Exhibit 99.1

 

  

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

 

Strong Loan Growth, Solid Net Interest Margin and Expense Control Contribute to Profits

 

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

 

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

 

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

 

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

 

•

Net interest income increased 14% to $27.0 million for 2014, compared to $23.8 million for 2013. Net interest income increased 9% to $6.8 million for the current quarter, compared to $6.3 million for the fourth quarter a year ago and declined slightly from $6.9 million for the third quarter 2014.

 

•

Net interest margin expanded 17 basis points to 4.17% for 2014, from 4.00% for 2013. Net interest margin was 4.01% for fourth quarter 2014, compared to 4.13% for the preceding quarter, and 3.98% for fourth quarter 2013.

 

•

Overall operating (noninterest) expenses declined 5% in 2014 from 2013 reflecting reductions in OREO expenses and the previously mentioned one-time conversion costs in 2013. Expenses were flat in the fourth quarter 2014 compared to both the preceding and year ago quarters, resulting in greater operating efficiencies.

 

•

Gross loans increased 12% to $563.1 million, compared to $504.7 million at December 31, 2013, and grew 2% from $552.1 million at September 30, 2014.

 

•

Noninterest-bearing deposits were $165.8 million at December 31, 2014, compared to $145.0 million at year end 2013, and $182.3 million at September 30, 2013.

 

•

Nonperforming assets totaled $10.1 million, or 1.36% of total assets at December 31, 2014, compared to $10.0 million, or 1.42% of total assets at December 31, 2013, and $6.4 million, or 0.86% of total assets at September 30, 2014.

 

•

For the full year, net charge-offs were $306,000, compared to $549,000 for 2013. Net charge-offs declined substantially to $2,000 in the current quarter, from $447,000 for the fourth quarter 2013, and $160,000 for the third quarter 2014.

 

•

The company declared an annual cash dividend of $0.21 per share, a 5% increase from 2013. Capital levels exceeded regulatory requirements for a well-capitalized financial institution, with a total risk-based capital ratio of 13.60% and a leverage ratio of 9.81% at December 31, 2014.

 

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

 

  

Pacific Financial Corporation Profits Increased 32% in 2014 and 42% in Fourth Quarter 2014

February 2, 2015

Page 2

 

OPERATING RESULTS

PACIFIC FINANCIAL CORPORATION

CONSOLIDATED STATEMENTS OF INCOME

(Dollars in Thousands, Except per Share Data)

 

		For the Quarter Ended												Sequential				Year over
		December 31,				September 30,				December 31,				Quarter				Year
		2014				2014				2013				% Change				% Change
INTEREST AND DIVIDEND INCOME
Loans		$	6,805			$	6,894			$	6,243				-1	%			9	%
Deposits in banks and federal funds sold			26				24				29				8	%			-10	%
Securities available for sale:
Taxable			287				296				305				-3	%			-6	%
Tax-exempt			166				164				211				1	%			-21	%
Securities held to maturity:
Taxable			2				2				2				0	%			0	%
Tax-exempt			19				19				23				0	%			-17	%
FHLB & PCBB dividends			31				1				1				3000	%			3000	%
Total interest and dividend income			7,336				7,400				6,814				-1	%			8	%
INTEREST EXPENSE
Deposits:
Interest-bearing demand and savings			166				134				153				24	%			8	%
Time			252				269				295				-6	%			-15	%
Short-term borrowings			-				1				9				-100	%			-100	%
Long-term borrowings			57				53				45				8	%			27	%
Junior subordinated debentures			61				61				61				0	%			0	%
Total interest expense			536				518				563				3	%			-5	%
Net interest income			6,800				6,882				6,251				-1	%			9	%
LOAN LOSS PROVISION			100				100				-				0	%			0	%
Net interest income after loan loss provision			6,700				6,782				6,251				-1	%			7	%
NON-INTEREST INCOME
Service charges on deposit accounts			450				450				450				0	%			0	%
Net loss on sale of other real estate owned			(28	)			(85	)			(3	)			-67	%			833	%
Net gains from sales of loans			970				1,120				865				-13	%			12	%
Net gains on sales of securities available for sale			-				38				4				-100	%			-100	%
Net other-than-temporary impairment			-				-				1				100	%			-100	%
Earnings on bank owned life insurance			126				127				110				-1	%			15	%
Other operating income			503				624				495				-19	%			2	%
Total non-interest income			2,021				2,274				1,922				-11	%			5	%
NON-INTEREST EXPENSE
Salaries and employee benefits			4,494				4,286				4,030				5	%			12	%
Occupancy			512				483				501				6	%			2	%
Equipment			274				261				241				5	%			14	%
Data processing			509				534				478				-5	%			6	%
Professional services			108				230				217				-53	%			-50	%
Other real estate owned write-downs			-				1				310				-100	%			-100	%
Other real estate owned operating costs			48				100				132				-52	%			-64	%
State taxes			103				110				98				-6	%			5	%
FDIC and state assessments			110				119				140				-8	%			-21	%
Other non-interest expense			969				1,009				975				-4	%			-1	%
Total non-interest expense			7,127				7,133				7,122				0	%			0	%
INCOME BEFORE PROVISION FOR INCOME TAXES			1,594				1,923				1,051				-17	%			52	%
PROVISION FOR INCOME TAXES			473				549				262				-14	%			81	%
Effective Tax Rate			29.67	%			28.55	%			24.93	%			4	%			19	%
NET INCOME APPLICABLE TO COMMON SHAREHOLDERS		$	1,121			$	1,374			$	789				-18	%			42	%
EARNINGS PER COMMON SHARE:
BASIC		$	0.11			$	0.13			$	0.08
DILUTED		$	0.11			$	0.13			$	0.08
WEIGHTED AVERAGE SHARES OUTSTANDING:
BASIC			10,369,417				10,281,745				10,129,331
DILUTED			10,459,808				10,379,166				10,219,443

 

  

Pacific Financial Corporation Profits Increased 32% in 2014 and 42% in Fourth Quarter 2014

February 2, 2015

Page 3

 

PACIFIC FINANCIAL CORPORATION

CONSOLIDATED STATEMENTS OF INCOME

(Dollars in Thousands, Except per Share Data)

 

		For the Year Ended								One
		December 31,				December 31,				Year
		2014				2013				% Change
INTEREST AND DIVIDEND INCOME
Loans		$	26,937			$	24,401				10	%
Deposits in banks and federal funds sold			89				114				-22	%
Securities available for sale:
Taxable			1,261				769				64	%
Tax-exempt			749				798				-6	%
Securities held to maturity:
Taxable			8				10				-20	%
Tax-exempt			81				198				-59	%
FHLB & PCBB dividends			33				2				1550	%
Total interest and dividend income			29,158				26,292				11	%
INTEREST EXPENSE
Deposits:
Interest-bearing demand and savings			581				700				-17	%
Time			1,087				1,322				-18	%
Short-term borrowings			1				9				-89	%
Long-term borrowings			215				214				0	%
Secured borrowings			-				-				0	%
Junior subordinated debentures			241				247				-2	%
Total interest expense			2,125				2,492				-15	%
Net interest income			27,033				23,800				14	%
LOAN LOSS PROVISION (RECAPTURE)			300				(450	)			-167	%
Net interest income after loan loss provision (recapture)			26,733				24,250				10	%
NON-INTEREST INCOME
Service charges on deposit accounts			1,809				1,731				5	%
Net loss on sale of other real estate owned			(207	)			40				-618	%
Net gains from sales of loans			3,686				5,171				-29	%
Net gains on sales of securities available for sale			88				405				-78	%
Net other-than-temporary impairment			(48	)			(37	)			30	%
Earnings on bank owned life insurance			505				452				12	%
Other operating income			2,246				2,193				2	%
Total non-interest income			8,079				9,955				-19	%
NON-INTEREST EXPENSE
Salaries and employee benefits			17,118				17,013				1	%
Occupancy			2,006				1,839				9	%
Equipment			1,050				860				22	%
Data processing			2,009				2,268				-11	%
Professional services			745				935				-20	%
Other real estate owned write-downs			67				946				-93	%
Other real estate owned operating costs			238				408				-42	%
State taxes			417				458				-9	%
FDIC and state assessments			491				535				-8	%
Other non-interest expense			4,014				4,240				-5	%
Total non-interest expense			28,155				29,502				-5	%
INCOME BEFORE PROVISION FOR INCOME TAXES			6,657				4,703				42	%
PROVISION FOR INCOME TAXES			1,730				972				78	%
Effective Tax Rate			25.99	%			20.67	%			26	%
NET INCOME APPLICABLE TO COMMON SHAREHOLDERS		$	4,927			$	3,731				32	%
EARNINGS PER COMMON SHARE:
BASIC		$	0.48			$	0.37
DILUTED		$	0.48			$	0.37
WEIGHTED AVERAGE SHARES OUTSTANDING:
BASIC			10,256,242				10,121,738
DILUTED			10,347,338				10,189,888

 

  

Pacific Financial Corporation Profits Increased 32% in 2014 and 42% in Fourth Quarter 2014

February 2, 2015

Page 4

 

PACIFIC FINANCIAL CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

(Dollars in Thousands, except per share data)

  

														Sequential				Year over
		December 31,				September 30,				December 31,				Quarter				Year
		2014				2014				2013				% Change				% Change
ASSETS
Cash and cash equivalents:
Cash and due from banks		$	14,782			$	15,284			$	12,214				-3	%			21	%
Interest-bearing deposits in banks			16,255				25,497				23,734				-36	%			-32	%
Total cash and cash equivalents			31,037				40,781				35,948				-24	%			-14	%
Interest-bearing certificates of deposit (original maturities greater than 90 days)			2,727				2,727				2,727				0	%			0	%
Federal Home Loan Bank stock, at cost			2,896				2,926				3,013				-1	%			-4	%
Pacific Coast Bankers' Bank stock, at cost			1,000				1,000				-				0	%			100	%
Investment securities:
Investment securities available-for-sale, at fair market value (amoritzed cost of $86,907, 89,326 and $97,536)			87,440				89,328				96,144				-2	%			-9	%
Investment securities held-to-maturity, at amortized cost (fair value of $1,852, $1,874 and $2,158)			1,829				1,857				2,132				-2	%			-14	%
Total investment securities			89,269				91,185				98,276				-2	%			-9	%
Loans held-for-sale			5,786				8,161				7,765				-29	%			-25	%
Loans, net of deferred loan fees			563,099				552,140				504,666				2	%			12	%
Allowance for loan losses			(8,353	)			(8,255	)			(8,359	)			1	%			0	%
Loans, net			554,746				543,885				496,307				2	%			12	%
Premises and equipment, net of accumulated depreciation and amortization			16,303				16,460				16,790				-1	%			-3	%
Other real estate owned and foreclosed assets			999				1,210				2,771				-17	%			-64	%
Accrued interest receivable			2,348				2,337				2,307				0	%			2	%
Cash surrender value of life insurance			18,742				18,615				18,237				1	%			3	%
Goodwill			12,168				12,168				12,168				0	%			0	%
Other intangible assets			1,439				1,449				1,481				-1	%			-3	%
Other assets			6,073				6,143				7,249				-1	%			-16	%
TOTAL ASSETS		$	745,533			$	749,047			$	705,039				0	%			6	%
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
Deposits:
Demand		$	165,760			$	182,259			$	145,028				-9	%			14	%
Interest-bearing demand and savings			354,611				343,524				336,260				3	%			5	%
Time deposits			118,683				118,221				126,059				0	%			-6	%
Total deposits			639,054				644,004				607,347				-1	%			5	%
Accrued interest payable			145				141				167				3	%			-13	%
Short-term borrowings			-				-				-				0	%			0	%
Long-term borrowings			11,453				11,491				10,000				0	%			15	%
Junior subordinated debentures			13,403				13,403				13,403				0	%			0	%
Other liabilities			8,844				6,751				6,985				31	%			27	%
Total liabilities			672,899				675,790				637,902				0	%			5	%
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY
Preferred Stock, par value none 5,000,000 shares authorized, none outstanding
Common Stock, par value $1 25,000,000 shares authorized, 10,371,460, 10,367,460 and 10,182,083 shares issued and outstanding at 12/31/2014, 09/30/2014, and 12/31/2013, respectively			10,371				10,367				10,182				0	%			2	%
Additional paid-in-capital			42,991				42,940				41,817				0	%			3	%
Retained earnings			19,256				20,312				16,507				-5	%			17	%
Accumulated other comprehensive income/(loss)			16				(362	)			(1,369	)			-104	%			-101	%
Total shareholders' equity			72,634				73,257				67,137				-1	%			8	%
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY		$	745,533			$	749,047			$	705,039				0	%			6	%

 

  

Pacific Financial Corporation Profits Increased 32% in 2014 and 42% in Fourth Quarter 2014

February 2, 2015

Page 5

 

Net Interest Income

Net interest income for the quarter and twelve months ended December 31, 2014 increased from the quarter and twelve months ended December 31, 2013. This increase was primarily due to the growth in earning assets, along with changes in the balance sheet mix. Loan balances increased due to the production generated predominately in our Washington and Oregon markets. Investment securities and federal funds sold decreased as a proportion of the balance sheet, due to the strong loan demand during the current year. Funding costs have declined over the year due to the shift in mix toward non-interest bearing demand and lower-cost deposits, and continued historically low interest rates.

 

Net interest income for the current quarter decreased from the third quarter of 2014, primarily reflecting lower loan yields due to increased competition in our markets, despite higher loan balances. Interest expense was virtually unchanged between the quarters, given the lengthy period of very low interest rates over the past several years. Additional reductions in funding costs are becoming more difficult to achieve, as renewing certificates of deposit are receiving rates that are similar to those granted at previous renewals.

 

INCOME STATEMENT OVERVIEW

 

(Unaudited)

(Dollars in Thousands, Except for Income per Share Data)

 

		For the Three Months Ended December 31, 2014				For the Three Months Ended September 30, 2014				$ Change				% Change				For the Three Months Ended December 31, 2013				$ Change				% Change
Interest and dividend income		$	7,336			$	7,400			$	(64	)			-1	%		$	6,814			$	522				8	%
Interest expense			536				518				18				3	%			563				(27	)			-5	%
Net interest income			6,800				6,882				(82	)			-1	%			6,251				549				9	%
Loan loss provision			100				100				-				0	%			-				100				100	%
Non-interest income			2,021				2,274				(253	)			-11	%			1,922				99				5	%
Non-interest expense			7,127				7,133				(6	)			0	%			7,122				5				0	%
INCOME BEFORE PROVISION FOR INCOME TAXES			1,594				1,923				(329	)			-17	%			1,051				543				52	%
PROVISION FOR INCOME TAXES			473				549				(76	)			-14	%			262				211				81	%
NET INCOME		$	1,121			$	1,374			$	(253	)			-18	%		$	789			$	332				42	%
INCOME PER COMMON SHARE:
BASIC (1)		$	0.11			$	0.13			$	(0.02	)			-15	%		$	0.08			$	0.03				38	%
DILUTED (2)		$	0.11			$	0.13			$	(0.02	)			-15	%		$	0.08			$	0.03				38	%
Average common shares outstanding - basic (1)			10,369,417				10,281,745				87,672				1	%			10,129,331				240,086				2	%
Average common shares outstanding - diluted (2)			10,459,808				10,379,166				80,642				1	%			10,219,443				240,365				2	%
			For the Twelve Months Ended December 31, 2014				For the Twelve Months Ended December 31, 2013				$ Change				% Change
Interest and dividend income		$	29,158				26,292				2,866				11	%
Interest expense			2,125				2,492				(367	)			-15	%
Net interest income			27,033				23,800				3,233				14	%
Loan loss provision			300				(450	)			750				-167	%
Non-interest income			8,079				9,955				(1,876	)			-19	%
Non-interest expense			28,155				29,502				(1,347	)			-5	%
INCOME BEFORE PROVISION FOR INCOME TAXES			6,657				4,703				1,954				42	%
PROVISION FOR INCOME TAXES			1,730				972				758				78	%
NET INCOME		$	4,927				3,731				1,196				32	%
INCOME PER COMMON SHARE:
BASIC (1)		$	0.48				0.37				0.11				30	%
DILUTED (2)		$	0.48				0.37				0.11				30	%
Average common shares outstanding - basic (1)			10,256,242				10,121,738				134,504				1	%
Average common shares outstanding - diluted (2)			10,347,338				10,189,888				157,450				2	%

 

  

Pacific Financial Corporation Profits Increased 32% in 2014 and 42% in Fourth Quarter 2014

February 2, 2015

Page 6

 

Noninterest Income

Noninterest income for fourth quarter 2014 fell compared to the preceding quarter, primarily due to seasonal declines in residential real estate loan production and annuity sales. Noninterest income was up compared to the year ago quarter primarily as a result of a $140,000 gain on sale of government guaranteed loans in the current quarter. In addition, fee income from annuity sales increased in the current quarter compared to the fourth quarter of 2013. “Our annuity products continue to be attractive to our customers”, added Portmann. “Annuities provide a viable alternative investment for our customers, given the current low interest rate environment. By expanding the number of branch personnel who are licensed to offer annuity products, our customers now have access to these additional investment options at many of our local branches.” Losses on sale of other real estate owned (OREO) were lower in the current period as compared to the prior quarter, reflecting a decline in such holdings. This is in contrast to an increase compared to fourth quarter in 2013, reflecting a more aggressive approach to liquidation in the current quarter in order to reduce the levels of foreclosed assets.

 

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

 

Noninterest income

(Unaudited)

(Dollars in Thousands)

 

For The Three Months Ended

 

		December 31, 2014				September 30, 2014				$ Change				% Change				December 31, 2013				$ Change				% Change
Service charges on deposit accounts		$	450			$	450			$	-				0	%		$	450			$	-				0	%
Net (loss) on sale of other real estate owned			(28	)			(85	)			57				-67	%			(3	)			(25	)			833	%
Net gains from sales of loans			970				1,120				(150	)			-13	%			865				105				12	%
Net gains on sales of securities available for sale			-				38				(38	)			-100	%			4				(4	)			-100	%
Net other-than-temporary impairment			-				-				-				0	%			1				(1	)			-100	%
Earnings on bank owned life insurance			126				127				(1	)			-1	%			110				16				15	%
Other operating income
Fee income			405				498				(93	)			-19	%			419				(14	)			-3	%
Annuity sales income			81				111				(30	)			-27	%			71				10				14	%
Other non-interest income			17				15				2				13	%			5				12				240	%
Total non-interest income		$	2,021			$	2,274			$	(253	)			-11	%		$	1,922			$	99				5	%
For The Twelve Months Ended
			December 31, 2014				December 31, 2013				$ Change				% Change
Service charges on deposit accounts		$	1,809			$	1,731			$	78				5	%
Net gain (loss) on sale of other real estate owned			(207	)			40				(247	)			-618	%
Net gains from sales of loans			3,686				5,171				(1,485	)			-29	%
Net gains on sales of securities available for sale			88				405				(317	)			-78	%
Net other-than-temporary impairment			(48	)			(37	)			(11	)			30	%
Earnings on bank owned life insurance			505				452				53				12	%
Other operating income
Fee income			1,709				1,811				(102	)			-6	%
Annuity sales income			464				320				144				45	%
Other non-interest income			73				62				11				18	%
Total non-interest income		$	8,079			$	9,955			$	(1,876	)			-19	%

 

Noninterest Expense

Noninterest expense for fourth quarter 2014 was virtually unchanged as compared to third quarter 2014 and the year ago quarter. Increases in personnel expense related to the the addition of loan production personnel and branch staff for a new branch that opened in the fourth quarter of 2013 were partially offset by $471,000 savings generated from reduction in mortgage lending staff initiated in first quarter 2014 prompted by the decline in residential mortgage loan refinance activity. Decreases in OREO operating costs and reduction in professional services expenses associated with a change in external audit firms earlier in the year also contributed to a decline in expenses. Total costs associated with OREO and related third-party loan expenses decreased due to the decline in OREO balances and stabilization of collateral valuations.

 

  

Pacific Financial Corporation Profits Increased 32% in 2014 and 42% in Fourth Quarter 2014

February 2, 2015

Page 7

 

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

 

Noninterest expense

(Unaudited)

(Dollars in Thousands)

 

For The Three Months Ended

 

		December 31, 2014				September 30, 2014				$ Change				% Change				December 31, 2013				$ Change				% Change
Salaries and employee benefits		$	4,494			$	4,286			$	208				5	%		$	4,030			$	464				12	%
Occupancy			512				483				29				6	%			501				11				2	%
Equipment			274				261				13				5	%			241				33				14	%
Data processing			509				534				(25	)			-5	%			478				31				6	%
Professional services			108				230				(122	)			-53	%			217				(109	)			-50	%
Other real estate owned write-downs			-				1				(1	)			-100	%			310				(310	)			-100	%
Other real estate owned operating costs			48				100				(52	)			-52	%			132				(84	)			-64	%
State taxes			103				110				(7	)			-6	%			98				5				5	%
FDIC and state assessments			110				119				(9	)			-8	%			140				(30	)			-21	%
Other non-interest expense:
Director fees			79				80				(1	)			-1	%			60				19				32	%
Communication			53				65				(12	)			-18	%			42				11				26	%
Advertising			104				73				31				42	%			94				10				11	%
Professional liability insurance			20				24				(4	)			-17	%			22				(2	)			-9	%
Amortization			95				99				(4	)			-4	%			104				(9	)			-9	%
Other non-interest expense			618				668				(50	)			-7	%			653				(35	)			-5	%
Total non-interest expense		$	7,127			$	7,133			$	(6	)			0	%		$	7,122			$	5				0	%
For The Twelve Months Ended
			December 31, 2014				December 31, 2013				$ Change				% Change
Salaries and employee benefits		$	17,118			$	17,013			$	105				1	%
Occupancy			2,006				1,839				167				9	%
Equipment			1,050				860				190				22	%
Data processing			2,009				2,268				(259	)			-11	%
Professional services			745				935				(190	)			-20	%
Other real estate owned write-downs			67				946				(879	)			-93	%
Other real estate owned operating costs			238				408				(170	)			-42	%
State taxes			417				458				(41	)			-9	%
FDIC and state assessments			491				535				(44	)			-8	%
Other non-interest expense:
Director fees			287				224				63				28	%
Communication			209				172				37				22	%
Advertising			331				316				15				5	%
Professional liability insurance			85				90				(5	)			-6	%
Amortization			385				415				(30	)			-7	%
Other non-interest expense			2,717				3,023				(306	)			-10	%
Total non-interest expense		$	28,155			$	29,502			$	(1,347	)			-5	%

 

Income Taxes

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

 

  

Pacific Financial Corporation Profits Increased 32% in 2014 and 42% in Fourth Quarter 2014

February 2, 2015

Page 8

 

SUMMARY BALANCE SHEET OVERVIEW

 

(Unaudited)

(Dollars in Thousands)

 

		December				September								%				December								%
		31, 2014				30, 2014				$ Change				Change				31, 2013				$ Change				Change
Assets:
Cash and cash equivalents		$	31,037			$	40,781			$	(9,744	)			-24	%		$	35,948			$	(4,911	)			-14	%
Interest-bearing certificates of deposit			2,727				2,727				-				0	%			2,727				-				0	%
Federal Home Loan Bank stock, at cost			2,896				2,926				(30	)			-1	%			3,013				(117	)			-4	%
Pacific Coast Bankers' Bank stock, at cost			1,000				1,000				-				0	%			-				1,000				100	%
Investment securities			89,269				91,185				(1,916	)			-2	%			98,276				(9,007	)			-9	%
Loans held-for-sale			5,786				8,161				(2,375	)			-29	%			7,765				(1,979	)			-25	%
Gross loans, net of deferred fees			563,099				552,140				10,959				2	%			504,666				58,433				12	%
Allowance for loan losses			(8,353	)			(8,255	)			(98	)			1	%			(8,359	)			6				0	%
Net loans			554,746				543,885				10,861				2	%			496,307				58,439				12	%
Other assets			58,072				58,382				(310	)			-1	%			61,003				(2,931	)			-5	%
Total assets		$	745,533			$	749,047			$	(3,514	)			0	%		$	705,039			$	40,494				6	%
Liabilities and shareholders' equity
Total deposits		$	639,054			$	644,004			$	(4,950	)			-1	%		$	607,347			$	31,707				5	%
Accrued interest payable			145				141				4				3	%			167				(22	)			-13	%
Borrowings			24,856				24,894				(38	)			0	%			23,403				1,453				6	%
Other liabilities			8,844				6,751				2,093				31	%			6,985				1,859				27	%
Shareholders' equity			72,634				73,257				(623	)			-1	%			67,137				5,497				8	%
Total liabilities and shareholders' equity		$	745,533			$	749,047			$	(3,514	)			0	%		$	705,039			$	40,494				6	%

 

Cash and Cash Equivalents and Investment Securities

(Unaudited)

(Dollars in Thousands)

 

		December 31, 2014				% of Total				September 30, 2014				% of Total				$ Change				% Change				December 31, 2013				% of Total				$ Change				% Change
Cash and due from banks		$	14,782				12	%		$	15,284				11	%		$	(502	)			-3	%		$	12,214				9	%		$	2,568				21	%
Cash equivalents:
Interest-bearing deposits			16,255				13	%			25,497				18	%			(9,242	)			-36	%			23,734				17	%			(7,479	)			-32	%
Interest-bearing certificates of deposit			2,727				2	%			2,727				2	%			-				0	%			2,727				2	%			-				0	%
Total cash equivalents and certificate of deposits			33,764				27	%			43,508				31	%			(9,744	)			-22	%			38,675				28	%			(4,911	)			-13	%
Investment securities:
Collateralized mortgage obligations: agency issued			38,767				31	%			40,039				30	%			(1,272	)			-3	%			38,791				28	%			(24	)			0	%
Collateralized mortgage obligations: non-agency issued			527				0	%			579				0	%			(52	)			-9	%			2,011				1	%			(1,484	)			-74	%
Mortgage-backed securities: agency issued			12,322				10	%			12,630				9	%			(308	)			-2	%			13,548				10	%			(1,226	)			-9	%
U.S. Government and agency securities			8,056				6	%			8,655				6	%			(599	)			-7	%			8,811				6	%			(755	)			-9	%
State and municipal securities			29,597				23	%			29,282				21	%			315				1	%			34,133				24	%			(4,536	)			-13	%
Corporate bonds			-				0	%			-				0	%			-				0	%			982				1	%			(982	)			-100	%
FHLB Stock, at cost			2,896				2	%			2,926				2	%			(30	)			-1	%			3,013				2	%			(117	)			-4	%
Pacific Coast Bankers' Bank stock, at cost			1,000				1	%			1,000				1	%			-				0	%			-				0	%			1,000				100	%
Total investment securities			93,165				73	%			95,111				69	%			(1,946	)			-2	%			101,289				72	%			(8,124	)			-8	%
Total cash equivalents and investment securities		$	126,929				100	%		$	138,619				100	%		$	(11,690	)			-8	%		$	139,964				100	%		$	(13,035	)			-9	%
Total cash equivalents and investment securities as a % of total assets							17	%							19	%															20	%

 

  

Pacific Financial Corporation Profits Increased 32% in 2014 and 42% in Fourth Quarter 2014

February 2, 2015

Page 9

  

Investment securities

(Unaudited)

(Dollars in Thousands)

 

For the Three Months Ended		December 31, 2014				September 30, 2014				$ Change				% Change				December 31, 2013				$ Change				% Change
Balance beginning of period		$	95,111			$	93,539			$	1,572				2	%		$	96,178			$	(1,067	)			-1	%
Principal purchases			1,182				7,482				(6,300	)			-84	%			9,879				(8,697	)			-88	%
Proceeds from sales			-				(3,927	)			3,927				-100	%			(595	)			595				-100	%
Principal paydowns, maturities, and calls			(3,348	)			(1,673	)			(1,675	)			100	%			(3,310	)			(38	)			1	%
Gains on sales of securities			-				94				(94	)			-100	%			4				(4	)			-100	%
Losses on sales of securities			-				(56	)			56				-100	%			-				-				0	%
OTTI loss writedown			-				-				-				0	%			-				-				0	%
Change in unrealized gains (loss) before tax			529				(64	)			593				-927	%			(576	)			1,105				-192	%
Amortization and accretion of discounts and premiums			(309	)			(284	)			(25	)			9	%			(291	)			(18	)			6	%
Total investment securities		$	93,165			$	95,111			$	(1,946	)			-2	%		$	101,289			$	(8,124	)			-8	%

 

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

 

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

 

LOANS

 

Loans by category

 

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

 

Loan portfolio growth continues to be well diversified and generated predominately within our Washington and Oregon markets. This includes the sale of $3.6 million in purchased government-guaranteed commercial and commercial real estate loans during the quarter, which currently total $32.7 million. In addition, the loan portfolio contains $30.8 million in indirect consumer loans to individuals to finance luxury and classic cars as a part of a strategy to diversify the loan portfolio.

 

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

 

  

Pacific Financial Corporation Profits Increased 32% in 2014 and 42% in Fourth Quarter 2014

February 2, 2015

Page 10

 

DEPOSITS

 

Deposits

(Unaudited)

 

(Dollars in Thousands)		December 31, 2014				Percent of Total				September 30, 2014				Percent of Total				$ Change				December 31, 2013				Percent of Total				$ Change
Interest-bearing demand and money market		$	274,614				42	%		$	266,863				42	%		$	7,751			$	262,848				43	%		$	11,766
Savings			79,997				13	%			76,661				12	%			3,336				73,412				12	%			6,585
Time deposits			118,683				19	%			118,221				18	%			462				126,059				21	%			(7,376	)
Total interest-bearing deposits			473,294				74	%			461,745				72	%			11,549				462,319				76	%			10,975
Non-interest bearing demand			165,760				26	%			182,259				28	%			(16,499	)			145,028				24	%			20,732
Total deposits		$	639,054				100	%		$	644,004				100	%		$	(4,950	)		$	607,347				100	%		$	31,707

 

Total deposits were down at December 31, 2014, compared to previous quarter, but up compared to the same quarter a year ago. Non-interest bearing deposits declined in the current quarter due to seasonal outflows associated with decreased business activity in our local markets with economies focused on summer tourism. Recent success in acquiring business deposit relationships in conjunction with the growth in lending achieved over the past year has mitigated the impact of such seasonal factors. The combination of our efforts to reduce higher-cost time deposits through lowering interest rates paid and offering non-insured deposit products, when appropriate, reduced the average rate paid on total deposits in fourth quarter 2014 from fourth quarter in 2013.

 

Total brokered deposits were $22.4 million at December 31, 2014, which included $2.3 million via reciprocal deposit arrangements. This compares to $22.6 million and $21.6 million at September 30, 2014 and December 31, 2013, respectively. The Company views the prudent use of brokered deposits and borrowings to be an appropriate funding tool to support interest rate risk mitigation strategies.

 

CAPITAL

Pacific Financial Corporation, and its subsidiary Bank of the Pacific, continue to satisfy the requirements to qualify as “well-capitalized” under regulatory guidelines. Capital ratios decreased slightly as compared to the prior quarter primarily due to asset growth and the declaration of a cash dividend of $2.2 million, or $0.21 per share, in fourth quarter 2014. Capital growth is provided primarily through earnings retention. Also, $1.2 million of additional capital was supplied in the prior quarter via the exercise at a price of $6.50 per share of warrants to purchase 185,000 shares of common stock originally issued in conjunction with a private capital raise conducted in 2009. In general, capital ratios declined from December 31, 2013 due to the successful execution of the Company’s growth strategy and shift in the balance sheet mix to higher risk-weighted loan assets.

 

The Board of Governors of the Federal Reserve System (“Federal Reserve”) and the FDIC have established minimum requirements for capital adequacy for bank holding companies and state non-member banks. For more information on these topics, see the discussions under the subheading “Capital Adequacy” in the section “Business” included in Item 1 of the Company’s Annual Report on Form 10-K for the year ended December 31, 2013, as filed with the Securities and Exchange Commission. The following table summarizes the capital measures of the Company and the Bank, respectively, at the dates listed below.

 

The total risk based capital ratios of the Company include $13.4 million of junior subordinated debentures, all of which qualified as Tier 1 capital at December 31, 2014 and 2013, under guidance issued by the Federal Reserve. The Company expects to continue to rely on these junior subordinated debentures as part of its regulatory capital.

 

  

Pacific Financial Corporation Profits Increased 32% in 2014 and 42% in Fourth Quarter 2014

February 2, 2015

Page 11

 

		December 31, 2014				September 30, 2014				Change				December 31, 2013				Change				Regulatory Minimum to be "Well Capitalized"
																						greater than or equal to
Pacific Financial Corporation
Actual amount
Total risk-based capital ratio			13.60	%			14.09	%			(0.49	)			14.11	%			(0.51	)			10	%
Tier 1 risk-based capital ratio			12.35	%			12.83	%			(0.48	)			12.85	%			(0.50	)			6	%
Leverage ratio			9.81	%			10.09	%			(0.28	)			9.83	%			(0.02	)			5	%
Tangible common equity ratio			8.06	%			8.11	%			(0.05	)			7.74	%			0.32				n/a
Bank of the Pacific
Total risk-based capital ratio			13.52	%			13.87	%			(0.35	)			14.03	%			(0.51	)			10	%
Tier 1 risk-based capital ratio			12.27	%			12.61	%			(0.34	)			12.78	%			(0.51	)			6	%
Leverage ratio			9.73	%			9.91	%			(0.18	)			9.77	%			(0.04	)			5	%

 

FINANCIAL PERFORMANCE OVERVIEW

(Unaudited)

(Dollars in Thousands, Except per Share Data)

 

For The Three Months Ended

 

		December 31, 2014				September 30, 2014				Change				December 31, 2013				Change
Selective performance ratios
Return on average assets, annualized			0.59	%			0.74	%			(0.15	)			0.45	%			0.14
Return on average equity, annualized			5.98	%			7.55	%			(1.57	)			4.53	%			1.45
Efficiency ratio (1)			80.80	%			77.91	%			2.89				87.14	%			(6.34	)
Share and per share information
Average common shares outstanding - basic			10,369,417				10,281,745				87,672				10,129,331				240,086
Average common shares outstanding - diluted			10,459,808				10,379,166				80,642				10,219,443				240,365
Basic income per common share			0.11				0.13				(0.02	)			0.08				0.03
Diluted income per common share			0.11				0.13				(0.02	)			0.08				0.03
Book value per common share (2)			7.00				7.07				(0.07	)			6.60				0.40
Tangible book value per common share (3)			5.69				5.75				(0.06	)			5.26				0.43
For The Twelve Months Ended
			December 31, 2014				December 31, 2013				Change
Selective performance ratios
Return on average assets, annualized			0.68	%			0.55	%			0.13
Return on average equity, annualized			6.92	%			5.48	%			1.44
Efficiency ratio (1)			80.19	%			87.40	%			(7.21	)
Share and per share information
Average common shares outstanding - basic			10,256,242				10,121,738				134,504
Average common shares outstanding - diluted			10,347,338				10,189,888				157,450
Basic income per common share			0.48				0.37				0.11
Diluted income per common share			0.48				0.37				0.11

 

(1)

Non-interest expense divided by net interest income plus non-interest income.

(2)

Book value is calculated as the total common equity divided by the period ending number of common shares outstanding.

(3)

Tangible book value is calculated as the total common equity less total intangible assets and liabilities divided by the period ending number of common shares outstanding.

 

  

Pacific Financial Corporation Profits Increased 32% in 2014 and 42% in Fourth Quarter 2014

February 2, 2015

Page 12

 

NET INTEREST MARGIN

(Annualized, tax-equivalent basis)

(Unaudited)

For The Three Months Ended

 

		December 31, 2014				September 30, 2014				Change				December 31, 2013				Change
Selective performance ratios
Yield on average gross loans (1) (2)			4.84	%			4.95	%			(0.11	)			4.97	%			(0.13	)
Yield on average investment securities (1)			2.00	%			2.02	%			(0.02	)			2.00	%			-
Cost of average interest bearing deposits			0.35	%			0.34	%			0.01				0.39	%			(0.04	)
Cost of average borrowings			1.88	%			1.83	%			0.05				1.80	%			0.08
Cost of average total deposits and borrowings			0.32	%			0.31	%			0.01				0.36	%			(0.04	)
Cost of average interest-bearing liabilities			0.43	%			0.42	%			0.01				0.46	%			(0.03	)
Yield on average interest-earning assets			4.32	%			4.44	%			(0.12	)			4.33	%			(0.01	)
Cost of average interest-bearing liabilities			0.43	%			0.42	%			0.01				0.46	%			(0.03	)
Net interest spread			3.89	%			4.02	%			(0.13	)			3.87	%			0.02
Net interest margin (1)			4.01	%			4.13	%			(0.12	)			3.98	%			0.03
For The Twelve Months Ended
			December 31, 2014				December 31, 2013				Change
Selective performance ratios
Yield on average gross loans (1) (2)			4.99	%			5.06	%			(0.07	)
Yield on average investment securities (1)			2.22	%			1.87	%			0.35
Cost of average interest bearing deposits			0.36	%			0.45	%			(0.09	)
Cost of average borrowings			1.89	%			1.97	%			(0.08	)
Cost of average total deposits and borrowings			0.33	%			0.41	%			(0.08	)
Cost of average interest-bearing liabilities			0.43	%			0.52	%			(0.09	)
Yield on average interest-earning assets			4.49	%			4.39	%			0.10
Cost of average interest-bearing liabilities			0.43	%			0.52	%			(0.09	)
Net interest spread			4.06	%			3.87	%			0.19
Net interest margin (1)			4.17	%			4.00	%			0.17

 

⁽¹⁾ Tax-exempt income has been adjusted to a tax equivalent basis at a 34% rate.

⁽²⁾ Includes loans held for sale

 

Net Interest Margin

Net interest margin for the current quarter declined compared to third quarter 2014, primarily due to reductions in yields on investment securities and loans. Declines in yields on investment securities were primarily due to portfolio restructuring to reduce duration for interest rate risk management purposes. Loan yield declines primarily resulted from increased competition for high quality borrowing relationships in the marketplace. In addition, approximately $60,000 in interest income was reversed in fourth quarter 2014 due to the placement of two loan relationships totaling $4.3 million on non-accrual. As a result, loan yields and net interest margin were reduced by 5 and 4 basis points, respectively, for the quarter. Net interest margin improved when compared to fourth quarter 2013, predominantly due to a shift in the mix of earning assets toward higher-yielding loans and the lower cost of interest bearing liabilities.

 

The growth in the proportion of noninterest bearing deposits over the past year has supported the improvement in net interest margin as well. The improvement in yields on investment securities also enhanced net interest margin for the twelve months ending December 31, 2014 as compared to the same period in 2013. This was primarily the result of redeploying lower yielding cash-equivalents into higher-yielding federal government guaranteed mortgage-backed securities.

 

  

Pacific Financial Corporation Profits Increased 32% in 2014 and 42% in Fourth Quarter 2014

February 2, 2015

Page 13

 

The following tables set forth information with regard to average balances of interest earning assets and interest bearing liabilities and the resultant yields or cost, net interest income, and the net interest margin on a tax equivalent basis. Loans held for sale and non-accrual loans are included in total loans.

 

 

Average Interest Earning Balances:		For the Three Months Ended
		December 31, 2014												September 30, 2014												December 31, 2013
		Average Balance				Interest Income or Expense				Average Yields or Rates				Average Balance				Interest Income or Expense				Average Yields or Rates				Average Balance				Interest Income or Expense				Average Yields or Rates
(Dollars in Thousands)
ASSETS:
Interest bearing certificate of deposit		$	2,727			$	11				1.60	%		$	2,727			$	11				1.60	%		$	2,298			$	9				1.55	%
Interest bearing deposits in banks			26,735				15				0.22	%			23,928				13				0.22	%			34,108				20				0.23	%
Investments - taxable			66,466				320				1.91	%			63,751				298				1.85	%			67,565				308				1.81	%
Investments - nontaxable			28,427				280				3.91	%			27,646				278				3.99	%			33,047				355				4.26	%
Gross loans (1)			554,886				6,787				4.85	%			549,280				6,871				4.96	%			494,136				6,227				5.00	%
Loans held for sale			7,306				66				3.58	%			7,068				69				3.87	%			8,091				63				3.09	%
Total interest earning assets			686,547				7,479				4.32	%			674,400				7,540				4.44	%			639,245				6,982				4.33	%
Cash and due from banks			13,483												14,169												12,105
Bank premises and equipment (net)			16,414												16,615												16,676
Other real estate owned			1,063												940												3,861
Deferred fees			(1,172	)											(1,113	)											(1,114	)
Allowance for loan losses			(8,306	)											(8,342	)											(8,612	)
Other assets			40,142												40,757												40,810
Total assets		$	748,171											$	737,426											$	702,971
LIABILITIES AND SHAREHOLDERS' EQUITY:
Interest-bearing deposits		$	351,653			$	166				0.19	%		$	343,204			$	134				0.15	%		$	329,218			$	153				0.18	%
Time deposits			118,624				252				0.84	%			120,515				269				0.89	%			131,245				295				0.89	%
FHLB borrowings			11,466				57				1.97	%			10,878				61				2.22	%			10,000				54				2.14	%
Short term borrowings			-				-				0.00	%			587				-				0.00	%			-				-				0.00	%
Junior subordinated debentures			13,403				61				1.81	%			13,403				54				1.60	%			13,403				61				1.81	%
Total interest bearing liabilities			495,146				536				0.43	%			488,587				518				0.42	%			483,866				563				0.46	%
Non-interest-bearing deposits			172,002												170,560												145,092
Other liabilities			6,655												6,055												4,962
Equity			74,368												72,224												69,051
Total liabilities and shareholders' equity		$	748,171											$	737,426											$	702,971
Net interest income (3)						$	6,943											$	7,022											$	6,419
Net interest spread											3.89	%											4.02	%											3.87	%
Average yield on investments											2.00	%											2.02	%											2.00	%
Average yield on earning assets (2) (3)											4.32	%											4.44	%											4.33	%
Interest expense to earning assets											0.32	%											0.30	%											0.35	%
Net interest income to earning assets (2) (3)											4.01	%											4.13	%											3.98	%
Reconciliation of Non-GAAP measure:
Tax Equivalent Net Interest Income
Net interest income						$	6,800											$	6,882											$	6,251
Tax equivalent adjustment for municipal loan interest							48												46												47
Tax equivalent adjustment for municipal bond interest							95												94												121
Tax equivalent net interest income						$	6,943											$	7,022											$	6,419

 

Non-GAAP financial measures have inherent limitations, are not required to be uniformly applied, and are not audited.

Management believes that presentation of this non-GAAP measure provides useful information frequently used by shareholders in the evaluation of a company.

Non-GAAP financial measures have limitations as analytical tools and should not be considered in isolation or as a substitute for analyses of results as reported under GAAP.

(1) Non-accrual loans of approximately $8.7 million at 12/31/14, $4.8 million at 09/30/2014, and $7.2 million for 12/31/2013 are included in the average loan balances.

(2) Loan interest income includes loan fee income of $196,000, $152,000, and $151,000 for the three months ended 12/31/2014, 09/30/2014, and 12/31/2013, respectively.

(3) Tax-exempt income has been adjusted to a tax equivalent basis at a 34% effective rate. The amount of such adjustment was an addition to recorded pre-tax income of $143,000, $140,000, and $168,000 for the three months ended December 31, 2014, September 30, 2014, and December 31, 2013, respectively.

 

 

Pacific Financial Corporation Profits Increased 32% in 2014 and 42% in Fourth Quarter 2014

February 2, 2015

Page 14

 

		For the Three Months Ended												For the Three Months Ended
		December 31, 2014 vs. September 30, 2014												December 31, 2014 vs. December 31, 2013
		Increase (Decrease) Due To												Increase (Decrease) Due To
										Net												Net
		Volume				Rate				Change				Volume				Rate				Change
(Dollars in Thousands)
ASSETS:
Interest bearing certificate of deposit		$	-			$	-			$	-			$	2			$	-			$	2
Interest bearing deposits in banks			2				-				2				(4	)			(1	)			(5	)
Investments - taxable			13				9				22				(5	)			17				12
Investments - nontaxable			8				(6	)			2				(50	)			(25	)			(75	)
Gross loans			70				(154	)			(84	)			766				(206	)			560
Loans held for sale			2				(5	)			(3	)			(6	)			9				3
Total interest earning assets		$	95			$	(156	)		$	(61	)		$	703			$	(206	)		$	497
LIABILITIES AND SHAREHOLDERS' EQUITY:
Interest-bearing deposits		$	3			$	29			$	32			$	10			$	3			$	13
Time deposits			(4	)			(13	)			(17	)			(28	)			(15	)			(43	)
FHLB borrowings			3				(7	)			(4	)			8				(5	)			3
Short-term borrowings			-				-				-				-				-				-
Long-term borrowings			-				7				7				-				-				-
Total interest bearing liabilities			2				16				18				(10	)			(17	)			(27	)
Net increase (decrease) in net interest income		$	93			$	(172	)		$	(79	)		$	713			$	(189	)		$	524

 

  

Pacific Financial Corporation Profits Increased 32% in 2014 and 42% in Fourth Quarter 2014

February 2, 2015

Page 15

 

Average Interest Earning Balances:		For the Twelve Months Ended
		December 31, 2014												December 31, 2013
		Average Balance				Interest Income or Expense				Average Yields or Rates				Average Balance				Interest Income or Expense				Average Yields or Rates
(Dollars in Thousands)
ASSETS:
Interest bearing certificate of deposit		$	2,727			$	42				1.54	%		$	2,309			$	29				1.26	%
Interest bearing deposits in banks			20,326				47				0.23	%			36,540				85				0.23	%
Investments - taxable			65,960				1,302				1.97	%			55,820				779				1.40	%
Investments - nontaxable			30,094				1,258				4.18	%			33,428				1,508				4.51	%
Gross loans (1)			536,971				26,871				5.00	%			477,356				24,303				5.09	%
Loans held for sale			7,026				255				3.63	%			9,302				312				3.35	%
Total interest earning assets			663,104				29,775				4.49	%			614,755				27,016				4.39	%
Cash and due from banks			13,201												11,636
Bank premises and equipment (net)			16,633												15,831
Other real estate owned			1,658												4,030
Deferred fees			(1,123	)											(1,035	)
Allowance for loan losses			(8,327	)											(9,065	)
Other assets			40,681												40,894
Total assets		$	725,827											$	677,046
LIABILITIES AND SHAREHOLDERS' EQUITY:
Interest-bearing deposits		$	344,084			$	581				0.17	%		$	316,184			$	700				0.22	%
Time deposits			122,002				1,087				0.89	%			135,447				1,320				0.97	%
FHLB borrowings			10,591				215				2.03	%			10,049				223				2.22	%
Short term borrowings			150				1				0.67	%			-				-				0.00	%
Junior subordinated debentures			13,403				241				1.80	%			13,403				247				1.84	%
Total interest bearing liabilities			490,230				2,125				0.43	%			475,083				2,490				0.52	%
Non-interest-bearing deposits			158,697												129,218
Other liabilities			5,712												4,688
Equity			71,188												68,057
Total liabilities and shareholders' equity		$	725,827											$	677,046
Net interest income (3)						$	27,650											$	24,526
Net interest spread											4.06	%											3.87	%
Average yield on investments											2.22	%											1.87	%
Average yield on earning assets (2) (3)											4.49	%											4.39	%
Interest expense to earning assets											0.33	%											0.42	%
Net interest income to earning assets (2) (3)											4.17	%											4.00	%
Reconciliation of Non-GAAP measure:
Tax Equivalent Net Interest Income
Net interest income						$	27,033											$	23,800
Tax equivalent adjustment for municipal loan interest							189												213
Tax equivalent adjustment for municipal bond interest							428												513
Tax equivalent net interest income						$	27,650											$	24,526

 

Non-GAAP financial measures have inherent limitations, are not required to be uniformly applied, and are not audited.

Management believes that presentation of this non-GAAP measure provides useful information frequently used by shareholders in the evaluation of a company.

Non-GAAP financial measures have limitations as analytical tools and should not be considered in isolation or as a substitute for analyses of results as reported under GAAP.

(1) Non-accrual loans of approximately $8.7 million at 12/31/14 and $7.2 million for 12/31/2013 are included in the average loan balances.

(2) Loan interest income includes loan fee income of $679,000 and $547,000 for the twelve months ended 12/31/2014 and 12/31/2013, respectively.

(3) Tax-exempt income has been adjusted to a tax equivalent basis at a 34% effective rate. The amount of such adjustment was an addition to recorded pre-tax income of $617,000 and $726,000 for the twelve months ended December 31, 2014 and December 31, 2013, respectively.

 

  

Pacific Financial Corporation Profits Increased 32% in 2014 and 42% in Fourth Quarter 2014

February 2, 2015

Page 16

 

		For the Twelve Months Ended
		December 31, 2014 vs. December 31, 2013
		Increase (Decrease) Due To
(Dollars in Thousands)										Net
			Volume				Rate				Change
ASSETS:
Interest bearing certificate of deposit		$	5			$	8			$	13
Interest bearing deposits in banks			(37	)			(1	)			(38	)
Investments - taxable			142				381				523
Investments - nontaxable			(150	)			(100	)			(250	)
Gross loans			3,034				(466	)			2,568
Loans held for sale			(76	)			19				(57	)
Total interest earning assets		$	2,918			$	(159	)		$	2,759
LIABILITIES AND SHAREHOLDERS' EQUITY:
Interest-bearing deposits		$	61			$	(180	)		$	(119	)
Time deposits			(130	)			(103	)			(233	)
FHLB borrowings			12				(20	)			(8	)
Short-term borrowings			-				1				1
Long-term borrowings			-				(6	)			(6	)
Total interest bearing liabilities			(57	)			(308	)			(365	)
Net increase (decrease) in net interest income		$	2,975			$	149			$	3,124

 

  

Pacific Financial Corporation Profits Increased 32% in 2014 and 42% in Fourth Quarter 2014

February 2, 2015

Page 17

 

SUMMARY AVERAGE BALANCE SHEETS

 

(Unaudited)

(Dollars in Thousands)

Averages for the Three Months Ended

 

		December				September												December
		31, 2014				30, 2014				$ Change				% Change				31, 2013				$ Change				% Change
Assets:
Cash and due from banks		$	13,483			$	14,169			$	(686	)			-5	%		$	12,105			$	1,378				11	%
Interest-bearing deposits in banks			26,735				23,928				2,807				12	%			34,108				(7,373	)			-22	%
Interest bearing certificate of deposit			2,727				2,727				-				0	%			2,298				429				19	%
Investment securities			94,893				91,397				3,496				4	%			100,612				(5,719	)			-6	%
Loans, net of deferred loan fees			561,020				555,235				5,785				1	%			501,113				59,907				12	%
Allowance for loan losses			(8,306	)			(8,342	)			36				0	%			(8,612	)			306				-4	%
Net loans			552,714				546,893				5,821				1	%			492,501				60,213				12	%
Other assets			57,619				58,312				(693	)			-1	%			61,347				(3,728	)			-6	%
Total assets		$	748,171			$	737,426			$	10,745				1	%		$	702,971			$	45,200				6	%
Liabilities:
Total deposits		$	642,279			$	634,279			$	8,000				1	%		$	605,555			$	36,724				6	%
Borrowings			24,869				24,868				1				0	%			23,403				1,466				6	%
Other liabilities			6,655				6,055				600				10	%			4,962				1,693				34	%
Total liabilities			673,803				665,202				8,601				1	%			633,920				39,883				6	%
Equity:
Common equity			74,368				72,224				2,144				3	%			69,051				5,317				8	%
Total equity			74,368				72,224				2,144				3	%			69,051				5,317				8	%
Total liabilities and shareholders' equity		$	748,171			$	737,426			$	10,745				1	%		$	702,971			$	45,200				6	%
Averages for the Twelve Months Ended			December				December
			31, 2014				31, 2013				$ Change				% Change
Assets:
Cash and due from banks		$	13,201			$	11,636			$	1,565				13	%
Interest-bearing deposits in banks			20,326				36,540				(16,214	)			-44	%
Interest bearing certificate of deposit			2,727				2,309				418				18	%
Investment securities			96,054				89,248				6,806				8	%
Loans, net of deferred loan fees			542,874				485,623				57,251				12	%
Allowance for loan losses			(8,327	)			(9,065	)			738				-8	%
Net loans			534,547				476,558				57,989				12	%
Other assets			58,972				60,755				(1,783	)			-3	%
Total assets		$	725,827			$	677,046			$	48,781				7	%
Liabilities:
Total deposits		$	624,783			$	580,849			$	43,934				8	%
Borrowings			24,144				23,452				692				3	%
Other liabilities			5,712				4,688				1,024				22	%
Total liabilities			654,639				608,989				45,650				7	%
Equity:
Common equity			71,188				68,057				3,131				5	%
Total equity			71,188				68,057				3,131				5	%
Total liabilities and shareholders' equity		$	725,827			$	677,046			$	48,781				7	%

 

ASSET QUALITY

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

 

  

Pacific Financial Corporation Profits Increased 32% in 2014 and 42% in Fourth Quarter 2014

February 2, 2015

Page 18

 

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

 

Adversely classified loans and securities

(Unaudited)

(Dollars in Thousands)

 

		December 31, 2014				September 30, 2014				$ Change				% Change				December 31, 2013				$ Change				% Change
Rated substandard or worse, but not impaired		$	7,368			$	11,020			$	(3,652	)			-33	%		$	2,842			$	4,526				159	%
Impaired			11,311				7,429				3,882				52	%			9,922				1,389				14	%
Total adversely classified loans¹		$	18,679			$	18,449			$	230				1	%		$	12,764			$	5,915				46	%
Total investment securities²		$	199			$	228			$	(29	)			-13	%		$	1,834			$	(1,635	)			-89	%
Gross loans (excluding deferred loan fees)		$	564,313			$	553,319			$	10,994				2	%		$	505,803			$	58,510				12	%
Adversely classified loans to gross loans			3.31	%			3.33	%			-0.02	%							2.52	%			0.79	%
Allowance for loan losses		$	8,353			$	8,255			$	98				1	%		$	8,359			$	(6	)			0	%
Allowance for loan losses as a percentage of adversely classified loans			44.72	%			44.74	%			-0.02	%							65.49	%			-20.77	%
Allowance for loan losses to total impaired loans			73.85	%			111.12	%			-37.27	%							84.25	%			-10.40	%
Adversely classified loans and securities to total assets			2.53	%			2.49	%			0.04	%			2	%			2.07	%			0.46	%			22	%

 

¹Adversely classified loans are defined as loans having a well-defined weakness or weaknesses related to the borrower's financial capacity or to pledged collateral that may jeopardize the repayment of the debt. They are characterized by the possibility that the Bank may sustain some loss if the deficiencies giving rise to the substandard classification are not corrected. Note that any loans internally rated worse than substandard are included in the impaired loan totals.

²Adversely classified investment securities consist of one private label collateralized mortgage obligation (CMO) as of 12/31/2014 and 09/30/2014 and four private label CMOs as of 12/31/2013.

 

30-89 Days Past Due by type

(Dollars in Thousands)

 

		December 31, 2014				% of Category				September 30, 2014				% of Category				$ Change				% Change				December 31, 2013				% of Category				$ Change				% Change
Commercial and agricultural		$	-				0.0	%		$	7				0.2	%		$	(7	)			-100	%		$	14				1.0	%		$	(14	)			-100	%
Real estate:
Construction and development			18				2.1	%			-				0.0	%			18				100	%			-				0.0	%			18				100	%
Residential 1-4 family			605				71.9	%			251				8.7	%			354				141	%			333				24.0	%			272				82	%
Multi-family			-				0.0	%			-				0.0	%			-				0	%			-				0.0	%			-				0	%
Commercial real estate -- owner occupied			-				0.0	%			-				0.0	%			-				0	%			-				0.0	%			-				0	%
Commercial real estate -- non owner occupied			-				0.0	%			2,612				91.0	%			(2,612	)			-100	%			-				0.0	%			-				0	%
Farmland			46				5.5	%			-				0.0	%			46				100	%			875				62.9	%			(829	)			-95	%
Total real estate		$	669							$	2,863							$	(2,194	)			-77	%		$	1,208							$	(539	)
Consumer			172				20.5	%			2				0.1	%			170				8500	%			168				12.1	%			4				2	%
Total loans 30-89 days past due, not in nonaccrual status		$	841				100.0	%		$	2,872				100.0	%		$	(2,031	)			-71	%		$	1,390				100.0	%		$	(549	)			-39	%
Delinquent loans to total loans, not in nonaccrual status			0.23	%							0.60	%															0.28	%

 

  

Pacific Financial Corporation Profits Increased 32% in 2014 and 42% in Fourth Quarter 2014

February 2, 2015

Page 19

 

Non-performing assets

(Unaudited)

 

(Dollars in Thousands)		December 31, 2014				September 30, 2014				$ Change				% Change				December 31, 2013				$ Change				% Change
Loans on nonaccrual status		$	8,716			$	4,811			$	3,905				81	%		$	7,243			$	1,473				20	%
Loans past due greater than 90 days but not on nonaccrual status			409				409				-				0	%			-				409				-
Total non-performing loans			9,125				5,220				3,905				75	%			7,243				1,882				26	%
Other real estate owned and foreclosed assets			999				1,210				(211	)			-17	%			2,771				(1,772	)			-64	%
Total nonperforming assets		$	10,124			$	6,430			$	3,694				57	%		$	10,014			$	110				1	%
Percentage of nonperforming assets to total assets			1.36	%			0.86	%											1.42	%

 

OREO decreased during fourth quarter 2014 and year-over-year, due to continued liquidation of these assets. OREO valuation adjustments continued to be minimal. At December 31, 2014, the OREO portfolio consisted of 4 properties, down from both third quarter 2014 and fourth quarter 2013. The largest balances in the OREO portfolio at the end of the quarter were attributable to commercial properties, all of which are located within our market area.

 

Other real estate owned and foreclosed assets

(Unaudited)

(Dollars in Thousands)

 

For the Three Months Ended		December 31, 2014				% of Category				September 30, 2014				% of Category				$ Change				% Change				December 31, 2013				% of Category				$ Change				% Change
Other real estate owned, beginning of period		$	1,210				121	%		$	991				82	%		$	219				22	%		$	4,334				156	%		$	(3,124	)			-72	%
Transfers from outstanding loans			-				0	%			525				43	%			(525	)			-100	%			140				5	%			(140	)			-100	%
Improvements and other additions			-				0	%			-				0	%			-				0	%			-				0	%			-				0	%
Proceeds from sales			(183	)			-18	%			(219	)			-18	%			36				-16	%			(1,415	)			-51	%			1,232				-87	%
Net gain (loss) on sales			(28	)			-3	%			(86	)			-7	%			58				-67	%			(3	)			0	%			(25	)			833	%
Impairment charges			-				0	%			(1	)			0	%			1				-100	%			(285	)			-10	%			285				-100	%
Total other real estate owned		$	999				100	%		$	1,210				100	%		$	(211	)			-17	%		$	2,771				100	%		$	(1,772	)			-64	%
For the Twelve Months Ended			December 31, 2014				% of Category				December 31, 2013				% of Category				$ Change				% Change
Other real estate owned, beginning of period		$	2,771				277	%		$	4,678				169	%		$	(1,907	)			-41	%
Transfers from outstanding loans			842				84	%			1,731				62	%			(889	)			-51	%
Improvements and other additions			-				0	%			-				0	%			-				0	%
Proceeds from sales			(2,340	)			-234	%			(2,757	)			-99	%			417				-15	%
Net gain (loss) on sales			(207	)			-21	%			40				1	%			(247	)			-618	%
Impairment charges			(67	)			-6	%			(921	)			-33	%			854				-93	%
Total other real estate owned		$	999				100	%		$	2,771				100	%		$	(1,772	)			-64	%

 

Other real estate owned and foreclosed assets by type

(Unaudited)

(Dollars in Thousands)

 

		December 31, 2014				# of Properties				September 30, 2014				# of Properties				$ Change				% Change				December 31, 2013				# of Properties				$ Change				% Change
Construction, Land Dev & Other Land		$	35				1			$	35				1			$	-				0	%		$	121				4			$	(86	)			-71	%
1-4 Family Residential Properties			-				-				86				2				(86	)			-100	%			788				5				(788	)			-100	%
Nonfarm Nonresidential Properties			964				3				1,089				4				(125	)			-11	%			1,862				11				(898	)			-48	%
Total OREO by type		$	999				4			$	1,210				7			$	(211	)			-17	%		$	2,771				20			$	(1,772	)			-64	%

 

ALLOWANCE FOR LOAN LOSSES

The allowance for loan losses continues to decline in relation to total loans in concert with the general trend of improvement in charge offs and delinquencies after incorporating loss potential of adversely classified loans. As such, loss factors used in estimates to establish reserve levels have declined commensurately. A provision was made to the allowance for loan losses in the current and prior quarter, corresponding to recent growth in the loan portfolio. No provision was made in fourth quarter 2013.

 

  

Pacific Financial Corporation Profits Increased 32% in 2014 and 42% in Fourth Quarter 2014

February 2, 2015

Page 20

 

For the quarter ended December 31, 2014, total net loan charge-offs fell compared to the quarter ended September 30, 2014 and the quarter ended December 31, 2013. The charge-offs incurred in the fourth quarter 2014 were primarily centered in various residential real estate and consumer loans. As a result, the ratio of net loan charge-offs to average gross loans (annualized) for the current quarter was down compared to both the prior quarter and the same quarter one year ago.

 

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

 

Allowance for Loan Losses

(Dollars in Thousands)

 

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

 

  

Pacific Financial Corporation Profits Increased 32% in 2014 and 42% in Fourth Quarter 2014

February 2, 2015

Page 21

 

ABOUT PACIFIC FINANCIAL CORPORATION

Pacific Financial Corporation of Aberdeen, Washington, is the bank holding company for Bank of the Pacific, a state chartered and federally insured commercial bank. Bank of the Pacific offers banking products and services to small-to-medium sized businesses and professionals in western Washington and Oregon. As of December 31, 2014, the Company had total assets of $746 million and operates seventeen branches in the communities of Grays Harbor, Pacific, Whatcom, Skagit, Clark and Wahkiakum counties in the State of Washington, and three branches in Clatsop County, Oregon. The Company also operates loan production offices in the communities of DuPont and Burlington in Washington and Salem, Oregon. Visit the Company’s website at www.bankofthepacific.com. Member FDIC.

  

Cautions Concerning Forward-Looking Statements

 

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