Oak Valley Bancorp — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019; comparisons are with Q1 2018 for income and cash flows, and December 31, 2018 for balance-sheet changes. Oak Valley Bancorp is a California community bank focused primarily on commercial and real-estate lending. Financial statement amounts below are in millions unless stated otherwise.
Key financial metrics
| Metric | Q1 2019 / Mar. 31, 2019 | Comparable period / Dec. 31, 2018 |
|---|---|---|
| Net income | $3.104; $0.38 per basic and diluted share | $2.802; $0.35 per share in Q1 2018 |
| Interest income / expense | $10.533 / $0.422 | $9.407 / $0.290 in Q1 2018 |
| Net interest income, financial statements | $10.111 | $9.117 in Q1 2018 |
| Net interest margin | 4.16% | 3.80% in Q1 2018 |
| Non-interest income / expense | $1.275 / $7.233 | $1.332 / $6.732 in Q1 2018 |
| Total assets | $1,055.681 | $1,094.887 at Dec. 31, 2018 |
| Net loans / deposits | $697.768 / $938.743 | $702.220 / $986.495 at Dec. 31, 2018 |
| Cash and cash equivalents | $93.947 | $126.145 at Dec. 31, 2018 |
| Shareholders’ equity | $102.218 | $99.038 at Dec. 31, 2018 |
| Operating / investing / financing cash flow | $8.004 / $8.740 / $(48.942) | $4.671 / $(6.544) / $15.406 in Q1 2018 |
The MD&A reports net interest income of $10.273 million on a fully taxable-equivalent basis, versus $9.292 million in Q1 2018. This differs from the financial-statement amounts above; the filing presents the MD&A figures as tax-equivalent measures.
Material changes and financial condition
- Net income rose $302,000, or about 10.8%, year over year. Management attributed the increase mainly to higher net interest income; pre-tax income increased $436,000.
- Net interest income increased $994,000, or 10.9%, according to management. The reported net interest margin expanded 36 basis points, supported by higher earning-asset balances and yields, including loan and securities growth and higher rates.
- Non-interest expense increased $501,000, or 7.4%, mainly from salaries and benefits, including staffing for the Sacramento branch opened in September 2018, and other operating costs. Non-interest income fell $57,000, or 4.3%, largely because Q1 2018 included a $193,000 gain on an OREO sale.
- Assets declined $39.2 million from year-end, including deposits down $47.8 million (4.8%), net loans down $4.5 million, and securities down $6.3 million. Management said deposit outflows reflected competitive pressure in higher-rate accounts that the Bank chose not to match.
- Cash and cash equivalents fell $32.2 million during the quarter. Liquid assets were $212.7 million, or 20.1% of total assets, versus $238.5 million, or 21.8%, at year-end. Management expects available cash and other funding sources to meet needs and regulatory liquidity requirements for the next 12 months.
- The Bank reported no outstanding FHLB advances or correspondent-bank federal-funds borrowings. FHLB borrowing capacity was approximately $273.5 million; two correspondent lines totaled $30 million.
- Capital ratios remained above fully phased-in minimums: the Bank’s total risk-based capital ratio was 11.8%, CET1 was 10.8%, and Tier 1 leverage was 9.1%. The Company’s corresponding ratios were 11.9%, 10.9%, and 9.1%.
Asset quality, risks, and outlook
- No loan-loss provision was recorded in Q1 2019 or Q1 2018. The allowance was $8.677 million, or 1.23% of gross loans, versus $8.685 million, or 1.22%, at year-end.
- Non-accrual loans were $920,000. One additional $47,000 loan was over 90 days past due and still accruing, bringing non-performing loans to $967,000. Four troubled debt restructurings totaled $920,000; all were non-accrual. The allowance equaled 897.3% of non-performing loans.
- Commercial real estate, including construction, represented approximately 78% of loans. Management noted real-estate, construction, and agricultural lending sensitivities to economic conditions, interest rates, property values, and other sector-specific factors.
- Management said it expects non-interest expense to continue increasing with growth, while seeking to limit increases relative to growth. No specific earnings or revenue guidance was provided.
- The company adopted lease accounting (Topic 842) on January 1, 2019, recording a $5.246 million lease liability and a $4.817 million right-of-use asset; management said the adoption did not materially affect the financial statements. CECL adoption was still under evaluation; management expected the expected-loss model to result in earlier loss recognition.
- Management judged securities with unrealized losses to be temporarily impaired, attributing losses primarily to interest-rate changes, and said it did not intend or expect to be required to sell them before recovery or maturity. The filing states market-risk exposures had not changed materially since year-end.
- Forward-looking risks include economic conditions, competition, regulation, interest rates, customer financial stability, real-estate loan concentrations, and accounting-standard changes. Management reported no material legal proceedings, no material changes to previously disclosed risk factors, and effective disclosure controls.
Important facts for investors to verify
- Reconcile the MD&A’s tax-equivalent net interest income and margin analysis with the GAAP financial-statement presentation.
- Track whether deposit outflows persist, particularly in money-market accounts, and how they affect liquidity, funding costs, and loan capacity.
- Monitor the concentrated commercial real-estate exposure, delinquent and non-accrual loans, and any future allowance or provision changes.
- Assess whether rising operating costs are contained as the Sacramento branch and broader business expand.
- Follow the company’s CECL implementation assessment and any resulting allowance or retained-earnings impact.