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Pacific Financial Corporation Earnings Increase 17% in Third Quarter 2015, Driven by Loan Growth, Solid Net Interest Margin and Increased Noninterest Income; Year-to-Date 2015 Earnings Grow 12%

ABERDEEN, Wash., Oct. 22, 2015 (GLOBE NEWSWIRE) -- Pacific Financial Corporation (OTCQB:PFLC), the holding company for Bank of the Pacific today reported net income of $1.6 million, or $0.15 per share, for the third quarter of 2015, compared to $1.6 million, or $0.15 per share for the second quarter of 2015, and grew 17% from $1.4 million, or $0.13 per share, for the third quarter a year ago. Year-to-date, net income increased 12% to $4.3 million, or $0.41 per share, from $3.8 million, or $0.37 per share, for the like period in 2014. Driving profitability in 2015 was robust loan growth, solid net interest margin and increased noninterest income.

"We continued to post solid profitability in the third quarter, powered by sustained lending activity and strong residential real estate mortgage revenue," said Denise Portmann, President & Chief Executive Officer. "Additions to our lending teams at the beginning of the year have generated 10% loan growth year-over-year. Mortgage loan originations were up 42% year-over-year, reflecting the continued improvement in our local economy."

"Our expansion into the Salem, Oregon market with a new loan production office (LPO) earlier this year is going well. This office, staffed with a team of experienced bankers, is already making a meaningful contribution to loan growth," added Portmann. "We expect to generate solid core deposits, build commercial relationships, deepen our residential mortgage penetration and expand our franchise into this and other growth markets in Western Washington and Oregon."

Third Quarter 2015 Highlights (as of, or for the period ended September 30, 2015, except as noted):

  • Earnings per share (EPS) were $0.15, as compared to $0.15 in the linked quarter, and grew 15% from third quarter 2014. Year-to-date, EPS increased 11% to $0.41, from the same period in 2014.
  • Net interest income grew $96,000, or 1%, to $7.4 million, compared to $7.3 million for the immediate prior quarter, and grew 7% from $6.9 million in the third quarter of 2014. Year-to-date, net interest income increased 7% to $21.6 million from the like period in 2014.
  • Net interest margin (NIM), on a tax equivalent basis, declined to 4.06%, as compared to 4.16% in the preceding quarter and 4.13% for third quarter 2014. Interest rate risk strategies implemented during the current quarter involved a modest addition of higher-cost longer-term fixed rate funding and lower-yielding LIBOR-based floating rate loans, impacting net interest margin. Year-to-date, net interest margin was 4.12% compared to 4.22% for the same period in 2014. NIM in 2014 was enhanced by the one-time collection of nonaccrual interest during the period.
  • Total assets increased 4% to $814.9 million from $786.5 at June 30, 2015, and grew 9% from $749.0 million at September 30, 2014.
  • Gross loans increased 1% to $609.5 million compared to the second quarter 2015 and grew 10% from a year ago.
  • Total deposits were $705.1 million, compared to $664.8 million at June 30, 2015, and increased 9% from a year ago. Non-interest bearing demand deposits grew 5% on a linked quarter basis and decreased 2% over the third quarter of 2014.
  • Classified loans declined to $14.5 million, or 2.37% of gross loans versus 2.67% and 3.33% at June 30, 2015 and September 30, 2014, respectively. Similarly, nonperforming assets decreased to $5.9 million, or 0.72% of total assets as compared to 0.94% at the linked quarter and 0.86% a year ago. The Company experienced net recoveries of $244,000, or -0.16% of average gross loans resulting from the payoff of a $1.1 million nonaccrual loan during the current period. Loans 30 – 89 days delinquent not in nonaccrual status stood at 0.08% of total loans outstanding.

Operating Results

Total assets grew 4% from the linked quarter and 9% year-over-year. This increase in assets was primarily due to the growth in loans, funded by increases in core deposits and longer-term brokered deposits. In addition, cash and cash equivalents grew, due in part, to seasonal deposit inflows attributed to economic activity associated with increased tourism activity during the current period in some of our markets. Liquidity remains strong, including ample unused borrowing capacity. Capital ratios continue to exceed the thresholds to be considered "Well-Capitalized" under published regulatory standards.

Net interest income increased from the immediate quarter and from the like quarter a year ago. This increase reflects growth in earning assets and changes in the balance sheet mix. Loan balances increased due to loan production generated predominately in Western Washington and Oregon. The increased deposits were primarily retained in fed funds sold due to the prospect of continued loan growth anticipated by the Company's loan pipeline and expected seasonal declines in deposits in the coming winter months. Funding costs increased slightly due to a modest addition of higher-cost longer-term fixed-rate funding to lengthen liability maturities for interest rate risk management purposes. Loan yields decreased slightly, primarily due to the growth in lower-yielding LIBOR-based floating-rate loans, as mentioned above. As a result, net interest margin declined slightly during the immediate quarter 2015.

Balance Sheet Overview
(Unaudited)
(Dollars in Thousands, Except per Share Data)
September 30, June 30, $ % September 30, $ %
2015 2015 Change Change 2014 Change Change
Assets:
Cash and cash equivalents $ 48,904 $ 16,965 $ 31,939 188% $ 40,781 $ 8,123 20%
Interest-bearing certificates of deposit 2,727 2,727 0 0% 2,727 0 0%
Federal Home Loan Bank and Pacific Coast Banker's Bank stock, at cost 2,348 2,949 (601) -20% 3,926 (1,578) -40%
Investment securities 89,702 90,976 (1,274) -1% 91,185 (1,483) -2%
Loans held-for-sale 9,799 16,482 (6,683) -41% 8,161 1,638 20%
Gross loans, net of deferred fees 609,475 603,562 5,913 1% 552,140 57,335 10%
Allowance for loan losses (8,756) (8,347) (409) 5% (8,255) (501) 6%
Net loans 600,719 595,215 5,504 1% 543,885 56,834 10%
Other assets 60,657 61,228 (571) -1% 58,382 2,275 4%
Total assets $ 814,856 $ 786,542 $ 28,314 4% $ 749,047 $ 65,809 9%
Liabilities and shareholders' equity:
Total deposits $ 705,100 $ 664,816 $ 40,284 6% $ 644,004 $ 61,096 9%
Accrued interest payable 141 151 (10) -7% 141 0 0%
Borrowings 24,744 39,781 (15,037) -38% 24,894 (150) -1%
Other liabilities 7,386 6,542 844 13% 6,751 635 9%
Shareholders' equity 77,485 75,252 2,233 3% 73,257 4,228 6%
Total liabilities and shareholders' equity $ 814,856 $ 786,542 $ 28,314 4% $ 749,047 $ 65,809 9%
Common Stock Shares Outstanding 10,384,997 10,380,492 4,505 0% 10,213,334 171,663 2%
Book value per common share (1) $ 7.46 $ 7.25 $ 0.21 3% $ 7.17 $ 0.29 4%
Tangible book value per common share (2) $ 6.15 $ 5.94 $ 0.21 4% $ 5.84 $ 0.31 5%
Net loans to deposits ratio 85.2% 89.5% 84.5%
(1) Book value per common share is calculated as the total common shareholders' equity divided by the period ending number of common stock shares outstanding.
(2) Tangible book value per common share is calculated as the total common shareholders' equity less total intangible assets and liabilities, divided by the period ending number of common stock shares outstanding.
Income Statement Overview
(Unaudited)
(Dollars in Thousands, Except per Share Data)
For the Three Months Ended,
September 30,
2015

June 30, 2015

$ Change

% Change
September 30,
2014

$ Change

% Change
Interest and dividend income $ 7,946 $ 7,817 $ 129 2% $ 7,400 $ 546 7%
Interest expense 561 528 33 6% 518 43 8%
Net interest income 7,385 7,289 96 1% 6,882 503 7%
Loan loss provision 165 187 (22) -12% 100 65 65%
Noninterest income 2,686 2,823 (137) -5% 2,274 412 18%
Noninterest expense 7,709 7,732 (23) 0% 7,133 576 8%
Income before provision for income taxes 2,197 2,193 4 0% 1,923 274 14%
Provision for income taxes 596 611 (15) -2% 549 47 9%
Net Income $ 1,601 $ 1,582 $ 19 1% $ 1,374 $ 227 17%
Average common shares outstanding - basic 10,384,997 10,380,542 4,455 0% 10,281,745 103,252 1%
Average common shares outstanding - diluted 10,520,581 10,504,376 16,205 0% 10,379,166 141,415 1%
Income per common share
Basic $ 0.15 $ 0.15 $ -- 0% $ 0.13 $ 0.02 15%
Diluted $ 0.15 $ 0.15 $ -- 0% $ 0.13 $ 0.02 15%
For the Nine Months Ended,
September 30,
2015
September
30, 2014

$ Change

% Change
Interest and dividend income $ 23,196 $ 21,821 $1,375 6%
Interest expense 1,598 1,589 9 1%
Net interest income 21,598 20,232 1,366 7%
Loan loss provision 382 200 182 91%
Noninterest income 7,482 6,058 1,424 24%
Noninterest expense 22,925 21,028 1,897 9%
Income before provision for income taxes 5,773 5,062 711 14%
Provision for income taxes 1,493 1,257 236 19%
Net Income $ 4,280 $ 3,805 $ 475 12%
Average common shares outstanding - basic 10,379,742 10,218,103 161,639 2%
Average common shares outstanding - diluted 10,523,625 10,309,436 214,189 2%
Income per common share
Basic $ 0.41 $ 0.37 $ 0.04 11%
Diluted $ 0.41 $ 0.37 $ 0.04 11%

Noninterest Income

Noninterest income was down 5% from the linked quarter, primarily due to one-time gains in second quarter 2015, such as income from, and sale of, other real estate owned. In addition, gains on sale of investment securities were taken in the linked quarter as part of a realignment in the mix of securities to mitigate the impact of potential changes in market rates on the value of the portfolio. Noninterest income increased 18% from the third quarter in 2014, primarily due to the increase in gains on sale of residential mortgage loans when compared to the year-over-year quarter. This was mainly due to recent increases in residential real estate sales which benefitted from continued improvement of the local economy. For the three and nine months ended 2015, other non-interest income fell, primarily as a result of lower annuity commission revenue earned versus the like periods in 2014.

Noninterest Income
(Unaudited)
(Dollars in Thousands)
For the Three Months Ended,

September
30, 2015


June 30, 2015

$
Change

%
Change
September
30,
2014

$
Change


% Change
Service charges on deposit accounts $ 451 $ 436 $ 15 3% $ 450 $ 1 0%
Net gain (loss) on sale of other real estate owned 57 89 (32) -36% (85) 142 167%
Net gain from sale of loans 1,464 1,426 38 3% 1,120 344 31%
Net gain on sale of securities available for sale -- 53 (53) -100% 38 (38) -100%
Earnings on bank owned life insurance 120 126 (6) -5% 127 (7) -6%
Other noninterest income
Fee income 553 549 4 1% 498 55 11%
Income from other real estate owned -- 67 (67) -100% 6 (6) -100%
Other 41 77 (36) -47% 120 (79) -66%
Total noninterest income $ 2,686 $ 2,823 $ (137) -5% $ 2,274 $ 412 18%
For the Nine Months Ended,
September 30,
2015
September 30,
2014
$
Change
%
Change
Service charges on deposit accounts $ 1,314 $ 1,359 $ (45) -3%
Net gain (loss) on sale of other real estate owned 140 (179) 319 178%
Net gain from sale of loans 3,844 2,717 1,127 41%
Net gain on sale of securities available for sale 53 88 (35) -40%
Net other-than-temporary impairment -- (48) 48 100%
Earnings on bank owned life insurance 368 378 (10) -3%
Other noninterest income
Fee income 1,541 1,340 201 15%
Income from other real estate owned 67 34 33 97%
Other 155 369 (214) -58%
Total noninterest income $ 7,482 $ 6,058 $ 1,424 24%

Noninterest Expense

Noninterest expense was unchanged compared to the immediate prior quarter. Increases in costs incurred in operating other real estate owned were offset by declines in data processing costs and expenses associated with providing a reserve for unfunded commitments. Current quarter reductions in data processing expenses were achieved through the renegotiation of the Company's core processing contract in the linked quarter. Noninterest expense was also up 9% compared to the year-over-year quarter. In addition to higher commission expenses associated with increased residential real estate loan production, further salary and benefit expense was incurred as a result of the opening of our Salem, Oregon LPO at the beginning of 2015.

Noninterest expense was also up 9% for the first nine months of 2015 compared to the same period in 2014. This increase was primarily due to additional salary and benefit expense associated with the opening of our Salem LPO, increased commissions paid to residential real estate mortgage lenders reflecting higher production volume, and annual increases in salary and health benefit plan expenses. The increase in other noninterest expense year-to-date was related to establishment of a reserve for unfunded commitments of $143,000, which is further explained under the subheading "Allowance for Loan Losses".

Noninterest Expense
(Unaudited)
(Dollars in Thousands)
For the Three Months Ended,
September 30,
2015
June 30,
2015
$
Change
%
Change
September 30,
2014
$
Change

% Change
Salaries and employee benefits $ 4,868 $ 4,837 $ 31 1% $ 4,286 $ 582 14%
Occupancy 480 485 (5) -1% 483 (3) -1%
Equipment 271 250 21 8% 261 10 4%
Data processing 451 471 (20) -4% 492 (41) -8%
Professional services 194 190 4 2% 220 (26) -12%
Other real estate owned write-downs -- 74 (74) -100% 1 (1) -100%
Other real estate owned operating costs 80 -10 90 N/M 100 (20) -20%
State taxes 125 120 5 4% 110 15 14%
FDIC and state assessments 131 133 (2) -2% 119 12 10%
Other noninterest expense:
Director fees 71 83 (12) -14% 80 (9) -11%
Communication 63 62 1 2% 65 (2) -3%
Advertising 88 81 7 9% 73 15 21%
Professional liability insurance 25 15 10 67% 24 1 4%
Amortization 85 88 (3) -3% 99 (14) -14%
Other 777 853 (76) -9% 720 57 8%
Total noninterest expense $ 7,709 $ 7,732 $ (23) 0% $ 7,133 $ 576 8%
For the Nine Months Ended,
September 30,
2015
September 30,
2014
$
Change
%
Change
Salaries and employee benefits $ 14,283 $ 12,624 $ 1,659 13%
Occupancy 1,487 1,494 (7) 0%
Equipment 788 775 13 2%
Data processing 1,400 1,387 13 1%
Professional services 511 606 (95) -16%
Other real estate owned write-downs 104 67 37 55%
Other real estate owned operating costs 87 191 (104) -54%
State taxes 347 314 33 11%
FDIC and state assessments 397 381 16 4%
Other noninterest expense:
Director fees 225 208 17 8%
Communication 185 155 30 19%
Advertising 265 227 38 17%
Professional liability insurance 62 65 (3) -5%
Amortization 256 291 (35) -12%
Other 2,528 2,243 285 13%
Total noninterest expense $ 22,925 $ 21,028 $ 1,897 9%
Financial Performance Overview
(Unaudited)
For the Three Months Ended
September 30,
2015
June 30,
2015

Change
September 30,
2014

Change
Performance Ratios
Return on average assets, annualized 0.79% 0.80% (0.01) 0.74% 0.05
Return on average equity, annualized 8.30% 8.24% 0.06 7.55% 0.75
Efficiency ratio (1) 76.55% 76.62% (0.07) 77.91% (1.36)
For the Nine Months Ended
September 30,
2015
September 30,
2014

Change
Performance Ratios
Return on average assets, annualized 0.74% 0.71% 0.03
Return on average equity, annualized 7.62% 7.26% 0.36
Efficiency ratio (1) 78.83% 79.98% (1.15)
(1) Non-interest expense divided by net interest income plus noninterest income.

LIQUIDITY

Cash and Cash Equivalents and Investment Securities
(Unaudited)
(Dollars in Thousands)
Sept 30,
2015
% of
Total
June 30,
2015
% of
Total
$
Change
%
Change
Sept 30,
2014
% of
Total
$
Change
%
Change
Cash and due from banks $ 12,613 9% $ 16,431 15% $ (3,818) -23% $ 15,284 11% $ (2,671) -17%
Cash equivalents:
Interest-bearing deposits 36,291 25% 534 0% 35,757 N/M 25,497 18% 10,794 42%
Interest-bearing certificates of deposit 2,727 2% 2,727 2% -- 0% 2,727 2% -- 0%
Total cash equivalents and certificate of deposits 51,631 36% 19,692 17% 31,939 162% 43,508 31% 8,123 19%
Investment securities:
Collateralized mortgage obligations: agency issued 36,377 25% 38,479 34% (2,102) -5% 40,039 30% (3,662) -9%
Collateralized mortgage obligations: non-agency issued 483 0% 483 0% 0 0% 579 0% (96) -17%
Mortgage-backed securities: agency issued 9,349 7% 9,468 8% (119) -1% 12,630 9% (3,281) -26%
U.S. Government and agency securities 10,026 7% 10,004 9% 22 0% 8,655 6% 1,371 16%
State and municipal securities 33,467 23% 32,542 29% 925 3% 29,282 21% 4,185 14%
FHLB Stock, at cost 1,348 1% 1,949 2% (601) -31% 2,926 2% (1,578) 100%
Pacific Coast Bankers' Bank stock, at cost 1,000 1% 1,000 1% -- 0% 1,000 1% 0 0%
Total investment securities 92,050 64% 93,925 83% (1,875) -2% 95,111 69% (3,061) -3%
Total cash equivalents and investment securities $ 143,681 100% $ 113,617 100% $ 30,064 26% $ 138,619 100% $ 5,062 4%
Total cash equivalents and investment securities
as a % of total assets 18% 14% 19%

Liquidity remains strong based on current levels of combined cash equivalents, investment securities and unused borrowing capacity. "In anticipation of additional loan growth, we retained a higher level of cash equivalents as compared to the linked quarter," said Douglas N. Biddle, EVP and Chief Executive Officer. "Our investment securities include a large component of fully amortized U.S. agency mortgage-backed securities, for which we expect to have limited extension risk." The securities portfolio also contains municipal securities rated A or better. The expected modified duration (adjusted for calls, consensus pre-payment speeds and rate adjustment dates) of the investment portfolio was 3.6 years at September 30. 2015, 4.2 years at June 30, 2015 and 4.3 years at September 30, 2014.

The Bank had $11.3 million in outstanding borrowings against its $167.2 million in established borrowing capacity with the Federal Home Loan Bank of Des Moines (FHLB) as of September 30, 2015. The Bank had $26.4 million and $11.5 million outstanding in FHLB borrowings at June 30, 2015 and September 30, 2014 respectively. The borrowing capacity at the FHLB was $156.3 million and $143.8 million at June 30, 2015 and September 30, 2014 respectively. The Bank's borrowing facility with the FHLB is subject to collateral and stock ownership requirements. The Bank also had available a discount window primary credit line with the Federal Reserve Bank of San Francisco of approximately $66.7 million, subject to collateral requirements, and $16.0 million from correspondent banks, with no balance outstanding on either of these facilities.

LOANS

Loans by Category
(Unaudited) Sept 30, % of June 30, % of $ % Sept 30, % of $ %
(Dollars in Thousands) 2015 Gross Loans 2015 Gross Loans Change Change 2014 Gross Loans Change Change
Commercial and agricultural $ 120,818 20% $ 121,435 20% $ (617) -1% $ 112,873 20% $ 7,945 7%
Real estate:
Construction and development 35,071 6% 32,382 5% 2,689 8% 25,419 5% 9,652 38%
Residential 1-4 family 96,182 16% 94,616 16% 1,566 2% 94,101 17% 2,081 2%
Multi-family 24,797 4% 24,617 4% 180 1% 20,554 4% 4,243 21%
Commercial real estate -- owner occupied 134,092 22% 134,680 22% (588) 0% 122,090 22% 12,002 10%
Commercial real estate -- non owner occupied 130,977 21% 127,654 21% 3,323 3% 120,569 22% 10,408 9%
Farmland 19,951 3% 21,958 4% (2,007) -9% 22,926 4% (2,975) -13%
Consumer 48,998 8% 47,616 8% 1,382 3% 34,787 6% 14,211 41%
Gross loans 610,886 100% 604,958 100% 5,928 1% 553,319 100% 57,567 10%
Less: allowance for loan losses (8,756) (8,347) (409) (8,255) (501)
Less: deferred fees (1,411) (1,396) (15) (1,179) (232)
Loans, net $ 600,719 $ 595,215 $ 5,504 $ 543,885 $ 56,834

Loan portfolio growth continues to be well-diversified, with higher balances in most lending categories. The recent loan growth was generated predominately within the Western Washington and Oregon markets. The portfolio does include $30.2 million in purchased government-guaranteed commercial and commercial real estate loans. In addition, the portfolio contains $37.8 million in indirect consumer loans to finance luxury and classic cars as a part of a strategy to diversify the loan portfolio. These loans, which have been an important component in the $14.3 million, or 44%, increase in consumer loans over the prior year, have been made to individuals with high credit scores and have exhibited very low loss experience to date. The Company manages new loan origination volume using concentration limits that establish maximum exposure levels by designated industry segment, real estate product types, geography, and single borrower limits.

DEPOSITS

Deposits
(Unaudited)
(Dollars in Thousands)
Sept 30,
2015
% of
Total
June 30,
2015
% of
Total
$
Change
%
Change
Sept 30,
2014
% of
Total
$
Change
%
Change
Interest-bearing demand and money market $ 298,993 42% $ 284,844 43% $ 14,149 5% $ 266,863 42% $ 32,130 12%
Savings 88,561 13% 81,619 12% 6,942 9% 76,661 12% 11,900 16%
Time deposits 138,200 20% 127,809 19% 10,391 8% 118,221 18% 19,979 17%
Total interest-bearing deposits 525,754 75% 494,272 74% 31,482 6% 461,745 72% 64,009 14%
Non-interest bearing demand 179,346 25% 170,544 26% 8,802 5% 182,259 28% (2,913) -2%
Total deposits $ 705,100 100% $ 664,816 100% $ 40,284 6% $ 644,004 100% $ 61,096 9%

Total deposits grew during the current quarter, primarily due to seasonal deposit inflows attributed to economic activity associated with increased tourism activity during the current period in some of our markets. In addition, the increase is partially due to recent successes in acquiring business deposit relationships in conjunction with the growth in lending achieved over the past year. The purposeful addition of longer-term fixed rate time deposits for interest rate risk management purposes did result in raising the average rate paid on total deposits during the quarter.

Total brokered deposits were $44.6 million, which included $1.3 million via reciprocal deposit arrangements, up from $28.9 million and $22.7 million at June 30, 2015 and September 30, 2014, respectively. The brokered deposits acquired during the quarter had fixed rates with terms ranging from 2 to 5 years. "These deposits were obtained to lock in historically low rates to implement interest rate risk mitigation strategies," explained Biddle.

CAPITAL

Pacific Financial Corporation ("Company"), and its subsidiary Bank of the Pacific ("Bank"), met the thresholds to be considered "Well-Capitalized" under published regulatory standards for total risk-based capital, Tier 1 risk-based capital, Common equity Tier 1 and Tier 1 leverage capital. Capital ratios have generally increased as compared to the second quarter of 2015 due to a decline in risk-weighted assets during the current period. The increased deposits experienced during the quarter were primarily retained in fed funds sold due to the prospect of continued loan growth anticipated by the Company's loan pipeline and expected seasonal declines in deposits in the coming winter months However, the current period ratios have decreased as compared to the same quarter a year ago, primarily due to the successful execution of the Company's growth strategy and shift in balance sheet mix to higher risk-weighted assets, such as loans.

The Federal Deposit Insurance Corporation ("FDIC") has established minimum requirements for capital adequacy for state non-member banks under the Basel III capital framework. On April 9, 2015, The Board of Governors of the Federal Reserve System ("Federal Reserve") issued a final rule to amend the Small Bank Holding Company Policy Statement. With this amendment, small bank holding companies, including Pacific Financial Corporation, will not be subject to Basel III capital rules. For illustrative purposes, Basel III framework capital ratios are displayed below for both the Company and the Bank.

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 under guidance issued by the Federal Reserve. As provided in the Dodd-Frank Act, the Company expects to continue to rely on these junior subordinated debentures as part of its regulatory capital.

The following table summarizes the capital measures of the Company and the Bank respectively, at the dates listed below.



Sept 30,
2015


June 30,
2015



Change


Sept 30,
2014



Change
Regulatory
Minimum to be
"Well
Capitalized"*
greater than or
equal to
Pacific Financial Corporation
Total risk-based capital ratio 13.35% 12.87% 0.48 14.09% (0.74) 10.5%
Tier 1 risk-based capital ratio 12.10% 11.62% 0.48 12.83% (0.73) 8.5%
Common equity tier 1 ratio 10.06% 9.62% 0.44 n/a n/a 7.0%
Leverage ratio 9.83% 9.90% (0.07) 10.09% (0.26) 5.0%
Tangible common equity ratio 7.98% 7.98% -- 8.11% (0.13) n/a
Bank of the Pacific
Total risk-based capital ratio 13.31% 12.84% 0.47 13.87% (0.56) 10.5%
Tier 1 risk-based capital ratio 12.05% 11.59% 0.46 12.61% (0.56) 8.5%
Common equity tier 1 ratio 12.05% 11.59% 0.46 n/a n/a 7.0%
Leverage ratio 9.79% 9.88% (0.09) 9.91% (0.12) 5.0%
*Includes Basel III Capital Conservation Buffer

Net Interest Margin

Net interest margin declined slightly compared to the second quarter of 2015, predominantly due to a modest addition of higher-cost longer-term fixed rate funding and lower-yielding LIBOR-based floating rate loans for interest rate risk management purposes. Net interest margin declined as compared to the year-over-year quarter and year-to-date for the prior year. In both periods of 2014, loan yields and net interest margin were each enhanced by 7 and 5 basis points respectively, due to the collection of non-accrual interest.

The decline in yields on investment securities also contributed to the decrease in net interest margin from the preceding quarter. This was primarily due to some realignment of the composition of the portfolio toward the end of the linked quarter to mitigate the impact of potential changes in market rates on the value of the portfolio. In addition, the proportion of lower yielding cash-equivalent investments was increased when compared to the second quarter 2015 in anticipation of continued loan growth, as noted above.

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.

Net Interest Margin
(Annualized, tax-equivalent basis)
(Unaudited)
For the Three Months Ended,
Sept 30,
2015
June 30,
2015
$
Change
%
Change
Sept 30,
2014
$
Change
%
Change
Average Balances
Gross loans $ 605,552 $ 594,741 $ 10,811 2% $ 549,280 $ 56,272 10%
Loans held for sale $ 11,787 $ 14,713 $ (2,926) -20% $ 7,068 $ 4,719 67%
Investment securities $ 118,102 $ 107,074 $ 11,028 10% $ 118,052 $ 50 0%
Total interest-earning assets $ 735,441 $ 716,528 $ 18,913 3% $ 674,400 $ 61,041 9%
Non-interest bearing demand deposits $ 181,091 $ 168,967 $ 12,124 7% $ 170,560 $ 10,531 6%
Interest bearing deposits $ 506,257 $ 491,750 $ 14,507 3% $ 463,719 $ 42,538 9%
Borrowings $ 28,794 $ 34,809 $ (6,015) -17% $ 24,868 $ 3,926 16%
Total interest-bearing liabilities $ 535,051 $ 526,559 $ 8,492 2% $ 488,587 $ 46,464 10%
Total Equity $ 76,540 $ 75,164 $ 1,376 2% $ 72,224 $ 4,316 6%
Sept 30,
2015
June 30,
2015

Change
Sept 30,
2014

Change
Net Interest Margin
Yield on average gross loans (1) 4.83% 4.84% (0.01) 4.95% (0.12)
Yield on average investment securities (1) 1.95% 2.26% (0.31) 2.02% (0.07)
Cost of average interest bearing deposits 0.34% 0.33% 0.01 0.34% --
Cost of average borrowings 1.67% 1.43% 0.24 1.83% (0.16)
Cost of average total deposits and borrowings 0.31% 0.30% 0.01 0.31% --
Yield on average interest-earning assets 4.37% 4.46% (0.09) 4.44% (0.07)
Cost of average interest-bearing liabilities 0.42% 0.40% 0.02 0.42% --
Net interest spread 3.95% 4.06% (0.11) 4.02% (0.07)
Net interest margin (1) 4.06% 4.16% (0.10) 4.13% (0.07)
(1) Tax-exempt income has been adjusted to a tax equivalent basis at a 34% rate.
For the Nine Months Ended
Sept 30,
2015
Sept 30,
2014
$
Change
%
Change
Average Balances
Gross loans $ 589,499 $ 531,517 $ 57,982 11%
Loans held for sale $ 11,097 $ 6,348 $ 4,749 75%
Investment securities $ 113,745 $ 117,339 $ (3,594) -3%
Interest-earning assets $ 714,341 $ 655,204 $ 59,137 9%
Non-interest bearing demand deposits $ 172,534 $ 154,213 $ 18,321 12%
Interest bearing deposits $ 492,989 $ 464,673 $ 28,316 6%
Borrowings $ 29,498 $ 23,899 $ 5,599 23%
Interest-bearing liabilities $ 522,487 $ 488,572 $ 33,915 7%
Total Equity $ 75,067 $ 70,116 $ 4,951 7%
Sept 30,
2015
Sept 30,
2014

Change
Net Interest Margin
Yield on average gross loans (1) 4.86% 5.04% (0.18)
Yield on average investment securities (1) 2.10% 2.30% (0.20)
Cost of average interest bearing deposits 0.34% 0.36% (0.02)
Cost of average borrowings 1.63% 1.90% (0.27)
Cost of average total deposits and borrowings 0.31% 0.33% (0.02)
Yield on average interest-earning assets 4.42% 4.55% (0.13)
Cost of average interest-bearing liabilities 0.41% 0.43% (0.02)
Net interest spread 4.01% 4.12% (0.11)
Net interest margin (1) 4.12% 4.22% (0.10)
(1) Tax-exempt income has been adjusted to a tax equivalent basis at a 34% rate.

ASSET QUALITY

Adversely classified loans declined compared to the preceding quarter and the like quarter a year ago. This current decrease is primarily due to the payoff of a nonaccrual commercial real estate loan relationship totaling $1.1 million. Total 30-89 day delinquencies remained below 0.50%, mirroring the continued improvement in overall credit quality.

Adversely Classified Loans and Securities
(Unaudited)
(Dollars in Thousands)
Sept 30,
2015
June 30,
2015
$
Change
%
Change
Sept 30,
2014
$
Change

% Change
Rated substandard or worse, but not impaired $ 9,803 $ 10,442 $ (639) -6% $ 11,020 $ (1,217) -11%
Impaired 4,681 5,715 (1,034) -18% 7,429 (2,748) -37%
Total adversely classified loans¹ $ 14,484 $ 16,157 $ (1,673) -10% $ 18,449 $ (3,965) -21%
Total investment securities² $ 179 $ 189 $ (10) -5% $ 228 $ (49) -21%
Gross loans (excluding deferred loan fees) $ 610,886 $ 604,958 $ 5,928 1% $ 553,319 $ 57,567 10%
Adversely classified loans to gross loans 2.37% 2.67% 3.33%
Allowance for loan losses $ 8,756 $ 8,347 $ 409 5% $ 8,255 $ 501 6%
Allowance for loan losses as a percentage of adversely classified loans 60.45% 51.66% 44.74%
Allowance for loan losses to total impaired loans 187.05% 146.05% 111.12%
Adversely classified loans and securities to total assets 1.80% 2.08% 2.49%
Delinquent loans to gross loans, not in nonaccrual status 0.08% 0.01% 0.60%
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 September 30, 2015, June 30, 2015 and September 30, 2014.

Nonperforming assets were down as compared to the linked quarter, primarily due to the payoff of a $1.1 million loan relationship, as noted above. Nonperforming assets also declined during this period in terms of percentage of total assets. Reductions in nonperforming assets were also due to sales of OREO.

Non-Performing Assets
(Unaudited)
(Dollars in Thousands)
Sept 30,
2015
June 30,
2015
$
Change
%
Change
Sept 30,
2014
$
Change
%
Change
Loans on nonaccrual status $ 2,142 $ 3,155 $ (1,013) -32% $ 4,811 $ (2,669) -55%
Loans past due greater than 90 days but not on nonaccrual status -- -- -- 0% 409 -409 -100%
Total non-performing loans 2,142 3,155 (1,013) -32% 5,220 (3,078) -59%
Other real estate owned and foreclosed assets 3,761 4,240 (479) -11% 1,210 2,551 211%
Total nonperforming assets $ 5,903 $ 7,395 $ (1,492) -20% $ 6,430 $ (527) -8%
Percentage of nonperforming assets to total assets 0.72% 0.94% 0.86%
Nonperforming loans to total loans 0.35% 0.52% 0.94%

OREO property disposition activities continued during the third quarter. In the current period, the Company sold one OREO commercial real estate property with a book value of $348,000 at a small gain and one residential real estate property with a book value of $128,000 at a small loss. OREO valuation adjustments continue to be minimal. The largest balances in the OREO portfolio at the end of the quarter were attributable to two commercial properties, followed by one residential property, all of which are located within our market area.

ALLOWANCE FOR LOAN LOSSES

The allowance for loan losses continues to decline in concert with the general trend of reduced levels of classified loans, loan delinquencies and other relevant credit metrics. With the reduction in net charge-offs, changes in the loan portfolio composition over the past several years and overall improvement in credit quality, loss factors used in estimates to establish reserve levels have declined commensurately. Provision expenses were made to the allowance for loan losses in concert with the loan portfolio growth and improvement in credit quality experienced during those periods. In addition, $143,000 was expensed during the first nine months of 2015 as other noninterest expense to establish a separate reserve for unfunded commitments, much of which had already been incorporated into the Company's allowance for loan losses valuation methodology.

For the third quarter 2015, charge-offs continue to be minimal and were centered in various consumer loan relationships, none of which were of notable size. The Company experienced net recoveries of $244,000, or -0.16% of average gross loans resulting from the payoff of a $1.1 million nonaccrual loan during the current period. As such, the ratio of net loan charge-offs to average gross loans (annualized) for the current quarter reflects this net recovery position. The overall risk profile of the loan portfolio continues to improve. However, the trend of future provision for loan losses will depend primarily on economic conditions, growth in the loan portfolio, level of adversely-classified assets, and changes in collateral values.

Allowance for Loan Losses
(Unaudited)
(Dollars in Thousands)
For the Three Months Ended,
Sept 30,
2015
June 30,
2015
$
Change
%
Change
Sept 30,
2014
$
Change
%
Change
Gross loans outstanding at end of period $ 610,886 $ 604,958 $ 5,928 1% $ 553,319 $ 57,567 10%
Average loans outstanding, gross $ 605,552 $ 594,741 $ 10,811 2% $ 549,280 $ 56,272 10%
Allowance for loan losses, beginning of period $ 8,347 $ 8,254 $ 93 1% $ 8,315 $ 32 0%
Commercial -- -- -- 0% -- -- 0%
Commercial Real Estate -- (122) 122 -100% (127) 127 -100%
Residential Real Estate -- -- -- 0% (61) 61 -100%
Consumer (30) (22) (8) 36% (12) (18) 150%
Total charge-offs (30) (144) 114 -79% (200) 170 -85%
Commercial 2 36 (34) -94% 7 (5) -71%
Commercial Real Estate 257 2 255 N/M 29 228 N/M
Residential Real Estate 7 11 (4) -36% 4 3 75%
Consumer 8 1 7 N/M -- 8 100%
Total recoveries 274 50 224 N/M 40 234 N/M
Net (charge-offs)/recoveries 244 (94) 338 N/M (160) 404 N/M
Provision charged to income 165 187 (22) -12% 100 65 65%
Allowance for loan losses, end of period 8,756 8,347 409 5% 8,255 501 6%
Ratio of net loans charged-off to average gross loans outstanding, annualized -0.16% 0.06% -0.22% N/M 0.12% -0.28% N/M
Ratio of allowance for loan losses to gross loans outstanding 1.43% 1.38% 0.05% 4% 1.49% -0.06% -4%
For the Nine Months Ended,
Sept 30,
2015
Sept 30,
2014
$
Change
%
Change
Gross loans outstanding at end of period $ 610,886 $ 553,319 $ 57,567 10%
Average loans outstanding, gross $ 589,499 $ 531,517 $ 57,982 11%
Allowance for loan losses, beginning of period $ 8,353 $ 8,359 $ (6) 0%
Commercial -- (26) 26 -100%
Commercial Real Estate (122) (523) 401 -77%
Residential Real Estate (86) (105) 19 -18%
Consumer (123) (59) (64) 108%
Total charge-offs (331) (713) 382 -54%
Commercial 45 9 36 N/M
Commercial Real Estate 261 381 (120) -31%
Residential Real Estate 20 17 3 18%
Consumer 26 2 24 N/M
Total recoveries 352 409 (57) -14%
Net (charge-offs)/recoveries 21 (304) 325 -107%
Provision charged to income 382 200 182 91%
Allowance for loan losses, end of period $ 8,756 $ 8,255 $ 501 6%
Ratio of net loans charged-off to average gross loans outstanding, annualized -0.01% 0.06% -0.07% -117%
Ratio of allowance for loan losses to gross loans outstanding 1.43% 1.60% -0.17% -11%

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, 2015, the Company had total assets of $815 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 operated 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. We undertake no obligation to update or revise any forward-looking statement. Readers of this release are cautioned not to put undue reliance on forward-looking statements.

CONTACT: DENISE PORTMANN, PRESIDENT & CEO DOUGLAS BIDDLE, EVP & CFO 360.537.4061 The Cereghino Group IR CONTACT: 206-388-5785Source:Pacific Financial Corporation