Oak Valley Bancorp annual report, FY2019

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Oak Valley Bancorp — 2019 Form 10-K

Reporting period: Fiscal year ended December 31, 2019; this is an annual filing, not a standalone fourth-quarter report. Oak Valley Bancorp is the parent of Oak Valley Community Bank, a California community bank serving Central Valley and Eastern Sierra markets.

Financial performance and condition

  • Profitability: Net income was $12.489 million, up 8.3% from $11.537 million in 2018. Diluted EPS was $1.54 versus $1.42. Return on average assets improved to 1.15% from 1.08%, while return on average common equity declined to 11.78% from 12.26%.
  • Interest income and margins: GAAP net interest income rose 6.4% to $41.034 million from $38.568 million. Fully tax-equivalent net interest margin increased to 4.13% from 3.89%; net interest spread rose to 4.03% from 3.80%. Total interest income was $42.602 million and interest expense was $1.568 million.
  • Other income and expenses: Noninterest income increased 7.1% to $5.047 million, principally on deposit service charges and debit-card fees. Noninterest expense increased 5.4% to $28.847 million, led by employee costs, data processing and other operating costs. The efficiency ratio improved slightly to 60.95% from 61.37%.
  • Credit costs: Provision for loan losses was $545,000, compared with $555,000. Net charge-offs increased to $84,000 from $36,000. Nonperforming loans rose to $1.103 million, or 0.15% of loans, from $920,000, or 0.13%. The allowance was $9.146 million, 1.22% of loans, unchanged as a percentage from 2018.
  • Balance sheet: Total assets grew 4.8% to $1.148 billion. Gross loans rose 5.5% to $750.985 million; net loans were $741.047 million. Deposits increased 3.4% to $1.020 billion. Shareholders’ equity was $112.570 million, up from $99.038 million; book value per share was $13.71 versus $12.09.
  • Funding and liquidity: Cash and cash equivalents were $147.594 million, up from $126.145 million. Management reported liquid assets of approximately $227.6 million, or 19.8% of assets, compared with $238.5 million, or 21.8%. Core deposits were 98.2% of deposits; the company had no brokered deposits. No FHLB advances or other short- or long-term borrowings were outstanding. Available FHLB borrowing capacity was approximately $275.2 million, with $30 million in correspondent-bank lines also available.
  • Cash flow and distributions: Operating cash flow was $17.209 million versus $14.440 million. Investing activities used $26.856 million, and financing activities provided $31.096 million. Cash dividends paid were $2.214 million; the reported dividend payout ratio was 17.53%.
  • Capital: The Bank was well capitalized. At year-end, its total risk-based capital ratio was 12.3%, Tier 1 and common equity Tier 1 ratios were each 11.3%, and leverage ratio was 9.5%. These exceeded reported fully phased-in well-capitalized thresholds of 10.5%, 8.5%, 7.0% and 4.0%, respectively.

Material changes from 2018

  • Loan growth and a shift from lower-yielding cash to loans helped lift net interest income and margin. Average loans increased by $59.4 million, while average interest-earning cash balances fell by $56.1 million.
  • Commercial real estate loans increased $52.5 million; CRE represented 80.9% of gross loans, up from 78.0%. Construction and land loans increased to $61.5 million from $31.2 million.
  • Deposits grew overall, with demand and savings balances higher but money-market and time-deposit balances lower. The average cost of interest-bearing liabilities edged up to 0.26% from 0.25%.
  • Noninterest expense rose with staffing and ongoing operation of the Sacramento branch, open for a full year in 2019, as well as increased business-support costs. Lower regulatory assessments partly offset these increases.
  • Other comprehensive income was positive $2.832 million, compared with a loss of $1.587 million, largely reflecting improved market values of available-for-sale securities as Treasury yields declined.

Outlook, risks and unusual items

  • Management’s 2020 priorities were relationship-based growth, increasing the loan-to-deposit ratio, expanding net interest margin, and controlling expenses and credit losses. The filing provides no specific numerical earnings or growth guidance.
  • Management described the balance sheet as modestly asset-sensitive. Further rate cuts or static rates could compress margin because deposit rates were already low and could not reasonably be reduced much further; rate increases could help, but competitive deposit pricing may offset some benefit.
  • Credit and concentration risk are important: approximately 81% of loans were CRE, around 98% of loans and 90% of deposits were generated in the Central Valley, and local economic and real-estate weakness could increase losses. CRE aggregate loan-to-value was reported at 53.6%; construction and development lending expanded materially during the year.
  • The filing identified the newly emerging coronavirus outbreak as a possible risk, while stating that management did not then expect an operating-results impact; an adverse economic effect remained possible. Other stated risks include natural disasters, cyber and vendor failures, liquidity, regulation, and interest-rate movements.
  • Available-for-sale debt securities had $1.172 million of gross unrealized losses at year-end, which management attributed primarily to interest-rate changes; it concluded the losses were temporary and reported no other-than-temporary impairment.
  • Off-balance-sheet commitments to extend credit totaled $164.7 million, including $3.1 million of standby letters of credit. The company also had a $3.0 million unfunded LIHTC commitment and $520,000 remaining to fund a small-business private-equity investment.
  • The company reported no material litigation matters known to management. It had one OREO property carried at zero, described as residential land rendered unmarketable because public utilities were unavailable. The 2019 allowance for off-balance-sheet commitments was $427,000.
  • CECL adoption was deferred to January 1, 2023 for the company; management had not quantified the impact and expected the expected-loss approach to result in earlier loss recognition. Auditors issued unqualified opinions on the financial statements and internal control over financial reporting; management also concluded controls were effective.

Key facts for investors to verify

  • Review CRE and construction/land growth, borrower and geographic concentrations, collateral values, and any deterioration in local property or economic conditions.
  • Track nonperforming loans, charge-offs, criticized and classified loans, and whether the $9.146 million allowance remains adequate as the portfolio grows.
  • Assess sensitivity of net interest income and margin to further rate changes and deposit repricing; management’s modeled one-year net interest income declined 7.06% under a 100-basis-point rate decrease and rose 3.56% under a 100-basis-point increase.
  • Monitor deposit mix, liquidity levels, and the practical availability of FHLB and correspondent borrowing capacity, including collateral requirements.
  • Confirm subsequent developments affecting the coronavirus-related outlook, CECL transition planning, securities unrealized losses, and the company’s ability to sustain dividends subject to Bank earnings and regulatory limits.