Business context and reporting period
Oak Valley Bancorp is the holding company for Oak Valley Community Bank, a California community bank serving Central Valley and Eastern Sierra markets. Its primary revenue source is lending, principally to middle-market businesses. This unaudited Form 10-Q covers the three months ended March 31, 2022; comparisons are with Q1 2021 unless otherwise noted.
Financial performance and position
- Earnings: Net income was $2.37 million, down 45.6% from $4.36 million. Basic and diluted EPS were $0.29, versus $0.54 and $0.53, respectively.
- Interest income and margins: Interest income was $11.20 million, down 10.2%; net interest income was $10.96 million, down 10.5%. Net interest margin fell to 2.51% from 3.43%; annualized return on average assets was 0.50% versus 1.12%, and return on average common equity was 6.84% versus 13.44%.
- Other income and expenses: Non-interest income was $1.17 million, little changed. Non-interest expense rose 18.2% to $9.12 million. The effective tax rate was 21.1%, compared with 23.5%.
- Credit quality: No loan-loss provision was recorded in either period. The allowance was $10.76 million, or 1.25% of gross loans. Non-accrual, past-due, and nonperforming loans were reported at zero; one $21,000 consumer loan was classified as a troubled debt restructuring.
- Balance sheet: Total assets were $1.946 billion, down 0.9% from December 31, 2021. Gross loans were $858.8 million, down slightly; deposits were $1.799 billion, down 0.4%. Available-for-sale securities increased to $349.1 million from $262.9 million.
- Cash flow and liquidity: Operating cash flow was $2.36 million, versus $7.28 million. Cash and cash equivalents declined $109.0 million to $669.2 million, principally alongside $107.8 million of securities purchases. Management reported liquid assets of $839.2 million, or 43.1% of assets, and stated liquidity was sufficient for expected needs.
- Capital and funding: The Bank’s total risk-based capital ratio was 12.9%, common equity Tier 1 was 11.9%, and Tier 1 leverage was 6.9%, all above stated minimums. There were no outstanding borrowings or brokered deposits.
Material changes versus comparable periods
- Lower PPP-related loan interest and fees were the main earnings headwind: PPP interest and fees were $0.49 million versus $2.59 million in Q1 2021. The company reported $17.7 million of PPP loans remaining at quarter-end, after $327 million of total program forgiveness payments.
- Net interest margin declined amid lower earning-asset yields, high cash balances earning low rates, and the runoff of PPP loans. Growth in securities and other earning assets partly offset the decline.
- Non-interest expense increased $1.40 million, principally from staffing and operating costs, reduced deferred-cost offsets related to PPP lending, and higher regulatory assessments.
- Other comprehensive loss was $12.16 million, primarily from unrealized securities holding losses. Accumulated other comprehensive income shifted from positive $6.19 million at year-end to a $5.97 million loss; shareholders’ equity fell to $131.6 million from $142.6 million.
Outlook, risks and unusual items
- No formal earnings or financial guidance was provided. Management anticipated continued expense growth as the business expands, while stating it would pursue cost control. The filing noted the Federal Reserve had raised its target rate range in May 2022 and that further increases were expected, with future net interest income dependent on rate decisions and balance-sheet repricing.
- Management considered the loan-loss allowance adequate but warned that COVID-19 effects, economic deterioration, or borrower stress could require additional provisions and reduce capital and earnings. One borrower relationship totaling approximately $8.1 million had principal payments deferred and was on interest-only terms through mid-2022.
- Credit exposure is concentrated in commercial real estate, which represented approximately 83% of loans. The filing also identifies risks from agricultural conditions, local real estate and economic conditions, interest-rate changes, deposit liquidity needs, and competition.
- Available-for-sale securities had $11.64 million of gross unrealized losses at quarter-end. Management attributed losses primarily to interest-rate changes, judged the impairments temporary, and said it did not intend or expect to be required to sell the securities before recovery or maturity.
- CECL adoption was scheduled for January 1, 2023; the company had not quantified the effect and expected the model to result in earlier loss recognition.
Important facts for investors to verify
- Whether PPP runoff and changing interest rates stabilize or further pressure net interest income and margin.
- Whether commercial real estate, the deferred-payment borrower, and other credit exposures remain sound, and whether the allowance proves adequate.
- How unrealized securities losses, potential securities sales, and deposit movements affect equity and liquidity.
- The impact of CECL adoption and continued expense growth on earnings, capital, and shareholder returns.