ABERDEEN, Wash., Oct. 29, 2019 (GLOBE NEWSWIRE) -- Pacific Financial Corporation (OTCQX: PFLC), the holding company for Bank of the Pacific, today reported third quarter net income increased 18% to a record $3.8 million, or $0.35 per diluted share, compared to $3.2 million, or $0.30 per diluted share, in the third quarter of 2018, reflecting higher net interest income and gains on sale of residential mortgage loans.  Net income for the second quarter of 2019 was $3.6 million, or $0.34 per diluted share.  For the nine months ended September 30, 2019, net income was $10.3 million, or $0.97 per diluted share, up 28% from $8.1 million, or $0.76 per diluted share, for the nine months ended September 30, 2018.

The Board of Directors of Pacific Financial Corporation declared a quarterly cash dividend of $0.11 per share on October 23, 2019.  The dividend will be payable on November 25, 2019, to shareholders of record at close of business day on November 12, 2019.

“We again delivered record profits for the current quarter and for the first nine months of the year, fueled by an above industry-average net interest margin of 4.57% and robust growth in noninterest income, mainly due to increased gain on sale of loans,” said Denise Portmann, President and Chief Executive Officer.  “Additionally, we had solid growth in core deposits during the quarter.  Our performance metrics were above average with an annualized return on average assets (“ROAA”) at 1.61% and an annualized return on average equity (“ROAE”) of 14.52%.   

“With the recent opening of our new commercial banking center along the I-5 corridor in the high-growth area of Eugene, Oregon, our talented banking team is actively fostering long-term customer relationships – not only in the surrounding area of Eugene – but throughout the markets we serve,” said Portmann.  “We will continue to invest in our future and are pleased with the progress we have made so far.

“Earlier this month, our Board of Directors also announced the repurchase of up to $2.63 million, or approximately 2%, of the outstanding common stock of the Company, beginning November 1, 2019,” added Portmann.  “The balance between allocating capital to our growing franchise and returning capital to our shareholders through our quarterly cash dividend, is important to our strategic growth initiative.”

Third Quarter 2019 Financial Highlights (as of, or for the period ended September 30, 2019, except as noted):

• Earnings per share were $0.35, compared to $0.30 for the third quarter of 2018, and $0.34 for the second quarter of 2019.
• ROAA was 1.61%, compared to 1.38% for the third quarter a year ago.  Industry peer ROAA was 1.02%.  ROAE was 14.52%, compared to 13.89% for the third quarter of 2018.  Industry peer ROAE was 9.69%.  [Industry peers are the 469 banks that make up the SNL Microcap U.S. Bank Index, at June 30, 2019.]
• Net interest margin remained solid at 4.57% for the third quarter, up 2 basis points from the third quarter a year ago and contracted 17 basis points from the preceding quarter.  Industry peer NIM was 3.71%.  [Industry peers are the 469 banks that comprised the SNL Microcap U.S. Bank Index, at June 30, 2019.]  Net interest margin expanded 16 basis points to 4.66% for the first nine months of 2019 compared to 4.50% for the first nine months of 2018. 
• Noninterest income increased 57%, or $1.5 million, to $4.2 million in the third quarter, compared to $2.6 million in the third quarter a year ago, and increased 21%, or $723,000, from $3.4 million in the second quarter of 2019.  Positively impacting noninterest income in the current quarter was a gain on sale of loans of $2.4 million.
• Total assets increased $8.1 million to $945.2 million from $937.1 million a year earlier.
• Total deposits were $816.1 million, compared to $815.2 million at September 30, 2018, and $795.5 million at June 30, 2019.  This includes a reduction of $20.3 million and $6.5 million in brokered CDs from the year-over-year quarter and the preceding quarter, respectively.  Noninterest-bearing deposits represented 33% of total deposits, at September 30, 2019.
• Gross loans were $683.8 million at quarter end, compared to $693.1 million a year ago and $689.7 million at June 30, 2019.  This includes a strategic reduction of $10.8 million in indirect consumer loans to finance luxury and classic cars year-over-year.
• Asset quality remains solid with nonperforming assets to total assets at 0.11% at quarter end.
• The allowance for loan losses was 1.32% of gross loans outstanding at quarter end.
• Capital ratios continue to exceed the regulatory guidelines for a well-capitalized financial institution, including a leverage ratio of 11.11% and a total risk based capital ratio of 14.30%.

Results of Operations

Net interest income increased $191,000, or 2%, to $9.8 million in the third quarter of 2019, compared to $9.7 million in the third quarter a year ago, and increased $117,000, or 1%, from $9.7 million in the second quarter of 2019.  In the first nine months of 2019, net interest income increased $1.5 million, or 6%, to $29.2 million from $27.7 million in the first nine months a year ago.  No provision for loan losses has been booked since the third quarter of 2017.

The increases in the current quarter and for the first nine months of 2019, compared to the same periods in 2018, were primarily the result of an increase in yield on loans to 5.47% and 5.48%, compared to 5.35% and 5.24%, respectively.  Increases in market rates during 2017 and 2018 had a positive impact on asset yields in 2018 and early 2019. Increases in loan yields were partially offset by an increase in the cost of funds to 0.35% and 0.37% for the quarter, and nine months ended September 30, 2019, compared to 0.33% and 0.32% in the like periods in 2018.  Again, increases in market rates during 2017 and 2018 resulted in a modest increase in funding costs during 2019.  After a period of expanding earning asset yields and increasing margins, net interest margin and earning asset yields declined during the current quarter to 4.57% and 4.91%, respectively, compared to 4.74% and 5.10% in the quarter ended June 30, 2019, reflecting the recent decline in market interest rates.

Noninterest income increased 57%, or $1.5 million, to $4.2 million for the third quarter of 2019, compared to $2.6 million for the third quarter of 2018, and increased 21%, or $723,000, from $3.4 million in the second quarter of 2019.  This includes an increase in gain on sale of loans to $2.4 million in the current quarter compared to $1.7 million and $1.2 million for the quarters ended June 30, 2019 and September 30, 2018, respectively.  Similarly, for the first of nine months of 2019, noninterest income increased $2.4 million including an increase of $1.8 million in gain on sale of loans.  Recent declines in mortgage rates increased demand for refinancing and encouraged more sellers to add to the supply of housing inventory for sale in several of our Western Washington and Oregon markets.

“The recent decline in mortgage interest rates have encouraged an increase in both home purchase and refinance activities within our markets.  This loan activity has increased contributions to noninterest income during the current quarter and for the first nine months of the year,” added Portmann.  “In addition, we continue to benefit from initiatives introduced last year which have improved workflow efficiencies, revenue and cost management.”  

Noninterest expense increased 12% to $9.4 million compared to $8.4 million in the third quarter of 2018 and grew 8% from $8.7 million on a linked quarter basis.  For the first nine months of 2019, noninterest expense was $26.5 million compared to $25.5 million for the first nine months of 2018.  The increase in operating expenses, year-over-year and for the first nine months of 2019, was primarily due to higher compensation and commissions associated with the growth in residential mortgage production, and expenses for professional services related to executive search, strategic marketing and technology consulting.  These costs were partially offset by declines in occupancy and equipment expense associated with the closure of two branches in first quarter of 2019. 

The efficiency ratio was 67.03% for the third quarter of 2019, compared to 68.23% for the third quarter a year ago, and 66.00% for the second quarter of 2019.  Year-to-date, the efficiency ratio was 67.60% compared to 72.38% for the first nine months of 2018.

Balance Sheet Review

Total assets increased $8.1 million to $945.2 million at September 30, 2019, compared to $937.1 million at September 30, 2018, and grew $20.3 million from $924.9 million at June 30, 2019.

Investment securities decreased $5.1 million to $99.2 million at September 30, 2019, compared to $104.3 million at September 30, 2018, primarily as a result of maturities, payments and sales within the portfolio.  The portfolio is comprised primarily of amortizing U.S. agency collateralized mortgage and mortgage-backed securities.

Liquidity within the company remains strong.  At September 30, 2019, in addition to cash equivalent assets of $89.0 million, the Bank had established borrowing lines with the Federal Home Loan Bank of Des Moines of $174.7 million, with $3.3 million outstanding at September 30, 2019.  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 $51.8 million, subject to collateral requirements, and $16.0 million from correspondent banks, with no balance outstanding on any of these facilities.

The loan portfolio remains well-diversified with loans originating predominately within the Western Washington and Oregon markets.  Gross loan balances were $683.8 million at September 30, 2019, compared to $693.1 million at September 30, 2018.  To manage risk, the Company oversees new loan origination volume and current loan balance using concentration limits that establish maximum exposure levels by designated industry segment, real estate product types, geography and single borrower limits.  The portfolio includes $51.4 million in indirect consumer loans to finance luxury and classic cars. “As part of our strategic plan, we have been limiting our concentrations in the indirect consumer loans to finance luxury and classic cars,” said Portmann.  As at September 30, 2019, this portfolio balance totaled $51.4 million, a decline of $10.7 million from $62.1 million a year earlier and down $2.4 million compared to $53.8 million at June 30, 2019.

Total deposits were $816.1 million at September 30, 2019, a slight increase from $815.2 million at September 30, 2018, and an increase of 3% from $795.5 million at June 30, 2019.  Excluding a $20.3 million reduction in brokered deposits, year-over-year deposits increased $21.3 million. Time deposits continue to decline as a component of funding, primarily due to the reduction in brokered deposits.  Noninterest bearing deposits to total deposits ratio remains outstanding at 33%, up from 32% from a year ago. “Liquidity remains strong based on existing levels of combined cash equivalents, investment securities and unused borrowing capacity.  Seasonal inflows, typical for this time of year, impacted total deposits during the current quarter,” said Carla Tucker, EVP and Chief Financial Officer.

Capital ratios of Pacific Financial Corporation, and its subsidiary Bank of the Pacific, continue to exceed the regulatory requirements for the well-capitalized thresholds. At September 30, 2019, Pacific Financial Corporation’s leverage ratio was 11.11% and the total risk-based capital ratio was 14.30%. 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.

Asset Quality

Asset quality continues to be strong, at or near historical low levels, with delinquent loans to gross loans at 0.25% and loan net charge-offs of $29,000 for the third quarter and $32,000 for the first nine months of 2019. Adversely classified loans to total gross loans was 1.17% at the end of the current quarter and linked quarter versus 1.12% a year earlier.  Nonperforming assets were $1.0 million, or 0.11% of total assets, at September 30, 2019, compared to $746,000 or 0.08% of total assets at September 30, 2018, and $773,000, or 0.08% of total assets at June 30, 2019. 

The allowance for loan losses is managed in concert with loan growth, credit quality and market conditions.  The allowance for loan losses to gross loans stood at 1.32% at September 30, 2019, compared to 1.31% a year ago, and 1.31% at June 30, 2019.  No provision for loan losses was incurred in the current quarter, linked quarter or the like quarter a year ago. The overall risk profile of the loan portfolio continues to be conservative, demonstrating the solid credit risk management framework in place.

Income Tax Provision

Income tax provision for the third quarter was $859,000 for an effective tax rate of 18.6%.  For the quarters ended June 30, 2019 and September 30, 2018, a provision for income tax of $870,000 and $724,000 were recorded. Tax expense for the nine months ending September 30, 2019, was $2.4 million versus $1.7 million in the same period for the prior year. A planned reduction in nontaxable municipal securities during the June 30, 2019 quarter contributed to the increase in the effective tax rate.  The remaining tax provision increase can be attributed to growth in pre-tax income.  In addition to federal corporate income tax, Pacific Financial also pays Oregon corporate income tax and Washington Business and Occupation tax on revenues.

Balance Sheet Overview
(Unaudited)
		Sept 30, 2019			June 30, 2019			$ Change			% Change			Sept 30, 2018			$ Change			% Change
Assets:		(Dollars in thousands, except per share data)
Cash on hand and in banks	$	48,910		$	33,158		$	15,752			48	%	$	80,121		$	(31,211	)		-39	%
Interest bearing deposits		3,250			3,250			-			0	%		994			2,256			227	%
Federal funds sold		36,876			26,551			10,325			100	%		-			36,876			100	%
Investment securities		99,222			104,143			(4,921	)		-5	%		104,343			(5,121	)		-5	%
Loans held-for-sale		23,542			18,489			5,053			27	%		7,745			15,797			204	%
Loans, net of deferred fees		682,832			688,684			(5,852	)		-1	%		692,092			(9,260	)		-1	%
Allowance for loan losses		(9,017	)		(9,046	)		29			0	%		(9,067	)		50			-1	%
Net loans		673,815			679,638			(5,823	)		-1	%		683,025			(9,210	)		-1	%
Federal Home Loan Bank and Pacific Coast Bankers' Bank stock, at cost		2,218			2,220			(2	)		0	%		2,409			(191	)		-8	%
Other assets		57,372			57,496			(124	)		0	%		58,455			(1,083	)		-2	%
Total assets	$	945,205		$	924,945		$	20,260			2	%	$	937,092		$	8,113			1	%
Liabilities and Shareholders' Equity:
Total deposits	$	816,090		$	795,504		$	20,586			3	%	$	815,153		$	937			0	%
Borrowings		16,644			16,681			(37	)		0	%		21,794			(5,150	)		-24	%
Accrued interest payable and other liabilities		9,000			11,534			(2,534	)		-22	%		8,806			194			2	%
Shareholders' equity		103,471			101,226			2,245			2	%		91,339			12,132			13	%
Total liabilities and shareholders' equity	$	945,205		$	924,945		$	20,260			2	%	$	937,092		$	8,113			1	%
Common Stock Shares Outstanding		10,608,558			10,593,697			14,861			0	%		10,565,034			43,524			0	%
Book value per common share (1)	$	9.75		$	9.56		$	0.19			2	%	$	8.65		$	1.10			13	%
Tangible book value per common share (2)	$	8.48		$	8.28		$	0.20			2	%	$	7.37		$	1.11			15	%
Gross loans to deposits ratio		83.7	%		86.6	%		-2.9	%					84.9	%		-1.2	%
(1) Book value per common share is calculated as the total common shareholders' equity divided by the period ending number of common stock shares outstanding.
(2) Tangible book value per common share is calculated as the total common shareholders' equity less total intangible assets and liabilities, divided by the period ending number of common stock shares outstanding.

Income Statement Overview
(Unaudited)
		For the Three Months Ended,
		Sept 30, 2019			June 30, 2019			$ Change			% Change			Sept 30, 2018			$ Change			% Change
		(Dollars in thousands, except per share data)
Interest and dividend income	$	10,563		$	10,460		$	103			1	%	$	10,337		$	226			2	%
Interest expense		721			735			(14	)		-2	%		686			35			5	%
Net interest income		9,842			9,725			117			1	%		9,651			191			2	%
Loan loss provision		-			-			-			0	%		-			-			0	%
Noninterest income		4,167			3,444			723			21	%		2,648			1,519			57	%
Noninterest expense		9,390			8,692			698			8	%		8,392			998			12	%
Income before income taxes		4,619			4,477			142			3	%		3,907			712			18	%
Income tax expense		859			870			(11	)		-1	%		724			135			19	%
Net Income	$	3,760		$	3,607		$	153			4	%	$	3,183		$	577			18	%
Average common shares outstanding - basic		10,595,992			10,587,140			8,852			0	%		10,563,104			32,888			0	%
Average common shares outstanding - diluted		10,669,761			10,670,586			(825	)		0	%		10,685,274			(15,513	)		0	%
Income per common share
Basic	$	0.35		$	0.34		$	0.01			3	%	$	0.30		$	0.05			17	%
Diluted	$	0.35		$	0.34		$	0.01			3	%	$	0.30		$	0.05			17	%
Effective tax rate		18.6	%		19.4	%		-0.8	%					18.5	%		0.1	%
		For the Nine Months Ended,
		Sept 30, 2019			Sept 30, 2018			$ Change			% Change
		(Dollars in thousands, except per share data)
Interest and dividend income	$	31,383		$	29,541		$	1,842			6	%
Interest expense		2,198			1,890			308			16	%
Net interest income		29,185			27,651			1,534			6	%
Loan loss provision		-			-			-			0	%
Noninterest income		10,009			7,622			2,387			31	%
Noninterest expense		26,494			25,529			965			4	%
Income before income taxes		12,700			9,744			2,956			30	%
Income tax expense		2,387			1,658			729			44	%
Net Income	$	10,313		$	8,086		$	2,227			28	%
Average common shares outstanding - basic		10,586,778			10,546,315			40,463			0	%
Average common shares outstanding - diluted		10,670,517			10,672,184			(1,667	)		0	%
Income per common share
Basic	$	0.97		$	0.77		$	0.20			26	%
Diluted	$	0.97		$	0.76		$	0.21			28	%
Effective tax rate		18.8	%		17.0	%		1.8	%

Noninterest Income
(Unaudited)
		For the Three Months Ended,
		Sept 30, 2019		June 30, 2019		$ Change			% Change			Sept 30, 2018		$ Change			% Change
		(Dollars in thousands)
Service charges on deposits	$	493	$	531	$	(38	)		-7	%	$	504	$	(11	)		-2	%
Gain on sale of loans, net		2,353		1,707		646			38	%		1,155		1,198			104	%
Gain on sale of securities available for sale, net		-		102		(102	)		100	%		-		-			100	%
Earnings on bank owned life insurance		333		109		224			206	%		108		225			208	%
Other noninterest income
Fee income		936		884		52			6	%		871		65			7	%
Other		52		111		(59	)		-53	%		10		42			420	%
Total noninterest income	$	4,167	$	3,444	$	723			21	%	$	2,648	$	1,519			57	%
		For the Nine Months Ended,
		Sept 30, 2019		Sept 30, 2018		$ Change			% Change
		(Dollars in thousands)
Service charges on deposits	$	1,529	$	1,527	$	2			0	%
Gain on sale of loans, net		4,991		3,163		1,828			58	%
Gain on sale of securities available for sale, net		102		-		102			100	%
Earnings on bank owned life insurance		548		321		227			71	%
Other noninterest income
Fee income		2,649		2,520		129			5	%
Other		190		91		99			109	%
Total noninterest income	$	10,009	$	7,622	$	2,387			31	%

Noninterest Expense
(Unaudited)
		For the Three Months Ended,
		Sept 30, 2019		June 30, 2019		$ Change			% Change			Sept 30, 2018		$ Change			% Change
		(Dollars in thousands)
Salaries and employee benefits	$	6,058	$	5,506	$	552			10	%	$	5,328	$	730			14	%
Occupancy		584		510		74			15	%		524		60			11	%
Equipment		251		241		10			4	%		255		(4	)		-2	%
Data processing		737		701		36			5	%		726		11			2	%
Professional services		376		303		73			24	%		173		203			117	%
State and local taxes		136		139		(3	)		-2	%		131		5			4	%
FDIC and State assessments		50		69		(19	)		-28	%		84		(34	)		-40	%
Other noninterest expense:
Director fees		67		66		1			2	%		65		2			3	%
Communication		74		76		(2	)		-3	%		73		1			1	%
Advertising		70		90		(20	)		-22	%		82		(12	)		-15	%
Professional liability insurance		54		50		4			8	%		49		5			10	%
Amortization		114		100		14			14	%		92		22			24	%
Other		819		841		(22	)		-3	%		810		9			1	%
Total noninterest expense	$	9,390	$	8,692	$	698			8	%	$	8,392	$	998			12	%
		For the Nine Months Ended,
		Sept 30, 2019		Sept 30, 2018		$ Change			% Change
		(Dollars in thousands)
Salaries and employee benefits	$	16,965	$	16,079	$	886			6	%
Occupancy		1,595		1,601		(6	)		0	%
Equipment		734		840		(106	)		-13	%
Data processing		2,131		2,122		9			0	%
Professional services		1,047		562		485			86	%
Other real estate owned operating costs		-		6		(6	)		-100	%
State and local taxes		357		375		(18	)		-5	%
FDIC and State assessments		127		320		(193	)		-60	%
Other noninterest expense:
Director fees		199		198		1			1	%
Communication		221		229		(8	)		-3	%
Advertising		226		246		(20	)		-8	%
Professional liability insurance		153		141		12			9	%
Amortization		306		286		20			7	%
Loss on real estate owned, net		-		-		-			0	%
Other		2,433		2,524		(91	)		-4	%
Total noninterest expense	$	26,494	$	25,529	$	965			4	%

Financial Performance Overview
(Unaudited)
		For the Three Months Ended
		Sept 30, 2019			June 30, 2019			Change			Sept 30, 2018			Change
Performance Ratios
Return on average assets, annualized		1.61	%		1.62	%		(0.01	)		1.38	%		0.23
Return on average equity, annualized		14.52	%		14.62	%		(0.10	)		13.89	%		0.63
Efficiency ratio (1)		67.03	%		66.00	%		1.03			68.23	%		(1.20	)
(1) Non-interest expense divided by net interest income plus noninterest income.
		For the Nine Months Ended,
		Sept 30, 2019			Sept 30, 2018			Change
Performance Ratios
Return on average assets, annualized		1.52	%		1.21	%		0.31
Return on average equity, annualized		13.95	%		12.23	%		1.72
Efficiency ratio (1)		67.60	%		72.38	%		(4.78	)
(1) Non-interest expense divided by net interest income plus noninterest income.

LIQUIDITY

Cash and Cash Equivalents and Investment Securities
(Unaudited)
		Sept 30, 2019		% of Total			June 30, 2019		% of Total			$ Change			% Change			Sept 30, 2018		Total			$ Change			% Change
		(Dollars in thousands)
Cash on hand and in banks	$	21,517		11	%	$	17,310		11	%	$	4,207			24	%	$	14,767		8	%	$	6,750			46	%
Interest bearing deposits		27,393		15	%		15,848		9	%		11,545			73	%		65,354		35	%		(37,961	)		-58	%
Other interest earning deposits		3,250		2	%		3,250		2	%		-			0	%		994		1	%		2,256			227	%
Federal funds sold		36,876		20	%		26,551		16	%		10,325			39	%		-		0	%		36,876			100	%
Total		89,036		48	%		62,959		38	%		26,077			41	%		81,115		44	%		7,921			10	%
Investment securities:
Collateralized mortgage obligations		43,805		23	%		46,712		28	%		(2,907	)		-6	%		35,980		19	%		7,825			22	%
Mortgage backed securities		20,457		11	%		22,061		13	%		(1,604	)		-7	%		14,190		8	%		6,267			44	%
U.S. Government and agency securities		501		0	%		536		0	%		(35	)		-7	%		4,121		2	%		(3,620	)		-88	%
Municipal securities		32,378		17	%		32,766		20	%		(388	)		-1	%		49,980		27	%		(17,602	)		-35	%
Corporate debt securities		1,999		1	%		1,995		1	%		4			0	%		-		0	%		1,999			100	%
Equity securities		82		0	%		73		0	%		9			12	%		72		0	%		10			14	%
Total		99,222		52	%		104,143		62	%		(4,921	)		-5	%		104,343		56	%		(5,121	)		-5	%
Total cash equivalents and investment securities	$	188,258		100	%	$	167,102		100	%	$	21,156			13	%	$	185,458		100	%	$	2,800			2	%
Total cash equivalents and investment securities
as a percent of total assets				20	%				18	%										14	%

LOANS

Loans by Category
(Unaudited)
		Sept 30, 2019			% of Gross Loans			June 30, 2019			% of Gross Loans			$ Change			% Change			Sept 30, 2018			% of Gross Loans			$ Change			% Change
		(Dollars in thousands)
Commercial and agricultural	$	134,758			20	%	$	142,107			21	%	$	(7,349	)		-5	%	$	135,204			20	%	$	(446	)		0	%
Real estate:
Construction and development		41,663			6	%		41,815			6	%		(152	)		0	%		49,697			7	%		(8,034	)		-16	%
Residential 1-4 family		86,771			13	%		88,461			13	%		(1,690	)		-2	%		90,394			13	%		(3,623	)		-4	%
Multi-family		32,920			5	%		32,010			5	%		910			3	%		31,134			4	%		1,786			6	%
Commercial real estate -- owner occupied		142,297			21	%		137,565			20	%		4,732			3	%		144,349			21	%		(2,052	)		-1	%
Commercial real estate -- non owner occupied		150,249			21	%		152,143			21	%		(1,894	)		-1	%		138,255			20	%		11,994			9	%
Farmland		32,448			5	%		30,043			4	%		2,405			8	%		29,075			4	%		3,373			12	%
Consumer		62,707			9	%		65,533			10	%		(2,826	)		-4	%		74,998			11	%		(12,291	)		-16	%
Gross Loans		683,813			100	%		689,677			100	%		(5,864	)		-0.9	%		693,106			100	%		(9,293	)		-1	%
Less: allowance for loan losses		(9,017	)					(9,046	)					29						(9,067	)					50
Less: deferred fees		(981	)					(993	)					12						(1,014	)					33
Net loans	$	673,815					$	679,638					$	(5,823	)				$	683,025					$	(9,210	)
Loan Concentration
(Unaudited)
		Sept 30, 2019			% of Risk Based Capital			June 30, 2019			% of Risk Based Capital			Change			Sept 30, 2018			% of Risk Based Capital			Change
		(Dollars in thousands)
Commercial and agricultural	$	134,758			123	%	$	142,107			132	%		-9	%	$	135,204			134	%		-11	%
Real estate:
Construction and development		41,663			38	%		41,815			39	%		-1	%		49,697			49	%		-11	%
Residential 1-4 family		86,771			79	%		88,461			82	%		-3	%		90,394			89	%		-10	%
Multi-family		32,920			30	%		32,010			30	%		0	%		31,134			31	%		-1	%
Commercial real estate -- owner occupied		142,297			130	%		137,565			128	%		2	%		144,349			143	%		-13	%
Commercial real estate -- non owner occupied		150,249			137	%		152,143			141	%		-4	%		138,255			137	%		0	%
Farmland		32,448			30	%		30,043			28	%		2	%		29,075			29	%		1	%
Consumer		62,707			57	%		65,533			61	%		-4	%		74,998			74	%		-17	%
Gross Loans	$	683,813					$	689,677								$	693,106
Regulatory Commercial Real Estate	$	221,191			202	%	$	221,663			205	%		-3	%	$	213,891			212	%		-10	%
Total Risk Based Capital*	$	109,428					$	107,877								$	101,031
*Bank of the Pacific

DEPOSITS

Deposits by Category
(Unaudited)
		Sept 30, 2019			% of Total			June 30, 2019		% of Total			$ Change			% Change			Sept 30, 2018			% of Total			$ Change			% Change
		(Dollars in thousands)
Interest-bearing demand	$	222,412			27	%	$	218,828		28	%	$	3,584			2	%	$	201,058			24	%	$	21,354			11	%
Money market		150,655			18	%		146,886		18	%		3,769			3	%		161,012			20	%		(10,357	)		-6	%
Savings		106,284			13	%		102,721		13	%		3,563			3	%		102,680			13	%		3,604			4	%
Time deposits (CDs)		71,501			9	%		77,870		10	%		(6,369	)		-8	%		87,874			11	%		(16,373	)		-19	%
Total interest-bearing deposits		550,852			67	%		546,305		69	%		4,547			1	%		552,624			68	%		(1,772	)		0	%
Non-interest bearing demand		265,238			33	%		249,199		31	%		16,039			6	%		262,529			32	%		2,709			1	%
Total deposits	$	816,090			100	%	$	795,504		100	%	$	20,586			2.6	%	$	815,153			100	%	$	937			0	%

The following table summarizes the capital measures of the Company and the Bank respectively, at the dates listed below.

Capital Measures
(unaudited)
	Sept 30, 2019			June 30, 2019			Change			Sept 30, 2018			Change			Well Capitalized Under Prompt Correction Action Regulations*
Pacific Financial Corporation
Total risk-based capital ratio	14.30	%		14.16	%		0.14			13.61	%		0.69			N/A
Tier 1 risk-based capital ratio	13.13	%		12.98	%		0.15			12.40	%		0.73			N/A
Common equity tier 1 ratio	11.45	%		11.28	%		0.17			10.67	%		0.78			N/A
Leverage ratio	11.11	%		11.32	%		(0.21	)		10.30	%		0.81			N/A
Tangible common equity ratio	9.66	%		9.63	%		0.03			8.43	%		1.23			N/A
Bank of the Pacific
Total risk-based capital ratio	14.22	%		14.08	%		0.14			13.49	%		0.73			10.5	%
Tier 1 risk-based capital ratio	13.02	%		12.88	%		0.14			12.26	%		0.76			8.5	%
Common equity tier 1 ratio	13.02	%		12.88	%		0.14			12.26	%		0.76			7.0	%
Leverage ratio	11.01	%		11.24	%		(0.23	)		10.18	%		0.83			7.5	%
*Includes Basel III 2019 Capital Conservation Buffer

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,
			Sept 30, 2019			June 30, 2019			$ Change			% Change			Sept 30, 2018		$ Change			% Change
Average Balances			(Dollars in thousands)
Gross loans		$	688,166		$	695,086		$	(6,920	)		-1	%	$	695,011	$	(6,845	)		-1	%
Loans held for sale		$	16,825		$	10,746		$	6,079			57	%	$	8,860	$	7,965			90	%
Investment securities		$	104,236		$	110,277		$	(6,041	)		-5	%	$	107,619	$	(3,383	)		-3	%
Federal funds sold & interest bearing deposits in banks		$	51,931		$	13,630		$	38,301			281	%	$	41,409	$	10,522			25	%
Total interest-earning assets		$	861,158		$	829,739		$	31,419			4	%	$	852,899	$	8,259			1	%
Non-interest bearing demand deposits		$	254,184		$	231,308		$	22,876			10	%	$	251,847	$	2,337			1	%
Interest bearing deposits		$	541,200		$	534,823		$	6,377			1	%	$	543,436	$	(2,236	)		0	%
Total Deposits		$	795,384		$	766,131		$	29,253			4	%	$	795,283	$	101			0	%
Borrowings		$	16,661		$	19,186		$	(2,525	)		-13	%	$	21,943	$	(5,282	)		-24	%
Total interest-bearing liabilities		$	557,861		$	554,009		$	3,852			1	%	$	565,379	$	(7,518	)		-1	%
Total Equity		$	102,715		$	98,965		$	3,750			4	%	$	90,903	$	11,812			13	%
			For the Three Months Ended,
			Sept 30, 2019			June 30, 2019			Change			Sept 30, 2018			Change
Yield on average gross loans (1)			5.47	%		5.52	%		(0.05	)		5.35	%		0.12
Yield on average investment securities (1)			2.80	%		2.87	%		(0.07	)		2.80	%		-
Yield on Fed funds sold & interest bearing deposits in banks			2.24	%		2.68	%		(0.44	)		1.98	%		0.26
Cost of average interest bearing deposits			0.42	%		0.42	%		-			0.37	%		0.05
Cost of average borrowings			3.60	%		3.62	%		(0.02	)		3.34	%		0.26
Cost of average total deposits and borrowings			0.35	%		0.37	%		(0.02	)		0.33	%		0.02
Yield on average interest-earning assets			4.91	%		5.10	%		(0.19	)		4.86	%		0.05
Cost of average interest-bearing liabilities			0.51	%		0.53	%		(0.02	)		0.48	%		0.03
Net interest spread			4.40	%		4.57	%		(0.17	)		4.38	%		0.02
Net interest margin (1)			4.57	%		4.74	%		(0.17	)		4.55	%		0.02
(1) Tax-exempt income has been adjusted to a tax equivalent basis at a rate of 21%.
			For the Nine Months Ended,
			Sept 30, 2019			Sept 30, 2018			$ Change			% Change
Average Balances			(Dollars in thousands)
Gross loans		$	693,738		$	693,868		$	(130	)		0	%
Loans held for sale		$	10,990		$	7,949		$	3,041			38	%
Investment securities		$	112,511		$	108,479		$	4,032			4	%
Federal funds sold & interest bearing deposits in banks		$	27,912		$	22,140		$	5,772			26	%
Interest-earning assets		$	845,151		$	832,436		$	12,715			2	%
Non-interest bearing demand deposits		$	241,188		$	246,993		$	(5,805	)		-2	%
Interest bearing deposits		$	539,227		$	529,473		$	9,754			2	%
Total Deposits		$	780,415		$	776,466		$	3,949			1	%
Borrowings		$	19,193		$	22,400		$	(3,207	)		-14	%
Interest-bearing liabilities		$	558,420		$	551,873		$	6,547			1	%
Total Equity		$	98,872		$	88,367		$	10,505			12	%
Total Deposits excl. Brokered CDs			759,417			736,843			22,574			3.1	%
			For the Nine Months Ended,
			Sept 30, 2019			Sept 30, 2018			Change
Net Interest Margin
Yield on average gross loans (1)			5.48	%		5.24	%		0.24
Yield on average investment securities (1)			2.89	%		2.72	%		0.17
Yield on Fed funds sold & interest bearing deposits in banks			2.40	%		1.83	%		0.57
Cost of average interest bearing deposits			0.42	%		0.34	%		0.08
Cost of average borrowings			3.65	%		3.25	%		0.40
Cost of average total deposits and borrowings			0.37	%		0.32	%		0.05
Yield on average interest-earning assets			5.01	%		4.80	%		0.21
Cost of average interest-bearing liabilities			0.53	%		0.46	%		0.07
Net interest spread			4.48	%		4.34	%		0.14
Net interest margin (1)			4.66	%		4.50	%		0.16
(1) Tax-exempt income has been adjusted to a tax equivalent basis at a rate of 21%.

Adversely Classified Loans and Securities
(Unaudited)
		Sept 30, 2019			June 30, 2019			$ Change			% Change			Sept 30, 2018			$ Change			% Change
		(Dollars in thousands)
Rated substandard or worse, but not impaired	$	6,637		$	6,978		$	(341	)		-5	%	$	6,733		$	(96	)		-1	%
Impaired		1,341			1,106			235			21	%		1,044			297			28	%
Total adversely classified loans1	$	7,978		$	8,084		$	(106	)		-1	%	$	7,777		$	201			3	%
Gross loans (excluding deferred loan fees)	$	683,813		$	689,677		$	(5,864	)		-1	%	$	693,106		$	(9,293	)		-1	%
Adversely classified loans to gross loans		1.17	%		1.17	%								1.12	%
Allowance for loan losses	$	9,017		$	9,046		$	(29	)		0	%	$	9,067		$	(50	)		-1	%
Allowance for loan losses as a percentage of adversely classified loans		113.02	%		111.90	%								116.59	%
Allowance for loan losses to total impaired loans		672.41	%		817.90	%								868.49	%
Adversely classified loans to total assets		0.84	%		0.87	%								0.83	%
Delinquent loans to gross loans, not in nonaccrual status		0.25	%		0.12	%								0.18	%

¹ Adversely 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
(Unaudited)
		Sept 30, 2019			June 30, 2019			$ Change			% Change			Sept 30, 2018			$ Change			% Change
		(Dollars in thousands)
Loans on nonaccrual status	$	1,014		$	773		$	241			31	%	$	696		$	318			46	%
Total nonaccrual loans		1,014			773			241			31	%		696			318			46	%
Other real estate owned and foreclosed assets		-			-			-			0	%		50			(50	)		-100	%
Total nonperforming assets	$	1,014		$	773		$	241			31	%	$	746		$	268			36	%
Restructured performing loans	$	327		$	132		$	195			148	%	$	348		$	(21	)		-6	%
Accruing loans past due 90 days or more	$	-		$	151		$	(151	)		100	%	$	-		$	-			100	%
Percentage of nonperforming assets to total assets		0.11	%		0.08	%								0.08	%
Nonperforming loans to total loans		0.15	%		0.11	%								0.10	%

Allowance for Loan Losses
(Unaudited)
		For the Three Months Ended,
		Sept 30, 2019			June 30, 2019			$ Change			% Change			Sept 30, 2018			$ Change			% Change
		(Dollars in thousands)
Gross loans outstanding at end of period	$	683,813		$	689,677		$	(5,864	)		-1	%	$	693,106		$	(9,293	)		-1	%
Average loans outstanding, gross	$	688,166		$	695,086		$	(6,920	)		-1	%	$	695,011		$	(6,845	)		-1	%
Allowance for loan losses, beginning of period	$	9,046		$	9,056		$	(10	)		0	%	$	9,143		$	(97	)		-1	%
Commercial		-			-			-			-100	%		(4	)		4			0	%
Commercial Real Estate		-			-			-			0	%		-			-			0	%
Residential Real Estate		-			-			-			0	%		-			-			0	%
Consumer		(33	)		(20	)		(13	)		65	%		(103	)		70			-68	%
Total charge-offs		(33	)		(20	)		(13	)		65	%		(107	)		74			-69	%
Commercial		-			-			-			-100	%		23			(23	)		-100	%
Commercial Real Estate		-			-			-			0	%		-			-			0	%
Residential Real Estate		-			-			-			-100	%		-			-			0	%
Consumer		4			10			(6	)		-60	%		8			(4	)		-50	%
Total recoveries		4			10			(6	)		-60	%		31			(27	)		-87	%
Net recoveries/(charge-offs)		(29	)		(10	)		(19	)		190	%		(76	)		47			-62	%
Provision charged to income		-			-			-			0	%		-			-			0	%
Allowance for loan losses, end of period	$	9,017		$	9,046		$	(29	)		0	%	$	9,067		$	(50	)		-1	%
Ratio of net loans charged-off to average
gross loans outstanding, annualized		0.02	%		0.01	%		0.01	%					0.04	%		-0.02	%
Ratio of allowance for loan losses to
gross loans outstanding		1.32	%		1.31	%		0.01	%					1.31	%		0.01	%
		For the Nine Months Ended,
		Sept 30, 2019			Sept 30, 2018			$ Change			% Change
		(Dollars in thousands)
Gross loans outstanding at end of period	$	683,813		$	693,106		$	(9,293	)		-1	%
Average loans outstanding, gross	$	693,738		$	693,868		$	(130	)		0	%
Allowance for loan losses, beginning of period	$	9,049		$	9,092		$	(43	)		0	%
Commercial		(30	)		(4	)		(26	)		100	%
Commercial Real Estate		-			-			-			0	%
Residential Real Estate		-			-			-			0	%
Consumer		(112	)		(155	)		43			-28	%
Total charge-offs		(142	)		(159	)		17			-11	%
Commercial		56			77			(21	)		-27	%
Commercial Real Estate		-			-			-			0	%
Residential Real Estate		34			-			34			100	%
Consumer		20			57			(37	)		-65	%
Total recoveries		110			134			(24	)		-18	%
Net (charge-offs)		(32	)		(25	)		(7	)		28	%
Provision charged to income		-			-			-			0	%
Allowance for loan losses, end of period	$	9,017		$	9,067		$	(50	)		-1	%
Ratio of net loans charged-off to average
gross loans outstanding, annualized		0.00	%		0.00	%		0.00	%
Ratio of allowance for loan losses to
gross loans outstanding		1.32	%		1.31	%		0.01	%

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 9/30/19, the Company had total assets of $945.2 million and operated fourteen branches in the communities of Grays Harbor, Pacific, Whatcom, Skagit, Clark and Wahkiakum counties in the State of Washington, and two branches in Clatsop County, Oregon.  The Company also operated loan production offices in the communities of Burlington, Washington and Salem and Eugene, 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 CARLA TUCKER, EVP & CFO 360.533.8873

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