ABERDEEN, Wash., July 23, 2019 (GLOBE NEWSWIRE) -- Pacific Financial Corporation (OTCQX: PFLC), the holding company for Bank of the Pacific, today reported net income increased 38% to $3.6 million, or $0.34 per diluted share, for the second quarter of 2019, from $2.6 million, or $0.25 per diluted share, for the second quarter of 2018, supported by a higher net interest margin, net interest income and gains on sale of residential mortgage loans.  For the first quarter of 2019, net income was $2.9 million, or $0.28 per diluted share.  For the first six months ended June 30, 2019, net income was $6.6 million, or $0.61 per diluted share, up 34% from $4.9 million, or $0.46 per diluted share, for the first six months of 2018.  All results are unaudited. 

Pacific Financial also announced that it will begin paying cash dividends quarterly, instead of the current yearly cash dividends, commencing the third quarter of 2019, in a move aimed at distributing income to shareholders more regularly and efficiently.  At the same time, the board of directors declared a half-year cash dividend, which includes the first and second quarters of 2019, of $0.20 per common share payable on August 26, 2019, to shareholders of record on August 5, 2019.  On an annualized basis, this equates to a dividend yield of 3.51%, an increase of 33% from the dividend yield of 2.63% for the full year of 2018. 

“We are excited to be able to begin distributing our cash dividend on a more frequent basis; switching to a quarterly cash dividend will provide a more regular flow of dividend income to our loyal shareholders, enhancing the timing of their return on investment,” said Denise Portmann, President & Chief Executive Officer.  “We also recently qualified to trade on the OTCQX, which we believe will increase our visibility and outreach to investors.  The clear advantage of moving up to the OTCQX is improved transparency and, ultimately, increased liquidity to the benefit of investors.”   

“Following our strong earnings momentum from the first quarter, we continued to post record profits for both the current quarter and the first half of 2019,” said Denise Portmann, President & Chief Executive Officer.  “Net interest margin improved by 23 basis points to 4.74% from a year earlier and yields across all asset classes improved with modest increases in our cost of funds.  Our balance sheet mix and deposit pricing strategies contributed to a 7% growth in net interest income from a year ago, reflecting the rise in interest rates over the past few years.  On a linked quarter basis, solid loan pricing discipline contributed to an increase in loan yields despite the recent inverted yield curve.”  

“With the increasing importance of technology-based services, we  introduced person-to-person (P2P) money transfer services earlier this month.  Our selection of Zelle to power this product offering improves our competitive position with both regional and national banks in this arena,” said Portmann.

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

• Diluted earnings per share (“EPS”) were $0.34 for 2Q19, compared to $0.25 for 2Q18, and $0.28 for 1Q19. For the first six months of 2019, diluted earnings per share grew 33% to $0.61 from $0.46 per diluted share for the first six months of 2018.

• Return on average assets (“ROAA”) was 1.62% and return on average equity (“ROAE”) was 14.62%, for 2Q19, compared to 1.19% and 10.76%, respectively, for 2Q18; and 1.32% and 12.60%, respectively, for 1Q19.  Industry peer ROAA was 0.95% and ROAE was 9.11% at March 31, 2019.  [Industry peers comprise of approximately 476 banks in the SNL Microcap U.S. Bank Index.] Return on average assets (“ROAA”) increased to 1.47%, and return on average equity (“ROAE”) increased to 13.63%, compared to 1.12% and 11.35%, for the first six months of 2019 and 2018, respectively.

• Net interest income was $9.7 million for 2Q19, an increase of 7% from $9.1 million for 2Q18 and grew 1% from $9.6 million for 1Q19.  Net interest income totaled $19.3 million for the first six months of 2019, compared to $18.0 million for the first six months of 2018.

• Net interest margin, on a tax equivalent basis (“NIMTE”), improved by 23 basis points to 4.74% for 2Q19, compared to 4.51% for 2Q18, and expanded four basis points from 4.70% for 1Q19, reflecting improving yields on interest earning assets and slower growth in cost of funds.  Industry peer NIM was 3.71%.  [Industry peers are the 476 banks that comprised the SNL Microcap U.S. Bank Index, at March 31, 2019.] NIMTE expanded 24 basis points to 4.72% for the first six months of 2019, compared to 4.48% for the first six months of 2018.

• Gross loans were $689.7 million at quarter end, versus $704.3 million at June 30, 2018, and $692.3 million at March 31, 2019.

• Total deposits were $795.5 million, compared to $767.5 million at June 30, 2018, and $776.3 million at March 31, 2019.  This includes a reduction of $18.5 million and $3.8 million in brokered CDs from the year-over-year quarter and the immediate prior quarter, respectively. Non-interest-bearing deposits represented 31% of total deposits, at June 30, 2019.

• Asset quality remains solid:   
  • Loans 30 – 89 days delinquent, still on accrual status, were minimal at 0.12% of gross loans outstanding. 
  • Net charge-offs totaled $10,000, or 0.01% of average gross loans, for 2Q19, compared to net recoveries of $7,000, or 0.00% of average gross loans, for 1Q19, and net recoveries of $2,000, or 0.00% of average gross loans, for 2Q18. 
  • Nonperforming assets were $773,000, or 0.08% of total assets, at June 30, 2019, compared to $976,000, or 0.11% of total assets at March 31, 2019, and $1.5 million, or 0.16% of total assets at June 30, 2018. 
  • Adversely classified loans were $8.1 million, or 1.17% of gross loans, at June 30, 2019, versus $7.6 million, or 1.10% of gross loans, at March 31, 2019, and $9.3 million, or 1.32% of gross loans, at June 30, 2018. 
  • No provision for loan losses was incurred in 2Q19, 1Q19 or 2Q18. 
  • The allowance for loan losses to gross loans stood at 1.31% at June 30, 2019, compared to 1.31% at March 31, 2019, and 1.30% at June 30, 2018.

• The Company’s consolidated capital ratios and the Bank’s capital ratios exceeded the regulatory guidelines for a well-capitalized financial institution under current regulatory requirements.

Balance Sheet Overview
(Unaudited)
			June 30, 2019			Mar 31, 2019			$  Change			%  Change			June 30, 2018			$ Change			% Change
Assets:			(Dollars in thousands, except per share data)
	Cash on hand and in banks	$	33,158		$	22,341		$	10,817			48	%	$	16,295		$	16,863			103	%
	Interest bearing deposits		3,250			3,250			-			0	%		994			2,256			227	%
	Federal funds sold		26,551			7,428			19,123			100	%		-			26,551			100	%
	Investment securities		104,143			120,155			(16,012	)		-13	%		107,203			(3,060	)		-3	%
	Loans held-for-sale		18,489			7,717			10,772			140	%		7,749			10,740			139	%
	Loans, net of deferred fees		688,684			691,293			(2,609	)		0	%		703,272			(14,588	)		-2	%
	Allowance for loan losses		(9,046	)		(9,056	)		10			0	%		(9,143	)		97			-1	%
	Net loans		679,638			682,237			(2,599	)		0	%		694,129			(14,491	)		-2	%
	Federal Home Loan Bank and Pacific Coast   Bankers' Bank stock, at cost		2,220			2,421			(201	)		-8	%		2,453			(233	)		-9	%
	Other assets		57,496			58,180			(684	)		-1	%		58,338			(842	)		-1	%
	Total assets	$	924,945		$	903,729		$	21,216			2	%	$	887,161		$	37,784			4	%
Liabilities and Shareholders' Equity:
	Total deposits	$	795,504		$	776,260		$	19,244			2	%	$	767,547		$	27,957			4	%
	Borrowings		16,681			21,719			(5,038	)		-23	%		22,896			(6,215	)		-27	%
	Accrued interest payable and other liabilities		11,534			8,982			2,552			28	%		8,102			3,432			42	%
	Shareholders' equity		101,226			96,768			4,458			5	%		88,616			12,610			14	%
	Total liabilities and shareholders' equity	$	924,945		$	903,729		$	21,216			2	%	$	887,161		$	37,784			4	%
Common Stock Shares Outstanding			10,593,697			10,580,263			13,434			0	%		10,562,593			31,104			0	%
Book value per common share (1)		$	9.56		$	9.15		$	0.41			4	%	$	8.39		$	1.17			14	%
Tangible book value per common share (2)		$	8.28		$	7.87		$	0.41			5	%	$	7.11		$	1.17			16	%
Gross loans to deposits ratio			86.6	%		89.1	%		-2.5	%					91.6	%		-5.0	%
(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,
			June 30,  2019			Mar 31,  2019			$  Change			%  Change			June 30,  2018			$ Change			% Change
			(Dollars in thousands, except per share data)
Interest and dividend income		$	10,460		$	10,360		$	100			1	%	$	9,741		$	719			7	%
Interest expense			735			742			(7	)		-1	%		624			111			18	%
	Net interest income		9,725			9,618			107			1	%		9,117			608			7	%
Loan loss provision			-			-			-			0	%		-			-			0	%
Noninterest income			3,444			2,398			1,046			44	%		2,649			795			30	%
Noninterest expense			8,692			8,412			280			3	%		8,580			112			1	%
Income before income taxes			4,477			3,604			873			24	%		3,186			1,291			41	%
Income tax expense			870			658			212			32	%		570			300			53	%
	Net Income	$	3,607		$	2,946		$	661			22	%	$	2,616		$	991			38	%
Average common shares outstanding - basic			10,587,140			10,576,994			10,146			0	%		10,555,340			31,800			0	%
Average common shares outstanding - diluted			10,670,586			10,672,509			(1,923	)		0	%		10,673,808			(3,222	)		0	%
Income per common share
	Basic	$	0.34		$	0.28		$	0.06			21	%	$	0.25		$	0.09			36	%
	Diluted	$	0.34		$	0.28		$	0.06			21	%	$	0.25		$	0.09			36	%
Effective tax rate			19.4	%		18.3	%		1.1	%					17.9	%		1.5	%
			For the Six Months Ended,
			June 30,  2019			June 30,  2018			$  Change			%  Change
			(Dollars in thousands, except per share data)
Interest and dividend income		$	20,820		$	19,204		$	1,616			8	%
Interest expense			1,477			1,204			273			23	%
	Net interest income		19,343			18,000			1,343			7	%
Loan loss provision			-			-			-			0	%
Noninterest income			5,843			4,974			869			17	%
Noninterest expense			17,105			17,137			(32	)		0	%
Income before income taxes			8,081			5,837			2,244			38	%
Income tax expense			1,528			934			594			64	%
	Net Income	$	6,553		$	4,903		$	1,650			34	%
Average common shares outstanding - basic			10,582,095			10,537,781			44,314			0	%
Average common shares outstanding - diluted			10,670,819			10,665,500			5,319			0	%
Income per common share
	Basic	$	0.62		$	0.47		$	0.15			32	%
	Diluted	$	0.61		$	0.46		$	0.15			33	%
Effective tax rate			18.9	%		16.0	%		2.9	%

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,
			June 30,  2019			Mar 31,  2019			$  Change		%  Change			June 30,  2018			$ Change		% Change
Non-GAAP Operating Income			(Dollars in thousands)
Net Income		$	3,607		$	2,946		$	661		22	%	$	2,616		$	991		38	%
	Loan loss provision		-			-			-		0	%		-			-		0	%
	Loss on real estate owned, net		-			-			-		0	%		-			-		0	%
	Income tax expense		870			658			212		32	%		570			300		53	%
Pre-tax, pre-credit operating income		$	4,477		$	3,604		$	873		24	%	$	3,186		$	1,291		41	%
			For the Six Months Ended,
			June 30,  2019			June 30,  2018			$  Change		%  Change
Non-GAAP Operating Income			(Dollars in thousands)
Net Income		$	6,553		$	4,903		$	1,650		34	%
	Loan loss provision		-			-			-		0	%
	Loss on real estate owned, net		-			-			-		0	%
	Income tax expense		1,528			934			594		64	%
Pre-tax, pre-credit operating income		$	8,081		$	5,837		$	2,244		38	%

Noninterest Income

Noninterest income grew on a linked quarter basis, primarily due to an increase in revenue from the sale of residential mortgage loans and a gain from sale of investment securities.  “We realigned our investment portfolio to take advantage of the inverted yield curve during the period.  Noninterest income increased compared to the year-over-year quarter for similar reasons.  Recent decreases in mortgage rates have 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.  Increases in housing prices have moderated of late, encouraging more activity since the first of the year,” Portmann noted.  For the first half of the year, noninterest income was up versus the first six months of the prior year for the reasons previously noted. 

“Our residential mortgage lending group increased its contribution to noninterest income from the preceding quarter and from the second quarter a year ago,” added Portmann.  “The recent decline in mortgage interest rates appear to have spurred a modest increase in both home purchase and refinance activities within our markets during the first half of the year.  In addition, we continue to benefit from initiatives introduced last year which have improved workflow efficiencies, revenue and cost management.”  

Noninterest Income
(Unaudited)
			For the Three Months Ended,
			June 30,  2019		Mar 31,  2019		$  Change		%  Change			June 30,  2018		$ Change			% Change
			(Dollars in thousands)
Service charges on deposits		$	531	$	505	$	26		5	%	$	528	$	3			1	%
Gain on sale of loans, net			1,707		932		775		83	%		1,063		644			61	%
Gain on sale of securities available for sale, net			102		-		102		100	%		-		102			100	%
Earnings on bank owned life insurance			109		106		3		3	%		106		3			3	%
Other noninterest income
	Fee income		884		829		55		7	%		910		(26	)		-3	%
	Other		111		26		85		327	%		42		69			164	%
Total noninterest income		$	3,444	$	2,398	$	1,046		44	%	$	2,649	$	795			30	%
			For the Six Months Ended,
			June 30,  2019		June 30,  2018		$  Change		%  Change
			(Dollars in thousands)
Service charges on deposits		$	1,036	$	1,024	$	12		1	%
Gain on sale of loans, net			2,638		2,007		631		31	%
Gain on sale of securities available for sale, net			102		-		102		100	%
Earnings on bank owned life insurance			215		213		2		1	%
Other noninterest income
	Fee income		1,713		1,649		64		4	%
	Other		139		81		58		72	%
Total noninterest income		$	5,843	$	4,974	$	869		17	%

Noninterest Expense

Noninterest expense increased from the preceding quarter chiefly from increases in compensation expense due to increases in commission expense associated with growth in residential mortgage production during the period and the resumption of regulatory assessment expense after the expiration of a credit in the prior quarter.  State and local tax expense increased due to the receipt in the linked quarter of a $45,000 refund from an annual reconciliation of a state revenue tax return.  Noninterest expenses increased as compared to the year-over-year quarter, primarily due to increased commissions as noted above and professional services related to executive search, strategic marketing and technology consulting expenses.  This was partially offset by declines in occupancy and equipment expense associated with the closure of two branches in first quarter of 2019.  In addition, data processing expenses declined due to a reduction in processing fees associated with a change in debit card processing switch network.   

Noninterest expenses for the first six months of the year remained unchanged compared to the like period a year ago.   Increases in commission expenses and consulting expenses for the reasons previously cited were offset by declines in occupancy and equipment expense and regulatory assessment expense and employee travel, meals and training expense.

Noninterest Expense
(Unaudited)
			For the Three Months Ended,
			June 30,  2019		Mar 31,  2019		$  Change			%  Change			June 30,  2018		$ Change			% Change
			(Dollars in thousands)
Salaries and employee benefits		$	5,506	$	5,401	$	105			2	%	$	5,380	$	126			2	%
Occupancy			510		502		8			2	%		528		(18	)		-3	%
Equipment			241		242		(1	)		0	%		263		(22	)		-8	%
Data processing			701		692		9			1	%		794		(93	)		-12	%
Professional services			303		369		(66	)		-18	%		198		105			53	%
State and local taxes			139		82		57			70	%		127		12			9	%
FDIC and State assessments			69		8		61			763	%		102		(33	)		-32	%
Other noninterest expense:
	Director fees		66		66		-			0	%		68		(2	)		-3	%
	Communication		76		71		5			7	%		86		(10	)		-12	%
	Advertising		90		66		24			36	%		93		(3	)		-3	%
	Professional liability insurance		50		50		-			0	%		45		5			11	%
	Amortization		100		91		9			10	%		103		(3	)		-3	%
	Other		841		772		69			9	%		793		48			6	%
Total noninterest expense		$	8,692	$	8,412	$	280			3	%	$	8,580	$	112			1	%
			For the Six Months Ended,
			June 30,  2019		June 30,  2018		$  Change			%  Change
			(Dollars in thousands)
Salaries and employee benefits		$	10,907	$	10,751	$	156			1	%
Occupancy			1,011		1,076		(65	)		-6	%
Equipment			483		585		(102	)		-17	%
Data processing			1,393		1,395		(2	)		0	%
Professional services			671		389		282			72	%
Other real estate owned operating costs			-		6		(6	)		-100	%
State and local taxes			221		245		(24	)		-10	%
FDIC and State assessments			76		236		(160	)		-68	%
Other noninterest expense:
	Director fees		131		132		(1	)		-1	%
	Communication		147		156		(9	)		-6	%
	Advertising		156		165		(9	)		-5	%
	Professional liability insurance		99		92		7			8	%
	Amortization		192		103		89			86	%
	Loss on real estate owned, net		-		-		-			0	%
	Other		1,618		1,806		(188	)		-10	%
Total noninterest expense		$	17,105	$	17,137	$	(32	)		0	%

Income Tax Provision

For the second quarter of 2019, Pacific Financial recorded $870,000 in income tax expense for an effective tax rate of 19.4%.  A planned reduction in nontaxable municipal securities during the current quarter contributed to the increase in the effective tax rate.  In the first quarter of 2019, Pacific Financial recorded $658,000 in income tax expense with an effective tax rate of 18.3%. This compares to tax expense of $570,000 for the second quarter of 2018, resulting in an effective tax rate of 17.9%.  Tax expense for the six months ending June 30, 2019, was $1.5 million versus $934 million in the same period for the prior year, which was impacted by a $90,000  discreet tax credit resulting from the exercise and vesting of a large amount of stock compensation awards in that period.  All increases in expense for the comparative periods are 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.

Financial Performance Overview
(Unaudited)
		For the Three Months Ended
		June 30,  2019			Mar 31,  2019			Change			June 30,  2018			Change
Performance Ratios
Return on average assets, annualized		1.62	%		1.32	%		0.30			1.19	%		0.43
Return on average equity, annualized		14.62	%		12.60	%		2.02			11.94	%		2.68
Efficiency ratio (1)		66.00	%		70.01	%		(4.01	)		72.92	%		(6.92	)
(1) Non-interest expense divided by net interest income plus noninterest income.
		For the Six Months Ended,
		June 30,  2019			June 30,  2018			Change
Performance Ratios
Return on average assets, annualized		1.47	%		1.12	%		0.35
Return on average equity, annualized		13.63	%		11.35	%		2.28
Efficiency ratio (1)		67.91	%		74.59	%		(6.68	)
(1) Non-interest expense divided by net interest income plus noninterest income.

LIQUIDITY

Cash and Cash Equivalents and Investment Securities
(Unaudited)
				June 30, 2019		% of Total			Mar 31, 2019		% of Total			$  Change			%  Change			June 30, 2018		Total			$  Change			%  Change
				(Dollars in thousands)
Cash on hand and in banks			$	17,310		11	%	$	12,911		9	%	$	4,399			34	%	$	15,939		13	%	$	1,371			9	%
Interest bearing deposits				15,848		9	%		9,430		6	%		6,418			68	%		356		0	%		15,492			4352	%
Other interest earning deposits				3,250		2	%		3,250		2	%		-			0	%		994		1	%		2,256			227	%
Federal funds sold				26,551		16	%		7,428		5	%		19,123			257	%		-		0	%		26,551			100	%
	Total			62,959		38	%		33,019		22	%		29,940			91	%		17,289		14	%		45,670			264	%
Investment securities:
	Collateralized mortgage obligations			46,712		28	%		39,445		27	%		7,267			18	%		37,458		30	%		9,254			25	%
	Mortgage backed securities			22,061		13	%		20,983		14	%		1,078			5	%		14,046		11	%		8,015			57	%
	U.S. Government and agency securities			536		0	%		4,107		3	%		(3,571	)		-87	%		4,141		3	%		(3,605	)		-87	%
	Municipal securities			32,766		20	%		54,555		37	%		(21,789	)		-40	%		51,469		40	%		(18,703	)		-36	%
	Corporate debt securities			1,995		1	%		993		1	%		1,002			101	%		-		0	%		1,995			100	%
	Equity securities			73		0	%		72		1	%		1			1	%		89		40	%		(16	)		-18	%
		Total		104,143		62	%		120,155		82	%		(16,012	)		-13	%		107,203		86	%		(3,060	)		-3	%
Total cash equivalents and investment securities			$	167,102		100	%	$	153,174		100	%	$	13,928			9	%	$	124,492		100	%	$	42,610			34	%
Total cash equivalents and investment securities
	as a percent of total assets					18	%				17	%										14	%

“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 Douglas N. Biddle, EVP and Chief Financial Officer. “Our investment securities include a large component of fully amortizing U.S. agency collateralized mortgage and mortgage-backed securities, for which we expect to have limited extension risk. Some restructuring of the securities portfolio was undertaken in the current quarter to reduce the proportion of nontaxable municipal securities.  Securities with less prepayment risk during a decline in interest rates were added to the portfolio and Fed Funds balances were increased as a result of the deepening of an inverted yield curve during the period.” The expected modified duration (adjusted for calls, consensus pre-payment speeds and rate adjustment dates) of the investment portfolio was 3.9 years at June 30, 2019; 3.6 years at March 31, 2019 and 3.9 years at June 30, 2018.

The Bank had $3.3 million in outstanding borrowings against its $185.0 million in established borrowing capacity with the Federal Home Loan Bank of Des Moines (FHLB) at June 30, 2019. The Bank had $8.3 million and $9.5 million in outstanding borrowings with the FHLB at March 31, 2019, and June 30, 2018, 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 $52.8 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)
			June 30, 2019			% of Gross Loans			Mar 31, 2019			% of Gross Loans			$  Change			%  Change			June 30, 2018			% of Gross Loans			$  Change			%  Change
			(Dollars in thousands)
Commercial and agricultural		$	142,107			21	%	$	131,491			19	%	$	10,616			8	%	$	140,182			20	%	$	1,925			1	%
Real estate:
Construction and development			41,815			6	%		48,377			7	%		(6,562	)		-14	%		51,325			7	%		(9,510	)		-19	%
Residential 1-4 family			88,461			13	%		87,851			13	%		610			1	%		90,073			13	%		(1,612	)		-2	%
Multi-family			32,010			5	%		29,500			4	%		2,510			9	%		22,755			3	%		9,255			41	%
Commercial real estate -- owner occupied			137,565			20	%		142,175			21	%		(4,610	)		-3	%		146,788			21	%		(9,223	)		-6	%
Commercial real estate -- non owner occupied			152,143			21	%		154,140			22	%		(1,997	)		-1	%		149,941			21	%		2,202			1	%
Farmland			30,043			4	%		28,815			4	%		1,228			4	%		28,979			4	%		1,064			4	%
Consumer			65,533			10	%		69,916			10	%		(4,383	)		-6	%		74,280			11	%		(8,747	)		-12	%
	Gross Loans		689,677			100	%		692,265			100	%		(2,588	)		-0.4	%		704,323			100	%		(14,646	)		-2	%
	Less: allowance for loan losses		(9,046	)					(9,056	)					10						(9,143	)					97
	Less: deferred fees		(993	)					(972	)					(21	)					(1,051	)					58
	Net loans	$	679,638					$	682,237					$	(2,599	)				$	694,129					$	(14,491	)
Loan Concentration
(Unaudited)
			June 30, 2019			% of Risk Based Capital			Mar 31, 2019			% of Risk Based Capital			Change			June 30, 2018			% of Risk Based Capital			Change
			(Dollars in thousands)
Commercial and agricultural		$	142,107			132	%	$	131,491			126	%		6	%	$	140,182			143	%		-11	%
Real estate:
Construction and development			41,815			39	%		48,377			46	%		-7	%		51,325			52	%		-13	%
Residential 1-4 family			88,461			82	%		87,851			84	%		-2	%		90,073			92	%		-10	%
Multi-family			32,010			30	%		29,500			28	%		2	%		22,755			23	%		7	%
Commercial real estate -- owner occupied			137,565			128	%		142,175			136	%		-8	%		146,788			150	%		-22	%
Commercial real estate -- non owner occupied			152,143			141	%		154,140			148	%		-7	%		149,941			153	%		-12	%
Farmland			30,043			28	%		28,815			28	%		0	%		28,979			30	%		-2	%
Consumer			65,533			61	%		69,916			67	%		-6	%		74,280			76	%		-15	%
	Gross Loans	$	689,677					$	692,265								$	704,323
Regulatory Commercial Real Estate		$	221,663			205	%	$	226,221			217	%		-12	%	$	219,980			224	%		-19	%
Total Risk Based Capital*		$	107,877					$	104,369								$	98,120
*Bank of the Pacific

The loan portfolio continues to be well-diversified and is originated predominately within our Western Washington and Oregon markets. Commercial loan balances grew during the current quarter reflecting the normal seasonality of our markets.  Balances were also impacted by higher than expected payoffs of several commercial real estate loans from long-term financing sources.  The portfolio includes $39.1 million in LIBOR-based and $144.1 million in Wall Street Journal Prime-based floating rate commercial, commercial real estate and home equity loans. The portfolio also includes $12.3 million in purchased government-guaranteed commercial and commercial real estate loans and $53.8 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 commercial real estate loan portfolio is prudently managed to meet regulatory concentration guidelines. 

DEPOSITS

Deposits by Category
(Unaudited)
		June 30,  2019			% of Total			Mar 31,  2019		% of Total			$  Change			%  Change			June 30,  2018			% of Total			$  Change			%  Change
		(Dollars in thousands)
Interest-bearing demand	$	218,828			28	%	$	211,503		27	%	$	7,325			3	%	$	197,409			26	%	$	21,419			11	%
Money market		146,886			18	%		149,400		19	%		(2,514	)		-2	%		142,945			19	%		3,941			3	%
Savings		102,721			13	%		101,974		13	%		747			1	%		93,715			12	%		9,006			10	%
Time deposits (CDs)		77,870			10	%		82,003		11	%		(4,133	)		-5	%		94,294			12	%		(16,424	)		-17	%
Total interest-bearing deposits		546,305			69	%		544,880		70	%		1,425			0	%		528,363			69	%		17,942			3	%
Non-interest bearing demand		249,199			31	%		231,380		30	%		17,819			8	%		239,184			31	%		10,015			4	%
Total deposits	$	795,504			100	%	$	776,260		100	%	$	19,244			2.5	%	$	767,547			100	%	$	27,957			4	%

Total deposits increased from the linked quarter, due to seasonal deposit inflows, as previously noted. Time deposits continue to decline as a component of funding, primarily due to reduction in brokered deposits.  The proportion of noninterest bearing deposits to total deposits remained unchanged from a year ago, despite businesses reinvesting more liquidity into their operations reflecting the continued improvement in the economy. 

Brokered certificates of deposit totaled $18.7 million at June 30, 2019, $22.5 million at March 31, 2019, and $37.2 million at June 30, 2018.  The brokered deposits were acquired during the latter part of 2015 and early 2016 with fixed rates and 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, and its subsidiary Bank of the Pacific, 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 quarter, primarily due to the retention of earnings and reduction in risk-weighted assets.  All ratios have increased from the like quarter a year ago, primarily due to the retention of earnings.  In addition, the change in the unrealized gain/(loss) on investment securities classified as “Available for Sale” had a positive impact on the Tangible Common Equity Ratio (TCE) of 10 basis points.  The unrealized gain/(loss) was $1.3 million; $442,000; and $(1.5 million) as of June 30, 2019, March 31, 2019 and June 30, 2018, respectively.  The recent decline in longer-term rates associated with the recent inversion of the yield curve contributed to this change. 

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)
	June 30,  2019			Mar 31,  2019			Change		June 30,  2018			Change		Well Capitalized Under Prompt Correction Action Regulations*
Pacific Financial Corporation
Total risk-based capital ratio	14.16	%		13.93	%		0.23		12.98	%		1.18		N/A
Tier 1 risk-based capital ratio	12.98	%		12.73	%		0.25		11.78	%		1.20		N/A
Common equity tier 1 ratio	11.28	%		11.00	%		0.28		10.08	%		1.20		N/A
Leverage ratio	11.32	%		10.77	%		0.55		10.33	%		0.99		N/A
Tangible common equity ratio	9.63	%		9.36	%		0.27		8.60	%		1.03		N/A
Bank of the Pacific
Total risk-based capital ratio	14.08	%		13.86	%		0.22		12.88	%		1.20		10.5	%
Tier 1 risk-based capital ratio	12.88	%		12.64	%		0.24		11.68	%		1.20		8.5	%
Common equity tier 1 ratio	12.88	%		12.64	%		0.24		11.68	%		1.20		7.0	%
Leverage ratio	11.24	%		10.69	%		0.55		10.24	%		1.00		7.5	%
*Includes Basel III 2019 Capital Conservation Buffer

Net Interest Margin

Net interest margin improved from the preceding quarter and from a year ago, primarily due to increases in average loan and investment securities yields. Increases in interest rates over the past few years had a positive impact on asset yields during the period.  

Recent market competition has resulted in a modest increase in funding costs versus the first quarter of 2019 and the like quarter a year ago due to the rise in interest rates during the period.  This has also resulted in rate increases in LIBOR-based junior subordinated debentures referenced above.  The non-renewal of higher-cost long-term fixed rate brokered deposits partially mitigated the impact of the increase in funding costs during these respective 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,
			June 30, 2019			Mar 31, 2019			$  Change			%  Change			June 30, 2018			$  Change			%  Change
Average Balances			(Dollars in thousands)
Gross loans		$	695,086		$	696,040		$	(954	)		0	%	$	699,110		$	(4,024	)		-1	%
Loans held for sale		$	10,746		$	5,271		$	5,475			104	%	$	7,381		$	3,365			46	%
Investment securities		$	123,907		$	141,030		$	(17,123	)		-12	%	$	114,651		$	9,256			8	%
Total interest-earning assets		$	829,739		$	842,341		$	(12,602	)		-1	%	$	821,142		$	8,597			1	%
Non-interest bearing demand deposits		$	231,308		$	237,892		$	(6,584	)		-3	%	$	239,301		$	(7,993	)		-3	%
Interest bearing deposits		$	534,823		$	541,665		$	(6,842	)		-1	%	$	525,706		$	9,117			2	%
Borrowings		$	19,186		$	21,790		$	(2,604	)		-12	%	$	23,373		$	(4,187	)		-18	%
Total interest-bearing liabilities		$	554,009		$	563,455		$	(9,446	)		-2	%	$	549,079		$	4,930			1	%
Total Equity		$	98,965		$	94,847		$	4,118			4	%	$	87,884		$	11,081			13	%
			For the Three Months Ended,
			June 30, 2019			Mar 31, 2019			Change			June 30, 2018			Change
Yield on average gross loans (1)			5.49	%		5.46	%		0.03			5.18	%		0.31
Yield on average investment securities (1)			2.50	%		3.01	%		(0.51	)		2.57	%		(0.07	)
Cost of average interest bearing deposits			0.42	%		0.41	%		0.01			0.33	%		0.09
Cost of average borrowings			3.62	%		3.63	%		(0.01	)		3.21	%		0.41
Cost of average total deposits and borrowings			0.37	%		0.38	%		(0.01	)		0.32	%		0.05
Yield on average interest-earning assets			5.10	%		5.06	%		0.04			4.82	%		0.28
Cost of average interest-bearing liabilities			0.53	%		0.53	%		-			0.46	%		0.07
Net interest spread			4.57	%		4.53	%		0.04			4.36	%		0.21
Net interest margin (1)			4.74	%		4.70	%		0.04			4.51	%		0.23
(1) Tax-exempt income has been adjusted to a tax equivalent basis at a rate of 21%.
			For the Six Months Ended,
			June 30, 2019			June 30, 2018			$  Change			%  Change
Average Balances			(Dollars in thousands)
Gross loans		$	695,085		$	693,287		$	1,798			0	%
Loans held for sale		$	8,024		$	7,486		$	538			7	%
Investment securities		$	132,421		$	121,261		$	11,160			9	%
Interest-earning assets		$	835,530		$	822,034		$	13,496			2	%
Non-interest bearing demand deposits		$	234,582		$	244,525		$	(9,943	)		-4	%
Interest bearing deposits		$	538,225		$	522,375		$	15,850			3	%
Total Deposits		$	772,807		$	766,900		$	5,907			1	%
Borrowings		$	20,480		$	22,632		$	(2,152	)		-10	%
Interest-bearing liabilities		$	558,705		$	545,007		$	13,698			3	%
Total Equity		$	96,918		$	87,077		$	9,841			11	%
Total Deposits excl. Brokered CDs			749,116			725,299			23,817			3.3	%
			For the Six Months Ended,
			June 30, 2019			June 30, 2018			Change
Net Interest Margin
Yield on average gross loans (1)			5.48	%		5.15	%		0.33
Yield on average investment securities (1)			2.90	%		2.57	%		0.33
Cost of average interest bearing deposits			0.42	%		0.33	%		0.09
Cost of average borrowings			3.67	%		3.19	%		0.48
Cost of average total deposits and borrowings			0.38	%		0.31	%		0.07
Yield on average interest-earning assets			5.07	%		4.77	%		0.30
Cost of average interest-bearing liabilities			0.53	%		0.45	%		0.08
Net interest spread			4.54	%		4.32	%		0.22
Net interest margin (1)			4.72	%		4.48	%		0.24
(1) Tax-exempt income has been adjusted to a tax equivalent basis at a rate of 21%.

ASSET QUALITY

Asset quality continues to be strong as levels of adversely classified and non-performing assets remain at low levels.  Delinquencies remained below 0.50%, a positive leading indicator of future credit quality. Adversely classified loans increased slightly from the linked quarter.  Adversely classified loans to total gross loans was 1.17% at the end of the current quarter versus 1.10% at the linked quarter and 1.32% a year earlier.  The decline in adversely classified assets from the prior year quarter were primarily due to various payoffs and reductions achieved during the intervening quarters. 

“Credit quality remains a hallmark, with adversely classified and nonperforming loans continuing at historically low levels,” continued Portmann.  “In addition, we maintain a diversified loan portfolio to manage risk, particularly to avoid concentration in commercial real estate.  Consequently, no provision for loan losses was booked during the quarter. 

Adversely Classified Loans and Securities
(Unaudited)
		June 30,  2019			Mar 31,  2019			$  Change			% Change			June 30,  2018			$  Change			% Change
		(Dollars in thousands)
Rated substandard or worse, but not impaired	$	6,978		$	6,298		$	680			11	%	$	7,516		$	(538	)		-7	%
Impaired		1,106			1,314			(208	)		-16	%		1,765			(659	)		-37	%
Total adversely classified loans¹	$	8,084		$	7,612		$	472			6	%	$	9,281		$	(1,197	)		-13	%
Gross loans (excluding deferred loan fees)	$	689,677		$	692,265		$	(2,588	)		0	%	$	704,323		$	(14,646	)		-2	%
Adversely classified loans to gross loans		1.17	%		1.10	%								1.32	%
Allowance for loan losses	$	9,046		$	9,056		$	(10	)		0	%	$	9,143		$	(97	)		-1	%
Allowance for loan losses as a percentage of adversely classified loans		111.90	%		118.97	%								98.51	%
Allowance for loan losses to total impaired loans		817.90	%		689.19	%								518.02	%
Adversely classified loans to total assets		0.87	%		0.84	%								1.05	%
Delinquent loans to gross loans, not in nonaccrual status		0.12	%		0.14	%								0.06	%
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 declined from three months ago, primarily due to the payoff of a $400,000 loan to finance an exotic automobile.  As a result, the percentage of nonperforming assets to total assets declined between those periods. Nonperforming assets were also below the amount of the prior year quarter, primarily due to various payoffs and reductions achieved during the intervening quarters.

Nonperforming Assets
(Unaudited)
		June 30,  2019			Mar 31,  2019			$  Change			%  Change			June 30,  2018			$  Change			% Change
		(Dollars in thousands)
Loans on nonaccrual status	$	773		$	976		$	(203	)		-21	%	$	1,412		$	(639	)		-45	%
Total nonaccrual loans		773			976			(203	)		-21	%		1,412			(639	)		-45	%
Other real estate owned and foreclosed assets		-			-			-			0	%		38			(38	)		-100	%
Total nonperforming assets	$	773		$	976		$	(203	)		-21	%	$	1,450		$	(677	)		-47	%
Restructured performing loans	$	132		$	338		$	(206	)		-61	%	$	353		$	(221	)		-63	%
Accruing loans past due 90 days or more	$	151		$	-		$	151			100	%	$	-		$	151			100	%
Percentage of nonperforming assets to total assets		0.08	%		0.11	%								0.16	%
Nonperforming loans to total loans		0.11	%		0.14	%								0.20	%

ALLOWANCE FOR LOAN LOSSES

The allowance for loan losses is managed in concert with loan growth, credit quality and market conditions. 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.  No provision for loan losses was incurred in the second quarter of 2019, first quarter of 2019 or second quarter of 2018.
    
There was a small net charge-off for the first quarter of 2019 versus a small net recovery for the linked quarter and year-over-year quarter.  Charge-offs incurred during the three months ending June 30, 2019, were comprised primarily of loans and credit cards to individuals, all of which were modest in size.  “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 conservative, 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,
		June 30,  2019			Mar 31,  2019			$  Change			% Change			June 30,  2018			$  Change			% Change
		(Dollars in thousands)
Gross loans outstanding at end of period	$	689,677		$	692,265		$	(2,588	)		0	%	$	704,323		$	(14,646	)		-2	%
Average loans outstanding, gross	$	695,086		$	696,040		$	(954	)		0	%	$	699,110		$	(4,024	)		-1	%
Allowance for loan losses, beginning of period	$	9,056		$	9,049		$	7			0	%	$	9,141		$	(85	)		-1	%
Commercial		-			(30	)		30			-100	%		-			-			0	%
Commercial Real Estate		-			-			-			0	%		-			-			0	%
Residential Real Estate		-			-			-			0	%		-			-			0	%
Consumer		(20	)		(59	)		39			-66	%		(25	)		5			-20	%
Total charge-offs		(20	)		(89	)		69			-78	%		(25	)		5			-20	%
Commercial		-			56			(56	)		-100	%		2			(2	)		-100	%
Commercial Real Estate		-			-			-			0	%		-			-			0	%
Residential Real Estate		-			34			(34	)		-100	%		-			-			0	%
Consumer		10			6			4			67	%		25			(15	)		-60	%
Total recoveries		10			96			(86	)		-90	%		27			(17	)		-63	%
Net recoveries/(charge-offs)		(10	)		7			(17	)		-243	%		2			(12	)		-600	%
Provision charged to income		-			-			-			0	%		-			-			0	%
Allowance for loan losses, end of period	$	9,046		$	9,056		$	(10	)		0	%	$	9,143		$	(97	)		-1	%
Ratio of net loans charged-off to average
gross loans outstanding, annualized		0.01	%		0.00	%		0.01	%					0.00	%		0.01	%
Ratio of allowance for loan losses to
gross loans outstanding		1.31	%		1.31	%		0.00	%					1.30	%		0.01	%
		For the Six Months Ended,
		June 30,  2019			June 30,  2018			$  Change			% Change
		(Dollars in thousands)
Gross loans outstanding at end of period	$	689,677		$	704,323		$	(14,646	)		-2	%
Average loans outstanding, gross	$	695,085		$	693,287		$	1,798			0	%
Allowance for loan losses, beginning of period	$	9,049		$	9,092		$	(43	)		0	%
Commercial		(30	)		-			(30	)		100	%
Commercial Real Estate		-			-			-			0	%
Residential Real Estate		-			-			-			0	%
Consumer		(79	)		(52	)		(27	)		52	%
Total charge-offs		(109	)		(52	)		(57	)		110	%
Commercial		56			54			2			4	%
Commercial Real Estate		-			-			-			0	%
Residential Real Estate		34			-			34			100	%
Consumer		16			49			(33	)		-67	%
Total recoveries		106			103			3			3	%
Net (charge-offs)		(3	)		51			(54	)		-106	%
Provision charged to income		-			-			-			0	%
Allowance for loan losses, end of period	$	9,046		$	9,143		$	(97	)		-1	%
Ratio of net loans charged-off to average
gross loans outstanding, annualized		0.00	%		-0.01	%		0.01	%
Ratio of allowance for loan losses to
gross loans outstanding		1.31	%		1.30	%		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 June 30, 2019, the Company had total assets of $925 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 Tacoma 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 IR Group Inc.
IR CONTACT: 206-388-5785

 

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