Pacific Financial Corp 4Q16 Earnings Increased 13% from 4Q15; Full Year 2016 Net Income Grew 18%

ABERDEEN, WA – January 24, 2017 – Pacific Financial Corporation (OTCQB: PFLC), the holding company for Bank of the Pacific today reported net income increased 18% to $6.6 million, or $0.63 per share, in 2016, compared to $5.6 million, or $0.54 per share, for 2015. For the fourth quarter of 2016, net income was $1.5 million, or $0.14 per share, down from $2.0 million, or $0.19 per share, for the third quarter of 2016, and up 13% compared to $1.3 million, or $0.12 per share, for the fourth quarter of 2015. Profitability in 2016 was sustained by continued loan growth, stable net interest margin and increased noninterest income. Fourth quarter and full year results were negatively impacted by charges related to a loss on the sale of other real estate owned (OREO), totaling $328,000, and a write-down taken to reduce the carrying value of a former branch property of $324,000. All results are unaudited.

“We achieved solid fourth quarter and full year financial results, including charges resulting from a sale of OREO and a valuation adjustment of a former branch property. The continued strength of our core earnings was due to steady loan growth, robust noninterest revenue and stable net interest margin. The commercial lending teams located in our newer markets contributed significantly to loan growth. Revenue from our residential real estate mortgage operation continued to be strong, up 43% for the quarter versus the fourth quarter in 2015,” said Denise Portmann, President & Chief Executive Officer. “With the recent increase in long-term interest rates, consumers are increasingly interested in locking in long-term fixed rates, which are still low by historical standards. As the economy continues to strengthen, our residential mortgage lending team is well situated to generate additional revenue from the anticipated increase in purchase activity.”

“Our credit quality continues to be solid, as delinquent and non-performing loans remain at low levels, despite the additions to adversely classified loans during the fourth quarter,” added Portmann. “Our loan growth over the recent quarters is robust, and we continue to foster a strong risk management culture by administering our commercial real estate portfolio well within regulatory concentration guidelines. In addition, our expansion into treasury management services is producing strong growth of noninterest bearing commercial deposits.”

Fourth Quarter 2016 Highlights (as of, or for the period ended December 31, 2016, except as noted):

• Pre-tax, pre-credit operating income (non-GAAP) grew 22% from $2.3 million for the fourth quarter of 2015. Pre-tax, pre-credit operating income declined 4% to $2.8 million for the fourth quarter of 2016, compared to $2.9 million for the third quarter of 2016. This was primarily due to a decrease of $268,000 in gains on sale of residential real estate loans as a result of typical seasonal slowdown in mortgage activity during this time of the year.

• An annual cash dividend of $0.23 per share was declared in December 2016, an increase of 5% relative to the dividend paid last year. The current dividend was 36% of 2016 net income as compared to 41% in 2015.

• Net interest margin (NIM), on a tax equivalent basis, was 4.00%, as compared to 4.02% in the preceding quarter and 4.02% for fourth quarter 2015. Net interest margin declined during the current quarter primarily due to an increase in the cost of borrowings as a result of slight increases in interest rates experienced in the latter portion of the fourth quarter. NIM for the year remained above average at 4.11% compared to the average of 3.58% posted by the 357 banks in the SNL U.S. Microcap Index for the third quarter of 2016.

• Total assets declined slightly to $891.2 million, at December 31, 2016, compared to $896.6 million, at September 30, 2016, and grew 8% from $824.6 million at December 31, 2015.

• Gross loans grew by $8.6 million, or 1%, to $659.3 million, on a linked quarter basis and increased by $32.5 million, or 5%, over the fourth quarter of 2015. This growth is net of the sale/participation of $5.1 million in non-owner occupied commercial real estate loans during the fourth quarter of 2016.

• Total deposits decreased 1% to $779.7 million, compared to $783.9 million at September 30, 2016, and increased 9% from a year earlier. Seasonal outflows of deposits normally begin in the winter and extend into spring due to the slowdown of tourism activity in certain core markets. Non-interest bearing demand deposits were virtually unchanged on a linked quarter basis, but grew 26% over the fourth quarter of 2015.

• Nonperforming assets were $1.8 million, or 0.20% of total assets, compared to 0.43% on a linked quarter basis and 0.62% a year ago.

• Net recoveries totaled $48,000, or 0.03% of average gross loans in the fourth quarter, compared to net charge-offs of $16,000, or 0.01% of average gross loans, in third quarter 2016. Loans 30 – 89 days’ delinquent, not in nonaccrual status, stood at 0.03% of total loans outstanding.

• Classified loans were $17.5 million, or 2.65% of gross loans, compared to 1.51% and 2.56% at September 30, 2016 and December 31, 2015, respectively. The recent increase was primarily due to the adverse classification of one commercial relationships totaling $6.9 million during the fourth quarter of 2016.