Pacific Financial Corp Earns $3.9 Million, or $0.37 per Diluted Share, for Second Quarter of 2023, and $8.0 Million, or $0.77 per Diluted Share, for the First Six Months of 2023

ABERDEEN, Wash., July 27, 2023 (GLOBE NEWSWIRE) -- Pacific Financial Corporation (OTCQX: PFLC), (“Pacific Financial”) or the (“Company”), the holding company for Bank of the Pacific (the “Bank”), reported net income of $3.9 million, or $0.37 per diluted share for the second quarter 2023, compared to $4.1 million, or $0.39 per diluted share for the first quarter of 2023, and $1.6 million, or $0.15 per diluted share for the second quarter of 2022. There was a provision for credit losses of $71,000 in the second quarter of 2023, compared to a provision for credit losses of $151,000 for the preceding quarter and no provision in the second quarter a year ago. For the first six months of 2023, net income was $8.0 million, or $0.77 per diluted share, compared to $3.2 million, or $0.31 per diluted share, for the first six months of 2022. There was a $223,000 provision in the first half of 2023, compared to no provision in the first half of 2022. All results are unaudited.

The board of directors of Pacific Financial declared a quarterly cash dividend of $0.13 per share on July 19, 2023. The dividend will be payable on August 25, 2023 to shareholders of record on August 11, 2023.

“Following our strong earnings momentum from the first quarter, we continued to post strong profits for both the current quarter and for the first half of 2023, highlighted by steady growth in our loan portfolio, and a solid net interest margin,” said Denise Portmann, President and Chief Executive Officer. “Year-over-year net interest margin for the current quarter and first half of 2023 expanded 151 basis points and 176 basis points respectively. Current quarter net interest margin of 4.33% contracted 18 basis points compared to the linked quarter of 4.51%, with improved yields across all asset classes, offset by an increase in costs of funds due primarily to competitive rate pressures early in the current quarter.”

“We continue to maintain a high level of on-balance sheet cash and robust liquidity metrics. Though deposits decreased during the quarter due, largely to industry-wide competitive pricing pressures and normal seasonal declines in deposits balances combined with higher customer spending levels and customers moving excess funds to alternative higher yielding investments, deposit balances showed signs of stabilization during the latter part of the current quarter,” stated Portmann. “Our deposits are well-diversified and core deposits represent 93% of total deposits at June 30, 2023, with non-interest bearing demand representing 41% of total deposits. This well-diversified deposit base is supported by our strong capital and excess liquidity positions. As always we continue to prioritize our customer relationships, which have been the bedrock of our success for over fifty years.”

“Credit quality remains solid, aided by continued low levels of adversely classified and nonperforming loans. Our risk management protocols guide the growth of our loan portfolio as we carefully monitor loan concentrations to stay within regulatory guidelines, particularly in commercial real estate. As a result, charge-offs continued to be minimal,” added Portmann.

Second Quarter 2023 Financial Highlights

• Return on average assets (“ROAA”) was 1.30%, compared to 1.33% for the first quarter 2023, and 0.49% for the second quarter 2022.
• Return on average equity (“ROAE”) was 14.30%, compared to 15.63% from the preceding quarter, and 6.05% from the second quarter a year earlier.
• Net interest income was $12.2 million, down 7% compared to $13.1 million for the first quarter of 2023, and increased 38% from $8.8 million for the second quarter of 2022.
• Net interest margin (“NIM”) contracted 18 basis points to 4.33%, compared to 4.51% from the preceding quarter, and expanded 151 basis points from 2.82% in the second quarter a year ago.
• Gross loans balances increased $13.1 million, or 2%, to $658.7 million at June 30, 2023, compared to $645.6 from the preceding quarter end and 9% or $51.8 million compared June 30, 2022.
• Total deposits declined $32.9 million to $1.08 billion, compared to $1.11 billion from the first quarter 2023, with core deposits representing 93% of total deposits at June 30, 2023. Non-interest bearing deposits represented 41% of total deposits at June 30, 2023.
• Asset quality remains solid with nonperforming assets to total assets unchanged at 0.08%, compared to nonperforming assets to total assets at 0.08% for the preceding quarter.
• Tangible book value per common share was $9.15 at June 30, 2023, compared to $9.16 at March 31, 2023, and $8.59 at June 30, 2022.

Liquidity

Liquidity metrics were robust with:

• Cash on hand or in banks of $200 million, or 84% of uninsured and uncollateralized deposits, at June 30, 2023 compared to $238 million at March 31, 2023.
• Coverage of short-term funds available to uninsured and uncollateralized deposits was 261% at June 30, 2023 compared to 259% at March 31, 2023.
• Uninsured or uncollateralized deposits were 22% of total deposits at June 30, 2023 compared to 23% at March 31, 2023.
  

As shown below the Bank has established credit lines with borrowing capacity from the Federal Home Loan Bank of Des Moines (FHLB) and from the Federal Reserve Bank of San Francisco, both of which are subject to collateral requirements. In addition, the Bank has $60.0 million in unsecured borrowing capacity from various correspondent banks. There is no balance outstanding on any of these facilities.

Income Statement Review

Net interest income declined 7% to $12.2 million during the current quarter compared to $13.1 million for the first quarter of 2023, and grew 38% from $8.8 million for the second quarter of 2022. For the current quarter, both interest income and interest expense increased compared to the linked quarter with a larger increase in interest expense. For the six months ended June 30, 2023, net interest income increased 47% or $8.1 million compared to the like period in 2022. Current quarter net interest margin contracted 18 basis points to 4.33% for the second quarter of 2023, compared to 4.51% for the first quarter of 2023, and expanded 151 basis points from 2.82% compared to the second quarter of 2022. For the first six months of 2023, the NIM expanded 176 basis points to 4.42% from 2.66% for the first six months of 2022.

During the current quarter, the decrease in net interest income compared to the first quarter of 2023 was primarily a result of funding costs growth outpacing growth in average interest earning asset yields. The increases in both net interest income and net interest margin year-over-year were largely due to increased yields on all categories of interest earning assets which outpaced growth in funding costs during those same time periods. The increase in average yields on interest-earning assets during the current quarter and first half of 2023 reflects the benefit of variable rate interest-earning assets repricing higher, as well as new loans being originated at higher interest rates. As a result, average loan yields for the current quarter increased 11 basis points to 5.55% compared to the preceding quarter of 5.44%, and increased 85 basis points from 4.70% from the second quarter of 2022. The yield on interest-bearing bank deposits increased 48 basis points to 5.09% for the current quarter, compared to 4.61% for the preceding quarter, and increased 425 basis points from 0.84% from the second quarter of 2022. The Bank’s total cost of funds increased to 0.58% for the current quarter, compared to 0.21% for the preceding quarter, and 0.08% for the second quarter of 2022. The increases in deposit cost of funds were largely a result of increases in money market and certificate of deposit rates early in the current quarter due to competitive rate pressures, as well as an increase in LIBOR-based junior subordinated debentures borrowing costs.

Noninterest income was $1.7 million for the second quarter of 2023, compared to $1.3 million for the first quarter of 2023, and $1.9 million for the second quarter of 2022. The increase in noninterest income on a linked quarter basis was primarily due to the increase in gain-on-sale of loans, and $154,000 loss on sale of securities booked in first quarter of 2023, as well as increased service charges and other fee income. Service charges on deposits increased 21% to $509,000 from the quarter a year ago. Deposit service charges and other related fees were increased earlier in the current year consistent with product pricing in our market.

While mortgage production improved during the current quarter, higher mortgage interest rates and housing prices, as well as tight housing supply continue to impact home financing activities and home purchases within our markets. Correspondingly, we continue to manage our staffing levels in this line of business. “Recent increases in mortgage rates have moderated demand for refinancing. Demand for purchase financing has slowed as the increase in mortgage rates are beginning to price some prospective purchasers out of the market,” Carla Tucker, EVP, Chief Financial Officer noted.

For the first six months of 2023, noninterest income declined to 3.0 million compared to $4.0 million for the six months ended June 30, 2022, primarily due to lower gain on sale of loans due to factors noted above.

Noninterest expense declined to $8.9 million for the second quarter of 2023, compared to $9.2 million for the first quarter of 2023, and increased slightly from $8.8 million for the second quarter of 2022. The decrease in noninterest expense from the linked quarter was primarily due to lower payroll taxes and benefit costs compared to a higher level of those same expenses typically experienced in the first quarter of the year. Noninterest expense for the first six months of 2023 increased 4% to $18.1 million compared to $17.4 million for the first six months of 2022, primarily due to increased FDIC insurance premiums, as well as increased salary and employee benefits. Salary expenses comprise a large portion of non-interest expenses and continue to be impacted by competitive recruiting and wages pressures. Employee staffing numbers, excluding mortgage banking employees, have remained relatively stable during the previous 12 months.

Federal and Oregon state income tax expense was $994,000 for the current quarter, and $930,000 for the preceding quarter, resulting in effective tax rates of 20.3% and 18.5%, respectively. These income tax expenses reflect the benefits of tax exempt income and tax credits. Income tax expense for the six months ended June 30, 2023 was $1.9 million, and $476,000 for the six months ended June 30, of 2022, with an effective tax rate of 19.4% and 12.8%, respectively.

Balance Sheet Review

Total Assets decreased 3% to $1.21 billion at June 30, 2023, compared to $1.24 billion at March 31, 2023 and declined 9% from $1.33 billion at March 31, 2022.

Investment Securities totaled $276.4 million at June 30, 2023, compared to $285.9 million at March 31, 2023, and increased 1% from $274.3 million at June 30, 2022 with no investment purchases during the current quarter. The average portfolio yield was 3.21%, 3.20% and 1.96% for the current quarter, linked quarter, and for the second quarter a year ago, respectively. The increase year-over-year was primarily related to investment purchases in the later part of 2022 at higher rates due to increased market interest rates. The average adjusted duration of the investment securities portfolio was 4.5 years at June 30, 2023.

Gross loans balances increased $13.1 million, or 2%, to $658.7 million at June 30, 2023, compared to $645.6 million at March 31, 2023. Year-over-year growth was 9% or $51.8 million. The Bank has experienced growth in most of our loan categories with the exception of commercial and agriculture loans. Utilization on commercial lines-of credit decreased during the pandemic and continues to remain at historic lows. Year-over-year the largest growth categories were residential 1-4 family, owner occupied commercial real estate, and consumer with growth of $23.6 million, $16.1 million and $7.7 million, respectively. For the current quarter, larger growth categories by dollar included owner-occupied and non-occupied commercial real estate as well as multi-family loans.

The Bank also maintains a portfolio of loans to finance luxury and classic cars and as part of our risk management program the Bank manages the concentration levels of that portfolio. Loans to finance luxury and classic cars increased 1% to $62.8 million at June 30, 2023 compared to $62.1 million at March 31, 2023, and increased 14% or $7.6 million compared to $55.2 million a year ago.

The Company manages new loan origination volume using concentration limits that establish maximum exposure levels by certain industry segments, loan product types, geography and single borrower limits. Our loan pipeline continues to be strongly supported by continued business development activity by our commercial lending teams. In addition, the loan portfolio continues to be well-diversified and is originated predominantly within our Western Washington and Oregon markets.

Credit Quality metrics remain sound with nonperforming assets at $959,000, or 0.08% of total assets at June 30, 2023, compared to nonperforming assets of $961,000, or 0.08% of total assets at March 31, 2023, and $1.4 million of nonperforming assets, or 0.10% of total assets, at June 30, 2022. Balances related to non-impaired loans, graded watch or other loans especially mentioned, increased slightly to $13.1 million at June 30, 2023, compared to $12.7 million at March 31, 2023, and decreased substantially from $31.4 million at March 31, 2022. This decrease was primarily related to risk rating upgrades.

“Our sustained strength in asset quality metrics, including ongoing low levels of nonperforming assets, past due loans, and loan charge-offs, reflects our persistent emphasis on solid loan underwriting and our borrowers’ demonstrated ability to meet the challenges posed by the current operating environment. As part of our standard risk management program, we will continue to closely monitor our loan portfolio for any signs of a systemic decline in credit quality and will seek to swiftly implement curative measures to mitigate the impact of any identified credit issues on our overall financial condition,” noted Dan Kuenzi, EVP and Chief Credit Officer.

Adoption of New Accounting Standard In June 2016, Financial Accounting Standards Board issued Accounting Standard Update No. 2016-13, Measurement of Credit Losses on Financial Instruments (ASU 2016-13). The allowance for credit losses under ASU 2016-13 utilizes a Current Expected Credit Losses (“CECL”) methodology which estimates the expected loan losses over the contractual life of the loans. GAAP prior to ASU 2016-13 required an “incurred loss” methodology for recognizing credit losses that delays recognition until it is probable a loss has been incurred. ASU 2016-13 became effective for the Company on January 1, 2023. The day 1 adoption of ASU 2016-13 and related amendments resulted in a decrease of $157,000 to the Bank’s allowance for credit losses-loans and an increase of $609,000 to the Bank’s allowance for credit losses-unfunded loan commitments for a cumulative-effect adjustment of $452,000 to decrease the beginning balance of retained earnings.

Allowance for Credit Losses (“ACL”) was $8.2 million, or 1.25% of gross loans (excluding PPP) at June 30, 2023, compared to $8.2 million, or 1.28% of gross loans, at March 31, 2023, and $8.2 million, or 1.37%, at March 31, 2022. Net charge-offs remained minimal and were $79,000 for both the current quarter and the first six months of 2023. A provision for credit losses of $71,000 was booked in the second quarter of 2023, largely due to continued loan growth as discussed in the loan section, with a total provision for credit losses of $223,000 for the first six months of 2023, compared to no provision for the first six months of 2022. In addition to the allowance for credit losses for loans, the Bank maintains a liability for credit losses for unfunded loan commitments, which was $754,000 at June 30, 2023, compared to $817,000 at March 31, 2023. Unfunded loan commitments decreased during the quarter as advances on construction lines were drawn upon.

Total Deposits were $1.10 billion at June 30, 2023, compared to $1.11 billion at March 31, 2023 and $1.20 billion at March 31, 2022. Deposits decreased quarter over quarter, though deposit balances showed signs of stabilization toward the latter part of the current quarter. Industry-wide pressure on deposits and competitive pricing pressures impacted deposit balances during the quarter as well as normal seasonal declines in deposit balances. Deposits were also impacted by interest rate sensitive customers transferring a portion of their excess deposits funds and increased customer spending. As some customers continued to seek higher yields, the demand for certificates of deposits (“CD’s”) increased by $10.2 million from the linked quarter and $23.2 million from the second quarter a year ago. Time deposits represented 7%, 6%, and 4%, of total deposits, at June 30, 2023, March 31, 2023, and June 30, 2022, respectively. With a strong core deposit track record, noninterest-bearing deposits represented 41% of total deposits, with core deposits (excluding CDs) representing 93% of total deposits at June 30, 2023.

Shareholder’s Equity was relatively flat at $108.9 million at June 30, 2023 compared to March 31, 2023 and increased 6% from $102.8 million at June 30, 2022. Book value per common share was $10.44 at June 30, 2023, compared to $10.45 at March 31, 2023, and $9.89 at June 30, 2022. Regulatory capital ratios of both the company and the Bank continue to exceed the well-capitalized regulatory thresholds, with the company’s leverage ratio at 10.8% and total risk-based capital ratio at 17.8% as of June 30, 2023.

The small decrease in book value per common share quarter-over-quarter was largely due to a decrease in the comprehensive income due to unrealized loss on available for sale securities partially offset by quarterly net income. With the increase in longer-term market interest rates during the quarter, the unrealized loss on available for sale securities increased 2% or $3.4 million to $23.9 million.