Oak Valley Bancorp — Q3 2023 Form 10-Q
Reporting period: Three and nine months ended September 30, 2023; balance-sheet comparisons are to December 31, 2022. Unaudited consolidated results cover Oak Valley Bancorp and Oak Valley Community Bank. Unless stated otherwise, dollar amounts below are in millions.
Business context
Oak Valley Community Bank serves individuals and small to medium-sized businesses in California’s Central Valley and Eastern Sierras. Lending is its primary revenue source, with the loan portfolio concentrated in commercial real estate.
Financial performance and position
| Metric | Q3 2023 / September 30, 2023 | Comparison |
|---|---|---|
| Interest income | $20.35 | $17.06 in Q3 2022 |
| Net interest income | $18.94 | $16.77 in Q3 2022; up 12.9% |
| Net interest margin | 4.34% | 3.61% in Q3 2022 |
| Net income / diluted EPS | $7.35 / $0.89 | $6.80 / $0.83 in Q3 2022 |
| Non-interest income / expense | $1.57 / $10.58 | $1.61 / $9.37 in Q3 2022 |
| Total assets | $1,835.4 | $1,968.3 at December 31, 2022 |
| Gross loans / net loans | $971.2 / $960.2 | Gross loans up 6.1% from year-end |
| Deposits | $1,666.5 | Down $147.7, or 8.1%, from year-end |
| Cash and cash equivalents | $277.8 | Down $151.9, or 35.3%, from year-end |
| Allowance for credit losses | $9.74; 1.00% of gross loans | $9.47; 1.03% at year-end |
For the first nine months, net income was $24.98 million versus $13.43 million in 2022, and diluted EPS was $3.04 versus $1.64. Net interest income was $57.89 million, up 41.3%; reported net interest margin was 4.39%, compared with 3.05%. Management attributed the improvement chiefly to loan and investment growth, higher earning-asset yields following Federal Reserve rate increases, and deployment of cash into higher-yielding assets. Interest expense also increased, to $2.56 million for the nine-month period from $0.78 million.
Nine-month net cash provided by operating activities was $34.3 million; investing activities used $35.6 million and financing activities used $150.6 million, primarily reflecting a $153.9 million net decrease in demand and savings deposits. Cash and cash equivalents declined by $151.9 million over the period.
Material changes and notable items
- Deposits declined as customers moved funds to higher-rate offerings at other financial institutions, including the company’s investment advisory service. Demand, money-market and savings balances fell; time deposits increased. The company reported no brokered deposits.
- Non-interest expense rose 12.9% in Q3 and 9.8% year to date, mainly from staffing, branch overhead, data processing and regulatory assessments. Management cited support for portfolio growth and the Roseville branch opened in December 2022.
- Q3 included a $0.30 million credit-loss provision; the nine-month period recorded a $0.16 million reversal. The allowance increased from year-end in part because of the $0.35 million CECL adoption adjustment. CECL adoption also reduced retained earnings by $0.63 million.
- Available-for-sale securities had $62.97 million of gross unrealized losses against $547.62 million amortized cost at September 30. The company attributed losses primarily to higher market yields, reported no securities credit-loss allowance, and said it did not intend or expect to be required to sell the securities before recovery or maturity. Accumulated other comprehensive loss was $44.16 million, net of tax.
- Commercial real estate, including construction, represented approximately 87% of loans. The company reported no non-accrual loans, nonperforming assets or loans 90 days or more past due; $0.19 million was 60–89 days past due in agriculture loans. Special-mention and substandard balances were $15.05 million and $4.79 million, respectively.
Liquidity, debt and capital
Management described liquidity as strong: cash and cash equivalents were $277.8 million, liquid assets were $527.4 million (28.7% of total assets), and reported liquidity sources included approximately $342 million of FHLB borrowing capacity, a $70 million correspondent-bank line and approximately $33 million of Federal Reserve discount-window capacity. There were no outstanding borrowings or FHLB advances. No brokered deposits were reported. The company said available resources should meet operating, investing, financing and regulatory needs for at least 12 months.
At September 30, the Bank’s total risk-based capital ratio was 14.5%, Tier 1 risk-based ratio 13.7%, common equity Tier 1 ratio 13.7%, and Tier 1 leverage ratio 9.2%; each exceeded the applicable stated minimum, including the capital conservation buffer. The company reported no material change in market-risk exposure since year-end.
Outlook, risks and other disclosures
No quantitative earnings or revenue guidance was provided. Management expects non-interest expense to continue increasing as the business grows, while stating it intends to control costs and limit increases relative to growth. It will continue monitoring credit quality and the allowance, which could require adjustments as economic conditions and borrower finances change.
Disclosed risks include deposit volatility and higher funding costs amid banking-sector uncertainty and competition for deposits; rising interest rates and market-value losses on securities; recession, inflation, unemployment and collateral-value pressure; real-estate lending concentrations; and regulatory, cybersecurity and other operational risks. Management said recent banking-sector events had caused nominal negative liquidity impacts to the company. The filing reported no pending or threatened material legal proceedings and stated that disclosure controls were effective.
Important facts for investors to verify
- Whether deposit outflows stabilize, and the effect of deposit pricing and mix on funding costs and net interest margin.
- Whether cash and other available liquidity remain adequate if deposit withdrawals or loan funding needs increase.
- How the commercial-real-estate concentration, criticized loan grades and California economic conditions affect future credit losses and allowance adequacy.
- Whether unrealized securities losses persist or could become realized through liquidity needs, sales or credit deterioration.
- Whether expense growth, including staffing, technology and FDIC assessments, remains consistent with management’s cost-control expectations.