Oak Valley Bancorp — Q2 2019 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2019. The company operates Oak Valley Community Bank, a California community bank serving businesses and individuals, with a loan portfolio concentrated in commercial real estate. Financial amounts below are in millions unless noted.
Financial performance and position
- Q2 earnings: Net income was $2.963 million, up 14.4% from $2.591 million in Q2 2018; diluted EPS was $0.37 versus $0.32. For the first half, net income was $6.067 million, up 12.5%, and diluted EPS was $0.75 versus $0.67.
- Revenue and margins: Q2 net interest income was $10.128 million, up 8.6%; first-half net interest income was $20.239 million, up 9.7%. Noninterest income was $1.242 million in Q2 and $2.517 million year to date. Net interest margin was 4.23% for Q2 and 4.19% for the first half, compared with 3.83% and 3.82%, respectively, in 2018. Management attributes margin improvement mainly to loan growth, higher asset yields, and the effect of prior rate increases. (MD&A also presents tax-equivalent net interest figures.)
- Profitability and expenses: Annualized return on average assets was 1.13% for Q2 and 1.15% for the first half; annualized return on average common equity was 11.39% and 11.95%, respectively. Noninterest expense rose 5.9% in Q2 and 6.6% in the first half, primarily reflecting salaries and benefits and operating costs supporting business growth.
- Balance sheet: Total assets were $1,069.0 million, down 2.4% from year-end 2018. Net loans were $708.3 million, up 0.9%; deposits were $949.1 million, down 3.8%. Shareholders’ equity increased to $106.6 million from $99.0 million.
- Cash flow and liquidity: First-half operating cash flow was $7.151 million. Cash and cash equivalents declined $34.588 million to $91.557 million. Management reported liquid assets of $192.1 million, or 18.0% of total assets, versus $238.5 million and 21.8% at year-end. It expects available cash and other funding sources to meet needs for the next 12 months.
- Funding and capital: The company reported no FHLB advances at quarter-end and no brokered deposits; it had approximately $264.7 million of FHLB borrowing capacity and $30 million of correspondent-bank federal-funds lines available. Bank total capital ratio was 12.0%, common equity Tier 1 ratio 11.0%, and Tier 1 leverage ratio 9.6%, above stated fully phased-in minimums.
Material changes versus comparable periods
- Net interest income and net income increased year over year, supported by loan and investment growth and higher yields. Q2 loan interest and fees rose to $8.615 million from $7.628 million.
- Deposit balances fell by $37.405 million from December 31, 2018. Management cited competitive pressure on certain high-rate accounts that it chose not to match; demand deposits and savings grew while money-market and large time deposits declined.
- Cash declined as deposits ran off and loans grew. First-half financing cash flow was negative $38.620 million, chiefly reflecting the $36.046 million net decrease in demand and savings deposits.
- Noninterest income increased 22.8% in Q2, with higher other income and deposit service charges; first-half growth was 7.4%. The 2018 first half included a $193,000 gain on sale of OREO, while 2019 had no such sale.
Outlook, risks and unusual items
- No quantified earnings or revenue guidance is provided. Management expects noninterest expense to continue rising as the business grows, while stating it intends to control costs. It expects liquidity to be adequate for the next 12 months.
- Credit quality indicators were broadly stable: nonperforming loans were $906,000, or 0.13% of total loans, and the allowance was $8.770 million, or 1.22% of loans. The quarter and first half included a $95,000 loan-loss provision, versus none in the comparable 2018 periods. Three troubled debt restructurings totaling $906,000 were all on nonaccrual; one borrower accounted for the nonaccrual exposure.
- Approximately 78% of loans were commercial real estate, including construction lending. Management identifies sensitivity to real estate and general economic conditions, borrower financial stability, interest rates, competition, regulation, and deposit funding as risks. It reported no loans classified as loss and no material change in risk factors from the 2018 Form 10-K.
- Available-for-sale securities had $1.091 million of gross unrealized losses at June 30, 2019; management attributed these mainly to interest-rate changes and determined no security was other-than-temporarily impaired. Securities-related unrealized gains improved accumulated other comprehensive income during the period.
- The company adopted lease accounting (Topic 842) on January 1, 2019, recording a $5.246 million lease liability and $4.817 million right-of-use asset; management said the balance-sheet gross-up was not material. It was evaluating CECL (Topic 326), expected earlier loss recognition, and noted a proposed adoption delay for smaller reporting companies that was not yet presented as finalized.
- Management reported effective disclosure controls, no significant internal-control changes during the quarter, and no pending or threatened material legal proceedings.
Key facts for investors to verify
- Whether the deposit decline persists and how deposit pricing or mix affects funding costs, liquidity, and loan growth.
- Trends in commercial real estate concentrations, criticized loans, the nonaccrual borrower, and allowance adequacy.
- Whether net interest margin and earnings growth continue as asset yields and deposit costs change.
- The final CECL adoption date and quantified effect on the allowance and opening retained earnings.
- The sustainability of noninterest income, including equity-security fair-value gains and other income, and of expense growth tied to staffing and expansion.