D E F I N I N G
M O M E N T S
C E L E B R A T I N G
30
YEARS
OAK VAL LEY BANCORP
2020 ANNUAL RE PORT
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,
2020
2019
2018
2017
2016
Interest income
Interest expense
Net interest income
Provision for loan losses
Non-interest income
Non-interest expense
Net income before income taxes
Provision for income taxes
Net income
Net earnings per share (diluted)
Cash dividends paid per share
Cash dividends paid
Weighted average 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
$46,110
1,153
44,957
2,165
4,815
29,864
17,743
4,056
13,687
$1.68
$0.28
$2,299
8,138,528
$1,511,478
1,420,229
1,013,115
226,656
220,589
$572,927
794,882
1,367,809
129,694
$42,602
1,568
41,034
545
5,047
28,847
16,689
4,200
12,489
$1.54
$0.27
$2,214
$40,174
1,606
38,568
555
4,712
27,378
15,347
3,810
11,537
$1.42
$0.26
$2,117
$35,245
$32,289
1,065
34,180
350
5,976
24,565
15,241
6,147
9,094
$1.13
$0.25
$2,022
764
31,525
484
4,413
24,315
11,139
3,474
7,665
$0.95
$0.24
$1,940
8,116,627
8,100,098
8,081,497
8,082,657
$1,147,785
$1,094,887
$1,034,852
$1,002,110
1,067,816
750,985
147,594
193,385
1,027,161
711,902
126,145
209,818
971,199
662,544
149,173
182,360
$405,738
$344,554
$325,959
614,191
1,019,929
112,570
641,941
986,495
99,038
612,923
938,882
90,767
938,595
610,949
190,810
160,333
$311,879
602,214
914,093
82,450
DEAR CUSTOMERS,
SHAREHOLDERS AND FRIENDS:
Defining moments. When
you look back at the course
of history – whether you
are talking about great
civilizations or great
companies – you will find a
series of defining moments
which spurred evolution and
growth. In some cases, the
growth may occur as one
defining moment; and in
others, it may result from a
string of events which fuel
the transformation from good
to great.
On the following pages,
we highlight several key
events that brought us to
where we are today—some
more pivotal than others—
but all holding a notable
place in the bank’s 30-year
history. While many events
have collectively driven the
bank’s success, the past
year will be remembered as
a monumental moment for
asset and loan growth.
With all the uncertainty
the pandemic brought upon
us, we are extremely proud
of our team’s response in
supporting the needs of
clients and local business
owners as they navigated
through difficult times.
While many banks closed
branch lobbies and reduced
hours, Oak Valley kept
our branches open, while
embracing digital channels
to expedite transactions
remotely. In 2020, the bank
processed 1,672 first draw
PPP loans, totaling over
$244 million as we sought to
secure desperately needed
funding for clients and local
businesses.
In the past year, the
bank’s commitment to
serving the needs of the
business community was
called to action and on
display. This historic growth
resulting from the bank’s
fervent participation in PPP,
combined with over $50
million of organic (non-PPP)
loan growth, helped the bank
attain record-level earnings.
Years from now, when we
reflect on 2020, we are
confident the relationships
forged during these times
will be among the strongest
client connections we have
ever made.
While the events of 2020
have been extraordinary,
through dedication and hard
work, our teams have turned
in a remarkably solid financial
performance. For the year
ended December 31, 2020,
net income totaled $13.7
million, or $1.68 per diluted
share, representing an
increase of 9.6% compared
to $12.5 million or $1.54 per
diluted share for
2019. The increase
to net income
compared to the
prior year was
primarily due to
strong earning
asset growth
and corresponding
increases to net
interest income.
Total assets
grew to $1.51 billion
for the year ended
December 31,
2020, an increase
of $363.7 million
over the prior year.
Gross loans at year-
end totaled $1.01
billion, reflecting an
increase of $262.1
million over the prior
year. Total deposits
increased to $1.37
billion at year-end,
an increase of
$347.9 million over
the prior year.
“YEARS FROM NOW,
WHEN WE REFLECT
ON 2020, WE ARE
CONFIDENT THE
RELATIONSHIPS
FORGED DURING
THESE TIMES WILL
BE AMONG THE
STRONGEST CLIENT
CONNECTIONS WE’VE
EVER MADE.”
or providing a
premier banking
experience, we
are committed to
supporting our
neighbors and
community leaders
who are dedicated
to strengthening
the places we
call home.
As we celebrate
30 years serving
the needs of
our amazing
communities, we
would like to thank
the individuals,
families, and
businesses that
have blessed us
Our teams remain rooted
in creating a culture of
service, integrity, teamwork,
credit quality, and community.
They are diligent in attracting
new clients and strengthening
the relationships with
our existing clients. We
wholeheartedly believe that
if we can deliver on these
promises, while introducing
new clients to and immersing
them in our unique service
culture, they will become
enthusiastic advocates
for the bank.
We are dedicated
to offering financial
solutions to meet
the needs of our
communities.
Whether lending to
clients devoted to
serving the Central
Valley and Sierra Region
with their patronage. Whether
you have been with us for the
long haul, recently started
a banking relationship, or
have only just discovered
Oak Valley Community
Bank, we appreciate your
respective loyalty, choice, and
consideration. You have our
steadfast commitment that
we’ll continue building the
bank in the image upon which
it was founded: cultivating
lifelong customers by providing
a relationship-oriented brand
of superior service.
As always, thank you for
your support, investment,
and belief in community
banking.
Sincerely,
Christopher M. Courtney
S TAY I N G S T R O N G T O G E T H E R
of our staff to work from
home, minimizing exposure
and allowing them to more
easily balance the new home
life paradigm.
The can-do spirit and
team loyalty cultivated in
our branches carried over
to the work-from-home
environment, fueling a
seamless operation where
camaraderie remained as
strong as productivity
and service.
continue serving customers
with the same commitment
to personalized service
and convenience. We also
arranged for nearly 40 percent
L O O K I N G B A C K A T O U R 3 0 Y E A R H I S T O R Y
Bob Stewart (right) of R.L.
Stewart Insurance opens
his account, earning the
distinction of being Oak
Valley’s first client.
Since its inception, Oak Valley Community
Bank has steadfastly pursued its mission of
cultivating lifelong customers by executing
a unique brand of relationship service. As a
business partner, supporter, and friend, the
bank became a trusted ally to thousands
during the global pandemic—providing a port
in the storm to customers new and old.
We invite you to experience our journey in
the following pages, showcasing some of
the bank’s highlights during the past
three decades.
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1994
Oak Valley Community
Bank is founded by a
group of community-
minded individuals with
a vision to make local
banking available to
Oakdale and surrounding
communities. The
branch welcomes its first
customers in May 1991.
Founding Board Members assemble to mark the
moment at one of the bank’s early shareholder
meetings.
offered a port in the storm
to new customers who were
turned away by their own
banks, providing them with
much-needed PPP loans.
This provided a unique
watershed moment for us to
showcase our personalized
approach to banking, with a
high probability of attracting
these individuals—many who
were already disillusioned
with their existing financial
institution—and turning
them into new, long-term
customers.
Even with the demands of
the pandemic, we continued
to grow in both stature
and strength as a loyal
provider to, and builder of,
the communities we serve.
As the pandemic stretched
into summer and beyond,
our employees continued
to rally, working with cross-
trained team members and
executives rolling up their
sleeves to work virtually
alongside loan officers and
credit staff to fulfill PPP
loans and service other
banking needs.
Naturally, keeping
everyone safe was of utmost
importance, so like many
businesses, we enforced
social distancing and
masking in our branches to
to the aid of our existing
clients to help alleviate their
financial burdens, we also
The circumstances of the
past year presented an
unprecedented challenge
to humankind, testing our
strength, agility, perseverance
and ultimately our sense of
hope. Oak Valley Community
Bank, which has served
as business partner,
supporter and friend to
many, became a trusted
ally during these uncertain
times. Not only did we come
S E R V I N G O U R C O M M U N I T I E S
When we first explored the
idea of starting a de novo
community bank 30 years
ago, the goal was simple:
to build a single branch to
serve the banking needs of
Oakdale and the surrounding
towns. Our aim was to
provide competitive rates
and premier service to the
local business community.
But after opening the first
branch, the impetus to grow
was too great, especially
with neighboring counties in
need. By 2000, Oak Valley
established branches in
Sonora and Modesto, and
was eyeing opportunities
in the Eastern Sierra. And,
thanks to our dedicated staff,
loyal customers, shareholder
support, and directors’
guidance, our vision and
footprint continue to grow.
In addition to PPP loan
balances, we generated
millions of dollars in regular
loan production and deposit
growth to attain our highest
level of profitability, thanks to
the combined efforts of our
dedicated teams.
For the fifth consecutive
year, Success Capital
Expansion and Development
Corporation recognized Oak
Valley as their “Most Active
SBA 504 Lending Partner” in
2020. We booked nearly $8
million in loans, helping to
fund over $21 million in total
projects. Additionally, Mike
Garcia, Senior Vice President,
Commercial Banking, was
awarded for “Largest SBA 504
Loan.” Both distinctions reflect
our commitment to providing
the small business community
with local access to the capital
needed to grow businesses
and promote growth in the
Central Valley.
The bank also received
an “Outstanding” rating,
the highest possible, for its
community development
and lending efforts in its
most recent Community
Reinvestment Act (CRA)
Performance Evaluation
from the Federal Reserve
Bank of San Francisco. This
achievement makes the bank
one of only 11 banks, regulated
by the Federal Reserve
Bank and headquartered
in California, to receive an
Overall Rating of Outstanding
since 2010. During the
evaluation period, Oak Valley
originated over 60 community
development loans totaling
$114.2 million to support
Community Reinvestment
purposes; invested $7.8 million
in Mortgage-Backed Securities
(MBS) that helped low- and
moderate-income borrowers
obtain mortgage loans; and
contributed $21.3 million
within its assessment areas,
representing 20 percent of its
Tier 1 Capital.
L O O K I N G B A C K | C O N T I N U E D
The Oakdale branch
achieves rapid
success, exceeding
$41 million in total
assets by the end of
the year.
Moving westward, Oak Valley opens
a branch on McHenry Avenue in
Modesto to serve local businesses
and residents in rapidly growing
Stanislaus County.
A new era of expansion begins.
The bank reaches into the Eastern
Sierra, establishing its first branch
in Bridgeport to serve a market
ready to embrace the spirit of
community banking. Total assets
reach $134 million by year end.
Oak Valley
rapidly
gains
market
share in
Stanislaus
County.
A push for expansion
begins with the launch
of branches in Turlock,
Stockton, Patterson, and
Ripon in quick succession,
bringing the bank’s
footprint to ten branches.
Reconstruction is completed
on the Clocktower Building,
restoring this historical
landmark to its former glory.
The bank moves into its new
headquarters.
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With a mission to grow slowly and
focus on personalized customer
service, the bank opens a branch in
Sonora, pushing the bank’s assets to
over $55 million.
With banking
options scarce
in the Eastern
Sierra, Oak Valley
ventures into
the region to
establish three
branches.
The bank adds
branches in
Mammoth Lakes and
Bishop to strengthen
its presence in the
Eastern Sierra.
Oak Valley enters the Modesto
downtown core to increase
visibility and customer
convenience, relocating the
McHenry branch to the 12th
Street Plaza Building. The bank
opens the Escalon branch.
The bank
opens or
relocates
six
branches
over two
years.
Northern Modesto experiences
continued growth and the bank seizes
the opportunity to open a second
branch in this bustling business
and farming community - offering
superior service and a strong
foundation of deposits.
The Oak
Valley Team
Since the pandemic
began, it’s been
anything but business
as usual at Oak Valley.
Not only did we quickly
push through $244
million in PPP loans, at
times working day and
night to accomplish
this feat, through it
all we continued to
process all types of
loans and fulfilled our
customers routine
banking needs.
We commend and
congratulate our
heroes, the entire Oak
Valley team, who went
above and beyond
to keep everything
running smoothly.
“ We have a tried and
true saying at Oak
Valley: ‘Service to our
customers is only as
good as service to
each other.’ I believe it’s
the close relationships
and teamwork culture
we’ve nurtured in the
branches that enable
us to accomplish the
seemingly impossible.”
Christopher M. Courtney,
President and CEO
L O O K I N G T O T H E F U T U R E
Despite the challenges of
the pandemic, Oak Valley
increased charitable giving
and donations of both
volunteer time and money
to needy organizations.
In certain cases, the bank
provided donations to many
nonprofits they regularly
support instead of, or in
addition to, providing PPP
loans to help rescue or
revitalize programs
and services.
One notable investment
this past year was the
bank’s generous financial
contribution to help
establish the Stanislaus
Community Foundation’s
Business Resilience Fund.
Oak Valley has consistently
supported the foundation
with contributions toward
its numerous innovative
community development
efforts for many years.
We also maintained our
commitment to providing
operational support to
the most vulnerable
organizations, including the
Modesto Gospel Mission
serving homeless individuals.
The bank continued its
financial assistance to meet
the Mission’s immediate
needs with a focus on future
recovery, helping to fund
training in life skills and
employment, in addition
to addiction recovery and
medical services for its
clients. This year, volunteers
also banded together to
deliver food to needy seniors.
In total, the bank logged
more than 1,600 volunteer
hours last year in support
of community development
and service organizations
spanning several counties.
Oak Valley also extended
funding to the Center for
Human Services (CHS) in
Modesto, serving more than
500,000 individuals, children
and families annually in
Stanislaus County for the
past 50 years via seven
core program areas: Mental
Health Services, Shelter
Services, Youth Services,
Juvenile Justice Services,
School Based Services,
Substance Abuse Treatment
and Family Resource Centers.
The bank also continued its
business partnership with the
organization via a new credit
facility for the expansion of
their Youth Navigation Center
which will engage, stabilize
and prepare the county’s
most vulnerable youth for
bright futures.
L O O K I N G B A C K | C O N T I N U E D
The bank returns to McHenry, opening a third
branch in Modesto to capitalize on the city’s
continued business growth. In kind, Oak Valley
opens its first branch in Manteca to serve the
needs of customers and enhance coverage in
southern San Joaquin County.
As the economy
continues to
rebound from the
recession, the bank
envisions another
round of expansion
to include new
branches in Tracy,
downtown Sonora,
and the acquisition
of Mother Lode
Bank.
Oak Valley Bancorp is established
to provide the bank with greater
opportunities for growth by enhancing
the flexibility in the ownership
structure. The bank begins publicly
trading on NASDAQ.
Oak Valley
has grown
to 17
branches
and $1.5
billion in
assets.
The COVID-19 pandemic descends
on the U.S., and Oak Valley rallies
to support its customers and other
local businesses in the region.
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2009
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2015
2016
2017
2018
2019
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Again focused on visibility and customer convenience,
the bank relocates the Mammoth Lakes branch to
the main shopping district’s central core to increase
business development opportunities.
In larger markets,
the bank typically
establishes a
Loan Production
Office before
embarking upon the
development of a
full-service branch.
The bank boldly moves to establish a presence in
Sacramento, beginning with a loan production office
on Capitol Mall, followed by a full-service branch nine
months later. The bank relocates the East Sonora and
Turlock branches.
The bank issues
$244 million in PPP
loans, extending
greatly needed
funds to existing
clients and brand
new customers
seeking a more
responsive PPP
experience.
Jose Sabala,
Community
Reinvestment
Act Officer
If there is a food
drive, fundraising
campaign, or volunteer
event, you can bet
that Jose Sabala is
involved, if not playing
a leadership role. For
the past three years,
Jose has served as the
bank’s Community
Reinvestment Act
Officer, evaluating
new community
development
opportunities,
businesses and non-
profits with borrowing
needs in underserved
areas within the
bank’s footprint. Both
highly recognized
and well-loved in
the community,
Jose combines his
knowledge, active
involvement, and
local partnerships
to serve numerous
needy organizations,
often recruiting other
Oak Valley team
members to the effort.
Jose is a current
member of South
Modesto Partnerships,
Stanislaus County New
Leadership Network,
Central Valley Hispanic
Chamber of Commerce,
City Ministry Network,
and Love Our Cities.
MARKET MAKERS
John Cavender
Raymond James &
Associates
(415) 616-8935
Joey Warmenhoven
Wedbush Securities
(503) 922-4888
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
B A N K O F F I C E R S
DIRECTORS
Donald L. Barton
Chairman of the Board
Chairman Investment
Committee
Agribusinessman
James L. Gilbert
Vice Chairman of the Board
Chairman Nominating
Committee
Feed and Seed Business
Christopher M. Courtney
President and CEO
Oak Valley
Community Bank
Lynn R. Dickerson
Non Profit Executuve
Thomas A. Haidlen
Automobile Dealer
H. Randolph Holder
Media Company Executive
Allison C. Lafferty
Attorney
Daniel J. Leonard
Chairman Compensation
Committee
Winery Executive
Ronald C. Martin
Retired Bank Executive
Janet S. Pelton
Chairman Audit Committee
Certified Public Accountant
Danny L. Titus
Chairman CRA Committee
Real Estate and
Investments
Terrance P. Withrow
Chairman Loan Committee
Certified Public Accountant
and Farmer
DIRECTORS EMERITUS
Michael Q. Jones
General Contracting and
Real Estate
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 Operating Officer
Corporate Secretary
Julie DeHart
Executive Vice President
Retail Banking Group
Cathy Ghan
Executive Vice President
Commercial Real Estate
Janis Powers
Executive Vice President
Risk Management
Mike Rodrigues
Executive Vice President
Chief Credit Officer
Russell Stahl
Executive Vice President
Information Technology
Gary Stephens
Executive Vice President
Commercial Banking Group
Kim Booke
Senior Vice President
Credit Administration
Peter Brown
Senior Vice President
Credit Administration
Melissa Fuller
Senior Vice President
Human Resources
Jeff Gall
Senior Vice President
Chief Financial Officer
Mike Garcia
Senior Vice President
Commercial Banking
Jeff Hushaw
Senior Vice President
Commercial Banking
Bill Nunes
Senior Vice President
Marketing
Michael Petrucelli
Senior Vice President
Commercial Banking
Linda Spinelli
Senior Vice President
Central Operations
INDEPENDENT AUDITORS
RSM US LLP
44 Montgomery St, Ste
3900
San Francisco, CA 94104
LEGAL COUNSEL
Matteo G. Daste
Orrick, Herrington and
Sutcliffe, LLP
405 Howard St
San Francisco, CA 94105
CORRESPONDENT BANK
MUFG Union Bank, N.A.
400 California St
San Francisco, CA 94104
Pacific Coast Bankers’ Bank
340 Pine St, Ste 401
San Francisco, CA 94104
TRANSFER AGENT
AND REGISTRAR
Computershare
250 Royall St
Canton, MA 02021
(800) 962-4284
D e e p R o o t s ~ S t r o n g B r a n c h e s
San Francisco
80
Sacramento
Bridgeport
Stockton
Manteca
580
Ripon
Tracy
Patterson
Escalon
Sonora
Oakdale
Modesto
Turlock
99
5
Fresno
395
Mammoth
Lakes
Bishop
EASTERN SIERR A
COMMUNITY BA NK
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 LOCATIO NS :
United States Marine Corps
Marine Housing Exchange
Coleville, CA
United States Marine Corps
Mountain Warfare
Training Center
Bridgeport, CA
B R A N C H E S
OAK VALLEY
COMMUNITY BANK
OAKDALE
125 N Third Avenue
Oakdale, CA 95361
(209) 848-BANK (2265)
SONORA-DOWNTOWN
85 Mono Way
Sonora, CA 95370
(209) 396-7720
SONORA-EAST
14890 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
241 W Main Street
Turlock, CA 95380
(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
M ANT ECA
191 W North Street
Manteca, CA 95336
(209) 249-7360
T R ACY
1034 N Central Avenue
Tracy, CA 95376
(209) 834-3340
SACRAMENTO
455 Capitol Mall
Sacramento, CA 95814
(916) 260-5800
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, 2020
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission File Number: 001-34142
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
Securities registered pursuant to Section 12(g) of the Act:
Trading Symbol
OVLY
None
(Title of class)
Name of each exchange on which registered
The Nasdaq Stock Market, LLC
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. Yes No
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90
days. Yes No
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files).
Yes No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging
growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the
Exchange Act.
Large accelerated filer
Accelerated filer
Non-accelerated filer
Smaller reporting company
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised
financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over
financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes No
As of June 30, 2020, the last business day of the Registrant’s most recently completed second fiscal quarter, the aggregate market value of the registrant’s common
stock held by non-affiliates of the registrant, based upon the closing price of $12.68 per share of the registrant’s common stock as reported by the Nasdaq, was
approximately $86 million. As of March 26, 2021, there were 8,235,939 shares of common stock outstanding.
Portions of the registrant’s Proxy Statement for the Annual Meeting of Shareholders will be filed with the Commission within 120 days after the end of the Registrant’s
2020 fiscal year end and are incorporated by reference into Part III of this report.
DOCUMENTS INCORPORATED BY REFERENCE
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, FINANCIAL STATEMENT SCHEDULES
FORM 10-K SUMMARY
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 -
ITEM 16 -
SIGNATURES
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20
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33
33
33
34
34
35
63
65
65
65
66
67
67
68
68
68
68
70
71
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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K (Annual Report) 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.
All statements contained in this Annual Report other than statements of historical fact, including, for example, statements
regarding descriptions of plans or objectives of management for future operations, products or services, forecasts of our revenues,
earnings or other measures of economic performance, our assessment of significant factors and developments that may affect our
results, regulatory controls and processes and their impact on our business, our business strategy and plans and our objectives for
future operations, are forward-looking statements. The words “believe,” “may,” “will,” “potentially,” “estimate,” “continue.”
“anticipate,” “intend,” “could,” “would,” “project,” “plan” “expect,” and similar expressions that convey uncertainty of future events
or outcomes are intended to identify forward-looking statements.
We have based these forward-looking statements on our current expectations and projections about future events and trends.
These forward-looking statements are subject to a number of risks, uncertainties and assumptions that are difficult to predict,
including the impact of the coronavirus (COVID-19) pandemic on our business, results of operations and financial condition and our
and the U.S. government’s response to it, and including those listed in this “Special Note Regarding Forward-Looking Statements,”
and those described in Part II, Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
Moreover, we operate in a very competitive and rapidly changing environment, and new risks emerge from time to time. It is not
possible for our management to predict all risks, nor can we assess the impact of all factors on our business or the extent to which any
factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements
we may make. In light of these risks, uncertainties, and assumptions, the forward-looking events and circumstances discussed in this
Annual Report may not occur and actual results could differ materially and adversely from those anticipated or implied in the forward-
looking statements.
You should not rely upon forward-looking statements as predictions of future events. Although we believe that the
expectations reflected in the forward-looking statements are reasonable, we cannot guarantee that the future results, levels of activity,
performance or events and circumstances reflected in the forward-looking statements will be achieved or occur. We undertake no
obligation to update publicly any forward-looking statements to conform these statements to actual results or to changes in our
expectations, except as required by law. You should read this Annual Report with the understanding that our actual future results,
levels of activity, performance and events and circumstances may be materially different from what we expect.
3
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 8,218,873 are issued and
outstanding at December 31, 2020, 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 Financial Protection and Innovation (DFPI), the Federal Deposit Insurance Commission
(FDIC) and the Federal Reserve Board (FRB). Since its formation, the Bank has provided basic banking services to individuals and
business enterprises in Oakdale, California and the surrounding areas. The focus of the Bank is to offer a range of commercial banking
services designed for both individuals and small to medium-sized businesses in the two main areas of service of the Bank: the Central
Valley and the Eastern Sierras.
The Bank offers a complement of business checking and savings accounts for its business customers. The Bank also offers
commercial and real estate loans, as well as lines of credit. Real estate loans are generally of a short-term nature for both residential
and commercial lending purposes. Longer-term real estate loans are generally made with adjustable interest rates and contain
customary provisions for acceleration. Traditional residential mortgages are available to Bank customers through a third party.
The Bank offers other services for both individuals and businesses including online banking, remote deposit capture, mobile
banking, merchant services, night depository, extended hours, wire transfer of funds, note collection, and automated teller machines in
a national network. The Bank does not currently offer international banking or trust services although the Bank may make such
services available to the Bank’s customers through financial institutions with which the Bank has correspondent banking
relationships. The Bank does not offer stock transfer services, nor does it directly issue credit cards.
Expansion
Branch Expansion. Since opening our doors of the main Oakdale branch in 1991, our network of branches and loan production
offices have been expanded geographically. As of December 31, 2020, we maintained seventeen full-service branch offices (in
addition to our corporate headquarters) and one loan production office. Beginning in October 1995, we started our geographic
expansion outside of Oakdale, by opening a Loan Production Office in Sonora, California. We subsequently opened a branch in
Sonora and two branches in Modesto. In September 2000, we expanded into the Eastern Sierra, opening a branch in Bridgeport,
California under the name Eastern Sierra Community Bank. Since that time, we have added branches in Mammoth Lakes and Bishop.
During 2005 and 2006, we aggressively increased our presence in the Central Valley, by opening branches in Turlock, Stockton,
Patterson, Ripon and Escalon. In March 2007, our corporate headquarters expanded by adding an adjacent historical building located
in downtown Oakdale to our 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. In 2018, we opened a new branch in Sacramento. We intend to
continue our growth strategy in future years through the opening of additional branches and loan production offices as demand
dictates 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
4
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
Management has determined that because all of the banking products and services offered by the Company are available
in each branch of the Bank, all branches are located within the same economic environment and management does not allocate
resources based on the performance of different lending or transaction activities, it is appropriate to aggregate the Bank
branches and report them as a single operating segment. No customer accounts for more than 10 percent of revenues for the
Company or the Bank.
Primary Market Area
We conduct business from our main office in Oakdale, a city of approximately 23,500 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 98% of our loans and 90% 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.
Loan Procedures. Loans recommended for approval by the Senior Loan Committee made up of our Board of Directors and
designated executive officers of the bank, by Joint Authority or by loan officers, to the extent of their lending 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 or Joint Authority includes all amounts above the
individual officer loan authority and below the Senior Loan Committee limits of $5,000,000 for real estate secured loans, $2,500,000
for loans secured by collateral other than real estate and cash, $1,500,000 for unsecured loans, or when the borrower’s aggregate total
outstanding commitment exceeds $5,000,000. These loans require joint approval of either the Chief Executive Officer, President,
Chief Credit Officer, Senior Lending Officer or Credit Administrator.
At December 31, 2020, the Bank’s authorized legal lending limits were $19.4 million for unsecured loans plus an additional
$13.0 million for specific secured loans. Legal lending limits are calculated in conformance with California law, which prohibits a
bank from lending to any one individual or entity or its related interests an aggregate amount which exceeds 15% of primary capital
5
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, 2020 totaled $129.7 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, 2020, consumer and commercial real estate loans constituted 68% of our loan
portfolio, of which 96% were commercial real estate loans.
Commercial real estate loans typically have 10-year maturities with up to 25-year amortization of principal and interest and
loan-to-value ratios of not more than 75% of the appraised value or purchase price, whichever is lower. We usually impose a
prepayment penalty during the period within 3 to 5 years of the date of the loan.
Construction loans are comprised of loans on commercial, residential and income producing properties that generally have terms
of 1 year, with options to extend for additional periods to complete construction and to accommodate the lease-up period. We usually
require 15% equity capital investment by the developer and loan to value ratios of not more than 75% of anticipated completion value.
Miniperm loans finance the purchase and/or ownership of commercial properties, including owner-occupied and income
producing properties. We also offer miniperm loans as take-out financing with our construction loans. Miniperm loans are generally
made with an amortization schedule ranging from 20 to 25 years, with a lump sum balloon payment due in 3 to 5 years.
Equity lines of credit are revolving lines of credit with repayment term and are 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
25 years (10-year interest only with 15-year amortization).
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
renewal individually, (b) using a joint 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, 2020, the aggregate loan-to-value of the entire commercial real estate portfolio was 52.2%, based on the
most recent appraisals as of the time of origination or renewal. Historical data suggests that the Bank continues to maintain strong
LTV, which has served as a cushion against precipitous reductions in real estate values. Non-owner occupied CRE comprises 45.4%
of the Bank’s total commitments, as of December 31, 2020. The loan-to-value on the non-owner occupied CRE segment was 37.8%,
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as of December 31, 2020. The highest concentration by product type is CRE Office, which comprised 22.3% of total CRE loan
commitments outstanding, as of December 31, 2020.
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 reasonable 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 in the event of
any 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, Constant Maturity Treasury 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 joint 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 as required 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. We also participated in the SBA’s Paycheck Protection Program (“PPP”) established in 2020 to
provide economic assistance to small businesses during the COVID-19 pandemic.
Consumer Loans. Consumer loans include personal loans, auto loans, home improvement loans, home mortgage loans,
revolving lines of credit and other loans typically made by banks to individual borrowers. We provide consumer loan products in an
effort to diversify our product line.
Our consumer loan portfolio is subject to certain risks, including:
• amount of credit offered to consumers in the market,
• interest rate increases, and
• consumer bankruptcy laws which allow consumers to discharge certain debts.
We attempt to reduce the exposure to such risks through the direct approval of all consumer loans by:
• reviewing each loan request and renewal individually,
• using a dual signature system of approval,
• strictly adhering to written credit policies, and
• performing external independent credit review.
7
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 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 Accounts. Checking accounts are generally non-interest and interest bearing accounts, respectively, and may include
service fees based on activity and balances.
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 (“FHLB”). 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 equity 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, 2020, we owned $4,003,000 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, 2020, our borrowing limit with the Federal Home Loan Bank was approximately
$318 million.
Internet and Mobile Banking
We offer Internet banking services, 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, make person-to-person payments 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. Mobile Banking offers many of the same services as internet banking but also includes mobile check
deposit.
Other Services
We offer ATMs located at branch offices as well as three other ATMs at various off-site locations, and customer access to an
ATM network. Additionally, we offer remote deposit capture service to allow commercial deposit customers the convenience of
scanning check deposits for quicker access to deposited funds.
8
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, 2020, our primary service areas contained 274 banking offices, with approximately $52.4 billion in total deposits.
As of June 30, 2020, we had total deposits of approximately $1.3 billion, which represented approximately 2.5% 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 four largest competing banks had 113 total branches
and deposits averaged approximately $269 million per office as of June 30, 2020 within the Bank’s primary service area.
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
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.
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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 68% of our loan portfolio held for investment at December
31, 2020 consisted of real estate-related loans, including construction loans, mini-perm 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, Sacramento, 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, 2020, we had 191 employees (161 full-time employees and 30 part-time employees). None of our employees
are currently represented by a union or covered by a collective bargaining agreement. We consider our relations with our employees
to be good.
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 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations, 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 light of recent conditions in the United States economy and the financial services industry, the Trump administration,
Congress, the regulators and various states continue to focus attention on the financial services industry. Additional proposals that
affect the industry have been and will likely continue to be introduced. The Company cannot predict whether any of these proposals
will be enacted or adopted or, if they are, the effect they would have on our business, the Company's operations or financial condition.
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.
The Company is 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 DFPI 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
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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 DFPI 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 DFPI 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.
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• 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.
• Provisions of the Gramm-Leach Bliley Act of 1999 (“GLBA”) 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 Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank Act”), enacted in 2010 has broadly affected the
financial services industry by creating 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:
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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 although depository institution holding companies
with assets of less than $15 billion as of year-end 2009 were grandfathered with respect to such securities issued prior to
March 19, 2020 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
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significantly restricts certain activities by covered bank holding companies, including restrictions on proprietary trading and private
equity investing.
In addition to the Dodd-Frank Act, other legislative and regulatory proposals affecting banks have been made both domestically
and internationally. Among other things, these proposals include significant additional capital and liquidity requirements and limitations
on size or types of activity in which banks may engage.
Legislation is introduced from time to time in the United States Congress that may affect our operations. In addition, the regulations
governing us may be amended from time to time. Any legislative or regulatory changes in the future could adversely affect our operations
and financial condition.
Volcker Rule
The “Volcker Rule” prohibits 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 Volker Rule also imposes limits on banking entities’ investments in, and other relationships
with, hedge funds or private equity funds. Certain collateralized debt obligations (“CDOs”), securities backed by trust preferred
securities are exempted.
The Volker Rule provides 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 Volker
Rule also clarifies that certain activities are not prohibited, including acting as agent, broker, or custodian.
The compliance requirements under the Volker Rule 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 Volker Rule reduces 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, 2020 or 2019 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.” In July 2014, the U.S. federal bank regulatory agencies
approved the U.S. version of Basel III, which 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 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 were 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
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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, were fully phased in by the end of 2019.
The Bank is well capitalized. As of December 31, 2020 and 2019, the Bank’s Total Risk-Based Capital Ratio was 13.1% and
12.3%, Tier 1 Risk-Based Capital Ratio was 12.0% and 11.3%, and our Common Equity Tier 1 Risk-Based Capital Ratio was 12.0%
and 11.3%, respectively.
In addition to the risk-based guidelines, federal banking regulators require banking organizations to maintain a minimum amount
of Tier 1 capital to total average assets, referred to as the leverage ratio. Banks that have received the highest rating of the five
categories used by regulators to rate banks and are not anticipating or experiencing any significant growth must maintain a ratio of
Tier 1 capital (net of all intangibles) to adjusted total assets, or “Leverage Capital Ratio”, of at least 3%. All other institutions are
required to maintain a leverage ratio of at least 100 to 200 basis points above the 3% minimum, for a minimum of 4% to 5%. Pursuant
to federal regulations, banks must maintain capital levels commensurate with the level of risk to which they are exposed, including the
volume and severity of problem loans. As of December 31, 2020 and 2019, the Bank’s Leverage Capital Ratios were 8.0% and 9.5%,
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
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 DFPI 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 2021.
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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.
As insurer, the FDIC imposes deposit insurance premiums and is authorized to conduct examinations of and to require reporting
by FDIC-insured institutions. FDIC-insured institutions are required to pay an additional quarterly assessment called the FICO
assessment in order to fund the interest on bonds issued to resolve thrift failures in the 1980s. This assessment continued until the end
of 2019, as the bonds matured in the years 2017 through 2019. The final collection was on the March 29, 2019 FDIC Quarterly
Certified Statement Invoice.
The FDIC assesses deposit insurance premiums quarterly on each FDIC-insured institution based on annualized rates. Each
institution with $10 billion or more in assets is assessed under a scorecard method using supervisory ratings, financial ratios and other
factors. Such institutions are also subject to a temporary surcharge required by the Dodd-Frank Act. As required by the Dodd-Frank
Act, deposit insurance premiums are assessed on the amount of an institution’s total assets minus its Tier 1 capital. Smaller institutions
are assessed by a method using supervisory ratings and financial ratios.
Community Reinvestment Act
We are subject to certain requirements and reporting obligations involving the 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 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 October of 2019 and we received an overall “Outstanding” 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 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
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privacy policy to consumers and permit consumers to “opt out” of having certain personal financial information disclosed to
unaffiliated 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.
Data privacy and data security are areas of increasing state legislative focus. The California Consumer Privacy Act (“CCPA”),
which became effective and enforceable in 2020 requires, among other things, covered companies to provide new disclosures to
California consumers regarding the use of personal information, gives California residents expanded rights to access their personal
information and allows such consumers new abilities to opt-out of certain sales of personal information. Further, the new California
Privacy Rights Act (“CPRA”) which was passed in November 2020, significantly modifies the CCPA. These modifications may result
in additional uncertainty and require us to incur additional costs and expenses in our effort to comply. Because we meet the thresholds
set forth in the CCPA and CPRA, we will be required to comply with these laws. We will continue to monitor developments related to
the CCPA and CPRA. The full impact of the CCPA and CPRA on our business is yet to be determined.
Like other lenders, we use credit bureau data in their underwriting activities. Use of such data is regulated under the Fair Credit
Reporting Act (“FCRA”), and the FCRA also regulates reporting information to credit bureaus, prescreening individuals for credit
offers, sharing of information between affiliates and using affiliate data for marketing purposes. Similar state laws may impose
additional requirements on us.
Other Consumer Protection Laws and Regulations
Bank regulatory agencies are increasingly focusing on compliance with consumer protection laws and regulations.
Interest and other charges collected or contracted for by the Bank are subject to state usury laws and federal laws concerning
interest rates. The Bank’s operations are also subject to federal laws applicable to credit transactions, and consumer protection statutes
and regulations, such as the:
• Truth-In-Lending Act, governing disclosures of credit terms to consumer borrowers;
• Home Mortgage Disclosure Act, requiring financial institutions to provide information to enable the public and public
officials to determine whether a financial institution is fulfilling its obligation to help meet the housing needs of the
community it serves;
• Equal Credit Opportunity Act, prohibiting discrimination on the basis of race, creed or other prohibited factors in
extending credit;
• Fair Credit Reporting Act, governing the use and provision of information to credit reporting agencies;
• Fair Debt Collection Act, governing the manner in which consumer debts may be collected by collection agencies;
• Truth in Savings Act; and
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rules and regulations of the various federal agencies charged with the responsibility of implementing such federal laws.
The operations of the Bank are also subject to the:
• Right to Financial Privacy Act, which imposes a duty to maintain confidentiality of consumer financial records and
prescribes procedures for complying with administrative subpoenas of financial records;
• Electronic Funds Transfer Act and Regulation E promulgated thereunder, which govern automatic deposits to and
withdrawals from deposit accounts and customers’ rights and liabilities arising from the use of automated teller
machines and other electronic banking services;
• Check Clearing for the 21st Century Act (also known as “Check 21”), which gives “substitute checks,” such as digital
check images and copies made from that image, the same legal standing as the original paper check; and
• The USA PATRIOT Act (“Patriot Act”), which requires financial institutions to, among other things, establish
broadened anti-money laundering compliance programs, and due diligence policies and controls to ensure the detection
and reporting of money laundering. Such required compliance programs are intended to supplement existing
compliance requirements that also apply to financial institutions under the Bank Secrecy Act and the Office of Foreign
Assets Control 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.
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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.
Securities Laws and Corporate Governance
The Company is subject to the disclosure and regulatory requirements of the 1933 Act and the 1934 Act, 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.
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 1934 Act 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.
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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
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ITEM 1A. RISK FACTORS
An investment in our securities is subject to certain risks. These risk factors should be considered by prospective and current
investors in our securities when evaluating the disclosures in this Annual Report on Form 10-K. The risks and uncertainties not
presently known to us or that we currently deem immaterial also may impair our business operations. If any of the following risks
actually occur, our business, results of operations and financial condition could suffer. In that event, the value of our securities could
decline, and you may lose all or part of your investment.
COVID-19 RISKS
Our business and our customers are negatively impacted by the COVID-19 pandemic, and we cannot predict the overall cost or
duration of these impacts on our business or the economy as a whole.
As a result of both consumer responses to the COVID-19 pandemic and government-imposed stay-home or shelter in place
orders, many businesses have suffered extreme financial hardship. Unemployment has increased both nationally and in California, and
on June 8, 2020, the National Bureau of Economic Research announced that the United States was in an economic recession.
Consequentially, we have substantially increased our allowance for credit loss in response to the negative economic impacts of the
COVID-19 pandemic. We consider certain qualitative factors for each loan pool, including changes in collateral values and economic
conditions, to adjust the expected historic loss rates for current and forecasted conditions that are not incorporated into the historical
loss information. However, we cannot be sure that the amount by which we have increased our allowance for credit losses will be
adequate or that additional increases to the allowance for credit loss will not be needed in subsequent periods. The lack of information
regarding when orders requiring the closure of non-essential parts of our economy will be lifted, how they will be lifted, the potential
for future outbreaks of infections that may require additional closures of the economy and the long lasting impacts of the pandemic on
the economy generally, the actual credit performance of our loan portfolio as compared to the modeled estimation, as well as on
consumer behavior in the near term and the long run, make it hard to accurately model the total expected impact to the credit quality
of our loan portfolio. While our provisioning incorporates past events and current conditions regarding the expected economic impact,
the actual impact is unknowable, and a failure to make adequate provision may result in future losses above our expected losses,
which would have a negative impact on our capital position, liquidity, financial position and results of operations.
In March 2020, the Federal Open Market Committee (FOMC) decreased the federal funds target rate in March 2020 to a range
of 0%-0.25%, which resulted in a reduction in our earning assets yields. Even though further FOMC rate cuts are not forecasted for
2021, we expect this negative impact will continue to some degree due to continued repricing of existing loans and investment
securities. The potential compression of net interest income and net interest margin could occur 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 remain at historic lows and cannot reasonably be further reduced.
To date, we have not closed any of our branches for extended periods in response to the COVID-19 pandemic. However, many
other banks in our area have had to close branches due to risks of infection or actual infection within those branches. While we have
implemented social distancing and sanitation plans and other safeguards and provided personal protection equipment for our front line
employees, those employees remain at heightened risk for infection due to their exposure to the public, and any exposure to the virus
may require us to temporarily close one or more of our branches in order to provide for appropriate cleaning of the branch to reduce
the risk of infection. These measures, including limiting branch access, potential closures and costs of increased cleaning, may
increase our costs of doing business and decrease the profitability of our branches, which may in turn impact our results of operations.
The extent to which the COVID-19 global pandemic and measures taken in response to it will impact our business, results of
operations and financial condition will depend on future developments, which are highly uncertain and are difficult to predict; these
developments include, but are not limited to, the duration and spread of the pandemic, its severity, the actions to contain the virus or
address its impact, including the effectiveness of vaccination programs, U.S. and foreign government actions to respond to the
reduction in global economic activity, and how quickly and to what extent normal economic and operating conditions can resume.
As a participating lender in the SBA PPP loans, the Company and the Bank are subject to additional risks of litigation from the
Bank’s customers or other parties regarding the Bank’s processing of loans for the PPP and risks that the SBA may not fund some
or all PPP loan guaranties.
On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) was signed into law, which
included a $349 billion loan program administered through the SBA referred to as the Paycheck Protection Program, or PPP, which
the Bank participated in as a lender. After the initial $349 billion in PPP funds were exhausted, the Treasury Department announced
that an additional $310 billion would be available in a second round of the First Draw PPP, which commenced on April 27, 2020 and
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closed on August 8, 2020. As of December 31, 2020, the PPP remained closed and was not accepting applications, but resumed on
January 11, 2021. PPP loans have a two-year term if the loan was approved by the SBA prior to June 5, 2020, and loans approved
after that date have a five-year term. All PPP loans earn interest at 1%.
Since the opening of the PPP, several other larger banks have been subject to litigation regarding the process and procedures that
such banks used in processing applications for the PPP. The Company and the Bank may be exposed to the risk of similar litigation,
from both customers and non-customers that approached the Bank regarding PPP loans, regarding its process and procedures used in
processing applications for the PPP. Class action lawsuits have also been filed in some states against certain lenders alleging that those
institutions inappropriately prioritized larger loans for processing in order to maximize agency fees. If any such litigation is filed
which names the Company or the Bank as a defendant and which is not resolved in a manner favorable to the Company or the Bank, it
may result in significant financial liability or adversely affect the Company’s reputation. In addition, litigation can be costly,
regardless of outcome. Any financial liability, litigation costs or reputational damage caused by PPP related litigation could have a
material adverse impact on our business, financial condition and results of operations.
The Bank may also have unplanned credit risk on PPP loans if a determination is made by the SBA that there is a deficiency in
the manner in which the loan was originated, documented, funded, or serviced by the Bank, such as an issue with the eligibility of a
borrower to receive a PPP loan, which may or may not be related to the ambiguity in the laws, rules and guidance regarding the
operation of the PPP. In the event of a loss resulting from a default on a PPP loan and a determination by the SBA that there was a
deficiency in the manner in which the PPP loan was originated, funded, or serviced by the Company, the SBA may deny its liability
under the guaranty, deny forgiveness of the forgivable part of the PPP loan, reduce the amount of the guaranty, or, if it has already
paid under the guaranty, seek recovery of any loss related to the deficiency from the Company.
See Notes 1 and 20 to our Condensed Consolidated Financial Statements and “Management’s Discussion and Analysis of
Financial Position and Results of Operations” for additional discussion of risks related to the COVID-19 pandemic and the actual
operational and financial impacts that we have experienced to date.
Risks Associated with Our Business
Our business strategy includes sustainable growth plans, and our financial condition and results of operations could be negatively
affected if we fail to grow or fail to manage our growth effectively.
We intend to pursue an organic growth strategy for our business. If appropriate opportunities present themselves, we may also
engage in selected acquisitions of financial institutions, branch acquisitions and other business growth initiatives or undertakings.
There can be no assurance that we will successfully execute our organic growth strategy, that we will be able to negotiate or finance
such activities or that such activities, if undertaken, will be successful.
There are risks associated with our growth strategy. To the extent that we grow through acquisitions, we cannot ensure that we
will be able to adequately or profitably manage this growth. Acquiring other banks, branches or other assets, as well as other
expansion activities, involves various risks including the risks of incorrectly assessing the credit quality of acquired assets,
encountering greater than expected costs of integrating acquired banks or branches, the risk of loss of customers and/or employees of
the acquired institution or branch, executing cost savings measures, not achieving revenue enhancements and otherwise not realizing
the transaction’s anticipated benefits. Our ability to address these matters successfully cannot be assured. There is also the risk that the
requisite regulatory approvals might not be received and other conditions to consummation of a transaction might not be satisfied
during the anticipated timeframes, or at all. In addition, our strategic efforts may divert resources or management’s attention from
ongoing business operations, may require investment in integration and in development and enhancement of additional operational
and reporting processes and controls, and may subject us to additional regulatory scrutiny. To finance an acquisition, we may borrow
funds, thereby increasing our leverage and diminishing our liquidity, or raise additional capital, which could dilute the interests of our
existing stockholders.
Our growth initiatives may also require us to recruit experienced personnel to assist in such initiatives. Accordingly, the failure
to identify and retain such personnel would place significant limitations on our ability to successfully execute our growth strategy. In
addition, to the extent we expand our lending beyond our current market areas, we could incur additional risks related to those new
market areas. We may not be able to expand our market presence in our existing market areas or successfully enter new markets.
If we do not successfully execute our growth plan, it could adversely affect our business, financial condition, results of
operations, reputation and growth prospects. In addition, if we were to conclude that the value of an acquired business had decreased
and that the related goodwill had been impaired, that conclusion would result in an impairment of goodwill charge to us, which would
adversely affect our results of operations. While we believe we will have the executive management resources and internal systems in
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place to successfully manage our future growth, there can be no assurance growth opportunities will be available or that we will
successfully manage our growth.
Our financial condition and results of operations are dependent on the economy, particularly in the Bank’s market areas.
Our primary market area is concentrated in the Central Valley and the Eastern Sierras. Adverse economic conditions in any of
these areas can reduce our rate of growth, affect our customers’ ability to repay loans and adversely impact our financial condition and
earnings. General economic conditions, including inflation, unemployment and money supply fluctuations, also may affect our
profitability adversely.
A deterioration in economic conditions in the market areas we serve could result in the following consequences, any of which
could have a material adverse effect on our business, financial condition and results of operations:
• Demand for our products and services may decline;
• Loan delinquencies, problem assets and foreclosures may increase;
• Collateral for our loans may further decline in value; and
• The amount of our low cost or noninterest-bearing deposits may decrease.
We cannot accurately predict the possibility of weakness in the national or local economy effecting our future operating results.
We cannot accurately predict the possibility of the national or local economy’s return to recessionary conditions or to a period of
economic weakness, which would adversely impact the markets we serve. Any deterioration in national or local economic conditions
would have an adverse effect, which could be material, on our business, financial condition, results of operations and prospects, and
any economic weakness could present substantial risks for the banking industry and for us.
There are risks associated with our lending activities and our allowance for loan losses may prove to be insufficient to absorb
actual incurred losses in our loan portfolio.
Lending money is a substantial part of our business. Every loan carries a certain risk that it will not be repaid in accordance with
its terms or that any underlying collateral will not be sufficient to assure repayment. This risk is affected by, among other things:
• cash flow of the borrower and/or the project being financed;
•
•
in the case of a collateralized loan, the changes and uncertainties as to the future value of the collateral;
the credit history of a particular borrower;
• changes in economic and industry conditions; and
•
the duration of the loan.
We maintain an allowance for loan losses which we believe is appropriate to provide for probable incurred losses inherent in our
loan portfolio. The amount of this allowance is determined by our management through a periodic review and consideration of several
factors, including, but not limited to:
• an ongoing review of the quality, size and diversity of the loan portfolio;
• evaluation of non-performing loans;
• historical default and loss experience;
• historical recovery experience;
• existing economic conditions;
•
•
risk characteristics of the various classifications of loans; and
the amount and quality of collateral, including guarantees, securing the loans.
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If actual losses on our loans exceed our estimates used to establish our allowance for loan losses, our business, financial condition
and profitability may suffer.
The determination of the appropriate level of the allowance for loan losses inherently involves a high degree of subjectivity and
requires us to make various assumptions and judgments about the collectability of our loan portfolio, including the creditworthiness of
our borrowers and the value of the real estate and other assets serving as collateral for the repayment of many of our loans. In
determining the amount of the allowance for loan losses, we review our loans and the loss and delinquency experience, and evaluate
economic conditions and make significant estimates of current credit risks and future trends, all of which may undergo material
changes. If our estimates are incorrect, the allowance for loan losses may not be sufficient to cover losses inherent in our loan
portfolio, resulting in the need for additions to our allowance through an increase in the provision for loan losses. Deterioration in
economic conditions affecting borrowers, new information regarding existing loans, identification of additional problem loans and
other factors, both within and outside of our control, may require an increase in the allowance for loan losses. In addition, bank
regulatory agencies periodically review our allowance for loan losses and may require an increase in the provision for loan losses or
the recognition of further charge-offs (which will in turn also require an increase in the provision for loan losses if the charge-offs
exceed the allowance for loan losses), based on judgments different than that of management. Any increases in the provision for loan
losses will result in a decrease in net income and may have a material adverse effect on our financial condition and results of
operations.
Our underwriting practices may not protect us against losses in our loan portfolio.
We seek to mitigate the risks inherent in our loan portfolio by adhering to specific underwriting practices, including: analyzing a
borrower’s credit history, financial statements, tax returns and cash flow projections; valuing collateral based on reports of
independent appraisers; and verifying liquid assets. Although we believe that our underwriting criteria are, and historically have been,
appropriate for the various kinds of loans we make, we have incurred losses on loans that have met these criteria, and may continue to
experience higher than expected losses depending on economic factors and consumer behavior. In addition, our ability to assess the
creditworthiness of our customers may be impaired if the models and approaches we use to select, manage, and underwrite our
customers become less predictive of future behaviors. Finally, we may have higher credit risk, or experience higher credit losses, to
the extent our loans are concentrated by loan type, industry segment, borrower type, or location of the borrower or collateral.
Deterioration in real estate values and underlying economic conditions in the Central Valley and the Eastern Sierras could result in
significantly higher credit losses to our portfolio.
Our commercial real estate loans involve higher principal amounts than other loans and repayment of these loans may be
dependent on factors outside our control or the control of our borrowers.
We originate commercial real estate loans for individuals and businesses for various purposes, which are secured by commercial
properties. These loans typically involve higher principal amounts than other types of loans, and repayment is dependent upon income
generated, or expected to be generated, by the property securing the loan in amounts sufficient to cover operating expenses and debt
service, which may be adversely affected by changes in the economy or local market conditions. For example, if the cash flow from
the borrower’s project is reduced as a result of leases not being obtained or renewed in a timely manner or at all, the borrower’s ability
to repay the loan may be impaired.
Commercial real estate loans also expose us to greater credit risk than loans secured by residential real estate because the
collateral securing these loans typically cannot be sold as easily as residential real estate. In addition, many of our commercial real
estate loans are not fully amortizing and contain large balloon payments upon maturity. Such balloon payments may require the
borrower to either sell or refinance the underlying property in order to make the payment, which may increase the risk of default or
non-payment.
If we foreclose on a commercial real estate loan, our holding period for the collateral typically is longer than for residential
mortgage loans because there are fewer potential purchasers of the collateral. Additionally, commercial real estate loans generally
have relatively large balances to single borrowers or groups of related borrowers. Accordingly, if we make any errors in judgment in
the collectability of our commercial real estate loans, any resulting charge-offs may be larger on a per loan basis than those incurred
with our residential or consumer loan portfolios.
Repayment of our commercial and industrial loans is often dependent on the cash flows of the borrower, which may be
unpredictable, and the collateral securing these loans may not be sufficient to repay the loan in the event of default.
We make our commercial and industrial loans primarily based on the identified cash flow of the borrower and secondarily on the
underlying collateral provided by the borrower. Collateral securing commercial and industrial loans may depreciate over time, be
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difficult to appraise and fluctuate in value. 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 the amounts due from its customers.
We are exposed to risk of environmental liabilities with respect to real properties which we may acquire.
In prior years, due to weakness of the U.S. economy and, more specifically, the California economy, including higher levels of
unemployment than the nationwide average and declines in real estate values, certain borrowers have been unable to meet their loan
repayment obligations and, as a result, we have had to initiate foreclosure proceedings with respect to and take title to a number of real
properties that had collateralized their loans. As an owner of such properties, we could become subject to environmental liabilities and
incur substantial costs for any property damage, personal injury, investigation and clean-up that may be required due to any
environmental contamination that may be found to exist at any of those properties, even though we did not engage in the activities that
led to such contamination. In addition, if we are the owner or former owner of a contaminated site, we may be subject to common law
claims by third parties seeking damages for environmental contamination emanating from the site. If we were to become subject to
significant environmental liabilities or costs, our business, financial condition, results of operations and prospects could be adversely
affected.
Our business is subject to interest rate risk and variations in interest rates may hurt our profits.
To be profitable, we have to earn more money in interest that we receive on loans and investments than we pay to our depositors
and lenders in interest. If interest rates rise, our net interest income and the value of our assets could be reduced if interest paid on
interest-bearing liabilities, such as deposits, increases more quickly than interest received on interest-earning assets, such as loans,
other mortgage-related investments and investment securities. This is most likely to occur if short-term interest rates increase at a
faster rate than long-term interest rates, which would cause our net interest income to go down. In addition, rising interest rates may
hurt our income, because that may reduce the demand for loans and the value of our securities. In a rapidly changing interest rate
environment, we may not be able to manage our interest rate risk effectively, which would adversely impact our financial condition
and results of operations.
If interest rates decline, our net interest income could be reduced if interest rates on interest-earning assets such as loans,
investment securities and cash balances, decrease more quickly than interest paid on interest-bearing liabilities, such as deposits.
New lines of business, new products and services, or strategic project initiatives may subject us to additional risks.
From time to time, we may seek to implement new lines of business or offer new products and services within existing lines of
business. There are substantial risks and uncertainties associated with these efforts, particularly in instances where the markets are not
fully developed. In developing and marketing new lines of business and/or new products and services, we may invest significant time
and resources. Initial timetables for the introduction and development of new lines of business and/or new products or services may
not be achieved, and price and profitability targets may not prove feasible, which could in turn have a material negative effect on our
operating results. New lines of business and/or new products or services also could subject us to additional regulatory requirements,
increased scrutiny by our regulators and other legal risks.
Additionally, from time to time we undertake strategic project initiatives. Significant effort and resources are necessary to
manage and oversee the successful completion of these initiatives. These initiatives often place significant demands on a limited
number of employees with subject matter expertise and management and may involve significant costs to implement as well as
increase operational risk as employees learn to process transactions under new systems. The failure to properly execute on these
strategic initiatives could adversely impact our business and results of operations.
Strong competition within our market areas may limit our growth and profitability.
Competition in the banking and financial services industry is intense. In our market areas, we compete with commercial banks,
savings institutions, mortgage brokerage firms, credit unions, finance companies, mutual funds, insurance companies, and brokerage
and investment banking firms operating locally and elsewhere. Many of these competitors have substantially greater name recognition,
resources and lending limits than we do and may offer certain services or prices for services that we do not or cannot provide. Our
profitability depends upon our continued ability to successfully compete in our markets.
In addition, our future success will depend, in part, upon our ability to address the needs of our clients by using technology to
provide products and services that will satisfy client demands for convenience, as well as to create additional efficiencies in our
operations. Many of our competitors have substantially greater resources to invest in technological improvements. We may not be able
to effectively implement new technology-driven products and services or be successful in marketing these products and services to our
clients.
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Risks Related to Our Operations
We face significant operational risks.
We operate many different financial service functions and rely on the ability of our employees, third party vendors and systems
to process a significant number of transactions. Operational risk is the risk of loss from operations, including fraud by employees or
outside persons, employees’ execution of incorrect or unauthorized transactions, data processing and technology errors or hacking and
breaches of internal control systems.
Our enterprise risk management framework may not be effective in mitigating risk and reducing the potential for losses.
Our enterprise risk management framework seeks to mitigate risk and loss to us. We have established comprehensive policies
and procedures and an internal control framework designed to provide a sound operational environment for the types of risk to which
we are subject, including credit risk, market risk (interest rate and price risks), liquidity risk, operational risk, compliance risk,
strategic risk, and reputational risk. However, as with any risk management framework, there are inherent limitations to our current
and future risk management strategies, including risks that we have not appropriately anticipated or identified. In certain instances, we
rely on models to measure, monitor and predict risks. However, these models are inherently limited because they involve techniques,
including the use of historical data in some circumstances, and judgments that cannot anticipate every economic and financial
outcome in the markets in which we operate, nor can they anticipate the specifics and timing of such outcomes. There is no assurance
that these models will appropriately capture all relevant risks or accurately predict future events or exposures. Accurate and timely
enterprise-wide risk information is necessary to enhance management’s decision-making in times of crisis. If our enterprise risk
management framework proves ineffective or if our enterprise-wide management information is incomplete or inaccurate, we could
suffer unexpected losses, which could materially adversely affect our results of operations or financial condition. In addition, our
businesses and the markets in which we operate are continuously evolving. We may fail to fully understand the implications of
changes in our businesses or the financial markets or fail to adequately or timely enhance our enterprise risk framework to address
those changes. If our enterprise risk framework is ineffective, either because it fails to keep pace with changes in the financial markets,
regulatory requirements, our businesses, our counterparties, clients or service providers or for other reasons, we could incur losses,
suffer reputational damage or find ourselves out of compliance with applicable regulatory or contractual mandates.
An important aspect of our enterprise risk management framework is creating a risk culture in which all employees fully
understand that there is risk in every aspect of our business and the importance of managing risk as it relates to their job functions. We
continue to enhance our enterprise risk management program to support our risk culture, ensuring that it is sustainable and appropriate
to our role as a major financial institution. Nonetheless, if we fail to create the appropriate environment that sensitizes all of our
employees to managing risk, our business could be adversely impacted.
Managing reputational risk is important to attracting and maintaining customers, investors and employees.
Threats to our reputation can come from many sources, including adverse sentiment about financial institutions generally,
unethical practices, employee misconduct, failure to deliver minimum standards of service or quality, compliance deficiencies,
regulatory investigations, cybersecurity breaches, marketplace rumors and questionable or fraudulent activities of our customers. We
have policies and procedures in place to promote ethical conduct and protect our reputation. However, these policies and procedures
may not be fully effective and cannot adequately protect against all threats to our reputation. Negative publicity regarding our
business, employees, or customers, with or without merit, may result in the loss of customers, investors and employees, costly
litigation, a decline in revenues and increased governmental oversight.
Liquidity risk could impair our ability to fund operations and jeopardize our financial condition.
Liquidity is essential to our business. An inability to raise funds through deposits, borrowings, the sale of loans and other sources
could have a substantial negative effect on our liquidity. Our access to funding sources in amounts adequate to finance our activities or
on terms that are acceptable to us could be impaired by factors that affect us specifically or the financial services industry or economy
in general.
Factors that could detrimentally impact our access to liquidity sources include a decrease in the level of our business activity as a
result of a downturn in the markets in which our loans are concentrated or adverse regulatory action against us. Our ability to borrow
could also be impaired by factors that are not specific to us, such as a disruption in the financial markets or negative views and
expectations about the prospects for the financial services industry.
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We currently hold a significant amount of bank owned life insurance.
At December 31, 2020, we held bank owned life insurance (BOLI) on certain key and former employees and executives and our
directors, with a cash surrender value of $25,325,000. The eventual repayment of the cash surrender value is subject to the ability of
the various insurance companies to pay death benefits or to return the cash surrender value to us if needed for liquidity purposes. We
continually monitor the financial strength of the various companies with whom we carry these policies.
However, any one of these companies could experience a decline in financial strength, which could impair its ability to pay
benefits or return our cash surrender value. If we need to liquidate these policies for liquidity purposes, we would be subject to
taxation on the increase in cash surrender value and penalties for early termination, both of which would adversely impact earnings.
We rely on numerous external vendors.
We rely on numerous external vendors to provide us with products and services necessary to maintain our day-to-day operations.
Accordingly, our operations are exposed to risk that these vendors will not perform in accordance with the contracted arrangements
under service level agreements. The failure of an external vendor to perform in accordance with the contracted arrangements under
service level agreements because of changes in the vendor's organizational structure, financial condition, support for existing products
and services or strategic focus or for any other reason, could be disruptive to our operations, which in turn could have a material
negative impact on our financial condition and results of operations. We also could be adversely affected to the extent such an
agreement is not renewed by the third-party vendor or is renewed on terms less favorable to us.
Our holding company relies on dividends from the Bank for substantially all of its income and the net proceeds of capital raising
transactions are currently the primary source of funds for cash dividends to our preferred and common stockholders.
Our primary source of revenue at the holding company level is dividends from the Bank and we also have previously relied on
the net proceeds of capital raising transactions as the primary source of funds for cash dividends to our preferred and common
stockholders. To the extent we are limited in our ability to raise capital in the future, our ability to pay cash dividends to our
stockholders could likewise be limited, especially if we are unable to increase the amount of dividends the Bank pays to us. If the
Bank is unable to pay dividends to us, then we may not be able to service our debt, including our senior notes, pay our other
obligations or pay cash dividends on our preferred and common stock. Our inability to service our debt, pay our other obligations or
pay dividends to our stockholders could have a material adverse impact on our financial condition and the value of your investment in
our securities.
We may elect or be compelled to seek additional capital in the future, but that capital may not be available when it is needed.
We are required by federal regulatory authorities to maintain adequate levels of capital to support our operations. At some point,
we may need to raise additional capital to support continued growth.
Our ability to raise additional capital, if needed, will depend on conditions in the capital markets, economic conditions, our
financial performance and a number of other factors, many of which are outside our control. Accordingly, we cannot assure you of our
ability to raise additional capital if needed or on terms acceptable to us. If we cannot raise additional capital when needed, our ability
to further expand our operations could be materially impaired and our financial condition and liquidity could be materially and
adversely affected.
Technology Risks
Our security measures may not be sufficient to mitigate the risk of a cyber-attack or cyber theft.
Communications and information systems are essential to the conduct of our business, as we use such systems to manage our
customer relationships, our general ledger and virtually all other aspects of our business. Our operations rely on the secure collection,
processing, storage, and transmission of confidential, personal, and other information using our computer systems and networks and as
part of our internet banking activities, as well as the computer systems and networks of third party service providers that support our
operations, but which we do not control. Although we take protective measures and endeavor to enhance them as circumstances
warrant, the security of our computer systems, software, and networks, as well as those of our computer systems and networks of third
party service providers that support our operations, may be vulnerable to security breaches, unauthorized access, misuse, computer
viruses, or other malicious code and cyber-attacks whose objectives include obtaining unauthorized access confidential and personal
information, manipulation or destruction of data, disruption or our services, or theft of money. If one or more of these events occur,
this could jeopardize our or our customers' confidential, personal, and other information collected and processed by, stored in, and
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transmitted through our computer systems and networks and our third party service providers, or otherwise cause interruptions or
malfunctions in our operations or adversely impact our customers or counterparties. These adverse consequences could include
causing certain customers to cease doing business with us, impair our ability to attract new customers or expand relationships with
existing customers and third parties, making it difficult to service customers and comply with regulatory obligations (including
privacy and banking laws), or impair our brand and reputation. We may be required to expend significant additional resources to
enhance our protective measures, to investigate any such event, notify individuals, third parties, or regulators, and remediate
vulnerabilities or other exposures, and we may be subject to litigation and financial losses that are either not insured against or not
fully covered through any insurance maintained by us. We could also suffer significant reputational damage.
Our security measures may not protect us from systems failures or interruptions.
While we have established policies and procedures to prevent or limit the impact of systems failures and interruptions, there can
be no assurance that such events will not occur or that they will be adequately addressed if they do. In addition, we outsource certain
aspects of our data processing and other operational functions to certain third-party providers. If our third-party providers encounter
difficulties, or if we have difficulty in communicating with them, our ability to adequately process and account for transactions could
be affected, and our business operations could be adversely impacted. Threats to information security also exist in the processing of
customer information through various other vendors and their personnel.
We may be required to expend significant additional resources to continue to modify or enhance our information security
infrastructure or to investigate and remediate any information security vulnerabilities in response to continuing information systems
security threats.
The occurrence of any systems failure or interruption could damage our reputation and result in a loss of customers and business,
could subject us to additional regulatory scrutiny, or could expose us to legal liability. Any of these occurrences could have a material
adverse effect on our financial condition and results of operations.
We rely on communications, information, operating and financial control systems technology from third party service providers,
and we may suffer an interruption in those systems.
We rely heavily on third party service providers for much of our communications, information, operating and financial control
systems technology, including our online banking services and data processing systems. We also rely on third party vendors, who may
experience unauthorized access to and disclosure of client or customer information or the destruction or theft of such information. Any
failure or interruption, or breaches in security, of these systems could result in failures or interruptions in our customer relationship
management, general ledger, deposit, servicing and/or loan origination systems and, therefore, could harm our business, operating
results and financial condition. Additionally, interruptions in service and security breaches could lead existing customers to terminate
their banking relationships with us and could make it more difficult for us to attract new banking customers.
We are subject to a variety of federal and state privacy and data security laws, which govern the collection, safeguarding, sharing
and use of customer information
We are subject to a variety of federal and state privacy and data security laws, which govern the collection, safeguarding, sharing
and use of customer information, and require that financial institutions have in place policies regarding information privacy and
security. For example, the Gramm-Leach-Bliley Act of 1999 (“GLBA”) requires all financial institutions offering financial products or
services to retail customers to provide such customers with the financial institution’s privacy policy and practices for sharing
nonpublic information with third parties, provide advance notice of any changes to the policies and provide such customers the
opportunity to “opt out” of the sharing of certain personal financial information with unaffiliated third parties. It also requires banks to
safeguard personal information of consumer customers. Some state laws also protect the privacy of information of state residents and
require adequate security for such data, and certain state laws may, in some circumstances, require us to notify affected individuals of
security breaches of computer databases that contain their personal information. These laws may also require us to notify law
enforcement, regulators or consumer reporting agencies in the event of a data breach, as well as businesses and governmental agencies
that own data.
Data privacy and data security are areas of increasing state legislative focus. The California Consumer Privacy Act (“CCPA”),
which became effective and enforceable in 2020 requires, among other things, covered companies to provide new disclosures to
California consumers regarding the use of personal information, gives California residents expanded rights to access their personal
information and allows such consumers new abilities to opt-out of certain sales of personal information. Further, the new California
Privacy Rights Act (“CPRA”) which was passed in November 2020, significantly modifies the CCPA. These modifications may result
in additional uncertainty and require us to incur additional costs and expenses in our effort to comply. Because we meet the thresholds
27
set forth in the CCPA and CPRA, we will be required to comply with these laws. We will continue to monitor developments related to
the CCPA and CPRA. The full impact of the CCPA and CPRA on our business is yet to be determined.
Like other lenders, we use credit bureau data in their underwriting activities. Use of such data is regulated under the Fair Credit
Reporting Act (“FCRA”), and the FCRA also regulates reporting information to credit bureaus, prescreening individuals for credit
offers, sharing of information between affiliates and using affiliate data for marketing purposes. Similar state laws may impose
additional requirements on us.
Regulatory Risks
We operate in a highly regulated environment and our operations and income may be affected adversely by changes in laws, rules
and regulations governing our operations.
We are subject to extensive regulation and supervision by the DFPI, FRB and the FDIC. The FRB regulates the supply of money
and credit in the United States. Its fiscal and monetary policies determine in a large part our cost of funds for lending and investing
and the return that can be earned on those loans and investments, both of which affect our net interest margin. FRB policies can also
materially affect the value of financial instruments that we hold, such as debt securities. Its policies also can affect our borrowers,
potentially increasing the risk that they may fail to repay their loans or satisfy their obligations to us. Changes in policies of the FRB
are beyond our control and the impact of changes in those policies on our activities and results of operations can be difficult to predict.
The Company and the Bank are heavily regulated. This regulation is to protect depositors, federal deposit insurance funds and
the banking system as a whole, and not stockholders. These regulatory authorities have extensive discretion in connection with their
supervisory and enforcement activities, including the ability to impose increased capital requirements and restrictions on a bank’s
operations, to reclassify assets, to determine the adequacy of a bank’s allowance for loan losses and to set the level of deposit
insurance premiums assessed.
Congress, state legislatures and federal and state agencies continually review banking, lending and other laws, regulations and
policies for possible changes. Any change in such regulation and oversight, whether in the form of regulatory policy, new regulations
or legislation, that applies to us or additional deposit insurance premiums could have a material adverse impact on our operations.
Because our business is highly regulated, the laws and applicable regulations are subject to frequent change. Any new laws, rules and
regulations could make compliance more difficult or expensive or otherwise adversely affect our business, financial condition or
growth prospects. Such changes could subject us to additional costs, limit the types of financial services and products we may offer
and/or increase the ability of non-banks to offer competing financial services and products, among other things.
The Dodd-Frank Act and supporting regulations could have a material adverse effect on us.
The Dodd-Frank Act provides for various capital requirements and new restrictions on financial institutions and their holding
companies. These changes may result in additional restrictions on investments and other activities.
Regulations under the Dodd-Frank Act significantly impact our operations, and we expect to continue to face increased
regulation. These regulations may affect the manner in which we do business and the products and services that we provide, affect or
restrict our ability to compete in our current businesses or our ability to enter into or acquire new businesses, reduce or limit our
revenue or impose additional fees, assessments or taxes on us, intensify the regulatory supervision of us and the financial services
industry, and adversely affect our business operations.
The Dodd-Frank Act, among other things, established the CFPB with broad authority to administer and enforce a new federal
regulatory framework of consumer financial regulation. Many of the provisions of the Dodd-Frank Act have extended implementation
periods and require extensive rulemaking, guidance and interpretation by various regulatory agencies. While some rules have been
finalized or issued in proposed form, some have yet to be proposed. It is impossible to predict when all such additional rules will be
issued or finalized, and what the content of such rules will be.
We must apply resources to ensure that we are in compliance with all applicable provisions of the Dodd-Frank Act and any
implementing rules, which may increase our costs of operations and adversely impact our earnings. We expect that the Dodd-Frank
Act, including current and future rules implementing its provisions and the interpretations of those rules, will reduce our revenues,
increase our expenses, require us to change certain of our business practices, increase the regulatory supervision of us, increase our
capital requirements and impose additional assessments and costs on us, and otherwise adversely affect our business.
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The short-term and long-term impact of the changing regulatory capital requirements and new capital rules is uncertain.
In July 2013, the FRB and the other federal bank regulatory agencies issued a final rule to revise their risk-based and leverage
capital requirements and their method for calculating risk-weighted assets to make them consistent with Basel III and certain
provisions of the Dodd-Frank Act. The final rule applies to all banking organizations, including the Company. Among other things,
the rule establishes a common equity Tier 1 minimum capital requirement of 4.5 percent of risk-weighted assets and a minimum Tier 1
risk-based capital requirement of 6.0 percent of risk-weighted assets and assigns higher risk-weightings than in the past (150 percent)
to exposures that are more than 90 days past due or are on non-accrual status and certain commercial real estate facilities that finance
the acquisition, development or construction of real property. The final rule also limits a banking organization’s capital distributions
and certain discretionary bonus payments if the banking organization does not hold a “capital conservation buffer” in excess of 2.5
percent of common equity tier 1 capital in addition to the minimum risk-based capital ratios. An institution will be subject to
limitations on paying dividends, engaging in share repurchases, and paying discretionary bonuses if its capital level falls below the
buffer amount.
While our current capital levels exceed the capital requirements, our capital levels could decrease in the future as a result of
factors such as acquisitions, faster than anticipated growth, reduced earnings levels, operating losses and other factors. The application
of more stringent capital requirements for us could, among other things, result in lower returns on equity, require the raising of
additional capital, and result in our inability to pay dividends or repurchase shares if we were to be unable to comply with such
requirements.
We are subject to federal and state fair lending laws, and failure to comply with these laws could lead to material penalties.
Federal and state fair lending laws and regulations, such as the Equal Credit Opportunity Act, impose nondiscriminatory lending
requirements on financial institutions. The Department of Justice, CFPB and other federal and state agencies are responsible for
enforcing these laws and regulations. Private parties may also have the ability to challenge an institution’s performance under fair
lending laws in private class action litigation. A successful challenge to our performance under the fair lending laws and regulations
could adversely impact our rating under the CRA and result in a wide variety of sanctions, including the required payment of damages
and civil money penalties, injunctive relief, imposition of restrictions on merger and acquisition activity and restrictions on expansion
activity, which could negatively impact our reputation, business, financial condition and results of operations.
Non-compliance with the Patriot Act, Bank Secrecy Act, or other laws and regulations could result in fines or sanctions or
operating restrictions.
The Patriot and Bank Secrecy Acts require financial institutions to develop programs to prevent financial institutions from being
used for money laundering and terrorist activities. If such activities are detected, financial institutions are obligated to file suspicious
activity reports with the U.S. Treasury’s Office of Financial Crimes Enforcement Network. These rules require financial institutions to
establish procedures for identifying and verifying the identity of customers seeking to open new financial accounts. In addition, legal
requirements relating to the collection, storage, handling, use, disclosure, transfer, and security of personal data continue to increase,
along with enforcement actions and investigations by regulatory authorities related to data security incidents and privacy violations.
Failure to comply with these regulations could result in fines, sanctions or restrictions that could have a material adverse effect on our
strategic initiatives. Several banking institutions have received large fines, or suffered limitations on their operations, for non-
compliance with these laws and regulations. Although we have developed policies and procedures designed to assist in compliance
with these laws and regulations, no assurance can be given that these policies and procedures will be effective in preventing violations
of these laws and regulations.
We are subject to a variety of federal and state privacy and data security laws, which govern the collection, safeguarding, sharing
and use of customer information
We are subject to a variety of federal and state privacy and data security laws, which govern the collection, safeguarding, sharing
and use of customer information, and require that financial institutions have in place policies regarding information privacy and
security. For example, the Gramm-Leach-Bliley Act of 1999 (“GLBA”) requires all financial institutions offering financial products or
services to retail customers to provide such customers with the financial institution’s privacy policy and practices for sharing
nonpublic information with third parties, provide advance notice of any changes to the policies and provide such customers the
opportunity to “opt out” of the sharing of certain personal financial information with unaffiliated third parties. It also requires banks to
safeguard personal information of consumer customers. Some state laws also protect the privacy of information of state residents and
require adequate security for such data, and certain state laws may, in some circumstances, require us to notify affected individuals of
security breaches of computer databases that contain their personal information. These laws may also require us to notify law
enforcement, regulators or consumer reporting agencies in the event of a data breach, as well as businesses and governmental agencies
that own data.
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Data privacy and data security are areas of increasing state legislative focus. For example, in November 2020, a ballot initiative
called the California Privacy Rights Act ("CPRA"), passed in California. The CPRA will create additional obligations relating to
personal information that would take effect on January 1, 2023 (with certain provisions having retroactive effect to January 1, 2022).
The CPRA’s implementing regulations are expected on or before July 1, 2022, and enforcement is scheduled to begin July 1, 2023.
We will continue to monitor developments related to the CPRA. The full impact of the CPRA on our business is yet to be determined.
In addition, laws similar to the CPRA may be adopted by other states where we do business and the federal government may also pass
data privacy or data security legislation.
Like other lenders, we use credit bureau data in their underwriting activities. Use of such data is regulated under the Fair Credit
Reporting Act (“FCRA”), and the FCRA also regulates reporting information to credit bureaus, prescreening individuals for credit
offers, sharing of information between affiliates and using affiliate data for marketing purposes. Similar state laws may impose
additional requirements on us.
Increases in deposit insurance premiums and special FDIC assessments will negatively impact our earnings.
We may pay higher FDIC premiums in the future. The Dodd-Frank Act increased the minimum FDIC deposit insurance reserve
ratio from 1.15 percent to 1.35 percent. The FDIC has adopted a plan under which it will meet this ratio by the statutory deadline of
December 31, 2020.
The Dodd-Frank Act requires the FDIC to offset the effect of the increase in the minimum reserve ratio on institutions with
assets less than $10 billion. To implement the offset requirement, the FDIC has imposed a temporary surcharge on institutions with
assets greater than $10 billion. In addition to the minimum reserve ratio, the FDIC must set a designated reserve ratio. The FDIC has
set a designated reserve ratio of 2.0, which exceeds the minimum reserve ratio.
Tax and Financial Risks
The Company has a deferred tax asset that may or may not be fully realized.
The Company has a deferred tax asset and cannot assure that it will be fully realized. Deferred tax assets and liabilities are the
expected future tax amounts for the temporary differences between the carrying amounts and the tax basis of assets and liabilities
computed using enacted tax rates. If we determine that we will not achieve sufficient future taxable income to realize our net deferred
tax asset, we are required under generally accepted accounting principles (GAAP) to establish a full or partial valuation allowance. If
we determine that a valuation allowance is necessary, we are required to incur a charge to operations. We regularly assess available
positive and negative evidence to determine whether it is more likely than not that our net deferred tax asset will be realized.
Realization of a deferred tax asset requires us to apply significant judgment and is inherently speculative because it requires estimates
that cannot be made with certainty. At December 31, 2020, the Company had a net deferred tax asset of $1.4 million. For additional
information, see Note 10 to Consolidated Financial Statements included in Item 8 of this Annual Report on Form 10-K.
We may experience future goodwill impairment.
If our estimates of the fair value of our reporting units change as a result of changes in our business or other factors, we may
determine that a goodwill impairment charge is necessary. Estimates of fair value are based on a complex model using, among other
things, estimated cash flows and industry pricing multiples. The Company tests its goodwill for impairment annually as of December
31 (the Measurement Date), and quarterly if a triggering event causes concern of a possible goodwill impairment charge. At each
Measurement Date, the Company, in accordance with ASC 350-20-35-3, evaluates, based on the weight of evidence, the significance
of all qualitative factors to determine whether it is more likely than not that the fair value of each of the reporting units is less than its
carrying amount.
The assessment of qualitative factors at the most recent Measurement Date (December 31, 2020), indicated that it was not more
likely than not that impairment existed; as a result, no further testing was performed. No assurance can be given that the Company will
not record an impairment loss on goodwill in the future and any such impairment loss could have a material adverse effect on our
results of operations and financial condition.
In preparing our financial statements we make certain assumptions, judgments and estimates that affect amounts reported in our
consolidated financial statements, which, if not accurate, may significantly impact our financial results.
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We make assumptions, judgments and estimates for a number of items, including the fair value of financial instruments, goodwill
and other intangible assets, the realizability of deferred tax assets, the fair value of stock awards, the allowances for loan losses, income
tax provisions and determination, recognition and measurement of impaired loans. These assumptions, judgments and estimates are
drawn from historical experience and various other factors that we believe are reasonable under the circumstances as of the date of the
consolidated financial statements. Actual results could differ materially from our estimates, and such differences could significantly
impact our financial results.
General Risks
We depend on our key employees.
Our future prospects are and will remain highly dependent on our directors and executive officers. Our success will, to some
extent, depend on the continued service of our directors and continued employment of the executive officers. The unexpected loss of
the services of any of these individuals could have a detrimental effect on our business. Although we have entered into employment
agreements with members of our senior management team, no assurance can be given that these individuals will continue to be
employed by us. The loss of any of these individuals could negatively affect our ability to achieve our business plan and could have a
material adverse effect on our results of operations and financial condition.
Severe weather, natural disasters, acts of war or terrorism and other external events could significantly impact our business.
Severe weather, natural disasters such as earthquakes and wildfires, acts of war or terrorism, global pandemics and other adverse
external events could have a significant impact on our ability to conduct business. Such events could affect the stability of our deposit
base, impair the ability of our borrowers to repay their outstanding loans, cause significant property damage or otherwise impair the
value of collateral securing our loans, and result in loss of revenue and/or cause us to incur additional expenses. Although we have
established disaster recovery plans and procedures, and we monitor the effects of any such events on our loans, properties and
investments, the occurrence of any such event could have a material adverse effect on us or our earnings or our financial condition.
Anti-takeover provisions could negatively impact our stockholders.
Provisions in our charter and bylaws, the corporate law of the State of California and federal regulations could delay, defer or prevent
a third party from acquiring us, despite the possible benefit to our stockholders, or otherwise adversely affect the market price of any
class of our equity securities. These provisions include: the election of directors to staggered terms of three years; advance notice
requirements for nominations for election to our Board of Directors and for proposing matters that stockholders may act on at
stockholder meetings, a requirement that only directors may fill a vacancy in our Board of Directors, and the other provisions of our
charter and bylaws. Our charter also authorizes our Board of Directors to issue preferred stock, and preferred stock could be issued as
a defensive measure in response to a takeover proposal. In addition, pursuant to federal banking regulations, as a general matter, no
person or company, acting individually or in concert with others, may acquire more than 10 percent of our common stock without
prior approval from our federal banking regulator. These provisions may discourage potential takeover attempts, discourage bids for
our common stock at a premium over market price or adversely affect the market price of, and the voting and other rights of the
holders of, our common stock. These provisions could also discourage proxy contests and make it more difficult for holders of our
common stock to elect directors other than the candidates nominated by our Board of Directors.
Our business could be negatively affected as a result of actions by activist stockholders.
Campaigns by stockholders to effect changes at publicly traded companies are sometimes led by investors seeking to increase
short-term stockholder value through various corporate actions. In the future we may have disagreements with activist stockholders
which could prove disruptive to our operations. Activist stockholders could seek to elect their own candidates to our board of directors
or could take other actions intended to challenge our business strategy and corporate governance. Responding to actions by activist
stockholders may adversely affect our profitability or business prospects, by diverting the attention of management and our employees
from executing our strategic plan. Any perceived uncertainties as to our future direction or strategy arising from activist stockholder
initiatives could also cause increased reputational, operational, financial, regulatory and other risks, harm our ability to raise new
capital, or adversely affect the market price or increase the volatility of our securities.
If we fail to maintain proper and effective internal controls, our ability to produce accurate and timely financial statements could
be impaired and investors’ views of us could be harmed.
As a public company, we are required to maintain internal control over financial reporting and to report any material weaknesses
in such internal controls. We have evaluated and tested our internal controls in order to allow management to report on our internal
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controls, as required by Section 404 of the Sarbanes-Oxley Act of 2002. If we are not able to meet the requirements of Section 404 in
a timely manner or with adequate compliance, we would be required to disclose material weaknesses if they develop or are uncovered
and we may be subject to sanctions or investigation by regulatory authorities, such as the Securities and Exchange Commission. Any
such action could negatively impact the perception of us in the financial market and our business. In addition, our internal controls
may not prevent or detect all errors and fraud. A control system, no matter how well designed and operated, is based upon certain
assumptions and can provide only reasonable assurance that the objectives of the control system will be met.
If securities or industry analysts do not publish research or reports about our business, or if they publish negative reports about
our business, our stock price and trading volume could decline.
The trading market for our common stock may be influenced by the research and reports that securities or industry analysts
publish about us or our business. We do not have control over these analysts. If one or more of the analysts who cover us downgrade
our stock or change their opinion of our shares or publish inaccurate or unfavorable research about our business, our stock price would
likely decline. If one or more of these analysts cease coverage of our company or fail to publish reports on us regularly, we could lose
visibility in the financial markets, which could cause our stock price or trading volume to decline.
The price of our common stock may fluctuate significantly, and this may make it difficult for you to sell shares of common stock
owned by you at times or at prices you find attractive.
The trading price of our common stock may fluctuate widely as a result of a number of factors, many of which are outside our
control. In addition, the stock market is subject to fluctuations in the share prices and trading volumes that affect the market prices of
the shares of many companies. These broad market fluctuations could adversely affect the market price of our common stock. Among
the factors that could affect our stock price are:
•
•
•
•
•
•
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•
•
•
•
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•
•
actual or anticipated quarterly fluctuations in our operating results and financial condition and prospects;
changes in revenue or earnings estimates or publication of research reports and recommendations by financial analysts;
failure to meet analysts’ revenue or earnings estimates;
speculation in the press or investment community;
strategic actions by us or our competitors, such as acquisitions or restructurings;
acquisitions of other banks or financial institutions;
actions by institutional stockholders;
fluctuations in the stock price and operating results of our competitors;
general market conditions and, in particular, developments related to market conditions for the financial services industry;
proposed or adopted regulatory changes or developments;
anticipated or pending investigations, proceedings, or litigation that involve or affect us;
successful management of reputational risk;
health epidemics, such as the recent outbreak of coronavirus; and
domestic and international economic factors, such as interest or foreign exchange rates, stock, commodity, credit, or asset
valuations or volatility, unrelated to our performance.
The stock market and, in particular, the market for financial institution stocks, has experienced significant volatility. As a result,
the market price of our common stock may be volatile. In addition, the trading volume in our common stock may fluctuate more than
usual and cause significant price variations to occur. The trading price of the shares of our common stock and the value of our other
securities will depend on many factors, which may change from time to time, including, without limitation, our financial condition,
performance, creditworthiness and prospects, future sales of our equity or equity related securities, and other factors identified above
32
in “Forward-Looking Statements,” and in this Item 1A — “Risk Factors.” The capital and credit markets can experience volatility and
disruption. Such volatility and disruption can reach unprecedented levels, resulting in downward pressure on stock prices and credit
availability for certain issuers without regard to their underlying financial strength. A significant decline in our stock price could result
in substantial losses for individual stockholders and could lead to costly and disruptive securities litigation.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2. PROPERTIES
Not applicable.
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.
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ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER
PURCHASES OF EQUITY SECURITIES.
PART II
Trading Symbol and Holders of Common Stock
Our common stock is traded on the Nasdaq Capital Market under the symbol “OVLY.” On March 26, 2021, there were
approximately 378 shareholders of record of the common stock and 8,235,939 outstanding shares of common stock. The actual
number of shareholders is greater than this number of record holders and includes shareholders who are beneficial owners but whose
shares are held in street name by brokers and other nominees.
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 DFPI, 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 DFPI determines
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
DFPI 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.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
Not applicable.
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ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The following discussion of financial condition as of December 31, 2020 and 2019 and results of operations for each of the
years in the two-year period ended December 31, 2020 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. This discussion contains forward-looking statements that reflect our plans, estimates
and beliefs and involve numerous risks and uncertainties. Actual results may differ materially from those contained in any forward-
looking statements. You should carefully read “Special Note Regarding Forward-Looking Statements” included in this report.
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, 2020, we had approximately $1.51 billion in total assets, $1.01 billion in total gross loans, and $1.37
billion in total deposits.
We believe the following were key indicators of our performance during 2020:
• Total assets increased to $1.51 billion at the end of 2020, an increase of 31.7% from $1.15 billion at the end of 2019.
• Total deposits increased to $1.37 billion at the end of 2020, an increase of 34.1%, from $1.02 billion at the end of 2019.
• Total net loans increased to $997 million at the end of 2020, an increase of 34.6%, from $741 million at the end of
2019.
• Net interest income increased to $45.0 million in 2020, an increase of $3.9 million or 9.6%, compared to $41.0 million
in 2019, mainly as a result of growth of our loan and investment portfolios.
• The growth in total assets, deposits, loans and net interest income as described above was bolstered by PPP loans
funded during 2020, which had an outstanding balance of $211 million as of December 31, 2020.
•
Provision for loan losses increased by $1,620,000 to $2,165,000 in 2020, compared to $545,000 in 2019, mainly due to
a qualitative adjustment in the loan loss reserve corresponding to the COVID-19 pandemic and loan growth during
2020.
• The ratio of total non-performing loans to total loans decreased to 0.00% at December 31, 2020 from 0.15% at
December 31, 2019. Management considers the size of the ratio of non-performing assets to total loans to be low and
manageable, and reserves have been taken appropriately.
• Total noninterest income decreased to $4.8 million in 2020, a decrease of 4.6%, from $5.0 million in 2019, which is
mainly due to a reduction in overdraft fee income during 2020 as higher deposit account balances corresponding to PPP
and stimulus payments, coupled with pandemic related changes in spending patterns resulted in relatively low overdraft
activity.
• Total noninterest expense increased from $28.8 million in 2019 to $29.9 million in 2020, primarily due to staffing
increases and general operating costs necessary to support the growing loan and deposit portfolios.
• Provision from income taxes decreased by $144,000 to $4.1 million in 2020, mainly due to a higher percentage of our
pre-tax income coming from tax-free municipal bond interest income.
These items, as well as other factors, contributed to the increase in net income for 2020 to $13.7 million from $12.5 million
in 2019, which translates into $1.68 per diluted share in 2020 as compared to $1.54 per diluted share in 2019.
Over the past several years, our network of branches and loan production offices have expanded geographically. We currently
maintain seventeen 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.
35
COVID-19 Impact
The coronavirus (“COVID-19”) pandemic and the Federal Reserve's response to the economic challenges during 2020 has
resulted in an uncertain and rapidly evolving economy. In response to the pandemic, approximately 27% of our administrative staff were
working remotely as of December 31, 2020, while all of the branch staff have returned to working in the office. . To date, we have been
able to fully support our remote workforce and these remote work arrangements have not adversely impacted our ability to serve our
clients. These remote work arrangements have also not had an impact on our financial reporting systems or the internal controls we have
over financial reporting, disclosures and related procedures. In addition to the remote work arrangements, the Company has taken many
other measures to protect employees and customers, including, adherence to state mask wearing mandates, social distancing, sanitizing
protocols and posting of public safety notices on branch buildings.
The most significant impact of COVID-19 on our business has been to the quality of our loan portfolio and to net interest
income as short-term interest rates have sharply declined. During the second quarter, we increased the qualitative factors used in the
determination of the adequacy of our allowance for loan and lease loss in anticipation of the impact that COVID-19 will have on our
clients and their ability to fulfill their obligations. The provision for loan losses increased by $1,620,000 in 2020 due to qualitative
adjustments in the loan loss reserve corresponding to COVID-19 pandemic.
Offsetting these factors was loan interest and fee income of $4,720,000 in Paycheck Protection Program (“PPP”) loans funded
during 2020 through the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”), as the Bank committed early to be
an active participant in the effort to support local businesses through the PPP program. Further, higher deposit account balances
corresponding to PPP and government stimulus payments, coupled with changes in business and consumer spending patterns amid the
COVID-19 stay-at-home orders and business lockdowns, resulted in relatively low overdraft activity and hence the decrease to non-
interest income. Outside of this recent trend, the Bank’s core customer base and corresponding service fee income related to servicing
loan and deposit accounts, continues to grow at a steady pace. The year-to-date results were also bolstered by deferred loan cost GAAP
accounting adjustments of $1,253,000 against salary expense during 2020, corresponding to the PPP loans funded.
The COVID-19 Pandemic negatively impacted the revenue streams of certain borrowers, and during the second quarter of 2020
the Company elected to allow these borrowers to defer payments for a term up to six months. These deferrals were specifically related
to the pandemic and the resulting economic hardships. As of December 31, 2020, the Company had no loans for which payments were
deferred, as normal payment schedules had resumed on the deferrals granted during the second quarter of 2020. This compares to 53
loans with an outstanding balance of $74,868,000 as of June 30, 2020 for which payments were deferred due to the financial impact of
COVID-19. After an evaluation of financial stability, no specific loan loss reserve allocation was required on any of these loans at the
time of deferral and the short-term modifications granted in response to the COVID-19 pandemic are not considered to be troubled debt
restructurings.
We have no certainty that the provisions we made during 2020 will be sufficient to absorb the losses that stem from the impact
of COVID-19 on our clients. As the longer-term effects on our clients from the COVID-19 pandemic become more apparent, we may
still need to charge-off some or all of the balance on certain loans and make further provisions to increase our allowance for loan and
lease losses. These potential additional provisions for loan and lease losses will have a direct impact upon our capital, including the
potential need to reevaluate the need for a valuation allowance on our deferred tax asset. At this time, we do not expect that there would
be any material impairment to the valuation of other long-lived assets, right of use assets, or our investment securities. However, we
expect a reduction in the amount of interest income we earn for the remainder of the year due to the FOMC rate cuts. In addition, on
June 8, 2020, the National Bureau of Economic Research announced that the United States was in an economic recession. A prolonged
recession may result in increased overdraft activity and defaults on loans, which could materially harm our business, results of operations
and financial condition.
The Bank is currently well capitalized under federal banking regulations that apply to all United States-based banks (see
“Capital Ratios” section below for more information on the Bank’s capital position). In the event that future loan and leases loss and/or
tax provisions reduce our capital surplus, we would be required to undertake measures to return the Bank's capital ratios to well
capitalized levels, which could include but not be limited to raising additional capital or reducing the Banks asset size. We believe that
we would have access to equity and debt markets to secure additional capital for the Bank should the need arise, but we have no certainty
regarding the extent of the availability of these markets at the time such need would arise.
Increased demand for liquidity by our clients is another impact that we anticipate could occur should the COVID-19 effects be
prolonged. As of December 31, 2020, the Company and the Bank's on-balance sheet liquidity was very strong and combined with our
contingent liquidity resources, we believe that the Bank has sufficient resources to meet the liquidity needs of our clients. In response
to COVID-19, the Federal Reserve has made other provisions that could assist the Bank in satisfying its liquidity needs, such as reducing
our reserve requirement to zero, expanding access to the discount window through collateral pledging and extension of term borrowings.
36
The extent to which the COVID-19 pandemic affects the Company’s future financial results and operations will depend on
future developments which are highly uncertain and cannot be predicted, including new information which may emerge concerning the
duration and broad impacts of the pandemic, and current or future actions in response thereto. Management is working closely with our
Board of Directors as we plan and execute our response to the significant disruption caused by the crisis. See Part II, Item 1A, Risk
Factors, for additional discussion of risks related to the COVID-19 pandemic.
2021 Outlook
As we begin our strategic business plan for 2021, we remained focused on relationship-based expansion throughout our
market area. We plan to continue to focus on increasing our loan-to-deposit ratio to expand our net interest margin, while attempting
to control expenses and credit losses.
Favorable trends in our economy prompted the Federal Reserve Open Market Committee, or FOMC, to increase the target
federal funds by 0.25% in 2016, 0.75% in 2017 and 1.00% in 2018, which was followed by decreases of 0.75% and 1.50% in 2019
and 2020, respectively. The increased market interest rates from 2016 through 2018 had a positive impact on net interest income
mainly due to growth of earning assets and the fact that our balance sheet is slightly asset sensitive. In 2019 and 2020, that trend
reversed and we recognized yield compression on our earning assets due to the FOMC rate cuts. Even though further FOMC rate cuts
are not forecasted for 2021, we expect this negative impact will continue to some degree due to continued repricing of existing loans
and investment securities. The potential compression of net interest income and net interest margin could occur 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 remain at historic lows and cannot reasonably be further reduced.
Given our asset sensitive balance sheet, we expect our net interest income to benefit from interest rate increases, but we
expect any such benefit to be proportional to the increase in rates. 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. That said, in light of the current
economic environment, if the rates increase is modest, 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. The economies and real estate markets in our primary market areas are expected to continue to be
significant determinants of the quality of our assets in future periods and, thus, our results of operations, liquidity and financial
condition.
For 2021, management remains focused on the above challenges and opportunities and other factors affecting the business
similar to the factors driving the 2020 results as discussed in this section.
Critical Accounting Policies
Critical accounting policies are those that are 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
(“GAAP”). 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.
37
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.
Net realizable value of the underlying collateral is the fair value of the collateral, less estimated selling costs and any prior
liens. Appraisals, recent comparable sales, offers and listing prices are factored in when valuing the collateral. We review and verify
the qualifications and licenses of the certified general appraisers used for appraising commercial properties or certified residential
appraisers for residential properties. Real estate appraisals may utilize a combination of approaches including replacement cost, sales
comparison and the income approach. Comparable sales and income data are analyzed by the appraisers and adjusted to reflect
differences between them and the subject property such as type, leasing status and physical condition. When the appraisals are
received, management reviews the assumptions and methodology utilized in the appraisal, as well as the overall resulting value in
conjunction with independent data sources, such as recent market data and industry-wide statistics. We generally use a 6% discount
for selling costs which is applied to all properties, regardless of size. Appraised values may be adjusted to reflect changes in market
conditions that have occurred subsequent to the appraisal date, or for revised estimates regarding the timing or cost of the property
sale. These adjustments are based on qualitative judgments made by management on a case-by-case basis.
Our available for sale portfolio is carried at estimated fair value, with any unrealized gains and losses, net of taxes, reported
as accumulated other comprehensive income in shareholders’ equity. We conduct a periodic review and evaluation of the securities
portfolio to determine if the value of any security has declined below its carrying value and whether such decline is other than
temporary. If such decline is deemed other than temporary, we would adjust the carrying amount of the security by writing down the
security to fair value through a charge to current period income for the amount that is determined to be other than temporary . The fair
values of our securities are significantly affected by changes in interest rates.
In general, as interest rates rise, we expect that the fair value of fixed-rate securities should decrease; as interest rates fall, we
expect that the fair value of fixed-rate securities should 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.
38
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 trends,
• problem loan trends,
• loss and recovery trends,
• quality of loan review,
• 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.
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,
39
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
our 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.
We file income tax returns in the U.S. federal jurisdiction, and the state of California. With few exceptions, we are no
longer subject to U.S. federal or state/local income tax examinations by tax authorities for years before 2016.
Fair Value Measurements
We use fair value measurements to record fair value adjustments to certain assets and liabilities and to determine fair value
disclosures. We base our fair values on the price that would be received to sell an asset or paid to transfer a liability in an orderly
transaction between market participants at the measurement date. Securities available for sale, derivatives, and loans held for sale, if
any, are recorded at fair value on a recurring basis. Additionally, from time to time, we may be required to record certain assets at fair
value on a non-recurring basis, such as certain impaired loans held for investment and securities held to maturity that are other-than-
temporarily impaired. These non-recurring fair value adjustments typically involve write-downs of individual assets due to application
of lower-of-cost or market accounting.
We have established and documented a process for determining fair value. We maximize the use of observable inputs and
minimize the use of unobservable inputs when developing fair value measurements. Whenever there is no readily available market
data, management uses its best estimate and assumptions in determining fair value, but these estimates involve inherent uncertainties
and the application of management's judgment. As a result, if other assumptions had been used, our recorded earnings or disclosures
could have been materially different from those reflected in these financial statements. For detailed information on our use of fair
value measurements and our related valuation methodologies, see Note 14 to the Consolidated Financial Statements in Item 8 of this
report.
Recently Issued Accounting Standards
In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments – Credit Losses (Topic 326). This update revises
the methodology used by financial institutions under GAAP to recognize credit losses in the financial statements. Currently, GAAP
requires the use of the incurred loss model, whereby financial institutions recognize in current period earnings, incurred credit losses
and those inherent in the financial statements, as of the date of the balance sheet. This guidance results in a new model for estimating
the allowance for loan and lease losses, commonly referred to as the Current Expected Credit Loss (“CECL”) model. Under the CECL
model, financial institutions are required to estimate future credit losses and recognize those losses in current period earnings. The
amendments within the update are effective for fiscal years and all interim periods beginning after December 15, 2019, with early
adoption permitted. In October 2019, FASB approved an amendment that will delay the adoption of this ASU for three years for certain
entities including the Company since we are classified as a Small Reporting Company. Accordingly, this ASU will become effective
for the Company on January 1, 2023. Upon adoption of the amendments within this update, the Company will be required to make a
cumulative-effect adjustment to the opening balance of retained earnings in the year of adoption. The Company is currently in the
process of evaluating the impact the adoption of this update will have on its financial statements. While the Company has not quantified
the impact of this ASU, it does expect changing from the current incurred loss model to an expected loss model will result in an earlier
recognition of losses.
In January 2017, the FASB issued ASU 2017-04, Intangibles Goodwill and Other (Subtopic 350): Simplifying the Test for
Goodwill Impairment. The provisions of the update eliminate the existing second step of the goodwill impairment test which
provides for the allocation of reporting unit fair value among existing assets and liabilities, with the net leftover amount
representing the implied fair value of goodwill. In replacement of the existing goodwill impairment rule, the update will
provide that impairment should be recognized as the excess of any of the reporting unit’s goodwill over the fair value of the
reporting unit. Under the provisions of this update, the amount of the impairment is limited to the carrying value of the
reporting unit’s goodwill. For public business entities that are Securities and Exchange Commission filers, the amendments of
40
the update became effective in fiscal years beginning after December 15, 2019. The Company adopted the standards update
January 1, 2020 and evaluates goodwill in accordance with the provisions of the standard. Due to the economic impact that
COVID-19 has had on the Company, management concluded that factors such as the decline in macroeconomic conditions have
led to the occurrence of a triggering event and therefore an interim impairment test over goodwill was performed as of
September 30, 2020. As part of this interim impairment assessment, in the event that the Company concluded that all or a
portion of its goodwill is impaired, a non-cash charge for the amount of such impairment would be recorded to earnings. Such
a charge would have no impact on tangible capital or regulatory capital. Based upon the results of our interim goodwill
assessment, we have concluded that an impairment did not exist as of the time of the assessment.
In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Subtopic 820): Disclosure Framework -
Changes to the Disclosure Requirements for Fair Value Measurement. The primary focus of ASU 2018-13 is to improve the
effectiveness of the disclosure requirements for fair value measurements. The changes affected all companies that are
required to include fair value measurement disclosures. In general, the amendments in ASU 2018-13 are effective for all
entities for fiscal years and interim periods within those fiscal years, beginning after December 15, 2019. An entity is
permitted to early adopt the removed or modified disclosures upon the issuance of ASU 2018-13 and may delay adoption of
the additional disclosures, which are required for public companies only, until their effective date. The Company first adopted
this ASU beginning with the period ended March 31, 2020, and it did not have a significant impact on the Company's consolidated
financial statements.
In April 2019, the FASB issued ASU 2019-04, Codification Improvements to Topic 326, Financial Instruments - Credit
Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments that clarifies and improves areas of guidance related
to recently issued standards on credit losses, hedging and recognition and measurement. The provisions of this ASU are effective January
1, 2020 and contain various methods of adoption. This ASU did not have a material impact on our financial condition or results of
operations.
In May 2019, the FASB issued ASU 2019-05, Financial Instruments - Credit Losses (Topic 326): Targeted Transition Relief.
This ASU allows an option for entities to irrevocably elect the fair value option on an instrument-by-instrument basis for eligible
financial assets measured at amortized cost basis upon adoption of the credit loss standards. This amendment provides relief for those
entities electing the fair value option on newly originated or purchased financial assets, while maintaining existing similar financial
assets at amortized cost, avoiding the requirement to maintain dual measurement methods for similar assets. The fair value option does
not apply to held-to-maturity debt securities. The effective date for this ASU is the same as for ASU 2016-13, as discussed above. We
will evaluate this ASU in conjunction with ASU 2016-13 to determine its impact on our financial condition and results of operations.
In March 2020, FASB issued ASU 2020-04 - Reference Rate Reform (Subtopic 848): Facilitation of the Effects of
Reference Rate Reform on Financial Reporting. This ASU provides optional expedients and exceptions for contracts, hedging
relationships, and other transactions that reference LIBOR or other reference rates expected to be discontinued because of reference
rate reform. The ASU is effective for all entities as of March 12, 2020 through December 31, 2022. The Company is in the process of
evaluating the provisions of this ASU and its effects on our consolidated financial statements.
Results of Operations
The Company earns income from two primary sources. The first is net interest income, which is interest income generated by
earning assets less interest expense on interest-bearing liabilities. The second is noninterest income, which primarily consists of deposit
service charges and fees, the increase in cash surrender value of life insurance, investment advisory service fee income 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, 2020 of $13,687,000 or $1.68 per diluted share compared to
$12,489,000 or $1.54 per diluted share for the year ended December 31, 2019. The increase in net income for the year ended
December 31, 2020 was primarily due to an increase of $3,923,000 in net interest income, mainly from PPP loan fees and interest
income and the growth of our loan and investment portfolios. Non-interest income decreased by $232,000 in 2020, mainly as a result
of decreased NSF revenue due to higher cash balances in checking deposit accounts. The provision for loan losses increased by
$1,620,000 in 2020 due to qualitative adjustments in the loan loss reserve corresponding to COVID-19 pandemic. Non-interest
41
expense increased by $1,017,000 associated with staffing and general operating overhead increases to support the growth of our loan
and deposit portfolios.
Highlights of the financial results are presented in the following table:
(Dollars in thousands, except per share data)
2020
2019
As of and for the years ended December 31,
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
$
$
$
13,687
1.68
1.68
11.40 %
1.00 %
16.67 %
58.20 %
$
$
$
$
15.78
1,511,478
1,013,115
1,367,809
$
$
$
$
$
$
$
12,489
1.54
1.54
11.78 %
1.15 %
17.53 %
60.95 %
13.71
1,147,785
750,985
1,019,929
72.91 %
72.66 %
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, governmental budgetary matters, and the actions of the Federal
Reserve Board.
42
For a detailed analysis of interest income and interest expense, see the “Average Balance Sheets” and the “Rate/Volume Analysis”
below.
(Dollars in Thousands)
2020
Average
Balance
Interest
Income/
Expense
Avg
Rate/
Yield
Average
Balance
2019
Interest
Income/
Expense
Avg
Rate/
Yield
Distribution, Yield and Rate Analysis of Net Income
For the Years Ended December 31,
Assets:
Earning assets:
Gross loans (1) (2)
$ 930,578
$ 40,040
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:
Demand
Money market
Savings
Time deposits $250,000 and under
Tim deposits over $250,000
Borrowed Funds
Total interest-bearing liabilities
Noninterest-bearing liabilities:
Noninterest-bearing demand deposits
Other liabilities
Total noninterest-bearing liabilities
Shareholders' equity
7,644
212,020
20,406
106,458
22
6,457
57
461
4.30%
0.29%
3.05%
0.28%
0.43%
$ 717,255
$ 34,903
12,436
187,846
11,977
79,647
129
6,327
242
1,675
1,277,106
47,037
3.68%
1,009,161
43,276
86,567
$ 1,363,673
75,102
$ 1,084,263
297,707
270,184
99,506
20,051
16,122
10,805
527
402
49
56
85
34
0.18%
0.15%
0.05%
0.28%
0.53%
0.31%
251,067
232,866
82,271
21,792
17,335
0
916
464
47
60
81
0
714,375
1,153
0.16%
605,331
1,568
514,996
14,211
529,207
120,091
359,113
13,775
372,888
106,044
Total liabilities and shareholders' equity
$ 1,363,673
$ 1,084,263
Net interest income
Net interest spread (3)
Net interest margin (4)
$ 45,884
$ 41,708
3.52%
3.59%
4.87%
1.04%
3.37%
2.02%
2.10%
4.29%
0.36%
0.20%
0.06%
0.28%
0.47%
0.00%
0.26%
4.03%
4.13%
(1) Loan fees have been included in the calculation of interest income.
(2) Yields on municipal securities and loans have been adjusted to their fully-taxable equivalents (FTE), based on a federal marginal
tax rate of 21.0%.
(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.
43
Net interest income, on a fully tax equivalent basis (“FTE”), increased $4,176,000 or 10.0% to $45,884,000 for the year ended
December 31, 2020, compared to $41,708,000 in 2019. Net interest spread and net interest margin were 3.52% and 3.59%,
respectively, for the year ended December 31, 2020, compared to 4.03% and 4.13%, respectively, for the year ended December 31,
2019. This downward trend is mainly due to the FOMC rate cuts in March 2020 of 1.50% resulting in a decrease in earning asset
yields, as described below.
Our earning asset yield decreased 61 basis points in 2020 compared to 2019. The yield on loans recognized a decrease of 57
basis points for 2020 compared to 2019, which was primarily due to repricing of variable rate loans and lower rate indexes on new
loans, resulting from the FOMC rate cuts in March 2020. The FOMC cut rates by 0.25% three times in 2019 with the first one in
August and again by 1.50% in March 2020, so rates on average were significantly lower in 2020, as compared to 2019. Further
compressing loan yield was the funding of $244 million in PPP loans beginning in April 2020, which only earned a contractual
interest rate of 1.00%. The decrease in loan yield was minimized by the $3,091,000 in PPP net loan fees and costs recognized during
2020, which was paid by the SBA and is scheduled to be deferred over the life of the PPP loans. Also offsetting the earning asset
yield compression was growth in the loan and investment portfolio average balances of $213,323,000 and $19,382,000, respectively,
in 2020 as compared to 2019.
The cost of funds on interest-bearing liabilities decreased to 0.16% in 2020 compared to 0.26% in 2019 as our excess liquidity
has allowed us to keep deposit rates at historic lows and even make some downward adjustments on certain accounts. Average non-
interest-bearing demand deposit balances increased by $155,883,000 in 2020 compared to 2019, which contributed in lowering our
cost of funds on total deposits.
The net interest margin compression the Company recognized in 2020, is due to the factors discussed above which could
possibly result in further compression if rate indexes on assets were to fall, and/or: 1) deposit interest rates remain at historic lows
from which they cannot reasonably be further reduced, 2) competition in the lending market restrict significant increases in new loan
rates, and 3) deposit growth out-paces loan growth as recognized in recent years, resulting in higher interest-bearing cash balances,
which yield approximately 0.10% as of December 31, 2020.
Changes in volume resulted in an increase in net interest income (on a FTE basis) of $11,636,000 for the year of 2020 compared
to the year 2019, and changes in interest rates and the mix resulted in a decrease in net interest income (on a FTE basis) of $7,460,000
for the year 2020 versus the year 2019. Management closely monitors both total net interest income and the net interest margin.
Market rates are in part based on the FOMC target Federal funds interest rate (the interest rate banks charge each other for short-
term borrowings). The change in the Federal funds sold 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%.
The FOMC increased the Federal funds rate again in December 2016 by 0.25% to a range of 0.50% to 0.75%. In 2017, the FOMC
increased the Federal funds rate by 0.25% on three occasions resulting in a range of 1.25% to 1.50% as of December 31, 2017. In 2018,
the FOMC increased the Federal funds rate by 0.25% on four occasions resulting in a range of 2.25% to 2.50% as of December 31,
2018. In 2019, the FOMC decreased the Federal funds rate by 0.25% on three occasions resulting in a range of 1.50% to 1.75% as of
December 31, 2019. In 2020, the FOMC decreased the Federal funds rate by 0.50% and 1.00% on two occasions in March resulting in
a range of 0.00% to 0.25% as of December 31, 2020.
44
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)
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:
Interest-Earning DDA
Money market deposits
Savings deposits
Time certificates over $250,000
Other time deposits
Borrowed Funds
Total interest expense
Rate/Volume Analysis of Net Interest Income
For the Year Ended December 31,
2020 vs. 2019
Increases (Decreases)
Due to Change In
For the Year Ended December 31,
2019 vs. 2018
Increases (Decreases)
Due to Change In
Volume
Rate
Total
Volume
Rate
Total
$
10,381
$
(5,244)
$
(50)
814
170
564
11,879
(57)
(684)
(355)
(1,778)
(8,118)
$
170
$
(559)
$
74
10
(5)
(6)
0
243
(136)
(8)
1
10
34
(658)
(415)
5,137
(107)
130
(185)
(1,214)
3,761
(389)
(62)
2
(4)
4
34
$
2,867
$
259
$
3,126
(64)
106
34
(1,114)
1,829
(17)
188
17
143
590
$
26
$
373
$
(176)
(273)
4
(14)
(5)
0
(165)
8
1
18
0
127
(81)
294
51
(971)
2,419
399
(449)
12
(13)
13
0
(38)
Change in net interest income
$
11,636
$
(7,460)
$
4,176
$
1,994
$
463
$
2,457
(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 loan
growth, net charge-offs, changes in the composition of the loan portfolio, and delinquencies. As a result of management’s analysis, a
range of the potential amount of the allowance for loan losses is determined.
The Company recorded provision for loan losses of $2,165,000 during the year ended December 31, 2020 to provide an adequate
loan loss reserve for the new loan funding and to make a qualitative adjustment corresponding to the COVID-19 pandemic, as
compared to provisions of $545,000 for the year ended December 31, 2019. The Company did not have any nonperforming loans at
December 31, 2020 as compared to $1,103,000 at December 31, 2019, or 0.15% of total loans. Nonperforming loans are primarily in
nonperforming real estate construction and development loans. The allowance for loan losses was $11,297,000 and $9,146,000 at
December 31, 2020 and 2019, or 1.12% and 1.22%, respectively, of total loans. The decrease as a percentage of total loans is due to
45
the $211 million in PPP loans outstanding as of December 31, 2020 that do not require a reserve as they are fully guaranteed by the
U.S. government through the SBA program. The strong credit quality has resulted in relatively low net charge-off totals of $14,000 in
2020 and $84,000 in 2019.
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
The following table sets forth a summary of noninterest income for the periods indicated:
For the Years Ended December 31,
(Dollars in thousands)
2020
2019
Service charges on deposits
Debit card transaction fee income
Earnings on cash surrender value of life insurance
Mortgage commissions
Gains on calls of securities
Gain on sale of other real estate owned
Other
Total
Amount
$
$
1,272
1,355
694
130
2
34
1,328
4,815
$
%
26.4%
28.1%
14.4%
2.7%
0.0%
0.7%
27.6%
100.00%
$
Amount
1,619
1,297
602
88
138
0
1,303
5,047
%
32.1%
25.7%
11.9%
1.7%
2.7%
0.0%
25.8%
Year-Over-Year
%
$
Change
Change
$
(347)
-21.4%
58
92
42
(136)
34
25
4.5%
15.3%
47.7%
-98.6%
1.9%
-4.6%
100.00%
$
(232)
Average assets
$
1,363,673
$
1,084,263
Noninterest income as a % of average assets
0.4%
0.5%
Noninterest income was $4,815,000 for the year ended December 31, 2020, compared to $5,047,000 for the year 2019. Service
charge income decreased to $1,272,000 compared to $1,619,000 for 2019, due to higher balances held in checking deposit accounts
and a change in spending patterns due to the COVID-19 pandemic leading to less overdraft activity and NSF fee income. Debit card
transaction fee income increased to $1,355,000 in 2020 as compared to $1,297,000 in 2019, as a result of the increase in the aggregate
number of transaction deposit accounts and corresponding service fee income, and the aforementioned spending pattern shift to debit
cards due to the COVID-19 stay at home orders. Earnings on the cash surrender value of life insurance recognized an increase of
$92,000 in 2020 compared to 2019, due to four new life insurance policies that began earning revenue in July of 2019. Mortgage
commissions have increased by $42,000 for the year 2020, as compared to 2019, as a result of the increased demand for home
purchases and refinancing. Gains on called securities decreased from $138,000 in 2019 to $2,000 in 2020, mainly due to one security
that was called during the first quarter of 2019. There was one sale of an OREO property in 2020, which resulted in a gain of $34,000
as compared to no sales or corresponding gains in 2019. In 2020, other income increased by $25,000, which was attributable to
investment advisory fee income increases. The Company continues to evaluate its deposit product offerings with the intention of
continuing to expand its offerings to the consumer and business depositors.
46
Noninterest Expense
The following table sets forth a summary of noninterest expenses for the periods indicated:
(Dollars in thousands)
2020
2019
For the Years Ended December 31,
Salaries and employee benefits
Occupancy expenses
Data processing fees
Regulatory assessments (FDIC & DFPI)
Other operating expenses
Total
Year-Over-Year
%
$
Change
Change
Amount
$
17,972
3,642
2,062
324
5,864
%
60.2%
12.2%
6.9%
1.1%
19.6%
Amount
$
17,400
3,493
1,907
270
5,777
%
60.3%
12.1%
6.6%
0.9%
20.0%
$
572
149
155
54
87
$
29,864
100.00%
$
28,847
100.00%
$
1,017
3.3%
4.3%
8.1%
20.0%
1.5%
3.5%
Average assets
$
1,363,673
$
1,084,263
Noninterest expenses as a % of average assets
2.2%
2.7%
Noninterest expense was $29,864,000 for the year ended December 31, 2020, an increase of $1,017,000 or 3.5% compared to
$28,847,000 for the year ended 2019. Salaries and employee benefits increased by $572,000 in 2020 to $17,972,000 compared to the
prior year, due to expanding our staff to support loan and deposit growth. Included in the salary and benefit expense total is deferred
loan cost GAAP accounting adjustments of $1,253,000 against salary expense in 2020, corresponding to PPP loans funded.
Occupancy expense realized an increase of $149,000 in 2020 compared to the prior year, primarily from depreciation expense
on new ATM machines purchased for our branches and rent increases on certain branch locations.
Data processing costs increased in 2020 over 2019 by $155,000, primarily due to servicing costs on the growing number of
loan and deposit accounts.
FDIC and DFPI regulatory assessments increased by $54,000 in 2020 compared to 2019. In January 2019, the FDIC sent
notification that small banks less than $10 billion would receive assessment credits for the portion of their assessments that contributed
to the growth in the Deposit Insurance Fund Reserve Ratio from 1.15% to 1.35%, to be applied when the reserve ratio reached 1.38%.
That threshold was achieved in early 2019 and therefore the Company did not recognize any expense for FDIC assessments during the
third quarter of 2019. Additionally, the initial base assessment rate for financial institutions varies based on the overall risk profile of
the institution as defined by the FDIC and our risk profile was stable during 2019 and 2020, with a slight improvement for both years in
asset quality metrics that are included in the risk profile. We expect that the relatively low assessment rate should be offset by deposit
growth in 2021. The increase to our recorded expense in 2020 was due to the aforementioned credit that was recognized in 2019 and
higher deposit balances in 2020, as the FDIC assessment rates are applied to average quarterly total liabilities as the primary basis.
Management is also aware of the potential for further assessment credits to be recognized in future periods if the FDIC reserve ratio
remains above 1.38%.
Other operating expenses increased by $87,000 or 1.5% to $5,864,000 in 2020, primarily as a result of various general
operating expense increases required to support our growing business portfolios and compliance mandates, some of which included
telephone and data communications, software license fees, advertising and charitable contributions.
Management anticipates that noninterest expense should continue to increase as we continue to grow, and management believes
the Company’s administration as currently set up is scalable to handle future deposit growth. However, management remains
committed to cost-control and efficiency, and we expect to keep these increases to a minimum relative to growth.
47
Provision for Income Taxes
We reported a provision for income taxes of $4,056,000 and $4,200,000 for the years 2020 and 2019, respectively. The effective
income tax rate on income from continuing operations was 22.9% for the year ended December 31, 2020 compared to 25.2% for the
year 2019. 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).
Financial Condition
The Company’s total assets were $1,511,478,000 at December 31, 2020 compared to $1,147,785,000 at December 31, 2019, an
increase of $363,693,000 or 31.7%. Net loans increased by $256,199,000, of which $210,822,000 was from PPP loans, investments
increased $27,204,000, bank premises and equipment increased $541,000, interest receivable and other assets increased $90,000,
while cash and cash equivalents increased $79,062,000 for the year ended December 31, 2020 as compared to December 31, 2019.
Loans gross of the allowance for loan losses and deferred fees were $1,013,115,000 at December 31, 2020, compared to
$750,985,000 at December 31, 2019, an increase of $262,130,000 or 34.9%. The increase was due to an increase of $54,329,000 or
9.0% in commercial real estate loans, an increase of $214,302,000 or 275.8% in commercial and industrial loans which included
growth of $210,822,000 from PPP loans, a decrease of $6,398,000 or 16.9% in consumer loans and consumer residential loans and a
decrease of $103,000 or 0.4% in agriculture loans. The PPP loans changed the composition of the loan portfolio categories, but
excluding those loans, the composition remained relatively unchanged as a percentage of total loans, with commercial real estate
comprising 65% and 81% of the loan portfolio at December 31, 2020 and 2019, respectively.
Deposits increased $347,880,000 or 34.1% to $1,367,809,000 at December 31, 2020 compared to $1,019,929,000 at
December 31, 2019. Demand, Money Market and Savings increased by $243,226,000, $67,980,000 and $37,763,000, respectively,
while Time Deposits decreased by $1,089,000 as of December 31, 2020 as compared to December 31, 2019.
There were no short-term borrowing or long-term debt outstanding balances at December 31, 2020 and 2019. The Company uses
short-term borrowings, primarily short-term FHLB advances, to fund short-term liquidity needs and manage net interest margin.
Equity increased $17,124,000 or 15.2% to $129,694,000 at December 31, 2020, compared to $112,570,000 at December 31,
2019.
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, 2020, and 2019, we had $33,085,000 and $13,785,000, respectively, in federal funds sold.
Investment Securities
Management of our investment securities portfolio focuses on providing an adequate level of liquidity and establishing an
interest rate-sensitive position, while earning an adequate level of investment income without taking undue risk. Investment securities
that we intend to hold until maturity are classified as held-to-maturity securities, and all other investment securities are classified as
either available-for-sale or equity securities. Currently, all of our investment securities are classified as available-for-sale, except for
one mutual fund classified as an equity security.
The fair value of the equity security was $3,425,000 and $3,297,000 at December 31, 2020 and December 31, 2019,
48
respectively. Consistent with ASU 2016-01, equity securities are carried at fair value with the changes in fair value recognized in the
consolidated statement of income. Accordingly, the Company recognized an unrealized gain of $48,000 during the year ended
December 31, 2020, as compared to an unrealized gain of $101,000 during the year ended December 31, 2019.
Our available for sale investment securities holdings increased by $27,076,000 or 14.2% to $217,164,000 at December 31,
2020, compared to holdings of $190,088,000 at December 31, 2019. 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.
Total investment securities as a percentage of total assets decreased to 14.6% as of December 31, 2020 compared to 16.8%
at December 31, 2019. As of December 31, 2020, $147,795,000 of the investment securities were pledged to secure public deposits.
As of December 31, 2020, the total unrealized loss on debt securities that were in a loss position for less than 12 continuous
months was $59,000 with an aggregate fair value of $11,362,000. The total unrealized loss on debt securities that were in a loss
position for greater than 12 continuous months was $529,000 with an aggregate fair value of $36,082,000.
The following table summarizes the book value and fair value and distribution of our debt investment securities, which does
not include equity securities, as of the dates indicated:
Debt Investment Securities Portfolio
December 31, 2020
December 31, 2019
December 31, 2018
Amortized
Cost
Market Value
Amortized
Cost
Market Value
Amortized
Cost
Market Value
$
22,802
$
23,692
$
31,180
$
31,729
$
44,474
$
44,106
1,250
115,706
5,027
14,229
47,226
1,223
125,602
5,008
14,352
47,287
1,618
86,826
6,419
19,253
41,389
1,614
90,571
6,395
18,968
40,811
2,071
92,257
8,707
21,426
38,395
2,012
93,237
8,673
20,587
38,097
$
206,240
$
217,164
$ 186,685
$
190,088
$ 207,330
$
206,712
Dollars in Thousands
Available-for-Sale:
U.S. agencies
Collateralized mortgage
obligations
Municipalities
SBA pools
Corporate debt
Asset backed securities
Total debt securities
At December 31, 2020, fourteen asset-backed securities, seven Small Business Administration pools, three corporate debts,
one U.S. agency, and one collateralized mortgage obligations make up the total debt securities in an unrealized loss position for
greater than 12 months. At December 31, 2020, seven asset backed securities and three U.S. agencies make up the total debt 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 the 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 the Company 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,
2020, we did not have any investment securities that constituted 10% or more of the stockholders’ equity of any third-party issuer.
49
The following table summarizes the maturity and repricing schedule of our debt investment securities, which does not
include equity securities, at their amortized cost and their weighted average yields at December 31, 2020:
Debt Investment Maturities and Repricing Schedule
Yields in the above table have 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 (including net deferred loan fees and costs) and the
percentage distributions in each category, for the years ended December 31, 2020 and 2019.
(Dollars in Thousands)
Commercial real estate
Commercial and industrial
Consumer
Consumer residential
Agriculture
Unearned income
YEARS ENDED DECEMBER 31,
2020
2019
$
661,331 $
607,002
292,006
636
30,887
28,255
(4,572)
77,704
1,274
36,647
28,358
(792)
Total Loans, net of unearned income
$
1,008,543 $
750,193
Commercial real estate
Commercial and industrial
Consumer
Consumer residential
Agriculture
Unearned income
Total Loans, net of unearned income
65.6%
29.0%
0.1%
3.1%
2.8%
-0.5%
100.0%
80.9%
10.4%
0.2%
4.9%
3.8%
-0.1%
100.0%
Commercial real estate loans increased $54,329,000 in 2020 as compared to 2019, due to the increased demand by qualified
borrowers in our serving area. Of the commercial real estate loans at December 31, 2020, 64% are non-owner occupied and 36% are
50
YieldYieldYieldYieldYieldAvailable-for-sale:U.S. agencies$51.05%$4,1681.78%$4,3612.11%$14,2682.51%$22,8022.30%Collateralized mortgage obligations00.00%00.00%00.00%1,2501.53% 1,250 1.53%Municipalities8,5512.85%65,3513.66%38,3342.85%3,4705.66%115,7063.39%SBA pools00.00% 1,011 2.47% 2,609 2.64%1,4063.99% 5,026 2.98%Corporate debt3,6931.81%8,0361.95%2,5000.82%00.00%14,2291.72%Asset backed securities00.00% 1,960 0.76% 7,848 2.62%37,4190.97% 47,227 1.23%Total debt securities$12,2492.54%$80,5263.31%$55,6522.66%$57,8131.72%$206,2402.64% Within Five Years Within Ten YearsWithin One YearAfter One ButAfter Five But(Dollars in Thousands)AmountAmountAmountAmountAmountAfter Ten YearsTotal
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 $214,302,000 in 2020 as compared to 2019, mainly due to the $210,822,000 in PPP
loans outstanding at December 31, 2020 that were all funded during 2020 in response to the pandemic relief legislation. 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, 2020 and 2019:
(Dollars in Thousands)
December 31, 2020
December 31, 2019
$
Commercial real estate loans by
geographic location (County)
Stanislaus
San Joaquin
Sacramento
Fresno
Tuolumne
Contra Costa
Shasta
Merced
Alameda
Placer
Marin
Calaveras
Santa Clara
San Luis Obispo
Sonoma
Inyo
San Francisco
Solano
Mono
Butte
Madera
Other
Total
$
% of
Commercial
Real Estate
Loans
Amount
% of
Commercial
Real Estate
Loans
Amount
184,853
141,749
58,608
43,858
26,547
22,010
17,918
13,982
12,183
11,981
11,626
9,347
8,890
7,350
7,058
5,801
5,160
4,966
4,785
3,896
3,624
55,139
661,331
$
28.0%
21.4%
8.9%
6.6%
4.0%
3.3%
2.7%
2.1%
1.8%
1.8%
1.8%
1.4%
1.3%
1.1%
1.1%
0.9%
0.8%
0.8%
0.7%
0.6%
0.5%
8.4%
100.0%
$
160,790
131,199
54,757
46,975
31,795
14,453
8,075
17,336
10,421
11,316
11,885
12,168
9,059
7,452
7,166
7,127
5,285
5,161
4,249
4,327
2,720
43,286
607,002
26.5%
21.6%
9.0%
7.7%
5.2%
2.9%
1.3%
2.4%
1.7%
1.9%
2.0%
2.0%
1.5%
1.2%
1.2%
1.2%
0.9%
0.9%
0.7%
0.7%
0.4%
7.1%
100.0%
51
Construction and land loans are classified as commercial real estate loans and decreased $23.8 million in 2020 as compared to
2019. The table below shows an analysis of construction and land loans by type and location. Non-owner-occupied land loans of $5.3
million at December 31, 2020 included loans for lands specified for commercial development of $2.0 million and for residential
development of $3.3 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, 2020
December 31, 2019
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
Sacramento
Shasta
San Joaquin
Calaveras
El Dorado
Tuolumne
Yolo
Los Angeles
Contra Costa
Inyo
San Mateo
Other
Total
% of
Construction
and Land Loans
7.2%
2.7%
67.3%
8.7%
14.1%
100.0%
Amount
2,712
1,030
25,426
3,291
5,318
37,777
% of
Construction
and Land Loans
34.5%
15.3%
14.0%
13.5%
9.3%
6.7%
3.8%
0.7%
0.0%
0.0%
0.0%
0.0%
0.0%
2.2%
100.0%
Amount
13,016
5,766
5,279
5,112
3,528
2,524
1,422
281
0
0
0
0
0
849
37,777
$
$
$
$
% of
Construction
and Land Loans
2.7%
4.9%
49.5%
29.3%
13.6%
100.0%
Amount
1,691
3,041
30,386
18,051
8,367
61,536
% of
Construction
and Land Loans
18.8%
16.8%
22.7%
7.9%
11.3%
2.7%
0.0%
1.5%
11.4%
2.6%
1.9%
1.4%
0.3%
0.7%
100.0%
Amount
11,573
10,351
13,939
4,855
6,965
1,640
0
930
7,000
1,600
1,160
855
195
473
61,536
$
$
$
$
52
Loan Maturities
The following table shows the contractual maturity distribution and repricing intervals of the outstanding loans in our
portfolio, as of December 31, 2020. 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 and are
therefore classified as a variable rate loan in the table below.
(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, 2020
Within
One Year
After One But
Within
Five Years
After
Five Years
Total
$
82,552
$
184,429
$
394,349
$
661,331
231,548
306
2,518
25,710
(1,546)
341,089
103,652
237,437
$
$
$
48,406
287
12,945
2,145
(1,121)
247,091
146,661
100,430
$
$
$
12,052
43
15,423
400
(1,905)
292,006
636
30,887
28,255
(4,572)
$
$
$
420,363
$
1,008,543
260,276
160,087
$
$
510,589
497,954
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. Positive trends in Northern California real estate values, the low loan-to-
value ratios in our commercial real estate portfolio, and the high percentage of owner-occupied properties further solidify our credit
quality position.
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 due to 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
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 did not have any nonperforming loans at December 31, 2020, as compared to $1.1 million at December 31,
2019. The ratio of nonperforming loans to total loans was 0.0% and 0.15% at December 31, 2020 and 2019, respectively.
53
In addition, the Company held one OREO property as of December 31, 2020 and 2019, a residential land property that was
acquired through foreclosure that was written down to a zero balance because the public utilities have not been obtainable, thereby
rendering these land lots unmarketable at this time.
Management believes that the reserve provided for nonperforming loans, together with the tangible collateral, were
adequate as of December 31, 2020. See “Allowance for Loan Losses” below for further discussion. Except as disclosed above, as of
December 31, 2020, 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 not arise in the
future.
The following table provides information with respect to the components of our nonperforming assets as of December 31,
2020 and 2019. (The figures in the table are net of the portion guaranteed by the U.S. Government):
(Dollars in Thousands)
Nonaccrual loans(1)
Commercial real estate
Commercial and industrial
Consumer
Consumer residential
Agriculture
Total
Loans 90 days or more past due and still accruing (as to principal or interest):
Total nonperforming loans
Other real estate owned
Total nonperforming assets
Accruing restructured loans (2)
Total impaired loans
At December 31,
2020
2019
0
0
0
0
0
0
0
0
0
0
0
0
$
$
855
0
0
248
0
1,103
0
$
1,103
$
0
1,103
0
$
1,103
$
$
$
$
$
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
0.0%
0.0%
0.0%
0.15%
0.15%
829.19%
(1) During the fiscal year ended December 31, 2019, no interest income related to these loans was included in net income while on
nonaccrual status. Additional interest income of approximately $62,000 would have been recorded during the year ended
December 31, 2019, 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.
54
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 probable 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.
In recent years, the economic recovery has had a positive impact on the financial stability of our borrowers resulting in
improvements in credit quality of our loan portfolio which has allowed us to reduce the reserve for loan losses as a percentage of gross
loans. In 2020, the economy slipped into a recession following the COVID-19 pandemic which inevitability impacted the financial
condition of certain borrowers. We responded by making qualitative risk-based discretionary adjustments in connection with the
COVID-19 pandemic and corresponding economic stress. This adjustment combined with regular provisions corresponding to loan
growth, resulted in an increase of $2,151,000 in the allowance for loan losses to $11,297,000 at December 31, 2020, as compared with
$9,146,000 at December 31, 2019. In 2020, the allowance for loan losses as a percentage of total loans decreased to 1.12% as of
December 31, 2019, as compared to 1.22% as of December 31, 2019. This decrease as a percentage of total loans is due to the
outstanding PPP loans that do not require a loan loss reserve as they are guaranteed by the federal government through the SBA
program. Based on the current conditions of the loan portfolio, management believes that the $11,297,000 allowance for loan losses at
December 31, 2020 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 in recent years and help to offset the economic risk corresponding to the current COVID-19 pandemic. We
continue to monitor the impact of the economic environment, and adjustments to the provision for loan loss will be made accordingly.
During 2020, the Company recognized net loan charge-offs of $14,000 as compared to $84,000 in 2019.
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. Although management has
allocated a portion of the allowance to specific loan categories, the adequacy of the allowance is considered in its entirety.
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
Years Ended December 31,
2020
2019
Specific review of individual loans
$
0 $
Review of portfolio based on loss trends and current economic climate
Review of portfolio based on inherent risk and other subjective factors
4,527
6,770
$
11,297 $
680
5,347
3,119
9,146
55
The Components of the Allowance for Loan Losses
As stated previously in "Critical Accounting Policies," the overall allowance consists of a specific allowance for individually
identified impaired loans, an allowance factor for categories of credits with similar characteristics and trends, and an allowance for
changing environmental factors.
The first component, the specific allowance, results from the analysis of identified problem credits and the evaluation of sources
of repayment including collateral, as applicable. Through management's ongoing loan grading process, individual loans are identified
that have conditions that indicate the borrower may be unable to pay all amounts due under the contractual terms. These loans are
evaluated individually by management and specified allowances for loan losses are established when the discounted cash flows of future
payments or collateral value of collateral-dependent loans are lower than the recorded investment in the loan. Generally, with problem
credits that are collateral-dependent, we obtain appraisals of the collateral at least annually. We may obtain appraisals more frequently
if we believe the collateral value is subject to market volatility, if a specific event has occurred to the collateral (e.g. tentative map has
been filed), or if we believe foreclosure is imminent. Impaired loan balances decreased from $1,103,000 at December 31, 2019 to a
zero balance at December 31, 2020. The specific allowance totaled $680,000 at December 31, 2019, and zero as of December 31, 2020,
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, 2020 and 2019, the allowance allocated by categories of credits totaled $4.5 million and $5.3
million, respectively.
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, 2020 and 2019, the general valuation allowance, including the economic component, totaled $6.8 million and $3.1
million, respectively. The increase is due in part to the qualitative risk-based adjustments pertaining to inherent risk associated with the
economic impact of the COVID-19 pandemic. While published economic data indicates that the economy is recovering from a recession
cycle prompted by the COVID-19 pandemic, it is uncertain that the recovery cycle will continue for any definite period of time. 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.
56
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
Actual charge-offs:
Consumer
Consumer Residential
Total charge-offs
Recoveries on loans previously charged off:
Commercial real estate
Consumer
Consumer Residential
Total recoveries
Net loan charge-offs
Provision for loan losses
Balance at end of period
Ratios:
Net loan charge-offs to average total loans
Allowance for loan losses to total loans at end of period
Net loan charge-offs to allowance for loan losses at end of period
Net loan charge-offs to provision for loan losses
2020
2019
$
$
$
930,578
1,013,115
9,146
$
$
$
717,255
750,985
8,685
29
2
31
6
10
1
17
14
28
64
92
0
6
2
8
84
2,165
545
$
11,297
$
9,146
0.00%
1.12%
0.12%
0.65%
0.01%
1.22%
0.92%
15.41%
57
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
(Dollars in thousands)
December 31, 2020
December 31, 2019
Amount
% of Loan
Balance to
Gross Loans
Amount
% of Loan
Balance to
Gross Loans
Applicable to:
Commercial real estate
$
Commercial and Industrial
Consumer
Consumer Residential
Agriculture
9,310
1,079
22
325
561
$
65.3%
28.8%
0.1%
3.0%
2.8%
7,250
1,002
38
331
525
80.9%
10.3%
0.2%
4.9%
3.7%
Total Allowance
$
11,297
100.0%
$
9,146
100.0%
Other Earning Assets
For various business purposes, we make investments in earning assets other than the interest-earning securities and loans
discussed above. The primary other earning assets held by the Company as of December 31, 2020 and 2019, includes the cash
surrender value of the BOLI policies, Federal Home Loan Bank stock and Federal Reserve Bank stock. During 2019, we purchased 4
new life insurance policies on certain directors and employees for a total investment of $5 million. During 2018, we committed to
invest $5 million in a low-income housing tax credit fund (“LIHTC”) to promote our participation in CRA activities, which had an
unfunded commitment of $1,425,000 as of December 31, 2020. As of December 31, 2020 and 2019, we held another LIHTC
investment that we’ve participated in since 2006, for which the original investment was $1 million, and there were no unfunded
commitments as of December 31, 2020 and 2019. For both LIHTC investments, we receive the return in the form of tax credits and
tax deductions over a period of approximately 15 years. In 2017, we made a $1 million commitment as a limited partner, to a small
business private equity partnership to promote our participation in CRA activities. Returns will be received in the form of dividends
from the general partner. As of December 31, 2020, we have remaining commitments to fund an additional $470,000 on this
investment.
The balances of other earning assets as of December 31, 2020 and December 31, 2019 were as follows:
(Dollars in Thousands)
December 31, 2020
December 31, 2019
BOLI
LIHTCs
Small business private equity partnership
Federal Reserve Bank Stock
Federal Home Loan Bank Stock
$
$
$
$
$
25,325 $
4,158 $
$
530
754 $
4,003 $
24,631
4,640
480
758
4,003
58
Deposits and Other Sources of Funds
Deposits
Total deposits at December 31, 2020 and 2019 were $1,367,809,000 and $1,019,929,000, respectively, representing an
increase of $347,880,000 or 34.1% in 2020. The average deposits for the year ended December 31, 2020 increased $254,121,000 or
26.3% to $1,218,56,000 compared to $964,444,000 at December 31, 2019.
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 $350.1 million or 35.0% in 2020 to $1.35 billion at
December 31, 2020. The percentage of core deposits to total deposits increased slightly to 98.8% at December 31, 2020 as compared
to 98.2% at December 31, 2019. The average rate paid on time deposits in denominations of over $250,000 was 0.28% and 0.47% for
the years ended December 31, 2020 and 2019, 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:
(Dollars in Thousands)
Demand
Money market
Savings
Time deposits $250,000 and under
Time deposits over $250,000
Total deposits
$
1,218,566
Distribution of Average Daily Deposits
Average Deposits
2020
2019
Average
Balance
Average
Rate
Average
Balance
Average
Rate
$
812,703
270,184
99,506
20,051
16,122
0.18%
0.15%
0.05%
0.28%
0.53%
0.09%
$
610,180
232,866
82,271
21,792
17,335
$
964,444
0.36%
0.20%
0.06%
0.28%
0.47%
0.16%
The scheduled maturities of our time deposits in denominations of more than $250,000 at December 31, 2020 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
$
$
505
2,498
10,221
2,910
16,134
59
Because our client base is comprised primarily of commercial and industrial accounts, individual account balances are
generally higher than those of consumer-oriented banks. Three of our clients carry deposit balances of more than 1% of our total
deposits, none of which had a deposit balance of more than 3% of total deposits at December 31, 2020. The Company had no
brokered deposits as of December 31, 2020 and 2019.
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 FHLB as an alternative to retail deposit funds. We had no outstanding balances as of
December 31, 2020 but did advance $50 million during the second quarter of 2020 in anticipation of PPP loan fundings, which was
fully paid off by July 2020. The average balance of FHLB advances outstanding in 2020 was $10.8 million for which we paid an
average interest rate of 0.32%. We had no outstanding balances as of December 31, 2019 or at any time during 2019. See “Liquidity
Management” below for the details on the FHLB borrowings program.
Return on Equity and Assets
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,
2020
2019
1.00 %
11.40 %
16.67 %
8.58 %
1.15 %
11.78 %
17.53 %
9.81 %
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, 2020 and 2019, our aggregate payment obligations under this plan totaled $10.6 million
and $9.9 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, 2020, and 2019, we had commitments to extend credit of $145.7 million and $164.7 million,
respectively. Obligations under standby letters of credit, included in total commitments to extend credit, were $2.9 million and $3.1
million at December 31, 2020 and 2019, 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 13- Commitments and Other Contingencies- to our 2020 year-end consolidated
financial statements located elsewhere in this report.
60
Contractual Obligations
The following chart summarizes certain contractual obligations of the Company as of December 31, 2020 (dollars in thousands):
Less than 1
year
1-3 years
3-5 years
More than 5
years
Total
Operating lease obligations
$
1,199
$
2,147
$
1,274
$
1,736
$
Supplemental retirement plans
122
364
646
3,359
6,356
4,491
Time deposit maturities
27,255
9,663
920
-
37,838
Total
$
28,576
$
12,174
$
2,840
$
5,095
$
48,685
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 that 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 Company had no brokered deposits as of December 31, 2020 and 2019.
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 amounts of advances by assigning a percentage to each eligible loan category
that will count towards the borrowing capacity. At December 31, 2020 and 2019, the Company had no FHLB advances outstanding
and had sufficient collateral to borrow an additional $317.6 million and $275.2 million, respectively. In addition, the Company had
lines of credit with its correspondent banks to purchase overnight federal funds totaling $70 million and $30 million at December 31,
2020 and 2019, respectively. No advances were made on these lines of credit as of December 31, 2020 and 2019.
The Company’s liquidity depends primarily on dividends paid to it as the sole shareholder of the Bank. The Bank’s ability to pay
dividends to the Company may 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, 2020 and 2019 totaled approximately $336.6 million and $241.0 million, respectively. Our liquidity level measured as
the percentage of liquid assets to total assets was 22.3% and 21.0% at December 31, 2020, and 2019, respectively.
61
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, 2020, total shareholders’ equity increased to $129.7 million, representing an increase of $17.1 million from
December 31, 2019. The increase was due to net income of $13.7 million recorded to retained earnings, and other comprehensive
income of $5.3 million, net of income taxes, due to the positive effect that declining treasury yields had on the unrealized market value
adjustment of our available for sale investment portfolio during 2020. Also, retained earnings was reduced by the common stock
dividend payments totaling $2.3 million during 2020. As of December 31, 2020, 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 the 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” in this report for exact definitions and regulatory capital requirements.)
As of December 31, 2020, we were qualified as a “well capitalized institution” under the regulatory framework for prompt
corrective action. The following table presents the regulatory minimums 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
Regulatory Minimum (1)
10.5%
8.5%
7.0%
4.0%
December 31, 2020
December 31, 2019
13.1%
12.0%
12.0%
8.0%
12.3%
11.3%
11.3%
9.5%
(1)
2019.
The “Regulatory Minimum” thresholds in the table above are reflected on a fully phased-in basis, which occurred in January
62
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Market Risk
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.
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 should 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 a high percentage of variable
rate earning assets and a vast majority of its deposits are non-maturing that reprice only at management’s discretion based on competition
in the banking industry and liquidity needs of the Company.
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).
63
Presented below, as of December 31, 2020, is an analysis of the Company's interest rate risk as measured by changes in net interest
income, for instantaneous and sustained parallel shifts of applicable interest rates, over one and two-year projection periods:
Asset sensitivity indicates that in a rising interest rate environment the Company's net interest income would increase and in a
decreasing interest rate environment the Company's net interest income would decrease. Liability sensitivity indicates that in a rising
interest rate environment a Company's net interest income would decrease and in a decreasing interest rate environment the Company's
net interest income would increase. For all of 2020, we were "asset-sensitive" meaning we expect our net interest income to increase as
market rates increase and to decrease as market rates decrease. The relative level of asset sensitivity as of December 31, 2020 has
increased from 2019 primarily due to an increase in sensitivity from higher interest-bearing cash balances. In the decreasing interest rate
environments, we show a decline in net interest income as interest-bearing assets re-price lower while deposits remain at or near their
floors.
It should be noted that although net interest income simulation results are presented for down rate scenarios, most market rate
reach zero before declining the full 100 basis points, and our simulation parameters floor rates at zero and assume they do not go
negative. Therefore, results are less sensitive in down-rate exposure as compared to the prior year.
Management believes that our interest rate risk modeling 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 our model 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 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.
64
(in thousands)Interest Rate Shock Scenario1 Year ProjectionDown 200Down 100BaseUp 100Up 200Up 300Up 400Interest Income$40,942 $43,778 $47,554 $53,485 $59,651 $65,919 $72,225 Interest Expense402 402 1,162 4,274 7,393 10,512 13,630 Net Interest Income$40,540 $43,376 $46,391 $49,211 $52,258 $55,408 $58,595 % Change-12.61%-6.50%6.08%12.65%19.44%26.31%2 Year ProjectionDown 100Down 100BaseUp 100Up 200Up 300Up 400Interest Income$75,032 $84,140 $94,418 $108,719 $123,479 $138,538 $153,756 Interest Expense786 786 2,381 8,939 15,511 22,083 28,655 Net Interest Income$74,245 $83,354 $92,037 $99,780 $107,968 $116,456 $125,101 % Change-19.33%-9.43%8.41%17.31%26.53%35.92%
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Our consolidated financial statements and the Independent Auditors’ Report appear on pages F-1 through F-45 of this Report
and are incorporated into this Item 8 by reference.
INDEX TO FINANCIAL STATEMENTS
MANAGEMENT’S ASSESSMENT OF INTERNAL CONTROL OVER FINANCIAL REPORTING
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
CONSOLIDATED FINANCIAL STATEMENTS
Balance sheets
Statements of income
Statements of comprehensive income
Statements of shareholders’ equity
Statements of cash flows
Notes to financial statements
PAGE
F-1
F-2
F-4
F-5
F-6
F-7
F-8
F-10
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our
reports under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) is recorded, processed, summarized and
reported within the time periods specified in the rules and forms of the SEC, and that such information is accumulated and
communicated to our management, including our Chief Executive Officer and Chief Financial Officer, to allow timely decisions
regarding required disclosure. In designing and evaluating our disclosure controls and procedures, our management recognized that
any system of controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving
the desired control objectives, as ours are designed to do, and management necessarily was required to apply its judgment in
evaluating the cost-benefit relationship of possible controls and procedures.
As required by SEC rules, an evaluation was performed under the supervision and with the participation of our Chief Executive
Officer and Chief Financial Officer of the effectiveness, as of December 31, 2020, of the Company’s disclosure controls and
procedures (as defined in Rule 13a-15(e) under the Exchange Act). Based on that evaluation, our Chief Executive Officer and Chief
Financial Officer concluded that, as of December 31, 2020, the Company’s disclosure controls and procedures were effective to
provide reasonable assurance that information required to be disclosed in the reports that we file under the Exchange Act is recorded,
processed, summarized and reported within the time periods specified in the SEC’s rules and forms and that such information is
accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, to allow timely
decisions regarding required disclosure.
Management’s Annual Report on Internal Control Over Financial Reporting
Management of Oak Valley Bancorp is responsible for establishing and maintaining adequate internal control over financial
reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. Our internal control over financial reporting is a
process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with accounting principles generally accepted in the United States of America. Internal
control over financial reporting includes those written policies and procedures that:
65
•
•
•
•
pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of
our assets;
provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in
accordance with accounting principles generally accepted in the United States of America;
provide reasonable assurance that our receipts and expenditures are being made only in accordance with authorization of our
management and board of directors; and
provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of assets
that could have a material effect on our consolidated financial statements.
Internal control over financial reporting includes the controls themselves, monitoring and internal auditing practices and actions
taken to correct deficiencies as identified. Because of its inherent limitations, internal control over financial reporting may not prevent
or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risks that controls may
become inadequate because of changes in conditions or because the degree of compliance with the policies or procedures may
deteriorate.
Our management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31,
2020, based on criteria for effective internal control over financial reporting described in “Internal Control – Integrated Framework”
(2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Management’s assessment included an
evaluation of the design and the testing of the operational effectiveness of the Company’s internal control over financial reporting.
Management reviewed the results of its assessment with the Audit Committee of our Board of Directors.
Based on that assessment, management concluded that the Company's internal control over financial reporting was effective as
of December 31, 2020.
Changes in Internal Control Over Financial Reporting
There have been no changes in our internal control over financial reporting during the quarter ended December 31, 2020 that
materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
There were no significant changes in the Company’s internal control over financial reporting during the year ended December
31, 2020 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial
reporting subsequent to the Evaluation Date. We have not experienced any significant impact to our internal controls over financial
reporting despite the fact that most of our employees are working remotely due to the COVID-19 pandemic. The design of our
processes and controls allow for remote execution with accessibility to secure data. We are continually monitoring and assessing the
COVID-19 situation to minimize the impact, if any, on the design and operating effectiveness on our internal controls.
ITEM 9B. OTHER INFORMATION
None.
66
ITEM 10.
DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
PART III
The information required by this Item is incorporated by reference to the section entitled “Corporate Governance and Board
Matters,” and “Information About Directors and Executive Officers” in our Proxy Statement to be filed prior to the 2020 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.
Delinquent Section 16(a) Reports
Section 16(a) of the 1934 Act 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 SEC. 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,
the Company believes that for the 2020 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
Allison Lafferty
Daniel Leonard
Don Barton
Randolph Holder
Tom Haidlen
Terrance Withrow
Form
4
4
4
4
4
4
Transaction Type
Purchase
Purchase
Purchase
Purchase
Purchase
Purchase
Transaction Date
2/12/2020
2/18/2020
4/27/2020
5/5/2020
8/3/2020
9/22/2020
# of Shares
600
391
4,500
42
2,249
5,300
ITEM 11.
EXECUTIVE COMPENSATION
The information required by this Item is incorporated by reference to the Section entitled “Executive Compensation Discussion
and Analysis” in our Proxy Statement to be filed prior to the 2021 Annual Meeting of Shareholders.
67
ITEM 12.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
STOCKHOLDER MATTERS
Equity Compensation Plan Information
The following table provides information as of December 31, 2020 with respect to shares of our common stock that are
authorized to be issued under the Company’s 2018 Equity Plan. Shares subject to restricted stock awards are not included in the table
below.
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,
Warrants and Rights
Weighted Average Exercise Price of
Outstanding Options, Warrants and
Rights
C
Number of Securities Remaining Available for
Future Issuance Under Equity Compensation
Plans (Excluding Securities Reflected in
Column A)
0
$
0
0
$
0
0
0
558,299
0
558,299
Certain information required by this Item is incorporated by reference to the section entitled “Security Ownership of Certain
Beneficial Owners and Management” in our Proxy Statement to be filed prior to the 2021 Annual Meeting of Shareholders.
ITEM 13.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
The information required by this Item is incorporated by reference to the section entitled “Certain Relationship and Related
Transactions” in our Proxy Statement to be filed prior to the 2021 Annual Meeting of Shareholders.
ITEM 14.
PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information required by this Item is incorporated by reference to “Proposal No. 2: Ratification of Appointment of
Independent Registered Public Accounting Firm” in our Proxy Statement to be filed prior to the 2021 Annual Meeting of Shareholders.
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
PART IV
Documents Filed as Part of this Report:
(a)(1) Financial Statements
The Financial Statements of the Company and the Report of Independent Registered Public Accounting Firm are set forth on
pages F-1 through F-45.
(a)(2) Financial Statement Schedules
All schedules to the Financial Statements are omitted because of the absence of the conditions under which they are required or
because the required information is included in the Financial Statements or accompanying notes.
(a)(3) Exhibits
68
Exhibit
Number
INDEX TO EXHIBITS
Description
3.1
Articles of Incorporation of Oak Valley Bancorp, Inc. (incorporated by reference to Exhibit 3.1 to the Form 10 filed on
July 31, 2008).
3.2
First Amendment to Articles of Incorporation of Oak Valley Bancorp, Inc. (incorporated by reference to Exhibit 3.2 to
the Form 10 filed on July 31, 2008).
3.3 Bylaws of Oak Valley Bancorp, Inc. (incorporated by reference to Exhibit 3.3 to the Form 10 filed on July 31, 2008).
3.4
First Amended and Restated Bylaws of Oak Valley Bancorp, Inc. (incorporated by reference to Exhibit 3.5 to the
Form 8-A filed on January 14, 2009).
3.5
Certificate of Amendment of Bylaws dated effective as of August 11, 2011 (incorporated by reference to Exhibit 3.5 to
the Form 10-Q filed on November 14, 2011).
3.6
4.1
Amendment of Bylaws (incorporated by reference to Exhibit 3.2 to the Form 8-K filed on July 22, 2013).
Description of Securities of the Registrant (incorporated by reference to Exhibit 4.1 to the Form 10-K filed on March 13,
2020)
10.1
Oak Valley Community Bank Form of Director Retirement Agreement. (incorporated by reference to Exhibit 10.2 to the
Form 10 filed on July 31, 2008).
10.2
Oak Valley Bancorp 2008 Equity Plan (incorporated by reference to Exhibit 4.2 to the Form S-8 filed on March 25,
2009).
10.3 Oak Valley Bancorp 2018 Equity Incentive Plan (incorporated by reference to Appendix A of the Registrant’s Proxy
Statement for its 2018 Annual Meeting of Stockholders filed as of May 7, 2018). †
10.4 Oak Valley Community Bank Form of Executive Salary Continuation Agreement.
10.5 Executive Employment Agreement between Richard A. McCarty and Oak Valley Bancorp dated March 19, 2021.
14
Code of Ethics (incorporated by reference to Exhibit 14 to the Form 10-K filed on March 31, 2009).
21 Subsidiaries of the Issuer (incorporated by reference to Exhibit 21 to the Form 10 filed on July 31, 2008).
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
The following financial statements from the Company's Annual Report on Form 10-K for the year ended December 31,
2020, formatted in Inline XBRL: (i) Consolidated Balance Sheets as of December 31, 2020 and 2019, (ii) Consolidated
Statements of Income for the Years Ended December 31, 2020 and 2019, (iii) Consolidated Statements of
Comprehensive Income for the Years Ended December 31, 2020 and 2019, (iv) Consolidated Statements of
69
Shareholders’ Equity for the Years Ended December 31, 2020 and 2019, (v) Consolidated Statements of Cash Flows for
the Years Ended December 31, 2020 and 2019, and (vi) Notes to Consolidated Financial.
104 Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)
*
†
Furnished, not filed.
Indicates management contract or compensatory plan.
ITEM 16. FORM 10-K SUMMARY
None.
70
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, (the “1934 Act”) the
registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, in Oakdale, California
on March 31, 2021.
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 1934 Act, 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 1934 Act 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
Director
/s/ CHRISTOPHER M. COURTNEY
Christopher M. Courtney
President, Chief Executive Officer
and Director (Principal Executive
Officer)
/s/ LYNN R. DICKERSON
Lynn R. Dickerson
Director
/s/ JEFFREY A. GALL
Jeffrey A. Gall
/s/ JAMES L. GILBERT
James L. Gilbert
/s/ THOMAS A. HAIDLEN
Thomas A. Haidlen
/s/ H. RANDOLPH HOLDER
H. Randolph Holder
/s/ DANIEL J. LEONARD
Daniel J. Leonard
Chief Financial Officer (Principal
Financial and Principal Accounting
Officer)
Director
Director
Director
Director
Date
March 31, 2021
March 31, 2021
March 31, 2021
March 31, 2021
March 31, 2021
March 31, 2021
March 31, 2021
March 31, 2021
/s/ RONALD C. MARTIN
Director
March 31, 2021
71
Ronald C. Martin
/s/ JANET S. PELTON
Janet S. Pelton
/s/ DANNY L. TITUS
Danny L. Titus
/s/ TERRANCE P. WITHROW
Terrance P. Withrow
/s/ ALLISON C. LAFFERTY
Allison C. Lafferty
Director
Director
Director
Director
March 31, 2021
March 31, 2021
March 31, 2021
March 31, 2021
72
MANAGEMENT’S ASSESSMENT OF INTERNAL CONTROL OVER FINANCIAL REPORTING
The management of Oak Valley Bancorp is responsible for establishing and maintaining adequate internal control over financial
reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. Our internal control system was designed to ensure that
material information regarding our operations is made available to management and the board of directors to provide them reasonable
assurance that the published financial statements are fairly presented. There are limitations inherent in any internal control, such as the
possibility of human error and the circumvention or overriding of controls. As a result, even effective internal controls can provide
only reasonable assurance with respect to financial statement preparation. As conditions change over time so too may the effectiveness
of internal controls.
Our management has evaluated our internal control over financial reporting as of December 31, 2020 based on the framework in
Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations (COSO 2013) of the Treadway
Commission. Based on this assessment, our management concluded that our internal control over financial reporting was effective as
of December 31, 2020.
/s/ CHRISTOPHER M. COURTNEY
Christopher M. Courtney, President and Chief Executive Officer
/s/ JEFFREY A. GALL
Jeffrey A. Gall, Chief Financial Officer
F-1
To the Shareholders and the Board of Directors of Oak Valley Bancorp
Report of Independent Registered Public Accounting Firm
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Oak Valley Bancorp and its subsidiary (the Company)
as of December 31, 2020 and 2019, the related consolidated statements of income, comprehensive income,
shareholders’ equity and cash flows for the years then ended, and the related notes to the consolidated financial
statements (collectively, the financial statements). In our opinion, the financial statements present fairly, in all material
respects, the financial position of the Company as of December 31, 2020 and 2019, and the results of its operations and
its cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of
America.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an
opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the
Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect
to the Company in accordance with U.S. federal securities laws and the applicable rules and regulations of the Securities
and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial statements are free of material
misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an
audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of
internal control over financial reporting 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.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements,
whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included
examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also
included evaluating the accounting principles used and significant estimates made by management, as well as evaluating
the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current period audit of the financial statements
that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or
disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex
judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements,
taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the
critical audit matters or on the accounts or disclosures to which they relate.
Allowance for Loan Losses
As described in Notes 1 and 4 to the consolidated financial statements, the Company's allowance for loan losses
(allowance) represents management’s best estimate of probable losses that have been incurred within the existing
portfolio of loans and, in the judgment of management, is necessary to reserve for estimated loan losses and risks
inherent in the loan portfolio. The allowance 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. The allowance is comprised of three components: (1) specific valuation
allowances determined in accordance with Accounting Standards Codification (ASC) Topic 310 based on probable losses
on specific loans, which represented $0 at December 31, 2020; (2) a historical allowance 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 (3) an adjustment to historical losses 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 historical allowance combined with the adjustments for qualitative conditions represented
$11,297,000 at December 31, 2020.
The determination of the qualitative factors requires management to make significant estimates and assumptions related
to the collectability of loans based on the experience, ability and effectiveness of the Company’s lending management and
F-2
staff, the effectiveness of the Company’s loan policies, procedures and internal controls, changes in asset
quality, changes in loan portfolio volume, the composition and concentrations of credit, the impact of competition on loan
structuring and pricing, the effectiveness of the internal loan review function, the impact of environmental risks on portfolio
risks, and the impact of rising interest rates on portfolio risk. Management believes changes in these assumptions could
have a significant impact on the value of the allowance.
We identified the qualitative factors within the allowance as a critical audit matter. The qualitative factors within the
allowance are a significant accounting estimate involving management's judgments and subjectivity. In turn, auditing
management's judgments regarding the qualitative factors involved a high degree of subjectivity.
The primary audit procedures we performed to address this critical audit matter included, among others:
• Obtaining an understanding of the management review control over the determination, review and approval of the
qualitative factors and testing such control for design and operating effectiveness, as well as understanding of the
controls over the data used in the determination of the qualitative factors.
• Testing the data inputs used in the determination of qualitative factors to ensure completeness and accuracy by
comparing to source documents and independently validating external data.
• Evaluating management's process for determining the qualitative factors within the allowance, including
evaluating whether the conclusions reached by management with respect to the final qualitative factor
adjustments applied for each component were reasonable after considering internal and external data and
assumptions related to those qualitative factors.
Goodwill Impairment Assessment
As described in Note 1 to the consolidated financial statements, the Company’s goodwill balance was $3,313,000 at
December 31, 2020, which is allocated to the Company’s sole reporting unit. Goodwill is evaluated for impairment, at a
minimum, on an annual basis. To test for goodwill impairment, 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 uses several quantitative valuation
methodologies in evaluating goodwill for impairment.
We identified the applicable goodwill impairment evaluations performed during the period as a critical audit matter.
Goodwill impairment is a significant accounting estimate for which our audit procedures to evaluate management's
judgments involved subjectivity and increased audit effort, including use of an internal specialist.
• The primary audit procedures we performed to address this critical audit matter included, among others:
Obtaining an understanding of the management review controls relating to management’s goodwill impairment
test, including the management review control over the reporting unit determination and the determination of the
fair value of the reporting unit, and testing such controls for design and operating effectiveness.
• Evaluating management’s determination of reporting units by reviewing management’s documentation discussing
the conclusion of the chief operating decision maker and comparing to internal company data and assessing for
reasonableness.
• Utilizing an internal valuation specialist to assist in performing the following:
o Evaluating the methodologies utilized by management.
o Testing key inputs used by management to determine the fair value of the reporting unit, including:
-
-
Independently assessing the appropriateness of selected acquisitions for comparable institutions.
Independently obtaining data to verify the multiple of total value paid to target tangible equity for
the acquisitions and the average control premiums for the acquisitions.
/s/ RSM US LLP
We have served as the Company's auditor since 2018.
San Francisco, CA
March 31, 2021
F-3
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
Securities - equity investments
Loans, net of allowance for loan losses of $11,297 and $9,146
at December 31, 2020 and 2019, respectively
Cash surrender value of life insurance
Bank premises and equipment, net
Goodwill and other intangible assets, net
Interest receivable and other assets
December 31,
2020
December 31,
2019
$
193,571 $
33,085
226,656
217,164
3,425
997,246
25,325
15,770
3,740
22,152
133,809
13,785
147,594
190,088
3,297
741,047
24,631
15,229
3,837
22,062
$
1,511,478 $
1,147,785
LIABILITIES AND SHAREHOLDERS’ EQUITY
Deposits
Interest payable and other liabilities
Total liabilities
$
1,367,809 $
13,975
1,381,784
1,019,929
15,286
1,035,215
Shareholders’ equity
Common stock, no par value; 50,000,000 shares authorized,
8,218,873 and 8,210,147 shares issued and outstanding at
at December 31, 2020 and 2019, respectively
Additional paid-in capital
Retained earnings
Accumulated other comprehensive income, net of tax
Total shareholders’ equity
See accompanying notes
F-4
25,435
4,216
92,349
7,694
129,694
25,435
3,777
80,961
2,397
112,570
$
1,511,478 $
1,147,785
OAK VALLEY BANCORP
CONSOLIDATED STATEMENTS OF INCOME
(dollars in thousands, except per share amounts)
INTEREST INCOME
Interest and fees on loans
Interest on securities
Interest on federal funds sold
Interest on deposits with banks
Total interest income
INTEREST EXPENSE
Deposits
FHLB advances
Total interest expense
Net interest income
Provision for loan losses
YEAR ENDED
DECEMBER 31,
2020
2019
$ 39,952
5,640
57
461
46,110
$ 34,813
5,872
242
1,675
42,602
1,119
34
1,153
44,957
2,165
1,568
0
1,568
41,034
545
Net interest income after provision for loan losses
42,792
40,489
NON-INTEREST INCOME
Service charges on deposits
Debit card transaction fee income
Earnings on cash surrender value of life insurance
Mortgage commissions
Gains on calls of available-for-sale securities
Gain on sale of other real estate owned
Other
Total non-interest income
NON-INTEREST EXPENSE
Salaries and employee benefits
Occupancy expenses
Data processing fees
Regulatory assessments (FDIC & DFPI)
Other operating expenses
Total non-interest expense
Net income before provision for income taxes
Total provision for income taxes
Net Income
1,272
1,355
694
130
2
34
1,328
4,815
17,972
3,642
2,062
324
5,864
29,864
17,743
4,056
1,619
1,297
602
88
138
0
1,303
5,047
17,400
3,493
1,907
270
5,777
28,847
16,689
4,200
$ 13,687
$ 12,489
Net income per share
$ 1.68
$ 1.54
Net income per diluted share
$ 1.68
$ 1.54
See accompanying notes
F-5
OAK VALLEY BANCORP
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(dollars in thousands)
Net income
Other comprehensive income:
Unrealized gains on securities:
YEAR ENDED
DECEMBER 31,
2020
2019
$
13,687
$
12,489
Unrealized holding gains arising during the period
Less: reclassification for net gains included in net income
Other comprehensive income, before tax
Tax expense related to items of other comprehensive income
Total other comprehensive income
Comprehensive income
7,521
(2)
7,519
(2,222)
5,297
$
18,984
$
4,160
(138)
4,022
(1,190)
2,832
15,321
See accompanying notes
F-6
OAK VALLEY BANCORP
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
See accompanying notes
F-7
AccumulatedAdditionalOtherTotalPaid-inRetainedComprehensiveShareholders’(dollars in thousands)SharesAmountCapitalEarningsIncome (Loss)EquityBalances, January 1, 20198,194,805$25,429$3,358$70,686$(435)$99,038Stock options exercised1,00066Restricted stock issued26,0950Restricted stock forfeited(4,500)0Restricted stock surrendered for tax withholding(7,253)(130)(130)Cash dividends declared $0.27 per share of common stock(2,214)(2,214)Stock based compensation549549Other comprehensive income2,8322,832Net income12,48912,489Balances, December 31, 20198,210,147$25,435$3,777$80,961$2,397$112,570Restricted stock issued17,7560Restricted stock forfeited(2,400) 0Restricted stock surrendered for tax withholding(6,630) (110) (110)Cash dividends declared $0.28 per share of common stock(2,299)(2,299)Stock based compensation549 549Other comprehensive income5,297 5,297Net income13,687 13,687Balances, December 31, 20208,218,873$25,435$4,216$92,349$7,694$129,694YEAR ENDED DECEMBER 31, 2020 AND 2019Common Stock
OAK VALLEY BANCORP
CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income
Adjustments to reconcile net income to net cash from operating activities:
Provision for loan losses
Increase (decrease) in deferred fees/costs, net
Depreciation
Amortization of investment securities, net
Stock based compensation
Gain on sale of OREO property
Gain on calls of available for sale securities
Earnings on cash surrender value of life insurance
Increase in deferred tax asset
Increase in interest payable and other liabilities
(Increase) decrease in interest receivable
Decrease (increase) in other assets
Net cash from operating activities
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of available for sale securities
Purchases of equity securities
Proceeds from maturities, calls, and principal paydowns of securities available for sale
Investment in LIHTC
Net increase in loans
Purchase of FHLB Stock
Purchase of BOLI policies
Proceeds from sale of OREO
Purchases of premises and equipment
Net cash used in investing activities
CASH FLOWS FROM FINANCING ACTIVITIES:
FHLB advanced funds
FHLB payments
Shareholder cash dividends paid
Net increase in demand deposits and savings accounts
Net decrease in time deposits
Proceeds from exercise of stock options
Tax withholding payments on vested restricted shares surrendered
Net cash from financing activities
YEAR ENDED
DECEMBER 31,
2020
2019
$
13,687 $
12,489
2,165
3,780
1,199
545
549
(34)
(2)
(694)
(479)
262
(2,232)
494
19,240
(68,677)
(80)
48,531
(1,573)
(262,281)
0
0
171
(1,740)
(285,649)
50,000
(50,000)
(2,299)
348,969
(1,089)
0
(110)
345,471
545
(205)
1,091
899
549
0
(138)
(602)
(229)
6,527
298
(4,015)
17,209
(26,181)
(90)
45,965
(595)
(39,168)
(404)
(5,000)
0
(1,383)
(26,856)
0
0
(2,214)
36,819
(3,385)
6
(130)
31,096
NET INCREASE IN CASH AND CASH EQUIVALENTS
79,062
21,449
CASH AND CASH EQUIVALENTS, beginning of period
147,594
126,145
CASH AND CASH EQUIVALENTS, end of period
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest
F-8
$
$
226,656 $
147,594
1,149 $
1,558
Income taxes
NON-CASH INVESTING ACTIVITIES:
Real estate acquired through foreclosure
Change in unrealized gain on securities
Lease right-of-use assets
NON-CASH FINANCING ACTIVITIES:
Present value of lease obligations
See accompanying notes
$
$
$
$
$
4,338 $
3,870
137 $
7,521 $
273 $
0
4,021
4,312
(210)
$
(4,698)
F-9
OAK VALLEY BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 — SUMMARY OF ACCOUNTING POLICIES
Nature of Operations
On July 3, 2008 (the “Effective Date”), a bank holding company reorganization was completed whereby Oak Valley Bancorp (“the
Company”) became the parent holding company for Oak Valley Community Bank (the “Bank”). On the Effective Date, a tax-free
exchange was completed whereby each outstanding share of the Bank was converted into one share of the Company and the Bank
became the sole wholly-owned subsidiary of the Company.
The Company is authorized to issue 50,000,000 shares of common stock, without par value, of which 8,218,873 are issued and
outstanding at December 31, 2020 and 10,000,000 shares of preferred stock, without par value, of which no shares are issued and
outstanding.
The consolidated financial statements include the accounts of the Company 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, Escalon and Sacramento, California.
The Bridgeport, Mammoth Lakes, and Bishop branches operate as a separate division, Eastern Sierra Community Bank. The
Company’s primary source of revenue is providing loans to customers who are predominantly middle-market businesses.
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions. These estimates and assumptions affect the reported amounts of assets and
liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.
Significant accounting estimates reflected in the Company’s consolidated financial statements include the allowance for loan losses,
accounting for income taxes, fair value measurements and goodwill impairment. Actual results could differ from these estimates due
to the uncertainty around the magnitude and duration of the COVID-19 pandemic, as well as other factors.
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, 2020 through the date of the
filing for 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 are reported as an
amount in accumulated other comprehensive income, net of tax. Gains and losses on the sale or call 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, except for premiums on securities with call dates which are amortized to
the earliest call date.
Consistent with ASU 2016-01, equity securities consist of those securities with readily determinable fair value and are carried at fair
value with the changes in fair value recognized in the consolidated statements of income.
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
F-10
Company does not intend to sell and will not be required to sell prior to recovery of the amortized cost basis, the amount of
impairment is separated into the amount that is credit related (credit loss component) and the amount due to all other factors. The
credit loss component is recognized in earnings and is calculated as the difference between the security’s amortized cost basis and the
present value of its expected future cash flows. The remaining difference between the security’s fair value and the present value of the
future expected cash flows is deemed to be due to factors that are not credit related and is recognized in other comprehensive income.
If the Company sold an impaired security, both the credit loss component and amount due to other factors would be recognized
through earnings as described above.
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 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 impaired loans measured 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; (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 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
F-11
of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal
and interest owed.
The method for calculating the allowance for unfunded loan commitments is based on an allowance percentage which is less than
other outstanding loan types because they are at a lower risk level. This allowance percentage is evaluated by management
periodically and is applied to the total undisbursed loan commitment balance to calculate the allowance for unfunded loan
commitments which is recorded included in interest payable and other liabilities on the consolidated balance sheet.
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.
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
The Company adopted ASU No. 2016-02, Leases (Topic 842) on the effective date of January 1, 2019. All of the Company’s leases
were determined to be operating leases. The Company determined the operating lease liability as of January 1, 2019, by calculating
the present value of remaining base rent cash payments on each of its leases, excluding any renewal options regardless of the
likelihood that the option would be exercised. The resulting operating lease liability recorded as of January 1, 2019 was $5,246,000,
which is included in interest payable and other liabilities in the consolidated balance sheet. The ROU asset was then determined by
adjusting the operating lease liability by deferred rent and unamortized tenant improvement allowance. The ROU asset recorded on
January 1, 2019 was $4,817,000, which is included in interest receivable and other assets on the consolidated balance sheet.
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 tax examinations by tax authorities for years before 2017 or to state/local income tax examinations
by tax authorities for years before 2016.
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 $401,000 and $304,000
for the years ended December 31, 2020 and 2019, respectively.
F-12
Comprehensive income — Comprehensive income is comprised of net income and other comprehensive income (loss). Other
comprehensive income (loss) includes items previously recorded directly to shareholders’ 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, 2020 and 2019, $1,000 and $97,000 net of tax, respectively, was reclassified
from comprehensive income into net income related to gains on called available for sale securities.
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 equity 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 equity
securities. Management periodically evaluates FHLB stock for other-than-temporary impairment. Management’s determination of whether
these investments are impaired is based on its assessment of the ultimate recoverability of cost rather than by recognizing temporary declines
in value. The determination of whether a decline affects the ultimate recoverability of cost is influenced by criteria such as (1) the
significance of any decline in net assets of the FHLB as compared to the capital stock amount for the FHLB and the length of time this
situation has persisted, (2) commitments by the FHLB to make payments required by law or regulation and the level of such payments in
relation to the operating performance of the FHLB, (3) the impact of legislative and regulatory changes on institutions and, accordingly, the
customer base of the FHLB, and (4) the liquidity position of the FHLB. This investment is reflected as a component of interest receivable and
other assets on the consolidated balance sheets.
Earnings per common share (“EPS”) — EPS is based upon the weighted average number of common shares outstanding during
each year. The table in footnote 12 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. Basic EPS are calculated by dividing net income by the
weighted average number of common shares outstanding during each period, excluding dilutive stock options and 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
restricted stock, 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 restricted stock grant is based on the closing market price of the Company’s stock on the date of grant.
The Company issued restricted stock grants totaling 17,756 and 26,095 shares in 2020 and 2019, respectively.
Fair values of financial instruments — The consolidated financial statements include various estimated fair value information as of
December 31, 2020 and 2019. 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 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.
F-13
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.
Goodwill and other intangible assets — As of December 31, 2020 intangible assets are comprised of goodwill of $3,313,000 and core
deposit intangibles of $427,000, which were acquired through a business combination, as compared to goodwill of $3,313,000 and core
deposit intangible of $524,000 as of December 31, 2019. Intangible assets with definite useful lives are amortized over their respective
estimated useful lives. 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 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. The core 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 as of December 31, 2020. At December 31, 2020, the core deposit
intangibles future estimated amortization expense is as follows:
(in thousands)
2021
2022
2023
2024
2025
Total
Core deposit intangible amortization
$ 93
$ 89 $ 86
$ 82
$ 77
$ 427
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 uses
several quantitative valuation methodologies in evaluating goodwill for impairment 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, 2020.
Recently Issued Accounting Standards —
In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments – Credit Losses (Topic 326). This update revises
the methodology used by financial institutions under GAAP to recognize credit losses in the financial statements. Currently, GAAP
requires the use of the incurred loss model, whereby financial institutions recognize in current period earnings, incurred credit losses
and those inherent in the financial statements, as of the date of the balance sheet. This guidance results in a new model for estimating
the allowance for loan and lease losses, commonly referred to as the Current Expected Credit Loss (“CECL”) model. Under the CECL
model, financial institutions are required to estimate future credit losses and recognize those losses in current period earnings. The
amendments within the update are effective for fiscal years and all interim periods beginning after December 15, 2019, with early
adoption permitted. In October 2019, FASB approved an amendment that will delay the adoption of this ASU for three years for certain
entities including the Company since we are classified as a Small Reporting Company. Accordingly, this ASU will become effective
for the Company on January 1, 2023. Upon adoption of the amendments within this update, the Company will be required to make a
cumulative-effect adjustment to the opening balance of retained earnings in the year of adoption. The Company is currently in the
process of evaluating the impact the adoption of this update will have on its financial statements. While the Company has not quantified
the impact of this ASU, it does expect changing from the current incurred loss model to an expected loss model will result in an earlier
recognition of losses.
In January 2017, the FASB issued ASU 2017-04, Intangibles Goodwill and Other (Subtopic 350): Simplifying the Test for
Goodwill Impairment. The provisions of the update eliminate the existing second step of the goodwill impairment test which
provides for the allocation of reporting unit fair value among existing assets and liabilities, with the net leftover amount
representing the implied fair value of goodwill. In replacement of the existing goodwill impairment rule, the update will
provide that impairment should be recognized as the excess of any of the reporting unit’s goodwill over the fair value of the
reporting unit. Under the provisions of this update, the amount of the impairment is limited to the carrying value of the
reporting unit’s goodwill. For public business entities that are Securities and Exchange Commission filers, the amendments of
F-14
the update became effective in fiscal years beginning after December 15, 2019. The Company adopted the standards update
January 1, 2020 and evaluates goodwill in accordance with the provisions of the standard. Due to the economic impact that
COVID-19 has had on the Company, management concluded that factors such as the decline in macroeconomic conditions have
led to the occurrence of a triggering event and therefore an interim impairment test over goodwill was performed as of
September 30, 2020. As part of this interim impairment assessment, in the event that the Company concluded that all or a
portion of its goodwill is impaired, a non-cash charge for the amount of such impairment would be recorded to earnings. Such
a charge would have no impact on tangible capital or regulatory capital. Based upon the results of our interim goodwill
assessment, we have concluded that an impairment did not exist as of the time of the assessment.
In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Subtopic 820): Disclosure Framework -
Changes to the Disclosure Requirements for Fair Value Measurement. The primary focus of ASU 2018-13 is to improve the
effectiveness of the disclosure requirements for fair value measurements. The changes affect all companies that are required
to include fair value measurement disclosures. In general, the amendments in ASU 2018-13 are effective for all entities for
fiscal years and interim periods within those fiscal years, beginning after December 15, 2019. An entity is permitted to early
adopt the removed or modified disclosures upon the issuance of ASU 2018-13 and may delay adoption of the additional
disclosures, which are required for public companies only, until their effective date. The Company first adopted this ASU
beginning with the period ended March 31, 2020, and it did not have a significant impact on the Company's consolidated financial
statements.
In April 2019, the FASB issued ASU 2019-04, Codification Improvements to Topic 326, Financial Instruments - Credit
Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments that clarifies and improves areas of guidance related
to recently issued standards on credit losses, hedging and recognition and measurement. The provisions of this ASU became effective
and was adopted by the Company on January 1, 2020. This ASU did not have a material impact on our financial condition or results of
operations.
In May 2019, the FASB issued ASU 2019-05, Financial Instruments - Credit Losses (Topic 326): Targeted Transition Relief.
This ASU allows an option for entities to irrevocably elect the fair value option on an instrument-by-instrument basis for eligible
financial assets measured at amortized cost basis upon adoption of the credit loss standards. This amendment provides relief for those
entities electing the fair value option on newly originated or purchased financial assets, while maintaining existing similar financial
assets at amortized cost, avoiding the requirement to maintain dual measurement methods for similar assets. The fair value option does
not apply to held-to-maturity debt securities. The effective date for this ASU is the same as for ASU 2016-13, as discussed above. We
will evaluate this ASU in conjunction with ASU 2016-13 to determine its impact on our financial condition and results of operations.
In March 2020, FASB issued ASU 2020-04 - Reference Rate Reform (Subtopic 848): Facilitation of the Effects of
Reference Rate Reform on Financial Reporting. This ASU provides optional expedients and exceptions for contracts, hedging
relationships, and other transactions that reference LIBOR or other reference rates expected to be discontinued because of reference
rate reform. The ASU is effective for all entities as of March 12, 2020 through December 31, 2022. The Company is in the process of
evaluating the provisions of this ASU and its effects on our consolidated financial statements.
NOTE 2 — CASH AND DUE FROM BANKS
Cash and due from banks includes balances with the Federal Reserve Bank and other correspondent banks. Prior to March 2020, the
Fed Reserve Bank required the Company to maintain a minimum reserve balance based on a percentage of the Company’s deposit
liabilities. Effective March 26, 2020, the Federal Reserve Bank reduced the reserve requirement ratios to zero percent, which
eliminated the reserve requirements for all depository institutions. As of December 31, 2020 and 2019, the Company had balances of
$153,856,000 and $82,296,000, respectively, which would have exceeded the reserve requirement if it was still in effect.
F-15
NOTE 3 — SECURITIES
Equity Securities
The Company held equity securities with fair values of $3,425,000 and $3,297,000 at December 31, 2020 and December 31, 2019,
respectively. There were no sales of equity securities during the year ended December 31, 2020 or 2019. Consistent with ASU 2016-
01, these securities are carried at fair value with the changes in fair value recognized in the consolidated statements of income.
Accordingly, the Company recognized unrealized gains of $48,000 and $101,000 during the years ended December 31, 2020 and
2019, respectively.
Debt Securities
Debt securities have been classified in the financial statements as available for sale. The amortized cost and estimated fair values of
debt securities as of December 31, 2020 are as follows:
(dollars in thousands)
Available-for-sale securities:
U.S. agencies
Collateralized mortgage obligations
Municipalities
SBA pools
Corporate debt
Asset backed securities
Amortized Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Fair Value
$
22,802
$
1,250
115,706
5,027
14,229
47,226
$
892
18
9,896
6
308
392
$
206,240
$
11,512
$
(2)
(45)
0
(25)
(185)
(331)
(588)
$
23,692
1,223
125,602
5,008
14,352
47,287
$
217,164
The following tables detail the gross unrealized losses and fair values aggregated of debt securities by investment category and length
of time that individual securities have been in a continuous unrealized loss position at December 31, 2020.
(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
$
94
(1) $
251 $
(1) $
345 $
Collateralized mortgage obligations
Municipalities
SBA pools
Corporate debt
0
0
0
0
0
0
0
0
565
0
3,847
6,315
Asset backed securities
11,268
(58)
25,104
(45)
0
(25)
(185)
(273)
565
0
3,847
6,315
36,372
Total temporarily impaired securities
$
11,362 $
(59) $
36,082 $
(529) $
47,444 $
(2)
(45)
0
(25)
(185)
(331)
(588)
At December 31, 2020, fourteen asset-backed securities, seven Small Business Administration pools, three corporate debts, one U.S.
agency, and one collateralized mortgage obligations make up the total debt securities in an unrealized loss position for greater than 12
months. At December 31, 2020, seven asset backed securities and three U.S. agencies make up the total debt 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
F-16
related factors such as third party guarantees and the 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 the Company 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, 2020, 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
$
12,249
80,526
55,652
57,813
12,441
85,696
59,612
59,415
$
206,240
$
217,164
Debt securities have been classified in the financial statements as available for sale. The amortized cost and estimated fair values of
debt securities as of December 31, 2019 are as follows:
(dollars in thousands)
Available-for-sale securities:
U.S. agencies
Collateralized mortgage obligations
Municipalities
SBA pools
Corporate debt
Asset backed securities
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Fair Value
$
31,180
$
566
$
(17)
$
1,618
86,826
6,419
19,253
41,389
5
3,746
9
173
76
(9)
(1)
(33)
(458)
(654)
31,729
1,614
90,571
6,395
18,968
40,811
$
186,685
$
4,575
$
(1,172)
$
190,088
The following tables detail the gross unrealized losses and fair values aggregated of debt securities by investment category and length
of time that individual securities have been in a continuous unrealized loss position at December 31, 2019.
(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
$
3,934
(11) $
1,535 $
(6) $
5,469 $
Collateralized mortgage obligations
Municipalities
SBA pools
Corporate debt
Asset backed securities
0
0
1,423
2,994
12,891
0
0
(7)
(6)
650
411
3,545
8,859
(233)
21,313
(9)
(1)
(26)
(452)
(421)
650
411
4,968
11,853
34,204
(17)
(9)
(1)
(33)
(458)
(654)
Total temporarily impaired securities
$
21,242 $
(257) $
36,313 $
(915) $
57,555 $
(1,172)
F-17
The Company recognized gross realized gains of $2,000 and $138,000 during 2020 and 2019, respectively, on certain available-for-
sale securities that were called. There were no sales of securities during 2020 and 2019.
Securities carried at $147,795,000 and $123,381,000 at December 31, 2020 and 2019, respectively, were pledged to secure deposits of
public funds.
NOTE 4 — LOANS
The Company’s customers are primarily located in Stanislaus, San Joaquin, Tuolumne, Inyo, and Mono Counties. As of December 31,
2020, approximately 65% of the Company’s loans are commercial real estate loans which includes construction loans. Approximately
29% of the Company’s loans are for general commercial uses including professional, retail, and small business. Also included in the
commercial and industrial loans in the table below are Paycheck Protection Program loans (as described below) totaling $210,822,000.
Additionally, 3% of the Company’s loans are for residential real estate and other consumer loans. The remaining 3% are agriculture
loans.
Loan totals were as follows:
(in thousands)
Commercial real estate:
December 31, 2020
December 31, 2019
Commercial real estate- construction
$
32,459 $
Commercial real estate- mortgages
Land
Farmland
Commercial and industrial
Consumer
Consumer residential
Agriculture
Total
loans
Less:
Deferred loan fees and costs, net
Allowance for loan losses
540,556
5,318
82,998
292,006
636
30,887
28,255
1,013,115
(4,572)
(11,297)
53,169
475,146
8,367
70,320
77,704
1,274
36,647
28,358
750,985
(792)
(9,146)
Net loans
$
997,246 $
741,047
Paycheck Protection Program. With the passage of the Paycheck Protection Program (“PPP”), administered by the SBA, the
Company assisted its customers with applications for resources through the program. As of April 16, 2020, all $350 billion of the
available funds under the First Draw of this program had been allocated. The Treasury Department later announced that an additional
$310 billion would be available for second round of the First Draw PPP, which commenced on April 27, 2020 and closed on August 8,
2020. As of December 31, 2020, the PPP remained closed and was not accepting applications, but resumed on January 11, 2021. PPP
loans have a two-year term if the loan was approved by the SBA prior to June 5, 2020, and loans approved after that date have a five-
year term. All PPP loans earn a contractual interest rate of 1%. The Company believes that the majority of PPP loans will ultimately
be forgiven by the SBA in accordance with the terms of the program which resulted in loan pay-offs of approximately $33 million
during the fourth quarter of 2020 and will continue into 2021. As of December 31, 2020, the Company has received approvals with the
SBA for 1,671 PPP loans representing approximately $244,197,000 in funding, of which $33,375,000 was paid off by the SBA
through PPP loan forgiveness, resulting in an outstanding balance of $210,822,000 at December 31, 2020. As a result of funding the
PPP loans, the Company received fee income that is recorded to total interest income net of deferred loan costs, through amortization
F-18
over the life of the loans. It is the Company’s understanding that loans funded through the PPP program are fully guaranteed by the
U.S. government, and therefore, no allowance for credit losses has been allocated for PPP loans. Should those circumstances change,
the Company could be required to establish additional allowance for credit losses through additional provision for credit loss expense
charged to earnings.
COVID-19 Related Loan Payment Deferrals. The COVID-19 Pandemic has negatively impacted the revenue streams of certain
borrowers of the Company, and therefore, during the second of 2020 the Company elected to allow these clients to defer payments for
a term up to six months. These deferrals were specifically related to the pandemic and the resulting economic hardships. As of
December 31, 2020, the Company had no loans for which payments were deferred due to the financial impact of the pandemic, as
normal payment schedules had resumed on the deferrals granted during the second quarter of 2020. After an evaluation of financial
stability, no specific loan loss reserve allocation was required on any of these loans at the time of deferral. In accordance with
regulatory and accounting guidance, these short-term modifications granted in response to the COVID-19 pandemic are not
considered to be troubled debt restructurings.
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
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, 2020, approximately 36% 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
F-19
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 function that validates the credit risk program on a periodic basis. Results of
these reviews are presented to management. The loan review process complements and reinforces the risk identification and
assessment decisions made by lenders and credit personnel, as well as the Company’s policies and procedures.
Non-Accrual and Past Due Loans. Loans are considered past due if the required principal and interest payments have not been
received as of the date such payments were due. Loans are placed on non-accrual status when, in management’s opinion, the borrower
may be unable to meet payment obligations as they become due, as well as when required by regulatory provisions. Loans may be
placed on non-accrual status regardless of whether or not such loans are considered past due. When interest accrual is discontinued, all
unpaid accrued interest is reversed. Interest income is subsequently recognized only to the extent cash payments are received in excess
of principal due. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current
and future payments are reasonably assured.
Year-end non-accrual loans, segregated by class of loans, were as follows:
(in thousands)
December 31, 2020
December 31, 2019
Commercial real estate:
Land
Consumer residential
Total non-accrual loans
$
0
0
0 $
855
248
1,103
Had non-accrual loans performed in accordance with their original contract terms, the Company would have recognized additional
interest income of approximately $62,000 in 2019.
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, 2020 (in thousands):
December 31, 2020
Commercial real estate:
30-59
Days Past
Due
60-89
Days Past
Due
Greater
Than 90
Days Past
Due
Total Past
Due
Current
Total
Commercial R.E. - construction
$
0 $
Commercial R.E. - mortgages
Land
Farmland
Commercial and industrial
Consumer
Consumer residential
Agriculture
362
0
0
0
0
0
0
Total
$
362 $
0 $
0
0
0
0
0
0
0
0 $
0 $
0
0
0
0
0
0
0
0 $
0 $
362
0
0
0
0
0
0
32,459 $
540,194
5,318
82,998
292,006
636
30,887
28,255
32,459 $
540,556
5,318
82,998
292,006
636
30,887
28,255
362 $
1,012,753 $
1,013,115 $
Greater
Than 90
Days Past
Due and
Still
Accruing
0
0
0
0
0
0
0
0
0
F-20
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, 2019 (in thousands):
December 31, 2019
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
0 $
0
0
0
0
2
0
0
2 $
0 $
0
0
0
0
0
0
0
0 $
0 $
0
0
111
0
0
137
0
248 $
0 $
0
0
111
0
2
137
0
250 $
53,169 $
475,146
8,367
70,209
77,704
1,272
36,510
28,358
53,169 $
475,146
8,367
70,320
77,704
1,274
36,647
28,358
750,735 $
750,985 $
Greater
Than 90
Days Past
Due and
Still
Accruing
0
0
0
0
0
0
0
0
0
Impaired Loans. Loans are considered impaired when, based on current information and events, it is probable the Company will be
unable to collect all amounts due in accordance with the original contractual terms of the loan agreement, including scheduled
principal and interest payments. Impairment is evaluated in total for smaller-balance loans of a similar nature and on an individual
loan basis for other loans. If a loan is impaired, a specific valuation allowance is allocated, if necessary, so that the loan is reported
net, at the present value of estimated future cash flows using the loan’s existing rate or at the fair value of collateral if repayment is
expected solely from the collateral. Interest payments on impaired loans are typically applied to principal unless collectability of the
principal amount is reasonably assured, in which case interest is recognized on a cash basis. Impaired loans, or portions thereof, are
charged off when deemed uncollectible.
Impaired loans by class as of December 31, 2020 and 2019 are set forth in the following tables. No interest income was recognized on
impaired loans subsequent to their classification as impaired during 2020 and 2019.
(in thousands)
December 31, 2020
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
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
0
0
0
0 $
0 $
0
0
0
0
0
0
0
0 $
0
0
724
0
0
0
87
0
811
F-21
(in thousands)
December 31, 2019
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
873
0
0
0
312
0
1,185 $
0 $
0
0
0
0
0
248
0
248 $
0 $
0
855
0
0
0
0
0
855 $
0 $
0
855
0
0
0
248
0
1,103 $
0 $
0
680
0
0
0
0
0
680 $
0
0
892
0
0
0
113
0
1,005
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, 2020, there were no loans classified as troubled debt restructurings, as compared to one loan classified as a troubled
debt restructuring totaling $855,000, as of December 31, 2019. This loan was on non-accrual status, there were no were no unfunded
commitments, and we had allocated $680,000 of specific reserves for potential loan charge-offs as of December 31, 2019.
During the year ended December 31, 2019, the same loan described above was modified as a troubled debt restructuring totaling
$906,000 at the time it was modified, as compared to no troubled debt restructurings during 2020. The modification of the terms of
such loans typically includes 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 is conceded. The troubled debt restructuring during 2019 did
not modify the principal balance, did not increase the allowance for loan losses and there were no charge offs as a result of the loan
modification.
There were no loans modified as troubled debt restructurings within the previous twelve months and for which there was a payment
default during the twelve months ended December 31, 2020 and 2019. A loan is considered to be in payment default once it is ninety
days contractually past due under the modified terms.
Loan Risk Grades– 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.
The Company grades loans using the following letter system:
1 Exceptional Loan
2 Quality Loan
3A Better Than Acceptable Loan
3B Acceptable Loan
3C Marginally Acceptable Loan
4 (W) Watch Acceptable Loan
5 Special Mention Loan
6 Substandard Loan
7 Doubtful Loan
8 Loss
F-22
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 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 Loan - 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.
4(W). Watch Acceptable Loan - 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 a 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.).
• Any managerial or personal problems of company management, decline in the entire industry or local economic
conditions, or failure to provide financial information or other documentation as requested.
•
Issues regarding delinquency, overdrafts, or renewals.
• 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.
• Weaknesses that are identified are short-term in nature.
F-23
• Loans in this category are usually accounts the Bank would want to retain providing a positive turnaround can be
expected within a reasonable time frame. Grade 4 loans are considered Pass.
5. Special Mention Loan - 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 Bank will sustain some loss if the
deficiencies are not corrected. Loss potential, while existing in the aggregate amount of substandard credits, does not have to exist in
individual extensions of credit classified as substandard.
7. Doubtful Loan - An extension of credit classified as “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 as
doubtful when collection of a specific portion appears highly probable. An example of proper use of the doubtful category is the case
of a company being liquidated, with the trustee-in-bankruptcy indicating a minimum disbursement of 40 percent and a maximum of 65
percent to unsecured creditors, including the Bank. In this situation, estimates are based on liquidation value appraisals with actual
values yet to be realized. By definition, the only portion of the credit that is doubtful is the 25 percent difference between 40 and 65
percent.
A proper classification of such a credit would show 40 percent substandard, 25 percent doubtful, and 35 percent loss. A credit
classified as doubtful should be resolved within a ‘reasonable’ period of time. Reasonable is generally defined as the period between
examinations. In other words, a credit classified as 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 as “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, 2020 and 2019, there are no loans that are classified with a risk grade of 7-Doubtful Loan or 8- Loss.
F-24
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, 2020
December 31, 2019
Weighted Average
Risk Grade
Weighted Average
Risk Grade
3.16
3.11
3.94
3.06
3.02
1.74
3.00
3.05
3.08
3.00
3.02
3.72
3.04
3.05
2.29
3.02
3.17
3.03
The following table presents risk grade totals by class of loans as of December 31, 2020 and 2019. Risk grades 1 through 4(W) have
been aggregated in the “Pass” line.
Allowance for Loan Losses. The allowance for loan losses is a reserve established through a provision for loan losses charged to
expense, which represents management’s best estimate of probable losses that have been incurred within the existing portfolio of
loans. The allowance, in the judgment of management, is necessary to reserve for estimated loan losses and risks inherent in the loan
portfolio. The Company’s allowance for loan loss methodology includes allowance allocations calculated in accordance with ASC
Topic 310, “Receivables” and allowance allocations calculated in accordance with ASC Topic 450, “Contingencies.” Accordingly, the
methodology is based on historical loss experience by type of credit and internal risk grade, specific homogeneous risk pools and
specific loss allocations, with adjustments for current events and conditions. The Company’s process for determining the appropriate
level of the allowance for loan losses is designed to account for credit deterioration as it occurs. The provision for loan losses reflects
loan quality trends, including the levels of and trends related to non-accrual loans, past due loans, potential problem loans, criticized
loans and net charge-offs or recoveries, among other factors. The provision for loan losses also reflects the totality of actions taken on
all loans for a particular period. In other words, the amount of the provision reflects not only the necessary increases in the allowance
for loan losses related to newly identified criticized loans, but it also reflects actions taken related to other loans including, among
other things, any necessary increases or decreases in required allowances for specific loans or loan pools.
The level of the allowance reflects management’s continuing evaluation of industry concentrations, specific credit risks, loan loss
experience, current loan portfolio quality, present economic, political and regulatory conditions and unidentified losses inherent in the
current loan portfolio. Portions of the allowance may be allocated for specific credits; however, the entire allowance is available for
F-25
(in thousands) December 31, 2020Pass$ 32,459 $ 531,507 $ 4,469 $ 81,972 $ 290,504 $ 613 $ 30,849 $ 28,007 $ 1,000,380 Special mention - 9,049 849 - - - - - 9,898 Substandard - - - 1,026 1,502 23 38 248 2,837 Total loans$ 32,459 $ 540,556 $ 5,318 $ 82,998 $ 292,006 $ 636 $ 30,887 $ 28,255 $ 1,013,115 December 31, 2019Pass$ 53,169 $ 471,594 $ 7,512 $ 69,002 $ 74,960 $ 1,249 $ 36,470 $ 26,512 $ 740,468 Special mention - 3,552 - 1,207 550 - - 1,846 7,155 Substandard - - 855 111 2,194 25 177 - 3,362 Total loans$ 53,169 $ 475,146 $ 8,367 $ 70,320 $ 77,704 $ 1,274 $ 36,647 $ 28,358 $ 750,985 Commercial R.E.ConstructionLandFarmlandCommercial and IndustrialConsumerCommercial R.E.MortgagesConsumer ResidentialAgricultureTotal
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-26
The following table details activity in the allowance for loan losses by portfolio segment for the years ended December 31, 2020 and
2019. 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 Losses
For the Years Ended December 31, 2020 and 2019
(in thousands)
Year Ended December 31, 2020
Beginning balance
Charge-offs
Recoveries
Provision for (reversal of) loan losses
Ending balance
Year Ended December 31, 2019
Beginning balance
Charge-offs
Recoveries
Provision for (reversal of) loan losses
Ending balance
$
$
$
$
Commercial
Real Estate
Commercial
and Industrial
Consumer
Consumer
Residential
Agriculture
Total
7,250 $
0
6
2,054
9,310 $
6,584 $
0
0
666
7,250 $
1,002 $
0
0
77
1,079 $
1,065 $
0
0
(63)
1,002 $
38 $
(29)
10
3
22 $
39 $
(28)
6
21
38 $
331 $
(2)
1
(5)
325 $
304 $
(64)
2
89
331 $
525 $
0
0
36
561 $
693 $
0
0
(168)
525 $
9,146
(31)
17
2,165
11,297
8,685
(92)
8
545
9,146
The following table details the allowance for loan losses and ending gross loan balances as of December 31, 2020 and 2019,
summarized by collective and individual evaluation methods of impairment.
(in thousands)
December 31, 2020
Allowance for loan losses for loans:
Individually evaluated for impairment
Collectively evaluated for impairment
Ending gross loan balances:
Individually evaluated for impairment
Collectively evaluated for impairment
December 31, 2019
Allowance for loan losses for loans:
Individually evaluated for impairment
Collectively evaluated for impairment
Ending gross loan balances:
Individually evaluated for impairment
Collectively evaluated for impairment
$
$
$
$
$
$
$
$
Commercial
Real Estate
Commercial
and
Industrial
Consumer
Consumer
Residential
Agriculture
Total
0 $
9,310
0 $
1,079
9,310 $
1,079 $
0 $
22
22 $
0 $
325
325 $
0 $
561
561 $
0
11,297
11,297
0 $
0 $
661,331
292,006
0 $
636
0 $
0 $
30,887
28,255
0
1,013,115
661,331 $
292,006 $
636 $
30,887 $
28,255 $
1,013,115
680 $
6,570
0 $
1,002
7,250 $
1,002 $
0 $
38
38 $
0 $
331
331 $
0 $
525
525 $
680
8,466
9,146
855 $
0 $
0 $
248 $
0 $
606,147
77,704
1,274
36,399
28,358
607,002 $
77,704 $
1,274 $
36,647 $
28,358 $
1,103
749,882
750,985
F-27
Changes in the allowance for undisbursed loan commitments were as follows:
(in thousands)
Balance, beginning of year
Provision (reversed) charged to operations for off balance sheet
Balance, end of year
YEARS ENDED DECEMBER 31,
2020
2019
$
$
427
(48)
379
$
$
396
31
427
The method for calculating the reserve for undisbursed 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 undisbursed loan commitments. Reserves for undisbursed loan commitments are
recorded in interest payable and other liabilities on the consolidated balance sheets.
At December 31, 2020 and 2019, loans carried at $1,013,115,000 and $750,985,000, respectively, were pledged as collateral on
advances from the Federal Home Loan Bank.
NOTE 5 — PREMISES AND EQUIPMENT
Major classifications of premises and equipment are summarized as follows:
(in thousands)
Land
Building
Leasehold improvements
Furniture, fixtures, and equipment
Branch construction work-in-process
Less accumulated depreciation
DECEMBER 31,
2020
2019
$
5,195
$
10,601
5,190
9,007
518
30,511
5,195
10,013
5,064
8,707
928
29,907
(14,741)
(14,678)
$
15,770
$
15,229
Depreciation expense was $1,199,000 and $1,091,000 for the years ended December 31, 2020 and 2019, respectively.
NOTE 6 — INTEREST RECEIVABLE AND OTHER ASSETS
Interest receivable and other assets are summarized as follows:
(in thousands)
Net deferred tax asset
Restricted equity securities
Interest income receivable on loans
Interest income receivable on investments
Investments in limited partnerships
Lease right of use asset
Prepaid expenses and other
F-28
DECEMBER 31,
2020
2019
$
1,363 $
4,757
4,308
1,381
4,688
4,585
1,070
3,107
4,761
2,089
1,368
5,120
4,312
1,305
$
22,152
$
22,062
NOTE 7 — DEPOSITS
Deposit totals were as follows:
(in thousands)
Demand
Money market
Savings
Time deposits $250,000 and under
Time deposits over $250,000
Total deposits
DECEMBER 31,
2020
2019
$
$
$
907,913
301,506
120,552
21,704
16,134
664,687
233,526
82,789
20,785
18,142
1,367,809
$
1,019,929
Time deposits issued and their remaining maturities at December 31, 2020, are as follows (in thousands):
Year ending December 31,
2021
2022
2023
2024
2025
$
27,255
5,665
3,997
122
798
$
37,838
NOTE 8 — FHLB ADVANCES
At December 31, 2020, the Company had no outstanding advances from the Federal Home Loan Bank (“FHLB”). Unused and
available advances totaled $317,630,000 at December 31, 2020. Loans carried at $1,013,115,000 as of December 31, 2020, were
pledged as collateral on advances from the Federal Home Loan Bank.
At December 31, 2019, the Company had no outstanding advances from the Federal Home Loan Bank (“FHLB”). Unused and
available advances totaled $275,191,000 at December 31, 2019. Loans carried at $750,985,000 as of December 31, 2019, were
pledged as collateral on advances from the Federal Home Loan Bank.
NOTE 9 — INTEREST ON DEPOSITS
Interest on deposits was comprised of the following:
(in thousands)
Savings and other deposits
Time deposits over $250,000
Time deposits $250,000 and under
YEARS ENDED DECEMBER 31,
2020
2019
978
$
1,427
85
56
81
60
1,119
$
1,568
$
$
F-29
NOTE 10 — INCOME TAXES
The provision for income taxes consists of the following:
(in thousands)
Current
Federal
State
Deferred
Federal
State
2020
2019
$ 2,526
$ 2,675
2,009
1,754
4,535
4,429
(255)
(109)
(224)
(120)
(479)
(229)
$ 4,056
$ 4,200
The components of the Company’s deferred tax assets and liabilities (included in accrued interest and other assets on the consolidated
balance sheets), is shown below:
(in thousands)
Deferred tax assets:
Allowance for loan losses
Restricted stock expense
Accrued vacation
Accrued salary continuation liability
Deferred compensation
Core deposit intangible
Merger Costs
Reserve for undisbursed commitments
OREO expenses
State income tax
Holding company organization fees
Deferred tax liabilities:
Prepaid expenses
FHLB dividends
Accumulated depreciation
Accrued bonus
Deferred loan costs
Goodwill Amortization
Limited partner investment in small business equity fund
Unrealized gain on securities available for sale
DECEMBER 31,
2020
2019
$ 3,340
$ 2,705
111
155
1,328
77
77
79
112
173
422
7
5,881
(73)
(144)
(118)
0
(595)
(326)
(33)
105
100
1,176
75
69
87
149
173
386
10
5,035
(87)
(144)
(12)
(2)
(378)
(261)
(38)
(3,229)
(4,518)
(1,006)
(1,928)
Net deferred income tax asset
$ 1,363
$ 3,107
F-30
Management has assessed the realizability of deferred tax assets and believes it is more likely than not that all deferred tax assets will
be realized in the normal course of operations. Accordingly, these assets have not been reduced by a valuation allowance.
The Company periodically reviews its income tax positions based on tax laws and regulations and financial reporting considerations,
and records adjustments as appropriate. This review takes into consideration the status of current taxing authorities’ examinations of
the Company’s tax returns, recent positions taken by the taxing authorities on similar transactions.
The Company had no liabilities for unrecognized tax benefits as of December 31, 2020 and 2019.
The effective tax rate for 2020 and 2019 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
Other
Effective tax rate
YEARS ENDED DECEMBER 31,
2020
2019
21.0%
8.6%
-4.1%
-2.6%
22.9%
21.0%
8.6%
-3.2%
-1.2%
25.2%
Oak Valley Bancorp files a consolidated return in the U.S. Federal tax jurisdiction and a combined report in the State of California tax
jurisdiction. None of the entities are subject to examination by taxing authorities for years before 2017 for U.S. Federal or for years
before 2016 for California.
NOTE 11 — STOCK OPTION PLAN
The Company currently has two equity based incentive plans, the Oak Valley Bancorp 2008 Stock Plan and the Oak Valley Bancorp
2018 Stock Plan. The 2018 Stock Plan provides for awards in the form of incentive stocks, non-statutory stock options, stock
appreciation rights and restrictive stocks. Under the 2018 Plan, the Company is authorized to issue 607,500 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 2008 Stock Plan and will all be issued from the 2018 Stock Plan until it expires. As
of December 31, 2020, 558,299 shares were available to be issued under the 2018 Stock Plan pursuant to new grants.
A summary of the status of the Company’s equity based incentive plans and changes during the years end December 31, 2020 and
2019 are presented below.
Outstanding at beginning of year
Granted
Exercised
Forfeited
Outstanding at end of year
DECEMBER 31, 2020
DECEMBER 31, 2019
Shares
Weighted-
Average
Exercise Price
Weighted-
Average
Exercise Price
Shares
0
0
0
0
0
$
$
$
$
$
0.00
0.00
0.00
0.00
0.00
1,000
0
(1,000 )
0
0
$
$
$
$
$
5.74
0.00
5.74
0.00
0.00
F-31
(dollars in thousands)
Weighted-average fair value of options granted during the year
December 31,
2020
N/A
2019
N/A
Intrinsic value of options exercised
N/A
$ 12
Options outstanding and exercisable at year end:
Weighted average exercise price
Intrinsic value
Weighted average remaining contractual life
0
N/A
N/A
N/A
0
N/A
N/A
N/A
For the years ended December 31, 2020 and 2019, there was no recorded income tax benefits related to disqualifying dispositions of
stock option exercises. All outstanding stock options became fully vested during 2014 and therefore there is no remaining
unrecognized stock option compensation expense.
A summary of the status of the Company’s restricted stock and changes during the years ended December 31, 2020 and 2019 are
presented below.
Unvested at beginning of year
Granted
Vested
Cancelled
Unvested at end of year
DECEMBER 31, 2020
DECEMBER 31, 2019
Weighted
Average
Grant Date
Fair Value
$
$
$
$
$
19.75
16.08
19.53
19.19
19.32
Shares
101,555
17,756
(27,083 )
(2,400 )
89,828
Weighted
Average
Grant Date
Fair Value
Shares
107,600
26,095
(27,640 )
(4,500 )
101,555
$
$
$
$
$
20.09
17.59
18.97
20.11
19.75
The Company granted 17,756 shares of restricted stock in 2020 with a weighted average fair value of $16.08 per share. For the year
ended December 31, 2020, total compensation expense recorded in the consolidated statements of income related to restricted stock
awards was $549,000, with an offsetting tax benefit of $162,000, as this expense is deductible for income tax purposes. The Company
recorded an additional tax expense of $31,000 to income tax expense to adjust for the full tax deduction of the vested restricted stock,
which is equal to the fair value on the vesting date, as the tax benefit from the restricted stock expense is based on the grant date fair
value. As of December 31, 2020, there was $1,324,000 of total unrecognized compensation cost related to restricted stock awards
which is expected to be recognized over a weighted-average period of 2.78 years. During 2020, shares of restricted stock awards
totaling 27,083 with a fair value of $423,000, based on the vested date of each award, were vested and became unrestricted.
The Company granted 26,095 shares of restricted stock in 2019 with a weighted average fair value of $17.59 per share. For the year
ended December 31, 2019, total compensation expense recorded in the consolidated statements of income related to restricted stock
awards was $549,000, with an offsetting tax benefit of $162,000, as this expense is deductible for income tax purposes. The Company
recorded an additional tax expense of $12,000 to income tax expense to adjust for the full tax deduction of the vested restricted stock,
which is equal to the fair value on the vesting date, as the tax benefit from the restricted stock expense is based on the grant date fair
value. As of December 31, 2019, there was $1,633,000 of total unrecognized compensation cost related to restricted stock awards
which is expected to be recognized over a weighted-average period of 3.41 years. During 2019, shares of restricted stock awards
totaling 27,640 with a fair value of $482,000, based on the vested date of each award, were vested and became unrestricted.
F-32
NOTE 12 — 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. Basic EPS are calculated by dividing net income by the weighted average number of common shares
outstanding during each period, excluding dilutive stock options and 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 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:
Non-vested restricted stock
Total dilutive shares
Diluted EPS:
Net income per diluted share
(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, 2020
Income
(Numerator)
Weighted Avg
Shares
(Denominator)
Per-Share
Amount
$
13,687
8,123,386
$
1.68
—
15,142
15,142
$
13,687
8,138,528
$
1.68
YEAR ENDED DECEMBER 31, 2019
Income
(Numerator)
Weighted Avg
Shares
(Denominator)
Per-Share
Amount
$
12,489
8,102,442
$
1.54
—
—
54
14,131
14,185
$
12,489
8,116,627
$
1.54
F-33
NOTE 13 — 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, 2020 and 2019, was
$1,135,000 and $1,096,000, respectively.
We have historically entered into a number of lease arrangements under which we are the lessee. We have elected the practical
expedient to rely on our original lease classification at the commencement of each lease contract, and not reassess the lease
classifications upon the adoption of ASU No. 2016-02, Leases (Topic 842) on the effective date of January 1, 2019. Therefore, all of
the Company’s leases are determined to be operating leases. The other practical expedients the Company adopted are: (1) combining
lease and non-lease components into a single liability amount and (2) leases with fair values of less than $5,000 were not included as
they are not considered to be material. The Company does not have any short-term leases in which the original term at
commencement is twelve months or less and therefore there is no impact of short-term leases on the initial ROU or lease liability
recorded on January 1, 2019.
Most of our office leases include one or more optional renewal periods. The Company has not elected the hindsight practical
expedient and therefore potential payments related to future lease renewal options are not reflected in the ROU asset and lease
liability. Generally, all of the lease contracts have annual rent payment increases, some of which are based on the Consumer Price
Index and others are fixed increases that are set forth within the contracts. The majority of our lease contracts are gross leases, in
which a single monthly payment includes the lessor’s property and casualty insurance costs, property taxes, and common area
maintenance associated with the property.
The Company determined the operating lease liability as of January 1, 2019, by calculating the present value of remaining base rent
cash payments on each of its leases, excluding any renewal options regardless of the likelihood that the option would be exercised. As
of January 1, 2019, the weighted average remaining term of the lease contracts was 7.9 years and the weighted average discount rate
used to calculate the present value of the operating lease liability was 3.12%. The discount rate was based on our incremental
borrowing rate through our line of credit with the FHLB as of January 1, 2019, for the borrowing term that was equal to the remaining
term of each lease. The resulting operating lease liability recorded as of January 1, 2019 was $5,246,000, which is included in interest
payable and other liabilities in the condensed consolidated balance sheet. The ROU asset was then determined by adjusting the
operating lease liability by deferred rent and unamortized tenant improvement allowance. The ROU asset recorded on January 1,
2019 was $4,817,000, which is included in interest receivable and other assets on the condensed consolidated balance sheet.
At December 31, 2020, the future minimum commitments under these operating leases are as follows (in thousands):
Year ending December 31,
2021
2022
2023
2024
2025
Thereafter
$
$
1,199
1,217
930
793
481
1,736
6,356
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-34
Financial instruments at December 31, 2020 whose contract amounts represent credit risk:
(in thousands)
Contract
Amount
Undisbursed loan commitments
$
126,632
Checking reserve
Equity lines
Standby letters of credit
1,455
14,736
2,895
$
145,718
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 14 — FINANCIAL INSTRUMENTS AND FAIR VALUE MEASUREMENTS
Fair values of financial instruments — The consolidated financial statements include various estimated fair value information as of
December 31, 2020 and 2019. 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.
We determine the fair values of our financial instruments based on the fair value hierarchy established under applicable accounting
guidance which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when
measuring fair value:
Level 1: Inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets.
Level 2: Inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets and inputs that
are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument.
Level 3: Inputs to the valuation methodology are unobservable and significant to the fair value measurement.
In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, the level
in the fair value hierarchy within which the fair value measurement in its entirety falls has been determined based on the lowest level
input that is significant to the fair value measurement in its entirety. The Company’s assessment of the significance of a particular
input to the fair value measurement in its entirety requires judgment and considers factors specific to the asset or liability. Transfers
between levels of the fair value hierarchy are recognized on the actual date of the event or circumstance that caused the transfer, which
generally corresponds with the Company’s quarterly valuation process. There were no transfers between levels during the years ended
December 31, 2020 and 2019.
Following is a description of valuation methodologies used for assets and liabilities in the tables below:
Cash and cash equivalents – The carrying amounts of cash and cash equivalents approximate their fair value and are considered a
level 1 valuation.
F-35
Restricted Equity Securities- The carrying amounts of the stock the Company owns in Federal Reserve Bank (“FRB”) and Federal
Home Loan Bank (“FHLB”) approximate their fair value and are considered a level 2 valuation.
Loans receivable — The fair value of the loan portfolio is estimated using discounted cash flow analyses, using interest rates currently
being offered for loans with similar terms to borrowers of similar credit quality. The Company’s fair value model takes into account
many inputs including loan discounts due to credit risk, current market rates on new loans, the U.S. treasury yield curve, LIBOR yield
curve, rate floors, rate ceilings, remaining maturity, and average life based on specific loan type. ASU 2016-01 requires the use of an
exit price rather than an entrance price to determine the fair value of loans not measured at fair value on a non-recurring basis. Loans
are considered to be a level 3 valuation.
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. The
fair value of deposits is determined by the Company’s internal assets and liabilities modeling system that accounts for various inputs
such as decay rates, rate floors, FHLB yield curve, maturities and current rates offered on new accounts. Fair value on deposits is
considered a level 3 valuation.
Interest receivable and payable - The carrying amounts of accrued interest approximate their fair value and are considered to be a
level 2 valuation.
Off-balance-sheet instruments — Fair values for the Bank’s off-balance-sheet lending commitments are based on fees currently
charged to enter into similar agreements, taking into account the remaining terms of the agreements and the credit standing of the
counterparties. The Company considers the Bank’s off balance sheet instruments to be a level 3 valuation.
The estimated fair values of the Company’s financial instruments not measured at fair value as of December 31, 2020 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
$
226,656
$
4,757
997,246
5,689
226,656
4,757
1,006,335
5,689
(1,367,809 )
(1,367,874 )
(20 )
(20 )
(1,457 )
1
2
3
2
3
2
3
F-36
The estimated fair values of the Company’s financial instruments not measured at fair value as of December 31, 2019 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
$
147,594
$
4,761
741,047
3,457
147,594
4,761
742,484
3,457
(1,019,929 )
(1,019,654 )
(50 )
(50 )
(1,647 )
1
2
3
2
3
2
3
The following table presents the carrying value of recurring and nonrecurring financial instruments that were measured at fair value
and that were still held in the consolidated balance sheets at each respective period end, by level within the fair value hierarchy as of
December 31, 2020 and 2019.
(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
Equity Securities:
Mutual fund
Fair Value Measurements at December 31, 2020 Using
Quoted Prices
in Active
Markets for
Identical Assets
(Level 1)
Significant
Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
December 31,
2020
$
23,692
$
1,223
125,602
5,008
14,352
47,287
0
0
0
0
0
0
$
23,692
$
1,223
125,602
5,008
14,352
47,287
0
0
0
0
0
0
$
3,425
$
3,425
$
0
$
0
Assets and liabilities measured on a non-recurring basis:
N/A
F-37
(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
Equity Securities:
Mutual fund
Assets and liabilities measured on a non-recurring basis:
Impaired loans:
Land
Consumer residential
Fair Value Measurements at December 31, 2019 Using
Quoted Prices
in Active
Markets for
Identical Assets
(Level 1)
Significant
Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
December 31,
2019
$
31,729
$
1,614
90,571
6,395
18,968
40,811
0
0
0
0
0
0
$
31,729
$
1,614
90,571
6,395
18,968
40,811
0
0
0
0
0
0
$
3,297
$
3,297
$
0
$
0
$
175
$
248
$
0
0
$
0
0
175
248
Available-for-sale and equity securities - Investment securities 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 where significant inputs are unobservable.
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.
There have been no significant changes in the valuation techniques during the year ended December 31, 2020.
F-38
NOTE 15 — 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
Loans outstanding to retired director removed from related party status
Aggregate amount outstanding, end of year
YEARS ENDED DECEMBER 31,
2020
2019
$
$
5,734 $
12,152
(11,943 )
(400)
5,543 $
5,895
1,096
(1,257 )
0
5,734
Related party deposits totaled $15,914,000 and $10,900,000 at December 31, 2020 and 2019, respectively.
From time to time, some of the Company’s Directors, directly or through affiliates, may perform services for the Bank. These
activities are performed in the ordinary course of the Bank’s business and are subject to strict compliance with the policies outlined
below. In 2020, the Company made payments totaling $924,000 to Crown Painting and Design Studio 120, companies affiliated with
a Director’s daughter, for renovation and design work performed in connection with various projects and maintenance on the Bank’s
branches. In 2019, the Company made payments totaling $275,000 to these same related party companies for similar services. Except
for such payments, no other material services or activities were performed for purposes of Item 404(a) of Regulation S-K under the
Exchange Act.
NOTE 16 — PROFIT SHARING PLAN
The profit sharing plan to which both the Company and eligible employees contribute was established in 1995. To be eligible,
employees must complete 1,000 hours of service within a one-year period and be 21 years of age or older. Bank contributions are
voluntary and at the discretion of the Board of Directors. Contributions were approximately $737,000 and $665,000 for the years
ended December 31, 2020 and 2019, respectively.
NOTE 17 — 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 Financial Protection and Innovation, 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 18 — OTHER POST-RETIREMENT BENEFIT PLANS
Certain officers have entered into salary continuation agreements with the Company (the “Salary Continuation Agreements”). Under
the Salary Continuation Agreements, the participants will be provided with a fixed annual retirement benefit for ten to twenty years
after retirement. The Company is also responsible for certain pre-retirement death benefits under the Salary Continuation
Agreements. In connection with the implementation of the Salary Continuation Agreements, the Company purchased single premium
life insurance policies on the life of each of the officers covered under the Salary Continuation Agreements. The Company is the
owner and partial beneficiary of these life insurance policies. The assets of the Salary Continuation Agreements, under Internal
Revenue Service regulations, are owned by the Company and are available to satisfy the Company’s general creditors.
F-39
During December 2001, the Company adopted a director retirement plan (“DRP”). Under the DRP, the participants will be provided
with a fixed annual retirement benefit for ten years after retirement. The Company is also responsible for certain pre-retirement death
benefits under the DRP. In connection with the implementation of the DRP, the Company purchased single premium life insurance
policies on the life of each director covered under the DRP. The Company is the owner and partial beneficiary of these life insurance
policies. The assets of the DRP, under Internal Revenue Service regulations, are the property of the Company and are available to
satisfy the Company’s general creditors.
Future compensation under both types of arrangements 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 arrangements. 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 ten years. At December 31, 2020 and 2019, $4,491,000
and $3,978,000, 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 $25,325,000 and $24,631,000 at December 31,
2020 and 2019, respectively.
NOTE 19 — REGULATORY MATTERS
The Company is regulated by the FRB and is subject to the securities registration and public reporting regulations of the Securities and
Exchange Commission. As a California state-chartered bank, the Company’s banking subsidiary is subject to primary supervision,
examination and regulation by the California Department of Financial Protection and Innovation (DFPI) 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. Management is not aware of any recommendations of regulatory
authorities or otherwise which, if they were to be implemented, would have a material effect on the Company’s or Bank’s liquidity,
capital resources, or operations.
The U.S. Basel III rules contain capital standards regarding the composition of capital, minimum capital ratios and counter-party
credit risk capital requirements. The Basel III rules also include a definition of common equity Tier 1 capital and require that certain
levels of such common equity Tier 1 capital be maintained. The rules also include a capital conservation buffer, which imposes a
common equity requirement above the new minimum that can be depleted under stress and could result in restrictions on capital
distributions and discretionary bonuses under certain circumstances, as well as a new standardized approach for calculating risk-
weighted assets. Under the Basel III rules, we must maintain a ratio of common equity Tier 1 capital to risk-weighted assets of at least
4.5%, a ratio of Tier 1 capital to risk-weighted assets of at least 6%, a ratio of total capital to risk-weighted assets of at least 8% and a
minimum Tier 1 leverage ratio of 4.0%. In addition to the preceding requirements, all financial institutions subject to the Rules,
including both the Company and the Bank, are required to establish a "conservation buffer," consisting of common equity Tier 1
capital, which is at least 2.5% above each of the preceding common equity Tier 1 capital ratio, the Tier 1 risk-based ratio and the total
risk-based ratio. An institution that does not meet the conservation buffer will be subject to restrictions on certain activities including
payment of dividends, stock repurchases and discretionary bonuses to executive officers. The conservation buffer became fully
effective on January 1, 2019.
On September 17, 2019, the FDIC finalized a rule that introduces an optional simplified measure of capital adequacy for qualifying
community banking organizations (i.e., the community bank leverage ratio (CBLR) framework), as required by the Economic Growth,
Regulatory Relief and Consumer Protection Act. The CBLR framework is designed to reduce burden by removing the requirements
for calculating and reporting risk-based capital ratios for qualifying community banking organizations that opt into the framework. In
order to qualify for the CBLR framework, a community banking organization must have a tier 1 leverage ratio of greater than 9.0%,
less than $10 billion in total consolidated assets, and limited amounts of off-balance-sheet exposures and trading assets and liabilities.
A qualifying community banking organization that opts into the CBLR framework and meets all requirements under the framework
will be considered to have met the well-capitalized ratio requirements under the Prompt Corrective Action regulations and will not be
required to report or calculate risk-based capital. The CBLR framework was first available for banks to use in their March 31, 2020
Call Report. The Company has performed a analysis of the changes to capital adequacy and reporting requirements within the
quarterly Call Report, and has determined that it will not opt into the CBLR framework.
F-40
Failure to meet minimum capital requirements can trigger regulatory actions that could have a material adverse effect on the
Company’s financial statements and operations. Under capital adequacy guidelines and the regulatory framework for prompt
corrective action, the Company and Bank must meet specific capital guidelines that rely on quantitative measures of assets, liabilities
and certain off-balance-sheet items as calculated under regulatory accounting practices. The Company’s and Bank’s amounts and
classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.
The Company and Bank’s actual capital amounts and ratios at December 31, 2020 and 2019, are presented in the following table.
(in thousands)
Capital ratios for Bank:
As of December 31, 2020
Actual
Regulatory
Minimum (1)
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)
$
$
129,654
117,978
$
117,978
$
117,978
13.1%
12.0%
12.0%
8.0%
As of December 31, 2019
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)
$
$
115,713
106,140
$
106,140
$
106,140
12.3%
11.3%
11.3%
9.5%
Capital ratios for the Company:
As of December 31, 2020
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, 2019
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)
$
$
$
$
$
$
$
$
129,936
118,260
118,260
118,260
13.2%
12.0%
12.0%
8.0%
115,910
106,337
106,337
106,337
12.4%
11.3%
11.3%
9.5%
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
103,632
>10.5%
83,893
69,088
59,306
>8.5%
>7.0%
>4.0%
98,423
79,676
65,615
44,948
>10.5%
>8.5%
>7.0%
>4.0%
103,637
>10.5%
83,896
69,091
59,309
>8.5%
>7.0%
>4.0%
98,428
79,680
65,619
44,951
>10.5%
>8.5%
>7.0%
>4.0%
(1) The adequately capitalized thresholds in the table above are reflected on a fully phased-in basis, which occurred in January
2019.
F-41
OAK VALLEY BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 20 – RISKS AND UNCERTAINTIES
The coronavirus (“COVID-19”) pandemic and the Federal Reserve's response to the economic challenges during 2020 has resulted in
an uncertain and rapidly evolving economy. In response to the pandemic, approximately 27% of our administrative staff and none of
our branch staff were working remotely as of December 31, 2020, as a majority of employees working from home have returned to the
office. To date, we have been able to fully support our remote workforce and these remote work arrangements have not adversely
impacted our ability to serve our clients.
The most significant impact of COVID-19 on our business has been to the quality of our loan portfolio and to net interest income as
short-term interest rates have sharply declined. The Company has increased the qualitative factors used in the determination of the
adequacy of the allowance for loan and lease loss in anticipation of the impact that COVID-19 will have on clients and their ability to
fulfill their obligations. There is no certainty that the provisions made during 2020 will be sufficient to absorb the losses that stem
from the impact of COVID-19 on the Company’s clients. As the longer-term effects on clients from the COVID-19 pandemic become
more apparent, it may be necessary to charge-off some or all of the balance on certain loans and make further provisions to increase
the allowance for loan and lease losses. These potential additional provisions for loan and lease losses will have a direct impact upon
capital, including the potential need to reevaluate a valuation allowance on our deferred tax asset. At this time, the Company does not
expect that there would be any material impairment to the valuation of other long-lived assets, right of use assets, or our investment
securities.
Increased demand for liquidity by clients is another impact that could occur should the COVID-19 effects be prolonged. As of
December 31, 2020, the Company and the Bank's on-balance sheet liquidity was very strong and combined with contingent liquidity
resources, management believes that the Bank has sufficient resources to meet the liquidity needs of its clients. In response to COVID-
19, the Federal Reserve has made other provisions that could assist the Bank in satisfying its liquidity needs, such as reducing the
reserve requirement to zero, expanding access to the discount window through collateral pledging and extension of term borrowings.
The extent to which the COVID-19 pandemic affects the Company’s future financial results and operations will depend on future
developments which are highly uncertain and cannot be predicted, including new information which may emerge concerning the
duration and broad impacts of the pandemic, and current or future actions in response thereto. Management is working closely with
our Board of Directors as we plan and execute our response to the significant disruption caused by the crisis. See “Management’s
Discussion and Analysis of Financial Position and Results of Operations” and Part II, Item 1A, Risk Factors, for additional discussion
of risks related to the COVID-19 pandemic.
F-42
NOTE 21. PARENT ONLY CONDENSED FINANCIAL STATEMENTS
CONDENSED BALANCE SHEETS
(dollars in thousands)
ASSETS
Cash
Investment in bank subsidiary
Other assets
Total assets
LIABILITIES AND SHAREHOLDERS’ EQUITY
Other liabilities
Total liabilities
Shareholders’ equity
Common stock, no par value; 50,000,000 shares authorized,
8,218,873 and 8,210,147 shares issued and outstanding at
December 31, 2020 and 2019, respectively
Additional paid-in capital
Retained earnings
Accumulated other comprehensive income, net of tax
December 31,
2020
December 31,
2019
$
$
250 $
129,412
43
149
112,373
48
129,705 $
112,570
$
11
$
-
$
11
$
-
25,435
4,216
92,349
7,694
25,435
3,777
80,961
2,397
Total shareholders’ equity
129,694
112,570
Total liabilities and shareholders' equity
$
129,705 $
112,570
F-43
OAK VALLEY BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 21. PARENT ONLY CONDENSED FINANCIAL STATEMENTS (CONTINUED)
CONDENSED STATEMENTS OF INCOME
(dollars in thousands)
INCOME
Dividends declared by subsidiary
Total income
EXPENSES
Salary expense
Employee benefit expense
Legal expense
Other operating expenses
Total expenses
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
Year Ended December 31,
2020
2019
$
2,549 $
2,549
2,214
2,214
116
549
40
108
813
1,736
11,742
13,478
209
113
549
53
102
817
1,397
10,863
12,260
229
$
13,687 $
12,489
F-44
OAK VALLEY BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 21. PARENT ONLY CONDENSED FINANCIAL STATEMENTS (CONTINUED)
CONDENSED STATEMENTS OF CASHFLOWS
YEAR ENDED DECEMBER 31,
2020
2019
$
13,687 $
12,489
(11,742)
549
11
5
2,510
(2,299)
0
(110)
(2,409)
101
149
250 $
(10,863)
549
(28)
59
2,206
(2,214)
6
(130)
(2,338)
(132)
281
149
4,338 $
3,870
(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
Increase (decrease) in other liabilities
Decrease 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
Tax withholding payments on vested restricted shares surrendered
Net cash used in financing activities
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
CASH AND CASH EQUIVALENTS, beginning of period
CASH AND CASH EQUIVALENTS, end of period
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for income taxes
$
$
F-45
EXHIBIT 10.4
SALARY CONTINUATION AGREEMENT
This Salary Continuation Agreement (the “Agreement”), by and between Oak Valley
Community Bank, located in Oakdale, California (the “Employer”), and _____________________
(the “Executive”), made this ___ day of ______________________, formalizes the agreements and
understanding between the Employer and the Executive.
WHEREAS, the Executive is employed by the Employer;
WITNESSETH:
WHEREAS, the Employer recognizes the valuable services the Executive has
performed for the Employer and wishes to encourage the Executive’s continued employment
and to provide the Executive with additional incentive to achieve corporate objectives;
WHEREAS, the Employer wishes to provide the terms and conditions upon which the
Employer shall pay additional retirement benefits to the Executive;
WHEREAS, the Employer and the Executive intend this Agreement shall at all times
be administered and interpreted in compliance with Code Section 409A; and
WHEREAS, the Employer intends this Agreement shall at all times be administered
and interpreted in such a manner as to constitute an unfunded nonqualified deferred
compensation arrangement, maintained primarily to provide supplemental retirement
benefits for the Executive, a member of select group of management or highly compensated
employee of the Employer.
NOW THEREFORE, in consideration of the premises and of the mutual promises
herein contained, the Employer and the Executive agree as follows:
ARTICLE 1
DEFINITIONS
For the purpose of this Agreement, the following phrases or terms shall have the
indicated meanings:
1.1
“Accrued Benefit” means the dollar value of the liability that should be accrued
by the Employer, under Generally Accepted Accounting Principles, for the Employer’s
obligation to the Executive under this Agreement, calculated by applying Accounting
Standards Codification 710-10 and the Discount Rate.
1.2
“Administrator” means the Board or its designee.
1.3
“Affiliate” means any business entity with whom the Employer would be
considered a single employer under Section 414(b) and 414(c) of the Code. Such term shall
be interpreted in a manner consistent with the definition of “service recipient” contained in
Code Section 409A.
1.4
“Beneficiary” means the person or persons designated in writing by the
Executive to receive benefits hereunder in the event of the Executive’s death.
1.5
“Board” means the Board of Directors of the Employer.
1.6
“Cause” means any of the following acts or circumstances: gross negligence or
gross neglect of duties to the Employer; conviction of a felony or of a gross misdemeanor
involving moral turpitude in connection with the Executive’s employment with the
Employer; or fraud, disloyalty, dishonesty or willful violation of any law or significant
Employer policy committed in connection with the Executive's employment and resulting in
a material adverse effect on the Employer.
1.7
“Change in Control” means a change in the ownership or effective control of
the Employer, or in the ownership of a substantial portion of the assets of the Employer, as
such change is defined in Code Section 409A and regulations thereunder.
1.8
“Claimant” means a person who believes that he or she is being denied a
benefit to which he or she is entitled hereunder.
1.9
“Code” means the Internal Revenue Code of 1986, as amended.
1.10
“Disability” means a condition of the Executive whereby the Executive either:
(i) is unable to engage in any substantial gainful activity by reason of any medically
determinable physical or mental impairment that can be expected to result in death or can
be expected to last for a continuous period of not less than 12 months, or (ii) is, by reason of
any medically determinable physical or mental impairment that can be expected to result in
death or can be expected to last for a continuous period of not less than 12 months, receiving
income replacement benefits for a period of not less than three months under an accident
and health plan covering employees of the Employer. The Administrator will determine
whether the Executive has incurred a Disability based on its own good faith determination
and may require the Executive to submit to reasonable physical and mental examinations for
this purpose. The Executive will also be deemed to have incurred a Disability if determined
to be totally disabled by the Social Security Administration or in accordance with a disability
insurance program, provided that the definition of disability applied under such disability
insurance program complies with the initial sentence of this Section.
1.11
“Discount Rate” means the rate used by the Administrator for determining the
Accrued Benefit. The initial Discount Rate is four and one-half per cent (4.5%). The
Administrator may adjust the Discount Rate to maintain the rate within reasonable
standards according to Generally Accepted Accounting Principles and applicable bank
regulatory guidance.
2
1.12
“Early Termination” means Separation from Service before Normal Retirement
Age except when such Separation from Service occurs within twenty-four (24) months
following a Change in Control or due to termination for Cause or Disability.
1.13
“Effective Date” means January 1, 2021.
1.14
“ERISA” means the Employee Retirement Income Security Act of 1974, as
amended.
1.15
“Normal Retirement Age” means the date the Executive attains age sixty-five
(65).
1.16
“Plan Year” means each twelve (12) month period commencing on January 1
and ending on December 31 of each year. The initial Plan Year shall commence on the
Effective Date and end on the following December 31.
1.17
“Schedule A” means the schedule attached hereto and made a part hereof.
Schedule A shall be updated upon a change to any of the benefits described in Article 2
hereof.
1.18
“Separation from Service” means a termination of the Executive’s employment
with the Employer and its Affiliates for reasons other than death. A Separation from Service
may occur as of a specified date for purposes of the Agreement even if the Executive
continues to provide some services for the Employer or its Affiliates after that date, provided
that the facts and circumstances indicate that the Employer and the Executive reasonably
anticipated at that date that either no further services would be performed after that date,
or that the level of bona fide services the Executive would perform after such date (whether
as an employee or as an independent contractor) would permanently decrease to no more
than twenty percent (20%) of the average level of bona fide services performed over the
immediately preceding thirty-six (36) month period (or the full period during which the
Executive performed services for the Employer, if that is less than thirty-six (36) months). A
Separation from Service will not be deemed to have occurred while the Executive is on
military leave, sick leave, or other bona fide leave of absence if the period of such leave does
not exceed six (6) months or, if longer, the period for which a statute or contract provides
the Executive with the right to reemployment with the Employer. If the Executive’s leave
exceeds six (6) months but the Executive is not entitled to reemployment under a statute or
contract, the Executive incurs a Separation of Service on the next day following the
expiration of such six (6) month period. In determining whether a Separation of Service
occurs the Administrator shall take into account, among other things, the definition of
“service recipient” and “employer” set forth in Treasury regulation §1.409A-1(h)(3). The
Administrator shall have full and final authority, to determine conclusively whether a
Separation from Service occurs, and the date of such Separation from Service.
1.19
“Specified Employee” means an individual that satisfies the definition of a “key
employee” of the Employer as such term is defined in Code §416(i) (without regard to Code
§416(i)(5)), provided that the stock of the Employer is publicly traded on an established
securities market or otherwise, as defined in Code §1.897-1(m). If the Executive is a key
3
employee at any time during the twelve (12) months ending on December 31, the Executive
is a Specified Employee for the twelve (12) month period commencing on the first day of the
following April.
ARTICLE 2
PAYMENT OF BENEFITS
2.1
Normal Retirement Benefit. Upon Separation from Service after Normal
Retirement Age, the Employer shall pay the Executive an annual benefit in the amount of
Sixty-One Thousand One Hundred Twenty-Five Dollars ($61,125) in lieu of any other benefit
hereunder. The annual benefit will be paid for fifteen (15) years in equal monthly
installments commencing the month following Separation from Service.
2.2
Early Termination Benefit. If Early Termination occurs, the Employer shall pay
the Executive the Early Termination benefit amount shown on Schedule A for the Plan Year
ending immediately prior to Separation from Service in lieu of any other benefit hereunder.
The benefit will be paid in a lump sum within sixty (60) days following Separation from
Service, with the precise payment date determined by the Employer in its sole discretion.
2.3
Disability Benefit. In the event Separation from Service occurs prior to Normal
Retirement Age and following a Disability, the Employer shall pay the Executive the
Disability benefit amount shown on Schedule A for the Plan Year ending immediately prior
to Separation from Service in lieu of any other benefit hereunder. The benefit will be paid in
a lump sum within sixty (60) days following Separation from Service, with the precise
payment date determined by the Employer in its sole discretion.
2.4
Change in Control Benefit. If a Change in Control occurs, followed within
twenty-four (24) months by Separation of Service prior to Normal Retirement Age, the
Employer shall pay the Executive an annual benefit shown on Schedule A for the Plan Year
ending immediately prior to Separation from Service in lieu of any other benefit hereunder.
The annual benefit will be paid for fifteen (15) years in equal monthly installments
commencing the month following Separation from Service.
2.5
Death Prior to Commencement of Benefit Payments. In the event the Executive
dies prior to Separation from Service and the Employer owns a life insurance policy on the
life of the Executive at the time of the Executive’s death, the Employer shall pay the
Beneficiary the Death benefit amount shown on Schedule A for the Plan Year ending
immediately prior to the Executive’s death in lieu of any other benefit hereunder. In the
event the Executive dies prior to Separation from Service and the Employer does not own a
life insurance policy on the life of the Executive at the time of the Executive’s death, the
Employer shall pay the Beneficiary the Accrued Benefit determined as of the end of the Plan
Year ending immediately prior to the Executive’s death in lieu of any other benefit
hereunder. In either event, the benefit will be paid in a lump sum within sixty (60) days
following the Executive’s death, with the precise payment date determined by the Employer
in its sole discretion.
4
2.6
Death Subsequent to Commencement of Benefit Payments. In the event the
Executive dies while receiving payments, but prior to receiving all payments due and owing
hereunder, the Employer shall pay the Beneficiary the same amounts at the same times as
the Employer would have paid the Executive had the Executive survived.
2.7
Termination for Cause.
If the Employer terminates the Executive’s
employment for Cause, then the Executive shall not be entitled to any benefits under the
terms of this Agreement.
2.8
Restriction on Commencement of Distributions. Notwithstanding any provision
of this Agreement to the contrary, if the Executive is considered a Specified Employee at the
time of Separation from Service, the provisions of this Section shall govern all distributions
hereunder. Distributions which would otherwise be made to the Executive due to Separation
from Service shall not be made during the first six (6) months following Separation from
Service. Rather, any distribution which would otherwise be paid to the Executive during
such period shall be accumulated and paid to the Executive in a lump sum on the first day of
the seventh month following Separation from Service, or if earlier, upon the Executive’s
death. All subsequent distributions shall be paid as they would have had this Section not
applied.
2.9
Acceleration of Payments. Except as specifically permitted herein, no
acceleration of the time or schedule of any payment may be made hereunder.
Notwithstanding the foregoing, payments may be accelerated, in accordance with the
provisions of Treasury Regulation §1.409A-3(j)(4) in the following circumstances: (i) as a
result of certain domestic relations orders; (ii) in compliance with ethics agreements with
the federal government; (iii) in compliance with the ethics laws or conflicts of interest laws;
(iv) in limited cashouts (but not in excess of the limit under Code §402(g)(1)(B)); (v) to pay
employment-related taxes; or (vi) to pay any taxes that may become due at any time that the
Agreement fails to meet the requirements of Code Section 409A.
2.10 Delays in Payment by Employer. A payment may be delayed to a date after the
designated payment date under any of the circumstances described below, and the provision
will not fail to meet the requirements of establishing a permissible payment event. The delay
in the payment will not constitute a subsequent deferral election, so long as the Employer
treats all payments to similarly situated participants on a reasonably consistent basis.
(a)
Payments that would violate Federal securities laws or other applicable
law. A payment may be delayed where the Employer reasonably anticipates that the
making of the payment will violate Federal securities laws or other applicable law
provided that the payment is made at the earliest date at which the Employer
reasonably anticipates that the making of the payment will not cause such violation.
The making of a payment that would cause inclusion in gross income or the
application of any penalty provision of the Internal Revenue Code is not treated as a
violation of law.
5
(b)
Solvency. Notwithstanding the above, a payment may be delayed
where the payment would jeopardize the ability of the Employer to continue as a
going concern.
2.11 Treatment of Payment as Made on Designated Payment Date. Solely for
purposes of determining compliance with Code Section 409A, any payment under this
Agreement made after the required payment date shall be deemed made on the required
payment date provided that such payment is made by the latest of: (i) the end of the calendar
year in which the payment is due; (ii) the 15th day of the third calendar month following the
payment due date; (iii) if Employer cannot calculate the payment amount on account of
administrative impracticality which is beyond the Executive’s control, the end of the first
calendar year which payment calculation is practicable; and (iv) if Employer does not have
sufficient funds to make the payment without jeopardizing the Employer’s solvency, in the
first calendar year in which the Employer’s funds are sufficient to make the payment.
2.12 Facility of Payment. If a distribution is to be made to a minor, or to a person
who is otherwise incompetent, then the Administrator may make such distribution: (i) to the
legal guardian, or if none, to a parent of a minor payee with whom the payee maintains his
or her residence; or (ii) to the conservator or administrator or, if none, to the person having
custody of an incompetent payee. Any such distribution shall fully discharge the Employer
and the Administrator from further liability on account thereof.
2.13 Excise Tax Limitation. Notwithstanding any provision of this Agreement to the
contrary, if any benefit payment hereunder would be treated as an “excess parachute
payment” under Code Section 280G, the Employer shall reduce such benefit payment to the
extent necessary to avoid treating such benefit payment as an excess parachute payment.
The Executive shall be entitled to only the reduced benefit and shall forfeit any amount over
and above the reduced amount.
2.14 Changes in Form or Timing of Benefit Payments. The Employer and the
Executive may, subject to the terms hereof, amend this Agreement to delay the timing or
change the form of payments. Any such amendment:
(a) must take effect not less than twelve (12) months after the amendment
is made;
(b) must, for benefits distributable due solely to the arrival of a specified
date, or on account of Separation from Service or Change in Control, delay the
commencement of distributions for a minimum of five (5) years from the date the first
distribution was originally scheduled to be made;
(c) must, for benefits distributable due solely to the arrival of a specified
date, be made not less than twelve (12) months before distribution is scheduled to
begin; and
(d) may not accelerate the time or schedule of any distribution.
6
ARTICLE 3
BENEFICIARIES
3.1
Designation of Beneficiaries. The Executive may designate any person to
receive any benefits payable under the Agreement upon the Executive’s death, and the
designation may be changed from time to time by the Executive by filing a new designation.
Each designation will revoke all prior designations by the Executive, shall be in the form
prescribed by the Administrator, and shall be effective only when filed in writing with the
Administrator during the Executive’s lifetime. If the Executive names someone other than
the Executive’s spouse as a Beneficiary, the Administrator may, in its sole discretion,
determine that spousal consent is required to be provided in a form designated by the
Administrator, executed by the Executive’s spouse and returned to the Administrator. The
Executive’s beneficiary designation shall be deemed automatically revoked if the Beneficiary
predeceases the Executive or if the Executive names a spouse as Beneficiary and the
marriage is subsequently dissolved.
3.2
Absence of Beneficiary Designation. In the absence of a valid Beneficiary
designation, or if, at the time any benefit payment is due to a Beneficiary, there is no living
Beneficiary validly named by the Executive, the Employer shall pay the benefit payment to
the Executive’s spouse. If the spouse is not living then the Employer shall pay the benefit
payment to the Executive’s living descendants per stirpes, and if there are no living
descendants, to the Executive’s estate. In determining the existence or identity of anyone
entitled to a benefit payment, the Employer may rely conclusively upon information supplied
by the Executive’s personal representative, executor, or administrator.
ARTICLE 4
ADMINISTRATION
4.1
Administrator Duties. The Administrator shall be responsible for the
When making a
management, operation, and administration of the Agreement.
determination or calculation, the Administrator shall be entitled to rely on information
furnished by the Employer, Executive or Beneficiary. No provision of this Agreement shall
be construed as imposing on the Administrator any fiduciary duty under ERISA or other law,
or any duty similar to any fiduciary duty under ERISA or other law.
4.2
Administrator Authority. The Administrator shall enforce this Agreement in
accordance with its terms, shall be charged with the general administration of this
Agreement, and shall have all powers necessary to accomplish its purposes.
4.3
Binding Effect of Decision. The decision or action of the Administrator with
respect to any question arising out of or in connection with the administration,
interpretation or application of this Agreement and the rules and regulations promulgated
hereunder shall be final, conclusive and binding upon all persons having any interest in this
Agreement.
4.4
Compensation, Expenses and Indemnity. The Administrator shall serve without
compensation for services rendered hereunder. The Administrator is authorized at the
7
expense of the Employer to employ such legal counsel and/or recordkeeper as it may deem
advisable to assist in the performance of its duties hereunder. Expense and fees in
connection with the administration of this Agreement shall be paid by the Employer.
4.5
Employer Information. The Employer shall supply full and timely information
to the Administrator on all matters relating to the Executive’s compensation, death,
Disability or Separation from Service, and such other information as the Administrator
reasonably requires.
4.6
Termination of Participation. If the Administrator determines in good faith
that the Executive no longer qualifies as a member of a select group of management or highly
compensated employees, as determined in accordance with ERISA, the Administrator shall
have the right, in its sole discretion, to cease further benefit accruals hereunder.
4.7
Compliance with Code Section 409A. The Employer and the Executive intend
that the Agreement comply with the provisions of Code Section 409A to prevent the inclusion
in gross income of any amounts deferred hereunder in a taxable year prior to the year in
which amounts are actually paid to the Executive or Beneficiary. This Agreement shall be
construed, administered and governed in a manner that affects such intent, and the
Administrator shall not take any action that would be inconsistent therewith.
ARTICLE 5
CLAIMS AND REVIEW PROCEDURES
5.1
Claims Procedure. A Claimant who has not received benefits under this
Agreement that he or she believes should be distributed shall make a claim for such benefits
as follows.
(a)
Initiation – Written Claim. The Claimant initiates a claim by submitting
to the Administrator a written claim for the benefits. If such a claim relates to the
contents of a notice received by the Claimant, the claim must be made within sixty
(60) days after such notice was received by the Claimant. All other claims must be
made within one hundred eighty (180) days of the date on which the event that
caused the claim to arise occurred. The claim must state with particularity the
determination desired by the Claimant.
(b)
Timing of Administrator Response. The Administrator shall respond to
such Claimant within forty-five (45) days after receiving the claim. If the
Administrator determines that special circumstances require additional time for
processing the claim, the Administrator can extend the response period by an
additional thirty (30) days by notifying the Claimant in writing, prior to the end of the
initial forty-five (45) day period, that an additional period is required. The extension
notice shall specifically explain the standards on which entitlement to a disability
benefit is based, the unresolved issues that prevent a decision on the claim and the
additional information needed from the Claimant to resolve those issues, and the
Claimant shall be afforded at least forty-five (45) days within which to provide the
specified information.
8
(c)
Notice of Decision. If the Administrator denies all or a part of the claim,
the Administrator shall notify the Claimant in writing of such denial in a culturally
and linguistically appropriate manner. The Administrator shall write the notification
in a manner calculated to be understood by the Claimant. The notification shall set
forth: (i) the specific reasons for the denial; (ii) a reference to the specific provisions
of this Agreement on which the denial is based; (iii) a notice that the Claimant has a
right to request a review of the claim denial and an explanation of the Agreement’s
review procedures and the time limits applicable to such procedures; (iv) a statement
of the Claimant’s right to bring a civil action under ERISA Section 502(a) following an
adverse benefit determination on review, and a description of any time limit for
bringing such an action; (v) for any Disability claim, a discussion of the decision,
including an explanation of the basis for disagreeing with or not following: (A) the
views presented by the Claimant of health care professionals treating the Claimant
and vocational professionals who evaluated the Claimant; (B) the views of medical or
vocational experts whose advice was obtained on behalf of the Employer in
connection with a Claimant’s adverse benefit determination, without regard to
whether the advice was relied upon in making the benefit determination; or (C) a
disability determination regarding the Claimant presented by the Claimant made by
the Social Security Administration (vi) for any Disability claim, the specific internal
rules, guidelines, protocols, standards or other similar criteria relied upon in making
the adverse determination or, alternatively, a statement that such rules, guidelines,
protocols, standards or other similar criteria do not exist; and (viii) for any Disability
claim, a statement that the Claimant is entitled to receive, upon request and free of
charge, reasonable access to, and copies of, all documents, records, and other
information relevant to the Claimant’s claim for benefits. Whether a document,
record, or other information is relevant to a claim for benefits shall be determined by
Department of Labor Regulation Section 2560.503-1(m)(8).
5.2
Review Procedure. If the Administrator denies all or a part of the claim, the
Claimant shall have the opportunity for a full and fair review by the Administrator of the
denial as follows.
(a)
Additional Evidence. Prior to the review of the denied claim, the
Claimant shall be given, free of charge, any new or additional evidence considered,
relied upon, or generated by the Administrator, or any new or additional rationale, as
soon as possible and sufficiently in advance of the date on which the notice of adverse
benefit determination on review is required to be provided, to give the Claimant a
reasonable opportunity to respond prior to that date.
(b)
Initiation – Written Request. To initiate the review, the Claimant,
within sixty (60) days after receiving the Administrator’s notice of denial, must file
with the Administrator a written request for review.
(c)
Additional Submissions – Information Access. After such request the
Claimant may submit written comments, documents, records and other information
relating to the claim. The Administrator shall also provide the Claimant, upon request
and free of charge, reasonable access to, and copies of, all documents, records and
9
other information relevant (as defined in applicable ERISA regulations) to the
Claimant’s claim for benefits.
(d)
the review,
In considering
Considerations on Review.
the
Administrator shall consider all materials and information the Claimant submits
relating to the claim, without regard to whether such information was submitted or
considered in the initial benefit determination. Additional considerations shall be
required in the case of a claim for Disability benefits. The claim shall be reviewed by
an individual or committee who did not make the initial determination that is subject
of the appeal and who is not a subordinate of the individual who made the
determination. Additionally, the review shall be made without deference to the initial
adverse benefit determination. If the initial adverse benefit determination was based
in whole or in part on a medical judgment, the Administrator will consult with a
health care professional with appropriate training and experience in the field of
medicine involving the medical judgment. The health care professional who is
consulted on appeal will not be the same individual who was consulted during the
initial determination and will not be the subordinate of such individual. If the
Administrator obtained the advice of medical or vocational experts in making the
initial adverse benefits determination (regardless of whether the advice was relied
upon), the Administrator will identify such experts.
(e)
Timing of Administrator Response. The Administrator shall respond in
writing to such Claimant within forty-five (45) days after receiving the request for
review. If the Administrator determines that special circumstances require
additional time for processing the claim, the Administrator can extend the response
period by an additional forty-five (45) days by notifying the Claimant in writing, prior
to the end of the initial forty-five (45) day period, that an additional period is
required. The notice of extension must set forth the special circumstances and the
date by which the Administrator expects to render its decision.
(f)
Notice of Decision. The Administrator shall notify the Claimant in
writing of its decision on review. The Administrator shall write the notification in a
culturally and linguistically appropriate manner calculated to be understood by the
Claimant. The notification shall set forth: (i) the specific reasons for the denial; (ii) a
reference to the specific provisions of this Agreement on which the denial is based;
(iii) a statement that the Claimant is entitled to receive, upon request and free of
charge, reasonable access to, and copies of, all documents, records and other
information relevant (as defined in applicable ERISA regulations) to the Claimant’s
claim for benefits; (iv) a statement of the Claimant’s right to bring a civil action under
ERISA Section 502(a); (v) for any Disability claim, a discussion of the decision,
including an explanation of the basis for disagreeing with or not following: (A) the
views presented by the Claimant of health care professionals treating the Claimant
and vocational professionals who evaluated the Claimant; (B) the views of medical or
vocational experts whose advice was obtained on behalf of the Employer in
connection with a Claimant’s adverse benefit determination, without regard to
whether the advice was relied upon in making the benefit determination; or (C) a
disability determination regarding the Claimant presented by the Claimant made by
the Social Security Administration; and (vi) for any Disability claim, the specific
internal rules, guidelines, protocols, standards or other similar criteria relied upon in
10
making the adverse determination or, alternatively, a statement that such rules,
guidelines, protocols, standards or other similar criteria do not exist.
5.3
Exhaustion of Remedies. The Claimant must follow these claims review
procedures and exhaust all administrative remedies before taking any further action with
respect to a claim for benefits.
5.4
Failure to Follow Procedures. In the case of a claim for Disability benefits, if the
Administrator fails to strictly adhere to all the requirements of this claims procedure with
respect to a Disability claim, the Claimant is deemed to have exhausted the administrative
remedies available under the Agreement, and shall be entitled to pursue any available
remedies under ERISA Section 502(a) on the basis that the Administrator has failed to
provide a reasonable claims procedure that would yield a decision on the merits of the claim,
except where the violation was: (a) de minimis; (b) non-prejudicial; (c) attributable to good
cause or matters beyond the Administrator’s control; (d) in the context of an ongoing good-
faith exchange of information; and (e) not reflective of a pattern or practice of
noncompliance. The Claimant may request a written explanation of the violation from the
Administrator, and the Administrator must provide such explanation within ten (10) days,
including a specific description of its basis, if any, for asserting that the violation should not
cause the administrative remedies to be deemed exhausted. If a court rejects the Claimant’s
request for immediate review on the basis that the Administrator met the standards for the
exception, the claim shall be considered as re-filed on appeal upon the Administrator’s
receipt of the decision of the court. Within a reasonable time after the receipt of the decision,
the Administrator shall provide the claimant with notice of the resubmission.
ARTICLE 6
AMENDMENT AND TERMINATION
6.1
Agreement Amendment Generally. Except as provided in Section 6.2, this
Agreement may be amended only by a written agreement signed by both the Employer and
the Executive.
6.2
Amendment to Insure Proper Characterization of Agreement. Notwithstanding
anything in this Agreement to the contrary, the Agreement may be amended by the Employer
at any time, if found necessary in the opinion of the Employer, (i) to ensure that the
Agreement is characterized as plan of deferred compensation maintained for a select group
of management or highly compensated employees as described under ERISA, (ii) to conform
the Agreement to the requirements of any applicable law or (iii) to comply with the written
instructions of the Employer’s auditors or banking regulators.
6.3
Agreement Termination Generally. This Agreement may be terminated only by
a written agreement signed by the Employer and the Executive. No such termination shall
cause a distribution of benefits under this Agreement. Rather, after termination benefit
payments will be made at the earliest distribution event permitted under Article 2.
11
ARTICLE 7
MISCELLANEOUS
7.1
No Effect on Other Rights. This Agreement constitutes the entire agreement
between the Employer and the Executive as to the subject matter hereof. No rights are
granted to the Executive by virtue of this Agreement other than those specifically set forth
herein. Nothing contained herein will confer upon the Executive the right to be retained in
the service of the Employer nor limit the right of the Employer to discharge or otherwise
deal with the Executive without regard to the existence hereof.
7.2
State Law. To the extent not governed by ERISA, the provisions of this
Agreement shall be construed and interpreted according to the internal law of the State of
California without regard to its conflicts of laws principles.
7.3
Validity. In case any provision of this Agreement shall be illegal or invalid for
any reason, said illegality or invalidity shall not affect the remaining parts hereof, but this
Agreement shall be construed and enforced as if such illegal or invalid provision had never
been inserted herein.
7.4
Nonassignability. Benefits under this Agreement cannot be sold, transferred,
assigned, pledged, attached or encumbered in any manner.
7.5
Unsecured General Creditor Status. Payment to the Executive or any
Beneficiary hereunder shall be made from assets which shall continue, for all purposes, to be
part of the general, unrestricted assets of the Employer and no person shall have any interest
in any such asset by virtue of any provision of this Agreement. The Employer’s obligation
hereunder shall be an unfunded and unsecured promise to pay money in the future. In the
event that the Employer purchases an insurance policy insuring the life of the Executive to
recover the cost of providing benefits hereunder, neither the Executive nor the Beneficiary
shall have any rights whatsoever in said policy or the proceeds therefrom.
7.6
Life Insurance. If the Employer chooses to obtain insurance on the life of the
Executive in connection with its obligations under this Agreement, the Executive hereby
agrees to take such physical examinations and to truthfully and completely supply such
information as may be required by the Employer or the insurance company designated by
the Employer.
7.7
Unclaimed Benefits. The Executive shall keep the Employer informed of the
Executive’s current address and the current address of the Beneficiary. If the location of the
Executive is not made known to the Employer within three years after the date upon which
any payment of any benefits may first be made, the Employer shall delay payment of the
Executive’s benefit payment(s) until the location of the Executive is made known to the
Employer; however, the Employer shall only be obligated to hold such benefit payment(s)
for the Executive until the expiration of three (3) years. Upon expiration of the three (3) year
period, the Employer may discharge its obligation by payment to the Beneficiary. If the
location of the Beneficiary is not made known to the Employer by the end of an additional
two (2) month period following expiration of the three (3) year period, the Employer may
12
discharge its obligation by payment to the Executive’s estate. If there is no estate in existence
at such time or if such fact cannot be determined by the Employer, the Executive and
Beneficiary shall thereupon forfeit all rights to any benefits provided under this Agreement.
7.8
Suicide or Misstatement. No benefit shall be distributed hereunder if the
Executive commits suicide within two (2) years after the Effective Date, or if an insurance
company which issued a life insurance policy covering the Executive and owned by the
Employer denies coverage (i) for material misstatements of fact made by the Executive on
an application for life insurance, or (ii) for any other reason.
7.9
Removal. Notwithstanding anything in this Agreement to the contrary, the
Employer shall not distribute any benefit under this Agreement if the Executive is subject to
a final removal or prohibition order issued pursuant to Section 8(e) of the Federal Deposit
Insurance Act. Furthermore, any payments made to the Executive pursuant to this
Agreement shall, if required, comply with 12 U.S.C. 1828, FDIC Regulation 12 CFR Part 359
and any other regulations or guidance promulgated thereunder.
7.10 Notice. Any notice, consent or demand required or permitted to be given to
the Employer or Administrator under this Agreement shall be sufficient if in writing and
hand-delivered or sent by registered or certified mail to the Employer’s principal business
office. Any notice or filing required or permitted to be given to the Executive or Beneficiary
under this Agreement shall be sufficient if in writing and hand-delivered or sent by mail to
the last known address of the Executive or Beneficiary, as appropriate. Any notice shall be
deemed given as of the date of delivery or, if delivery is made by mail, as of the date shown
on the postmark or on the receipt for registration or certification.
7.11 Headings and Interpretation. Headings and sub-headings in this Agreement
are inserted for reference and convenience only and shall not be deemed part of this
Agreement. Wherever the fulfillment of the intent and purpose of this Agreement requires
and the context will permit, the use of the masculine gender includes the feminine and use
of the singular includes the plural.
7.12 Alternative Action. In the event it becomes impossible for the Employer or the
Administrator to perform any act required by this Agreement due to regulatory or other
constraints, the Employer or Administrator may perform such alternative act as most nearly
carries out the intent and purpose of this Agreement and is in the best interests of the
Employer, provided that such alternative act does not violate Code Section 409A.
7.13 Coordination with Other Benefits. The benefits provided for the Executive or
the Beneficiary under this Agreement are in addition to any other benefits available to the
Executive under any other plan or program for employees of the Employer. This Agreement
shall supplement and shall not supersede, modify, or amend any other such plan or program
except as may otherwise be expressly provided herein.
7.14
Inurement. This Agreement shall be binding upon and shall inure to the benefit
of the Employer, its successor and assigns, and the Executive, the Executive’s successors,
heirs, executors, administrators, and the Beneficiary.
13
7.15 Tax Withholding. The Employer may make such provisions and take such
action as it deems necessary or appropriate for the withholding of any taxes which the
Employer is required by any law or regulation to withhold in connection with any benefits
under the Agreement. The Executive shall be responsible for the payment of all individual
tax liabilities relating to any benefits paid hereunder.
7.16 Aggregation of Agreement. If the Employer offers other non-qualified deferred
compensation plans, this Agreement and those plans shall be treated as a single plan to the
extent required under Code Section 409A.
IN WITNESS WHEREOF, the Executive and a representative of the Employer have
executed this Agreement document as indicated below:
Executive:
Employer:
By:
Its:
14
SALARY CONTINUATION AGREEMENT
Beneficiary Designation
I, ___________________, designate the following as Beneficiary under this Agreement:
Primary
____________________________________________________________________________________
_______%
____________________________________________________________________________________
_______%
Contingent
____________________________________________________________________________________
_______%
____________________________________________________________________________________
_______%
I understand that I may change this beneficiary designation by delivering a new
written designation to the Administrator, which shall be effective only upon receipt by the
Administrator prior to my death. I further understand that the designation will be
automatically revoked if the Beneficiary predeceases me or if I have named my spouse as
Beneficiary and our marriage is subsequently dissolved.
Signature:
_______________________________
Date: _______
SPOUSAL CONSENT (Required only if Administrator requests and someone other than
spouse is named Beneficiary)
I consent to the beneficiary designation above. I also acknowledge that if I am named
Beneficiary and my marriage is subsequently dissolved, the beneficiary designation will
be automatically revoked.
Spouse Name:
_______________________________
Signature:
_______________________________ Date:
Received by the Administrator this ________ day of ___________________, 20__
By:
_________________________________
Title: _________________________________
EXHIBIT 10.5
EXECUTIVE EMPLOYMENT AGREEMENT
Oak Valley Community Bank, a California Banking Corporation, having its principal place
of business at 125 North Third Avenue, Oakdale, California, hereinafter referred to as
“Employer” and Richard A. McCarty, hereinafter referred to as “Executive”, in
consideration of the mutual promises made herein, hereby enter into this agreement
(“Agreement”) as of the date first written below (“Effective Date”):
Term of Employment
1.01. Employer hereby employs Executive and Executive hereby accepts employment
with Employer for a period of three (3) years beginning March 19, 2021 and ending
on March 18, 2024.
Duties and Obligations of Executive
2.01. Executive shall serve as the Senior Executive Vice President, and Chief Operating
Officer of Employer. In this capacity, he shall perform the customary duties of a
COO of a commercial bank including but not limited to:
1.
2.
3.
4.
5.
6.
7.
Act as a member of the following Board Committees: Loan Committee,
Investment Committee and CRA Committee;
Participate in community affairs that are beneficial to the Employer;
Maintain a good relationship with Employer, customers and shareholders;
Maintain a good relationship with regulatory authorities;
Provide leadership in planning and implementing the affairs of the
Employer;
Supervise operations and operate the Bank in a safe and sound manner
consistent with all applicable provisions of the Articles and Bylaws of the
Bank and all laws, rules and regulations;
Such other duties as may, from time to time, be reasonably requested of him
by the President and CEO and the Board of Directors of Employer,
including but not limited to the hiring and firing of employees, subject at all
times to the policies set by Employer’s Board of Directors.
Devotion to Employer’s Business
2.02. Executive shall devote his full time, ability, and attention to the business of
Employer during the term of this contract. Executive shall not engage in any other
business duties or pursuits whatsoever, or directly or indirectly render any services
of a business, commercial, or professional nature to any other person or
organization, whether for compensation or otherwise, without the prior written
1
consent of Employer’s Board of Directors.
Competitive Activities
2.03. During the term of this Agreement, Executive shall not, directly or indirectly, either
as an employee, Employer, consultant, agent, principal, partner, stockholder,
corporate officer, director, or in any other individual or representative capacity,
engage or participate in any business that is in competition in any manner
whatsoever with the business of Employer.
Indemnification
2.04. Employer shall indemnify Executive to the full extent permitted by law from all
liability, cost or expense incurred by or paid by Executive in connection with any
action, suit or proceeding arising out of or related to the performance by Executive
of his duties or responsibilities for Employer.
Disclosure of Information
2.05. Executive shall not, unless required by law, either before or after termination of this
Agreement, disclose to anyone any information relating to Employer or any
financial information, trade and business secrets or know-how germane to the
business and operation of Employer that is not otherwise public. Executive
recognizes and acknowledges that any financial information concerning any of
Employer’s customers, as it may exist from time to time, is strictly confidential and
is a valuable, special and unique asset of Employer’s business. Executive shall not,
either before or after termination of this Agreement, disclose to anyone said
financial information or any part thereof, for any reason or purpose whatsoever.
Surety Bond
2.06. Executive agrees that he will furnish all information and take any other steps
necessary to enable the Employer to obtain or maintain a fidelity bond conditional
on the rendering of a true account by the Executive of all moneys, goods, or other
property which may come into the custody, charge, or possession of the Executive
during the term of his employment. The surety company issuing the bond and the
amount of the bond must be acceptable to the Employer. All premiums on the bond
are to be paid by the Employer. If Executive cannot qualify for a surety bond at
any time during the term of this Agreement, Employer shall have the option to
terminate this Agreement immediately.
Compensation
3.01. As compensation for the services to be performed hereunder, Executive shall
receive a salary of $297,000 for the year subject to usual withholding for taxes,
payable in equal installments not less than twice a month, during the employment
term, subject to annual adjustment as determined by the Board of Directors.
Executive’s performance shall be reviewed and discussed with Executive at least
once each year during the term of this Agreement.
2
Bonus
3.02. Executive shall be entitled to a cash bonus, as outlined in the Employer’s Bonus
Plan, as in effect from time to time.
Benefits
4.01. Executive shall be entitled to standard benefits available to other executive
employees, including but not limited to:
4.01.1. Participation in incentive equity plans as adopted from time to time.
4.01.2. Participation in salary continuation and retirement benefits programs.
4.01.3. Automobile allowance and expense account.
Vacation and PTO
5.01. Executives shall be entitled to vacation and paid time off benefits as generally
available from time to time to the executive employees of the Employer.
Business Expenses
6.01
It is understood and agreed by the parties that the services required of Employer
will require Executive to incur entertainment and other expenses on behalf of
Employer. Employer hereby agrees to reimburse Executive for all reasonable and
necessary expenses incurred or to be incurred by Executive in carrying out his
duties.
Executive shall, however, furnish to Employer adequate records and other
documentary evidence required by Federal and State Statutes and regulations for
the substantiation of each such expenditure as an income tax deduction or other
records as may be required by the Board of Directors.
Termination at the Will of Employer
7.01. One of the primary needs of the Employer is to maintain flexibility in its upper
management. Employer shall therefore have the right, at Employer’s sole
discretion, to terminate the employment of Executive at the will of Employer. In
the event of such termination, provided that such termination is not for Cause, and
except as provided in Section 7.04 below, Executive shall be entitled to severance
pay in the total amount equal to three (3) months of Employee’s current annual
salary, payable in three (3) equal monthly payments from date of such termination.
The severance pay shall cease upon the end of the three (3) months. Such severance
pay is the sole and exclusive remedy for Employee terminated at the will of
Employer.
Termination for Cause
7.02. This Agreement shall terminate immediately upon the occurrence of any one of the
following events:
(1)
The occurrence of circumstances that make it impossible or impractical for
the business of the Employer to be continued.
The death of the Executive.
The loss by Executive of legal capacity.
(2)
(3)
3
(4)
(5)
(6)
(7)
The willful breach of duty by the Executive in the course of his
employment, unless waived by the Employer.
The habitual neglect by the Executive of his employment duties, unless
waived by the Employer.
Executive is disabled for a period in excess of six (6) months unless waived
by the Employer.
The continued unsatisfactory performance of duties by Executive as
determined solely by the Board of Directors of Employer.
In the event of the termination of this Agreement prior to the completion of the term
of employment specified herein for one of the causes enumerated in this paragraph,
no severance pay is due or payable to employee, except for salary and car allowance
to date of termination.
Termination at Will by Executive
7.03 Executive shall have the right at Executive’s sole discretion to terminate his
employment at the will of Executive. In such event, Executive shall give three (3)
months (90 days) notice to Employer of said determination to sever employment.
Effect of Merger, Transfer of Assets, or Dissolution
7.04 A Change in Control means the occurrence of any of the following:
(a)
(b)
any acquisition of the Employer’s stock or any reorganization as defined in
section 368 (a) (1) of the Internal Revenue Code (Code) to which Employer
is a party and in which the Employer is not the surviving corporation or is
not immediately after the reorganization engaged in the active conduct of a
trade or business or in which the stockholders of the Company will own;
less than fifty (50%) of the voting securities of the surviving corporation; or
any sale or conveyance of substantially all of the net assets of the Employer,
unless immediately after such sale Employer is engaged in the active
conduct of a trade or business.
In the event of a Change in Control, this Agreement shall automatically be
terminated, in which case Executive shall be entitled as severance pay under this
Agreement to an amount such that the net amount received by Executive, after
taking into account federal, state and local income taxes payable as a result of such
severance payments equals two (2) years salary based on the compensation in effect
under this Agreement plus the amount equal to the sum of the prior two (2) years
bonus (the “Severance Payment”). Notwithstanding the foregoing sentence, if the
surviving, continuing, successor, or purchasing corporation, as the case may be (the
“Acquiring Corporation”), enters into a new employment agreement with
Executive (the “Replacement Agreement”) on terms acceptable to Executive,
which acceptance shall not be unreasonable withheld, this Agreement shall be
terminated but no Severance Payment shall be due to Executive. Unless a
Replacement Agreement is entered into on or before the Change in Control,
4
Employer shall pay the Severance Payment to Executive in a single lump sum
payment on or before any such Change in Control.
General Provisions
Notices
8.01. Any notices to be given hereunder by either party to the other shall be in writing
and may be transmitted by personal delivery or by mail, registered or certified,
postage prepaid with return receipt requested. Mailed notices shall be addressed to
the parties at the addresses listed as follows:
Employer:
125 N Third Ave., Oakdale, CA 95361
Executive:
P.O. Box 279, Clements, CA 95227
but each party may change that address by written notice in accordance with this
section. Notices delivered personally shall be deemed communicated as of the date
of actual receipt; mailed notices shall be deemed communicated as of the date of
mailing.
Arbitration
8.02.
(a)
(b)
(c)
Entire Agreement
involving
the
Any controversy between Employer and Executive
construction or application of any of the terms, provisions, or conditions of
this Agreement shall on the written request of either party served on the
other be submitted to arbitration. Arbitration shall comply with and be
governed by the provisions of the California Arbitration Act and shall be
governed by California law.
Employer and Executive shall each appoint one person to hear and
determine the dispute. If the two persons so appointed are unable to agree,
then those persons shall select a third impartial arbitrator whose decision
shall be final and conclusive upon both parties.
The cost of arbitration shall be borne by the losing party or in such
proportions as the arbitrators decide.
8.03. This Agreement supersedes any and all other agreements, either oral or in writing,
between the parties hereto with respect to the employment of Executive by
Employer and contains all of the covenants and agreements between the parties
with respect to that employment in any manner whatsoever. Each party to this
Agreement acknowledges that no other representation, inducements, promises, or
agreements, orally or otherwise, have been made by any party, or anyone acting on
behalf of any party, which are not embodied herein, and that no other agreement,
statement, or promise not contained in this Agreement shall be valid or binding on
either party.
5
Modifications
8.04. Any modification of this Agreement will be effective only if it is in writing and
signed by both parties.
Effect of Waiver
8.05. The failure of either party to insist on strict compliance with any of the terms,
covenants, or conditions of this Agreement by the other party will not be deemed a
waiver of that term, covenant, or condition, nor shall any waiver or relinquishment
of any right or power at any one time or times be deemed a waiver or relinquishment
of that right or power for all or any other times.
Partial Invalidity
8.06.
If any provision in this Agreement is held by a court of competent jurisdiction to
be invalid, void, or unenforceable, the remaining provisions shall nevertheless
continue in full force without being impaired or invalidated in any way.
Law Governing Agreement
8.07. This Agreement shall be governed by and construed in accordance with the laws of
the State of California.
Sums Due Deceased Executive
8.08.
If Executive dies prior to the expiration of the term of his employment, any sums
that may be due him from Employer under this Agreement as of the date of death
shall be paid
to Executive’s executors, administrators, heirs, personal
representatives, successors, and assigns.
This Amended Employment Agreement is effective as of March 19, 2021.
OAK VALLEY COMMUNITY BANK
By: /s/ Chris Courtney _
Chris Courtney
Title: President & CEO
EXECUTIVE
/s/ Richard A. McCarty _
Richard A. McCarty
Date: March 19, 2021 _
6
EXHIBIT 23.1
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We consent to the incorporation by reference in the Registration Statements (No. 333-158201 and 333-225950) on Form S-8 of Oak
Valley Bancorp of our reports dated March 31, 2021, relating to the consolidated financial statements and the effectiveness of internal
control over financial reporting of Oak Valley Bancorp, appearing in this Annual Report on Form 10-K of Oak Valley Bancorp for the
year ended December 31, 2020.
/s/ RSM US LLP
San Francisco, CA
March 31, 2021
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 31, 2021
/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 31, 2021
/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, 2020, 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 31, 2021
Dated: March 31, 2021
/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.