Oak Valley Bancorp — Q3 2019 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2019; unaudited. Oak Valley Bancorp operates Oak Valley Community Bank, a California community bank focused primarily on commercial and real estate lending. Dollar amounts below are in millions unless stated otherwise.
Financial performance and position
- Quarter: Net income was $3.23 million, up 2.1% from $3.17 million in Q3 2018; diluted EPS was $0.40 versus $0.39. Net interest income was $10.45 million, up 5.0%; provision for loan losses was $0.24 million versus zero. Noninterest income rose 12.1% to $1.28 million, while noninterest expense rose 4.9% to $7.16 million.
- Nine months: Net income was $9.30 million, up 8.6% from $8.56 million; diluted EPS was $1.15 versus $1.06. Net interest income increased 8.1% to $30.68 million. Provision for loan losses was $0.34 million versus zero. Noninterest income increased 9.0% to $3.79 million and noninterest expense increased 6.1% to $21.70 million.
- Margins and returns: Net interest margin was 4.18% for Q3 and 4.19% year to date, compared with 3.97% and 3.87%, respectively, in 2018. Annualized return on average assets was 1.18% for Q3 and 1.16% year to date; return on average common equity was 11.86% and 11.92%.
- Balance sheet at September 30: Total assets were $1.10 billion, up 0.6% from year-end 2018. Gross loans were $732.3 million, up $20.4 million; net loans were $722.4 million. Deposits were $978.0 million, down 0.9%. Shareholders’ equity was $109.3 million, compared with $99.0 million at year-end; accumulated other comprehensive income improved to $2.48 million from a $0.44 million loss, primarily reflecting securities valuation changes.
- Cash flow and liquidity: Nine-month operating cash flow was $12.1 million; investing activities used $11.0 million and financing activities used $10.8 million. Cash and cash equivalents declined $9.8 million to $116.4 million. Management reported liquid assets of $214.1 million, or 19.4% of assets, versus $238.5 million, or 21.8%, at year-end. It considered liquidity adequate for the next 12 months.
- Debt and capital: There were no outstanding FHLB advances at September 30, 2019; available FHLB borrowing capacity was approximately $267.2 million, plus $30 million in correspondent-bank federal funds lines. Bank capital ratios included 12.1% total risk-based capital and 9.5% Tier 1 leverage, above the stated regulatory minimums.
Material changes and operating drivers
- Management attributed higher net interest income mainly to organic loan growth and the impact of prior Federal Reserve rate increases. Loan volume and yield improved, while average interest-earning deposits fell as cash was deployed into loans.
- Management said deposit balances fell partly because it chose not to match rates on certain high-rate accounts. Demand deposits increased $35.5 million, while money-market deposits declined $46.9 million. The bank reported no brokered deposits.
- Loan growth drove the new 2019 loan-loss provision. The allowance rose to $9.0 million, or 1.23% of gross loans, from $8.7 million, or 1.22%, at year-end. Net charge-offs for the first nine months were $15,000.
- Nonperforming loans increased to $1.2 million from $0.9 million. Two consumer residential loans entered nonaccrual status in Q3; total past-due loans were $0.31 million, with none more than 90 days past due. One troubled debt restructuring totaling $0.89 million remained on nonaccrual. Commercial real estate represented approximately 79% of loans.
- Expense growth reflected staffing and operating costs supporting business growth, including the Sacramento branch. Noninterest income benefited from service and debit-card fees and equity-security gains; mortgage commissions declined. Year-to-date 2018 noninterest income included a $0.19 million gain on OREO sale that did not recur.
Outlook, risks, and unusual items
- No specific earnings or loan-growth guidance was provided. Management expected noninterest expenses to continue rising with growth, while emphasizing cost control. It expected liquidity to remain adequate for operating, investing, financing, and regulatory needs over the next 12 months.
- Management considered the allowance adequate but cautioned that actual credit losses may differ and could rise with adverse economic conditions. Risks cited include local economic conditions, competition, interest-rate changes, customer creditworthiness, real-estate lending concentrations, regulation, and accounting changes.
- Management reported that no available-for-sale security was other-than-temporarily impaired; unrealized losses were attributed primarily to interest-rate changes. Securities with $47.7 million fair value had $0.91 million of unrealized losses, and management said it did not intend or expect to be required to sell them before recovery or maturity.
- The company adopted lease accounting in 2019, recording operating-lease right-of-use assets and liabilities; management said the financial-statement impact was not material. The filing said CECL adoption was delayed three years for qualifying smaller reporting companies; the company was assessing the impact and expected earlier recognition of credit losses under the new model.
- Management reported effective disclosure controls, no material change in internal control over financial reporting, no material pending legal proceedings, and no material changes to previously disclosed risk factors.
Important facts for investors to verify
- Whether loan growth and net interest margin remain resilient as interest rates and deposit competition change.
- Whether deposit outflows continue, and how the bank funds loan growth while maintaining liquidity.
- Trends in nonaccrual loans, past-due balances, criticized loans, and the allowance—especially given the commercial real estate concentration.
- The eventual effect of CECL adoption on the allowance, retained earnings, and reported credit costs.
- Reconcile the statement-of-income net interest figures with the MD&A average-balance analysis, which presents tax-equivalent amounts; use the financial statements for GAAP reported figures.