Oak Valley Bancorp — 2018 Form 10-K
Reporting period: Fiscal year ended December 31, 2018. This is an annual filing; it does not provide standalone fourth-quarter results. Oak Valley Bancorp is the parent of Oak Valley Community Bank, a California community bank serving the Central Valley and Eastern Sierras.
Financial performance and condition
| Metric | 2018 | 2017 | Change |
|---|---|---|---|
| Net income | $11.54 million | $9.09 million | +26.9% |
| Diluted earnings per share | $1.42 | $1.13 | +25.7% |
| Total assets, year-end | $1.095 billion | $1.035 billion | +5.8% |
| Gross loans, year-end | $711.9 million | $662.5 million | +7.5% |
| Deposits, year-end | $986.5 million | $938.9 million | +5.1% |
| Net interest income | $38.57 million | $34.18 million | +12.8% |
| Noninterest income | $4.71 million | $5.98 million | -21.2% |
| Noninterest expense | $27.38 million | $24.57 million | +11.5% |
| Provision for loan losses | $555,000 | $350,000 | +$205,000 |
Net interest margin increased to 3.89% from 3.77% on a fully tax-equivalent basis; net interest spread rose to 3.80% from 3.71%. Return on average assets improved to 1.08% from 0.91%, and return on average common equity to 12.26% from 10.41%. The efficiency ratio was 61.37%, versus 60.66%.
Net cash from operating activities was $13.0 million. Investing activities used $81.6 million, principally reflecting loan growth and securities purchases; financing activities provided $45.5 million. Cash and cash equivalents declined $23.0 million to $126.1 million. Management reported liquid assets of $238.5 million, or 21.8% of assets, compared with $254.8 million, or 24.6%, a year earlier.
The company reported no short- or long-term borrowings outstanding at year-end. It had $268.9 million of available FHLB borrowing capacity and $30 million in unused correspondent-bank credit lines. Shareholders’ equity was $99.0 million, up 9.1%. Bank regulatory capital ratios were 11.7% total risk-based, 10.7% Tier 1 and 8.7% leverage; the Bank was classified as well capitalized.
Changes and notable items
- Profit growth was driven mainly by higher net interest income, reflecting loan and investment growth, improved earning-asset yields and higher market rates. Average loan yield rose 15 basis points; average cost of interest-bearing liabilities increased to 0.25% from 0.17%.
- Noninterest income fell primarily because 2017 included $938,000 of merger-related settlement payments and a $108,000 gain on sale of property. Gains on called and sold securities also declined. Deposit service charges and debit-card fee income increased.
- Expenses rose with a new Sacramento branch, two branch relocations, increased staffing and costs supporting portfolio growth. The company opened its Sacramento branch in 2018; full-time-equivalent staffing increased by eleven.
- The effective tax rate declined to 24.8% from 40.3%. The 2017 rate included a $983,000 deferred-tax-asset remeasurement related to U.S. tax reform; the federal corporate rate fell to 21% for 2018.
- Nonperforming loans declined to $920,000 from $1.31 million. The allowance for loan losses rose to $8.69 million, equal to 1.22% of loans, and net charge-offs were $36,000. The portfolio remained concentrated in commercial real estate, about 78% of loans.
- Unrealized losses on available-for-sale debt securities totaled $2.35 million at year-end, principally attributed by management to interest-rate changes; management said it did not intend, and was unlikely to be required, to sell the securities before recovery or maturity.
Outlook, risks and contingencies
For 2019, management planned relationship-based expansion, sought to increase the loan-to-deposit ratio and net interest margin, and emphasized expense and credit-loss control. Management said the asset-sensitive balance sheet had benefited from rate increases but could face margin compression if rates remain flat or decline, as deposit rates have limited room to fall and competition may require deposit-rate increases. In the company’s modeled one-year scenarios, a 100-basis-point rate increase raised projected net interest income 2.67%, while a 100-basis-point decrease reduced it 5.58%; these are model estimates, not guidance.
Principal risks include concentration in real-estate lending and Central California markets, local economic or property-market weakness, borrower credit deterioration, interest-rate and liquidity risk, competition, regulatory requirements, and operational, vendor and cybersecurity risks. The company had $153.9 million of commitments to extend credit, including $2.3 million of standby letters of credit; utilization is uncertain. Management reported no material litigation pending. It committed $5 million to a low-income housing tax-credit investment, with $3.593 million unfunded at year-end, and had $600,000 remaining to fund a small-business private-equity investment.
The company adopted revenue-recognition and financial-instrument accounting updates in 2018 without material financial-statement impact. It had not quantified the impact of the forthcoming CECL expected-credit-loss standard and expected it to result in earlier loss recognition. Auditors issued unqualified opinions on the financial statements and internal controls; management also concluded disclosure controls and internal control over financial reporting were effective.
Important facts for investors to verify
- Reconcile the filing’s nonperforming-loan ratio: the narrative reports 0.13% for 2018, while one table appears to show 0.20%; reported nonperforming loans were $920,000 and gross loans were $711.9 million.
- Review commercial real-estate and geographic concentration, collateral values, loan growth, and allowance adequacy, particularly as economic conditions change.
- Assess sensitivity of margin and earnings to interest rates, deposit repricing and competition, alongside the decline in liquid assets.
- Check the recurring earnings contribution against 2017’s merger-related settlement income and the 2018 branch-related expense increases.
- Monitor the eventual CECL adoption effect, the deferred tax asset’s realization, and funding obligations for the tax-credit and private-equity investments.