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

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

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

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

On July3,2008 (the “Effective Date”), a bank holding company reorganization was completed whereby Oak Valley Bancorp (“the Company”, “us”, “our”) became the parent holding company for Oak Valley Community Bank ~~( the~~(the “Bank”). On the Effective Date, a tax-free exchange was completed whereby each outstanding share of the Bank was converted into one share of the Company and the ~~Company~~Bank became the sole wholly-owned subsidiary of the holding company.

The consolidated financial statements include the accounts of the parent company and its wholly-owned bank subsidiary. Unless otherwise stated, the “Company” refers to the consolidated entity, Oak Valley Bancorp, while the “Bank” refers to Oak Valley Community Bank. All material intercompany transactions have been eliminated. In the opinion of Management, the consolidated financial statements contain all adjustments necessary to present fairly the financial position, results of operations, changes in shareholders’ equity and cash flows. All adjustments are of a normal, recurring nature. The interim consolidated financial statements included in this report are unaudited but reflect all adjustments which, in the opinion of management, are necessary for a fair presentation of the financial position and results of operations for the interim periods presented. All such adjustments are of a normal recurring nature. The results of operations for the three and ~~nine month~~six-month periods ended ~~September~~June 30, ~~2017~~ 2021 are not necessarily indicative of the results of a full year’s operations. Certain prior year amounts have been reclassified to conform to the current year presentation. There was no effect on net income or shareholders’ equity as previously reported as a result of reclassifications. For further information, refer to the audited consolidated financial statements and footnotes included in the Company’s Form ~~10-K~~10-K for the year ended December 31, ~~2016.~~2020.

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

On December 23, 2015, the Company completed its acquisition of Mother Lode Bank (“MLB”), a California state-chartered bank headquartered in Sonora, California, in a transaction in which Mother Lode Bank was merged with and into the Bank, with the Bank as the surviving company in the transaction. The purchase price for Mother Lode Bank was approximately $7.3 million.

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

In ~~May 2014,~~ the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2014-09, Revenue from Contracts with Customers (Topic 606). This ASU is a converged standard involving FASB and International Financial Reporting Standards that provides a single comprehensive revenue recognition model for all contracts with customers across transactions and industries. The core principal of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount and at a time that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. Subsequent updates related to Revenue from Contracts with Customers (Topic 606) are as follows:

~~The adoption of this update is~~ ~~not expected to have a material impact on the Company’s consolidated financial statements.~~

~~In September, 2015,~~June 2016, the FASB issued ASU No. ~~2015-16,~~ ~~Simplifying the Accounting for Measurement Period Adjustments (Topic 805).~~ This ASU eliminates the requirement to restate prior period financial statements for measurement period adjustments to assets acquired and liabilities assumed in a business combination. The new guidance under this update requires the cumulative impact of measurement period adjustments be recognized in the period the adjustment is determined. This update does not change what constitutes a measurement period adjustment, nor does it change the length of the measurement period. The new standard is effective for interim annual periods beginning after December 15, 2015 and should be applied prospectively to measurement period adjustments that occur after the effective date. The adoption of this update did not have a material impact on the Company’s consolidated financial statements.

~~In January~~ 2016 ~~the FASB issued ASU No. 2016-01,~~ -13,Financial Instruments ~~- Overall (Subtopic 825-10)~~: Recognition and Measurement of Financial Assets and Financial Liabilities. The amendments in this ASU make improvements to GAAP related to financial instruments that include the following as applicable to us:

ASU 2016-01 is effective for public business entities for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. This ASU will impact our financial statement disclosures, however, we do not expect this ASU to have a material impact on our financial condition or results of operations.

~~In February 2016, the FASB issued ASU No. 2016-02,~~ –~~Leases (Topic 842).~~ This ASU was issued to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities, including leases classified as operating leases under previous GAAP, on the balance sheet and requiring additional disclosures of key information about leasing arrangements. ASU 2016-02 is effective for annual periods, including interim periods within those annual periods beginning after December 15, 2018 and requires a modified retrospective approach to adoption. Early application of the amendments is permitted. While the Company has not quantified the impact to its balance sheet, it does expect the adoption of this ASU will result in a gross-up in its balance sheet as a result of recording a right-of-use asset and a lease liability for each lease, which is expected to decrease our leverage ratio by less than one percent.

~~In March 2016, FASB issued ASU 2016-09,~~ ~~Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting.~~ The amendments in ASU 2016-09 simplify several aspects of the accounting for share-based payment award transactions, including: (a) income tax consequences; (b) classification of awards as either equity or liabilities; and (c) classification on the statement of cash flows. The amendments are effective for public companies for annual periods beginning after December 15, 2016, and interim periods within those annual periods. Early adoption is permitted for any interim or annual period. The Company adopted this ASU for the full fiscal year of 2016 and it did not have a significant impact on its consolidated financial statements.

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

In ~~August~~ ~~2016,~~ January 2017, the FASB issued ASU ~~No. 2016-15,~~2017-04, ~~Statement~~Intangibles Goodwill and Other (Subtopic 350): Simplifying the Test for Goodwill Impairment. The provisions of ~~Cash Flows – Classification~~the update eliminate the existing second step of ~~Certain Cash Receipts~~the goodwill impairment test which provides for the allocation of reporting unit fair value among existing assets and ~~Cash Payments (Topic 230).~~ ~~This~~liabilities, with the net leftover amount representing the implied fair value of goodwill. In replacement of the existing goodwill impairment rule, the update ~~clarifies how~~will provide that impairment should be recognized as the excess of any of the reporting unit’s goodwill over the fair value of the reporting unit. Under the provisions of this update, the amount of the impairment is limited to the carrying value of the reporting unit’s goodwill. For public business entities ~~should classify certain cash receipts~~that are Securities and ~~cash payments~~Exchange Commission filers, the amendments of the update became effective in fiscal years beginning after December 15, 2019. The Company adopted the standards update effective January 1, 2020 and evaluates goodwill in accordance with the provisions of the standard. Due to the economic impact that COVID-19 has had on the ~~statement~~Company, management concluded that factors such as the decline in macroeconomic conditions have led to the occurrence of ~~cash flows with~~a triggering event and therefore an interim impairment test over goodwill was performed as of September 30, 2020. As part of this interim impairment assessment, if the ~~objective~~Company concluded that all or a portion of ~~reducing~~its goodwill is impaired, a non-cash charge for the ~~existing diversity in practice related~~amount of such impairment would be recorded to ~~eight specific cash flow issues.~~earnings. Such a charge would have no impact on tangible capital or regulatory capital. Based upon the results of our interim goodwill assessment, we have concluded that an impairment did not exist as of the time of the assessment.

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

In ~~January 2017,~~May 2019, the FASB issued ASU ~~2017-03,~~ 2019-05,Accounting Changes and Error Corrections (Topic 250) and Investments - Equity Method and Joint Ventures (Topic 323): Amendments to SEC Paragraphs Pursuant to Staff Announcements at the September 22, 2016 and November 17, 2016 EITF Meetings. ~~These amendments apply to ASU 2014-9 (Revenue from Contracts with Customers), ASU 2016-02 (Leases), and ASU 2016-13 (Financial~~Financial Instruments - Credit ~~Losses).~~ Losses (Topic 326): Targeted Transition Relief. This ASU allows an option for entities to irrevocably elect the fair value option on an instrument-by-instrument basis for eligible financial assets measured at amortized cost basis upon adoption of the credit loss standards. This amendment provides relief for those entities electing the fair value option on newly originated or purchased financial assets, while maintaining existing similar financial assets at amortized cost, avoiding the requirement to maintain dual measurement methods for similar assets. The fair value option does not apply to held-to-maturity debt securities. The effective date for this ASU is the same as for ASU 2016-13, as discussed above. We will evaluate this ASU in conjunction with ASU 2016-13 to determine its impact on our financial condition and results of operations.

In March 2020, FASB issued ASU 2020-04 - Reference Rate Reform (Subtopic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting. This ASU provides optional expedients and exceptions for contracts, hedging relationships, and other transactions that reference LIBOR or other reference rates expected to be discontinued because of reference rate reform. The ASU is effective for all entities as of March 12, 2020 through December 31, 2022. The Company ~~does not expect these amendments to have a significant impact~~is in the process of evaluating the provisions of this ASU and its effects on ~~its~~our consolidated financial statements.

The Company held equity securities with fair values of $3,413,000 and $3,425,000 as of June 30, 2021 and December 31, 2020, respectively. There were 0 sales of equity securities during the three and six-month periods ended June 30, 2021 and 2020. Consistent with ASU 2016-01, these securities are carried at fair value with the changes in fair value recognized in the condensed consolidated statements of income. Accordingly, the Company recognized 0 gains or losses during the three months ended June 30, 2021, and a loss of $45,000 during the six months ended June 30, 2021, as compared to gains of $15,000 and $66,000 during the same periods of 2020.

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~~June 30, ~~2017~~ 2021 are as follows:

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~~as of June 30, ~~2017.~~2021.

At ~~September~~As of June 30, ~~2017, there were ten~~2021, one corporate ~~debts,~~ debt, three U.S. agencies, four ~~municipalities, two SBA~~ Small Business Administration (“SBA”) pools, one ~~U.S. agency, one~~ collateralized mortgage obligation ~~one~~and seven 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 June 30, 2021, 4 asset backed securities, ~~two SBA pools,~~ 2 corporate debts, one ~~collateralized mortgage obligation,~~ U.S. agency and ~~one corporate debt that~~two municipalities 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.

The a~~mortized~~amortized cost and estimated fair value of ~~investment~~debt securities ~~at September~~as of June 30, ~~2017,~~2021, 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.

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The amortized cost and estimated fair values of debt securities as of December 31, ~~2016,~~ 2020 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	$	22,802	$	892	$	(2	)	$	23,692
Collateralized mortgage obligations		1,250		18		(45	)		1,223
Municipalities		115,706		9,896		0			125,602
SBA pools		5,027		6		(25	)		5,008
Corporate debt		14,229		308		(185	)		14,352
Asset backed securities		47,226		392		(331	)		47,287
	$	206,240	$	11,512	$	(588	)	$	217,164

The following tables detail the gross unrealized losses and fair values aggregated of debt securities by investment category and length of time that individual securities have been in a continuous unrealized loss position at December31, ~~2016.~~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	$	8,769	$	(208	)	$	718	$	(1	)	$	9,487	$	(209	)	$	94	$	(1	)	$	251	$	(1	)	$	345	$	(2	)
Collateralized mortgage obligations		3,166		(57	)		0		0			3,166		(57	)		0		0			565		(45	)		565		(45	)
Municipalities		45,137		(917	)		402		(29	)		45,539		(946	)		0		0			0		0			0		0
SBA pools		6,415		(46	)		753		(5	)		7,168		(51	)		0		0			3,847		(25	)		3,847		(25	)
Corporate debt		12,776		(757	)		2,884		(110	)		15,660		(867	)		0		0			6,315		(185	)		6,315		(185	)
Asset backed securities		2,576		(15	)		8,272		(86	)		10,848		(101	)		11,268		(58	)		25,104		(273	)		36,372		(331	)
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	)	$	11,362	$	(59	)	$	36,082	$	(529	)	$	47,444	$	(588	)

At December 31, 2020, fourteen asset-backed securities, seven Small Business Administration pools, three corporate debts, one U.S. agency, and one collateralized mortgage obligations make up the total debt securities in an unrealized loss position for greater than 12 months. At December 31, 2020, seven asset backed securities and three U.S. agencies make up the total debt securities in a loss position for less than 12 months.

WeThe Company recognized ~~gross~~ gains of ~~$4,000~~$1,000 on called securities during the three and ~~$394,000 for the three and nine month~~six-month periods ended ~~September~~June 30, ~~2017, respectively, on certain~~2021 and 2020. There were 0 sales of available-for-sale securities ~~that were called, which compares to $10,000 and $29,000 in the same periods of 2016. There were no securities sold~~ during the ~~first nine months of 2017 or 2016.~~six-months ended June 30, 2021 and 2020.

~~Securities carried~~Debt securities carried at ~~$93,594,000~~$174,081,000 and ~~$89,362,000 at September~~$147,795,000 as of June 30, ~~2017~~ 2021 and December 31, ~~2016,~~2020, respectively, were pledged to secure deposits of public funds.

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NOTE 44– – LOANS

~~Our~~The Company’s customers are primarily located in Stanislaus, San Joaquin, ~~Tuolumne,~~Tuolumne, Inyo, and Mono Counties. As of ~~September~~June 30, ~~2017,~~ 2021, approximately ~~79%~~70% of the Company’s loans are commercial real estate loans which include construction loans. Approximately ~~10%~~25% of the Company’s loans are for general commercial uses including professional, retail, and small business. Also included in the commercial and industrial loans in the table below are Paycheck Protection Program loans (as described below) totaling $151,439,000. Additionally, 6%3% of the Company’s loans are for residential real estate and other consumer loans. The remaining 5%2% are agriculture loans. Loan totals were as follows:

(in thousands)	June 30, 2021			December 31, 2020
Commercial real estate:
Commercial real estate- construction	$	18,383		$	32,459
Commercial real estate- mortgages		556,939			540,556
Land		5,156			5,318
Farmland		81,049			82,998
Commercial and industrial		231,494			292,006
Consumer		536			636
Consumer residential		27,614			30,887
Agriculture		22,723			28,255
Total loans		943,894			1,013,115

Less:
Deferred loan fees and costs, net		(5,024	)		(4,572	)
Allowance for loan losses		(11,327	)		(11,297	)
Net loans	$	927,543		$	997,246

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

Paycheck Protection Program. With the passage of the Paycheck Protection Program (“PPP”), administered by the SBA, the Company assisted its customers with applications for resources through the program. As of April 16, 2020, all $350 billion of the available funds under the First Draw of this program had been allocated. The Treasury Department later announced that an additional $310 billion would be available for second round of the First Draw PPP, which commenced on April 27, 2020 and closed on August 8, 2020. As of December 31, 2020, the PPP remained closed and was not accepting applications, but resumed in January 2021. Also, in January 2021 the SBA began its Second Draw PPP to provide a second PPP loan to small businesses provided they meet specific criteria pertaining to economic hardship. PPP loans have a two-year term if the loan was approved by the SBA prior to June 5, 2020, and loans approved after that date have a five-year term. All PPP loans earn a contractual interest rate of 1%. The Company believes that the vast majority of PPP loans will ultimately be forgiven by the SBA in accordance with the terms of the program, which resulted in loan pay-offs of approximately $33 million during the fourth quarter of 2020, $62 million during the first quarter of 2021 and $99 million during the second quarter of 2021. As of December 31, 2020, the Company had received approvals with the SBA for 1,671 PPP loans representing approximately $244,197,000 in funding under the First Draw PPP, of which $33,375,000 was paid off by the SBA through PPP loan forgiveness, resulting in an outstanding balance of $210,822,000 at December 31, 2020. During the firstsix months of 2021, the Company received approvals with the SBA for 924 Second Draw PPP loans, representing approximately $100,698,000 in funding, resulting in a total PPP outstanding balance of $151,439,000 at June 30, 2021. As a result of funding the PPP loans, the Company received fee income that is recorded to total interest income net of deferred loan costs, through amortization over the life of the loans. It is the Company’s understanding that loans funded through the PPP program are fully guaranteed by the U.S. government, and therefore, no allowance for credit losses has been allocated for PPP loans. Should those circumstances change, the Company could be required to establish additional allowance for credit losses through additional provision for credit loss expense charged to earnings.

COVID-19 Related Loan Payment Deferrals. The COVID-19 Pandemic has negatively impacted the revenue streams of certain borrowers of the Company, and therefore, during the second quarter of 2020 the Company elected to allow these clients to defer payments for a term up to six months. These deferrals were specifically related to the pandemic and the resulting economic hardships. As of December 31, 2020, the Company had 0 loans for which payments were deferred due to the financial impact of the pandemic, as normal payment schedules had resumed on the deferrals granted during the second quarter of 2020. As of June 30, 2021, one borrowing relationship consisting of 4 loans totaling $8,381,000 has experienced economic hardship related to COVID-19 during 2021 and the bank responded by deferring principal payments, and thus converting the loans to interest-only for the remainder of 2021. After an evaluation of financial stability, no specific loan loss reserve allocation was required on any of these loans at the time of deferral. In accordance with regulatory and accounting guidance, these short-term modifications granted in response to the COVID-19 pandemic are not considered to be troubled debt restructurings.

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

Commercial and industrial loans are underwritten after evaluating and understanding the ~~borrower~~’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.

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~~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~~As of June 30, ~~2017~~ 2021 and December 31, ~~2016, commercial real estate loans equal to~~ 2020, approximately ~~42.3% and 40.9%, respectively,~~36% of the outstanding principal balance of ~~our~~ commercial real estate loans were secured by owner-occupied properties.

~~Table of Contents~~

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

(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

~~Table of Contents~~

~~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.~~

(in thousands)	June 30, 2021		December 31, 2020
Commercial real estate:
Commercial real estate- construction	$	0	$	0
Commercial real estate- mortgages		362		0
Land		0		0
Farmland		0		0
Commercial and industrial		0		0
Consumer		0		0
Consumer residential		0		0
Agriculture		0		0
Total non-accrual loans	$	362	$	0

Had non-accrual loans performed in accordance with their original contract terms, wethe Company would have recognized additional interest income of approximately ~~$27,000~~$3,000 and ~~$95,000~~$6,000 in the three and ~~nine month~~six-month periods ended ~~September~~June 30, ~~2017,~~ 2021, respectively, as compared to ~~$38,000~~$11,000 and ~~$118,000~~$22,000 in the same periods of ~~2016.~~2020.

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~~June 30, ~~2017 (in~~2021 (in thousands):

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
June 30, 2021																	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	$	18,383	$	18,383	$	0
Commercial R.E. - mortgages		25		0		0		25		417,228		0		417,253		0		0		0		362		362		556,577		556,939		0
Land		0		0		993		993		7,470		33		8,496		0		0		0		0		0		5,156		5,156		0
Farmland		0		0		0		0		56,670		0		56,670		0		0		0		0		0		81,049		81,049		0
Commercial and industrial		0		0		302		302		65,142		0		65,444		0		0		0		0		0		231,494		231,494		0
Consumer		0		0		0		0		607		0		607		0		0		0		0		0		536		536		0
Consumer residential		0		0		0		0		37,836		0		37,836		0		0		0		0		0		27,614		27,614		0
Agriculture		0		0		0		0		30,049		0		30,049		0		0		0		0		0		22,723		22,723		0
Total	$	25	$	0	$	1,295	$	1,320	$	635,256	$	33	$	636,609	$	0	$	0	$	0	$	362	$	362	$	943,532	$	943,894	$	0

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 December31, ~~2016~~2020 (in thousands):

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
December 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	$	23,378	$	0		23,378	$	0	$	0		0		0		0	$	32,459	$	32,459	$	0
Commercial R.E. - mortgages		0		0		0		0		389,495		0		389,495		0		362		0		0		362		540,194		540,556		0
Land		0		0		2,715		2,715		7,075		33		9,823		0		0		0		0		0		5,318		5,318		0
Farmland		0		0		0		0		56,159		0		56,159		0		0		0		0		0		82,998		82,998		0
Commercial and industrial		0		0		302		302		63,899		0		64,201		0		0		0		0		0		292,006		292,006		0
Consumer		0		0		0		0		767		0		767		0		0		0		0		0		636		636		0
Consumer residential		0		0		16		16		38,656		0		38,672		0		0		0		0		0		30,887		30,887		0
Agriculture		0		0		0		0		28,454		0		28,454		0		0		0		0		0		28,255		28,255		0
Total	$	0	$	0	$	3,033	$	3,033	$	607,883	$	33		610,949	$	0	$	362	$	0	$	0	$	362	$	1,012,753	$	1,013,115	$	0

Table of Contents

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 and ~~nine months~~six-months ended ~~September~~June 30, ~~2017~~ 2021 and ~~2016.~~2020.

~~Table of Contents~~

Impaired loans as of ~~September~~June 30, ~~2017 and December 31, 2016~~ 2021 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.

(in thousands)	Unpaid Contractual Principal Balance		Recorded Investment With No Allowance		Recorded Investment With Allowance		Total Recorded Investment		Related Allowance
June 30, 2021
Commercial real estate:
Commercial R.E. - construction	$	0	$	0	$	0	$	0	$	0
Commercial R.E. - mortgages		362		362		0		362		0
Land		0		0		0		0		0
Farmland		0		0		0		0		0
Commercial and Industrial		0		0		0		0		0
Consumer		0		0		0		0		0
Consumer residential		0		0		0		0		0
Agriculture		0		0		0		0		0
Total	$	362	$	362	$	0	$	362	$	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

(in thousands)

Unpaid
Contractual
Principal
Balance

Recorded
Investment
With No
Allowance

Recorded
Investment
With
Allowance

Total
Recorded
Investment

Related
Allowance

December 31, 2016

Commercial real estate:

Commercial R.E. - construction
$ 0 $ 0 $ 0 $ 0 $ 0
Commercial R.E. - mortgages
0 0 0 0 0
Land
3,131 0 2,715 2,715 680
Farmland
0 0 0 0 0
Commercial and Industrial
353 306 0 306 0
Consumer
0 0 0 0 0
Consumer residential
16 16 0 16 0
Agriculture
0 0 0 0 0
Total
$ 3,500 $ 322 $ 2,715 $ 3,037 $ 680

~~Table of Contents~~

Average recorded investment in impaired loans outstanding as of ~~September~~June 30, ~~2017~~ 2021 and ~~2016~~2020 is set forth in the following table.

(in thousands)									Average Recorded Investment for the Three Months Ended June 30,				Average Recorded Investment for the Six Months Ended June 30,
	Average Recorded Investment for the								2021		2020		2021		2020
	Three Months Ended		Three Months Ended		Nine Months Ended		Nine Months Ended
(in thousands)	September 30, 2017		September 30, 2016		September 30, 2017		September 30, 2016
Commercial real estate:
Commercial R.E. - construction	$	0	$	0	$	0	$	0	$	0	$	0	$	0	$	0
Commercial R.E. - mortgages		0		0		0		0		362		0		248		0
Land		1,518		2,324		2,018		2,439		0		803		0		819
Farmland		0		0		0		0		0		0		0		0
Commercial and Industrial		302		312		304		316		0		0		0		0
Consumer		0		0		0		0		0		0		0		0
Consumer residential		75		0		96		0		0		137		0		164
Agriculture		0		0		0		0		0		0		0		0
Total	$	1,895	$	2,636	$	2,418	$	2,755	$	362	$	940	$	248	$	983

Table of Contents

Impaired loans as of December 31, 2020 are set forth in the following table.

(in thousands)	Unpaid Contractual Principal Balance		Recorded Investment With No Allowance		Recorded Investment With Allowance		Total Recorded Investment		Related Allowance		Average Recorded Investment
December 31, 2020
Commercial real estate:
Commercial R.E. - construction	$	0	$	0	$	0	$	0	$	0	$	0
Commercial R.E. - mortgages		0		0		0		0		0		0
Land		0		0		0		0		0		724
Farmland		0		0		0		0		0		0
Commercial and Industrial		0		0		0		0		0		0
Consumer		0		0		0		0		0		0
Consumer residential		0		0		0		0		0		87
Agriculture		0		0		0		0		0		0
Total	$	0	$	0	$	0	$	0	$	0	$	811

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, there were 5 loans that were considered to be troubled debt restructurings, all of which are considered non-accrual totaling $1,311,000. At December 31, 2016, there were 6 loans that were considered to be troubled debt restructurings, all of which are considered non-accrual totaling $3,037,000. At September 30, 2017 and December 31, 2016 there were no unfunded commitments on loans classified as a troubled debt restructures. We have allocated $680,000 of specific reserves to loans whose terms have been modified in troubled debt restructurings as of September 30, 2017 and December 31, 2016.

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.

As of June 30, 2021 and December 31, 2020, there were no loans classified as troubled debt restructurings. During the ~~three~~ six-months ended June 30, 2021 and ~~nine months ended September 30, 2017,~~ 2020, there were no loans that were modified as troubled debt restructurings, compared to one loan with a recorded investment 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.restructurings. There were no ~~charge-offs as a result of the loan modification, as the contractual balances outstanding were determined to be collectible.~~

~~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~~six-month periods ended ~~September~~June 30, ~~2017~~ 2021 and ~~2016.~~2020. A loan is considered to be in payment default once it is ninety days contractually past due under the modified terms.

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

~~We grade~~The Company grades loans using the following letter system:

1 Exceptional Loan

2 Quality Loan

~~3 A~~3A Better Than Acceptable Loan

~~3 B~~3B Acceptable Loan

~~3 C~~3C Marginally Acceptable Loan

4 (W) Watch Acceptable Loan

5 ~~Other Loans Especially Mentioned~~ Special Mention Loan

6 Substandard Loan

7 Doubtful Loan

8 Loss

~~Table of Contents~~

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~~
●
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.

Table of ~~business from well-defined primary and secondary sources.~~

Contents

~~-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.~~

~~-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~~
●
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.

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

●

Requires collateral.

●

A credit facility where the borrower has average financial strengths, but usually lacks reliable secondary sources of repayment other than the subject collateral.

●

~~Requires collateral. A credit facility where the borrower has average financial strengths, but usually lacks reliable secondary sources of repayment other than the subject collateral.~~ Other common characteristics can include some or all of the following: minimal background experience of management, lacking continuity of management, a start-up operation, erratic historical profitability (acceptable reasons-well identified), lack of or marginal sponsorship of guarantor, and government guaranteed loans.

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:

●

Any unexpected short-term adverse financial performance from budgeted projections or a prior period’s results (i.e., declining profits, sales, margins, cash flow, or increased reliance on leverage, including adverse balance sheet ratios, trade debt issues, etc.).

●

Any managerial or personal problems with company management, decline in the entire industry or local economic conditions, or failure to provide financial information or other documentation as requested.

●

Issues regarding delinquency, overdrafts, or renewals.

●

Any other issues that cause concern for the company.

●

Loans to individuals or loans supported by guarantors with marginal net worth and/or marginal collateral.

●

Weaknesses that are identified are short-term in nature.

●

Loans in this category are usually accounts the Bank would want to retain providing a positive turnaround can be expected within a reasonable time frame. Grade 4(W) loans are considered Pass.

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

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

~~-Questions exist regarding the condition of and/or control over collateral.~~

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

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

~~Table of Contents~~

●

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

●

Questions exist regarding the condition of and/or control over collateral.

●

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

●

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

6 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.

Table of Contents

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

As of ~~September~~June 30, ~~2017~~ 2021 and December 31, ~~2016,~~ 2020, there are no0 loans that are classified with a risk ~~grade~~grades of 8-8- Loss.

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

	September 30, 2017		December 31, 2016		June 30, 2021		December 31, 2020
	Weighted Average Risk Grade		Weighted Average Risk Grade		Weighted Average Risk Grade		Weighted Average Risk Grade
Commercial real estate:
Commercial real estate - construction		3.00		3.07		3.00		3.16
Commercial real estate - mortgages		3.07		3.08		3.08		3.11
Land		3.98		4.39		3.95		3.94
Farmland		3.22		3.09		3.08		3.06
Commercial and industrial		3.59		2.70		3.00		3.02
Consumer		2.15		2.28		1.66		1.74
Consumer residential		3.01		3.03		3.01		3.00
Agriculture		3.20		3.08		3.23		3.05
Total gross loans		3.15		3.06		3.06		3.08

~~Table of Contents~~

The following table presents risk grade totals by class of loans as of ~~September~~June 30, ~~2017~~ 2021 and December 31, ~~2016.~~ 2020. Risk grades 1 through 4(W) have been aggregated in the “Pass” line.

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

September 30, 2017

June 30, 2021
Pass	$	20,254	$	416,289	$	7,041	$	56,670	$	60,335	$	579	$	37,773	$	30,049	$	628,990	$	18,383	$	547,763	$	4,330	$	79,034	$	230,296	$	514	$	27,577	$	22,723	$	930,620
Special mention		-		258		-		-		3,920		-		-		-		4,178		0		8,814		826		0		0		0		0		0		9,640
Substandard		-		706		1,175		-		1,189		28		63		-		3,161		0		362		0		2,015		1,198		22		37		0		3,634
Doubtful		-		-		280		-		-		-		-		-		280
Total loans	$	20,254	$	417,253	$	8,496	$	56,670	$	65,444	$	607	$	37,836	$	30,049	$	636,609	$	18,383	$	556,939	$	5,156	$	81,049	$	231,494	$	536	$	27,614	$	22,723	$	943,894

December 31, 2016

December 31, 2020
Pass	$	22,560	$	388,365	$	6,637	$	56,159	$	62,770	$	738	$	38,300	$	28,454	$	603,983	$	32,459	$	531,507	$	4,469	$	81,972	$	290,504	$	613	$	30,849	$	28,007	$	1,000,380
Special mention		818		1,063		-		-		189		-		-		-		2,070		0		9,049		849		0		0		0		0		0		9,898
Substandard		-		67		2,906				1,242		29		372		-		4,616		0		0		0		1,026		1,502		23		38		248		2,837
Doubtful		-		-		280		-		-		-		-		-		280
Total loans	$	23,378	$	389,495	$	9,823	$	56,159	$	64,201	$	767	$	38,672	$	28,454	$	610,949	$	32,459	$	540,556	$	5,318	$	82,998	$	292,006	$	636	$	30,887	$	28,255	$	1,013,115

~~(1)~~

~~Included in the above table is Purchased Credit Impaired loans recorded at their fair value of $33,000 as of September 30, 2017 and December 31, 2016,~~
~~which were acquired in the MLB Acquisition.~~

Table of Contents

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.

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.

~~Table of Contents~~

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.

2218

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The following table details activity in the allowance for loan losses by portfolio segment for the three and ~~nine months~~six-months ended ~~September~~June 30, ~~2017~~ 2021 and ~~2016.~~2020. Allocation of a portion of the allowance to one category of loans does not preclude its availability to absorb losses in other categories.

(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 and Six Months Ended June 30, 2021 and 2020																			For the Three and Six Months Ended June 30, 2021 and 2020

(in thousands)	Commercial			Commercial					Consumer
Three Months Ended September 30, 2016	Real Estate			and Industrial		Consumer			Residential			Agriculture		Unallocated		Total
Three Months Ended June 30, 2021																				Commercial Real Estate			Commercial and Industrial			Consumer			Consumer Residential			Agriculture			Total
Beginning balance	$	6,133		$	671	$	55		$	387		$	431	$	3	$	7,680			$	9,520		$	1,015		$	19		$	336		$	422		$	11,312
Charge-offs		0			0		(5	)		0			0		0		(5	)			0			0			(3	)		0			0			(3	)
Recoveries		0			0		2			0			0		0		2				16			0			1			1			0			18
(Reversal of) provision for loan losses		(62	)		60		(4	)		(8	)		63		41		90
Provision for (reversal of) loan losses																					(12	)		14			0			(23	)		21			0
Ending balance	$	6,071		$	731	$	48		$	379		$	494	$	44	$	7,767			$	9,524		$	1,029		$	17		$	314		$	443		$	11,327

Nine Months Ended September 30, 2016
Six Months Ended June 30, 2021
Beginning balance	$	5,920		$	627	$	38		$	426		$	309	$	36	$	7,356			$	9,310		$	1,079		$	22		$	325		$	561		$	11,297
Charge-offs		-			-		(12	)		-			-		-		(12	)			0			0			(8	)		0			0			(8	)
Recoveries		3			-		5			-			-		-		8				32			0			5			1			0			38
(Reversal of) provision for loan losses		148			104		17			(47	)		185		8		415
Provision for (reversal of) loan losses																					182			(50	)		(2	)		(12	)		(118	)		0
Ending balance	$	6,071		$	731	$	48		$	379		$	494	$	44	$	7,767			$	9,524		$	1,029		$	17		$	314		$	443		$	11,327

Three Months Ended June 30, 2020
Beginning balance																				$	7,691		$	1,068		$	33		$	328		$	466		$	9,586
Charge-offs																					0			0			(5	)		0			0			(5	)
Recoveries																					0			0			2			0			0			2
Provision for (reversal of) loan losses																					1,743			45			4			(7	)		75			1,860
Ending balance																				$	9,434		$	1,113		$	34		$	321		$	541		$	11,443

Six Months Ended June 30, 2020
Beginning balance																				$	7,277		$	1,000		$	38		$	306		$	525		$	9,146
Charge-offs																					0			0			(16	)		(2	)		0			(18	)
Recoveries																					0			0			4			1			0			5
Provision for loan losses																					2,157			113			8			16			16			2,310
Ending balance																				$	9,434		$	1,113		$	34		$	321		$	541		$	11,443

2319

Table of Contents

TheThe following table details the allowance for loan losses and ending gross loan balances as of ~~September~~June 30, ~~2017,~~ 2021 and December 31, ~~2016 and September 30, 2016~~ 2020, summarized by collective and individual evaluation methods of impairment.

(in thousands)	Commercial		Commercial				Consumer
September 30, 2017	Real Estate		and Industrial		Consumer		Residential		Agriculture		Unallocated		Total
June 30, 2021															Commercial Real Estate		Commercial and Industrial		Consumer		Consumer Residential		Agriculture		Total
Allowance for loan losses for loans:
Individually evaluated for impairment	$	680	$	0	$	0	$	0	$	0			$	680	$	0	$	0	$	0	$	0	$	0	$	0
Collectively evaluated for impairment		5,570		761		23		314		553		16		7,237		9,524		1,029		17		314		443		11,327
	$	6,250	$	761	$	23	$	314	$	553	$	16	$	7,917	$	9,524	$	1,029	$	17	$	314	$	443	$	11,327

Ending gross loan balances:
Individually evaluated for impairment	$	993	$	303	$	0	$	15	$	0	$	0	$	1,311	$	362	$	0	$	0	$	0	$	0	$	362
Individually evaluated purchased credit impaired loans		33		0		0		0		0		0		33
Collectively evaluated for impairment		501,647		65,141		607		37,821		30,049		0		635,265		661,165		231,494		536		27,614		22,723		943,532
	$	502,673	$	65,444	$	607	$	37,836	$	30,049	$	0	$	636,609	$	661,527	$	231,494	$	536	$	27,614	$	22,723	$	943,894

December 31, 2016
December 31, 2020
Allowance for loan losses for loans:
Individually evaluated for impairment	$	680	$	0	$	0	$	0	$	0			$	680	$	0	$	0	$	0	$	0	$	0	$	0
Collectively evaluated for impairment		5,505		697		51		325		504		70		7,152		9,310		1,079		22		325		561		11,297
	$	6,185	$	697	$	51	$	325	$	504	$	70	$	7,832	$	9,310	$	1,079	$	22	$	325	$	561	$	11,297

Ending gross loans balances:
Individually evaluated for impairment	$	2,715	$	306	$	0	$	16	$	0	$	0	$	3,037
Individually evaluated purchased credit impaired loans		33		0		0		0		0		0		33
Collectively evaluated for impairment		476,107		63,895		767		38,656		28,454		0		607,879
	$	478,855	$	64,201	$	767	$	38,672	$	28,454	$	0	$	610,949

September 30, 2016
Allowance for loan losses for loans:
Ending gross loan balances:
Individually evaluated for impairment	$	680	$	0	$	0	$	0	$	0			$	680	$	0	$	0	$	0	$	0	$	0	$	0
Collectively evaluated for impairment		5,391		731		48		379		494		44		7,087		661,331		292,006		636		30,887		28,255		1,013,115
	$	6,071	$	731	$	48	$	379	$	494	$	44	$	7,767	$	661,331	$	292,006	$	636	$	30,887	$	28,255	$	1,013,115

Ending gross loans balances:
Individually evaluated for impairment	$	2,305	$	309	$	0	$	0	$	0	$	0	$	2,614
Individually evaluated purchased credit impaired loans		33		499		0		0		0		0		532
Collectively evaluated for impairment		466,899		67,265		736		36,756		27,767		0		599,423
	$	469,237	$	68,073	$	736	$	36,756	$	27,767	$	0	$	602,569

Changes in the reserve for off-balance-sheet commitments were as follows:

	THREE MONTHS ENDED SEPTEMBER 30,					NINE MONTHS ENDED SEPTEMBER 30,
(in thousands)											THREE MONTHS ENDED JUNE 30,				SIX MONTHS ENDED JUNE 30,
	2017			2016		2017		2016			2021		2020		2021		2020

Balance, beginning of period	$	302		$	257	$	284	$	238		$	428	$	396	$	379	$	427
Provision (Recovery) to Operations for Off Balance Sheet Commitments		(4	)		6		14		(25	)
Provision (Reversal) to Operations for Off Balance Sheet Commitments												7		23		56		(8	)
Balance, end of period	$	298		$	263	$	298	$	263		$	435	$	419	$	435	$	419

The method for calculating the reserve for off-balance-sheet loan commitments is based on a reserve percentage which is less than other outstanding loan types because they are at a lower risk level. This reserve percentage, based on many factors including historical losses and existing economic conditions, is evaluated by management periodically and is applied to the total undisbursed loan commitment balance to calculate the reserve for off-balance-sheet commitments. Reserves for off-balance-sheet commitments are recorded in interest payable and other liabilities on the condensed consolidated balance sheets.

At ~~September~~June 30, ~~2017~~ 2021 and December 31, ~~2016,~~2020, loans carried at ~~$636,609,000~~$943,894,000 and ~~$610,949,000,~~$1,013,115,000, respectively, were pledged as collateral on advances from the Federal Home Loan Bank.

~~Table of Contents~~

~~NOTE~~ 5 ~~– OTHER REAL ESTATE OWNED~~

~~As of~~ September 30, 2017, the Company owned two properties classified as other real estate totaling $253,000, as compared to three properties totaling $1,210,000 as of December 31, 2016. One of the properties owned at September 30, 2017 and December 31, 2016, was a residential land property that was written down to a zero balance because the public utilities have not been obtainable rendering these land lots unmarketable at this time. Each of the OREO properties were acquired through loan foreclosures. During the nine months ended September 30, 2017, there was one sale of an OREO property resulting in a gain on sale of $211,000, and there were no OREO property acquisitions. The Company acquired one property through a loan foreclosure during the three and nine months ended September 30, 2016 with a balance of $253,000. There was one sale during the nine months ended September 30, 2016 that accounted for the disposition of two OREO properties resulting in a loss of $88,000.

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

~~NOTE~~ 6– ~~OTHER POST-RETIREMENT BENEFIT PLANS~~

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

In August 2001, the Board of Directors of the Bank authorized Director Retirement Plans (“DRP”) with each director. The Bank awarded a director retirement plan to two of its directors in January 2008, to three of its directors in March 2014, and to its newest director in 2016. Under the DRP, the participants will be provided with a fixed annual retirement benefit for ten years after retirement. The Bank is also responsible for certain pre-retirement death benefits under the DRP. In connection with the implementation of the DRP, the Bank purchased single premium life insurance policies on the life of each director covered under the DRP. The Bank is the owner and partial beneficiary of these life insurance policies. The assets of the DRP, under Internal Revenue Service regulations, are the property of the Bank and are available to satisfy the Bank’s general creditors.

~~Future co~~mpensation under both plans is earned for services rendered through retirement. The Bank accrues for the salary continuation liability based on anticipated years of service and vesting schedules provided under the plans. The Bank’s current benefit liability is determined based on vesting and the present value of the benefits at a corresponding discount rate. The discount rate used is an equivalent rate for investment-grade bonds with lives matching those of the service periods remaining for the salary continuation contracts, which average approximately 10 years. The salary continuation liability as of September 30, 2017 and December 31, 2016 was $2,960,000 and $2,762,000, respectively, and is reported in interest payable and other liabilities on the condensed consolidated balance sheets.

~~During~~ January 2008, the Bank purchased $4.7 million in bank owned life insurance policies and entered into split-dollar life insurance agreements with certain officers and directors. During March 2014, the Bank purchased an additional $1.0 million in bank owned life insurance policies and entered into split-dollar life insurance agreements with its three newest directors. During September 2016, the Bank purchased an additional $4.0 million in bank owned life insurance policies and entered into split-dollar life insurance agreements with certain officers and directors. In connection with the implementation of the split-dollar agreements, the Bank purchased single premium life insurance policies on the life of each of the officers and directors covered by the split-dollar life insurance agreements. The Bank is the owner of the policies and the partial beneficiary in an amount equal to the cash surrender value of the policies.

~~The combined cash surrender value of all Bank-owned life insu~~rance policies recorded in interest receivable and other assets on the condensed consolidated balance sheets were $18,389,000 and $18,004,000 at September 30, 2017 and December 31, 2016, respectively.

NOTE 5—7 — FINANCIAL INSTRUMENTS AND FAIR VALUE MEASUREMENTS

Fair values of financial instruments — The condensed consolidated financial statements include various estimated fair value information as of ~~September~~June 30, ~~2017~~ 2021 and December 31, ~~2016.~~2020. 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.

~~Table of Contents~~

~~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.

Table of Contents

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 and six-month periods ended ~~September~~June 30, ~~2017 or 2016.~~2021 and 2020.

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-~~ 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~~off-balance sheet instruments to be a level 3 valuation.

~~Table of Contents~~

The estimated fair values of the ~~Company~~’sCompany’s financial instruments not measured at fair value ~~at September~~as of June 30, ~~2017~~ 2021 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	$	525,802		$	525,802			1
Restricted equity securities		4,135			4,135			2		5,493			5,493			2
Loans, net		626,911			633,841			3		927,543			937,840			3
Interest receivable		2,730			2,730			2		4,568			4,568			2

Financial liabilities:
Deposits		(901,716	)		(802,610	)		3		(1,614,480	)		(1,614,497	)		3
Interest payable		(33	)		(33	)		2		(17	)		(17	)		2

Off-balance-sheet assets (liabilities):
Off-balance-sheet liabilities:
Commitments and standby letters of credit					(1,165	)		3					1,671			3

Table of Contents

The estimated fair values of the ~~Company~~’sCompany’s financial instruments not measured at fair value at as of December 31, ~~2016~~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	$	190,810		$	190,810			1	$	226,656		$	226,656			1
Restricted equity securities		3,795			3,795			2		4,757			4,757			2
Loans, net		601,104			611,553			3		997,246			1,006,335			3
Interest receivable		2,831			2,831			2		5,689			5,689			2

Financial liabilities:
Deposits		(914,093	)		(811,519	)		3		(1,367,809	)		(1,367,874	)		3
Interest payable		(45	)		(45	)		2		(20	)		(20	)		2

Off-balance-sheet assets (liabilities):
Off-balance-sheet liabilities:
Commitments and standby letters of credit					(1,107	)		3					1,457			3

~~Table of Contents~~

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~~June 30, ~~2017~~ 2021 and December 31, ~~2016.~~2020.

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 June 30, 2021 Using
(in thousands)	June 30, 2021		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	$	25,318	$	0	$	25,318	$	0
Collateralized mortgage obligations		1,067		0		1,067		0
Municipalities		143,997		0		143,997		0
SBA pools		4,487		0		4,487		0
Corporate debt		14,949		0		14,949		0
Asset backed securities		46,957		0		46,957		0

Equity Securities:
Mutual fund	$	3,413	$	3,413	$	0	$	0

Assets and liabilities measured on a non-recurring basis:
Impaired loans:
Commercial real estate - mortgages	$	362	$	0	$	0	$	362

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	Fair Value Measurements at December 31, 2020 Using
(in thousands)	December 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	$	23,692	$	0	$	23,692	$	0
Collateralized mortgage obligations		1,223		0		1,223		0
Municipalities		125,602		0		125,602		0
SBA pools		5,008		0		5,008		0
Corporate debt		14,352		0		14,352		0
Asset backed securities		47,287		0		47,287		0

Equity Securities:
Mutual fund	$	3,425	$	3,425	$	0	$	0

Assets and liabilities measured on a non-recurring basis:		N/A

~~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 six-month period ended ~~September~~June 30, ~~2017.~~2021.

NOTE 6–8 – EARNINGS PER SHARE

Earnings per share (“EPS”) are based upon the weighted average number of common shares outstanding during each year. The following table shows: ~~(1)~~(1) weighted average basic shares, ~~(2)~~(2) effect of dilutive securities related to ~~stock options and~~ non-vested restricted stock, and ~~(3)~~(3) weighted average shares of common stock and common stock equivalents. Net income available to common stockholders is calculated as net income reduced by dividends accumulated on preferred stock, if any. Basic EPS ~~are~~is calculated by dividing net income available to common stockholders by the weighted average number of common shares outstanding during each period, excluding unvested restricted stock awards. Diluted EPS ~~are~~is calculated using the weighted average diluted shares, which reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock. The dilutive shares included in year-to-date diluted EPS is a weighted average of the dilutive shares included in each quarterly diluted EPS computation under the treasury stock method. ~~We have~~ The Company has two forms of outstanding common stock: fully vested common stock and unvested restricted stock awards. Holders of restricted stock awards receive non-forfeitable dividends at the same rate as common stockholders and they both share equally in undistributed earnings. Therefore, under the two ~~class~~-class method the difference in EPS is not significant for these participating securities.

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The ~~Company~~’sCompany’s calculation of basic and diluted ~~earnings per share (“EPS”)~~EPS for the three and ~~nine month~~six-month periods ended ~~September~~June 30, ~~2017~~ 2021 and ~~2016~~2020 are reflected in the ~~table~~tables below.

	THREE MONTHS ENDED				THREE MONTHS ENDED
(In thousands)	SEPTEMBER 30,				JUNE 30,
	2017		2016		2021		2020
BASIC EARNINGS PER SHARE

Net income	$	2,468	$	1,930	$	3,960	$	2,581
Weighted average shares outstanding		8,065		8,031		8,146		8,124
Net income per common share	$	0.31	$	0.24	$	0.49	$	0.32

DILUTED EARNINGS PER SHARE

Net income	$	2,468	$	1,930	$	3,960	$	2,581
Weighted average shares outstanding		8,065		8,031		8,146		8,124
Effect of dilutive stock options		5		1
Effect of dilutive non-vested restricted shares		13		31		32		6
Weighted average shares of common stock and common stock equivalents		8,083		8,063		8,178		8,130
Net income per diluted common share	$	0.31	$	0.24	$	0.48	$	0.32

	NINE MONTHS ENDED				SIX MONTHS ENDED
(In thousands)	SEPTEMBER 30,				JUNE 30,
	2017		2016		2021		2020
BASIC EARNINGS PER SHARE

Net income	$	7,505	$	5,343	$	8,316	$	5,290
Weighted average shares outstanding		8,056		8,023		8,140		8,119
Net income per common share	$	0.93	$	0.67	$	1.02	$	0.65

DILUTED EARNINGS PER SHARE

Net income	$	7,505	$	5,343	$	8,316	$	5,290
Weighted average shares outstanding		8,056		8,023		8,140		8,119
Effect of dilutive stock options		18		35
Effect of dilutive non-vested restricted shares		4		1		32		13
Weighted average shares of common stock and common stock equivalents		8,078		8,059		8,172		8,132
Net income per diluted common share	$	0.93	$	0.66	$	1.02	$	0.65

~~During the three~~ and nine month periods ended September 30, 2017, there were no anti-dilutive options to purchase shares of common stock, as compared to anti-dilutive weighted average stock options of 12,261 and 22,446 outstanding during the three and nine month periods of 2016, respectively, with prices ranging from $9.95 to $15.00. These options were not included in the computation of diluted EPS because the options’ exercise price was greater than the average market price of the common shares.

NOTE 7– RISKS AND UNCERTAINTIES

The coronavirus (“COVID-19”) pandemic and the Federal Reserve's response to the economic challenges has resulted in an uncertain and rapidly evolving economy. In the early stages of the pandemic, a significant portion of staff worked remotely, but essentially all staff have returned to the office as of June 30, 2021. The remote work arrangements did not adversely impact the ability to serve clients and did not have an impact on the Company’s financial reporting systems or the internal controls over financial reporting, disclosures and related procedures.

The most significant impact of COVID-19 on the Company’s business has been to the quality of the loan portfolio and to net interest income as short-term interest rates have sharply declined. The Company has increased the qualitative factors used in the determination of the adequacy of the allowance for loan and lease loss in anticipation of the impact that COVID-19 will have on clients and their ability to fulfill their obligations. There ~~were~~ is no ~~anti-dilutive non-vested restricted~~ ~~stock grants~~ certainty that the allowance for loan losses as of June 30, 2021 will be sufficient to absorb the ~~three~~losses that stem from the impact of COVID-19 on the Company’s clients. As the longer-term effects on clients from the COVID-19 pandemic become more apparent, it may be necessary to charge-off some or all of the balance on certain loans and ~~nine months ended September~~make further provisions to increase the allowance for loan and lease losses. These potential additional provisions for loan and lease losses will have a direct impact upon capital, including the potential need to reevaluate a valuation allowance on our deferred tax asset. At this time, the Company does not expect that there would be any material impairment to the valuation of other long-lived assets, right of use assets, or our investment securities.

Increased demand for liquidity by clients is another impact that could occur should the COVID-19 effects be prolonged. As of June 30, ~~2017~~2021, the Company and ~~2016.~~ the Bank's on-balance sheet liquidity was very strong and combined with contingent liquidity resources, management believes that the Bank has sufficient resources to meet the liquidity needs of its 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 the 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. See “Management’s Discussion and Analysis of Financial Position and Results of Operations” and Part II, Item 1A, Risk Factors, for an additional discussion of risk related to COVID-19.

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Item 2. ~~Management’s~~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 2020 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.

Forward-Looking Statements

Some matters discussed in this Form10-Q may be ~~“forward-looking statements”~~“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,~~“anticipate,”“believe,”“estimate,”“may,”“intend,” and “expect.” ~~“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 continuing 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 continuing 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~~Company’s credit customers; risks associated with concentrations in real estate related loans; changes in accounting standards and ~~interpretations~~;interpretations; and other risks as may be detailed from time to time in the ~~Company’s~~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.

~~Critical Accounting Estimates~~Introduction

In July 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. The Bank is an insured bank under the Federal Deposit Insurance Act and 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 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’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.

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COVID-19 Impact

The coronavirus (“COVID-19”) pandemic and the Federal Reserve's response to the economic challenges during the 2020 and 2021 has resulted in an uncertain and rapidly evolving economy. In the early stages of the pandemic, a significant portion of staff worked remotely, but essentially all staff have returned to the office as of June 30, 2021. In addition to remote work arrangements, the Company has taken many other measures to protect employees and customers, including, adherence to state mask wearing mandates, social distancing, sanitizing protocols and posting of public safety notices on branch buildings.

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. The Company has increased the qualitative factors used in the determination of the adequacy of the allowance for loan and lease loss in anticipation of the impact that COVID-19 will have on clients and their ability to fulfill their obligations. There is no certainty that the allowance for loan losses as of June 30, 2021 will be sufficient to absorb the losses that stem from the impact of COVID-19 on the Company’s clients. No loan loss provisions were warranted during the first six months of 2021 because credit quality remained strong with only one outstanding loan with a balance of $362,000 on non-accrual status, and PPP loans do not require a reserve because they are guaranteed by the federal government through the SBA program. The Company funded new PPP loans totaling $101 million under the Second Draw PPP during the first six months of 2021 which partially contributed to total PPP interest and fee income of $2,202,000 and $4,793,000 recorded during the three and six months ended June 30, 2021, respectively. As of June 30, 2021, only one borrowing relationship consisting of 4 loans totaling $8,381,000 has experienced economic hardship related to COVID-19 during 2021 and the Bank responded by deferring principal payments, and thus converting the loans to interest-only for the remainder of 2021. As the longer-term effects on clients from the COVID-19 pandemic become more apparent, it may be necessary to charge-off some or all of the balance on certain loans and make further provisions to increase the allowance for loan and lease losses. These potential additional provisions for loan and lease losses will have a direct impact upon capital, including the potential need to reevaluate a valuation allowance on our deferred tax asset. At this time, the Company does not expect that there would be any material impairment to the valuation of other long-lived assets, right of use assets, or our investment securities. The Company completed its funding of PPP loans during the second quarter of 2021 and does not expect to fund any other PPP loans as the funding phase of the program has expired. The Company expects the vast majority of outstanding PPP loans to be forgiven during 2021, which should result in relatively high levels of loan fees recognized during the third and fourth quarters of 2021, but is expected to drop off significantly in 2022.

Increased demand for liquidity by clients is another impact that could occur should the COVID-19 effects be prolonged. As of June 30, 2021, the Company and the Bank's on-balance sheet liquidity was very strong and combined with contingent liquidity resources, management believes that the Bank has sufficient resources to meet the liquidity needs of its 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 the 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 the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2020, for additional discussion of risks related to the COVID-19 pandemic.

Critical Accounting Estimates

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

Allowance for Loan Losses

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 specific review of individual loans,

●

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

●

~~our judgmental~~

● management’s estimate based on various subjective factors.

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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.

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:

●

● concentration of credits,

●

~~nature and volume of the loan portfolio,~~

●

~~delinquency trends,~~

●

~~non-accrual loan trend,~~

●

~~problem loan trend,~~

●

~~loss and recovery trend,~~

●

~~quality of loan review,~~

●

~~lending and management staff,~~

●

~~lending policies and procedures,~~

●

~~economic and business conditions, and~~

●

~~other external factors, including regulatory review.~~

~~Our~~● nature and volume of the loan portfolio,

● delinquency trends,

● non-accrual loan trends,

● problem loan trends,

● loss and recovery trends,

● quality of loan review,

● lending and management staff,

● lending policies and procedures,

● economic and business conditions, and

● other external factors, including regulatory review.

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.

Non-Accrual Loan Policy

Interest on loans is credited to income as earned and is accrued only if deemed collectible. Accrual of interest is discontinued when a loan is over 90 days delinquent or if management believes that collection is highly uncertain. Generally, payments received on 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.

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Asset Impairment Judgments

Certain ~~of our~~ assets are carried in ~~our~~the condensed 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.

Other ~~real estate assets~~Real Estate Owned (“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.

Fair Value Measurements

~~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.

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Income Taxes

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.

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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.

~~Introduction~~

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

~~Oak Valley Community Bank commenced operations in May~~ 1991. We are an insured bank under the Federal Deposit Insurance Act and are a member of the Federal Reserve. Since its formation, the Bank has provided basic banking services to individuals and business enterprises in Oakdale, California and the surrounding areas. The focus of the Bank is to offer a range of commercial banking services designed for both individuals and small to medium-sized businesses in the two main areas of service of the 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~~’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.2016.

Overview of Results of Operations and Financial Condition

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~~six-month period ended ~~September~~June 30, ~~2017:~~2021:

The Company recognized net income of $2,468,000 and $7,505,000 for the three and nine month periods ended September 30, 2017, respectively, as compared to $1,930,000 and $5,343,000 for the same periods in 2016. The factors contributing to these results will be discussed below.

•

The Company recognized ~~loan loss provisions~~net income of ~~$70,000~~$3,960,000 and ~~$105,000~~$8,316,000 for the three and ~~nine month~~six-month periods ended ~~September~~June 30, ~~2017,~~2021, respectively, as compared to ~~$90,000~~$2,581,000 and ~~$415,000 during~~$5,290,000 for the same periods in 2020. The second quarter and year-to-date net income increase was mainly due to growth of ~~2016. This variance corresponds~~earning assets and corresponding net interest income, and a decrease in loan loss provision.

•

The Company recognized no loan loss provisions during the three and six-month periods ended June 30, 2021, as compared to ~~a lower volume~~$1,860,000 and $2,310,000 for the comparable periods of ~~gross loan growth~~2020. No provisions were warranted during the first ~~nine~~six months of ~~2017~~2021 because core loans, which exclude PPP loans, decreased by $9 million year-to-date, and PPP loans do not require a reserve, as they are guaranteed by the SBA.

•

Net interest income increased $842,000 or 7.6% and 2,856,000 or 13.4% for the three and six-month periods ended June 30, 2021, respectively, compared to the same periods in 2020. The increase was primarily due to an increase in earning assets including PPP loans, which earned interest and fees of $2,202,000 and $4,793,000 during the three and six-months ended June 30, 2021, respectively, which was offset by lower yields on all earning assets due to the FOMC rate cuts in March 2020.

•

Non-interest income increased by $382,000 or 37.3% and $273,000 or 11.8% for the three and six-months ended June 30, 2021, respectively, as compared to ~~2016,~~the same periods in 2020. The increase was primarily due to an increase in service charges on deposit accounts, an increase in debit card transaction fees, and ~~an improvement~~a decrease in ~~credit quality during 2017.~~the unrealized loss on one equity security.

Net interest income increased $791,000 or 10.1% and $1,680,000 or 7.2% for the three and nine month periods ended September 30, 2017, respectively, compared to the same periods in 2016. The increase was primarily due to the growth of our loan and investment security portfolios.

•

Non-interest expense increased by $1,341,000 or 19.5% and $1,612,000 or 11.3% for the three and six-month periods ended June 30, 2021, respectively, as compared to the same periods in 2020. The increase was primarily due to staffing increases and general operating costs related to servicing the growing loan and deposit portfolios, and a reduction in deferred costs associated with funded PPP loans recorded against salary expense.

Non-interest income increased by $199,000 or 18.5% and $1,612,000 or 50.9% for the three and nine months ended September 30, 2017, respectively, as compared to the same periods in 2016, primarily due to professional service provider settlement payments and an increase in gains on called securities.

•

Total assets increased $252,986,000 or 16.7%, total net loans decreased by $69,703,000 or 7.0% and investment securities increased by $19,599,000 or 8.9% in each case from December 31, 2020 to June 30, 2021, while deposits increased by $246,671,000 or 18.0% for the same period. Consequently, cash and cash equivalent balances increased by $299,146,000. The June 30, 2021 balance sheet totals were bolstered by the $151 million outstanding in PPP loans that began to fund during the second quarter of 2020. Total funding since commencement of the PPP loan program was $345 million and as of June 30, 2021, we’ve received $194 million in forgiveness payments from the SBA. The PPP loans consequently increased total deposits, as the PPP funded amounts were credited directly to the borrowers’ deposit accounts.

Non-interest expense increased by $136,000 or 2.3% and $44,000 or 0.2% for the three and nine month periods ended September 30, 2017, respectively, as compared to the same periods in 2016. The increase was partially due to staffing increases necessary for providing service on our growing loan and deposit portfolios.

Total assets decreased $5,389,000 or 0.5% from December 31, 2016. Total net loans increased by $25,807,000 or 4.3% and investment securities increased by $20,524,000 or 12.8% from December 31, 2016 to September 30, 2017, while deposits decreased by $12,377,000 or 1.4% for the same period. Consequently, liquid assets declined due to the decline in deposits and the funding of new loans and investment purchases, which was offset by the growth in equity due to earnings and securities valuation.

~~Table of Contents~~

Income Summary

For the three and ~~nine month~~six-month periods ended ~~September~~June 30, ~~2017,~~2021, the Company recorded net income of ~~$2,468,000~~$3,960,000 and ~~$7,505,000,~~$8,316,000, respectively, representing increases of ~~$538,000~~$1,379,000 and ~~$2,162,000,~~$3,026,000, as compared to ~~$1,930,000 and $5,343,000 recorded during~~ the same periods in ~~2016.~~2020. Return on average assets (annualized) was ~~0.98%~~0.93% and ~~1.01%~~1.02% for the three and ~~nine months~~six-months ended ~~September~~June 30, ~~2017,~~2021, respectively, as compared to ~~0.82%~~0.75% and ~~0.78%~~0.84% for the same periods in ~~2016.~~2020. Annualized return on average common equity was ~~11.04%~~11.77% and ~~11.64%~~12.59% for the three and ~~nine months~~six-months ended ~~September~~June 30, ~~2017,~~2021, respectively, as compared to ~~9.28%~~8.80% and ~~8.83%~~9.15% for the same periods ~~of 2016.~~

in 2020. Net income before provisions for income taxes increased ~~$874,000~~by $1,743,000 and ~~$3,558,000~~$3,827,000 for the three and ~~nine month~~six-month periods ended ~~September~~June 30, ~~2017,~~2021, respectively, from the comparable ~~2016~~2020 periods. The income statement components of these variances are as follows:

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Pre-Tax Income Variance Summary:

(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			Effect on Pre-Tax Income			Effect on Pre-Tax Income
Change from 2016 to 2017 in:
							*Increase (Decrease)*			*Increase (Decrease)*
							Three Months Ended			Six Months Ended
							June 30, 2021			June 30, 2021
Change from 2020 to 2021 in:
Net interest income	$	791		$	1,680		$	842		$	2,856
Provision for loan losses		20			310			1,860			2,310
Non-interest income		199			1,612			382			273
Non-interest expense		(136	)		(44	)		(1,341	)		(1,612	)
Change in net income before income taxes	$	874		$	3,558		$	1,743		$	3,827

These variances will be explained in the discussion below.

Net Interest Income

Net interest income is the largest source of the ~~Company~~’sCompany’s operating income. For the three and ~~nine month~~six-month periods ended ~~September~~June 30, ~~2017,~~2021, net interest income was ~~$8,620,000~~$11,988,000 and ~~$25,157,000,~~$24,230,000, respectively, which represented increases of ~~$791,000~~$842,000 or ~~10.1%~~7.6% and ~~$1,680,000~~$2,856,000 or ~~7.2%~~13.4%, from the comparable periods in ~~2016.~~2020. The increase iswas primarily due to ~~loan~~an increase in earning assets including PPP loans which earned interest and ~~investment portfolio growth.~~fees of $2,202,000 and $4,793,000 during the three and six-months ended June 30, 2021, respectively, compared to $1,092,000 in both the three and six-month periods of 2020.

The net interest margin (net interest income as a percentage of average i~~nterest~~interest earning assets) was ~~3.78%~~3.09% and ~~3.74%~~3.56% for the three and ~~nine month~~six-month periods ended ~~September~~June 30, ~~2017,~~2021, respectively, compared to ~~3.73%~~3.55% and ~~3.84%~~3.72% for the same periods in ~~2016.~~2020. 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~~strong deposit growth resulting in high levels of low-yielding cash equivalent balances, and the ~~average loan balance and~~negative impact that the FOMC interest rate cuts had on our yield on earning assets.

E~~arning~~ The PPP loan production further compressed the interest margin because PPP loans earn an interest rate of only 1%. Earning asset yield ~~increased~~decreased by 749 and 51 basis points for the three ~~month period~~and six-month periods ended ~~September~~June 30, ~~2017, but decreased by 8 basis points for the nine month period ended September 30, 2017,~~2021, respectively, as compared to the same periods of ~~2016. The quarter over quarter increase is mainly due to an increase in loan volume, loan yield, and~~2020. 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 organic loan portfolio and investment portfolios which recognized average balance increases of $47 million and $26 million, respectively, in the nine month period of 2017 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.security portfolio.

~~Table of Contents~~

The cost of funds on interest-bearing ~~liabilities increased~~liabilities decreased by 5 ~~basis points~~ and 47 basis points for the three and ~~nine month~~six-month periods of ~~2017,~~2020, respectively, as compared to the same periods in ~~2016, as deposit rates remain low and the banking industry has not reacted to the recent FOMC interest rate hikes thus far.~~2020. The Company continues to recognize strong core deposit growth as evidenced by the increase in average non-interest-bearing demand deposit balances of ~~$48~~$162 million, for the ~~nine month~~six-month period ended ~~September~~June 30, ~~2017,~~2021, as compared to the same period of ~~2016.~~2020. Deposit balances were bolstered by the PPP loans, as the funded amounts were credited directly to the borrowers’ deposit accounts.

Net interest income has already been impacted by the COVID-19 since early 2020 and certain risks still exist. Net interest income has in fact steadily increased since the pandemic began, however this is primarily due to interest and fees on PPP loans which is only temporary and there may be additional negative effects to net interest income related to the pandemic. First, interest rates declined sharply at the end of the first quarter of 2020 causing a reduction in the yield on our earning assets which will continue as assets mature and reprice. Second, if the economy worsens to the point of another economic recession, it 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 June 30, 2021, 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.

Table of Contents

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~~six-month periods ended ~~September~~June 30, ~~2017~~2021 and ~~2016:~~2020:

Net Interest Analysis

	Three Months Ended September 30, 2017							Three Months Ended September 30, 2016								Three Months Ended June 30, 2021							Three Months Ended June 30, 2020
(in thousands)	Average Balance		Interest Income / Expense		Avg Rate/ Yield (5)			Average Balance		Interest Income / Expense		Avg Rate/ Yield (5)				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)	$	627,372	$	7,339		4.64	%	$	586,070	$	6,811		4.61	%		$	992,690	$	10,886		4.40	%	$	935,119	$	9,842		4.22	%
Investment securities (2)		174,041		1,413		3.22	%		147,728		1,300		3.49	%			222,176		1,529		2.76	%		240,900		1,833		3.05	%
Federal funds sold		9,041		28		1.23	%		3,421		4		0.46	%			33,970		7		0.08	%		19,261		4		0.08	%
Interest-earning deposits		127,915		429		1.33	%		122,052		169		0.55	%			337,739		76		0.09	%		92,890		29		0.13	%
Total interest-earning assets		938,369		9,209		3.89	%		859,271		8,284		3.82	%			1,586,575		12,498		3.16	%		1,288,170		11,708		3.65	%
Total noninterest earning assets		60,522							72,760								112,411							90,695
Total Assets		998,891							932,031								1,698,986							1,378,865
Liabilities and Shareholders' Equity:															Liabilities and Shareholders' Equity:
Interest-bearing liabilities:
Interest-earning DDA		202,094		73		0.14	%		178,291		44		0.10	%			368,301		122		0.13	%		283,008		119		0.17	%
Money market deposits		289,893		151		0.21	%		284,917		76		0.11	%			350,887		91		0.10	%		263,398		103		0.16	%
Savings deposits		66,673		8		0.05	%		74,994		31		0.16	%			139,639		17		0.05	%		94,190		11		0.05	%
Time certificates of deposit $250,000 or more		18,822		17		0.36	%		22,118		18		0.32	%
Other time deposits		32,288		25		0.31	%		33,029		27		0.32	%
Other borrowings		0		0		0.00	%		13		0		0.00	%
Time deposits $250,000 and under																	21,812		15		0.28	%		19,582		14		0.29	%
Time deposits over $250,000																	17,359		14		0.32	%		17,755		28		0.63	%
Other Borrowings																	0		0		0.00	%		41,099		32		0.31	%
Total interest-bearing liabilities		609,770		274		0.18	%		593,362		196		0.13	%			897,998		259		0.12	%		719,032		307		0.17	%
Noninterest-bearing liabilities:
Noninterest-bearing deposits		294,854							251,759								567,522							527,059
Other liabilities		5,591							4,433								98,527							15,110
Total noninterest-bearing liabilities		300,445							256,192								666,049							542,169
Shareholders' equity		88,676							82,477								134,939							117,664
Total liabilities and shareholders' equity	$	998,891						$	932,031							$	1,698,986						$	1,378,865
Net interest income			$	8,935						$	8,088							$	12,239						$	11,401
Net interest spread (3)						3.72	%						3.69	%							3.04	%						3.47	%
Net interest margin (4)						3.78	%						3.73	%							3.09	%						3.55	%

(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%~~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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	Six months ended June 30, 2021							Six months ended June 30, 2020
(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)	$	1,008,330	$	22,092		4.42	%	$	845,169	$	18,654		4.43	%
Investment securities (2)		215,206		2,986		2.80	%		217,441		3,342		3.08	%
Federal funds sold		32,360		14		0.09	%		16,424		46		0.56	%
Interest-earning deposits		275,581		125		0.09	%		95,665		396		0.83	%
Total interest-earning assets		1,531,477		25,217		3.32	%		1,174,699		22,438		3.83	%
Total noninterest earning assets		107,735							86,050
Total assets		1,639,212							1,260,749
Liabilities and Shareholders' Equity:
Interest-bearing liabilities:
Interest-earning DDA		353,990		224		0.13	%		268,356		296		0.22	%
Money market deposits		336,688		181		0.11	%		249,744		204		0.16	%
Savings deposits		133,066		33		0.05	%		88,652		21		0.05	%
Time deposits $250,000 and under		21,811		30		0.28	%		19,761		27		0.27	%
Time deposits over $250,000		16,863		28		0.33	%		17,521		57		0.64	%
Other Borrowings		0		0		0.00	%		20,549		32		0.31	%
Total interest-bearing liabilities		862,418		496		0.12	%		664,913		637		0.19	%
Noninterest-bearing liabilities:
Noninterest-bearing deposits		627,510							465,184
Other liabilities		16,092							14,752
Total noninterest-bearing liabilities		643,602							479,936
Shareholders' equity		133,192							115,900
Total liabilities and shareholders' equity	$	1,639,212						$	1,260,749
Net interest income			$	24,721						$	21,801
Net interest spread (3)						3.20	%						3.64	%
Net interest margin (4)						3.26	%						3.72	%

(1)

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%~~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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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~~six-month periods ended ~~September~~June 30, ~~2017~~2021 and ~~2016.~~2020. 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									June 30, 2021 vs 2020
	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		$	606		$	438		$	1,044
Investment securities (2)		232			(119	)		113			(142	)		(162	)		(304	)
Federal funds sold		7			17			24			3			0			3
Interest-earning deposits		8			252			260			76			(29	)		47
Total interest income	$	727		$	198		$	925		$	543		$	247		$	790

Interest expense:
Interest-earning DDA		6			23			29			36			(33	)		3
Money market deposits		1			74			75			34			(46	)		(12	)
Savings deposits		(3	)		(20	)		(23	)		5			1			6
Time CD $250K or more		(3	)		2			(1	)
Other time deposits		(1	)		(1	)		(2	)
Other borrowings		0			0			0
Time deposits $250,000 and under											2			(1	)		1
Time deposits over $250,000											(1	)		(13	)		(14	)
Other Borrowings											(32	)		0			(32	)
Total interest expense	$	0		$	78		$	78		$	44		$	(92	)	$	(48	)

Change in net interest income	$	727		$	120		$	847		$	499		$	339		$	838

(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~~$499,000 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 second quarter of 2021 as compared to the same period of 2020. Changes in earning asset yields and rates on interest-bearing liabilities resulted in an increase of ~~$727,000~~$339,000 to net interest income, over the same period. This increase was mainly due to interest and fees on PPP loans as described above.

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	For the Six Months Ended June 30,
	2021 vs 2020
	Increase (Decrease)
	in interest income and expense
(in thousands)	due to changes in:
	Volume			Rate			Total
Interest income:
Gross loans (1) (2)	$	3,601		$	(163	)	$	3,438
Investment securities (2)		(34	)		(322	)		(356	)
Federal funds sold		45			(77	)		(32	)
Interest-earning deposits		746			(1,017	)		(271	)
Total interest income	$	4,358		$	(1,579	)	$	2,779

Interest expense:
Interest-earning DDA	$	94		$	(166	)	$	(72	)
Money market deposits		71			(94	)		(23	)
Savings deposits		11			1			12
Time deposits $250,000 and under		3			0			3
Time deposits over $250,000		(2	)		(27	)		(29	)
Other Borrowings		(32	)		0			(32	)
Total interest expense	$	145		$	(286	)	$	(141	)

Change in net interest income	$	4,213		$	(1,293	)	$	2,920

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)(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 a~~bove~~above reflects ~~a decrease~~an increase of ~~$652,000~~$4,213,000 in net interest income due to ~~rate changes for the nine month period~~growth 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 during the first six months of 2021 as compared to the same periods of 2021. The decrease in earning asset yields and rates on interest-bearing liabilities triggered by recent FOMC rate cuts resulted in ~~an increase~~a decrease of ~~$2,422,000~~$1,293,000 to net interest income, over the same period.

Provision for Loan Losses

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 no loan loss provisions during the three and six-months ended June 30, 2021, as compared to $1,860,000 and $2,310,000 during the same periods of 2020. No loan loss provisions were warranted during the first six months of 2021 because credit quality remained strong with only one outstanding loan with a balance of $362,000 on non-accrual status. The gross loan decrease during the quarter was mainly related to PPP loans, which do not require a reserve because they are guaranteed by the federal government through the SBA program. The provisions recorded during 2020 were primarily due 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. In particular, the loan loss provision of $1.86 million during the three months ended June 30, 2020 was mainly attributable to qualitative risk factor adjustments corresponding to 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 and ~~nine month~~six-month periods ended ~~September~~June 30, ~~2017,~~2021, non-interest income was ~~$2,036,000~~$1,405,000 and ~~$3,507,000,~~$2,580,000, respectively, representing increases of ~~$980,000~~$382,000 or ~~92.8%~~37.3% and ~~$1,414,000~~273,000 or ~~67.6%~~11.8%, compared to the same periods in ~~2016.~~2020. The increase is partially due to higher debit card transaction fee income as business and consumer spending patterns have shifted to electronic payment methods amid the COVID-19 pandemic.

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

(in thousands)	For the Three Months Ended September 30,										For the Three Months Ended June 30,
	2017		2016		$ change			% change			2021		2020		$ change		% change
Service charges on deposits	$	365	$	341	$	24			7.0	%	$	323	$	269	$	54		20.1	%
Debit card transaction fee income												427		312		115		36.9	%
Earnings on cash surrender value of life insurance		130		102		28			27.5	%		184		176		8		4.5	%
Mortgage commissions		28		49		(21	)		(42.9%	)		52		6		46		766.7	%
Gains on calls and sales of securities		4		10		(6	)		(60.0%	)
Gains on calls of available-for-sale securities												1		1		0		0.0	%
Other income		749		575		174			30.3	%		418		259		159		61.4	%
Total non-interest income	$	1,276	$	1,077	$	199			18.5	%	$	1,405	$	1,023	$	382		37.3	%

~~Table of Contents~~

(in thousands)	For the Six Months Ended June 30,
	2021		2020		$ change			% change
Service charges on deposits	$	618	$	656	$	(38	)		-5.8	%
Debit card transaction fee income		808		607		201			33.1	%
Earnings on cash surrender value of life insurance		348		350		(2	)		-0.6	%
Mortgage commissions		84		51		33			64.7	%
Gains on calls of available-for-sale securities		1		1		0			0.0	%
Other income		721		642		79			12.3	%
Total non-interest income	$	2,580	$	2,307	$	273			11.8	%

(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 ~~charges~~charges on deposits increased by ~~$24,000~~$54,000 and ~~$40,000~~decreased by $38,000 for the three and ~~nine months~~six-months ended ~~September~~June 30, ~~2017,~~2021, respectively, compared to the same periods in ~~2016,~~2020. The second quarter increase was due to anstrong growth of our core customer base and corresponding service fee income related to servicing loan and deposit accounts. The year-to-date decrease was due to higher deposit account balances corresponding to PPP loans and government stimulus payments, coupled with changes in customer spending patterns amid the COVID-19 pandemic resulting in lower overdraft fees in 2021 compared to 2020.

Debit card transaction fee income increased by $115,000 and $201,000 for the three and six-months ended June 30, 2021, respectively, compared to the same periods in 2020. The increase during 2021 is attributable to changes in business and consumer spending patterns have shifted to electronic payment methods amid the ~~number of deposit accounts.~~COVID-19 pandemic.

Earnings on cash surrender value of life insurance increased by ~~$28,000~~$8,000 and ~~$81,000~~decreased by $2,000 for the three and ~~nine months~~six-months ended ~~September~~June 30, ~~2017,~~2021, respectively, compared to the same periods in ~~2016, due~~2020, corresponding to normal fluctuations in yields paid from the ~~five most recently issued policies that began accruing earnings during the fourth quarter of 2016.~~insurance carriers.

~~Mortgag~~eMortgage commissions ~~decreased~~increased by ~~$21,000~~$46,000 and ~~$17,000~~$33,000 for the three and ~~nine months~~six-months ended ~~September~~June 30, ~~2017,~~2021, respectively, as compared to the same periods of ~~2016,~~2020, 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.~~from last year.

Other ~~inco~~meincome increased by ~~$174,000~~$159,000 and ~~$1,142,000~~$79,000 for the three and ~~nine month~~six-month periods ended ~~September~~June 30, ~~2017,~~2021, respectively, as compared to the same periods of ~~2016. The quarter-over-quarter increase is~~2020, mainly 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.~~in investment advisory 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 September 30,										For the Three Months Ended June 30,
	2017		2016		$ change			% change			2021		2020		$ Change		% Change
Salaries and employee benefits	$	3,534	$	3,225	$	309			9.6	%	$	5,052	$	3,947	$	1,105		28.0	%
Occupancy		823		819		4			0.5	%
Occupancy expenses												985		886		99		11.2	%
Data processing fees		399		435		(36	)		(8.3%	)		531		505		26		5.1	%
Regulatory assessments (FDIC & DBO)		102		178		(76	)		(42.7%	)
Other		1,202		1,267		(65	)		(5.1%	)
Regulatory assessments (FDIC & DFPI)												132		72		60		83.3	%
Other operating expenses												1,515		1,464		51		3.5	%
Total non-interest expense	$	6,060	$	5,924	$	136			2.3	%	$	8,215	$	6,874	$	1,341		19.5	%

(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~~

(in thousands)	For the Six Months Ended June 30,
	2021		2020		$ Change			% Change
Salaries and employee benefits	$	9,795	$	8,548	$	1,247			14.6	%
Occupancy expenses		1,951		1,754		197			11.2	%
Data processing fees		1,025		999		26			2.6	%
Regulatory assessments (FDIC & DFPI)		249		102		147			144.1	%
Other operating expenses		2,915		2,920		(5	)		-0.2	%
Total non-interest expense	$	15,935	$	14,323	$	1,612			11.3	%

Non-interest expenses increased by ~~$136,000~~$1,341,000 or ~~2.3%~~19.5% and ~~$44,000~~$1,612,000 or ~~0.2%~~11.3% for the three and ~~nine months~~six-months ended ~~September~~June 30, ~~2017,~~2021, respectively, as compared to the same periods of ~~2016.~~2020. Salaries and employee benefits increased ~~$309,000~~$1,105,000 and ~~$653,000~~$1,247,000 for the three and ~~nine months~~six-months ended ~~September~~June 30, ~~2017,~~2021, respectively, as compared to the same periods of ~~2016, primarily~~2020. The increase is due to additional staffing expense required to support the continued loan and deposit ~~growth.~~growth and a decrease in deferred cost adjustments on funded PPP loans that are recorded against salary expense.

Occupancy expenses in~~creased~~increased by ~~$4,000~~$99,000 and ~~$26,000~~$197,000 for the three and ~~nine months~~six-months ended ~~September~~June 30, ~~2017,~~2021, respectively, as compared to the same periods of ~~2016, which is primarily~~2020, mainly due to ~~rent and general overhead associated with~~depreciation expense on new ATM machines that were placed into service during the ~~branches.~~ second quarter of 2020.

Data processing fees ~~decreased~~increased by ~~$36,000 and $192,000~~$26,000 for the three and ~~nine month~~six-month periods ended ~~September~~June 30, ~~2017, respectively, as~~2021 and 2020. The number of loan and deposit accounts has increased resulting in the slight increase which was partially offset by a ~~result of cost efficiencies gained from the conversion of the Mother Lode Bank~~lower pricing structure that was negotiated with our third-party core ~~data system completed in April 2016.~~service provider.

FDIC and ~~DBO~~ ~~(California~~California Department of ~~Business Oversight)~~Financial Protection and Innovation (DFPI) regulatory assessments ~~decreased~~increased by ~~$76,000~~$60,000 and ~~$124,000~~$147,000 for the three and ~~nine months~~six-months ended ~~September~~June 30, ~~2017,~~2021, respectively as compared to the same periods in ~~2016.~~2020. 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 was met in the early part of 2019 and therefore the Company did not recognize any expense for FDIC assessments during the last six months of 2019 and the first quarter of 2020. The Company resumed its expense accrual during the second quarter of 2020, when the credit was fully utilized. 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 ~~our~~the Company’s risk profile has remained at stable ~~during 2016~~levels in 2020 and ~~2017. In April~~2021 thus far, resulting in a relatively low assessment rate. However, management recognizes that it could be offset by deposit growth throughout the remainder 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~~2021 and ~~resulting calculated expense,~~into 2022, as the FDIC assessment rates are applied to average quarterly total liabilities as the primary basis.

Other expense increased by $51,000 and decreased by ~~$65,000 and $319,000~~$5,000 for the three and ~~nine months~~six-months ended ~~September~~June 30, ~~2017,~~2021, respectively, as compared to the same periods in ~~2016, partially as~~2020, due to increases in a ~~result~~variety of ~~a $204,000 decrease in merger related~~general operating expenses ~~on a year-to-date basis. Additionally,~~which is typical given 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.~~Company’s business portfolios continued expansion.

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

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Income Taxes

WeThe Company reported provisions for income taxes of ~~$1,298,000~~$1,218,000 and ~~$3,987,000~~$2,559,000 for the three and ~~nine month~~six-month periods ended ~~September~~June 30, ~~2017,~~2021, respectively, representing increases of ~~$336,000~~$364,000 and ~~$1,396,000 as~~$801,000 compared to the provisions reported in the comparable periods of ~~2016.~~2020. The effective income tax ~~rates~~rate on income from continuing operations was ~~34.5% and 34.7%~~23.5% for the three and ~~nine months~~six-months ended ~~September~~June 30, ~~2017, respectively,~~2021, compared to ~~33.3% and 32.7%~~24.9% for the comparable periods of ~~2016.~~2020. 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~~bank owned life insurance and certain tax-exempt loans). The disparity between the effective tax rates for ~~2017~~2021 as compared to ~~2016~~2020 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~~comprised a larger proportion of pre-tax income in ~~2016~~2021 as compared to ~~2017.~~2020.

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 oror principal, loans 90 days or more past due and still accruing interest and ~~other real estate owned (“OREO”).~~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~~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 ~~$1,311,000 at September~~$362,000 and $0 as of June 30, ~~2017, as compared to $3,037,000 at~~2021 and December 31, ~~2016.~~2020, respectively. The non-accrual loans as of ~~September~~June 30, ~~2017~~2021 are loans made to ~~three borrowers primarily~~one borrower for ~~residential~~commercial real ~~estate development and general commercial purposes.~~estate. As of ~~September~~June 30, ~~2017, we had five~~2021 and December 31, 2020, the Company did not have any loans ~~considered~~classified as troubled debt ~~restructurings totaling $1,311,000 million, all of which are included in non-accrual loans.~~restructurings.

OREO as of ~~September~~June 30, ~~2017~~2021 and December 31, 2020 consisted of ~~two properties,~~ one ~~of which was~~property, a residential land property 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. ~~The other~~There were no sales, acquisitions or fair value adjustments of OREO ~~asset was a residential property with a carrying value~~properties during the first six months of ~~$253,000 that was acquired through foreclosure.~~2021 and 2020.

~~Table of Contents~~

The following table presents information about the ~~Bank~~’sBank’s non-performing assets, including asset quality ratios as of ~~September~~June 30, ~~2017~~2021 and December 31, ~~2016:~~2020:

No~~n-Performing~~Non-Performing Assets

(in thousands)	September 30,			December 31,			June 30,			December 31,
	2017			2016			2021			2020
Loans in non-accrual status	$	1,311		$	3,037		$	362		$	0
Loans past due 90 days or more and accruing		0			0			0			0
Total non-performing loans		1,311			3,037			362			0
Other real estate owned		253			1,210			0			0
Total non-performing assets	$	1,564		$	4,247		$	362		$	0

Allowance for loan losses	$	7,917		$	7,832		$	11,327		$	11,297

Asset quality ratios:
Non-performing assets to total assets		0.16	%		0.42	%		0.02	%		0.00	%
Non-performing loans to total loans		0.21	%		0.50	%		0.04	%		0.00	%
Allowance for loan losses to total loans		1.24	%		1.28	%		1.20	%		1.12	%
Allowance for loan losses to total non-performing loans		603.9	%		257.9	%		3129.16	%		NA

~~Non-performing~~Non-performing assets ~~decreased~~increased by ~~$1,005,000~~$362,000 as of ~~September~~June 30, ~~2017,~~2021, as compared to December 31, ~~2016, as a result of principal payments of $854,000 and~~2020, due to one commercial real estate 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~~quarter due to ~~OREO properties during the first nine months of 2017.~~delinquent payments.

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

Due to credit risk inherent in ~~our~~the lending business, wethe Company routinely ~~set~~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 ~~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 no loan loss provisions ~~of $70,000 and $105,000~~ during the three and ~~nine~~six-months ended June 30, 2021, as compared to $1,860,000 and $2,310,000 in the same periods of 2020.

The provisions during 2020 were 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. In particular, the loan loss provision of $1.86 million during the three months ended ~~September~~June 30, ~~2017, respectively, compared~~2020 was mainly related to ~~provisions of $90,000 and $415,000 during~~qualitative risk factor adjustments corresponding to the ~~comparable periods of 2016.~~COVID-19 pandemic.

The allowance forfor loan losses increased by ~~$85,000 or 1.1%,~~$30,000 to ~~$7,917,000 at September~~$11,327,000 as of June 30, ~~2017,~~2021, as compared to ~~$7,832,000 at~~$11,297,000 as of December 31, ~~2016,~~2020, due to ~~the $105,000 loan loss provision which was offset by~~ net loan ~~charge-off~~recoveries of ~~$20,000 recorded~~$30,000 during the ~~nine month period~~first six months of ~~2017. Improved credit quality~~2021. These factors combined with the decrease in the gross loan ~~growth~~balance resulted in ~~a decrease to~~an increase in the allowance for loan losses as a percentage of total loans to ~~1.24% at September~~1.20% as of June 30, ~~2017~~2021, as compared to ~~1.28% at~~1.12% as of December 31, ~~2016.~~2020. This increase is mainly due to paydowns of the PPP loans outstanding at June 30, 2021 that do not require a loan loss reserve as they are guaranteed by the federal government through the SBA program.

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~~as of June 30, ~~2017~~2021 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.

~~Table of Contents~~

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~~June 30, ~~2017,~~2021, and December 31, ~~2016, we~~2020, the Company had ~~$139,628,000~~$525,802,000 and ~~$190,810,000,~~$226,656,000, 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 $3,413,000 as of June 30, 2021. 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.

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~~

Table 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.~~

Contents

Deposits

Total deposits at ~~September~~as of June 30, ~~2017~~2021 were ~~$901,716,000,~~$1,614,480,000, a ~~$12,377,000~~$246,671,000 or ~~1.4% decrease~~18.0% increase from the deposit total of ~~$914,093,000 at~~$1,367,809,000 as of December 31, ~~2016.~~2020. Average deposits increased ~~$75,123,000~~by $359,831,000 to ~~$902,632,000~~$1,489,928,000 for the ~~nine month~~six-month period ended ~~September~~June 30, ~~2017~~2021 as compared to the same period in ~~2016. We believe we~~2020, mainly due to core deposit growth as the PPP Program provided opportunities to win the business of various business clients. PPP loan funds were consequently credited directly to borrowers’ deposit accounts. 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% )

~~Table of Contents~~

	June 30,		December 31,		Six Month Change
(in thousands)	2021		2020		$			%

Demand	$	1,075,111	$	907,913		167,198			18.4	%
MMDA		360,265		301,506		58,759			19.5	%
Savings		140,098		120,552		19,546			16.2	%
Time < $250K		21,619		16,134		5,485			34.0	%
Time > $250K		17,387		21,704		(4,317	)		(19.9	%)
	$	1,614,480	$	1,367,809	$	246,671			18.0	%

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~~Seven 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~~as of June 30, ~~2017. We believe~~2021. 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~~June 30, ~~2017~~2021 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.2020.

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”) as an alternative to retail deposit funds. ~~Our~~The Company took out a $50 million FHLB advance in April 2020 in anticipation of funding a large volume of PPP loans, which was fully paid off during July 2020. As of June 30, 2021 and December 31, 2020, there were no outstanding FHLB advances ~~remained a zero balance at December 31, 2016 and September 30, 2017,~~or borrowings of any kind, 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)~~DFPI and the Federal Reserve Board. The Federal Reserve Board is the primary federal regulator of state member banks. The Bank is also subject to regulation by the FDIC, which insures the Bank’s deposits as permitted by law. ~~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.

~~The Company must comply with regulatory capital requirements established by~~Under the ~~FRB. Failure to meet minimum capital requirements can initiate certain mandatory, and possibly additional discretionary, actions by regulators that, if undertaken, could have a direct material effect on our financial statements. 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 ~~January 1, 2015.~~

~~Table~~certain activities including payment of ~~Contents~~

dividends, stock repurchases and discretionary bonuses to executive officers.

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.

Table of Contents

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

Actual

adequacy purposes

action provisions

Capital ratios for Bank:

Amount

Ratio

Amount

Ratio

Amount

Ratio

As of September 30, 2017

Total capital (to Risk- Weighted Assets)
$ 92,289 11.5% $ 73,996
>9.25%
$ 79,996
>10.0%

Tier I capital (to Risk- Weighted Assets)
$ 84,074 10.5% $ 57,997
>7.25%
$ 63,996
>8.0%

Common Equity Tier 1 Capital (to Risk Weighted Assets)
$ 84,074 10.5% $ 45,997
>5.75%
$ 51,997
>6.5%

Tier I capital (to Average Assets)
$ 84,074 8.5% $ 39,806
>4.0%
$ 49,757
>5.0%

As of December 31, 2016

Total capital (to Risk- Weighted Assets)
$ 86,603 11.3% $ 66,358
>8.625%
$ 76,937
>10.0%

Tier I capital (to Risk- Weighted Assets)
$ 78,487 10.2% $ 50,970
>6.625%
$ 61,549
>8.0%

Common Equity Tier 1 Capital (to Risk Weighted Assets)
$ 78,487 10.2% $ 39,430
>5.125%
$ 50,009
>6.5%

Tier I capital (to Average Assets)
$ 78,487 8.1% $ 38,726
>4.0%
$ 48,408
>5.0%

Capital ratios for the Company:

As of September 30, 2017

Total capital (to Risk- Weighted Assets)
$ 92,655 11.6% $ 74,000
>9.25%
N/A N/A
Tier I capital (to Risk- Weighted Assets)
$ 84,440 10.6% $ 58,000
>7.25%
N/A N/A
Common Equity Tier 1 Capital (to Risk Weighted Assets)
$ 84,440 10.6% $ 58,000
>5.75%
N/A N/A
Tier I capital (to Average Assets)
$ 84,440 8.5% $ 39,809
>4.0%
N/A N/A

As of December 31, 2016

Total capital (to Risk- Weighted Assets)
$ 86,966 11.3% $ 66,365
>8.625%
N/A N/A
Tier I capital (to Risk- Weighted Assets)
$ 78,850 10.3% $ 50,976
>6.625%
N/A N/A
Common Equity Tier 1 Capital (to Risk Weighted Assets)
$ 78,850 10.3% $ 39,435
>5.125%
N/A N/A
Tier I capital (to Average Assets)
$ 78,850 8.1% $ 38,731
>4.0%
N/A N/A

(in thousands)						Regulatory
	Actual					Minimum (1)
Capital ratios for Bank:	Amount		Ratio			Amount		Ratio

As of June 30, 2021
Total capital (to Risk- Weighted Assets)	$	137,219		13.7	%	$	104,980		>10.5	%
Tier I capital (to Risk- Weighted Assets)	$	125,457		12.6	%	$	84,984		>8.5	%
Common Equity Tier 1 Capital (to Risk Weighted Assets)	$	125,457		12.6	%	$	69,986		>7.0	%
Tier I capital (to Average Assets)	$	125,457		7.5	%	$	67,404		>4.0	%

As of December 31, 2020
Total capital (to Risk- Weighted Assets)	$	129,654		13.1	%	$	103,632		>10.5	%
Tier I capital (to Risk- Weighted Assets)	$	117,978		12.0	%	$	83,893		>8.5	%
Common Equity Tier 1 Capital (to Risk Weighted Assets)	$	117,978		12.0	%	$	69,088		>7.0	%
Tier I capital (to Average Assets)	$	117,978		8.0	%	$	59,306		>4.0	%

Capital ratios for the Company:

As of June 30, 2021
Total capital (to Risk- Weighted Assets)	$	137,407		13.7	%	$	104,986		>10.5	%
Tier I capital (to Risk- Weighted Assets)	$	125,645		12.6	%	$	84,989		>8.5	%
Common Equity Tier 1 Capital (to Risk Weighted Assets)	$	125,645		12.6	%	$	69,991		>7.0	%
Tier I capital (to Average Assets)	$	125,645		7.5	%	$	67,409		>4.0	%

As of December 31, 2020
Total capital (to Risk- Weighted Assets)	$	129,936		13.2	%	$	103,637		>10.5	%
Tier I capital (to Risk- Weighted Assets)	$	118,260		12.0	%	$	83,896		>8.5	%
Common Equity Tier 1 Capital (to Risk Weighted Assets)	$	118,260		12.0	%	$	69,091		>7.0	%
Tier I capital (to Average Assets)	$	118,260		8.0	%	$	59,309		>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~~as of June 30, ~~2017~~2021 were ~~$251.5~~$601.1 million compared to ~~$269.7~~$336.6 million atas of December 31, ~~2016. Our~~2020. The Company’s liquidity level measured as the percentage of liquid assets to total assets was ~~25.2% at September~~34.1% as of June 30, ~~2017 and~~2021, compared to 22.3% as of December 31, ~~2016. We anticipate~~2020. Liquid assets increased during the first six months of 2021, mainly due to the deposit increase of $246.7 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 at least 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~~June 30, ~~2017, our~~2021, the Company’s borrowing capacity from the FHLB was approximately ~~$255.1~~$331.4 million and there were no outstanding advances. WeThe Company also ~~maintain~~maintains 2 lines of credit with correspondent banks to purchase up to ~~$30~~$70 million in federal funds, for which there were no advances as of ~~September~~June 30, ~~2017.~~2021.

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

~~Off-Balance-Sheet~~Off-Balance Sheet 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~~June 30, ~~2017~~2021 and December 31, ~~2016, we~~2020, the Company had commitments to extend credit of ~~$116.6~~$167.1 million and ~~$110.8~~$145.7 million, respectively, which includes obligations under letters of credit of ~~$1.4~~$3.4 million and ~~$1.3 million.~~$2.9 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~~

Quantitative and Qualitative Disclosures About Market Risk

~~Not applicable.~~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 2020 Annual Report on Form 10-K. As of June 30, 2021, the Company’s exposures to market risk have not changed materially since December 31, 2020. We will continue to monitor our exposures to market risk in light of the COVID-19 pandemic.

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~~June 30, ~~2017~~2021 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.

4641

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PARTII - OTHER INFORMATION

~~Item 1.~~~~Legal Proceedings~~

Item 1.

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

~~Item 2.~~~~Unregistered Sales~~

As of ~~Equity~~the date of this Quarterly Report on Form 10-Q, there have been no material changes from the risk factors disclosed in our Annual Report on Form 10-K for the year ended December 31, 2020, filed with the Securities and ~~Use of Proceeds~~Exchange Commission on June 30, 2021.

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

None.

~~Item 3.~~~~Defaults Upon Senior Securities~~

Item 3.

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.INS101		~~XBRL Instance Document~~The following financial statements from the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 2021, formatted in Inline XBRL: (i) Condensed Consolidated Balance Sheets at June 30, 2021 (Unaudited) and December 31, 2020, (ii) Condensed Consolidated Statements of Income for the three-month periods ended June 30, 2021 and March 31, 2020 (Unaudited), (iii) Condensed Consolidated Statements of Comprehensive Income for the three-month periods ended June 30, 2021 and March 31, 2020 (Unaudited), (iv) Condensed Consolidated Statements of Changes of Shareholders’ Equity for the three-month periods ended June 30, 2021 and March 31, 2020 (Unaudited), (v) Condensed Consolidated Statements of Cash Flows for the three-month periods ended June 30, 2021 and March 31, 2020 (Unaudited), and (vi) Notes to Condensed Consolidated Financial Statements, tagged as blocks of text and including detailed tags

101.SCH104		Cover Page Interactive Data File (formatted as Inline XBRL ~~Taxonomy Extension Schema Document~~and contained in Exhibit 101)
101.CAL*		~~XBRL Taxonomy Extension Calculation Linkbase Document~~
101.DEF*		~~XBRL Taxonomy Extension Definition Linkbase Document~~
101.LAB*		~~XBRL Taxonomy Extension Label Linkbase Document~~
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~~August 13, 2021	By:	/s/ JEFFREY A. GALL
		Jeffrey A. Gall
			Senior Vice President and Chief Financial Officer
		(Principal Financial Officer and duly authorized signatory)
		~~signatory)~~

☒	QUARTERLY REPORT PURSUANT TO SECTION13 OR 15(d)OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2021

~~For the quarterly period ended~~ ~~September 30, 2017~~

OR

☐	TRANSITION REPORT UNDER SECTION13 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 ☐

(in thousands)	June 30,		December 31,
	2021		2020
ASSETS
Cash and due from banks	$	478,712	$	193,571
Federal funds sold		47,090		33,085
Cash and cash equivalents		525,802		226,656

Securities - available for sale		236,775		217,164
Securities - equity investments		3,413		3,425
Loans, net of allowance for loan losses of $11,327 and $11,297 at June 30, 2021 and December 31, 2020, respectively		927,543		997,246
Cash surrender value of life insurance		28,673		25,325
Bank premises and equipment, net		15,642		15,770
Goodwill and other intangible assets, net		3,694		3,740
Interest receivable and other assets		22,922		22,152

	$	1,764,464	$	1,511,478

LIABILITIES AND SHAREHOLDERS’ EQUITY

Deposits	$	1,614,480	$	1,367,809
Interest payable and other liabilities		13,364		13,975
Total liabilities		1,627,844		1,381,784

Shareholders’ equity
Common stock, no par value; 50,000,000 shares authorized, 8,231,983 and 8,218,873 shares issued and outstanding at at June 30, 2021 and December 31, 2020, respectively		25,435		25,435
Additional paid-in capital		4,430		4,216
Retained earnings		99,474		92,349
Accumulated other comprehensive income, net of tax		7,281		7,694
Total shareholders’ equity		136,620		129,694

	$	1,764,464	$	1,511,478

			Page
PARTI – FINANCIAL INFORMATION			1

Item 1.	Financial Statements		3 2

Condensed Consolidated Balance Sheets at ~~September~~June 30, ~~2017~~2021 (Unaudited) and December 31, ~~2016 (Unaudited)~~2020			4

~~Condensed Consolidated~~ ~~Statements of Income for the Three and Nine month period Ended September 30, 2017 and September 30, 2016 (Unaudited)~~		52

Condensed Consolidated Statements of Income for the three and six-month periods ended June 30, 2021 and June 30, 2020 (Unaudited)			3

Condensed Consolidated Statements of Comprehensive Income for the ~~Three~~three and ~~Nine month period Ended September~~six-month periods ended June 30, ~~2017~~2021 and ~~September~~June 30, ~~2016~~2020 (Unaudited)			64

Condensed Consolidated Statements of Changes ~~of Shareholders’~~in Shareholders’ Equity for the ~~Year Ended December 31, 2016~~three and ~~the Nine-month period Ended September~~six-month periods ended June 30, ~~2017~~2021 and June 30, 2020 (Unaudited)			75

Condensed Consolidated Statements of Cash Flows for the ~~Nine-month~~six-month periods ~~Ended September~~ended June 30, ~~2017~~2021 and ~~September~~June 30, ~~2016~~2020 (Unaudited)			8
		6

Notes to Condensed Consolidated Financial Statements			97

Item 2.	Management’s’s Discussion and Analysis of Financial Condition and Results of Operations		3125

Item 3.	Quantitative and Qualitative Disclosures About Market Risk		4641

Item 4.	Controls and Procedures		4641

PARTII – OTHER INFORMATION			4742

Item 1.	Legal Proceedings		4742
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		4742
Item 3.	Defaults Upon Senior Securities		4742
Item 4.	Mine Safety Disclosures		4742
Item 5.	Other Information		4742
Item 6.	Exhibits		4843

	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 JUNE 30,				SIX MONTHS ENDED JUNE 30,
	2021		2020		2021		2020
INTEREST INCOME
Interest and fees on loans	$	10,865	$	9,820	$	22,048	$	18,610
Interest on securities		1,299		1,599		2,537		2,958
Interest on federal funds sold		7		4		14		47
Interest on deposits with banks		76		29		125		396
Total interest income		12,247		11,452		24,724		22,011

INTEREST EXPENSE
Deposits		259		274		494		605
FHLB advances		0		32		0		32
Total interest expense		259		306		494		637

Net interest income		11,988		11,146		24,230		21,374
Provision for loan losses		0		1,860		0		2,310

Net interest income after provision for loan losses		11,988		9,286		24,230		19,064

NON-INTEREST INCOME
Service charges on deposits		323		269		618		656
Debit card transaction fee income		427		312		808		607
Earnings on cash surrender value of life insurance		184		176		348		350
Mortgage commissions		52		6		84		51
Gains on calls of available-for-sale securities		1		1		1		1
Other		418		259		721		642
Total non-interest income		1,405		1,023		2,580		2,307

NON-INTEREST EXPENSE
Salaries and employee benefits		5,052		3,947		9,795		8,548
Occupancy expenses		985		886		1,951		1,754
Data processing fees		531		505		1,025		999
Regulatory assessments (FDIC & DFPI)		132		72		249		102
Other operating expenses		1,515		1,464		2,915		2,920
Total non-interest expense		8,215		6,874		15,935		14,323

Net income before provision for income taxes		5,178		3,435		10,875		7,048

Total provision for income taxes		1,218		854		2,559		1,758
Net Income	$	3,960	$	2,581	$	8,316	$	5,290

Net income per share	$	0.49	$	0.32	$	1.02	$	0.65

Net income per diluted share	$	0.48	$	0.32	$	1.02	$	0.65

	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 JUNE 30, 2021 AND 2020
											Accumulated
						Additional					Other		Total
	Common Stock					Paid-in			Retained		Comprehensive		Shareholders’
(dollars in thousands)	Shares			Amount		Capital			Earnings		Income (Loss)		Equity

Balances, April 1, 2020		8,216,714		$	25,435	$	3,837		$	82,521	$	2,594	$	114,387
Restricted stock forfeited		(900	)		0		0			0		0		0
Restricted stock surrendered for tax withholding		(407	)		0		(6	)		0		0		(6	)
Stock based compensation					0		126			0		0		126
Other comprehensive income					0		0			0		2,819		2,819
Net income					0		0			2,581		0		2,581
Balances, June 30, 2020		8,215,407		$	25,435	$	3,957		$	85,102	$	5,413	$	119,907

Balances, April 1, 2021		8,235,939		$	25,435	$	4,279		$	95,514	$	6,714		131,942
Restricted stock forfeited		(3,300	)		0		0			0		0		0
Restricted stock surrendered for tax withholding		(656	)		0		0			0		0		0
Stock based compensation					0		151			0		0		151
Other comprehensive income					0		0			0		567		567
Net income					0		0			3,960		0		3,960
Balances, June 30, 2021		8,231,983		$	25,435	$	4,430		$	99,474	$	7,281	$	136,620

	SIX MONTHS ENDED JUNE 30, 2021 AND 2020
												Accumulated
						Additional						Other			Total
	Common Stock					Paid-in			Retained			Comprehensive			Shareholders’
(dollars in thousands)	Shares			Amount		Capital			Earnings			Income (Loss)			Equity

Balances, January 1, 2020		8,210,147		$	25,435	$	3,777		$	80,961		$	2,397		$	112,570
Restricted stock issued		14,006			0		0			0			0			0
Restricted stock forfeited		(2,400	)		0		0			0			0			0
Restricted stock surrendered for tax withholding		(6,346	)		0		(106	)		0			0			(106	)
Cash dividends declared $0.135 per share of common stock					0		0			(1,149	)		0			(1,149	)
Stock based compensation					0		286			0			0			286
Other comprehensive income					0		0			0			3,016			3,016
Net income					0		0			5,290			0			5,290
Balances, June 30, 2020		8,215,407		$	25,435	$	3,957		$	85,102		$	5,413		$	119,907

Balances, January 1, 2021		8,218,873		$	25,435	$	4,216		$	92,349		$	7,694		$	129,694
Restricted stock issued		22,207			0		0			0			0			0
Restricted stock forfeited		(3,300	)		0		0			0			0			0
Restricted stock surrendered for tax withholding		(5,797	)		0		(84	)		0			0			(84	)
Cash dividends declared $0.145 per share of common stock					0		0			(1,191	)		0			(1,191	)
Stock based compensation					0		298			0			0			298
Other comprehensive loss					0		0			0			(413	)		(413	)
Net income					0		0			8,316			0			8,316
Balances, June 30, 2021		8,231,983		$	25,435	$	4,430		$	99,474		$	7,281		$	136,620

	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

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

Available-for-sale securities:
U.S. agencies	$	26,780	$	513	$	(84	)	$	27,209	$	24,585	$	734	$	(1	)	$	25,318
Collateralized mortgage obligations		3,963		6		(29	)		3,940		1,078		16		(27	)		1,067
Municipalities		88,026		2,677		(103	)		90,600		135,034		8,975		(12	)		143,997
SBA pools		12,389		33		(15	)		12,407		4,478		21		(12	)		4,487
Corporate debt		19,356		98		(722	)		18,732		14,730		290		(71	)		14,949
Asset backed securities		24,727		137		(11	)		24,853		46,533		536		(112	)		46,957
Mutual fund		3,324		0		(208	)		3,116
	$	178,565	$	3,464	$	(1,172	)	$	180,857	$	226,438	$	10,572	$	(235	)	$	236,775

(dollars in thousands)	Amortized		Fair		Amortized		Fair
	Cost		Value		Cost		Value
Available-for-sale securities:
Due in one year or less	$	12,724	$	12,981	$	10,919	$	11,075
Due after one year through five years		57,326		57,740		82,660		87,365
Due after five years through ten years		56,841		58,143		76,337		80,232
Due after ten years		51,674		51,993		56,522		58,103
	$	178,565	$	180,857	$	226,438	$	236,775

(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

	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

	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%	)

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

As of September 30, 2017
Total capital (to Risk- Weighted Assets)	$	92,289		11.5%	$	73,996	>9.25%	$	79,996	>10.0%
Tier I capital (to Risk- Weighted Assets)	$	84,074		10.5%	$	57,997	>7.25%	$	63,996	>8.0%
Common Equity Tier 1 Capital (to Risk Weighted Assets)	$	84,074		10.5%	$	45,997	>5.75%	$	51,997	>6.5%
Tier I capital (to Average Assets)	$	84,074		8.5%	$	39,806	>4.0%	$	49,757	>5.0%

As of December 31, 2016
Total capital (to Risk- Weighted Assets)	$	86,603		11.3%	$	66,358	>8.625%	$	76,937	>10.0%
Tier I capital (to Risk- Weighted Assets)	$	78,487		10.2%	$	50,970	>6.625%	$	61,549	>8.0%
Common Equity Tier 1 Capital (to Risk Weighted Assets)	$	78,487		10.2%	$	39,430	>5.125%	$	50,009	>6.5%
Tier I capital (to Average Assets)	$	78,487		8.1%	$	38,726	>4.0%	$	48,408	>5.0%

Capital ratios for the Company:

As of September 30, 2017
Total capital (to Risk- Weighted Assets)	$	92,655		11.6%	$	74,000	>9.25%		N/A		N/A
Tier I capital (to Risk- Weighted Assets)	$	84,440		10.6%	$	58,000	>7.25%		N/A		N/A
Common Equity Tier 1 Capital (to Risk Weighted Assets)	$	84,440		10.6%	$	58,000	>5.75%		N/A		N/A
Tier I capital (to Average Assets)	$	84,440		8.5%	$	39,809	>4.0%		N/A		N/A

As of December 31, 2016
Total capital (to Risk- Weighted Assets)	$	86,966		11.3%	$	66,365	>8.625%		N/A		N/A
Tier I capital (to Risk- Weighted Assets)	$	78,850		10.3%	$	50,976	>6.625%		N/A		N/A
Common Equity Tier 1 Capital (to Risk Weighted Assets)	$	78,850		10.3%	$	39,435	>5.125%		N/A		N/A
Tier I capital (to Average Assets)	$	78,850		8.1%	$	38,731	>4.0%		N/A		N/A