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

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

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

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

NOTE 3 – SECURITIES

Equity Securities

The Company held equity securities with fair values of $3,371,000 and $3,297,000 as of March 31, 2020 and December 31, 2019, respectively. There were no sales of equity securities during the three-month periods ended March 31, 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 gain of $53,000 during the three months ended March 31, 2020, as compared to a loss of $43,000 during the three months ended March 31, 2019.

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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, 2017~~March 31, 2020 are as follows:

(dollars in thousands)

Amortized
Cost

Gross
Unrealized
Gains

Gross
Unrealized
Losses

Fair Value

Available-for-sale securities:

U.S. agencies
$ 26,780 $ 513 $ (84 ) $ 27,209
Collateralized mortgage obligations
3,963 6 (29 ) 3,940
Municipalities
88,026 2,677 (103 ) 90,600
SBA pools
12,389 33 (15 ) 12,407
Corporate debt
19,356 98 (722 ) 18,732
Asset backed securities
24,727 137 (11 ) 24,853
Mutual fund
3,324 0 (208 ) 3,116
$ 178,565 $ 3,464 $ (1,172 ) $ 180,857

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(dollars in thousands)	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value

Available-for-sale securities:
U.S. agencies	$	29,255	$	875	$	(22	)	$	30,108
Collateralized mortgage obligations		1,546		17		(134	)		1,429
Municipalities		134,250		6,234		(10	)		140,474
Small Business Administration pools		5,888		9		(29	)		5,868
Corporate debt		18,253		175		(1,012	)		17,416
Asset backed securities		52,281		23		(2,444	)		49,860
	$	241,473	$	7,333	$	(3,651	)	$	245,155

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 at ~~September 30, 2017.~~as of March 31, 2020.

(dollars in thousands)	Less than 12 months					12 months or more					Total					Less than 12 months					12 months or more					Total
Description of Securities	Fair Value		Unrealized Loss			Fair Value		Unrealized Loss			Fair Value		Unrealized Loss			Fair Value		Unrealized Loss			Fair Value		Unrealized Loss			Fair Value		Unrealized Loss
U.S. agencies	$	6,464		(72	)	$	1,841	$	(12	)	$	8,305	$	(84	)	$	3,631		(10	)	$	294	$	(12	)	$	3,925	$	(22	)
Collateralized mortgage obligations		1,122		(10	)		968		(19	)		2,090		(29	)		598		(134	)		0		0			598		(134	)
Municipalities		10,158		(58	)		2,879		(45	)		13,037		(103	)		6,442		(10	)		0		0			6,442		(10	)
SBA pools		3,812		(8	)		716		(7	)		4,528		(15	)
Small Business Administration pools																	1,323		(5	)		3,184		(24	)		4,507		(29	)
Corporate debt		1,984		(16	)		13,785		(706	)		15,769		(722	)		1,999		(1	)		8,299		(1,011	)		10,298		(1,012	)
Asset backed securities		6,219		(9	)		347		(2	)		6,566		(11	)		29,324		(823	)		18,853		(1,621	)		48,177		(2,444	)
Mutual fund		0		0			3,116		(208	)		3,116		(208	)
Total temporarily impaired securities	$	29,759	$	(173	)	$	23,652	$	(999	)	$	53,411	$	(1,172	)	$	43,317	$	(983	)	$	30,630	$	(2,668	)	$	73,947	$	(3,651	)

At ~~September 30, 2017, there were ten~~As of March 31, 2020, six corporate debts, ~~four municipalities, two SBA pools,~~ one U.S. agency, ~~one collateralized mortgage obligation, one~~five Small Business Administration pools and ten asset backed securities ~~and one mutual fund that comprised~~make up the total debt securities in an unrealized loss position for greater than 12 ~~months and twelve municipalities, five U.S. agencies, four~~months. As of March 31, 2020, sixteen asset backed securities, one corporate debt, four U.S. agencies, two ~~SBA~~Small Business Administration pools, three municipalities and one collateralized mortgage obligation ~~and one corporate debt that~~ make up the total debt securities in a loss position for less than 12 months. Management periodically evaluates each available-for-sale investment security in an unrealized loss position to determine if the impairment is temporary or other than temporary. This evaluation encompasses various factors including, the nature of the investment, the cause of the impairment, the severity and duration of the impairment, credit ratings and other credit related factors such as third party guarantees and the volatility of the security’s fair value. Management has determined that no investment security is other than temporarily impaired. The unrealized losses are due primarily to ~~interest rate changes and the~~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 wethe Company will be required to sell the securities before the earlier of the forecasted recovery or the maturity of the underlying investment security.

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The a~~mortized~~amortized cost and estimated fair value of ~~investment~~debt securities ~~at September 30, 2017,~~as of March 31, 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
$ 12,724 $ 12,981
Due after one year through five years
57,326 57,740
Due after five years through ten years
56,841 58,143
Due after ten years
51,674 51,993
$ 178,565 $ 180,857

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(dollars in thousands)	Amortized		Fair
	Cost		Value
Available-for-sale securities:
Due in one year or less	$	28,968	$	28,962
Due after one year through five years		72,893		75,484
Due after five years through ten years		67,749		69,532
Due after ten years		71,863		71,177
	$	241,473	$	245,155

The amortized cost and estimated fair values of debt securities as of December 31, ~~2016,~~2019 are as follows:

(dollars in thousands)

Amortized
Cost

Gross
Unrealized
Gains

Gross
Unrealized
Losses

Fair Value

Available-for-sale securities:

U.S. agencies
$ 27,879 $ 616 $ (209 ) $ 28,286
Collateralized mortgage obligations
4,159 7 (57 ) 4,109
Municipalities
77,957 1,318 (946 ) 78,329
SBA pools
7,219 0 (51 ) 7,168
Corporate debt
21,349 81 (867 ) 20,563
Asset backed securities
18,888 32 (101 ) 18,819
Mutual fund
3,264 0 (205 ) 3,059
$ 160,715 $ 2,054 $ (2,436 ) $ 160,333

(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 ~~aggregated~~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, ~~2016.~~2019.

(dollars in thousands)	Less than 12 months					12 months or more					Total					Less than 12 months					12 months or more					Total
Description of Securities	Fair Value		Unrealized Loss			Fair Value		Unrealized Loss			Fair Value		Unrealized Loss			Fair Value		Unrealized Loss			Fair Value		Unrealized Loss			Fair Value		Unrealized Loss
U.S. agencies	$	8,769	$	(208	)	$	718	$	(1	)	$	9,487	$	(209	)	$	3,934		(11	)	$	1,535	$	(6	)	$	5,469	$	(17	)
Collateralized mortgage obligations		3,166		(57	)		0		0			3,166		(57	)		0		0			650		(9	)		650		(9	)
Municipalities		45,137		(917	)		402		(29	)		45,539		(946	)		0		0			411		(1	)		411		(1	)
SBA pools		6,415		(46	)		753		(5	)		7,168		(51	)		1,423		(7	)		3,545		(26	)		4,968		(33	)
Corporate debt		12,776		(757	)		2,884		(110	)		15,660		(867	)		2,994		(6	)		8,859		(452	)		11,853		(458	)
Asset backed securities		2,576		(15	)		8,272		(86	)		10,848		(101	)		12,891		(233	)		21,313		(421	)		34,204		(654	)
Mutual fund		0		0			3,059		(205	)		3,059		(205	)
Total temporarily impaired securities	$	78,839	$	(2,000	)	$	16,088	$	(436	)	$	94,927	$	(2,436	)	$	21,242	$	(257	)	$	36,313	$	(915	)	$	57,555	$	(1,172	)

At December 31, 2019, one municipality, three U.S. agencies, six corporate debts, five Small Business Administration 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 Small Business Administration pools and two corporate debts make up the total debt securities in a loss position for less than 12 months.

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The Company recognized ~~gross~~no gains ~~of $4,000 and $394,000 for~~or losses during the ~~three and nine month periods~~three-month period ended ~~September 30, 2017, respectively,~~March 31, 2020, on ~~certain~~ available-for-sale securities that were called, ~~which compares~~compared to ~~$10,000 and $29,000 in~~gains of $109,000 recorded for the same ~~periods of 2016.~~period during 2019. There were no sales of available-for-sale securities ~~sold~~ during the ~~first nine months of 2017 or 2016.~~three-months ended March 31, 2020 and 2019.

~~Securities carried~~Debt securities carried at ~~$93,594,000~~$114,812,000 and ~~$89,362,000 at September 30, 2017~~$123,381,000 as of March 31, 2020 and December 31, ~~2016,~~2019, respectively, were pledged to secure deposits of public funds.

~~Our~~The Company’s customers are primarily located in Stanislaus, San Joaquin, ~~Tuolumne,~~Tuolumne, Inyo, and Mono Counties. As of ~~September 30, 2017,~~March 31, 2020, approximately ~~79%~~81% of the Company’s loans are commercial real estate loans which include construction loans. Approximately ~~10%~~11% of the Company’s loans are for general commercial uses including professional, retail, and small business. Additionally, 6%5% of the Company’s loans are for residential real estate and other consumer loans. The remaining 5%3% are agriculture loans. Loan totals were as follows:

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~~’sborrower’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, ~~our~~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.

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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~~’sCompany’s commercial real estate portfolio are diverse in terms of type and geographic location. This diversity helps reduce the Company’s exposure to adverse economic events that affect any single market or industry. Management monitors and evaluates commercial real estate loans based on collateral, geography and risk grade criteria. As a general rule, the Company avoids financing single-purpose projects unless other underwriting factors are present to help mitigate risk. The Company also utilizes third-party experts to provide insight and guidance about economic conditions and trends affecting market areas it serves. In addition, management tracks the level of owner-occupied commercial real estate loans versus non-owner occupied loans. ~~At September 30, 2017~~As of March 31, 2020 and December 31, ~~2016,~~2019, commercial real estate loans equal to approximately ~~42.3%~~38% and ~~40.9%~~39%, respectively, of the outstanding principal balance of ~~our~~ commercial real estate loans were secured by owner-occupied properties.

With respect to loans to developers and builders that are secured by non-owner occupied properties that the Company may originate from time to time, the Company generally requires the borrower to have had an existing relationship with the Company and have a proven record of success. Construction loans are underwritten utilizing feasibility studies, independent appraisal reviews, sensitivity ~~analysis~~analyses of absorption and lease rates and financial ~~analysis~~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 ~~department~~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~~’sBank’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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~~Excluded from the above non-accrual loan table~~ ~~is the $33,000 carrying value of one Purchased Credit Impaired loan acquired in the MLB Acquisition.~~

Had non-accrual loans performed in accordance with their original contract terms, wethe Company would have recognized additional interest income of approximately ~~$27,000 and $95,000~~$11,000 in the ~~three and nine month periods~~three-month period ended ~~September 30, 2017, respectively,~~March 31, 2020, as compared to ~~$38,000 and $118,000~~$14,000 in the same ~~periods~~period of ~~2016.~~2019.

The following table analyzes past due loans including the past due non-accrual loans in the above table, segregated by class of loans, as of ~~September 30, 2017~~March 31, 2020 (in thousands):

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The following table analyzes past due loans including the past due non-accrual loans in the above table, segregated by class of loans, as of December 31, ~~2016~~2019 (in thousands):

Impaired Loans. Loans are considered impaired when, based on current information and events, it is probable the Company will be unable to collect all amounts due in accordance with the original contractual terms of the loan agreement, including scheduled principal and interest payments. Impairment is evaluated in total for smaller-balance loans of a similar nature and on an individual loan basis for other loans. If a loan is impaired, a specific valuation allowance is allocated, if necessary, so that the loan is reported net, at the present value of estimated future cash flows using the loan’s existing rate or at the fair value of collateral if repayment is expected solely from the collateral. Interest payments on impaired loans are typically applied to principal unless collectability of the principal amount is reasonably assured, in which case interest is recognized on a cash basis. There was no interest income realized on impaired loans for the ~~three~~three-months ended March 31, 2020 and ~~nine months ended September 30, 2017 and 2016.~~2019.

Impaired loans as of ~~September 30, 2017 and December~~March 31, ~~2016~~2020 are set forth in the following ~~tables. PCI loans are excluded from the tables below, as they have not experienced post acquisition declines in cash flows expected to be collected.~~table.

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Average recorded investment in impaired loans outstanding as of ~~September 30, 2017~~March 31, 2020 and ~~2016~~2019 is set forth in the following table.

Troubled Debt Restructurings – In order to determine whether a borrower is experiencing financial difficulty, an evaluation is performed of the probability that the borrower will be in payment default on any of its debt in the foreseeable future without the modification. This evaluation is performed under the Company’s internal underwriting policy.

At ~~September 30, 2017,~~As of March 31, 2020, there ~~were 5 loans~~was one loan that ~~were~~was considered to be a troubled debt ~~restructurings, all~~restructuring totaling $823,000, which is included in non-accrual loans. The troubled debt restructuring as of ~~which are considered non-accrual totaling $1,311,000. At~~March 31, 2020 was not related to the economic challenges caused by the COVID-19 pandemic. As of December 31, ~~2016,~~2019, there ~~were 6 loans~~was one loan that ~~were~~was considered to be a troubled debt ~~restructurings, all~~restructuring totaling $855,000, which is included in non-accrual loans. As of ~~which are considered non-accrual totaling $3,037,000. At September 30, 2017~~March 31, 2020 and December 31, ~~2016~~2019, there were no unfunded commitments on loans classified as a troubled debt ~~restructures. We have~~restructurings. The Company has allocated $680,000 of specific reserves to loans whose terms have been modified in troubled debt restructurings as of ~~September 30, 2017~~March 31, 2020 and December 31, ~~2016.~~2019.

During the three-months ended March 31, 2020 and 2019, there were no loans that were modified as troubled debt restructurings. The modification of the terms of such loans typically includes one or a combination of the following: a reduction of the stated interest rate of the loan; an extension of the maturity date; or a temporary payment modification in which the payment amount allocated towards principal was reduced. In some cases, a permanent reduction of the accrued interest on the loan is conceded.

~~During the~~ ~~three and nine months ended September 30, 2017, no loans were modified as troubled debt restructurings, compared to one loan with a recorded investment~~

Table of $292,000 that was modified as a troubled debt restructuring by extending the maturity date during the nine month period ended September 30, 2016. This troubled debt restructuring did not increase the allowance for loan losses as a result of loan modifications. There were no charge-offs as a result of the loan modification, as the contractual balances outstanding were determined to be collectible.

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There were no loans modified as troubled debt restructurings within the previous twelve months and for which there was a payment default during the ~~three and nine month~~three-month periods ended ~~September 30, 2017~~March 31, 2020 and ~~2016.~~2019. A loan is considered to be in payment default once it is ninety days contractually past due under the modified terms.

Loan Risk ~~Grades~~–Grades– Quality ratings (Risk Grades) are assigned to all commitments and stand-alone notes. Risk grades define the basic characteristics of commitments or stand-alone note in relation to their risk. All loans are graded using a system that maximizes the loan quality information contained in loan review grades, while ensuring that the system is compatible with the grades used by bank examiners.

1. Exceptional Loan - Loans with A+ credits that contain very little, if any, risk. Grade 1 loans are considered Pass. To qualify for this rating, the following characteristics must be present:

~~-A high level of liquidity and whose debt-servicing capacity exceeds expected obligations by a substantial margin.~~

~~-Where leverage is below average for the industry and earnings are consistent or growing without severe vulnerability to economic cycles.~~

~~-Also~~

●

A high level of liquidity and whose debt-servicing capacity exceeds expected obligations by a substantial margin.

●

Where leverage is below average for the industry and earnings are consistent or growing without severe vulnerability to economic cycles.

●

Also included in this rating (but not mandatory unless one or more of the preceding characteristics are missing) are loans that are fully secured and properly margined by our own time instruments or U.S. blue chip securities. To be properly margined, cash collateral must be equal to, or greater than, 110% of the loan amount.

2. Quality Loan - Loans with excellent sources of repayment that conform in all respects to bank policy and regulatory requirements. These are also loans for which little repayment risk has been identified. No credit or collateral exceptions. Grade 2 loans are considered Pass. Other factors include:

~~-Unquestionable debt-servicing capacity to cover all obligations in the ordinary course of business from well-defined primary and secondary sources.~~

-A

●

Unquestionable debt-servicing capacity to cover all obligations in the ordinary course of business from well-defined primary and secondary sources.

●

Consistent strong earnings.

●

A solid equity base.

3A. Better than Acceptable Loan - In the interest of better delineating the loan portfolio’s true credit risk for reserve allocation, further granularity has been sought by splitting the grade 3 category into three classifications. The distinction between the three are bank-defined guidelines and represent a further refinement of the regulatory definition of a pass, or grade 3 loan. Grade 3A is ~~the stronger third of the pass category, but is not strong enough to be a grade 2 and is~~ characterized by:

~~-Strong earnings with no loss in last three years and ample cash flow to service all debt well above policy guidelines.~~

~~-Long term experienced management with depth and defined management succession.~~

~~-Loan-to-value on real estate secured transactions is 10% to 20% less than policy guidelines.~~

~~-Very liquid balance sheet that may have cash available to pay off our loan completely.~~

~~-Little~~

●

Strong earnings with no loss in last three years and ample cash flow to service all debt well above policy guidelines.

●

Long term experienced management with depth and defined management succession.

●

The loan has no exceptions to policy.

●

Loan-to-value on real estate secured transactions is 10% to 20% less than policy guidelines.

●

Very liquid balance sheet that may have cash available to pay off our loan completely.

●

Little to no debt on balance sheet.

3B. Acceptable Loan - 3B loans are simply defined as all loans that are less qualified than 3A loans and are stronger than 3C loans. These loans are characterized by acceptable sources of repayment that conform to bank policy and regulatory requirements. Repayment risks are acceptable for these loans. Credit or collateral exceptions are minimal, are in the process of correction, and do not represent repayment risk. These loans:

~~-Are those where the borrower has average financial strengths, a history of profitable operations and experienced management.~~

~~-Are~~

●

Are those where the borrower has average financial strengths, a history of profitable operations and experienced management.

●

Are those where the borrower can be expected to handle normal credit needs in a satisfactory manner.

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3C. Marginally Acceptable Loan - 3C loans have similar characteristics as that of 3Bs with the following additional characteristics:

4W 4(W).Watch Acceptable Loan - Watch grade will be assigned to any credit that is adequately secured and performing but monitored for a number of indicators. These characteristics may include any unexpected short-term adverse financial performance from budgeted projections or prior period’s results (i.e., declining profits, sales, margins, cash flow, or increased reliance on leverage, including adverse balance sheet ratios, trade debt issues, etc.). Additionally, any managerial or personal problems of company management, decline in the entire industry or local economic conditions, or failure to provide financial information or other documentation as requested; issues regarding delinquency, overdrafts, or renewals; and any other issues that cause concern for the company. Loans to individuals or loans supported by guarantors with marginal net worth and/or marginal collateral. Weakness identified in a Watch credit is short-term in nature. Loans in this category are usually accounts the Bank would want to retain providing a positive turnaround can be expected within a reasonable time frame. Grade 4 loans are considered Pass.include:

5~~Other Loans Especially Mentioned (Special Mention)~~.Special Mention Loan - A special mention extension of credit is defined as having potential weaknesses that deserve management’s close attention. If left uncorrected, these potential weaknesses may, at some future date result in the deterioration of the repayment prospects for the credit or the institution’s credit position. Extensions of credit that might be detailed in this category include the following:

~~-The lending officer may be unable to properly supervise the credit because of an inadequate loan or credit agreement.~~

~~-Economic or market conditions may unfavorably affect the obligor in the future.~~

~~-A declining trend in the obligor’s operations or an imbalanced position in the balance sheet exists, but not to the point that repayment is jeopardized.~~

6.Substandard Loan - A “substandard” extension of credit is inadequately protected by the current sound worth and paying capacity of the obligor or of the collateral pledged, if any. Extensions of credit so classified must have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the Bank will sustain some loss if the deficiencies are not corrected. Loss potential, while existing in the aggregate amount of substandard credits, does not have to exist in individual extensions of credit classified as substandard.

7.Doubtful Loan - An extension of credit classified as “doubtful” has all the weaknesses inherent in one classified substandard, with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable. The possibility of loss is extremely high but because of certain important and reasonably specific pending factors that may work to the advantage of and strengthen the credit, its classification as an estimated loss is deferred until its more exact status may be determined. Pending factors may include a proposed merger or acquisition, liquidation proceedings, capital injection, perfecting liens on additional collateral or refinancing plans. The entire loan need not be classified as doubtful when collection of a specific portion appears highly probable. An example of proper use of the doubtful category is the case of a company being liquidated, with the trustee-in-bankruptcy indicating a minimum disbursement of 40 percent and a maximum of 65 percent to unsecured creditors, including the Bank. In this situation, estimates are based on liquidation value appraisals with actual values yet to be realized. By definition, the only portion of the credit that is doubtful is the 25 percent difference between 40 and 65 percent.

A proper classification of such a credit would show 40 percent substandard, 25 percent doubtful, and 35 percent loss. A credit classified as doubtful should be resolved within a ~~‘reasonable’~~‘reasonable’ period of time. Reasonable is generally defined as the period between examinations. In other words, a credit classified as doubtful at an examination should be cleared up before the next exam. However, there may be situations that warrant continuation of the doubtful classification a while longer.

8.Loss - Extensions of credit classified as “loss” are considered uncollectible and of such little value that their continuance as bankable assets is not warranted. This classification does not mean that the credit has absolutely no recovery or salvage value, but rather that it is not practical or desirable to defer writing off, even though partial recovery may be affected in the future. It should not be the Company’s practice to attempt long-term recoveries while the credit remains on the books. Losses should be taken in the period in which they surface as uncollectible.

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As of ~~September 30, 2017~~March 31, 2020 and December 31, ~~2016,~~2019, there are no loans that are classified with a risk grade of 8- Loss.

The following table presents weighted average risk grades of ~~our~~the Company’s loan portfolio:

The following table presents risk grade totals by class of loans as of ~~September 30, 2017~~March 31, 2020 and December 31, ~~2016.~~2019. Risk grades 1 through 44(W) have been aggregated in the “Pass” line.

Allowance for Loan Losses. The allowance for loan losses is a reserve established by the Company through a provision for loan losses charged to expense, which represents management’s best estimate of probable losses that have been incurred within the existing portfolio of loans. The allowance, in the judgment of management, is necessary to reserve for estimated loan losses and risks inherent in the loan portfolio. The allowance for loan loss methodology includes allowance allocations calculated in accordance with ASC Topic 310, “Receivables” and allowance allocations calculated in accordance with ASC Topic 450, “Contingencies.” Accordingly, the methodology is based on historical loss experience by type of credit and internal risk grade, specific homogeneous risk pools and specific loss allocations, with adjustments for current events and conditions. The process for determining the appropriate level of the allowance for loan losses is designed to account for credit deterioration as it occurs. The provision for loan losses reflects loan quality trends, including the levels of and trends related to non-accrual loans, past due loans, potential problem loans, criticized loans and net charge-offs or recoveries, among other factors. The provision for loan losses also reflects the totality of actions taken on all loans for a particular period. In other words, the amount of the provision reflects not only the necessary increases in the allowance for loan losses related to newly identified criticized loans, but it also reflects actions taken related to other loans including, among other things, any necessary increases or decreases in required allowances for specific loans or loan pools.

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The level of the allowance reflects ~~management~~’smanagement’s continuing evaluation of industry concentrations, specific credit risks, loan loss experience, current loan portfolio quality, present economic, political and regulatory conditions and unidentified losses inherent in the current loan portfolio. Portions of the allowance may be allocated for specific credits; however, the entire allowance is available for any credit that, in management’s judgment, should be charged off. While management utilizes its best judgment and information available, the ultimate adequacy of the allowance is dependent upon a variety of factors beyond the Company’s control, including, among other things, the performance of the Company’s loan portfolio, the economy, changes in interest rates and the view of the regulatory authorities toward loan classifications.

The ~~Company~~’sCompany’s allowance for loan losses consists of three elements: (i) specific valuation allowances determined in accordance with ASC Topic 310 based on probable losses on specific loans; (ii) historical valuation allowances determined in accordance with ASC Topic 450 based on historical loan loss experience for similar loans with similar characteristics and trends, adjusted, as necessary, to reflect the impact of current conditions; and (iii) general valuation allowances determined in accordance with ASC Topic 450 based on general economic conditions and other qualitative risk factors both internal and external to the Bank and the ~~Company; and (iv) unallocated allowance which represents the excess allowance not allocated to specific loans pools.~~Company.

The allowances established for probable losses on specific loans are based on a regular analysis and evaluation of problem loans. Loans are classified based on an internal credit risk grading process that evaluates, among other things: (i) the obligor’s ability to repay; (ii) the underlying collateral, if any; and (iii) the economic environment and industry in which the borrower operates. This analysis is performed at the relationship manager level for all commercial loans. When a loan has a calculated grade of 5 or higher, a special assets officer analyzes the loan to determine whether the loan is impaired and, if impaired, the need to specifically allocate a portion of the allowance for loan losses to the loan. Specific valuation allowances are determined by analyzing the borrower’s ability to repay amounts owed, collateral deficiencies, the relative risk grade of the loan and economic conditions affecting the borrower’s industry, among other things.

Historical valuation allowances are calculated based on the historical loss experience of specific types of loans and the internal risk grade of such loans at the time they were charged-off. The Company calculates historical loss ratios for pools of similar loans with similar characteristics based on the proportion of actual charge-offs experienced to the total population of loans in the pool. The historical loss ratios are periodically updated based on actual charge-off experience. A historical valuation allowance is established for each pool of similar loans based upon the product of the historical loss ratio and the total dollar amount of the loans in the pool. The ~~Company~~’sCompany’s pools of similar loans include similarly risk-graded groups of commercial and industrial loans, commercial real estate loans, consumer ~~real estate loans and~~residential, consumer and ~~other loans.~~agriculture.

General valuation allowances are based on general economic conditions and other qualitative risk factors both internal and external to the Bank and the Company. In general, such valuation allowances are determined by evaluating, among other things: (i) the experience, ability and effectiveness of the Bank’s lending management and staff; (ii) the effectiveness of the Bank’s loan policies, procedures and internal controls; (iii) changes in asset quality; (iv) changes in loan portfolio volume; (v) the composition and concentrations of credit; (vi) the impact of competition on loan structuring and pricing; (vii) the effectiveness of the internal loan review function; (viii) the impact of environmental risks on portfolio risks; and (ix) the impact of rising interest rates on portfolio risk. Management evaluates the degree of risk that each one of these components has on the quality of the loan portfolio on a quarterly basis. Each component is determined to have either a high, moderate or low degree of risk. The results are then input into a “general allocation matrix” to determine an appropriate general valuation allowance.

Included in the general valuation allowances are allocations for groups of similar loans with risk characteristics that exceed certain concentration limits established by management. Concentration risk limits have been established, among other things, for certain industry concentrations, large balance and highly leveraged credit relationships that exceed specified risk grades, and loans originated with policy exceptions that exceed specified risk grades.

Loans identified as losses by management, internal loan review and/or bank examiners are charged-off. Furthermore, consumer loan accounts are charged-off automatically based on regulatory requirements.

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The following table details activity in the allowance for loan losses by portfolio segment for the ~~three~~three-months ended March 31, 2020 and ~~nine months ended September 30, 2017 and 2016.~~2019. Allocation of a portion of the allowance to one category of loans does not preclude its availability to absorb losses in other categories.

NOTE 76 — FINANCIAL INSTRUMENTS AND FAIR VALUE MEASUREMENTS

Fair values of financial instruments — The consolidated financial statements include various estimated fair value information as of ~~September 30, 2017~~March 31, 2020 and December 31, ~~2016.~~2019. Such information, which pertains to the Company’s financial instruments, does not purport to represent the aggregate net fair value of the Company. Further, the fair value estimates are based on various assumptions, methodologies, and subjective considerations, which vary widely among different financial institutions and which are subject to change.

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

We determine the fair values of our financial instruments based on the fair value hierarchy established under applicable accounting guidance which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value:

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

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

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

In certain cases, the inputs used to measure fair value may fall into different le~~vels~~levels of the fair value hierarchy. In such cases, the level in the fair value hierarchy within which the fair value measurement in its entirety falls has been determined based on the lowest level input that is significant to the fair value measurement in its entirety. The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the asset or liability. Transfers between levels of the fair value hierarchy are recognized on the actual date of the event or circumstance that caused the transfer, which generally corresponds with the Company’s quarterly valuation process. There were no transfers between levels during the ~~nine month~~three-month periods ended ~~September 30, 2017 or 2016.~~March 31, 2020 and 2019.

Following is a description of valuation methodologies used for assets and liabilities in the tables below:

Cash and cash equivalents – The carrying amounts of cash and cash equivalents approximate their fair value and are considered a level 1 valuation.

Restricted Equity Securities- The carrying amounts of the stock the ~~Company’s~~Company owns in ~~FRB~~Federal Reserve Bank (“FRB”) and FHLB approximate their fair value and are considered a level 2 valuation.

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~~value of the loan portfolio is estimated using discounted cash flow analyses, using interest rates currently being offered for loans with similar terms to borrowers of similar credit quality. The ~~allowance for loan losses is considered to be a reasonable estimate of loan discount due to credit risks. The~~ Company’s fair value model takes into account many inputs including loan discounts due to credit risk, current market rates on new loans, the U.S. treasury yield curve, LIBOR yield curve, rate floors, rate ceilings, remaining maturity, and average life based on specific loan type. The exit price rather than the entrance price is used to determine the fair value of loans not measured at fair value on a non-recurring basis. Loans are considered to be a level 3 valuation.

Deposit liabilities — The fair values estimated for demand deposits (interest and non-interest checking, savings, and certain types of money market accounts) are, by definition, equal to the amount payable on demand at the reporting date (i.e. their carrying amounts). The carrying amounts for variable-rate, fixed-term money market accounts and certificates of deposit approximate their fair values at the reporting date. Fair values for fixed-rate certificates of deposit are estimated using a discounted cash flow calculation that applies interest rates currently being offered on certificates to a schedule of the aggregate expected monthly maturities on time deposits. The fair value of deposits is determined by the Company’s internal assets and liabilities modeling system that accounts for various inputs such as decay rates, rate floors, FHLB yield curve, maturities and current rates offered on new accounts. Fair value on deposits is considered a level 3 valuation.

Interest receivable and payable - The carrying amounts of accrued interest approximate their fair value and are considered to be a level 2 valuation.

Off-balance-sheet instruments — Fair values for the Bank’s off-balance-sheet lending commitments are based on fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the credit standing of the counterparties. The Company considers the Bank’s off balance sheet instruments to be a level 3 valuation.

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The estimated fair values of the ~~Company~~’sCompany’s financial instruments not measured at fair value ~~at September 30, 2017~~as of March 31, 2020 were as follows:

							Hierarchy								Hierarchy
(in thousands)	Carrying			Fair			Valuation		Carrying			Fair			Valuation
	Amount			Value			Level		Amount			Value			Level
Financial assets:
Cash and cash equivalents	$	139,628		$	139,628			1	$	92,814		$	92,814		1
Restricted equity securities		4,135			4,135			2		4,761			4,761		2
Loans, net		626,911			633,841			3		749,726			760,179		3
Interest receivable		2,730			2,730			2		3,716			3,716		2

Financial liabilities:
Deposits		(901,716	)		(802,610	)		3		(1,026,925	)		(1,026,952	)	3
Interest payable		(33	)		(33	)		2		(64	)		(64	)	2

Off-balance-sheet assets (liabilities):
Commitments and standby letters of credit					(1,165	)		3					(1,532	)	3

The estimated fair values of the ~~Company~~’sCompany’s financial instruments not measured at fair value atas of December 31, ~~2016~~2019 were as follows:

							Hierarchy								Hierarchy
(in thousands)	Carrying			Fair			Valuation		Carrying			Fair			Valuation
	Amount			Value			Level		Amount			Value			Level
Financial assets:
Cash and cash equivalents	$	190,810		$	190,810			1	$	147,594		$	147,594		1
Restricted equity securities		3,795			3,795			2		4,761			4,761		2
Loans, net		601,104			611,553			3		741,047			742,484		3
Interest receivable		2,831			2,831			2		3,457			3,457		2

Financial liabilities:
Deposits		(914,093	)		(811,519	)		3		(1,019,929	)		(1,019,654	)	3
Interest payable		(45	)		(45	)		2		(50	)		(50	)	2

Off-balance-sheet assets (liabilities):
Commitments and standby letters of credit					(1,107	)		3					(1,647	)	3

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The following table presents the carrying value of recurring and nonrecurring financial instruments that were measured at fair value and that were still held in the condensed consolidated balance sheets at each respective period end, by level within the fair value hierarchy as of ~~September 30, 2017~~March 31, 2020 and December 31, ~~2016.~~2019.

Fair Value Measurements at September 30, 2017 Using

(in thousands)

September 30, 2017

Quoted Prices
in Active
Markets for
Identical Assets
(Level 1)

Significant
Other
Observable
Inputs
(Level 2)

Significant
Unobservable
Inputs
(Level 3)

Assets and liabilities measured on a recurring basis:

Available-for-sale securities:

U.S. agencies
$ 27,209 $ 0 $ 27,209 $ 0
Collateralized mortgage obligations
3,940 0 3,940 0
Municipalities
90,600 0 90,600 0
SBA pools
12,407 0 12,407 0
Corporate debt
18,732 0 18,732 0
Asset backed securities
24,853 0 24,853 0
Mutual fund
3,116 3,116 0 0

Assets and liabilities measured on a non-recurring basis:

Impaired loans:

Land
$ 313 $ 0 $ 0 $ 313
Commercial and industrial
302 0 0 302
Other real estate owned
253 0 0 253

Fair Value Measurements at December 31, 2016 Using

(in thousands)

December 31,
2016

Quoted Prices
in Active
Markets for
Identical Assets
(Level 1)

Significant
Other
Observable
Inputs
(Level 2)

Significant
Unobservable
Inputs
(Level 3)

Assets and liabilities measured on a recurring basis:

Available-for-sale securities

U.S. agencies
$ 28,286 $ 0 $ 28,286 $ 0
Collateralized mortgage obligations
4,109 0 4,109 0
Municipalities
78,329 0 78,329 0
SBA pools
7,168 0 7,168 0
Corporate debt
20,563 0 20,563 0
Asset backed securities
18,819 0 18,819 0
Mutual fund
3,059 3,059 0 0

Assets and liabilities measured on a non-recurring basis:

Impaired loans:

Land
$ 1,746 $ 0 $ 0 $ 1,746
Commercial and industrial
302 0 0 302
Other real estate owned
$ 1,210 $ 0 $ 0 $ 1,210

	Fair Value Measurements as of March 31, 2020 Using
(in thousands)	March 31, 2020		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Assets and liabilities measured on a recurring basis:
Available-for-sale securities:
U.S. agencies	$	30,108	$	0	$	30,108	$	0
Collateralized mortgage obligations		1,429		0		1,429		0
Municipalities		140,474		0		140,474		0
Small Business Administration pools		5,868		0		5,868		0
Corporate debt		17,416		0		17,416		0
Asset backed securities		49,860		0		49,860		0

Equity Securities:*
Mutual fund	$	3,371	$	3,371	$	0	$	0

Assets and liabilities measured on a non-recurring basis:
Impaired loans:
Land	$	143	$	0	$	0	$	143
Consumer residential		137		0		0		137

	Fair Value Measurements at December 31, 2019 Using
(in thousands)	December 31, 2019		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Assets and liabilities measured on a recurring basis:
Available-for-sale securities:
U.S. agencies	$	31,729	$	0	$	31,729	$	0
Collateralized mortgage obligations		1,614		0		1,614		0
Municipalities		90,571		0		90,571		0
Small Business Administration pools		6,395		0		6,395		0
Corporate debt		18,968		0		18,968		0
Asset backed securities		40,811		0		40,811		0

Equity Securities:*
Mutual fund	$	3,297	$	3,297	$	0	$	0

Assets and liabilities measured on a non-recurring basis:
Impaired loans:
Land	$	175	$	0	$	0	$	175
Consumer residential		248		0		0		248

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~~Following is a description of valuation methodologies used for assets and liabilities recorded at fair value.~~

Available-for-sale and equity securities - Investment securities ~~available-for-sale~~ are recorded at fair value on a recurring basis. Fair value measurement is based upon quoted market prices, if available. If quoted market prices are not available, fair values are measured using independent pricing models or other model-based valuation techniques such as the present value of future cash flows, adjusted for the security’s credit rating, prepayment assumptions, and other factors such as credit loss assumptions. Level 1 securities include those traded on an active exchange, such as the New York Stock Exchange, U.S. Treasury securities that are traded by dealers or brokers in active over-the-counter markets and money market funds. Level 2 securities include mortgage-backed securities issued by government sponsored entities, municipal bonds and corporate debt securities. Securities classified as Level 3 include asset-backed securities in less liquid markets where significant inputs are unobservable.

Impaired loans - ASC Topic 820 applies to loans measured for impairment using the practical expedients permitted by ASC Topic 310, Accounting by Creditors for Impairment of a Loan. The Company does not record loans at fair value on a recurring basis. However, from time to time, a loan is considered impaired and an allowance for loan losses is established. Loans for which it is probable that payment of interest and principal will not be made in accordance with the contractual terms of the loan agreement are considered impaired. Impaired loans where an allowance is established based on the fair value of collateral less the cost related to liquidation of the collateral require classification in the fair value hierarchy. When the fair value of the collateral is based on an observable market price or a current appraised value, the Company records the impaired loan as non-recurring Level 3. Likewise, when an appraised value is not available or management determines the fair value of the collateral is further impaired below the appraised value and there is no observable market price, the Company records the impaired loan as non-recurring Level 3.

~~Other Real Estate Owned~~ - Other real estate assets (“OREO”) acquired through, or in lieu of, foreclosure are held-for-sale and are initially recorded at the lower of cost or fair value, less selling costs. Any write-downs to fair value at the time of transfer to OREO are charged to the allowance for loan losses, subsequent to foreclosure. Appraisals or evaluations are then done periodically thereafter charging any additional write-downs or valuation allowances to the appropriate expense accounts. Values are derived from appraisals of underlying collateral and discounted cash flow analysis. OREO is classified within Level 3 of the hierarchy.

~~Net~~ realizable value of the underlying collateral is the fair value of the collateral less estimated selling costs and any prior liens. Appraisals, recent comparable sales, offers and listing prices are factored in when valuing the collateral. We review and verify the qualifications and licenses of the certified general appraisers used for appraising commercial properties or certified residential appraisers for residential properties. Real estate appraisals may utilize a combination of approaches including replacement cost, sales comparison and the income approach. Comparable sales and income data are analyzed by the appraisers and adjusted to reflect differences between them and the subject property such as type, leasing status and physical condition. When the appraisals are received, Management reviews the assumptions and methodology utilized in the appraisal, as well as the overall resulting value in conjunction with independent data sources such as recent market data and industry-wide statistics. We generally use a 6% discount for selling costs which is applied to all properties, regardless of size. Appraised values may be adjusted to reflect changes in market conditions that have occurred subsequent to the appraisal date, or for revised estimates regarding the timing or cost of the property sale. These adjustments are based on qualitative judgments made by management on a case-by-case basis. No fair value adjustments were made to OREO properties during the three months ended September 30, 2017.

There have been no significant changes in the valuation techniques during the three-month period ended ~~September 30, 2017.~~March 31, 2020.

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

The following discussion explains the significant factors affecting ~~our operations~~the Company’s operations and financial position for the periods presented. The discussion should be read in conjunction with ~~our~~the Company’s financial statements and the notes related thereto which appear or that are referenced to elsewhere in this report, and with the audited consolidated financial statements and accompanying notes included in ~~our 2016~~the Company’s 2019 Annual Report on Form 10-K. Average balances, including balances used in calculating certain financial ratios, are generally comprised of average daily balances.

The discussion and an~~alysis~~analysis of ~~our~~the Company’s financial condition and results of operations is based upon ~~our~~the Company’s financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires management to make estimates and judgments that affect the reported amounts of assets and liabilities, revenues and expenses, and related disclosures of contingent assets and liabilities at the date of ~~our~~the Company’s financial statements. Actual results may differ from these estimates under different assumptions or conditions. This discussion and analysis includes executive management’s (“Management”) insight of the Company’s financial condition and results of operations of Oak Valley Bancorp and its subsidiary. Unless otherwise stated, the “Company” refers to the consolidated entity, Oak Valley Bancorp, while the “Bank” refers to Oak Valley Community Bank.

Some matters discussed in this Form 10-Q may be “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995 and therefore may involve risks, uncertainties and other factors which may cause ~~our~~the Company’s actual results to be materially different from the results expressed or implied by ~~our~~the Company’s forward-looking statements. These statements generally appear with words such as “anticipate,” “believe,” “estimate,” “may,” “intend,” and “expect.” Although management believes that the assumptions and expectations reflected in such forward-looking statements are reasonable, it can give no assurance that such expectations will prove to be correct. Factors that could cause actual results to differ from results discussed in forward-looking statements include, but are not limited to: the credit exposure of certain loan products and other components of our business that could be impacted by the COVID-19 pandemic, changes in monetary, fiscal or tax policy to address the impact of COVID-19, any of which could cause us to incur additional loan losses and adversely affect our results of operations in the future,economic conditions (both generally and in the markets where the Company operates); the impact of the COVID-19 pandemic on our employees and customers; the success of our efforts to mitigate the impact of the COVID-19 pandemic; competition from other providers of financial services offered by the Company; changes in government regulation and legislation; changes in interest rates; material unforeseen changes in the financial stability and liquidity of the Company’s credit customers; risks associated with concentrations in real estate related loans; changes in accounting standards and interpretations; and other risks as may be detailed from time to time in the Company’s filings with the Securities and Exchange Commission, all of which are difficult to predict and which may be beyond the control of the Company. Many of the foregoing risks and uncertainties are, and will be, exacerbated by the COVID-19 pandemic and any worsening of the global business and economic environment as a result.The Company undertakes no obligation to revise forward-looking statements to reflect events or changes after the date of this discussion or to reflect the occurrence of unanticipated events.

Forward-looking statements speak only as of the date they are made, and the Company does not undertake to update forward-looking statements to reflect circumstances or events that occur after the date the forward-looking statements are made, whether as a result of new information, future developments or otherwise, except as may be required by law.

The coronavirus (“COVID-19”) pandemic and the Federal Reserve's response to the economic challenges during the first quarter of 2020 has resulted in an uncertain and rapidly evolving economy. Governmental response to combat this pandemic have resulted in approximately 17% of our branch staff and 81% of our administrative staff to work remotely. Our business continuity plans have been activated by COVID-19 and we have been able to fully support our remote workforce and have the ability to support all employees in a remote work environment. These remote work arrangements have not adversely impacted our ability to serve our clients, and have not had an impact on our financial reporting systems or the internal controls we have over financial reporting, disclosures and related procedures.

The most significant impact of COVID-19 on our business has been to the quality of our loan portfolio and to net interest income as short-term interest rates have sharply declined. We have increased the qualitative factors used in the determination of the adequacy of our allowance for loan and lease loss in anticipation of the impact that COVID-19 will have on our clients and their ability to fulfill their obligations. We have no certainty that the provisions we made during the first quarter of 2020 will be sufficient to absorb the losses that stem from the impact of COVID-19 on our clients. As the longer-term effects on our clients from the COVID-19 pandemic become more apparent, we may need to charge-off some or all of the balance on certain loans and make further provisions to increase our allowance for loan and lease losses. These potential additional provisions for loan and lease losses will have a direct impact upon our capital, including the potential need to reevaluate the need for a valuation allowance on our deferred tax asset. At this time, we don't expect that there would be any material impairment to the valuation of other long-lived assets, right of use assets, or our investment securities.

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The Bank is currently well capitalized under federal banking regulations that apply to all United States-based banks, see “Capital Ratios” section below for more information on the Bank’s capital position. In the event that future loan and leases loss and/or tax provisions reduce our capital surplus, we would be required to undertake measures to return the Bank's capital ratios to well capitalized levels, which could include but not be limited to raising additional capital or reducing the Banks asset size. We believe that we would have access to equity and debt markets to secure additional capital for the Bank should the need arise, but we have no certainty regarding the extent of the availability of these markets at the time such need would arise.

Increased demand for liquidity by our clients is another impact that we anticipate could occur should the COVID-19 effects be prolonged. As of March 31, 2020 the Company and the Bank's on-balance sheet liquidity was very strong and combined with our contingent liquidity resources, we believe that the Bank has sufficient resources to meet the liquidity needs of our clients. In response to COVID-19, the Federal Reserve has made other provisions that could assist the Bank in satisfying its liquidity needs, such as reducing our reserve requirement to zero, expanding access to the discount window through collateral pledging and extension of term borrowings.

The extent to which the COVID-19 pandemic affects the Company’s future financial results and operations will depend on future developments which are highly uncertain and cannot be predicted, including new information which may emerge concerning the duration and broad impacts of the pandemic, and current or future actions in response thereto. Management is working closely with our Board of Directors as we plan and execute our response to the significant disruption caused by the crisis. See “Management’s Discussion and Analysis of Financial Position and Results of Operations” and Part II, Item 1A, Risk Factors, for additional discussion of risks related to the COVID-19 pandemic.

Management has determined the following five accounting ~~policies~~estimates to be critical:

Accounting for allowance for loan losses involves significant judgment and assumptions by management and is based on ~~historical~~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~~The Company bases the allowance for loan losses on an estimation of probable losses inherent in ~~our~~the loan portfolio. ~~Our~~The Company’s methodology for assessing loan loss allowances are intended to reduce the differences between estimated and actual losses and involves a detailed analysis of ~~our~~the loan portfolio in three phases:

The first phase of ~~our~~the methodology involves the specific review of individual loans to identify and measure impairment. ~~We evaluate~~The Company evaluates each loan by use of a risk rating system, except for homogeneous loans, such as automobile loans and home mortgages. ~~Specif~~icSpecific 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~~remainder of the risk rated loan portfolio into groups or pools of loans, together with loans with similar characteristics, for evaluation. ~~We determine~~The Company determines the calculated loss ratio tofor each loan pool based on its historical net losses and ~~benchmark~~benchmarks it against the levels of other peer banks.

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

Management estimates the probable effect of such conditions based on ~~our~~management’s judgment, experience and known or ~~anticipate~~danticipated trends. Such estimation may be reflected as an additional allowance to each group of loans, if necessary. Management reviews these conditions with ~~our~~the Company’s 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 ourmanagement’s assessment of appropriate loss allowance is ~~our~~the internal 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 interest payable and other liabilities), the adequacy of the allowance is considered in its entirety.

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 non-accrual 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. Loans are considered past due if the required principal and interest payments have not been received as of the date such payments were due.

Certain ~~of our~~ assets are carried in ~~our~~the consolidated balance sheets at fair value or at the lower of cost or fair value. Valuation allowances are established when necessary to recognize impairment of such assets. WeThe Company periodically ~~perform~~performs analyses to test for impairment of various assets. In addition to ~~our~~management’s impairment analyses related to loans, another significant impairment analysis relates to other than temporary declines in the value of ~~our~~investment securities.

Loans for which it is probable that payment of interest and principal will not be made in accordance with the contractual terms of the loan agreement are considered impaired and are carried at fair value or below. Appraisals are done periodically on impaired loans and if required an allowance is established based on the fair value of collateral less the cost related to liquidation of the collateral. In some circumstances, an impaired loan may be charged off to bring the carrying value to fair value.

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OREO acquired through, or in lieu of, foreclosure, are held-for-sale and are initially recorded at ~~the lower of cost or~~ fair value, less selling costs. Any write-downs to fair value at the time of transfer to OREO are charged to the allowance for loan losses, subsequent to foreclosure. Appraisals or evaluations are then done periodically and 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.

Net realizable value of the underlying collateral is the fair value of the collateral less estimated selling costs and any prior liens. Appraisals, recent comparable sales, offers and listing prices are factored in when valuing the collateral. ~~We review~~The Company reviews and ~~verify~~verifies the qualifications and licenses of the certified general appraisers used for appraising commercial properties or certified residential appraisers for residential properties. Real estate appraisals may utilize a combination of approaches including replacement cost, sales comparison and the income approach. Comparable sales and income data are analyzed by the appraisers and adjusted to reflect differences between them and the subject property such as type, leasing status and physical condition. When the appraisals are received, Management reviews the assumptions and methodology utilized in the appraisal, as well as the overall resulting value in conjunction with independent data sources such as recent market data and industry-wide statistics. WeThe Company generally ~~use~~uses a 6% discount for selling costs which is applied to all properties, regardless of size. Appraised values may be adjusted to reflect changes in market conditions that have occurred subsequent to the appraisal date, or for revised estimates regarding the timing or cost of the property sale. These adjustments are based on qualitative judgments made by management on a case-by-case basis.

~~Our~~The available for sale investment portfolio is carried at estimated fair value, with any unrealized gains and losses, net of taxes, reported as accumulated other comprehensive income in ~~shareholders~~’shareholders’ equity. ~~We conduct~~The Company conducts 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, wethe Company 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~~investment 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~~the Company evaluates the intent and ability to hold the security for a sufficient time to recover the recorded principal balance. Estimated fair values for securities are based on published or securities dealers’ market values. Market volatility is unpredictable and may impact such values.

~~We use~~The Company uses fair value measurements to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures. ~~We base our~~The Company bases fair values on the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Securities available for sale, derivatives, and loans held for sale, if any, are recorded at fair value on a recurring basis. Additionally, from time to time, wethe Company may be required to record certain assets at fair value on a non-recurring basis, such as certain impaired loans held for investment and securities held to maturity that are other-than-temporarily impaired. These non-recurring fair value adjustments typically involve write-downs of individual assets due to application of lower-of-cost or market accounting.

~~We have~~The Company has established and documented a process for determining fair value. ~~We maximize~~The Company maximizes the use of observable inputs and minimize the use of unobservable inputs when developing fair value measurements. Whenever there is no readily available market data, management uses its best estimate and assumptions in determining fair value, but these estimates involve inherent uncertainties and the application of management's judgment. As a result, if other assumptions had been used, ~~our~~the recorded earnings or disclosures could have been materially different from those reflected in these financial statements.

Deferred income taxes are provided for the temporary differences between the financial reporting basis and the tax basis of the ~~Company~~’sCompany’s assets and liabilities. Deferred tax assets and liabilities are reflected at currently enacted income tax rates applicable to the period in which the deferred tax assets or liabilities are expected to be realized or settled using the liability method. As changes in tax laws or rates are enacted, deferred tax assets and liabilities are adjusted through the provision for income taxes.

The Company files income tax returns in the U.S. federal jurisdiction, and the state of California. ~~With few exceptions, the~~The Company is no longer subject to U.S. federal or state/local income tax examinations by tax authorities for years before ~~201~~2.2015.

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

Oak Valley Community Bank (“the Bank”) commenced operations in May 1991. ~~We are~~The Bank is an insured bank under the Federal Deposit Insurance Act and ~~are~~is 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 Company: the~~ Central Valley and the Eastern Sierras.

The Bank offers a complement of business checking and savings accounts for its business customers. The Bank also offers commercial and real estate loans, as well as lines of credit. Real estate loans are generally of a short-term nature for both residential and commercial purposes. Longer-term real estate loans are generally made with adjustable interest rates and contain normal provisions for acceleration. In addition, the Bank offers traditional residential mortgages through a third party.

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

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

Management believes the following were ~~important~~important factors in the Company’s performance during the ~~three and nine month periods~~three-month period ended ~~September 30, 2017:~~March 31, 2020:

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For the ~~three~~ ~~and nine month periods~~three-month period ended ~~September 30, 2017,~~March 31, 2020, the Company recorded net income of ~~$2,468,000 and $7,505,000, respectively,~~$2,709,000, representing ~~increases~~a decrease of ~~$538,000 and $2,162,000,~~$395,000, as compared to ~~$1,930,000 and $5,343,000 recorded during~~ the same ~~periods~~period in ~~2016.~~2019. Return on average assets (annualized) was ~~0.98% and 1.01%~~0.95% for the ~~three and nine months~~three-months ended ~~September 30, 2017, respectively,~~March 31, 2020, as compared to ~~0.82% and 0.78%~~1.17% for the same ~~periods~~period in ~~2016.~~2019. Annualized return on average common equity was ~~11.04% and 11.64%~~9.52% for the ~~three and nine months~~three-months ended ~~September 30, 2017, respectively,~~March 31, 2020, as compared to ~~9.28% and 8.83%~~12.54% for the same ~~periods of 2016.~~

period in 2019. Net income before provisions for income taxes ~~increased $874,000 and $3,558,000~~ decreased by $540,000 for the ~~three and nine month periods~~three-month period ended ~~September 30, 2017, respectively,~~March 31, 2020, from the comparable ~~2016 periods.~~2019 period. The income statement components of these variances are as follows:

Net interest income is the largest source of the ~~Company~~’sCompany’s operating income. For the ~~three and nine month periods~~three-month period ended ~~September 30, 2017,~~March 31, 2020, net interest income was ~~$8,620,000 and $25,157,000, respectively,~~$10,228,000, which represented ~~increases~~an increase of ~~$791,000~~$117,000 or ~~10.1% and $1,680,000 or 7.2%~~1.2%, from the comparable ~~periods~~period in ~~2016.~~2019. The increase is primarily due to loan growth and ~~investment portfolio growth.~~an increase in average cash account balances.

The net interest margin (net interest income as a percentage of average i~~nterest~~interest earning assets) was ~~3.78% and 3.74%~~3.93% for the ~~three and nine month periods~~three-month period ended ~~September 30, 2017, respectively,~~March 31, 2020, compared to ~~3.73% and 3.84%~~4.16% for the same ~~periods~~period in ~~2016.~~2019. The ~~year to date~~ decrease is mainly due to a decrease in loan discount amortization on acquired loans. In general, the Company has experienced net interest margin compression since the economic downturn in 2010 for several reasons: 1) deposit interest rates have essentially reached a threshold in which they cannot reasonably be further reduced, 2) competition in the lending market has driven new loan rates down, 3) loan and investment portfolio yields continue to decrease due to contractual repricing and 4) deposit growth in recent years has resulted in high interest-bearing cash balances, which yield approximately 1.25%, has compressed our net interest margin. The quarter over quarter increase in net interest margin is primarily due to ~~an increase in~~ the ~~average loan balance~~negative impact that the Federal Open Market Committee (“FOMC”) interest rate cuts, during 2019 and 2020, had on our yield on earning assets.

E~~arning~~ Earning asset yield ~~increased~~decreased by 727 basis points for the ~~three month~~three-month period ended ~~September 30, 2017, but decreased by 8 basis points for the nine month period ended September 30, 2017,~~March 31, 2020, as compared to the same ~~periods~~period of ~~2016. The quarter over quarter increase is mainly due to an increase in loan volume, loan yield, and~~2019. Lessening this downward trend, was the ~~yield on cash balances that have been recognized due to the recent FOMC rate hikes. Additionally, the earning asset yield is trending upward as a result~~deployment of ~~deploying~~ low yielding cash equivalent balances into the loan ~~and investment portfolios~~portfolio, which recognized an average balance ~~increases~~increase of ~~$47~~$51 million ~~and $26 million, respectively,~~ in the ~~nine month~~three-month period of ~~2017~~2020 as compared to ~~2016. The year to date earning asset decrease is mainly due to a decrease in loan discount accretion on loans acquired in the Mother Lode Bank acquisition.~~2019.

The cost of funds on interest-bearing ~~liabilities increased~~liabilities decreased by 56 basis ~~points and 4 basis points~~point for the ~~three and nine month periods~~three-month period of ~~2017, respectively,~~2020, as compared to the same ~~periods~~period in ~~2016, as deposit rates remain low and the banking industry has not reacted to the recent FOMC interest rate hikes thus far.~~2019. The Company continues to recognize strong core deposit growth as evidenced by the increase in average non-interest-bearing demand deposit balances of ~~$48~~$63 million, for the ~~nine month~~three-month period ended ~~September 30, 2017,~~March 31, 2020, as compared to the same period of ~~2016.~~2019.

Net interest income has already been impacted by the COVID-19 during the first quarter and there may be additional negative effects. First, interest rates have already declined sharply at the end of the first quarter which reduced the yield on our earning assets which will continue as assets mature and reprice. Second, an economic recession could reduce the demand for loans and cause credit quality deterioration leading to more non-accrual loans, for which interest income is not recognized. Third, an increase in demand for liquidity by our clients could result in a decrease in deposits and force us to rely on our lines of credit, which could potentially increase our cost of funds. As of March 31, 2020 the Company and the Bank's on-balance sheet liquidity was very strong and combined with our contingent liquidity resources, we believe that the Bank has sufficient resources to meet the liquidity needs of our clients.

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The following tables ~~shows~~show the relative impact of changes in average balances of interest earning assets and ~~interest bearing~~interest-bearing liabilities, and interest rates earned and paid by the Company on those assets and liabilities for the ~~three and nine month~~three-month periods ended ~~September 30, 2017~~March 31, 2020 and ~~2016:~~2019:

(2) Yields and interest income on municipal securities and loans have been adjusted to their fully-taxable equivalents, based on a federal marginal tax rate of ~~34.0%~~21.0%.

(3) Represents the average rate earned on interest-earning assets less the average rate paid on interest-bearing liabilities.

(4) Represents net interest income as a percentage of average interest-earning assets.

(5) Annual interest rates are computed by dividing the interest income/expense by the number of days in the period multiplied by 365.

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Nine months ended
September 30, 2017

Nine months ended
September 30, 2016

(in thousands)

Average
Balance

Interest
Income /
Expense

Avg
Rate/
Yield (5)

Average
Balance

Interest
Income /
Expense

Avg
Rate/
Yield (5)

Assets:

Earning assets:

Gross loans (1) (2)
$ 617,408 $ 21,512 4.66 % $ 570,861 $ 20,495 4.78 %
Investment securities (2)
168,912 4,117 3.26 % 142,776 3,800 3.55 %
Federal funds sold
8,333 65 1.04 % 5,134 19 0.49 %
Interest-earning deposits
137,004 1,100 1.07 % 122,194 492 0.54 %
Total interest-earning assets
931,657 26,794 3.85 % 840,965 24,806 3.93 %
Total noninterest earning assets
62,731 71,398
Total assets
994,388 912,363
Liabilities and Shareholders' Equity:

Interest-bearing liabilities:

Interest-earning DDA
196,199 202 0.14 % 167,597 108 0.09 %
Money market deposits
290,133 398 0.18 % 288,026 236 0.11 %
Savings deposits
69,290 43 0.08 % 73,799 5 0.15 %
Time certificates of deposit $250,000 or more
20,596 57 0.37 % 22,077 44 0.27 %
Other time deposits
32,221 73 0.30 % 30,107 82 0.36 %
Other borrowings
0 0 0.00 % 17 0 0.00 %
Total interest-bearing liabilities
608,439 773 0.17 % 581,623 555 0.13 %
Noninterest-bearing liabilities:

Noninterest-bearing deposits
294,193 245,903
Other liabilities
5,564 4,205
Total noninterest-bearing liabilities
299,757 250,108
Shareholders' equity
86,192 80,632
Total liabilities and shareholders' equity
$ 994,388 $ 912,363
Net interest income
$ 26,021 $ 24,251
Net interest spread (3)
3.68 % 3.80 %
Net interest margin (4)
3.73 % 3.84 %

~~(1)~~ ~~Loan fees have been included in the calculation of interest income.~~

~~(2)~~ ~~Yields and interest income on municipal securities and loans have been adjusted to their fully-taxable equivalents, based on a federal marginal tax rate of 34.0%.~~

~~(3)~~ ~~Represents the average rate earned on interest-earning assets less the average rate paid on interest-bearing liabilities.~~

~~(4)~~ ~~Represents net interest income as a percentage of average interest-earning assets.~~

~~(5) Annual interest rates are computed by dividing the interest income/expense by the number of days in the period multiplied by 365.~~

~~Table of Contents~~

S~~hown~~Shown in the following tables are the relative impacts on net interest income of changes in the average outstanding balances (volume) of earning assets and ~~interest bearing~~interest-bearing liabilities and the rates earned and paid by the Company on those assets and liabilities for the ~~three and nine month~~three-month periods ended ~~September 30, 2017~~March 31, 2020 and ~~2016.~~2019. Changes in interest income and expense that are not attributable specifically to either rate or volume are allocated to the rate column below.

Rate / Volume Variance An~~alysis~~Analysis

(In thousands)

	For the Three Months Ended									For the Three Months Ended
	September 30, 2017 vs 2016									March 31, 2020 vs 2019
	Increase (Decrease)									Increase (Decrease)
	in interest income and expense									in interest income and expense
(in thousands)	due to changes in:									due to changes in:
	Volume			Rate			Total			Volume			Rate			Total
Interest income:
Gross loans (1) (2)	$	480		$	48		$	528		$	610		$	(243	)	$	367
Investment securities (2)		232			(119	)		113			(110	)		(64	)		(174	)
Federal funds sold		7			17			24			30			(39	)		(9	)
Interest-earning deposits		8			252			260			102			(251	)		(149	)
Total interest income	$	727		$	198		$	925		$	632		$	(597	)	$	35

Interest expense:
Interest-earning DDA		6			23			29		$	7		$	(46	)	$	(39	)
Money market deposits		1			74			75			(9	)		(49	)		(58	)
Savings deposits		(3	)		(20	)		(23	)		0			(3	)		(3	)
Time CD $250K or more		(3	)		2			(1	)		0			12			12
Other time deposits		(1	)		(1	)		(2	)		(2	)		(1	)		(3	)
Other borrowings		0			0			0
Total interest expense	$	0		$	78		$	78		$	(4	)	$	(87	)	$	(91	)

Change in net interest income	$	727		$	120		$	847		$	636		$	(510	)	$	126

(1(1) Loan fees have been included in the calculation of interest income.

(2) Interest income on municipal securities and loans has been adjusted to their fully-taxable equivalents, based on a federal marginal tax rate of ~~34.0%~~21.0%.

The table above reflects an increase of ~~$120,000~~$636,000 in net interest income due to ~~rate changes for the third quarter~~growth of 2017 as compared to the same period of 2016. This increase is the result of the positive impact of recent FOMC rate hikes on interest-earning cash balance accounts, but was partially offset by the current flat yield curve’s negative impact on investment security yields. The increase in earning asset balances combined with the overall change in mix of balances during the first quarter of 2020 as compared to the same period of 2019. The decrease in earning asset yields triggered by recent FOMC rate cuts resulted in an ~~increase~~decrease of ~~$727,000~~$510,000 to net interest income over the same period.

~~Table of Contents~~

For the Nine Months Ended September 30,

2017 vs 2016

Increase (Decrease)

in interest income and expense

(in thousands)

due to changes in:

Volume

Rate

Total

Interest income:

Gross loans (1) (2)
$ 1,671 $ (654 ) $ 1,017
Investment securities (2)
696 (379 ) 317
Federal funds sold
12 34 46
Interest-earning deposits
61 547 608
Total interest income
$ 2,440 $ (452 ) $ 1,988

Interest expense:

Interest-earning DDA
$ 18 $ 76 $ 94
Money market deposits
2 160 162
Savings deposits
(5 ) (37 ) (42 )
Time CD $250K or more
(3 ) 16 13
Other time deposits
6 (15 ) (9 )
Other borrowings
0 0 0
Total interest expense
$ 18 $ 200 $ 218

Change in net interest income
$ 2,422 $ (652 ) $ 1,770

(1~~) Loan fees have been included in the calculation of interest income.~~

~~(2)~~ ~~Interest income~~ ~~on municipal securities and loans has been adjusted to their fully-taxable equivalents, based on a federal marginal tax rate of 34.0%.~~

~~The table a~~bove reflects a decrease of $652,000 in net interest income due to rate changes for the nine month period of 2017 as compared to the same period of 2016. This decrease is primarily the result of a $542,000 decline in loan discount accretion on loans acquired at fair value, and is compounded by the adverse impact the current low interest rate environment has had on security yields, but was partially offset by the recent interest rate hike’s positive impact on interest-earning deposits. The increase in earning asset balances combined with the overall change in mix of balances resulted in an increase of $2,422,000 to net interest income over the same period.

~~Non-Interest Income~~

~~Non-interest income represents service charges on deposit accounts and other non-interest~~ related charges and fees, including fees from mortgage commissions and investment service fee income. For the three and nine month periods ended September 30, 2017, non-interest income was $2,036,000 and $3,507,000, respectively, representing increases of $980,000 or 92.8% and $1,414,000 or 67.6%, compared to the same periods in 2016.

~~The following tables show the major components of non-interest income:~~

(in thousands)

For the Three Months Ended September 30,

2017

2016

$ change

% change

Service charges on deposits
$ 365 $ 341 $ 24 7.0 %
Earnings on cash surrender value of life insurance
130 102 28 27.5 %
Mortgage commissions
28 49 (21 ) (42.9% )
Gains on calls and sales of securities
4 10 (6 ) (60.0% )
Other income
749 575 174 30.3 %
Total non-interest income
$ 1,276 $ 1,077 $ 199 18.5 %

~~Table of Contents~~

(in thousands)

For the Nine Months Ended September 30,

2017

2016

$ change

% change

Service charges on deposits
$ 1,051 $ 1,011 $ 40 4.0 %
Earnings on cash surrender value of life insurance
386 305 81 26.6 %
Mortgage commissions
127 144 (17 ) (11.8% )
Net gain on sales and calls of securities
394 28 366 1307.1 %
Other income
2,824 1,682 1,142 67.9 %
Total non-interest income
$ 4,782 $ 3,170 $ 1,612 50.9 %

~~Service cha~~rges on deposits increased by $24,000 and $40,000 for the three and nine months ended September 30, 2017, respectively, compared to the same periods in 2016, due to an increase in the number of deposit accounts.

Earnings on cash surrender value of life insurance increased by $28,000 and $81,000 for the three and nine months ended September 30, 2017, respectively, compared to the same periods in 2016, due to the five m~~ost recently issued policies that began accruing earnings during the fourth quarter of 2016.~~

~~Mortgag~~e commissions decreased by $21,000 and $17,000 for the three and nine months ended September 30, 2017, respectively, as compared to the same periods of 2016, as the demand for home purchases and refinancing has retracted.

~~Net gain on~~ sales and calls of securities decreased by $6,000 for the three months ended September 30, 2017, and increased by $366,000 for the nine months ended September 30, 2017, as compared to the same periods in 2016, due to two large gains on called securities recorded during the first quarter of 2017.

~~Other inco~~me increased by $174,000 and $1,142,000 for the three and nine month periods ended September 30, 2017, respectively, as compared to the same periods of 2016. The quarter-over-quarter increase is due to a gain of $211,000 recorded on the sale of an OREO property during the third quarter of 2017. The year-to-date increase was due to settlement payments, recorded during the second quarter of 2017, totaling $938,000 from professional service providers related to the acquisition of Mother Lode Bank.

~~Non-Interest Expense~~

~~Non-interest expense represents salaries and benefits, occupancy expenses, professional~~ ~~expenses, outside services, and other miscellaneous expenses necessary to conduct business.~~

~~The following tables show the major components of non-interest expenses:~~

(in thousands)

For the Three Months Ended September 30,

2017

2016

$ change

% change

Salaries and employee benefits
$ 3,534 $ 3,225 $ 309 9.6 %
Occupancy
823 819 4 0.5 %
Data processing fees
399 435 (36 ) (8.3% )
Regulatory assessments (FDIC & DBO)
102 178 (76 ) (42.7% )
Other
1,202 1,267 (65 ) (5.1% )
Total non-interest expense
$ 6,060 $ 5,924 $ 136 2.3 %

(in thousands)

For the Nine Months Ended September 30,

2017

2016

$ change

% change

Salaries and employee benefits
$ 10,603 $ 9,950 $ 653 6.6 %
Occupancy
2,496 2,470 26 1.1 %
Data processing fees
1,154 1,346 (192 ) (14.3% )
Regulatory assessments (FDIC & DBO)
381 505 (124 ) (24.6% )
Other
3,708 4,027 (319 ) (7.9% )
Total non-interest expense
$ 18,342 $ 18,298 $ 44 0.2 %

~~Table of Contents~~

~~Non-interest~~ expenses increased by $136,000 or 2.3% and $44,000 or 0.2% for the three and nine months ended September 30, 2017, respectively, as compared to the same periods of 2016. Salaries and employee benefits increased $309,000 and $653,000 for the three and nine months ended September 30, 2017, respectively, as compared to the same periods of 2016, primarily due to additional staffing required to support the continued loan and deposit growth.

~~Occupancy expenses in~~creased by $4,000 and $26,000 for the three and nine months ended September 30, 2017, respectively, as compared to the same periods of 2016, which is primarily due to rent and general overhead associated with the branches. Data processing fees decreased by $36,000 and $192,000 for the three and nine month periods ended September 30, 2017, respectively, as a result of cost efficiencies gained from the conversion of the Mother Lode Bank core data system completed in April 2016.

~~FDIC and DBO~~ (California Department of Business Oversight) regulatory assessments decreased by $76,000 and $124,000 for the three and nine months ended September 30, 2017, respectively, as compared to the same periods in 2016. The initial base assessment rate for financial institutions varies based on the overall risk profile of the institution as defined by the FDIC and our risk profile has remained stable during 2016 and 2017. In April of 2016 the FDIC changed the methodology for determining the assessment rate, which first appeared on the December 31, 2016 invoice. The result was a reduction in our assessment rate and resulting calculated expense, as the FDIC assessment rates are applied to average quarterly total liabilities as the primary basis.

~~Other expense~~ decreased by $65,000 and $319,000 for the three and nine months ended September 30, 2017, respectively, compared to the same periods in 2016, partially as a result of a $204,000 decrease in merger related expenses on a year-to-date basis. Additionally, the Company recorded an $85,000 legal settlement payment received related to an OREO that was recorded as an offset to OREO expenses during the second quarter of 2017.

~~Management anticipates that non~~-interest 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 Taxes~~

~~We reported~~ provisions for income taxes of $1,298,000 and $3,987,000 for the three and nine month periods ended September 30, 2017, respectively, representing increases of $336,000 and $1,396,000 as compared to the provisions reported in the comparable periods of 2016. The effective income tax rates on income from continuing operations was 34.5% and 34.7% for the three and nine months ended September 30, 2017, respectively, compared to 33.3% and 32.7% for the comparable periods of 2016. These provisions reflect accruals for taxes at the applicable rates for federal income tax and California franchise tax based upon reported pre-tax income, and adjusted for the effects of all permanent differences between income for tax and financial reporting purposes (such as earnings on qualified municipal securities, BOLI and certain tax-exempt loans). The disparity between the effective tax rates for 2017 as compared to 2016 is primarily due to tax credits from California Enterprise Zones and low income housing projects as well as tax free-income on municipal securities and loans that comprise a larger proportion of pre-tax income in 2016 as compared to 2017.

~~Asset Quality~~

Non-performing assets consist of loans on non-accrual status, including loans restructured on non-accrual status, where the terms of repayment have been renegotiated resulting in a reduction or deferral of interest o~~r principal, loans 90 days or more past due and still accruing interest 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.

~~Non-accrual~~ loans totaled $1,311,000 at September 30, 2017, as compared to $3,037,000 at December 31, 2016. The non-accrual loans as of September 30, 2017 are loans made to three borrowers primarily for residential real estate development and general commercial purposes. As of September 30, 2017, we had five loans considered troubled debt restructurings totaling $1,311,000 million, all of which are included in non-accrual loans.

~~OREO as of~~ September 30, 2017 consisted of two properties, one of which was a residential land acquired through foreclosure that was written down to a zero balance because the public utilities have not been obtainable rendering these land lots unmarketable at this time. The other OREO asset was a residential property with a carrying value of $253,000 that was acquired through foreclosure.

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~~The following table presents information about the Bank’s non-performing assets, including asset quality ratios as of September 30, 2017 and December 31, 2016:~~

No~~n-Performing Assets~~

(in thousands)

September 30,

December 31,

2017

2016

Loans in non-accrual status
$ 1,311 $ 3,037
Loans past due 90 days or more and accruing
0 0
Total non-performing loans
1,311 3,037
Other real estate owned
253 1,210
Total non-performing assets
$ 1,564 $ 4,247

Allowance for loan losses
$ 7,917 $ 7,832

Asset quality ratios:

Non-performing assets to total assets
0.16
%
0.42
%
Non-performing loans to total loans
0.21
%
0.50
%
Allowance for loan losses to total loans
1.24
%
1.28
%
Allowance for loan losses to total non-performing loans
603.9
%
257.9
%

~~Non-perform~~ing assets decreased by $1,005,000 as of September 30, 2017, as compared to December 31, 2016, as a result of principal payments of $854,000 and one loan totaling $289,000 that was returned to accrual status, which was offset by a loan totaling $138,000 that was placed on non-accrual status during the first six months of 2017. The Company did not acquire or sell any OREO properties during the first nine months of 2017, and there were no fair value adjustments to OREO properties during the first nine months of 2017.

~~Allowance~~Provision for Loan ~~and Lease~~ Losses (“~~ALLL”)~~

~~Due~~ to credit risk inherent in our lending business, we routinely set aside allowances through charges to earnings. Such charges are not only made for the outstanding loan portfolio, but also for off-balance sheet items, such as commitments to extend credits or letters of credit. Charges made for the outstanding loan portfolio have been credited to the allowance for loan losses, whereas charges for off-balance sheet items have been credited to the reserve for off-balance sheet items, which is presented as a component of other liabilities. The Company recorded loan loss provisions of $70,000 and $105,000 during the three and nine months ended September 30, 2017, respectively, compared to provisions of $90,000 and $415,000 during the comparable periods of 2016.

~~The allowance f~~or loan losses increased by $85,000 or 1.1%, to $7,917,000 at September 30, 2017, as compared to $7,832,000 at December 31, 2016, due to the $105,000 loan loss provision which was offset by net loan charge-off of $20,000 recorded during the nine month period of 2017. Improved credit quality combined with loan growth resulted in a decrease to the allowance for loan losses as a percentage of total loans to 1.24% at September 30, 2017 as compared to 1.28% at December 31, 2016.

~~The Company~~ will continue to monitor the adequacy of the allowance for loan losses and make additions to the allowance in accordance with the analysis referred to above. Because of uncertainties inherent in estimating the appropriate level of the allowance for loan losses, actual results may differ from management’s estimate of credit losses and the related allowance.

The Company makes provisions for loan losses when required to bring the total allowance for loan and lease losses to a level deemed appropriate for the level of risk in the loan portfolio. At least quarterly, management conducts an assessment of the overall quality of the loan portfolio and general economic trends in the local market. The determination of the appropriate level for the allowance is based on that review, considering such factors as historical experience, the volume and type of lending conducted, the amount of and identified potential loss associated with specific non-performing loans, regulatory policies, general economic conditions, and other factors related to the collectability of loans in the portfolio.

The Company recorded loan loss provisions of $450,000 during the three-months ended March 31, 2020, as compared to no provisions during the same period of 2019, mainly due to loan growth during 2020 and an adjustment to our reserve calculation for qualitative risk factors related to the current economic environment.

The provision of $450,000 during the first quarter was due mainly to the impact of the COVID-19 pandemic. Management reviewed the qualitative factors within the allowance for loan loss calculation and determined that a macro-economic adjustment was necessary to account for the potential negative impact of the financial strain that is being experienced by certain borrowers. Management will continue to closely monitor the economic impacts to our loan portfolio and may need to make further qualitative adjustments depending on the severity and longevity of the COVID-19 pandemic.

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Non-Interest Income

Non-interest income represents service charges on deposit accounts and other non-interest related charges and fees, including fees from mortgage commissions and investment service fee income. For the three-month period ended March 31, 2020, non-interest income was $1,284,000, representing an increase of $9,000 or 0.7%, compared to the same period in 2019.

The following tables show the major components of non-interest income:

(in thousands)	For the Three Months Ended March 31,
	2020		2019		$ change			% change
Service charges on deposits	$	387	$	393	$	(6	)		(1.5%	)
Debit card transaction fee income		295		274		21			7.7	%
Earnings on cash surrender value of life insurance		174		125		49			39.2	%
Mortgage commissions		45		22		23			104.5	%
Gains on sales and calls of securities		0		109		(109	)		(100.0%	)
Other income		383		352		31			8.8	%
Total non-interest income	$	1,284	$	1,275	$	9			0.7	%

Service charges on deposits decreased by $6,000 for the three-months ended March 31, 2020, compared to the same period in 2019. The number of deposit accounts has increased but corresponding service fee income has decreased slightly due to higher balances per account which allow for service charges to be waived on certain accounts.

Debit card transaction fee income increased by $21,000 for the three-months ended March 31, 2020, compared to the same period in 2019, due to an increase in the number of deposit accounts and corresponding service fee income.

Earnings on cash surrender value of life insurance increased by $49,000 for the three-months ended March 31, 2020, compared to the same period in 2019. The increase was due to four new life insurance policies purchased on certain directors and officers during the third quarter of 2019.

Mortgage commissions increased by $23,000 for the three-months ended March 31, 2020, as compared to the same period of 2019, as the demand for home purchases and refinancing has expanded during 2019.

There were no gains or losses on calls and sales of securities during the three-months ended March 31, 2020, as compared to gains of $109,000 recorded in the same period of 2019, as the volume of called securities continues to be higher than normal in 2020 and 2019 due to the low interest rate environment.

Other income increased by $31,000 for the three-month period ended March 31, 2020, as compared to the same period of 2019, mainly due to an increase of $24,000 in investment advisory service fee income.

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Non-Interest Expense

Non-interest expense represents salaries and benefits, occupancy expenses, professional expenses, outside services, and other miscellaneous expenses necessary to conduct business.

The following tables show the major components of non-interest expenses:

(in thousands)	For the Three Months Ended March 31,
	2020		2019		$ change			% change
Salaries and employee benefits	$	4,601	$	4,404	$	197			4.5	%
Occupancy expenses		868		890		(22	)		(2.5%	)
Data processing fees		494		447		47			10.5	%
Regulatory assessments (FDIC & DBO)		30		110		(80	)		(72.7%	)
Other operating expenses		1,456		1,382		74			5.4	%
Total non-interest expense	$	7,449	$	7,233	$	216			3.0	%

Non-interest expenses increased by $216,000 or 3.0% for the three-months ended March 31, 2020, as compared to the same period of 2019. Salaries and employee benefits increased $197,000 for the three-months ended March 31, 2020, as compared to the same period of 2019, primarily due to additional staffing required to support the continued loan and deposit growth.

Occupancy expenses decreased by $22,000 for the three-months ended March 31, 2020, as compared to the same period of 2019, due in part to a decrease in various maintenance expenses incurred to keep our branches at professional level our customers have come to expect.

Data processing fees increased by $47,000 for the three-month period ended March 31, 2020, as compared to the same period of 2019. The increase is mainly due to servicing costs on the growing number of loan and deposit accounts.

FDIC and DBO (California Department of Business Oversight) regulatory assessments decreased by $80,000 for the three-months ended March 31, 2020, as compared to the same period in 2019. In January 2019, the FDIC sent notification that small banks less than $10 billion would receive assessment credits for the portion of their assessments that contributed to the growth in the Deposit Insurance Fund Reserve Ratio from 1.15% to 1.35%, to be applied when the reserve ratio reached 1.38%. That threshold has since been met and therefore the Company did not recognize any expense for FDIC assessments during the last three quarters. Additionally, the initial base assessment rate for financial institutions varies based on the overall risk profile of the institution as defined by the FDIC and the Company’s risk profile has improved throughout 2019, resulting in a reduction in the Company’s assessment rate. However, management expects it to be offset by deposit growth throughout the remainder of 2020, as the FDIC assessment rates are applied to average quarterly total liabilities as the primary basis.

Other expense increased by $74,000 for the three-months ended March 31, 2020, as compared to the same period in 2019, due to increases in a variety of general operating expenses as the Company’s business portfolios continue to expand.

Management anticipates that non-interest expense will continue to increase as the Company continues to grow. However, management remains committed to cost-control and efficiency, and expects to keep these increases to a minimum relative to growth.

Income Taxes

The CARES Act, passed by Congress during the first quarter of 2020 in response to the COVID-19 pandemic, provides for assistance in the form of income tax related relief measures, including temporary changes to income tax laws such as the ability to carryback NOLs for a period of five years, which does not apply to our Company. Management performed an evaluation of the tax relief measures available, and determined there was no significant impact to our Company, and therefore, no tax relief provisions were applied.

The Company reported provisions for income taxes of $904,000 for the three-month period ended March 31, 2020, representing a decrease of $145,000, compared to the provisions reported in the comparable period of 2019. The effective income tax rate on income from continuing operations was 25.0% for the three-months ended March 31, 2020, compared to 25.3% for the comparable period of 2019. These provisions reflect accruals for taxes at the applicable rates for federal income tax and California franchise tax based upon reported pre-tax income, and adjusted for the effects of all permanent differences between income for tax and financial reporting purposes (such as earnings on qualified municipal securities, bank owned life insurance and certain tax-exempt loans). The disparity between the effective tax rates for 2020 as compared to 2019 is primarily due to tax credits from low income housing projects as well as tax free-income on municipal securities and loans that comprised a larger proportion of pre-tax income in 2020 as compared to 2019.

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Asset Quality

Non-performing assets consist of loans on non-accrual status, including loans restructured on non-accrual status, where the terms of repayment have been renegotiated resulting in a reduction or deferral of interest or principal, loans 90 days or more past due and still accruing interest and OREO.

Loans are generally placed on non-accrual status when they become 90 days past due, unless management believes the loan is adequately collateralized and in the process of collection. The past due loans may or may not be adequately collateralized, but collection efforts are continuously pursued. Loans may be restructured by management when a borrower has experienced some changes in financial status, causing an inability to meet the original repayment terms, and where management believes 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.

Non-accrual loans totaled $960,000 and $1,103,000 as of March 31, 2020 and December 31, 2019, respectively. The non-accrual loans as of March 31, 2020 are loans made to two borrowers primarily for commercial real estate land and consumer residential. As of March 31, 2020, the Company had one loan considered troubled debt restructurings totaling $823,000, which is included in non-accrual loans.

OREO as of March 31, 2020 and December 31, 2019 consisted of one property, a residential land acquired through foreclosure that was written down to a zero balance because the public utilities have not been obtainable, therefore, rendering these land lots unmarketable at this time. There were no sales, acquisitions or fair value adjustments of OREO properties during the first three months of 2020 and 2019.

The following table presents information about the Bank’s non-performing assets, including asset quality ratios as of March 31, 2020 and December 31, 2019:

Non-Performing Assets

(in thousands)	March 31,			December 31,
	2020			2019
Loans in non-accrual status	$	960		$	1,103
Loans past due 90 days or more and accruing		0			0
Total non-performing loans		960			1,130
Other real estate owned		0			0
Total non-performing assets	$	960		$	1,103

Allowance for loan losses	$	9,586		$	9,146

Asset quality ratios:
Non-performing assets to total assets		0.08	%		0.10	%
Non-performing loans to total loans		0.13	%		0.15	%
Allowance for loan losses to total loans		1.26	%		1.22	%
Allowance for loan losses to total non-performing loans		998.54	%		829.19	%

Non-performing assets decreased by $143,000 as of March 31, 2020, as compared to December 31, 2019, due to payments received from borrowers on two loans on non-accrual status during the first quarter of 2020.

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Allowance for Loan and Lease Losses

Due to credit risk inherent in the lending business, the Company routinely sets aside allowances through charges to earnings. Such charges are not only made for the outstanding loan portfolio, but also for off-balance sheet items, such as commitments to extend credits or letters of credit. Charges for the outstanding loan portfolio have been credited to the allowance for loan losses, whereas charges for off-balance sheet items have been credited to the reserve for off-balance sheet items, which is presented as a component of other liabilities. The Company recorded loan loss provisions of $450,000 during the three-months ended March 31, 2020, as compared to no provisions in the same period of 2019. This increase is mainly a result of the higher volume of loan growth during 2020 as compared to 2019, and an adjustment to our loan loss reserve calculation to account for qualitative risk factors related to the current economic environment.

The allowance for loan losses increased by $440,000, to $9,586,000 as of March 31, 2020, as compared to $9,146,000 as of December 31, 2019, due to the $450,000 provision for loan loss during the first three months of 2020, which was partially offset by net loan charge-offs of $10,000 during the same period. These factors combined with the increase in the gross loan balance resulted in a slight increase in the allowance for loan losses as a percentage of total loans to 1.26% as of March 31, 2020, as compared to 1.22% as of December 31, 2019.

The Company will continue to monitor the adequacy of the allowance for loan losses and make additions to the allowance in accordance with the analysis referred to above. Because of uncertainties inherent in estimating the appropriate level of the allowance for loan losses, actual results may differ from management’s estimate of credit losses and the related allowance.

Although management believes the allowance at ~~September 30, 2017~~as of March 31, 2020 was adequate to absorb probable losses from any known and inherent risks in the portfolio, no assurance can be given that the adverse effect of current and future economic conditions on ~~our~~the Company’s service areas, or other variables, will not result in increased losses in the loan portfolio in the future.

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Investment Activities

Investments are a key source of interest income. Management of ~~our~~the investment portfolio is set in accordance with strategies developed and overseen by ~~our~~the Company’s Investment Committee. Investment balances, including cash equivalents and interest-bearing deposits in other financial institutions, are subject to change over time based on ~~our~~the Company’s asset/liability funding needs and interest rate risk management objectives. ~~Our~~The Company’s 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

The Company holds federal funds sold, unpledged available-for-sale securities and salable go~~vernment~~government guaranteed loans to help meet liquidity requirements and provide temporary holdings until the funds can be otherwise deployed or invested. As of ~~September 30, 2017,~~March 31, 2020, and December 31, ~~2016, we~~2019, the Company had ~~$139,628,000~~$92,814,000 and ~~$190,810,000,~~$147,594,000, respectively, in cash and cash equivalents.

Investment Securities

Management of ~~our~~the 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 ~~incom~~eincome without taking undue risk. Investment securities that ~~we intend~~the Company intends to hold until maturity are classified as held-to-maturity securities, and all other investment securities are classified as ~~available-for-sale.~~available-for-sale or equity securities. Currently, all of ~~our~~the investment securities are classified as ~~available-for-sale.~~available-for-sale except for one mutual fund classified as an equity security with a carrying value of $3,371,000 as of March 31, 2020. 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. The carrying values of equity securities are adjusted for unrealized gains or losses through noninterest income in the consolidated statement of income.

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Management has evaluated the investment securities portfolio to determine if the impairment of any security in an unrealized loss position is temporary or other than temporary. ~~We conduct~~The Company conducts a periodic review and evaluation of the securities portfolio to determine if the value of any security has declined below its carrying value. If such decline is ~~deemed~~determined to be other than temporary, wethe Company would adjust the carrying amount of the security by writing down the security to fair value through a charge to current period income or a charge to accumulated other comprehensive income depending on the nature of the impairment and managements intent or requirement to sell the security. Management has determined that no investment security is other than temporarily impaired. The unrealized losses are due primarily to interest rate changes.

~~Goodwill~~

~~Goodwill arises when the Company~~’s purchase price exceeds the fair value of the net assets of an acquired business. Goodwill represents the value attributable to intangible elements acquired. The value of goodwill is supported ultimately by profit from the acquired business. A decline in earnings could lead to impairment, which would be recorded as a write-down in the Company’s consolidated statements of earnings. Events that may indicate goodwill impairment include significant or adverse changes in results of operations of the acquired business or asset, economic or political climate; an adverse action or assessment by a regulator; unanticipated competition; and a more-likely-than-not expectation that a reporting unit will be sold or disposed of at a loss. While goodwill is not amortized, the Company does conduct periodic impairment analysis on goodwill at least annually or more often as conditions require.

At ~~September 30, 2017, the Company had goodwill in the amount of $3,312,000 in connection with the acquisition of Mother Lode Bank in December of 2015.~~

Deposits

Total deposits at ~~September 30, 2017~~as of March 31, 2020 were ~~$901,716,000,~~$1,026,925,000, a ~~$12,377,000~~$6,996,000 or ~~1.4% decrease~~0.7% increase from the deposit total of ~~$914,093,000 at~~$1,019,929,000 as of December 31, ~~2016.~~2019. Average deposits increased ~~$75,123,000~~by $56,921,000 to ~~$902,632,000~~$1,014,101,000 for the ~~nine month~~three-month period ended ~~September 30, 2017~~March 31, 2020 as compared to the same period in ~~2016. We believe we~~2019, mainly due to core deposit growth. Management believes the Company attracted deposits due to the safety and soundness of the Bank and our focus on customer service.

Deposits Outstanding

September 30,

December 31,

Nine Month Change

(in thousands)

2017

2016
$
%

Demand
$ 495,454 $ 500,930 $ (5,476 ) (1.1% )
MMDA
288,217 283,643 4,574 1.6 %
Savings
67,643 75,122 (7,479 ) (10.0% )
Time < $250K
31,854 33,428 (1,574 ) (4.7% )
Time > $250K
18,548 20,970 (2,422 ) (11.6% )
$ 901,716 $ 914,093 $ (12,377 ) (1.4% )

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	March 31,		December 31,		Three Month Change
(in thousands)	2020		2019		$			%

Demand	$	671,230	$	664,687		6,543			1.0	%
MMDA		235,050		233,526		1,524			0.7	%
Savings		83,479		82,789		690			0.8	%
Time < $250K		19,568		20,785		(1,217	)		(5.9%	)
Time > $250K		17,598		18,142		(544	)		(3.0%	)
	$	1,026,925	$	1,019,929	$	6,996			0.7	%

B~~ecause our~~Because the Company’s client base is comprised primarily of commercial and industrial accounts, individual account balances are generally higher than those of consumer-oriented banks. ~~Five of our~~Four clients carry deposit balances of more than 1% of ~~our~~ total deposits, ~~one of which~~but none had a deposit balance of more than 3% of total deposits ~~at September 30, 2017. We believe~~as of March 31, 2020. Management believes that ~~our~~the Company’s funding concentration risk is not significant and is mitigated by the ample sources of funds the Bank has access to.

Since ~~our~~the deposit growth strategy emphasizes core deposit growth, ~~we have~~the Company has avoided relying on brokered deposits as a consistent ~~sourc~~esource of funds. The Company had ~~$50,000 in~~no brokered deposits as of ~~September 30, 2017~~March 31, 2020 and December 31, 2016. The only brokered deposits the Bank holds are from CDARS and ICS, a certificate of deposit and money market account program, respectively, that exchanges funds with other network banks to offer full FDIC insurance coverage to the customer.2019.

Borrowings

Although deposits are the primary source of funds for ~~our~~ lending and investment activities and for general business purposes, wethe Company may obtain advances from the ~~Federal Home Loan Bank of San Francisco (“FHLB”)~~FHLB as an alternative to retail deposit funds. ~~Our~~The outstanding FHLB advances remained a zero balance atas of March 31, 2020 and December 31, ~~2016 and September 30, 2017,~~2019, as ~~we continue~~the Company continues to rely on deposit growth as ~~our~~its primary source of funding. See “Liquidity Management” below for the details on the FHLB borrowings program.

Capital Ratios

The Company is regulated by the ~~Board of Governors of the Federal Reserve Board (FRB)~~FRB and is subject to the securities registration and public reporting regulations of the Securities and Exchange Commission. As a California state-chartered bank, ~~our~~the Company’s banking subsidiary is subject to primary supervision, examination and regulation by the California Department of Business Oversight (DBO) and the Federal Reserve Board. The Federal Reserve Board is the primary federal regulator of state member banks. The Bank is also subject to regulation by the FDIC, which insures the Bank’s deposits as permitted by law. ~~We are~~Management is not aware of any recommendations of regulatory authorities or otherwise which, if they were to be implemented, would have a material effect on ~~our~~the Company’s or Bank’s liquidity, capital resources, or operations.

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In July 2013, the FRB and other U.S. banking regulators approved final rules regarding new risk-based capital, leverage and liquidity standards, known as “Basel III.” The ~~Company must comply with regulatory~~U.S. Basel III rules contain capital ~~requirements established by~~standards that change the ~~FRB. Failure to meet~~composition of capital, increase minimum capital ~~requirements~~ratios and strengthen counter-party credit risk capital requirements. The Basel III rules also include a definition of common equity Tier 1 capital and require that certain levels of such common equity Tier 1 capital be maintained. The rules also include a new capital conservation buffer, which imposes a common equity requirement above the new minimum that can ~~initiate~~be depleted under stress and could result in restrictions on capital distributions and discretionary bonuses under certain ~~mandatory, and possibly additional discretionary, actions by regulators that, if undertaken, could have~~circumstances, as well as a ~~direct material effect on our financial statements.~~new standardized approach for calculating risk-weighted assets. Under ~~capital adequacy guidelines and~~ the ~~regulatory framework for prompt corrective action,~~Basel III rules, we must ~~meet specific capital guidelines that involve quantitative measures~~maintain a ratio 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. These capital standards require us to maintain minimum ratios of “Tier 1”common equity Tier 1 capital to ~~total~~ risk-weighted assets ~~and~~of at least 4.5%, a ratio of Tier 1 capital to risk-weighted assets of at least 6%, a ratio of total capital to risk-weighted assets of ~~6.00%~~at least 8% and ~~8.00%, respectively.~~a minimum Tier 1 ~~capital is comprised~~leverage ratio of total shareholders’ equity calculated in accordance with generally accepted accounting principles, excluding accumulated other comprehensive income (loss), less intangible assets, and total capital is comprised of Tier 1 capital plus certain adjustments, the largest of which is our allowance for loan losses. Risk-weighted assets refer to our on- and off-balance sheet exposures, adjusted for their related risk levels using formulas set forth in FRB and FDIC regulations.

4.0%. In addition to the ~~risk-based capital requirements described above, we are~~preceding requirements, all financial institutions subject to ~~a leverage capital requirement, which calls for a minimum ratio of Tier 1 capital (as defined above) to quarterly average total assets of 4.00%.~~

~~In July 2013,~~ the U.S. banking agencies approved the U.S. version of Basel III. The federal bank regulatory agencies adopted version of Basel III revises the risk-based and leverage capital requirements and the method for calculating risk-weighted assets to make them consistent with Basel III and to meet the requirements of the Dodd-Frank Act. Although many of the rules contained in these final regulations are applicable only to large, internationally active banks, some of them will apply on a phased in basis to all banking organizations,Rules, including the Company and the Bank. Among other things, the rules establish a new minimum common equity Tier 1 ratio (4.5% of risk-weighted assets), a higher minimum Tier 1 risk-based capital requirement (6.0% of risk-weighted assets) and a minimum non-risk-based leverage ratio (4.00% eliminating a 3.00% exception for higher rated banks). The new additional capital conservation buffer of 2.5% of risk weighted assets over each of the required capital ratios will be phased in from 2016 to 2019 and must be met to avoid limitations on the ability of the Bank to pay dividends, repurchase shares or pay discretionary bonuses. The additional “countercyclical capital buffer” is also required for larger and more complex institutions. The new rules assign higher risk weighting to exposures that are more than 90 days past due or are on nonaccrual status and certain commercial real estate facilities that finance the acquisition, development or construction of real property. The rules also change the permitted composition of Tier 1 capital to exclude trust preferred securities, mortgage servicing rights and certain deferred tax assets and include unrealized gains and losses on available for sale debt and equity securities (with a one-time opt out option for Standardized Banks (banks with less than $250 billion of total consolidated assets and less than $10 billion of foreign exposures)). The rules, including alternative requirements for smaller community financial institutions like the Company, would be phased in through 2019. The implementation of the Basel III framework forboth the Company and the Bank, ~~commenced~~are required to establish a "conservation buffer," consisting of common equity Tier 1 capital, which is at least 2.5% above each of the preceding common equity Tier 1 capital ratio, the Tier 1 risk-based ratio and the total risk-based ratio. An institution that does not meet the conservation buffer will be subject to restrictions on certain activities including payment of dividends, stock repurchases and discretionary bonuses to executive officers. The conservation buffer became fully effective on January 1, ~~2015.~~2019.

~~Table~~

On September 17, 2019, the FDIC finalized a rule that introduces an optional simplified measure of ~~Contents~~

capital adequacy for qualifying

community banking organizations (i.e., the community bank leverage ratio (CBLR) framework), as required by the Economic Growth, Regulatory Relief and Consumer Protection Act. The CBLR framework is designed to reduce burden by removing the requirements for calculating and reporting risk-based capital ratios for qualifying community banking organizations that opt into the framework. In order to qualify for the CBLR framework, a community banking organization must have a tier 1 leverage ratio of greater than 9.0%, less than $10 billion in total consolidated assets, and limited amounts of off-balance-sheet exposures and trading assets and liabilities. A qualifying community banking organization that opts into the CBLR framework and meets all requirements under the framework will be considered to have met the well-capitalized ratio requirements under the Prompt Corrective Action regulations and will not be required to report or calculate risk-based capital. The CBLR framework became available for banks to use in their March 31, 2020, Call Report. The Company has performed a preliminary analysis of the changes to capital adequacy and reporting requirements within the quarterly Call Report, and has made the decision that it will not opt into the CBLR framework.

Failure to meet minimum capital requirements can trigger regulatory actions that could have a material adverse effect on ~~our~~the Company’s financial statements and operations. Under ~~capita~~lcapital adequacy guidelines and the regulatory framework for prompt corrective action, wethe Company and Bank 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~~The Company’s and Bank’s amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.

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The following ~~table shows~~tables present a comparison of our actual capital ratios ~~as calculated under regulatory guidelines, compared~~ to the ~~regulatory~~ minimum ~~capital~~required ratios ~~and~~as of the ~~regulatory minimum capital ratios needed to qualify as a “well-capitalized” institution at September 30, 2017 and December 31, 2016:~~dates indicated:

								To be well
								capitalized under
(in thousands)					For capital			prompt corrective							Regulatory
	Actual				adequacy purposes			action provisions				Actual			Minimum (1)
Capital ratios for Bank:	Amount		Ratio		Amount		Ratio	Amount		Ratio		Amount		Ratio	Amount		Ratio

As of September 30, 2017
As of March 31, 2020
Total capital (to Risk- Weighted Assets)	$	92,289		11.5%	$	73,996	>9.25%	$	79,996	>10.0%		$	117,606	12.1%	$	101,910	>10.5%
Tier I capital (to Risk- Weighted Assets)	$	84,074		10.5%	$	57,997	>7.25%	$	63,996	>8.0%		$	107,624	11.1%	$	82,499	>8.5%
Common Equity Tier 1 Capital (to Risk Weighted Assets)	$	84,074		10.5%	$	45,997	>5.75%	$	51,997	>6.5%		$	107,624	11.1%	$	67,940	>7.0%
Tier I capital (to Average Assets)	$	84,074		8.5%	$	39,806	>4.0%	$	49,757	>5.0%		$	107,624	9.5%	$	45,379	>4.0%

As of December 31, 2016
As of December 31, 2019
Total capital (to Risk- Weighted Assets)	$	86,603		11.3%	$	66,358	>8.625%	$	76,937	>10.0%		$	115,713	12.3%	$	98,423	>10.5%
Tier I capital (to Risk- Weighted Assets)	$	78,487		10.2%	$	50,970	>6.625%	$	61,549	>8.0%		$	106,140	11.3%	$	79,676	>8.5%
Common Equity Tier 1 Capital (to Risk Weighted Assets)	$	78,487		10.2%	$	39,430	>5.125%	$	50,009	>6.5%		$	106,140	11.3%	$	65,615	>7.0%
Tier I capital (to Average Assets)	$	78,487		8.1%	$	38,726	>4.0%	$	48,408	>5.0%		$	106,140	9.5%	$	44,948	>4.0%

Capital ratios for the Company:
Capital ratios for the Company:

As of September 30, 2017
As of March 31, 2020
Total capital (to Risk- Weighted Assets)	$	92,655		11.6%	$	74,000	>9.25%		N/A		N/A	$	117,606	12.2%	$	101,927	>10.5%
Tier I capital (to Risk- Weighted Assets)	$	84,440		10.6%	$	58,000	>7.25%		N/A		N/A	$	107,624	11.1%	$	82,512	>8.5%
Common Equity Tier 1 Capital (to Risk Weighted Assets)	$	84,440		10.6%	$	58,000	>5.75%		N/A		N/A	$	107,624	11.1%	$	67,951	>7.0%
Tier I capital (to Average Assets)	$	84,440		8.5%	$	39,809	>4.0%		N/A		N/A	$	107,624	9.5%	$	45,383	>4.0%

As of December 31, 2016
As of December 31, 2019
Total capital (to Risk- Weighted Assets)	$	86,966		11.3%	$	66,365	>8.625%		N/A		N/A	$	115,910	12.4%	$	98,428	>10.5%
Tier I capital (to Risk- Weighted Assets)	$	78,850		10.3%	$	50,976	>6.625%		N/A		N/A	$	106,337	11.3%	$	79,680	>8.5%
Common Equity Tier 1 Capital (to Risk Weighted Assets)	$	78,850		10.3%	$	39,435	>5.125%		N/A		N/A	$	106,337	11.3%	$	65,619	>7.0%
Tier I capital (to Average Assets)	$	78,850		8.1%	$	38,731	>4.0%		N/A		N/A	$	106,337	9.5%	$	44,951	>4.0%

~~The~~ ~~Bank is also subject to capital requirements similar to those discussed above.~~(1) The ~~Bank’s capital ratios do not vary materially from our capital ratios presented above. At September 30, 2017,~~adequately capitalized thresholds in the ~~Bank exceeded the minimum ratios established by the FRB.~~table above are reflected on a fully phased-in basis, which occurred in January 2019.

Liquidity Management

Since the Company is a holding company and does not conduct regular banking operations, its primary sources of liquidity are dividends from the Bank. Under the California ~~Financi~~alFinancial Code, payment of a dividend from the Bank to the Company is restricted to the lesser of the Bank’s retained earnings or the amount of the Bank’s undistributed net profits from the previous three fiscal years. The primary uses of funds for the Company are stockholder dividends, investment in the Bank and ordinary operating expenses. Management anticipates that there will be sufficient earnings at the Bank level to provide dividends to the Company to meet its funding requirements for the next twelve months.

~~Table of Contents~~

Maintenance of adequate liquidity requires that sufficient resources be available at all times to meet ~~our~~the Company’s 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~~the 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~~the Company maintains a portion of ~~our~~ funds in cash and cash equivalents, salable government guaranteed loans and securities available for sale. ~~We obtain~~The Company obtains funds from the repayment and maturity of loans as well as deposit inflows, investment security maturities and paydowns, Federal funds purchased, FHLB advances, and other borrowings. ~~Our~~The Company’s primary ~~uses~~use of funds are the origination of loans, the purchase of investment securities, withdrawals of deposits, maturity of certificate of deposits, repayment of borrowings and dividends to common and preferred stockholders. ~~Our~~The Company’s liquid assets ~~at September 30, 2017~~as of March 31, 2020 were ~~$251.5~~$248.3 million compared to ~~$269.7~~$241.0 million atas of December 31, ~~2016. Our~~2019. The Company’s liquidity level measured as the percentage of liquid assets to total assets was ~~25.2% at September 30, 2017 and~~21.5% as of March 31, 2020, compared to 21.0% as of December 31, ~~2016. We anticipate~~2019. Liquidity increased during the first three months of 2020, mainly due to the deposit increase of $7 million, resulting in higher levels of cash. Management anticipates that cash and cash equivalents on hand and other sources of funds will provide adequate liquidity for ~~our~~ operating, investing and financing needs and ~~our~~ regulatory liquidity requirements for the next twelve months. Management monitors ~~our~~the Company’s liquidity position daily, balancing loan funding/payments with changes in deposit activity and overnight investments.

Table of Contents

As a secondary source of liquidity, ~~we rely~~the Company relies on ~~advanc~~esadvances from the FHLB to supplement ~~our~~the supply of lendable funds and to meet deposit withdrawal requirements. Advances from the FHLB are typically secured by a portion of ~~our~~the loan portfolio. 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 ~~September 30, 2017, our~~March 31, 2020, the Company’s borrowing capacity from the FHLB was approximately ~~$255.1~~$286.9 million and there were no outstanding advances. WeThe Company also ~~maintain~~maintains 2 lines of credit with correspondent banks to purchase up to $30 million in federal funds, for which there were no advances as of ~~September 30, 2017.~~March 31, 2020.

During the period of uncertainty and volatility related to the COVID-19 pandemic, we will continue to monitor our liquidity.

~~Off-Balance-Sheet~~Off-BalanceSheet Arrangements

During the ordinary course of business, ~~we provide~~the Company provides 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~~the balance sheets.

As of ~~September 30, 2017~~March 31, 2020 and December 31, ~~2016, we~~2019, the Company had commitments to extend credit of ~~$116.6~~$153.2 million and ~~$110.8~~$164.7 million, respectively, which includes obligations under letters of credit of ~~$1.4~~$2.7 million and ~~$1.3 million.~~$3.1 million, respectively.

The effect on ~~our~~the Company’s revenues, expenses, cash flows and liquidity from the unused portion of the commitments to provide credit ~~cann~~otcannot be reasonably predicted because there is no guarantee that the lines of credit will be used.

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

For qualitative and quantitative disclosures about market risk, please see the sections entitled “Market Risk” and “Interest Rate Management” in Item 7 of the Company’s 2019 Annual Report on Form 10-K. As of March 31, 2020, the Company’s exposures to market risk have not changed materially since December 31, 2019. We will continue to monitor our exposures to market risk in light of the COVID-19 pandemic.

~~Item 3.~~~~Quantitative and Qualitative Disclosures About Market Risk~~

~~Not applicable.~~

Item 4.~~Controls and Procedures~~

Controls and Procedures

The ~~Company~~’sCompany’s Chief Executive Officer and its Chief Financial Officer, after evaluating the effectiveness of the Company’s disclosure controls and procedures, as defined in Exchange Act Rules 13a-15(e) and 15(d)-15(e) promulgated under the Exchange Act, as of the end of the period covered by this report (the “Evaluation Date”) have concluded that as of the Evaluation Date, the Company’s disclosure controls and procedures were effective to ensure that material information relating to the Company would be made known to them by others within the Company, particularly during the period in which this report was being prepared. Disclosure controls and procedures are designed to ensure that information required to be disclosed by usmanagement in the reports that ~~we file~~the Company files or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange 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 usmanagement in the reports that ~~we file~~the Company files under the Exchange Act is accumulated and communicated to ~~our~~ management, including ~~our~~the Company’s Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

There were no significant changes in ~~our~~the Company’s internal control over financial reporting during the quarter ended ~~September 30, 2017~~March 31, 2020 that have materially affected, or are reasonably likely to materially affect, ~~our~~the Company’s internal control over financial reporting subsequent to the Evaluation Date.

We have not experienced any significant impact to our internal controls over financial reporting despite the fact that most of our employees are working remotely due to the COVID-19 pandemic. The design of our processes and controls allow for remote execution with accessibility to secure data. We are continually monitoring and assessing the COVID-19 situation to minimize the impact, if any, on the design and operating effectiveness on our internal controls.

Table of Contents

PART II - OTHER INFORMATION

Item 1.~~Legal Proceedings~~

Legal Proceedings

There are no pending, or to management's knowledge, any threatened, material legal proceedings to which ~~we are~~the Company is a defendant, or to which any of ~~our~~the Company’s properties are subject. There are no material legal proceedings to which any director, any nominee for election as a director, any executive officer, or any associate of any such director, nominee or officer is a party adverse to ~~us.~~the Company.

Item 1A.

Risk Factors

The following risk factor supplements, and should be read in conjunction with, the risk factors described in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2019.

The coronavirus (“COVID-19”) pandemic could adversely impact certain industries in which the Company’s customers operate and impair their ability to fulfill their obligations to the Company. Further, the spread of the pandemic could lead to an economic recession or other severe disruptions in the U.S. economy and may disrupt banking and other financial activity in the areas in which the Company operates and could potentially create widespread business continuity issues for the Company.

The Company’s business is dependent upon the willingness and ability of its employees and customers to conduct banking and other financial transactions. The spread of highly infectious or contagious diseases could cause severe disruptions in the U.S. economy at large, and for small businesses in particular, which could disrupt the Company’s operations and if the global response to contain the COVID-19 pandemic escalates or is unsuccessful, the Company could experience a material adverse effect on its business, financial condition, results of operations and cash flows. The COVID-19 pandemic may result in a decrease in our customers’ businesses, a decrease in consumer confidence and business generally or a disruption in the services provided by the Company. Disruptions to our customers could result in increased risk of delinquencies, defaults, foreclosures and losses on our loans, declines in revenues, negatively impact regional economic conditions, result in declines in local loan demand, liquidity of loan guarantors, loan collateral (particularly in real estate), loan originations and deposit availability and negatively impact the implementation of our growth strategy. The Company relies upon its third-party vendors to conduct business and to process, record, and monitor transactions. If any of these vendors are unable to continue to provide the Company with these services, it could negatively impact the Company’s ability to serve its customers. Furthermore, the pandemic could negatively impact the ability of the Company’s employees and customers to engage in banking and other financial transactions in the geographic areas in which the Company operates and could create widespread business continuity issues for the Company. The Company also could be adversely affected if key personnel or a significant number of employees were to become unavailable due to the effects and restrictions of a COVID-19 pandemic in our market areas. Although the Company has business continuity plans and other safeguards in place, there is no assurance that such plans and safeguards will be effective.

The extent to which the COVID-19 global pandemic and measures taken in response to it will impact our business, results of operations and financial condition will depend on future developments, which are highly uncertain and are difficult to predict; these developments include, but are not limited to, the duration and spread of the pandemic, its severity, the actions to contain the virus or address its impact, U.S. and foreign government actions to respond to the reduction in global economic activity, and how quickly and to what extent normal economic and operating conditions can resume.

See Note 8 to our Condensed Consolidated Financial Statements and “Management’s Discussion and Analysis of Financial Position and Results of Operations” for additional discussion of risks related to the COVID-19 pandemic and the actual operational and financial impacts that we have experienced to date.

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

None.

~~Item 2.~~~~Unregistered Sales of Equity Securities and Use of Proceeds~~

~~None.~~

Item 3.~~Defaults Upon Senior Securities~~

Defaults Upon Senior Securities

None.

Item 4. ~~Mine Safety Disclosures~~

Mine Safety Disclosures

None.

Item 5.

Other Information

~~Item 5.~~~~Other Information~~

None.

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Item 6.~~Exhibits~~

Exhibits

The following exhibits are filed as part of this report:

Exhibit

No.

Exhibit Description


~~31.01~~	31.01*	Certification of Principal Executive Officer pursuant to Rule 13a-14(a)/15d-14(a) as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
~~31.02~~	31.02*	Certification of Principal Financial Officer pursuant to Rule 13a-14(a)/15d-14(a) as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
~~32.01~~	32.01**	Certification pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

101.INS*		XBRL Instance Document
101.SCH*	101.SCH*	XBRL Taxonomy Extension Schema Document
101.CAL*	101.CAL*	XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF*	101.DEF*	XBRL Taxonomy Extension Definition Linkbase Document
101.LAB*	101.LAB*	XBRL Taxonomy Extension Label Linkbase Document
101.PRE*	101.PRE*	XBRL Taxonomy Extension Presentation Linkbase Document

*~~In accordance with Rule 406T of Regulation S-T, the information in these exhibits is “furnished” and shall~~ Filed herewith.

** Furnished, not be deemed to be “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to liability under that section, and shall not be incorporated by reference into any registration statement or other document filed under the Securities Act of 1933, as amended, except as expressly set forth by specific reference in such filing.filed.

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SIGNATURES

Pursuant to the requirements 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.

	Oak Valley Bancorp
Date: ~~November 7, 2017~~May 11, 2020	By:	/s/ JEFFREY A. GALL
		Jeffrey A. Gall
		Senior Vice President and Chief Financial Officer
		(Principal Financial Officer and duly authorized
		signatory)

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

For the quarterly period ended ~~September 30, 2017~~March 31, 2020

OR

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

California		26-2326676
State or other jurisdiction of		I.R.S. Employer
incorporation or organization		Identification No.

Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock	OVLY	The Nasdaq Stock Market, LLC

Large accelerated filer ☐		Accelerated filer ☐☒
Non-accelerated filer ☐		Smaller reporting company ☒
~~(Do not check if a smaller reporting company)~~		Emerging growth company ☐

		Page
PART I – FINANCIAL INFORMATION		1

Item 1.	Financial Statements	32

Condensed Consolidated Balance Sheets at ~~September 30, 2017~~March 31, 2020 (Unaudited) and December 31, ~~2016 (Unaudited)~~2019		42

Condensed Consolidated Statements of Income for the ~~Three~~three-month periods ended March 31, 2020 and ~~Nine month period Ended September 30, 2017 and September 30, 2016~~March 31, 2019 (Unaudited)		53

Condensed Consolidated Statements of Comprehensive Income for the ~~Three~~three-month periods ended March 31, 2020 and ~~Nine month period Ended September 30, 2017 and September 30, 2016~~March 31, 2019 (Unaudited)		64

Condensed Consolidated Statements of Changes of ~~Shareholders’~~Shareholders’ Equity for the ~~Year Ended December~~three-month periods ended March 31, ~~2016~~2020 and ~~the Nine-month period Ended September 30, 2017~~March 31, 2019 (Unaudited)		75

Condensed Consolidated Statements of Cash Flows for the ~~Nine-month~~three-month periods ~~Ended September 30, 2017~~ended March 31, 2020 and ~~September 30, 2016~~March 31, 2019 (Unaudited)		86

Notes to Condensed Consolidated Financial Statements		97

Item 2.	~~Management~~’sManagement’s Discussion and Analysis of Financial Condition and Results of Operations	3127

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	4642

Item 4.	Controls and Procedures	4642

PART II – OTHER INFORMATION		4743

Item 1.	Legal Proceedings	4743
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	4743
Item 3.	Defaults Upon Senior Securities	4743
Item 4.	Mine Safety Disclosures	4743
Item 5.	Other Information	4743
Item 6.	Exhibits	4844

(in thousands)	March 31,		December 31,
	2020		2019
ASSETS
Cash and due from banks	$	72,884	$	133,809
Federal funds sold		19,930		13,785
Cash and cash equivalents		92,814		147,594

Securities - available for sale		245,155		190,088
Securities - equity investments		3,371		3,297
Loans, net of allowance for loan losses of $9,586 and $9,146 at March 31, 2020 and December 31, 2019, respectively		749,726		741,047
Cash surrender value of life insurance		24,805		24,631
Bank premises and equipment, net		15,174		15,229
Goodwill and other intangible assets, net		3,812		3,837
Interest receivable and other assets		21,778		22,062

	$	1,156,635	$	1,147,785

LIABILITIES AND SHAREHOLDERS’ EQUITY

Deposits	$	1,026,925	$	1,019,929
Interest payable and other liabilities		15,323		15,286
Total liabilities		1,042,248		1,035,215

Shareholders’ equity
Common stock, no par value; 50,000,000 shares authorized, 8,216,714 and 8,210,147 shares issued and outstanding at at March 31, 2020 and December 31, 2019, respectively		25,435		25,435
Additional paid-in capital		3,837		3,777
Retained earnings		82,521		80,961
Accumulated other comprehensive income, net of tax		2,594		2,397
Total shareholders’ equity		114,387		112,570

	$	1,156,635	$	1,147,785

	September 30,		December 31,
	2017		2016
ASSETS
Cash and due from banks	$	129,633	$	179,025
Federal funds sold		9,995		11,785
Cash and cash equivalents		139,628		190,810

Securities available for sale		180,857		160,333
Loans, net of allowance for loan loss of $7,917 and $7,832 at September 30, 2017 and December 31, 2016, respectively		626,911		601,104
Bank premises and equipment, net		13,048		13,688
Other real estate owned		253		1,210
Interest receivable and other assets		36,024		34,965

	$	996,721	$	1,002,110

LIABILITIES AND SHAREHOLDERS’ EQUITY

Deposits	$	901,716	$	914,093
Interest payable and other liabilities		5,329		5,567
Total liabilities		907,045		919,660

Commitments and contingencies

Shareholders’ equity
Common stock, no par value; 50,000,000 shares authorized, 8,098,605 and 8,088,455 shares issued and outstanding at September 30, 2017 and December 31, 2016, respectively		24,773		24,682
Additional paid-in capital		3,551		3,473
Retained earnings		60,003		54,520
Accumulated other comprehensive income (loss), net of tax		1,349		(225	)
Total shareholders’ equity		89,676		82,450

	$	996,721	$	1,002,110

(dollars in thousands, except per share amounts)	THREE MONTHS ENDED SEPTEMBER 30,				NINE MONTHS ENDED SEPTEMBER 30,
	2017		2016		2017			2016
INTEREST INCOME
Interest and fees on loans	$	7,300	$	6,807	$	21,451		$	20,484
Interest on securities available for sale		1,138		1,045		3,314			3,038
Interest on federal funds sold		28		4		65			18
Interest on deposits with banks		428		169		1,100			492
Total interest income		8,894		8,025		25,930			24,032

INTEREST EXPENSE
Deposits		274		196		773			555
Total interest expense		274		196		773			555

Net interest income		8,620		7,829		25,157			23,477
Provision for loan losses		70		90		105			415

Net interest income after provision for loan losses		8,550		7,739		25,052			23,062

OTHER INCOME
Service charges on deposits		365		341		1,051			1,011
Earnings on cash surrender value of life insurance		130		102		386			305
Mortgage commissions		28		49		127			144
Gains on called securities		4		10		394			28
Other		749		575		2,824			1,682
Total non-interest income		1,276		1,077		4,782			3,170

OTHER EXPENSES							��
Salaries and employee benefits		3,534		3,225		10,603			9,950
Occupancy expenses		823		819		2,496			2,470
Data processing fees		399		435		1,154			1,346
Regulatory assessments (FDIC & DBO)		102		178		381			505
Other operating expenses		1,202		1,267		3,708			4,027
Total non-interest expense		6,060		5,924		18,342			18,298

Net income before provision for income taxes		3,766		2,892		11,492			7,934

PROVISION FOR INCOME TAXES		1,298		962		3,987			2,591
NET INCOME	$	2,468	$	1,930	$	7,505		$	5,343

NET INCOME PER COMMON SHARE	$	0.31	$	0.24	$	0.93		$	0.67

NET INCOME PER DILUTED COMMON SHARE	$	0.31	$	0.24	$	0.93		$	0.66

(in thousands, except per share amounts)	THREE MONTHS ENDED MARCH 31,
	2020		2019
INTEREST INCOME
Interest and fees on loans	$	8,791	$	8,427
Interest on securities		1,359		1,539
Interest on federal funds sold		42		51
Interest on deposits with banks		367		516
Total interest income		10,559		10,533

INTEREST EXPENSE
Deposits		331		422
Total interest expense		331		422

Net interest income		10,228		10,111
Provision for loan losses		450		0

Net interest income after provision for loan losses		9,778		10,111

NON-INTEREST INCOME
Service charges on deposits		387		393
Debit card transaction fee income		295		274
Earnings on cash surrender value of life insurance		174		125
Mortgage commissions		45		22
Gains on sales and calls of available-for-sale securities		0		109
Other		383		352
Total non-interest income		1,284		1,275

NON-INTEREST EXPENSE
Salaries and employee benefits		4,601		4,404
Occupancy expenses		868		890
Data processing fees		494		447
Regulatory assessments (FDIC & DBO)		30		110
Other operating expenses		1,456		1,382
Total non-interest expense		7,449		7,233

Net income before provision for income taxes		3,613		4,153

Total provision for income taxes		904		1,049
Net Income	$	2,709	$	3,104

Net income per share	$	0.33	$	0.38

Net income per diluted share	$	0.33	$	0.38

	THREE MONTHS ENDED MARCH 31, 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		20,845														0
Restricted stock forfeited		(1,500	)													0
Restricted stock surrendered for tax withholding		(5,400	)				(90	)								(90	)
Cash dividends declared $0.135 per share of common stock										(1,106	)					(1,106	)
Stock based compensation							131									131
Other comprehensive income													1,135			1,135
Net income																3,104
Balances, March 31, 2019		8,209,750		$	25,435	$	3,399		$	72,684		$	700		$	102,218

Balances, January 1, 2020		8,210,147		$	25,435	$	3,777		$	80,961		$	2,397		$	112,570
Restricted stock issued		14,006														0
Restricted stock forfeited		(1,500	)													0
Restricted stock surrendered for tax withholding		(5,939	)				(100	)								(100	)
Cash dividends declared $0.140 per share of common stock										(1,149	)					(1,149	)
Stock based compensation							160									160
Other comprehensive income													197			197
Net income										2,709						2,709
Balances, March 31, 2020		8,216,714		$	25,435	$	3,837		$	82,521		$	2,594		$	114,387

	YEAR ENDED DECEMBER 31, 2016 AND NINE MONTHS ENDED SEPTEMBER 30, 2017
												Accumulated
						Additional						Other			Total
	Common Stock					Paid-in			Retained			Comprehensive			Shareholders’
(dollars in thousands)	Shares			Amount		Capital			Earnings			Income (Loss)			Equity

Balances, January 1, 2016		8,078,155		$	24,682	$	3,217		$	48,795		$	1,569		$	78,263
Restricted stock issued		17,000														0
Restricted stock forfeited		(6,700	)													0
Cash dividends declared										(1,940	)					(1,940	)
Stock based compensation							256									256
Other comprehensive loss													(1,794	)		(1,794	)
Net income										7,665						7,665
Balances, December 31, 2016		8,088,455		$	24,682	$	3,473		$	54,520		$	(225	)	$	82,450

Stock options exercised		9,000			91			��								91
Restricted stock issued		8,000														0
Restricted stock forfeited		(6,850	)													0
Cash dividends declared										(2,022	)					(2,022	)
Stock based compensation							78									78
Other comprehensive income													1,574			1,574
Net income										7,505						7,505
Balances, September 30, 2017		8,098,605		$	24,773	$	3,551		$	60,003		$	1,349		$	89,676

	THREE MONTHS ENDED MARCH 31,
(dollars in thousands)	2020			2019

CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	2,709		$	3,104
Adjustments to reconcile net income to net cash from operating activities:
Provision for loan losses		450			0
Increase (decrease) in deferred fees/costs, net		6			(33	)
Depreciation		265			272
Amortization of investment securities, net		134			280
Stock based compensation		160			131
Gain on sales and calls of available for sale securities		0			(109	)
Earnings on cash surrender value of life insurance		(174	)		(125	)
Increase in interest payable and other liabilities		278			5,568
(Increase) decrease in interest receivable		(259	)		392
Decrease (increase) in other assets		487			(1,476	)
Net cash from operating activities		4,056			8,004

CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of available for sale securities		(67,627	)		(7,176	)
Purchases of available-for-sale securities		(21	)		(22	)
Proceeds from maturities, calls, and principal paydowns of securities available for sale		12,651			11,657
Investment in LIHTC		(241	)		(202	)
Net (increase) decrease in loans		(9,135	)		4,485
Purchases of bank premises and equipment		(210	)		(2	)
Net cash (used in) from investing activities		(64,583	)		8,740

CASH FLOWS FROM FINANCING ACTIVITIES:
Shareholder cash dividends paid		(1,149	)		(1,106	)
Net increase (decrease) in demand deposits and savings accounts		8,757			(44,967	)
Net decrease in time deposits		(1,761	)		(2,785	)
Proceeds from exercise of stock options		0			6
Tax withholding payments on vested restricted shares surrendered		(100	)		(90	)
Net cash from (used in) financing activities		5,747			(48,942	)

NET DECREASE IN CASH AND CASH EQUIVALENTS		(54,780	)		(32,198	)

CASH AND CASH EQUIVALENTS, beginning of period		147,594			126,145

CASH AND CASH EQUIVALENTS, end of period	$	92,814		$	93,947

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest	$	317		$	423

NON-CASH INVESTING ACTIVITIES:
Change in unrealized gain on securities	$	278		$	1,612
Change in contributions payable to LIHTC limited partner investment	$	(241	)	$	(202	)
Lease right-of-use assets	$	241		$	4,817

NON-CASH FINANCING ACTIVITIES:
Present value of lease obligations	$	(255	)	$	5,246

	NINE MONTHS ENDED SEPTEMBER 30,
(dollars in thousands)	2017			2016

CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	7,505		$	5,343
Adjustments to reconcile net earnings to net cash from operating activities:
Provision for loan losses		105			415
Increase (decrease) in deferred fees/costs, net		40			(29	)
Depreciation		847			948
Amortization of investment securities, net		624			270
Stock based compensation		78			195
Gain on sale of premises and equipment		0			(4	)
OREO (gain) loss on sales and write downs		(211	)		88
Gain on sales and calls of available for sale securities		(394	)		(29	)
Earnings on cash surrender value of life insurance		(386	)		(305	)
Gain on BOLI death benefit		0			(2	)
(Decrease) increase in interest payable and other liabilities		(238	)		320
Decrease in interest receivable		101			52
Increase in other assets		(1,535	)		(227	)
Net cash from operating activities		6,536			7,035

CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of available for sale securities		(41,542	)		(47,182	)
Proceeds from maturities, calls, and principal paydowns of securities available for sale		23,463			20,103
Net increase in loans		(25,952	)		(62,895	)
Purchase of FHLB Stock		(340	)		(79	)
Purchase of BOLI policies		0			(4,000	)
Proceeds from sale of OREO		1,168			746
Proceeds from redemption of BOLI policies		0			186
Proceeds from sales of premises and equipment		0			4
Net purchases of premises and equipment		(207	)		(383	)
Net cash used in investing activities		(43,410	)		(93,500	)

CASH FLOWS FROM FINANCING ACTIVITIES:
Shareholder cash dividends paid		(2,022	)		(1,940	)
Net (decrease) increase in demand deposits and savings accounts		(8,381	)		40,612
Net (decrease) increase in time deposits		(3,996	)		4,453
Proceeds from sale of common stock and exercise of stock options		91			0
Net cash (used in) from financing activities		(14,308	)		43,125

NET DECREASE IN CASH AND CASH EQUIVALENTS		(51,182	)		(43,340	)

CASH AND CASH EQUIVALENTS, beginning of period		190,810			190,603

CASH AND CASH EQUIVALENTS, end of period	$	139,628		$	147,263

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest	$	785		$	558
Income taxes	$	4,437		$	1,434

NON-CASH INVESTING ACTIVITIES:
Real estate acquired through foreclosure	$	0		$	253
Change in unrealized gain on available-for-sale securities	$	2,675		$	1,694

	September 30, 2017			December 31, 2016
Commercial real estate:
Commercial real estate- construction	$	20,254		$	23,378
Commercial real estate- mortgages		417,253			389,495
Land		8,496			9,823
Farmland		56,670			56,159
Commercial and industrial		65,444			64,201
Consumer		607			767
Consumer residential		37,836			38,672
Agriculture		30,049			28,454
		636,609			610,949


Deferred loan fees and costs, net		(1,781	)		(2,013	)
Allowance for loan losses		(7,917	)		(7,832	)
	$	626,911		$	601,104

(in thousands)	March 31, 2020			December 31, 2019
Commercial real estate:
Commercial real estate- construction	$	48,458		$	53,169
Commercial real estate- mortgages		488,305			475,146
Land		8,091			8,367
Farmland		70,743			70,320
Commercial and industrial		81,351			77,704
Consumer		1,081			1,274
Consumer residential		37,522			36,647
Agriculture		24,558			28,358
Total loans		760,109			750,985

Less:
Deferred loan fees and costs, net		(797	)		(792	)
Allowance for loan losses		(9,586	)		(9,146	)
Net loans	$	749,726		$	741,047

(in thousands)	September 30, 2017		December 31, 2016
Commercial real estate:
Commercial real estate- construction	$	0	$	0
Commercial real estate- mortgages		0		0
Land		993		2,715
Farmland		0		0
Commercial and industrial		302		306
Consumer		0		0
Consumer residential		16		16
Agriculture		0		0
Total non-accrual loans	$	1,311	$	3,037

September 30, 2017	30-59 Days Past Due		60-89 Days Past Due		Greater Than 90 Days Past Due		Total Past Due		Current		Purchased Credit Impaired Loans		Total		Greater Than 90 Days Past Due and Still Accruing
March 31, 2020																	30-59 Days Past Due		60-89 Days Past Due		Greater Than 90 Days Past Due		Total Past Due		Current		Total		Greater Than 90 Days Past Due and Still Accruing
Commercial real estate:
Commercial R.E. - construction	$	0	$	0	$	0	$	0	$	20,254	$	0	$	20,254	$	0	$	0	$	0	$	0	$	0	$	48,458	$	48,458	$	0
Commercial R.E. - mortgages		25		0		0		25		417,228		0		417,253		0		14		0		0		14		488,291		488,305		0
Land		0		0		993		993		7,470		33		8,496		0		0		0		0		0		8,091		8,091		0
Farmland		0		0		0		0		56,670		0		56,670		0		0		0		0		0		70,743		70,743		0
Commercial and industrial		0		0		302		302		65,142		0		65,444		0		0		0		0		0		81,351		81,351		0
Consumer		0		0		0		0		607		0		607		0		0		0		0		0		1,081		1,081		0
Consumer residential		0		0		0		0		37,836		0		37,836		0		0		0		137		137		37,385		37,522		0
Agriculture		0		0		0		0		30,049		0		30,049		0		0		0		0		0		24,558		24,558		0
Total	$	25	$	0	$	1,295	$	1,320	$	635,256	$	33	$	636,609	$	0	$	14	$	0	$	137	$	151	$	759,958	$	760,109	$	0

December 31, 2016	30-59 Days Past Due		60-89 Days Past Due		Greater Than 90 Days Past Due		Total Past Due		Current		Purchased Credit Impaired Loans		Total		Greater Than 90 Days Past Due and Still Accruing
Commercial real estate:
Commercial R.E. - construction	$	0	$	0	$	0	$	0	$	23,378	$	0		23,378	$	0
Commercial R.E. - mortgages		0		0		0		0		389,495		0		389,495		0
Land		0		0		2,715		2,715		7,075		33		9,823		0
Farmland		0		0		0		0		56,159		0		56,159		0
Commercial and industrial		0		0		302		302		63,899		0		64,201		0
Consumer		0		0		0		0		767		0		767		0
Consumer residential		0		0		16		16		38,656		0		38,672		0
Agriculture		0		0		0		0		28,454		0		28,454		0
Total	$	0	$	0	$	3,033	$	3,033	$	607,883	$	33		610,949	$	0

December 31, 2019	30-59 Days Past Due		60-89 Days Past Due		Greater Than 90 Days Past Due		Total Past Due		Current		Total		Greater Than 90 Days Past Due and Still Accruing
Commercial real estate:
Commercial R.E. - construction	$	0	$	0	$	0	$	0	$	53,169	$	53,169	$	0
Commercial R.E. - mortgages		0		0		0		0		475,146		475,146		0
Land		0		0		0		0		8,367		8,367		0
Farmland		0		0		111		111		70,209		70,320		0
Commercial and industrial		0		0		0		0		77,704		77,704		0
Consumer		2		0		0		2		1,272		1,274		0
Consumer residential		0		0		137		137		36,510		36,647		0
Agriculture		0		0		0		0		28,358		28,358		0
Total	$	2	$	0	$	248	$	250	$	750,735	$	750,985	$	0

(in thousands)	Unpaid Contractual Principal Balance		Recorded Investment With No Allowance		Recorded Investment With Allowance		Total Recorded Investment		Related Allowance
September 30, 2017
Commercial real estate:
Commercial R.E. - construction	$	0	$	0	$	0	$	0	$	0
Commercial R.E. - mortgages		0		0		0		0		0
Land		1,309		0		993		993		680
Farmland		0		0		0		0		0
Commercial and Industrial		351		302		0		302		0
Consumer		0		0		0		0		0
Consumer residential		16		16		0		16		0
Agriculture		0		0		0		0		0
Total	$	1,676	$	318	$	993	$	1,311	$	680

	Average Recorded Investment for the
	Three Months Ended		Three Months Ended		Nine Months Ended		Nine Months Ended		Average Recorded Investment for the Three Months Ended March 31,
(in thousands)	September 30, 2017		September 30, 2016		September 30, 2017		September 30, 2016		2020		2019
Commercial real estate:
Commercial R.E. - construction	$	0	$	0	$	0	$	0	$	0	$	0
Commercial R.E. - mortgages		0		0		0		0		0		0
Land		1,518		2,324		2,018		2,439		835		906
Farmland		0		0		0		0		0		0
Commercial and Industrial		302		312		304		316		0		0
Consumer		0		0		0		0		0		0
Consumer residential		75		0		96		0		192		14
Agriculture		0		0		0		0		0		0
Total	$	1,895	$	2,636	$	2,418	$	2,755	$	1,027	$	920

	September 30, 2017		December 31, 2016
	Weighted Average Risk Grade		Weighted Average Risk Grade
Commercial real estate:
Commercial real estate - construction		3.00		3.07
Commercial real estate - mortgages		3.07		3.08
Land		3.98		4.39
Farmland		3.22		3.09
Commercial and industrial		3.59		2.70
Consumer		2.15		2.28
Consumer residential		3.01		3.03
Agriculture		3.20		3.08
Total gross loans		3.15		3.06

(in thousands)	Commercial R.E. Construction		Commercial R.E. Mortgages		Land (1)		Farmland		Commercial and Industrial		Consumer		Consumer Residential		Agriculture		Total

September 30, 2017

Pass	$	20,254	$	416,289	$	7,041	$	56,670	$	60,335	$	579	$	37,773	$	30,049	$	628,990
Special mention		-		258		-		-		3,920		-		-		-		4,178
Substandard		-		706		1,175		-		1,189		28		63		-		3,161
Doubtful		-		-		280		-		-		-		-		-		280
Total loans	$	20,254	$	417,253	$	8,496	$	56,670	$	65,444	$	607	$	37,836	$	30,049	$	636,609

December 31, 2016

Pass	$	22,560	$	388,365	$	6,637	$	56,159	$	62,770	$	738	$	38,300	$	28,454	$	603,983
Special mention		818		1,063		-		-		189		-		-		-		2,070
Substandard		-		67		2,906				1,242		29		372		-		4,616
Doubtful		-		-		280		-		-		-		-		-		280
Total loans	$	23,378	$	389,495	$	9,823	$	56,159	$	64,201	$	767	$	38,672	$	28,454	$	610,949

(in thousands)	Commercial		Commercial					Consumer
Three Months Ended September 30, 2017	Real Estate		and Industrial		Consumer			Residential			Agriculture		Unallocated			Total
Beginning balance	$	6,247	$	746	$	30		$	321		$	453	$	57		$	7,854
Charge-offs		0		0		(9	)		0			0		0			(9	)
Recoveries		0		0		2			0			0		0			2
(Reversal of) provision for loan losses		3		15		0			(7	)		100		(41	)		70
Ending balance	$	6,250	$	761	$	23		$	314		$	553	$	16		$	7,917

Nine Months Ended September 30, 2017
Beginning balance	$	6,185	$	697	$	51		$	325		$	504	$	70		$	7,832
Charge-offs		0		0		(26	)		0			0		0			(26	)
Recoveries		0		0		5			1			0		0			6
(Reversal of) provision for loan losses		65		64		(7	)		(12	)		49		(54	)		105
Ending balance	$	6,250	$	761	$	23		$	314		$	553	$	16		$	7,917

Allowance for Loan Losses																			Allowance for Loan Losses
For the Three Months Ended March 31, 2020 and 2019																			For the Three Months Ended March 31, 2020 and 2019

(in thousands)	Commercial			Commercial					Consumer											Commercial		Commercial					Consumer
Three Months Ended September 30, 2016	Real Estate			and Industrial		Consumer			Residential			Agriculture		Unallocated		Total
Three Months Ended March 31, 2020																				Real Estate		and Industrial		Consumer			Residential			Agriculture			Unallocated			Total
Beginning balance	$	6,133		$	671	$	55		$	387		$	431	$	3	$	7,680			$	7,170	$	1,000	$	38		$	306		$	525		$	107		$	9,146
Charge-offs		0			0		(5	)		0			0		0		(5	)			0		0		(12	)		(2	)		0			0			(14	)
Recoveries		0			0		2			0			0		0		2				0		0		3			1			0			0			4
(Reversal of) provision for loan losses		(62	)		60		(4	)		(8	)		63		41		90
Provision for (reversal of) loan losses																					518		68		4			23			(59	)		(104	)		450
Ending balance	$	6,071		$	731	$	48		$	379		$	494	$	44	$	7,767			$	7,688	$	1,068	$	33		$	328		$	466		$	3		$	9,586

Nine Months Ended September 30, 2016
Beginning balance	$	5,920		$	627	$	38		$	426		$	309	$	36	$	7,356
Charge-offs		-			-		(12	)		-			-		-		(12	)
Recoveries		3			-		5			-			-		-		8
(Reversal of) provision for loan losses		148			104		17			(47	)		185		8		415
Ending balance	$	6,071		$	731	$	48		$	379		$	494	$	44	$	7,767

	THREE MONTHS ENDED SEPTEMBER 30,					NINE MONTHS ENDED SEPTEMBER 30,					THREE MONTHS ENDED MARCH 31,
	2017			2016		2017		2016
(in thousands)											2020			2019

Balance, beginning of period	$	302		$	257	$	284	$	238		$	427		$	396
Provision (Recovery) to Operations for Off Balance Sheet Commitments		(4	)		6		14		(25	)
Provision to Operations for Off Balance Sheet Commitments												(31	)		49
Balance, end of period	$	298		$	263	$	298	$	263		$	396		$	445

	THREE MONTHS ENDED
(In thousands)	SEPTEMBER 30,
	2017		2016
BASIC EARNINGS PER SHARE

Net income	$	2,468	$	1,930
Weighted average shares outstanding		8,065		8,031
Net income per common share	$	0.31	$	0.24

DILUTED EARNINGS PER SHARE

Net income	$	2,468	$	1,930
Weighted average shares outstanding		8,065		8,031
Effect of dilutive stock options		5		1
Effect of dilutive non-vested restricted shares		13		31
Weighted average shares of common stock and common stock equivalents		8,083		8,063
Net income per diluted common share	$	0.31	$	0.24

	NINE MONTHS ENDED
(In thousands)	SEPTEMBER 30,
	2017		2016
BASIC EARNINGS PER SHARE

Net income	$	7,505	$	5,343
Weighted average shares outstanding		8,056		8,023
Net income per common share	$	0.93	$	0.67

DILUTED EARNINGS PER SHARE

Net income	$	7,505	$	5,343
Weighted average shares outstanding		8,056		8,023
Effect of dilutive stock options		18		35
Effect of dilutive non-vested restricted shares		4		1
Weighted average shares of common stock and common stock equivalents		8,078		8,059
Net income per diluted common share	$	0.93	$	0.66

(In thousands)	Effect on Pre-Tax Income *Increase (Decrease)* Three Months Ended September 30, 2017			Effect on Pre-Tax Income *Increase (Decrease)* Nine months ended September 30, 2017
Change from 2016 to 2017 in:
Net interest income	$	791		$	1,680
Provision for loan losses		20			310
Non-interest income		199			1,612
Non-interest expense		(136	)		(44	)
Change in net income before income taxes	$	874		$	3,558

(In thousands)	Effect on Pre-Tax Income
	*Increase (Decrease)*
	Three Months Ended
	March 31, 2020
Change from 2019 to 2020 in:
Net interest income	$	117
Provision for loan losses		(450	)
Non-interest income		9
Non-interest expense		(216	)
Change in net income before income taxes	$	(540	)

	Nine months ended September 30, 2017							Nine months ended September 30, 2016
(in thousands)	Average Balance		Interest Income / Expense		Avg Rate/ Yield (5)			Average Balance		Interest Income / Expense		Avg Rate/ Yield (5)
Assets:
Earning assets:
Gross loans (1) (2)	$	617,408	$	21,512		4.66	%	$	570,861	$	20,495		4.78	%
Investment securities (2)		168,912		4,117		3.26	%		142,776		3,800		3.55	%
Federal funds sold		8,333		65		1.04	%		5,134		19		0.49	%
Interest-earning deposits		137,004		1,100		1.07	%		122,194		492		0.54	%
Total interest-earning assets		931,657		26,794		3.85	%		840,965		24,806		3.93	%
Total noninterest earning assets		62,731							71,398
Total assets		994,388							912,363
Liabilities and Shareholders' Equity:
Interest-bearing liabilities:
Interest-earning DDA		196,199		202		0.14	%		167,597		108		0.09	%
Money market deposits		290,133		398		0.18	%		288,026		236		0.11	%
Savings deposits		69,290		43		0.08	%		73,799		5		0.15	%
Time certificates of deposit $250,000 or more		20,596		57		0.37	%		22,077		44		0.27	%
Other time deposits		32,221		73		0.30	%		30,107		82		0.36	%
Other borrowings		0		0		0.00	%		17		0		0.00	%
Total interest-bearing liabilities		608,439		773		0.17	%		581,623		555		0.13	%
Noninterest-bearing liabilities:
Noninterest-bearing deposits		294,193							245,903
Other liabilities		5,564							4,205
Total noninterest-bearing liabilities		299,757							250,108
Shareholders' equity		86,192							80,632
Total liabilities and shareholders' equity	$	994,388						$	912,363
Net interest income			$	26,021						$	24,251
Net interest spread (3)						3.68	%						3.80	%
Net interest margin (4)						3.73	%						3.84	%

	For the Nine Months Ended September 30,
	2017 vs 2016
	Increase (Decrease)
	in interest income and expense
(in thousands)	due to changes in:
	Volume			Rate			Total
Interest income:
Gross loans (1) (2)	$	1,671		$	(654	)	$	1,017
Investment securities (2)		696			(379	)		317
Federal funds sold		12			34			46
Interest-earning deposits		61			547			608
Total interest income	$	2,440		$	(452	)	$	1,988

Interest expense:
Interest-earning DDA	$	18		$	76		$	94
Money market deposits		2			160			162
Savings deposits		(5	)		(37	)		(42	)
Time CD $250K or more		(3	)		16			13
Other time deposits		6			(15	)		(9	)
Other borrowings		0			0			0
Total interest expense	$	18		$	200		$	218

Change in net interest income	$	2,422		$	(652	)	$	1,770

(in thousands)	For the Three Months Ended September 30,
	2017		2016		$ change			% change
Service charges on deposits	$	365	$	341	$	24			7.0	%
Earnings on cash surrender value of life insurance		130		102		28			27.5	%
Mortgage commissions		28		49		(21	)		(42.9%	)
Gains on calls and sales of securities		4		10		(6	)		(60.0%	)
Other income		749		575		174			30.3	%
Total non-interest income	$	1,276	$	1,077	$	199			18.5	%

	September 30,		December 31,		Nine Month Change
(in thousands)	2017		2016		$			%

Demand	$	495,454	$	500,930	$	(5,476	)		(1.1%	)
MMDA		288,217		283,643		4,574			1.6	%
Savings		67,643		75,122		(7,479	)		(10.0%	)
Time < $250K		31,854		33,428		(1,574	)		(4.7%	)
Time > $250K		18,548		20,970		(2,422	)		(11.6%	)
	$	901,716	$	914,093	$	(12,377	)		(1.4%	)