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Pacific Financial Corp Earns Record $3.6 Million, or $0.34 per Share, for the Second Quarter of 2019, and $6.6 Million, or $0.61 per Share, for the First Half of 2019; Declares Half-Year Cash Dividend of $0.20 per Share, and Moves to Quarterly Cash Dividends

Company Release - 7/23/2019 9:00 AM ET

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 liabilities11,534  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, annualized1.62% 1.32%   0.30  1.19%   0.43 
Return on average equity, annualized14.62% 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, annualized1.47% 1.12%   0.35     
Return on average equity, annualized13.63% 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 occupied152,143  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 occupied152,143  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 ratio14.16% 13.93%   0.23 12.98%   1.18 N/A
Tier 1 risk-based capital ratio12.98% 12.73%   0.25 11.78%   1.20 N/A
Common equity tier 1 ratio11.28% 11.00%   0.28 10.08%   1.20 N/A
Leverage ratio11.32% 10.77%   0.55 10.33%   0.99 N/A
            
Tangible common equity ratio9.63% 9.36%   0.27 8.60%   1.03 N/A
            
Bank of the Pacific           
Total risk-based capital ratio14.08% 13.86%   0.22 12.88%   1.20 10.5%
Tier 1 risk-based capital ratio12.88% 12.64%   0.24 11.68%   1.20 8.5%
Common equity tier 1 ratio12.88% 12.64%   0.24 11.68%   1.20 7.0%
Leverage ratio11.24% 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)