Pacific Financial Corp Earns $2.4 Million, or $0.23 per Diluted Share, for Second Quarter 2020; Declares Quarterly Cash Dividend of $0.08 per Share; Updates COVID-19 Response

ABERDEEN, Wash., July 28, 2020 (GLOBE NEWSWIRE) -- Pacific Financial Corporation PFLC, ("Pacific"), the holding company (the "Company") for Bank of the Pacific (the "Bank"), today reported net income of $2.4 million, or $0.23 per diluted share for the second quarter 2020, compared to $1.2 million, or $0.11 per diluted share in the preceding quarter and $3.6 million, or $0.34 per diluted share, for the second quarter of 2019. For the first six months of 2020, net income was $3.6 million, or $0.34 per diluted share, compared to $6.6 million, or $0.61 per diluted share, for the first six months of 2019. Impacting earnings for the second quarter and for the first half of 2020 was the increased loan loss provision taken in the first two quarters of 2020 related to the COVID-19 pandemic, which was partially offset by robust revenue growth generated from gain on sale of loans.

"Driven by solid loan and deposit growth, Pacific's second quarter 2020 operating results were strong, although overshadowed by the Coronavirus pandemic and its continuing impact on the economy and our communities," said Denise Portmann, President and Chief Executive Officer. "Our focus continues to be on keeping our employees and communities safe. All of our branches are currently open with COVID-19 health safety protocols in place, while many of our back-office employees continue to work from home.

"Earnings for the current quarter benefitted from a record level of mortgage banking production, propelled by refinancing activity as a result of historically low interest rates, which led to higher gains on sale of loans. Also enhancing our loan portfolio was the addition of $130.5 million in Small Business Administration ("SBA") Paycheck Protection Program ("PPP") loans that we funded during the quarter, which was partially offset by an $18.0 million reduction in commercial loans mainly due to a decline in credit line utilization," said Portmann. "Significant deposit inflows as well as the deposits of customer PPP loan proceeds contributed to a 25% growth in total deposits during the quarter. I am incredibly proud of our bankers as they worked together to support our customers and communities during one of the most difficult and challenging quarters on record.

"Our net interest margin contracted during the quarter as anticipated with two Fed rate cuts earlier in the year as well as the 1% rate on newly funded SBA PPP loans," commented Portmann. "While there were no deteriorating credit metrics, with nonperforming assets and adversely classified loans improving from the linked quarter, we proactively provisioned an additional $1.0 million for potential credit losses on loans for the second quarter of 2020, bringing our reserves to $11.5 million at quarter end."

Pacific Financial's board of directors declared a quarterly cash dividend of $0.08 per share on July 22, 2020. The dividend will be payable August 26, 2020, to shareholders of record on August 12, 2020. The current annualized dividend yield is 4.5% based on recent market prices and represents 35% of second quarter earnings. "Pacific will continue to take appropriate measures to maintain strong capital and liquidity levels," said Portmann. 

COVID-19 Pandemic Update

Pacific has taken a number of steps to protect its employees and support small businesses impacted by COVID-19 and continues to work diligently with its customers.

Branches and Key Operating Functions: In Mid-June, as counties within our branch footprint began removing some restrictions as they met COVID-19 phase qualifications for the states of Washington or Oregon, our branch lobbies were re-opened after operating through the drive-up only early in the pandemic. However, Pacific continues to encourage the use of digital and electronic channels. Additionally, the Company continues to disperse key operating functions including deposit operations, loan documentation and servicing, electronic banking and wires, and network services to enhance the safety of our employees and to minimize disruption in case of illness.

Programs to Provide Relief and Support our Clients: 

SBA Paycheck Protection Program: In March 2020, Congress passed the Coronavirus Aid, Relief, and Economic Security Act ("CARES Act") which provides economic relief for the country, including the Small Business Administration ("SBA") Paycheck Protection Program ("PPP") to fund short-term loans for small businesses. The Company actively participated in this program and as of June 30, 2020, the Bank has processed and funded 740 applications for a total of $130.5 million with an average loan amount of $176,000. Lender origination fees, paid by the SBA, are estimated to be $4.6 million and will be recognized over the earlier of forgiveness/payoff of the loan or amortized over the term of the loan. As of the date of this release, the bank has not processed any requests for loan forgiveness as the SBA has not yet announced the method by which applications are to be submitted.

Loan Payment Deferrals: In March 2020, the Bank began providing 90 day payment deferrals to customers adversely impacted by operating restrictions due to COVID-19. Currently, loan payment deferral requests have declined. As of June 30, 2020, 354 notes, or $106.2 million in loans, have been modified under this program representing 15.8% of gross loans outstanding, excluding PPP loans. A majority of these loan payment deferrals will expire during July and August. As of June 30, 2020, the bank granted a second round of payment deferrals on approximately $4.0 million in loans.

Other: As well as the items mentioned above, the Bank implemented other measures to assist its customers, including waiver of telephone transfer fees, waiver of deposit account monthly service charges through September for first responders and health care professionals, and waiver of early withdrawal fees on time deposits with a COVID-19 related need. 

Second Quarter 2020 Results

"There was significant growth in our balance sheet in the second quarter," said Carla Tucker, Executive Vice President and Chief Financial Officer. "The growth was primarily a result of the funding of SBA PPP loans totaling $130.5 million. Most of these loans were made to existing customers who deposited the loan proceeds into their checking accounts with us at Bank of the Pacific. In addition, net income grew from the first quarter as a result of increased mortgage banking production as well as a lower provision for loan losses." 

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

• Net income was $2.4 million for the second quarter of 2020, compared to $3.6 million for the second quarter a year ago, and $1.2 million for first quarter 2020.
  
  
• Diluted earnings per share were $0.23, for the second quarter of 2020, compared to $0.34 for the second quarter 2019, and $0.11 for the first quarter 2020.
  
  
• Provision for loan losses was $1.0 million for the second quarter, compared to no provision a year earlier, and $2.0 million in the first quarter of 2020.
  
  
• Net interest margin ("NIM") was 3.70% including SBA PPP loans, and 3.89% excluding SBA PPP loans, for the second quarter of 2020, compared to 4.74% for the second quarter of 2019, and 4.30% for the preceding quarter. Industry peer NIM was 3.57% at March 31, 2020. [Industry peers comprise of approximately 488 banks in the SNL Microcap U.S. Bank Index.] 
  
  
• Noninterest income for the second quarter of 2020 increased 39% over the like quarter a year ago and 35% from the linked quarter.
  
  
• Total deposits increased $199.5 million, or 25%, to $995.0 million at June 30, 2020, compared to $795.5 million at June 30, 2019 and increased $200.4 million from $794.6 million at March 31, 2020. Non-interest-bearing deposits grew by 42% from the linked quarter and represented 34% of total deposits at June 30, 2020.
  
  
• Gross loans increased $97.7 million, or 14%, to $787.3 million at June 30, 2020, compared to $689.7 million at June 30, 2019, and grew $108.7 million, or 16%, from $678.6 million at March 31, 2020. Included in total loans for the current quarter were 740 PPP loans totaling $130.5 million.
  
  
• Annualized return on average assets was 0.93%, and annualized return on average equity was 8.90%. Industry peer ROAA was 0.67% and ROAE was 6.15% at March 31, 2020. Pre-tax pre-provision return on average assets (non-GAAP) was 1.53% for the second quarter of 2020, compared to 2.01% for the second quarter a year ago and 1.53% for the first quarter of 2020. [Industry peers comprise of approximately 488 banks in the SNL Microcap U.S. Bank Index.] 
  
  
• Shareholder equity increased 8% to $109.4 million from a year ago and grew 3% from the linked quarter.
  
  
• Book value per share increased 8% to $10.31 from a year earlier and 3% from the first quarter of 2020.

Results of Operations

Net income was $2.4 million for the second quarter of 2020, compared to $3.6 million for the second quarter a year ago, and $1.2 million for first quarter 2020. For the first six months of 2020, net income was $3.6 million, compared to $6.6 million for the first six months of 2019.

Diluted earnings per share were $0.23 for the second quarter of 2020, compared to $0.34 per diluted share for the second quarter of 2019, and $0.11 for the first quarter of 2020. For the six months ended June 20, 2020, diluted earnings per share were $0.34, compared to $0.61 for the six months ended June 30, 2019.

Net interest income, before provision for loan losses, was $9.0 million for the second quarter of 2020, compared to $9.7 million for the second quarter a year ago, and $9.1 million for first quarter 2020. For the first six months of 2020, net interest income was $18.1 million compared to $19.3 million from the first six months of 2019. The drop in net interest income from the preceding quarter and year-to-date, was primarily due to a decline in earning asset yields, as interest rates on adjustable rate loans and investments decreased following reductions in short term interest rates, coupled with a lagging decrease in the cost of interest bearing deposits. Contributing to net interest income was amortized SBA PPP fees of $276,000 and SBA PPP loan interest of $258,000 for the current quarter.

The net interest margin was 3.70% including SBA PPP loans, and 3.89% excluding SBA PPP loans, for the second quarter of 2020, compared to 4.74% for the second quarter 2019, and 4.30% for the first quarter 2020. For the first six months of 2020, the NIM was 3.98% including SBA PPP loans and 4.15% excluding SBA PPP loans, compared to 4.72% for the first six months of 2019. "Our NIM came under pressure from the two Federal Reserve rate cuts earlier in the year, lower yields on the repricing of the loan portfolio, and the growth in lower yielding federal funds sold as a result of PPP loan proceeds, as well as the addition of $130.5 million in low yielding SBA PPP loans," said Tucker. Pacific Financial continues to maintain a net interest margin above the peer average posted by the SNL Small Cap U.S. Bank Index as of March 31, 2020. 

The yield on average interest-earning assets was 3.96%, including PPP loans, and 4.17% excluding PPP loans, for the second quarter of 2020, compared to 5.10% for the second quarter a year ago and 4.62% for the first quarter of 2020. Year-to-date, the yield on average interest-earning assets was 4.27%, including PPP loans, and 4.46% excluding PPP loans, compared to 5.07% for the first six months of 2019. The average yield on PPP loans, including amortized fees and interest income, was 2.12% for the current quarter. The loan portfolio, excluding PPP loans, is comprised of $193.0 million, or 29.4%, of fixed rate loans, and $463.8 million, or 70.6%, of variable rate loans. As of June 30, 2020, $223.2 million, or 48%, of total variable rate loans with a weighted average rate of 5.05%, have reached their rate floors.

The cost of average total funds was 0.27% for the second quarter of 2020, compared to 0.37% for the second quarter a year ago and 0.35% for the first quarter of 2020. Year-to-date, the cost of average total funds was 0.31% compared to 0.38% for the first six months of 2019. As a pro-active step to partially offset the decrease in earning assets yields, rates on new and renewed term deposits rates, as well as rates on money market, savings and checking accounts were lowered during the quarter.

Provision for loan losses was $1.0 million for the second quarter of 2020, compared to $2.0 million provision for loan losses for the preceding quarter. Year-to-date, the provision for loan losses totaled $3.0 million, compared to no provision for the first six months of 2019. "The higher provision taken in the first half of the year was predominantly due to economic uncertainties associated with COVID-19 and changes to the qualitative factors within the allowance for loan losses," said Portmann. Net charge-offs for the second quarter totaled $279,000, unrelated to COVID-19, compared to $207,000 for the preceding quarter, and $10,000 for the second quarter a year ago.

Noninterest income increased 39%, or $1.4 million, to $4.8 million for the second quarter of 2020, compared to $3.4 million for the second quarter 2019, and grew $1.2 million, or 35%, from $3.6 million for the first quarter 2020, primarily due to the increase in gain on sale of loans. Gain on sale of loans almost doubled from a year ago and increased by 68% on a linked quarter basis. Service charges on deposits were down 41%, or $216,000, from the second quarter of 2019 and 38%, or $192,000, from the quarter ended March 31, 2020. The decrease is a result of the impact of Stay-at-Home orders decreasing customer spending and the increased customer deposit balances from SBA PPP loan proceeds and stimulus checks. For the first six months of 2020, noninterest income increased 43% to $8.4 million from $5.8 million for the first six months of 2019. The growth in noninterest income for the first half of 2020 was largely due to higher gain on sale of loans.

Noninterest expense increased 13% to $9.8 million for the second quarter of 2020, compared to $8.7 million for the second quarter of 2019, and increased 7% from $9.1 million for the first quarter of 2020. Higher noninterest expense in the current quarter was primarily due to variable compensation and commissions on record mortgage production, as well as costs associated with the continued I-5 corridor expansion into the Eugene market and the growing Willamette Valley. These expenses were partially offset by the decrease in FDIC and State assessments as well as the decline in marketing and consulting expenses.

Income tax provision was $569,000 for the second quarter of 2020, compared to $870,000 for the second quarter 2019 and $296,000 for the first quarter 2020. The effective tax rate for the second quarter of 2020 was 19.1%, compared to 19.4% for the second quarter 2019, and 19.8% for the first quarter 2020. For the first six months of 2020 the income tax provision was $864,000, down 43% from $1.5 million. In addition to federal corporate income tax, Pacific Financial also pays Oregon corporate income tax and Washington Business and Occupation tax on revenues.

Balance Sheet Review

Total Assets reached $1.1 billion at June 30, 2020, up 22% from $925.0 million at June 30, 2019. Total assets increased 22% from $926.3 million on a linked quarter basis, primarily due to the addition of SBA PPP loans and the related deposit inflows.

Investment Securities increased 13% to $118.1 million at June 30, 2020, compared to $104.1 million at June 30, 2019, and increased 7% compared to $109.9 million at March 31, 2020. The increase in investment securities on a linked quarter basis and year-over-year was primarily the result of reinvesting a portion of its federal funds sold balances into higher yielding investments. The portfolio is comprised mainly of amortizing U.S. agency collateralized mortgage, mortgage-backed securities and municipal securities. 

Liquidity: "Liquidity within the Company remains strong with significant on-balance sheet liquidity and access to unused lines totaling $195.4 million with the Federal Reserve and Federal Home Loan Bank," said Tucker. In addition, the Company has access to $16 million in unused unsecured lines with correspondent banks, as well as access to brokered deposits and access to the Federal Reserve Paycheck Protection Program Lending Facility ("PPPLF"). The Federal Reserve's PPPLF allows the Bank to pledge and borrow against 100% of the principal balance of PPP loans originated. The Bank's borrowing facilities with the FHLB and the Federal Reserve Bank are subject to collateral requirements.

Gross Loans increased 14% to $787.3 million at June 30, 2020, compared to $689.7 million at June 30, 2019 and increased 16% compared to $678.6 million at March 31, 2020. The growth in gross loans compared to the preceding quarter reflects the addition of $130.5 million in funded SBA PPP loans during the second quarter. Loan balances, excluding SBA PPP loans, declined 3%, or $21.8 million, from March 31, 2020, primarily due to an $18.0 million reduction in commercial and agricultural loans. Commercial and agricultural loans balances were impacted by a $15 million reduction in commercial line of credit utilization during the quarter. 

Loans are predominately originated within our Western Washington and Oregon markets and the portfolio is well-diversified without significant concentration risk by collateral type or by industry. CRE concentrations were at 193% at June 30, 2020, compared to regulatory guidance of 300%. Commercial loans, along with CRE-owner occupied, account for 40% of total loans outstanding (excluding PPP loans) at June 30, 2020 and remained relatively constant compared to 41% at June 30, 2019. Loans to finance luxury and classic cars comprise a majority of the consumer loan balances at $45.4 million as of June 30, 2020, a decline of $8.4 million from $53.8 million a year ago and down $685,000 compared to $46.1 million at March 31, 2020. Commercial non-owner occupied and multifamily loans were $190.0 million at June 30, 2020, comprising 29% of gross loans, excluding PPP loans, an increase from $184.1 million at June 30, 2019 and from $183.2 million at March 31, 2020. Hospitality, 5+ unit apartments and commercial property comprise the largest areas of the commercial real estate non-owner occupied and multifamily portfolios.

Higher Risk Industries as a Result of COVID-19: Although it is difficult to determine the economic and business impact of the Coronavirus pandemic on various business and industries, with the Stay-at-Home orders and phased reopening plans in both Washington and Oregon, certain industries have seen a dramatic change in revenues in their businesses. Those early impact industries include accommodation (hospitality), animal production (primarily dairy), restaurants, retail trade, health care, repair and maintenance (primary automotive) and recreation and entertainment. At Pacific Financial, the total of these higher risk categories is $134.7 million, or 21% of gross loans without PPP. Although these industries are more directly impacted by COVID-19, the bank's customer base within these sectors covers a wide range of clients, including those who operate under diversified business models reaching a broader range of clients, possess necessary financial resources, and are managed by experienced management teams who aid in working through these economic challenges. 

Credit Underwriting policies are conservative. In light of increased risk associated with the COVID-19 pandemic, the Company has continued to make prudent enhancements to its credit oversight, such as greater underwriting control of unsecured lending with all requests regardless of size requiring credit administration approval, and the planned addition of an experienced credit risk officer to the credit administration team to support existing clients as needed. To manage risk, the Company oversees new loan origination volume and current loan balances using concentration limits that establish maximum exposure levels by designated industry segment, real estate product types, geography and single borrower limits. The overall risk profile of the loan portfolio continues to be conservative, demonstrating the solid credit risk management framework in place.

Total Deposits increased 25% to $995.0 million at June 30, 2020, compared to $795.5 million from a year earlier, and grew 25.2% from $794.6 million at March 31, 2020. Significant deposit inflows as well as the deposits from customer PPP loan proceeds contributed to this growth. Approximately 50% of the growth was in non-interest-bearing deposits which increased 37%, or $93.4 million, to $342.6 million at June 30, 2020, compared $249.2 million at June 30, 2019, and 42%, or $101.1 million, from $241.5 million at March 31, 2020. "The substantial growth in non-interest-bearing demand deposits was mainly a result of deposits made while funding SBA PPP loans," said Portmann. Non-interesting-bearing deposits represented 34% of total deposits at June 30, 2020, while total core deposits, (consisting of non-interest-bearing, interest-bearing accounts, money market and savings accounts) accounted for 93% of total deposits.

Capital Ratios of Pacific Financial Corporation, and its subsidiary Bank of the Pacific, continue to exceed the well-capitalized regulatory thresholds. At June 30, 2020, Pacific Financial Corporation's leverage ratio was 10.17% and the total risk-based capital ratio was 15.11%. On April 9, 2020, the regulatory agencies issued an interim final rule that neutralizes the effects of PPP loans funded through the Federal Reserve's new PPPLF. As of June 30, 2020, the Company has not utilized the PPPLF, as result the funding of the PPP loans impacted our leverage ratio by 111 basis points. The funding of PPP loans did not impact the total risk-based capital ratio, as with the 100% SBA guarantee, PPP loans have a zero percent risk-weighting for risk-based capital purposes. The total risk-based capital ratios of the Company include $13.4 million of junior subordinated debentures, all of which qualified as Tier 1 capital under guidance issued by the Federal Reserve. As provided in the Dodd-Frank Act, the Company expects to continue to rely on these junior subordinated debentures as part of its regulatory capital.

Asset Quality: "Although our credit metrics remain solid, we continue to build reserves in response to the Coronavirus pandemic and its economic impact in our markets," said Portmann. As noted above, the Bank offered a 90-day deferred payment option to eligible borrowers. These loans were not categorized as troubled debt restructures, but were conservatively downgraded to watch within the pass category at the time of the loan modification. As of June 30, 2020, 354 notes, or $106.2 million in loans, have been modified under the deferred payment option. 

Adversely classified loans increased by $1.7 million to $9.8 million, or 1.48% of adversely classified loans to gross loans (excluding PPP loans) at June 30, 2020, compared to $8.1 million, or 1.17% of gross loans, at June 30, 2019, while declining $1.4 million, from $11.2 million, or 1.65% of gross loans, at March 31, 2020. The decline on a linked quarter basis was primarily due to the payoff of several loans totaling $1.0 million.

90 day payment deferrals granted in the first half of 2020 have provided temporary relief to businesses as those businesses navigate the impacts of pandemic disruptions. At June 30, 2020, delinquencies were 0.03% of total loans, excluding SBA PPP loans, compared to 0.12% at June 30, 2019, and 0.27% at March 31, 2020. As with adversely classified assets, the decline from the linked quarter was related to payoffs and charge-offs of several loans totaling $1.0 million. Nonperforming assets ("NPA") remain minimal and totaled $1.4 million, or 0.18% of total assets, at June 30, 2020, compared to $773,000 at June 30, 2019 and $1.6 million at March 31, 2020. While delinquencies and nonperforming assets remained low for the quarter, we recognize that the challenges and credit impacts related to the COVID-19 economic downturn may not be realized until later in the year or into next year. 

As of June 30, 2020, the classified coverage ratio was 8.3% compared to 9.6% and 7.4% on March 31, 2020 and June 30, 2019, respectively. As noted above, the improvement in the ratio from linked quarter was primarily related to payoffs and charge offs of adversely classified assets. The classified coverage ratio is a measurement of asset risk and the capacity for capital to protect against that risk. It reflects the aggregate level of all adversely classified items in relation to Tier 1 Capital and the allowance for loan losses. 

The Allowance for Loan Losses ("ALL") increased 27% to $11.5 million, or 1.46% of gross loans or 1.75% of gross loans excluding PPP loans, at June 30, 2020, compared to $9.0 million, or 1.31% of gross loans, a year earlier and grew 7% from $10.8 million, or 1.59% of gross loans, at March 31, 2020. The Company provisioned $1.0 million for loan losses during the second quarter, compared to $2.0 million in the first quarter. These provisions are a proactive response to the economic uncertainties associated with the COVID-19 pandemic and are primarily a result of the pro-active downgrade within the pass category of deferred payment loans. 

While above June 30, 2019 levels, net charge offs for the current quarter and the first half of 2020 remained relatively low at 17 and 7 basis points of gross loans, excluding PPP loans, respectively. Net charge-offs in the current quarter totaled $279,000, compared to $207,000 in the preceding quarter and $10,000 in the like quarter a year ago. Current quarter net charge-offs were primarily a result of three loans totaling $329,000, unrelated to COVID-19. For the first six months of 2020, net charge-offs totaled $486,000 compared to $3,000 for the first six months of 2019.

LIQUIDITY

LOANS

DEPOSITS

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

The following tables set forth information regarding average balances of interest-earning assets and interest-bearing liabilities and the resultant yields or cost, and the net interest margin on a tax equivalent basis. Loans held for sale and non-accrual loans are included in total loans.