Pacific Financial Corp Earns $2.6 Million, or $0.25 per Diluted Share, for Third Quarter of 2021; Year-To-Date, Net Income increased 40% to $10.6 Million, from $7.5 Million for the First Nine Months of 2020; Declares Quarterly Cash Dividend of $0.13 per Share

Thursday, 28. October 2021 15:00

ABERDEEN, Wash., Oct. 28, 2021 (GLOBE NEWSWIRE) -- Pacific Financial Corporation (OTCQX: PFLC), (“Pacific Financial”) or the (“Company”), the holding company for Bank of the Pacific (the “Bank”), today reported net income of $2.6 million, or $0.25 per diluted share for the third quarter of 2021, compared to $3.9 million, or $0.37 per diluted share for the third quarter of 2020, and $3.7 million, or $0.36 per diluted share for the second quarter of 2021. Included in earnings for the current quarter was the recapture of $500,000 from the allowance for loan losses, compared to a provision for loan losses of $500,000 for the third quarter of 2020, and a recapture of $1.6 million for the second quarter of 2021. For the first nine months of 2021, net income increased 40% to $10.6 million, or $1.01 per diluted share, compared to $7.5 million, or $0.71 per diluted share, for the first nine months of 2020. Included in earnings for the first nine months of 2021 was a recapture of $3.5 million from the allowance for loan losses, compared to a provision for loan losses of $3.5 million for the first nine months of 2020. All results are unaudited.

The board of directors of Pacific Financial declared a quarterly cash dividend of $0.13 per share on October 20, 2021. The dividend will be payable on November 25, 2021, to shareholders of record on November 11, 2021.

“Third quarter earnings were solid, despite the challenging low interest rate environment. Credit quality improved as loans classified as non-impaired especially mention or watch loan balances decreased $16.0 million during the quarter, resulting in a recapture from the allowance for loan losses,” said Denise Portmann, President and Chief Executive Officer. “We are pleased with our ability to hold loan yields and balances, excluding PPP loans, relatively steady for the quarter. Our loan pipeline remains active, and we are optimistic that loan activity will increase with the continued improvement in our local economies. As expected with the decrease in refinance activity during the quarter, mortgage banking revenue was down for the third quarter compared to the linked quarter and year-over-year.”

“In addition, while the net interest margin decreased during the quarter as a result of continued deposit growth and higher levels of liquidity, total interest income excluding PPP interest and fees increased compared to the linked quarter, as the bank continued to deploy lower yielding federal funds sold balances into higher yielding investment securities,” commented Portmann. “We believe our balance sheet is well positioned for when interest rates return to more normal levels. Finally, our capital position is strong relative to our risk profile, with our total risk-based capital ratio reaching 17.27%, up from 15.13% early in 2020, at the beginning of the pandemic.”

Third Quarter 2021 Financial Highlights (as of, or for the period ended September 30, 2021, except as noted):
  • Net income was $2.6 million, or $0.25 per diluted share, for the third quarter of 2021, compared to $3.9 million, or $0.37 per diluted share, for the third quarter a year ago, and $3.7 million, or $0.36 per diluted share, for the second quarter of 2021.
  • Return on average assets (“ROAA”) was 0.79%, compared to 1.37% in the third quarter a year ago and 1.19% for the preceding quarter. Year to date ROAA was 1.13% compared to 0.97% a year ago.
  • The Bank recorded a $500,000 recapture from the allowance for loan losses during the current quarter, compared to a loan loss provision of $500,000 in the third quarter a year ago, and a recapture of $1.6 million in the second quarter of 2021.
  • Net interest margin (“NIM”) was 2.86% for the third quarter of 2021, compared to 3.49% for the third quarter of 2020, and 3.06% for the linked quarter.
  • Net gain-on-sale of loans from mortgage banking activities decreased $2.8 million to $1.6 million, compared to $4.4 million for the third quarter a year ago, and decreased $1.3 million from $2.9 million for the second quarter of 2021.
  • Gross loans totaled $665.6 million, compared to $779.8 million at September 30, 2020, and $693.9 million from the preceding quarter. Included in total loans at September 30, 2021, was $45.6 million of PPP loans compared to $130.7 million at September 30, 2020, and $69.6 million on a linked quarter basis.
  • Core deposits (non-interest bearing and interest-bearing transaction and savings accounts) increased 19% to $1.13 billion at September 30, 2021, compared to $952.5 million at September 30, 2020, and increased by 5% from $1.11 billion at June 30, 2021. Core deposits represented 95% of total deposits, with non-interest-bearing deposits representing 41% of total deposits at September 30, 2021.
  • Asset quality:
    • Watch loans or other loans especially mentioned, decreased $16.0 million from $46.7 million at June 30, 2021 and decreased $91.8 million, or 75%, to $30.8 million at September 30, 2021, compared to $122.6 million at September 30, 2020.
    • Non-performing, assets as a percentage of total assets, remain minimal at 0.15% at September 30, 2021, compared 0.14% at September 30, 2020 and 0.16% at June 30, 2021.
  • The Company’s consolidated capital ratios continue to exceed regulatory guidelines for a well-capitalized financial institution.
  • The Company repurchased 45,000 shares of its common stock during the quarter at an average cost of $12.51.
Income Statement Review

Net income was $2.6 million, or $0.25 per diluted share, for the third quarter of 2021, compared to $3.9 million, or $0.37 per diluted share, for the third quarter a year ago, and $3.7 million, or $0.36 per diluted share, for the second quarter of 2021. For the first nine months of 2021, net income increased 40% to $10.6 million, or $1.01 per diluted share compared to $7.5 million, or $0.71 per diluted share for the first nine months of 2020.

Net interest income, before the provision for loan losses, was $8.9 million for the third quarter of 2021, compared to $9.4 million for the third quarter a year ago and $9.0 million for the second quarter of 2021. Amortized PPP fees and interest totaled $1.0 million, $1.0 million and $1.4 million, for the quarters ended September 30, 2021, September 30, 2020 and June 30, 2021, respectively. For the first nine months of 2021, net interest income was $27.1 million, compared to $27.5 million for the first nine months of 2020, with amortized PPP fees and interest totaling $4.2 million and $1.6 million for year-to-date 2021 and 2020, respectively. Interest income, excluding PPP interest and fees, increased during the quarter compared to the linked quarter, as lower-yield federal funds sold were deployed into higher-yielding assets. In addition, continued decreases in interest expenses also positively impacted net interest income during the quarter and year-over-year.

The net interest margin (“NIM”) was 2.86% for the third quarter of 2021, compared to 3.49% for the third quarter of 2020, and 3.06% for the second quarter of 2021. Year-to-date, the NIM was 3.08% compared to 3.80% for the first nine months of 2020. Net interest margin was impacted by higher average balances of low yielding federal funds sold and interest bearing deposits in banks with an average rate of 14-basis points, as well as lower rates in the securities portfolio. The increased liquidity resulted from the continued growth in core deposit balances and PPP loan forgiveness payments. “The impact of the increased liquidity was partially offset by a reduction in deposit costs, purchases and increased balances of securities, and stable loan yields for the quarter,” stated Carla Tucker, EVP and Chief Financial Officer.

Average loan yields excluding PPP loans for the current quarter was 4.59% compared to 4.58% for the second quarter of 2021 and 4.87% a year ago. Average loan yields including PPP loans for the current quarter increased 10 basis points to 4.82% from 4.72% for the second quarter of 2021 and 22 basis points from 4.60% a year ago. Yields on investment securities decreased during the quarter as the company purchased additional balances of securities at yields lower than the previous portfolio. The Bank’s total cost of funds continued to decrease and was at 0.10% for the third quarter of 2021 compared to 0.22% a year earlier, and 0.12% at the linked quarter. The decreases were primarily the result of the decreases in deposit market rates as well as a reduction in the borrowing rate on the Company’s junior subordinated debentures. For the first nine months of 2021, loan yields increased four basis points to 4.81%, compared to 4.77% for the comparable period in 2020, while the cost of funds declined 16 basis points year-to-date compared to the like period in 2020.

Noninterest income declined 35%, or $2.1 million, to $4.0 million for the third quarter of 2021, compared to $6.0 million for the third quarter of 2020, and declined 14%, or $665,000, from $4.6 million for the second quarter of 2021. For the nine months ended September 30 2021, non-interest income was $13.7 million, compared to $14.4 million, for the first nine months ended September 30, 2020. Gain-on-sale of loans decreased $2.8 million for the current quarter to $1.6 million, compared to the third quarter a year ago, and declined $1.3 million from the preceding quarter. For the nine months ended September 30, 2021, gain-on-sale of loans decreased $1.7 million to $8.0 million from the nine months ended September 30, 2020. During the quarter, refinance volume slowed as expected and that combined with lower gain on sale margins during 2021 resulted in the decreased gains year-over-year and on a linked quarter basis. This reduction was partially offset by an unexpected bank-owned life insurance event of $875,000 recorded into income during the current quarter. In addition, OD/NSF fee income increased slightly during the current quarter, and debit card income, ATM income, and merchant processing income continued to increase exceeding pre-pandemic levels as the number of digital transactions and automated payment channels by our customers has consistently increased over the last year.

Noninterest expenses increased 4% to $10.4 million for the third quarter of 2021, compared to $10.0 million for the third quarter of 2020 and declined $122,000 from $10.5 million for the second quarter of 2021. The decrease from the linked quarter primarily reflects a decrease in salary and employee benefits including lower variable commission on mortgage banking due to decreased loan origination volumes. This decrease was partially offset by an increase in other expenses. The year-over-year quarterly non-interest expenses increase was due to higher FDIC and State assessments, data processing related expenses and other miscellaneous expenses. For the first nine months 2021, total noninterest expense increased by 8%, or $2.4 million, to $31.4 million compared to $29.0 million for the first nine months of 2020. The increase was primarily due to salary and employee benefits increases associated with mortgage banking activities during the first half of 2021, as well as increases in FDIC and state assessments, state and local taxes and other miscellaneous expenses.

The Bank had $368,000 in income tax expense for the third quarter of 2021, down 62% from $977,000 for the second quarter of 2021 and down 63% from $1.0 million from the year-over-year quarter. The lower effective tax rate for the third quarter of 2021 at 12.3% reflects the impact of the tax-exempt BOLI event posted this quarter. For the second quarter of 2021, and third quarter of 2020, the effective tax rate was 20.7% and 20.4%, respectively. This income tax includes not only federal corporate income tax but also includes Oregon corporate income tax.

Balance Sheet Review

Total Assets increased 15% to $1.34 billion, at September 30, 2021, compared to $1.16 billion at September 30, 2020, and grew 4% from $1.29 billion at June 30, 2021.

Investment Securities increased 76% to $223.6 million at September 30, 2021, compared to $126.8 million at September 30, 2020 and grew 41% from $158.4 million at June 30, 2021. During the current quarter, the Bank continued to deploy its excess liquidity into investment securities. This included $77.4 million in investment purchases, which was partially offset by $4.9 million in calls, maturities and payments. The average duration of the investment securities portfolio was approximately 5.5 years. Federal funds balances remained at higher than historical levels, primarily as a result of total deposit increases over the current quarter and during 2020, as well as the receipt of PPP loan forgiveness payments.

Gross Loan balances excluding PPP loans remained relatively steady at period-end compared to the linked quarter end, while total gross loans declined $28.3 million during the quarter to $665.6 million, driven primarily by PPP forgiveness reducing PPP balances by $24.1 million. Gross loan balances were $779.8 million at September 30, 2020, and $693.9 million at June 30, 2021. Included in total loans at September 30, 2021, September 30, 2020, and June 30, 2021 was $45.6 million, $130.7 million and $69.6 million in PPP loans, respectively.

Commercial real estate (“CRE”), which includes both owner occupied, and non-owner occupied, comprised 46% or $307.1 of the portfolio excluding PPP loans, as September 30, 2021. CRE owner occupied increased to $153.5 million at September 30, 2021, from $150.2 million a year earlier, and from $149.2 million at June 30, 2021, while non-owner occupied decreased during the like time-frames. At September 30, 2021, CRE concentration percentages remained relatively unchanged at 173% of total risk-based capital; well below the regulatory guidance limit of 300%. Commercial and agricultural loans, excluding PPP loans, decreased to $88.8 million compared to $107.2 million year-over-year and from $91.0 million the previous quarter end, in part due to decreased lines of credit utilization. On the consumer side, loans to finance luxury and classic cars were $49.7 million at September 30, 2021, compared to $45.8 million and $50.1 million at September 30, 2020 and June 30, 2021, respectively. As of September 30, 2021, the luxury and classic car portfolio includes 845 loans with an average balance of $59,000. The portfolio continues to perform adequately, as delinquent and non-accrual loans were 0.45% of the total luxury and classic car portfolio at September 30, 2021.

Loans were predominately originated within the Western Washington and Oregon markets and the Bank’s portfolio is well-diversified by collateral type and by industry with a prudent credit discipline. With the risks associated with the COVID-19 pandemic reducing in severity, earlier this year the Bank made reasonable adjustments to incrementally relax certain underwriting guidance, that had been tightened earlier in the pandemic, for non-owner occupied commercial real estate lending. To manage risk, the Bank 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.

Credit Quality

Credit quality remains strong, but has also continued to improve during 2021. In early 2020, the Bank provided $106.2 million in 90-day payment deferrals to customers adversely impacted by operating restrictions due to COVID-19. During the third and fourth quarters of 2020 and early 2021, a majority of these loan deferrals returned to regular payment status, reducing the balance of deferrals to $0 at September 30, 2021. Primarily as a result of the return to regular payment status, balances related to loans graded watch or other loans especially mentioned, declined $16.0 million during the quarter to $30.8 million. Non-performing assets were $2.0 million or 0.15% of total assets at September 30, 2021, compared to $2.06 million or 0.16% at June 30, 2021 and $1.6 million or 0.14% at September 30, 2020.

The Bank continues to identify several industries as being potentially more vulnerable to the economic and business impacts of the Coronavirus pandemic. Those industries include restaurants, retail trade, and recreation and entertainment. Although these industries are potentially more directly impacted by COVID-19, the bank’s customer base within these sectors covers a wide range of clients, and are managed by experienced management teams who aid in working through these economic challenges. At September 30, 2021, total loans to these industries was $49.5 million, representing 8% of gross loans excluding PPP.

Stressed Sectors (without PPP)
(Unaudited)
     
  Sept 30,
2021
 % of Gross
Loans
(without PPP)
 (Dollars in thousands)
Restaurants 14,886 2%
Recreation, arts and entertainment 5,808 1%
Retail trade 28,840 5%
Total stressed sectors$49,534 8%

The Allowance for Loan Losses (“ALL”) was $8.5 million, or 1.38% of gross loans (excluding PPP) at September 30, 2021, $12.0 million, or 1.85%, at September 30, 2020, and $9.1 million, or 1.45%, at June 30, 2021. Net charge-offs totaled $51,000 for the third quarter of 2021, compared to net charge-offs of $5,000 for the third quarter a year earlier, and net charge offs of $43,000 for the second quarter of 2021. The Bank reversed $500,000 of loan loss provision during the current quarter compared to a $500,000 provision for the like quarter a year ago and a recapture of $1.6 million for the linked quarter. The reversal of provision for loan losses during 2021 reflects management’s ongoing assessment of the credit quality of the company’s loan portfolio.

Total Deposits increased $171.5 million, or 17%, to $1.2 billion at September 30, 2021, compared to $1.0 billion at September 30, 2020, and increased $50.8 million, or 4%, from $1.1 billion at June 30, 2021. Increases are primarily related to PPP loan proceeds deposited into our customers’ accounts at Bank of the Pacific, from a generally higher level of client liquidity from reduced business investment, from elevated savings patterns, and also from receipt of stimulus funds during 2020 and 2021. “Core deposit growth remains very strong for the quarter, due in part to seasonal inflows, with a majority of the deposit growth in non-interest-bearing deposits,” commented Carla Tucker, EVP and Chief Financial Officer. Year over year noninterest-bearing deposits increased 39% and represents 41% or $493.6 million of total deposits at September 30, 2021, 35% or $356.2 million at September 30, 2020 and 41% or $466.5 million at June 30, 2021. Term deposits were at 5% or $61.8 million of total deposits as of September 30, 2021, down from $64.3 million at June 30, 2021 and $70.8 million at September 30, 2020.

Shareholder’s Equity was $117.5 million at September 30, 2021 compared to $112.0 million at September 30, 2020 and $118.0 million as of June 30, 2021. 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 8.8% and total risk-based capital ratio at 17.3% as of September 30, 2021. 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. The company’s tangible book value per share was $10.02 compared to $9.36 a year ago. During the quarter ended September 30, 2021, Pacific Financial repurchased a total of 45,000 shares, at an average price of $12.51, under its share repurchase program.


Balance Sheet Overview
(Unaudited)
                
   Sept 30,
2021
 June 30,
2021
 $
Change
 %
Change
 Sept 30,
2020
 $
Change
 %
Change
Assets: (Dollars in thousands, except per share data)
 Cash on hand and in banks$20,003 $20,128 $(125) -1%$147,476 $(127,473) -86%
 Interest bearing deposits 328,717  307,773  20,944  7% 3,250  325,467  10014%
 Federal funds sold 32,796  23,965  8,831  37% 20,735  12,061  58%
 Investment securities 223,610  158,379  65,231  41% 126,799  96,811  76%
 Loans held-for-sale 15,903  37,777  (21,874) -58% 37,813  (21,910) -58%
 Loans, net of deferred fees 663,219  690,607  (27,388) -4% 775,865  (112,646) -15%
 Allowance for loan losses (8,527) (9,078) 551  -6% (12,002) 3,475  -29%
 Net loans 654,692  681,529  (26,837) -4% 763,863  (109,171) -14%
 Federal Home Loan Bank and Pacific Coast                     
 Bankers' Bank stock, at cost 2,418  2,419  (1) 0% 2,138  280  13%
 Other assets 58,470  58,841  (371) -1% 59,269  (799) -1%
 Total assets$1,336,609 $1,290,811 $45,798  4%$1,161,343 $175,266  15%
                
Liabilities and Shareholders' Equity:              
 Total deposits$1,194,867 $1,144,033 $50,834  4%$1,023,319 $171,548  17%
 Borrowings 13,844  13,881  (37) 0% 13,994  (150) -1%
 Accrued interest payable and other liabilities 10,408  14,884  (4,476) -30% 11,985  (1,577) -13%
 Shareholders' equity 117,490  118,013  (523) 0% 112,045  5,445  5%
 Total liabilities and shareholders' equity$1,336,609 $1,290,811 $45,798  4%$1,161,343 $175,266  15%
                
Common Shares Outstanding 10,385,133  10,429,133  (44,000) 0% 10,528,290  (143,157) -1%
                
Book value per common share (1)$11.31 $11.32 $(0.01) 0%$10.64 $0.67  6%
Tangible book value per common share (2)$10.02 $10.03 $(0.01) 0%$9.36 $0.66  7%
Gross loans to deposits ratio 55.5% 60.4% -4.9%   75.8% -20.3%  
                
(1) Book value per common share is calculated as the total common shareholders' equity divided by the period ending number of common stock shares outstanding.
(2) Tangible book value per common share is calculated as the total common shareholders' equity less total intangible assets and liabilities, divided by the period ending number of common stock shares outstanding.
                


Income Statement Overview
(Unaudited)
                
   For the Three Months Ended,
   Sept 30,
2021
 June 30,
2021
 $
Change
 %
Change
 Sept 30,
2020
 $
Change
 %
Change
   (Dollars in thousands, except per share data)
Interest and dividend income$9,188 $9,318 $(130) -1%$9,964 $(776) -8%
Interest expense 284  324  (40) -12% 562  (278) -49%
 Net interest income 8,904  8,994  (90) -1% 9,402  (498) I-5%
Loan loss provision (500) (1,600) 1,100  -69% 500  (1,000) -200%
Noninterest income 3,951  4,616  (665) -14% 6,033  (2,082) -35%
Noninterest expense 10,375  10,497  (122) -1% 9,993  382  4%
Income before income taxes 2,980  4,713  (1,733) -37% 4,942  (1,962) -40%
Income tax expense 368  977  (609) -62% 1,007  (639) -63%
 Net Income$2,612 $3,736 $(1,124) -30%$3,935 $(1,323) -34%
                
Average common shares outstanding - basic 10,405,340  10,429,181  (23,841) 0% 10,599,494  (194,154) -2%
Average common shares outstanding - diluted 10,435,341  10,461,046  (25,705) 0% 10,626,598  (191,257) -2%
                
Income per common share              
 Basic$0.25 $0.36 $(0.11) -31%$0.37 $(0.12) -32%
 Diluted$0.25 $0.36 $(0.11) -31%$0.37 $(0.12) -32%
                
Effective tax rate 12.3% 20.7% -8.4%   20.4% -8.1%  
                
   For the Nine Months Ended,      
   Sept 30,
2021
 Sept 30,
2020
 $
Change
 %
Change
      
   (Dollars in thousands, except per share data)      
Interest and dividend income$28,118 $29,355 $(1,237) -4%      
Interest expense 995  1,888  (893) -47%      
 Net interest income 27,123  27,467  (344) -1%      
Loan loss provision (3,500) 3,500  (7,000) -200%      
Noninterest income 13,732  14,389  (657) -5%      
Noninterest expense 31,377  28,944  2,433  8%      
Income before income taxes 12,978  9,412  3,566  38%      
Income tax expense 2,402  1,872  530  28%      
 Net Income$10,576 $7,540 $3,036  40%      
                
Average common shares outstanding - basic 10,422,089  10,611,380  (189,291) -2%      
Average common shares outstanding - diluted 10,451,334  10,638,484  (187,150) -2%      
                
Income per common share              
 Basic$1.01 $0.71 $0.30  42%      
 Diluted$1.01 $0.71 $0.30  42%      
                
Effective tax rate 18.5% 19.9% -1.4%        
                       

 

Reconciliation of Non-GAAP Measure
(Unaudited)
                
   For the Three Months Ended,
   Sept 30,
2021
 June 30,
2021
 $
Change
 %
Change
 Sept 30,
2020
 $
Change
 %
Change
Non-GAAP Net Income (Dollars in thousands)
Net Income$2,612 $3,736 $(1,124) -30%$3,935 $(1,323) -34%
 Loan loss provision (500) (1,600) 1,100  -69% 500  (1,000) -200%
 Income tax expense 368  977  (609) -62% 1,007  (639) -63%
Pre-tax, pre-provision net income$2,480 $3,113 $(633) -20%$5,442 $(2,962) -54%
                
Pre-tax, pre-provisions ROA, annualized0.75% 0.99% (0.24)   1.89% (1.14)  
Pre-tax, pre-provisions ROE, annualized8.29% 10.73% (2.44)   19.24% (10.95)  
                
   For the Nine Months Ended,      
   Sept 30,
2021
 Sept 30,
2020
 $
Change
 %
Change
      
Non-GAAP Operating Income (Dollars in thousands)      
Net Income$10,576 $7,540 $3,036  40%      
 Loan loss provision (3,500) 3,500  (7,000) -200%      
 Income tax expense 2,402  1,872  530  28%      
Pre-tax, pre-provision net income$9,478 $12,912 $(3,434) -27%      
                
Pre-tax, pre-provisions ROA, annualized1.01% 1.67% (0.66)        
Pre-tax, pre-provisions ROE, annualized10.84% 15.81% (4.97)        
                


Noninterest Income
(Unaudited)
   For the Three Months Ended,
   Sept 30,
2021
 June 30,
2021
 $
Change
 %
Change
 Sept 30,
2020
 $
Change
 %
Change
   (Dollars in thousands)
Service charges on deposits$365$351$14  4%$356$9  3%
Gain on sale of loans, net 1,562 2,882 (1,320) -46% 4,384 (2,822) -64%
Earnings on bank owned life insurance 1,003 126 877  696% 130 873  672%
Other noninterest income              
 Fee income 995 1,248 (253) -20% 1,132 (137) -12%
 Other 26 9 17  189% 31 (5) -16%
Total noninterest income$3,951$4,616$(665) -14%$6,033$(2,082) -35%
                
                
   For the Nine Months Ended,      
   Sept 30,
2021
 Sept 30,
2020
 $
Change
 %
Change
      
   (Dollars in thousands)      
Service charges on deposits$1,059$1,178$(119) -10%      
Gain on sale of loans, net 7,980 9,709 (1,729) -18%      
Gain on sale of securities available for sale, net - - -  -       
Earnings on bank owned life insurance 1,255 373 882  236%      
Other noninterest income              
 Fee income 3,376 3,042 334  11%      
 Other 62 87 (25) -29%      
Total noninterest income$13,732$14,389$(657) -5%      
                


Noninterest Expense
(Unaudited)
                
   For the Three Months Ended,
   Sept 30,
2021
 June 30,
2021
 $
Change
 %
Change
 Sept 30,
2020
 $
Change
 %
Change
   (Dollars in thousands)
Salaries and employee benefits$6,577$7,148$(571) -8%$6,940$(363) -5%
Occupancy 503 481 22  5% 498 5  1%
Equipment 315 316 (1) 0% 292 23  8%
Data processing 841 804 37  5% 763 78  10%
Professional services 251 296 (45) -15% 208 43  21%
State and local taxes 186 273 (87) -32% 202 (16) -8%
FDIC and State assessments 124 82 42  51% 35 89  254%
Other noninterest expense:              
 Director fees 76 80 (4) -5% 81 (5) -6%
 Communication 69 72 (3) -4% 108 (39) -36%
 Advertising 31 59 (28) -47% 33 (2) -6%
 Professional liability insurance 60 60 -  0% 53 7  13%
 Amortization 48 110 (62) -56% 91 (43) -47%
 Other 1,294 716 578  81% 689 605  88%
Total noninterest expense$10,375$10,497$(122) -1%$9,993$382  4%
                
                
   For the Nine Months Ended,      
   Sept 30,
2021
 Sept 30,
2020
 $
Change
 %
Change
      
   (Dollars in thousands)      
Salaries and employee benefits$21,058$19,786$1,272  6%      
Occupancy 1,495 1,527 (32) -2%      
Equipment 949 870 79  9%      
Data processing 2,474 2,312 162  7%      
Professional services 781 688 93  14%      
State and local taxes 661 459 202  44%      
FDIC and State assessments 287 51 236  463%      
Other noninterest expense:              
 Director fees 234 238 (4) -2%      
 Communication 212 252 (40) -16%      
 Advertising 119 115 4  3%      
 Professional liability insurance 179 164 15  9%      
 Amortization 264 289 (25) -9%      
 Other 2,664 2,193 471  21%      
Total noninterest expense$31,377$28,944$2,433  8%      
                


Financial Performance Overview
(Unaudited)
           
  For the Three Months Ended
  Sept 30,
2021
 June 30,
2021
 Change Sept 30,
2020
 Change
Performance Ratios         
Return on average assets, annualized0.79% 1.19% (0.40) 1.37% (0.58)
Return on average equity, annualized8.73% 12.87% (4.14) 13.91% (5.18)
Efficiency ratio (1)80.71% 77.13% 3.58  64.74% 15.97 
           
(1) Non-interest expense divided by net interest income plus noninterest income.      
           
           
  For the Nine Months Ended,    
  Sept 30,
2021
 Sept 30,
2020
 Change    
Performance Ratios         
Return on average assets, annualized1.13% 0.97% 0.16     
Return on average equity, annualized12.11% 9.22% 2.89     
Efficiency ratio (1)76.80% 69.15% 7.65     
           
(1) Non-interest expense divided by net interest income plus noninterest income.      
           


LIQUIDITY

Cash and Cash Equivalents and Investment Securities
(Unaudited)
    Sept 30,
2021
 % of
Total
 June 30,
2021
 % of
Total
 $
Change
 %
Change
 Sept 30,
2020
 Total $
Change
 %
Change
    (Dollars in thousands)
Cash on hand and in banks$20,003 3%$20,128 4%$(125) -1%$15,492 5%$4,511 29%
Interest bearing deposits 325,467 54% 304,523 60% 20,944  7% 131,984 44% 193,483 147%
Other interest earning deposits 3,250 1% 3,250 1% -  0% 3,250 1% - 0%
Federal funds sold 32,796 5% 23,965 5% 8,831  37% 20,735 7% 12,061 58%
 Total 381,516 63% 351,866 70% 29,650  8% 171,461 57% 210,055 123%
                       
Investment securities:                    
 Collateralized mortgage obligations 84,530 14% 65,102 12% 19,428  30% 46,811 16% 37,719 81%
 Mortgage backed securities 16,013 3% 9,459 2% 6,554  69% 13,194 4% 2,819 21%
 U.S. Government and agency securities 49,901 8% 19,235 4% 30,666  159% 8,449 3% 41,452 491%
 Municipal securities 71,041 12% 62,467 12% 8,574  14% 56,272 19% 14,769 26%
 Corporate debt securities 2,016 0% 2,017 0% (1) 0% 2,009 1% 7 0%
 Equity securities 109 0% 99 0% 10  10% 64 0% 45 70%
  Total 223,610 37% 158,379 30% 65,231  41% 126,799 43% 96,811 76%
Total cash equivalents and investment securities$605,126 100%$510,245 100%$94,881  19%$298,260 100%$306,866 103%
                       
Total cash equivalents and investment securities                    
 as a percent of total assets   45%   40%       26%    
                       


LOANS

 Loans by Category
 (Unaudited)
                       
    Sept 30, 2021 % of
Gross Loans
 June 30, 2021 % of
Gross Loans
 $
Change
 %
Change
 Sept 30, 2020 % of
Gross Loans
 $
Change
 %
Change
 Commercial: (Dollars in thousands)
  Commercial and agricultural$88,828  13%$91,038  13%$(2,210) -2%$107,187  14%$(18,359) -17%
  PPP 45,558  7% 69,621  10% (24,063) -35% 130,700  16% (85,142) 100%
 Real estate:                    
 Construction and development 35,052  5% 31,429  5% 3,623  12% 35,276  5% (224) -1%
 Residential 1-4 family 66,771  10% 68,238  10% (1,467) -2% 76,856  10% (10,085) -13%
 Multi-family 39,971  6% 38,764  6% 1,207  3% 36,293  5% 3,678  10%
 Commercial real estate – owner occupied 153,502  23% 149,209  22% 4,293  3% 150,211  19% 3,291  2%
 Commercial real estate – non owner occupied 153,641  23% 161,450  22% (7,809) -5% 160,922  20% (7,281) -5%
 Farmland 25,140  4% 26,047  4% (907) -3% 30,268  4% (5,128) -17%
 Consumer 57,112  9% 58,092  8% (980) -2% 52,078  7% 5,034  10%
  Gross Loans 665,575  100% 693,888  100% (28,313) -4% 779,791  100% (114,216) -15%
  Less: allowance for loan losses (8,527)   (9,078)   551    (12,002)   3,475   
  Less: deferred fees (2,356)   (3,281)   925    (3,926)   1,570   
  Net loans$654,692   $681,529   $(26,837)  $763,863   $(109,171)  
                       


Loan Concentration
(Unaudited)
   Sept 30, 2021 % of Risk Based Capital June 30, 2021 % of Risk Based Capital Change Sept 30, 2020 % of Risk Based Capital Change 
Commercial: (Dollars in thousands) 
 Commercial and agricultural$88,828 72%$91,038 74% -2%$107,187 93% -21% 
 PPP 45,558 37% 69,621 57% -20% 130,700 113% -76% 
Real estate:                
Construction and development 35,052 28% 31,429 26% 2% 35,276 30% -2% 
Residential 1-4 family 66,771 54% 68,238 55% -1% 76,856 66% -12% 
Multi-family 39,971 32% 38,764 32% 0% 36,293 31% 1% 
Commercial real estate -- owner occupied 153,502 124% 149,209 121% 3% 150,211 130% -6% 
Commercial real estate -- non owner occupied 153,641 124% 161,450 131% -7% 160,922 139% -15% 
Farmland 25,140 20% 26,047 21% -1% 30,268 26% -6% 
Consumer 57,112 46% 58,092 47% -1% 52,078 45% 1% 
 Gross Loans$665,575  $693,888    $779,791    
Regulatory Commercial Real Estate$214,212 173%$219,091 178% -5%$222,719 192% -19% 
Total Risk Based Capital*$123,472  $123,048    $115,852    
                  
*Bank of the Pacific                
                  


DEPOSITS

                     
Deposits by Category
(Unaudited)
                     
  Sept 30, 2021 % of Total June 30, 2021 % of Total $
Change
 %
Change
 Sept 30, 2020 % of Total $
Change
 %
Change
  (Dollars in thousands)
Interest-bearing demand$274,505 24%$264,470 22%$10,035  4%$286,512 28%$(12,007) -4%
Money market 196,236 16% 192,653 17% 3,583  2% 183,425 18% 12,811  7%
Savings 168,786 14% 156,123 14% 12,663  8% 126,359 12% 42,427  34%
Time deposits (CDs) 61,786 5% 64,269 6% (2,483) -4% 70,823 7% (9,037) -13%
Total interest-bearing deposits 701,313 59% 677,515 59% 23,798  4% 667,119 65% 34,194  5%
Non-interest bearing demand 493,554 41% 466,518 41% 27,036  6% 356,200 35% 137,354  39%
Total deposits$1,194,867 100%$1,144,033 100%$50,834  4%$1,023,319 100%$171,548  17%
                     


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

Capital Measures
(unaudited)
 Sept 30,
2021
 June 30,
2021
 Change Sept 30,
2020
 Change Well
Capitalized
Under Prompt Correction
Action
Regulations
Pacific Financial Corporation           
Total risk-based capital ratio17.3% 16.7% 0.7  15.4% 2.0  N/A
Tier 1 risk-based capital ratio16.1% 15.4% 0.7  14.1% 2.0  N/A
Common equity tier 1 ratio14.2% 13.7% 0.6  12.4% 1.9  N/A
Leverage ratio8.8% 9.1% (0.3) 9.5% (0.7) N/A
Tangible common equity ratio7.9% 8.2% (0.3) 8.6% (0.7) N/A
            
Bank of the Pacific           
Total risk-based capital ratio17.2% 16.6% 0.6  15.2% 2.0  10.5%
Tier 1 risk-based capital ratio16.0% 15.4% 0.6  14.0% 2.0  8.5%
Common equity tier 1 ratio16.0% 15.4% 0.6  14.0% 2.0  7.0%
Leverage ratio8.7% 9.1% (0.3) 9.4% (0.6) 7.5%
                  


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.

   For the Three Months Ended,
                
   Sept 30,
2021
 June 30,
2021
 $
Change
 %
Change
 Sept 30,
2020
 $
Change
 %
Change
Average Balances (Dollars in thousands)
Gross loans$670,061$709,818$(39,757) -6%$781,917$(111,856) -14%
Gross loans without PPP$613,090$612,907$183  0%$655,481$(42,391) -6%
Loans held for sale$23,270$28,236$(4,966) -18%$25,002$(1,732) -7%
Investment securities$188,997$144,927$44,070  30%$124,062$64,935  52%
Federal funds sold & interest bearing deposits in banks$363,327$308,196$55,131  18%$148,970$214,357  144%
Total interest-earning assets$1,245,655$1,191,177$54,478  5%$1,079,951$165,704  15%
Non-interest bearing demand deposits$483,479$452,149$31,330  7%$349,763$133,716  38%
Interest bearing deposits$685,650$662,573$23,077  3%$655,945$29,705  5%
Total Deposits$1,169,129$1,114,722$54,407  5%$1,005,708$163,421  16%
Borrowings$13,856$13,894$(38) 0%$14,018$(162) -1%
Total interest-bearing liabilities$699,506$676,467$23,039  3%$669,963$29,543  4%
Total Equity$118,744$116,399$2,345  2%$112,236$6,508  6%
                


   For the Three Months Ended,
   Sept 30,
2021
 June 30,
2021
 Change Sept 30,
2020
 Change
Yield on average gross loans (1) 4.82% 4.72% 0.10  4.60% 0.22 
Yield on average gross loans without PPP (1) 4.59% 4.58% 0.01  4.87% (0.28)
Yield on average investment securities (1) 1.87% 2.12% (0.25) 2.43% (0.56)
Yield on Fed funds sold & interest bearing deposits in banks 0.16% 0.12% 0.04  0.16% - 
Cost of average interest bearing deposits 0.13% 0.16% (0.03) 0.30% (0.17)
Cost of average borrowings 1.72% 1.76% (0.04) 1.90% (0.18)
Cost of average total deposits and borrowings 0.10% 0.12% (0.02) 0.22% (0.12)
            
Yield on average interest-earning assets 2.96% 3.17% (0.21) 3.69% (0.73)
Cost of average interest-bearing liabilities 0.16% 0.19% (0.03) 0.33% (0.17)
Net interest spread 2.80% 2.98% (0.18) 3.36% (0.56)
Net interest spread without PPP 2.59% 2.76% (0.17) 3.43% (0.84)
            
Net interest margin (1) 2.86% 3.06% (0.20) 3.49% (0.63)
Net interest margin without PPP (1) 2.66% 2.83% (0.17) 3.53% (0.87)
            
(1) Tax-exempt income has been adjusted to a tax equivalent basis at a rate of 21%.       
            


   For the Nine Months Ended, 
   Sept 30,
2021
 Sept 30,
2020
 $
Change
 %
Change
 
Average Balances (Dollars in thousands) 
Gross loans$701,181$742,649$(41,468) -6% 
Gross loans without PPP$616,163$680,679$(64,516) -9% 
Loans held for sale$26,222$17,887$8,335  47% 
Investment securities$154,587$113,873$40,714  36% 
Federal funds sold & interest bearing deposits in banks$307,014$99,531$207,483  208% 
Interest-earning assets$1,189,004$973,940$215,064  22% 
Non-interest bearing demand deposits$432,386$299,134$133,252  45% 
Interest bearing deposits$679,162$602,249$76,913  13% 
Total Deposits$1,111,548$901,383$210,165  23% 
Borrowings$13,891$15,470$(1,579) -10% 
Interest-bearing liabilities$693,053$617,719$75,334  12% 
Total Equity$116,760$109,194$7,566  7% 
          
Total Deposits excl. Brokered CDs 1,108,774 895,718 213,056  23.8% 
          


   For the Nine Months Ended,   
   Sept 30,
2021
 Sept 30,
2020
 Change   
Net Interest Margin         
Yield on average gross loans (1) 4.81% 4.77% 0.04   
Yield on average gross loans without PPP (1) 4.60% 5.10% (0.50)  
Yield on average investment securities (1) 2.11% 2.71% (0.60)  
Yield on Fed funds sold & interest bearing deposits in banks 0.14% 0.42% (0.28)  
Cost of average interest bearing deposits 0.16% 0.35% (0.19)  
Cost of average borrowings 1.76% 2.58% (0.82)  
Cost of average total deposits and borrowings 0.12% 0.28% (0.16)  
        
Yield on average interest-earning assets 3.19% 4.06% (0.87)  
Cost of average interest-bearing liabilities 0.19% 0.41% (0.22)  
Net interest spread 3.00% 3.65% (0.65)  
Net interest spread without PPP 2.76% 3.85% (1.09)  
        
Net interest margin (1) 3.08% 3.80% (0.72)  
Net interest margin without PPP (1) 2.83% 3.98% (1.15)  
        
(1) Tax-exempt income has been adjusted to a tax equivalent basis at a rate of 21%.   
        


Adversely Classified Loans and Securities
(Unaudited)
               
  Sept 30,
2021
 June 30,
2021
 $
Change
 %
Change
 Sept 30,
2020
 $
Change
 %
Change
  (Dollars in thousands)
Rated substandard or worse, but not impaired, beginning of three month period$8,038 $12,698 $(4,660) -37%$8,144 $(106) -1%
Addition of previously classified pass graded loans 1,379  589  790  134% 4,222  (2,843) -67%
Upgrades to pass or other loans especially mentioned status (185) (4,605) 4,420  -96% (89) (96) 108%
Moved to nonaccrual -  -  -  0% (486) 486  -100%
Principal payments, net (447) (644) 197  -31% (186) (261) 140%
Rated substandard or worse, but not impaired, end of three month period$8,785 $8,038 $747  9%$11,605 $(2,820) -24%
Impaired 3,330  3,357  (27) -1% 1,797  1,533  85%
Total adversely classified loans¹$12,115 $11,395 $720  6%$13,402 $(1,287) -10%
               
Other loans especially mentioned or watch, but not impaired$30,770 $46,723 $(15,953) -34%$122,567 $(91,797) -75%
Gross loans (excluding deferred loan fees)$665,575 $693,888 $(28,313) -4%$779,791 $(114,216) -15%
Adversely classified loans to gross loans 1.82% 1.64%     1.72%    
Adversely classified loans to gross loans without PPP 1.95% 1.83%     2.06%    
Allowance for loan losses$8,527 $9,078 $(551) -6%$12,002 $(3,475) -29%
Allowance for loan losses as a percentage of adversely classified loans 70.38% 79.67%     89.55%    
Allowance for loan losses to total impaired loans 256.07% 270.42%     667.89%    
Adversely classified loans to total assets 0.91% 0.88%     1.15%    
Delinquent loans to gross loans, not in nonaccrual status 2 0.02% 0.01%     0.00%    
Delinquent loans to gross loans without PPP, not in nonaccrual status 0.02% 0.01%     0.00%    
               
Adversely 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.         
               
2 Delinquent loans are defined as loans past due 30-90 days and still accruing              
               


Nonperforming Assets
(Unaudited)
               
  Sept 30,
2021
 June 30,
2021
 $
Change
 %
Change
 Sept 30,
2020
 $
Change
 %
Change
  (Dollars in thousands)
Total nonaccrual loans, beginning of three month period$1,819 $2,203 $(384) -17%$1,426 $393  28%
Transfer to performing loans -  (138) 138  -100% -  -  0%
Addition of nonaccrual loans 323  -  323  100% 543  (220) -41%
Moved to other assets owned -  -  -  0% -  -  0%
Principal payments, net (308) (246) (62) 25% (346) 38  -11%
Charge-offs, net (34) -  (34) -100% -  (34) -100%
Total nonaccrual loans, end of three month period$1,800 $1,819 $(19) -1%$1,623 $177  11%
               
Other real estate owned and foreclosed assets 194  241  (47) -20% -  194  100%
Total nonperforming assets$1,994 $2,060 $(66) -3%$1,623 $371  23%
               
               
Total restructured performing loans, beginning of period$1,538 $1,545 $(7) 0%$180 $1,358  754%
Transfer to nonaccrual loans -  -  -  0% -  -  0%
Addition of restructured performing loans -  -  -  0% -  -  0%
Principal payments, net (7) (7) -  0% (6) (1) 17%
Charge-offs, net -  -  -  0% -  -  0%
Total restructured performing loans, end of period$1,531 $1,538 $(7) 0%$174 $1,357  780%
               
Accruing loans past due 90 days or more$- $- $-  0%$- $-  0%
Percentage of nonperforming assets to total assets 0.15% 0.16%     0.14%    
Nonperforming loans to total loans 0.27% 0.26%     0.21%    
Nonperforming loans to total loans without PPP 0.29% 0.29%     0.25%    
               


Allowance for Loan Losses
(Unaudited)
               
  For the Three Months Ended,
  Sept 30,
2021
 June 30,
2021
 $
Change
 %
Change
 Sept 30,
2020
 $
Change
 %
Change
  (Dollars in thousands)
Gross loans outstanding at end of period$665,575 $693,888 $(28,313) -4%$779,791 $(114,216) -15%
Average loans outstanding, gross$670,061 $709,818 $(39,757) -6%$781,917 $(111,856) -14%
Allowance for loan losses, beginning of period$9,078 $10,721 $(1,643) -15%$11,507 $(2,429) -21%
Commercial (34) -  (34) -100% -  (34) -100%
Commercial Real Estate -  -  -  0% -  -  0%
Residential Real Estate -  -  -  0% -  -  0%
Consumer (21) (48) 27  -56% (14) (7) 50%
Total charge-offs (55) (48) (7) 15% (14) (41) 293%
Commercial -  4  (4) -100% 5  (5) -100%
Commercial Real Estate -  -  -  0% -  -  0%
Residential Real Estate -  -  -  0% -  -  0%
Consumer 4  1  3  300% 4  -  0%
Total recoveries 4  5  (1) -20% 9  (5) -56%
Net recoveries/(charge-offs) (51) (43) (8) 19% (5) (46) 920%
Provision to income (500) (1,600) 1,100  -69% 500  (1,000) -200%
Allowance for loan losses, end of period$8,527 $9,078 $(551) -6%$12,002 $(3,475) -29%
Ratio of net loans charged-off to average              
gross loans outstanding, annualized 0.03% 0.02% 0.01%   0.00% 0.03%  
Ratio of net loans charged-off to average              
gross loans outstanding without PPP, annualized 0.03% 0.03% 0.00%   0.00% 0.03%  
Ratio of allowance for loan losses to              
gross loans outstanding 1.28% 1.31% -0.03%   1.54% -0.26%  
Ratio of allowance for loan losses to              
gross loans without PPP outstanding 1.38% 1.45% -0.07%   1.85% -0.47%  
               


  For the Nine Months Ended, 
  Sept 30,
2021
 Sept 30,
2020
 $
Change
 %
Change
  
  (Dollars in thousands)           
Gross loans outstanding at end of period$665,575 $779,791 $(114,216) -15% 
Average loans outstanding, gross$701,181 $742,649 $(41,468) -6% 
Allowance for loan losses, beginning of period$12,068 $8,993 $3,075  34% 
Commercial (34) (433) 399  -92% 
Commercial Real Estate -  -  -  0% 
Residential Real Estate -  -  -  0% 
Consumer (115) (147) 32  -22% 
Total charge-offs (149) (580) 431  -74% 
Commercial 42  5  37  740% 
Commercial Real Estate -  -  -  0% 
Residential Real Estate 49  72  (23) -32% 
Consumer 17  12  5  42% 
Total recoveries 108  89  19  21% 
Net recoveries (charge-offs) (41) (491) 450  -92% 
Provision charged to income (3,500) 3,500  (7,000) -200% 
Allowance for loan losses, end of period$8,527 $12,002 $(3,475) -29% 
Ratio of net loans charged-off to average        
gross loans outstanding, annualized 0.01% 0.07% -0.06%  
Ratio of net loans charged-off to average        
gross loans outstanding without PPP, annualized 0.01% 0.07% -0.06%  
Ratio of allowance for loan losses to        
gross loans outstanding 1.28% 1.54% -0.26%  
Ratio of allowance for loan losses to        
gross loans without PPP outstanding 1.38% 1.85% -0.47%  
         

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 September 30, 2021, the Company had total assets of $1.34 billion and operated fourteen branches in the communities of Grays Harbor, Pacific, Whatcom, Skagit, Clark and Wahkiakum counties in the State of Washington, and two branches in Clatsop County, Oregon. The Company also operated loan production offices in the communities of Burlington, Washington and Salem and Eugene, 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, and could negatively impact the Company’s operating and stock price performance. These risks and uncertainties include various risks associated with growing the Bank and expanding the services it provides, development of new business lines and markets, competition in the marketplace, general economic conditions, including the COVID-19 pandemic and government responses thereto, 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
CARLA TUCKER, EVP & CFO
360.533.8873


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