacific Financial Corporation Profits Increase 36% in Second Quarter 2014

and 20% in First Half of 2014

 

Driven by Accelerating Loan Growth, Solid Credit Quality and Strong Net Interest Margin

 

ABERDEEN, WA – July 28, 2014 – 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.

 

  

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

July 28, 2014

Page 2

 

•

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.

 

  

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

July 28, 2014

Page 3

 

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 Ended		June 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 Ended		June 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	%

 

  

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

July 28, 2014

Page 4

 

Reconciliation of Non-GAAP Measure:

Tax Equivalent Net Income

(Dollars in Thousands)

 

For the Three Months ended		June 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 income before income taxes*			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 ended		June 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 income before income taxes*			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.

 

 

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

July 28, 2014

Page 5

 

Noninterest income

(Unaudited)

(Dollars in Thousands)

 

For The Three Months Ended

 

		June 30, 2014				March 31, 2014				$ Change				% Change				June 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.

 

 

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

July 28, 2014

Page 6

 

Noninterest expense

(Unaudited)

(Dollars in Thousands)

 

For The Three Months Ended

 

		June 30, 2014				March 31,  2014				$ Change				% Change				June 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.

 

  

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

July 28, 2014

Page 7

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 and certificate of deposits			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	%

 

  

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

July 28, 2014

Page 8

 

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,				% of				March 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.

 

  

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

July 28, 2014

Page 9

 

DEPOSITS

 

Deposits
(Unaudited)
(Dollars in Thousands)		June 30, 2014				Percent of Total				March 31, 2014				Percent of Total				$ Change				June 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.

 

 

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

July 28, 2014

Page 10

 

		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.

 

 

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

July 28, 2014

Page 11

 

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.

 

 

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

July 28, 2014

Page 12

 

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, 2014												March 31, 2014												June 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

 

 

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

July 28, 2014

Page 13

 

Average Interest Earning Balances:		For the Six Months Ended
		June 30, 2014												June 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

 

 

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

July 28, 2014

Page 14

 

SUMMARY AVERAGE BALANCE SHEETS

 

(Unaudited)

(Dollars in Thousands)

Averages for the Three Months Ended

 

		June 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 Ended		June 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.

 

 

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

July 28, 2014

Page 15

 

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 Days Past Due 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	%

 

 

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

July 28, 2014

Page 16

 

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 Ended		June 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 Ended		June 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				% Change				June 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	%

 

 

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

July 28, 2014

Page 17

 

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.

 

 

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

July 28, 2014

Page 18

 

Allowance for Loan Losses

(Unaudited)

(Dollars in Thousands)

 

For the Three Months Ended		June 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 Ended		June 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	%

 

 

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

July 28, 2014

Page 19

 

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.