Pacific Financial Corp Earns $3.9 Million, or $0.37 per Diluted Share, for the Third Quarter of 2020; Declares Quarterly Cash Dividend of $0.08 per Share

ABERDEEN, Wash., Oct. 27, 2020 (GLOBE NEWSWIRE) -- Pacific Financial Corporation (OTCQX: PFLC), (“Pacific”), the holding company (the “Company”) for Bank of the Pacific (the “Bank”), today reported net income of $3.9 million, or $0.37 per diluted share for the third quarter of 2020, compared to $3.8 million, or $0.35 per diluted share for the third quarter of 2019, and $2.4 million, or $0.23 per diluted share for the second quarter of 2020. For the first nine months of 2020, net income was $7.5 million, or $0.71 per diluted share, compared to $10.3 million, or $0.97 per diluted share, for the first nine months of 2019.

Pacific Financial’s board of directors declared a quarterly cash dividend of $0.08 per share on October 21, 2020. The dividend will be payable on November 24, 2020, to shareholders of record on November 10, 2020.

At September 30, 2020 Pacific continues to exceed regulatory well-capitalized requirements with a leverage ratio of 9.51% and a total risk-based capital ratio of 15.38%. During the quarter Pacific resumed our share buyback program announced earlier in year. Since that resumption 108,487 shares of stock totaling $833,000 have been repurchased for a grand-total of 145,731 shares of stock or $1.2 million under the program. “We believe our stock is an attractive investment and repurchasing shares affirms our optimism for the future and offers an excellent way to build long-term value for our shareholders,” said Denise Portmann, President and Chief Executive Officer.

“We delivered solid operating results in the third quarter, bolstered by record mortgage banking production and lower credit costs. Our non-interest income growth has increased substantially year-over-year and from the linked quarter, primarily due to the gain on sale of loans and the growth in fee income,” said Portmann. “In addition, deposit growth remains robust with growth of 25% year over year with deposits reaching over $1.0 billion.”   

“While our credit quality metrics remained strong with minimal downgrades and negligible charge-offs in the current quarter, given the continued economic uncertainty from the pandemic we proactively added to our loan loss reserves during the current quarter, resulting in an allowance for loan losses of $12.0 million at September 30, 2020,” commented Portmann. “We are increasingly more optimistic about credit as most first round payment deferrals have expired, and the second round of deferrals has been limited. We continue to benefit from the Small Business Administration (“SBA”) Paycheck Protection Program (“PPP”) loans generated in the second quarter with total PPP interest and fee income of $1.6 million recognized during the year.”

COVID-19 Pandemic Update
Branches and Operations:   Bank branch lobbies re-opened in June to the public with strict pandemic protocols in place. However, as we remain committed to prioritizing the safety of our customers and employees, the Bank continues to encourage the use of drive up services, and digital and electronic channels, while our bankers proactively reach out to our customers to provide personalized customer service. Many of our front-line customer facing relationship officers are back in offices to provide a high level of service and for more convenient interaction with our customers. Conversely, where practicable, many of our staff in back-office functions including deposit operations, loan documentation and servicing, electronic banking, and network services continue to work from home.  

SBA Paycheck Protection Program: SBA PPP was implemented to provide short-term loans to help small businesses impacted by COVID-19. As of September 30, 2020, the Bank has processed and funded 747 applications for a total of $130.7 million with an average loan amount of $176,000. As of the end of the 3^rd quarter, the bank has submitted 45 applications, or $10.5 million, for loan forgiveness for our customers.

Loan Payment Deferrals: At the end of the first quarter, the Company began providing 90-day payment deferrals to customers adversely impacted by operating restrictions due to COVID-19. During the current quarter the Bank made consistent progress reducing modified loans, with a majority of the $106.2 million in the first round of deferrals expiring with loans returning to regular payment status. During the current quarter, the Company also offered a more limited second round deferral program and, as of September 30, 2020, deferrals totaled $16.8 million, or 3.0% of total loans outstanding excluding PPP, compared to $106.2 million or 16.2% as of June 30, 2020.

Third quarter of 2020 Financial Highlights (as of, or for the period ended September 30, 2020, except as noted):

• Net income was $3.9 million for the third quarter of 2020, compared to $3.8 million for the third quarter a year ago, and $2.4 million for the second quarter of 2020.
• Diluted earnings per share were $0.37, for the third quarter of 2020, compared to $0.35 for the third quarter 2019, and $0.23 for the second quarter of 2020.
• Annualized pre-tax pre-provision return on assets (non-GAAP) was 1.89% for the third quarter of 2020, compared to 1.98% for the third quarter a year ago and 1.53% for the second quarter of 2020.
• Annualized pre-tax pre-provision return on equity (non-GAAP) was 19.24% for the third quarter of 2020, compared to 17.84% for the third quarter of 2019, and 14.70% for the second quarter of 2020.
• The provision for loan losses was $500,000 for the third quarter of 2020, compared to no provision in the third quarter a year ago, and $1.0 million in the second quarter of 2020.
• Net interest margin (“NIM”) was 3.49% including SBA PPP loans, and 3.53% excluding SBA PPP loans, for the third quarter of 2020, compared to 4.57% for the third quarter of 2019, and 3.70% including SBA PPP loans and 3.89% excluding SBA PPP loans for the preceding quarter. Industry peer NIM was 3.36% at June 30, 2020. [Industry peers comprise of approximately 482 banks in the SNL Microcap U.S. Bank Index.]  
• Noninterest income for the third quarter of 2020 increased 45% over the like quarter a year ago and 26% from the linked quarter.
• Total deposits increased by $207.2 million, or 25%, to $1.0 billion at September 30, 2020, compared to $816.1 million at September 30, 2019, and increased by $28.4 million from $995.0 million at June 30, 2020. Non-interest-bearing deposits grew by 34% from a year ago and represented 35% of total deposits at September 30, 2020.
• Gross loans increased by $96.0 million, or 14%, to $779.8 million at September 30, 2020, compared to $683.8 million at September 30, 2019, and decreased by $7.5 million, or 1%, from $787.3 million at June 30, 2020. Included in total loans for the current quarter were 747 PPP loans totaling $130.7 million.  
• Shareholder equity increased 8% to $112.0 million from the third quarter a year ago and grew 2% from the linked quarter.   Book value per share increased 9% to $10.64 from a year earlier and grew 3% from the second quarter of 2020.

Results of Operations

Net income was $3.9 million for the third quarter of 2020, compared to $3.8 million for the third quarter a year ago, and $2.4 million for second quarter of 2020.   For the first nine months of 2020, net income was $7.5 million, compared to $10.3 million for the first nine months of 2019.

Diluted earnings per share were $0.37 for the third quarter of 2020, compared to $0.35 per diluted share for the third quarter of 2019, and $0.23 for the second quarter of 2020. For the nine months ended September 30, 2020, diluted earnings per share were $0.71, compared to $0.97 for the nine months ended September 30, 2019.

Net interest income, before provision for loan losses, was $9.4 million for the third quarter of 2020, compared to $9.8 million for the third quarter a year ago, and $9.0 million for second quarter of 2020. The increase in net interest income from the linked quarter was primarily due to PPP interest and fee amortization of $1.0 million in the current quarter compared to $600,000 for the linked quarter. For the first nine months of 2020, net interest income was $27.5 million compared to $29.2 million from the first nine months of 2019. The decline in net interest income from a year ago, for both the quarter and nine months, 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. This decrease was partially offset by a decrease in cost of funds. Interest and fee amortization on SBA PPP loans have contributed $1.0 million and $1.6 million, respectively, for the quarter and nine months ended September 30, 2020.

The net interest margin (“NIM”) was 3.49% including SBA PPP loans, and 3.53% excluding SBA PPP loans, for the third quarter of 2020, compared to 4.57% for the third quarter 2019, and 3.70% including SBA PPP loans and 3.89% excluding SBA PPP loans for the second quarter of 2020. For the first nine months of 2020, the NIM was 3.80% including SBA PPP loans and 3.98% excluding SBA PPP loans, compared to 4.66% for the first nine months of 2019.   “As expected, our NIM continued to be under pressure during the quarter, however, with the stabilization in market interest rates and no significant change in asset composition during the current quarter, the compression was less than in the second quarter,” said Carla Tucker, Executive Vice President and Chief Financial Officer .   “The Federal Reserve rate cuts over the last twelve months, combined with low interest PPP loans and a higher level of liquidity has impacted loan and investment yields and ultimately our NIM during that same time period.” The Company continues to maintain a net interest margin above the peer average posted by the SNL Micro Cap U.S. Bank Index as of June 30, 2020⁽¹⁾. ⁽¹⁾As of June 30, 2020, the SNL Micro Cap US Bank Index tracked 482 banks with total common market capitalization less than $250 million with an average for NIM of 3.36%.

The yield on average interest-earning assets was 3.69% including SBA PPP and 3.76% excluding SBA PPP loans for the third quarter of 2020, compared to 4.91% for the third quarter a year ago and 3.96% including SBA PPP loans and 4.17% excluding SBA PPP loans for the second quarter of 2020. For the first nine months of 2020, the yield on average interest-earning assets was 4.06% including SBA PPP loans and 4.26% excluding SBA PPP loans, compared to 5.01% for the first nine months of 2019. The Bank earns 1.0% interest on SBA PPP loans as well as a fee from SBA based on the size of the loan. This fee is estimated at $4.6 million and will be recognized over the duration of the respective loans. For the nine months ended September 30, 2020, $976,000 of this fee has been recognized into income. As of September 30, 2020, $213.7 million, or 47%, of total variable rate loans with a weighted average rate of 4.60%, have reached their rate floors.  

The cost of deposits continued to decrease during the current quarter due to ongoing reductions in deposit rates, as well as higher growth in low or non-interest earning deposits compared to higher cost certificate of deposits. In addition, the borrowing rate on the Company’s junior subordinated debentures has declined to 1.90% for the current quarter compared to 2.61% for the same quarter a year ago and 3.94% for the linked quarter in 2020. The Bank’s total cost of funds was 0.33% for the third quarter of 2020, compared to 0.51% for the third quarter a year ago and 0.41% for the second quarter of 2020. Year-to-date, the cost of funds was 0.41% compared to 0.53% for the first nine months of 2019.  

Provision for loan losses was $500,000 for the third quarter of 2020, compared to $1.0 million for the second quarter of 2020. Year-to-date, the provision for loan losses totaled $3.5 million, compared to no provision for the first nine months of 2019. Net charge-offs for the third quarter of 2020 were minimal at $5,000, compared to $279,000 of net charge-offs for the linked quarter which were unrelated to COVID-19.  

Noninterest income increased 45%, or $1.9 million, to $6.0 million for the third quarter of 2020, compared to $4.2 million for the third quarter 2019, and grew by 26%, or $1.2 million, from $4.8 million for the second quarter of 2020. The increase in noninterest income in the current quarter was primarily due to the 86%, or $2.0 million, increase in gain on sale of loans to $4.4 million for the third quarter of 2020, from $2.4 million for the third quarter a year ago and increased 31% compared to $3.3 million on a linked quarter basis. In addition, fee income was up 21% to $1.1 million for the third quarter of 2020, compared to $936,000 for the third quarter of 2019, and increased by 14% from $992,000 for the second quarter of 2020. While quarterly service charges on deposits declined on a year over year basis, service charges for the current quarter increased $41,000, or 13%, from the linked quarter.   For the nine months ended September 30, 2020, total noninterest income increased by 44% or $4.4 million to $14.4 million, compared to $10.0 million for the nine months ended September 30, 2019, and similar to the quarter was largely due to significant increases in gain on sale of loans.

Noninterest expenses rose moderately for the third quarter of 2020, increasing 6% to $10.0 million, compared to $9.4 million for the third quarter of 2019, and increasing only 2% from $9.8 million for the second quarter of 2020. The modest increase in noninterest expense in the current quarter was primarily due to higher variable compensation and commissions on higher mortgage banking production, as well as costs associated with the I-5 corridor expansion into the Eugene market and the growing Willamette Valley, which were partially offset by reductions in occupancy costs and professional services expenses. As with the current quarter, for the nine months ended September 30, 2020, noninterest expenses increased with the majority of the increase related to salary and employee benefits including higher variable commission on mortgage banking. Similar to the quarter, these increases were partially offset by reduction in professional services, occupancy, and advertising expenses.

Income tax provision was $1.0 million for the third quarter of 2020, compared to $859,000 for the third quarter 2019 and $569,000 for the second quarter of 2020. The effective tax rate for the third quarter of 2020 was 20.4%, compared to 18.6% for the third quarter of 2019, and 19.1% for the second quarter of 2020.   For the first nine months of 2020 the income tax provision was $1.9 million, down 22% from $2.4 million for the first nine months of 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 reached $1.2 billion at September 30, 2020, an increase of 23% over $945.2 million at September 30, 2019, and grew by 3% from $1.1 billion at June 30, 2020. The increase in assets on a linked quarter basis was primarily due to the continued inflow of deposits with noninterest-bearing deposits increasing by 4%, or $13.6 million, during the current quarter.

Investment Securities increased 28% to $126.8 million at September 30, 2020, compared to $99.2 million at September 30, 2019, and increased 7% from $118.1 at June 30, 2020. The increase in investment securities on a linked quarter basis and year-over-year was primarily the result of reinvesting a portion of federal funds sold balances into higher yielding investments. The portfolio is comprised mainly of amortizing U.S. agency collateralized mortgage-backed securities, mortgage-backed securities and municipal securities.     

Gross Loans increased 14%, or $96.0 million, to $779.8 million at September 30, 2020, compared to $683.8 million at September 30, 2019, and were relatively flat from $787.3 million at June 30, 2020. Total loans at September 30, 2020, included $130.7 million of PPP loans. Loan growth during the year has been impacted by commercial and agricultural lines of credit usage which has declined by 13.9%, or $17.9 million, at September 30, 2020, compared to September 30, 2019.

Loans are predominately originated within our Western Washington and Oregon markets and the Company’s portfolio is well-diversified by collateral type and by industry with a prudent credit discipline. With the potential increased risk associated with the COVID-19 pandemic, the Company has continued to make prudent enhancements to its credit oversight, such as greater underwriting control of both unsecured and non-owner occupied commercial real estate lending along with the 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. At September 30, 2020, CRE concentration remained relatively unchanged at 192% of total risk-based capital; below the regulatory guidance limit of 300%.   Commercial loans together with CRE-owner occupied, account for 40% of total loans outstanding (excluding PPP loans) at September 30, 2020 and remained relatively unchanged compared to 39% at September 30, 2019. CRE non-owner occupied and multifamily concentrations totaled $197.2 million. Hospitality, 5+ unit apartments and commercial properties comprise the largest areas of the commercial real estate non-owner occupied and multi-family property portfolios at $44.9 million, $41.7 million and $33.6 million, respectively.

On the consumer side, loans to finance luxury and classic cars, which encompass a majority of the consumer loan balances, were held relatively flat from June 30, 2020 at approximately $45.8 million with September 30, 2020 balances representing a decline of $5.6 million from $51.4 million a year ago. As part of our strategic plan, we have been limiting our concentrations in indirect loans to finance luxury and classic cars. As of September 30, 2020 the luxury and classic car portfolio includes 871 loans resulting in an average balance of $52,600. The portfolio continues to perform well with delinquencies including only two loans for under $25,000, or 5 basis points, as compared to the $45.8 million in total luxury and classic car indirect loan balances.

Higher Risk Industries as a Result of COVID-19: Early in the pandemic, the Company identified several industries as being potentially more vulnerable to the economic and business impacts of the Coronavirus pandemic. Those industries included accommodation (hospitality), animal production (primarily dairy), restaurants, retail trade, healthcare, repair and maintenance (primary automotive) and recreation and entertainment. Although these industries are potentially more directly impacted by COVID-19, the bank’s customer base within these sectors covers a wide range of clients, including those who operate under diversified business models reaching a broader range of clients, possess necessary financial resources, and are managed by experienced management teams who aid in working through these economic challenges. At September 30, 2020, the total of these industries was $131.3 million, representing 20% of gross loans without PPP.

Throughout the last few quarters, the Bank has closely monitored the performance and status of loans within these industries. Despite the initial impact to these higher risk industries caused by required shut down measures taken at onset of crises as well as pandemic driven changes to certain client operating models, generally most customers have been able to successfully navigate the challenges faced by their businesses. Certain industries appear to be stabilizing, such as accommodation (hospitality) where clients have generally performed well through the summer and early fall months especially for those operators located in coastal markets benefiting from local Pacific Northwest consumers preferring to vacation closer to home. Animal production (primarily dairy) clients were negatively impacted by lower milk prices in early stages of the crises, but prices have since rebounded in the year along with financial benefits provided under several government programs. Retail trade portfolio is well diversified within the Banks geographic footprint with majority of business located in rural markets versus metropolitan areas that are experiencing domestic unrest or protests. Despite business re-openings and rising consumer spending, there continues to be challenges for selective retail trade credits and commercial real estate retail tenants.   A larger share of Bank’s restaurant clients are more focused on convenience food and quick service concepts that have performed well through-out the pandemic. Although encouraged by the general near term improvement, the Bank will continue its close monitoring of customer performance in higher risk industries.

Asset Quality deteriorated slightly during the quarter with nonperforming assets totaling $1.6 million, or 0.14% of total assets, at September 30, 2020, compared to $1.0 million, or 0.11%, of total assets at September 30, 2019, and $1.4 million, or 0.13%, of total assets at June 30, 2020. However, asset quality metrics remain very low by historical standards. At September 30, 2020, delinquent loans to gross loans, excluding PPP loans, were 0.0% at September 30, 2020, compared to 0.25% at September 30, 2019, and 0.03% at June 30, 2020. “While delinquencies and nonperforming assets remained low for the quarter, we recognize that the challenges and credit impacts related to the COVID-19 economic downturn may not be realized until later in the year or into next year,” added Portmann.

At September 30, 2020, adversely classified loans increased $5.4 million, to $13.4 million, or 2.06% of adversely classified loans to gross loans (excluding PPP), compared to $8.0 million, or 1.17% of gross loans, at September 30, 2019, and increased by $3.7 million from $9.8 million or 1.48% of gross loans (excluding PPP), at June 30, 2020. The increase from June 30, 2020 was largely due to the downgrade of three loan relationships totaling $4.2 million, all from different industries including transportation, tourism and agriculture (dairy). Although limited in impact, the pandemic crisis was a contributor to increase in adversely classified loans as these businesses struggled to adapt restrictive operating models to the new environment.

As of September 30, 2020, the classified coverage ratio was 11.59%, compared to 7.24% at September 30, 2019, and 8.27%, at June 30, 2020. As noted above, the increase from the linked quarter was primarily related to the downgrade of three relationships. 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.

The Allowance for Loan Losses (“ALL”) increased 33% to $12.0 million, or 1.54% of gross loans, or 1.85% of gross loans excluding PPP, at September 30, 2020, compared to $9.0 million, or 1.32% of gross loans, a year earlier and grew 4% from $11.5 million, or 1.75% of gross loans excluding PPP, at June 30, 2020. The provision for loan losses for the third quarter of 2020 was $500,000, compared to no provision for the third quarter of 2019, and $1.0 million provision for the second quarter of 2020. For the nine months ended September 30, 2020, the loan loss provision was $3.5 million, compared to no provision for the nine months ended September 30, 2019.   The increase in reserves during 2020 was driven primarily by increases in adversely classified and watch loan balances as a result of the economic impact of the Coronavirus pandemic, along with adjustments to various qualitative factors within the allowance methodology. Adjustment to certain qualitative factors were made in the third quarter to reflect greater risk associated with the potential of a coronavirus resurgence as the country heads into winter, along with a heightened level of uncertainty caused by a number of other factors related to the current political climate, expiration of existing government stimulus with no clear understanding of additional stimulus, and global recession. Net charge-offs for the third quarter of 2020 were minimal at $5,000, compared to $279,000 of net charge-offs for the preceding quarter which were unrelated to COVID-19 and $29,000 for the like quarter a year ago.   For the first nine months of 2020, net charge-offs were $491,000, compared to net charge-offs of $32,000 for the first nine months of 2019.  

Total Deposits increased 25% to $1.0 billion at September 30, 2020, compared to $816.1 million from a year earlier, and grew 3% from $995.0 million at June 30, 2020. The various forms of stimulus including PPP loan proceeds drove the growth in deposits for the current year, and despite those PPP monies seemingly being spent to earn PPP loan forgiveness, the lack of capital spending and higher rate of cash savings of both consumer and commercial clients, continued to drive higher deposit levels. “We continue to benefit from the deposit inflows from customers of PPP loan proceeds with the growth in non-interest-bearing deposits,” said Tucker. Non-interest-bearing deposits increased by 4% on a linked quarter basis and represented 35% of total deposits at September 30, 2020, while core deposits (consisting of non-interest-bearing, interest-bearing accounts, money market and savings accounts) accounted for 93% of total deposits.

Capital Ratios of Pacific Financial Corporation, and its subsidiary Bank of the Pacific, continue to exceed the well-capitalized regulatory thresholds. At September 30, 2020, Pacific Financial Corporation’s leverage ratio was 9.51% and the total risk-based capital ratio was 15.38%. 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.

LIQUIDITY

LOANS

DEPOSITS

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

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.