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Pacific Financial Corp Reports Record 1Q18 Net Income of $2.3 Million, or $0.21 per Share; Up 68% from 4Q17 and 44% from 1Q17

ABERDEEN, Wash., April 24, 2018 (GLOBE NEWSWIRE) --

Pacific Financial Corporation (OTCQB:PFLC), the holding company for Bank of the Pacific today reported net income increased 68% to $2.3 million, or $0.21 per diluted share, for the first quarter of 2018, compared to net income for the fourth quarter of 2017 of $1.4 million, or $0.13 per diluted share, and increased 44% compared to $1.6 million, or $0.15 per diluted share, for the first quarter of 2017. Earnings for 4Q17 included a charge to income tax expense of $1.0 million, or $0.07 per diluted share, resulting from the revaluation of its deferred tax asset (“DTA”) to comply with recently enacted tax legislation. All results are unaudited. 

“We delivered record results for the first quarter, driven by an improved net interest margin, growth in net interest income and enhanced operating efficiencies,” said Denise Portmann, President & Chief Executive Officer. “We continued to introduce automated processes to improve workflows and implement revenue enhancement and expense reduction initiatives.  In addition, we are investing a portion of the benefit from the lower corporate tax rate in our employees by boosting the employer 401(k) match, expanding training opportunities and making improvements to our technology.”

“Given the continued solid credit quality of our loan portfolio, no provision was booked for the current quarter.  We continue to manage our loan growth for credit risks, within regulatory guidelines, particularly in commercial real estate,” commented Portmann. “Residential mortgage lending contributed $944,000 to noninterest income during the quarter, down from the revenue earned in the prior quarter, but typical for this time of the year due to seasonal factors.” 

Financial Highlights (as of, or for the period ended March 31, 2018, except as noted):

  • Diluted earnings per share was $0.21, compared to $0.13 for the fourth quarter of 2017, and $0.15 for the first quarter of 2017.   The DTA adjustment reduced earnings per share by $0.07 for the fourth quarter of 2017.
     
  • Return on average assets (“ROAA”) increased to 1.05% and return on average equity (“ROAE”) increased to 10.76%, compares to 0.60% and 6.09%, respectively, for the fourth quarter of 2017 (as impacted by the one-time tax expense noted above), and 0.75% and 7.92%, respectively, for the first quarter of 2017.
     
  • Net interest income increased 10% to $8.9 million, compared to $8.1 million a year ago, and remained relatively flat on a linked quarter basis.
     
  • Net interest margin on a tax equivalent basis (“NIMTE”), expanded 12 basis points to 4.44%, compared to 4.32% in the preceding quarter and improved 25 basis points from 4.19% for the first quarter of 2017.
     
  • Total gross loans were $693.5 million versus $688.4 million, at December 31, 2017 and $668.4 million at March 31, 2017. 
     
  • Total deposits were $785.2 million, compared to $777.2 million at December 31, 2017 and $762.0 million at March 31, 2017.  Non-interest bearing deposits comprise 32% of total deposits.
     
  • Asset quality remains solid. 
    • Loans 30 – 89 days’ delinquent, not on nonaccrual status, were minimal at 0.21% of gross loans outstanding. 
    • Net recoveries totaled $49,000, or 0.03% of average gross loans in the first quarter of 2018, compared to net charge-offs of $120,000, or 0.07% of average gross loans in fourth quarter of 2017, and net charge-offs of $97,000, or 0.06% of average gross loans, in first quarter of 2017. 
    • Nonperforming assets were $1.7 million, or 0.19% of total assets, as compared to $2.2 million, or 0.25% of total assets at December 31, 2017 and $1.3 million, or 0.15% of total assets at March 31, 2017. 
    • Adversely classified loans were $9.5 million, or 1.37% of gross loans, versus $7.5 million, or 1.10% of gross loans, at December 31, 2017 and $15.0 million, or 2.24% of gross loans, at March 31, 2017. 
    • There was no provision for loan losses for the first quarter of 2018 and the preceding quarter, compared to a provision of $122,000 for the first quarter of 2017. 
    • The allowance for loan losses to gross loans stood at 1.32% at March 31, 2018 and December 31, 2017, compared to 1.38% at March 31, 2017.
       
  • The Company’s consolidated capital ratios exceeded regulatory guidelines, and the Bank’s capital ratios exceeded the regulatory guidelines for a well-capitalized financial institution under current regulatory requirements.

Operating Results

Total assets were virtually unchanged from the linked quarter, due primarily to typical seasonality of tourism markets in coastal Washington and Oregon. Loans grew modestly during the period. Total assets were up year-over-year primarily due to the increase in loans funded by growth in deposits and retained earnings. Liquidity remains strong, including unused borrowing capacity. Capital ratios continue to exceed the thresholds to be considered “Well-Capitalized” under published regulatory standards.     

Balance Sheet Overview
(Unaudited)
                               
      Mar 31, 2018   Dec 31, 2017   $ Change   % Change   Mar 31, 2017   $ Change   % Change
Assets:    (Dollars in thousands, except per share data)
  Cash and cash equivalents $ 43,203   $ 34,571   $ 8,632     25 % $ 28,230   $ 14,973     53 %
  Other interest earning deposits   994     994     -     0 %   2,231     (1,237 )   -55 %
  Investment securities   105,585     110,767     (5,182 )   -5 %   109,963     (4,378 )   -4 %
  Loans held-for-sale   7,187     10,886     (3,699 )   -34 %   12,309     (5,122 )   -42 %
  Loans, net of deferred fees   692,485     687,319     5,166     1 %   666,918     25,567     4 %
  Allowance for loan losses   (9,141 )   (9,092 )   (49 )   1 %   (9,217 )   76     -1 %
    Net loans   683,344     678,227     5,117     1 %   657,701     25,643     4 %
  Federal Home Loan Bank and Pacific Coast
  Bankers' Bank stock, at cost
  2,412     2,409     3     0 %   2,413     (1 )   0 %
  Other assets   58,276     57,099     1,177     2 %   59,962     (1,686 )   -3 %
    Total assets $ 901,001   $ 894,953   $ 6,048     1 % $ 872,809   $ 28,192     3 %
                               
Liabilities and Shareholders' Equity:                            
  Total deposits $ 785,193   $ 777,225   $ 7,968     1 % $ 761,951   $ 23,242     3 %
  Borrowings   21,869     21,906     (37 )   0 %   22,019     (150 )   -1 %
  Accrued interest payable and other liabilities 7,700     10,791     (3,091 )   -29 %   7,008     692     10 %
  Shareholders' equity   86,239     85,031     1,208     1 %   81,831     4,408     5 %
    Total liabilities and shareholders' equity $ 901,001   $ 894,953   $ 6,048     1 % $ 872,809   $ 28,192     3 %
                               
Common Stock Shares Outstanding   10,550,852     10,491,892     58,960     1 %   10,436,544     114,308     1 %
                               
Book value per common share (1) $ 8.17   $ 8.10   $ 0.07     1 % $ 7.84   $ 0.33     4 %
Tangible book value per common share (2) $ 6.89   $ 6.82   $ 0.07     1 % $ 6.54   $ 0.35     5 %
Gross loans to deposits ratio   88.2 %   88.4 %   -0.2 %       87.5 %   0.7 %    
                                       


(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.
     

Net interest income was unchanged on a linked quarter basis, despite growth in average earning assets and an increase in yields associated with the recent rise in short-term interest rates, primarily as a result of two less days in the current period. Net interest income increased from a year ago, mainly due to growth in loan production generated predominately in Western Washington and Oregon, an increase in yields associated with the recent rise in short-term interest rates, and a reduction in interest expense. 

Interest expense declined from the fourth quarter of 2017 and first quarter a year ago, primarily due to the non-renewal of higher-cost brokered and public certificates of deposit throughout the period, despite rate increases in LIBOR-based junior subordinated debentures during the period. The continued growth of noninterest-bearing deposits mitigated the impact of the above. Income tax expense was reduced in the current period by $90,000 as an offset to the income tax liability paid on behalf of employees due to a tax windfall from the significant amount of stock compensation awards exercised during the period, per a recently adopted accounting standard.

Pre-tax, pre-credit operating income (non-GAAP) for first quarter 2018, decreased from the linked quarter, primarily due to a seasonal decline in gain on sale of real estate loans, coupled with increases in employee income tax withholding, equipment and training expense. Pre-tax, pre-credit operating income was up from the first quarter of 2017 due to the increase in net interest income.

Income Statement Overview
(Unaudited)
                               
       For the Three Months Ended,
      Mar 31, 2018   Dec 31, 2017   $ Change   %  Change   Mar 31, 2017   $ Change   % Change
       (Dollars in thousands, except per share data)
Interest and dividend income $ 9,463 $ 9,495 $ (32 )   0 % $ 8,678 $ 785     9 %
Interest expense   580   593   (13 )   -2 %   620   (40 )   -6 %
  Net interest income   8,883   8,902   (19 )   0 %   8,058   825     10 %
Loan loss provision   -   -   -     0 %   122   (122 )   -100 %
Noninterest income   2,325   2,625   (300 )   -11 %   2,281   44     2 %
Noninterest expense   8,556   8,013   543     7 %   8,150   406     5 %
Income before income taxes   2,652   3,514   (862 )   -25 %   2,067   585     28 %
Income tax expense   364   2,156   (1,792 )   -83 %   476   (112 )   -24 %
  Net Income $ 2,288 $ 1,358 $ 930     68 % $ 1,591 $ 697     44 %
                               
Average common shares outstanding - basic   10,520,027   10,482,545   37,482     0 %   10,430,276   89,751     1 %
Average common shares outstanding - diluted   10,656,997   10,661,422   (4,425 )   0 %   10,653,999   2,998     0 %
                               
Income per common share                            
  Basic $ 0.22 $ 0.13 $ 0.09     69 % $ 0.15 $ 0.07     47 %
  Diluted $ 0.21 $ 0.13 $ 0.08     62 % $ 0.15 $ 0.06     40 %
                                       

The following tables provide the reconciliation of net income to pre-tax, pre-credit operating income (non-GAAP):

Reconciliation of Non-GAAP Measure
(Unaudited)
                               
       For the Three Months Ended,
      Mar 31, 2018   Dec 31, 2017   $ Change   % Change   Mar 31, 2017   $ Change   % Change
Non-GAAP Operating Income    (Dollars in thousands)
Net Income $ 2,288 $ 1,358 $ 930     68 % $ 1,591 $ 697     44 %
  Loan loss provision   -   -   -     0 %   122   (122 )   -100 %
  Loss on sale of other real estate owned, net   -   -   -     0 %   52   (52 )   -100 %
  Income tax expense   364   2,156   (1,792 )   -83 %   476   (112 )   -24 %
Pre-tax, pre-credit operating income $ 2,652 $ 3,514 $ (862 )   -25 % $ 2,241 $ 411     18 %
                                     

Noninterest Income

Noninterest income declined on a linked quarter basis, primarily due to a seasonal decline in revenue from the sale of residential mortgage loans, while remaining unchanged compared to the year-over-year quarter. Fee income during the current quarter included a $54,000 loan prepayment penalty and $51,000 in annual debit card marketing incentives. Recent increases in mortgage rates have moderated demand for refinancing. However, demand for purchase financing remains strong, with robust demand for new homes chasing a limited supply of housing in several of our Western Washington and Oregon markets. Supply constraints, and resulting increases in housing prices, have, in part, stemmed from increased governmental regulations governing real estate development over the past several years.

Noninterest Income
(Unaudited)
      For the Three Months Ended,
      Mar 31, 2018   Dec 31, 2017   $ Change   % Change   Mar 31, 2017   $ Change   % Change
      (Dollars in thousands)
Service charges on deposits $ 495 $ 474   $ 21     4 % $ 460   $ 35     8 %
Net loss on sale of other real estate owned, net   -   -     -     0 %   (52 )   52     -100 %
Gain on sale of loans, net   944   1,406     (462 )   -33 %   1,020     (76 )   -7 %
Gain on sale of securities available for sale, net   -   (70 )   70     -100 %   79     (79 )   -100 %
Earnings on bank owned life insurance   108   109     (1 )   -1 %   110     (2 )   -2 %
Other noninterest income                            
  Fee income   739   661     78     12 %   609     130     21 %
  Other   39   45     (6 )   -13 %   55     (16 )   -29 %
Total noninterest income $ 2,325 $ 2,625   $ (300 )   -11 % $ 2,281   $ 44     2 %
                                         

Noninterest Expense

Noninterest expense increased from the linked quarter and prior year period, primarily due to an increase in employee income tax withholding, equipment and training expense. Additional employee income tax expense of $75,000 was incurred associated with the annual bonus payouts made during the period. In addition, a portion of the tax expense savings from the recently enacted tax reform legislation was redeployed in the form of increased equipment and employee training investments during the current period. Data processing and software expense also increased versus the prior periods with the continued introduction of technology solutions to augment cyber-security and enhance productivity. 

Noninterest Expense
(Unaudited)
                               
      For the Three Months Ended,
      Mar 31, 2018   Dec 31, 2017   $ Change   % Change   Mar 31, 2017   $ Change   % Change
      (Dollars in thousands)
Salaries and employee benefits $ 5,371 $ 5,181 $ 190     4 % $ 5,147 $ 224     4 %
Occupancy   548   498   50     10 %   502   46     9 %
Equipment   323   262   61     23 %   282   41     15 %
Data processing   603   575   28     5 %   539   64     12 %
Professional services   191   137   54     39 %   217   (26 )   -12 %
Other real estate owned write-downs   -   -   -     0 %   -   -     0 %
Other real estate owned operating costs   10   -   10     100 %   11   (1 )   -9 %
State and local taxes   118   123   (5 )   -4 %   130   (12 )   -9 %
FDIC and State assessments   134   120   14     12 %   106   28     26 %
Other noninterest expense:                            
  Director fees   65   71   (6 )   -8 %   51   14     27 %
  Communication   70   70   -     0 %   88   (18 )   -20 %
  Advertising   72   80   (8 )   -10 %   81   (9 )   -11 %
  Professional liability insurance   47   43   4     9 %   47   -     0 %
  Amortization   91   86   5     6 %   62   29     47 %
  Other   913   767   146     19 %   887   26     3 %
Total noninterest expense $ 8,556 $ 8,013 $ 543     7 % $ 8,150 $ 406     5 %
                                     


Financial Performance Overview
(Unaudited)
                     
    For the Three Months Ended
    Mar 31, 2018   Dec 31, 2017   Change   Mar 31, 2017   Change
Performance Ratios                  
Return on average assets, annualized 1.05 %   0.60 %     0.45   0.75 %     0.30  
Return on average equity, annualized 10.76 %   6.09 %     4.67   7.92 %     2.84  
Efficiency ratio (1) 76.34 %   69.52 %     6.82   78.83 %     (2.49 )
                           


(1)   Non-interest expense divided by net interest income plus noninterest income.
     

LIQUIDITY

Cash and Cash Equivalents and Investment Securities
(Unaudited)
        Mar 31, 2018    % of Total   Dec 31, 2017    % of Total   $ Change   % Change   Mar 31, 2017    Total   $ Change   % Change
        (Dollars in thousands)
Cash on hand and in banks $ 26,893   18 % $ 14,667   9 % $ 12,226     83 % $ 16,057   11 % $ 10,836     67 %
Interest bearing deposits   16,309   11 %   19,904   14 %   (3,595 )   -18 %   12,173   9 %   4,136     34 %
Other interest earning deposits   994   1 %   994   1 %   -     0 %   2,231   2 %   (1,237 )   -55 %
  Total cash equivalents and interest earning deposits   44,196   30 %   35,565   24 %   8,631     24 %   30,461   22 %   13,735     45 %
                                             
Investment securities:                                        
  Collateralized mortgage obligations: agency issued   37,601   25 %   39,719   27 %   (2,118 )   -5 %   40,079   29 %   (2,478 )   -6 %
  Collateralized mortgage obligations: non-agency   237   0 %   257   0 %   (20 )   -8 %   305   0 %   (68 )   -22 %
  Mortgage-backed securities: agency issued   14,834   10 %   15,775   11 %   (941 )   -6 %   14,645   10 %   189     1 %
  U.S. Government and agency securities   2,327   2 %   2,483   2 %   (156 )   -6 %   2,617   2 %   (290 )   -11 %
  State and municipal securities   50,587   33 %   52,533   36 %   (1,946 )   -4 %   52,317   37 %   (1,730 )   -3 %
    Total investment securities   105,586   70 %   110,767   76 %   (5,181 )   -5 %   109,963   78 %   (4,377 )   -4 %
Total cash equivalents and investment securities $ 149,782   100 % $ 146,332   100 % $ 3,450     2 % $ 140,424   100 % $ 9,358     7 %
                                             
Total cash equivalents and investment securities                                        
  as a percent of total assets       17 %       16 %               20 %        
                                                 

“Liquidity remains strong based on existing levels of combined cash equivalents, investment securities and unused borrowing capacity.  While seasonal outflow of deposits typical for this time of year impacted total deposits during the quarter, noninterest-bearing deposits increased 11% from the first quarter a year ago,” 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 4.1 years at March 31, 2018, 4.0 years at December 31, 2017 and 4.0 years at March 31, 2017.

The Bank had $8.5 million in outstanding borrowings against its $185.7 million in established borrowing capacity with the Federal Home Loan Bank of Des Moines (FHLB) at March 31, 2018. The Bank had $8.5 million and $8.6 million in outstanding borrowings with the FHLB at December 31, 2017 and March 31, 2017, 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 $47.8 million, subject to collateral requirements, and $16.0 million from correspondent banks, with no balance outstanding on any of these facilities.

LOANS

Loans by Category
(Unaudited)
                                           
      Mar 31, 2018   % of Gross Loans   Dec 31, 2017   % of Gross Loans   $ Change    % Change   Mar 31, 2017   % of Gross Loans   $ Change    % Change
      (Dollars in thousands)
Commercial and agricultural $ 137,786     19 % $ 138,629     21 % $ (843 )   -1 % $ 133,533     20 % $ 4,253     3 %
Real estate:                                        
Construction and development   47,593     7 %   62,980     9 %   (15,387 )   -24 %   46,049     7 %   1,544     3 %
Residential 1-4 family   89,701     13 %   88,055     13 %   1,646     2 %   91,924     14 %   (2,223 )   -2 %
Multi-family   25,046     4 %   22,333     3 %   2,713     12 %   28,619     4 %   (3,573 )   -12 %
Commercial real estate -- owner occupied   142,891     21 %   139,163     20 %   3,728     3 %   131,507     20 %   11,384     9 %
Commercial real estate -- non owner occupied   149,512     22 %   139,169     20 %   10,343     7 %   143,578     21 %   5,934     4 %
Farmland   28,596     4 %   30,196     4 %   (1,600 )   -5 %   27,850     4 %   746     3 %
Consumer   72,419     10 %   67,890     10 %   4,529     7 %   65,306     10 %   7,113     11 %
  Loans, net of deferred fees   693,544     100 %   688,415     100 %   5,129     1 %   668,366     100 %   25,178     4 %
    Less:  allowance for loan losses   (9,141 )       (9,092 )       (49 )       (9,217 )       76      
    Less:  deferred fees   (1,059 )       (1,096 )       37         (1,448 )       389      
  Net loans $ 683,344       $ 678,227       $ 5,117       $ 657,701       $ 25,643      
                                                     


Loan Concentration
(Unaudited)
      Mar 31, 2018   % of Risk Based Capital   Dec 31, 2017   % of Risk Based Capital    Change   Mar 31, 2017   % of Risk Based Capital    Change
      (Dollars in thousands)
Commercial and agricultural $ 137,786   145 % $ 138,629   148 %   -3 % $ 133,533   148 %   -3 %
Real estate:                                
Construction and development   47,593   50 %   62,980   67 %   -17 %   46,049   51 %   -1 %
Residential 1-4 family   89,701   94 %   88,055   94 %   0 %   91,924   102 %   -8 %
Multi-family   25,046   26 %   22,333   24 %   2 %   28,619   32 %   -6 %
Commercial real estate -- owner occupied   142,891   150 %   139,163   149 %   1 %   131,507   145 %   5 %
Commercial real estate -- non owner occupied   149,512   157 %   139,169   149 %   8 %   143,578   159 %   -2 %
Farmland   28,596   30 %   30,196   32 %   -2 %   27,850   31 %   -1 %
Consumer   72,419   76 %   67,890   72 %   4 %   65,306   72 %   4 %
  Loans net of deferred fees $ 693,544     $ 688,415         $ 668,366        
                                           
Regulatory Commercial Real Estate $ 215,219   226 % $ 215,087   230 %   -4 % $ 208,604   231 %   -5 %
                                 
Total Risk Based Capital* $ 95,308     $ 93,660         $ 90,420        
                                   
*Bank of the Pacific                                
                                 

The loan portfolio continues to be well-diversified with balances in most lending categories originating predominately within the Western Washington and Oregon markets. Increases in loans were generated in most categories during the current quarter, with the primary exception of construction and development loans. Declines in this segment occurred due to the normal completion and payoff of the project financed. The portfolio includes $29.8 million in LIBOR-based and $160.3 million in Wall Street Journal Prime-based floating rate commercial and commercial real estate loans.  The portfolio also includes $17.3 million in purchased government-guaranteed commercial and commercial real estate loans and $61.3 million in indirect consumer loans to finance luxury and classic cars as a part of a strategy to diversify the loan portfolio. The indirect consumer loans have been made to individuals with high credit scores and have exhibited very low losses 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.  The Bank’s recent portfolio growth includes commercial real estate loans, which are carefully managed to meet regulatory guidelines. 

DEPOSITS

Deposits by Category
(Unaudited)
                                         
    Mar 31, 2018   % of Total   Dec 31, 2017   % of Total   $ Change   % Change   Mar 31, 2017   % of Total   $ Change   % Change
    (Dollars in thousands)
Interest-bearing demand and money market $ 337,831   44 % $ 332,707   44 % $ 5,124     2 % $ 323,471   43 % $ 14,360     4 %
Savings   95,154   12 %   89,303   11 %   5,851     7 %   86,151   11 %   9,003     10 %
Time deposits (CDs)   97,758   12 %   103,871   13 %   (6,113 )   -6 %   122,813   16 %   (25,055 )   -20 %
  Total interest-bearing deposits   530,743   68 %   525,881   68 %   4,862     1 %   532,435   70 %   (1,692 )   0 %
Non-interest bearing demand   254,451   32 %   251,344   32 %   3,107     1 %   229,516   30 %   24,935     11 %
  Total deposits $ 785,194   100 % $ 777,225   100 % $ 7,969     1 % $ 761,951   100 % $ 23,243     3 %
                                                       

Total deposits increased from the linked quarter, but were impacted by the withdrawal of funds by a commercial client, as noted above.    Time deposits continue to decline as a component of funding as retail depositors do not look to lock in relatively low interest rates for an extended period. In addition, balances of brokered deposits also declined during these periods. The proportion of noninterest bearing deposits to total deposits continued to increase year-over-year due to an expansion of treasury management services during the period.     

Brokered certificates of deposit totaled $41.0 million, which included $1.4 million via reciprocal deposit arrangements, down from $42.3 million at December 31, 2017 and $50.8 million at March 31, 2017. The brokered deposits were acquired during the latter part of 2015 with 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 regulatory standards for total risk-based capital, Tier 1 risk-based capital, Common equity Tier 1 and Tier 1 leverage capital. All ratios have increased compared to the linked and prior year quarters, due to the retention of earnings, coupled with the modest level of growth during the period. 

The Federal Deposit Insurance Corporation (“FDIC”) has established minimum requirements for capital adequacy for 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 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)
  Mar 31, 2018   Dec 31, 2017   Change   Mar 31, 2017   Change     Well
Capitalized
Under Prompt
Correction
Action
Regulations*
Pacific Financial Corporation                        
Total risk-based capital ratio 12.90 %   12.69 %     0.21   12.57 %     0.33     N/A  
Tier 1 risk-based capital ratio 11.68 %   11.46 %     0.22   11.32 %     0.36     N/A  
Common equity tier 1 ratio 9.94 %   9.71 %     0.23   9.53 %     0.41     N/A  
Leverage ratio 10.01 %   9.56 %     0.45   9.63 %     0.38     N/A  
                         
Tangible common equity ratio 8.19 %   8.16 %     0.03   7.99 %     0.20     N/A  
                         
Bank of the Pacific                        
Total risk-based capital ratio 12.78 %   12.63 %     0.15   12.50 %     0.28     10.5 %
Tier 1 risk-based capital ratio 11.56 %   11.40 %     0.16   11.25 %     0.31     8.5 %
Common equity tier 1 ratio 11.56 %   11.40 %     0.16   11.25 %     0.31     7.0 %
Leverage ratio 9.90 %   9.51 %     0.39   9.57 %     0.33     7.5 %
                         
*Includes Basel III 2019 Capital Conservation Buffer                      
                       

Net Interest Margin

Net interest margin expanded on a linked quarter and year-over-year basis, primarily due to increases in average loan and investment securities balances and yields. Increases in interest rates recently initiated by the Federal Reserve had a positive impact on asset yields during the period. Net interest margin for the current period improved as compared to the prior year for similar reasons.

Cost of deposits remained relatively unchanged as compared to the linked quarter and year-over-year periods. The increase in the proportion of deposits coming from noninterest-bearing deposits and lower levels of renewals on higher-cost long-term fixed rate brokered deposits favorably impacted funding costs during these respective periods. Improvement in loan and investment security yields offset increases in the cost of LIBOR-based junior subordinated debentures as a result of rising interest rates in the current quarter as compared to the linked and year-over-year periods.

The following tables set forth information regarding 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,
                               
      Mar 31, 2018   Dec 31, 2017   $ Change   % Change   Mar 31, 2017   $ Change   % Change
Average Balances   (Dollars in thousands)
Gross loans $ 687,400   $ 682,688   $ 4,712     1 % $ 665,281   $ 22,119     3 %
Loans held for sale $ 7,591   $ 9,475   $ (1,884 )   -20 % $ 5,058   $ 2,533     50 %
Investment securities $ 127,945   $ 147,863   $ (19,918 )   -13 % $ 130,594   $ (2,649 )   -2 %
Total interest-earning assets $ 822,936   $ 840,026   $ (17,090 )   -2 % $ 800,933   $ 22,003     3 %
Non-interest bearing demand deposits $ 249,807   $ 265,002   $ (15,195 )   -6 % $ 225,494   $ 24,313     11 %
Interest bearing deposits $ 519,008   $ 519,595   $ (587 )   0 % $ 529,367   $ (10,359 )   -2 %
Borrowings $ 21,881   $ 21,919   $ (38 )   0 % $ 22,076   $ (195 )   -1 %
Total interest-bearing liabilities $ 540,889   $ 541,514   $ (625 )   0 % $ 551,443   $ (10,554 )   -2 %
Total Equity $ 86,262   $ 88,466   $ (2,204 )   -2 % $ 81,438   $ 4,824     6 %
                               
      For the Three Months Ended,        
      Mar 31, 2018   Dec 31, 2017   Change   Mar 31, 2017   Change        
Yield on average gross loans (1)   5.12 %   5.08 %     0.04     4.92 %     0.20          
Yield on average investment securities (1)   2.56 %   2.37 %     0.19     2.34 %     0.22          
Cost of average interest bearing deposits   0.33 %   0.34 %     (0.01 )   0.37 %     (0.04 )        
Cost of average borrowings   2.95 %   2.73 %     0.22     2.52 %     0.43          
Cost of average total deposits and borrowings   0.30 %   0.29 %     0.01     0.32 %     (0.02 )        
                               
Yield on average interest-earning assets   4.73 %   4.60 %     0.13     4.50 %     0.23          
Cost of average interest-bearing liabilities   0.43 %   0.43 %     -      0.46 %     (0.03 )        
Net interest spread   4.30 %   4.17 %     0.13     4.04 %     0.26          
                               
Net interest margin (1)   4.44 %   4.32 %     0.12     4.19 %     0.25          
                               
(1) Tax-exempt income has been adjusted to a tax equivalent basis at a 21% rate.                    
                     

ASSET QUALITY

Asset quality remained strong with non-performing assets declining in the quarter and remaining at very low levels.  Total 30-89-day delinquencies remained below 0.50%, a positive leading indicator of future credit quality.   Adversely classified loans increased by $2.0 million, primarily from the designation of a $2.1 million dairy farm relationship as “Substandard” by the bank due to recent declines in milk prices. The dairy operation is in the process of pursuing financing at another institution. Adversely classified loans to total gross loans was 1.37% at the end of the quarter compared to 1.10% in the linked quarter and 2.24% in the year ago quarter. Asset quality improved compared to the year-over-year quarter, primarily due to the payoff of two adversely-classified commercial loans totaling $4.4 million in the linked quarter.

Adversely Classified Loans and Securities
(Unaudited)
                             
    Mar 31, 2018   Dec 31, 2017   $ Change   % Change   Mar 31, 2017   $ Change   % Change
    (Dollars in thousands)
Rated substandard or worse, but not impaired $ 7,415   $ 5,017   $ 2,398     48 % $ 13,434   $ (6,019 )   -45 %
Impaired   2,093     2,529     (436 )   -17 %   1,537     556     36 %
Total adversely classified loans¹ $ 9,508   $ 7,546   $ 1,962     26 % $ 14,971   $ (5,463 )   -36 %
                             
                             
Gross loans (excluding deferred loan fees) $ 693,544   $ 688,415   $ 5,129     1 % $ 668,366   $ 25,178     4 %
Adversely classified loans to gross loans   1.37 %   1.10 %           2.24 %        
Allowance for loan losses $ 9,141   $ 9,092   $ 49     1 % $ 9,217   $ (76 )   -1 %
                                   
Allowance for loan losses as a percentage of adversely classified loans   96.14 %   120.49 %           61.57 %        
Allowance for loan losses to total impaired loans   436.74 %   359.51 %           599.67 %        
Adversely classified loans to total assets   1.06 %   0.84 %           1.72 %        
Delinquent loans to gross loans, not in nonaccrual status   0.21 %   0.04 %           0.03 %        
   
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.            
             

Nonperforming assets decreased as compared to the linked quarter, primarily due to the payoff of one commercial loan on nonaccrual status totaling $550,000. As a result, there was a slight decrease in the percentage of nonperforming assets to total assets. However, nonperforming assets remained above the amount year-over-year, primarily due to the placement of a $400,000 loan to finance an exotic automobile placed on nonaccrual in the linked quarter. 

Nonperforming Assets
(Unaudited)
                             
    Mar 31, 2018   Dec 31, 2017   $ Change    % Change   Mar 31, 2017   $ Change    % Change
    (Dollars in thousands)
Loans on nonaccrual status $ 1,502   $ 2,163   $ (661 )   -31 % $ 1,154   $ 348   30 %
Total nonaccrual loans   1,502     2,163     (661 )   -31 %   1,154     348   30 %
                             
Other real estate owned and foreclosed assets   199     50     149     298 %   144     55   38 %
Total nonperforming assets $ 1,701   $ 2,213   $ (512 )   -23 % $ 1,298   $ 403   31 %
                             
                             
Restructured performing loans $ 591   $ 366   $ 225     61 % $ 383   $ 208   54 %
Accruing loans past due 90 days or more $ -   $ -   $ -     0 % $ -   $ -   0 %
                                   
Percentage of nonperforming assets to total assets   0.19 %   0.25 %           0.15 %        
Nonperforming loans to total loans   0.22 %   0.31 %           0.17 %        
                                   

ALLOWANCE FOR LOAN LOSSES

The allowance for loan losses has been managed in concert with recent loan 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.
    
There was a net recovery in the first quarter, primarily from the payoff of a $550,000 commercial real estate loan on non-accrual status, the proceeds of which were in excess of the current balance. This compares to modest net charge offs recorded in the linked and prior year quarter. “The low level of charge-offs and ratio of net loan charge-offs to average gross loans demonstrate the solid credit quality of the portfolio,” said Biddle. The overall risk profile of the loan portfolio continues to be modest, demonstrating the solid credit risk management framework in place. The trend of future provisions 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,
    Mar 31, 2018   Dec 31, 2017   $ Change    % Change   Mar 31, 2017   $ Change    % Change
    (Dollars in thousands)
Gross loans outstanding at end of period $ 693,544   $ 688,415   $ 5,129     1 % $ 668,366   $ 25,178     4 %
Average loans outstanding, gross $ 687,400   $ 682,688   $ 4,712     1 % $ 665,281   $ 22,119     3 %
                                           
Allowance for loan losses, beginning of period $ 9,092   $ 9,212   $ (120 )   -1 % $ 9,192   $ (100 )   -1 %
Commercial   -     (10 )   10     100 %   (131 )   131     -100 %
Commercial Real Estate   -     -     -     0 %   -     -     0 %
Residential Real Estate   -     -     -     0 %   -     -     0 %
Consumer   (27 )   (113 )   86     -76 %   (16 )   (11 )   69 %
Total charge-offs   (27 )   (123 )   96     -78 %   (147 )   120     -82 %
Commercial   52     2     50     NM     40     12     30 %
Commercial Real Estate   -     -     -     0 %   -     -     0 %
Residential Real Estate   -     -     -     0 %   8     (8 )   -100 %
Consumer   24     1     23     NM     2     22     NM  
Total recoveries   76     3     73     NM     50     26     52 %
Net recoveries/(charge-offs)   49     (120 )   169     -141 %   (97 )   146     -151 %
Provision charged to income   -     -     -     0 %   122     (122 )   -100 %
Allowance for loan losses, end of period $ 9,141   $ 9,092   $ 49     1 % $ 9,217   $ (76 )   -1 %
                             
Ratio of net loans charged-off to average                            
gross loans outstanding, annualized   -0.03 %   0.07 %   -0.10 %       0.06 %   -0.09 %    
Ratio of allowance for loan losses to                            
gross loans outstanding   1.32 %   1.32 %   0.00 %       1.38 %   -0.06 %    
                                       

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. At March 31, 2018, the Company had total assets of $901 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
360.533.8873

The Cereghino Group
IR CONTACT: 206-388-5785

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