Oregon Pacific Bank Announces Second Quarter Earnings Results

Oregon Pacific Bancorp, and its wholly owned subsidiary Oregon Pacific Bank, reported quarterly net income of $830 thousand, or $0.12 per diluted share compared to $1.0 million, or $0.15 per diluted share for the quarter ended June 30, 2019. Through June 30, 2020, the Bank recorded year-to-date net income totaling $1.5 million, or $0.21 per diluted share compared to $1.4 million, or $0.20 per diluted share for the same period in 2019. During the six months ended June 30, 2020 provision for loan losses grew to $1.3 million compared to $110 thousand during the six months ended June 30, 2019.

“I am pleased with the results of the second quarter amidst the current economic uncertainty surrounding COVID-19,” said Ron Green, President and CEO. “Our clients have experienced many struggles and our bankers have risen to the challenge, providing assistance through this difficult time.”

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 June 30, 2020, Oregon Pacific Bank had 708 PPP loans approved through the SBA, totaling $123.8 million.

“As the Paycheck Protection Program progressed our bankers worked to secure loans for clients of all sizes, with an average loan size of $124 thousand.” said John Raleigh, Executive Vice President and Chief Lending Officer. “Oregon Pacific Bank recognizes the impact of businesses large and small in our community and is happy to provide the support borrowers desperately needed.”

Period end loans, net of deferred loan origination fees, totaled $421.6 million, representing growth of $120.5 million during the quarter. The majority of that growth was attributable to the PPP loan portfolio, with $420 thousand of loan growth attributable to the non-PPP loan portfolio.  The prepayment activity experienced during first quarter 2020 and fourth quarter 2019 decreased significantly as economic uncertainty made the prospects of refinancing more difficult for some borrowers.

The Bank experienced deposit growth totaling $126.1 million during the second quarter.  As PPP loans were initially funded most clients placed the loan proceeds into a deposit account with Oregon Pacific Bank.  This resulted in a deposit increase approximately equal to the PPP loan growth.  During the month of April $95.4 million of PPP loans were funded.  It was originally assumed that the increase in deposits would be temporary, and the bank would move into a borrowing position, utilizing the PPP Liquidity Facility through the Federal Reserve, as clients spent their PPP funds. This has not materialized through June, due to two factors: clients spending PPP funds slower than expected and onboarding of new deposit accounts for clients migrating their full relationship to Oregon Pacific Bank due to the Paycheck Protection Program. The Bank has enrolled in the Paycheck Protection Program Liquidity Facility, which enables the Bank to pledge PPP loans as collateral and borrow against that collateral for a term equal to the PPP loan term, at a cost of 0.35%.  The Bank is ready to execute borrowings once current liquidity is depleted.

The second quarter net interest margin lowered to 3.73%, down from 4.39% in first quarter 2020. Contributing to a reduction in the margin were the PPP Loans, which have a contractual effective interest rate of 1.0%.  In addition to the contractual rate, the Bank is amortizing the PPP loan fees as an adjustment to yield over the term of the loan, which added an additional 1.70% to the loan yield, for a total second quarter PPP loan yield of 2.70%.  The projected yield is expected to improve slightly in the third quarter as the loans booked later in the quarter tended to be smaller in size, which had a 5% loan fee, compared to the 3% loan fee for loans over $350 thousand and a 1% loan fee for loans over $2 million. 

The effective yield on non-PPP loans during the second quarter totaled 4.85%, down from 5.14% in the first quarter.  Included in the first quarter yield on loans was a prepayment penalty totaling $141 thousand, which when excluded would have made the first quarter yield 4.95% representing a 0.10% linked quarter reduction. The Bank also saw a reduction in the cost of funds to 0.22%, down from 0.45% in first quarter 2020 as deposit rate reductions were implemented in mid-March.  An additional factor impacting the net interest margin was the interest rate paid on excess balances through the Federal Reserve.  On March 16, 2020, the rate was dropped from 1.10% to 0.10% while the Bank’s quarterly average excess balance increased to $40.5 million in second quarter 2020, up from $21.8 million in first quarter 2020. 

On June 5, 2020, the Paycheck Protection Program Flexibility Act of 2020, became law and made significant changes to the Paycheck Protection Program. The legislation expanded the covered period during which PPP loan recipients can spend the funds and still qualify for loan forgiveness from eight weeks to 24 weeks.  It also lowered the portion of PPP funding that must be used on payroll costs to qualify for full forgiveness from 75% to 60%. The Bank assumes this program change will result in a larger portion of the loans qualifying for forgiveness, but it will also prolong the period for which the Bank will hold the PPP loans. This will lead to a longer period of reduced net interest margin associated with the low yield of the PPP loans.

For the quarter ended June 30, 2020, the Bank booked net recoveries of $7 thousand. Quarterly earnings were impacted by an increase in provision for loan losses, totaling $900 thousand for the quarter. The increase in provision 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 from $9.1 million at March 31, 2020, to $11.9 million at June 30, 2020.  Through June 30, 2020, the Bank worked with borrowers to initiate COVID-19 related loan modifications totaling $53.3 million, with ninety-eight relationships totaling $38.8 million on interest only payment structures, and thirty-one relationships totaling $14.5 million are on six-month full payment deferral. The Bank’s Credit Administration is proactively monitoring loan relationships to determine if future downgrades are necessary. The Bank also liquidated its only residential other real estate property, which resulted in a gain on sale of $22 thousand.

During the second quarter 2020, noninterest income was $1.2 million, unchanged from the $1.2 million earned in the first quarter of 2020. The biggest reduction in noninterest income was attributable to the mortgage loan sales and servicing category, as tighter underwriting guidelines implemented by the Bank’s wholesale mortgage partners, in response to COVID-19, limited borrowers’ abilities to qualify for financing.

Noninterest expense in the second quarter totaled $3.4 million, down $410 thousand from the first quarter 2020. On a linked quarter basis, the Bank saw a decrease in salaries and employee benefits expense, primarily tied to the deferred loan origination costs associated with the PPP loans, which is booked as a credit to salary expense. The Bank also saw a reduction in outside services, primarily tied to the timing of the Bank’s external audit, which occurred during the first quarter 2020.  The Bank continued to incur loan and collection expense as one of the Bank’s problem assets, an agricultural property, is requiring ongoing assistance from a receiver to support maintenance of the property. The Bank is continuing to work through issues associated with the liquidation.