Oak Valley Bancorp — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023. Oak Valley Bancorp is the parent of Oak Valley Community Bank, a California community bank serving the Central Valley and Eastern Sierra; lending is primarily to middle-market businesses.
Financial performance and position
- Net income: $9.2 million, or $1.13 per basic share and $1.12 diluted, versus $2.4 million and $0.29 per share in Q1 2022. Annualized return on assets was 1.93% (0.50%); return on average common equity was 28.36% (6.84%).
- Net interest income: $19.5 million versus $11.0 million. Net interest margin increased to 4.39% from 2.51%, principally reflecting higher earning-asset yields and portfolio growth. Interest expense was $0.5 million versus $0.2 million.
- Other income and expense: Non-interest income rose 41.7% to $1.7 million, including a $0.1 million gain on securities sales. Non-interest expense rose 7.0% to $9.8 million, mainly from staffing, branch occupancy, and data-processing costs. The effective tax rate was 22.5%, versus 21.1%.
- Credit costs: The company recorded a $0.46 million provision reversal, compared with no provision in Q1 2022. The loan allowance was $9.4 million, or 1.01% of loans. There were no non-accrual, past-due, or non-performing loans reported at March 31.
- Balance sheet: Assets totaled $1.94 billion, down 1.4% from year-end 2022. Net loans were $916.2 million, up 1.2%; deposits were $1.77 billion, down 2.5%. Cash and cash equivalents were $389.4 million, down $40.2 million from year-end.
- Cash flow: Operating activities provided $12.0 million. Investing activities used $5.6 million and financing activities used $46.6 million, resulting in a $40.2 million decrease in cash and cash equivalents.
- Liquidity, funding, and capital: Management reported $669.7 million in liquid assets, equal to 34.5% of assets. There were no borrowings outstanding; available capacity included approximately $325 million from the FHLB and $70 million under correspondent-bank lines. The Bank’s total risk-based capital ratio was 13.2% and Tier 1 leverage ratio was 8.1%; both exceeded stated regulatory minimums.
- Securities: Available-for-sale securities had a $532.6 million fair value and $35.0 million in gross unrealized losses, attributed mainly to rising rates rather than credit quality. Accumulated other comprehensive loss improved to $23.1 million from $30.7 million at year-end.
Material changes and management commentary
- Management attributed higher earnings to growth in loans and investments, higher earning-asset yields following Federal Reserve rate increases, and the credit-loss reversal. The filing says loan and investment growth helped earnings even as total deposits and cash declined.
- Deposits fell by $45.1 million during the quarter. Management attributed the decline to normal seasonal activity and some customers moving to higher-rate offers elsewhere; it described the effect of recent banking-sector events on the company’s liquidity as nominal.
- Management said it expects non-interest expense to continue rising as the business grows, while aiming to limit increases relative to growth. The filing provides no specific earnings, revenue, or margin guidance.
- Oak Valley adopted the CECL credit-loss standard on January 1, 2023. Adoption increased the loan allowance by $346,000 and the unfunded-commitment reserve by $547,000, and reduced retained earnings by $629,000, net of a stated tax benefit. The reported quarter includes a separate $460,000 reversal of credit-loss provision.
Risks, contingencies, and unusual items
- The filing highlights risks from bank failures, deposit volatility, competition for deposits, interest-rate changes, unrealized securities losses, possible recession, and potential changes to banking regulation and FDIC assessments. It also cites risks associated with its real-estate-heavy loan portfolio: approximately 85% of loans were commercial real estate, including construction lending.
- The company reported no material pending or threatened legal proceedings, no brokered deposits, no FHLB advances, and no outstanding OREO. Loan commitments, including letters of credit, totaled $200.8 million.
- Management stated that it did not intend to sell securities in unrealized loss positions and did not expect to be required to sell them before recovery or maturity. This assessment depends on liquidity and market conditions.
Important facts for investors to verify
- Reconcile the MD&A’s net-interest-income discussion: the income statement reports $19.543 million versus $10.958 million, while another MD&A passage gives different comparative increase figures.
- Track deposit balances and pricing, liquidity, and the availability of contingent funding if deposit outflows accelerate.
- Monitor commercial real estate concentrations, criticized loan grades, credit-loss allowance assumptions, and any change from the quarter’s zero non-performing loans.
- Assess the effect of interest rates and any required securities sales on unrealized losses, accumulated other comprehensive loss, and capital.