Oak Valley Bancorp — Q3 2018 Form 10-Q
Reporting period: Three and nine months ended September 30, 2018; balance-sheet comparisons are against December 31, 2017. The filing is unaudited. Oak Valley Bancorp is a California bank holding company whose subsidiary serves businesses and individuals in the Central Valley and Eastern Sierra; lending is concentrated in commercial real estate.
Financial performance and position
Amounts are in millions of dollars except per-share data and ratios.
| Metric | Q3 2018 / September 30, 2018 | Comparable period / December 31, 2017 |
|---|---|---|
| Net income | $3.165; diluted EPS $0.39 | Q3 2017: $2.468; $0.31 |
| Nine-month net income / diluted EPS | $8.558 / $1.06 | 2017: $7.505 / $0.93 |
| Net interest income | Q3: $9.944; nine months: $28.388 | Q3 2017: $8.620; nine months: $25.157 |
| Net interest margin | Q3: 3.97%; nine months: 3.87% | Q3 2017: 3.78%; nine months: 3.73% |
| Non-interest income / expense | Q3: $1.137 / $6.820; nine months: $3.480 / $20.457 | Q3 2017: $1.276 / $6.060; nine months: $4.782 / $18.342 |
| Total assets | $1,075.805 | $1,034.852 |
| Loans, net / deposits | $653.995 / $974.424 | $652.989 / $938.882 |
| Cash and cash equivalents | $162.841 | $149.173 |
| Shareholders’ equity | $95.666 | $90.767 |
| Allowance for loan losses | $8.135; 1.23% of gross loans | $8.166; 1.24% |
- Q3 pretax income was $4.261 million versus $3.766 million a year earlier; nine-month pretax income was $11.411 million versus $11.492 million. Lower income-tax expense lifted earnings: the effective tax rate was 25.0% for nine months versus 34.7% in 2017, primarily reflecting the federal corporate tax rate reduction.
- Net cash from operating activities was $11.690 million for the first nine months; investing activities used $31.447 million and financing activities provided $33.425 million. Cash and cash equivalents increased $13.668 million.
- The company reported no outstanding FHLB advances or correspondent-bank line advances. Liquid assets were $269.8 million, or 25.1% of assets. FHLB borrowing capacity was approximately $267.4 million, and available federal-funds lines totaled $30 million.
- Bank capital ratios at September 30 included total risk-based capital of 11.9%, Tier 1 risk-based capital of 10.9%, common equity Tier 1 of 10.9%, and Tier 1 leverage of 8.6%; each exceeded the disclosed well-capitalized thresholds.
Material changes versus prior periods
- Q3 and nine-month net income rose 28.2% and 14.0%, respectively. Net interest income increased 15.4% and 12.8%, respectively, supported by loan and securities growth and higher rates. The nine-month net interest margin improved 14 basis points.
- Gross loans grew only $0.651 million from year-end, which management attributed to high loan payoffs; deposits rose $35.542 million, or 3.8%, and securities increased $25.990 million on the balance sheet. Assets grew 4.0%.
- Nine-month non-interest income declined 27.2%, largely because 2017 included $938,000 in merger-related professional-service settlement payments, as well as higher securities gains. Non-interest expense increased 11.5%, mainly from salaries and benefits, branch-related costs, and support for business growth.
- Non-performing assets fell to $0.920 million from $1.564 million at year-end 2017, reflecting loan principal payments and the sale of OREO. Non-accrual loans were $0.920 million; there were no loans 90 days past due and still accruing.
- Available-for-sale securities had $2.517 million of gross unrealized losses at September 30, 2018, versus $1.196 million at year-end. Management attributed losses primarily to interest-rate changes and judged the securities not other-than-temporarily impaired. Accumulated other comprehensive loss was $0.707 million, versus income of $0.989 million at year-end.
Outlook, commentary, and risks
- No specific earnings or revenue guidance was provided. Management expects non-interest expense to continue increasing with growth, while stating it will seek to contain increases through cost control. Management expected liquidity to remain adequate for operating, investing, financing, and regulatory needs over the next 12 months.
- Management said rising rates were benefiting loan yields and interest-earning cash, while deposit funding costs were also increasing. The company cited core deposit growth and no brokered deposits.
- Credit risk is concentrated in commercial real estate: approximately 77% of loans were commercial real estate, including construction. Six depositors each held more than 1% of deposits; one exceeded 3%. Management considered funding concentration risk not significant.
- Four troubled debt restructurings totaling $0.920 million were all on non-accrual status; $0.680 million of specific reserves was allocated to them. Management stated the allowance was adequate but cautioned that economic conditions and other factors could cause actual losses to differ from estimates.
- CECL was expected to require earlier loss recognition; the company had not quantified its impact. The company expected adoption of the new lease standard to create a non-material balance-sheet gross-up. Market-risk exposure had not materially changed since year-end 2017.
- Other notable items: Sacramento branch opened in September 2018; an $85,000 charge related to a vacated Turlock branch lease was recorded in 2018. The filing reported no material pending or threatened legal proceedings, no material risk-factor changes, and effective disclosure controls.
Important facts for investors to verify
- Whether loan growth resumes after the reported payoffs, and how commercial real estate concentration and local economic conditions affect credit quality.
- Trends in deposit pricing, net interest margin, and funding concentration as interest rates change.
- Whether the $8.135 million loan-loss allowance remains appropriate, including coverage of troubled restructurings and off-balance-sheet commitments.
- The persistence of higher operating expenses following branch expansion and relocation, and the impact of declining non-interest income after unusual 2017 items.
- Future securities valuation changes and CECL adoption effects; assess the filing’s statements alongside subsequent disclosures and updated guidance.