Oak Valley Bancorp — Q1 2020 Form 10-Q
Period: Three months ended March 31, 2020; balance-sheet comparisons are with December 31, 2019. Unaudited. Amounts are in U.S. dollars; financial statement figures are in thousands unless stated otherwise.
Business context
Oak Valley Bancorp is the holding company for Oak Valley Community Bank, a California community bank serving the Central Valley and Eastern Sierra. Its primary revenue source is lending to predominantly middle-market businesses. Approximately 81% of loans were commercial real estate, including construction, at quarter-end.
Financial results and condition
- Profit: Net income was $2.709 million, down 12.7% from $3.104 million in Q1 2019. Diluted EPS was $0.33, compared with $0.38. Annualized return on average assets was 0.95% (1.17% prior year); return on average common equity was 9.52% (12.54%).
- Revenue and margins: Net interest income rose 1.2% to $10.228 million. Net interest margin declined to 3.93% from 4.16%, primarily reflecting lower earning-asset yields after Federal Reserve rate cuts. Non-interest income was $1.284 million, up 0.7%. Non-interest expense increased 3.0% to $7.449 million.
- Credit costs and asset quality: The company recorded a $450,000 loan-loss provision, versus none in Q1 2019. The allowance was $9.586 million, or 1.26% of gross loans, compared with $9.146 million, or 1.22%, at year-end. Non-accrual loans were $960,000; past-due loans totaled $151,000. Management reported no loans graded “loss.”
- Balance sheet: Total assets were $1.157 billion, up 0.8% from year-end. Net loans rose 1.2% to $749.7 million; available-for-sale securities increased 28.5% to $245.2 million. Deposits increased 0.7% to $1.027 billion. Shareholders’ equity was $114.4 million.
- Cash flow and liquidity: Operating cash flow was $4.056 million. Investing activities used $64.583 million, largely reflecting securities purchases; financing activities provided $5.747 million. Cash and cash equivalents declined $54.780 million to $92.814 million. Management reported liquid assets of $248.3 million, 21.5% of total assets, and considered liquidity sufficient for the next 12 months.
- Debt and capital: FHLB advances were zero at quarter-end. The Bank had approximately $286.9 million of FHLB borrowing capacity and $30 million of correspondent-bank federal-funds lines, with no advances outstanding. Bank total capital to risk-weighted assets was 12.1%; Tier 1 leverage was 9.5%. The Bank was described as well capitalized.
Material changes and management commentary
- Pre-tax income declined $540,000 year over year: higher net interest income (+$117,000) and non-interest income (+$9,000) were more than offset by the loan-loss provision (−$450,000) and increased expenses (−$216,000).
- Loan growth and higher average balances supported interest income, but lower rates reduced asset yields; management warned that repricing and possible deterioration in borrower credit could further pressure net interest income.
- Management increased qualitative credit-risk factors in the allowance for expected COVID-19 impacts. It cautioned that further provisions or charge-offs may be needed and could reduce capital.
- As of May 7, 2020, the company reported SBA approval for 1,278 Paycheck Protection Program loans totaling approximately $220.259 million. It expected related fees to be recognized in interest income over the loan lives and believed most loans would be forgiven, subject to program terms.
- After quarter-end, the company agreed to payment deferrals of up to six months on 33 loans. The filing reports their outstanding balance as $432,236,000; no specific reserve allocation was required when deferrals were granted.
- Management said remote work had not impaired customer service, financial reporting systems, or internal controls. It provided no earnings guidance; future results depend substantially on the pandemic’s duration and economic effects.
Risks, contingencies, and unusual items
- COVID-19 could weaken borrowers, increase delinquencies and credit losses, reduce loan demand and collateral values, and affect deposits, liquidity, and earnings. Management stated that the sufficiency of Q1 provisions could not be assured.
- The loan portfolio is concentrated in commercial real estate and geographically concentrated in the company’s California markets. The filing also identifies sensitivity to interest rates, economic conditions, and customer and vendor continuity.
- Available-for-sale securities had $3.651 million of gross unrealized losses at March 31, 2020, compared with $1.172 million at year-end. Management considered the losses temporary and said it did not expect to need to sell the securities before recovery or maturity.
- The filing reports no material pending legal proceedings. It notes CECL adoption is deferred to January 1, 2023 for the company and expects the expected-loss model to recognize losses earlier.
Important facts for investors to verify
- Confirm the reported $432.236 million balance for 33 loans receiving payment deferrals; the figure appears unusually large relative to the disclosed loan portfolio, and the filing text does not clarify it.
- Reconcile the December 31, 2019 non-performing-loan figures: the asset-quality table reports $1.130 million, while the narrative and other disclosure report $1.103 million.
- Monitor subsequent COVID-19 credit performance, deferrals, PPP forgiveness and fee recognition, allowance adequacy, and any additional provisions or charge-offs.
- Assess the effect of lower rates on net interest margin, deposit costs, liquidity, and capital, and review the disclosed unrealized securities losses and management’s ability and intent to hold those securities.