Pacific Financial Corp Earns $3.4 Million, or $0.32 per Diluted Share, for 4Q19, up 6% from 4Q18; Net Income Increases 21% to a Record $13.8 Million, or $1.29 per Diluted Share, for the Full Year of 2019 Declares Regular Quarterly Cash Dividend of $0.11 p

ABERDEEN, Wash., Jan. 28, 2020 (GLOBE NEWSWIRE) -- Pacific Financial Corporation (OTCQX: PFLC), the holding company (the “Company”) for Bank of the Pacific (the “Bank”), today reported fourth quarter net income increased 6% to $3.4 million, or $0.32 per diluted share, compared to $3.2 million, or $0.30 per diluted share, for the fourth quarter of 2018.  Net income for the third quarter of 2019 was $3.8 million, or $0.35 per diluted share.  For the year ended December 31, 2019, net income was $13.8 million, or $1.29 per diluted share, an increase of 21% from $11.3 million, or $1.06 per diluted share, for 2018.

The Board of Directors of Pacific Financial declared a quarterly cash dividend of $0.11 per share on January 22, 2020.  The dividend will be payable on February 26, 2020, to shareholders of record at close of business day on February 12, 2020.

“We generated record profits for the year ended December 31, 2019, highlighted by a strong net interest margin of 4.58%, and a 39% increase in noninterest income from 2018, which was primarily driven by an increase in mortgage lending activity,” said Denise Portmann, President and Chief Executive Officer.  “Credit quality remains solid, with nonperforming loans to total loans at 0.15%, and adversely classified loans remaining at relatively low levels.  Our risk management protocols guide the growth of our loan portfolio as we carefully monitor loan concentrations to stay within regulatory guidelines, particularly in commercial real estate.”  Fourth quarter 2019 performance metrics remained above average with an annualized return on average assets (“ROAA”) at 1.45% and an annualized return on average equity (“ROAE”) of 13.01%.

“Our recent expansion along the I-5 corridor in the growing area of Eugene was a logical progressive step for us,” said Portmann.  “With our team of highly experienced lenders, we look forward to developing a solid customer base initially focusing on commercial lending. Operating expenses incurred during the year reflect the investments associated with the expansion of our franchise operations into Eugene and the hiring of key talent.  We will continue to invest in our future and look forward to continuing to deliver value to each of our customers and shareholders.”

Fourth Quarter 2019 Financial Highlights (as of, or for the period ended December 31, 2019, except as noted):

• Diluted earnings per share were $0.32, compared to $0.30 for the fourth quarter of 2018, and $0.35 for the third quarter of 2019.
• ROAA was 1.45%, compared to 1.39% for the fourth quarter a year ago.  Industry peer ROAA was 1.02%.  ROAE was 13.01%, compared to 13.76% for the fourth quarter of 2018.  Industry peer ROAE was 9.66%.  [Industry peers are the 418 banks that make up the SNL Microcap U.S. Bank Index, at September 30, 2019.]
• Net interest margin was 4.31% for the fourth quarter, compared to 4.58% for the fourth quarter 2018, and 4.57% for the third quarter of 2019.  Industry peer NIM was 3.67%.  [Industry peers are the 418 banks that comprised the SNL Microcap U.S. Bank Index, at September 30, 2019.]  Net interest margin for the full year was 4.58% compared to 4.52% for 2018.
• Noninterest income increased 61%, or $1.5 million, to $3.9 million in the fourth quarter, compared to $2.4 million in the fourth quarter a year ago, and declined 7% from $4.2 million on a linked quarter basis.  For the full year, noninterest income increased 39% to $13.9 million from $10.0 million for 2018.
• Total assets increased $21.5 million to $929.4 million from $907.9 million a year earlier.
• Total deposits were $798.6 million, compared to $783.5 million at December 31, 2018 and $816.1 million at September 30, 2019.  The decline in deposits on a linked quarter basis was due to seasonal deposit outflow and an intentional roll-off of $4.8 million of brokered deposits.  Noninterest-bearing demand deposits represented 31% of total deposits, at December 31, 2019.
• Gross loans were $685.3 million at December 31, 2019, compared to $704.1 million a year ago, and $683.8 million at September 30, 2019.  This includes a strategic reduction of $12.1 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 December 31, 2019.
• The allowance for loan losses was 1.31% of gross loans outstanding at December 31, 2019.

Results of Operations

Net interest income was $9.5 million for the fourth quarter of 2019, compared to $9.8 million for the fourth quarter a year ago, and $9.8 million for third quarter of 2019.  The decline in net interest income from a year ago, and from the preceding quarter, was largely due to a decrease in earning asset yields, as interest rates on adjustable rate loans and investments decreased following decreases in short term rates of 50 basis points and 25 points during the quarters ending September 30, 2019 and December 31, 2019, respectively.  The yield on interest earning assets was 4.64% for the fourth quarter of 2019, compared to 4.90% for the fourth quarter a year ago and 4.91% on a linked quarter basis.  The cost of funds remained relatively steady at 0.35% for the fourth quarter of 2019, compared to 0.34% for the fourth quarter a year ago, and 0.35% for the third quarter of 2019.

For the full year 2019, net interest income grew 3%, to $38.6 million compared to $37.5 million for 2018.  This increase was largely due to year-over-year increases in yields on loans and other interest earning assets, which were partially offset by a four basis points increase in cost of funds to 0.36% for 2019, from 0.32% for 2018.

The net interest margin was 4.31% for the fourth quarter of 2019, compared to 4.58% for the fourth quarter of 2018, and 4.57% for the third quarter of 2019.  The compression in the net interest margin from the preceding quarter and year-over-year, was primarily due to the impact of decreasing market interest rates, including fed funds and prime interest rates.  For the full year 2019, the net interest margin expanded six basis points to 4.58% from 4.52% for 2018.

Noninterest income increased 61%, or $1.5 million, to $3.9 million for the fourth quarter of 2019, compared to $2.4 million for the fourth quarter of 2018, and declined from $4.2 million for the third quarter of 2019.  The decline in noninterest income from the preceding quarter, was primarily due to the decrease in the gain on sale of loans during the fourth quarter, and from recognition of income from an unexpected bank-owned life insurance event in the third quarter.  The increase in noninterest income year-over-year was primarily due to increases in gains on sale of loans and higher fee income.  For the full year, noninterest income increased 39% to $13.9 million, compared to $10.0 million for 2018.

“Mortgage banking production remained robust in this continued low rate environment.  This loan activity has increased contributions to noninterest income throughout the year,” added Portmann.  “In addition, we continue to benefit from initiatives which have improved workflow efficiencies, revenue and cost management.”

Noninterest expense increased 10% to $9.1 million, compared to $8.3 million in the fourth quarter of 2018, and declined 3% from $9.4 million on a linked quarter basis.  The increase in operating expenses year-over-year, was primarily due to higher compensation and commissions associated with the growth in residential mortgage production, the investment made in expanding operations down the I-5 corridor into the Eugene market, professional fees and state and local taxes.  These costs were partially offset by a decline in occupancy expenses as well as credits from the FDIC insurance assessment.  For the full year 2019, noninterest expense grew 5% to $35.6 million compared to $33.8 million for 2018.

The efficiency ratio was 67.91% for the fourth quarter of 2019, compared to 67.58% for the fourth quarter of 2018, and 67.03% for the third quarter of 2019.  The efficiency ratio improved to 67.68% for the year ended December 31, 2019, compared to 71.14% for the year ended December 31, 2018.

Balance Sheet Review

Total assets increased $21.5 million to $929.4 million at December 31, 2019, compared to $907.9 million at December 31, 2018, and decreased $15.8 million from $945.2 million at September 30, 2019.

Investment securities declined 16% to $103.2 million, at December 31, 2019, compared to $122.6 million at December 31, 2018, primarily as a result of maturities, payments and sales within the portfolio.  During the fourth quarter, the Bank re-invested a portion of its federal funds sold balances into higher yielding investments; as a result, the portfolio grew 4% compared to the preceding quarter.  The portfolio is comprised primarily of amortizing U.S. agency collateralized mortgage, mortgage-backed securities and municipal securities.

“Liquidity within the company remains strong as a result of existing levels of combined cash equivalents, investment securities, unused borrowing capacity and strong deposit growth,” said Carla Tucker, EVP and Chief Financial Officer.  In addition to cash equivalent assets of $81.2 million, the Bank had established borrowing lines with the Federal Home Loan Bank of Des Moines of $181.0 million, with $3.2 million outstanding, at December 31, 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 $53.0 million, subject to collateral requirements, and $16.0 million from correspondent banks, with no balance outstanding on any of these facilities.

The loan portfolio continues to remain well-diversified with loans originating predominately within the Western Washington and Oregon markets.  Gross loan balances were $685.3 million at December 31, 2019, compared to $704.1 million at December 31, 2018.  Decreases during the year occurred in consumer loans, and commercial and agricultural loans and commercial real estate loans.  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.  As of December 31, 2019, the consumer loan portfolio included $48.2 million in indirect consumer loans to finance luxury and classic cars, a decline of $12.1 million from $60.3 million a year earlier, and down $3.2 million compared to $51.4 million at September 30, 2019.  “As part of our strategic plan, we have been limiting our concentrations in indirect consumer loans to finance luxury and classic cars,” said Portmann.

Deposit growth continues to be strong. Excluding brokered deposits, total deposits increased by $36.3 million or 4.8%.  Including brokered deposits, total deposits increased $15.1 million, or 2%, to $798.6 million at December 31, 2019, compared to $783.5 million at December 31, 2018.  This increase included a planned roll-off of $21.2 million in brokered CDs that were acquired during the latter part of 2015 and 2016.  Interest-bearing demand deposits grew by $37.0 million, or 19%, year-over-year.  Noninterest-bearing deposits accounted for 31% of total deposits, at December 31, 2019.

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 December 31, 2019, Pacific Financial Corporation’s leverage ratio was 11.17% and the total risk-based capital ratio was 14.72%.  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 remained solid with nonperforming assets to total assets at 0.11%, at December 31, 2019, and at September 30, 2019, compared to 0.12% at December 31, 2018.  Net charge offs remained at low levels and were $24,000 for the fourth quarter and $56,000 for the full year of 2019.  Adversely classified loans to total gross loans increased to 1.71% at the end of the current quarter, compared to 1.10% a year earlier, and 1.17% on a linked quarter basis.  This increase was primarily related to the adverse classification of five relationships totaling $4.1 million.  Two relationships were related to the dairy industry which has struggled in recent years with historically low milk prices while the other three relationships suffered from financial setbacks unique to their own business rather than as a result the broader economic environment.

The allowance for loan losses to gross loans stood at 1.31%, at December 31, 2019, compared to 1.29% a year ago, and 1.32% at September 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 was $836,000 for the fourth quarter of 2019, compared to $719,000 for the fourth quarter of 2018, and $859,000 for the third quarter of 2019.  The effective tax rate for the fourth quarter of 2019 was 19.5%, compared to 18.1% for the fourth quarter of 2018, and 18.6% for the third quarter of 2019.  Income tax expense for the full year of 2019 was $3.2 million, compared to $2.4 million for 2018.  The effective tax rates were 19.0%, and 17.3% for the years ending December 31, 2019 and December 31, 2018, respectively.  A planned reduction in nontaxable municipal securities during 2019, a decrease in tax credit for stock awards and an increase in Oregon tax expenses 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)
			Dec 31, 2019			Sept 30, 2019			$ Change			% Change			Dec 31, 2018			$ Change			% Change
Assets:			(Dollars in thousands, except per share data)
	Cash on hand and in banks	$	36,723		$	48,910		$	(12,187	)		-25	%	$	22,188		$	14,535			66	%
	Interest bearing deposits		3,250			3,250			-			0	%		3,250			-			0	%
	Federal funds sold		41,210			36,876			4,334			12	%		-			41,210			100	%
	Investment securities		103,216			99,222			3,994			4	%		122,610			(19,394	)		-16	%
	Loans held-for-sale		10,108			23,542			(13,434	)		-57	%		6,204			3,904			63	%
	Loans, net of deferred fees		684,438			682,832			1,606			0	%		703,103			(18,665	)		-3	%
	Allowance for loan losses		(8,993	)		(9,017	)		24			0	%		(9,049	)		56			-1	%
	Net loans		675,445			673,815			1,630			0	%		694,054			(18,609	)		-3	%
	Federal Home Loan Bank and Pacific Coast
	Bankers' Bank stock, at cost		2,217			2,218			(1	)		0	%		2,407			(190	)		-8	%
	Other assets		57,246			57,372			(126	)		0	%		57,216			30			0	%
	Total assets	$	929,415		$	945,205		$	(15,790	)		-2	%	$	907,929		$	21,486			2	%
Liabilities and Shareholders' Equity:
	Total deposits	$	798,638		$	816,090		$	(17,452	)		-2	%	$	783,549		$	15,089			2	%
	Borrowings		16,606			16,644			(38	)		0	%		21,756			(5,150	)		-24	%
	Accrued interest payable and other liabilities		8,878			9,000			(122	)		-1	%		10,141			(1,263	)		-12	%
	Shareholders' equity		105,293			103,471			1,822			2	%		92,483			12,810			14	%
	Total liabilities and shareholders' equity	$	929,415		$	945,205		$	(15,790	)		-2	%	$	907,929		$	21,486			2	%
Common Stock Shares Outstanding			10,632,058			10,608,558			23,500			0	%		10,568,720			63,338			1	%
Book value per common share (1)		$	9.90		$	9.75		$	0.15			2	%	$	8.75		$	1.15			13	%
Tangible book value per common share (2)		$	8.64		$	8.48		$	0.16			2	%	$	7.47		$	1.17			16	%
Gross loans to deposits ratio			85.7	%		83.7	%		2.0	%					89.7	%		-4.0	%
(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,
			Dec 31, 2019			Sept 30, 2019			$ Change			% Change			Dec 31, 2018			$ Change			% Change
			(Dollars in thousands, except per share data)
Interest and dividend income		$	10,187		$	10,563		$	(376	)		-4	%	$	10,519		$	(332	)		-3	%
Interest expense			730			721			9			1	%		700			30			4	%
	Net interest income		9,457			9,842			(385	)		-4	%		9,819			(362	)		-4	%
Loan loss provision			-			-			-			0	%		-			-			0	%
Noninterest income			3,887			4,167			(280	)		-7	%		2,409			1,478			61	%
Noninterest expense			9,062			9,390			(328	)		-3	%		8,264			798			10	%
Income before income taxes			4,282			4,619			(337	)		-7	%		3,964			318			8	%
Income tax expense			836			859			(23	)		-3	%		719			117			16	%
	Net Income	$	3,446		$	3,760		$	(314	)		-8	%	$	3,245		$	201			6	%
Average common shares outstanding - basic			10,626,443			10,595,992			30,451			0	%		10,565,595			60,848			1	%
Average common shares outstanding - diluted			10,664,213			10,669,761			(5,548	)		0	%		10,673,908			(9,695	)		0	%
Income per common share
	Basic	$	0.32		$	0.35		$	(0.03	)		-9	%	$	0.31		$	0.01			3	%
	Diluted	$	0.32		$	0.35		$	(0.03	)		-9	%	$	0.30		$	0.02			7	%
Effective tax rate			19.5	%		18.6	%		0.9	%					18.1	%		1.4	%
			For the Year Ended,
			Dec 31, 2019			Dec 31, 2018			$ Change			% Change
			(Dollars in thousands, except per share data)
Interest and dividend income		$	41,570		$	40,060		$	1,510			4	%
Interest expense			2,928			2,590			338			13	%
	Net interest income		38,642			37,470			1,172			3	%
Loan loss provision			-			-			-			0	%
Noninterest income			13,895			10,031			3,864			39	%
Noninterest expense			35,556			33,793			1,763			5	%
Income before income taxes			16,981			13,708			3,273			24	%
Income tax expense			3,223			2,378			845			36	%
	Net Income	$	13,758		$	11,330		$	2,428			21	%
Average common shares outstanding - basic			10,596,776			10,551,174			45,602			0	%
Average common shares outstanding - diluted			10,652,126			10,673,393			(21,267	)		0	%
Income per common share
	Basic	$	1.30		$	1.07		$	0.23			21	%
	Diluted	$	1.29		$	1.06		$	0.23			22	%
Effective tax rate			19.0	%		17.3	%		1.7	%

Noninterest Income
(Unaudited)
			For the Three Months Ended,
			Dec 31, 2019		Sept 30, 2019		$ Change			% Change			Dec 31, 2018		$ Change			% Change
			(Dollars in thousands)
Service charges on deposits		$	527	$	493	$	34			7	%	$	507	$	20			4	%
Gain on sale of loans, net			2,212		2,353		(141	)		-6	%		941		1,271			135	%
Gain on sale of securities available for sale, net			-		-		-			0	%		-		-			0	%
Earnings on bank owned life insurance			119		333		(214	)		-64	%		111		8			7	%
Other noninterest income
	Fee income		992		936		56			6	%		811		181			22	%
	Other		37		52		(15	)		-29	%		39		(2	)		-5	%
Total noninterest income		$	3,887	$	4,167	$	(280	)		-7	%	$	2,409	$	1,478			61	%
			For the Year Ended,
			Dec 31, 2019		Dec 31, 2018		$ Change			% Change
			(Dollars in thousands)
Service charges on deposits		$	2,055	$	2,034	$	21			1	%
Gain on sale of loans, net			7,204		4,103		3,101			76	%
Gain on sale of securities available for sale, net			102		-		102			100	%
Earnings on bank owned life insurance			667		432		235			54	%
Other noninterest income
	Fee income		3,641		3,331		310			9	%
	Other		226		131		95			73	%
Total noninterest income		$	13,895	$	10,031	$	3,864			39	%

Noninterest Expense
(Unaudited)
			For the Three Months Ended,
			Dec 31, 2019		Sept 30, 2019		$ Change			% Change			Dec 31, 2018			$ Change			% Change
			(Dollars in thousands)
Salaries and employee benefits		$	5,726	$	6,058	$	(332	)		-5	%	$	5,186		$	540			10	%
Occupancy			529		584		(55	)		-9	%		606			(77	)		-13	%
Equipment			275		251		24			10	%		246			29			12	%
Data processing			781		737		44			6	%		740			41			6	%
Professional services			389		376		13			3	%		193			196			102	%
State and local taxes			158		136		22			16	%		(15	)		173			-1153	%
FDIC and State assessments			8		50		(42	)		-84	%		73			(65	)		-89	%
Other noninterest expense:
	Director fees		75		67		8			12	%		67			8			12	%
	Communication		76		74		2			3	%		74			2			3	%
	Advertising		78		70		8			11	%		95			(17	)		-18	%
	Professional liability insurance		54		54		-			0	%		51			3			6	%
	Amortization		108		114		(6	)		-5	%		88			20			23	%
	Other		805		819		(14	)		-2	%		860			(55	)		-6	%
Total noninterest expense		$	9,062	$	9,390	$	(328	)		-3	%	$	8,264		$	798			10	%
			For the Year Ended,
			Dec 31, 2019		Dec 31, 2018		$ Change			% Change
			(Dollars in thousands)
Salaries and employee benefits		$	22,691	$	21,265	$	1,426			7	%
Occupancy			2,125		2,207		(82	)		-4	%
Equipment			1,009		1,087		(78	)		-7	%
Data processing			2,912		2,862		50			2	%
Professional services			1,436		756		680			90	%
Other real estate owned operating costs			-		6		(6	)		-100	%
State and local taxes			515		360		155			43	%
FDIC and State assessments			135		393		(258	)		-66	%
Other noninterest expense:
	Director fees		274		264		10			4	%
	Communication		297		303		(6	)		-2	%
	Advertising		304		341		(37	)		-11	%
	Professional liability insurance		207		193		14			7	%
	Amortization		414		374		40			11	%
	Other		3,237		3,382		(145	)		-4	%
Total noninterest expense		$	35,556	$	33,793	$	1,763			5	%

Financial Performance Overview
(Unaudited)
		For the Three Months Ended
		Dec 31, 2019			Sept 30, 2019			Change			Dec 31, 2018			Change
Performance Ratios
Return on average assets, annualized		1.45	%		1.61	%		(0.16	)		1.39	%		0.06
Return on average equity, annualized		13.01	%		14.52	%		(1.51	)		13.76	%		(0.75	)
Efficiency ratio (1)		67.91	%		67.03	%		0.88			67.58	%		0.33
(1) Non-interest expense divided by net interest income plus noninterest income.
		For the Year Ended,
		Dec 31, 2019			Dec 31, 2018			Change
Performance Ratios
Return on average assets, annualized		1.50	%		1.26	%		0.24
Return on average equity, annualized		13.70	%		12.63	%		1.07
Efficiency ratio (1)		67.68	%		71.14	%		(3.46	)
(1) Non-interest expense divided by net interest income plus noninterest income.

LIQUIDITY

Cash and Cash Equivalents and Investment Securities
(Unaudited)
				Dec 31, 2019		% of Total			Sept 30, 2019		% of Total			$ Change			% Change			Dec 31, 2018		Total			$ Change			% Change
				(Dollars in thousands)
Cash on hand and in banks			$	12,264		7	%	$	21,517		11	%	$	(9,253	)		-43	%	$	15,899		11	%	$	(3,635	)		-23	%
Interest bearing deposits				24,458		13	%		27,393		15	%		(2,935	)		-11	%		6,289		4	%		18,169			289	%
Other interest earning deposits				3,250		2	%		3,250		2	%		-			0	%		3,250		2	%		-			0	%
Federal funds sold				41,210		22	%		36,876		20	%		4,334			12	%		-		0	%		41,210			100	%
	Total			81,182		44	%		89,036		48	%		(7,854	)		-9	%		25,438		17	%		55,744			219	%
Investment securities:
	Collateralized mortgage obligations			45,141		25	%		43,805		23	%		1,336			3	%		40,424		28	%		4,717			12	%
	Mortgage backed securities			18,579		10	%		20,457		11	%		(1,878	)		-9	%		22,393		15	%		(3,814	)		-17	%
	U.S. Government and agency securities			484		0	%		501		0	%		(17	)		-3	%		4,125		3	%		(3,641	)		-88	%
	Municipal securities			36,925		20	%		32,378		17	%		4,547			14	%		54,649		36	%		(17,724	)		-32	%
	Corporate debt securities			2,004		1	%		1,999		1	%		5			0	%		959		1	%		1,045			109	%
	Equity securities			84		0	%		82		0	%		2			2	%		60		0	%		24			40	%
	Total			103,217		56	%		99,222		52	%		3,995			4	%		122,610		83	%		(19,393	)		-16	%
Total cash equivalents and investment securities			$	184,399		100	%	$	188,258		100	%	$	(3,859	)		-2	%	$	148,048		100	%	$	36,351			25	%
Total cash equivalents and investment securities
	as a percent of total assets					20	%				20	%										14	%

LOANS

Loans by Category
(Unaudited)
			Dec 31,  2019			% of Gross Loans			Sept 30, 2019			% of Gross Loans			$  Change			%  Change			Dec 31, 2018			% of Gross Loans			$ Change			% Change
			(Dollars in thousands)
Commercial and agricultural		$	132,167			19	%	$	134,758			20	%	$	(2,591	)		-2	%	$	140,167			20	%	$	(8,000	)		-6	%
Real estate:
Construction and development			45,227			7	%		41,663			6	%		3,564			9	%		47,291			7	%		(2,064	)		-4	%
Residential 1-4 family			85,711			13	%		86,771			13	%		(1,060	)		-1	%		89,091			13	%		(3,380	)		-4	%
Multi-family			29,865			4	%		32,920			5	%		(3,055	)		-9	%		30,948			4	%		(1,083	)		-3	%
Commercial real estate -- owner occupied			147,049			21	%		142,297			21	%		4,752			3	%		142,761			21	%		4,288			3	%
Commercial real estate -- non owner occupied			153,865			22	%		150,249			21	%		3,616			2	%		152,017			20	%		1,848			1	%
Farmland			32,370			5	%		32,448			5	%		(78	)		0	%		28,876			4	%		3,494			12	%
Consumer			59,014			9	%		62,707			9	%		(3,693	)		-6	%		72,946			11	%		(13,932	)		-19	%
	Gross Loans		685,268			100	%		683,813			100	%		1,455			0	%		704,097			100	%		(18,829	)		-3	%
	Less:  allowance for loan losses		(8,993	)					(9,017	)					24						(9,049	)					56
	Less:  deferred fees		(830	)					(981	)					151						(994	)					164
	Net loans	$	675,445					$	673,815					$	1,630					$	694,054					$	(18,609	)
Loan Concentration
(Unaudited)
			Dec 31,  2019			% of Risk Based Capital			Sept 30, 2019			% of Risk Based Capital			Change			Dec 31, 2018			% of Risk Based Capital			Change
			(Dollars in thousands)
Commercial and agricultural		$	132,167			118	%	$	134,758			123	%		-5	%	$	140,167			134	%		-16	%
Real estate:
Construction and development			45,227			40	%		41,663			38	%		2	%		47,291			49	%		-9	%
Residential 1-4 family			85,711			77	%		86,771			79	%		-2	%		89,091			89	%		-12	%
Multi-family			29,865			27	%		32,920			30	%		-3	%		30,948			31	%		-4	%
Commercial real estate -- owner occupied			147,049			132	%		142,297			130	%		2	%		142,761			143	%		-11	%
Commercial real estate -- non owner occupied			153,865			138	%		150,249			137	%		1	%		152,017			137	%		1	%
Farmland			32,370			29	%		32,448			30	%		-1	%		28,876			29	%		0	%
Consumer			59,014			53	%		62,707			57	%		-4	%		72,946			74	%		-21	%
	Gross Loans	$	685,268					$	683,813								$	704,097
Regulatory Commercial Real Estate		$	222,899			199	%	$	221,191			202	%		-3	%	$	225,806			212	%		-13	%
Total Risk Based Capital*		$	111,782					$	109,428								$	101,487
*Bank of the Pacific

DEPOSITS

Deposits by Category
(Unaudited)
		Dec 31, 2019			% of Total			Sept 30, 2019		% of Total			$ Change			% Change			Dec 31, 2018			% of Total			$ Change			% Change
		(Dollars in thousands)
Interest-bearing demand	$	228,579			28	%	$	222,412		27	%	$	6,167			3	%	$	191,530			24	%	$	37,049			19	%
Money market		149,510			19	%		150,655		18	%		(1,145	)		-1	%		162,238			20	%		(12,728	)		-8	%
Savings		104,871			13	%		106,284		13	%		(1,413	)		-1	%		101,408			13	%		3,463			3	%
Time deposits (CDs)		70,668			9	%		71,501		9	%		(833	)		-1	%		86,188			11	%		(15,520	)		-18	%
Total interest-bearing deposits		553,628			69	%		550,852		67	%		2,776			1	%		541,364			68	%		12,264			2	%
Non-interest bearing demand		245,010			31	%		265,238		33	%		(20,228	)		-8	%		242,185			32	%		2,825			1	%
Total deposits	$	798,638			100	%	$	816,090		100	%	$	(17,452	)		-2.1	%	$	783,549			100	%	$	15,089			2	%

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

Capital Measures
(unaudited)
	Dec 31, 2019			Sept 30, 2019			Change		Dec 31, 2018			Change			Well Capitalized Under Prompt Correction Action Regulations*
Pacific Financial Corporation
Total risk-based capital ratio	14.72	%		14.30	%		0.42		13.36	%		1.36			N/A
Tier 1 risk-based capital ratio	13.54	%		13.13	%		0.41		12.17	%		1.37			N/A
Common equity tier 1 ratio	11.84	%		11.45	%		0.39		10.47	%		1.37			N/A
Leverage ratio	11.17	%		11.11	%		0.06		10.21	%		0.96			N/A
Tangible common equity ratio	10.02	%		9.66	%		0.36		8.83	%		1.19			N/A
Bank of the Pacific
Total risk-based capital ratio	14.60	%		14.22	%		0.38		13.30	%		1.30			10.5%
Tier 1 risk-based capital ratio	13.40	%		13.02	%		0.38		12.09	%		1.31			8.5%
Common equity tier 1 ratio	13.40	%		13.02	%		0.38		12.09	%		1.31			7.0%
Leverage ratio	11.07	%		11.01	%		0.06		10.14	%		0.93			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,
			Dec 31, 2019			Sept 30, 2019			$ Change			% Change			Dec 31, 2018			$ Change			% Change
Average Balances			(Dollars in thousands)
Gross loans		$	680,220		$	688,166		$	(7,946	)		-1	%	$	691,064		$	(10,844	)		-2	%
Loans held for sale		$	16,909		$	16,825		$	84			0	%	$	5,793		$	11,116			192	%
Investment securities		$	100,942		$	104,236		$	(3,294	)		-3	%	$	119,402		$	(18,460	)		-15	%
Federal funds sold & interest bearing deposits in banks		$	79,827		$	51,931		$	27,896			54	%	$	45,070		$	34,757			77	%
Total interest-earning assets		$	877,898		$	861,158		$	16,740			2	%	$	861,329		$	16,569			2	%
Non-interest bearing demand deposits		$	257,780		$	254,184		$	3,596			1	%	$	255,968		$	1,812			1	%
Interest bearing deposits		$	552,949		$	541,200		$	11,749			2	%	$	545,616		$	7,333			1	%
Total Deposits		$	810,729		$	795,384		$	15,345			2	%	$	801,584		$	9,145			1	%
Borrowings		$	16,619		$	16,661		$	(42	)		0	%	$	21,769		$	(5,150	)		-24	%
Total interest-bearing liabilities		$	569,568		$	557,861		$	11,707			2	%	$	567,385		$	2,183			0	%
Total Equity		$	105,072		$	102,715		$	2,357			2	%	$	93,560		$	11,512			12	%
			For the Three Months Ended,
			Dec 31, 2019			Sept 30, 2019			Change			Dec 31, 2018			Change
Yield on average gross loans (1)			5.30	%		5.47	%		(0.17	)		5.43	%		(0.13	)
Yield on average investment securities (1)			2.78	%		2.80	%		(0.02	)		2.66	%		0.12
Yield on Fed funds sold & interest bearing deposits in banks			1.72	%		2.24	%		(0.52	)		2.25	%		(0.53	)
Cost of average interest bearing deposits			0.42	%		0.42	%		-			0.37	%		0.05
Cost of average borrowings			3.37	%		3.60	%		(0.23	)		3.39	%		(0.02	)
Cost of average total deposits and borrowings			0.35	%		0.35	%		-			0.34	%		0.01
Yield on average interest-earning assets			4.64	%		4.91	%		(0.27	)		4.90	%		(0.26	)
Cost of average interest-bearing liabilities			0.51	%		0.51	%		-			0.49	%		0.02
Net interest spread			4.13	%		4.40	%		(0.27	)		4.41	%		(0.28	)
Net interest margin (1)			4.31	%		4.57	%		(0.26	)		4.58	%		(0.27	)
(1) Tax-exempt income has been adjusted to a tax equivalent basis at a rate of 21%.
			For the Year Ended,
			Dec 31, 2019			Dec 31, 2018			$ Change			% Change
Average Balances			(Dollars in thousands)
Gross loans		$	689,594		$	692,376		$	(2,782	)		0	%
Loans held for sale		$	12,482		$	7,405		$	5,077			69	%
Investment securities		$	109,595		$	111,232		$	(1,637	)		-1	%
Federal funds sold & interest bearing deposits in banks		$	40,997		$	27,920		$	13,077			47	%
Interest-earning assets		$	852,668		$	838,933		$	13,735			2	%
Non-interest bearing demand deposits		$	245,370		$	249,255		$	(3,885	)		-2	%
Interest bearing deposits		$	542,687		$	533,541		$	9,146			2	%
Total Deposits		$	788,057		$	782,796		$	5,261			1	%
Borrowings		$	18,542		$	22,241		$	(3,699	)		-17	%
Interest-bearing liabilities		$	561,229		$	555,782		$	5,447			1	%
Total Equity		$	100,435		$	89,676		$	10,759			12	%
Total Deposits excl. Brokered CDs			769,455			745,312			24,143			3.2	%
			For the Year Ended,
			Dec 31, 2019			Dec 31, 2018			Change
Net Interest Margin
Yield on average gross loans (1)			5.45	%		5.30	%		0.15
Yield on average investment securities (1)			2.87	%		2.60	%		0.27
Yield on Fed funds sold & interest bearing deposits in banks			2.06	%		2.00	%		0.06
Cost of average interest bearing deposits			0.42	%		0.35	%		0.07
Cost of average borrowings			3.59	%		3.29	%		0.30
Cost of average total deposits and borrowings			0.36	%		0.32	%		0.04
Yield on average interest-earning assets			4.92	%		4.83	%		0.09
Cost of average interest-bearing liabilities			0.52	%		0.47	%		0.05
Net interest spread			4.40	%		4.36	%		0.04
Net interest margin (1)			4.58	%		4.52	%		0.06
(1) Tax-exempt income has been adjusted to a tax equivalent basis at a rate of 21%.

Adversely Classified Loans and Securities
(Unaudited)
		Dec 31, 2019			Sept 30,  2019			$ Change			% Change			Dec 31, 2018			$ Change			% Change
		(Dollars in thousands)
Rated substandard or worse, but not impaired	$	10,400		$	6,637		$	3,763			57	%	$	6,723		$	3,677			55	%
Impaired		1,349			1,341			8			1	%		1,043			306			29	%
Total adversely classified loans¹	$	11,749		$	7,978		$	3,771			47	%	$	7,766		$	3,983			51	%
Gross loans (excluding deferred loan fees)	$	685,268		$	683,813		$	1,455			0	%	$	704,097		$	(18,829	)		-3	%
Adversely classified loans to gross loans		1.71	%		1.17	%								1.10	%
Allowance for loan losses	$	8,993		$	9,017		$	(24	)		0	%	$	9,049		$	(56	)		-1	%
Allowance for loan losses as a percentage of adversely classified loans		76.54	%		113.02	%								116.52	%
Allowance for loan losses to total impaired loans		666.64	%		672.41	%								867.59	%
Adversely classified loans to total assets		1.26	%		0.84	%								0.86	%
Delinquent loans to gross loans, not in nonaccrual status		0.16	%		0.25	%								0.43	%
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 mayjeopardize 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)
		Dec 31, 2019			Sept 30, 2019			$ Change			% Change			Dec 31, 2018			$ Change			% Change
		(Dollars in thousands)
Loans on nonaccrual status	$	1,029		$	1,014		$	15			1	%	$	1,079		$	(50	)		-5	%
Total nonaccrual loans		1,029			1,014			15			1	%		1,079			(50	)		-5	%
Other real estate owned and foreclosed assets		22			-			22			100	%		-			22			100	%
Total nonperforming assets	$	1,051		$	1,014		$	37			4	%	$	1,079		$	(28	)		-3	%
Restructured performing loans	$	320		$	327		$	(7	)		-2	%	$	281		$	39			14	%
Accruing loans past due 90 days or more	$	-		$	-		$	-			0	%	$	239		$	(239	)		-100	%
Percentage of nonperforming assets to total assets		0.11	%		0.11	%								0.12	%
Nonperforming loans to total loans		0.15	%		0.15	%								0.15	%

Allowance for Loan Losses
(Unaudited)
		For the Three Months Ended,
		Dec 31, 2019			Sept 30, 2019			$ Change			% Change			Dec 31, 2018			$ Change			% Change
		(Dollars in thousands)
Gross loans outstanding at end of period	$	685,268		$	683,813		$	1,455			0	%	$	704,097		$	(18,829	)		-3	%
Average loans outstanding, gross	$	680,220		$	688,166		$	(7,946	)		-1	%	$	692,043		$	(11,823	)		-2	%
Allowance for loan losses, beginning of period	$	9,017		$	9,046		$	(29	)		0	%	$	9,067		$	(50	)		-1	%
Commercial		-			-			-			0	%		-			-			0	%
Commercial Real Estate		-			-			-			0	%		-			-			0	%
Residential Real Estate		-			-			-			0	%		-			-			0	%
Consumer		(27	)		(33	)		6			-18	%		(22	)		(5	)		23	%
Total charge-offs		(27	)		(33	)		6			-18	%		(22	)		(5	)		23	%
Commercial		-			-			-			0	%		-			-			0	%
Commercial Real Estate		-			-			-			0	%		-			-			0	%
Residential Real Estate		-			-			-			0	%		-			-			0	%
Consumer		3			4			(1	)		-25	%		4			(1	)		-25	%
Total recoveries		3			4			(1	)		-25	%		4			(1	)		-25	%
Net recoveries/(charge-offs)		(24	)		(29	)		5			-17	%		(18	)		(6	)		33	%
Provision charged to income		-			-			-			0	%		-			-			0	%
Allowance for loan losses, end of period	$	8,993		$	9,017		$	(24	)		0	%	$	9,049		$	(56	)		-1	%
Ratio of net loans charged-off to average
gross loans outstanding, annualized		0.01	%		0.02	%		-0.01	%					0.01	%		0.00	%
Ratio of allowance for loan losses to
gross loans outstanding		1.31	%		1.32	%		-0.01	%					1.29	%		0.02	%
		For the Year Ended,
		Dec 31, 2019			Dec 31, 2018			$ Change			% Change
		(Dollars in thousands)
Gross loans outstanding at end of period	$	685,268		$	704,097		$	(18,829	)		-3	%
Average loans outstanding, gross	$	689,594		$	693,408		$	(3,814	)		-1	%
Allowance for loan losses, beginning of period	$	9,049		$	9,092		$	(43	)		0	%
Commercial		(30	)		(4	)		(26	)		650	%
Commercial Real Estate		-			-			-			0	%
Residential Real Estate		-			-			-			0	%
Consumer		(139	)		(177	)		38			-21	%
Total charge-offs		(169	)		(181	)		12			-7	%
Commercial		56			77			(21	)		-27	%
Commercial Real Estate		-			-			-			0	%
Residential Real Estate		34			-			34			100	%
Consumer		23			61			(38	)		-62	%
Total recoveries		113			138			(25	)		-18	%
Net (charge-offs)		(56	)		(43	)		(13	)		30	%
Provision charged to income		-			-			-			0	%
Allowance for loan losses, end of period	$	8,993		$	9,049		$	(56	)		-1	%
Ratio of net loans charged-off to average
gross loans outstanding, annualized		0.01	%		0.01	%		0.00	%
Ratio of allowance for loan losses to
gross loans outstanding		1.31	%		1.29	%		0.02	%

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 December 31, 2019, the Company had total assets of $929.4 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