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Pacific Financial Corp Earns $1.2 Million, or $0.11 per Diluted Share, for First Quarter 2020; Declares Quarterly Cash Dividend of $0.11 per Share

Company Release - 5/5/2020 9:00 AM ET

ABERDEEN, Wash., May 05, 2020 (GLOBE NEWSWIRE) -- Pacific Financial Corporation (OTCQX: PFLC), the holding company (the “Company”) for Bank of the Pacific (the “Bank”), today reported first quarter net income of $1.2 million, or $0.11 per diluted share, compared to $2.9 million, or $0.28 per diluted share, for the first quarter of 2019, and $3.4 million, or $0.32 per diluted share for the fourth quarter of 2019.  First quarter 2020 operating results reflected a continued robust refinancing market and steady net interest margin which were partially offset by a higher loan loss provision due to the COVID-19 impact and a projected slowing economy.  All results are unaudited. 

“The Bank had strong momentum early in the first quarter prior to the pandemic.  Despite the economic challenges brought on by COVID-19, we are well positioned to navigate the uncertainties that lie ahead.  We have abundant liquidity and are substantially better capitalized today due to healthy earnings retention in recent years.  We have a strong balance sheet with an excellent core deposit base, and our credit quality is solid with conservative underwriting and a risk management culture that should serve us well,” said Denise Portmann, President and Chief Executive Officer.  “Although these are unprecedented times, we have a 50-year history including a solid operating performance through tough times, an experienced management team and a rich employee culture with depth of talent and commitment to assisting customers to work together to find solutions.”

The Board of Directors of Pacific Financial declared a quarterly cash dividend of $0.11 per share on April 29, 2020, which is unchanged compared to the prior quarter. The dividend will be payable on June 2, 2020, to shareholders of record at close of business day on May 19, 2020. At March 31, 2020, Pacific Financial Corporation’s remains well-capitalized with a leverage ratio of 11.40% and a total risk-based capital ratio of 15.13%. During the quarter Pacific Financial repurchased 37,400 shares of stock for a total of $348,000 prior to making the decision on March 19, 2020 to temporarily suspend the share buyback program.

Response to the COVID-19 Pandemic

"We are operating in unprecedented times that were impossible to predict just two months ago.  Similar to all individuals and businesses, we had to re-orient our business priorities in response to the COVID-19 pandemic and the subsequent economic fallout,” stated Portmann.  “In mid-February, we began preparations for the COVID-19 pandemic and established an Oversight Team intently focused on doing everything we can to help our employees, customers and communities.  In addition, our bankers have been proactively reaching out to customers to determine the impact of the decline in economic activity on their businesses.”

“Over the last few months, we undertook a number of actions for operational preparedness as well as implementing programs to assist our clients and employees,” continued Portmann.

  • Employees First:  Taking care of our employees remains our top priority.  Effective March 16, prior to the Emergency Paid Leave Act, an additional 80 hours of sick leave was front-loaded to all employees.  The Company also amended bank health plans to cover costs associated with testing and treatment for COVID-19 and premium pay of an additional $1.25 per hour was initiated for all critical front-line branch staff during Stay-at-Home orders in Washington and Oregon.
     
  • Branches and Key Operating Functions:  To accommodate the Stay-at-Home orders and to help ensure the safety of our employees and customers, while continuing to serve the needs of our customers, our branches were moved to drive-up and appointment only.  In addition, the Company dispersed key operating functions including deposit operations, loan documentation and servicing, electronic banking and wires, and network services to enhance the safety of our employees and to minimize disruption in case of illness. The Company also mobilized technology to accommodate a remote workforce. 
     
  • Programs to Provide Relief and Support our Clients: 
    • Congress passed the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) on March 27, 2020 providing economic relief for the country, including the Small Business Administration (“SBA”) Paycheck Protection Program (“PPP”) to fund short-term loans for small businesses. The PPP was designed to provide needed financial relief to small business customers enabling them to retain their employees. As an SBA Preferred Lender, Pacific Financial began taking loan applications from its small business clients immediately after the program was implemented.  As of April 24, 2020, the Bank processed and funded 439 applications for a total of $104 million with an average loan amount of $237,000.  We will also participate in the second wave of PPP funding.  Lender origination fees, to be paid by the SBA, is estimated to be $4.5 million and will be recognized over the earlier of the life of the loan, or forgiveness or payoff of the loan.  “I’m incredibly proud of our bankers who worked around the clock for the last four weeks to provide a critical lifeline to our customers so they could access PPP dollars to fund payroll and keep their employees working,” said Portmann.
       
    • In March, the Bank began providing 90 day payment deferrals to customers adversely impacted by operating restrictions due to COVID-19.  As of April 24, 2020, 178 notes, or $77.1 million in commercial loans, and 101 notes, or $7.3 million in consumer loans, have been modified under this program.  The combined deferrals are $84.4 million, representing 12% of total loans outstanding as of March 31, 2020.  
       
    • As well as the items mentioned above, the Bank implemented other measures to assist our customers, including waiver of telephone transfer fees, waiver of deposit account monthly services charges through September for first responders and health care professionals, and waiver of early withdrawal fees on certificates of deposits with a COVID-19 related need, delayed reporting of past due loans to credit agencies and temporarily suspended foreclosure proceedings on residential real estate loans.  

First Quarter Results

First quarter results were highlighted by a year-over-year increase in noninterest income and a solid net interest margin with a low cost of funds.  Supporting operating income during the quarter was the significant production in mortgage lending as a result of a spike in refinance activity due to the drop in long-term interest rates. Included in the first quarter results was a $2.0 million loan loss provision related to the economic uncertainties associated with the COVID-19 pandemic and changes to qualificator factors within the allowance for loan losses. 

First quarter 2020 Financial Highlights (as of, or for the period ended March 31, 2020, except as noted):

  • Net income was $1.2 million for the first quarter of 2020, compared to $2.9 million for the first quarter a year ago, and $3.4 million for fourth quarter 2019. Diluted earnings per share were $0.11, for the first quarter of 2020, compared to $0.28 for the first quarter 2019, and $0.32 for the fourth quarter 2019.
  • Return on average assets and return on average equity was 0.52% and 4.52% for the first quarter of 2020, compared to 1.32% and 12.60% for the first quarter a year ago and 1.45% and 13.01% for the fourth quarter of 2019. Pre-tax pre-provision return on average assets (non-GAAP) was 1.53% for the first quarter of 2020, compared to 1.62% for the first quarter a year ago and 1.80% for the fourth quarter of 2019.
  • Net interest margin was 4.30% for the first quarter of 2020, compared to 4.70% for the first quarter 2019, and 4.31% for the fourth quarter 2019.  
  • Noninterest income increased 48%, or $1.2 million, to $3.6 million in the first quarter of 2020, compared to $2.4 million in the first quarter a year ago, and declined 9% from $3.9 million on a linked quarter basis. 
  • Total deposits were $794.6 million at March 31, 2020, up $18.3 million compared to $776.3 million at March 31, 2019 and declined $4.0 million from $798.6 million at December 31, 2019.  Noninterest-bearing demand deposits grew 4% to $241.5 million from a year ago and represented 30% of total deposits at March 31, 2020.
  • Gross loans were $678.6 million at March 31, 2020, compared to $692.3 million a year ago, and $685.3 million at December 31, 2019.
  • Asset quality
    • Provision for loan losses was $2.0 million for the quarter ended March 31, 2020 compared to $0 for quarters ending March 31, 2019 and December 31, 2019.
    • The allowance for loan losses was 1.59% of gross loans outstanding at March 31, 2020.
    • The percentage of nonperforming assets to total assets was 0.18% at March 31, 2020.
    • Adversely classified assets were 1.21% of total assets at March 31, 2020.

Results of Operations

Net Income: Net income was $1.2 million for the first quarter of 2020, compared to $2.9 million for the first quarter a year ago, and $3.4 million for fourth quarter 2019.  The decrease in the quarter ended March 31, 2020 compared to a year ago quarter, and the preceding quarter, was primarily a result of a $2.0 million provision for loan losses taken in the current quarter due to the economic impact from COVID-19.  Pre-tax, pre-provision net income (non-GAAP) for the first quarter of 2020 remained relatively flat compared to first quarter of 2019, and decreased $800,000 from the linked quarter, primarily as a result of decreases in interest income and seasonal decreases in gain on sale of loans.

Net Interest Income: Net interest income was $9.1 million for the first quarter of 2020, compared to $9.6 million for the first quarter a year ago, and $9.5 million for fourth quarter 2019.  The decrease in net interest income from a year ago, and from the preceding quarter, was primarily due to a decline in earning asset yields, as interest rates on adjustable rate loans and investments decreased following reductions in short term interest rates, coupled with a lagging decrease in the cost of interest bearing deposits.

The net interest margin was 4.30% for the first quarter of 2020, compared to 4.70% for the first quarter 2019, and 4.31% for the fourth quarter 2019.  The yield on average interest-earning assets was 4.62% for the first quarter of 2020, compared to 5.06% for the first quarter a year ago and 4.64% on a linked quarter basis. The cost of funds remained steady at 0.35% for the first quarter of 2020, compared to 0.38% for the first quarter a year ago, and 0.35% for the fourth quarter 2019.

During the quarters ended September 30, 2019 and December 31, 2019, the Federal Reserve decreased the federal funds target rate by 50 and 25 basis points, respectively.  In addition, in March 2020, the Federal Reserve decreased the federal funds rates by 150 basis points.  These rate decreases impacted federal funds sold and loan interest income and yields.  The loan portfolio is comprised of $208 million, or 30.5%, of fixed rate loans and $469 million, or 69.5%, of variable rate loans.  As of March 31, 2020, $217 million, or 46%, of total variable rate loans with a weighted average rate of 5.08%, have reached their rate floors.

As a pro-active step to partially offset the decrease in earning assets yields, rates on new and renewed term deposits rates as well as rates on money market accounts were lowered during March 2020.  “The full effect of this lower interest rate environment has not yet been realized,” said Carla Tucker, EVP and Chief Financial Officer. “Further margin compression can be expected going forward as the sharp decline in interest rates did not occur until mid-March 2020.”  Pacific Financial continues to maintain a net interest margin above the peer average posted by the SNL Small Cap U.S. Bank Index as of December 31, 2019. 

Provision for Loan Losses:  Pacific Financial proactively provisioned $2.0 million for loan losses during the quarter ended March 31, 2020 due to economic uncertainties associated with COVID-19 and changes to the qualitative factors within the allowance for loan losses.  Net charge-offs were $207,000 for the first quarter of 2020, compared to $24,000 for the preceding quarter, and were unrelated to the current pandemic.

Noninterest Income: Noninterest income increased 48%, or $1.2 million, to $3.6 million for the first quarter of 2020, compared to $2.4 million for the first quarter 2019, and declined 9% from $3.9 million for the fourth quarter 2019.  Gain on sale of loans continues to be the largest component of noninterest income.  During the current quarter, loan production decreased slightly from the preceding quarter as expected due to seasonal declines, but increased year-over-year. This production and subsequent sale of loans resulted in gain on sale of loans of $2.0 million for the quarter ended March 31, 2020 compared to $932,000 and $2.2 million for the quarters ended March 31, 2019 and December 31, 2019, respectively.  Mortgage banking production is robust with elevated refinance activity.    The percentage of loans sold attributable to refinance activity was 58.9% in the current quarter compared to 50.9% in the prior quarter. “This increased loan activity has contributed significantly to our noninterest income and serves as a natural hedge in a declining rate environment,” commented Tucker.  Other noninterest income components remained relatively constant for the three noted quarters.   

Noninterest Expense: Noninterest expense increased 9% to $9.1 million for the first quarter of 2020, compared to $8.4 million for the first quarter of 2019 and was up slightly from $9.1 million on a linked quarter basis.  This was mostly due to an increase in salaries and employee benefits from commissions associated with residential mortgage production, costs associated with the I-5 corridor expansion into the Eugene market, and increases for stock compensation expense and new medical plans.  These increases were partially offset by decreases in one-time professional fees related to strategic marketing and technology consulting expenses incurred in the like quarter a year ago.  “Although our Eugene team of bankers are presently under Stay-at-Home orders, we continue to move forward with our expansion along the I-5 corridor and establishing Bank of the Pacific in the growing Willamette Valley area,” said Portmann.  

Income Tax Provision: Income tax provision was $296,000 for the first quarter of 2020, compared to $658,000 for the first quarter 2019, and $836,000 for the fourth quarter 2019.  The effective tax rate for the first quarter of 2020 was 19.8%, compared to 18.3% for the first quarter 2019, and 19.5% for the fourth quarter 2019.  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 Review

Total Assets: Total assets increased $22.6 million to $926.3 million at March 31, 2020, compared to $903.7 million at March 31, 2019, and declined by $3.1 million from $929.4 million at December 31, 2019.

Investment Securities: Investment securities declined 9% to $109.9 million, at March 31, 2020, compared to $120.2 million at March 31, 2019, and increased 6% compared to $103.2 million at December 31, 2019.  The growth in investment securities on a linked quarter basis was primarily a result of reinvesting a portion of its federal funds sold balances into higher yielding investments.  The year-over-year decline in securities was a result of maturities, payments and sales within the portfolio. The portfolio is comprised primarily of amortizing U.S. agency collateralized mortgage, mortgage-backed securities and municipal securities. 

Liquidity:  “Liquidity within the Company remains strong with significant on-balance sheet liquidity and access to unused lines totaling $229.8 million with the Federal Reserve and Federal Home Loan Bank,” said Tucker.  In addition, the Company has access to $16 million in unused unsecured lines with correspondent banks, as well as access to brokered deposits and access to the newly established Federal Reserve Paycheck Protection Program Lending Facility (“PPPLF”). The Federal Reserve’s PPPLF allows the Bank to pledge and borrow against 100% of the principal balance of PPP loans originated.  Pacific Financial anticipates using on-balance sheet liquidity as well as term funding from the Federal Reserve to fund the PPP loans.  Federal Reserve borrowings will be repaid as PPP loans are repaid or forgiven. The Company actively monitors liquidity including credit line utilization on loans outstanding with no significant change in utilization noted as of March 31, 2020.  As of March 31, 2020, liquidity levels and ratios remained relatively consistent.  The Bank’s borrowing facilities with the FHLB and the Federal Reserve Bank are subject to collateral requirements.

Loans: Gross loan balances totaled $678.6 million at March 31, 2020, compared to $692.3 million at March 31, 2019 and $685.3 million at December 31, 2019.  Declines in the loan portfolio since year end 2019 primarily occurred in indirect consumer loans to finance luxury and classic cars, commercial real estate non-owner occupied and commercial loans, with commercial owner occupied loans increasing $5.0 million during the quarter. The reduction in commercial real estate non-owner occupied and commercial loans was primarily related to loan principal payments and payoffs.

The loan portfolio remains well-diversified without significant concentration risk by collateral type or by industry. Loans are predominately originated within our Western Washington and Oregon markets.  CRE concentrations were 196% at March 31, 2020 compared to regulatory guidance of 300%.  Commercial loans along with CRE-owner occupied account for 41% of total loans outstanding (excluding agricultural lending) at March 31, 2020 compared to 40% at December 31, 2019.   As of March 31, 2020, consumer loans to finance luxury and classic cars totaled $46.1 million, a decline of $11.5 million from $57.6 million a year earlier, and down $2.1 million compared to $48.2 million at December 31, 2019.

Higher Risk Industries as a Result of COVID-19: Although it is difficult to determine the economic and business impact of the coronavirus pandemic on various business and industries, with the Stay-at-Home orders in both Washington and Oregon, certain industries have seen a dramatic change in revenues in their businesses.  Those early impact industries include hospitality, agriculture (primarily dairy), restaurants, health care, and recreation and entertainment. At Pacific Financial, the total of these higher risk categories is $105.2 million or 16% of total loans.  Within those areas considered higher risk, the largest are: (1) Accommodation and Food Services (excluding SBA Guaranteed loan balances) $56.4 million or 8% of total loans; (2) Animal Production $24.0 million or 4% of total loans; (3) Retail Trade $19.2 million or 3% of total loans; and (4) Entertainment and Recreation $5.6 million or 1% of total loans.  Although these industries are more directly impacted by COVID-19, the bank’s customer base within these sectors covers a wide range of clients including those that operate under diversified business models reaching a broader range of clients, possess necessary financial resources and are managed by experienced management teams that aid in working through challenges presented.  Worth noting is a majority of hospitality are mature properties with experienced owner/operators that successfully navigated through the Great Recession. 

Credit Underwriting: Credit underwriting policies are conservative.  In light of increased risk associated with the pandemic, the Company has made prudent enhancements to its credit oversight such as greater underwriting control of unsecured lending with all requests regardless of size requiring credit administration approval, and the planned addition of an experienced credit risk officer to the credit administration team to support existing clients as needed. To manage risk, the Company oversees new loan origination volume and current loan balances using concentration limits that establish maximum exposure levels by designated industry segment, real estate product types, geography and single borrower limits.  The overall risk profile of the loan portfolio continues to be conservative, demonstrating the solid credit risk management framework in place.

Deposits: Core deposits continue to remain strong at 91% of total deposits.  Total deposits decreased $4.0 million during the quarter to $794.6 million and this negligible decline was primarily due to seasonal deposit outflows. Year-over year deposits, excluding brokered CDs, grew 4.7%, or $35.2 million, with non-brokered time deposits increasing $9.9 million, or 16%. Positively impacting time deposit growth during 2019 was the increase in time deposit rates in March 2019 which resulted in customers shifting from lower yielding savings and money market accounts. With the recent decrease in market rates, time deposit rates were reduced in March 2020.  

Capital Management: Capital ratios of Pacific Financial Corporation, and its subsidiary Bank of the Pacific, continue to exceed the well-capitalized regulatory thresholds.  At March 31, 2020, Pacific Financial Corporation’s leverage ratio was 11.40% and the total risk-based capital ratio was 15.13%.  All ratios have increased from the first quarter a year ago and from the preceding quarter.  On April 9, 2020, the regulatory agencies issued an interim final rule that neutralizes the effects of PPP loans funded through the Federal Reserve’s new PPPLF.  In addition, with the 100% SBA guarantee, all PPP loans have a zero percent risk-weighting for risk-based capital purposes. 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: “While asset quality at quarter end remained strong, we are being proactive in our approach to the COVID-19 pandemic and its economic impact on our markets,” said Portmann.  “At the close of the current quarter, we began to see the initial effects of the pandemic, primarily an increase in watch risk-rated loans.”  As noted above, the Bank offered a 90-day deferred payment option to eligible borrowers.  These loans were not categorized as troubled debt restructures, but were conservatively downgraded within the pass category.

Adversely classified loans decreased by $580,000 during the current quarter to $11.2 million, or 1.65%, compared to $11.7 million, or 1.71%, in the preceding quarter.  The decline on a linked quarter basis was primarily due to the payoff of several loans including one large payoff of $928,000. The classified coverage ratio is a measurement of asset risk and the capacity for capital to protect against that risk.  It reflects the aggregate level of all adversely classified items in relation to Tier 1 Capital and the allowance for loan losses.  As of March 31, 2020, the classified coverage ratio was 9.6% compared to 7.3% and 10.4% on March 31, 2019 and December 31, 2019, respectively.  As noted above, the improvement in the ratio from year end 2019 was primarily related to payoffs of adversely classified assets. 

Nonperforming assets were $1.6 million, or 0.18% of total assets, at March 31, 2020, compared to $976,000, or 0.11% of total assets, at March 31, 2019, and $1.1 million, or 0.11% of total assets, at December 31, 2019. This slight increase for the quarter was primarily due to the transfer of three loans to non-accrual, which was partially offset by a $126,000 charge-off of one loan relationship and a $126,000 loan upgraded and return to accrual status. The three loans added to non-accrual were prior to COVID-19 and related to individual customer circumstances rather than the negative impact from the pandemic. Total loans past due as of March 31, 2020, increased to 0.49% compared to 0.25% and 0.28% on March 31, 2019 and December 31, 2019, respectively.  The increase for the quarter was primarily related to delinquent loans that existed prior to the COVID-19 crisis, although pandemic further impacted these loans ability to repay. 

Allowance for Loan Losses: The allowance for loan losses (“ALL”) increased to $10.8 million at March 31, 2020, or 1.59% of gross loans, compared to ALL of $9.1 million and 1.31% of gross loans at March 31, 2019, and ALL of $9.0 million and 1.31% of gross loans on a linked quarter basis. The provision for loan losses was $2.0 million for the quarter compared to zero in 2019.   The increase in the provision was due primarily to economic uncertainties associated with COVID-19 and changes to the qualitative factors within the allowance for loan losses.  Net charge-offs remained relatively low for the quarter ended March 31, 2020 at $207,000 and one loan relationship comprised $126,000 of the charge-off totals. The timing and level of potential losses will be influenced by many factors including, but not limited to, the duration of Stay-at-Home orders and other protective measures necessary to control the spread of the Coronavirus, consumer spending post crisis, and severity and duration of an economic decline.

  
Balance Sheet Overview 
(Unaudited) 
                 
   Mar 31,
2020
 Dec 31,
2019
 $
Change
 %
Change
 Mar 31,
2019
 
$ Change
 
% Change
 
Assets: (Dollars in thousands, except per share data) 
 Cash on hand and in banks$40,342 $36,723 $3,619  10%$22,341 $18,001  81% 
 Interest bearing deposits 3,250  3,250  -  0% 3,250  -  0% 
 Federal funds sold 25,170  41,210  (16,040) -39% 7,428  17,742  100% 
 Investment securities 109,875  103,216  6,659  6% 120,155  (10,280) -9% 
 Loans held-for-sale 21,398  10,108  11,290  112% 7,717  13,681  177% 
 Loans, net of deferred fees 677,907  684,438  (6,531) -1% 691,293  (13,386) -2% 
 Allowance for loan losses (10,786) (8,993) (1,793) 20% (9,056) (1,730) 19% 
   Net loans 667,121  675,445  (8,324) -1% 682,237  (15,116) -2% 
 Federal Home Loan Bank and Pacific Coast Bankers' Bank stock, at cost 2,241  2,217  24  1% 2,421  (180) -7% 
 Other assets 56,947  57,246  (299) -1% 58,180  (1,233) -2% 
   Total assets$926,344 $929,415 $(3,071) 0%$903,729 $22,615  3% 
                 
Liabilities and Shareholders' Equity:               
 Total deposits$794,585 $798,638 $(4,053) -1%$776,260 $18,325  2% 
 Borrowings 16,569  16,606  (37) 0% 21,719  (5,150) -24% 
 Accrued interest payable and other liabilities 8,641  8,878  (237) -3% 8,982  (341) -4% 
 Shareholders' equity 106,549  105,293  1,256  1% 96,768  9,781  10% 
   Total liabilities and shareholders' equity$926,344 $929,415 $(3,071) 0%$903,729 $22,615  3% 
                 
Common Stock Shares Outstanding 10,607,617  10,632,058  (24,441) 0% 10,580,263  27,354  0% 
                 
Book value per common share (1)$10.04 $9.90 $0.14  1%$9.15 $0.89  10% 
Tangible book value per common share (2)$8.78 $8.64 $0.14  2%$7.87 $0.91  12% 
Gross loans to deposits ratio 85.3% 85.7% -0.4%   89.1% -3.8%   
                 
(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, 
   Mar 31,
2020
 Dec 31,
2019
 $
Change
 %
Change
 Mar 31,
2019
 
$ Change
 
% Change
 
   (Dollars in thousands, except per share data) 
Interest and dividend income$9,783 $10,187 $(404) -4%$10,360 $(577) -6% 
Interest expense 700  730  (30) -4% 742  (42) -6% 
 Net interest income 9,083  9,457  (374) -4% 9,618  (535) -6% 
Loan loss provision 2,000  -  2,000  100% -  2,000  100% 
Noninterest income 3,555  3,887  (332) -9% 2,398  1,157  48% 
Noninterest expense 9,142  9,062  80  1% 8,412  730  9% 
Income before income taxes 1,496  4,282  (2,786) -65% 3,604  (2,108) -58% 
Income tax expense 296  836  (540) -65% 658  (362) -55% 
 Net Income$1,200 $3,446 $(2,246) -65%$2,946 $(1,746) -59% 
                 
Average common shares outstanding - basic 10,627,160  10,626,443  717  0% 10,576,994  50,166  0% 
Average common shares outstanding - diluted 10,676,227  10,664,621  11,606  0% 10,672,509  3,718  0% 
                 
Income per common share               
 Basic$0.11 $0.32 $(0.21) -66%$0.28 $(0.17) -61% 
 Diluted$0.11 $0.32 $(0.21) -66%$0.28 $(0.17) -61% 
                 
Effective tax rate 19.8% 19.5% 0.3%   18.3% 1.5%   
                 

 

Reconciliation of Non-GAAP Measure 
(Unaudited) 
                 
   For the Three Months Ended, 
   Mar 31,
2020
 Dec 31,
2019
 $
Change
 %
Change
 Mar 31,
2019
 
$ Change
 
% Change
 
Non-GAAP Net Income (Dollars in thousands) 
Net Income$1,200 $3,446 $(2,246) -65%$2,946 $(1,746) -59% 
 Loan loss provision 2,000  -  2,000  100% -  2,000  100% 
 Income tax expense 296  836  (540) -65% 658  (362) -55% 
Pre-tax, pre-provision net income$3,496 $4,282 $(786) -18%$3,604 $(108) -3% 
                 
Pre-tax, pre-provisions return on average assets, annualized1.53% 1.80% (0.27)   1.62% 0.18    
Pre-tax, pre-provisions return on average equity, annualized13.16% 16.17% (3.01)   15.41% 0.76    
                 

 

Noninterest Income
(Unaudited)
   For the Three Months Ended,
   Mar 31,
2020
 Dec 31,
2019
 $
Change
 %
Change
 Mar 31,
2019
 
$ Change
 
% Change
   (Dollars in thousands)
Service charges on deposits$507$527$(20) -4%$505$2  0%
Gain on sale of loans, net 1,990 2,212 (222) -10% 932 1,058  114%
Earnings on bank owned life insurance 115 119 (4) -3% 106 9  8%
Other noninterest income              
 Fee income 918 992 (74) -7% 829 89  11%
 Other 25 37 (12) -32% 26 (1) -4%
Total noninterest income$3,555$3,887$(332) -9%$2,398$1,157  48%
                

 

Noninterest Expense 
(Unaudited) 
                 
   For the Three Months Ended, 
   Mar 31,
2020
 Dec 31,
2019
 $
Change
 %
Change
 Mar 31,
2019
 
$ Change
 
% Change
 
   (Dollars in thousands) 
Salaries and employee benefits$6,066$5,726$340  6%$5,401$665  12% 
Occupancy 522 529 (7) -1% 502 20  4% 
Equipment 285 275 10  4% 242 43  18% 
Data processing 746 781 (35) -4% 692 54  8% 
Professional services 200 389 (189) -49% 369 (169) -46% 
State and local taxes 145 158 (13) -8% 82 63  77% 
FDIC and State assessments 8 8 -  0% 8 -  0% 
Other noninterest expense:               
 Director fees 74 75 (1) -1% 66 8  12% 
 Communication 68 76 (8) -11% 71 (3) -4% 
 Advertising 48 78 (30) -38% 66 (18) -27% 
 Professional liability insurance 55 54 1  2% 50 5  10% 
 Amortization 97 108 (11) -10% 91 6  7% 
 Other 828 805 23  3% 772 56  7% 
Total noninterest expense$9,142$9,062$80  1%$8,412$730  9% 
                 

 

Financial Performance Overview 
(Unaudited) 
            
  For the Three Months Ended 
  Mar 31,
2020
 Dec 31,
2019
 
Change
 Mar 31,
2019
 
Change
 
Performance Ratios          
Return on average assets, annualized0.52% 1.45% (0.93) 1.32% (0.80) 
Return on average equity, annualized4.52% 13.01% (8.49) 12.60% (8.08) 
Efficiency ratio (1)72.34% 67.91% 4.43  70.01% 2.33  
            
(1) Non-interest expense divided by net interest income plus noninterest income.       
            


LIQUIDITY

Cash and Cash Equivalents and Investment Securities 
(Unaudited) 
    Mar 31,
2020
  % of
Total
 Dec 31,
2019
  % of
Total
 $
Change
 %
Change
 Mar 31,
2019
  
Total
 $
Change
 %
Change
 
    (Dollars in thousands) 
Cash on hand and in banks$13,088 7%$12,264 7%$824  7%$12,911 10%$177  1% 
Interest bearing deposits 27,254 15% 24,458 13% 2,796  11% 9,430 6% 17,824  189% 
Other interest earning deposits 3,250 2% 3,250 2% -  0% 3,250 2% -  0% 
Federal funds sold 25,170 14% 41,210 22% (16,040) -39% - 0% 25,170  100% 
 Total 68,762 38% 81,182 44% (12,420) -15% 25,591 18% 43,171  169% 
                        
Investment securities:                     
 Collateralized mortgage obligations 43,483 25% 45,141 25% (1,658) -4% 39,445 27% 4,038  10% 
 Mortgage backed securities 16,934 9% 18,579 10% (1,645) -9% 20,983 14% (4,049) -19% 
 U.S. Government and agency securities 2,010 1% 484 0% 1,526  315% 4,107 3% (2,097) -51% 
 Municipal securities 45,518 25% 36,925 20% 8,593  23% 54,555 37% (9,037) -17% 
 Corporate debt securities 1,874 1% 2,004 1% (130) -6% 993 1% 881  89% 
 Equity securities 56 0% 84 0% (28) -33% 72 0% (16) -22% 
  Total 109,875 61% 103,217 56% 6,658  6% 120,155 82% (10,280) -9% 
Total cash equivalents and investment securities$178,637 99%$184,399 100%$(5,762) -3%$145,746 100%$32,891  23% 
                        
Total cash equivalents and investment securities                     
 as a percent of total assets   19%   20%       14%     
                        

LOANS

 Loans by Category
 (Unaudited)
                       
    
Mar 31,
2020
 % of
Gross
Loans
 
Dec 31,
2019
 % of
Gross
Loans
 
$
Change
 

% Change
 
Mar 31,
2019
 % of
Gross
Loans
 
$
Change
 
%
Change
    (Dollars in thousands)
 Commercial and agricultural$129,085  19%$132,167  19%$(3,082) -2%$131,491  19%$(2,406) -2%
 Real estate:                    
 Construction and development 47,054  7% 45,227  7% 1,827  4% 48,377  7% (1,323) -3%
 Residential 1-4 family 84,662  12% 85,711  13% (1,049) -1% 87,851  13% (3,189) -4%
 Multi-family 30,368  4% 29,865  4% 503  2% 29,500  4% 868  3%
 Commercial real estate -- owner occupied 147,024  22% 147,049  21% (25) 0% 142,175  21% 4,849  3%
 Commercial real estate -- non owner occupied 152,830  23% 153,865  22% (1,035) -1% 154,140  22% (1,310) -1%
 Farmland 31,500  5% 32,370  5% (870) -3% 28,815  4% 2,685  9%
 Consumer 56,091  8% 59,014  9% (2,923) -5% 69,916  10% (13,825) -20%
  Gross Loans 678,614  100% 685,268  100% (6,654) -1% 692,265  100% (13,651) -2%
    Less: allowance for loan losses (10,786)   (8,993)   (1,793)   (9,056)   (1,730)  
    Less: deferred fees (707)   (830)   123    (972)   265   
  Net loans$667,121   $675,445   $(8,324)  $682,237   $(15,116)  
                       
 Loan Concentration    
 (Unaudited)    
    
Mar 31,
2020
 % of Risk
Based
Capital
 
Dec 31,
2019
 % of Risk
Based
Capital
 

Change
 
Mar 31,
2019
 % of Risk
Based
Capital
 

Change
    
    (Dollars in thousands)    
 Commercial and agricultural$129,085  114%$132,167  118% -4%$131,491  126% -12%    
 Real estate:                    
 Construction and development 47,054  42% 45,227  40% 2% 48,377  46% -4%    
 Residential 1-4 family 84,662  75% 85,711  77% -2% 87,851  84% -9%    
 Multi-family 30,368  27% 29,865  27% 0% 29,500  28% -1%    
 Commercial real estate -- owner occupied 147,024  130% 147,049  132% -2% 142,175  136% -6%    
 Commercial real estate -- non owner occupied 152,830  135% 153,865  138% -3% 154,140  148% -13%    
 Farmland 31,500  28% 32,370  29% -1% 28,815  28% 0%    
 Consumer 56,091  50% 59,014  53% -3% 69,916  67% -17%    
  Gross Loans$678,614   $685,268     $692,265         
 Regulatory Commercial Real Estate$220,794  196%$222,899  199% -3%$226,221  217% -21%    
 Total Risk Based Capital*$112,802   $111,782     $104,369         
                       
 * Bank of the Pacific
                       

DEPOSITS

Deposits by Category 
(Unaudited) 
                      
  Mar 31,
2020
 
% of Total
 Dec 31,
2019
 
% of Total
 $
Change
 %
Change
 Mar 31,
2019
 
% of Total
 $
Change
 %
Change
 
  (Dollars in thousands) 
Interest-bearing demand$224,741  27%$228,579  28%$(3,838) -2%$211,503 27%$13,238  6% 
Money market 147,412  19% 149,510  19% (2,098) -1% 149,400 19% (1,988) -1% 
Savings 105,983  13% 104,871  13% 1,112  1% 101,974 13% 4,009  4% 
Time deposits (CDs) 74,972  9% 70,668  9% 4,304  6% 82,003 11% (7,031) -9% 
  Total interest-bearing deposits 553,108  70% 553,628  69% (520) 0% 544,880 70% 8,228  2% 
Non-interest bearing demand 241,477  30% 245,010  31% (3,533) -1% 231,380 30% 10,097  4% 
  Total deposits$794,585  100%$798,638  100%$(4,053) -0.5%$776,260 100%$18,325  2% 
                      

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

  
Capital Measures 
(unaudited) 
 



Mar 31,
2020
 



Dec 31,
2019
 




Change
 



Mar 31,
2019
 




Change
  Well
Capitalized
Under Prompt
Correction
Action
Regulations*
 
Pacific Financial Corporation             
Total risk-based capital ratio15.13% 14.72% 0.41 13.93% 1.20  N/A  
Tier 1 risk-based capital ratio13.88% 13.54% 0.34 12.73% 1.15  N/A  
Common equity tier 1 ratio12.13% 11.84% 0.29 11.00% 1.13  N/A  
Leverage ratio11.40% 11.17% 0.23 10.77% 0.63  N/A  
              
Tangible common equity ratio10.20% 10.02% 0.18 9.36% 0.84  N/A  
               
Bank of the Pacific              
Total risk-based capital ratio15.01% 14.60% 0.41 13.86% 1.15  10.5% 
Tier 1 risk-based capital ratio13.76% 13.40% 0.36 12.64% 1.12  8.5% 
Common equity tier 1 ratio13.76% 13.40% 0.36 12.64% 1.12  7.0% 
Leverage ratio11.34% 11.07% 0.27 10.69% 0.65  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, 
                 
   Mar 31,
2020
 Dec 31,
2019
 $
Change
 %
Change
 Mar 31,
2019
 $
Change
 %
Change
 
Average Balances (Dollars in thousands) 
Gross loans$683,096 $680,220 $2,876  0%$695,084 $(11,988) -2% 
Loans held for sale$10,293 $16,909 $(6,616) -39%$5,271 $5,022  95% 
Investment securities$105,202 $100,942 $4,260  4%$123,230 $(18,028) -15% 
Federal funds sold & interest bearing deposits in banks$59,139 $79,827 $(20,688) -26%$17,800 $41,339  232% 
Total interest-earning assets$857,730 $877,898 $(20,168) -2%$841,385 $16,345  2% 
Non-interest bearing demand deposits$239,280 $257,780 $(18,500) -7%$237,892 $1,388  1% 
Interest bearing deposits$548,769 $552,949 $(4,180) -1%$541,665 $7,104  1% 
Total Deposits$788,049 $810,729 $(22,680) -3%$779,557 $8,492  1% 
Borrowings$16,581 $16,619 $(38) 0%$21,790 $(5,209) -24% 
Total interest-bearing liabilities$565,350 $569,568 $(4,218) -1%$563,455 $1,895  0% 
Total Equity$106,853 $105,072 $1,781  2%$94,847 $12,006  13% 
                 
   For the Three Months Ended,     
   Mar 31,
2020
 Dec 31,
2019
 
Change
 Mar 31,
2019
 
Change
     
Yield on average gross loans (1) 5.16% 5.30% (0.14) 5.46% (0.30)     
Yield on average investment securities (1) 3.02% 2.78% 0.24  3.01% 0.01      
Yield on Fed funds sold & interest bearing deposits in banks 1.43% 1.72% (0.29) 2.62% (1.19)     
Cost of average interest bearing deposits 0.42% 0.42% -  0.41% 0.01      
Cost of average borrowings 3.18% 3.37% (0.19) 3.63% (0.45)     
Cost of average total deposits and borrowings 0.35% 0.35% -  0.38% (0.03)     
                 
Yield on average interest-earning assets 4.62% 4.64% (0.02) 5.06% (0.44)     
Cost of average interest-bearing liabilities 0.50% 0.51% (0.01) 0.53% (0.03)     
Net interest spread 4.12% 4.13% (0.01) 4.53% (0.41)     
                 
Net interest margin (1) 4.30% 4.31% (0.01) 4.70% (0.40)     
                 
(1) Tax-exempt income has been adjusted to a tax equivalent basis at a rate of 21%.           
                 

 

                
Adversely Classified Loans and Securities 
(Unaudited) 
                
  Mar 31,
2020
 Dec 31,
2019
 $
Change
 
% Change
 Mar 31,
2019
 $
Change
 
% Change
 
  (Dollars in thousands) 
Rated substandard or worse, but not impaired, beginning of period$10,400 $6,637 $3,763  57%$6,723 $3,677  55% 
Addition of previously classified pass graded loans -  4,221  (4,221) -100% 1,337  (1,337) -100% 
Upgrades to pass or other loans especially mentioned status -  (27) 27  -100% (1,102) 1,102  -100% 
Principal payments, net (1,131) (431) (700) 162% (660) (471) 71% 
Rated substandard or worse, but not impaired, end of period$9,269 $10,400 $(1,131) -11%$6,298 $2,971  47% 
Impaired 1,900  1,349  551  41% 1,314  586  45% 
Total adversely classified loans¹$11,169 $11,749 $(580) -5%$7,612 $3,557  47% 
                
Other loans especially mentioned or watch, but not impaired$105,008 $22,690 $82,318  363%$30,943 $74,065  239% 
Gross loans (excluding deferred loan fees)$678,614 $685,268 $(6,654) -1%$692,265 $(13,651) -2% 
Adversely classified loans to gross loans 1.65% 1.71%     1.10%     
Allowance for loan losses$10,786 $8,993 $1,793  20%$9,056 $1,730  19% 
                   
Allowance for loan losses as a percentage of adversely classified loans 96.57% 76.54%     118.97%     
Allowance for loan losses to total impaired loans 567.68% 666.64%     689.19%     
Adversely classified loans to total assets 1.21% 1.26%     0.84%     
Delinquent loans to gross loans, not in nonaccrual status 0.27% 0.02%     0.14%     
                
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 
(Unaudited) 
                
  Mar 31,
2020
 Dec 31,
2019
 $
Change
 %
Change
 Mar 31,
2019
 $
Change
 %
Change
 
  (Dollars in thousands) 
Total nonaccrual loans, beginning of period$1,029 $1,014 $15  1%$700 $329  47% 
Transfer to performing loans (127) -  (127) -100% -  (127) -100% 
Addition of nonaccrual loans 852  349  503  144% 310  542  175% 
Principal payments, net (6) (312) 306  -98% (34) 28  -82% 
Charge-offs, net (126) (22) (104) 473% -  (126) -100% 
Total nonaccrual loans, end of period$1,622 $1,029 $593  58%$976 $646  66% 
                
Other real estate owned and foreclosed assets -  22  (22) -100% -  -  0% 
Total nonperforming assets$1,622 $1,051 $571  54%$976 $646  66% 
                
                
Total restructured performing loans, beginning of period$320 $327 $(7) -2%$364 $(44) -12% 
Transfer to nonaccrual loans (129) -  (129) 100% -  (129) 100% 
Addition of restructured performing loans 93  -  93  100% -  93  100% 
Principal payments, net (6) (7) 1  -14% (26) 20  -77% 
Total restructured performing loans, end of period$278 $320 $(42) -13%$338 $(60) -18% 
                
Accruing loans past due 90 days or more$- $- $-  0%$- $-  0% 
Percentage of nonperforming assets to total assets 0.18% 0.11%     0.11%     
Nonperforming loans to total loans 0.24% 0.15%     0.14%     
                

 

Allowance for Loan Losses 
(Unaudited) 
                
  For the Three Months Ended, 
  Mar 31,
2020
 Dec 31,
2019
 $
Change
 %
Change
 Mar 31,
2019
 $
Change
 %
Change
 
  (Dollars in thousands) 
Gross loans outstanding at end of period$678,614  $685,268  $(6,654) -1% $692,265  $(13,651) -2% 
Average loans outstanding, gross$683,096  $680,220  $2,876  0% $696,040  $(12,944) -2% 
Allowance for loan losses, beginning of period$8,993  $9,017  $(24) 0% $9,049  $(56) -1% 
Commercial (130) -  (130) 100% (30) (100) 333% 
Commercial Real Estate -  -  -  0% -  -  0% 
Residential Real Estate -  -  -  0% -  -  0% 
Consumer (80) (27) (53) 196% (59) (21) 36% 
Total charge-offs (210) (27) (183) NM  (89) (121) 136% 
Commercial -  -  -  0% 56  (56) -100% 
Commercial Real Estate -  -  -  0% -  -  0% 
Residential Real Estate -  -  -  0% 34  (34) -100% 
Consumer 3  3  -  0% 6  (3) -50% 
Total recoveries 3  3  -  0% 96  (93) -97% 
Net recoveries/(charge-offs) (207) (24) (183) NM  7  (214) NM  
Provision charged to income 2,000  -  -  100% -  2,000  100% 
Allowance for loan losses, end of period$10,786  $8,993  $1,793  20% $9,056  $1,730  19% 
Ratio of net loans charged-off to average               
gross loans outstanding, annualized 0.12% 0.01% 0.11%   0.00% 0.12%   
Ratio of allowance for loan losses to               
gross loans outstanding 1.59% 1.31% 0.28%   1.31% 0.28%   
                

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, 2020, the Company had total assets of $926.3 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, including the current COVID-19 pandemic and government responses thereto, changes in interest rates, extensive and evolving regulation of the banking industry, and many other risks. The pandemic could cause us to experience higher loan losses within our lending portfolio, impairment of goodwill, reduced demand for our products and services and other negative impacts on our financial position or results of operations.  The depth, severity and scope of this current recession is uncertain, and our company will not be immune to the effects of the financial stress resulting from a global pandemic and economic shutdown. 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

pfc logo.jpg

Source: Pacific Financial Corporation