ABERDEEN, Wash., Oct. 23, 2018 (GLOBE NEWSWIRE) -- Pacific Financial Corporation (OTCQB: PFLC), the holding company for Bank of the Pacific, today reported net income increased 22% to $3.2 million, or $0.30 per diluted share, for the third quarter of 2018, compared to $2.6 million, or $0.25 per diluted share, for the second quarter of 2018 and increased 48% compared to $2.2 million, or $0.20 per diluted share, for the third quarter of 2017. For the first nine months ended September 30, 2018, net income was $8.1 million, or $0.76 per diluted share, up 44% from $5.6 million, or $0.53 per diluted share, for the first nine months of 2017.
“We again delivered record profits for the quarter highlighted by a stronger net interest margin of 4.55% boosted by improving yields on loans, strong core deposit growth and minimal increases in cost of funds. Income before taxes was up 23% from the linked quarter, while our net interest income grew 6% from the second quarter and increased 11% year-over-year,” said Denise Portmann, President & Chief Executive Officer. “While the continued growth in our profitability benefitted from the recent reduction in the corporate tax rate, initiatives introduced over the past year have enhanced workflows, improved revenue and augmented operating efficiencies.
“Credit quality remains solid aided by a large pay off during the quarter of $710,000 non-accrual commercial loan. Consequently, no provision for loan losses was booked for the current quarter. Our risk management parameters continue to govern our prudent underwriting standards. We carefully monitor loan concentrations to stay well within regulatory guidelines, particularly in commercial real estate. Residential mortgage lending contributed $1.2 million to noninterest income during the quarter, up 9% from the revenue earned in the prior quarter, but down 17% from the amount for same quarter last year. Rising interest rates and tight housing supply are dampening home financing activities within our markets.
“We recently announced the closure of two branch locations in Naselle, WA. and Warrenton, OR., effective February 1, 2019,” said Portmann. “Customers are increasingly using our technology-based banking services such as mobile banking, remote deposit capture, ATMs, debit cards and online banking to meet their banking needs. Optimizing our branch network plays a significant role in allocating capital resources. We expect to achieve annualized reduction in operating costs of approximately $437,000, offset by a one-time charge estimated at $60,000 for severance costs and write-down of fixed assets. We are purposefully redeploying resources to enhance training and technology to broaden the skillsets of our staff and expand our product offerings.”
Financial Highlights (as of, or for the period ended September 30, 2018, except as noted):
- Diluted earnings per share increased 20% to $0.30, compared to $0.25 for the second quarter of 2018, and 50% from $0.20 for the third quarter of 2017. Diluted earnings per share grew 43% to $0.76 for the first nine months of 2018, compared to $0.53 per diluted share for the first nine months of 2017.
- Income before tax increased 23% to $3.9 million, compared to $3.2 million for the second quarter of 2018 and increased 29% compared to $3.0 million for the third quarter of 2017. Income before tax increased 25% to $9.7 million for the first nine months of 2018, compared to $7.8 million for the first nine months of 2017.
- Return on average assets (“ROAA”) increased to 1.38% and return on average equity (“ROAE”) increased to 13.89%, compared to 1.19% and 11.94%, respectively, for the second quarter of 2018, and 0.96% and 9.90%, respectively, for the third quarter of 2017. ROAA increased to 1.21% and ROAE increased to 12.23%, compared to 0.86% and 8.97%, for the first nine months of 2018 and 2017, respectively.
- Net interest income increased 6% to $9.6 million, compared to $9.1 million for the second quarter of 2018 and increased 11% compared to $8.7 million for the third quarter of 2017. Net interest income totaled $27.7 million for the first nine months of 2018, compared to $25.1 million for the first nine months of 2017.
- Net interest margin on a tax equivalent basis (“NIMTE”), expanded 4 basis points to 4.55%, compared to 4.51% in the preceding quarter and improved 26 basis points from 4.29% for the third quarter of 2017. Net interest margin on a tax equivalent basis (“NIMTE”), expanded 22 basis points to 4.50% for the first nine months of 2018, compared to 4.28% for the first nine months of 2017, reflecting improving yields on interest earning assets and slower growth in cost of funds. At June 30, 2018, industry peer NIM was 3.75%. [Industry peers are the 474 banks that comprised the SNL Microcap U.S. Bank Index, as at June 30, 2018.]
- Gross loans declined to $693.1 million versus $704.3 million, at June 30, 2018, and $681.7 million at September 30, 2017.
- Total deposits grew to $815.2 million, compared to $767.5 million at June 30, 2018, and $798.0 million at September 30, 2017. Non-interest-bearing deposits comprise 32% of total deposits.
- Asset quality remains solid:
- Loans 30 – 89 days’ delinquent, not on nonaccrual status, were minimal at 0.18% of gross loans outstanding.
- Net charge-offs totaled $76,000, or 0.04% of average gross loans in the third quarter of 2018, compared to net recoveries of $2,000 in the second quarter of 2018, and net charge-offs of $28,000, or 0.02% of average gross loans, in the third quarter of 2017.
- Nonperforming assets were $746,000, or 0.08% of total assets, as compared to $1.5 million, or 0.16% of total assets at June 30, 2018, and $2.6 million, or 0.28% of total assets at September 30, 2017.
- Adversely classified loans were $7.8 million, or 1.12% of gross loans, versus $9.3 million, or 1.32% of gross loans, at June 30, 2018, and $11.4 million, or 1.67% of gross loans, at September 30, 2017.
- There was no provision for loan losses for both the second and third quarters of 2018. Provision expense of $150,000 was incurred in the third quarter of 2017. No provision expense was incurred for the first nine months of 2018. Provision expense of $272,000 was incurred for the first nine months of 2017.
- The allowance for loan losses to gross loans stood at 1.31% at September 30, 2018, 1.30% at June 30, 2018, and 1.35% at September 30, 2017.
- The Company’s consolidated capital ratios exceeded regulatory guidelines, and the Bank’s capital ratios exceeded the regulatory guidelines for a well-capitalized financial institution under current regulatory requirements.
Operating Results
Total assets increased from the linked quarter, due to seasonal deposit inflows, which are typical of tourism markets in coastal Washington and Oregon. This increase is despite the withdrawal of $12 million in deposits in the linked quarter associated with a relationship for which the Bank declined to offer a credit facility as requested. Loans declined during the period primarily due to the payoff of several large non-owner occupied commercial real estate loans and the seasonal reduction in commercial lines of credit balances. Total assets were up slightly year-over-year, primarily due to the increase in loans and interest-bearing cash equivalents funded by growth in deposits and retained earnings. Liquidity remains strong, including unused borrowing capacity. Capital ratios continue to exceed the thresholds to be considered “Well-Capitalized” under published regulatory standards.
| Balance Sheet Overview | ||||||||||||||||||||||
| (Unaudited) | ||||||||||||||||||||||
| Sept 30, 2018 | June 30, 2018 | $ Change | % Change | Sept 30, 2017 | $ Change | % Change | ||||||||||||||||
| Assets: | (Dollars in thousands, except per share data) | |||||||||||||||||||||
| Cash and cash equivalents | $ | 80,121 | $ | 16,295 | $ | 63,826 | 392 | % | $ | 66,545 | $ | 13,576 | 20 | % | ||||||||
| Other interest earning deposits | 994 | 994 | - | 0 | % | 1,490 | (496 | ) | -33 | % | ||||||||||||
| Investment securities | 104,343 | 107,203 | (2,860 | ) | -3 | % | 111,159 | (6,816 | ) | -6 | % | |||||||||||
| Loans held-for-sale | 7,745 | 7,749 | (4 | ) | 0 | % | 9,505 | (1,760 | ) | -19 | % | |||||||||||
| Loans, net of deferred fees | 692,092 | 703,272 | (11,180 | ) | -2 | % | 680,514 | 11,578 | 2 | % | ||||||||||||
| Allowance for loan losses | (9,067 | ) | (9,143 | ) | 76 | -1 | % | (9,212 | ) | 145 | -2 | % | ||||||||||
| Net loans | 683,025 | 694,129 | (11,104 | ) | -2 | % | 671,302 | 11,723 | 2 | % | ||||||||||||
| Federal Home Loan Bank and Pacific Coast Bankers' Bank stock, at cost | 2,409 | 2,453 | (44 | ) | -2 | % | 2,410 | (1 | ) | 0 | % | |||||||||||
| Other assets | 58,455 | 58,338 | 117 | 0 | % | 58,991 | (536 | ) | -1 | % | ||||||||||||
| Total assets | $ | 937,092 | $ | 887,161 | $ | 49,931 | 6 | % | $ | 921,402 | $ | 15,690 | 2 | % | ||||||||
| Liabilities and Shareholders' Equity: | ||||||||||||||||||||||
| Total deposits | $ | 815,153 | $ | 767,547 | $ | 47,606 | 6 | % | $ | 798,044 | $ | 17,109 | 2 | % | ||||||||
| Borrowings | 21,794 | 22,896 | (1,102 | ) | -5 | % | 21,944 | (150 | ) | -1 | % | |||||||||||
| Accrued interest payable and other liabilities | 8,806 | 8,102 | 704 | 9 | % | 14,790 | (5,984 | ) | -40 | % | ||||||||||||
| Shareholders' equity | 91,339 | 88,616 | 2,723 | 3 | % | 86,624 | 4,715 | 5 | % | |||||||||||||
| Total liabilities and shareholders' equity | $ | 937,092 | $ | 887,161 | $ | 49,931 | 6 | % | $ | 921,402 | $ | 15,690 | 2 | % | ||||||||
| Common Stock Shares Outstanding | 10,565,034 | 10,562,593 | 2,441 | 0 | % | 10,479,475 | 85,559 | 1 | % | |||||||||||||
| Book value per common share (1) | $ | 8.65 | $ | 8.39 | $ | 0.26 | 3 | % | $ | 8.27 | $ | 0.38 | 5 | % | ||||||||
| Tangible book value per common share (2) | $ | 7.37 | $ | 7.11 | $ | 0.26 | 4 | % | $ | 6.98 | $ | 0.39 | 6 | % | ||||||||
| Gross loans to deposits ratio | 84.9 | % | 91.6 | % | -6.7 | % | 85.3 | % | -0.4 | % | ||||||||||||
| (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. | ||||||||||||||||||||||
Net interest income increased on a linked quarter basis, largely due to an increase in earning asset (primarily loan) yields, which outpaced growth in funding costs as a result of the recent rise in interest rates. Similarly, net interest income increased from the like quarter a year ago and from the first nine months of 2017, primarily as a result of the impact of rising interest rates in earning asset yields.
Interest expense increased from the second quarter of 2018 and third quarter a year ago, due to rate increases in non-maturity deposits, LIBOR-based junior subordinated debentures and public funds during the periods. This was partially offset by non-renewal of higher-cost brokered certificates of deposit. Interest expense increased for the nine months of 2018 as compared to the same period in 2017 for similar reasons.
Pre-tax, pre-credit operating income (non-GAAP) for the third quarter of 2018 increased from the preceding quarter, primarily due to growth in net interest income and gain on sale of real estate loans. Noninterest expenses declined from the linked quarter chiefly from reductions in compensation and data processing costs. Gain on sale of real estate loans was down as compared to the prior periods, reflecting rising interest rates and tight housing supply that have impacted mortgage loan production. Noninterest income for the first nine months of 2018 was down versus the same period in 2017. This was primarily due to the decline in gain on sale of real estate loans cited above and one-time income of $340,000 earned from the sale of commercial loans and monetized fees from pricing of loans over the swap curve in the second quarter of 2017. This was partially mitigated by increases in deposit service charges and related fee income in the current period. Noninterest expenses for the first nine months of 2018 grew compared to the like period in 2017, as increases in compensation and technology expense were offset by a decline in professional fees paid to a firm providing process improvement consulting in the second quarter of 2017.
| Income Statement Overview | ||||||||||||||||||||||
| (Unaudited) | ||||||||||||||||||||||
| For the Three Months Ended, | ||||||||||||||||||||||
| Sept 30, 2018 | June 30, 2018 | $ Change | % Change | Sept 30, 2017 | $ Change | % Change | ||||||||||||||||
| (Dollars in thousands, except per share data) | ||||||||||||||||||||||
| Interest and dividend income | $ | 10,337 | $ | 9,741 | $ | 596 | 6 | % | $ | 9,283 | $ | 1,054 | 11 | % | ||||||||
| Interest expense | 686 | 624 | 62 | 10 | % | 594 | 92 | 15 | % | |||||||||||||
| Net interest income | 9,651 | 9,117 | 534 | 6 | % | 8,689 | 962 | 11 | % | |||||||||||||
| Loan loss provision | - | - | - | 0 | % | 150 | (150 | ) | 0 | % | ||||||||||||
| Noninterest income | 2,648 | 2,649 | (1 | ) | 0 | % | 2,662 | (14 | ) | -1 | % | |||||||||||
| Noninterest expense | 8,392 | 8,580 | (188 | ) | -2 | % | 8,164 | 228 | 3 | % | ||||||||||||
| Income before income taxes | 3,907 | 3,186 | 721 | 23 | % | 3,037 | 870 | 29 | % | |||||||||||||
| Income tax expense | 724 | 570 | 154 | 27 | % | 884 | (160 | ) | -18 | % | ||||||||||||
| Net Income | $ | 3,183 | $ | 2,616 | $ | 567 | 22 | % | $ | 2,153 | $ | 1,030 | 48 | % | ||||||||
| Average common shares outstanding - basic | 10,563,104 | 10,555,340 | 7,764 | 0 | % | 10,456,923 | 106,181 | 1 | % | |||||||||||||
| Average common shares outstanding - diluted | 10,685,274 | 10,673,808 | 11,466 | 0 | % | 10,630,969 | 54,305 | 1 | % | |||||||||||||
| Income per common share | ||||||||||||||||||||||
| Basic | $ | 0.30 | $ | 0.25 | $ | 0.05 | 20 | % | $ | 0.21 | $ | 0.09 | 43 | % | ||||||||
| Diluted | $ | 0.30 | $ | 0.25 | $ | 0.05 | 20 | % | $ | 0.20 | $ | 0.10 | 50 | % | ||||||||
| Effective tax rate | 18.5 | % | 17.9 | % | 0.6 | % | 29.1 | % | -10.6 | % | ||||||||||||
| For the Nine Months Ended, | ||||||||||||||||||||||
| Sept 30, 2018 | Sept 30, 2017 | $ Change | % Change | |||||||||||||||||||
| (Dollars in thousands, except per share data) | ||||||||||||||||||||||
| Interest and dividend income | $ | 29,541 | $ | 26,950 | $ | 2,591 | 10 | % | ||||||||||||||
| Interest expense | 1,890 | 1,802 | 88 | 5 | % | |||||||||||||||||
| Net interest income | 27,651 | 25,148 | 2,503 | 10 | % | |||||||||||||||||
| Loan loss provision | - | 272 | (272 | ) | -100 | % | ||||||||||||||||
| Noninterest income | 7,622 | 7,804 | (182 | ) | -2 | % | ||||||||||||||||
| Noninterest expense | 25,529 | 24,870 | 659 | 3 | % | |||||||||||||||||
| Income before income taxes | 9,744 | 7,810 | 1,934 | 25 | % | |||||||||||||||||
| Income tax expense | 1,658 | 2,205 | (547 | ) | -25 | % | ||||||||||||||||
| Net Income | $ | 8,086 | $ | 5,605 | $ | 2,481 | 44 | % | ||||||||||||||
| Average common shares outstanding - basic | 10,546,315 | 10,441,726 | 104,589 | 1 | % | |||||||||||||||||
| Average common shares outstanding - diluted | 10,672,184 | 10,641,876 | 30,308 | 0 | % | |||||||||||||||||
| Income per common share | ||||||||||||||||||||||
| Basic | $ | 0.77 | $ | 0.54 | $ | 0.23 | 43 | % | ||||||||||||||
| Diluted | $ | 0.76 | $ | 0.53 | $ | 0.23 | 43 | % | ||||||||||||||
| Effective tax rate | 17.0 | % | 28.2 | % | -11.2 | % | ||||||||||||||||
The following tables provide the reconciliation of net income to pre-tax, pre-credit operating income (non-GAAP):
| Reconciliation of Non-GAAP Measure | |||||||||||||||||||
| (Unaudited) | |||||||||||||||||||
| For the Three Months Ended, | |||||||||||||||||||
| Sept 30, 2018 | June 30, 2018 | $ Change | % Change | Sept 30, 2017 | $ Change | % Change | |||||||||||||
| Non-GAAP Operating Income | (Dollars in thousands) | ||||||||||||||||||
| Net Income | $ | 3,183 | $ | 2,616 | $ | 567 | 22 | % | $ | 2,153 | $ | 1,030 | 48 | % | |||||
| Loan loss provision | - | - | - | 0 | % | 150 | (150 | ) | -100 | % | |||||||||
| Loss on sale of other real estate owned, net | - | - | - | 0 | % | - | - | 0 | % | ||||||||||
| Loss on real estate owned, net | - | - | - | 0 | % | - | - | 0 | % | ||||||||||
| Income tax expense | 724 | 570 | 154 | 27 | % | 884 | (160 | ) | -18 | % | |||||||||
| Pre-tax, pre-credit operating income | $ | 3,907 | $ | 3,186 | $ | 721 | 23 | % | $ | 3,187 | $ | 720 | 23 | % | |||||
| For the Nine Months Ended, | |||||||||||||||||||
| Sept 30, 2018 | Sept 30, 2017 | $ Change | % Change | ||||||||||||||||
| Non-GAAP Operating Income | (Dollars in thousands) | ||||||||||||||||||
| Net Income | $ | 8,086 | $ | 5,605 | $ | 2,481 | 44 | % | |||||||||||
| Loan loss provision | - | 272 | (272 | ) | -100 | % | |||||||||||||
| Loss on sale of other real estate owned, net | - | 47 | (47 | ) | -100 | % | |||||||||||||
| Loss on real estate owned, net | - | 34 | (34 | ) | -100 | % | |||||||||||||
| Income tax expense | 1,658 | 2,205 | (547 | ) | -25 | % | |||||||||||||
| Pre-tax, pre-credit operating income | $ | 9,744 | $ | 8,163 | $ | 1,581 | 19 | % | |||||||||||
Noninterest Income
Noninterest income remained unchanged as compared to the linked quarter, with increases in gain on sale of real estate mortgage loans offset by declines in deposit service charges and fee income from ATM/debit card activity. However, noninterest income declined compared to the year-over-year quarter, mainly due to higher revenue from sale of residential mortgage loans in the prior period. For the first nine months of 2018, noninterest income declined versus the similar period in 2017, primarily due to factors noted above. Deposit service charges were increased earlier in the current year consistent with product pricing in the market. “Recent increases in mortgage rates have moderated demand for refinancing. Interest in purchase financing remains strong, with robust demand chasing a limited supply of housing in several of our Western Washington and Oregon markets. While the coastal communities and those along the I-5 corridor in Washington and Oregon are seeing notable activity, our lending exposure to the extremely vibrant greater Seattle and Portland markets is modest. Supply constraints from increased governmental regulations governing real estate development over the past several years, and resulting increases in housing prices, have dampened mortgage financing activity,” Portmann noted.
| Noninterest Income | ||||||||||||||||||||
| (Unaudited) | ||||||||||||||||||||
| For the Three Months Ended, | ||||||||||||||||||||
| Sept 30, 2018 | June 30, 2018 | $ Change | % Change | Sept 30, 2017 | $ Change | % Change | ||||||||||||||
| (Dollars in thousands) | ||||||||||||||||||||
| Service charges on deposits | $ | 504 | $ | 528 | $ | (24 | ) | -5 | % | $ | 456 | $ | 48 | 11 | % | |||||
| Net loss on sale of other real estate owned, net | - | - | - | 0 | % | - | - | 0 | % | |||||||||||
| Gain on sale of loans, net | 1,155 | 1,063 | 92 | 9 | % | 1,398 | (243 | ) | -17 | % | ||||||||||
| Gain on sale of securities available for sale, net | - | - | - | 0 | % | - | - | 0 | % | |||||||||||
| Earnings on bank owned life insurance | 108 | 106 | 2 | 2 | % | 110 | (2 | ) | -2 | % | ||||||||||
| Other noninterest income | ||||||||||||||||||||
| Fee income | 871 | 910 | (39 | ) | -4 | % | 672 | 199 | 30 | % | ||||||||||
| Other | 10 | 42 | (32 | ) | -76 | % | 26 | (16 | ) | -62 | % | |||||||||
| Total noninterest income | $ | 2,648 | $ | 2,649 | $ | (1 | ) | 0 | % | $ | 2,662 | $ | (14 | ) | -1 | % | ||||
| For the Nine Months Ended, | ||||||||||||||||||||
| Sept 30, 2018 | Sept 30, 2017 | $ Change | % Change | |||||||||||||||||
| (Dollars in thousands) | ||||||||||||||||||||
| Service charges on deposits | $ | 1,527 | $ | 1,382 | $ | 145 | 10 | % | ||||||||||||
| Gain on sale of other real estate owned, net | - | (47 | ) | 47 | -100 | % | ||||||||||||||
| Gain on sale of loans, net | 3,163 | 3,737 | (574 | ) | -15 | % | ||||||||||||||
| Gain on sale of securities available for sale, net | - | 79 | (79 | ) | -100 | % | ||||||||||||||
| Earnings on bank owned life insurance | 321 | 331 | (10 | ) | -3 | % | ||||||||||||||
| Other noninterest income | ||||||||||||||||||||
| Fee income | 2,520 | 1,913 | 607 | 32 | % | |||||||||||||||
| Other | 91 | 409 | (318 | ) | -78 | % | ||||||||||||||
| Total noninterest income | $ | 7,622 | $ | 7,804 | $ | (182 | ) | -2 | % | |||||||||||
Noninterest Expense
Noninterest expenses declined from the linked quarter, primarily due to decreases in compensation, data processing and professional fee expenses. However, noninterest expenses grew versus the year-over-year quarter mainly due to increases in compensation expense from the addition of commercial lending production talent and expenses associated with additional investment in technology. These increases were partially offset by the completion of our process improvement program and the associated reduction in professional fees of $160,000 in second quarter of 2017. In addition, a portion of the tax expense savings from the recently enacted tax reform legislation was redeployed in the form of increased equipment and employee training investments during the current period. Data processing and software expense also increased versus the prior periods with the continued introduction of technology solutions to augment cyber-security and enhance productivity.
Noninterest expenses for the first nine months of 2018 grew compared to the like period in 2017, as increases in compensation and technology expense were offset by a decline in $547,000 in professional fees paid to a firm providing process improvement consulting, as noted above.
| Noninterest Expense | |||||||||||||||||||||
| (Unaudited) | |||||||||||||||||||||
| For the Three Months Ended, | |||||||||||||||||||||
| Sept 30, 2018 | June 30, 2018 | $ Change | % Change | Sept 30, 2017 | $ Change | % Change | |||||||||||||||
| (Dollars in thousands) | |||||||||||||||||||||
| Salaries and employee benefits | $ | 5,328 | $ | 5,380 | $ | (52 | ) | -1 | % | $ | 5,090 | $ | 238 | 5 | % | ||||||
| Occupancy | 524 | 528 | (4 | ) | -1 | % | 489 | 35 | 7 | % | |||||||||||
| Equipment | 255 | 263 | (8 | ) | -3 | % | 282 | (27 | ) | -10 | % | ||||||||||
| Data processing | 726 | 794 | (68 | ) | -9 | % | 581 | 145 | 25 | % | |||||||||||
| Professional services | 173 | 198 | (25 | ) | -13 | % | 330 | (157 | ) | -48 | % | ||||||||||
| Other real estate owned operating costs | - | (5 | ) | 5 | -100 | % | (1 | ) | 1 | -100 | % | ||||||||||
| State and local taxes | 131 | 127 | 4 | 3 | % | 195 | (64 | ) | -33 | % | |||||||||||
| FDIC and State assessments | 84 | 102 | (18 | ) | -18 | % | 115 | (31 | ) | -27 | % | ||||||||||
| Other noninterest expense: | |||||||||||||||||||||
| Director fees | 65 | 68 | (3 | ) | -4 | % | 64 | 1 | 2 | % | |||||||||||
| Communication | 73 | 86 | (13 | ) | -15 | % | 69 | 4 | 6 | % | |||||||||||
| Advertising | 82 | 93 | (11 | ) | -12 | % | 78 | 4 | 5 | % | |||||||||||
| Professional liability insurance | 49 | 45 | 4 | 9 | % | 48 | 1 | 2 | % | ||||||||||||
| Amortization | 92 | 103 | (11 | ) | -11 | % | 72 | 20 | 28 | % | |||||||||||
| Loss on real estate owned, net | - | - | - | 0 | % | - | - | 0 | % | ||||||||||||
| Other | 810 | 798 | 12 | 2 | % | 752 | 58 | 8 | % | ||||||||||||
| Total noninterest expense | $ | 8,392 | $ | 8,580 | $ | (188 | ) | -2 | % | $ | 8,164 | $ | 228 | 3 | % | ||||||
| For the Nine Months Ended, | |||||||||||||||||||||
| Sept 30, 2018 | Sept 30, 2017 | $ Change | % Change | ||||||||||||||||||
| (Dollars in thousands) | |||||||||||||||||||||
| Salaries and employee benefits | $ | 16,079 | $ | 15,384 | $ | 695 | 5 | % | |||||||||||||
| Occupancy | 1,601 | 1,521 | 80 | 5 | % | ||||||||||||||||
| Equipment | 840 | 837 | 3 | 0 | % | ||||||||||||||||
| Data processing | 2,122 | 1,722 | 400 | 23 | % | ||||||||||||||||
| Professional services | 562 | 1,133 | (571 | ) | -50 | % | |||||||||||||||
| Other real estate owned operating costs | 6 | 16 | (10 | ) | -63 | % | |||||||||||||||
| State and local taxes | 375 | 465 | (90 | ) | -19 | % | |||||||||||||||
| FDIC and State assessments | 320 | 343 | (23 | ) | -7 | % | |||||||||||||||
| Other noninterest expense: | |||||||||||||||||||||
| Director fees | 198 | 198 | - | 0 | % | ||||||||||||||||
| Communication | 229 | 199 | 30 | 15 | % | ||||||||||||||||
| Advertising | 246 | 242 | 4 | 2 | % | ||||||||||||||||
| Professional liability insurance | 141 | 142 | (1 | ) | -1 | % | |||||||||||||||
| Amortization | 286 | 200 | 86 | 43 | % | ||||||||||||||||
| Loss on real estate owned, net | - | 34 | (34 | ) | 0 | % | |||||||||||||||
| Other | 2,524 | 2,434 | 90 | 4 | % | ||||||||||||||||
| Total noninterest expense | $ | 25,529 | $ | 24,870 | $ | 659 | 3 | % | |||||||||||||
Income Tax Provision
For the second quarter of 2018, Pacific Financial recorded $724,000 in state and federal income tax expense for an effective tax rate of 18.5%. For the second quarter of 2018 tax expense was $570,000 for an effective tax rate of 17.9%, both reflecting the new lower federal corporate rate. For the third quarter of 2017, tax expense was $844,000, for an effective tax rate of 31.2%. Similarly, tax expense for the first nine months of 2018 was $1.7 million versus $2.2 million for the same period in 2017. In addition to the lower federal tax rates for the current period resulting from the Tax Cuts and Jobs Act enacted at the end of 2017, Pacific Financial also pays Oregon corporate income tax on profits and Washington Business and Occupation tax on revenues.
| Financial Performance Overview | ||||||||||||||||
| (Unaudited) | ||||||||||||||||
| For the Three Months Ended | ||||||||||||||||
| Sept 30, 2018 | June 30, 2018 | Change | Sept 30, 2017 | Change | ||||||||||||
| Performance Ratios | ||||||||||||||||
| Return on average assets, annualized | 1.38 | % | 1.19 | % | 0.19 | 0.96 | % | 0.42 | ||||||||
| Return on average equity, annualized | 13.89 | % | 11.94 | % | 1.95 | 9.90 | % | 3.99 | ||||||||
| Efficiency ratio (1) | 68.23 | % | 72.92 | % | (4.69 | ) | 71.92 | % | (3.69 | ) | ||||||
| (1) Non-interest expense divided by net interest income plus noninterest income. | ||||||||||||||||
| For the Nine Months Ended, | ||||||||||||||||
| Sept 30, 2018 | Sept 30, 2017 | Change | ||||||||||||||
| Performance Ratios | ||||||||||||||||
| Return on average assets, annualized | 1.21 | % | 0.86 | % | 0.35 | |||||||||||
| Return on average equity, annualized | 12.23 | % | 8.97 | % | 3.26 | |||||||||||
| Efficiency ratio (1) | 72.38 | % | 75.47 | % | (3.09 | ) | ||||||||||
| (1) Non-interest expense divided by net interest income plus noninterest income. | ||||||||||||||||
LIQUIDITY
| Cash and Cash Equivalents and Investment Securities | |||||||||||||||||||||||||||||
| (Unaudited) | |||||||||||||||||||||||||||||
| Sept 30, 2018 | % of Total | June 30, 2018 | % of Total | $ Change | % Change | Sept 30, 2017 | Total | $ Change | % Change | ||||||||||||||||||||
| (Dollars in thousands) | |||||||||||||||||||||||||||||
| Cash on hand and in banks | $ | 14,767 | 8 | % | $ | 15,939 | 13 | % | $ | (1,172 | ) | -7 | % | $ | 18,460 | 9 | % | $ | (3,693 | ) | -20 | % | |||||||
| Interest bearing deposits | 65,354 | 35 | % | 356 | 0 | % | 64,998 | 18258 | % | 48,085 | 27 | % | 17,269 | 36 | % | ||||||||||||||
| Other interest earning deposits | 994 | 1 | % | 994 | 1 | % | - | 0 | % | 1,490 | 1 | % | (496 | ) | -33 | % | |||||||||||||
| Total cash equivalents and interest earning deposits | 81,115 | 44 | % | 17,289 | 14 | % | 63,826 | 369 | % | 68,035 | 38 | % | 13,080 | 19 | % | ||||||||||||||
| Investment securities: | |||||||||||||||||||||||||||||
| Collateralized mortgage obligations: agency issued | 35,789 | 19 | % | 37,221 | 30 | % | (1,432 | ) | -4 | % | 39,320 | 21 | % | (3,531 | ) | -9 | % | ||||||||||||
| Collateralized mortgage obligations: non-agency | 191 | 0 | % | 237 | 0 | % | (46 | ) | -19 | % | 305 | 0 | % | (114 | ) | -37 | % | ||||||||||||
| Mortgage-backed securities: agency issued | 14,190 | 8 | % | 14,046 | 11 | % | 144 | 1 | % | 13,469 | 8 | % | 721 | 5 | % | ||||||||||||||
| U.S. Government and agency securities | 4,193 | 2 | % | 4,230 | 3 | % | (37 | ) | -1 | % | 2,578 | 1 | % | 1,615 | 63 | % | |||||||||||||
| State and municipal securities | 49,980 | 27 | % | 51,469 | 40 | % | (1,489 | ) | -3 | % | 55,487 | 31 | % | (5,507 | ) | -10 | % | ||||||||||||
| Total investment securities | 104,343 | 56 | % | 107,203 | 86 | % | (2,860 | ) | -3 | % | 111,159 | 62 | % | (6,816 | ) | -6 | % | ||||||||||||
| Total cash equivalents and investment securities | $ | 185,458 | 100 | % | $ | 124,492 | 100 | % | $ | 60,966 | 49 | % | $ | 179,194 | 100 | % | $ | 6,264 | 3 | % | |||||||||
| Total cash equivalents and investment securities | |||||||||||||||||||||||||||||
| as a percent of total assets | 20 | % | 14 | % | 19 | % | |||||||||||||||||||||||
“Liquidity remains strong based on existing levels of combined cash equivalents, investment securities and unused borrowing capacity. Seasonal inflow of deposits typical for this time of year impacted total deposits during the quarter. Deposits also grew from the third quarter a year ago,” said Douglas N. Biddle, EVP and Chief Financial Officer. “Our investment securities include a large component of fully amortized U.S. agency collateralized mortgage and mortgage-backed securities, for which we expect to have limited extension risk. The securities portfolio also contains municipal securities rated A or better.” The expected modified duration (adjusted for calls, consensus pre-payment speeds and rate adjustment dates) of the investment portfolio was 4.0 years at September 30, 2018, 3.9 years at June 30, 2018, and 3.9 years at September 30, 2017.
The Bank had $8.4 million in outstanding borrowings against its $199.8 million in established borrowing capacity with the Federal Home Loan Bank of Des Moines (FHLB) at September 30, 2018. The Bank had $9.5 million and $8.5 million in outstanding borrowings with the FHLB at June 30, 2018, and September 30, 2017, respectively. The Bank’s borrowing facility with the FHLB is subject to collateral and stock ownership requirements. The Bank also has available a discount window primary credit line with the Federal Reserve Bank of San Francisco of approximately $53.6 million, subject to collateral requirements, and $16.0 million from correspondent banks, with no balance outstanding on any of these facilities.
LOANS
| Loans by Category | ||||||||||||||||||||||||||||||||
| (Unaudited) | ||||||||||||||||||||||||||||||||
| Sept 30, 2018 | % of Gross Loans | June 30, 2018 | % of Gross Loans | $ Change | % Change | Sept 30, 2017 | % of Gross Loans | $ Change | % Change | |||||||||||||||||||||||
| (Dollars in thousands) | ||||||||||||||||||||||||||||||||
| Commercial and agricultural | $ | 135,204 | 20 | % | $ | 140,182 | 20 | % | $ | (4,978 | ) | -4 | % | $ | 137,520 | 19 | % | $ | (2,316 | ) | -2 | % | ||||||||||
| Real estate: | ||||||||||||||||||||||||||||||||
| Construction and development | 49,697 | 7 | % | 51,325 | 7 | % | (1,628 | ) | -3 | % | 67,967 | 10 | % | (18,270 | ) | -27 | % | |||||||||||||||
| Residential 1-4 family | 90,394 | 13 | % | 90,073 | 13 | % | 321 | 0 | % | 88,897 | 13 | % | 1,497 | 2 | % | |||||||||||||||||
| Multi-family | 31,134 | 4 | % | 22,755 | 3 | % | 8,379 | 37 | % | 19,425 | 3 | % | 11,709 | 60 | % | |||||||||||||||||
| Commercial real estate -- owner occupied | 144,349 | 21 | % | 146,788 | 21 | % | (2,439 | ) | -2 | % | 134,970 | 20 | % | 9,379 | 7 | % | ||||||||||||||||
| Commercial real estate -- non owner occupied | 138,255 | 20 | % | 149,941 | 21 | % | (11,686 | ) | -8 | % | 135,925 | 20 | % | 2,330 | 2 | % | ||||||||||||||||
| Farmland | 29,075 | 4 | % | 28,979 | 4 | % | 96 | 0 | % | 34,583 | 5 | % | (5,508 | ) | -16 | % | ||||||||||||||||
| Consumer | 74,998 | 11 | % | 74,280 | 11 | % | 718 | 1 | % | 62,408 | 9 | % | 12,590 | 20 | % | |||||||||||||||||
| Gross Loans | 693,106 | 100 | % | 704,323 | 100 | % | (11,217 | ) | -2 | % | 681,695 | 100 | % | 11,411 | 2 | % | ||||||||||||||||
| Less: allowance for loan losses | (9,067 | ) | (9,143 | ) | 76 | (9,212 | ) | 145 | ||||||||||||||||||||||||
| Less: deferred fees | (1,014 | ) | (1,051 | ) | 37 | (1,181 | ) | 167 | ||||||||||||||||||||||||
| Net loans | $ | 683,025 | $ | 694,129 | $ | (11,104 | ) | $ | 671,302 | $ | 11,723 | |||||||||||||||||||||
| Loan Concentration | ||||||||||||||||||||||||||||||||
| (Unaudited) | ||||||||||||||||||||||||||||||||
| Sept 30, 2018 | % of Risk Based Capital | June 30, 2018 | % of Risk Based Capital | Change | Sept 30, 2017 | % of Risk Based Capital | Change | |||||||||||||||||||||||||
| (Dollars in thousands) | ||||||||||||||||||||||||||||||||
| Commercial and agricultural | $ | 135,204 | 134 | % | $ | 140,182 | 143 | % | -9 | % | $ | 137,520 | 146 | % | -12 | % | ||||||||||||||||
| Real estate: | ||||||||||||||||||||||||||||||||
| Construction and development | 49,697 | 49 | % | 51,325 | 52 | % | -3 | % | 67,967 | 72 | % | -23 | % | |||||||||||||||||||
| Residential 1-4 family | 90,394 | 89 | % | 90,073 | 92 | % | -3 | % | 88,897 | 94 | % | -5 | % | |||||||||||||||||||
| Multi-family | 31,134 | 31 | % | 22,755 | 23 | % | 8 | % | 19,425 | 21 | % | 10 | % | |||||||||||||||||||
| Commercial real estate -- owner occupied | 144,349 | 143 | % | 146,788 | 150 | % | -7 | % | 134,970 | 143 | % | 0 | % | |||||||||||||||||||
| Commercial real estate -- non owner occupied | 138,255 | 137 | % | 149,941 | 153 | % | -16 | % | 135,925 | 144 | % | -7 | % | |||||||||||||||||||
| Farmland | 29,075 | 29 | % | 28,979 | 30 | % | -1 | % | 34,583 | 37 | % | -8 | % | |||||||||||||||||||
| Consumer | 74,998 | 74 | % | 74,280 | 76 | % | -2 | % | 62,408 | 66 | % | 8 | % | |||||||||||||||||||
| Gross Loans | $ | 693,106 | $ | 704,323 | $ | 681,695 | ||||||||||||||||||||||||||
| Regulatory Commercial Real Estate | $ | 213,891 | 212 | % | $ | 219,980 | 224 | % | -12 | % | $ | 210,142 | 222 | % | -10 | % | ||||||||||||||||
| Total Risk Based Capital* | $ | 101,031 | $ | 98,120 | $ | 94,494 | ||||||||||||||||||||||||||
| *Bank of the Pacific | ||||||||||||||||||||||||||||||||
The loan portfolio continues to be well-diversified with balances in most lending categories, which have been originated predominately within our Western Washington and Oregon markets. Decreases during the current quarter occurred in commercial real estate, mainly due to the expected payoff from long-term financing sources. Commercial loan balances declined during the current quarter as clients applied seasonal deposit inflows to paydown borrowing lines. The portfolio includes $30.3 million in LIBOR-based and $157.3 million in Wall Street Journal Prime-based floating rate commercial, commercial real estate and home equity loans. The portfolio also includes $14.7 million in purchased government-guaranteed commercial and commercial real estate loans and $63.5 million in indirect consumer loans to finance luxury and classic cars as a part of a strategy to diversify the loan portfolio. The indirect consumer loans have been made to individuals with high credit scores and have exhibited very low losses to date. The Company manages new loan origination volume using concentration limits that establish maximum exposure levels by designated industry segment, real estate product types, geography and single borrower limits. The Bank’s recent portfolio growth includes commercial real estate loans, which are carefully managed to meet regulatory guidelines.
DEPOSITS
| Deposits by Category | ||||||||||||||||||||||||||||
| (Unaudited) | ||||||||||||||||||||||||||||
| Sept 30, 2018 | % of Total | June 30, 2018 | % of Total | $ Change | % Change | Sept 30, 2017 | % of Total | $ Change | % Change | |||||||||||||||||||
| (Dollars in thousands) | ||||||||||||||||||||||||||||
| Interest-bearing demand | $ | 201,058 | 24 | % | $ | 197,409 | 26 | % | $ | 3,649 | 2 | % | $ | 192,826 | 24 | % | $ | 8,232 | 4 | % | ||||||||
| Money market | 161,012 | 20 | % | 142,945 | 19 | % | 18,067 | 13 | % | 144,648 | 18 | % | 16,364 | 11 | % | |||||||||||||
| Savings | 102,680 | 13 | % | 93,715 | 12 | % | 8,965 | 10 | % | 88,306 | 11 | % | 14,374 | 16 | % | |||||||||||||
| Time deposits (CDs) | 87,874 | 11 | % | 94,294 | 12 | % | (6,420 | ) | -7 | % | 111,064 | 14 | % | (23,190 | ) | -21 | % | |||||||||||
| Total interest-bearing deposits | 552,624 | 68 | % | 528,363 | 69 | % | 24,261 | 5 | % | 536,844 | 67 | % | 15,780 | 3 | % | |||||||||||||
| Non-interest bearing demand | 262,529 | 32 | % | 239,184 | 31 | % | 23,345 | 10 | % | 261,200 | 33 | % | 1,329 | 1 | % | |||||||||||||
| Total deposits | $ | 815,153 | 100 | % | $ | 767,547 | 100 | % | $ | 47,606 | 6 | % | $ | 798,044 | 100 | % | $ | 17,109 | 2 | % | ||||||||
Total deposits increased from the linked quarter, due to seasonal deposit inflows as noted above. Time deposits continue to decline as a component of funding as retail depositors do not look to lock in relatively low interest rates for an extended period. In addition, balances of brokered deposits also declined during these periods. The proportion of noninterest bearing deposits to total deposits remained stable year-over-year.
Brokered certificates of deposit totaled $32.5 million, down from $37.2 million at June 30, 2018, and $47.1 million at September 30, 2017. The brokered deposits were acquired during the latter part of 2015 with fixed rates with terms ranging from 2 to 5 years. “These deposits were obtained to lock in historically low rates to enhance the Bank’s interest rate risk mitigation strategies,” explained Biddle.
CAPITAL
Pacific Financial Corporation, and its subsidiary Bank of the Pacific, met the thresholds to be considered “well-capitalized” under regulatory standards for total risk-based capital, Tier 1 risk-based capital, common equity Tier 1 and Tier 1 leverage capital. All ratios have increased compared to the linked and prior year quarters primarily due to the retention of earnings. This is despite the impact on capital of the unrealized gain/(loss) on investment securities classified as “Available for Sale”, which was $(2.0 million), $(1.5 million) and $253,000 as of September 30, 2018, June 30, 2018 and September 30, 2017, respectively. In addition, the increase in tangible assets as compared to the linked quarter contributed to a 17-basis point decline in the Tangible Common Equity Ratio (TCE). Despite this reduction, TCE increased by 35 basis points as compared to the prior year quarter primarily due to earnings retention.
The total risk-based capital ratios of the Company include $13.4 million of junior subordinated debentures, all of which qualified as Tier 1 capital under guidance issued by the Federal Reserve. As provided in the Dodd-Frank Act, the Company expects to continue to rely on these junior subordinated debentures as part of its regulatory capital.
The following table summarizes the capital measures of the Company and the Bank respectively, at the dates listed below.
| Capital Measures | ||||||||||||||||||
| (unaudited) | ||||||||||||||||||
| Sept 30, 2018 | June 30, 2018 | Change | Sept 30, 2017 | Change | Well Capitalized Under Prompt Correction Action Regulations* | |||||||||||||
| Pacific Financial Corporation | ||||||||||||||||||
| Total risk-based capital ratio | 13.61 | % | 12.98 | % | 0.63 | 12.82 | % | 0.79 | N/A | |||||||||
| Tier 1 risk-based capital ratio | 12.40 | % | 11.78 | % | 0.62 | 11.58 | % | 0.82 | N/A | |||||||||
| Common equity tier 1 ratio | 10.67 | % | 10.08 | % | 0.59 | 9.84 | % | 0.83 | N/A | |||||||||
| Leverage ratio | 10.30 | % | 10.33 | % | (0.03 | ) | 9.85 | % | 0.45 | N/A | ||||||||
| Tangible common equity ratio | 8.43 | % | 8.60 | % | (0.17 | ) | 8.08 | % | 0.35 | N/A | ||||||||
| Bank of the Pacific | ||||||||||||||||||
| Total risk-based capital ratio | 13.49 | % | 12.88 | % | 0.61 | 12.71 | % | 0.78 | 10.5 | % | ||||||||
| Tier 1 risk-based capital ratio | 12.26 | % | 11.68 | % | 0.58 | 11.47 | % | 0.79 | 8.5 | % | ||||||||
| Common equity tier 1 ratio | 12.26 | % | 11.68 | % | 0.58 | 11.47 | % | 0.79 | 7.0 | % | ||||||||
| Leverage ratio | 10.18 | % | 10.24 | % | (0.06 | ) | 9.75 | % | 0.43 | 7.5 | % | |||||||
| *Includes Basel III 2019 Capital Conservation Buffer | ||||||||||||||||||
Net Interest Margin
Net interest margin expanded on a linked quarter and year-over-year basis, primarily due to increases in average loan yields. Recent increases in interest rates initiated by the Federal Reserve had a positive impact on asset yields during the period. Net interest margin for the current year to date period improved as compared to the prior year for similar reasons.
Cost of deposits remained relatively unchanged as compared to the linked quarter and year-over-year periods. The non-renewal of higher-cost long-term fixed rate brokered deposits favorably impacted funding costs during these respective periods. Improvement in loan and investment security yields offset increases in the cost of LIBOR-based junior subordinated debentures as a result of rising interest rates in the current quarter as compared to the linked and year-over-year periods.
The following tables set forth information regarding average balances of interest-earning assets and interest-bearing liabilities and the resultant yields or cost, and the net interest margin on a tax equivalent basis. Loans held for sale and non-accrual loans are included in total loans.
| Net Interest Margin | |||||||||||||||||||||
| (Unaudited) | |||||||||||||||||||||
| (Annualized, tax-equivalent basis) | |||||||||||||||||||||
| For the Three Months Ended, | |||||||||||||||||||||
| Sept 30, 2018 | June 30, 2018 | $ Change | % Change | Sept 30, 2017 | $ Change | % Change | |||||||||||||||
| Average Balances | (Dollars in thousands) | ||||||||||||||||||||
| Gross loans | $ | 695,011 | $ | 699,110 | $ | (4,099 | ) | -1 | % | $ | 676,059 | $ | 18,952 | 3 | % | ||||||
| Loans held for sale | $ | 8,860 | $ | 7,381 | $ | 1,479 | 20 | % | $ | 8,457 | $ | 403 | 5 | % | |||||||
| Investment securities | $ | 149,028 | $ | 114,651 | $ | 34,377 | 30 | % | $ | 140,167 | $ | 8,861 | 6 | % | |||||||
| Total interest-earning assets | $ | 852,899 | $ | 821,142 | $ | 31,757 | 4 | % | $ | 824,683 | $ | 28,216 | 3 | % | |||||||
| Non-interest bearing demand deposits | $ | 251,847 | $ | 239,301 | $ | 12,546 | 5 | % | $ | 251,003 | $ | 844 | 0 | % | |||||||
| Interest bearing deposits | $ | 543,436 | $ | 525,706 | $ | 17,730 | 3 | % | $ | 521,545 | $ | 21,891 | 4 | % | |||||||
| Borrowings | $ | 21,943 | $ | 23,373 | $ | (1,430 | ) | -6 | % | $ | 21,956 | $ | (13 | ) | 0 | % | |||||
| Total interest-bearing liabilities | $ | 565,379 | $ | 549,079 | $ | 16,300 | 3 | % | $ | 543,501 | $ | 21,878 | 4 | % | |||||||
| Total Equity | $ | 90,903 | $ | 87,884 | $ | 3,019 | 3 | % | $ | 86,262 | $ | 4,641 | 5 | % | |||||||
| For the Three Months Ended, | |||||||||||||||||||||
| Sept 30, 2018 | June 30, 2018 | Change | Sept 30, 2017 | Change | |||||||||||||||||
| Yield on average gross loans (1) | 5.35 | % | 5.18 | % | 0.17 | 5.04 | % | 0.31 | |||||||||||||
| Yield on average investment securities (1) | 2.57 | % | 2.57 | % | - | 2.32 | % | 0.25 | |||||||||||||
| Cost of average interest bearing deposits | 0.37 | % | 0.33 | % | 0.04 | 0.34 | % | 0.03 | |||||||||||||
| Cost of average borrowings | 3.34 | % | 3.21 | % | 0.13 | 2.69 | % | 0.65 | |||||||||||||
| Cost of average total deposits and borrowings | 0.33 | % | 0.32 | % | 0.01 | 0.30 | % | 0.03 | |||||||||||||
| Yield on average interest-earning assets | 4.86 | % | 4.82 | % | 0.04 | 4.58 | % | 0.28 | |||||||||||||
| Cost of average interest-bearing liabilities | 0.48 | % | 0.46 | % | 0.02 | 0.43 | % | 0.05 | |||||||||||||
| Net interest spread | 4.38 | % | 4.36 | % | 0.02 | 4.15 | % | 0.23 | |||||||||||||
| Net interest margin (1) | 4.55 | % | 4.51 | % | 0.04 | 4.29 | % | 0.26 | |||||||||||||
| (1) Tax-exempt income has been adjusted to a tax equivalent basis at a rate of 21% as of September 30, 2018 and June 30, 2018 and 34% as of September 30, 2017. | |||||||||||||||||||||
| For the Nine Months Ended, | |||||||||||||||||||||
| Sept 30, 2018 | Sept 30, 2017 | $ Change | % Change | ||||||||||||||||||
| Average Balances | (Dollars in thousands) | ||||||||||||||||||||
| Gross loans | $ | 693,868 | $ | 669,723 | $ | 24,145 | 4 | % | |||||||||||||
| Loans held for sale | $ | 7,949 | $ | 7,104 | $ | 845 | 12 | % | |||||||||||||
| Investment securities | $ | 130,619 | $ | 131,135 | $ | (516 | ) | 0 | % | ||||||||||||
| Interest-earning assets | $ | 832,436 | $ | 807,962 | $ | 24,474 | 3 | % | |||||||||||||
| Non-interest bearing demand deposits | $ | 246,993 | $ | 234,637 | $ | 12,356 | 5 | % | |||||||||||||
| Interest bearing deposits | $ | 529,473 | $ | 524,156 | $ | 5,317 | 1 | % | |||||||||||||
| Borrowings | $ | 22,400 | $ | 22,135 | $ | 265 | 1 | % | |||||||||||||
| Interest-bearing liabilities | $ | 551,873 | $ | 546,291 | $ | 5,582 | 1 | % | |||||||||||||
| Total Equity | $ | 88,367 | $ | 83,800 | $ | 4,567 | 5 | % | |||||||||||||
| For the Nine Months Ended, | |||||||||||||||||||||
| Sept 30, 2018 | Sept 30, 2017 | Change | |||||||||||||||||||
| Net Interest Margin | |||||||||||||||||||||
| Yield on average gross loans (1) | 5.22 | % | 5.00 | % | 0.22 | ||||||||||||||||
| Yield on average investment securities (1) | 2.57 | % | 2.41 | % | 0.16 | ||||||||||||||||
| Cost of average interest bearing deposits | 0.34 | % | 0.35 | % | (0.01 | ) | |||||||||||||||
| Cost of average borrowings | 3.25 | % | 2.62 | % | 0.63 | ||||||||||||||||
| Cost of average total deposits and borrowings | 0.32 | % | 0.31 | % | 0.01 | ||||||||||||||||
| Yield on average interest-earning assets | 4.80 | % | 4.58 | % | 0.22 | ||||||||||||||||
| Cost of average interest-bearing liabilities | 0.46 | % | 0.44 | % | 0.02 | ||||||||||||||||
| Net interest spread | 4.34 | % | 4.14 | % | 0.20 | ||||||||||||||||
| Net interest margin (1) | 4.50 | % | 4.28 | % | 0.22 | ||||||||||||||||
| (1) Tax-exempt income has been adjusted to a tax equivalent basis at a rate of 21% as of September 30, 2018 and 34% as of September 30, 2017. | |||||||||||||||||||||
ASSET QUALITY
Asset quality remained strong with non-performing assets declining in the quarter, primarily due to the payoff of a $710,000 non-accrual commercial loan. Total 30-89-day delinquencies remained well below 0.50%, a positive leading indicator of future credit quality. Adversely classified loans decreased from various paydowns, including a $792,000 reduction in outstandings to a mechanical engineering firm reflecting improved cash flow and a payoff of a $385,000 commercial loan to an electrical contracting relationship. These reductions were offset by a $436,000 downgrade of an agricultural relationship due to continued negative cash flow and a $696,000 commercial loan to a non-profit entity due to a decline in revenues. Adversely classified loans to total gross loans was 1.12% the end of the quarter compared to 1.32% in the linked quarter and 1.67% in the year ago quarter.
| Adversely Classified Loans and Securities | |||||||||||||||||||||
| (Unaudited) | |||||||||||||||||||||
| Sept 30, 2018 | June 30, 2018 | $ Change | % Change | Sept 30, 2017 | $ Change | % Change | |||||||||||||||
| (Dollars in thousands) | |||||||||||||||||||||
| Rated substandard or worse, but not impaired | $ | 6,733 | $ | 7,516 | $ | (783 | ) | -10 | % | $ | 8,490 | $ | (1,757 | ) | -21 | % | |||||
| Impaired | 1,044 | 1,765 | (721 | ) | -41 | % | 2,916 | (1,872 | ) | -64 | % | ||||||||||
| Total adversely classified loans¹ | $ | 7,777 | $ | 9,281 | $ | (1,504 | ) | -16 | % | $ | 11,406 | $ | (3,629 | ) | -32 | % | |||||
| Gross loans (excluding deferred loan fees) | $ | 693,106 | $ | 704,323 | $ | (11,217 | ) | -2 | % | $ | 681,695 | $ | 11,411 | 2 | % | ||||||
| Adversely classified loans to gross loans | 1.12 | % | 1.32 | % | 1.67 | % | |||||||||||||||
| Allowance for loan losses | $ | 9,067 | $ | 9,143 | $ | (76 | ) | -1 | % | $ | 9,212 | $ | (145 | ) | -2 | % | |||||
| Allowance for loan losses as a percentage of adversely classified loans | 116.59 | % | 98.51 | % | 80.76 | % | |||||||||||||||
| Allowance for loan losses to total impaired loans | 868.49 | % | 518.02 | % | 315.91 | % | |||||||||||||||
| Adversely classified loans to total assets | 0.83 | % | 1.05 | % | 1.24 | % | |||||||||||||||
| Delinquent loans to gross loans, not in nonaccrual status | 0.18 | % | 0.06 | % | 0.08 | % | |||||||||||||||
| 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 decreased from the linked quarter, primarily due to the payoff of a $710,000 non-accrual commercial loan, as previously noted. As a result, there was a decrease in the percentage of nonperforming assets to total assets. Similarly, nonperforming assets were below the amount as of the prior year quarter, primarily due to various payoffs and reductions achieved during the intervening quarters.
| Nonperforming Assets | |||||||||||||||||||||
| (Unaudited) | |||||||||||||||||||||
| Sept 30, 2018 | June 30, 2018 | $ Change | % Change | Sept 30, 2017 | $ Change | % Change | |||||||||||||||
| (Dollars in thousands) | |||||||||||||||||||||
| Loans on nonaccrual status | $ | 696 | $ | 1,412 | $ | (716 | ) | -51 | % | $ | 2,545 | $ | (1,849 | ) | -73 | % | |||||
| Total nonaccrual loans | 696 | 1,412 | (716 | ) | -51 | % | 2,545 | (1,849 | ) | -73 | % | ||||||||||
| Other real estate owned and foreclosed assets | 50 | 38 | 12 | 32 | % | 8 | 42 | 525 | % | ||||||||||||
| Total nonperforming assets | $ | 746 | $ | 1,450 | $ | (704 | ) | -49 | % | $ | 2,553 | $ | (1,807 | ) | -71 | % | |||||
| Restructured performing loans | $ | 348 | $ | 353 | $ | (5 | ) | -1 | % | $ | 371 | $ | (23 | ) | -6 | % | |||||
| Accruing loans past due 90 days or more | $ | - | $ | - | $ | - | 0 | % | $ | - | $ | - | 0 | % | |||||||
| Percentage of nonperforming assets to total assets | 0.08 | % | 0.16 | % | 0.28 | % | |||||||||||||||
| Nonperforming loans to total loans | 0.10 | % | 0.20 | % | 0.37 | % | |||||||||||||||
ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses has been managed in concert with recent loan growth, credit quality and market conditions. With changes in the loan portfolio composition over the past several years and overall improvement in credit quality, loss factors used in estimates to establish reserve levels have declined commensurately.
There were a small amount of net charge-offs in the current quarter versus net recoveries in the linked quarter. This compares to minimal net charge offs recorded in the prior year quarter. Net charge-offs for the first nine months of 2018 were below those of the similar period for 2017. These charge-offs were comprised of various consumer loans, all of which were modest in size. “The low level of charge-offs and ratio of net loan charge-offs to average gross loans demonstrate the solid credit quality of the portfolio,” said Biddle. The overall risk profile of the loan portfolio continues to be modest, demonstrating the solid credit risk management framework in place. The trend of future provisions for loan losses will depend primarily on economic conditions, growth in the loan portfolio, level of adversely-classified assets and changes in collateral values.
| Allowance for Loan Losses | |||||||||||||||||||||
| (Unaudited) | |||||||||||||||||||||
| For the Three Months Ended, | |||||||||||||||||||||
| Sept 30, 2018 | June 30, 2018 | $ Change | % Change | Sept 30, 2017 | $ Change | % Change | |||||||||||||||
| (Dollars in thousands) | |||||||||||||||||||||
| Gross loans outstanding at end of period | $ | 693,106 | $ | 704,323 | $ | (11,217 | ) | -2 | % | $ | 681,695 | $ | 11,411 | 2 | % | ||||||
| Average loans outstanding, gross | $ | 695,011 | $ | 699,110 | $ | (4,099 | ) | -1 | % | $ | 676,059 | $ | 18,952 | 3 | % | ||||||
| Allowance for loan losses, beginning of period | $ | 9,143 | $ | 9,141 | $ | 2 | 0 | % | $ | 9,090 | $ | 53 | 1 | % | |||||||
| Commercial | (4 | ) | - | (4 | ) | 0 | % | - | (4 | ) | 0 | % | |||||||||
| Commercial Real Estate | - | - | - | 0 | % | - | - | 0 | % | ||||||||||||
| Residential Real Estate | - | - | - | 0 | % | - | - | 0 | % | ||||||||||||
| Consumer | (103 | ) | (25 | ) | (78 | ) | 312 | % | (33 | ) | (70 | ) | 212 | % | |||||||
| Total charge-offs | (107 | ) | (25 | ) | (82 | ) | 328 | % | (33 | ) | (74 | ) | 224 | % | |||||||
| Commercial | 23 | 2 | 21 | 1050 | % | 2 | 21 | 1050 | % | ||||||||||||
| Commercial Real Estate | - | - | - | 0 | % | - | - | 0 | % | ||||||||||||
| Residential Real Estate | - | - | - | 0 | % | 1 | (1 | ) | -100 | % | |||||||||||
| Consumer | 8 | 25 | (17 | ) | -68 | % | 2 | 6 | NM | ||||||||||||
| Total recoveries | 31 | 27 | 4 | 15 | % | 5 | 26 | NM | |||||||||||||
| Net recoveries/(charge-offs) | (76 | ) | 2 | (78 | ) | -3900 | % | (28 | ) | (48 | ) | 171 | % | ||||||||
| Provision charged to income | - | - | - | 0 | % | 150 | (150 | ) | -100 | % | |||||||||||
| Allowance for loan losses, end of period | $ | 9,067 | $ | 9,143 | $ | (76 | ) | -1 | % | $ | 9,212 | $ | (145 | ) | -2 | % | |||||
| Ratio of net loans charged-off to average | |||||||||||||||||||||
| gross loans outstanding, annualized | 0.04 | % | 0.00 | % | 0.04 | % | 0.02 | % | 0.02 | % | |||||||||||
| Ratio of allowance for loan losses to | |||||||||||||||||||||
| gross loans outstanding | 1.31 | % | 1.30 | % | 0.01 | % | 1.35 | % | -0.04 | % | |||||||||||
| For the Nine Months Ended, | |||||||||||||||||||||
| Sept 30, 2018 | Sept 30, 2017 | $ Change | % Change | ||||||||||||||||||
| (Dollars in thousands) | |||||||||||||||||||||
| Gross loans outstanding at end of period | $ | 693,106 | $ | 681,695 | $ | 11,411 | 2 | % | |||||||||||||
| Average loans outstanding, gross | $ | 693,868 | $ | 669,723 | $ | 24,145 | 4 | % | |||||||||||||
| Allowance for loan losses, beginning of period | $ | 9,092 | $ | 9,192 | $ | (100 | ) | -1 | % | ||||||||||||
| Commercial | (4 | ) | (236 | ) | 232 | -98 | % | ||||||||||||||
| Commercial Real Estate | - | - | - | 0 | % | ||||||||||||||||
| Residential Real Estate | - | (3 | ) | 3 | -100 | % | |||||||||||||||
| Consumer | (155 | ) | (74 | ) | (81 | ) | 109 | % | |||||||||||||
| Total charge-offs | (159 | ) | (313 | ) | 154 | -49 | % | ||||||||||||||
| Commercial | 77 | 44 | 33 | 75 | % | ||||||||||||||||
| Commercial Real Estate | - | - | - | 0 | % | ||||||||||||||||
| Residential Real Estate | - | 11 | (11 | ) | -100 | % | |||||||||||||||
| Consumer | 57 | 6 | 51 | NM | |||||||||||||||||
| Total recoveries | 134 | 61 | 73 | 120 | % | ||||||||||||||||
| Net (charge-offs) | (25 | ) | (252 | ) | 227 | -90 | % | ||||||||||||||
| Provision charged to income | - | 272 | (272 | ) | -100 | % | |||||||||||||||
| Allowance for loan losses, end of period | $ | 9,067 | $ | 9,212 | $ | (145 | ) | -2 | % | ||||||||||||
| Ratio of net loans charged-off to average | |||||||||||||||||||||
| gross loans outstanding, annualized | 0.00 | % | 0.04 | % | -0.04 | % | |||||||||||||||
| Ratio of allowance for loan losses to | |||||||||||||||||||||
| gross loans outstanding | 1.31 | % | 1.35 | % | -0.04 | % | |||||||||||||||
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 September 30, 2018, the Company had total assets of $937 million and operated fifteen branches in the communities of Grays Harbor, Pacific, Whatcom, Skagit, Clark and Wahkiakum counties in the State of Washington, and three branches in Clatsop County, Oregon. The Company also operated loan production offices in the communities of DuPont and Burlington in Washington and Salem, 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, changes in interest rates, extensive and evolving regulation of the banking industry, and many other risks. 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
DOUGLAS BIDDLE, EVP & CFO
360.533.8873