Table of Contents

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

Form 10-Q

 

x      QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended March 31, 2010

 

OR

 

o         TRANSITION REPORT UNDER 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

 

I.R.S. Employer

incorporation or organization

 

Identification No.

 

125 N. Third Ave., Oakdale, CA  95361

(Address of principal executive offices)

 

(209) 848-2265

Issuer’s telephone number

 

Not applicable

(Former name, former address and former fiscal year, if changed since last report)

 

Indicate by check mark whether the issuer (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 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 x  No o

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o  No o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer o

 

Accelerated filer o

 

 

 

Non-accelerated filer o

 

Smaller reporting company x

(Do not check if a smaller reporting company)

 

 

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes o No x

 

APPLICABLE ONLY TO CORPORATE ISSUERS

 

State the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:  7,681,877 shares of common stock outstanding as of April 30, 2010.

 

 

 



Table of Contents

 

Oak Valley Bancorp

March 31, 2010

 

Index

 

 

 

Page

PART I – FINANCIAL INFORMATION

3

 

 

Item 1.

Financial Statements

3

 

 

 

Condensed Consolidated Balance Sheets at March 31, 2010, and December 31, 2009

4

 

 

 

Condensed Consolidated Statements of Operations for the Three Month Periods Ended March 31, 2010 and March 31, 2009

5

 

 

 

Condensed Consolidated Statements of Changes of Shareholders’ Equity for the Three-Month Period Ended March 31, 2010 and the Year Ended December 31, 2009

6

 

 

 

Condensed Consolidated Statements of Cash Flows for the Three-Month Periods Ended March 31, 2010 and March 31, 2009

7

 

 

 

Notes to Consolidated Financial Statements

8

 

 

 

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

17

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

30

 

 

 

Item 4T.

Controls and Procedures

30

 

 

 

PART II – OTHER INFORMATION

31

 

 

 

Item 1.

Legal Proceedings

31

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

31

Item 3.

Defaults Upon Senior Securities

31

Item 4.

Reserved

31

Item 5.

Other Information

31

Item 6.

Exhibits

31

 

2



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PART I — FINANCIAL STATEMENTS

 

Item 1. Financial Statements

 

3



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OAK VALLEY BANCORP

CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)

AT MARCH 31, 2010 AND DECEMBER 31, 2009

 

 

 

March 31,

 

December 31,

 

 

 

2010

 

2009

 

ASSETS

 

 

 

 

 

Cash and due from banks

 

$

23,945,896

 

$

20,003,548

 

Federal funds sold

 

6,515,000

 

1,645,000

 

Cash and cash equivalents

 

30,460,896

 

21,648,548

 

 

 

 

 

 

 

Securities available for sale

 

50,991,219

 

50,765,314

 

Loans, net of allowance for loan loss of $6,762,255 in 2010 and $7,020,222 in 2009

 

403,503,347

 

417,795,686

 

Bank premises and equipment, net

 

10,453,962

 

10,167,297

 

Other real estate owned (OREO)

 

2,456,401

 

2,149,514

 

Accrued interest and other assets

 

22,409,541

 

22,195,354

 

 

 

 

 

 

 

 

 

$

520,275,366

 

$

524,721,713

 

 

 

 

 

 

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

 

 

 

Deposits

 

$

431,624,097

 

$

429,210,284

 

Accrued interest and other liabilities

 

2,947,676

 

2,619,178

 

FHLB advances

 

24,300,000

 

32,200,000

 

 

 

 

 

 

 

Total liabilities

 

458,871,773

 

464,029,462

 

 

 

 

 

 

 

Commitments and contingencies

 

 

 

 

 

 

 

 

 

 

 

Shareholders’ equity

 

 

 

 

 

Preferred stock, no par value; $1,000 per share liquidation preference, 10,000,000 shares authorized and 13,500 Series A Preferred shares issued and outstanding at March 31, 2010 and December 31, 2009

 

12,888,958

 

12,847,297

 

Common stock, no par value; 50,000,000 shares authorized, 7,681,877 shares issued and outstanding at March 31, 2010 and December 31, 2009

 

23,933,440

 

23,933,440

 

Additional paid-in capital

 

2,019,417

 

1,997,747

 

Retained earnings

 

20,967,913

 

20,230,683

 

Accumulated other comprehensive income, net of tax

 

1,593,865

 

1,683,084

 

 

 

 

 

 

 

Total shareholders’ equity

 

61,403,593

 

60,692,251

 

 

 

 

 

 

 

 

 

$

520,275,366

 

$

524,721,713

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

4



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OAK VALLEY BANCORP

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)

FOR THE THREE MONTH PERIODS ENDED MARCH 31, 2010 AND MARCH 31, 2009

 

 

 

3 MONTHS ENDED

 

 

 

MARCH 31,

 

 

 

2010

 

2009

 

INTEREST INCOME

 

 

 

 

 

Interest and fees on loans

 

$

6,438,525

 

$

6,596,208

 

Interest on securities available for sale

 

584,275

 

612,158

 

Interest on federal funds sold

 

1,558

 

903

 

Interest on deposits with banks

 

4,281

 

763

 

Total interest income

 

7,028,639

 

7,210,032

 

 

 

 

 

 

 

INTEREST EXPENSE

 

 

 

 

 

Deposits

 

869,406

 

1,323,920

 

FHLB advances

 

98,375

 

229,452

 

Federal funds purchased

 

110

 

264

 

Total interest expense

 

967,891

 

1,553,636

 

 

 

 

 

 

 

Net interest income

 

6,060,748

 

5,656,396

 

PROVISION FOR LOAN LOSSES

 

1,005,000

 

1,900,000

 

 

 

 

 

 

 

Net interest income after provision for loan losses

 

5,055,748

 

3,756,396

 

 

 

 

 

 

 

OTHER INCOME

 

 

 

 

 

Service charges on deposits

 

255,640

 

282,385

 

Earnings on cash surrender value of life insurance

 

103,986

 

101,057

 

Mortgage commissions

 

19,127

 

42,544

 

Other

 

267,847

 

172,323

 

Total non-interest income

 

646,600

 

598,309

 

 

 

 

 

 

 

OTHER EXPENSES

 

 

 

 

 

Salaries and employee benefits

 

2,190,328

 

2,049,884

 

Occupancy expenses

 

681,508

 

695,398

 

Data processing fees

 

236,533

 

218,516

 

OREO expenses

 

347,800

 

125,029

 

Assessments (FDIC & DFI)

 

258,000

 

137,961

 

Other operating expenses

 

731,090

 

711,519

 

Total non-interest expense

 

4,445,259

 

3,938,307

 

 

 

 

 

 

 

Net income before provision for income taxes

 

1,257,089

 

416,398

 

 

 

 

 

 

 

PROVISION (BENEFIT) INCOME TAXES

 

309,448

 

(13,912

)

NET INCOME

 

$

947,641

 

$

430,310

 

 

 

 

 

 

 

Preferred stock dividends and accretion

 

210,411

 

210,411

 

 

 

 

 

 

 

NET INCOME AVAILABLE TO COMMON SHAREHOLDERS

 

$

737,230

 

$

219,899

 

 

 

 

 

 

 

NET EARNINGS PER COMMON SHARE

 

$

0.10

 

$

0.03

 

NET EARNINGS PER DILUTED COMMON SHARE

 

$

0.10

 

$

0.03

 

 

The accompanying notes are an integral part of these consolidated financial statements

 

5


 


Table of Contents

 

OAK VALLEY BANCORP

CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY (UNAUDITED)

FOR THE YEAR ENDED DECEMBER 31, 2009 AND THE THREE-MONTH PERIOD ENDED MARCH 31, 2010

 

 

 

THREE MONTHS ENDED MARCH 31, 2010 AND YEAR ENDED DECEMBER 31, 2009

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

 

 

Additional

 

 

 

 

 

Other

 

Total

 

 

 

Common Stock

 

Preferred Stock

 

Paid-in

 

Retained

 

Comprehensive

 

Comprehensive

 

Shareholders’

 

 

 

Shares

 

Amount

 

Shares

 

Amount

 

Capital

 

Earnings

 

Income

 

Income

 

Equity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balances, January 1, 2009

 

7,661,627

 

$

23,863,331

 

13,500

 

$

12,680,649

 

$

1,925,224

 

$

19,226,645

 

 

 

$

290,230

 

$

57,986,079

 

Stock options exercised

 

20,250

 

$

70,109

 

 

 

 

 

 

 

 

 

 

 

 

 

70,109

 

Preferred stock accretion

 

 

 

 

 

 

 

$

166,648

 

 

 

$

(166,648

)

 

 

 

 

0

 

Preferred stock dividend payments

 

 

 

 

 

 

 

 

 

 

 

(637,500

)

 

 

 

 

(637,500

)

Cash dividends ($0.025 per share)

 

 

 

 

 

 

 

 

 

 

 

(191,542

)

 

 

 

 

(191,542

)

Stock based compensation

 

 

 

 

 

 

 

 

 

72,523

 

 

 

 

 

 

 

72,523

 

Comprehensive income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net changes in unrealized gain on available-for-sale securities (net of income tax of $988,188)

 

 

 

 

 

 

 

 

 

 

 

 

 

1,392,854

 

1,392,854

 

1,392,854

 

Net income

 

 

 

 

 

 

 

 

 

 

 

1,999,728

 

1,999,728

 

 

 

1,999,728

 

Comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

$

3,392,582

 

 

 

 

 

Balances, December 31, 2009

 

7,681,877

 

$

23,933,440

 

13,500

 

$

12,847,297

 

$

1,997,747

 

$

20,230,683

 

 

 

$

1,683,084

 

$

60,692,251

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Preferred stock accretion

 

 

 

 

 

 

 

$

41,661

 

 

 

$

(41,661

)

 

 

 

 

0

 

Preferred stock dividend payments

 

 

 

 

 

 

 

 

 

 

 

(168,750

)

 

 

 

 

(168,750

)

Stock based compensation

 

 

 

 

 

 

 

 

 

21,670

 

 

 

 

 

 

 

21,670

 

Comprehensive income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net changes in unrealized gain on available-for-sale securities (net of income tax of $62,384)

 

 

 

 

 

 

 

 

 

 

 

 

 

(89,219

)

(89,219

)

(89,219

)

Net income

 

 

 

 

 

 

 

 

 

 

 

947,641

 

947,641

 

 

 

947,641

 

Comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

$

858,422

 

 

 

 

 

Balances, March 31, 2010

 

7,681,877

 

$

23,933,440

 

13,500

 

$

12,888,958

 

$

2,019,417

 

$

20,967,913

 

 

 

$

1,593,865

 

$

61,403,593

 

 

The accompanying notes are an integral part of these consolidated financial statements

 

6


 


Table of Contents

 

OAK VALLEY BANCORP

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

FOR THE THREE-MONTH PERIODS ENDED MARCH 31, 2010 AND MARCH 31, 2009

 

 

 

THREE MONTHS ENDED
MARCH 31,

 

 

 

2010

 

2009

 

 

 

 

 

 

 

CASH FLOWS FROM OPERATING ACTIVITIES:

 

 

 

 

 

Net income

 

$

947,641

 

$

430,310

 

Adjustments to reconcile net earnings to net cash from operating activities:

 

 

 

 

 

Provision for loan losses

 

1,005,000

 

1,900,000

 

Depreciation

 

239,300

 

274,062

 

Amortization and accretion, net

 

(2,410

)

(12,655

)

Stock-based compensation expense

 

21,670

 

24,000

 

OREO Write downs and losses on sale

 

211,996

 

63,395

 

Gain on called available for sale securities

 

(55,838

)

(35,826

)

Increase in BOLI cash surrender value

 

(103,986

)

(101,057

)

Increase (decrease) in accrued interest payable and other liabilities

 

328,498

 

(97,600

)

(Increase) decrease in accrued interest receivable

 

(16,173

)

63,877

 

(Increase) decrease in other assets

 

(31,644

)

46,764

 

Net cash from operating activities

 

2,544,054

 

2,555,270

 

 

 

 

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES:

 

 

 

 

 

Purchases of available for sale securities

 

(3,022,258

)

(11,924,601

)

Proceeds from maturities, calls, and principal paydowns of securities available for sale

 

2,702,998

 

2,031,402

 

Net decrease (increase) in loans

 

12,758,640

 

(3,788,530

)

Proceeds from sale of OREO

 

9,816

 

0

 

Net purchases of premises and equipment

 

(525,965

)

(16,871

)

Net cash from investing activities

 

11,923,231

 

(13,698,600

)

 

 

 

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES:

 

 

 

 

 

FHLB advanced funds

 

480,000

 

24,100,000

 

FHLB payments

 

(480,000

)

(41,100,000

)

Federal funds advances

 

100,000

 

6,285,000

 

Federal funds payments

 

(8,000,000

)

(6,285,000

)

Shareholder cash dividends paid

 

0

 

(191,542

)

Preferred stock dividend payment

 

(168,750

)

(131,250

)

Net increase in demand deposits and savings accounts

 

5,888,075

 

15,075,860

 

Net (decrease) increase in time deposits

 

(3,474,262

)

16,764,885

 

Net cash from financing activities

 

(5,654,937

)

14,517,953

 

 

 

 

 

 

 

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS

 

8,812,348

 

3,374,623

 

 

 

 

 

 

 

CASH AND CASH EQUIVALENTS, beginning of period

 

21,648,548

 

9,837,860

 

 

 

 

 

 

 

CASH AND CASH EQUIVALENTS, end of period

 

$

30,460,896

 

$

13,212,483

 

 

 

 

 

 

 

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:

 

 

 

 

 

Cash paid during the year for:

 

 

 

 

 

Interest

 

$

1,071,830

 

$

1,613,368

 

Income taxes

 

$

451,000

 

$

0

 

 

 

 

 

 

 

NON-CASH INVESTING ACTIVITIES:

 

 

 

 

 

Real estate acquired through foreclosure

 

$

528,699

 

$

584,839

 

Change in unrealized gain/loss on available-for-sale securities

 

$

(151,603

)

$

1,103,724

 

 

 

 

 

 

 

NON-CASH FINANCING ACTIVITIES:

 

 

 

 

 

Accretion of preferred stock

 

$

41,661

 

$

41,662

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

7



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OAK VALLEY BANCORP

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 1 – BASIS OF PRESENTATION

 

On July 3, 2008 (the “Effective Date”), a bank holding company reorganization was completed whereby Oak Valley Bancorp became the parent holding company for Oak Valley Community Bank ( the “Bank”).  On the Effective Date, each outstanding share of the Bank was converted into one share of Oak Valley Bancorp and the Bank became a wholly-owned subsidiary of the holding company. The condensed consolidated financial statements and accompanying footnotes are presented as if the reorganization occurred as of the earliest periods presented and are consistent with those of Oak Valley Community Bank, since prior to the Effective Date, Oak Valley Bancorp had no material assets, liabilities or operations.

 

The accounting principles followed by the Company and the methods of applying these principles conform with accounting principles generally accepted in the United States of America (GAAP) and with general practices within the banking industry. In preparing financial statements in conformity with GAAP, management is required to make estimates and assumptions that affect the reported amounts in the financial statements. Actual results could differ significantly from those estimates. Material estimates common to the banking industry that are particularly susceptible to significant change in the near term include, but are not limited to, the determination of the allowance for loan losses, the estimation of compensation expense related to stock options granted to employees and directors, and valuation allowances associated with deferred tax assets, the recognition of which are based on future taxable income.

 

The interim consolidated financial statements included in this report are unaudited but reflect all adjustments which, in the opinion of management, are necessary for a fair presentation of the financial position and results of operations for the interim periods presented. All such adjustments are of a normal recurring nature. The results of operations for the three month period ended March 31, 2010 are not necessarily indicative of the results of a full year’s operations.  For further information, refer to the audited financial statements and footnotes included in the Company’s Form 10-K for the year ended December 31, 2009.

 

NOTE 2 – CURRENT ACCOUNTING PRONOUNCEMENTS

 

Accounting Standards Codification. The Financial Accounting Standards Board’s (FASB) Accounting Standards Codification (ASC) became effective on July 1, 2009. At that date, the ASC became FASB’s officially recognized source of authoritative U.S. generally accepted accounting principles (GAAP) applicable to all public and non-public non-governmental entities, superseding existing FASB, American Institute of Certified Public Accountants (AICPA), Emerging Issues Task Force (EITF) and related literature. Rules and interpretive releases of the SEC under the authority of federal securities laws are also sources of authoritative GAAP for SEC registrants. All other accounting literature is considered non-authoritative. The switch to the ASC affects the away companies refer to U.S. GAAP in financial statements and accounting policies. Citing particular content in the ASC involves specifying the unique numeric path to the content through the Topic, Subtopic, Section and Paragraph structure.

 

FASB ASC Topic 815, “Derivatives and Hedging.” New authoritative accounting guidance under ASC Topic 815, “Derivatives and Hedging,” amends prior guidance to amend and expand the disclosure requirements for derivatives and hedging activities to provide greater transparency about (i) how and why an entity uses derivative instruments, (ii) how derivative instruments and related hedge items are accounted for under ASC Topic 815, and (iii) how derivative instruments and related hedged items affect an entity’s financial position, results of operations and cash flows. To meet those objectives, the new authoritative accounting guidance requires qualitative disclosures about objectives and strategies for using derivatives, quantitative disclosures about fair value amounts of gains and losses on derivative instruments and disclosures about credit-risk-related contingent features in derivative agreements. The new authoritative accounting guidance under ASC Topic 815 became effective for the Company on January 1, 2009 and did not have a significant impact on the Company’s financial statements.

 

FASB ASC Topic 820, “Fair Value Measurements and Disclosures.” New authoritative accounting guidance under ASC Topic 820,”Fair Value Measurements and Disclosures,” affirms that the objective of fair value when the market for an asset is not active is the price that would be received to sell the asset in an orderly transaction, and clarifies and includes additional factors for determining whether there has been a significant decrease in market activity for an asset when the market for that asset is not active. ASC Topic 820 requires an entity to base its conclusion about whether a transaction was not orderly on the weight of the evidence. The new accounting guidance amended prior guidance to expand certain disclosure requirements. The Company adopted the new authoritative accounting guidance under ASC Topic 820 during the first quarter of 2009. Adoption of the new guidance did not significantly impact the Company’s financial statements.

 

Further new authoritative accounting guidance (Accounting Standards Update No. 2009-5) under ASC Topic 820 provides guidance for measuring the fair value of a liability in circumstances in which a quoted price in an active market for the identical liability is not available. In such instances, a reporting entity is required to measure fair value utilizing a valuation technique that uses (i) the quoted price of the identical liability when traded as an asset, (ii) quoted prices for similar liabilities or similar liabilities when traded as assets, or (iii) another valuation technique that is consistent with the existing principles of ASC Topic 820, such as an income approach or market approach. The new authoritative accounting guidance also clarifies that when estimating the fair value of a liability, a reporting

 

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entity is not required to include a separate input or adjustment to other inputs relating to the existence of a restriction that prevents the transfer of the liability. The forgoing new authoritative accounting guidance under ASC Topic 820 became effective for the Company’s financial statements beginning October 1, 2009 and did not have a significant impact on the Company’s financial statements.

 

FASB ASC Topic 320, “Investments - Debt and Equity Securities.” New authoritative accounting guidance under ASC Topic 320, “Investments - Debt and Equity Securities,” (i) changes existing guidance for determining whether an impairment is other than temporary to debt securities and (ii) replaces the existing requirement that the entity’s management assert it has both the intent and ability to hold an impaired security until recovery with a requirement that management assert: (a) it does not have the intent to sell the security; and (b) it is more likely than not it will not have to sell the security before recovery of its cost basis. Under ASC Topic 320, declines in the fair value of held-to-maturity and available-for-sale securities below their cost that are deemed to be other than temporary are reflected in earnings as realized losses to the extent the impairment is related to credit losses. The amount of the impairment related to other factors is recognized in other comprehensive income. The Company adopted the provisions of the new authoritative accounting guidance under ASC Topic 320 during the second quarter of 2009. Adoption of the new guidance did not significantly impact the Company’s financial statements.

 

FASB ASC Topic 825 “Financial Instruments.” New authoritative accounting guidance under ASC Topic 825, “Financial Instruments,” requires an entity to provide disclosures about the fair value of financial instruments in interim financial information and amends prior guidance to require those disclosures in summarized financial information at interim reporting periods. The new interim disclosures required under Topic 825 were included in the Company’s Form 10-Q beginning June 30, 2009.

 

FASB ASC Topic 825 “Fair Value Measurements and Disclosures.”   In January 2010, the FASB issued ASU No. 2010-06, Fair Value Measurements and Disclosures (Topic 820): Improving Disclosures about Fair Value Measurements. This ASU requires: (1) disclosure of the amounts of significant transfers in and out of Level 1 and Level 2 fair value measurement categories and the reasons for the transfers; and (2) separate presentation of purchases, sales, issuances, and settlements in the reconciliation for fair value measurements using significant unobservable inputs (Level 3). In addition, ASU 2010-06 clarifies the requirements of the following existing disclosures set forth in the Codification Subtopic 820-10: (1) For purposes of reporting fair value measurement for each class of assets and liabilities, a reporting entity needs to use judgment in determining the appropriate classes of assets and liabilities; and (2) a reporting entity should provide disclosures about the valuation techniques and inputs used to measure fair value for both recurring and non-recurring fair value measurements. ASU 2010-06 is effective for interim and annual reporting periods beginning January 1, 2010, except for the disclosures about purchases, sales, issuances, and settlements in the roll forward of activity in Level 3 fair value measurements, which are effective for fiscal years beginning January 1, 2011, and for interim periods within those fiscal years. As ASU 2010-06 is disclosure-related only, our adoption of this ASU in the first quarter of 2010 did not impact our financial condition or results of operations.

 

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Table of Contents

 

NOTE 3 – SECURITIES

 

The amortized cost and estimated fair values of debt securities as of March 31, 2010 are as follows:

 

 

 

Amortized Cost

 

Gross
Unrealized
Gains

 

Gross
Unrealized
Losses

 

Estimated Fair
Value

 

Available-for-sale securities:

 

 

 

 

 

 

 

 

 

U.S. agencies

 

$

28,167,181

 

$

1,494,982

 

$

 

$

29,662,163

 

Collateralized mortgage obligations

 

5,713,664

 

86,277

 

(4,624

)

5,795,317

 

Municipalities

 

11,268,651

 

1,133,556

 

(1,339

)

12,400,868

 

SBA Pools

 

1,566,519

 

 

(23,465

)

1,543,054

 

Mutual Fund

 

1,566,379

 

23,438

 

 

1,589,817

 

 

 

$

48,282,394

 

$

2,738,253

 

$

(29,428

)

$

50,991,219

 

 

The following tables detail the gross unrealized losses and fair values aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position at March 31, 2010.

 

 

 

Less than 12 months

 

12 months or more

 

Total

 

Description of Securities

 

Fair Value

 

Unrealized
Loss

 

Fair
Value

 

Unrealized
Loss

 

Fair
Value

 

Unrealized
Loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. agencies

 

$

 

$

 

$

 

$

 

$

 

$

 

Collateralized mortgage obligations

 

994,650

 

(4,624

)

 

 

994,650

 

(4,624

)

Municipalities

 

412,728

 

(1,339

)

 

 

412,728

 

(1,339

)

SBA Pools

 

 

 

1,537,456

 

(23,465

)

1,537,456

 

(23,465

)

Asset Backed Securities

 

 

 

 

 

 

 

Total temporarily impaired securities

 

$

1,407,378

 

$

(5,963

)

$

1,537,456

 

$

(23,465

)

$

2,944,834

 

$

(29,428

)

 

At March 31, 2010, a total of two SBA pools make up the total amount of securities in an unrealized loss position for greater than 12 months.  Management periodically evaluates each available-for-sale investment security in an unrealized loss position to determine if the impairment is temporary or other than temporary.  Management has determined that no investment security is other than temporarily impaired. The unrealized losses are due solely to interest rate changes and the Bank does not intend to sell the securities and it is not likely that we will be required to sell the securities before the earlier of the forecasted recovery or the maturity of the underlying investment security.

 

The amortized cost and estimated fair value of debt securities at March 31, 2010, by contractual maturity or call date, are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

 

 

 

 

 

Estimated

 

 

 

Amortized

 

Fair

 

 

 

Cost

 

Value

 

Available-for-sale securities:

 

 

 

 

 

3 Months or Less

 

$

510,000

 

$

512,752

 

Due after one year through five years

 

1,904,864

 

1,949,055

 

Due after five years through ten years

 

12,611,339

 

13,337,142

 

Due after ten years

 

33,256,191

 

35,192,270

 

 

 

$

48,282,394

 

$

50,991,219

 

 

The amortized cost and estimated fair values of debt securities as of December 31, 2009, are as follows:

 

10


 


Table of Contents

 

 

 

Amortized Cost

 

Gross Unrealized
Gains

 

Gross Unrealized
Losses

 

Fair Value

 

Available-for-sale securities:

 

 

 

 

 

 

 

 

 

U.S. agencies

 

$

29,475,777

 

1,511,122

 

$

(2,181

)

$

30,984,718

 

Collateralized mortgage obligations

 

2,883,988

 

110,758

 

 

2,994,746

 

Municipalities

 

12,327,922

 

1,235,683

 

(6,454

)

13,557,151

 

SBA Pools

 

1,588,867

 

 

(9,519

)

1,579,348

 

Asset-Back Security

 

81,867

 

707

 

 

82,574

 

Mutual Fund

 

1,546,465

 

20,312

 

 

1,566,777

 

 

 

$

47,904,886

 

$

2,878,582

 

$

(18,154

)

$

50,765,314

 

 

The following tables detail the gross unrealized losses and fair values aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position at December 31, 2009.

 

 

 

Less than 12 months

 

12 months or more

 

Total

 

Description of Securities

 

Fair
Value

 

Unrealized
Loss

 

Fair
Value

 

Unrealized
Loss

 

Fair
Value

 

Unrealized
Loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. agencies

 

$

425,908

 

$

(2,181

)

$

 

 

$

425,908

 

$

(2,181

)

Collateralized mortgage obligations

 

 

 

 

 

 

 

Municipalities

 

402,628

 

(6,454

)

 

 

402,628

 

(6,454

)

SBA Pools

 

 

 

1,579,348

 

(9,519

)

1,579,348

 

(9,519

)

Asset Backed Securities

 

 

 

 

 

 

 

Total temporarily impaired securities

 

$

828,536

 

$

(8,635

)

$

1,579,348

 

$

(9,519

)

$

2,407,884

 

$

(18,154

)

 

At December 31, 2009, two SBA pools make up the total amount of securities in an unrealized loss position for greater than 12 months. Management periodically evaluates each available-for-sale investment security in an unrealized loss position to determine if the impairment is temporary or other than temporary. Management has determined that no investment security is other than temporarily impaired. The unrealized losses are due solely to interest rate changes and the Bank does not intend to sell the securities and it is not likely that we will be required to sell the securities before the earlier of the forecasted recovery or the maturity of the underlying investment security.

 

There were no realized gains or losses on sales of available-for-sale securities during 2010 and 2009, however the Company did recognize a gain of $55,838 and $35,826 for the three month periods ended March 31, 2010 and 2009, respectively, on certain available-for-sale securities that were partially called. There were no other sales of available-for-sale securities during 2010 and 2009.

 

Securities carried at $42,446,448 and $34,545,513 at March 31, 2010 and December 31, 2009, respectively, were pledged to secure deposits of public funds.

 

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Table of Contents

 

NOTE 4 – LOANS

 

Loan totals were as follows:

 

 

 

MARCH 31,

 

DECEMBER 31,

 

 

 

2010

 

2009

 

Loans

 

 

 

 

 

Commercial real estate

 

$

279,260,247

 

$

283,387,329

 

Commercial

 

34,933,957

 

38,159,590

 

Real estate construction

 

48,139,839

 

52,951,968

 

Agriculture

 

27,152,734

 

29,659,656

 

Residential real estate and consumer

 

21,526,550

 

21,468,468

 

Total loans

 

411,013,327

 

425,627,011

 

Less:

 

 

 

 

 

Deferred loan fees and costs, net

 

(747,725

)

(811,103

)

Allowance for loan losses

 

(6,762,255

)

(7,020,222

)

 

 

 

 

 

 

Net loans

 

$

403,503,347

 

$

417,795,686

 

 

Changes in the allowance for loan losses were as follows:

 

 

 

MARCH 31,

 

DECEMBER 31,

 

 

 

2010

 

2009

 

 

 

 

 

 

 

Balance, beginning of year

 

$

7,020,222

 

$

5,569,496

 

Provision charged to operations

 

1,005,000

 

5,862,012

 

Loans charged off

 

(1,263,862

)

(4,419,335

)

Loan recoveries

 

895

 

8,049

 

 

 

 

 

 

 

Balance, end of period

 

$

6,762,255

 

$

7,020,222

 

 

The total recorded investment in impaired loans at March 31, 2010, was $12,368,210 which had a loan loss reserve of $892,723.  The total recorded investment in impaired loans at December 31, 2009, was $14,418,204 which had a loan loss reserve of $1,256,329.  No interest income was recognized on impaired loans, while considered impaired during 2010 and 2009.  As of March 31, 2010, we had undisbursed funding commitments on one impaired loan to one borrower totaling $359,579 with a maturity date of October 2010.

 

12



Table of Contents

 

OAK VALLEY BANCORP

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 5 – OTHER REAL ESTATE OWNED

 

As of March 31, 2010, eight loans with outstanding balances of $2,456,401 were reclassified to other real estate owned, as compared to six loans with outstanding balances of $2,149,514 as of December 31, 2009.

 

Real estate properties acquired through, or in lieu of, loan foreclosure are to be sold and are initially recorded at the lower of carrying amount of the loan or fair value of the property at the date of foreclosure less selling costs.  Subsequent to foreclosure, valuations are periodically performed and any subject revisions in the estimate of fair value are reported as adjustment to the carrying value of the real estate, provided the adjusted carrying amount does not exceed the original amount at foreclosure.  Revenues and expenses from operations and changes in the valuation allowance are included in other operating expenses.

 

NOTE 6– OTHER POST-RETIREMENT BENEFIT PLANS

 

During January 2008, the Bank awarded certain officers a salary continuation plan (the “Plan”).  Under the Plan, the participants will be provided with a fixed annual retirement benefit for twenty years after retirement. The Bank is also responsible for certain pre-retirement death benefits under the Plan. In connection with the implementation of the Plan, the Bank purchased single premium life insurance policies on the life of each of the officers covered under the Plan. The Bank is the owner and partial beneficiary of these life insurance policies. The assets of the Plan, under Internal Revenue Service regulations, are owned by the Bank and are available to satisfy the Bank’s general creditors.

 

During January 2008 the Bank awarded two of its directors a director retirement plan (“DRP”). Under the DRP, the participants will be provided with a fixed annual retirement benefit for ten years after retirement. The Bank is also responsible for certain pre-retirement death benefits under the DRP. In connection with the implementation of the DRP, the Bank purchased single premium life insurance policies on the life of each director covered under the DRP. The Bank is the owner and partial beneficiary of these life insurance policies. The assets of the DRP, under Internal Revenue Service regulations, are the property of the Bank and are available to satisfy the Bank’s general creditors.

 

Future compensation under both plans is earned for services rendered through retirement. The Bank accrues for the salary continuation liability based on anticipated years of service and vesting schedules provided under the plans. The Bank’s current benefit liability is determined based on vesting and the present value of the benefits at a corresponding discount rate. The discount rate used is an equivalent rate for investment-grade bonds with lives matching those of the service periods remaining for the salary continuation contracts, which average approximately 20 years.

 

During January 2008, the Bank purchased $4.7 million in bank owned life insurance policies and entered into split-dollar life insurance agreements with certain officers and directors.  In connection with the implementation of the split-dollar agreements, the Bank purchased single premium life insurance policies on the life of each of the officers and directors covered by the split-dollar life insurance agreements. The Bank is the owner of the policies and the partial beneficiary in an amount equal to the cash surrender value of the policies.

 

The combined cash surrender value of all Bank-owned life insurance policies recorded in other assets on the balance sheet was $10,371,848 and $10,267,862 at March 31, 2010 and December 31, 2009, respectively.

 

NOTE 7 – FINANCIAL INSTRUMENTS AND FAIR VALUE MEASUREMENTS

 

Fair values of financial instruments — The financial statements include various estimated fair value information as of March 31, 2010 and December 31, 2009. Such information, which pertains to the Bank’s financial instruments, does not purport to represent the aggregate net fair value of the Bank. Further, the fair value estimates are based on various assumptions, methodologies, and subjective considerations, which vary widely among different financial institutions and which are subject to change. The following methods and assumptions are used by the Bank.

 

Cash and cash equivalents — The carrying amounts of cash and cash equivalents approximate their fair value.

 

Securities (including mortgage-backed securities) — Fair values for securities are based on quoted market prices, where available. If quoted market prices are not available, fair values are based on quoted market prices of comparable instruments.

 

Loans receivable — For variable-rate loans that reprice frequently and have no significant change in credit risk, fair values are based on carrying values. The fair values for other loans (e.g., real estate construction and mortgage, commercial, and installment loans) are estimated using discounted cash flow analyses, using interest rates currently being offered for loans with similar terms to borrowers of similar credit quality.

 

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Table of Contents

 

Deposit liabilities — The fair values estimated for demand deposits (interest and non-interest checking, passbook savings, and certain types of money market accounts) are, by definition, equal to the amount payable on demand at the reporting date (i.e. their carrying amounts). The carrying amounts for variable-rate, fixed-term money market accounts and certificates of deposit approximate their fair values at the reporting date. Fair values for fixed-rate certificates of deposit are estimated using a discounted cash flow calculation that applies interest rates currently being offered on certificates to a schedule of the aggregate expected monthly maturities on time deposits.

 

Federal Home Loan Bank (FHLB) advances — Rates currently available to the Bank for borrowings with similar terms and remaining maturities are used to estimate the fair value of the existing debt.

 

Accrued interest — The carrying amounts of accrued interest approximate their fair value.

 

Off-balance-sheet instruments — Fair values for the Bank’s off-balance-sheet lending commitments are based on fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the credit standing of the counterparties.

 

The estimated fair values of the Bank’s financial instruments at March 31, 2010 are as follows:

 

 

 

 

 

Estimated

 

 

 

Carrying

 

Fair

 

 

 

Amount

 

Value

 

Financial assets:

 

 

 

 

 

Cash and cash equivalents

 

$

30,460,896

 

$

30,460,896

 

Securities available for sale

 

50,991,219

 

50,991,219

 

Loans

 

411,013,327

 

417,224,529

 

Accrued interest receivable

 

1,750,505

 

1,750,505

 

 

 

 

 

 

 

Financial liabilities:

 

 

 

 

 

Deposits

 

(431,624,097

)

(426,222,688

)

FHLB advance

 

(24,300,000

)

(24,463,725

)

Accrued interest payable

 

(296,230

)

(296,230

)

 

 

 

 

 

 

Off-balance-sheet assets (liabilities):

 

 

 

 

 

 

 

 

 

 

 

Commitments and standby letters of credit

 

 

 

(560,705

)

 

The estimated fair values of the Bank’s financial instruments at December 31, 2009 are as follows:

 

 

 

Carrying

 

Fair

 

 

 

Amount

 

Value

 

Financial assets:

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

21,648,548

 

$

21,648,548

 

Securities available for sale

 

50,765,314

 

50,765,314

 

Loans

 

425,627,011

 

434,698,550

 

Accrued interest receivable

 

1,734,332

 

1,734,332

 

 

 

 

 

 

 

Financial liabilities:

 

 

 

 

 

 

 

 

 

 

 

Deposits

 

(429,210,284

)

(429,780,364

)

FHLB advance

 

(32,200,000

)

(32,367,049

)

Accrued interest payable

 

(400,169

)

(400,169

)

 

 

 

 

 

 

Off-balance-sheet assets (liabilities):

 

 

 

 

 

 

 

 

 

 

 

Commitments and standby letters of credit

 

 

 

(631,324

)

 

14



Table of Contents

 

OAK VALLEY BANCORP

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

Fair Value Measurements defines fair value, establishes a framework for measuring fair value, establishes a three-level valuation hierarchy for disclosure of fair value measurement and enhances disclosure requirements for fair value measurements. The valuation hierarchy is based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date. The three levels are defined as follow:

 

Level 1:  Inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets.

Level 2:  Inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument.

Level 3:  Inputs to the valuation methodology are unobservable and significant to the fair value measurement.

 

In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy.  In such cases, the level in the fair value hierarchy within which the fair value measurement in its entirety falls has been determined based on the lowest level input that is significant to the fair value measurement in its entirety.  The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment, and considers factors specific to the asset or liability.

 

Assets and liabilities measured at fair value on a recurring and non-recurring basis are summarized below:

 

 

 

Fair Value Measurements at March 31, 2010

 

 

 

March 31, 2010

 

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

 

$

29,475,777

 

$

 

 

$

29,475,777

 

$

 

 

Collateralized mortgage obligations

 

$

2,883,988

 

$

 

 

$

2,883,988

 

$

 

 

Municipalities

 

$

12,327,922

 

$

 

 

$

12,327,922

 

$

 

 

SBA Pools

 

$

1,588,867

 

$

 

 

$

1,588,867

 

$

 

 

Asset-Back Security

 

$

81,867

 

$

 

 

$

81,867

 

$

 

 

Mutual Fund

 

$

1,546,465

 

$

 

 

$

1,546,465

 

$

 

 

 

 

 

 

 

 

 

 

 

 

Assets and liabilities measured on a non-recurring basis:

 

 

 

 

 

 

 

 

 

Impaired Loans

 

$

6,830,416

 

$

 

$

 

$

6,830,416

 

Other real estate owned

 

$

2,456,401

 

$

 

$

 

$

2,456,401

 

 

 

 

Fair Value Measurements at December 31, 2009

 

 

 

December 31,
2009

 

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

 

$

50,765,314

 

$

 

$

50,765,314

 

$

 

 

 

 

 

 

 

 

 

 

 

Assets and liabilities measured on a non-recurring basis:

 

 

 

 

 

 

 

 

 

Impaired Loans

 

$

10,372,613

 

$

 

$

 

$

10,372,613

 

Other real estate owned

 

$

2,149,514

 

$

 

$

 

$

2,149,514

 

 

The fair value of securities available for sale equals quoted market price, if available.  If quoted market prices are not available, fair value is determined using quoted market prices for similar securities.  Changes in fair market value are recorded in other comprehensive income net of tax.

 

The fair value measurement applies to impaired loans, which includes impaired loans measured at an observable market price (if available), or at the fair value of the loan’s collateral (if the loan is collateral dependent). Fair value of the loan’s collateral, when the loan is dependent on collateral, is determined by appraisals or independent valuation which is then adjusted for the cost related to liquidation of the collateral.  At March 31, 2010, impaired loans that had a specific loan loss reserve had a principal balance of $7,723,139, with a

 

15


 


Table of Contents

 

valuation allowance of $892,723.  Upon being classified as impaired, either a charge off or a specific reserve or both may be taken to reduce the balance of each loan to an estimate of the collateral fair market value less cost to dispose. This estimate was a level 3 valuation.  There was no direct impact on the income statement.  The charge-offs were recorded as a debit to the allowance for loan losses.

 

Fair value of other real estate owned is determined by appraisals or independent valuation which is then adjusted for the cost related to liquidation of the property.  Total fair market value at March 31, 2010 was $2,456,401 which was a level 3 valuation.  There is a direct impact to the income statement as any market value write downs are charged directly to operating expenses.  The Bank is required by internal bank policies to order real estate appraisals on OREO properties every six months.  In addition, management evaluates the book values on a quarterly basis for reasonableness and makes fair value adjustments as necessary.

 

NOTE 8 – EARNINGS (LOSS) PER SHARE

 

Earnings per share (EPS) is calculated based on the weighted average common shares outstanding during the period.  Basic EPS excludes dilution and is calculated by dividing net income available to common shareholders by the weighted average common shares outstanding.  Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock.

 

 

 

THREE MONTHS ENDED

 

 

 

MARCH 31,

 

In thousands (except share and per share amounts)

 

2010

 

2009

 

BASIC EARNINGS PER SHARE

 

 

 

 

 

 

 

 

 

 

 

Net income available to common shareholders

 

$

737,230

 

$

219,899

 

Weighted average shares outstanding

 

7,681,877

 

7,661,627

 

Net income per common share

 

$

0.10

 

$

0.03

 

 

 

 

 

 

 

DILUTED EARNINGS PER SHARE

 

 

 

 

 

 

 

 

 

 

 

Net income available to common shareholders

 

$

737,230

 

$

219,899

 

Weighted average shares outstanding

 

7,681,877

 

7,661,627

 

Effect of dilutive stock options

 

23,611

 

42,265

 

Weighted average shares of common stock and common stock equivalents

 

7,705,488

 

7,703,892

 

Net income per diluted common share

 

$

0.10

 

$

0.03

 

 

During the three month period ended March 31, 2010, anti-dilutive weighted average options to purchase 240,187 shares of common stock with prices ranging from $4.58 to $15.67 were outstanding.   Anti-dilutive weighted average options of 242,963 were outstanding during the same three month period of 2009 with prices ranging from $5.20 to $15.67.  These options were not included in the computation of diluted EPS because the options’ exercise price was greater than the average market price of the common shares. These options begin to expire in 2013.  In addition, weighted average warrants of 350,346 issued to the U.S. Treasury Capital Purchase Program were anti-dilutive for the three-month periods of 2010 and 2009, as the price of $5.78 was more than the average market price of common shares.

 

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Item 2.   Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

The following discussion explains the significant factors affecting our operations and financial position for the periods presented. The discussion should be read in conjunction with our financial statements and the notes related thereto which appear or that are referenced to elsewhere in this report, and with the audited consolidated financial statements and accompanying notes included in our 2009 Annual Report on Form 10-K, as amended.

 

Forward-Looking Statements

 

Some matters discussed in this Form 10-Q may be “forward-looking statements” within the meaning of the Private Litigation Reform Act of 1995 and therefore may involve risks, uncertainties and other factors which may cause our actual results to be materially different from the results expressed or implied by our forward-looking statements.  These statements generally appear with words such as “anticipate,” “believe,” “estimate,” “may,” “intend,” and “expect.”  Although management believes that the assumptions and expectations reflected in such forward-looking statements are reasonable, it can give no assurance that such expectations will prove to be correct.  Factors that could cause actual results to differ from results discussed in forward-looking statements include, but are not limited to: economic conditions (both generally and in the markets where the Bank operates); competition from other providers of financial services offered by the Bank; government regulation and legislation; changes in interest rates; material unforeseen changes in the financial stability and liquidity of the Bank’s credit customers; risks associated with concentrations in real estate related loans; changes in accounting standards and interpretations; 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 or the Bank.  The Company undertakes no obligation to revise forward-looking statements to reflect events or changes after the date of this discussion or to reflect the occurrence of unanticipated events.

 

Critical Accounting Estimates

 

The discussion and analysis of our financial condition and results of operations is based upon our financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires management to make estimates and judgments that affect the reported amounts of assets and liabilities, revenues and expenses, and related disclosures of contingent assets and liabilities at the date of our financial statements. Actual results may differ from these estimates under different assumptions or conditions.

 

Allowance for Loan Losses

 

Accounting for allowance for loan losses involves significant judgment and assumptions by management and is based on historical data and management’s view of the current economic environment. At least on a quarterly basis, our management reviews the methodology and adequacy of allowance for loan losses and reports its assessment to the Board of Directors for its review and approval.

 

We base our allowance for loan losses on an estimation of probable losses inherent in our loan portfolio. Our methodology for assessing loan loss allowances are intended to reduce the differences between estimated and actual losses and involves a detailed analysis of our loan portfolio in three phases:

 

· the specific review of individual loans,

 

· the segmenting and review of loan pools with similar characteristics and,

 

· our judgmental estimate based on various subjective factors.

 

The first phase of our methodology involves the specific review of individual loans to identify and measure impairment. We evaluate each loan by use of a risk rating system, except for homogeneous loans, such as automobile loans and home mortgages. Specific risk rated loans are deemed impaired if all amounts, including principal and interest, will likely not be collected in accordance with the contractual terms of the related loan agreement. Impairment for commercial and real estate loans is measured either based on the present value of the loan’s expected future cash flows or, if collection on the loan is collateral dependent, the estimated fair value of the collateral, less selling and holding costs.

 

The second phase involves the segmenting of the remainder of the risk rated loan portfolio into groups or pools of loans, together with loans with similar characteristics, for evaluation. We determine the calculated loss ratio to each loan pool based on its historical net losses and benchmark it against the levels of other peer banks.

 

In the third phase, we consider relevant internal and external factors that may affect the collectibility of loan portfolio and each group of loan pool. The factors considered are, but are not limited to:

 

· concentration of credits,

 

· nature and volume of the loan portfolio,

 

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· delinquency trends,

 

· non-accrual loan trend,

 

· problem loan trend,

 

· loss and recovery trend,

 

· quality of loan review,

 

· lending and management staff,

 

· lending policies and procedures,

 

· economic and business conditions, and

 

· other external factors including regulatory review.

 

Our management estimates the probable effect of such conditions based on our judgment, experience and known or anticipated trends. Such estimation may be reflected as an additional allowance to each group of loans, if necessary. Management reviews these conditions with our senior credit officers. To the extent that any of these conditions is evidenced by a specifically identifiable problem credit or portfolio segment as of the evaluation date, management’s estimate of the effect of such condition may be reflected as a specific allowance applicable to such credit or portfolio segment. Where any of these conditions is not evidenced by a specific, identifiable problem credit or portfolio segment as of the evaluation date, management’s evaluation of the inherent loss related to such condition is reflected in the unallocated allowance.

 

Central to our credit risk management and our assessment of appropriate loss allowance is our loan risk rating system. Under this system, the originating credit officer assigns borrowers an initial risk rating based on a thorough analysis of each borrower’s financial capacity in conjunction with industry and economic trends. Approvals are made based upon the amount of inherent credit risk specific to the transaction and are reviewed for appropriateness by senior line and credit administration personnel. Credits are monitored by line and credit administration personnel for deterioration in a borrower’s financial condition which may impact the ability of the borrower to perform under the contract. Although management has allocated a portion of the allowance to specific loans, specific loan pools, and off-balance sheet credit exposures (which are reported separately as part of other liabilities), the adequacy of the allowance is considered in its entirety.

 

Non-Accrual Loan Policy

 

Interest on loans is credited to income as earned and is accrued only if deemed collectible. Accrual of interest is discontinued when a loan is over 90 days delinquent or if management believes that collection is highly uncertain. Generally, payments received on nonaccrual loans are recorded as principal reductions. Interest income is recognized after all principal has been repaid or an improvement in the condition of the loan has occurred that would warrant resumption of interest accruals.

 

Stock-Based Compensation

 

The Company recognizes in the income statement the grant-date fair value of stock options and other equity-based forms of compensation issued to employees over the employees’ requisite service period (generally the vesting period).  The Bank uses the straight-line recognition of expenses for awards with graded vesting.  The Bank utilizes a binomial pricing model for all grants.  Expected volatility is based on the historical volatility of the price of the Bank’s stock for the period equal to the contractual stock option term. The Bank uses historical data to estimate option exercise and stock option forfeiture rates within the valuation model. The expected term of options granted for the binomial model is derived from applying a historical suboptimal exercise factor to the contractual term of the grant. For binomial pricing, the risk-free rate for periods is equal to the U.S. Treasury yield at the time of grant and commensurate with the contractual term of the grant.

 

Other Real Estate Owned

 

Other real estate owned, which represents real estate acquired through foreclosure, or deed in lieu of foreclosure in satisfaction of commercial and real estate loans, is carried at the lower of cost or estimated fair value less the estimated selling costs of the real estate. The fair value of the property is based upon a current appraisal. The difference between the fair value of the real estate collateral and the loan balance at the time of transfer is recorded as a loan charge off if fair value is lower. Subsequent to foreclosure, management periodically performs valuations and the OREO property is carried at the lower of carrying value or fair value, less costs to sell. The  determination of a property’s estimated fair value incorporates (1) revenues projected to be realized from disposal of the property, (2) construction and renovation costs, (3) marketing and transaction costs, and (4) holding costs (e.g., property taxes, insurance and homeowners’ association dues). Any subsequent declines in the fair value of the OREO property after the date of transfer are recorded

 

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through a write-down of the asset. Any subsequent operating expenses or income, reduction in estimated fair values, and gains or losses on disposition of such properties are charged or credited to current operations.

 

Introduction

 

Oak Valley Community Bank commenced operations in May 1991.  We are an insured bank under the Federal Deposit Insurance Act and are a member of the Federal Reserve.  Since its formation, the Bank has provided basic banking services to individuals and business enterprises in Oakdale, California and the surrounding areas. The focus of the Bank is to offer a range of commercial banking services designed for both individuals and small to medium-sized businesses in the two main areas of service of the Bank: the Central Valley and the Eastern Sierras.

 

The Bank offers a complement of business checking and savings accounts for its business customers.  The Bank also offers commercial and real estate loans, as well as lines of credit.  Real estate loans are generally of a short-term nature for both residential and commercial purposes.  Longer-term real estate loans are generally made with adjustable interest rates and contain normal provisions for acceleration.  In addition, the Bank offers traditional residential mortgages through a partner financial institution under Community Bank Lending Exchange (“CBLX”).

 

The Bank also offers other services for both individuals and businesses including online banking, remote deposit capture, merchant services, night depository, extended hours, traveler’s checks, 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.

 

Effective July 3, 2008, Oak Valley Community Bank became a subsidiary of Oak Valley Bancorp, a newly established bank holding company. Oak Valley Bancorp operates Oak Valley Community Bank as a community bank in the general commercial banking business, with our primary market encompassing the California Central Valley around Oakdale and Modesto, and the Eastern Sierras. As such, unless otherwise noted, all references are about Oak Valley Bancorp.

 

Overview of Results of Operations and Financial Condition

 

The purpose of this summary is to provide an overview of the items management focuses on when evaluating the condition of the Company and its success in implementing its business and shareholder value strategies. The Company’s business strategy is to operate the Bank as a well-capitalized, profitable and independent community oriented bank.  The Company’s shareholders value strategy has three major themes: (1) enhancing shareholders’ value; (2) making its retail banking franchise more valuable; and (3) efficiently utilizing its capital.

 

Management believes the following were important factors in the Company’s performance during the quarter March 31, 2010:

 

·                  Thanks to our deep roots in the communities that we serve, our focus on customer care and our selectivity in lending, during the first three months of 2010, our performance has been better than most institutions of our size that compete in our market.  Despite the severity of the recession affecting our primary market areas, we have been able to increase our core deposits to $386.3 million and have posted net income per common share of $0.10.

 

·                  While recently published economic data indicate that the current downturn may be easing, it is not clear when or at what speed the recession will end. To the extent that the recession continues, it will affect the market areas that we serve and our results accordingly.

 

·                  The Company recognized net income available to common shareholders of $737,000 for the three month period ended March 31, 2010 as compared with net income available to common shareholders of $220,000 for the same period in 2009.  The Company recognized net income before preferred stock dividends and accretion of $948,000 for the first quarter of 2010.  The factors contributing to these results will be discussed below.

 

·                  The Company recognized $210,000 in the first quarter of 2010 and 2009 associated with the accrual for preferred stock dividends and accretion of the preferred stock discount in connection with the 13,500 shares of Series A Preferred Stock that the U.S. Treasury purchased from the Company in December 2008 under the TARP Program. So long as such preferred stock remains outstanding, it will pay quarterly cumulative dividends at a rate of 5% per year for the first five years and thereafter at a rate of 9% per year.

 

·                  The Company has taken significant steps to reduce the risk of loan losses.   In the three month period ended March 31, 2010, the provision for loan loss was $1,005,000 which was a decrease of $895,000 compared to the first quarter of 2009 but an increase of $105,000 and $80,000 over the prior two quarters (4th and 3rd quarter of 2009, respectively).  These increases were mainly due to management’s assessment of the appropriate level for the allowance for loan losses and an increase in the level of non-accrual loans. The Company continues to monitor its loan portfolio with the objective of avoiding defaults or write-downs.  Despite these actions, the possibility of additional losses can not be eliminated, but the Board of Directors and

 

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all employees continue to work hard to make the best of these continuing challenging conditions.

 

·                  Net interest income increased $404,000 or 7.1% for the three month period ended March 31, 2010, compared to the same period in 2009.  This increase was primarily due to the net interest margin increase of 36 basis points, which was offset by a decrease in average earning assets of $2.7 million for the three month periods ended March 31, 2010, as compared to the same period of 2009.  The net interest margin increase is attributable primarily to liabilities repricing faster than assets in the declining rate environment as described in further detail below.

 

·                  For the three month period ended March 31, 2010, non-interest income increased by $48,000 or 8.1% from the same period in 2009.  The increase was primarily due to an increase in other income which included the gain on called securities, which was partially offset by a decrease in NSF fee income and mortgage commissions as described below.

 

·                  Non-interest expense increased by $507,000 or 12.9% for the three month period ended March 31, 2010, as compared to the same period in 2009, primarily due to write downs of OREO property values, increased FDIC Assessments and increased salaries and benefits as described below.

 

·                  Total assets decreased $4.4 million or 0.8% from December 31, 2009.  Total net loans decreased by $14.3 million or 3.4% and investment securities increased by $0.2 million or 0.4% from December 31, 2009 to March 31, 2010, while deposits increased by $2.4 million or 0.6%.

 

Income Summary

 

For the three month period ended March 31, 2010, the Company recorded net income available to common shareholders of $737,000, an increase of $517,000 for the quarter, as compared to $220,000 for the same period in 2009.  Return on average assets (annualized) was 0.75% for the first quarter of 2010, as compared with 0.34% for the same period in 2009.  Annualized return on average common equity was 6.22% for the first quarter of 2010, as compared to 1.97% for the same period of 2009.

 

Net income before provisions for income taxes and preferred stock dividends and accretion was up $840,000 for the first quarter of 2010 from the comparable 2009 period.  The income statement components of these variances are as follows:

 

Pre-Tax Income Variance Summary

(In thousands)

 

 

 

Effect on Pre-Tax
Income

 

 

 

Increase (Decrease)

 

 

 

Three Months

 

Change from 2008 to 2009 in:

 

 

 

Net interest income

 

$

404,000

 

Provision for loan losses

 

895,000

 

Non-interest income

 

48,000

 

Non-interest expense

 

(507,000

)

Change in income before income taxes

 

$

840,000

 

 

These variances will be explained in the discussion below.

 

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Net Interest Income

 

Net interest income is the largest source of the Bank’s operating income.  For the three month period ended March 31, 2010, net interest income was $6.06 million, which represented an increase of $404,000 or 7.1% from the comparable period in 2009.

 

The net interest margin (net interest income as a percentage of average interest earning assets) was 5.22% for the three month period ended March 31, 2010, an increase of 36 basis points as compared to the same period in 2009.  The increase in the net interest margin in 2010 was primarily attributable to the impact that the decline in market interest rates had on our liability sensitive balance sheet which caused interest-bearing liabilities to decrease faster than the yields on earning assets.  The total cost of funds decreased 58 basis points in the first quarter 2010 compared to 2009 due to a shift from high cost CDs and FHLB borrowed funds into money market accounts which realized the highest rate decrease of 68 basis points.  The decrease in our earning asset yield was minimal at only 14 basis points, partly due to the portion of our loan portfolio that was at the contractual rate floors.  Yield on loans remained relatively flat at 6.24% for the first quarter 2010 versus 6.23% in the first quarter of 2009.

 

The following tables shows the relative impact of changes in average balances of interest earning assets and interest bearing liabilities, and interest rates earned and paid by the Company on those assets and liabilities for the three and nine month periods ended March 31, 2010 and 2009:

 

Net Interest Analysis

(Dollars in thousands)

 

 

 

Three months ended

 

Three months ended

 

 

 

March 31, 2010

 

March 31, 2009

 

 

 

Average
Balance

 

Interest
Income /
Expense

 

Avg
Rate/
Yield

 

Average
Balance

 

Interest
Income /
Expense

 

Avg
Rate/
Yield

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

Earning assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross loans (1) (2)

 

$

419,029

 

$

6,452

 

6.24

%

$

429,860

 

$

6,604

 

6.23

%

Investment securities (2)

 

47,055

 

651

 

5.61

%

46,999

 

698

 

6.11

%

Federal funds sold

 

2,936

 

2

 

0.22

%

1,383

 

1

 

0.27

%

Interest-earning deposits

 

8,066

 

4

 

0.22

%

1,525

 

1

 

0.21

%

Total interest-earning assets

 

477,086

 

7,109

 

6.04

%

479,767

 

7,304

 

6.18

%

Total noninterest earning assets

 

38,237

 

 

 

 

 

37,768

 

 

 

 

 

Total Assets

 

515,323

 

 

 

 

 

517,535

 

 

 

 

 

Liabilities and Shareholders’ Equity:

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest-bearing liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

Money market deposits

 

208,710

 

453

 

0.88

%

163,514

 

628

 

1.56

%

NOW deposits

 

57,817

 

48

 

0.34

%

53,950

 

75

 

0.56

%

Savings deposits

 

14,429

 

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