ABERDEEN, Wash., Oct. 22, 2015 (GLOBE NEWSWIRE) -- Pacific Financial Corporation (OTCQB:PFLC), the holding company for Bank of the Pacific today reported net income of $1.6 million, or $0.15 per share, for the third quarter of 2015, compared to $1.6 million, or $0.15 per share for the second quarter of 2015, and grew 17% from $1.4 million, or $0.13 per share, for the third quarter a year ago. Year-to-date, net income increased 12% to $4.3 million, or $0.41 per share, from $3.8 million, or $0.37 per share, for the like period in 2014. Driving profitability in 2015 was robust loan growth, solid net interest margin and increased noninterest income.
"We continued to post solid profitability in the third quarter, powered by sustained lending activity and strong residential real estate mortgage revenue," said Denise Portmann, President & Chief Executive Officer. "Additions to our lending teams at the beginning of the year have generated 10% loan growth year-over-year. Mortgage loan originations were up 42% year-over-year, reflecting the continued improvement in our local economy."
"Our expansion into the Salem, Oregon market with a new loan production office (LPO) earlier this year is going well. This office, staffed with a team of experienced bankers, is already making a meaningful contribution to loan growth," added Portmann. "We expect to generate solid core deposits, build commercial relationships, deepen our residential mortgage penetration and expand our franchise into this and other growth markets in Western Washington and Oregon."
Third Quarter 2015 Highlights (as of, or for the period ended September 30, 2015, except as noted):
- Earnings per share (EPS) were $0.15, as compared to $0.15 in the linked quarter, and grew 15% from third quarter 2014. Year-to-date, EPS increased 11% to $0.41, from the same period in 2014.
- Net interest income grew $96,000, or 1%, to $7.4 million, compared to $7.3 million for the immediate prior quarter, and grew 7% from $6.9 million in the third quarter of 2014. Year-to-date, net interest income increased 7% to $21.6 million from the like period in 2014.
- Net interest margin (NIM), on a tax equivalent basis, declined to 4.06%, as compared to 4.16% in the preceding quarter and 4.13% for third quarter 2014. Interest rate risk strategies implemented during the current quarter involved a modest addition of higher-cost longer-term fixed rate funding and lower-yielding LIBOR-based floating rate loans, impacting net interest margin. Year-to-date, net interest margin was 4.12% compared to 4.22% for the same period in 2014. NIM in 2014 was enhanced by the one-time collection of nonaccrual interest during the period.
- Total assets increased 4% to $814.9 million from $786.5 at June 30, 2015, and grew 9% from $749.0 million at September 30, 2014.
- Gross loans increased 1% to $609.5 million compared to the second quarter 2015 and grew 10% from a year ago.
- Total deposits were $705.1 million, compared to $664.8 million at June 30, 2015, and increased 9% from a year ago. Non-interest bearing demand deposits grew 5% on a linked quarter basis and decreased 2% over the third quarter of 2014.
- Classified loans declined to $14.5 million, or 2.37% of gross loans versus 2.67% and 3.33% at June 30, 2015 and September 30, 2014, respectively. Similarly, nonperforming assets decreased to $5.9 million, or 0.72% of total assets as compared to 0.94% at the linked quarter and 0.86% a year ago. The Company experienced net recoveries of $244,000, or -0.16% of average gross loans resulting from the payoff of a $1.1 million nonaccrual loan during the current period. Loans 30 – 89 days delinquent not in nonaccrual status stood at 0.08% of total loans outstanding.
Operating Results
Total assets grew 4% from the linked quarter and 9% year-over-year. This increase in assets was primarily due to the growth in loans, funded by increases in core deposits and longer-term brokered deposits. In addition, cash and cash equivalents grew, due in part, to seasonal deposit inflows attributed to economic activity associated with increased tourism activity during the current period in some of our markets. Liquidity remains strong, including ample unused borrowing capacity. Capital ratios continue to exceed the thresholds to be considered "Well-Capitalized" under published regulatory standards.
Net interest income increased from the immediate quarter and from the like quarter a year ago. This increase reflects growth in earning assets and changes in the balance sheet mix. Loan balances increased due to loan production generated predominately in Western Washington and Oregon. The increased deposits were primarily retained in fed funds sold due to the prospect of continued loan growth anticipated by the Company's loan pipeline and expected seasonal declines in deposits in the coming winter months. Funding costs increased slightly due to a modest addition of higher-cost longer-term fixed-rate funding to lengthen liability maturities for interest rate risk management purposes. Loan yields decreased slightly, primarily due to the growth in lower-yielding LIBOR-based floating-rate loans, as mentioned above. As a result, net interest margin declined slightly during the immediate quarter 2015.
Balance Sheet Overview | |||||||
(Unaudited) | |||||||
(Dollars in Thousands, Except per Share Data) | |||||||
September 30, | June 30, | $ | % | September 30, | $ | % | |
2015 | 2015 | Change | Change | 2014 | Change | Change | |
Assets: | |||||||
Cash and cash equivalents | $ 48,904 | $ 16,965 | $ 31,939 | 188% | $ 40,781 | $ 8,123 | 20% |
Interest-bearing certificates of deposit | 2,727 | 2,727 | 0 | 0% | 2,727 | 0 | 0% |
Federal Home Loan Bank and Pacific Coast Banker's Bank stock, at cost | 2,348 | 2,949 | (601) | -20% | 3,926 | (1,578) | -40% |
Investment securities | 89,702 | 90,976 | (1,274) | -1% | 91,185 | (1,483) | -2% |
Loans held-for-sale | 9,799 | 16,482 | (6,683) | -41% | 8,161 | 1,638 | 20% |
Gross loans, net of deferred fees | 609,475 | 603,562 | 5,913 | 1% | 552,140 | 57,335 | 10% |
Allowance for loan losses | (8,756) | (8,347) | (409) | 5% | (8,255) | (501) | 6% |
Net loans | 600,719 | 595,215 | 5,504 | 1% | 543,885 | 56,834 | 10% |
Other assets | 60,657 | 61,228 | (571) | -1% | 58,382 | 2,275 | 4% |
Total assets | $ 814,856 | $ 786,542 | $ 28,314 | 4% | $ 749,047 | $ 65,809 | 9% |
Liabilities and shareholders' equity: | |||||||
Total deposits | $ 705,100 | $ 664,816 | $ 40,284 | 6% | $ 644,004 | $ 61,096 | 9% |
Accrued interest payable | 141 | 151 | (10) | -7% | 141 | 0 | 0% |
Borrowings | 24,744 | 39,781 | (15,037) | -38% | 24,894 | (150) | -1% |
Other liabilities | 7,386 | 6,542 | 844 | 13% | 6,751 | 635 | 9% |
Shareholders' equity | 77,485 | 75,252 | 2,233 | 3% | 73,257 | 4,228 | 6% |
Total liabilities and shareholders' equity | $ 814,856 | $ 786,542 | $ 28,314 | 4% | $ 749,047 | $ 65,809 | 9% |
Common Stock Shares Outstanding | 10,384,997 | 10,380,492 | 4,505 | 0% | 10,213,334 | 171,663 | 2% |
Book value per common share (1) | $ 7.46 | $ 7.25 | $ 0.21 | 3% | $ 7.17 | $ 0.29 | 4% |
Tangible book value per common share (2) | $ 6.15 | $ 5.94 | $ 0.21 | 4% | $ 5.84 | $ 0.31 | 5% |
Net loans to deposits ratio | 85.2% | 89.5% | 84.5% | ||||
(1) Book value per common share is calculated as the total common shareholders' equity divided by the period ending number of common stock shares outstanding. | |||||||
(2) Tangible book value per common share is calculated as the total common shareholders' equity less total intangible assets and liabilities, divided by the period ending number of common stock shares outstanding. | |||||||
Income Statement Overview | |||||||
(Unaudited) | |||||||
(Dollars in Thousands, Except per Share Data) | |||||||
For the Three Months Ended, | |||||||
September 30, 2015 |
June 30, 2015 |
$ Change |
% Change |
September 30, 2014 |
$ Change |
% Change |
|
Interest and dividend income | $ 7,946 | $ 7,817 | $ 129 | 2% | $ 7,400 | $ 546 | 7% |
Interest expense | 561 | 528 | 33 | 6% | 518 | 43 | 8% |
Net interest income | 7,385 | 7,289 | 96 | 1% | 6,882 | 503 | 7% |
Loan loss provision | 165 | 187 | (22) | -12% | 100 | 65 | 65% |
Noninterest income | 2,686 | 2,823 | (137) | -5% | 2,274 | 412 | 18% |
Noninterest expense | 7,709 | 7,732 | (23) | 0% | 7,133 | 576 | 8% |
Income before provision for income taxes | 2,197 | 2,193 | 4 | 0% | 1,923 | 274 | 14% |
Provision for income taxes | 596 | 611 | (15) | -2% | 549 | 47 | 9% |
Net Income | $ 1,601 | $ 1,582 | $ 19 | 1% | $ 1,374 | $ 227 | 17% |
Average common shares outstanding - basic | 10,384,997 | 10,380,542 | 4,455 | 0% | 10,281,745 | 103,252 | 1% |
Average common shares outstanding - diluted | 10,520,581 | 10,504,376 | 16,205 | 0% | 10,379,166 | 141,415 | 1% |
Income per common share | |||||||
Basic | $ 0.15 | $ 0.15 | $ -- | 0% | $ 0.13 | $ 0.02 | 15% |
Diluted | $ 0.15 | $ 0.15 | $ -- | 0% | $ 0.13 | $ 0.02 | 15% |
For the Nine Months Ended, | |||||||
September 30, 2015 |
September 30, 2014 |
$ Change |
% Change |
||||
Interest and dividend income | $ 23,196 | $ 21,821 | $1,375 | 6% | |||
Interest expense | 1,598 | 1,589 | 9 | 1% | |||
Net interest income | 21,598 | 20,232 | 1,366 | 7% | |||
Loan loss provision | 382 | 200 | 182 | 91% | |||
Noninterest income | 7,482 | 6,058 | 1,424 | 24% | |||
Noninterest expense | 22,925 | 21,028 | 1,897 | 9% | |||
Income before provision for income taxes | 5,773 | 5,062 | 711 | 14% | |||
Provision for income taxes | 1,493 | 1,257 | 236 | 19% | |||
Net Income | $ 4,280 | $ 3,805 | $ 475 | 12% | |||
Average common shares outstanding - basic | 10,379,742 | 10,218,103 | 161,639 | 2% | |||
Average common shares outstanding - diluted | 10,523,625 | 10,309,436 | 214,189 | 2% | |||
Income per common share | |||||||
Basic | $ 0.41 | $ 0.37 | $ 0.04 | 11% | |||
Diluted | $ 0.41 | $ 0.37 | $ 0.04 | 11% | |||
Noninterest Income
Noninterest income was down 5% from the linked quarter, primarily due to one-time gains in second quarter 2015, such as income from, and sale of, other real estate owned. In addition, gains on sale of investment securities were taken in the linked quarter as part of a realignment in the mix of securities to mitigate the impact of potential changes in market rates on the value of the portfolio. Noninterest income increased 18% from the third quarter in 2014, primarily due to the increase in gains on sale of residential mortgage loans when compared to the year-over-year quarter. This was mainly due to recent increases in residential real estate sales which benefitted from continued improvement of the local economy. For the three and nine months ended 2015, other non-interest income fell, primarily as a result of lower annuity commission revenue earned versus the like periods in 2014.
Noninterest Income | |||||||
(Unaudited) | |||||||
(Dollars in Thousands) | |||||||
For the Three Months Ended, | |||||||
September 30, 2015 |
June 30, 2015 |
$ Change |
% Change |
September 30, 2014 |
$ Change |
% Change |
|
Service charges on deposit accounts | $ 451 | $ 436 | $ 15 | 3% | $ 450 | $ 1 | 0% |
Net gain (loss) on sale of other real estate owned | 57 | 89 | (32) | -36% | (85) | 142 | 167% |
Net gain from sale of loans | 1,464 | 1,426 | 38 | 3% | 1,120 | 344 | 31% |
Net gain on sale of securities available for sale | -- | 53 | (53) | -100% | 38 | (38) | -100% |
Earnings on bank owned life insurance | 120 | 126 | (6) | -5% | 127 | (7) | -6% |
Other noninterest income | |||||||
Fee income | 553 | 549 | 4 | 1% | 498 | 55 | 11% |
Income from other real estate owned | -- | 67 | (67) | -100% | 6 | (6) | -100% |
Other | 41 | 77 | (36) | -47% | 120 | (79) | -66% |
Total noninterest income | $ 2,686 | $ 2,823 | $ (137) | -5% | $ 2,274 | $ 412 | 18% |
For the Nine Months Ended, | |||||||
September 30, 2015 |
September 30, 2014 |
$ Change |
% Change |
||||
Service charges on deposit accounts | $ 1,314 | $ 1,359 | $ (45) | -3% | |||
Net gain (loss) on sale of other real estate owned | 140 | (179) | 319 | 178% | |||
Net gain from sale of loans | 3,844 | 2,717 | 1,127 | 41% | |||
Net gain on sale of securities available for sale | 53 | 88 | (35) | -40% | |||
Net other-than-temporary impairment | -- | (48) | 48 | 100% | |||
Earnings on bank owned life insurance | 368 | 378 | (10) | -3% | |||
Other noninterest income | |||||||
Fee income | 1,541 | 1,340 | 201 | 15% | |||
Income from other real estate owned | 67 | 34 | 33 | 97% | |||
Other | 155 | 369 | (214) | -58% | |||
Total noninterest income | $ 7,482 | $ 6,058 | $ 1,424 | 24% | |||
Noninterest Expense
Noninterest expense was unchanged compared to the immediate prior quarter. Increases in costs incurred in operating other real estate owned were offset by declines in data processing costs and expenses associated with providing a reserve for unfunded commitments. Current quarter reductions in data processing expenses were achieved through the renegotiation of the Company's core processing contract in the linked quarter. Noninterest expense was also up 9% compared to the year-over-year quarter. In addition to higher commission expenses associated with increased residential real estate loan production, further salary and benefit expense was incurred as a result of the opening of our Salem, Oregon LPO at the beginning of 2015.
Noninterest expense was also up 9% for the first nine months of 2015 compared to the same period in 2014. This increase was primarily due to additional salary and benefit expense associated with the opening of our Salem LPO, increased commissions paid to residential real estate mortgage lenders reflecting higher production volume, and annual increases in salary and health benefit plan expenses. The increase in other noninterest expense year-to-date was related to establishment of a reserve for unfunded commitments of $143,000, which is further explained under the subheading "Allowance for Loan Losses".
Noninterest Expense | |||||||
(Unaudited) | |||||||
(Dollars in Thousands) | |||||||
For the Three Months Ended, | |||||||
September 30, 2015 |
June 30, 2015 |
$ Change |
% Change |
September 30, 2014 |
$ Change |
% Change |
|
Salaries and employee benefits | $ 4,868 | $ 4,837 | $ 31 | 1% | $ 4,286 | $ 582 | 14% |
Occupancy | 480 | 485 | (5) | -1% | 483 | (3) | -1% |
Equipment | 271 | 250 | 21 | 8% | 261 | 10 | 4% |
Data processing | 451 | 471 | (20) | -4% | 492 | (41) | -8% |
Professional services | 194 | 190 | 4 | 2% | 220 | (26) | -12% |
Other real estate owned write-downs | -- | 74 | (74) | -100% | 1 | (1) | -100% |
Other real estate owned operating costs | 80 | -10 | 90 | N/M | 100 | (20) | -20% |
State taxes | 125 | 120 | 5 | 4% | 110 | 15 | 14% |
FDIC and state assessments | 131 | 133 | (2) | -2% | 119 | 12 | 10% |
Other noninterest expense: | |||||||
Director fees | 71 | 83 | (12) | -14% | 80 | (9) | -11% |
Communication | 63 | 62 | 1 | 2% | 65 | (2) | -3% |
Advertising | 88 | 81 | 7 | 9% | 73 | 15 | 21% |
Professional liability insurance | 25 | 15 | 10 | 67% | 24 | 1 | 4% |
Amortization | 85 | 88 | (3) | -3% | 99 | (14) | -14% |
Other | 777 | 853 | (76) | -9% | 720 | 57 | 8% |
Total noninterest expense | $ 7,709 | $ 7,732 | $ (23) | 0% | $ 7,133 | $ 576 | 8% |
For the Nine Months Ended, | |||||||
September 30, 2015 |
September 30, 2014 |
$ Change |
% Change |
||||
Salaries and employee benefits | $ 14,283 | $ 12,624 | $ 1,659 | 13% | |||
Occupancy | 1,487 | 1,494 | (7) | 0% | |||
Equipment | 788 | 775 | 13 | 2% | |||
Data processing | 1,400 | 1,387 | 13 | 1% | |||
Professional services | 511 | 606 | (95) | -16% | |||
Other real estate owned write-downs | 104 | 67 | 37 | 55% | |||
Other real estate owned operating costs | 87 | 191 | (104) | -54% | |||
State taxes | 347 | 314 | 33 | 11% | |||
FDIC and state assessments | 397 | 381 | 16 | 4% | |||
Other noninterest expense: | |||||||
Director fees | 225 | 208 | 17 | 8% | |||
Communication | 185 | 155 | 30 | 19% | |||
Advertising | 265 | 227 | 38 | 17% | |||
Professional liability insurance | 62 | 65 | (3) | -5% | |||
Amortization | 256 | 291 | (35) | -12% | |||
Other | 2,528 | 2,243 | 285 | 13% | |||
Total noninterest expense | $ 22,925 | $ 21,028 | $ 1,897 | 9% | |||
Financial Performance Overview | |||||
(Unaudited) | |||||
For the Three Months Ended | |||||
September 30, 2015 |
June 30, 2015 |
Change |
September 30, 2014 |
Change |
|
Performance Ratios | |||||
Return on average assets, annualized | 0.79% | 0.80% | (0.01) | 0.74% | 0.05 |
Return on average equity, annualized | 8.30% | 8.24% | 0.06 | 7.55% | 0.75 |
Efficiency ratio (1) | 76.55% | 76.62% | (0.07) | 77.91% | (1.36) |
For the Nine Months Ended | |||||
September 30, 2015 |
September 30, 2014 |
Change |
|||
Performance Ratios | |||||
Return on average assets, annualized | 0.74% | 0.71% | 0.03 | ||
Return on average equity, annualized | 7.62% | 7.26% | 0.36 | ||
Efficiency ratio (1) | 78.83% | 79.98% | (1.15) | ||
(1) Non-interest expense divided by net interest income plus noninterest income. | |||||
LIQUIDITY
Cash and Cash Equivalents and Investment Securities | ||||||||||
(Unaudited) | ||||||||||
(Dollars in Thousands) | ||||||||||
Sept 30, 2015 |
% of Total |
June 30, 2015 |
% of Total |
$ Change |
% Change |
Sept 30, 2014 |
% of Total |
$ Change |
% Change |
|
Cash and due from banks | $ 12,613 | 9% | $ 16,431 | 15% | $ (3,818) | -23% | $ 15,284 | 11% | $ (2,671) | -17% |
Cash equivalents: | ||||||||||
Interest-bearing deposits | 36,291 | 25% | 534 | 0% | 35,757 | N/M | 25,497 | 18% | 10,794 | 42% |
Interest-bearing certificates of deposit | 2,727 | 2% | 2,727 | 2% | -- | 0% | 2,727 | 2% | -- | 0% |
Total cash equivalents and certificate of deposits | 51,631 | 36% | 19,692 | 17% | 31,939 | 162% | 43,508 | 31% | 8,123 | 19% |
Investment securities: | ||||||||||
Collateralized mortgage obligations: agency issued | 36,377 | 25% | 38,479 | 34% | (2,102) | -5% | 40,039 | 30% | (3,662) | -9% |
Collateralized mortgage obligations: non-agency issued | 483 | 0% | 483 | 0% | 0 | 0% | 579 | 0% | (96) | -17% |
Mortgage-backed securities: agency issued | 9,349 | 7% | 9,468 | 8% | (119) | -1% | 12,630 | 9% | (3,281) | -26% |
U.S. Government and agency securities | 10,026 | 7% | 10,004 | 9% | 22 | 0% | 8,655 | 6% | 1,371 | 16% |
State and municipal securities | 33,467 | 23% | 32,542 | 29% | 925 | 3% | 29,282 | 21% | 4,185 | 14% |
FHLB Stock, at cost | 1,348 | 1% | 1,949 | 2% | (601) | -31% | 2,926 | 2% | (1,578) | 100% |
Pacific Coast Bankers' Bank stock, at cost | 1,000 | 1% | 1,000 | 1% | -- | 0% | 1,000 | 1% | 0 | 0% |
Total investment securities | 92,050 | 64% | 93,925 | 83% | (1,875) | -2% | 95,111 | 69% | (3,061) | -3% |
Total cash equivalents and investment securities | $ 143,681 | 100% | $ 113,617 | 100% | $ 30,064 | 26% | $ 138,619 | 100% | $ 5,062 | 4% |
Total cash equivalents and investment securities | ||||||||||
as a % of total assets | 18% | 14% | 19% |
Liquidity remains strong based on current levels of combined cash equivalents, investment securities and unused borrowing capacity. "In anticipation of additional loan growth, we retained a higher level of cash equivalents as compared to the linked quarter," said Douglas N. Biddle, EVP and Chief Executive Officer. "Our investment securities include a large component of fully amortized U.S. agency 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 3.6 years at September 30. 2015, 4.2 years at June 30, 2015 and 4.3 years at September 30, 2014.
The Bank had $11.3 million in outstanding borrowings against its $167.2 million in established borrowing capacity with the Federal Home Loan Bank of Des Moines (FHLB) as of September 30, 2015. The Bank had $26.4 million and $11.5 million outstanding in FHLB borrowings at June 30, 2015 and September 30, 2014 respectively. The borrowing capacity at the FHLB was $156.3 million and $143.8 million at June 30, 2015 and September 30, 2014 respectively. The Bank's borrowing facility with the FHLB is subject to collateral and stock ownership requirements. The Bank also had available a discount window primary credit line with the Federal Reserve Bank of San Francisco of approximately $66.7 million, subject to collateral requirements, and $16.0 million from correspondent banks, with no balance outstanding on either of these facilities.
LOANS
Loans by Category | ||||||||||
(Unaudited) | Sept 30, | % of | June 30, | % of | $ | % | Sept 30, | % of | $ | % |
(Dollars in Thousands) | 2015 | Gross Loans | 2015 | Gross Loans | Change | Change | 2014 | Gross Loans | Change | Change |
Commercial and agricultural | $ 120,818 | 20% | $ 121,435 | 20% | $ (617) | -1% | $ 112,873 | 20% | $ 7,945 | 7% |
Real estate: | ||||||||||
Construction and development | 35,071 | 6% | 32,382 | 5% | 2,689 | 8% | 25,419 | 5% | 9,652 | 38% |
Residential 1-4 family | 96,182 | 16% | 94,616 | 16% | 1,566 | 2% | 94,101 | 17% | 2,081 | 2% |
Multi-family | 24,797 | 4% | 24,617 | 4% | 180 | 1% | 20,554 | 4% | 4,243 | 21% |
Commercial real estate -- owner occupied | 134,092 | 22% | 134,680 | 22% | (588) | 0% | 122,090 | 22% | 12,002 | 10% |
Commercial real estate -- non owner occupied | 130,977 | 21% | 127,654 | 21% | 3,323 | 3% | 120,569 | 22% | 10,408 | 9% |
Farmland | 19,951 | 3% | 21,958 | 4% | (2,007) | -9% | 22,926 | 4% | (2,975) | -13% |
Consumer | 48,998 | 8% | 47,616 | 8% | 1,382 | 3% | 34,787 | 6% | 14,211 | 41% |
Gross loans | 610,886 | 100% | 604,958 | 100% | 5,928 | 1% | 553,319 | 100% | 57,567 | 10% |
Less: allowance for loan losses | (8,756) | (8,347) | (409) | (8,255) | (501) | |||||
Less: deferred fees | (1,411) | (1,396) | (15) | (1,179) | (232) | |||||
Loans, net | $ 600,719 | $ 595,215 | $ 5,504 | $ 543,885 | $ 56,834 | |||||
Loan portfolio growth continues to be well-diversified, with higher balances in most lending categories. The recent loan growth was generated predominately within the Western Washington and Oregon markets. The portfolio does include $30.2 million in purchased government-guaranteed commercial and commercial real estate loans. In addition, the portfolio contains $37.8 million in indirect consumer loans to finance luxury and classic cars as a part of a strategy to diversify the loan portfolio. These loans, which have been an important component in the $14.3 million, or 44%, increase in consumer loans over the prior year, have been made to individuals with high credit scores and have exhibited very low loss experience 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.
DEPOSITS
Deposits | ||||||||||
(Unaudited) | ||||||||||
(Dollars in Thousands) | ||||||||||
Sept 30, 2015 |
% of Total |
June 30, 2015 |
% of Total |
$ Change |
% Change |
Sept 30, 2014 |
% of Total |
$ Change |
% Change |
|
Interest-bearing demand and money market | $ 298,993 | 42% | $ 284,844 | 43% | $ 14,149 | 5% | $ 266,863 | 42% | $ 32,130 | 12% |
Savings | 88,561 | 13% | 81,619 | 12% | 6,942 | 9% | 76,661 | 12% | 11,900 | 16% |
Time deposits | 138,200 | 20% | 127,809 | 19% | 10,391 | 8% | 118,221 | 18% | 19,979 | 17% |
Total interest-bearing deposits | 525,754 | 75% | 494,272 | 74% | 31,482 | 6% | 461,745 | 72% | 64,009 | 14% |
Non-interest bearing demand | 179,346 | 25% | 170,544 | 26% | 8,802 | 5% | 182,259 | 28% | (2,913) | -2% |
Total deposits | $ 705,100 | 100% | $ 664,816 | 100% | $ 40,284 | 6% | $ 644,004 | 100% | $ 61,096 | 9% |
Total deposits grew during the current quarter, primarily due to seasonal deposit inflows attributed to economic activity associated with increased tourism activity during the current period in some of our markets. In addition, the increase is partially due to recent successes in acquiring business deposit relationships in conjunction with the growth in lending achieved over the past year. The purposeful addition of longer-term fixed rate time deposits for interest rate risk management purposes did result in raising the average rate paid on total deposits during the quarter.
Total brokered deposits were $44.6 million, which included $1.3 million via reciprocal deposit arrangements, up from $28.9 million and $22.7 million at June 30, 2015 and September 30, 2014, respectively. The brokered deposits acquired during the quarter had fixed rates with terms ranging from 2 to 5 years. "These deposits were obtained to lock in historically low rates to implement interest rate risk mitigation strategies," explained Biddle.
CAPITAL
Pacific Financial Corporation ("Company"), and its subsidiary Bank of the Pacific ("Bank"), met the thresholds to be considered "Well-Capitalized" under published regulatory standards for total risk-based capital, Tier 1 risk-based capital, Common equity Tier 1 and Tier 1 leverage capital. Capital ratios have generally increased as compared to the second quarter of 2015 due to a decline in risk-weighted assets during the current period. The increased deposits experienced during the quarter were primarily retained in fed funds sold due to the prospect of continued loan growth anticipated by the Company's loan pipeline and expected seasonal declines in deposits in the coming winter months However, the current period ratios have decreased as compared to the same quarter a year ago, primarily due to the successful execution of the Company's growth strategy and shift in balance sheet mix to higher risk-weighted assets, such as loans.
The Federal Deposit Insurance Corporation ("FDIC") has established minimum requirements for capital adequacy for state non-member banks under the Basel III capital framework. On April 9, 2015, The Board of Governors of the Federal Reserve System ("Federal Reserve") issued a final rule to amend the Small Bank Holding Company Policy Statement. With this amendment, small bank holding companies, including Pacific Financial Corporation, will not be subject to Basel III capital rules. For illustrative purposes, Basel III framework capital ratios are displayed below for both the Company and the Bank.
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.
Sept 30, 2015 |
June 30, 2015 |
Change |
Sept 30, 2014 |
Change |
Regulatory Minimum to be "Well Capitalized"* |
|
greater than or equal to |
||||||
Pacific Financial Corporation | ||||||
Total risk-based capital ratio | 13.35% | 12.87% | 0.48 | 14.09% | (0.74) | 10.5% |
Tier 1 risk-based capital ratio | 12.10% | 11.62% | 0.48 | 12.83% | (0.73) | 8.5% |
Common equity tier 1 ratio | 10.06% | 9.62% | 0.44 | n/a | n/a | 7.0% |
Leverage ratio | 9.83% | 9.90% | (0.07) | 10.09% | (0.26) | 5.0% |
Tangible common equity ratio | 7.98% | 7.98% | -- | 8.11% | (0.13) | n/a |
Bank of the Pacific | ||||||
Total risk-based capital ratio | 13.31% | 12.84% | 0.47 | 13.87% | (0.56) | 10.5% |
Tier 1 risk-based capital ratio | 12.05% | 11.59% | 0.46 | 12.61% | (0.56) | 8.5% |
Common equity tier 1 ratio | 12.05% | 11.59% | 0.46 | n/a | n/a | 7.0% |
Leverage ratio | 9.79% | 9.88% | (0.09) | 9.91% | (0.12) | 5.0% |
*Includes Basel III Capital Conservation Buffer |
Net Interest Margin
Net interest margin declined slightly compared to the second quarter of 2015, predominantly due to a modest addition of higher-cost longer-term fixed rate funding and lower-yielding LIBOR-based floating rate loans for interest rate risk management purposes. Net interest margin declined as compared to the year-over-year quarter and year-to-date for the prior year. In both periods of 2014, loan yields and net interest margin were each enhanced by 7 and 5 basis points respectively, due to the collection of non-accrual interest.
The decline in yields on investment securities also contributed to the decrease in net interest margin from the preceding quarter. This was primarily due to some realignment of the composition of the portfolio toward the end of the linked quarter to mitigate the impact of potential changes in market rates on the value of the portfolio. In addition, the proportion of lower yielding cash-equivalent investments was increased when compared to the second quarter 2015 in anticipation of continued loan growth, as noted above.
The following tables set forth information with regard to average balances of interest-earning assets and interest-bearing liabilities and the resultant yields or cost, net interest income, 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 | |||||||
(Annualized, tax-equivalent basis) | |||||||
(Unaudited) | |||||||
For the Three Months Ended, | |||||||
Sept 30, 2015 |
June 30, 2015 |
$ Change |
% Change |
Sept 30, 2014 |
$ Change |
% Change |
|
Average Balances | |||||||
Gross loans | $ 605,552 | $ 594,741 | $ 10,811 | 2% | $ 549,280 | $ 56,272 | 10% |
Loans held for sale | $ 11,787 | $ 14,713 | $ (2,926) | -20% | $ 7,068 | $ 4,719 | 67% |
Investment securities | $ 118,102 | $ 107,074 | $ 11,028 | 10% | $ 118,052 | $ 50 | 0% |
Total interest-earning assets | $ 735,441 | $ 716,528 | $ 18,913 | 3% | $ 674,400 | $ 61,041 | 9% |
Non-interest bearing demand deposits | $ 181,091 | $ 168,967 | $ 12,124 | 7% | $ 170,560 | $ 10,531 | 6% |
Interest bearing deposits | $ 506,257 | $ 491,750 | $ 14,507 | 3% | $ 463,719 | $ 42,538 | 9% |
Borrowings | $ 28,794 | $ 34,809 | $ (6,015) | -17% | $ 24,868 | $ 3,926 | 16% |
Total interest-bearing liabilities | $ 535,051 | $ 526,559 | $ 8,492 | 2% | $ 488,587 | $ 46,464 | 10% |
Total Equity | $ 76,540 | $ 75,164 | $ 1,376 | 2% | $ 72,224 | $ 4,316 | 6% |
Sept 30, 2015 |
June 30, 2015 |
Change |
Sept 30, 2014 |
Change |
|||
Net Interest Margin | |||||||
Yield on average gross loans (1) | 4.83% | 4.84% | (0.01) | 4.95% | (0.12) | ||
Yield on average investment securities (1) | 1.95% | 2.26% | (0.31) | 2.02% | (0.07) | ||
Cost of average interest bearing deposits | 0.34% | 0.33% | 0.01 | 0.34% | -- | ||
Cost of average borrowings | 1.67% | 1.43% | 0.24 | 1.83% | (0.16) | ||
Cost of average total deposits and borrowings | 0.31% | 0.30% | 0.01 | 0.31% | -- | ||
Yield on average interest-earning assets | 4.37% | 4.46% | (0.09) | 4.44% | (0.07) | ||
Cost of average interest-bearing liabilities | 0.42% | 0.40% | 0.02 | 0.42% | -- | ||
Net interest spread | 3.95% | 4.06% | (0.11) | 4.02% | (0.07) | ||
Net interest margin (1) | 4.06% | 4.16% | (0.10) | 4.13% | (0.07) | ||
(1) Tax-exempt income has been adjusted to a tax equivalent basis at a 34% rate. | |||||||
For the Nine Months Ended | |||||||
Sept 30, 2015 |
Sept 30, 2014 |
$ Change |
% Change |
||||
Average Balances | |||||||
Gross loans | $ 589,499 | $ 531,517 | $ 57,982 | 11% | |||
Loans held for sale | $ 11,097 | $ 6,348 | $ 4,749 | 75% | |||
Investment securities | $ 113,745 | $ 117,339 | $ (3,594) | -3% | |||
Interest-earning assets | $ 714,341 | $ 655,204 | $ 59,137 | 9% | |||
Non-interest bearing demand deposits | $ 172,534 | $ 154,213 | $ 18,321 | 12% | |||
Interest bearing deposits | $ 492,989 | $ 464,673 | $ 28,316 | 6% | |||
Borrowings | $ 29,498 | $ 23,899 | $ 5,599 | 23% | |||
Interest-bearing liabilities | $ 522,487 | $ 488,572 | $ 33,915 | 7% | |||
Total Equity | $ 75,067 | $ 70,116 | $ 4,951 | 7% | |||
Sept 30, 2015 |
Sept 30, 2014 |
Change |
|||||
Net Interest Margin | |||||||
Yield on average gross loans (1) | 4.86% | 5.04% | (0.18) | ||||
Yield on average investment securities (1) | 2.10% | 2.30% | (0.20) | ||||
Cost of average interest bearing deposits | 0.34% | 0.36% | (0.02) | ||||
Cost of average borrowings | 1.63% | 1.90% | (0.27) | ||||
Cost of average total deposits and borrowings | 0.31% | 0.33% | (0.02) | ||||
Yield on average interest-earning assets | 4.42% | 4.55% | (0.13) | ||||
Cost of average interest-bearing liabilities | 0.41% | 0.43% | (0.02) | ||||
Net interest spread | 4.01% | 4.12% | (0.11) | ||||
Net interest margin (1) | 4.12% | 4.22% | (0.10) | ||||
(1) Tax-exempt income has been adjusted to a tax equivalent basis at a 34% rate. | |||||||
ASSET QUALITY
Adversely classified loans declined compared to the preceding quarter and the like quarter a year ago. This current decrease is primarily due to the payoff of a nonaccrual commercial real estate loan relationship totaling $1.1 million. Total 30-89 day delinquencies remained below 0.50%, mirroring the continued improvement in overall credit quality.
Adversely Classified Loans and Securities | |||||||
(Unaudited) | |||||||
(Dollars in Thousands) | |||||||
Sept 30, 2015 |
June 30, 2015 |
$ Change |
% Change |
Sept 30, 2014 |
$ Change |
% Change |
|
Rated substandard or worse, but not impaired | $ 9,803 | $ 10,442 | $ (639) | -6% | $ 11,020 | $ (1,217) | -11% |
Impaired | 4,681 | 5,715 | (1,034) | -18% | 7,429 | (2,748) | -37% |
Total adversely classified loans¹ | $ 14,484 | $ 16,157 | $ (1,673) | -10% | $ 18,449 | $ (3,965) | -21% |
Total investment securities² | $ 179 | $ 189 | $ (10) | -5% | $ 228 | $ (49) | -21% |
Gross loans (excluding deferred loan fees) | $ 610,886 | $ 604,958 | $ 5,928 | 1% | $ 553,319 | $ 57,567 | 10% |
Adversely classified loans to gross loans | 2.37% | 2.67% | 3.33% | ||||
Allowance for loan losses | $ 8,756 | $ 8,347 | $ 409 | 5% | $ 8,255 | $ 501 | 6% |
Allowance for loan losses as a percentage of adversely classified loans | 60.45% | 51.66% | 44.74% | ||||
Allowance for loan losses to total impaired loans | 187.05% | 146.05% | 111.12% | ||||
Adversely classified loans and securities to total assets | 1.80% | 2.08% | 2.49% | ||||
Delinquent loans to gross loans, not in nonaccrual status | 0.08% | 0.01% | 0.60% | ||||
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. | |||||||
²Adversely classified investment securities consist of one private label collateralized mortgage obligation (CMO) as of September 30, 2015, June 30, 2015 and September 30, 2014. | |||||||
Nonperforming assets were down as compared to the linked quarter, primarily due to the payoff of a $1.1 million loan relationship, as noted above. Nonperforming assets also declined during this period in terms of percentage of total assets. Reductions in nonperforming assets were also due to sales of OREO.
Non-Performing Assets | |||||||
(Unaudited) | |||||||
(Dollars in Thousands) | |||||||
Sept 30, 2015 |
June 30, 2015 |
$ Change |
% Change |
Sept 30, 2014 |
$ Change |
% Change |
|
Loans on nonaccrual status | $ 2,142 | $ 3,155 | $ (1,013) | -32% | $ 4,811 | $ (2,669) | -55% |
Loans past due greater than 90 days but not on nonaccrual status | -- | -- | -- | 0% | 409 | -409 | -100% |
Total non-performing loans | 2,142 | 3,155 | (1,013) | -32% | 5,220 | (3,078) | -59% |
Other real estate owned and foreclosed assets | 3,761 | 4,240 | (479) | -11% | 1,210 | 2,551 | 211% |
Total nonperforming assets | $ 5,903 | $ 7,395 | $ (1,492) | -20% | $ 6,430 | $ (527) | -8% |
Percentage of nonperforming assets to total assets | 0.72% | 0.94% | 0.86% | ||||
Nonperforming loans to total loans | 0.35% | 0.52% | 0.94% |
OREO property disposition activities continued during the third quarter. In the current period, the Company sold one OREO commercial real estate property with a book value of $348,000 at a small gain and one residential real estate property with a book value of $128,000 at a small loss. OREO valuation adjustments continue to be minimal. The largest balances in the OREO portfolio at the end of the quarter were attributable to two commercial properties, followed by one residential property, all of which are located within our market area.
ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses continues to decline in concert with the general trend of reduced levels of classified loans, loan delinquencies and other relevant credit metrics. With the reduction in net charge-offs, 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. Provision expenses were made to the allowance for loan losses in concert with the loan portfolio growth and improvement in credit quality experienced during those periods. In addition, $143,000 was expensed during the first nine months of 2015 as other noninterest expense to establish a separate reserve for unfunded commitments, much of which had already been incorporated into the Company's allowance for loan losses valuation methodology.
For the third quarter 2015, charge-offs continue to be minimal and were centered in various consumer loan relationships, none of which were of notable size. The Company experienced net recoveries of $244,000, or -0.16% of average gross loans resulting from the payoff of a $1.1 million nonaccrual loan during the current period. As such, the ratio of net loan charge-offs to average gross loans (annualized) for the current quarter reflects this net recovery position. The overall risk profile of the loan portfolio continues to improve. However, the trend of future provision 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) | |||||||
(Dollars in Thousands) | |||||||
For the Three Months Ended, | |||||||
Sept 30, 2015 |
June 30, 2015 |
$ Change |
% Change |
Sept 30, 2014 |
$ Change |
% Change |
|
Gross loans outstanding at end of period | $ 610,886 | $ 604,958 | $ 5,928 | 1% | $ 553,319 | $ 57,567 | 10% |
Average loans outstanding, gross | $ 605,552 | $ 594,741 | $ 10,811 | 2% | $ 549,280 | $ 56,272 | 10% |
Allowance for loan losses, beginning of period | $ 8,347 | $ 8,254 | $ 93 | 1% | $ 8,315 | $ 32 | 0% |
Commercial | -- | -- | -- | 0% | -- | -- | 0% |
Commercial Real Estate | -- | (122) | 122 | -100% | (127) | 127 | -100% |
Residential Real Estate | -- | -- | -- | 0% | (61) | 61 | -100% |
Consumer | (30) | (22) | (8) | 36% | (12) | (18) | 150% |
Total charge-offs | (30) | (144) | 114 | -79% | (200) | 170 | -85% |
Commercial | 2 | 36 | (34) | -94% | 7 | (5) | -71% |
Commercial Real Estate | 257 | 2 | 255 | N/M | 29 | 228 | N/M |
Residential Real Estate | 7 | 11 | (4) | -36% | 4 | 3 | 75% |
Consumer | 8 | 1 | 7 | N/M | -- | 8 | 100% |
Total recoveries | 274 | 50 | 224 | N/M | 40 | 234 | N/M |
Net (charge-offs)/recoveries | 244 | (94) | 338 | N/M | (160) | 404 | N/M |
Provision charged to income | 165 | 187 | (22) | -12% | 100 | 65 | 65% |
Allowance for loan losses, end of period | 8,756 | 8,347 | 409 | 5% | 8,255 | 501 | 6% |
Ratio of net loans charged-off to average gross loans outstanding, annualized | -0.16% | 0.06% | -0.22% | N/M | 0.12% | -0.28% | N/M |
Ratio of allowance for loan losses to gross loans outstanding | 1.43% | 1.38% | 0.05% | 4% | 1.49% | -0.06% | -4% |
For the Nine Months Ended, | |||||||
Sept 30, 2015 |
Sept 30, 2014 |
$ Change |
% Change |
||||
Gross loans outstanding at end of period | $ 610,886 | $ 553,319 | $ 57,567 | 10% | |||
Average loans outstanding, gross | $ 589,499 | $ 531,517 | $ 57,982 | 11% | |||
Allowance for loan losses, beginning of period | $ 8,353 | $ 8,359 | $ (6) | 0% | |||
Commercial | -- | (26) | 26 | -100% | |||
Commercial Real Estate | (122) | (523) | 401 | -77% | |||
Residential Real Estate | (86) | (105) | 19 | -18% | |||
Consumer | (123) | (59) | (64) | 108% | |||
Total charge-offs | (331) | (713) | 382 | -54% | |||
Commercial | 45 | 9 | 36 | N/M | |||
Commercial Real Estate | 261 | 381 | (120) | -31% | |||
Residential Real Estate | 20 | 17 | 3 | 18% | |||
Consumer | 26 | 2 | 24 | N/M | |||
Total recoveries | 352 | 409 | (57) | -14% | |||
Net (charge-offs)/recoveries | 21 | (304) | 325 | -107% | |||
Provision charged to income | 382 | 200 | 182 | 91% | |||
Allowance for loan losses, end of period | $ 8,756 | $ 8,255 | $ 501 | 6% | |||
Ratio of net loans charged-off to average gross loans outstanding, annualized | -0.01% | 0.06% | -0.07% | -117% | |||
Ratio of allowance for loan losses to gross loans outstanding | 1.43% | 1.60% | -0.17% | -11% | |||
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. As of September 30, 2015, the Company had total assets of $815 million and operated seventeen 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.