Press Release

Email page PDF view Print view Email Alert Social media sharing

Pacific Financial Corp Earns $3.0 Million, or $0.28 per Share, for 1Q19, Up 29% from $2.3 Million, or $0.21 per Share, for 1Q18

Company Release - 4/23/2019 9:00 AM ET

ABERDEEN, Wash., April 23, 2019 (GLOBE NEWSWIRE) -- Pacific Financial Corporation (OTCQB: PFLC), the holding company for Bank of the Pacific, today reported net income increased 29% to $3.0 million, or $0.28 per diluted share, for the first quarter of 2019, from $2.3 million, or $0.21 per diluted share, for the first quarter of 2018, supported by a higher net interest margin and net interest income.  For the fourth quarter of 2018, net income was $3.2 million, or $0.30 per diluted share.  All results are unaudited. 

“After delivering record profits for the fourth quarter, and full year of 2018, first quarter 2019 earnings were strong,” said Denise Portmann, President & Chief Executive Officer.  “Net interest margin improved by 26 basis points to 4.70% from a year earlier and yields across all asset classes improved with modest increases in cost of funds.  Our balance sheet mix and deposit pricing strategies contributed to an 8% 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, a large amount of loan payoffs, as well as seasonal deposit outflows, contributed to a decline in net interest income. 

“Credit quality remains solid, mainly due to continued low levels of adversely classified and nonperforming loans,” added Portmann.  “Our risk management protocols guide the growth of our loan portfolio, as we monitor loan concentrations to stay within regulatory guidelines, particularly in commercial real estate.  Consequently, no provision for loan losses was booked during the quarter.  The contribution of residential mortgage lending to noninterest income was virtually unchanged from the preceding quarter and from the first quarter a year ago.  The recent decline in mortgage interest rates appear to have spurred a modest increase in home financing activities within our markets during the current quarter.  In addition, we continue to benefit from initiatives introduced over the past year which have enhanced workflow efficiencies and improved revenue and cost management.  

“As planned, we completed the consolidation of the two branches in Naselle, WA and Warrenton, OR, into existing locations by March 1, 2019,” said Portmann.  “Optimizing our branch network in light of increasing use of technology-based banking services plays a significant role in allocating capital resources.  We continue to augment our technology-based product offerings, enhance our network infrastructure and strengthen our marketing data analytics.”

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

  • Diluted earnings per share (“EPS”) were $0.28 for the first quarter of 2019, compared to $0.21 for the first quarter of 2018 and $0.30 for the fourth quarter of 2018. 
  • Return on average assets (“ROAA”) was 1.32% and return on average equity (“ROAE”) was 12.60%, for the first quarter of 2019, compared to 1.05% and 10.76%, respectively, for the first quarter of 2018; and 1.39% and 13.76%, respectively, for the fourth quarter of 2018.  Industry peer ROAA was 1.08% and ROAE was 11.72% at March 31, 2019.  [Industry peers comprise of approximately 485 banks in the SNL Microcap U.S. Bank Index.] 
  • Net interest income was $9.6 million, an increase of 8% from $8.9 million for the first quarter of 2018, and $9.8 million for the fourth quarter of 2018. 
  • Net interest margin, on a tax equivalent basis (“NIMTE”), improved by 26 basis points to 4.70% for the first quarter of 2019, compared to 4.44% for the first quarter of 2018, and expanded 12 basis points from 4.58% for the fourth quarter of 2018, reflecting improving yields on interest earning assets and slower growth in cost of funds.  Industry peer NIM was 3.71%.  [Industry peers are the 485 banks that comprised the SNL Microcap U.S. Bank Index, at March 31, 2019.]
  • Net loans totaled $692.3 million at March 31, 2019,  versus $693.5 million at March 31, 2018, and $694.1 million at December 31, 1018.
  • Total deposits were $776.3 million, compared to $785.2 million at March 31, 2018, and $783.5 million at December 31, 2018.  This includes a reduction of $6.1 million and $17.1 million in brokered CDs from the immediate prior quarter and year-over-year quarter, respectively.   Non-interest-bearing deposits represent 30% of total deposits, at March 31, 2019.
  • Asset quality remains solid: 
    • Loans 30 – 89 days delinquent, still on accrual status, were minimal at 0.14% of gross loans outstanding. 
    • Net recoveries totaled $7,000, or 0.00% of average gross loans, for the first quarter of 2019, compared to net charge offs of $18,000, or 0.01% of average gross loans, for the fourth quarter of 2018 and net recoveries of $49,000, or 0.03% of average gross loans, for the first quarter of 2018. 
    • Nonperforming assets improved to $976,000, or 0.11% of total assets, at March 31, 2019, compared to $1.1 million, or 0.12% of total assets at December 31, 2018, and $1.7 million, or 0.19% of total assets at March 31, 2018. 
    • Adversely classified loans were $7.6 million, or 1.10% of gross loans, at March 31, 2019, versus $7.8 million, or 1.10% of gross loans, at December 31, 2018, and $9.5 million, or 1.37% of gross loans, at March 31, 2018. 
    • No provision for loan losses was incurred in the first quarter of 2019, fourth quarter of 2018 or first quarter of 2018. 
    • The allowance for loan losses to gross loans stood at 1.31% at March 31, 2019, compared to 1.29% at December 31, 2018, and 1.32% at March 31, 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.

Operating Results Overview

Total assets declined from the fourth quarter of 2018, mostly due to seasonal deposit outflows and non-renewal of $6.1 million in brokered CDs that matured during the current period.  Deposits declined slightly year-over-year, despite the withdrawal of $12.0 million in deposits in the second quarter of 2018 associated with a relationship to which the Bank declined to offer a credit facility.  In addition, $17.1 million in brokered CDs were paid off since the first quarter of 2018. Loans decreased modestly from the preceding quarter and year-over-year, primarily due to the large amount of commercial real estate loan payoffs and the seasonal reduction in commercial lines of credit balances in the current period.  Total assets were unchanged on a linked quarter basis and year-over-year, due to the above.  Liquidity remains strong, including unused borrowing capacity.  Capital ratios continue to exceed the thresholds to be considered “Well-Capitalized” under published regulatory standards.

  
Balance Sheet Overview 
(Unaudited) 
                 
   Mar 31,  2019 Dec 31,  2018 $  Change %  Change Mar 31,  2018 $ Change % Change 
                 
Assets: (Dollars in thousands, except per share data) 
 Cash and cash equivalents$22,341 $22,188 $153  1%$43,203 $(20,862) -48% 
 Other interest earning deposits 3,250  3,250  -  0% 994  2,256  227% 
 Federal funds sold 7,428  -  7,428  100% -  7,428  100% 
 Investment securities 120,155  122,610  (2,455) -2% 105,585  14,570  14% 
 Loans held-for-sale 7,717  6,204  1,513  24% 7,187  530  7% 
 Loans, net of deferred fees 691,293  703,103  (11,810) -2% 692,485  (1,192) 0% 
 Allowance for loan losses (9,056) (9,049) (7) 0% (9,141) 85  -1% 
 Net loans 682,237  694,054  (11,817) -2% 683,344  (1,107) 0% 
 Federal Home Loan Bank and Pacific Coast
   Bankers' Bank stock, at cost
 2,421  2,407  14  1% 2,412  9  0% 
 Other assets 58,180  57,216  964  2% 58,276  (96) 0% 
 Total assets$903,729 $907,929 $(4,200) 0%$901,001 $2,728  0% 
                 
Liabilities and Shareholders' Equity:               
 Total deposits$776,260 $783,549 $(7,289) -1%$785,193 $(8,933) -1% 
 Borrowings 21,719  21,756  (37) 0% 21,869  (150) -1% 
 Accrued interest payable and other liabilities8,982  10,141  (1,159) -11% 7,700  1,282  17% 
 Shareholders' equity 96,768  92,483  4,285  5% 86,239  10,529  12% 
 Total liabilities and shareholders' equity$903,729 $907,929 $(4,200) 0%$901,001 $2,728  0% 
                 
Common Stock Shares Outstanding 10,580,263  10,568,720  11,543  0% 10,550,852  29,411  0% 
                 
Book value per common share (1)$9.15 $8.75 $0.40  5%$8.17 $0.98  12% 
Tangible book value per common share (2)$7.87 $7.47 $0.40  5%$6.89 $0.98  14% 
Gross loans to deposits ratio 89.1% 89.7% -0.6%   88.2% 0.9%   
                 
(1) Book value per common share is calculated as the total common shareholders' equity divided by the period ending number of common stock shares
  outstanding.
 
(2) Tangible book value per common share is calculated as the total common shareholders' equity less total intangible assets and liabilities, divided by the period
  ending number of common stock shares outstanding.
 
                 

Net interest income decreased from the prior three months, largely due to high loan payoffs and seasonal deposit outflows which reduced balances of interest-earning cash equivalents.  In addition, market competition has begun to result in a modest increase in funding costs as a result of the recent rise in interest rates.  Net interest income increased from the prior year period, primarily as a result of the increase in earning assets and the impact of rising interest rates on earning asset yields.  Interest expense increased versus the fourth quarter of 2018 and the like quarter a year ago, due to rate increases in non-maturity deposits, LIBOR-based junior subordinated debentures and public funds during the periods.  This was partially offset by non-renewal of higher-cost brokered certificates of deposit. 

Noninterest expense increased from the preceding quarter chiefly from one-time professional fees associated with consulting expenses related to executive search and strategic marketing and technology.  Increases in employee benefit expenses also contributed to this increase.  This was partially offset by a regulatory assessment expense credit and a decline in occupancy expense associated with the write-down in the prior quarter of a former bank premises being donated to a rural healthcare provider.  Noninterest expenses declined as compared to the year-over-year quarter primarily due to decline in occupancy and regulatory assessment expense, despite the increase in professional fees as noted above.   

Noninterest income remained relatively constant.  Gain on sale of real estate loans was unchanged as compared to the prior periods.  However, the recent decline in longer-term rates have begun to have a positive impact on residential purchases and resulting mortgage loan production in our markets.  “According to press release issued by the MLS in April 2019, both pending sales and new listing activity around Western Washington surged during March 2019 as buyers, sellers, and brokers emerged from February's record snowfall,” added Portmann.  “Brokers added 10,516 new listings of single-family homes and condos to the Northwest Multiple Listing Service inventory last month, the highest monthly volume since August 2018. Compared to the same month a year ago, new listings across the 23 counties in the report were down slightly (79 fewer units).”  https://www.nwmls.com/News--Information.  In addition, periodic promotional activities to spur debit card usage have increased fee revenue as compared to the prior year quarter.

 
Income Statement Overview
(Unaudited)
                
   For the Three Months Ended,
   Mar 31,  2019 Dec 31,  2018 $  Change %  Change Mar 31,  2018 $ Change % Change
                
   (Dollars in thousands, except per share data)
Interest and dividend income$10,360 $10,519 $(159) -2%$9,463 $897  9%
Interest expense 742  700  42  6% 580  162  28%
 Net interest income 9,618  9,819  (201) -2% 8,883  735  8%
Loan loss provision -  -  -  0% -  -  0%
Noninterest income 2,398  2,409  (11) 0% 2,325  73  3%
Noninterest expense 8,412  8,264  148  2% 8,556  (144) -2%
Income before income taxes 3,604  3,964  (360) -9% 2,652  952  36%
Income tax expense 658  719  (61) -8% 364  294  81%
 Net Income$2,946 $3,245 $(299) -9%$2,288 $658  29%
                
Average common shares outstanding - basic 10,576,994  10,565,595  11,399  0% 10,520,027  56,967  1%
Average common shares outstanding - diluted 10,672,509  10,673,908  (1,399) 0% 10,656,997  15,512  0%
                
Income per common share              
 Basic$0.28 $0.31 $(0.03) -10%$0.22 $0.06  27%
 Diluted$0.28 $0.30 $(0.02) -7%$0.21 $0.07  33%
                
Effective tax rate 18.3% 18.1% 0.2%   13.7% 4.6%  
                

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, 
   Mar 31,  2019 Dec 31,  2018 $  Change %  Change Mar 31,  2018 $ Change % Change
                
Non-GAAP Operating Income  (Dollars in thousands) 
Net Income$2,946$3,245$(299) -9%$2,288$658 29%
 Loan loss provision - - -  0% - - 0%
 Loss on real estate owned, net - - -  0% - - 0%
 Income tax expense 658 719 (61) -8% 364 294 81%
Pre-tax, pre-credit operating income$3,604$3,964$(360) -9%$2,652$952 36%
                

Noninterest Income

Noninterest income was unchanged compared to the linked quarter and the year-over-year quarter.  Revenue from sale of residential mortgage loans remained stable versus the prior periods.  However, the recent decline in longer-term rates appear to have had a positive impact on residential purchases and related mortgage loan production.   In addition, promotional activities initiated during holiday periods to spur debit card usage have led to increased transaction activity resulting in growth in fee revenue as compared to the linked and prior year quarters.

 
Noninterest Income
(Unaudited)
   For the Three Months Ended,
   Mar 31,  2019 Dec 31,  2018 $  Change %  Change Mar 31,  2018 $ Change % Change
                
   (Dollars in thousands)
Service charges on deposits$505$507$(2) 0%$495$10  2%
Gain on sale of loans, net 932 941 (9) -1% 944 (12) -1%
Gain on sale of securities available for sale, net - - -  0% - -  0%
Earnings on bank owned life insurance 106 111 (5) -5% 108 (2) -2%
Other noninterest income              
 Fee income 829 811 18  2% 739 90  12%
 Other 26 39 (13) -33% 39 (13) -33%
Total noninterest income$2,398$2,409$(11) 0%$2,325$73  3%
                

Noninterest Expense

Noninterest expenses increased from the preceding quarter, chiefly from $191,000 in one-time professional fee expenses associated with executive search and strategic marketing and technology consulting and an increase of $116,000 in group health and 401k contribution expenses.  In addition, first quarter 2019 tax expense reflects a $98,000 increase in state and local taxes due to a $150,000 refund of state revenue taxes from a reconciliation of apportionable income in prior years received in the linked quarter.  This was partially offset by a reduction in regulatory assessment expense of $68,000 due to the credit previously referenced, a decline in occupancy expense of $63,000 associated with the write-down in the immediate prior quarter of a former bank premises being donated to a rural healthcare provider, and a reduction in fraud losses due to a $75,000 wire fraud loss taken in fourth quarter 2018.   Noninterest expenses declined compared to the year-over-year quarter, mainly due to a decrease in general occupancy and equipment expenses, regulatory assessment expenses, and $106,000 in employee travel, meals and training expense.  This was partially offset by the increase in professional fee expense noted above and $94,000 in data processing and software expense incurred as a result of continued introduction of technology solutions to augment cyber-security and enhance productivity. 

  
Noninterest Expense 
(Unaudited) 
                 
   For the Three Months Ended, 
   Mar 31,  2019 Dec 31,  2018 $  Change %  Change Mar 31,  2018 $ Change % Change 
                 
   (Dollars in thousands) 
Salaries and employee benefits$5,401$5,186 $215  4%$5,371$30  1% 
Occupancy 502 606  (104) -17% 548 (46) -8% 
Equipment 242 246  (4) -2% 323 (81) -25% 
Data processing 692 740  (48) -6% 603 89  15% 
Professional services 369 193  176  91% 191 178  93% 
State and local taxes 82 (15) 97  NM  118 (36) -31% 
FDIC and State assessments 8 73  (65) -89% 134 (126) -94% 
Other noninterest expense:               
 Director fees 66 67  (1) -1% 65 1  2% 
 Communication 71 74  (3) -4% 70 1  1% 
 Advertising 66 95  (29) -31% 72 (6) -8% 
 Professional liability insurance 50 51  (1) -2% 47 3  6% 
 Amortization 91 88  3  3% 91 -  0% 
 Other 772 860  (88) -10% 923 (151) -16% 
Total noninterest expense$8,412$8,264 $148  2%$8,556$(144) -2% 
                 

Income Tax Provision

For the first quarter of 2019, Pacific Financial recorded $658,000 in income tax expense for an effective tax rate of 18.3%.  In the fourth quarter of 2018, Pacific Financial recorded $719,000 in income tax expense with an effective tax rate of 18.1%. The amount included a $78,000 refund due to a refreshed cost segregation analysis performed on premises constructed during a prior period. This compares to tax expense of $364,000 for the first quarter of 2018, resulting in an effective tax rate of 13.7%.  Tax expense for the year-over-year quarter 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.  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 
  Mar 31,  2019 Dec 31,  2018 Change Mar 31,  2018 Change 
Performance Ratios          
Return on average assets, annualized1.32% 1.39% (0.07) 1.05% 0.27  
Return on average equity, annualized12.60% 13.76% (1.16) 10.76% 1.84  
Efficiency ratio (1)70.01% 67.58% 2.43  76.34% (6.33) 
            
(1) Non-interest expense divided by net interest income plus noninterest income.      
            

LIQUIDITY

Cash and Cash Equivalents and Investment Securities 
(Unaudited) 
    Mar 31,  2019 % of Total Dec 31,  2018 % of Total $  Change %  Change Mar 31,  2018 Total $  Change %  Change 
                        
    (Dollars in thousands) 
Cash on hand and in banks$12,911 10%$15,899 11%$(2,988) -19%$26,893 18%$(13,982) -52% 
Interest bearing deposits 9,430 6% 6,289 4% 3,141  50% 16,309 11% (6,879) -42% 
Other interest earning deposits 3,250 2% 3,250 2% -  0% 994 1% 2,256  227% 
 Total cash equivalents and interest earning deposits 25,591 18% 25,438 17% 153  1% 44,196 30% (18,605) -42% 
                        
Investment securities:                     
 Collateralized mortgage obligations 39,445 27% 40,423 27% (978) -2% 37,838 25% 1,607  4% 
 Mortgage backed securities 20,983 14% 22,393 15% (1,410) -6% 14,834 10% 6,149  41% 
 U.S. Government and agency securities 4,107 3% 4,125 3% (18) 0% 2,240 2% 1,867  83% 
 Municipal securities 54,555 37% 54,650 37% (95) 0% 50,587 33% 3,968  8% 
 Corporate debt securities 993 1% 959 1% 34  4% - 0% 993  100% 
 Equity securities 72 0% 60 0% 12  20% 87 0% (15) -17% 
  Total investment securities 120,155 82% 122,610 83% (2,455) -2% 105,586 70% 14,569  14% 
Total cash equivalents and investment securities$145,746 100%$148,048 100%$(2,302) -2%$149,782 100%$(4,036) -3% 
                        
Total cash equivalents and investment securities                     
 as a percent of total assets   16%   16%       19%     
                        

“Liquidity remains strong based on existing levels of combined cash equivalents, investment securities and unused borrowing capacity.  Seasonal outflows, 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. The securities portfolio also contains municipal securities rated A or better.” The expected modified duration (adjusted for calls, consensus pre-payment speeds and rate adjustment dates) of the investment portfolio was 3.6 years at March 31, 2019; 3.8 years at December 31, 2018 and 4.1 years at March 31, 2018.

The Bank had $8.3 million in outstanding borrowings against its $185.0 million in established borrowing capacity with the Federal Home Loan Bank of Des Moines (FHLB) at March 31, 2019. The Bank had $8.4 million and $8.5 million in outstanding borrowings with the FHLB at December 31, 2018, and March 31, 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 $51.9 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)
                       
    Mar 31,  2019 % of Gross Loans Dec 31,  2018 % of Gross Loans $  Change %  Change Mar 31,  2018 % of Gross Loans $  Change %  Change
                       
    (Dollars in thousands)
 Commercial and agricultural$131,491  19%$140,167  20%$(8,676) -6%$137,786  19%$(6,295) -5%
 Real estate:                    
 Construction and development 48,377  7% 47,291  7% 1,086  2% 47,593  7% 784  2%
 Residential 1-4 family 87,851  13% 89,091  13% (1,240) -1% 89,701  13% (1,850) -2%
 Multi-family 29,500  4% 30,948  4% (1,448) -5% 25,046  4% 4,454  18%
 Commercial real estate -- owner occupied 142,175  21% 142,761  20% (586) 0% 142,891  21% (716) -1%
 Commercial real estate -- non owner occupied 154,140  22% 152,017  22% 2,123  1% 149,512  22% 4,628  3%
 Farmland 28,815  4% 28,876  4% (61) 0% 28,596  4% 219  1%
 Consumer 69,916  10% 72,946  10% (3,030) -4% 72,419  10% (2,503) -3%
  Gross Loans 692,265  100% 704,097  100% (11,832) -2% 693,544  100% (1,279) 0%
  Less:  allowance for loan losses (9,056)   (9,049)   (7)   (9,141)   85   
  Less:  deferred fees (972)   (994)   22    (1,059)   87   
  Net loans$682,237   $694,054   $(11,817)  $683,344   $(1,107)  
                       
                       
 Loan Concentration    
 (Unaudited)    
    Mar 31,  2019 % of Risk Based Capital Dec 31,  2018 % of Risk Based Capital Change Mar 31,  2018 % of Risk Based Capital Change    
                       
    (Dollars in thousands)    
 Commercial and agricultural$131,491  126%$140,167  138% -12%$137,786  145% -19%    
 Real estate:                    
 Construction and development 48,377  46% 47,291  47% -1% 47,593  50% -4%    
 Residential 1-4 family 87,851  84% 89,091  88% -4% 89,701  94% -10%    
 Multi-family 29,500  28% 30,948  30% -2% 25,046  26% 2%    
 Commercial real estate -- owner occupied 142,175  136% 142,761  141% -5% 142,891  150% -14%    
 Commercial real estate -- non owner occupied 154,140  148% 152,017  150% -2% 149,512  157% -9%    
 Farmland 28,815  28% 28,876  28% 0% 28,596  30% -2%    
 Consumer 69,916  67% 72,946  72% -5% 72,419  76% -9%    
  Gross Loans$692,265   $704,097     $693,544         
 Regulatory Commercial Real Estate$226,221  217%$225,806  222% -5%$215,219  226% -9%    
 Total Risk Based Capital*$104,369   $101,487     $95,308         
                       
 *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 decreased during the current quarter to an expected payoff of a $7.0 million advance to a professional services firm used to fund distribution payouts prior to the end of the 2018 calendar year.  Balances were also impacted by payoffs of several commercial real estate loans from long-term financing sources.  The portfolio includes $37.0 million in LIBOR-based and $139.3 million in Wall Street Journal Prime-based floating rate commercial, commercial real estate and home equity loans.  The portfolio also includes $14.0 million in purchased government-guaranteed commercial and commercial real estate loans and $58.7 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 recent portfolio growth includes commercial real estate loans, which are carefully managed to meet regulatory guidelines. 

DEPOSITS

Deposits by Category 
(Unaudited) 
                      
  Mar 31,  2019 % of Total Dec 31,  2018 % of Total $  Change %  Change Mar 31,  2018 % of Total $  Change %  Change 
                      
  (Dollars in thousands) 
Interest-bearing demand$211,503  27%$191,530 24%$19,973  10%$186,581  24%$24,922  13% 
Money market 149,400  19% 162,238 21% (12,838) -8% 151,250  20% (1,850) -1% 
Savings 101,974  13% 101,408 13% 566  1% 95,154  12% 6,820  7% 
Time deposits (CDs) 82,003  11% 86,188 11% (4,185) -5% 97,758  13% (15,755) -16% 
Total interest-bearing deposits 544,880  70% 541,364 69% 3,516  1% 530,743  68% 14,137  3% 
Non-interest bearing demand 231,380  30% 242,185 31% (10,805) -4% 254,450  33% (23,070) -9% 
Total deposits$776,260  100%$783,549 100%$(7,289) -1%$785,193  101%$(8,933) -1% 
                      

Total deposits decreased from the linked quarter, due to seasonal deposit outflows, as noted above. 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 declined from a year ago, as businesses have been reinvesting more liquidity into their operations reflecting the continued improvement in the economy.     

Brokered certificates of deposit totaled $22.5 million at March 31, 2019, $28.6 million at December 31, 2018, and $39.6 million at March 31, 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 16 basis points.  The unrealized gain/(loss) was $442,000; $(899,000) and $(1.2 million) as of March 31, 2019, December 31, 2018 and March 31, 2018, respectively.  The recent decline in longer-term rates 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) 
  Mar 31,  2019 Dec 31,  2018 Change Mar 31,  2018 Change  Well Capitalized Under Prompt Correction Action Regulations* 
               
 Pacific Financial Corporation              
 Total risk-based capital ratio13.93% 13.36% 0.57 12.90% 1.03  N/A  
 Tier 1 risk-based capital ratio12.73% 12.17% 0.56 11.68% 1.05  N/A  
 Common equity tier 1 ratio11.00% 10.47% 0.53 9.94% 1.06  N/A  
 Leverage ratio10.77% 10.21% 0.56 10.01% 0.76  N/A  
                
 Tangible common equity ratio9.36% 8.83% 0.53 8.19% 1.17  N/A  
                
 Bank of the Pacific              
 Total risk-based capital ratio13.86% 13.30% 0.56 12.78% 1.08  10.5% 
 Tier 1 risk-based capital ratio12.64% 12.09% 0.55 11.56% 1.08  8.5% 
 Common equity tier 1 ratio12.64% 12.09% 0.55 11.56% 1.08  7.0% 
 Leverage ratio10.69% 10.14% 0.55 9.90% 0.79  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 fourth quarter of 2018 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, 
                 
   Mar 31,  2019 Dec 31,  2018 $  Change %  Change Mar 31,  2018 $  Change %  Change 
                 
Average Balances (Dollars in thousands) 
Gross loans$696,040 $692,043 $3,997  1%$687,400$8,640  1% 
Loans held for sale$5,271 $5,793 $(522) -9%$7,591$(2,320) -31% 
Investment securities$138,263 $164,472 $(26,209) -16%$127,945$10,318  8% 
Total interest-earning assets$839,574 $862,308 $(22,734) -3%$822,936$16,638  2% 
Non-interest bearing demand deposits$237,892 $255,968 $(18,076) -7%$249,807$(11,915) -5% 
Interest bearing deposits$541,665 $545,616 $(3,951) -1%$519,008$22,657  4% 
Borrowings$21,790 $21,769 $21  0%$21,881$(91) 0% 
Total interest-bearing liabilities$563,455 $567,385 $(3,930) -1%$540,889$22,566  4% 
Total Equity$94,847 $93,560 $1,287  1%$86,262$8,585  10% 
                 
   For the Three Months Ended,     
   Mar 31,  2019 Dec 31,  2018 Change Mar 31,  2018 Change     
Yield on average gross loans (1) 5.46% 5.42% 0.04  5.12% 0.34     
Yield on average investment securities (1) 3.01% 2.66% 0.35  2.56% 0.45     
Cost of average interest bearing deposits 0.41% 0.37% 0.04  0.33% 0.08     
Cost of average borrowings 3.63% 3.39% 0.24  2.95% 0.68     
Cost of average total deposits and borrowings 0.38% 0.34% 0.04  0.30% 0.08     
                 
Yield on average interest-earning assets 5.06% 4.90% 0.16  4.73% 0.33     
Cost of average interest-bearing liabilities 0.53% 0.49% 0.04  0.43% 0.10     
Net interest spread 4.53% 4.41% 0.12  4.30% 0.23     
                 
Net interest margin (1) 4.70% 4.58% 0.12  4.44% 0.26     
                 
(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 remained unchanged from the linked quarter.  Adversely classified loans to total gross loans was 1.10% at the end of the current and linked quarter compared to 1.37% 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.

                
 Adversely Classified Loans and Securities
 (Unaudited)
                
   Mar 31,  2019 Dec 31,  2018 $  Change % Change Mar 31,  2018 $  Change % Change
                
   (Dollars in thousands)
 Rated substandard or worse, but not impaired$6,298 $6,723 $(425) -6%$7,415 $(1,117) -15%
 Impaired 1,314  1,043  271  26% 2,093  (779) -37%
 Total adversely classified loans¹$7,612 $7,766 $(154) -2%$9,508 $(1,896) -20%
                
                
 Gross loans (excluding deferred loan fees)$692,265 $704,097 $(11,832) -2%$693,544 $(1,279) 0%
 Adversely classified loans to gross loans 1.10% 1.10%     1.37%    
 Allowance for loan losses$9,056 $9,049 $7  0%$9,141 $(85) -1%
 Allowance for loan losses as a percentage of adversely classified loans 118.97% 116.52%     96.14%    
 Allowance for loan losses to total impaired loans 689.19% 867.59%     436.74%    
 Adversely classified loans to total assets 0.84% 0.86%     1.06%    
 Delinquent loans to gross loans, not in nonaccrual status 0.14% 0.43%     0.21%    
                
 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 remained relatively unchanged from three months ago.  As a result, there was virtually no change in the percentage of nonperforming assets to total assets between those periods. However, nonperforming assets were below the amount of the prior year quarter, primarily due to various payoffs and reductions achieved during the intervening quarters as noted above.

Nonperforming Assets 
(Unaudited) 
                
  Mar 31,  2019 Dec 31,  2018 $  Change %  Change Mar 31,  2018 $  Change % Change 
                
  (Dollars in thousands) 
Loans on nonaccrual status$976 $1,079 $(103) -10%$1,502 $(526) -35% 
Total nonaccrual loans 976  1,079  (103) -10% 1,502  (526) -35% 
                
Other real estate owned and foreclosed assets -  -  -  0% 199  (199) -100% 
Total nonperforming assets$976 $1,079 $(103) -10%$1,701 $(725) -43% 
                
                
Restructured performing loans$338 $281 $57  20%$591 $(253) -43% 
Accruing loans past due 90 days or more$- $239 $(239) -100%$- $-  0% 
Percentage of nonperforming assets to total assets 0.11% 0.12%     0.19%     
Nonperforming loans to total loans 0.14% 0.15%     0.22%     
                

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 first quarter of 2019, fourth quarter of 2018 or first quarter of 2018.
    
There was a slight net recovery for the first quarter of 2019 versus a small net charge-off for the linked quarter and a modest net recovery in the year-over-year quarter.  Charge-offs incurred during the three months ending March 31, 2019, were comprised primarily of loans to small businesses and credit cards, 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,
  Mar 31,  2019 Dec 31,  2018 $  Change % Change Mar 31,  2018 $  Change % Change
               
  (Dollars in thousands)
Gross loans outstanding at end of period$692,265 $704,097 $(11,832) -2%$693,544 $(1,279) 0%
Average loans outstanding, gross$696,040 $692,043 $3,997  1%$687,400 $8,640  1%
Allowance for loan losses, beginning of period$9,049 $9,067 $(18) 0%$9,092 $(43) 0%
Commercial (30) -  (30) 100% -  (30) 100%
Commercial Real Estate -  -  -  0% -  -  0%
Residential Real Estate -  -  -  0% -  -  0%
Consumer (59) (22) (37) 168% (27) (32) 119%
Total charge-offs (89) (22) (67) 305% (27) (62) 230%
Commercial 56  -  56  100% 52  4  8%
Commercial Real Estate -  -  -  0% -  -  0%
Residential Real Estate 34  -  34  100% -  34  100%
Consumer 6  4  2  50% 24  (18) -75%
Total recoveries 96  4  92  NM 76  20  26%
Net recoveries/(charge-offs) 7  (18) 25  -139% 49  (42) -86%
Provision charged to income -  -  -  0% -  -  0%
Allowance for loan losses, end of period$9,056 $9,049 $7  0%$9,141 $(85) -1%
Ratio of net loans charged-off to average              
gross loans outstanding, annualized 0.00% 0.01% -0.01%   -0.03% 0.03%  
Ratio of allowance for loan losses to              
gross loans outstanding 1.31% 1.29% 0.02%   1.32% -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 March 31, 2019, the Company had total assets of $903.7 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

pfc logo.jpg

Source: Pacific Financial Corporation