Oak Valley Bancorp — Q2 2018 Form 10-Q
Business and period: Unaudited results for the three and six months ended June 30, 2018. Oak Valley Bancorp is a California bank holding company operating Oak Valley Community Bank, serving businesses and individuals in California’s Central Valley and Eastern Sierra; lending is primarily to middle-market businesses.
Financial performance
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Total interest income | $9.686m | $8.725m | $19.094m | $17.036m |
| Net interest income | $9.327m | $8.455m | $18.444m | $16.537m |
| Net interest margin | 3.83% | 3.74% | 3.82% | 3.72% |
| Noninterest income | $1.011m | $2.036m | $2.343m | $3.507m |
| Noninterest expense | $6.905m | $6.076m | $13.637m | $12.283m |
| Net income | $2.591m | $2.830m | $5.393m | $5.037m |
| Diluted EPS | $0.32 | $0.35 | $0.67 | $0.62 |
Q2 net income declined about 8% year over year, while first-half net income rose about 7%. First-half operating cash flow was $7.081m, versus $6.848m a year earlier; cash and cash equivalents increased $17.137m during the period to $166.310m.
Financial position and key changes
- Total assets were $1.070bn at June 30, up $34.748m (3.4%) from year-end 2017. Deposits rose $31.733m (3.4%) to $970.615m. Shareholders’ equity was $94.145m.
- Net loans declined $7.853m (1.2%) to $645.136m; gross loans fell $7.950m. Available-for-sale securities increased $25.465m (14.2%) to $204.713m.
- Liquidity was reported at $285.1m, or 26.7% of assets, versus $254.8m, or 24.6%, at year-end. There were no FHLB advances or brokered deposits; available FHLB borrowing capacity was approximately $263.1m, with $30m of correspondent-bank federal-funds lines and no advances.
- The allowance for loan losses was $8.162m, 1.25% of gross loans. Nonaccrual loans were $1.310m; nonperforming assets were $1.310m, or 0.12% of assets. Four troubled debt restructurings totaling $1.310m were all nonaccrual. No loans were more than 90 days past due and still accruing.
- The Bank’s regulatory capital ratios exceeded “well-capitalized” thresholds: total capital to risk-weighted assets was 11.5%, Tier 1 risk-based capital 10.5%, common equity Tier 1 10.5%, and Tier 1 leverage 8.6%.
Drivers, outlook, and risks
- Net interest income increased 10.3% in Q2 and 11.5% in the first half, chiefly from growth in loan and investment balances and higher yields on loans and cash. Management noted that recent rate increases benefited cash and loan yields, partly offset by lower investment-security yields and rising deposit costs.
- Noninterest income fell 50.3% in Q2 and 33.2% in the first half, largely because 2017 included $938,000 of merger-related professional-service settlement payments. First-half 2018 also had lower securities gains, partly offset by a $193,000 gain on an OREO sale.
- Noninterest expense rose 13.6% in Q2 and 11.0% in the first half, mainly from salaries, benefits, occupancy and growth-related operating costs. Q2 occupancy included an $85,000 charge for the remaining lease obligation on a relocated Turlock branch. Management expects expenses to continue rising as the business grows, while emphasizing cost control; a Sacramento branch was scheduled to open in August 2018.
- The effective tax rate was 24.5% for Q2 and 24.6% for the first half, down from 35.4% and 34.8% in 2017, primarily reflecting the federal corporate tax-rate reduction from 34% to 21% under the Tax Cuts and Jobs Act.
- Management reported no material change in market-risk exposure since December 31, 2017 and no material change in risk factors from the 2017 Form 10-K. Key disclosed risks include local and broader economic conditions, competition, regulation, interest rates, customer financial strength, and real-estate loan concentrations. Approximately 78% of loans were commercial real estate, including construction.
- No specific earnings or financial guidance was provided. The filing says adoption of CECL, effective for the company after December 15, 2019, is expected to result in earlier loss recognition; the impact had not been quantified. Adoption of the new lease standard was expected to add right-of-use assets and lease liabilities, also not quantified.
Investor facts to verify
- Whether loan and deposit trends, especially the decline in loans and growth in deposits, continued after June 30.
- Credit quality and the adequacy of the allowance, given the real-estate concentration and the $1.310m of nonaccrual troubled restructurings.
- Whether net interest margin gains persisted as market rates and deposit pricing changed.
- Underlying recurring noninterest income and expense, excluding 2017’s merger settlement payments and 2018’s OREO gain and lease charge.
- The eventual balance-sheet and retained-earnings effects of lease-standard and CECL adoption.