Current Report Filing (8-k)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_____________________

FORM 8-K
CURRENT REPORT
Pursuant to
SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

_______________________

Date of Report (Date of earliest event reported): October 29, 2014

PACIFIC FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter)

Washington
(State or other jurisdiction
of incorporation or organization)

000-29829
(SEC File Number)

91-1815009
(IRS Employer
Identification No.)

1101 S. Boone Street
Aberdeen, Washington 98520-5244
(360) 533-8870
(Address, including zip code, and telephone number,
including area code, of Registrant's principal executive offices)

Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions:

¨ Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)

¨ Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)

¨ Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))

¨ Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))

Item 2.02. Results of Operations and Financial Condition.

On October 29, 2014, Pacific Financial Corporation announced financial results for the quarterly period ended September 30, 2014. A copy of the press release is furnished as Exhibit 99.1 to this report and incorporated by reference.

Item 9.01. Financial Statements and Exhibits.

(d) Exhibits: The following exhibit is furnished with this Form 8-K:

99.1 Press Release dated October 29, 2014.

-2-

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

DATED: October 29, 2014	PACIFIC FINANCIAL CORPORATION
	By:	/s/ Douglas N. Biddle
		Douglas N. Biddle EVP & Chief Financial Officer

-3-

Exhibit 99.1

Pacific Financial Corporation Profits Increase 51% Year-Over-Year

Propelled by Steady Loan Growth, Improving Credit Quality and Solid Net Interest Margin

ABERDEEN, WA – October 29, 2014 – Pacific Financial Corporation (OTCQB: PFLC), the holding company for Bank of the Pacific, today reported net profits increased 51% to $1.4 million, or $0.13 per share, for the third quarter of 2014, compared to $909,000, or $0.09 per share, for the third quarter of 2013. Earnings for the third quarter of 2014 were impacted by increased tax expenses, reflecting a reduction in non-taxable income for the period. Second quarter 2014 earnings were $1.4 million, or $0.14 per share. For the nine months of 2014 net profits increased 29% to $3.8 million, or $0.37 per share, from $2.9 million, or $0.29 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 2013, earnings were impacted by a credit to the provision for losses of $450,000, offset by a one-time cost of $395,000 relating to the conversion of three branches purchased from Sterling Savings Bank. All results are unaudited.

“We reported solid profitability this quarter delivering strong performance across key metrics. Profit drivers were growth in loans and increasing core deposits, a strong net interest margin and further enhancements in credit quality.” said Dennis A. Long, President and Chief Executive Officer. “Our diversified loan portfolio increased 14%, while non-interest bearing deposits grew 17% from a year ago. In addition nonperforming assets declined 47% from the third quarter of 2013. In the second quarter this year, we announced the expansion of our Vancouver loan production office into a full-service commercial banking center. This is validation of the momentum we are building in this market.”

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

•

Year-to-date, EPS increased 28% to $0.37, from $0.29 for the same period in 2013. Earnings per share (EPS) declined by 7% to $0.13, compared to $0.14 in second quarter 2014, primarily due more shares outstanding reflecting the exercise of warrants during the quarter. EPS grew 44% from $0.09 in third quarter 2013.

•

Net interest income increased $86,000, or 1%, to $6.9 million, compared to $6.8 million in second quarter 2014, and grew $867,000, or 14%, from $6.0 million in third quarter 2013. For the first nine months of 2014, net interest income increased $2.7 million, or 15%, to $20.2 million, from $17.5 million for the like period in 2013.

	•	Net interest margin (NIM) was 4.13%, compared to 4.28% for the preceding quarter, and 3.88% for third quarter 2013. Year-to-date, net interest margin expanded 23 basis points to 4.22%, compared to 3.99% for the first nine months of 2013.

	•	Gross loans grew 13% to $552.1 million, from $486.7 million at September 30, 2013 and increased by $4.8 million, or 1% from $547.3 million at June 30, 2014.

•

Nonperforming assets declined to $6.4 million, or 0.86% of total assets, down from $7.4 million, or 1.03% of total assets, at June 30, 2014 and $12.4 million, or 1.73% of total assets at September 30, 2013.

•

Classified loans increased to $18.4 million, or 3.33% of gross loans, up from $16.0 million, or 2.91% of gross loans, at June 30, 2014, and $13.7 million, or 2.82% of gross loans at September 30, 2013.

	•	Net charge-offs totaled $160,000, compared to $73,000 in second quarter 2014 and $156,000 for third quarter 2013. Year-to-date, net charge-offs were $304,000, compared to $102,000 for the first nine months of 2013.

•

Capital levels exceeded regulatory requirements for a well-capitalized financial institution, with a total risk-based capital ratio of 14.06% and a leverage ratio of 10.09% at quarter end.

“We are encouraged by the recent activity in home purchases in the quarter, which has fueled new residential mortgage originations,” said Denise Portmann, President and Chief Executive Officer of Bank of the Pacific. “We are also expanding our customized lending offerings to meet the needs of customers whose residence does not conform to secondary-market requirements. With our wide-range of innovative products and services, and a talented and motivated team of exceptional people, we are well positioned to continue to deepen and grow customer relationships, as well as bring in new customers and grow our market share.”

Pacific Financial Corporation Profits Increased 51% in Third Quarter 2014 and 29% in First Nine Months of 2014

October 29, 2014

Page 2

OPERATING RESULTS

Net Interest Income

Net interest income for the quarter and nine months ended September 30, 2014, increased from the quarter and nine months ended September 30, 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 Western Washington. Investment securities and federal funds sold decreased 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.

Net interest income for the current quarter increased from the second quarter of 2014, reflecting higher loan balances and lower levels of investments. While funding costs declined slightly 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, 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 September 30, 2014		For the Three Months Ended June 30, 2014		$ Change			% Change			For the Three Months Ended September 30, 2013		$ Change			% Change

Interest and dividend income	$	7,400	$	7,337	$	63			1	%	$	6,605	$	795			12	%
Interest expense		518		541		(23	)		-4	%		590		(72	)		-12	%
Net interest income		6,882		6,796		86			1	%		6,015		867			14	%
Loan loss provision		100		100		-			0	%		-		100			100	%
Non-interest income		2,274		2,176		98			5	%		2,232		42			2	%
Non-interest expense		7,133		7,066		67			1	%		7,089		44			1	%
INCOME BEFORE PROVISION FOR INCOME TAXES		1,923		1,806		117			6	%		1,158		765			66	%
PROVISION FOR INCOME TAXES		549		403		146			36	%		249		300			120	%

NET INCOME	$	1,374	$	1,403	$	(29	)		-2	%	$	909	$	465			51	%

INCOME PER COMMON SHARE:
BASIC ⁽¹⁾	$	0.13	$	0.14	$	(0.01	)		-7	%	$	0.09	$	0.04			44	%
DILUTED ⁽²⁾	$	0.13	$	0.14	$	(0.01	)		-7	%	$	0.09	$	0.04			44	%

Average common shares outstanding - basic ⁽¹⁾		10,281,745		10,189,386		92,359			1	%		10,121,853		159,892			2	%
Average common shares outstanding - diluted ⁽²⁾		10,379,166		10,275,628		103,538			1	%		10,194,826		184,340			2	%

	For the Nine Months Ended September 30, 2014		For the Nine Months Ended September 30, 2013			$ Change			% Change

Interest and dividend income	$	21,821		19,476			2,345			12	%
Interest expense		1,589		1,927			(338	)		-18	%
Net interest income		20,232		17,549			2,683			15	%
Loan loss provision		200		(450	)		650			-144	%
Non-interest income		6,058		8,033			(1,975	)		-25	%
Non-interest expense		21,028		22,380			(1,352	)		-6	%
INCOME BEFORE PROVISION FOR INCOME TAXES		5,062		3,652			1,410			39	%
PROVISION FOR INCOME TAXES		1,257		710			547			77	%

NET INCOME	$	3,805		2,942			863			29	%

INCOME PER COMMON SHARE:
BASIC ⁽¹⁾	$	0.37		0.29			0.08			28	%
DILUTED ⁽²⁾	$	0.37		0.29			0.08			28	%

Average common shares outstanding - basic ⁽¹⁾		10,218,103		10,121,853			96,250			1	%
Average common shares outstanding - diluted ⁽²⁾		10,309,436		10,179,928			129,508			1	%

Pacific Financial Corporation Profits Increased 51% in Third Quarter 2014 and 29% in First Nine Months of 2014

October 29, 2014

Page 3

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	September 30, 2014		June 30, 2014		$ Change			% Change			September 30, 2013		$ Change			% Change

Net income	$	1,374	$	1,403	$	(29	)		-2	%	$	909	$	465			51	%
Provision for loan losses		100		100		0			0	%		-		100			100	%
Other real estate owned write-downs		1		54		(53	)		-98	%		176		(175	)		-99	%
Other real estate owned operating costs		100		30		70			233	%		67		33			49	%
Provision for income taxes		549		403		146			36	%		249		300			120	%
Pre-tax, pre-credit cost operating income*	$	2,124	$	1,990	$	134			7	%	$	1,401	$	723			52	%

For The Nine Months Ended	September 30, 2014		September 30, 2013			$ Change			% Change

Net income	$	3,805	$	2,942		$	863			29	%
Provision for loan losses		200		(450	)		650			-144	%
Other real estate owned write-downs		67		636			(569	)		-89	%
Other real estate owned operating costs		191		276			(85	)		-31	%
Provision for income taxes		1,257		710			547			77	%
Pre-tax, pre-credit cost operating income*	$	5,520	$	4,114		$	1,406			34	%

Reconciliation of Non-GAAP Measure:

Tax Equivalent Income

(Dollars in Thousands)

For the Three Months ended	September 30, 2014			June 30, 2014			$ Change			% Change			September 30, 2013			$ Change			% Change

Net interest income	$	6,882		$	6,796		$	86			1	%	$	6,015		$	867			14	%
Tax equivalent adjustment for municipal loan interest		45			46			(1	)		-2	%		46			(1	)		-2	%
Tax equivalent adjustment for municipal bond interest		94			120			(26	)		-22	%		121			(27	)		-22	%
Tax equivalent net interest income		7,021			6,962			59			1	%		6,182			839			14	%
Provision for loan losses		100			100			-			0	%		-			100			100	%
Non-interest income		2,274			2,176			98			5	%		2,232			42			2	%
Non-interest expense		7,133			7,066			67			1	%		7,089			44			1	%
Tax equivalent income before income taxes*		2,062			1,972			90			5	%		1,325			737			56	%
Provision for income taxes		549			403			146			36	%		249			300			120	%
Accumulative tax adjustment		(139	)		(166	)		27			-16	%		(167	)		28			-17	%
Common stock dividends		-			-			-			0	%		-			-			0	%
Net income	$	1,374		$	1,403		$	(29	)		-2	%	$	909		$	465			51	%

For the Nine Months ended	September 30, 2014			September 30, 2013			$ Change			% Change

Net interest income	$	20,232		$	17,549		$	2,683			15	%
Tax equivalent adjustment for municipal loan interest		138			163			(25	)		-15	%
Tax equivalent adjustment for municipal bond interest		332			392			(60	)		-15	%
Tax equivalent net interest income		20,702			18,104			2,598			14	%
Provision for loan losses		200			(450	)		650			-144	%
Non-interest income		6,058			8,033			(1,975	)		-25	%
Non-interest expense		21,028			22,380			(1,352	)		-6	%
Tax equivalent income before income taxes*		5,532			4,207			1,325			31	%
Provision for income taxes		1,257			710			547			77	%
Accumulative tax adjustment		(470	)		(555	)		85			-15	%
Common stock dividends		-			-			-			0	%
Net income	$	3,805		$	2,942		$	863			29	%

*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 third quarter 2014 grew compared to both the preceding and year ago quarters, reflecting increases in gains from sales of loans. In addition, fee income from annuity sales increased in the current quarter compared to the second quarter of 2013, but was down slightly from the prior quarter due to seasonal factors. “Our annuity products are proving to be popular with our customers”, added Portmann. “Annuities provide an attractive alternative investment for our customers, given the current low interest rate environment. To accommodate the increased demand for these products, we are 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 higher in the current period as compared to the prior quarter and were in contrast to a small gain in third quarter in 2013, reflecting a more aggressive approach to pricing in order to reduce the levels of foreclosed assets.

Pacific Financial Corporation Profits Increased 51% in Third Quarter 2014 and 29% in First Nine Months of 2014

October 29, 2014

Page 4

Gains on sale of residential mortgage loans and related fee income rose in third quarter 2014 compared to second quarter 2014, and was similar to that earned in third quarter 2013. Portmann continued, “The recent rebound in home purchases throughout many of our markets is fueling new residential mortgage originations. In addition, we locked in gains on our securities available for sale portfolio in third quarter 2014 and third quarter 2013 improving the mix of securities in the portfolio and to reduce interest rate risk.”

Noninterest income for the first nine months of 2014 was down from the same period in 2013, reflecting the declines in gains on sale of residential mortgage loans due to the slowdown in refinancing activity in 2013 and higher losses on sale of OREO.

Noninterest income

(Unaudited)

(Dollars in Thousands)

For The Three Months Ended

	September 30, 2014			June 30, 2014			$ Change			% Change			September 30, 2013			$ Change			% Change

Service charges on deposit accounts	$	450		$	474		$	(24	)		-5	%	$	440		$	10			2	%
Net (loss) on sale of other real estate owned		(85	)		(57	)		(28	)		49	%		18			(103	)		-572	%
Net gains from sales of loans		1,120			968			152			16	%		1,128			(8	)		-1	%
Net gains on sales of securities available for sale		38			(2	)		40			-2000	%		14			24			171	%
Net other-than-temporary impairment (net of $0, $0, and $7,
respectively recognized other comprehensive income before taxes)		-			(3	)		3			-100	%		(4	)		4			-100	%
Earnings on bank owned life insurance		127			140			(13	)		-9	%		105			22			21	%
Other operating income
Fee income		498			442			56			13	%		421			77			18	%
Income from other real estate owned		6			17			(11	)		-65	%		22			(16	)		-73	%
Other non-interest income		120			197			(77	)		-39	%		88			32			36	%
Total non-interest income	$	2,274		$	2,176		$	98			5	%	$	2,232		$	42			2	%

For The Nine Months Ended

	September 30, 2014			September 30, 2013			$ Change			% Change

Service charges on deposit accounts	$	1,359		$	1,281		$	78			6	%
Net (loss) on sale of other real estate owned		(179	)		43			(222	)		-516	%
Net gains from sales of loans		2,717			4,306			(1,589	)		-37	%
Net gains on sales of securities available for sale		88			401			(313	)		-78	%
Net other-than-temporary impairment (net of $15, and $2,
respectively recognized other comprehensive income before taxes)		(48	)		(38	)		(10	)		26	%
Earnings on bank owned life insurance		378			342			36			11	%
Other operating income
Fee income		1,304			1,392			(88	)		-6	%
Income from other real estate owned		34			51			(17	)		-33	%
Other non-interest income		405			255			150			59	%
Total non-interest income	$	6,058		$	8,033		$	(1,975	)		-25	%

Noninterest Expense

Noninterest expense for third quarter of 2014 was virtually unchanged as compared to the second quarter of 2014. Decreases in OREO write-downs were offset by increased operating costs associated with acquisitions into OREO during the current quarter.

Noninterest expense for third quarter 2014 was virtually unchanged compared to the year ago quarter. Salary and benefits expense increased with the addition of loan production personnel and branch staff for the new branch that opened in the fourth quarter of 2013. Total costs associated with OREO and related third-party loan expenses decreased due to the decline in OREO balances and stabilization of valuations. Other non-interest expenses also declined primarily due to a decrease in loan origination and appraisal expense associated with a decline in mortgage origination activity.

Pacific Financial Corporation Profits Increased 51% in Third Quarter 2014 and 29% in First Nine Months of 2014

October 29, 2014

Page 5

Noninterest expense for the first nine months of 2014 was down as compared to the same period in 2013, because of the $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. Also, in second quarter 2013 the Bank incurred one-time expenses of $395,000 in data processing conversion costs for three branches from Sterling Savings Bank acquired in June 2013. In addition, OREO write-downs and expenses and loan origination and appraisal expense were down as compared to the prior period for reasons noted above.

Noninterest expense

(Unaudited)

(Dollars in Thousands)

For The Three Months Ended

	September 30, 2014		June 30, 2014		$ Change			% Change			September 30, 2013		$ Change			% Change

Salaries and employee benefits	$	4,286	$	4,283	$	3			0	%	$	4,098	$	188			5	%
Occupancy		483		504		(21	)		-4	%		473		10			2	%
Equipment		261		263		(2	)		-1	%		233		28			12	%
Data processing		492		462		30			6	%		449		43			10	%
Professional services		220		201		19			9	%		198		22			11	%
Other real estate owned write-downs		1		54		(53	)		-98	%		176		(175	)		-99	%
Other real estate owned operating costs		100		30		70			233	%		67		33			49	%
State taxes		110		107		3			3	%		110		0			0	%
FDIC and state assessments		119		129		(10	)		-8	%		129		(10	)		-8	%
Other non-interest expense:
Director fees		80		72		8			11	%		48		32			67	%
Communication		65		53		12			23	%		42		23			55	%
Advertising		73		76		(3	)		-4	%		76		(3	)		-4	%
Professional liability insurance		24		19		5			26	%		21		3			14	%
Amortization		99		98		1			1	%		116		(17	)		-15	%
Other non-interest expense		720		715		5			1	%		853		(133	)		-16	%
Total non-interest expense	$	7,133	$	7,066	$	67			1	%	$	7,089	$	44			1	%

For The Nine Months Ended

	September 30, 2014		September 30, 2013		$ Change			% Change

Salaries and employee benefits	$	12,624	$	12,983	$	(359	)		-3	%
Occupancy		1,494		1,338		156			12	%
Equipment		775		619		156			25	%
Data processing		1,387		1,688		(301	)		-18	%
Professional services		606		696		(90	)		-13	%
Other real estate owned write-downs		67		636		(569	)		-89	%
Other real estate owned operating costs		191		276		(85	)		-31	%
State taxes		314		360		(46	)		-13	%
FDIC and state assessments		381		395		(14	)		-4	%
Other non-interest expense:
Director fees		208		164		44			27	%
Communication		155		130		25			19	%
Advertising		227		222		5			2	%
Professional liability insurance		65		67		(2	)		-3	%
Amortization		291		311		(20	)		-6	%
Other non-interest expense		2,243		2,495		(252	)		-10	%
Total non-interest expense	$	21,028	$	22,380	$	(1,352	)		-6	%

Income Taxes

The Company recorded an income tax provision for the three months ended September 30, 2014, June 30, 2014 and September 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 September 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 51% in Third Quarter 2014 and 29% in First Nine Months of 2014

October 29, 2014

Page 6

SUMMARY BALANCE SHEET OVERVIEW

(Unaudited)

(Dollars in Thousands)

	September			June						%			September						%
	30, 2014			30, 2014			$ Change			Change			30, 2013			$ Change			Change
Assets:
Cash and cash equivalents	$	40,781		$	17,694		$	23,087			130	%	$	69,657		$	(28,876	)		-41	%
Interest-bearing certificates of deposit		2,727			2,727			0			0	%		1,735			992			57	%
Federal Home Loan Bank stock, at cost		2,926			2,956			(30	)		-1	%		3,041			(115	)		-4	%
Pacific Coast Bankers' Bank stock, at cost		1,000			0			1,000			-			0			1,000			100	%
Investment securities		91,185			90,583			602			1	%		94,129			(2,944	)		-3	%

Loans held-for-sale		8,161			7,632			529			7	%		7,266			895			12	%

Gross loans, net of deferred fees		552,140			547,283			4,857			1	%		486,700			65,440			13	%
Allowance for loan losses		(8,255	)		(8,315	)		60			-1	%		(8,806	)		551			-6	%
Net loans		543,885			538,968			4,917			1	%		477,894			65,991			14	%

Other assets		58,382			58,912			(530	)		-1	%		62,026			(3,644	)		-6	%
Total assets	$	749,047		$	719,472		$	29,575			4	%	$	715,748		$	33,299			5	%

Liabilities and shareholders' equity
Total deposits	$	644,004		$	619,301		$	24,703			4	%	$	618,918		$	25,086			4	%
Accrued interest payable		141			151			(10	)		-7	%		182			(41	)		-23	%
Borrowings		24,894			23,743			1,151			5	%		23,403			1,491			6	%
Other liabilities		6,751			5,417			1,334			25	%		4,909			1,842			38	%
Shareholders' equity		73,257			70,860			2,397			3	%		68,336			4,921			7	%
Total liabilities and shareholders' equity	$	749,047		$	719,472		$	29,575			4	%	$	715,748		$	33,299			5	%

Cash and Cash Equivalents and Investment Securities

(Unaudited)

(Dollars in Thousands)

	September 30, 2014		% of Total			June 30, 2014		% of Total			$ Change			% Change			September 30, 2013		% of Total			$ Change			% Change

Cash and due from banks	$	15,284		11	%	$	17,455		15	%	$	(2,171	)		-12	%	$	15,494		9	%	$	(210	)		-1	%
Cash equivalents:
Interest-bearing deposits		25,497		18	%		239		0	%		25,258			10568	%		54,163		32	%		(28,666	)		-53	%
Interest-bearing certificates of deposit		2,727		2	%		2,727		2	%		-			0	%		1,735		1	%		992			57	%
Total cash equivalents and certificate of deposits		43,508		31	%		20,421		18	%		23,087			113	%		71,392		42	%		(27,884	)		-39	%

Investment securities:
Collateralized mortgage obligations: agency issued		40,039		29	%		38,822		34	%		1,217			3	%		34,482		20	%		5,557			16	%
Collateralized mortgage obligations: non-agency issued		579		0	%		604		1	%		(25	)		-4	%		2,179		1	%		(1,600	)		-73	%
Mortgage-backed securities: agency issued		12,630		9	%		12,059		11	%		571			5	%		12,972		8	%		(342	)		-3	%
U.S. Government and agency securities		8,655		6	%		8,721		8	%		(66	)		-1	%		8,859		5	%		(204	)		-2	%
State and municipal securities		29,282		21	%		30,377		27	%		(1,095	)		-4	%		35,042		21	%		(5,760	)		-16	%
Corporate bonds		-		0	%		-		0	%		-			0	%		595		0	%		(595	)		-100	%
FHLB Stock		2,926		2	%		2,956		3	%		(30	)		-1	%		3,041		2	%		(115	)		-4	%
Pacific Coast Bankers' Bank stock, at cost		1,000		1	%		-		0	%		1,000			100	%		-		0	%		1,000			100	%
Total investment securities		95,111		69	%		93,539		82	%		1,572			2	%		97,170		58	%		(2,059	)		-2	%

Total cash equivalents and investment securities	$	138,619		100	%	$	113,960		100	%	$	24,659			22	%	$	168,562		100	%	$	(29,943	)		-18	%

Total cash equivalents and investment securities as a % of total assets				19	%				16	%										24	%

Pacific Financial Corporation Profits Increased 51% in Third Quarter 2014 and 29% in First Nine Months of 2014

October 29, 2014

Page 7

Investment securities and interest-bearing certificates of deposit

(Unaudited)

(Dollars in Thousands)

For the Three Months Ended	September 30, 2014			June 30, 2014			$ Change			% Change			September 30, 2013			$ Change			% Change

Balance beginning of period	$	96,266		$	102,951		$	(6,685	)		-6	%	$	94,855		$	1,411			1	%
Principal purchases		7,482			3,806			3,676			97	%		10,772			(3,290	)		-31	%
Proceeds from sales		(3,927	)		(8,979	)		5,052			-56	%		(3,067	)		(860	)		28	%
Principal paydowns, maturities, and calls		(1,673	)		(2,144	)		471			-22	%		(4,266	)		2,593			-61	%
Gains on sales of securities		94			159			(65	)		-41	%		57			37			65	%
Losses on sales of securities		(56	)		(161	)		105			-65	%		(43	)		(13	)		30	%
OTTI loss writedown		-			(3	)		3			-100	%		13			(13	)		-100	%
Change in unrealized gains (loss) before tax		(64	)		903			(967	)		-107	%		770			(834	)		-108	%
Amortization and accretion of discounts and premiums		(284	)		(266	)		(18	)		7	%		(186	)		(98	)		53	%

Total investment portfolio	$	97,838		$	96,266		$	1,572			2	%	$	98,905		$	(1,067	)		-1	%

Liquidity remains strong based on the current levels of cash equivalents and investment securities. “We also have unsecured lines of credit totaling $16.0 million with correspondent banks, all of which are currently available. In addition, we have a secured borrowing facility with the Federal Home Loan Bank of Seattle of $143.8 million, of which $11.5 million is currently outstanding,” said Douglas Biddle, Executive Vice President and Chief Financial Officer. “In an effort to fund pending loan demand, we increased our cash equivalents during the current quarter. In addition, we initiated some restructuring of the investment portfolio to reduce the impact of interest rate risk on securities valuation, resulting in a lowering of portfolio yields.” The expected modified duration (adjusted for calls, consensus pre-payment speeds and rate adjustment dates) of the investment portfolio was 4.3 years at September 30, 2014, 4.5 years at June 30, 2014 and 4.4 years at September 30, 2013.

LOANS

Loans by category
(Unaudited)	September 30,			% of			June 30,			% of			$						September			% of			$
(Dollars in Thousands)	2014			Gross Loans			2014			Gross Loans			Change			% Change			30, 2013			Gross Loans			Change			% Change

Commercial and agricultural	$	112,873			21	%	$	109,368			20	%	$	3,505			3	%	$	94,471			20	%	$	18,402			19	%
Real estate:
Construction and development		25,419			3	%		32,071			6	%		(16,766	)		-52	%		29,538			6	%		(14,233	)		-48	%
Residential 1-4 family		94,101			19	%		90,549			17	%		13,666			15	%		85,625			18	%		18,590			22	%
Multi-family		20,554			4	%		20,110			4	%		444			2	%		13,846			3	%		6,708			48	%
Commercial real estate — owner occupied		122,090			22	%		117,203			22	%		4,887			4	%		106,670			22	%		15,420			14	%
Commercial real estate — non owner occupied		120,569			22	%		124,929			23	%		(4,360	)		-3	%		115,290			24	%		5,279			5	%
Farmland		22,926			4	%		23,900			4	%		(974	)		-4	%		24,002			5	%		(1,076	)		-4	%
Consumer		34,787			6	%		30,241			6	%		4,546			15	%		18,366			4	%		16,421			89	%
Gross loans		553,319						548,371						4,948			1	%		487,808						65,511			13	%
Less: allowance for loan losses		(8,255	)		-2	%		(8,315	)		-2	%		60			-1	%		(8,806	)		-2	%		551			-6	%
Less: deferred fees		(1,179	)		0	%		(1,088	)		0	%		(91	)		8	%		(1,108	)		0	%		(71	)		6	%
Loans, net	$	543,885					$	538,968					$	4,917			1	%	$	477,894					$	65,991			14	%

Loan portfolio growth continues to be well diversified and generated predominately within our Washington and Oregon markets. This is despite a payoff of a $5.7 million non-owner occupied commercial real estate relationship during the current quarter. The portfolio includes $36.3 million in purchased government-guaranteed commercial and commercial real estate loans. In addition, the loan portfolio contains $25.3 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 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 51% in Third Quarter 2014 and 29% in First Nine Months of 2014

October 29, 2014

Page 8

DEPOSITS

Deposits

(Unaudited)

(Dollars in Thousands)	September 30, 2014		Percent of Total			June 30, 2014		Percent of Total			$ Change			September 30, 2013		Percent of Total			$ Change

Interest-bearing demand and money market	$	266,863		41.4	%	$	268,480		43.4	%	$	(1,617	)	$	253,895		41.0	%	$	12,968
Savings		76,661		11.9	%		74,336		12.0	%		2,325			72,880		11.8	%		3,781
Time deposits		118,221		18.4	%		119,531		19.3	%		(1,310	)		135,979		22.0	%		(17,758	)
Total interest-bearing deposits		461,745		71.7	%		462,347		74.7	%		(602	)		462,754		74.8	%		(1,009	)
Non-interest bearing demand		182,259		28.3	%		156,954		25.3	%		25,305			156,164		25.2	%		26,095

Total deposits	$	644,004		100.0	%	$	619,301		100.0	%	$	24,703		$	618,918		100.0	%	$	25,086

Total deposits were up at September 30, 2014, compared to the second quarter of this year and the third quarter a year ago. Non-interest bearing deposits grew due to seasonal inflows associated with increased 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 also contributed to deposit growth. 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 third quarter 2014 from third quarter in 2013.

Total brokered deposits were $22.6 million at September 30, 2014, which included $2.5 million via reciprocal deposit arrangements. This compares to $22.9 million and $24.1 million at June 30, 2014 and September 30, 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 meet the thresholds to be considered “well-capitalized” under regulatory requirements. Capital ratios increased slightly as compared to the prior quarter primarily due to earnings retention. Also, $1.2 million of additional capital was supplied 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 September 30, 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. However, the tangible common equity ratio grew due to the additional capital supplied via exercise of warrants, as previously mentioned.

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 September 30, 2014, 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.

	September 30, 2014			June 30, 2014			Change			September 30, 2013			Change			Regulatory Minimum to be "Well Capitalized"
																greater than or equal to
Pacific Financial Corporation
Total risk-based capital ratio		14.09	%		13.76	%		0.33			14.84	%		(0.75	)		10	%
Tier 1 risk-based capital ratio		12.83	%		12.51	%		0.32			13.59	%		(0.76	)		6	%
Leverage ratio		10.09	%		10.04	%		0.05			10.04	%		0.05			5	%
Tangible common equity ratio		8.11	%		8.11	%		-			7.79	%		0.32			n/a

Bank of the Pacific
Total risk-based capital ratio		13.87	%		13.73	%		0.14			14.85	%		(0.98	)		10	%
Tier 1 risk-based capital ratio		12.61	%		12.48	%		0.13			13.59	%		(0.98	)		6	%
Leverage ratio		9.91	%		10.01	%		(0.10	)		10.04	%		(0.13	)		5	%

Pacific Financial Corporation Profits Increased 51% in Third Quarter 2014 and 29% in First Nine Months of 2014

October 29, 2014

Page 9

FINANCIAL PERFORMANCE OVERVIEW

(Unaudited)

(Dollars in Thousands, Except per Share Data)

For The Three Months Ended

	September 30, 2014			June 30, 2014			Change			September 30, 2013			Change
Selective quarterly performance ratios
Return on average assets, annualized		0.74	%		0.79	%		(0.05	)		0.52	%		0.22
Return on average equity, annualized		7.55	%		8.04	%		(0.49	)		5.33	%		2.22
Efficiency ratio ⁽¹⁾		77.91	%		78.76	%		(0.85	)		85.96	%		(8.05	)

Share and per share information
Average common shares outstanding - basic		10,281,745			10,189,386			92,359			10,121,853			159,892
Average common shares outstanding - diluted		10,379,166			10,275,628			103,538			10,194,826			184,340
Basic income per common share		0.13			0.14			(0.01	)		0.09			0.04
Diluted income per common share		0.13			0.14			(0.01	)		0.09			0.04
Book value per common share ⁽²⁾		7.07			6.94			0.13			6.75			0.32
Tangible book value per common share ⁽³⁾		5.75			5.60			0.15			5.46			0.29

For The Nine Months Ended

	September 30, 2014			September 30, 2013			Change
Selective quarterly performance ratios
Return on average assets, annualized		0.71	%		0.59	%		0.12
Return on average equity, annualized		7.26	%		5.81	%		1.45
Efficiency ratio ⁽¹⁾		79.98	%		87.48	%		(7.50	)

Share and per share information
Average common shares outstanding - basic		10,218,103			10,121,853			96,250
Average common shares outstanding - diluted		10,309,436			10,179,928			129,508
Basic income per common share		0.37			0.29			0.08
Diluted income per common share		0.37			0.29			0.08

⁽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 51% in Third Quarter 2014 and 29% in First Nine Months of 2014

October 29, 2014

Page 10

NET INTEREST MARGIN

(Annualized, tax-equivalent basis)
(Unaudited)
For The Three Months Ended
	September 30, 2014			June 30, 2014			Change			September 30, 2013			Change
Selective quarterly performance ratios
Yield on average gross loans ⁽¹⁾		4.95	%		5.04	%		(0.09	)		4.99	%		(0.04	)
Yield on average investment securities ⁽¹⁾		2.02	%		2.54	%		(0.52	)		1.70	%		0.32
Cost of average interest bearing deposits		0.34	%		0.37	%		(0.03	)		0.41	%		(0.07	)
Cost of average borrowings		1.83	%		1.90	%		(0.07	)		1.97	%		(0.14	)
Cost of average total deposits and borrowings		0.31	%		0.34	%		(0.03	)		0.38	%		(0.07	)
Cost of average interest-bearing liabilities		0.42	%		0.44	%		(0.02	)		0.48	%		(0.06	)

Yield on average interest-earning assets		4.44	%		4.61	%		(0.17	)		4.25	%		0.19
Cost of average interest-bearing liabilities		0.42	%		0.44	%		(0.02	)		0.48	%		(0.06	)
Net interest spread		4.02	%		4.17	%		(0.15	)		3.77	%		0.25

Net interest margin ⁽¹⁾		4.13	%		4.28	%		(0.15	)		3.88	%		0.25

For The Nine Months Ended
	September 30, 2014			September 30, 2013			Change
Selective quarterly performance ratios
Yield on average gross loans ⁽¹⁾		5.04	%		5.09	%		(0.05	)
Yield on average investment securities ⁽¹⁾		2.30	%		1.83	%		0.47
Cost of average interest bearing deposits		0.36	%		0.47	%		(0.11	)
Cost of average borrowings		1.90	%		2.02	%		(0.12	)
Cost of average total deposits and borrowings		0.33	%		0.43	%		(0.10	)
Cost of average interest-bearing liabilities		0.43	%		0.55	%		(0.12	)

Yield on average interest-earning assets		4.55	%		4.42	%		0.13
Cost of average interest-bearing liabilities		0.43	%		0.55	%		(0.12	)
Net interest spread		4.12	%		3.87	%		0.25

Net interest margin ⁽¹⁾		4.22	%		3.99	%		0.23

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

Net Interest Margin

Net interest margin declined compared to second quarter of 2014, as reductions in investment securities and loan yields offset declines in deposit costs. Declines in yields on investment securities were primarily due to portfolio restructuring. Loan yield declines resulted from increased competition for high quality borrowing relationships in the marketplace. Net interest margin improved when compared to third quarter of 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. 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 nine months ending September 30, 2014 and the same period in 2013. This was primarily the result of reducing the proportion of lower yielding cash-equivalent investments to fund loan growth and increasing the proportion of relatively higher-yielding federal government guaranteed mortgage-backed securities.

Pacific Financial Corporation Profits Increased 51% in Third Quarter 2014 and 29% in First Nine Months of 2014

October 29, 2014

Page 11

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
	September 30, 2014								June 30, 2014								September 30, 2013

				Interest		Average						Interest		Average						Interest		Average
	Average			Income or		Yields or			Average			Income or		Yields or			Average			Income or		Yields or
	Balance			Expense		Rates			Balance			Expense		Rates			Balance			Expense		Rates

(Dollars in Thousands)
ASSETS:
Interest bearing certificate of deposit	$	2,727		$	11		1.60	%	$	2,727	$		10		1.47	%	$	1,871	$		6		1.27	%
Interest bearing deposits in banks		23,928			14		0.23	%		12,552			9		0.29	%		46,665			29		0.25	%
Investments - taxable		63,751			298		1.85	%		65,964			343		2.09	%		61,924			221		1.42	%
Investments - nontaxable		27,646			277		3.98	%		31,607			352		4.47	%		32,058			355		4.39	%
Gross loans (1)		549,280			6,870		4.96	%		532,490			6,718		5.06	%		483,459			6,090		5.00	%
Loans held for sale		7,068			69		3.87	%		7,685			71		3.71	%		6,642			72		4.30	%
Total interest earning assets		674,400			7,539		4.44	%		653,025			7,503		4.61	%		632,619			6,773		4.25	%
Cash and due from banks		14,169								13,135								12,362
Bank premises and equipment (net)		16,615								16,703								16,167
Other real estate owned		940								2,088								4,070
Deferred fees		(1,113	)							(1,068	)							(1,045	)
Allowance for loan losses		(8,342	)							(8,271	)							(8,917	)
Other assets		40,757								40,705								40,955
Total assets	$	737,426							$	716,317							$	696,211

LIABILITIES AND SHAREHOLDERS' EQUITY:

Interest-bearing deposits	$	343,204			134		0.15	%	$	345,116			140		0.16	%	$	322,606			167		0.21	%
Time deposits		120,515			269		0.89	%		122,134			290		0.95	%		138,762			307		0.88	%
FHLB borrowings		10,878			61		2.22	%		10,000			60		2.41	%		10,000			62		2.46	%
Short term borrowings		587			-		0.00	%		6			-		0.00	%		-			-		0.00	%
Junior subordinated debentures		13,403			54		1.60	%		13,403			51		1.53	%		13,403			54		1.60	%
Total interest bearing liabilities		488,587			518		0.42	%		490,659			541		0.44	%		484,771			590		0.48	%
Non-interest-bearing deposits		170,560								150,776								138,875
Other liabilities		6,055								4,928								4,957
Equity		72,224								69,954								67,608
Total liabilities and shareholders' equity	$	737,426							$	716,317							$	696,211

Net interest income (3)				$	7,021							$	6,962							$	6,183
Net interest spread							4.02	%							4.17	%							3.77	%
Average yield on investments							2.02	%							2.54	%							1.70	%

Average yield on earning assets (2) (3)							4.44	%							4.61	%							4.25	%
Interest expense to earning assets							0.31	%							0.33	%							0.37	%
Net interest income to earning assets (2) (3)							4.13	%							4.28	%							3.88	%

Reconciliation of Non-GAAP measure:
Tax Equivalent Net Interest Income

Net interest income				$	6,882							$	6,796							$	6,015
Tax equivalent adjustment for municipal loan interest					45								46								46
Tax equivalent adjustment for municipal bond interest					94								120								121
Tax equivalent net interest income				$	7,021							$	6,962							$	6,182

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 $4.8 million at 09/30/14, $6.4 million at 06/30/2014, and $7.8 million for 09/30/2013 are included in the average loan balances.

(2) Loan interest income includes loan fee income of $152,000, $180,000, and $169,000 for the three months ended 09/30/2014, 06/30/2014, and 09/30/2013, 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 $139,000, $166,000, and $167,000 for the three months ended September 30, 2014, June 30, 2014, and September 30, 2013, respectively.

Pacific Financial Corporation Profits Increased 51% in Third Quarter 2014 and 29% in First Nine Months of 2014

October 29, 2014

Page 12

	For the Three Months Ended									For the Three Months Ended
	September 30, 2014 vs. June 30, 2014									September 30, 2014 vs. September 30, 2013
	Increase (Decrease) Due To									Increase (Decrease) Due To
(Dollars in Thousands)							Net									Net
	Volume			Rate			Change			Volume			Rate			Change
ASSETS:
Interest bearing certificate of deposit	$	-		$	1		$	1		$	3		$	2		$	5
Interest bearing deposits in banks		8			(3	)		5			(14	)		(1	)		(15	)
Investments - taxable		(12	)		(33	)		(45	)		6			71			77
Investments - nontaxable		(44	)		(31	)		(75	)		(48	)		(30	)		(78	)
Gross loans		212			(60	)		152			821			(41	)		780
Loans held for sale		(6	)		4			(2	)		5			(8	)		(3	)
Total interest earning assets	$	158		$	(122	)	$	36		$	773		$	(7	)	$	766

LIABILITIES AND SHAREHOLDERS' EQUITY:
Interest-bearing deposits	$	(1	)	$	(5	)	$	(6	)	$	11		$	(44	)	$	(33	)
Time deposits		(4	)		(17	)		(21	)		(40	)		2			(38	)
FHLB borrowings		5			(4	)		1			5			(6	)		(1	)
Short-term borrowings		-			-			-			-			-			-
Long-term borrowings		-			3			3			-			-			-
Total interest bearing liabilities		0			(23	)		(23	)		(24	)		(48	)		(72	)
Net increase (decrease) in net interest income	$	158		$	(99	)	$	59		$	797		$	41		$	838

Pacific Financial Corporation Profits Increased 51% in Third Quarter 2014 and 29% in First Nine Months of 2014

October 29, 2014

Page 13

Average Interest Earning Balances:	For the Nine Months Ended
	September 30, 2014								September 30, 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		$	31		1.52	%	$	2,312		$	20		1.16	%
Interest bearing deposits in banks		18,167			33		0.24	%		37,359			66		0.24	%
Investments - taxable		65,789			980		1.99	%		51,861			472		1.22	%
Investments - nontaxable		30,656			977		4.26	%		33,557			1,153		4.59	%
Gross loans (1)		531,517			20,081		5.05	%		471,702			18,071		5.12	%
Loans held for sale		6,348			189		3.98	%		9,709			249		3.43	%
Total interest earning assets		655,204			22,291		4.55	%		606,500			20,031		4.42	%
Cash and due from banks		13,106								11,478
Bank premises and equipment (net)		16,707								15,547
Other real estate owned		1,858								4,086
Deferred fees		(1,106	)							(1,008	)
Allowance for loan losses		(8,334	)							(9,218	)
Other assets		40,862								40,925
Total assets	$	718,297							$	668,310

LIABILITIES AND SHAREHOLDERS' EQUITY:

Interest-bearing deposits	$	341,533			415		0.16	%	$	311,792			547		0.23	%
Time deposits		123,140			835		0.91	%		136,863			1,026		1.00	%
FHLB borrowings		10,296			181		2.35	%		10,066			186		2.47	%
Short term borrowings		200			-		0.00	%		-			-		0.00	%
Junior subordinated debentures		13,403			158		1.58	%		13,403			168		1.68	%
Total interest bearing liabilities		488,572			1,589		0.43	%		472,124			1,927		0.55	%
Non-interest-bearing deposits		154,213								123,868
Other liabilities		5,396								4,596
Equity		70,116								67,722
Total liabilities and shareholders' equity	$	718,297							$	668,310
Net interest income (3)				$	20,702							$	18,104
Net interest spread							4.12	%							3.87	%
Average yield on investments							2.30	%							1.83	%

Average yield on earning assets (2) (3)							4.55	%							4.42	%
Interest expense to earning assets							0.33	%							0.43	%
Net interest income to earning assets (2) (3)							4.22	%							3.99	%

Reconciliation of Non-GAAP measure:
Tax Equivalent Net Interest Income

Net interest income				$	20,232							$	17,549
Tax equivalent adjustment for municipal loan interest					138								163
Tax equivalent adjustment for municipal bond interest					332								392
Tax equivalent net interest income				$	20,702							$	18,104

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 $4.8 million at 09/30/14 and $7.8 million for 09/30/2013 are included in the average loan balances.

(2) Loan interest income includes loan fee income of $482,000 and $396,000 for the nine months ended 09/30/2014 and 09/30/2013, 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 $470,000 and $555,000 for the nine months ended September 30, 2014 and September 30, 2013, respectively.

	For the Nine Months Ended
	September 30, 2014 vs. September 30, 2013
	Increase (Decrease) Due To
(Dollars in Thousands)							Net
	Volume			Rate			Change
ASSETS:
Interest bearing certificate of deposit	$	2		$	9		$	11
Interest bearing deposits in banks		(23	)		(10	)		(33	)
Investments - taxable		84			424			508
Investments - nontaxable		(66	)		(110	)		(176	)
Gross loans		1,519			491			2,010
Loans held for sale		(57	)		(3	)		(60	)
Total interest earning assets	$	1,459		$	801		$	2,260

LIABILITIES AND SHAREHOLDERS' EQUITY:
Interest-bearing deposits	$	34		$	(166	)	$	(132	)
Time deposits		(68	)		(123	)		(191	)
FHLB borrowings		3			(8	)		(5	)
Short-term borrowings		-			-			-
Long-term borrowings		-			(10	)		(10	)
Total interest bearing liabilities		(31	)		(307	)		(338	)
Net increase (decrease) in net interest income	$	1,490		$	1,108		$	2,598

Pacific Financial Corporation Profits Increased 51% in Third Quarter 2014 and 29% in First Nine Months of 2014

October 29, 2014

Page 14

SUMMARY AVERAGE BALANCE SHEETS

(Unaudited)
(Dollars in Thousands)
Averages for the Three Months Ended	September 30,			June 30,									September 30,
	2014			2014			$ Change			% Change			2013			$ Change			% Change
Assets:
Cash and due from banks	$	14,169		$	13,135		$	1,034			8	%	$	12,362		$	1,807			15	%
Interest-bearing deposits in banks		23,928			12,552			11,376			91	%		46,665			(22,737	)		-49	%
Interest bearing certificate of deposit		2,727			2,727			0			0	%		1,871			856			46	%
Investment securities		91,397			97,571			(6,174	)		-6	%		93,982			(2,585	)		-3	%

Loans, net of deferred loan fees		555,235			539,106			16,129			3	%		489,056			66,179			14	%
Allowance for loan losses		(8,342	)		(8,271	)		(71	)		1	%		(8,917	)		575			-6	%
Net loans		546,893			530,835			16,058			3	%		480,139			66,754			14	%

Other assets		58,312			59,497			(1,185	)		-2	%		61,191			(2,879	)		-5	%
Total assets	$	737,426		$	716,317		$	21,109			3	%	$	696,210		$	41,216			6	%

Liabilities:
Total deposits	$	634,279		$	618,026		$	16,253			3	%	$	600,242		$	34,037			6	%
Borrowings		24,868			23,409			1,459			6	%		23,403			1,465			6	%
Other liabilities		6,055			4,928			1,127			23	%		4,957			1,098			22	%
Total liabilities		665,202			646,363			18,839			3	%		628,602			36,600			6	%

Equity:
Common equity		72,224			69,954			2,270			3	%		67,608			4,616			7	%
Total equity		72,224			69,954			2,270			3	%		67,608			4,616			7	%

Total liabilities and shareholders' equity	$	737,426		$	716,317		$	21,109			3	%	$	696,210		$	41,216			6	%

Averages for the Nine Months Ended	September 30,			September 30,
	2014			2013			$ Change			% Change
Assets:
Cash and due from banks	$	13,106		$	11,478		$	1,628			14	%
Interest-bearing deposits in banks		18,167			37,359			(19,192	)		-51	%
Interest bearing certificate of deposit		2,727			2,312			415			18	%
Investment securities		96,445			85,418			11,027			13	%

Loans, net of deferred loan fees		536,759			480,404			56,355			12	%
Allowance for loan losses		(8,334	)		(9,218	)		884			-10	%
Net loans		528,425			471,186			57,239			12	%

Other assets		59,427			60,557			(1,130	)		-2	%
Total assets	$	718,297		$	668,310		$	49,987			7	%

Liabilities:
Total deposits	$	618,886		$	572,523		$	46,363			8	%
Borrowings		23,899			23,469			430			2	%
Other liabilities		5,396			4,596			800			17	%
Total liabilities		648,181			600,588			47,593			8	%

Equity:
Common equity		70,116			67,722			2,394			4	%
Total equity		70,116			67,722			2,394			4	%

Total liabilities and shareholders' equity	$	718,297		$	668,310		$	49,987			7	%

ASSET QUALITY

At September 30, 2014, total adversely classified loans increased in dollars and as a percentage of gross loans from the preceding and year ago quarters. This is the result of designating a $4.7 million commercial and commercial real estate relationship as adversely classified during the current quarter. Total loans on accruing status 30-89 days past due continue to remain below 1.00% of gross loans, mirroring the improvement in overall credit quality noted previously. Past due loans increased in the current period primarily from a $2.6 million commercial real estate relationship scheduled to be paid off. We monitor delinquencies, defined as loans on accruing status 30-89 days past due, as an indicator of future adversely classified loans.

At September 30, 2014, total nonperforming loans were down compared to June 30, 2014 and September 30, 2013. Nonperforming assets also declined during this period as a percentage of total assets, despite the increase in OREO during the current quarter. This was primarily due to the payoff of a $1.0 million non-accrual commercial real estate loan during the current quarter. Nonperforming loans consist primarily of commercial real estate loans.

Pacific Financial Corporation Profits Increased 51% in Third Quarter 2014 and 29% in First Nine Months of 2014

October 29, 2014

Page 15

Adversely classified loans

(Unaudited)

(Dollars in Thousands)

	September 30, 2014			June 30, 2014			$ Change			% Change			September 30, 2013			$ Change			% Change

Rated substandard or worse, but not impaired	$	11,020		$	6,938		$	4,082			59	%	$	3,365		$	7,655			227	%
Impaired		7,429			9,025			(1,596	)		-18	%		10,383			(2,954	)		-28	%
Total adversely classified loans*	$	18,449		$	15,963		$	2,486			16	%	$	13,748		$	4,701			34	%

Gross loans	$	553,319		$	548,371		$	4,948			1	%	$	487,808		$	65,511			13	%
Adversely classified loans to gross loans		3.33	%		2.91	%		0.42	%					2.82	%		0.51	%
Allowance for loan losses	$	8,255		$	8,315		$	(60	)		-1	%	$	8,806		$	(551	)		-6	%
Allowance for loan losses as a percentage of adversely classified loans		44.74	%		52.09	%		-7.35	%					64.05	%		-19.31	%
Allowance for loan losses to total impaired loans		111.12	%		92.13	%		18.99	%					84.81	%		26.31	%

* 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)

	September 30, 2014			% of Category			June 30, 2014			% of Category			$ Change			% Change			September 30, 2013			% of Category			$ Change			% Change

Commercial and agricultural	$	7			0.2	%	$	23			16.5	%	$	(16	)		-70	%	$	52			6.7	%	$	(45	)		-87	%
Real estate:
Construction and development					0.0	%		-			0.0	%		-			0	%		-			0.0	%		-			0	%
Residential 1-4 family		251			8.7	%		53			38.1	%		198			374	%		590			76.5	%		(339	)		-57	%
Multi-family					0.0	%		-			0.0	%		-			0	%		-			0.0	%		-			0	%
Commercial real estate — owner occupied					0.0	%		0			0.0	%		0			0	%		87			11.3	%		(87	)		-100	%
Commercial real estate — non owner occupied		2,612			90.9	%		0			0.0	%		2,612			100	%		-			0.0	%		2,612			100	%
Farmland								-			0.0	%		-			0	%		37			4.8	%		(37	)		-100	%
Total real estate	$	2,863					$	53					$	2,810			5302	%	$	714					$	2,149
														-
Consumer		2			0.1	%		63			45.3	%		(61	)		-97	%		5			0.6	%		(3	)		-60	%
Total loans 30-89 days past due, not in nonaccrual status	$	2,872			100.0	%	$	139			100.0	%	$	2,733			1966	%	$	771			100.0	%	$	2,101			273	%

Delinquent loans to total loans, not in nonaccrual status		0.60	%					0.03	%											0.17	%

Non-performing assets

(Unaudited)

(Dollars in Thousands)	September 30, 2014			June 30, 2014			$ Change			% Change			September 30, 2013			$ Change			% Change
Loans on nonaccrual status	$	4,811		$	6,388		$	(1,577	)		-25	%	$	7,829		$	(3,018	)		-39	%
Loans past due greater than 90 days but not on nonaccrual status		409			-			409			100	%		221			188			85	%
Total non-performing loans		5,220			6,388			(1,168	)		-18	%		8,050			(2,830	)		-35	%
Other real estate owned and foreclosed assets		1,210			991			219			22	%		4,334			(3,124	)		-72	%
Total nonperforming assets	$	6,430		$	7,379		$	(949	)		-13	%	$	12,384		$	(5,954	)		-48	%

Percentage of nonperforming assets to total assets		0.86	%		1.03	%								1.73	%

OREO increased during third quarter 2014, but declined significantly year-over-year. One commercial income property was taken into the OREO portfolio during the quarter. OREO valuation adjustments continued to be minimal. At September 30, 2014, the OREO portfolio consisted of 7 properties, down from both second quarter 2014 and third 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.

Pacific Financial Corporation Profits Increased 51% in Third Quarter 2014 and 29% in First Nine Months of 2014

October 29, 2014

Page 16

Other real estate owned and foreclosed assets

(Unaudited)

(Dollars in Thousands)

For the Three Months Ended	September 30, 2014			% of Category			June 30, 2014			% of Category			$ Change			% Change			September 30, 2013			% of Category			$ Change			% Change
Other real estate owned, beginning of period	$	991			81.9	%	$	2,386			240.8	%	$	(1,395	)		-58	%	$	3,451			79.6	%	$	(2,460	)		-71	%
Transfers from outstanding loans		525			43.4	%		206			20.8	%		319			155	%		1,382			31.9	%		(857	)		-62	%
Improvements and other additions		-			0.0	%		-			0.0	%		-			0	%		-			0.0	%		-			0	%
Proceeds from sales		(219	)		-18.1	%		(1,490	)		-150.4	%		1,271			-85	%		(341	)		-7.9	%		122			-36	%
Net gain (loss) on sales		(86	)		-7.1	%		(57	)		-5.8	%		(29	)		51	%		18			0.4	%		(104	)		-578	%
Impairment charges		(1	)		-0.1	%		(54	)		-5.4	%		53			-98	%		(176	)		-4.1	%		175			-99	%
Total other real estate owned	$	1,210			100.0	%	$	991			100.0	%	$	219			22	%	$	4,334			100.0	%	$	(3,124	)		-72	%

For the Nine Months Ended	September 30, 2014			% of Category			September 30, 2013			% of Category			$ Change			% Change
Other real estate owned, beginning of period	$	2,771			229.0	%	$	4,678			107.9	%	$	(1,907	)		-41	%
Transfers from outstanding loans		842			69.6	%		1,591			36.7	%		(749	)		-47	%
Improvements and other additions		-			0.0	%		-			0.0	%		-			0	%
Proceeds from sales		(2,157	)		-178.3	%		(1,342	)		-31.0	%		(815	)		61	%
Net gain (loss) on sales		(179	)		-14.8	%		43			1.0	%		(222	)		-516	%
Impairment charges		(67	)		-5.5	%		(636	)		-14.7	%		569			-89	%
Total other real estate owned	$	1,210			100.0	%	$	4,334			100.0	%	$	(3,124	)		-72	%

Other real estate owned and foreclosed assets by type

(Unaudited)

(Dollars in Thousands)

	September 30, 2014		# of Properties		June 30, 2014		# of Properties		$ Change			% Change			September 30, 2013		# of Properties		$ Change			% Change

Construction, Land Dev & Other Land	$	35		1	$	46		2	$	(11	)		-24	%	$	787		7	$	(752	)		-96	%
1-4 Family Residential Properties		86		2		317		4		(231	)		-73	%		868		6		(782	)		-90	%
Nonfarm Nonresidential Properties		1,089		4		628		4		461			73	%		2,679		13		(1,590	)		-59	%
Total OREO by type	$	1,210		7	$	991		10	$	219			22	%	$	4,334		26	$	(3,124	)		-72	%

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 relevant credit metrics. 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 third quarter 2013.

For the quarter ended September 30, 2014, total net loan charge-offs were up compared to the quarter ended June 30, 2014, but virtually unchanged versus the quarter ended September 30, 2013. The charge-offs incurred in the third quarter 2014 were primarily centered in one commercial real estate loan, which was written down $127,000 prior to transfer to OREO. The ratio of net loan charge-offs to average gross loans (annualized) for the current quarter was up compared to the prior quarter, but unchanged from the third 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.

Pacific Financial Corporation Profits Increased 51% in Third Quarter 2014 and 29% in First Nine Months of 2014

October 29, 2014

Page 17

Allowance for Loan Losses

(Unaudited)

(Dollars in Thousands)

For the Three Months Ended	September 30, 2014			June 30, 2014			$ Change			% Change			September 30, 2013			$ Change			% Change

Gross loans outstanding at end of period	$	553,319		$	548,371		$	4,948			1	%	$	487,808		$	65,511			13	%
Average loans outstanding, gross	$	549,280		$	532,490		$	16,790			3	%	$	483,459		$	65,821			14	%
Allowance for loan losses, beginning of period	$	8,315		$	8,288		$	27			0	%	$	8,962		$	(647	)		-7	%
Commercial		0			(9	)		9			-100	%		(40	)		40			-100	%
Commercial Real Estate		(126	)		(389	)		263			-68	%		(37	)		(89	)		241	%
Residential Real Estate		(61	)		(4	)		(57	)		1425	%		(29	)		(32	)		110	%
Consumer		(12	)		(29	)		17			-59	%		(79	)		67			-85	%
Total charge-offs		(199	)		(431	)		232			-54	%		(185	)		(14	)		8	%
Commercial		7			1			6			600	%		20			(13	)		-65	%
Commercial Real Estate		28			347			(319	)		-92	%		5			23			460	%
Residential Real Estate		3			9			(6	)		-67	%		3			0			0	%
Consumer		1			1			-			0	%		1			0			0	%
Total recoveries		39			358			(319	)		-89	%		29			10			34	%
Net charge-offs		(160	)		(73	)		(87	)		119	%		(156	)		(4	)		3	%
Provision charged to income		100			100			0			0	%		-			100			100	%
Allowance for loan losses, end of period	$	8,255		$	8,315		$	(60	)		-1	%	$	8,806		$	(551	)		-6	%
Ratio of net loans charged-off to average gross loans outstanding, annualized		0.12	%		0.05	%		0.07	%		140	%		0.13	%		-0.01	%		-8	%

Ratio of allowance for loan losses to gross loans outstanding		1.49	%		1.52	%		-0.03	%		-2	%		1.81	%		-0.32	%		-18	%

For the Nine Months Ended	September 30, 2014			September 30, 2013			$ Change			% Change

Gross loans outstanding at end of period	$	553,319		$	487,808		$	65,511			13	%
Average loans outstanding, gross	$	531,517		$	471,702		$	59,815			13	%
Allowance for loan losses, beginning of period	$	8,359		$	9,358		$	(999	)		-11	%
Commercial		(26	)		(40	)		14			-35	%
Commercial Real Estate		(509	)		(83	)		(426	)		513	%
Residential Real Estate		(67	)		(95	)		28			-29	%
Consumer		(110	)		(145	)		35			-24	%
Total charge-offs		(712	)		(363	)		(349	)		96	%
Commercial		9			35			(26	)		-74	%
Commercial Real Estate		380			220			160			73	%
Residential Real Estate		16			4			12			300	%
Consumer		3			2			1			50	%
Total recoveries		408			261			147			56	%
Net charge-offs		(304	)		(102	)		(202	)		198	%
Provision charged to income		200			(450	)		650			-144	%
Allowance for loan losses, end of period	$	8,255		$	8,806		$	(551	)		-6	%
Ratio of net loans charged-off to average gross loans outstanding, annualized		0.08	%		0.03	%		0.05	%		167	%
Ratio of allowance for loan losses to gross loans outstanding		1.49	%		1.81	%		-0.32	%		-18	%

Pacific Financial Corporation Profits Increased 51% in Third Quarter 2014 and 29% in First Nine Months of 2014

October 29, 2014

Page 18

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 September 30, 2014, the Company had total assets of $749 million and operated 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. 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.

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