O A K VA L L E Y C O M M U N I T Y B A N K | 2007 ANNUAL REPORT
L o c a l l y o w n e d | L e n d i n g a t h o m e | I n v e s t i n g i n y o u r c o m m u n i t y
R e p o r t
O A K V A L L E Y B A N C O R P 2 0 0 9 A n n u a l
T h e R o a d L e s s T r a v e l e d
G E N E R A T
I O N S
F O R A L
L
B A N K I N G
1
Celebrating
25 years
of successful,
lasting
relationships
STRETCHING OUR HORIZON WITH STRONG GROWTH
2 0 1 2 A N N U A L R E P O R T
|
L E Y B A N C O R P
O A K V A L
OAK VALLEY BANCORP
2015 ANNUAL REPORT
O a k V a l l e y C o m m u n i t y B a n k 2 0 0 5 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
(In thousands except for per share amounts)
Year Ended December 31,
2015
2014
2013
2012
2011
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
Weighted average common
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
$26,020
615
25,405
(125)
4,107
22,675
6,962
2,054
4,908
-
$4,908
$25,936
647
25,289
(1,877)
3,764
20,234
10,696
3,574
7,122
-
$7,122
$25,104
828
24,276
300
3,280
18,660
8,596
2,710
5,886
68
$5,818
$25,982
1,137
24,845
1,150
3,149
18,249
8,595
2,814
5,781
452
$5,329
$26,828
1,648
25,180
1,500
2,751
17,394
9,037
3,176
5,861
1,161
$4,700
$0.61
$0.21
$1,695
8,036,845
$0.89
$0.165
$1,318
7,992,731
$0.74
$-
$-
7,846,078
$0.69
$-
$-
7,766,745
$0.61
$-
$-
7,738,999
$897,038
837,867
541,032
190,603
131,546
$256,163
558,528
814,691
78,263
$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
Dear Customers,
Shareholders and
Friends:
For the fiscal year ended December 31,
excellence and respond with creativity and
2015, net income totaled $4.9 million,
a can-do attitude. They are empowered
or $0.61 per diluted share, compared to
to recommend and implement solid
$7.1 million, or $0.89 per diluted share,
solutions to help our clients succeed,
AS OAK VALLEY COMMUNITY BANK
for 2014. It should be noted that 2014
making our employees the
CELEBRATES its silver anniversary, we
included a $1.88 million reversal of loan
linchpin in ensuring our
look back on the accomplishments of
loss provisions related to the recovery
customers’ needs come first.
2015 and reflect on the bank’s progress,
of a charged off loan and 2015 includes
We remain committed
its style of customer engagement, and
$1.97 million in merger-related expenses
to delivering the perfect
our commitment to community.
associated with the acquisition of Mother
blend of in-person service and
2015 saw the opening of our sixteenth
Lode Bank.
technology-driven convenience.
branch and a first for the bank with the
Total assets grew to $897.0 million
Whether a customer wants to visit the
acquisition of Mother Lode Bank. To put
for the year ended December 31, 2015,
bank every day, or make deposits and
the year’s momentum into perspective,
an increase of $147.4 million, or 19.7%
payments from the office or comfort
the combined merger and organic
over the prior year. Gross loans at year
of home, we have the tools to fit their
growth resulted in the largest increase
end totaled $541.0 million, reflecting an
lifestyle and accommodate their needs.
in assets, loans and deposits of any
increase of $86.6 million, or 19.0%, over
We will continue to employ our
year in the bank’s history. In fact, these
2014. Deposits increased to $814.7 million,
strategy of operating as a community-
gains exceeded what we accomplished
which was an increase of $145.1 million, or
oriented, relationship bank through the
in aggregate during our first ten years.
21.7% over the prior year.
one-billion dollar asset mark and beyond.
Through this transformative growth we
The bank’s long-term strategic
Our philosophy has propelled us to where
have not wavered from our mission
“Rolling 10 Year Plan” provides a powerful
we are today, and will guide us toward
of developing life-long customers by
road map for the future, and engaged
greater success in the future.
providing a unique style of relationship
employees are the driving force behind
Thank you for your patronage
service, which reinforces the vision of
those numbers. Dedicated staff brings our
throughout the past 25 years. As
our long term strategy and the
power of teamwork in making
Oak Valley an even better
place to bank and work.
We are pleased to report
blueprint for success to life. Our
you continue to enjoy the Oak Valley
team works hard to provide a
experience, we ask that you keep others
unique customer experience
in mind — like yourself — who would
which we have developed and
enjoy the benefits of banking with a true
refined through the years. They
community bank. We appreciate your
another year of positive results
understand that our clients look
support and look forward to serving you
and solid earnings for
the company.
to us to guide them in their
for many years to come.
pursuit of financial
—Sincerely, Christopher M. Courtney
Continuing a
tradition of innovation
and old-fashioned
customer service
CUSTOMER-CENTERED BANKING
CONTINUES TO EVOLVE
We continue to expand our model
of banking anytime, from anywhere
— offering our customers the option
to connect with us and manage their
money in whatever way fits their needs
A PREMIER BANKING EXPERIENCE
and lifestyle. While some of our more
SPANNING GENERATIONS
established customers enjoy the
With great pride and gratitude, we
personalized approach of the teller
are pleased to celebrate our 25th
window or meeting face-to-face with
O a k V a l l e y B a n c o r p | 2 0 1 1 A n n u a l R e p o r t
anniversary. We’ve built a strong team
a loan officer, others prefer to interact
at Oak Valley Community Bank over
utilizing available technology, enjoying
qualities by practicing “The Oak
the years, and we have our customers
the convenience of online, mobile
Valley Way” of personal service,
to thank for making Oak Valley their
or telephone banking without ever
which is designed to empower our
bank of choice and driving
visiting a branch. Either way, we offer
employees with the tools to achieve
our success. Many have
the products and delivery options to
their professional development goals.
been with us since the
provide banking “your” way for our
Our successful efforts in growing the
beginning, as you’ll
customers.
witness as you read our
bank pave the way for satisfying career
paths, rich with opportunities for
story here. A growing
A STRONG FOUNDATION BUILT
professional growth.
number have recently
ON QUALITY PEOPLE
We have an obligation to our
joined us and are already reaping
One of the most important factors
employees to provide a positive
the rewards of our ideal, time-tested
in our ability to deliver a diverse
experience as they execute their vital
blend of modern banking convenience
and satisfying customer experience
role as part of the Oak Valley team. We
delivered with a personal touch.
throughout changing times is our
believe fulfillment in the workplace lends
exceptional staff. We have created a
itself to satisfaction and well-being in
culture of teamwork, where everyone
other parts of our lives, so everybody
is focused on delivering a unique style
of relationship banking. We instill these
D R . M O N T E S W A N B E R G
Then
Then
&
&
Now
Now
SWANBERG & SCEVILLE
DENTAL
This successful dental practice
has been banking with
Oak Valley since the family’s
patriarch began moving his
business accounts in 1992.
When her father retired, Jodi
Swanberg-Sceville sold her
private practice in Southern
California and returned to
Oakdale to purchase the family
practice with husband Jeff
Sceville. As their relationship has
grown to include a business loan
and home mortgage to purchase
another practice, the bank has
always served their needs with a
personal touch, while providing
the convenience of online
banking and a streamlined
deposit system.
Then
Then
&
&
Now
Now
GILTON SOLID WASTE
MANAGEMENT AND
RESOURCE RECOVERY
Since their beginnings as
Airport Garbage in 1947, this
thriving enterprise has expanded
and diversified, providing fully
integrated waste management
and recycling services. With
the third generation taking
the helm at Gilton Solid Waste
Management and Resource
Recovery, they sought a banking
partner for their thriving
business that shared their
concern for the local community.
They transferred their banking
relationship to Oak Valley
and they’ve never
looked back.
wins when we invest in creating a great
employees and customers of the
work environment where employees can
former Mother Lode Bank into the
bring their best every day.
Oak Valley family and look forward to
From a business perspective,
enriching them with our unique brand
long-term employees are the bedrock
of customer service.
of Oak Valley, a cornerstone of our
We also opened a new location in
strong foundation and an important
Downtown Sonora, in line with our de
dimension in our growth strategy. They
novo growth strategy, bringing our total
are the power behind the numbers —
branches to 16 in the Central Valley
the driving force that fuels our success.
and Sierra footprint. With these recent
Growing a
profitable bank, one
customer at a time
investments, we are poised for further
expansion and will strive to achieve
even greater milestones. However, rest
assured that despite our increasing size,
we are committed to maintaining our
style of customer service and “keeping
it personal” with our loyal clientele.
EXPANDING TO SERVE OUR
GROWING COMMUNITIES
A PROVEN PLAN FOR SUCCESS
For Oak Valley, 2015 was a
Our prudent, steady growth approach
transformative year, in which we
has served us well over the past 25
pursued our first-ever acquisition of
years, fueling our expansion across
another bank to fulfill the financial
the region as well as deep within our
services needs of the thriving Sonora
communities. Last year, we put over
5
2
Y
E
A
R
S
Y
E
A
R
S
community and to
$150 million in new loan dollars to work
strengthen our market
in the communities we serve, increasing
share. We have
our emphasis on agriculture loans
seamlessly integrated
where we see continued opportunities
for growth. We remain committed to
financing a diverse array of commercial
real estate and businesses, offering
tailor-made solutions to foster the
growth and prosperity of our clients.
estoring
Relationship
Banking
R
a k
a l l e y
om m u n i t y
O
V
C
B
a n k | 2 0 0 6 A nnua l R ep o r t
E U G E N E A N D
L E R O Y G I L T O N
Then
Then
&
&
Now
Now
STEWART KRIESE
INSURANCE AGENCY
Originally opened by Bob
Stewart in 1985 as R.L. Stewart
Insurance Agency, the business
was purchased by Bob’s son and
his wife, in 1997, who expanded
it in 2007 with the acquisition of
Kriese Insurance. In 1991, when
we opened our doors,
Mr. Stewart was the bank’s first
customer. Brian and Lucy Stewart
appreciate the important role
Oak Valley has played in their
growth and success, helping them
expand with additional agency
and property acquisitions
over the years.
B O B S T E W A R T
Contributing to
the quality of life
through community
involvement
We contribute volunteer time and
regularly through an annual Friends
talent in addition to financial resources
of Scouting pledge and by supporting
to the following organizations:
and attending multiple Boy Scout
events. Several members of the bank’s
THE UNITED SAMARITANS
management team have participated
FOUNDATION
throughout the years, some on the
We proudly support the largest non-
council’s board of directors, others
SINCE OUR INCEPTION a quarter-
profit direct food distributor to the
as volunteers, and most recently, our
century ago, Oak Valley has maintained
hungry within Stanislaus County, which
President has been serving on the
a firm commitment to supporting
provides more than 30,000 meals per
Honorary Host
human service organizations focused
month to people in need. The bank
Committee for the
on improving the lives of people in the
makes a perennial financial contribution
scouts’ annual dinner.
communities we serve.
and several Oak Valley Community Bank
In recent years, we have expanded
officers support the organization through
GIRL SCOUTS HEART
our mission of hands-on community
the foundation’s annual fundraiser.
OF CENTRAL VALLEY
involvement to support education in our
A relatively new
communities, donating several college
TURLOCK GOSPEL MISSION
recipient of financial
scholarships and providing funding
We are helping this worthwhile
support from the bank,
Then
Then
&
&
Now
Now
CHILDREN’S GUARDIAN HOME
AND CHILDREN’S CRISIS
CENTER
Oak Valley has supported this
organization for more than 15
years, continually helping the
Guardian Home, founded by
August and Elsie Martin, and its
three sister shelters achieve the
mission of providing temporary
emergency care and housing for
at-risk children in the region.
Our donations contribute to
the operation of the homes in
Oakdale, Modesto, Ceres, and
Turlock, while our Oakdale branch
manager serves on the Guardian
Home’s board of directors.
E L S I E A N D
A U G U S T M A R T I N
C
G
ELE B R ATIN
2 5
S ERVI
RS O F
A
E
C
Y
E
for local school programs on
organization realize its dream of
this local Girl Scout
an annual basis. And, to
building a year-round shelter for
council covers three
promote the health of
the homeless in Turlock, providing a
counties in our service
the business community,
five-year commitment to their Hope
area. Our donation enables
we regularly contribute to
Lives Here capital campaign. One
girls, who would otherwise
county economic initiatives
of our Turlock branch officers serves
be unable to participate,
including the Stanislaus Business
on the HLH campaign committee
to take part in this
Alliance, San Joaquin Business Council,
and conducts outreach for speaking
worthwhile organization.
Inc., Tuolumne Business Council, and
engagements at service clubs to
San Joaquin Partnership, which invest
encourage further community support.
in business and economic development
In addition, our Turlock staff periodically
to fuel job creation and generate tax
assists in the distribution of the
dollars in the region.
Mission’s newsletter.
GREATER YOSEMITE COUNCIL,
BOY SCOUTS OF AMERICA
As a frequent benefactor of the local
Boy Scout council, the bank contributes
FRIENDS OF SCOUTING
The bank and its recently passed
director, Roger Schrimp, have
always supported the Scouts.
At right, mentored by his uncle
Roger, David Schrimp carried
on the tradition of earning the
prestigious rank of Eagle Scout.
Roger was an avid advocate for
many and he will be
dearly missed.
R O G E R
S C H R I M P
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
25YEARS
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
DIRECTORS
Daniel J. Leonard
Chairman of the Board
Chairman Compensation
Committee
Chairman Investment
Committee
Winery Executive
Ronald C. Martin
Vice Chairman of the Board
Retired Bank Executive
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
Automobile Dealer
H. Randolph Holder
Media Company Executive
Michael Q. Jones
Chairman Loan Committee
General Contracting, Land
Development and General
Real Estate
Janet S. Pelton
Chairman Audit Committee
Certified Public Accountant
Danny L. Titus
Chairman CRA Committee
Real Estate and Investments
Terrance P. Withrow
Certified Public Accountant
and Farmer
INDEPENDENT AUDITORS
Moss-Adams LLP
3121 W March Ln, Ste 100
Stockton, CA 95219-2303
LEGAL COUNSEL
Matteo G. Daste
Squire Patton Boggs LLP
600 Hansen Way
Palo Alto, CA 94304
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
TRANSFER AGENT
AND REGISTRAR
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
DIRECTORS EMERITUS
Richard J. Vaughan
Agribusinessman
In Memoriam:
Roger M. Schrimp
Attorney and Cattle Rancher
Barry M. Jett
Real Estate Investor
Arne J. Knudsen
Wholesale Nurseryman
Romain J. Schonhoff
CPA and Farmer
OFFICERS
Christopher M. Courtney
President and CEO
Rick McCarty
Senior Executive Vice President
Chief Administration 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
Jeff Gall
Senior Vice President
Chief Financial Officer
Cathy Ghan
Senior Vice President
Commercial Real Estate
Jim Nemmers
Senior Vice President
Agricultural Loans
Russell Stahl
Senior Vice President
Information Technology
Gary Stephens
Senior Vice President
Senior Lending Officer
In Memorium
R o g e r M . S c h r i m p
Founder, Director, Supporter and Friend
May 26, 1941 ~ February 10, 2016
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
EA STE RN SIERR A
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
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 VALL EY
COMMUNITY BAN K
OAKDALE
125 N Third Avenue
Oakdale, CA 95361
(209) 848-BANK (2265)
SONORA-DOWNTOWN
85 Mono Way
Sonora, CA 95370
(209) 396-7720
SONORA-EAST
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
PATTERSON
20 Plaza
Patterson, CA 95363
(209) 892-5757
STOCKTON
2935 W March Lane
Stockton, CA 95219
(209) 320-7850
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, 2015
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, 2015, 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, 2016,
there were 8,088,155 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 21, 2016 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
18
18
18
19
19
20
21
22
53
53
53
53
54
55
55
56
56
56
56
57
2
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 8,078,155 are issued and
outstanding at December 31, 2015, 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.
On December 23, 2015, the Company completed its acquisition of Mother Lode Bank (“MLB”), a California state-chartered
bank headquartered in Sonora, California, in a transaction in which Mother Lode Bank was merged with and into the Bank, with the
Bank as the surviving company in the transaction. The purchase price for Mother Lode Bank was approximately $7.3 million. As of
the acquisition date, Mother Lode Bank’s total assets were $78.7 million and total deposits were $71.1 million.
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, 2015, we maintained eighteen 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. In
2015, we added a second branch in Sonora. Later in 2015, Mother Lode Bank was merged with and into the Bank, which temporarily
added two more branches in Sonora until they were eventually closed in January 2016 decreasing our total number of branches to
sixteen, after management determined that our two existing branches would be able to support our new customers. We intend to
3
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.
Business Segments
The Bank operates in two primary lines of business: Retail Banking and Commercial Banking, as described in additional detail
below. These business lines 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 87% of our loans and 87% 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 suite of technology based services and new types of
lending.
4
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, 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 joint approval of either Chief Executive Officer, Chief Credit
Officer, Senior Lending Officer and Credit Administrator. Loans for which direct and indirect borrower liability exceeds combined
administrative lending authority are referred to our Board of Directors Loan Committee.
At December 31, 2015, the Bank’s authorized legal lending limits were $12.5 million for unsecured loans plus an additional
$8.3 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, 2015 totaled $81.5 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, 2015, real estate loans constituted 84% of our loan portfolio, of which 93% were
commercial loans. This includes the real estate loans made by Mother Lode Bank prior to its merger into the Bank in 2015.
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 interest rates that float with an established index.
Our real estate portfolio is subject to certain risks, including (i) downturns in the California economy, (ii) significant interest rate
fluctuations, (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, potential 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
5
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, 2015, the aggregate loan-to-value of the entire commercial real estate portfolio was 50.8%. Historical data
suggests that the Company continues to maintain strong LTV, which has served as a cushion against precipitous reductions in real
estate values. Non-owner occupied real estate comprises 40.8% of the Company’s total commitments, as of December 31, 2015. The
loan-to-value on the non-owner occupied segment was 46.6%, as of December 31, 2015. The highest concentration by product type is
office buildings, which comprised 27.1% of total CRE loan commitments outstanding, as of December 31, 2015.
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.
Our portfolio of commercial loans is also subject to certain risks, including (i) downturns in the California economy,
(ii) significant interest rate fluctuations; 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
6
• 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,
• 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, 2015, we owned $2,958,000 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, 2015, our borrowing limit with the Federal Home Loan Bank was approximately
$198 million.
7
Internet Banking
Since August 1, 2001, we have offered Internet banking service, which allows our customers to access their deposit accounts
through the Internet. Customers are able to obtain transaction history and account information, transfer funds between accounts and
make on-line bill payments. We intend to improve and develop our Internet banking products and delivery channels as the need arises
and our resources permit.
Other Services
We also offer ATMs located at branch offices as well as seven other ATMs at various off site locations, and customer access to
an ATM network.
Marketing
Our marketing relies principally upon local advertising and promotional activity and upon personal contacts by our directors,
officers and shareholders to attract business and to acquaint potential customers with our personalized services. We emphasize a high
degree of personalized client service in order to be able to provide for each customer’s banking needs. Our marketing approach
emphasizes the advantages of dealing with an independent, locally managed and state chartered bank to meet the particular needs of
consumers, professionals and business customers in the community. Our management continually evaluates all of our banking services
with regard to their profitability and efforts and makes determinations based on these evaluations whether to continue or modify our
business plan, where appropriate.
We do not currently have any plans to develop any new lines of business, which would require a material amount of capital
investment on our part.
Competition
Regional Branch Competition. We consider our primary service area to be composed of the counties of San Joaquin,
Stanislaus, Tuolumne, Inyo and Mono Counties, 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, 2015, our primary service areas contained one hundred seventy-four (174) banking offices, with approximately
$13.8 billion in total deposits. As of June 30, 2015, we had total deposits of approximately $684 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 $122 million per office as of June 30, 2015.
In order to compete with major financial institutions in our primary service areas, we use to the fullest extent the flexibility that
our independent status permits. This includes an emphasis on specialized services, local promotional activity, and personal contacts
by our officers, directors and employees. In the event that there are customers whose needs exceed our lending limits, we may arrange
for such loans on a participation basis with other financial institutions. We also assist customers who require other services that we do
not offer by obtaining such services from correspondent banks. However, no assurance can be given that our continued efforts to
compete with other financial institutions will be successful.
In addition to other banks, our competitors include savings institutions, credit unions, and numerous non-banking institutions,
such as finance companies, leasing companies, insurance companies, brokerage firms, and investment banking firms. In recent years,
increased competition has also developed from specialized finance and non-finance companies that offer money market and mutual
funds, wholesale finance, credit card, and other consumer finance services, including on-line banking services and personal finance
8
software. Strong competition for deposit and loan products affects the rates of those products as well as the terms on which they are
offered to customers.
Other Competitive Factors. The more general competitive trends in the industry include increased consolidation and
competition. Strong competitors, other than financial institutions, have entered banking markets with focused products targeted at
highly profitable customer segments. Many of these competitors are able to compete across geographic boundaries and provide
customers increasing access to meaningful alternatives to banking services in nearly all significant products areas. Mergers between
financial institutions have placed additional pressure on banks within the industry to streamline their operations, reduce expenses, and
increase revenues to remain competitive. Competition has also intensified due to the federal and state interstate banking laws, which
permit banking organizations to expand geographically, and the California market has been particularly attractive to out-of-state
institutions. The Financial Modernization Act, which has made it possible for full affiliations to occur between banks and securities
firms, insurance companies, and other financial companies, is also expected to intensify competitive conditions.
Technological innovations have also resulted in increased competition in the financial services industry. Such innovations have,
for example, made it possible for non-depository institutions to offer customers automated transfer payment services that were
previously considered traditional banking products. In addition, many customers now expect a choice of several delivery systems and
channels, including telephone, mail, home computer, mobile devices, 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 84% of our loan portfolio held for investment at December
31, 2015 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, 2015, we had 167 employees (135 full-time employees and 32 part-time employees). None of our employees
are currently represented by a union or covered by a collective bargaining agreement. We added 9 employees as a result of the merger
of Mother Lode Bank into the Bank.
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 against financial institutions towards the end of the last decade and into the beginning of this decade, the level of
such actions compared to the peak in 2010 has decreased.
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.
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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.
Fair lending and truth in lending laws to ensure equal access to credit and to protect consumers in credit transactions.
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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.
Many of the regulations to implement the Dodd-Frank Act have not yet been published for comment or adopted in final form and
a number of the regulations that have been adopted in final form will take effect over several years, making it difficult to anticipate the
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overall financial impact on the Company and the Bank, our customers or the financial industry more generally. Individually and
collectively, these 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”, 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 or 2015 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
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;
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(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 2014, 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, 2015 and 2014, the Bank’s Total Risk-Based Capital Ratio was 12.2% and
14.5%, and our Tier 1 Risk-Based Capital Ratio was 11.1% and 13.2%, respectively. As of December 31, 2015, the Bank’s Common
Equity Tier 1 Risk-Based Capital Ratio was 11.1%.
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, 2015 and 2014, the Bank’s Leverage Capital Ratios were 9.1% and 10.2%,
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 2016.
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,
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• 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.
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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
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.
Sonora, 85 Mono Way
* The Company owns this property.
Square
Footage
Lease
Expiration Date
Lease
Extension Options
n/a*
n/a*
two, 5-year term extensions
one, 5-year term extensions
n/a*
n/a*
one, 5-year term extensions
one, 5-year term extensions
one, 5-year term extensions
n/a*
two, 5-year term extensions
No remaining extensions
two, 5-year term extensions
n/a*
one, 5-year term extensions
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
4,000
n/a*
n/a*
4/2018
3/2021
n/a*
n/a*
8/2019
3/2021
1/2020
n/a*
4/2021
12/2020
12/2022
n/a*
5/2021
7/2024
12/2030
18
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, 2015 and 2014, 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, 2014
June 30, 2014
September 30, 2014
December 31, 2014
March 31, 2015
June 30, 2015
September 30, 2015
December 31, 2015
Closing Sale Price
High
12.48
10.22
10.50
10.75
11.75
10.50
10.40
11.35
$
$
$
$
$
$
$
$
Low
8.25
9.42
9.44
9.47
8.87
8.99
9.29
9.26
$
$
$
$
$
$
$
$
On March 18, 2016, the closing price of our common stock was $9.61 per share; and there were approximately 422 shareholders
of record of the common stock and 8,088,155 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 year
ended December 31, 2013. 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. During 2015, two cash dividends were paid, a $0.10 per common share dividend in January and a
$0.11 per common share dividend in July.
Equity Compensation Plan Information
The following table provides information as of December 31, 2015 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”).
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)
33,000
$
0
33,000
$
12.13
0
12.13
1,312,820
0
1,312,820
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, 2015 and 2014 and results of operations for each of the years in
the two-year period ended December 31, 2015 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 our market presence through growth in our loan portfolio which is primarily funded by steady core deposit growth.
As of December 31, 2015, we had approximately $897 million in total assets, $541 million in total gross loans, and $815 million
in total deposits. These figures include $79 million in total assets, $43 million in total net loans, and $71 million in total deposits of
Mother Lode Bank that were brought in upon the merger of Mother Lode Bank into the Bank.
We believe the following were key indicators of our performance during 2015:
• our total assets increased to $897 million at the end of 2015, an increase of 19.7%, from $750 million at the end of 2014.
The acquisition of Mother Lode Bank is attributable for $79 million or 53% of the 2015 growth.
• our total deposits increased to $815 million at the end of 2015, an increase of 21.7%, from $670 million at the end of 2014.
The acquisition of Mother Lode Bank is attributable for $71 million or 49% of the 2015 growth.
• our total net loans increased to $530 million at the end of 2015, an increase of 18.8%, from $446 million at the end of 2014.
The acquisition of Mother Lode Bank is attributable for $43 million or 51% of the 2015 growth.
• net interest income increased $116,000 or 0.5% in 2015 compared to 2014, mainly as a result of growth of our loan and
investment portfolios. The acquisition of Mother Lode Bank is attributable for $57,000 or 49% of the 2015 growth.
• reversal of provision for loan losses decreased $1.8 million or 93.3% to a reversal of provision of $125,000 compared to
$1.9 million in 2014, due to a loan recovery as described below.
• our ratio of total non-performing loans to total loans increased to 1.22% at December 31, 2015 from 1.03% at
December 31, 2014. Non-performing loans acquired from Mother Lode Bank were 0.62% of the acquired total loans.
22
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.
• total noninterest income increased to $4.1 million in 2015, an increase of 9.1%, from $3.8 million in 2014, which is mainly
attributable to our growing deposit account base. The acquisition of Mother Lode Bank is attributable for $7,000 or 2% of
the 2015 growth.
• total noninterest expense increased from $20.2 million in 2014 to $22.7 million in 2015, primarily due to the merger related
expenses of $1.97 million associated with the acquisition of Mother Lode Bank.
These items, as well as other factors, such as the acquisition of Mother Lode Bank, contributed to the decrease in net
income for 2015 to $4.91 million from $7.12 million in 2014, which translates into $0.61 per diluted share in 2015 as compared to
$0.89 per diluted share in 2014.
Over the past several years, our network of branches and loan production offices have expanded geographically. We currently
maintain sixteen 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.
2016 Outlook
As we begin our strategic business plan for 2016, we remained focused on relationship based expansion throughout our
market area. We will continue to focus on increasing our loan-to-deposit ratio to expand our net interest margin, while attempting to
control expenses and credit losses.
The decline of market interest rates to historic lows over the past years, has had a negative impact on net interest income
despite the slight increase recognized during 2015, which was primarily due to growth of earning assets. We expect the low interest
rate environment could have a similar impact in 2016 unless interest rates begin to increase significantly. The potential compression
of net interest income and net interest margin would be a likely outcome if interest rates remain static or decline, given that our
balance sheet is asset sensitive to interest rate changes primarily due to the number of variable rate loans and a high level of interest-
earning cash balances. This could in turn result in further decrease on the yield of earning assets compared to the cost of deposits and
other funds, which have already reached a floor which cannot reasonably be further reduced.
Recent trends in our economy prompted the FOMC to increase the target federal funds by 0.25% in December 2015 and it’s
likely that interest rates may continue to rise during 2016 at a moderate pace. Given our asset sensitive balance sheet, we expect a
favorable impact on net interest income from interest rate increases. 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 offsetting any gains to 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 2016, management remains focused on the above challenges and opportunities and other factors affecting the business
similar to the factors driving 2015 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.
23
• facilitates the acquisition of related businesses as opportunities arise.
• improves our ability to diversify.
• enhances our ability to remain competitive in the future with other companies in the financial services industry that are
organized in a holding company structure.
• enhances our ability to raise capital to support growth.
The financial statements and discussion thereof contained in this report for periods subsequent to the reorganization relate to
the consolidated financial statements of Oak Valley Bancorp.
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
24
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.
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,
25
• lending and management staff,
• lending policies and procedures,
• economic and business conditions, and
• other external factors.
Our management estimates the probable effect of such conditions based on our judgment, experience and known or
anticipated trends. Such estimation may be reflected as an additional allowance to each group of loans, if necessary. Management
reviews these conditions with our senior credit officers. To the extent that any of these conditions is evidenced by a specifically
identifiable problem credit or portfolio segment as of the evaluation date, management’s estimate of the effect of such condition may
be reflected as a specific allowance applicable to such credit or portfolio segment. Where any of these conditions is not evidenced by a
specific, identifiable problem credit or portfolio segment as of the evaluation date, management’s evaluation of the inherent loss
related to such condition is reflected in the unallocated allowance.
Central to our credit risk management and our assessment of appropriate loss allowance is our loan risk rating system.
Under this system, the originating credit officer assigns borrowers an initial risk rating based on a thorough analysis of each
borrower’s financial capacity in conjunction with industry and economic trends. Approvals are made based upon the amount of
inherent credit risk specific to the transaction and are reviewed for appropriateness by senior line and credit administration personnel.
Credits are monitored by line and credit administration personnel for deterioration in a borrower’s financial condition which may
impact the ability of the borrower to perform under the contract. Although management has allocated a portion of the allowance to
specific loans, specific loan pools, and off-balance sheet credit exposures (which are reported separately as part of other liabilities), the
adequacy of the allowance is considered in its entirety.
It is the policy of management to maintain the allowance for loan losses at a level adequate for risks inherent in the overall
loan portfolio, however, the loan portfolio can be adversely affected if the state of California’s economic conditions and its real estate
market in our general market area were to further deteriorate or weaken. Additionally, further weakness of a prolonged nature in the
agricultural and general economy would have a negative impact on the local market. The effect of such economic events, although
uncertain and unpredictable at this time, could result in an increase in the levels of nonperforming loans and additional loan losses,
which could adversely affect our future growth and profitability. No assurance of the level of predicted credit losses can be given with
any certainty.
Non-Accrual Loan Policy
Interest on loans is credited to income as earned and is accrued only if deemed collectible. Accrual of interest is
discontinued when a loan is over 90 days delinquent or if management believes that collection is highly uncertain. Generally,
payments received on nonaccrual loans are recorded as principal reductions. Interest income is recognized after all principal has been
repaid or an improvement in the condition of the loan has occurred that would warrant resumption of interest accruals.
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 2011.
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
26
value on a non-recurring basis, such as certain impaired loans held for investment and securities held to maturity that are other-than-
temporarily impaired. These non-recurring fair value adjustments typically involve write-downs of individual assets due to application
of lower-of-cost or market accounting.
We have established and documented a process for determining fair value. We maximize the use of observable inputs and
minimize the use of unobservable inputs when developing fair value measurements. Whenever there is no readily available market
data, management uses its best estimate and assumptions in determining fair value, but these estimates involve inherent uncertainties
and the application of management's judgment. As a result, if other assumptions had been used, our recorded earnings or disclosures
could have been materially different from those reflected in these financial statements. For detailed information on our use of fair
value measurements and our related valuation methodologies, see Note 16 to the Consolidated Financial Statements in Item 8 of this
Form 10-K.
Recently Issued Accounting Standards
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 did not
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 did not 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 adoption of ASU No. 2014-14 did not have a
material impact on the Company's consolidated financial statements.
In September, 2015, the FASB issued ASU No. 2015-16, Simplifying the Accounting for Measurement Period Adjustments
(Topic 805). This ASU eliminates the requirement to restate prior period financial statements for measurement period adjustments to
assets acquired and liabilities assumed in a business combination. The new guidance under this update requires the cumulative impact
of measurement period adjustments be recognized in the period the adjustment is determined. This update does not change what
constitutes a measurement period adjustment, nor does it change the length of the measurement period. The new standard is effective
for interim annual periods beginning after December 15, 2015 and should be applied prospectively to measurement period adjustments
that occur after the effective date. The adoption of this update did not have a material impact on the Company’s consolidated financial
27
statements.
In January 2016, the FASB issued ASU No. 2016-01, Financial Instruments - Overall (Subtopic 825-10): Recognition and
Measurement of Financial Assets and Financial Liabilities. The amendments in this ASU make improvements to GAAP related to
financial instruments that include the following as applicable to us.
• Equity investments, except for those accounted for under the equity method of accounting or those that result in consolidation
of the investee, are required to be measured at fair value with changes in fair value recognized in net income. However, an
entity may choose to measure equity investments that do not have readily determinable fair values at cost minus impairment,
if any, plus or minus changes resulting from observable price changes in orderly transactions for the identical or a similar
investment of the same issuer.
• Simplifies the impairment assessment of equity investments without readily determinable fair values by requiring a
qualitative assessment to identify impairment - if impairment exists, this requires measuring the investment at fair value.
• Eliminates the requirement for public companies to disclose the method(s) and significant assumptions used to estimate the
fair value that is currently required to be disclosed for financial instruments measured at amortized cost on the balance sheet.
• Public companies will be required to use the exit price notion when measuring the fair value of financial instruments for
disclosure purposes.
• Requires separate presentation of financial assets and financial liabilities by measurement category and form of financial
asset on the balance sheet or the accompanying notes to the financial statements.
• The reporting entity should evaluate the need for a valuation allowance on a deferred tax asset related to available-for-sale
securities in combination with the entity's other deferred tax assets.
ASU 2016-01 is effective for public business entities for fiscal years beginning after December 15, 2017, including interim
periods within those fiscal years. This ASU will impact our financial statement disclosures, however, we do not expect this ASU to
have a material impact on our financial condition or results of operations.
In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842). This ASU was issued to increase transparency and
comparability among organizations by recognizing lease assets and lease liabilities, including leases classified as operating leases
under previous GAAP, on the balance sheet and requiring additional disclosures of key information about leasing arrangements. ASU
2016-02 is effective for annual periods, including interim periods within those annual periods beginning after December 15, 2018 and
requires a modified retrospective approach to adoption. Early application of the amendments is permitted. We are currently evaluating
the provisions of this ASU and will be monitoring developments and additional guidance to determine the potential outcome the
amendments will have on our financial condition and results of operations.
Results of Operations
The Company earns income from two primary sources. The first is net interest income, which is interest income generated by
earning assets less interest expense on interest-bearing liabilities. The second is noninterest income, which primarily consists of
deposit service charges and fees, the increase in cash surrender value of life insurance 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 for the year ended December 31, 2015 of $4,908,000 or $0.61 per diluted share compared to
$7,122,000 or $0.89 per diluted share for the year ended December 31, 2014. The decrease in net income for the year ended
December 31, 2015 was primarily due to an increase of $2,441,000 in non-interest expense, mainly from the $1,971,000 in merger
related expenses and an increase in overhead from the new Tracy and Sonora branches that were opened in December 2014 and
December 2015, respectively. Contributing to the net income decrease in 2015 was a decrease of $1,752,000 in reversals of provision
for loan losses. Partially offsetting these factors was an increase of $116,000 in net interest income, an increase in non-interest income
of $343,000 and a decrease in income tax provision of $1,520,000 due to lower levels of pre-tax earnings.
28
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
As of and for the years ended December 31,
2015
2014
2013
$
4,908
$
7,122
$
5,819
$
$
$
0.61
$
0.61
6.41 %
0.63 %
34.54 %
68.07 %
0.90
0.89
$
$
10.07 %
1.03 %
18.54 %
67.03 %
0.75
0.74
9.07 %
0.90 %
13.51 %
65.65 %
$
$
$
$
9.69
897,038
541,032
814,691
$
$
$
$
9.29
749,665
454,471
669,581
$
$
$
$
8.14
671,853
419,438
602,633
65.10 %
66.68 %
68.23 %
Net Interest Income and Net Interest Margin
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)
Assets:
Earning assets:
Distribution, Yield and Rate Analysis of Net Income
For the Years Ended December 31,
2015
Interest
Income/
Expense
Avg
Rate/
Yield
Average
Balance
2014
Interest
Income/
Expense
Avg
Rate/
Yield
Average
Balance
Gross loans (1) (2)
$ 466,509
$ 22,055
4.73%
$ 430,448
$ 22,018
Securities of U.S. government agencies
Other investment securities (2)
Federal funds sold
Interest-earning deposits
Total interest-earning assets
Total noninterest earning assets
Total Assets
Liabilities and Shareholders' Equity:
Interest-bearing liabilities:
Business Interest DDA
Money market deposits
NOW deposits
Savings deposits
Time certificates over $250,000
Other time deposits
Other borrowings
Total interest-bearing liabilities
Noninterest-bearing liabilities:
Noninterest-bearing deposits
Other liabilities
Total noninterest-bearing liabilities
Shareholders' equity
8,287
117,756
13,842
111,790
141
1.70%
4,402
3.74%
34
304
0.25%
0.27%
11,139
110,261
16,426
65,377
212
4,248
38
179
5.12%
1.90%
3.85%
0.23%
0.27%
718,184
26,936
3.75%
633,651
26,695
4.21%
57,356
$ 775,540
20,587
266,856
112,472
48,130
14,564
32,936
12
59,367
$ 693,018
8
0.04%
283
0.11%
77
55
26
0.07%
0.11%
0.18%
166
0.50%
0
0.00%
16,338
238,736
97,080
39,820
10,141
40,831
2
7
277
69
43
32
219
0
0.04%
0.12%
0.07%
0.11%
0.32%
0.54%
0.08%
495,557
615
0.12%
442,948
647
0.15%
199,446
3,999
203,445
76,538
175,329
4,047
179,376
70,694
Total liabilities and shareholders' equity
$ 775,540
$ 693,018
Net interest income
Net interest spread (3)
Net interest margin (4)
$ 26,321
$ 26,048
3.63%
3.66%
4.06%
4.11%
(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 $273,000 or 1.1% to $26,321,000 for the year ended
December 31, 2015, compared to $26,048,000 in 2014. Net interest spread and net interest margin were 3.63% and 3.66%,
respectively, for the year ended December 31, 2015, compared to 4.06% and 4.11%, respectively, for the year ended December 31,
2014. 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 from 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 3 basis points in 2015 compared to 2014, 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 $24,117,000 in 2015 compared to 2014, further reducing our cost of funds.
Our earning asset yield decreased 46 basis points in 2015 compared to 2014. The yield on loans recognized a reduction of 39
basis points for 2015 compared to 2014, 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 increased average balances of $36,061,000 and $4,643,000, respectively, in 2015 as compared
to 2014.
Changes in volume resulted in an increase in net interest income (FTE) of $2,174,000 for the year of 2015 compared to the year
2014, and changes in interest rates and the mix resulted in a decrease in net interest income (FTE) of $1,901,000 for the year 2015
versus the year 2014. 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 until December 2015
when the FOMC increased by 0.25% to a range of 0.25% to 0.50%.
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,
2015 vs. 2014
Increases (Decreases)
Due to Change In
For the Year Ended December 31,
2014 vs. 2013
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 over $250,000
Other time deposits
Other borrowings
Total interest expense
$
1,845 $
(1,808)
$
(54)
289
(6)
127
(17)
(135)
2
(2)
2,201
(1,960)
$
2 $
(1)
$
33
11
9
14
(42)
0
27
(27)
(3)
3
(20)
(11)
0
(59)
Change in net interest income
$
2,174 $
(1,901)
$
37
(71)
154
(4)
125
241
1
6
8
12
(6)
(53)
0
(32)
273
$
1,807 $
(1,202)
$
(24)
324
13
(38)
35
63
0
6
2,082
(1,098)
$
4 $
(10)
$
0
14
7
2
(34)
0
(7)
(47)
(28)
(15)
(15)
(59)
0
(174)
605
11
387
13
(32)
984
(6)
(47)
(14)
(8)
(13)
(93)
0
(181)
$
2,089 $
(924)
$
1,165
(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 sale of the collateral property and subsequent pay off of an impaired loan and noted trends of improved credit quality,
the Company recorded a reversal loan loss provisions of $125,000 for the year ended December 31, 2015 as compared to reversal of
loan loss provisions of $1,877,000 resulting from a loan settlement of $2,923,000 for the year ended December 31, 2014.
Nonperforming loans were $5,816,000 at December 31, 2015 and $4,700,000 at December 31, 2014, or 1.07% and 1.03%,
32
respectively, of total loans. Nonperforming loans are primarily in nonperforming real estate construction and development loans. The
allowance for loan losses was $7,356,000 and $7,534,000 at December 31, 2015 and 2014, or 1.36% and 1.66%, respectively, of total
loans. The decrease in the allowance for loan loasses as a percentage of total loans is due to the $42,831,000 in loans acquired from
Mother Lode Bank that are marked to fair value according to purchase accounting rules, and therefore do not require an allowance for
loan loss at the time of acquisition. Net charge-offs totaled $53,000 in 2015, compared to net recoveries of $1,752,000 in 2014. The
increase of the net charge-offs in 2015 compared to 2014 was due to the $2,923,000 loan settlement which resulted in the recovery of
$1,877,000 in 2014.
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 $4,107,000 for the year ended December 31, 2015, compared to $3,764,000 for the year 2014. In 2015,
other income increased by $465,000, which was attributable to the elimination of our checking rewards program in December 2014,
increases in FHLB stock dividends and debit card interchange fee income of $195,000, $137,000 and $96,000, respectively,
compared to 2014. Mortgage commissions have decreased by $9,000 or 5.7% for the year 2015, as compared to 2014, as a result of
the slow demand for home purchases and refinancing. Service charge income decreased to $1,240,000 for the year 2015 compared to
$1,346,000 for the year 2014, as a result of the decrease in overdraft activity and corresponding overdraft fees, despite an increase in
the aggregate number of transaction deposit accounts. Earnings on cash surrender value of life insurance and gains on called
securities were relatively flat compared to the prior year, as there were no changes to life insurance policies and we recognized
comparable one-time gains from called securities. The Mother Lode Bank had a minimal impact of $7,000 on the non-interest income
recognized in 2015, as the Company owned the acquired loans and deposits for the final eight days of 2015. 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)
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
For the Years Ended December 31,
2015
2014
(Amount)
(%)
(Amount)
(%)
1,240
429
148
206
2,084
4,107
30.2 % $
10.5 %
3.6 %
5.0 %
50.7 %
100.0 % $
1,346
433
157
209
1,619
3,764
35.8 %
11.5 %
4.2 %
5.5 %
43.0 %
100.0 %
775,540
$
693,018
0.5 %
0.5 %
$
$
$
33
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,
2015
2014
(Amount)
(%)
(Amount)
(%)
11,717
3,009
1,466
506
5,977
22,675
51.7 % $
13.3 %
6.5 %
2.2 %
26.3 %
11,120
2,902
1,336
459
4,417
100.0 % $
20,234
55.0 %
14.3 %
6.6 %
2.3 %
21.8 %
100.0 %
775,540
$
693,018
2.9 %
2.9 %
$
$
$
Noninterest expense was $22,675,000 for the year ended December 31, 2015, an increase of $2,441,000 or 12.1% compared
to $20,234,000 for the year ended 2014. The acquisition of Mother Lode Bank resulted in merger related expenses of $1,971,000
recorded in 2015.
Data processing costs increased in 2015 over 2014 by $130,000, reflecting the additional costs related to the increased
number of deposit accounts and the expansion of our products and services. We expect higher data processing costs in 2016 as a
result of the servicing costs on the acquired deposits and loans from Mother Lode Bank, but we anticipate cost efficiencies to be
gained upon the completion of the data systems conversion scheduled for the second quarter of 2016.
Other operating expenses increased in 2015 by $1,560,000 compared to 2014, primarily due to the $1,971,000 in one-time
merger related expenses associated with the Mother Lode Bank acquisition. We expect our core operating expenses to increase in
2016 as we continue to integrate the operations of Mother Lode Bank into those of the Bank.
FDIC and DBO (California Department of Business Oversight) regulatory assessments increased by $47,000 to $506,000 in
2015 compared to $459,000 in 2014. The initial base assessment rate for financial institutions varies based on the overall risk profile
of the institution as defined by the FDIC. Our risk profile and corresponding assessment rate has remained stable, however the
increase in 2015 is the result of the higher deposit balances in 2015, as the FDIC assessment rates are applied to average quarterly total
liabilities as the primary basis. We expect further increases in 2016 due to the cost to insure the acquired deposits from Mother Lode
Bank.
Salaries and employee benefits increased by $597,000 in 2015 to $11,717,000 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 10 as of
December 31, 2015 compared to last year, which resulted in increased salary expense and group medical insurance benefits. Much of
this increase was due to the impact of the Tracy branch opened in December 2014, as well as the added cost of the second Sonora
branch opened in December 2015. The staffing increase was a result of the nine employees that were hired from Mother Lode Bank,
which we expect will result in higher expenses in 2016.
Occupancy expense realized an increase of $107,000 in 2015 compared to the prior year, primarily from rent and other
overhead expenses from the new Tracy and Sonora branches. The Mother Lode acquisition will have minimal impact on occupancy
expense in 2016, as both acquired branches were closed in January 2016.
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.
34
Provision for Income Taxes
We reported a provision for income taxes of $2,054,000 and $3,574,000 for the years 2015 and 2014, respectively. The effective
income tax rate on income from continuing operations was 29.5% for the year ended December 31, 2015 compared to 33.4% for the
year 2014. 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 2015 as compared to 2014 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 2015 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 $897,038,000 at December 31, 2015 compared to $749,665,000 at December 31, 2014, an
increase of $147,373,000 or 19.7%. Net loans increased $83,902,000, investments increased $10,269,000, bank premises and
equipment increased $211,000 and interest receivable and other assets increased $5,494,000, while cash and cash equivalents
increased $46,315,000 for the year ended December 31, 2015 as compared to December 31, 2014. Included in these balance sheet
growth totals was the acquisition of Mother Lode Bank which added $78,717,000 in assets, $42,831,000 in net loans, $23,500,000 in
cash and $4,051,000 in interest receivable and other assets.
Loans gross of the allowance for loan losses and deferred fees were $541,032,000 at December 31, 2015, compared to
$454,471,000 at December 31, 2014, an increase of $86,561,000 or 19.1%. The increase was primarily due to an increase of
$64,649,000 or 18.0% in commercial real estate loans, an increase of $9,725,000 or 18.0% in commercial and industrial loans, an
increase of $7,093,000 or 27.0% in consumer loans and consumer residential loans and an increase of $5,094,000 or 32.3% in
agriculture loans. Included in these growth totals is $45,962,000 in gross loans acquired from Mother Lode Bank. The composition
of the loan portfolio categories remained relatively unchanged as a percentage of total loans, with commercial real estate comprising
78% and 79% of the loan portfolio at December 31, 2015 and 2014, respectively.
Deposits increased $145,110,000 or 21.7% to $814,691,000 at December 31, 2015 compared to $669,581,000 at December 31,
2014. Time deposits increased by $2,178,000, while Demand, NOW, Money Market and Savings increased by $53,410,000,
$22,300,000, $35,007,000 and $32,215,000, respectively, as of December 31, 2015 as compared to December 31, 2014. Included in
these growth totals is $71,125,000 in total deposits acquired from Mother Lode Bank.
There were no short-term borrowing or long-term debt outstanding balances at December 31, 2015 and 2014. The Company uses
short-term borrowings, primarily short-term FHLB advances, to fund short-term liquidity needs and manage net interest margin.
Equity increased $3,222,000 or 4.3% to $78,263,000 at December 31, 2015, compared to $75,041,000 at December 31, 2014. The
Company did not issue any stock to Mother Lode Bank shareholders as it was paid 100% in cash, and therefore there was no impact to
equity other than the merger related expenses and exclusions of goodwill and intangibles, which are excluded from tangible equity.
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, 2015, and 2014, we had $15,825,000 and $12,210,000, respectively, in federal funds sold.
35
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 $10,269,000, or 8.5%, to $131,546,000 at December 31, 2015, compared to
holdings of $121,277,000 at December 31, 2014. Total investment securities as a percentage of total assets decreased to 14.7% as of
December 31, 2015 compared to 16.2% at December 31, 2014. As of December 31, 2015, $65,902,000 of the investment securities
were pledged to secure public deposits.
As of December 31, 2015, the total unrealized loss on securities that were in a loss position for less than 12 continuous
months was $352,000 with an aggregate fair value of $33,307,000. The total unrealized loss on securities that were in a loss position
for greater than 12 continuous months was $433,000 with an aggregate fair value of $15,349,000.
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:
Investment Securities Portfolio
December 31, 2015
December 31, 2014
December 31, 2013
Amortized
Cost
Market
Value
Amortized
Cost
Market
Value
Amortized
Cost
Market
Value
U.S. agencies
$
31,815
$
32,868
$
40,316
$
41,930
$
52,540
$
53,116
Collateralized mortgage
obligations
Municipal securities
SBA Pools
Corporate debt
Asset backed Securities
Mutual fund
2,729
66,535
811
13,497
10,321
3,172
2,719
68,586
806
13,420
10,138
3,009
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
9,781
40,269
1,081
4,697
4,825
5,858
2,975
5,856
2,818
Total investment securities
$
128,880
$
131,546
$
118,103
$
121,277
$
119,042
$
117,746
At December 31, 2015, there was one U.S. agency, one collateralized mortgage obligation, 6 municipalities, two SBA
pools, three asset backed security, and one mutual fund that comprised the total securities in an unrealized loss position for greater
than 12 months and 4 U.S. agencies, 9 municipalities, seven corporate debts, and three 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, 2015, we did not have any investment
securities that constituted 10% or more of the stockholders’ equity of any third party issuer.
36
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, 2015:
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
$
4,999
1.02 % $
8,140
4.24 % $
1,648
3.56 % $ 17,028
2.75 % $
31,815
2.90 %
Collateralized mortgage obligations
0
0.00 %
0
0.00 %
0
0.00 %
2,524
5.30 %
27,841
2.57 %
32,037
2.97 %
2,729
4,133
2.06 %
3.93 %
2,729
2.06 %
66,535
2.95 %
Municipalities
SBA Pools
Corporate debt
Asset Backed Securities
Mutual Fund
0
2,000
0
0
0.00 %
2.24 %
0.00 %
0.00 %
0
0
0
0.00 %
0
0.00 %
811
0.58 %
811
0.58 %
4,172
2.36 %
4,825
2.58 %
2,500
4.00 %
13,497
2.72 %
0.00 %
9,869
2.33 %
452
1.42 %
10,321
2.29 %
0.00 %
0
0.00 %
3,172
0.00 %
3,172
0.00 %
2.44 %
T otal Investment Securities
$
9,523
1.94 % $ 40,153
2.89 % $ 48,379
2.08 % $ 30,825
2.58 % $ 128,880
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.
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
$
423,047 $
358,398 $
332,874 $
316,075 $
330,045
2015
2014
2013
2012
2011
Commercial and industrial
Consumer
Consumer residential
Agriculture
Unearned income
63,776
774
32,588
20,847
(3,282)
54,051
805
25,464
15,753
(446)
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)
Total Loans, net of unearned income
$
537,750 $
454,025 $
418,815 $
390,387 $
395,569
Participation loans sold and serviced
by the Bank
$
19,848 $
16,243 $
11,733 $
8,045 $
7,929
Commercial real estate
Commercial and industrial
Consumer
Consumer residential
Agriculture
Unearned income
Total Loans, net of unearned income
78.7%
11.9%
0.1%
6.1%
3.9%
-0.6%
100.0%
79.5%
11.6%
0.2%
6.1%
2.7%
-0.1%
100.0%
80.9%
9.4%
0.3%
6.6%
3.0%
-0.2%
100.0%
83.5%
8.1%
0.3%
6.0%
2.3%
-0.2%
100.0%
78.9%
11.9%
0.2%
5.6%
3.5%
-0.1%
100.0%
37
Commercial real estate loans increased $64,649,000 in 2015 as compared to 2014, as a result of the increased demand by
qualified borrowers in our serving area. The acquisition of Mother Lode Bank was attributable for $22,089,000 of the commercial real
estate loan growth. Of the commercial real estate loans at December 31, 2015, 44.3% are non-owner occupied and 55.7% 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 $9,725,000 in 2015 as compared to 2014, as a result of the $13,667,000 in
commercial and industrial loans acquired from Mother Lode Bank. 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.
The following table summarizes our commercial real estate loan portfolio by the geographic location in which the property
is located as of December 31, 2015 and 2014:
Commercial Real Estate Loans Outstanding by Geographic Location
(Dollars in Thousands)
December 31, 2015
December 31, 2014
Commercial real estate loans by
geographic location (County)
Stanislaus
San Joaquin
Tuolumne
Fresno
Merced
Alameda
Madera
Sacramento
San Luis Obispo
Mono
Calaveras
Sonoma
Inyo
Contra Costa
Marin
Santa Clara
Butte
Solano
Other
Total
Amount
$
141,694
91,323
36,733
19,836
13,903
13,030
10,233
9,397
8,911
8,060
7,474
6,898
6,511
5,756
5,681
4,328
4,319
4,168
$
24,792
423,047
% of
Commercial
Real Estate
Loans
33.5%
21.6%
8.7%
4.7%
3.3%
3.1%
2.4%
2.2%
2.1%
1.9%
1.8%
1.6%
1.5%
1.4%
1.3%
1.0%
1.0%
1.0%
5.9%
Amount
$
142,293
% of
Commercial
Real Estate
Loans
39.7%
18.8%
6.9%
4.3%
3.2%
5.4%
2.1%
1.2%
2.5%
2.4%
1.1%
1.7%
0.9%
1.7%
1.9%
0.9%
1.1%
1.2%
3.0%
100.0%
67,486
24,854
15,566
11,384
19,216
7,452
4,348
9,098
8,543
3,863
5,988
3,295
5,915
6,749
3,393
3,796
4,318
10,841
358,398
100.0%
$
38
Construction and land loans are classified as commercial real estate loans and increased $9.8 million in 2015 as compared to
2014. The table below shows an analysis of construction loans by type and location. Non-owner-occupied land loans of $10.2 million
at December 31, 2015 included loans for lands specified for commercial development of $8.8 million and for residential development
of $1.4 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, 2015
December 31, 2014
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
Fresno
San Joaquin
Mono
Los Angeles
Tuolumne
San Bernardino
Nevada
Calaveras
Contra Costa
Amador
Inyo
Merced
Other
Total
% of
Construction
and Land Loans
6.7%
3.6%
37.3%
17.8%
34.6%
$
100.0%
$
Amount
1,985
1,056
11,043
5,279
10,239
29,602
% of
Construction
and Land Loans
0.0%
1.8%
5.3%
39.3%
53.6%
100.0%
Amount
0
354
1,045
7,782
10,620
19,801
$
% of
Construction
and Land Loans
36.3%
16.8%
8.8%
7.9%
7.3%
6.9%
6.1%
3.5%
2.2%
1.3%
1.0%
0.4%
0.0%
1.5%
100.0%
$
Amount
10,731
4,974
2,593
2,350
2,150
2,031
1,822
1,051
655
370
309
113
0
453
29,602
% of
Construction
and Land Loans
58.0%
0.0%
4.1%
13.6%
0.0%
0.0%
0.0%
0.0%
0.0%
1.9%
0.0%
0.9%
21.5%
0.0%
100.0%
Amount
11,490
0
815
2,700
0
0
0
0
0
370
0
164
4,254
8
19,801
$
$
$
$
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, 2015. 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
Total loans, net of unearned income
Loans with variable (floating) interest rates
Loans with predetermined (fixed) interest rates
Loan Maturities and Repricing Schedule
At December 31, 2015
Within
One Year
After One
But Within
Five Years
After
Five Years
Total
$
$
$
$
81,785
39,847
309
1,479
18,366
(860)
140,926
129,724
11,202
$
219,008
$
122,254
$
423,047
17,907
412
9,863
1,929
(1,511)
247,608
202,923
44,685
6,022
53
21,246
552
(911)
149,216
80,769
68,446
$
$
$
$
$
$
63,776
774
32,588
20,847
(3,282)
537,750
413,416
124,334
$
$
$
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 $5.82 million at December 31, 2015, as compared to $4.70 million at December
31, 2014, $2.34 million at December 31, 2013, $6.92 million at December 31, 2012 and $7.23 million at December 31, 2011. The
40
ratio of nonperforming loans over total loans was 1.07%, 1.03%, 0.56%, 1.77% and 1.83% at December 31, 2015, 2014, 2013, 2012
and 2011, respectively.
In addition, the Company held five OREO properties with outstanding balances of approximately $2.1 million as of
December 31, 2015, 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. One of these properties was
acquired from Mother Lode Bank with a balance of $275,000. The Company held three of these same properties with balances of
approximately $884,000 and $916,000 as of December 31, 2014 and 2013, respectively. The Company held only the one zero-balance
property as of December 31, 2012 as compared to two properties with a market value of $0.2 million as of December 31, 2011.
Management believes that the reserve provided for nonperforming loans, together with the tangible collateral, were
adequate as of December 31, 2015. See “Allowance for Loan Losses” below for further discussion. Except as disclosed above, as of
December 31, 2015, 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,
2015
2014
2013
2012
2011
Nonaccrual loans(1)
Commercial real estate
Commercial and industrial
Consumer
Consumer residential
Agriculture
Total
Loans 90 days or more past due and still
accruing (as to principal or interest):
Commercial real estate
Commercial and industrial
Consumer
Consumer residential
Agriculture
Total
$
2,790
$
4,363
$
2,322
$
5,891
$
7,129
$
$
322
0
0
2704
5,816
0
0
0
0
0
0
337
0
0
0
18
0
0
0
21
0
1011
0
104
0
0
0
$
4,700
$
2,340
$
6,923
$
7,233
$
$
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
5,816
4,700
2,340
6,923
7,233
Other real estate owned
Total nonperforming assets
2,066
884
916
0
244
$
7,882
$
5,584
$
3,256
$
6,923
$
7,477
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
$
5,816
$
4,700
$
2,340
$
6,923
$
7,233
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
1.07%
1.45%
1.03%
1.23%
0.56%
0.77%
1.77%
1.77%
1.83%
1.89%
126.48%
160.30%
327.37%
115.19%
119.03%
(1) During the fiscal year ended December 31, 2015 and 2014, no interest income related to these loans was included in net income
while on nonaccrual status. Additional interest income of approximately $376,000 and $321,000 would have been recorded during the
year ended December 31, 2015 and 2014, 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 2015, amid signs of credit quality improvement, the allowance for
loan losses decreased by 2.4%, or $178,000, to $7.36 million at December 31, 2015 as compared with $7.53 million at December 31,
2014. Such allowances were $7.66 million, $7.98 million and $8.61 million at December 31, 2013, 2012 and 2011, respectively. In
2015, the allowance for loan losses as a percentage of total loans decreased corresponding to our improved credit quality, as reflected
in the ratios of 1.36%, 1.66%, 1.83%, 2.04% and 2.17%, at the end of 2015, 2014, 2013, 2012 and 2011, respectively. The decrease to
1.36% at the end of 2015 is due in part to the acquisition of $42,831,000 in loans from Mother Lode Bank which are recorded at fair
value and therefore do not require a loan loss reserve. Based on the current conditions of the loan portfolio, management believes that
the $7.36 million allowance for loan losses at December 31, 2015 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 2015, the Company recognized net loan
charge-offs of $53,000 as compared to net loan recoveries of $1,752,000 in 2014, 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 and $1,146,000 in 2013, 2012
and 2011, 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, 2015 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, 2015, 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,
2014
2013
2015
$
$
722
$
993
$
4,423
2,211
7,356
$
4,388
2,153
7,534
$
392
5,362
1,905
7,659
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 $4.7
million at December 31, 2014 to $6.1 million at December 31, 2015. The specific allowance totaled $722,000 and $993,000 at
December 31, 2015 and 2014, 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, 2015 and 2014, the allowance allocated by categories of credits totaled $4.4 million.
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, 2015 and 2014, the general valuation allowance, including the economic component, totaled $2.2 million.
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:
Allowance for Loan Losses
(Dollars in thousands)
Balances:
Average total loans outstanding during period
Total loans outstanding at end of period
Allowance for loan losses:
Balances at beginning of period
2015
2014
2013
2012
2011
$
$
$
466,509
541,032
7,534
$
$
$
430,448
454,471
7,659
$
$
$
396,953
419,438
7,975
$
$
$
390,856
390,986
8,609
$
$
$
394,130
396,202
8,255
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
0
32
30
0
0
62
5
0
4
0
0
9
103
0
40
0
0
143
1,882
0
2
11
0
1,895
Net loan charge-offs (recoveries)
53
(1,752)
(Reversal of) provision for loan losses
(125)
(1,877)
436
0
22
178
0
636
8
0
3
9
0
20
616
300
1,663
0
26
150
0
1,839
35
1
4
15
0
55
1,108
44
7
38
0
1,197
30
14
6
1
0
51
1,784
1,146
1,150
1,500
Balance at end of period
$
7,356
$
7,534
$
7,659
$
7,975
$
8,609
Ratios:
Net loan charge-offs (recoveries) to average total loans
Allowance for loan losses to total loans at end of period
Net loan charge-offs (recoveries) to allowance for loan
losses at end of period
Net loan charge-offs to provision for loan losses
0.01%
1.36%
0.72%
N/A
-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%
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):
Allocation of the Allowance for Loan Losses
Amount Outstanding as of December 31,
(Dollars in thousands)
2015
2014
2013
2012
2011
Applicable to:
Commercial real estate
$
5,920
$
5,963
$
6,248
$
6,571
$
6,969
Commercial and Industrial
Consumer
Consumer Residential
Agriculture
Unallocated
627
38
426
309
36
720
42
388
286
135
663
47
440
217
44
474
50
384
286
210
606
65
348
363
258
Total Allowance
$
7,356
$
7,534
$
7,659
$
7,975
$
8,609
Other Earning Assets
For various business purposes, we make investments in earning assets other than the interest-earning securities and loans
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, 2015 and December 31, 2014 were as follows:
(Dollars in Thousands)
December 31, 2015
December 31, 2014
BOLI
LIHTCF
Federal Reserve Bank Stock
Federal Home Loan Bank Stock
Deposits and Other Sources of Funds
Deposits
$
$
$
$
13,747 $
388 $
758 $
2,958 $
13,545
455
758
2,517
Total deposits at December 31, 2015 and 2014 were $814,691,000 and $669,581,000, respectively, representing an increase
of $145,110,000 or 21.7% in 2015. The Mother Lode Bank acquisition added total deposits of $71,125,000. The average deposits for
the year ended December 31, 2015 increased $76,716,000 or 12.4% to $694,991,000 compared to $618,275,000 at December 31,
2014. The Mother Lode Bank acquired deposits had a minimal impact of $1,372,000 on the 2015 average balance.
46
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 $141 million or 21.4% in 2015 to $798.6 million at
December 31, 2015. Included in these totals, is core deposits acquired from Mother Lode Bank totaling $70.4 million. The percentage
of core deposits to total deposits decreased slightly to 98.0% at December 31, 2015 as compared to 98.2% at December 31, 2014. The
average rate paid on time deposits in denominations of over $250,000 was 0.18% and 0.32% for the years ended December 31, 2015
and 2014, respectively. The composition and cost of the Company's deposit base are important components in analyzing the
Company's net interest margin and balance sheet liquidity characteristics, both of which are discussed in greater detail in other
sections herein. See “Net Interest Income and Net Interest Margin” for further discussion.
The Company's liquidity is impacted by the volatility of deposits or other funding instruments or, in other words, by the
propensity of that money to leave the institution for rate-related or other reasons. Deposits can be adversely affected if economic
conditions in California and the Company's market area in particular, continue to weaken. Potentially, the most volatile deposits in a
financial institution are jumbo certificates of deposit, meaning time deposits with balances that equal or exceed $250,000, as
customers with balances of that magnitude are typically more rate-sensitive than customers with smaller balances.
The following tables summarize the distribution of average daily deposits and the average daily rates paid for the periods
indicated:
Distribution of Average Daily Deposits
2015
Average Deposits
2014
2013
Average
Balance
Average
Rate
Average
Balance
Average
Rate
Average
Balance
Average
Rate
$
220,033
0.00%
$
191,667
0.00%
$
169,229
266,856
112,472
48,130
14,564
32,936
0.11%
0.07%
0.11%
0.18%
0.50%
238,736
97,080
39,820
10,141
40,831
0.12%
0.07%
0.11%
0.32%
0.54%
238,956
83,268
35,162
9,752
45,620
$
694,991
0.17%
$
618,275
0.20%
$
581,987
0.00%
0.14%
0.10%
0.15%
0.46%
0.68%
0.27%
(Dollars in Thousands)
Demand
Money market
NOW
Savings
Time certificates of deposit over $250,000
Other time deposits
Total deposits
The scheduled maturities of our time deposits in denominations of more than $250,000 at December 31, 2015 are, as
follows:
Maturities of Time Deposits over $250,000
(Dollars in Thousands)
Three months or less
Over three months through six months
Over six months through twelve months
Over twelve months
Total
$
5,019
2,237
4,860
2,976
$
15,092
Because our client base is comprised primarily of commercial and industrial accounts, individual account balances are
generally higher than those of consumer-oriented banks. Four of our clients carry deposit balances of more than 1% of our total
deposits, one of which had a deposit balance of more than 3% of total deposits at December 31, 2015.
The Company had $1.0 million and $1.9 million in brokered deposits as of December 31, 2015 and 2014, 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, 2014
and 2015. See “Liquidity Management” below for the details on the FHLB borrowings program.
The following table is a summary of FHLB borrowings for fiscal years 2015 and 2014:
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
$
$
$
2015
2014
0 $
12 $
0 $
N/A
N/A
0
1
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,
2015
2014
0.63 %
6.41 %
34.54 %
8.72 %
1.03 %
10.07 %
18.54 %
10.01 %
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, 2015 and 2014, our aggregate payment obligations under this plan totaled $7.7 million
and $7.8 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, 2015, and 2014, we had commitments to extend credit of $91.7 million and $84.8 million,
respectively. Obligations under standby letters of credit were $1.6 million and $1.1 million at December 31, 2015 and 2014,
respectively, and there were no obligations under commercial letters of credit for either period.
The effect on our revenues, expenses, cash flows and liquidity from the unused portion of the commitments to provide
credit cannot be reasonably predicted because there is no guarantee that the lines of credit will be used. For more information
regarding our off balance sheet arrangements, see Note 14- Commitments and Other Contingencies- to our 2015 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, 2015 (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
$
911 $
1,660 $
1,431
$
2,453
$
60
38,295
134
12,279
280
0
1,966
0
$
39,266 $
14,073 $
1,711
$
4,419
$
Total
6,455
2,440
50,574
59,469
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 $1.0 million and $1.9 million in brokered deposits as of December 31, 2015 and 2014, 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, 2015 and 2014, the Company had no FHLB advances outstanding
and had sufficient collateral to borrow an additional $198.4 million and $176.7 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, 2015 and 2014.
No advances were made on these lines of credit as of December 31, 2015 and December 31, 2014.
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, 2015 and 2014 totaled approximately $269.3 million and $223.5 million, respectively. The
49
acquisition of Mother Lode Bank resulted in additional liquid assets of $23.5 million, net of aggregate cash consideration of $7.3
million paid to Mother Lode Bank shareholders. Our liquidity level measured as the percentage of liquid assets to total assets was
30.0% and 29.8% at December 31, 2015, and 2014, 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, 2015, total shareholders’ equity increased to $78.3 million, representing an increase of $3.2 million from
December 31, 2014. The increase was due to the increase in retained earnings of $4.9 million, offset by a comprehensive loss of $0.3
million due to the negative effect that rising treasury yields had on the unrealized market value adjustment of our available for sale
investment portfolio, and by the common stock dividend payments totaling $1.7 million during 2015. The Company did not issue any
stock to Mother Lode Bank shareholders, as they were paid 100% in cash, and therefore there was no impact to equity other than the
merger related expenses and exclusions of goodwill and intangibles, which are excluded from tangible equity.
As of December 31, 2015, 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, 2015, 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
Common equity tier 1 risk-weighted assets
Tier I capital to average assets
Market Risk
Regulatory Well-
Capitalized Standards
December 31, 2015
December 31, 2014
10.0 %
8.0 %
6.5 %
5.0 %
12.2 %
11.1 %
11.1 %
9.1 %
14.5 %
13.2 %
N/A
10.1 %
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, 2015, 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, 2015 and 2014, 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, 2015
December 31, 2014
$ Change
in Market
Value
%
Change
in
Market
Value
Market Value as a % of
Present Value of Assets
Market Value as a % of
Present Value of Assets
MV
Ratio
Change
(bp)
$ Change
in Market
Value
%
Change in
Market
Value
MV
Ratio
Change
(bp)
Shock Scenario
+200 bp
+100 bp
0 bp
-100 bp
-200 bp
$
$
$
$
$
(22,458)
(10,089)
0
(20,851)
(50,759)
(12.88) %
(5.79) %
0.00 %
(11.96) %
(29.12) %
17.47 %
18.53 %
19.28 %
16.67 %
13.31 %
(181)
(75)
0
(261)
(597)
$
$
$
$
$
(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 %
(100)
13
0
(159)
(472)
(Dollars in Thousands)
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-51 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, 2015. 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, 2015.
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, 2015
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 2016 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 2015 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
Terry Withrow
Terry Withrow
Terry Withrow
Tom Haidlen
Tom Haidlen
Tom Haidlen
Tom Haidlen
Tom Haidlen
Tom Haidlen
Tom Haidlen
Tom Haidlen
Tom Haidlen
Tom Haidlen
Tom Haidlen
Tom Haidlen
Jay Gilbert
Form
4
4
4
4/A
4/A
4
4
4
4
4
4
4
4
4
4
4
Transaction Type
Purchase
Purchase
Purchase
Adjustment (1)
Adjustment (2)
Purchase (3)
Sale
Sale
Sale
Sale
Sale
Sale
Sale
Sale
Purchase (3)
Purchase (3)
Transaction Date
11/6/2014
11/7/2014
12/1/2014
12/31/2014
12/31/2014
1/30/2015
2/6/2015
2/6/2015
2/6/2015
2/6/2015
2/6/2015
2/6/2015
2/6/2015
2/6/2015
7/30/2015
7/31/2015
# of Shares
1,330
1,500
170
10,300
(17,837)
158
(1,107)
(192)
(96)
(96)
(48)
(190)
(109)
(96)
159
301
(1) Adjustment to holdings for shares held by Mr. Haidlen's spouse.
(2) Adjustment to holdings for shares previously reported in retirement plan for which Mr. Haidlen is the trustee, but not the
beneficial owner.
(3) 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 2016 Annual
Meeting of Shareholders.
55
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 2016 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 2016 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 2016 Annual
Meeting of Shareholders.
PART IV
ITEM 15 — EXHIBITS, FINANCIAL STATEMENT SCHEDULES
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-51.
(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 29, 2016.
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 Jeffrey A. Gall, 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/ DANNY L. TITUS
Danny L. Titus
/s/ TERRANCE P. WITHROW
Terrance P. Withrow
Director
Director
Director
Director
Director
Director
Director
Director
Director
Director
57
Date
March 29, 2016
March 29, 2016
March 29, 2016
March 29, 2016
March 29, 2016
March 29, 2016
March 29, 2016
March 29, 2016
March 29, 2016
March 29, 2016
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, 2015, 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, 2015, 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/ JEFFREY A. GALL
Jeffrey A. Gall, 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, 2015 and 2014 and the related consolidated statements of income, comprehensive income, shareholders’ equity, and
cash flows for the years ended December 31, 2015 and 2014. 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, 2015 and 2014, and the consolidated results of their operations and
their cash flows for the years ended December 31, 2015 and 2014 in conformity with accounting principles generally accepted in the
United States of America.
/s/ Moss Adams LLP
Stockton, California
March 30, 2016
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 $7,356 and $7,534
at December 31, 2015 and 2014, 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 (Note 14)
Shareholders’ equity
Common stock, no par value; 50,000,000 shares authorized,
8,078,155 and 8,074,855 shares issued and outstanding at
December 31, 2015 and 2014, respectively
Additional paid-in capital
Retained earnings
Accumulated other comprehensive income, net of tax
Total shareholders’ equity
See accompanying notes
F-3
December 31,
2015
December 31,
2014
$
$
$
174,778 $
15,825
190,603
132,078
12,210
144,288
131,546
121,277
530,394
14,277
2,066
28,152
446,492
14,066
884
22,658
897,038 $
749,665
814,691 $
4,084
818,775
669,581
5,043
674,624
24,682
3,217
48,795
1,569
78,263
24,682
2,910
45,582
1,867
75,041
$
897,038 $
749,665
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,
2015
2014
$ 22,053
3,629
34
304
$ 22,011
3,708
38
179
26,020
25,936
615
615
25,405
(125)
647
647
25,289
(1,877)
Net interest income after reversal of provision for loan losses
25,530
27,166
OTHER INCOME
Service charges on deposits
Earnings on cash surrender value of life insurance
Mortgage commissions
Gains on called and sold 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
PROVISION FOR INCOME TAXES
NET INCOME
1,240
429
148
206
2,084
4,107
11,717
3,009
1,466
506
5,977
22,675
6,962
2,054
1,346
433
157
209
1,619
3,764
11,120
2,902
1,336
459
4,417
20,234
10,696
3,574
$ 4,908
$ 7,122
NET INCOME PER COMMON SHARE
$ 0.61
$ 0.90
NET INCOME PER DILUTED COMMON SHARE
$ 0.61
$ 0.89
See accompanying notes
F-4
OAK VALLEY BANCORP
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in thousands)
Net income
Other comprehensive income:
Unrealized holding (losses) gains on securities arising during the current period, net of
tax effect of ($124) thousand and $1.9 million for the years ended December 31, 2015
and 2014, respectively
Reclassification adjustment due to net gains realized on calls of securities, net of tax
effect of $85 thousand and $86 thousand for the years ended December 31, 2015 and
2014, respectively
Total other comprehensive (loss) income
Comprehensive income
YEAR ENDED DECEMBER 31,
2015
2014
$
4,908
$
7,122
(177)
2,753
(121)
(298)
$
4,610
$
(123)
2,630
9,752
See accompanying notes
F-5
OAK VALLEY BANCORP
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
(dollars in thousands)
Balances, January 1, 2014
Stock options exercised
Tax benefit on stock based compensation
Restricted stock issued
Restricted stock forfeited
Cash dividends declared
Stock based compensation
Other comprehensive income
Net income
YEAR ENDED DECEMBER 31, 2014 AND 2015
Common Stock
Shares
Amount
Additional
Paid-in
Capital
Retained
Earnings
Accumulated
Other
Comprehensive
Income (Loss)
Total
Shareholders’
Equity
7,929,730
$
23,758
$
2,537 $
38,985 $
(763) $
64,517
122,625
924
24,500
(2,000)
102
271
(525)
7,122
2,630
Balances, December 31, 2014
8,074,855
$
24,682
$
2,910 $
45,582 $
1,867 $
6,000
(2,700)
Restricted stock issued
Restricted stock forfeited
Cash dividends declared
Stock based compensation
Tax benefit on stock based compensation
Other comprehensive loss
Net income
261
46
(1,695)
4,908
$
(298)
Balances, December 31, 2015
8,078,155
$
24,682
$
3,217 $
48,795 $
1,569 $
See accompanying notes
F-6
924
102
0
0
(525)
271
2,630
7,122
75,041
0
0
(1,695)
261
46
(298)
4,908
78,263
OAK VALLEY BANCORP
CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income
Adjustments to reconcile net earnings to net cash from operating activities:
Reversal of provision for loan losses
Decrease in deferred fees/costs, net
Depreciation
Amortization of investment securities, net
Stock based compensation
Excess tax benefits from exercised stock options
Gain on sale of premises and equipment
OREO write downs
Gain on sales and calls of available for sale securities
Earnings on cash surrender value of life insurance
Deferred tax provision
Gain on BOLI death benefit
(Decrease) increase in interest payable and other liabilities
Increase in interest receivable
(Increase) decrease in other assets
Net cash from operating activities
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of available for sale securities
Proceeds from maturities, calls, and principal
paydowns of securities available for sale
Net increase in loans
Purchase of FHLB Stock
Purchase of BOLI policies
Proceeds from redemption of BOLI policies
Cash acquired from acquisitions, net of cash paid
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
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
YEAR ENDED DECEMBER 31,
2015
2014
$
4,908 $
7,122
(125)
(124)
1,207
188
261
(46)
(5)
50
(206)
(429)
35
(66)
(1,214)
(33)
(90)
4,311
(1,877)
(178)
1,174
147
271
(102)
(3)
32
(209)
(433)
(187)
0
1,134
(13)
529
7,407
(42,694)
(17,883)
31,935
(41,778)
(142)
0
292
23,468
5
(1,418)
(30,332)
(1,695)
77,313
(3,328)
46
0
72,336
18,884
(33,281)
(104)
(1,029)
0
0
3
(1,556)
(34,966)
(1,318)
71,529
(4,581)
102
924
66,656
NET INCREASE IN CASH AND CASH EQUIVALENTS
46,315
39,097
CASH AND CASH EQUIVALENTS, beginning of period
144,288
105,191
CASH AND CASH EQUIVALENTS, end of period
$
190,603 $
144,288
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
Change in unrealized (loss) gain on available-for-sale securities
Acquisitions:
Fair value of assets acquired
Fair value of liabilities assumed
$
$
$
$
$
$
618 $
4,152 $
956 $
$
(507)
78,717 $
71,381 $
668
3,005
0
4,470
0
0
See accompanying notes
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.
On December 23, 2015, the Company completed its acquisition of Mother Lode Bank (“MLB”), a California state-chartered bank
headquartered in Sonora, California, in a transaction in which Mother Lode Bank was merged with and into the Bank, with the Bank
as the surviving company in the transaction. The purchase price for Mother Lode Bank was approximately $7.3 million. As of the
acquisition date, Mother Lode Bank’s total assets were $78.7 million and total deposits were $71.1 million.
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, fair value measurements, 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.
Subsequent events — The Company has evaluated events and transactions subsequent to December 31, 2015for potential recognition
or disclosure.
Cash and cash equivalents — The Company has defined cash and cash equivalents to include cash, due from banks, certificates of
deposit with original 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.
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 an amount in accumulated other comprehensive income, net of tax. 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
F-9
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.
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 originated — 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.
Allowance for loan losses — 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.
F-10
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.
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. A TDR loan is impaired and 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.
Acquired Loans and Leases — Loans and leases acquired through purchase or through a business combination are recorded at their
fair value at the acquisition date. Credit discounts, which reflect estimates of credit losses, expected to be incurred over the life of the
loan, are included in the determination of fair value; therefore, an allowance for loan and lease losses is not recorded at the acquisition
date.
Acquired loans are evaluated upon acquisition for evidence of deterioration in credit quality since their origination to determine if it is
probable the Company will be unable to collect all contractually required payments. These loans are classified as Purchased Credit
Impaired (“PCI”) loans, while all other acquired loans are classified as non-PCI loans. The Company has elected to account for PCI
loans at the individual loan level. The Company estimates the amount and timing of expected cash flows for each loan. The expected
cash flow in excess of the loan's carrying value, is referred to as the accretable yield, and is recorded as interest income over the
remaining expected life of the loan. The excess of the loan's contractual principal and interest over expected cash flows is referred to
as the non-accretable difference, and is representative of contractual amounts the Company does not expect to collect. The non-
accretable difference is not recorded in the Company's consolidated financial statements.
Quarterly, management performs an evaluation of expected future cash flows for PCI loans. If current expectations of future cash
flows are less than management's previous expectations, other than due to decreases in interest rates and prepayment assumptions, an
allowance for loan and leases losses is recorded with a charge to provision for loan and lease losses. If there has been a probable and
significant increase in expected future cash flows over that which was previously expected, the Company first reduces any previously
established allowance for loan and lease losses, and then records an adjustment to interest income through a prospective increase in
the accretable yield.
For acquired loans not considered credit impaired (“non-PCI”), we recognize the entire fair value discount accretion to interest
income, based on contractual cash flows using an effective interest rate method for term loans, and on a straight line basis for
revolving lines. When a non-PCI loan is placed on non-accrual status subsequent to acquisition, accretion stops until the loan is
returned to accrual status. The level of accretion on non-PCI loans varies from period to period due to maturities and early pay-offs of
these loans during the reporting periods. Subsequent to acquisition, if the probable and estimable losses for non-PCI loans exceed the
amount of the remaining unaccreted discount, the excess is established as an allowance for loan losses. All acquired loans were
acquired in acquisitions and do not represent loans purchased from third parties.
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 and amortization are:
Building
Equipment
31.5
years
3 – 12 years
Furniture and fixtures
3 – 7 years
Leasehold improvements
5 – 15 years
Automobiles
3 – 5 years
F-11
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 2011.
Transfers of financial assets — Transfers of an entire financial asset, a group of financial assets, or a participating interest in an
entire financial asset 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 $189,000 and $215,000
for the years ended December 31, 2015 and 2014, 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, 2015 and 2014, $121,000 and $123,000 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, 2015 and 2014
was $67,000 and $61,000, 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 2015 and 2022. In 2014, a tax benefit of $89,000 was utilized for income tax purposes and
an estimated amount of $88,000 will be utilized for 2015. The recorded investment in limited partnerships totaled $388,000 and
$455,000 at December 31, 2015 and 2014, respectively, and is reflected as a component of interest receivable and other assets on the
consolidated balance sheets.
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.
F-12
Earnings per common 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 is calculated as net income reduced by dividends
accumulated on preferred stock. Basic EPS are calculated by dividing net income 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. Therefore, under the two-class method, the
difference in EPS is not significant for these participating securities.
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 2015 or 2014.
Fair values of financial instruments — The consolidated financial statements include various estimated fair value information as of
December 31, 2015 and 2014. 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
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.
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.
Business combinations and related matters — Business combinations are accounted for under the acquisition method of accounting
in accordance with ASC 805, Business Combinations. Under the acquisition method the acquiring entity in a business combination
recognizes 100 percent of the acquired assets and assumed liabilities, regardless of the percentage owned, at their estimated fair values
as of the date of acquisition. Any excess of the purchase price over the fair value of net assets and other identifiable intangible assets
acquired is recorded as goodwill. Assets acquired and liabilities assumed from contingencies must also be recognized at fair value, if
the fair value can be determined during the measurement period. Results of operations of an acquired business are included in the
statement of operations from the date of acquisition. Acquisition-related costs, including conversion charges, are expensed as incurred.
The Company applied this guidance to the acquisition of Mother Lode Bank that was consummated on December 23, 2015. The
Company's consolidated financial statements reflect the operations of Mother Lode Bank from December 24, 2015 through
December 31, 2015.
Goodwill and other intangible assets — Intangible assets are comprised of goodwill and core deposit intangibles acquired in the
Mother Lode Bank Acquisition. Intangible assets with definite useful lives are amortized over their respective estimated useful lives.
F-13
If an event occurs that indicates the carrying amount of an intangible asset may not be recoverable, management reviews the asset for
impairment. Any goodwill and any intangible asset acquired in a purchase business combination determined to have an indefinite
useful life is not amortized, but is evaluated for impairment, at a minimum, on an annual basis.
The Company applies a qualitative analysis of conditions in order to determine if it is more likely than not that the carrying value is
impaired. In the event that the qualitative analysis suggests that the carrying value of goodwill may be impaired, the Company, with
the assistance of an independent third party valuation firm, uses several quantitative valuation methodologies in evaluating goodwill
for impairment including a discounted cash flow approach that includes assumptions made concerning the future earnings potential of
the organization, and a market-based approach that looks at values for organizations of comparable size, structure and business model.
The current year's review of qualitative factors did not indicate that impairment has occurred, as such no quantitative analysis was
performed at December 31, 2015.
Recently Issued Accounting Standards —
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 did not 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 did not 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 adoption of this update did not have a material
impact of the Company’s consolidated financial statements.
In September, 2015, the FASB issued ASU No. 2015-16, Simplifying the Accounting for Measurement Period Adjustments (Topic
805). This ASU eliminates the requirement to restate prior period financial statements for measurement period adjustments to assets
acquired and liabilities assumed in a business combination. The new guidance under this update requires the cumulative impact of
measurement period adjustments be recognized in the period the adjustment is determined. This update does not change what
constitutes a measurement period adjustment, nor does it change the length of the measurement period. The new standard is effective
for interim annual periods beginning after December 15, 2015 and should be applied prospectively to measurement period adjustments
F-14
that occur after the effective date. The adoption of this update is not expected to have a material impact on the Company’s
consolidated financial statements.
In January 2016, the FASB issued ASU No. 2016-01, Financial Instruments - Overall (Subtopic 825-10): Recognition and
Measurement of Financial Assets and Financial Liabilities. The amendments in this ASU make improvements to GAAP related to
financial instruments that include the following as applicable to us.
• Equity investments, except for those accounted for under the equity method of accounting or those that result in consolidation
of the investee, are required to be measured at fair value with changes in fair value recognized in net income. However, an
entity may choose to measure equity investments that do not have readily determinable fair values at cost minus impairment,
if any, plus or minus changes resulting from observable price changes in orderly transactions for the identical or a similar
investment of the same issuer.
• Simplifies the impairment assessment of equity investments without readily determinable fair values by requiring a
qualitative assessment to identify impairment - if impairment exists, this requires measuring the investment at fair value.
• Eliminates the requirement for public companies to disclose the method(s) and significant assumptions used to estimate the
fair value that is currently required to be disclosed for financial instruments measured at amortized cost on the balance sheet.
• Public companies will be required to use the exit price notion when measuring the fair value of financial instruments for
disclosure purposes.
• Requires separate presentation of financial assets and financial liabilities by measurement category and form of financial
asset on the balance sheet or the accompanying notes to the financial statements.
• The reporting entity should evaluate the need for a valuation allowance on a deferred tax asset related to available-for-sale
securities in combination with the entity's other deferred tax assets.
ASU 2016-01 is effective for public business entities for fiscal years beginning after December 15, 2017, including interim periods
within those fiscal years. This ASU will impact our financial statement disclosures, however, we do not expect this ASU to have a
material impact on our financial condition or results of operations.
In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842). This ASU was issued to increase transparency and
comparability among organizations by recognizing lease assets and lease liabilities, including leases classified as operating leases
under previous GAAP, on the balance sheet and requiring additional disclosures of key information about leasing arrangements. ASU
2016-02 is effective for annual periods, including interim periods within those annual periods beginning after December 15, 2018 and
requires a modified retrospective approach to adoption. Early application of the amendments is permitted. We are currently evaluating
the provisions of this ASU and will be monitoring developments and additional guidance to determine the potential outcome the
amendments will have on our financial condition and results of operations.
NOTE 2 – BUSINESS COMBINATION
On December 23, 2015, in effort to expand our market presence and enhance shareholder value, the Company acquired 100% of the
outstanding common shares of Mother Lode Bank ("MLB") and all unexercised options to purchase MLB common stock were
cancelled, in exchange for $7,336,000 in cash (the "MLB Acquisition"). In conjunction with the MLB Acquisition, MLB was merged
with and into Oak Valley Community Bank. On January 29, 2016, the two acquired MLB branches in Sonora were closed after
management determined that our two existing branches in Sonora would be able to support our new customers. The assets acquired
and liabilities assumed, both tangible and intangible, were recorded at their fair values as of the acquisition date in accordance with
ASC 805, Business Combinations.
F-15
The following table reflects the estimated fair values of the assets acquired and liabilities assumed related to the MLB Acquisition:
(Dollars in thousands)
Assets:
Cash and cash equivalents
Loans
Core deposit intangible
Deferred tax asset
Goodwill
Other assets
Acquisition Date
December 23, 2015
$
30,804
42,831
1,031
2,651
662
738
Total assets acquired
$
78,717
Liabilities:
Deposits:
Non-interest bearing
Interest bearing
Transaction accounts
Savings accounts
Money market accounts
Other time accounts
Total deposits
Other liabilites
Total liabilities assumed
$
36,177
6,112
15,727
7,602
5,507
71,125
256
$
71,381
Merger consideration
$
7,336
F-16
The following table presents the net assets acquired from MLB and the estimated fair value adjustments:
(Dollars in thousands)
Acquisition Date
December 23, 2015
Book value of net assets acquired from Mother Lode Bank
$
4,884
Fair value adjustments:
Loans
Reversal of Allowance for Loan Loss
Core deposit intangible asset
Other assets & liabilities, net
Total purchase accounting adjustments
Deferred tax asset (tax effect of purchase accounting adjustments at 41.15%)
DTA Carryforward
Fair value of net assets acquired from Mother Lode Bank
Merger consideration
Less: fair value of net assets acquired
Goodwill
(2,960)
1,279
1,031
(210)
$
(860)
354
2,296
$
6,674
7,336
(6,674)
$
662
As a result of the MLB Acquisition, we recorded $662,000 in goodwill, which represents the excess of the total purchase price paid
over the fair value of the assets acquired, net of the fair values of liabilities assumed. Goodwill mainly reflects expected value created
through the combined operations of MLB and the Company. At December 31, 2015, we determined that the fair value of our
traditional community banking activities (provided through our branch network) exceeded the carrying amount. Therefore, no
impairment on goodwill has been recorded. The goodwill is not deductible for tax purposes. The following is a description of the
methods used to determine the fair values of significant assets and liabilities at acquisition date presented above.
Loans
As discussed in Note 1, the fair values for acquired loans were developed based upon the present values of the expected cash flows
utilizing market-derived discount rates. Expected cash flows for each acquired loan were projected based on contractual cash flows
adjusted for expected prepayment, expected default (i.e. probability of default and loss severity), and principal recovery.
Prepayment rates were applied to the principal outstanding based on the type of loan, where appropriate. Prepayments were based on a
constant prepayment rate (“CPR”) applied across the life of a loan. The annual CPRs were between 0% and 5%, depending on the
characteristics of the loan pool (e.g. construction, commercial real estate, etc.).
Non-credit-impaired loans with similar characteristics were grouped together and were treated in the aggregate when applying the
discount rate on the expected cash flows. Aggregation factors considered included the type of loan and related collateral, risk
classification, fixed or variable interest rate, term of loan and whether or not the loan was amortizing. See Notes 1 and 5 for additional
information.
Core Deposit Intangible
The core deposit intangible represents the estimated future benefits of acquired deposits and is booked separately from the related
deposits. The value of the core deposit intangible asset was determined using a discounted cash flow approach to arrive at the cost
differential between the core deposits (non-maturity deposits such as transaction, savings and money market accounts) and alternative
funding sources. It is calculated as the present value of the difference in cash flows between maintaining the core deposits (interest
and net maintenance costs) and the cost of an equal amount of funds with a similar term from an alternative source. The core
F-17
deposit intangible is amortized on an accelerated basis over an estimated ten-year life, and it is evaluated periodically for impairment.
No impairment loss was recognized in 2015. A core deposit intangible asset of $1,031,000 was recorded in conjunction with the
Acquisition, which will begin to amortize in 2016.
Pro Forma Results of Operations
Included in the Company’s consolidated statement of income for the year ended December 31, 2015, was revenue of $64,000 and net
income of $37,000 related to normal business operations of MLB.
The following table presents unaudited pro forma information as if the MLB Acquisition had occurred on January 1, 2014, which
includes the pre-acquisition period for MLB. The unaudited pro forma information includes adjustments for interest income on loans
acquired, amortization of intangibles arising from the transaction, interest expense on deposits acquired, operating expenses including
salaries, servicing costs on loan and deposit accounts and merger related expenses, and the related income tax effects. The unaudited
pro forma financial information is not necessarily indicative of the results of operations that would have occurred had the transaction
been effected on the assumed date.
(dollars in thousands, except per share data)
For the Years Ended December 31,
Net interest income
Provision for loan and lease losses
Non-interest income
Non-interest expense
Income before income taxes
Income tax expense
Net income
Earnings Per Common Share
Basic
Diluted
2015
(Unaudited)
2014
(Unaudited)
$
$
$
$
28,258
(125)
4,434
21,606
11,211
3,611
7,600
0.95
0.95
$
$
$
$
28,293
(1,877)
4,088
23,442
10,816
3,814
7,002
0.88
0.88
Acquisition-related expenses are recognized as incurred and continue until all systems have been converted and operational functions
become fully integrated. We incurred one-time third-party acquisition-related expenses in the consolidated statements of income in
2015 as follows:
(Dollars in thousands)
Data processing
Professional services
Personnel severance
Other
$
$
1,137
582
210
42
1,971
F-18
NOTE 3 — 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, 2015 the Company had a balance of $107,792,000 which exceeds the reserve requirement.
NOTE 4 — SECURITIES
The amortized cost and estimated fair values of debt securities as of December 31, 2015, are as follows:
(dollars in thousands)
Available-for-sale securities:
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
U.S. agencies
$
31,815
$
1,142
$
Collateralized mortgage obligations
Municipalities
SBA pools
Corporate debt
Asset backed securities
Mutual fund
2,729
66,535
811
13,497
10,321
3,172
17
2,248
0
44
0
0
(89)
(27)
(197)
(5)
(121)
(183)
(163)
Fair Value
$
32,868
2,719
68,586
806
13,420
10,138
3,009
$
128,880
$
3,451
$
(785)
$
131,546
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, 2015.
(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
$
7,129 $
(30) $
1,800 $
(59) $
8,929 $
Collateralized mortgage obligations
Municipalities
SBA pools
Corporate debt
Asset backed securities
Mutual fund
0
11,451
0
9,376
5,351
0
0
(123)
0
(121)
(78)
0
1,266
3,680
807
0
4,787
3,009
(27)
(74)
(5)
0
(105)
(163)
1,266
15,131
807
9,376
10,138
3,009
Total temporarily impaired securities
$
33,307 $
(352) $
15,349 $
(433) $
48,656 $
(89)
(27)
(197)
(5)
(121)
(183)
(163)
(785)
At December 31, 2015, there was one U.S. agency, one collateralized mortgage obligation, six municipalities, two SBA pools, three
asset backed securities, and one mutual fund that comprised the total securities in an unrealized loss position for greater than 12
months and four U.S. agencies, nine municipalities, seven corporate debts, and three 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
F-19
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.
The amortized cost and estimated fair value of debt securities at December 31, 2015, 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
$
9,523
40,153
48,379
30,825
$
9,863
41,491
48,847
31,345
$
128,880
$
131,546
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
F-20
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)
The Company recognized gross realized gains of $238,000 and $209,000 during 2015 and 2014, respectively, on certain available-for-
sale securities that were called or sold. The gains in 2015 reflected in the condensed consolidated statements of income are net of a
$32,000 gross realized loss related to one available-for-sale security sold during the first quarter of 2015, compared to no sales of
securities during 2014. There were no losses on called available-for-sale securities realized during 2015 and 2014.
Securities carried at $65,902,000 and $60,474,000 at December 31, 2015 and 2014, respectively, were pledged to secure deposits of
public funds.
F-21
NOTE 5 — LOANS
The Company’s customers are primarily located in Stanislaus, San Joaquin, Tuolumne, Inyo, and Mono Counties. As of December 31,
2015, approximately 78% 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 4% are agriculture loans.
Loan totals were as follows:
(in thousands)
Commercial real estate:
DECEMBER 31,
2015
2014
Commercial real estate- construction
$
19,363 $
Commercial real estate- mortgages
Land
Farmland
Commercial and industrial
Consumer
Consumer residential
Agriculture
Total loans
Less:
363,644
10,239
29,801
63,776
774
32,588
20,847
9,181
315,506
10,620
23,091
54,051
805
25,464
15,753
541,032
454,471
Net deferred loan fees/costs and fair value discount
on acquired loans
Allowance for loan losses
(3,282)
(7,356)
(445)
(7,534)
Net loans
$
530,394 $
446,492
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 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
F-22
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, 2015, approximately 44.3% 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.
Purchased Credit-Impaired (“PCI”) Loans. We evaluated loans purchased in the Acquisition in accordance with accounting
guidance in ASC 310-30 related to loans acquired with deteriorated credit quality. Acquired loans are considered credit-impaired if
there is evidence of significant deterioration of credit quality since origination and it is probable, at the acquisition date, that we will
be unable to collect all contractually required payments receivable. Management has determined certain loans purchased in the MLB
Acquisition to be PCI loans based on credit indicators such as nonaccrual status, past due status, loan risk grade, loan-to-value ratio,
etc. Revolving credit agreements (e.g., home equity lines of credit and revolving commercial loans) are not considered PCI loans as
cash flows cannot be reasonably estimated.
For acquired loans not considered credit-impaired, the difference between the contractual amounts due (principal amount) and the fair
value is accounted for subsequently through accretion. We recognize discount accretion based on the acquired loan’s contractual cash
flows using an effective interest rate method. The accretion is recognized through the net interest margin.
The following table presents the fair value of purchased credit-impaired and other loans acquired from Mother Lode Bank as of the
acquisition date:
(in thousands)
December 23, 2015
Purchased credit-
impaired loans
Other purchased
loans
Total
Contractually required payments including interest
$
Less: nonaccretable difference
Cash flows expected to be collected (undiscounted)
Accretable yield
1,982 $
(1,103)
879
(14)
44,007 $
0
44,007
(2,041)
Fair value of purchased loans
$
865 $
41,966 $
45,989
(1,103)
44,886
(2,055)
42,831
F-23
For the PCI loans, the accretable yield represents the excess of the cash flows expected to be collected at acquisition over the fair
value of the loans at the acquisition date, and is accreted into interest income over the estimated remaining life of the purchased credit-
impaired loans using the effective yield method, provided that the timing and amount of future cash flows is reasonably estimable. The
cash flows expected to be collected are updated each quarter based on current assumptions regarding default rates, loss severities, and
other factors that are reflective of current market conditions. Probable decreases in expected cash flows after acquisition result in the
recognition of impairment as a specific allowance for loan losses or a charge-off to the allowance. The nonaccretable difference
represents the difference between the undiscounted contractual cash flows and the undiscounted expected cash flows, and also reflects
the estimated credit losses in the acquired loan portfolio at the acquisition date and can fluctuate due to changes in expected cash flows
during the life of the PCI loans. Due to the timing of the Acquisition being near December 31, 2015, the accretable yield at
Acquisition approximates the accretable yield at December 31, 2015.
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.
Year-end non-accrual loans, segregated by class of loans, were as follows:
(in thousands)
Commercial real estate:
Commercial real estate- construction
$
Commercial real estate- mortgages
Land
Farmland
Commercial and industrial
Consumer
Consumer residential
Agriculture
Total non-accrual loans
$
YEAR ENDED DECEMBER 31,
2015
2014
0 $
0
2,739
51
322
0
0
2,704
5,816 $
0
1,296
2,995
72
337
0
0
0
4,700
(1) Excluded from the above non-accrual loan table are Purchased Credit Impaired loans acquired in the MLB Acquisition.
Had non-accrual loans performed in accordance with their original contract terms, the Company would have recognized additional
interest income of approximately $376,000 in 2015 and $321,000 in 2014.
F-24
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, 2015 (in thousands):
30-59
Days
Past
Due
60-89
Days
Past
Due
Greater
Than
90
Days
Past
Due
Total
Past
Due
Current
Purchased
Credit
Impaired
Loans
Total
$
0 $
0 $
0 $
0 $
19,363 $
0 $
19,363 $
0
0
1,182
352
0
0
0
0
0
0
0
0
0
2,704
0
2,261
51
312
0
0
0
0
363,526
2,261
1,233
664
0
0
2,704
7,709
28,568
62,634
774
32,588
18,143
118
269
0
478
0
0
0
363,644
10,239
29,801
63,776
774
32,588
20,847
December 31, 2015
Commercial real estate:
Commercial R.E. -
construction
Commercial R.E. –
mortgages
Land
Farmland
Commercial and industrial
Consumer
Consumer residential
Agriculture
Total
$
1,534 $
2,704 $
2,624 $
6,862 $
533,305 $
865 $
541,032 $
Greater
Than 90
Days
Past Due
and Still
Accruing
0
0
0
0
0
0
0
0
0
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 $
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 $
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.
F-25
Impaired loans by class as of December 31, 2015 and 2014 are set forth in the following tables. PCI loans are excluded from the 2015
table, as they have not experienced post acquisition declines in cash flows expected to be collected. No interest income was
recognized on impaired loans subsequent to their classification as impaired during 2015 and 2014.
(in thousands)
December 31, 2015
Commercial real estate:
Commercial R.E. - construction
Commercial R.E. - mortgages
Land
Farmland
Commercial and Industrial
Consumer
Consumer residential
Agriculture
Total
(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 $
0
3,856
63
357
0
0
2,704
6,980 $
0 $
0
0
51
322
0
0
2,704
3,077 $
0 $
0
2,739
0
0
0
0
0
2,739 $
0 $
0
2,739
51
322
0
0
2,704
5,816 $
0
0
722
0
0
0
0
0
722
0
301
2,914
61
611
0
0
7
3,894
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-26
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, 2015, there were 5 loans that were considered to be troubled debt restructurings, all of which are considered non-
accrual totaling $3,060,000. At December 31, 2014, there were 5 loans that were considered to be troubled debt restructurings, all of
which are considered non-accrual totaling $3,331,000. There were no unfunded commitments on TDR loans at December 31, 2015
and 2014. We have allocated $722,000 and $993,000 of specific reserves to loans whose terms have been modified in troubled debt
restructurings as of December 31, 2015 and 2014, respectively.
During the year ended December 31, 2015 the terms of two loans were modified as troubled debt restructurings, as compared to four
loans during 2014. 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.
The following table presents loans by class modified as troubled debt restructurings that occurred during the years ended December
31, 2015 and 2014:
(dollars in thousands)
For the Year Ended
December 31, 2015
For the Year Ended
December 31, 2014
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 $
0
1
0
1
0
0
0
0
570
0
24
0
0
0
0
0
570
0
24
0
0
0
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
2 $
594 $
594
4 $
3,438 $
3,438
The troubled debt restructurings during the years ended December 31, 2015 and 2014 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, 2015 and 2014 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
F-27
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.
-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.
F-28
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
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.
As of December 31, 2015 and 2014, there are no loans that are classified with a risk grade of 8- Loss.
F-29
The following table presents weighted average risk grades of our loan portfolio.
Commercial real estate:
Commercial real estate - construction
Commercial real estate - mortgages
Land
Farmland
Commercial and industrial
Consumer
Consumer residential
Agriculture
Total gross loans
December 31, 2015
December 31, 2014
Weighted Average
Risk Grade
Weighted Average
Risk Grade
3.72
3.16
4.58
3.12
3.57
1.99
3.01
3.39
3.25
3.00
3.15
4.34
3.01
3.39
2.11
3.02
3.18
3.19
The following table presents risk grade totals by class of loans as of December 31, 2015 and 2014. Risk grades 1 through 4 have been
aggregated in the “Pass” line.
(in thousands)
December 31, 2015
Pass
Special mention
Substandard
Doubtful
Commercial R.E.
Construction
Commercial R.E.
M ortgages
Land
Farmland
Commercial and
Industrial
Consumer
Consumer
Residential
Agriculture
Total
$ 18,312 $ 357,339 $ 6,358 $ 28,568 $ 55,957 $ 745 $ 32,532 $ 18,143
-
2,704
-
4,389
1,916
-
-
29
-
-
56
-
-
1,233
-
6,153
1,416
250
110
3,283
488
-
1,051
-
$
517,954
10,652
11,688
738
Total loans
$ 19,363
$ 363,644
$
10,239
$ 29,801
$
63,776
$ 774
$ 32,588
$ 20,847
$
541,032
December 31, 2014
Pass
Special mention
Substandard
Doubtful
$ 9,181
-
-
-
$ 310,912
2,722
1,872
-
$
7,625
-
2,995
-
$ 23,019
-
72
-
$
48,997
3,438
1,616
-
$ 790
-
15
-
$ 25,283
-
181
-
$ 15,753
-
-
-
$
441,560
6,160
6,751
-
Total loans
$ 9,181
$ 315,506
$
10,620
$ 23,091
$
54,051
$
805
$
25,464
$ 15,753
$
454,471
(1)
Included in the above table is Purchased Credit Impaired loans recorded at their fair value of $865,000, which were acquired in
the MLB Acquisition.
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
F-30
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.
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.
F-31
The following table details activity in the allowance for loan losses by portfolio segment for the years ended December 31, 2015 and
2014. 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, 2015 and 2014
(in thousands)
Commercial
Commercial
Ye ar Ende d De ce mbe r 31, 2015
Beginning balance
Charge-offs
Recoveries
(Reversal of) provision for loan losses
Ending balance
Ye ar Ende d De ce mbe r 31, 2014
Beginning balance
Charge-offs
Recoveries
(Reversal of) provision for loan losses
Ending balance
$
$
$
$
Real Estate
5,963
0
5
(48)
$
and Industrial
720
(32)
0
(61)
$
Consumer
42
(30)
4
22
$
Consumer
Residential
388
0
0
38
$
$
Agriculture
286
0
0
23
$
135
0
0
(99)
Unallocated
T otal
5,920
$
627
$
38
$
426
$
309
$
36
$
$
6,247
(103)
1,882
(2,063)
5,963
$
663
0
0
57
720
$
$
$
47
(40)
2
33
$
440
0
11
(63)
42
$
388
$
217
0
0
69
286
$
$
45 $
0
0
90
135 $
7,534
(62)
9
(125)
7,356
7,659
(143)
1,895
(1,877)
7,534
The following table details the allowance for loan losses and ending gross loan balances as of December 31, 2015 and 2014,
summarized by collective and individual evaluation methods of impairment.
(in thousands)
De ce mbe r 31, 2015
Allowance for loan losses for loans:
Individually evaluated for impairment
Collectively evaluated for impairment
Ending gross loan balances:
Individually evaluated for impairment
Individually evaluated purchased credit impaired loans
Collectively evaluated for impairment
De ce mbe r 31, 2014
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
$
$
$
$
$
$
$
$
$
$
$
722
5,198
5,920
2,790
387
419,870
$
$
$
0
627
627
322
478
62,976
423,047
$
63,776
$
993
4,970
5,963
4,363
354,035
358,398
$
$
$
$
0
720
720
337
53,714
54,051
$
$
$
$
0
38
38
0
0
774
774
0
42
42
0
805
805
$
$
$
$
$
$
$
$
$
$
$
0
426
426
0
0
32,588
$
$
$
0
309
309
2,704
0
18,143
32,588
$
20,847
$
0
388
388
0
25,464
25,464
$
$
$
$
0
286
286
0
15,753
15,753
$
$
$
$
$
$
$
$
$
$
$
$
36
36
0
0
0
0
0
135
135
0
0
0
722
6,634
7,356
5,816
865
534,351
541,032
993
6,541
7,534
4,700
449,771
454,471
F-32
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
Acquired balance from Mother Lode Bank (fair value)
Balance, end of year
YEARS ENDED DECEMBER 31,
2015
2014
$
$
218
$
7
13
238
$
134
84
0
218
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, 2015 and 2014, loans carried at $541,032,000 and $454,471,000, respectively, were pledged as collateral on
advances from the Federal Home Loan Bank.
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,
2015
2014
$
4,755
$
8,939
4,135
7,132
24,961
(10,684)
$
14,277
$
4,755
8,667
3,672
6,479
23,573
(9,507)
14,066
Depreciation expense was $1,207,000 and $1,174,000 and for the years ended December 31, 2015 and 2014, respectively.
F-33
DECEMBER 31,
2015
2014
$
1,495 $
925
5,439
758
2,958
13,747
388
662
1,031
749
$
28,152
$
1,271
753
2,614
758
2,517
13,545
455
0
0
2,016
22,658
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
Goodwill
Core deposit intangible
Prepaid expenses and other
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,
2015
2014
$
279,367
$
130,674
282,449
71,627
35,482
15,092
225,957
108,374
247,442
39,412
38,247
10,149
$
814,691
$
669,581
Certificates of deposit issued and their remaining maturities at December 31, 2015, are as follows (in thousands):
Year ending December 31,
2016
2017
2018
2019
$
$
38,295
10,263
1,793
223
50,574
F-34
NOTE 9 — FHLB ADVANCES
At December 31, 2015, the Company had no outstanding advances from the Federal Home Loan Bank (“FHLB”). Unused and
available advances totaled $198,415,000 at December 31, 2015. Loans carried at $541,032,000 as of December 31, 2015, were
pledged as collateral on advances from the Federal Home Loan Bank.
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.
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,
2015
2014
$
$
423
$
26
166
615
$
396
32
219
647
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
2015
2014
$ 1,498
$ 2,757
521
1,004
2,019
3,761
64
(185)
(29)
(2)
35
(187)
$ 2,054
$ 3,574
F-35
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
Fair value discount on acquired loans
Acquired net operating loss
Restricted stock expense
Accrued vacation
Accrued salary continuation liability
Deferred compensation
Nonaccrual loans
Reserve for undisbursed commitments
OREO expenses
Investment in limited partnership
State income tax
Holding company organization fees
Deferred tax liabilities:
Prepaid expenses
FHLB dividends
Accumulated depreciation
Deferred loan costs
Accrued bonus
Core deposit intangible
Unrealized gain on securities available for sale
DECEMBER 31,
2015
2014
$ 3,033
$ 3,100
1,218
1,587
50
72
1,004
110
213
92
492
0
245
30
0
0
38
53
914
109
140
90
254
(1)
353
34
8,146
5,084
(98)
(220)
(505)
(361)
(2)
(424)
(1,097)
(2,707)
(73)
(220)
(609)
(259)
(3)
0
(1,306)
(2,470)
Net deferred income tax asset
$ 5,439
$ 2,614
As a result of the recent acquisition of MLB, the Company has included in its deferred tax asset usable net operating loss
carryforwards in the federal and California jurisdictions of $3.8 million, which begin to expire in 2025 and 2028, respectively. The
amount of carryforwards that may be utilized in each jurisdiction annually is limited to $191,000 per year under Sections 382 of the
Internal Revenue Code due to the change in control. As the result of limitations under Section 382, $2.4 million and $1.9MM of the
Company’s federal and California net operating losses are expected to expire unused and have been excluded from the deferred tax
asset.
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
F-36
the Company’s tax returns, recent positions taken by the taxing authorities on similar transactions, if any, and the overall tax
environment.
During 2015, the Company settled the exams for the tax years of 2010, 2011, 2012 and 2013 with the California Franchise Tax Board
(“FTB”) by submitting a payment of $332,000. The net impact of this payment after the federal deduction was $219,000 and therefore
resulted in a reversal of $83,000 to tax expense to clear the unrecognized tax benefit liability account of $302,000 as described below.
The Company had no liabilities for unrecognized tax benefits as of December 31, 2015.
As of December 31, 2014, the Company had a liability for unrecognized tax benefits of $302,000 associated with the 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.
Detailed below is a reconciliation of the Company’s unrecognized tax benefits, gross of any related tax benefits, for the year ended
December 31, 2015 and 2014:
Beginning balance
Payments to FTB to settle tax exams, net of federal deduction
Reversal of unrecognized tax benefits to income tax expense
Ending balance
Years Ended December 31,
2015
2014
$
$
302
(219 )
(83 )
0
$
$
302
0
0
302
The effective tax rate for 2015 and 2014 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
Reversal of reserve for tax exams
Low income housing tax credit
California enterprise zone tax credits and deductions
Non-deductible merger expenses
Other
Effective tax rate
YEARS ENDED DECEMBER 31,
2015
2014
34.0%
7.2%
-8.7%
-2.5%
-1.2%
-0.9%
-0.5%
2.4%
-0.2%
29.5%
34.0%
7.2%
-4.7%
-1.7%
0.0%
-0.6%
-0.4%
0.0%
0.2%
33.4%
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. None of the entities are subject to examination by taxing authorities for years before 2012 for U.S. Federal or for years
before 2011 for California.
F-37
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, 2015
Weighted-
Average
Exercise
Price
12.57
0.00
0.00
12.98
12.13
Shares
67,500
0
0
$
$
$
(34,500 ) $
33,000 $
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
DECEMBER 31, 2015
Weighted-
Average
Grant Date
Fair Value
7.36
9.64
7.18
8.05
7.59
Shares
114,747
6,000
$
$
(36,536 ) $
(2,700 ) $
81,511 $
(dollars in thousands)
December 31,
Weighted-average fair value of options granted during the year
Intrinsic value of options exercised
Options outstanding and exerciseable at year end:
Weighted average exercise price
Intrinsic value
Weighted average remaining contractual life
2015
N/A
N/A
33,000
$ 12.13
$ 19
1.13 years
2014
N/A
$ 239
67,500
$ 12.57
$ 17
1.16 years
There were no tax benefits recorded in the consolidated statements of income during 2015 and 2014 related to the vesting of non-
qualified stock options. As of December 31, 2015, there was no unrecognized compensation cost related to non-vested stock options.
F-38
For the year ended December 31, 2015, there were no exercises of stock options and therefore no income tax benefits related to
disqualifying dispositions. All outstanding stock options became fully vested during 2014 and therefore there was no recognition of
stock option compensation expense in the consolidated statements of income in 2015.
The Company granted 6,000 shares of restricted stock in 2015 with a weighted average fair value of $9.64 per share. For the year
ended December 31, 2015, total compensation expense recorded in the consolidated statements of income related to restricted stock
awards was $261,000, with an offsetting tax benefit of $107,000, as this expense is deductible for income tax purposes. The Company
recorded an additional tax benefit of $46,000 to paid-in capital to recognize the full tax deduction of the vested restricted stock, which
is equal to the fair value on the vesting date, as the tax benefit recognized in the consolidated statements of income is based on the
grant date fair value. As of December 31, 2015, there was $412,000 of total unrecognized compensation cost related to restricted
stock awards which is expected to be recognized over a weighted-average period of 2.24 years. During 2015, shares of restricted
stock awards totaling 36,536 with a fair value of $345,000 were vested and became unrestricted.
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 $271,000, with an offsetting tax benefit of $111,000, as this expense is deductible for income tax purposes. The Company
recorded an additional tax benefit of $30,000 to paid-in capital to recognize the full tax deduction of the vested restricted stock, which
is equal to the fair value on the vesting date, as the tax benefit recognized in the consolidated statements of income is based on the
grant date fair value. 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.
NOTE 13 — 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 is calculated as net income reduced by dividends accumulated on
preferred stock. Basic EPS are calculated by dividing net income 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. Therefore, under the two class method the difference in EPS is not
significant for these participating securities.
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:
Net income
Effect of dilutive securities:
Stock options
Non-vested restricted stock
Total dilutive shares
Diluted EPS:
Net income per diluted share
YEAR ENDED DECEMBER 31, 2015
Shares
(Denominator)
Income
(Numerator)
Per-Share
Amount
$
4,908
7,989,088
$
0.61
—
—
1,399
46,358
47,757
$
4,908
8,036,845
$
0.61
F-39
Anti-dilutive options to purchase 47,784 and 63,815 shares of common stock in prices ranging from $9.95 to $15.67 were outstanding
during 2015 and 2014, respectively. 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 began to expire in 2015.
During 2015 and 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:
Net income
Effect of dilutive securities:
Stock options
Non-vested restricted stock
Total dilutive shares
Diluted EPS:
Net income per diluted share
YEAR ENDED DECEMBER 31, 2014
Shares
(Denominator)
Income
(Numerator)
Per-Share
Amount
$
7,122
7,938,052
$
0.90
—
—
4,822
49,857
54,679
$
7,122
7,992,731
$
0.89
NOTE 14 — 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, 2015 and 2014, was
$874,000 and $816,000, respectively.
At December 31, 2015, the future minimum commitments under these operating leases are as follows (in thousands):
Year ending December 31,
2016
2017
2018
2019
2020
Thereafter
$
$
911
865
795
765
666
2,453
6,455
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.
F-40
Financial instruments at December 31, 2015 whose contract amounts represent credit risk:
(in thousands)
Undisbursed loan commitments
Checking reserve
Equity lines
Standby letters of credit
Contract
Amount
$
$
74,654
1,235
14,219
1,623
91,731
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.
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 15 — FINANCIAL INSTRUMENTS
Fair values of financial instruments — The consolidated financial statements include various estimated fair value information as of
December 31, 2015 and 2014. 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 16 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.
F-41
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, 2015 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
$
190,603
$
3,716
530,394
2,420
190,603
3,716
537,761
2,420
(814,691 )
(725,982 )
(36 )
(36 )
(917 )
1
2
3
2
3
2
3
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
NOTE 16 − 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.
F-42
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 2015, there were no transfers between levels of the
fair value hierarchy.
Assets and liabilities measured at fair value on a recurring and non-recurring basis for the years ended December 31, 2015 and 2014
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
Other real estate owned
Fair Value Measurements at December 31, 2015 Using
Quoted Prices
in Active
Markets for
Identical Assets
(Level 1)
Significant
Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
December 31,
2015
$
$
32,868
2,719
68,586
806
13,420
10,138
3,009
$
0
0
0
0
0
0
3,172
$
31,815
2,729
66,535
811
10,944
10,321
0
0
0
0
0
2,476
0
0
$
$
1,965
2,066
$
$
0
0
$
$
0
0
$
$
1,965
2,066
F-43
(in thousands)
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
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
$
$
$
$
$
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
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
F-44
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 17 — 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,
2015
2014
$
$
8,218 $
17,402
(18,986 )
6,634 $
13,684
8,345
(13,811 )
8,218
Related party deposits totaled $62,727,000 and $58,446,000 at December 31, 2015 and 2014, respectively.
NOTE 18 — 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 $454,000 and $371,000 for the years
ended December 31, 2015 and 2014, respectively.
NOTE 19 — 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 20 — 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.
F-45
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, 2015 and 2014, $2,440,000 and $2,222,000,
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 $13,747,000 and $13,545,000 at December 31,
2015 and 2014, respectively. The cash surrender value of the life insurance policies is included in other assets on the consolidated
balance sheets (Note 7).
NOTE 21 — 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.
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, Tier I and Common Equity 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, 2015,
that the Bank and Company meets all capital adequacy requirements to which they are subject.
As of December 31, 2015, 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, Common Equity Tier 1 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.
F-46
fThe Company and Bank’s actual capital amounts and ratios at December 31, 2015 and 2014, are presented in the following table.
(in thousands)
Capital ratios for Bank:
As of December 31, 2015
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) $
Common equity Tier 1 capital (to Risk-
Weighted Assets)
Tier I capital (to Average Assets)
$
$
81,462
73,868
73,868
73,868
12.2%
11.1%
11.1%
9.1%
As of December 31, 2014
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%
Capital ratios for Bancorp:
As of December 31, 2015
Total capital (to Risk- Weighted Assets)
Tier I capital (to Risk- Weighted Assets)
Common equity Tier 1 capital (to Risk-
Weighted Assets)
Tier I capital (to Average Assets)
As of December 31, 2014
Total capital (to Risk- Weighted Assets)
Tier I capital (to Risk- Weighted Assets)
Tier I capital (to Average Assets)
$
$
$
$
$
$
$
81,852
74,258
74,258
74,258
12.3%
11.1%
11.1%
9.2%
79,873
73,020
73,020
14.5%
13.3%
10.2%
$
$
$
$
$
$
$
$
$
$
$
$
$
$
53,348
40,011
30,008
32,475
>8.0%
>6.0%
>4.5%
>4.0%
43,778
21,889
28,783
>8.0%
>4.0%
>4.0%
$
$
$
$
$
$
$
66,685
53,348
43,345
40,593
>10.0%
>8.0%
>6.5%
>5.0%
54,722
32,833
35,979
>10.0%
>6.0%
>5.0%
53,353
40,014
30,011
32,478
>8.0%
>6.0%
>4.5%
>4.0%
43,785
21,893
28,787
>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
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
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.
F-47
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.
F-48
OAK VALLEY BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
22. PARENT ONLY CONDENSED FINANCIAL STATEMENTS
CONDENSED BALANCE SHEETS
(dollars in thousands)
ASSETS
Cash
Investment in bank subsidiary
Other assets
Total assets
December 31,
2015
December 31,
2014
$
$
359 $
77,878
109
612
74,287
142
78,346 $
75,041
LIABILITIES AND SHAREHOLDERS’ EQUITY
Other liabilities
$
83 $
-
Total liabilities
$
83 $
-
Shareholders’ equity
Common stock, no par value; 50,000,000 shares authorized,
8,078,155 and 8,074,855 shares issued and outstanding at
December 31, 2015 and 2014, respectively
Additional paid-in capital
Retained earnings
Accumulated other comprehensive income, net of tax
Total shareholders’ equity
24,682
3,217
48,795
1,569
78,263
24,682
2,910
45,582
1,867
75,041
Total liabilities and shareholders' equity
$
78,346 $
75,041
F-49
OAK VALLEY BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
22. PARENT ONLY CONDENSED FINANCIAL STATEMENTS (CONTINUED)
CONDENSED STATEMENTS OF INCOME
(dollars in thousands)
INCOME
Year Ended December 31,
2015
2014
Dividends declared by subsidiary
$
Total income
1,695 $
1,695
793
793
75
271
34
103
483
310
6,577
6,887
235
94
261
76
476
907
788
3,889
4,677
231
$
4,908 $
7,122
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 of subsidiary
Income before income tax benefit
Income tax benefit
Net income
F-50
OAK VALLEY BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
22. PARENT ONLY CONDENSED FINANCIAL STATEMENTS (CONTINUED)
CONDENSED STATEMENTS OF CASHFLOWS
(dollars in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income
Adjustments to reconcile net income to net cash from operating activities:
Undistributed net income of subsidiary
Stock based compensation
Excess tax benefits from stock-based payment arrangements
Increase in other liabilities
Decrease (increase) in other assets
Net cash from operating activities
CASH FLOWS FROM FINANCING ACTIVITIES:
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 used in financing activities
NET (DECREASE) 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,
2015
2014
$
4,908 $
7,122
(3,889)
261
(46)
83
79
1,396
(1,695)
0
46
(1,649)
(253)
612
359 $
(6,577)
271
(102)
0
(17)
697
(1,318)
924
102
(292)
405
207
612
4,152
$
3,005
$
$
F-51
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
30, 2016, 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, 2015.
/s/ Moss Adams LLP
Stockton, California
March 30, 2016
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 29, 2016
/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, Jeffrey A. Gall, 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 29, 2016
/s/ Jeffrey A. Gall
Jeffrey A. Gall
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, 2015, 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 29, 2016
Dated: March 29, 2016
/s/ Christopher M. Courtney
Christopher M. Courtney
President and Chief Executive Officer
/s/ Jeffrey A. Gall
Jeffrey A. Gall
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.