Oak Valley Bancorp — Q2 2020 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2020. Oak Valley Bancorp operates Oak Valley Community Bank, serving businesses and individuals in California’s Central Valley and Eastern Sierras.
Financial performance
Amounts are in millions of dollars except per-share data and ratios. Year-over-year comparisons are with the corresponding 2019 period.
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Net interest income | $11.146 | $10.128 | $21.374 | $20.239 |
| Provision for loan losses | $1.860 | $0.095 | $2.310 | $0.095 |
| Non-interest income | $1.023 | $1.242 | $2.307 | $2.517 |
| Non-interest expense | $6.874 | $7.310 | $14.323 | $14.543 |
| Net income | $2.581 | $2.963 | $5.290 | $6.067 |
| Diluted earnings per share | $0.32 | $0.37 | $0.65 | $0.75 |
| Net interest margin | 3.55% | 4.23% | 3.72% | 4.19% |
Q2 net income declined about 13% year over year; first-half net income declined 12.8%. Net interest income grew, but higher credit-loss provisioning and lower non-interest income more than offset that growth. Annualized return on average assets was 0.75% for Q2 and 0.84% for the first half, versus 1.13% and 1.15% in 2019; return on average common equity was 8.80% and 9.15%, versus 11.39% and 11.95%.
Financial position, cash flow and capital
| Metric | June 30, 2020 | December 31, 2019 |
|---|---|---|
| Total assets | $1,464.9 million | $1,147.8 million |
| Gross loans | $1,003.2 million | $751.0 million |
| Net loans | $984.8 million | $741.0 million |
| Deposits | $1,299.9 million | $1,019.9 million |
| Cash and cash equivalents | $168.9 million | $147.6 million |
| Shareholders’ equity | $119.9 million | $112.6 million |
| FHLB advances | $30.0 million | None |
Assets grew 27.6%, net loans 32.9%, securities 26.7%, and deposits 27.4% from year-end. Growth was substantially associated with approximately $235 million of Paycheck Protection Program (PPP) lending and resulting deposits. Six-month cash flows were $13.6 million provided by operating activities, $301.0 million used in investing activities, and $308.7 million provided by financing activities; cash increased $21.3 million.
Management reported liquid assets of $283.1 million, or 19.3% of total assets, and said liquidity was strong. FHLB borrowing capacity was approximately $289.1 million; two correspondent-bank lines provided an additional $70 million, with no draws on those lines at quarter-end. The $30 million FHLB balance was repaid in July 2020. The Bank’s June 30 capital ratios included 12.5% total risk-based capital, 11.3% Tier 1 risk-based capital and 8.1% Tier 1 leverage, above the reported regulatory thresholds for well-capitalized status.
Material changes and notable items
- Q2 net interest income rose 10.1% year over year, primarily reflecting loan growth and $1.092 million of interest and fees recognized on PPP loans. The net interest margin nevertheless compressed as market rates fell and PPP loans yield 1%.
- Loan-loss provision increased to $1.860 million in Q2 and $2.310 million for the first half, versus $95,000 in each comparable 2019 period. Management attributed the increase principally to COVID-19-related qualitative adjustments.
- Non-interest income fell 17.6% in Q2, mainly as elevated deposits and changed customer activity reduced overdraft-related service charges. Non-interest expense declined 6.0% in Q2, largely due to PPP deferred loan-cost accounting adjustments against salary expense.
- The allowance for loan losses was $11.443 million, or 1.14% of gross loans, compared with $9.146 million, or 1.22%, at year-end. Management noted PPP loans guaranteed by the SBA do not require a loan-loss reserve, affecting the ratio.
- Non-accrual loans were $927,000, down from $1.103 million at year-end; there were no loans over 90 days past due and still accruing. The filing reports 53 COVID-19-related payment deferrals totaling $74.868 million, with no specific loan-loss allocation required at the time.
- Available-for-sale securities had $2.371 million of gross unrealized losses at quarter-end. Management considered the losses temporary, reported no intent or expected need to sell before recovery or maturity, and identified no other-than-temporary impairment.
Outlook, risks and contingencies
The filing provides no formal earnings or revenue guidance. Management expected lower interest income for the remainder of 2020 because of Federal Reserve rate cuts and warned that recession conditions could weaken loan demand, increase credit deterioration and non-accruals, and pressure earnings. It said operating expenses may continue to rise with growth, while emphasizing cost control.
Management stated that the sufficiency of the COVID-19-related allowance was uncertain and that further provisions or charge-offs could be needed, affecting earnings and capital. It also identified possible increased client liquidity needs, while believing available on- and off-balance-sheet resources were adequate. PPP-related risks include potential litigation, program-compliance issues, and SBA denial or reduction of guarantees or forgiveness if loan origination, documentation, funding or servicing deficiencies are found. The filing also notes that actual effects of the pandemic are highly uncertain.
The company reported effective disclosure controls, no material change in internal control over financial reporting, and no pending or known threatened material legal proceedings. The interim statements are unaudited, and management cautions that the results are not necessarily indicative of full-year results.
Key investor verification points
- Track subsequent loan performance, payment-deferral outcomes, criticized loan grades, charge-offs and any further allowance increases as the economic effects of COVID-19 develop.
- Verify PPP forgiveness and SBA guarantee outcomes, including the timing and recognition of remaining PPP fees and the resolution of any compliance or litigation exposure.
- Monitor net interest margin and earnings as low rates affect asset repricing and PPP balances are forgiven or repaid.
- Assess whether deposit balances remain stable and whether liquidity, FHLB borrowing and capital remain adequate if client funding needs or credit losses rise.
- Review later filings for updates to management’s outlook, since this 10-Q gives no quantified earnings guidance.