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Pacific Financial Corporation Earnings Increase 22% in Fourth Quarter 2015, Driven by Loan Growth, Solid Net Interest Margin and Increased Noninterest Income; Full Year 2015 Earnings Grow 15%

ABERDEEN, Wash., Jan. 22, 2016 (GLOBE NEWSWIRE) -- Pacific Financial Corporation (OTCQB:PFLC), the holding company for Bank of the Pacific today reported net income of $1.4 million, or $0.13 per share, for the fourth quarter of 2015, compared to $1.6 million, or $0.15 per share for the third quarter of 2015, and grew 22% from $1.1 million, or $0.11 per share, for the fourth quarter a year ago. For the full year 2015, net income increased 15% to $5.6 million, or $0.54 per share, from $4.9 million, or $0.48 per share, for 2014. Driving profitability in 2015 was robust loan growth, solid net interest margin and increased noninterest income.

“We continued to post strong profitability in the fourth quarter, powered by sustained lending activity. Despite typical seasonal patterns that impact residential real estate mortgage activity, our revenue this quarter was up 15% versus the like quarter in 2014,” said Denise Portmann, President & Chief Executive Officer. “The expansion of our commercial lending teams into new markets over the past several years has resulted in another solid year of loan growth. Mortgage loan originations were up 43% year-over-year, reflecting the continued improvement in our local economy.”

“We plan on complementing our capacity to generate loan growth with specific initiatives to grow business deposits,” added Portmann. “Staffing and systems resources are currently being added to enhance our ability to generate solid core deposits and build commercial relationships. We are continuing to expand our residential mortgage generation capacity into other growth markets in western Washington and Oregon.”

Fourth Quarter 2015 and Full Year 2015 Highlights (as of, or for the period ended December 31, 2015, except as noted):

  • Earnings per share (EPS) were $0.13, as compared to $0.15 in the linked quarter, and grew 18% from fourth quarter 2014. For 2015, EPS increased 13% to $0.54 from 2014.
  • Net interest income grew $155,000, or 2%, to $7.5 million, compared to $7.4 million for the immediate prior quarter, and grew 11% from $6.8 million in the fourth quarter of 2014. For the full year 2015, net interest income increased 8% to $29.1 million from 2014.
  • Net interest margin (NIM), on a tax equivalent basis, contracted to 4.02%, as compared to 4.06% in the preceding quarter and 4.01% for fourth quarter 2014. Interest rate risk strategies implemented during the prior 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. For the full year 2015, net interest margin was 4.10% compared to 4.17% for 2014.
  • Total assets increased 1% to $824.6 million during the quarter from $814.9 million at September 30, 2015, and grew 11% from $744.8 million at December 31, 2014.
  • Gross loans increased 3% to $625.3 million compared to the third quarter 2015 and grew 11% from a year ago. Despite recent growth, commercial real estate levels remain well within regulatory guidelines.
  • Total deposits were $714.5 million, compared to $705.1 million at September 30, 2015, and increased 12% from a year ago. Non-interest bearing demand deposits grew 3% on a linked quarter basis and 12% over the fourth quarter of 2014.
  • Nonperforming assets decreased to $5.1 million, or 0.62% of total assets, compared to 0.72% at the linked quarter and 1.36% a year ago. Net charge offs were $639,000, or 0.41% of average gross loans, resulting from the write-down of $684,000 associated with one commercial real estate loan during the fourth quarter. Loans 30 – 89 days delinquent not in nonaccrual status stood at 0.20% of total loans outstanding. Classified loans were $16.1 million, or 2.56% of gross loans at September 30, 2015, versus 2.37% and 3.31% and December 31, 2014.
  • As previously announced, two branch locations will be closed in first quarter 2016 in order to enhance operational efficiencies. Cost savings associated with this action are estimated at $400,000 annually. A one-time charge of $150,000 pertaining to closing costs was taken in the current quarter.

Operating Results

Total assets grew 1% from the linked quarter and 11% year-over-year. This increase in assets was primarily due to the growth in loans and investment securities, funded by increases in core deposits and longer-term brokered deposits and declines in cash and cash equivalents. 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 prior 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. 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 remained steady despite growth in lower-yielding LIBOR-based floating-rate loans, as mentioned above. As a result, net interest margin declined slightly during the fourth quarter.

Balance Sheet Overview
(Unaudited)
(Dollars in thousands, except per share data)
December 31, September 30, $ % December 31, $ %
2015 2015 Change Change 2014 Change Change
Assets:
Cash and cash equivalents$ 27,526 $ 48,904 $ (21,378) -44%$ 31,037 $ (3,511) -11%
Interest-bearing certificates of deposit 2,727 2,727 - 0% 2,727 - 0%
Federal Home Loan Bank and Pacific Coast Banker's Bank stock, at cost 2,346 2,348 (2) 0% 3,896 (1,550) -40%
Investment securities 101,721 89,702 12,019 13% 89,269 12,452 14%
Loans held-for-sale 12,333 9,799 2,534 26% 5,786 6,547 113%
Gross loans, net of deferred fees 625,336 609,475 15,861 3% 563,099 62,237 11%
Allowance for loan losses (8,317) (8,756) 439 -5% (8,353) 36 0%
Net loans 617,019 600,719 16,300 3% 554,746 62,273 11%
Other assets 60,965 60,657 308 1% 57,346 3,619 6%
Total assets$ 824,637 $ 814,856 $ 9,781 1%$ 744,807 $ 79,830 11%
Liabilities and shareholders' equity:
Total deposits$ 714,499 $ 705,100 $ 9,399 1%$ 639,054 $ 75,445 12%
Accrued interest payable 152 141 11 8% 145 7 5%
Borrowings 24,706 24,744 (38) 0% 24,856 (150) -1%
Other liabilities 9,062 7,386 1,676 23% 8,269 793 10%
Shareholders' equity 76,218 77,485 (1,267) -2% 72,483 3,735 5%
Total liabilities and shareholders' equity$ 824,637 $ 814,856 $ 9,781 1%$ 744,807 $ 79,830 11%
Common Stock Shares Outstanding 10,394,828 10,384,997 9,831 0% 10,371,460 23,368 0%
Book value per common share (1)$ 7.33 $ 7.46 $ (0.13) -2%$ 6.99 $ 0.34 5%
Tangible book value per common share (2)$ 6.03 $ 6.15 $ (0.12) -2%$ 5.68 $ 0.35 6%
Net loans to deposits ratio 86.4% 85.2% 86.8%
(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,
December 31, September 30, $ % December 31, $ %
2015 2015 Change Change 2014 Change Change
Interest and dividend income$8,143$7,946$ 197 2%$7,336$807 11%
Interest expense 603 561 42 7% 536 67 13%
Net interest income 7,540 7,385 155 2% 6,800 740 11%
Loan loss provision 200 165 35 21% 100 100 100%
Noninterest income 2,320 2,686 (366) -14% 2,021 299 15%
Noninterest expense 7,735 7,709 26 0% 7,127 608 9%
Income before provision for income taxes 1,925 2,197 (272) -12% 1,594 331 21%
Provision for income taxes 560 596 (36) -6% 473 87 18%
Net Income$1,365$1,601$ (236) -15%$1,121$244 22%
Average common shares outstanding - basic 10,391,290 10,384,997 6,293 0% 10,281,745 109,545 1%
Average common shares outstanding - diluted 10,526,718 10,520,581 6,137 0% 10,379,166 147,552 1%
Income per common share
Basic$ 0.13$ 0.15$ (0.02) -13%$ 0.11$ 0.02 18%
Diluted$ 0.13$ 0.15$ (0.02) -13%$ 0.11$ 0.02 18%
For the Twelve Months Ended,
December 31, December 31, $ %
2015 2014 Change Change
Interest and dividend income$31,340$29,158$ 2,182 7%
Interest expense 2,201 2,125 76 4%
Net interest income 29,139 27,033 2,106 8%
Loan loss provision 582 300 282 94%
Noninterest income 9,799 8,079 1,720 21%
Noninterest expense 30,659 28,155 2,504 9%
Income before provision for income taxes 7,697 6,657 1,040 16%
Provision for income taxes 2,053 1,730 323 19%
Net Income$5,644$4,927$ 717 15%
Average common shares outstanding - basic 10,382,499 10,256,242 126,257 1%
Average common shares outstanding - diluted 10,524,268 10,347,338 176,930 2%
Income per common share
Basic$ 0.54$ 0.48$ 0.06 13%
Diluted$ 0.54$ 0.48$ 0.06 13%

Noninterest Income

Noninterest income was down 14% on a linked quarter basis, primarily as a result of a reduction in gains on sale of residential mortgage loans from seasonal declines in residential sales activity typical for this period. Noninterest income increased 15% for the fourth quarter and 21% for the year, primarily due to the increase in gains on sale of residential mortgage loans when compared to the year-over-year periods. Increases in residential real estate sales benefitted from continued improvement of the local economy.

For 2015, other noninterest income grew principally as a result of higher ATM/debit card fee income. The growth in fee income was primarily due to a combination of increased usage of these banking channels by our customers and a one-time incentive of $120,000 as part of an enhancement of our membership arrangement with the processing entity, which was offset by lower annuity commission revenue earned versus in 2014.

Noninterest Income
(Unaudited)
(Dollars in thousands)
For the Three Months Ended,
December 31, September 30, $ % December 31, $ %
2015 2015 Change Change 2014 Change Change
Service charges on deposit accounts$ 451 $ 451 $ 0 0%$ 450 $ 1 0%
Net (loss)gain on sale of other real estate owned (11) 57 (68) -119% (28) 17 -61%
Net gain from sale of loans 1,117 1,464 (347) -24% 970 147 15%
Net gain on sale of securities available for sale - - 0 0% - 0 0%
Earnings on bank owned life insurance 122 120 2 2% 126 (4) -3%
Other noninterest income
Fee income 615 549 66 12% 405 210 52%
Income from other real estate owned - 67 (67) -100% 6 (6) -100%
Other 26 (22) 48 -218% 92 (66) -72%
Total noninterest income$ 2,320 $ 2,686 $ (366) -14%$ 2,021 $ 299 15%
For the Twelve Months Ended,
December 31, December 31, $ %
2015 2014 Change Change
Service charges on deposit accounts$ 1,764 $ 1,809 $ (45) -2%
Net gain(loss) on sale of other real estate owned 128 (207) 335 -162%
Net gain from sale of loans 4,961 3,686 1,275 35%
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 490 505 (15) -3%
Other noninterest income
Fee income 2,156 1,709 447 26%
Income from other real estate owned 67 34 33 97%
Other 180 503 (323) -64%
Total noninterest income$ 9,799 $ 8,079 $ 1,720 21%


Noninterest Expense

Noninterest expense was unchanged compared to the immediate prior quarter. Salaries and employee benefit costs were reduced as commissions paid for residential real estate production declined due to a reduction in volume, as previously noted. Professional services expenses decreased due to a decline in audit fees associated with the company’s deregistration from the Securities and Exchange Commission earlier in the year. These expense reductions were offset by a one-time $150,000 write-down in the carrying value of a branch facility scheduled for sale due to its planned closure in first quarter 2016. Noninterest expense was 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 employee benefit expense was incurred as a result of the opening of our Salem, Oregon Loan Production Office (“LPO”) at the beginning of 2015. Increases in other noninterest expenses also contributed to growth in noninterest expenses in the current period when compared to the year-over-year quarter. These increases were associated with additional employee training and travel expenses, along with the one-time write-down of the branch facility, as previously noted.

Noninterest expense was up 9% for the full year of 2015 as compared to the previous year 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-over-year resulted primarily from additional employee training and travel expenses and loan appraisal costs from increased residential real estate production. The establishment of a reserve for unfunded commitments of $143,000, which is further explained under the subheading “Allowance for Loan Losses”, and the one-time write-down of the branch facility, as previously noted, also contributed to an increase in other noninterest expense.

Noninterest Expense
(Unaudited)
(Dollars in thousands)
For the Three Months Ended,
December 31,
2015
September 30,
2015
$
Change
%
Change
December 31,
2014
$
Change
% Change
Salaries and employee benefits$4,788$4,868$ (80) -2%$4,494$ 294 7%
Occupancy 478 480 (2) 0% 512 (34) -7%
Equipment 273 271 2 1% 274 (1) 0%
Data processing 472 451 21 5% 509 (37) -7%
Professional services 103 194 (91) -47% 108 (5) -5%
Other real estate owned write-downs - - - 0% - - 0%
Other real estate owned operating costs 98 80 18 23% 48 50 104%
State taxes 119 125 (6) -5% 103 16 16%
FDIC and state assessments 138 131 7 5% 110 28 25%
Other noninterest expense:
Director fees 70 71 (1) -1% 79 (9) -11%
Communication 66 63 3 5% 53 13 25%
Advertising 81 88 (7) -8% 104 (23) -22%
Professional liability insurance 40 25 15 60% 20 20 100%
Amortization 85 85 0 0% 95 (10) -11%
Other 924 777 147 19% 618 306 50%
Total noninterest expense$7,735$7,709$ 26 0%$7,127$ 608 9%
For the Twelve Months Ended,
December 31,
2015
December 31,
2014
$
Change
%
Change
Salaries and employee benefits$19,070$17,118$ 1,952 11%
Occupancy 1,965 2,006 (41) -2%
Equipment 1,061 1,050 11 1%
Data processing 1,872 2,009 (137) -7%
Professional services 599 745 (146) -20%
Other real estate owned write-downs 104 67 37 55%
Other real estate owned operating costs 184 238 (54) -23%
State taxes 465 417 48 12%
FDIC and state assessments 535 491 44 9%
Other noninterest expense:
Director fees 295 287 8 3%
Communication 251 209 42 20%
Advertising 346 331 15 5%
Professional liability insurance 102 85 17 20%
Amortization 341 385 (44) -11%
Other 3,469 2,717 752 28%
Total noninterest expense$30,659$28,155$ 2,504 9%


Financial Performance Overview
(Unaudited)
For the Three Months Ended
December 31,
2015
September 30,
2015
Change December 31,
2014
Change
Performance Ratios
Return on average assets, annualized 0.66% 0.79% (0.13) 0.59% 0.07
Return on average equity, annualized 6.92% 8.30% (1.38) 5.98% 0.94
Efficiency ratio (1) 78.45% 76.55% 1.90 80.80% (2.35)
For the Twelve Months Ended
December 31,
2015
December 31,
2014
Change
Performance Ratios
Return on average assets, annualized 0.72% 0.68% 0.04
Return on average equity, annualized 7.44% 6.92% 0.52
Efficiency ratio (1) 78.74% 80.19% (1.45)
(1) Non-interest expense divided by net interest income plus noninterest income.


LIQUIDITY

Cash and Cash Equivalents and Investment Securities
(Unaudited)
(Dollars in thousands)
Dec 31,
2015
% of
Total
Sept 30,
2015
% of
Total
$
Change
%
Change
Dec 31,
2014
% of
Total
$
Change
%
Change
Cash and due from banks$17,680 14%$12,613 9%$ 5,067 40%$14,782 12%$ 2,898 20%
Cash equivalents:
Interest-bearing deposits 9,846 7% 36,291 25% (26,445) -73% 16,255 13% (6,409) -39%
Interest-bearing certificates of deposit 2,727 2% 2,727 2% - 0% 2,727 2% - 0%
Total cash equivalents and certificate of deposits 30,253 23% 51,631 36% (21,378) -41% 33,764 27% (3,511) -10%
Investment securities:
Collateralized mortgage obligations: agency issued 38,984 29% 36,377 25% 2,607 7% 38,767 31% 217 1%
Collateralized mortgage obligations: non-agency issued483 0% 483 0% 0 0% 527 0% (44) -8%
Mortgage-backed securities: agency issued 11,022 8% 9,349 7% 1,673 18% 12,322 10% (1,300) -11%
U.S. Government and agency securities 9,867 7% 10,026 7% (159) -2% 8,056 6% 1,811 22%
State and municipal securities 41,365 31% 33,467 23% 7,898 24% 29,597 23% 11,768 40%
FHLB Stock, at cost 1,346 1% 1,348 1% (2) 0% 2,896 2% (1,550) 100%
Pacific Coast Bankers' Bank stock, at cost 1,000 1% 1,000 1% - 0% 1,000 1% 0 0%
Total investment securities 104,067 77% 92,050 64% 12,017 13% 93,165 73% 10,902 12%
Total cash equivalents and investment securities$134,320 100%$143,681 100%$ (9,361) -7%$126,929 100%$ 7,391 6%
Total cash equivalents and investment securities as a % of total assets 16% 18% 17%

Liquidity remains strong based on current levels of combined cash equivalents, investment securities and unused borrowing capacity. “During the quarter, we redeployed our cash equivalents into higher-yielding securities and loans as compared to the linked quarter,” said Douglas N. Biddle, EVP and Chief Financial 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 3.5 years at December 31, 2015, 3.6 years at September 30, 2015 and 4.1 years at December 31, 2014.

The Bank had $11.5 million and $11.3 million in outstanding borrowings against its $294.2 million in established borrowing capacity with the Federal Home Loan Bank of Des Moines (FHLB) at September 30, 2015 and December 31, 2015, respectively. The borrowing capacity at the FHLB was $167.2 million and $149.7 million at September 30, 2015 and December 31, 2014, respectively. The Bank’s borrowing facility with the FHLB is subject to collateral and stock ownership requirements. The Bank also has available a discount window primary credit line with the Federal Reserve Bank of San Francisco of approximately $65.4 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) Dec 31, % of Sept 30, % of $ % Dec 31, % of $ %
(Dollars in thousands) 2015 Gross Loans 2015 Gross Loans Change Change 2014 Gross Loans Change Change
Commercial and agricultural$ 131,734 21%$ 120,818 20%$ 10,916 9%$ 120,517 21%$ 11,217 9%
Real estate:
Construction and development 33,170 5% 35,071 6% (1,901) -5% 26,711 5% 6,459 24%
Residential 1-4 family 94,217 15% 96,182 16% (1,965) -2% 92,965 16% 1,252 1%
Multi-family 26,828 4% 24,797 4% 2,031 8% 18,541 3% 8,287 45%
Commercial real estate -- owner occupied 134,366 21% 134,092 22% 274 0% 125,632 23% 8,734 7%
Commercial real estate -- non owner occupied 134,612 21% 130,977 21% 3,635 3% 117,137 21% 17,475 15%
Farmland 20,492 3% 19,951 3% 541 3% 22,245 4% (1,753) -8%
Consumer 51,352 8% 48,998 8% 2,354 5% 40,565 7% 10,787 27%
Gross loans 626,771 100% 610,886 100% 15,885 3% 564,313 100% 62,458 11%
Less: allowance for loan losses (8,317) (8,756) 439 (8,353) 36
Less: deferred fees (1,435) (1,411) (24) (1,214) (221)
Loans, net$ 617,019 $ 600,719 $ 16,300 $ 554,746 $ 62,273
Loan Concentration
(Unaudited) % of % of % of
(Dollars in thousands) Dec 31, 2015 Risk Based Capital Sept 30, 2015 Risk Based Capital Change Dec 31, 2014 Risk Based Capital Change
Commercial and agricultural$ 131,734 157%$ 120,818 142% 15%$ 120,517 153% 4%
Real estate:
Construction and development 33,170 39% 35,071 41% -2% 26,711 34% 5%
Residential 1-4 family 94,217 112% 96,182 113% -1% 92,965 118% -6%
Multi-family 26,828 32% 24,797 29% 3% 18,541 24% 8%
Commercial real estate -- owner occupied 134,366 160% 134,092 157% 3% 125,632 160% 0%
Commercial real estate -- non owner occupied 134,612 160% 130,977 153% 7% 117,137 149% 11%
Farmland 20,492 24% 19,951 23% 1% 22,245 28% -4%
Consumer 51,352 61% 48,998 57% 4% 40,565 52% 9%
Gross loans$ 626,771 $ 610,886 $ 564,313
Regulatory Commercial Real Estate$ 189,948 226%$ 185,321 217% 9%$ 160,022 203% 23%
Total Risk Based Capital*$ 84,073 $ 85,365 $ 78,686
*Bank of the Pacific

Loan portfolio growth continues to be well-diversified with higher balances in most lending categories. The recent loan growth was originated predominately within the Western Washington and Oregon markets, including $16.5 million in lower-yielding LIBOR-based floating rate commercial real estate loans. The portfolio does include $26.4 million in purchased government-guaranteed commercial and commercial real estate loans. In addition, the portfolio contains $40.1 million in indirect consumer loans to finance luxury and classic cars as a part of a strategy to diversify the loan portfolio. These loans 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. While the Bank’s recent loan growth does include commercial real estate, the amount of such exposure continues to be managed within regulatory guidelines.

DEPOSITS

(Unaudited)
(Dollars in thousands)
Dec 31,
2015
% of
Total
Sept 30,
2015
% of
Total
$
Change
%
Change
Dec 31,
2014
% of
Total
$
Change
%
Change
Interest-bearing demand and money market$299,343 41%$298,993 42%$350 0%$274,614 42%$24,729 9%
Savings 90,380 13% 88,561 13% 1,819 2% 79,997 13% 10,383 13%
Time deposits 139,775 20% 138,200 20% 1,575 1% 118,683 19% 21,092 18%
Total interest-bearing deposits 529,498 74% 525,754 75% 3,744 1% 473,294 74% 56,204 12%
Non-interest bearing demand 185,001 26% 179,346 25% 5,655 3% 165,760 26% 19,241 12%
Total deposits$714,499 100%$705,100 100%$9,399 1%$639,054 100%$75,445 12%


Total deposits grew during the current quarter 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 $52.2 million, which included $1.3 million via reciprocal deposit arrangements, up from $44.6 million at September 30, 2015 and $22.4 million December 31, 2014. 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 enhance the Bank’s 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. The current period ratios have decreased compared to the linked quarter and 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. In addition, the declaration of a $2.3 million cash dividend by the Company also contributed to the reduction in capital ratios in the current period as compared to the linked quarter.

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, are not being 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.

(Unaudited)Dec 31,
2015
Sept 30,
2015
Change Dec 31,
2014
Change Regulatory
Minimum
to be "Well
Capitalized"*
greater than
or equal to
Pacific Financial Corporation
Total risk-based capital ratio 12.78% 13.35% (0.57) 13.60% (0.82) 10.5%
Tier 1 risk-based capital ratio 11.53% 12.10% (0.57) 12.35% (0.82) 8.5%
Common equity tier 1 ratio 9.57% 10.06% (0.49) 8.06% 1.51 7.0%
Leverage ratio 9.44% 9.83% (0.39) 9.81% (0.37) 5.0%
Tangible common equity ratio 7.72% 7.98% (0.26) 8.11% (0.39) n/a
Bank of the Pacific
Total risk-based capital ratio 12.69% 13.31% (0.62) 13.52% (0.83) 10.5%
Tier 1 risk-based capital ratio 11.44% 12.05% (0.61) 12.27% (0.83) 8.5%
Common equity tier 1 ratio 11.44% 12.05% (0.61) n/a n/a 7.0%
Leverage ratio 9.36% 9.79% (0.43) 9.73% (0.37) 5.0%
*Includes Basel III Capital Conservation Buffer


Net Interest Margin

Net interest margin declined slightly compared to the third quarter of 2015, predominantly due to a modest addition of higher-cost longer-term fixed rate brokered deposit funding for interest rate risk management purposes. Net interest margin was unchanged compared to the year-over-year quarter in which $60,000 in interest income was reversed in the fourth quarter 2014 due to the placement of two loan relationships totaling $4.3 million on non-accrual. As a result, loan yields and net interest margin were reduced by 5 and 4 basis points, respectively, for that quarter. Net interest margin declined in 2015 as compared to 2014. However, in 2014 loan yields and net interest margin were each enhanced by 7 and 5 basis points respectively, due to the collection of $225,000 in non-accrual interest in the first and second quarters of 2014.

Yield on investment securities remained relatively unchanged from the preceding and the year-over-year quarters. The small decline at 2015 as compared to the prior year was primarily due to some realignment of the composition of the portfolio during the year to mitigate the impact of potential changes in interest rates on the value of the portfolio.

Cost of deposits and borrowings remained unchanged in the current quarter as compared to the linked and year-over-year quarters. Despite the modest addition of higher-cost longer-term fixed rate brokered deposit funding during the current year, funding costs declined slightly in 2015 as compared to 2014. This reduction was primarily due to an increase in the proportion of funding coming from non-interest bearing deposits throughout the current year versus the prior year.

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,
Dec 31,
2015
Sept 30,
2015
$
Change
%
Change
Dec 31,
2014
$
Change
%
Change
Average Balances
Gross loans$ 612,429 $ 605,552 $ 6,877 1%$ 554,886 $ 57,543 10%
Loans held for sale$ 10,126 $ 11,787 $ (1,661) -14%$ 7,306 $ 2,820 39%
Investment securities$ 137,160 $ 118,102 $ 19,058 16%$ 124,355 $ 12,805 10%
Total interest-earning assets$ 759,715 $ 735,441 $ 24,274 3%$ 686,547 $ 73,168 11%
Non-interest bearing demand deposits$ 183,876 $ 181,091 $ 2,785 2%$ 172,002 $ 11,874 7%
Interest bearing deposits$ 529,188 $ 506,257 $ 22,931 5%$ 470,277 $ 58,911 13%
Borrowings$ 24,719 $ 28,794 $ (4,075) -14%$ 24,869 $ (150) -1%
Total interest-bearing liabilities$ 553,907 $ 535,051 $ 18,856 4%$ 495,146 $ 58,761 12%
Total Equity$ 78,257 $ 76,540 $ 1,717 2%$ 74,368 $ 3,889 5%
Dec 31,
2015
Sept 30,
2015
Change Dec 31,
2014
Change
Net Interest Margin
Yield on average gross loans (1) 4.86% 4.83% 0.03 4.90% (0.04)
Yield on average investment securities (1) 1.92% 1.95% (0.03) 1.91% 0.01
Cost of average interest bearing deposits 0.36% 0.34% 0.02 0.35% 0.01
Cost of average borrowings 2.01% 1.67% 0.34 1.88% 0.13
Cost of average total deposits and borrowings 0.32% 0.31% 0.01 0.32% -
Yield on average interest-earning assets 4.33% 4.37% (0.04) 4.32% 0.01
Cost of average interest-bearing liabilities 0.43% 0.42% 0.01 0.43% -
Net interest spread 3.90% 3.95% (0.05) 3.89% 0.01
Net interest margin (1) 4.02% 4.06% (0.04) 4.01% 0.01
(1) Tax-exempt income has been adjusted to a tax equivalent basis at a 34% rate.
For the Twelve Months Ended,
Dec 31,
2015
Dec 31,
2014
$
Change
%
Change
Average Balances
Gross loans$ 595,278 $ 536,971 $ 58,307 11%
Loans held for sale$ 10,852 $ 7,026 $ 3,826 54%
Investment securities$ 119,647 $ 119,107 $ 540 0%
Interest-earning assets$ 725,777 $ 663,104 $ 62,673 9%
Non-interest bearing demand deposits$ 175,393 $ 158,697 $ 16,696 11%
Interest bearing deposits$ 502,113 $ 466,086 $ 36,027 8%
Borrowings$ 28,294 $ 24,144 $ 4,150 17%
Interest-bearing liabilities$ 530,407 $ 490,230 $ 40,177 8%
Total Equity$ 75,870 $ 71,188 $ 4,682 7%
Dec 31,
2015
Dec 31,
2014
Change
Net Interest Margin
Yield on average gross loans (1) 4.86% 4.99% (0.13)
Yield on average investment securities (1) 2.05% 2.22% (0.17)
Cost of average interest bearing deposits 0.34% 0.36% (0.02)
Cost of average borrowings 1.72% 1.89% (0.17)
Cost of average total deposits and borrowings 0.31% 0.33% (0.02)
Yield on average interest-earning assets 4.40% 4.49% (0.09)
Cost of average interest-bearing liabilities 0.41% 0.43% (0.02)
Net interest spread 3.99% 4.06% (0.07)
Net interest margin (1) 4.10% 4.17% (0.07)
(1) Tax-exempt income has been adjusted to a tax equivalent basis at a 34% rate.


ASSET QUALITY

Adversely classified loans increased compared to the preceding quarter, but declined versus the like quarter a year ago primarily due to the downgrade of a $6.9 million commercial real estate loan relationship paid current, but in technical default. This was offset by the refinance of a $2.0 million troubled debt restructure (“TDR”) to a fully performing commercial loan and the transfer of a $589,000 commercial loan to OREO. 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)
Dec 31,
2015
Sept 30,
2015
$
Change
%
Change
Dec 31,
2014
$
Change
% Change
Rated substandard or worse, but not impaired$ 14,090 $ 9,803 $ 4,287 44%$ 7,368 $ 6,722 91%
Impaired 1,982 4,681 (2,699) -58% 11,311 (9,329) -82%
Total adversely classified loans¹$ 16,072 $ 14,484 $ 1,588 11%$ 18,679 $ (2,607) -14%
Total investment securities²$ 169 $ 179 $ (10) -6%$ 199 $ (30) -15%
Gross loans (excluding deferred loan fees)$ 626,771 $ 610,886 $ 15,885 3%$ 564,313 $ 62,458 11%
Adversely classified loans to gross loans 2.56% 2.37% 3.31%
Allowance for loan losses$ 8,317 $ 8,756 $ (439) -5%$ 8,353 $ (36) 0%
Allowance for loan losses as a percentage of adversely classified loans 51.75% 60.45% 44.72%
Allowance for loan losses to total impaired loans 419.63% 187.05% 73.85%
Adversely classified loans and securities to total assets 1.97% 1.80% 2.53%
Delinquent loans to gross loans, not in nonaccrual status 0.20% 0.08% 0.23%
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 December 31, 2015, September 30, 2015 and December 31, 2014.


Nonperforming assets were down as compared to the linked quarter, primarily due to a $684,000 partial charge-off of a nonaccrual legacy commercial loan as part of its transfer to OREO. In addition, a $580,000 commercial loan relationship was transferred from nonaccrual status to OREO during the current quarter. 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)
Dec 31,
2015
Sept 30,
2015
$
Change
%
Change
Dec 31,
2014
$
Change
%
Change
Loans on nonaccrual status$ 1,518 $ 2,142 $ (624) -29%$ 8,716 $ (7,198) -83%
Loans past due greater than 90 days but not on nonaccrual status - - - 0% 409 -409 -100%
Total non-performing loans 1,518 2,142 (624) -29% 9,125 (7,607) -83%
Other real estate owned and foreclosed assets 3,610 3,761 (151) -4% 999 2,611 261%
Total nonperforming assets$ 5,128 $ 5,903 $ (775) -13%$ 10,124 $ (4,996) -49%
Percentage of nonperforming assets to total assets 0.62% 0.72% 1.36%
Nonperforming loans to total loans 0.24% 0.35% 1.62%


The Company sold one OREO residential commercial real estate property with a book value of $47,000 at a small loss. The largest balances in the OREO portfolio at the quarter end were attributable to four commercial properties and three residential properties, 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 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 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 fourth quarter 2015, charge-offs increased primarily due to a partial charge-off of $684,000 related to one legacy commercial loan relationship placed into OREO. Due to current quarter charge-offs, the ratio of net loan charge-offs to average gross loans for the current year increased when compared to the prior year. Given the dated origination of this legacy commercial relationship, this is not considered indicative of any negative trends in portfolio quality. 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,
Dec 31,
2015
Sept 30,
2015
$
Change
%
Change
Dec 31,
2014
$
Change
%
Change
Gross loans outstanding at end of period$ 626,771 $ 610,886 $ 15,885 3%$ 564,313 $ 62,458 11%
Average loans outstanding, gross$ 612,429 $ 605,552 $ 6,877 1%$ 554,886 $ 57,543 10%
Allowance for loan losses, beginning of period$ 8,756 $ 8,347 $ 409 5%$ 8,255 $ 501 6%
Commercial - - - 0% - - 0%
Commercial Real Estate (684) - (684) 100% (10) (674) 6740%
Residential Real Estate - - - 0% (24) 24 -100%
Consumer (20) (30) 10 -33% (20) 0 0%
Total charge-offs (704) (30) (674) 2247% (54) (650) 1204%
Commercial 7 2 5 250% 2 5 250%
Commercial Real Estate - 257 (257) -100% 44 (44) -100%
Residential Real Estate 49 7 42 600% 5 44 880%
Consumer 9 8 1 13% 1 8 100%
Total recoveries 65 274 (209) -76% 52 13 25%
Net (charge-offs)/recoveries (639) 244 (883) -362% (2) (637) N/M
Provision charged to income 200 165 35 21% 100 100 100%
Allowance for loan losses, end of period$ 8,317 $ 8,756 $ (439) -5%$ 8,353 $ (36) 0%
Ratio of net loans charged-off to average gross loans outstanding, annualized 0.41% -0.16% 0.57% N/M 0.00% 0.41% 100%
Ratio of allowance for loan losses to gross loans outstanding 1.33% 1.43% -0.10% -7% 1.48% -0.15% -10%
For the Twelve Months Ended,
Dec 31,
2015
Dec 31,
2014
$
Change
%
Change
Gross loans outstanding at end of period$ 626,771 $ 564,313 $ 62,458 11%
Average loans outstanding, gross$ 595,278 $ 536,971 $ 58,307 11%
Allowance for loan losses, beginning of period$ 8,353 $ 8,359 $ (6) 0%
Commercial - (26) 26 -100%
Commercial Real Estate (806) (533) (273) 51%
Residential Real Estate (86) (129) 43 -33%
Consumer (143) (79) (64) 81%
Total charge-offs (1,035) (767) (268) 35%
Commercial 52 11 41 373%
Commercial Real Estate 261 425 (164) -39%
Residential Real Estate 69 22 47 214%
Consumer 35 3 32 N/M
Total recoveries 417 461 (44) -10%
Net (charge-offs)/recoveries (618) (306) (312) 102%
Provision charged to income 582 300 282 94%
Allowance for loan losses, end of period$ 8,317 $ 8,353 $ (36) 0%
Ratio of net loans charged-off to average gross loans outstanding, annualized 0.41% 0.06% 0.35% 583%
Ratio of allowance for loan losses to gross loans outstanding 1.33% 1.48% -0.15% -10%


ABOUT PACIFIC FINANCIAL CORPORATION

Pacific Financial Corporation of Aberdeen, Washington, is the bank holding company for Bank of the Pacific, a state chartered and federally insured commercial bank. Bank of the Pacific offers banking products and services to small-to-medium sized businesses and professionals in western Washington and Oregon. As of December 31, 2015, the Company had total assets of $825 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.

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

Source:Pacific Financial Corporation