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Pacific Financial Corporation 1Q16 Earnings Increase 26% to $1.4 Million, or $0.13 Per Share, Year-over-Year; Highlighted by Continued Steady Loan Growth, Stable Net Interest Margin and Increased Noninterest Income

ABERDEEN, Wash., April 26, 2016 (GLOBE NEWSWIRE) -- Pacific Financial Corporation (OTCQB:PFLC), the holding company for Bank of the Pacific today reported net income increased 6% to $1.4 million, or $0.13 per share, for the first quarter of 2016, compared to $1.3 million, or $0.12 per share for the fourth quarter of 2015, and grew 26% from $1.1 million, or $0.11 per share, for the first quarter of 2015. Driving profitability in 2016 was continued loan growth, stable net interest margin and increased noninterest income. All results are unaudited.

“We continued to post solid profitability in the first quarter, fostered by sustained lending growth. Revenue from residential real estate mortgage activity was up 8% this quarter versus the like quarter in 2015. With our commercial lending teams now established in markets we entered during the past several years, we are beginning to reap the rewards,” said Denise Portmann, President & Chief Executive Officer. “First quarter results are typically impacted by normal seasonal effects, such as reduced post-holiday consumer spending, so we are particularly pleased with this quarter’s results. Demonstrating our continued commitment to creating value for our shareholders, we again paid an annual dividend of $0.22 per share in early January, an increase of 5% from a year ago.”

“Our strategic plan to expand our client base and increase business deposits is gaining traction. Our non-interest demand deposits grew 5% during the quarter,” added Portmann. “We have experienced treasury management professionals in place; and are enhancing our depository product offerings and systems to support growth in our commercial relationships. The expansion of our residential mortgage teams into other growth markets in western Washington and Oregon is now in full swing. As we look forward to our financial performance in the quarters ahead, we will continue to stay focused on the best revenue growth opportunities, while prudently controlling expenses.”

First Quarter 2016 Highlights (as of, or for the period ended March 31, 2016, except as noted):

  • Paid an annual dividend of $0.22 per share, up 5% from a year ago. The dividend generates a current yield at recent market prices of 3.1%.
  • Earnings per share (EPS) were $0.13, as compared to $0.12 in the linked quarter, and $0.11 in first quarter 2015.
  • Net interest income grew $380,000, or 5%, to $7.9 million, compared to $7.5 million for the immediate prior quarter, and grew 14% from $6.9 million in the first quarter of 2015.
  • Net interest margin (NIM), on a tax equivalent basis, grew to 4.27%, as compared to 4.02% in the preceding quarter and 4.15% for first quarter 2015. Net interest margin was enhanced by 12 basis points on an annualized basis during first quarter 2016 due to a breach in loan agreement, resulting in an additional one-time interest income.
  • Total assets increased 1% to $829.5 million during the quarter from $824.6 million at December 31, 2015, and grew 9% from $762.1 million at March 31, 2015.
  • Gross loans increased 3% to $643.4 million, as compared to $625.3 million as of December 31, 2015, and grew 12% from a year ago. Despite recent growth, commercial real estate levels remain well within regulatory guidelines.
  • Total deposits were $722.7 million, compared to $714.5 million at December 31, 2015, and increased 10% from a year ago. Non-interest bearing demand deposits grew 5% on a linked quarter basis and 16% over first quarter 2015.
  • Nonperforming assets decreased to $3.9 million, or 0.47% of total assets, compared to 0.62% on a linked quarter basis and 1.05% a year ago.
  • Net charge offs totaled $27,000, or 0.02% of average gross loans. This compares to $639,000, or 0.41% of average gross loans in fourth quarter 2015 due to a write-down of $684,000 associated with one commercial real estate loan. Loans 30 – 89 days delinquent, not in nonaccrual status, stood at 0.31% of total loans outstanding.
  • Classified loans were $17.5 million, or 2.72% of gross loans, compared to 2.56% and 3.31% at December 31, 2015 and March 31, 2015, respectively.
  • As previously announced, two underperforming branch locations were closed and consolidated into nearby offices in first quarter 2016 to enhance operational efficiencies. Cost savings associated with this action are estimated at $400,000 annually. A one-time charge of $360,000 for closing costs was taken in the fourth quarter 2015.

Operating Results

Total assets grew 1% from the linked quarter and 9% year-over-year. This increase in assets was primarily due to growth in loans funded by increases in core deposits and longer-term brokered deposits, supplemented by 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 both the linked and year ago quarters. 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 remained stable despite a modest addition of higher-cost longer-term fixed-rate deposits throughout the prior year to lengthen liability maturities for interest rate risk management purposes. The continued growth of noninterest bearing deposits ameliorated the impact of the addition of longer-term deposits on funding costs. The increase in loan yields was partially due to the imposition of additional interest due to a breach in loan agreement as noted above. As a result, net interest margin improved during the quarter.

Balance Sheet Overview
(Unaudited)
March 31, December 31, $ % March 31, $ %
2016 2015 Change Change 2015 Change Change
Assets: (Dollars in thousands, except per share data)
Cash and cash equivalents$ 22,961 $ 27,526 $ (4,565) -17%$ 27,603 $ (4,642) -17%
Other interest earning deposits 2,727 2,727 - 0% 2,727 - 0%
Investment securities 96,004 101,721 (5,717) -6% 95,009 995 1%
Loans held-for-sale 9,446 12,333 (2,887) -23% 10,780 (1,334) -12%
Loans, net of deferred fees 643,377 625,336 18,041 3% 572,783 70,594 12%
Allowance for loan losses (8,552) (8,317) (235) 3% (8,254) (298) 4%
Net loans 634,825 617,019 17,806 3% 564,529 70,296 12%
Federal Home Loan Bank and Pacific Coast Bankers' Bank stock, at cost 2,339 2,346 (7) 0% 3,865 (1,526) -39%
Other assets 61,205 60,941 264 0% 57,583 3,622 6%
Total assets$ 829,507 $ 824,613 $ 4,894 1%$ 762,096 $ 67,411 9%
Liabilities and Shareholders' Equity:
Total deposits$ 722,736 $ 714,499 $ 8,237 1%$ 657,112 $ 65,624 10%
Borrowings 22,169 24,706 (2,537) -10% 24,819 (2,650) -11%
Accrued interest payable and other liabilities 6,147 9,123 (2,976) -33% 6,028 119 2%
Shareholders' equity 78,455 76,285 2,170 3% 74,137 4,318 6%
Total liabilities and shareholders' equity$ 829,507 $ 824,613 $ 4,894 1%$ 762,096 $ 67,411 9%
Common Stock Shares Outstanding 10,417,868 10,394,828 23,040 0% 10,380,492 37,376 0%
Book value per common share (1)$ 7.53 $ 7.34 $ 0.19 3%$ 7.14 $ 0.39 5%
Tangible book value per common share (2)$ 6.23 $ 6.03 $ 0.20 3%$ 5.83 $ 0.40 7%
Net loans to deposits ratio 87.8% 86.4% 85.9%
(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)
For the Three Months Ended,
March 31, December 31, $ % March 31, $ %
2016 2015 Change Change 2015 Change Change
(Dollars in thousands, except per share data)
Interest and dividend income$8,529$8,145$384 5%$7,432$1,097 15%
Interest expense 607 603 4 1% 509 98 19%
Net interest income 7,922 7,542 380 5% 6,923 999 14%
Loan loss provision 262 200 62 31% 30 232 773%
Noninterest income 2,531 2,317 214 9% 1,973 558 28%
Noninterest expense 8,270 7,934 336 4% 7,484 786 11%
Income before income taxes 1,921 1,725 196 11% 1,382 539 39%
Income tax expense 545 428 117 27% 286 259 91%
Net Income$1,376$1,297$79 6%$1,096$280 26%
Average common shares outstanding - basic 10,401,140 10,391,290 9,850 0% 10,373,563 27,577 0%
Average common shares outstanding - diluted 10,547,413 10,526,857 20,556 0% 10,505,901 41,512 0%
Income per common share
Basic$ 0.13$ 0.12$ 0.01 8%$ 0.11$ 0.02 18%
Diluted$ 0.13$ 0.12$ 0.01 8%$ 0.10$ 0.03 30%

Noninterest Income

Noninterest income was up 9% on a linked quarter basis, primarily as a result of a $351,000 gain on the sale of a $1.2 million other-real-estate-owned (OREO) property. Revenue from residential mortgage loans decreased slightly in the quarter, mainly due to declines in residential sales activity typical for the winter season. Noninterest income increased 28% versus the same quarter a year ago, primarily due to the aforementioned gain on sale of OREO and an increase in gains on sale of residential mortgage loans. Increases in residential real estate sales benefitted from continued improvement of the local economy. Other noninterest income fell as compared to the linked quarter principally as a result of lower ATM/debit card fee income. This decline was due to a one-time incentive of $120,000 received in fourth quarter 2015 as part of an enhancement of our membership arrangement with the processing entity. In addition, fee income from ATM/debit card activity decreased as compared to the linked quarter due to higher retail sales associated with holiday shopping in fourth quarter 2015.

Noninterest Income
(Unaudited)
For the Three Months Ended,
March 31, December 31, $ % March 31, $ %
2016 2015 Change Change 2015 Change Change
(Dollars in thousands)
Service charges on deposits$449$ 451 $ (2) 0%$ 426 $23 5%
Net gain (loss) on sale of other real estate owned 420 (11) 431 N/M (6) 426 N/M
Gains on sale of loans, net 1,032 1,117 (85) -8% 954 78 8%
Earnings on bank owned life insurance 121 122 (1) -1% 121 - 0%
Other noninterest income
Fee income 443 615 (172) -28% 439 4 1%
Other 66 23 43 187% 39 27 69%
Total noninterest income$2,531$ 2,317 $ 214 9%$ 1,973 $558 28%

Noninterest Expense

Noninterest expense increased from the immediate prior quarter. Salaries and employee benefit costs increased due to the addition of banking professionals as part of the current strategic initiatives to expand treasury management and small business banking lines of business as well as annual merit increases effective in the first quarter. OREO operating costs increased by $348,000 as a result of expenses associated with preparing the above-referenced $1.2 million OREO property for sale. These one-time expenses were offset by a decline in other noninterest expenses of $360,000 taken in the linked quarter. This expense resulted from the one-time write-down in the carrying value of a branch facility, the closure of which was announced in fourth quarter 2015. Noninterest expense was up 11% 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 personnel additions previously mentioned. Increases in OREO operating costs also contributed to growth in noninterest expenses in the current period when compared to the year-over-year quarter. These increases were due to the one-time costs associated with the sale of OREO, as previously noted.

Noninterest Expense
(Unaudited)
For the Three Months Ended,
March 31,
2016
December 31,
2015
$
Change
%
Change
March 31,
2015
$
Change
%
Change
(Dollars in thousands)
Salaries and employee benefits$5,057$4,788$ 269 6%$4,578$ 479 10%
Occupancy 495 478 17 4% 522 (27) -5%
Equipment 259 273 (14) -5% 267 (8) -3%
Data processing 491 472 19 4% 513 (22) -4%
Professional services 151 103 48 47% 168 (17) -10%
Other real estate owned write-downs - - - 0% 31 (31) 0%
Other real estate owned operating costs 417 98 319 N/M 17 400 N/M
State and local taxes 121 119 2 2% 102 19 19%
FDIC and state assessments 134 138 (4) -3% 133 1 1%
Other noninterest expense:
Director fees 72 70 2 3% 71 1 1%
Communication 64 66 (2) -3% 61 3 5%
Advertising 71 81 (10) -12% 96 (25) -26%
Professional liability insurance 48 40 8 20% 22 26 118%
Amortization 57 85 (28) -33% 83 (26) -31%
Other 833 1,123 (290) -26% 820 13 2%
Total noninterest expense$8,270$7,934$ 336 4%$7,484$ 786 11%


Financial Performance Overview
(Unaudited)
For the Three Months Ended
March 31,
2016
December 31,
2015
Change March 31,
2015
Change
Performance Ratios
Return on average assets, annualized 0.67% 0.59% 0.08 0.59% 0.08
Return on average equity, annualized 7.11% 6.16% 0.95 6.05% 1.06
Efficiency ratio (1) 79.12% 80.48% (1.36) 84.13% (5.01)
(1) Non-interest expense divided by net interest income plus noninterest income.

LIQUIDITY

Cash and Cash Equivalents and Investment Securities
(Unaudited)
March 31,
2016
% of
Total
Dec 31,
2015
% of
Total
$
Change
%
Change
March 31,
2015
% of
Total
$
Change
%
Change
(Dollars in thousands)
Cash on hand and in banks$13,868 12%$17,680 13%$ (3,812) -22%$15,321 12%$ (1,453) -9%
Interest bearing deposits 9,093 7% 9,846 7% (753) -8% 12,282 10% (3,189) -26%
Certificates of deposit 2,727 2% 2,727 2% - 0% 2,727 2% - 0%
Total cash equivalents and certificate of deposits 25,688 21% 30,253 23% (4,565) -15% 30,330 23% (4,642) -15%
Investment securities:
Collateralized mortgage obligations: agency issued 35,020 28% 38,984 29% (3,964) -10% 42,108 33% (7,088) -17%
Collateralized mortgage obligations: non-agency 483 0% 483 0% 0 0% 504 0% (21) -4%
Mortgage-backed securities: agency issued 10,920 9% 11,022 8% (102) -1% 12,136 9% (1,216) -10%
U.S. Government and agency securities 9,929 8% 9,867 7% 62 1% 10,114 8% (185) -2%
State and municipal securities 39,652 32% 41,365 31% (1,713) -4% 30,147 23% 9,505 32%
FHLB Stock, at cost 1,339 1% 1,346 1% (7) -1% 2,865 2% (1,526) 100%
Pacific Coast Bankers' Bank stock, at cost 1,000 1% 1,000 1% - 0% 1,000 1% - 0%
Total investment securities 98,343 79% 104,067 77% (5,724) -6% 98,874 77% (531) -1%
Total cash equivalents and investment securities$124,031 100%$134,320 100%$ (10,289) -8%$129,204 100%$ (5,173) -4%
Total cash equivalents and investment securities
as a % of total assets 15% 16% 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 loans as compared to the fourth quarter,” said Douglas N. Biddle, EVP and Chief Financial Officer. “Our investment securities include a large component of fully amortized U.S. agency collateralized mortgage and 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 3.3 years at March 31, 2016, 3.5 years at December 31, 2015 and 4.2 years at March 31, 2015.

The Bank had $8.8 million in outstanding borrowings against its $279.6 million in established borrowing capacity with the Federal Home Loan Bank of Des Moines (FHLB) at March 31, 2016. The Bank had $11.3 million and $11.4 million in outstanding borrowings with the FHLB at December 31, 2015 and March 31, 2015, respectively. The borrowing capacity at the FHLB was $282.9 million and $137.6 million at December 31, 2015 and March 31, 2015, 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 $61.7 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)
March 31, % of Dec 31, % of $ % March 31, % of $ %
2016 Gross Loans 2015 Gross Loans Change Change 2015 Gross Loans Change Change
(Dollars in thousands)
Commercial and agricultural$ 134,540 21%$ 131,734 21%$ 2,806 2%$ 119,095 21%$ 15,445 13%
Real estate:
Construction and development 34,469 5% 33,170 5% 1,299 4% 28,831 5% 5,638 20%
Residential 1-4 family 93,826 15% 94,217 15% (391) 0% 91,865 16% 1,961 2%
Multi-family 27,505 4% 26,828 4% 677 3% 20,287 3% 7,218 36%
Commercial real estate -- owner occupied 135,704 21% 134,366 22% 1,338 1% 130,486 23% 5,218 4%
Commercial real estate -- non owner occupied 141,203 22% 134,612 22% 6,591 5% 116,095 20% 25,108 22%
Farmland 22,182 3% 20,492 3% 1,690 8% 21,898 4% 284 1%
Consumer 55,427 9% 51,352 8% 4,075 8% 45,411 8% 10,016 22%
Gross loans 644,856 100% 626,771 100% 18,085 3% 573,968 100% 70,888 12%
Less: allowance for loan losses (8,552) (8,317) (235) (8,254) (298)
Less: deferred fees (1,479) (1,435) (44) (1,185) (294)
Loans, net$ 634,825 $ 617,019 $ 17,806 $ 564,529 $ 70,296


Loan Concentration
(unaudited)
% of % of % of
March 31,
2016
Risk Based
Capital
Dec 31,
2015
Risk Based
Capital
Change March 31,
2015
Risk Based
Capital
Change
(Dollars in thousands)
Commercial and agricultural$134,540 157%$131,734 157% 0%$119,095 147% 10%
Real estate:
Construction and development 34,469 40% 33,170 39% 1% 28,831 35% 5%
Residential 1-4 family 93,826 109% 94,217 112% -3% 91,865 113% -4%
Multi-family 27,505 32% 26,828 32% 0% 20,287 25% 7%
Commercial real estate -- owner occupied 135,704 158% 134,366 160% -2% 130,486 161% -3%
Commercial real estate -- non owner occupied 141,203 165% 134,612 160% 5% 116,095 143% 22%
Farmland 22,182 26% 20,492 24% 2% 21,898 27% -1%
Consumer 55,427 65% 51,352 61% 4% 45,411 56% 9%
Gross loans$644,856 $626,771 $573,968
Regulatory Commercial Real Estate$199,148 232%$189,948 226% 6%$161,873 199% 33%
Total Risk Based Capital*$85,814 $84,073 $81,286
*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. The portfolio includes $39.7 million in lower-yielding LIBOR-based floating rate commercial real estate loans. The portfolio also includes $25.4 million in purchased government-guaranteed commercial and commercial real estate loans. In addition, the portfolio contains $44.4 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

Deposits by Category
(Unaudited)
March 31,
2016
% of
Total
Dec 31,
2015
% of
Total
$
Change
%
Change
March 31,
2015
% of
Total
$
Change
%
Change
(Dollars in thousands)
Interest-bearing demand and money market$295,056 41%$299,343 41%$ (4,287) -1%$291,083 44%$3,973 1%
Savings 94,734 13% 90,380 13% 4,354 5% 83,346 13% 11,388 14%
Time deposits (CDs) 138,277 19% 139,775 20% (1,498) -1% 115,419 18% 22,858 20%
Total interest-bearing deposits 528,067 73% 529,498 74% (1,431) 0% 489,848 75% 38,219 8%
Non-interest bearing demand 194,669 27% 185,001 26% 9,668 5% 167,264 25% 27,405 16%
Total deposits$722,736 100%$714,499 100%$ 8,237 1%$657,112 100%$65,624 10%

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. Accordingly, the proportion of noninterest bearing deposits to total deposits grew to 27%, up from 26% and 25% at December 31, 2015 and March 31, 2015, respectively.

Total brokered deposits were $53.7 million, which included $1.1 million via reciprocal deposit arrangements, up from $52.2 million at December 31, 2015 and $21.8 million at March 31, 2015. The brokered deposits acquired 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 remained relatively unchanged compared to the fourth quarter. They have declined as compared to the first 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, 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.

Capital Measures
(unaudited)
March 31,
2016
Dec 31,
2015
Change March 31,
2015
Change To be Well
Capitalized
Under
Prompt
Correction
Action
Regulations*
Pacific Financial Corporation
Total risk-based capital ratio 12.73% 12.78% (0.05) 13.28% (0.55) N/A
Tier 1 risk-based capital ratio 11.48% 11.53% (0.05) 12.02% (0.54) N/A
Common equity tier 1 ratio 9.57% 9.57% - 9.91% (0.34) N/A
Leverage ratio 9.58% 9.44% 0.14 10.01% (0.43) N/A
Tangible common equity ratio 7.95% 7.73% 0.22 8.09% (0.14) N/A
Bank of the Pacific
Total risk-based capital ratio 12.66% 12.69% (0.03) 13.21% (0.55) 10.0%
Tier 1 risk-based capital ratio 11.41% 11.44% (0.03) 11.96% (0.55) 8.0%
Common equity tier 1 ratio 11.41% 11.44% (0.03) 11.96% (0.55) 6.5%
Leverage ratio 9.50% 9.35% 0.15 9.96% (0.46) 5.0%
*Includes Basel III Capital Conservation Buffer

Net Interest Margin

Net interest margin improved by 25 basis points compared to fourth quarter 2015, predominantly due to the imposition of additional interest due to a breach in loan agreement, resulting in additional one-time interest income during the period. This enhanced net interest margin 12 basis points on an annualized basis. Correspondingly, net interest margin improved as compared to the year-over-year quarter.

Yield on investment securities increased as compared to the linked and year-over-year quarters. This was primarily due to an increase in the proportion of higher-yielding tax-exempt securities within the portfolio. Correspondingly, the proportion of mortgage-backed securities was reduced to mitigate the impact of potential changes in interest rates on the value of these types of securities.

Cost of deposits and borrowings remained relatively unchanged in the current quarter as compared to the linked and year-over-year quarters. This was despite the modest addition of higher-cost longer-term fixed rate brokered deposit funding during the prior year. The increase in the proportion of deposits coming from non-interest bearing deposits favorably impacted funding costs during these respective periods.

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, 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
(Unaudited)
(Annualized, tax-equivalent basis)
For the Three Months Ended,
March 31,
2016
Dec 31,
2015
$
Change
%
Change
March 31,
2015
$
Change
%
Change
Average Balances (Dollars in thousands)
Gross loans$ 637,187 $ 612,429 $ 24,758 4%$ 567,788 $ 69,399 12%
Loans held for sale$ 9,957 $ 10,126 $ (169) -2%$ 6,735 $ 3,222 48%
Investment securities$ 115,892 $ 137,160 $ (21,268) -16%$ 116,033 $ (141) 0%
Total interest-earning assets$ 763,036 $ 759,715 $ 3,321 0%$ 690,556 $ 72,480 10%
Non-interest bearing demand deposits$ 181,777 $ 183,876 $ (2,099) -1%$ 167,391 $ 14,386 9%
Interest bearing deposits$ 522,327 $ 529,188 $ (6,861) -1%$ 480,681 $ 41,646 9%
Borrowings$ 37,238 $ 24,719 $ 12,519 51%$ 24,849 $ 12,389 50%
Total interest-bearing liabilities$ 559,565 $ 553,907 $ 5,658 1%$ 505,530 $ 54,035 11%
Total Equity$ 77,853 $ 78,257 $ (404) -1%$ 73,463 $ 4,390 6%
For the Three Months Ended,
March 31,
2016
Dec 31,
2015
Change March 31,
2015
Change
Net Interest Margin
Yield on average gross loans (1) 5.01% 4.86% 0.15 4.92% 0.09
Yield on average investment securities (1) 2.26% 1.92% 0.34 2.11% 0.15
Cost of average interest bearing deposits 0.36% 0.36% - 0.33% 0.03
Cost of average borrowings 1.51% 2.01% (0.50) 1.89% (0.38)
Cost of average total deposits and borrowings 0.33% 0.32% 0.01 0.31% 0.02
Yield on average interest-earning assets 4.59% 4.33% 0.26 4.45% 0.14
Cost of average interest-bearing liabilities 0.44% 0.43% 0.01 0.41% 0.03
Net interest spread 4.15% 3.90% 0.25 4.04% 0.11
Net interest margin (1) 4.27% 4.02% 0.25 4.15% 0.12
(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, primarily due to the downgrade of a $1.4 million commercial relationship during the period. Adversely classified loans declined versus the like quarter a year ago primarily due to the refinancing of a $2.0 million troubled debt restructure (“TDR”) to a fully performing commercial loan. Total 30-89 day delinquencies remained below 0.50%, mirroring the continued improvement in overall credit quality.

Adversely Classified Loans and Securities
(Unaudited)
March 31,
2016
Dec 31,
2015
$
Change
%
Change
March 31,
2015
$
Change
%
Change
(Dollars in thousands)
Rated substandard or worse, but not impaired$ 15,597 $ 14,090 $ 1,507 11%$ 7,368 $ 8,229 112%
Impaired 1,915 1,982 (67) -3% 11,311 (9,396) -83%
Total adversely classified loans¹$ 17,512 $ 16,072 $ 1,440 9%$ 18,679 $ (1,167) -6%
Total adversely classified investment securities²$ 165 $ 169 $ (4) -2%$ 199 $ (34) -17%
Gross loans (excluding deferred loan fees)$ 644,856 $ 626,771 $ 18,085 3%$ 564,313 $ 80,543 14%
Adversely classified loans to gross loans 2.72% 2.56% 3.31%
Allowance for loan losses$ 8,552 $ 8,317 $ 235 3%$ 8,353 $ 199 2%
Allowance for loan losses as a percentage of adversely classified loans 48.84% 51.75% 44.72%
Allowance for loan losses to total impaired loans 446.58% 419.63% 73.85%
Adversely classified loans and securities to total assets 2.13% 1.97% 2.48%
Delinquent loans to gross loans, not in nonaccrual status 0.31% 0.20% 0.12%
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 March 31, 2016, December 31, 2015 and March 31, 2015.

Nonperforming assets declined as compared to the linked quarter, primarily due to sales of OREO, as noted below. In addition, a $218,000 commercial loan relationship was transferred from nonaccrual status to OREO. As a result, nonperforming assets declined during the period as a percentage of total assets.

Nonperforming Assets
(Unaudited)
March 31,
2016
Dec 31,
2015
$
Change
%
Change
March 31,
2015
$
Change
%
Change
(Dollars in thousands)
Loans on nonaccrual status$ 1,373 $ 1,518 $ (145) -10%$ 6,900 $ (5,527) -80%
Loans past due greater than 90 days but
not on nonaccrual status - - - - - - -
Total non-performing loans 1,373 1,518 (145) -10% 6,900 (5,527) -80%
Other real estate owned and
foreclosed assets 2,557 3,610 (1,053) -29% 1,124 1,433 127%
Total nonperforming assets$ 3,930 $ 5,128 $ (1,198) -23%$ 8,024 $ (4,094) -51%
Percentage of nonperforming assets to total assets 0.47% 0.62% 1.05%
Nonperforming loans to total loans 0.21% 0.24% 1.22%

The Company sold two OREO residential commercial real estate properties with a book value of $1.7 million for a combined gain of $420,000. The largest balances in the OREO portfolio at the quarter end were attributable to three commercial properties, all of which are located within our market area.

ALLOWANCE FOR LOAN LOSSES

The allowance for loan losses has increased in concert with recent loan growth. The provision for loan losses totaled $262,000 for the first quarter reflecting loan portfolio growth. 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.

For the current quarter, charge-offs decreased considerably from the linked quarter. This was primarily due to a partial charge-off of $684,000 taken in fourth quarter 2015 related to one legacy commercial loan relationship placed into OREO. “Given the dated origination of this legacy commercial relationship, we do not consider this to be indicative of negative trends in portfolio quality,” said Biddle. As a result, charge-offs and the ratio of net loan charge-offs to average gross loans for the current period declined significantly when compared to the linked quarter. The current quarter’s experience compares favorably with that of the year-over-year quarter. 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)
For the Three Months Ended,
March 31,
2016
Dec 31,
2015
$
Change
%
Change
March 31,
2015
$
Change
%
Change
(Dollars in thousands)
Gross loans outstanding at end of period$ 644,856 $ 626,771 $ 18,085 3%$ 573,968 $ 70,888 12%
Average loans outstanding, gross$ 637,187 $ 612,429 $ 24,758 4%$ 567,788 $ 69,399 12%
Allowance for loan losses, beginning of period$ 8,317 $ 8,756 $ (439) -5%$ 8,353 $ (36) 0%
Commercial - - - 0% - - 0%
Commercial Real Estate - (684) 684 -100% (8) 8 -100%
Residential Real Estate (16) - (16) 100% (86) 70 -81%
Consumer (26) (20) (6) 30% (64) 38 -59%
Total charge-offs (42) (704) 662 -94% (158) 116 -73%
Commercial 1 7 (6) -86% 6 (5) -83%
Commercial Real Estate 2 - 2 100% 3 (1) -33%
Residential Real Estate 11 49 (38) -78% 9 2 22%
Consumer 1 9 (8) -89% 11 (10) 100%
Total recoveries 15 65 (50) -77% 29 (14) -48%
Net (charge-offs)/recoveries (27) (639) 612 -96% (129) 102 -79%
Provision charged to income 262 200 62 31% 30 232 N/M
Allowance for loan losses, end of period$ 8,552 $ 8,317 $ 235 3%$ 8,254 $ 298 4%















Ratio of net loans charged-off to average
gross loans outstanding, annualized 0.02% 0.41% -0.39% -95% 0.09% -0.07% 100%
Ratio of allowance for loan losses to
gross loans outstanding 1.33% 1.33% 0.00% 0% 1.44% -0.11% -8%

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 March 31, 2016, the Company had total assets of $830 million and operated fifteen 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