Market Overview

Pacific Financial Corp Earns Record $2.6 Million, or $0.25 per Share for 2Q18, Up 14% from 1Q18 and 40% from 2Q17; Earns $4.9 Million, or $0.46 per Share for 1H18, Up 42% from 1H17

Share:

ABERDEEN, Wash., July 24, 2018 (GLOBE NEWSWIRE) -- Pacific Financial Corporation (OTCQB:PFLC), the holding company for Bank of the Pacific, today reported net income increased 14% to $2.6 million, or $0.25 per diluted share, for the second quarter of 2018, compared to $2.3 million, or $0.21 per diluted share, for the first quarter of 2018 and increased 40% compared to $1.9 million, or $0.18 per diluted share, for the second quarter of 2017. For the first six months ended June 30, 2018, net income was $4.9 million, or $0.46 per diluted share, up 42% from $3.5 million, or $0.32 per diluted share, for the first six months of 2017.    

"Second quarter earnings were the most profitable quarter in our history and marks another significant step in strengthening our franchise.  Our net interest margin was above industry average at 4.51%, net interest income grew 9% year-over-year and 3% on a linked quarter basis and we continue to focus on expense control," said Denise Portmann, President & Chief Executive Officer. "While benefitting from the recent reduction in the corporate tax rate, we also posted strong growth in net income before taxes, which was up 20% from the linked quarter.  Initiatives introduced over the past year to improve workflows, boost revenue and enhance operating efficiencies, continue to gain traction throughout the company.  Concurrently, we are investing in training and technology to broaden the skillsets of our staff and expand our product offerings."  Key performance metrics advanced to a return on average assets ("ROAA") of 1.19%, and a return on average common equity ("ROAE") of 11.94%.

"Credit quality remains strong, and consequently no provision for loan losses was booked for the current quarter.  Our risk management guidelines continue to govern our loan growth.  We carefully monitor loan concentrations to stay well within regulatory guidelines, particularly in commercial real estate," commented Portmann.  "Residential mortgage lending contributed $1.1 million to noninterest income during the quarter, up from the revenue earned in the prior quarter, but behind the amount for same quarter last year.  Rising interest rates and tight housing supply are dampening home financing activities within our markets." 

Financial Highlights (as of, or for the period ended June 30, 2018, except as noted):

  • Diluted earnings per share increased 19% to $0.25, compared to $0.21 for the first quarter of 2018, and 39% from $0.18 for the second quarter of 2017.   Diluted earnings per share grew 44% to $0.46 for the first six months of 2018, compared to $0.32 per diluted share for the first six months of 2017.

  • Income before tax increased 20% to $3.2 million, compared to $2.6 million for the first quarter of 2018 and increased 18% compared to $2.7 million for the second quarter of 2017.  Income before tax increased 22% to $5.8 million for the first six months of 2018, compared to $4.8 million for the first six months of 2017.

  • Return on average assets ("ROAA") increased to 1.19% and return on average equity ("ROAE") increased to 11.94%, compared to 1.05% and 10.76%, respectively, for the first quarter of 2018, and 0.87% and 8.93%, respectively, for the second quarter of 2017.  Return on average assets ("ROAA") increased to 1.12% and return on average equity ("ROAE") increased to 11.35%, compared to 0.81% and 8.46%, for the first six months of 2018 and 2017, respectively.

  • Net interest income increased 3% to $9.1 million, compared to $8.9 million for the first quarter of 2018 and increased 9% compared to $8.4 million for the second quarter of 2017.  Net interest income totaled $18.0 million for the first six months of 2018, compared to $16.5 million for the first six months of 2017.

  • Net interest margin on a tax equivalent basis ("NIMTE"), expanded 7 basis points to 4.51%, compared to 4.44% in the preceding quarter and improved 18 basis points from 4.33% for the second quarter of 2017.  Net interest margin on a tax equivalent basis ("NIMTE"), expanded 21 basis points to 4.48% for the first six months of 2018, compared to 4.27% for the first six months of 2017.

  • Gross loans grew to $704.3 million versus $693.5 million, at March 31, 2018 and $671.5 million at June 30, 2017. 

  • Total deposits were $767.5 million, compared to $785.2 million at March 31, 2018 and $764.5 million at June 30, 2017.  Non-interest-bearing deposits comprise 31% of total deposits.

  • Asset quality remains solid: 


    • Loans 30 – 89 days' delinquent, not on nonaccrual status, were minimal at 0.06% of gross loans outstanding. 
    • Net recoveries totaled $2,000, or 0.00% of average gross loans in the second quarter of 2018, compared to net recoveries of $49,000, or 0.03% of average gross loans in first quarter of 2018, and net charge-offs of $127,000, or 0.08% of average gross loans, in second quarter of 2017. 
    • Nonperforming assets were $1.4 million, or 0.16% of total assets, as compared to $1.7 million, or 0.22% of total assets at March 31, 2018, and $1.1 million, or 0.12% of total assets at June 30, 2017. 
    • Adversely classified loans were $9.3 million, or 1.32% of gross loans, versus $9.5 million, or 1.37% of gross loans, at March 31, 2018, and $6.5 million, or 0.97% of gross loans, at June 30, 2017. 
    • There was no provision for loan losses for the second quarter of 2018, the preceding quarter and the second quarter of 2017.  Provision expense of $122,000 was incurred for the first half of 2017. 
    • The allowance for loan losses to gross loans stood at 1.30% at June 30, 2018, 1.32% at March 31, 2018, and 1.35% at June 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 declined from the linked quarter, due to typical deposit seasonality of tourism markets in coastal Washington and Oregon, and the withdrawal of $12 million in deposits associated with relationship for which the Bank declined to offer a credit facility as requested. Loans grew modestly during the period. Total assets were up slightly year-over-year, primarily due to the increase in loans 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)
                               
      June 30,  2018   Mar 31,  2018   $  Change   %  Change   June 30,  2017   $ Change   % Change
Assets:    (Dollars in thousands, except per share data) 
  Cash and cash equivalents $ 16,295   $ 43,203   $ (26,908 )   -62 % $ 37,346   $ (21,051 )   -56 %
  Other interest earning deposits   994     994     -     0 %   2,231     (1,237 )   -55 %
  Investment securities   107,203     105,585     1,618     2 %   107,697     (494 )   0 %
  Loans held-for-sale   7,749     7,187     562     8 %   7,940     (191 )   -2 %
  Loans, net of deferred fees   703,272     692,485     10,787     2 %   670,326     32,946     5 %
  Allowance for loan losses   (9,143 )   (9,141 )   (2 )   0 %   (9,090 )   (53 )   1 %
    Net loans   694,129     683,344     10,785     2 %   661,236     32,893     5 %
  Federal Home Loan Bank and Pacific Coast
  Bankers' Bank stock, at cost
  2,453     2,412     41     2 %   2,412     41     2 %
  Other assets   58,338     58,276     62     0 %   59,636     (1,298 )   -2 %
    Total assets $ 887,161   $ 901,001   $ (13,840 )   -2 % $ 878,498   $ 8,663     1 %
                               
Liabilities and Shareholders' Equity:                            
  Total deposits $ 767,547   $ 785,193   $ (17,646 )   -2 % $ 764,459   $ 3,088     0 %
  Borrowings   22,896     21,869     1,027     5 %   21,981     915     4 %
  Accrued interest payable and other liabilities 8,102     7,700     402     5 %   7,688     414     5 %
  Shareholders' equity   88,616     86,239     2,377     3 %   84,370     4,246     5 %
    Total liabilities and shareholders' equity $ 887,161   $ 901,001   $ (13,840 )   -2 % $ 878,498   $ 8,663     1 %
                               
Common Stock Shares Outstanding   10,562,593     10,550,852     11,741     0 %   10,437,462     125,131     1 %
                               
Book value per common share (1) $ 8.39   $ 8.17   $ 0.22     3 % $ 8.08   $ 0.31     4 %
Tangible book value per common share (2) $ 7.11   $ 6.89   $ 0.22     3 % $ 6.79   $ 0.32     5 %
Gross loans to deposits ratio   91.6 %   88.2 %   3.4 %       87.7 %   3.9 %    
                               
(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, despite no change in average earning assets, as earning asset yields outpaced funding costs as a result of the recent rise in interest rates.  Net interest income increased from the like quarter a year ago and from the first six months of 2017, as a result of growth in earning assets along with the impact of rising interest rates.  This growth in earning assets stems from loan production generated predominately in Western Washington and Oregon. 

Interest expense increased from the first quarter of 2018 and second quarter a year ago, primarily due to rate increases in 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 first half of 2018 as compared to the first half of 2017 for similar reasons.   

Pre-tax, pre-credit operating income (non-GAAP) for the second quarter of 2018 increased from the linked quarter, primarily due to growth in net interest income, deposit service charges and related fee income, and gain on sale of real estate loans.  Noninterest expenses remained unchanged from the linked and year-over-year quarter.  Gain on sale of real estate loans was down in the current quarter and year-to-date period versus second quarter and first half of 2017, as rise in interest rates and tight housing supply have impacted mortgage loan production. In addition, noninterest income for the first six months of 2018 was down versus the first half of 2017.  This was primarily due to 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 six months of 2018 grew slightly 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, 
      June 30,  2018   Mar 31,  2018   $  Change   %  Change   June 30,  2017   $ Change   % Change
       (Dollars in thousands, except per share data) 
Interest and dividend income $ 9,741   $ 9,463   $ 278     3 % $ 8,989   $ 752     8 %
Interest expense   624     580     44     8 %   588     36     6 %
  Net interest income 9,117     8,883     234     3 %   8,401     716     9 %
Loan loss provision   -     -     -     0 %   -     -     0 %
Noninterest income   2,649     2,325     324     14 %   2,861     (212 )   -7 %
Noninterest expense   8,580     8,556     24     0 %   8,555     25     0 %
Income before income taxes 3,186     2,652     534     20 %   2,707     479     18 %
Income tax expense   570     364     206     57 %   844     (274 )   -32 %
  Net Income $ 2,616   $ 2,288   $ 328     14 % $ 1,863   $ 753     40 %
                               
Average common shares outstanding - basic  10,555,340     10,520,027     35,313     0 %   10,436,591     118,749     1 %
Average common shares outstanding - diluted 10,673,808     10,656,997     16,811     0 %   10,639,588     34,220     0 %
                               
Income per common share                          
  Basic $ 0.25   $ 0.22   $ 0.03     14 % $ 0.18   $ 0.07     39 %
  Diluted $ 0.25   $ 0.21   $ 0.04     19 % $ 0.18   $ 0.07     39 %
                               
Effective tax rate   17.9 %   13.7 %   4.2 %       31.2 %   -13.3 %    
                               
       For the Six Months Ended,             
      June 30,  2018   June 30,  2017   $  Change   %  Change            
       (Dollars in thousands, except per share data)             
Interest and dividend income $ 19,204   $ 17,668   $ 1,536     9 %            
Interest expense   1,204     1,208     (4 )   0 %            
  Net interest income 18,000     16,460     1,540     9 %            
Loan loss provision   -     122     (122 )   -100 %            
Noninterest income   4,974     5,142     (168 )   -3 %            
Noninterest expense   17,137     16,706     431     3 %            
Income before income taxes 5,837     4,774     1,063     22 %            
Income tax expense   934     1,320     (386 )   -29 %            
  Net Income $ 4,903   $ 3,454   $ 1,449     42 %            
                               
Average common shares outstanding - basic  10,537,781     10,433,451     104,330     1 %            
Average common shares outstanding - diluted 10,665,500     10,646,652     18,848     0 %            
                               
Income per common share                          
  Basic $ 0.47   $ 0.33   $ 0.14     42 %            
  Diluted $ 0.46   $ 0.32   $ 0.14     44 %            
                               
Effective tax rate   16.0 %   27.6 %   -11.6 %                
                               

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, 
      June 30,  2018   Mar 31,  2018   $  Change   %  Change   June 30,  2017   $ Change   % Change
Non-GAAP Operating Income  (Dollars in thousands) 
Net Income   $ 2,616 $ 2,288 $ 328     14 % $ 1,863   $ 753     40 %
Loan loss provision -   -   -     0 %   -     -     0 %
Loss on sale of other real estate owned, net -   -   -     0 %   (5 )   5     -100 %
Loss on real estate owned, net -   -   -     0 %   34     (34 )   -100 %
Income tax expense 570   364   206     57 %   844     (274 )   -32 %
Pre-tax, pre-credit operating income $ 3,186 $ 2,652 $ 534     20 % $ 2,736   $ 450     16 %
                               
                               
                               
       For the Six Months Ended,             
      June 30,  2018   June 30,  2017   $  Change   %  Change            
Non-GAAP Operating Income  (Dollars in thousands)             
Net Income   $ 4,903 $ 3,454 $ 1,449     42 %            
Loan loss provision -   122   (122 )   -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 934   1,320   (386 )   -29 %            
Pre-tax, pre-credit operating income $ 5,837 $ 4,977 $ 860     17 %            
 

Noninterest Income

Noninterest income grew on a linked quarter basis, primarily due to an increase in deposit service charges, fee income from increases in ATM/debit card activity and revenue from the sale of residential mortgage loans. Deposit service charges were increased earlier in the year consistent with product pricing in the market.  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. In addition, the prior period contained one-time income of $340,000 earned from the sale of commercial loans and monetized fees from pricing of loans over the swap curve.  This was partially offset by the increase in deposit service and related fees as previously described.  "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.

For the first half of 2018, noninterest income was down versus the first six months of 2017.  This was primarily a result of a decline in revenue from the sale of residential mortgage loans for reasons noted above, the one-time income of $340,000 earned in 2017 from the sale of commercial loans and monetized fees from pricing of loans over the swap curve, as previously mentioned.  This was partially offset by the increase in deposit service and related fees from growth in ATM/debit card activity versus the comparable period in the prior year, due to the impact of recent promotional activities to expand debit card usage. 

Noninterest Income
(Unaudited)
      For the Three Months Ended,
      June 30,  2018   Mar 31,  2018   $  Change   %  Change   June 30,  2017   $ Change   % Change
      (Dollars in thousands)
Service charges on deposits $ 528 $ 495   $ 33     7 % $ 467 $ 61     13 %
Net loss on sale of other real estate owned, net -   -     -     0 %   5   (5 )   -100 %
Gain on sale of loans, net   1,063   944     119     13 %   1,319   (256 )   -19 %
Gain on sale of securities available for sale, net -   -     -     0 %   -   -     0 %
Earnings on bank owned life insurance 106   108     (2 )   -2 %   111   (5 )   -5 %
Other noninterest income                            
  Fee income   910   739     171     23 %   633   277     44 %
  Income from other real estate owned -   -     -     0 %   -   -     0 %
  Other   42   39     3     8 %   326   (284 )   -87 %
Total noninterest income $ 2,649 $ 2,325   $ 324     14 % $ 2,861 $ (212 )   -7 %
                               
                               
      For the Six Months Ended,             
      June 30,  2018   June 30,  2017   $  Change   %  Change            
      (Dollars in thousands)            
Service charges on deposits $ 1,024 $ 927   $ 97     10 %            
Gain on sale of other real estate owned, net -   (47 )   47     -100 %            
Gain on sale of loans, net   2,007   2,339     (332 )   -14 %            
Gain on sale of securities available for sale, net -   79     (79 )   -100 %            
Earnings on bank owned life insurance 213   221     (8 )   -4 %            
Other noninterest income                            
  Fee income   1,649   1,241     408     33 %            
  Other   81   382     (301 )   -79 %            
Total noninterest income $ 4,974 $ 5,142   $ (168 )   -3 %            
 

Noninterest Expense

Noninterest expenses remained unchanged from the linked and the year-over-year quarter.  Increases in technology expense from the linked quarter were offset by decreases in shareholder, FDIC assessment and travel expenses.  Increases in personnel and technology expenses from the prior year quarter were offset by declines in professional fees associated with $350,000 in expenses for process improvement and revenue enhancement consulting engagement begun 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 six 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, as noted above.

Noninterest Expense
(Unaudited)
                               
      For the Three Months Ended,
      June 30,  2018   Mar 31,  2018   $  Change   %  Change   June 30,  2017   $ Change   % Change
      (Dollars in thousands)
Salaries and employee benefits $ 5,380   $ 5,371 $ 9     0 % $ 5,147 $ 233     5 %
Occupancy     528     548   (20 )   -4 %   530   (2 )   0 %
Equipment     263     323   (60 )   -19 %   273   (10 )   -4 %
Data processing   794     603   191     32 %   602   192     32 %
Professional services   198     191   7     4 %   587   (389 )   -66 %
Other real estate owned operating costs (5 )   10   (15 )   300 %   6   (11 )   -183 %
State and local taxes   127     118   9     8 %   140   (13 )   -9 %
FDIC and State assessments 102     134   (32 )   -24 %   122   (20 )   -16 %
Other noninterest expense:                          
Director fees 68     65   3     5 %   83   (15 )   -18 %
Communication 86     70   16     23 %   41   45     110 %
Advertising   93     72   21     29 %   82   11     13 %
Professional liability insurance 45     47   (2 )   -4 %   47   (2 )   -4 %
Amortization 103     91   12     13 %   67   36     54 %
Loss on real estate owned, net -     -   -     0 %   34   (34 )   -100 %
Other   798     913   (115 )   -13 %   794   4     1 %
Total noninterest expense $ 8,580   $ 8,556 $ 24     0 % $ 8,555 $ 25     0 %
                               
                               
      For the Six Months Ended,             
      June 30,  2018   June 30,  2017   $  Change   %  Change            
      (Dollars in thousands)            
Salaries and employee benefits $ 10,751   $ 10,294 $ 457     4 %            
Occupancy     1,076     1,032   44     4 %            
Equipment     585     555   30     5 %            
Data processing   1,395     1,141   254     22 %            
Professional services   389     803   (414 )   -52 %            
Other real estate owned operating costs 6     17   (11 )   -65 %            
State and local taxes   245     270   (25 )   -9 %            
FDIC and State assessments 236     228   8     4 %            
Other noninterest expense:                          
Director fees 132     134   (2 )   -1 %            
Communication 156     130   26     20 %            
Advertising   165     164   1     1 %            
Professional liability insurance 92     95   (3 )   -3 %            
Amortization 103     34   69     203 %            
Loss on real estate owned, net -     34   (34 )   -100 %            
Other   1,806     1,775   31     2 %            
Total noninterest expense $ 17,137   $ 16,706 $ 431     3 %            
                               

Income Tax Provision

For the second quarter of 2018, Pacific Financial recorded $570,000 in state and federal income tax expense for an effective tax rate of 17.9%, reflecting the new lower federal corporate rate. For the first quarter of 2018, the tax expense was $364,000 in state and federal income tax expense for an effective tax rate of 13.7%. For the second quarter of 2017, the tax expense was $844,000 in state and federal income tax expense, for an effective tax rate of 31.2%. In addition to the lower federal tax rates 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
    June 30,  2018   Mar 31,  2018   Change   June 30,  2017   Change
Performance Ratios                  
Return on average assets, annualized 1.19 %   1.05 %     0.14     0.87 %     0.32  
Return on average equity, annualized 11.94 %   10.76 %     1.18     8.93 %     3.01  
Efficiency ratio (1) 72.92 %   76.34 %     (3.42 )   75.96 %     (3.04 )
                     
(1) Non-interest expense divided by net interest income plus noninterest income.          
                     
                     
    For the Six Months Ended,         
    June 30,  2018   June 30,  2017   Change        
Performance Ratios                  
Return on average assets, annualized 1.12 %   0.81 %     0.31          
Return on average equity, annualized 11.35 %   8.46 %     2.89          
Efficiency ratio (1) 74.59 %   77.34 %     (2.75 )        
                     
(1) Non-interest expense divided by net interest income plus noninterest income.          
           

LIQUIDITY

 
Cash and Cash Equivalents and Investment Securities
(Unaudited)
        June 30,  2018    % of Total   Mar 31,  2018    % of Total   $  Change   %  Change   June 30,  2017    Total   $  Change   %  Change
        (Dollars in thousands)
Cash on hand and in banks $ 15,939   13 % $ 26,893   18 % $ (10,954 )   -41 % $ 19,957   13 % $ (4,018 )   -20 %
Interest bearing deposits     356   0 %   16,309   11 %   (15,953 )   -98 %   17,389   12 %   (17,033 )   -98 %
Other interest earning deposits   994   1 %   994   1 %   -     0 %   2,231   2 %   (1,237 )   -55 %
Total cash equivalents and interest earning deposits 17,289   14 %   44,196   30 %   (26,907 )   -61 %   39,577   27 %   (22,288 )   -56 %
                                             
Investment securities:                                          
Collateralized mortgage obligations: agency issued 37,221   30 %   37,601   25 %   (380 )   -1 %   38,083   25 %   (862 )   -2 %
Collateralized mortgage obligations: non-agency  237   0 %   237   0 %   -     0 %   305   0 %   (68 )   -22 %
Mortgage-backed securities: agency issued 14,046   11 %   14,834   10 %   (788 )   -5 %   14,129   10 %   (83 )   -1 %
U.S. Government and agency securities 4,230   3 %   2,327   2 %   1,903     82 %   2,644   2 %   1,586     60 %
State and municipal securities 51,469   40 %   50,587   33 %   882     2 %   52,536   36 %   (1,067 )   -2 %
Total investment securities 107,203   86 %   105,586   70 %   1,617     2 %   107,697   73 %   (494 )   0 %
Total cash equivalents and investment securities $ 124,492   100 % $ 149,782   100 % $ (25,290 )   -17 % $ 147,274   100 % $ (22,782 )   -15 %
                                             
Total cash equivalents and investment securities                                      
as a percent of total assets     14 %       17 %               20 %        
                                             

"Liquidity remains strong based on existing levels of combined cash equivalents, investment securities and unused borrowing capacity. Seasonal outflow of deposits typical for this time of year impacted total deposits during the quarter. However, noninterest-bearing deposits grew slightly from the second quarter a year ago.  This was despite a $12 million reduction in deposit balances associated with relationship for which the Bank declined to offer a credit facility as requested," 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 3.9 years at June 30, 2018, 4.1 years at March 31, 2018, and 3.9 years at March 31, 2017.

The Bank had $9.5 million in outstanding borrowings against its $188.4 million in established borrowing capacity with the Federal Home Loan Bank of Des Moines (FHLB) at June 30, 2018. The Bank had $8.5 million and $8.6 million in outstanding borrowings with the FHLB at March 31, 2018, and June 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 $47.0 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)
                                           
      June 30,  2018   % of Gross Loans   Mar 31,  2018   % of Gross Loans   $  Change    %  Change    June 30,  2017   % of Gross Loans   $  Change    %  Change 
      (Dollars in thousands)
Commercial and agricultural $ 140,182     20 % $ 137,786     19 % $ 2,396     2 % $ 137,730     20 % $ 2,452     2 %
Real estate:                                          
Construction and development 51,325     7 %   47,593     7 %   3,732     8 %   55,901     8 %   (4,576 )   -8 %
Residential 1-4 family   90,073     13 %   89,701     13 %   372     0 %   91,578     14 %   (1,505 )   -2 %
Multi-family   22,755     3 %   25,046     4 %   (2,291 )   -9 %   19,407     3 %   3,348     17 %
Commercial real estate -- owner occupied 146,788     21 %   142,891     21 %   3,897     3 %   133,363     20 %   13,425     10 %
Commercial real estate -- non owner occupied 149,941     21 %   149,512     22 %   429     0 %   137,682     21 %   12,259     9 %
Farmland     28,979     4 %   28,596     4 %   383     1 %   34,393     5 %   (5,414 )   -16 %
Consumer     74,280     11 %   72,419     10 %   1,861     3 %   61,469     9 %   12,811     21 %
Loans, net of deferred fees 704,323     100 %   693,544     100 %   10,779     2 %   671,523     100 %   32,800     5 %
  Less:  allowance for loan losses (9,143 )       (9,141 )       (2 )       (9,090 )       (53 )    
  Less:  deferred fees (1,051 )       (1,059 )       8         (1,197 )       146      
Net loans $ 694,129       $ 683,344       $ 10,785       $ 661,236       $ 32,893      
                                           
                                           
Loan Concentration        
(Unaudited)        
      June 30,  2018   % of Risk Based Capital   Mar 31,  2018   % of Risk Based Capital    Change    June 30,  2017   % of Risk Based Capital    Change         
      (Dollars in thousands)        
Commercial and agricultural $ 140,182     143 % $ 137,786     145 %   -2 % $ 137,730     149 %   -6 %        
Real estate:                                          
Construction and development 51,325     52 %   47,593     50 %   2 %   55,901     61 %   -9 %        
Residential 1-4 family   90,073     92 %   89,701     94 %   -2 %   91,578     99 %   -7 %        
Multi-family   22,755     23 %   25,046     26 %   -3 %   19,407     21 %   2 %        
Commercial real estate -- owner occupied 146,788     150 %   142,891     150 %   0 %   133,363     145 %   5 %        
Commercial real estate -- non owner occupied 149,941     153 %   149,512     157 %   -4 %   137,682     149 %   4 %        
Farmland     28,979     30 %   28,596     30 %   0 %   34,393     37 %   -7 %        
Consumer     74,280     76 %   72,419     76 %   0 %   61,469     67 %   9 %        
Loans net of deferred fees $ 704,323       $ 693,544           $ 671,523                  
Regulatory Commercial Real Estate $ 219,980     224 % $ 215,219     226 %   -2 % $ 199,701     217 %   7 %        
Total Risk Based Capital* $ 98,120       $ 95,308           $ 92,216                  
                                           
*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. Increases in loans were generated in most categories during the current quarter, with the exception of multi-family loans. Declines in this segment occurred due to the normal completion and payoff of the project financed.    The portfolio includes $29.8 million in LIBOR-based and $153.7 million in Wall Street Journal Prime-based floating rate commercial and commercial real estate loans.  The portfolio also includes $16.8 million in purchased government-guaranteed commercial and commercial real estate loans and $60.0 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)
                                         
    June 30,  2018   % of Total   Mar 31,  2018   % of Total   $  Change   %  Change   June 30,  2017   % of Total   $  Change   %  Change
    (Dollars in thousands)
Interest-bearing demand and money market $ 340,354   45 % $ 337,831   44 % $ 2,523     1 % $ 325,779   43 % $ 14,575     4 %
Savings   93,715   12 %   95,154   12 %   (1,439 )   -2 %   85,366   11 %   8,349     10 %
Time deposits (CDs) 94,294   12 %   97,758   12 %   (3,464 )   -4 %   116,259   15 %   (21,965 )   -19 %
  Total interest-bearing deposits 528,363   69 %   530,743   68 %   (2,380 )   0 %   527,404   69 %   959     0 %
Non-interest bearing demand 239,184   31 %   254,450   32 %   (15,266 )   -6 %   237,055   31 %   2,129     1 %
  Total deposits $ 767,547   100 % $ 785,193   100 % $ (17,646 )   -2 % $ 764,459   100 % $ 3,088     0 %
                                         

Total deposits decreased from the linked quarter, due to seasonal factors and the withdrawal of funds by a commercial client, 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 $37.2 million, down from $39.6 million at March 31, 2018 and $47.1 million at June 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 ("Company"), and its subsidiary Bank of the Pacific ("Bank"), 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 $(1.5 million), $(1.2 million) and $271,000 as of June 30, 2018, March 31, 2018, and June 30, 2017, respectively.  In addition, the decline in tangible assets as compared to the linked quarter contributed to a 13-basis point increase in the Tangible Common Equity Ratio.

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)
    June 30,  2018   Mar 31,  2018   Change    June 30,  2017   Change      Well Capitalized Under Prompt Correction Action Regulations*
  Pacific Financial Corporation                          
  Total risk-based capital ratio 12.98 %   12.90 %     0.08     12.76 %     0.22       N/A  
  Tier 1 risk-based capital ratio 11.78 %   11.68 %     0.10     11.51 %     0.27       N/A  
  Common equity tier 1 ratio 10.08 %   9.94 %     0.14     9.73 %     0.35       N/A  
  Leverage ratio 10.33 %   10.01 %     0.32     9.90 %     0.43       N/A  
                                 
  Tangible common equity ratio 8.60 %   8.19 %     0.41     8.22 %     0.38       N/A  
                                 
  Bank of the Pacific                            
  Total risk-based capital ratio 12.88 %   12.78 %     0.10     12.66 %     0.22       10.5 %
  Tier 1 risk-based capital ratio 11.68 %   11.56 %     0.12     11.41 %     0.27       8.5 %
  Common equity tier 1 ratio 11.68 %   11.56 %     0.12     11.41 %     0.27       7.0 %
  Leverage ratio 10.24 %   9.90 %     0.34     9.81 %     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 balances and 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,
                               
      June 30,  2018   Mar 31,  2018   $  Change   %  Change   June 30,  2017   $  Change   % Change
Average Balances   (Dollars in thousands)
Gross loans   $ 699,110   $ 687,400   $ 11,710     2 % $ 667,711   $ 31,399     5 %
Loans held for sale $ 7,381   $ 7,591   $ (210 )   -3 % $ 7,760   $ (379 )   -5 %
Investment securities $ 114,651   $ 127,945   $ (13,294 )   -10 % $ 122,539   $ (7,888 )   -6 %
Total interest-earning assets $ 821,142   $ 822,936   $ (1,794 )   0 % $ 798,010   $ 23,132     3 %
Non-interest bearing demand deposits $ 239,301   $ 249,807   $ (10,506 )   -4 % $ 227,132   $ 12,169     5 %
Interest bearing deposits $ 525,706   $ 519,008   $ 6,698     1 % $ 521,643   $ 4,063     1 %
Borrowings   $ 23,373   $ 21,881   $ 1,492     7 % $ 22,373   $ 1,000     4 %
Total interest-bearing liabilities $ 549,079   $ 540,889   $ 8,190     2 % $ 544,016   $ 5,063     1 %
Total Equity   $ 87,884   $ 86,262   $ 1,622     2 % $ 83,647   $ 4,237     5 %
                               
      For the Three Months Ended,        
      June 30,  2018   Mar 31,  2018   Change   June 30,  2017   Change        
Yield on average gross loans (1) 5.18 %   5.12 %     0.06     5.00 %     0.18          
Yield on average investment securities (1) 2.57 %   2.56 %     0.01     2.57 %     -           
Cost of average interest bearing deposits 0.33 %   0.33 %     -      0.34 %     (0.01 )        
Cost of average borrowings 3.21 %   2.95 %     0.26     2.58 %     0.63          
Cost of average total deposits and borrowings 0.32 %   0.30 %     0.02     0.31 %     0.01          
                               
Yield on average interest-earning assets 4.82 %   4.73 %     0.09     4.63 %     0.19          
Cost of average interest-bearing liabilities 0.46 %   0.43 %     0.03     0.43 %     0.03          
Net interest spread   4.36 %   4.30 %     0.06     4.20 %     0.16          
                               
Net interest margin (1)   4.51 %   4.44 %     0.07     4.33 %     0.18          
                               
(1) Tax-exempt income has been adjusted to a tax equivalent basis at a rate of 21% as of June 30, 2018 and March 31,2018 and 34% as of June 30, 2017.        
                               
      For the Six Months Ended,             
      June 30,  2018   June 30,  2017   $  Change   % Change            
Average Balances   (Dollars in thousands)            
Gross loans   $ 693,287   $ 666,502   $ 26,785     4 %            
Loans held for sale $ 7,486   $ 6,417   $ 1,069     17 %            
Investment securities $ 121,261   $ 126,544   $ (5,283 )   -4 %            
Interest-earning assets $ 822,034   $ 799,463   $ 22,571     3 %            
Non-interest bearing demand deposits $ 244,525   $ 226,318   $ 18,207     8 %            
Interest bearing deposits $ 522,375   $ 525,484   $ (3,109 )   -1 %            
Borrowings   $ 22,632   $ 22,226   $ 406     2 %            
Interest-bearing liabilities $ 545,007   $ 547,710   $ (2,703 )   0 %            
Total Equity   $ 87,077   $ 82,548   $ 4,529     5 %            
                               
                               
       For the Six Months Ended,                 
      June 30,  2018   June 30,  2017   Change                
Net Interest Margin                            
Yield on average gross loans (1) 5.15 %   4.98 %     0.17                  
Yield on average investment securities (1) 2.57 %   2.46 %     0.11                  
Cost of average interest bearing deposits 0.33 %   0.36 %     (0.03 )                
Cost of average borrowings 3.19 %   2.57 %     0.62                  
Cost of average total deposits and borrowings 0.31 %   0.32 %     (0.01 )                
                               
Yield on average interest-earning assets 4.77 %   4.58 %     0.19                  
Cost of average interest-bearing liabilities 0.45 %   0.45 %     -                   
Net interest spread   4.32 %   4.13 %     0.19                  
                               
Net interest margin (1)   4.48 %   4.27 %     0.21                  
                               
(1) Tax-exempt income has been adjusted to a tax equivalent basis at a rate of 21% as of June 30, 2018  and 34% as of June 30, 2017.            
                               

ASSET QUALITY

Asset quality remained strong with non-performing assets declining in the quarter and remaining at very low levels.  Total 30-89-day delinquencies remained below 0.50%, a positive leading indicator of future credit quality.   Adversely classified loans decreased from various paydowns, including a $655,000 reduction in a dairy farm relationship from the sale of business assets and a $540,000 reduction in an electrical contractor relationship via refinancing by another lender.  These reductions were offset by a $2.1 downgrade of a mechanical contractor relationship due to an unprofitable fiscal year.  Adversely classified loans to total gross loans was 1.32% the end of the quarter compared to 1.37% in the linked quarter and 0.97% in the year ago quarter. 

                             
Adversely Classified Loans and Securities
(Unaudited)
                             
    June 30,  2018   Mar 31,  2018   $  Change   % Change   June 30,  2017   $  Change   % Change
    (Dollars in thousands)
Rated substandard or worse, but not impaired $ 7,516   $ 7,415   $ 101     1 % $ 5,126   $ 2,390   47 %
Impaired   1,765     2,093     (328 )   -16 %   1,355     410   30 %
Total adversely classified loans¹ $ 9,281   $ 9,508   $ (227 )   -2 % $ 6,481   $ 2,800   43 %
                             
                             
Gross loans (excluding deferred loan fees) $ 704,323   $ 693,544   $ 10,779     2 % $ 671,523   $ 32,800   5 %
Adversely classified loans to gross loans 1.32 %   1.37 %           0.97 %        
Allowance for loan losses $ 9,143   $ 9,141   $ 2     0 % $ 9,090   $ 53   1 %
                                         
Allowance for loan losses as a percentage of adversely classified loans   98.51 %   96.14 %           140.26 %        
Allowance for loan losses to total impaired loans 518.02 %   436.74 %           670.85 %        
Adversely classified loans to total assets 1.05 %   1.06 %           0.74 %        
Delinquent loans to gross loans, not in nonaccrual status 0.06 %   0.21 %           0.03 %        
                             
 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 sale of a $150,000 residence held as other real estate owned at no loss.  As a result, there was a slight decrease in the percentage of nonperforming assets to total assets. However, nonperforming assets remained above the amount year-over-year, primarily due to the placement of a $400,000 loan to finance an exotic automobile placed on nonaccrual in the fourth quarter of 2017. 

Nonperforming Assets
(Unaudited)
                             
    June 30,  2018   Mar 31,  2018   $  Change    %  Change    June 30,  2017   $  Change    % Change 
    (Dollars in thousands)
Loans on nonaccrual status $ 1,412   $ 1,502   $ (90 )   -6 % $ 977   $ 435     45 %
Total nonaccrual loans 1,412     1,502     (90 )   -6 %   977     435     45 %
                             
Other real estate owned and foreclosed assets 38     199     (161 )   -81 %   105     (67 )   -64 %
Total nonperforming assets $ 1,450   $ 1,701   $ (251 )   -15 % $ 1,082   $ 368     34 %
                             
                             
Restructured performing loans $ 353   $ 591   $ (238 )   -40 % $ 378   $ (25 )   -7 %
Accruing loans past due 90 days or more $ -   $ -   $ -     0 % $ -   $ -     0 %
                                           
Percentage of nonperforming assets to total assets   0.16 %   0.19 %           0.12 %        
Nonperforming loans to total loans   0.20 %   0.22 %           0.15 %        
                             

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 net recoveries in the current and linked quarter. This compares to minimal net charge offs recorded in the prior year quarter and first six months of 2017. These charge-offs were comprised of various 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,
    June 30,  2018   Mar 31,  2018   $  Change    % Change    June 30,  2017   $  Change    % Change 
    (Dollars in thousands)
Gross loans outstanding at end of period $ 704,323   $ 693,544   $ 10,779     2 % $ 671,523   $ 32,800     5 %
Average loans outstanding, gross $ 699,110   $ 687,400   $ 11,710     2 % $ 667,711   $ 31,399     5 %
Allowance for loan losses, beginning of period $ 9,141   $ 9,092   $ 49     1 % $ 9,217   $ (76 )   -1 %
Commercial   -     -     -     0 %   (105 )   105     -100 %
Commercial Real Estate -     -     -     0 %   -     -     0 %
Residential Real Estate -     -     -     0 %   (3 )   3     -100 %
Consumer   (25 )   (27 )   2     -7 %   (25 )   -     0 %
Total charge-offs (25 )   (27 )   2     -7 %   (133 )   108     -81 %
Commercial   2     52     (50 )   -96 %   2     -     0 %
Commercial Real Estate -     -     -     0 %   -     -     0 %
Residential Real Estate -     -     -     0 %   2     (2 )   -100 %
Consumer   25     24     1     4 %   2     23     NM  
Total recoveries 27     76     (49 )   -64 %   6     21     NM  
Net recoveries/(charge-offs)  2     49     (47 )   -96 %   (127 )   129     -102 %
Provision charged to income -     -     -     0 %   -     -     0 %
Allowance for loan losses, end of period $ 9,143   $ 9,141   $ 2     0 % $ 9,090   $ 53     1 %
Ratio of net loans charged-off to average                      
gross loans outstanding, annualized 0.00 %   -0.03 %   0.03 %       0.08 %   -0.08 %    
Ratio of allowance for loan losses to                         
gross loans outstanding 1.30 %   1.32 %   -0.02 %       1.35 %   -0.05 %    
                             
                             
    For the Six Months Ended,             
    June 30,  2018   June 30,  2017   $  Change    % Change             
    (Dollars in thousands)            
Gross loans outstanding at end of period $ 704,323   $ 671,523   $ 32,800     5 %            
Average loans outstanding, gross $ 693,287   $ 666,502   $ 26,785     4 %            
                                     
Allowance for loan losses, beginning of period $ 9,092   $ 9,192   $ (100 )   -1 %            
Commercial     -      (236 )   236     -100 %            
Commercial Real Estate   -        -      -     0 %            
Residential Real Estate   -      (3 )   3     -100 %            
Consumer   (52 )   (41 )   (11 )   27 %            
Total charge-offs (52 )   (280 )   228     -81 %            
Commercial   54     42     12     29 %            
Commercial Real Estate   -        -      -     0 %            
Residential Real Estate   -      10     (10 )   -100 %            
Consumer   49     4     45     NM              
Total recoveries 103     56     47     84 %            
Net (charge-offs) 51     (224 )   275     -123 %            
Provision charged to income   -      122     (122 )   -100 %            
Allowance for loan losses, end of period $ 9,143   $ 9,090   $ 53     1 %            
Ratio of net loans charged-off to average                      
gross loans outstanding, annualized -0.01 %   0.03 %   -0.04 %                
Ratio of allowance for loan losses to                         
gross loans outstanding 1.30 %   1.35 %   -0.05 %                
                             

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 June 30, 2018, the Company had total assets of $887 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

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