C u l t i v a t i n g s u c c e s s w i t h l i f e l o n g r e l a t i o n s h i p s
O A K V A L L E Y B A N C O R P | 2 0 1 4 A N N U A L R E P O R T
S E L E C T E D F I N A N C I A L D A T A F I V E - Y E A R S U M M A R Y
(Dollars in thousands except for per share amounts)
Year Ended December 31,
2014
2013
2012
2011
2010
Interest income
Interest expense
Net interest income
(Reversal of) provision for loan losses
Non-interest income
Non-interest expense
Net income before income taxes
Provision for income taxes
Net income
Preferred stock dividends & accretion
Net income available to common
shareholders
Net earnings per common share (diluted)
Cash dividends paid per common share
Cash dividends paid
$25,936
$25,104
$25,982
$26,828
647
25,289
(1,877)
3,764
20,234
10,696
3,574
7,122
-
$7,122
$0.89
$0.165
$1,318
828
24,276
300
3,280
18,660
8,596
2,710
5,886
68
$5,818
1,137
24,845
1,150
3,149
18,249
8,595
2,814
5,781
452
1,648
25,180
1,500
2,751
17,394
9,037
3,176
5,861
1,161
$27,926
2,919
25,007
4,020
2,770
16,776
6,981
2,353
4,628
842
$5,329
$4,700
$3,786
$0.74
$0.69
$-
$-
$-
$-
$0.61
$-
$-
$0.49
$-
$-
Weighted average common
7,992,731
7,846,078
7,766,745
7,738,999
7,720,624
shares outstanding (diluted)
Year End Balance Sheet
Total assets
Total earning assets
Gross loans
Cash and cash equivalents
Investment securities
Non-interest bearing deposits
Interest bearing deposits
Total deposits
Total stockholder’s equity
$749,665
668,827
454,471
144,288
121,277
$206,677
462,904
669,581
75,041
$671,853
624,864
419,438
105,191
117,746
$176,964
425,669
602,633
64,517
$660,581
605,275
390,986
141,335
103,866
$163,991
423,002
586,993
69,969
$612,172
557,784
396,202
101,085
89,695
$130,143
406,061
536,204
70,402
$552,396
518,845
404,194
68,937
53,268
$102,422
374,317
476,739
64,658
DEAR
hands-on relationship with
company, our clients, and
$669.6 million, which was
CUSTOMERS,
the Bank, expanding our
our shareholders.
an increase of $66.9 million,
SHAREHOLDERS
AND FRIENDS:
branch footprint for their
We are delighted to
or 11.1% over the prior year.
convenience as we execute
report another year of
Gross loans at year end
our long-term vision for the
positive results and record
totaled $454.5 million, reflect-
It’s often said that big things
Central Valley and Sierra
earnings. For the fiscal year
ing an increase of $35.0 mil-
come in small packages, and
foothills. Our 15th location,
ended December 31, 2014,
lion, or 8.4%, over 2013.
the Oak Valley style of com-
opened last December in
net income totaled $7.1 mil-
We are pleased to reward
munity banking has certainly
Tracy, has been well-re-
lion, or $0.89 per diluted
our shareholders with the
proven this adage. Even as
ceived and we look forward
share, compared to $5.8
payment of semi-annual
we continue to grow, we are
to opening a second location
million, or $0.74 per diluted
dividends, which result from
focused on delivering inti-
in Sonora by the end of 2015.
share, for 2013, which
the strength of the Bank’s
mate, personalized service in
Teamwork continues to
included the final preferred
performance and our confi-
keeping with our goal of cul-
be one of our most defining
stock dividend payment of
dence in the Central Valley’s
tivating lifelong relationships.
attributes. As employees of
$68,000 recorded in the
economic recovery.
People shape our success—
a company with a largely
first quarter of 2013. The
As we look ahead, we
both in front of and behind
intangible product, we rec-
2014 operating results rep-
reaffirm our commitment
the counter—as you’ll see in
ognize, our service is the
resented a 22.4% increase
to a full-service relationship
the following pages.
brand. We remind ourselves
in consolidated net income
banking strategy, which
We continually strive to
daily that our actions, indi-
available to common share-
consistently serves as a
increase convenience and
vidually and as a team,
holders and marked a new
successful hedge against
add value across all ser-
create lasting impressions
annual earnings record for
competitive pressures,
vice delivery channels and
that influence the Oak Valley
Oak Valley Bancorp.
interest rate uncertainty,
throughout our product lines.
Community Bank customer
As reported earlier,
and ongoing regulatory
Given the ongoing influence
experience. Our ability to
income from normal oper-
changes—all while gener-
of technology on our every-
collectively provide the per-
ations was bolstered by a
ating year over year gains
day lives, ubiquitous access
fect blend of personal ser-
$1.88 million credit to the
across the board. By listen-
to one’s money is expected
vice and technology-driven
loan loss provision related
ing to our customers and
from institutions both large
convenience translates into
to the recovery of a previ-
understanding their needs,
and small. That’s why
financial success for the
ously charged off loan. This
we can offer beneficial solu-
we’ve continued to invest in
enhancements to our online
and mobile banking services
with features like Express
Deposit, allowing customers
to make deposits remotely
via their smartphone.
We’ve stayed true to
customers who want a more
recovery was received and
tions leading to our common
reported in the second quar-
goal of financial success.
ter of 2014. We applaud the
As always, thank you for
diligence and perseverance
seeing us through another
of our team in bringing about
successful year. We appre-
its successful resolution.
ciate your business, invest-
Total assets grew to
ment and support.
$749.7 million for the year
—Sincerely, Christopher M. Courtney
ended December 31, 2014,
an increase of $77.8 mil-
lion, or 11.6% over the prior
year. Deposits increased to
Community banking
comes home to Tracy:
The newest branch in
our network beckons
Tracy area residents to
experience community
banking at its best.
A UNIQUE
BRAND OF
RELATIONSHIP
SERVICE
developed a wide range of
banking products tailored
to not only their financial
circumstances, but also
to the unique stages of
Cultivating Lifelong
their lives. Our ability to
Customers
continuously serve our
At Oak Valley Community
customers’ needs for a
Bank, we take pride in
lifetime is what drives their
consistently delivering the
satisfaction and loyalty.
deposit feature, previously
making deposits with
banking products is to
Now, individuals pursuing
only available to personal
a smart phone, directly
simplify our consumer
a higher education or who
banking customers. In the
from the office, field, or
checking account options.
have honorably served our
past, business clients—
job site as soon as they
We’ve streamlined our
country can more easily
regardless of size or
receive payment from their
product line to reward
experience greater benefits.
complexity—had to use
customer. This eliminates a
customers on the basis of
our commercial remote
trip to the bank, saving our
their financial commitment
Expanding to Meet
deposit capture service,
customer time and allowing
to the Bank. As the customer
Customers Where They Live
which wasn’t cost-effective
them to focus on running
relationship grows, so
To meet the demand of our
for many of them. Now,
and growing their business.
do the variety of benefits
growing customer base
highest level of personalized
This relationship offers the
our clients, we often discover
present a couple of options
business clients with
they receive through their
and ensure our customers
service. Unlike many larger
best opportunity for sound
they’re searching for the
and let the customer choose
less frequent depositing
Sensible Products for Today
checking account. It’s a basic
are never too far from their
financial institutions, we
business growth based on
best overall package, not
the one that best fits their
needs can utilize our
and Tomorrow
1-2-3 approach: the most
money wherever they live,
understand that one
the idea that it’s generally
merely the best rate or
specific situation.
Mobile Express Deposit
One of the ways we’ve
engaged customers enjoy
work and play, we opened
size doesn’t fit all and we
easier and more economical
the lowest fees. The astute
infrastructure, conveniently
differentiated our personal
the most versatile features
a new Tracy branch in
embrace the differences
to keep a satisfied customer
business or agribusiness
We also try to stay nimble
our customers bring to our
than to try and attract a
owner will generally seek
on the product development
business. It’s why we’ve
new one.
the best combination of
and delivery channel
and functionality, giving them
December 2014. We also
every reason to remain loyal
received regulatory approval
and valued customers for life.
last summer to open a
terms, so we avoid backing
side. This year, we began
OUR DEFINITION OF RELATIONSHIP BANKING
second location in Sonora,
Business Banking with a
ourselves, or our client, into a
offering business clients
Personal Touch
corner with absolute pricing.
our affordable mobile check
When it comes to commercial
Especially with commercial
banking, one of our
credit, it’s not uncommon to
strategies is to remain
flexible. When we listen to
IS FOUNDED ON THE BELIEF THAT THE
GREATER COMMITMENT, THE BETTER AN
EXPERIENCE OUR CUSTOMER ENJOYS.
We have also added College
which will bring our number
Student and Military discount
of branches to sixteen.
options to our flagship Oak
Tree Checking account.
OUR
MODEL
FOR
SUCCESS
our organization. It’s the
foundation for their personal
growth and advancement as
a reward for living the “Oak
Valley Way.”
Developing the Individual
We believe our success,
Seamless Team
bolstered by personalized
Participation
attention and community
Teamwork may be a trite
commitment, begins with
word to some, but at Oak
the individual. From the back
Valley, it’s a concept that is
shop to the front line, every
integral to the processes that
employee is encouraged to
drive success at every level.
develop an intuition which
With the right individuals
goes beyond job description
working in unison, we can
and role, extending to
continually improve our
the way they think about
processes to empower our
our customers’ needs. We
people to deliver in concert
and competitive pressure
want our employees to
with our performance cycle.
to provide true excellence
understand our customers’
in customer service. Armed
goals and advocate for their
Our business model can
with Oak Valley’s mission
financial well-being. This
be likened to a road map. It
statement—the compass
emotional connection occurs
serves as a daily reminder
by which we navigate our
not between a “bank” and
of the importance of service,
daily decisions—our staff,
its customer, but between
community, results and
executives and officers have
two people; one with a
process improvement. It
a clear vision and executable
need and the other with a
is highly dependent upon
plan for delivering the
desire to wholeheartedly
effective teamwork from
ultimate banking experience
serve. Our employees are
top to bottom and it guides
to our customers.
professional, knowledgeable,
us on the path toward long-
and they embody a caring
term success. Qualities like
This commitment to strong
and concerned attitude from
communication, consistency,
teamwork and continual
which a mutually trusting
trust and credibility are
improvement is what
customer relationship
essential ingredients
differentiates us from our
can develop. We invest in
in building a culture of
competitors and makes the
special high-quality people
collaboration. Unified by
Oak Valley brand one that
as long-term assets, who
the shared objective of
stands the test of time.
together form the basis of
creating satisfied customers
highly effective teams across
and never being content
with where we are, our
teams know we need
to continually adapt to
changing economic factors
Standing by our clients:
Escalon Branch Manager,
Laura Weaver and Customer
Service Manager, Julia
Robertson with Brad Klump
of BKI Exports Inc. At left,
Wendy Coddington of Lee
and Associates, pictured at
Stockton Branch with Gladys
Dillard and Lori Strasser.
OUR MISSION IS TO
CULTIVATE LIFELONG
CUSTOMERS BY EXECUTING
A UNIQUE BRAND OF
RELATIONSHIP SERVICE.
SEAMLESS TEAM
PARTICIPATION DEVELOPS
THE INDIVIDUAL AND
DRIVES OUR COMMITMENT
TO CONTINUALLY IMPROVE,
OPTIMIZING INVESTOR
RETURNS AND ENRICHING
THE COMMUNITIES IN
WHICH WE LIVE.
ENRICHING
OUR
COMMUNITIES
Center for Human Services,
Stanislaus County
Youth Services, Juvenile
build-out of the interior.
Justice Services, School
“By managing a separate
Based Services, Substance
capital campaign to repay
Abuse Treatment and Family
the tenant improvement
Resource Centers.
loan, we can use more of
A Growing Partnership
operating budget in service
our yearly fundraising and
A Beacon of Hope
Recently, the relationship
to our community,” said
Oak Valley Community
between Oak Valley and
CHS Executive Director,
Bank’s philanthropy
CHS blossomed from a
Cindy Duenas.
supports programs designed
charitable partnership to a
to empower underserved
business relationship when
Other worthwhile programs
and underprivileged
the organization became a
that benefit from Oak
individuals to improve their
new loan customer. Having
Valley’s support:
quality of life. One beneficiary
dreamt of acquiring a larger
is the Center for Human
facility to house not only
Center for a Non-Violent
Services (CHS) in Modesto,
an increasing number of
Community—Tuolumne
which has served more
programs and client needs,
County
than 500,000 individuals,
but also a growing staff, CHS
An Oak Valley representative
children and families during
procured financing from Oak
serves on the board of
its 45-year existence. CHS
Valley for a new building. The
directors, and the Bank
provides services to the
larger space will allow CHS
contributes funds to
people of Stanislaus County
to significantly expand its
the Center for a Non-
via seven core program
mental health services and
Violent Community, which
areas: Mental Health
drug and alcohol treatment
administers domestic
Services, Shelter Services,
programs in Stanislaus
violence, bullying prevention,
County. CHS is conducting a
legal assistance and sexual
capital campaign “Framing
assault programs to actively
Our Future” to fund the
support the right of all
people to live their lives free
from interpersonal violence.
Second Harvest Food
Bank—San Joaquin and
Stanislaus County
With a mission to end
hunger in the region,
Second Harvest helps
“OVCB UNDERSTANDS OUR
NEEDS AS A LOCAL
NONPROFIT. THEY ARE
RESPONSIVE AND
COMMITTED TO OUR WORK.”
—Carmen Wilson
CHS Director of Finance
Cindy Duenas, Executive
Director (center) pictured with
members of the CHS Senior
Management Team on the job
site at their new facility.
Pictured below, Branch
Manager, Lupe Rodriguez and
Commercial Loan Officer, Mike
Garcia who helped tailor the
loan to fit CHS’ needs.
35,000 individuals in need
through donations and
each month through its
board representation.
Food Assistance, Food 4
Thought, and Senior Brown
Bishop Junior Livestock
Bag programs. The Bank
Auction—Inyo, Mono
supports their efforts
and Alpine Counties
This year marked the 10th
consecutive year in which
our Eastern Sierra branches
volunteered and ran the
“bank” at the Bishop Junior
Livestock Auction.
DIRECTORS
DIRECTORS EMERITUS
LEGAL COUNSEL
Michael Q. Jones
Chairman of the Board
General Contracting, Land
Development and General
Real Estate
Daniel J. Leonard
Vice Chairman of the Board
Chairman Investment
Committee
Winery Executive
Richard J. Vaughan
Agribusinessman
In Memoriam:
Barry M. Jett
Real Estate Investor
Arne J. Knudsen
Wholesale Nurseryman
Romain J. Schonhoff
CPA and Farmer
Matteo G. Daste
Squire Patton Boggs
275 Battery St, Suite 2600
San Francisco CA 94111
CORRESPONDENT BANK
MUFG Union Bank, N.A.
400 California St
San Francisco CA 94104
Pacific Coast Bankers’ Bank
340 Pine Street, Ste 401
San Francisco CA 94104
Donald L. Barton
Agribusinessman
Christopher M. Courtney
President and CEO
Oak Valley
Community Bank
James L. Gilbert
Chairman Nominating
Committee
Feed and Seed Business
Thomas A. Haidlen
Chairman Loan Committee
Automobile Dealer
Ronald C. Martin
Retired Bank Executive
Janet S. Pelton
Certified Public Accountant
Roger M. Schrimp
Chairman Audit Committee
Chairman Compensation
Committee
Attorney and Cattle
Rancher
Danny L. Titus
Chairman CRA Committee
Real Estate and
Investments
Terrance P. Withrow
Certified Public Accountant
and Farmer
OFFICERS
Christopher M. Courtney
President and CEO
TRANSFER AGENT
AND REGISTRAR
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
Janis Powers
Executive Vice President
Risk Management
Mike Rodrigues
Executive Vice President
Chief Credit Officer
Cathy Ghan
Senior Vice President
Commercial Real Estate
Russell Stahl
Senior Vice President
Information Technology
Gary Stephens
Senior Vice President
Senior Lending Officer
INDEPENDENT AUDITORS
Moss-Adams LLP
3121 W March Ln, Ste 100
Stockton CA 95219-2303
Computershare
250 Royall St
Canton MA 02021
(800) 962-4284
MARKET MAKERS
John Cavender
Raymond James &
Associates
(415) 616-8935
Joey Warmenhoven
Wedbush Securities
(503)-922-4888
Tom Thiel
Wedbush Securities
(503) 471-6790
ADVISORS
Debbie Armstrong
Nelson Bahler
Joseph Barlupo
Bruce Baron
Gary Barton
Tony Benites
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
Robert Fores
Paula Frago
Richard Gilton
Richard Gonzales
Anthony Guida
Dick Hagerty
Stephen Haycock
John Hooper
Don Hoy
Bob Hoyt
Gary Huff
Marge Imfeld
Trevor Irish
Mike Kline
Brad Klump
Steven Knudsen
Daniel Lee
Gary Linhares
Chaitanya Mahida
Tim Martin
David Martini
Maggie Mejia
Adan Mendoza
Jeff Mika
Carol Ornelas
Robert Ott
Ray Perez
Scott Piercy
Joel Pluim
Marc Robinson
Frank Rocha
Kathy Rocha
David Rogers
Mike Ruddy Sr.
Jeff Sceville
Jodi Sceville
Ward Schemper
Rick Schiltz
Collin Schut
Dave Silva
Tom Spadini
Bob Spengler
Jim Stevens
Bob Summers
Niniv Tamimi
Robbie Tani
Bruce Thompson
Phil Tilbury
Willie Traina
Tom Vermeulen
Arlon Waterson
FOUNDERS
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
In Memoriam
B A R R Y M . J E T T
Initial Organizer, Founder, Director and Friend
November 10, 1935 ~ July 20, 2014
D e e p R o o t s ~ S t r o n g B r a n c h e s
80
Sacramento
San Francisco
Bridgeport
Stockton
Manteca
580
Tracy
Ripon
Patterson
Escalon
Sonora
Oakdale
Modesto
Turlock
99
5
Fresno
395
Mammoth
Lakes
Bishop
EASTER N SIERRA
COMMUNITY BANK
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 N Main Street
Bishop, CA 93514
(760) 874-BANK (2265)
www.escbank.com
ATM ONLY LOCATIONS:
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
B R A N C H E S
OAK VALLEY
COMMUNITY BANK
OAKDALE
125 N Third Avenue
Oakdale, CA 95361
(209) 848-BANK (2265)
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 W March Lane
Stockton, CA 95219
(209) 320-7850
PATTERSON
20 Plaza
Patterson, CA 95363
(209) 892-5757
RIPON
150 N 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
TRACY
1034 N Central Avenue
Tracy, CA 95376
(209) 834-3340
www.ovcb.com
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, 2014
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
No
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.
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
Yes
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).
No
As of December 31, 2014, the aggregate market value of the registrant’s common stock held by non-affiliates of the registrant, based upon
the closing price per share of the registrant’s common stock as reported by the NASDAQ, was approximately $69 million. As of March 17, 2015,
there were 8,075,355 shares of common stock outstanding.
Yes
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant’s Proxy Statement for the Annual Meeting of Shareholders to be held on June 16, 2015 are incorporated by reference into
Part III.
TABLE OF CONTENTS
BUSINESS
RISK FACTORS
UNRESOLVED STAFF COMMENTS
PROPERTIES
LEGAL PROCEEDINGS
MINE SAFETY DISCLOSURES
MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES
SELECTED FINANCIAL DATA
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
CONTROLS AND PROCEDURES
OTHER INFORMATION
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
PART I
ITEM 1 -
ITEM 1A -
ITEM 1B -
ITEM 2 -
ITEM 3 -
ITEM 4 -
PART II
ITEM 5 -
ITEM 6 -
ITEM 7-
ITEM 7A -
ITEM 8 -
ITEM 9 -
ITEM 9A -
ITEM 9B-
PART III
ITEM 10 -
ITEM 11 -
ITEM 12 -
ITEM 13 -
ITEM 14 -
PART IV
ITEM 15 -
SIGNATURES
EXHIBIT INDEX
3
19
19
20
20
20
21
22
23
54
54
54
54
55
56
56
56
56
56
57
58
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ITEM 1. BUSINESS OF OAK VALLEY BANCORP
Overview of the Business
PART I
Oak Valley Bancorp. Oak Valley Bancorp (the “Company”) 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”) (from time to time, the Bank and the Company may be
generally referred to as “we”, “us” or “our”). 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.
The Company is authorized to issue 50,000,000 shares of common stock, without par value, of which 8,074,855 are issued and
outstanding at December 31, 2014, and 10,000,000 shares of preferred stock, without par value, of which no shares are issued and
outstanding.
The Company is the holding company of the Bank, and its only assets are the outstanding capital stock of the Bank, which the
Company wholly owns, cash and income tax benefits receivable classified as other assets.
Oak Valley Community Bank. The Bank commenced operations in May 1991. The Bank is an insured bank under the Federal
Deposit Insurance Act and is a member of the Federal Reserve. The Bank is subject to regulation, supervision and regular
examination by the California Department of Business Oversight (DBO), the Federal Deposit Insurance Commission (FDIC) and the
Federal Reserve Board (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 lending purposes. Longer-term real estate loans are generally made with adjustable interest rates and contain
customary provisions for acceleration. Traditional residential mortgages are available to Bank customers through a third party.
The Bank offers other services for both individuals and businesses including online banking, remote deposit capture, mobile
banking, 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. Since opening our doors of the main Oakdale branch in 1991, our network of branches and loan production
offices have been expanded geographically. As of December 31, 2014, we maintained fifteen full-service branch offices (in addition to
our corporate headquarters). 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 2011, we opened a third branch in Modesto and a branch in Manteca. In 2014, we opened a new branch in Tracy. 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 outstanding share of common stock of the Bank was exchanged into a share of common stock of the Company.
Operating our banking business within a holding company structure provides, among other things, greater operating flexibility;
facilitates the potential acquisition of related businesses as opportunities may arise from time to time; improves our ability to diversify
as needed; 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; and improves our ability to raise capital to support growth.
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Business Segments
The Bank operates in two primary business segments: Retail Banking and Commercial Banking, as described in additional detail
below. These segments do not meet the quantitative thresholds for reporting as separate segments and are therefore considered one
segment for financial reporting purposes:
Retail Banking. We offer 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, we offer real estate and home equity financing, as well as consumer, automobile, and
home improvement loans.
Commercial Banking. We offer a range of deposit and lending services to business customers. More specifically, we offer a
variety of commercial loans for virtually any business, professional, or agricultural need. These include loans for short-term working
capital, operating lines of credit, equipment purchases, leasehold improvements, construction, commercial real estate acquisitions or
refinancing. Currently, virtually all of our business relationships are with customers located in the San Joaquin, Stanislaus, Tuolumne,
Inyo and Mono Counties, of California.
Primary Market Area
We conduct business from our main office in Oakdale, a city of approximately 21,500 residents 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 96% of our loans and 91% 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 Chief Executive Officer, President, Chief Credit Officer, Credit Administrator and
to some department managers and loan officers. 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 Chief Executive Officer, President, and
either our Chief Credit Officer or our Credit Administrator. Loans for which direct and indirect borrower liability exceeds combined
administrative lending authority or 75% of the banks legal unsecured and secured lending limits are referred to our Board of Directors
Loan Committee.
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At December 31, 2014, the Bank’s authorized legal lending limits were $12.0 million for unsecured loans plus an additional
$8.0 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. The Bank’s primary capital plus allowance
for loan losses at December 31, 2014 totaled $80.0 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, 2014, real estate loans constituted 85% of our loan portfolio, of which 93% 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 from time to time. 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 an established index such as prime or LIBOR.
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, 2014, the aggregate loan-to-value of the entire commercial real estate portfolio was 52.1%. Historical data
suggests that the Company continues to maintain strong LTV, which has served as a cushion against precipitous reductions in real
5
estate values. Non-owner occupied real estate comprises 42.6% of the Company’s total commitments, as of December 31, 2014. The
loan-to-value on the non-owner occupied segment was 44.7%, as of December 31, 2014. The highest concentration by product type is
office buildings, which comprised 30.3% of total CRE loan commitments outstanding, as of December 31, 2014.
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 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 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. As an
SBA lender, we enable borrowers to obtain SBA loans in order to acquire new businesses, expand existing businesses, and acquire
locations in which to do business.
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.
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,
6
• 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, 2014, we owned $2,517,000 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, 2014, our borrowing limit with the Federal Home Loan Bank was approximately
$177 million.
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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, of California. 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 are 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 Company 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, 2014, our primary service areas contained one hundred sixty-four (164) banking offices, with approximately $12
billion in total deposits. As of June 30, 2014, we had total deposits of approximately $603 million, which represented approximately
5.0% 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 $116 million per office as of June 30, 2014.
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
8
funds, wholesale finance, credit card, and other consumer finance services, including on-line banking services and personal finance
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 85% of our loan portfolio held for investment at
December 31, 2014 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, 2014, we had 157 employees (126 full-time employees and 31 part-time employees). None of our employees
are currently represented by a union or covered by a collective bargaining agreement.
Economic Conditions and Legislative and Regulatory Developments
As it is the case with financial institutions with our size and scope, our profitability primarily depends on interest rate
differentials. Interest rates are highly sensitive to many factors that are beyond our control and cannot be predicted, such as inflation,
recession and unemployment, and the impact that future changes in domestic and foreign economic conditions might have on the
Company. A more detailed discussion of the Company’s interest rate risks and the mitigation of those risks is included in Item 7A.
Quantitative and Qualitative Disclosures About Market Risk, in this Annual Report on Form 10-K.
Our business is also influenced by the monetary and fiscal policies of the Federal government and the policies of regulatory
agencies. The Federal Reserve Board implements national monetary policies (with objectives such as maintaining price stability,
stimulating growth and reducing unemployment) through its open-market operations in U.S. Government securities, by adjusting the
required level of reserves for depository institutions subject to its reserve requirements, and by varying the target Federal funds and
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 also affect interest earned on interest-earning assets and interest paid on
interest-bearing liabilities. The nature and impact of any future changes in monetary and fiscal policies on us cannot be predicted.
From time to time, federal and state legislation is enacted that may have the effect of materially increasing the cost of doing
business, limiting or expanding permissible activities, or affecting the competitive balance between banks and other financial services
providers. In response to the economic downturn and financial industry instability, legislative and regulatory initiatives were, and are
expected to continue to be, introduced and implemented, which substantially intensify the regulation of the financial services
industry. Moreover, in light of the economic environment over the last three to five years, bank regulatory agencies have responded to
concerns and trends identified in examinations. While their response resulted in the increased issuance and continuation of
enforcement actions to financial institutions towards the end of the last decade and into the beginning of this decade, the level of such
actions has recently been on the decline.
9
Supervision and Regulation in General
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. These regulations affect our lending practices,
consumer protections, capital structure, investment practices and dividend policy.
The Company is a legal entity separate and distinct from the Bank. The Company and the Bank are each subject to supervision
and regulation by a number of federal and state agencies and regulatory bodies, as outlined below.
Upon effectiveness of the bank holding company reorganization on July 2, 2008, the Company became subject to regulation
under the Bank Holding Company Act of 1956, as amended (“BHCA”). As a bank holding company, the Company is regulated and is
subject to inspection, examination and supervision by the Federal Reserve Board. It is also subject to the California Financial Code, as
well as limited oversight by the DBO and the FDIC. 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.
As a California-state chartered bank, the Bank is subject to primary supervision, examination and regulation by the DBO and the
Federal Reserve Board. The Federal Reserve Board is the primary federal regulator of state member banks. The Bank is also subject
to regulation by the FDIC, which insures the Bank’s deposits as permitted by law. If, as a result of an examination of a bank, the
Federal Reserve Board determines that the financial condition, capital resources, asset quality, earnings prospects, management,
liquidity or other aspects of its operations are unsatisfactory, or that it or its management is violating or has violated any law or
regulation, various remedies are available to the Federal Reserve Board. Such remedies include the power to: enjoin “unsafe or
unsound” practices; require affirmative action to correct any conditions resulting from any violation or practice; issue an
administrative order that can be judicially enforced; direct an increase in capital; restrict growth; assess civil monetary penalties;
remove officers and directors; institute a receivership; and, ultimately terminate the bank’s deposit insurance, which would result in a
revocation of its charter. The DBO separately holds many of the same remedial powers.
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 FRB or the Federal Reserve Board. 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 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
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.
The federal and state bank regulatory agencies may respond to concerns and trends identified in examinations by issuing
enforcement actions to, and entering into cease and desist orders, consent orders and memoranda of understanding with, financial
institutions requiring action by management and boards of directors to address credit quality, liquidity, risk management and capital
adequacy concerns, as well as other safety and soundness or compliance issues. Banks and bank holding companies are also subject to
examination and potential enforcement actions by their state regulatory agencies.
10
Bank Holding Company and Bank Regulation
Bank holding companies and their subsidiaries are subject to significant regulation and restrictions by Federal and State laws and
regulatory agencies. Federal and State laws, regulations and restrictions, which may affect the cost of doing business, limit
permissible activities and expansion or impact the competitive balance between banks and other financial services providers, are
intended primarily for the protection of depositors and the FDIC deposit insurance fund (“DIF”), and secondarily for the stability of
the U.S. banking system. They are not intended for the benefit of shareholders of financial institutions. The following discussion of
key statutes and regulations to which the Company and the Bank are subject is a summary and does not purport to be complete nor
does it address all applicable statutes and regulations. This discussion is qualified in its entirety by reference to the statutes and
regulations referred to in this discussion.
The wide range of requirements and restrictions contained in both Federal and State banking laws include:
Requirements that bank holding companies serve as a source of strength for their banking subsidiaries. In addition, the
regulatory agencies have “prompt corrective action” authority to limit activities and order an assessment of a bank holding
company if the capital of a bank subsidiary falls below capital levels required by the regulators.
Limitations on dividends payable to shareholders. A substantial portion of the Company’s funds to pay dividends or to pay
principal and interest on our debt obligations is derived from dividends paid by the Bank. The Company’s and the Bank’s
ability to pay dividends is subject to legal and regulatory restrictions. The Federal Reserve Board has authority to prohibit
bank holding companies from paying dividends if such payment is deemed to be an unsafe or unsound practice.
Limitations on dividends payable by bank subsidiaries. These dividends are subject to various legal and regulatory
restrictions. The federal banking agencies have indicated that paying dividends that deplete a depositary institution’s capital
base to an inadequate level would be an unsafe and unsound banking practice. Moreover, the federal agencies have issued
policy statements that provide that bank holding companies and insured banks should generally only pay dividends out of
current operating earnings.
Safety and soundness requirements. Banks must be operated in a safe and sound manner and meet standards applicable to
internal controls, information systems, internal audit, loan documentation, credit underwriting, interest rate exposure, asset
growth and compensation, as well as other operational and management standards. These safety and soundness requirements
give bank regulatory agencies significant latitude in exercising their supervisory authority and their authority to initiate
informal or formal enforcement action.
Requirements for approval of acquisitions and activities. Prior approval or non-objection of the applicable federal regulatory
agencies is required for most acquisitions and mergers and in order to engage in certain non-banking activities and activities
that have been determined by the Federal Reserve to be financial in nature, incidental to financial activities, or
complementary to a financial activity. Laws and regulations governing state-chartered banks contain similar provisions
concerning acquisitions and activities.
The Community Reinvestment Act (the “CRA”). The CRA requires that banks help meet the credit needs in their
communities, including the availability of credit to low and moderate income individuals. If the Company or the Bank fails to
adequately serve their communities, penalties may be imposed, including denials of applications for branches, to add
subsidiaries and affiliates, or to merge with or purchase other financial institutions.
The Bank Secrecy Act, the USA Patriot Act, and other anti-money laundering laws. These laws and regulations require
financial institutions to assist U.S. Government agencies in detecting and preventing money laundering and other illegal acts
by maintaining policies, procedures and controls designed to detect and report money laundering, terrorist financing, and
other suspicious activity.
Limitations on the amount of loans to one borrower and its affiliates and to executive officers and directors.
Limitations on transactions with affiliates.
Restrictions on the nature and amount of any investments in, and ability to underwrite certain securities.
Requirements for opening of branches intra- and interstate.
11
Fair lending and truth in lending laws to ensure equal access to credit and to protect consumers in credit transactions.
Provisions of the Gramm-Leach-Bliley Act of 1999 (“GLB Act”) and other federal and state laws dealing with privacy for
nonpublic personal information of customers.
The following discussion summarizes certain significant laws, rules and regulations affecting both the Company and the Bank.
The Bank addresses the many state and federal regulations it is subject to through a comprehensive compliance program that addresses
the various risks associated with these issues. The following discussion is not meant to cover all applicable rules and regulations and it
is qualified in its entirety by reference to such laws, rules and regulations which may change from time to time.
The Dodd-Frank Wall Street Reform and Consumer Protection Act
The events of the past several years have led to numerous new laws and regulatory pronouncements in the United States and
internationally for financial institutions. The Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank Act”),
enacted in 2010, is one of the most far reaching legislative actions affecting the financial services industry in decades and significantly
restructures the financial regulatory regime in the United States.
The Dodd-Frank Act broadly affects the financial services industry by creating new resolution authorities, requiring ongoing
stress testing of capital, mandating higher capital and liquidity requirements, increasing regulation of executive and incentive-based
compensation and requiring numerous other provisions aimed at strengthening the sound operation of the financial services sector
depending, in part, on the size of the financial institution. Among other things, the Dodd-Frank Act provides for:
capital standards applicable to bank holding companies may be no less stringent than those applied to insured depository
institutions;
annual stress tests and early remediation or so-called living wills are required for larger banks with more than $50 billion of
assets as well risk committees of their boards of directors that include a risk expert and such requirements may have the effect
of establishing new best practices standards for smaller banks;
trust preferred securities must generally be deducted from Tier 1 capital over a three-year phase-in period ending in 2016,
although depository institution holding companies with assets of less than $15 billion as of year-end 2009 are grandfathered
with respect to such securities for purposes of calculating regulatory capital;
the assessment base for federal deposit insurance was changed to consolidated assets less tangible capital instead of the
amount of insured deposits, which generally increased the insurance fees of larger banks, but had relatively less impact on
smaller banks;
repeal of the federal prohibition on the payment of interest on demand deposits, including business checking accounts, and
made permanent the $250,000 limit for federal deposit insurance;
the establishment of the Consumer Finance Protection Bureau (the “CFPB”) with responsibility for promulgating regulations
designed to protect consumers’ financial interests and prohibit unfair, deceptive and abusive acts and practices by financial
institutions, and with authority to directly examine those financial institutions with $10 billion or more in assets for
compliance with the regulations promulgated by the CFPB;
limits, or places significant burdens and compliance and other costs, on activities traditionally conducted by banking
organizations, such as originating and securitizing mortgage loans and other financial assets, arranging and participating in
swap and derivative transactions, proprietary trading and investing in private equity and other funds; and
the establishment of new compensation restrictions and standards regarding the time, manner and form of compensation
given to key executives and other personnel receiving incentive compensation, including documentation and governance,
proxy access by stockholders, deferral and claw-back requirements.
As required by the Dodd-Frank Act, federal regulators have adopted regulations to (i) increase capital requirements on banks and
bank holding companies pursuant to Basel III, and (ii) implement the so-called “Volcker Rule” of the Dodd-Frank Act, which
significantly restricts certain activities by covered bank holding companies, including restrictions on proprietary trading and private
equity investing.
12
Many of the regulations to implement the Dodd-Frank Act have not yet been published for comment or adopted in final form
and/or will take effect over several years, making it difficult to anticipate the overall financial impact on the Company and the Bank,
our customers or the financial industry more generally. Individually and collectively, these proposed regulations resulting from the
Dodd-Frank Act may materially and adversely affect the Company’s and the Bank’s business, financial condition, and results of
operations. 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.
Volcker Rule
The final rules adopted on December 10, 2013, to implement a part of the Dodd-Frank Act commonly referred to as the “Volcker
Rule”, would prohibit insured depository institutions and companies affiliated with insured depository institutions (“banking entities”)
from engaging in short-term proprietary trading of certain securities, derivatives, commodity futures and options on these instruments,
for their own account. The final rules also impose limits on banking entities’ investments in, and other relationships with, hedge funds
or private equity funds. These rules became effective on April 1, 2014. Certain collateralized debt obligations (“CDOs”), securities
backed by trust preferred securities which were initially defined as covered funds subject to the investment prohibitions, have been
exempted to address the concern that many community banks holding such CDOs securities may have been required to recognize
significant losses on those securities.
Like the Dodd-Frank Act, the final rules provide exemptions for certain activities, including market making, underwriting,
hedging, trading in government obligations, insurance company activities, and organizing and offering hedge funds or private equity
funds. The final rules also clarify that certain activities are not prohibited, including acting as agent, broker, or custodian.
The compliance requirements under the final rules vary based on the size of the banking entity and the scope of activities
conducted. Banking entities with significant trading operations will be required to establish a detailed compliance program and their
CEOs will be required to attest that the program is reasonably designed to achieve compliance with the final rule. Independent testing
and analysis of an institution’s compliance program will also be required. The final rules reduce the burden on smaller, less-complex
institutions by limiting their compliance and reporting requirements. Additionally, a banking entity that does not engage in covered
trading activities will not need to establish a compliance program. The Company and the Bank held no investment positions at
December 31, 2014 that were subject to the final rule. Therefore, while these new rules may require us to conduct certain internal
analysis and reporting, we believe that they will not require any material changes in our operations or business.
Capital Adequacy Requirements
Banks and bank holding companies are subject to various capital requirements administered by state and federal banking
agencies. Capital adequacy guidelines involve quantitative measures of assets, liabilities and certain off-balance-sheet items
calculated under regulatory accounting practices. Capital amounts and classifications are also subject to qualitative judgments by
regulators about components, risk weighting and other factors.
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 regulatory agencies’ risk-based capital guidelines are based upon capital accords of the internal Basel Committee on Bank
Supervision (“Basel Committee”), a committee of central banks and bank supervisors/regulators from the major industrialized
countries that develops broad policy guidelines, which each country’s supervisors can use to determine the supervisory policies they
apply to their home jurisdiction. In December 2010, the Basel Committee released its final framework for strengthening international
capital and liquidity regulation, now officially identified as “Basel III.” Basel III, when fully phased-in, would require bank holding
companies and their bank subsidiaries to maintain substantially more capital than currently required, with a greater emphasis on
common equity. The Basel III capital framework, among other things:
• introduces as a new capital measure, Common Equity Tier 1 (“CET1”), more commonly known in the United States as “Tier
1 Common,” and defines CET1 narrowly by requiring that most adjustments to regulatory capital measures be made to CET1 and not
to the other components of capital, and expands the scope of the adjustments as compared to existing regulations;
• when fully phased in, requires banks to maintain: (i) a newly adopted international standard, a minimum ratio of CET1 to
risk-weighted assets of at least 4.5%, plus a 2.5% “capital conservation buffer” (which is added to the 4.5% CET1 ratio as that buffer
13
is phased in, effectively resulting in a minimum ratio of CET1 to risk-weighted assets of at least 7%); (ii) an additional “SIFI buffer”
for those large institutions deemed to be systemically important, ranging from 1.0% to 2.5%, and up to 3.5% under certain conditions;
(iii) a minimum ratio of Tier 1 capital to risk-weighted assets of at least 6.0%, plus the capital conservation buffer (which is added to
the 6.0% Tier 1 capital ratio as that buffer is phased in, effectively resulting in a minimum Tier 1 capital ratio of 8.5% upon full
implementation); (iv) a minimum ratio of Total (that is, Tier 1 plus Tier 2) capital to risk-weighted assets of at least 8.0%, plus the
capital conservation buffer (which is added to the 8.0% total capital ratio as that buffer is phased in, effectively resulting in a
minimum total capital ratio of 10.5% upon full implementation); and (v) as a newly adopted international standard, a minimum
leverage ratio of 3%, calculated as the ratio of Tier 1 capital to balance sheet exposures plus certain off-balance sheet exposures (as
the average for each quarter of the month-end ratios for the quarter); and
• an additional “countercyclical capital buffer,” generally to be imposed when national regulators determine that excess
aggregate credit growth becomes associated with a buildup of systemic risk, that would be a CET1 add-on to the capital conservation
buffer in the range of 0% to 2.5% when fully implemented.
In July 2013, the U.S. banking agencies approved the U.S. version of Basel III. The federal bank regulatory agencies adopted
version of Basel III revises the risk-based and leverage capital requirements and the method for calculating risk-weighted assets to
make them consistent with Basel III and to meet the requirements of the Dodd-Frank Act. Although many of the rules contained in
these final regulations are applicable only to large, internationally active banks, some of them will apply on a phased in basis to all
banking organizations, including the Company and the Bank. Among other things, the rules establish a new minimum common equity
Tier 1 ratio (4.5% of risk-weighted assets), a higher minimum Tier 1 risk-based capital requirement (6.0% of risk-weighted assets) and
a minimum non-risk-based leverage ratio (4.00% eliminating a 3.00% exception for higher rated banks). The new additional capital
conservation buffer of 2.5% of risk weighted assets over each of the required capital ratios will be phased in from 2016 to 2019 and
must be met to avoid limitations on the ability of the Bank to pay dividends, repurchase shares or pay discretionary bonuses. The
additional “countercyclical capital buffer” is also required for larger and more complex institutions. The new rules assign higher risk
weighting to exposures that are more than 90 days past due or are on nonaccrual status and certain commercial real estate facilities that
finance the acquisition, development or construction of real property. The rules also change the permitted composition of Tier 1
capital to exclude trust preferred securities, mortgage servicing rights and certain deferred tax assets and include unrealized gains and
losses on available for sale debt and equity securities (with a one-time opt out option for Standardized Banks (banks with less than
$250 billion of total consolidated assets and less than $10 billion of foreign exposures)). The rules, including alternative requirements
for smaller community financial institutions like the Company, would be phased in through 2019. The implementation of the Basel III
framework for the Company and the Bank commenced on January 1, 2015.
The Bank is well capitalized. As of December 31, 2014 and 2013, the Bank’s Total Risk-Based Capital Ratio was 14.4% and
14.6%, and our Tier 1 Risk-Based Capital Ratio was 13.2% and 13.3%, 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, 2014 and 2013, the Bank’s Leverage Capital Ratios were 10.1% and 9.8%,
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.
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
14
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 the Company is subject to restrictions set forth in the California Financial Code
(the “Code”). Prior to any distribution from the Bank to The Company, 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 DBO and the FRB. In the event
that the intended distribution from the Bank to The Company exceeds the restriction in the Code, advance approval from FRB is
required. Management anticipates that there will be sufficient earnings at the Bank level to provide dividends to the Company to meet
its cash requirements for 2015.
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.
Deposit Insurance and FDIC Insurance Assessments
Our deposits are insured by the FDIC to the maximum amount permitted by law, which is currently $250,000 per depositor. The
Dodd-Frank Act made the deposit insurance coverage permanent at the $250,000 level retroactive to January 1, 2008.
On February 7, 2011, as required by the Dodd-Frank Act, the FDIC approved a rule that changes the FDIC insurance assessment
base from adjusted domestic deposits to a bank’s average consolidated total assets minus average tangible equity, defined as Tier 1
capital. Since the new base is larger than the current base, the new rule lowers assessment rates to between 2.5 and 9 basis points on
the broader base for banks in the lowest risk category, and 30 to 45 basis points for banks in the highest risk category. The change was
effective beginning with the second quarter of 2011. Since we have a solid core deposit base and do not rely heavily on borrowings
and brokered deposits, the benefit of the lower assessment rate (which has dropped by approximately half for us) significantly
outweighed the effect of a wider assessment base.
The Dodd-Frank act also provided depositors at all FDIC-insured institutions with unlimited deposit insurance coverage on
traditional checking accounts that do not pay interest and Interest on Lawyers Trust Accounts beginning December 31, 2010 through
the end of 2012, when this provision expired.
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 Company’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
15
with its assessment of CRA performance, the FRB assigns a rating of “outstanding,” “satisfactory,” “needs to improve” or “substantial
noncompliance.” Our CRA performance is evaluated by the FRB under the intermediate small bank requirements. The FRB’s last
CRA performance examination was performed on us and completed in July of 2013 and we 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 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
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.
Restriction on Transactions between Member Banks and their Affiliates
Transactions between the Company and the Bank are quantitatively and qualitatively restricted under Sections 23A and 23B of
the Federal Reserve Act and Federal Reserve Regulation W. Section 23A places restrictions on the Bank’s “covered transactions” with
the Company, including loans and other extensions of credit, investments in the securities of, and purchases of assets from the
Company. Section 23B requires that certain transactions, including all covered transactions, be on market terms and conditions.
Federal Reserve Regulation W combines statutory restrictions on transactions between the Bank and the Company with FRB
interpretations in an effort to simplify compliance with Sections 23A and 23B.
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,
16
• 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 Company to review its current procedures and policies to determine whether they comply with the new legislation and its
implementing regulations. The Company is primarily responsible for ensuring compliance with Sarbanes-Oxley and the NASDAQ
governance rules, as applicable.
Securities Laws and Corporate Governance
The Company is subject to the disclosure and regulatory requirements of the Securities Act of 1933, as amended, and the Securities
Exchange Act of 1934, as amended, both as administered by the SEC. As a company listed on the NASDAQ Global Select Market,
the Company is subject to NASDAQ listing standards for listed companies.
As discussed above, we are also subject to the Sarbanes-Oxley Act of 2002, provisions of the Dodd-Frank Act, and other federal and
state laws and regulations which address, among other issues, required executive certification of financial presentations, corporate
governance requirements for board audit committees and their members, and disclosure of controls and procedures and internal
control over financial reporting, auditing and accounting, executive compensation, and enhanced and timely disclosure of corporate
information. NASDAQ has also adopted corporate governance rules, which are intended to allow shareholders and investors to more
easily and efficiently monitor the performance of companies and their directors.
Finally, the Company is subject to the provisions of the California General Corporation Law, while the Bank is also subject to the
California Financial Code provisions.
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.
17
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 website also contains its Committee Charters, Code of Ethics, Code of Conduct and Corporate
Governance Guidelines. 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.
In addition, copies of our filings are available by requesting them in writing or by phone from:
Corporate Secretary
Oak Valley Bancorp
125 North Third Avenue
Oakdale, California
209-844-7578
ITEM 1A. RISK FACTORS
Not applicable.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
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 Company’s Oakdale complex includes the adjacent corporate headquarter building and 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.
Tracy, 1034 N. Central Ave.
n/a*
n/a*
two, 5-year term extensions
two, 5-year term extensions
n/a*
n/a*
one, 5-year term extensions
two, 5-year term extensions
one, 5-year term extensions
n/a*
two, 5-year term extensions
one, 5-year term extension
two, 5-year term extensions
n/a*
two, 5-year term extensions
two, 5-year term extensions
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
5,000
n/a*
n/a*
4/2018
3/2016
n/a*
n/a*
8/2019
3/2015
1/2020
n/a*
4/2021
12/2015
12/2022
n/a*
5/31/2016
7/2024
18
* The Company owns this property.
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.
To our knowledge, there are no material litigation matters pending at the current time. Although the results of any 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. MINE SAFETY DISCLOSURES
Not applicable.
19
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 two calendar years ended December 31, 2014 and 2013, 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
March 31, 2013
June 30, 2013
September 30, 2013
December 31, 2013
March 31, 2014
June 30, 2014
September 30, 2014
December 31, 2014
Closing Sale Price
High
8.88
8.24
8.80
8.37
12.48
10.22
10.50
10.75
$
$
$
$
$
$
$
$
Low
7.33
7.37
7.59
7.85
8.25
9.42
9.44
9.47
$
$
$
$
$
$
$
$
On March 17, 2015, the closing price of our common stock was $9.72 per share; and there were approximately 444 shareholders
of record of the common stock and 8,075,355 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.
Dividends the Company declares are subject to the restrictions set forth in the California General Corporation Law (the
“Corporation Law”). The Corporation Law provides that a corporation may make a distribution to its shareholders if the corporation’s
retained earnings equal at least the amount of the proposed distribution. The Corporation Law also provides that, in the event that
sufficient retained earnings are not available for the proposed distribution, a corporation may nevertheless make a distribution to its
shareholders if it meets two conditions, which generally stated are as follows: (i) the corporation’s assets equal at least 1 and 1/4 times
its liabilities, and (ii) the corporation’s current assets equal at least its current liabilities or, if the average of the corporation’s earnings
before taxes on income and before interest expenses for the two preceding fiscal years was less than the average of the corporation’s
interest expenses for such fiscal years, then the corporation’s current assets must equal at least 1 and 1/4 times its current liabilities.
Additionally, the Federal Reserve Board has authority to limit the payment of dividends by bank holding companies, such as the
Company, in certain circumstances, requiring, among other things, a holding company to consult with the Federal Reserve Board prior
to payment of a dividend if the company does not have sufficient recent earnings in excess of the proposed dividend.
The principal source of funds from which the Company may pay dividends is the receipt of dividends from the Bank. The
availability of dividends from the Bank is limited by various statutes and regulations. The Bank is subject first to corporate
restrictions on its ability to pay dividends. Further, the Bank may not pay a dividend if it would be undercapitalized after the dividend
payment is made. The payment of cash dividends by the Bank is subject to restrictions set forth in the California Financial Code (the
“Financial Code”). The Financial Code provides that a bank may not make a cash distribution to its shareholders in excess of the
lesser of (a) bank’s retained earnings; or (b) bank’s net income for its last three fiscal years, less the amount of any distributions made
by the bank or by any majority-owned subsidiary of the bank to the shareholders of the bank during such period. However, a bank
may, with the approval of the DBO, make a distribution to its shareholders in an amount not exceeding the greatest of (a) its retained
earnings; (b) its net income for its last fiscal year; or (c) its net income for its current fiscal year. In the event that the DBO determines
20
that the shareholders’ equity of a bank is inadequate or that the making of a distribution by the bank would be unsafe or unsound, the
DBO may order the bank to refrain from making a proposed distribution. The FDIC may also restrict the payment of dividends if such
payment would be deemed unsafe or unsound or if after the payment of such dividends, the bank would be included in one of the
“undercapitalized” categories for capital adequacy purposes pursuant to federal law.
While the Federal Reserve Board has no general restriction with respect to the payment of cash dividends by an adequately
capitalized bank to its parent holding company, the Federal Reserve Board might, under certain circumstances, place restrictions on
the ability of a particular bank to pay dividends based upon peer group averages and the performance and maturity of the particular
bank, or object to management fees to be paid by a subsidiary bank to its holding company on the basis that such fees cannot be
supported by the value of the services rendered or are not the result of an arm’s length transaction.
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 pay cash dividends in the future. No dividends were paid for the years
ended December 31, 2013 and 2012. During 2014, two cash dividends were paid, a $0.10 per common share dividend in January and
a $0.065 per common share dividend in July.
Equity Compensation Plan Information
The following table provides information as of December 31, 2014 with respect to shares of our common stock that are issued
and currently outstanding under the Company’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 Equity 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
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)
67,500
$
0
67,500
$
12.57
0
12.57
1,316,120
0
1,316,120
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
Not applicable.
21
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATION
The following discussion of financial condition as of December 31, 2014 and 2013 and results of operations for each of the years in
the two-year period ended December 31, 2014 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.
Introduction
Our continued focus on responsible community banking fundamentals and our strong customer relationships have enabled us
to increase net income to common shareholders in 2014, and have led to higher core deposits, a key funding source for our steady
asset growth.
As of December 31, 2014, we had approximately $750 million in total assets, $454 million in total gross loans, and $670 million
in total deposits.
We believe the following were key indicators of our performance during 2014:
• our total assets increased to $750 million at the end of 2014, an increase of 11.5%, from $672 million at the end of 2013.
• our total deposits increased to $670 million at the end of 2014, an increase of 11.1%, from $603 million at the end of 2013.
• our total net loans increased to $446 million at the end of 2014, an increase of 8.5%, from $411 million at the end of 2013.
• net interest income increased $1.0 million or 4.2% in 2014 compared to 2013, mainly as a result of growth of our loan and
investment portfolios.
• provision for loan losses decreased $2.2 million or 725.7% to a reversal of provision of $1.9 million in 2014 compared to
$0.3 million provision in 2013, due to a loan recovery as described below and noted trends of improved credit quality.
• our ratio of total non-performing loans to total loans increased to 1.03% at December 31, 2014 from 0.56% at
December 31, 2013. 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.
22
• total noninterest income increased to $3.8 million in 2014, an increase of 14.8%, from $3.3 million in 2013, which is
mainly attributable to our growing deposit account base.
• total noninterest expense increased from $18.7 million in 2013 to $20.2 million in 2014, reflecting the increase salaries and
other overhead costs associated with the growth of our product lines and services.
These items, as well as other factors, contributed to the increase in net income available to common shareholders for 2014
to $7.12 million from $5.82 million in 2013, which translates into $0.89 per diluted common share in 2014 as compared to $0.74 per
diluted common share in 2013.
Over the past several years, our network of branches and loan production offices has been expanded geographically. We
currently maintain fourteen 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.
2015 Outlook
As we begin our strategic business plan for 2015, we are continuing to explore opportunities for growth in our existing
markets, as well as opportunities to expand into new markets through de novo branching. In 2015, 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 continue to be an important
strategic initiative.
As a result of market interest rates declining to historic lows over the past years, we recognized a decrease in our net
interest income, which we expect could slightly compress further in 2015 even if interest rates begin to increase. The potential
compression of net interest income and net interest margin would be a likely outcome if interest rates increase, given that our 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
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. While published economic data indicates that the downturn is behind us, it is not clear at what speed the economy will
recover.
For 2015, management remains focused on the above challenges and opportunities and other factors affecting the business
similar to the factors driving 2014 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 Bancorp.
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.
23
• 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 consolidated 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 consolidated balance sheets 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.
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 and are carried at fair value or below. Appraisals are done periodically on
impaired loans and if required an allowance is established based on the fair value of collateral less the cost related to liquidation of the
collateral. In some circumstances, an impaired loan may be charged off to bring the carrying value to fair value.
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.
Net realizable value of the underlying collateral is the fair value of the collateral less estimated selling costs and any prior
liens. Appraisals, recent comparable sales, offers and listing prices are factored in when valuing the collateral. We review and verify
the qualifications and licenses of the certified general appraisers used for appraising commercial properties or certified residential
appraisers for residential properties. Real estate appraisals may utilize a combination of approaches including replacement cost, sales
comparison and the income approach. Comparable sales and income data are analyzed by the appraisers and adjusted to reflect
differences between them and the subject property such as type, leasing status and physical condition. When the appraisals are
received, Management reviews the assumptions and methodology utilized in the appraisal, as well as the overall resulting value in
conjunction with independent data sources such as recent market data and industry-wide statistics. We generally use a 6% discount for
selling costs which is applied to all properties, regardless of size. Appraised values may be adjusted to reflect changes in market
conditions that have occurred subsequent to the appraisal date, or for revised estimates regarding the timing or cost of the property
sale. These adjustments are based on qualitative judgments made by management on a case-by-case basis.
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 shareholders’ equity. We conduct a periodic review and evaluation of the securities
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 value through a charge to current period income. The fair values of our securities are significantly affected by changes
in interest rates.
24
In general, as interest rates rise, the fair value of fixed-rate securities will decrease; as interest rates fall, the fair 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,
• lending and management staff,
• lending policies and procedures,
25
• 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 Company recognizes in the consolidated statements of income 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 Company uses straight-line recognition of expenses for awards with graded vesting. The Company utilizes a binomial pricing
model for all stock option grants. Expected volatility is based on the historical volatility of the price of the Company’s stock. The
Company 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. For restricted stock grants, the Company uses the market price of the stock on
the grant date and expenses the market value over the vesting period.
Income Taxes
Deferred income taxes are provided for the temporary differences between the financial reporting basis and the tax basis of
the Company’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.
26
The Company files income tax returns in the U.S. federal jurisdiction, and the state of California. With few exceptions, the
Company is no longer subject to U.S. federal or state/local income tax examinations by tax authorities for years before 2009.
Deferred Compensations Plans
Future compensation under the Company’s executive salary continuation plan and director retirement plan is earned for
services rendered through retirement. The Company accrues for the salary continuation liability based on anticipated years of service
and vesting schedules provided under the plans. The Company’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.
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 17 to the Consolidated Financial Statements in Item 8 of this
Form 10-K.
Recently Issued Accounting Standards
In February 2013, the FASB issued ASU No. 2013-04, Obligations Resulting from Joint and Several Liability Arrangements
for Which the Total Amount of the Obligation Is Fixed at the Reporting Date. The Update requires an entity to measure obligations
resulting from joint and several liability arrangements for which the total amount of the obligation within the scope of this guidance is
fixed at the reporting date, as the sum of the following: 1) The amount the reporting entity agreed to pay on the basis of its
arrangement among its co-obligors, and 2) Any additional amount the reporting entity expects to pay on behalf of its co-obligors. The
guidance in this Update also requires an entity to disclose the nature and amount of the obligation as well as other information about
those obligations. The amendments in this Update are effective for fiscal years, and interim periods within those years, beginning
after December 15, 2013, and are applied retrospectively to all prior periods presented for those obligations resulting from joint and
several liability arrangements within the Update’s scope that exist at the beginning of an entity’s fiscal year of adoption. The adoption
of ASU No. 2013-04 did not have a material impact on the Company's consolidated financial statements
In July 2013, the FASB issued ASU No. 2013-10, Inclusion of the Fed Funds Effective Swap Rate (or Overnight Index Swap
Rate) as a Benchmark Interest Rate for Hedge Accounting Purposes. ASU No. 2013-10 permits the use of the Fed Funds Effective
Swap Rate (OIS) to be used as a U.S. benchmark interest rate for hedge account purposes. The amendment is effective prospectively
for qualifying new or redesiginated hedging relationships entered into on or after July 17, 2013. The adoption of ASU No. 2013-10 did
not have a material impact on the Company's consolidated financial statements
In July 2013, the FASB issued ASU No. 2013-11, Presentation of an Unrecognized Tax Benefit When a Net Operating Loss
Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists. ASU No. 2013-11 requires an entity to present an
unrecognized tax benefit, or a portion of an unrecognized tax benefit, as a reduction to a deferred tax asset for a net operating loss
carryforward, a similar tax loss, or a tax credit carryforward, except to the extent a net operating loss carryforward, a similar tax loss,
or a tax credit carryforward is not available at the reporting date under the tax law of the applicable jurisdiction to settle any additional
income taxes that would result from the disallowance of a tax position or the tax law of the applicable jurisdiction does not require the
entity to use, and the entity does not intend to use, the deferred tax asset for such purpose, the unrecognized tax benefit should be
presented in the financial statements as a liability and should not be combined with deferred tax assets. No new recurring disclosures
27
are required. The amendments are effective for annual and interim reporting periods beginning on or after December 15, 2013 and are
to be applied prospectively to all unrecognized tax benefits that exist at the effective date. Retrospective application is permitted. The
adoption of ASU No. 2013-11 did not have a material impact on the Company's consolidated financial statements.
In January 2014, the FASB issued ASU No. 2014 – 01, Investments – Equity Method and Joint Ventures (Topic 323),
Accounting for Investments in Qualified Affordable Housing Projects. This Update provides guidance on accounting for
investments by a reporting entity in flow-through limited liability entities that manage or invest in affordable housing projects that
qualify for the low-income housing tax credit. The amendments in this Update permit reporting entities to make an accounting policy
election to account for their investments in qualified affordable housing projects using the proportional amortization method if certain
conditions are met. Under the proportional amortization method, an entity amortizes the initial cost of the investment in proportion to
the tax credits and other tax benefits received and recognizes the net investment performance in the income statement as a component
of income tax expense (benefit). The amendments in this Update are effective for public business entities for annual periods and
interim reporting periods within those annual periods, beginning after December 15, 2014. The adoption of ASU No. 2014-01 is not
expected to have a material impact on the Company's consolidated financial statements.
In January 2014, the FASB issued ASU No. 2014 – 04, Receivables – Troubled Debt Restructurings by Creditors. This ASU
provides clarification that an in substance repossession or foreclosure occurs, and a creditor is considered to have received physical
possession of residential real estate property collateralizing a consumer mortgage loan, upon either (1) the creditor obtaining legal title
to the residential real estate property upon completion of a foreclosure or (2) the borrower conveying all interest in the residential real
estate property to the creditor to satisfy that loan through completion of a deed in lieu of foreclosure or through a similar legal
agreement. Additionally, the amendments require interim and annual disclosure of both (1) the amount of foreclosed residential real
estate property held by the creditor and (2) the recorded investment in consumer mortgage loans collateralized by residential real
estate property that are in the process of foreclosure according to local requirements of the applicable jurisdiction. The amendments in
this ASU are effective for public business entities for annual periods, and interim periods within those annual periods, beginning after
December 15, 2014. The adoption of ASU No. 2014-04 is not expected to have a material impact on the Company's consolidated
financial statements.
In August 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-
14 Receivables – Troubled Debt Restructurings by Creditors (Subtopic 310-40), Classification of Certain Government-Guaranteed
Mortgage Loans upon Foreclosure. This update addresses classification of government-guaranteed mortgage loans, including those
where guarantees are offered by the Federal Housing Administration (“FHA”), the U.S. Department of Housing and Urban
Development (“HUD”), and the U.S. Department of Veterans Affairs (“VA”). Although current accounting guidance stipulates proper
measurement and classification in situations where a creditor obtains from a debtor, assets in satisfaction of a receivable (such as
through foreclosure), current guidance does not specify how to measure and classify foreclosed mortgage loans that are government-
guaranteed. Under the provisions of this update, a creditor would derecognize a mortgage loan that has been foreclosed upon, and
recognize a separate receivable if the following conditions are met: (1) the loan has a government guarantee that is not separable from
the loan before foreclosure, (2) At the time of foreclosure, the creditor has the intent to convey the real estate property to the guarantor
and make a claim on the guarantee, and the creditor has the ability to recover under that claim, (3) At the time of foreclosure, any
amount of the claim that is determined on the basis of the fair value of the real estate is fixed. The amendments within this update are
effective for annual and interim periods beginning after December 15, 2014. The Company does not believe the adoption of this
update will have a material impact of the Company’s consolidated financial statements.
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 and mortgage commissions. The majority of the
Company's noninterest expenses are operating costs that relate to providing a full range of banking services to our customers.
Overview
We recorded net income available to common shareholders for the year ended December 31, 2014 of $7,122,000 or $0.89
per diluted common share compared to $5,818,000 or $0.74 per diluted common share for the year ended December 31, 2013. The
increase in net income available to common shareholders for the year ended December 31, 2014 was primarily due to a decrease of
$2,177,000 in provision for loan losses, an increase of $1,013,000 in net interest income and an increase in non-interest income of
$484,000. Partially offsetting these factors was an increase of $1,574,000 in non-interest expense associated with an increase in
28
staffing necessary to support the loan and deposit growth and preparation for expansion into the Tracy market and an increase in
income tax provision of $864,000 due to higher levels of pre-tax earnings.
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 of earnings during the period
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,
2014
2013
2012
$
7,122
$
5,819
$
5,329
$
$
0.90
0.89
$
$
10.07 %
1.03 %
18.54 %
67.03 %
$
$
0.75
0.74
9.07 %
0.90 %
13.51 %
65.65 %
0.69
0.69
8.80 %
0.95 %
0.00 %
63.83 %
$
$
$
$
9.29
749,665
454,471
669,581
$
$
$
$
8.14
671,853
419,438
602,633
$
$
$
$
7.99
660,581
390,986
586,993
66.68 %
68.23 %
65.15 %
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.
29
For a detailed analysis of interest income and interest expense, see the “Average Balance Sheets” and the “Rate/Volume Analysis”
below.
(Dollars in Thousands)
2014
Average
Balance
Interest
Income/
Expense
Avg
Rate/
Yield
2013
Interest
Income/
Expense
Avg
Rate/
Yield
Average
Balance
Distribution, Yield and Rate Analysis of Net Income
For the Years Ended December 31,
Assets:
Earning assets:
Gross loans (1) (2)
$ 430,448
$ 22,018
5.12%
$ 396,953
$ 21,413
5.39%
Securities of U.S. government agencies
11,139
212
1.90%
12,635
201
1.59%
Other investment securities (2)
110,261
4,248
3.85%
101,723
3,861
3.80%
Federal funds sold
Interest-earning deposits
Total interest-earning assets
Total noninterest earning assets
Total Assets
Liabilities and Shareholders' Equity:
Interest-bearing liabilities:
Business Interest DDA
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
16,426
65,377
38
0.23%
179
0.27%
10,793
79,716
25
0.23%
211
0.26%
633,651
26,695
4.21%
601,820
25,711
4.27%
59,367
$ 693,018
49,553
$ 651,373
16,338
7
0.04%
12,600
13
0.10%
238,736
277
0.12%
238,956
324
0.14%
97,080
39,820
33,285
17,687
69
44
0.07%
0.11%
186
0.56%
64
0.36%
2
0
0.08%
83,268
35,162
35,873
19,499
1
83
52
0.10%
0.15%
263
0.73%
93
0
0.48%
0.27%
442,948
647
0.15%
425,359
828
0.19%
175,329
4,047
179,376
70,694
156,629
3,892
160,521
65,493
Total liabilities and shareholders' equity
$ 693,018
$ 651,373
Net interest income
Net interest spread (3)
Net interest margin (4)
$ 26,048
$ 24,883
4.06%
4.11%
4.08%
4.13%
(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.
30
Net interest income, on a fully tax equivalent basis (FTE), increased $1.1 million or 4.7% to $26.0 million for the year ended
December 31, 2014, compared to $24.9 million in 2013. Net interest spread and net interest margin were 4.06% and 4.11%,
respectively, for the year ended December 31, 2014, compared to 4.08% and 4.13%, respectively, for the year ended December 31,
2013. Overall, the Company has experienced net interest margin compression since the economic downturn in 2008 for several
reasons: 1) deposit interest rates have essentially reached a threshold in which they cannot reasonably be further reduced, 2)
competition in the lending market has driven new loan rates down, 3) loan and investment portfolio yields continue to decrease due to
contractual repricing and 4) deposit growth has out-paced loan growth and the elevated interest-bearing cash balances, which yield
approximately 0.25%, have compressed our net interest margin.
The cost of funds on interest-bearing liabilities decreased 4 basis points in 2014 compared to 2013, due to moderate rate
reductions across all deposit products and a shift from high cost CDs into demand deposit and savings accounts. In addition, average
non-interest-bearing demand deposit balances increased by $18.7 million in 2014 compared to 2013, further reducing our cost of
funds.
Our earning asset yield decreased 6 basis points in 2014 compared to 2013. The yield on loans recognized a reduction of 27
basis points for 2014 compared to 2013, which was minimized due to the significant portion of our loans that are at their contractual
rate 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 and five years. This decrease in loan yield was primarily a result of competitive pressure on the pricing of new
loan fundings. The drop in loan yield was offset by deploying a portion of the low yielding cash equivalent balances into loan and
investment balances which recognized increases of $32.0 million and $7.0 million, respectively, in 2014 as compared to 2013.
Changes in volume resulted in an increase in net interest income (FTE) of $2,085,000 for the year of 2014 compared to the year
2013, and changes in interest rates and the mix resulted in a decrease in net interest income (FTE) of $920,000 for the year 2014
versus the year 2013. Management closely monitors both total net interest income and the net interest margin.
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
2014.
31
Rate/Volume Analysis
The following table below sets forth certain information regarding changes in interest income and interest expense of the
Company 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.
(Dollars in Thousands)
Rate/Volume Analysis of Net Interest Income
For the Year Ended December 31,
2014 vs. 2013
Increases (Decreases)
Due to Change In
For the Year Ended December 31,
2013 vs. 2012
Increases (Decreases)
Due to Change In
Volume
Rate
Total
Volume
Rate
Total
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:
Business Interest DDA
Money market deposits
NOW deposits
Savings deposits
Time certificates of $100,000 or more
Other time deposits
Other borrowings
Total interest expense
$
1,807
$
(1,202)
$
(24)
324
13
(38)
35
63
0
6
2,082
(1,098)
$
4
$
0
14
7
(19)
(9)
0
(3)
$
(10)
(47)
(28)
(15)
(58)
(20)
0
(178)
605
11
387
13
(32)
984
(6)
(47)
(14)
(8)
(77)
(29)
0
(181)
$
350
$
(1,396)
$
(1,046)
109
246
(4)
62
763
46
(105)
0
14
155
141
(4)
76
(1,441)
(678)
$
16
$
(8)
$
8
(22)
22
20
(11)
(14)
(4)
7
(167)
(42)
(25)
(48)
(25)
0
(315)
(189)
(20)
(5)
(59)
(39)
(4)
(308)
(370)
Change in net interest income
$
2,085
$
(920)
$
1,165
$
756
$
(1,126)
$
(1) Loan fees have been included in the calculation of interest income.
Provision for Loan Losses
Credit risk is inherent in the business of making loans. The Company establishes an allowance for loan losses through charges to
earnings, which are shown in the consolidated statements of income as the provision for loan losses. Specifically identifiable and
quantifiable losses are promptly charged off against the allowance. The Company 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.
Due to a loan settlement of $2,923,000 and noted trends of improved credit quality, the Company recognized a $1,877,000
reversal of loan loss provisions for the year ended December 31, 2014, compared to a provision of $300,000 for the year end
December 31, 2013. Nonperforming loans were $4.70 million at December 31, 2014 and $2.34 million at December 31, 2013, or
1.03% and 0.56%, respectively, of total loans. Nonperforming loans are primarily in nonperforming real estate construction and
development loans. The allowance for loan losses was $7.53 million and $7.66 million at December 31, 2014 and 2013, or 1.66% and
1.83%, respectively, of total loans. Net recoveries totaled $1,752,000 in 2014, compared to net charge-offs of $616,000 in 2013. The
32
decrease of the net charge-offs in 2014 compared to 2013 was due to the $2,923,000 loan settlement which resulted in the recovery of
$1,877,000.
The Company 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 $3.76 million for the year ended December 31, 2014, compared to $3.28 million for the year 2013. In
2014, other income increased by $269,000, which was attributable to increases in debit card interchange fee income, FHLB stock
dividends and investment service fee income of $101,000, $75,000 and $54,000, respectively, compared to 2013. Mortgage
commissions have decreased by $72,000 or 31.4% for the year 2014, as compared to 2013, as a result of the slow demand for home
purchases and refinancing. Service charge income increased to $1.35 million for the year 2014 compared to $1.24 million for the year
2013, as a result of the increase in the aggregate number of transaction deposits. Earnings on cash surrender value of life insurance
increased by $29,000 for the year 2014 compared to 2013, as a result of three new life insurance plans totaling $1.0 million purchased
on directors during the first quarter of 2014. The Company 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)
For the Years Ended December 31,
2014
2013
(Amount)
(%)
(Amount)
(%)
1,346
433
157
209
1,619
3,764
35.8 % $
11.5 %
4.2 %
5.5 %
43.0 %
100.0 % $
1,237
404
229
60
1,350
3,280
37.7 %
12.3 %
7.0 %
1.8 %
41.2 %
100.0 %
693,018
$
651,373
0.5 %
0.5 %
$
$
$
Service charges on deposit accounts
Earnings on cash surrender value of life insurance
Mortgage commissions
Gains on called securities
Other income
Total
Average assets
Noninterest income as a % of average assets
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
Regulatory assessments (FDIC & DBO)
Other operating expenses
Total
Average assets
Noninterest expenses as a % of average assets
For the Years Ended December 31,
2014
2013
(Amount)
(%)
(Amount)
(%)
11,120
2,902
1,336
459
4,417
20,234
55.0 % $
14.3 %
6.6 %
2.3 %
21.8 %
9,978
2,924
1,307
480
3,971
100.0 % $
18,660
53.4 %
15.7 %
7.0 %
2.6 %
21.3 %
100.0 %
693,018
$
651,373
2.9 %
2.9 %
$
$
$
33
Noninterest expense was $20,234,000 for the year ended December 31, 2014, an increase of $1,574,000 or 8.4% compared to
$18,660,000 for the year ended 2013.
Data processing costs increased in 2014 over 2013 by $29,000, reflecting the additional costs related to the increased number
of deposit accounts and the expansion of our products and services.
Other operating expenses increased in 2014 by $445,000 compared to 2013, due to a variety of costs necessary for the
expansion of our products and services, such as software licensing, insurance, and advertising. In addition, director fees increased by
$124,000 due to an increase in the monthly retainer paid to each independent director, which was approved during the first quarter of
2014.
FDIC and DBO (California Department of Business Oversight) regulatory assessments decreased by $21,000 to $459,000 in
2014 compared to $480,000 in 2013. The initial base assessment rate for financial institutions varies based on the overall risk profile
of the institution as defined by the FDIC. The decrease in 2014 is the result of an overall improved risk profile and a corresponding
reduction of our assessment rate. The lower assessment rate offset the increase in our deposit balances, as the FDIC assessment rates
are applied to average quarterly total liabilities as the primary basis.
Salaries and employee benefits increased by $1,142,000 in 2014 to $11,120,000 compared to the prior year. To support loan
and deposit growth and continue our emphasis on superior customer service, we increased our full-time equivalent staff by 11 as of
December 31, 2014 compared to last year, which resulted in increased salary expense and group medical insurance benefits.
Occupancy expense realized a modest decrease of $22,000 in 2014 compared to the prior year, primarily from run-off of fixed asset
depreciation from assets that had become fully depreciated.
Management anticipates that noninterest expense will continue to increase as we continue to grow, even though management
also estimates that the Company’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.
Provision for Income Taxes
We reported a provision for income taxes of $3,574,000 and $2,710,000 for the years 2014 and 2013, respectively. The effective
income tax rate on income from continuing operations was 33.4% for the year ended December 31, 2014 compared to 31.5% for the
year 2013. 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 2014 as compared to 2013 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 2013 as compared to 2014. We have not been subject to an alternative minimum tax ("AMT") during
these periods.
Financial Condition
The Company’s total assets were $749.7 million at December 31, 2014 compared to $671.9 million at December 31, 2013, an
increase of $77.6 million or 11.6%. Net loans increased $35.3 million, investments increased $3.5 million, bank premises and
equipment increased $0.4 million and interest receivable and other assets decreased $0.5 million, while cash and cash equivalents
increased $39.1 million for the year ended December 31, 2014 as compared to December 31, 2013.
Loans gross of the allowance for loan losses and deferred fees were $454.5 million at December 31, 2014, compared to $419.4
million at December 31, 2013, an increase of $35.0 million or 8.4%. The increase was primarily due to an increase of $25.5 million or
7.7% in commercial real estate loan, an increase of $5.3 million or 10.8% in commercial and industrial loans and an increase of $4.5
million or 39.8% in agriculture loans. This was offset by a decrease of $0.2 million in consumer loans and consumer residential loans.
The composition of the loan portfolio categories remained relatively unchanged as a percentage of total loans, with commercial real
estate comprising 79% of the loan portfolio at December 31, 2014 and 2013.
34
Deposits increased $66.9 million or 11.1% to $669.6 million at December 31, 2014 compared to $602.6 million at December 31,
2013. Time deposits decreased by $4.6 million, while Demand, NOW, Money Market and Savings increased by $38.4 million, $17.6
million, $10.9 million and $4.6 million, respectively, as of December 31, 2014 as compared to December 31, 2013.
Short-term borrowings were fully paid off during 2012 to leave no outstanding balances at December 31, 2013 and 2014. There
was no long-term debt outstanding at December 31, 2014 and December 31, 2013. The Company uses short-term borrowings,
primarily short-term FHLB advances, to fund short-term liquidity needs and manage net interest margin.
Equity increased $10.5 million or 16.3% to $75.0 million at December 31, 2014, compared to $64.5 million at December 31,
2013. The Company 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. In August 2011, the Company repurchased these Series A preferred
stock shares and simultaneously issued $13,500,000 in Series B Preferred Stock to the U.S. Treasury under the Small Business
Lending Funding (“SBLF”) program. Subsequently, the Company fully redeemed a warrant to purchase 350,346 shares of its
Common Stock, at the exercise price of $5.78 per share that the Company had granted to the U.S. Treasury pursuant to the TCPP, for
a purchase price of $560,000, which settled in September 2011. In May 2012, the Company repurchased from the U.S. Treasury
6,750 shares of Series B Preferred Stock for aggregate consideration of $6.75 million. In March 2013, the Company repurchased from
the U.S. Treasury the remaining 6,750 shares of Series B Preferred Stock for aggregate consideration of $6.8 million, reflecting $6.75
million paid for the repurchase, and $67,500 paid for accrued dividends. The securities issued to the Treasury were accounted for as
components of regulatory Tier 1 capital. See Notes 3 to the Consolidated Financial Statements in Item 8 of this report for further
discussion regarding our participation in the TCPP and SBLF.
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.
Cash Equivalents and Interest-bearing Deposits in other Financial Institutions
The Company 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, 2014, and 2013, we had $12.2 million and $5.1 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 $3.5 million, or 3.0%, to $121.3 million at December 31, 2014, compared
to holdings of $117.7 million at December 31, 2013. Total investment securities as a percentage of total assets decreased to 16.2% as
of December 31, 2014 compared to 17.5% at December 31, 2013. As of December 31, 2014, $60.5 million of the investment
securities were pledged to secure public deposits.
As of December 31, 2014, the total unrealized loss on securities that were in a loss position for less than 12 continuous
months was $0.1 million with an aggregate fair value of $9.3 million. The total unrealized loss on securities that were in a loss
position for greater than 12 continuous months was $0.5 million with an aggregate fair value of $27.5 million.
35
The following table summarizes the book value and fair value and distribution of our investment securities as of the dates
indicated:
(Dollars in Thousands)
Available-for-Sale:
U.S. agencies
Collateralized mortgage obligations
Municipal securities
SBA Pools
Corporate debt
Asset backed Securities
Mutual fund
Investment Securities Portfolio
December 31, 2014
December 31, 2013
December 31, 2012
Amortized
Cost
Fair Value
Amortized
Cost
Fair Value
Amortized
Cost
Fair Value
$
40,316
$
41,930
$
52,540
$
53,116
$
52,608
$
6,927
49,396
895
6,726
10,766
3,077
7,072
50,897
892
6,804
10,710
2,972
9,580
42,304
1,088
4,697
5,858
2,975
9,781
40,269
1,081
4,825
5,856
11,698
25,323
1,178
4,669
0
2,818
2,875
2,868
55,518
12,604
26,992
1,178
4,706
0
Total investment securities
$ 118,103
$
121,277
$ 119,042
$
117,746
$
98,351
$
103,866
At December, 2014, there were 6 U.S. agencies, one collateralized mortgage obligation, 14 municipalities, two SBA pools,
one asset backed security, and one mutual fund that comprised the total securities in an unrealized loss position for greater than 12
months and 3 municipalities, one corporate debt, and two asset backed securities that make up the total securities in a loss position for
less 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. This evaluation encompasses various factors including, the nature
of the investment, the cause of the impairment, the severity and duration of the impairment, credit ratings and other credit related
factors such as third party guarantees and volatility of the security’s fair value. Management has determined that no investment
security is other than temporarily impaired. The unrealized losses are due primarily to interest rate changes and the Company 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, 2014, we did not have any investment securities that
constituted 10% or more of the stockholders’ equity of any third party issuer.
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, 2014:
Investment Maturities and Repricing Schedule
Afte r O ne But
Afte r Five But
(Dollars in T housands)
Within O ne Ye ar
Within Five Ye ar
Within Te n Ye ars
Afte r Te n Ye ars
Total
Amount
Yie ld
Amount
Yie ld
Amount
Yie ld
Amount
Yie ld
Amount
Yie ld
Available -for-sale :
U.S. agencies
$
8,440
1.03 % $
7,863
4.55 % $
1,696
3.18 % $ 22,317
3.22 % $
40,316
3.02 %
Collateralized mortgage obligations
0
0.00 %
0
0.00 %
0
0.00 %
Municipalities
SBA Pools
Corporate debt
Asset Backed Securities
Mutual Fund
1,864
5.78 %
16,471
3.11 %
27,819
2.99 %
0
2,726
0
0
0.00 %
1.69 %
0
0.00 %
0
0.00 %
2,000
3.00 %
2,000
2.42 %
0.00 %
1,165
1.46 %
5,813
1.56 %
0.00 %
0
0.00 %
0
0.00 %
6,927
3,242
895
0
3,788
3,077
3.26 %
3.95 %
0.58 %
0.00 %
2.17 %
0.00 %
T otal Investment Securities
$ 13,030
1.84 % $ 27,499
3.38 % $ 37,328
2.37 % $ 40,246
2.88 % $ 118,103
6,927
3.26 %
49,396
3.20 %
895
0.58 %
6,726
2.30 %
10,766
1.76 %
3,077
0.00 %
2.72 %
Yields in the above table have not been adjusted to a fully tax equivalent basis. Securities are reported at the earliest possible call,
repricing or maturity date.
36
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.
(Dollars in Thousands)
YEARS ENDED DECEMBER 31,
Commercial real estate
$
358,398 $
332,874 $
316,075 $
330,045 $
336,730
2014
2013
2012
2011
2010
Commercial and Industrial
Consumer
Consumer residential
Agriculture
Unearned income
54,051
805
25,464
15,753
(445)
48,787
883
25,623
11,272
(624)
36,529
1,096
25,659
11,628
(600)
32,018
1,213
23,871
9,056
(634)
30,756
1,242
21,844
13,622
(733)
Total loans, net of unearned income
$
454,026 $
418,815 $
390,387 $
395,569 $
403,461
Participation loans sold and serviced by
the Bank
$
16,243 $
11,733 $
8,045 $
7,929 $
9,283
Commercial real estate
Commercial and Industrial
Consumer
Consumer residential
Agriculture
Unearned income
Total Loans, net of unearned income
78.9%
11.9%
0.2%
5.6%
3.5%
-0.1%
100.0%
79.5%
11.6%
0.2%
6.1%
2.7%
-0.1%
100.0%
80.9%
83.5%
83.5%
9.4%
0.3%
6.6%
3.0%
-0.2%
100.0%
8.1%
0.3%
6.0%
2.3%
-0.2%
100.0%
7.6%
0.3%
5.4%
3.4%
-0.2%
100.0%
Commercial real estate loans increased $25.5 million in 2014 as compared to 2013, as a result of the increased demand by
qualified borrowers in our serving area. Of the commercial real estate loans at December 31, 2014, 63.1% are non-owner occupied and
36.9% 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 loans increased $5.3 million in 2014 as compared to 2013, as a 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. Substantially all of our residential loans are indexed to Treasury
Constant Maturity Rates and have provisions to reset five years after their origination dates.
37
The following table summarizes our commercial real estate loan portfolio by the geographic location in which the property
is located as of December 31, 2014 and 2013:
Commercial Real Estate Loans Outstanding by Geographic Location
(Dollars in Thousands)
December 31, 2014
December 31, 2013
$
Commercial real estate loans by
geographic location (County)
Stanislaus
San Joaquin
Tuolumne
Alameda
Fresno
Merced
San Luis Obispo
Mono
Madera
Marin
Sonoma
Contra Costa
Sacramento
Solano
Calaveras
Butte
Santa Clara
Inyo
Tulare
Los Angeles
San Bernardino
Other
Total
$
% of
Commercial
Real Estate
Loans
Amount
% of
Commercial
Real Estate
Loans
Amount
142,293
67,486
24,854
19,216
15,566
11,384
9,098
8,543
7,452
6,749
5,988
5,915
4,348
4,318
3,863
3,796
3,393
3,295
2,964
8
0
7,869
358,398
$
39.7%
18.8%
6.9%
5.4%
4.3%
3.2%
2.5%
2.4%
2.1%
1.9%
1.7%
1.7%
1.2%
1.2%
1.1%
1.1%
0.9%
0.9%
0.8%
0.0%
0.0%
2.2%
100.0%
$
127,890
60,069
22,823
19,694
15,084
9,636
0
11,531
7,566
6,891
4,403
5,542
4,498
3,419
4,014
0
3,174
3,765
3,031
14
7,884
11,946
332,874
38.4%
18.0%
6.9%
5.9%
4.5%
2.9%
0.0%
3.5%
2.3%
2.1%
1.3%
1.7%
1.4%
1.0%
1.2%
0.0%
1.0%
1.1%
0.9%
0.0%
2.4%
3.5%
100.0%
38
Construction and land loans are classified as commercial real estate loans and decreased $6.9 million in 2014 as compared to
2013. The table below shows an analysis of construction loans by type and location. Non-owner-occupied land loans of $10.6 million
at December 31, 2014 included loans for lands specified for commercial development of $4.6 million and for residential development
of $6.0 million, the majority of which are located in Stanislaus County.
Construction and Land Loans Outstanding by Type and Geographic Location
(Dollars in Thousands)
December 31, 2014
December 31, 2013
Construction and land loans by type
Single family non-owner-occupied
Single family owner-occupied
Commercial non-owner-occupied
Commercial owner-occupied
Land non-owner-occupied
Total
Construction and land loans by
geographic location (County)
Stanislaus
Merced
Mono
San Joaquin
Contra Costa
Inyo
San Bernardino
Fresno
Madera
Tuolumne
Other
Total
% of
Construction
and Land
Loans
$
0.0%
1.8%
5.3%
39.3%
53.6%
100.0%
$
% of
Construction
and Land
Loans
0.0%
1.7%
56.5%
0.0%
41.8%
100.0%
Amount
0
456
15,099
0
11,157
26,712
Amount
0
354
1,045
7,782
10,620
19,801
% of
Construction
and Land
Loans
Amount
% of
Construction
and Land
Loans
Amount
11,490
4,254
2,700
815
370
164
0
0
0
0
8
19,801
$
58.0%
21.5%
13.6%
4.1%
1.9%
0.9%
0.0%
0.0%
0.0%
0.0%
0.0%
7,675
0
2,894
962
658
355
7,884
5,739
515
17
13
28.7%
0.0%
10.8%
3.6%
2.5%
1.3%
29.5%
21.5%
1.9%
0.1%
0.1%
100.0%
$
26,712
100.0%
$
$
$
$
39
Loan Maturities
The following table shows the contractual maturity distribution and repricing intervals of the outstanding loans in our
portfolio, as of December 31, 2014. 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.
(Dollars in thousands)
Commercial real estate
Commercial & industrial
Consumer
Consumer residential
Agriculture
Unearned income
Loan Maturities and Repricing Schedule
At December 31, 2014
Within
One Year
After One
But Within
Five Years
After
Five Years
Total
$
62,464
$
199,563
$
96,371
$
358,398
35,994
365
2,635
13,970
(113)
12,457
393
12,396
1,233
(222)
5,600
47
10,433
550
(110)
54,051
805
25,464
15,753
(445)
Total loans, net of unearned income
$
115,315
$
225,820
$
112,891
$
454,026
Loans with variable (floating) interest rates
Loans with predetermined (fixed) interest rates
$
$
99,944
$
198,231
$
62,419
$
360,594
15,371
$
27,589
$
50,472
$
93,432
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 Company had nonperforming loans of $4.70 million at December 31, 2014, as compared to $2.34 at December 31,
2013, $6.92 million at December 31, 2012, $7.23 million at December 31, 2011 and $11.48 million at December 31, 2010. The ratio
40
of nonperforming loans over total loans was 1.03%, 0.56%, 1.77%, 1.83% and 2.84% at December 31, 2014, 2013, 2012, 2011 and
2010, respectively.
In addition, the Company held three OREO properties with outstanding balances of approximately $884,000 as of
December 31, 2014, one of which consisted of residential land acquired through foreclosure that was written down to a zero balance
because the public utilities have not been obtainable rendering these land lots unmarketable at this time. The Company held the same
three properties as of December 31, 2013 and held only the one zero-balance property as of December 31, 2012. The Company held
two properties with a market value of $0.2 million as of December 31, 2011 as compared to three OREO properties with a market
value of $0.8 million as of December 31, 2010.
Management believes that the reserve provided for nonperforming loans, together with the tangible collateral, were
adequate as of December 31, 2014. See “Allowance for Loan Losses” below for further discussion. Except as disclosed above, as of
December 31, 2014, 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.
41
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)
At December 31,
Nonperforming Assets
2014
2013
2012
2011
2010
Nonaccrual loans(1)
Commercial real estate
Commercial and industrial
Consumer
Consumer residential
Agriculture
Total
$
4,363
$
2,322
$
5,891
$
7,129
$
11,253
337
0
0
0
18
0
0
0
21
0
1011
0
104
0
0
0
222
0
0
0
$
4,700
$
2,340
$
6,923
$
7,233
$
11,475
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
$
$
0
0
0
0
0
0
$
0
0
0
0
0
0
$
0
0
0
0
0
0
$
0
0
0
0
0
0
0
0
0
0
0
0
Total nonperforming loans
4,700
2,340
6,923
7,233
11,475
Other real estate owned
Total nonperforming assets
884
916
0
244
778
$
5,584
$
3,256
$
6,923
$
7,477
$
12,253
Accruing restructured loans (2)
Commercial real estate
Commercial and industrial
Consumer
Consumer residential
Agriculture
Total
$
$
0
0
0
0
0
0
$
0
0
0
0
0
0
$
0
0
0
0
0
0
$
0
0
0
0
0
0
0
0
0
0
0
0
Total impaired loans
$
4,700
$
2,340
$
6,923
$
7,233
$
11,475
Nonperforming loans as a percentage of total loans
Nonperforming assets as a percentage of total loans
and other real estate owned
Allowance for loan losses as a percentage of
nonperforming loans
1.03%
1.23%
0.56%
0.77%
1.77%
1.77%
1.83%
1.89%
2.84%
3.03%
160.30%
327.37%
115.19%
119.03%
71.94%
(1) During the fiscal year ended December 31, 2014 and 2013, no interest income related to these loans was included in net income
while on nonaccrual status. Additional interest income of approximately $321,000 and $583,000 would have been recorded during the
year ended December 31, 2014 and 2013, 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 concession because of deterioration in the financial
position of the borrower.
42
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.
Historically, over the past five years, due to the economic downturn’s effect on the financial stability of certain borrowers,
we set aside more reserves for probable loan losses. However, in 2014, amid signs of credit quality improvement, the allowance for
loan losses decreased by 1.6%, or $125,000, to $7.53 million at December 31, 2014 as compared with $7.66 million at December 31,
2013. Such allowances were $7.98 million, $8.61 million and $8.25 million at December 31, 2012, 2011 and 2010, respectively. In
2014, the allowance for loan losses as a percentage of total loans decreased corresponding to our improved credit quality, as reflected
in the ratios of 1.66%, 1.83%, 2.04%, 2.17% and 2.04%, at the end of 2014, 2013, 2012, 2011 and 2010, respectively. Based on the
current conditions of the loan portfolio, management believes that the $7.53 million allowance for loan losses at December 31, 2014 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.
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 stagnant economic environment will continue to be
monitored, and adjustments to the provision for loan loss will be made accordingly. During 2014, the Company recognized net loan
recoveries of $1,752,000 primarily from one loan for which we received a net settlement of $2,923,000, resulting in a recovery of
$1,877,000. In prior years, the weak business climate adversely impacted the financial conditions of some of our clients and resulted
in net loan charge-offs of $616,000, $1,784,000, $1,146,000 and $2,785,000 in 2013, 2012, 2011 and 2010, 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, 2014 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, 2014, 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”):
(Dollars in Thousands)
Phase of Methodology
Specific review of individual loans
Review of portfolio based on loss trends and current economic climate
Review of portfolio based on inherent risk and other subjective factors
Years Ended December 31,
2013
2012
2014
$
$
993
$
392
$
4,388
2,153
7,534
$
5,362
1,905
7,659
$
549
5,521
1,905
7,975
43
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 increased from $2.3
million at December 31, 2013 to $4.7 million at December 31, 2014. The specific allowance totaled $993,000 and $392,000 at
December 31, 2014 and 2013, 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
historical losses, 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 based on loss history
to outstanding loans. At December 31, 2014 and 2013, the allowance allocated by categories of credits totaled $4.4 million and $5.4
million, respectively. The decrease mainly related to one borrower with three loans that were placed on non-accrual during 2014
which resulted in a reduction of $822,000 from the second ALLL component, as the loans were subsequently evaluated individually
for impairment.
The third component of the allowance for loan losses is an economic and qualitative component that 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, 2014 and 2013, the general valuation allowance, including the economic component, totaled $2.2 million
and $1.9 million, respectively. Starting in late 2008, we witnessed financial difficulties experienced by borrowers in our market, where
real estate sale prices declined and holding periods increased. In the past several years, while published economic data indicates that
the downturn is behind us, it is not clear at what speed the economy will recover. 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.
44
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:
(Dollars in Thousands)
Balances:
Allowance for Loan Losses
2014
2013
2012
2011
2010
Average total loans outstanding during period
Total loans outstanding at end of period
Allowance for loan losses:
Balances at beginning of period
$
$
$
430,448
454,471
7,659
$
$
$
396,953
419,438
7,975
$
$
$
390,856
390,986
8,609
$
$
$
394,130
396,202
8,255
$
$
$
411,590
404,194
7,020
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
Net loan (recoveries) charge-offs
103
0
40
0
0
143
1,882
0
2
11
0
1,895
(1,752)
(Reversal of) provision for loan losses
(1,877)
436
0
22
178
0
636
9
0
3
8
0
20
616
300
1,663
1,108
2,696
0
26
150
0
44
7
38
0
52
1
43
0
1,839
1,197
2,792
35
1
4
15
0
55
30
14
6
1
0
51
0
2
5
0
0
7
1,784
1,146
2,785
1,150
1,500
4,020
Balance at end of period
$
7,534
$
7,659
$
7,975
$
8,609
$
8,255
Ratios:
Net loan (recoveries) charge-offs to average total loans
Allowance for loan losses to total loans at end of period
Net loan (recoveries) charge-offs to allowance for loan
losses at end of period
Net loan charge-offs to provision for loan losses
(0.41%)
1.66%
(23.25%)
N/A
0.16%
1.83%
8.04%
205.33%
0.46%
2.04%
22.37%
155.13%
0.29%
2.17%
13.31%
76.40%
0.68%
2.04%
33.74%
69.28%
45
The table below summarizes the allowance for loan loss balance by type of loan balance at the end of each period (See
“Loan Portfolio” above for a description of each type of loan balance):
(Dollars in thousands)
Amount Outstanding as of December 31,
Allocation of the Allowance for Loan Losses
2014
2013
2012
2011
2010
Applicable to:
Commercial real estate
$
5,963
$
6,248
$
6,571
$
6,969
$
6,577
Commercial and Industrial
Consumer
Consumer Residential
Agriculture
Unallocated
720
42
388
286
135
663
47
440
217
45
474
50
384
286
210
606
65
348
363
258
686
61
375
153
403
Total Allowance
$
7,534
$
7,659
$
7,975
$
8,609
$
8,255
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 Company Owned Life Insurances (“BOLI”).
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 a three year period, which was fully funded by the year 2009. We receive the
return in the form of tax credits and tax deductions which began in 2007 and are expected to continue through the year 2022. The $1
million contribution is being amortized to other expenses over a term of 15 years, commensurate with the benefits received.
The balances of other earning assets as of December 31, 2014 and December 31, 2013 were as follows:
(Dollars in Thousands)
December 31, 2014
December 31, 2013
BOLI
LIHTCF
Federal Reserve Bank Stock
Federal Home Loan Bank Stock
Deposits and Other Sources of Funds
Deposits
$
$
$
$
13,545 $
455 $
758 $
2,517 $
12,083
515
758
2,412
Total deposits at December 31, 2014 and 2013 were $669.6 million and $602.6 million, respectively, representing an
increase of $67.0 million or 11.1% in 2014. The average deposits for the year ended December 31, 2013 increased $45.0 million or
8.4% to $582.0 million compared to $537.0 million at December 31, 2012.
Deposits are the Company’s primary source of funds. Due to strategic emphasis by management, core deposits (based on
definition provided by FDIC’s Uniform Bank Performance Report) increased by 11.2% in 2014 to $657.6 million at December 31,
2014. The percentage of core deposits to total deposits remained flat at 98.2% at December 31, 2014 as compared to 98.1% at
December 31, 2013. The average rate paid on time deposits in denominations of $100,000 or more was 0.56% and 0.73% for the
years ended December 31, 2014 and 2013, respectively. The composition and cost of the Company's deposit base are important
46
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:
(Dollars in Thousands)
Demand
Money market
NOW
Savings
Time certificates of deposit of
$100,000 or more
Other time deposits
Total deposits
Distribution of Average Daily Deposits
2014
2013
2012
Average
Balance
Average
Rate
Average
Balance
Average
Rate
Average
Balance
Average
Rate
$
191,667
0.00%
$
169,229
0.00%
$
133,674
238,736
97,080
39,820
33,285
17,687
0.12%
0.07%
0.11%
0.56%
0.36%
238,956
83,268
35,162
35,873
19,499
0.14%
0.10%
0.15%
0.73%
0.48%
249,652
68,454
26,238
37,150
21,822
$
618,275
0.10%
$
581,987
0.14%
$
536,990
0.00%
0.21%
0.15%
0.22%
0.87%
0.60%
0.21%
The scheduled maturities of our time deposits in denominations of $100,000 or greater at December 31, 2014 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
$
7,895
6,176
9,291
8,263
$
31,625
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, two of which had a deposit balance of more than 3% of total deposits at December 31, 2014.
The Company had $1.9 million in brokered deposits as of December 31, 2014 and 2013, respectively. The only brokered
deposits the Company holds are from CDARS and ICS, a certificate of deposit and money market account program, respectively, that
exchanges funds with other network banks to offer full FDIC insurance coverage to the customer.
47
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
funds. Our outstanding FHLB advances were fully paid off during 2012, leaving no outstanding balances as of December 31, 2013
and 2014. See “Liquidity Management” below for the details on the FHLB borrowings program.
The following table is a summary of FHLB borrowings for fiscal years 2014 and 2013:
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
$
$
$
2014
2013
0 $
1 $
0 $
N/A
N/A
0
0
0
N/A
N/A
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
Year Ended December 31,
2014
2013
1.03 %
10.07 %
18.54 %
10.01 %
0.90 %
9.07 %
13.51 %
9.60 %
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, 2014 and 2013, our aggregate payment obligations under this plan totaled $7.8 million
and $7.4 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, 2014, and 2013, we had commitments to extend credit of $84.8 million and $52.6 million,
respectively. Obligations under standby letters of credit were $1.1 million and $0.3 million at December 31, 2014 and 2013,
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 15- Commitments and Other Contingencies- to our 2014 year-end consolidated
financial statements located elsewhere in this report.
48
Contractual Obligations
The following chart summarizes certain contractual obligations of the Company as of December 31, 2014 (dollars in thousands):
Contractual Obligations
Operating lease obligations
Supplemental retirement plans
Time deposit maturities
Total
Less than 1
Year
1-3 years
3-5 years
More than 5
years
Total
$
$
844 $
1,405 $
1,320
$
2,182
$
60
146
35,668
36,572 $
12,706
14,257 $
302
22
1,644
$
1,714
0
3,896
$
5,751
2,222
48,396
56,369
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. 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 Company holds are from CDARS and ICS, a certificate of deposit and money market
program, respectively, that exchanges funds with other network banks to offer full FDIC insurance coverage to the customer. The
Company had $1.9 million in brokered deposits as of December 31, 2014 and 2013, 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, 2014 and 2013, the Company had no FHLB advances outstanding
and had sufficient collateral to borrow an additional $176.7 million and $168.0 million, respectively. In addition, the Company had
lines of credit with its correspondent banks to purchase overnight federal funds totaling $25 million at December 31, 2014 and 2013.
No advances were made on these lines of credit as of December 31, 2014 and December 31, 2013.
The Company’s liquidity depends primarily on dividends paid to it as sole shareholder of the Bank. The Bank’s ability to pay
dividends to the Company will depend on whether the Bank will be in a position to pay dividends based on regulatory requirements
and the performance of the Bank.
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
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, 2014 and 2013 totaled approximately $223.5 million and $183.3 million, respectively. Our
49
liquidity level measured as the percentage of liquid assets to total assets was 29.8% and 27.3% at December 31, 2014, and 2013,
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, 2014, total shareholders’ equity increased to $75.0 million, representing an increase of $10.5 million from
December 31, 2013. The increase was due to the increase in retained earnings of $7.1 million, a comprehensive gain of $2.6 million
due to the positive effect that declining treasury yields had on the unrealized market value adjustment of our available for sale
investment portfolio and $0.9 million from stock option exercise proceeds. These increases were offset by the common stock
dividend declaration totaling $0.5 million during the third quarter of 2014.
In December 2008, the Company was selected to participate in the U.S. Treasury Capital Purchase Program which
demonstrated the confidence the U.S. Treasury Department has in the stability of the Company. The Company issued $13.5 million in
Series A preferred stock. In August 2011, the Company repurchased these Series A preferred stock shares and simultaneously issued
$13,500,000 in Series B Preferred Stock to the U.S. Treasury under the Small Business Lending Funding (“SBLF”) program.
Subsequently, the Company fully redeemed a warrant to purchase 350,346 shares of its Common Stock, at the exercise price of $5.78
per share that the Company had granted to the U.S. Treasury pursuant to the TCPP, for a purchase price of $560,000, which settled in
September 2011. In May 2012, the Company repurchased from the U.S. Treasury 6,750 shares of Series B Preferred Stock for
aggregate consideration of $6.75 million. In March 2013, the Company repurchased from the U.S. Treasury the remaining 6,750
shares of Series B Preferred Stock for aggregate consideration of $6,817,500, reflecting $6,750,000 paid for the repurchase, and
$67,500 paid for accrued dividends. The securities issued to the Treasury were accounted for as components of regulatory Tier 1
capital. See Note 3 to the Consolidated Financial Statements in Item 8 of this report for further discussion regarding our participation
in the TCPP and SBLF.
As of December 31, 2014, we had no material commitments for capital expenditures.
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, 2014, 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, 2014
December 31, 2013
10.0 %
6.0 %
5.0 %
14.5 %
13.2 %
10.1 %
14.6 %
13.3 %
9.8 %
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
Company's role as a financial intermediary in customer-related transactions. The objective of market risk management is to avoid
excessive exposure of the Company's earnings and equity to loss and to reduce the volatility inherent in certain financial instruments.
50
Interest Rate Management
Market risk arises from changes in interest rates, exchange rates, commodity prices and equity prices. The Company'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 Company does not engage in the trading of financial instruments, nor does the
Company 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 Company in a manner that will optimize the risk/reward equation for earnings and capital in relation to
changing interest rates. The Company'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 Company 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 Company uses modeling software for asset/liability management in order to simulate the effects of potential interest rate
changes on the Company's net interest margin, and to calculate the estimated fair values of the Company'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 Company's interest income and interest expense.
Rate scenarios consisting of key rate and yield curve projections are run against the Company'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 Company 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 for the purpose of the table below. Additionally, management evaluates shocked and ramped scenarios for interest rate
changes up to 400 basis points.
At December 31, 2014, it was estimated that the Company's MV would decrease 12.8% in the event of an immediate 200 basis
point increase in market interest rates. The Company's MV at the same date would decrease 25.8% in the event of an immediate 200
basis point decrease in applicable interest rates.
51
Presented below, as of December 31, 2014 and 2013, is an analysis of the Company's interest rate risk as measured by changes in
MV for instantaneous and sustained parallel shifts of applicable interest rates:
December 31, 2014
December 31, 2013
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)
$
$
$
$
$
(19,562)
(8,356)
0
(16,087)
(39,357)
(12.82) %
(5.47) %
0.00 %
(10.54) %
(25.78) %
18.28 %
19.41 %
20.12 %
17.69 %
14.56 %
(184)
(71)
0
(243)
(556)
$
$
$
$
$
(6,282)
(1,854)
0
4,064
3,529
(6.77) %
(2.00) %
0.00 %
4.38 %
3.81 %
13.13 %
13.51 %
13.49 %
13.83 %
13.66 %
(36)
2
0
34
17
(Dollars in
Thousands)
Shock Scenario
+200 bp
+100 bp
0 bp
-100 bp
-200 bp
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
Company'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.
52
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-45 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 income
Statements of comprehensive income
Statements of shareholders’ equity
Statements of cash flows
Notes to financial statements
PAGE
F-1
F-2
F-3
F-4
F-5
F-6
F-7
F-9
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
We conducted an evaluation under the supervision and with the participation of our management, including our Chief
Executive Officer and Chief Financial Officer, or persons performing similar functions, of the effectiveness of the design and
operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) or 15d-15(e) under the Exchange Act of 1934 (the
“Act”)) as of December 31, 2014. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that
our disclosure controls and procedures were effective as of December 31, 2014.
The term disclosure controls and procedures means controls and other procedures that are designed to ensure that information
required to be disclosed by us in the reports that we file or submit under the Act (15 U.S.C. 78a et seq.) is recorded, processed,
summarized and reported, within the time periods specified in the Commission's rules and forms. Disclosure controls and procedures
include, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in the reports
that we file or submit under the Act is accumulated and communicated to our Management, including our principal executive and
principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required
disclosure.
There are inherent limitations to the effectiveness of any system of disclosure controls and procedures. These limitations
include the possibility of human error, the circumvention or overriding of the controls and procedures and reasonable resource
constraints. In addition, because we have designed our system of controls based on certain assumptions, which we believe are
reasonable, about the likelihood of future events, our system of controls may not achieve its desired purpose under all possible future
53
conditions. Accordingly, our disclosure controls and procedures provide reasonable assurance, but not absolute assurance, of
achieving their objectives.
Management's Annual Report on Internal Control over Financial Reporting
Our Management’s report on Internal Control over Financial Reporting is set forth in Item 8 and is incorporated herein by
reference.
Our internal control over financial reporting is designed to provide reasonable, but not absolute, assurance regarding the
financial reporting and the preparation of financial statements in accordance with generally accepted accounting principles. There are
inherent limitations to the effectiveness of any system of internal control over financial reporting. These limitations include the
possibility of human error, the circumvention of overriding of the system and reasonable resource constraints. Because of its inherent
limitations, our internal control over financial reporting may not prevent or detect misstatements. 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.
This annual report does not include an attestation report of the Company’s independent registered public accounting firm
regarding internal control over financial reporting. Management’s report was not subject to attestation by the Company’s independent
registered public accounting firm pursuant to rules of the Securities and Exchange Commission that permit the Company to provide
only management’s report in this annual report.
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, 2014
that has materially affected or is reasonably likely to materially affect our internal control over financial reporting.
ITEM 9B. OTHER INFORMATION
None.
54
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 2015 Annual
Meeting of Shareholders. The Company and the Company 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.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934 requires the Company’s officers and directors, and persons who own more than
10% of a registered class of the Company’s equity securities, to file reports of ownership and changes in ownership with the FDIC.
Officers, directors and greater than 10% shareholders are required by SEC regulations to furnish the Company with copies of all
Section 16(a) forms they file.
Based solely on its review of the copies of such forms received by it, or written representations from certain reporting persons that no
Forms 4 and 5 were required for those persons, the Company believes that for the 2014 fiscal year the officers and directors of the
Company complied with all applicable filing requirements, except for the late filings for the directors in the table below:
Name
Jay Gilbert
Jay Gilbert
Tom Haidlen
Dan Leonard
Roger Schrimp
Roger Schrimp
Roger Schrimp
Form
4
4
4
4
4
4
4
Transaction Type
Purchase (1)
Purchase (1)
Purchase (1)
Purchase (1)
Sale
Sale
Sale
Transaction Date
1/22/2014
7/29/2014
1/21/2014
1/22/2014
2/13/2014
2/19/2014
2/21/2014
# of Shares
302
162
406
353
(500)
(620)
(8,880)
(1) Automatic Reinvestment of Cash Dividend
ITEM 11.
EXECUTIVE COMPENSATION
The information required by this Item is incorporated by reference from our Proxy Statement to be filed prior to the 2015 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 2015 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 2015 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 2015 Annual
Meeting of Shareholders.
55
ITEM 15 — EXHIBITS, FINANCIAL STATEMENT SCHEDULES
PART IV
Documents Filed as Part of this Report:
(a)(1) Financial Statements
The Financial Statements of the Company and the Report of Independent Registered Public Accounting Firm are set forth on
pages F-1 through F-45.
(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
56
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 24, 2015.
SIGNATURES
OAK VALLEY BANCORP
a California corporation
By:
/s/ CHRISTOPHER M. COURTNEY
Christopher M. Courtney, President and 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 Christopher M. Courtney 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 L. 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/ DANIEL J. LEONARD
Daniel J. Leonard
/s/ RONALD C. MARTIN
Ronald C. Martin
/s/ JANET S. PELTON
Janet S. Pelton
/s/ ROGER M. SCHRIMP
Roger M. Schrimp
Director
Director
Director
Director
Director
Director
Director
Director
Director
Date
March 17, 2015
March 17, 2015
March 17, 2015
March 17, 2015
March 17, 2015
March 17, 2015
March 17, 2015
March 17, 2015
March 17, 2015
/s/ DANNY L. TITUS
Director
March 17, 2015
57
Danny L. Titus
/s/ TERRANCE P. WITHROW
Terrance P. Withrow
Director
March 17, 2015
58
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, 2014, 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 (1992 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, 2014, 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/ _CHRISTOPHER M. COURTNEY_________________
Christopher M. Courtney, President and 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, 2014 and 2013 and the related consolidated statements of income, comprehensive income, shareholders’ equity, and
cash flows for the years ended December 31, 2014 and 2013. 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 consolidated 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 consolidated 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, 2014 and 2013, and the consolidated results of their operations and
their cash flows for the years ended December 31, 2014 and 2013 in conformity with accounting principles generally accepted in the
United States of America.
/s/ Moss Adams LLP
Stockton, California
March 24, 2015
F-2
OAK VALLEY BANCORP
CONSOLIDATED BALANCE SHEETS
(dollars in thousands)
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 $7,534 and $7,659
at December 31, 2014 and 2013, respectively
Bank premises and equipment, net
Other real estate owned
Interest receivable and other assets
LIABILITIES AND SHAREHOLDERS’ EQUITY
Deposits
Interest payable and other liabilities
Total liabilities
Commitments and contingencies
Shareholders’ equity
Common stock, no par value; 50,000,000 shares authorized,
8,074,855 and 7,929,730 shares issued and outstanding at
December 31, 2014 and 2013, respectively
Additional paid-in capital
Retained earnings
Accumulated other comprehensive income (loss), net of tax
Total shareholders’ equity
See accompanying notes
F-3
December 31,
2014
December 31,
2013
$
$
$
132,078 $
12,210
144,288
100,096
5,095
105,191
121,277
117,746
446,492
14,066
884
22,658
411,156
13,684
916
23,160
749,665 $
671,853
669,581 $
5,043
674,624
602,633
4,703
607,336
24,682
2,910
45,582
1,867
75,041
23,758
2,537
38,985
(763)
64,517
$
749,665 $
671,853
OAK VALLEY BANCORP
CONSOLIDATED STATEMENTS OF INCOME
(dollars in thousands, except per share amounts)
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
Total interest expense
Net interest income
(Reversal of) provision for loan losses
YEAR ENDED DECEMBER 31,
2014
2013
$ 22,011
3,708
38
179
25,936
$ 21,406
3,462
25
211
25,104
647
647
25,289
(1,877)
828
828
24,276
300
Net interest income after (reversal of) provision for loan losses
27,166
23,976
OTHER INCOME
Service charges on deposits
Earnings on cash surrender value of life insurance
Mortgage commissions
Gains on called securities
Other
Total non-interest income
OTHER EXPENSES
Salaries and employee benefits
Occupancy expenses
Data processing fees
Regulatory assessments (FDIC & DBO)
Other operating expenses
Total non-interest expense
Net income before provision for income taxes
1,346
433
157
209
1,619
3,764
11,120
2,902
1,336
459
4,417
20,234
10,696
1,237
404
229
60
1,350
3,280
9,978
2,923
1,307
480
3,972
18,660
8,596
PROVISION FOR INCOME TAXES
NET INCOME
3,574
$ 7,122
2,710
$ 5,886
Preferred stock dividends
0
68
NET INCOME AVAILABLE TO COMMON SHAREHOLDERS
$ 7,122
$ 5,818
NET INCOME PER COMMON SHARE
$ 0.90
$ 0.75
NET INCOME PER DILUTED COMMON SHARE
$ 0.89
$ 0.74
See accompanying notes
F-4
OAK VALLEY BANCORP
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in thousands)
Net income
Available for sale securities:
Unrealized holding gains (losses) on securities arising during the current period, net of
tax effect of $1.9 million and ($2.8) million for the years ended December 31, 2014 and
2013, respectively
Reclassification adjustment due to net gains realized on calls of securities, net of tax
effect of $86 thousand and $24 thousand for the years ended December 31, 2014 and
2013, respectively
Other comprehensive income (loss)
Comprehensive income
YEAR ENDED DECEMBER 31,
2014
2013
$
7,122
$
5,886
2,753
(3,972)
(123)
2,630
(36)
(4,008)
$
9,752
$
1,878
See accompanying notes
F-5
OAK VALLEY BANCORP
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
(dollars in thousands)
Balances, January 1, 2013
Stock options exercised
Restricted stock issued
Restricted stock cancelled
Repurchase of Series B preferred stock
Preferred stock dividend payments
Common stock dividend declared
Stock based compensation
Other comprehensive loss
Net income
$
$
Balances, December 31, 2013
7,929,730
Stock options exercised
Tax benefit on stock based compensation
Restricted stock issued
Restricted stock cancelled
Common stock dividend declared
Stock based compensation
Other comprehensive income
Net income
122,625
24,500
(2,000)
YEARS ENDED DECEMBER 31, 2013 AND 2014
Common Stock
Preferred Stock
Shares
Amount
Shares
Amount
Additional
Paid-in
Capital
Retained
Earnings
Accumulated
Other
Comprehensive
Income (Loss)
Total
Shareholders’
Equity
6,750 $
6,750
$
2,342 $
33,959 $
3,245 $
23,673
85
7,907,780
$
11,250
15,000
(4,300)
(6,750) $
(6,750)
195
(67)
(793)
5,886
(4,008)
23,758
0 $
0
$
2,537 $
38,985 $
(763) $
924
102
271
(525)
7,122
$
2,630
69,969
85
(6,750)
(67)
(793)
195
(4,008)
5,886
64,517
924
102
(525)
271
2,630
7,122
75,041
Balances, December 31, 2014
8,074,855
$
24,682
0 $
0
$
2,910 $
45,582 $
1,867 $
See accompanying notes
F-6
OAK VALLEY BANCORP
CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)
YEARS ENDED DECEMBER 31,
2014
2013
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income
Adjustments to reconcile net earnings to net cash from operating activities:
$
7,122 $
(Reversal of) provision for loan losses
(Decrease) increase in deferred fees/costs, net
Depreciation
Amortization of investment securities, net
Stock based compensation
Excess tax benefits from stock-based payment arrangements
(Gain) loss on sale of premises and equipment
OREO write downs and loss (gain) on sale
Gain on called available for sale securities
Earnings on cash surrender value of life insurance
(Increase) decrease in deferred tax asset
Increase in interest payable and other liabilities
Increase in interest receivable
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 increase in loans
Purchase of FHLB Stock
Purchase of BOLI policies
Proceeds from sale of OREO
Proceeds from sales of premises and equipment
Net purchases of premises and equipment
Net cash used in investing activities
CASH FLOWS FROM FINANCING ACTIVITIES:
Shareholder cash dividends paid
Preferred stock dividend payment
Repurchase of Series B preferred stock
Net increase in demand deposits and savings accounts
Net decrease in time deposits
Excess tax benefits from stock-based payment arrangements
Proceeds from sale of common stock and exercise of stock options
Net cash from financing activities
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
CASH AND CASH EQUIVALENTS, beginning of period
(1,877)
(178)
1,174
147
271
(102)
(3)
32
(209)
(433)
(187)
1,134
(13)
529
7,408
(17,883)
18,884
(33,281)
(104)
(1,029)
0
3
(1,556)
(34,966)
(1,318)
0
0
71,529
(4,581)
102
924
66,656
39,097
105,191
5,886
300
24
1,160
237
195
0
32
(17)
(60)
(404)
207
290
(357)
23
7,516
(36,082)
15,215
(32,200)
(41)
0
982
6
(448)
(52,568)
0
(68)
(6,750)
21,029
(5,388)
0
85
8,908
(36,144)
141,335
CASH AND CASH EQUIVALENTS, end of period
$
144,288 $
105,191
F-7
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest
Income taxes
NON-CASH INVESTING ACTIVITIES:
Real estate acquired through foreclosure
Corporate headquarter premises acquired through foreclosure
Common stock dividend declared
Change in unrealized gain (loss) on available-for-sale securities
See accompanying notes
$
$
$
$
$
$
668 $
3,005 $
0 $
0 $
525 $
4,470 $
835
2,345
1,882
1,250
793
(6,810)
F-8
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 Company was converted into one share of Bancorp and the Company
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 shareholders’ equity and cash
flows. All adjustments are of a normal, recurring nature.
Oak Valley Community Bank is a California State chartered bank. The Company was incorporated under the laws of the state of
California on May 31, 1990, and began operations in Oakdale on May 28, 1991. The Company operates branches in Oakdale, Sonora,
Bridgeport, Bishop, Mammoth Lakes, Modesto, Manteca, Patterson, Turlock, Ripon, Stockton, and Escalon, California. The
Bridgeport, Mammoth Lakes, and Bishop branches operate as a separate division, Eastern Sierra Community Bank. The Company’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 Company’s consolidated financial statements include the allowance for loan losses,
accounting for income taxes, other-than-temporary impairment of investment securities, the fair value of stock options, fair value
measurements, deferred compensation plans, 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 consolidated financial statements
follows.
Cash and cash equivalents — The Company 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.
If the Company sold an impaired security, both the credit loss component and amount due to other factors would be recognized
through earnings as described above.
F-9
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 estimated 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
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 are deferred and amortized, as an adjustment to interest yield, over the estimated life
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 Company’s allowance
for loan losses. Such agencies may require the Company 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 Company 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. 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-10
The Company considers a loan to be a troubled debt restructure (“TDR”) when the Company has granted a concession and the
borrower is experiencing financial difficulty. In order to determine whether a borrower is experiencing financial difficulty, an
evaluation is performed of the probability that the borrower will be in payment default on any of its debt in the foreseeable future
without the modification. This evaluation is performed under the Company’s internal underwriting policy. A TDR loan is kept on
non-accrual status until the borrower has paid for six consecutive months with no payment defaults, at which time the TDR is placed
back on accrual status. If a TDR loan is impaired, a specific valuation allowance is allocated, if necessary, so that the TDR loan is
reported net, at the present value of estimated future cash flows using the TDR loan’s existing rate or at the fair value of collateral if
repayment is expected solely from the collateral.
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 Company’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 Company files income tax returns in the U.S. federal jurisdiction, and the state of California. With few exceptions, the Company
is no longer subject to U.S. federal or state/local income tax examinations by tax authorities for years before 2010.
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 Company,
(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 Company does not maintain effective control over the transferred assets through an agreement to
repurchase them before their maturity.
Advertising costs — The Company expenses marketing costs as they are incurred. Advertising expense was $215,000 and $198,000
for the years ended December 31, 2014 and 2013, 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 statements of comprehensive income and as a component of
shareholders’ equity. For the years ended December 31, 2014 and 2013, $123,000 and $36,000 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 Company 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 Company’s limited partnership investment is accounted for under the equity method. The
Company’s noninterest expense associated with the utilization of these tax credits for the year ended December 31, 2014 and 2013
was $61,000 and $60,000, 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 2014 and 2022. In 2013, a tax benefit of $89,000 was utilized for income tax purposes and
an estimated amount of $88,000 will be utilized for 2014. The recorded investment in limited partnerships totaled $455,000 and
$515,000 at December 31, 2014 and 2013, respectively, and is reflected as a component of interest receivable and other assets on the
consolidated balance sheets.
F-11
Federal Reserve Bank Stock — Federal Reserve Bank stock represents the Company’s investment in the stock of the Federal Reserve
Bank (“FRB”) 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 FRB stock. Therefore, the shares are considered as restricted investment securities. Management
periodically evaluates FRB stock for other-than-temporary impairment. Management’s determination of whether 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 FRB as compared to the capital stock amount for the FRB and the length of time this situation has persisted,
(2) commitments by the FRB to make payments required by law or regulation and the level of such payments in relation to the operating
performance of the FRB, (3) the impact of legislative and regulatory changes on institutions and, accordingly, the customer base of the FRB,
and (4) the liquidity position of the FRB. This investment is reflected as a component of interest receivable and other assets on the
consolidated 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
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 interest receivable and
other assets on the consolidated balance sheets.
Earnings per share (“EPS”) — EPS is based upon the weighted average number of common shares outstanding during each year.
The table in footnote 14 shows: (1) weighted average basic shares, (2) effect of dilutive securities related to stock options and non-
vested restricted stock, and (3) weighted average diluted shares. Net income available to common shareholders is calculated as net
income reduced by dividends accumulated on preferred stock. Basic EPS are calculated by dividing net income available to common
stockholders by the weighted average number of common shares outstanding during each period, excluding unvested restricted stock
awards. Diluted EPS are calculated using the weighted average diluted shares. The total dilutive shares included in annual diluted EPS
is a year-to-date weighted average of the total dilutive shares included in each quarterly diluted EPS computation under the treasury
stock method. We have two forms of outstanding common stock: common stock and unvested restricted stock awards. Holders of
restricted stock awards receive non-forfeitable dividends at the same rate as common stockholders and they both share equally in
undistributed earnings.
Stock based compensation — The Company recognizes in the consolidated statements of income 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 Company 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 a binomial option-pricing model for all grants. Expected
volatility is based on the historical volatility of the price of the Company’s stock. The Company 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. There
were no stock options granted in 2014 or 2013.
The fair value of restricted stock awards is based on the price of the Company’s stock at the date of grant. There were 24,500 and
15,000 shares of restricted stock granted during 2014 and 2013, respectively. Stock based compensation recorded during the years
ended December 31, 2014 and 2013 totaled approximately $271,000 and $195,000, respectively.
Fair values of financial instruments — The consolidated financial statements include various estimated fair value information as of
December 31, 2014 and 2013. Such information, which pertains to the Company’s financial instruments, does not purport to represent
the aggregate net fair value of the Company. 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.
Fair Value Measurements — The Company uses fair value measurements to record fair value adjustments to certain assets and
liabilities and to determine fair value disclosures. The Company bases the 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, the
Company may be required to record certain assets at fair value on a non-recurring basis, such as certain impaired loans held for
F-12
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.
The Company has established and documented a process for determining fair value. The Company maximizes the use of observable
inputs and minimizes 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 consolidated statements.
Deferred compensations plans — Future compensation under the Company’s executive salary continuation plan and director
retirement plan is earned for services rendered through retirement. The Company accrues for the salary continuation liability based on
anticipated years of service and vesting schedules provided under the plans. The Company’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.
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 as a result of reclassifications.
Recently Issued Accounting Standards —
In February 2013, the FASB issued ASU No. 2013-04, Obligations Resulting from Joint and Several Liability Arrangements
for Which the Total Amount of the Obligation Is Fixed at the Reporting Date. The Update requires an entity to measure obligations
resulting from joint and several liability arrangements for which the total amount of the obligation within the scope of this guidance is
fixed at the reporting date, as the sum of the following: 1) The amount the reporting entity agreed to pay on the basis of its
arrangement among its co-obligors, and 2) Any additional amount the reporting entity expects to pay on behalf of its co-obligors. The
guidance in this Update also requires an entity to disclose the nature and amount of the obligation as well as other information about
those obligations. The amendments in this Update are effective for fiscal years, and interim periods within those years, beginning
after December 15, 2013, and are applied retrospectively to all prior periods presented for those obligations resulting from joint and
several liability arrangements within the Update’s scope that exist at the beginning of an entity’s fiscal year of adoption. The adoption
of ASU No. 2013-04 did not have a material impact on the Company's consolidated financial statements.
In July 2013, the FASB issued ASU No. 2013-10, Inclusion of the Fed Funds Effective Swap Rate (or Overnight Index Swap
Rate) as a Benchmark Interest Rate for Hedge Accounting Purposes. ASU No. 2013-10 permits the use of the Fed Funds Effective
Swap Rate (OIS) to be used as a U.S. benchmark interest rate for hedge account purposes. The amendment is effective prospectively
for qualifying new or redesiginated hedging relationships entered into on or after July 17, 2013. The adoption of ASU No. 2013-10 did
not have a material impact on the Company's consolidated financial statements.
In July 2013, the FASB issued ASU No. 2013-11, Presentation of an Unrecognized Tax Benefit When a Net Operating Loss
Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists. ASU No. 2013-11 requires an entity to present an
unrecognized tax benefit, or a portion of an unrecognized tax benefit, as a reduction to a deferred tax asset for a net operating loss
carryforward, a similar tax loss, or a tax credit carryforward, except to the extent a net operating loss carryforward, a similar tax loss,
or a tax credit carryforward is not available at the reporting date under the tax law of the applicable jurisdiction to settle any additional
income taxes that would result from the disallowance of a tax position or the tax law of the applicable jurisdiction does not require the
entity to use, and the entity does not intend to use, the deferred tax asset for such purpose, the unrecognized tax benefit should be
presented in the financial statements as a liability and should not be combined with deferred tax assets. No new recurring disclosures
are required. The amendments are effective for annual and interim reporting periods beginning on or after December 15, 2013 and are
to be applied prospectively to all unrecognized tax benefits that exist at the effective date. Retrospective application is permitted. The
adoption of ASU No. 2013-11 did not have a material impact on the Company's consolidated financial statements.
In January 2014, the FASB issued ASU No. 2014 – 01, Investments – Equity Method and Joint Ventures (Topic 323),
Accounting for Investments in Qualified Affordable Housing Projects. This Update provides guidance on accounting for
investments by a reporting entity in flow-through limited liability entities that manage or invest in affordable housing projects that
qualify for the low-income housing tax credit. The amendments in this Update permit reporting entities to make an accounting policy
election to account for their investments in qualified affordable housing projects using the proportional amortization method if certain
conditions are met. Under the proportional amortization method, an entity amortizes the initial cost of the investment in proportion to
the tax credits and other tax benefits received and recognizes the net investment performance in the income statement as a component
of income tax expense (benefit). The amendments in this Update are effective for public business entities for annual periods and
F-13
interim reporting periods within those annual periods, beginning after December 15, 2014. The adoption of ASU No. 2014-01 is not
expected to have a material impact on the Company's consolidated financial statements.
In January 2014, the FASB issued ASU No. 2014 – 04, Receivables – Troubled Debt Restructurings by Creditors. This ASU
provides clarification that an in substance repossession or foreclosure occurs, and a creditor is considered to have received physical
possession of residential real estate property collateralizing a consumer mortgage loan, upon either (1) the creditor obtaining legal title
to the residential real estate property upon completion of a foreclosure or (2) the borrower conveying all interest in the residential real
estate property to the creditor to satisfy that loan through completion of a deed in lieu of foreclosure or through a similar legal
agreement. Additionally, the amendments require interim and annual disclosure of both (1) the amount of foreclosed residential real
estate property held by the creditor and (2) the recorded investment in consumer mortgage loans collateralized by residential real
estate property that are in the process of foreclosure according to local requirements of the applicable jurisdiction. The amendments in
this ASU are effective for public business entities for annual periods, and interim periods within those annual periods, beginning after
December 15, 2014. The adoption of ASU No. 2014-04 is not expected to have a material impact on the Company's consolidated
financial statements.
In August 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-
14 Receivables – Troubled Debt Restructurings by Creditors (Subtopic 310-40), Classification of Certain Government-Guaranteed
Mortgage Loans upon Foreclosure. This update addresses classification of government-guaranteed mortgage loans, including those
where guarantees are offered by the Federal Housing Administration (“FHA”), the U.S. Department of Housing and Urban
Development (“HUD”), and the U.S. Department of Veterans Affairs (“VA”). Although current accounting guidance stipulates proper
measurement and classification in situations where a creditor obtains from a debtor, assets in satisfaction of a receivable (such as
through foreclosure), current guidance does not specify how to measure and classify foreclosed mortgage loans that are government-
guaranteed. Under the provisions of this update, a creditor would derecognize a mortgage loan that has been foreclosed upon, and
recognize a separate receivable if the following conditions are met: (1) the loan has a government guarantee that is not separable from
the loan before foreclosure, (2) At the time of foreclosure, the creditor has the intent to convey the real estate property to the guarantor
and make a claim on the guarantee, and the creditor has the ability to recover under that claim, (3) At the time of foreclosure, any
amount of the claim that is determined on the basis of the fair value of the real estate is fixed. The amendments within this update are
effective for annual and interim periods beginning after December 15, 2014. The Company does not believe the adoption of this
update will have a material impact of the Company’s consolidated financial statements.
NOTE 2 — CASH AND DUE FROM BANKS
Cash and due from banks includes balances with the Federal Reserve Bank and other correspondent banks. The Company is required
to maintain specified reserves by the Federal Reserve Bank. The average reserve requirements are based on a percentage of the
Company’s deposit liabilities. In addition, the Federal Reserve Bank requires the Company to maintain a certain minimum balance at
all times. As of December 31, 2014 the Company had a balance of $53,762,000 which is more than adequate to satisfy the reserve
requirement.
NOTE 3 – PREFERRED STOCK REPURCHASE AND WARRANT REDEMPTION
In August 2011, the Company repurchased the $13,500,000 of Series A Preferred Stock originally issued to the U.S. Treasury in
December 2008 in connection with the Company’s participation in the Capital Purchase Program (“CPP”). The Company
simultaneously issued $13,500,000 in Series B Preferred Stock to the U.S. Treasury under the Small Business Lending Funding
(“SBLF”) program. Subsequently, the Company fully redeemed a warrant to purchase 350,346 shares of its Common Stock, at the
exercise price of $5.78 per share that the Company had granted to the U.S. Treasury pursuant to the CPP, for a purchase price of
$560,000, which settled in September 2011.
In May 2012, the Company repurchased from the U.S. Treasury 6,750 shares of Series B Preferred Stock for aggregate consideration
of $6.75 million. In March 2013, the Company repurchased the remaining 6,750 shares of Series B Preferred Stock for aggregate
consideration of $6.75 million plus $67,500 for accrued dividends. At December 31, 2013 and 2014, there were no outstanding shares
of Series B Preferred Stock.
F-14
NOTE 4 — SECURITIES
The amortized cost and estimated fair values of debt securities as of December 31, 2014, are as follows:
(dollars in thousands)
Available-for-sale securities:
U.S. agencies
Collateralized mortgage obligations
Municipalities
SBA pools
Corporate debt
Asset backed securities
Mutual fund
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Fair Value
$
40,316
$
1,760
$
6,927
49,396
895
6,726
10,766
3,077
184
1,713
0
95
50
0
$
118,103
$
3,802
$
(146)
(39)
(212)
(3)
(17)
(106)
(105)
(628)
$
41,930
7,072
50,897
892
6,804
10,710
2,972
$
121,277
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, 2014.
(dollars in thousands)
Less than 12 months
12 months or more
Total
Description of Securities
Fair
Value
Unrealized
Loss
Fair
Value
Unrealized
Loss
Fair
Value
Unrealized
Loss
U.S. agencies
$
Collateralized mortgage obligations
0 $
0
Municipalities
SBA pools
Corporate debt
Asset backed securities
Mutual fund
3,530
0
1,983
3,798
0
0 $
8,446 $
(146) $
8,446 $
0
(22)
0
(17)
(79)
0
1,445
12,791
892
0
971
2,972
(39)
(190)
(3)
0
(27)
(105)
1,445
16,321
892
1,983
4,769
2,972
Total temporarily impaired securities
$
9,311 $
(118) $
27,517 $
(510) $
36,828 $
(146)
(39)
(212)
(3)
(17)
(106)
(105)
(628)
At December 31, 2014, there were 6 U.S. agencies, one collateralized mortgage obligation, 14 municipalities, two SBA pools, one
asset backed security, and one mutual fund that comprised the total securities in an unrealized loss position for greater than 12 months
and 3 municipalities, one corporate debt, and two asset backed securities that make up the total securities in a loss position for less
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. This evaluation encompasses various factors including, the nature
of the investment, the cause of the impairment, the severity and duration of the impairment, credit ratings and other credit related
factors such as third party guarantees and volatility of the security’s fair value. Management has determined that no investment
security is other than temporarily impaired. The unrealized losses are due primarily to interest rate changes and the Company 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-15
The amortized cost and estimated fair value of debt securities at December 31, 2014, 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.
(dollars in thousands)
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
$
13,030
27,499
37,328
40,246
$
13,420
29,062
37,583
41,212
$
118,103
$
121,277
The amortized cost and estimated fair values of debt securities as of December 31, 2013, are as follows:
(dollars in thousands)
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Fair Value
Available-for-sale securities:
U.S. agencies
$
Collateralized mortgage obligations
Municipalities
SBA Pools
Corporate debt
Asset Backed Securities
Mutual Fund
52,539
9,580
42,304
1,088
4,697
5,858
2,975
1,844
$
248
953
-
$
(1,268)
(47)
(2,988)
(7)
128
-
28
-
(29)
(157)
53,115
9,781
40,269
1,081
4,825
5,857
2,818
$
119,041
$
3,201
$
(4,496)
$
117,746
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, 2013.
(dollars in thousands)
Less than 12 months
12 months or more
Total
Description of Securities
Fair
Value
Unrealized
Loss
Fair
Value
Unrealized
Loss
Fair
Value
Unrealized
Loss
U.S. agencies
$
21,700 $
(1,012) $
1,740
$
(256) $
23,440 $
(1,268)
Collateralized mortgage obligations
Municipalities
SBA Pools
Corporate debt
Asset Backed Securities
Mutual Fund
1,642
25,502
829
—
3,894
2,818
(47)
(2,762)
(5)
—
(29)
(157)
—
2,879
246
—
—
—
—
(226)
(2)
—
—
—
1,642
28,381
1,075
—
3,894
2,818
(47)
(2,988)
(7)
—
(29)
(157)
Total temporarily impaired securities
$
56,385 $
(4,012) $
4,865 $
(484) $
61,250 $
(4,496)
F-16
Gross realized gains on called available-for-sale securities during 2014 and 2013 totaled $209,000 and $60,000, respectively. There
were no losses on called available-for-sale securities realized during 2014 and 2013. There were no sales of available-for-sale
securities during 2014 and 2013.
Securities carried at $60,474,000 and $72,371,000 at December 31, 2014 and 2013, respectively, were pledged to secure deposits
of public funds.
NOTE 5 — LOANS
The Company’s customers are primarily located in Stanislaus, San Joaquin, Tuolumne, Inyo, and Mono Counties. As of December
31, 2014, approximately 79% of the Company’s loans are commercial real estate loans which includes construction loans.
Approximately 12% of the Company’s loans are for general commercial uses including professional, retail, and small business.
Additionally, 6% of the Company’s loans are for residential real estate and other consumer loans. The remaining 3% are agriculture
loans.
Loan totals were as follows:
(in thousands)
Commercial real estate:
YEAR ENDED DECEMBER 31,
2014
2013
Commercial real estate- construction
$
Commercial real estate- mortgages
9,181 $
315,506
Land
Farmland
Commercial and industrial
Consumer
Consumer residential
Agriculture
Deferred loan fees and costs, net
Allowance for loan losses
Total loans
Less:
Net loans
10,620
23,091
54,051
805
25,464
15,753
454,471
(445)
(7,534)
$
446,492 $
15,555
285,840
11,157
20,321
48,787
883
25,623
11,272
419,438
(623)
(7,659)
411,156
Loan Origination/Risk Management. The Company 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 Company’s
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
F-17
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 Company’s commercial real estate portfolio are diverse in terms of type and geographic location. This
diversity helps reduce the Company’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
Company avoids financing single-purpose projects unless other underwriting factors are present to help mitigate risk. The Company
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, 2014, approximately 36.9% of the outstanding principal balance of the Company’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 Company may
originate from time to time, the Company generally requires the borrower to have had an existing relationship with the Company 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 Company 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 Company 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 Company 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 Company’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-18
Year-end non-accrual loans, segregated by class of loans, were as follows:
(in thousands)
Commercial real estate:
YEAR ENDED DECEMBER 31,
2014
2013
Commercial real estate- construction
$
0 $
Commercial real estate- mortgages
Land
Farmland
Commercial and industrial
Consumer
Consumer residential
Agriculture
1,296
2,995
72
337
0
0
0
0
1,047
1,183
92
18
0
0
0
Total non-accrual loans
$
4,700 $
2,340
Had non-accrual loans performed in accordance with their original contract terms, the Company would have recognized additional
interest income of approximately $321,000 in 2014 and $583,000 in 2013.
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, 2014 (in thousands):
December 31, 2014
Commercial real estate:
Commercial R.E. -
construction
Commercial R.E. -
mortgages
Land
Farmland
Commercial and industrial
Consumer
Consumer residential
Agriculture
Total
$
30-59
Days Past
Due
60-89
Days Past
Due
Greater
Than 90
Days Past
Due
Total Past
Due
Current
Total
Greater Than
90 Days Past
Due and Still
Accruing
$
0 $
0 $
0 $
0
$
9,181 $
9,181 $
0
0
0
0
0
0
0
0
0
35
0
0
14
0
0
0
49
1,296
0
0
0
0
0
0
0
2,493
72
323
0
0
0
1,331
2,493
72
337
0
0
0
314,175
8,127
23,019
53,714
805
25,464
15,753
315,506
10,620
23,091
54,051
805
25,464
15,753
$
1,296
$
2,888 $
4,233
$
450,238
$
454,471 $
F-19
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, 2013 (in thousands):
December 31, 2013
Commercial real estate:
Commercial R.E. -
construction
Commercial R.E. -
mortgages
Land
Farmland
Commercial and industrial
Consumer
Consumer residential
Agriculture
30-59
Days Past
Due
60-89
Days Past
Due
Greater
Than 90
Days Past
Due
Total Past
Due
Current
Total
$
0 $
0 $
0 $
0 $
15,555 $
15,555 $
1,348
0
0
0
0
0
0
0
2,651
0
1,407
0
0
0
1,046
659
92
0
0
0
0
2,394
3,310
92
1,407
0
0
0
283,446
7,847
20,229
47,380
883
25,623
11,272
285,840
11,157
20,321
48,787
883
25,623
11,272
Total
$
1,348 $
4,058 $
1,797 $
7,203 $
412,235 $
419,438 $
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 Company 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
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 collectability 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.
Impaired loans by class as of December 31, 2014 and 2013 are set forth in the following tables. No interest income was recognized on
impaired loans subsequent to their classification as impaired during 2014 and 2013.
(in thousands)
December 31, 2014
Commercial real estate:
Commercial R.E. - construction
Commercial R.E. - mortgages
Land
Farmland
Commercial and Industrial
Consumer
Consumer residential
Agriculture
Total
$
$
Unpaid
Contractual
Principal
Balance
Recorded
Investment
With No
Allowance
Recorded
Investment
With
Allowance
Total
Recorded
Investment
Related
Allowance
Average
Recorded
Investment
0 $
1,301
3,215
80
359
0
0
0
4,956 $
0 $
0
0
72
337
0
0
0
408 $
0 $
1,296
2,995
0
0
0
0
0
4,291 $
0 $
1,296
2,995
72
337
0
0
0
4,700 $
0 $
125
868
0
0
0
0
0
993 $
0
554
3,155
82
304
0
0
0
4,096
F-20
(in thousands)
December 31, 2013
Commercial real estate:
Commercial R.E. - construction
Commercial R.E. - mortgages
Land
Farmland
Commercial and Industrial
Consumer
Consumer residential
Agriculture
Total
$
$
Unpaid
Contractual
Principal
Balance
Recorded
Investment
With No
Allowance
Recorded
Investment
With
Allowance
Total
Recorded
Investment
Related
Allowance
Average
Recorded
Investment
0 $
3,049
1,320
95
27
0
0
0
4,491 $
0 $
1,047
0
92
18
0
0
0
1,157 $
0 $
0
1,183
0
0
0
0
0
1,183 $
0 $
1,047
1,183
92
18
0
0
0
2,340 $
0 $
0
392
0
0
0
0
0
392 $
51
1,980
1,635
62
20
0
354
0
4,102
Troubled Debt Restructurings – In order to determine whether a borrower is experiencing financial difficulty, an evaluation is
performed of the probability that the borrower will be in payment default on any of its debt in the foreseeable future without the
modification. This evaluation is performed under the Company’s internal underwriting policy.
At December 31, 2014, there were 5 loans and leases that were considered to be troubled debt restructurings, all of which are
considered non-accrual totaling $3,331,000. At December 31, 2013, there were 3 loans and leases that were considered to be troubled
debt restructurings, all of which are considered non-accrual totaling $1,201,000. The increase of two TDR loans during 2014 is due in
part to a foreclosure on a loan relationship comprised of 3 loans totaling $2,816,000 that was subsequently sold. There were no
unfunded commitments on TDR loans at December 31, 2014 and 2013. We have allocated $993,000 and $392,000 of specific
reserves to loans whose terms have been modified in troubled debt restructurings as of December 31, 2014 and 2013, respectively.
During the year ended December 31, 2014 the terms of three loans were modified as troubled debt restructurings, as compared to two
loans during 2013. The modification of the terms of such loans included one or a combination of the following: a reduction of the
stated interest rate of the loan; an extension of the maturity date; or a temporary payment modification in which the payment amount
allocated towards principal was reduced. In some cases, a permanent reduction of the accrued interest on the loan was conceded.
F-21
The following table presents loans by class modified as troubled debt restructurings that occurred during the years ended December
31, 2014 and 2013:
(dollars in thousands)
Year Ended December 31, 2014
Year Ended December 31, 2013
Pre-
Modification
Outstanding
Recorded
Investment
Post-
Modification
Outstanding
Recorded
Investment
Number
of
Loans
Pre-
Modification
Outstanding
Recorded
Investment
Post-
Modification
Outstanding
Recorded
Investment
Number
of
Loans
Commercial real estate:
Commercial R.E. -
construction
Commercial R.E. - mortgages
Land
Farmland
Commercial and Industrial
Consumer
Consumer residential
Agriculture
Total
0 $
0
3
0
1
0
0
0
0 $
0
3,107
0
331
0
0
0
0
0
3,107
0
331
0
0
0
0 $
0 $
0
1
0
1
0
0
0
0
542
0
27
0
0
0
0
0
542
0
27
0
0
0
4 $
3,438 $
3,438
2 $
569 $
569
The troubled debt restructurings during the years ended December 31, 2014 and 2013 did not increase the allowance for loan losses as
a result of the loan modification and there were no charge offs as a result of the loan modifications.
There were no loans modified as troubled debt restructurings during the years ended December 31, 2014 and 2013 that had payment
defaults during each respective year.
A loan is considered to be in payment default once it is ninety days contractually past due under the modified terms.
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
6 Substandard Loan
7 Doubtful Loan
8 Loss
1. Exceptional Loan - Loans with A+ credits that contain very little, if any, risk. Grade 1 loans are considered Pass. 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.
F-22
-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. Grade 2 loans are
considered Pass. 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 Company would want to retain providing a
positive turnaround can be expected within a reasonable time frame. Grade 4 loans are considered Pass.
5 Other Loans Especially Mentioned (Special Mention) - 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.
-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 Company will sustain some loss if
F-23
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 Company. 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
Company’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, 2014
December 31, 2013
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
3.84
3.14
4.50
3.04
3.13
2.31
3.05
3.27
3.20
3.00
3.15
4.34
3.01
3.39
2.12
3.02
3.18
3.19
F-24
The following table presents risk grade totals by class of loans as of December 31, 2014 and 2013. Risk grades 1 through 4 have been
aggregated in the “Pass” line.
(in thousands)
December 31, 2014
Pass
Special mention
Substandard
Doubtful
Total loans
December 31, 2013
Pass
Special mention
Substandard
Doubtful
Total loans
Commercial R.E.
Construction
Commercial R.E.
M ortgages
Land
Farmland
Commercial and
Industrial
Consumer
Consumer
Residential
Agriculture
Total
$ 9,181 $ 310,912 $ 7,625 $ 23,019 $ 48,997 $ 790 $ 25,283 $ 15,753
-
-
-
2,722
1,872
-
-
2,995
-
-
15
-
-
181
-
3,438
1,616
-
-
72
-
-
-
-
$
441,560
6,160
6,751
-
$ 9,181
$ 315,506
$
10,620
$ 23,091
$
54,051
$ 805
$ 25,464
$ 15,753
$
454,471
$ 15,555
-
-
-
$ 278,533
3,758
3,549
-
$
7,323
-
3,834
-
$ 20,229
-
92
-
$
46,712
253
1,822
-
$ 867
-
16
-
$ 25,200
-
423
-
$
11,272
-
-
-
$
405,691
4,011
9,736
-
$ 15,555
$ 285,840
$
11,157
$ 20,321
$
48,787
$ 883
$ 25,623
$ 11,272
$
419,438
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 Company’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 Company’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 Company’s control, including,
among other things, the performance of the Company’s loan portfolio, the economy, changes in interest rates and the view of the
regulatory authorities toward loan classifications.
The Company’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 Company.
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-25
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 Company 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
Company’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 Company. In general, such valuation allowances are determined by evaluating, among other things: (i) the experience, ability
and effectiveness of the Company’s lending management and staff; (ii) the effectiveness of the Company’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.
The following table details activity in the allowance for loan losses by portfolio segment for the years ended December 31, 2014
and 2013. 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 Ye ar Ende d De ce mbe r 31, 2014 and 2013
(in thousands)
Commercial
Commercial
Real Estate
6,247
(103)
1,882
(2,063)
$
and Industrial
663
0
0
57
$
Consumer
47
(40)
2
33
$
Consumer
Residential
440
0
11
(63)
$
$
Agriculture
217
0
0
69
$
45
0
0
90
Unallocated
T otal
Ye ar Ende d De ce mbe r 31, 2014
Beginning balance
Charge-offs
Recoveries
(Reversal of) provision for loan losses
Ending balance
Ye ar Ende d De ce mbe r 31, 2013
Beginning balance
Charge-offs
Recoveries
Provision for (reversal of) loan losses
Ending balance
$
$
$
$
7,659
(143)
1,895
(1,877)
7,534
7,975
(636)
20
300
7,659
5,963
$
720
$
42
$
388
$
286
$
135
$
6,570
$
474
$
50
$
384
$
286
$
211
$
(436)
9
104
6,247
$
0
0
189
663
$
(22)
3
16
47
$
(178)
8
226
440
0
0
0
0
(69)
(166)
$
217
$
45
$
F-26
The following table details the allowance for loan losses and ending gross loan balances as of December 31, 2014 and 2013,
summarized by collective and individual evaluation methods of impairment.
(in thousands)
De ce mbe r 31, 2014
Allowance for loan losses for loans:
Individually evaluated for impairment
Collectively evaluated for impairment
Ending gross loan balances:
Individually evaluated for impairment
Collectively evaluated for impairment
De ce mbe r 31, 2013
Allowance for loan losses for loans:
Individually evaluated for impairment
Collectively evaluated for impairment
Ending balances of loans:
Individually evaluated for impairment
Collectively evaluated for impairment
$
$
$
$
$
$
$
$
Commercial
Real Estate
Commercial
and Industrial
Consumer
Consumer
Residential
Agriculture
Unallocated
T otal
993
4,970
5,963
4,363
354,035
358,398
392
5,855
6,247
2,321
330,552
332,873
$
$
$
$
$
$
$
$
0
720
720
337
53,714
54,051
0
663
663
18
48,769
48,787
$
$
$
$
$
$
$
$
0
42
42
0
805
805
0
47
47
0
883
883
$
$
$
$
$
$
$
$
0
388
388
0
25,464
25,464
0
440
440
0
25,623
25,623
$
$
$
$
$
$
$
$
0
286
286
0
15,753
15,753
0
217
217
0
11,272
11,272
$
$
$
$
$
$
$
$
0
135
135
0
0
0
0
45
45
0
0
0
$
$
$
$
$
$
$
$
993
6,541
7,534
4,700
449,771
454,471
392
7,267
7,659
2,339
417,099
419,438
Changes in the allowance off-balance-sheet commitments were as follows:
(in thousands)
Balance, beginning of year
Provision charged to operations for off balance sheet
Balance, end of year
YEARS ENDED DECEMBER 31,
2014
2013
$
$
134
84
218
$
$
108
26
134
The method for calculating the reserve for off-balance-sheet loan commitments is based on a reserve percentage which is less than
other outstanding loan types because they are at a lower risk level. This reserve percentage, based on many factors including
historical losses and existing economic conditions, is evaluated by management periodically and is applied to the total undisbursed
loan commitment balance to calculate the reserve for off-balance-sheet commitments. Reserves for off-balance-sheet commitments
are recorded in interest payable and other liabilities on the consolidated balance sheets.
At December 31, 2014 and 2013, loans carried at $454,471,000 and $419,438,000, respectively, were pledged as collateral on
advances from the Federal Home Loan Bank.
F-27
NOTE 6 — PREMISES AND EQUIPMENT
Major classifications of premises and equipment are summarized as follows:
(in thousands)
Land
Building
Leasehold improvements
Furniture, fixtures, and equipment
Less accumulated depreciation and amortization
DECEMBER 31,
2014
2013
$
4,755
$
8,667
3,672
6,479
23,573
(9,507)
$
14,066
$
4,755
8,094
3,145
6,041
22,035
(8,351)
13,684
Depreciation expense was $1,174,000 and $1,160,000 and for the years ended December 31, 2014 and 2013, respectively.
In November 2013, the company acquired its corporate headquarter building located at 338 East F street in Oakdale, California by
foreclosing on the loan made to the owner of the building. The Company recorded the building in premises and equipment at the loan
carrying value of $1,250,000 which was determined to be less than fair value at the time of acquisition. The book value of existing
leasehold improvement assets associated with the headquarter building were also transferred to the building account.
NOTE 7 — INTEREST RECEIVABLE AND OTHER ASSETS
Other assets are summarized as follows:
(in thousands)
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,
2014
2013
$
1,271 $
753
2,614
758
2,517
13,545
455
2,016
$
22,658
$
1,313
698
4,266
758
2,412
12,083
515
1,115
23,160
F-28
NOTE 8 — DEPOSITS
Deposit totals were as follows:
(in thousands)
Demand
NOW accounts
Money market deposit accounts
Savings
Time, $250,000 and under
Time, over $250,000
Total deposits
DECEMBER 31,
2014
2013
$
225,957
$
108,374
247,442
39,412
38,247
10,149
187,577
90,759
236,547
34,774
43,474
9,502
$
669,581
$
602,633
Certificates of deposit issued and their remaining maturities at December 31, 2014, are as follows (in thousands):
Year ending December 31,
2015
2016
2017
2018
2019
$
35,668
8,206
4,500
3
19
$
48,396
NOTE 9 — FHLB ADVANCES
At December 31, 2014, the Company had no outstanding advances from the Federal Home Loan Bank (“FHLB”). Unused and
available advances totaled $176,689,000 at December 31, 2014. Loans carried at $454,471,000 as of December 31, 2014, were
pledged as collateral on advances from the Federal Home Loan Bank.
At December 31, 2013, the Company had no outstanding advances from the Federal Home Loan Bank (“FHLB”). Unused and
available advances totaled $167,957,000 at December 31, 2013. Loans carried at $419,438,000 as of December 31, 2013, were
pledged as collateral on advances from the Federal Home Loan Bank.
NOTE 10 — INTEREST ON DEPOSITS
Interest on deposits was comprised of the following:
(in thousands)
Savings and other deposits
Time deposits over $250,000
Other time deposits
YEARS ENDED DECEMBER 31,
2014
2013
396
$
32
219
647
$
471
45
312
828
$
$
F-29
NOTE 11 — INCOME TAXES
The provision for income taxes consists of the following:
(in thousands)
YEARS ENDED DECEMBER 31,
Current
Federal
State
Deferred
Federal
State
2014
2013
$ 2,757
$ 2,065
1,004
438
3,761
2,503
(185)
151
(2)
56
(187)
207
$ 3,574
$ 2,710
The components of the Company’s deferred tax assets and liabilities (included in accrued interest and other assets on the consolidated
balance sheets, is shown below:
(in thousands)
Deferred tax assets:
Allowance for loan losses
Restricted stock expense
Accrued vacation
Accrued salary continuation liability
Deferred compensation
Nonaccrual loans
Reserve for undisbursed commitments
OREO expenses
Checking cash rewards
Investment in limited partnership
State income tax
Holding company organization fees
Unrealized loss on securities available for sale
Deferred tax liabilities:
Prepaid expenses
FHLB dividends
Accumulated depreciation
Deferred loan costs
Accrued bonus
Unrealized gain on securities available for sale
DECEMBER 31,
2014
2013
$ 3,100
$ 3,151
38
53
914
109
140
90
254
0
(1)
353
34
0
5,084
(73)
(220)
(609)
(259)
(3)
(1,306)
(2,470)
23
51
832
106
196
55
241
37
0
167
38
533
5,430
(86)
(220)
(639)
(218)
(1)
0
(1,164)
Net deferred income tax asset
$ 2,614
$ 4,266
F-30
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 Company 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 Company’s tax returns, recent positions taken by the taxing authorities on similar transactions, if any, and the overall tax
environment.
As of December 31, 2014, the Company had a liability for unrecognized tax benefits of $302,000 associated with the California
Franchise Tax Board’s (“FTB”) potential exam of our 2010, 2011, 2012 and 2013 tax returns, approximately $51,000 of which relates
to interest. The Company believes the $302,000 accrued liability is an adequate reserve for the potential of an exam for the 2010,
2011, 2012 and 2013 tax returns. There were no unrecognized tax benefit during 2014, as the entire $302,000 liability relates to prior
years.
As of December 31, 2013, the Company had a liability for unrecognized tax benefits of $302,000 associated with the California
Franchise Tax Board’s (“FTB”) potential exam of our 2010, 2011, 2012 and 2013 tax returns, approximately $33,000 of which relates
to interest. The Company believes the $302,000 accrued liability is an adequate reserve for the potential of an exam for the 2010,
2011, 2012 and 2013 tax returns. If recognized, the unrecognized tax benefit would have impacted the 2013 annual effective tax rate
by 0.8%.
Detailed below is a reconciliation of the Company’s unrecognized tax benefits, gross of any related tax benefits, for the year ended
December 31, 2014 and 2013:
Beginning balance
Additions for current year tax positions
Ending balance
Years Ended December 31,
2014
2013
$
$
302
0
302
$
$
230
72
302
The effective tax rate for 2014 and 2013 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,
2014
2013
34.0 %
7.2 %
(4.7 )%
(1.7 )%
(0.3 )%
(0.6 )%
(0.4 )%
(0.1 )%
33.4 %
34.0 %
7.2 %
(4.7 )%
(1.9 )%
(0.2 %
(0.7 )%
(2.7 )%
0.5 %
31.5 %
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 Company 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 2011 for U.S. Federal or for years
before 2010 for California.
F-31
NOTE 12 — STOCK OPTION PLAN
The Company 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 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.
A summary of the status of the Company’s stock option plan and changes during the year are presented below.
Outstanding at beginning of year
Granted
Exercised
Forfeited
Outstanding at end of year
DECEMBER 31, 2014
Weighted-
Average
Exercise
Price
9.36
0.00
7.54
10.11
12.57
Shares
200,250
0
$
$
(122,625 ) $
(10,125 ) $
67,500 $
A summary of the status of the Company’s restricted stock and changes during the year are presented below.
Unvested at beginning of year
Granted
Vested
Cancelled
Unvested at end of year
(dollars in thousands)
Weighted-average fair value of options granted during the year
DECEMBER 31, 2014
Weighted-
Average
Grant Date
Fair Value
6.79
9.44
6.79
6.73
7.36
Shares
126,483
24,500
$
$
(34,236 ) $
(2,000 ) $
114,747 $
December 31,
2014
N/A
2013
N/A
Intrinsic value of options exercised
$ 239
$ 11
Options exerciseable 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
67,500
12.57
$ 17
1.16 years
199,750
$ 9.39
$ 117
0.94 years
67,500
200,250
12.57
$ 17
1.16 years
$ 9.36
$ 117
0.95 years
F-32
There were no tax benefits recorded in the consolidated statements of income during 2014 and 2013 related to the vesting of non-
qualified stock options. As of December 31, 2014, there was no unrecognized compensation cost related to non-vested stock options.
For the year ended December 31, 2014, the Company received proceeds of approximately $924,000 from the exercise of stock options
and received income tax benefits of approximately $88,000 related to disqualifying dispositions in the exercise of incentive stock
options. During 2014, the Company recorded $1,000 in the consolidated statements of income related to stock option compensation
expense.
The Company granted 24,500 shares of restricted stock in 2014 with a weighted average fair value of $9.44 per share. For the year
ended December 31, 2014, total compensation expense recorded in the consolidated statements of income related to restricted stock
awards was $270,000, with an offsetting tax benefit of $111,000, as this expense is deductible for income tax purposes. As of
December 31, 2014, there was $636,000 of total unrecognized compensation cost related to restricted stock awards which is expected
to be recognized over a weighted-average period of 2.81 years. During 2014, shares of restricted stock awards totaling 34,236 with a
fair value of $306,000 were vested and became unrestricted.
For the year ended December 31, 2013, the Company received proceeds of approximately $85,000 from the exercise of stock options
and received income tax benefits of approximately $4,000 related to disqualifying dispositions in the exercise of incentive stock
options. During 2013, the Company recorded $1,000 in the consolidated statements of income related to stock option compensation
expense.
The Company granted 15,000 shares of restricted stock in 2013 with a weighted average fair value of $7.66 per share. For the year
ended December 31, 2013, total compensation expense recorded in the consolidated statements of income related to restricted stock
awards was $195,000, with an offsetting tax benefit of $84,000, as this expense is deductible for income tax purposes. As of
December 31, 2013, there was $687,000 of total unrecognized compensation cost related to restricted stock awards which is expected
to be recognized over a weighted-average period of 3.25 years. During 2013, shares of restricted stock awards totaling 29,736 with a
fair value of $241,000 were vested and became unrestricted.
NOTE 13 — 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, 2008, the Company 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. The attached warrants were immediately exercisable and
expired 10 years after the issuance date. We were required to comply with restrictions on executive compensation during the period
that the U.S. Treasury held an equity position in us through the TCPP.
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) was scheduled to be amortized over a five-year period, using effective yield method.
See Note 3 above for information regarding the Company’s repurchase of the Series A preferred shares from the TCPP, issuance of
Series B preferred stock under the SBLF, redemption of warrants in August 2011 and repurchase of Series B preferred stock in 2012
and 2013.
F-33
NOTE 14 — EARNINGS PER SHARE
Earnings per share (“EPS”) are based upon the weighted average number of common shares outstanding during each year. The
following table shows: (1) weighted average basic shares, (2) effect of dilutive securities related to stock options and non-vested
restricted stock, and (3) weighted average diluted shares. Net income available to common stockholders is calculated as net income
reduced by dividends accumulated on preferred stock. Basic EPS are calculated by dividing net income available to common
stockholders by the weighted average number of common shares outstanding during each period, excluding unvested restricted stock
awards. Diluted EPS are calculated using the weighted average diluted shares. The total dilutive shares included in annual diluted EPS
is a year-to-date weighted average of the total dilutive shares included in each quarterly diluted EPS computation under the treasury
stock method. We have two forms of outstanding common stock: common stock and unvested restricted stock awards. Holders of
restricted stock awards receive non-forfeitable dividends at the same rate as common stockholders and they both share equally in
undistributed earnings.
The Company’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:
(dollars in thousands)
Basic EPS:
YEAR ENDED DECEMBER 31, 2014
Shares
(Denominator)
Income
(Numerator)
Per-Share
Amount
Net earnings available to common shareholders
$
7,122
7,938,052
$
0.90
Effect of dilutive securities:
Stock options
Non-vested restricted stock
Total dilutive shares
Diluted EPS:
—
—
4,822
49,857
54,679
Net earnings available to common shareholders plus assumed conversions
$
7,122
7,992,731
$
0.89
Anti-dilutive options to purchase 68,315 shares of common stock in prices ranging from $9.95 to $15.67 were outstanding during
2014. 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.
During 2014, there were no anti-dilutive shares from non-vested restricted stock grants because the fair value of each grant was lower
than the average market price of the common shares.
(dollars in thousands)
Basic EPS:
YEAR ENDED DECEMBER 31, 2013
Shares
(Denominator)
Income
(Numerator)
Per-Share
Amount
Net earnings available to common shareholders
$
5,819
7,796,659
$
0.75
Effect of dilutive securities:
Stock options
Non-vested restricted stock
Total dilutive shares
Diluted EPS:
—
—
10,395
39,024
49,419
Net earnings available to common shareholders plus assumed conversions
$
5,819
7,846,078
$
0.74
Anti-dilutive options to purchase 70,856 shares of common stock in prices ranging from $8.25 to $15.67 were outstanding during
2013. 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.
F-34
During 2013, there were no anti-dilutive shares from non-vested restricted stock grants because the fair value of each grant was lower
than the average market price of the common shares.
NOTE 15 — COMMITMENTS AND CONTINGENCIES
The Company 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, 2014 and 2013, was
$816,000 and $863,000, respectively.
At December 31, 2014, the future minimum commitments under these operating leases are as follows (in thousands):
Year ending December 31,
2015
2016
2017
2018
2019
Thereafter
$
$
844
709
696
676
644
2,182
5,751
The Company 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 Company has in
particular classes of financial instruments.
The Company’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 Company uses the
same credit policies in making commitments and conditional obligations as it does for on-balance-sheet instruments.
Financial instruments at December 31, 2014 whose contract amounts represent credit risk:
(in thousands)
Undisbursed loan commitments
Checking reserve
Equity lines
Standby letters of credit
Contract
Amount
$
$
71,468
1,242
10,994
1,113
84,817
Commitments to extend credit, including undisbursed loan commitments and equity lines, 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 Company evaluates each customer’s
creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Company 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.
Checking reserves are lines of credit associated consumer deposit accounts that meet qualification standards for extension of credit if
the deposit account were to become overdraft.
F-35
Standby letters of credit are conditional commitments issued by the Company 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.
NOTE 16 — FINANCIAL INSTRUMENTS
Fair values of financial instruments — The consolidated financial statements include various estimated fair value information as of
December 31, 2014 and 2013. Such information, which pertains to the Company’s financial instruments, does not purport to represent
the aggregate net fair value of the Company. 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 Company.
Cash and cash equivalents — The carrying amounts of cash and cash equivalents approximate their fair value.
Restricted Equity Securities — The carrying amounts of the stock the Company’s owns in FRB and FHLB approximate their fair
value and are considered a level 2 valuation.
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. See Note 17 for
additional disclosure regarding fair values of securities.
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. The allowance for loan losses is considered to be a reasonable estimate of loan discount due to credit risks.
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.
Interest receivable and payable — The carrying amounts of accrued interest approximate their fair value.
Off-balance-sheet instruments — Fair values for the Company’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 Company’s financial instruments at December 31, 2014 were as follows:
(in thousands)
Financial assets:
Cash and cash equivalents
Restricted equity securities
Loans, net
Interest receivable
Financial liabilities:
Deposits
Interest payable
Off-balance-sheet assets (liabilities):
Commitments and standby letters of credit
Carrying
Amount
Fair
Value
Hierarchy
Valuation
Level
$
144,288
$
3,275
446,492
2,024
144,288
3,275
455,501
2,024
(669,581 )
(600,941 )
(39 )
(39 )
(848 )
1
2
3
2
3
2
3
F-36
The estimated fair values of the Company’s financial instruments at December 31, 2013 were as follows:
(in thousands)
Financial assets:
Cash and cash equivalents
Restricted equity securities
Loans, net
Interest receivable
Financial liabilities:
Deposits
Interest payable
Off-balance-sheet assets (liabilities):
Commitments and standby letters of credit
Carrying
Amount
Fair
Value
Hierarchy
Valuation
Level
$
105,191
$
105,191
3,170
411,156
2,011
3,170
426,433
2,011
(602,633 )
(590,495 )
(60 )
(60 )
(526 )
1
2
3
2
3
2
3
NOTE 17 − FAIR VALUE MEASUREMENTS
ASC Topic 820, Fair Value Measurements, 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 Company’s quarterly valuation process. During 2014, there were no transfers between levels of the
fair value hierarchy.
F-37
Assets and liabilities measured at fair value on a recurring and non-recurring basis for the years ended December 31, 2014 and 2013
are summarized below:
(in thousands)
Assets and liabilities measured on a recurring basis:
Available-for-sale securities
U.S. agencies
Collateralized mortgage obligations
Municipalities
SBA pools
Corporate debt
Asset backed securities
Mutual fund
Assets and liabilities measured on a non-recurring basis:
Impaired loans:
Land
Commercial real estate - mortgages
Other real estate owned
(in thousands)
Assets and liabilities measured on a recurring basis:
Available-for-sale securities
U.S. agencies
Collateralized mortgage obligations
Municipalities
SBA pools
Corporate debt
Asset backed securities
Mutual fund
Assets and liabilities measured on a non-recurring basis:
Impaired loans:
Land
Other real estate owned
Fair Value Measurements at December 31, 2014 Using
Quoted Prices
in Active
Markets for
Identical Assets
(Level 1)
Significant
Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
December 31,
2014
$
$
$
$
$
$
41,930
7,072
50,897
892
6,804
10,710
2,972
$
0
0
0
0
0
0
2,972
$
41,930
7,072
50,897
892
6,804
10,710
0
0
0
0
0
0
0
0
1,743
1,171
884
$
$
$
0
0
0
$
$
$
0
0
0
$
$
$
1,743
1,171
884
Fair Value Measurements at December 31, 2013 Using
Quoted Prices
in Active
Markets for
Identical Assets
(Level 1)
Significant
Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
December 31,
2013
$
53,115
9,781
40,269
1,081
4,825
5,857
2,818
$
0
0
0
0
0
0
2,818
$
53,115
9,781
40,269
1,081
4,825
5,857
0
0
0
0
0
0
0
0
$
$
790
916
$
$
0
0
$
$
0
0
$
$
790
916
F-38
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 Company 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 Company records the impaired loan as non-recurring Level 3. Likewise,
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 Company 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.
Net realizable value of the underlying collateral is the fair value of the collateral less estimated selling costs and any prior liens.
Appraisals, recent comparable sales, offers and listing prices are factored in when valuing the collateral. We review and verify the
qualifications and licenses of the certified general appraisers used for appraising commercial properties or certified residential
appraisers for residential properties. Real estate appraisals may utilize a combination of approaches including replacement cost, sales
comparison and the income approach. Comparable sales and income data are analyzed by the appraisers and adjusted to reflect
differences between them and the subject property such as type, leasing status and physical condition. When the appraisals are
received, Management reviews the assumptions and methodology utilized in the appraisal, as well as the overall resulting value in
conjunction with independent data sources such as recent market data and industry-wide statistics. We generally use a 6% discount for
selling costs which is applied to all properties, regardless of size. Appraised values may be adjusted to reflect changes in market
conditions that have occurred subsequent to the appraisal date, or for revised estimates regarding the timing or cost of the property
sale. These adjustments typically range between 10% and 20% of the appraised value and are based on qualitative judgments made by
management on a case-by-case basis.
NOTE 18 — RELATED PARTY TRANSACTIONS
The Company, 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 Company. Loans to directors, officers, shareholders, and affiliates are summarized below:
(in thousands)
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,
2014
2013
$
$
13,684 $
8,345
(13,811 )
8,218 $
8,376
15,717
(10,409 )
13,684
Related party deposits totaled $58,446,000 and $69,801,000 at December 31, 2014 and 2013, respectively.
F-39
NOTE 19 — PROFIT SHARING PLAN
The profit sharing plan to which both the Company and eligible employees contribute was established in 1995. Bank contributions are
voluntary and at the discretion of the Board of Directors. Contributions were approximately $371,000 and $337,000 for the years
ended December 31, 2014 and 2013, respectively.
NOTE 20 — RESTRICTIONS ON DIVIDENDS
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 Business Oversight, 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 21 — OTHER POST-RETIREMENT BENEFIT PLANS
The Company 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 Company is also responsible for certain pre-retirement death
benefits under the Plan. In connection with the implementation of the Plan, the Company purchased single premium life insurance
policies on the life of each of the officers covered under the Plan. The Company 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 Company and are available to
satisfy the Company’s general creditors.
During December 2001, the Company 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 Company is also responsible for certain pre-
retirement death benefits under the DRP. In connection with the implementation of the DRP, the Company purchased single premium
life insurance policies on the life of each director covered under the DRP. The Company 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 Company and are
available to satisfy the Company’s general creditors.
Future compensation under both plans is earned for services rendered through retirement. The Company accrues for the salary
continuation liability based on anticipated years of service and vesting schedules provided under the plans. The Company’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, 2014 and 2013, $2,222,000 and $2,021,000,
respectively, has been accrued to date, and is included in other liabilities on the consolidated balance sheets.
The Company entered into split-dollar life insurance agreements with certain officers. In connection with the implementation of the
split-dollar agreements, the Company purchased single premium life insurance policies on the life of each of the officers covered by
the split-dollar life insurance agreements. The Company 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 $13,545,000 and $12,083,000 at December 31,
2014 and 2013, respectively. The cash surrender value of the life insurance policies is included in other assets on the consolidated
balance sheets (Note 7).
NOTE 22 — REGULATORY MATTERS
The Bank and the Company are 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 Company’s financial statements. Under capital adequacy
guidelines and the regulatory framework for prompt corrective action, the Company must meet specific capital guidelines that involve
quantitative measures of the Company’s assets, liabilities, and certain off-balance-sheet items as calculated under regulatory
accounting practices. The Company’s capital amounts and classifications are also subject to qualitative judgments by the regulators
about components, risk weightings, and other factors.
F-40
Quantitative measures established by regulation to ensure capital adequacy require the Company to maintain minimum amounts and
ratios (set forth in the table below) 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, 2014, that the Bank and Company
meets all capital adequacy requirements to which they are subject.
As of December 31, 2014, 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 Company and Bank’s actual capital amounts and ratios at December 31, 2014 and 2013, are presented in the following table.
(in thousands)
Capital ratios for Bank:
As of December 31, 2014
Actual
For capital
adequacy purposes
To be well
capitalized under
prompt corrective
action provisions
Amount
Ratio
Amount
Ratio
Amount
Ratio
Total capital (to Risk- Weighted Assets)
$
Tier I capital (to Risk- Weighted Assets) $
Tier I capital (to Average Assets)
$
79,168
72,316
72,316
14.5%
13.2%
10.1%
As of December 31, 2013
Total capital (to Risk- Weighted Assets)
$
Tier I capital (to Risk- Weighted Assets) $
Tier I capital (to Average Assets)
$
71,876
65,685
65,685
14.6%
13.3%
9.8%
Capital ratios for Bancorp:
As of December 31, 2014
Total capital (to Risk- Weighted Assets)
Tier I capital (to Risk- Weighted Assets)
Tier I capital (to Average Assets)
As of December 31, 2013
Total capital (to Risk- Weighted Assets)
Tier I capital (to Risk- Weighted Assets)
Tier I capital (to Average Assets)
$
$
$
$
$
$
79,873
73,020
73,020
14.5%
13.3%
10.2%
71,313
65,122
65,122
14.5%
13.2%
9.7%
$
$
$
$
$
$
$
$
$
$
$
$
43,778
21,889
28,783
>8.0%
>4.0%
>4.0%
39,492
19,746
26,780
>8.0%
>4.0%
>4.0%
$
$
$
$
$
$
54,722
32,833
35,979
>10.0%
>6.0%
>5.0%
49,365
29,619
33,475
>10.0%
>6.0%
>5.0%
43,785
21,893
28,787
>8.0%
>4.0%
>4.0%
39,494
19,747
26,782
>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
In July 2013, the U.S. banking agencies approved the U.S. version of Basel III. The federal bank regulatory agencies adopted
version of Basel III revises the risk-based and leverage capital requirements and the method for calculating risk-weighted assets to
make them consistent with Basel III and to meet the requirements of the Dodd-Frank Act. Although many of the rules contained in
these final regulations are applicable only to large, internationally active banks, some of them will apply on a phased in basis to all
banking organizations, including the Company and the Bank. Among other things, the rules establish a new minimum common equity
Tier 1 ratio (4.5% of risk-weighted assets), a higher minimum Tier 1 risk-based capital requirement (6.0% of risk-weighted assets) and
a minimum non-risk-based leverage ratio (4.00% eliminating a 3.00% exception for higher rated banks). The new additional capital
conservation buffer of 2.5% of risk weighted assets over each of the required capital ratios will be phased in from 2016 to 2019 and
must be met to avoid limitations on the ability of the Bank to pay dividends, repurchase shares or pay discretionary bonuses. The
F-41
additional “countercyclical capital buffer” is also required for larger and more complex institutions. The new rules assign higher risk
weighting to exposures that are more than 90 days past due or are on nonaccrual status and certain commercial real estate facilities that
finance the acquisition, development or construction of real property. The rules also change the permitted composition of Tier 1
capital to exclude trust preferred securities, mortgage servicing rights and certain deferred tax assets and include unrealized gains and
losses on available for sale debt and equity securities (with a one-time opt out option for Standardized Banks (banks with less than
$250 billion of total consolidated assets and less than $10 billion of foreign exposures)). The rules, including alternative requirements
for smaller community financial institutions like the Company, would be phased in through 2019. The implementation of the Basel III
framework for the Company and the Bank commenced on January 1, 2015.
The Bank is well capitalized. As of December 31, 2014 and 2013, the Bank’s Total Risk-Based Capital Ratio was 14.4% and
14.6%, and our Tier 1 Risk-Based Capital Ratio was 13.2% and 13.3%, 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, 2014 and 2013, the Bank’s Leverage Capital Ratios were 10.1% and 9.8%,
respectively.
F-42
OAK VALLEY BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
23. PARENT ONLY CONDENSED FINANCIAL STATEMENTS
CONDENSED BALANCE SHEETS
(dollars in thousands)
ASSETS
Cash
Investment in bank subsidiary
Other assets
Total assets
December 31,
2014
December 31,
2013
$
$
612 $
74,287
142
207
65,080
23
75,041 $
65,310
LIABILITIES AND SHAREHOLDERS’ EQUITY
Other liabilities
$
- $
793
Total liabilities
$
- $
793
Shareholders’ equity
Common stock, no par value; 50,000,000 shares authorized,
8,074,855 and 7,929,730 shares issued and outstanding at
December 31, 2014 and 2013, respectively
Additional paid-in capital
Retained earnings
Accumulated other comprehensive income (loss), net of tax
Total shareholders’ equity
24,682
2,910
45,582
1,867
75,041
23,758
2,537
38,985
(763)
64,517
Total liabilities and shareholders' equity
$
75,041 $
65,310
F-43
OAK VALLEY BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
23. PARENT ONLY CONDENSED FINANCIAL STATEMENTS (CONTINUED)
CONDENSED STATEMENTS OF INCOME
Year Ended December 31,
2013
2014
$
793 $
793
(dollars in thousands)
INCOME
Dividends declared by subsidiary
Total income
EXPENSES
Salary expense
Employee benefit expense
Legal expense
Other operating expenses
Total non-interest expense
Income before equity in undistributed income of subsidiary
Equity in undistributed net income (loss) of subsidiary
Income before income tax benefit
Income tax benefit
Net income
Preferred stock dividends
Net income available to common shareholders
6,902
6,902
71
206
97
129
503
6,399
(734)
5,665
221
75
271
34
103
483
310
6,577
6,887
235
$
$
7,122 $
5,886
0
68
7,122 $
5,818
F-44
OAK VALLEY BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
23. PARENT ONLY CONDENSED FINANCIAL STATEMENTS (CONTINUED)
CONDENSED STATEMENTS OF CASHFLOWS
(dollars in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income
Adjustments to reconcile net earnings to net cash from operating
activities:
Undistributed net (gain) loss of subsidiary
Stock based compensation
Excess tax benefits from stock-based payment arrangements
Decrease in other liabilities
Increase in other assets
Net cash (used in) from operating activities
CASH FLOWS FROM FINANCING ACTIVITIES:
Repurchase of Series B Preferred Stock
Preferred stock dividend payment
Shareholder cash dividends paid
Proceeds from sale of common stock and exercise of stock options
Excess tax benefits from stock-based payment arrangements
Net cash from (used in) financing activities
NET INCREASE 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
YEAR ENDED DECEMBER 31,
2014
2013
$
7,122 $
5,886
(6,577)
271
(102)
(793)
(17)
(96)
0
0
(525)
924
102
501
405
207
612 $
734
195
0
(84)
6
6,737
(6,750)
(68)
0
85
0
(6,733)
4
203
207
3,005
$
2,345
$
$
F-45
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**
3.7
Certificate of Amendment of Bylaws dated effective as of August 11, 2011****
3.8
Amendment of Bylaws incorporated by reference from the Form 8-K filed on July 22, 2013.
4.1
Certificate of Determination dated December 2, 2008 filed with the California Secretary of State for Fixed Rate
Cumulative Perpetual Preferred Stock, Series A**
4.2
Warrant to Purchase Common Stock dated December 5, 2008**
4.3
Certificate of Determination dated August 11, 2011 and filed with the California Secretary of State for Senior Non-
Cumulative Perpetual Preferred Stock, Series B****
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**
10.5
Securities Purchase Agreement dated August 11, 2011 between the Company and the Secretary of the U.S. Treasury,
with respect to the issuance and sale of Senior Non-Cumulative Perpetual Preferred Stock, Series B.****
10.6
Warrant Redemption Letter Agreement dated September 28, 2011 between the Company and the U.S. Treasury, with
respect to the redemption of the Warrant to Purchase Common Stock dated December 5, 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
101.01 XBLR Interactive Data File*****
* 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
**** Incorporated by reference from the Form 10-Q filed on November 14, 2011
***** As provided in Rule 406T of Regulation S-T, this information is furnished and not filed for purposes of Sections 11 and 12 of
the Securities Act of 1933 and Section 18 of the Securities Exchange Act of 1934.
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
24, 2015, relating to the consolidated financial statements of Oak Valley Bancorp appearing in this Annual Report on Form 10-K of
Oak Valley Bancorp for the year ended December 31, 2014.
/s/ Moss Adams LLP
Stockton, California
March 24, 2015
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, Christopher M. Courtney, President and 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 17, 2015
/s/ Christopher M. Courtney
Christopher M. Courtney
President and 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 17, 2015
/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, 2014, 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 17, 2015
Dated: March 17, 2015
/s/ Christopher M. Courtney
Christopher M. Courtney
President and 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.