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Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

Form 10-Q

 

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

For the quarterly period ended September 30, 2020

 

 

OR

 

 

TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

Commission file number 001-34142

 

OAK VALLEY BANCORP

(Exact name of registrant as specified in its charter)

 

California

 

26-2326676

State or other jurisdiction of

 

I.R.S. Employer

incorporation or organization

 

Identification No.

 

125 N. Third Ave., Oakdale, CA  95361

(Address of principal executive offices)

 

(209) 848-2265

Issuer’s telephone number

 

Not applicable

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

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common Stock

OVLY

The Nasdaq Stock Market, LLC

 

Indicate by check mark whether the issuer (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes   No 

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes     No 

 

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

 

Large accelerated filer 

 

Accelerated filer 

Non-accelerated filer 

 

Smaller reporting company 

 

 

Emerging growth company 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. 

 

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

 

APPLICABLE ONLY TO CORPORATE ISSUERS

 

State the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:  8,218,873 shares of common stock outstanding as of November 2, 2020.

 

 

 

 

 

 

Oak Valley Bancorp

September 30, 2020

 

Table of Contents

 

 

 

 

Page

PART I – FINANCIAL INFORMATION

 

1

 

 

 

 

Item 1.

Financial Statements

 

2

 

 

 

 

Condensed Consolidated Balance Sheets at September 30, 2020 (Unaudited) and December 31, 2019

 

2

 

 

 

 

Condensed Consolidated Statements of Income for the three and nine-month periods ended September 30, 2020 and September 30, 2019 (Unaudited)

 

3

 

   

Condensed Consolidated Statements of Comprehensive Income for the three and nine-month periods ended September 30, 2020 and September 30, 2019 (Unaudited)

  4

 

 

 

 

Condensed Consolidated Statements of Changes of Shareholders’ Equity for the three and nine-month periods ended September 30, 2020 and September 30, 2019 (Unaudited)

 

5

 

 

 

 

Condensed Consolidated Statements of Cash Flows for the nine-month periods ended September 30, 2020 and September 30, 2019 (Unaudited)

 

6

 

 

 

 

Notes to Condensed Consolidated Financial Statements

 

7

 

 

 

 

Item 2.

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

 

26

 

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

 

43

 

 

 

 

Item 4.

Controls and Procedures

 

43

 

 

 

 

PART II – OTHER INFORMATION

 

44

 

 

 

 

Item 1.

Legal Proceedings

 

44

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

 

45

Item 3.

Defaults Upon Senior Securities

 

45

Item 4.

Mine Safety Disclosures

 

45

Item 5.

Other Information

 

45

Item 6.

Exhibits

 

46

 

 

 

 

 

 

 

PART I – FINANCIAL STATEMENTS

 

 

1

 

Item 1. Financial Statements

 

 

 

OAK VALLEY BANCORP

CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)

 

 

(in thousands, except per share amounts)

 

September 30,

  

December 31,

 
  

2020

  

2019

 

ASSETS

        

Cash and due from banks

 $120,890  $133,809 

Federal funds sold

  21,910   13,785 

Cash and cash equivalents

  142,800   147,594 
         

Securities - available for sale

  226,912   190,088 

Securities - equity investments

  3,418   3,297 

Loans, net of allowance for loan losses of $11,635 and $9,146 at September 30, 2020 and December 31, 2019, respectively

  1,009,032   741,047 

Cash surrender value of life insurance

  25,154   24,631 

Bank premises and equipment, net

  15,756   15,229 

Other real estate owned

  137   0 

Goodwill and other intangible assets, net

  3,764   3,837 

Interest receivable and other assets

  22,078   22,062 
         
  $1,449,051  $1,147,785 
         

LIABILITIES AND SHAREHOLDERS’ EQUITY

        
         

Deposits

 $1,311,188  $1,019,929 

Interest payable and other liabilities

  13,881   15,286 

Total liabilities

  1,325,069   1,035,215 
         

Shareholders’ equity

        

Common stock, no par value; 50,000,000 shares authorized, 8,218,873 and 8,210,147 shares issued and outstanding at at September 30, 2020 and December 31, 2019, respectively

  25,435   25,435 

Additional paid-in capital

  4,084   3,777 

Retained earnings

  87,700   80,961 

Accumulated other comprehensive income, net of tax

  6,763   2,397 

Total shareholders’ equity

  123,982   112,570 
         
  $1,449,051  $1,147,785 

 

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

 

2

 

 

OAK VALLEY BANCORP

CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)

 

(in thousands, except per share amounts)

 

THREE MONTHS ENDED
SEPTEMBER 30,

   

NINE MONTHS ENDED
SEPTEMBER 30,

 
   

2020

   

2019

   

2020

   

2019

 

INTEREST INCOME

                               

Interest and fees on loans

  $ 10,302     $ 8,878     $ 28,912     $ 25,920  

Interest on securities

    1,398       1,463       4,356       4,526  

Interest on federal funds sold

    4       46       51       153  

Interest on deposits with banks

    25       442       421       1,274  

Total interest income

    11,729       10,829       33,740       31,873  
                                 

INTEREST EXPENSE

                               

Deposits

    272       384       877       1,189  

FHLB advances

    2       0       34       0  

Total interest expense

    274       384       911       1,189  
                                 

Net interest income

    11,455       10,445       32,829       30,684  

Provision for loan losses

    193       240       2,503       335  
                                 

Net interest income after provision for loan losses

    11,262       10,205       30,326       30,349  
                                 

NON-INTEREST INCOME

                               

Service charges on deposits

    303       415       959       1,211  

Debit card transaction fee income

    365       355       971       955  

Earnings on cash surrender value of life insurance

    174       174       524       426  

Mortgage commissions

    27       4       78       53  

Gains on calls of available-for-sale securities

    0       27       1       137  

Other

    359       300       1,002       1,010  

Total non-interest income

    1,228       1,275       3,535       3,792  
                                 

NON-INTEREST EXPENSE

                               

Salaries and employee benefits

    4,410       4,333       12,958       13,217  

Occupancy expenses

    951       911       2,705       2,658  

Data processing fees

    533       477       1,532       1,396  

Regulatory assessments (FDIC & DFPI)

    111       28       213       240  

Other operating expenses

    1,496       1,408       4,416       4,189  

Total non-interest expense

    7,501       7,157       21,824       21,700  
                                 

Net income before provision for income taxes

    4,989       4,323       12,037       12,441  
                                 

Total provision for income taxes

    1,241       1,092       2,999       3,144  
                                 

Net Income

  $ 3,748     $ 3,231     $ 9,038     $ 9,297  
                                 

Net income per share

  $ 0.46     $ 0.40     $ 1.11     $ 1.15  
                                 

Net income per diluted share

  $ 0.46     $ 0.40     $ 1.11     $ 1.15  

 

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

 

3

 

 

OAK VALLEY BANCORP

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)

 

 

   

THREE MONTHS ENDED

SEPTEMBER 30,

   

NINE MONTHS ENDED
SEPTEMBER 30,

 

(dollars in thousands)

 

2020

   

2019

   

2020

   

2019

 
                                 

Net income

  $ 3,748     $ 3,231     $ 9,038     $ 9,297  

Other comprehensive income:

                               

Unrealized gains on securities:

                               

Unrealized holding gains arising during the period

    1,916       742       6,198       4,276  

Less: reclassification for net gains included in net income

    0       (27 )     (1 )     (137 )

Other comprehensive income, before tax

    1,916       715       6,197       4,139  

Tax expense related to items of other comprehensive income

    (566 )     (212 )     (1,831 )     (1,224 )

Total other comprehensive income

    1,350       503       4,366       2,915  

Comprehensive income

  $ 5,098     $ 3,734     $ 13,404     $ 12,212  

 

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

 

4

 

 

OAK VALLEY BANCORP

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

 

  

THREE MONTHS ENDED SEPTEMBER 30, 2020 AND 2019

 
                  

Accumulated

     
          

Additional

      

Other

  

Total

 
  

Common Stock

  

Paid-in

  

Retained

  

Comprehensive

  

Shareholders’

 

(dollars in thousands)

 

Shares

  

Amount

  

Capital

  

Earnings

  

Income (Loss)

  

Equity

 
                         

Balances, July 1, 2019

  8,208,853  $25,435  $3,524  $75,647  $1,977  $106,583 

Stock options exercised

                 0 

Restricted stock issued

  5,250               0 

Restricted stock forfeited

  (3,000)              0 

Restricted stock surrendered for tax withholding

  (466)     (6)        (6)

Cash dividends declared $0.135 per share of common stock

           (1,109)     (1,109)

Stock based compensation

         118         118 

Other comprehensive income

               503   503 

Net income

                  3,231 

Balances, September 30, 2019

  8,210,637  $25,435  $3,636  $77,769  $2,480  $109,320 
                         

Balances, July 1, 2020

  8,215,407  $25,435  $3,957  $85,102  $5,413  $119,907 

Restricted stock issued

  3,750               0 

Restricted stock surrendered for tax withholding

  (284)     (3)        (3)

Cash dividends declared $0.140 per share of common stock

           (1,150)     (1,150)

Stock based compensation

         130         130 

Other comprehensive income

               1,350   1,350 

Net income

            3,748      3,748 

Balances, September 30, 2020

  8,218,873  $25,435  $4,084  $87,700  $6,763  $123,982 

 

  

NINE MONTHS ENDED SEPTEMBER 30, 2020 AND 2019

 
                  

Accumulated

     
          

Additional

      

Other

  

Total

 
  

Common Stock

  

Paid-in

  

Retained

  

Comprehensive

  

Shareholders’

 

(dollars in thousands)

 

Shares

  

Amount

  

Capital

  

Earnings

  

Income (Loss)

  

Equity

 
                         

Balances, January 1, 2019

  8,194,805  $25,429  $3,358  $70,686  $(435) $99,038 

Stock options exercised

  1,000   6            6 

Restricted stock issued

  26,095               0 

Restricted stock forfeited

  (4,500)              0 

Restricted stock surrendered for tax withholding

  (6,763)     (121)        (121)

Cash dividends declared $0.135 per share of common stock

           (2,214)     (2,214)

Stock based compensation

         399         399 

Other comprehensive income

               2,915   2,915 

Net income

                  9,297 

Balances, September 30, 2019

  8,210,637  $25,435  $3,636  $77,769  $2,480  $109,320 
                         

Balances, January 1, 2020

  8,210,147  $25,435  $3,777  $80,961  $2,397  $112,570 

Restricted stock issued

  17,756               0 

Restricted stock forfeited

  (2,400)              0 

Restricted stock surrendered for tax withholding

  (6,630)     (109)        (109)

Cash dividends declared $0.140 per share of common stock

           (2,299)     (2,299)

Stock based compensation

         416         416 

Other comprehensive income

               4,366   4,366 

Net income

            9,038      9,038 

Balances, September 30, 2020

  8,218,873  $25,435  $4,084  $87,700  $6,763  $123,982 

 

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

 

5

 

 

OAK VALLEY BANCORP

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

 

   

NINE MONTHS ENDED
SEPTEMBER 30,

 

(dollars in thousands)

 

2020

   

2019

 
                 

CASH FLOWS FROM OPERATING ACTIVITIES:

               

Net income

  $ 9,038     $ 9,297  

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

               

Provision for loan losses

    2,503       335  

Increase in deferred fees/costs, net

    5,391       113  

Depreciation

    870       816  

Amortization of investment securities, net

    444       715  

Stock based compensation

    416       399  

Gain on calls of available for sale securities

    (1 )     (137 )

Earnings on cash surrender value of life insurance

    (524 )     (426 )

Increase in interest payable and other liabilities

    11       4,977  

(Increase) decrease in interest receivable

    (1,836 )     556  

Decrease (increase) in other assets

    61       (4,524 )

Net cash from operating activities

    16,375       12,121  
                 

CASH FLOWS FROM INVESTING ACTIVITIES:

               

Purchases of available for sale securities

    (67,627 )     (23,860 )

Purchases of equity securities

    (62 )     (68 )

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

    36,498       40,423  

Investment in LIHTC

    (1,416 )     (512 )

Net increase in loans

    (276,016 )     (20,674 )

Purchase of FHLB Stock

    0       (404 )

Purchase of BOLI policies

    0       (5,000 )

Purchases of premises and equipment

    (1,397 )     (946 )

Net cash used in investing activities

    (310,020 )     (11,041 )
                 

CASH FLOWS FROM FINANCING ACTIVITIES:

               

FHLB advanced funds

    50,000       0  

FHLB payments

    (50,000 )     0  

Shareholder cash dividends paid

    (2,299 )     (2,214 )

Net increase (decrease) in demand deposits and savings accounts

    296,292       (5,270 )

Net decrease in time deposits

    (5,033 )     (3,232 )

Proceeds from exercise of stock options

    0       6  

Tax withholding payments on vested restricted shares surrendered

    (109 )     (121 )

Net cash from (used in) financing activities

    288,851       (10,831 )
                 

NET DECREASE IN CASH AND CASH EQUIVALENTS

    (4,794 )     (9,751 )
                 

CASH AND CASH EQUIVALENTS, beginning of period

    147,594       126,145  
                 

CASH AND CASH EQUIVALENTS, end of period

  $ 142,800     $ 116,394  
                 

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:

               

Cash paid during the period for:

               

Interest

  $ 909     $ 1,200  

Income taxes

  $ 2,754     $ 3,420  
                 

NON-CASH INVESTING ACTIVITIES:

               

Real estate acquired through foreclosure

  $ 137     $ 0  

Change in unrealized gain on securities

  $ 6,197     $ 4,139  

Change in contributions payable to LIHTC limited partner investment

  $ (590 )   $ (511 )

Lease right-of-use assets

  $ 538     $ 4,550  
                 

NON-CASH FINANCING ACTIVITIES:

               

Present value of lease obligations

  $ (487 )   $ (4,947 )

 

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

 

6

 

OAK VALLEY BANCORP

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

 

 

NOTE 1 – BASIS OF PRESENTATION

 

On July 3, 2008 (the “Effective Date”), a bank holding company reorganization was completed whereby Oak Valley Bancorp (“the Company”, “us”, “our”) became the parent holding company for Oak Valley Community Bank (the “Bank”).  On the Effective Date, a tax-free exchange was completed whereby each outstanding share of the Bank was converted into one share of the Company and the Bank became the sole wholly-owned subsidiary of the holding company.

 

The consolidated financial statements include the accounts of the parent company and its wholly-owned bank subsidiary. Unless otherwise stated, the “Company” refers to the consolidated entity, Oak Valley Bancorp, while the “Bank” refers to Oak Valley Community Bank. All material intercompany transactions have been eliminated. The interim consolidated financial statements included in this report are unaudited but reflect all adjustments which, in the opinion of management, are necessary for a fair presentation of the financial position and results of operations for the interim periods presented. All such adjustments are of a normal recurring nature. The results of operations for the three and nine-month periods ended September 30, 2020 are not necessarily indicative of the results of a full year’s operations. Certain prior year amounts have been reclassified to conform to the current year presentation. There was no effect on net income or shareholders’ equity as previously reported as a result of reclassifications. For further information, refer to the audited consolidated financial statements and footnotes included in the Company’s Form 10-K for the year ended December 31, 2019.

 

Oak Valley Community Bank is a California state-chartered bank. The Company was incorporated under the laws of the State of California on May 31, 1990 and began operations in Oakdale on May 28, 1991. The Company operates branches in Oakdale, Sonora, Bridgeport, Bishop, Mammoth Lakes, Modesto, Manteca, Patterson, Turlock, Ripon, Stockton, Escalon, and Sacramento, California. The Bridgeport, Mammoth Lakes, and Bishop branches operate as a separate division, Eastern Sierra Community Bank. The Company’s primary source of revenue is providing loans to customers who are predominantly middle-market businesses.

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (“GAAP”) requires management to make estimates and assumptions. These estimates and assumptions affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Significant accounting estimates reflected in the Company’s consolidated financial statements include the allowance for loan losses and fair value measurements. The estimates and assumptions may change as new events occur, as more experience is acquired, as additional information is obtained and as the Company’s operating environment changes. Actual results may differ from these estimates due to the uncertainty around the magnitude and duration of the COVID-19 pandemic, as well as other factors.

 

   

 

NOTE 2 – RECENT ACCOUNTING PRONOUNCEMENTS

   

In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments – Credit Losses (Topic 326). This update revises the methodology used by financial institutions under GAAP to recognize credit losses in the financial statements.  Currently, GAAP requires the use of the incurred loss model, whereby financial institutions recognize in current period earnings, incurred credit losses and those inherent in the financial statements, as of the date of the balance sheet.    This guidance results in a new model for estimating the allowance for loan and lease losses, commonly referred to as the Current Expected Credit Loss (“CECL”) model.  Under the CECL model, financial institutions are required to estimate future credit losses and recognize those losses in current period earnings.  The amendments within the update are effective for fiscal years and all interim periods beginning after December 15, 2019, with early adoption permitted.  In October 2019, FASB approved an amendment that will delay the adoption of this ASU for three years for certain entities including the Company since we are classified as a Small Reporting Company. Accordingly, this ASU will become effective for the Company on January 1, 2023. Upon adoption of the amendments within this update, the Company will be required to make a cumulative-effect adjustment to the opening balance of retained earnings in the year of adoption. The Company is currently in the process of evaluating the impact the adoption of this update will have on its financial statements. While the Company has not quantified the impact of this ASU, it does expect changing from the current incurred loss model to an expected loss model will result in an earlier recognition of losses.

 

In January 2017, the FASB issued ASU 2017-04, Intangibles Goodwill and Other (Subtopic 350)Simplifying the Test for Goodwill Impairment. The provisions of the update eliminate the existing second step of the goodwill impairment test which provides for the allocation of reporting unit fair value among existing assets and liabilities, with the net leftover amount representing the implied fair value of goodwill. In replacement of the existing goodwill impairment rule, the update will provide that impairment should be recognized as the excess of any of the reporting unit’s goodwill over the fair value of the reporting unit. Under the provisions of this update, the amount of the impairment is limited to the carrying value of the reporting unit’s goodwill. For public business entities that are Securities and Exchange Commission filers, the amendments of the update will become effective in fiscal years beginning after December 15, 2019. The Company adopted the standards update January 1, 2020 and evaluates goodwill in accordance with the provisions of the standard. Due to the economic impact that COVID-19 has had on the Company, management concluded that factors such as the decline in macroeconomic conditions have led to the occurrence of a triggering event and therefore an interim impairment test over goodwill was performed as of September 30, 2020. As part of this interim impairment assessment, in the event that the Company concluded that all or a portion of its goodwill is impaired, a non-cash charge for the amount of such impairment would be recorded to earnings. Such a charge would have no impact on tangible capital or regulatory capital. Based upon the results of our interim goodwill assessment, we have concluded that an impairment did not exist as of the time of the assessment.

 

7

 

In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Subtopic 820)Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement. The primary focus of ASU 2018-13 is to improve the effectiveness of the disclosure requirements for fair value measurements. The changes affect all companies that are required to include fair value measurement disclosures. In general, the amendments in ASU 2018-13 are effective for all entities for fiscal years and interim periods within those fiscal years, beginning after December 15, 2019. An entity is permitted to early adopt the removed or modified disclosures upon the issuance of ASU 2018-13 and may delay adoption of the additional disclosures, which are required for public companies only, until their effective date. The Company first adopted this ASU beginning with the period ended March 31, 2020, and it did not have a significant impact on the Company's consolidated financial statements.

 

In April 2019, the FASB issued ASU 2019-04, Codification Improvements to Topic 326, Financial Instruments - Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments that clarifies and improves areas of guidance related to recently issued standards on credit losses, hedging and recognition and measurement. The provisions of this ASU are effective January 1, 2020 and contain various methods of adoption. This ASU did not have a material impact on our financial condition or results of operations.

 

In May 2019, the FASB issued ASU 2019-05, Financial Instruments - Credit Losses (Topic 326): Targeted Transition Relief. This ASU allows an option for entities to irrevocably elect the fair value option on an instrument-by-instrument basis for eligible financial assets measured at amortized cost basis upon adoption of the credit loss standards. This amendment provides relief for those entities electing the fair value option on newly originated or purchased financial assets, while maintaining existing similar financial assets at amortized cost, avoiding the requirement to maintain dual measurement methods for similar assets. The fair value option does not apply to held-to-maturity debt securities. The effective date for this ASU is the same as for ASU 2016-13, as discussed above. We will evaluate this ASU in conjunction with ASU 2016-13 to determine its impact on our financial condition and results of operations.

 

In March 2020, FASB issued ASU 2020-04 - Reference Rate Reform (Subtopic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting. This ASU provides optional expedients and exceptions for contracts, hedging relationships, and other transactions that reference LIBOR or other reference rates expected to be discontinued because of reference rate reform. The ASU is effective for all entities as of March 12, 2020 through December 31, 2022. The Company is in the process of evaluating the provisions of this ASU and its effects on our consolidated financial statements.

 

 

 

NOTE 3 – SECURITIES

 

Equity Securities

 

The Company held equity securities with fair values of $3,418,000 and $3,297,000 as of September 30, 2020 and December 31, 2019, respectively. There were no sales of equity securities during the three and nine-month periods ended September 30, 2020 and 2019. Consistent with ASU 2016-01, these securities are carried at fair value with the changes in fair value recognized in the consolidated statements of income. Accordingly, the Company recognized a loss of $7,000 and a gain of $59,000 during the three and nine months ended September 30, 2020, respectively, as compared to gains of $18,000 and $108,000 during the same periods of 2019.

 

8

 

Debt Securities

 

Debt securities have been classified in the financial statements as available for sale. The amortized cost and estimated fair values of debt securities as of September 30, 2020 are as follows:

 

(dollars in thousands)

 

Amortized

Cost

  

Gross

Unrealized

Gains

  

Gross

Unrealized

Losses

  

Fair Value

 
                 

Available-for-sale securities:

                

U.S. agencies

 $24,580  $945  $(9) $25,516 

Collateralized mortgage obligations

  1,332   20   (57)  1,295 

Municipalities

  122,879   9,425   (1)  132,303 

SBA pools

  5,283   5   (30)  5,258 

Corporate debt

  14,228   211   (419)  14,020 

Asset backed securities

  49,009   369   (858)  48,520 
  $217,311  $10,975  $(1,374) $226,912 

 

The following tables detail the gross unrealized losses and fair values of debt securities aggregated by investment category and the length of time that individual securities have been in a continuous unrealized loss position as of September 30, 2020.

 

(dollars in thousands)

 

Less than 12 months

  

12 months or more

  

Total

 

Description of Securities

 

Fair

Value

  

Unrealized

Loss

  

Fair

Value

  

Unrealized

Loss

  

Fair

Value

  

Unrealized

Loss

 

U.S. agencies

 $99   (1) $1,214  $(8) $1,313  $(9)

Collateralized mortgage obligations

  584   (57)  0   0   584   (57)

Municipalities

  1   (1)  0   0   1   (1)

SBA pools

  0   0   4,055   (30)  4,055   (30)

Corporate debt

  0   0   8,081   (419)  8,081   (419)

Asset backed securities

  15,921   (188)  24,333   (670)  40,254   (858)

Total temporarily impaired securities

 $16,605  $(247) $37,683  $(1,127) $54,288  $(1,374)

 

As of September 30, 2020, four corporate debts, two U.S. agencies, seven Small Business Administration (“SBA”) pools and fourteen asset backed securities make up the total debt securities in an unrealized loss position for greater than 12 months. As of September 30, 2020, nine asset backed securities, three U.S. agencies, one municipality and one collateralized mortgage obligation make up the total debt securities in a loss position for less than 12 months. Management periodically evaluates each available-for-sale investment security in an unrealized loss position to determine if the impairment is temporary or other than temporary. This evaluation encompasses various factors including, the nature of the investment, the cause of the impairment, the severity and duration of the impairment, credit ratings and other credit related factors such as third party guarantees and the volatility of the security’s fair value. Management has determined that no investment security is other than temporarily impaired. The unrealized losses are due primarily to asset backed securities that are backed by federal government guaranteed student loans that are repaying slower than expected due to legislation that allows borrowers to extend payment schedules based on their income level. The Company does not intend to sell the securities and it is not likely that the Company will be required to sell the securities before the earlier of the forecasted recovery or the maturity of the underlying investment security.

 

9

 

The amortized cost and estimated fair value of debt securities as of September 30, 2020, segregated by contractual maturity or call date, are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

 

(dollars in thousands)

 

Amortized

  

Fair

 
  

Cost

  

Value

 

Available-for-sale securities:

        

Due in one year or less

 $17,985  $18,136 

Due after one year through five years

  80,469   85,593 

Due after five years through ten years

  52,764   55,849 

Due after ten years

  66,093   67,334 
  $217,311  $226,912 

 

The amortized cost and estimated fair values of debt securities as of December 31, 2019 are as follows:

 

(dollars in thousands)

 

Amortized

Cost

  

Gross

Unrealized

Gains

  

Gross

Unrealized

Losses

  

Fair Value

 
                 

Available-for-sale securities:

                

U.S. agencies

 $31,180  $566  $(17) $31,729 

Collateralized mortgage obligations

  1,618   5   (9)  1,614 

Municipalities

  86,826   3,746   (1)  90,571 

SBA pools

  6,419   9   (33)  6,395 

Corporate debt

  19,253   173   (458)  18,968 

Asset backed securities

  41,389   76   (654)  40,811 
  $186,685  $4,575  $(1,172) $190,088 

 

The following tables detail the gross unrealized losses and fair values of debt securities segregated by investment category and length of time that individual securities have been in a continuous unrealized loss position at December 31, 2019.

 

(dollars in thousands)

 

Less than 12 months

  

12 months or more

  

Total

 

Description of Securities

 

Fair

Value

  

Unrealized

Loss

  

Fair

Value

  

Unrealized

Loss

  

Fair

Value

  

Unrealized

Loss

 

U.S. agencies

 $3,934   (11) $1,535  $(6) $5,469  $(17)

Collateralized mortgage obligations

  0   0   650   (9)  650   (9)

Municipalities

  0   0   411   (1)  411   (1)

SBA pools

  1,423   (7)  3,545   (26)  4,968   (33)

Corporate debt

  2,994   (6)  8,859   (452)  11,853   (458)

Asset backed securities

  12,891   (233)  21,313   (421)  34,204   (654)

Total temporarily impaired securities

 $21,242  $(257) $36,313  $(915) $57,555  $(1,172)

 

At December 31, 2019, one municipality, three U.S. agencies, six corporate debts, five SBA pools, one collateralized mortgage obligations and eleven asset backed securities make up the total debt securities in an unrealized loss position for greater than 12 months. At December 31, 2019, three U.S. agencies, eight asset backed securities, two SBA pools and two corporate debts make up the total debt securities in a loss position for less than 12 months.

 

The Company recognized no gains on called securities during the three-month period ended September 30, 2020 and a gain of $1,000 during the nine-month period ended September 30, 2020, compared to gains of $27,000 and $137,000, respectively, for the same periods during 2019. There were no sales of available-for-sale securities during the nine-months ended September 30, 2020 and 2019.

 

10

 

Debt securities carried at $154,586,000 and $123,381,000 as of September 30, 2020 and December 31, 2019, respectively, were pledged to secure deposits of public funds.

 

 

 

NOTE 4 – LOANS

 

The Company’s customers are primarily located in Stanislaus, San Joaquin, Tuolumne, Inyo, and Mono Counties. As of September 30, 2020, approximately 63% of the Company’s loans are commercial real estate loans which include construction loans Approximately 31% of the Company’s loans are for general commercial uses including professional, retail, and small business. Also included in the commercial and industrial loans in the table below are Paycheck Protection Program loans (as described below) totaling $244,198,000. Additionally, 3% of the Company’s loans are for residential real estate and other consumer loans. The remaining 3% are agriculture loans. Loan totals were as follows:

 

(in thousands)

 

September 30, 2020

  

December 31, 2019

 

Commercial real estate:

        

Commercial real estate- construction

 $36,737  $53,169 

Commercial real estate- mortgages

  527,827   475,146 

Land

  5,493   8,367 

Farmland

  79,693   70,320 

Commercial and industrial

  317,316   77,704 

Consumer

  712   1,274 

Consumer residential

  33,329   36,647 

Agriculture

  25,743   28,358 

Total loans

  1,026,850   750,985 
         

Less:

        

Deferred loan fees and costs, net

  (6,183)  (792)

Allowance for loan losses

  (11,635)  (9,146)

Net loans

 $1,009,032  $741,047 

 

Paycheck Protection Program. With the passage of the Paycheck Protection Program (“PPP”), administered by the SBA, the Company assisted its customers with applications for resources through the program. As of April 16, 2020, all $350 billion of the available funds under Round One of this program had been allocated. The Treasury Department later announced that an additional $310 billion would be available for Round Two of the PPP, which commenced on April 27, 2020 and closed on August 8, 2020. As of September 30, 2020, the PPP remained closed and was not accepting applications. PPP loans have a two-year term if the loan was approved by the SBA prior to June 5, 2020, and loans approved after that date have a five-year term. All PPP loans earn interest at 1%. The Company believes that the majority of PPP loans will ultimately be forgiven by the SBA in accordance with the terms of the program which will result in loan pay-offs throughout the remainder of the year and into 2021. As of September 30, 2020, the Company has received approvals with the SBA for 1,677 PPP loans representing approximately $261,960,000 in funding. As a result, the Company is expecting to receive fee income that will be recorded in total interest income, amortized over the life of the loans. It is the Company’s understanding that loans funded through the PPP program are fully guaranteed by the U.S. government, and therefore, no allowance for credit losses has been allocated for PPP loans. Should those circumstances change, the Company could be required to establish additional allowance for credit losses through additional provision for credit loss expense charged to earnings.

 

COVID-19 Related Loan Payment Deferrals. The COVID-19 Pandemic has negatively impacted the revenue streams of certain borrowers of the Company, and therefore, the Company has elected to allow these clients to defer payments for a term up to six months. These deferrals were specifically related to the pandemic and the resulting economic hardships. No deferrals were granted during the first quarter of 2020. As of September 30, 2020, the Company had 7 loans with an outstanding balance of $25,151,000 for which payments were deferred due to the financial impact of the pandemic. After an evaluation of financial stability, no specific loan loss reserve allocation was required on any of these loans at the time of deferral. In accordance with regulatory and accounting guidance, these short-term modifications granted in response to the COVID-19 pandemic are not considered to be troubled debt restructurings.

 

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Loan Origination/Risk Management. The Company has certain lending policies and procedures in place that are designed to maximize loan income within an acceptable level of risk. Management reviews and approves these policies and procedures on a regular basis. A reporting system supplements the review process by providing management with frequent reports related to loan production, loan quality, concentration of credit, loan delinquencies and non-performing and potential problem loans. Diversification in the loan portfolio is a means of managing risk associated with fluctuations in economic conditions.

 

Commercial and industrial loans are underwritten after evaluating and understanding the borrower’s ability to operate profitably and prudently expand its business. Underwriting standards are designed to promote relationship banking rather than transactional banking. Once it is determined that the borrower’s management possesses sound ethics and solid business acumen, the Company’s management examines current and projected cash flows to determine the ability of the borrower to repay their obligations as agreed. Commercial and industrial loans are primarily made based on the identified cash flows of the borrower and secondarily made based on the underlying collateral provided by the borrower. The cash flows of borrowers, however, may not be as expected and the collateral securing these loans may fluctuate in value. Most commercial and industrial loans are secured by the assets being financed or other business assets such as accounts receivable or inventory and may incorporate a personal guarantee; however, some short-term loans may be made on an unsecured basis. In the case of loans secured by accounts receivable, the availability of funds for the repayment of these loans may be substantially dependent on the ability of the borrower to collect amounts due from its customers.

 

Commercial real estate loans are subject to underwriting standards and processes similar to commercial and industrial loans, in addition to those of real estate loans. These loans are viewed primarily as cash flow loans and secondarily as loans secured by real estate. Commercial real estate lending typically involves higher loan principal amounts and the repayment of these loans is generally largely dependent on the successful operation of the property securing the loan or the business conducted on the property securing the loan. Commercial real estate loans may be more adversely affected by conditions in the real estate markets or in the general economy. The properties securing the Company’s commercial real estate portfolio are diverse in terms of type and geographic location. This diversity helps reduce the Company’s exposure to adverse economic events that affect any single market or industry. Management monitors and evaluates commercial real estate loans based on collateral, geography and risk grade criteria. As a general rule, the Company avoids financing single-purpose projects unless other underwriting factors are present to help mitigate risk. The Company also utilizes third-party experts to provide insight and guidance about economic conditions and trends affecting market areas it serves. In addition, management tracks the level of owner-occupied commercial real estate loans versus non-owner occupied loans. As of September 30, 2020 and December 31, 2019, commercial real estate loans equal to approximately 36% and 39%, respectively, of the outstanding principal balance of commercial real estate loans were secured by owner-occupied properties.

 

With respect to loans to developers and builders that are secured by non-owner occupied properties that the Company may originate from time to time, the Company generally requires the borrower to have had an existing relationship with the Company and have a proven record of success. Construction loans are underwritten utilizing feasibility studies, independent appraisal reviews, sensitivity analyses of absorption and lease rates and financial analyses of the developers and property owners. Construction loans are generally based upon estimates of costs and value associated with the complete project. These estimates may be inaccurate. Construction loans often involve the disbursement of substantial funds with repayment substantially dependent on the success of the ultimate project. Sources of repayment for these types of loans may be pre-committed permanent loans from approved long-term lenders, sales of developed property or an interim loan commitment from the Company until permanent financing is obtained. These loans are closely monitored by on-site inspections and are considered to have higher risks than other real estate loans due to their ultimate repayment being sensitive to interest rate changes, governmental regulation of real property, general economic conditions and the availability of long-term financing.

 

Agricultural production, real estate and development lending is susceptible to credit risks including adverse weather conditions, pest and disease, as well as market price fluctuations and foreign competition. Agricultural loan underwriting standards are maintained by following Company policies and procedures in place to minimize risk in this lending segment. These standards consist of limiting credit to experienced farmers who have demonstrated farm management capabilities, requiring cash flow projections displaying margins sufficient for repayment from normal farm operations along with equity injected as required by policy, as well as providing adequate secondary repayment and sponsorship including satisfactory collateral support. Credit enhancement obtained through government guarantee programs may also be used to provide further support as available. 

 

The Company originates consumer loans utilizing common underwriting criteria specified in policy. To monitor and manage consumer loan risk, policies and procedures are developed and modified, as needed, jointly by line and staff personnel. This activity, coupled with relatively small loan amounts that are spread across many individual borrowers, minimizes risk. Additionally, trend and outlook reports are reviewed by management on a regular basis. Underwriting standards for 1-4 family residential loans, home equity lines and loans follow bank policy, which include, but are not limited to, a maximum loan-to-value percentage of 80%, a maximum housing and total debt ratio of 36% and 42%, respectively, and other specified credit and documentation requirements.

 

The Company maintains an independent loan review program that reviews and validates the credit risk program on a periodic basis. Results of these reviews are presented to management. The loan review process complements and reinforces the risk identification and assessment decisions made by lenders and credit personnel, as well as the Bank’s policies and procedures.

 

Non-Accrual and Past Due Loans. Loans are considered past due if the required principal and interest payments have not been received as of the date such payments were due. Loans are placed on non-accrual status when, in management’s opinion, the borrower may be unable to meet payment obligations as they become due, as well as when required by regulatory provisions. Loans may be placed on non-accrual status regardless of whether or not such loans are considered past due. When interest accrual is discontinued, all unpaid accrued interest is reversed. Interest income is subsequently recognized only to the extent cash payments are received in excess of principal due. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured.

 

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Non-accrual loans, segregated by class of loans, were as follows:

 

(in thousands)

 

September 30, 2020

  

December 31, 2019

 

Commercial real estate:

        

Commercial real estate- construction

 $0  $