As filed with the Securities and Exchange Commission on July 30, 2008
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10
GENERAL FORM FOR REGISTRATION OF SECURITIES
Pursuant to Section 12(b) or (g) of The Securities Exchange Act of 1934
OAK VALLEY BANCORP
(Exact name of registrant as specified in its charter)
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California (State or other jurisdiction of incorporation or organization) |
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6712 (Primary Standard Industrial Classification Code Number) |
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26-2326676 (I.R.S. Employer Identification No.) |
Oak Valley Bancorp
125 North Third Avenue
Oakdale, California 95361
(209) 848-2265
(Address, including zip code, and telephone number,
including area code, of registrant’s principal executive offices)
Securities to be registered under Section 12(b) of the Act:
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Title of each class |
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Name of each exchange on which |
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to be so registered |
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each class is to be registered |
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Common Stock |
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NASDAQ |
Securities to be registered under Section 12(g) of the Act:
None
(Title of class)
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 the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
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Large accelerated filer o |
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Accelerated filer o |
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Non-accelerated filer (Do not check if a smaller reporting company) o |
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Smaller reporting company x |
ITEM 1. BUSINESS OF OAK VALLEY BANCORP
Overview of the Business
Oak Valley Bancorp was incorporated on April 1, 2008 in California for the purpose of becoming Oak Valley Community Bank’s parent bank holding company. Effective July 3, 2008, Oak Valley Bancorp acquired all of the outstanding capital stock of Oak Valley Community Bank. The principal office of Oak Valley Bancorp is located at 125 North Third Avenue, Oakdale, California 95361 and its principal telephone is (209) 848-2265.
Oak Valley Bancorp is authorized to issue 50,000,000 shares of common stock, without par value, of which 7,641,377 are issued and outstanding, and 10,000,000 shares of preferred stock, without par value, of which none are issued or outstanding.
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. The Bank introduced a mortgage-lending program, Community Bank Lending Exchange (“CBLX”), at the beginning of 2003. At December 31, 2007, the Bank has originated $192 million in loans for funding by 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.
Expansion
Branch Expansion. Over the past few years, our network of branches and loan production offices have been expanded geographically. As of March 31, 2008, we maintained twelve full-service branch offices (in addition to our main office). Beginning in October 1995, we started our geographic expansion outside of Oakdale, by opening a Loan Production Office in Sonora, California. We subsequently opened a branch in Sonora and branches in Modesto. In September 2000, we expanded into the Eastern Sierra, opening a branch in Bridgeport, California under the name Eastern Sierra Community Bank. Since that time we have added branches in Mammoth Lakes and Bishop. During 2005 and through the first part of 2006, we aggressively increased our presence in the Central Valley, by opening branches. In March 2007 our corporate headquarters expanded by adding an adjacent historical building located in downtown Oakdale to its complex. We intend to continue our growth strategy in future years through the opening of additional branches and loan production offices as our needs and resources permit.
Bank Holding Company Reorganization. Effective July 3, 2008, we entered into a bank holding company reorganization, whereby each of the Bank’s outstanding shares of common stock converted into an equal number of shares of common stock in Oak Valley Bancorp, which currently owns the Bank as its wholly-owned subsidiary. Management believes that operating the Bank within a holding company structure will, among other things, provide greater operating flexibility than is currently enjoyed by Oak Valley Community Bank; facilitate the acquisition of related businesses as opportunities arise; improve the Bank’s ability to diversify; enhance the Bank’s ability to remain competitive in the future with other companies in the financial services industry that are organized in a holding company structure; and improve the Bank’s ability to raise capital to support growth. The reorganization was approved by the vote of the majority of the issued and outstanding shares of common stock.
Business Segments
We operate in two primary business segments: Retail Banking and Commercial Banking. We determine operating results of each segment based on an internal management system that allocates certain expenses to each segment. These segments are described in additional detail below:
Retail Banking. The Bank offers a range of checking and savings accounts, including NOW and Super NOW accounts, overdraft protection, passbook savings accounts, certificates of deposit, money market certificates, and Individual Retirement Accounts (“IRA”). To satisfy the lending needs of individuals in its service area, the Bank offers real estate and home equity financing, as well as consumer, automobile, and home improvement loans.
Commercial Banking . The Bank offers a range of deposit and lending services to business customers. More specifically, the Bank offers a variety of commercial loans for virtually any business, professional, or agricultural need. These include short-term working capital, operating lines of credit, equipment purchases, leasehold improvements, commercial real estate acquisitions or refinancing. Currently, virtually all of the Bank’s business relationships are with customers located in the San Joaquin, Stanislaus, Tuolumne, Inyo and Mono Counties.
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
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evaluate a variety of options to augment our traditional focus by broadening the services and products we provide. Possible avenues of growth include more branch locations, expanded days and hours of operation and new types of lending.
Loan Procedures. Loan applications may be approved by the Director Loan Committee of our Board of Directors, or by our management or lending officers to the extent of their loan authority. Our Board of Directors authorizes our lending limits. Our President and Chief Credit Officer are responsible for evaluating the authority limits for individual credit officers and recommending lending limits for all other officers to the board of directors for approval.
We grant individual lending authority to our President, Chief Credit Officer and some department managers. Our highest management lending authority is the combined administrative lending authority for unsecured and secured lending of $1,500,000, which requires the approval of our President or Chief Credit Officer. Loans for which direct and indirect borrower liability exceeds an individual’s lending authority are referred to our Board of Directors Loan Committee.
At December 31, 2007, our authorized legal lending limits were $7.1 million for unsecured loans plus an additional $4.7 million for specific secured loans. Legal lending limits are calculated in conformance with California law, which prohibits a bank from lending to any one individual or entity or its related interests an aggregate amount which exceeds 15% of primary capital plus the allowance for loan losses on an unsecured basis, plus an additional 10% on a secured basis. Our primary capital plus allowance for loan losses at December 31, 2007 totaled $47.3 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 refinancing of existing commercial properties, such as shopping centers, office buildings, industrial buildings, warehouses, hotels, automotive industry facilities and multiple dwellings. At December 31, 2007, real estate loans constituted 78% of our loan portfolio, of which 54% were commercial loans.
Commercial real estate loans typically have 10-year maturities with up to 25-year amortization of principal and interest and loan-to-value ratios of not more than 75% of the appraised value or purchase price, whichever is lower. We usually impose a prepayment penalty during the period within 3 to 5 years of the date of the loan.
Construction loans are comprised of loans on commercial, residential and income producing properties that generally have terms of 1 year, with options to extend for additional periods to complete construction and to accommodate the lease-up period. We usually require 15% equity capital investment by the developer and loan to value ratios of not more than 75% of anticipated completion value.
Miniperm loans finance the purchase and/or ownership of commercial properties, including owner-occupied and income producing properties. We also offer miniperm loans as take-out financing with our construction loans. Miniperm loans are generally made with an amortization schedule ranging from 20 to 25 years with a lump sum balloon payment due in 3 to 5 years.
Equity lines of credit are revolving lines of credit collateralized by junior deeds of trust on residential real properties. They generally bear a rate of interest that floats with our base rate or the prime rate and have maturities of 10 years. From time to time, we purchase participation interests in loans made by other financial institutions. 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 subject to corporate or individual guarantees from financially capable parties as available. The properties collateralizing real estate loans are principally located in our primary market areas of the California Central Valley and the Eastern Sierra. Real estate loans typically bear an interest rate that floats with our base rate, prime rate or another established index.
Our real estate portfolio is subject to certain risks, including (i) downturns in the California economy, (ii) interest rate increases, (iii) reduction in real estate values in the California Central Valley, (iv) increased competition in pricing and loan structure, and (v) environmental risks, including natural disasters. We strive to reduce the exposure to such risks by (a) reviewing each loan request and renewal individually, (b) using a dual signature approval system for the approval of each loan request for loans over a certain dollar amount, (c) adherence to written loan policies, including, among other factors, minimum collateral requirements, maximum loan-to-value ratio requirements, cash flow requirements and personal guarantees, (d) secondary appraisals, (e) 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.
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 our base rate, the prime rate, LIBOR or another established index.
Commercial term loans are typically made to finance the acquisition of fixed assets, refinance short-term debts or to finance the purchase of businesses. Commercial term loans generally have terms from one to five years. They may be collateralized by the asset being acquired or other available assets and bear interest rates which either floats with the Bank’s base rate, prime rate, LIBOR or another established index or is fixed for the term of the loan.
We also provide other banking services tailored to the small business market. We have focused recently on diversifying our loan portfolio, which has led to an increase in commercial real estate and commercial business loans to small and medium sized businesses.
Our portfolio of commercial loans is subject to certain risks, including (i) downturns in the California economy, (ii) interest rate increases; and (iii) the deterioration of a borrower’s or guarantor’s financial capabilities. We attempt to reduce the exposure to such risks through (a) reviewing each loan request and renewal individually, (b) a dual signature approval system, (c) strict adherence to written loan policies, and (d) external independent credit review. In addition, loans based on short-term asset values are monitored on a monthly or quarterly basis. In general, we receive and review financial statements of borrowing customers on an ongoing basis during the term of the relationship and respond to any deterioration noted.
Small Business Administration Lending Services. Small Business Administration, or SBA, lending forms an important part of our business. Our SBA lending service places an emphasis on minority-owned businesses. Our SBA market area includes the geographic areas encompassed by our full-service banking offices in the California Central Valley and in the Eastern Sierra. Our SBA Loan Department has attained “Preferred Lender” status, which permits us to approve SBA guaranteed loans directly. As an SBA Preferred Lender, we provide quicker and more efficient service to our clientele, enabling them to obtain SBA loans in order to acquire new businesses, expand existing businesses, and acquire locations in which to do business, without having to go through the time consuming SBA approval process.
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Although our participation in the SBA program is subject to the legislative power of Congress and the continued maintenance of our approved status by the SBA, we have no reason to believe that this program (and our participation therein) will not continue, particularly in view of the lengthy duration of the SBA program nationally.
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,
· strict adherence to written credit policies and,
· external independent credit review.
Deposit Activities and Other Sources of Funds
Our primary sources of funds are deposits and loan repayments. Scheduled loan repayments are a relatively stable source of funds, whereas deposit inflows and 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 remain a primary source of funds, but these balances may be influenced by adverse market changes in the industry. Other borrowings may be used:
· on a short-term basis to compensate for reductions in deposit inflows at less than projected levels, and
· on a longer-term basis to support expanded lending activities and to match the maturity of repricing intervals of assets.
We offer a variety of accounts for depositors which are designed to attract both short-term and long-term deposits. These accounts include certificates of deposit, or “CDs”, regular savings accounts, money market accounts, checking and negotiable order of withdrawal, or “NOW”, accounts, installment savings accounts, and individual retirement accounts, or “IRAs”. These accounts generally earn interest at rates established by management based on competitive market factors and management’s desire to increase or decrease certain types or maturities of deposits. As needs arise, we augment these customer deposits with brokered deposits. The more significant deposit accounts offered by us are described below:
Certificates of Deposit. We offer several types of CDs with a maximum maturity of five years. The substantial majority of our CDs have a maturity of one to twelve months and typically pay simple interest credited monthly or at maturity.
Regular Savings Accounts. We offer savings accounts that allow for unlimited deposits and withdrawals, provided that depositors maintain a $100 minimum balance. Interest is compounded daily and credited quarterly.
Money Market Account. Money market accounts pay a variable interest rate that is tiered depending on the balance maintained in the account. Minimum opening balances vary. Interest is compounded daily and paid monthly.
Checking and NOW Accounts. Checking and NOW accounts are generally non-interest and interest bearing accounts, respectively, and may include service fees based on activity and balances. NOW accounts pay interest, but require a higher minimum balance to avoid service charges.
Federal Home Loan Bank Borrowings. To supplement our deposits as a source of funds for lending or investment, we borrow funds in the form of advances from the Federal Home Loan Bank. We regularly make use of Federal Home Loan Bank advances as part of our interest rate risk management, primarily to extend the duration of funding to match the longer term fixed rate loans held in the loan portfolio as part of our growth strategy.
As a member of the Federal Home Loan Bank system, we are required to invest in Federal Home Loan Bank stock based on a predetermined formula. Federal Home Loan Bank stock is a restricted investment security that can only be sold to other Federal Home Loan Bank members or redeemed by the Federal Home Loan Bank. As of December 31, 2007, we owned $2,283,300 in FHLB stock.
Advances from the Federal Home Loan Bank are typically secured by our entire real estate loan portfolio, which includes residential and commercial loans. At December 31, 2007, our borrowing limit with the Federal Home Loan Bank was approximately $99 million.
Internet Banking
Since August 1, 2001, we have offered Internet banking service, which allows our customers to access their deposit accounts through the Internet. Customers are able to obtain transaction history and account information, transfer funds between accounts and make on-line bill payments. We intend to improve and develop our Internet banking products and delivery channels as the need arises and our resources permit.
Other Services
We also offer ATM machines located at branch offices, and customer access to an ATM network.
Marketing
Our business plan relies principally upon local advertising and promotional activity and upon personal contacts by our directors, officers and shareholders to attract
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business and to acquaint potential customers with our personalized services. We emphasize a high degree of personalized client service in order to be able to provide for each customer’s banking needs. Our marketing approach emphasizes the advantages of dealing with an independent, locally-managed and state chartered bank to meet the particular needs of consumers, professionals and business customers in the community. Our management continually evaluates all of our banking services with regard to their profitability and efforts and makes determinations based on these evaluations whether to continue or modify our business plan, where appropriate.
We do not currently have any plans to develop any new lines of business which would require a material amount of capital investment on our part.
Competition
Regional Branch Competition. We consider our primary service area to be composed of the counties of San Joaquin, Stanislaus, Tuolumne, Inyo and Mono Counties. 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. 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 certain of these institutions have over us 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 Bank 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.
In addition to competing with savings institutions, commercial banks compete with other financial markets for funds. For instance, yields on corporate and government debt securities and other commercial paper affect the ability of commercial banks to attract and hold deposits. Commercial banks also compete for available funds with money market funds.
As of June 30, 2007, our primary service areas contained one hundred thirty-two (132) banking offices, with approximately $7.5 billion in total deposits. As of June 30, 2007, we had total deposits of approximately $365 million, which represented approximately 4.87% of the total deposits in the Bank’s primary service area. There can be no assurance that the Bank will maintain its competitive position against current and potential competitors, especially those with greater resources than the Bank. The deposits of the four (4) largest competing banks averaged approximately $93 million per office as of June 30, 2007.
In order to compete with major financial institutions in its primary service area, 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 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 those customers requiring other services not offered by us in obtaining such services from its correspondent banks. However, no assurance can be given that our efforts to compete with other financial institutions will be successful.
Other Competitive Factors. Large commercial bank competitors have, among other advantages, the ability to finance wide-ranging and effective advertising campaigns and to allocate their investment resources to areas of highest yield and demand. Many of the major banks operating in our market area offer certain services that we do not offer directly (but some of which we offer through correspondent institutions). By virtue of their greater total capitalization, such banks also have substantially higher lending limits (restricted to a percentage of the bank’s total shareholders’ equity, depending upon the nature of the loan transaction) than we do.
In addition to other banks, our competitors include savings institutions, credit unions, and numerous non-banking institutions, such as finance companies, leasing companies, insurance companies, brokerage firms, and investment banking firms. In recent years, increased competition has also developed from specialized finance and non-finance companies that offer money market and mutual funds, wholesale finance, credit card, and other consumer finance services, including on-line banking services and personal finance software. Strong competition for deposit and loan products affects the rates of those products as well as the terms on which they are offered to customers.
The more general competitive trends in the industry include increased consolidation and competition. Strong competitors, other than financial institutions, have entered banking markets with focused products targeted at highly profitable customer segments. Many of these competitors are able to compete across geographic boundaries and provide customers increasing access to meaningful alternatives to banking services in nearly all significant products areas. Mergers between financial institutions have placed additional pressure on banks within the industry to streamline their operations, reduce expenses, and increase revenues to remain competitive. Competition has also intensified due to the federal and state interstate banking laws, which permit banking organizations to expand geographically, and the California market has been particularly attractive to out-of-state institutions. The Financial Modernization Act, which has made it possible for full affiliations to occur between banks and securities firms, insurance companies, and other financial companies, is also expected to intensify competitive conditions.
Technological innovations have also resulted in increased competition in the financial services industry. Such innovations have, for example, made it possible for non-depository institutions to offer customers automated transfer payment services that were previously considered traditional banking products. In addition, many customers now expect a choice of several delivery systems and channels, including telephone, mail, home computer, ATMs, self-service branches and/or in-store branches.
Business Concentration. No individual or single group of related accounts is considered material in relation to our total assets or deposits, or in relation to our overall business. However, approximately 82.9% of our loan portfolio held for investment at December 31, 2007 consisted of real estate-related loans, including construction loans, miniperm loans, real estate mortgage loans and commercial loans secured by real estate. Moreover, our business activities are currently focused primarily in Central California, with the majority of our business concentrated in San Joaquin, Stanislaus, Tuolumne, Inyo and Mono Counties. Consequently, our results of operations and financial condition are dependent upon the general trends in the Central California economies and, in particular, the residential and commercial real estate markets. In addition, the concentration of our operations in Central California exposes us to greater risk than other banking companies with a wider geographic base in the event of catastrophes, such as earthquakes, fires and floods in this region.
Employees
As of December 31, 2007, we had 120 full time equivalent employees (105 full-time employees and 28 part-time employees). None of our employees are currently represented by a union or covered by a collective bargaining agreement. Management believes its employee relations are satisfactory.
Regulation of the Bank
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. 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 Federal Reserve Board. The Federal Reserve Board implements national monetary policies (with objectives such as curbing inflation and combating recession) by its open-market operations in United States Government securities, by adjusting the
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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 also affects interest rates charged on loans and paid on deposits. Indirectly such actions may also impact the ability of non-bank financial institutions to compete with us. The nature and impact of any future changes in monetary policies cannot be predicted.
The laws, regulations and policies affecting financial services businesses are continuously under review by Congress and state legislatures and federal and state regulatory agencies. From time to time, legislation is enacted which has the effect of increasing the cost of doing business, limiting or expanding permissible activities or affecting the competitive balance between banks and other financial intermediaries. Proposals to change the laws and regulations governing the operations and taxation of banks, bank holding companies and other financial intermediaries are frequently made in Congress, in the California legislature and by various bank regulatory agencies and other professional agencies. Changes in the laws, regulations or policies that impact us cannot necessarily be predicted, but they may have a material effect on our business and earnings.
As a California state-chartered bank whose accounts are insured by the FDIC up to a maximum of $100,000 per depositor, the Bank is subject to regulation, supervision and regular examination by the California Department of Financial Institutions and the FDIC. In addition, although we are not 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 FDIC is generally intended to protect depositors and is not intended for the protection of our shareholders.
The following discussion of statutes and regulations affecting banks is only a summary and does not purport to be complete. This discussion is qualified in its entirety by reference to such statutes and regulations. No assurance can be given that the referenced statutes or regulations will not change in the future.
Capital Adequacy Requirements
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 guidelines divide a bank’s capital into two tiers. Tier I includes common equity, retained earnings, certain non-cumulative perpetual preferred stock, and minority interests in equity accounts of consolidated subsidiaries. Goodwill and other intangible assets (except for mortgage servicing rights and purchased credit card relationships, subject to certain limitations) are subtracted from Tier I capital. Tier II capital includes, among other items, cumulative perpetual and long-term, limited-life preferred stock, mandatory convertible securities, certain hybrid capital instruments, term subordinated debt and the allowance for loan losses (subject to certain limitations). Certain items are required to be deducted from Tier II capital. Banks must maintain a total risk-based ratio of 8%, of which at least 4% must be Tier I capital. As of December 31, 2007 and 2006, our Total Risk-Based Capital Ratios were 11.1% and 9.5%, respectively, and our Tier 1 Risk-Based Capital Ratios were 10.0% and 8.4%, respectively.
In addition to the risk-based guidelines, federal banking regulators require banking organizations to maintain a minimum amount of Tier 1 capital to total average assets, referred to as the leverage ratio. Banks that have received the highest rating of the five categories used by regulators to rate banks and are not anticipating or experiencing any significant growth must maintain a ratio of Tier 1 capital (net of all intangibles) to adjusted total assets, or “Leverage Capital Ratio”, of at least 3%. All other institutions are required to maintain a leverage ratio of at least 100 to 200 basis points above the 3% minimum, for a minimum of 4% to 5%. Pursuant to federal regulations, banks must maintain capital levels commensurate with the level of risk to which they are exposed, including the volume and severity of problem loans. As of December 31, 2007 and 2006, our Leverage Capital Ratios were 9.4% and 7.9%, respectively.
Federal banking regulators may set capital requirements higher than the minimums described above for financial institutions whose circumstances warrant it. For example, a financial institution experiencing or anticipating significant growth may be expected to maintain capital positions substantially above the minimum supervisory levels without significant reliance on intangible assets.
Prompt Corrective Action Provisions
Federal law requires each federal banking agency to take prompt corrective action to resolve the problems of insured financial institutions, including but not limited to those that fall below one or more prescribed minimum capital ratios. The federal banking agencies have by regulation defined the following five capital categories:
· “well capitalized” (Total Risk-Based Capital Ratio of 10%; Tier 1 Risk-Based Capital Ratio of 6%; and Leverage Ratio of 5%),
· “adequately capitalized” (Total Risk-Based Capital Ratio of 8%; Tier 1 Risk-Based Capital Ratio of 4%; and Leverage Ratio of 4% or 3% if the institution receives the highest rating from its primary regulator),
· “undercapitalized” (Total Risk-Based Capital Ratio of less than 8%; Tier 1 Risk-Based Capital Ratio of less than 4%; or Leverage Ratio of less than 4% or 3% if the institution receives the highest rating from its primary regulator),
· “significantly undercapitalized” (Total Risk-Based Capital Ratio of less than 6%; Tier 1 Risk-Based Capital Ratio of less than 3%; or Leverage Ratio less than 3%), and
· “critically undercapitalized” (tangible equity to total assets less than 2%).
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 FDIC 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
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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.
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.
Premiums for Deposit Insurance
FDIC regulations also implement a risk-based premium system, whereby insured depository institutions are required to pay insurance premiums depending on their risk classification. Under this system, institutions like us that are insured by the Bank Insurance Fund, are categorized into one of three capital categories (well capitalized, adequately capitalized, and undercapitalized) and one of three supervisory categories based on federal regulatory evaluations. The three supervisory categories are:
· financially sound with only a few minor weaknesses (Group A),
· demonstrates weaknesses that could result in significant deterioration (Group B), and
· poses a substantial probability of loss (Group C).
The capital ratios used by the FDIC to define well capitalized, adequately capitalized and undercapitalized are the same as the FDIC’s prompt corrective action regulations. Our current Bank Insurance Fund base assessment rates (expressed as cents per $100 of deposits) are summarized as follows:
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Group A |
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Group B |
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Group C |
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|
|
|
|
|
|
|
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Well Capitalized |
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0 |
|
3 |
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17 |
|
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Adequately Capitalized |
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3 |
|
10 |
|
24 |
|
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Undercapitalized |
|
10 |
|
24 |
|
27 |
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The Financing Corporation, a mixed ownership government corporation, was established under the authority of the Competitive Equality Banking Act of 1987, as a financing vehicle for the Federal Savings & Loan Insurance Corporation. Effective December 12, 1991, as provided by the Resolution Trust Corporation Refinancing, Restructuring and Improvement Act of 1991, the Financing Corporation’s ability to issue new debt was terminated. Outstanding Financing Corporation bonds, which are 30-year noncallable bonds with a principal amount of approximately $8.1 billion, mature in 2017 through 2019.
The Financing Corporation still retains assessment authority, separate from the FDIC’s authority to assess risk-based premiums for deposit insurance, to collect funds from FDIC-insured institutions sufficient to pay interest on Financing Corporation bonds. The FDIC acts as collection agent for the Financing Corporation. The Deposit Insurance Funds Act of 1996 authorizes the Financing Corporation to assess both Bank Insurance Fund and SAIF insured deposits.
The Financing Corporation assessment rate is adjusted quarterly to reflect changes in the assessment bases of the respective funds based on quarterly Call Report and Thrift Financial Report submissions. Our Financing Corporation assessment rate at December 31, 2007 was 1.69 basis points, or 1.69 cents per $100 of insured deposits.
Community Reinvestment Act
We are subject to certain requirements and reporting obligations involving the Community Reinvestment Act, or “CRA”. The CRA generally requires federal banking agencies to evaluate the record of financial institutions in meeting the credit needs of local communities, including low and moderate-income neighborhoods. The CRA further requires that a record be kept of whether a financial institution meets its community credit needs, which record will be taken into account when evaluating applications for, among other things, domestic branches, consummating mergers or acquisitions, or holding company formations. In measuring a bank’s compliance with its CRA obligations, the regulators now utilize a performance-based evaluation system which bases CRA ratings on the bank’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 FDIC assigns a rating of “outstanding,” “satisfactory,” “needs to improve” or “substantial noncompliance.” We were last examined for CRA compliance in August 15, 2005 and received a satisfactory CRA Assessment Rating.
Other Consumer Protection Laws and Regulations
Bank regulatory agencies are increasingly focusing on compliance with consumer protection laws and regulations. Examination and enforcement has become intense, and banks have been advised to monitor compliance carefully with various consumer protection laws and their implementing regulations. For example, the federal Interagency Task Force on Fair Lending issued a policy statement on discrimination in home mortgage lending describing three methods that federal agencies will use to prove discrimination: overt evidence of discrimination, evidence of disparate treatment, and evidence of disparate impact. In addition to CRA and fair lending requirements, we are subject to numerous other federal consumer protection statutes and regulations. Due to heightened regulatory concern related to compliance with consumer protection laws and regulations generally, we may incur additional compliance costs or be required to expend additional funds for investments in the local communities we serve.
Interstate Banking and Branching The Riegle-Neal
The Interstate Banking and Branching Efficiency Act of 1994, or “Interstate Banking Act,” regulates the interstate activities of banks and bank holding companies and establishes a framework for nationwide interstate banking and branching. Since June 1, 1997, a bank in one state has generally been permitted to merge with a bank in another state without the need for explicit state law authorization. However, states were given the ability to prohibit interstate mergers of banks in their own state by “opting-out” (enacting state legislation prohibiting such mergers) prior to June 1, 1997.
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Since 1995, adequately capitalized and managed bank holding companies have been permitted to acquire banks located in any state, subject to two exceptions: first, any state may still prohibit bank holding companies from acquiring a bank which is less than five years old; and second, no interstate acquisition can be consummated by a bank holding company if the acquirer would control more than 10% of the deposits held by insured depository institutions nationwide or 30% or more of the deposits held by insured depository institutions in any state in which the target bank has branches.
A bank may establish and operate de novo branches in any state in which the bank does not maintain a branch, if that state has enacted legislation to expressly permit all out-of-state banks to establish branches in that state.
In 1995, California enacted legislation to implement important provisions of the Interstate Banking Act and to repeal California’s previous interstate banking laws, which were largely preempted by the Interstate Banking Act.
The changes effected by the Interstate Banking Act and California laws have increased competition in our market by permitting out-of-state financial institutions to enter our market areas directly or indirectly. We believe that the Interstate Banking Act has contributed to the accelerated consolidation of the banking industry. Although many large out-of-state banks have already entered the California market as a result of this legislation, it is not possible to predict the precise impact of this legislation on us and the competitive environment in which we operate.
USA Patriot Act of 2001
On October 26, 2001, President Bush signed the USA Patriot Act of 2001, or “Patriot Act”. The Patriot Act was enacted in response to the terrorist attacks in New York, Pennsylvania and Washington, D.C. on September 11, 2001, and is intended to strengthen U.S. law enforcement’s and the intelligence community’s ability to work cohesively to combat terrorism on a variety of fronts. The potential impact of the Patriot Act on financial institutions is significant and wide ranging. The Act contains sweeping anti-money laundering and financial transparency laws and requires various regulations, including:
· due diligence requirements for financial institutions that administer, maintain, or manage private bank accounts or correspondent accounts for non-U.S. persons,
· standards for verifying customer identification at account opening,
· rules to promote cooperation among financial institutions, regulators, and law enforcement entities in identifying parties that may be involved in terrorism or money laundering,
· reports by non-financial trades and business filed with the Treasury Department’s Financial Crimes Enforcement Network for transactions exceeding $10,000, and
· filing of suspicious activities reports if they believe a customer may be violating U.S. laws and regulations.
Currently we are unable to quantify the impact the Patriot Act has had or may in the future have on our financial condition or results of operations.
The Sarbanes-Oxley Act of 2002
On July 30, 2002, President Bush signed into law The Sarbanes-Oxley Act of 2002, or “Sarbanes-Oxley Act”. The Sarbanes-Oxley Act addresses accounting oversight and corporate governance matters relating to the operations of public companies. During 2003, the Commission issued a number of regulations under the directive of the Sarbanes-Oxley Act significantly increasing public company governance-related obligations and filing requirements, including:
· the establishment of an independent public oversight of public company accounting firms by a board that will set auditing, quality and ethical standards for and have investigative and disciplinary powers over such accounting firms,
· the enhanced regulation of the independence, responsibilities and conduct of accounting firms which provide auditing services to public companies,
· the increase of penalties for fraud related crimes,
· the enhanced disclosure, certification, and monitoring of financial statements, internal financial controls and the audit process, and
· the enhanced and accelerated reporting of corporate disclosures and internal governance.
Furthermore, in November 2003, in response to the directives of the Sarbanes-Oxley Act, Nasdaq adopted substantially expanded corporate governance criteria for the issuers of securities quoted on the Nasdaq markets. The new Nasdaq rules govern, among other things, the enhancement and regulation of corporate disclosure and internal governance of listed companies and of the authority, role and responsibilities of their boards of directors and, in particular, of “independent” members of such boards of directors, in the areas of nominations, corporate governance, compensation and the monitoring of the audit and internal financial control processes.
The Sarbanes-Oxley Act, the Commission rules promulgated thereunder, and the new Nasdaq governance requirements have required the Bank to review its current procedures and policies to determine whether they comply with the new legislation and its implementing regulations. Oak Valley Bancorp will be primarily responsible for ensuring compliance with Sarbanes-Oxley and the Nasdaq governance rules, as applicable. Although the impact these new requirements will have upon the Oak Valley Bancorp’s and the Bank’s operations is not entirely clear, the Bank has already experienced an increase in expenditures associated with certain outside professional costs necessary to compliance.
Other Pending and Proposed Legislation
Other legislative and regulatory initiatives which could affect us and the banking industry, in general, are pending and additional initiatives may be proposed or introduced before the United States Congress, the California legislature and other governmental bodies in the future. Such proposals, if enacted, may further alter the structure, regulation and competitive relationship among financial institutions, and may subject us to increased regulation, disclosure and reporting requirements. In addition, the various banking regulatory agencies often adopt new rules and regulations to implement and enforce existing legislation. We cannot predict whether, or in what form, any such legislation or regulations may be enacted or the extent to which our business would be affected thereby.
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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.
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CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
Any statements in this document about expectations, beliefs, plans, objectives, assumptions or future events or performance are not historical facts and are forward-looking statements. These statements are often, but not always, made through the use of words or phrases such as “may,” “should,” “could,” “predict,” “potential,” “believe,” “will likely result,” “expect,” “will continue,” “anticipate,” “seek,” “estimate,” “intend,” “plan,” “projection,” “would” and “outlook,” and similar expressions. Accordingly, these statements involve estimates, assumptions and uncertainties, which could cause actual results to differ materially from those expressed in them. Any forward-looking statements are qualified in their entirety by reference to the factors discussed throughout this document. The following cautionary statements identify important factors that could cause the Bank’s or Oak Valley Bancorp’s actual results to differ materially from those projected in the forward-looking statements made in this document. Among the key factors that have a direct bearing on the Bank’s or Oak Valley Bancorp’s results of operation are:
· competitive pressures among depository and other financial services;
· movements or volatility in domestic and foreign debt and securities markets or in interest or foreign exchange rates or indices;
· general economic or business conditions, either internationally, nationally or in the State of California;
· changes in political, social and economic conditions;
· acts of terrorism;
· success of acquisitions and operating initiatives; changes in business strategy or development of plans; management of growth;
· dependence on senior management; business abilities and judgment of personnel; availability of qualified personnel; labor and employee benefit costs;
· shortages in electricity and other sources of power;
· changes in governmental or regulatory policies, including adverse interpretations of regulatory guidelines;
· adverse decisions relating to material litigation or investigations;
· failure of management’s assumptions and estimates used in applying critical accounting policies;
· inadequate design or circumvention of disclosure controls and procedures or internal controls
· volatility in the trading price of Oak Valley Bancorp Common Stock; and
These factors and the risk factors referred to below could cause actual results or outcomes to differ materially from those expressed in any forward-looking statements made by the Bank or Oak Valley Bancorp, and you should not place undue reliance on any such forward-looking statements. Any forward-looking statement speaks only as of the date on which it is made and neither the Bank nor Oak Valley Bancorp undertakes any obligation to update any forward-looking statement or statements to reflect events or circumstances after the date on which such statement is made or to reflect the occurrence of unanticipated events. New factors emerge from time to time, and it is not possible for the Bank or Oak Valley Bancorp to predict which will arise. In addition, neither the Bank nor Oak Valley Bancorp can assess the impact of each factor on the Bank’s or Oak Valley Bancorp’s 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.
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ITEM 2. Financial Information
Management”s Discussion and Analysis of Financial Condition and Results of Operation
The following discussion explains the significant factors affecting the Bank”s operations and financial position for the periods presented, and includes the statistical disclosures required by Securities and Exchange Commission Guide 3 (“Statistical Disclosure by Bank Holding Companies”). The discussion should be read in conjunction with our financial statements and the notes related thereto which appear elsewhere in this registration statement.
Statements contained in this report that are not purely historical are forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, including our expectations, intentions, beliefs, or strategies regarding the future. Any statements in this document about expectations, beliefs, plans, objectives, assumptions or future events or performance are not historical facts and are forward-looking statements. These statements are often, but not always, made through the use of words or phrases such as “may,” “should,” “could,” “predict,” “potential,” “believe,” “will likely result,” “expect,” “will continue,” “anticipate,” “seek,” “estimate,” “intend,” “plan,” “projection,” “would” and “outlook,” and similar expressions. Accordingly, these statements involve estimates, assumptions and uncertainties, which could cause actual results to differ materially from those expressed in them. Any forward-looking statements are qualified in their entirety by reference to the factors discussed throughout this document. All forward-looking statements concerning economic conditions, rates of growth, rates of income or values as may be included in this document are based on information available to us on the dates noted, and we assume no obligation to update any such forward-looking statements. It is important to note that our actual results may differ materially from those in such forward-looking statements due to fluctuations in interest rates, inflation, government regulations, economic conditions, customer disintermediation and competitive product and pricing pressures in the geographic and business areas in which we conduct operations, including our plans, objectives, expectations and intentions and other factors.
Actual results or outcomes in by differ materially from those expressed in any forward-looking statements made by us, and you should not place undue reliance on any such forward-looking statements. Any forward-looking statement speaks only as of the date on which it is made and we do not undertake any obligation to update any forward-looking statement or statements to reflect events or circumstances after the date on which such statement is made or to reflect the occurrence of unanticipated events. New factors emerge from time to time, and it is not possible for us to predict which will arise. In addition, we cannot assess the impact of each factor 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.
Introduction
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 Community Bank.
In the bank holding company reorganization, each Bank outstanding shares of common stock converted into an equal number of shares of common stock in the holding company, which now owns the Bank as its wholly-owned subsidiary. Management believes that operating the Bank within a holding company structure will, among other things:
· provide greater operating flexibility than is currently enjoyed by us.
· facilitate the acquisition of related businesses as opportunities arise.
· improve our ability to diversify.
· enhance our ability to remain competitive in the future with other companies in the financial services industry that are organized in a holding company structure.
· enhance our ability to raise capital to support growth.
At December 31, 2007, we had approximately $454 million in total assets, $382 million in total loans, and $377 million in total deposits.
Over the past few years, our network of branches and loan production offices have been expanded geographically. We currently maintain twelve 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.
2007 Key Performance Indicators
We believe the following were key indicators of our performance for operations during 2007:
· our total assets slightly decreased to $454 million at the end of 2007, or a decrease of 0.18%, from $455 million at the end of 2006.
· our total deposits slightly decreased to $377 million at the end of 2007, or a decrease of 0.31%, from $378 million at the end of 2006.
· our total loans grew to $382 million at the end of 2007, or an increase of 2.56%, from $372 million at the end of 2006.
· our ratio of total non-performing loans to total loans increased to 2.4% at December 31, 2007 from none at December 31, 2006. This increase is a result of the downturn in the current economic environment. Management feels that the size of the ratio of non-performing assets to total loans is moderate and manageable, and reserves have been taken appropriately.
· total noninterest income increased to $2.2 million in 2007, or an increase of 30.13%, from $1.7 million in 2006. We primarily attribute this increase to our efforts to expand our deposit account base and diversify our non-interest revenue sources.
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· total noninterest expense increased from $12.2 million in 2006 to $14.2 million in 2007, reflecting the expanded personnel and premises associated with our business growth, including the recent opening of new branch offices.
These items, as well as other factors, contributed to the increase in net income for 2007 to $3.93 million from $3.72 million in 2006, which translates into $0.52 per common share in 2007 and $0.51 in 2006 - assuming dilution and are discussed in further detail throughout “Management”s Discussion and Analysis of Financial Condition and Results of Operation.”
2008 Outlook
As we look ahead to 2008, we will continue to pursue opportunities for growth in our existing markets, as well as opportunities to expand into new markets through de novo branching. Further, we expect that our portfolio of unsecured business loans and consumer loans will experience additional growth in 2008 as a result of target marketing efforts in these areas.
In 2008, we will continue to focus on loan and account growth and managing our net interest margin, while attempting to control expenses and credit losses and manage its business to achieve its net income and other objectives. We will continue to utilize strategies to control other operating expenses. These efforts are important for us to continue to attract new accounts and grow loans. However, we will continue to strive to be more efficient and focus on controlling the growth of these expenses so that they grow more slowly than the growth in loans.
Although interest rates decreased in 2007, pressuring our interest margins, we have continued to exhibit growth in net interest income, and expect this growth to continue in 2008. In addition, if interest rates begin to rise, our interest margin will likely increase. Should interest rates increase in 2008, our yield on earnings assets is likely to increase and we could then determine to increase the interest rates we pay on our deposit accounts or change our promotional or other interest rates on new deposits in marketing activation programs to attempt to achieve a certain net interest margin. Any increases in the rates we charge on accounts could have an effect on our efforts to attract new customers and grow loans, particularly with the continuing competition in the commercial and consumer lending industry. The economies and real estate markets in our primary market areas will continue to be significant determinants of the quality of our assets in future periods and, thus, our results of operations, liquidity and financial condition. Current economic indicators suggest that the national economy and the economies in our primary market areas are facing a downturn but the length and severity of it are difficult to predict.
For 2008, management will be focused on the above challenges and opportunities and other factors affecting the business similar to the factors driving 2007 results as discussed in this “Management”s Discussion and Analysis of Financial Condition and Results of Operation.”
Critical Accounting Policies
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 effect the reported amounts of assets and liabilities, revenues and expenses, and related disclosures of contingent assets and liabilities at the date of our financial statements. Actual results may differ from these estimates under different assumptions or conditions.
Asset Impairment Judgments
Certain of our assets are carried in our statements of financial condition at fair value or at the lower of cost or fair value. Valuation allowances are established when necessary to recognize impairment of such assets. We periodically perform analyses to test for impairment of various assets. In addition to our impairment analyses related to loans discussed above, another significant impairment analysis relates to other than temporary declines in the value of our securities.
Our available for sale portfolio is carried at estimated fair value, with any unrealized gains and losses, net of taxes, reported as accumulated other comprehensive income in stockholders” equity. We conduct a periodic review and evaluation of the securities portfolio to determine if the value of any security has declined below its carrying value and whether such decline is other than temporary. If such decline is deemed other than temporary, we would adjust the carrying amount of the security by writing down the security to fair market value through a charge to current period income. The market values of our securities are significantly affected by changes in interest rates. In general, as interest rates rise, the market value of fixed-rate securities will decrease; as interest rates fall, the market value of fixed-rate securities will increase. With significant changes in interest rates, we evaluate our intent and ability to hold the security for a sufficient time to recover the recorded principal balance. Estimated fair values for securities are based on published or securities dealers” market values.
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 in accordance with SFAS No. 5, “Accounting for Contingencies,” 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 in accordance with SFAS No. 5. 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,
· delinquency trends,
· non-accrual loan trend,
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· 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.
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
Effective January 1, 2006, the Bank adopted the provisions of Statement of Financial Accounting Standards (“SFAS”) No. 123R, Share Based Payments, a revision to the previously issued guidance on accounting for stock options and other forms of equity-based compensation. SFAS No. 123R requires companies to recognize 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 has adopted SFAS No. 123R using the modified prospective method which means that the unvested portion of previously granted awards and any awards that are granted or modified after the date of adoption will be measured and accounted for under the provisions of SFAS No. 123R. Accordingly, financial statement amounts for prior periods have not been restated to reflect the fair value method of recognizing compensation cost relating to stock options. The Bank will continue to use 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. 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 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.
Impact of SAB No. 108
In September 2006, the SEC”s Office of the Chief Accountant and Divisions of Corporation Finance and Investment Management released SAB No. 108, “Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements” (“SAB 108”), that provides interpretive guidance on how the effects of the carryover or reversal of prior year misstatements should be considered in quantifying a current year misstatement. The SEC staff believes that registrants should quantify errors using both a balance sheet and an income statement approach and evaluate whether either approach results in quantifying a misstatement that, when all relevant quantitative and qualitative factors are considered, is material. This pronouncement was effective for fiscal years ending after November 15, 2006. The Company initially adopted SAB 108 in conjunction with the filing of this registration statement. This change in accounting policy was retrospectively applied in accordance with Statement of Financial Accounting Standards No. 154, Accounting Changes and Error Corrections. The adoption of SAB 108 had no material impact on the Company”s financial position, results of operations, or cash flows, although we made certain adjustments that resulted in a decrease of net income of $43,227 for the year ended December 31, 2007 (a decrease of $0.01 in basic and diluted earnings per share), and $105,102 for the year ended December 31, 2006 (a decrease of $0.01 in basic and diluted earnings per share), respectively. See note 1 to the December 31, 2007 financial statements for further discussion.
Overview
Three Months Ended March 31, 2008 and 2007
We recorded a net income for the quarter ended March 31, 2008 of $775,797 or $0.10 per diluted share compared to net income of $1,001,546 or $0.14 per diluted share for the comparable period in 2007. The decrease in net income and net income per diluted share for the three-month period was primarily due to an increase in noninterest expenses of $745,795 in the first three months of 2008 compared to the first three months of 2007. Partially offsetting these factors was an increase in net interest income of $207,206 and an increase in noninterest income of $83,089 in the first three months of 2008 compared to the first three months of 2007.
Fiscal Years Ended December 31, 2007 and 2006
We recorded net income for the year ended December 31, 2007 of $3,968,408 or $0.53 per diluted share compared to net income of $3,830,876 or also $0.52 per diluted share for the year ended December 31, 2006. The increase in net income for the year ended December 31, 2007 was primarily due to an increase of $1,497,147 in net interest income, an increase in noninterest income of $508,820 and a decrease in the provision for loan losses of $40,000. Partially offsetting these factors was an increase in noninterest expense of $1,991,525.
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Results of Operation
Net Interest Income and Net Interest Margin
Our primary source of revenue is net interest income, which is the difference between interest and fees derived from earning assets and interest paid on liabilities obtained to fund those assets. Our net interest income is affected by changes in the level and mix of interest-earning assets and interest- bearing liabilities, referred to as volume changes. Our net interest income is also affected by changes in the yields earned on assets and rates paid on liabilities, referred to as rate changes. Interest rates charged on our loans are affected principally by the demand for such loans, the supply of money available for lending purposes and competitive factors. Those factors are, in turn, affected by general economic conditions and other factors beyond our control, such as federal economic policies, the general supply of money in the economy, legislative tax policies, the governmental budgetary matters, and the actions of the Federal Reserve Board.
Three Months Ended March 31, 2008 and 2007
Net interest income was $4.8 million for the three months ended March 31, 2008 an increase of $0.2 million or 4.5% from $4.6 million for the comparable period of 2007. On an annualized basis, the net interest spread and net interest margin were 4.49% and 4.60%, respectively, for the current quarter, compared to 4.34% and 4.49%, respectively, for the same period of 2007. The increase in the net interest margin was primarily due to a shift in the deposit mix from high cost CDs to low cost checking and money market accounts. Changes in volume resulted in an increase in net interest income of approximately $296,000 for the first quarter of 2008 compared to the same period in 2007, and changes in interest rates resulted in a decrease in net interest income of approximately $89,000 for the first quarter of 2008 versus the comparable period in 2007.
Fiscal Years Ended December 31, 2007, and 2006
Net interest income was $18.8 million for the year ended December 31, 2007, an increase of $1.5 million or 8.6% from $17.3 million for the year ended December 31, 2006. Net interest spread and net interest margin were 3.82% and 4.53%, respectively, for the year ended December 31, 2007, compared to 3.97% and 4.50%, respectively, for the year ended December 31, 2006. The increase in the net interest margin was primarily due to the change in deposit mix, which resulted in an increased percentage of non-interest bearing deposits. Changes in volume resulted in an increase in net interest income of $2.1 million for the year of 2007 compared to the year 2006, and changes in interest rates and the mix resulted in a decrease in net interest income of $0.6 million for the year 2007 versus the year 2006.
For a detailed analysis of interest income and interest expense, see “Average Balance Sheets” and “Rate/Volume Analysis” below.
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2006 |
|
||||||||||||
|
(Dollars in Thousands) |
|
Average
|
|
Interest
|
|
Avg
|
|
Average
|
|
Interest
|
|
Avg
|
|
||||
|
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
Earning assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
Gross loans (1) |
|
$ |
381,316 |
|
$ |
30,133 |
|
7.90 |
% |
$ |
345,063 |
|
$ |
26,946 |
|
7.81 |
% |
|
Securities of U.S. government agencies |
|
8,322 |
|
328 |
|
3.95 |
% |
10,076 |
|
443 |
|
4.39 |
% |
||||
|
Other investment securities |
|
26,687 |
|
1,213 |
|
4.54 |
% |
27,827 |
|
1,180 |
|
4.24 |
% |
||||
|
Federal funds sold |
|
3,122 |
|
159 |
|
5.10 |
% |
2,421 |
|
124 |
|
5.13 |
% |
||||
|
Interest-earning deposits |
|
76 |
|
4 |
|
5.56 |
% |
186 |
|
2 |
|
1.33 |
% |
||||
|
Total interest-earning assets |
|
419,523 |
|
31,837 |
|
7.59 |
% |
385,573 |
|
28,695 |
|
7.44 |
% |
||||
|
Total noninterest earning assets |
|
26,772 |
|
|
|
|
|
27,913 |
|
|
|
|
|
||||
|
Total Assets |
|
$ |
446,2945 |
|
|
|
|
|
$ |
413,486 |
|
|
|
|
|
||
|
Liabilities and Shareholders” Equity: |
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
Interest-bearing liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
Money market deposits |
|
125,574 |
|
4,539 |
|
3.62 |
% |
117,635 |
|
4,035 |
|
3.43 |
% |
||||
|
NOW deposits |
|
53,634 |
|
565 |
|
1.05 |
% |
49,071 |
|
543 |
|
1.11 |
% |
||||
|
Savings deposits |
|
16,745 |
|
558 |
|
3.33 |
% |
21,644 |
|
651 |
|
3.01 |
% |
||||
|
Time certificates of deposit in denominations of $100,000 or more |
|
66,007 |
|
3,432 |
|
5.20 |
% |
70,937 |
|
3,187 |
|
4.49 |
% |
||||
|
Other time deposits |
|
49,118 |
|
2,133 |
|
4.34 |
% |
52,124 |
|
2,219 |
|
4.26 |
% |
||||
|
Other borrowings |
|
34,384 |
|
1,779 |
|
5.17 |
% |
16,182 |
|
727 |
|
4.49 |
% |
||||
|
Total interest-bearing liabilities |
|
345,462 |
|
13,006 |
|
3.76 |
% |
327,593 |
|
11,362 |
|
3.47 |
% |
||||
|
Noninterest-bearing liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
Noninterest-bearing deposits |
|
58,468 |
|
|
|
|
|
49,966 |
|
|
|
|
|
||||
|
Other liabilities |
|
3,543 |
|
|
|
|
|
3,015 |
|
|
|
|
|
||||
|
Total noninterest-bearing liabilities |
|
62,011 |
|
|
|
|
|
52,981 |
|
|
|
|
|
||||
|
Shareholders” equity |
|
38,822 |
|
|
|
|
|
32,912 |
|
|
|
|
|
||||
|
Total liabilities and shareholders” equity |
|
$ |
446,295 |
|
|
|
|
|
$ |
413,486 |
|
|
|
|
|
||
|
Net interest income |
|
|
|
$ |
18,831 |
|
|
|
|
|
$ |
17,333 |
|
|
|
||
|
Net interest spread(2) |
|
|
|
|
|
3.82 |
% |
|
|
|
|
3.97 |
% |
||||
|
Net interest margin(3) |
|
|
|
|
|
4.53 |
% |
|
|
|
|
4.50 |
% |
||||
14
(1) Loan fees have been included in the calculation of interest income. Loan fees were approximately $1,331,000, and $1,260,000 for the years ended December 31, 2007, and 2006, respectively. Loans are net of the allowance for loan losses, deferred fees, unearned income, and related direct costs.
(2) Represents the average rate earned on interest-earning assets less the average rate paid on interest-bearing liabilities.
(3) Represents net interest income as a percentage of average interest-earning assets.
Rate/Volume Analysis
The following table below sets forth certain information regarding changes in interest income and interest expense of Oak Valley Community Bank 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.
|
|
|
Rate/Volume Analysis of Net Interest Income |
|
||||||||||||||||
|
|
|
For the Year Ended December 31, |
|
For the Year Ended December 31, |
|
||||||||||||||
|
|
|
2007 vs. 2006 |
|
2006 vs. 2005 |
|
||||||||||||||
|
|
|
Increases (Decreases) |
|
Increases (Decreases) |
|
||||||||||||||
|
|
|
Due to Change In |
|
Due to Change In |
|
||||||||||||||
|
(Dollars in Thousands) |
|
Volume |
|
Rate |
|
Total |
|
Volume |
|
Rate |
|
Total |
|
||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
|
Interest income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
|
Net loans(1) |
|
$ |
2,831 |
|
$ |
356 |
|
$ |
3,187 |
|
$ |
4,941 |
|
$ |
2,120 |
|
$ |
7,061 |
|
|
Securities of U.S. government agencies |
|
(77 |
) |
(38 |
) |
(115 |
) |
172 |
|
115 |
|
287 |
|
||||||
|
Other investment securities |
|
(48 |
) |
81 |
|
33 |
|
(103 |
) |
27 |
|
(76 |
) |
||||||
|
Federal funds sold |
|
36 |
|
(1 |
) |
35 |
|
(85 |
) |
61 |
|
(24 |
) |
||||||
|
Interest-earning deposits |
|
(1 |
) |
3 |
|
2 |
|
1 |
|
(1 |
) |
0 |
|
||||||
|
Total interest income |
|
2,741 |
|
401 |
|
3,142 |
|
4,926 |
|
2,322 |
|
7,248 |
|
||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
|
Interest expense: |
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
|
Money market deposits |
|
$ |
272 |
|
$ |
232 |
|
$ |
504 |
|
$ |
1,048 |
|
$ |
2,111 |
|
$ |
3,159 |
|
|
NOW deposits |
|
51 |
|
(29 |
) |
22 |
|
32 |
|
36 |
|
68 |
|
||||||
|
Savings deposits |
|
(147 |
) |
54 |
|
(93 |
) |
(29 |
) |
245 |
|
216 |
|
||||||
|
Time certificates of deposit in denominations of $100,000 or more |
|
(222 |
) |
467 |
|
245 |
|
78 |
|
910 |
|
988 |
|
||||||
|
Other time deposits |
|
(128 |
) |
42 |
|
(86 |
) |
(242 |
) |
728 |
|
486 |
|
||||||
|
Other borrowings |
|
818 |
|
234 |
|
1,052 |
|
(123 |
) |
284 |
|
161 |
|
||||||
|
Total interest expense |
|
644 |
|
1,000 |
|
1,644 |
|
764 |
|
4,314 |
|
5,078 |
|
||||||
|
Change in net interest income |
|
$ |
2,097 |
|
$ |
(599 |
) |
$ |
1,498 |
|
$ |
4,162 |
|
$ |
(1,992 |
) |
$ |
2,170 |
|
(1) Loan fees have been included in the calculation of interest income. Loan fees were approximately $1,331,000, $1,260,000, and $1,084,000 for the years ended December 31, 2007, 2006, and 2005, respectively. Loans are net of the allowance for loan losses, deferred fees, unearned income, and related direct costs.
15
Provision for Loan Losses
Three Months Ended March 31, 2008 and 2007
The Bank had $145,000 as a provision for loan losses for the three months ended March 31, 2008 after recording a provision of $120,000 in the fourth quarter of 2007 and a provision of $170,000 in the first quarter of 2007. Nonperforming loans were $4.55 million at March 31, 2008 and $9.81 million at December 31, 2007, or 1.17% and 2.54%, respectively, of total loans. Nonperforming loans are currently stable and are primarily associated with acquisition and development construction loans. The allowance for loan losses was $4.23 million and $4.51 million at March 31, 2008 and December 31, 2007, or 1.09% and 1.16%, respectively, of total loans. Net charge-offs were $416,731 in the first quarter of 2008 compared to $36,033 in the same period in 2007. The net charge-offs were primarily due to real estate construction and development loans. The charge-offs for both periods had been adequately reserved for in previous periods.
Fiscal Years Ended December 31, 2007, and 2006
The provision for loan losses was $555,000 for the year ended December 31, 2007, compared to $595,000 for the year 2006. Nonperforming loans were $9.81 million at December 31, 2007 and $0 at December 31, 2006, or 2.54% and 0%, respectively, of total loans. Nonperforming loans are primarily in nonperforming real estate construction and development loans. The allowance for loan losses was $4.51 million and $4.34 million at December 31, 2007 and December 31, 2006, or 1.16% and 1.15%, respectively, of total loans. Net charge-offs were $402,000 in 2007 compared to $15,000 in 2006. The increase in net charge-offs in 2007 was primarily due to the economic downturn and the effect on the housing market.
The Bank maintains the allowance for loan losses at a level that it considers to be adequate to provide for credit losses inherent in its loan portfolio. Management determines the level of the allowance by performing a quarterly analysis that considers concentrations of credit, past loss experience, current economic conditions, the amount and composition of the loan portfolio (including nonperforming and potential problem loans), estimated fair value of underlying collateral, and other information relevant to assessing the risk of loss inherent in the loan portfolio. As a result of management’s analysis, a range of the potential amount of the allowance for loan losses is determined.
The Bank will continue to monitor the adequacy of the allowance for loan losses and make additions to the allowance in accordance with the analysis referred to above. Because of uncertainties inherent in estimating the appropriate level of the allowance for loan losses, actual results may differ from management”s estimate of credit losses and the related allowance.
The following table sets forth the amount of total loans outstanding (excluding unearned income) and the percentage distributions in each category, as of the dates indicated.
|
|
|
Distribution
of Loans and Percentage Composition of Loan Portfolio
|
|
|||||||||||||
|
|
|
2007 |
|
2006 |
|
2005 |
|
2004 |
|
2003 |
|
|||||
|
|
|
(Dollars in Thousands) |
|
|||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
|
Commercial real estate |
|
$ |
208,309 |
|
$ |
233,110 |
|
$ |
212,901 |
|
$ |
175,641 |
|
$ |
130,326 |
|
|
Commercial |
|
45,497 |
|
41,077 |
|
31,349 |
|
22,156 |
|
15,611 |
|
|||||
|
Real estate construction |
|
83,173 |
|
60,269 |
|
37,717 |
|
36,457 |
|
23,565 |
|
|||||
|
Agriculture |
|
31,430 |
|
27,527 |
|
22,390 |
|
13,016 |
|
6,112 |
|
|||||
|
Residential real estate and consumer |
|
19,400 |
|
16,409 |
|
13,752 |
|
11,225 |
|
11,934 |
|
|||||
|
Unearned income |
|
(1,038 |
) |
(1,233 |
) |
(1,345 |
) |
(1,188 |
) |
(891 |
) |
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
|
Total loans, net of unearned income |
|
386,771 |
|
377,160 |
|
316,764 |
|
$ |
257,307 |
|
$ |
186,657 |
|
|||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
|
Participation loans sold and serviced by the Bank |
|
$ |
1,314 |
|
$ |
3,488 |
|
$ |
3,838 |
|
$ |
3,872 |
|
$ |
5,539 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
|
Commercial real estate |
|
53.9 |
% |
61.8 |
% |
67.2 |
% |
68.3 |
% |
69.8 |
% |
|||||
|
Commercial |
|
11.8 |
% |
10.9 |
% |
9.9 |
% |
8.6 |
% |
8.4 |
% |
|||||
|
Real estate construction |
|
21.5 |
% |
16.0 |
% |
11.9 |
% |
14.2 |
% |
12.6 |
% |
|||||
|
Agriculture |
|
8.1 |
% |
7.3 |
% |
7.1 |
% |
5.1 |
% |
3.3 |
% |
|||||
|
Residential real estate and consumer |
|
5.0 |
% |
4.4 |
% |
4.3 |
% |
4.4 |
% |
6.4 |
% |
|||||
|
Unearned income |
|
(0.3 |
)% |
(0.3 |
)% |
(0.4 |
)% |
(0.5 |
)% |
(0.5 |
)% |
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
|
Total loans, net of unearned income |
|
100.0 |
% |
100.0 |
% |
100.0 |
% |
100.0 |
% |
100.0 |
% |
|||||
16
The following table shows the contractual maturity distribution and repricing intervals of the outstanding loans in our portfolio, as of December 31, 2007. 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 table excludes the gross amount of non-accrual loans of $9.09 million, and includes unearned income and deferred fees totaling $1.04 million at December 31, 2007.
|
|
|
Loan
Maturities and Repricing Schedule
|
|
||||||||||
|
|
|
|
|
After One |
|
|
|
|
|
||||
|
|
|
Within |
|
But Within |
|
After |
|
|
|
||||
|
|
|
One Year |
|
Five Years |
|
Five Years |
|
Total |
|
||||
|
|
|
(Dollars in Thousands) |
|
||||||||||
|
|
|
|
|
|
|
|
|
|
|
||||
|
Commercial real estate |
|
$ |
67,991 |
|
$ |
121,668 |
|
$ |
18,650 |
|
$ |
208,309 |
|
|
Commercial |
|
27,797 |
|
16,462 |
|
1,238 |
|
45,497 |
|
||||
|
Real estate construction |
|
71,232 |
|
11,097 |
|
844 |
|
83,173 |
|
||||
|
Agriculture |
|
22,271 |
|
6,221 |
|
2,938 |
|
31,430 |
|
||||
|
Residential real estate and consumer |
|
9,795 |
|
5,543 |
|
4,061 |
|
19,399 |
|
||||
|
|
|
|
|
|
|
|
|
|
|
||||
|
Total loans, net of unearned income |
|
$ |
199,087 |
|
$ |
160,991 |
|
$ |
27,731 |
|
$ |
387,808 |
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
Loans with variable (floating) interest rates |
|
$ |
157,765 |
|
$ |
125,498 |
|
$ |
11,635 |
|
$ |
294,897 |
|
|
Loans with predetermined (fixed) interest rates |
|
$ |
41,322 |
|
$ |
35,494 |
|
$ |
16,096 |
|
$ |
92,911 |
|
The majority of the properties taken as collateral are located in Northern California. We employ strict guidelines regarding the use of collateral located in less familiar market areas. The recent decline in Northern California real estate value is offset by the low loan-to-value ratios in our commercial real estate portfolio and high percentage of owner-occupied properties.
Nonperforming Assets
Nonperforming assets consist of loans on non-accrual status, loans 90 days or more past due and still accruing interest, loans restructured, where the terms of repayment have been renegotiated resulting in a reduction or deferral of interest or principal, and other real estate owned (“OREO”).
Loans are generally placed on non-accrual status when they become 90 days past due, unless management believes the loan is adequately collateralized and in the process of collection. The past due loans may or may not be adequately collateralized, but collection efforts are continuously pursued. Loans may be restructured by management when a borrower has experienced some changes in financial status, causing an inability to meet the original repayment terms, and where we believe the borrower will eventually overcome those circumstances and repay the loan in full. OREO consists of properties acquired by foreclosure or similar means and which management intends to offer for sale.
The recent economic downturn increased our nonperforming loans to $9.81 million at December 31, 2007, as compared to no nonperforming loans at December 31, 2006, 2005 and 2004, respectively. We had $5,000 in nonperforming loans at December 31, 2003. The ratio of nonperforming loans over total loans increased to 2.54% at December 31, 2007, as compared with 0.0% in the prior four year-end periods.
In addition, we did not possess any OREO during any of the year-end periods from 2003 through 2007.
Management believes that the reserve provided for nonperforming loans, together with the tangible collateral, were adequate as of December 31, 2007. See “Allowance for Loan Losses” below for further discussion. Except as disclosed above, as of December 31, 2007, management was not aware of any material credit problems of borrowers that would cause it to have serious doubts about the ability of a borrower to comply with the present loan payment terms. However, no assurance can be given that credit problems may exist that may not have been brought to the attention of management.
The following table provides information with respect to the components of our nonperforming assets as of the dates indicated. (The figures in the table are net of the portion guaranteed by the U.S. Government):
17
Nonperforming Assets
|
|
|
At December 31, |
|
|||||||||||||
|
|
|
2007 |
|
2006 |
|
2005 |
|
2004 |
|
2003 |
|
|||||
|
|
|
(Dollars in Thousands) |
|
|||||||||||||
|
|
|
|
|
|||||||||||||
|
Nonaccrual loans(1) |
|
|
|
|
|
|
|
|
|
|
|
|||||
|
Commercial real estate |
|
$ |
1,127 |
|
$ |
0 |
|
$ |
0 |
|
$ |
0 |
|
$ |
0 |
|
|
Commercial |
|
0 |
|
0 |
|
0 |
|
0 |
|
0 |
|
|||||
|
Real estate construction |
|
7,960 |
|
0 |
|
0 |
|
0 |
|
0 |
|
|||||
|
Agriculture |
|
0 |
|
0 |
|
0 |
|
0 |
|
0 |
|
|||||
|
Residential real estate and consumer |
|
0 |
|
0 |
|
0 |
|
0 |
|
0 |
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
|
Total |
|
$ |
9,087 |
|
$ |
0 |
|
0 |
|
$ |
0 |
|
0 |
|
||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
|
Loans 90 days or more past due and still accruing (as to principal or interest): |
|
|
|
|
|
|
|
|
|
|
|
|||||
|
Commercial real estate |
|
$ |
0 |
|
$ |
0 |
|
$ |
0 |
|
$ |
0 |
|
$ |
0 |
|
|
Commercial |
|
0 |
|
0 |
|
0 |
|
0 |
|
4 |
|
|||||
|
Real estate construction |
|
721 |
|
0 |
|
0 |
|
0 |
|
0 |
|
|||||
|
Agriculture |
|
0 |
|
0 |
|
0 |
|
0 |
|
1 |
|
|||||
|
Residential real estate and consumer |
|
0 |
|
0 |
|
0 |
|
0 |
|
0 |
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
|
Total |
|
721 |
|
0 |
|
0 |
|
0 |
|
5 |
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
|
Restructured loans(2) |
|
|
|
|
|
|
|
|
|
|
|
|||||
|
Commercial real estate |
|
$ |
0 |
|
$ |
0 |
|
$ |
0 |
|
$ |
0 |
|
$ |
0 |
|
|
Commercial |
|
0 |
|
0 |
|
0 |
|
0 |
|
0 |
|
|||||
|
Real estate construction |
|
0 |
|
0 |
|
0 |
|
0 |
|
0 |
|
|||||
|
Agriculture |
|
0 |
|
0 |
|
0 |
|
0 |
|
0 |
|
|||||
|
Residential real estate and consumer |
|
0 |
|
0 |
|
0 |
|
0 |
|
0 |
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
|
Total |
|
0 |
|
0 |
|
0 |
|
0 |
|
0 |
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
|
Total nonperforming loans |
|
9,808 |
|
0 |
|
0 |
|
0 |
|
5 |
|
|||||
|
Other real estate owned |
|
0 |
|
0 |
|
0 |
|
0 |
|
0 |
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
|
Total nonperforming assets |
|
$ |
9,808 |
|
$ |
0 |
|
$ |
0 |
|
$ |
0 |
|
$ |
0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
|
Nonperforming loans as a percentage of total loans |
|
2.54 |
% |
0.00 |
% |
0.00 |
% |
0.00 |
% |
0.00 |
% |
|||||
|
Nonperforming assets as a percentage of total loans and other real estate owned |
|
2.54 |
% |
0.00 |
% |
0.00 |
% |
0.00 |
% |
0.00 |
% |
|||||
|
Allowance for loan losses as a percentage of nonperforming loans |
|
45.95 |
% |
— |
|
— |
|
— |
|
467.60 |
% |
|||||
(1) During the fiscal year ended December 31, 2007, no interest income related to these loans was included in net income while on nonaccrual status. Additional interest income of approximately $233,000 would have been recorded during the year ended December 31, 2007, if these loans had been paid in accordance with their original terms and had been outstanding throughout the fiscal year ended December 31, 2007 or, if not outstanding throughout the fiscal year ended December 31, 2007, since origination.
(2) A “restructured loan” is one the terms of which were renegotiated to provide a reduction or deferral of interest or principal because of deterioration in the financial position of the borrower.
Allowance for Loan Losses
In anticipation of credit risk inherent in our lending business, we set aside allowances through charges to earnings. Such charges were 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 were credited to the allowance for loan losses, whereas charges for off-balance sheet items were credited to the reserve for off-balance sheet items, which is presented as a component of other liabilities. The provision for loan losses is discussed in the section entitled “Provision for Loan Losses” above.
The rapid growth of our loan portfolio in the past five years has required more reserves for probable loan losses. The allowance for loan losses increased by 3.8%, or $167,000, to $4.51 million at December 31, 2007, as compared with $4.34 million at December 31, 2006. Such allowances were $3.98 million, $3.27 million, and $2.34 million at December 31, 2005, 2004, and 2003, respectively. Despite the increases in loan loss allowances, the rapid growth of our loan portfolio has continued to lower the allowance for loan losses as a percentage of total loans from 1.26%, 1.27% and 1.25% at the end of 2005, 2004 and 2003, respectively, to 1.15% and 1.16% at the end of 2006 and 2007, respectively. In 2007, the weak business climate adversely impacted the financial conditions of certain of our clients and increased our net loan charge-off to $402,000, compared to $15,000 and $1,000 in 2006 and 2005, respectively.
Management reviews these conditions with our senior credit officers. To the extent that any of these conditions is evidenced by a specifically identifiable problem credit or portfolio segment as of the evaluation date, management”s estimate of the effect of such condition may be reflected as a specific allowance applicable to such credit or portfolio segment. Where any of these conditions is not evidenced by a specific, identifiable problem credit or portfolio segment as of the evaluation date, management”s evaluation of the inherent loss related to such condition is reflected in the unallocated allowance. Although management has allocated a portion of the allowance to specific loan categories, the adequacy of the allowance is considered in its entirety.
Although management believes the allowance at December 31, 2007 was adequate to absorb losses from any known and inherent risks in the portfolio, no assurance can be given that economic conditions which adversely affect our service areas or other variables will not result in increased losses in the loan portfolio in the future.
18
As of December 31, 2007, our allowance for loan losses consisted of amounts allocated to three phases of our methodology for assessing loan loss allowances, as follows (see details of methodology for assessing allowance for loan losses in the section entitled “Critical Accounting Policies”):
|
Phase of Methodology
|
|
As of:
|
|
|
|
Specific review of individual loans |
|
$ |
95 |
|
|
Review of pools of loans with similar characteristics |
|
$ |
4,412 |
|
|
Judgmental estimate based on various subjective factors |
|
$ |
— |
|
The table below summarizes, for the periods indicated, loan balances at the end of each period, the daily averages during the period, changes in the allowance for loan losses arising from loans charged off, recoveries on loans previously charged off, additions to the allowance and certain ratios related to the allowance for loan losses:
Allowance for Loan Losses
|
|
|
2007 |
|
2006 |
|
2005 |
|
2004 |
|
2003 |
|
|||||
|
|
|
(Dollars in thousands) |
|
|||||||||||||
|
|
|
|
|
|||||||||||||
|
Balances: |
|
|
|
|
|
|
|
|
|
|
|
|||||
|
Average total loans outstanding during period |
|
$ |
381,316 |
|
$ |
345,063 |
|
$ |
276,277 |
|
$ |
220,526 |
|
$ |
159,171 |
|
|
Total loans outstanding at end of period |
|
$ |
386,771 |
|
$ |
377,160 |
|
$ |
316,764 |
|
$ |
257,307 |
|
$ |
186,657 |
|
|
Allowance for loan losses: |
|
|
|
|
|
|
|
|
|
|
|
|||||
|
Balances at beginning of period |
|
$ |
4,341 |
|
$ |
3,976 |
|
$ |
3,272 |
|
$ |
2,338 |
|
$ |
1,680 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
|
Actual charge-offs: |
|
|
|
|
|
|
|
|
|
|
|
|||||
|
Commercial real estate |
|
0 0 |
|
0 |
|
0 |
|
0 |
|
0 |
|
|||||
|
Commercial |
|
0 |
|
0 |
|
1 |
|
5 |
|
0 |
|
|||||
|
Real estate construction |
|
366 |
|
0 |
|
0 |
|
0 |
|
0 |
|
|||||
|
Agriculture |
|
|
|
0 |
|
0 |
|
0 |
|
0 |
|
|||||
|
Residential real estate and consumer |
|
35 |
|
15 |
|
0 |
|
0 |
|
8 |
|
|||||
|
Total charge-offs |
|
402 |
|
15 |
|
1 |
|
5 |
|
8 |
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
|
Recoveries on loans previously charged off |
|
|
|
|
|
|
|
|
|
|
|
|||||
|
Commercial real estate |
|
0 |
|
0 |
|
0 |
|
0 |
|
0 |
|
|||||
|
Commercial |
|
0 |
|
0 |
|
0 |
|
0 |
|
11 |
|
|||||
|
Real estate construction |
|
0 |
|
0 |
|
0 |
|
0 |
|
0 |
|
|||||
|
Agriculture |
|
0 |
|
0 |
|
0 |
|
0 |
|
0 |
|
|||||
|
Residential real estate and consumer |
|
5 |
|
2 |
|
0 |
|
1 |
|
0 |
|
|||||
|
Total recoveries |
|
5 |
|
2 |
|
0 |
|
1 |
|
11 |
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
|
Net loan charge-offs/(recoveries) |
|
397 |
|
13 |
|
1 |
|
4 |
|
(3 |
) |
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
|
Provision for loan losses |
|
555 |
|
595 |
|
705 |
|
938 |
|
655 |
|
|||||
|
Reclassification of reserve related to off-balance-sheet commitments |
|
8 |
|
(217 |
) |
0 |
|
0 |
|
0 |
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
|
Balance at end of period |
|
$ |
4,507 |
|
$ |
4,341 |
|
$ |
3,976 |
|
$ |
3,272 |
|
$ |
2,338 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
|
Ratios: |
|
|
|
|
|
|
|
|
|
|
|
|||||
|
Net loan charge-offs/(recoveries) to average total loans |
|
0.10 |
% |
0.00 |
% |
0.00 |
% |
0.00 |
% |
0.00 |
% |
|||||
|
Allowance for loan losses to total loans at end of period |
|
1.16 |
% |
1.15 |
% |
1.256 |
% |
1.27 |
% |
1.25 |
% |
|||||
|
Net loan charge-offs (recoveries) to allowance for loan losses at end of period |
|
8.81 |
% |
0.29 |
% |
0.02 |
% |
0.11 |
% |
(0.12 |
)% |
|||||
|
Net loan charge-offs (recoveries) to provision for loan losses |
|
71.57 |
% |
2.12 |
% |
0.10 |
% |
0.38 |
% |
(0.42 |
)% |
|||||
19
The table below summarizes, for the periods indicated, the balance of the allowance for loan losses and the percentage of each type of loan balance at the end of each period (See “Loan Portfolio” above for a description of each type of loan balance):
Allocation of the Allowance for Loan Losses
|
|
|
Amount Outstanding as of December 31, |
|
|||||||||||||
|
|
|
2007 |
|
2006 |
|
2005 |
|
2004 |
|
2003 |
|
|||||
|
|
|
(Dollars in Thousands) |
|
|||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
|
Applicable to: |
|
|
|
|
|
|
|
|
|
|
|
|||||
|
Commercial real estate |
|
$ |
2,672 |
|
$ |
2,755 |
|
$ |
2,693 |
|
$ |
2,350 |
|
$ |
1,564 |
|
|
Commercial |
|
663 |
|
413 |
|
364 |
|
262 |
|
213 |
|
|||||
|
Real estate construction |
|
837 |
|
885 |
|
691 |
|
514 |
|
426 |
|
|||||
|
Agriculture |
|
189 |
|
162 |
|
118 |
|
65 |
|
66 |
|
|||||
|
Residential real estate and consumer |
|
147 |
|
126 |
|
110 |
|
81 |
|
69 |
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
|
Total Allowance |
|
$ |
4,507 |
|
$ |
4,341 |
|
$ |
3,976 |
|
$ |
3,272 |
|
$ |
2,338 |
|
Noninterest Income
Three Months Ended March 31, 2008 and 2007
Noninterest income was $613,583 for the three months ended March 31, 2008, compared to $530,494 for the same period in 2007. Service charge income was $302,927 for the three months ended March 31, 2008, compared to $265,447 for the comparable period in 2007. The Bank continually evaluates its deposit product offerings with the intention of continuing to expand its offerings to the consumer and business depositor. Currently, the Bank is pursuing a strategy to increase its core deposit base by expanding the Bank”s offering of remote deposit capture products as well as cash management products for current and prospective business depositors. All other noninterest income increased $45,609 to $310,656 for the first quarter 2008.
Fiscal Years Ended December 31, 2007 and 2006
Noninterest income was $2,2 million for the year ended December 31, 2007, compared to $1.7 million for the year 2006. Service charge income was $1.1 million for the year 2007 compared to $0.9 million for the year 2006. The Bank continues to evaluate its deposit product offerings with the intention of continuing to expand its offerings to the consumer and business depositors.
Noninterest Income
(Dollars in thousands)
|
|
|
For the Years Ended December 31, |
|
|
||||||||
|
|
|
2007 |
|
2006 |
|
|
||||||
|
|
|
(Amount) |
|
(%) |
|
(Amount) |
|
(%) |
|
|
||
|
Service charges on deposit accounts |
|
$ |
1,090 |
|
49.6 |
% |
$ |
866 |
|
51.3 |
% |
% |
|
Earnings on cash surrender value of life insurance |
|
175 |
|
8.0 |
% |
168 |
|
9.9 |
% |
% |
||
|
Mortgaged Commissions |
|
195 |
|
8.9 |
% |
246 |
|
14.5 |
% |
% |
||
|
Other income |
|
737 |
|
33.6 |
% |
410 |
|
24.3 |
% |
% |
||
|
|
|
|
|
|
|
|
|
|
|
|
||
|
Total |
|
2,198 |
|
100.0 |
% |
1,689 |
|
100.0 |
% |
% |
||
|
|
|
|
|
|
|
|
|
|
|
|
||
|
Average assets |
|
$ |
446,295 |
|
|
|
$ |
413,486 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||
|
Noninterest income as a % of average assets |
|
|
|
0.49 |
% |
|
|
0.41 |
% |
% |
||
20
Noninterest Expense
Three Months Ended March 31, 2008 and 2007
Noninterest expense was $4,056,570 for the three months ended March 31, 2008, compared to $3,310,775 for the same period in 2007. Contributing to the increase were increases in salaries and employee benefits associated with the Bank’s new location in Stockton, increased lending staff costs and technology expenses for the telephone banking and remote capture system.
Fiscal Years Ended December 31, 2007 and 2006
Noninterest expense was $14.2 million for the year ended December 31, 2007 compared to $12.2 million for the year ended 2006. Contributing to the increase were increases in salaries and employee benefits associated with the Bank’s growth, the addition of a new location and additions to the Bank’s commercial lending team.
The following table sets forth a summary of noninterest expenses for the periods indicated:
Noninterest Expense
(Dollars in thousands)
|
|
|
For the Years Ended December 31, |
|
||||||||
|
|
|
2007 |
|
2006 |
|
||||||
|
|
|
(Amount) |
|
(%) |
|
(Amount) |
|
(%) |
|
||
|
Salaries and employee benefits |
|
$ |
8,586 |
|
60.6 |
% |
$ |
7,585 |
|
62.3 |
% |
|
Occupancy and equipment |
|
2,222 |
|
15.4 |
% |
1,787 |
|
14.4 |
% |
||
|
Data processing |
|
542 |
|
3.8 |
% |
484 |
|
4.0 |
% |
||
|
Communications |
|
254 |
|
1.8 |
% |
224 |
|
1.8 |
% |
||
|
Other |
|
2,609 |
|
18.4 |
% |
2,141 |
|
17.6 |
% |
||
|
|
|
|
|
|
|
|
|
|
|
||
|
Total |
|
14,213 |
|
100.0 |
% |
12,221 |
|
100.0 |
% |
||
|
|
|
|
|
|
|
|
|
|
|
||
|
Average assets |
|
$ |
446,295 |
|
|
|
$ |
413,486 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||
|
Noninterest expenses as a % of average assets |
|
|
|
3.18 |
% |
|
|
2.95 |
% |
||
Generally, noninterest expense has increased during the past three years as a result of additional facilities and corresponding branch personnel, as well as continued additions to the Bank’s administrative and support personnel, positioning the Bank for continued growth. Management anticipates that noninterest expense will continue to increase as we continue to grow. However, management remains committed to cost-control and efficiency, and we expect to keep these increases to a minimum relative to growth.
Income Tax Expense
Three Months Ended March 31, 2008 and 2007
The effective income tax rate on income before income taxes was 36.5% for the three months ended March 31, 2008 compared to 39.4% for the same period in 2007. The change in the effective tax rate for the quarter is primarily due to various tax benefits associated with the California enterprise zones and tax credits from a low income housing investment.
Fiscal Years Ended December 31, 2007 and 2006
The effective income tax rate on income from continuing operations was 37.03% for the year ended December 31, 2007 compared to 40.0% for the year 2006. The effective tax rate is relatively unchanged primarily due to the similar tax deductions and credits in both periods.
Financial Condition
March 31, 2008 and December 31, 2007
The Bank’s total assets were $463.04 million at March 31, 2008 compared to $454.3 million at December 31, 2007, an increase of $8.80 million or 1.9%. Cash and cash equivalents decreased $99,000, net loans increased $125,000, investments increased $1.24 million, premises and equipment increased $608,000, other real estate owned increased $2.85 million and interest receivable and other assets increased $4.0 million primarily due to an increase in bank owned life insurance of $4.81 million.
Loans gross of the allowance for loan losses remained static at $387.6 million at March 31, 2008, compared to $387.8 million at December 31, 2007, a decrease of $0.2 million or 0.04%. The Bank’s commercial real estate loan portfolio increased $9.1 million or 2.9%, which was offset by a decrease in commercial loans of $9.5 million of 14.8%. All loan categories relatively remained the same as a percentage of total loans, except commercial real estate loans which increased from approximately 53.9% to 56.6% of total loans, commercial loans, which decreased from approximately 11.8% to 10.3% of total loans and agriculture loans which decreased from 8.1% to 7.1%. The Bank continues to identify opportunities to cross sell its other products, including home equity and consumer loans for its loan portfolio.
Deposits decreased $14.6 million or 3.9% to $362.8 million at March 31, 2008 compared to $377.3 million at December 31, 2007. This decrease was primarily due to a decrease in time deposits of $15.3 million as a result of the Bank’s emphasis on core deposit growth and our efforts to avoid a dependency on high cost time
21
deposits in order to maintain a strong net interest margin. Money market deposits increased $5.0 million, which is due in part to a customers shifting funds from a time deposit accounts to money market accounts to gain greater liquidity.
Short-term borrowings increased $18 million to $46 million at March 31, 2008, compared to $28 million at December 31, 2007 while long-term debt was $8 million and $3 million at March 31, 2008 and December 31, 2007, respectively. The increase in short-term borrowings mainly due to the decease of $15.3 million in time deposits. The Bank uses short-term borrowings, primarily short-term FHLB advances, to fund short-term liquidity needs and manage net interest margin.
December 31, 2007 and 2006
The Bank’s total assets were $454.3 million at December 31, 2007 compared to $455.0 million at December 31, 2006, a decrease of $0.7 million or 0.2%. Net loans increased $9.4 million, bank premises and equipment increased $4.6 million and interest receivable and other assets increased $1.6 million, while cash and cash equivalents decreased $13.6 million, investments decreased $2.9 million.
Loans gross of the allowance for loan losses were $387.8 million at December 31, 2007, compared to $378.4 million at December 31, 2006, an increase of $9.4 million or 2.5%. The increase was primarily due to increase of $22.9 or 38.0% in the real estate construction loans and an increases of $4.4 million, $3.9 million and $3.0 million in commercial, agriculture and residential real estate and consumer loans, respectively. These were offset by a decrease in commercial real estate loans of $24.8 million or 10.6%. All loan categories increased or remained the same as a percentage of total loans, except commercial real estate loans, which decreased from approximately 61.8% to 53.9% of total loans.
Deposits decreased $1.2 million or 0.3% to $377.3 million at December 31, 2007 compared to $378.5 million at December 31, 2006. This decrease was mainly a result of decrease in time deposits of $27.8 million, much of which was transferred by customers to money market accounts as evidenced by an increase of $27.3 million in money market accounts. Demand deposit accounts increased $11.8 million as a result of a general marketing campaign promoting a checking account products in an effort to reduce the Bank’s dependency on higher costing time deposits.
Short-term borrowings decreased $5.6 million to $28 million at December 31, 2007, compared to $33.6 million at December 31, 2006 while long-term debt increased to $3 million at December 31, 2007, compared to $0 at December 31, 2006. The increase in long-term debt was due to the Bank deciding to utilize a long-term FHLB fixed rate advance and thus reducing the level of short-term FHLB advances. The Bank uses short-term borrowings, primarily short-term FHLB advances, to fund short-term liquidity needs and manage net interest margin.
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.
March 31, 2008 and December 31, 2007
At March 31, 2008 and December 31, 2007, the Bank did not have any brokered deposits.
At March 31, 2008 and December 31, 2007, the Bank had total FHLB advances outstanding of $54 million and $31 million, respectively. At March 31, 2008 and December 31, 2007, the Bank had sufficient collateral to borrow an additional $44.7 million and $68.0 million, respectively. In addition, the Bank had lines of credit to purchase overnight federal funds with its correspondent banks totaling $20 million. No advances were made on these lines of credit as of March 31, 2008 and December 31, 2007.
December 31, 2007 and 2006
At December 31, 2007 and December 31, 2006, the Bank did not have any brokered deposits.
At December 31, 2007 and December 31, 2006, the Bank had total FHLB advances outstanding of $31.0 million and $33.6 million, respectively. At December 31, 2007 and December 31, 2006, the Bank had sufficient collateral to borrow an additional $68.0 million and $55.5 million, respectively. In addition, the Bank had lines of credit to purchase overnight federal funds with its correspondent banks totaling $20 million. No advances were made on these lines of credit as of December 31, 2007 and December 31, 2006.
Oak Valley Bancorp’s liquidity depends primarily on dividends paid to it as sole shareholder of the Bank. The Bank’s ability to pay dividends to Oak Valley Bancorp without regulatory approval will depend on whether the Bank will be in a position to pay dividends.
Aggregate contractual obligations to make future payments as of December 31, 2007 for FHLB borrowings and operating leases of one year or less were 28.8 million, between one and three years were $4.7 million, between three and five years were 1.7 million, and over five years were 4.6 million, respectively.
Return on Equity and Assets
The following table sets forth certain information regarding our return on equity and assets for the periods indicated:
|
At March 31, 2008 |
|
At December 31, 2007 |
|
At December 31, 2006 |
|
||
|
Return on assets |
|
0.69 |
% |
0.88 |
% |
0.93 |
% |
|
Return on equity |
|
7.24 |
% |
10.18 |
% |
11.40 |
% |
|
Dividend payout ratio |
|
0 |
% |
56.6 |
% |
37.3 |
% |
|
Equity to assets ratio |
|
9.5 |
% |
3.65 |
% |
7.94 |
% |
22
Off-Balance Sheet Arrangements
During the ordinary course of business, we provide various forms of credit lines to meet the financing needs of our customers. These commitments, which represent a credit risk to us, are not represented in any form on our balance sheets.
As of December 31, 2007, and 2006, we had commitments to extend credit of $81.40 million, and $85.41 million, respectively. Obligations under standby letters of credit were $1.14 million, and $0.76 million, for 2007, and 2006, respectively, and the obligations under commercial letters of credit were $1.50 million, and $1.50 million for the same periods.
The effect on our revenues, expenses, cash flows and liquidity from the unused portion of the commitments to provide credit cannot be reasonably predicted because there is no guarantee that the lines of credit will be used. For more information regarding our off balance sheet arrangements, see Note 14 to our 2007 year end financial statements located elsewhere in this registration statement.
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 bank 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 March 31, 2008, and 2007, we had $2.62 million, and $4.59 million, respectively, in federal funds sold. As of December 31, 2007, and 2006, we had $3.81 million, and $2.64 million, respectively, in federal funds sold.
Investment Securities
Management of our investment securities portfolio focuses on providing an adequate level of liquidity and establishing an interest rate-sensitive position, while earning an adequate level of investment income without taking undue risk. Investment securities that we intend to hold until maturity are classified as held-to-maturity securities, and all other investment securities are classified as available-for-sale. Currently, all of our investment securities are classified as available-for-sale. The carrying values of available-for-sale investment securities are adjusted for unrealized gains or losses as a valuation allowance and any gain or loss is reported on an after-tax basis as a component of other comprehensive income.
Our investment securities holdings decreased by $2.95 million, or 8.1%, to $33.3 million at December 31, 2007, compared to holdings of $36.59 million at December 31, 2006. Accordingly, total investment securities as a percentage of total assets decreased to 7.3% and 8.0% at December 31, 2007 and 2006, respectively. As of December 31, 2007, all of the investment securities were pledged to secure certain deposits. Investment securities holdings decreased by $0.8 million, or 2.3% to $34.6 million at March 31, 2008, compared to holdings of $35.4 million at March 31, 2007.
As of December 31, 2007, the total unrealized loss on securities that were in a loss position for less than 12 continuous months was $13,350 with an aggregate fair value of $4,896,349. The total unrealized loss on securities that were in a loss position for greater than 12 continuous months was $129,726 with an aggregate fair value of $9,577,818.
The following table summarizes the book value and market value and distribution of our investment securities as of the dates indicated:
Investment Securities Portfolio
|
|
|
As of December 31, 2007 |
|
As of December 31, 2006 |
|
||||||||
|
Dollars in Thousands |
|
Amortized
|
|
Market Value |
|
Amortized
|
|
Market Value |
|
||||
|
Available-for-Sale: |
|
|
|
|
|
|
|
|
|
||||
|
Securities of U.S. government agencies |
|
$ |
24,875 |
|
$ |
24,962 |
|
$ |
27,464 |
|
$ |
27,250 |
|
|
Collateralized mortgage obligations |
|
4,024 |
|
3,961 |
|
6,219 |
|
6,020 |
|
||||
|
Municipal securities |
|
2,343 |
|
2,400 |
|
2,903 |
|
2,979 |
|
||||
|
SBA Pools |
|
2,054 |
|
2,049 |
|
0 |
|
0 |
|
||||
|
|
|
|
|
|
|
|
|
|
|
||||
|
Total investment securities |
|
$ |
33,296 |
|
$ |
33,373 |
|
$ |
36,586 |
|
$ |
36,249 |
|
A total of ten U.S. Government agency bonds, four collateralized mortgage obligations, three mortgage-backed securities and 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 has the ability and intent to hold all investment securities with identified impairments resulting from interest rate changes to the earlier of the forecasted recovery or the maturity of the underlying investment security. As of December 31, 2007, we did not have any investment securities that constituted 10% or more of the stockholders’ equity of any third party issuer.
The following table summarizes the maturity and repricing schedule of our investment securities at their amortized cost and their weighted average yields at December 31, 2007 (There were no securities to mature or reprice after 10 years):
23
Investment Maturities and Repricing Schedule
(Dollars in Thousands)
|
|
|
Within One Year |
|
After One But
|
|
After Five But
|
|
After Ten Years |
|
Total |
|
|||||||||||||||
|
|
|
Amount |
|
Yield |
|
Amount |
|
Yield |
|
Amount |
|
Yield |
|
Amount |
|
Yield |
|
Amount |
|
Yield |
|
|||||
|
Available-for-sale: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
|
Securities of U.S. government agencies |
|
$ |
996 |
|
4.65 |
% |
$ |
1,099 |
|
4.89 |
% |
$ |
1,114 |
|
4.42 |
% |
$ |
21,666 |
|
5.12 |
% |
$ |
24,875 |
|
5.06 |
% |
|
Collateralized mortgage obligations |
|
0 |
|
0.00 |
% |
0 |
|
0.00 |
% |
0 |
|
0.00 |
% |
4,024 |
|
4.16 |
% |
4,024 |
|
4.16 |
% |
|||||
|
Municipal securities |
|
510 |
|
5.81 |
% |
390 |
|
4.80 |
% |
1,071 |
|
3.73 |
% |
371 |
|
4.90 |
% |
2,343 |
|
4.54 |
% |
|||||
|
SBA Pools |
|
0 |
|
0.00 |
% |
0 |
|
0.00 |
% |
0 |
|
0.00 |
% |
2,054 |
|
4.95 |
% |
2,054 |
|
4.95 |
% |
|||||
|
Total Investment Securities |
|
$ |
1,507 |
|
5.04 |
% |
$ |
1,489 |
|
4.86 |
% |
$ |
2,185 |
|
4.08 |
% |
$ |
28,115 |
|
4.96 |
% |
$ |
33,296 |
|
4.90 |
% |
Other Earning Assets
For various business purposes, we make investments in earning assets other than the interest-earning securities discussed above. Before 2007, the only other earning assets held by us were insignificant amounts of Federal Home Loan Bank stock, Federal Reserve Bank stock and the cash surrender value on the Bank Owned Life Insurances (“BOLI”). Balances of the Federal Home Loan Bank stock, Federal Reserve Bank stock and the BOLI cash surrender value as of December 31, 2007 were $2,283,300, $669,500 and $4,749,230 respectively.
During 2007, we invested in a low-income housing tax credit funds (“LIHTCF”) to promote our participation in CRA activities. We committed to invest $1 million, over the next two to three years. We anticipate receiving the return following this two to three year period in the form of tax credits and tax deductions over the next fifteen years.
The balances of other earning assets as of December 31, 2007 and December 31, 2006 were as follows:
|
Dollars in Thousands |
|
Balance as of
|
|
Balance as of
|
|
||
|
Type |
|
|
|
|
|
||
|
BOLI |
|
$ |
4,749 |
|
$ |
4,574 |
|
|
LIHTCF |
|
$ |
378 |
|
$ |
0 |
|
|
Federal Reserve Bank Stock |
|
$ |
670 |
|
573 |
|
|
|
Federal Home Loan Bank Stock |
|
$ |
2,283 |
|
$ |
1,833 |
|
Deposits and Other Sources of Funds
Deposits
Total deposits at December 31, 2007, and 2006 were $377.3 million, and $378.5 million, respectively, representing an decrease of $1.18 million or 0.3%, in 2007. The average deposits for the years ended December 31, 2007, and 2006 were $369.55 million and $361.38 million, respectively. Thus, average deposits grew by $8.2 million (or 2.3%) in 2007.
Deposits are the Bank’s primary source of funds. Due to strategic emphasis by management, core deposits (consisting of DDA, NOW and Savings accounts) increased by 3.9% in 2007 to $139.1 million at December 31, 2007. As a result, the percentage of core deposits to total deposits increased to 36.9% from 35.4% as of December 31, 2007 as compared to December 31, 2006. The average rate paid on time deposits in denominations of $100,000 or more was 5.20%, and 4.49% for the years ended December 31, 2007, and 2006, respectively. See “Net Interest Income and Net Interest Margin” for further discussion.
The following tables summarize the distribution of average daily deposits and the average daily rates paid for the periods indicated:
|
|
|
Average Deposits |
|
||||||||
|
|
|
2007 |
|
2006 |
|
||||||
|
Dollars in Thousands |
|
Average
|
|
Average
|
|
Average
|
|
Average
|
|
||
|
|
|
|
|
|
|
|
|
|
|
||
|
Demand, noninterest-bearing |
|
$ |
58,468 |
|
0.00 |
% |
$ |
49,966 |
|
0.00 |
% |
|
Money market |
|
125,574 |
|
3.62 |
% |
117,635 |
|
3.43 |
% |
||
|
NOW |
|
53,634 |
|
1.05 |
% |
49,071 |
|
1.11 |
% |
||
|
Savings |
|
16,745 |
|
3.33 |
% |
21,644 |
|
3.01 |
% |
||
|
Time certificates of deposit in denominations of $100,000 or more |
|
66,007 |
|
5.20 |
% |
70,937 |
|
4.49 |
% |
||
|
Other time deposits |
|
49,118 |
|
4.34 |
% |
52,124 |
|
4.26 |
% |
||
|
|
|
|
|
|
|
|
|
|
|
||
|
Total deposits |
|
$ |
369,546 |
|
3.04 |
% |
$ |
361,377 |
|
2.94 |
% |
24
The scheduled maturities of our time deposits in denominations of $100,000 or greater at December 31, 2007 are, as follows:
Maturities of Time Deposits of $100,000 or More, at December 31, 2007
(Dollars in Thousands)
|
Three months or less |
|
$ |
30,437 |
|
|
Over three months through six months |
|
14,444 |
|
|
|
Over six months through twelve months |
|
11,309 |
|
|
|
Over twelve months |
|
1,431 |
|
|
|
Total |
|
$ |
57,621 |
|
Because our client base is comprised primarily of commercial and industrial accounts, individual account balances are generally higher than those of consumer-oriented banks. A number of clients carry deposit balances of more than 1% of our total deposits, but only one customer had a deposit balance of more than 3% of total deposits in 2007.
Since our deposit growth strategy emphasizes core deposit growth we have avoided relying on brokered deposits as a consistent source of funds. We had no brokered deposits as of December 31, 2007 and 2006.
FHLB Borrowings
Although deposits are the primary source of funds for our lending and investment activities and for general business purposes, we may obtain advances from the Federal Home Loan Bank of San Francisco (“FHLB”) as an alternative to retail deposit funds. Our outstanding FHLB advances decreased by $2.6 million at year-end 2007 compared to the prior year as a result of our emphasis on core deposit growth. See “Liquidity Management” below for the details on the FHLB borrowings program.
The following table is a summary of FHLB borrowings for fiscal years 2007 and 2006:
|
Dollars in Thousands |
|
2007 |
|
2006 |
|
||
|
Balance at year-end |
|
$ |
31,000 |
|
$ |
33,600 |
|
|
Average balance during the year |
|
$ |
33,455 |
|
$ |
15,130 |
|
|
Maximum amount outstanding at any month-end |
|
$ |
61,125 |
|
$ |
33,600 |
|
|
Average interest rate during the year |
|
5.17 |
% |
4.43 |
% |
||
|
Average interest rate at year-end |
|
4.70 |
% |
4.91 |
% |
||
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 Management
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, 2007 and 2006 totaled approximately $59.9 million, and $75.5 million, respectively. Our liquidity level measured as the percentage of liquid assets to total assets was 13.2%, and 16.6% at December 31, 2007, and 2006, respectively.
As a secondary source of liquidity, we rely on advances from the FHLB to supplement our supply of lendable funds and to meet deposit withdrawal requirements. Advances from the FHLB are typically secured by a portion of our loan portfolio and stock issued by the FHLB. The FHLB determines limitations on the amount of advances by assigning a percentage to each eligible loan category that will count towards the borrowing capacity. As of December 31, 2007, our borrowing capacity from the FHLB was about $94 million and the outstanding balance was $31 million, or approximately 33% of our borrowing capacity. We also maintain 2 lines of credit with correspondent banks to purchase up to $20 million in federal funds.
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, 2007, total shareholders’ equity increased to $42.64 million, representing an increase of $8.2 million from December 31, 2006. This increase is primarily from a stock offering which raised $5.0 million and from internally generated operating income and stock option exercises. As of December 31, 2007, we had no material commitments for capital expenditures.
We are subject to various regulatory capital requirements administered by federal banking agencies. Failure to meet minimum capital requirements can trigger regulatory actions that could have a material adverse effect on our financial statements and operations. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, we must meet specific capital guidelines that rely on quantitative measures of our assets, liabilities and certain off-balance-sheet items as calculated under regulatory accounting practices. Our capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. (See “Description of Business—Regulation and Supervision—Capital Adequacy Requirements” herein for exact definitions and regulatory capital requirements.)
25
As of December 31, 2007, we were qualified as a “well capitalized institution” under the regulatory framework for prompt corrective action. The following table presents the regulatory standards for well-capitalized institutions, compared to our capital ratios as of the dates specified:
|
|
|
Regulatory Well-
|
|
December 31, 2007 |
|
December 31, 2006 |
|
|
Total capital to risk-weighted assets |
|
10.0 |
% |
11.1 |
% |
9.5 |
% |
|
Tier I capital to risk-weighted assets |
|
6.0 |
% |
10.0 |
% |
8.4 |
% |
|
Tier I capital to average assets |
|
5.0 |
% |
9.4 |
% |
7.9 |
% |
Recently Issued Accounting Standards
In September 2006, the FASB issued Statement of Financial Accounting Standards No. 157, “Fair Value Measurements,” (“SFAS 157”) which is effective for fiscal years beginning after November 15, 2007 and for interim periods within those years. SFAS 157 defines fair value, establishes a framework for measuring fair value and expands the related disclosure requirements. This Statement applies under other accounting pronouncements that require or permit fair value measurements. The Statement indicates, among other things, that a fair value measurement assumes that the transaction to sell an asset or transfer a liability occurs in the principal market for the asset or liability or, in the absence of a principal market, the most advantageous market for the asset or liability. SFAS 157 defines fair value based upon an exit price model. Relative to SFAS 157, the FASB proposed FASB Staff Positions (FSP) 157-a, 157-b, and 157-c. FSP 157-a amends SFAS 157 to exclude Financial Accounting Standards No. 13, “Accounting for Leases,” and its related interpretive accounting pronouncements that address leasing transactions, while FSP 157-b delays the effective date of SFAS 157 for all nonfinancial assets and nonfinancial liabilities, except those that are recognized or disclosed at fair value in the financial statements on a recurring basis. FSP 157-c clarifies the principles in SFAS 157 on the fair value measurement of liabilities. Public comments on FSP 157-a and 157-b were due in January 2008, while public comments on FSP 157-c were due in February 2008. Based upon pronouncements issued to date, the Company has determined that the adoption of this Standard will not have a material impact on the Company’s financial position, results of operations or cash flows.
In February 2007, the FASB issued Statement of Financial Accounting Standards No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities” (“SFAS 159”), which permits entities to choose to measure many financial instruments and certain other items at fair value. The objective is to improve financial reporting by providing entities with the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities using different measurement techniques. SFAS 159 requires additional disclosures related to the fair value measurements included in the entity’s financial statements. This Statement is effective for financial statements issued for fiscal years beginning after November 15, 2007. Accordingly, the Company will adopt SFAS 159 in the first quarter of 2008. The Company has determined that the adoption of this Standard will not have a material impact on the Company’s financial position, results of operations or cash flows.
In December 2007, the FASB issued Statement of Financial Accounting Standards No. 141 (revised 2007), “Business Combinations” (“SFAS 141(R)”), which replaces Statement of Financial Accounting Standards No. 141, “Business Combinations” (“SFAS 141”). SFAS 141(R) retains the underlying concepts of SFAS 141 in that all business combinations are still required to be accounted for at fair value under the acquisition method of accounting but SFAS 141(R) changed the method of applying the acquisition method in a number of significant aspects. Acquisition costs will generally be expensed as incurred; noncontrolling interests will be valued at fair value at the acquisition date; in-process research and development will be recorded at fair value as an indefinite-lived intangible asset at the acquisition date; restructuring costs associated with a business combination will generally be expensed subsequent to the acquisition date; and changes in deferred tax asset valuation allowances and income tax uncertainties after the acquisition date generally will affect income tax expense. SFAS 141(R) is effective on a prospective basis for all business combinations for which the acquisition date is on or after the beginning of the first annual period subsequent to December 15, 2008, with the exception of the accounting for valuation allowances on deferred taxes and acquired tax contingencies. SFAS 141(R) amends SFAS 109 such that adjustments made to valuation allowances on deferred taxes and acquired tax contingencies associated with acquisitions that closed prior to the effective date of SFAS 141(R) would also apply the provisions of SFAS 141(R). Early adoption is not permitted. The Company is currently evaluating the potential impact this Statement may have on the Company’s future financial position, results of operations and cash flows.
In December 2007, the FASB issued Statement of Financial Accounting Standards No. 160, “Noncontrolling Interests in Consolidated Financial Statements—an amendment of ARB No. 51.” (“SFAS 160”). SFAS 160 is effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2008, with earlier adoption prohibited. The Statement requires the recognition of a noncontrolling interest (minority interest) as equity in the consolidated financial statements and separate from the parent’s equity. The amount of net income attributable to the noncontrolling interest will be included in consolidated net income on the face of the income statement. The Statement also amends certain of ARB No. 51’s consolidation procedures for consistency with the requirements of SFAS 141(R). This Statement also includes expanded disclosure requirements regarding the interests of the parent and its noncontrolling interest. The Company is currently evaluating the potential impact this Statement may have on the Company’s financial position, results of operations and cash flows, but does not believe the impact of the adoption will be material.
FASB Emerging Issues Task Force (“EITF”) Issue No. 06-4, “Accounting for Deferred Compensation and Postretirement Benefit Aspects of Endorsement Split Dollar Life Insurance Arrangements.” EITF 06-4 requires the recognition of a liability and related compensation expense for bank owned life insurance policies with joint beneficiary agreements that provide a benefit to an employee that extends to post-retirement periods. Under EITF 06-4, life insurance policies purchased for the purpose of providing such benefits do not effectively settle an entity’s obligation to the employee. Accordingly, the entity must recognize a liability and related compensation expense during the employee’s active service period based on the future cost of insurance to be incurred during the employee’s retirement. If the entity has agreed to provide the employee with a death benefit, then the liability for the future death benefit should be recognized by following the guidance in SFAS 106, “Employer’s Accounting for Postretirement Benefits Other Than Pensions.” EITF 6-04 was effective for fiscal years beginning after December 17, 2007. The Bank adopted this pronouncement effective January 1, 2008 and has recorded an initial liability of $119,842 with an offsetting adjustment to retained earning of $70,459 and deferred taxes of $49,383, pursuant to this accounting pronouncement.
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.
Controls and Procedures
Our Chief Executive Officer and Chief Financial Officer, after evaluating the effectiveness of our disclosure controls and procedures as defined in Exchange Act Rules 13a-14(c) and 15-d-14(c) as of the end of the period covered by this report (the “Evaluation Date”) have concluded that as of the Evaluation Date, our disclosure controls and procedures were adequate and effective to ensure that material information relating to the Bank and its consolidated subsidiaries would be made
26
known to them by others within those entities, particularly during the period in which this annual report was being prepared. Disclosure controls and procedures are designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Commission’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in the reports that we file under the Exchange Act is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.
There were no significant changes in our internal controls or in other factors that could significantly affect our internal controls subsequent to the Evaluation Date, nor any significant deficiencies or material weaknesses in such controls requiring corrective actions. As a result, we did not taken any corrective actions.
27
ITEM 3. PROPERTIES
Our main office is located in a complex at 125 North Third Avenue, Oakdale, CA 95361, in downtown Oakdale. The building has an automated teller machine and onsite parking. The Bank’s complex occupies approximately 20,000 square feet of space.
|
Property Location and Address |
|
Square Footage |
|
Monthly Rent |
|
Lease
|
|
Lease
|
|
|
|
|
|
|
|
|
|
|
|
Oakdale, 125 N. 3 rd Ave. |
|
9,600 |
|
n/a* |
|
n/a* |
|
n/a |
|
Oakdale, 338 F Street |
|
9,860 |
|
|
|
3/2017 |
|
three, 5-year term extensions |
|
Sonora |
|
2,500 |
|
|
|
4/2010 |
|
n/a |
|
Modesto, 12 th & I Street |
|
4,500 |
|
|
|
3/2016 |
|
two, 5-year term extensions |
|
Bridgeport |
|
2,875 |
|
n/a* |
|
n/a* |
|
n/a |
|
Mammoth Lakes |
|
1,856 |
|
n/a* |
|
n/a* |
|
n/a |
|
Bishop |
|
3,680 |
|
|
|
8/2014 |
|
two, 5-year term extensions |
|
Modesto Dale |
|
4,500 |
|
|
|
3/2015 |
|
two, 5-year term extensions |
|
Turlock |
|
2,400 |
|
|
|
1/2015 |
|
two, 5-year term extensions |
|
Patterson |
|
2,100 |
|
|
|
6/2010 |
|
one, 5-year term extension |
|
Escalon |
|
3,500 |
|
|
|
4/2021 |
|
two, 5-year term extensions |
|
Ripon |
|
1,800 |
|
|
|
1/2011 |
|
two, 5-year term extensions |
|
Stockton |
|
8,000 |
|
|
|
12/2022 |
|
two, 5-year term extensions |
* The Bank owns this property.
Management has determined that all of its premises are adequate for its present and anticipated level of business.
ITEM 4. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Ownership of Securities
The following table sets forth certain information known to us with respect to the beneficial ownership of our common stock as of March 31, 2008, by:
· each person known by us to be a beneficial owner of five percent (5%) or more of our common stock;
· each current director, each of whom is a nominee for election as a director; and
· all current directors and executive officers as a group.
Our common stock is the only class of voting securities outstanding. Beneficial ownership is determined in accordance with the rules of the Securities and Exchange Commission and includes voting and investment power with respect to the securities. Except as indicated in the notes following the table, and subject to applicable community property laws, the persons named in the table have sole voting and investment power with respect to all shares of common stock shown as beneficially owned by them. The percentage of beneficial ownership is based on 7,614,377 shares of common stock outstanding as of March 31, 2008. In computing the number of shares beneficially owned by a person and the percentage ownership of that person, shares of our common stock subject to options held by that person that are currently exercisable or will become exercisable within 60 days following March 31, 2008 are deemed outstanding. However, these shares are not deemed outstanding for the purpose of computing the percentage ownership of any other person or entity.
|
|
|
Common Stock Beneficially Owned (1)
|
|
||||
|
Beneficial Owner |
|
Shares
|
|
Vested Option
|
|
Percentage of
|
|
|
Five Percent Shareholder: (4) |
|
|
|
|
|
|
|
|
Patrick W. Hopper |
|
711,707 |
|
N/A |
|
9.31 |
% |
|
|
|
|
|
|
|
|
|
|
Executive Officers and Directors:(5) |
|
|
|
|
|
|
|
|
James L. Gilbert |
|
143,561 |
|
2,500 |
|
1.91 |
% |
|
Thomas A. Haidlen |
|
191,380 |
|
3,375 |
|
2.55 |
% |
|
Michael Q. Jones |
|
11,520 |
|
— |
|
0.15 |
% |
|
Arne J. Knudsen |
|
342,160 |
|
16,875 |
|
4.70 |
% |
|
Roger M. Schrimp |
|
198,065 |
|
— |
|
2.59 |
% |
|
Danny L. Titus |
|
216,051 |
|
— |
|
2.83 |
% |
|
Richard J. Vaughan |
|
88,000 |
|
16,875 |
|
1.37 |
% |
|
Don Barton |
|
4,000 |
|
1,000 |
|
0.07 |
% |
|
Ronald C. Martin |
|
322,985 |
|
27,000 |
|
4.58 |
% |
|
Christopher M. Courtney |
|
34,696 |
|
77,625 |
|
1.47 |
% |
|
Richard A. McCarty |
|
1,502 |
|
50,528 |
|
0.68 |
% |
|
|
|
|
|
|
|
|
|
|
All officers and directors as a group (12) |
|
2,265,627 |
|
195,778 |
|
32.22 |
% |
28
(1) Except as otherwise noted, may include shares held by such person’s spouse (except where legally separated) and minor children, and by any other relative of such person who has the same home; shares held in “street name” for the benefit of such person; shares held by a family or living trust as to which such person is a trustee and primary beneficiary with sole voting and investment power (or shared power with a spouse); or shares held in an Individual Retirement Account or pension plan as to which such person is the sole beneficiary.
(2) Consists of shares which the applicable individual or group has the right to acquire upon the exercise of stock options which are vested or will vest within 60 days of March 31, 2008 pursuant to the Bank’s 1991 Stock Option Plan as amended and restated in 1998.
(3) This percentage is based on the total number of shares of our common stock outstanding, plus the number of option shares which the applicable individual or group has the right to acquire upon the exercise of stock options which are vested or will vest within 60 days of March 31, 2008 pursuant to our Stock Option Plan.
(4) The address for Patrick Hopper is 2624 Pebblegold Avenue, Henderson, Nevada 89074.
(5) The address for all officers and directors is c/o Oak Valley Community Bank, 125 North Third Avenue, Oakdale, California 95361.
ITEM 5. DIRECTORS AND EXECUTIVE OFFICERS
The following section sets forth certain biographical information concerning our directors and our current executive officers. Oak Valley Bancorp and the Bank share the same directors and executive officers. The same individuals serving as directors of the Bank have been serving as directors of Oak Valley Bancorp since May 2008.
Our directors currently have terms which will end at our next annual meeting of the shareholders or until their successors are elected and qualify, subject to their prior death, resignation, or removal. Officers serve at the discretion of the Board of Directors. There are no family relationships among any of our directors and executive officers.
The current executive officers and directors of the Bank and of Oak Valley Bancorp are as follows:
Donald Barton, 51 , has been a director of the Bank since 2005 and of Oak Valley Bancorp since 2008.
Christopher M. Courtney , 45, has been the Bank’s President since August of 2004 and a director since January 2007. He has been Oak Valley Bancorp President since May 2008. Previously, he has served as the Bank’s Chief Operating Officer and Chief Credit Officer since 2000 and 1999, respectively. Mr. Courtney has 18 years of diverse banking experience, joining Oak Valley Community Bank in 1996, as a lender, after working for a major bank, a mid-size bank and a small community bank. He graduated from Wells Fargo Bank Credit Training Program in 1989. Mr. Courtney has a B.S. in Finance and a Masters in Business Administration from California State University, Sacramento. He is also a graduate of the Pacific Coast Banking School at the University of Washington.
James L. “Jay” Gilbert , 63, has been a Director of the Bank since 1992 and of Oak Valley Bancorp since 2008. Mr. Gilbert has lived in Oakdale since 1946. Mr. Gilbert is involved in the feed and seed business as well as retail feed stores and almond farming.
Thomas A. Haidlen , 61, has been a director of the Bank since 1992 and of Oak Valley Bancorp since 2008. Mr. Haidlen was born in Oakdale and has resided in Oakdale for over 50 years. He owns and operates the Ford-Mercury Dealership in Oakdale.
Michael Q. Jones, 62, has been a director of the Bank since 1992 and of Oak Valley Bancorp since 2008. Mr. Jones has been a resident of Sonora since 1974. Mr. Jones is Chairman of California Gold Development Corporation and Prudential California Realty.
Arne J. Knudsen , 69, is a director of the Bank and of Oak Valley Bancorp. Mr. Knudsen is also the Secretary of the Bank and of Oak Valley Bancorp. Mr. Knudsen has been a resident of Oakdale since 1960. He owns and operates Knudsen Nursery, Inc., a wholesale nursery operation.
Ronald C. Martin , 61, has served as a director and Chief Executive Officer of the Bank since 1992. He was also the Bank’s President until August 2004. He has been Oak Valley Bancorp Chief Executive Officer and a Director since May 2008. Mr. Martin began his banking career in 1977 with River City Bank in Sacramento. Between 1977 and 1987 he was employed in the Sacramento area and from December 1987 to January 1992 he served as President and Chief Executive Officer of Butte Savings in Chico, California. Mr. Martin has a B.S. in Finance from the University of Arizona.
Richard A. McCarty , 36, has been the Executive Vice President and Chief Financial Officer since 2000, after returning to Oak Valley Community Bank in August of 1999. He has been Oak Valley Bancorp Executive Vice President and Chief Financial Officer since May 2008. Mr. McCarty first joined Oak Valley in 1996, leaving in 1997 for Del Monte Foods Corporation. Mr. McCarty has a B.S. in Finance from California State University, Stanislaus.
Roger M. Schrimp , 66, has been a director of the Bank since 1992 and of Oak Valley Bancorp since 2008. Mr. Schrimp has practiced law in Oakdale since 1967. He is a senior partner in the Modesto Law Firm of Damrell, Nelson, Schrimp, Pallios & Ladine, and owns and operates a cattle ranch.
Danny L. Titus , 63, has been a director of the Bank since 1992 and of Oak Valley Bancorp since 2008. Mr. Titus is currently the President of Titus Investments, Inc. and manages real estate and investments. Mr. Titus was formerly the general manager of Steelgard, Inc. which manufacturers portable buildings.
29
Richard J. Vaughan , 70, has been a director of the Bank since 1992 and of Oak Valley Bancorp since 2008. Mr. Vaughan owns Vaughan Farms, operating in Waterford and Oakdale, California. Mr. Vaughan has been involved with agribusiness since 1961.
ITEM 6. EXECUTIVE COMPENSATION
Summary of Cash and Certain Other Compensation
The following table provides certain summary information concerning the compensation earned, by our Chief Executive Officer, and the two most highly compensated executive officers for services rendered in all capacities to us for the fiscal years ended December 31, 2007 and 2006 in their respective executive officer capacities with the Bank:
|
|
|
|
|
|
|
|
|
|
|
Long Term |
|
|
|
||||
|
|
|
|
|
|
|
|
|
|
|
Compensation |
|
|
|
||||
|
|
|
Annual Compensation |
|
Awards |
|
||||||||||||
|
|
|
|
|
|
|
|
|
|
|
Securities |
|
All |
|
||||
|
Name and Principal |
|
|
|
|
|
|
|
Other |
|
Underlying |
|
Other |
|
||||
|
Position |
|
Year |
|
Salary |
|
Bonus |
|
Compensation(1) |
|
Options |
|
Compensation(2) |
|
||||
|
Ronald C. Martin |
|
2007 |
|
$ |
248,000 |
|
$ |
81,250 |
|
$ |
9,000 |
|
— |
|
$ |
42,510 |
|
|
Director and CEO |
|
2006 |
|
$ |
231,800 |
|
$ |
88,250 |
|
$ |
— |
|
— |
|
$ |
40,824 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
Christopher M. Courtney |
|
2007 |
|
$ |
187,000 |
|
$ |
81,250 |
|
$ |
7,800 |
|
— |
|
$ |
61,089 |
|
|
Director and President |
|
2006 |
|
$ |
177,800 |
|
$ |
70,600 |
|
$ |
7,200 |
|
— |
|
$ |
58,569 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
Richard A. McCarty |
|
2007 |
|
$ |
159,000 |
|
$ |
66,625 |
|
$ |
7,800 |
|
— |
|
$ |
46,140 |
|
|
Executive Vice |
|
2006 |
|
$ |
151,300 |
|
$ |
60,010 |
|
$ |
7,200 |
|
— |
|
$ |
42,855 |
|
|
President/CAO/CFO |
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
(1) Reflects automobile allowances.
(2) Amounts shown for Mr. Martin include (a) for 2007, $23,369 for accrued and unused vacation paid, $15,375 in 401(k) plan matching contributions and $3,766 representing director retirement plan accrual; (b) for 2006, $21,397 for accrued and unused vacation paid, $16,047 in 401(k) plan matching contributions and $3,380 representing director retirement plan accrual.
Amounts shown for Mr. Courtney include (a) for 2007, $34,017 representing executive salary continuation plan accrual which vests as described under “Employment and Salary Continuation Agreements”, $15,822 for accrued and unused vacation paid and $11,250 in 401(k) plan matching contributions; (b) for 2006, $32,041 representing executive salary continuation plan accrual which vests as described under “Employment and Salary Continuation Agreements”, $15,747 for accrued and unused vacation paid and $10,781 in 401(k) plan matching contributions.
Amounts shown for Mr. McCarty include (a) for 2007, $26,329 representing executive salary continuation plan accrual which vests as described under “Employment and Salary Continuation Agreements”, $8,561 for accrued and unused vacation paid and $11,250 in 401(k) plan matching contributions; (b) for 2006, $24,800 representing executive salary continuation plan accrual which vests as described under “Employment and Salary Continuation Agreements”, $7,274 for accrued and unused vacation paid and $10,781 in 401(k) plan matching contributions.
Option Grants in Last Fiscal Year
No individual grants of stock options were made during 2007 to each of the named Bank executive officers in the Summary Compensation Table.
Aggregated Option Exercises and Fiscal Year-End Option Values
The following table provides information about stock options exercised in 2007 and options held as of December 31, 2007 by each of the Bank executive officers named in the Summary Compensation Table. Actual gains on exercise, if any, will depend on the value of our common stock on the date on which the shares are sold.
FISCAL 2007 OPTION VALUES
|
|
|
|
|
|
|
Number of Securities Underlying
|
|
Value of Unexercised In-the-
|
|
|||||||
|
|
|
Shares Acquired
|
|
Value
|
|
Exercisable |
|
Unexercisable |
|
Exercisable |
|
Unexercisable |
|
|||
|
Ronald C. Martin |
|
0 |
|
$ |
0 |
|
20,250 |
|
13,500 |
|
$ |
14,064 |
|
$ |
9,376 |
|
|
Christopher M. Courtney |
|
6,328 |
|
44,725 |
|
70,875 |
|
13,500 |
|
256,446 |
|
9,376 |
|
|||
|
Richard A. McCarty |
|
0 |
|
0 |
|
46,028 |
|
9,000 |
|
165,113 |
|
6,251 |
|
|||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||
|
Total |
|
6,328 |
|
$ |
44,725 |
|
137,153 |
|
36,000 |
|
$ |
433,623 |
|
$ |
25,003 |
|
(1) The value realized of shares acquired on exercise was determined by subtracting the exercise price from the fair market value of the common stock on the exercise date multiplied by the number of shares acquired on exercise
30
(2) Options granted under our 1991 Stock Option Plan and its successor restated plan are immediately exercisable. “Exercisable” refers to those options which were both exercisable and vested while “Unexercisable” refers to those options which were unvested.
Employment Contracts, Termination of Employment and Change in Control Arrangements
On August 21, 2001, the Board of Directors of the Bank approved Salary Continuation Agreements between the Bank and Messrs. Courtney and McCarty. Under the Salary Continuation Agreements, Messrs. Courtney and McCarty are entitled to receive maximum annual payments of $85,000 and $65,000, respectively, for a period of 20 years following their retirement at the age of 62 or upon a change in control, as defined in each salary continuation agreement. In the event of disability while employed at the Bank prior to the age of 62, either executive will receive a benefit equal to the retirement liability balance accrued by the Bank at the time of disability. In the event of early termination, either executive will receive a vested portion of his retirement liability balance accrued by the Bank at the time of such early retirement. The vesting schedule is 20% per year of service beginning with the sixth year of service. In the event the Executive dies prior to termination of his salary continuation agreement, the beneficiary of such executive will receive from the Bank a lump sum death benefit amount.
In December 2001, the Bank purchased insurance policies on the lives of Messrs. Courtney and McCarty, paying the premiums for these insurance policies with one lump-sum premium payment of approximately $590,000. Under the Bank’s Split Dollar Agreements and Split Dollar Policy endorsements, the policy interests are divided between the Bank and such executives. The Bank is entitled to any insurance policy death benefits remaining after payment to the executive’s beneficiary.
If Messrs. Courtney or McCarty are terminated for cause, the Bank will not pay any benefits under the Salary Continuation Agreement. For this purpose, the term “cause” means an executive’s gross negligence or gross neglect of duties, fraud, disloyalty, dishonesty or willful violation of law or significant bank policies in connection with the executive’s service that results in an adverse effect on the Bank.
ITEM 7. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE.
Loans to Directors and Officers in the Ordinary Course of Business
The Bank offers loans to directors, officers, and employees in the ordinary course of business on substantially the same terms, including interest rate and collateral, as those prevailing at the time for comparable transactions with other persons, and which do not involve more than the normal risk of collectibility or present other unfavorable features. All such loans were performing in accordance with their terms as of the date of this registration statement. Federal regulations permit executive officers and directors to participate in loan programs that are available to other employees, so long as the director or executive officer is not given preferential treatment compared to other participating employees.
Section 402 of the Sarbanes-Oxley Act of 2002 generally prohibits a company from extending credit, arranging for the extension of credit or renewing an extension of credit in the form of a personal loan one of its officers or directors. There are several exceptions to this general prohibition, including loans made by an FDIC insured depository institution that is subject to the insider lending restrictions of the Federal Reserve Act. All loans to our directors and officers comply with the Federal Reserve Act and the Federal Reserve Board’s Regulation O and, therefore, are excepted from the prohibitions of Section 402.
Director Retirement Agreements ; Bank-Owned Life Insurance Policies
On August 21, 2001, the Board of Directors authorized the Bank to enter into Director Retirement Agreements with each director. The agreements are intended to encourage existing directors to remain directors of the Bank, assuring the Bank that it will have the benefit of the directors’ experience and guidance in the years ahead.
For retirement after the later of age 72 or five years of service, the Director Retirement Agreements provide an annual benefit during the director’s lifetime of $12,000 for 10 years. If a director retires or becomes disabled before the Normal Retirement Age, he will receive a lump-sum payment in an amount equal to the retirement liability balance accrued by the Bank at the time of early retirement or disability.
If a change in control of the Bank occurs (as defined in the Director Retirement Agreements) and a director’s service terminates within 24 months after the change in control, the director will receive the retirement liability balance accrued by the Bank payable to the director for retirement at age 72 or after five years of service.
In December of 2001, the Bank purchased insurance policies on the lives of its directors, paying the premiums for these insurance policies with one lump-sum premium payment of approximately $1,045,000. Although the Bank expects the policies on the directors’ lives to serve as a source of funds for benefits payable under the Director Retirement Agreements, the contractual entitlements arising under the Director Retirement Agreements are not funded and remain contractual liabilities of the Bank, payable upon each director’s termination of service.
The policy interests are divided between the Bank and each director. Under the Bank’s Split Dollar Agreements and Split Dollar Policy endorsements with the directors, the Bank is entitled to any insurance policy death benefits remaining after payment to the director’s beneficiary. The Bank expects to recover the premium in full from its portion of the policies’ death benefits.
If a director is terminated for cause, the Bank will not pay any benefits under his Director Retirement Agreement. For this purpose, the term “cause” means a director’s gross negligence or gross neglect of duties, fraud, disloyalty, dishonesty or willful violation of law or significant bank policies in connection with the director’s service that results in an adverse effect on the Bank.
On August 21, 2001, the Board of Directors of the Bank adopted the Oak Valley Community Bank Supplemental Life Insurance Plan which applies to Messrs. Martin, Courtney and McCarty. The Plan is intended to encourage these key employees of the Bank to continue their employment with the Bank. In December 2001, December 2002 and January 2003, the Bank purchased single premium life insurance policies in the amounts of $951,000, $579,000 and $592,000, respectively, on the life of each of the officers covered by the Plan. Under the Split Dollar Life Insurance Agreements to be entered into by the Bank with each such officer in the Plan, the Bank is the owner of the policies and the partial beneficiary in an amount equal to the cash surrender values of the policies.
31
Compensation of Non-employee Directors
Persons who are directors and are not employees of the Bank receive $2,000 per month. There is no plan in place for compensation of persons who are directors who are employees. In addition, non-employee Directors of the Bank were eligible to participate in the Bank’s incentive stock plan. However, there were no stock options granted to non-employee directors in fiscal year 2006 or 2007.
Director Compensation Table
The following table provides compensation information for the year ended December 31, 2007 for each non-employee Director of the Bank. Information related to Messrs. Martin and Courtney’s compensation is detailed in the “Summary Compensation Table” set forth above.
DIRECTOR COMPENSATION TABLE
|
Name |
|
Fees Earned or
|
|
Stock Awards
|
|
Option Awards
|
|
Change in
|
|
All Other
|
|
Total |
|
|||||
|
James L. Gilbert |
|
$ |
24,000 |
|
$ |
|
|
— |
|
$ |
|
|
$ |
5,660 |
|
$ |
28,760 |
|
|
Thomas A. Haidlen |
|
$ |
24,000 |
|
$ |
|
|
— |
|
$ |
|
|
$ |
4,541 |
|
$ |
27,618 |
|
|
Arne J. Knudsen |
|
$ |
24,000 |
|
$ |
|
|
— |
|
$ |
|
|
$ |
13,429 |
|
$ |
36,477 |
|
|
Roger M. Schrimp |
|
$ |
24,000 |
|
$ |
|
|
— |
|
$ |
|
|
$ |
8,662 |
|
$ |
31,722 |
|
|
Danny L. Titus |
|
$ |
24,000 |
|
$ |
|
|
|
|
$ |
|
|
$ |
5,557 |
|
$ |
28,657 |
|
|
Richard J. Vaughan |
|
$ |
24,000 |
|
$ |
|
|
|
|
$ |
|
|
$ |
15,524 |
|
$ |
38,456 |
|
(5) Represents amounts accrued under the Director Retirement Agreements and Split Dollar Insurance Agreements between the Bank and each Director.
Corporate Governance Principles and Board Matters
We are committed to having sound corporate governance principles. Having such principles is essential to running our business efficiently and to maintaining our integrity in the marketplace.
We have adopted a Code of Conduct that applies to our directors, executive officers, employees and consultants. In addition, our Chief Executive Officer and all senior financial officers, including the Chief Financial Officer, are bound by a separate Code of Ethics for the Chief Executive Officer and Senior Financial Officers in posted on our Internet website address is http://www.oakvalleybank.com.
Board Independence
The Board has determined that each of the current directors, except for Messrs. Martin and Courtney, is independent under the Nasdaq director independence standards set forth in Marketplace Rules 4200 and 4350, as currently in effect.
Director Qualifications
We believe that our directors should have the highest professional and personal ethics and values, consistent with longstanding our values and standards. They should have broad experience at the policy-making level in business, government, or banking. They should be committed to enhancing shareholder value and should have sufficient time to carry out their duties and to provide insight and practical wisdom based on experience. Their service on other boards of public companies should be limited to a number that permits them, given their individual circumstances, to perform responsibly all director duties. Each director must represent the interests of all shareholders.
We also believe that it is necessary that the majority of our Board of Directors must be comprised of independent directors as set forth in the Nasdaq Marketplace Rules 4200 and 4350 and desirable to have at least one financial expert on the Board of Directors who serves on our Audit Committee as set forth in Section 401(h) of Regulation S-K under the federal securities laws. When considering potential director candidates, the Board also considers the candidate’s character, judgment, diversity, age, skills, including financial literacy, and experience in the context of our needs and the Board of Directors.
Identifying and Evaluating Nominees for Directors
The Board Nominating Committee utilizes a variety of methods for identifying and evaluating nominees for director. Directors regularly assess the appropriate size of the Board, and whether any vacancies on the Board are expected due to retirement or otherwise. In the event that vacancies are anticipated, or otherwise arise, the Board considers various potential candidates for director. Candidates may come to the attention of the Board through current Board members, shareholders or other persons. These candidates are evaluated at regular or special meetings of the Board and the independent directors meeting separately, and may be considered at any point during the year. As described above, the Board considers properly submitted shareowner nominations for candidates for the Board. Following verification of the shareowner status of persons proposing candidates, recommendations are aggregated and considered by the Board at a regularly scheduled meeting, which is generally the first or second meeting prior to the issuance of the proxy statement for our annual meeting. If any materials are provided by a shareholder with the nomination of a director candidate, such materials are forwarded to the Board. In evaluating such nominations, the Board seeks to achieve a balance of knowledge, experience and capability on the Board.
ITEM 8. LEGAL PROCEEDINGS
From time to time, the Bank is a party to claims and legal proceedings arising in the ordinary course of business. The Bank’s 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.
32
We believe that there are no material litigation matters at the current time. Although the results of 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 Bank’s financial position, liquidity, or results of operations.
ITEM 9. MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
Price Range of Common Stock
As of June 30, 2008, the Bank common stock traded in the over-the-counter market and is quoted on the OTC Bulletin Board under the symbol “OVYB”. The following table sets forth the high and low closing bid prices (which reflect prices between dealers and do not include retail markup, markdown or commission and may not represent actual transactions) for the current year and the two calendar years ended December 31, 2007 and 2006, respectively. From time to time, during the periods indicated, trading activity in our common stock was infrequent. The source of the quotes is The Nasdaq Stock Market, Inc.
|
|
|
Closing Sale Price(1) |
|
||
|
For Calendar Quarter Ended |
|
High |
|
Low |
|
|
|
|
|
|
|
|
|
March 31, 2006 |
|
23.60 |
|
13.50 |
|
|
June 30, 2006 |
|
16.75 |
|
13.35 |
|
|
September 30, 2006 |
|
16.00 |
|
12.75 |
|
|
December 31, 2006 |
|
14.75 |
|
12.55 |
|
|
March 31, 2007 |
|
13.03 |
|
10.80 |
|
|
June 30, 2007 |
|
11.35 |
|
10.90 |
|
|
September 30, 2007 |
|
11.00 |
|
9.17 |
|
|
December 31, 2007 |
|
10.05 |
|
7.52 |
|
|
March 31, 2008 |
|
8.49 |
|
8.49 |
|
|
June 30, 2008 |
|
8.00 |
|
6.50 |
|
As of June 30, 2008 the closing price of our common stock was $7.00 per share. As of June 30, 2008, there were approximately 547 shareholders of record of the common stock and 7,658,252 outstanding shares of common stock. Beginning July 3, 2008, Oak Valley Bancorp common stock is traded on the OTC Bulletin Board. Oak Valley Bancorp proposes to apply for listing its common stock on NASDAQ.
(1) Figures in the table have been retroactively adjusted to reflect a three-for-two stock split in January 2005 and a three-for-two stock split in January 2006.
Dividends
Under California law, the Bank may declare a cash dividend out of net profits up to the lesser of retained earnings or net income for the last three (3) fiscal years (less any distributions made to shareholders during such period), or, with the prior written approval of the Commissioner of Department of Financial Institutions, in an amount not exceeding the greatest of:
· retained earnings,
· net income for the prior fiscal year, or
· net income for the current fiscal year.
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.
Shareholders are entitled to receive dividends only when and if dividends are declared by our Board of Directors. Although we have paid dividends in the past, it is no guarantee that we will continue paying cash dividends in the future.
The Bank has declared and paid a dividend on its common stock every year since 1996. Dividends for the year ended December 31, 2006 were $0.19 per share of common stock. Dividends for the year ended December 31, 2007 were $0.19 per share of common stock.
The following table shows stock dividends and stock splits declared for the three years ended December 31, 2007:
|
Declaration Date |
|
Payable Date |
|
Record Date |
|
Type |
|
|
|
|
|
|
|
|
|
|
|
November 17, 2004 |
|
January 14, 2005 |
|
January 3, 2005 |
|
Three-for-two stock split |
|
|
November 16, 2005 |
|
January 17, 2006 |
|
January 3, 2006 |
|
Three-for-two stock split |
|
Equity Compensation Plan Information
The following table provides information as of December 31, 2007 with respect to shares of our common stock that may be issued under equity compensation plans. Figures in the table have been retroactively adjusted to reflect three-for-two stock splits in August 2005 and 2006.
|
|
|
A |
|
B |
|
C |
|
|
|
Plan Category |
|
Number of Securities to be Issued Upon
|
|
Weighted Average Exercise Price of
|
|
Number of Securities Remaining Available for
|
|
|
|
Equity Compensation Plans Approved by Shareholders |
|
506,564 |
|
$ |
6.9 |
|
1,500,000 |
|
|
Equity Compensation Plans Not Approved by Shareholders |
|
|
|
Not applicable |
|
0 |
|
|
|
Total |
|
506,564 |
|
$ |
6.9 |
|
1,500,000 |
|
33
ITEM 10. RECENT SALES OF UNREGISTERED SECURITIES.
None.
ITEM 11. DESCRIPTION OF REGISTRANT’S SECURITIES TO BE REGISTERED.
Description of Oak Valley Bancorp Capital Stock
The authorized capital stock of Oak Valley Bancorp consists of 50,000,000 shares of common stock, no par value, and 10,000,000 shares of preferred stock, no par value. There are a nominal number of shares of Oak Valley Bancorp common stock outstanding, all of which are currently held by the Bank in connection with the organization of Oak Valley Bancorp as the proposed holding company for the Bank and which will be canceled in connection with the closing of the Reorganization. There are no shares of preferred stock outstanding and there exists no present plan to issue such shares.
Common Stock
Holders of Oak Valley Bancorp common stock are entitled to one vote for each share held of record on all matters submitted to a vote of shareholders. Each share of common stock has the same rights, privileges and preferences as every other share and will share equally in the net assets of Oak Valley Bancorp upon liquidation or dissolution. Oak Valley Bancorp common stock has no preemptive, conversion or redemption rights or sinking fund provisions, and all of the issued and outstanding shares of Oak Valley Bancorp common stock, when issued, will be fully paid and nonassessable. Shareholders are entitled to receive ratably dividends as may be legally declared by the Oak Valley Bancorp Board of Directors.
Under California law, each holder of a share of common stock is entitled to one vote per share for each matter submitted to the vote of the shareholders. Cumulative voting generally is required for the election of directors, except that “listed corporations” may expressly eliminate cumulative voting for directors in the articles of incorporation of the corporation.
In the event of a liquidation of Oak Valley Bancorp, common shareholders are entitled to share ratably in all assets remaining after payment of liabilities and liquidation preferences for securities with a priority over the Oak Valley Bancorp common stock.
Preferred Stock
Oak Valley Bancorp preferred stock may be issued from time to time in one or more series, as authorized by the Board of Directors of Oak Valley Bancorp. The Board of Directors is authorized to fix the number of shares of any series of preferred stock and to determine the designation of any such series. The Board of Directors is also authorized to determine or alter the rights, preferences, privileges and restrictions granted to or imposed upon any wholly unissued series of preferred stock and, within the limits and restrictions stated in any board resolution originally fixing the number of shares constituting any series of preferred stock, to increase or decrease (but not below the number of shares of such series then outstanding) the number of shares of any such series subsequent to the issue of shares of that series.
The Board of Directors of Oak Valley Bancorp has not authorized the issuance of preferred stock and has no present plan to issue preferred stock. If and when any shares of preferred stock are issued, the holders of preferred stock may have a preference over holders of the common stock upon the payment of dividends, upon liquidation of Oak Valley Bancorp, in respect of voting rights, and in the redemption of the capital stock of Oak Valley Bancorp. The issuance of any preferred stock could have the effect of delaying, deferring or preventing a change in control of Oak Valley Bancorp without further action of its shareholders.
In addition, the issuance of preferred stock with voting rights and conversion rights may adversely affect the voting power of the holders of common stock.
Certain provisions of the proposed charter documents of Oak Valley Bancorp may have the effect of delaying or preventing changes in control or management, which could have an adverse effect on the market price of our common stock. Several provisions of Oak Valley Bancorp’s Articles of Incorporation and Bylaws may discourage unilateral tender offers or other attempts to take over and acquire the business of the holding company, including, without limitation:
· qualifications for nominees to Oak Valley Bancorp’s Board of Directors —Oak Valley Bancorp’s Bylaws provide qualifications which a director must meet in order to serve on the Oak Valley Bancorp ‘s board. The qualifications in the Bylaws are: (a) a requirement that the director be domiciled in one of the communities that Bancorp or its subsidiary bank serves for at least five (5) years immediately prior to his or her election; (b) a requirement that the director may not be affiliated with any other bank or savings and loan association engaged in business in California; (c) a requirement that the director may not be a nominee of someone who is affiliated with any other bank or savings and loan association doing business in California. Directors must be shareholders of the corporation.
· the elimination of cumulative voting —Oak Valley Bancorp’s Articles of Incorporation contain provisions opting out of cumulative voting rights of shareholders for the election of directors if Oak Valley Bancorp becomes a listed corporation. The Oak Valley Bancorp Bylaws provide that common stock will be entitled to one vote for each share held in all matters subject to shareholder voting, and will not have cumulative voting rights in connection with the election of directors. The elimination of cumulative voting provisions shall become effective only when Oak Valley Bancorp becomes a listed corporation within the meaning of Section 301.5 of the California Corporations Code.
· the adoption of a classified Board of directors —Oak Valley Bancorp’s Articles of Incorporation provide that the Oak Valley Bancorp Board will be divided into three classes of directors, as nearly equal in number as reasonably possible. The three classes will be designated as Class I, Class II, and Class III. One class of directors will be elected each year for a three-year term. The classified Board provisions shall become effective only when Oak Valley Bancorp becomes a listed corporation within the meaning of Section 301.5 of the California Corporations Code.
· removal of directors without cause —Because Oak Valley Bancorp will have a classified board of directors, a director generally may be removed without cause only if the votes cast against removal of a director, or not consenting in writing to the removal, would be sufficient to elect the director if voted cumulatively ( without regard to whether shares may otherwise be voted cumulatively ) at an election at which the same total number of votes were cast (or, if the action is taken by written consent, all shares entitled to vote were voted) and either the number of directors elected at the most recent annual meeting of shareholders, of if greater, the number of directors for whom removal is being sought, were then being elected.
34
ITEM 12. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Section 317 of the California General Corporation Law (the “CGCL”) authorizes a court to award, or a corporation’s board of directors to grant, indemnity to directors and officers who are parties or are threatened to be made parties to any proceeding (with certain exceptions) by reason of the fact that the person is or was an agent of the corporation, against expenses, judgments, fines, settlements and other amounts actually and reasonably incurred in connection with the proceeding if that person acted in good faith and in a manner the person reasonably believed to be in the best interests of the corporation, and in the case of a criminal proceeding, had no reasonable cause to believe the conduct of the person was unlawful.
Section 204 of the CGCL provides that a corporation’s articles of incorporation may not limit the liability of directors (i) for acts or omissions that involve intentional misconduct or a knowing and culpable violation of law, (ii) for acts or omissions that a director believes to be contrary to the best interests of the corporation or its shareholders or that involve the absence of good faith on the part of the director, (iii) for any transaction from which a director derived an improper personal benefit, (iv) for acts or omissions that show a reckless disregard for the director’s duty to the corporation or its shareholders in circumstances in which the director was aware, or should have been aware, in the ordinary course of performing a director’s duties, of a risk of a serious injury to the corporation or its shareholders, (v) for acts or omissions that constitute an unexcused pattern of inattention that amounts to an abdication of the director’s duty to the corporation or its shareholders, (vi) under Section 310 of the CGCL (concerning transactions between corporations and directors or corporations having interrelated directors) or (vii) under Section 316 of the CGCL (concerning directors’ liability for distributions, loans, and guarantees).
Section 204 further provides that a corporation’s articles of incorporation may not limit the liability of directors for any act or omission occurring prior to the date when the provision became effective or any act or omission as an officer, notwithstanding that the officer is also a director or that his or her actions, if negligent or improper, have been ratified by the directors. Further, Section 317 has no effect on claims arising under federal or state securities laws and does not affect the availability of injunctions and other equitable remedies available to a corporation’s shareholders for any violation of a director’s fiduciary duty to the corporation or its shareholders.
In accordance with Section 317, the Registrant’s Articles of Incorporation limit the liability of a director to the Registrant or its shareholders for monetary damages to the fullest extent permissible under California law. The Articles further authorize the Registrant to provide indemnification to its agents (including officers and directors), subject to the limitations set forth above. The Articles and the Registrants Bylaws further provide for indemnification of corporate agents to the maximum extent permitted by the CGCL.
The indemnification provisions contained in Registrant’s Bylaws are not exclusive of any other rights to which a person may be entitled under any statute, provision of the Articles, Bylaws, agreement, vote of shareholders or disinterested directors or otherwise. In addition, Registrant may maintain insurance on behalf of its directors and officers. The rights conferred to any person under the Bylaws with respect to indemnification continue as to a person who has ceased to be a director, officer, employee or other agent and inures to the benefit of such person’s heirs, executors and administrators.
The foregoing summaries are necessarily subject to the complete text of the statute, the Articles, and the Bylaws and are qualified in their entirety by reference thereto.
ITEM 13. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements required to be included in this registration statement appear at the end of the registration statement beginning on page F-1.
Under the rules of the SEC applicable to smaller reporting companies, we have omitted supplementary financial information from this registration statement.
ITEM 14. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
35
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) The financial statements required to be included in this registration statement appear beginning on page F-1.
(b) See the Exhibit Index below.
The warranties, representations and covenants contained in any of the agreements included herein or which appear as exhibits hereto should not be relied upon by buyers, sellers or holders of the Company’s securities and are not intended as warranties, representations or covenants to any individual or entity except as specifically set forth in such agreement
EXHIBIT INDEX
|
Exhibit
|
|
Description |
|
2.1 |
|
Agreement and Plan of Merger between the Registrant, Interim Oak Valley Bancorp, Inc. and Oak Valley Community Bank |
|
|
|
|
|
3.1 |
|
Articles of Incorporation of Oak Valley Bancorp, Inc. |
|
|
|
|
|
3.2 |
|
First Amendment to Articles of Incorporation of Oak Valley Bancorp, Inc. |
|
|
|
|
|
3.3 |
|
Bylaws of Oak Valley Bancorp, Inc. |
|
|
|
|
|
10.1 |
|
Oak Valley Community Bank 1998 Restated Stock Option Plan |
|
|
|
|
|
10.2 |
|
Oak Valley Community Bank Form of Director Retirement Agreement |
|
|
|
|
|
10.3 |
|
Oak Valley Community Bank Form of Salary Continuation Agreement |
|
|
|
|
|
11 |
|
Statement Regarding Computation of Net Earnings per Share |
|
|
|
|
|
21 |
|
Subsidiaries of the Registrant |
|
|
|
|
|
24 |
|
Power of Attorney (included on the signature page of this registration statement) |
36
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, in Oakdale, California on July , 2008.
|
|
OAK VALLEY BANCORP
|
|
|
|
|
|
|
|
|
|
|
|
By: |
/s/ RONALD C. MARTIN |
|
|
|
Ronald C. Martin, Chief Executive Officer |
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the date indicated.
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each of the undersigned officers and directors of the registrant hereby constitutes and appoints Ronald C. Martin and Richard A. McCarty, and each of them, as lawful attorney-in-fact and agent for each of the undersigned (with full power of substitution and resubstitution, for and in the name, place and stead of each of the undersigned officers and directors), to sign and file with the Securities and Exchange Commission under the Securities Exchange Act of 1934, as amended, any and all amendments, supplements and exhibits to this report and any and all other documents in connection therewith, hereby granting unto said attorneys-in-fact, and each of them, full power and authority to do and perform each and every act and thing necessary or desirable to be done in order to effectuate the same as fully and to all intents and purposes as each of the undersigned might or could do if personally present, hereby ratifying and confirming all that said attorneys-in-fact and agents, or any of them, or any of their substitutes, may do or cause to be done by virtue hereof.
|
Signature |
|
Title |
|
Date |
|
|
|
|
|
|
|
/s/ DONALD BARTON |
|
Director |
|
July 30, 2008 |
|
Donald Barton |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
/s/ CHRISTOPHER M. COURTNEY |
|
Director |
|
July 30, 2008 |
|
Christopher M. Courtney |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
/s/ JAMES L. GILBERT |
|
Director |
|
July 30, 2008 |
|
James L. Gilbert |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
/s/ THOMAS A. HAIDLEN |
|
Director |
|
July 30, 2008 |
|
Thomas A. Haidlen |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
/s/ MICHAEL Q. JONES |
|
Director |
|
July 30, 2008 |
|
Michael Q. Jones |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
/s/ ARNE J. KNUDSEN |
|
Director |
|
July 30, 2008 |
|
Arne J. Knudsen |
|
|
|
|
37
|
/s/ RONALD C. MARTIN |
|
Director |
|
July 30, 2008 |
|
Ronald C. Martin |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
/s/ ROGER M. SCHRIMP |
|
Director |
|
July 30, 2008 |
|
Roger M. Schrimp |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
/s/ DANNY L. TITUS |
|
Director |
|
July 30, 2008 |
|
Danny L. Titus |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
/s/ RICHARD J. VAUGHAN |
|
Director |
|
July 30, 2008 |
|
Richard J. Vaughan |
|
|
|
|
38
Oak Valley Community Bank Financial Statements as of and for the Years Ended December 31, 2007 and 2006
Oak Valley Community Bank Condensed Financial Statements as of and for the Three Months Ended March 31, 2008 and 2007 (Unaudited)
39
OAK VALLEY COMMUNITY BANK
Independent Auditor’s Report
and
Financial Statements
Years Ended December 31, 2007 and 2006
F-1
To the Stockholders and
Directors of
Oak Valley Community Bank
We have audited the accompanying balance sheet of Oak Valley Community Bank (the “Bank”) as of December 31, 2007 and 2006 and the related statements of earnings, shareholders’ equity, and cash flows for the two years in the period ended December 31, 2007. These financial statements are the responsibility of the Bank’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Bank’s internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Oak Valley Community Bank as of December 31, 2007 and 2006, and the results of its operations and cash flows for the years ended December 31, 2007 and 2006, in conformity with accounting principles generally accepted in the United States of America.
/s/ Moss Adams LLP
Stockton, California
July 29, 2008
F-3
OAK VALLEY COMMUNITY BANK
|
|
|
DECEMBER 31, |
|
||||
|
|
|
2007 |
|
2006 |
|
||
|
|
|
|
|
|
|
||
|
ASSETS |
|
|
|
|
|
||
|
Cash and due from banks |
|
$ |
10,397,951 |
|
$ |
25,179,177 |
|
|
Federal funds sold |
|
3,805,000 |
|
2,640,000 |
|
||
|
|
|
|
|
|
|
||
|
Cash and cash equivalents |
|
14,202,951 |
|
27,819,177 |
|
||
|
|
|
|
|
|
|
||
|
Securities available for sale |
|
33,372,624 |
|
36,248,824 |
|
||
|
Loans, net |
|
382,264,026 |
|
372,819,289 |
|
||
|
Bank premises and equipment, net |
|
10,108,620 |
|
5,512,739 |
|
||
|
Accrued interest and other assets |
|
14,310,569 |
|
12,670,137 |
|
||
|
|
|
|
|
|
|
||
|
|
|
$ |
454,258,790 |
|
$ |
455,070,166 |
|
|
|
|
|
|
|
|
||
|
LIABILITIES AND SHAREHOLDERS’ EQUITY |
|
|
|
|
|
||
|
|
|
|
|
|
|
||
|
Deposits |
|
$ |
377,347,776 |
|
$ |
378,530,305 |
|
|
Accrued interest and other liabilities |
|
3,549,624 |
|
8,750,932 |
|
||
|
FHLB advances |
|
31,000,000 |
|
33,600,000 |
|
||
|
|
|
|
|
|
|
||
|
Total liabilities |
|
411,897,400 |
|
420,881,237 |
|
||
|
|
|
|
|
|
|
||
|
Commitments and contingencies (Notes 13 and 14) |
|
|
|
|
|
||
|
|
|
|
|
|
|
||
|
Shareholders’ equity |
|
|
|
|
|
||
|
Preferred stock, no par value; 10,000,000 shares authorized, none issued or outstanding |
|
— |
|
— |
|
||
|
Common stock, no par value; 10,000,000 shares authorized and 7,607,780 shares and 7,103,243 shares issued and outstanding at December 31, 2007 and 2006, respectively |
|
22,843,171 |
|
17,648,475 |
|
||
|
Additional paid-in capital |
|
1,748,380 |
|
1,502,004 |
|
||
|
Retained earnings |
|
17,723,646 |
|
15,243,222 |
|
||
|
Accumulated other comprehensive income (loss), net of tax |
|
46,193 |
|
(204,772 |
) |
||
|
|
|
|
|
|
|
||
|
Total shareholders’ equity |
|
42,361,390 |
|
34,188,929 |
|
||
|
|
|
|
|
|
|
||
|
|
|
$ |
454,258,790 |
|
$ |
455,070,166 |
|
See accompanying notes
F-5
OAK VALLEY COMMUNITY BANK
|
|
|
YEAR ENDED DECEMBER 31, |
|
||||
|
|
|
2007 |
|
2006 |
|
||
|
|
|
|
|
|
|
||
|
INTEREST INCOME |
|
|
|
|
|
||
|
Interest and fees on loans |
|
$ |
30,132,688 |
|
$ |
26,946,158 |
|
|
Interest on securities available for sale |
|
1,541,034 |
|
1,622,746 |
|
||
|
Interest on federal funds sold |
|
159,163 |
|
124,106 |
|
||
|
Interest on deposits with banks |
|
4,203 |
|
2,479 |
|
||
|
|
|
31,837,088 |
|
28,695,489 |
|
||
|
|
|
|
|
|
|
||
|
INTEREST EXPENSE |
|
|
|
|
|
||
|
Deposits |
|
11,227,565 |
|
10,634,843 |
|
||
|
FHLB advances |
|
1,730,636 |
|
670,933 |
|
||
|
Federal funds purchased |
|
48,286 |
|
56,259 |
|
||
|
|
|
13,006,487 |
|
11,362,035 |
|
||
|
Net interest income |
|
18,830,601 |
|
17,333,454 |
|
||
|
PROVISION FOR LOAN LOSSES |
|
555,000 |
|
595,000 |
|
||
|
|
|
|
|
|
|
||
|
Net interest income after provision for loan losses |
|
18,275,601 |
|
16,738,454 |
|
||
|
|
|
|
|
|
|
||
|
OTHER INCOME |
|
|
|
|
|
||
|
Service charges on deposits |
|
1,090,125 |
|
865,545 |
|
||
|
Earnings on cash surrender value of life insurance |
|
175,168 |
|
167,938 |
|
||
|
Mortgage commissions |
|
194,975 |
|
245,673 |
|
||
|
Other |
|
737,341 |
|
409,633 |
|
||
|
|
|
2,197,609 |
|
1,688,789 |
|
||
|
OTHER EXPENSES |
|
|
|
|
|
||
|
Salaries and employee benefits |
|
8,586,098 |
|
7,584,724 |
|
||
|
Occupancy expenses |
|
2,222,541 |
|
1,786,947 |
|
||
|
Data processing fees |
|
541,556 |
|
484,314 |
|
||
|
Telephone expenses |
|
253,500 |
|
223,824 |
|
||
|
Other operating expenses |
|
2,609,124 |
|
2,141,485 |
|
||
|
|
|
14,212,819 |
|
12,221,294 |
|
||
|
|
|
|
|
|
|
||
|
Earnings before provision for income taxes |
|
6,260,391 |
|
6,205,949 |
|
||
|
PROVISION FOR INCOME TAXES |
|
2,335,270 |
|
2,480,175 |
|
||
|
NET EARNINGS |
|
$ |
3,925,121 |
|
$ |
3,725,774 |
|
|
NET EARNINGS PER SHARE |
|
$ |
0.53 |
|
$ |
0.53 |
|
|
|
|
|
|
|
|
||
|
NET EARNINGS PER SHARE – assuming dilution |
|
$ |
0.52 |
|
$ |
0.51 |
|
See accompanying notes
F-6
OAK VALLEY COMMUNITY BANK
STATEMENT OF SHAREHOLDERS’ EQUITY
|
|
|
YEARS ENDED DECEMBER 31, 2007 AND 2006 |
|
||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated |
|
|
|
||||||
|
|
|
|
|
|
|
Additional |
|
|
|
|
|
Other |
|
Total |
|
||||||
|
|
|
Common Stock |
|
Paid-in |
|
Retained |
|
Comprehensive |
|
Comprehensive |
|
Shareholders’ |
|
||||||||
|
|
|
Shares |
|
Amount |
|
Capital |
|
Earnings |
|
Income |
|
Income |
|
Equity |
|
||||||
|
Balances, January 1, 2006 |
|
6,988,087 |
|
17,198,801 |
|
1,212,526 |
|
12,997,349 |
|
|
|
(370,769 |
) |
31,168,134 |
|
||||||
|
Cumulative effect of change in accounting principle |
|
|
|
|
|
|
|
(130,227 |
) |
|
|
|
|
(130,227 |
) |
||||||
|
Stock options exercised |
|
115,156 |
|
449,674 |
|
— |
|
— |
|
|
|
— |
|
449,674 |
|
||||||
|
Tax benefit of stock options exercised |
|
— |
|
— |
|
158,248 |
|
— |
|
|
|
— |
|
158,248 |
|
||||||
|
Cash dividends ($0.19 per share) |
|
— |
|
— |
|
— |
|
(1,347,526 |
) |
|
|
— |
|
(1,347,526 |
) |
||||||
|
Cash paid for fractional shares related to stock split effective December 31, 2006 |
|
— |
|
— |
|
— |
|
(2,148 |
) |
|
|
— |
|
(2,148 |
) |
||||||
|
Stock-based compensation |
|
— |
|
— |
|
131,230 |
|
— |
|
|
|
— |
|
131,230 |
|
||||||
|
Comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
|
Net changes in unrealized gain on available-for-sale securities (net of income tax of $107,926) |
|
— |
|
— |
|
— |
|
— |
|
$ |
165,997 |
|
165,997 |
|
165,997 |
|
|||||
|
Net earnings |
|
— |
|
— |
|
— |
|
3,725,774 |
|
3,725,774 |
|
— |
|
3,725,774 |
|
||||||
|
Comprehensive income |
|
|
|
|
|
|
|
|
|
$ |
3,891,771 |
|
|
|
|
|
|||||
|
Balances, December 31, 2006 |
|
7,103,243 |
|
$ |
17,648,475 |
|
$ |
1,502,004 |
|
$ |
15,243,222 |
|
|
|
$ |
(204,772 |
) |
$ |
34,188,929 |
|
|
|
Stock offering |
|
456,431 |
|
$ |
5,020,739 |
|
$ |
— |
|
$ |
— |
|
|
|
$ |
— |
|
$ |
5,020,739 |
|
|
|
Stock offering expense |
|
|
|
(25,000 |
) |
|
|
|
|
|
|
|
|
(25,000 |
) |
||||||
|
Stock options exercised |
|
48,106 |
|
198,957 |
|
|
|
|
|
|
|
|
|
198,957 |
|
||||||
|
Tax benefit of stock options exercised |
|
— |
|
— |
|
116,303 |
|
— |
|
|
|
— |
|
116,303 |
|
||||||
|
Cash dividends ($0.19 per share) |
|
— |
|
— |
|
— |
|
(1,444,697 |
) |
|
|
— |
|
(1,444,697 |
) |
||||||
|
Stock based compensation |
|
|
|
|
|
130,073 |
|
|
|
|
|
|
|
130,073 |
|
||||||
|
Comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
|
Net changes in unrealized gain on available-for-sale securities (net of income tax of $163,169) |
|
— |
|
— |
|
— |
|
— |
|
$ |
250,965 |
|
250,965 |
|
250,965 |
|
|||||
|
Net earnings |
|
— |
|
— |
|
— |
|
3,925,121 |
|
3,925,121 |
|
— |
|
3,925,121 |
|
||||||
|
Comprehensive income |
|
|
|
|
|
|
|
|
|
$ |
4,176,086 |
|
|
|
|
|
|||||
|
Balances, December 31, 2007 |
|
7,607,780 |
|
$ |
22,843,171 |
|
$ |
1,748,380 |
|
$ |
17,723,646 |
|
|
|
$ |
46,193 |
|
$ |
42,361,390 |
|
|
F-7
OAK VALLEY COMMUNITY BANK
|
|
|
YEAR ENDED DECEMBER 31, |
|
||||
|
|
|
2007 |
|
2006 |
|
||
|
|
|
|
|
|
|
||
|
CASH FLOWS FROM OPERATING ACTIVITIES: |
|
|
|
|
|
||
|
Net earnings |
|
$ |
3,925,121 |
|
$ |
3,725,774 |
|
|
Adjustments to reconcile net earnings to net cash from operating activities: |
|
|
|
|
|
||
|
Provision for loan losses |
|
555,000 |
|
595,000 |
|
||
|
Depreciation, amortization, and accretion, net |
|
986,559 |
|
893,467 |
|
||
|
Stock-based compensation expense |
|
130,073 |
|
131,230 |
|
||
|
Excess tax benefits from stock-based payment arrangements |
|
(106,355 |
) |
(158,248 |
) |
||
|
Gain on sale of premises and equipment |
|
(14,400 |
) |
— |
|
||
|
Decrease (increase) in accrued interest receivable |
|
7,062 |
|
(375,155 |
) |
||
|
(Decrease) increase in accrued interest payable and other liabilities |
|
(5,085,005 |
) |
5,691,661 |
|
||
|
Increase in other assets |
|
(2,583,711 |
) |
(2,392,778 |
) |
||
|
Net cash from operating activities |
|
(2,185,656 |
) |
8,110,951 |
|
||
|
|
|
|
|
|
|
||
|
CASH FLOWS FROM INVESTING ACTIVITIES: |
|
|
|
|
|
||
|
Purchases of securities available for sale |
|
(19,190,393 |
) |
(11,444,591 |
) |
||
|
Proceeds from maturities, calls, and principal paydowns of securities available for sale |
|
22,516,909 |
|
8,392,263 |
|
||
|
Net increase in loans |
|
(9,999,737 |
) |
(60,627,165 |
) |
||
|
Proceeds from sales of premises and equipment |
|
14,400 |
|
— |
|
||
|
Net purchases of premises and equipment |
|
(4,845,574 |
) |
(422,013 |
) |
||
|
Net cash from investing activities |
|
(11,504,395 |
) |
(64,101,506 |
) |
||
|
|
|
|
|
|
|
||
|
CASH FLOWS FROM FINANCING ACTIVITIES: |
|
|
|
|
|
||
|
FHLB advanced funds |
|
129,174,400 |
|
82,600,000 |
|
||
|
FHLB payments |
|
(131,774,400 |
) |
(68,000,000 |
) |
||
|
Dividends paid |
|
(1,444,697 |
) |
(1,347,526 |
) |
||
|
Net increase in demand deposits and savings accounts |
|
32,607,147 |
|
37,539,038 |
|
||
|
Net (decrease) increase in time deposits |
|
(33,789,676 |
) |
11,911,714 |
|
||
|
Excess tax benefits from stock-based payment arrangements |
|
106,355 |
|
158,248 |
|
||
|
Cash paid for fractional shares related to 3:2 stock split |
|
— |
|
(2,148 |
) |
||
|
Proceeds from sale of common stock and exercise of stock options |
|
5,194,696 |
|
449,674 |
|
||
|
Net cash from financing activities |
|
73,825 |
|
63,309,000 |
|
||
|
|
|
|
|
|
|
||
|
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS |
|
(13,616,226 |
) |
7,318,445 |
|
||
|
|
|
|
|
|
|
||
|
CASH AND CASH EQUIVALENTS, beginning of year |
|
27,819,177 |
|
20,500,732 |
|
||
|
|
|
|
|
|
|
||
|
CASH AND CASH EQUIVALENTS, end of year |
|
$ |
14,202,951 |
|
$ |
27,819,177 |
|
See accompanying notes
F-8
|
|
|
YEAR ENDING DECEMBER 31, |
|
||||
|
|
|
2007 |
|
2006 |
|
||
|
|
|
|
|
|
|
||
|
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: |
|
|
|
|
|
||
|
Cash paid during the year for: |
|
|
|
|
|
||
|
Interest |
|
$ |
13,341,328 |
|
$ |
11,034,128 |
|
|
Income taxes |
|
$ |
2,461,000 |
|
$ |
2,685,983 |
|
NON-CASH INVESTING AND FINANCING ACTIVITIES:
During 2007 the Bank recognized a decrease in the unrealized loss on available-for-sale securities of $414,134. As a result, the deferred tax asset was decreased by $163,169 and equity was increased by $250,965.
During 2007 the Bank transferred $773,048 in other assets to Bank premises and equipment.
During 2006 the Bank recognized a decrease in the unrealized loss on available-for-sale securities of $273,923. As a result, the deferred tax asset was decreased by $107,926 and equity was increased by $165,997.
During 2006 the Bank transferred $1,987,747 in other assets to Bank premises and equipment.
See accompanying notes
F-9
OAK VALLEY COMMUNITY BANK
NOTE 1 – SUMMARY OF ACCOUNTING POLICIES
A summary of the significant accounting policies applied in the preparation of the accompanying financial statements follows.
Oak Valley Community Bank (the “Bank”) is a California State chartered bank. The Bank was incorporated under the laws of the state of California on May 31, 1990, and began operations in Oakdale on May 28, 1991. The Bank operates branches in Oakdale, Sonora, Bridgeport, Bishop, Mammoth Lakes, Modesto, Patterson, Turlock, Ripon, Stockton, and Escalon, California. The Bridgeport, Mammoth Lakes, and Bishop branches operate as a separate division, Eastern Sierra Community Bank. The Bank’s primary source of revenue is providing loans to customers who are predominantly middle-market businesses.
In preparing financial statements in conformity with accounting principles generally accepted in the United States of America, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and revenues and expenses during the reporting period. Actual results could differ from those estimates.
Change in accounting principle – During 2008 in conjunction with the Company’s filing of a Form 10 registration statement with the SEC, the Company made a change in accounting principle and adopted Staff Accounting Bulletin (SAB) No. 108. As a result, the Company recorded adjustments to its deferred tax assets and also recorded a liability related to lease agreements that include fixed rent escalation clauses.
In accordance with Statement of Financial Accounting Standards (SFAS) No. 154, Accounting Changes and Error Corrections, the Company adjusted its financial statements to apply SAB No. 108 retrospectively. As a result of the change in accounting principle, the following adjustments to the financial statements were made:
· Accrued interest and other assets decreased by $144,586 and $143,316 at December 31, 2007 and 2006, respectively.
· Other liabilities increased by $134,030 and $92,013 at December 31, 2007 and 2006, respectively.
· Retained earnings decreased by $278,616 and $235,329 at December 31, 2007 and 2006, respectively.
· Occupancy expense increased $42,107 and $37,427 for the years ended December 31, 2007 and 2006, respectively.
· Income tax expense increased $1,270 and $67,675 for the years ended December 31, 2007 and 2006, respectively.
· Net income decreased $43,227 and basic and diluted earnings per share decreased $.01 per share to $.53 and $.52 per share, respectively, for the year ended December 31, 2007.
· Net income decreased $105,102 and basic and diluted earnings per share decreased $.01 per share to $.53 and $.51 per share, respectively, for the year ended December 31, 2006.
· The cumulative effect of the change on retained earnings as of January 1, 2006 was a decrease of $130,227, from the $12,997,349 originally reported.
F-10
OAK VALLEY COMMUNITY BANK
NOTES TO FINANCIAL STATEMENTS
NOTE 1 – SUMMARY OF ACCOUNTING POLICIES (CONTINUED)
Stock offering – During 2007 the Bank facilitated a stock offering in an effort to raise additional capital. The stock was first offered to existing shareholders between May 14, 2007 through June 15, 2007. Subsequently, the offering was extended to the public between June 16, 2007 through July 16, 2007. Common stock of the Bank was offered at $11 per share to all investors. As a result of the offering, the Bank raised $4,995,739 in capital, net of offering expenses of $25,000. Additionally, 456,431 in additional common shares of the Bank were issued as a result of the offering.
Cash and cash equivalents – The Bank has defined cash and cash equivalents to include cash, due from banks, certificates of deposit with maturities of three months or less, and federal funds sold. Generally, federal funds are sold for one-day periods. At times throughout the year, balances can exceed FDIC insurance limits. Management believes the risk of loss is remote as these amounts are held by major financial institutions.
Fair values of financial instruments – The financial statements include various estimated fair value information as of December 31, 2007 and 2006. 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 – T he 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.
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.
F-11
OAK VALLEY COMMUNITY BANK
NOTES TO FINANCIAL STATEMENTS
NOTE 1 – SUMMARY OF ACCOUNTING POLICIES (CONTINUED)
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.
Securities available for sale – Available-for-sale securities consist of bonds, notes, and debentures not classified as trading securities or held-to-maturity securities. Available-for-sale securities with unrealized holding gains and losses, net of tax, are reported as a net amount in a separate component of shareholders’ equity, accumulated other comprehensive income, until realized. Gains and losses on the sale of available-for-sale securities are determined using the specific identification method. The amortization of premiums and accretion of discounts are recognized as adjustments to interest income over the period to maturity.
Investments with fair values that are less than amortized cost are considered impaired. Impairment may result from either a decline in the financial condition of the issuing entity or, in the case of fixed interest rate investments, from rising interest rates. At each financial statement date, management assesses each investment to determine if impaired investments are temporarily impaired or if the impairment is other than temporary based on the positive and negative evidence available. Evidence evaluated includes, but is not limited to, industry analyst reports, credit market conditions, and interest rate trends. If negative evidence outweighs positive evidence that the carrying amount is recoverable within a reasonable period of time, the impairment is deemed to be other than temporary and the security is written down in the period in which such determination is made.
Loans and allowance for loan losses – Loans are reported at the principal amount outstanding, net of unearned income, deferred loan fees, and the allowance for loan losses. Unearned discounts on installment loans are recognized as income over the terms of the loans. Interest on other loans is calculated by using the simple interest method on the daily balance of the principal amount outstanding.
Loan fees net of certain direct costs of origination, which represent an adjustment to interest yield, are deferred and amortized over the contractual term of the loan.
Loans on which the accrual of interest has been discontinued are designated as non-accrual loans. Accrual of interest on loans is discontinued either when reasonable doubt exists as to the full and timely collection of interest or principal or when a loan becomes contractually past due by ninety days or more with respect to interest or principal. When a loan is placed on non-accrual status, all interest previously accrued, but not collected, is reversed against current period interest income. Income on such loans is then recognized only to the extent that cash is received and where the future collection of principal is probable. Interest accruals are resumed on such loans only when they are brought fully current with respect to interest and principal and when, in the judgment of management, the loans are estimated to be fully collectible as to both principal and interest.
The allowance for loan losses is established through a provision for loan losses charged to operations. Loans are charged against the allowance for loan losses when management believes that the collectibility of the principal is unlikely. Subsequent recoveries of previously charged off amounts, if any, are credited to the allowance.
The allowance for loan losses is evaluated on a regular basis by management and is based on management’s periodic review of the collectibility of the loans in light of historical experience, the nature and volume of the loan portfolio, adverse situations that may affect the borrower’s ability to
F-12
OAK VALLEY COMMUNITY BANK
NOTES TO FINANCIAL STATEMENTS
NOTE 1 – SUMMARY OF ACCOUNTING POLICIES (CONTINUED)
repay, estimated value of any underlying collateral, and prevailing economic conditions. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available.
The allowance consists of specific, general, and unallocated components. The specific component relates to loans that are classified as impaired. Impaired loans, as defined, are measured based on the present value of expected future cash flows discounted at the loan’s effective interest rate or the fair value of the collateral if the loan is collateral dependent. The general component relates to non-impaired loans and is based on historical loss experience adjusted for qualitative factors. An unallocated component is maintained to cover uncertainties that could affect management’s estimate of probable losses. The unallocated component of the allowance reflects the margin of imprecision inherent in the underlying assumptions used in the methodologies for estimating specific and general losses in the portfolio.
The Bank considers a loan impaired when it is probable that all amounts of principal and interest due, according to the contractual terms of the loan agreement, will not be collected, which is the same criteria used for the transfer of loans to non-accrual status. Interest income is recognized on impaired loans in the same manner as non-accrual loans. Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed.
Premises and equipment – Premises and equipment are stated at cost less accumulated depreciation and amortization. Depreciation and amortization are provided for in amounts sufficient to relate the cost of depreciable assets to operations over their estimated service lives using the straight-line basis. The estimated lives used in determining depreciation are:
|
Building |
|
31.5 |
years |
|
Equipment |
|
3 – 12 |
years |
|
Furniture and fixtures |
|
3 – 7 |
years |
|
Leasehold improvements |
|
5 – 15 |
years |
|
Automobiles |
|
3 – 5 |
years |
Leasehold improvements are amortized over the lesser of the useful life of the asset or the remaining term of the lease. The straight-line method of depreciation is followed for all assets for financial reporting purposes, but accelerated methods are used for tax purposes. Deferred income taxes have been provided for the resulting temporary differences.
Income taxes – Deferred income taxes are provided for the temporary differences between the financial reporting basis and the tax basis of the Bank’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.
F-13
OAK VALLEY COMMUNITY BANK
NOTES TO FINANCIAL STATEMENTS
NOTE 1 – SUMMARY OF ACCOUNTING POLICIES (CONTINUED)
The Bank adopted the provisions of FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes , on January 1, 2007. The Bank had no unrecognized tax benefits which would require an adjustment to the January 1, 2007 beginning balance of retained earnings. The Bank had no unrecognized tax benefits at January 1, 2007 and at December 31, 2007.
The Bank recognizes interest accrued and penalties related to unrecognized tax benefits in tax expense. During the years ended December 31, 2007 and 2006 the Bank recognized no interest and penalties.
The Bank files income tax returns in the U.S. federal jurisdiction, and various states. With few exceptions, the Bank is no longer subject to U.S. federal or state/local income tax examinations by tax authorities for years before 2004.
Transfers of financial assets – Transfers of financial assets are accounted for as sales when control over the assets has been surrendered. Control over transferred assets is deemed to be surrendered when: (1) the assets have been isolated from the Bank, (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 Bank does not maintain effective control over the transferred assets through an agreement to repurchase them before their maturity.
Advertising costs – The Bank expenses marketing costs as they are incurred. Advertising expense was $119,000 and $133,000 for the years ended December 31, 2007 and 2006, respectively.
Comprehensive income – Comprehensive income is comprised of net income and other comprehensive income. Other comprehensive income includes items previously recorded directly to equity, such as unrealized gains and losses on securities available for sale. Comprehensive income is presented in the statement of shareholders’ equity. For the years ended December 31, 2007 and 2006, no amounts were reclassified out of comprehensive income into earnings.
Investment in limited partnership – During 2007 the Bank acquired limited interests in a private limited partnership that acquires affordable housing properties in California that generate Low Income Housing Tax Credits under Section 42 of the Internal Revenue Code of 1986, as amended. The Bank’s limited partnership investment is accounted for under the equity method. The Bank’s noninterest expense associated with the utilization of these tax credits for the year ended December 31, 2007 was $54,308. The limited partnership investment is expected to generate a total tax benefit of approximately $1.16 million over the life of the investment for the combination of the tax credits and deductions on noninterest expense. The tax credits expire between 2009 and 2022. It is expected that a tax benefit of $72,000 will be utilized for income tax purposes for the year ended December 31, 2007. The recorded investment in limited partnerships totaled $377,790 at December 31, 2007, and is reflected as a component of accrued interest and other assets on the balance sheets.
Stock based compensation – Effective January 1, 2006, the Bank adopted the provisions of Statement of Financial Accounting Standards (“SFAS”) No. 123R, Share Based Payments , a revision to the previously issued guidance on accounting for stock options and other forms of equity-based compensation. SFAS No. 123R requires companies to recognize in the income statement the grant-date fair value of stock
F-14
OAK VALLEY COMMUNITY BANK
NOTES TO FINANCIAL STATEMENTS
NOTE 1 – SUMMARY OF ACCOUNTING POLICIES (CONTINUED)
options and other equity-based forms of compensation issued to employees over the employees’ requisite service period (generally the vesting period).
The Bank has adopted SFAS No. 123R using the modified prospective method which means that the unvested portion of previously granted awards and any awards that are granted or modified after the date of adoption will be measured and accounted for under the provisions of SFAS No. 123R. The Bank will continue to use straight-line recognition of expenses for awards with graded vesting.
The fair value of each option grant is estimated as of the grant date using an option-pricing model with the assumptions noted in the following table. 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. 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.
The fair value of each option is estimated on the date of grant using an options pricing model with the following weighted average assumptions:
|
|
|
YEAR ENDED DECEMBER 31, |
|
||||
|
|
|
2007 |
|
2006 |
|
||
|
Pricing model |
|
Binomial |
|
Binomial |
|
||
|
Dividend yield |
|
1.73% |
|
1.35% |
|
||
|
Expected volatility |
|
36.33% |
|
35.11% |
|
||
|
Risk-free interest rate |
|
4.79% |
|
4.84% |
|
||
|
Expected option term |
|
7.25 years |
|
5.0 years |
|
||
|
Stock-based compensation recorded |
|
$ |
130,073 |
|
$ |
131,230 |
|
Reclassifications - Certain prior year amounts have been reclassified to conform to the current year presentation.
Recently Issued Accounting Standards – In September 2006, the FASB issued Statement of Financial Accounting Standards No. 157, “Fair Value Measurements,” (“SFAS 157”) which is effective for fiscal years beginning after November 15, 2007 and for interim periods within those years. SFAS 157 defines fair value, establishes a framework for measuring fair value and expands the related disclosure requirements. This Statement applies under other accounting pronouncements that require or permit fair value measurements. The Statement indicates, among other things, that a fair value measurement assumes that the transaction to sell an asset or transfer a liability occurs in the principal market for the asset or liability or, in the absence of a principal market, the most advantageous market for the asset or liability. SFAS 157 defines fair value based upon an exit price model. Relative to SFAS 157, the FASB proposed FASB Staff Positions (FSP) 157-a, 157-b, and 157-c. FSP 157-a amends SFAS 157 to exclude Financial Accounting Standards No. 13, “Accounting for Leases,” and its related interpretive accounting
F-15
OAK VALLEY COMMUNITY BANK
NOTES TO FINANCIAL STATEMENTS
NOTE 1 – SUMMARY OF ACCOUNTING POLICIES (CONTINUED)
pronouncements that address leasing transactions, while FSP 157-b delays the effective date of SFAS 157 for all nonfinancial assets and nonfinancial liabilities, except those that are recognized or disclosed at fair value in the financial statements on a recurring basis. FSP 157-c clarifies the principles in SFAS 157 on the fair value measurement of liabilities. Public comments on FSP 157-a and 157-b were due in January 2008, while public comments on FSP 157-c were due in February 2008. Based upon pronouncements issued to date, the Company has determined that the adoption of this Standard will not have a material impact on the Company’s financial position, results of operations or cash flows.
In February 2007, the FASB issued Statement of Financial Accounting Standards No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities” (“SFAS 159”), which permits entities to choose to measure many financial instruments and certain other items at fair value. The objective is to improve financial reporting by providing entities with the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities using different measurement techniques. SFAS 159 requires additional disclosures related to the fair value measurements included in the entity’s financial statements. This Statement is effective for financial statements issued for fiscal years beginning after November 15, 2007. Accordingly, the Company will adopt SFAS 159 in the first quarter of 2008. The Company has determined that the adoption of this Standard will not have a material impact on the Company’s financial position, results of operations or cash flows.
In December 2007, the FASB issued Statement of Financial Accounting Standards No. 141 (revised 2007), “Business Combinations” (“SFAS 141(R)”), which replaces Statement of Financial Accounting Standards No. 141, “Business Combinations” (“SFAS 141”). SFAS 141(R) retains the underlying concepts of SFAS 141 in that all business combinations are still required to be accounted for at fair value under the acquisition method of accounting but SFAS 141(R) changed the method of applying the acquisition method in a number of significant aspects. Acquisition costs will generally be expensed as incurred; noncontrolling interests will be valued at fair value at the acquisition date; in-process research and development will be recorded at fair value as an indefinite-lived intangible asset at the acquisition date; restructuring costs associated with a business combination will generally be expensed subsequent to the acquisition date; and changes in deferred tax asset valuation allowances and income tax uncertainties after the acquisition date generally will affect income tax expense. SFAS 141(R) is effective on a prospective basis for all business combinations for which the acquisition date is on or after the beginning of the first annual period subsequent to December 15, 2008, with the exception of the accounting for valuation allowances on deferred taxes and acquired tax contingencies. SFAS 141(R) amends SFAS 109 such that adjustments made to valuation allowances on deferred taxes and acquired tax contingencies associated with acquisitions that closed prior to the effective date of SFAS 141(R) would also apply the provisions of SFAS 141(R). Early adoption is not permitted. The Company is currently evaluating the potential impact this Statement may have on the Company’s future financial position, results of operations and cash flows.
In December 2007, the FASB issued Statement of Financial Accounting Standards No. 160, “Noncontrolling Interests in Consolidated Financial Statements—an amendment of ARB No. 51.” (“SFAS 160”). SFAS 160 is effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2008, with earlier adoption prohibited. The Statement requires the recognition of a noncontrolling interest (minority interest) as equity in the consolidated financial statements and separate from the parent’s equity. The amount of net income attributable to the
F-16
OAK VALLEY COMMUNITY BANK
NOTES TO FINANCIAL STATEMENTS
NOTE 1 – SUMMARY OF ACCOUNTING POLICIES (CONTINUED)
noncontrolling interest will be included in consolidated net income on the face of the income statement. The Statement also amends certain of ARB No. 51’s consolidation procedures for consistency with the requirements of SFAS 141(R). This Statement also includes expanded disclosure requirements regarding the interests of the parent and its noncontrolling interest. The Company is currently evaluating the potential impact this Statement may have on the Company’s financial position, results of operations and cash flows, but does not believe the impact of the adoption will be material.
FASB Emerging Issues Task Force (“EITF”) Issue No. 06-4, “Accounting for Deferred Compensation and Postretirement Benefit Aspects of Endorsement Split Dollar Life Insurance Arrangements.” EITF 06-4 requires the recognition of a liability and related compensation expense for bank owned life insurance policies with joint beneficiary agreements that provide a benefit to an employee that extends to post-retirement periods. Under EITF 06-4, life insurance policies purchased for the purpose of providing such benefits do not effectively settle an entity’s obligation to the employee. Accordingly, the entity must recognize a liability and related compensation expense during the employee’s active service period based on the future cost of insurance to be incurred during the employee’s retirement. If the entity has agreed to provide the employee with a death benefit, then the liability for the future death benefit should be recognized by following the guidance in SFAS 106, “Employer’s Accounting for Postretirement Benefits Other Than Pensions.” The Company adopted this pronouncement effective January 1, 2008. The impact to the Company’s financial position, results of operations and cash flows was not material.
NOTE 2 – CASH AND DUE FROM BANKS
Cash and due from banks includes balances with the Federal Reserve Bank and other correspondent banks. The Bank is required to maintain specified reserves by the Federal Reserve Bank. The average reserve requirements are based on a percentage of the Bank’s deposit liabilities. In addition, the Federal Reserve Bank requires the Bank to maintain a certain minimum balance at all times.
F-17
OAK VALLEY COMMUNITY BANK
NOTES TO FINANCIAL STATEMENTS
NOTE 3 – SECURITIES
The amortized cost and estimated fair values of debt securities as of December 31, 2007, are as follows:
|
|
|
|
|
Gross |
|
Gross |
|
Estimated |
|
||||
|
|
|
Amortized |
|
Unrealized |
|
Unrealized |
|
Fair |
|
||||
|
|
|
Cost |
|
Gains |
|
Losses |
|
Value |
|
||||
|
|
|
|
|
|
|
|
|
|
|
||||
|
Available-for-sale securities: |
|
|
|
|
|
|
|
|
|
||||
|
U.S. agencies |
|
$ |
24,874,744 |
|
$ |
153,914 |
|
$ |
(66,313 |
) |
$ |
24,962,345 |
|
|
Collateralized mortgage obligations |
|
4,024,103 |
|
7,014 |
|
(69,967 |
) |
3,961,150 |
|
||||
|
Municipalities |
|
2,343,015 |
|
58,834 |
|
(1,855 |
) |
2,399,994 |
|
||||
|
SBA Pools |
|
2,054,076 |
|
— |
|
(4,941 |
) |
2,049,135 |
|
||||
|
|
|
|
|
|
|
|
|
|
|
||||
|
|
|
$ |
33,295,938 |
|
$ |
219,762 |
|
$ |
(143,076 |
) |
$ |
33,372,624 |
|
NOTE 3 – SECURITIES (CONTINUED)
The following table details 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, 2007.
|
|
|
Less than 12 months |
|
12 months or more |
|
Total |
|
||||||||||||
|
|
|
|
|
Unrealized |
|
Fair |
|
Unrealized |
|
|
|
Unrealized |
|
||||||
|
|
|
Fair Value |
|
Loss |
|
Value |
|
Loss |
|
Fair Value |
|
Loss |
|
||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
|
Description of Securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
|
U.S. agencies |
|
$ |
1,564,653 |
|
$ |
(1,182 |
) |
$ |
7,076,297 |
|
$ |
(65,131 |
) |
$ |
8,640,950 |
|
$ |
(66,313 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
|
Collateralized mortgage obligations |
|
977,951 |
|
(6,821 |
) |
2,241,900 |
|
(63,146 |
) |
$ |
3,219,851 |
|
$ |
(69,967 |
) |
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
|
Municipalities |
|
304,611 |
|
(406 |
) |
259,621 |
|
(1,449 |
) |
$ |
564,232 |
|
$ |
(1,855 |
) |
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
|
SBA Pools |
|
2,049,134 |
|
(4,941 |
) |
— |
|
— |
|
$ |
2,049,134 |
|
$ |
(4,941 |
) |
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
|
Total temporarily impaired securities |
|
$ |
4,896,349 |
|
$ |
(13,350 |
) |
$ |
9,577,818 |
|
$ |
(129,726 |
) |
$ |
14,474,167 |
|
$ |
(143,076 |
) |
F-18
OAK VALLEY COMMUNITY BANK
NOTES TO FINANCIAL STATEMENTS
NOTE 3 – SECURITIES (CONTINUED)
A total of ten U.S. agencies, four collateralized mortgage obligations, three municipal securities, and 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 has the ability and intent to hold all investment securities with identified impairments resulting from interest rate changes to 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, 2007, 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: |
|
|
|
|
|
||
|
Due in one year or less |
|
$ |
996,486 |
|
$ |
998,245 |
|
|
Due after one year through five years |
|
1,098,711 |
|
1,103,109 |
|
||
|
Due after five years through ten years |
|
2,695,262 |
|
2,698,864 |
|
||
|
Due after ten years |
|
28,505,479 |
|
28,572,406 |
|
||
|
|
|
$ |
33,295,938 |
|
$ |
33,372,624 |
|
The amortized cost and estimated fair values of debt securities as of December 31, 2006, are as follows:
|
|
|
|
|
Gross |
|
Gross |
|
Estimated |
|
||||
|
|
|
Amortized |
|
Unrealized |
|
Unrealized |
|
Fair |
|
||||
|
|
|
Cost |
|
Gains |
|
Losses |
|
Value |
|
||||
|
|
|
|
|
|
|
|
|
|
|
||||
|
Available-for-sale securities: |
|
|
|
|
|
|
|
|
|
||||
|
U.S. agencies |
|
$ |
27,464,267 |
|
$ |
32,429 |
|
$ |
(246,990 |
) |
$ |
27,249,706 |
|
|
Collateralized mortgage obligations |
|
6,219,133 |
|
— |
|
(198,714 |
) |
6,020,419 |
|
||||
|
Municipalities |
|
2,902,872 |
|
76,730 |
|
(903 |
) |
2,978,699 |
|
||||
|
|
|
$ |
36,586,272 |
|
$ |
109,159 |
|
$ |
(446,607 |
) |
$ |
36,248,824 |
|
There were no realized gains or losses on sales of available-for-sale securities during 2007 and 2006. There were no sales of available-for-sale securities during 2007 and 2006.
Securities carried at $28,930,614 and $36,048,824 at December 31, 2007 and 2006, respectively, were pledged to secure deposits of public funds.
F-19
OAK VALLEY COMMUNITY BANK
NOTES TO FINANCIAL STATEMENTS
NOTE 4 – LOANS
The Bank’s customers are primarily located in Stanislaus, San Joaquin, Tuolumne, Inyo, and Mono Counties. Approximately 54% of the Bank’s loans are commercial real estate loans. Approximately 12% of the Bank’s loans are for general commercial uses including professional, retail, and small business. Additionally, 21% of the Bank’s loans are for real estate construction for residential and commercial real estate. The remaining 13% are in agriculture, residential real estate, and consumer loans. Generally, real estate loans are collateralized by real property while commercial and other loans are collateralized by funds on deposit, business, or personal assets. Repayment of loans is generally expected from cash flows of the borrower. Pre-approved permanent financing generally pays off construction loans.
Loan totals were as follows:
F-20
OAK VALLEY COMMUNITY BANK
NOTES TO FINANCIAL STATEMENTS
NOTE 4 – LOANS (CONTINUED)
Changes in the allowance for loan losses were as follows:
|
|
|
YEARS ENDED DECEMBER 31, |
|
||||
|
|
|
2007 |
|
2006 |
|
||
|
|
|
|
|
|
|
||
|
Balance, beginning of year |
|
$ |
4,341,062 |
|
$ |
3,976,380 |
|
|
Provision charged to operations |
|
555,000 |
|
595,000 |
|
||
|
Loans charged off |
|
(401,510 |
) |
(14,922 |
) |
||
|
Loan recoveries |
|
4,275 |
|
2,287 |
|
||
|
Reclassification of reserve related to off-balance-sheet commitments |
|
7,926 |
|
(217,683 |
) |
||
|
|
|
|
|
|
|
||
|
Balance, end of year |
|
$ |
4,506,753 |
|
$ |
4,341,062 |
|
The total recorded investment in impaired loans at December 31, 2007, was $9,087,462. The average recorded investment in impaired loans was $1,411,000 during 2007. The recorded investment in impaired loans that have a specific reserve was $977,218 at December 31, 2007. The recorded investment in impaired loans that did not have a specific reserve was $8,476,508 at December 31, 2007. The total specific reserve related to impaired loans and included in the allowance for loan losses was $95,430. No interest income was recognized on impaired loans, while considered impaired during 2007. There were no loans impaired at December 31, 2006, and no loans were considered impaired during 2006. The total recorded investment in non-accrual loans was $9,087,462 at December 31, 2007. There were no non-accrual loans at December 31, 2006. In addition, there were no loans past due greater than 90 days and still accruing interest at December 31, 2007 or 2006.
At December 31, 2007 and 2006, loans carried at $261,861,840 and $258,504,620, respectively, were pledged as collateral on advances from the Federal Home Loan Bank.
F-21
OAK VALLEY COMMUNITY BANK
NOTES TO FINANCIAL STATEMENTS
NOTE 5 – PREMISES AND EQUIPMENT
Major classifications of premises and equipment are summarized as follows:
|
|
|
DECEMBER 31, |
|
||||
|
|
|
2007 |
|
2006 |
|
||
|
|
|
|
|
|
|
||
|
Land |
|
$ |
3,611,703 |
|
$ |
483,000 |
|
|
Building |
|
2,480,649 |
|
1,805,649 |
|
||
|
Leasehold improvements |
|
3,152,407 |
|
2,372,749 |
|
||
|
Furniture, fixtures, and equipment |
|
5,606,695 |
|
4,614,128 |
|
||
|
|
|
|
|
|
|
||
|
|
|
14,851,454 |
|
9,275,526 |
|
||
|
|
|
|
|
|
|
||
|
Less accumulated depreciation and amortization |
|
4,742,834 |
|
3,762,787 |
|
||
|
|
|
|
|
|
|
||
|
|
|
$ |
10,108,620 |
|
$ |
5,512,739 |
|
Depreciation expense was $1,022,739 and $767,284 for the years ended 2007 and 2006, respectively.
NOTE 6 – ACCRUED INTEREST AND OTHER ASSETS
Other assets are summarized as follows:
|
|
|
DECEMBER 31, |
|
||||
|
|
|
2007 |
|
2006 |
|
||
|
|
|
|
|
|
|
||
|
Interest income receivable on loans |
|
$ |
1,693,677 |
|
$ |
1,649,411 |
|
|
Interest income receivable on investments |
|
184,940 |
|
236,271 |
|
||
|
Net deferred tax asset |
|
2,237,414 |
|
2,423,684 |
|
||
|
Federal Reserve Bank stock |
|
669,500 |
|
573,200 |
|
||
|
Federal Home Loan Bank stock |
|
2,283,300 |
|
1,833,200 |
|
||
|
Cash surrender value of life insurance |
|
4,749,230 |
|
4,574,063 |
|
||
|
Investment in limited partnership |
|
377,790 |
|
— |
|
||
|
Prepaid expenses and other |
|
2,114,718 |
|
1,380,308 |
|
||
|
|
|
|
|
|
|
||
|
|
|
$ |
14,310,569 |
|
$ |
12,670,137 |
|
F-22
OAK VALLEY COMMUNITY BANK
NOTES TO FINANCIAL STATEMENTS
NOTE 7 – DEPOSITS
Deposit totals were as follows:
|
|
|
DECEMBER 31, |
|
||||
|
|
|
2007 |
|
2006 |
|
||
|
|
|
|
|
|
|
||
|
Demand |
|
$ |
68,150,833 |
|
$ |
56,339,290 |
|
|
NOW accounts |
|
54,496,524 |
|
54,748,343 |
|
||
|
Money market deposit accounts |
|
138,413,815 |
|
111,041,709 |
|
||
|
Savings |
|
16,438,359 |
|
22,763,042 |
|
||
|
Time, under $100,000 |
|
42,227,602 |
|
48,266,078 |
|
||
|
Time, $100,000 and over |
|
57,620,643 |
|
85,371,843 |
|
||
|
|
|
|
|
|
|
||
|
Total deposits |
|
$ |
377,347,776 |
|
$ |
378,530,305 |
|
Certificates of deposit issued and their remaining maturities at December 31, 2007, are as follows:
|
Year ending December 31, |
|
|
|
|
|
2008 |
|
$ |
96,168,046 |
|
|
2009 |
|
2,589,194 |
|
|
|
2010 |
|
782,632 |
|
|
|
2011 |
|
13,623 |
|
|
|
2012 |
|
294,750 |
|
|
|
|
|
|
|
|
|
|
|
$ |
99,848,245 |
|
NOTE 8 – FHLB ADVANCES
At December 31, 2007, the Bank had advances from the Federal Home Loan Bank (“FHLB”) totaling $31,000,000. Of the total advances outstanding, $10,000,000 represents term advances due in 2008, $3,000,000 represents term advances due in 2009, and $18,000,000 represents overnight open advances. The weighted average interest rate on these advances was 4.69% and interest payments are due monthly. Unused and available advances totaled $67,740,720 at December 31, 2007. Loans carried at $261,861,840 at December 31, 2007, were pledged as collateral on advances from the Federal Home Loan Bank.
At December 31, 2006, the Bank had advances from the FHLB totaling $33,600,000. Of the total advances outstanding, $12,000,000 is term advances due in 2007 and $21,600,000 is overnight open advances. The weighted average interest rate on these advances was 5.21% and interest payments are due monthly. Unused and available advances totaled $55,475,288 at December 31, 2006. Loans carried at $258,504,620 at December 31, 2006, were pledged as collateral on advances from the FHLB.
F-23
OAK VALLEY COMMUNITY BANK
NOTES TO FINANCIAL STATEMENTS
NOTE 9 – INTEREST ON DEPOSITS
Interest on deposits was comprised of the following:
|
|
|
YEARS ENDED DECEMBER 31, |
|
||||
|
|
|
2007 |
|
2006 |
|
||
|
|
|
|
|
|
|
||
|
Savings and other deposits |
|
$ |
5,636,857 |
|
$ |
5,210,451 |
|
|
Time deposits of $100,000 or more |
|
3,457,958 |
|
3,509,499 |
|
||
|
Other time deposits |
|
2,132,750 |
|
1,914,893 |
|
||
|
|
|
|
|
|
|
||
|
|
|
$ |
11,227,565 |
|
$ |
10,634,843 |
|
NOTE 10 – INCOME TAXES
The provision for income taxes consists of the following:
|
|
|
YEARS ENDED DECEMBER 31, |
|
||||
|
|
|
2007 |
|
2006 |
|
||
|
|
|
|
|
|
|
||
|
Current |
|
|
|
|
|
||
|
Federal |
|
$ |
1,739,000 |
|
$ |
2,089,500 |
|
|
State |
|
530,000 |
|
718,000 |
|
||
|
|
|
|
|
|
|
||
|
|
|
2,269,000 |
|
2,807,500 |
|
||
|
Deferred |
|
|
|
|
|
||
|
Federal |
|
65,970 |
|
(285,325 |
) |
||
|
State |
|
300 |
|
(42,000 |
) |
||
|
|
|
|
|
|
|
||
|
|
|
66,270 |
|
(327,325 |
) |
||
|
|
|
|
|
|
|
||
|
|
|
$ |
2,335,270 |
|
$ |
2,480,175 |
|
F-24
OAK VALLEY COMMUNITY BANK
NOTES TO FINANCIAL STATEMENTS
NOTE 10 – INCOME TAXES (CONTINUED)
The components of the Bank’s deferred tax assets and liabilities (included in accrued interest and other assets on the balance sheet), is shown below:
|
|
|
DECEMBER 31, |
|
||||
|
|
|
2007 |
|
2006 |
|
||
|
|
|
|
|
|
|
||
|
Deferred tax assets: |
|
|
|
|
|
||
|
Deferred loan fees |
|
$ |
400 |
|
$ |
1,000 |
|
|
Allowance for loan losses |
|
1,765,414 |
|
1,859,684 |
|
||
|
State income tax |
|
200,000 |
|
223,000 |
|
||
|
Accumulated depreciation |
|
— |
|
26,000 |
|
||
|
Accrued vacation |
|
31,000 |
|
22,000 |
|
||
|
Accrued salary continuation liability |
|
280,000 |
|
237,000 |
|
||
|
Split Dollar Life Insurance |
|
108,000 |
|
99,000 |
|
||
|
Stock Options |
|
2,600 |
|
1,000 |
|
||
|
Nonaccrual loans |
|
113,000 |
|
— |
|
||
|
Unrealized loss on securities available for sale |
|
13,000 |
|
133,000 |
|
||
|
|
|
|
|
|
|
||
|
|
|
2,513,414 |
|
2,601,684 |
|
||
|
Deferred tax liabilities: |
|
|
|
|
|
||
|
Prepaid expenses |
|
(51,000 |
) |
(62,000 |
) |
||
|
FHLB dividends |
|
(167,000 |
) |
(116,000 |
) |
||
|
Accumulated depreciation |
|
(58,000 |
) |
— |
|
||
|
|
|
|
|
|
|
||
|
|
|
(276,000 |
) |
(178,000 |
) |
||
|
|
|
|
|
|
|
||
|
Net deferred income tax asset |
|
$ |
2,237,414 |
|
$ |
2,423,684 |
|
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.
F-25
OAK VALLEY COMMUNITY BANK
NOTES TO FINANCIAL STATEMENTS
NOTE 11 – STOCK OPTION PLAN
During 1991 the Bank’s Board of Directors approved a fixed stock option plan (the “Plan”) under which incentive and non-qualified stock options may be granted to key employees and directors, respectively, to purchase up to thirty-five percent of the authorized and un-issued common stock of the Bank at a price equal to the fair market 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. The Plan was ratified by the shareholders at the Bank’s annual meeting in April 1992.
A summary of the status of the Bank’s fixed stock option plan and changes during the year are presented below.
F-26
OAK VALLEY COMMUNITY BANK
NOTES TO FINANCIAL STATEMENTS
NOTE 11 – STOCK OPTION PLAN (CONTINUED)
|
|
|
DECEMBER 31, |
|
||||
|
|
|
2007 |
|
2006 |
|
||
|
|
|
|
|
|
|
||
|
Weighted-average fair value of options granted during the year |
|
$ |
4.18 |
|
$ |
6.73 |
|
|
|
|
|
|
|
|
||
|
Intrinsic value of options exercised |
|
314,048 |
|
1,115,583 |
|
||
|
|
|
|
|
|
|
||
|
Options exercisable at year end: |
|
357,913 |
|
331,918 |
|
||
|
|
|
|
|
|
|
||
|
Weighted average exercise price |
|
$ |
5.52 |
|
$ |
4.77 |
|
|
Intrinsic value |
|
1,155,012 |
|
2,748,814 |
|
||
|
Weighted average remaining contractual life |
|
4.36 years |
|
4.85 years |
|
||
|
|
|
|
|
|
|
||
|
Options outstanding at year end: |
|
506,564 |
|
540,420 |
|
||
|
|
|
|
|
|
|
||
|
Weighted average exercise price |
|
$ |
6.96 |
|
$ |
6.23 |
|
|
Intrinsic value |
|
1,210,741 |
|
3,525,661 |
|
||
|
Weighted average remaining contractual life |
|
5.22 years |
|
5.94 years |
|
||
Tax benefits totaling $1,600 were recorded in the statement of earnings during 2007 related to the vesting of non-qualified stock options. As of December 31, 2007, there was $325,205 of total unrecognized compensation cost related to non-vested stock options which is expected to be recognized over a weighted-average period of 1.92 years.
For the year ended December 31, 2007, the Bank received $198,957 from the exercise of stock options and received income tax benefits of $116,303 related to the exercise of non-qualified employee stock options and disqualifying dispositions in the exercise of incentive stock options.
F-27
OAK VALLEY COMMUNITY BANK
NOTES TO FINANCIAL STATEMENTS
NOTE 12 – EARNINGS PER SHARE
The Bank computes earnings per share (“EPS”) in accordance with SFAS No. 128, Earnings per Share. SFAS No. 128 requires the presentation of basic EPS, which does not consider the effect of common stock equivalents and diluted EPS, which considers all dilutive common stock equivalents.
|
|
|
YEAR ENDED DECEMBER 31, 2007 |
|
||||||
|
|
|
Income |
|
Shares |
|
Per-Share |
|
||
|
|
|
(Numerator) |
|
(Denominator) |
|
Amount |
|
||
|
|
|
|
|
|
|
|
|
||
|
Net earnings |
|
$ |
3,925,121 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||
|
Basic EPS: |
|
|
|
|
|
|
|
||
|
Net earnings available to common shareholders |
|
$ |
3,925,121 |
|
7,364,681 |
|
$ |
0.53 |
|
|
|
|
|
|
|
|
|
|
||
|
Effect of dilutive securities: |
|
|
|
|
|
|
|
||
|
Stock options |
|
— |
|
159,824 |
|
|
|
||
|
|
|
|
|
|
|
|
|
||
|
Diluted EPS: |
|
|
|
|
|
|
|
||
|
Net earnings available to common shareholders plus assumed conversions |
|
$ |
3,925,121 |
|
7,524,505 |
|
$ |
0.52 |
|
Options to purchase 104,750 shares of common stock in prices ranging from $10.85 to $15.67 were outstanding during 2007. They were not included in the computation of diluted EPS because the options’ exercise price was greater than the average market price of the common shares. These options begin to expire in 2015.
F-28
OAK VALLEY COMMUNITY BANK
NOTES TO FINANCIAL STATEMENTS
NOTE 12 – EARNINGS PER SHARE (CONTINUED)
|
|
|
YEAR ENDED DECEMBER 31, 2006 |
|
||||||
|
|
|
Income |
|
Shares |
|
Per-Share |
|
||
|
|
|
(Numerator) |
|
(Denominator) |
|
Amount |
|
||
|
|
|
|
|
|
|
|
|
||
|
Net earnings |
|
$ |
3,725,774 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||
|
Basic EPS: |
|
|
|
|
|
|
|
||
|
Net earnings available to common shareholders |
|
$ |
3,725,774 |
|
7,062,841 |
|
$ |
0.53 |
|
|
|
|
|
|
|
|
|
|
||
|
Effect of dilutive securities: |
|
|
|
|
|
|
|
||
|
Stock options |
|
— |
|
241,884 |
|
|
|
||
|
|
|
|
|
|
|
|
|
||
|
Diluted EPS: |
|
|
|
|
|
|
|
||
|
Net earnings available to common shareholders plus assumed conversions |
|
$ |
3,725,774 |
|
7,304,725 |
|
$ |
0.51 |
|
Options to purchase 14,500 shares of common stock in prices ranging from $14.75 to $15.67 a share were outstanding during 2006. They were not included in the computation of diluted EPS because the options’ exercise price was greater than the average market price of the common shares. These options expire in October 2016.
NOTE 13 – COMMITMENTS AND CONTINGENCIES
The Bank 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, 2007 and 2006, was $627,037 and $513,928, respectively.
At December 31, 2007, the future minimum commitments under these operating leases are as follows:
|
Year ending December 31, |
|
|
|
|
|
2008 |
|
$ |
861,728 |
|
|
2009 |
|
818,313 |
|
|
|
2010 |
|
811,986 |
|
|
|
2011 |
|
784,286 |
|
|
|
2012 |
|
794,542 |
|
|
|
Thereafter |
|
4,738,204 |
|
|
|
|
|
$ |
8,809,059 |
|
F-29
OAK VALLEY COMMUNITY BANK
NOTES TO FINANCIAL STATEMENTS
NOTE 14 – FINANCIAL INSTRUMENTS
The Bank 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 Bank has in particular classes of financial instruments.
The Bank’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 Bank uses the same credit policies in making commitments and conditional obligations as it does for on-balance-sheet instruments.
Financial instruments whose contract amounts represent credit risk:
|
|
|
Contract |
|
|
|
|
|
Amount |
|
|
|
|
|
|
|
|
|
Undisbursed loan commitments |
|
$ |
73,887,970 |
|
|
Checking reserve |
|
282,607 |
|
|
|
Equity lines |
|
6,093,453 |
|
|
|
Standby letters of credit |
|
1,137,111 |
|
|
|
|
|
$ |
81,401,141 |
|
Commitments to extend credit 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 Bank evaluates each customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Bank upon extension of credit, is based on management’s credit evaluation. Collateral held varies but may include accounts receivable, inventory, property, plant, and equipment, and income-producing commercial properties.
Standby letters of credit are conditional commitments issued by the Bank 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.
F-30
OAK VALLEY COMMUNITY BANK
NOTES TO FINANCIAL STATEMENTS
NOTE 14 – FINANCIAL INSTRUMENTS (CONTINUED)
The estimated fair values of the Bank’s financial instruments at December 31, 2007, are as follows:
|
|
|
|
|
Estimated |
|
||
|
|
|
Carrying |
|
Fair |
|
||
|
|
|
Amount |
|
Value |
|
||
|
Financial assets: |
|
|
|
|
|
||
|
|
|
|
|
|
|
||
|
Cash and cash equivalents |
|
$ |
14,202,951 |
|
$ |
14,202,951 |
|
|
Securities available for sale |
|
33,372,624 |
|
33,372,624 |
|
||
|
Loans |
|
387,809,129 |
|
394,349,356 |
|
||
|
Accrued interest receivable |
|
1,878,617 |
|
1,878,617 |
|
||
|
|
|
|
|
|
|
||
|
Financial liabilities: |
|
|
|
|
|
||
|
|
|
|
|
|
|
||
|
Deposits |
|
(377,347,776 |
) |
(377,536,730 |
) |
||
|
FHLB advance |
|
(31,000,000 |
) |
(31,080,813 |
) |
||
|
Accrued interest payable |
|
(1,816,645 |
) |
(1,816,645 |
) |
||
|
|
|
|
|
|
|
||
|
Off-balance-sheet assets (liabilities): |
|
|
|
|
|
||
|
|
|
|
|
|
|
||
|
Commitments and standby letters of credit |
|
|
|
(814,000 |
) |
||
F-31
OAK VALLEY COMMUNITY BANK
NOTES TO FINANCIAL STATEMENTS
NOTE 14 – FINANCIAL INSTRUMENTS (CONTINUED)
The estimated fair values of the Bank’s financial instruments at December 31, 2006, were as follows:
|
|
|
|
|
Estimated |
|
||
|
|
|
Carrying |
|
Fair |
|
||
|
|
|
Amount |
|
Value |
|
||
|
Financial assets: |
|
|
|
|
|
||
|
|
|
|
|
|
|
||
|
Cash and cash equivalents |
|
$ |
27,819,177 |
|
$ |
27,819,177 |
|
|
Securities available-for-sale |
|
36,248,824 |
|
36,248,824 |
|
||
|
Loans |
|
378,393,148 |
|
368,311,925 |
|
||
|
Accrued interest receivable |
|
1,885,682 |
|
1,885,682 |
|
||
|
|
|
|
|
|
|
||
|
Financial liabilities: |
|
|
|
|
|
||
|
|
|
|
|
|
|
||
|
Deposits |
|
(378,530,305 |
) |
(378,536,262 |
) |
||
|
FHLB advance |
|
(33,600,000 |
) |
(33,586,869 |
) |
||
|
Accrued interest payable |
|
(2,151,486 |
) |
(2,151,486 |
) |
||
|
|
|
|
|
|
|
||
|
Off-balance-sheet assets (liabilities): |
|
|
|
|
|
||
|
|
|
|
|
|
|
||
|
Commitments and standby letters of credit |
|
— |
|
(854,000 |
) |
||
F-32
OAK VALLEY COMMUNITY BANK
NOTES TO FINANCIAL STATEMENTS
NOTE 15 – RELATED PARTY TRANSACTIONS
The Bank, 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 Bank. Loans to directors, officers, shareholders, and affiliates are summarized below:
|
|
|
YEARS ENDED DECEMBER 31, |
|
||||
|
|
|
2007 |
|
2006 |
|
||
|
|
|
|
|
|
|
||
|
Aggregate amount outstanding, beginning of year |
|
$ |
7,307,946 |
|
$ |
11,518,551 |
|
|
|
|
|
|
|
|
||
|
New loans or advances during year |
|
2,793,291 |
|
3,819,815 |
|
||
|
Repayments during year |
|
(4,315,445 |
) |
(8,030,420 |
) |
||
|
|
|
|
|
|
|
||
|
Aggregate amount outstanding, end of year |
|
$ |
5,785,792 |
|
$ |
7,307,946 |
|
Related party deposits totaled $9,367,808 and $9,727,110 at December 31, 2007 and 2006, respectively.
NOTE 16 – PROFIT SHARING PLAN
The profit sharing plan to which both the Bank and eligible employees contribute was established in 1995. Bank contributions are voluntary and at the discretion of the Board of Directors. Contributions were approximately $326,000 and, $251,000 for 2007 and 2006, respectively.
NOTE 17 – RESTRICTIONS ON RETAINED EARNINGS
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 Institutions, 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-33
OAK VALLEY COMMUNITY BANK
NOTES TO FINANCIAL STATEMENTS
NOTE 18 - OTHER POST-RETIREMENT BENEFIT PLANS
The Bank has awarded certain officers a salary continuation plan (the “Plan”). Under the Plan, the participants will be provided with a fixed annual retirement benefit for 20 years after retirement. The 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 December 2001 the Bank awarded its directors a director retirement plan (“DRP”). Under the DRP, the participants will be provided with a fixed annual retirement benefit for ten years after retirement. The 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. At December 31, 2007 and 2006, $680,844 and $576,098, respectively, has been accrued to date, based on a discounted cash flow using a discount rate of 6%, and is included in other liabilities.
The Bank entered into split-dollar life insurance agreements with certain officers. 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 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 was $4,749,230 and $4,574,063 at December 31, 2007 and 2006, respectively. The cash surrender value of the life insurance policies is included in other assets (Note 6).
F-34
OAK VALLEY COMMUNITY BANK
NOTES TO FINANCIAL STATEMENTS
NOTE 19 – REGULATORY MATTERS
The Bank is subject to various regulatory capital requirements administered by federal and state banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory – and possibly additional discretionary – actions by regulators that, if undertaken, could have a direct material effect on the Bank’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of the Bank’s assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. The Bank’s capital amounts and classifications are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy require the Bank to maintain minimum amounts and ratios (set forth in the table on the next page) of total and Tier I capital (as defined in the regulations) to risk-weighted assets (as defined), and of Tier I capital (as defined) to average assets (as defined). Management believes, as of December 31, 2007, that the Bank meets all capital adequacy requirements to which it is subject.
As of December 31, 2007, the most recent notification from the Federal Reserve Bank categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized, the Bank must maintain minimum total risk-based, Tier I risk-based, and Tier I leverage ratios as set forth in the following table. There are no conditions or events since notification that management believes have changed the Bank’s category.
F-35
OAK VALLEY COMMUNITY BANK
NOTES TO FINANCIAL STATEMENTS
NOTE 19 – REGULATORY MATTERS (CONTINUED)
The Bank’s actual capital amounts and ratios at December 31, 2007 and 2006, are presented in the following table.
|
|
|
|
|
|
|
|
|
|
|
To be well |
|
|||||
|
|
|
|
|
|
|
|
|
|
|
capitalized under |
|
|||||
|
|
|
|
|
|
|
For capital |
|
prompt corrective |
|
|||||||
|
|
|
Actual |
|
adequacy purposes |
|
action provisions |
|
|||||||||
|
|
|
Amount |
|
Ratio |
|
Amount |
|
Ratio |
|
Amount |
|
Ratio |
|
|||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||
|
As of December 31, 2007: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|||
|
Total capital (to Risk- Weighted Assets) |
|
$ |
47,311,000 |
|
11.1 |
% |
$ |
33,994,000 |
|
> 8.0% |
|
$ |
4,249,300 |
|
> 10.0% |
|
|
Tier I capital (to Risk- Weighted Assets) |
|
$ |
42,594,000 |
|
10.0 |
% |
$ |
16,997,000 |
|
> 4.0% |
|
$ |
25,496,000 |
|
> 6.0% |
|
|
Tier I capital (to Average Assets) |
|
$ |
42,594,000 |
|
9.4 |
% |
$ |
18,092,000 |
|
> 4.0% |
|
$ |
22,614,000 |
|
> 5.0% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||
|
As of December 31, 2006: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|||
|
Total capital (to Risk- Weighted Assets) |
|
$ |
39,188,000 |
|
9.5 |
% |
$ |
32,915,000 |
|
> 8.0% |
|
$ |
41,143,000 |
|
> 10.0% |
|
|
Tier I capital (to Risk- Weighted Assets) |
|
$ |
34,629,000 |
|
8.4 |
% |
$ |
16,457,000 |
|
> 4.0% |
|
$ |
24,686,000 |
|
> 6.0% |
|
|
Tier I capital (to Average Assets) |
|
$ |
34,629,000 |
|
7.9 |
% |
$ |
17,465,000 |
|
> 4.0% |
|
$ |
21,831,000 |
|
> 5.0% |
|
F-36
OAK VALLEY COMMUNITY BANK
CONDENSED BALANCE SHEETS (UNAUDITED)
|
|
|
MARCH 31, |
|
DECEMBER 31, |
|
||
|
|
|
2008 |
|
2007 |
|
||
|
ASSETS |
|
|
|
|
|
||
|
|
|
|
|
|
|
||
|
Cash and due from banks |
|
$ |
11,483,949 |
|
$ |
10,397,951 |
|
|
Federal funds sold |
|
2,620,000 |
|
3,805,000 |
|
||
|
|
|
|
|
|
|
||
|
Cash and cash equivalents |
|
14,103,949 |
|
14,202,951 |
|
||
|
|
|
|
|
|
|
||
|
Securities available for sale |
|
34,613,545 |
|
33,372,624 |
|
||
|
Loans, net |
|
382,389,377 |
|
382,264,026 |
|
||
|
Bank premises and equipment, net |
|
10,716,636 |
|
10,108,620 |
|
||
|
Other real estate owned |
|
2,850,237 |
|
— |
|
||
|
Accrued interest and other assets |
|
18,370,608 |
|
14,310,569 |
|
||
|
|
|
|
|
|
|
||
|
|
|
$ |
463,044,352 |
|
$ |
454,258,790 |
|
|
|
|
|
|
|
|
||
|
LIABILITIES AND SHAREHOLDERS’ EQUITY |
|
|
|
|
|
||
|
|
|
|
|
|
|
||
|
Deposits |
|
$ |
362,760,483 |
|
$ |
377,347,776 |
|
|
Accrued interest and other liabilities |
|
2,981,466 |
|
3,549,624 |
|
||
|
FHLB advances |
|
54,000,000 |
|
31,000,000 |
|
||
|
|
|
|
|
|
|
||
|
Total liabilities |
|
419,741,949 |
|
411,897,400 |
|
||
|
|
|
|
|
|
|
||
|
Commitments and contingencies (Notes 13 and 14) |
|
|
|
|
|
||
|
|
|
|
|
|
|
||
|
Shareholders’ equity |
|
|
|
|
|
||
|
Preferred stock, no par value; 10,000,000 shares authorized, none issued or outstanding |
|
— |
|
— |
|
||
|
Common stock, no par value; 10,000,000 shares authorized and 7,611,377 shares and 7,607,780 shares issued and outstanding at March 31, 2008 and December 31, 2007, respectively |
|
22,855,314 |
|
22,843,171 |
|
||
|
Additional paid-in capital |
|
1,781,089 |
|
1,748,380 |
|
||
|
Retained earnings |
|
18,428,984 |
|
17,723,646 |
|
||
|
Accumulated other comprehensive income, net of tax |
|
237,016 |
|
46,193 |
|
||
|
|
|
|
|
|
|
||
|
Total shareholders’ equity |
|
43,302,403 |
|
42,361,390 |
|
||
|
|
|
|
|
|
|
||
|
|
|
$ |
463,044,352 |
|
$ |
454,258,790 |
|
See accompanying notes
F-39
OAK VALLEY COMMUNITY BANK
CONDENSED STATEMENTS OF EARNINGS (UNAUDITED)
|
|
|
FOR THE THREE MONTHS ENDED
|
|
||||
|
|
|
2008 |
|
2007 |
|
||
|
INTEREST INCOME |
|
|
|
|
|
||
|
Interest and fees on loans |
|
$ |
6,934,131 |
|
$ |
7,513,229 |
|
|
Interest on securities available for sale |
|
394,682 |
|
385,973 |
|
||
|
Interest on federal funds sold |
|
5,104 |
|
26,599 |
|
||
|
Interest on deposits with banks |
|
718 |
|
1,670 |
|
||
|
|
|
7,334,635 |
|
7,927,471 |
|
||
|
INTEREST EXPENSE |
|
|
|
|
|
||
|
Deposits |
|
2,157,558 |
|
2,737,057 |
|
||
|
FHLB advances |
|
361,672 |
|
568,312 |
|
||
|
Federal funds purchased |
|
6,372 |
|
20,275 |
|
||
|
|
|
2,525,602 |
|
3,325,644 |
|
||
|
Net interest income |
|
4,809,033 |
|
4,601,827 |
|
||
|
PROVISION FOR LOAN LOSSES |
|
145,000 |
|
170,000 |
|
||
|
Net interest income after provision for loan losses |
|
4,664,033 |
|
4,431,827 |
|
||
|
OTHER INCOME |
|
|
|
|
|
||
|
Service charges on deposits |
|
302,927 |
|
265,447 |
|
||
|
Earnings on cash surrender value of life insurance |
|
81,276 |
|
43,615 |
|
||
|
Mortgage commissions |
|
49,730 |
|
100,283 |
|
||
|
Other |
|
179,650 |
|
121,149 |
|
||
|
|
|
613,583 |
|
530,494 |
|
||
|
OTHER EXPENSES |
|
|
|
|
|
||
|
Salaries and employee benefits |
|
2,446,427 |
|
2,077,998 |
|
||
|
Occupancy expenses |
|
669,553 |
|
498,018 |
|
||
|
Data processing fees |
|
178,559 |
|
108,130 |
|
||
|
Telephone expenses |
|
71,498 |
|
61,933 |
|
||
|
Other operating expenses |
|
690,533 |
|
564,696 |
|
||
|
|
|
4,056,570 |
|
3,310,775 |
|
||
|
Earnings before provision for income taxes |
|
1,221,046 |
|
1,651,546 |
|
||
|
PROVISION FOR INCOME TAXES |
|
445,249 |
|
650,000 |
|
||
|
NET EARNINGS |
|
$ |
775,797 |
|
$ |
1,001,546 |
|
|
NET EARNINGS PER SHARE |
|
$ |
0.10 |
|
$ |
0.14 |
|
|
NET EARNINGS PER SHARE – assuming dilution |
|
$ |
0.10 |
|
$ |
0.14 |
|
See accompanying notes
F-40
OAK VALLEY COMMUNITY BANK
CONDENSED STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY (UNAUDITED)
|
|
|
YEAR ENDED DECEMBER 31, 2007 AND THE THREE MONTH PERIOD ENDED MARCH 31, 2008 |
|
||||||||||||||||||
|
|
|
Common Stock |
|
Additional
|
|
Retained |
|
Comprehensive |
|
Accumulated
|
|
Total
|
|
||||||||
|
|
|
Shares |
|
Amount |
|
Capital |
|
Earnings |
|
Income |
|
Income |
|
Equity |
|
||||||
|
Balances, January 1, 2007 |
|
7,103,243 |
|
$ |
17,648,475 |
|
$ |
1,502,004 |
|
$ |
15,243,222 |
|
|
|
$ |
(204,772 |
) |
$ |
24,188,929 |
|
|
|
Stock offering |
|
456,431 |
|
$ |
5,020,739 |
|
$ |
— |
|
$ |
— |
|
|
|
$ |
— |
|
$ |
5,020,739 |
|
|
|
Stock offering expense |
|
|
|
(25,000 |
) |
|
|
|
|
|
|
|
|
(25,000 |
) |
||||||
|
Stock options exercised |
|
48,106 |
|
198,957 |
|
|
|
|
|
|
|
|
|
198,957 |
|
||||||
|
Tax benefit of stock options exercised |
|
— |
|
— |
|
116,303 |
|
— |
|
|
|
— |
|
116,303 |
|
||||||
|
Cash dividends ($0.19 per share) |
|
— |
|
— |
|
— |
|
(1,444,697 |
) |
|
|
— |
|
(1,444,697 |
) |
||||||
|
Stock based compensation |
|
|
|
|
|
130,073 |
|
|
|
|
|
|
|
130,073 |
|
||||||
|
Comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
|
Net changes in unrealized gain on available-for-sale securities (net of income tax of $163,169) |
|
— |
|
— |
|
— |
|
— |
|
$ |
250,965 |
|
|
|
250,965 |
|
|||||
|
Net earnings |
|
— |
|
— |
|
— |
|
3,925,121 |
|
3,925,121 |
|
— |
|
3,925,121 |
|
||||||
|
Comprehensive income |
|
|
|
|
|
|
|
|
|
$ |
4,176,086 |
|
|
|
|
|
|||||
|
Balances, December 31, 2007 |
|
7,607,780 |
|
$ |
22,843,171 |
|
$ |
1,748,380 |
|
$ |
17,723,646 |
|
|
|
$ |
46,193 |
|
$ |
42,361,390 |
|
|
|
Stock options exercised |
|
3,597 |
|
12,143 |
|
|
|
|
|
|
|
|
|
12,143 |
|
||||||
|
Stock based compensation |
|
|
|
|
|
32,709 |
|
|
|
|
|
|
|
32,709 |
|
||||||
|
Cumulative effect of adopting EITF 06-04 |
|
|
|
|
|
|
|
(70,459 |
) |
|
|
|
|
(70,459 |
) |
||||||
|
Comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
|
Net changes in unrealized gain on available-for-sale securities (net of income tax of $124,067) |
|
— |
|
— |
|
— |
|
— |
|
$ |
190,823 |
|
|
|
190,823 |
|
|||||
|
Net earnings |
|
— |
|
— |
|
— |
|
775,797 |
|
775,797 |
|
— |
|
775,797 |
|
||||||
|
Comprehensive income |
|
|
|
|
|
|
|
|
|
$ |
966,620 |
|
|
|
|
|
|||||
|
Balances, March 31, 2008 |
|
7,611,377 |
|
$ |
22,855,314 |
|
$ |
1,781,089 |
|
$ |
18,428,984 |
|
|
|
$ |
237,016 |
|
$ |
43,302,403 |
|
|
F-41
OAK VALLEY COMMUNITY BANK
CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)
|
|
|
FOR THE THREE MONTHS
|
|
||||
|
|
|
2008 |
|
2007 |
|
||
|
CASH FLOWS FROM OPERATING ACTIVITIES: |
|
|
|
|
|
||
|
Net earnings |
|
$ |
775,797 |
|
$ |
1,001,546 |
|
|
Adjustments to reconcile net earnings to net cash from operating activities: |
|
|
|
|
|
||
|
Provision for loan losses |
|
145,000 |
|
170,000 |
|
||
|
Depreciation, amortization, and accretion, net |
|
282,299 |
|
248,020 |
|
||
|
Stock-based compensation expense |
|
32,709 |
|
33,285 |
|
||
|
Excess tax benefits from stock-based payment arrangements |
|
— |
|
(56,453 |
) |
||
|
Loss (Gain) on sale of premises and equipment |
|
1,434 |
|
— |
|
||
|
(Increase) decrease in accrued interest receivable |
|
(67,544 |
) |
(210,753 |
) |
||
|
(Decrease) increase in accrued interest payable and other liabilities |
|
(688,000 |
) |
(5,010,767 |
) |
||
|
Decrease (increase) in other assets |
|
672,821 |
|
(439,985 |
) |
||
|
Net cash from operating activities |
|
1,154,516 |
|
(4,265,107 |
) |
||
|
|
|
|
|
|
|
||
|
CASH FLOWS FROM INVESTING ACTIVITIES: |
|
|
|
|
|
||
|
Purchases of securities available for sale |
|
(2,013,739 |
) |
— |
|
||
|
Proceeds from maturities, calls, and principal paydowns of securities available for sale |
|
1,089,808 |
|
910,248 |
|
||
|
Net increase in loans |
|
(3,120,588 |
) |
(9,190,277 |
) |
||
|
Purchase of BOLI policies |
|
(4,740,000 |
) |
— |
|
||
|
Net purchases of premises and equipment |
|
(893,849 |
) |
(3,819,154 |
) |
||
|
Net cash from investing activities |
|
(9,678,368 |
) |
(12,099,183 |
) |
||
|
|
|
|
|
|
|
||
|
CASH FLOWS FROM FINANCING ACTIVITIES: |
|
|
|
|
|
||
|
FHLB advanced funds |
|
97,645,400 |
|
47,524,700 |
|
||
|
FHLB payments |
|
(74,645,400 |
) |
(20,000,000 |
) |
||
|
Net increase (decrease) in demand deposits and savings accounts |
|
1,634,997 |
|
(7,858,062 |
) |
||
|
Net (decrease) increase in time deposits |
|
(16,222,290 |
) |
(18,585,963 |
) |
||
|
Excess tax benefits from stock-based payment arrangements |
|
— |
|
56,453 |
|
||
|
Proceeds from sale of common stock and exercise of stock options |
|
12,143 |
|
88,403 |
|
||
|
Net cash from financing activities |
|
8,424,850 |
|
1,225,531 |
|
||
|
|
|
|
|
|
|
||
|
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS |
|
(99,002 |
) |
(15,138,759 |
) |
||
|
|
|
|
|
|
|
||
|
CASH AND CASH EQUIVALENTS, beginning of period |
|
14,202,951 |
|
27,819,177 |
|
||
|
|
|
|
|
|
|
||
|
CASH AND CASH EQUIVALENTS, end of period |
|
$ |
14,103,949 |
|
$ |
12,680,418 |
|
|
|
|
|
|
|
|
||
|
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: |
|
|
|
|
|
||
|
Cash paid during the year for: |
|
|
|
|
|
||
|
Interest |
|
$ |
3,087,895 |
|
$ |
3,841,742 |
|
See accompanying notes
F-42
OAK VALLEY COMMUNITY BANK
CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)
NON-CASH INVESTING AND FINANCING ACTIVITIES:
During the first quarter of 2008, the Bank realized an increase in the unrealized gain on available-for-sale securities of $314,890. As a result, the deferred tax asset was decreased by $125,956 and equity was increased by $188,934.
During the first quarter of 2008, the Bank transferred $2,850,237 from the loan portfolio to Other Real Estate Owned due to a foreclosure.
During the first quarter of 2008, the Bank adopted EITF 06-04 and therefore recorded $119,842 in other liabilities. As a result, the deferred tax asset was increased by $49,383 and equity was decreased by $70,459.
During the first quarter of 2007, the Bank realized a decrease in the unrealized loss on available-for-sale securities of $101,176. As a result, the deferred tax asset was decreased by $40,470 and equity was increased by $60,706.
See accompanying notes
F-43
OAK VALLEY COMMUNITY BANK
NOTE 1 – BASIS OF PRESENTATION
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, or 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 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, 2008 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 annual report for the year ended December 31, 2007.
NOTE 2 – CURRENT ACCOUNTING PRONOUNCEMENTS
In September 2006, the Financial Accounting Standards Board, or FASB, issued Statement No. 157, “Fair Value Measurements” (SFAS 157). SFAS No. 157 defines the fair value, establishes a framework for measuring fair value and expands disclosure of fair value measurements. SFAS No. 157 applies under other accounting pronouncements that require or permit fair value measurements and accordingly, does not require any new fair value measurements. We adopted SFAS No. 157 as of January 1, 2008 and the adoption did not have a material impact on the financial condition or results of operations of the Company.
In February 2007, the FASB issued SFAS 159, “The Fair Value Option for Financial Assets and Financial Liabilities - Including an Amendment of FASB Statement No. 115”. SFAS 159 permits an entity to choose to measure many financial instruments and certain other items at fair value. Most of the provisions of SFAS 159 are elective; however, the amendment to SFAS 115, “Accounting for Certain Investments in Debt and Equity Securities”, applies to all entities with available for sale or trading securities. For financial instruments elected to be accounted for at fair value, an entity will report the unrealized gains and losses in earnings. We adopted SFAS No. 159 on January 1, 2008. We chose not to elect the option to measure the fair value of eligible financial assets and liabilities.
In September 2006 the Emerging Issues Task Force (“EITF”) ratified EITF issue 06-04, “Accounting for Deferred Compensation and Postretirement Benefit Aspect of Endorsement Split-Dollar Life Insurance Arrangements”. This ruling provides that the Company should recognize a liability for future benefits based on the agreements held with employees. The issue was effective for fiscal years beginning after December 17, 2007. The Company adopted this pronouncement effective January 1, 2008 and has recorded an initial liability of $119,842 with an offsetting adjustment to retained earnings of $70,459 and deferred taxes of $49,383, pursuant to this accounting pronouncement.
F-44
OAK VALLEY COMMUNITY BANK
NOTES TO FINANCIAL STATEMENTS
NOTE 3 – LOANS
Loan totals were as follows:
|
|
|
MARCH 31, |
|
DECEMBER 31, |
|
||
|
|
|
2008 |
|
2007 |
|
||
|
Loans |
|
|
|
|
|
||
|
Commercial real estate |
|
$ |
218,693,450 |
|
$ |
208,309,072 |
|
|
Commercial |
|
39,904,205 |
|
45,496,794 |
|
||
|
Real estate construction |
|
82,136,509 |
|
83,173,030 |
|
||
|
Agriculture |
|
27,579,928 |
|
31,429,970 |
|
||
|
Residential real estate and consumer |
|
19,332,737 |
|
19,400,263 |
|
||
|
|
|
|
|
|
|
||
|
Total loans |
|
387,646,829 |
|
387,809,129 |
|
||
|
|
|
|
|
|
|
||
|
Less: |
|
|
|
|
|
||
|
Deferred loan fees and costs, net |
|
(1,032,935 |
) |
(1,038,350 |
) |
||
|
Allowance for loan losses |
|
(4,224,517 |
) |
(4,506,753 |
) |
||
|
|
|
|
|
|
|
||
|
Net loans |
|
$ |
382,389,377 |
|
$ |
382,264,026 |
|
Changes in the allowance for loan losses were as follows for the period ending:
|
|
|
MARCH 31, |
|
DECEMBER 31, |
|
||
|
|
|
2008 |
|
2007 |
|
||
|
|
|
|
|
|
|
||
|
Balance, beginning of period |
|
$ |
4,506,753 |
|
$ |
4,341,062 |
|
|
Provision charged to operations |
|
145,000 |
|
555,000 |
|
||
|
Loans charged off |
|
(416,731 |
) |
(401,510 |
) |
||
|
Loan recoveries |
|
1,425 |
|
4,275 |
|
||
|
Reclassification of reserve related to off-balance-sheet commitments |
|
(11,930 |
) |
7,926 |
|
||
|
|
|
|
|
|
|
||
|
Balance, end of period |
|
$ |
4,224,517 |
|
$ |
4,506,753 |
|
F-45
OAK VALLEY COMMUNITY BANK
NOTES TO FINANCIAL STATEMENTS
NOTE 3 – LOANS (CONTINUED)
The total recorded investment in impaired loans at March 31, 2008, was $4,890,330. The total recorded investment in impaired loans at December 31, 2007, was $9,087,462. No interest income was recognized on impaired loans, while considered impaired during 2008 and 2007.
NOTE 4 – OTHER REAL ESTATE OWNED
As of March 31, 2008, a construction loan with an outstanding balance of $2.85 million was reclassified from to other real estate owned.
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. 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 carrying amount at foreclosure. Revenues and expenses from operations and changes in the valuation allowance are included in other operating expenses.
NOTE 5 - OTHER POST-RETIREMENT BENEFIT PLANS
During January 2008, the Bank has awarded certain officers a salary continuation plan (the “Plan”). Under the Plan, the participants will be provided with a fixed annual retirement benefit for 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 entered into split-dollar life insurance agreements with certain officers. 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 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 was $9,570,506 and $4,749,230 at March 31, 2008 and December 31, 2007, respectively.
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 date of foreclosure 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 carrying amount at foreclosure. Revenue and expenses from operations and changes in the valuation allowance are included in other operating expenses.
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OAK VALLEY COMMUNITY BANK
NOTES TO FINANCIAL STATEMENTS
NOTE 6 - FAIR VALUE MEASUREMENTS
SFAS No. 157, Fair Value Measurements, which the Company adopted effective January 1, 2008, 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:
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. SFAS No. 157 applies to loans measured for impairment using the practical expedients permitted by SFAS No. 114, Accounting by Creditors for Impairment of a Loan, including impaired loans measured at an observable market
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OAK VALLEY COMMUNITY BANK
NOTES TO FINANCIAL STATEMENTS
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, 2008, impaired loans had a principal balance of $2.2 million, with a valuation allowance of $0.4 million at March 31, 2008. Upon being classified as impaired, charge offs were 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.
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EXHIBIT 2.1
A0679210
ENDORSED-FILED
In the office of the Secretary of State
Of the State of California
JULY 02 2008
AGREEMENT AND PLAN OF MERGER
THIS AGREEMENT AND PLAN OF MERGER (the “ Agreement ”), is made effective as of the 1st day of May, 2008, by and between OAK VALLEY COMMUNITY BANK , a bank organized under the laws of the State of California whose principal office is located in Oakdale, California (the “ Bank ”), and INTERIM OAK VALLEY BANCORP , a general business corporation organized under the laws of the State of California (the “ Interim Company ”), and joined in by OAK VALLEY BANCORP , a general business corporation organized under the laws of the State of California (the “ Company ”).
WITNESSETH:
WHEREAS, the Bank is a commercial bank duly organized and validly existing under the California General Corporation Law (the “ Corporation Law “) and the California Financial Code (the “ Financial Code ”), having its principal office in Oakdale, California, with authorized capital stock consisting of 10,000,000 shares of common stock, no par value (the “ Bank Common Stock ”) and 10,000,000 shares of preferred stock;
WHEREAS, certain Bank officers (the “Initial Shareholders”) own all of the issued and outstanding shares of common stock, no par value (the “ Company Common Stock ”), of the Company;
WHEREAS, the Company is a general business corporation duly organized and validly existing under the laws of the State of California and owns all of the issued and outstanding shares of common stock, no par value (the “ Interim Company Common Stock ”), of the Interim Company;
WHEREAS, the Interim Company is a general business corporation duly organized and validly existing under the laws of the State of California, having its principal office in Oakdale, California, and is a wholly-owned subsidiary of the Company;
WHEREAS, the respective Boards of Directors of Bank, the Interim Company, and the Company each have determined that it is in the best interests of their respective companies and the shareholders of their respective companies to establish a bank holding company structure and to combine the Interim Company and the Bank into a single company through the merger of the Interim Company with and into the Bank (the “ Merger “), on the terms and conditions set forth herein, and each has agreed to recommend approval of the transactions contemplated hereby by their respective shareholders, to the extent required by applicable law;
WHEREAS, for federal income tax purposes, it is intended that the Merger shall qualify as a reorganization within the meaning of Section 368(a) of the Internal Revenue Code of 1986, as amended, and the rules and regulations promulgated thereunder (the “ Code ”); and
WHEREAS, as and when required by the provisions of this Agreement, all such action as may be necessary or appropriate shall be taken by the Interim Company, the Bank and the Company in order to consummate the Merger.
NOW, THEREFORE, on the stated premises and for and in consideration of the mutual covenants and agreements hereinafter set forth and the mutual benefits to the parties to be derived here from, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, and intending to be legally bound, the parties hereby agree as follows:
ARTICLE I.
THE MERGER
Section 1.01 Merger. Upon the terms and subject to the conditions set forth in this Agreement, at the Effective Time (as defined in Section 1.08), and in accordance with the Corporation Law and the Financial Code, the Interim Company shall be merged with and into the Bank pursuant to the provisions of Section 1100 et seq . of the Corporation Law and Section 18(c) of the Federal Deposit Insurance Act (the “ FDI Act ”). As a result of the Merger, the Bank shall be the surviving entity (the “ Surviving Bank ”), the separate existence of the Interim Company shall cease and the existence of the Bank, as the Surviving Bank, shall continue with all the rights, privileges, immunities, powers and franchises and subject to all the duties, restrictions and liabilities of a banking association organized under the laws of the State of California, and the Bank shall become a wholly-owned subsidiary of the Company.
Section 1.02 Effect of Merger. The Merger shall have the effects set forth in Section 1100 et seq . of the Corporation Law and Section 18(c) of the FDI Act.
Section 1.03 Transfer of Assets and Liabilities. At the Effective Time, all rights, privileges, immunities, powers, franchises and interests of the Interim Company in and to every type of property (real, personal and mixed) shall be transferred to and vested in the Surviving Bank by virtue of such Merger without any deed or other transfer, and the Surviving Bank, without any order or other action on the part of any court or otherwise, shall hold and enjoy all rights of property, privileges, immunities, powers, franchises and interests, including, without limitation, appointments, designations and nominations, all other rights and interests as trustee, executor, administrator, registrar of stocks and bonds, guardian of estates, assignee, receiver and committee of estates of incompetence and in every other fiduciary capacity, in the same manner and to the same extent as such rights, privileges, immunities, powers, franchises and interests are held or enjoyed by the Interim Company. The Surviving Bank shall be liable for all liabilities of the Interim Company, all deposits, debts, liabilities, obligations and contracts of the Interim Company, matured or unmatured, whether accrued, absolute, contingent or otherwise and whether or not reflected or reserved against on balance sheets, books of account or records of the Interim Company, shall be those of the Surviving Bank and shall not be released or impaired by the Merger. All rights of creditors and other obligees and all liens on property of the Interim Company shall be preserved and unimpaired.
Section 1.04 Name. The name of the Surviving Bank shall be “Oak Valley Community Bank.”
Section 1.05 Articles of Incorporation and Bylaws.
A. The Articles of Incorporation of the Bank, as in effect immediately prior to the Effective Time, shall continue to be the articles of incorporation of the Surviving Bank until thereafter amended or restated, as provided therein and by applicable law.
B. The Bylaws of the Bank, as in effect immediately prior to the Effective Time, shall continue to be the bylaws of the Surviving Bank until thereafter amended or restated, as provided therein and by applicable law.
Section 1.06 Directors and Officers.
A. The Directors of the Bank immediately prior to the Effective Time shall serve as the Board of Directors of the Surviving Bank at the Effective Time, and shall serve until the next annual meeting of shareholders of the Surviving Bank or until their successors are elected and have qualified or until their earlier death, resignation or removal in accordance with the Surviving Bank’s articles of incorporation and bylaws. Any vacancy on the Board of Directors at the Effective Time shall be filled in the manner provided in the articles of incorporation and bylaws of the Surviving Bank.
B. The officers of the Bank immediately prior to the Effective Time shall continue as officers of the Surviving Bank, subject to the review and approval of the Board of Directors of Surviving Bank.
Section 1.07 Closing. Upon the terms and subject to the conditions set forth in the Agreement, the closing (“ Closing ”) of the transaction contemplated by this Agreement shall take place in the offices of the Company at 10:00 a.m. on the first business day (any day on which banks are not required or authorized to close in Oakdale, California) following receipt of all necessary regulatory approvals and expiration of all mandatory waiting periods, or on such other day or at such other time or place as may be mutually agreed upon by the parties (“ Closing Date ”).
Section 1.08 Effective Time. The Merger described herein shall become effective upon the filing of a copy of this Agreement with the Secretary of State of California in accordance with Section 1103 of the Corporation Law (such time as the Merger becomes effective being the “ Effective Time ”).
Section 1.09 Conversion of the Bank Common Stock and Stock Options. At the Effective Time, by virtue of the Merger and without any action on the part of the Company, the Bank, the Interim Company or any shareholder thereof:
A. Each share of the Bank Common Stock issued and outstanding immediately prior to the Effective Time (other than any shares of Bank Common Stock to be canceled pursuant to Section 1.09(E)) shall be canceled and extinguished and be converted automatically into the right to receive one (1) validly issued, fully paid and nonassessable share of Company Common Stock (the “ Exchange Ratio ”). The shares of Company Common Stock into which shares of Bank Common Stock are converted pursuant to this Section 1.09(A) is referred to herein as the “Merger Consideration.”
B. All shares of Bank Common Stock to be converted into Company Common Stock pursuant to Section 1.09(A) shall cease to exist, and each holder of a certificate, which immediately prior to the Effective Time represented any such shares of Bank Common Stock (such certificate or other evidence of ownership, a “ Certificate “) shall thereafter cease to have any rights with respect to such shares of Bank Common Stock, except the right to receive the applicable number of shares of Company Common Stock with respect thereto to be issued in consideration therefor and any dividends or other distributions to which holders of Bank Common Stock become entitled upon the surrender of such Certificate.
C. The Company will assume all of the Bank’s rights and obligations under the Bank’s 1998, as amended, Stock Option Plan (the “Stock Option Plan”) and under each outstanding stock option agreement evidencing an option (whether an incentive stock option or a nonstatutory stock option) previously granted under the Stock Option Plan . By virtue of such assumption, each option to acquire shares of Bank Common Stock, whether vested or unvested, shall be converted into an option to acquire the same number of shares of Company Common Stock which the holders thereof would have been entitled to receive in the Merger had such option been fully exercised immediately prior to the Effective Time, which option shall be exercisable upon the same terms and conditions as were applicable to the options to acquire Bank Common Stock, provided that there shall be a proportionate adjustment of the exercise price therefor. Each such option, subject to such modifications as may be appropriate or required, and subject to the requirements of the Securities Act of 1933, as amended (the “ Securities Act ”), and the
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California Corporate Securities Law of 1968, as amended, shall constitute a continuation of the option, substituting the Company for the Bank. Each option granted pursuant to the Stock Option Plan, from and after the Effective Time, shall constitute an option granted by the Company to purchase shares of Company Common Stock.
D. All of the shares of the Interim Company Common Stock issued and outstanding immediately prior to the Effective Time shall be cancelled and converted, on a pro rata basis, into such number of shares of common stock of the Surviving Bank, all of which will be owned by the Company, with the effect that the number of shares of common stock of the Surviving Bank issued and outstanding at the Effective Time shall be equal to the number of shares of Bank Common Stock issued and outstanding immediately prior to the Effective Time.
E. Any shares of Bank Common Stock that are owned immediately prior to the Effective Time by the Bank as treasury stock or by the Company or Interim Company shall be canceled and extinguished without any conversion thereof or consideration therefor.
F. If, between the date of this Agreement and the Effective Time, the outstanding shares of Company Common Stock or the outstanding shares of Bank Common Stock shall have been increased, decreased, changed into or exchanged for a different number of shares or different class, in each case, by reason of any reclassification, recapitalization, stock split, split-up, combination or exchange of shares or a stock dividend or dividend payable in any other securities shall be declared with a record date within such period, or any similar event shall have occurred, the applicable Exchange Ratio shall be appropriately adjusted to provide to the holders of Company Common Stock and Bank Common Stock the same economic effect as contemplated by this Agreement prior to such event.
G. All of the shares of Company Common Stock issued and outstanding to the initial shareholders shall be repurchased by the Company at its initial price immediately following the Effective Time.
Section 1.10 Transfer Agent. Promptly following the Effective Time, the Company will cause Computershare, or another qualified trust company selected by the Company and the Bank (the “ Transfer Agent ”), to send to each shareholder of the Bank a letter of transmittal for use in exchanging such shareholders’ Certificates representing shares of Bank Common Stock for certificates representing the number of shares of Company Common Stock to which they are entitled pursuant to this Agreement. Each shareholder of the Bank shall be entitled to receive shares of Company Common Stock for such shareholders Bank Common Stock only upon surrender of the Certificates representing such shares of Bank Common Stock, or after providing an appropriate affidavit of lost certificate and indemnity agreement and/or bond as may reasonably be required in each case by the Transfer Agent. Until so surrendered, each Certificate formerly representing shares of Bank Common Stock will be deemed for all corporate purposes to represent and evidence solely the right to receive the merger consideration described in Section 1.09(A) hereof.
Section 1.11 Distributions with Respect to Unexchanged Shares. No dividends or other distributions with a record date after the Effective Time shall be paid to the holder of any unsurrendered Certificate with respect to the shares of Company Common Stock that such holder would be entitled to receive upon surrender of such Certificate, until such holder shall surrender such Certificate in accordance with Section 1.10. Subject to the effect of applicable laws, following surrender of any such Certificate, there shall be paid to the record holder thereof without interest: (a) promptly after the time of such surrender, the amount of dividends or other distributions with a record date after the Effective Time theretofore paid with respect to such whole shares of Company Common Stock, and (b) at the appropriate payment date, the amount of dividends or other distributions with a record date after the Effective Time and a payment date subsequent to such surrender payable with respect to such shares of Company Common Stock.
Section 1.12 No Further Ownership Rights in Company Common Stock. All shares of Company Common Stock issued upon conversion of shares of Bank Common Stock in accordance with the terms of this Article I shall be deemed to have been issued or paid in full satisfaction of all rights pertaining to the shares of Bank Common Stock.
Section 1.13 No Liability. None of the Bank, the Company or Interim Company or the Exchange Agent shall be liable to any an individual, corporation, limited liability company, partnership, association, trust, unincorporated organization, other entity or group (as defined in the Securities Exchange Act of 1934, as amended) (each a “ Person ”) in respect of any Merger Consideration delivered to a public official pursuant to any applicable abandoned property, escheat or similar law.
Section 1.14 Lost Certificates. If any Certificate shall have been lost, stolen or destroyed, upon the making of an affidavit of that fact by the Person claiming such Certificate to be lost, stolen or destroyed and, if required by the Company, the posting by such Person of a bond in such reasonable amount as the Company may direct as indemnity against any claim that may be made against it with respect to such Certificate, the Exchange Agent will deliver in exchange for such lost, stolen or destroyed Certificate the applicable Merger Consideration with respect to the shares of Bank Common Stock formerly represented thereby and unpaid dividends and distributions on shares of Company Common Stock deliverable in respect thereof, pursuant to this Agreement.
Section 1.15 Withholding Rights. The Company shall be entitled to deduct and withhold from the consideration otherwise payable pursuant to this Agreement to any holder of shares of Bank Common Stock such amounts as it is required to deduct and withhold with respect to the making of such payment under the Code regulations promulgated thereunder, or any provision of state, local or foreign tax law. To the extent that amounts are so withheld by Buyer, such withheld amounts shall be treated for all purposes of this Agreement as having been paid to the holder of the shares of Company Common Stock in respect of which such deduction and withholding was made by Buyer.
Section 1.16 Further Assurances. At and after the Effective Time, the officers and directors of the Company shall be authorized to execute and deliver, in the name and on behalf of the Bank, the Company and the Interim Company, any deeds, bills of sale, assignments or assurances and to take and do, in the name and on behalf of the Bank, the Company and the Interim Company, any other actions and things to vest, perfect or confirm of record or otherwise in the Bank, the Company and the Interim Company, any and all right, title and interest in, to and
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under any of the rights, properties or assets acquired or to be acquired by the Bank, the Company and the Interim Company, as a result of, or in connection with, the Merger.
Section 1.17 Dissenters’ Rights. In accordance with the Corporation Law, shareholders of the Bank will not be entitled to dissenters’ or appraisal rights in the Merger.
Section 1.18 Bank Shareholders’ Meeting. This Agreement shall be submitted to the shareholders of the Bank at a meeting called to be held as promptly as practicable and to the sole shareholder of the Interim Company by written consent of the sole shareholder. Upon approval by the requisite vote of the shareholders of the Bank and the approval of the sole shareholder of the Interim Company, this Agreement shall be made effective as soon as practicable thereafter as provided in Section 1.08 hereof.
ARTICLE II.
COVENANTS
Section 2.01 Shareholder Approval. As soon as practicable following the date of this Agreement, this Agreement shall be submitted to the stockholders of Bank, Company and Interim Company, if required by law, for ratification and approval in accordance with the provisions of applicable law.
Section 2.02 Regulatory Approvals. As soon as practicable following the date of this Agreement, each of the Company and the Bank shall file or cause the be filed applications for all regulatory approvals required to be obtained such parties in connection with this Agreement and the other agreements contemplated hereby, and shall diligently seek all other required approvals and shall take any and all further action as may be necessary or appropriate to permit the timely consummation of the Merger provided for in this Agreement.
Section 2.03 Legal Requirements. Each of the Company and the Bank will, and will cause their respective subsidiaries to, take all commercially reasonable actions necessary to comply promptly with all legal requirements which may be imposed on them with respect to the consummation of the transactions contemplated by this Agreement and will promptly cooperate with and furnish information to any party hereto necessary in connection with any such requirements imposed upon such other party in connection with the consummation of the transactions contemplated by this Agreement.
Section 2.04 Blue Sky Laws. The Company shall take such steps as may be necessary to comply with the securities and blue sky laws of all jurisdictions which are applicable to the issuance of the Company Common Stock in connection with the Merger. The Bank shall use its commercially reasonable efforts to assist the Company as may be necessary to comply with the securities and blue sky laws of all jurisdictions which are applicable in connection with the issuance of Company Common Stock in connection with the Merger.
Section 2.05 Best Efforts. Each of the Company and the Bank shall use their best efforts to take, or cause to be taken, all actions or do, or cause to be done, all things necessary, proper or advisable under applicable laws and regulations to consummate and make effective the transactions contemplated by this Agreement, subject, however, to the requisite vote of the shareholders of the Bank in accordance with the requirements of the Corporation Law and the Financial Code.
ARTICLE III.
CONDITIONS PRECEDENT TO THE OBLIGATIONS OF THE PARTIES
The respective obligations of each party to this Agreement to consummate and effect the transactions contemplated hereby shall be subject to the satisfaction at or prior to the Effective Time of each of the following conditions, any of which may be waived:
Section 3.01 Shareholder Approvals. The shareholders of the Bank entitled to vote on the Merger and this Agreement shall have approved the Merger and this Agreement in accordance with the Corporation Law and the Financial Code.
Section 3.02 Government and Other Approvals. Each of the Company, Interim Company and the Bank shall have received approvals, acquiescence or consents of the transactions contemplated by this Agreement, from all necessary governmental agencies and authorities and other third parties, including but not limited to the Federal Reserve Bank of San Francisco, the Federal Deposit Insurance Corporation, the California Department of Financial Institutions, and the California Department of Corporations, and all applicable waiting periods shall have expired, and the approvals and consents of all third parties required to consummate this Agreement and the other agreements contemplated hereby, and the transactions contemplated hereby and thereby. Such approvals and the transactions contemplated hereby shall not have been contested or threatened to be contested by any federal, state or local governmental authority or by any other third party by formal proceedings.
ARTICLE IV.
TERMINATION, WAIVER, AMENDMENT AND MODIFICATION
Section 4.01 Termination. This Agreement may be terminated and abandoned at any time prior to or at the Effective Time, whether before or after action thereon by the shareholders of the Bank or the Interim Company, by the mutual consent in writing of the Bank, Interim Company and Company.
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Section 4.02 Effect of Termination. In the event of the termination and abandonment of this Agreement pursuant to the provisions of Section 4.01, the same shall be of no further force or effect and there shall be no liability by reason of this Agreement or the termination thereof on the part of either the Bank, Interim Company, Company or the directors, officers, employees, agents or shareholders of any of them.
Section 4.03 Waiver, Amendment and Modification. Any of the terms or conditions of this Agreement may be waived at any time prior to the Effective Time, whether before or after action thereon by the shareholders of the Bank by the party that is entitled to the benefits thereof. This Agreement may be modified or amended prior to the Effective Time, whether before or after action thereon by the shareholders of the Bank, by the Bank, Interim Company and Company; provided , however , that in the event that applicable law shall require the approval of this Agreement by the shareholders of any of the parties hereto, in no event may any amendment hereto be made that changes the principal terms of this Agreement without the requisite approval of such shareholders. Any waiver, modification or amendment of this Agreement shall be in writing.
ARTICLE V.
EXPENSES
Section 5.01 General. Each party hereto will pay its own expenses incurred in connection with this Agreement, whether or not the transactions contemplated herein are effected.
Section 5.02 Special Dividend. Promptly after the Effective Time of the Merger, the Bank shall pay a special dividend to the Company in an amount equal to the sum of (i) the expenses incurred by the Company in connection with the transactions contemplated in this Agreement, and (ii) the principal amount of any loan or line of credit that the Company shall have obtained to carry out this Agreement, plus any accrued and unpaid interest and fees with respect thereto.
ARTICLE VI.
MISCELLANEOUS
Section 6.01 Multiple Counterparts. For the convenience of the parties hereto, this Agreement may be executed in multiple counterparts, each of which shall be deemed an original, and all counterparts hereof so executed by the parties hereto, whether or not such counterpart shall bear the execution of each of the parties hereto, shall be deemed to be, and shall be construed as, one and the same Agreement. A telecopy or facsimile transmission of a signed counterpart of this Agreement shall be sufficient to bind the party or parties whose signature(s) appear thereon.
Section 6.02 Governing Law. THIS AGREEMENT SHALL BE CONSTRUED IN ACCORDANCE WITH AND GOVERNED BY THE LAWS OF THE STATE OF CALIFORNIA.
Section 6.03 Further Assurances. Each party hereto agrees from time to time, as and when requested by the other party hereto, or by its successors or assigns, to execute and deliver, or cause to be executed and delivered, all such deeds and instruments and to take or cause to be taken such further or other acts, either before or after the Effective Time, as may be deemed necessary or desirable in order to vest in and confirm to the Surviving Bank title to and possession of any assets of the Interim Company or the Bank acquired or to be acquired by reason of or as a result of the Merger and otherwise to carry out the intent and purposes hereof, and the officers and directors of the parties hereto are fully authorized in the name of their respective corporate names to take any and all such actions.
Section 6.04 Assignment. This Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns, but no party to this Agreement shall assign this Agreement, by operation of law or otherwise, in whole or in part, without the prior written consent of the other parties. Any assignment made or attempted in violation of this Section 6.04 shall be void and of no effect.
Section 6.05 Severability. In the event that any provision of this Agreement is held to be illegal, invalid or unenforceable under present or future laws, then (a) such provision shall be fully severable and this Agreement shall be construed and enforced as if such illegal, invalid or unenforceable provision were not a part hereof; (b) the remaining provisions of this Agreement shall remain in full force and effect and shall not be affected by such illegal, invalid or unenforceable provision or by its severance from this Agreement; and (c) there shall be added automatically as a part of this Agreement a provision as similar in terms to such illegal, invalid or unenforceable provision as may be possible and still be legal, valid and enforceable.
Section 6.06 Specific Performance. Each of the parties hereto acknowledges that the other parties would be irreparably damaged and would not have an adequate remedy at law for money damages in the event that any of the covenants contained in this Agreement were not performed in accordance with its terms or otherwise were materially breached. Each of the parties hereto therefore agrees that, without the necessity of proving actual damages or posting bond or other security, the other party shall be entitled to temporary and/or permanent injunction or injunctions to prevent breaches of such performance and to specific enforcement of such covenants in addition to any other remedy to which they may be entitled, at law or in equity.
Section 6.07 Rules of Construction. Descriptive headings as to the contents of particular sections are for convenience only and shall not control or affect the meaning, construction or interpretation of any provision of this Agreement. Each use herein of the masculine, neuter or feminine gender shall be deemed to include the other genders. Each use herein of the plural shall include the singular and vice versa, in each case as the context requires or as it is otherwise appropriate. The word “or” is used in the inclusive sense.
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Section 6.08 Entire Agreement. This Agreement represents the entire agreement between the parties relating to the subject matter hereof. This Agreement alone fully and completely expresses the agreement of the parties relating to the subject matter hereof. There are no other courses of dealing, understandings, agreements, representations or warranties, written or oral, except as set forth herein.
Section 6.09 Binding Effect. All of the terms, covenants, representations, warranties and conditions of this Agreement shall be binding upon, and inure to the benefit of and be enforceable by, the parties hereto and their respective successors, representatives and permitted assigns. Nothing expressed or referred to herein is intended or shall be construed to give any Person other than the parties hereto any legal or equitable right, remedy or claim under or in respect of this Agreement, or any provision herein contained, it being the intention of the parties hereto that this Agreement, the assumption of obligations and statements of responsibilities hereunder, and all other conditions and provisions hereof are for the sole benefit of the parties to this Agreement and for the benefit of no other Person. Nothing in this Agreement shall act to relieve or discharge the obligation or liability of any third party to any party to this Agreement, nor shall any provision give any third party any right of subrogation or action over or against any party to this Agreement.
[Signature Page Follows]
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[Signature Page to Agreement and Plan of Merger]
IN WITNESS WHEREOF, the Bank and the Interim Company have caused this Agreement to be executed by their duly authorized officers as of this 1st day of May, 2008, and the officers of each such company have hereunto subscribed their names.
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BANK: |
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OAK VALLEY COMMUNITY BANK |
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By: |
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/s/ CHRISTOPHER M. COURTNEY |
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Christopher M. Courtney, President |
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By: |
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/s/ ARNE J. KNUDSEN |
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Arne J. Knudsen, Secretary |
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INTERIM COMPANY: |
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Interim Oak Valley Bancorp |
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/s/ CHRISTOPHER M. COURTNEY |
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Christopher M. Courtney, President |
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By: |
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/s/ ARNE J. KNUDSEN |
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Arne J. Knudsen, Secretary |
The Company hereby joins in the foregoing Agreement, and undertakes that it will be bound thereby and will do and perform all acts and things therein referred to or provided to be done by it.
IN WITNESS WHEREOF, the Company has caused this Agreement to be executed by its duly authorized officers as of this 1 st day of May, 2008.
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COMPANY: |
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OAK VALLEY BANCORP |
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By: |
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/s/ CHRISTOPHER M. COURTNEY |
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Christopher M. Courtney, President |
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By: |
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/s/ ARNE J. KNUDSEN |
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Arne J. Knudsen, Secretary |
7
OAK VALLEY COMMUNITY BANK
OFFICERS’ CERTIFICATE
Christopher M. Courtney and Arne J. Knudsen certify that:
They are the President and the Secretary, respectively, of Oak Valley Community Bank, a California banking corporation.
This corporation has outstanding 7,641,377 shares of common stock and no shares of preferred stock, and the total number of outstanding shares of this corporation entitled to vote on the merger is 7,641,377 shares of common stock.
The principal terms of the agreement of merger in the form attached to this certificate were approved by a vote of the number of shares of common stock that equaled or exceeded the vote required.
The percentage vote required was more than 50% of the outstanding common stock of this corporation.
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8
IN WITNESS WHEREOF , the undersigned have executed this certificate on July 1, 2008.
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/s/ Christopher M. Courtney |
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CHRISTOPHER M. COURTNEY |
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President |
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/s/ Arne J. Knudsen |
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ARNE J. KNUDSEN |
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Secretary |
Each of the undersigned declares under penalty of perjury that the statements in the above certificate are true of his own knowledge, and that this declaration was executed on July 1, 2008 in Oakdale, California.
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/s/ Christopher M. Courtney |
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CHRISTOPHER M. COURTNEY |
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President |
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/s/ Arne J. Knudsen |
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ARNE J. KNUDSEN |
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Secretary |
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INTERIM OAK VALLEY BANCORP
OFFICERS’ CERTIFICATE
1. Christopher M. Courtney and Arne J. Knudsen certify that:
2. They are the President and the Secretary, respectively, of Interim Oak Valley Bancorp, a California corporation.
3. This corporation has outstanding 100 shares of common stock and no shares of preferred stock, and the total number of outstanding shares of this corporation entitled to vote on the merger is 100 shares of common stock.
4. The percentage vote required was more than 50% of the outstanding common stock of this corporation.
5. Equity securities of Oak Valley Bancorp, a California corporation, which is the parent corporation of this corporation are to be issued in the merger, and the required vote of the shareholders of that parent corporation was obtained.
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IN WITNESS WHEREOF , the undersigned have executed this certificate on July 1, 2008.
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/s/ Christopher M. Courtney |
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CHRISTOPHER M. COURTNEY |
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President |
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/s/ Arne J. Knudsen |
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ARNE J. KNUDSEN |
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Secretary |
Each of the undersigned declares under penalty of perjury that the statements in the above certificate are true of his own knowledge, and that this declaration was executed on July 1, 2008 in Oakdale, California.
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/s/ Christopher M. Courtney |
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CHRISTOPHER M. COURTNEY |
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President |
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/s/ Arne J. Knudsen |
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ARNE J. KNUDSEN |
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Secretary |
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OAK VALLEY BANCORP
OFFICERS’ CERTIFICATE
Christopher M. Courtney and Arne J. Knudsen certify that:
6. They are the President and the Secretary, respectively, of Oak Valley Bancorp, a California corporation.
This corporation has outstanding 100 shares of common stock and no shares of preferred stock, and the total number of outstanding shares of this corporation entitled to vote on the merger is 100 shares of common stock.
The principal terms of the agreement of merger in the form attached to this certificate were approved by a vote of the number of shares of common stock that equaled or exceeded the vote required.
The percentage vote required was more than 50% of the outstanding common stock of this corporation.
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12
IN WITNESS WHEREOF , the undersigned have executed this certificate on July 1, 2008.
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/s/ Christopher M. Courtney |
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CHRISTOPHER M. COURTNEY |
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President |
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/s/ Arne J. Knudsen |
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ARNE J. KNUDSEN |
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Secretary |
Each of the undersigned declares under penalty of perjury that the statements in the above certificate are true of his own knowledge, and that this declaration was executed on July 1, 2008 in Oakdale, California.
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/s/ Christopher M. Courtney |
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CHRISTOPHER M. COURTNEY |
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President |
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/s/ Arne J. Knudsen |
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ARNE J. KNUDSEN |
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Secretary |
13
EXHIBIT 3.1
2953598
ENDORSED-FILED
In the office of the Secretary of State
Of the State of California
APR 01 2008
ARTICLES OF INCORPORATION
OF
OAK VALLEY BANCORP
ARTICLE I
The name of this corporation is OAK VALLEY BANCORP.
ARTICLE II
The purpose of the corporation is to engage in any lawful act or activity for which a corporation may be organized under the General Corporation Law of California other than the banking business, the trust company business, or the practice of a profession permitted to be incorporated by the California Corporations Code.
ARTICLE III
The name and address in the State of California of this corporation’s initial agent for service of process is:
Richard A. McCarty
125 North Third Avenue
Oakdale, California 95361
ARTICLE IV
This corporation is authorized to issue two classes of shares, designated respectively “Common Stock” and “Preferred Stock”. This corporation is authorized to issue 5,000,000 shares, no par value, of Common Stock and 2,500,000 shares, no par value, of Preferred Stock. The Preferred Stock authorized by these Articles of Incorporation shall be issued from time to time in one or more series. The Board of Directors of this corporation (the “Board of Directors”) is authorized to determine the designation of any such series and to fix the number of shares of any such series. The Board of Directors may determine or alter the rights, preferences, privileges and restrictions granted to or imposed upon any wholly unissued series of Preferred Stock. Within the limits and restrictions stated in any resolution or resolutions of the Board of Directors originally fixing the number of shares constituting any series of Preferred Stock, the Board of Directors may increase or decrease (but not below the number of shares of such series then outstanding) the number of shares of any such series subsequent to the issue of shares of that series.
ARTICLE V
A. The liability of the directors of this corporation for monetary damages shall be eliminated to the fullest extent permissible under California law.
B. This corporation is authorized to provide indemnification of agents (as defined in Section 317 of the California Corporations Code) through bylaw provisions, agreements with agents, vote of shareholders or disinterested directors or otherwise, in excess of the indemnification otherwise permitted by Section 317 of the California Corporations Code, subject only to the applicable limits set forth in Section 204 of the California Corporations Code with respect to actions for breach of duty to the corporation and its shareholders.
C. Any repeal or modification of the foregoing provisions of this Article V by the shareholders of this corporation shall not adversely affect any right or protection of a director of this corporation existing at the time of such repeal or modification.
IN WITNESS WHEREOF, for the purposes of forming this corporation under the laws of the State of California, the undersigned incorporator of this corporation has executed these Articles of Incorporation this 31 ST day of March, 2008.
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/s/ |
Matteo G. Daste |
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Matteo G. Daste, Incorporator |
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EXHIBIT 3.2
A0675623
ENDORSED-FILED
In the office of the Secretary of State
Of the State of California
APR 14 2008
FIRST AMENDMENT TO
ARTICLES OF INCORPORATION
OF
OAK VALLEY BANCORP
The undersigned certifies that:
1. He is the sole incorporator of Oak Valley Bancorp, a California corporation.
2. This Corporation has not issued any shares. No directors were named in the original Articles of Incorporation and none have been elected.
3. Article IV of the Articles of Incorporation of this Corporation is amended as follows:
ARTICLE IV
This Corporation is authorized to issue two classes of shares, designated respectively “Common Stock” and “Preferred Stock”. This Corporation is authorized to issue 50,000,000 shares, no par value, of Common Stock and 10,000,000 shares, no par value, of Preferred Stock. The Preferred Stock authorized by these Articles of Incorporation shall be issued from time to time in one or more series. The Board of Directors of this corporation (the “Board of Directors”) is authorized to determine the designation of any such series and to fix the number of shares of any such series. The Board of Directors may determine or alter the rights, preferences, privileges and restrictions granted to or imposed upon any wholly unissued series of Preferred Stock. Within the limits and restrictions stated in any resolution or resolutions of the Board of Directors originally fixing the number of shares constituting any series of Preferred Stock, the Board of Directors may increase or decrease (but not below the number of shares of such series then outstanding) the number of shares of any such series subsequent to the issue of shares of that series.
I further declare under penalty of perjury under the laws of the State of California that the matters set forth in this certificate are true and correct of my own knowledge.
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Date: April 12, 2008 |
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/s/ |
Matteo G. Daste |
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Matteo G. Daste, Incorporator |
2
TABLE OF CONTENTS
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ARTICLE I CORPORATE OFFICES |
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1.1. |
PRINCIPAL OFFICE |
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1.2. |
OTHER OFFICES |
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ARTICLE II MEETINGS OF SHAREHOLDERS |
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2.1. |
PLACE OF MEETINGS |
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2.2. |
ANNUAL MEETING |
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2.3. |
SPECIAL MEETINGS |
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2.4. |
NOTICE OF SHAREHOLDERS’ MEETINGS |
5 |
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2.5. |
MANNER OF GIVING NOTICE; AFFIDAVIT OF NOTICE |
5 |
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2.6. |
QUORUM |
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2.7. |
ADJOURNED MEETING NOTICE |
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2.8. |
VOTING |
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2.9. |
VALIDATION OF MEETINGS; WAIVER OF NOTICE; CONSENT |
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2.10. |
SHAREHOLDER ACTION BY WRITTEN CONSENT WITHOUT A MEETING |
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2.11. |
RECORD DATE FOR SHAREHOLDER NOTICE; VOTING; GIVING CONSENTS |
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2.12. |
PROXIES |
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2.13. |
INSPECTORS OF ELECTION |
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ARTICLE III DIRECTORS |
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3.1. |
POWERS |
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3.2. |
NUMBER OF DIRECTORS |
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3.3. |
ELECTION AND TERM OF OFFICE OF DIRECTORS |
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3.4. |
REMOVAL |
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3.5. |
RESIGNATION AND VACANCIES |
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3.6. |
PLACE OF MEETINGS; MEETINGS BY TELEPHONE |
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3.7. |
REGULAR MEETINGS |
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3.8. |
SPECIAL MEETINGS; NOTICE |
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3.9. |
QUORUM |
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3.10. |
WAIVER OF NOTICE |
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3.11. |
ADJOURNMENT |
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3.12. |
NOTICE OF ADJOURNMENT |
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3.13. |
BOARD ACTION BY WRITTEN CONSENT WITHOUT A MEETING |
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3.14. |
FEES AND COMPENSATION OF DIRECTORS |
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3.15. |
APPROVAL OF LOANS TO OFFICERS |
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3.16. |
DIRECTOR QUALIFICATIONS |
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ARTICLE IV COMMITTEES |
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4.1. |
COMMITTEES |
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4.2. |
MEETINGS AND ACTION OF COMMITTEES |
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ARTICLE V OFFICERS |
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5.1. |
OFFICERS |
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5.2. |
APPOINTMENT OF OFFICERS |
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5.3. |
SUBORDINATE OFFICERS |
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5.4. |
REMOVAL AND RESIGNATION OF OFFICERS |
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5.5. |
VACANCIES IN OFFICES |
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5.6. |
CHAIRMAN OF THE BOARD |
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5.7. |
PRESIDENT |
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5.8. |
CHIEF EXECUTIVE OFFICER |
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5.9. |
VICE PRESIDENTS |
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5.10. |
SECRETARY |
11 |
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5.11. |
CHIEF FINANCIAL OFFICER |
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ARTICLE VI INDEMNIFICATION OF DIRECTORS, OFFICERS, EMPLOYEES, AND OTHER AGENTS |
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6.1. |
INDEMNIFICATION OF DIRECTORS |
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6.2. |
INDEMNIFICATION OF OTHERS |
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6.3. |
PAYMENT OF EXPENSES IN ADVANCE |
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6.4. |
INDEMNITY NOT EXCLUSIVE |
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6.5. |
INSURANCE INDEMNIFICATION |
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6.6. |
CONFLICTS |
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6.7. |
RIGHT TO BRING SUIT |
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6.8. |
INDEMNITY AGREEMENTS |
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6.9. |
AMENDMENT, REPEAL OR MODIFICATION |
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ARTICLE VII RECORDS AND REPORTS |
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7.1. |
MAINTENANCE AND INSPECTION OF SHARE REGISTER |
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7.2. |
MAINTENANCE AND INSPECTION OF BYLAWS |
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7.3. |
MAINTENANCE AND INSPECTION OF OTHER CORPORATE RECORDS |
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7.4. |
INSPECTION BY DIRECTORS |
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7.5. |
ANNUAL REPORT TO SHAREHOLDERS; WAIVER |
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7.6. |
FINANCIAL STATEMENTS |
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7.7. |
REPRESENTATION OF SHARES OF OTHER CORPORATIONS |
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ARTICLE VIII GENERAL MATTERS |
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8.1. |
RECORD DATE FOR PURPOSES OTHER THAN NOTICE AND VOTING |
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8.2. |
CHECKS; DRAFTS; EVIDENCES OF INDEBTEDNESS |
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8.3. |
CORPORATE CONTRACTS AND INSTRUMENTS: HOW EXECUTED |
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8.4. |
CERTIFICATES FOR SHARES |
16 |
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8.5. |
LOST CERTIFICATES |
16 |
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8.6. |
CONSTRUCTION; DEFINITIONS |
16 |
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ARTICLE IX AMENDMENTS |
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9.1. |
AMENDMENT BY SHAREHOLDERS |
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9.2. |
AMENDMENT BY DIRECTORS |
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9.3. |
RECORD OF AMENDMENTS |
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ARTICLE X INTERPRETATION |
17 |
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iii
BYLAWS
OF
OAK VALLEY BANCORP
ARTICLE I
CORPORATE OFFICES
1.1. PRINCIPAL OFFICE
The principal executive office in the State of California for the transaction of the business of the corporation (called the principal office) is fixed and located at:
125 North Third Avenue
Oakdale, California 95361
The Board of Directors shall have the authority from time to time to change the principal office from one location to another within the State by amending this Article I.
1.2. OTHER OFFICES
One or more branches or other subordinate offices may at any time be fixed and located by the Board of Directors at such place or places within or without the State of California as it deems appropriate.
ARTICLE II
MEETINGS OF SHAREHOLDERS
2.1. PLACE OF MEETINGS
Meetings of shareholders shall be held at any place within or outside the State of California designated by the Board of Directors. In the absence of any such designation, shareholders’ meetings shall be held at the principal executive office of the corporation or at any place consented to in writing by all persons entitled to vote at such meeting, given before or after the meeting and filed with the Secretary of the corporation.
2.2. ANNUAL MEETING
An annual meeting of shareholders shall be held each year on the second Tuesday of May of each year, if not a legal holiday, and if a legal holiday, then on the next succeeding business day, at the hour of 2:00 p.m., at which time the shareholders shall elect a Board of Directors, consider reports of the affairs of the corporation, and transact such other business as may properly be brought before the meeting.
If the annual meeting of shareholders shall not be held on the date above specified, the Board of Directors shall cause such a meeting to be held as soon thereafter as convenient, and any business transacted or election held at such meeting shall be as valid as if transacted or held at an annual meeting on the date above specified.
2.3. SPECIAL MEETINGS
Special meetings of the shareholders may be called at any time, subject to the provisions of Sections 2.4 and 2.5 of these Bylaws, by the Board of Directors, the Chairman of the Board, the President or the holders of shares entitled to cast not less than ten percent (10%) of the votes at that meeting.
If a special meeting is called by anyone other than the Board of Directors or the President or the Chairman of the Board, then the request shall be in writing, specifying the time of such meeting and the general nature of the business proposed to be transacted, and shall be delivered personally or sent by registered mail or by other written communication to the Chairman of the Board, the President, any Vice President or the Secretary of the corporation. The officer receiving the request forthwith shall cause notice to be given to the shareholders entitled to vote, in accordance with the provisions of Sections 2.4 and 2.5 of these Bylaws, that a meeting will be held at the time requested by the person or persons calling the meeting, so long as that time is not less than thirty-five (35) nor more than sixty (60) days after the receipt of the request. If the notice is not given within twenty (20) days after receipt of the request, then the person or persons requesting the meeting may give the notice. Nothing contained in this paragraph of this Section 2.3 shall be construed as limiting, fixing or affecting the time when a meeting of shareholders called by action of the Board of Directors may be held.
4
2.4. NOTICE OF SHAREHOLDERS’ MEETINGS
All notices of meetings of shareholders shall be sent or otherwise given in accordance with Section 2.5 of these Bylaws not less than ten (10) (or, if sent by third-class mail pursuant to Section 2.5 of these Bylaws, not less than thirty (30)) nor more than sixty (60) days before the date of the meeting to each shareholder entitled to vote thereat. Such notice shall state the place, date, and hour of the meeting and (i) in the case of a special meeting, the general nature of the business to be transacted, and no business other than that specified in the notice may be transacted, or (ii) in the case of the annual meeting, those matters which the Board of Directors, at the time of the mailing of the notice, intends to present for action by the shareholders, but, subject to the provisions of the next paragraph of this Section 2.4, any proper matter may be presented at the meeting for such action. The notice of any meeting at which Directors are to be elected shall include the names of nominees intended at the time of the notice to be presented by the Board for election.
If action is proposed to be taken at any meeting for approval of (i) a contract or transaction in which a director has a direct or indirect financial interest, pursuant to Section 310 of the California Corporations Code (the “Code”), (ii) an amendment of the Articles of Incorporation, pursuant to Section 902 of the Code, (iii) a reorganization of the corporation, pursuant to Section 1201 of the Code, (iv) a voluntary dissolution of the corporation, pursuant to Section 1900 of the Code, or (v) a distribution in dissolution other than in accordance with the rights of any outstanding preferred shares, pursuant to Section 2007 of the Code, then the notice shall also state the general nature of that proposal.
2.5. MANNER OF GIVING NOTICE; AFFIDAVIT OF NOTICE
Notice of a shareholders’ meeting shall be given either personally or by first-class mail, or, if the corporation has outstanding shares held of record by five hundred (500) or more persons (determined as provided in Section 605 of the Code) on the record date for the shareholders’ meeting, notice may be sent by third-class mail, or other means of written communication, addressed to the shareholder at the address of the shareholder appearing on the books of the corporation or given by the shareholder to the corporation for the purpose of notice; or if no such address appears or is given, at the place where the principal executive office of the corporation is located or by publication at least once it a newspaper of general circulation in the county in which the principal executive office is located. The notice shall be deemed to have been given at the time when delivered personally or deposited in the mail or sent by other means of written communication.
If any notice (or any report referenced in Article VII of these Bylaws) addressed to a shareholder at the address of such shareholder appearing on the books of the corporation is returned to the corporation by the United States postal Service marked to indicate that the United States Postal Service is unable to deliver the notice to the shareholder at that address, all future notices or reports shall be deemed to have been duly given without further mailing if the same shall be available to the shareholder upon written demand of the shareholder at the principal executive office of the corporation for a period of one (1) year from the date of the giving of the notice.
An affidavit of mailing of any notice or report in accordance with the provisions of this Section 2.5, executed by the Secretary, Assistant Secretary or any transfer agent, shall be prima facie evidence of the giving of the notice or report.
2.6. QUORUM
The presence at any meeting, in person or by proxy, of the persons entitled to vote a majority of the voting shares of the corporation shall constitute a quorum for the transaction of business. Shareholders present at a valid meeting at which a quorum is initially present may continue to do business until adjournment notwithstanding the withdrawal of enough shareholders to leave less than a quorum, if any action taken (other than adjournment) is approved by persons voting more than 25 percent of the voting shares.
2.7. ADJOURNED MEETING NOTICE
Any shareholders’ meeting, annual or special, whether or not a quorum is present, may be adjourned from tine to time by the vote of the majority of the shares represented at that meeting, either in person or by proxy.
When any meeting of shareholders, either annual or special, is adjourned to another time or place, notice need not be given of the adjourned meeting if its time and place are announced at the meeting at which the adjournment is taken. However, if the adjournment is for more than forty-five (45) days from the date set for the original meeting or if a new record date for the adjourned meeting is fixed, a notice of the adjourned meeting shall be given to each shareholder of record entitled to vote at the adjourned meeting in accordance with the provisions of Sections 2.4 and 2.5 of these Bylaws. At any adjourned meeting the corporation may transact any business which might have been transacted at the original meeting.
2.8. VOTING
The shareholders entitled to vote at any meeting of shareholders shall be determined in accordance with the provisions of Section 2.11 of these Bylaws, subject to the provisions of Sections 702 through 704 of the Code (relating to voting shares held by a fiduciary, in the name of a corporation, or it joint ownership).
Except as provided in the last paragraph of this Section 2.8, or as may be otherwise provided in the Articles of Incorporation, each outstanding share, regardless of class, shall be entitled to one vote on each matter submitted to a vote of the shareholders. Any holder of shares entitled to vote on any matter may vote part of the shares in favor of the proposal and refrain from voting the remaining shares or may vote them against the proposal other than elections to office, but, if the shareholder fails to specify the number of shares such shareholder is voting
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affirmatively, it will be conclusively presumed that the shareholder’s approving vote is with respect to all shares which the shareholder is entitled to vote.
The affirmative vote of the majority of the shares represented and voting at a duly held meeting at which a quorum is present (which shares voting affirmatively also constitute at least a majority of the required quorum) shall be the act of the shareholders, unless the vote of a greater number or voting by classes is required by the Code or by the Articles of Incorporation.
Such vote may be viva voce or by ballot; provided, however, that all elections for directors must be by ballot upon demand made by a shareholder at any election and before the voting begins. No shareholder shall be entitled to cumulate votes unless the candidates’ names have been placed in nomination prior to commencement of the voting and a shareholder has given notice prior to commencement of the voting of the shareholder’s intention to exercise his or her cumulative voting rights. If any shareholder has given such a notice, then every shareholder entitled to vote may cumulate his votes and give one candidate a number of votes equal to the number of directors to be elected multiplied by the number of votes to which his shares are entitled, or to distribute his votes on the same principle among as many candidates as he shall think fit.
In any election of directors, the candidates receiving the highest number of votes of the shares entitled to be voted for them, up to the number of directors to be elected by such shares, are elected. Votes against any candidate and votes withheld shall have no legal effect.
2.9. VALIDATION OF MEETINGS; WAIVER OF NOTICE; CONSENT
The transactions of any meeting of shareholders, either annual or special, however called and noticed, and wherever held, are as valid as though they had been taken at a meeting duly held after regular call and notice, if a quorum be present either in person or by proxy, and if, either before or after the meeting, each of the persons entitled to vote, not present in person or by proxy, signs a written waiver of notice or a consent to the holding of the meeting or an approval of the minutes thereof. Neither the business to be transacted at nor the purpose of any annual or special meeting of shareholders need be specified in any written waiver of notice or consent to the holding of the meeting or approval of the minutes thereof, except that if action is taken or proposed to be taken for approval of any of those matters specified in the second paragraph of Section 2.4 of these Bylaws, the waiver of notice or consent or approval shall state the general nature of the proposal. All such waivers, consents, and approvals shall be filed with the corporate records or made a part of the minutes of the meeting.
Attendance of a person at a meeting shall constitute a waiver of notice of and presence at that meeting, except when the person objects, at the beginning of the meeting, to the transaction of any business because the meeting is not lawfully called or convened and except that attendance at a meeting is not a waiver of any right to object to the consideration of matters required by the Code to be included in the notice of such meeting but not so included, if such objection is expressly made at the meeting.
2.10. SHAREHOLDER ACTION BY WRITTEN CONSENT WITHOUT A MEETING
Any action which may be taken at any annual or special meeting of shareholders may be taken without a meeting and without prior notice, if a consent in writing, setting forth the action so taken, shall be signed by the holders of outstanding shares having not less than the minimum number of votes that would be necessary to authorize or take such action at a meeting at which all shares entitled to vote thereon were present and voted.
Directors may not be elected by written consent except by unanimous written consent of all shares entitled to vote for the election of directors. However, a director may be elected at any time to fill any vacancy on the Board of Directors, provided that it was not created by removal of a director and that it has not been filled by the directors, by the written consent of the holders of a majority of the outstanding shares entitled to vote for the election of directors.
All such consents shall be maintained in the corporate records. Any shareholder giving a written consent, or the shareholder’s proxy holders, or a transferee of the shares, or a personal representative of the shareholder, or their respective proxy holders, may revoke the consent by a writing received by the Secretary of the corporation before written consents of the number of shares required to authorize the proposed action have been filed with the Secretary.
If the consents of all shareholders entitled to vote have not been solicited in writing, the Secretary shall give prompt notice of any corporate action approved by the shareholders without a meeting by less than unanimous written consent to those shareholders entitled to vote who have not consented in writing. Such notice shall be given in the manner specified in Section 2.5 of these Bylaws. In the case of approval of (i) a contract or transaction in which a director has a direct or indirect financial interest, pursuant to Section 310 of the Code, (ii) indemnification of a corporate “agent,” pursuant to Section 317 of the Code, (iii) a reorganization of the corporation, pursuant to Section 1201 of the Code, and (iv) a distribution in dissolution other than in accordance with the rights of outstanding preferred shares, pursuant to Section 2007 of the Code, the notice shall be given at least ten (10) days before the consummation of any action authorized by that approval, unless the consents of all shareholders entitled to vote have been solicited in writing.
2.11. RECORD DATE FOR SHAREHOLDER NOTICE; VOTING; GIVING CONSENTS
In order that the corporation may determine the shareholders entitled to notice of any meeting or to vote, the Board of Directors may fix, in advance, a record date, which shall not be more than sixty (60) days nor less than ten (10) days prior to the date of such meeting nor more than sixty (60) days before any other action. Shareholders at the close of business on the record date are entitled to notice and to vote, as the case may be, notwithstanding any transfer of any shares on the books of the corporation after the record date, except as otherwise provided in the Articles of Incorporation or the Code.
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A determination of shareholders of record entitled to notice of or to vote at a meeting of shareholders shall apply to any adjournment of the meeting unless the Board of Directors fixes a new record date for the adjourned meeting, but the Board of Directors shall fix a new record date if the meeting is adjourned for more than forty-five (45) days from the date set for the original meeting.
If the Board of Directors does not so fix a record date:
(a) The record date for determining shareholders entitled to notice of or to vote at a meeting of shareholders shall be at the close of business on the business day next preceding the day on which notice is given or, if notice is waived, at the close of business on the tenth (10 th ) business day next preceding the day on which the meeting is held.
(b) The record date for determining shareholders entitled to give consent to corporate action in writing without a meeting, (i) when no prior action by the Board has been taken, shall be the day on which the first written consent is given, or (ii) when prior action by the Board has been taken, shall be at the close of business on the day on which the Board adopts the resolution relating thereto, or the sixtieth (60th) day prior to the date of such other action, whichever is later.
The record date for any other purpose shall be as provided in Section 8.1 of these Bylaws.
2.12. PROXIES
Every person entitled to vote for directors, or on any other matter, shall have the right to do so either in person or by one or more agents authorized by a written proxy signed by the person and filed with the Secretary of the corporation. A proxy shall be deemed signed if the shareholder’s name or other authorization is placed on the proxy (whether by manual signature, typewriting, telegraphic or electronic transmission or otherwise) by the shareholder or the shareholder’s attorney-in-fact. A validly executed proxy which does not state that it is irrevocable shall continue in full force and effect unless (i) the person who executed the proxy revokes it prior to the time of voting by delivering a writing to the corporation stating that the proxy is revoked or by executing a subsequent proxy and presenting it to the meeting or by attendance at such meeting and voting in person, or (ii) written notice of the death or incapacity of the maker of that proxy is received by the corporation before the vote pursuant to that proxy is counted; provided, however, that no proxy shall be valid after the expiration of eleven (11) months from the date thereof, unless otherwise provided in the proxy, but in no case such date shall exceed seven (7) years from the date of its execution. The dates contained on the form of proxy presumptively determine the order of execution, regardless of the postmark dates on the envelopes in which they are mailed. The revocability of a proxy that states on its face that it is irrevocable shall be governed by the provisions of Sections 705(e) and 705(f) of the Code.
2.13. INSPECTORS OF ELECTION
In advance of any meeting of shareholders, the Board of Directors may appoint inspectors of election to act at the meeting and any adjournment thereof. If inspectors of election are not so appointed or designated or if any persons so appointed fail to appear or refuse to act, then the Chairman of the meeting may, and on the request of any shareholder or a shareholder’s proxy shall, appoint inspectors of election (or persons to replace those who so fail to appear) at the meeting. The number of inspectors shall be either one (1) or three (3). If appointed at a meeting on the request of one (1) or more shareholders or proxies, the majority of shares represented in person or by proxy shall determine whether one (1) or three (3) inspectors are to be appointed.
The inspectors of election shall determine the number of shares outstanding and the voting power of each, the shares represented at the meeting, the existence of a quorum, and the authenticity, validity, and effect of proxies, receive votes, ballots or consents, hear and determine all challenges and questions in any way arising in connection with the right to vote, count and tabulate all votes or consents, determine when the polls shall close, determine the result and do any other acts that may be proper to conduct the election or vote with fairness to all shareholders.
ARTICLE III
DIRECTORS
3.1. POWERS
Subject to the provisions of the Code and any limitations in the Articles of Incorporation and these Bylaws relating to action required to be approved by the shareholders or by the outstanding shares, the business and affairs of the corporation shall be managed and all corporate powers shall be exercised by or under the direction of the Board of Directors. The Board may delegate all management of the day-to-day operation of the business of the corporation to a management company or other person provided that the business and affairs of the corporation shall be managed and all corporate powers shall be exercised under the ultimate direction of the Board.
3.2. NUMBER OF DIRECTORS
The authorized number of directors of the corporation shall be not less than seven (7) nor more than thirteen (13) (which in no case shall be greater than two times the stated minimum minus one), and the exact number of directors shall be ten (10) until changed, within the limits specified above, by a resolution amending such exact number, duly adopted by the Board of Directors or by the shareholders. The minimum and maximum number of directors may be changed, or a definite number may be fixed without provision for an indefinite number, by a duly adopted amendment to the Articles of Incorporation or by an amendment to this Bylaw duly adopted by the vote or written consent of holders of a majority of the outstanding shares entitled to vote; provided, however, that (i) an amendment reducing the fixed number or the
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minimum number of directors to a number less than five (5) cannot be adopted if the votes cast against its adoption at a meeting, or the shares not consenting in the case of an action by written consent, are equal to more than sixteen and two-thirds percent (16-2/3%) of the outstanding shares entitled to vote thereon, and (ii) no amendment may change the stated maximum number of authorized directors to a number greater than two times the stated minimum number of directors minus one. No reduction of the authorized number of directors shall have the effect of removing any director before that director’s term of office expires.
3.3. ELECTION AND TERM OF OFFICE OF DIRECTORS
At each annual meeting of shareholders, directors shall be elected to hold office until the next annual meeting. Each director, including a director elected to fill a vacancy, shall hold office until the expiration of the term for which elected and until a successor has been elected and qualified, except in the case of the death, resignation, or removal of such a director.
3.4. REMOVAL
The entire Board of Directors or any individual director may be removed from office without cause by the affirmative vote of a majority of the outstanding shares entitled to vote on such removal; provided, however, that unless the entire Board is removed, no individual director may be removed when the votes cast against such director’s removal, or not consenting in writing to such removal, would be sufficient to elect that director if voted cumulatively at an election at which the same total number of votes cast were cast (or, if such action is taken by written consent, all shares entitled to vote were voted) and the entire number of directors authorized at the time of such director’s most recent election were then being elected.
No reduction of the authorized number of directors shall have the effect of removing any director before his term of office expires.
3.5. RESIGNATION AND VACANCIES
Any director may resign effective upon giving oral or written notice to the Chairman of the Board, the President, the Secretary or the Board of Directors, unless the notice specifies a later time for the effectiveness of such resignation. If the resignation of a director is effective at a future time, the Board of Directors may elect a successor to take office when the resignation becomes effective.
Vacancies on the Board of Directors may be filled by a majority of the remaining directors, or if the number of directors then in office is less than a quorum by (i) unanimous written consent of the directors then in office, (ii) the affirmative vote of a majority of the directors then in office at a meeting held pursuant to notice or waivers of notice, or (iii) a sole remaining director; however, a vacancy created by the removal of a director by the vote or written consent of the shareholders or by court order may be filled only by the affirmative vote of a majority of the shares represented and voting at a duly held meeting at which a quorum is present (which shares voting affirmatively also constitute at least a majority of the required quorum), or by the unanimous written consent of all shares entitled to vote thereon. Each director so elected shall hold office until the next annual meeting of the shareholders and until a successor has been elected and qualified, or until his or her death, resignation or removal.
A vacancy or vacancies in the Board of Directors shall be deemed to exist (i) in the event of the death, resignation or removal of any director, (ii) if the Board of Directors by resolution declares vacant the office of a director who has been declared of unsound mind by an order of court or convicted of a felony, (iii) if the authorized number of directors is increased, or (iv) if the shareholders fail, at any meeting of shareholders at which any director or directors are elected, to elect the full authorized number of directors to be elected at that meeting.
The shareholders may elect a director or directors at any time to fill any vacancy or vacancies not filled by the directors, but any such election by written consent, other than to fill a vacancy created by removal, shall require the consent of the holders of a majority of the outstanding shares entitled to vote thereon. A director may not be elected by written consent to fill a vacancy created by removal except by unanimous consent of all shares entitled to vote for the election of directors.
3.6. PLACE OF MEETINGS; MEETINGS BY TELEPHONE
Regular meetings of the Board of Directors may be held at any place within or outside the State of California that has been designated from time to time by resolution of the Board. In the absence of such a designation, regular meetings shall be held at the principal executive office of the corporation. Special meetings of the Board may be held at any place within or outside the State of California that has been designated in the notice of the meeting or, if not stated in the notice or if there is no notice, at the principal executive office of the corporation.
Members of the Board may not participate in a meeting through the use of conference telephone or similar communications equipment. Participation in a meeting by members of the Board is by physical presence only.
3.7. REGULAR MEETINGS
The Board of Directors shall hold a meeting at least once each calendar month. All meetings of the Board of Directors shall be held at any place within the State of California which has been designated from time to time by resolution of the Board or by written consent of all members of the Board. In the absence of such designation, meetings shall be held at the corporate office.
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At the next regular Board meeting following each annual meeting of shareholders, the Board of Directors shall hold a regular meeting for the purpose or organization, electing of officers, and the transaction of other business. Call and notice of such meetings are hereby dispensed with.
Other regular monthly meetings of the Board of Directors shall be held without call at 7:00 a.m. on the third Thursday of each month provided, however, should said day fall upon a legal holiday, then said meeting shall be held at the same time on the next day thereafter ensuing which is a full business day. Notice of all such regular meetings of the Board of Directors is hereby dispensed with.
3.8. SPECIAL MEETINGS; NOTICE
Subject to the provisions of the following paragraph, special meetings of the Board of Directors for any purpose or purposes may be called at any time by the Chairman of the Board, the President, any Vice President, the Secretary or any two (2) directors.
Notice of the time and place of special meetings shall be delivered personally or by telephone to each director or sent by first-class mail, telegram, charges prepaid, or by telecopier, addressed to each director at that director’s address as it is shown on the records of the corporation. If the notice is mailed, it shall be deposited in the United States mail at least four (4) days before the time of the holding of the meeting. If the notice is delivered personally or by telephone or by telecopier or telegram, it shall be delivered personally or by telephone or by telecopier or to the telegraph company at least forty-eight (48) hours before the time of the holding of the meeting. Any oral notice given personally or by telephone may be communicated either to the director or to a person at the office of the director who the person giving the notice has reason to believe will promptly communicate it to the director. The notice need not specify the purpose of the meeting.
3.9. QUORUM
A majority of the authorized number of directors shall constitute a quorum for the transaction of business, except to adjourn as provided in Section 3.11 of these Bylaws. Every act or decision done or made by a majority of the directors present at a meeting duly held at which a quorum is present is the act of the Board of Directors, subject to the provisions of Section 310 of the Code (as to approval of contracts or transactions in which a director has a direct or indirect material financial interest), Section 311 of the Code (as to appointment of committees), Section 317(e) of the Code (as to indemnification of directors), the Articles of Incorporation, and other applicable law.
A meeting at which a quorum is initially present may continue to transact business notwithstanding the withdrawal of directors, if any action taken is approved by at least a majority of the required quorum for such meeting.
3.10. WAIVER OF NOTICE
Notice of a meeting need not be given to any director who signs a waiver of notice or a consent to holding the meeting or an approval of the minutes thereof, whether before or after the meeting, or who attends the meeting without protesting, prior thereto or at its commencement, the lack of notice to such director. All such waivers, consents, and approvals shall be filed with the corporate records or made a part of the minutes of the meeting. A waiver of notice need not specify the purpose of any regular or special meeting of the Board of Directors.
3.11. ADJOURNMENT
A majority of the directors present, whether or not a quorum is present, may adjourn any meeting to another time and place.
3.12. NOTICE OF ADJOURNMENT
Notice of the time and place of holding an adjourned meeting need not be given to absent directors unless the meeting is adjourned for more than twenty-four (24) hours. If the meeting is adjourned for more than twenty-four (24) hours, notice of any adjournment to another time and place shall be given prior to the time of the adjourned meeting to the directors who were not present at the time of the adjournment.
3.13. BOARD ACTION BY WRITTEN CONSENT WITHOUT A MEETING
Any action required or permitted to be taken by the Board of Directors may be taken without a meeting, if all members of the Board individually or collectively consent in writing to such action. Such written consent or consents shall be filed with the minutes of the proceedings of the Board. Such action by written consent shall have the same force and effect as a unanimous vote of the Board of Directors.
3.14. FEES AND COMPENSATION OF DIRECTORS
Directors and members of committees may receive such compensation, if any, for their services and such reimbursement of expenses as may be fixed or determined by resolution of the Board of Directors. This Section 3.14 shall not be construed to preclude any director from serving the corporation in any other capacity as an officer, agent, employee or otherwise and receiving compensation for those services.
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3.15. APPROVAL OF LOANS TO OFFICERS
If these Bylaws have been approved by the corporation’s shareholders in accordance with the Code, the corporation may, upon the approval of the Board of Directors alone, make loans of money or property to, or guarantee the obligations of, any officer of the corporation or of its parent, if any, whether or not a director, or adopt an employee benefit plan or plans authorizing such loans or guaranties provided that (i) the Board of Directors determines that such a loan or guaranty or plan may reasonably be expected to benefit the corporation, (ii) the corporation has outstanding shares held of record by 100 or more persons (determined as provided in Section 605 of the Code) on the date of approval by the Board of Directors, (iii) the approval of the Board of Directors is by a vote sufficient without counting the vote of any interested director or directors; and (iv) the making of the loan is permitted under applicable state and federal law. Notwithstanding the foregoing, the corporation shall have the power to make loans as permitted by the Code or by any other applicable state and federal law.
3.16. DIRECTOR QUALIFICATIONS
Oak Valley Bancorp’s Bylaws provide qualifications which a director must meet in order to serve on the Bancorp’s board. The qualifications in the Bylaws are: (a) a requirement that the director be domiciled in one of the communities that Bancorp or its subsidiary bank serves for at least five (5) years immediately prior to his or her election; (b) a requirement that the director may not be affiliated with any other bank or savings and loan association engaged in business in California; (c) a requirement that the director may not be a nominee of someone who is affiliated with any other bank or savings and loan association doing business in California. Directors must be shareholders of the corporation.
ARTICLE IV
COMMITTEES
4.1. COMMITTEES
The Board of Directors may, by resolution adopted by a majority of the unauthorized number of directors, designate one or more committees, each consisting of at least two or more directors, to serve at the pleasure of the Board and with such authority and organization as the Board may from time to time determine.
The Board of Directors may appoint, from time to time, other temporary committees, for such purposes and with such powers as the Board may determine.
4.2. MEETINGS AND ACTION OF COMMITTEES
Meetings and actions of committees shall be governed by, and held and taken in accordance with, the provisions of Article III of these Bylaws, with such changes in the context of these bylaws as are necessary to substitute the committee and its members for the Board of Directors and its members, except that the time of regular meeting of committees may be determined either by resolution of the Board of Directors or by resolution of the committee, special meetings of committees may also be called by resolution of the Board of Directors, and notice of special meetings of committees shall also be given to all alternate members, who shall have the right to attend all meetings of the committee. Any action to be taken by a committee with members who are not also Directors must be approved by Directors constituting a majority of the committee or be submitted to the Board of Directors for approval. The Board of Directors may adopt rules for government of any committee not inconsistent with the provisions of these Bylaws.
ARTICLE V
OFFICERS
5.1. OFFICERS
The officers of the corporation shall be a President, a Secretary, and a Treasurer or Chief Financial Officer. The corporation may also have, at the discretion of the Board of Directors, a Chairman of the Board, a Chief Executive Officer, one or more Vice Presidents, one or more Assistant Secretaries, one or more Assistant Treasurers, and such other officers as may be appointed in accordance with the provisions of Section 5.3 of these Bylaws. Any number of offices may be held by the same person.
5.2. APPOINTMENT OF OFFICERS
The officers of the corporation, except such officers as may be appointed in accordance with the provisions of Section 5.3 or Section 5.5 of these Bylaws, shall be chosen by the Board and serve at the pleasure of the Board, subject to the rights, if any, of an officer under any contract of employment.
5.3. SUBORDINATE OFFICERS
The Board of Directors may appoint, or may empower the Chairman of the Board or the President to appoint, such other officers as the business of the corporation may require, each of whom shall hold office for such period, have such authority, and perform such duties as are provided in these Bylaws or as the Board of Directors may from time to time determine.
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5.4. REMOVAL AND RESIGNATION OF OFFICERS
Subject to the rights, if any, of an officer under any contract of employment, all officers serve at the pleasure of the Board of Directors and any officer may be removed, either with or without cause, by the Board of Directors at any regular or special meeting of the Board or, except in case of an officer chosen by the Board of Directors, by any officer upon whom such power of removal may be conferred by the Board of Directors.
Any officer may resign at any time by giving written notice to the corporation. Any resignation shall take effect at the date of the receipt of that notice or at any later time specified in that notice; and, unless otherwise specified in that notice, the acceptance of the resignation shall not be necessary to make it effective. Any resignation is without prejudice to the rights, if any, of the corporation under any contract to which the officer is a party.
5.5. VACANCIES IN OFFICES
A vacancy in any office because of death, resignation, removal, disqualification or any other cause shall be filled in the manner prescribed in these Bylaws for regular appointments to that office.
5.6. CHAIRMAN OF THE BOARD
The Chairman of the Board, if such an officer be elected, shall, if present, preside at meetings of the Board of Directors and exercise and perform such other powers and duties as may from time to time be assigned by the Board of Directors or as may be prescribed by these Bylaws. If there is no President, then the Chairman of the Board shall also be the chief executive officer of the corporation and shall have the powers and duties prescribed in Section 5.7 of these Bylaws.
The Board of Directors shall appoint one of its members to be the Vice-Chairman of the Board. He shall, in the absence of the Chairman, preside at all meetings of the shareholders and at all meetings of the Board of Directors and exercise and perform such other powers and duties as may be from time to time assigned to him by the Board of Directors or prescribed by the Bylaws.
5.7. PRESIDENT
Subject to such supervisory powers, if any, as may be given by the Board of Directors to the Chairman of the Board, if there be such an officer, the President shall, subject to the control of the Board of Directors, have general supervision, direction, and control of the business and the officers of the corporation. The President shall preside at all meetings of the shareholders and, in the absence or nonexistence of a Chairman of the Board, at all meetings of the Board of Directors. The President shall have such other powers and duties as may be prescribed by the Board of Directors or by these Bylaws.
5.8. CHIEF EXECUTIVE OFFICER
Subject to such supervisory powers, if any, as may be given by the Board of Directors to the Chairman of the Board, if there be such an officer, or the President or both, the Chief Executive Officer shall, subject to the control of the Board of Directors, have the general powers and duties of management of the corporation. The Chief Executive Officer shall have such other powers and duties as may be prescribed by the Board of Directors or by these Bylaws.
5.9. VICE PRESIDENTS
In the absence or disability of the President, the Vice Presidents, if any, in order of their rank as fixed by the Board of Directors or, if not ranked, a Vice President designated by the Board of Directors, shall perform all the duties of the President and when so acting shall have all the powers of, and be subject to all the restrictions upon, the President. The Vice Presidents shall have such other powers and perform such other duties as from time to time may be prescribed for them respectively by the Board of Directors, these Bylaws, the President or the Chairman of the Board.
5.10. SECRETARY
The Secretary shall keep or cause to be kept, at the principal executive office of the corporation or such other place as the Board of Directors may direct, a book of minutes of all meetings and actions of Directors, committees of directors and shareholders. The minutes shall show the time and place of each meeting, whether regular or special (and, if special, how authorized and the notice given), the names of those present at directors’ meetings or committee meetings, the number of shares present or represented at shareholders’ meetings, and the proceedings thereof.
The Secretary shall keep, or cause to be kept, at the principal executive office of the corporation or at the office of the corporation’s transfer agent or registrar, as determined by resolution of the Board of Directors, a share register, or a duplicate share register, showing the names of all shareholders and their addresses, the number and classes of shares held by each, the number and date of certificates evidencing such shares, and the number and date of cancellation of every certificate surrendered for cancellation.
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The Secretary shall give, or cause to be given, notice of all meetings of the shareholders and of the Board of Directors required to be given by law or by these Bylaws. The Secretary shall keep the seal of the corporation, if one be adopted, in safe custody and shall have such other powers and perform such other duties as may be prescribed by the Board of Directors or by these Bylaws.
The Secretary shall, in the absence of the Chairman and Vice-Chairman, preside at all shareholder meetings and meetings of the Board of Directors.
The Assistant Secretaries, if any, shall assist the Secretary in the performance of his or her duties, and shall attend to such other matters as may be required of them by the Secretary or by the Board of Directors. In the case of the absence or inability to act of the Secretary, one of them shall act in his stead.
5.11. CHIEF FINANCIAL OFFICER
The Chief Financial Officer shall keep and maintain, or cause to be kept and maintained adequate and correct books and records of accounts of the properties and business transactions of the corporation, including accounts of its assets, liabilities, receipts, disbursements, gains, losses, capital, retained earnings, and shares. The books of account shall at all reasonable times be open to inspection by any director.
The Chief Financial Officer shall deposit all money and other valuables in the name and to the credit of the corporation with such depositaries as may be designated by the Board of Directors. The Chief Financial Officer shall disburse the funds of the corporation as may be ordered by the Board of Directors, shall render to the President and directors, whenever they request it, an account of all of his or her transactions as Chief Financial Officer and of the financial condition of the corporation, and shall have such other powers and perform such other duties as may be prescribed by the Board of Directors or these Bylaws.
ARTICLE VI
INDEMNIFICATION OF DIRECTORS, OFFICERS,
EMPLOYEES, AND OTHER AGENTS
6.1. INDEMNIFICATION OF DIRECTORS
The corporation shall, to the maximum extent and in the manner permitted by the Code, indemnify each of its directors against expenses (as defined it Section 317(a) of the Code), judgments, fines, settlements, and other amounts actually and reasonably incurred in connection with any proceeding (as defined in Section 317(a) of the Code), arising by reason of the fact that such person is or was a director of the corporation. For purposes of this Article VI, a “director” of the corporation includes any person (i) who is or was a director of the corporation, (ii) who is or was serving at the request of the corporation as a director of another foreign or domestic corporation, partnership, joint venture, trust or other enterprise, or (iii) who was a director of a corporation which was a predecessor corporation of the corporation or of another enterprise at the request of such predecessor corporation.
6.2. INDEMNIFICATION OF OTHERS
The corporation shall have the power, to the extent and in the manner permitted by the Code, to indemnify each of its employees, officers, and agents (other than directors) against expenses (as defined it Section 317(a) of the Code), judgments, fines, settlements, and other amounts actually and reasonably incurred in connection with any proceeding (as defined in Section 317(a) of the Code), arising by reason of the fact that such person is or was an employee, officer, or agent of the corporation. For purposes of this Article VI, an “employee” or “officer” or “agent” of the corporation (other than a director) includes any person (i) who is or was an employee, officer, or agent of the corporation, (ii) who is or was serving at the request of the corporation as an employee, officer, or agent of another foreign or domestic corporation, partnership, joint venture, trust or other enterprise, or (iii) who was an employee, officer, or agent of a corporation which was a predecessor corporation of the corporation or of another enterprise at the request of such predecessor corporation.
The corporation may, to the extent authorized from time to time by the Board of Directors, grant rights to indemnification and to the advancement of expenses to any other agent of the corporation generally or as to any specific legal action and/or instance, by a duly adopted resolution of the Board of Directors, agreement or otherwise, up to the fullest extent of the provisions of this section with respect to the indemnification and advancement of expenses for directors and certain officers of the corporation. Notwithstanding the foregoing, to the extent that an agent of the corporation has been successful on the merits in the defense of any proceeding arising by reason of the fact such person is or was an agent of the corporation, or in the defense of any claim, issue, or matter therein, the agent shall be indemnified against expenses actually and reasonably incurred by the agent in connection therewith.
6.3. PAYMENT OF EXPENSES IN ADVANCE
Expenses and attorneys’ fees incurred in defending any civil or criminal action or proceeding for which indemnification is required pursuant to Section 6.1, or if otherwise authorized by the Board of Directors, shall be paid by the corporation in advance of the final disposition of such action or proceeding upon receipt of an undertaking by or on behalf of the indemnified party to repay such amount if it shall ultimately be determined that the indemnified party is not entitled to be indemnified as authorized in this Article VI.
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6.4. INDEMNITY NOT EXCLUSIVE
The indemnification provided by this Article VI shall not be deemed exclusive of any other rights to which those seeking indemnification may be entitled under any Bylaw, agreement, vote of shareholders or directors or otherwise, both as to action in an official capacity and as to action in another capacity while holding such office. The rights to indemnity hereunder shall continue as to a person who has ceased to be a director, officer, employee, or agent and shall inure to the benefit of the heirs, executors, and administrators of the person.
6.5. INSURANCE INDEMNIFICATION
The corporation shall have the power to purchase and maintain insurance on behalf of any person who is or was a director, officer, employee or agent of the corporation against any liability asserted against or incurred by such person in such capacity or arising out of that person’s status as such, whether or not the corporation would have the power to indemnify that person against such liability under the provisions of this Article VI.
Notwithstanding the foregoing, no indemnification shall be made to any indemnitee who was or is a party, or is threatened to be made a party, to any threatened, pending or completed action by or in the right of the corporation or the Bank to procure a judgment in its favor for any of the following:
(a) In respect of any claim, issue or matter as to which the indemnitee shall have been adjudged to be liable to the corporation (or the Bank, as the case may be) in the performance of that person’s duty to the corporation (or the Bank) and its shareholders, unless and only to the extent that the court in which that proceeding is or was pending shall determine upon application that, in view of all the circumstances of the case, that person is fairly and reasonably entitled to indemnity for the expenses which the court shall determine;
(b) Of amounts paid in settling or otherwise disposing of a pending action without court approval; or
(c) Of expenses incurred in defending a pending action which is settled or otherwise disposed of without court approval.
Any other provision herein to the contrary notwithstanding, the corporation shall not be obligated to indemnify an indemnitee for any expenses and/or the payment of profits arising from the purchase and sale by indemnitee of securities in violation of Section 16(b) of the Securities Exchange Act of 1934, as amended, or any similar successor statute.
This section does not apply to any proceeding against any trustee, investment manager, or other fiduciary of an employee benefit plan in that person’s capacity as such, even though that person may also be an agent of the corporation. The corporation shall have power to indemnify such a trustee, investment manager or other fiduciary to the extent permitted by Section 207(f) of the Code.
No amendment of any provision of this section shall reduce the rights to indemnification of any director or officer of vice president level or above of the corporation or the Bank from the rights to indemnification which were set forth in this section at the time of the accrual of the alleged cause of action asserted in any proceeding for which such director or officer is seeking indemnification or an advance of expenses.
6.6. CONFLICTS
No indemnification or advance shall be made under this Article VI, except where such indemnification or advance is mandated by law or the order, judgment or decree of any court of competent jurisdiction, in any circumstance where it appears:
(a) That it would be inconsistent with a provision of the Articles of Incorporation, these Bylaws, a resolution of the shareholders or an agreement in effect at the time of the accrual of the alleged cause of the action asserted in the proceeding in which the expenses were incurred or other amounts were paid, which prohibits or otherwise limits indemnification; or
(b) That it would be inconsistent with any condition expressly imposed by a court in approving a settlement.
6.7. RIGHT TO BRING SUIT
If a claim under this Article is not paid in full by the corporation within 90 days after a written claim has been received by the corporation (either because the claim is denied or because no determination is made), the claimant may at any time thereafter bring suit against the Corporation to recover the unpaid amount of the claim and, if successful in whole or in part, the claimant shall also be entitled to be paid the expenses of prosecuting such claim. The corporation shall be entitled to raise as a defense to any such action that the claimant has not met the standards of conduct that make it permissible under the Code for the corporation to indemnify the claimant for the claim. Neither the failure of the corporation (including its Board of Directors, independent legal counsel, or its shareholders) to have made a determination prior to the commencement of such action that indemnification of the claimant is permissible in the circumstances because he or she has met the applicable standard of conduct, if any, nor an actual determination by the corporation (including its Board of Directors, independent legal counsel, or its shareholders) that the claimant has not met the applicable standard of conduct, shall be a defense to such action or create a presumption for the purposes of such action that the claimant has not met the applicable standard of conduct.
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6.8. INDEMNITY AGREEMENTS
The Board of Directors is authorized to enter into a contract with any director, officer, employee or agent of the corporation, or any person who is or was serving at the request of the corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, including employee benefit plans, or any person who was a director, officer, employee or agent of a corporation which was a predecessor corporation of the corporation or of another enterprise at the request of such predecessor corporation, providing for indemnification rights equivalent to or, if the Board of Directors so determines and to the extent permitted by applicable law, greater than, those provided for in this Article VI.
6.9. AMENDMENT, REPEAL OR MODIFICATION
Any amendment, repeal or modification of any provision of this Article VI shall not adversely affect any right or protection of a director or agent of the corporation existing at the time of such amendment, repeal or modification.
ARTICLE VII
RECORDS AND REPORTS
7.1. MAINTENANCE AND INSPECTION OF SHARE REGISTER
The corporation shall keep either at its principal executive office or at the office of its transfer agent or registrar (if either be appointed), as determined by resolution of the Board of Directors, a record of its shareholders listing the names and addresses of all shareholders and the number and class of shares held by each shareholder.
A shareholder or shareholders of the corporation holding at least five percent (5%) in the aggregate of the outstanding voting shares of the corporation shall have an absolute right to do either or both of the following (i) inspect and copy the record of shareholders’ names, addresses, and shareholdings during usual business hours upon five (5) days’ prior written demand upon the corporation, or (ii) obtain from the transfer agent for the corporation, upon written demand and upon the tender of such transfer agent’s usual charges for such list (the amount of which charges shall be stated to the shareholder by the transfer agent upon request), a list of the shareholders’ names and addresses who are entitled to vote for the election of directors, and their shareholdings, as of the most recent record date for which it has been compiled or as of a date specified by the shareholder subsequent to the date of demand. The list shall be made available on or before the later of five (5) business days after the demand is received or the date specified therein as the date as of which the list is to be compiled.
The record of shareholders shall also be open to inspection and copying by any shareholder or holder of a voting trust certificate at any time during usual business hours upon written demand on the corporation, for a purpose reasonably related to the holder’s interests as a shareholder or holder of a voting trust certificate.
Any inspection and copying under this Section 7.1 may be made in person or by an agent or attorney of the shareholder or holder of a voting trust certificate making the demand.
7.2. MAINTENANCE AND INSPECTION OF BYLAWS
The corporation shall keep at its principal executive office or, if its principal executive office is not in the State of California, at its principal business office in California, the original or a copy of these Bylaws as amended to date, which shall be open to inspection by the shareholders at all reasonable times during office hours. If the principal executive office of the corporation is outside the State of California and the corporation has no principal business office in such state, then it shall, upon the written request of any shareholder, furnish to such shareholder a copy of these Bylaws as amended to date.
7.3. MAINTENANCE AND INSPECTION OF OTHER CORPORATE RECORDS
The accounting books and records and the minutes of proceedings of the shareholders and the Board of Directors, and committees of the Board of Directors shall be kept at such place or places as are designated by the Board of Directors or, in absence of such designation, at the principal executive office of the corporation. The minutes shall be kept in written form, and the accounting books and records shall be kept either in written form or in any other form capable of being converted into written form.
The minutes and accounting books and records shall be open to inspection upon the written demand on the corporation of any shareholder or holder of a voting trust certificate at any reasonable time during usual business hours, for a purpose reasonably related to such holder’s interests as a shareholder or as the holder of a voting trust certificate. Such inspection by a shareholder or holder of a voting trust certificate may be made in person or by an agent or attorney and the right of inspection includes the right to copy and make extracts. Such rights of inspection shall extend to the records of each subsidiary corporation of the corporation.
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7.4. INSPECTION BY DIRECTORS
Every director shall have the absolute right at any reasonable tine to inspect and copy all books, records, and documents of every kind and to inspect the physical properties of the corporation and each of its subsidiary corporations, domestic or foreign. Such inspection by a director may be made in person or by an agent or attorney and the right of inspection includes the right to copy and make extracts.
7.5. ANNUAL REPORT TO SHAREHOLDERS; WAIVER
The Board of Directors shall cause an annual report to be sent to the shareholders not later than one hundred twenty (120) days after the close of the fiscal year adopted by the corporation. Such report shall be sent to the shareholders at least fifteen (15) (or, if sent by third-class mail, thirty-five (35)) days prior to the annual meeting of shareholders to be held during the next fiscal year and in the manner specified in Section 2.5 of these Bylaws for giving notice to shareholders of the corporation.
The annual report shall contain a balance sheet as of the end of the fiscal year and an income statement and statement of changes in financial position for the fiscal year, accompanied by any report thereon of independent accountants or, if there is no such report, the certificate of an authorized officer of the corporation that the statements were prepared without audit from the books and records of the corporation.
The foregoing requirement of an annual report shall be waived so long as the shares of the corporation are held by fewer than one hundred (100) holders of record.
7.6. FINANCIAL STATEMENTS
If no annual report for the fiscal year has been sent to shareholders, then the corporation shall, upon the written request of any shareholder made more than one hundred twenty (120) days after the close of such fiscal year, deliver or mail to the person making the request, within thirty (30) days thereafter, a copy of a balance sheet as of the end of such fiscal year and an income statement and statement of changes in financial position for such fiscal year.
A shareholder or shareholders holding at least five percent (5%) of the outstanding shares of any class of the corporation may make a written request to the corporation for an income statement of the corporation for the three-month, six-month or nine-month period of the current fiscal year ended more than thirty (30) days prior to the date of the request and a balance sheet of the corporation as of the end of that period. The statements shall be delivered or mailed to the person making the request within thirty (30) days thereafter. A copy of the statements shall be kept on file in the principal office of the corporation for twelve (12) months and it shall be exhibited at all reasonable times to any shareholder demanding an examination of the statements or a copy shall be mailed to the shareholder. If the corporation has not sent to the shareholders its annual report for the last fiscal year, the statements referred to in the first paragraph of this Section 7.6 shall likewise be delivered or mailed to the shareholder or shareholders within thirty (30) days after the request.
The quarterly income statements and balance sheets referred to in this section shall be accompanied by the report thereon, if any, of any independent accountants engaged by the corporation or the certificate of an authorized officer of the corporation that the financial statements were prepared without audit from the books and records of the corporation.
7.7. REPRESENTATION OF SHARES OF OTHER CORPORATIONS
The Chairman of the Board, the President, any Vice President, the Chief Executive Officer, the Chief Financial Officer, the Secretary or Assistant Secretary of this corporation, or any other person authorized by the Board of Directors or the President or a Vice President, is authorized to vote, represent, and exercise on behalf of this corporation all rights incident to any and all shares of any other corporation or corporations standing in the name of this corporation. The authority herein granted may be exercised either by such person directly or by any other person authorized to do so by proxy or power of attorney duly executed by such person having the authority.
ARTICLE VIII
GENERAL MATTERS
8.1. RECORD DATE FOR PURPOSES OTHER THAN NOTICE AND VOTING
For purposes of determining the shareholders entitled to receive payment of any dividend or other distribution or allotment of any rights or entitled to exercise any rights in respect of any other lawful action (other than with respect to notice or voting at a shareholders meeting or action by shareholders by written consent without a meeting), the Board of Directors may fix, in advance, a record date, which shall not be more than sixty (60) days prior to any such action. Only shareholders of record at the close of business on the record date are entitled to receive the dividend, distribution or allotment of rights, or to exercise the rights, as the case may be, notwithstanding any transfer of any shares on the books of the corporation after the record date, except as otherwise provided in the Articles of Incorporation or the Code.
If the Board of Directors does not so fix a record date, then the record date for determining shareholders for any such purpose shall be at the close of business on the day on which the Board adopts the resolution relating thereto or the sixtieth (60th) day prior to the date of that action, whichever is later.
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8.2. CHECKS; DRAFTS; EVIDENCES OF INDEBTEDNESS
From time to time, the Board of Directors shall determine by resolution which person or persons may sign or endorse all checks, drafts, other orders for payment of money, notes or other evidences of indebtedness that are issued in the name of or payable to the corporation, and only the persons so authorized shall sign or endorse those instruments.
8.3. CORPORATE CONTRACTS AND INSTRUMENTS: HOW EXECUTED
The Board of Directors, except as otherwise provided in these Bylaws, may authorize any officer or officers, or agent or agents, to enter into any contract or execute any instrument in the name of and on behalf of the corporation; such authority may be general or confined to specific instances. Unless so authorized or ratified by the Board of Directors or within the agency power of an officer, no officer, agent or employee shall have any power or authority to bind the corporation by any contract or engagement or to pledge its credit or to render it liable for any purpose or for any amount.
8.4. CERTIFICATES FOR SHARES
A certificate or certificates for shares of the corporation shall be issued to each shareholder when any of such shares are fully paid. The Board of Directors may authorize the issuance of certificates for shares partly paid provided that these certificates shall state the total amount of the consideration to be paid for them and the amount actually paid. All certificates shall be signed in the name of the corporation by the Chairman of the Board or the Vice Chairman of the Board or the President or a Vice President and by the Chief Financial Officer or an Assistant Treasurer or the Secretary or an Assistant Secretary, certifying the number of shares and the class or series of shares owned by the shareholder. Any or all of the signatures on the certificate may be by facsimile.
Every certificate authenticated by a facsimile of a signature must be countersigned by a transfer agent or transfer clerk, and be registered by an incorporated bank or trust company as registrar of transfers, before issuance.
In case any officer, transfer agent or registrar who has signed or whose facsimile signature has been placed on a certificate has ceased to be such officer, transfer agent or registrar before such certificate is issued, it may be issued by the corporation with the same effect as if that person were an officer, transfer agent or registrar at the date of issue.
8.5. LOST CERTIFICATES
Except as provided in this Section 8.5, no new certificates for shares shall be issued to replace a previously issued certificate unless the latter is surrendered to the corporation or its transfer agent or registrar and cancelled at the same time. The Board of Directors may, in case any share certificate or certificate for any other security is lost, stolen or destroyed (as evidenced by a written affidavit or affirmation of such fact), authorize the issuance of replacement certificates on such terms and conditions as the Board may require; the Board may require indemnification of the corporation secured by a bond or other adequate security sufficient to protect the corporation against any claim that may be made against it, including any expense or liability, on account of the alleged loss, theft or destruction of the certificate or the issuance of the replacement certificate.
8.6. CONSTRUCTION; DEFINITIONS
Unless the context requires otherwise, the general provisions, rules of construction, and definitions in the Code shall govern the construction of these Bylaws. Without limiting the generality of this provision, the singular number includes the plural, the plural number includes the singular, and the term “person” includes both a corporation and a natural person.
ARTICLE IX
AMENDMENTS
9.1. AMENDMENT BY SHAREHOLDERS
New Bylaws may be adopted or these Bylaws may be amended or repealed by the vote or written consent of holders of a majority of the outstanding shares entitled to vote; provided, however, that if the Articles of Incorporation of the corporation set forth the number of authorized Directors of the corporation, then the authorized number of Directors may be changed only by an amendment of the Articles of Incorporation.
9.2. AMENDMENT BY DIRECTORS
Subject to the rights of the shareholders as provided in Section 9.1 of these Bylaws, Bylaws, other than a Bylaw or an amendment of a Bylaw changing the authorized number of directors (except to fix the authorized number of directors pursuant to a Bylaw providing for a variable number of directors), may be adopted, amended or repealed by the Board of Directors.
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9.3. RECORD OF AMENDMENTS
Whenever an amendment or new Bylaw is adopted, it shall be copied in the book of minutes with the original Bylaws. If any Bylaw is repealed, the fact of repeal, with the date of the meeting at which the repeal was enacted or written consent was filed, shall be stated in said book.
ARTICLE X
INTERPRETATION
Reference in these Bylaws to any provision of the California Corporations Code shall be deemed to include all amendments thereof.
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SECRETARY’S CERTIFICATE OF ADOPTION OF BYLAWS
OF
OAK VALLEY BANCORP
I, the undersigned, do hereby certify:
(a) That I am the duly elected and acting Secretary of OAK VALLEY BANCORP, a California corporation.
(b) That the foregoing Bylaws constitute the Bylaws of said corporation as adopted by the Directors of said corporation by unanimous written consent on April 1, 2008.
IN WITNESS WHEREOF, I have hereunto subscribed my name this 1 st day of April, 2008.
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By: |
/s/ ARNE J. KNUDSEN |
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EXHIBIT 10.1
OAK VALLEY COMMUNITY BANK
SECOND AMENDED 1991 STOCK OPTION PLAN
ARTICLE I Purpose.
The purpose of the 1991 Stock Option Plan, as amended (the “Plan”) is to provide a means whereby selected officers, directors and key, full-time, salaried employees of Oak Valley Community Bank and its subsidiaries (hereinafter called the “Bank”) may be given an opportunity to purchase the Common Stock of the Bank (the “Common Stock”) . The word “subsidiary” or “parent”, as used in this Plan, means a subsidiary or parent corporation as defined in Section 424 of the Internal Revenue Code of 1986, as amended. The Internal Revenue Code of 1986, as amended to date and as it may be amended from time to time, is referred to herein as the “Code”.
ARTICLE II Stock Options.
Stock options granted pursuant to the Plan may, at the discretion of the Board, be granted either as Incentive Stock Options (“ISO”) or as Nonstatutory Stock options (“NSO”). An ISO shall mean an option described in Section 422 of the Code. A NSO shall mean an option not described in Sections 422 or 423(b) of the Code. Except as provided in Section 4(b) of the Plan, no option may be granted alternatively as an ISO and as a NSO.
ARTICLE III Administration.
3.1. The Board of Directors (the “Board”), whose authority shall be plenary, shall administer the Plan unless and until such time as the Board delegates administration of the Plan pursuant to subsection 3(c).
3.2. The Board, whose determinations shall be conclusive, shall have the power, subject to and within the limits of the express provisions of the Plan:
(a) To grant options pursuant to the Plan.
(b) To determine from time to time which of the eligible persons shall be granted options under the Plan, the number of shares for which each option shall be granted, the term of each granted option and the time or times during the term of each option within which all or portions of each option may be exercised (which at the Board’s discretion may be accelerated).
(c) To construe and interpret the Plan and options granted under it, and to establish amend, and revoke rules and regulations for its administration. The Board, in the exercise of this power, shall generally determine all questions of policy and expediency that may arise and may correct any defect, omission, or inconsistency in the Plan or in any option agreement in a manner and to the extent it shall deem necessary or expedient to make the Plan fully effective.
(d) To grant options in exchange for cancellation of options granted earlier at different exercise prices, provided, however, nothing contained herein shall empower the Board to grant an ISO under conditions or pursuant to terms that are inconsistent with the requirements of Section 4(b) hereinbelow.
(e) To prescribe the terms and provisions of each option granted (which need not be identical) and the form of written instrument that shall constitute the option agreement.
(f) To amend the Plan as provided in Section 11.
(g) Generally, to exercise each powers and to perform such acts as are deemed necessary or expedient to promote the best interest of the Bank.
(h) To take appropriate action to cause any option granted hereunder to cease to be an ISO, provided, however, no such action may be taken by the Board without the prior written consent of the affected optionee.
3.3. For grants of options to any person eligible under the Plan, the Board may, by resolution, delegate administration of the Plan (including, without limitation, the Board’s powers under subsection 3(b) hereinabove) to an existing committee acting under the authority of the Board. The Board shall have complete discretion to determine the composition, structure, form, term and operation of any committee established to administer the Plan. If administration is delegated to a committee, unless the Board otherwise provides, the committee, shall have, in connection with the administration of the Plan, the powers theretofore possessed by the Board, subject, however, to such constraints, not inconsistent with the provisions of the Plan, as may be adopted from time to time by the Board. The Board at any time may revest in the Board the administration of the Plan. No member of such committee nor any director or officer may be granted an option unless said grant is made by a majority of all of the directors and a majority of the directors acting in such matter are, and have been for at least one year prior thereto, ineligible for benefits under the Plan or any other stock option, stock purchase, stock bonus, stock appreciation right or similar plan of the Bank or any of its affiliates.
ARTICLE IV Shares Subject to Plan and to Options.
4.1. Subject to the provisions of Section 9 (relating to adjustments upon changes in stock), the stock which may be sold pursuant to options granted under the Plan shall not exceed in the aggregate 266,759 shares of the Bank’s authorized Common Stock. If any options granted under the Plan shall for any reason terminate or expire without having been exercised in full, the stock not purchased under such options shall be available again for the purposes of the Plan.
4.2. The aggregate fair market value of the stock (determined at the time of the grant of the option) for which any employee may exercise ISOs for the first time in any calendar year under all plans of the Bank and its parent and subsidiary shall not exceed $100,000 plus any unused limit carryover (as defined in the Code) to such year or any other maximum aggregate fair market value to be established in the future under the Code. Should it be determined that any ISO granted under the Plan inadvertently exceeds such maximum, such ISO grant shall be deemed to be a grant of a NSO to the extent, but only to the extent, of such excess.
ARTICLE V Eligibility.
Persons eligible for participation in the Plan shall be selected by the Board of Directors or the Committee. Directors of the Bank who are not also employees of the Bank shall not be eligible for an ISO. No ISO may be granted to a person who, at the time of grant, owns stock possessing more than 10% of the total combined voting power of the Bank or its parent or any subsidiary unless the option price is at least 110% of the fair market value of the stock subject to the option and the term of the option does not exceed five (5) years from the date such ISO is granted. Any employee may hold more than one option at any time.
ARTICLE VI Terms of Option Agreement.
Each option agreement shall be in such form and shall contain such terms and conditions as the board or its delegate from time to time deem appropriate, subject to the following limitations:
6.1. The term of any ISO shall not be greater than ten (10) years from the date it was granted.
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6.2. The purchase price of each ISO and NSO shall be not less than the fair market value of the stock subject to the ISO or NSO on the date the ISO or NSO is granted.
6.3. An ISO, by its terms shall not be transferable otherwise than by will or the laws of descent and distribution and may be exercisable during the lifetime of the option holder only by the option holder.
6.4. The option shall vest over a five-year period, with 20% of the Shares exercisable at the end of each year Participant has completed as an employee or director of the Bank, or upon such other schedule as the Board may fix.
6.5. An option (the “New Option”) which is designated by the Board or its delegate, as the case may be, as an ISO by its terms shall not be exercisable, notwithstanding that such may be vested in whole or in part, with respect to all or any part of the Shares subject thereto while there is outstanding any other ISO, granted to the optionee prior to the grant of the New Option, to purchase Common Stock in the Bank or in a corporation that is, at the time of granting of the New Option, a parent or subsidiary of the Bank, or in a predecessor corporation of any such corporations. For purposes of the preceding sentence, an ISO shall be treated as “outstanding” until such option is exercised in full or expires by reason of the lapse of time.
6.6. Upon the termination of a Participant’s employment, his rights to exercise an option then held by him shall be only as follows:
DEATH OR DISABILITY: If a Participant’s employment is terminated by death or disability (as defined in Code Section 105(d)(4)), he or his estate, as the case may be, shall have the right for a period of twelve (12) months following the death or disability to exercise the option the Participant was entitled to exercise such option on the date of his death or disability, or to the extent otherwise specified by the Board, which may so specify, at a time that is subsequent to the date of his death or disability, provided the actual date of exercise is in no event after the expiration of the term of the option. A Participant’s estate shall mean his legal representative or any person who acquires the right to exercise an option by reason of the Participant’s death or disability.
MISCONDUCT: If a Plan participant is determined by the Board of Directors or its delegate (as defined in Section 3 hereinabove) to have committed an act of theft, embezzlement, fraud, dishonesty, a breach of fiduciary duty to the Bank (or affiliate), or deliberate disregard of the rules of the Bank (or affiliate) which resulted in loss, damage or injury to the Bank (or affiliate), or if a participant makes any unauthorized disclosure of any of the trade secrets or confidential information of the Bank (or affiliate), engages in any conduct which constitutes unfair competition with the Bank (or affiliate), induces any customer of the Bank (or affiliate) to breach any contract with the Bank (or affiliate) or induces any principal for whom the Bank (or affiliate) acts as agent to terminate such agency relationship, neither the participant nor his estate shall be entitled to exercise any option with respect to any shares whatsoever after termination of employment, whether or not after termination of employment, the participant receives any other payment, compensation or benefits from the Bank (or affiliate). In making such determination, the Board of Directors shall give the participant an opportunity to present to the Board or its delegate evidence on his behalf. For the purpose of this paragraph of this subsection 6(e), termination of employment shall be deemed to occur when the Bank (or affiliate) dispatches notice or advice to participant that his employment is terminated.
OTHER REASONS: If a Plan participant’s employment is terminated for any reason other than those mentioned above under “Death or Disability” or “Misconduct”, he or his estate may, within ninety (90) days following such termination, or with such longer period as the Board may fix, exercise the option to the extent such option was exercisable by the participant on the date of
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termination of his employment, or to the extent otherwise specified by the Board, which may so specify at a time that is subsequent to the date of the termination of his employment, provided the date of exercise is in no event after the expiration of the term of the option.
6.7. In the event of sale, dissolution or liquidation of the Bank or a merger or consolidation in which the Bank is not the surviving or resulting corporation, the Board of Directors shall have the power to cause the termination of every option outstanding hereunder, except that the surviving or resulting corporation may, in its absolute and uncontrolled discretion, tender an option or options to purchase its shares and otherwise; provided, however, that in all events the optionee shall have the right immediately prior to such sale, dissolution, liquidation, merger or consolidation in which the Bank is not the surviving or resulting corporation, to exercise his option and purchase shares subject thereto to the extent of any unexercised portion of his option, regardless of any contrary vesting provisions. This right of exercise shall be conditioned upon the completion of such dissolution or liquidation or merger or consolidation.
In the event of an offer by any person or entity to all shareholders of the Bank to purchase any or all shares of Common Stock of the Bank (or shares of stock or other securities which shall be substituted for such shares or to which such shares shall be adjusted as provided in Section 9 hereof), any participant under this Plan shall have the right upon receipt of such offer to exercise his or her option and purchase shares subject thereto to the extent of any unexercised or unvested portion of such option.
The grant of an option pursuant to the Plan shall not affect in any way the right or power of the Bank to make adjustments, reclassifications, reorganizations or changes or its capital or business structure or to merge or to consolidate or to dissolve, liquidate or sell, or transfer all or any part of its business or assets.
6.8. Options may also contain such other provisions, which shall not be inconsistent with any of the foregoing terms, as the Board of Directors shall deem appropriate. No option, however, nor anything contained in the Plan, shall confer upon any employee any right to continue in the employ of the Bank (or affiliate) nor limit in any way the right of the Bank (or affiliate) to terminate his employment at any time.
ARTICLE VII Payments.
7.1. To the extent the right to purchase Shares has vested under a participant’s stock option agreement, options may be exercised from time to time by delivering payment in full at the Option Price for the number of Shares being purchased by cash, certified check, official bank check or the equivalent thereof acceptable to the Bank. Such payment shall be accompanied by written notice to the Secretary of the Bank identifying the option or part thereof being exercised and specifying the number of shares for which payment is being tendered. The Bank shall deliver or cause to be delivered to the optionee, which delivery shall be not less than fifteen (15) days and not more than sixty (60) days after the giving of such notice, without transfer or issue tax to the optionee (or other person entitled to exercise the option) at the principal office of the company, or such other place as shall be mutually acceptable, a certificate or certificates for such Shares dated the date the options were validly exercised; provided, however, that the time of such delivery may be postponed by the Bank for such period as may be required for it with reasonable diligence to comply with any requirements of law. If an option covers incentive and non-statutory stock options, separate stock certificates shall be issued; one or more for stock acquired upon exercise of the incentive stock options and one or more for the stock acquired upon exercise of the non-statutory stock options.
7.2. Where in the opinion of counsel to the company, the Bank has or will have a legal obligation to withhold taxes relating to the exercise of any stock option, such option may not be exercised, in whole or in part, unless such tax obligation is first satisfied in manner satisfactory to the Bank.
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ARTICLE VIII Use of Proceeds from Stock.
Proceeds from the sale of stock pursuant to options granted under the Plan shall be used for general corporate purposes.
ARTICLE IX Adjustments of and Changes in the Stock.
In the event that the shares of Common Stock of the Bank, as presently constituted, shall be changed into or exchanged for a different number or kind of shares of stock or other securities of the Bank or of another corporation (whether by reason of merger, consolidation, recapitalization, reclassification, split-up, combination of shares, or otherwise), or if the number of shares of Common Stock of the Bank shall be increased through the payment of a stock dividend, or a stock split, then there shall be substituted for or added to each share of Common Stock of the Bank theretofore appropriated or thereafter subject or which may become subject to in option under the Plan, the number and kind of shares of stock or other securities into which each outstanding share of Common Stock of the Bank shall be so changed, or for which each such share shall be exchanged or to which each such share shall be entitled, as the case may be. Outstanding options shall also be amended as to price and other terms if necessary to reflect the foregoing events. In the event there shall be any other change in the number or kind of the outstanding shares of Common Stock of the Bank, or of any stock or other securities into which such Common Stock of the Bank, or of any stock or other securities into which such Common Stock shall have changed, or for which it shall have been exchanged, then if the Board of Directors shall, in its sole discretion, determine that such change equitably requires an adjustment in any option heretofore granted or which may be granted under the Plan, such adjustment shall be made in accordance with such determination. No right to purchase fractional shares shall result from any adjustment in options pursuant to this Section 9. In case of any such adjustment, the shares subject to the option shall be rounded own to the nearest whole share. Notice of any adjustment shall be given by the Bank to each holder of an option which shall have been so adjusted and such adjustment (whether or not such notice is given) shall be effective and binding for all purposes of the Plan.
ARTICLE X Amendment of the Plan.
The Board at any time, and from time to time, may amend the Plan, subject to approval by, the Superintendent of Banks; and within twelve (12) months before or after the date of such amendment’s adoption, approval by the vote or written consent of a majority of the outstanding shares of the Bank entitled to vote, where such amendment will:
10.1. increase the number of shares reserved for options under the Plan;
10.2. materially increase the benefits accruing to participants under the Plan; or
10.3. materially modify the requirements of Section 5 as to eligibility for participation in the Plan.
It is expressly contemplated that the Board may amend the Plan in any respect necessary to provide the Bank’s employees with the maximum benefits provided or to be provided under Section 422 of the Code and the regulations promulgated thereunder relating to employee incentive stock options and/or to bring the Plan or options granted under it into compliance therewith.
Rights and obligations under any option granted before any amendment of the Plan shall not be altered or impaired by amendment o the Plan, except with the consent, which may be obtained in any manner deemed by the Board to be appropriate, of the person to whom the option was granted.
ARTICLE XI Termination or Suspension of the Plan.
The Board at any time may suspend or terminate the Plan. The Plan, unless sooner terminated, shall terminate at the end of ten (10) years from the date the Plan is adopted by the Board or approved by the stockholders of the Bank, whichever is earlier. An option may not be granted under the Plan while the Plan is suspended or after it is terminated.
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Rights and obligations under any option granted while the Plan is in effect shall not be altered or impaired by suspension or termination of the Plan, except with the consent of the person to whom the option was granted, which may be obtained in any manner that the Board deems appropriate.
ARTICLE XII Listing, Qualification or Approval of Stock, Approval of Options.
All options granted under the Plan are subject to the requirement that if at any time the Board of Directors shall determine in its discretion that the listing or qualification of the shares of stock subject thereto on any securities exchange or under any applicable law, or the consent or approval by any governmental regulatory body or the Shareholders of the Bank, is necessary or desirable as a condition of or in connection with the issuance of shares under the option, the option may not be exercised in whole or in part unless such listing, qualification, consent or approval shall have been effected or obtained free of any condition not acceptable to the Board of Directors.
ARTICLE XIII Binding Effect of Conditions.
The conditions and stipulations hereinabove contained or in any option granted pursuant to the Plan shall be and constitute a covenant running with all of the shares of the Bank owned by the Participant at any time, directly or indirectly whether the same have been issued or not, and those shares of the Bank owned by the Participant shall not be sold, assigned or transferred by any persons save and except in accordance with the terms and conditions herein provided, and the Participant shall agree to use his best efforts to cause the officers of the Bank to refuse to record on the books of the Bank any assignments or transfer made or attempted to be made except as provided in the Plan and to cause said officers to refuse to cancel old certificates or to issue or deliver new certificates therefor where the purchaser or assignee as acquired certificates for the stock represented thereby, except strictly in accordance with the provisions of this Plan.
ARTICLE XIV Effective Date of Plan.
The Plan shall become effective as determined by the Board but no options granted under it shall be exercisable until the Plan has been approved by the California Superintendent of Banks and the Plan has been approved by the vote or written consent of the holders of a majority of the outstanding shares of the Bank entitled to vote.
ARTICLE XV Privileges of Stock Ownership; Securities Law Compliance; Notice of Sale.
No optionee shall be entitled to the privileges of stock ownership as to any Shares not actually issued and delivered, to the optionee. No Shares shall be purchased upon the exercise of any option unless and until any then applicable requirements of any regulatory agencies having jurisdiction and of any exchanges upon which the Common Stock of the Bank may be listed shall have been fully complied with. The Bank shall diligently endeavor to comply with all applicable securities laws before any options are granted under the Plan and before Shares are issued pursuant to the exercise of such options.
ARTICLE XVI Indemnification.
To the extent permitted by applicable law in effect from time to time, no member of the Board of Directors or the Committee shall be liable for any action or omission of any other member of the Bard of Directors or Committee nor for any act or omission on the member’s own part, excepting only the member’s own willful misconduct or gross negligence. The Bank shall pay expenses incurred by, and satisfy a judgment or fine rendered or levied against, a present or former director or member of the Committee in any action against such person (whether or not the Bank is joined as a party defendant) to impose a liability or penalty on such person for an act alleged to have been committed by such person while a director or member of the Committee arising with respect to the Plan or administration thereof or out of membership on the Committee or by the Bank, or all or any combination of the preceding so long as the Director or Committee member was acting in good faith, within what such
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director or Committee member reasonably believed to have been within the scope of his or her employment or authority and for a purpose which he or she reasonably believed to be in the best interests of the Bank or its shareholders. Payments authorized hereunder include amounts paid and expenses incurred in settling any such action or threatened action. This section does not apply to any action instituted or maintained in the right of the Bank by a shareholder or holder of a voting trust certificate representing shares of the Bank. The provisions of this section shall apply to the estate, executor, administrator, heirs, legatees or devisees of a director or Committee member, and the term “person” as used in this section all include the estate, executor, administrator, heirs, legatees, of devisees of such person.
ARTICLE XVII Miscellaneous.
The use of any masculine pronoun or similar term is intended to be without legal significance as to gender.
ARTICLE XVIII Adoption and Approval.
The Plan was adopted by the Board of Directors on November 21, 1995 and approved on April 16, 1996 by a majority of the shares entitled to vote. This Second Amended Plan was adopted by the Board of Directors on January 20, 1998 and approved on April 21, 1998 by a majority of the shareholders entitled to vote.
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THIRD AMENDMENT TO
OAK VALLEY COMMUNITY BANK
1991 STOCK OPTION PLAN
Pursuant to the authority set forth in Paragraph 10 of the Oak Valley Community Bank 1991 Stock Option Plan (the “Plan”), as amended and restated by the Second Amended 1991 Stock Option Plan effective January 20, 1998, and approved on April 21, 1998 by a majority of the shareholders entitled to vote, the Plan is hereby amended as follows:
1. Paragraph 6(e) of the Plan is deleted in its entirety.
2. Paragraphs 6 (f) , (g) and (h) shall be renumbered as paragraphs 6(e), (f) and (g), respectively.
3. Except as so amended the terms of the Plan shall continue in full force and effect.
This Third Amendment to the Oak Valley Community Bank 1991 Stock Option Plan is effective as of May 19, 1998, pursuant to the resolutions adopted by the Board of Directors of Oak Valley Community Bank at its meeting held on May 19, 1998.
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EXHIBIT 10.2
OAK VALLEY COMMUNITY BANK
DIRECTOR RETIREMENT AGREEMENT
THIS AGREEMENT is adopted this 1 st day of January, 2002, by and between OAK VALLEY COMMUNITY BANK, a state-chartered commercial bank located in Oakdale, California (the “Company’) and (the “Director”).
INTRODUCTION
To encourage the Director to remain a member of the Company’s Board of Directors, the Company is willing to provide retirement benefits to the Director. The Company will pay the benefits from its general assets.
AGREEMENT
The Director and the Company agree as follows:
ARTICLE XIX
Definitions
Whenever used in this Agreement, the following words and phrases shall have the meanings specified:
19.1. “ Change of Control ” means:
(a) A change in the ownership of the capital stock of the Company or the Holding Company, whereby a corporation, person, or group acting in concert (hereinafter this Agreement shall collectively refer to any combination of these three [a corporation, person, or group acting in concert] as a “Person”) as described in Section 14(d)(2) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), acquires, directly or indirectly, beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of a number of shares of capital stock of the Company or Holding Company which constitutes fifty percent (50%) or more of the combined voting power of the Company’s or Holding Company’s then outstanding capital stock then entitled to vote generally in the election of directors; or
(b) The persons who were members of the Board of Directors of the Company or Holding Company immediately prior to a tender offer, exchange offer, contested election or any combination of the foregoing, cease to constitute a majority of the Board of Directors; or
(c) The adoption by the Board of Directors of the Company or of the Holding Company of a merger, consolidation or reorganization plan involving the Company or Holding Company in which the Company or the Holding Company is not the surviving entity, or a sale of all or substantially all of the assets of the Company or Holding Company. For purposes of this Agreement, a sale of all or substantially all of the assets of the Company or Holding Company shall be deemed to occur if any Person acquires (or during the 12-month period ending on the date of the most recent acquisition by such Person, has acquired) gross assets of the Company or Holding Company that have an aggregate fair market value equal to fifty percent (50%) or more of the fair market value of all of the respective gross assets of the Company or Holding Company immediately prior to such acquisition or acquisitions; or
(d) A tender offer or exchange offer is made by any Person which results in such Person beneficially owning (within the meaning of Rule 13d-3 promulgated under the Exchange Act) either fifty percent (50%) or more of the Company’s or Holding Company’s outstanding shares of Common Stock or shares of capital stock having fifty percent (50%) or more the combined voting power of the Company’s or Holding Company’s then outstanding capital stock (other than an offer made by the Company or the Holding Company), and sufficient shares are acquired under the offer to cause such person to own fifty percent (50%) or more of the voting power; or
(e) Any other transactions or series of related transactions occurring which have substantially the same effect as the transactions specified in any of the preceding clauses of this subsection (1.1).
(a) “Permitted Transfers” means that a Shareholder, defined as the existing owners of all issued and outstanding stock of the Company as of the date of this Agreement, may make the following transfers and such transfers shall be deemed not to be a Change of Control under Section 1.1:
(a) To any trust created solely for the benefit of any Shareholder or any spouse of or any lineal descendant of any Shareholder;
(b) To any individual or entity by bona fide gift;
(c) To any spouse or former spouse pursuant to the terms of a decree of divorce;
(d) To any officer or employee of the Company pursuant to any incentive stock option plan established by the Shareholders;
(e) To any family member; or
(f) After receipt of any necessary regulatory approvals, to any Company or partnership a majority of the stock or interests of which Company or partnership are owned by any of the Shareholders.
19.2. “Code” means the Internal Revenue Code of 1986, as amended.
19.3. “Disability” means the Director’s suffering a sickness, accident or injury which has been determined by the carrier of any individual or group disability insurance policy covering the Director, or by the Social Security Administration, to be a disability rendering the Director totally and permanently disabled. The Director must submit proof to the Company of the carrier’s or Social Security Administration’s determination upon the request of the Company.
19.4. “Early Termination” means the Termination of Service before Normal Retirement Age for reasons other than death, Disability, Termination for Cause or following a Change of Control.
19.5. “Early Termination Date” means the month, day and year in which Early Termination occurs.
19.6. “ Effective Date ” means January 1, 2002.
19.7. “Involuntary Termination of Service” means, following a Change of Control, the Director is removed from the Board of Directors without his consent.
19.8. “Normal Retirement Age” means the later of the Director’s 72 nd birthday or five (5) Years of Service.
19.9. “Normal Retirement Date” means the later of Normal Retirement Age or Termination of Service.
19.10. “Plan Year” means each calendar year from January 1 through December 31. The initial Plan Year shall commence on the date of this Agreement, and end on December 31, 2001.
19.11. “ Termination for Cause ” See Section 5.2.
19.12. “Termination of Service” means that the Director ceases to be a member of the Company’s Board of Directors for any reason, voluntarily or involuntarily, other than by reason of a leave of absence approved by the Company.
19.13. “Years of Service “ means the total number of calendar years during which the Director serves on the Board of Directors.
ARTICLE XX
Lifetime Benefits
20.1. Normal Retirement Benefit. Upon Termination of Service on or after the Normal Retirement Date for reasons other than death, the Company shall pay to the Director the benefit described in this Section 2.1 in lieu of any other benefit under this Article.
(a) Amount of Benefit. The annual benefit under this Section 2.1 is twelve thousand dollars ($12,000). The Company’s Board of Directors, in its sole discretion, may increase the annual benefit under this Section 2.1.1; however, any increase shall require the recalculation of Schedule A.
(b) Payment of Benefit. The Company shall pay the annual benefit to the Director in 12 equal monthly installments payable on the first day of each month commencing with the month following the Director’s Normal Retirement Date. The annual benefit shall be paid to the Director for ten (10) years.
(c) Benefit Increases. Commencing on the first anniversary of the first benefit payment, and continuing on each subsequent anniversary, the Company’s Board of Directors, in its sole discretion, may increase the benefit.
20.2. Early Termination Benefit. Upon Early Termination, the Company shall pay to the Director the benefit described in this Section 2.2 in lieu of any other benefit under this Agreement.
(a) Amount of Benefit. The benefit under this Section 2.2 is the Early Termination Lump Sum Benefit set forth in Schedule A for the Plan Year ending immediately prior to the Early Termination Date, determined by vesting the Director in one hundred percent (100%) of the Accrual Balance on Schedule A. Any increase in the annual benefit under Section 2.1.1 shall require the recalculation of this benefit on Schedule A.
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(b) Payment of Benefit. The Company shall pay the benefit to the Director in a lump sum within sixty (60) days following Termination of Service.
20.3. Disability Benefit. If the Director terminates service due to Disability prior to Normal Retirement Age, the Company shall pay to the Director the benefit described in this Section 2.3 in lieu of any other benefit under this Agreement.
(a) Amount of Benefit. The benefit under this Section 2.3 is the Disability Lump Sum Benefit set forth in Schedule A for the Plan Year ending immediately prior to the date in which Termination of Service occurs, determined by vesting the Director in one hundred percent (100%) percent of the Accrual Balance on Schedule A. Any increase in the annual benefit under Section 2.1.1 would require the recalculation of the Disability benefit on Schedule A.
(b) Payment of Benefit. The Company shall pay the benefit amount to the Director in a lump sum within sixty (60) days following the Termination of Service.
20.4. Change of Control Benefit. Upon Involuntary Termination of Service within twenty-four (24) months following a Change of Control, the Company shall pay to the Director the benefit described in this Section 2.4 in lieu of any other benefit under this Agreement.
(a) Amount of Benefit. The annual benefit under this Section 2.4 is the Change of Control Annual Benefit set forth in Schedule A for the Plan Year ending immediately prior to the date in which Termination of Service occurs, determined by vesting the Director in the one hundred percent (100%) of the Normal Retirement Benefit described in Section 2.1.1. Any increase in the annual benefit under Section 2.1.1 would require the recalculation of the Change of Control benefit on Schedule A.
(b) Payment of Benefit. The Company shall pay the annual benefit amount to the Director in 12 equal monthly installments payable on the first day of each month commencing with the month following the Termination of Service. The annual benefit shall be paid to the Director for ten (10) years.
(c) Benefit Increases. Benefit payments may be increased as provided in Section 2.1.3.
ARTICLE XXI
Death Benefits
Upon the Director’s death prior to the termination of this Agreement or prior to the commencement of any payments to the Director, if any, under Section 2.4, the Company shall pay to the Director’s beneficiary the sum of (i) the Accrual Balance on Schedule A for the Plan Year ending immediately prior to the date of the Director’s death, plus (ii) the benefit described in the Split Dollar Agreement and Endorsement attached as Addendum A between the Company and the Director. The Company shall pay the benefit in (i) above to the Director’s beneficiary in a lump sum within 60 days following the Director’s death.
ARTICLE XXII
Beneficiaries
22.1. Beneficiary Designations. The Director shall designate a beneficiary by delivering a written designation to the Company. The Director may revoke or modify the designation at any time by delivering a new designation. However, designations will only be effective if signed by the Director and delivered to and received by the Company during the Director’s lifetime. The Director’s beneficiary designation shall be deemed automatically revoked if the beneficiary predeceases the Director or if the Director names a spouse as beneficiary and the marriage is subsequently dissolved. If the Director dies without a valid beneficiary designation, all payments shall be made to the personal representative of the Director’s estate.
22.2. Facility of Payment. If a benefit is payable to a minor, to a person declared incompetent or to a person incapable of handling the disposition of his or her property, the Company may pay such benefit to the guardian, legal representative or person having the care or custody of such minor, incapacitated person or incapable person. The Company may require proof of incompetence, minority or guardianship as it may deem appropriate prior to distribution of the benefit. Such distribution shall completely discharge the Company from all liability with respect to such benefit.
ARTICLE XXIII
General Limitations
23.1. Excess Parachute Payment. Notwithstanding any provision of this Agreement to the contrary, the Company shall not pay any benefit under this Agreement to the extent the benefit would create an excise tax under the excess parachute rules of Section 280G of the Code. To the extent possible, such benefit payment shall be reduced to allow payment within the fullest extent permissible under applicable law.
23.2. Termination for Cause. Notwithstanding any provision of this Agreement to the contrary, the Company shall not pay any benefit under this Agreement if the Company terminates the Director’s service for:
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(a) Gross negligence or gross neglect of duties; or
(b) Fraud, disloyalty, dishonesty or willful violation of any law or significant Company policy committed in connection with the Director’s service and resulting in an adverse effect on the Company.
23.3. Suicide or Misstatement. The Company shall not pay any benefit under this Agreement if the Director commits suicide within three years after the date of this Agreement. In addition, the Company shall not pay any benefit under this Agreement if the Director has made any material misstatement of fact on a resume provided to the Company, or on any application for any benefits provided by the Company to the Director.
ARTICLE XXIV
Claims and Review Procedures
24.1. Claims Procedure. A Participant or beneficiary (“claimant”) who has not received benefits under the Plan that he or she believes should be paid shall make a claim for such benefits as follows:
(a) Initiation — Written Claim. The claimant initiates a claim by submitting to the Company a written claim for the benefits.
(b) Timing of Company Response. The Company shall respond to such claimant within 90 days after receiving the claim. If the Company determines that special circumstances require additional time for processing the claim, the Company can extend the response period by an additional 90 days by notifying the claimant in writing, prior to the end of the initial 90-day period, that an additional period is required. The notice of extension must set forth the special circumstances and the date by which the Company expects to render its decision.
(c) Notice of Decision. If the Company denies part or all of the claim, the Company shall notify the claimant in writing of such denial. The Company shall write the notification in a manner calculated to be understood by the claimant. The notification shall set forth:
24.1.3.1 The specific reasons for the denial,
24.1.3.2 A reference to the specific provisions of the Plan on which the denial is based,
24.1.3.3 A description of any additional information or material necessary for the claimant to perfect the claim and an explanation of why it is needed,
24.1.3.4 An explanation of the Plan’s review procedures and the time limits applicable to such procedures, and
24.1.3.5 A statement of the claimant’s right to bring a civil action under ERISA Section 502(a) following an adverse benefit determination on review.
24.2. Review Procedure. If the Company denies part or all of the claim, the claimant shall have the opportunity for a full and fair review by the Company of the denial, as follows:
(a) Initiation — Written Request. To initiate the review, the claimant, within 60 days after receiving the Company’s notice of denial, must file with the Company a written request for review.
(b) Additional Submissions — Information Access. The claimant shall then have the opportunity to submit written comments, documents, records and other information relating to the claim. The Company shall also provide the claimant, upon request and free of charge, reasonable access to, and copies of, all documents, records and other information relevant (as defined in applicable ERISA regulations) to the claimant’s claim for benefits.
(c) Considerations on Review. In considering the review, the Company shall take into account all materials and information the claimant submits relating to the claim, without regard to whether such information was submitted or considered in the initial benefit determination.
(d) Timing of Company Response. The Company shall respond in writing to such claimant within 60 days after receiving the request for review. If the Company determines that special circumstances require additional time for processing the claim, the Company can extend the response period by an additional 60 days by notifying the claimant in writing, prior to the end of the initial 60-day period, that an additional period is required. The notice of extension must set forth the special circumstances and the date by which the Company expects to render its decision.
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(e) Notice of Decision. The Company shall notify the claimant in writing of its decision on review. The Company shall write the notification in a manner calculated to be understood by the claimant. The notification shall set forth:
24.2.5.1 The specific reasons for the denial,
24.2.5.2 A reference to the specific provisions of the Plan on which the denial is based,
24.2.5.3 A statement that the claimant is entitled to receive, upon request and free of charge, reasonable access to, and copies of, all documents, records and other information relevant (as defined in applicable ERISA regulations) to the claimant’s claim for benefits, and
24.2.5.4 A statement of the claimant’s right to bring a civil action under ERISA Section 502(a).
ARTICLE XXV
Amendments and Termination
This Agreement may be amended or terminated only by a written agreement signed by the Company and the Director. Provided, however, unless otherwise agreed to by the Company and the Director, this Agreement will automatically terminate upon the Director’s Termination of Service prior to the Normal Retirement Age and payment in full by the Company of any benefits due to the Director under Sections 2.2, 2.3 or 2.4.
Notwithstanding the previous paragraph in this Article 7, the Company may amend or terminate this Agreement at any time if, pursuant to legislative, judicial or regulatory action, continuation of the Agreement would (i) cause benefits to be taxable to the Director prior to actual receipt, or (ii) result in significant financial penalties or other significantly detrimental ramifications to the Company (other than the financial impact of paying he benefits).
ARTICLE XXVI
Miscellaneous
26.1. Binding Effect. This Agreement shall bind the Director and the Company, and their beneficiaries, survivors, executors, successors, administrators and transferees.
26.2. No Guarantee of Service. This Agreement is not a contract for services. It does not give the Director the right to remain in the service of the Company, nor does it interfere with the shareholder’s rights to discharge the Director. It also does not require the Director to remain in the service of the Company nor interfere with the Director’s right to terminate services at any time.
26.3. Non-Transferability. Benefits under this Agreement cannot be sold, transferred, assigned, pledged, attached or encumbered in any manner.
26.4. Reorganization. The Company shall not merge or consolidate into or with another company, or reorganize, or sell substantially all of its assets to another company, firm, or person unless such succeeding or continuing company, firm, or person agrees to assume and discharge the obligations of the Company under this Agreement. Upon the occurrence of such event, the term “Company” as used in this Agreement shall be deemed to refer to the successor or survivor company.
26.5. Tax Withholding. The Company shall withhold any taxes that are required to be withheld from the benefits provided under this Agreement.
26.6. Applicable Law. The Agreement and all rights hereunder shall be governed by the laws of the State of California, except to the extent preempted by the laws of the United States of America.
26.7. Unfunded Arrangement. The Director and beneficiary are general unsecured creditors of the Company for the payment of benefits under this Agreement. The benefits represent the mere promise by the Company to pay such benefits. The rights to benefits are not subject in any manner to anticipation, alienation, sale, transfer, assignment, pledge, encumbrance, attachment, or garnishment by creditors. Any insurance on the Director’s life is a general asset of the Company to which the Director and beneficiary have no preferred or secured claim.
26.8. Entire Agreement. This Agreement constitutes the entire agreement between the Company and the Director as to the subject matter hereof. No rights are granted to the Director by virtue of this Agreement other than those specifically set forth herein.
26.9. Administration. The Company shall have powers which are necessary to administer this Agreement, including but not limited to:
(a) Interpreting the provisions of the Agreement;
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(b) Establishing and revising the method of accounting for the Agreement;
(c) Maintaining a record of benefit payments; and
(d) Establishing rules and prescribing any forms necessary or desirable to administer the Agreement.
26.10. Named Fiduciary. The Company shall be the named fiduciary and plan administrator under the Agreement. The named fiduciary may delegate to others certain aspects of the management and operation responsibilities of the plan including the Service of advisors and the delegation of ministerial duties to qualified individuals.
IN WITNESS WHEREOF, the Director and a duly authorized Company officer have signed this Agreement.
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OAK VALLEY COMMUNITY BANK |
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BENEFICIARY DESIGNATION
OAK VALLEY COMMUNITY BANK
DIRECTOR RETIREMENT AGREEMENT
I designate the following as beneficiary of any death benefits under this Agreement:
Primary:
Contingent:
Note: To name a trust as beneficiary, please provide the name of the trustee(s) and the exact name and date of the trust agreement.
I understand that I may change these beneficiary designations by filing a new written designation with the Company. I further understand that the designations will be automatically revoked if the beneficiary predeceases me, or, if I have named my spouse as beneficiary and our marriage is subsequently dissolved.
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Received by the Company this 22 nd day of January, 2002
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ADDENDUM A
OAK VALLEY COMMUNITY BANK
SPLIT DOLLAR AGREEMENT
THIS AGREEMENT is made and entered into this 1 st day of January, 2002, by and between OAK VALLEY COMMUNITY BANK, a state-chartered commercial bank located in Oakdale, California (the “Company”), and (the “Director”). This Agreement shall append the Split Dollar Endorsement entered into on January 1, 2002, by and between the aforementioned parties.
INTRODUCTION
To encourage the Director to remain a member of the Company’s Board of Directors, the Company is willing to divide the death proceeds of a life insurance policy on the Director’s life. The Company will pay life insurance premiums from its general assets.
General Definitions
The following terms shall have the meanings specified:
26.11. “Insurer” means each life insurance carrier in which there is a Split Dollar Policy Endorsement attached to this Agreement.
26.12. “Policy” means the specific life insurance policy issued by the Insurer.
26.13. “Insured” means the Director.
26.14. “Normal Retirement Age” means the later of the Director’s seventy-second (72nd) birthday or five (5) Years of Service to the Company.
26.15. “Termination of Service” means the Director ceases to be a member of the Company’s Board of Directors, for any reason whatsoever, other than by reason of a leave of absence approved by the Company.
ARTICLE XXVII
Policy Ownership/Interests
27.1. Company Ownership. The Company is the sole owner of the Policy and shall have the right to exercise all incidents of ownership. The Company shall be the direct beneficiary of the remaining death proceeds after the Director’s interest is paid pursuant to Article 2.2 below.
27.2. Director’s Interest. The Director shall have the right to designate the beneficiary of death proceeds of the Policy in the amount of eighty thousand dollars ($80,000). The Director shall also have the right to elect and change settlement options that may be permitted. Provided, however, the Director, the Director’s transferee or the Director’s beneficiary shall have no rights or interests in the Policy with respect to that portion of the death proceeds designated in this section 2.2 if the Director terminates service with the Company prior to Normal Retirement Age.
27.3. Option to Purchase. The Company shall not sell, surrender or transfer ownership of the Policy while this Agreement is in effect without first giving the Director or the Director’s transferee the option to purchase the Policy for a period of sixty (60) days from written notice of such intention. The purchase price shall be an amount equal to the cash surrender value of the Policy. This provision shall not impair the right of the Company to terminate this Agreement.
27.4. Comparable Coverage. If the Director reaches the Normal Retirement Age while in the continuous service to the Company, the Company shall thereafter maintain the Policy in full force and effect and in no event shall the Company amend, terminate or otherwise abrogate the Director’s interest in the Policy, unless the Company replaces the Policy with a comparable insurance policy to cover the benefit provided under this Agreement and executes a new Split Dollar Agreement and Endorsement for said comparable insurance policy. The Policy or any comparable policy shall be subject to the claims of the Company’s creditors.
ARTICLE XXVIII
Premiums
28.1. Premium Payment. The Company shall pay any premiums due on the Policy.
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28.2. Economic Benefit. The Company shall determine the economic benefit attributable to the Director based on the amount of the current term rate for the Director’s age multiplied by the aggregate death benefit payable to the Director’s beneficiary. The “current term rate” is the minimum amount required to be imputed under Revenue Rulings 64 -328 and 66-110, or any subsequent applicable authority.
28.3. Reimbursement. At the end of each Plan Year, the Director shall reimburse the Company in an amount equal to the economic benefit.
ARTICLE XXIX
Assignment
The Director may assign without consideration his interests in the Policy and in this Agreement to any person, entity or trust. In the event the Director transfers all of the Director’s interest in the Policy, then all of the Director’s interest in the Policy and in the Agreement shall be vested in the Director’s transferee, who shall be substituted as a party hereunder and the Director shall have no further interest in the Policy or in this Agreement.
ARTICLE XXX
Insurer
The Insurer shall be bound only by the terms of the Policy. Any payments the Insurer makes or actions it takes in accordance with the Policy shall fully discharge it from all claims, suits and demands of all entities or persons. The Insurer shall not be bound by or be deemed to have notice of the provisions of this Agreement.
ARTICLE XXXI
Claims Procedure
31.1. Claims Procedure. A Participant or beneficiary (“claimant”) who has not received benefits under the Plan that he or she believes should be paid shall make a claim for such benefits as follows:
(a) Initiation — Written Claim. The claimant initiates a claim by submitting to the Company a written claim for the benefits.
(b) Timing of Company Response. The Company shall respond to such claimant within 90 days after receiving the claim. If the Company determines that special circumstances require additional time for processing the claim, the Company can extend the response period by an additional 90 days by notifying the claimant in writing, prior to the end of the initial 90-day period, that an additional period is required. The notice of extension must set forth the special circumstances and the date by which the Company expects to render its decision.
(c) Notice of Decision. If the Company denies part or all of the claim, the Company shall notify the claimant in writing of such denial. The Company shall write the notification in a manner calculated to be understood by the claimant. The notification shall set forth:
31.1.3.1 The specific reasons for the denial,
31.1.3.2 A reference to the specific provisions of the Plan on which the denial is based,
31.1.3.3 A description of any additional information or material necessary for the claimant to perfect the claim and an explanation of why it is needed,
31.1.3.4 An explanation of the Plan’s review procedures and the time limits applicable to such procedures, and
31.1.3.5 A statement of the claimant’s right to bring a civil action under ERISA Section 502(a) following an adverse benefit determination on review.
31.2. Review Procedure. If the Company denies part or all of the claim, the claimant shall have the opportunity for a full and fair review by the Company of the denial, as follows:
(a) Initiation — Written Request. To initiate the review, the claimant, within 60 days after receiving the Company’s notice of denial, must file with the Company a written request for review.
(b) Additional Submissions — Information Access. The claimant shall then have the opportunity to submit written comments, documents, records and other information relating to the claim. The Company shall also provide the claimant, upon request and free
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of charge, reasonable access to, and copies of, all documents, records and other information relevant (as defined in applicable ERISA regulations) to the claimant’s claim for benefits.
(c) Considerations on Review. In considering the review, the Company shall take into account all materials and information the claimant submits relating to the claim, without regard to whether such information was submitted or considered in the initial benefit determination.
(d) Timing of Company Response. The Company shall respond in writing to such claimant within 60 days after receiving the request for review. If the Company determines that special circumstances require additional time for processing the claim, the Company can extend the response period by an additional 60 days by notifying the claimant in writing, prior to the end of the initial 60-day period, that an additional period is required. The notice of extension must set forth the special circumstances and the date by which the Company expects to render its decision.
(e) Notice of Decision. The Company shall notify the claimant in writing of its decision on review. The Company shall write the notification in a manner calculated to be understood by the claimant. The notification shall set forth:
31.2.5.1 The specific reasons for the denial,
31.2.5.2 A reference to the specific provisions of the Plan on which the denial is based,
31.2.5.3 A statement that the claimant is entitled to receive, upon request and free of charge, reasonable access to and copies of, all documents, records and other information relevant (as defined in applicable ERISA regulations) to the claimant’s claim for benefits, and
31.2.5.4 A statement of the claimant’s right to bring a civil action under ERISA Section 502(a).
ARTICLE XXXII
Amendments and Termination
This Agreement may be amended or terminated only by a written agreement signed by the Company and the Director. However, unless otherwise agreed to by the Company and the Director, this Agreement will automatically terminate upon the Director’s Termination of Service prior to the Normal Retirement Age.
Notwithstanding the previous paragraph in this Article 7, the Company may amend or terminate this Agreement at any time if, pursuant to legislative, judicial or regulatory action, continuation of the Agreement would result in significant financial penalties or other significantly detrimental ramifications to the Company (other than the financial impact of paying the benefits).
ARTICLE XXXIII
Miscellaneous
33.1. Binding Effect. This Agreement shall bind the Director and the Company, their beneficiaries, survivors, executors, administrators and transferees, and any Policy beneficiary.
33.2. No Guarantee of Service. This Agreement is not a contract for services. It does not give the Director the right to remain in the service of the Company, nor does it interfere with the shareholder’s rights to discharge the Director. It also does not require the Director to remain in the service of the Company nor interfere with the Director’s right to terminate services at any time.
33.3. Applicable Law. The Agreement and all rights hereunder shall be governed by and construed according to the laws of the State of California, except to the extent preempted by the laws of the United States of America.
33.4. Reorganization. The Company shall not merge or consolidate into or with another company, or reorganize, or sell substantially all of its assets to another company, firm or person unless such succeeding or continuing company, firm or person agrees to assume and discharge the obligations of the Company.
33.5. Notice. Any notice, consent or demand required or permitted to be given under the provisions of this Split Dollar Agreement by one party to another shall be in writing, shall be signed by the party giving or making the same, and may be given either by delivering the same to such other party personally, or by mailing the same, by United States certified mail, postage prepaid, to such party, addressed to his or her last known address as shown on the records of the Company. The date of such mailing shall be deemed the date of such mailed notice, consent or demand.
33.6. Entire Agreement. This Agreement constitutes the entire agreement between the Company and the Director as to the subject matter hereof. No rights are granted to the Director by virtue of this Agreement other than those specifically set forth herein.
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33.7. Administration. The Company shall have powers which are necessary to administer this Agreement, including but not limited to:
(a) Interpreting the provisions of the Agreement;
(b) Establishing and revising the method of accounting for the Agreement;
(c) Maintaining a record of benefit payments; and
(d) Establishing rules and prescribing any forms necessary or desirable to administer the Agreement.
33.8. Named Fiduciary. For purposes of the Employee Retirement Income Security Act of 1974, if applicable, the Company shall be the named fiduciary and plan administrator under the Agreement. The named fiduciary may delegate to others certain aspects of the management and operation responsibilities of the plan including the employment of advisors and the delegation of ministerial duties to qualified individuals
IN WITNESS WHEREOF, the parties have executed this Agreement the day and year first above written.
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Exhibit 10.3
OAK VALLEY COMMUNITY BANK
SALARY CONTINUATION AGREEMENT
THIS AGREEMENT is adopted this 1 st day of January 2002, by and between OAK VALLEY COMMUNITY BANK, a state-chartered commercial bank located in Oakdale, California (the “Company”), and (the “Executive”).
INTRODUCTION
To encourage the Executive to remain an employee of the Company, the Company is willing to provide salary continuation benefits to the Executive. The Company will pay the benefits from its general assets.
AGREEMENT
The Company and the Executive agree as follows:
ARTICLE XXXIV
Definitions
Whenever used in this Agreement, the following words and phrases shall have the meanings specified:
34.1. “ Change of Control ” means:
(e) A change in the ownership of the capital stock of the Company or the Holding Company, whereby a corporation, person, or group acting in concert (hereinafter this Agreement shall collectively refer to any combination of these three [a corporation, person, or group acting in concert] as a “Person”) as described in Section 14(d)(2) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), acquires, directly or indirectly, beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of a number of shares of capital stock of the Company or Holding Company which constitutes fifty percent (50%) or more of the combined voting power of the Company’s or Holding Company’s then outstanding capital stock then entitled to vote generally in the election of directors; or
(f) The persons who were members of the Board of Directors of the Company or Holding Company immediately prior to a tender offer, exchange offer, contested election or any combination of the foregoing, cease to constitute a majority of he Board of Directors; or
(g) The adoption by the Board of Directors of the Company or of the Holding Company of a merger, consolidation or reorganization plan involving the Company or Holding Company in which the Company or the Holding Company is not the surviving entity, or a sale of all or substantially all of the assets of the Company or Holding Company. For purposes of this Agreement, a sale of all or substantially all of the assets of the Company or Holding Company shall be deemed to occur if any Person acquires (or during the 12-month period ending on the date of the most recent acquisition by such Person, has acquired) gross assets of the Company or Holding Company that have an aggregate fair market value equal to fifty percent (50%) or more of the fair market value of all of the respective gross assets of the Company or Holding Company immediately prior to such acquisition or acquisitions; or
(h) A tender offer or exchange offer is made by any Person which results in such Person beneficially owning (within the meaning of Rule 13d-3 promulgated under the Exchange Act) either fifty percent (50%) or more of the Company’s or Holding Company’s outstanding shares of Common Stock or shares of capital stock having fifty percent (50%) or more the combined voting power of the Company’s or Holding Company’s then outstanding capital stock (other than an offer made by the Company or the Holding Company), and sufficient shares are acquired under the offer to cause such person to own fifty percent (50%) or more of the voting power; or
(i) Any other transactions or series of related transactions occurring which have substantially the same effect as the transactions specified in any of the preceding clauses of this subsection (1.1).
(a) “Permitted Transfers “ means that a Shareholder, defined as the existing owners of all issued and outstanding stock of the Company as of the date of this Agreement, may make the following transfers and such transfers shall be deemed not to be a Change of Control under Section 1.1:
(a) To any trust created solely for the benefit of any Shareholder or any spouse of or any lineal descendant of any Shareholder;
(b) To any individual or entity by bona fide gift;
(c) To any spouse or former spouse pursuant to the terms of a decree of divorce;
(d) To any officer or employee of the Company pursuant to any incentive stock option plan established by the Shareholders;
(e) To any family member; or
(f) After receipt of any necessary regulatory approvals, to any Company or partnership a majority of the stock or interests of which Company or partnership are owned by any of the Shareholders.
34.2. “Code” means the Internal Revenue Code of 1986, as amended.
34.3. “ Constructive Termination of Employment ” means, following a Change of Control:
(a) Without the Executive’s express written consent, the assignment to the Executive of any duties inconsistent with the Executive’s positions, duties, responsibilities and status with the Company, or a change in the Executive’s reporting responsibilities, titles or offices, or any removal of the Executive from or any failure to re-elect the Executive to any of such positions, except in connection with the termination of the Executive’s employment for Cause, Disability or retirement or as a result of the Executive’s death;
(b) A reduction by the Company in the Executive’s base salary as in effect on the date hereof of as the same may be increased from time to time;
(c) Without the Executive’s express written consent the failure by the Company to continue any action which would adversely affect the Executive’s participation in or materially reduce the Executive’s benefits under any of such plans, or the failure by the Company to provide the Executive with the number of paid vacation days to which the Executive is then entitled on the basis of Years of Service with the Company in accordance with the Company’s normal vacation policy in effect on the date hereof, or
(d) The Company requiring the Executive to be based anywhere other than in the community where the Executive is currently based at the time of a Change of Control, except for required travel on Company business to an extent substantially consistent with the Executive’s present- business travel obligations, or in the event the Executive consents to a proposed relocation, the failure by the Company to pay (or reimburse the Executive) for all reasonable moving expenses incurred by the Executive relating to a change of principal resident in connection with such relocation, and to indemnify the Executive against any loss of the fair market value of such residence as determined by a real estate appraiser designated by the Executive and reasonably satisfactory to the Company realized on the sale of the Executive’s principal residence in connection with any such change of residence.
34.4. “Disability” means the Executive’s suffering a sickness, accident or injury which has been determined by the carrier of any individual or group disability insurance policy covering the Executive, or by the Social Security Administration, to be a disability rendering the Executive totally and permanently disabled. The Executive must submit proof to the Company of the carrier’s or Social Security Administration’s determination upon the request of the Company.
34.5. “Early Termination” means the Termination of Employment before Normal Retirement Age for reasons other than death, Disability, Termination for Cause or following a Change of Control.
34.6. “Early Termination Date” means the month, day and year in which Early Termination occurs.
34.7. “Effective Date” means January 1, 2002.
34.8. “Involuntary Termination of Employment” means, following a Change of Control, the Executive has been notified in writing by the Company that employment with the Company is terminated.
34.9. “Normal Retirement Age” means the Executive’s sixty-second (62 nd ) birthday.
34.10. “Normal Retirement Date” means the later of the Normal Retirement Age or Termination of Employment.
34.11. “Plan Year” means each calendar year ending December 31. The initial Plan Year shall commence on the effective date of this Agreement.
34.12. “ Termination for Cause ” See Article 5.
34.13. “Termination of Employment” means that the Executive ceases to be employed by the Company for any reason, voluntary or involuntary, other than by reason of a leave of absence approved by the Company.
34.14. “Years of Service” means the total number of calendar years during which the Executive is employed on a full-time basis by the Company, with a minimum of 1,000 hours, inclusive of any leaves of absence approved by the Company.
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ARTICLE XXXV
Lifetime Benefits
35.1. Normal Retirement Benefit. Upon Termination of Employment on or after the Normal Retirement Age for reasons other than death, the Company shall pay to the Executive the benefit described in this Section 2.1 in lieu of any other benefit under this Article.
(a) Amount of Benefit. The annual benefit under this Section 2.1 is $85,000 (Eighty-Five Thousand Dollars). The Company’s Board of Directors, in its sole discretion, may increase the annual benefit under this Section 2.1.1; however, any increase shall require the recalculation of Schedule A.
(b) Payment of Benefit. The Company shall pay the annual benefit to the Executive in 12 equal monthly installments payable on the first day of each month commencing with the month following the Executive’s Normal Retirement Date. The annual benefit shall be paid to the Executive for a period of twenty (20) years.
(c) Benefit Increases. Commencing on the first anniversary of the first benefit payment, and continuing on each subsequent anniversary, the Company’s Board of Directors, at its sole discretion, may increase the benefit.
35.2. Early Termination Benefit. Upon Early Termination, the Company shall pay to the Executive the benefit described in this Section 2.2 in lieu of any other benefit under this Agreement.
(a) Amount of Benefit. The benefit under this Section 2.2 is the Early Termination Benefit set forth in Schedule A for the Plan Year ending immediately prior to the Early Termination Date, determined by vesting the Executive in zero percent (0%) of the Accrual Balance set forth in Schedule A for the first five (5) Years of Service, twenty percent (20%) of the Accrual Balance in the sixth (6 th ) Year of Service, and an additional twenty percent (20%) of said amount for each succeeding Year of Service thereafter until the Executive becomes on hundred percent (100%) vested in the Accrual Balance. Any increase in the annual benefit under Section 2.1.1 shall require the recalculation of this benefit on Schedule A.
(b) Payment of Benefit. The Company shall pay the benefit to the Executive in a lump sum within sixty (60) days following the Early Termination Date.
35.3. Disability Benefit. If the Executive terminates employment due to Disability prior to Normal Retirement Age, the Company shall pay to the Executive the benefit described in this Section 2.3 in lieu of any other benefit under this Agreement.
(a) Amount of Benefit. The benefit under this Section 2.3 is the Disability Lump Sum Benefit set forth in Schedule A for the Plan Year ending immediately prior to the date in which the Termination of Employment occurs (except during the first Plan Year, the benefit is the amount set forth for Plan Year 1), determined by vesting the Executive in one hundred percent (100%) of the Accrual Balance. Any increase in the annual benefit under Section 2.1.1 would require the recalculation of the Disability benefit on Schedule A.
(b) Payment of Benefit. The Company shall pay the annual benefit to the Executive in a lump sum within sixty (60) days following Termination of Employment.
35.4. Change of Control Benefit. Upon a Change of Control, the Company shall owe to the Executive the benefit described in this Section 2.4 in lieu of any other benefit under this Agreement.
(a) Amount of Benefit. The benefit, under this Section 2.4 is the Change of Control Annual Benefit set forth in Schedule A for the Plan Year ending immediately prior to the date in which Termination of Employment occurs (except during the first Plan Year, the benefit is the amount set forth for Plan Year 1), determined by vesting the Executive in one hundred percent (100%) of the Normal Retirement Benefit described in Section 2.1.1. Any increase in the annual benefit under Section 2.1.1 would require the recalculation of the Change of Control benefit on Schedule A.
(b) Payment of Benefit. The Company shall pay the annual benefit to the Executive in 12 equal monthly installments payable on the first day of each month commencing with the month following Termination of Employment. The annual benefit shall be paid to the Executive for a period of twenty (20) years.
(c) Benefit Increases. Benefit payments may be increased as provided in Section 2.1.3.
(d) Excess Parachute Payment. Notwithstanding any provision of this Agreement to the contrary, the Company shall not pay any benefit under this Agreement to the extent the benefit would create an excise tax under the excess parachute rules of Section 280G of the Code. To the extent possible, such benefit payment shall be reduced to allow payment within the fullest extent permissible under applicable law.
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ARTICLE XXXVI
Death Benefits
Upon the Executive’s death prior to the termination of this Agreement or prior to the commencement of any payments to the Executive, if any, under Section 2.4, the Company shall pay to the Executive’s beneficiary the benefit described in the Split Dollar Agreement and Endorsement attached as Addendum A between the Company and the Executive.
ARTICLE XXXVII
Beneficiaries
37.1. Beneficiary Designations. The Executive shall designate a beneficiary by delivering a written designation to the Company. The Executive may revoke or modify the designation at any time by delivering a new designation. However, designations will only be effective if signed by the Executive and delivered to and received by the Company during the Executive’s lifetime. The Executive’s beneficiary designation shall be deemed automatically revoked if the beneficiary predeceases the Executive, or if the Executive names a spouse as beneficiary and the marriage is subsequently dissolved. If the Executive dies without a valid beneficiary designation, all payments shall be made to the personal representative of the Executive’s estate.
37.2. Facility of Payment. If a benefit is payable to a minor, to a person declared incompetent, or to a person incapable of handling the disposition of his or her property, the Company may pay such benefit to the guardian, legal representative or person having the care or custody of such minor, incapacitated person or incapable person. The Company may require proof of incompetence, minority or guardianship as it may deem appropriate prior to distribution of the benefit. Such distribution shall completely discharge the Company from all liability with respect to such benefit.
ARTICLE XXXVIII
General Limitations
38.1. Termination for Cause. Notwithstanding any provision of this Agreement to the contrary, the Company shall not pay any benefit under this Agreement if the Company terminates the Executive’s employment for:
(a) Gross negligence or gross neglect of duties; or
(b) Fraud or willful violation of any law or significant Company policy committed in connection with the Executive’s employment and resulting in an adverse effect on the Company.
38.2. Suicide or Misstatement. The Company shall not pay any benefit under this Agreement if the Executive commits suicide within three years after the date of this Agreement. In addition, the Company shall not pay any benefit under this Agreement if the Executive has made any material misstatement of fact on an employment application or resume provided to the Company, or on any application for any benefits provided by the Company to the Executive.
ARTICLE XXXIX
Claims and Review Procedures
39.1. Claims Procedure. A Participant or beneficiary (“claimant”) who has not received benefits under the Plan that he or she believes should be paid shall make a claim for such benefits as follows:
(a) Initiation — Written Claim. The claimant initiates a claim by submitting to the Company a written claim for the benefits.
(b) Timing of Company Response. The Company shall respond to such claimant within 90 days after receiving the claim. If the Company determines that special circumstances require additional time for processing the claim, the Company can extend the response period by an additional 90 days by notifying the claimant in writing, prior to the end of the initial 90-day period, that an additional period is required. The notice of extension must set forth the special circumstances and the date by which the Company expects to render its decision.
(c) Notice of Decision. If the Company denies part or all of the claim, the Company shall notify the claimant in writing of such denial. The Company shall write the notification in a manner calculated to be understood by the claimant. The notification shall set forth:
39.1.3.1 The specific reasons for the denial,
39.1.3.2 A reference to the specific provisions of the Plan on which the denial is based,
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39.1.3.3 A description of any additional information or material necessary for the claimant to perfect the claim and an explanation of why it is needed,
39.1.3.4 An explanation of the Plan’s review procedures and the time limits applicable to such procedures, and
39.1.3.5 A statement of the claimant’s right to bring a civil action under ERISA Section 502(a) following an adverse benefit determination on review.
39.2. Review Procedure. If the Company denies part or all of the claim, the claimant shall have the opportunity for a full and fair review by the Company of the denial, as follows:
(a) Initiation — Written Request. To initiate the review, the claimant, within 60 days after receiving the Company’s notice of denial, must file with the Company a written request for review.
(b) Additional Submissions — Information Access. The claimant shall then have the opportunity to submit written comments, documents, records and other information relating to the claim. The Company shall also provide the claimant, upon request and free of charge, reasonable access to, and copies of, all documents, records and other information relevant (as defined in applicable ERISA regulations) to the claimant’s claim for benefits.
(c) Considerations on Review. In considering the review, the Company shall take into account all materials and information the claimant submits relating to the claim, without regard to whether such information was submitted or considered in the initial benefit determination.
(d) Timing of Company Response. The Company shall respond in writing to such claimant within 60 days after receiving the request for review. If the Company determines that special circumstances require additional time for processing the claim, the Company can extend the response period by an additional 60 days by notifying the claimant in writing, prior o the end of the initial 60-day period, that an additional period is required. The notice of extension must set forth the special circumstances and the date by which the Company expects to render its decision.
(e) Notice of Decision. The Company shall notify the claimant in writing of its decision on review. The Company shall write the notification in a manner calculated to be understood by the claimant. The notification shall set forth:
39.2.5.1 The specific reasons for the denial,
39.2.5.2 A reference to the specific provisions of the Plan on which the denial is based,
39.2.5.3 A statement that the claimant is entitled to receive, upon request and free of charge, reasonable access to, and copies of, all documents, records and other information relevant (as defined in applicable ERISA regulations) to the claimant’s claim for benefits, and
39.2.5.4 A statement of the claimant’s right to bring a civil action under ERISA Section 502(a).
ARTICLE XL
Amendments and Termination
This Agreement may be amended or terminated only by a written agreement signed by the Company and the Executive. Provided, however, unless otherwise agreed to by the Company and the Executive, this Agreement will automatically terminate upon the Executive’s Termination of Service prior to the Normal Retirement Age and payment in full by the Company of any benefits due to the Executive under Sections 2.2, 2.3 or 2.4.
Notwithstanding the previous paragraph in this Article 7, the Company may amend or terminate this Agreement at any time if, pursuant to legislative, judicial or regulatory action, continuation of the Agreement would (i) cause benefits to be taxable to the Executive prior to actual receipt, or (ii) result in significant financial penalties or other significantly detrimental ramifications to the Company (other than the financial impact of paying the benefits).
ARTICLE XLI
Miscellaneous
41.1. Binding Effect. This Agreement shall bind the Executive and the Company, and their beneficiaries, survivors, executors, successors, administrators and transferees.
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41.2. No Guarantee of Employment. This Agreement is not an employment policy or contract. It does not give the Executive the right to remain an employee of the Company, nor does it interfere with the Company’s right to discharge the Executive. It also does not require the Executive to remain an employee nor interfere with the Executive’s right to terminate employment at any time.
41.3. Non-Transferability. Benefits under this Agreement cannot be sold, transferred, assigned, pledged, attached or encumbered in any manner.
41.4. Reorganization. The Company shall not merge or consolidate into or with another company, or reorganize, or sell substantially all of its assets to another company, firm, or person unless such succeeding or continuing company, firm, or person agrees to assume and discharge the obligations of the Company under this Agreement. Upon the occurrence of such event, the term “Company” as used in this Agreement shall be deemed to refer to the successor or survivor company.
41.5. Tax Withholding. The Company shall withhold any taxes that are required to be withheld from the benefits provided under this Agreement.
41.6. Applicable Law. The Agreement and all rights hereunder shall be governed by the laws of California, except to the extent preempted by the laws of the United States of America.
41.7. Unfunded Arrangement. The Executive and beneficiary are general unsecured creditors of the Company for the payment of benefits under this Agreement. The benefits represent the mere promise by the Company to pay such benefits. The rights to benefits are not subject in any manner to anticipation, alienation, sale, transfer, assignment, pledge, encumbrance, attachment, or garnishment by creditors. Any insurance on the Executive’s life is a general asset of the Company to which the Executive and beneficiary have no preferred or secured claim.
41.8. Entire Agreement. This Agreement constitutes the entire agreement between the Company and the Executive as to the subject matter hereof. No rights are granted to the Executive by virtue of this Agreement other than those specifically set forth herein.
41.9. Administration. The Company shall have powers which are necessary to administer this Agreement, including but not limited to:
(a) Interpreting the provisions of the Agreement;
(b) Establishing and revising the method of accounting for the Agreement;
(c) Maintaining a record of benefit payments; and
(d) Establishing rules and prescribing any forms necessary or desirable to administer the Agreement.
41.10. Named Fiduciary. The Company shall be the named fiduciary and plan administrator under this Agreement. It may delegate to others certain aspects of the management and operational responsibilities including the employment of advisors and the delegation of ministerial duties to qualified individuals.
IN WITNESS WHEREOF, the Executive and the Company have signed this Agreement.
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OAK VALLEY COMMUNITY BANK |
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BENEFICIARY DESIGNATION
OAK VALLEY COMMUNITY BANK
SALARY CONTINUATION AGREEMENT
I designate the following as beneficiary of any death benefits under this Agreement:
Primary:
Contingent:
Note: To name a trust as beneficiary, please provide the name of the trustee(s) and the exact name and date of the trust agreement.
I understand that I may change these beneficiary designations by filing a new written designation with the Company. I further understand that the designations will be automatically revoked if the beneficiary predeceases me, or, if I have named my spouse as beneficiary and our marriage is subsequently dissolved.
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Received by the Company this day of .
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ADDENDUM A
OAK VALLEY COMMUNITY BANK
SPLIT DOLLAR AGREEMENT
THIS AGREEMENT is made and entered into this , by and between OAK VALLEY COMMUNITY BANK, a state-chartered commercial bank located in Oakdale, California (the “Company”), and (the “Executive”). This Agreement shall append the Split Dollar Endorsement entered into on , by and between the aforementioned parties.
INTRODUCTION
To encourage the Executive to remain an employee of the Company, the Company is willing to divide the death proceeds of a life insurance policy on the Executive’s life. The Company will pay life insurance premiums from its general assets.
General Definitions
The following terms shall have the meanings specified:
41.11. “Insurer” means each life insurance carrier in which there is a Split Dollar Policy Endorsement attached to this Agreement.
41.12. “Policy” means the specific life insurance policy issued by the Insurer.
41.13. “Insured” means the Executive.
41.14. “Normal Retirement Age” means the Executive’s sixty-second (62 1d ) birthday.
41.15. “Termination of f Employment” means the Executive ceasing to be employed by the Company for any reason whatsoever, other than by reason of a leave of absence approved by the Company.
ARTICLE XLII
Policy Ownership/Interests
42.1. Company Ownership. The Company is the sole owner of the Policy and shall have the right to exercise all incidents of ownership. The Company shall be the direct beneficiary of the remaining death proceeds after the Executive’s interest is paid pursuant to Section 2.2 below.
42.2. Executive’s Interest. The Executive shall have the right to designate the beneficiary of death proceeds of the Policy in the amount of $880,000. The Executive shall also have the right to elect and change settlement options that may be permitted. Provided, however, the Executive, the Executive’s transferee or the Executive’s beneficiary shall have no rights or interests in the Policy with respect to that portion of the death proceeds designated in this Section 2.2 if the Executive terminates employment with the Company prior to Normal Retirement Age.
42.3. Option to Purchase. The Company shall not sell, surrender or transfer ownership of the Policy while this Agreement is in effect without first giving the Executive or the Executive’s transferee the option to purchase the Policy for a period of sixty (60) days from written notice of such intention. The purchase price shall be an amount equal to the cash surrender value of the Policy. This provision shall not impair the right of the Company to terminate this Agreement.
42.4. Comparable Coverage. If the Executive attains Normal Retirement Age while in the continuous employ of the Company, the Company shall thereafter maintain the Policy in full force and effect and in no event shall the Company amend, terminate or otherwise abrogate the Executive’s interest in the Policy, unless the Company replaces the Policy with a comparable insurance policy to cover the benefit provided under this Agreement and executes a new Split Dollar Agreement and Endorsement for said comparable insurance policy. The Policy or any comparable policy shall be subject to the claims of the Company’s creditors.
ARTICLE XLIII
Premiums
43.1. Premium Payment. The Company shall pay any premiums due on the Policy.
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43.2. Economic Benefit. The Company shall determine the economic benefit attributable to the Executive based on the amount of the current term rate for the Executive’s age multiplied by the aggregate death benefit payable to the Executive’s beneficiary. The “current term rate” is the minimum amount required to be imputed under Revenue Rulings 64-328 and 66-110, or any subsequent applicable authority.
43.3. Reimbursement. At the end of each Plan Year, the Executive shall reimburse the Company in an amount equal to the economic benefit.
ARTICLE XLIV
Assignment
The Executive may assign without consideration his interests in the Policy and in this Agreement to any person, entity or trust. In the event the Executive transfers all of the Executive’s interest in the Policy, then all of the Executive’s interest in the Policy and in the Agreement shall be vested in the Executive’s transferee, who shall be substituted as a party hereunder and the Executive shall have no further interest in the Policy or in this Agreement.
ARTICLE XLV
Insurer
The Insurer shall be bound only by the terms of the Policy. Any payments the Insurer makes or actions it takes in accordance with the Policy shall fully discharge it from all claims, suits and demands of all entities or persons. The Insurer shall not be bound by or be deemed to have notice of the provisions of this Agreement.
ARTICLE XLVI
Claims Procedure
46.1. Claims Procedure . A Participant or beneficiary (“claimant”) who has not received benefits under the Plan that he or she believes should be paid shall make a claim for such benefits as follows:
(a) Initiation — Written Claim . The claimant initiates a claim by submitting to the Company a written claim for the benefits.
(b) Timing of Company Response . The Company shall respond to such claimant within 90 days after receiving the claim. If the Company determines that special circumstances require additional time for processing the claim, the Company can extend the response period by an additional 90 days by notifying the claimant in writing, prior to the end of the initial 90-day period, that an additional period is required. The notice of extension must set forth the special circumstances and the date by which the Company expects to render its decision.
(c) Notice of Decision . If the Company denies. part or all of the claim, the Company shall notify the claimant in writing of such denial. The Company shall write the notification in a manner calculated to be understood by the claimant. The notification shall set forth:
46.1.3.1 The specific reasons for the denial,
46.1.3.2 A reference to the specific provisions of the Plan on which the denial is based,
46.1.3.3 A description of any additional information or material necessary for the claimant to perfect the claim and an explanation of why it is needed,
46.1.3.4 An explanation of the Plan’s review procedures and the time limits applicable to such procedures, and
46.1.3.5 A statement of the claimant’s right to bring a civil action under ERISA Section 502(a) following an adverse benefit determination on review.
46.2. Review Procedure . If the Company denies part or all of the claim, the claimant shall have the opportunity for a full and fair review by the Company of the denial, as follows:
(a) Initiation — Written Request . To initiate the review, the claimant, within 60 days after receiving the Company’s notice of denial, must file with the Company a written request for review.
(b) Additional Submissions — Information Access . The claimant shall then have the opportunity to submit written comments, documents, records and other information relating to the claim. The Company shall also provide the claimant, upon request and free
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of charge, reasonable access to, and copies of, all documents, records and other information relevant (as defined in applicable ERISA regulations) to the claimant’s claim for benefits.
(c) Considerations on Review . In considering the review, the Company shall take into account all materials and information the claimant submits relating to the claim, without regard to whether such information was submitted or considered in the initial benefit determination.
(d) Timing of Company Response . The Company shall respond in writing to such claimant within 60 days after receiving the request for review. If the Company determines that special circumstances require additional time for processing the claim, the Company can extend the response period by an additional 60 days by notifying the claimant in writing, prior to the end of the initial 60-day period, that an additional period is required. The notice of extension must set forth the special circumstances and the date by which the Company expects to render its decision.
(e) Notice of Decision . The Company shall notify the claimant in writing of its decision on review. The Company shall write the notification in a manner calculated to be understood by the claimant. The notification shall set forth:
46.2.5.1 The specific reasons for the denial,
46.2.5.2 A reference to the specific provisions of the Plan on which the denial is based,
46.2.5.3 A statement that the claimant is entitled to receive, upon request and free of charge, reasonable access to and copies of, all documents, records and other information relevant (as defined in applicable ERISA regulations) to the claimant’s claim for benefits, and
46.2.5.4 A statement of the claimant’s right to bring a civil action under ERISA Section 502(a).
ARTICLE XLVII
Amendments and Termination
This Agreement may be amended or terminated only by a written agreement signed by the Company and the Executive. However, unless otherwise agreed to by the Company and the Executive, this Agreement will automatically terminate upon the Executive’s Termination of Employment prior to Normal Retirement Age.
Notwithstanding the previous paragraph in this Article 7, the Company may amend or terminate this Agreement at any time if, pursuant to legislative, judicial or regulatory action, continuation of the Agreement would result in significant financial penalties or other significantly detrimental ramifications to the Company (other than the financial impact of paying the benefits).
ARTICLE XLVIII
Miscellaneous
48.1. Binding Effect . This Agreement shall bind the Executive and the Company, their beneficiaries, survivors, executors, administrators and transferees, and any Policy beneficiary.
48.2. No Guarantee of Employment . This Agreement is not an employment policy or contract. It does not give the Executive the right to remain an employee of the Company, nor does it interfere with the Company’s right to discharge the Executive. It also does not require the Executive to remain an employee nor interfere with the Executive’s right to terminate employment at any time.
48.3. Applicable Law . The Agreement and all rights hereunder shall be governed by and construed according to the laws of the State of California, except to the extent preempted by the laws of the United States of America.
48.4. Reorganization . The Company shall not merge or consolidate into or with another company, or reorganize, or sell substantially all of its assets to another company, firm or person unless such succeeding or continuing company, firm or person agrees to assume and discharge the obligations of the Company.
48.5. Notice . Any notice, consent or demand required or permitted to be given under the provisions of this Split Dollar Agreement by one party to another shall be in writing, shall be signed by the party giving or making the same, and may be given either by delivering the same to such other party personally, or by mailing the same, by United States certified mail, postage prepaid, to such party, addressed to his or her last known address as shown on the records of the Company. The date of such mailing shall be deemed the date of such mailed notice, consent or demand.
48.6. Entire Agreement . This Agreement constitutes the entire agreement between the Company and the Executive as to the subject matter hereof. No rights are granted to the Executive by virtue of this Agreement other than those specifically set forth herein.
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48.7. Administration . The Company shall have powers which are necessary to administer this Agreement, including but not limited to:
(a) Interpreting the provisions of the Agreement;
(b) Establishing and revising the method of accounting for the Agreement;
(c) Maintaining a record of benefit payments; and
(d) Establishing rules and prescribing any forms necessary or desirable to administer the Agreement.
48.8. Named Fiduciary . For purposes of the Employee Retirement Income Security Act of 1974, if applicable, the Company shall be the named fiduciary and plan administrator under the Agreement. The named fiduciary may delegate to others certain aspects of the management and operation responsibilities of the plan including the employment of advisors and the delegation of ministerial duties to qualified individuals
IN WITNESS WHEREOF, the parties have executed this Agreement the day and year first above written.
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OAK VALLEY COMMUNITY BANK |
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SPLIT DOLLAR POLICY ENDORSEMENT
OAK VALLEY COMMUNITY BANK
SPLIT DOLLAR AGREEMENT
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Insured: |
Insurer: Jefferson Pilot Life Insurance Company
Supplementing and amending the application for insurance to Insurer on , the applicant requests and directs that:
BENEFICIARIES
1. OAK VALLEY COMMUNITY BANK, a state-chartered commercial bank located in Oakdale, California (the “Company”), shall be the beneficiary of the remaining death proceeds after payment is made pursuant to Paragraph 2 below.
2. The beneficiary of death proceeds in the amount of $ shall be designated by the Insured or the Insured’s transferee, subject to the provisions of Paragraph 5 below.
OWNERSHIP
3. The Owner of the policy shall be the Company. The Owner shall have all ownership rights in the Policy except as may be specifically granted to the Insured or the Insured’s transferee in Paragraph 4 of this endorsement.
4. The Insured or the Insured’s transferee shall have the right to assign his rights and interests in the Policy with respect to that portion of the death proceeds designated in Paragraph 2 of this endorsement, and to exercise all settlement options with respect to such death proceeds.
5. Notwithstanding the provisions of Paragraph 4 above, the Insured or the Insured’s transferee shall have no rights or interests in the Policy with respect to that portion of the death proceeds designated in Paragraph 2 of this endorsement if the Insured ceases to be employed by the Company prior to the Normal Retirement Age of 62 for any reason whatsoever (other than by reason of a leave of absence which is approved by the Company), unless otherwise agreed to by the Company and the Insured.
MODIFICATION OF ASSIGNMENT PROVISIONS OF THE POLICY
Upon the death of the Insured, the interest of any collateral assignee of the Owner of the Policy designated in Paragraph 3 above shall be limited to the portion of the proceeds described in Paragraph 1 above.
OWNERS AUTHORITY
The Insurer is hereby authorized to recognize the Owner’s claim to rights hereunder without investigating the reason for any action taken by the Owner, including its statement of the amount of premiums it has paid on the Policy. The signature of the Owner shall be sufficient for the exercise of any rights under this Endorsement and the receipt of the Owner for any sums received by it shall be a full discharge and release therefore to the Insurer.
Any transferee’s rights shall be subject to this Endorsement.
Signed at Oakdale, California, this day of .
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OAK VALLEY COMMUNITY BANK |
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The Insured accepts and agrees to the foregoing and, subject to the rights of the Owner as stated above, designates
as primary beneficiary and
as secondary beneficiary of the portion of the proceeds described in Paragraph 2 above.
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Signed at Oakdale, California, this day of .
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THE INSURED : |
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SPLIT DOLLAR POLICY ENDORSEMENT
OAK VALLEY COMMUNITY BANK
SPLIT DOLLAR AGREEMENT
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Insured: |
Insurer: West Coast Life Insurance Company
Supplementing and amending the application for insurance to Insurer on , the applicant requests and directs that:
BENEFICIARIES
1. OAK VALLEY COMMUNITY BANK, a state-chartered commercial bank located in Oakdale, California (the “Company”), shall be the beneficiary of the remaining death proceeds after payment is made pursuant to Paragraph 2 below
2. The beneficiary of death proceeds in the amount of $ shall be designated by the Insured or the Insured’s transferee, subject to the provisions of Paragraph 5 below.
OWNERSHIP
3. The Owner of the policy shall be the Company. The Owner shall have all ownership rights in the Policy except as may be specifically granted to the Insured or the Insured’s transferee in Paragraph 4 of this endorsement.
4. The Insured or the Insured’s transferee shall have the right to assign his rights and interests in the Policy with respect to that portion of the death proceeds designated in Paragraph 2 of this endorsement, and to exercise all settlement options with respect to such death proceeds.
5. Notwithstanding the provisions of Paragraph 4 above, the Insured or the Insured’s transferee shall have no rights or interests in the Policy with respect to that portion of the death proceeds designated in Paragraph 2 of this endorsement if the Insured ceases to be employed by the Company prior to the Normal Retirement Age of 62 for any reason whatsoever (other than by reason of a leave of absence which is approved by the Company), unless otherwise agreed to by the Company and the Insured.
MODIFICATION OF ASSIGNMENT PROVISIONS OF THE POLICY
Upon the death of the Insured, the interest of any collateral assignee of the Owner of the Policy designated in Paragraph 3 above shall be limited to the portion of the proceeds described in Paragraph 1 above.
OWNERS AUTHORITY
The Insurer is hereby authorized to recognize the Owner’s claim to rights hereunder without investigating the reason for any action taken by the Owner, including its statement of the amount of premiums it has paid on the Policy. The signature of the Owner shall be sufficient for the exercise of any rights under this Endorsement and the receipt of the Owner for any sums received by it shall be a full discharge and release therefore to the Insurer.
Any transferee’s rights shall be subject to this Endorsement.
Signed at Oakdale, California, this day of .
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OAK VALLEY COMMUNITY BANK |
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The Insured accepts and agrees to the foregoing and, subject to the rights of the Owner as stated above, designates as primary beneficiary andas secondary beneficiary of the portion of the proceeds described in Paragraph 2 above.
Signed at Oakdale, California, this day of .
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THE INSURED : |
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OAK VALLEY COMMUNITY BANK
EXECUTIVE BONUS AGREEMENT
THIS AGREEMENT is adopted this day of , by and between OAK VALLEY COMMUNITY BANK, a state-chartered commercial bank, located in Oakdale, California (the “Company’), and (the “Executive”).
INTRODUCTION
To encourage the Executive to remain an employee of the Company, the Company is willing to provide to the Executive a bonus opportunity. The Company will pay the Executive’s bonus from the Company’s general assets.
AGREEMENT
The Executive and the Company agree as follows:
Definitions
Whenever used in this Agreement, the following words and phrases shall have the meanings specified:
48.9. “ Bonus ” means only the cash bonus award paid to the Executive during a Plan Year and does not include any salary.
48.10. “ Change of Control ” means the transfer of shares of the Company’s voting common stock such that one entity or one person acquires (or is deemed to acquire when applying Section 318 of the Code) more than 50 percent of the Company’s outstanding voting common stock followed within twelve (12) months by the Executive’s Termination of Employment for reasons other than death, Disability or retirement.
48.11. “ Code ” means the Internal Revenue Code of 1986, as amended.
48.12. “ Disability ” means the Executive’s suffering a sickness, accident or injury which has been determined by the carrier of any individual or group disability insurance policy covering the Executive, or by the Social Security Administration, to be a disability rendering the Executive totally and permanently disabled. The Executive must submit proof to the Company of the carrier’s or Social Security Administration’s determination upon the request of the Company
48.13. “ Early Termination ” means the Termination of Employment before Normal Retirement Age for reasons other than death, Disability, Termination for Cause or following a Change of Control.
48.14. “ Normal Retirement Age ” means the Executive’s sixty-second (62nd) birthday.
48.15. “ Normal Retirement Date ” means the later of the Normal Retirement Age or Termination of Employment.
48.16. “ Plan Year ” means the calendar year.
48.17. “ Termination of Employment ” means that the Executive ceases to be employed by the Company for any reason, voluntary or involuntary, other than by reason of a leave of absence approved by the Company.
48.18. “ Termination for Cause ” means the Company terminating the Executive’s employment for:
(a) Gross negligence or gross neglect of duties to the Company; or
(b) Fraud, disloyalty, dishonesty or willful violation of any law or significant Company policy committed in connection with the Executive’s employment and resulting in an adverse effect on the Company.
ARTICLE XLIX
Bonus Award
49.1. Bonus Award . The Company shall pay the Executive a cash Bonus equal to the Executive’s economic benefit under a separate Split Dollar Agreement, if any, divided by one minus the Company’s combined marginal income tax rate for the calendar year
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immediately preceding such payment. The Executive shall have no right to determine or influence such Bonus award. The Company shall pay such Bonus award prior to December 31 of each year.
49.2. Payment of Bonus Award . The Company shall continue to pay the Executive the Bonus Award under the following circumstances:
(a) Upon the Executive attaining Normal Retirement Age;
(b) Upon the Executive’s Disability; or
(c) Upon a Change of Control.
ARTICLE L
Reimbursement
Reimbursement to Company. In the event the Company has provided the Executive any split dollar death benefit under separate agreement, the Executive shall annually pay to the Company an amount equal to the Executive’s economic benefit determined under such agreement.
ARTICLE LI
General Limitations
The Company shall not continue to pay any Bonus award under this Agreement under the following circumstances:
(a) Upon the Executive’s Early Termination;
(b) Upon the Executive’s death;
(c) Upon the Executive’s Termination for Cause; or
(d) Upon the termination of this Agreement.
ARTICLE LII
Amendments and Termination
This Agreement may be amended or terminated in the sole discretion of the Company after written notification of such amendment or termination is provided to the Executive.
ARTICLE LIII
Miscellaneous
53.1. Binding Effect . This Agreement shall bind the Executive and the Company and their beneficiaries, survivors, executors, administrators and transferees.
53.2. No Guarantee of Employment . This Agreement is not an employment policy or contract. It does not give the Executive the right to remain an employee of the Company, nor does it interfere with the Company’s right to discharge the Executive. It also does not require the Executive to remain an employee nor interfere with the Executive’s right to terminate employment at any time.
53.3. Applicable Law . The Agreement and all rights hereunder shall be governed by the laws of the State of California, except to the extent preempted by the laws of the United States of America.
53.4. Non-Transferability . Benefits under this Agreement cannot be sold, transferred, assigned, pledged, attached or encumbered in any manner.
53.5. Tax Withholding . The Company shall withhold any taxes that are required to be withheld from the Bonus award provided under this Agreement.
53.6. Reorganization . The Company shall not merge or consolidate into or with another company, or reorganize, or sell substantially all of its assets to another company, firm, or person unless such succeeding or continuing company, firm, or person agrees to assume and discharge the obligations of the Company under this Agreement.
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53.7. Entire Agreement . This Agreement constitutes the entire agreement between the Company and the Executive as to the subject matter hereof. No rights are granted to the Executive by virtue of this Agreement other than those specifically set forth herein.
53.8. Administration . The Company shall have powers which are necessary to administer this Agreement, including but not limited to:
(a) Interpreting the provisions of the Agreement; and
(b) Maintaining a record of Bonus award payments.
53.9. Facility of Payment . If the Executive is declared to be incompetent, or incapable of handling the disposition of his or her property, the Company may pay such benefit to the duly appointed guardian, legal representative or person having the care or custody of the Executive. The Company may require proof of incompetence, minority or guardianship as it may deem appropriate prior to distribution of the benefit. Such distribution shall completely discharge the Company from all liability with respect to such benefit
53.10. Named Fiduciary . The Company shall be the named fiduciary and plan administrator under this Agreement. It may delegate to others certain aspects of the management and operational responsibilities including the employment of advisors and the delegation of ministerial duties to qualified individuals.
IN WITNESS WHEREOF, the Executive and a duly authorized Company officer have signed this Agreement.
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OAK VALLEY COMMUNITY BANK |
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EXHIBIT 11
Statement of Computation of Per Share Earnings
Set forth below are the bases for the computation of earnings per share for the periods shown.
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Three Months Ended |
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March 31, |
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2008 |
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2007 |
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Earnings Per Common Share |
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Basic |
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$ |
0.10 |
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$ |
0.14 |
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Average Shares Outstanding |
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7,610,039 |
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7,108,923 |
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Diluted |
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0.10 |
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0.14 |
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Average Shares Outstanding (including dilutive effect of stock options) |
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7,748,962 |
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7,293,827 |
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Fiscal Year Ended |
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December 31, |
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2007 |
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2006 |
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Earnings Per Common Share |
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Basic |
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$ |
0.53 |
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$ |
0.53 |
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Average Shares Outstanding |
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7,607,780 |
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7,103,243 |
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Diluted |
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$ |
0.52 |
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$ |
0.51 |
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Average Shares Outstanding (including dilutive effect of stock options) |
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7,767,604 |
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7,345,127 |
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EXHIBIT 21
SUBSIDIARIES OF THE REGISTRANT
Oak Valley Community Bank is our only subsidiary