PACIFIC FINANCIAL CORP

On April 28, 2015, the Company, relying on Section 12(g)(4) of the Securities Exchange Act of 1934, as amended by the Jumpstart Our Business Startups Act (the "Exchange Act"), filed Form 15 to terminate the registration of its common stock under Section 12(g) of the Exchange Act. The Company intends to seek suspension or termination of its obligations to file with the Securities and Exchange Commission ("SEC") periodic and current reports under the Exchange Act, and believes that a termination or suspension will be achieved within 90 days after filing of the Form 15. Upon the effectiveness of its deregistration, the Company’s obligations to comply with the periodic and current reporting requirements of, and the proxy rules , under the Exchange Act will be terminated, as will the obligations of the Company's officers and directors to file reports under Section 16 of the Exchange Act. The Company anticipates that its common stock will continue to trade on the OTCQB exchange under its existing stock symbol “PFLC.”

The slight decrease in noninterest income from fourth quarter 2014 was due to a variety of factors, including slight declines in service charge income on deposit accounts, along with other miscellaneous sources of fee income, arising out of seasonal declines in economic activity. Gains on sale of residential mortgage loans were unchanged in the current quarter compared to the linked quarter, but up significantly when compared to first quarter 2014. In addition, gains on sales of securities were taken in the first quarter of 2014 for the purpose of adjusting the mix of securities to mitigate the impact of potential changes in market rates on the value of the portfolio. A small OTTI impairment charge was expensed during first quarter 2014 to reflect a reduction in fair value of a private-label CMO investment security.

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

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

Net interest margin (“NIM”) for first quarter 2015 increased as compared to fourth quarter and first quarter 2014, predominantly due to a shift in the mix of earning assets toward higher-yielding loans. NIM was also favorably impacted by 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 NIM as well. In first quarter 2014, loan yields and net interest margin were each enhanced by 7 basis points due to the collection of $108,000 in non-accrual interest. Improvement in yields on investment securities also contributed to the increase in net interest margin between the periods, partially due to a decline in amortization expense associated with a decrease in prepayment speeds of mortgage-backed securities during the current period. In addition, the Company reduced the proportion of lower yielding cash-equivalent investments and increased the proportion of relatively higher-yielding federal government guaranteed and municipal securities during the first quarter of 2015.