Score and fold
O a k V a l l e y B a n cOr p
| 2 0 1 0 an n u a l re pOr t
B r a n c h eS
O a k V a l l e y
c Om m u n i t y B a n k
eaSt e r n S i e r r a
c Om m u n i t y B a n k
Oakdale
125 North Third Avenue
Oakdale, CA 95361
(209) 848-BANK (2265)
BridgepOrt
166 Main Street
Bridgeport, CA 93517
(760) 932-7926
mammOth lakeS
307 Old Mammoth Road
Mammoth Lakes, CA 93546
(760) 924-0990
BiShOp
351 North Main Street
Bishop, CA 93514
(760) 874-BANK (2265)
www.escbank.com
a t m O n l y l Oc a t iOnS :
Crowley Lake General Store
Crowley Lake, CA
Bishop Creek Lodge
Bishop, CA
United States Marine Corps
Marine Housing Exchange
Coleville, CA
United States Marine Corps
Mountain Warfare
Training Center
Bridgeport, CA
Inyo Shell
Bishop, CA
Pearsonville Shell
Pearsonville, CA
Mammoth Shell
Mammoth Lakes, CA
SOnOra
14580 Mono Way
Sonora, CA 95370
(209) 532-7100
mOdeStO -12th & i
1200 I Street
Modesto, CA 95354
(209) 549-BANK (2265)
mOdeStO -dale
4120 B Dale Road
Modesto, CA 95356
(209) 758-8000
mOdeStO -mchenry
3508 McHenry Avenue
Modesto, CA 95356
(209) 579-3360
turlOck
2001 Geer Road
Turlock, CA 95382
(209) 633-2850
StOcktOn
2935 West March Lane
Stockton, CA 95219
(209) 320-7850
patterSOn
20 Plaza Circle
Patterson, CA 95363
(209) 892-5757
ripOn
150 North Wilma Avenue
Ripon, CA 95366
(209) 599-9430
eScalOn
1910 McHenry Avenue
Escalon, CA 95320
(209) 821-3070
manteca
191 W. North Street
Manteca, CA 95336
(209) 249-7360
www.ovcb.com
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deep rOOtS
Y E A R S A N D G R O W I N G
Score and fold
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W E M E A N B U S I N E S S
Selected Finan ci al dat a FiVe-year Summar y
(In thousands except for per share amounts)
Year Ended December 31,
2010
2009
2008
2007
2006
Interest income
Interest expense
Net interest income
Provision for loan losses
Net interest income
after provision for loan losses
Non-interest income
Non-interest expense
Provision for income taxes
Net income
Preferred stock dividends & accretion
Net income availabe to common shareholders
Per common share net income (basic)
Per common share cash dividends declared
Cash dividends declared
Total assets
Total earning assets
Net loans
Cash and cash equivalents
Investment securities
Total deposits
Non-interest bearing deposits
Interest bearing deposits
Total stockholder’s equity
Weighted average common
shares outstanding
$27,926
2,919
25,007
4,020
20,987
2,770
16,776
2,353
4,628
(842)
3,786
0.49
-
-
552,396
518,845
395,206
68,937
53,268
476,739
102,422
374,317
64,658
$29,283
5,641
23,642
5,862
17,780
2,641
18,218
203
2,000
(842)
1,158
0.15
0.025
192
524,722
485,704
417,796
21,649
50,765
429,210
69,647
359,563
60,692
$29,247
8,732
20,515
2,188
18,327
2,522
17,865
822
2,162
(64)
2,098
0.27
0.075
574
508,203
470,428
421,573
9,838
41,449
378,248
64,277
313,971
57,986
$31,837
13,006
18,831
555
18,276
2,198
14,213
2,335
3,925
-
3,925
0.53
0.190
1,445
454,259
425,128
382,264
14,203
33,373
377,348
68,151
309,197
42,361
$28,695
11,362
17,333
595
16,738
1,689
12,221
2,480
3,726
-
3,726
0.53
0.190
1,348
455,070
417,282
372,819
27,819
36,249
378,530
56,339
322,191
34,189
7,689,760
7,668,562
7,642,775
7,364,681
7,062,841
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L e t t e r t o S h a r e h oLd e rS
Dear Customers,
shareholDers
anD FrIenDs:
It Is wIth great pleasure that we
look upon another successful year at Oak
Valley Community Bank. In 2010, we saw
profitability restored to nearly the highest
level ever recorded, as we continued to
monitor and manage our credit portfolio,
and focus on attracting new businesses.
Our strong credit practices have helped
us remain profitable through arguably
the worst post-Depression era economic
downturn in history. Additionally, we made
great strides in transforming our deposit
mix and corresponding increases in net
interest margin solidified bank earnings.
For the fiscal year ended December
31, 2010, net income for 2010 totaled
$4.6 million compared to $2.0 million
for 2009. After adjustment for preferred
stock dividends and accretion, net
income available to common sharehold-
ers was $3.8 million, or $0.49 per diluted
share, compared to net income of $1.2
million, or $0.15 per diluted common
share, in 2009.
Total assets grew to $552.4 million
for the year ended December 31, 2010,
a 5.3% increase over the prior year.
Deposits increased to $476.7 million, an
increase of $47.5 million, or 11.1% over
December 31, 2009. Gross loans at year
end totaled $404.2 million, reflecting a
decrease of $21.4
million, or 5.0%,
during 2010.
Looking ahead,
2011 includes a fair
share of exciting
developments. The
bank’s strong financial performance has
enabled us to infill our footprint with two
new locations—Modesto and Manteca.
Slated to open this spring, the Modesto-
McHenry Branch will be our third location
in Modesto. It’s a highly visible, prime
location which will add convenience for
existing customers and enhance our abil-
ity to serve new families and businesses in
the area. Scheduled to open shortly after
McHenry, the Manteca Branch will be our
fourth location in San Joaquin County,
providing convenient access to a new
audience of potential customers.
As we execute our plans for the
future, we pause to take a nostalgic look
back at the last 20 years of serving the
banking needs of the local community.
We humbly acknowledge this admirable
accomplishment as a milestone for any
business. It establishes a foundation of
credibility on which customers, new and
old, can look with confidence as they do
business with a company with a proven
history, a commitment to service, and
an appreciation for building lifelong
relationships. We consider ourselves
fortunate to reach this mark and hope it
serves as a symbol of our strength and
stability for years to come.
Our customers, shareholders, and the
communities we serve can be assured
that, as we grow, we will remain commit-
ted to the conservative principles which
have guided us from the beginning. Our
adherence to solid credit
standards and sound
lending practices will
never waver. These
practices have helped
us navigate the tenu-
ous economic times
and fare much better
than the vast major-
ity of our peers. As
the economy begins what is likely to be a
measured recovery, our conservative
approach will ensure our continued
strength amidst any future uncertainty.
As we enter our next decade of
growth, customers can count on receiv-
ing the same unique style of service they
have come to expect and enjoy from the
Bank. Personal attention and one-on-one
relationship banking will always form the
foundation of the Oak Valley brand. At the
same time, we understand that our world
is ever changing, so we will proactively
adopt new technologies when they
create a more convenient, secure, or grati-
fying banking experience for our custom-
ers. As consumers increasingly demand
24/7 access to their finances, we will strive
to provide tools to help them. Upcom-
ing electronic banking enhancements
include upgrades to our Online Bill Pay
and Online Account Opening platforms,
a sophisticated internal Fraud Prevention
system, and an eagerly anticipated OVCB
Mobile Banking and Bill Pay service.
With numerous exciting changes on
the horizon, it is a rewarding time to be
a part of Oak Valley and Eastern Sierra
Community Bank. We would like to
thank our shareholders, customers and
friends for their ongoing support, loyalty
and patronage, as well as our valued
employees for making customer care a
top priority every day. We are grateful for
the success each of you has helped us
achieve through the years—with your
loyal support, we sincerely believe that
the next 20 years will outshine the first.
—Ronald C. Martin,
Chief Executive Officer
W e M e a n
B uSi n eS S
Just lIke our latest advertis-
ing campaign proclaims, at Oak Valley
Community Bank, “We mean business.”
We’re serious about our commitment to
supporting business banking and com-
mercial growth in our five-county region.
It’s why we invest in dozens of local com-
panies every year, providing expansion
funds and other sources of financing to
support good businesses and keep them
growing. By fueling these businesses, we
ensure that they continue to provide not
only necessary products and services,
but also generate a healthy tax base for
our public services to thrive.
We especially respect the role that
small businesses play, providing the
lifeblood of the communities we serve.
Many of these have been founded on
just plain good ideas, with solid busi-
ness plans and good old-fashioned hard
work—the same values that Oak Valley
Community Bank embodies. With a
little help from Oak Valley, they grow to
become part of the fabric of our com-
munity, providing local employment so
families can work where they live. One
example of this is Oakdale’s Hi-Tech Park,
an industrial development located in our
own backyard, where we have helped
many businesses grow into viable
contributors to our local economy. In
fact, loans to small businesses represent
the majority of our portfolio, comprising
more than 50% of our lending activity.
Oak Valley provides us with
1
competitive products and financing,
and they take the time to get to know
our business, working with us to
craft solutions that address our
specific needs.
Dan Marchione
Hi-Tech Emergency Vehicle Services, Inc
Oak Valley delivers - first-class
2
service, competitive returns, and the
ability to work with local people who
understand the needs of Central
Valley businesses.
Jeff Hamilton
Hamilton and Co. CPA
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university Park is
a unique project which
required customized
financing. Oak Valley
listened to our needs and
developed a solution that
worked for the bank, for
us, and the community.
Kevin Huber
Grupe Commercial Company
1
we’re a small BusIness, too!
Conservative lending practices have also kept Oak Valley Community Bank strong, enabling
us to weather the tough times and remain profitable over the long term. In addition to
supporting the local economy through business lending, we contribute to the region’s
economy as an employer of more than 130 individuals. We take pride in providing good
jobs, stable incomes and a place for our employees to achieve their career goals. We’ve built
teams of the best people in the region, providing the security they need to support their
families. In fact, during the past few years, we have maintained our employee base, without
staff lay-offs, at a time when few businesses can make such a claim.
c h a n g i n g t iMeS ,
c o nSt a n t Se r v i c e
as the olD adage says, “The only
constant is change.” However, while we
have eagerly embraced proven tech-
nologies and developed new products
to enhance the convenience of banking
with Oak Valley, we believe that old-fash-
ioned customer service should always be
the constant. So, later this year when we
upgrade our Online Bill Pay and Online
Account Opening platforms, we’ll do so
with careful attention to streamlining
the enrollment process and improving
the customer experience. Similarly, for
the upcoming launch of OVCB Mobile
Banking and Bill Pay, we have chosen a
platform which supports all modes of
mobile banking: SMS/Text, Mobile Web,
and downloadable smartphone apps.
This will ensure that OVCB Mobile is
available to virtually all mobile phone us-
ers. Best of all, we’ll continue to provide
friendly, personal assistance to custom-
ers so they can make the most of these
exciting innovations.
In addition, we’ve also affiliated with
the MoneyPass Network to enable our
customers to enjoy free access to their
funds at more than 17,000 ATMs coast to
coast. In the back office, we’ve imple-
mented comprehensive fraud preven-
tion software to address the growing
realities surrounding identity theft. Both
of these moves illustrate to customers
that we’re always looking out for them
and their money!
taIlor-maDe solutIons
We’ve made relationship banking a
hallmark of our business, taking the time
to learn about our customers’ busi-
nesses while consulting them in sound
decision-making. Branch Managers and
Commercial Loan Officers are read-
ily accessible, and you’ll often find our
executives meet directly with our com-
mercial clients. With this knowledge and
shared trust, we can customize a loan
to our customer’s needs so it’s mutually
beneficial. And, because loan decisions
are made locally, customers can get fast
answers to address their needs.
BranChIng out
With an eye toward recovery, Oak Valley
is pleased to open the doors of two
new branches this year, one in Modesto
and the other in Manteca. As the third
oVCB got our business 10
years ago when they
helped us finance the building of
our dental office. They’ve
been there for all of our business
needs in the years since. It’s
nice to work with a bank that is
invested in the community and
that treats you like family.
Brent and Amanda Bell
Bell Dentistry
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We value our
1
relationship with Oak Valley. They have
the same products and technology as
the big banks, but with better service
and a better understanding of
We get great results from Oak
2
Valley Community Bank. They make
2
our business needs.
managing our finances easy and keep
Allied Concrete & Supply
our deposits working for us.
Van Groningen & Sons Inc.
branch in our Modesto footprint, the
new McHenry location is poised at one
of the most highly traveled corners in
town, with great access and visibility. The
Manteca branch opening follows, our
fourth location in San Joaquin County. In
keeping with our “people first” philoso-
phy, we recruited a top-notch banking
professional to serve as the cornerstone
of this new branch, which we anticipate
will provide strong growth and profits
for the Bank.
coM Mi t t e d t o o u r
c oM Mu n i t i eS
the name “Oak Valley Community
Bank” has become synonymous with
volunteerism throughout the five-county
region. Not only do our Bank executives
serve on the boards of numerous
nonprofits, dozens of employees at
every level contribute their time to many
worthwhile service organizations. Last
year, Bank employees volunteered more
than 1,200 hours to approximately 60
different organizations throughout our
local communities, including:
intervention, and shelter services to
the abused, neglected, and high risk
children in Stanislaus County. Last
year, the Bank became a “Golden
Angel” sponsor, helping to raise nearly
$130,000 to fund the Crisis Center’s
annual operating budget.
Color the Skies—Color the Skies,
2
Inc. generates awareness and financial
support for Children’s Hospital Central
California (CHCC) with the goal of
ensuring the best pediatric care
Center for Human Services—RVP
possible for all Central Valley children,
Operations Theresa Hamilton serves
regardless of financial resources. With
as Secretary on the board of CHS,
the Bank’s assistance, Color the Skies
an organization that endeavors to
raised $50,000 for CHCC last year.
change lives and build futures through
prevention, intervention and counseling
programs that strengthen and support
Care Packages for the U.S. Marine
3
Corps—Our Eastern Sierra branch in
youth and families, including support
Bridgeport has been lighting up the
for Hutton House and Pathways shelters.
lives of our dedicated soldiers, providing
This past year, to celebrate CHS’ 40th
countless care packages to the Marine
anniversary, she volunteered as one
Corps 2/3 battalion this past year. They
of 40 team leaders pledging to raise
also donated 80+ homemade quilts to
$40 from each of 40 people, ultimately
the Wounded Warrior Battalion Program
exceeding her goal and helping CHS
at Camp Pendleton, a 200-bed hospital,
raise over $64,000.
Children’s Guardian Home/
1
Children’s Crisis Center—VP
and a continuing effort. Janelle Mills,
Customer Service Representative,
spearheaded the projects, which have
brought joy to the men and women who
Commercial Loan Officer Frank
serve our country abroad.
Middleton is a new board member
of this organization, whose mission
is to provide child abuse prevention,
3
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CommunIty CommenDatIons
In 2010, Oak Valley Community Bank received the “Outstanding Community Support”
award from Habitat for Humanity, Stanislaus County for providing a line of credit
for “Hope Village” and similar projects, writing grants, and administering the WISH
($150,000) and the Affordable Housing Programs ($300,000). The Bank also received the
“Business of the Year” award from the Oakdale Chamber of Commerce, honoring the
Bank for its contributions to the community.
1
D Ir eCt o r s
o F F I Ce r s
C o r r e s p o nDe n t
Danny L. Titus
Chairman of the Board
Chairman CRA Committee
Real Estate and Investments
Donald L. Barton
Vice Chairman of the Board
Agribusinessman
Christopher M. Courtney
President
Oak Valley Community Bank
James L. Gilbert
Feed and Seed Business
Thomas A. Haidlen
Automobile Dealer
Michael Q. Jones
General Contracting, Land
Development and General
Real Estate
Ronald C. Martin
Chief Executive Officer
Christopher M. Courtney
President
Rick McCarty
Executive Vice President
Chief Administration Officer
Chief Financial Officer
Corporate Secretary
Wendy Burth
Executive Vice President
Retail Banking Group
Dave Harvey
Executive Vice President
Commercial Banking Group
Mike Rodrigues
Executive Vice President
Chief Credit Officer
Ronald C. Martin
Chief Executive Officer
Oak Valley Community Bank
John Coburn
Senior Vice President
Commercial Loan Officer
Roger M. Schrimp
Chairman Loan Committee
Chairman Audit Committee
Chairman Compensation
Committee
Attorney and Cattle Rancher
Richard J. Vaughan
Chairman Investment
Committee
Agribusinessman
Cathy Ghan
Senior Vice President
Commercial Real Estate
Janis Powers
Senior Vice President
Risk Management Officer
Gary Stephens
Senior Vice President
Credit Administrator
DIr eCt o r s em e rIt u s
I nDe p e nDe n t
Barry M. Jett
Real Estate Investor
Romain J. Schonhoff
CPA and Farmer
In Memoriam
Arne J. Knudsen
Wholesale Nurseryman
auD It o r s
Moss-Adams LLP
3121 West March Lane,
Suite 100
Stockton, CA 95219-2303
le g a l C o u n s e l
Matteo Daste
BuchalterNemer
333 Market Street, 25th Floor
San Francisco, CA 94105-2126
B a n k
Union Bank, N.A.
400 California Street
San Francisco, CA 94104
Pacific Coast Bankers’ Bank
340 Pine Street, Suite 401
San Francisco, CA 94104
tr a n sFe r ag e n t
a nD re gIs t r a r
Computershare
250 Royall Street
Canton, MA 02021
(800) 962-4284
ma r k e t ma k e r s
Troy Norlander
The Seidler Companies
(800) 288-2811
John Cavender
Howe Barnes Hoeffer
and Arnett
(415) 538-5725
Joey Warmenhoven
McAdams Wright Ragen
(503) 922-4888
a DvIs o r s
Jeff Arambel
Debbie Armstrong
Nelson Bahler
Joseph Barlupo
Bruce Baron
Gary Barton
Jennifer Bethel
David Bhakta
Dennis Bitters
Candido Borges
Roy Brown Jr.
Larry Buehner
Wendy Coddington
Hal Copp
Susan Creedon
Ron Day
Jim Devenport
Herb Dompe
John Ellsworth
Charlie Evans
Paula Frago
Arlene Francis
Matt Friedrich
Richard Gilton
Richard Gonzales
Roger Gregg
Anthony Guida
Carmen Hagan
Frank Hagan
Dick Hagerty
Stephen Haycock
John Hooper
Don Hoy
Bob Hoyt
Gary Huff
Marge Imfeld
Trevor Irish
Larry Jones
Olga Jones
Cher Kablanow-Tonge
Mike Kline
Brad Klump
Steven Knudsen
Theresa Lara (In Memoriam)
Daniel Lee
Gary Linhares
Tim Martin
David Martini
Carol Ornelas
Robert Ott
Ann Patel
Ray Perez
Scott Piercy
Joel Pluim
Bruce Porter
John Ramos
Marc Robinson
Frank Rocha
Kathy Rocha
Mike Ruddy Sr.
Jeff Sceville
Jodi Sceville
Ward Schemper
Rick Schiltz
Collin Schut
Donald Segerstrom
Dave Silva
Bob Spengler
Jim Stevens
Roger Stevens
Bob Summers
Niniv Tamimi
Robbie Tani
Bruce Thompson
Phil Tilbury
Willie Traina
Tom Vermeulen
Arlon Waterson
Tirzah Woodward
F o u nDe r s
Steve Benak, MD
Andrea Boston-Gilbert
Gordon A. and Yvonne Brown
Robert and Beverly Brunker
William D. and Joyce
A.Compton
Hal and Chrys Copp
Betty Dallas
Ramon A. Esslinger
Donald Fagundes
Richard A. and Susan J. Franco
Joel W. Geddes, Jr.
Harrison Gibbs
James Lawrence Gilbert
Thomas A. and Julia D.
Haidlen
Mr. and Mrs. Walter H.
Heckendorf
Barbara Heckendorf
Mrs. Beverly Haidlen Holloway
Leonard B. and Betty M.
Jackson
Barry M. and Betty-Lynn Jett
Henry Kamps, Jr.
Arne and Birgitta Knudsen
Soren and Sharon Knudsen
Steven Knudsen
Joe and Joyce Martin
Della Messner
Bill and Sharon Morris
James A. Morrison III
Ben and Judy Mullins
Dr. and Mrs. J. Patrick
Mulrooney
Thomas W. and Marsha L. Orr
Willem Postma
Mike Reed
Roger M. and Delsie Schrimp
Romain and Janette
Schonhoff
Ralph P. and Margitta R.
Sikkema, DVM
Richard D. and Ola L. Stokes
George and Ruth Thoukis
Danny L. and Suzette Titus
DeWayne F. Titus
Lynda Vaughan
Richard J. Vaughan
Jack Watkins
Gilbert O. Wymond III
Score and fold
W E M E A N B U S I N E S S
Selected Finan ci al dat a FiVe-year Summar y
(In thousands except for per share amounts)
Year Ended December 31,
2010
2009
2008
2007
2006
Interest income
Interest expense
Net interest income
Provision for loan losses
Net interest income
after provision for loan losses
Non-interest income
Non-interest expense
Provision for income taxes
Net income
Preferred stock dividends & accretion
Net income availabe to common shareholders
Per common share net income (basic)
Per common share cash dividends declared
Cash dividends declared
Total assets
Total earning assets
Net loans
Cash and cash equivalents
Investment securities
Total deposits
Non-interest bearing deposits
Interest bearing deposits
Total stockholder’s equity
Weighted average common
shares outstanding
$27,926
2,919
25,007
4,020
20,987
2,770
16,776
2,353
4,628
(842)
3,786
0.49
-
-
552,396
518,845
395,206
68,937
53,268
476,739
102,422
374,317
64,658
$29,283
5,641
23,642
5,862
17,780
2,641
18,218
203
2,000
(842)
1,158
0.15
0.025
192
524,722
485,704
417,796
21,649
50,765
429,210
69,647
359,563
60,692
$29,247
8,732
20,515
2,188
18,327
2,522
17,865
822
2,162
(64)
2,098
0.27
0.075
574
508,203
470,428
421,573
9,838
41,449
378,248
64,277
313,971
57,986
$31,837
13,006
18,831
555
18,276
2,198
14,213
2,335
3,925
-
3,925
0.53
0.190
1,445
454,259
425,128
382,264
14,203
33,373
377,348
68,151
309,197
42,361
$28,695
11,362
17,333
595
16,738
1,689
12,221
2,480
3,726
-
3,726
0.53
0.190
1,348
455,070
417,282
372,819
27,819
36,249
378,530
56,339
322,191
34,189
7,689,760
7,668,562
7,642,775
7,364,681
7,062,841
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O a k V a l l e y B a n cOr p
| 2 0 1 0 an n u a l re pOr t
B r a n c h eS
O a k V a l l e y
c Om m u n i t y B a n k
eaSt e r n S i e r r a
c Om m u n i t y B a n k
Oakdale
125 North Third Avenue
Oakdale, CA 95361
(209) 848-BANK (2265)
BridgepOrt
166 Main Street
Bridgeport, CA 93517
(760) 932-7926
mammOth lakeS
307 Old Mammoth Road
Mammoth Lakes, CA 93546
(760) 924-0990
BiShOp
351 North Main Street
Bishop, CA 93514
(760) 874-BANK (2265)
www.escbank.com
a t m O n l y l Oc a t iOnS :
Crowley Lake General Store
Crowley Lake, CA
Bishop Creek Lodge
Bishop, CA
United States Marine Corps
Marine Housing Exchange
Coleville, CA
United States Marine Corps
Mountain Warfare
Training Center
Bridgeport, CA
Inyo Shell
Bishop, CA
Pearsonville Shell
Pearsonville, CA
Mammoth Shell
Mammoth Lakes, CA
SOnOra
14580 Mono Way
Sonora, CA 95370
(209) 532-7100
mOdeStO -12th & i
1200 I Street
Modesto, CA 95354
(209) 549-BANK (2265)
mOdeStO -dale
4120 B Dale Road
Modesto, CA 95356
(209) 758-8000
mOdeStO -mchenry
3508 McHenry Avenue
Modesto, CA 95356
(209) 579-3360
turlOck
2001 Geer Road
Turlock, CA 95382
(209) 633-2850
StOcktOn
2935 West March Lane
Stockton, CA 95219
(209) 320-7850
patterSOn
20 Plaza Circle
Patterson, CA 95363
(209) 892-5757
ripOn
150 North Wilma Avenue
Ripon, CA 95366
(209) 599-9430
eScalOn
1910 McHenry Avenue
Escalon, CA 95320
(209) 821-3070
manteca
191 W. North Street
Manteca, CA 95336
(209) 249-7360
www.ovcb.com
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2010
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
OAK VALLEY BANCORP
(Exact name of registrant as specified in its charter)
California
(State or other jurisdiction
of incorporation or organization)
125 North Third Avenue
Oakdale, California
(Address of principal executive offices)
26-2326676
(I.R.S. Employer
Identification No.)
95361
(Zip Code)
(209) 848-2265
(Registrant’s telephone number including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Common Stock
Name of each exchange on which registered
The NASDAQ Stock Market, LLC
Securities registered pursuant to Section 12(g) of the Act:
None
(Title of class)
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange
Act.
Yes
No
No
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive
Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (232.405 of this chapter during the preceding 12 months (or for
such shorter period that the registrant was required to submit and post such files). Yes No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K.
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting
company. See definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
(Check one):
Large accelerated filer
Smaller reporting company
Accelerated filer
Non-accelerated filer
(Do not check if a
smaller reporting company)
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes
No
As of December 31, 2010, the aggregate market value of the registrant’s common stock held by non-affiliates of the registrant was
$38,851,400 based on the closing price.
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
Common Stock, No Par Value
[Common Stock, No par value per share]
Outstanding at March 22, 2011
7,713,794 shares
DOCUMENTS INCORPORATED BY REFERENCE
Document
Parts Into Which Incorporated
NONE
TABLE OF CONTENTS
DESCRIPTION OF BUSINESS
PART I
ITEM 1 -
ITEM 1A - RISK FACTORS
ITEM 1B - UNRESOLVED STAFF COMMENTS
ITEM 2 -
ITEM 3 -
ITEM 4 -
PROPERTIES
LEGAL PROCEEDINGS
REMOVED AND RESERVED
PART II
ITEM 5 -
ITEM 6 -
ITEM 7-
MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
ISSUERS PURCHASES OF EQUITY SECURITIES.
SELECTED CONSOLIDATED FINANCIAL DATA
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
ITEM 7A - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
ITEM 8 -
ITEM 9 -
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
ITEM 9A - CONTROLS AND PROCEDURES
ITEM 9B-
OTHER INFORMATION
PART III
ITEM 10 -
ITEM 11 -
ITEM 12 -
ITEM 13 -
ITEM 14 -
PART IV
ITEM 15 -
DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
EXECUTIVE COMPENSATION
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
STOCKHOLDER MATTERS
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
PRINCIPAL ACCOUNTANT FEES AND SERVICES
EXHIBITS AND FINANCIAL STATEMENTS
SIGNATURES
2
ITEM 1. BUSINESS OF OAK VALLEY BANCORP
Overview of the Business
PART I
Oak Valley Bancorp was incorporated on April 1, 2008 in California for the purpose of becoming Oak Valley Community
Bank’s parent bank holding company. Effective July 3, 2008, Oak Valley Bancorp acquired all of the outstanding capital stock of Oak
Valley Community Bank (the “Bank”). The principal office of Oak Valley Bancorp is located at 125 North Third Avenue, Oakdale,
California 95361 and its principal telephone is (209) 848-2265.
Oak Valley Bancorp is authorized to issue 50,000,000 shares of common stock, without par value, of which 7,713,794 are issued
and outstanding, and 10,000,000 shares of preferred stock, without par value, of which 13,500 Series A preferred stock shares are
issued or outstanding.
Oak Valley Community Bank commenced operations in May 1991. We are an insured bank under the Federal Deposit Insurance
Act and are a member of the Federal Reserve. The Bank is subject to regulation, supervision and regular examination by the
California Department of Financial Institutions and the Federal Reserve Bank (FRB). Since its formation, the Bank has provided basic
banking services to individuals and business enterprises in Oakdale, California and the surrounding areas. The focus of the Bank is to
offer a range of commercial banking services designed for both individuals and small to medium-sized businesses in the two main
areas of service of the Bank: the Central Valley and the Eastern Sierras.
The Bank offers a complement of business checking and savings accounts for its business customers. The Bank also offers
commercial and real estate loans, as well as lines of credit. Real estate loans are generally of a short-term nature for both residential
and commercial purposes. Longer-term real estate loans are generally made with adjustable interest rates and contain normal
provisions for acceleration. The Bank also offers traditional residential mortgages through a third party.
The Bank also offers other services for both individuals and businesses including online banking, remote deposit capture,
merchant services, night depository, extended hours, wire transfer of funds, note collection, and automated teller machines in a
national network. The Bank does not currently offer international banking or trust services although the Bank may make such services
available to the Bank’s customers through financial institutions with which the Bank has correspondent banking relationships. The
Bank does not offer stock transfer services nor does it directly issue credit cards.
Expansion
Branch Expansion. Over the past few years, our network of branches and loan production offices have been expanded
geographically. As of December 31, 2010, we maintained twelve full-service branch offices (in addition to our main office).
Beginning in October 1995, we started our geographic expansion outside of Oakdale, by opening a Loan Production Office in Sonora,
California. We subsequently opened a branch in Sonora and two branches in Modesto. In September 2000, we expanded into the
Eastern Sierra, opening a branch in Bridgeport, California under the name Eastern Sierra Community Bank. Since that time we have
added branches in Mammoth Lakes and Bishop. During 2005 and 2006, we aggressively increased our presence in the Central Valley,
by opening branches in Turlock, Stockton, Patterson, Ripon and Escalon. In March 2007, our corporate headquarters expanded by
adding an adjacent historical building located in downtown Oakdale to its complex. In 2010, we purchased a third branch in Modesto
and signed a lease agreement to open a branch in Manteca. The new Modesto branch is expected to open in May and the new
Manteca branch is expected to open in June. We intend to continue our growth strategy in future years through the opening of
additional branches and loan production offices as our needs and resources permit.
Bank Holding Company Reorganization. Effective July 3, 2008, we entered into a bank holding company reorganization,
whereby each of the Bank’s outstanding shares of common stock converted into an equal number of shares of common stock in Oak
Valley Bancorp, which currently owns the Bank as its wholly-owned subsidiary. Management believes that operating the Bank within
a holding company structure provides, among other things, greater operating flexibility than operating as a bank; facilitates the
acquisition of related businesses as opportunities arise; improves the Bank’s ability to diversify; enhances the Bank’s ability to remain
competitive in the future with other companies in the financial services industry that are organized in a holding company structure;
and improves the Bank’s ability to raise capital to support growth. The reorganization was approved by the vote of the majority of the
issued and outstanding shares of common stock.
3
Business Segments
We operate in two primary business segments: Retail Banking and Commercial Banking. These segments are described in
additional detail below:
Retail Banking. The Bank offers a range of checking and savings accounts, including NOW accounts, money market accounts,
overdraft protection, health savings accounts, certificates of deposit, and Individual Retirement Accounts (“IRA”). To satisfy the
lending needs of individuals in its service area, the Bank offers real estate and home equity financing, as well as consumer,
automobile, and home improvement loans.
Commercial Banking. The Bank offers a range of deposit and lending services to business customers. More specifically, the
Bank offers a variety of commercial loans for virtually any business, professional, or agricultural need. These include short-term
working capital, operating lines of credit, equipment purchases, leasehold improvements, construction, commercial real estate
acquisitions or refinancing. Currently, virtually all of the Bank’s business relationships are with customers located in the San Joaquin,
Stanislaus, Tuolumne, Inyo and Mono Counties.
Primary Market Area
We conduct business from our main office in Oakdale, a city of approximately 19,300 located in Stanislaus County, California.
Oakdale is approximately 15 miles from Modesto and sits at the foothills of the Sierra Nevada Mountains, at the edge of the California
Central Valley agricultural area. Through our branches, we serve customers in the Central Valley, from Fresno to Sacramento, and in
foothill locations. We also reach into the Highway 395 corridor in the Eastern Sierras and in the towns of Bishop, Mammoth and
Bridgeport. Approximately 92% of our loans and 88% of our deposits are generated from the Central Valley. The Central Valley area
includes Stanislaus, San Joaquin and Tuolumne counties and has a total population of over 3 million.
Lending Activities
General. Our loan policies set forth the basic guidelines and procedures by which we conduct our lending operations. These
policies address the types of loans available, underwriting and collateral requirements, loan terms, interest rate and yield
considerations, compliance with laws and regulations and our internal lending limits. Our Board of Directors reviews and approves
our loan policies on an annual basis. We supplement our own supervision of the loan underwriting and approval process with periodic
loan audits by experienced external loan specialists who review credit quality, loan documentation and compliance with laws and
regulations. We engage in a full complement of lending activities, including:
• commercial real estate loans,
• commercial business lending and trade finance,
• Small Business Administration lending, and
• consumer loans, including automobile loans, home mortgages, credit lines and other personal loans.
As part of our efforts to achieve long-term stable profitability and respond to a changing economic environment in the California
Central Valley, we constantly evaluate a variety of options to augment our traditional focus by broadening the services and products
we provide. Possible avenues of growth include more branch locations, expanded days and hours of operation and new types of
lending.
Loan Procedures. Loan applications may be approved by the Director Loan Committee of our Board of Directors, or by our
management or lending officers, to the extent of their loan authority. Our Board of Directors authorizes our lending limits. Our
President and Chief Credit Officer are responsible for evaluating the authority limits for individual credit officers and recommending
lending limits for all other officers to the board of directors for approval.
We grant individual lending authority to our President, Chief Credit Officer, and to some department managers. Our highest
management lending authority is combined administrative lending authority for unsecured and secured lending of $2,500,000, which
requires the approval of our President or Chief Credit Officer. Loans for which direct and indirect borrower liability exceeds an
individual’s lending authority are referred to our Board of Directors Loan Committee.
4
At December 31, 2010, our authorized legal lending limits were $10.7 million for unsecured loans plus an additional $7.1 million
for specific secured loans. Legal lending limits are calculated in conformance with California law, which prohibits a bank from
lending to any one individual or entity or its related interests an aggregate amount which exceeds 15% of primary capital plus the
allowance for loan losses on an unsecured basis, plus an additional 10% on a secured basis. Our primary capital plus allowance for
loan losses at December 31, 2010 totaled $71.4 million.
We seek to mitigate the risks inherent in our loan portfolio by adhering to certain underwriting practices. The review of each loan
application includes analysis of the applicant’s prior credit history, income level, cash flow and financial condition, tax returns, cash
flow projections, and the value of any collateral to secure the loan, based upon reports of independent appraisers and audits of
accounts receivable or inventory pledged as security. In the case of real estate loans over a specified amount, the review of collateral
value includes an appraisal report prepared by an independent, Bank-approved, appraiser.
Real Estate Loans. We offer commercial real estate loans to finance the acquisition of new or the refinancing of existing
commercial properties, such as office buildings, industrial buildings, warehouses, hotels, shopping centers, automotive industry
facilities and multiple dwellings. At December 31, 2010, real estate loans constituted 89% of our loan portfolio, of which 81% were
commercial loans.
Commercial real estate loans typically have 10-year maturities with up to 25-year amortization of principal and interest and
loan-to-value ratios of not more than 75% of the appraised value or purchase price, whichever is lower. We usually impose a
prepayment penalty during the period within 3 to 5 years of the date of the loan.
Construction loans are comprised of loans on commercial, residential and income producing properties that generally have terms
of 1 year, with options to extend for additional periods to complete construction and to accommodate the lease-up period. We usually
require 15% equity capital investment by the developer and loan to value ratios of not more than 75% of anticipated completion value.
Miniperm loans finance the purchase and/or ownership of commercial properties, including owner-occupied and income
producing properties. We also offer miniperm loans as take-out financing with our construction loans. Miniperm loans are generally
made with an amortization schedule ranging from 20 to 25 years, with a lump sum balloon payment due in 3 to 5 years.
Equity lines of credit are revolving lines of credit collateralized by junior deeds of trust on residential real properties. They
generally bear a rate of interest that floats with our base rate or the prime rate, and have maturities of 10 years.
We purchase participation interests in loans made by other financial institutions as the need arises. These loans are subject to the
same underwriting criteria and approval process as loans made directly by us.
Our real estate loans are typically collateralized by first or junior deeds of trust on specific commercial properties and equity
lines of credit, and are subject to corporate or individual guarantees from financially capable parties, as available. The properties
collateralizing real estate loans are principally located in our primary market areas of the California Central Valley and the Eastern
Sierra. Real estate loans typically bear an interest rate that floats with our base rate, prime rate or another established index.
Our real estate portfolio is subject to certain risks, including (i) downturns in the California economy, (ii) interest rate increases,
(iii) reduction in real estate values in the California Central Valley, (iv) increased competition in pricing and loan structure, and
(v) environmental risks, including natural disasters. As a result of the high concentration of the real estate loan in our loan portfolio,
the current difficulties in the real estate markets could cause significant increases in nonperforming loans, which would reduce our
profits. A decline in real estate values could cause some of our mortgage loans to become inadequately collateralized, which would
expose us to a greater risk of loss. Additionally, a decline in real estate values could adversely affect our portfolio of commercial real
estate loans and could result in a decline in the origination of such loans. However, we strive to reduce the exposure to such risks and
seek to continue to maintain high quality in our real estate loans by (a) reviewing each loan request and each loan renewal
individually, (b) using a dual signature approval system for the approval of each loan request for loans over a certain dollar amount,
(c) adhering to written loan policies, including, among other factors, minimum collateral requirements, maximum loan-to-value ratio
requirements, cash flow requirements and personal guarantees, (d) performing secondary appraisals from time to time, (e) conducting
external independent credit review, and (f) conducting environmental reviews, where appropriate. We review each loan request on the
basis of our ability to recover both principal and interest in view of the inherent risks. We monitor and stress test our entire portfolio,
evaluating debt coverage ratios and loan-to-value ratios, on a quarterly basis. We monitor trends and evaluate exposure derived from
simulated stressed market conditions. The portfolio is stratified by owner classification (either owner occupied or non-owner
occupied), product type, geography and size.
As of December 31, 2010, the aggregate loan-to-value of the entire commercial real estate portfolio was 55.6%. Historical data
suggests that the Bank continues to maintain strong LTV, which has served as a cushion against precipitous reductions in real estate
5
values. Non-owner occupied real estate comprises 45.7% of the Bank’s total commitments, as of December 31, 2010. The loan-to-
value on the non-owner occupied segment was 51.9%, as of December 31, 2010. The highest concentration by product type is retail,
which comprised 28.2% of total CRE loan commitments outstanding, as of December 31, 2010.
Our portfolio diversity in terms of both product types and geographic distribution, combined with strong debt coverage ratios, a
low aggregate loan-to-value and a high percentage of owner-occupied properties, significantly mitigate the risks associated with
excessive commercial real estate concentration. These elements contribute strength to our overall real estate portfolio despite the
current weakness in the real estate market.
Commercial Business Lending. We offer commercial loans to sole proprietorships, partnerships and corporations, with an
emphasis on the real estate related industry. These commercial loans include business lines of credit and commercial term loans to
finance operations, to provide working capital or for specific purposes, such as to finance the purchase of assets, equipment or
inventory. Since a borrower’s cash flow from operations is generally the primary source of repayment, our policies provide specific
guidelines regarding required debt coverage and other important financial ratios.
Lines of credit are extended to businesses or individuals based on the financial strength and integrity of the borrower and are
secured primarily by real estate, accounts receivable and inventory, and have a maturity of one year or less. Such lines of credit bear
an interest rate that floats with our base rate, the prime rate, LIBOR or another established index.
Commercial term loans are typically made to finance the acquisition of fixed assets, refinance short-term debts or to finance the
purchase of businesses. Commercial term loans generally have terms from one to five years. They may be collateralized by the asset
being acquired or other available assets and bear interest rates, which either floats with the Bank’s base rate, prime rate, LIBOR or
another established index or is fixed for the term of the loan.
We also provide other banking services tailored to the small business market. We have focused recently on diversifying our loan
portfolio, which has led to an increase in commercial real estate and commercial business loans to small and medium sized businesses.
Our portfolio of commercial loans is also subject to certain risks, including (i) downturns in the California economy, (ii) interest
rate increases; and (iii) the deterioration of a borrower’s or guarantor’s financial capabilities. We attempt to reduce the exposure to
such risks through (a) reviewing each loan request and renewal individually, (b) requiring a dual signature approval system, (c)
mandating strict adherence to written loan policies, and (d) performing external independent credit review. In addition, we monitor
loans based on short-term asset values on a monthly or quarterly basis. In general, during the term of the relationship, we receive and
review the financial statements of our borrowing customers on an ongoing basis, and we promptly respond to any deterioration that we
note.
Small Business Administration Lending Services. Small Business Administration, or SBA, lending, forms an important part of
our business. Our SBA lending service places an emphasis on minority-owned businesses. Our SBA market area includes the
geographic areas encompassed by our full-service banking offices in the California Central Valley and in the Eastern Sierra. Our SBA
Loan Department has attained “Preferred Lender” status, which permits us to approve SBA guaranteed loans directly. As an SBA
Preferred Lender, we provide quicker and more efficient service to our clientele, enabling them to obtain SBA loans in order to
acquire new businesses, expand existing businesses, and acquire locations in which to do business, without having to go through the
time consuming SBA approval process.
Although our participation in the SBA program is subject to the legislative power of Congress and the continued maintenance of
our approved status by the SBA, we have no reason to believe that this program (and our participation therein) will not continue,
particularly in view of the lengthy duration of the SBA program nationally.
Consumer Loans. Consumer loans include personal loans, auto loans, home improvement loans, home mortgage loans,
revolving lines of credit and other loans typically made by banks to individual borrowers. We provide consumer loan products in an
effort to diversify our product line.
Our consumer loan portfolio is subject to certain risks, including:
• amount of credit offered to consumers in the market,
• interest rate increases, and
• consumer bankruptcy laws which allow consumers to discharge certain debts.
6
We attempt to reduce the exposure to such risks through the direct approval of all consumer loans by:
• reviewing each loan request and renewal individually,
• using a dual signature system of approval,
• strictly adhering to written credit policies and,
• performing external independent credit review.
Deposit Activities and Other Sources of Funds
Our primary sources of funds are deposits and loan repayments. Scheduled loan repayments are a relatively stable source of
funds, whereas deposit inflows, outflows and unscheduled loan prepayments (which are influenced significantly by general interest
rate levels, interest rates available on other investments, competition, economic conditions and other factors) are not as stable.
Customer deposits also remain a primary source of funds, but these balances may be influenced by adverse market changes in the
industry. We may resort to other borrowings, on an as needed basis, as follows:
• on a short-term basis to compensate for reductions in deposit inflows at less than projected levels, and
• on a longer-term basis to support expanded lending activities and to match the maturity of repricing intervals of assets.
We offer a variety of accounts for depositors, which are designed to attract both short-term and long-term deposits. These
accounts include certificates of deposit, or “CDs”, regular savings accounts, money market accounts, checking and negotiable order of
withdrawal, or “NOW”, accounts, savings accounts, health savings accounts and individual retirement accounts, or “IRAs”. These
accounts generally earn interest at rates established by management based on competitive market factors and management’s desire to
increase or decrease certain types or maturities of deposits. As needs arise, we augment these customer deposits with brokered
deposits. The more significant deposit accounts offered by us are described below:
Certificates of Deposit. We offer several types of CDs with a maximum maturity of five years. The substantial majority of our
CDs have a maturity of one to twelve months and pay compounded interest typically credited monthly or at maturity.
Regular Savings Accounts. We offer savings accounts that allow for unlimited ATM and in-branch deposits and withdrawals.
Interest is compounded daily and paid monthly.
Money Market Account. Money market accounts pay a variable interest rate that is tiered depending on the balance maintained
in the account. Minimum opening balances vary. Interest is compounded daily and paid monthly.
Checking and NOW Accounts. Checking and NOW accounts are generally non-interest and interest bearing accounts,
respectively, and may include service fees based on activity and balances. NOW accounts pay interest, but require a higher minimum
balance to avoid service charges.
Federal Home Loan Bank Borrowings. To supplement our deposits as a source of funds for lending or investment, we borrow
funds in the form of advances from the Federal Home Loan Bank. We regularly make use of Federal Home Loan Bank advances as
part of our interest rate risk management, primarily to extend the duration of funding to match the longer term fixed rate loans held in
the loan portfolio as part of our growth strategy.
As a member of the Federal Home Loan Bank system, we are required to invest in Federal Home Loan Bank stock based on a
predetermined formula. Federal Home Loan Bank stock is a restricted investment security that can only be sold to other Federal Home
Loan Bank members or redeemed by the Federal Home Loan Bank. As of December 31, 2010, we owned $3,380,700 in FHLB stock.
Advances from the Federal Home Loan Bank are typically secured by our entire real estate loan portfolio, which includes
residential and commercial loans. At December 31, 2010, our borrowing limit with the Federal Home Loan Bank was approximately
$122 million.
7
Internet Banking
Since August 1, 2001, we have offered Internet banking service, which allows our customers to access their deposit accounts
through the Internet. Customers are able to obtain transaction history and account information, transfer funds between accounts and
make on-line bill payments. We intend to improve and develop our Internet banking products and delivery channels as the need arises
and our resources permit.
Other Services
We also offer ATMs located at branch offices as well as seven other ATMs at various off site locations, and customer access to
an ATM network.
Marketing
Our marketing relies principally upon local advertising and promotional activity and upon personal contacts by our directors,
officers and shareholders to attract business and to acquaint potential customers with our personalized services. We emphasize a high
degree of personalized client service in order to be able to provide for each customer’s banking needs. Our marketing approach
emphasizes the advantages of dealing with an independent, locally managed and state chartered bank to meet the particular needs of
consumers, professionals and business customers in the community. Our management continually evaluates all of our banking services
with regard to their profitability and efforts and makes determinations based on these evaluations whether to continue or modify our
business plan, where appropriate.
We do not currently have any plans to develop any new lines of business, which would require a material amount of capital
investment on our part.
Competition
Regional Branch Competition. We consider our primary service area to be composed of the counties of San Joaquin,
Stanislaus, Tuolumne, Inyo and Mono Counties. The banking business in California generally, and in our primary service area,
specifically, is competitive with respect to both loans and deposits and is dominated by a relatively small number of major banks
which have many offices operating over wide geographic areas. These include Wells Fargo Bank, Bank of America, JP Morgan
Chase Bank and Bank of the West. We compete for deposits and loans principally with these banks, as well as with savings and loan
associations, thrift and loan associations, credit unions, mortgage companies, insurance companies, offerors of money market accounts
and other lending institutions.
Among the advantages of these institutions is their ability to finance extensive advertising campaigns and to allocate their
investment assets to regions of highest yield and demand, their ability to offer certain services, such as international banking and trust
services which are not offered directly by the Bank and, the ability by virtue of their greater total capitalization, to have substantially
higher lending limits than we do. In addition, as a result of increased consolidation and the passage of interstate banking legislation
there is and will continue to be increased competition among banks, savings and loan associations and credit unions for the deposit
and loan business of individuals and businesses.
As of June 30, 2010, our primary service areas contained one hundred sixty-eight (168) banking offices, with approximately
$10.2 billion in total deposits. As of June 30, 2010, we had total deposits of approximately $436 million, which represented
approximately 4.3% of the total deposits in the Bank’s primary service area. There can be no assurance that the Bank will maintain its
competitive position against current and potential competitors, especially those with greater resources than the Bank. The deposits of
the four (4) largest competing banks averaged approximately $95 million per office as of June 30, 2010.
In order to compete with major financial institutions in our primary service areas, we use to the fullest extent the flexibility that
our independent status permits. This includes an emphasis on specialized services, local promotional activity, and personal contacts
by our officers, directors and employees. In the event that there are customers whose needs exceed our lending limits, we may arrange
for such loans on a participation basis with other financial institutions. We also assist customers who require other services that we do
not offer by obtaining such services from correspondent banks. However, no assurance can be given that our continued efforts to
compete with other financial institutions will be successful.
In addition to other banks, our competitors include savings institutions, credit unions, and numerous non-banking institutions,
such as finance companies, leasing companies, insurance companies, brokerage firms, and investment banking firms. In recent years,
increased competition has also developed from specialized finance and non-finance companies that offer money market and mutual
funds, wholesale finance, credit card, and other consumer finance services, including on-line banking services and personal finance
8
software. Strong competition for deposit and loan products affects the rates of those products as well as the terms on which they are
offered to customers.
Other Competitive Factors. The more general competitive trends in the industry include increased consolidation and
competition. Strong competitors, other than financial institutions, have entered banking markets with focused products targeted at
highly profitable customer segments. Many of these competitors are able to compete across geographic boundaries and provide
customers increasing access to meaningful alternatives to banking services in nearly all significant products areas. Mergers between
financial institutions have placed additional pressure on banks within the industry to streamline their operations, reduce expenses, and
increase revenues to remain competitive. Competition has also intensified due to the federal and state interstate banking laws, which
permit banking organizations to expand geographically, and the California market has been particularly attractive to out-of-state
institutions. The Financial Modernization Act, which has made it possible for full affiliations to occur between banks and securities
firms, insurance companies, and other financial companies, is also expected to intensify competitive conditions.
Technological innovations have also resulted in increased competition in the financial services industry. Such innovations have,
for example, made it possible for non-depository institutions to offer customers automated transfer payment services that were
previously considered traditional banking products. In addition, many customers now expect a choice of several delivery systems and
channels, including telephone, mail, home computer, ATMs, self-service branches and/or in-store branches.
Business Concentration. No individual or single group of related accounts is considered material in relation to our total assets
or deposits, or in relation to our overall business. However, approximately 89% of our loan portfolio held for investment at
December 31, 2010 consisted of real estate-related loans, including construction loans, miniperm loans, real estate mortgage loans and
commercial loans secured by real estate. Moreover, our business activities are currently focused primarily in Central California, with
the majority of our business concentrated in San Joaquin, Stanislaus, Tuolumne, Inyo and Mono Counties. Consequently, our results
of operations and financial condition are dependent upon the general trends in the Central California economies and, in particular, the
residential and commercial real estate markets. In addition, the concentration of our operations in Central California exposes us to
greater risk than other banking companies with a wider geographic base in the event of catastrophes, such as earthquakes, fires and
floods in this region.
Employees
As of December 31, 2010, we had 123 employees (101 full-time employees and 22 part-time employees). None of our employees
are currently represented by a union or covered by a collective bargaining agreement.
Bank Holding Company Regulation
Upon effectiveness of the bank holding company reorganization on July 2, 2008, we became subject to regulation under the Bank
Holding Company Act of 1956, as amended (“BHCA”) which subjects Oak Valley Bancorp to Federal Reserve Board reporting and
examination requirements. Under the Federal Reserve Board’s regulations, a bank holding company is required to serve as a source of
financial and managerial strength to its subsidiary banks.
The BHCA regulates the activities of holding companies including acquisitions, mergers, and consolidations and, together with
the Gramm-Leach Bliley Act of 1999, the scope of allowable banking activities.
Government Policies, Legislation, and Regulatory Initiatives
The banking and financial services business in which we engage is highly regulated. Such regulation is intended, among other
things, to protect depositors insured by the FDIC and the entire banking system. The commercial banking business is also influenced
by the monetary and fiscal policies of the federal government and the policies of the Board of Governors of the Federal Reserve
System, also known as the Federal Reserve Board. The Federal Reserve Board implements national monetary policies (with objectives
such as curbing inflation and combating recession) by its open-market operations in United States Government securities, by adjusting
the required level of reserves for financial intermediaries subject to its reserve requirements and by varying the discount rates
applicable to borrowings by depository institutions. The actions of the Federal Reserve Board in these areas influence the growth of
bank loans, investments and deposits and affects interest rates charged on loans and paid on deposits. Indirectly such actions may also
impact the ability of non-bank financial institutions to compete with us. The nature and impact of any future changes in monetary
policies cannot be predicted.
The laws, regulations and policies affecting financial services businesses are continuously under review by Congress and state
legislatures and federal and state regulatory agencies. From time to time, legislation is enacted which has the effect of increasing the
cost of doing business, limiting or expanding permissible activities or affecting the competitive balance between banks and other
financial intermediaries. Proposals to change the laws and regulations governing the operations and taxation of banks, bank holding
companies and other financial intermediaries are frequently made in Congress, in the California legislature and by various bank
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regulatory agencies and other professional agencies. Changes in the laws, regulations or policies that impact us cannot necessarily be
predicted, but they may have a material effect on our business and earnings.
As a California state-chartered bank whose accounts are insured by the FDIC up to a maximum of $250,000 (as approved on
October 10, 2008 by the FDIC through the end of 2009 and later revised on May 20, 2009 to extend the coverage through December
31, 2013), the Bank is subject to regulation, supervision and regular examination by the California Department of Financial
Institutions and the Federal Reserve Bank (FRB). As a member of the Federal Reserve System, we are subject to certain regulations of
the Board of Governors of the Federal Reserve System. The regulations of these agencies govern most aspects of our business,
including the filing of periodic reports, and activities relating to dividends, investments, loans, borrowings, capital requirements,
certain check-clearing activities, branching, mergers and acquisitions, reserves against deposits, and numerous other areas.
Supervision, legal action and examination of us by the FRB is generally intended to protect depositors and is not intended for the
protection of our shareholders.
The following discussion of statutes and regulations affecting banks is only a summary and does not purport to be complete. This
discussion is qualified in its entirety by reference to such statutes and regulations. No assurance can be given that the referenced
statutes or regulations will not change in the future.
Capital Adequacy Requirements
The federal banking agencies have adopted risk-based minimum capital guidelines intended to provide a measure of capital that
reflects the degree of risk associated with a banking organization’s operations for both transactions reported on the balance sheet as
assets and transactions which are recorded as off balance sheet items. Under these guidelines, nominal dollar amounts of assets and
credit equivalent amounts of off balance sheet items are multiplied by one of several risk adjustment percentages, which range from
0% for assets with low credit risk, such as federal banking agencies, to 100% for assets with relatively high credit risk. The higher the
category, the more risk a bank is subject to and thus the more capital that is required.
The guidelines divide a bank’s capital into two tiers. Tier I includes common equity, retained earnings, certain non-cumulative
perpetual preferred stock, and minority interests in equity accounts of consolidated subsidiaries. Goodwill and other intangible assets
(except for mortgage servicing rights and purchased credit card relationships, subject to certain limitations) are subtracted from Tier I
capital. Tier II capital includes, among other items, cumulative perpetual and long-term, limited-life preferred stock, mandatory
convertible securities, certain hybrid capital instruments, term subordinated debt and the allowance for loan losses (subject to certain
limitations). Certain items are required to be deducted from Tier II capital. Banks must maintain a total risk-based ratio of 8%, of
which at least 4% must be Tier I capital. As of December 31, 2010 and 2009, the Bank’s Total Risk-Based Capital Ratio was 14.9%
and 13.6%, and our Tier 1 Risk-Based Capital Ratio was 13.7% and 12.3%, respectively.
In addition to the risk-based guidelines, federal banking regulators require banking organizations to maintain a minimum amount
of Tier 1 capital to total average assets, referred to as the leverage ratio. Banks that have received the highest rating of the five
categories used by regulators to rate banks and are not anticipating or experiencing any significant growth must maintain a ratio of
Tier 1 capital (net of all intangibles) to adjusted total assets, or “Leverage Capital Ratio”, of at least 3%. All other institutions are
required to maintain a leverage ratio of at least 100 to 200 basis points above the 3% minimum, for a minimum of 4% to 5%. Pursuant
to federal regulations, banks must maintain capital levels commensurate with the level of risk to which they are exposed, including the
volume and severity of problem loans. As of December 31, 2010 and 2009, our Leverage Capital Ratios were 11.5% and 11.3%,
respectively.
Federal banking regulators may set capital requirements higher than the minimums described above for financial institutions
whose circumstances warrant it. For example, a financial institution experiencing or anticipating significant growth may be expected
to maintain capital positions substantially above the minimum supervisory levels without significant reliance on intangible assets.
Prompt Corrective Action Provisions
Federal law requires each federal banking agency to take prompt corrective action to resolve the problems of insured financial
institutions, including but not limited to those that fall below one or more prescribed minimum capital ratios. The federal banking
agencies have by regulation defined the following five capital categories:
• “well capitalized” (Total Risk-Based Capital Ratio of 10%; Tier 1 Risk-Based Capital Ratio of 6%; and Leverage Ratio of 5%),
• “adequately capitalized” (Total Risk-Based Capital Ratio of 8%; Tier 1 Risk-Based Capital Ratio of 4%; and Leverage Ratio of
4% or 3% if the institution receives the highest rating from its primary regulator),
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• “undercapitalized” (Total Risk-Based Capital Ratio of less than 8%; Tier 1 Risk-Based Capital Ratio of less than 4%; or
Leverage Ratio of less than 4% or 3% if the institution receives the highest rating from its primary regulator),
• “significantly undercapitalized” (Total Risk-Based Capital Ratio of less than 6%; Tier 1 Risk-Based Capital Ratio of less than
3%; or Leverage Ratio less than 3%), and
• “critically undercapitalized” (tangible equity to total assets less than 2%).
A bank may be treated as though it were in the next lower capital category if, after notice and the opportunity for a hearing, the
appropriate federal agency finds an unsafe or unsound condition or practice so warrants, but no bank may be treated as “critically
undercapitalized” unless its actual capital ratio warrants such treatment.
At each successively lower capital category, an insured bank is subject to increased restrictions on its operations. For example, a
bank is generally prohibited from paying management fees to any controlling persons or from making capital distributions, if to do so
would make the bank “undercapitalized.” Asset growth and branching restrictions apply to undercapitalized banks, which are required
to submit written capital restoration plans meeting specified requirements (including a guarantee by the parent holding company, if
any). “Significantly undercapitalized” banks are subject to broad regulatory authority, including among other things, capital directives,
forced mergers, restrictions on the rates of interest they may pay on deposits, restrictions on asset growth and activities, and
prohibitions on paying certain bonuses without FRB approval. Even more severe restrictions apply to critically undercapitalized
banks. Most importantly, except under limited circumstances, the appropriate federal banking agency is required to appoint a
conservator or receiver for an insured bank not later than 90 days after the bank becomes critically undercapitalized.
In addition to measures taken under the prompt corrective action provisions, insured banks may be subject to potential actions by
federal regulators for unsafe or unsound practices in conducting their businesses or for violations of any law, rule, regulation or any
condition imposed in writing by the agency or any written agreement with the agency. Enforcement actions may include the issuance
of cease and desist orders, termination of insurance of deposits (in the case of a bank), the imposition of civil money penalties, the
issuance of directives to increase capital, formal and informal agreements, or removal and prohibition orders against “institution-
affiliated” parties.
Dividends
The payment of cash dividends by the Bank to Oak Valley Bancorp is subject to restrictions set forth in the California Financial
Code (the “Code”). Prior to any distribution from the Bank to Oak Valley Bancorp, a calculation is made to ensure compliance with
the provisions of the Code and to ensure that the Bank remains within capital guidelines set forth by the DFI and the FRB. In the event
that the intended distribution from the Bank to Oak Valley Bancorp exceeds the restriction in the Code, advance approval from FRB is
required. While advance approval may be required from the FRB for up to three years if we terminate our participation in the U.S.
Treasury Capital Purchase Program, Management does not believe that these regulations will limit dividends from the Bank to meet
the operating requirements of Bancorp for the foreseeable future. See Note 19 to the Consolidated Financial Statements in Item 8 of
this report.
As long as the U.S. Treasury holds an equity position in us, we are restricted from increasing our dividends per common share
without prior approval from the U.S. Treasury until December 5, 2011. We are also precluded from paying any dividends on common
shares if we are in arrears on payment of dividends on preferred shares which are payable quarterly at an annual rate of 5%.
Safety and Soundness Standards
Federal banking agencies have also adopted guidelines establishing safety and soundness standards for all insured depository
institutions. Those guidelines relate to internal controls, information systems, internal audit systems, loan underwriting and
documentation, compensation and interest rate exposure. In general, the standards are designed to assist the federal banking agencies
in identifying and addressing problems at insured depository institutions before capital becomes impaired. If an institution fails to
meet these standards, the appropriate federal banking agency may require the institution to submit a compliance plan and institute
enforcement proceedings, if an acceptable compliance plan is not submitted.
Premiums for Deposit Insurance
Our deposits are insured by the FDIC to the maximum amount permitted by law, which is currently $250,000 per depositor. On
October 14, 2008, the FDIC announced the Temporary Transaction Account Guarantee Program to strengthen confidence in the
banking system. The program was subsequently extended through December 31, 2010 at which time it expired. The rule allowed, at
11
the participating FDIC-insured institutions’ option, full deposit insurance coverage for non-interest bearing transaction accounts and
interest-bearing transaction accounts paying less than 0.25% regardless of the dollar amount. We elected to participate in the program
by paying a 10 basis point surcharge on qualifying transaction accounts over $250,000. In addition, the FDIC finalized a change in
the premium rate structure and imposed a uniform increase in minimum assessment from five cents to twelve cents annually for every
$100 of domestic deposits on institutions that are assigned to the lowest risk category for the first calendar quarter of 2009. Effective
April 1, 2009, assessment rates were adjusted to differentiate for risk. Banks in the best risk category pay a base rate from twelve to
sixteen cents per $100 of deposits. Further, on May 22, 2009, the FDIC adopted a final rule imposing a 5-basis-point emergency
special assessment on all insured depository institutions on June 30, 2009 that was collected on September 30, 2009.
On November 9, 2010, the FDIC issued a Final Rule implementing section 343 of the Dodd-Frank Wall Street Reform and
Consumer Protection Act that provides for unlimited insurance coverage of noninterest-bearing transaction accounts. Beginning
December 31, 2010, through December 31, 2012, all noninterest-bearing transaction accounts are fully insured, regardless of the
balance of the account, at all FDIC-insured institutions. The unlimited insurance coverage is available to all depositors, including
consumers, businesses, and government entities. This unlimited insurance coverage is separate from, and in addition to, the insurance
coverage provided to a depositor’s other deposit accounts held at an FDIC-insured institution.
On April 13, 2010, the FDIC adopted a final rule modifying the risk-based assessment system and setting initial base assessment
rates beginning April 1, 2011, at 5 to 9 basis points for banks in the best risk category.
Community Reinvestment Act
We are subject to certain requirements and reporting obligations involving the Community Reinvestment Act, or “CRA”. The
CRA generally requires federal banking agencies to evaluate the record of financial institutions in meeting the credit needs of local
communities, including low and moderate-income neighborhoods. The CRA further requires that a record be kept of whether a
financial institution meets its community credit needs, which record will be taken into account when evaluating applications for,
among other things, domestic branches, consummating mergers or acquisitions, or holding company formations. In measuring a
bank’s compliance with its CRA obligations, the regulators now utilize a performance-based evaluation system, which bases CRA
ratings on the bank’s actual lending service and investment performance, rather than on the extent to which the institution conducts
needs assessments, documents community outreach activities or complies with other procedural requirements. In connection with its
assessment of CRA performance, the FRB assigns a rating of “outstanding,” “satisfactory,” “needs to improve” or “substantial
noncompliance.” We were last examined for CRA compliance in August 24, 2009 and received an overall satisfactory CRA
Assessment Rating.
Anti-Money Laundering Regulations
A series of banking laws and regulations beginning with the Bank Secrecy Act in 1970 require banks to prevent, detect, and
report illicit or illegal financial activities to the federal government to prevent money laundering, international drug trafficking, and
terrorism. Under the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct
Terrorism Act of 2001, financial institutions are subject to prohibitions against specified financial transactions and account
relationships as well as enhanced due diligence and “know your customer” standards in their dealings with high risk customers,
foreign financial institutions, and foreign individuals and entities. We have extensive controls to comply with these requirements.
Privacy and Data Security
The Gramm-Leach Bliley Act (“GLBA”) of 1999 imposed requirements on financial institutions with respect to consumer
privacy. The GLBA generally prohibits disclosure of consumer information to non-affiliated third parties unless the consumer has
been given the opportunity to object and has not objected to such disclosure. Financial institutions are further required to disclose
their privacy policies to consumers annually. The GLBA also directs federal regulators, including the FRB, to prescribe standards for
the security of consumer information. We are subject to such standards, as well as standards for notifying consumers in the event of a
security breach. We must disclose our privacy policy to consumers and permit consumers to “opt out” of having non-public customer
information disclosed to third parties. We are required to have an information security program to safeguard the confidentiality and
security of customer information and to ensure proper disposal. Customers must be notified when unauthorized disclosure involves
sensitive customer information that may be misused.
Other Consumer Protection Laws and Regulations
Bank regulatory agencies are increasingly focusing on compliance with consumer protection laws and regulations. Examination
and enforcement has become intense, and banks have been advised to monitor compliance carefully with various consumer protection
12
laws and their implementing regulations. For example, the federal Interagency Task Force on Fair Lending issued a policy statement
on discrimination in home mortgage lending describing three methods that federal agencies will use to prove discrimination: overt
evidence of discrimination, evidence of disparate treatment, and evidence of disparate impact. In addition to CRA and fair lending
requirements, we are subject to numerous other federal consumer protection statutes and regulations. Due to heightened regulatory
concern related to compliance with consumer protection laws and regulations generally, we may incur additional compliance costs or
be required to expend additional funds for investments in the local communities we serve.
Interstate Banking and Branching The Riegle-Neal
The Interstate Banking and Branching Efficiency Act of 1994, or “Interstate Banking Act,” regulates the interstate activities of
banks and bank holding companies and establishes a framework for nationwide interstate banking and branching. Since June 1, 1997,
a bank in one state has generally been permitted to merge with a bank in another state without the need for explicit state law
authorization. However, states were given the ability to prohibit interstate mergers of banks in their own state by “opting-out”
(enacting state legislation prohibiting such mergers) prior to June 1, 1997.
Since 1995, adequately capitalized and managed bank holding companies have been permitted to acquire banks located in any
state, subject to two exceptions: first, any state may still prohibit bank holding companies from acquiring a bank which is less than
five years old; and second, no interstate acquisition can be consummated by a bank holding company if the acquirer would control
more than 10% of the deposits held by insured depository institutions nationwide or 30% or more of the deposits held by insured
depository institutions in any state in which the target bank has branches.
A bank may establish and operate de novo branches in any state in which the bank does not maintain a branch, if that state has
enacted legislation to expressly permit all out-of-state banks to establish branches in that state.
In 1995, California enacted legislation to implement important provisions of the Interstate Banking Act and to repeal California’s
previous interstate banking laws, which were largely preempted by the Interstate Banking Act.
The changes effected by the Interstate Banking Act and California laws have increased competition in our market by permitting
out-of-state financial institutions to enter our market areas directly or indirectly. We believe that the Interstate Banking Act has
contributed to the accelerated consolidation of the banking industry. Although many large out-of-state banks have already entered the
California market as a result of this legislation, it is not possible to predict the precise impact of this legislation on us and the
competitive environment in which we operate.
USA Patriot Act of 2001
On October 26, 2001, President Bush signed the USA Patriot Act of 2001, or “Patriot Act”. The Patriot Act was enacted in
response to the terrorist attacks in New York, Pennsylvania and Washington, D.C. on September 11, 2001, and is intended to
strengthen U.S. law enforcement’s and the intelligence community’s ability to work cohesively to combat terrorism on a variety of
fronts. The potential impact of the Patriot Act on financial institutions is significant and wide ranging. The Act contains sweeping anti-
money laundering and financial transparency laws and requires various regulations, including:
• due diligence requirements for financial institutions that administer, maintain, or manage private bank accounts or
correspondent accounts for non-U.S. persons,
• standards for verifying customer identification at account opening,
• rules to promote cooperation among financial institutions, regulators, and law enforcement entities in identifying parties that
may be involved in terrorism or money laundering,
• reports by non-financial trades and business filed with the Treasury Department’s Financial Crimes Enforcement Network for
transactions exceeding $10,000, and
• filing of suspicious activities reports if they believe a customer may be violating U.S. laws and regulations.
Currently we are unable to quantify the impact the Patriot Act has had or may in the future have on our financial condition or
results of operations.
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The Sarbanes-Oxley Act of 2002
On July 30, 2002, President Bush signed into law The Sarbanes-Oxley Act of 2002, or “Sarbanes-Oxley Act”. The Sarbanes-
Oxley Act addresses accounting oversight and corporate governance matters relating to the operations of public companies. During
2003, the Commission issued a number of regulations under the directive of the Sarbanes-Oxley Act significantly increasing public
company governance-related obligations and filing requirements, including:
• the establishment of an independent public oversight of public company accounting firms by a board that will set auditing,
quality and ethical standards for and have investigative and disciplinary powers over such accounting firms,
• the enhanced regulation of the independence, responsibilities and conduct of accounting firms which provide auditing services
to public companies,
• the increase of penalties for fraud related crimes,
• the enhanced disclosure, certification, and monitoring of financial statements, internal financial controls and the audit process,
and
• the enhanced and accelerated reporting of corporate disclosures and internal governance.
Furthermore, in November 2003, in response to the directives of the Sarbanes-Oxley Act, Nasdaq adopted substantially expanded
corporate governance criteria for the issuers of securities quoted on the Nasdaq markets. The new Nasdaq rules govern, among other
things, the enhancement and regulation of corporate disclosure and internal governance of listed companies and of the authority, role
and responsibilities of their boards of directors and, in particular, of “independent” members of such boards of directors, in the areas
of nominations, corporate governance, compensation and the monitoring of the audit and internal financial control processes.
The Sarbanes-Oxley Act, the Commission rules promulgated thereunder, and the new Nasdaq governance requirements have
required the Bank to review its current procedures and policies to determine whether they comply with the new legislation and its
implementing regulations. Oak Valley Bancorp will be primarily responsible for ensuring compliance with Sarbanes-Oxley and the
Nasdaq governance rules, as applicable. Although the impact these new requirements will have upon the Oak Valley Bancorp’s and
the Bank’s operations is not entirely clear, the Bank has already experienced an increase in expenditures associated with certain
outside professional costs necessary for compliance.
The Emergency Economic Stabilization Act and its Related Government Policies, Legislations, and Regulations
Dramatic negative developments in the latter half of 2007 in the subprime mortgage market and the securitization markets for
such loans, together with volatility in oil prices and other factors, have resulted in uncertainty in the financial markets in general and a
related economic downturn, which continued through 2010 and is anticipated to continue through 2011. Dramatic declines in the
housing market, with decreasing home prices and increasing delinquencies and foreclosures, have negatively impacted the credit
performance of mortgage and construction loans and resulted in significant write-downs of assets by many financial institutions. In
addition, the values of real estate collateral supporting many commercial and residential loans have declined and may continue to
decline. General downward economic trends, reduced availability of commercial credit and increasing unemployment have negatively
impacted the credit performance of commercial and consumer credit, resulting in additional write-downs. Concerns over the stability
of the financial markets and the economy have resulted in decreased lending by many financial institutions to their customers and to
each other. This market turmoil and tightening of credit has led to increased commercial and consumer delinquencies, lack of
customer confidence, increased market volatility and widespread reduction in general business activity. Competition among
depository institutions for deposits has increased significantly. Bank and bank holding company stock prices have been negatively
affected as has the ability of banks and bank holding companies to raise capital or borrow in the debt markets compared to recent
years. Bank regulators have been very aggressive in responding to concerns and trends identified in examinations, and this has
resulted in the increased issuance of formal and informal enforcement orders and other supervisory actions requiring action to address
credit quality, liquidity and risk management and capital adequacy, as well as other safety and soundness concerns.
On October 3, 2008, the Emergency Economic Stabilization Act of 2008 (“EESA”) was enacted to restore confidence and
stabilize the volatility in the U.S. banking system and to encourage financial institutions to increase their lending to customers and to
each other. Initially introduced as the Troubled Asset Relief Program (“TARP”), the EESA authorized the United States Department
of the Treasury (“U.S. Treasury”) to purchase from financial institutions and their holding companies up to $700 billion in mortgage
loans, mortgage-related securities and certain other financial instruments, including debt and equity securities issued by financial
14
institutions and their holding companies. Initially, $350 billion was made immediately available to the U.S. Treasury. On January 15,
2009, the remaining $350 billion was released to the U.S. Treasury.
On October 14, 2008, the U.S. Treasury announced its intention to inject capital into nine large U.S. financial institutions
under the TARP Capital Purchase Program (the “TARP CPP”), and since has injected capital into many other financial institutions,
including the Company. The U.S. Treasury initially allocated $250 billion towards the TARP CPP.
In order to participate in the TARP CPP, financial institutions were required to adopt certain standards for executive
compensation and corporate governance. These standards generally apply to the Chief Executive Officer, Chief Financial Officer and
the three next most highly compensated senior executive officers. The standards include (1) ensuring that incentive compensation for
named senior executives does not encourage unnecessary and excessive risks that threaten the value of the financial institution; (2)
required clawback of any bonus or incentive compensation paid to a senior executive based on statements of earnings, gains or other
criteria that are later proven to be materially inaccurate; (3) prohibition on making golden parachute payments to senior executives;
and (4) agreement not to deduct for tax purposes executive compensation in excess of $500,000 for each senior executive. The
Company has complied with these requirements and will continue to comply.
The bank regulatory agencies, U.S. Treasury and the Office of Special Inspector General, also created by the EESA, have
issued guidance and requests to the financial institutions that participated in the TARP CPP to document their plans and use of TARP
CPP funds and their plans for addressing the executive compensation requirements associated with the TARP CPP. The Company has
received and responded to that request.
On February 17, 2009, the American Recovery and Reinvestment Act of 2009 (“ARRA”) was signed into law by President
Obama. The ARRA includes a wide variety of programs intended to stimulate the economy and provide for extensive infrastructure,
energy, health, and education needs. In addition, the ARRA imposes certain new executive compensation and corporate expenditure
limits on all current and future TARP recipients, including the Company, until the institution has repaid the U.S. Treasury, which is
now permitted under the ARRA without penalty and without the need to raise new capital, subject to the U.S. Treasury’s consultation
with the recipient’s appropriate regulatory agency.
The ARRA executive compensation standards that went into effect on September 14, 2009 are more stringent than those
currently in effect under the TARP CPP or those previously proposed by the U.S. Treasury. The new standards include (but are not
limited to); (i) prohibitions on bonuses, retention awards and other incentive compensation, other than restricted stock grants which do
not fully vest during the TARP CPP period up to one-third of an employee’s total annual compensation, (ii) prohibitions on golden
parachute payments for departures, (iii) an expanded clawback of bonuses, retention awards, and incentive compensation if payment is
based on materially inaccurate statements of earnings, revenues, gains or other criteria, (iv) prohibitions on compensation plans that
encourage manipulation of reported earnings, (v) retroactive review of bonuses, retention awards and other compensation previously
provided by TARP CPP recipients if found by the U.S. Treasury to be inconsistent with the purposes of TARP CPP or otherwise
contrary to public interest, (vi) required establishment of a company-wide policy regarding “excessive or luxury expenditures,” and
(vii) inclusion in a participant’s proxy statements for annual shareholder meetings of a nonbinding “Say on Pay” shareholder vote on
the compensation of executives.
The Dodd-Frank Wall Street Reform and Consumer Protection Act
On July 21, 2010, President Obama signed into law the sweeping financial regulatory reform act entitled the "Dodd-Frank
Wall Street Reform and Consumer Protection Act" (the "Dodd-Frank Act") that implements significant changes to the regulation of
the financial services industry, including provisions that, among other things:
· Centralize responsibility for consumer financial protection by creating a new agency within the Federal Reserve Board,
the Bureau of Consumer Financial Protection, with broad rulemaking, supervision and enforcement authority for a wide range
of consumer protection laws that would apply to all banks and thrifts. Smaller financial institutions, including the Bank, will
be subject to the supervision and enforcement of their primary federal banking regulator with respect to the federal consumer
financial protection laws.
· Apply the same leverage and risk-based capital requirements that apply to insured depository institutions to bank holding
companies.
· Require the FDIC to seek to make its capital requirements for banks countercyclical so that the amount of capital
required to be maintained increases in times of economic expansion and decreases in times of economic contraction.
15
· Change the assessment base for federal deposit insurance from the amount of insured deposits to consolidated assets less
tangible capital.
· Implement corporate governance revisions, including executive compensation and proxy access by stockholders.
· Make permanent the $250,000 limit for federal deposit insurance and increase the cash limit of Securities Investor
Protection Corporation protection from $100,000 to $250,000, and provide unlimited federal deposit insurance until January
1, 2013 for non-interest bearing demand transaction accounts at all insured depository institutions.
· Repeal the federal prohibitions on the payment of interest on demand deposits effective July 21, 2011, thereby permitting
depository institutions to pay interest on business transaction and other accounts.
Many aspects of the Dodd-Frank Act are subject to rulemaking by various regulatory agencies and are expected to take effect
over several years, making it difficult to anticipate the overall financial impact on the Company, its customers or the financial industry
more generally. The elimination of the prohibition on the payment of interest on demand deposits could materially increase our
interest expense, depending on our competitors' responses. Provisions in the legislation that require revisions to the capital
requirements of the Company and the Bank could require the Company and the Bank to seek additional sources of capital in the
future.
Environmental Regulations
In the course of our business, we may foreclose and take title to real estate, and could be subject to environmental liabilities with
respect to these properties. We may be held liable to a governmental entity or to third parties for property damage, personal injury,
investigation and clean-up costs incurred by these parties in connection with environmental contamination, or may be required to
investigate or clean up hazardous or toxic substances, or chemical releases at a property. The costs associated with investigation or
remediation activities could be substantial. In addition, as the owner or former owner of a contaminated site, we may be subject to
common law claims by third parties based on damages and costs resulting from environmental contamination emanating from the
property. If we ever become subject to significant environmental liabilities, our business, financial condition, liquidity and results of
operations could be materially and adversely affected.
Other Pending and Proposed Legislation
Other legislative and regulatory initiatives which could affect us and the banking industry, in general, are pending and additional
initiatives may be proposed or introduced before the United States Congress, the California legislature and other governmental bodies
in the future. Such proposals, if enacted, may further alter the structure, regulation and competitive relationship among financial
institutions, and may subject us to increased regulation, disclosure and reporting requirements. In addition, the various banking
regulatory agencies often adopt new rules and regulations to implement and enforce existing legislation. We cannot predict whether,
or in what form, any such legislation or regulations may be enacted or the extent to which our business would be affected thereby.
Available Information
The Company maintains an Internet website at http://www.ovcb.com. The Company makes available its annual reports on
Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to such reports filed or furnished pursuant
to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, and other information related to the Company free of
charge, through this site as soon as reasonably practicable after it electronically files those documents with, or otherwise furnishes
them to, the SEC. The Company’s internet website and the information contained therein or connected thereto are not intended to be
incorporated into this annual report on Form 10-K.
ITEM 1A. RISK FACTORS
Not applicable.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
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ITEM 2. PROPERTIES
Our main office is located in a complex at 125 North Third Avenue, Oakdale, CA 95361, in downtown Oakdale and houses our
primary loan production, operations, and administrative offices. The building has an automated teller machine and onsite parking.
The Bank’s complex occupies approximately 20,000 square feet of space.
Property Location and Address
Square
Footage
Lease
Expiration Date
Lease
Extension Options
Oakdale, 125 N. 3rd Ave.
Oakdale, 338 F Street
Sonora, 14580 Mono Way
Modesto, 12th & I Street
Bridgeport, 166 Main Street
Mammoth Lakes, 170 Mountain Blvd.
Bishop, 351 North Main Street
Modesto, 4120 Dale Road
Turlock, 2001 Geer Road
Patterson, 20 Plaza Circle
Escalon, 1910 McHenry Ave.
Ripon, 150 North Wilma Ave.
Stockton, 2935 West March Lane
Modesto, 3508 McHenry Ave.**
Manteca, 191 W. North St. ***
* The Bank owns this property.
** Expected to open May 2011.
*** Expected to open June 2011.
9,600
9,860
2,500
4,500
2,875
1,856
3,680
4,500
2,400
2,100
3,500
1,800
8,000
5,400
2,800
n/a*
3/2017
4/2013
3/2016
n/a*
n/a*
8/2014
3/2015
1/2015
n/a*
4/2021
1/2011
12/2022
n/a*
5/31/2016
n/a*
three, 5-year term extensions
n/a
two, 5-year term extensions
n/a*
n/a*
two, 5-year term extensions
two, 5-year term extensions
two, 5-year term extensions
n/a*
two, 5-year term extensions
two, 5-year term extensions
two, 5-year term extensions
n/a*
two, 5-year term extensions
Management has determined that all of its premises are adequate for its present and anticipated level of business.
ITEM 3. LEGAL PROCEEDINGS
From time to time, the Company is a party to claims and legal proceedings arising in the ordinary course of business. Our
management evaluates its exposure to these claims and proceedings individually and in the aggregate and provides for potential losses
on such litigation if the amount of the loss is estimable and the loss is probable.
We believe that there are no material litigation matters at the current time. Although the results of such litigation matters and
claims cannot be predicted with certainty, we believe that the final outcome of any such claims and proceedings will not have a
material adverse impact on the Company’s financial position, liquidity, or results of operations.
ITEM 4. REMOVED AND RESERVED
17
PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER
PURCHASES OF EQUITY SECURITIES.
Price Range of Common Stock
Our common stock is traded on the NASDAQ Capital Market under the symbol “OVLY.” The following table sets forth the
high and low closing bid prices (which reflect prices between dealers and do not include retail markup, markdown or commission and
may not represent actual transactions) for the current year and the two calendar years ended December 31, 2010 and 2009,
respectively. From time to time, during the periods indicated, trading activity in our common stock was infrequent. The source of the
quotes is The Nasdaq Stock Market, LLC.
For Calendar Quarter Ended
Closing Sale Price
High
Low
March 31, 2009
June 30, 2009
September 30, 2009
December 31, 2009
March 31, 2010
June 30, 2010
September 30, 2010
December 31, 2010
6.00
4.92
5.10
5.00
4.60
6.50
5.94
6.00
3.75
2.75
3.75
4.10
4.00
4.10
4.83
5.08
On March 22, 2011, the closing price of our common stock was $5.91 per share; and there were approximately 506 shareholders
of record of the common stock and 7,713,794 outstanding shares of common stock.
Dividends
Our ability to pay any cash dividends will depend not only upon our earnings during a specified period, but also on our meeting
certain capital requirements.
Shareholders are entitled to receive dividends only when and if dividends are declared by our Board of Directors. Although we
have paid dividends in the past, it is no guarantee that we will continue paying cash dividends in the future.
No dividends were paid for the year ended December 31, 2010. Dividends for the year ended December 31, 2009 were $0.025
per share of common stock.
For additional information regarding our ability to pay dividends, see discussion in Note 12 to the Consolidated Financial
Statement, in Item 8 of this report.
18
Equity Compensation Plan Information
The following table provides information as of December 31, 2010 with respect to shares of our common stock that are issued
and currently outstanding under the Bank’s 1998 Restated Stock Option Plan (the “1998 Restated Stock Option Plan”), and the
number of shares that are authorized to be issued under the Company’s 2008 Stock Option Plan (the “2008 Equity Plan”). Figures in
the table have been retroactively adjusted to reflect three-for-two stock splits in August 2005 and 2006.
Plan Category
Equity Compensation Plans
Approved by Shareholders
Equity Compensation Plans Not
Approved by Shareholders (1)
Total
A
B
Number of Securities to be Issued Upon
Exercise of Outstanding Options
Weighted Average Exercise Price of
Outstanding Options
C
Number of Securities Remaining Available for
Future Issuance Under 2008 Equity Plan
(Excluding Securities Reflected in
Column A)
287,922
$
350,346
638,268
$
8.09
5.78
6.46
1,497,500
0
1,497,500
(1) Consists of a warrant issued to the U.S. Treasury to purchase 350,346 shares of the Company's common stock. The warrant is
immediately exercisable and has a 10-year term with an initial exercise price of $5.78 pursuant to a Letter Agreement of Securities
Purchase dated December 5, 2008.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
Not applicable.
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATION
The following discussion of financial condition as of December 31, 2010 and 2009 and results of operations for each of the years in
the three-year period ended December 31, 2010 should be read in conjunction with our consolidated financial statements and related
notes thereto, included in this report. Average balances, including balances used in calculating certain financial ratios, are generally
comprised of average daily balances.
Forward-Looking Statements
This discussion of financial results includes forward-looking statements within the meaning of Section 27A of the
Securities Act of 1933, as amended, (the “1933 Act”) and Section 21E of the Securities Exchange Act of 1934, as amended, (the
“1934 Act”). Those sections of the 1933 Act and 1934 Act provide a “safe harbor” for forward-looking statements to encourage
companies to provide prospective information about their financial performance so long as they provide meaningful, cautionary
statements identifying important factors that could cause actual results to differ significantly from projected results.
Our forward-looking statements include descriptions of plans or objectives of Management for future operations, products
or services, and forecasts of our revenues, earnings or other measures of economic performance. Forward-looking statements can be
identified by the fact that they do not relate strictly to historical or current facts. They often include the words “believe,” “expect,”
“intend,” “estimate” or words of similar meaning, or future or conditional verbs such as “will,” “would,” “should,” “could” or “may.”
Forward-looking statements are based on Management’s current expectations regarding economic, legislative, and
regulatory issues that may impact our earnings in future periods. A number of factors - many of which are beyond Management’s
control - could cause future results to vary materially from current Management’s expectations. Such factors include, but are not
limited to, general economic conditions, the current financial turmoil in the United States and abroad, changes in interest rates, deposit
flows, real estate values and industry competition; changes in accounting principles, policies or guidelines; changes in legislation or
regulation; and other economic, competitive, governmental, regulatory and technological factors affecting our operations, pricing,
products and services. Forward-looking statements speak only as of the date they are made. We do not undertake to update forward-
looking statements to reflect circumstances or events that occur after the date the forward-looking statements are made or to reflect the
occurrence of unanticipated events.
19
Introduction
Our continued focus on responsible community banking fundamentals and our strong customer relationships have enabled us
to increase profitability in 2010, and have led to higher deposits, a core funding source for our steady asset growth.
As of December 31, 2010, we had approximately $552 million in total assets, $404 million in total loans, and $477 million in
total deposits.
We believe the following were key indicators of our performance for operations during 2010:
• our total assets increased to $552 million at the end of 2010, an increase of 5.3%, from $525 million at the end of 2009.
• our total deposits increased to $477 million at the end of 2010, an increase of 11.1%, from $429 million at the end of
2009.
• our total net loans decreased to $395 million at the end of 2010, a decrease of 5.4%, from $418 million at the end of 2009.
• our ratio of total non-performing loans to total loans decreased to 2.8% at December 31, 2010 from 3.4% at December 31,
2009. Management considers that the size of the ratio of non-performing assets to total loans is moderate and manageable,
and reserves have been taken appropriately.
• net interest income increased $1.4 million or 5.8% in 2010 compared to 2009, mainly as a result of an increase in the net
interest margin from 4.99% to 5.20% and an increase in average earning assets of $4.5 million.
• provision for loan losses decreased $1.84 million or 31.4% to $4.02 million in 2010 compared to $5.86 million in 2009.
• total noninterest income increased to $2.77 million in 2010, an increase of 4.9%, from $2.64 million in 2009. We
primarily attribute this increase to our efforts to expand our deposit account base and diversify our non-interest revenue
sources.
• total noninterest expense decreased from $18.2 million in 2009 to $16.8 million in 2010, reflecting the decrease in fair
market value write downs on other real estate owned.
These items, as well as other factors, contributed to the increase in net income available to common shareholders for 2010
to $3.79 million from $1.16 million in 2009, which translates into $0.49 per diluted common share in 2010 and $0.15 per diluted
common share in 2009.
Over the past few years, our network of branches and loan production offices have been expanded geographically. We
currently maintain twelve full-service offices. We intend to continue our growth strategy in future years through the opening of
additional branches and loan production offices as our needs and resources permit.
2011 Outlook
As we begin our strategic business plan for 2011, we are continuing to pursue opportunities for growth in our existing
markets, as well as opportunities to expand into new markets through de novo branching. Further, we expect that our portfolio of
small business loans will overall experience additional growth in 2011 as a result of targeted marketing efforts in this area.
In 2011, we are continuing to focus on loan and account growth and managing our net interest margin, while attempting to
control expenses and credit losses and manage our business to achieve our net income and other objectives. Efforts to attract new
accounts and grow loans continues to be an important strategic initiative.
Although interest rates remained flat at historic lows in 2010, we have increased our net interest margin with continued
growth in net interest income, which we expect could slightly compress in 2011 if interest rates begin to increase. This potential
compression of net interest margin and net interest income would be a likely outcome if interest rates increase given that are balance
sheet is liability sensitive to interest rate changes primarily due to the number of loans currently at their contractual rate floors and
competitive pressures to increase deposit rates. This could in turn result in a slower increase on the yield of earning assets compared
to the cost of deposits and other funds. Ideally, if we experience an increase in our yield on earnings assets we could then determine
to increase the interest rates we pay on our deposit accounts or change our promotional or other interest rates on new deposits in
marketing activation programs to attempt to achieve a certain net interest margin. In light of the current economic environment, it may
not be possible to manage the interest margin in this manner, as competitive pressures may dictate that we increase deposit rates at a
20
faster rate than the earning assets increase, thereby further compressing the net interest margin. Any increases in the rates we charge
on accounts could have an effect on our efforts to attract new customers and grow loans, particularly with the continuing competition
in the commercial and consumer lending industry. The economies and real estate markets in our primary market areas will continue to
be significant determinants of the quality of our assets in future periods and, thus, our results of operations, liquidity and financial
condition. Current economic indicators suggest that the national economy and the economies in our primary market areas will remain
depressed but the length and severity of the cycle is difficult to predict.
For 2011, management remains focused on the above challenges and opportunities and other factors affecting the business
similar to the factors driving 2010 results as discussed in this section.
Holding Company
Effective July 3, 2008, Oak Valley Community Bank became a subsidiary of Oak Valley Bancorp, a newly established bank
holding company. Oak Valley Bancorp operates Oak Valley Community Bank as a community bank in the general commercial
banking business, with our primary market encompassing the California Central Valley around Oakdale and Modesto, and the Eastern
Sierras. As such, unless otherwise noted, all references are about Oak Valley Community Bank.
In the bank holding company reorganization, all outstanding shares of common stock of the bank were exchanged for an
equal number of shares of common stock of Oak Valley Bancorp, which now owns the Bank as its wholly-owned subsidiary.
Management believes that operating the Bank within a holding company structure, among other things:
• provides greater operating flexibility than is currently enjoyed by us.
• facilitates the acquisition of related businesses as opportunities arise.
• improves our ability to diversify.
• enhances our ability to remain competitive in the future with other companies in the financial services industry that are
organized in a holding company structure.
• enhances our ability to raise capital to support growth.
The financial statements and discussion thereof contained in this report for periods subsequent to the reorganization relate to
the consolidated financial statements of Oak Valley Bancorp. Periods prior to the reorganization relate to the Bank only. The
information is comparable as the sole subsidiary of Oak Valley Bancorp is the Bank.
Critical Accounting Policies
Critical accounting policies are those that are both most important to the portrayal of our financial condition and results of
operations and require management's most difficult, subjective, or complex judgments, often as a result of the need to make estimates
about the effect of matters that are inherently uncertain.
The discussion and analysis of our financial condition and results of operations is based upon our financial statements,
which have been prepared in accordance with accounting principles generally accepted in the United States of America. The
preparation of these financial statements requires management to make estimates and judgments that effect the reported amounts of
assets and liabilities, revenues and expenses, and related disclosures of contingent assets and liabilities at the date of our financial
statements. Actual results may differ from these estimates under different assumptions or conditions. In addition, GAAP itself may
change from one previously acceptable method to another method, although the economics of our transactions would be the same.
Management has determined the following accounting policies to be critical:
Asset Impairment Judgments
Certain of our assets are carried in our statements of financial condition at fair value or at the lower of cost or fair value.
Valuation allowances are established when necessary to recognize impairment of such assets. We periodically perform analyses to test
for impairment of various assets. In addition to our impairment analyses related to loans, another significant impairment analysis
relates to other than temporary declines in the value of our securities.
Our available for sale portfolio is carried at estimated fair value, with any unrealized gains and losses, net of taxes, reported
as accumulated other comprehensive income in stockholders” equity. We conduct a periodic review and evaluation of the securities
21
portfolio to determine if the value of any security has declined below its carrying value and whether such decline is other than
temporary. If such decline is deemed other than temporary, we would adjust the carrying amount of the security by writing down the
security to fair market value through a charge to current period income. The market values of our securities are significantly affected
by changes in interest rates.
In general, as interest rates rise, the market value of fixed-rate securities will decrease; as interest rates fall, the market value
of fixed-rate securities will increase. With significant changes in interest rates, we evaluate our intent and ability to hold the security
for a sufficient time to recover the recorded principal balance. Estimated fair values for securities are based on published or securities
dealers’ market values. Market volatility is unpredictable and may impact such values.
Allowance for Loan Losses
Credit risk is inherent in the business of lending and making commercial loans. Accounting for our allowance for loan
losses involves significant judgment and assumptions by management and is based on historical data and management’s view of the
current economic environment. At least on a quarterly basis, our management reviews the methodology and adequacy of allowance for
loan losses and reports its assessment to the Board of Directors for its review and approval.
The allowance for loan losses is an estimate of probable incurred losses with regard to our loans. Our loan loss provision
for each period is dependent upon many factors, including loan growth, net charge-offs, changes in the composition of the loans,
delinquencies, management's assessment of the quality of the loans, the valuation of problem loans and the general economic
conditions in our market area. We base our allowance for loan losses on an estimation of probable losses inherent in our loan
portfolio.
Our methodology for assessing loan loss allowances are intended to reduce the differences between estimated and actual
losses and involves a detailed analysis of our loan portfolio, in three phases:
• the specific review of individual loans,
• the segmenting and review of loan pools with similar characteristics, and
• our judgmental estimate based on various subjective factors:
The first phase of our methodology involves the specific review of individual loans to identify and measure impairment.
We evaluate each loan by use of a risk rating system, except for homogeneous loans, such as automobile loans and home mortgages.
Specific risk rated loans are deemed impaired if all amounts, including principal and interest, will likely not be collected in accordance
with the contractual terms of the related loan agreement. Impairment for commercial and real estate loans is measured either based on
the present value of the loan’s expected future cash flows or, if collection on the loan is collateral dependent, the estimated fair value
of the collateral, less selling and holding costs.
The second phase involves the segmenting of the remainder of the risk rated loan portfolio into groups or pools of loans,
together with loans with similar characteristics, for evaluation. We determine the calculated loss ratio to each loan pool based on its
historical net losses and benchmark it against the levels of other peer banks.
In the third phase, we consider relevant internal and external factors that may affect the collectability of loan portfolio and
each group of loan pool. The factors considered are, but are not limited to:
• concentration of credits,
• nature and volume of the loan portfolio,
• delinquency trends,
• non-accrual loan trend,
• problem loan trend,
• loss and recovery trend,
• quality of loan review,
22
• lending and management staff,
• lending policies and procedures,
• economic and business conditions, and
• other external factors.
Our management estimates the probable effect of such conditions based on our judgment, experience and known or
anticipated trends. Such estimation may be reflected as an additional allowance to each group of loans, if necessary. Management
reviews these conditions with our senior credit officers. To the extent that any of these conditions is evidenced by a specifically
identifiable problem credit or portfolio segment as of the evaluation date, management’s estimate of the effect of such condition may
be reflected as a specific allowance applicable to such credit or portfolio segment. Where any of these conditions is not evidenced by a
specific, identifiable problem credit or portfolio segment as of the evaluation date, management’s evaluation of the inherent loss
related to such condition is reflected in the unallocated allowance.
Central to our credit risk management and our assessment of appropriate loss allowance is our loan risk rating system.
Under this system, the originating credit officer assigns borrowers an initial risk rating based on a thorough analysis of each
borrower’s financial capacity in conjunction with industry and economic trends. Approvals are made based upon the amount of
inherent credit risk specific to the transaction and are reviewed for appropriateness by senior line and credit administration personnel.
Credits are monitored by line and credit administration personnel for deterioration in a borrower’s financial condition which may
impact the ability of the borrower to perform under the contract. Although management has allocated a portion of the allowance to
specific loans, specific loan pools, and off-balance sheet credit exposures (which are reported separately as part of other liabilities), the
adequacy of the allowance is considered in its entirety.
It is the policy of management to maintain the allowance for loan losses at a level adequate for risks inherent in the overall
loan portfolio, however, the loan portfolio can be adversely affected if the State of California’s economic conditions and its real estate
market in our general market area were to further deteriorate or weaken. Additionally, further weakness of a prolonged nature in the
agricultural and general economy would have a negative impact on the local market. The effect of such economic events, although
uncertain and unpredictable at this time, could result in an increase in the levels of nonperforming loans and additional loan losses,
which could adversely affect our future growth and profitability. No assurance of the level of predicted credit losses can be given with
any certainty.
Non-Accrual Loan Policy
Interest on loans is credited to income as earned and is accrued only if deemed collectible. Accrual of interest is
discontinued when a loan is over 90 days delinquent or if management believes that collection is highly uncertain. Generally,
payments received on nonaccrual loans are recorded as principal reductions. Interest income is recognized after all principal has been
repaid or an improvement in the condition of the loan has occurred that would warrant resumption of interest accruals.
Stock-Based Compensation
The Bank recognizes in the income statement the grant-date fair value of stock options and other equity-based forms of
compensation issued to employees over the employees” requisite service period (generally the vesting period). The Bank uses
straight-line recognition of expenses for awards with graded vesting. The Bank utilizes a binomial pricing model for all grants.
Expected volatility is based on the historical volatility of the price of the Bank’s stock. The Bank uses historical data to estimate
option exercise and stock option forfeiture rates within the valuation model. The expected term of options granted for the binomial
model is derived from applying a historical suboptimal exercise factor to the contractual term of the grant. For binomial pricing, the
risk-free rate for periods is equal to the U.S. Treasury yield at the time of grant and commensurate with the contractual term of the
grant.
23
Other Real Estate Owned
Other real estate owned, which represents real estate acquired through foreclosure, or deed in lieu of foreclosure in
satisfaction of commercial and real estate loans, is carried at the lower of cost or estimated fair value less the estimated selling costs of
the real estate. The fair value of the property is based upon a current appraisal. The difference between the fair value of the real estate
collateral and the loan balance at the time of transfer is recorded as a loan charge off if fair value is lower. Subsequent to foreclosure,
management periodically performs valuations and the OREO property is carried at the lower of carrying value or fair value, less costs
to sell. The determination of a property’s estimated fair value incorporates (1) revenues projected to be realized from disposal of the
property, (2) construction and renovation costs, (3) marketing and transaction costs, and (4) holding costs (e.g., property taxes,
insurance and homeowners” association dues). Any subsequent declines in the fair value of the OREO property after the date of
transfer are recorded through a write-down of the asset. Any subsequent operating expenses or income, reduction in estimated fair
values, and gains or losses on disposition of such properties are charged or credited to current operations.
Fair Value Measurements
We use fair value measurements to record fair value adjustments to certain assets and liabilities and to determine fair value
disclosures. We base our fair values on the price that would be received to sell an asset or paid to transfer a liability in an orderly
transaction between market participants at the measurement date. Securities available for sale, derivatives, and loans held for sale, if
any, are recorded at fair value on a recurring basis. Additionally, from time to time, we may be required to record certain assets at fair
value on a non-recurring basis, such as certain impaired loans held for investment and securities held to maturity that are other-than-
temporarily impaired. These non-recurring fair value adjustments typically involve write-downs of individual assets due to application
of lower-of-cost or market accounting.
We have established and documented a process for determining fair value. We maximize the use of observable inputs and
minimize the use of unobservable inputs when developing fair value measurements. Whenever there is no readily available market
data, Management uses its best estimate and assumptions in determining fair value, but these estimates involve inherent uncertainties
and the application of Management's judgment. As a result, if other assumptions had been used, our recorded earnings or disclosures
could have been materially different from those reflected in these financial statements. For detailed information on our use of fair
value measurements and our related valuation methodologies, see Note 16 to the Consolidated Financial Statements in Item 8 of this
Form 10-K.
Recently Issued Accounting Standards
Accounting Standards Codification. The Financial Accounting Standards Board’s (FASB) Accounting Standards Codification
(ASC) became effective on July 1, 2009. At that date, the ASC became FASB’s officially recognized source of authoritative U.S.
generally accepted accounting principles (GAAP) applicable to all public and non-public non-governmental entities, superseding
existing FASB, American Institute of Certified Public Accountants (AICPA), Emerging Issues Task Force (EITF) and related
literature. Rules and interpretive releases of the SEC under the authority of federal securities laws are also sources of authoritative
GAAP for SEC registrants. All other accounting literature is considered non-authoritative. The switch to the ASC affects the away
companies refer to U.S. GAAP in financial statements and accounting policies. Citing particular content in the ASC involves
specifying the unique numeric path to the content through the Topic, Subtopic, Section and Paragraph structure.
FASB ASC Topic 815, “Derivatives and Hedging.” New authoritative accounting guidance under ASC Topic 815, “Derivatives
and Hedging,” amends prior guidance to amend and expand the disclosure requirements for derivatives and hedging activities to
provide greater transparency about (i) how and why an entity uses derivative instruments, (ii) how derivative instruments and related
hedge items are accounted for under ASC Topic 815, and (iii) how derivative instruments and related hedged items affect an entity’s
financial position, results of operations and cash flows. To meet those objectives, the new authoritative accounting guidance requires
qualitative disclosures about objectives and strategies for using derivatives, quantitative disclosures about fair value amounts of gains
and losses on derivative instruments and disclosures about credit-risk-related contingent features in derivative agreements. The new
authoritative accounting guidance under ASC Topic 815 became effective for the Company on January 1, 2009 and did not have a
significant impact on the Company’s financial statements.
FASB ASC Topic 820, “Fair Value Measurements and Disclosures.” New authoritative accounting guidance under ASC Topic
820,”Fair Value Measurements and Disclosures,” affirms that the objective of fair value when the market for an asset is not active is
the price that would be received to sell the asset in an orderly transaction, and clarifies and includes additional factors for determining
whether there has been a significant decrease in market activity for an asset when the market for that asset is not active. ASC Topic
820 requires an entity to base its conclusion about whether a transaction was not orderly on the weight of the evidence. The new
accounting guidance amended prior guidance to expand certain disclosure requirements. The Company adopted the new authoritative
24
accounting guidance under ASC Topic 820 during the first quarter of 2009. Adoption of the new guidance did not significantly impact
the Company’s financial statements.
Further new authoritative accounting guidance (Accounting Standards Update No. 2009-5) under ASC Topic 820 provides
guidance for measuring the fair value of a liability in circumstances in which a quoted price in an active market for the identical
liability is not available. In such instances, a reporting entity is required to measure fair value utilizing a valuation technique that uses
(i) the quoted price of the identical liability when traded as an asset, (ii) quoted prices for similar liabilities or similar liabilities when
traded as assets, or (iii) another valuation technique that is consistent with the existing principles of ASC Topic 820, such as an
income approach or market approach. The new authoritative accounting guidance also clarifies that when estimating the fair value of a
liability, a reporting entity is not required to include a separate input or adjustment to other inputs relating to the existence of a
restriction that prevents the transfer of the liability. The forgoing new authoritative accounting guidance under ASC Topic 820 became
effective for the Company’s financial statements beginning October 1, 2009 and did not have a significant impact on the Company’s
financial statements.
FASB ASC Topic 320, “Investments - Debt and Equity Securities.” New authoritative accounting guidance under ASC Topic
320, “Investments - Debt and Equity Securities,” (i) changes existing guidance for determining whether an impairment is other than
temporary to debt securities and (ii) replaces the existing requirement that the entity’s management assert it has both the intent and
ability to hold an impaired security until recovery with a requirement that management assert: (a) it does not have the intent to sell the
security; and (b) it is more likely than not it will not have to sell the security before recovery of its cost basis. Under ASC Topic 320,
declines in the fair value of held-to-maturity and available-for-sale securities below their cost that are deemed to be other than
temporary are reflected in earnings as realized losses to the extent the impairment is related to credit losses. The amount of the
impairment related to other factors is recognized in other comprehensive income. The Company adopted the provisions of the new
authoritative accounting guidance under ASC Topic 320 during the second quarter of 2009. Adoption of the new guidance did not
significantly impact the Company’s financial statements.
FASB ASC Topic 825 “Financial Instruments.” New authoritative accounting guidance under ASC Topic 825, “Financial
Instruments,” requires an entity to provide disclosures about the fair value of financial instruments in interim financial information and
amends prior guidance to require those disclosures in summarized financial information at interim reporting periods. The new interim
disclosures required under Topic 825 were included in the Company’s Form 10-Q beginning September 30, 2009.
FASB ASC Topic 825 “Fair Value Measurements and Disclosures.” In January 2010, the FASB issued ASU No. 2010-06,
Fair Value Measurements and Disclosures (Topic 820): Improving Disclosures about Fair Value Measurements. This ASU requires:
(1) disclosure of the amounts of significant transfers in and out of Level 1 and Level 2 fair value measurement categories and the
reasons for the transfers; and (2) separate presentation of purchases, sales, issuances, and settlements in the reconciliation for fair
value measurements using significant unobservable inputs (Level 3). In addition, ASU 2010-06 clarifies the requirements of the
following existing disclosures set forth in the Codification Subtopic 820-10: (1) For purposes of reporting fair value measurement for
each class of assets and liabilities, a reporting entity needs to use judgment in determining the appropriate classes of assets and
liabilities; and (2) a reporting entity should provide disclosures about the valuation techniques and inputs used to measure fair value
for both recurring and non-recurring fair value measurements. ASU 2010-06 is effective for interim and annual reporting periods
beginning January 1, 2010, except for the disclosures about purchases, sales, issuances, and settlements in the roll forward of activity
in Level 3 fair value measurements, which are effective for fiscal years beginning January 1, 2011, and for interim periods within
those fiscal years. As ASU 2010-06 is disclosure-related only, our adoption of this ASU in the first quarter of 2010 did not impact our
financial condition or results of operations.
FASB ASC Topic 310 “Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses.”
In July 2010, FASB issued Accounting Standards Update 2010-20, Disclosures about the Credit Quality of Financing Receivables
and the Allowance for Credit Losses (Topic 310). This standard expands disclosures about credit quality of financing receivables and
the allowance for loan losses. The standard will require the Company to expand disclosures about the credit quality of our loans and
the related reserves against them. The extra disclosures will include disaggregated matters related to our past due loans, credit quality
indicators, and modifications of loans. The Company adopted the standard beginning with our December 31, 2010 financial
statements. This standard will not have an impact on the Company’s financial position or results of operations.
Results of Operations
The Company earns income from two primary sources. The first is net interest income, which is interest income generated by
earning assets less interest expense on interest-bearing liabilities. The second is noninterest income, which primarily consists of
deposit service charges and fees, the increase in cash surrender value of life insurance, mortgage commissions and gains on called
investment securities. The majority of the Company's noninterest expenses are operating costs that relate to providing a full range of
banking services to our customers.
25
Overview
We recorded net income available to common shareholders for the year ended December 31, 2010 of $3,786,000 or $0.49
per diluted common share compared to $1,158,000 or $0.15 per diluted common share for the year ended December 31, 2009. The
increase in net income available to common shareholders for the year ended December 31, 2010 was primarily due to a decrease of
$1,842,000 in provision for loan losses, an increase in net interest income of $1,365,000, an increase in non-interest income of
$128,000 and a decrease of $2,015,000 related to fair market value write downs and overhead costs of other real estate owned.
Partially offsetting these factors was an increase in income tax provision of $2,150,000.
Highlights of the financial results are presented in the following table:
(Dollars in thousands, except per share data)
For the period:
Net income available to common shareholders
Net income per common share:
Basic
Diluted
Return on average common equity
Return on average assets
Common stock dividend payout ratio
Efficiency ratio
At period end:
Book value per common share
Total assets
Total gross loans
Total deposits
Net loan-to-deposit ratio
Net Interest Income and Net Interest Margin
As of and for the years ended December 31,
2010
2009
2008
$
$
$
$
$
$
$
3,786
$
1,158
$
2,098
$
0.49
$
0.49
7.65 %
0.88 %
0.00 %
59.62 %
$
0.15
$
0.15
2.51 %
0.38 %
16.54 %
68.04 %
0.27
0.27
4.77 %
0.46 %
27.38 %
76.55 %
6.64
552,396
404,194
476,739
$
$
$
$
82.90 %
6.14
524,722
425,627
429,210
$
$
$
$
97.34 %
5.81
508,203
428,177
378,248
111.45 %
Our primary source of revenue is net interest income, which is the difference between interest and fees derived from earning
assets and interest paid on liabilities obtained to fund those assets. Our net interest income is affected by changes in the level and mix
of interest-earning assets and interest- bearing liabilities, referred to as volume changes. Our net interest income is also affected by
changes in the yields earned on assets and rates paid on liabilities, referred to as rate changes. Interest rates charged on our loans are
affected principally by the demand for such loans, the supply of money available for lending purposes and competitive factors. Those
factors are, in turn, affected by general economic conditions and other factors beyond our control, such as federal economic policies,
the general supply of money in the economy, legislative tax policies, the governmental budgetary matters, and the actions of the
Federal Reserve Board.
26
For a detailed analysis of interest income and interest expense, see the “Average Balance Sheets” and the “Rate/Volume
Analysis” below.
Distribution, Yield and Rate Analysis of Net Income
For the Years Ended December 31,
2010
Average
Balance
Interest
Income/
Expense
Avg
Rate/
Yield
2009
Interest
Income/
Expense
Avg
Rate/
Yield
Average
Balance
Assets:
Earning assets:
Gross loans (1) (2)
Securities of U.S. government agencies
Other investment securities (2)
Federal funds sold
Interest-earning deposits
Total interest-earning assets
Total noninterest earning assets
Total Assets
Liabilities and Shareholders' Equity:
Interest-bearing liabilities:
Money market deposits
NOW deposits
Savings deposits
Time certificates of $100,000 or more
Other time deposits
Other borrowings
Total interest-bearing liabilities
Noninterest-bearing liabilities:
Noninterest-bearing deposits
Other liabilities
Total noninterest-bearing liabilities
Shareholders' equity
$ 411,590
$ 25,536
6.20%
$ 426,748
$ 26,733
1,552
47,669
8,286
17,099
9
0.60%
2,597
5.45%
19
42
0.23%
0.25%
1,641
48,551
2,218
2,455
10
2,943
5
5
486,196
28,203
5.80%
481,613
29,696
38,773
$ 524,969
38,858
$ 520,471
212,621
1,374
0.65%
183,314
2,455
59,617
14,963
42,352
33,383
19,171
186
62
510
459
328
0.31%
0.42%
1.20%
1.37%
1.71%
56,921
13,851
48,912
47,883
44,071
267
100
1,156
978
685
382,107
2,919
0.76%
394,952
5,641
76,820
3,065
79,885
62,977
62,874
2,957
65,831
59,688
Total liabilities and shareholders' equity
$ 524,969
$ 520,471
Net interest income
Net interest spread (3)
Net interest margin (4)
$ 25,284
$ 24,055
5.04%
5.20%
6.26%
0.59%
6.06%
0.23%
0.21%
6.17%
1.34%
0.47%
0.72%
2.36%
2.04%
1.55%
1.43%
4.74%
4.99%
(1) Loan fees have been included in the calculation of interest income.
(2) Yields on municipal securities and loans have been adjusted to their fully-taxable equivalents (FTE), based on a federal marginal
tax rate of 34.0%.
(3) Represents the average rate earned on interest-earning assets less the average rate paid on interest-bearing liabilities.
(4) Represents net interest income as a percentage of average interest-earning assets.
Net interest income, on a fully tax equivalent basis (FTE), increased $1.2 million or 5.1% to $25.3 million for the year ended
December 31, 2010, compared to $24.1 million in 2009. Net interest spread and net interest margin were 5.04% and 5.20%,
respectively, for the year ended December 31, 2010, compared to 4.74% and 4.99%, respectively, for the year ended December 31,
2009. The increase in the net interest margin in 2010 was attributable to these factors: 1) a significant portion of the loan portfolio is
either at a fixed rate or is variable and at the contractual floors resulting in minimal downward repricing as evidenced by only a 6 basis
point decrease in 2010 compared to 2009 for our total loan yield, 2) average core money market accounts grew by $29 million which
27
have a lower cost than overall interest-bearing liabilities and 3) balances in time deposits and other borrowings, which are the two
highest cost liabilities, decreased by $21 million and $25 million, respectively. All of these factors combined caused the rate on
interest-bearing liabilities to decrease faster than the rate on earning assets. Changes in volume resulted in a decrease in net interest
income (FTE) of $535,000 for the year of 2010 compared to the year 2009, and changes in interest rates and the mix resulted in an
increase in net interest income (FTE) of $1,764,000 for the year 2010 versus the year 2009. Management closely monitors both total
net interest income and the net interest margin.
The net interest rate spread in 2010 is consistent with 2009, reflecting a decrease of thirty-seven basis points in the yield on
interest-earning assets and a decline of ninety-seven basis points in the cost of interest-bearing liabilities, reflecting a sharply declining
interest rate environment. Market rate changes have a more immediate effect on deposit rates than on loan yields due to our fixed-rate
loans and variable rate loans at their contractual floors. In addition, the large majority of our variable loans are tied to the U.S.
Treasury Constant Maturity Indices with repricing intervals between one year to five years.
Market rates are in part based on the Federal Reserve Open Market Committee ("FOMC") target Federal funds interest rate (the
interest rate banks charge each other for short-term borrowings). The change in the Federal funds sold and purchased rates is the
result of target rate changes implemented by the FOMC. In 2008, there were seven downward adjustments to the target rate totaling
325 basis points, bringing the target interest rate to a historic low with a range of 0% to 0.25% where it remained as of December
2010.
Rate/Volume Analysis
The following table below sets forth certain information regarding changes in interest income and interest expense of the Bank
for the periods indicated. For each category of earning assets and interest bearing liabilities, information is provided on changes
attributable to (i) changes in volume (change in average volume multiplied by old rate); and (ii) changes in rates (change in rate
multiplied by old average volume). Changes in rate/volume (change in rate multiplied by the change in volume) have been allocated to
the changes due to volume and rate in proportion to the absolute value of the changes due to volume and rate prior to the allocation.
Rate/Volume Analysis of Net Interest Income
For the Year Ended December 31,
2010 vs. 2009
Increases (Decreases)
Due to Change In
For the Year Ended December 31,
2009 vs. 2008
Increases (Decreases)
Due to Change In
Volume
Rate
Total
Volume
Rate
Total
$
(950)
$
(247)
$
(1,197)
$
1,788
$
(2,694)
$
(1)
(53)
14
31
0
(293)
0
6
(1)
(346)
14
37
(959)
(534)
(1,493)
(24)
867
15
105
2,751
(39)
476
(27)
(102)
(2,386)
(906)
(63)
1,343
(12)
3
365
$
393
$
(1,474)
$
(1,081)
$
818
$
(1,940)
$
(1,122)
13
8
(155)
(296)
(387)
(424)
(94)
(46)
(491)
(223)
30
(81)
(38)
(646)
(519)
(357)
(2,298)
(2,722)
20
(28)
343
98
(390)
861
(139)
(130)
(764)
(561)
(418)
(119)
(158)
(421)
(463)
(807)
(3,952)
(3,091)
Interest income:
Net loans (1)
Securities of U.S. government agencies
Other Investment securities
Federal funds sold
Interest-earning deposits
Total interest income
Interest expense:
Money market deposits
NOW deposits
Savings deposits
Time certificates of $100,000 or more
Other time deposits
Other borrowings
Total interest expense
Change in net interest income
$
(535)
$
1,764
$
1,229
$
1,890
$
1,566
$
3,456
(1) Loan fees have been included in the calculation of interest income.
28
Provision for Loan Losses
Credit risk is inherent in the business of making loans. The Bank establishes an allowance for loan losses through charges to
earnings, which are shown in the statements of operations as the provision for loan losses. Specifically identifiable and quantifiable
losses are promptly charged off against the allowance. The Bank maintains the allowance for loan losses at a level that it considers to
be adequate to provide for credit losses inherent in its loan portfolio. Management determines the level of the allowance by
performing a quarterly analysis that considers concentrations of credit, past loss experience, current economic conditions, the amount
and composition of the loan portfolio (including nonperforming and potential problem loans), estimated fair value of underlying
collateral, and other information relevant to assessing the risk of loss inherent in the loan portfolio such as for example loan growth,
net charge-offs, changes in the composition of the loan portfolio, and delinquencies. As a result of management’s analysis, a range of
the potential amount of the allowance for loan losses is determined.
The provision for loan losses was $4,020,000 for the year ended December 31, 2010, compared to $5,862,000 for the year end
December 31, 2009. Nonperforming loans were $11.47 million at December 31, 2010 and $14.42 million at December 31, 2009, or
2.84% and 3.39%, respectively, of total loans. Nonperforming loans are primarily in nonperforming real estate construction and
development loans. The allowance for loan losses was $8.26 million and $7.02 million at December 31, 2010 and 2009, or 2.04% and
1.65%, respectively, of total loans. Net charge-offs were $2,785,000 in 2010 compared to $4,411,000 in 2009. The relatively high
level of net charge-offs for 2010 and 2009 as compared to all prior years was primarily due to the economic downturn and the effect
on the housing market.
The Bank will continue to monitor the adequacy of the allowance for loan losses and make additions to the allowance in
accordance with the analysis referred to above. Because of uncertainties inherent in estimating the appropriate level of the allowance
for loan losses, actual results may differ from management’s estimate of credit losses and the related allowance.
Noninterest Income
Noninterest income was $2.77 million for the year ended December 31, 2010, compared to $2.64 million for the year 2009. In
2010, other income increased by $232,000, which was primarily attributable to an increase of $109,000 in bank debit card fees, an
increase of $54,000 in rental income on banked owned properties and an increase of $26,000 from gains on called available for sale
securities as compared to 2009. Service charge income was $1.07 million for the year 2010 compared to $1.16 million for the year
2009 as a result of a decrease in NSF fee income. This decrease was in spite of the increase in the aggregate number of DDA, Now,
Money Market and Savings accounts of 10.3% to 20,379 at December 31, 2010 as compared to 18,476 accounts as of December 31,
2009. The Bank continues to evaluate its deposit product offerings with the intention of continuing to expand its offerings to the
consumer and business depositors.
Noninterest Income
(Dollars in thousands)
Service charges on deposit accounts
Earnings on cash surrender value of life insurance
Mortgaged Commissions
Other income
Total
Average assets
Noninterest income as a % of average assets
For the Years Ended December 31,
2010
2009
(Amount)
(%)
(Amount)
(%)
1,065
436
108
1,161
2,770
38.5 % $
15.7 %
3.9 %
41.9 %
100.00 % $
1,164
408
140
929
2,641
44.0 %
15.5%
5.3%
35.2%
100.00 %
524,969
$
520,471
0.5 %
0.5%
$
$
$
29
Noninterest Expense
The following table sets forth a summary of noninterest expenses for the periods indicated:
Noninterest Expense
(Dollars in thousands)
Salaries and employee benefits
Occupancy expenses
Data processing fees
OREO expenses
Regulatory assessments (FDIC & DFI)
Other operating expenses
Total
Average assets
Noninterest expenses as a % of average assets
For the Years Ended December 31,
2010
2009
(Amount)
(%)
(Amount)
(%)
8,457
2,700
947
638
1,051
2,983
50.4% $
16.1%
5.6%
3.8%
6.3%
17.8%
7,781
2,717
894
2,653
996
3,177
42.7%
14.9%
4.9%
14.6%
5.5%
17.4%
16,776
100.0% $
18,218
100.0%
524,969
$
520,471
3.2%
3.5%
$
$
$
Noninterest expense was $16.8 million for the year ended December 31, 2010, a decrease of $1.4 million or 7.9% compared
to $18.2 million for the year ended 2009.
OREO expenses decreased by $2.01 million to $0.64 million in 2010, compared to $2.65 million in 2009 due to decreased
market value write-downs on owned properties and the overhead costs associated with carrying those properties.
Other expenses recognized a decrease in 2010 compared to 2009 of $194,000 as our core operations remained stable and
management remains committed to improving operating efficiency.
Occupancy expenses in 2010 were relatively flat at $2.70 million compared to $2.72 in 2009. The slight decrease was
primarily due to a decrease in the depreciation expense of building, furnishings and equipment fixed assets.
FDIC and DFI (California Department of Financial Institutions) regulatory assessments increased by $55,000 to $1,051,000
in 2010 compared to $996,000 in 2009. The increase in FDIC insurance was due to a higher deposit base in 2010 as compared to
2009, as the FDIC assessment rates are applied to average quarterly deposits. Effective April 1, 2009, the FDIC adopted a final rule
revising its risk-based insurance assessment system and effectively increasing the overall assessment rate. The new initial base
assessment rates for Risk Category 1 institutions range from twelve to sixteen basis points, on an annualized basis. The increase in
2010 was due in part to these industry-wide increased FDIC base assessment rates applied for the full year, as opposed to half of the
year in 2009. In addition, we continued to participate in the FDIC Transaction Account Guarantee Program, which provided unlimited
insurance coverage on non-interest-bearing transaction accounts defined by the FDIC, on which we paid a 10 basis point surcharge per
$100 covered balances in excess of $250 thousand in 2009 and a 20 basis point surcharge in 2010.
Offsetting these decreases was an increase in salaries and employee benefits of $676,000 as a result of hiring to fill existing
positions, increased group health insurance benefits and a decrease in deferred loan costs.
Data processing costs increased in 2010 over 2009 by $53,000, reflecting the additional costs that related to the increased
number of deposit accounts.
Management anticipates that noninterest expense will continue to increase as we continue to grow, even though management
also estimates that the Bank’s administration as currently set up may be scalable to handle a larger deposit base of up to around $1B in
deposits. However, management remains committed to cost-control and efficiency, and we expect to keep these increases to a
minimum relative to growth.
30
Provision for Income Taxes
We reported a provision for income taxes of $2,353,000, and $203,000 for the years 2010 and 2009 respectively. The effective
income tax rate on income from continuing operations was 33.7% for the year ended December 31, 2010 compared to 9.2% for the
year 2009. These provisions reflect accruals for taxes at the applicable rates for federal income tax and California franchise tax based
upon reported pre-tax income, and adjusted for the effects of all permanent differences between income for tax and financial reporting
purposes (such as earnings on qualified municipal securities, BOLI and certain tax-exempt loans). The disparity between the effective
tax rates in 2010 as compared to 2009 is primarily due to tax credits from California Enterprise Zones and low income housing
projects as well as tax free-income on loans within these enterprise zones and municipal securities and loans that comprise a larger
proportion of pre-tax income in 2009 as compared to 2010. We have not been subject to an alternative minimum tax ("AMT") during
these periods.
Financial Condition
The Bank’s total assets were $552.4 million at December 31, 2010 compared to $524.7 million at December 31, 2009, an
increase of $27.7 million or 5.3%. Net loans decreased $22.6 million, investments increased $2.5 million, bank premises and
equipment remained flat at $10.2 million and interest receivable and other assets increased $1.8 million, while cash and cash
equivalents increased $47.3 million.
Loans gross of the allowance for loan losses and deferred fees were $404.2 million at December 31, 2010, compared to $425.6
million at December 31, 2009, a decrease of $21.4 million or 5.0%. The decrease was primarily due to a decrease of $16.4 million or
4.7% in the commercial real estate, a decrease of $7.4 million in commercial and industrial loans and a decrease of $109,000 in
consumer loans. These were offset by increases of $1.7 million and $0.8 million in consumer residential and agriculture loans,
respectively. The composition of the loan portfolio categories remained relatively unchanged as a percentage of total loans, except for
commercial and industrial loans which recognized the highest change from 9.0% at December 31, 2009 to 7.6% at December 31,
2010.
Deposits increased $47.5 million or 11.1% to $476.7 million at December 31, 2010 compared to $429.2 million at December 31,
2009. All deposit types increased except for time deposits which decreased by $8.9 million. All other deposits increased, including
demand deposit accounts which recognized a $32.8 million increase. Money market, NOW and Savings each increased by $18.9
million, $3.6 million and $1.1 million, respectively.
Short-term borrowings decreased $22.2 million to $5.0 million at December 31, 2010, compared to $27.2 million at
December 31, 2009 and long-term debt decreased to $3.0 million at December 31, 2010, compared to $5.0 million at December 31,
2009. The decrease in short-term and long-term debt was due to the deposit growth of $48 million. This allowed us to pay off matured
FHLB advances thus reducing our cost of funds and improving our liquidity ratio. The Bank uses short-term borrowings, primarily
short-term FHLB advances, to fund short-term liquidity needs and manage net interest margin.
Equity increased $4.0 million or 6.5% to $64.7 million at December 31, 2010, compared to $60.7 million at December 31, 2009.
The Bank was selected to participate in the U.S. Treasury Capital Purchase Program (“TCPP”) which resulted in the issuance of $13.5
million in preferred stock in December 2008. The Bank intends to use the capital to increase credit availability to local, creditworthy,
businesses and consumers. The preferred stock shares have a 5% coupon for 5 years and 9% thereafter. Warrants to purchase 350,346
shares of common stock at a per share exercise price of $5.78 are attached and fully exercisable. The warrants expire 10 years after the
issuance date. The securities issued to the Treasury will be accounted for as components of regulatory Tier 1 capital. See Note 12 to
the Consolidated Financial Statements in Item 8 of this report for further discussion regarding our participation in the TCPP.
Investment Activities
Investments are a key source of interest income. Management of our investment portfolio is set in accordance with
strategies developed and overseen by our Investment Committee. Investment balances, including cash equivalents and interest-bearing
deposits in other financial institutions, are subject to change over time based on our asset/liability funding needs and interest rate risk
management objectives. Our liquidity levels take into consideration anticipated future cash flows and all available sources of credits
and are maintained at levels management believes are appropriate to assure future flexibility in meeting anticipated funding needs.
31
Cash Equivalents and Interest-bearing Deposits in other Financial Institutions
The Bank holds federal funds sold, unpledged available-for-sale securities and salable government guaranteed loans to help
meet liquidity requirements and provide temporary holdings until the funds can be otherwise deployed or invested. As of
December 31, 2010, and 2009, we had $40.8 million and $1.6 million, respectively, in federal funds sold.
Investment Securities
Management of our investment securities portfolio focuses on providing an adequate level of liquidity and establishing an
interest rate-sensitive position, while earning an adequate level of investment income without taking undue risk. Investment securities
that we intend to hold until maturity are classified as held-to-maturity securities, and all other investment securities are classified as
available-for-sale. Currently, all of our investment securities are classified as available-for-sale. The carrying values of available-for-
sale investment securities are adjusted for unrealized gains or losses as a valuation allowance and any gain or loss is reported on an
after-tax basis as a component of other comprehensive income.
Our investment securities holdings increased by $2.5 million, or 4.9%, to $53.3 million at December 31, 2010, compared to
holdings of $50.8 million at December 31, 2009. Total investment securities as a percentage of total assets decreased to 9.6% as
compared to 9.7% at December 31, 2009. As of December 31, 2010, $46.4 million of the investment securities were pledged to secure
certain deposits.
As of December 31, 2010, the total unrealized loss on securities that were in a loss position for less than 12 continuous
months was $67,000 with an aggregate fair value of $4,518,000. The total unrealized loss on securities that were in a loss position for
greater than 12 continuous months was $11,000 with an aggregate fair value of $1,499,000.
The following table summarizes the book value and market value and distribution of our investment securities as of the
dates indicated:
Investment Securities Portfolio
As of December 31, 2010
As of December 31, 2009
As of December 31, 2008
Amortized
Cost
Market Value
Amortized
Cost
Market Value
Amortized
Cost
Market Value
$
28,679
$
30,190
$
29,475
$
30,985
$
25,541
$
26,085
7,947
9,871
1,517
0
8,137
10,800
1,506
0
2,631
2,635
2,885
12,328
1,589
82
1546
2,995
13,557
1,579
83
1566
3,439
9,971
1,820
198
0
3,485
9,902
1,779
198
0
Dollars in Thousands
Available-for-Sale:
Securities of U.S. government
agencies
Collateralized mortgage
obligations
Municipal securities
SBA Pools
Asset Backed Security
Mutual Fund
Total investment securities
$
50,645
$
53,268
$
47,905
$
50,765
$
40,969
$
41,449
At December 31, 2010, two SBA pools make up the total amount of securities in an unrealized loss position for greater than
12 months. Management periodically evaluates each available-for-sale investment security in an unrealized loss position to determine
if the impairment is temporary or other than temporary. Management has determined that no investment security is other than
temporarily impaired. The unrealized losses are due solely to interest rate changes and the Bank does not intend to sell the securities
and it is not likely that we will be required to sell the securities before the earlier of the forecasted recovery or the maturity of the
underlying investment security. As of December 31, 2010, we did not have any investment securities that constituted 10% or more of
the stockholders’ equity of any third party issuer.
32
The following table summarizes the maturity and repricing schedule of our investment securities at their amortized cost and
their weighted average yields at December 31, 2010:
Investment Maturities and Repricing Schedule
(Dollars in Thousands)
After One But
After Five But
Within One Year
Within Five Years
Within Ten Years
After Ten Years
Total
Amount Yield
Amount
Yield
Amount
Yield
Amount Yield
Amount
Yield
Available-for-sale:
Securities of U.S. government agencies
$
Collateralized mortgage obligations
Municipal securities
SBA Pools
Mutual Fund
0
0
1,025
0
0
0.00% $
3,175
3.08% $ 13,695
4.72% $ 11,809
4.93% $ 28,679
0.00%
4.98%
0.00%
0.00%
0
2,476
0
0
0.00%
5.20%
0.00%
0.00%
0
5,285
0
0
0.00%
5.71%
0.00
0.00%
7,947
1,084
1,517
2,632
4.21%
5.94%
0.58%
0.00%
7,947
9,871
1,517
2,631
4.63%
4.21%
8.92%
0.58%
0.00%
Total Investment Securities
$
1,025
4.98% $
5,651
4.01% $ 18,980
5.00% $ 24,989
3.96% $ 50,645
4.38%
Interest income and yields in the above table have not been adjusted to a fully tax equivalent basis.
Loans
The following table sets forth the amount of total loans outstanding (excluding unearned income) and the percentage distributions
in each category, as of the dates indicated.
Commercial real estate
Commercial and Industrial
Consumer
Consumer residential
Agriculture
Unearned income
YEARS ENDED DECEMBER 31,
2010
2009
2008
2007
2006
$
336,730 $
353,171 $
354,401 $
303,723
$
304,526
30,756
1,242
21,844
13,622
(733)
38,160
1,351
20,117
12,828
(811)
37,302
1,281
21,613
13,580
(1,035)
45,497
1,414
17,986
19,189
(1,038)
41,077
1,607
14,803
16,380
(1,233)
Total Loans, net of unearned income
$
403,461 $
424,816 $
427,142 $
386,771
$
377,160
Participation loans sold and serviced by the Bank
9,283
14,907
9,759
1,314
3,488
Commercial real estate
Commercial and Industrial
Consumer
Consumer residential
Agriculture
Unearned income
Total Loans, net of unearned income
83.5%
83.1%
83.0%
7.6%
0.3%
5.4%
3.4%
(0.2%)
100.0%
9.0%
0.3%
4.7%
3.0%
(0.2%)
100.0%
8.7%
0.3%
5.1%
3.2%
(0.2%)
100.0%
78.5%
11.8%
0.4%
4.7%
5.0%
(0.3%)
100.0%
80.7%
10.9%
0.4%
3.9%
4.3%
(0.3%)
100.0%
33
Commercial real estate loans decreased $16.4 million in 2010 as compared to 2009, as a result of the decline in demand by
qualified borrowers in our serving area. Of the commercial real estate loans at December 31, 2010, 62.5% are non-owner occupied and
37.5% are owner occupied. Our commercial real estate loan portfolio is weighted towards term loans for which the primary source of
repayment is cash flow from net operating income of the real estate property.
Commercial and industrial loan decrease of $7.4 million in 2010 as compared to 2009 was the result of our reassessment of
the commercial and industrial lending market, specifically asset-based lines of credit. We have historically targeted well-established
local businesses with strong guarantors that have proven to be resilient in periods of economic stress.
Our residential loan portfolio includes no sub-prime loans, nor is it our normal practice to underwrite loans commonly
referred to as "Alt-A mortgages", the characteristics of which are loans lacking full documentation, borrowers having low FICO scores
or collateral compositions reflecting high loan-to-value ratios. However, substantially all of our residential loans are indexed to
Treasury Constant Maturity Rates and have provisions to reset five years after their origination dates.
The following table summarizes our commercial real estate loan portfolio by the geographic location in which the property
is located as of December 31, 2010 and 2009:
Commercial Real Estate Loans Outstanding by Geographic Location
Commercial real estate loans by
geographic location (County)
Stanislaus
San Joaquin
Tuolumne
Mono
Sacramento
Alameda
Inyo
Merced
Fresno
Madera
Los Angeles
Contra Costa
Tulare
Marin
Santa Clara
Other
Total
December 31, 2010
December 31, 2009
% of
Commercial
Real Estate
Loans
Amount
% of
Commercial
Real Estate
Loans
Amount
148,562
58,248
26,222
18,208
11,376
10,653
9,514
8,911
8,640
7,318
6,247
6,076
3,951
3,937
3,904
4,963
336,730
$
44.1%
17.3%
7.8%
5.4%
3.4%
3.2%
2.8%
2.6%
2.6%
2.2%
1.9%
1.8%
1.2%
1.2%
1.1%
1.4%
100.0%
$
159,617
59,469
26,161
22,732
11,586
12,075
10,191
9,055
4,667
7,526
6,480
1,846
4,005
3,977
4,907
8,877
353,171
45.2%
16.8%
7.4%
6.4%
3.3%
3.4%
2.9%
2.6%
1.3%
2.1%
1.8%
0.5%
1.1%
1.1%
1.5%
2.6%
100.0%
$
$
34
Construction loans decreased $20.3 million in 2010 as compared to 2009, primarily due to the successful completion and sell-
through of construction development projects booked in prior years, a slow down in construction activity (primarily residential
development), as well as a conscious effort to reduce our concentration in construction loans. The table below shows an analysis of
construction loans by type and location. Non-owner-occupied land loans of $17.7 million at December 31, 2010 included loans for
lands specified for commercial development of $5.7 million and for residential development of $12.0 million, the majority of which
are located in Stanislaus County.
Construction Loans Outstanding by Type and Geographic Location
Construction loans by type
Single family non-owner-occupied
Single family owner-occupied
Commercial non-owner-occupied
Commercial owner-occupied
Land non-owner-occupied
Land owner-occupied
Total
Construction loans by
geographic location (County)
Stanislaus
Fresno
Mono
Contra Costa
Tuolumne
Tulare
Inyo
Madera
San Joaquin
Other
Total
December 31, 2010
December 31, 2009
Amount
% of
Construction
Loans
Amount
% of
Construction
Loans
2,663
1,342
8,217
1,448
17,699
1,276
32,645
$
8.2%
4.1%
25.2%
4.4%
54.2%
3.9%
100.0%
$
7,860
761
10,867
8,217
22,078
3,169
52,952
14.8%
1.4%
20.5%
15.5%
41.8%
6.0%
100.0%
Amount
% of
Construction
Loans
Amount
% of
Construction
Loans
13,984
8,217
6,814
1,539
913
736
414
0
0
28
32,645
$
42.8%
25.2%
20.9%
4.7%
2.8%
2.2%
1.3%
0.0%
0.0%
0.1%
100.0%
$
17,271
4,236
10,814
774
4,821
750
587
7,525
5,134
1,040
52,952
32.6%
8.0%
20.4%
1.5%
9.1%
1.4%
1.1%
14.2%
9.7%
2.0%
100.0%
$
$
$
$
Loan Maturities
The following table shows the contractual maturity distribution and repricing intervals of the outstanding loans in our
portfolio, as of December 31, 2010. In addition, the table shows the distribution of such loans between those with variable or floating
interest rates and those with fixed or predetermined interest rates. The large majority of the variable rate loans are tied to independent
indices (such as the Wall Street Journal prime rate or a Treasury Constant Maturity Rate). Substantially all loans with an original term
of more than five years have provisions for the fixed rates to reset, or convert to a variable rate, after one, three or five years.
35
(Dollars in thousands)
Commercial real estate
Commercial & Industrial
Consumer
Consumer Residential
Agriculture
Unearned income
Total loans, net of unearned income
Loans with variable (floating) interest rates
Loans with predetermined (fixed) interest rates
Loan Maturities and Repricing Schedule
At December 31, 2010
Within
One Year
After One
But Within
Five Years
After
Five Years
Total
$
$
$
$
98,007
16,535
620
1,354
10,793
(231)
127,078
99,652
27,426
$
184,161
$
13,087
622
6,469
1,066
(373)
205,032
167,747
37,285
$
$
$
$
$
$
54,562
1,134
0
14,021
1,763
(129)
71,351
38,993
32,358
$
336,730
30,756
1,242
21,844
13,622
(733)
403,461
306,392
97,069
$
$
$
The majority of the properties taken as collateral are located in Northern California. We employ strict guidelines regarding
the use of collateral located in less familiar market areas. The recent decline in Northern California real estate value is offset by the
low loan-to-value ratios in our commercial real estate portfolio and high percentage of owner-occupied properties.
Nonperforming Assets
Financial institutions generally have a certain level of exposure to credit quality risk, and could potentially receive less than
a full return of principal and interest if a debtor becomes unable or unwilling to repay. Since loans are the most significant assets of
the Company and generate the largest portion of its revenues, the Company's management of credit quality risk is focused primarily on
loan quality. Banks have generally suffered their most severe earnings declines as a result of customers' inability to generate sufficient
cash flow to service their debts and/or downturns in national and regional economies which have brought about declines in overall
property values. In addition, certain debt securities that the Company may purchase have the potential of declining in value if the
obligor's financial capacity to repay deteriorates.
Nonperforming assets consist of loans on non-accrual status, loans 90 days or more past due and still accruing interest,
loans restructured, where the terms of repayment have been renegotiated resulting in a reduction or deferral of interest or principal and
other real estate owned (“OREO”).
Loans are generally placed on non-accrual status when they become 90 days past due, unless management believes the loan
is adequately collateralized and in the process of collection. The past due loans may or may not be adequately collateralized, but
collection efforts are continuously pursued. Loans may be restructured by management when a borrower has experienced some
changes in financial status, causing an inability to meet the original repayment terms, and where we believe the borrower will
eventually overcome those circumstances and repay the loan in full. OREO consists of properties acquired by foreclosure or similar
means and which management intends to offer for sale.
The Bank had nonperforming loans of $11.48 million at December 31, 2010, as compared to $14.42 million at
December 31, 2009, $4.08 million at December 31, 2008, $9.81 million at December 31, 2007 and no nonperforming loans at
December 31, 2006. The ratio of nonperforming loans over total loans was 2.84%, 3.39%, 1.10%, 2.54% and 0.00% at December 31,
2010, 2009, 2008, 2007 and 2006, respectively.
In addition, the Bank held three OREO properties with a market value of $0.8 million as of December 31, 2010 as
compared with 6 properties with a market value of $2.1 million as of December 31, 2009 and two properties with a market value of
$2.7 million at December 31, 2008. The Bank did not possess any OREO during any of the year-end periods of 2006 through 2007.
Management believes that the reserve provided for nonperforming loans, together with the tangible collateral, were
adequate as of December 31, 2010. See “Allowance for Loan Losses” below for further discussion. Except as disclosed above, as of
36
December 31, 2010, management was not aware of any material credit problems of borrowers that would cause it to have serious
doubts about the ability of a borrower to comply with the present loan payment terms. However, no assurance can be given that credit
problems may exist that may not have been brought to the attention of management, or that credit problems may arise.
The following table provides information with respect to the components of our nonperforming assets as of the dates
indicated. (The figures in the table are net of the portion guaranteed by the U.S. Government):
(Dollars in Thousands)
Nonaccrual loans(1)
Commercial real estate
Commercial and industrial
Consumer
Consumer residential
Agriculture
Total
Loans 90 days or more past due and still accruing
(as to principal or interest):
Commercial real estate
Commercial and industrial
Consumer
Consumer residential
Agriculture
Total
Restructured loans(2)
Commercial real estate
Commercial and industrial
Consumer
Consumer residential
Agriculture
Total
Nonperforming Assets
2010
2009
2008
2007
2006
At December 31, 2010
$
11,253
$
12,701
$
4,078
$
9,087
$
$
$
$
222
0
0
0
488
0
0
1,229
0
0
0
0
0
0
0
0
11,475
$
14,418
$
4,078
9,087
$
$
$
0
0
0
0
0
0
0
0
0
0
0
0
$
$
0
0
0
0
0
0
0
0
0
0
0
0
$
$
643
0
0
0
0
643
0
0
0
0
0
0
$
$
721
0
0
0
0
721
0
0
0
0
0
0
Total nonperforming loans
Other real estate owned
11,475
778
14,418
2,150
4,721
2,746
9,808
0
Total nonperforming assets
$
12,253
$
16,568
$
7,467
$
9,808
$
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
Nonperforming loans as a percentage of total loans
2.84%
3.39%
1.10 %
2.54%
Nonperforming assets as a percentage of total loans and other real
estate owned
Allowance for loan losses as a percentage of nonperforming loans
3.03%
71.94%
3.88%
48.69%
1.74 %
117.97 %
2.54%
45.95%
0.00
0.00
—
(1) During the fiscal year ended December 31, 2010 and 2009, no interest income related to these loans was included in net income
while on nonaccrual status. Additional interest income of approximately $818,000 and $457,000 would have been recorded during the
year ended December 31, 2010 and 2009, respectively, if these loans had been paid in accordance with their original terms.
(2) A “restructured loan” is one the terms of which were renegotiated to provide a reduction or deferral of interest or principal because
of deterioration in the financial position of the borrower.
37
Allowance for Loan Losses
In anticipation of credit risk inherent in our lending business, we set aside allowances through charges to earnings. Such
charges are not only made for the outstanding loan portfolio, but also for off-balance sheet items, such as commitments to extend
credits or letters of credit. The charges made for the outstanding loan portfolio are credited to the allowance for loan losses, whereas
charges for off-balance sheet items are credited to the reserve for off-balance sheet items, which is presented as a component of other
liabilities. The provision for loan losses is discussed in the section entitled “Provision for Loan Losses” above.
The balance of our allowance for loan losses is Management's best estimate of the remaining losses inherent in the
portfolio. The ultimate adequacy of the allowance is dependent upon a variety of factors beyond our control, including the real estate
market, changes in interest rate and economic and political environments.
The current stagnant economic condition combined with growth of our loan portfolio in the past five years has required
more reserves for probable loan losses. The allowance for loan losses increased by 17.6%, or $1,235,000, to $8.26 million at
December 31, 2010, as compared with $7.02 million at December 31, 2009. Such allowances were $5.57 million, $4.51 million and
$4.34 million at December 31, 2008, 2007 and 2006, respectively. Due to loan growth and the current economic downturn’s effect on
the financial stability of certain borrowers, the loan loss allowances have increased to maintain an adequate reserve as a percentage of
total loans, as reflected in the ratios of 2.04%, 1.65%, 1.30%, 1.16% and 1.15%, at the end of 2010, 2009, 2008, 2007 and 2006,
respectively. Based on the current conditions of the loan portfolio, Management believes that the $8.26 million allowance for loan
losses at December 31, 2010 is adequate to absorb losses inherent in our loan portfolio. No assurance can be given, however, that
adverse economic conditions or other circumstances will not result in increased losses in the portfolio.
In light of the current weakness in the economic environment, and specifically in the real estate construction sector,
reserves have been increased to recognize such increased risk. Diversification, low loan-to-values, strong credit quality and enhanced
credit monitoring contribute to a reduction in the portfolio’s overall risk, and help to offset the economic risk. The impact of the
increasing economic weakness will continue to be monitored, and adjustments to the provision for loan loss will be made accordingly.
As evidenced in 2010, the weak business climate adversely impacted the financial conditions of some of our clients and increased our
net loan charge-off to $2,785,000, compared to $4,411,000, $1,110,000, $397,000 and $13,000 in 2009, 2008, 2007 and 2006,
respectively.
Management reviews these conditions with our senior credit officers. To the extent that any of these conditions is evidenced
by a specifically identifiable problem credit or portfolio segment as of the evaluation date, management’s estimate of the effect of
such condition may be reflected as a specific allowance applicable to such credit or portfolio segment. Where any of these conditions
is not evidenced by a specific, identifiable problem credit or portfolio segment as of the evaluation date, management’s evaluation of
the inherent loss related to such condition is reflected in the unallocated allowance. Although management has allocated a portion of
the allowance to specific loan categories, the adequacy of the allowance is considered in its entirety.
Although management believes the allowance at December 31, 2010 was adequate to absorb losses from any known and
inherent risks in the portfolio, no assurance can be given that economic conditions which adversely affect our service areas or other
variables will not result in increased losses in the loan portfolio in the future.
As of December 31, 2010, our allowance for loan losses consisted of amounts allocated to three phases of our methodology
for assessing loan loss allowances, as follows (see details of methodology for assessing allowance for loan losses in the section
entitled “Critical Accounting Policies”):
Phase of Methodology (Dollars in Thousands)
Specific review of individual loans
Review of pools of loans with similar characteristics
Judgmental estimate based on various subjective factors
Years Ended December 31,
2009
2008
2010
$
$
$
948
5,392
1,915
$
$
$
1,256
3,808
1,956
$
$
$
769
2,939
1,861
38
The Components of the Allowance for Loan Losses
As stated previously in "Critical Accounting Policies," the overall allowance consists of a specific allowance for individually
identified impaired loans, an allowance factor for categories of credits with similar characteristics and trends, and an allowance for
changing environmental factors.
The first component, the specific allowance, results from the analysis of identified problem credits and the evaluation of
sources of repayment including collateral, as applicable. Through Management's ongoing loan grading process, individual loans are
identified that have conditions that indicate the borrower may be unable to pay all amounts due under the contractual terms. These
loans are evaluated individually by Management and specified allowances for loan losses are established when the discounted cash
flows of future payments or collateral value of collateral-dependent loans are lower than the recorded investment in the loan.
Generally with problem credits that are collateral-dependent, we obtain appraisals of the collateral at least annually. We may obtain
appraisals more frequently if we believe the collateral value is subject to market volatility, if a specific event has occurred to the
collateral (e.g. tentative map has been filed), or if we believe foreclosure is imminent. Impaired loan balances decreased from $14.4
million at December 31, 2009 to $11.5 million at December 31, 2010. The specific allowance totaled $948,000 and $1,256,000 at
December 31, 2010 and 2009, respectively, as we charge off substantially all of our estimated losses related to specifically identified
impaired loans as the losses are identified.
The second component, the allowance factor, is an estimate of the probable inherent losses in each loan pool stratified by
major categories or loans with similar characteristics in our loan portfolio. This analysis encompasses segmenting and reviewing loan
grades by pool and current general economic and business conditions. Confirmation of the quality of our grading process is obtained
by independent reviews conducted by consultants specifically hired for this purpose and by various bank regulatory agencies. This
analysis covers our entire loan portfolio but excludes any loans that were analyzed individually for specific allowances as discussed
above. There are limitations to any credit risk grading process. The number of loans makes it impractical to review every loan every
quarter. Therefore, it is possible that in the future some currently performing loans not recently graded will not be as strong as their
last grading and an insufficient portion of the allowance will have been allocated to them. Grading and loan review often must be done
without knowing whether all relevant facts are at hand. Troubled borrowers may deliberately or inadvertently omit important
information from reports or conversations with lending officers regarding their financial condition and the diminished strength of
repayment sources.
The total amount allocated for the second component is determined by applying loss estimation factors to outstanding loans.
At December 31, 2010 and 2009, the allowance allocated by categories of credits totaled $5.4 million and $3.8 million, respectively.
The increase mainly related to increased allowance factors for land loans related to the construction of residential subdivisions,
commercial quick-qualifier loans and manufactured home loans, recognizing increased risk for these types of loans, as well as loan
growth.
The third component of the allowance for loan losses is an economic component that is not allocated to specific loans or
groups of loans, but rather is intended to absorb losses caused by portfolio trends, concentration of credit, growth, and economic
trends, as stated previously in "Critical Accounting Policies". At December 31, 2010 and 2009, the general valuation allowance,
including the economic component, totaled $1.9 million and $2.0 million, respectively. Starting in late 2008, we witnessed financial
difficulties experienced by borrowers in our market, where real estate sale prices have declined and holding periods have
increased. The U.S. economy is still experiencing significantly reduced business activity as a result of, among other factors,
disruptions in the financial system, dramatic declines in the housing prices, and an increasing unemployment rate. There have been
significant reductions in spending by consumers and businesses. In response to this, we have been proactive in evaluating reserve
percentages for economic and other qualitative loss factors used to determine the adequacy of the allowance for loan losses. The
increase to the third component of the allowance for loan losses reflected such evaluation.
39
The table below summarizes, for the periods indicated, loan balances at the end of each period, the daily averages during
the period, changes in the allowance for loan losses arising from loans charged off, recoveries on loans previously charged off,
additions to the allowance and certain ratios related to the allowance for loan losses:
Allowance for Loan Losses
(in thousands)
2010
2009
2008
2007
2006
Balances:
Average total loans outstanding during period
$
411,590
Total loans outstanding at end of period
404,194
Allowance for loan losses:
Balances at beginning of period
$
7,020
$
$
$
426,748
425,627
5,569
$
$
$
400,821
428,177
4,507
$
$
$
381,316
386,771
4,341
$
$
$
345,063
377,160
3,976
Actual charge-offs:
Commercial real estate
Commercial and Industrial
Consumer
Consumer Residential
Agriculture
Total charge-offs
Recoveries on loans previously charged off:
Commercial real estate
Commercial and Industrial
Consumer
Consumer Residential
Agriculture
Total recoveries
2,696
52
1
43
0
3,524
871
0
24
0
1,062
11
0
42
0
2,792
4,419
1,115
0
2
5
0
0
7
0
0
0
8
0
8
0
0
0
5
0
5
Net loan charge-offs
2,785
4,411
1,110
Provision for loan losses
Reclassification of reserve related to off-balance-sheet
commitments
4,020
0
5,862
0
2,188
(16)
366
0
0
35
0
402
0
0
0
5
0
5
397
555
8
0
0
0
15
0
15
0
0
0
2
0
2
13
595
(217)
Balance at end of period
$
8,255
$
7,020
$
5,569
$
4,507
$
4,341
Ratios:
Net loan charge-offs to average total loans
Allowance for loan losses to total loans at end of period
Net loan charge-offs to allowance for loan losses at end
of period
0.68 %
2.04 %
1.03 %
1.65 %
0.28 %
1.30 %
0.10 %
1.16 %
33.74 %
62.83 %
19.93 %
8.81 %
Net loan charge-offs to provision for loan losses
69.28 %
75.25 %
50.73 %
71.57 %
0.00 %
1.15 %
0.29 %
2.12 %
40
The table below summarizes, for the periods indicated, the balance of the allowance for loan losses and the percentage of
each type of loan balance at the end of each period (See “Loan Portfolio” above for a description of each type of loan balance):
Allocation of the Allowance for Loan Losses
Amount Outstanding as of December 31,
2010
2009
2008
(Dollars in Thousands)
2007
2006
Applicable to:
Commercial real estate
$
6,577
$
5,845
$
4,364
$
3,403
$
3,683
Commercial and Industrial
Consumer
Consumer Residential
Agriculture
Unallocated
686
61
375
153
403
649
44
202
142
138
732
34
193
127
119
642
25
117
183
137
420
28
100
164
(54)
Total Allowance
$
8,255
$
7,020
$
5,569
$
4,507
$
4,341
Other Earning Assets
For various business purposes, we make investments in earning assets other than the interest-earning securities discussed
above. Before 2007, the only other earning assets held by us were insignificant amounts of Federal Home Loan Bank stock, Federal
Reserve Bank stock and the cash surrender value on the Bank Owned Life Insurances (“BOLI”). Balances of the Federal Home Loan
Bank stock, Federal Reserve Bank stock and the BOLI cash surrender value as of December 31, 2010 were $3.4 million, $1.2 million
and $11.1 million, respectively.
During 2007, we invested in a low-income housing tax credit funds (“LIHTCF”) to promote our participation in CRA
activities. We committed to invest $1 million, over the next two to three years. We anticipate receiving the return following this two to
three year period in the form of tax credits and tax deductions over the next fifteen years.
The balances of other earning assets as of December 31, 2010 and December 31, 2009 were as follows:
Dollars in Thousands
Type
BOLI
LIHTCF
Federal Reserve Bank Stock
Federal Home Loan Bank Stock
Deposits and Other Sources of Funds
Deposits
Balance as of
December 31, 2010
Balance as of
December 31, 2009
$
$
$
$
11,099 $
703 $
1,159 $
3,381 $
10,268
769
1,157
3,804
Total deposits at December 31, 2010, and 2009 were $476.7 million, and $429.2 million, respectively, representing an
increase of $47.5 million or 11.1%, in 2010. The average deposits for the years ended December 31, 2010 increased $26.0 million or
6.3% to $439.8 million compared to $413.8 million at December 31, 2009.
Deposits are the Bank’s primary source of funds. Due to strategic emphasis by management, core deposits (based on
definition provided by FDIC’s UBPR) increased by 12.6% in 2010 to $431.8 million at December 31, 2010. As a result, the
percentage of core deposits to total deposits increased to 90.1% at December 31, 2010 as compared to 89.3% at December 31, 2009.
The average rate paid on time deposits in denominations of $100,000 or more was 1.37% and 2.36% for the years ended December 31,
41
2010 and 2009, respectively. The composition and cost of the Company's deposit base are important components in analyzing the
Company's net interest margin and balance sheet liquidity characteristics, both of which are discussed in greater detail in other
sections herein. See “Net Interest Income and Net Interest Margin” for further discussion.
The Company's liquidity is impacted by the volatility of deposits or other funding instruments or, in other words, by the
propensity of that money to leave the institution for rate-related or other reasons. Deposits can be adversely affected if economic
conditions in California and the Company's market area in particular, continue to weaken. Potentially, the most volatile deposits in a
financial institution are jumbo certificates of deposit, meaning time deposits with balances that equal or exceed $100,000, as
customers with balances of that magnitude are typically more rate-sensitive than customers with smaller balances
The following tables summarize the distribution of average daily deposits and the average daily rates paid for the periods
indicated:
Distribution of Average Daily Deposits
(Dollars in Thousands)
2010
Average Deposits
2009
2008
Dollars in Thousands
Average
Balance
Average
Rate
Average
Balance
Average
Rate
Average
Balance
Average
Rate
Demand, noninterest-bearing
$
76,820
0.00%
$
62,874
0.00%
$
61,554
Money market
NOW
Savings
Time certificates of deposit of
$100,000 or more
Other time deposits
Total deposits
212,621
59,617
14,963
42,352
33,383
0.65%
0.31%
0.42%
1.20%
1.37%
183,314
56,921
13,851
48,912
47,883
1.34%
0.47%
0.72%
2.36%
2.04%
149,202
54,160
15,563
40,172
44,846
$
439,756
0.58%
$
413,755
1.20%
$
365,497
0.00%
2.40%
0.71%
1.66%
3.92%
3.21%
1.98%
The scheduled maturities of our time deposits in denominations of $100,000 or greater at December 31, 2010 are, as
follows:
Maturities of Time Deposits of $100,000 or More
(Dollars in Thousands)
Three months or less
Over three months through six months
Over six months through twelve months
Over twelve months
Total
$
$
15,081
4,172
12,127
13,770
45,150
Because our client base is comprised primarily of commercial and industrial accounts, individual account balances are
generally higher than those of consumer-oriented banks. Five of our clients carry deposit balances of more than 1% of our total
deposits, one of which had a deposit balance of more than 3% of total deposits at December 31, 2010.
The only brokered deposit the Bank holds are from CDARS, a certificate of deposit program that exchanges funds with
other network banks to offer full FDIC insurance coverage to the customer. The Bank had $3.8 million and $11.4 million in brokered
deposits as of December 31, 2010 and 2009, respectively.
FHLB Borrowings
Although deposits are the primary source of funds for our lending and investment activities and for general business
purposes, we may obtain advances from the Federal Home Loan Bank of San Francisco (“FHLB”) as an alternative to retail deposit
42
funds. Our outstanding FHLB advances decreased by $24.2 million to $8.0 million at year-end 2010 compared to the prior year as a
result of our emphasis on managing non-relationship, high cost CDs. See “Liquidity Management” below for the details on the FHLB
borrowings program.
The following table is a summary of FHLB borrowings for fiscal years 2010 and 2009:
Dollars in Thousands
Balance at year-end
Average balance during the year
Maximum amount outstanding at any month-end
Average interest rate during the year
Average interest rate at year-end
Return on Equity and Assets
$
$
$
2010
2009
8,000 $
19,161 $
24,200 $
1.71%
1.10%
32,200
44,038
79,000
1.55%
1.75%
The following table sets forth certain information regarding our return on equity and assets for the periods indicated:
Return on average assets
Return on average common equity
Dividend payout ratio
Equity to assets ratio
Deferred Compensation Obligations
At December 31, 2010
At December 31, 2009
0.88 %
7.65 %
0.00 %
11.69 %
0.38%
2.51%
16.54%
11.57%
We maintain a nonqualified, unfunded deferred compensation plan for certain key management personnel. Under this plan,
participating employees may defer compensation, which will entitle them to receive certain payments upon retirement, death, or
disability. The plan provides for payments commencing upon retirement and reduced benefits upon early retirement, disability, or
termination of employment. At December 31, 2010 and 2009, our aggregate payment obligations under this plan totaled $7.5 million
and $7.6 million, respectively.
Off-Balance Sheet Arrangements
During the ordinary course of business, we provide various forms of credit lines to meet the financing needs of our
customers. These commitments, which represent a credit risk to us, are not represented in any form on our balance sheets.
As of December 31, 2010, and 2009, we had commitments to extend credit of $59.9 million and $63.1 million,
respectively. Obligations under standby letters of credit were $1.4 million and $2.8 million, for 2010, and 2009, respectively, and
there were no obligations under commercial letters of credit for either period.
The effect on our revenues, expenses, cash flows and liquidity from the unused portion of the commitments to provide
credit cannot be reasonably predicted because there is no guarantee that the lines of credit will be used. For more information
regarding our off balance sheet arrangements, see Note 14- Commitments and Other Contingencies- to our 2010 year-end financial
statements located elsewhere in this report.
43
Contractual Obligations
The following chart summarizes certain contractual obligations of the Bank as of December 31, 2010 (dollars in thousands):
Contractual Obligations
FHLB borrowings
Operating lease obligations
Supplemental retirement plans
Time deposit maturities
Less than 1
Year
1-3 years
3-5 years
More than 5
years
Total
$
5,000 $
3,000 $
0
$
0
$
857
12
53,793
1,761
130
16,290
1,513
28
3,121
2,482
1,130
0
8,000
6,613
1,300
73,204
Total
$
59,662 $
21,181 $
4,662
$
3,612
$
89,117
As permitted or required under California law and to the maximum extent allowable under that law, we have certain
obligations to indemnify our current and former officers and directors for certain events or occurrences while the officer or director is,
or was serving, at our request in such capacity. We also have the power to similarly indemnify our current and former officers. These
indemnification obligations are valid as long as the director or officer acted in good faith and in a manner the person reasonably
believed to be in, or not opposed to, our best interests, and with respect to any criminal action or proceeding, had no reasonable cause
to believe his or her conduct was unlawful. The maximum potential amount of future payments we could be required to make under
these indemnification obligations is unlimited; however, we have a director and officer insurance policy that mitigates our exposure
and enables us to recover a portion of any future amounts paid. We believe the estimated fair value of these indemnification
obligations is minimal.
Liquidity and Asset/Liability Management
Management seeks to ascertain optimum and stable utilization of available assets and liabilities as a vehicle to attain our
overall business plans and objectives. In this regard, management focuses on measurement and control of liquidity risk, interest rate
risk and market risk, capital adequacy, operation risk and credit risk.
Liquidity
Liquidity to meet borrowers’ credit and depositors’ withdrawal demands is provided by maturing assets, short-term liquid assets
that can be converted to cash and the ability to attract funds from depositors. Additional sources of liquidity may include institutional
deposits, advances from the FHLB and other short-term borrowings, such as federal funds purchased.
Since our deposit growth strategy emphasizes core deposit growth we have avoided relying on brokered deposits as a consistent
source of funds. The only brokered deposit the Bank holds are from CDARS, a certificate of deposit program that exchanges funds
with other network banks to offer full FDIC insurance coverage to the customer. The Bank had $3.8 million and $11.4 million in
brokered deposits as of December 31, 2010 and 2009, respectively.
As a secondary source of liquidity, we rely on advances from the FHLB to supplement our supply of lendable funds and to meet
deposit withdrawal requirements. Advances from the FHLB are typically secured by a portion of our loan portfolio and stock issued
by the FHLB. The FHLB determines limitations on the amount of advances by assigning a percentage to each eligible loan category
that will count towards the borrowing capacity. At December 31, 2010 and December 31, 2009, the Bank had total FHLB advances
outstanding of $8.0 million and $32.2 million which equaled 7% and 27% of our borrowing capacity, respectively. At December 31,
2010 and December 31, 2009, the Bank had sufficient collateral to borrow an additional $113.9 million and $86.2 million,
respectively. In addition, the Bank had lines of credit with its correspondent banks to purchase overnight federal funds totaling $15
million and $20 million at December 31, 2010 and 2009, respectively. No advances were made on these lines of credit as of
December 31, 2010 and December 31, 2009.
Oak Valley Bancorp’s liquidity depends primarily on dividends paid to it as sole shareholder of the Bank. The Bank’s ability to
pay dividends to Oak Valley Bancorp without regulatory approval will depend on whether the Bank will be in a position to pay
dividends.
Maintenance of adequate liquidity requires that sufficient resources be available at all time to meet our cash flow
requirements. Liquidity in a banking institution is required primarily to provide for deposit withdrawals and the credit needs of its
44
customers and to take advantage of investment opportunities as they arise. Liquidity management involves our ability to convert assets
into cash or cash equivalents without incurring significant loss, and to raise cash or maintain funds without incurring excessive
additional cost. For this purpose, we maintain a portion of our funds in cash and cash equivalents, loans and securities available for
sale. Our liquid assets at December 31, 2010 and 2009 totaled approximately $129.0 million and $80.1 million, respectively. Our
liquidity level measured as the percentage of liquid assets to total assets was 23.33% and 15.26% at December 31, 2010, and 2009,
respectively.
Capital Resources and Capital Adequacy Requirements
In the past two years, our primary source of capital has been internally generated operating income through retained
earnings. At December 31, 2010, total shareholders’ equity increased to $64.7 million, representing an increase of $4.0 million from
December 31, 2009. In December 2008, the Bank was selected to participate in the U.S. Treasury Capital Purchase Program which
demonstrates the confidence the U.S. Treasury Department has in the stability of the Bank. The Bank issued $13.5 million in preferred
stock and intends to use the capital to increase credit availability to local, creditworthy, businesses and consumers. The preferred stock
shares have a 5% coupon for 5 years and 9% thereafter. Warrants to purchase 350,346 shares of common stock at a per share exercise
price of $5.78 are attached and fully exercisable. The warrants expire 10 years after the issuance date. The securities issued to the
Treasury are accounted for as components of regulatory Tier 1 capital.
As of December 31, 2010, we had no material commitments for capital expenditures other than the preferred stock dividend
payments due to the U.S. Treasury Department.
We are subject to various regulatory capital requirements administered by federal banking agencies. Failure to meet
minimum capital requirements can trigger regulatory actions that could have a material adverse effect on our financial statements and
operations. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, we must meet specific
capital guidelines that rely on quantitative measures of our assets, liabilities and certain off-balance-sheet items as calculated under
regulatory accounting practices. Our capital amounts and classification are also subject to qualitative judgments by the regulators
about components, risk weightings, and other factors. (See “Description of Business-Regulation and Supervision-Capital Adequacy
Requirements” herein for exact definitions and regulatory capital requirements.)
As of December 31, 2010, we were qualified as a “well capitalized institution” under the regulatory framework for prompt
corrective action. The following table presents the regulatory standards for well-capitalized institutions, compared to the Bank’s
capital ratios as of the dates specified:
Total capital to risk-weighted assets
Tier I capital to risk-weighted assets
Tier I capital to average assets
Market Risk
Regulatory Well-
Capitalized Standards
December 31, 2010
December 31, 2009
10.0%
6.0%
5.0%
14.9 %
13.7 %
11.5 %
13.6%
12.3%
11.3%
Market risk is the risk of loss of future earnings, fair values, or future cash flows that may result from changes in the price
of a financial instrument. The value of a financial instrument may change as a result of changes in interest rates, foreign currency
exchange rates, commodity prices, equity prices and other market changes that affect market risk sensitive instruments. Market risk is
attributed to all market risk sensitive financial instruments, including securities, loans, deposits and borrowings, as well as the Bank's
role as a financial intermediary in customer-related transactions. The objective of market risk management is to avoid excessive
exposure of the Bank's earnings and equity to loss and to reduce the volatility inherent in certain financial instruments.
Interest Rate Management
Market risk arises from changes in interest rates, exchange rates, commodity prices and equity prices. The Bank's market risk
exposure is primarily that of interest rate risk, and it has established policies and procedures to monitor and limit earnings and balance
sheet exposure to changes in interest rates. The Bank does not engage in the trading of financial instruments, nor does the Bank have
exposure to currency exchange rates.
The principal objective of interest rate risk management (often referred to as "asset/liability management") is to manage the
financial components of the Bank in a manner that will optimize the risk/reward equation for earnings and capital in relation to
45
changing interest rates. The Bank's exposure to market risk is reviewed on a regular basis by the Asset/Liability Committee. Interest
rate risk is the potential of economic losses due to future interest rate changes. These economic losses can be reflected as a loss of
future net interest income and/or a loss of current fair market values. The objective is to measure the effect on net interest income and
to adjust the balance sheet to minimize the inherent risk while at the same time maximizing income. Management realizes certain risks
are inherent, and that the goal is to identify and manage the risks. Management uses two methodologies to manage interest rate risk:
(i) a standard GAP analysis; and (ii) an interest rate shock simulation model.
The planning of asset and liability maturities is an integral part of the management of an institution's net interest margin. To the
extent maturities of assets and liabilities do not match in a changing interest rate environment, the net interest margin may change over
time. Even with perfectly matched repricing of assets and liabilities, risks remain in the form of prepayment of loans or securities or in
the form of delays in the adjustment of rates of interest applying to either earning assets with floating rates or to interest bearing
liabilities. The Bank has generally been able to control its exposure to changing interest rates by maintaining primarily floating interest
rate loans and a majority of its time certificates with relatively short maturities.
Interest rate changes do not affect all categories of assets and liabilities equally or at the same time. Varying interest rate
environments can create unexpected changes in prepayment levels of assets and liabilities, which may have a significant effect on the
net interest margin and are not reflected in the interest sensitivity analysis table. Because of these factors, an interest sensitivity gap
report may not provide a complete assessment of the exposure to changes in interest rates.
The Bank uses modeling software for asset/liability management in order to simulate the effects of potential interest rate changes
on the Bank's net interest margin, and to calculate the estimated fair values of the Bank's financial instruments under different interest
rate scenarios. The program imports current balances, interest rates, maturity dates and repricing information for individual financial
instruments, and incorporates assumptions on the characteristics of embedded options along with pricing and duration for new
volumes to project the effects of a given interest rate change on the Bank's interest income and interest expense. Rate scenarios
consisting of key rate and yield curve projections are run against the Bank's investment, loan, deposit and borrowed funds portfolios.
These rate projections can be shocked (an immediate and parallel change in all base rates, up or down) and ramped (an incremental
increase or decrease in rates over a specified time period), based on current trends and econometric models or stable economic
conditions (unchanged from current actual levels).
The Bank applies a market value ("MV") methodology to gauge its interest rate risk exposure as derived from its simulation
model. Generally, MV is the discounted present value of the difference between incoming cash flows on interest-earning assets and
other investments and outgoing cash flows on interest-bearing liabilities and other liabilities. The application of the methodology
attempts to quantify interest rate risk as the change in the MV which would result from a theoretical 200 basis point (1 basis point
equals 0.01%) change in market interest rates. Both a 200 basis point increase and a 200 basis point decrease in market rates are
considered.
At December 31, 2010, it was estimated that the Bank's MV would decrease 12.75% in the event of an immediate 200 basis point
increase in market interest rates. The Bank's MV at the same date would increase 11.78% in the event of an immediate 200 basis point
decrease in applicable interest rates.
Presented below, as of December 31, 2010 and 2009, is an analysis of the Bank's interest rate risk as measured by changes in MV
for instantaneous and sustained parallel shifts of applicable interest rates:
2010
2009
Market Value as a % of
Present Value of Assets
Market Value as a % of
Present Value of Assets
$ Change
in Market
Value
% Change
in Market
Value
MV Ratio
Change
(bp)
$ Change
in Market
Value
% Change
in Market
Value
MV Ratio
Change
(bp)
(Dollars in Thousands)
Shock Scenario
+200 bp
+100 bp
0 bp
-100 bp
-200 bp
$
$
$
$
$
(9,372)
(4,182)
-
6,744
8,658
(12.75%)
(5.69%)
0.00%
9.17%
11.78%
11.98%
12.69%
13.17%
14.02%
14.15%
(119)
(48)
-
85
98
(13,223)
$
$
(7,393)
$ -
$ 6,679
$ 3,334
(17.75%)
(9.92%)
0.00%
8.97%
4.48%
11.99%
12.87%
13.96%
14.88%
14.16%
(197)
$
$
(109)
$ -
92
$
20
$
46
Management believes that the MV methodology overcomes three shortcomings of the typical maturity gap methodology. First, it
does not use arbitrary repricing intervals and accounts for all expected future cash flows. Second, because the MV method projects
cash flows of each financial instrument under different interest rate environments, it can incorporate the effect of embedded options on
an institution's interest rate risk exposure. Third, it allows interest rates on different instruments to change by varying amounts in
response to a change in market interest rates, resulting in more accurate estimates of cash flows.
However, as with any method of gauging interest rate risk, there are certain shortcomings inherent to the MV methodology. The
model assumes interest rate changes are instantaneous parallel shifts in the yield curve. In reality, rate changes are rarely
instantaneous. The use of the simplifying assumption that short-term and long-term rates change by the same degree may also misstate
historic rate patterns, which rarely show parallel yield curve shifts. Further, the model assumes that certain assets and liabilities of
similar maturity or period to repricing will react in the same way to changes in rates. In reality, certain types of financial instruments
may react in advance of changes in market rates, while the reaction of other types of financial instruments may lag behind the change
in general market rates. When interest rates change, actual loan prepayments and actual early withdrawals from certificates may
deviate significantly from the assumptions used in the model. Finally, this methodology does not measure or reflect the impact that
higher rates may have on adjustable-rate loan clients' ability to service their debt. All of these factors are considered in monitoring the
Bank's exposure to interest rate risk.
Impact of Inflation; Seasonality
Inflation primarily impacts us by its effect on interest rates. Our primary source of income is net interest income, which is
affected by changes in interest rates. We attempt to limit the impact of inflation on our net interest margin through management of
rate-sensitive assets and liabilities and the analysis of interest rate sensitivity. The effect of inflation on premises and equipment as
well as noninterest expenses has not been significant for the periods covered in this report. Our business is generally not seasonal.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Not required.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Our consolidated financial statements and the Independent Auditors’ Report appear on pages F-1 through F-40 of this Report
and are incorporated into this Item 8 by reference.
INDEX TO FINANCIAL STATEMENTS
MANAGEMENT’S ASSESSMENT OF INTERNAL CONTROL OVER FINANCIAL REPORTING
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
CONSOLIDATED FINANCIAL STATEMENTS
Balance sheets
Statements of earnings
Statements of shareholders’ equity
Statements of cash flows
Notes to financial statements
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
None.
47
PAGE
F-1
F-2
F-3
F-4
F-5
F-6
F-8
ITEM 9A. CONTROLS AND PROCEDURES
Disclosure Control and Procedures
The Company has carried out an evaluation, under the supervision and with the participation of the Company's management,
including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company's
disclosure controls and procedures as of December 31, 2010. As defined in Rule 13a-15(e) under the Securities Exchange Act of 1934,
as amended (the "Exchange Act"), disclosure controls and procedures are controls and procedures designed to reasonably assure that
information required to be disclosed in our reports filed or submitted under the Exchange Act are recorded, processed, summarized
and reported on a timely basis. Disclosure controls are also designed to reasonably assure that such information is accumulated and
communicated to our management, including the Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely
decisions regarding required disclosure. Based upon their evaluation, our Chief Executive Officer and Chief Financial Officer
concluded that the Company's disclosure controls were effective as of December 31, 2010, the period covered by this report.
Inherent Limitations on Effectiveness of Controls
The Company's management, including the Chief Executive Officer and Chief Financial Officer, does not expect that our
disclosure controls or our internal control over financial reporting will prevent or detect all errors and fraud. A control system, no
matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system's objectives will
be met. The design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be
considered relative to their costs. Further, because of the inherent limitations in all control systems, no evaluation of controls can
provide absolute assurance that misstatements due to error or fraud will not occur or that all control issues and instances of fraud, if
any, within the Company have been detected. These inherent limitations include the realities that judgments in decision-making can be
faulty and that breakdowns can occur because of simple error or mistake. Controls can also be circumvented by the individual acts of
some persons, by collusion of two or more people, or by management override of the controls. The design of any system of controls is
based in part on certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed
in achieving its stated goals under all potential future conditions. Projections of any evaluation of controls effectiveness to future
periods are subject to risks. Over time, controls may become inadequate because of changes in conditions or deterioration in the
degree of compliance with policies or procedures.
Changes in Internal Control over Financial Reporting
There was no change in our internal control over financial reporting that occurred during the quarter ended December 31, 2010
that has materially affected or is reasonably likely to materially affect our internal control over financial reporting.
ITEM 9B. OTHER INFORMATION
None.
48
ITEM 10.
DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
PART III
The information required by this Item is incorporated by reference from our Proxy Statement to be filed prior to the 2011 Annual
Meeting of Shareholders. The Company and the Bank have adopted a Code of Ethics that applies to all staff including the Chief
Executive Officer, and the Chief Financial Officer. A copy of the Code of Ethics will be provided to any person, without charge, upon
written request to Corporate Secretary, Oak Valley Bancorp, 125 North Third Avenue, Oakdale, CA 95361.
ITEM 11.
EXECUTIVE COMPENSATION
The information required by this Item is incorporated by reference from our Proxy Statement to be filed prior to the 2010 Annual
Meeting of Shareholders.
ITEM 12.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
STOCKHOLDER MATTERS
The information required by this Item is incorporated by reference from our Proxy Statement to be filed prior to the 2011 Annual
Meeting of Shareholders.
ITEM 13.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
The information required by this Item is incorporated by reference from our Proxy Statement to be filed prior to the 2011 Annual
Meeting of Shareholders.
ITEM 14.
PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information required by this Item is incorporated by reference from our Proxy Statement to be filed prior to the 2011 Annual
Meeting of Shareholders.
49
ITEM 15 — EXHIBITS, FINANCIAL STATEMENT SCHEDULES
(a)(1) Financial Statements
PART IV
The Financial Statements of the Company and the Report of Independent Registered Public Accounting Firm are set forth on
pages F-1 through F-31.
(a)(2) Financial Statement Schedules
All schedules to the Financial Statements are omitted because of the absence of the conditions under which they are required or
because the required information is included in the Financial Statements or accompanying notes.
(a)(3) Exhibits
The exhibit list required by this Item is incorporated by reference to the Exhibit Index included in this report. The warranties,
representations and covenants contained in any of the agreements included herein or which appear as exhibits hereto should not be
relied upon by buyers, sellers or holders of the Company’s securities and are not intended as warranties, representations or covenants
to any individual or entity except as specifically set forth in such agreement
50
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the registrant has duly
caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, in Oakdale, California on March 25, 2011.
SIGNATURES
OAK VALLEY BANCORP
a California corporation
By: /s/ RONALD C. MARTIN
Ronald C. Martin, Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons
on behalf of the registrant and in the capacities and on the date indicated.
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each of the undersigned officers and directors of the registrant hereby constitutes
and appoints Ronald C. Martin and Richard A. McCarty, and each of them, as lawful attorney-in-fact and agent for each of the
undersigned (with full power of substitution and resubstitution, for and in the name, place and stead of each of the undersigned
officers and directors), to sign and file with the Securities and Exchange Commission under the Securities Exchange Act of 1934, as
amended, any and all amendments, supplements and exhibits to this report and any and all other documents in connection therewith,
hereby granting unto said attorneys-in-fact, and each of them, full power and authority to do and perform each and every act and thing
necessary or desirable to be done in order to effectuate the same as fully and to all intents and purposes as each of the undersigned
might or could do if personally present, hereby ratifying and confirming all that said attorneys-in-fact and agents, or any of them, or
any of their substitutes, may do or cause to be done by virtue hereof.
Signature
Title
/s/ DONALD BARTON
Donald Barton
/s/ CHRISTOPHER M. COURTNEY
Christopher M. Courtney
/s/ JAMES L. GILBERT
James L. Gilbert
/s/ THOMAS A. HAIDLEN
Thomas A. Haidlen
/s/ MICHAEL Q. JONES
Michael Q. Jones
/s/ RONALD C. MARTIN
Ronald C. Martin
/s/ ROGER M. SCHRIMP
Roger M. Schrimp
/s/ DANNY L. TITUS
Danny L. Titus
/s/ RICHARD J. VAUGHAN
Richard J. Vaughan
Director
Director
Director
Director
Director
Director
Director
Director
Director
51
Date
March 25, 2011
March 25, 2011
March 25, 2011
March 25, 2011
March 25, 2011
March 25, 2011
March 25, 2011
March 25, 2011
March 25, 2011
MANAGEMENT’S ASSESSMENT OF INTERNAL CONTROL OVER FINANCIAL REPORTING
The management of the Company is responsible for establishing and maintaining adequate internal control over financial
reporting. The Company’s internal control over financial reporting is a process designed under the supervision of the
Company’s Chief Executive Officer and Chief Financial Officer to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of the Company’s financial statements for external purposes in accordance with U.S.
generally accepted accounting principles.
As of December 31, 2010, management assessed the effectiveness of the Company’s internal control over financial reporting
based on the criteria for effective internal control over financial reporting established in Internal Control—Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) and guidance issued
by the Securities and Exchange Commission. Based on the assessment, management determined that the Company
maintained effective internal control over financial reporting as of December 31, 2010, based on those criteria.
The Company’s management, including its Chief Executive Officer and Chief Financial Officer, does not expect that its
disclosure controls and procedures, or its internal controls will prevent all error and all fraud. A control system, no matter
how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control
system are met. Further, the design of a control system must reflect the fact that there are resource constraints and the benefit
of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation
of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been
detected.
/s/ RONALD C. MARTIN
Ronald C. Martin, Chief Executive Officer
/s/ RICHARD A. MCCARTY
Richard A. McCarty, Chief Financial Officer
F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders
Oak Valley Bancorp
We have audited the accompanying consolidated balance sheets of Oak Valley Bancorp and subsidiary (the “Company”) as of
December 31, 2010 and 2009 and the related consolidated statements of earnings, shareholders’ equity, and cash flows for the years
ended December 31, 2010 and 2009. These consolidated financial statements are the responsibility of the Company’s management.
Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of
material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over
financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the
Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial
position of Oak Valley Bancorp and subsidiary as of December 31, 2010 and 2009, and the consolidated results of their operations and
their cash flows for the years ended December 31, 2010 and 2009 in conformity with accounting principles generally accepted in the
United States of America.
/s/ Moss Adams LLP
Stockton, California
March 28, 2011
F-2
OAK VALLEY BANCORP
BALANCE SHEETS
ASSETS
Cash and due from banks
Federal funds sold
Cash and cash equivalents
Securities available for sale
Loans, net of allowance for loan loss of $8,254,929 in 2010 and $7,020,222 in 2009
Bank premises and equipment, net
Other real estate owned (OREO)
Accrued interest and other assets
LIABILITIES AND SHAREHOLDERS’ EQUITY
Deposits
Accrued interest and other liabilities
FHLB advances
December 31,
December 31,
2010
2009
$
28,091,916
$
40,845,000
68,936,916
53,267,982
395,206,208
10,173,822
778,174
24,033,316
20,003,548
1,645,000
21,648,548
50,765,314
417,795,686
10,167,297
2,149,514
22,195,354
$
552,396,418
$
524,721,713
$
476,738,850
$
429,210,284
2,999,836
8,000,000
2,619,178
32,200,000
Total liabilities
487,738,686
464,029,462
Commitments and contingencies (Note 14)
Shareholders’ equity
Preferred stock, no par value; $1,000 per share liquidation preference,
10,000,000 shares authorized and 13,500 issued and outstanding at
December 31, 2010 and December 31, 2009
13,013,945
12,847,297
Common stock, no par value; 50,000,000 shares authorized,
7,702,127 and 7,681,877 shares issued and outstanding at
December 31, 2010 and 2009, respectively
Additional paid-in capital
Retained earnings
Accumulated other comprehensive income, net of tax
24,003,549
2,080,218
24,016,466
1,543,554
23,933,440
1,997,747
20,230,683
1,683,084
Total shareholders’ equity
64,657,732
60,692,251
$
552,396,418
$
524,721,713
See accompanying notes
F-3
OAK VALLEY BANCORP
STATEMENTS OF EARNINGS
INTEREST INCOME
Interest and fees on loans
Interest on securities available for sale
Interest on federal funds sold
Interest on deposits with banks
Total interest income
INTEREST EXPENSE
Deposits
FHLB advances
Federal funds purchased
Total interest expense
Net interest income
PROVISION FOR LOAN LOSSES
YEAR ENDED DECEMBER 31,
2010
2009
$ 25,503,634
$ 26,686,633
2,361,723
19,133
41,595
2,585,816
5,117
5,205
27,926,085
29,282,771
2,591,086
327,900
110
2,919,096
4,956,231
684,137
419
5,640,787
25,006,989
23,641,984
4,020,000
5,862,012
Net interest income after provision for loan losses
20,986,989
17,779,972
OTHER INCOME
Service charges on deposits
Earnings on cash surrender value of life insurance
Mortgage commissions
Other
Total non-interest income
OTHER EXPENSES
Salaries and employee benefits
Occupancy expenses
Data processing fees
OREO expenses
Regulatory assessments (FDIC & DFI)
Other operating expenses
Total non-interest expense
1,065,063
435,884
107,848
1,160,736
2,769,531
8,456,982
2,699,897
947,338
637,725
1,051,262
2,982,626
1,163,515
408,628
139,757
929,483
2,641,383
7,780,574
2,717,285
894,056
2,653,205
996,288
3,177,025
16,775,830
18,218,433
Net income before provision for income taxes
6,980,690
2,202,922
PROVISION FOR INCOME TAXES
NET INCOME
2,353,259
203,194
$ 4,627,431
$ 1,999,728
Preferred stock dividends and accretion
841,648
841,644
NET INCOME AVAILABLE TO COMMON SHAREHOLDERS
$ 3,785,783
$ 1,158,084
NET INCOME PER COMMON SHARE
$ 0.49
$ 0.15
NET INCOME PER DILUTED COMMON SHARE
$ 0.49
$ 0.15
See accompanying notes
F-4
OAK VALLEY BANCORP
STATEMENTS OF SHAREHOLDERS’ EQUITY
YEARS ENDED DECEMBER 31, 2010 AND 2009
Common Stock
Preferred Stock
Shares
Amount
Shares
Amount
Additional
Paid-in
Capital
Accumulated
Other
Retained
Earnings
Comprehensive Comprehensive
Income
Income
Total
Shareholders’
Equity
7,661,627
20,250
$
$
7,681,877
20,250
$
$
Balances, January 1, 2009
Stock options exercised
Preferred stock accretion
Preferred stock dividend payments
Cash dividends ($0.025 per share)
Stock based compensation
Comprehensive income:
Net changes in unrealized gain on
available-for-sale securities (net
of income tax of $988,188)
Net income
Comprehensive income
Balances, December 31, 2009
Stock options exercised
Preferred stock accretion
Preferred stock dividend payments
Stock based compensation
Comprehensive income:
Net changes in unrealized gain on
available-for-sale securities (net
of income tax benefit of $97,563)
Net income
Comprehensive income
23,863,331
13,500 $
12,680,649
$
1,925,224 $
19,226,645
$
290,230 $
57,986,079
70,109
$
166,648
$
72,523
(166,648)
(637,500)
(191,542)
1,999,728
23,933,440
13,500 $
12,847,297
$
1,997,747 $
20,230,683
70,109
$
166,648
$
(166,648)
(675,000)
82,471
4,627,431
70,109
0
(637,500)
(191,542)
72,523
1,392,854
1,999,728
3,392,582
1,392,854
1,392,854
1,999,728
$
1,683,084 $
60,692,251
$
70,109
0
(675,000)
82,471
(139,530)
4,627,431
4,487,901
(139,530)
(139,530)
4,627,431
$
$
Balances, December 31, 2010
7,702,127
$
24,003,549
13,500 $
13,013,945
$
2,080,218 $
24,016,466
$
1,543,554 $
64,657,732
See accompanying notes
F-5
OAK VALLEY BANCORP
STATEMENTS OF CASH FLOWS
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income
Adjustments to reconcile net earnings to net cash from operating activities:
Provision for loan losses
Depreciation
Amortization and accretion, net
Stock-based compensation expense
OREO Write downs and losses on sale
Gain on called available for sale securities
Increase in BOLI cash surrender value
Increase in deferred tax asset
Increase (decrease) in accrued interest payable and other liabilities
Decrease in accrued interest receivable
(Increase) decrease in other assets
Net cash from operating activities
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of available for sale securities
Proceeds from maturities, calls, and principal
paydowns of securities available for sale
Net decrease (increase) in loans
Proceeds from sale of OREO
Net purchases of premises and equipment
Net cash from investing activities
CASH FLOWS FROM FINANCING ACTIVITIES:
FHLB advanced funds
FHLB payments
Federal funds advances
Federal funds payments
Shareholder cash dividends paid
Preferred stock dividend payment
Net increase in demand deposits and savings accounts
Net decrease in time deposits
Proceeds from sale of common stock and exercise of stock options
Net cash from financing activities
YEAR ENDED DECEMBER 31,
2009
2010
$
4,627,431 $
1,999,728
4,020,000
959,547
(2,192)
82,471
431,556
(195,745)
(435,884)
497,243
877,901
92,470
(2,391,471)
8,563,327
5,862,012
1,062,828
(28,644)
72,523
2,352,113
(170,019)
(408,628)
(2,144,694)
(349,287)
152,027
1,650,071
10,050,030
(12,114,593)
(16,945,222)
9,572,769
17,616,957
1,892,305
(966,072)
16,001,366
7,100,000
(31,300,000)
480,000
(480,000)
0
(675,000)
56,384,103
(8,855,537)
70,109
22,723,675
10,208,488
(4,978,802)
209,467
(136,157)
(11,642,226)
55,900,000
(92,700,000)
9,135,000
(9,135,000)
(191,542)
(637,500)
59,504,414
(8,542,597)
70,109
13,402,884
NET INCREASE IN CASH AND CASH EQUIVALENTS
47,288,368
11,810,688
CASH AND CASH EQUIVALENTS, beginning of period
21,648,548
9,837,860
CASH AND CASH EQUIVALENTS, end of period
$
68,936,916 $
21,648,548
F-6
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest
Income taxes
NON-CASH INVESTING ACTIVITIES:
Real estate acquired through foreclosure
Change in unrealized (loss) gain on available-for-sale securities
NON-CASH FINANCING ACTIVITIES:
Accretion of preferred stock
See accompanying notes
$
$
$
$
$
3,151,988 $
1,976,000 $
6,003,735
1,264,000
952,521 $
(237,093) $
1,965,519
2,381,042
166,648 $
166,648
F-7
OAK VALLEY BANCORP
NOTES TO FINANCIAL STATEMENTS
NOTE 1 — SUMMARY OF ACCOUNTING POLICIES
Introductory Explanation
On July 3, 2008 (the “Effective Date”), a bank holding company reorganization was completed whereby Oak Valley Bancorp
(“Bancorp”) became the parent holding company for Oak Valley Community Bank ( the “Bank”). On the Effective Date, a tax-free
exchange was completed whereby each outstanding share of the Bank was converted into one share of Bancorp and the Bank became
the sole wholly-owned subsidiary of the holding company.
The consolidated financial statements include the accounts of Bancorp and its wholly-owned bank subsidiary. All material
intercompany transactions have been eliminated. In the opinion of Management, the consolidated financial statements contain all
adjustments necessary to present fairly the financial position, results of operations, changes in stockholders’ equity and cash
flows. All adjustments are of a normal, recurring nature.
Oak Valley Community Bank is a California State chartered bank. The Bank was incorporated under the laws of the state of
California on May 31, 1990, and began operations in Oakdale on May 28, 1991. The Bank operates branches in Oakdale, Sonora,
Bridgeport, Bishop, Mammoth Lakes, Modesto, Patterson, Turlock, Ripon, Stockton, and Escalon, California. The Bridgeport,
Mammoth Lakes, and Bishop branches operate as a separate division, Eastern Sierra Community Bank. The Bank’s primary source of
revenue is providing loans to customers who are predominantly middle-market businesses.
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions. These estimates and assumptions affect the reported amounts of assets and
liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.
Significant accounting estimates reflected in the Bank’s 2010 financial statements include the allowance for loan losses, the valuation
allowance for deferred tax assets, the fair value of stock options and the determination, recognition and measurement of impaired
loans. Actual results could differ from these estimates.
A summary of the significant accounting policies applied in the preparation of the accompanying financial statements follows.
Cash and cash equivalents — The Bank has defined cash and cash equivalents to include cash, due from banks, certificates of
deposit with maturities of three months or less, and federal funds sold. Generally, federal funds are sold for one-day periods. At times
throughout the year, balances can exceed FDIC insurance limits. Management believes the risk of loss is remote as these amounts are
held by major financial institutions and management monitors their financial condition.
Securities available for sale — Available-for-sale securities consist of bonds, notes, and debentures not classified as trading
securities or held-to-maturity securities. Available-for-sale securities with unrealized holding gains and losses, net of tax, are reported
as a net amount in a separate component of shareholders’ equity, accumulated other comprehensive income, until realized. Gains and
losses on the sale of available-for-sale securities are determined using the specific identification method. The amortization of
premiums and accretion of discounts are recognized as adjustments to interest income over the period to maturity.
Investments with fair values that are less than amortized cost are considered impaired. Impairment may result from either a decline in
the financial condition of the issuing entity or, in the case of fixed interest rate investments, from rising interest rates. At each
consolidated financial statement date, management assesses each investment to determine if impaired investments are temporarily
impaired or if the impairment is other than temporary. This assessment includes a determination of whether the Company intends to
sell the security, or if it is more likely than not that the Company will be required to sell the security before recovery of its amortized
cost basis less any current-period credit losses. For debt securities that are considered other than temporarily impaired and that the
Company does not intend to sell and will not be required to sell prior to recovery of the amortized cost basis, the amount of
impairment is separated into the amount that is credit related (credit loss component) and the amount due to all other factors. The
credit loss component is recognized in earnings and is calculated as the difference between the security’s amortized cost basis and the
present value of its expected future cash flows. The remaining difference between the security’s fair value and the present value of the
future expected cash flows is deemed to be due to factors that are not credit related and is recognized in other comprehensive income.
Other real estate owned - Real estate properties acquired through, or in lieu of, loan foreclosure are to be sold and are initially
recorded at fair value of the property at the date of foreclosure less selling costs. Subsequent to foreclosure, valuations are
periodically performed and any subject revisions in the estimate of fair value are reported as adjustment to the carrying value of the
F-8
real estate, provided the adjusted carrying amount does not exceed the original amount at foreclosure. Revenues and expenses from
operations and changes in the valuation allowance are included in other operating expenses.
Loans and allowance for loan losses — Loans are reported at the principal amount outstanding, net of unearned income, deferred
loan fees, and the allowance for loan losses. Unearned discounts on installment loans are recognized as income over the terms of the
loans. Interest on other loans is calculated by using the simple interest method on the daily balance of the principal amount
outstanding.
Loan fees net of certain direct costs of origination, which represent an adjustment to interest yield, are deferred and amortized over the
contractual term of the loan.
Loans on which the accrual of interest has been discontinued are designated as non-accrual loans. Accrual of interest on loans is
discontinued either when reasonable doubt exists as to the full and timely collection of interest or principal or when a loan becomes
contractually past due by ninety days or more with respect to interest or principal. When a loan is placed on non-accrual status, all
interest previously accrued, but not collected, is reversed against current period interest income. Income on such loans is then
recognized only to the extent that cash is received and where the future collection of principal is probable. Interest accruals are
resumed on such loans only when they are brought fully current with respect to interest and principal and when, in the judgment of
management, the loans are estimated to be fully collectible as to both principal and interest.
The allowance for loan losses is established through a provision for loan losses charged to operations. Loans are charged against the
allowance for loan losses when management believes that the collectability of the principal is unlikely. Subsequent recoveries of
previously charged off amounts, if any, are credited to the allowance.
The allowance for loan losses is evaluated on a regular basis by management and is based on management’s periodic review of the
collectability of the loans in light of historical experience, the nature and volume of the loan portfolio, adverse situations that may
affect the borrower’s ability to repay, estimated value of any underlying collateral, and prevailing economic conditions. This
evaluation is inherently subjective, as it requires estimates that are susceptible to significant revision as more information becomes
available.
In addition, various regulatory agencies, as an integral part of their examination process, periodically review the Bank’s allowance for
loan losses. Such agencies may require the Bank to recognize additional allowance based on their judgment about information
available to them at the time of their examination.
The allowance consists of specific, general, and unallocated components. The specific component relates to loans that are classified as
impaired. Impaired loans, as defined, are measured based on the present value of expected future cash flows discounted at the loan’s
effective interest rate or the fair value of the collateral if the loan is collateral dependent. The general component relates to non-
impaired loans and is based on historical loss experience adjusted for qualitative factors. An unallocated component is maintained to
cover uncertainties that could affect management’s estimate of probable losses. The unallocated component of the allowance reflects
the margin of imprecision inherent in the underlying assumptions used in the methodologies for estimating specific and general losses
in the portfolio.
The Bank considers a loan impaired when it is probable that all amounts of principal and interest due, according to the contractual
terms of the loan agreement, will not be collected, which is the same criteria used for the transfer of loans to non-accrual status.
Interest income is recognized on impaired loans in the same manner as non-accrual loans. Factors considered by management in
determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest
payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as
impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into
consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the
delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed.
The method for calculating the allowance for unfunded loan commitments is based on an allowance percentage which is less than
other outstanding loan types because they are at a lower risk level. This allowance percentage is evaluated by management
periodically and is applied to the total undisbursed loan commitment balance to calculate the allowance for off-balance-sheet
commitments.
F-9
Premises and equipment — Premises and equipment are stated at cost less accumulated depreciation and amortization. Depreciation
and amortization are provided for in amounts sufficient to relate the cost of depreciable assets to operations over their estimated
service lives using the straight-line basis. The estimated lives used in determining depreciation are:
Building
Equipment
31.5
years
3 – 12
years
Furniture and fixtures
3 – 7
years
Leasehold improvements
5 – 15
years
Automobiles
3 – 5
years
Leasehold improvements are amortized over the lesser of the useful life of the asset or the remaining term of the lease. The straight-
line method of depreciation is followed for all assets for financial reporting purposes, but accelerated methods are used for tax
purposes. Deferred income taxes have been provided for the resulting temporary differences.
Income taxes — Deferred income taxes are provided for the temporary differences between the financial reporting basis and the tax
basis of the Bank’s assets and liabilities. Deferred tax assets and liabilities are reflected at currently enacted income tax rates
applicable to the period in which the deferred tax assets or liabilities are expected to be realized or settled using the liability method.
As changes in tax laws or rates are enacted, deferred tax assets and liabilities are adjusted through the provision for income taxes.
The Bank files income tax returns in the U.S. federal jurisdiction, and the state of California. With few exceptions, the Bank is no
longer subject to U.S. federal or state/local income tax examinations by tax authorities for years before 2006.
The Bank recognizes interest accrued and penalties related to unrecognized tax benefits in tax expense. During the year ended
December 31, 2010 the Bank had a liability for unrecognized tax benefits of $144,000 associated with the California Franchise Tax
Board’s exam of our 2006 and 2007 tax return, approximately $25,000 of which was due to interest. The Bank intends to settle the
exam during the first quarter of 2011 and believes the $144,000 accrued liability is adequate to pay the full settlement amount. During
the year ended December 31, 2009, the Bank recognized no unrecognized tax benefits or related interest and penalties.
Transfers of financial assets — Transfers of financial assets are accounted for as sales when control over the assets has been
surrendered. Control over transferred assets is deemed to be surrendered when: (1) the assets have been isolated from the Bank,
(2) the transferee obtains the right (free of conditions that contain it from taking advantage of that right) to pledge or exchange the
transferred assets, and (3) the Bank does not maintain effective control over the transferred assets through an agreement to repurchase
them before their maturity.
Advertising costs — The Bank expenses marketing costs as they are incurred. Advertising expense was $151,000 and $136,000 for
the years ended December 31, 2010 and 2009, respectively.
Comprehensive income — Comprehensive income is comprised of net income and other comprehensive income. Other
comprehensive income includes items previously recorded directly to equity, such as unrealized gains and losses on securities
available for sale. Comprehensive income is presented in the statement of shareholders’ equity. For the years ended December 31,
2010 and 2009, $115,000 and $110,000 net of tax, respectively, was reclassified from comprehensive income into net income related
to gains on called available for sale securities.
Investment in limited partnership — During 2007 the Bank acquired limited interests in a private limited partnership that acquires
affordable housing properties in California that generate Low Income Housing Tax Credits under Section 42 of the Internal Revenue
Code of 1986, as amended. The Bank’s limited partnership investment is accounted for under the equity method. The Bank’s
noninterest expense associated with the utilization of these tax credits for the year ended December 31, 2010 and 2009 was $66,144
and $94,781, respectively. The limited partnership investment is expected to generate a total tax benefit of approximately $1.16
million over the life of the investment for the combination of the tax credits and deductions on noninterest expense. The tax credits
expire between 2010 and 2022. In 2009, a tax benefit of $126,000 was utilized for income tax purposes and an estimated amount of
$107,000 will be utilized in 2010. The recorded investment in limited partnerships totaled $703,155 and $769,299 at December 31,
2010 and 2009, respectively, and is reflected as a component of accrued interest and other assets on the balance sheets.
Federal Home Loan Bank Stock — Federal Home Loan Bank stock represents the Company’s investment in the stock of the Federal
Home Loan Bank of San Francisco (“FHLB”) and is carried at par value, which reasonably approximates its fair value. While technically
these are considered equity securities, there is no market for the FHLB stock. Therefore, the shares are considered as restricted investment
securities. Management periodically evaluates FHLB stock for other-than-temporary impairment. Management’s determination of whether
F-10
these investments are impaired is based on its assessment of the ultimate recoverability of cost rather than by recognizing temporary declines
in value. The determination of whether a decline affects the ultimate recoverability of cost is influenced by criteria such as (1) the
significance of any decline in net assets of the FHLB as compared to the capital stock amount for the FHLB and the length of time this
situation has persisted, (2) commitments by the FHLB to make payments required by law or regulation and the level of such payments in
relation to the operating performance of the FHLB, (3) the impact of legislative and regulatory changes on institutions and, accordingly, the
customer base of the FHLB, and (4) the liquidity position of the FHLB. This investment is reflected as a component of accrued interest and
other assets on the balance sheets.
Stock based compensation — The Bank recognizes in the income statement the grant-date fair value of stock options and other
equity-based forms of compensation issued to employees over the employees’ requisite service period (generally the vesting period).
The bank uses the straight-line recognition of expenses for awards with graded vesting.
The fair value of each option grant is estimated as of the grant date using an option-pricing model with the assumptions noted in the
following table. The Bank utilizes a binomial pricing model for all grants. Expected volatility is based on the historical volatility of the
price of the Bank’s stock. The Bank uses historical data to estimate option exercise and stock option forfeiture rates within the
valuation model. The expected term of options granted for the binomial model is derived from applying a historical suboptimal
exercise factor to the contractual term of the grant. For binomial pricing, the risk-free rate for periods is equal to the U.S. Treasury
yield at the time of grant and commensurate with the contractual term of the grant.
The fair value of each option is estimated on the date of grant using an options pricing model with the following weighted average
assumptions. There were no stock options grants in 2010.
Pricing model
Dividend yield
Expected volatility
Risk-free interest rate
Expected option term
YEAR ENDED DECEMBER 31,
2009
2010
N/A
N/A
N/A
N/A
N/A
Binomial
1.82%
43.55%
2.60%
7.15 years
Stock-based compensation recorded
$ 82,471
$
72,523
Reclassifications — Certain prior year amounts have been reclassified to conform to the current year presentation. There was no
effect on net income or shareholders’ equity.
Recently Issued Accounting Standards —
Accounting Standards Codification. The Financial Accounting Standards Board’s (FASB) Accounting Standards Codification
(ASC) became effective on July 1, 2009. At that date, the ASC became FASB’s officially recognized source of authoritative U.S.
generally accepted accounting principles (GAAP) applicable to all public and non-public non-governmental entities, superseding
existing FASB, American Institute of Certified Public Accountants (AICPA), Emerging Issues Task Force (EITF) and related
literature. Rules and interpretive releases of the SEC under the authority of federal securities laws are also sources of authoritative
GAAP for SEC registrants. All other accounting literature is considered non-authoritative. The switch to the ASC affects the away
companies refer to U.S. GAAP in financial statements and accounting policies. Citing particular content in the ASC involves
specifying the unique numeric path to the content through the Topic, Subtopic, Section and Paragraph structure.
FASB ASC Topic 815, “Derivatives and Hedging.” New authoritative accounting guidance under ASC Topic 815, “Derivatives
and Hedging,” amends prior guidance to amend and expand the disclosure requirements for derivatives and hedging activities to
provide greater transparency about (i) how and why an entity uses derivative instruments, (ii) how derivative instruments and related
hedge items are accounted for under ASC Topic 815, and (iii) how derivative instruments and related hedged items affect an entity’s
financial position, results of operations and cash flows. To meet those objectives, the new authoritative accounting guidance requires
qualitative disclosures about objectives and strategies for using derivatives, quantitative disclosures about fair value amounts of gains
and losses on derivative instruments and disclosures about credit-risk-related contingent features in derivative agreements. The new
authoritative accounting guidance under ASC Topic 815 became effective for the Company on January 1, 2009 and did not have a
significant impact on the Company’s financial statements.
FASB ASC Topic 820, “Fair Value Measurements and Disclosures.” New authoritative accounting guidance under ASC Topic
820,”Fair Value Measurements and Disclosures,” affirms that the objective of fair value when the market for an asset is not active is
F-11
the price that would be received to sell the asset in an orderly transaction, and clarifies and includes additional factors for determining
whether there has been a significant decrease in market activity for an asset when the market for that asset is not active. ASC Topic
820 requires an entity to base its conclusion about whether a transaction was not orderly on the weight of the evidence. The new
accounting guidance amended prior guidance to expand certain disclosure requirements. The Company adopted the new authoritative
accounting guidance under ASC Topic 820 during the first quarter of 2009. Adoption of the new guidance did not significantly impact
the Company’s financial statements.
Further new authoritative accounting guidance (Accounting Standards Update No. 2009-5) under ASC Topic 820 provides
guidance for measuring the fair value of a liability in circumstances in which a quoted price in an active market for the identical
liability is not available. In such instances, a reporting entity is required to measure fair value utilizing a valuation technique that uses
(i) the quoted price of the identical liability when traded as an asset, (ii) quoted prices for similar liabilities or similar liabilities when
traded as assets, or (iii) another valuation technique that is consistent with the existing principles of ASC Topic 820, such as an
income approach or market approach. The new authoritative accounting guidance also clarifies that when estimating the fair value of a
liability, a reporting entity is not required to include a separate input or adjustment to other inputs relating to the existence of a
restriction that prevents the transfer of the liability. The forgoing new authoritative accounting guidance under ASC Topic 820 became
effective for the Company’s financial statements beginning October 1, 2009 and did not have a significant impact on the Company’s
financial statements.
FASB ASC Topic 320, “Investments - Debt and Equity Securities.” New authoritative accounting guidance under ASC Topic
320, “Investments - Debt and Equity Securities,” (i) changes existing guidance for determining whether an impairment is other than
temporary to debt securities and (ii) replaces the existing requirement that the entity’s management assert it has both the intent and
ability to hold an impaired security until recovery with a requirement that management assert: (a) it does not have the intent to sell the
security; and (b) it is more likely than not it will not have to sell the security before recovery of its cost basis. Under ASC Topic 320,
declines in the fair value of held-to-maturity and available-for-sale securities below their cost that are deemed to be other than
temporary are reflected in earnings as realized losses to the extent the impairment is related to credit losses. The amount of the
impairment related to other factors is recognized in other comprehensive income. The Company adopted the provisions of the new
authoritative accounting guidance under ASC Topic 320 during the second quarter of 2009. Adoption of the new guidance did not
significantly impact the Company’s financial statements.
FASB ASC Topic 825 “Financial Instruments.” New authoritative accounting guidance under ASC Topic 825, “Financial
Instruments,” requires an entity to provide disclosures about the fair value of financial instruments in interim financial information and
amends prior guidance to require those disclosures in summarized financial information at interim reporting periods. The new interim
disclosures required under Topic 825 were included in the Company’s Form 10-Q beginning September 30, 2009.
FASB ASC Topic 825 “Fair Value Measurements and Disclosures.” In January 2010, the FASB issued ASU No. 2010-06,
Fair Value Measurements and Disclosures (Topic 820): Improving Disclosures about Fair Value Measurements. This ASU requires:
(1) disclosure of the amounts of significant transfers in and out of Level 1 and Level 2 fair value measurement categories and the
reasons for the transfers; and (2) separate presentation of purchases, sales, issuances, and settlements in the reconciliation for fair
value measurements using significant unobservable inputs (Level 3). In addition, ASU 2010-06 clarifies the requirements of the
following existing disclosures set forth in the Codification Subtopic 820-10: (1) For purposes of reporting fair value measurement for
each class of assets and liabilities, a reporting entity needs to use judgment in determining the appropriate classes of assets and
liabilities; and (2) a reporting entity should provide disclosures about the valuation techniques and inputs used to measure fair value
for both recurring and non-recurring fair value measurements. ASU 2010-06 is effective for interim and annual reporting periods
beginning January 1, 2010, except for the disclosures about purchases, sales, issuances, and settlements in the roll forward of activity
in Level 3 fair value measurements, which are effective for fiscal years beginning January 1, 2011, and for interim periods within
those fiscal years. As ASU 2010-06 is disclosure-related only, our adoption of this ASU in the first quarter of 2010 did not impact our
financial condition or results of operations.
FASB ASC Topic 310 “Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses.”
In July 2010, FASB issued Accounting Standards Update 2010-20, Disclosures about the Credit Quality of Financing Receivables
and the Allowance for Credit Losses (Topic 310). This standard expands disclosures about credit quality of financing receivables and
the allowance for loan losses. The standard will require the Company to expand disclosures about the credit quality of our loans and
the related reserves against them. The extra disclosures will include disaggregated matters related to our past due loans, credit quality
indicators, and modifications of loans. The Company adopted the standard beginning with our December 31, 2010 financial
statements. This standard did not have an impact on the Company’s financial position or results of operations.
F-12
NOTE 2 — CASH AND DUE FROM BANKS
Cash and due from banks includes balances with the Federal Reserve Bank and other correspondent banks. The Bank is required to
maintain specified reserves by the Federal Reserve Bank. The average reserve requirements are based on a percentage of the Bank’s
deposit liabilities. In addition, the Federal Reserve Bank requires the Bank to maintain a certain minimum balance at all times. As of
December 31, 2010 the Bank had a balance of $22,867,522 which is more than adequate to satisfy the reserve requirement.
NOTE 3 — SECURITIES
The amortized cost and estimated fair values of debt securities as of December 31, 2010, are as follows:
Amortized Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Fair Market
Value
Available-for-sale securities:
U.S. agencies
$
28,678,709
1,566,549
$
(54,870)
$
30,190,388
Collateralized mortgage obligations
Municipalities
SBA Pools
Mutual Fund
7,946,854
9,870,381
1,517,332
2,631,371
189,926
931,375
—
14,063
—
(2,257)
(11,236)
(10,215)
8,136,780
10,799,499
1,506,096
2,635,219
$
50,644,647
$
2,701,913
$
(78,578)
$
53,267,982
The following tables detail the gross unrealized losses and fair values aggregated by investment category and length of time that
individual securities have been in a continuous unrealized loss position at December 31, 2010.
Description of Securities
Fair
Value
Unrealized
Loss
Fair
Value
Unrealized
Loss
Fair
Value
Unrealized
Loss
Less than 12 months
12 months or more
Total
U.S. agencies
$
3,101,384 $
(54,870)
$
— $
—
$
3,101,384 $
(54,870)
Collateralized mortgage
obligations
Municipalities
SBA Pools
Mutual Fund
Total temporarily impaired
securities
—
427,130
—
—
(2,257)
—
—
—
—
—
1,499,228
(11,236)
989,786
(10,215)
—
—
—
427,130
1,499,228
989,786
—
(2,257)
(11,236)
(10,215)
$ 4,518,300 $
(67,342)
$
1,499,228 $
(11,236)
$
6,017,528 $
(78,578)
At December 31, 2010, two SBA pools make up the total amount of securities in an unrealized loss position for greater than 12
months. Management periodically evaluates each available-for-sale investment security in an unrealized loss position to determine if
the impairment is temporary or other than temporary. Management has determined that no investment security is other than
temporarily impaired. The unrealized losses are due solely to interest rate changes and the Bank does not intend to sell the securities
and it is not likely that we will be required to sell the securities before the earlier of the forecasted recovery or the maturity of the
underlying investment security.
F-13
The amortized cost and estimated fair value of debt securities at December 31, 2010, by contractual maturity or call date, are shown
below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations
with or without call or prepayment penalties.
Available-for-sale securities:
Due in one year or less
Due after one year through five years
Due after five years through ten years
Due after ten years
Amortized
Cost
Fair
Value
$
1,025,000
5,651,241
18,979,525
24,988,881
$
1,034,394
6,126,905
20,071,301
26,035,382
$
50,644,647
$
53,267,982
The amortized cost and estimated fair values of debt securities as of December 31, 2009, are as follows:
Available-for-sale securities:
U.S. agencies
Collateralized mortgage
obligations
Municipalities
SBA Pools
Asset-Back Securities
Mutual Fund
Amortized Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Fair Value
$
29,475,777
1,511,122
$
(2,181)
$
30,984,718
2,883,988
12,327,922
1,588,867
81,867
1,546,465
110,758
1,235,683
—
707
20,312
—
(6,454)
(9,519 )
—
—
2,994,746
13,557,151
1,579,348
82,574
1,566,777
$
47,904,886
$
2,878,582
$
(18,154)
$
50,765,314
The following tables detail the gross unrealized losses and fair values aggregated by investment category and length of time that
individual securities have been in a continuous unrealized loss position at December 31, 2009.
Description of Securities
Fair
Value
Unrealized
Loss
Fair
Value
Unrealized
Loss
Fair
Value
Unrealized
Loss
Less than 12 months
12 months or more
Total
U.S. agencies
$
425,908 $
(2,181)
$
—
$
425,908 $
(2,181)
Collateralized mortgage
obligations
Municipalities
SBA Pools
Asset Backed Securities
Total temporarily
impaired securities
—
—
—
—
402,628
—
—
—
(6,454)
—
—
—
—
—
402,628
1,579,348
(9,519)
1,579,348
—
—
—
—
(6,454)
(9,519)
—
$
828,536 $
(8,635)
$
1,579,348 $
(9,519)
$
2,407,884 $
(18,154)
F-14
At December 31, 2009, two SBA pools make up the total amount of securities in an unrealized loss position for greater than 12
months. Management periodically evaluates each available-for-sale investment security in an unrealized loss position to determine if
the impairment is temporary or other than temporary. Management has determined that no investment security is other than
temporarily impaired. The unrealized losses are due solely to interest rate changes and the Bank does not intend to sell the securities
and it is not likely that we will be required to sell the securities before the earlier of the forecasted recovery or the maturity of the
underlying investment security.
Realized gains on called available-for-sale securities during 2010 and 2009 totaled $195,745 and $170,019, respectively. There
were no sales of available-for-sale securities during 2010 and 2009.
Securities carried at $46,405,847 and $34,545,513at December 31, 2010 and 2009, respectively, were pledged to secure deposits of
public funds.
NOTE 4 — LOANS
The Bank’s customers are primarily located in Stanislaus, San Joaquin, Tuolumne, Inyo, and Mono Counties. Approximately 83%
of the Bank’s loans are commercial real estate loans which includes construction loans. Approximately 8% of the Bank’s loans are for
general commercial uses including professional, retail, and small business. Additionally, 6% of the Bank’s loans are for residential
real estate and other consumer loans. The remaining 3% are agriculture loans.
Loan totals were as follows:
YEARS ENDED DECEMBER 31,
2010
2009
Loans
Commercial real estate:
Commercial real estate- construction
$
13,669,527
$
Commercial real estate- mortgages
Land
Farmland
Commercial and Industrial
Consumer
Consumer residential
Agriculture
Total gross loans
Less:
Deferred loan fees and costs, net
Allowance for loan losses
289,208,721
18,975,637
14,876,426
30,755,651
1,242,300
21,843,935
13,621,952
26,938,288
283,387,330
26,013,680
16,831,716
38,159,590
1,351,343
20,117,123
12,827,941
404,194,149
425,627,011
(733,012)
(8,254,929)
(811,103)
(7,020,222)
Net loans
$
395,206,208
$
417,795,686
Loan Origination/Risk Management. The Corporation has certain lending policies and procedures in place that are designed to
maximize loan income within an acceptable level of risk. Management reviews and approves these policies and procedures on a
regular basis. A reporting system supplements the review process by providing management with frequent reports related to loan
production, loan quality, concentrations of credit, loan delinquencies and non-performing and potential problem loans. Diversification
in the loan portfolio is a means of managing risk associated with fluctuations in economic conditions.
Commercial and industrial loans are underwritten after evaluating and understanding the borrower’s ability to operate profitably
and prudently expand its business. Underwriting standards are designed to promote relationship banking rather than transactional
banking. Once it is determined that the borrower’s management possesses sound ethics and solid business acumen, the Bank’s
F-15
management examines current and projected cash flows to determine the ability of the borrower to repay their obligations as agreed.
Commercial and industrial loans are primarily made based on the identified cash flows of the borrower and secondarily on the
underlying collateral provided by the borrower. The cash flows of borrowers, however, may not be as expected and the collateral
securing these loans may fluctuate in value. Most commercial and industrial loans are secured by the assets being financed or other
business assets such as accounts receivable or inventory and may incorporate a personal guarantee; however, some short-term loans
may be made on an unsecured basis. In the case of loans secured by accounts receivable, the availability of funds for the repayment of
these loans may be substantially dependent on the ability of the borrower to collect amounts due from its customers.
Commercial real estate loans are subject to underwriting standards and processes similar to commercial and industrial loans, in
addition to those of real estate loans. These loans are viewed primarily as cash flow loans and secondarily as loans secured by real
estate. Commercial real estate lending typically involves higher loan principal amounts and the repayment of these loans is generally
largely dependent on the successful operation of the property securing the loan or the business conducted on the property securing the
loan. Commercial real estate loans may be more adversely affected by conditions in the real estate markets or in the general economy.
The properties securing the Bank’s commercial real estate portfolio are diverse in terms of type and geographic location. This
diversity helps reduce the Bank’s exposure to adverse economic events that affect any single market or industry. Management
monitors and evaluates commercial real estate loans based on collateral, geography and risk grade criteria. As a general rule, the Bank
avoids financing single-purpose projects unless other underwriting factors are present to help mitigate risk. The Bank also utilizes
third-party experts to provide insight and guidance about economic conditions and trends affecting market areas it serves. In addition,
management tracks the level of owner-occupied commercial real estate loans versus non-owner occupied loans. At December 31,
2010, approximately 37.5% of the outstanding principal balance of the Bank’s commercial real estate loans were secured by owner-
occupied properties.
With respect to loans to developers and builders that are secured by non-owner occupied properties that the Bank may originate
from time to time, the Bank generally requires the borrower to have had an existing relationship with the Bank and have a proven
record of success. Construction loans are underwritten utilizing feasibility studies, independent appraisal reviews, sensitivity analysis
of absorption and lease rates and financial analysis of the developers and property owners. Construction loans are generally based
upon estimates of costs and value associated with the complete project. These estimates may be inaccurate. Construction loans often
involve the disbursement of substantial funds with repayment substantially dependent on the success of the ultimate project. Sources
of repayment for these types of loans may be pre-committed permanent loans from approved long-term lenders, sales of developed
property or an interim loan commitment from the Bank until permanent financing is obtained. These loans are closely monitored by
on-site inspections and are considered to have higher risks than other real estate loans due to their ultimate repayment being sensitive
to interest rate changes, governmental regulation of real property, general economic conditions and the availability of long-term
financing.
The Bank originates consumer loans utilizing a computer-based credit scoring analysis to supplement the underwriting process. To
monitor and manage consumer loan risk, policies and procedures are developed and modified, as needed, jointly by line and staff
personnel. This activity, coupled with relatively small loan amounts that are spread across many individual borrowers, minimizes risk.
Additionally, trend and outlook reports are reviewed by management on a regular basis. Underwriting standards for home equity loans
follow bank policy, which include, but are not limited to, a maximum loan-to-value percentage of 80%, a maximum housing and total
debt ratio of 36% and 42%, respectively and other specified credit and documentation requirements.
The Bank maintains an independent loan review department that reviews and validates the credit risk program on a periodic basis.
Results of these reviews are presented to management. The loan review process complements and reinforces the risk identification and
assessment decisions made by lenders and credit personnel, as well as the Bank’s policies and procedures.
Non-Accrual and Past Due Loans. Loans are considered past due if the required principal and interest payments have not been
received as of the date such payments were due. Loans are placed on non-accrual status when, in management’s opinion, the borrower
may be unable to meet payment obligations as they become due, as well as when required by regulatory provisions. Loans may be
placed on non-accrual status regardless of whether or not such loans are considered past due. When interest accrual is discontinued, all
unpaid accrued interest is reversed. Interest income is subsequently recognized only to the extent cash payments are received in excess
of principal due. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current
and future payments are reasonably assured.
F-16
Year-end non-accrual loans, segregated by class of loans, were as follows:
Loans
Commercial real estate:
Commercial real estate- construction
Commercial real estate- mortgages
Land
Farmland
Commercial and Industrial
Consumer
Consumer residential
Agriculture
Total non-accrual loans
YEARS ENDED DECEMBER 31,
2010
2009
$
$
3,252,081
4,190,665
3,810,473
0
221,723
0
0
0
11,474,942
$
$
7,943,818
1,458,217
4,792,631
0
223,536
0
0
0
14,418,202
Had non-accrual loans performed in accordance with their original contract terms, the Bank would have recognized additional
interest income of approximately $818,000 in 2010 and $457,000 in 2009.
The following table analyzes past due loans including the non-accrual loans in the above table, segregated by class of loans, as of
December 31, 2010:
30-59
Days Past
Due
60-89
Days Past
Due
Greater
Than 90
Days Past
Due
Total Past
Due
Current
December 31, 2010
Commercial real estate:
Commercial R.E. - construction
$
0 $
0 $
2,663,126 $
2,663,126 $
11,006,401
$
Commercial R.E. - mortgages
1,473,940
2,865,492
1,325,173
5,664,605
283,544,116
Land
Farmland
Commercial and Industrial
Consumer
Consumer residential
Agriculture
0
0
0
0
0
0
0
0
0
0
0
0
3,810,473
3,810,473
15,165,164
0
0
0
0
0
0
0
0
0
0
14,876,426
30,755,651
1,242,300
21,843,935
13,621,952
Total
$
1,473,940 $
2,865,492 $
7,798,772 $ 12,138,204 $ 392,055,945
$
Greater
Than 90
Days Past
Due and
Still
Accruing
0
0
0
0
0
0
0
0
0
Impaired Loans. Loans are considered impaired when, based on current information and events, it is probable the Bank will be
unable to collect all amounts due in accordance with the original contractual terms of the loan agreement, including scheduled
principal and interest payments. Impairment is evaluated in total for smaller-balance loans of a similar nature and on an individual
F-17
loan basis for other loans. If a loan is impaired, a specific valuation allowance is allocated, if necessary, so that the loan is reported
net, at the present value of estimated future cash flows using the loan’s existing rate or at the fair value of collateral if repayment is
expected solely from the collateral. Interest payments on impaired loans are typically applied to principal unless collectibility of the
principal amount is reasonably assured, in which case interest is recognized on a cash basis. Impaired loans, or portions thereof, are
charged off when deemed uncollectible.
Year-end impaired loans are set forth in the following table. No interest income was recognized on impaired loans subsequent to their
classification as impaired.
Unpaid
Contractual
Principal
Balance
Recorded
Investment
With No
Allowance
Recorded
Investment
With
Allowance
Total
Recorded
Investment
Related
Allowance
Average
Recorded
Investment
December 31, 2010
Commercial real estate:
Commercial R.E. - construction
$
3,405,167
$
1,427,776
$
1,824,305
$
3,252,081 $
179,725
$
4,430,245
Commercial R.E. - mortgages
Land
Farmland
4,469,681
7,710,271
0
4,190,665
739,732
0
Commercial and Industrial
222,023
221,723
0
3,070,741
0
0
0
0
0
4,190,665
3,810,473
0
221,723
0
0
0
0
768,118
0
0
0
0
0
1,900,081
4,231,514
0
207,384
0
2,417
0
0
0
0
0
0
0
$ 15,807,142
$
6,579,896
$
4,895,046
$
11,474,942 $
947,843
$
10,771,641
Consumer
Consumer residential
Agriculture
Total
December 31, 2009
Commercial real estate:
Commercial R.E. - construction
$
8,164,258
$
2,789,662
$
5,154,156
$
7,943,818 $
736,498
$
4,066,045
Commercial R.E. - mortgages
Land
Farmland
Commercial and Industrial
Consumer
Consumer residential
Agriculture
Total
1,458,217
6,885,674
0
223,536
0
0
0
0
0
0
0
0
0
0
1,458,217
4,792,631
0
1,458,217
4,792,631
0
223,536
223,536
0
0
0
0
0
0
117,675
390,918
0
11,238
0
0
0
475,717
5,364,882
0
295,071
0
0
0
$ 16,731,685
$
2,789,662
$
11,628,540
$
14,418,202 $
1,256,329
$
10,201,715
Quality ratings (Risk Grades) are assigned to all commitments and stand-alone notes. Risk grades define the basic characteristics of
commitments or stand-alone note in relation to their risk. All loans are graded using a system that maximizes the loan quality
information contained in loan review grades, while ensuring that the system is compatible with the grades used by bank examiners.
We grade loans using the following letter system:
1 Exceptional Loan
2 Quality Loan
3A Better Than Acceptable Loan
3B Acceptable Loan
3C Marginally Acceptable Loan
4 (W) Watch Acceptable Loan
5 Other Loans Especially Mentioned
F-18
6 Substandard Loan
7 Doubtful Loan
8 Loss
1. Exceptional Loan - Loans with A+ credits that contain very little, if any, risk. To qualify for this rating, the following characteristics
must be present:
-A high level of liquidity and whose debt-servicing capacity exceeds expected obligations by a substantial margin.
-Where leverage is below average for the industry and earnings are consistent or growing without severe vulnerability to
economic cycles.
-Also included in this rating (but not mandatory unless one or more of the preceding characteristics are missing) are loans that are
fully secured and properly margined by our own time instruments or U.S. blue chip securities. To be properly margined cash
collateral must be equal to, or greater than, 110% of the loan amount.
2. Quality Loan - Loans with excellent sources of repayment that conform in all respects to bank policy and regulatory requirements.
These are also loans for which little repayment risk has been identified. No credit or collateral exceptions. Other factors include:
-Unquestionable debt-servicing capacity to cover all obligations in the ordinary course of business from well-defined primary
and secondary sources.
-Consistent strong earnings.
-A solid equity base.
3A. Better than Acceptable Loan - In the interest of better delineating the loan portfolio’s true credit risk for reserve allocation, further
granularity has been sought by splitting the grade 3 category into three classifications. The distinction between the three are bank-
defined guidelines and represent a further refinement of the regulatory definition of a pass, or grade 3 loan. Grade 3A is the stronger
third of the pass category, but is not strong enough to be a grade 2 and is characterized by:
-Strong earnings with no loss in last three years and ample cash flow to service all debt well above policy guidelines.
-Long term experienced management with depth and defined management succession.
-The loan has no exceptions to policy.
-Loan-to-value on real estate secured transactions is 10% to 20% less than policy guidelines.
-Very liquid balance sheet that may have cash available to pay off our loan completely.
-Little to no debt on balance sheet.
3B. Acceptable Loan - 3B loans are simply defined as all loans that are less qualified than 3A loans and are stronger than 3C loans.
These loans are characterized by acceptable sources of repayment that conform to bank policy and regulatory requirements.
Repayment risks are acceptable for these loans. Credit or collateral exceptions are minimal, are in the process of correction, and do not
represent repayment risk. These loans:
-Are those where the borrower has average financial strengths, a history of profitable operations and experienced management.
-Are those where the borrower can be expected to handle normal credit needs in a satisfactory manner.
3C. Marginally Acceptable - 3C loans have similar characteristics as that of 3Bs with the following additional characteristics:
Requires collateral. A credit facility where the borrower has average financial strengths, but usually lacks reliable secondary sources
of repayment other than the subject collateral. Other common characteristics can include some or all of the following: minimal
background experience of management, lacking continuity of management, a start-up operation, erratic historical profitability
(acceptable reasons-well identified), lack of or marginal sponsorship of guarantor, and government guaranteed loans.
4W Watch Acceptable - Watch grade will be assigned to any credit that is adequately secured and performing but monitored for a
number of indicators. These characteristics may include any unexpected short-term adverse financial performance from budgeted
projections or prior period’s results (i.e., declining profits, sales, margins, cash flow, or increased reliance on leverage, including
adverse balance sheet ratios, trade debt issues, etc.). Additionally, any managerial or personal problems of company management,
decline in the entire industry or local economic conditions failure to provide financial information or other documentation as
requested; issues regarding delinquency, overdrafts, or renewals; and any other issues that cause concern for the company. Loans to
individuals or loans supported by guarantors with marginal net worth and/or marginal collateral. Weakness identified
in a Watch credit is short-term in nature. Loans in this category are usually accounts the bank would want to retain providing a
positive turnaround can be expected within a reasonable time frame.
5 Other Loans Especially Mentioned (OLEM) - A special mention extension of credit is defined as having potential weaknesses that
deserve management’s close attention. If left uncorrected, these potential weaknesses may, at some future date result in the
deterioration of the repayment prospects for the credit or the institution’s credit position. Extensions of credit that might be detailed in
this category include the following:
-The lending officer may be unable to properly supervise the credit because of an inadequate loan or credit agreement.
F-19
-Questions exist regarding the condition of and/or control over collateral.
-Economic or market conditions may unfavorably affect the obligor in the future.
-A declining trend in the obligor’s operations or an imbalanced position in the balance sheet exists, but not to the point that
repayment is jeopardized.
6 Substandard Loan - A “substandard” extension of credit is inadequately protected by the current sound worth and paying capacity of
the obligor or of the collateral pledged, if any. Extensions of credit so classified must have a well-defined weakness or weaknesses
that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the bank will sustain some loss if the
deficiencies are not corrected. Loss potential, while existing in the aggregate amount of substandard credits, does not have to exist in
individual extensions of credit classified substandard.
7 Doubtful Loan - An extension of credit classified “doubtful” has all the weaknesses inherent in one classified substandard, with the
added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and
values, highly questionable and improbable. The possibility of loss is extremely high but because of certain important and reasonably
specific pending factors that may work to the advantage of and strengthen the credit, its classification as an estimated loss is deferred
until its more exact status may be determined. Pending factors may include a proposed merger or acquisition, liquidation proceedings,
capital injection, perfecting liens on additional collateral or refinancing plans. The entire loan need not be classified doubtful when
collection of a specific portion appears highly probable. An example of proper use of the doubtful category is the case of a company
being liquidated, with the trustee-in-bankruptcy indicating a minimum disbursement of 40 percent and a maximum of 65 percent to
unsecured creditors, including the bank. In this situation, estimates are based on liquidation value appraisals with actual values yet to
be realized. By definition, the only portion of the credit that is doubtful is the 25 percent difference between 40 and 65 percent.
A proper classification of such a credit would show 40 percent substandard, 25 percent doubtful, and 35 percent loss. A credit
classified as doubtful should be resolved within a ‘reasonable’ period of time. Reasonable is generally defined as the period between
examinations. In other words, a credit classified doubtful at an examination should be cleared up before the next exam. However, there
may be situations that warrant continuation of the doubtful classification a while longer.
8. Loss - Extensions of credit classified “loss” are considered uncollectible and of such little value that their continuance as bankable
assets is not warranted. This classification does not mean that the credit has absolutely no recovery or salvage value, but rather that it
is not practical or desirable to defer writing off, even though partial recovery may be affected in the future. It should not be the bank’s
practice to attempt long-term recoveries while the credit remains on the books. Losses should be taken in the period in which they
surface as uncollectible.
The following table presents weighted average risk grades of our loan portfolio.
December 31, 2010
December 31, 2009
Weighted Average
Risk Grade
Weighted Average
Risk Grade
Commercial real estate:
Commercial real estate- construction
Commercial real estate- mortgages
Land
Farmland
Commercial and Industrial
Consumer
Consumer residential
Agriculture
Total gross loans
4.89
3.18
4.29
3.28
3.11
2.77
3.01
3.19
3.34
4.83
3.27
5.37
3.45
3.28
2.77
3.01
3.20
3.42
F-20
The following table presents classified loan balances by class of loans. Classified loans include loans in risk grades 5, 6, and 7.
December 31, 2010
December 31, 2009
Classified Loans
Classified Loans
Commercial real estate:
Commercial real estate- construction
$
3,252,081
$
Commercial real estate- mortgages
Land
Farmland
Commercial and Industrial
Consumer
Consumer residential
Agriculture
Total classified loans
23,847,535
14,899,516
2,650,619
2,459,935
17,228
120,000
1,028,547
7,943,818
18,292,059
11,185,830
1,554,806
1,151,367
1,742
94,491
688,939
$
48,275,461
$
40,913,052
Allowance for Loan Losses. The allowance for loan losses is a reserve established through a provision for loan losses charged to
expense, which represents management’s best estimate of probable losses that have been incurred within the existing portfolio of
loans. The allowance, in the judgment of management, is necessary to reserve for estimated loan losses and risks inherent in the loan
portfolio. The Bank’s allowance for loan loss methodology includes allowance allocations calculated in accordance with ASC
Topic 310, “Receivables” and allowance allocations calculated in accordance with ASC Topic 450, “Contingencies.” Accordingly, the
methodology is based on historical loss experience by type of credit and internal risk grade, specific homogeneous risk pools and
specific loss allocations, with adjustments for current events and conditions. The Bank’s process for determining the appropriate level
of the allowance for loan losses is designed to account for credit deterioration as it occurs. The provision for loan losses reflects loan
quality trends, including the levels of and trends related to non-accrual loans, past due loans, potential problem loans, criticized loans
and net charge-offs or recoveries, among other factors. The provision for loan losses also reflects the totality of actions taken on all
loans for a particular period. In other words, the amount of the provision reflects not only the necessary increases in the allowance for
loan losses related to newly identified criticized loans, but it also reflects actions taken related to other loans including, among other
things, any necessary increases or decreases in required allowances for specific loans or loan pools.
The level of the allowance reflects management’s continuing evaluation of industry concentrations, specific credit risks, loan loss
experience, current loan portfolio quality, present economic, political and regulatory conditions and unidentified losses inherent in the
current loan portfolio. Portions of the allowance may be allocated for specific credits; however, the entire allowance is available for
any credit that, in management’s judgment, should be charged off. While management utilizes its best judgment and information
available, the ultimate adequacy of the allowance is dependent upon a variety of factors beyond the Bank’s control, including, among
other things, the performance of the Bank’s loan portfolio, the economy, changes in interest rates and the view of the regulatory
authorities toward loan classifications.
The Bank’s allowance for loan losses consists of three elements: (i) specific valuation allowances determined in accordance with
ASC Topic 310 based on probable losses on specific loans; (ii) historical valuation allowances determined in accordance with ASC
Topic 450 based on historical loan loss experience for similar loans with similar characteristics and trends, adjusted, as necessary, to
reflect the impact of current conditions; and (iii) general valuation allowances determined in accordance with ASC Topic 450 based
on general economic conditions and other qualitative risk factors both internal and external to the Bank.
The allowances established for probable losses on specific loans are based on a regular analysis and evaluation of problem loans.
Loans are classified based on an internal credit risk grading process that evaluates, among other things: (i) the obligor’s ability to
repay; (ii) the underlying collateral, if any; and (iii) the economic environment and industry in which the borrower operates. This
analysis is performed at the relationship manager level for all commercial loans. When a loan has a calculated grade of 5 or higher, a
special assets officer analyzes the loan to determine whether the loan is impaired and, if impaired, the need to specifically allocate a
portion of the allowance for loan losses to the loan. Specific valuation allowances are determined by analyzing the borrower’s ability
to repay amounts owed, collateral deficiencies, the relative risk grade of the loan and economic conditions affecting the borrower’s
industry, among other things.
F-21
Historical valuation allowances are calculated based on the historical loss experience of specific types of loans and the internal risk
grade of such loans at the time they were charged-off. The Bank calculates historical loss ratios for pools of similar loans with similar
characteristics based on the proportion of actual charge-offs experienced to the total population of loans in the pool. The historical loss
ratios are periodically updated based on actual charge-off experience. A historical valuation allowance is established for each pool of
similar loans based upon the product of the historical loss ratio and the total dollar amount of the loans in the pool. The Bank’s pools
of similar loans include similarly risk-graded groups of commercial and industrial loans, commercial real estate loans, consumer real
estate loans and consumer and other loans.
General valuation allowances are based on general economic conditions and other qualitative risk factors both internal and external
to the Bank. In general, such valuation allowances are determined by evaluating, among other things: (i) the experience, ability and
effectiveness of the bank’s lending management and staff; (ii) the effectiveness of the Bank’s loan policies, procedures and internal
controls; (iii) changes in asset quality; (iv) changes in loan portfolio volume; (v) the composition and concentrations of credit; (vi) the
impact of competition on loan structuring and pricing; (vii) the effectiveness of the internal loan review function; (viii) the impact of
environmental risks on portfolio risks; and (ix) the impact of rising interest rates on portfolio risk. Management evaluates the degree
of risk that each one of these components has on the quality of the loan portfolio on a quarterly basis. Each component is determined
to have either a high, moderate or low degree of risk. The results are then input into a “general allocation matrix” to determine an
appropriate general valuation allowance.
Included in the general valuation allowances are allocations for groups of similar loans with risk characteristics that exceed certain
concentration limits established by management. Concentration risk limits have been established, among other things, for certain
industry concentrations, large balance and highly leveraged credit relationships that exceed specified risk grades, and loans originated
with policy exceptions that exceed specified risk grades.
Loans identified as losses by management, internal loan review and/or bank examiners are charged-off. Furthermore, consumer
loan accounts are charged-off automatically based on regulatory requirements.
F-22
The following table details activity in the allowance for loan losses by portfolio segment for the years ended December 31, 2010
and 2009. Allocation of a portion of the allowance to one category of loans does not preclude its availability to absorb losses in other
categories.
Allowance for Loan Losse s
For the Years Ende d De cembe r 31, 2010 and 2009
Commercial
Real Estate
Commercial
and Industrial
Consumer
Consumer
Residential
Agriculture
Unallocated
T otal
$
5,844,793
(2,695,836)
$
3,428,054
$
648,523
(52,382)
1,638
88,524
$
43,822
(569)
5,203
12,659
201,741
(43,399)
52
216,955
$
142,009
$
139,334
$
10,517
263,291
7,020,222
(2,792,186)
6,893
4,020,000
$
6,577,011
$
686,303
$
61,115
$
375,349
$
152,526
$
402,625
$
8,254,929
2010
Allowance for loan losses:
Beginning balance
Charge-offs
Recoveries
Provision
Ending balance
Allowance for loan losses for loans:
Individually evaluated for impairment
$
Collectively evaluated for impairment $
947,843
5,629,168
$
$
686,303
$
$
$
$
61,115
375,349
$
$
152,526
$
$
402,625
$
$
947,843
7,307,086
Ending balances of loans:
Individually evaluated for impairment
$
Collectively evaluated for impairment $
11,253,219
325,477,092
$
221,723
$ 30,533,928
$
$ 1,242,300
$
$ 21,843,935
$
$ 13,621,952
$
11,474,942
$ 392,719,207
2009
Allowance for loan losses:
Beginning balance
Charge-offs
Recoveries
Provision
Ending balance
Allowance for loan losses for loans:
$
4,364,115
(3,531,722)
$
5,012,400
$
731,875
(870,934)
3,475
784,107
34,387
(16,679)
4,574
21,540
$
192,680
$
126,557
$
119,882
$
9,061
15,452
19,452
5,569,496
(4,419,335)
8,049
5,862,012
$
5,844,793
$
648,523
$
43,822
$
201,741
$
142,009
$
139,334
$
7,020,222
Individually evaluated for impairment
$
Collectively evaluated for impairment $
1,245,091
4,599,702
$
$
11,238
637,285
$
$
$
$
43,822
201,741
$
$
142,009
$
$
139,334
$
$
1,256,329
5,763,893
Ending balances of loans:
Individually evaluated for impairment
$
Collectively evaluated for impairment $
14,194,666
338,976,348
$
223,536
$ 37,936,054
$
$ 1,351,343
$
$ 20,117,123
$
$ 12,827,941
$
14,418,202
$ 411,208,809
Changes in the allowance off-balance-sheet commitments were as follows:
Balance, beginning of year
Provision Charged to Operations for Off Balance Sheet
Balance, end of year
YEARS ENDED DECEMBER 31,
2010
2009
$
$
171,900
$
(14,899 )
157,001
$
175,331
(3,431 )
171,900
F-23
The method for calculating the allowance for off-balance-sheet loan commitments is based on an allowance percentage which is less
than other outstanding loan types because they are at a lower risk level. This allowance percentage is evaluated by management
periodically and is applied to the total undisbursed loan commitment balance to calculate the allowance for off-balance-sheet
commitments.
At December 31, 2010 and 2009, loans carried at $331,288,636 and $315,445,820, respectively, were pledged as collateral on
advances from the Federal Home Loan Bank.
NOTE 5 — PREMISES AND EQUIPMENT
Major classifications of premises and equipment are summarized as follows:
Land
Building
Leasehold improvements
Furniture, fixtures, and equipment
DECEMBER 31,
2010
2009
$
$
4,023,703
3,594,531
3,636,728
6,576,695
4,023,703
3,215,383
3,604,173
6,022,324
17,831,657
16,865,583
Less accumulated depreciation and amortization
7,657,835
6,698,286
$
10,173,822
$
10,167,297
Depreciation expense was $959,547 and $1,062,828 for the years ended 2010 and 2009, respectively.
NOTE 6 — ACCRUED INTEREST AND OTHER ASSETS
Other assets are summarized as follows:
Interest income receivable on loans
Interest income receivable on investments
Net deferred tax asset
Federal Reserve Bank stock
Federal Home Loan Bank stock
Cash surrender value of life insurance
Investment in limited partnership
Prepaid expenses and other
DECEMBER 31,
2010
2009
$
1,396,404
$
1,465,832
245,458
2,964,374
1,159,250
3,380,700
268,500
3,364,054
1,157,050
3,803,700
11,098,636
10,267,862
703,155
3,085,339
769,299
1,099,057
$
24,033,316
$
22,195,354
F-24
NOTE 7 — DEPOSITS
Deposit totals were as follows:
Demand
NOW accounts
Money market deposit accounts
Savings
Time, under $100,000
Time, $100,000 and over
Total deposits
DECEMBER 31,
2010
2009
$
102,422,347
$
69,646,979
60,992,425
57,377,899
221,814,286
202,947,582
18,305,430
28,053,882
45,150,480
17,177,924
36,214,623
45,845,277
$
476,738,850
$
429,210,284
Certificates of deposit issued and their remaining maturities at December 31, 2010, are as follows:
Year ending December 31,
2011
2012
2013
2014
2015
$
53,792,630
11,408,288
4,881,800
117,163
3,004,481
$
73,204,362
NOTE 8 — FHLB ADVANCES
At December 31, 2010, the Bank had advances from the Federal Home Loan Bank (“FHLB”) totaling $8,000,000. Of the total
advances outstanding, $5,000,000 represents term advances due in 2011, $3,000,000 represents term advances due in 2012, and there
were no overnight open advances. The weighted average interest rate on these advances was 1.10% and interest payments are due
monthly. Unused and available advances totaled $113,898,711 at December 31, 2010. Loans carried at $331,288,636 as of
December 31, 2010, were pledged as collateral on advances from the Federal Home Loan Bank.
At December 31, 2009, the Bank had advances from the Federal Home Loan Bank (“FHLB”) totaling $32,200,000. Of the total
advances outstanding, $27,200,000 represents term advances due in 2010, $5,000,000 represents term advances due in 2011, and there
were no overnight open advances. The weighted average interest rate on these advances was 1.75% and interest payments are due
monthly. Unused and available advances totaled $86,181,360 at December 31, 2009. Loans carried at $315,445,820 as of
December 31, 2009, were pledged as collateral on advances from the Federal Home Loan Bank.
F-25
NOTE 9 — INTEREST ON DEPOSITS
Interest on deposits was comprised of the following:
Savings and other deposits
Time deposits of $100,000 or more
Other time deposits
NOTE 10 — INCOME TAXES
The provision for income taxes consists of the following:
Current
Federal
State
Deferred
Federal
State
YEARS ENDED DECEMBER 31,
2010
2009
$
$
1,622,501
$
2,822,706
509,679
458,906
1,155,951
977,574
2,591,086
$
4,956,231
YEARS ENDED DECEMBER 31,
2010
2009
$
1,514,263
$
2,025,546
341,753
1,856,016
384,856
112,387
497,243
322,342
2,347,888
(1,575,946)
(568,748)
(2,144,694)
$
2,353,259
$
203,194
F-26
The components of the Bank’s deferred tax assets and liabilities (included in accrued interest and other assets on the balance sheet), is
shown below:
Deferred tax assets:
Deferred loan fees
Allowance for loan losses
Accrued vacation
Accrued salary continuation liability
Deferred compensation
Deferred rent
Nonaccrual loans
Reserve for undisbursed commitments
OREO expenses
State income tax
Holding company organization fees
Deferred tax liabilities:
Prepaid expenses
FHLB dividends
Accumulated depreciation
Deferred loan costs
Stock Options
Investment in limited partnership
Accrued bonus
Unrealized gain on securities available for sale
DECEMBER 31,
2010
2009
$ 154
$ 188
3,390,486
2,836,387
39,365
535,033
80,579
0
313,368
64,613
170,117
116,196
49,848
4,759,759
(97,872)
(220,188)
(287,826)
(104,217)
0
(3,144)
(2,635)
(1,079,503)
(1,795,385)
31,072
472,092
70,184
80,197
182,333
70,744
1,373,362
(26,719)
53,919
5,143,759
(133,737)
(220,188)
(124,683)
(65,212)
(49,710)
(1,243)
(7,866)
(1,177,066)
(1,779,705)
Net deferred income tax asset
$ 2,964,374
$ 3,364,054
Management has assessed the realizability of deferred tax assets and believes it is more likely than not that all deferred tax assets will
be realized in the normal course of operations. Accordingly, these assets have not been reduced by a valuation allowance.
The Bank adopted the revised provisions of FASB ASC 740, Income Taxes, (“ASC 740”), relating to the accounting for uncertainty in
income taxes on January 1, 2007. Upon the implementation of the revised provisions, the Bank recognized no adjustment in the form
of a liability for unrecognized tax benefits. The Bank periodically reviews its income tax positions based on tax laws and regulations
and financial reporting considerations, and records adjustments as appropriate. This review takes into consideration the status of
current taxing authorities’ examinations of the Bank’s tax returns, recent positions taken by the taxing authorities on similar
transactions, if any, and the overall tax environment. The Bank had a liability for unrecognized tax benefits of $144,000 as of
December 31, 2010, which included accrued interest of $25,000. If recognized the unrecognized tax benefit would impact the 2010
annual effective tax rate by 3.1%.
F-27
Detailed below is a reconciliation of the Bank’s unrecognized tax benefits, gross of any related tax benefits, for the year ended
December 31, 2010:
Beginning balance as of January 1, 2010
Additions for tax positions taken in prior years
Ending balance as of December 31, 2010
$
$
0
144,000
144,000
The effective tax rate for 2010 and 2009 differs from the current Federal statutory income tax rate as follows:
Federal statutory income tax rate
State taxes, net of federal tax benefit
Tax exempt interest on municipal securities and loans
Tax exempt earnings on bank owned life insurance
Stock based compensation
Low income housing tax credit
California enterprise zone tax credits and deductions
Other
Effective tax rate
YEARS ENDED DECEMBER 31,
2010
2009
34.0%
7.2%
(2.5)%
(2.6)%
0.5%
(1.3)%
(2.2)%
0.7%
33.7%
34.0 %
7.2 %
(12.3 )%
(7.6 )%
1.3 %
(4.7 )%
(7.8 )%
(0.9 )%
9.2 %
Oak Valley Bancorp files a consolidated return in the U.S. Federal tax jurisdiction and a combined report in the State of California tax
jurisdiction. Prior to the formation of Bancorp in 2008, the Bank filed in the U.S. Federal and California jurisdictions on a stand-alone
basis. None of the entities are subject to examination by taxing authorities for years before 2007 for U.S. Federal or for years before
2006 for California.
NOTE 11 — STOCK OPTION PLAN
The Bank currently has two equity based incentive plans, the Oak Valley Community Bank 1998 Restated Stock Option Plan and the
Oak Valley Bancorp 2008 Stock Plan. The 2008 Stock Plan provides for awards in the form of incentive stocks, non-statutory stock
options, Stock appreciation rights and restrictive stocks. Under the 2008 Plan, the Company is authorized to issue 1,500,000 shares of
its common stock to key employees and directors as incentive and non-qualified stock options, respectively, at a price equal to the fair
market value on the date of grant. The Plan provides that the options are exercisable in equal increments over a five-year period from
the date of grant or over any other schedule approved by the Board of Directors. All incentive stock options expire no later than
ten years from the date of grant. Future grants are not permitted under the 1998 Stock Plan and will all be issued from the 2008 Stock
Plan.
F-28
A summary of the status of the Bank’s fixed stock option plan and changes during the year are presented below.
Outstanding at beginning of year
Granted
Exercised
Forfeited
Outstanding at end of year
Weighted-average fair value of options granted during the year
Intrinsic value of options exercised
Options exercisable at year end:
Weighted average exercise price
Intrinsic value
Weighted average remaining contractual life
Options outstanding at year end:
Weighted average exercise price
Intrinsic value
Weighted average remaining contractual life
DECEMBER 31, 2010
Weighted-
Average
Exercise
Price
7.08
0.00
3.46
4.25
8.09
Shares
385,762
0
$
$
(20,250) $
(77,590) $
287,922 $
DECEMBER 31,
2010
2009
N/A $
1.83
32,298 $
14,940
273,022
354,062
7.97 $
115,414
3.28 years
6.69
108,264
3.31 years
287,922
385,762
8.09 $
117,126
3.45 years
7.08
108,264
3.61 years
$
$
$
$
There were no tax benefits recorded in the statement of earnings during 2010 related to the vesting of non-qualified stock options. As
of December 31, 2010, there was $39,057 of total unrecognized compensation cost related to non-vested stock options which is
expected to be recognized over a weighted-average period of 1.46 years.
For the year ended December 31, 2010, the Bank received $70,109 from the exercise of stock options and received no income tax
benefits related to the exercise of non-qualified employee stock options and disqualifying dispositions in the exercise of incentive
stock options.
NOTE 12 — TREASURY CAPITAL PURCHASE PROGRAM
In response to the stresses in the credit markets and to protect and recapitalize the U.S. financial system, on October 3, 2008, the
Emergency Economic Stabilization Act of 2008 (“EESA”) was signed into law. EESA includes the Treasury Capital Purchase
Program (the “TCPP”), which was intended to inject liquidity into, and stabilize the financial industry. On December 1, 2008, we
received preliminary approval from the United States Department of the Treasury (the “U.S. Treasury”) to participate in the
TCPP. On December 5, the Bank issued to the U.S. Treasury 13,500 shares of senior preferred stock with a zero par value and a
$1,000 per share liquidation preference, along with warrants to purchase 350,346 shares of common stock at a per share exercise price
of $5.78, in exchange for aggregate consideration of $13.5 million. Dividends will be payable quarterly in arrears on February 15,
May 15, August 15 and November 15 of each year with a 5% coupon dividend rate for the first five years and 9% thereafter. If
dividends on the senior preferred shares are not paid in full for six dividend periods, the U.S. Treasury will have the right to elect two
directors to our board until full dividends have been paid for four consecutive dividend periods. The attached warrants are
immediately exercisable and expire 10 years after the issuance date. We must comply with restrictions on executive compensation
during the period that the U.S. Treasury holds an equity position in us through the TCPP. Under the American Recovery and
F-29
Reinvestment Act of 2009, we may elect to repurchase the preferred stock at the original purchase price plus accrued but unpaid
dividends.
The proceeds of $13.5 million were allocated between the preferred stock and the warrants with $12.7 million allocated to preferred
stock and $833 thousand allocated to the warrants, based on their relative fair value at the time of issuance. The fair value of the
preferred stock was estimated using discounted cash flows with a discount rate of 9%. The fair value of the warrants was estimated
using the Binomial option pricing model with the following assumptions: 1) risk-free interest rate of 2.66% (the Treasury 10-year
yield rate as of warrant issuance date); 2) estimated life of ten years (contractual term of the warrants); 3) volatility of 37.4%; and 4)
dividend yield of 1.67%. The discount on the preferred stock (i.e., difference between the initial carrying amount and the liquidation
amount) is amortized over the five-year period preceding the 9% perpetual dividend, using effective yield method.
NOTE 13 — EARNINGS PER SHARE
The Bank’s calculation of earnings per share (“EPS”) including basic EPS, which does not consider the effect of common stock
equivalents and diluted EPS, which considers all dilutive common stock equivalents is as follows:
YEAR ENDED DECEMBER 31, 2010
Shares
(Denominator)
Income
(Numerator)
Per-Share
Amount
Basic EPS:
Net earnings available to common shareholders
$
3,785,783
7,689,760
$
0.49
Effect of dilutive securities:
Stock options
Warrants
Total dilutive shares
Diluted EPS:
—
—
30,864
—
30,864
Net earnings available to common shareholders plus assumed conversions
$
3,785,783
7,720,624
$
0.49
Anti-dilutive options to purchase 223,921 shares of common stock in prices ranging from $5.20 to $15.67 were outstanding during
2010. They were not included in the computation of diluted EPS because the options’ exercise price was greater than the average
market price of the common shares. These options begin to expire in 2015. In addition, warrants issued to the U.S. Treasury related to
the Capital Purchase Program of 350,346 with a price of $5.78 were antidilutive and not included in EPS because the warrants’
exercise price was greater than the average market price of the common shares.
YEAR ENDED DECEMBER 31, 2009
Shares
(Denominator)
Income
(Numerator)
Per-Share
Amount
Basic EPS:
Net earnings available to common shareholders
$
1,158,084
7,668,562
$
0.15
Effect of dilutive securities:
Stock options
Warrants
Total dilutive shares
Diluted EPS:
—
—
28,260
—
28,260
Net earnings available to common shareholders plus assumed conversions
$
1,158,084
7,696,822
$
0.15
Anti-dilutive options to purchase 240,187 shares of common stock in prices ranging from $4.58 to $15.67 were outstanding during
2009. They were not included in the computation of diluted EPS because the options’ exercise price was greater than the average
market price of the common shares. These options begin to expire in 2015. In addition, warrants issued to the U.S. Treasury related to
F-30
the Capital Purchase Program of 350,346 with a price of $5.78 were antidilutive and not included in EPS because the warrants’
exercise price was greater than the average market price of the common shares.
NOTE 14 — COMMITMENTS AND CONTINGENCIES
The Bank is obligated for rental payments under certain operating lease agreements, some of which contain renewal options and
escalation clauses that provide for increased rentals. Total rental expense for the years ended December 31, 2010 and 2009, was
$859,176 and $828,893, respectively.
At December 31, 2010, the future minimum commitments under these operating leases are as follows:
Year ending December 31,
2011
2012
2013
2014
2015
Thereafter
$
856,508
886,655
874,351
853,882
659,389
2,482,235
$
6,613,020
The Bank is a party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of
its customers. These financial instruments include commitments to extend credit in the form of loans or through standby letters of
credit. These instruments involve, to varying degrees, elements of credit and interest-rate risk in excess of the amount recognized in
the balance sheet. The contract amounts of those instruments reflect the extent of involvement the Bank has in particular classes of
financial instruments.
The Bank’s exposure to credit loss in the event of non-performance by the other party to the financial instrument for commitments to
extend credit and standby letters of credit is represented by the contractual amount of those instruments. The Bank uses the same
credit policies in making commitments and conditional obligations as it does for on-balance-sheet instruments.
Financial instruments at December 31, 2010 whose contract amounts represent credit risk:
Contract
Amount
Undisbursed loan commitments
$
47,057,722
Checking reserve
Equity lines
Standby letters of credit
1,182,141
10,276,484
1,427,985
$
59,944,332
Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the
contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since
many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements. The Bank evaluates each customer’s creditworthiness on a case-by-case basis. The amount of
collateral obtained, if deemed necessary by the Bank upon extension of credit, is based on management’s credit evaluation. Collateral
held varies but may include accounts receivable, inventory, property, plant, equipment and income-producing commercial properties.
Standby letters of credit are conditional commitments issued by the Bank to guarantee the performance of a customer to a third party.
The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers.
F-31
NOTE 15 — FINANCIAL INSTRUMENTS
Fair values of financial instruments — The financial statements include various estimated fair value information as of December 31,
20010 and 2009. Such information, which pertains to the Bank’s financial instruments, does not purport to represent the aggregate net
fair value of the Bank. Further, the fair value estimates are based on various assumptions, methodologies, and subjective
considerations, which vary widely among different financial institutions and which are subject to change. The following methods and
assumptions are used by the Bank.
Cash and cash equivalents — The carrying amounts of cash and cash equivalents approximate their fair value.
Securities (including mortgage-backed securities) — Fair values for securities are based on quoted market prices, where available. If
quoted market prices are not available, fair values are based on quoted market prices of comparable instruments.
Loans receivable — For variable-rate loans that reprice frequently and have no significant change in credit risk, fair values are based
on carrying values. The fair values for other loans (e.g., real estate construction and mortgage, commercial, and installment loans) are
estimated using discounted cash flow analyses, using interest rates currently being offered for loans with similar terms to borrowers of
similar credit quality.
Deposit liabilities — The fair values estimated for demand deposits (interest and non-interest checking, savings, and certain types of
money market accounts) are, by definition, equal to the amount payable on demand at the reporting date (i.e. their carrying amounts).
The carrying amounts for variable-rate, fixed-term money market accounts and certificates of deposit approximate their fair values at
the reporting date. Fair values for fixed-rate certificates of deposit are estimated using a discounted cash flow calculation that applies
interest rates currently being offered on certificates to a schedule of the aggregate expected monthly maturities on time deposits.
Federal Home Loan Bank (FHLB) advances — Rates currently available to the Bank for borrowings with similar terms and remaining
maturities are used to estimate the fair value of the existing debt.
Accrued interest — The carrying amounts of accrued interest approximate their fair value.
Off-balance-sheet instruments — Fair values for the Bank’s off-balance-sheet lending commitments are based on fees currently
charged to enter into similar agreements, taking into account the remaining terms of the agreements and the credit standing of the
counterparties.
The estimated fair values of the Bank’s financial instruments at December 31, 2010 were as follows:
Financial assets:
Cash and cash equivalents
Securities available for sale
Loans
Accrued interest receivable
Financial liabilities:
Deposits
FHLB advance
Accrued interest payable
Off-balance-sheet assets (liabilities):
Commitments and standby letters of credit
Carrying
Amount
Fair
Value
$
$
68,936,916
53,267,982
404,194,149
1,641,862
68,936,916
53,267,982
409,387,668
1,641,862
(476,738,850)
(8,000,000)
(167,277)
(477,261,566)
(8,028,835)
(167,277)
(599,443)
F-32
The estimated fair values of the Bank’s financial instruments at December 31, 2009 were as follows:
Financial assets:
Cash and cash equivalents
Securities available for sale
Loans
Accrued interest receivable
Financial liabilities:
Deposits
FHLB advance
Accrued interest payable
Off-balance-sheet assets (liabilities):
Commitments and standby letters of credit
Carrying
Amount
Fair
Value
$
$
21,648,548
50,765,314
425,627,011
1,734,332
21,648,548
50,765,314
434,698,550
1,734,332
(429,210,284)
(32,200,000)
(400,169)
(429,780,364)
(32,367,049)
(400,169)
(631,324)
NOTE 16 − FAIR VALUE MEASUREMENTS
ASC Topic 820, Fair Value Measurements, which the Company adopted effective January 1, 2008, defines fair value, establishes a
framework for measuring fair value, establishes a three-level valuation hierarchy for disclosure of fair value measurement and
enhances disclosure requirements for fair value measurements. The valuation hierarchy is based upon the transparency of inputs to the
valuation of an asset or liability as of the measurement date. The three levels are defined as follow:
Level 1: Inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets.
Level 2: Inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets and inputs that
are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument.
Level 3: Inputs to the valuation methodology are unobservable and significant to the fair value measurement.
In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, the level
in the fair value hierarchy within which the fair value measurement in its entirety falls has been determined based on the lowest level
input that is significant to the fair value measurement in its entirety. The Company’s assessment of the significance of a particular
input to the fair value measurement in its entirety requires judgment, and considers factors specific to the asset or liability. Transfers
between levels of the fair value hierarchy are recognized on the actual date of the event or circumstance that caused the transfer, which
generally corresponds with the Bank’s quarterly valuation process.
F-33
Assets and liabilities measured at fair value on a recurring and non-recurring basis for the years ended December 31, 2010 and 2009
are summarized below:
Fair Value Measurements at December 31, 2010 Using
Quoted Prices
in Active
Markets for
Identical Assets
(Level 1)
Significant
Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
December 31,
2010
Assets and liabilities measured on a recurring basis:
Available-for-sale securities
U.S. agencies
Collateralized mortgage obligations
Municipalities
SBA Pools
Mutual Fund
Assets and liabilities measured on a non-recurring basis:
Impaired Loans
Other real estate owned
$
$
$
30,190,388
8,136,780
10,799,499
1,506,096
2,635,219
$
$
$
—
30,190,388
8,136,780
10,799,499
1,506,096
2,635,219
3,947,203
778,174
$
$
—
—
$
$
—
—
$
$
3,947,203
778,174
Fair Value Measurements at December 31, 2009 Using
Quoted Prices
in Active
Markets for
Identical Assets
(Level 1)
Significant
Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
$
$
1,566,777
$
—
30,984,718
2,994,746
13,557,151
1,579,348
82,574
December 31,
2009
$
30,984,718
2,994,746
13,557,151
1,579,348
82,574
1,566,777
Assets and liabilities measured on a recurring basis:
Available-for-sale securities
U.S. agencies
Collateralized mortgage obligations
Municipalities
SBA Pools
Asset backed securities
Mutual Fund
Assets and liabilities measured on a non-recurring basis:
Impaired Loans
Other real estate owned
$
$
10,372,613
2,149,514
$
$
—
—
$
$
—
—
$
$
10,372,613
2,149,514
Losses recognized from non-recurring fair value adjustments for the years ended December 31, 2010 and 2009 are presented on the
following table:
Impaired loans
Foreclosed assets
Total loss from non-recurring fair value adjustments
YEARS ENDED DECEMBER 31,
2010
2009
$
$
2,059,247
$
2,313,483
95,162
2,290,275
2,154,409
$
4,603,758
F-34
Following is a description of valuation methodologies used for assets and liabilities recorded at fair value.
Available-for-sale securities - Investment securities available-for-sale are recorded at fair value on a recurring basis. Fair value
measurement is based upon quoted market prices, if available. If quoted market prices are not available, fair values are measured
using independent pricing models or other model-based valuation techniques such as the present value of future cash flows, adjusted
for the security’s credit rating, prepayment assumptions, and other factors such as credit loss assumptions. Level 1 securities include
those traded on an active exchange, such as the New York Stock Exchange, U.S. Treasury securities that are traded by dealers or
brokers in active over-the-counter markets and money market funds. Level 2 securities include mortgage-backed securities issued by
government sponsored entities, municipal bonds and corporate debt securities. Securities classified as Level 3 include asset-backed
securities in less liquid markets.
Impaired loans - ASC Topic 820 applies to loans measured for impairment using the practical expedients permitted by ASC Topic
310, Accounting by Creditors for Impairment of a Loan. The Bank does not record loans at fair value on a recurring basis. However,
from time to time, a loan is considered impaired and an allowance for loan losses is established. Loans for which it is probable that
payment of interest and principal will not be made in accordance with the contractual terms of the loan agreement are considered
impaired. Impaired loans where an allowance is established based on the fair value of collateral less the cost related to liquidation of
the collateral require classification in the fair value hierarchy. When the fair value of the collateral is based on an observable market
price or a current appraised value, the Bank records the impaired loan as non-recurring Level 2. When an appraised value is not
available or management determines the fair value of the collateral is further impaired below the appraised value and there is no
observable market price, the Bank records the impaired loan as non-recurring Level 3.
Other Real Estate Owned - Other real estate assets (“OREO”) acquired through, or in lieu of, foreclosure are held-for-sale and are
initially recorded at the lower of cost or fair value, less selling costs. Any write-downs to fair value at the time of transfer to OREO
are charged to the allowance for loan losses, subsequent to foreclosure. Appraisals or evaluations are then done periodically thereafter
charging any additional write-downs or valuation allowances to the appropriate expense accounts. Values are derived from appraisals
of underlying collateral and discounted cash flow analysis. OREO is classified within Level 3 of the hierarchy.
NOTE 17 — RELATED PARTY TRANSACTIONS
The Bank, in the normal course of business, makes loans and receives deposits from its directors, officers, principal shareholders, and
their associates. In management’s opinion, these transactions are on substantially the same terms as comparable transactions with
other customers of the Bank. Loans to directors, officers, shareholders, and affiliates are summarized below:
Aggregate amount outstanding, beginning of year
New loans or advances during year
Repayments during year
Aggregate amount outstanding, end of year
YEARS ENDED DECEMBER 31,
2010
2009
$
$
9,245,717
2,863,240
(4,089,809)
8,019,148
$
$
9,483,708
798,757
(1,036,748)
9,245,717
Related party deposits totaled $10,270,556 and $6,207,318 at December 31, 2010 and 2009, respectively.
NOTE 18 — PROFIT SHARING PLAN
The profit sharing plan to which both the Bank and eligible employees contribute was established in 1995. Bank contributions are
voluntary and at the discretion of the Board of Directors. Contributions were approximately $259,000 and $275,000 for 2010 and
2009, respectively.
F-35
NOTE 19 — RESTRICTIONS ON RETAINED EARNINGS
Under current California State banking laws, the Bank may not pay cash dividends in an amount that exceeds the lesser of retained
earnings of the Bank or the Bank’s net earnings for its last three fiscal years (less the amount of any distributions to shareholders made
during that period). If the above requirements are not met, cash dividends may only be paid with the prior approval of the
Commissioner of the Department of Financial Institutions, in an amount not exceeding the Bank’s net earnings for its last fiscal year
or the amount of its net earnings for its current fiscal year. Accordingly, the future payment of cash dividends will depend on the
Bank’s earnings and its ability to meet its capital requirements.
NOTE 20 — OTHER POST-RETIREMENT BENEFIT PLANS
The Bank has awarded certain officers a salary continuation plan (the “Plan”). Under the Plan, the participants will be provided with a
fixed annual retirement benefit for 20 years after retirement. The Bank is also responsible for certain pre-retirement death benefits
under the Plan. In connection with the implementation of the Plan, the Bank purchased single premium life insurance policies on the
life of each of the officers covered under the Plan. The Bank is the owner and partial beneficiary of these life insurance policies. The
assets of the Plan, under Internal Revenue Service regulations, are owned by the Bank and are available to satisfy the Bank’s general
creditors.
During December 2001, the Bank awarded its directors a director retirement plan (“DRP”). Under the DRP, the participants will be
provided with a fixed annual retirement benefit for ten years after retirement. The Bank is also responsible for certain pre-retirement
death benefits under the DRP. In connection with the implementation of the DRP, the Bank purchased single premium life insurance
policies on the life of each director covered under the DRP. The Bank is the owner and partial beneficiary of these life insurance
policies. The assets of the DRP, under Internal Revenue Service regulations, are the property of the Bank and are available to satisfy
the Bank’s general creditors.
Future compensation under both plans is earned for services rendered through retirement. The Bank accrues for the salary continuation
liability based on anticipated years of service and vesting schedules provided under the plans. The Bank’s current benefit liability is
determined based on vesting and the present value of the benefits at a corresponding discount rate. The discount rate used is an
equivalent rate for investment-grade bonds with lives matching those of the service periods remaining for the salary continuation
contracts, which average approximately 20 years. At December 31, 2010 and 2009, $1,300,062 and $1,147,125, respectively, has been
accrued to date, based on a discounted cash flow using a discount rate of 6%, and is included in other liabilities.
The Bank entered into split-dollar life insurance agreements with certain officers. In connection with the implementation of the split-
dollar agreements, the Bank purchased single premium life insurance policies on the life of each of the officers covered by the split-
dollar life insurance agreements. The Bank is the owner of the policies and the partial beneficiary in an amount equal to the cash
surrender value of the policies.
The combined cash surrender value of all Bank-owned life insurance policies was $11,098,636 and $10,267,862 at December 31,
2010 and 2009, respectively. The cash surrender value of the life insurance policies is included in other assets (Note 6).
NOTE 21 — REGULATORY MATTERS
The Bank and the Company is subject to various regulatory capital requirements administered by federal and state banking agencies.
Failure to meet minimum capital requirements can initiate certain mandatory — and possibly additional discretionary — actions by
regulators that, if undertaken, could have a direct material effect on the Bank’s financial statements. Under capital adequacy
guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve
quantitative measures of the Bank’s assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting
practices. The Bank’s capital amounts and classifications are also subject to qualitative judgments by the regulators about components,
risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy require the Bank to maintain minimum amounts and ratios
(set forth in the table on the next page) of total and Tier I capital (as defined in the regulations) to risk-weighted assets (as defined),
and of Tier I capital (as defined) to average assets (as defined). Management believes, as of December 31, 2010, that the Bank meets
all capital adequacy requirements to which it is subject.
F-36
As of December 31, 2010, the most recent notification from the Federal Reserve Bank categorized the Bank as well capitalized under
the regulatory framework for prompt corrective action. To be categorized as well capitalized, the Bank must maintain minimum total
risk-based, Tier I risk-based, and Tier I leverage ratios as set forth in the following table. There are no conditions or events since
notification that management believes have changed the Bank’s category.
The Bank’s actual capital amounts and ratios at December 31, 2010 and 2009, are presented in the following table.
Actual
For capital
adequacy purposes
To be well
capitalized under
prompt corrective
action provisions
Amount
Ratio
Amount
Ratio
Amount
Ratio
Capital ratios for Bank:
As of December 31, 2010
Total capital (to Risk- Weighted Assets)
$ 68,742,000
Tier I capital (to Risk- Weighted Assets) $ 62,946,000
Tier I capital (to Average Assets)
$ 62,946,000
As of December 31, 2009
Total capital (to Risk- Weighted Assets)
$ 64,821,000
Tier I capital (to Risk- Weighted Assets) $ 58,817,000
Tier I capital (to Average Assets)
$ 58,817,000
Capital ratios for Bancorp:
As of December 31, 2010
Total capital (to Risk- Weighted Assets)
$ 68,910,000
Tier I capital (to Risk- Weighted Assets)
$ 63,114,000
Tier I capital (to Average Assets)
$ 63,114,000
As of December 31, 2009
Total capital (to Risk- Weighted Assets)
$ 65,014,000
Tier I capital (to Risk- Weighted Assets)
$ 59,009,000
Tier I capital (to Average Assets)
$ 59,009,000
14.9%
13.7%
11.5%
13.6%
12.3%
11.3%
15.0%
13.7%
11.6%
13.6%
12.3%
11.3%
$ 36,872,000
$ 18,436,000
$ 21,864,000
>8.0%
>4.0%
>4.0%
$ 46,090,000
>10.0%
$ 27,654,000
$ 27,330,000
>6.0%
>5.0%
$ 38,275,000
$ 19,137,000
$ 20,819,000
>8.0%
>4.0%
>4.0%
$ 47,844,000
>10.0%
$ 28,706,000
$ 26,024,000
>6.0%
>5.0%
$ 36,874,000
$ 18,437,000
$ 21,865,000
>8.0%
>4.0%
>4.0%
$ 38,285,000
$ 19,142,000
$ 20,824,000
>8.0%
>4.0%
>4.0%
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
F-37
OAK VALLEY BANCORP
NOTES TO FINANCIAL STATEMENTS
22. PARENT ONLY CONDENSED FINANCIAL STATEMENTS
CONDENSED BALANCE SHEET
ASSETS
Cash
Investment in bank subsidiary
Other assets
Total Assets
LIABILITIES AND SHAREHOLDERS’ EQUITY
Total liabilities
Shareholders’ equity
Preferred stock, no par value; $1,000 per share liquidation preference,
10,000,000 shares authorized and 13,500 issued and outstanding at
December 31, 2010 and December 31, 2009
Common stock, no par value; 50,000,000 shares authorized,
7,702,127 and 7,681,877 shares issued and outstanding at
December 31, 2010 and 2009, respectively
Additional paid-in capital
Retained earnings
Accumulated other comprehensive income, net of tax
December 31,
2010
December 31,
2009
$
$
$
144,831
64,490,421
22,480
70,109
60,499,830
122,312
64,657,732
$
60,692,251
-
-
13,013,945
12,847,297
24,003,549
2,080,218
24,016,466
1,543,554
23,933,440
1,997,747
20,230,683
1,683,084
Total shareholders’ equity
64,657,732
60,692,251
Total liabilities and shareholders' equity
$
64,657,732
$
60,692,251
F-38
OAK VALLEY BANCORP
NOTES TO FINANCIAL STATEMENTS
22. PARENT ONLY CONDENSED FINANCIAL STATEMENTS (CONTINUED)
CONDENSED STATEMENT OF EARNINGS
INCOME
Dividends declared by subsidiary
Total income
EXPENSES
Salary Expense
Legal expense
Other operating expenses
Total non-interest expense
Year Ended December 31,
2009
2010
$ 675,000
675,000
$ 977,923
977,923
70,000
66,682
25,130
161,812
-
76,357
72,525
148,882
Income before equity in undistributed
income of subsidiary
513,188
829,041
Equity in undistributed net income of subsidiary
Income before income tax benefit
4,047,651
4,560,839
1,109,415
1,938,456
Income tax benefit
Net Income
66,592
61,272
$ 4,627,431
$ 1,999,728
Preferred Stock dividends and accretion
841,648
841,644
Net income available to common shareholders
$ 3,785,783
$ 1,158,084
F-39
OAK VALLEY BANCORP
NOTES TO FINANCIAL STATEMENTS
22. PARENT ONLY CONDENSED FINANCIAL STATEMENTS (CONTINUED)
CONDENSED STATEMENT OF CASHFLOWS
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings
Adjustments to reconcile net earnings to net cash from operating activities:
Undistributed net income of subsidiary
Decrease/(Increase) in other assets
Net cash from operating activities
$
4,627,431 $
1,999,728
(4,047,650)
99,832
679,613
(1,109,415)
(61,272)
829,041
YEAR ENDED DECEMBER 31,
2009
2010
CASH FLOWS FROM FINANCING ACTIVITIES:
Shareholder cash dividends paid
Preferred Stock dividends paid
Proceeds from sale of common stock and exercise of stock options
Net cash from financing activities
NET DECREASE IN CASH AND CASH EQUIVALENTS
CASH AND CASH EQUIVALENTS, beginning of period
CASH AND CASH EQUIVALENTS, end of period
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for:
Income taxes
NON-CASH FINANCING ACTIVITIES:
Accretion of preferred stock
0
(675,000)
70,109
(604,891)
74,722
70,109
(191,541)
(637,500)
70,109
(758,932)
70,109
0
144,831 $
70,109
1,976,000 $
1,264,000
166,648 $
166,648
$
$
$
F-40
INDEX TO EXHIBITS
Exhibit
Number
2.1
Description
Agreement and Plan of Merger between the Registrant, Interim Oak Valley Bancorp, Inc. and Oak Valley Community
Bank*
3.1 Articles of Incorporation of Oak Valley Bancorp, Inc.*
3.2 First Amendment to Articles of Incorporation of Oak Valley Bancorp, Inc.*
3.3 Bylaws of Oak Valley Bancorp, Inc.*
3.4 First Amended and Restated Bylaws of Oak Valley Bancorp, Inc.**
3.5 Certificate of Determination of Series A Preferred Stock of Oak Valley Bancorp, Inc.**
3.6
Letter Agreement between the United States Department of the Treasury and Oak Valley Bancorp dated December 5,
2008**
10.1 Oak Valley Community Bank 1998 Restated Stock Option Plan*
10.2 Oak Valley Community Bank Form of Director Retirement Agreement*
10.3 Oak Valley Community Bank Form of Salary Continuation Agreement*
10.4 Securities Purchase Agreement between Oak Valley Bancorp and the U.S. Treasury effective December 4, 2008**
14 Code of Ethics***
21 Subsidiaries of the Issuer*
23.1 Consent of Independent Registered Accounting Firm
24 Power of Attorney (included on the signature page of this report)
31.01
Certification of Chief Executive Officer pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002
31.02
Certification of Chief Financial Officer pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002
32.01
Certifications of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
99.1
IFR Section 30.15 – Certification for Years following First Fiscal Year **
99.2
IFR Section 30.15 – Certification for Years following First Fiscal Year **
* Incorporated by reference from the Form 10 filed on July 31, 2008
** Incorporated by reference from the Form 8-A filed on January 14, 2009
*** Incorporated by reference from the Form 10-K filed on March 31, 2009
EXHIBIT 23.1
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We consent to the incorporation by reference in the Registration Statement No. 333-158201 on Form S-8 of our report
dated March 28, 2011, relating to the consolidated financial statements appearing in this Annual Report on Form 10-K of
Oak Valley Bancorp for the year ended December 31, 2010.
/s/ Moss Adams LLP
Stockton, California
March 28, 2011
EXHIBIT 31.01
CERTIFICATION PURSUANT TO RULE 13a-14(a)/15d-14(a) AS ADOPTED PURSUANT TO SECTION 302 OF THE
SARBANES-OXLEY ACT OF 2002
I, Ronald C. Martin, Chief Executive Officer, certify that:
1.
I have reviewed this annual report on Form 10-K of Oak Valley Bancorp (the Registrant);
2.
3.
4.
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading
with respect to the period covered by this report;
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all
material respects the financial condition, results of operations and cash flows of the Registrant as of, and for, the periods
presented in this report;
The Registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as
defined in Exchange Act Rules 13a -15(f) and 15d-15(f)) for the Registrant and have:
(a)
(b)
(c)
(d)
designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed
under our supervision, to ensure that material information relating to the Registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is
being prepared;
designed such internal control over financial reporting, or caused such internal control over financial reporting to be
designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and
the preparation of financial statements for external purposes in accordance with generally accepted accounting
principles;
evaluated the effectiveness of the Registrant’s disclosure controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by
this report based on such evaluation; and
disclosed in this report any change in the Registrant’s internal control over financial reporting that occurred during
the Registrant’s most recent fiscal quarter (the Registrant’s fourth fiscal quarter in the case of an annual report) that
has materially affected, or is reasonably likely to materially affect, the Registrant’s internal control over financial
reporting; and
5.
The Registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over
financial reporting, to the Registrant’s auditors and the audit committee of Registrant’s Board of Directors:
(a)
(b)
all significant deficiencies and material weaknesses in the design or operation of internal control over financial
reporting, which are reasonably likely to adversely affect the Registrant’s ability to record, process, summarize and
report financial information; and
any fraud, whether or not material, that involves Management or other employees who have a significant role in the
Registrant’s internal control over financial reporting.
Dated: March 25, 2011
/s/ Ronald C. Martin
Ronald C. Martin
Chief Executive Officer
EXHIBIT 31.02
CERTIFICATION PURSUANT TO RULE 13a-14(a)/15d-14(a) AS ADOPTED PURSUANT TO SECTION 302 OF THE
SARBANES-OXLEY ACT OF 2002
I, Richard A. McCarty, Chief Financial Officer, certify that:
1.
2.
3.
4.
I have reviewed this annual report on Form 10-K of Oak Valley Bancorp (the Registrant);
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading
with respect to the period covered by this report;
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all
material respects the financial condition, results of operations and cash flows of the Registrant as of, and for, the periods
presented in this report;
The Registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as
defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the Registrant and have:
(a)
(b)
(c)
(d)
designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed
under our supervision, to ensure that material information relating to the Registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly during the period in which this report
is being prepared;
designed such internal control over financial reporting, or caused such internal control over financial reporting to be
designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and
the preparation of financial statements for external purposes in accordance with generally accepted accounting
principles;
evaluated the effectiveness of the Registrant’s disclosure controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by
this report based on such evaluation; and
disclosed in this report any change in the Registrant’s internal control over financial reporting that occurred during
the Registrant’s most recent fiscal quarter (the Registrant’s fourth fiscal quarter in the case of an annual report) that
has materially affected, or is reasonably likely to materially affect, the Registrant’s internal control over financial
reporting; and
5.
The Registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over
financial reporting, to the Registrant’s auditors and the audit committee of Registrant’s Board of Directors:
(a)
(b)
all significant deficiencies and material weaknesses in the design or operation of internal control over financial
reporting, which are reasonably likely to adversely affect the Registrant’s ability to record, process, summarize and
report financial information; and
any fraud, whether or not material, that involves Management or other employees who have a significant role in the
Registrant’s internal control over financial reporting.
Dated: March 25, 2011
/s/ Richard A. McCarty
Richard A. McCarty
Chief Financial Officer
EXHIBIT 32.01
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350 AS ADOPTED PURSUANT TO SECTION 906 OF THE
SARBANES-OXLEY ACT OF 2002
In connection with the annual report on Form 10-K of Oak Valley Bancorp (the Registrant) for the year ended December 31, 2010, as
filed with the Securities and Exchange Commission, the undersigned hereby certify pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
1)
2)
such Form 10-K fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934;
and
the information contained in such Form 10-K fairly presents, in all material respects, the financial condition and results
of operations of the Registrant.
Dated: March 25, 2011
Dated: March 25, 2011
/s/ Ronald C. Martin
Ronald C. Martin
Chief Executive Officer
/s/ Richard A. McCarty
Richard A. McCarty
Chief Financial Officer
This certification accompanies each report pursuant to section 906 of the Sarbanes Oxley Act of 2002 and shall not, except to the
extent required by the Sarbanes Oxley Act of 2002, be deemed filed by the Registrant for purposes of section 18 of the Securities and
Exchange Act of 1934, as amended.
IFR Section 30.15 – Certification for Years following First Fiscal Year
(Principal Executive Officer)
OAK VALLEY BANCORP
UST #205
Exhibit 99.1
I, Ronald C. Martin, Chief Executive Officer and principal executive officer of Oak Valley Bancorp (the
“Company”), certify, based on my knowledge, that:
(i) The Company’s Compensation Committee has discussed, reviewed and evaluated with senior risk officers
at least every six months during the most recently completed fiscal year, all of which was a TARP period,
senior executive officer (SEO) compensation plans and employee compensation plans and the risks these
plans pose to the Company;
(ii) During the discussions, reviews and evaluations described above, the Company’s Compensation
Committee did not identify, and thus did not need to take steps to limit, during the most recently completed
fiscal year any features of the SEO compensation plans that could lead SEOs to take unnecessary and
excessive risks that could threaten the value of the Company, and the Company’s Compensation
Committee did not identify any features of the employee compensation plans that pose risks to the
Company, and thus did not need to take steps to limit those features to ensure that the Company is not
unnecessarily exposed to risks;
(iii) The Company’s Compensation Committee has reviewed, at least every six months during the most recently
completed fiscal year, the terms of each employee compensation plan and identified any features of the
plan that could encourage the manipulation of reported earnings of the Company to enhance the
compensation of an employee, and has limited any such features;
(iv) The Company’s Compensation Committee will certify to the reviews of the SEO compensation plans and
employee compensation plans required under paragraphs (i) and (iii) above;
(v) The Company’s Compensation Committee will provide a narrative description of how it limited during any
part of the most recently completed fiscal year the features in:
(A) SEO compensation plans that could lead SEOs to take unnecessary and excessive risks that could
threaten the value of the Company;
(B) Employee compensation plans that unnecessarily expose the Company to risks; and
(C) Employee compensation plans that could encourage the manipulation of reported earnings of the
Company to enhance the compensation of an employee;
(vi) The Company has required that bonus payments to SEOs or any of the next twenty most highly
compensated employees, as defined in the regulations and guidance established under Section 111 of EESA
(bonus payments), be subject to a recovery or “clawback” provision during the most recently completed
fiscal year if the bonus payments were based on materially inaccurate financial statements or any other
materially inaccurate performance metric criteria;
(vii) The Company has prohibited any golden parachute payment, as defined in the regulations and guidance
established under Section 111 of EESA, to an SEO or any of the next five most highly compensated
employees during the most recently completed fiscal year;
(viii) The Company has limited bonus payments to its applicable employees in accordance with Section 111 of
EESA and the regulations and guidance established thereunder during the most recently completed fiscal
year;
(ix) The Company and its employees have complied with the excessive or luxury expenditures policy, as
defined in the regulations and guidance established under Section 111 of EESA, during the most recently
completed fiscal year; and any expenses that, pursuant to the policy, required approval of the board of
directors, a committee of the board of directors, an SEO, or an executive officer with a similar level of
responsibility were properly approved;
(x) The Company will permit a non-binding shareholder resolution in compliance with applicable federal
securities rules and regulations on the disclosures provided under the federal securities laws related to SEO
compensation paid or accrued during the most recently completed fiscal year;
(xi) The Company will disclose the amount, nature, and justification for the offering, during the most recently
completed fiscal year, of any perquisites, as defined in the regulations and guidance established under
Section 111 of EESA, whose total value exceeds $25,000 for the employee who is subject to the bonus
payment limitations identified in paragraph (viii);
(xii) The Company will disclose whether the Company, the Company’s board of directors, or the Company’s
Compensation Committee has engaged during the most recently completed fiscal year a compensation
consultant; and the services the compensation consultant or any affiliate of the compensation consultant
provided during this period;
(xiii) The Company has prohibited the payment of any gross-ups, as defined in the regulations and guidance
established under Section 111 of EESA, to the SEOs and the next twenty most highly compensated
employees during the most recently completed fiscal year;
(xiv) The Company has substantially complied with all other requirements related to employee compensation
that are provided in the agreement between the Company and Treasury, including any amendments;
(xv) The Company has submitted to Treasury a complete and accurate list of the SEOs and the twenty next most
highly compensated employees for the current fiscal year, with the non-SEOs ranked in descending order
of level of annual compensation, and with the name, title, and employer of each SEO and most highly
compensated employee identified; and
(xvi) I understand that a knowing and willful false or fraudulent statement made in connection with this
certification may be punished by fine, imprisonment, or both. (See, for example, 18 USC 1001.)
Dated: March 31, 2011
/s/ RONALD C. MARTIN
Ronald C. Martin
Chief Executive Officer
Oak Valley Bancorp
IFR Section 30.15 – Certification for Years following First Fiscal Year
(Principal Financial Officer)
OAK VALLEY BANCORP
UST #205
Exhibit 99.2
I, Richard A. McCarty, Executive Vice President and Chief Financial Officer of Oak Valley Bancorp (the
“Company”), certify, based on my knowledge, that:
(i) The Company’s Compensation Committee has discussed, reviewed and evaluated with senior risk officers
at least every six months during the most recently completed fiscal year, all of which was a TARP period,
senior executive officer (SEO) compensation plans and employee compensation plans and the risks these
plans pose to the Company;
(ii) During the discussions, reviews and evaluations described above, the Company’s Compensation
Committee did not identify, and thus did not need to take steps to limit, during the most recently completed
fiscal year any features of the SEO compensation plans that could lead SEOs to take unnecessary and
excessive risks that could threaten the value of the Company, and the Company’s Compensation
Committee did not identify any features of the employee compensation plans that pose risks to the
Company, and thus did not need to take steps to limit those features to ensure that the Company is not
unnecessarily exposed to risks;
(iii) The Company’s Compensation Committee has reviewed, at least every six months during the most recently
completed fiscal year, the terms of each employee compensation plan and identified any features of the
plan that could encourage the manipulation of reported earnings of the Company to enhance the
compensation of an employee, and has limited any such features;
(iv) The Company’s Compensation Committee will certify to the reviews of the SEO compensation plans and
employee compensation plans required under paragraphs (i) and (iii) above;
(v) The Company’s Compensation Committee will provide a narrative description of how it limited during any
part of the most recently completed fiscal year the features in:
(A) SEO compensation plans that could lead SEOs to take unnecessary and excessive risks that could
threaten the value of the Company;
(B) Employee compensation plans that unnecessarily expose the Company to risks; and
(C) Employee compensation plans that could encourage the manipulation of reported earnings of the
Company to enhance the compensation of an employee;
(vi) The Company has required that bonus payments to SEOs or any of the next twenty most highly
compensated employees, as defined in the regulations and guidance established under Section 111 of EESA
(bonus payments), be subject to a recovery or “clawback” provision during the most recently completed
fiscal year if the bonus payments were based on materially inaccurate financial statements or any other
materially inaccurate performance metric criteria;
(vii) The Company has prohibited any golden parachute payment, as defined in the regulations and guidance
established under Section 111 of EESA, to an SEO or any of the next five most highly compensated
employees during the most recently completed fiscal year;
(viii) The Company has limited bonus payments to its applicable employees in accordance with Section 111 of
EESA and the regulations and guidance established thereunder during the most recently completed fiscal
year;
(ix) The Company and its employees have complied with the excessive or luxury expenditures policy, as
defined in the regulations and guidance established under Section 111 of EESA, during the most recently
completed fiscal year; and any expenses that, pursuant to the policy, required approval of the board of
directors, a committee of the board of directors, an SEO, or an executive officer with a similar level of
responsibility were properly approved;
(x) The Company will permit a non-binding shareholder resolution in compliance with applicable federal
securities rules and regulations on the disclosures provided under the federal securities laws related to SEO
compensation paid or accrued during the most recently completed fiscal year;
(xi) The Company will disclose the amount, nature, and justification for the offering, during the most recently
completed fiscal year, of any perquisites, as defined in the regulations and guidance established under
Section 111 of EESA, whose total value exceeds $25,000 for the employee who is subject to the bonus
payment limitations identified in paragraph (viii);
(xii) The Company will disclose whether the Company, the Company’s board of directors, or the Company’s
Compensation Committee has engaged during the most recently completed fiscal year a compensation
consultant; and the services the compensation consultant or any affiliate of the compensation consultant
provided during this period;
(xiii) The Company has prohibited the payment of any gross-ups, as defined in the regulations and guidance
established under Section 111 of EESA, to the SEOs and the next twenty most highly compensated
employees during the most recently completed fiscal year;
(xiv) The Company has substantially complied with all other requirements related to employee compensation
that are provided in the agreement between the Company and Treasury, including any amendments;
(xv) The Company has submitted to Treasury a complete and accurate list of the SEOs and the twenty next most
highly compensated employees for the current fiscal year, with the non-SEOs ranked in descending order
of level of annual compensation, and with the name, title, and employer of each SEO and most highly
compensated employee identified; and
(xvi) I understand that a knowing and willful false or fraudulent statement made in connection with this
certification may be punished by fine, imprisonment, or both. (See, for example, 18 USC 1001.)
Dated: March 31, 2011
/s/ RICHARD A. MCCARTY
Richard A. McCarty
Executive Vice-President and
Chief Financial Officer
Oak Valley Bancorp