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
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 ResultsFirst 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 qualityProvision 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 OperationsNet 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 ReviewTotal 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.
LIQUIDITYLOANSDEPOSITSThe 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. ABOUT PACIFIC FINANCIAL CORPORATIONPacific 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 StatementsThis 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