Oak Valley Bancorp — Q3 2021 Form 10-Q
Reporting period: Three and nine months ended September 30, 2021; comparative periods ended September 30, 2020. Unaudited. Oak Valley Bancorp is the holding company for Oak Valley Community Bank, a California community bank focused on commercial banking and lending in the Central Valley and Eastern Sierra.
Financial performance
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Net interest income | $13.3 million | $11.5 million | $37.5 million | $32.8 million |
| Provision for loan losses | $0 | $0.2 million | $0 | $2.5 million |
| Non-interest income | $1.3 million | $1.2 million | $3.9 million | $3.5 million |
| Non-interest expense | $8.4 million | $7.5 million | $24.3 million | $21.8 million |
| Net income | $4.6 million | $3.7 million | $12.9 million | $9.0 million |
| Diluted earnings per share | $0.56 | $0.46 | $1.57 | $1.11 |
| Net interest margin | 3.17% | 3.44% | 3.22% | 3.62% |
Q3 and nine-month net income increased 21.5% and 42.4%, respectively. Management attributed the improvement mainly to higher earning assets, PPP loan interest and fees, and the absence of 2020 loan-loss provisions. PPP-related interest and fees were $2.7 million in Q3 and $7.5 million year to date. Annualized return on average assets was 1.00% for Q3 and 1.01% year to date; annualized return on average common equity was 13.01% and 12.74%, respectively.
Financial position, cash flow and liquidity
- At September 30, 2021, total assets were $1.857 billion, up 22.8% from December 31, 2020. Deposits were $1.701 billion, up $333.4 million (24.4%).
- Cash and cash equivalents reached $682.1 million, versus $226.7 million at year-end 2020; available-for-sale securities were $241.7 million.
- Gross loans were $872.1 million, down from $1.013 billion at year-end; net loans were $858.2 million. The decline chiefly reflected PPP forgiveness and paydowns. PPP balances were $66.5 million at quarter-end.
- Nine-month operating cash flow was $14.3 million. Investing activities provided $110.3 million, including net loan repayments; financing activities provided $330.9 million, mainly from deposit growth. Cash increased $455.5 million.
- Management reported liquid assets of $768.0 million, or 41.4% of total assets, and stated liquidity was sufficient for expected needs. Available contingent sources included $349.1 million of FHLB borrowing capacity and $70 million in correspondent-bank federal funds lines; neither had outstanding advances.
- No borrowings were outstanding at September 30, 2021. Shareholders’ equity was $139.8 million. Bank capital ratios included 12.6% common equity Tier 1, 13.7% total risk-based capital and 7.2% Tier 1 leverage, above stated regulatory minimums.
Changes, outlook and risks
- Net interest income rose year over year, but margin compressed as deposit growth and PPP forgiveness increased low-yielding cash, while prior Federal Reserve rate cuts continued to weigh on earning-asset yields.
- Non-interest expense rose 12.1% in Q3 and 11.5% year to date, mainly due to staffing and operating costs supporting portfolio growth and lower deferral of PPP-related costs. Management expects expenses to continue increasing with growth, while seeking to control the pace.
- Credit quality indicators were strong at quarter-end: no non-accrual, impaired, past-due, or nonperforming loans were reported. The allowance for loan losses was $11.4 million, or 1.30% of gross loans, compared with 1.12% at year-end 2020. There were no loan-loss provisions in the first nine months of 2021.
- One COVID-affected borrowing relationship covering three loans totaling $8.1 million received principal-payment deferrals, converting to interest-only payments through year-end 2021. Management cautioned that future credit losses and additional provisions remain possible and that the allowance may prove insufficient.
- Commercial real estate, including construction, represented approximately 77% of loans. This concentration exposes the bank to real-estate and broader economic conditions. The portfolio also included $66.5 million of PPP loans, generally federally guaranteed.
- The company completed PPP funding in Q2 2021 and did not expect further program originations. Management expected PPP-related loan fees to decline significantly from Q4 2021; $2.1 million of unrecognized net fees remained at September 30, expected to be recognized in Q4 2021 and fiscal 2022.
- Management described liquidity as strong but noted uncertainty around COVID-19’s duration and effects, potential borrower stress, interest-rate changes, loan demand, and deposit or liquidity needs. No formal earnings guidance was provided.
- Available-for-sale securities had $354,000 of gross unrealized losses at quarter-end. Management considered these temporary, stated it did not intend to sell the securities, and believed forced sale before recovery or maturity was unlikely.
- No material legal proceedings or material changes to previously disclosed risk factors were reported. Disclosure controls were deemed effective, with no significant change in internal control over financial reporting.
Investor facts to verify
- Whether PPP forgiveness and fee recognition unwind as expected, and how their decline affects loan growth, earnings and net interest margin.
- Whether large cash balances can be redeployed at attractive yields while deposit growth and funding costs remain manageable.
- Whether the allowance remains adequate as COVID-related borrower effects emerge, particularly given the commercial real estate concentration and the $8.1 million modified relationship.
- Whether loan growth, deposit stability, and capital and liquidity levels remain consistent with management’s expectations.