Oak Valley Bancorp — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018; balance-sheet comparisons are to December 31, 2017. Oak Valley Bancorp is a California community bank holding company serving Central Valley and Eastern Sierra markets, with lending focused on middle-market businesses. Amounts below are in millions except per-share data and ratios.
Financial results and condition
| Metric | Q1 2018 / March 31, 2018 | Comparable period / prior year-end |
|---|---|---|
| Net interest income | $9.117 | $8.082 in Q1 2017; up 12.8% |
| Net income; diluted EPS | $2.802; $0.35 | $2.207; $0.27 in Q1 2017 |
| Net interest margin | 3.80% | 3.69% in Q1 2017 |
| Annualized return on assets / equity | 1.08% / 12.47% | 0.91% / 10.73% in Q1 2017 |
| Total assets | $1,052.8 | $1,034.9 at Dec. 31, 2017 |
| Net loans / gross loans | $638.9 / $648.4 | $653.0 / $662.5 at Dec. 31, 2017 |
| Deposits | $955.3 | $938.9 at Dec. 31, 2017 |
| Cash and cash equivalents | $162.7 | $149.2 at Dec. 31, 2017 |
| Shareholders’ equity | $91.6 | $90.8 at Dec. 31, 2017 |
| Allowance for loan losses | $8.165; 1.26% of gross loans | $8.166 at Dec. 31, 2017 |
- Q1 net interest income rose $1.035 million, principally from loan and investment growth. Interest income increased $1.096 million; deposit interest expense increased $61,000.
- Noninterest income declined 9.4% to $1.332 million, mainly because securities gains were $71,000 versus $389,000 a year earlier. A $193,000 gain on sale of foreclosed real estate partly offset the decline.
- Noninterest expense rose 8.5% to $6.732 million, driven mainly by $407,000 higher salaries and benefits and $70,000 higher data-processing expense. Management expects expenses to continue increasing with growth, while seeking to control costs.
- Income tax provision was $915,000 versus $1.139 million; the effective rate fell to 24.6% from 34.0%, primarily reflecting the federal corporate tax rate reduction under the Tax Cuts and Jobs Act.
- Operating cash flow was $4.671 million, compared with $3.591 million in Q1 2017. Investing activities used $6.544 million and financing activities provided $15.406 million; cash increased $13.533 million during the quarter.
- Liquid assets were reported at $289.6 million, or 27.5% of assets, versus $254.8 million and 24.6% at year-end. FHLB borrowing capacity was approximately $249.2 million, with no advances outstanding; two correspondent-bank lines provided up to $30 million, also unused.
- No loan-loss provision was recorded in either Q1 2018 or Q1 2017. Nonaccrual loans were $1.310 million; there were no loans 90 days past due and still accruing. Four troubled debt restructurings, totaling $1.310 million, were all nonaccrual. No loans were classified as loss.
- Approximately 78% of loans were commercial real estate, including construction. Total nonperforming assets fell to $1.310 million from $1.564 million at year-end, principally following the sale of foreclosed property.
- Bank regulatory capital ratios included total capital to risk-weighted assets of 11.3%, Tier 1 risk-based capital of 10.3%, and Tier 1 leverage of 8.3%. The Bank exceeded the stated well-capitalized thresholds.
Material changes and notable items
- Average interest-earning assets increased year over year, notably average loans (up $42.4 million) and investment securities (up $25.4 million). Management attributed the higher margin to loan growth and improved yields on loans and cash balances; it noted that deposit-rate competition and prior cash accumulation have weighed on margins.
- At quarter-end, loans declined $14.1 million from year-end while available-for-sale securities increased $19.0 million and deposits increased $16.5 million. No brokered deposits or borrowings were outstanding.
- Unrealized losses on available-for-sale debt securities were $1.700 million at March 31, versus $1.196 million at year-end. Management attributed losses primarily to interest-rate changes and concluded no security was other-than-temporarily impaired; it stated it did not intend, and was not likely to be required, to sell before recovery or maturity.
- The company adopted revenue-recognition Topic 606 and financial-instruments ASU 2016-01 on January 1, 2018; neither had a material effect on financial condition or results. The filing expects lease standard adoption to add right-of-use assets and lease liabilities but had not quantified the impact. CECL adoption is required after December 15, 2019; management was evaluating the impact and expected earlier recognition of credit losses.
- On March 20, 2018, the company entered a three-year employment agreement with its COO, with annual base salary of $241,823, bonus eligibility, and severance equal to remaining-term salary for qualifying termination without cause.
Outlook, risks and contingencies
No earnings or revenue guidance was provided. Management expected liquidity to be adequate for operating, investing, financing, and regulatory needs over the next 12 months, and expected Bank earnings to support holding-company funding needs. Forward-looking risks identified include local and broader economic conditions, competition, interest-rate changes, customer financial stability and liquidity, real-estate loan concentrations, regulation, and accounting changes. Management cautioned that actual credit losses may exceed estimates. It reported no material pending or threatened legal proceedings, no material changes in risk factors from the 2017 Form 10-K, and no material changes in market-risk disclosures.
Key facts for investors to verify
- Whether the heavily real-estate-weighted loan portfolio and geographic concentrations remain resilient as economic and property-market conditions change.
- Whether the stable allowance and absence of a quarterly provision remain appropriate; track nonaccrual loans, criticized loans, charge-offs, and the four nonaccrual restructurings.
- How rising market rates affect net interest margin, deposit pricing, securities valuations, and liquidity; particularly monitor the $1.700 million unrealized securities loss.
- Whether expense growth, especially staffing and data-processing costs, remains proportionate to loan and deposit growth.
- The eventual balance-sheet and retained-earnings effects of lease accounting and CECL adoption; management had not quantified these impacts.