Rooted in Community
Growing Together
OAK VALLEY BANCORP | ANNUAL REPORT 2024
Year Ended December 31,
2024
2023
2022
2021
2020
Interest income
$
82,894
$
80,066
$
$61,195
$
49,806
$
46,110
Interest expense
12,860
4,864
1,119
971
1,153
Net interest income
70,034
75,802
60,076
48,835
44,957
(Reversal of) provision for credit losses
(1,620)
970
(1,350)
(635)
2,165
Non-interest income
6,555
6,631
5,571
5,426
4,815
Non-interest expense
46,017
41,157
37,308
33,219
29,864
Net income before income taxes
32,192
40,306
29,689
21,677
17,743
Provision for income taxes
7,244
9,458
6,787
5,340
4,056
Net income
$
24,948
$
30,848
$
22,902
$
16,337
$
13,687
Net earnings per share (diluted)
$
3.02
$
3.75
$
2.79
$
2.00
$
1.68
Cash dividends paid per share
$
0.45
$
0.32
$
0.30
$
0.29
$
0.28
Cash dividends paid
$
3,747
$
2,646
$
2,474
$
2,385
$
2,299
Weighted average shares
8,258,857
8,230,892
8,204,769
8,178,740
8,138,528
outstanding (diluted)
Year End Balance Sheet
Total assets
$ 1,900,604
$ 1,842,422
$ 1,968,346
$ 1,964,478
$ 1,511,478
Total earning assets
1,815,256
1,758,213
1,892,873
1,855,145
1,420,229
Gross loans
1,106,535
1,016,579
915,758
860,037
1,013,115
Cash and cash equivalents
168,751
216,568
429,633
778,267
226,656
Investment securities
529,665
521,210
530,428
266,280
220,589
Non-interest bearing deposits
$
583,261
$
616,669
$
705,488
$
769,616
$
572,927
Interest bearing deposits
1,112,429
1,033,865
1,108,809
1,037,350
794,882
Total deposits
1,695,690
1,650,534
1,814,297
1,806,966
1,367,809
Total stockholders’ equity
183,436
166,092
126,626
142,612
129,694
(In thousands except for per share amounts)
SELECTED FINANCIAL DATA - FIVE-YEAR SUMMARY
DEAR CUSTOMERS,
SHAREHOLDERS AND FRIENDS:
As we reflect on 2024, we are proud
to share another year of remarkable
achievements and continued growth.
Our commitment to exceptional
service and deep-rooted community
engagement remains at the forefront of
our operations, driving our success and
fostering lasting relationships with our
clients. By actively listening and adapting
to our clients’ evolving needs, we’ve
cultivated a collaborative, personalized
approach that empowers individuals and
businesses to reach their financial goals
with confidence and ease.
For the year ended December 31, 2024,
net income totaled $24.9 million, or
$3.02 per diluted share, representing
a decrease of 19.1% compared to
$30.8 million or $3.75 per diluted
share for 2023. The decrease to net
income compared to the prior year is
primarily due to an increase in deposit
interest expense and general operating
expenses. While Oak Valley has a solid
core deposit base and an exceptionally
low cost of funds relative to peer, we
are not entirely immune to deposit rate
pressures. The average cost of funds
increased to 0.78% in 2024, compared
to 0.28% in 2023.
Total assets were $1.90 billion for the
year ended December 31, 2024, an
increase of $58.2 million, or 3.2%, over
the prior year. Gross loans grew to $1.11
billion at year-end, an increase of $90.0
million, or 8.8%, over the prior year. Total
deposits were $1.70 billion at year-end,
an increase of $45.2 million, or 2.7%,
over the prior year. Our liquidity position
remains strong as evidenced by $168.8
million in cash and cash equivalents
balances at December 31, 2024.
We are honored to recognize our teams
for their outstanding performance and
for earning a few notable accolades
in 2024. During the year, we assisted
community partners in applying for
and securing over $2.1 million in FHLB
Grants. In the spring,
the bank was named
one of the Best
Places to Work in
the Central Valley. In
the fall, our lending
and credit teams
were recognized
by Success
Capital – Certified
Development
Corporation as the Most Active Bank for
SBA 504 Lending in their region.
We remained committed to elevating
our digital customer experience.
Building on the previous year’s website
and online banking enhancements,
we upgraded our mobile banking
platforms for both retail and commercial
clients. In addition, we launched our
Financial Literacy and Wellness Center,
a dynamic online resource providing
a comprehensive suite of interactive
tools, calculators, and coaching content
designed to help our community
members manage their finances and
optimize their financial health.
Perhaps the biggest initiative of 2024
was the streamlining of
our deposit products.
By reintroducing free
checking and free
business checking
products and
lowering the barriers
to opening other
checking and savings accounts, we have
created a more accessible, customer-
friendly banking experience. This update
was designed to ensure every client can
select accounts that best suit their needs
and financial goals.
In 2025, the bank
announced plans to
expand our footprint with
a new branch in Lodi. This
expansion represents
more than just growth—
it’s an opportunity to
welcome new clients and
offer added convenience
to those we already serve.
We look forward to introducing our
unique brand of premier service to even
more individuals and businesses.
Oak Valley Community Bank is
committed to providing the financial
guidance and resources to help clients
confidently navigate both new heights
and moments of uncertainty. We believe
in the strength of community and the
resilience of local businesses. We take
great pride in knowing that our branches
are staffed with dedicated bankers who
are genuinely invested in helping you
and your business thrive.
Thank you for your business, support,
and investment. We appreciate the
opportunity to serve our clients and
assist them in achieving their goals. By
working together, we aim to align our
objectives with those of our customers
and flourish together.
Sincerely,
Christopher M. Courtney
Chief Executive Officer
We believe in
the strength of
community and
the resilience of
local businesses.
Allison C. Lafferty
Chairman of the Board
Daniel L. Leonard
Vice Chairman of the Board
Compensation Committee
Chair
Donald L. Barton
Investment Committee Chair
Christopher M. Courtney
Chief Executive Officer
Lynn R. Dickerson
CRA Committee Chair
James L. Gilbert
Nominating Committee Chair
Thomas A. Haidlen
H. Randolph Holder
Loan Committee Chair
Richard A. McCarty
Janet S. Pelton
Audit Committee Chair
Gary J. Strong
Danny L. Titus
Terrance P. Withrow
DIRECTORS EMERITUS
Michael Q. Jones
Ronald C. Martin
Richard J. Vaughan
IN MEMORIAM
Barry M. Jett
Arne J. Knudsen
Romain J. Schonhoff
Roger M. Schrimp
BANK OFFICERS
BRANCHES
DIRECTORS
INDEPENDENT
AUDITORS
RSM US LLP
13155 Noel Road, Suite 2200
Dallas, TX 75240
LEGAL COUNSEL
Matteo G. Daste
Mayer Brown
575 Market St, Ste 2500
San Francisco, CA 94105
CORRESPONDENT
BANK
Pacific Coast Bankers’ Bank
340 Pine St, Ste 401
San Francisco, CA 94104
MARKET MAKER
John Cavender
Raymond James & Associates
415.616.8935
OAKDALE
209.848.BANK (2265)
SONORA-DOWNTOWN
209.396.7720
SONORA-EAST
209.532.7100
MODESTO-12TH & I
209.549.BANK (2265)
MODESTO-DALE
209.758.8000
MODESTO-MCHENRY
209.579.3360
TURLOCK
209.633.2850
PATTERSON
209.892.5757
STOCKTON
209.320.7850
RIPON
209.599.9430
ESCALON
209.821.3070
MANTECA
209.249.7360
TRACY
209.834.3340
SACRAMENTO
916.260.5800
ROSEVILLE
916.306.8336
LODI
Opening 2025
www.ovcb.com
OAK VALLEY
COMMUNITY BANK
EASTERN SIERRA
COMMUNITY BANK
BRIDGEPORT
Interactive Teller
760.932.7926
MAMMOTH LAKES
760.924.0990
BISHOP
760.874.BANK (2265)
www.escbank.com
Christopher M. Courtney
Chief Executive Officer
Richard A. McCarty
President and
Chief Operating Officer
Kim Booke
EVP Chief Risk Officer
Julie DeHart
EVP Retail Banking
Jeff Gall
EVP Chief Financial Officer
Corporate Secretary
Cathy Ghan
EVP Commercial Real
Estate
Theresa Roland
EVP Chief Human
Resources Officer
Mike Rodrigues
EVP Chief Credit Officer
Russell Stahl
EVP Chief Information
Officer
Gary Stephens
EVP Commercial Banking
Shariel Badal
SVP Credit Administration
Peter Brown
SVP Commercial Banking
Lynette Fletcher
SVP Commercial Banking
Jeff Hushaw
SVP Commercial Banking
Matthew Morgado
SVP Commercial Banking
Bill Nunes
SVP Marketing
Aaron Page
SVP Credit Administrator
Michael Petrucelli
SVP Commercial Banking
Linda Spinelli
SVP Central Operations
OFFICERS
Manteca
Escalon
Tracy
Stockton
Sonora
Turlock
Patterson
Modesto
Oakdale
Bridgeport
Mammoth
Lakes
Fresno
Bishop
Sacramento
Ripon
San
Francisco
Lodi
Roseville
TRANSFER AGENT
AND REGISTRAR
Computershare
250 Royall St
Canton, MA 02021
800.962.4284
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, 2024
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
26-2326676
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)
125 North Third Avenue
Oakdale, California
95361
(Address of principal executive offices)
(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
Trading Symbol
Name of each exchange on which registered
Common Stock
OVLY
The Nasdaq Stock Market, LLC
Securities registered pursuant to Section 12(g) of the Act:
None
(Title of class)
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act. 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.
If securities are registered pursuant to Section 12(b) of the Exchange Act, indicate by check mark whether the financial statements of the registrant included in the
filing reflect the correction of an error to previously issued financial statements. ☐
Indicate by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive-based compensation received by any of
the registrant’s executive officers during the relevant recovery period pursuant to §240.10D-1(b). ☐
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, 2024, 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 $24.97 per share of the registrant’s common stock as reported by the Nasdaq, was
approximately $173 million. As of December 31, 2024, there were 8,357,211 shares of common stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
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
2024 fiscal year end and are incorporated by reference into Part III of this report.
2
TABLE OF CONTENTS
PART I
ITEM 1 -
BUSINESS
4
ITEM 1A -
RISK FACTORS
22
ITEM 1B -
UNRESOLVED STAFF COMMENTS
35
ITEM 1C -
CYBERSECURITY
36
ITEM 2 -
PROPERTIES
37
ITEM 3 -
LEGAL PROCEEDINGS
37
ITEM 4 -
MINE SAFETY DISCLOSURES
37
PART II
ITEM 5 -
MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES
38
ITEM 6 -
[RESERVED]
38
ITEM 7 -
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
39
ITEM 7A -
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
59
ITEM 8 -
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
61
ITEM 9 -
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
61
ITEM 9A -
CONTROLS AND PROCEDURES
61
ITEM 9B -
OTHER INFORMATION
62
ITEM 9C -
DISCLOSURE REGARDING FOREIGN JURISDICTIONS THAT PREVENT INSPECTIONS
62
PART III
ITEM 10 -
DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
63
ITEM 11 -
EXECUTIVE COMPENSATION
63
ITEM 12 -
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
STOCKHOLDER MATTERS
64
ITEM 13 -
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
64
ITEM 14 -
PRINCIPAL ACCOUNTANT FEES AND SERVICES
64
PART IV
ITEM 15 -
EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
64
ITEM 16 -
FORM 10-K SUMMARY
65
SIGNATURES
66
3
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”).
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,” “forecast,”
“continue” “anticipate,” “target,” “intend,” “could,” “would,” “project,” “plan,” “goal,” “outlook,” “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 the
impact on our business, results of operations and financial condition. You should not place undue reliance on any forward-looking
statement and should consider the following risks and uncertainties listed and those more fully described in Part I, Item 1A. “Risk
Factors” and Part II, Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of this Annual
Report. Factors that could cause actual results to differ from results discussed in forward-looking statements include, but are not
limited to: the credit exposure of certain loan products and other components of our business that could be impacted by the changing
economic and business conditions; changes in monetary, fiscal or tax policy to address changing economic conditions including
interest rate policies of the Federal Reserve Board, any of which could cause us to incur additional loan losses and adversely affect our
results of operations in the future; economic conditions (both generally and in the markets where the Company operates) including
unemployment levels, energy prices, inflation, supply chain issues, a decline in housing prices or collateral values, trade policies and
tensions (including increased tariffs), geopolitical instability and the risk of a recession or slowed economic growth in the United
States economy; the continuing impact of the changing economic conditions on our employees and customers, including consumer
income, creditworthiness, confidence, spending and savings; the success of our efforts to mitigate the impact of the changing
economic conditions; competition from other providers of financial services offered by the Company and our response to competitive
pressures; changes in government regulation and legislation; the impact of any failure by the U.S. government to increase the debt
ceiling or any federal government shutdown; changes in interest rates and interest rate fluctuations; volatility in the capital markets;
the amount and rate of deposit growth and changes in deposit costs; material unforeseen changes in the financial stability and liquidity
of the Company’s credit customers; risks associated with concentrations in real estate related loans; our ability to maintain adequate
capital or liquidity levels or to comply with revised capital or liquidity requirements; changes in accounting standards and
interpretations; changes in the level and direction of loan delinquencies and write-offs and changes in estimates of the adequacy of the
allowance for credit losses; the soundness of other financial institutions, including disruptions, instability and failures in the banking
industry; physical or transition risks related to climate change; cybersecurity risks and heightened legislative and regulatory focus on
cybersecurity and data privacy; and other risks as may be detailed from time to time in the Company’s filings with the Securities and
Exchange Commission, all of which are difficult to predict and which may be beyond the control of the Company.
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. Forward-looking
statements speak only as of the date they are made, and we do not undertake to update forward-looking statements to reflect
circumstances or events that occur after the date the forward-looking statements are made, whether as a result of new information,
future developments or otherwise, except as may be 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.
4
PART I
ITEM 1. BUSINESS OF OAK VALLEY BANCORP
Overview of the Business
Oak Valley Bancorp. Oak Valley Bancorp (the “Company”) serves as the parent bank holding company of Oak Valley
Community Bank (the “Bank”), a California state-chartered bank. The Bank and the Company may be generally referred to as “we”,
“us” or “our”). The Company was incorporated under the laws of the State of California on May 31, 1990, and began operations in
Oakdale, California on May 28, 1991.
The Company’s 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 the doors of our main Oakdale branch in 1991, our network of branches have been expanded
geographically. As of December 31, 2024, we maintained eighteen full-service branch offices (in addition to our corporate
headquarters) located in the cities of Oakdale, Sonora, Modesto, Bridgeport, Mammoth Lakes, Bishop, Escalon, Patterson, Turlock,
Ripon, Stockton, Manteca, Tracy, Sacramento, and Roseville in California. 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.
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 23,000 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 99% of our loans and 90% of our deposits are generated from the Central Valley. The
5
Central Valley area includes Stanislaus, San Joaquin, Tuolumne, Sacramento, and Placer counties and has a total population of over 5
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 are recommended for approval by the Senior Loan Committee, made up of our Board of Directors and
designated executive officers of the bank, by joint management 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 certain
department managers and loan officers. Our highest management lending authority, known as Joint Authority, includes all amounts
above the individual officer loan authority limits 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 from two of the following
officers: Chief Executive Officer, President, Chief Credit Officer, Senior Lending Officer or Credit Administrator.
As of December 31, 2024, the Bank’s authorized legal lending limits were $32.2 million for unsecured loans plus an additional
$21.5 million for specific secured loans. Legal lending limits are calculated in conformance with California law, which prohibits a
bank from lending to any one individual or entity or its related interests an aggregate amount which exceeds 15% of primary capital
plus the allowance for credit losses on an unsecured basis, plus an additional 10% on a secured basis. The Bank’s primary capital plus
allowance for credit losses as of December 31, 2024 totaled $214.9 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. As of December 31, 2024, consumer and commercial real estate loans constituted 90% of our loan
portfolio, of which 97% 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.
6
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.
Mini-perm loans finance the purchase and/or ownership of commercial properties, including owner-occupied and income-
producing properties. We also offer mini-perm loans as take-out financing with our construction loans. Mini-perm 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, 2024, the aggregate loan-to-value of the entire commercial real estate portfolio was 45.3%, based on the
most recent appraisals as of the time of origination or renewal. Historical data suggests that the Bank continues to maintain strong
loan-to-value which has served as a cushion against precipitous reductions in real estate values during economic downturns. Non-
owner occupied commercial real estate comprises 66.5% of the Bank’s total commercial real estate commitments, as of December 31,
2024. The loan-to-value on the non-owner occupied CRE segment was 46.5%, as of December 31, 2024. The highest concentration
by product type is CRE Retail, which comprised 27.1% of total CRE loan commitments, as of December 31, 2024.
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, 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.
7
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, 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 (“SBA”) lending, forms an important part of
our business. Our SBA lending service places an emphasis on minority-owned businesses. Our SBA market area includes the
geographic areas encompassed by our full-service banking offices in the California Central Valley and in the Eastern Sierra. As an
SBA lender, we enable borrowers to obtain SBA loans in order to acquire new businesses, expand existing businesses, and acquire
locations in which to do business.
Consumer Loans. Consumer loans include personal loans, auto loans, home improvement loans, home mortgage loans,
revolving lines of credit and other loans typically made by banks to individual borrowers. We provide consumer loan products in an
effort to diversify our product line.
Our consumer loan portfolio is subject to certain risks, including:
• amount of credit offered to consumers in the market,
• interest rate increases, and
• consumer bankruptcy laws which allow consumers to discharge certain debts.
We attempt to reduce the exposure to such risks through the direct approval of all consumer loans by:
• reviewing each loan request and renewal individually,
• using a dual signature system of approval,
• strictly adhering to written credit policies, and
• performing external independent credit review.
8
Deposit Activities
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 (“CDs”), regular savings accounts, money market accounts, checking accounts, savings
accounts, health savings accounts and individual retirement accounts. 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.
Other Sources of Funds
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, 2024, we owned $5,531,000 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. As of December 31, 2024, our borrowing limit with the Federal Home Loan Bank was
approximately $364 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 online 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, 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.
9
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, Sacramento, Placer, 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, U.S. Bank, BMO Harris Bank and Citibank. 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, 2024, our primary service areas contained 279 banking offices, with approximately $88.2 billion in total
deposits. As of June 30, 2024, we had total deposits of approximately $1.6 billion, which represented approximately 1.9% 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 134
total branches and deposits averaged approximately $481 million per office as of June 30, 2024 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 online 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. 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 with
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.
10
The Financial Modernization Act, which has made it possible for full affiliations to occur between banks and securities firms,
insurance companies, and other financial companies, is also expected to intensify competitive conditions.
Technological innovations have also resulted in increased competition in the financial services industry. Such innovations have,
for example, made it possible for non-depository institutions to offer customers automated transfer payment services that were
previously considered traditional banking products. In addition, many customers now expect a choice of several delivery systems and
channels, including telephone, mail, home computer, mobile devices, ATMs, self-service branches and/or in-store branches.
Business Concentration. No individual or single group of related accounts is considered material in relation to our total assets
or deposits, or in relation to our overall business. However, approximately 90% of our loan portfolio held for investment as of
December 31, 2024 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, Placer, 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, 2024, we had 231 employees (199 full-time employees and 32 part-time employees). None of our employees
are currently represented by a union or covered by a collective bargaining agreement. We consider our relations with our employees
to be good.
Human Capital Management
We believe that our human capital is a key asset and a competitive advantage for our success as a community bank. We invest in
our human capital by attracting, developing, and retaining talented and diverse employees who share our vision, mission, and values.
We foster a culture of premier service, teamwork, performance, community involvement, and integrity, and we reward our employees
for their contributions and achievements. We also provide our employees with opportunities for professional growth, learning, and
development, as well as competitive compensation and benefits. We are committed to maintaining a safe, healthy, and inclusive work
environment that respects and values the diverse backgrounds of our employees and customers. We comply with all applicable laws
and regulations regarding labor and employment practices, and we support the principles of equal opportunity, nondiscrimination, and
fair labor standards.
Economic Conditions and Legislative and Regulatory Developments
As 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 Biden 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.
11
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 (the “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 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 U.S.
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 by 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 taking
enforcement actions against, and entering into cease and desist orders, consent orders and memoranda of understanding with, financial
institutions, that would require 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.
12
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, 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 required capital levels.
•
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, 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 Board to be financial in nature, incidental to financial activities, or
complementary to a financial activity. Laws and regulations governing state-chartered banks contain similar provisions
concerning acquisitions and activities.
•
The Community Reinvestment Act (the “CRA”). The CRA requires that banks help meet the credit needs in their
communities, including the availability of credit to low and moderate income individuals. If the Company or the Bank fails
to adequately serve their communities, penalties may be imposed, including denials of applications for branches, to add
subsidiaries and affiliates, or to merge with or purchase other financial institutions.
•
The Bank Secrecy Act, the USA Patriot Act, and other anti-money laundering laws. These laws and regulations require
financial institutions to assist U.S. government agencies in detecting and preventing money laundering and other illegal acts
by maintaining policies, procedures and controls designed to detect and report money laundering, terrorist financing, and
other suspicious activity.
•
Limitations on the amount of loans to one borrower and its affiliates and to executive officers and directors.
•
Limitations on transactions with affiliates.
•
Restrictions on the nature and amount of any investments in, and ability to underwrite certain securities.
•
Requirements for opening of branches intra- and interstate.
13
•
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:
•
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 as 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
significantly restricts certain activities by covered bank holding companies, including restrictions on proprietary trading and private
equity investing.
14
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, 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, 2024 or 2023 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. The U.S. regulatory capital rules implementing the Basel III regulatory capital framework provide
for a minimum common equity Tier 1 ratio (4.5% of risk-weighted assets), a 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) as
well as an additional capital conservation buffer of 2.5% of risk weighted assets over each of the required capital ratios , which must
be met to avoid limitations on the ability of the Bank to pay dividends, repurchase shares or pay discretionary bonuses. The additional
“countercyclical capital buffer” is also required for larger and more complex institutions. The 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.
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
15
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.
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.
The Basel IV framework was introduced in 2017 and focuses on the denominator of the capital ratio or the measurement of a
bank’s risk positions, especially in credit, market, counterparty and operational risk for banks with over $100 billion in assets and has
market risk provisions for banks with significant trading activity. The U.S. targeted implementation of Basel IV to begin on July 1,
2025, subject to a three-year transition period with full compliance expected by July 1, 2028. The public comment period concluded in
January 2024 for the proposed rules set forth by the U.S. banking regulators, with comment periods on ancillary rules and documentation
ongoing throughout 2024, making it unlikely that any rule will be finalized or effective by July 1, 2025. In addition, in light of the
change in the presidential administration, it is unclear whether the banking agencies will pursue the proposal or issue a revised proposal
for comment.
Although, Basel IV seeks to regulate banks with over $100 billion in assets and likely will not be applicable to the Company once
implemented, proposed rules which would affect banks below $100 billion in assets have been proposed in the past and the final form
of the rules is still undetermined. Its implementation may also cause changes in the financial markets which may affect the Company.1
Dividends
The payment of cash dividends by the Bank to the Company is subject to restrictions set forth in the Financial Code. Prior to any
distribution from the Bank to the Company, a calculation is made to ensure compliance with the provisions of the Financial 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 Financial Code, advance approval from the 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 2025.
1 https://www.fdic.gov/news/speeches/2023/spjul2723b.html. https://www.federalreserve.gov/aboutthefed/boardmeetings/fact-sheet-
basel-20230727.pdf.
16
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.
Compensation
Federal banking agencies have issued joint guidance on incentive compensation designed to ensure that the incentive compensation
policies of banking organizations such as the Company are consistent with the safety and soundness of the organization and its
subsidiary banks. In 2016, as required by the Dodd-Frank Act, the federal bank regulatory agencies and the SEC proposed revised
rules on incentive-based payment arrangements at specified regulated entities having at least $1 billion of total assets. These
guidelines prohibit excessive compensation as an unsafe and unsound practice and describe compensation as excessive when the
amounts paid are unreasonable or disproportionate to the services performed by an executive officer, employee, director, or principal
stockholder.
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.
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 January of 2023 and we received an overall “Outstanding” CRA Assessment Rating.
On May 5, 2022, the FDIC, Office of the Comptroller of the Currency (“OCC”) and the Federal Reserve issued a joint notice of
proposed rulemaking to strengthen and modernize the CRA regulatory framework. On October 24, 2023, the federal bank regulatory
agencies jointly issued a final rule to modernize CRA regulations consistent with the following key goals: (1) to encourage banks to
expand access to credit, investment, and banking services in low to moderate income communities; (2) to adapt to changes in the
banking industry, including internet and mobile banking and the growth of non-branch delivery systems; (3) to provide greater clarity
and consistency in the application of the CRA regulations, including adoption of a new metrics-based approach to evaluating bank
retail lending and community development financing; and (4) to tailor CRA evaluations and data collection to bank size and type,
recognizing differences in bank size and business models may impact CRA evaluations and qualifying activities. Most of the final
CRA rule’s requirements were to become be applicable beginning January 1, 2026, with certain requirements, including the data
reporting requirements, applicable as of January 1, 2027. However, on March 29, 2024, a federal court enjoined the enforcement of
17
the new CRA regulations. As a result, the previous CRA regulations continue to govern and the effective date will be extended each
day the injunction remains in place. We will continue to monitor for updates related to the CRA regulatory framework and are
currently evaluating the impact of the modified CRA regulations, but do not anticipate any resulting material impact to its operations
or compliance objectives.
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 USA Patriot Act, 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.
On September 29, 2022, the Financial Crimes Enforcement Network (“FinCEN”) issued a final rule establishing a beneficial
ownership information reporting requirement under the Corporate Transparency Act (“CTA”), which was passed as part of the Anti-
Money Laundering Act of 2020. The rule, which became effective January 1, 2024, requires most entities created in or registered to do
business in the United States, subject to certain exceptions, to report information about their beneficial owners to FinCEN. The
compliance date was January 1, 2025, but the beneficial ownership information reporting requirement under the CTA is currently
subject to ongoing litigation.
On March 2, 2025, the Treasury Department announced it will not enforce any penalties or fines associated with the beneficial
ownership information reporting rule under the existing regulatory deadlines, and further not enforce any penalties or fines against
U.S. citizens or domestic reporting companies or their beneficial owners after the rule changes take effect. Treasury Department
intends to further issue a proposed rulemaking that will narrow the scope of the rule for foreign reporting companies only.
In 2024, federal regulators, including the Federal Reserve and the OCC, proposed amendments to update the requirements to
establish, implement and maintain effective, risk-based and reasonably designed anti-money laundering programs, including the
identification, evaluation and documentation of money laundering risks. We continue to monitor for updates related to the CTA and
Anti-Money Laundering Act of 2020.
Privacy, Data Security and Cybersecurity
We are, or may become, subject to a variety of continuously evolving and developing laws and regulations in the United States at the
federal, state and local level regarding privacy, data protection and data security, including those related to the collection, storage,
handling, use, disclosure, transfer, security and other processing of personal information. For example, 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 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. For example, the California Consumer Protection
Act of 2018 (the “CCPA”), which became effective on January 1, 2020, applies to for-profit businesses that conduct business in
California and meet certain revenue or data collection thresholds. The CCPA gives California residents the right to, among other
things, request disclosure of information collected about them and whether that information has been sold to others, request deletion of
personal information (subject to certain exceptions), opt out of the sale of their personal information, and not be discriminated against
for exercising these rights. In 2020, the California Privacy Rights Act (“CPRA”) was approved and became effective on January 1,
2023. The CPRA amended the CCPA by adding additional consumer privacy rights and obligations for businesses. It also established
the California Privacy Protection Agency and tasked it with responsibilities including implementing and enforcing the law. In
addition, the CPRA significantly modifies the CCPA, including by expanding California residents’ rights with respect to certain
sensitive personal information. We will continue to monitor developments related to the CPRA. The full impact of the CPRA on our
business is yet to be determined.
18
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.
Cybersecurity also remains an area of significant regulatory focus, and state regulators have also been increasingly active in
implementing cybersecurity standards and regulations. In November 2021, the Federal Reserve, OCC, and FDIC issued a final rule
that, among other things, requires all banking organizations in the United States to notify their primary federal regulators of certain
material computer-security incidents as soon as possible and no later than 36 hours after determining that the incident has occurred.
The enactment of the Cyber Incident Reporting for Critical Infrastructure Act (the “CIRCIA”) in 2022, once rulemaking is
complete, will require, among other things, certain companies to report significant cyber incidents to the Cybersecurity and
Infrastructure Agency (the “CISA”) within 72 hours from the time the company reasonably believes the incident occurred (and within
24 hours of making a ransom payment as a result of a ransomware attack). On April 4, 2024, the CISA proposed a rule under the
CIRCIA that would clarify the scope of cyber incidents to be reported and would further define covered entities subject to CIRCIA to
expressly include companies in the financial services industry that are required to report cyber incidents to their primary federal
regulators.
The SEC recently issued a Cybersecurity Risk Management, Strategy, Governance, and Incident Disclosure rule, which became
effective in December of 2023, and which requires that a registered company file a Form 8-K to disclose the occurrence of a material
cybersecurity incident within four business days of determining that such an incident has occurred. The rule also requires that a
registered company include certain information regarding its information security program as part of its annual Form 10-K filing,
including a discussion of its processes for assessing, identifying, and managing material risks from cybersecurity threats and a
description of oversight and management of cybersecurity threats at the board and management levels.
Recently, several states have adopted regulations requiring certain financial institutions to implement cybersecurity programs and
providing detailed requirements with respect to these programs, including data encryption requirements. Many states have also
recently implemented or modified their data breach notification and data privacy requirements. We expect this trend of state-level
activity in those areas to continue and are continually monitoring developments, particularly if the CFPB is no longer enforcing
federal financial institution consumer privacy laws and regulations since it was instructed to cease all supervision, investigations,
enforcement, rulemaking, and stakeholder activities in February 2025. We continue to monitor these developments and integrate
applicable requirements into our operation and compliance frameworks.
In February 2024, the National Institute of Standards and Technology (“NISTU”) released Cybersecurity Framework 2.0, expanding
its original guidance to emphasize cybersecurity governance and supply chain risk management. While we are not mandated to adopt
this updated framework, our cybersecurity policies, governance structures, vendor risk management practices, and employee training
programs align substantively with the principles of the NIST Cybersecurity Framework 2.0. We continue to leverage this framework
as a guiding best practice to enhance our cybersecurity posture and manage risks effectively.
Mergers and Acquisitions
On September 17, 2024, the Board of Directors of the FDIC approved a final Statement of Policy on Bank Merger Transactions
(“FDIC Statement of Policy”), and the OCC approved a final rule updating its regulations for business combinations involving
national banks and federal savings associations (“OCC Final Rule”). The OCC Final Rule also includes a policy statement mirroring
the FDIC Statement of Policy regarding the Bank Merger Act statutory factors, but also describes the general principles the OCC
applies when reviewing bank merger applications (“OCC Statement of Policy”).
In September 2024, the Department of Justice (the “DOJ”) withdrew its 1995 Bank Merger Guidelines and issued the 2024 Banking
Addendum to 2023 Merger Guidelines (the “2024 Banking Addendum”). The DOJ clarified that it will assess competition
considerations in connection with bank and bank holding company mergers using its 2023 Merger Guidelines, which is the general
merger review framework the DOJ now uses to evaluate transactions in all segments of the economy, and 2024 Banking Addendum.
The 2024 Banking Addendum provides guidance on how the DOJ will assess competition in the context of bank and bank holding
company mergers. An analysis under the 2023 Merger Guidelines and 2024 Banking Addendum may include consideration of theories
of harm and relevant markets not considered under the 1995 Bank Merger Guidelines, which focused primarily on concentrations of
deposits and branches.
19
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
•
rules and regulations of the various federal agencies charged with the responsibility of implementing such federal laws.
On March 5, 2024, the Consumer Financial Protection Bureau (CFPB) issued a final rule amending provisions in Regulation Z
that govern credit card late fee charges, significantly lowering the safe harbor amount for past due fees that large credit card issuers.
The final rule is currently stayed as a result of ongoing litigation. In addition, in October 2024, the CFPB issued a final rule that will
require certain financial institutions to share certain data on certain consumer financial products and services upon request of the
consumer that could significantly impact our costs and our ability to protect and secure such information. In February 2025, the Acting
Director of the CFPB instructed staff to cease supervision and examination activities, pause pending investigation and enforcement
actions, and not approve or issue any proposed or final rules. We continue to monitor CFPB development and the implementation of
new rules.
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, 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 Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism
Act of 2001, as amended (the “USA 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.
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.
20
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
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.
Climate-related Developments
Climate change and the risks it may pose to financial institutions is an area of increased focus by the federal and state legislative bodies
and regulators, including the federal banking agencies. In the future, new regulations or guidance may be issued, or other regulatory or
supervisory actions may be taken, in this area by the federal banking agencies or other regulatory agencies, or new statutory requirements
may be adopted. For example, the federal banking agencies have issued principles for climate-related financial risk management, which
are designed to support the identification and management of climate-related financial risks at regulated institutions with more than
$100 billion in total consolidated assets. On March 6, 2024, the SEC adopted new rules that require public companies to disclose
substantial information about the material impacts of climate-related risks on their business, financial condition, and governance. These
new rules require disclosure of a range of climate-related matters. The new rules are currently being challenged in the Eighth Circuit
Court of Appeals. The current SEC Chairman instructed staff to request that the court not schedule oral arguments, suggesting that the
SEC may abandon its defense of the new rules.
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 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
21
reasonably practicable after it electronically files those documents with, or otherwise furnishes them to, the SEC. The SEC maintains a
website, http://www.sec.gov., that contains the reports, proxy and information statements and other information we file with them. The
Company’s website also contains its Committee Charters, Code of Ethics, Code of Conduct and Corporate Governance Guidelines.
We also use our website as a tool to disclose important information about the company and comply with our disclosure obligations
under Regulation Fair Disclosure. The Company’s internet website and the information contained therein or connected thereto are not
intended to be incorporated into this annual report on Form 10-K.
In addition, copies of our filings are available by requesting them in writing or by phone from:
Corporate Secretary
Oak Valley Bancorp
125 North Third Avenue
Oakdale, California
209-844-7578
22
ITEM 1A. RISK FACTORS
An investment in our securities is subject to certain risks. These risk factors and the risks discussed in Management’s Discussion
and Analysis of Financial Condition and Results of Operations and Quantitative and Qualitative Disclosures About Market Risk
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.
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
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, consumer spending, wage stagnation, federal shutdowns
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;
•
Net interest income may decline; and
•
The amount of our low cost or noninterest-bearing deposits may decrease.
23
In addition, any sudden or prolonged market downturn, as a result of the above factors or otherwise, could adversely affect our
results of operations and financial condition, including capital and liquidity levels. Elevated inflation and interest rate levels, changes
in trade policy, including the implementation of tariffs, monetary tightening by central banks, and geopolitical developments,
including the Russia/Ukraine conflict and the conflicts in the Middle East, have adversely impacted and could continue to adversely
impact financial markets and macroeconomic conditions, as well as result in additional market volatility and disruptions and
recessionary risk.
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.
Adverse developments affecting the financial services industry, such as actual events or concerns involving liquidity, defaults, or
non-performance by financial institutions or transactional counterparties, could adversely affect our business operations and our
financial condition and results of operations.
Actual events involving limited liquidity, defaults, non-performance or other adverse developments that affect financial
institutions, transactional counterparties or other companies in the financial services industry or the financial services industry
generally, or concerns or rumors about any events of these kinds or other similar risks, have in the past and may in the future lead to
market-wide liquidity problems. Since 2023, several financial services institutions failed or required outside liquidity support, in many
cases, as a result of the inability of the institutions to obtain needed liquidity. For example, on March 10, 2023, Silicon Valley Bank
(“SVB”) was closed by the California Department of Financial Protection and Innovation, which appointed the FDIC as receiver. This
has led to additional risk for other financial services institutions and the financial services industry generally as a result of increased
lack of confidence in the financial sector. The failure of other banks and financial institutions and the measures taken by governments,
businesses and other organizations in response to these events could adversely impact our business, financial condition and results of
operations.
Inflation and higher interest rates have led to a decline in the trading value of previously issued government securities with
interest rates below current market interest rates. Additionally, there is no guarantee that the U.S. Department of Treasury, FDIC and
Federal Reserve Board will provide access to uninsured funds in the future in the event of the closure of other banks or financial
institutions, or that they would do so in a timely fashion. There can be no assurance that there will not be additional bank failures or
issues such as liquidity concerns in the broader financial services industry or in the U.S. financial system as a whole. Adverse financial
market and economic conditions can exert downward pressure on stock prices, security prices, and credit availability for certain
issuers without regard to their underlying financial strength.
Any of these impacts, or any other impacts resulting from the factors described above or other related or similar factors, could
have material adverse effect on our liquidity and our business operations and financial condition and results of operations.
Recent bank failures have created significant market volatility, regulatory uncertainty, and decreased confidence in the U.S.
banking system.
Recent bank failures have caused significant market volatility, regulatory uncertainty, and decreased confidence in the U.S.
banking system. These bank failures occurred during a period of rapidly rising interest rates which, among other things, has resulted in
unrealized losses in longer duration securities and more competition for bank deposits, and may increase the risk of a potential
economic recession in the United States. The failure of other financial institutions may cause deposit outflows as customers spread
deposits among several different banks so as to maximize their amount of FDIC insurance, move deposits to banks deemed "too big to
fail" or remove deposits from the U.S. financial system entirely. We may experience more deposit volatility as customers react to
adverse events or market speculation involving financial institutions in the future. Inability to access short-term funding or the loss of
client deposits could increase our cost of funding, limit access to capital markets or negatively impact our overall liquidity or
capitalization.
Ratings agencies have also reacted to recent events by issuing updated ratings and assessments. In 2024, Moody’s changed the
global outlook for banks to stable from negative, but has downgraded the ratings of several large U.S. banks. Our ratings are subject
to further adjustments based on a number of factors, including our financial strength and ability to generate earnings as well as factors
not entirely within our control, such as conditions affecting the financial services industry generally.
24
In response to the bank failures, the United States government may adopt a variety of measures and new regulations designed to
strengthen capital levels, liquidity standards, and risk management practices and otherwise restore confidence in financial institutions.
Any reforms, if adopted, could have a significant impact on banks and bank holding companies. The premiums of the FDIC’s deposit
insurance program are expected to increase and a special assessment was imposed to recover losses to the Deposit Insurance Fund,
following the failure of Silicon Valley Bank. Banking regulators have also signaled further review of regulatory requirements and the
potential for changes to laws or regulations governing banks and bank holding companies. Changes resulting from these events could
include increased regulatory oversight, higher capital requirements or changes in the way regulatory capital is calculated, and the
impositions of additional restrictions through regulatory changes or supervisory or enforcement activities, each of which could have a
material impact on our business.
The failure to address the federal debt ceiling in a timely manner, downgrades of the U.S. credit rating and uncertain credit and
financial market conditions may affect the stability of securities issued or guaranteed by the federal government, which may affect
the valuation or liquidity of our investment securities portfolio and increase future borrowing costs.
Recent federal budget deficit concerns and political conflict over legislation to raise the U.S. government’s debt limit have
increased the possibility of a default by the U.S. government on its debt obligations, related credit-rating downgrades, or an economic
recession in the United States. As a result of uncertain political, credit and financial market conditions, including the potential
consequences of the federal government defaulting on its obligations for a period of time due to federal debt ceiling limitations or other
unresolved political issues, investments in financial instruments issued or guaranteed by the federal government pose credit default and
liquidity risks. Given that future deterioration in the U.S. credit and financial markets is a possibility, losses or significant deterioration
in the fair value of our U.S. government issued or guaranteed investments may occur. Downgrades to the U.S. credit rating could affect
the stability of securities issued or guaranteed by the federal government and the valuation or liquidity of our portfolio of such investment
securities, and could result in our counterparties requiring additional collateral for our borrowings. Further, unless and until U.S.
political, credit and financial market conditions have been sufficiently resolved or stabilized, it may increase our future borrowing costs.
There are risks associated with our lending activities and our allowance for credit 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 credit losses which we believe is appropriate to provide for current expected credit 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;
• reasonable and supportable forecasts that affect the collectability of reported amounts;
• risk characteristics of the various classifications of loans; and
• the amount and quality of collateral, including guarantees, securing the loans.
25
If actual losses on our loans exceed our estimates used to establish our allowance for credit losses, our business, financial
condition and profitability may suffer.
The determination of the appropriate level of the allowance for credit 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 credit 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 credit 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 credit 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 credit losses. In addition, bank
regulatory agencies periodically review our allowance for credit losses and may require an increase in the provision for credit losses or
the recognition of further charge-offs (which will in turn also require an increase in the provision for credit losses if the charge-offs
exceed the allowance for credit losses), based on judgments different than that of management. Any increases in the provision for
credit 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.
Because our loan portfolio has a large concentration of real estate loans, and commercial real estate loans in particular, negative
changes in the economy affecting real estate values and liquidity, or regional and national market conditions, could impair the
value of collateral securing our real estate loans and result in loan and other losses.
As of December 31, 2024, consumer and commercial real estate loans constituted 90% of our loan portfolio, of which 97% were
commercial real estate loans. 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 real estate
loans in our loan portfolio, potential difficulties in the real estate markets could cause significant increases in nonperforming loans,
which would reduce our profits. The market value of real estate can fluctuate significantly in a short period of time as a result of
market conditions in the geographic area in which the real estate is located. 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. Real estate values and real
estate markets are generally affected by changes in national, regional or local economic conditions, the rate of unemployment,
fluctuations in interest rates and the availability of loans to potential purchasers, changes in tax laws and other governmental statutes,
regulations and policies and acts of nature, such as earthquakes and other natural disasters. 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.
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.
26
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
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
27
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.
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
28
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.
We currently hold a significant amount of bank owned life insurance.
At December 31, 2024, we held bank owned life insurance (“BOLI”) on certain key and former employees and executives and
our directors, with a cash surrender value of $37,558,000. 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
29
to further expand our operations could be materially impaired and our financial condition and liquidity could be materially and
adversely affected.
Climate change manifesting as physical or transition risks could adversely affect our operations, businesses and customers.
There is an increasing concern over the risks of climate change and related environmental sustainability matters. The physical risks
of climate change include discrete events, such as flooding and wildfires, and longer term shifts in climate patterns, such as extreme
heat, sea level rise, and more frequent and prolonged drought. Such events could disrupt the Company’s operations or those of its clients
or third parties on which it relies, including through direct damage to assets and indirect impacts from supply chain disruption and
market volatility. Additionally, transitioning to a low carbon economy may entail extensive policy, legal, technology, and market
initiatives. Transition risks, including changes in consumer preferences and additional regulatory requirements or taxes, could increase
expenses and undermine business strategies. In addition, Company’s reputation and client relationships may be damaged as a result of
practices related to climate change, including its involvement, or its clients’ involvement, in certain industries or projects associated
with causing or exacerbating climate change, as well as any decisions the Company makes to continue to conduct or change its activities
in response to considerations relating to climate change, including the setting of climate-related goals, commitments and targets. As
climate risk is interconnected with all key risk types, the Company is advancing its processes to embed climate risk considerations into
risk management strategies such as market, credit and operational risks; however, because the timing and severity of climate change
may not be predictable, risk management strategies may not be effective in mitigating climate risk exposure.
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. The rapid evolution and increased
adoption of artificial intelligence technologies have also given rise to additional vulnerabilities and potential entry points for cyber
threats. 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 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.
30
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. In addition, if the rules and
proposals under CIRCIA are adopted as anticipated, financial services companies will be required to report significant cyber incidents
to the CISA within 72 hours from the time the company reasonably believes the incident occurred (and within 24 hours of making a
ransom payment as a result of a ransomware attack). Finally, several states have passed, implemented or enacted new cybersecurity
and data privacy laws. 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 or else are a covered entity under the CCPA, CPRA and CIRCIA,
we will be required to comply with these laws. We will continue to monitor developments related to the CCPA, CPRA, CIRCIA and
the enactment and implementation of new state laws. The full impact of the CCPA, CPRA, CIRCIA and newly enacted state laws 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.
31
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 credit 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.
In addition, we expect the Trump administration will seek to implement a regulatory reform agenda that is significantly different
than that of the Biden administration, thereby impacting the rulemaking, supervision, examination and enforcement priorities of the
federal banking agencies. Our results of operations could be adversely affected by changes in laws and regulations and in the way
existing statutes and regulations are interpreted or applied by courts and government agencies.
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.
32
The short-term and long-term impact of the changing regulatory capital requirements and new capital rules is uncertain.
Under the U.S. regulatory capital rules to implementing the Basel III regulatory capital framework, banking organizations,
including the Company are subject to 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 USA Patriot Act, Bank Secrecy Act, or other laws and regulations could result in fines or sanctions or
operating restrictions.
The USA Patriot Act and Bank Secrecy Act 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.
Increases in deposit insurance premiums and special FDIC assessments will negatively impact our earnings.
FDIC-insured banks are required to pay deposit insurance assessments to the FDIC. The amount of the deposit insurance
assessment for institutions with less than $10.0 billion in assets, such as the Bank, is based on its risk category, with certain
adjustments for any unsecured debt or brokered deposits held by the insured bank. We may pay higher FDIC premiums in the future
and increases in deposit insurance premiums and special FDIC assessments will negatively impact our earnings.
33
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, 2024, the Company had a net deferred tax asset of $15.5 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, 2024), 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.
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. We do not have any employment agreements
with members of our senior management team that require them to continue to work for us for any specified period and they could
terminate their employment with us at any time. Therefore, 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
34
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
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.
35
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:
•
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
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.
36
ITEM 1C. CYBERSECURITY
Cybersecurity risk management and strategy
Cybersecurity and risks associated with information security are operational risks included in the Company’s Enterprise Risk
Management (“ERM”) Framework. Under the ERM Framework, the Company’s Information Technology department and all
employees are the first line of defense (“First Line”). Those in the First Line are each responsible for identifying and managing the
information security risk associated with their activities. The Company’s IT Steering Committee is part of the independent risk
oversight of information security risk along with the Company’s Compliance and ERM Committees, both of which are management
risk oversight committees.
The BOD and IT Steering committee are primarily responsible for monitoring management’s implementation of operations and
technology risk controls, including those relating to cyber security and information security. The Company maintains a data protection
and information security program designed to ensure adequate governance and oversight is in place while evolving to meet changes in
applicable laws and regulations, and best practices. The Company’s information security controls and programs are designed to align
with the National Institute of Standards and Technology (“NIST”) standards for cybersecurity and the Federal Financial Institutions
Examination Council (“FFIEC”) examination guidelines, along with applicable privacy laws.
Information Security is the responsibility of the officers, employees, and agents of the Company with oversight by the Board of
Directors (“BOD”). Our investment in people is critical to maintaining an effective cyber defense, which begins by developing and
maintaining a robust Information Security function within the First Line. The Company’s Chief Information Officer (“CIO") has over
25 years of network architecture, information technology and cybersecurity experience. Collectively, the Company’s senior leadership
in this area have nearly 80 years of experience. Each Company employee is responsible for an effective cybersecurity defense which is
enforced with mandatory interactive cyber awareness training, periodic newsletters, executive security briefs and updates.
Additionally, the BOD is informed about cybersecurity and the relevant risks posed to the Company via regular updates from the
Company’s CIO. The BOD is regularly informed and actively oversees the data security and privacy program and its policies. The
BOD also receives regular education on innovative technology, cybersecurity, information systems/data management, fintech and
privacy.
Cybersecurity assessments
The Company engages external third parties to perform assessments on our adherence to the FFIEC’s recommendations on cyber
preparedness and NIST Cybersecurity Framework, as well as to review for best practices for the use of cloud services and FedLine
requirements. To validate the effectiveness of the Company’s overall information security controls, external third parties also perform
full-scope external and internal penetration testing designed to mimic the tactics used by individual hackers or criminal hacking
organizations. The Company also engages external third parties to perform ongoing adversarial simulation.
The Company conducts regular internal cybersecurity assessments intended to measure inherent risk and drive the adjustment of our
security posture according to the latest threats. These assessments include alignment with the FFIEC’s recommendations on cyber
preparedness and GLBA Safeguards Rule to protect user data. The Company performs continuous internal and external vulnerability
scanning to measure and react to new vulnerabilities and seeks conformance to industry best practices for both cloud-based and on-
premises technology. The Company reviews vendor and partner security practices to ensure they maintain proper information security
safeguards.
Cybersecurity operational measures
Led by our CIO, the Company's data protection, information, cyber and technology services team collaborates with subject-matter
experts throughout the business to identify, monitor and mitigate material risks, as well as to monitor compliance with the Company’s
security polices, applicable laws and regulations. The Company’s security monitoring team manages the security of our systems
through the ingestion of multiple external threat feeds and systems logs. Through the collection and integration of security-related IT
infrastructure information, external threat intelligence and the expertise of trained security analysts, the Company works to identify
and address potential indicators of compromise. Potential security events are identified and addressed through defined IT incident
response activities and with support of the Company’s Incident Response Plan. The Incident Response Plan is in place and updated
regularly with the intent to reduce impacts to clients and the Company caused by a declared cyber incident, such as an event involving
malicious code, unauthorized disclosure, loss of information or unauthorized use of information or systems. The Incident Response
Plan organizes resources to manage and resolve events that harm or threaten the security of information assets. The Incident Response
Plan includes involvement of the Company’s Executive Leadership Team and BOD based on the severity of a cyber event, including
the analysis of reporting requirements. The Incident Response Plan is tested annually and includes technical and executive
management in simulated crisis management cybersecurity tabletop exercises.
37
As of the date of this report, other than the risks discussed in “Risk Factors,” the Company knows of no risks from cybersecurity
threats that have materially affected or are reasonably likely to materially affect the Company, including its business strategy, results
of operations, or financial condition.
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.
There are no pending, or to management's knowledge, any threatened, material legal proceedings to which the Company is a
party, or to which any of the Company’s properties are subject. 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.
38
PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER
PURCHASES OF EQUITY SECURITIES.
Trading Symbol and Holders of Common Stock
Our common stock is traded on the Nasdaq Capital Market under the symbol “OVLY.” On March 18, 2025, there were
approximately 349 shareholders of record of the common stock and 8,382,062 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 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 and anticipate paying comparable dividends in the future, there is no guarantee that we will pay cash
dividends in the future.
Share Repurchases
The Company has no repurchase plans or programs with respect to its common stock or equity securities in place and therefore
there were no repurchased shares during the quarter ended December 31, 2024.
ITEM 6. [RESERVED]
39
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The following discussion of financial condition as of December 31, 2024 and 2023 and results of operations for each of the
years in the two-year period ended December 31, 2024 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, 2024, we had approximately $1.90 billion in total assets, $1.11 billion in total gross loans, and $1.70
billion in total deposits.
We believe the following were key indicators of our performance during 2024:
•
Total assets increased to $1.90 billion at the end of 2024, an increase of 3.2%, from $1.84 billion at the end of 2023.
•
Total deposits increased to $1.70 billion at the end of 2024, an increase of 2.7%, from $1.65 billion at the end of 2023.
•
Total net loans increased to $1.09 billion at the end of 2024, an increase of 8.9%, from $1.0 billion at the end of 2023.
•
Net interest income decreased to $70.0 million in 2024, a decrease of $5.7 million or 7.6%, compared to $75.8 million in
2023, mainly as a result of rising interest rates on deposit accounts.
•
A reversal of credit losses provisions totaling $1,620,000 and a provision for credit losses of $970,000 were recorded in 2024
and 2023, respectively. The reversal in 2024 was mainly due to loan recoveries of $2.2 million.
•
The ratio of total non-performing loans to total loans remained at 0.00% as of December 31, 2024 and 2023.
•
Total noninterest income decreased to $6.56 million in 2024, a decrease of 1.1%, from $6.63 million in 2023, which is
mainly due to negative changes in the fair value of equity securities and decreases in NSF fee income resulting from changes
in the NSF fee structure charged to deposit customers.
•
Total noninterest expense increased from $41.2 million in 2023 to $46.0 million in 2024, primarily due to staffing increases
and general operating costs necessary to support the growing loan and deposit portfolios.
•
Provision from income taxes decreased by $2.2 million to $7.2 million in 2024, due to lower pre-tax income.
These items, as well as other factors, contributed to the decrease in net income for 2024 to $24.9 million from $30.8 million
in 2023, which translates into $3.02 per diluted share in 2024 as compared to $3.75 per diluted share in 2023.
Over the past several years, our network of branches and loan production offices have expanded geographically. We currently
maintain eighteen 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.
2025 Outlook
As we begin our strategic business plan for 2025, we remained focused on relationship-based expansion throughout our
market area. We plan to continue to focus on growth of our loan and deposit portfolios to ease pressure on our net interest margin,
while attempting to control expenses and credit losses.
40
Unfavorable trends in inflation prompted the Federal Reserve Open Market Committee, or FOMC, to increase the target
federal funds rate in 2022 and 2023, which resulted yield increases on our earning assets. In response to moderating inflation and
weakening economic conditions, in 2024 the FOMC made minimal interest rates cuts. In spite of this, we expect the upward trend in
our earning asset yield will continue to some degree in 2025 due to continued repricing of existing loans. However, the negative
impact of the 2022-2023 FOMC rate hikes was increased rates on deposit accounts, which may continue to some degree into 2025.
Deposit interest rates are determined based on customer demand, market surveys of offerings from competitive institutions, and
overall liquidity position.
The Fed Funds rate is forecasted to decrease moderately during 2025, which could potentially compress net interest income
and net interest margin further, given that our balance sheet is slightly asset sensitive to interest rate changes primarily due to the
variable rate loans and interest-earning cash balances.
For 2025, management remains focused on the above challenges and opportunities and other factors affecting the business
similar to the factors driving the 2024 results as discussed in this section.
Critical Accounting Estimates
Critical accounting estimates are those estimates made in accordance with generally accepted accounting principles that
involve a significant level of estimation and uncertainty and have had or are reasonably likely to have a material impact on our
financial condition and results of operations. We consider accounting estimates to be critical to our financial results if (i) the
accounting estimate requires management to make assumptions about matters that are highly uncertain, (ii) management could have
applied different assumptions during the reported period, and (iii) changes in the accounting estimate are reasonably likely to occur in
the future and could have a material impact on our financial statements. Management has determined the following accounting
estimates and related policies to be critical:
Allowance for credit losses
Credit risk is inherent in the business of lending and making commercial loans. Accounting for our allowance for credit
losses involves significant judgment and assumptions by management and is based on historical data as well as reasonable and
supportable forecasts of future events. At least on a quarterly basis, our management reviews the methodology and adequacy of
allowance for credit losses and reports its assessment to the Board of Directors for its review and approval.
The allowance for credit losses is an estimate dependent upon many factors, including loan growth, net charge-offs,
changes in the composition of the loans, qualitative factors, the valuation of problem loans and the general economic conditions in our
market area. See Note 1 and Note 4 to the consolidated financial statements, and the “Provision for Credit Losses” and “Allowance
for Credit Losses” sections of this discussion and analysis for more information on the establishment of the Allowance for Credit
Losses and the implementation of the Current Expected Credit Loss (“CECL”) model.
Recently Issued Accounting Standards
See Note 1 to the Consolidated Financial Statements in Item 8 of this report.
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.
41
Overview
We recorded net income for the year ended December 31, 2024 of $24,948,000 or $3.02 per diluted share compared to
$30,848,000 or $3.75 per diluted share for the year ended December 31, 2023. The decrease in net income for the year ended
December 31, 2024 was primarily due to a decrease of $5,768,000 in net interest income, as a result of an increase in deposit interest
expense. Non-interest income decreased by $76,000 in 2024, mainly due to fair value changes on equity securities and decreased NSF
fee income. The provision for credit losses decreased compared to last year due to $2.2 million in loan recoveries in 2024, resulting in
a $1,620,000 credit loss provision reversal. Non-interest expense increased by $4,860,000 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:
As of and for the years ended December 31,
(Dollars in thousands, except per share data)
2024
2023
For the period:
Net income available to common shareholders
$
24,948
$
30,848
Net income per common share:
Basic
$
3.04
$
3.76
Diluted
$
3.02
$
3.75
Return on average common equity
14.39 %
21.87 %
Return on average assets
1.35 %
1.64 %
Common stock dividend payout ratio of earnings during the period
14.90 %
8.53 %
Efficiency ratio
60.08 %
49.93 %
At period end:
Book value per common share
$
21.95
$
20.03
Total assets
$
1,900,604
$
1,842,422
Total gross loans
$
1,106,535
$
1,016,579
Total deposits
$
1,695,690
$
1,650,534
Net loan-to-deposit ratio
64.49 %
60.85 %
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.
Distribution, Yield and Rate Analysis of Net Income
For the Years Ended December 31,
(Dollars in Thousands)
2024
2023
Average
Balance
Interest
Income/
Expense
Avg Rate/
Yield
Average
Balance
Interest
Income/
Expense
Avg Rate/
Yield
Assets:
Earning assets:
Gross loans (1) (2)
$ 1,058,294
$ 53,483
5.05%
$ 949,429
$ 44,854
4.72%
Securities - tax-exempt (2)
291,826
11,290
3.87%
313,559
12,487
3.98%
Securities - taxable
251,610
11,357
4.51%
243,300
10,550
4.34%
Federal funds sold
29,317
1,547
5.28%
27,197
1,414
5.20%
Interest-earning deposits
139,489
7,248
5.20%
275,160
13,901
5.05%
Total interest-earning assets
1,770,536
84,925
4.80%
1,808,645
83,206
4.60%
Total noninterest earning assets
82,779
70,820
Total Assets
$ 1,853,315
$ 1,879,465
Liabilities and Shareholders' Equity:
Interest-bearing liabilities:
Demand
484,046
2,414
0.50%
493,164
1,358
0.28%
Money market
383,171
7,616
1.99%
374,828
2,711
0.72%
Savings
128,203
175
0.14%
147,180
197
0.13%
Time deposits $250,000 and under
47,311
1,690
3.57%
24,172
375
1.55%
Time deposits over $250,000
28,837
966
3.35%
16,443
222
1.35%
Borrowed funds
0
0
0.00%
20
1
5.00%
Total interest-bearing liabilities
1,071,568
12,861
1.20%
1,055,807
4,864
0.46%
Noninterest-bearing liabilities:
Noninterest-bearing demand deposits
584,477
653,034
Other liabilities
23,935
29,585
Total noninterest-bearing liabilities
608,412
682,619
Shareholders' equity
173,335
141,039
Total liabilities and shareholders' equity
$ 1,853,315
$ 1,879,465
Net interest income
$ 72,064
$ 78,342
Net interest spread (3)
3.60%
4.14%
Net interest margin (4)
4.07%
4.33%
(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”), decreased $6,278,000 or 8.0% to $72,064,000 for the year ended
December 31, 2024, compared to $78,342,000 in 2023. Net interest spread and net interest margin were 3.60% and 4.07%,
respectively, for the year ended December 31, 2024, compared to 4.14% and 4.33%, respectively, for the year ended December 31,
2023. This downward trend is mainly due to an increase in deposit interest expense that was necessary to remain competitive with
peer banks, preserve liquidity, and continue to grow the balance sheet. The FOMC rate hikes that began in March 2022 resulted in an
immediate increase in earning asset yields, but deposit rates experienced a lag effect and did not increase until 2023 and into 2024.
The cost of funds on interest-bearing liabilities increased to 1.20% in 2024 compared to 0.46% in 2023 as a result of the
competitive environment and customer demand for higher rates. Promotional rates on money market accounts and higher time-deposit
rate offerings were utilized to retain deposit relationships, which contributed to the deposit growth of $45.2 million during 2024.
Our earning asset yield increased 20 basis points in 2024 compared to 2023 despite the FOMC cutting the federal funds target
rate from a range of 5.25% to 5.50% at the beginning of 2024, to a range of 4.25% to 4.50% by the end of the year. The FOMC rate
hikes in 2022 and 2023 continued to have a positive impact on rates of loans that repriced during 2024. The yield on loans recognized
an increase of 33 basis points for 2024 as compared to 2023, due to the upward repricing of variable rate loans and higher rate indexes
on new loans. Growth in average gross loans of $108.9 million, also contributed to net interest margin expansion.
The net interest margin compression in 2024, is due to the factors discussed above and could worsen if rate indexes on assets
were to fall, and/or: 1) deposit interest rates continue to increase due to customer demand, or competitive pressure from peer banks, 2)
competition in the lending market restrict significant increases in new loan rates, and 3) deposit growth out-paces loan growth,
resulting in higher interest-bearing cash balances, which would offer lower yields than loans and investments depending on the
Federal Funds rate as determined by the FOMC.
Changes in volume resulted in decrease in net interest income (on a FTE basis) of $2,641,000 for the year of 2024 compared to
the year 2023, and changes in interest rates and the mix resulted in a decrease in net interest income (on a FTE basis) of $3,637,000
for the year 2024 versus the year 2023. 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 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 and 2021. In 2022, the FOMC raised the federal funds rate seven times by an aggregate of 4.00%. In 2023, the
FOMC raised the Federal funds rate four times by 0.25% resulting in a range of 5.25% to 5.50%. In 2024, the FOMC cut the Federal
funds rate three times by an aggregate of 1.00%, resulting in a range of 4.25% to 4.50%. If FOMC were to cut rates in 2025 or thereafter,
we expect this would have a negative impact on our net interest income, due to repricing of interest-bearing cash balances, existing loans
and investment securities.
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.
For the Year Ended December 31,
For the Year Ended December 31,
(Dollars in Thousands)
2024 vs. 2023
2023 vs. 2022
Increases (Decreases)
Increases (Decreases)
Due to Change In
Due to Change In
Volume
Rate
Total
Volume
Rate
Total
Interest income:
Net loans (1)
$
5,143
$
3,486
$
8,629
$
2,690
$
3,192
$
5,882
Securities - tax exempt
(865)
(332)
(1,197)
1,290
830
2,120
Securities - taxable
360
447
807
1,507
3,108
4,615
Federal funds sold
110
23
133
94
905
999
Interest-earning deposits
(6,854)
201
(6,653)
(3,444)
9,607
6,163
Total interest income
(2,106)
3,825
1,719
2,137
17,642
19,779
Interest expense:
Interest-earning DDA
$
(25)
$
1,081
$
1,056
$
11
$
895
$
906
Money market deposits
60
4,845
4,905
(50)
2,280
2,230
Savings deposits
(25)
3
(22)
(10)
125
115
Time deposits $250,000 and under
359
956
1,315
2
315
317
Time deposits over $250,000
167
577
744
(2)
178
176
Borrowed funds
(1)
0
(1)
0
1
1
Total interest expense
535
7,462
7,997
(49)
3,794
3,745
Change in net interest income
$
(2,641)
$
(3,637)
$
(6,278)
$
2,186
$
13,848
$
16,034
(1) Loan fees have been included in the calculation of interest income.
Provision for credit losses
Credit risk is inherent in the business of making loans. The Company establishes an allowance for credit losses through charges
to earnings, which are shown in the consolidated statements of income as the provision for credit losses. Specifically identifiable and
quantifiable losses are promptly charged off against the allowance. The Company maintains the allowance for credit 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 credit losses is determined.
The Company recorded a reversal of provision for credit loss of $1,620,000 and a credit loss provision of $970,000 during the
years ended December 31, 2024 and 2023, respectively. The 2024 provision reversal was mainly due to loan recoveries totaling $2.2
million, which was offset in part by loan growth. The loan recoveries in 2024 were primarily from two loans from different borrowers
recovered during third quarter of 2024 totaling $1,992,000. Each of the recovered loans date back to the recession period when
collateral values were considerably depressed, and one of which was acquired in 2015 when we completed a bank acquisition. The
loan recoveries initially increased the allowance for credit losses (“ACL”), which subsequently resulted in the reversal of $1,620,000.
45
Current and forecasted macro-economic conditions are closely evaluated among other inputs that our internal credit risk model
utilizes to determine the appropriate credit loss allowance. The Company did not have any nonperforming loans as of December 31,
2024 and 2023. The allowance for credit losses was $11,460,000 and $10,896,000 as of December 31, 2024 and 2023, or 1.04% and
1.07%, respectively, of total loans. The decrease as a percentage of total loans corresponds to credit factors within the loan portfolio,
and changes to the current and forecasted macro-economic factors that have been established as credit loss indicators within our
model. The strong credit quality has resulted in net loan recoveries of $2,184,000 and $112,000 in 2024 and 2023, respectively.
The Company will continue to monitor the adequacy of the allowance for credit 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 credit 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:
(in thousands)
For the Year Ended December 31,
2024
2023
Year-Over-Year
Amount
%
Amount
%
$ Change
% Change
Service charges on deposits
$
1,682 25.7% $
1,813 27.3% $
(131)
-7.2%
Debit card transaction fee income
1,738 26.5%
1,773 26.7%
(35)
-2.0%
Earnings on cash surrender value of life insurance
1,052 16.0%
788 11.9%
264
33.5%
Mortgage commissions
31
0.5%
20
0.3%
11
55.0%
Gain on sale of other real estate owned
114
1.7%
156
2.4%
(42)
-26.9%
Other income
1,938 29.6%
2,081 31.4%
(143)
-6.9%
Total non-interest income
$
6,555 100.0% $
6,631 100.0% $
(76)
-1.1%
Average assets
$ 1,853,315
1,879,465
Noninterest expenses as a % of average assets
0.4%
0.4%
Noninterest income was $6,555,000 for the year ended December 31, 2024, compared to $6,631,000 for the year 2023. Service
charge income decreased to $1,682,000 in 2024 compared to $1,813,000 for 2023, due to a change in the NSF fee schedule that
resulted in a decline in NSF Fee income collected on deposit accounts, despite an increase in the number of checking accounts. Debit
card transaction fee income decreased to $1,738,000 in 2024 as compared to $1,773,000 in 2023, due to debit card network costs that
are included in the net revenue received by the bank. Earnings on the cash surrender value of life insurance recognized an increase of
$264,000 in 2024 compared to 2023, due to higher yields and three new life insurance policies purchased during the second quarter of
2024. Mortgage commissions have increased by $11,000 for the year 2024, as compared to 2023, a moderate upward trend but overall
demand for home purchases and refinancing remains low due to cost of housing and high interest rates. In 2024, other income
decreased by $143,000, primarily due to a negative change in the fair value of equity securities, as compared to 2023. 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:
(in thousands)
For the Year Ended December 31,
2024
2023
Year-Over-Year
Amount
%
Amount
%
$ Change % Change
Salaries and employee benefits
$
28,640 62.2%
$
26,109 63.4% $
2,531
9.7%
Occupancy expenses
4,610
10.0%
4,541
11.0%
69
1.5%
Data processing fees
2,814
6.1%
2,729
6.6%
85
3.1%
Regulatory assessments (FDIC & DFPI)
1,090
2.4%
1,020
2.5%
70
6.9%
Other operating expenses
8,863 19.3%
6,758 16.5%
2,105
31.1%
Total non-interest expense
$
46,017
100.0%
$
41,157
100.0%
$
4,860
11.8%
Average assets
$ 1,853,315
$ 1,879,465
Noninterest expenses as a % of average assets
2.5%
2.2%
Noninterest expense was $46,017,000 for the year ended December 31, 2024, an increase of $4,860,000 or 11.8% compared
to $41,157,000 for the year ended 2023. Salaries and employee benefits increased by $2,531,000 in 2024, due to expansion of our
staff to support loan and deposit growth, combined with normal merit-based and cost-of-living increases.
Occupancy expense realized an increase of $69,000 in 2024 compared to the prior year, primarily from property taxes, rent,
and utilities expense.
Data processing fees increased in 2024 over 2023 by $85,000, primarily due to servicing costs on the growing number of loan
and deposit accounts, as well as upgrades to our online banking and mobile banking platforms.
Federal Deposit Insurance Corporation (“FDIC”) and California Department of Financial Protection and Innovation (“DFPI”)
regulatory assessments increased by $70,000 in 2024 over 2023, mainly due to the increase in deposit balances. FDIC increased the
base rate to 0.05%, on an annual basis, for all member banks in order to build up the Deposit Insurance Fund. The FDIC adopted a
final rule in June 2022, applicable to all insured depository institutions, to increase initial base deposit insurance assessment rate
schedules uniformly by 2 basis points, beginning in the first quarterly assessment period of 2023. The final rule became effective as of
January 1, 2023, with an invoice payment date of June 30, 2023. The FDIC said that the increase in assessment rate schedules is
intended to increase the likelihood that the reserve ratio of the Deposit Insurance fund reaches the statutory minimum of 1.35 percent
by the statutory deadline of September 30, 2028. The final assessment rate for financial institutions is determined by making
adjustments to the base rate for various credit quality factors and other risk metrics of the institution as defined by the FDIC. The
Company’s risk profile and the related assessment rate remains at a relatively low level due to our strong credit quality, earnings and
risk-based capital ratios. Management recognizes that assessments could increase further depending on deposit growth throughout the
remainder of 2025, as the FDIC assessment rates are applied to average quarterly total liabilities as the primary basis, and based on
FDIC’s discretion to increase the base assessment rate as needed to replenish the Deposit Insurance Fund. Moreover, the FDIC retains
the authority and discretion to increase base assessment rates for banking entities in the future, as circumstances warrant.
Other operating expenses increased by $2,105,000 in 2024 as compared to 2023, primarily due to an increase in advertising
expenses from a direct-mail campaign launched in 2024 targeting consumer deposit accounts, and various general operating expense
increases required to support our growing business portfolios and compliance mandates. Some of these included audit expenses,
software license fees 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 loan and 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 $7,244,000 and $9,458,000 for the years 2024 and 2023, respectively. The effective
income tax rate on income from continuing operations was 22.5% for the year ended December 31, 2024, compared to 23.5% for the
year 2023. These provisions reflect accruals for taxes at the applicable rates for federal income tax and California franchise tax based
upon reported pre-tax income and adjusted for the effects of all permanent differences between income for tax and financial reporting
purposes (such as earnings on qualified municipal securities, BOLI and certain tax-exempt loans). The disparity between the
effective tax rates for 2024 as compared to 2023 is primarily due to tax credits from low-income housing projects as well as tax-free
income on municipal securities and loans that comprised a larger proportion of pre-tax income in 2024 as compared to 2023.
Financial Condition
The Company’s total assets were $1,900,604,000 at December 31, 2024 compared to $1,842,422,000 at December 31, 2023, an
increase of $58,182,000 or 3.2%. Net loans increased by $89,237,000, investments increased $8,455,000, net bank premises and
equipment increased $454,000, interest receivable and other assets decreased $370,000, while cash and cash equivalents decreased
$47,817,000 for the year ended December 31, 2024 as compared to December 31, 2023.
Loans gross of the allowance for credit losses and deferred fees were $1,106,535,000 as of December 31, 2024, compared to
$1,016,579,000 as of December 31, 2023, an increase of $89,956,000 or 8.9%. The increase was due to an increase of $65,906,000 or
7.4% in commercial real estate loans, an increase of $18,354,000 or 28.1% in commercial and industrial loans, an increase of
$2,282,000 or 7.2% in consumer loans, and an increase of $3,414,000 or 13.2% in agriculture loans. The composition remained
relatively unchanged as a percentage of total loans, with commercial real estate comprising 87% and 88% of the loan portfolio at
December 31, 2024 and 2023, respectively.
Deposits increased $45,156,000 or 2.7% to $1,695,690,000 as of December 31, 2024 compared to $1,650,534,000 at
December 31, 2023. Demand, Money Market, and Time Deposits increased by $1,925,000, $17,619,000 and $35,873,000,
respectively, while Savings decreased by $10,261,000, as of December 31, 2024 as compared to December 31, 2023.
There were no short-term borrowing or long-term debt outstanding balances at December 31, 2024 and 2023. The Company uses
short-term borrowings, primarily short-term FHLB advances, to fund short-term liquidity needs, if needed, and manage net interest
margin.
Equity increased $17,344,000 or 10.4% to $183,436,000 as of December 31, 2024, compared to $166,092,000 at December 31,
2023. Equity increased due to earnings, and was partially offset by the negative impact interest rates had on our unrealized loss on
available-for-sale investment securities.
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, 2024, and 2023, we had $30,270,000 and $36,500,000, 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
48
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 $3,169,000 and $3,132,000 at December 31, 2024 and December 31, 2023,
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 loss of $74,000 and an unrealized gain of
$41,000 during the years ended December 31, 2024 and 2023, respectively.
Our available-for-sale investment securities holdings increased by $8,418,000 or 1.6% to $526,496,000 at December 31,
2024, compared to holdings of $518,078,000 at December 31, 2023. 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 increased to 27.9% as of December 31, 2024 compared to 28.3%
at December 31, 2023. As of December 31, 2024, $305,513,000 of the investment securities were pledged to secure public deposits.
As of December 31, 2024, the total unrealized loss on debt securities that were in a loss position for less than 12 continuous
months was $3,262,000 with an aggregate fair value of $177,185,000. The total unrealized loss on debt securities that were in a loss
position for greater than 12 continuous months was $31,377,000 with an aggregate fair value of $292,476,000.
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, 2024:
Debt Investment Maturities and Repricing Schedule
After One But
After Five But
(Dollars in Thousands)
Within One Year
Within Five Years
Within Ten Years
After Ten Years
Total
Amount
Yield
Amount
Yield
Amount
Yield
Amount
Yield
Amount
Yield
Available-for-sale:
U.S. agencies
$ 30,016
1.01 % $
1,929
1.00 % $
1,386
4.88 % $
59,328
4.58 % $
92,659
3.35 %
Collateralized mortgage obligations
0
0.00 %
0
0.00 %
0
0.00 %
29,105
5.30 %
29,105
5.30 %
Municipalities
6,857
4.28 %
165,643
4.07 %
172,831
4.06 %
1,720
4.92 %
347,051
4.07 %
SBA pools
0
0.00 %
227
7.50 %
495
6.54 %
160
7.65 %
882
6.99 %
Corporate debt
41,000
2.97 %
2,500
3.81 %
0
0.00 %
0
0.00 %
43,500
3.02 %
Asset backed securities
618
5.44 %
0
0.00 %
20,232
6.29 %
26,096
5.18 %
46,946
5.66 %
Total debt securities
$ 78,491
2.35 % $ 170,299
4.04 % $ 194,944
4.30 % $ 116,409
4.90 % $ 560,143
4.07 %
Yields in the above table have been adjusted to a fully tax equivalent basis. The yields are calculated using a weighted
average method based on the investment security balances as of December 31, 2024. Securities are reported at the earliest possible
call, repricing or maturity date.
49
Loans
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 U.S. 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, 2024 and 2023:
(Dollars in Thousands)
December 31, 2024
December 31, 2023
Commercial real estate loans by
geographic location (County)
Amount
% of
Commercial
Real Estate Loans
Amount
% of
Commercial
Real Estate Loans
Stanislaus
$
209,459
21.8%
$
209,505
23.4%
San Joaquin
174,615
18.2%
180,408
20.2%
Sacramento
130,976
13.6%
107,270
12.0%
Fresno
73,123
7.6%
64,578
7.2%
Tuolumne
34,852
3.6%
32,950
3.7%
Merced
28,349
3.0%
26,620
3.0%
Shasta
28,066
2.9%
27,979
3.1%
Contra Costa
23,019
2.4%
13,941
1.6%
Yolo
21,752
2.3%
19,091
2.1%
Marin
20,454
2.1%
20,703
2.3%
Solano
18,515
1.9%
17,942
2.0%
Placer
17,066
1.8%
11,804
1.3%
Alameda
15,130
1.6%
13,675
1.5%
Sutter
15,109
1.6%
12,758
1.4%
Santa Clara
13,961
1.5%
8,833
1.0%
Sonoma
13,506
1.4%
14,102
1.6%
Tulare
12,732
1.3%
10,037
1.1%
Inyo
8,443
0.9%
5,218
0.6%
San Diego
8,427
0.9%
9,180
1.0%
Other
92,104
9.6%
87,158
9.8%
Total
$
959,658
100.0%
$
893,752
100.0%
50
Construction and land loans are classified as commercial real estate loans and decreased $45.2 million in 2024 as compared to
2023, mainly due to the completion of construction on existing projects that converted to permanent financing during 2024. The table
below shows an analysis of construction and land loans by type and location. Non-owner-occupied land loans of $5.6 million as of
December 31, 2024 included loans for land specified for commercial development of $3.9 million and for residential development of
$1.7 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, 2024
December 31, 2023
Construction and land loans by type
Amount
% of
Construction and
Land Loans
Amount
% of
Construction and
Land Loans
Single family non-owner-occupied
$
1,613
9.1%
$
2,707
3.8%
Single family owner-occupied
0
0.0%
533
0.8%
Commercial non-owner-occupied
9,656
54.2%
40,092
56.4%
Commercial owner-occupied
923
5.2%
7,181
8.8%
Land non-owner-occupied
5,620
31.5%
12,547
30.2%
Total
$
17,812
100.0%
$
63,060
100.0%
Construction and land loans by
geographic location (County)
Amount
% of
Construction and
Land Loans
Amount
% of
Construction and
Land Loans
Stanislaus
$
3,116
17.5%
$
10,665
16.9%
Santa Clara
2,547
14.3%
0
0.0%
Placer
2,435
13.7%
2,360
3.7%
Fresno
2,180
12.2%
7,804
12.4%
Shasta
2,150
12.1%
7,606
12.1%
San Joaquin
1,734
9.7%
9,621
15.3%
Merced
1,478
8.3%
1,626
2.6%
Contra Costa
989
5.6%
0
0.0%
Yolo
0
0.0%
6,860
10.9%
Tulare
0
0.0%
6,125
9.7%
Solano
0
0.0%
4,109
6.5%
Sacramento
0
0.0%
2,028
3.2%
Mono
0
0.0%
1,469
2.3%
Other
1,183
6.6%
2,787
4.4%
Total
$
17,812
100.0%
$
63,060
100.0%
51
Loan Maturities
The following table shows the contractual maturity distribution and repricing intervals of the outstanding loans in our
portfolio, as of December 31, 2024. 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.
Loan Maturities and Repricing Schedule
At December 31, 2024
(in thousands)
Within
1 Year
After 1 But
Within
5 Years
After 5 But
Within 15
Years
After
15 Years
Total
Commercial real estate
Construction & land
$
14,236
$
736
$
2,840
$
0
17,812
Multi-family
2,566
60,975
24,227
0
87,768
Owner occupied
30,312
76,769
122,715
165
229,961
Non-owner occupied
65,119
250,543
213,107
0
528,769
Farmland
11,448
27,688
55,818
394
95,348
Commercial & Industrial
30,075
44,107
9,386
4
83,572
Consumer
14,404
12,812
6,214
539
33,969
Agriculture
23,626
3,703
2,007
0
29,336
Unearned income
(271)
(674)
(616)
0
(1,561)
Total loans, net of unearned income
$
191,515
$
476,659
$
435,698
$
1,102
$
1,104,974
Loans with variable (floating) interest rates
$
140,676
$
317,955
87,046
$
0
$
545,677
Loans with predetermined (fixed) interest rates
$
50,839
$
158,704
348,652
$
1,102
$
559,297
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
52
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 as of December 31,
2024 and 2023.
The Company held no OREO properties as of December 31, 2024 and 2023. Accordingly, the Company had zero non-
performing assets recorded on the balance sheet as of December 31, 2024 and 2023.
Allowance for credit 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 credit 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 credit losses is discussed in the section entitled “Provision for credit losses” above.
The balance of our allowance for credit losses is management's best estimate of the current expected credit losses inherent
in the portfolio. The ultimate adequacy of the allowance is dependent upon a variety of factors beyond our control, including the real
estate market, changes in interest rate and economic and political environments.
The allowance for credit losses increased to $11,460,000 as of December 31, 2024, as compared with $10,896,000 at
December 31, 2023. The allowance for credit losses as a percentage of total loans decreased to 1.04% as of December 31, 2024, as
compared to 1.07% as of December 31, 2023, due to changes in the macro-economic indicators and qualitative factors used within our
CECL model. Based on the current conditions of the loan portfolio, management believes that the $11,460,000 allowance for credit
losses at December 31, 2024 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 various inherent credit risks. We continue to monitor the impact of the
economic environment, and adjustments to the provision for credit loss will be made accordingly. During 2024, the Company
recognized net loan recoveries of $2,184,000 as compared to $112,000 in 2023.
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.
As required by ASC Topic 326, on January 1, 2023 the Company implemented CECL and increased our ACL, previously
the allowance for loan losses, with a $346,000 cumulative adjustment. Under ASC Topic 326, the allowance for credit losses is
deducted from the amortized cost basis to present the net amount expected to be collected on the loans. The measurement of expected
credit losses is based on relevant information, which includes experience, current conditions, and reasonable and supportable forecasts
that affect the collectability of the reported amount over the remaining contractual life. The Company’s ACL is calculated monthly,
with any difference in the calculated ACL and the recorded ACL trued-up through an entry to the provision for credit losses.
Management calculates the quantitative portion of collectively evaluated reserves for all loan categories, using a discounted cash flow
(“DCF”) methodology. For purposes of estimating the Company’s ACL, management generally evaluates collectively evaluated loans
by federal call code in order to group loans with similar risk characteristics together, however management has grouped loans in
selected call codes together in determining portfolio segments, due to similar risk characteristics and reserve methodologies used for
certain call code classifications.
The DCF quantitative reserve methodology incorporates the consideration of probability of default (“PD”) and loss given
default (“LGD”) estimates to calculate expected lifetime losses. The PD estimates are derived using reasonable and supportable
economic forecasts and historical loss rate data from both the bank and a selected peer group. The historical loss rate data is compared
to identified benchmark economic indicators to create a regression model that is updated annually. Reasonable and supportable
forecasts for the identified economic indicators are then incorporated to arrive at expected default rates for the various loan categories.
The reasonable and supportable forecasts are based on the National Unemployment Rate and Real Gross Domestic
Product. The expected default rates are then applied to expected monthly loan balances estimated through the consideration of
contractual terms and expected prepayments. The Company utilizes a four-quarter forecast period, after which the expected default
rates revert to the historical average, over a four-quarter reversion period, on a straight-line basis. The prepayment assumptions are
estimated based on historical experience of the bank. The prepayment assumptions are updated quarterly and may be subject to
53
additional updates by Management in the event that changing conditions impact Management’s estimate. LGD utilized in the DCF is
derived from the application of models that correlate LGD and PD based on historical peer data.
Management recognizes that there are additional factors impacting risk of loss in the loan portfolio beyond what is captured
in the quantitative portion of collectively evaluated reserves. As current and expected conditions, may vary compared with conditions
over historical periods, which are utilized in the calculation of quantitative reserves, management considers whether additional or
reduced reserve levels on collectively evaluated loans may be warranted given the consideration of a variety of qualitative factors.
Several of the following qualitative factors (“Q-factors”) considered by management reflect regulatory guidance on Q-factors, whereas
several others represent factors unique to the Company or unique to the current time period.
● Changes in lending policies and procedures, including changes in underwriting standards and collection, charge-off,
and recovery practices
● Changes in international, regional and local economic and business conditions, and developments that affect the
collectability of the portfolio, as reflected in forecasts of the California unemployment rate
● Changes in the nature and volume of the loan portfolio
● Changes in the experience, ability, and depth of lending management and other relevant staff
● Changes in the volume and severity of past due, watch loans and classified loans
● Changes in the quality of the Bank’s loan review processes
● Changes in the value of underlying collateral for loans not identified as collateral dependent
● Changes in loan categorization concentrations
● Other external factors, which include, the regulatory risk ratings.
The qualitative portion of the Company’s reserves on collectively evaluated loans are calculated using a combination of
numeric frameworks, matrices defining reserve rate based on specified metrics, and management judgement, to determine risk
categorizations in each of the Q-factors presented above. The amount of qualitative reserves is also contingent upon the relative
weighting of Q-factors according to management’s judgement.
Loans identified as losses by management and internal loan review are charged-off. Furthermore, consumer loan accounts
are charged-off automatically based on regulatory requirements.
54
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 credit losses arising from loans charged off, recoveries on loans previously charged off, additions
to the allowance and certain ratios related to the allowance for credit losses:
Allowance for Credit Losses
December 31,
December 31,
(Dollars in thousands)
2024
2023
Balances:
Average total loans outstanding during period
$
1,058,294
$
949,429
Total loans outstanding at end of period
$
1,106,535
$
1,016,579
Net loan recoveries
$
2,184
$
112
(Reversal of) provision for credit losses
$
(1,620)
$
970
Allowance for credit losses at end of period
$
11,460
$
10,896
Ratios:
Net loan recoveries to average total loans
0.21%
0.01%
Allowance for loan losses to total loans at end of period
1.04%
1.07%
Net loan recoveries to allowance for loan losses at end of period
19.06%
1.03%
Net loan recoveries to (reversal of) provision for loan losses
(134.81%)
11.55%
Nonperforming loans as a percentage of total loans
0.00%
0.00%
Allowance for loan losses as a percentage of nonperforming loans
NA
NA
The table below summarizes the allowance for credit 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 Credit Losses
(Dollars in thousands)
December 31, 2024
December 31, 2023
Amount
% of
Allowance for
Loan Losses
Amount
% of Allowance
for Loan Losses
Applicable to:
Commercial real estate
Construction & land
$
258
2.3%
$
1,227
11.3%
Multi-family
737
6.4%
667
6.1%
Owner occupied
1,503
13.1%
1,805
16.6%
Non-owner occupied
6,401
55.9%
4,805
44.0%
Farmland
1,665
14.5%
1,468
13.5%
Commercial and Industrial
645
5.6%
650
6.0%
Consumer
175
1.5%
227
2.1%
Agriculture
76
0.7%
47
0.4%
Total Allowance
$
11,460
100.0%
$
10,896
100.0%
55
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, 2024 and 2023, includes the cash
surrender value of the BOLI policies, Federal Home Loan Bank stock and Federal Reserve Bank stock. During 2024, we purchased
three new life insurance policies on executive officers for a total investment of $5,000,000.
During 2018 and 2022, we committed to invest $5,000,000 and $10,500,000, respectively, in low-income housing tax credit
funds (“LIHTC”) to promote our participation in CRA activities, which had unfunded commitments of $5,664,000 and $9,782,000 as
of December 31, 2024 and 2023, respectively. For 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 $1,000,000 commitment as a limited partner, to a small business private equity partnership to promote
our participation in CRA activities. The value is recorded at fair market value with market gains or losses recorded to other income in
the consolidate financial statements. As of December 31, 2024, we have no remaining undisbursed commitments.
The balances of other earning assets as of December 31, 2024 and December 31, 2023 were as follows:
(in thousands)
December 31, 2024
December 31, 2023
BOLI
$
37,558
$
31,506
LIHTCs
$
11,354
$
12,655
Small business private equity partnership
$
1,063
$
1,029
Federal Reserve Bank Stock
$
755
$
755
Federal Home Loan Bank Stock
$
5,531
$
5,202
Deposits and Other Sources of Funds
Deposits
Total deposits at December 31, 2024 and 2023 were $1,695,690,000 and $1,650,534,000, respectively, representing an
increase of $45,156,000 or 2.7% in 2024. The average deposits for the year ended December 31, 2024 decreased $52,777,000 or 3.1%
to $1,656,045,000 compared to $1,708,822,000 at for the year ended December 31, 2023. Deposit data analysis has resulted in an
estimate of $811,351,000 in uninsured deposits, representing the balance that is not covered by FDIC insurance limits as of December
31, 2024.
Deposits are the Company’s primary source of funds. Due to strategic emphasis by management, core deposits (based on a
definition provided by FDIC’s Uniform Bank Performance Report) increased by $32,564,000 or 2.0% in 2024 to $1,654,700,000 at
December 31, 2024. The percentage of core deposits to total deposits decreased slightly to 97.6% at December 31, 2024 as compared
to 98.3% at December 31, 2023. The average rate paid on time deposits in denominations of over $250,000 was 3.35% and 1.35% for
the years ended December 31, 2024 and 2023, 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, were 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.
56
The following tables summarize the distribution of average daily deposits and the average daily rates paid for the periods
indicated:
Distribution of Average Daily Deposits
Average Deposits
2024
2023
(Dollars in Thousands)
Average
Average
Average
Average
Balance
Rate
Balance
Rate
Demand
$
1,068,523
0.23%
$
1,146,198
0.12%
Money market
383,171
1.99%
374,828
0.72%
Savings
128,203
0.14%
147,181
0.13%
Time deposits $250,000 and under
47,311
3.57%
24,172
1.55%
Time deposits over $250,000
28,837
3.35%
16,443
1.35%
Total deposits
$
1,656,045
0.78%
$
1,708,822
0.28%
The scheduled maturities of our time deposits in denominations of more than $250,000 at December 31, 2024 are as
follows:
Maturities of Time Deposits over $250,000
(Dollars in Thousands)
Three months or less
$
17,752
Over three months through six months
10,692
Over six months through twelve months
8,858
Over twelve months
290
Total
$
37,592
Because our client base is comprised primarily of commercial and industrial accounts, individual account balances are
generally higher than those of consumer-oriented banks. Four of our clients carry deposit balances of more than 1% of our total
deposits, one of which had a deposit balance of more than 3% of total deposits at December 31, 2024. The Company had no brokered
deposits as of December 31, 2024 and 2023.
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, 2024 and 2023. The average balance of FHLB advances outstanding in 2024 and 2023 was $0. See “Liquidity
Management” below for the details on the FHLB borrowings program.
Deferred Compensation Obligations
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. As of December 31, 2024 and 2023, our aggregate payment obligations under this plan totaled $14.1 million
and $11.4 million, respectively.
57
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, 2024 and 2023.
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. As of December 31, 2024 and 2023, the Company had no FHLB advances
outstanding and had sufficient collateral to borrow an additional $364.4 million and $333.1 million, respectively. In addition, the
Company had lines of credit with its correspondent banks to purchase overnight federal funds totaling $70 million at December 31,
2024 and 2023. No advances were made on these lines of credit as of December 31, 2024 and 2023.
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, 2024 and 2023 totaled approximately $431.8 million and $489.0 million, respectively. Our liquidity level measured as
the percentage of liquid assets to total assets was 22.7% and 26.5% as of December 31, 2024, and 2023, respectively.
We believe that our current unrestricted cash and cash equivalents, cash flows from operations and borrowing capacity under our
credit facility will be sufficient to meet our working capital, capital expenditures, and any other capital needs for at least the next 12
months. We are currently not aware of any trends or demands, commitments, events or uncertainties that will result in or that are
reasonably likely to result in our liquidity increasing or decreasing in any material way that will impact our capital needs during or
beyond the next 12 months.
58
The following tables summarizes short- and long-term material cash requirements as of December 31, 2024, which we believe
that we will be able to fund these obligations through cash generated from our operations and available alternative sources of funds
(dollars in thousands):
(in thousands)
Less than 1
year
1-3 years
3-5 years
More than 5
years
Total
Operating lease obligations
$
1,490
$
2,380
$
2,015
$
2,110
$
7,995
Supplemental retirement plans
135
366
527
13,048
14,076
Time deposit maturities
88,814
2,467
114
0
91,395
Total
$
90,439
$
5,213
$
2,656
$
15,158
$
113,466
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, 2024, total shareholders’ equity increased to $183.4 million, representing an increase of $17.4 million from
December 31, 2023. The increase was due to net income of $24.9 million recorded to retained earnings, which was partially offset by
other comprehensive losses of $4.5 million, net of income tax benefit, due to the negative effect that rising long-term treasury yields
had on the unrealized market value adjustment of our available-for-sale investment portfolio during 2024. Also, retained earnings was
reduced by the common stock dividend payments totaling $3.7 million during 2024. As of December 31, 2024, 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, 2024, we were qualified as a “well capitalized institution” under the regulatory framework for prompt
corrective action. For more information on our capital resources and capital adequacy requirements, see Note 19 to the Consolidated
Financial Statements in Item 8 of this report.
59
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 is the risk of a loss in earnings or economic value that arises from adverse changes or movements in market rates
and prices, such as interest rates or credit spreads. The Company's market risk exposure is primarily that of interest rate risk inherent in
its lending, investing, and deposit taking activities. The core banking activities of lending and deposit-taking expose the Company to
interest rate risk, which occurs when assets and liabilities re-price at different times and by different amounts as interest rates change.
The Company 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 Investment 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 relatively 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).
60
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 2024, we were relatively neutral but slightly "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, 2024 has decreased from 2023 primarily due to a decrease in interest-bearing cash balances that have floating rates. In
the decreasing interest rate environments, we show a decline in net interest income as interest-bearing assets re-price lower while
deposits reach their floors and cannot be reduced further.
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.
61
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Our consolidated financial statements and the Independent Auditors’ Report appear on pages F-1 through F-44 of this Annual
Report and are incorporated into this Item 8 by reference.
INDEX TO FINANCIAL STATEMENTS
PAGE
MANAGEMENT’S ASSESSMENT OF INTERNAL CONTROL OVER FINANCIAL REPORTING
F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
F-2
CONSOLIDATED FINANCIAL STATEMENTS
Balance sheets
F-4
Statements of income
F-5
Statements of comprehensive income
F-6
Statements of shareholders’ equity
F-7
Statements of cash flows
F-8
Notes to financial statements
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, 2024, 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, 2024, 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:
62
•
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,
2024, 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, 2024.
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, 2024 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, 2024 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial
reporting subsequent to the evaluation date.
ITEM 9B. OTHER INFORMATION
Insider Adoption or Termination of Trading Arrangements
During the quarter ended December 31, 2024, no director or officer (as defined in Rule 16a-1(f) under the Exchange Act) of the Company
informed us of the adoption or termination of any Rule 10b5-1 trading arrangements or non-Rule 10b5-1 trading arrangements (in each
case, as defined in Item 408 of Regulation S-K), other than, on November 5, 2024, Donald Barton, a director, adopted a Rule 10b5-1
trading arrangement providing for the sale of 375 shares of our common stock each month for a total of up to 4,500 shares of our
common stock. The trading arrangement is intended to satisfy the affirmative defense in Rule 10b5-1(c). The duration of the trading
arrangement is until February 11, 2026, or earlier if all transactions under the trading arrangement are completed.
ITEM 9C. DISCLOSURE REGARDING FOREIGN JURISDICTIONS THAT PREVENT INSPECTIONS
Not applicable.
63
PART III
ITEM 10.
DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The information required by this Item is incorporated by reference to the section entitled “Corporate Governance and Board
Matters,” “Information About Directors and Executive Officers” and “Corporate Governance - Insider Trading Policy” in our Proxy
Statement to be filed prior to the 2025 Annual Meeting of Shareholders.
The Company has 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. A copy of the Code of Ethics is also available at the
Company’s website at www.ovcb.com. The content of our website is not incorporated by reference into this Annual Report or any other
filings with the SEC.
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 2024 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
Form
Transaction Type
Transaction Date
# of Shares
Filing Date
James L Gilbert
4
Purchase
08/14/23
33
04/03/24
James L Gilbert
4
Purchase
02/12/24
48
04/03/24
Allison C Lafferty
4
Purchase
06/03/24
100
06/10/24
Allison C Lafferty
4
Purchase
08/21/24
100
09/09/24
Gary Strong
4
Purchase
05/20/24
3
05/29/24
Gary Strong
4
Purchase
05/21/24
1
05/29/24
Gary Strong
4
Purchase
02/24/24
1
05/29/24
Gary Strong
4
Purchase
02/28/24
695
05/29/24
Gary Strong
4
Purchase
08/05/24
700
08/08/24
Terrance P Withrow
4
Purchase
02/13/23
148
05/06/24
Terrance P Withrow
4
Purchase
08/14/23
152
05/06/24
Terrance P Withrow
4
Purchase
02/12/24
225
05/06/24
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 2025 Annual Meeting of Shareholders.
64
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, 2024 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.
A
B
C
Plan Category
Number of Securities to be Issued Upon
Exercise of Outstanding Options,
Warrants and Rights
Weighted Average Exercise Price of
Outstanding Options, Warrants and
Rights
Number of Securities Remaining Available for
Future Issuance Under Equity Compensation
Plans (Excluding Securities Reflected in
Column A)
Equity Compensation Plans
Approved by Shareholders
0
$
0
392,880
Equity Compensation Plans Not
Approved by Shareholders
0
0
0
Total
0
$
0
392,880
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 2025 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 2025 Annual Meeting of Shareholders.
ITEM 14.
PRINCIPAL ACCOUNTANT FEES AND SERVICES
The Company’s independent registered public accounting firm is RSM US LLP, Issuing Office: Dallas, TX, PCAOB ID: 49.
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 2025 Annual Meeting of Shareholders.
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
Documents Filed as Part of this Annual 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-44.
(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.
65
(a)(3) Exhibits
INDEX TO EXHIBITS
Exhibit
Number
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, as amended and restated on June 21, 2022 (incorporated by reference to Exhibit 3.1 to the Quarterly Report on Form
10-Q filed on August 12, 2022).
4.1 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).
10.3 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 (incorporated by reference to Exhibit 10.4 to
the Form 10-K filed on March 31, 2021).
10.5 Form of 2018 Equity Incentive Plan Stock Option Award Agreement (incorporated by reference to Exhibit 99.2 to the Form S-8
filed on June 28, 2018).†
10.6 Form of 2018 Equity Incentive Plan Restricted Stock Award Agreement (incorporated by reference to Exhibit 99.3 to the Form
S-8 filed on June 28, 2018).†
10.7 Form of 2018 Equity Incentive Plan Restricted Stock Unit Award Agreement (incorporated by reference to Exhibit 99.4 to the
Form S-8 filed on June 28, 2018).†
19.1 Oak Valley Bancorp Insider Trading Policy.
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.
31.1 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.
31.2 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.
32.1 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.*
97.1 Oak Valley Bancorp Clawback Policy (incorporated by reference to Exhibit 97.1 to the Form 10-K filed on April 1, 2024).
101 The following financial statements from the Company's Annual Report on Form 10-K for the year ended December 31, 2024,
formatted in Inline XBRL: (i) Consolidated Balance Sheets as of December 31, 2024 and 2023, (ii) Consolidated Statements of
Income for the Years Ended December 31, 2024 and 2023, (iii) Consolidated Statements of Comprehensive Income for the
Years Ended December 31, 2024 and 2023, (iv) Consolidated Statements of Shareholders’ Equity for the Years Ended
December 31, 2024 and 2023, (v) Consolidated Statements of Cash Flows for the Years Ended December 31, 2024 and 2023,
and (vi) Notes to Consolidated Financial Statements.
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.
66
SIGNATURES
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, 2025.
OAK VALLEY BANCORP
a California corporation
By: /s/ CHRISTOPHER M. COURTNEY
Christopher M. Courtney, 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.
Signature
Title
Date
/s/ DONALD L. BARTON
Director
March 31, 2025
Donald Barton
/s/ CHRISTOPHER M. COURTNEY
Chief Executive Officer and Director
(Principal Executive Officer)
March 31, 2025
Christopher M. Courtney
/s/ LYNN R. DICKERSON
Director
March 31, 2025
Lynn R. Dickerson
/s/ JEFFREY A. GALL
Chief Financial Officer (Principal
Financial and Principal Accounting
Officer)
March 31, 2025
Jeffrey A. Gall
/s/ JAMES L. GILBERT
Director
March 31, 2025
James L. Gilbert
/s/ THOMAS A. HAIDLEN
Director
March 31, 2025
Thomas A. Haidlen
/s/ H. RANDOLPH HOLDER
Director
March 31, 2025
H. Randolph Holder
/s/ DANIEL J. LEONARD
Director
March 31, 2025
Daniel J. Leonard
/s/ RICHARD A. McCARTY
President, Chief Operating Officer,
and Director
March 31, 2025
Richard A. McCarty
/s/ JANET S. PELTON
Director
March 31, 2025
Janet S. Pelton
/s/ GARY STRONG
Director
March 31, 2025
Gary Strong
/s/ DANNY L. TITUS
Director
March 31, 2025
Danny L. Titus
67
/s/ TERRANCE P. WITHROW
Director
March 31, 2025
Terrance P. Withrow
/s/ ALLISON C. LAFFERTY
Director
March 31, 2025
Allison C. Lafferty
F-1
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, 2024 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, 2024.
/s/ CHRISTOPHER M. COURTNEY
/s/ JEFFREY A. GALL
Christopher M. Courtney, Chief Executive Officer
Jeffrey A. Gall, Chief Financial Officer
F-2
Report of Independent Registered Public Accounting Firm
To the Shareholders and the Board of Directors of Oak Valley Bancorp
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, 2024 and 2023, 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, 2024 and 2023, 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 Credit Losses
As described in Notes 1 and 4 to the financial statements, the Company's allowance for credit losses (allowance) is
deducted from the amortized cost basis of loans to present the net amount expected to be collected on the loans. The
measurement of expected credit losses is based on relevant information, which includes historical experience, current
conditions, and reasonable and supportable forecasts that affect the collectability of the reported amount over the
contractual life. The total allowance represented $11,460,000 at December 31, 2024.
Management calculates the quantitative portion of collectively evaluated reserves for all loan categories using a
discounted cash flow (“DCF”) methodology. The DCF quantitative reserve methodology incorporates the consideration of
probability of default (“PD”) and loss given default (“LGD”) estimates to calculate expected lifetime losses. The PD
estimates are derived using reasonable and supportable economic forecasts and historical loss-rate data from both the
Company and a selected peer group. The historical loss-rate data is compared to identified benchmark economic
indicators to create a regression model that is updated annually. Reasonable and supportable forecasts for the identified
economic indicators are then incorporated to arrive at expected default rates for the various loan categories. The
reasonable and supportable forecasts are based on the National Unemployment Rate and Real Gross Domestic Product.
The expected default rates are then applied to expected monthly loan balances estimated through the consideration of
contractual terms and expected prepayments. The Company utilizes a four-quarter forecast period, after which the
F-3
expected default rates revert to the historical average over a four-quarter reversion period on a straight-line basis. The
prepayment assumptions are estimated based on historical experience of the Company. The prepayment assumptions
may be updated by Management in the event that changing conditions impact Management’s estimate. LGD utilized in
the DCF is derived from the application of models that correlate LGD and PD based on historical peer data.
Management recognizes that there are additional factors impacting risk of loss in the loan portfolio beyond what is
captured in the quantitative portion of collectively evaluated reserves. As current and expected conditions may vary
compared with conditions over historical periods, which are utilized in the calculation of quantitative reserves,
management considers whether additional or reduced reserve levels on collectively evaluated loans may be warranted
given the consideration of a variety of qualitative factors.
Several of the following qualitative factors considered by management reflect regulatory guidance on qualitative factors,
whereas several others represent factors unique to the Company or unique to the current time period.
● Changes in lending policies and procedures, including changes in underwriting standards and collection, charge-
off, and recovery practices
● Changes in international, regional and local economic and business conditions, and developments that affect the
collectability of the portfolio, as reflected in forecasts of the California unemployment rate
● Changes in the nature and volume of the loan portfolio
● Changes in the experience, ability, and depth of lending management and other relevant staff
● Changes in the volume and severity of past due, watch loans and classified loans
● Changes in the quality of the Company’s loan review processes
● Changes in the value of underlying collateral for loans not identified as collateral dependent
● Changes in loan categorization concentrations
● Other external factors, which include, the regulatory risk ratings
The qualitative portion of the Company’s reserves on collectively evaluated loans are calculated using a combination of
numeric frameworks (established matrices defining reserve rates based on specified metrics) and management
judgement to determine risk categorizations in each of the qualitative factors.
We identified the determination and evaluation of the PD, LGD, prepayment rate, reasonable and supportable forecast,
and qualitative factors components of the allowance as a critical audit matter. The determination and evaluation of the PD,
LGD, prepayment rate, reasonable and supportable forecast, and qualitative factors components of the allowance are a
significant accounting estimates involving management’s judgments and subjectivity. In turn, auditing management’s
judgments 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 and evaluation of the PD,
LGD, prepayment rate, reasonable and supportable forecast, and qualitative factors components of the allowance,
and testing such control for design and operating effectiveness.
• Obtaining an understanding of and testing the controls over the data used in the determination of these
components.
• Testing the data inputs used in the determination of these components to ensure completeness and accuracy by
comparing to source documents and independently validating certain external data inputs.
• Evaluating the appropriateness and consistency of management’s judgments related to the assumptions used to
determine the PD, LGD, prepayment rate, reasonable and supportable forecast, and qualitative factors
components of the allowance, including considering the sensitivity analyses performed by management over these
assumptions.
• Reviewing subsequent events and considering their impact on judgments applied in forming the PD, LGD,
prepayment rate, reasonable and supportable forecast, and qualitative factors component of the allowance for
credit losses as of the consolidated balance sheet date.
/s/ RSM US LLP
We have served as the Company's auditor since 2018.
Dallas, Texas
March 31, 2025
F-4
OAK VALLEY BANCORP
CONSOLIDATED BALANCE SHEETS
(dollars in thousands)
December 31,
December 31,
2024
2023
ASSETS
Cash and due from banks
$
138,481
$
180,068
Federal funds sold
30,270
36,500
Cash and cash equivalents
168,751
216,568
Securities - available for sale
526,496
518,078
Securities - equity investments
3,169
3,132
Loans, net of allowance for credit losses of $11,460 and $10,896
at December 31, 2024 and 2023, respectively
1,093,514
1,004,277
Cash surrender value of life insurance
37,558
31,506
Bank premises and equipment, net
16,319
15,865
Goodwill and other intangible assets, net
3,390
3,473
Deferred tax asset
15,501
13,247
Interest receivable and other assets
35,906
36,276
$
1,900,604
$
1,842,422
LIABILITIES AND SHAREHOLDERS’ EQUITY
Deposits
$
1,695,690
$
1,650,534
Interest payable and other liabilities
21,478
25,796
Total liabilities
1,717,168
1,676,330
Commitments and contingent liabilities (Note 13)
Shareholders’ equity
Common stock, no par value; 50,000,000 shares authorized,
8,357,211 and 8,293,168 shares issued and outstanding
at December 31, 2024 and 2023, respectively
25,435
25,435
Additional paid-in capital
6,199
5,512
Retained earnings
175,502
154,301
Accumulated other comprehensive loss, net of tax
(23,700)
(19,156)
Total shareholders’ equity
183,436
166,092
$
1,900,604
$
1,842,422
See accompanying notes
F-5
OAK VALLEY BANCORP
CONSOLIDATED STATEMENTS OF INCOME
(dollars in thousands, except per share amounts)
YEAR ENDED DECEMBER 31,
2024
2023
INTEREST INCOME
Interest and fees on loans
$
53,406
$
44,773
Interest on securities
20,693
20,578
Interest on federal funds sold
1,547
1,414
Interest on deposits with banks
7,248
13,901
82,894
80,666
INTEREST EXPENSE
Deposits
12,860
4,863
Federal funds purchased
0
1
Total interest expense
12,860
4,864
Net interest income
70,034
75,802
(Reversal of) provision for credit losses
(1,620)
970
Net interest income after (reversal of) provision for credit losses
71,654
74,832
NON-INTEREST INCOME
Service charges on deposits
1,682
1,813
Debit card transaction fee income
1,738
1,773
Earnings on cash surrender value of life insurance
1,052
788
Mortgage commissions
31
20
Gains on sales and calls of available-for-sale securities
114
156
Other
1,938
2,081
Total non-interest income
6,555
6,631
NON-INTEREST EXPENSE
Salaries and employee benefits
28,640
26,109
Occupancy expenses
4,610
4,541
Data processing fees
2,814
2,729
Regulatory assessments (FDIC & DFPI)
1,090
1,020
Other operating expenses
8,863
6,758
Total non-interest expense
46,017
41,157
Net income before provision for income taxes
32,192
40,306
Total provision for income taxes
7,244
9,458
Net Income
$
24,948
$
30,848
Net income per share
$
3.04
$
3.76
Net income per diluted share
$
3.02
$
3.75
See accompanying notes
F-6
OAK VALLEY BANCORP
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
YEAR ENDED DECEMBER 31,
(dollars in thousands)
2024
2023
Net income
$
24,948
$
30,848
Other comprehensive (loss) income:
Unrealized holding (loss) gain arising during the period
(6,337)
16,584
Less: reclassification for net gains included in net income
(114)
(156)
Other comprehensive (loss) income, before tax
(6,451)
16,428
Tax benefit (expense) related to items of other comprehensive income
1,907
(4,857)
Total other comprehensive (loss) income
(4,544)
11,571
Comprehensive income
$
20,404
$
42,419
See accompanying notes
OAK VALLEY BANCORP
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
YEARS ENDED DECEMBER 31, 2024 AND 2023
Accumulated
Additional
Other
Total
Common Stock
Paid-in
Retained
Comprehensive Shareholders'
(dollars in thousands)
Shares
Amount
Capital
Earnings
Income (Loss)
Equity
Balances, January 1, 2024
8,293,168 $ 25,435
$ 5,512 $ 154,301
$
(19,156)
$
166,092
Restricted stock issued
72,269
0
0
0
0
0
Restricted stock forfeited
(1,950)
0
0
0
0
0
Restricted stock surrendered for tax withholding
(6,276)
0
(158)
0
0
(158)
Cash dividends declared $0.45 per share of common stock
0
0
0
(3,747)
0
(3,747)
Stock based compensation
0
0
845
0
0
845
Other comprehensive loss
0
0
0
0
(4,544)
(4,544)
Net income
0
0
0
24,948
0
24,948
Balances, December 31, 2024
8,357,211 $ 25,435
$ 6,199 $ 175,502
$
(23,700)
$
183,436
Balances, January 1, 2023
8,257,894 $ 25,435
$ 5,190 $ 126,728
$
(30,727)
$
126,626
Restricted stock issued
43,446
0
0
0
0
0
Restricted stock forfeited
(300)
0
0
0
0
0
Restricted stock surrendered for tax withholding
(7,872)
0
(211)
0
0
(211)
Cash dividends declared $0.32 per share of common stock
0
0
0
(2,646)
0
(2,646)
Stock based compensation
0
0
533
0
0
533
Other comprehensive gain
0
0
0
0
11,571
11,571
CECL adoption adjustments
0
0
0
(629)
0
(629)
Net income
0
0
0
30,848
0
30,848
Balances, December 31, 2023
8,293,168
$ 25,435
$ 5,512
$ 154,301
$
(19,156)
$
166,092
See accompanying notes
F-8
OAK VALLEY BANCORP
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED
DECEMBER 31,
(dollars in thousands)
2024
2023
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income
$
24,948 $
30,848
Adjustments to reconcile net income to net cash provided by operating activities:
(Reversal of) provision for credit losses
(1,620)
970
Increase in deferred fees/costs, net
156
151
Depreciation
1,325
1,329
Amortization of investment securities, net
838
1,151
Unrealized loss (gain) on equity securities
74
(41)
Amortization of operating lease right-of-use asset
(231)
(231)
Stock based compensation
845
533
Gain on sales and calls of available for sale securities
(114)
(156)
Earnings on cash surrender value of life insurance
(1,052)
(788)
(Increase) decrease in deferred tax asset
(2,254)
706
Increase (decrease) in interest payable and other liabilities
914
(1,411)
Increase in interest receivable
(173)
(456)
Decrease in other assets
1,980
454
Net cash provided by operating activities
25,636
33,059
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of available for sale securities
(104,124)
(40,660)
Purchases of equity securities
(112)
(101)
Proceeds from the sale of available-for-sale securities
28,258
42,791
Proceeds from maturities, calls, and principal paydowns of securities available for sale
60,274
22,662
Investment in LIHTC
(4,119)
(373)
Net increase in loans
(87,773)
(100,709)
Purchase of FHLB Stock
(329)
(720)
Purchase of BOLI policies
(5,000)
(500)
Purchases of premises and equipment
(1,779)
(1,894)
Net cash used in investing activities
(114,704)
(79,504)
CASH FLOWS FROM FINANCING ACTIVITIES:
Federal funds advances
35
1,855
Federal funds payments
(35)
(1,855)
Shareholder cash dividends paid
(3,747)
(2,646)
Net increase (decrease) in demand deposits and savings accounts
9,283
(179,098)
Net increase in time deposits
35,873
15,335
Tax withholding payments on vested restricted shares surrendered
(158)
(211)
Net cash provided by (used in) in financing activities
41,251
(166,620)
NET DECREASE IN CASH AND CASH EQUIVALENTS
(47,817)
(213,065)
CASH AND CASH EQUIVALENTS, beginning of period
216,568
429,633
CASH AND CASH EQUIVALENTS, end of period
$
168,751 $
216,568
F-9
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest
$
12,747 $
4,715
Operating leases
$
1,497 $
1,469
Income taxes
$
6,385 $
10,449
NON-CASH INVESTING ACTIVITIES:
Change in unrealized (loss) gain on securities
$
(6,451)
$
16,428
Right-of-use asset obtained in exchange for new operating lease liability
$
(1,113)
$
(390)
See accompanying notes
F-10
OAK VALLEY BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 — SUMMARY OF ACCOUNTING POLICIES
Nature of Operations
Oak Valley Bancorp (“the Company”, “us”, “our”) is the parent holding company for Oak Valley Community Bank (the “Bank”), a
California state-chartered bank. The consolidated financial statements include the accounts of the parent company and its wholly-
owned bank subsidiary. Unless otherwise stated, the “Company” refers to the consolidated entity, Oak Valley Bancorp, while the
“Bank” refers to Oak Valley Community Bank. All material intercompany transactions have been eliminated. Certain prior period
amounts have been reclassified to conform to the current period presentation. There was no effect on net income or shareholders’
equity as previously reported as a result of reclassifications. 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.
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, Sacramento, and Roseville, 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
(“U.S. GAAP”) 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 credit losses, accounting for income taxes, fair value measurements and goodwill impairment. Actual results could differ from
these estimates.
A summary of the significant accounting policies applied in the preparation of the accompanying consolidated financial statements
follows.
Subsequent events — The Company has evaluated events and transactions subsequent to December 31, 2024 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 ASC Topic 825-10, 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.
For available-for-sale debt securities in an unrealized loss position, management evaluates whether the decline in fair value is a
reflection of credit deterioration or other factors. In performing this evaluation, management considers the extent which fair value has
fallen below amortized cost, changes in ratings by rating agencies, and other information indicating a deterioration in repayment
capacity of either the underlying issuer or the borrowers providing repayment capacity in a securitization. If management’s evaluation
indicates that a credit loss exists then a present value of the expected cash flows is calculated and compared to the amortized cost basis
of the security in question and to the degree that the amortized cost basis exceeds the present value an allowance for credit loss
(“ACL”) is established, with the caveat that the maximum amount of the reserve on any individual security is the difference between
the fair value and amortized cost balance of the security in question. Any unrealized loss that has not been recorded through an ACL is
recognized in other comprehensive income.
F-11
The unrealized losses are due primarily to rising market yields and not due to credit deterioration. As such, no ACL on available-for-
sale securities has been established as of December 31, 2024 and 2023. 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.
Loans originated — Loans are reported at the principal amount outstanding, net of unearned income, deferred loan fees, and the
allowance for credit 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 credit losses (“ACL”) — As required by ASC Topic 326, on January 1, 2023 the Company implemented CECL and
increased our ACL, previously the allowance for loan losses, with a $346,000 cumulative adjustment. Under ASC topic 326, the
allowance for credit losses is deducted from the amortized cost basis to present the net amount expected to be collected on the loans.
The measurement of expected credit losses is based on relevant information, which includes experience, current conditions, and
reasonable and supportable forecasts that affect the collectability of the reported amount over the remaining contractual life. The
Company’s ACL is calculated monthly, with any difference in the calculated ACL and the recorded ACL trued-up through an entry to
the provision for credit losses. Management calculates the quantitative portion of collectively evaluated reserves for all loan
categories, using a discounted cash flow (“DCF”) methodology. For purposes of estimating the Company’s ACL, management
generally evaluates collectively evaluated loans by federal call code in order to group loans with similar risk characteristics together,
however management has grouped loans in selected call codes together in determining portfolio segments, due to similar risk
characteristics and reserve methodologies used for certain call code classifications.
The DCF quantitative reserve methodology incorporates the consideration of probability of default (“PD”) and loss given default
(“LGD”) estimates to calculate expected lifetime losses. The PD estimates are derived using reasonable and supportable economic
forecasts and historical loss rate data from both the bank and a selected peer group. The historical loss rate data is compared to
identified benchmark economic indicators to create a regression model that is updated annually. Reasonable and supportable forecasts
for the identified economic indicators are then incorporated to arrive at expected default rates for the various loan categories. The
reasonable and supportable forecasts are based on the National Unemployment Rate and Real Gross Domestic
Product. The expected default rates are then applied to expected monthly loan balances estimated through the consideration of
contractual terms and expected prepayments. The Company utilizes a four-quarter forecast period, after which the expected default
rates revert to the historical average, over a four-quarter reversion period, on a straight-line basis. The prepayment assumptions are
estimated based on historical experience of the bank. The prepayment assumptions are updated quarterly and may be subject to
additional updates by Management in the event that changing conditions impact Management’s estimate. LGD utilized in the DCF is
derived from the application of models that correlate LGD and PD based on historical peer data.
Management recognizes that there are additional factors impacting risk of loss in the loan portfolio beyond what is captured in the
quantitative portion of collectively evaluated reserves. As current and expected conditions, may vary compared with conditions over
historical periods, which are utilized in the calculation of quantitative reserves, management considers whether additional or reduced
reserve levels on collectively evaluated loans may be warranted given the consideration of a variety of qualitative factors. Several of
the following qualitative factors (“Q-factors”) considered by management reflect regulatory guidance on Q-factors, whereas several
others represent factors unique to the Company or unique to the current time period.
●
Changes in lending policies and procedures, including changes in underwriting standards and collection, charge-off, and
recovery practices
●
Changes in international, regional and local economic and business conditions, and developments that affect the collectability
of the portfolio, as reflected in forecasts of the California unemployment rate
●
Changes in the nature and volume of the loan portfolio
F-12
●
Changes in the experience, ability, and depth of lending management and other relevant staff
●
Changes in the volume and severity of past due, watch loans and classified loans
●
Changes in the quality of the Bank’s loan review processes
●
Changes in the value of underlying collateral for loans not identified as collateral dependent
●
Changes in loan categorization concentrations
●
Other external factors, which include, the regulatory risk ratings.
The qualitative portion of the Company’s reserves on collectively evaluated loans are calculated using a combination of numeric
frameworks, matrices defining reserve rate based on specified metrics, and management judgement, to determine risk categorizations
in each of the Q-factors presented above. The amount of qualitative reserves is also contingent upon the relative weighting of Q-
factors according to management’s judgement.
Loans identified as losses by management and internal loan review are charged-off. Furthermore, consumer loan accounts are
charged-off automatically based on regulatory requirements.
Accrued interest receivable for loans is included in the “Interest receivable and other assets” line item on the Company’s Consolidated
Balance Sheet. The Company elected not to measure an allowance for accrued interest receivable and instead elected to reverse
accrued interest income on loans that are placed on nonaccrual status. The Company believes this policy results in the timely reversal
of uncollectible interest.
The method for calculating the allowance for unfunded loan commitments is based on applying an estimated funding rate to the
unfunded loan commitment balance to determine a projected cashflow schedule. Then the quantitative loan loss rate from each loan
pool as calculated in the DCF model described above is used to calculate the allowance for unfunded loan commitments which is
recorded included in interest payable and other liabilities on the consolidated balance sheet.
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
31.5
years
Equipment
3 – 12 years
Furniture and fixtures
3 – 7 years
Leasehold improvements
5 – 15 years
Leasehold improvements are amortized over the lesser of the useful life of the asset or the remaining term of the lease. The straight-
line method of depreciation is followed for all assets for financial reporting purposes, but accelerated methods are used for tax
purposes. Deferred income taxes have been provided for the resulting temporary differences.
Income taxes — Deferred income taxes are provided for the temporary differences between the financial reporting basis and the tax
basis of the Company’s assets and liabilities. Deferred tax assets and liabilities are reflected at currently enacted income tax rates
applicable to the period in which the deferred tax assets or liabilities are expected to be realized or settled using the liability method.
As changes in tax laws or rates are enacted, deferred tax assets and liabilities are adjusted through the provision for income taxes.
The Company files income tax returns in the U.S. federal jurisdiction, and the State of California. With few exceptions, the Company
is no longer subject to U.S. federal tax examinations by tax authorities for years before 2021 or to state/local income tax examinations
by tax authorities for years before 2020.
Low Income Housing Tax Credits (“LIHTC”) — The Company has invested in certain tax-advantaged projects promoting
affordable housing, new markets, and historic rehabilitation. These investments are designed to generate returns primarily though the
realization of federal and state income tax credits and other tax benefits, such as tax deductions from operating losses of the
investments, over specified time periods. These investments involve significant management judgments, including a determination of
which entities have the power to direct activities, and whether these entities are variable interest entities. The Company is required to
evaluate whether to consolidate a variable interest entity at both inception and on an ongoing basis. The Company is not required to
F-13
consolidate variable interest entities in which it has concluded it does not have a controlling financial interest and is not the primary
beneficiary. The Company’s maximum exposure to loss related to its investments in these unconsolidated variable interest entities is
limited to the carrying amount of the investment, net of any unfunded capital commitments and previously recorded tax credits which
remain subject to recapture by taxing authorities based on compliance features required to be met at the project level. The Company
believes potential losses from these investments are remote.
The Company has elected to apply the proportional amortization method in accounting for investments in LIHTCs. Income tax credits
and other tax benefits, net of investment amortization, were included as a component of the Company’s estimated annual effective tax
rate used for the calculation of income taxes presented on the Consolidated Statements of Income.
For additional information regarding these investments, see “Note 21 – Variable Interest Entities.”
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 advertising costs as they are incurred. Advertising expense was $922,000 and $371,000
for the years ended December 31, 2024 and 2023, respectively.
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, 2024 and 2023, $80,000 and $110,000, net of tax, respectively, was
reclassified from comprehensive income into net income related to gains on called and sold 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.
F-14
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 72,269 and 43,446 shares in 2024 and 2023, respectively.
Fair values of financial instruments — The consolidated financial statements include various estimated fair value information as of
December 31, 2024 and 2023. 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.
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.
Revenue recognition — Revenue from deposit account-related fees, including general service fees charged for deposit account
maintenance and activity and transaction-based fees charged for certain services, such as debit card, wire transfer or overdraft
activities, is recognized when the performance obligation is completed, which is generally after a transaction is completed or monthly
for account maintenance services. Investment advisory service fees are received from a third-party broker-dealer as part of a revenue
sharing agreement for fees earned from customers that the Company refers to the third party for services that include custody of assets,
investment management, trust services, and other fiduciary activities. Revenue is recognized when the performance obligation is
completed, which is generally monthly.
Goodwill and other intangible assets — As of December 31, 2024 intangible assets are comprised of goodwill of $3,313,000 and core
deposit intangibles of $77,000, which were acquired through a business combination, as compared to goodwill of $3,313,000 and core
deposit intangible of $159,000 as of December 31, 2023. 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, 2024. At December 31, 2024, the core deposit
intangibles future estimated amortization expense is as follows:
(in thousands)
2025
Total
Core deposit intangible amortization
$ 77
$ 77
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, 2024 and 2023.
F-15
Recently Issued Accounting Standards —
In June 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Codification (ASC) Topic 326, Financial
Instruments – Credit Losses. This update revises the methodology used by financial institutions under GAAP to recognize credit losses
in the financial statements. Previously, GAAP required the use of an “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. The
“incurred loss” methodology for recognizing credit losses delayed recognition until it is probable that a loss has been incurred. ASC
Topic 326 replaces such incurred loss impairment model with a new methodology that requires organizations to measure all expected
credit losses for financial instruments held at the reporting date based on historical experience, current conditions and reasonable and
supportable forecasts that affect the collectability of the reported amount. This ASC results in a new model for estimating the allowance
for credit 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 were initially effective for fiscal years and all interim periods beginning after December 15, 2019. In October 2019, FASB
approved an amendment that delayed the adoption of this ASC for three years for certain entities including the Company since we are
classified as a Smaller Reporting Company. The Company adopted these standards as required on January 1, 2023 using the modified
retrospective method for all financial assets measured at amortized cost and off-balance sheet credit exposures. There was no cumulative
effect adjustment related to our available-for-sale investment portfolio upon adoption and the Company had no securities designated as
held-to-maturity as of January 1, 2023.
Results for reporting periods beginning after January 1, 2023 are presented under CECL. The transition adjustment of the CECL
adoption included an increase in the allowance for credit losses of $346,000, an increase of $547,000 to the reserve for unfunded
commitments, a $629,000 decrease to retained earnings, and a $264,000 tax benefit recorded as part of the deferred tax asset in the
Company’s Consolidated Balance Sheet.
In March 2022, the FASB issued ASU No. 2022-02, Financial Instruments - Credit Losses (Topic 326): Troubled Debt Restructurings
and Vintage Disclosures (“ASU 2022-02”). ASU 2022-02 eliminates the accounting guidance for troubled debt restructurings in
Accounting Standards Codification (“ASC”) Subtopic 310-40, Receivables - Troubled Debt Restructurings by Creditors, while
enhancing disclosure requirements for certain loan refinancing and restructurings by creditors when a borrower is experiencing financial
difficulty. Additionally, ASU 2022-02 requires entities to disclose current-period gross write-offs by year of origination for financing
receivables and net investments in leases within the scope of ASC Subtopic 326-20, Financial Instruments - Credit Losses - Measured
at Amortized Cost. ASU 2022-02 became effective on January 1, 2023. The adoption of ASU 2022-02 did not have a significant impact
on our consolidated financial statements.
In March 2023, the FASB issued ASU No. 2023-02, Investments-Equity Method and Joint Ventures (Topic 323): Accounting for
Investments in Tax Credit Structures Using the Proportional Amortization Method (a consensus of the Emerging Issues Task Force).
The amendments in this update permit reporting entities to elect to account for their tax equity investments, regardless of the program
from which the income tax credits are received, using the proportional amortization method if certain conditions are met. A reporting
entity may make an accounting policy election to apply the proportional amortization method on a tax-credit-program-by-tax-credit-
program basis rather than electing to apply the proportional amortization method at the reporting entity level or to individual
investments. Previously, only Low-Income Housing Tax Credit investments were eligible to apply the proportional amortization
method. This ASU became effective on January 1, 2024. The adoption of this ASU did not have a material impact on the consolidated
financial statements.
In November 2023, the FASB issued ASU No. 2023-07, Segment Reporting (Topic 280): Improvements to Reportable Segment
Disclosures (ASU 2023-07). The update requires enhanced disclosures about significant segment expenses, enhanced interim
disclosure requirements, clarification for when multiple segment measures of profit or loss can be disclosed and other requirements
intended to improve overall reportable segment disclosures in annual and interim periods. ASU 2023-07 became effective in the
annual period beginning on January 1, 2024 and becomes effective for interim periods beginning on January 1, 2025 with
retrospective application to all prior periods presented. ASU 2023-07 did not have a significant impact on disclosures, as the
Company operates as a single segment and reporting unit.
In December 2023, the FASB issued ASU No. 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures (ASU
2023-09). ASU 2023-09 requires additional annual disclosures including further disaggregation of information in the rate
reconciliation, additional information for reconciling items meeting a quantitative threshold, further disaggregation of income taxes
paid and other required disclosures. ASU 2023-09 is effective for the Company in the annual period beginning on January 1, 2025 and
applied on a prospective basis with both early adoption and retrospective application permitted. The Company does not anticipate
ASU 2023-09 to have a significant impact on its income tax disclosures or financial statements.
F-16
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
Federal 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, 2024 and 2023, the Company had Federal
Reserve Bank balances of $102,484,000 and $147,379,000, respectively. In addition, the Company maintains other cash equivalent
balances, of which insured balances totaled $49,665,000 and uninsured balances totaled $16,602,000 as of December 31, 2024.
NOTE 3 — SECURITIES
Equity Securities
The Company held equity securities with fair values of $3,169,000 and $3,132,000 at December 31, 2024 and December 31, 2023,
respectively. There were no sales of equity securities during the year ended December 31, 2024 or 2023. Consistent with ASC Topic
326, these securities are carried at fair value with the changes in fair value recognized in the consolidated statements of income.
Accordingly, the Company recognized an unrealized loss of $74,000 and an unrealized gain of $41,000 during the years ended
December 31, 2024 and 2023, 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, 2024 are as follows:
(dollars in thousands)
Amortized Cost
Gross
Unrealized
Gains
Gross Unrealized
Losses
Fair Value
Available-for-sale securities:
U.S. agencies
$
92,659
$
20
$
(5,605)
$
87,074
Collateralized mortgage obligations
29,105
0
(606)
28,499
Municipalities
347,051
900
(25,459)
322,492
SBA pools
882
0
(3)
879
Corporate debt
43,500
6
(2,294)
41,212
Asset backed securities
46,946
66
(672)
46,340
$
560,143
$
992
$
(34,639)
$
526,496
F-17
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, 2024.
(dollars in thousands)
Less than 12 months
12 months or more
Total
Description of Securities
Number of
Securities
Fair
Value
Unrealized
Loss
Fair
Value
Unrealized
Loss
Fair
Value
Unrealized
Loss
U.S. agencies
45 $
29,489 $
(777) $
54,568 $
(4,828) $
84,057 $
(5,605)
Collateralized mortgage obligations
9
25,092
(189)
3,408
(417)
28,500
(606)
Municipalities
123
113,936
(2,280)
179,223
(23,179)
293,159
(25,459)
SBA pools
6
720
(1)
159
(2)
879
(3)
Corporate debt
11
0
0
39,206
(2,294)
39,206
(2,294)
Asset backed securities
13
7,948
(15)
15,912
(657)
23,860
(672)
Total temporarily impaired securities
207 $
177,185 $
(3,262) $
292,476 $
(31,377) $
469,661 $
(34,639)
For available-for-sale debt securities in an unrealized loss position, management evaluates whether the decline in fair value is a
reflection of credit deterioration or other factors. In performing this evaluation, management considers the extent which fair value has
fallen below amortized cost, changes in ratings by rating agencies, and other information indicating a deterioration in repayment
capacity of either the underlying issuer or the borrowers providing repayment capacity in a securitization. If management’s evaluation
indicates that a credit loss exists then a present value of the expected cash flows is calculated and compared to the amortized cost basis
of the security in question and to the degree that the amortized cost basis exceeds the present value an allowance for credit loss
(“ACL”) is established, with the caveat that the maximum amount of the reserve on any individual security is the difference between
the fair value and amortized cost balance of the security in question. Any unrealized loss that has not been recorded through an ACL is
recognized in other comprehensive income.
The unrealized losses are due primarily to rising market yields and not due to credit deterioration. As such, no ACL on available-for-
sale securities has been established as of December 31, 2024. 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, 2024, 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)
Amortized
Fair
Cost
Value
Available-for-sale securities:
Due in one year or less
$
78,491
$
75,072
Due after one year through five years
170,298
162,708
Due after five years through ten years
194,945
177,999
Due after ten years
116,409
110,717
$
560,143
$
526,496
F-18
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, 2023 are as follows:
(dollars in thousands)
Amortized Cost
Gross
Unrealized
Gains
Gross Unrealized
Losses
Fair Value
Available-for-sale securities:
U.S. agencies
$
84,678
$
11
$
(4,430)
$
80,259
Collateralized mortgage obligations
9,108
0
(444)
8,664
Municipalities
345,981
2,792
(19,865)
328,908
SBA pools
1,394
3
(2)
1,395
Corporate debt
47,500
9
(3,992)
43,517
Asset backed securities
56,613
133
(1,411)
55,335
$
545,274
$
2,948
$
(30,144)
$
518,078
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, 2023.
(dollars in thousands)
Less than 12 months
12 months or more
Total
Description of Securities
Number of
Securities
Fair
Value
Unrealized
Loss
Fair
Value
Unrealized
Loss
Fair
Value
Unrealized
Loss
U.S. agencies
51 $
190 $
(3)
$
79,556 $
(4,427) $
79,746 $
(4,430)
Collateralized mortgage obligations
6
4,791
(1)
3,873
(443)
8,664
(444)
Municipalities
106
44,859
(453)
178,812
(19,412)
223,671
(19,865)
SBA pools
4
116
0
472
(2)
588
(2)
Corporate debt
13
0
0
41,508
(3,992)
41,508
(3,992)
Asset backed securities
19
2,123
(8)
32,535
(1,403)
34,658
(1,411)
Total temporarily impaired securities
199 $
52,079 $
(465)
$
336,756 $
(29,679) $
388,835 $
(30,144)
The Company recognized gross realized gains of $8,000 and $13,000 during 2024 and 2023, respectively, on certain available-for-sale
securities that were called. The Company sold eighteen available-for-sale securities in 2024 and recorded a corresponding gain on sale
of $106,000, as compared to twenty-four available-for-sale securities sold in 2023 for a gain on sale of $143,000.
Securities carried at $305,513,000 and $288,199,000 at December 31, 2024 and 2023, respectively, were pledged to secure deposits of
public funds.
F-19
NOTE 4 — LOANS
The Company’s customers are primarily located in Stanislaus, San Joaquin, Tuolumne, Sacramento, Placer, Inyo, and Mono Counties.
As of December 31, 2024, approximately 87% of the Company’s loans are commercial real estate loans which includes construction
loans. Approximately 7% of the Company’s loans are for general commercial uses including professional, retail, and small business.
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)
December 31, 2024
December 31, 2023
Commercial real estate:
Construction & land
$
17,812
$
63,060
Multi-family
87,768
54,045
Owner occupied
229,961
210,407
Non-owner occupied
528,769
470,052
Farmland
95,348
96,188
Commercial and industrial
83,572
65,218
Consumer
33,969
31,687
Agriculture
29,336
25,922
Total loans
1,106,535
1,016,579
Less:
Deferred loan fees and costs, net
(1,561)
(1,406)
Allowance for credit losses
(11,460)
(10,896)
Net loans
$
1,093,514
$
1,004,277
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
F-20
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, 2024 and 2023, approximately 34% and 35%, respectively, 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. Significant events
can affect the construction industry, including: the inherent volatility of real estate markets and vulnerability to delays due to weather,
change orders, inability to obtain construction permits, labor or material shortages, and price changes. Construction loans often
involve the disbursement of substantial funds with repayment substantially dependent on the success of the ultimate project. Sources
of repayment for these types of loans may be pre-committed permanent loans from approved long-term lenders, sales of developed
property or an interim loan commitment from the Company until permanent financing is obtained. These loans are closely monitored
by on-site inspections and are considered to have higher risks than other real estate loans due to their ultimate repayment being
sensitive to interest rate changes, governmental regulation of real property, general economic conditions and the availability of long-
term financing.
The Company originates consumer loans utilizing a computer-based credit scoring analysis to supplement the underwriting process.
To monitor and manage consumer loan risk, policies and procedures are developed and modified, as needed, jointly by line and staff
personnel. This activity, coupled with relatively small loan amounts that are spread across many individual borrowers, minimizes risk.
Additionally, trend and outlook reports are reviewed by management on a regular basis. Underwriting standards for home equity loans
follow bank policy, which include, but are not limited to, a maximum loan-to-value percentage of 80%, a maximum housing and total
debt ratio of 36% and 42%, respectively and other specified credit and documentation requirements.
Agricultural loans are secured by crop production and livestock are especially vulnerable to two risk factors that are largely outside the
control of Company and borrowers: commodity prices and weather conditions. Other environmental factors such as drought and
availability of water also effect the production of crops.
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.
As of December 31, 2024 and 2023, there were no loans classified as non-accrual loans.
F-21
The following table analyzes past due loans, segregated by class of loans, as of December 31, 2024 (in thousands):
December 31, 2024
30-59
Days
Past Due
60-89
Days
Past Due
90 Days
or More
Past Due
Total
Past Due
Current
Total
90 Days
or More
Past Due
and Still
Accruing
Commercial real estate:
Construction & land
$
0 $
0 $
0 $
0 $
17,812 $
17,812 $
0
Multi-family
0
0
0
0
87,768
87,768
0
Owner occupied
0
0
0
0
229,961
229,961
0
Non-owner occupied
0
0
0
0
528,769
528,769
0
Farmland
0
0
0
0
95,348
95,348
0
Commercial and industrial
0
0
0
0
83,572
83,572
0
Consumer
0
0
0
0
33,969
33,969
0
Agriculture
0
0
0
0
29,336
29,336
0
Total
$
0 $
0 $
0 $
0 $ 1,106,535 $ 1,106,535 $
0
The following table analyzes past due loans, segregated by class of loans, as of December 31, 2023 (in thousands):
December 31, 2023
30-59
Days
Past Due
60-89
Days
Past Due
90 Days
or More
Past Due
Total
Past Due
Current
Total
90 Days
or More
Past Due
and Still
Accruing
Commercial real estate:
Construction & land
$
0 $
0 $
0 $
0 $
63,060 $
63,060 $
0
Multi-family
0
0
0
0
54,045
54,045
0
Owner occupied
0
0
0
0
210,407
210,407
0
Non-owner occupied
0
0
0
0
470,052
470,052
0
Farmland
0
0
0
0
96,188
96,188
0
Commercial and industrial
0
0
0
0
65,218
65,218
0
Consumer
0
0
0
0
31,687
31,687
0
Agriculture
0
0
0
0
25,922
25,922
0
Total
$
0 $
0 $
0 $
0 $ 1,016,579 $ 1,016,579 $
0
Collateral Dependent Loans. Management’s evaluation as to the ultimate collectability of loans includes estimates regarding future
cash flows from operations and the value of property, real and personal, pledged as collateral. These estimates are affected by
changing economic conditions and the economic prospects of borrowers. Prior to January 1, 2023, before CECL was adopted,
collateral dependent loans are loans in which repayment is expected to be provided solely by the underlying collateral and there are no
other available and reliable sources of repayment. Under CECL, loans can be determined to be collateral dependent if foreclosure of
the loan’s underlying collateral is probable or as a practical expedient if the borrower is experiencing financial difficulties and the
repayment is expected to be provided substantially through the operation or sale of the collateral. Loans are written down to the lower
of cost or fair value of underlying collateral, less estimated costs to sell. The Company had no collateral dependent loans as of
December 31, 2024 and 2023.
Loan Modification Disclosures Pursuant to ASU 2022-02 - The Company may agree to different types of concessions when modifying
a loan. There were no loan modifications to borrowers experiencing financial difficulty, including principal forgiveness, rate reductions,
payment deferral or term extension, during the years ended December 31, 2024 and 2023.
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.
F-22
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
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
F-23
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 with 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.
•
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(W) 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, 2024 and 2023, there are no loans that are classified with risk grades of 8- Loss. The risk grades are reviewed
every month, at a minimum and on an as-needed basis depending on the specific circumstances of the loan.
F-24
The following table summarizes loan risk grade totals by class and year of origination as of December 31, 2024. Risk grades 1
through 4(W) have been aggregated in the “Pass” line.
As of December 31, 2024
(in thousands)
Term Loans Amortized Cost Basis by Origination Year
Risk Grade Ratings
2024
2023
2022
2021
2020
Prior
Revolving
Loans
Total
Commercial real estate - construction & land
Pass
$
8,228 $
3,828 $
3,287 $
923 $
0 $
1,546 $
0 $
17,812
Total commercial real estate - construction & land
8,228
3,828
3,287
923
0
1,546
0
17,812
Commercial real estate - multi-family
Pass
28,222
4,706
13,827
7,682
3,352
29,979
0
87,768
Total commercial real estate - multi-family
28,222
4,706
13,827
7,682
3,352
29,979
0
87,768
Commercial real estate - owner occupied
Pass
28,828
9,762
48,427
46,107
23,390
63,747
198
220,459
Special mention
0
0
0
7,398
0
278
0
7,676
Substandard
0
0
0
0
0
1,826
0
1,826
Total commercial real estate - owner occupied
28,828
9,762
48,427
53,505
23,390
65,851
198
229,961
Commercial real estate - non-owner occupied
Pass
39,520
103,156
90,702
78,029
38,928
170,059
1,670
522,064
Special mention
0
0
0
0
0
6,705
0
6,705
Total commercial real estate - non-owner occupied
39,520
103,156
90,702
78,029
38,928
176,764
1,670
528,769
Commercial real estate - Farmland
Pass
7,853
12,925
10,050
16,706
12,165
27,888
0
87,587
Special mention
0
0
0
0
2,301
5,460
0
7,761
Total commercial real estate - farmland
7,853
12,925
10,050
16,706
14,466
33,348
0
95,348
Commercial and Industrial
Pass
25,781
11,200
9,055
6,779
3,032
4,221
23,343
83,411
Substandard
0
0
111
0
0
50
0
161
Total commercial and industrial
25,781
11,200
9,166
6,779
3,032
4,271
23,343
83,572
Consumer
Pass
4,190
1,050
4,782
3,516
2,088
8,723
9,576
33,925
Substandard
3
0
0
0
0
41
0
44
Total consumer
4,193
1,050
4,782
3,516
2,088
8,764
9,576
33,969
Agriculture
Pass
28
1,859
1,009
1,271
0
467
17,936
22,570
Special mention
0
1,570
0
0
0
0
5,196
6,766
Total agriculture
28
3,429
1,009
1,271
0
467
23,132
29,336
Total by Risk Category
Pass
142,650 148,486 181,139 161,013
82,955 306,630
52,723
1,075,596
Special mention
0
1,570
0
7,398
2,301
12,443
5,196
28,908
Substandard
3
0
111
0
0
1,917
0
2,031
Total
$ 142,653 $ 150,056 $ 181,250 $ 168,411 $
85,256 $ 320,990 $
57,919 $ 1,106,535
F-25
The following table summarizes loan risk grade totals by class and year of origination as of December 31, 2023. Risk grades 1
through 4(W) have been aggregated in the “Pass” line.
As of December 31, 2023
(in thousands)
Term Loans Amortized Cost Basis by Origination Year
Risk Grade Ratings
2023
2022
2021
2020
2019
Prior
Revolving
Loans
Total
Commercial real estate - Construction & land
Pass
$
16,237 $
42,670 $
1,259 $
0 $
1,244 $
1,650 $
0 $
63,060
Total commercial real estate - construction & land
16,237
42,670
1,259
0
1,244
1,650
0
63,060
Commercial real estate - Multi-family
Pass
3,803
6,976
8,711
3,473
6,780
24,302
0
54,045
Total commercial real estate - multi-family
3,803
6,976
8,711
3,473
6,780
24,302
0
54,045
Commercial real estate - owner occupied
Pass
10,031
40,666
48,377
25,642
14,341
57,971
251
197,279
Special mention
0
0
7,683
0
0
289
530
8,502
Substandard
0
0
0
0
4,626
0
0
4,626
Total commercial real estate - owner occupied
10,031
40,666
56,060
25,642
18,967
58,260
781
210,407
Commercial real estate - non-owner occupied
Pass
78,417
71,236
81,386
43,531
44,413
145,073
1,879
465,935
Special mention
0
0
0
0
0
4,117
0
4,117
Total commercial real estate - non-owner occupied
78,417
71,236
81,386
43,531
44,413
149,190
1,879
470,052
Commercial real estate - Farmland
Pass
14,377
10,393
1,667
15,392
6,551
31,610
15,717
95,707
Special mention
0
0
0
0
0
481
0
481
Total commercial real estate - farmland
14,377
10,393
1,667
15,392
6,551
32,091
15,717
96,188
Commercial and Industrial
Pass
10,967
11,268
9,608
6,018
4,384
2,239
20,502
64,986
Special mention
0
0
0
139
0
6
0
145
Substandard
0
0
0
0
0
87
0
87
Total commercial and industrial
10,967
11,268
9,608
6,157
4,384
2,332
20,502
65,218
Consumer
Pass
1,234
5,042
4,104
2,213
2,074
7,555
8,529
30,751
Special mention
0
0
0
0
0
0
890
890
Substandard
0
0
0
0
0
46
0
46
Total consumer
1,234
5,042
4,104
2,213
2,074
7,601
9,419
31,687
Agriculture
Pass
3,032
1,707
1,309
0
214
488
18,984
25,734
Special mention
0
0
0
0
0
0
188
188
Total agriculture
3,032
1,707
1,309
0
214
488
19,172
25,922
Total by Risk Category
Pass
138,098 189,958 156,421
96,269
80,001 270,888
65,862
997,497
Special mention
0
0
7,683
139
0
4,893
1,608
14,323
Substandard
0
0
0
0
4,626
133
0
4,759
Total
$ 138,098 $ 189,958 $ 164,104 $
96,408 $
84,627 $ 275,914 $
67,470 $ 1,016,579
F-26
The following table details activity in the ACL by portfolio segment for the years ended December 31, 2024 and 2023. 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 Credit Losses
For the Years Ended December 31, 2024 and 2023
(in thousands)
Year Ended December 31, 2024
CRE
Construction
& Land
CRE
Multi-
family
CRE
Owner
occupied
CRE
Non-
owner
occupied
CRE
Farmland
Commercial
and
Industrial
Consumer
Agriculture
Total
Beginning balance
$
1,227 $
667 $
1,805 $
4,805 $
1,468 $
650 $
227 $
47 $
10,896
Charge-offs
0
0
0
0
0
0
(62)
0
(62)
Recoveries
2,230
0
0
0
0
0
16
0
2,246
(Reversal of) provision for credit losses
(3,199)
70
(302)
1,596
197
(5)
(6)
29
(1,620)
Ending balance
$
258 $
737 $
1,503 $
6,401 $
1,665 $
645 $
175 $
76 $
11,460
Year Ended December 31, 2023
Beginning balance
$
1,055 $
479 $
1,798 $
4,211 $
830 $
612 $
311 $
172 $
9,468
CECL day-one adjustments
338
23
103
25
12
102
(120)
(137)
346
Charge-offs
0
0
0
0
0
(12)
(40)
0
(52)
Recoveries
139
0
0
0
0
12
13
0
164
(Reversal of) provision for credit losses
(305)
165
(96)
569
626
(64)
63
12
970
Ending balance
$
1,227 $
667 $
1,805 $
4,805 $
1,468 $
650 $
227 $
47 $
10,896
The following table details the allowance for credit losses and ending gross loan balances as of December 31, 2024 and 2023,
summarized by collective and individual evaluation methods of impairment.
(in thousands)
December 31, 2024
CRE
Construction
& Land
CRE
Multi-
family
CRE
Owner
occupied
CRE
Non-owner
occupied
CRE
Farmland
Commercial
and
Industrial
Consumer
Agriculture
Total
Allowance for credit losses for loans:
Individually evaluated for impairment $
0 $
0 $
0 $
0 $
0 $
0 $
0 $
0 $
0
Collectively evaluated for impairment
258
737
1,503
6,401
1,665
645
175
76
11,460
$
258 $
737 $
1,503 $
6,401 $
1,665 $
645 $
175 $
76 $
11,460
Ending gross loan balances:
Individually evaluated for impairment $
0 $
0 $
0 $
0 $
0 $
0 $
0 $
0 $
0
Collectively evaluated for impairment
17,812
87,768
229,961
528,769
95,348
83,572
33,969
29,336
1,106,535
$
17,812 $
87,768 $
229,961 $
528,769 $
95,348 $
83,572 $
33,969 $
29,336 $ 1,106,535
December 31, 2023
Allowance for credit losses for loans:
Individually evaluated for impairment $
0 $
0 $
0 $
0 $
0 $
0 $
0 $
0 $
0
Collectively evaluated for impairment
1,227
667
1,805
4,805
1,468
650
227
47
10,896
$
1,227 $
667 $
1,805 $
4,805 $
1,468 $
650 $
227 $
47 $
10,896
Ending gross loan balances:
Individually evaluated for impairment $
0 $
0 $
0 $
0 $
0 $
0 $
0 $
0 $
0
Collectively evaluated for impairment
63,060
54,045
210,407
470,052
96,188
65,218
31,687
25,922 1,016,579
$
63,060 $
54,045 $
210,407 $
470,052 $
96,188 $
65,218 $
31,687 $
25,922 $ 1,016,579
F-27
The following table presents gross charge-offs for the year ended December 31, 2024 by portfolio class and origination year (dollars in
thousands):
Year ended December 31, 2024
(in thousands)
Term Loans Charged-off by Origination Year
Chargeoffs
2024
2023
2022
2021
2020
Prior
Revolving
Loans
Total
Commercial real estate:
Construction & land
$
0
$
0
$
0
$
0
$
0
$
0
$
0
$
0
Multi-family
0
0
0
0
0
0
0
0
Owner occupied
0
0
0
0
0
0
0
0
Non-owner occupied
0
0
0
0
0
0
0
0
Farmland
0
0
0
0
0
0
0
0
Commercial and industrial
0
0
0
0
0
0
0
0
Consumer
0
0
0
0
0
0
62
62
Agriculture
0
0
0
0
0
0
0
0
Total
$
0
$
0
$
0
$
0
$
0
$
0
$
62
$
62
The following table presents gross charge-offs for the year ended December 31, 2023 by portfolio class and origination year (dollars in
thousands):
Year ended December 31, 2023
(in thousands)
Term Loans Charged-off by Origination Year
Chargeoffs
2023
2022
2021
2020
2019
Prior
Revolving
Loans
Total
Commercial real estate:
Construction & land
$
0
$
0
$
0
$
0
$
0
$
0
$
0
$
0
Multi-family
0
0
0
0
0
0
0
0
Owner occupied
0
0
0
0
0
0
0
0
Non-owner occupied
0
0
0
0
0
0
0
0
Farmland
0
0
0
0
0
0
0
0
Commercial and industrial
0
0
12
0
0
0
0
12
Consumer
0
0
0
0
0
0
40
40
Agriculture
0
0
0
0
0
0
0
0
Total
$
0
$
0
$
12
$
0
$
0
$
0
$
40
$
52
Changes in the allowance for undisbursed loan commitments were as follows:
(in thousands)
YEARS ENDED DECEMBER 31,
2024
2023
Balance, beginning of year
$
609
$
546
CECL day-one adjustment
0
547
(Reversal of) provision charged to operations for off balance sheet
(263)
(484)
Balance, end of year
$
346
$
609
F-28
The method for calculating the allowance for unfunded loan commitments is based on applying an estimated funding rate to the
unfunded loan commitment balance to determine a projected cashflow schedule. Then the quantitative loan loss rate from each loan
pool, as calculated in the DCF model described above, is used to calculate the allowance for unfunded loan commitments which is
recorded included in interest payable and other liabilities on the consolidated balance sheet.
At December 31, 2024 and 2023, loans carried at $1,106,535,000 and $1,016,579,000, 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)
DECEMBER 31,
2024
2023
Land
$
5,195
$
5,195
Building
10,967
10,874
Leasehold improvements
5,465
5,417
Furniture, fixtures, and equipment
5,382
5,087
Branch construction work-in-process
2,641
1,494
29,650
28,067
Less accumulated depreciation
(13,331)
(12,202)
$
16,319
$
15,865
Depreciation expense was $1,325,000 and $1,329,000 for the years ended December 31, 2024 and 2023, respectively.
NOTE 6 — INTEREST RECEIVABLE AND OTHER ASSETS
Interest receivable and other assets are summarized as follows:
(in thousands)
DECEMBER 31,
2024
2023
Restricted equity securities
$
6,285
$
5,956
Interest income receivable on loans
3,268
2,866
Interest income receivable on investments
5,291
5,520
Investments in limited partnerships
12,417
13,684
Lease right of use asset
6,663
6,853
Prepaid expenses and other
1,982
1,397
$
35,906
$
36,276
F-29
NOTE 7 — DEPOSITS
Deposit totals were as follows:
DECEMBER 31,
(in thousands)
2024
2023
Demand
$
1,101,755
$
1,099,830
Money market deposit accounts
381,005
363,386
Savings
121,535
131,796
Time deposits $250,000 and under
53,803
33,399
Time deposits over $250,000
37,592
22,123
Total deposits
$
1,695,690
$
1,650,534
Time deposits issued and their remaining maturities at December 31, 2024, are as follows (in thousands):
Year ending December 31,
2025
$
88,814
2026
2,015
2027
452
2028
1
2029
113
$
91,395
NOTE 8 — FHLB ADVANCES
At December 31, 2024, the Company had no outstanding advances from the Federal Home Loan Bank (“FHLB”). Unused and
available advances totaled $364,379,000 at December 31, 2024. Loans carried at $1,106,535,000 as of December 31, 2024, were
pledged as collateral on advances from the Federal Home Loan Bank.
At December 31, 2023, the Company had no outstanding advances from the Federal Home Loan Bank (“FHLB”). Unused and
available advances totaled $333,083,000 at December 31, 2023. Loans carried at $1,016,579,000 as of December 31, 2023, were
pledged as collateral on advances from the Federal Home Loan Bank.
F-30
NOTE 9 — INTEREST ON DEPOSITS
Interest on deposits was comprised of the following:
DECEMBER 31,
2024
2023
Savings and other deposits
$
10,205
$
4,266
Time deposits over $250,000
966
222
Other time deposits
1,690
375
Total deposits
$
12,861
$
4,863
NOTE 10 — INCOME TAXES
The provision for income taxes consists of the following:
(in thousands)
YEARS ENDED DECEMBER 31,
2024
2023
Current
Federal
$
4,443
$
6,215
State
3,148
4,213
7,591
10,428
Deferred
Federal
(152)
(739)
State
(195)
(231)
(347)
(970)
$
7,244
$
9,458
F-31
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)
DECEMBER 31,
2024
2023
Deferred tax assets:
Allowance for credit losses
$
3,388
$
3,221
Restricted stock expense
169
106
Accrued vacation
134
167
Accrued salary continuation liability
1,855
1,717
Deferred compensation
78
77
Core deposit intangible
99
95
Merger Costs
47
55
Reserve for undisbursed commitments
102
180
Operating lease liability
2,073
0
State income tax
638
885
Unrealized loss on equity securities
231
0
Accumulated depreciation
156
50
Unrealized loss on securities available for sale
9,949
8,040
$
18,919
$
14,593
Deferred tax liabilities:
Prepaid expenses
(134)
(92)
FHLB dividends
(144)
(144)
Operating lease right-of-use asset
(1,970)
0
Accrued bonus
0
(6)
Deferred loan costs
(334)
(347)
Goodwill Amortization
(588)
(522)
Limited partner investment in small business equity fund
(248)
(235)
$
(3,418)
$
(1,346)
Net deferred income tax asset
$
15,501
$
13,247
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, 2024 and 2023.
The effective tax rate for 2024 and 2023 differs from the current Federal statutory income tax rate as follows:
YEARS ENDED DECEMBER 31,
2024
2023
Federal statutory income tax rate
21.0%
21.0%
State taxes, net of federal tax benefit
8.6%
8.6%
Tax exempt interest on municipal securities and loans
-5.0%
-5.0%
Other
-2.1%
-1.1%
Effective tax rate
22.5%
23.5%
F-32
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 2021 for U.S. federal or for years before 2020 for
California.
NOTE 11 — STOCK OPTION PLAN
The Company currently has one equity based incentive plan, 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. As of December 31, 2024, 392,880 shares
were available to be issued under the 2018 Stock Plan pursuant to new grants.
A summary of the status of the Company’s restricted stock and changes during the years ended December 31, 2024 and 2023 are
presented below.
DECEMBER 31, 2024
DECEMBER 31, 2023
Shares
Weighted
Average Grant
Date
Fair Value
Shares
Weighted
Average Grant
Date Fair
Value
Unvested at beginning of year
92,991
$
21.96
82,023
$
18.43
Issued
72,269
$
24.31
43,446
$
26.46
Vested
(30,603 )
$
20.55
(32,178)
$
19.08
Forfeited
(1,950 )
$
22.75
(300)
$
17.85
Unvested at end of year
132,707
$
23.40
92,991
$
21.96
The Company issued 72,269 shares of restricted stock in 2024 with a weighted average fair value of $24.31 per share. For the year
ended December 31, 2024, total compensation expense recorded in the consolidated statements of income related to restricted stock
awards was $844,000, with an offsetting tax benefit of $249,000, as this expense is deductible for income tax purposes. The Company
recorded a tax benefit of $45,000 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, 2024, there was $2,516,000 of total unrecognized compensation cost related to restricted stock awards which is
expected to be recognized over a weighted-average period of 3.60 years. During 2024, shares of restricted stock awards totaling
30,603 with a fair value of $782,000, based on the vested date of each award, were vested and became unrestricted.
The Company issued 43,446 shares of restricted stock in 2023 with a weighted average fair value of $26.46 per share. For the year
ended December 31, 2023, total compensation expense recorded in the consolidated statements of income related to restricted stock
awards was $533,000, with an offsetting tax benefit of $158,000, as this expense is deductible for income tax purposes. The Company
recorded a tax benefit of $73,000 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, 2023, there was $1,647,000 of total unrecognized compensation cost related to restricted stock awards which is
expected to be recognized over a weighted-average period of 3.67 years. During 2023, shares of restricted stock awards totaling
32,178 with a fair value of $861,000, based on the vested date of each award, were vested and became unrestricted.
F-33
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:
YEAR ENDED DECEMBER 31, 2024
Weighted Avg
(dollars in thousands)
Income
Shares
Per-Share
(Numerator)
(Denominator)
Amount
Basic EPS:
Net income
$
24,948
8,218,846
$
3.04
Effect of dilutive securities:
Non-vested restricted stock
—
40,011
Total dilutive shares
40,011
Diluted EPS:
Net income per diluted share
$
24,948
8,258,857
$
3.02
YEAR ENDED DECEMBER 31, 2023
Weighted Avg
(dollars in thousands)
Income
Shares
Per-Share
(Numerator)
(Denominator)
Amount
Basic EPS:
Net income
$
30,848
8,193,874
$
3.76
Effect of dilutive securities:
Non-vested restricted stock
—
37,018
Total dilutive shares
37,018
Diluted EPS:
Net income per diluted share
$
30,848
8,230,892
$
3.75
NOTE 13 — COMMITMENTS AND CONTINGENT LIABILITIES
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, 2024 and 2023, was
$1,542,000 and $1,523,000, respectively.
We have historically entered into a number of lease arrangements under which we are the lessee. 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.
F-34
The Company determined the operating lease liability for new lease agreements and renewal options in 2024 and 2023 by calculating
the present value of future cash payments, excluding any future renewal options as it was not reasonably certain that they will be
exercised. A discount rate was applied to the cash obligation schedule to calculate the present value of the operating lease liability.
The discount rate was based on our incremental borrowing rate through our line of credit with the FHLB, for the borrowing term that
was equal to the term of each lease. As of December 31, 2024, the weighted average remaining term of the lease contracts was 6.6
years, and the weighted average discount rate used to calculate the present value of the operating lease liability was 3.24%. As of
December 31, 2023, the weighted average remaining term of the lease contracts was 7.5 years, and the weighted average discount rate
used to calculate the present value of the operating lease liability was 2.94%. The operating lease liability totaled $7,013,000 and
$7,159,000 as of December 31, 2024 and 2023, respectively, and is included in interest payable and other liabilities in the consolidated
balance sheet. The ROU asset totaled $6,663,000 and $6,853,000 as of December 31, 2024 and 2023, respectively, is recorded in
interest receivable and other assets on the consolidated balance sheet.
At December 31, 2024, the future minimum commitments under these operating leases are as follows (in thousands):
Year ending December 31,
2025
$
1,490
2026
1,267
2027
1,113
2028
1,084
2029
931
Thereafter
2,110
$
7,995
Reconciling items:
Present value discount
(982)
Present value of lease liabilities
$
7,013
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-35
Financial instruments at December 31, 2024 whose contract amounts represent credit risk:
Contract
(in thousands)
Amount
Undisbursed loan commitments
$
161,674
Checking reserve
1,136
Equity lines
18,789
Standby letters of credit
4,176
$
185,775
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, 2024 and 2023. 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, 2024 and 2023.
Following is a description of valuation methodologies used for assets and liabilities in the tables below:
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.
F-36
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.
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, 2024 were as follows:
Hierarchy
(in thousands)
Carrying
Fair
Valuation
Amount
Value
Level
Financial assets:
Cash and cash equivalents
$
168,751
$
168,751
1
Restricted equity securities
6,285
6,285
2
Loans, net
1,093,514
1,037,104
3
Interest receivable
8,559
8,559
2
Financial liabilities:
Deposits
(1,695,690 )
(1,695,342 )
3
Interest payable
(241 )
(241 )
2
Off-balance-sheet assets (liabilities):
Commitments and standby letters of credit
(1,858)
3
The estimated fair values of the Company’s financial instruments not measured at fair value as of December 31, 2023 were as follows:
Hierarchy
(in thousands)
Carrying
Fair
Valuation
Amount
Value
Level
Financial assets:
Cash and cash equivalents
$
216,568
$
216,568
1
Restricted equity securities
5,956
5,956
2
Loans, net
1,004,277
917,242
3
Interest receivable
8,386
8,386
2
Financial liabilities:
Deposits
(1,650,534 )
(1,649,808 )
3
Interest payable
(128 )
(128 )
2
Off-balance-sheet assets (liabilities):
Commitments and standby letters of credit
(1,863)
3
F-37
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, 2024 and 2023.
Fair Value Measurements at December 31, 2024 Using
(in thousands)
December 31,
2024
Quoted Prices
in Active
Markets for
Identical Assets
(Level 1)
Significant
Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
Assets and liabilities measured on a recurring basis:
Available-for-sale securities:
U.S. agencies
$
87,074
$
0
$
87,074
$
0
Collateralized mortgage obligations
28,499
0
28,499
0
Municipalities
322,492
0
322,492
0
SBA pools
879
0
879
0
Corporate debt
41,212
0
41,212
0
Asset backed securities
46,340
0
46,340
0
Equity Securities:
Mutual fund
$
3,169
$
3,169
$
0
$
0
Assets and liabilities measured on a non-recurring basis:
N/A
Fair Value Measurements at December 31, 2023 Using
(in thousands)
December 31,
2023
Quoted Prices
in Active
Markets for
Identical Assets
(Level 1)
Significant
Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
Assets and liabilities measured on a recurring basis:
Available-for-sale securities:
U.S. agencies
$
80,259
$
0
$
80,259
$
0
Collateralized mortgage obligations
8,664
0
8,664
0
Municipalities
328,908
0
328,908
0
SBA pools
1,395
0
1,395
0
Corporate debt
43,517
0
43,517
0
Asset backed securities
55,335
0
55,335
0
Equity Securities:
Mutual fund
$
3,132
$
3,132
$
0
$
0
Assets and liabilities measured on a non-recurring basis:
N/A
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.
F-38
Loans Evaluated Individually - The Company does not record portfolio loans at fair value on a recurring basis. However, periodically,
a loan is evaluated individually and is reported at the fair value of the underlying collateral, less estimated costs to sell, if repayment is
expected solely from the collateral. If the collateral value is not sufficient, a specific reserve is recorded. Collateral values are
estimated using a combination of observable inputs, including recent appraisals, and unobservable inputs based on customized
discounting criteria. Due to the significance of unobservable inputs, fair values of individually evaluated collateral dependent loans
have been classified as Level 3. As of December 31, 2024 and 2023, there were no individually evaluated collateral dependent loans.
There have been no significant changes in the valuation techniques during the year ended December 31, 2024.
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:
YEARS ENDED DECEMBER 31,
(in thousands)
2024
2023
Aggregate amount outstanding, beginning of year
$
11,046
$
4,055
New loans or advances during year
3,623
9,061
Repayments during year
(3,418 )
(2,070)
Aggregate amount outstanding, end of year
$
11,251
$
11,046
Related party deposits totaled $15,200,000 and $10,533,000 at December 31, 2024 and 2023, 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 2024, the Company made payments totaling $236,000 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 2023, the Company made payments totaling $250,000 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 six months of service and be 21 years of age or older. Bank contributions are voluntary and at the
discretion of the Board of Directors. Contributions were approximately $1,228,000 and $1,060,000 for the years ended December 31,
2024 and 2023, 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.
F-39
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. In connection
with the purchase of the life insurance policies, the Company entered into split-dollar life insurance agreements with each of the
insured officers, which pays the officers’ beneficiaries a pre-determined death benefit amount as set forth in the agreement, with the
remainder of the death benefit paid to the Company.
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, 2024 and 2023, $6,275,000
and $5,808,000, respectively, has been accrued to date, and is included in other liabilities on the consolidated balance sheets.
The combined cash surrender value of all Bank-owned life insurance policies was $37,558,000 and $31,506,000 at December 31,
2024 and 2023, 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.
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
F-40
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, 2024 and 2023, are presented in the following table.
(in thousands)
Regulatory
Actual
Minimum
Capital ratios for Bank:
Amount
Ratio
Amount
Ratio
As of December 31, 2024
Total capital (to Risk- Weighted Assets)
$
214,899
15.3%
$
147,360
>10.5%
Tier I capital (to Risk- Weighted Assets)
$
203,093
14.5%
$
119,291
>8.5%
Common Equity Tier 1 Capital (to Risk Weighted Assets)
$
203,093
14.5%
$
98,240
>7.0%
Tier I capital (to Average Assets)
$
203,093
10.5%
$
77,275
>4.0%
As of December 31, 2023
Total capital (to Risk- Weighted Assets)
$
193,005
14.7%
$
137,819
>10.5%
Tier I capital (to Risk- Weighted Assets)
$
181,500
13.8%
$
111,567
>8.5%
Common Equity Tier 1 Capital (to Risk Weighted Assets)
$
181,500
13.8%
$
91,879
>7.0%
Tier I capital (to Average Assets)
$
181,500
9.6%
$
75,303
>4.0%
Capital ratios for the Company:
As of December 31, 2024
Total capital (to Risk- Weighted Assets)
$ 215,552
15.4%
$ 147,372
>10.5%
Tier I capital (to Risk- Weighted Assets)
$ 203,746
14.5%
$ 119,301
>8.5%
Common Equity Tier 1 Capital (to Risk Weighted Assets)
$ 203,746
14.5%
$ 98,248
>7.0%
Tier I capital (to Average Assets)
$ 203,746
10.6%
$ 77,283
>4.0%
As of December 31, 2023
Total capital (to Risk- Weighted Assets)
$
193,280
14.7%
$
137,835
>10.5%
Tier I capital (to Risk- Weighted Assets)
$
181,775
13.9%
$
111,851
>8.5%
Common Equity Tier 1 Capital (to Risk Weighted Assets)
$
181,775
13.9%
$
91,890
>7.0%
Tier I capital (to Average Assets)
$
181,775
9.7%
$
75,306
>4.0%
NOTE 20 – SEGMENT REPORTING
The Company operates as a single reportable segment, providing a broad range of banking and financial services to individuals,
businesses, and institutional clients. These services include commercial and consumer lending, deposit products, wealth management,
and treasury management solutions. The Chief Executive Officer and the President/Chief Operating Officer are the Company’s Chief
Operating Decision Makers ("CODM"). The CODM regularly evaluates financial performance and allocates resources on a
consolidated basis. Some of the financial metrics included in this evaluation are net income, net interest income, net interest margin,
ROA, operating efficiency ratio, and total assets.
F-41
NOTE 21 – VARIABLE INTEREST ENTITIES
The Company invests in Low-Income Housing Tax Credit ("LIHTC") partnerships that are considered variable interest entities
("VIEs") under ASC 810, Consolidation. These partnerships are formed to develop and operate affordable housing projects that
qualify for federal tax credits under Section 42 of the Internal Revenue Code.
The Company evaluates its LIHTC investments to determine whether it has a controlling financial interest in the partnerships. A
controlling financial interest exists if the Company:
•Has the power to direct activities that most significantly impact the entity's economic performance; and
•Has the obligation to absorb losses or the right to receive benefits that could be significant.
Based on this assessment, the Company has determined that it is not the primary beneficiary of the LIHTC partnerships, as it does not
control the significant operating decisions. Therefore, these entities are not consolidated in the financial statements.
The Company accounts for its LIHTC investments using the proportional amortization method under ASC 323-740, Investments -
Equity method and Joint Ventures: Investments in Qualified Affordable Housing Projects. Under this method:
•The initial investment is recorded as an asset and included in interest receivable and other assets on the balance sheet, and an
offsetting payable amount is recorded in interest payable and other liabilities on the balance sheet.
•Tax credits and other tax benefits are recognized as a reduction of income tax expense.
•The investment is amortized over the period in which the tax credits are received, with amortization recorded as a
component of income tax expense.
For the year ended December 31, 2024, the income tax credits and tax benefits from deductible losses was $1,942,000 and the
offsetting amortization was $1,485,000. For the year ended December 31, 2023, the income tax credits and tax benefits from
deductible losses was $1,166,000 and the offsetting amortization was $972,000.
As of December 31, 2024, the company had total LIHTC commitments of $15,500,000, of which $10,663,000 had funded and the
remaining $4,837,000 was unfunded. As of December 31, 2023, the company had total LIHTC commitments of $15,500,000, of
which $5,719,000 had funded and the remaining $9,781,000 was unfunded.
F-42
NOTE 22 – PARENT ONLY CONDENSED FINANCIAL STATEMENTS
CONDENSED BALANCE SHEETS
(dollars in thousands)
December 31,
December 31,
ASSETS
2024
2023
Cash
$
557
$
167
Investment in bank subsidiary
182,783
165,817
Other assets
110
153
Total assets
$
183,450
$
166,137
LIABILITIES AND SHAREHOLDERS’ EQUITY
Other liabilities
$
14
$
45
Total liabilities
$
14
$
45
Shareholders’ equity
Common stock, no par value; 50,000,000 shares authorized,
8,357,211 and 8,293,168 shares issued and outstanding at
December 31, 2024 and 2023, respectively
25,435
25,435
Additional paid-in capital
6,199
5,512
Retained earnings
175,502
154,301
Accumulated other comprehensive loss, net of tax
(23,700)
(19,156)
Total shareholders’ equity
183,436
166,092
Total liabilities and shareholders' equity
$
183,450
$
166,137
F-43
OAK VALLEY BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 22 – PARENT ONLY CONDENSED FINANCIAL STATEMENTS (CONTINUED)
CONDENSED STATEMENTS OF INCOME
(dollars in thousands)
Year Ended December 31,
2024
2023
INCOME
Dividends declared by subsidiary
$
4,222
$
2,896
Total income
4,222
2,896
EXPENSES
Salary expense
160
146
Employee benefit expense
845
533
Legal expense
71
62
Other operating expenses
101
91
Total expenses
1,177
832
Income before equity in undistributed income of subsidiary
3,045
2,064
Equity in undistributed net income of subsidiary
21,510
28,465
Income before income tax benefit
24,555
30,529
Income tax benefit
393
319
Net income
$
24,948
$
30,848
F-44
OAK VALLEY BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 22 – PARENT ONLY CONDENSED FINANCIAL STATEMENTS (CONTINUED)
CONDENSED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31,
(dollars in thousands)
2024
2023
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income
$
24,948
$
30,848
Adjustments to reconcile net income to net cash from operating activities:
Undistributed net income of subsidiary
(21,510)
(28,465)
Stock based compensation
845
533
(Decrease) increase in other liabilities
(31)
44
Decrease (increase) in other assets
43
(101)
Net cash from operating activities
4,295
2,859
CASH FLOWS FROM FINANCING ACTIVITIES:
Shareholder cash dividends paid
(3,747)
(2,646)
Tax withholding payments on vested restricted shares surrendered
(158)
(211)
Net cash used in financing activities
(3,905)
(2,857)
NET INCREASE IN CASH AND CASH EQUIVALENTS
390
2
CASH AND CASH EQUIVALENTS, beginning of period
167
165
CASH AND CASH EQUIVALENTS, end of period
$
557
$
167
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for income taxes
$
6,385
$
10,449
EXHIBIT 23.1
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We consent to the incorporation by reference in the Registration Statement (No. 333-158201 and No. 333-225950) on Form S-8 of
Oak Valley Bancorp of our report dated March 31, 2025, relating to the consolidated financial statements of Oak Valley Bancorp this
Annual Report to Shareholders, which is incorporated in this Annual Report on Form 10-K of Oak Valley Bancorp for the year ended
December 31, 2024.
/s/ RSM US LLP
Dallas, Texas
March 31, 2025
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, Chief Executive Officer, certify that:
1.
I have reviewed this annual report on Form 10-K of Oak Valley Bancorp (the Registrant);
2.
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;
3.
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;
4.
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)
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;
(b)
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;
(c)
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
(d)
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)
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
(b)
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, 2025
/s/ Christopher M. Courtney
Christopher M. Courtney
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.
I have reviewed this annual report on Form 10-K of Oak Valley Bancorp (the Registrant);
2.
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;
3.
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;
4.
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)
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;
(b)
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;
(c)
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
(d)
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)
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
(b)
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, 2025
/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, 2024, 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)
such Form 10-K fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934;
and
2)
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, 2025
/s/ Christopher M. Courtney
Christopher M. Courtney
Chief Executive Officer
Dated: March 31, 2025
/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.