Oregon Pacific Bank Announces Third Quarter Earnings Results

Oregon Pacific Bancorp (ORPB) today reported financial results for the third quarter ended September 30, 2020.

Highlights

• Third quarter net income of $803 thousand; $0.11 per diluted share
• Quarterly deposit growth of $20.3 million
• Quarterly loan growth of $6.3 million

Oregon Pacific Bancorp, and its wholly owned subsidiary Oregon Pacific Bank, reported quarterly net income of $803 thousand, or $0.11 per diluted share compared to $1.0 million, or $0.15 per diluted share for the quarter ended September 30, 2019. Through September 30, 2020, the Bank recorded year-to-date net income totaling $2.3. million, or $0.32 per diluted share compared to $2.5 million, or $0.35 per diluted share for the same period in 2019. During the nine months ended September 30, 2020 provision for loan losses totaled $2.2 million compared to $205 thousand during the nine months ended September 30, 2019. "2020 has presented many challenges but I continue to be proud of our staff and their commitment to create value for those we support. In light of the pandemic, I am pleased with the results of the third quarter," said Ron Green, President and CEO. "The uncertainty surrounding long-term implications of COVID-19 have not been fully realized, but Oregon Pacific Bank is positioned well with a team of seasoned bankers, ready to assist our clients."

In the beginning of April, the Small Business Administration (SBA) opened the Paycheck Protection Program (PPP), which enabled eligible businesses and non-profit agencies to receive loans with forgiveness provisions to support payroll and other eligible expenses during the COVID-19 crisis. The PPP loans also carry a 100% SBA guarantee. Through September 30, 2020, Oregon Pacific Bank made 752 PPP loans, totaling $125.2 million. In addition, as of September 30, 2020, the Bank had a remaining balance of unearned loan origination fees of $3.3 million which will be recognized over the lives of the loans as an adjustment to yield. During the latter part of the third quarter the Bank's relationship managers began working with borrowers on the PPP forgiveness process. The Bank elected to work with a third-party software provider to help with the data transmission functionality between the Bank and PPP borrowers. As of September 30, 2020, the Bank had approved 75 forgiveness applications totaling $14.3 million, which were awaiting SBA approval.

Period end loans, net of deferred loan origination fees, totaled $428 million, representing net growth of $6.3 million during the quarter. The Bank continued to see loan opportunities during the third quarter, but a competitive rate environment is leading to a declining yield on the overall portfolio and the potential for an increased risk of prepayments in future quarters. The Bank is also seeing an increase in competition from non-bank lenders, offering terms and non-recourse financing Oregon Pacific Bank is unwilling to meet.

The Bank experienced deposit growth totaling $20.3 million during the third quarter. Approximately 80% of PPP loans were made to existing Oregon Pacific Bank clients. As PPP loans funded, most clients and non-clients placed the loan proceeds into a deposit account with Oregon Pacific Bank. This increase in deposits was originally expected to be short-term in nature, but the deposits are remaining with the Bank much longer than expected. Approximately 20% of the PPP loans originated were to non-clients, and the Bank is working to transition those clients from other financial institutions. As of September 30, 2020, deposit accounts opened after June 30, 2020, held deposit dollars totaling $20.0 million. Reductions in PPP related deposit balances are being approximately offset by the typical seasonal deposit growth for existing clients experienced during this part of the year as nearly all deposit growth during the quarter came through accounts opened during the third quarter.

The third quarter net interest margin lowered to 3.50%, down from 3.73.% in second quarter 2020. The yield on non-PPP loans lowered to 4.70%, down from 4.85% in second quarter as new loans are being booked at rates lower than the current portfolio yield. Partially offsetting the decrease in yield on earning assets was a reduction in the cost of interest bearing liabilities, primarily tied to a reduction in the variable interest rate for the Junior Subordinated Debenture, which resets quarterly.

For the quarter ended September 30, 2020, the Bank booked net recoveries of $9 thousand. Quarterly earnings were impacted by provision for loan losses, totaling $900 thousand for the second consecutive quarter. The provision expense was in response to COVID-19 and the economic factors impacting the allowance for loan losses calculation. The Bank continues to monitor credit quality statistics and saw classified asset totals increase $721 thousand during the quarter.

The Bank continued to work with borrowers experiencing financial difficulty related to COVID-19 during the third quarter. As of June 30, 2020, the Bank provided full payment deferral modifications to 31 borrowers totaling $14.5 million. Through September 30, that reduced to seven loan relationships totaling $2.2 million, with $12.3 million in relationships returning to normal payment status. The Bank also provided interest only loan modifications, which as of June 30, 2020, totaled $38.8 million associated with 98 lending relationships. Most of the interest only payment modifications provided a six-month interest only period, with many of the borrowers scheduled to return to full principal and interest payments in October. As of September 30, 2020, the Bank had 61 loans still covered by interest only payment modifications, totaling $29.8 million. The Bank's Credit Administration team is proactively monitoring loan relationships to determine if future downgrades are necessary.

During the third quarter 2020, noninterest income totaled $1.4 million, representing an increase of $213 thousand over the prior quarter. The Bank saw increases across almost all noninterest income categories. The largest increase occurred in the trust fee income category which grew $61 thousand to $628 thousand for the quarter. The increase was partially attributable to extraordinary income fees (XO fees) related to real estate sales which totaled $53 thousand during third quarter, up from $20 thousand during second quarter. The Bank also experienced a quarterly increase in merchant card services income and mortgage loan commission income, which increased $48 thousand and $46 thousand, respectively, during the quarter. During second quarter both income categories were adversely impacted by COVID-19 as uncertainty in the residential mortgage market made it more difficult for clients to qualify for financing and state mandated closures impacted the volume of merchant charges for the Bank's merchant bankcard clients. Fortunately, both areas appear to have rebounded to near pre-pandemic revenue levels during the third quarter.

Noninterest expense in the third quarter totaled $3.8 million, up $425 thousand from the second quarter, but in line with the noninterest expense of $3.8 experienced during first quarter 2020. On a linked-quarter basis, the Bank saw an increase in salaries and employee benefits expense, primarily tied to the deferred loan origination costs associated with the PPP loans, which were booked as a credit to salary expense primarily during second quarter. The Bank also saw an increase in outside service expense, which was partially attributable to an increase in the Bank's core system expense, which is assessed based on asset size and increased $26 thousand over the second quarter. As the Bank's balance sheet contracts through the spending of PPP related deposit dollars that expense should normalize.

Forward-Looking Statement Safe Harbor

This release contains "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995 ("PSLRA"). These statements can be identified by the fact that they do not relate strictly to historical or current facts. Forward-looking statements often use words such as "anticipates," "targets," "expects," "estimates," "intends," "plans," "goals," "believes" and other similar expressions or future or conditional verbs such as "will," "should," "would" and "could." The forward-looking statements made represent Oregon Pacific Bank's current estimates, projections, expectations, plans or forecasts of its future results and revenues, including but not limited to statements about performance, loan or deposit growth, loan prepayments, strategic focus, capital position, liquidity, credit quality and credit quality trends. These statements are not guarantees of future results or performance and involve certain risks, uncertainties and assumptions that are difficult to predict and are often beyond Oregon Pacific Bank's control. Actual outcomes and results may differ materially from those expressed in, or implied by, any of these forward-looking statements. You should not place undue reliance on any forward-looking statement and should consider all of the following uncertainties and risks. Oregon Pacific Bancorp undertakes no obligation to publicly revise or update any forward-looking statement to reflect the impact of events or circumstances that arise after the date of this release. This statement is included for the express purpose of invoking the PSLRA's safe harbor provisions.

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