Oak Valley Bancorp — Q2 2022 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2022. Oak Valley Bancorp is the holding company for Oak Valley Community Bank, a California community bank serving businesses and individuals, primarily in the Central Valley and Eastern Sierra. Financial amounts below are in millions unless noted.
Financial performance and condition
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Net interest income | $13.23 | $11.99 | $24.19 | $24.23 |
| Net income | $4.26 | $3.96 | $6.63 | $8.32 |
| Diluted earnings per share | $0.52 | $0.48 | $0.81 | $1.02 |
| Net interest margin | 2.98% | 3.09% | 2.75% | 3.26% |
| Non-interest income | $1.37 | $1.41 | $2.54 | $2.58 |
| Non-interest expense | $9.21 | $8.22 | $18.33 | $15.94 |
- Quarterly net income increased about 7.5%; six-month net income declined about 20.3%. Six-month pretax income was $8.40 million, versus $10.88 million.
- At June 30, total assets were $1.99 billion, up 1.4% from year-end 2021. Gross loans were $907.6 million, up 5.5%; net loans were $895.6 million. Available-for-sale securities were $501.5 million, up 90.8% from $262.9 million.
- Deposits totaled $1.85 billion, up 2.5% from year-end. Cash and cash equivalents were $499.9 million, down from $778.3 million. The filing reports liquid assets of $778.5 million, or 39.1% of total assets, compared with $858.2 million and 43.7% at year-end.
- Six-month operating cash flow was $6.9 million, compared with $9.4 million in 2021. Investing activities used $329.4 million, primarily reflecting securities purchases and loan growth; financing activities provided $44.2 million. Cash and cash equivalents decreased $278.4 million.
- Shareholders’ equity was $118.7 million versus $142.6 million at year-end. Accumulated other comprehensive loss reached $23.3 million, principally reflecting market-value declines in available-for-sale securities as yields rose. Pretax unrealized losses on those securities totaled $34.4 million; management attributed them primarily to interest-rate changes and reported no securities as other-than-temporarily impaired.
- The allowance for loan losses was $10.8 million, or 1.19% of gross loans, versus 1.25% at year-end. There were no non-accrual, past-due, or non-performing loans reported at June 30. One $20,000 consumer loan was classified as a troubled debt restructuring.
- No borrowings were outstanding. Bank regulatory capital ratios included 12.0% total risk-based capital, 11.1% Tier 1 and common equity Tier 1, and a 7.1% Tier 1 leverage ratio; each exceeded the filing’s stated minimum including conservation buffer.
Material changes and management commentary
- Q2 net interest income increased 10.4%, supported by growth in earning assets and higher yields following Federal Reserve rate increases. For the first half, lower PPP loan interest and fees largely offset growth elsewhere: PPP-related interest and fees fell to $0.75 million from $4.79 million.
- Non-interest expense rose 12.1% in Q2 and 15.0% for the first half, mainly from staffing and operating costs supporting portfolio growth, higher regulatory assessments, and lower deferral of PPP-related costs against salary expense.
- Non-interest income declined slightly. Higher deposit service charges were offset by lower mortgage commissions and other income; the latter was affected by fair-value changes in an equity security.
- The company had funded $345 million in PPP loans and received $335 million in forgiveness payments through June 30, 2022; $9.5 million remained outstanding.
- Management stated that liquidity was adequate for expected needs over the next twelve months, supported by cash, contingent resources, approximately $318.9 million of FHLB borrowing capacity, and $70 million of correspondent-bank federal-funds lines; no advances were outstanding. Management anticipated operating expenses would continue to rise with growth while emphasizing cost control.
- The filing discussed the July 2022 Federal Reserve increase of 0.75 percentage point to a 2.25%–2.50% target range and noted that further rate increases were expected at that time. No formal earnings or financial guidance was provided.
Risks, contingencies, and unusual items
- Credit risks include the effects of COVID-19 and economic conditions, potential borrower stress, rising rates, and the company’s concentration in real estate lending: approximately 84% of loans were commercial real estate, including construction. Management noted that future losses could require additional provisions; the adequacy of the allowance is uncertain.
- Management said strong liquidity and contingent resources should meet customer needs, but deposit outflows could increase reliance on credit lines and funding costs. Interest-rate changes may affect asset yields, deposit costs, securities values, and net interest income.
- Available-for-sale securities’ market losses reduced accumulated other comprehensive income and reported equity. Management stated it did not intend, and was not likely required, to sell the securities before recovery or maturity.
- CECL credit-loss accounting was scheduled for adoption January 1, 2023. The company had not quantified the impact and expected the change could result in earlier loss recognition.
- The filing reported no material legal proceedings, no material changes to previously disclosed risk factors, and no significant changes in internal control over financial reporting.
Investor verification points
- Track net interest margin and earnings as PPP income runs off and rate increases affect asset yields and deposit pricing.
- Review CRE concentration, criticized and special-mention credits, the COVID-related borrower exposure, and allowance adequacy as economic conditions evolve.
- Assess securities portfolio duration, unrealized losses, and effects on tangible and regulatory capital if market yields rise further.
- Monitor liquidity and deposit mix, including growth in non-interest-bearing deposits, available contingent funding, and the extent of any deposit repricing or outflows.
- Verify the eventual CECL transition adjustment and any effect on reserves, retained earnings, or regulatory capital.