Pacific Financial Corporation Earnings Increase 22% in

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 issued			483		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.

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%

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