Oak Valley Bancorp — 2020 Form 10-K
Reporting period: Fiscal year ended December 31, 2020. This is an annual report; it does not provide a standalone fourth-quarter income statement. Oak Valley Bancorp is the holding company for Oak Valley Community Bank, a community bank serving California’s Central Valley and Eastern Sierra.
Financial performance and condition
| Metric | 2020 | 2019 |
|---|---|---|
| Net income | $13.687 million | $12.489 million |
| Diluted earnings per share | $1.68 | $1.54 |
| Total assets, year-end | $1.511 billion | $1.148 billion |
| Gross loans, year-end | $1.013 billion | $751.0 million |
| Deposits, year-end | $1.368 billion | $1.020 billion |
| Net interest income, GAAP | $44.957 million | $41.034 million |
| Net interest margin | 3.59% | 4.13% |
| Noninterest income | $4.815 million | $5.047 million |
| Noninterest expense | $29.864 million | $28.847 million |
| Operating cash flow | $19.240 million | $17.209 million |
Net interest income on a fully tax-equivalent basis was $45.884 million in 2020, up 10.0% from $41.708 million in 2019. The filing reports a 58.20% efficiency ratio (60.95% in 2019), return on average assets of 1.00% (1.15%), and return on average common equity of 11.40% (11.78%).
Cash and cash equivalents increased to $226.656 million from $147.594 million. Net cash increased $79.062 million during the year; investing activities used $285.649 million and financing activities provided $345.471 million. Year-end liquid assets were approximately $336.6 million, or 22.3% of assets. No borrowings or long-term debt were outstanding at year-end; unused FHLB borrowing capacity was approximately $317.6 million. The net loan-to-deposit ratio was 72.91%, compared with 72.66%.
The Bank was well capitalized: total risk-based capital was 13.1%, Tier 1 risk-based capital 12.0%, common equity Tier 1 12.0%, and leverage capital 8.0%. The allowance for loan losses was $11.297 million, or 1.12% of gross loans, versus $9.146 million, or 1.22%, in 2019. Net charge-offs were $14,000; there were no nonperforming loans at year-end, compared with $1.103 million in 2019.
Material changes versus 2019
- Assets grew 31.7%, deposits 34.1%, and gross loans 34.9%. Growth was substantially supported by pandemic-related Paycheck Protection Program (PPP) lending and deposit inflows.
- At year-end, PPP loans outstanding were $210.822 million. The Bank had funded approximately $244.197 million across 1,671 loans; about $33.375 million had been forgiven and paid off by the SBA.
- Net interest income increased, helped by balance-sheet growth and PPP fees, but net interest margin fell 54 basis points as the Federal Reserve’s rate cuts reduced asset yields. The average earning-asset yield declined 61 basis points.
- Provision for loan losses rose to $2.165 million from $545,000, reflecting loan growth and COVID-19-related qualitative reserve adjustments.
- Noninterest income declined 4.6%, mainly because higher checking balances and altered spending patterns reduced overdraft and service-charge income. Noninterest expense increased 3.5%, principally from staffing and operating costs supporting growth.
- Shareholders’ equity increased to $129.694 million from $112.570 million, including $5.297 million of after-tax other comprehensive income, largely from unrealized gains on available-for-sale securities. The common dividend was $0.28 per share for 2020.
Outlook, risks and unusual items
Management’s 2021 priorities were relationship-based expansion, increasing the loan-to-deposit ratio to support net interest margin, and controlling expenses and credit losses. No specific earnings or revenue guidance was provided. Management expected continued pressure from the delayed repricing of loans and securities after rate cuts; it also said higher rates could benefit net interest income, subject to deposit pricing and competition.
COVID-19 remained a major uncertainty for borrower credit quality, economic conditions, interest income, and liquidity needs. The Bank had granted payment deferrals on 53 loans totaling $74.868 million as of June 30, 2020; by year-end, all had resumed normal payment schedules and no loans remained in deferral. Management cautioned that further provisions or charge-offs could be needed as the pandemic’s effects became clearer. PPP loans carry a 1% contractual rate and are assumed by the Company to be fully SBA-guaranteed; the filing identifies potential litigation and guarantee/forgiveness risks if loan processing or documentation is found deficient.
Credit concentration is a key exposure: real estate-related loans represented about 68% of the loan portfolio, and approximately 98% of loans were generated in the Central Valley. Commercial real estate loans had an aggregate loan-to-value ratio of 52.2%; the filing also identifies risks from regional economic weakness, real estate values, interest rates, cybersecurity, third-party vendors, regulation, and natural disasters. The Company reported $145.7 million in commitments to extend credit, including $2.9 million in standby letters of credit.
Management reported no material litigation pending and no expected material impairment of long-lived assets or investment securities. It performed an interim goodwill assessment during 2020 and reported no impairment. The allowance for loan losses is a significant estimate and was identified as a critical audit matter; goodwill impairment assessment was also a critical audit matter. The financial statements received an unqualified audit opinion. Management concluded that disclosure controls and internal control over financial reporting were effective; the external auditor did not express an opinion on internal control effectiveness.
Important facts for investors to verify
- How quickly PPP balances are forgiven or repaid, and whether any SBA guarantee, forgiveness, or borrower-litigation issues arise.
- Whether the COVID-19 reserve remains adequate as borrowers’ payment performance and regional economic conditions evolve.
- Credit quality and concentration within commercial real estate and Central Valley lending, including collateral values and criticized or special-mention exposures.
- Whether deposit growth can be deployed into loans without prolonged low-yield cash balances or further net interest margin compression.
- Available liquidity and capital under stress, given deposit volatility, contingent borrowing capacity, and the Bank’s regulatory capital requirements.