Pacific Financial Corp 3Q16 Earnings Increased 24% Year-over-Year and Grew 20% Year-to-Date; Boosted by Strong Loan Growth, Stable Net Interest Margin and Higher Noninterest Income

ABERDEEN, Wash., Oct. 25, 2016 (GLOBE NEWSWIRE) — Pacific Financial Corporation (OTCQB:PFLC), the holding company for Bank of the Pacific today reported net income increased 13% to $2.0 million, or $0.19 per share, for the third quarter of 2016, compared to $1.8 million, or $0.17 per share, for the second quarter of 2016, and grew 24% from $1.6 million, or $0.15 per share, from the third quarter of 2015.  For the first nine months ended September 30, 2016, net income was $5.1 million, or $0.49 per share, compared to $4.3 million, or $0.41 per share, for the first nine months ended September 30, 2015.  Driving profitability in 2016 was continued loan growth, stable net interest margin and increased noninterest income.  All results are unaudited. 

“We reported strong third quarter results, delivering steady loan growth and solid revenue with an above average net interest margin.  This growth demonstrates the continued impact of the commercial lending teams we placed in additional markets during the past several years.  Revenue from residential real estate mortgage activity continued to be robust, up 27% this quarter versus the third quarter in 2015,” said Denise Portmann, President & Chief Executive Officer.  “With the recent upswing in low longer-term interest rates, consumers are increasingly interested in locking in these long-term fixed rates.  Our residential mortgage lending team is well situated to generate additional revenue from the anticipated increase in refinance activity.”

“Our credit quality remained solid with a continued decline in adversely classified loans during the third quarter,” added Portmann.  “Despite our loan growth over the recent quarters, we continue to foster a strong risk management culture by managing our concentration of commercial real estate well within regulatory guidelines.  In addition, our recent initiatives to grow our commercial deposit balances via expansion of our treasury management offerings have begun to bear fruit.  We will continue our focus on loan and revenue growth opportunities available to us in our drive to achieve high-performance.”

Third Quarter 2016 Highlights (as of, or for the period ended September 30, 2016, except as noted):

  • Net interest margin (NIM), on a tax equivalent basis was 4.02%, as compared to 4.16% in the preceding quarter and 4.06% for third quarter 2015.  Net interest margin declined during the current quarter due to retention of seasonal deposit inflows in lower-yielding cash equivalents in anticipation of funding continued loan growth as indicated by a strong pipeline. 
  • Total assets increased 6% to $896.6 million during the quarter from $844.3 million at June 30, 2016, and grew 10% from $814.9 million at September 30, 2015.  
  • Gross loans increased 2% to $650.7 million, as compared to $640.6 million as of June 30, 2016.  Gross loans grew 7% from a year ago. 
  • Total deposits increased 7% to $783.9 million, compared to $734.2 million at June 30, 2016, and increased 11% from a year earlier.  Non-interest bearing demand deposits grew 19% on a linked quarter basis and 30% over the third quarter of 2015.
  • Nonperforming assets were $3.8 million, or 0.42% of total assets, compared to 0.41% on a linked quarter basis and 0.72% a year ago. 
  • Net charge offs totaled $16,000, or 0.01% of average gross loans in the current quarter.  This compares to $128,000, or 0.08% of average gross loans in second quarter 2016.  Loans 30 – 89 days delinquent, not in nonaccrual status, stood at 0.03% of total loans outstanding. 
  • Classified loans were $9.8 million, or 1.51% of gross loans, compared to 2.72% and 2.37% at June 30, 2016 and September 30, 2015, respectively.

Operating Results

Total assets grew from the linked quarter primarily in form of cash equivalents and loans.  Total assets grew year-over-year primarily in loans, investment securities and cash equivalents.  During both periods, asset growth was funded primarily by increases in core deposits due to a combination of seasonal deposit inflows and growth in commercial deposit relationships.   Liquidity remains strong, including ample unused borrowing capacity.  Capital ratios continue to exceed the thresholds to be considered “Well-Capitalized” under published regulatory standards.      

Balance Sheet Overview
(Unaudited)
                               
      Sept 30, 
2016
  June 30,
2016
  $
Change
  %
Change
  Sept 30,
2015
  $
Change
  %
Change
                                                           
Assets:     (Dollars in thousands, except per share data)
Cash and cash equivalents $   76,310   $   29,731   $   46,579       157 % $   48,904   $   27,406       56 %
Other interest earning deposits     2,727       2,727             0 %     2,727             0 %
Investment securities     100,358       103,460       (3,102 )     -3 %     89,702       10,656       12 %
Loans held-for-sale     14,069       15,081       (1,012 )     -7 %     9,799       4,270       44 %
Loans, net of deferred fees     649,108       639,065       10,043       2 %     609,475       39,633       7 %
Allowance for loan losses     (8,960 )     (8,700 )     (260 )     3 %     (8,756 )     (204 )     2 %
Net loans     640,148       630,365       9,783       2 %     600,719       39,429       7 %
Federal Home Loan Bank and Pacific Coast
  Bankers’ Bank stock, at cost
    2,336       2,338       (2 )     0 %     2,348       (12 )     -1 %
Other assets     60,623       60,551       72       0 %     60,657       (34 )     0 %
Total assets $   896,571   $   844,253   $   52,318       6 % $   814,856   $   81,715       10 %
                               
Liabilities and Shareholders’ Equity:                              
Total deposits $   783,888   $   734,245   $   49,643       7 % $   705,100   $   78,788       11 %
Borrowings     22,094       22,131       (37 )     0 %     24,885       (2,791 )     -11 %
Accrued interest payable and other liabilities     7,878       7,122       756       11 %     7,386       492       7 %
Shareholders’ equity     82,711       80,755       1,956       2 %     77,485       5,226       7 %
Total liabilities and shareholders’ equity $   896,571   $   844,253   $   52,318       6 % $   814,856   $   81,715       10 %
                               
Common Stock Shares Outstanding       10,422,871       10,419,957       2,914       0 %     10,384,997       37,874       0 %
                               
Book value per common share (1)   $   7.94   $   7.75   $   0.19       2 % $   7.46   $   0.48       6 %
Tangible book value per common share (2)   $   6.64   $   6.45   $   0.19       3 % $   6.15   $   0.49       8 %
Gross loans to deposits ratio       82.8 %     87.0 %             86.4 %        
                               
(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 increased from the linked quarter due primarily to an increase in the volume of loans and cash equivalents, as previously noted. For the nine months ending September 30, 2016, net interest income was enhanced by a net $107,000 one-time additional interest assessment due to the loan agreement breach.  Net interest income grew versus the third quarter a year ago and was up compared to the corresponding nine-month period in 2015.  This increase reflects growth in earning assets over the recent quarters.  Loan balances increased year-over-year due to loan production generated predominately in Western Washington and Oregon.  Interest expense declined as compared to the linked quarter with the reduction in Libor-based rates paid on borrowings during the period.  Interest expense grew year-to-date versus the corresponding period in 2015, commensurate with growth in core deposits and an 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.

Income Statement Overview
(Unaudited)
                               
      For the Three Months Ended,
      Sept 30,
2016
  June 30,
2016
  $
Change
  %
Change
  Sept 30,
2015
  $ Change   %
Change
                                           
      (Dollars in thousands, except per share data)
Interest and dividend income   $ 8,518 $ 8,394 $   124       1 % $ 7,946 $ 572     7 %
Interest expense     616   628     (12 )     -2 %   561   55     10 %
Net interest income   7,902   7,766     136       2 %   7,385   517     7 %
Loan loss provision     276   276           0 %   165   111     67 %
Noninterest income     3,194   3,025     169       6 %   2,686   508     19 %
Noninterest expense     8,178   7,981     197       2 %   7,709   469     6 %
Income before income taxes     2,642   2,534     108       4 %   2,197   445     20 %
Income tax expense     649   772     (123 )     -16 %   596   53     9 %
Net Income $ 1,993 $ 1,762 $   231       13 % $ 1,601 $ 392     24 %
                               
Average common shares outstanding – basic     10,421,921   10,418,560     3,361       0 %   10,384,997   36,924     0 %
Average common shares outstanding – diluted     10,582,695   10,578,267     4,428       0 %   10,520,581   62,114     1 %
                               
Income per common share                              
Basic $ 0.19 $ 0.17 $   0.02       12 % $ 0.15 $ 0.04     27 %
Diluted $ 0.19 $ 0.17 $   0.02       12 % $ 0.15 $ 0.04     27 %
                               
                               
      For the Nine Months Ended,            
      Sept 30,
2016
  Sept 30,
2015
  $
Change
  %
Change
           
                                       
      (Dollars in thousands, except per share data)            
Interest and dividend income   $ 25,441 $ 23,196 $   2,245       10 %            
Interest expense     1,851   1,598     253       16 %            
Net interest income   23,590   21,598     1,992       9 %            
Loan loss provision     814   382     432       113 %            
Noninterest income     8,751   7,482     1,269       17 %            
Noninterest expense     24,430   22,925     1,505       7 %            
Income before income taxes     7,097   5,773     1,324       23 %            
Income tax expense     1,966   1,493     473       32 %            
Net Income $ 5,131 $ 4,280 $   851       20 %            
                               
Average common shares outstanding – basic     10,413,903   10,379,742     34,161       0 %            
Average common shares outstanding – diluted     10,569,483   10,523,625     45,858       0 %            
                               
Income per common share                              
Basic $ 0.49 $ 0.41 $   0.08       20 %            
Diluted $ 0.49 $ 0.41 $   0.08       20 %            
                               

 

Noninterest Income

Noninterest income was up versus the linked quarter, primarily as a result of growth in revenue from residential mortgage loans and miscellaneous loan fees.  This was mainly due to increases in residential sales activity typical for the summer season and growth in refinance activity resulting from recent declines in longer-term interest rates.  Increases in residential real estate sales continue to benefit from improvement in the local economy.  Noninterest income for the linked quarter included $104,000 from gain on sale of SBA guaranteed loans and a one-time gain on death benefit from bank-owned life insurance of $100,000.  Noninterest income increased versus the third quarter a year ago, primarily due to the previously mentioned growth in revenue from residential mortgage loans and miscellaneous loan fees.  Noninterest income was also up as compared to the prior year-to-date period.  This was primarily due to the aforementioned gain on sale of OREO, increase in gains on sale of residential mortgage loans, gain on sale of SBA guaranteed loans, gain on death benefit from bank-owned life insurance and changes in service charges, as noted above. 

Noninterest Income
(Unaudited)
      For the Three Months Ended,
      Sept 30,
2016
  June 30,
2016
  $
Change
  %
Change
  Sept 30,
2015
  $
Change
  %
Change
                                               
      (Dollars in thousands)
Service charges on deposits   $ 477 $ 485 $   (8 )     -2 % $ 451 $   26       6 %
Gain on sale of other real estate owned, net       5     (5 )     -100 %   57     (57 )     -100 %
Gain on sale of loans, net     1,864   1,635     229       14 %   1,464     400       27 %
Gain on sale of securities available for sale, net                 0 %              
Earnings on bank owned life insurance     116   116           0 %   120     (4 )     -3 %
Other noninterest income                              
Fee income   694   520     174       33 %   553     141       25 %
Income from other real estate owned               0 %              
Other   43   264     (221 )     -84 %   41     2       5 %
Total noninterest income   $ 3,194 $ 3,025 $   169       6 % $ 2,686 $   508       19 %
                               
                               
      For the Nine Months Ended,            
      Sept 30,
2016
  Sept 30,
2015
  $
Change
  %
Change
           
                                       
      (Dollars in thousands)            
Service charges on deposits   $ 1,411 $ 1,314 $   97       7 %            
Gain on sale of other real estate owned, net     425   140     285       204 %            
Gain on sale of loans, net     4,530   3,844     686       18 %            
Gain on sale of securities available for sale, net     6   53     (47 )     -89 %            
Earnings on bank owned life insurance     353   368     (15 )     -4 %            
Other noninterest income                              
Fee income   1,656   1,541     115       7 %            
Income from other real estate owned     67     (67 )     -100 %            
Other   370   155     215       139 %            
Total noninterest income   $ 8,751 $ 7,482 $   1,269       17 %            
                               

 

Noninterest Expense

Noninterest expense increased from the immediate prior quarter, primarily due to higher commission expenses associated with increased residential real estate loan production and a write-down of OREO.  Noninterest expense was up compared to the year-over-year quarter, primarily related to salary and benefit costs, including 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 earlier in the current year to implement strategic initiatives to expand treasury management and small business lines of business.  Noninterest expenses grew year-to-date versus the same period a year ago, primarily due to increases related to salary and benefit costs, as mentioned above, and $348,000 in OREO operating expense incurred earlier in the year to prepare a $1.2 million OREO property for its eventual sale.  

Noninterest Expense
(Unaudited)
                               
      For the Three Months Ended,
      Sept 30,
2016
  June 30,
2016
  $
Change
  %
Change
  Sept 30,
2015
  $
Change
  %
Change
                                               
      (Dollars in thousands)
Salaries and employee benefits   $ 5,321 $ 5,165 $   156       3 % $ 4,868 $   453       9 %
Occupancy     512   520     (8 )     -2 %   480     32       7 %
Equipment     254   274     (20 )     -7 %   271     (17 )     -6 %
Data processing     535   489     46       9 %   451     84       19 %
Professional services     98   122     (24 )     -20 %   194     (96 )     -49 %
Other real estate owned write-downs     71       71       0 %       71       0 %
Other real estate owned operating costs     8   14     (6 )     -43 %   80     (72 )     -90 %
State and local taxes     129   121     8       7 %   125     4       3 %
FDIC and State assessments     130   143     (13 )     -9 %   131     (1 )     -1 %
Other noninterest expense:                              
Director fees   66   81     (15 )     -19 %   71     (5 )     -7 %
Communication   63   66     (3 )     -5 %   63           0 %
Advertising   68   75     (7 )     -9 %   88     (20 )     -23 %
Professional liability insurance   48   47     1       2 %   25     23       92 %
Amortization   60   56     4       7 %   85     (25 )     -29 %
Other   815   808     7       1 %   777     38       5 %
Total noninterest expense   $ 8,178 $ 7,981 $   197       2 % $ 7,709 $   469       6 %
                               
                               
      For the Nine Months Ended,            
      Sept 30,
2016
  Sept 30,
2015
 
Change
 
Change
           
                                       
      (Dollars in thousands)            
Salaries and employee benefits   $ 15,542 $ 14,283 $   1,259       9 %            
Occupancy     1,527   1,487     40       3 %            
Equipment     786   788     (2 )     0 %            
Data processing     1,515   1,400     115       8 %            
Professional services     346   511     (165 )     -32 %            
Other real estate owned write-downs     71   104     (33 )     -32 %            
Other real estate owned operating costs     439   87     352       405 %            
State and local taxes     372   347     25       7 %            
FDIC and State assessments     407   397     10       3 %            
Other noninterest expense:                              
Director fees   219   225     (6 )     -3 %            
Communication   193   185     8       4 %            
Advertising   213   265     (52 )     -20 %            
Professional liability insurance   144   62     82       132 %            
Amortization   174   256     (82 )     -32 %            
Other   2,482   2,528     (46 )     -2 %            
Total noninterest expense   $ 24,430 $ 22,925 $   1,505       7 %            
                               

 

Financial Performance Overview
(Unaudited)
                     
    For the Three Months Ended
    Sept 30,
2016
  June 30,
2016
  Change   Sept 30,
2015
  Change
Performance Ratios                    
Return on average assets, annualized     0.91 %     0.85 %     0.06       0.79 %     0.12  
Return on average equity, annualized     9.63 %     8.87 %     0.76       8.30 %     1.33  
Efficiency ratio (1)     73.70 %     73.96 %     (0.26 )     76.55 %     (2.85 )
                     
    For the Nine Months Ended,        
    Sept 30,
2016
  Sept 30,
2015
  Change        
Performance Ratios                    
Return on average assets, annualized     0.82 %     0.74 %     0.08          
Return on average equity, annualized     8.58 %     7.62 %     0.96          
Efficiency ratio (1)     75.54 %     78.83 %     (3.29 )        
                     
(1) Non-interest expense divided by net interest income plus noninterest income.                    
                     


LIQUIDITY

Cash and Cash Equivalents and Investment Securities
(Unaudited)
        Sept 30, 
2016
  % of
Total
  June 30,
2016
  % of
Total
 
Change
 
Change
  Sept 30,
2015
  Total  
Change
 
Change
                                                                         
        (Dollars in thousands)
Cash on hand and in banks     $ 15,395     8 % $ 16,803     12 % $   (1,408 )     -8 % $ 12,613     9 % $   2,782       22 %
Interest bearing deposits       60,915     34 %   12,928     9 %     47,987       371 %   36,291     25 %     24,624       68 %
Certificates of deposit       2,727     2 %   2,727     2 %           0 %   2,727     2 %           0 %
Total cash equivalents and certificate of deposits     79,037     43 %   32,458     23 %     46,579       144 %   51,631     36 %     27,406       53 %
                                             
Investment securities:                                            
Collateralized mortgage obligations: agency issued     34,100     20 %   36,156     27 %     (2,056 )     -6 %   36,377     25 %     (2,277 )     -6 %
Collateralized mortgage obligations: non-agency     483     0 %   483     0 %           0 %   483     0 %           0 %
Mortgage-backed securities: agency issued     10,384     6 %   10,711     8 %     (327 )     -3 %   9,349     7 %     1,035       11 %
U.S. Government and agency securities     9,876     5 %   9,930     7 %     (54 )     -1 %   10,026     7 %     (150 )     -1 %
State and municipal securities     45,515     25 %   46,180     33 %     (665 )     -1 %   33,467     23 %     12,048       36 %
FHLB Stock, at cost     1,336     1 %   1,338     1 %     (2 )     0 %   1,348     1 %     (12 )     -1 %
Pacific Coast Bankers’ Bank stock, at cost     1,000     1 %   1,000     1 %           0 %   1,000     1 %           0 %
Total investment securities   102,694     57 %   105,798     77 %     (3,104 )     -3 %   92,050     64 %     10,644       12 %
                                             
Total cash equivalents and investment securities     $ 181,731     100 % $ 138,256     100 % $   43,475       31 % $ 143,681     100 % $   38,050       26 %
                                             
Total cash equivalents and investment securities                                            
as a percent of total assets           20 %         16 %                 14 %        
                                             

Liquidity remains strong based on current levels of combined cash equivalents, investment securities and unused borrowing capacity.  “During the third quarter, we retained a portion of our deposit growth in cash equivalents in anticipation of funding continued loan growth and seasonal deposit outflows,” 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 September 30, 2016, 3.4 years at June 30, 2016 and 3.6 years at September 30, 2015.

The Bank had $8.7 million in outstanding borrowings against its $187.8 million in established borrowing capacity with the Federal Home Loan Bank of Des Moines (FHLB) at September 30, 2016.  The Bank had $8.7 million and $11.3 million in outstanding borrowings with the FHLB at June 30, 2016 and September 30, 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 $60.6 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)
                                           
      Sept 30,
2016
  % of
Gross
Loans
  June 30,
2016
  % of
Gross
Loans
  $
Change
  %
Change
  Sept 30,
2015
  % of
Gross Loans
  $
Change
  %
Change
                                                                                   
      (Dollars in thousands)
Commercial and agricultural   $   133,341       20 % $   133,285       21 % $   56       0 % $   120,818       20 % $   12,523       10 %
Real estate:                                          
Construction and development       36,022       6 %     29,639       5 %     6,383       22 %     35,071       6 %     951       3 %
Residential 1-4 family       90,900       14 %     93,194       15 %     (2,294 )     -2 %     96,182       16 %     (5,282 )     -5 %
Multi-family       30,871       5 %     29,786       5 %     1,085       4 %     24,797       4 %     6,074       24 %
Commercial real estate — owner occupied       134,565       20 %     134,421       20 %     144       0 %     134,092       22 %     473       0 %
Commercial real estate — non owner occupied       139,246       21 %     137,156       21 %     2,090       2 %     130,977       21 %     8,269       6 %
Farmland       23,668       4 %     23,363       4 %     305       1 %     19,951       3 %     3,717       19 %
Consumer       62,042       10 %     59,746       9 %     2,296       4 %     48,998       8 %     13,044       27 %
Gross loans     650,655       100 %     640,590       100 %     10,065       2 %     610,886       100 %     39,769       7 %
Less:  allowance for loan losses     (8,960 )         (8,700 )         (260 )         (8,756 )         (204 )    
Less:  deferred fees     (1,547 )         (1,525 )         (22 )         (1,411 )         (136 )    
Loans, net $   640,148       $   630,365       $   9,783       $   600,719       $   39,429      
                                           
                                           
                                           
Loan Concentration        
(unaudited)        
      Sept 30,
2016
  % of Risk
Based
Capital
  June 30,
2016
  % of Risk
Based
Capital
  Change   Sept 30,
2015
  % of Risk
Based
Capital
  Change        
                                                                           
      (Dollars in thousands)        
Commercial and agricultural   $   133,341       149 % $   133,285       152 %     -3 % $   120,818       142 %     7 %        
Real estate:                                          
Construction and development       36,022       40 %     29,639       34 %     6 %     35,071       41 %     -1 %        
Residential 1-4 family       90,900       101 %     93,194       106 %     -5 %     96,182       113 %     -12 %        
Multi-family       30,871       34 %     29,786       34 %     0 %     24,797       29 %     5 %        
Commercial real estate — owner occupied       134,565       150 %     134,421       153 %     -3 %     134,092       158 %     -8 %        
Commercial real estate — non owner occupied       139,246       155 %     137,156       156 %     -1 %     130,977       154 %     1 %        
Farmland       23,668       26 %     23,363       27 %     -1 %     19,951       23 %     3 %        
Consumer       62,042       69 %     59,746       68 %     1 %     48,998       58 %     11 %        
Gross loans $   650,655       $   640,590           $   610,886                  
Regulatory Commercial Real Estate $   200,010       223 % $   191,572       218 %     5 % $   182,732       215 %     8 %        
Total Risk Based Capital* $   89,678       $   87,690           $   84,990                  
                                           
*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 period.  The portfolio includes $39.4 million in lower-yielding LIBOR-based floating rate commercial real estate loans.  The portfolio also includes $23.6 million in purchased government-guaranteed commercial and commercial real estate loans.  In addition, the portfolio contains $51.6 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 a 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)
                                         
    Sept 30,
2016
  % of
Total
  June 30, 
2016
  % of
Total
  $
Change
  %
Change
  Sept 30,
2015
  % of
Total
  $
Change
  %
Change
                                                                     
    (Dollars in thousands)
Interest-bearing demand and money market $ 334,564     43 % $ 319,609     44 % $   14,955       5 % $ 298,993     42 % $   35,571       12 %
Savings   84,952     11 %   83,475     11 %     1,477       2 %   88,561     13 %     (3,609 )     -4 %
Time deposits (CDs)   131,747     17 %   135,040     18 %     (3,293 )     -2 %   138,200     20 %     (6,453 )     -5 %
Total interest-bearing deposits   551,263     70 %   538,124     73 %     13,139       2 %   525,754     75 %     25,509       5 %
Non-interest bearing demand   232,625     30 %   196,121     27 %     36,504       19 %   179,346     25 %     53,279       30 %
Total deposits $ 783,888     100 % $ 734,245     100 % $   49,643       7 % $ 705,100     100 % $   78,788       11 %
                                         

Total deposits grew during the current quarter, primarily due to seasonal deposit inflows and recent successes in acquiring business deposit relationships in conjunction with the growth in lending achieved over the past year.  Time deposits continue to decline as a component of funding due to the increasing propensity of retail depositors to not lock in relatively low interest rates for an extended period.  The proportion of noninterest bearing deposits to total deposits continued to increase due to the deposit seasonality and success of business deposit acquisition activities noted above.

Total brokered deposits were $52.1 million, which included $1.1 million via reciprocal deposit arrangements, down from $53.7 million at June 30, 2016 and $44.7 million at September 30, 2015.  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 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 leverage ratios have declined as compared to the linked and the third quarter a year ago, primarily due to the successful execution of the Company’s growth strategy.  Risk-weighted ratios remained relatively unchanged as compared to the linked quarter due to a shift to lower-weighted assets in the current period.  These same ratios declined versus the third quarter a year ago due to the 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)
  Sept 30,
2016
  June 30,
2016
  Change   Sept 30,
2015
  Change     To be Well
Capitalized
Under
Prompt
Correction
Action
Regulations*
Pacific Financial Corporation                        
Total risk-based capital ratio   12.67 %     12.64 %     0.03       13.35 %     (0.68 )     N/A  
Tier 1 risk-based capital ratio   11.42 %     11.39 %     0.03       12.10 %     (0.68 )     N/A  
Common equity tier 1 ratio   9.60 %     9.52 %     0.08       10.06 %     (0.46 )     N/A  
Leverage ratio   9.35 %     9.72 %     (0.37 )     9.83 %     (0.48 )     N/A  
                             
Tangible common equity ratio   7.89 %     8.16 %     (0.27 )     7.98 %     (0.09 )     N/A  
                         
Bank of the Pacific                        
Total risk-based capital ratio   12.58 %     12.55 %     0.03       13.31 %     (0.73 )       10.5 %
Tier 1 risk-based capital ratio   11.33 %     11.30 %     0.03       12.05 %     (0.72 )       8.5 %
Common equity tier 1 ratio   11.33 %     11.30 %     0.03       12.05 %     (0.72 )       7.0 %
Leverage ratio   9.27 %     9.65 %     (0.38 )     9.79 %     (0.52 )       7.5 %
                         
*Includes Basel III 2019 Capital Conservation Buffer                        
                         

Net Interest Margin

Net interest margin declined compared to second quarter 2016, predominantly due to maintaining a portion of our current period deposit growth in lower-yielding cash equivalents in anticipation of funding continued loan growth and seasonal deposit outflows.  Year-to date, a one-time interest of $107,000 was assessed due to a loan agreement breach, enhancing net interest margin by 2 basis points.      

Yield on loans remained stable across all timeframes, despite the growth experienced over the prior four quarters, due to disciplined pricing.  Yield on investment securities decreased as compared to the linked quarterly period, but remained unchanged versus the year-over-year quarter.  This was primarily due to maintaining a portion of our current period deposit growth in lower-yielding cash equivalents in anticipation of funding continued loan growth and seasonal deposit outflows, as previously mentioned. 

Cost of deposits and borrowings remained relatively unchanged in the current quarter as compared to the linked and year-over-year quarterly and year-to-date periods.  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,
                               
      Sept 30,
 2016
  June 30,
 2016
 
Change
 
Change
  Sept 30,
2015
 
Change
  %
Change
                                                         
Average Balances   (Dollars in thousands)
Gross loans   $   647,412   $   642,560   $   4,852       1 % $   605,552   $   41,860       7 %
Loans held for sale $   14,538   $   9,425   $   5,113       54 % $   11,787   $   2,751       23 %
Investment securities $   136,459   $   114,673   $   21,786       19 % $   118,102   $   18,357       16 %
Total interest-earning assets $   798,409   $   766,658   $   31,751       4 % $   735,441   $   62,968       9 %
Non-interest bearing demand deposits $   212,447   $   189,744   $   22,703       12 % $   181,091   $   31,356       17 %
Interest bearing deposits $   539,627   $   526,445   $   13,182       3 % $   506,257   $   33,370       7 %
Borrowings   $   22,880   $   27,742   $   (4,862 )     -18 % $   28,794   $   (5,914 )     -21 %
Total interest-bearing liabilities $   562,507   $   554,187   $   8,320       2 % $   535,051   $   27,456       5 %
Total Equity   $   82,088   $   79,719   $   2,369       3 % $   76,540   $   5,548       7 %
                               
      For the Three Months Ended,        
      Sept 30,
2016
  June 30,
2016
  Change   Sept 30,
2015
  Change        
Yield on average gross loans (1)   4.81 %     4.85 %     (0.04 )     4.83 %     (0.02 )        
Yield on average investment securities (1)   1.95 %     2.39 %     (0.44 )     1.95 %              
Cost of average interest bearing deposits   0.36 %     0.37 %     (0.01 )     0.34 %     0.02          
Cost of average borrowings   2.25 %     2.01 %     0.24       1.67 %     0.58          
Cost of average total deposits and borrowings   0.32 %     0.34 %     (0.02 )     0.31 %     0.01          
                               
Yield on average interest-earning assets   4.32 %     4.48 %     (0.16 )     4.37 %     (0.05 )        
Cost of average interest-bearing liabilities   0.43 %     0.45 %     (0.02 )     0.42 %     0.01          
Net interest spread     3.89 %     4.03 %     (0.14 )     4.06 %     (0.17 )        
                               
Net interest margin (1)     4.02 %     4.16 %     (0.14 )     4.06 %     (0.04 )        
                               
(1) Tax-exempt income has been adjusted to a tax equivalent basis at a 34% rate.                    
                               
      For the Nine Months Ended,            
      Sept 30, 
2016
  Sept 30,
2015
 
Change
  %
Change
           
                                             
Average Balances   (Dollars in thousands)            
Gross loans   $   642,405   $   589,499   $   52,906       9 %            
Loans held for sale $   11,318   $   11,097   $   221       2 %            
Investment securities $   122,394   $   113,745   $   8,649       8 %            
Interest-earning assets $   776,117   $   714,341   $   61,776       9 %            
Non-interest bearing demand deposits $   194,721   $   172,534   $   22,187       13 %            
Interest bearing deposits $   529,504   $   492,989   $   36,515       7 %            
Borrowings   $   29,263   $   29,498   $   (235 )     -1 %            
Interest-bearing liabilities $   558,767   $   522,487   $   36,280       7 %            
Total Equity   $   79,895   $   75,067   $   4,828       6 %            
                               
                               
      For the Nine Months Ended,                
      Sept 30, 
2016
  Sept 30,
2015
  Change                
Net Interest Margin                            
Yield on average gross loans (1)   4.90 %     4.86 %     0.04                  
Yield on average investment securities (1)   2.19 %     2.10 %     0.09                  
Cost of average interest bearing deposits   0.36 %     0.34 %     0.02                  
Cost of average borrowings   2.37 %     1.63 %     0.74                  
Cost of average total deposits and borrowings   0.33 %     0.31 %     0.02                  
                               
Yield on average interest-earning assets   4.47 %     4.42 %     0.05                  
Cost of average interest-bearing liabilities   0.44 %     0.41 %     0.03                  
Net interest spread     4.03 %     4.01 %     0.02                  
                               
Net interest margin (1)     4.15 %     4.12 %     0.03                  
                               
(1) Tax-exempt income has been adjusted to a tax equivalent basis at a 34% rate.                    
                               

ASSET QUALITY

Adversely classified loans decreased compared to the preceding quarter, primarily due to the payoff of a $1.6 million adversely classified non-owner occupied commercial real estate loan during the period.  Adversely classified loans declined versus the like quarter a year ago primarily due to the payoff of the above referenced loan, the refinancing of a $2.0 million troubled debt restructure (“TDR”) to a fully performing commercial loan and the payoff of a $1.5 million commercial loan on non-accrual.  Total 30-89 day delinquencies remained below 0.50%, mirroring the continued improvement in overall credit quality.   

Adversely Classified Loans and Securities
(Unaudited)
                             
    Sept 30, 
2016
  June 30, 
2016
 
Change
  %
Change
  Sept 30,
2015
 
Change
  %
Change
                                                         
    (Dollars in thousands)
Rated substandard or worse, but not impaired $   8,307   $   9,963   $   (1,656 )     -17 % $   9,803   $   (1,496 )     -15 %
Impaired     1,505       1,145       360       31 %     4,681       (3,176 )     -68 %
Total adversely classified loans¹ $   9,812   $   11,108   $   (1,296 )     -12 % $   14,484   $   (4,672 )     -32 %
                             
Total adversely classified investment securities² $     $     $         0 % $   179   $   (179 )     -100 %
                             
                             
Gross loans (excluding deferred loan fees) $   650,655   $   644,856   $   5,799       1 % $   610,886   $   39,769       7 %
Adversely classified loans to gross loans     1.51 %     2.72 %             2.37 %        
Allowance for loan losses $   8,960   $   8,552   $   408       5 % $   8,756   $   204       2 %
Allowance for loan losses as a percentage of adversely classified loans     91.32 %     48.84 %             60.45 %        
Allowance for loan losses to total impaired loans     595.35 %     446.58 %             187.05 %        
Adversely classified loans and securities to total assets     1.09 %     2.13 %             1.80 %        
Delinquent loans to gross loans, not in nonaccrual status     0.04 %     0.31 %             0.08 %        
                             
¹Adversely classified loans are defined as loans having a well-defined weakness or weaknesses related to the borrower’s financial capacity or to pledged collateral that may
jeopardize the repayment of the debt.  They are characterized by the possibility that the Bank may sustain some loss if the deficiencies giving rise to the substandard
classification are not corrected. Note that any loans internally rated worse than substandard are included in the impaired loan totals.
                             
²Adversely classified investment securities consist of one private label collateralized mortgage obligation (CMO) as of September 30, 2016.
                             

Nonperforming assets increased on a linked quarter basis, primarily due to the placement of a $355,000 home equity line of credit on nonaccrual.  However, nonperforming assets remained unchanged as a percentage of total assets as compared to the linked quarter.

Nonperforming Assets
(Unaudited)
                             
    Sept 30,
2016
  June 30,
2016
  $
Change
  %
Change
  Sept 30,
2015
  $
Change
  %
Change
                                                         
    (Dollars in thousands)
Loans on nonaccrual status $   1,505   $   1,145   $   360       31 % $   2,142   $   (637 )     -30 %
Loans past due greater than 90 days but                            
not on nonaccrual status                                          
                                                         
Total non-performing loans     1,505       1,145       360       31 %     2,142       (637 )     -30 %
Other real estate owned and                            
foreclosed assets     2,268       2,339       (71 )     -3 %     3,761       (1,493 )     -40 %
                                                         
Total nonperforming assets $   3,773   $   3,484   $   289       8 % $   5,903   $   (2,130 )     -36 %
                             
                             
Percentage of nonperforming assets to total assets     0.42 %     0.41 %             0.72 %        
Nonperforming loans to total loans     0.23 %     0.18 %             0.35 %        
                             

The Company took a $71,000 write-down on one OREO commercial real estate property in the current period.  After recognizing this decline, the book value of this property stands at $405,000.  The remaining property, with a current book value of $1.9 million, is in escrow. It is projected to close before year-end with net proceeds anticipated to approximate current book value.

ALLOWANCE FOR LOAN LOSSES

The allowance for loan losses has increased 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.     

For the current quarter, charge-offs decreased from the linked quarter, which included a partial charge-off of $97,000 related to an adjustment of the carrying value of a collateral dependent commercial loan.  “The low level of charge-offs and ratio of net loan charge-offs to average gross loans are indicative of the solid credit quality of the portfolio,” said Biddle.  The year-over-year quarter contained a net recovery of $244,000 resulting from the payoff of a $1.1 million nonaccrual loan during the current period.  The overall risk profile of the loan portfolio continues to be modest, illustrative of the solid credit risk management framework in place.  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,
    Sept 30,
2016
  June 30,
2016
 
Change
  %
Change
  Sept 30,
2015
 
Change
  %
Change
                                                         
    (Dollars in thousands)
Gross loans outstanding at end of period $   650,655   $   640,590   $   10,065       2 % $   610,886   $   39,769       7 %
Average loans outstanding, gross $   647,412   $   642,560   $   4,852       1 % $   605,552   $   41,860       7 %
Allowance for loan losses, beginning of period $   8,700   $   8,552   $   148       2 % $   8,347   $   353       4 %
Commercial           (8 )     8       100 %                 0 %
Commercial Real Estate           (97 )     97       100 %                  
Residential Real Estate           (19 )     19       -100 %                 100 %
Consumer     (36 )     (17 )     (19 )     112 %     (30 )     (6 )     20 %
Total charge-offs     (36 )     (141 )     105       -74 %     (30 )     (6 )     20 %
Commercial           1       (1 )     -100 %     2       (2 )     -100 %
Commercial Real Estate     2       2             0 %     257       (255 )     -99 %
Residential Real Estate     18       2       16       800 %     7       11       157 %
Consumer           8       (8 )     -100 %     8       (8 )     -100 %
Total recoveries     20       13       7       54 %     274       (254 )     -93 %
Net (charge-offs)/recoveries     (16 )     (128 )     112       -88 %     244       (260 )     -107 %
Provision charged to income     276       276             0 %     165       111       67 %
Allowance for loan losses, end of period $   8,960   $   8,700   $   260       3 % $   8,756   $   204       2 %
Ratio of net loans charged-off to average                            
gross loans outstanding, annualized     0.01 %     0.08 %     -0.07 %     -88 %     -0.16 %     0.17 %     -106 %
Ratio of allowance for loan losses to                            
gross loans outstanding     1.38 %     1.36 %     0.02 %     1 %     1.43 %     -0.05 %     -3 %
                             
                             
    For the Nine Months Ended,            
    Sept 30,
2016
  Sept 30,
2015
  $
Change
  %
Change
           
                                             
    (Dollars in thousands)            
Gross loans outstanding at end of period $   650,655   $   610,886   $   39,769       7 %            
Average loans outstanding, gross $   642,405   $   589,499   $   52,906       9 %            
Allowance for loan losses, beginning of period $   8,317   $   8,353   $   (36 )     0 %            
Commercial     (8 )           (8 )     100 %            
Commercial Real Estate     (97 )     (122 )     25       -20 %            
Residential Real Estate     (35 )     (86 )     51       -59 %            
Consumer     (79 )     (123 )     44       -36 %            
Total charge-offs     (219 )     (331 )     112       -34 %            
Commercial     2       45       (43 )     -96 %            
Commercial Real Estate     6       261       (255 )     -98 %            
Residential Real Estate     31       20       11       55 %            
Consumer     9       26       (17 )     -65 %            
Total recoveries     48       352       (304 )     -86 %            
Net (charge-offs)/recoveries     (171 )     21       (192 )     -914 %            
Provision charged to income     814       382       432       113 %            
Allowance for loan losses, end of period $   8,960   $   8,756   $   204       2 %            
Ratio of net loans charged-off to average                            
gross loans outstanding, annualized     0.03 %     -0.10 %     0.13 %     -130 %            
Ratio of allowance for loan losses to                            
gross loans outstanding     1.38 %     1.43 %     -0.05 %     -3 %            
                             

ABOUT PACIFIC FINANCIAL CORPORATION

Pacific Financial Corporation of Aberdeen, Washington, is the bank holding company for Bank of the Pacific, a state chartered and federally insured commercial bank.  Bank of the Pacific offers banking products and services to small-to-medium sized businesses and professionals in western Washington and Oregon.  As of September 30, 2016, the Company had total assets of $897 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.

CONTACT: CONTACTS:
DENISE PORTMANN, PRESIDENT & CEO
DOUGLAS BIDDLE, EVP & CFO
360.533.8873

The Cereghino Group
IR CONTACT: 206-388-5785