Oak Valley Bancorp — Q2 2023 Form 10-Q
Business context and period. Oak Valley Bancorp is the holding company for Oak Valley Community Bank, a California community bank focused on commercial and real estate lending in the Central Valley and Eastern Sierras. This unaudited filing covers the quarter and six months ended June 30, 2023; balance-sheet comparisons are with December 31, 2022. Dollar amounts below are in millions unless noted.
Financial performance and position
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Net interest income | $19.4 | $13.2 | $39.0 | $24.2 |
| Net income | $8.4 | $4.3 | $17.6 | $6.6 |
| Diluted earnings per share | $1.02 | $0.52 | $2.14 | $0.81 |
| Net interest margin | 4.45% | 2.98% | 4.42% | 2.75% |
- Growth and profitability: Q2 net income rose 97% year over year; six-month net income rose 166%. Management attributed improvement mainly to loan and investment growth, higher earning-asset yields, and lower credit-loss estimates. Annualized return on average assets was 1.79% for Q2 and 1.86% for the first half; return on average common equity was 23.48% and 25.80%, respectively.
- Other income and expenses: Non-interest income was $1.7 million in Q2 and $3.3 million year to date. Non-interest expense was $10.1 million and $19.8 million, up 9.3% and 8.1% year over year, respectively, largely reflecting staffing, the new Roseville branch, and higher portfolio servicing costs.
- Balance sheet and liquidity: Total assets were $1.862 billion, down 5.4% from year-end; deposits were $1.682 billion, down $131.9 million (7.3%). Net loans increased $34.7 million to $939.7 million. Cash and cash equivalents fell $129.1 million to $300.5 million. Management reported $559.6 million in liquid assets, 30.1% of assets, versus $755.2 million and 38.3% at year-end.
- Cash flow: First-half operating cash flow was $23.3 million, compared with $7.2 million a year earlier. Investing activities used $19.0 million and financing activities used $133.4 million; cash declined by $129.1 million. Deposit outflows were the principal financing cash use.
- Credit quality: No non-accrual, 90-days-past-due, or non-performing loans were reported at June 30. The allowance for credit losses was $9.4 million, or 0.99% of gross loans, versus 1.03% at year-end. The first half included a $0.46 million provision reversal; Q2 had no provision or reversal. Approximately 87% of loans were commercial real estate, including construction lending.
- Securities and equity: Available-for-sale securities were $515.9 million, with $38.4 million of gross unrealized losses, which management attributed primarily to higher market yields rather than credit deterioration; no allowance was recorded for these securities. Accumulated other comprehensive loss improved to $26.0 million from $30.7 million at year-end. Shareholders’ equity was $147.1 million.
- Debt and capital: The company reported no outstanding FHLB advances or other borrowings. At June 30, the Bank’s total risk-based capital ratio was 13.6%, common equity Tier 1 was 12.8%, and Tier 1 leverage was 8.8%, all above the stated regulatory minimums including the capital conservation buffer.
Material changes versus comparable periods
- Higher yields following Federal Reserve rate increases, plus loan and investment portfolio growth, drove substantial net interest income and margin expansion. The company reported that earning-asset yields increased 157 basis points in Q2 and 174 basis points for the first half year over year.
- Interest expense increased as deposit rates rose, but reported funding costs remained low: 0.26% for Q2 and 0.22% for the first half on interest-bearing liabilities.
- Deposits declined, partly due to seasonal activity and customers moving funds to higher-rate offerings elsewhere, including the company’s affiliated investment advisory service. Management said banking-industry events had caused nominal negative liquidity impacts.
- First-half securities sales generated a $143,000 net gain. Non-interest expense increased, particularly compensation and occupancy costs.
- The company adopted CECL on January 1, 2023. Day-one adjustments increased the loan allowance by $346,000, increased the unfunded-commitment reserve by $547,000, and reduced retained earnings by $629,000, net of a $285,000 tax benefit. Prior-year results remain under the prior incurred-loss method.
Outlook, risks, and contingencies
- No numeric earnings or financial guidance was provided. Management expects non-interest expenses to continue increasing as the business grows, while stating it will seek to control costs. Management expects available liquidity to be adequate for operating, investing, financing, and regulatory needs for at least 12 months.
- Key stated risks include deposit volatility and funding costs, banking-sector instability, interest-rate and securities-value exposure, economic slowdown, borrower credit deterioration, real-estate concentration, and regulatory or capital/liquidity requirement changes. Management cautioned that future economic conditions could require higher credit-loss reserves.
- Unfunded commitments to extend credit totaled $205.3 million, including $3.6 million of letters of credit. Available contingent funding included approximately $330 million of FHLB capacity, a $50 million correspondent-bank line, and $33 million of Federal Reserve Discount Window capacity; none had been drawn at quarter-end.
- Management reported no material pending or threatened legal proceedings, effective disclosure controls, and no significant changes in internal control over financial reporting. Management stated that the proposed FDIC special assessment described in the filing would not apply because deposits were below the stated $5 billion threshold.
Important facts for investors to verify
- Deposit trends, customer concentration, and the amount and stability of uninsured deposits; the filing notes four customers each held more than 1% of deposits, but none exceeded 3%.
- Interest-rate sensitivity, potential deposit repricing, and the capacity to maintain net interest margin if rates or deposit competition change.
- Commercial real estate exposure and changes in criticized or classified loans; at June 30, special-mention loans were $10.6 million and substandard loans were $5.1 million.
- Realizability of the securities portfolio’s unrealized losses and management’s ability to avoid selling securities before recovery or maturity.
- Future credit-loss reserve needs under CECL, capital levels, and actual use or availability of contingent liquidity sources.