Oak Valley Bancorp — Q3 2017 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2017; unaudited. Oak Valley Bancorp is the parent of Oak Valley Community Bank, a California community bank serving the Central Valley and Eastern Sierra. Amounts below are in millions of dollars unless stated otherwise.
Financial performance
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Net interest income | $8.620 | $7.829 | $25.157 | $23.477 |
| Provision for loan losses | $0.070 | $0.090 | $0.105 | $0.415 |
| Non-interest income | $1.276 | $1.077 | $4.782 | $3.170 |
| Non-interest expense | $6.060 | $5.924 | $18.342 | $18.298 |
| Net income | $2.468 | $1.930 | $7.505 | $5.343 |
| Diluted EPS | $0.31 | $0.24 | $0.93 | $0.66 |
- Q3 net income grew 27.9%; nine-month net income grew 40.5%. Management attributed the improvement mainly to higher net interest income, lower loan-loss provisions, and higher non-interest income.
- Net interest income rose 10.1% for Q3 and 7.2% year to date. Management reported net interest margin of 3.78% for Q3 versus 3.73%, and 3.74% year to date versus 3.84%. The year-to-date margin decline was attributed partly to lower accretion of acquired-loan discounts.
- Non-interest income increased 18.5% for Q3 and 50.9% year to date. Year-to-date items included $0.938 million in settlement payments related to the Mother Lode Bank acquisition and $0.394 million in gains on called securities; Q3 included a $0.211 million gain on sale of an OREO property.
- Non-interest expense increased 2.3% for Q3 and 0.2% year to date. Higher staffing costs were partly offset by lower data-processing, regulatory-assessment, and other expenses.
- Annualized return on average assets was 0.98% for Q3 and 1.01% year to date; annualized return on average common equity was 11.04% and 11.64%, respectively.
Financial position, cash flow and liquidity
- At September 30, total assets were $996.721 million, down 0.5% from December 31, 2016. Net loans were $626.911 million, up 4.3%; available-for-sale securities were $180.857 million, up 12.8%.
- Deposits were $901.716 million, down 1.4% from year-end. Cash and cash equivalents declined to $139.628 million from $190.810 million. Shareholders’ equity rose to $89.676 million from $82.450 million.
- Nine-month operating cash flow was $6.536 million; investing cash outflow was $43.410 million and financing cash outflow was $14.308 million. Cash and cash equivalents decreased $51.182 million.
- The company reported liquid assets of $251.5 million and a liquid-assets-to-total-assets ratio of 25.2% at September 30. It reported no FHLB advances or correspondent-bank line borrowings; FHLB borrowing capacity was approximately $255.1 million and available federal funds lines totaled $30 million.
- No outstanding funded debt is reported in the balance sheet; deposits are the primary funding source. Bank capital ratios were 11.5% total capital, 10.5% Tier 1 risk-based, 10.5% common equity Tier 1, and 8.5% Tier 1 leverage. The Bank exceeded applicable minimums and reported ratios above the stated well-capitalized thresholds.
Asset quality, risks and outlook
- Non-accrual loans fell to $1.311 million from $3.037 million at year-end; total non-performing assets declined to $1.564 million from $4.247 million. The allowance for loan losses was $7.917 million, or 1.24% of gross loans, versus 1.28% at year-end. The nine-month provision was $0.105 million, with net charge-offs of $0.020 million.
- Five troubled debt restructurings totaling $1.311 million were all on non-accrual status. Commercial real estate, including construction, represented approximately 79% of loans, creating notable real-estate concentration risk. Management also cites borrower, economic, interest-rate, regulatory, competition, and funding risks.
- Management said it expects expenses to rise as the business grows, while aiming to limit increases through cost control. It expected cash and other funding sources to meet operating and regulatory liquidity needs for the next 12 months. The filing provides no earnings or revenue guidance.
- Management judged the securities portfolio’s unrealized losses to be temporary, primarily related to interest-rate changes, and reported no securities as other-than-temporarily impaired. Management cautioned that estimates, including the loan-loss allowance, are uncertain and actual losses could differ.
- The filing notes future accounting changes: CECL adoption is expected to accelerate loss recognition and increase the allowance, but the impact had not been quantified. Lease accounting adoption is expected to add right-of-use assets and lease liabilities and decrease the leverage ratio by less than 1%.
- Management reported effective disclosure controls, no material change in internal control over financial reporting, and no pending or known threatened material legal proceedings.
Important facts for investors to verify
- Reconcile non-interest income figures: the financial statements report $1.276 million for Q3 and $4.782 million for nine months, while portions of MD&A state different totals. Confirm the statement figures and the nature and recurrence of the settlement and securities gains.
- Track deposit outflows, cash balances, and the use of contingent funding capacity as loan and securities growth continues.
- Monitor commercial-real-estate concentration, criticized loan grades, non-accrual loans, troubled debt restructurings, and allowance adequacy.
- Assess whether margin trends improve and whether earnings can be sustained without one-time gains and settlements.
- Review the eventual quantified effects of CECL and lease-accounting adoption.