Pacific Financial Corp Earns $3.8 Million, or $0.37 per Diluted Share, for the Fourth Quarter of 2020; Declares Quarterly Cash Dividend of $0.13 per Share
ABERDEEN, Wash., Jan. 26, 2021 (GLOBE NEWSWIRE) — Pacific Financial Corporation (OTCQX: PFLC), (“Pacific Financial” or the “Company”), the holding company for Bank of the Pacific (the “Bank”), today reported net income of $3.8 million, or $0.37 per diluted share for the fourth quarter of 2020, compared to $3.4 million, or $0.32 per diluted share for the fourth quarter of 2019, and $3.9 million, or $0.37 per diluted share for the third quarter of 2020. For the year ended December 31, 2020, net income was $11.4 million, or $1.07 per diluted share, compared to $13.8 million, or $1.29 per diluted share, for the year ended December 31, 2019. All results are unaudited. The board of directors of Pacific Financial declared a quarterly cash dividend of $0.13 per share on January 20, 2021. The dividend will be payable on February 24, 2021, to shareholders of record on February 10, 2021.“Despite the economic challenges brought on by the pandemic, our earnings for the fourth quarter and full year 2020 were solid, boosted by a robust mortgage banking business, as we continued to support customers’ home financing and re-financing needs,” said Denise Portmann, President and Chief Executive Officer. “In addition, we continued 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 and $3.3 million recognized for the fourth quarter and during the year, respectively. We plan on participating in the new round of PPP beginning the first quarter of 2021.” “Credit quality remains solid, and although we did experience some increase in adversely classified and nonperforming loans during the quarter, levels remain low. A majority of loans granted payment deferrals have resumed payments, with less than $2 million of loans under deferment at year end. This resumption of payments allowed us to upgrade several credits resulting in watch loan balances decreasing $13.2 million during the quarter. In prior quarters of 2020, the Bank proactively provisioned $3.5 million for potential credit losses on loans due to the COVID-19 impact and a projected slowing economy, however based on current credit quality and our ALLL methodology, no additional provision was provided for during the fourth quarter,” said Portmann.Pacific Financial continues to buy back shares under the program announced in early 2020 and as of December 31, 2020, has repurchased a total of 214,008 shares or $1.8 million. “We believe this is an excellent way to build long-term value for our shareholders,” said Portmann. All regulatory ratios continue to be in excess of “well-capitalized” requirements with a leverage ratio of 9.52% and a total risk-based capital ratio of 16.01% at December 31, 2020. COVID-19 Pandemic UpdateBranches and Operations: Bank branch lobbies remain open with pandemic safety protocols in place. 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, while, where practicable, many of our staff in back-office functions 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. During the year, the Bank funded 748 applications for a total of $130.8 million. At year end, the Bank had submitted 255, or $51.5 million, in loan forgiveness applications for our customers and by December 31, 2020 had received $35.2 million in funds relating to those forgiveness applications. At year end PPP loans totaled $96.1 million. It is our intent to participate in the second round of PPP beginning in the first quarter of 2021.
Loan Payment Deferrals: In March 2020, the Company began providing 90-day payment deferrals to customers adversely impacted by operating restrictions due to COVID-19. During the third and fourth quarters, the Company 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. As of December 31, 2020, deferrals totaled $1.9 million, compared to $16.8 million as of September 30, 2020.
Fourth quarter 2020 Financial Highlights (as of, or for the period ended December 31, 2020, except as noted):Net income was $3.8 million, or $0.37 per diluted share, for the fourth quarter of 2020, compared to $3.4 million, or $0.32 per diluted share, for the fourth quarter a year ago, and $3.9 million, or $0.37 per diluted share, for the third quarter of 2020.Annualized pre-tax pre-provision return on assets (non-GAAP) was 1.65% for the fourth quarter of 2020, compared to 1.80% for the fourth quarter a year ago, and 1.89% for the third quarter of 2020.Annualized pre-tax pre-provision return on equity (non-GAAP) was 16.93% for the fourth quarter of 2020, compared to 16.17% for the fourth quarter of 2019, and 19.24% for the third quarter of 2020.There was no provision for loan losses for the fourth quarter of 2020 nor the fourth quarter of 2019, compared to a provision of $500,000 in the third quarter of 2020. Net interest margin (“NIM”) was 3.53% including SBA PPP loans, and 3.27% excluding SBA PPP loans, for the fourth quarter of 2020, compared to 4.31% for the fourth quarter of 2019, with no PPP loans. For the preceding quarter, NIM was 3.49%, including SBA PPP loans and 3.53%, excluding SBA PPP loans. Industry peer NIM was 3.29% at September 30, 2020. [Industry peers comprise of approximately 476 banks in the SNL Microcap U.S. Bank Index.] Noninterest income for the fourth quarter of 2020 increased 48% over the like quarter a year ago. Total deposits increased by $229.8 million, or 29%, to $1.03 billion at December 31, 2020, compared to $798.6 million at December 30, 2019, and increased by $5.1 million from $1.02 billion at September 30, 2020. Non-interest-bearing deposits grew by 40% from a year ago and represented 33% of total deposits, at December 31, 2020.Gross loans increased by $46.8 million, or 7%, to $732.0 million at December 31, 2020, compared to $685.3 million at December 30, 2019, and decreased by $47.8 million, or 6%, from $779.8 million at September 30, 2020. Included in total loans for the current quarter were 578 PPP loans totaling $96.1 million. Shareholder equity increased 8% to $114.2 million from the fourth quarter a year ago and grew 2% from the linked quarter. Book value per share increased 11% to $10.94 from a year earlier and grew 3% from the third quarter of 2020.Results of OperationsNet income was $3.8 million for the fourth quarter of 2020, compared to $3.4 million for the fourth quarter a year ago, and $3.9 million for third quarter of 2020. For the year ended December 31, 2020, net income was $11.4 million, compared to $13.8 million for the year ended December 31, 2019.Diluted earnings per share were $0.37 for the fourth quarter of 2020, compared to $0.32 per diluted share for the fourth quarter of 2019, and $0.37 for the third quarter of 2020. For the year ended December 31, 2020, diluted earnings per share were $1.07, compared to $1.29 for the year ended December 31, 2019.Net interest income, before provision for loan losses, was $9.7 million for the fourth quarter of 2020, compared to $9.5 million for the fourth quarter a year ago, and $9.4 million for third quarter of 2020. The growth, both from a year ago and on a linked quarter basis, was primarily due to PPP fee income. For the year ended December 31, 2020, net interest income was $37.2 million compared to $38.6 million for 2019. Included in net interest income for the year ended December 31, 2020, was $3.3 million in fees and interest on PPP loans, compared to none in 2019. For the fourth quarter 2020, PPP fees and interest totaled $1.6 million compared to $1.0 million for the linked quarter and $0 for 2019.The net interest margin (“NIM”) including PPP loans increased 4 basis points during the current quarter compared to the linked quarter. NIM was 3.53% for the fourth quarter of 2020, compared to 4.31% for the fourth quarter 2019, and 3.49% for the third quarter of 2020. For the year ended December 31, 2020, the NIM was 3.73% compared to 4.57% for prior year. The low interest rate environment combined with the impact of low loan yields on SBA PPP loans and growth in core deposits resulting in significant growth in low yielding federal funds sold, adversely impacted the net interest margin for 2020 compared to 2019. 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 September 30, 2020(1). (1)As of September 30, 2020, the SNL Micro Cap US Bank Index tracked 476 banks with total common market capitalization less than $250 million with an average for NIM of 3.29%.During the fourth quarter yields on average interest-earning assets remained relatively unchanged, increasing 2 basis points to 3.71% from 3.69% for the linked quarter, and decreasing 93 basis points from the fourth quarter a year ago. For the year ended December 31, 2020, the yield on average interest-earning assets decreased 95 basis points to 3.97% compared to 4.92% for the year ended December 31, 2019. Average loan yields increased 28 basis points to 4.88% in the fourth quarter 2020 compared to 4.60% in the linked quarter and decreased 42 basis points compared to 5.30% a year ago. Average loan yield including PPP loans and PPP interest and fee can vary on a quarterly basis, as the amortization of PPP fees are typically higher in quarters with higher forgiveness or payoff of PPP loans, thus increasing the average loan yield. As such, overall average loan yields are impacted. During the current quarter, the impact of PPP loan yields increased overall loan yields by 18 basis points, while in the third quarter 2020, the impact of PPP loan yields decreased overall loan yield by 27 basis points. For 2020, the impact of PPP loan yields decreased overall loan yields by 13 basis points. The Bank’s total cost of funds continued to decrease during the fourth quarter to 0.19% from 0.22% for the third quarter of 2020 and compared to 0.35% for the fourth quarter a year ago. For the year ended December 31, 2020, the cost of funds was 0.25% compared to 0.36% for the year ended December 31, 2019. Included in the reduction was a decrease in the borrowing rate on the Company’s junior subordinated debentures to 1.81% for the current quarter compared to 3.64% for the like quarter a year ago and 1.89% for the third quarter of 2020.Provision for loan losses – The Bank recorded zero provision for loan losses for the fourth quarter of 2020 and 2019, compared to a provision of $500,000 for the third quarter of 2020. For the year ended December 31, 2020, the provision for loan losses totaled $3.5 million, compared to no provision for the year ended December 31, 2019. Noninterest income increased 48%, or $1.9 million, to $5.8 million for the fourth quarter of 2020, compared to $3.9 million for the fourth quarter 2019, and declined by 5%, or $277,000, for the third quarter of 2020. The year-over-year increase in noninterest income in the current quarter was primarily due to the 82%, or $1.8 million, increase in the gain on sale of loans to $4.0 million in the fourth quarter of 2020, from $2.2 million for the fourth quarter a year earlier. Fee income was up 13% to $1.1 million for the fourth quarter of 2020, compared to $992,000 for the fourth quarter of 2019, and declined by $15,000 from the linked quarter. For the year ended December 31, 2020, noninterest income increased by 45%, or $6.3 million, to $20.1 million, compared to $13.9 million for the year ended December 31, 2019, mainly due to the 91% increase in gain on sale of loans from 2019.Noninterest expenses rose 18% to $10.6 million for the fourth quarter of 2020, compared to $9.1 million for the fourth quarter of 2019 and increasing 7% from $10.0 million for the third quarter of 2020. For the year ended December 31, 2020, noninterest expense was $39.6 million, compared to $35.6 million for 2019. The increase in noninterest expense in the current quarter was primarily due to an increase in salary and employee benefits including increased mortgage banking variable compensation, which was partially offset by reductions in communication and professional services expenses. As with the current quarter, for the year ended December 31, 2020, noninterest expenses increased with the majority of the increase related to salary and employee benefits including higher variable commission on mortgage banking, as well as costs associated with the I-5 corridor expansion into the Eugene market and the growing Willamette Valley. Similar to the quarter, these increases were partially offset by reduction in professional services, occupancy, and advertising expenses.Income tax provision was $991,000 for the fourth quarter of 2020, compared to $836,000 for the fourth quarter 2019 and $1.0 million for the third quarter of 2020. The effective tax rate for the fourth quarter of 2020 was 20.5%, compared to 19.5% for the fourth quarter of 2019, and 20.4% for the third quarter of 2020. For the year ended December 31, 2020 the income tax provision was $2.9 million, down 11% from $3.2 million for the year ended December 31, 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 remained unchanged at $1.2 billion as of December 31, 2020 compared to September 30, 2020, with a significant increase of 26% from $929.4 million at December 30, 2019.Investment Securities, interest bearing deposits and federal funds sold increased $169.0 million to $341.1 million at December 31, 2020, compared to $172.1 million at December 30, 2019, and increased by $58.1 from $283.0 million at September 30, 2020. Within that total federal funds sold and interest bearing deposits increased $147.0 million compared to a year ago. This increase was primarily related to increases in deposits from PPP loan proceeds and other stimulus deposits received by our customers during the year, in addition to the receipt of funds from the SBA relating to the forgiveness of our customer’s PPP loans during the current quarter. Gross Loans increased 7%, or $46.8 million, to $732.0 million at December 31, 2020, compared to $685.3 million at December 30, 2019, and declined 6% from $779.8 million at September 30, 2020. Total loans at December 31, 2020, included $96.1 million of PPP loans compared to $130.7 million at September 30, 2020. Loan balances, excluding PPP loans, declined $49.3 million on a year over year basis, and was impacted by commercial and agricultural lines of credit usage which has declined by 18%, or $25.0 million, at December 31, 2020, compared to December 31, 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 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 December 31, 2020, CRE concentration remained relatively unchanged at 182% of total risk-based capital; below the regulatory guidance limit of 300%. Commercial and agricultural loans together with CRE-owner occupied, accounted for 41% of total loans outstanding (excluding PPP loans) at December 31, 2020, compared to 40% at December 30, 2019. CRE non-owner occupied and multifamily concentrations totaled $196.7 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 $44.7 million, $37.0 million and $31.6 million, respectively.On the consumer side, loans to finance luxury and classic cars, which encompass a majority of the consumer loan balances, were relatively flat during the current quarter, ending at $46.5 million compared to $45.8 million at September 30, 2020, and represented a decline of $1.7 million from $48.2 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 December 31, 2020 the luxury and classic car portfolio includes 871 loans with an average balance of $54,600. The portfolio continues to perform well with delinquencies at $118,000, or 2 basis points of the loans to finance luxury and classic car portfolio. 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 December 31, 2020, the total of these industries was $128.9 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 reasonably 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 crisis, but prices have since rebounded 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. There continues to be pandemic driven 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 acceptably well through-out the pandemic. The identified groups of higher risk industries may change over time as conditions improve or worsen. Nonetheless, the Bank will continue its close monitoring of customer performance in these higher risk industries.
Asset Quality – Nonperforming assets totaled $2.4 million, or 0.20% of total assets, at December 31, 2020, compared to $1.0 million, or 0.11%, of total assets at December 30, 2019, and $1.6 million, or 0.14%, of total assets at September 30, 2020. “While delinquencies and nonperforming assets remained low for the quarter, we recognize that the challenges and credit impacts related to the pandemic economic downturn may not be realized until next year,” added Portmann.At December 31, 2020, adversely classified loans increased $5.0 million, to $16.8 million, or 2.64% of adversely classified loans to gross loans (excluding PPP), compared to $11.7 million, or 1.71% of gross loans, at December 31, 2019, and increased by $3.4 million from $13.4 million or 2.06% of gross loans (excluding PPP), at September 30, 2020. The increase from September 30, 2020 was largely due to the downgrade of a credit within the hospitality industry where the pandemic crisis was a contributing factor to business performance. Conversely, balances related to loans graded watch or other loans especially mentioned, declined $13.2 during the quarter to $109.3 million, as several credits were upgraded upon resumption of payments after being deferred early in the year.The classified coverage ratio was 13.77%, at December 31, 2020, compared to 10.38% at December 30, 2019, and 11.59%, at September 30, 2020. The increase from the linked quarter was primarily related to the hospitality credit downgrade. 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 34% to $12.1 million, or 1.65% of gross loans, or 2.01% of gross loans excluding PPP, at December 31, 2020, compared to $9.0 million, or 1.31% of gross loans, a year earlier and grew slightly from $12.0 million, or 1.85% of gross loans excluding PPP, at September 30, 2020. There was no provision for loan losses for the fourth quarter of 2020, or for the fourth quarter of 2019, compared to a provision for loan losses of $500,000 for the third quarter of 2020. For the year ended December 31, 2020, the loan loss provision totaled $3.5 million, compared to no provision for the year ended December 31, 2019. The increase in reserves during 2020 was driven primarily by increases earlier in the year 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. No adjustment to qualitative factors were made in the fourth quarter of 2020. Net recoveries were $66,000 for the fourth quarter of 2020, as compared to net charge offs of $24,000 for the fourth quarter of 2019 and $5,000 for the third quarter of 2020. For the year ended December 31, 2020, net charge-offs were $425,000, compared to net charge-offs of $56,000 for the year ended December 31, 2019. Total Deposits increased 29% to $1.03 billion at December 31, 2020, compared to $798.6 million from a year earlier, and grew slightly from $1.02 billion at September 30, 2020. “We benefitted from deposit inflows from customers receiving PPP loan proceeds with the growth in non-interest-bearing deposits as well as increases relating to changes in spending habits during this pandemic,” said Tucker. Non-interest-bearing deposits increased by 40% from a year ago and represented 33% of total deposits at December 31, 2020, while core deposits (consisting of non-interest-bearing, interest-bearing accounts, money market and savings accounts) account for 94% 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 December 31, 2020, Pacific Financial Corporation’s leverage ratio was 9.52% and the total risk-based capital ratio was 16.01%. 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 table summarizes the capital measures of the Company and the Bank respectively, at the dates listed below.
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 December 31, 2020, the Company had total assets of $1.2 billion 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
360.533.8873
