Pacific Financial Corporation Announces Earnings
Pacific Financial Corp Announces Record Earnings of $3.8 Million, or $0.35 per Share, for Third Quarter 2019, and $10.3 Million, or $0.97 per Share, for the first Nine Months of 2019; Declares Regular Quarterly Cash Dividend of $0.11 per ShareCompany Release - 10/29/2019 9:00 AM ET
ABERDEEN, Wash., Oct. 29, 2019 (GLOBE NEWSWIRE) -- Pacific Financial Corporation (OTCQX: PFLC), the holding company for Bank of the Pacific, today reported third quarter net income increased 18% to a record $3.8 million, or $0.35 per diluted share, compared to $3.2 million, or $0.30 per diluted share, in the third quarter of 2018, reflecting higher net interest income and gains on sale of residential mortgage loans. Net income for the second quarter of 2019 was $3.6 million, or $0.34 per diluted share. For the nine months ended September 30, 2019, net income was $10.3 million, or $0.97 per diluted share, up 28% from $8.1 million, or $0.76 per diluted share, for the nine months ended September 30, 2018.
The Board of Directors of Pacific Financial Corporation declared a quarterly cash dividend of $0.11 per share on October 23, 2019. The dividend will be payable on November 25, 2019, to shareholders of record at close of business day on November 12, 2019.
“We again delivered record profits for the current quarter and for the first nine months of the year, fueled by an above industry-average net interest margin of 4.57% and robust growth in noninterest income, mainly due to increased gain on sale of loans,” said Denise Portmann, President and Chief Executive Officer. “Additionally, we had solid growth in core deposits during the quarter. Our performance metrics were above average with an annualized return on average assets (“ROAA”) at 1.61% and an annualized return on average equity (“ROAE”) of 14.52%.
“With the recent opening of our new commercial banking center along the I-5 corridor in the high-growth area of Eugene, Oregon, our talented banking team is actively fostering long-term customer relationships – not only in the surrounding area of Eugene – but throughout the markets we serve,” said Portmann. “We will continue to invest in our future and are pleased with the progress we have made so far.
“Earlier this month, our Board of Directors also announced the repurchase of up to $2.63 million, or approximately 2%, of the outstanding common stock of the Company, beginning November 1, 2019,” added Portmann. “The balance between allocating capital to our growing franchise and returning capital to our shareholders through our quarterly cash dividend, is important to our strategic growth initiative.”
Third Quarter 2019 Financial Highlights (as of, or for the period ended September 30, 2019, except as noted):
Earnings per share were $0.35, compared to $0.30 for the third quarter of 2018, and $0.34 for the second quarter of 2019.
ROAA was 1.61%, compared to 1.38% for the third quarter a year ago. Industry peer ROAA was 1.02%. ROAE was 14.52%, compared to 13.89% for the third quarter of 2018. Industry peer ROAE was 9.69%. [Industry peers are the 469 banks that make up the SNL Microcap U.S. Bank Index, at June 30, 2019.]
Net interest margin remained solid at 4.57% for the third quarter, up 2 basis points from the third quarter a year ago and contracted 17 basis points from the preceding quarter. Industry peer NIM was 3.71%. [Industry peers are the 469 banks that comprised the SNL Microcap U.S. Bank Index, at June 30, 2019.] Net interest margin expanded 16 basis points to 4.66% for the first nine months of 2019 compared to 4.50% for the first nine months of 2018.
Noninterest income increased 57%, or $1.5 million, to $4.2 million in the third quarter, compared to $2.6 million in the third quarter a year ago, and increased 21%, or $723,000, from $3.4 million in the second quarter of 2019. Positively impacting noninterest income in the current quarter was a gain on sale of loans of $2.4 million.
Total assets increased $8.1 million to $945.2 million from $937.1 million a year earlier.
Total deposits were $816.1 million, compared to $815.2 million at September 30, 2018, and $795.5 million at June 30, 2019. This includes a reduction of $20.3 million and $6.5 million in brokered CDs from the year-over-year quarter and the preceding quarter, respectively. Noninterest-bearing deposits represented 33% of total deposits, at September 30, 2019.
Gross loans were $683.8 million at quarter end, compared to $693.1 million a year ago and $689.7 million at June 30, 2019. This includes a strategic reduction of $10.8 million in indirect consumer loans to finance luxury and classic cars year-over-year.
Asset quality remains solid with nonperforming assets to total assets at 0.11% at quarter end.
The allowance for loan losses was 1.32% of gross loans outstanding at quarter end.
Capital ratios continue to exceed the regulatory guidelines for a well-capitalized financial institution, including a leverage ratio of 11.11% and a total risk based capital ratio of 14.30%.
Results of Operations
Net interest income increased $191,000, or 2%, to $9.8 million in the third quarter of 2019, compared to $9.7 million in the third quarter a year ago, and increased $117,000, or 1%, from $9.7 million in the second quarter of 2019. In the first nine months of 2019, net interest income increased $1.5 million, or 6%, to $29.2 million from $27.7 million in the first nine months a year ago. No provision for loan losses has been booked since the third quarter of 2017.
The increases in the current quarter and for the first nine months of 2019, compared to the same periods in 2018, were primarily the result of an increase in yield on loans to 5.47% and 5.48%, compared to 5.35% and 5.24%, respectively. Increases in market rates during 2017 and 2018 had a positive impact on asset yields in 2018 and early 2019. Increases in loan yields were partially offset by an increase in the cost of funds to 0.35% and 0.37% for the quarter, and nine months ended September 30, 2019, compared to 0.33% and 0.32% in the like periods in 2018. Again, increases in market rates during 2017 and 2018 resulted in a modest increase in funding costs during 2019. After a period of expanding earning asset yields and increasing margins, net interest margin and earning asset yields declined during the current quarter to 4.57% and 4.91%, respectively, compared to 4.74% and 5.10% in the quarter ended June 30, 2019, reflecting the recent decline in market interest rates.
Noninterest income increased 57%, or $1.5 million, to $4.2 million for the third quarter of 2019, compared to $2.6 million for the third quarter of 2018, and increased 21%, or $723,000, from $3.4 million in the second quarter of 2019. This includes an increase in gain on sale of loans to $2.4 million in the current quarter compared to $1.7 million and $1.2 million for the quarters ended June 30, 2019 and September 30, 2018, respectively. Similarly, for the first of nine months of 2019, noninterest income increased $2.4 million including an increase of $1.8 million in gain on sale of loans. Recent declines in mortgage rates increased demand for refinancing and encouraged more sellers to add to the supply of housing inventory for sale in several of our Western Washington and Oregon markets.
“The recent decline in mortgage interest rates have encouraged an increase in both home purchase and refinance activities within our markets. This loan activity has increased contributions to noninterest income during the current quarter and for the first nine months of the year,” added Portmann. “In addition, we continue to benefit from initiatives introduced last year which have improved workflow efficiencies, revenue and cost management.”
Noninterest expense increased 12% to $9.4 million compared to $8.4 million in the third quarter of 2018 and grew 8% from $8.7 million on a linked quarter basis. For the first nine months of 2019, noninterest expense was $26.5 million compared to $25.5 million for the first nine months of 2018. The increase in operating expenses, year-over-year and for the first nine months of 2019, was primarily due to higher compensation and commissions associated with the growth in residential mortgage production, and expenses for professional services related to executive search, strategic marketing and technology consulting. These costs were partially offset by declines in occupancy and equipment expense associated with the closure of two branches in first quarter of 2019.
The efficiency ratio was 67.03% for the third quarter of 2019, compared to 68.23% for the third quarter a year ago, and 66.00% for the second quarter of 2019. Year-to-date, the efficiency ratio was 67.60% compared to 72.38% for the first nine months of 2018.
Balance Sheet Review
Total assets increased $8.1 million to $945.2 million at September 30, 2019, compared to $937.1 million at September 30, 2018, and grew $20.3 million from $924.9 million at June 30, 2019.
Investment securities decreased $5.1 million to $99.2 million at September 30, 2019, compared to $104.3 million at September 30, 2018, primarily as a result of maturities, payments and sales within the portfolio. The portfolio is comprised primarily of amortizing U.S. agency collateralized mortgage and mortgage-backed securities.
Liquidity within the company remains strong. At September 30, 2019, in addition to cash equivalent assets of $89.0 million, the Bank had established borrowing lines with the Federal Home Loan Bank of Des Moines of $174.7 million, with $3.3 million outstanding at September 30, 2019. 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 $51.8 million, subject to collateral requirements, and $16.0 million from correspondent banks, with no balance outstanding on any of these facilities.
The loan portfolio remains well-diversified with loans originating predominately within the Western Washington and Oregon markets. Gross loan balances were $683.8 million at September 30, 2019, compared to $693.1 million at September 30, 2018. To manage risk, the Company oversees new loan origination volume and current loan balance using concentration limits that establish maximum exposure levels by designated industry segment, real estate product types, geography and single borrower limits. The portfolio includes $51.4 million in indirect consumer loans to finance luxury and classic cars. “As part of our strategic plan, we have been limiting our concentrations in the indirect consumer loans to finance luxury and classic cars,” said Portmann. As at September 30, 2019, this portfolio balance totaled $51.4 million, a decline of $10.7 million from $62.1 million a year earlier and down $2.4 million compared to $53.8 million at June 30, 2019.
Total deposits were $816.1 million at September 30, 2019, a slight increase from $815.2 million at September 30, 2018, and an increase of 3% from $795.5 million at June 30, 2019. Excluding a $20.3 million reduction in brokered deposits, year-over-year deposits increased $21.3 million. Time deposits continue to decline as a component of funding, primarily due to the reduction in brokered deposits. Noninterest bearing deposits to total deposits ratio remains outstanding at 33%, up from 32% from a year ago. “Liquidity remains strong based on existing levels of combined cash equivalents, investment securities and unused borrowing capacity. Seasonal inflows, typical for this time of year, impacted total deposits during the current quarter,” said Carla Tucker, EVP and Chief Financial Officer.
Capital ratios of Pacific Financial Corporation, and its subsidiary Bank of the Pacific, continue to exceed the regulatory requirements for the well-capitalized thresholds. At September 30, 2019, Pacific Financial Corporation’s leverage ratio was 11.11% and the total risk-based capital ratio was 14.30%. 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 continues to be strong, at or near historical low levels, with delinquent loans to gross loans at 0.25% and loan net charge-offs of $29,000 for the third quarter and $32,000 for the first nine months of 2019. Adversely classified loans to total gross loans was 1.17% at the end of the current quarter and linked quarter versus 1.12% a year earlier. Nonperforming assets were $1.0 million, or 0.11% of total assets, at September 30, 2019, compared to $746,000 or 0.08% of total assets at September 30, 2018, and $773,000, or 0.08% of total assets at June 30, 2019.
The allowance for loan losses is managed in concert with loan growth, credit quality and market conditions. The allowance for loan losses to gross loans stood at 1.32% at September 30, 2019, compared to 1.31% a year ago, and 1.31% at June 30, 2019. No provision for loan losses was incurred in the current quarter, linked quarter or the like quarter a year ago. The overall risk profile of the loan portfolio continues to be conservative, demonstrating the solid credit risk management framework in place.
Income Tax Provision
Income tax provision for the third quarter was $859,000 for an effective tax rate of 18.6%. For the quarters ended June 30, 2019 and September 30, 2018, a provision for income tax of $870,000 and $724,000 were recorded. Tax expense for the nine months ending September 30, 2019, was $2.4 million versus $1.7 million in the same period for the prior year. A planned reduction in nontaxable municipal securities during the June 30, 2019 quarter contributed to the increase in the effective tax rate. The remaining tax provision increase can be attributed to growth in pre-tax income. In addition to federal corporate income tax, Pacific Financial also pays Oregon corporate income tax and Washington Business and Occupation tax on revenues.
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