Oak Valley Bancorp — Q3 2022 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2022. Oak Valley Bancorp is the holding company for Oak Valley Community Bank, a California community bank serving the Central Valley and Eastern Sierras, with a loan portfolio primarily focused on commercial customers.
Financial results and condition
Amounts are in millions of dollars except per-share data and percentages.
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Interest income | $17.063 | $13.543 | $41.740 | $38.268 |
| Net interest income | $16.772 | $13.296 | $40.963 | $37.526 |
| Provision for loan losses | $0.200 | $0 | $0.200 | $0 |
| Non-interest income | $1.611 | $1.303 | $4.150 | $3.883 |
| Non-interest expense | $9.370 | $8.407 | $27.696 | $24.342 |
| Net income | $6.800 | $4.554 | $13.427 | $12.870 |
| Diluted earnings per share | $0.83 | $0.56 | $1.64 | $1.57 |
| Net interest margin | 3.61% | 3.17% | 3.05% | 3.22% |
- Q3 net income increased 49% year over year; nine-month net income increased 4%. Q3 pre-tax income rose $2.621 million, while nine-month pre-tax income was up only $0.150 million.
- Management attributed improved net interest income to loan and investment growth and rising asset yields. The nine-month comparison was partly offset by sharply lower PPP loan interest and fees. The reported nine-month margin declined, mainly due to lower PPP income and substantial lower-yielding cash balances.
- Non-interest expense increased 11.5% in Q3 and 13.8% for the nine months, reflecting staffing and operating costs associated with growth, among other items. Q3 non-interest income benefited from a fair-value gain on a limited partnership investment.
- At September 30, total assets were $1.962 billion, down $2.0 million from year-end 2021. Net loans were $899.9 million, up 6.1%; deposits were $1.831 billion, up 1.3%; and available-for-sale securities were $510.0 million, up 92.7%.
- Cash and cash equivalents fell $333.2 million to $445.1 million, principally as cash was deployed into securities and loans. Nine-month operating cash flow was $15.3 million; investing activities used $369.8 million and financing activities provided $21.3 million.
- Shareholders’ equity fell to $106.2 million from $142.6 million at year-end, largely reflecting a $47.7 million after-tax other comprehensive loss from securities valuation changes. Accumulated other comprehensive loss was $41.5 million at quarter-end.
- The allowance for loan losses was $11.0 million, or 1.21% of gross loans, versus 1.25% at year-end. No loans were past due, non-accrual, or classified as non-performing at September 30; one $20,000 consumer loan was a troubled debt restructuring.
- The Bank reported no borrowings outstanding. Regulatory capital ratios remained above stated minimums: Bank total capital was 11.8%, common equity Tier 1 was 11.0%, and Tier 1 leverage was 7.1%. Management reported liquid assets of $744 million, 37.9% of total assets, and access to approximately $325 million of FHLB borrowing capacity and $70 million in correspondent-bank lines.
Material changes, outlook and risks
- Interest-rate increases beginning in March 2022 supported yields during Q3. Management noted that the Federal Reserve had raised the federal funds target range to 3.00%–3.25% in September and expected further increases during 2022, while acknowledging uncertainty about future rates and their effects.
- About 85% of loans were commercial real estate, including construction. Management identifies real-estate concentration, economic and housing-market weakness, inflation, supply-chain issues, recession risk, agricultural conditions, borrower liquidity, and interest-rate changes as potential risks to credit quality and earnings.
- Available-for-sale securities had $59.2 million of gross unrealized losses at September 30, primarily attributed to rising market yields. Management concluded the losses were temporary, did not intend to sell the securities, and did not expect to be required to sell them before recovery or maturity. A substantial further decline in securities values could affect reported equity.
- Management considered liquidity sufficient for client needs and operating requirements for at least the next 12 months. It also cautioned that deposit outflows or increased client demand for liquidity could require greater use of borrowing facilities and raise funding costs.
- Management said expense levels are expected to continue increasing with business growth, while emphasizing cost control. The filing provides no numerical earnings, margin, loan-growth, or deposit-growth guidance.
- The company expected to adopt CECL on January 1, 2023; it had not quantified the effect and expected earlier recognition of credit losses. Adoption of ASU 2022-02 was not expected to have a significant financial-statement impact.
- No material changes to previously disclosed risk factors, material pending legal proceedings, or significant changes to disclosure controls were reported.
Important facts for investors to verify
- Whether higher rates continue to lift earning-asset yields without materially increasing deposit costs or weakening borrower repayment capacity.
- How the large commercial real-estate exposure, local economic conditions, and CECL adoption affect future provisions and the allowance.
- Whether securities unrealized losses recover or persist, and the resulting effect on accumulated other comprehensive loss, equity, and capital.
- Whether loan and deposit growth can be sustained while preserving liquidity, asset quality, and expense discipline.
- The source filing’s reported net interest margin and results: management also presents tax-equivalent net interest figures in its discussion, which differ from GAAP statement amounts.