Oak Valley Bancorp — Q3 2020 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2020. Oak Valley Bancorp is the parent of Oak Valley Community Bank, a California community bank serving businesses and individuals in the Central Valley and Eastern Sierras. Unless otherwise noted, financial amounts are in millions.
Financial results and position
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Net interest income | $11.455 | $10.445 | $32.829 | $30.684 |
| Provision for loan losses | $0.193 | $0.240 | $2.503 | $0.335 |
| Non-interest income | $1.228 | $1.275 | $3.535 | $3.792 |
| Non-interest expense | $7.501 | $7.157 | $21.824 | $21.700 |
| Net income | $3.748 | $3.231 | $9.038 | $9.297 |
| Diluted earnings per share | $0.46 | $0.40 | $1.11 | $1.15 |
- Q3 net interest margin was 3.44%, down from 4.18%; nine-month margin was 3.62%, down from 4.19%. Lower rates and 1% PPP loans weighed on asset yields, partly offset by loan and securities growth and lower funding costs.
- Annualized return on average assets was 1.04% for Q3 and 0.91% year to date, versus 1.18% and 1.16%, respectively, in 2019. Return on average common equity was 12.19% and 10.21%, versus 11.86% and 11.92%.
- At September 30, total assets were $1.449 billion, up 26.2% from year-end 2019. Gross loans were $1.027 billion, up 36.7%; net loans were $1.009 billion. Deposits were $1.311 billion, up 28.6%. Available-for-sale securities totaled $226.9 million.
- Cash and cash equivalents were $142.8 million, compared with $147.6 million at December 31, 2019. Management reported liquid assets of $244.4 million, or 16.9% of assets, and described liquidity as very strong. FHLB borrowing capacity was approximately $319.5 million and two correspondent-bank lines totaled $70 million; neither had outstanding advances at quarter-end.
- Nine-month cash from operating activities was $16.4 million; investing activities used $310.0 million, principally reflecting $276.0 million of net loan growth; financing activities provided $288.9 million, largely from deposit growth. Cash decreased $4.8 million over the period.
- The allowance for loan losses was $11.6 million, or 1.13% of gross loans, versus $9.1 million, or 1.22%, at year-end. The lower ratio partly reflects approximately $242 million of outstanding PPP loans, for which the company allocated no allowance based on the SBA guarantee.
- Bank regulatory capital ratios at September 30 included total risk-based capital of 12.9%, Tier 1 risk-based capital of 11.7%, and Tier 1 leverage of 8.0%. The filing states the Bank was well capitalized.
Changes versus comparable periods
- Q3 net income rose 16.0% year over year, mainly as the provision for loan losses fell to $0.193 million from $0.240 million and net interest income increased 9.7%. The quarter’s provision was substantially below the $1.86 million recorded in Q2 2020.
- Nine-month net income declined 2.8%, despite net interest income growth of 7.0%, because the loan-loss provision increased to $2.503 million from $0.335 million, primarily reflecting COVID-19-related qualitative reserve adjustments.
- PPP lending drove substantial balance-sheet expansion and contributed $2.570 million of loan interest and fees in the first nine months. Deposit growth also reflected PPP proceeds credited to borrowers’ accounts and government stimulus payments.
- Non-interest income fell 6.8% year to date, mainly from lower deposit service charges and fewer gains on called securities. Non-interest expense rose 0.6%; PPP deferred loan-cost accounting adjustments reduced reported salary expense by $1.253 million year to date.
- COVID-related payment deferrals fell to 7 loans totaling $25.2 million at September 30, from 53 loans totaling $74.9 million at the prior quarter-end. The company reported no past-due loans at September 30 and non-accrual loans of $0.757 million, down from $1.103 million at year-end.
Outlook, risks and unusual items
- Management expects lower interest income as assets mature or reprice following Federal Reserve rate cuts, and noted that the PPP application program had closed on August 8, 2020. It gave no quantified earnings guidance.
- Management cautioned that COVID-19’s duration and economic effects remain uncertain and that the allowance may prove insufficient. Further loan losses or provisions could affect earnings and capital; a prolonged recession could weaken borrowers, increase defaults, and reduce loan demand.
- PPP-related risks include possible customer or other litigation and the possibility that the SBA could deny, reduce, or seek recovery of guarantees if it finds deficiencies in origination, documentation, funding, or servicing.
- The company reported one troubled debt restructuring of $0.757 million, unrelated to COVID-19, and $0.137 million of other real estate owned acquired through foreclosure. It reported no material pending or threatened legal proceedings.
- An interim goodwill impairment test was performed because of COVID-related economic conditions; management concluded goodwill was not impaired. Management also said market-risk exposures had not changed materially since year-end 2019.
- Management said liquidity resources were sufficient for expected customer needs and anticipated funding requirements for at least the next twelve months. It expects operating expenses to continue rising with growth, while aiming to contain increases through cost control.
Important facts for investors to verify
- How PPP forgiveness, fee recognition, repayments, and any subsequent SBA guarantee determinations affect loan balances and future net interest income.
- Whether COVID-related borrower stress requires additional provisions or charge-offs, especially given the allowance’s 1.13% coverage of gross loans and the size of the PPP portfolio.
- Deposit stability and liquidity needs as PPP funds and stimulus-related balances change; confirm the availability and terms of contingent funding sources.
- Whether margin pressure from low rates and loan repricing outweighs continued asset growth and lower deposit funding costs.
- The filing’s reported financial statements and MD&A contain some differing PPP loan figures and net-interest-income presentations; confirm the underlying amounts in the source tables when comparing or modeling results.