Tableof Contents

 

 

 

**SECURITIESAND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

 

**Form 10-Q**

 
| **x**                                                       | **QUARTERLY  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE  ACT OF 1934** |
|-------------------------------------------------------------|---------------------------------------------------------------------------------------------------------|
| ** **                                                  | ** **                                                                                              |
| **For  the quarterly period ended September 30, 2008** |
| ** **                                                  | ** **                                                                                              |
| **OR**                                                      |
| ** **                                                  | ** **                                                                                              |
| **o**                                                       | **TRANSITION  REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF  1934**      |

 

**Commissionfile number 001-34142**

 

**OAKVALLEY BANCORP**

(Exact name ofregistrant as specified in its charter)

 

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

 

**125N. Third Ave., Oakdale, CA  95361**

(Address ofprincipal executive offices)

 

**(209)848-2265**

Issuer’s telephonenumber

 

**Notapplicable**

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

 

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

 

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

 

| Large  accelerated filer **o**            |   | Accelerated filer **o**          |
|------------------------------------------------|--------|---------------------------------------|
|                                           |   |                                  |
| Non-accelerated  filer **o**              |   | Smaller  reporting company **x** |
| (Do not check if  a smaller reporting company) |   |                                  |

 

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

 

**APPLICABLEONLY TO CORPORATE ISSUERS**

 

State the number ofshares outstanding of each of the issuer’s classes of common equity, as of thelatest practicable date: **7,658,252 shares of common stock outstanding as of September 30,2008.**

 

 

 

 

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**OakValley Bancorp**

**September 30,2008**

 

**Index**

** **
| ** **                                                                                                                                                                | ** **                                                                                      | ** ** | **Page**   |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------|-------------------------------------------------------------------------------------------------|------------|------------|
| **PART I  – FINANCIAL INFORMATION**                                                                                                                             |                                                                                            |       |
|                                                                                                                                                                      |                                                                                            |       |       |
| **Item  1.**                                                                                                                                                              | **Financial  Statements**                                                                       |       |       |
|                                                                                                                                                                      |                                                                                            |       |       |
| Condensed  Consolidated Balance Sheets at September 30, 2008, December 31,  2007                                                                                |                                                                                            | 3          |
|                                                                                                                                                                      |                                                                                            |       |       |
| Condensed Consolidated Statements of Earnings for the  Three and Nine Month Periods Ended September 30, 2008 and 2007                                                |                                                                                            | 4          |
|                                                                                                                                                                      |                                                                                            |       |       |
| Condensed Consolidated Statements of Changes of  Shareholders’ Equity for the Nine-Month Period Ended September 30, 2008  and Year Ended December 31, 2007 |                                                                                            | 5          |
|                                                                                                                                                                      |                                                                                            |       |       |
| Condensed Consolidated Statements of Cash Flows for  the Nine-Month Periods Ended September 30, 2008 and 2007                                                        |                                                                                            | 6          |
|                                                                                                                                                                      |                                                                                            |       |       |
| Notes to Consolidated Financial Statements                                                                                                                                |                                                                                            | 7          |
|                                                                                                                                                                      |                                                                                            |       |       |
| **Item 2.**                                                                                                                                                               | **Management’s  Discussion and Analysis of Financial Condition and Results of Operations** |       | 14         |
| ** **                                                                                                                                                                | ** **                                                                                      | ** ** | ** ** |
| **Item 3.**                                                                                                                                                               | **Quantitative  and Qualitative Disclosures About Market Risk**                                 |       | 28         |
| ** **                                                                                                                                                                | ** **                                                                                      | ** ** | ** ** |
| **Item 4T.**                                                                                                                                                              | **Controls and  Procedures**                                                                    |       | 28         |
|                                                                                                                                                                      |                                                                                            |       |       |
| **PART II  – OTHER INFORMATION**                                                                                                                                |                                                                                            |       |
|                                                                                                                                                                      |                                                                                            |       |       |
| **Item 1.**                                                                                                                                                               | **Legal Proceedings**                                                                           |       | 29         |
| **Item 2.**                                                                                                                                                               | **Unregistered  Sales of Equity Securities and Use of Proceeds**                                |       | 29         |
| **Item 3.**                                                                                                                                                               | **Defaults  Upon Senior Securities**                                                            |       | 29         |
| **Item 4.**                                                                                                                                                               | **Submission  of Matters to a Vote of Security Holders**                                        |       | 29         |
| **Item 5.**                                                                                                                                                               | **Other Information**                                                                           |       | 29         |
| **Item 6.**                                                                                                                                                               | **Exhibits**                                                                                    |       | 29         |

 

2

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**OAKVALLEY BANCORP**

**CONDENSED BALANCE SHEETS**

 
| ** **                                                                                                                                                                                                  | ** ** | **September 30,** | ** **  | **December 31,** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------|-------------|-----------------------|------------|
| ** **                                                                                                                                                                                                  | ** ** | **2008**               | ** **  | **2007**              | ** ** |
| ** **                                                                                                                                                                                                  | ** ** | **(Unaudited)**        | ** **  | ** **            | ** ** |
| **ASSETS**                                                                                                                                                                                                  |       |                   |        |                  |       |
| Cash and due  from banks                                                                                                                                                                                    |       | $                      | 10,263,546  |                  | $          | 10,397,951 |   |
| Federal funds  sold                                                                                                                                                                                         |       | 375,000                |        | 3,805,000             |       |
|                                                                                                                                                                                                        |       |                   |        |                  |       |
| Cash and cash  equivalents                                                                                                                                                                                  |       | 10,638,546             |        | 14,202,951            |       |
|                                                                                                                                                                                                        |       |                   |        |                  |       |
| Securities  available for sale                                                                                                                                                                              |       | 32,899,653             |        | 33,372,624            |       |
| Loans, net of  allowance for loan loss of $4,649,723 in 2008 and $4,506,753 in 2007                                                                                                                         |       | 411,032,444            |        | 382,264,026           |       |
| Bank premises  and equipment, net                                                                                                                                                                           |       | 10,244,896             |        | 10,108,620            |       |
| Other real  estate owned                                                                                                                                                                                    |       | 4,364,693              |        | —                |       |
| Accrued interest  and other assets                                                                                                                                                                          |       | 20,930,919             |        | 14,310,569            |       |
|                                                                                                                                                                                                        |       |                   |        |                  |       |
|                                                                                                                                                                                                        |       | $                      | 490,111,151 |                  | $          | 454,258,790 |   |
|                                                                                                                                                                                                        |       |                   |        |                  |       |
| **LIABILITIES AND SHAREHOLDERS’ EQUITY**                                                                                                                                                               | ** ** | ** **             | ** **  | ** **            | ** ** |
|                                                                                                                                                                                                        |       |                   |        |                  |       |
| Deposits                                                                                                                                                                                                    |       | $                      | 365,229,560 |                  | $          | 377,347,776 |   |
| Accrued interest  and other liabilities                                                                                                                                                                     |       | 2,730,165              |        | 3,549,624             |       |
| FHLB advances                                                                                                                                                                                               |       | 78,000,000             |        | 31,000,000            |       |
|                                                                                                                                                                                                        |       |                   |        |                  |       |
| Total  liabilities                                                                                                                                                                                          |       | 445,959,725            |        | 411,897,400           |       |
|                                                                                                                                                                                                        |       |                   |        |                  |       |
| Shareholders’  equity                                                                                                                                                                                  |       |                   |        |                  |       |
| Preferred stock,  no par value; 10,000,000 shares authorized, none issued or outstanding                                                                                                                    |       | —                 |        | —                |       |
| Common stock, no  par value; 10,000,000 shares authorized and 7,658,252 shares and  7,607,780 shares issued and outstanding at  September 30, 2008 and  December 31, 2007, respectively |       | 23,019,218             |        | 22,843,171            |       |
| Additional  paid-in capital                                                                                                                                                                                 |       | 1,904,073              |        | 1,748,380             |       |
| Retained  earnings                                                                                                                                                                                          |       | 19,148,174             |        | 17,723,646            |       |
| Accumulated  other comprehensive income, net of tax                                                                                                                                                         |       | 79,961                 |        | 46,193                |       |
|                                                                                                                                                                                                        |       |                   |        |                  |       |
| Total  shareholders’ equity                                                                                                                                                                            |       | 44,151,426             |        | 42,361,390            |       |
|                                                                                                                                                                                                        |       |                   |        |                  |       |
|                                                                                                                                                                                                        |       | $                      | 490,111,151 |                  | $          | 454,258,790 |   |

 

*See accompanying notes*

 

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**OAKVALLEY BANCORP**

**CONDENSEDSTATEMENTS OF EARNINGS (UNAUDITED)**

 
| ** **                                           | ** ** | **3 MONTHS ENDED** | ** ** | **9 MONTHS ENDED** | ** ** |
|------------------------------------------------------|------------|------------------------------|------------|------------------------------|------------|
| ** **                                           | ** ** | **SEPTEMBER 30,**       | ** ** | **SEPTEMBER 30,**       | ** ** |
| ** **                                           | ** ** | **2008**                     | ** ** | **2007**                     | ** ** | **2008** | ** ** | **2007** | ** ** |
|                                                 |       |                         |       |                         |       |   |   |   |   |
| Interest and  fees on loans                          |       | $                            | 7,040,391  |                         | $          | 7,632,002 |   | $ | 20,750,394 |   | $ | 22,765,409 |   |
| Interest on  securities available for sale           |       | 403,064                      |       | 409,574                      |       | 1,205,973 |   | 1,203,435 |   |
| Interest on  federal funds sold                      |       | 4,254                        |       | 54,543                       |       | 13,831 |   | 140,877 |   |
| Interest on  deposits with banks                     |       | 566                          |       | 832                          |       | 1,592 |   | 3,621 |   |
|                                                 |       |                         |       |                         |       |   |   |   |   |
| Total interest  income                               |       | 7,448,275                    |       | 8,096,951                    |       | 21,971,790 |   | 24,113,342 |   |
|                                                 |       |                         |       |                         |       |   |   |   |   |
| Deposits                                             |       | 1,700,868                    |       | 2,986,791                    |       | 5,568,872 |   | 8,573,026 |   |
| FHLB advances                                        |       | 455,441                      |       | 243,046                      |       | 1,214,339 |   | 1,389,833 |   |
| Federal funds  purchased                             |       | 238                          |       | 8,067                        |       | 7,554 |   | 36,979 |   |
|                                                 |       |                         |       |                         |       |   |   |   |   |
| Total interest  expense                              |       | 2,156,547                    |       | 3,237,904                    |       | 6,790,765 |   | 9,999,838 |   |
|                                                 |       |                         |       |                         |       |   |   |   |   |
| Net interest  income                                 |       | 5,291,728                    |       | 4,859,047                    |       | 15,181,025 |   | 14,113,504 |   |
|                                                 |       |                         |       |                         |       |   |   |   |   |
| Provision for  loan losses                           |       | 602,000                      |       | 145,000                      |       | 1,187,000 |   | 435,000 |   |
|                                                 |       |                         |       |                         |       |   |   |   |   |
| Net interest  income after provision for loan losses |       | 4,689,728                    |       | 4,714,047                    |       | 13,994,025 |   | 13,678,504 |   |
|                                                 |       |                         |       |                         |       |   |   |   |   |
| Service charges  on deposits                         |       | 337,264                      |       | 267,723                      |       | 984,556 |   | 807,853 |   |
| Earnings on cash  surrender value of life insurance  |       | 99,241                       |       | 43,615                       |       | 249,103 |   | 102,231 |   |
| Mortgage  commissions                                |       | 23,410                       |       | 14,404                       |       | 94,859 |   | 166,868 |   |
| Other                                                |       | 174,557                      |       | 170,410                      |       | 561,250 |   | 463,928 |   |
|                                                 |       |                         |       |                         |       |   |   |   |   |
| Total  Non-interest income                           |       | 634,472                      |       | 496,152                      |       | 1,889,768 |   | 1,540,880 |   |
|                                                 |       |                         |       |                         |       |   |   |   |   |
| Salaries and  employee benefits                      |       | 2,319,467                    |       | 2,121,404                    |       | 7,200,869 |   | 6,274,485 |   |
| Occupancy  expenses                                  |       | 675,728                      |       | 603,483                      |       | 2,015,674 |   | 1,656,663 |   |
| Data processing  fees                                |       | 193,009                      |       | 169,036                      |       | 562,007 |   | 385,131 |   |
| Telephone  expenses                                  |       | 74,360                       |       | 64,226                       |       | 218,742 |   | 188,255 |   |
| Other operating  expenses                            |       | 1,272,645                    |       | 614,323                      |       | 3,125,421 |   | 1,792,342 |   |
|                                                 |       |                         |       |                         |       |   |   |   |   |
| Total  Non-interest expense                          |       | 4,535,209                    |       | 3,572,472                    |       | 13,122,713 |   | 10,296,876 |   |
|                                                 |       |                         |       |                         |       |   |   |   |   |
| Earnings before  provision for income taxes          |       | 788,991                      |       | 1,637,727                    |       | 2,761,080 |   | 4,922,508 |   |
|                                                 |       |                         |       |                         |       |   |   |   |   |
| Provision for  income taxes                          |       | 239,595                      |       | 668,270                      |       | 883,150 |   | 1,948,270 |   |
|                                                 |       |                         |       |                         |       |   |   |   |   |
| NET EARNINGS                                         |       | $                            | 549,396    |                         | $          | 969,457 |   | $ | 1,877,930 |   | $ | 2,974,238 |   |
|                                                 |       |                         |       |                         |       |   |   |   |   |
| Net Earnings Per  Share                              |       | $                            | 0.07       |                         | $          | 0.13 |   | $ | 0.25 |   | $ | 0.41 |   |
| Net Earnings Per  Share - assuming dilution          |       | $                            | 0.07       |                         | $          | 0.13 |   | $ | 0.24 |   | $ | 0.40 |   |

 

*Seeaccompanying notes*

 

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**OAKVALLEY BANCORP**

**CONDENSEDSTATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY (UNAUDITED)**

 
| ** **                                                                                        | ** ** | **YEAR ENDED DECEMBER 31, 2007 AND THE NINE MONTH PERIOD ENDED SEPTEMBER 30, 2008** | ** ** |
|---------------------------------------------------------------------------------------------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
| ** **                                                                                        | ** ** | ** **                                                                                                                                           | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | **Accumulated** | ** ** | ** ** | ** ** |
| ** **                                                                                        | ** ** | ** **                                                                                                                                           | ** ** | ** ** | ** ** | **Additional** | ** ** | ** ** | ** ** | ** ** | ** ** | **Other** | ** ** | **Total** | ** ** |
| ** **                                                                                        | ** ** | **Common Stock**                                                                                                                                | ** ** | **Paid-in** | ** ** | **Retained** | ** ** | **Comprehensive** | ** ** | **Comprehensive** | ** ** | **Shareholders’** | ** ** |
| ** **                                                                                        | ** ** | **Shares**                                                                                                                                           | ** ** | **Amount** | ** ** | **Capital** | ** ** | **Earnings** | ** ** | **Income** | ** ** | **Income** | ** ** | **Equity** | ** ** |
| ** **                                                                                        | ** ** | ** **                                                                                                                                           | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Balances,  January 1, 2007                                                                   |       | 7,103,243                                                                                                                                            |       | 17,648,475 |   | $ | 1,502,004 |   | $ | 15,243,222 |   | $ |   |   | $ | (204,772 | ) | $ | 34,188,929 |   |
| Stock offering                                                                                    |       | 456,431                                                                                                                                              |       | 5,020,739 |   |   |   |   |   |   |   |   |   | 5,020,739 |   |
| Stock offering  expense                                                                           |       |                                                                                                                                                 |       | (25,000 | ) |   |   |   |   |   |   |   |   | (25,000 | ) |
| Stock options  exercised                                                                          |       | 48,106                                                                                                                                               |       | 198,957 |   |   |   |   |   |   |   |   |   | 198,957 |   |
| Tax benefit of  stock options exercised                                                           |       |                                                                                                                                                 |       |   |   | 116,303 |   |   |   |   |   |   |   | 116,303 |   |
| Cash dividends  ($0.19 per share)                                                                 |       |                                                                                                                                                 |       |   |   |   |   | (1,444,697 | ) |   |   |   |   | (1,444,697 | ) |
| Stock based  compensation                                                                         |       |                                                                                                                                                 |       |   |   | 130,073 |   |   |   |   |   |   |   | 130,073 |   |
| Comprehensive income                                                                              |       |                                                                                                                                                 |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Net changes in  unrealized gain on available-for-sale securities (net of income tax of  $163,169) |       |                                                                                                                                                 |       |   |   |   |   |   |   | $ | 250,965 |   | 250,965 |   | 250,965 |   |
| Net earnings                                                                                      |       |                                                                                                                                                 |       |   |   |   |   | 3,925,121 |   | 3,925,121 |   |   |   | 3,925,121 |   |
| Comprehensive  income                                                                             |       |                                                                                                                                                 |       |   |   |   |   |   |   | $ | 4,176,086 |   |   |   |   |   |
| Balances,  December 31, 2007                                                                 |       | 7,607,780                                                                                                                                            |       | 22,843,171 |   | $ | 1,748,380 |   | $ | 17,723,646 |   |   |   | $ | 46,193 |   | $ | 42,361,390 |   |
| Stock options  exercised                                                                          |       | 50,472                                                                                                                                               |       | 176,047 |   |   |   |   |   |   |   |   |   | 176,047 |   |
| Tax benefit of  stock options exercised                                                           |       |                                                                                                                                                 |       |   |   | 54,195 |   |   |   |   |   |   |   | 54,195 |   |
| Cash dividends  ($0.05 per share)                                                                 |       |                                                                                                                                                 |       |   |   |   |   | (382,943 | ) |   |   |   |   | (382,943 | ) |
| Stock based  compensation                                                                         |       |                                                                                                                                                 |       |   |   | 101,498 |   |   |   |   |   |   |   | 101,498 |   |
| Cumulative effect  of adopting EITF   06-04 (net of tax of $49,383)                               |       |                                                                                                                                                 |       |   |   |   |   | (70,459 | ) |   |   |   |   | (70,459 | ) |
| Comprehensive  income                                                                             |       |                                                                                                                                                 |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Net changes in  unrealized gain on available-for-sale securities (net of income tax of  $21,956)  |       |                                                                                                                                                 |       |   |   |   |   |   |   | $ | 33,768 |   | 33,768 |   | 33,768 |   |
| Net earnings                                                                                      |       |                                                                                                                                                 |       |   |   |   |   | 1,877,930 |   | 1,877,930 |   |   |   | 1,877,930 |   |
| Comprehensive  income                                                                             |       |                                                                                                                                                 |       |   |   |   |   |   |   | $ | 1,911,698 |   |   |   |   |   |
| Balances,  September 30, 2008                                                                |       | 7,658,252                                                                                                                                            |       | 23,019,218 |   | $ | 1,904,073 |   | $ | 19,148,174 |   |   |   | $ | 79,961 |   | $ | 44,151,426 |   |

 

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**OAKVALLEY BANCORP**

**CONDENSED STATEMENTS OF CASH FLOWS(UNAUDITED)**

 
| ** **                                                                                | ** ** | **9 MONTHS ENDED  SEPTEMBER 30,** | ** ** |
|-------------------------------------------------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                                                                | ** ** | **2008**                                         | ** ** | **2007** | ** ** |
|                                                                                      |       |                                             |       |   |   |
| CASH FLOWS FROM  OPERATING ACTIVITIES:                                                    |       |                                             |       |   |   |
| Net earnings                                                                              |       | $                                                | 1,877,930  |   | $ | 2,974,238 |   |
| Adjustments to  reconcile net earnings to net cash from operating activities:             |       |                                             |       |   |   |
| Provision for  loan losses                                                                |       | 1,187,000                                        |       | 435,000 |   |
| Depreciation,  amortization and accretion, net                                            |       | 835,826                                          |       | 739,164 |   |
| Stock-based  compensation expense                                                         |       | 101,498                                          |       | 97,531 |   |
| Excess tax  benefits from stock-based payment arrangements                                |       | (54,195                                          | )          | (125,252 | ) |
| Gain on sale of  premises and equipment                                                   |       | (2,428                                           | )          | (14,400 | ) |
| Decrease  (increase) in accrued interest receivable                                       |       | 100,599                                          |       | (62,496 | ) |
| Decrease in  accrued interest payable and other liabilities                               |       | (939,301                                         | )          | (5,262,914 | ) |
| Increase in  other assets                                                                 |       | (1,899,326                                       | )          | (872,418 | ) |
|                                                                                      |       |                                             |       |   |   |
| Net cash from  operating activities                                                       |       | 1,207,603                                        |       | (2,091,547 | ) |
|                                                                                      |       |                                             |       |   |   |
| CASH FLOWS FROM  INVESTING ACTIVITIES:                                                    |       |                                             |       |   |   |
| Purchases of  securities available for sale                                               |       | (6,459,330                                       | )          | (12,713,175 | ) |
| Proceeds from  maturities, calls, and principal paydowns of securities available for sale |       | 6,995,919                                        |       | 14,580,990 |   |
| Net increase in  loans                                                                    |       | (34,320,111                                      | )          | (7,737,243 | ) |
| Purchase of BOLI  policies                                                                |       | (4,740,000                                       | )          | 0 |   |
| Proceeds from  sales of premises and equipment                                            |       | 47,778                                           |       | 14,400 |   |
| Net purchases of  premises and equipment                                                  |       | (1,025,346                                       | )          | (5,430,134 | ) |
|                                                                                      |       |                                             |       |   |   |
| Net cash from  investing activities                                                       |       | (39,501,090                                      | )          | (11,285,162 | ) |
|                                                                                      |       |                                             |       |   |   |
| CASH FLOWS FROM  FINANCING ACTIVITIES:                                                    |       |                                             |       |   |   |
| FHLB advanced  funds                                                                      |       | 205,463,000                                      |       | 97,784,000 |   |
| FHLB payments                                                                             |       | (158,463,000                                     | )          | (107,434,000 | ) |
| Federal funds  advances                                                                   |       | 63,175,000                                       |       | (144,110,000 | ) |
| Federal funds  payments                                                                   |       | (63,175,000                                      | )          | 143,160,000 |   |
| Dividends paid                                                                            |       | (382,943                                         | )          | (1,444,697 | ) |
| Net increase in  demand deposits and savings accounts                                     |       | 6,249,207                                        |       | 28,906,000 |   |
| Net decrease in  time deposits                                                            |       | (18,367,424                                      | )          | (21,278,141 | ) |
| Excess tax  benefits from stock-based payment arrangements                                |       | 54,195                                           |       | 125,252 |   |
| Proceeds from  sale of common stock and exercise of stock options                         |       | 176,047                                          |       | 5,188,736 |   |
|                                                                                      |       |                                             |       |   |   |
| Net cash from  financing activities                                                       |       | 34,729,082                                       |       | 897,150 |   |
|                                                                                      |       |                                             |       |   |   |
| NET DECREASE IN  CASH AND CASH EQUIVALENTS                                                |       | (3,564,405                                       | )          | (12,479,559 | ) |
|                                                                                      |       |                                             |       |   |   |
| CASH AND CASH  EQUIVALENTS,                                                               |       |                                             |       |   |   |
| beginning of  period                                                                      |       | 14,202,951                                       |       | 27,819,177 |   |
|                                                                                      |       |                                             |       |   |   |
| CASH AND CASH  EQUIVALENTS,                                                               |       |                                             |       |   |   |
| end of period                                                                             |       | $                                                | 10,638,546 |   | $ | 15,339,618 |   |
|                                                                                      |       |                                             |       |   |   |
| SUPPLEMENTAL  DISCLOSURES OF CASH FLOW INFORMATION:                                       |       |                                             |       |   |   |
| Cash paid during  the year for:                                                           |       |                                             |       |   |   |
| Interest                                                                                  |       | $                                                | 7,860,601  |   | $ | 10,457,367 |   |
| Income taxes                                                                              |       | $                                                | 890,000    |   | $ | 1,776,000 |   |
|                                                                                      |       |                                             |       |   |   |
| NON-CASH  INVESTING ACTIVITIES:                                                           |       |                                             |       |   |   |
| Real estate  acquired through foreclosure                                                 |       | $                                                | 4,364,693  |   | $ | 0 |   |
| Net change in  unrealized gain/loss on available-for-sale securities                      |       | $                                                | 55,724     |   | $ | 88,548 |   |
|                                                                                      |       |                                             |       |   |   |
| NON-CASH  INVESTING ACTIVITIES:                                                           |       |                                             |       |   |   |
| Tax benefit from  stock options exercised                                                 |       | $                                                | 54,195     |   | $ | 125,252 |   |
| Cumulative  effect of adopting EITF 06-04                                                 |       | $                                                | 119,842    |   | $ | 0 |   |

 

*Seeaccompanying notes*

 

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Tableof Contents

 

**OAKVALLEY BANCORP**

** NOTES TO CONDENSED FINANCIAL STATEMENTS**

 

**NOTE1 – BASIS OF PRESENTATION**

** **

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

 

The accounting principlesfollowed by the Company and the methods of applying these principles conformwith accounting principles generally accepted in the United States of America(GAAP) and with general practices within the banking industry. In preparingfinancial statements in conformity with GAAP, management is required to makeestimates and assumptions that affect the reported amounts in the financialstatements. Actual results could differ significantly from those estimates.Material estimates common to the banking industry that are particularlysusceptible to significant change in the near term include, but are not limitedto, the determination of the allowance for loan losses, the estimation ofcompensation expense related to stock options granted to employees anddirectors, and valuation allowances associated with deferred tax assets, therecognition of which are based on future taxable income.

 

The interim financialstatements included in this report are unaudited but reflect all adjustmentswhich, in the opinion of management, are necessary for a fair presentation ofthe financial position and results of operations for the interim periods presented.All such adjustments are of a normal recurring nature. The results ofoperations for the nine month period ended September 30, 2008  are not necessarily indicative of the resultsof a full year’s operations. For further information, refer to the auditedfinancial statements and footnotes included in the Company’s annual report forthe year ended December 31, 2007.

 

**NOTE 2 –**CURRENT ACCOUNTING PRONOUNCEMENTS****

 

**Change in accounting principle –**During 2008 in conjunction with the Company’s filing of a Form 10registration statement with the SEC, the Company made a change in accountingprinciple and adopted Staff Accounting Bulletin (SAB) No. 108. As aresult, the Company recorded adjustments to its deferred tax assets and alsorecorded a liability related to lease agreements that include fixed rentescalation clauses.

 

In accordance withStatement of Financial Accounting Standards (SFAS) No. 154, *Accounting Changes and Correction of Errors,* the Companyadjusted its financial statements to apply SAB No. 108 retrospectively. Asa result of the change in accounting principle, the following adjustments tothe financial statements were made:

 

·                  Accrued interest and other assetsdecreased by $144,586 at December 31, 2007.

·                  Accrued interest and other liabilitiesincreased by $134,030 at December 31, 2007.

·                  Retained earnings decreased by$278,616 at December 31, 2007.

·                  Occupancy expense increased $42,107for the year ended December 31, 2007.

·                  Income tax expense increased $1,270for the year ended December 31, 2007.

 

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**OAKVALLEY BANCORP**

** NOTES TO CONDENSED FINANCIAL STATEMENTS**

 

·                  Net income decreased $43,227 andbasic and diluted earnings per share decreased $.01 per share to $.53 and $.52per share, respectively, for the year ended December 31, 2007.

 

In September 2006,the Financial Accounting Standards Board, or FASB, issued Statement No. 157,“Fair Value Measurements” (SFAS 157). SFAS No. 157 defines the fair value,establishes a framework for measuring fair value and expands disclosure of fairvalue measurements. SFAS No. 157 applies under other accountingpronouncements that require or permit fair value measurements and accordingly,does not require any new fair value measurements. We adopted SFAS No. 157as of January 1, 2008 and the adoption did not have a material impact onthe financial condition or results of operations of the Company.

 

In February 2007,the FASB issued SFAS 159, “The Fair Value Option for Financial Assets andFinancial Liabilities - Including an Amendment of FASB Statement No. 115”.SFAS 159 permits an entity to choose to measure many financial instruments andcertain other items at fair value. Most of the provisions of SFAS 159 areelective; however, the amendment to SFAS 115, “Accounting for CertainInvestments in Debt and Equity Securities”, applies to all entities withavailable for sale or trading securities. For financial instruments elected tobe accounted for at fair value, an entity will report the unrealized gains andlosses in earnings. We adopted SFAS No. 159 on January 1, 2008. Wechose not to elect the option to measure the fair value of eligible financialassets and liabilities at fair value.

 

InSeptember 2006 the Emerging Issues Task Force (“EITF”) ratified EITF issue06-04, “Accounting for DeferredCompensation and Postretirement Benefit Aspect of Endorsement Split-Dollar LifeInsurance Arrangements”.   This ruling provides that theCompany should recognize a liability for future benefits based on theagreements held with employees.  The issue was effective for fiscal yearsbeginning after December 17, 2007.  The Company adopted thispronouncement effective January 1, 2008 and has recorded an initialliability of $119,842 with an offsetting adjustment to retained earnings of$70,459 and deferred taxes of $49,383, pursuant to this accountingpronouncement.

 

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**OAKVALLEY BANCORP**

** NOTES TO CONDENSED FINANCIAL STATEMENTS**

 

**NOTE3 – LOANS**

 

Loan totals wereas follows:

 
| ** **                            | ** ** | **SEPTEMBER 30,** | ** **  | **DECEMBER 31,** | ** ** |
|---------------------------------------|------------|------------------------|-------------|-----------------------|------------|
| ** **                            | ** ** | **2008**               | ** **  | **2007**              | ** ** |
| Loans                                 |       |                   |        |                  |       |
| Commercial real  estate               |       | $                      | 240,059,833 |                  | $          | 208,309,072 |   |
| Commercial                            |       | 40,308,203             |        | 45,496,794            |       |
| Real estate  construction             |       | 90,631,577             |        | 83,173,030            |       |
| Agriculture                           |       | 23,886,459             |        | 31,429,970            |       |
| Residential real  estate and consumer |       | 21,778,213             |        | 19,400,263            |       |
|                                  |       |                   |        |                  |       |
| Total loans                           |       | 416,664,285            |        | 387,809,129           |       |
|                                  |       |                   |        |                  |       |
| Less:                                 |       |                   |        |                  |       |
| Deferred loan  fees and costs, net    |       | (982,118               | )           | (1,038,350            | )          |
| Allowance for  loan losses            |       | (4,649,723             | )           | (4,506,753            | )          |
|                                  |       |                   |        |                  |       |
| Net loans                             |       | $                      | 411,032,444 |                  | $          | 382,264,026 |   |

 

Changes in theallowance for loan losses were as follows:

 
| ** **                                                            | ** ** | **SEPTEMBER 30,** | ** ** | **DECEMBER 31,** | ** ** |
|-----------------------------------------------------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                                                            | ** ** | **2008**               | ** ** | **2007**              | ** ** |
|                                                                  |       |                   |       |                  |       |
| Balance,  beginning of year                                           |       | $                      | 4,506,753  |                  | $          | 4,341,062 |   |
| Provision  charged to operations                                      |       | 1,187,000              |       | 555,000               |       |
| Loans charged  off                                                    |       | (1,032,913             | )          | (401,510              | )          |
| Loan recoveries                                                       |       | 4,491                  |       | 4,275                 |       |
| Reclassification  of reserve related to off-balance-sheet commitments |       | (15,608                | )          | 7,926                 |       |
|                                                                  |       |                   |       |                  |       |
| Balance, end of  period                                               |       | $                      | 4,649,723  |                  | $          | 4,506,753 |   |

 

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**Table ofContents**

 

**OAKVALLEY BANCORP**

** NOTES TO CONDENSED FINANCIAL STATEMENTS**

 

**NOTE3 – LOANS (CONTINUED)**

** **

Effective July 1, 2008, the expense associated with the allowance foroff-balance-sheet commitments is recorded separately as a component of otherexpenses.  The $15,608 reclassificationfrom the allowance for loan losses to other liabilities is a non-recurringadjustment.

 

The total recorded investment in impaired loans at September 30,2008, was $2,175,362 which had a loan loss reserve of $305,807.  The total recorded investment in impairedloans at December 31, 2007, was $9,087,462 which had a loan loss reserveof $461,694.  No interest income wasrecognized on impaired loans, while considered impaired during 2008 and 2007.  As of September 30, 2008 we had no fundingcommitments on impaired loans.

 

**NOTE4 – OTHER REAL ESTATE OWNED**

 

As of September 30,2008, seven loans with outstanding balances of $4,364,693 were reclassified toother real estate owned.

 

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

 

**NOTE5**- OTHER POST-RETIREMENT BENEFIT PLANS

** **

During January 2008,the Bank has awarded certain officers a salary continuation plan (the “Plan”). Under the Plan, the participants will be providedwith a fixed annual retirement benefit for twenty years after retirement. TheBank is also responsible for certain pre-retirement death benefits under thePlan. In connection with the implementation of the Plan, the Bank purchasedsingle premium life insurance policies on the life of each of the officerscovered under the Plan. The Bank is the owner and partial beneficiary of theselife insurance policies. The assets of the Plan, under Internal Revenue Serviceregulations, are owned by the Bank and are available to satisfy the Bank’sgeneral creditors.

 

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

 

Future compensation underboth plans is earned for services rendered through retirement. The Bank accruesfor the salary continuation liability based on anticipated years of service andvesting schedules provided under the plans. The Bank’s current benefitliability is determined based on vesting and the present value of the benefitsat a corresponding discount rate. The discount rate used is an equivalent ratefor investment-grade bonds with lives matching those of the service periodsremaining for the salary continuation contracts, which average approximately20 years.

 

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**OAK VALLEYBANCORP**

** NOTES TO CONDENSED FINANCIAL STATEMENTS**

 

During January 2008,the Bank entered into split-dollar life insurance agreements with certainofficers. In connection with the implementation of the split-dollar agreements,the Bank purchased single premium life insurance policies on the life of eachof the officers covered by the split-dollar life insurance agreements. The Bankis the owner of the policies and the partial beneficiary in an amount equal tothe cash surrender value of the policies.

 

The combined cashsurrender value of all Bank-owned life insurance policies was $9,768,990 and$4,749,230 at September 30, 2008 and December 31, 2007, respectively.

 

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**OAKVALLEY BANCORP**

** NOTES TO CONDENSED FINANCIAL STATEMENTS**

 

**NOTE6**- FAIR VALUE MEASUREMENTS

** **

SFASNo. 157,**Fair Value Measurements, which theCompany adopted effective January 1, 2008, defines fair value, establishesa framework for measuring fair value, establishes a three-level valuationhierarchy for disclosure of fair value measurement and enhances disclosurerequirements for fair value measurements. The valuation hierarchy is based uponthe transparency of inputs to the valuation of an asset or liability as of themeasurement date. The three levels are defined as follow:

 

Level1:  Inputs to the valuation methodologyare quoted prices (unadjusted) for identical assets or liabilities in activemarkets.

Level2:  Inputs to the valuation methodologyinclude quoted prices for similar assets and liabilities in active markets andinputs that are observable for the asset or liability, either directly orindirectly, for substantially the full term of the financial instrument.

Level3:  Inputs to the valuation methodologyare unobservable and significant to the fair value measurement.

 

Incertain cases, the inputs used to measure fair value may fall into differentlevels of the fair value hierarchy.  Insuch cases, the level in the fair value hierarchy within which the fair valuemeasurement in its entirety falls has been determined based on the lowest levelinput that is significant to the fair value measurement in its entirety.  The Company’s assessment of the significanceof a particular input to the fair value measurement in its entirety requiresjudgment , and considers factors specific to the asset or liability.

 

Assetsand liabilities measured at fair value on a recurring and non-recurring basisare summarized below:

 
| ** **                                                 | ** ** | **Fair Value Measurements at September 30, 2008 Using** | ** ** |
|------------------------------------------------------------|------------|--------------------------------------------------------------------------------------------|------------|
| ** **                                                 | ** ** | **September 30,  2008**                                                               | ** ** | **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                             |       | $                                                                                          | 32,899,653 |   | $ | — |   | $ | 32,899,653 |   | $ | — |   |
|                                                       |       |                                                                                       |       |   |   |   |   |   |   |
| Assets and  liabilities measured on a non-recurring basis: |       |                                                                                       |       |   |   |   |   |   |   |
| Impaired Loans                                             |       | $                                                                                          | 1,867,372  |   | $ | — |   | $ | — |   | $ | 1,867,372 |   |

 

Thefair value of securities available for sale equals quoted market price, ifavailable.  If quoted market prices arenot available, fair value is determined using quoted market prices for similarsecurities.  Changes in fair market valueare recorded in other comprehensive income net of tax.  SFAS No. 157 

 

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**OAKVALLEY BANCORP**

** NOTES TO CONDENSED FINANCIAL STATEMENTS**

 

appliesto loans measured for impairment using the practical expedients permitted bySFAS No. 114,**Accounting by Creditors for Impairment of aLoan, including impaired loans measured at an observable market price(if available), or at the fair value of the loan’s collateral (if the loan iscollateral dependent). Fair value of the loan’s collateral, when the loan isdependent on collateral, is determined by appraisals or independent valuationwhich is then adjusted for the cost related to liquidation of the collateral.At September 30, 2008, impaired loans had a principal balance of $2,175,362,with a valuation allowance of $305,807 at September 30, 2008.  Upon being classified as impaired, chargeoffs were taken to reduce the balance of each loan to an estimate of thecollateral fair market value less cost to dispose. This estimate was a level 3valuation.  There was no direct impact on the income statement.  Thecharge-offs were recorded as a debit to the allowance for loan losses.

 

**NOTE 7 – EARNINGS PER SHARE**

** **

TheBank computes earnings per share (“EPS”) in accordance with SFAS No. 128, *Earnings per Share.* SFAS No. 128 requires thepresentation of basic EPS, which does not consider the effect of common stockequivalents and diluted EPS, which considers all dilutive common stockequivalents.

 
| ** **                                                            | ** ** | **THREE MONTHS ENDED** | ** ** | **NINE MONTHS ENDED** | ** ** |
|-----------------------------------------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| **In thousands (except share and per**       | ** ** | **SEPTEMBER 30,**           | ** ** | **SEPTEMBER 30,**          | ** ** |
| **share amounts)**                                               | ** ** | **2008**                         | ** ** | **2007**                        | ** ** | **2008** | ** ** | **2007** | ** ** |
| BASIC EARNINGS  PER SHARE                                             |       |                             |       |                            |       |   |   |   |   |
|                                                                  |       |                             |       |                            |       |   |   |   |   |
| Net income                                                            |       | $                                | 549,396    |                            | $          | 969,457 |   | $ | 1,877,930 |   | $ | 2,974,238 |   |
| Weighted average  shares outstanding                                  |       | 7,658,252                        |       | 7,567,719                       |       | 7,636,687 |   | 7,283,187 |   |
| Net income per  share                                                 |       | $                                | 0.07       |                            | $          | 0.13 |   | $ | 0.25 |   | $ | 0.41 |   |
|                                                                  |       |                             |       |                            |       |   |   |   |   |
| DILUTED EARNINGS  PER SHARE                                           |       |                             |       |                            |       |   |   |   |   |
|                                                                  |       |                             |       |                            |       |   |   |   |   |
| Net income                                                            |       | $                                | 549,396    |                            | $          | 969,457 |   | $ | 1,877,930 |   | $ | 2,974,238 |   |
| Weighted average  shares outstanding                                  |       | 7,658,252                        |       | 7,567,719                       |       | 7,636,687 |   | 7,283,187 |   |
| Effect of  dilutive stock options                                     |       | 84,839                           |       | 150,049                         |       | 100,363 |   | 159,817 |   |
| Weighted average  shares of common stock and common stock equivalents |       | 7,743,091                        |       | 7,717,768                       |       | 7,737,050 |   | 7,443,004 |   |
| Net income per  diluted share                                         |       | $                                | 0.07       |                            | $          | 0.13 |   | $ | 0.24 |   | $ | 0.40 |   |

 

During the three and ninemonth periods ended September 30, 2008, anti-dilutive weighted averageoptions to purchase 260,304 and 244,728 shares of common stock, respectively,in prices ranging from $7.00 to $15.67 were outstanding .   Anti-dilutive weighted average options of181,794 and 192,610, respectively, were outstanding during the same three andnine month periods of 2007 with prices ranging from $12.23 to $15.67.  They were not included in the computation ofdiluted EPS because the options’ exercise price was greater than the averagemarket price of the common shares. These options begin to expire in 2015.

 

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**Item2.****  Management’s Discussion and Analysis of Financial Condition and Results ofOperations**

 

Thefollowing discussion explains the significant factors affecting our operationsand financial position for the periods presented. The discussion should be readin conjunction with our financial statements and the notes related theretowhich appear elsewhere in this report.

 

**Forward-LookingStatements**

 

*Somematters discussed in this Form 10-Q may be “forward-looking statements”within the meaning of the Private Litigation Reform Act of 1995 and thereforemay involve risks, uncertainties and other factors which may cause our actualresults to be materially different from the results expressed or implied by ourforward-looking statements.  These statements generally appear with wordssuch as “anticipate,” “believe,” “estimate,” “may,” “intend,” and “expect.” Although management believes that the assumptions and expectations reflected insuch forward-looking statements are reasonable, it can give no assurance thatsuch expectations will prove to be correct.  Factors that could causeactual results to differ from results discussed in forward-looking statementsinclude, but are not limited to: economic conditions (both generally and in themarkets where the Bank operates); competition from other providers of financialservices offered by the Bank; government regulation and legislation; changes ininterest rates; material unforeseen changes in the financial stability andliquidity of the Bank’s credit customers; and other risks as may be detailedfrom time to time in the Company’s filings with the Securities and ExchangeCommission, all of which are difficult to predict and which may be beyond thecontrol of the Company or the Bank.  The Company undertakes no obligationto revise forward-looking statements to reflect events or changes after thedate of this discussion or to reflect the occurrence of unanticipated events.*

 

**Critical Accounting Estimates**

 

** **Thediscussion and analysis of our financial condition and results of operations isbased upon our financial statements, which have been prepared in accordancewith accounting principles generally accepted in the United States of America.The preparation of these financial statements requires management to makeestimates and judgments that effect the reported amounts of assets andliabilities, revenues and expenses, and related disclosures of contingentassets and liabilities at the date of our financial statements. Actual resultsmay differ from these estimates under different assumptions or conditions.

 

*Allowancefor Loan Losses*

 

Accounting for allowance for loan losses involves significant judgmentand assumptions by management and is based on historical data and management’sview of the current economic environment. At least on a quarterly basis, ourmanagement reviews the methodology and adequacy of allowance for loan lossesand reports its assessment to the Board of Directors for its review andapproval.

 

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

 

·**the specific review of individual loans,

 

·**the segmenting and review of loan pools with similar characteristics inaccordance with SFAS No. 5, “Accounting for Contingencies,” and

 

·**our judgmental estimate based on various subjective factors:

 

The first phase of our methodology involves the specific review ofindividual loans to identify and measure impairment. We evaluate each loan byuse of a risk rating system, except for homogeneous loans, such as automobileloans and home mortgages. Specific risk rated loans are deemed impaired if allamounts, including principal and interest, will likely not be collected inaccordance with the contractual terms of the related loan agreement. Impairmentfor commercial and real estate loans is measured either based on the presentvalue of the loan’s expected future cash flows or, if collection on the loan iscollateral dependent, the estimated fair value of the collateral, less sellingand holding costs.

 

The second phase involves the segmenting of the remainder of the riskrated loan portfolio into groups or pools of loans, together with loans withsimilar characteristics, for evaluation in accordance with SFAS No. 5. Wedetermine the calculated loss ratio to each loan pool based on its historicalnet losses and benchmark it against the levels of other peer banks.

 

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

 

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·**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.

 

Our management estimates the probable effect of such conditions basedon our judgment, experience and known or anticipated trends. Such estimationmay be reflected as an additional allowance to each group of loans, ifnecessary. Management reviews these conditions with our senior credit officers.To the extent that any of these conditions is evidenced by a specificallyidentifiable problem credit or portfolio segment as of the evaluation date,management’s estimate of the effect of such condition may be reflected as aspecific allowance applicable to such credit or portfolio segment. Where any ofthese conditions is not evidenced by a specific, identifiable problem credit orportfolio segment as of the evaluation date, management’s evaluation of theinherent loss related to such condition is reflected in the unallocatedallowance

 

Central to our credit risk management and our assessment of appropriateloss allowance is our loan risk rating system. Under this system, theoriginating credit officer assigns borrowers an initial risk rating based on athorough analysis of each borrower’s financial capacity in conjunction withindustry and economic trends. Approvals are made based upon the amount ofinherent credit risk specific to the transaction and are reviewed forappropriateness by senior line and credit administration personnel. Credits aremonitored by line and credit administration personnel for deterioration in aborrower’s financial condition which may impact the ability of the borrower toperform under the contract. Although management has allocated a portion of theallowance to specific loans, specific loan pools, and off-balance sheet creditexposures (which are reported separately as part of other liabilities), theadequacy of the allowance is considered in its entirety.

 

*Non-AccrualLoan Policy*

 

Interest on loans is credited to income as earned and is accrued onlyif deemed collectible. Accrual of interest is discontinued when a loan is over90 days delinquent or if management believes that collection is highlyuncertain. Generally, payments received on nonaccrual loans are recorded asprincipal reductions. Interest income is recognized after all principal hasbeen repaid or an improvement in the condition of the loan has occurred thatwould warrant resumption of interest accruals.

 

*Stock-BasedCompensation*

 

EffectiveJanuary 1, 2006, the Bank adopted the provisions of Statement of FinancialAccounting Standards (“SFAS”) No. 123R, *ShareBased Payments,*a revision to the previously issued guidance onaccounting for stock options and other forms of equity-based compensation. SFASNo. 123R requires companies to recognize in the income statement thegrant-date fair value of stock options and other equity-based forms ofcompensation issued to employees over the employees’ requisite service period(generally the vesting period).  The Bankhas adopted SFAS No. 123R using the modified prospective method whichmeans that the unvested portion of previously granted awards and any awardsthat are granted or modified after the date of adoption will be measured andaccounted for under the provisions of SFAS No. 123R. Accordingly,financial statement amounts for prior periods have not been restated to reflectthe fair value method of recognizing compensation cost relating to stockoptions. The Bank will continue to use straight-line recognition of expensesfor awards with graded vesting.  The Bankutilizes a binomial pricing model for all grants. Expected volatility is basedon the historical volatility of the price of the Bank’s stock. The Bank useshistorical data to estimate option exercise and stock option forfeiture rateswithin the valuation model. The expected term of options granted for thebinomial model is derived from applying a historical suboptimal exercise factorto the contractual term of the grant. For binomial pricing, the risk-free ratefor periods is equal to the U.S. Treasury yield at the time of grant andcommensurate with the contractual term of the grant.

 

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*OtherReal Estate Owned*

 

Other real estate owned, which represents real estate acquired throughforeclosure, or deed in lieu of foreclosure in satisfaction of commercial andreal estate loans, is carried at the lower of cost or estimated fair value lessthe estimated selling costs of the real estate. The fair value of the propertyis based upon a current appraisal. The difference between the fair value of thereal estate collateral and the loan balance at the time of transfer is recordedas a loan charge off if fair value is lower. Subsequent to foreclosure,management periodically performs valuations and the OREO property is carried atthe lower of carrying value or fair value, less costs to sell. The  determination of a property’s estimated fairvalue incorporates (1) revenues projected to be realized from disposal ofthe property, (2) construction and renovation costs, (3) marketingand transaction costs, and (4) holding costs (e.g., property taxes,insurance and homeowners’ association dues). Any subsequent declines in thefair value of the OREO property after the date of transfer are recorded througha write-down of the asset. Any subsequent operating expenses or income,reduction in estimated fair values, and gains or losses on disposition of suchproperties are charged or credited to current operations.

 

**Introduction**

 

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

 

**Overviewof Results of Operations and Financial Condition**

 

·                     TheCompany recognized net income of $549,396 and $1,877,930 for the three and ninemonth periods ended September 30, 2008 as compared with $969,457 and$2,974,238 for the same periods in 2007, respectively.  The factors resulting in this decrease willbe discussed below.

 

·                     Netinterest income increased $432,681 or 8.9% and $1,067,521 or 7.6% for the threeand nine month periods ended September 30, 2008, respectively, compared tothe same periods in 2007.  Theseincreases were primarily due to increases in the net interest margin of 9 and17 basis points and increases in average earning assets of $27.8 million and$13.4 million for the three and nine month periods ended September 30,2008, respectively.  The net interest margin increase is attributableprimarily to liabilities repricing faster than assets in the current decliningrate environment and a reduction of high cost certificates of deposit whichwere replaced by core deposits and FHLB advances with a lower interest rate.

 

·                     The provisionfor loan losses in the three and nine month periods ended September 30,2008 increased by $457,000 and $752,000, respectively, compared to the sameperiods in 2007, due to loan growth, an increase in the level of non-accrualloans and management’s assessment of the appropriate level for the allowancefor loan losses.

 

·                     For the threeand nine month periods ended September 30, 2008, non-interest incomeincreased by $138,320 or 27.9% and $348,888 or 22.6%, respectively, from thesame period in 2007, primarily due to increased service charges on deposits andearnings on cash surrender value of life insurance policies as described below.

 

·                     Non-interestexpense increased by $962,737 or 26.9% and $2,825,837 or 27.4%, for the threeand nine month periods ended September 30, 2008, respectively, as comparedto the same periods in 2007, principally due to increased costs for salariesand benefits and OREO year-to-date expenses of $936,370 due to overhead andmarket value write downs.

 

·                     Totalassets increased $35.9 million or 7.9% from December 31, 2007.  Totalnet loans increased by $28.8 million, or 7.5% from December 31, 2007 to September 30,2008, while deposits decreased by $12.1 million or 3.2%.

 

**IncomeSummary**

 

For the three and ninemonth periods ended September 30, 2008, the Company recorded net income of$549,396 and $1,877,930, a decrease of $420,061 and $1,096,308, respectively,as compared to the $969,457 and $2,974,238 in net income for the same periodsin 2007.  Return on average assets (annualized) was 0.45% and 0.54% forthe third quarter and nine month period of 2008, respectively, as compared with0.87% and 0.90% for the same periods of 2007.  Annualized return onaverage equity was 4.91% and 5.72% for the third quarter and nine month periodof 2008, respectively, as compared with 9.34% and 10.56% for the same periodsof 2007.

 

16

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Earnings before provisionsfor income taxes for the third quarter and nine month period of 2008 were down$848,736 and $2,161,428, respectively from the comparable 2007 periods. The income statement components of these variances are as follows:

 

***Pre-Tax Income Variance Summary***

***(In thousands)***

*** ***
| ** **                            | ** ** | **Effect on Pre-Tax  Income** | ** ** | **Effect on Pre-Tax  Income** | ** ** |
|---------------------------------------|------------|-----------------------------------------|------------|-----------------------------------------|------------|
| ** **                            | ** ** | **Increase (Decrease)**            | ** ** | **Increase (Decrease)**            | ** ** |
| ** **                            | ** ** | **Three Months**                   | ** ** | **Nine Months**                    | ** ** |
| Change from 2007  to 2008 in:         | ** ** | ** **                              | ** ** | ** **                              | ** ** |
| Net interest  income                  |       | $                                       | 433        |                                    | $          | 1,068 |   |
| Provision for  loan losses            |       | (457                                    | )          | (752                                    | )          |
| Non-interest  income                  |       | 138                                     |       | 349                                     |       |
| Non-interest  expense                 |       | (963                                    | )          | (2,826                                  | )          |
| Change in income  before income taxes |       | $                                       | (849       | )                                       | $          | (2,161 | ) |

 

These variances will beexplained in the discussion below.

 

**NetInterest Income**

 

Net interest income isthe largest source of the Bank’s operating income.  For the three and ninemonth period ended September 30, 2008, net interest income was $5.29million and $15.18 million, respectively, an increase of $432,681 or 8.9% and$1,067,521 or 7.6% from the comparable periods in 2007.

 

The net interest margin(net interest income as a percentage of average interest earning assets) was4.76% and 4.71%, respectively, for the three and nine month periods ended September 30,2008, an increase of 9 and 17 basis points as compared to the same periods in2007.  The increase in the net interest margin in 2008 was principallyattributable to the change in the deposit mix from high cost certificates ofdeposit to lower cost core deposit accounts which caused the rate on interest-bearingliabilities to decrease faster than the rate on earning assets.

 

17

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The following tablesshows the relative impact of changes in average balances of interest earningassets and interest bearing liabilities, and interest rates earned and paid bythe Company and the Bank on those assets and liabilities for the three and ninemonth periods ended September 30, 2008 and 2007:

 

***Net Interest Analysis***

*(Dollarsin thousands)*

* *
| ** **                                       | ** ** | **Three Months Ended  September 30, 2008** | ** ** | **Three Months Ended  September 30, 2007** | ** ** |
|--------------------------------------------------|------------|----------------------------------------------------------------|------------|----------------------------------------------------------------|------------|
| ** **                                       | ** ** | **Average  Balance**                                           | ** ** | **Interest  Inc /  Exp**                                  | ** ** | **Avg  Rate/  Yield** | ** ** | **Average  Balance** | ** ** | **Interest  Inc /  Exp** | ** ** | **Avg  Rate/  Yield** | ** ** |
| **Assets:**                                      |       |                                                           |       |                                                           |       |   |   |   |   |   |   |   |   |
| Earning assets:                                  |       |                                                           |       |                                                           |       |   |   |   |   |   |   |   |   |
| Gross loans  (1) (2)                        |       | $                                                              | 408,476    |                                                           | $          | 7,047 |   | 6.84 | % | $ | 376,253 |   | $ | 7,632 |   | 8.05 | % |
| Investment  securities (2)                       |       | 33,475                                                         |       | 416                                                            |       | 4.93 | % | 34,666 |   | 433 |   | 4.96 | % |
| Federal funds  sold                              |       | 877                                                            |       | 4                                                              |       | 1.93 | % | 4,268 |   | 55 |   | 5.07 | % |
| Interest-earning  deposits                       |       | 242                                                            |       | 1                                                              |       | 0.93 | % | 77 |   | 1 |   | 4.28 | % |
| Total  interest-earning assets                   |       | 443,070                                                        |       | 7,468                                                          |       | 6.69 | % | 415,264 |   | 8,121 |   | 7.76 | % |
| Total  noninterest earning assets                |       | 39,090                                                         |       |                                                           |       |   |   | 28,340 |   |   |   |   |   |
| Total Assets                                     |       | 482,160                                                        |       |                                                           |       |   |   | 443,604 |   |   |   |   |   |
| **Liabilities  and Shareholders’ Equity:**  |       |                                                           |       |                                                           |       |   |   |   |   |   |   |   |   |
| Interest-bearing  liabilities:                   |       |                                                           |       |                                                           |       |   |   |   |   |   |   |   |   |
| Money market  deposits                           |       | 153,260                                                        |       | 927                                                            |       | 2.40 | % | 132,707 |   | 1,281 |   | 3.83 | % |
| NOW deposits                                     |       | 54,711                                                         |       | 102                                                            |       | 0.74 | % | 53,262 |   | 150 |   | 1.12 | % |
| Savings deposits                                 |       | 15,225                                                         |       | 47                                                             |       | 1.23 | % | 17,587 |   | 150 |   | 3.38 | % |
| Time  certificates of deposit $100,000 or more   |       | 33,177                                                         |       | 280                                                            |       | 3.34 | % | 65,214 |   | 813 |   | 4.94 | % |
| Other time  deposits                             |       | 43,696                                                         |       | 346                                                            |       | 3.14 | % | 49,482 |   | 593 |   | 4.76 | % |
| Other borrowings                                 |       | 73,900                                                         |       | 455                                                            |       | 2.45 | % | 19,215 |   | 251 |   | 5.18 | % |
| Total  interest-bearing liabilities              |       | 373,969                                                        |       | 2,157                                                          |       | 2.29 | % | 337,466 |   | 3,238 |   | 3.81 | % |
| Noninterest-bearing  liabilities:                |       |                                                           |       |                                                           |       |   |   |   |   |   |   |   |   |
| Noninterest-bearing  deposits                    |       | 60,846                                                         |       |                                                           |       |   |   | 61,446 |   |   |   |   |   |
| Other  liabilities                               |       | 2,999                                                          |       |                                                           |       |   |   | 3,498 |   |   |   |   |   |
| Total  noninterest-bearing liabilities           |       | 63,845                                                         |       |                                                           |       |   |   | 64,944 |   |   |   |   |   |
| Shareholders’  equity                       |       | 44,346                                                         |       |                                                           |       |   |   | 41,194 |   |   |   |   |   |
| Total  liabilities and shareholders’ equity |       | $                                                              | 482,160    |                                                           |       |   |   |   | $ | 443,604 |   |   |   |   |   |
| Net interest  income                             |       |                                                           |       | $                                                              | 5,311      |   |   |   |   |   | $ | 4,883 |   |   |   |
| Net interest  spread (3)                         |       |                                                           |       |                                                           |       | 4.40 | % |   |   |   |   | 3.95 | % |
| Net interest  margin (4)                         |       |                                                           |       |                                                           |       | 4.76 | % |   |   |   |   | 4.67 | % |

 

----

*(1) *Loan fees have been included in the calculation of interest income. Loan feeswere approximately $278,000 and $381,000 for the three months ended September 30,2008 and 2007, respectively.  Loans arenet of the allowance for loan losses, deferred fees, unearned income, andrelated direct costs.

 

*(2) *Yieldson municipal securities and loans have been adjusted to their fully-taxableequivalents, based on a federal marginal tax rate of 34.0%.

 

*(3) *Representsthe average rate earned on interest-earning assets less the average rate paidon interest-bearing liabilities.

 

*(4) *Representsnet interest income as a percentage of average interest-earning assets.

 

18

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***Net Interest Analysis***

*(Dollarsin thousands)*

* *
| ** **                                       | ** ** | **Nine Months Ended  September 30, 2008** | ** ** | **Nine Months Ended  September 30, 2007** | ** ** |
|--------------------------------------------------|------------|---------------------------------------------------------------|------------|---------------------------------------------------------------|------------|
| ** **                                       | ** ** | **Average  Balance**                                          | ** ** | **Interest  Inc /  Exp**                                 | ** ** | **Avg  Rate/  Yield** | ** ** | **Average  Balance** | ** ** | **Interest  Inc /  Exp** | ** ** | **Avg  Rate/  Yield** | ** ** |
| **Assets:**                                      |       |                                                          |       |                                                          |       |   |   |   |   |   |   |   |   |
| Earning assets:                                  |       |                                                          |       |                                                          |       |   |   |   |   |   |   |   |   |
| Gross loans  (1) (2)                        |       | $                                                             | 396,583    |                                                          | $          | 20,771 |   | 6.98 | % | $ | 379,156 |   | $ | 22,799 |   | 8.04 | % |
| Investment  securities (2)                       |       | 33,964                                                        |       | 1,244                                                         |       | 4.88 | % | 35,150 |   | 1,252 |   | 4.76 | % |
| Federal funds  sold                              |       | 780                                                           |       | 14                                                            |       | 2.36 | % | 3,608 |   | 141 |   | 5.22 | % |
| Interest-earning  deposits                       |       | 146                                                           |       | 2                                                             |       | 1.45 | % | 108 |   | 4 |   | 4.47 | % |
| Total  interest-earning assets                   |       | 431,473                                                       |       | 22,031                                                        |       | 6.80 | % | 418,022 |   | 24,196 |   | 7.74 | % |
| Total  noninterest earning assets                |       | 36,287                                                        |       |                                                          |       |   |   | 26,253 |   |   |   |   |   |
| Total Assets                                     |       | 467,760                                                       |       |                                                          |       |   |   | 444,275 |   |   |   |   |   |
| **Liabilities  and Shareholders’ Equity:**  |       |                                                          |       |                                                          |       |   |   |   |   |   |   |   |   |
| Interest-bearing  liabilities:                   |       |                                                          |       |                                                          |       |   |   |   |   |   |   |   |   |
| Money market  deposits                           |       | 145,810                                                       |       | 2,748                                                         |       | 2.51 | % | 122,787 |   | 3,405 |   | 3.71 | % |
| NOW deposits                                     |       | 54,994                                                        |       | 298                                                           |       | 0.72 | % | 53,212 |   | 446 |   | 1.12 | % |
| Savings deposits                                 |       | 16,313                                                        |       | 227                                                           |       | 1.85 | % | 16,897 |   | 432 |   | 3.42 | % |
| Time  certificates of deposit $100,000 or more   |       | 39,418                                                        |       | 1,166                                                         |       | 3.94 | % | 68,205 |   | 2,528 |   | 4.95 | % |
| Other time  deposits                             |       | 42,209                                                        |       | 1,130                                                         |       | 3.57 | % | 49,598 |   | 1,762 |   | 4.75 | % |
| Other borrowings                                 |       | 60,551                                                        |       | 1,222                                                         |       | 2.69 | % | 36,198 |   | 1,427 |   | 5.27 | % |
| Total  interest-bearing liabilities              |       | 359,295                                                       |       | 6,791                                                         |       | 2.52 | % | 346,897 |   | 10,000 |   | 3.85 | % |
| Noninterest-bearing  liabilities:                |       |                                                          |       |                                                          |       |   |   |   |   |   |   |   |   |
| Noninterest-bearing  deposits                    |       | 61,556                                                        |       |                                                          |       |   |   | 56,149 |   |   |   |   |   |
| Other  liabilities                               |       | 3,127                                                         |       |                                                          |       |   |   | 3,554 |   |   |   |   |   |
| Total  noninterest-bearing liabilities           |       | 64,683                                                        |       |                                                          |       |   |   | 59,703 |   |   |   |   |   |
| Shareholders’  equity                       |       | 43,782                                                        |       |                                                          |       |   |   | 37,675 |   |   |   |   |   |
| Total  liabilities and shareholders’ equity |       | $                                                             | 467,760    |                                                          |       |   |   |   | $ | 444,275 |   |   |   |   |   |
| Net interest  income                             |       |                                                          |       | $                                                             | 15,240     |   |   |   |   |   | $ | 14,196 |   |   |   |
| Net interest  spread(3)                          |       |                                                          |       |                                                          |       | 4.28 | % |   |   |   |   | 3.88 | % |
| Net interest  margin(4)                          |       |                                                          |       |                                                          |       | 4.71 | % |   |   |   |   | 4.54 | % |

 

----

*(1) *Loan fees have been included in the calculation of interest income. Loan feeswere approximately $828,000 and $1,068,000 for the  nine months ended September 30, 2008 and2007, respectively. Loans are net of the allowance for loan losses, deferredfees, unearned income, and related direct costs.

 

*(2) *Yieldson municipal securities and loans have been adjusted to their fully-taxableequivalents, based on a federal marginal tax rate of 34.0%.

 

*(3) *Representsthe average rate earned on interest-earning assets less the average rate paidon interest-bearing liabilities.

 

*(4) *Representsnet interest income as a percentage of average interest-earning assets.

 

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Shown in the followingtables are the relative impacts on net interest income of changes in theaverage outstanding balances (volume) of earning assets and interestbearing liabilities and the rates earned and paid by the Company on thoseassets and liabilities for the three and nine month periods ended September 30,2008 and 2007.  Changes in interest income and expense that are notattributable specifically to either rate or volume are allocatedproportionately among both variances.

 

***Rate / Volume Variance Analysis***

*(Inthousands)*

* *
| ** **                        | ** ** | **For the Three Months Ended September 30,** | ** ** |
|-----------------------------------|------------|----------------------------------------------------------------------------|------------|
| ** **                        | ** ** | **2008 vs 2007**                                                 | ** ** |
| ** **                        | ** ** | **Increase (Decrease)**                                               | ** ** |
| ** **                        | ** ** | **in interest income and expense**                     | ** ** |
| ** **                        | ** ** | **due to changes in:**                                      | ** ** |
| ** **                        | ** ** | **Volume**                                                                 | ** ** | **Rate** | ** ** | **Total** | ** ** |
| **Interest  income:**             |       |                                                                       |       |   |   |   |   |
| Gross loans (1)                   |       | $                                                                          | 653        |   | $ | (1,238 | ) | $ | (585 | ) |
| Investment  securities            |       | (15                                                                        | )          | (3 | ) | (18 | ) |
| Federal funds  sold               |       | (43                                                                        | )          | (7 | ) | (50 | ) |
| Interest-earning  deposits        |       | 2                                                                          |       | (2 | ) | (0 | ) |
| **Total interest income**         | ** ** | **$**                                                                      | **597**    | ** ** | **$** | **(1,250** | **)** | **$** | **(653** | **)** |
|                              |       |                                                                       |       |   |   |   |   |
| **Interest  expense:**            |       |                                                                       |       |   |   |   |   |
| Money market  deposits            |       | 198                                                                        |       | (553 | ) | (355 | ) |
| NOW deposits                      |       | 4                                                                          |       | (53 | ) | (49 | ) |
| Savings deposits                  |       | (20                                                                        | )          | (83 | ) | (103 | ) |
| Time CD $100K or  more            |       | (399                                                                       | )          | (134 | ) | (533 | ) |
| Other time  deposits              |       | (69                                                                        | )          | (178 | ) | (248 | ) |
| Other borrowings                  |       | 715                                                                        |       | (510 | ) | 205 |   |
| **Total interest expense**        | ** ** | **$**                                                                      | **429**    | ** ** | **$** | **(1,511** | **)** | **$** | **(1,082** | **)** |
| ** **                        | ** ** | ** **                                                                 | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Change in net interest income** | ** ** | **$**                                                                      | **168**    | ** ** | **$** | **261** | ** ** | **$** | **429** | ** ** |

 

----

*(1) *Loan fees have been included in the calculation of interest income. Loan feeswere approximately $278,000 and $381,000 for the  three months ended September 30, 2008and 2007, respectively.  Loans are net ofthe allowance for loan losses, deferred fees, unearned income, and relateddirect costs.

 

20

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**Rate/VolumeAnalysis of Net Interest Income**

(in thousands)

 
| ** **                        | ** ** | **For the Nine Months Ended September 30,** | ** ** |
|-----------------------------------|------------|---------------------------------------------------------------------------|------------|
| ** **                        | ** ** | **2008 vs 2007**                                                | ** ** |
| ** **                        | ** ** | **Increase (Decrease)**                                              | ** ** |
| ** **                        | ** ** | **in interest income and expense**                    | ** ** |
| ** **                        | ** ** | **due to changes in:**                                     | ** ** |
| ** **                        | ** ** | **Volume**                                                                | ** ** | **Rate** | ** ** | **Total** | ** ** |
| **Interest  income:**             |       |                                                                      |       |   |   |   |   |
| Gross loans (1)                   |       | $                                                                         | 1,048      |   | $ | (3,076 | ) | $ | (2,028 | ) |
| Investment  securities            |       | (42                                                                       | )          | 34 |   | (8 | ) |
| Federal funds  sold               |       | (110                                                                      | )          | (17 | ) | (127 | ) |
| Interest-earning  deposits        |       | 1                                                                         |       | (3 | ) | (2 | ) |
| **Total interest income**         | ** ** | **$**                                                                     | **897**    | ** ** | **$** | **(3,062** | **)** | **$** | **(2,165** | **)** |
|                              |       |                                                                      |       |   |   |   |   |
| **Interest  expense:**            |       |                                                                      |       |   |   |   |   |
| Money market  deposits            |       | $                                                                         | 638        |   | (1,295 | ) | (657 | ) |
| NOW deposits                      |       | 15                                                                        |       | (163 | ) | (148 | ) |
| Savings deposits                  |       | (15                                                                       | )          | (190 | ) | (205 | ) |
| Time CD $100K or  more            |       | (1,067                                                                    | )          | (295 | ) | (1,361 | ) |
| Other time  deposits              |       | (263                                                                      | )          | (369 | ) | (632 | ) |
| Other borrowings                  |       | 960                                                                       |       | (1,165 | ) | (205 | ) |
| **Total interest expense**        | ** ** | **$**                                                                     | **268**    | ** ** | **$** | **(3,477** | **)** | **$** | **(3,209** | **)** |
| ** **                        | ** ** | ** **                                                                | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Change in net interest income** | ** ** | **$**                                                                     | **629**    | ** ** | **$** | **415** | ** ** | **$** | **1,044** | ** ** |

 

----

*(1) *Loan fees have been included in the calculation of interest income. Loan feeswere approximately $828,000 and $1,068,000 for the nine months ended September 30,2008 and 2007, respectively. Loans are net of the allowance for loan losses,deferred fees, unearned income, and related direct costs.

 

The table above reflectsthe rates decline has impacted liabilities slightly more than assets asindicated by the increase of $417,000 in net interest income due to the ratechange.  The increased loan volume andthe overall change in mix of deposit balances contributed an increase of$627,000 to net interest income.

 

**Non-InterestIncome**

 

Non-interest incomerepresents service charges on deposit accounts and other non-interest relatedcharges and fees, including fees from the sale of loans.  For the threeand nine month period ended September 30, 2008, non-interest income was$644,691 and $1,930,643, an increase of $139,001 or 27.5% and $351,611 or22.3%, respectively, from the same period in 2007.

 

The following table showsthe major components of non-interest income:

 

***Non-Interest Income***

***(In thousands)***

 

**Non-Interest Income**

 
| ** **                                          | ** ** | **For the Three Months Ended September 30,** | ** ** | **For the Nine Months Ended September 30,** | ** ** |
|-----------------------------------------------------|------------|----------------------------------------------------------------------------|------------|---------------------------------------------------------------------------|------------|
| ** **                                          | ** ** | **2008**                                                                   | ** ** | **2007**                                                                  | ** ** | **$ chg** | ** ** | **% chg** | ** ** | **2008** | ** ** | **2007** | ** ** | **$ chg** | ** ** | **% chg** | ** ** |
| Service charges  on deposits                        |       | $                                                                          | 337        |                                                                      | $          | 268 |   | $ | 69 |   | 26.0 | % | $ | 985 |   | $ | 808 |   | $ | 177 |   | 21.9 | % |
| Earnings on cash  surrender value of life insurance |       | 99                                                                         |       | 44                                                                        |       | 55 |   | 127.5 | % | 249 |   | 102 |   | 147 |   | 143.7 | % |
| Mortgage  commissions                               |       | 23                                                                         |       | 14                                                                        |       | 9 |   | 62.5 | % | 95 |   | 167 |   | (72 | ) | (43.2 | )% |
| Other                                               |       | 175                                                                        |       | 171                                                                       |       | 4 |   | 2.4 | % | 561 |   | 464 |   | 97 |   | 21.0 | % |
|                                                |       | $                                                                          | 634        |                                                                      | $          | 497 |   | $ | 137 |   | 27.9 | % | $ | 1,890 |   | $ | 1,541 |   | $ | 349 |   | 22.6 | % |

 

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Service charges ondeposits increased by $69,541 or 26.0% and $176,703 or 21.9% in the three andnine month periods ended September 30, 2008, respectively, as compared tothe same periods in 2007, which is primarily due to increases in the number ofdemand deposit accounts opened during the first nine months of 2008.  The Bank continues to expand its offerings tothe consumer and business depositor. Currently, the Bank is pursuing a strategyto increase its core deposit base further by expanding the Bank’s offering ofremote deposit capture products as well as cash management products for currentand prospective business depositors.  Inaddition, Earnings on cash surrender of life insurance increased by $55,626 and146,872 as a result of the $4.74 million invested in additional life insurancepolicies on certain officers and directors during the first quarter of 2008.

 

**Non-InterestExpense**

 

Non-interest expenserepresents salaries and benefits, occupancy expenses, professional expenses,outside services, and other miscellaneous expenses necessary to conductbusiness.

 

The following table showsthe major components of non-interest expenses:

 

***Non-Interest Expense***

***(In thousands)***

 
| ** **                      | ** ** | **For the Three Months Ended September 30,** | ** ** | **For the Nine Months Ended September 30,** | ** ** |
|---------------------------------|------------|----------------------------------------------------------------------------|------------|---------------------------------------------------------------------------|------------|
| ** **                      | ** ** | **2008**                                                                   | ** ** | **2007**                                                                  | ** ** | **$** | ** change** | ** ** | **%  change** | ** ** | **2008** | ** ** | **2007** | ** ** | **$** | ** change** | ** ** | **%  change** | ** ** |
| Salaries and  employee benefits |       | $                                                                          | 2,319      |                                                                      | $          | 2,121 |   | $ | 198 |   | 9.3 | % | $ | 7,201 |   | $ | 6,274 |   | $ | 927 |   | 14.8 | % |
| Occupancy  expenses             |       | 676                                                                        |       | 603                                                                       |       | 73 |   | 12.0 | % | 2,016 |   | 1,657 |   | 359 |   | 21.7 | % |
| Data processing  fees           |       | 193                                                                        |       | 169                                                                       |       | 24 |   | 14.2 | % | 562 |   | 385 |   | 177 |   | 45.9 | % |
| Telephone  expenses             |       | 74                                                                         |       | 64                                                                        |       | 10 |   | 15.8 | % | 219 |   | 188 |   | 31 |   | 16.2 | % |
| OREO expenses                   |       | 485                                                                        |       | —                                                                    |       | 485 |   |   |   | 936 |   | — |   | 936 |   |   |   |
| Other operating  expenses       |       | 788                                                                        |       | 615                                                                       |       | 173 |   | 28.2 | % | 2,189 |   | 1,793 |   | 396 |   | 22.1 | % |
|                            | ** ** | **$**                                                                      | **4,535**  | ** **                                                                | **$**      | **3,572** | ** ** | **$** | **963** | ** ** | **26.9** | **%** | **$** | **13,123** | ** ** | **$** | **10,297** | ** ** | **$** | **2,826** | ** ** | **27.4** | **%** |

 

Non-interest expensesincreased by $962,737 or 26.9% and $2,825,837 or 27.4% for the three and ninemonths ended September 30, 2008, as compared to the same periods of2007.  Salaries and employee benefitsincreased $198,063 and $926,384 for the three and nine months ended September 30,2008, as compared to the same periods of 2007 as a result of additional facilities, inStockton and Oakdale, and corresponding branch personnel, as well as continuedadditions to the Bank’s administrative and support personnel, positioning theBank for continued growth.  Theseadditional facilities were the primary reason for the increase in occupancyexpense of $72,245 and $359,011 for the three and nine months ended September 30,2008, as compared to the same periods of 2007.

 

Management anticipates that noninterest expense will continue toincrease as we continue to grow. However, management remains committed to cost-control and efficiency,and we expect to keep these increases to a minimum relative to growth.

 

**IncomeTaxes**

 

Income tax expense forthe three and nine months ended September 30, 2008, was $239,595 and$883,150, respectively, a decrease of $428,675 or 64.1% and $1,065,120 or 54.7%for the same periods in 2007.  The effective tax rate (income tax expenseas a percentage of pre-tax income) for the third quarter and nine month periodof 2008 was 30.4% and 32.0%, respectively, compared with 40.8% and 39.6% forthe same period in 2007.  The disparity between the effective tax rates in2008 as compared to 2007 is primarily due to tax credits from CaliforniaEnterprise Zones and low income housing projects as well as tax free-income onloans within these enterprise zones and municipal securities and loans thatcomprise a larger proportion of pre-tax income in 2008 as compared to 2007.

 

**BalanceSheet Analysis**

 

At September 30,2008, consolidated assets totaled $490.1 million, as compared with $454.3million at December 31, 2007.  This represents an increase of $35.8million or 7.9% compared to December 31, 2007.  Total net loansincreased $28.8 million or 7.5% over that period, while deposits decreased$12.1 million or 3.2% and shareholders’ equity increased $1.8 million or 4.2%over that same period.

 

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**AssetQuality**

 

Nonperforming assets consist of loans on non-accrual status, loans90 days or more past due and still accruing interest, loans restructured,where the terms of repayment have been renegotiated resulting in a reduction ordeferral of interest or principal, and other real estate owned (“OREO”).

 

Loans are generally placed on non-accrual status when they become90 days past due, unless management believes the loan is adequatelycollateralized and in the process of collection. The past due loans may or maynot be adequately collateralized, but collection efforts are continuouslypursued. Loans may be restructured by management when a borrower hasexperienced some changes in financial status, causing an inability to meet theoriginal repayment terms, and where we believe the borrower will eventuallyovercome those circumstances and repay the loan in full. OREO consists ofproperties acquired by foreclosure or similar means and which managementintends to offer for sale.

 

Non-accrual loans totaled$2.17 million at September 30, 2008, as compared to $9.09 million at December 31,2007.  The non-accrual loans as of September 30,2008 are loans made to 4 borrowers for purposes of residential construction andcommercial real estate.

 

OREO totals $4.36 millionas of September 30, 2008 and consists of three properties that wereacquired through foreclosure including residential land lots and a commercialreal estate property.

 

The following tablepresents information about the Company’s non-performing loans, including assetquality ratios as of September 30, 2008 and December 31, 2007:

 

***Non-Performing Assets***

*(inthousands)*

 
| ** **                                               | ** ** | **September 30** | ** ** | **December 31** | ** ** |
|----------------------------------------------------------|------------|-----------------------|------------|----------------------|------------|
| ** **                                               | ** ** | **2008**              | ** ** | **2007**             | ** ** |
| Loans in  nonaccrual status                              |       | $                     | 2,175      |                 | $          | 9,087 |   |
| Loans past due  90 days or more and accruing             |       | —                |       | 721                  |       |
| Restructured  loans                                      |       | —                |       | —               |       |
| Total  nonperforming loans                               |       | 2,175                 |       | 9,808                |       |
| Other real  estate owned                                 |       | 4,365                 |       |                 |       |
| Total  nonperforming assets                              |       | $                     | 6,540      |                 | $          | 9,808 |   |
|                                                     |       |                  |       |                 |       |
| Allowance for  loan losses                               |       | $                     | 4,650      |                 | $          | 4,507 |   |
|                                                     |       |                  |       |                 |       |
| Asset quality  ratios:                                   |       |                  |       |                 |       |
| Non-performing  assets to total assets                   |       | 1.33                  | %          | 2.16                 | %          |
| Non-performing  loans to total loans                     |       | 0.52                  | %          | 2.54                 | %          |
| Allowance for  loan losses to total loans                |       | 1.12                  | %          | 1.16                 | %          |
| Allowance for  loan losses to total non-performing loans |       | 214                   | %          | 46                   | %          |

 

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**Allowancefor Loan and Lease Losses**

 

In anticipation of credit risk inherent in our lending business, we setaside allowances through charges to earnings. Such charges were not only madefor the outstanding loan portfolio, but also for off-balance sheet items, suchas commitments to extend credits or letters of credit. The charges made for theoutstanding loan portfolio were credited to the allowance for loan losses,whereas charges for off-balance sheet items were credited to the reserve foroff-balance sheet items, which is presented as a component of otherliabilities.  The Bank recorded loan lossprovisions of $602,000 and $1,187,000 for the three and nine month periods in2008, respectively, a $457,000 and $752,000 increase from the provisionsrecorded in the same periods of 2007.

 

The allowance for loan losses increased by 3.2%, or $142,970, to$4.65 million at September 30, 2008, as compared with$4.51 million at December 31, 2007. The Bank recognized the increase in the allowance for loan losses duringthe first nine months of the year due to the loan loss provision of $1.19million which was partially offset by loan chargeoffs.  The weak business climate adversely impactedthe financial conditions of certain clients and increased net loan charge-offsby $1.03 million, for the first nine months of 2008, compared to $30,000 forthe first nine months of 2007. The increase to the allowance for loan losseswas outpaced by the growth of our loan portfolio which decreased the allowancefor loan losses as a percentage of total loans to 1.12% at September 30,2008 as compared to 1.16% at December 31, 2007.

 

Management reviews these conditions with our senior credit officers. Tothe extent that any of these conditions is evidenced by a specificallyidentifiable problem credit or portfolio segment as of the evaluation date,management’s estimate of the effect of such condition may be reflected as aspecific allowance applicable to such credit or portfolio segment. Where any ofthese conditions is not evidenced by a specific, identifiable problem credit orportfolio segment as of the evaluation date, management’s evaluation of theinherent loss related to such condition is reflected in the unallocatedallowance. Although management has allocated a portion of the allowance tospecific loan categories, the adequacy of the allowance is considered in itsentirety.

 

The following tableprovides an analysis of the changes in the ALLL for the nine-month periodsended September 30, 2008 and 2007:

 

***Allowance for Loan and Lease Losses***

*(dollarsin thousands)*

 
| ** **                                                            | ** ** | **Nine Months Ended** | ** ** |
|-----------------------------------------------------------------------|------------|---------------------------------|------------|
| ** **                                                            | ** ** | **September 30,**          | ** ** |
| ** **                                                            | ** ** | **2008**                        | ** ** | **2007** | ** ** |
| Balance at  beginning of period                                       |       | $                               | 4,507      |   | $ | 4,341 |   |
| Provision for  loan losses                                            |       | 1,187                           |       | 435 |   |
| Loans charged  off                                                    |       | (1,032                          | )          | (32 | ) |
| Recoveries of  previous charge-offs                                   |       | 4                               |       | 3 |   |
| Net charge-offs                                                       |       | (1,029                          | )          | (29 | ) |
| Reclassification  of reserve related to off-balance-sheet commitments |       | (16                             | )          | 10 |   |
| Balance at end  of period                                             |       | $                               | 4,650      |   | $ | 4,757 |   |
|                                                                  |       |                            |       |   |   |
| Allowance for  loan losses as a percentage of:                        |       |                            |       |   |   |
| Period end loans                                                      |       | 1.12                            | %          | 1.23 | % |
| Non-performing  loans                                                 |       | 213.74                          | %          | 391.29 | % |
| As a percentage  of average loans (annualized):                       |       |                            |       |   |   |
| Net charge-offs                                                       |       | .35                             | %          | .01 | % |
| Provision for  loan losses                                            |       | .40                             | %          | .15 | % |

 

The Bank makes provisionsfor loan losses when required to bring the total allowance for loan and leaselosses to a level deemed appropriate for the level of risk in the loanportfolio.  At least quarterly, management conducts an assessment of theoverall quality of the loan portfolio and general economic trends in the localmarket.  The determination of the appropriate level for the allowance isbased on that review, considering such factors as historical experience, thevolume and type of lending conducted, the amount of and identified potentialloss associated with specific nonperforming loans, regulatory policies, generaleconomic conditions, and other factors related to the collectibility of loansin the portfolio.

 

Although management believes the allowance at September 30, 2008was adequate to absorb probable losses from any known and inherent risks in theportfolio, no assurance can be given that economic conditions which adverselyaffect our service areas or other variables will not result in increased lossesin the loan portfolio in the future.

 

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**Investment Activities**

 

Investments are a key source of interest income. Management of ourinvestment portfolio is set in accordance with strategies developed andoverseen by our Investment Committee. Investment balances, including cashequivalents and interest-bearing deposits in other financial institutions, aresubject to change over time based on our asset/liability funding needs andinterest rate risk management objectives. Our liquidity levels take intoconsideration anticipated future cash flows and all available sources ofcredits and are maintained at levels management believes are appropriate toassure future flexibility in meeting anticipated funding needs.

 

*Cash Equivalents and Interest-bearing Deposits inother Financial Institutions*

 

The Bank holds federal funds sold, unpledged available-for-salesecurities and salable government guaranteed loans to help meet liquidityrequirements and provide temporary holdings until the funds can be otherwisedeployed or invested. As of September 30, 2008, and December 31,2007, we had $10.64 million, and $14.20 million, respectively, in cash andcash equivalents.

 

*Investment Securities*

 

Management of our investment securities portfolio focuses on providingan adequate level of liquidity and establishing an interest rate-sensitiveposition, while earning an adequate level of investment income without takingundue risk. Investment securities that we intend to hold until maturity areclassified as held-to-maturity securities, and all other investment securitiesare classified as available-for-sale. Currently, all of our investment securities are classified asavailable-for-sale. The carrying values of available-for-sale investmentsecurities are adjusted for unrealized gains or losses as a valuation allowanceand any gain or loss is reported on an after-tax basis as a component of othercomprehensive income.

 

Management has evaluated the investment securities portfolio todetermine if the impairment of any security in an unrealized lossposition is temporary or other than temporary.  Management has determined thatno investment security is other than temporarily impaired.  The unrealizedlosses are due solely to interest rate changes.

 

**Deposits**

 

Total deposits at September 30, 2008 were $365.2 million, a $12.1million or 3.2% decrease from the deposit total of $377.3 million at December 31,2007.  Average deposits decreased $6.5 to$360.3 million for the nine month period ended September 30, 2008 ascompared to the same period in 2007.

 

**Deposits**

**(inthousands)**

 
| ** **      | ** ** | **September 30,** | ** **  | **December 31,** | ** ** | **Nine months change** | ** ** |
|-----------------|------------|------------------------|-------------|-----------------------|------------|----------------------------------|------------|
| ** **      | ** ** | **2008**               | ** **  | **2007**              | ** ** | **$**                            | ** ** | **%** | ** ** |
| Demand          |       | $                      | 58,292      |                  | $          | 68,151                           |       | $ | (9,859 | ) | (14.5 | )% |
|            |       |                   |        |                  |       |                             |       |   |   |   |   |   |
| NOW             |       | 53,831                 |        | 54,496                |       | (666                             | )          | (1.2 | )% |
|            |       |                   |        |                  |       |                             |       |   |   |
| MMDA            |       | 157,215                |        | 138,414               |       | 18,801                           |       | 13.6 | % |
|            |       |                   |        |                  |       |                             |       |   |   |
| Savings         |       | 14,411                 |        | 16,438                |       | (2,027                           | )          | (12.3 | )% |
|            |       |                   |        |                  |       |                             |       |   |   |
| Time < 100K  |       | 45,419                 |        | 42,228                |       | 3,192                            |       | 7.6 | % |
|            |       |                   |        |                  |       |                             |       |   |   |
| Time > $100K |       | 36,062                 |        | 57,621                |       | (21,559                          | )          | (37.4 | )% |
|            |       |                   |        |                  |       |                             |       |   |   |
| ** **      | ** ** | **$**                  | **365,230** | ** **            | **$**      | **377,348**                      | ** ** | **$** | **(12,118** | **)** | **(3.2** | **)%** |

 

Because our client base is comprised primarily of commercial andindustrial accounts, individual account balances are generally higher thanthose of consumer-oriented banks. A number of clients carry deposit balances ofmore than 1% of our total deposits, but only one customer had a deposit balanceof more than 3% of total deposits at September 30, 2008.

 

Since our deposit growth strategy emphasizes core deposit growth wehave avoided relying on brokered deposits as a consistent source of funds.  The only brokered deposit the Bank holds arefrom CDARS, a certificate of deposit program that exchanges funds with othernetwork banks to offer full FDIC insurance coverage to the customer.  The bank had $4.2 million in brokereddeposits as of September 30, 2008 and none at December 31, 2007.

 

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**Borrowings**

 

Although deposits are the primary source of funds for our lending andinvestment activities and for general business purposes, we may obtain advancesfrom the Federal Home Loan Bank of San Francisco (“FHLB”) as an alternative toretail deposit funds. Our outstanding FHLB advances increased by $47 million atSeptember 30, 2008, to  $78.0million, compared to $31.0 million at December 31, 2007 due to thedecrease in deposits. See “Liquidity Management” below for the details on theFHLB borrowings program.

 

**CapitalRatios**

 

We are subject to various regulatory capital requirements administeredby federal banking agencies. Failure to meet minimum capital requirements cantrigger regulatory actions that could have a material adverse effect on ourfinancial statements and operations. Under capital adequacy guidelines and theregulatory framework for prompt corrective action, we must meet specificcapital guidelines that rely on quantitative measures of our assets,liabilities and certain off-balance-sheet items as calculated under regulatoryaccounting practices. Our capital amounts and classification are also subjectto qualitative judgments by the regulators about components, risk weightings,and other factors.

 

The following table showsthe Oak Valley Community Bank’s capital ratios, as calculated under regulatoryguidelines, compared to the regulatory minimum capital ratios and theregulatory minimum capital ratios needed to qualify as a “well-capitalized”institution at September 30, 2008, December 31, 2007:

 

***Oak Valley Community Bank Capital Ratios***

***(dollars in thousands)***

 
| ** **                                | ** ** | ** ** | ** ** | ** **           | ** ** | **Amount of Capital Required** | ** ** |
|-------------------------------------------|------------|------------|------------|----------------------|------------|-----------------------------------------------|------------|
| ** **                                | ** ** | ** ** | ** ** | ** **           | ** ** | **To Be**                                | ** ** | **To Be Adequately** | ** ** |
| ** **                                | ** ** | **Actual** | ** ** | **Well-Capitalized** | ** ** | **Capitalized**                               | ** ** |
| ** **                                | ** ** | **Amount** | ** ** | **Ratio**            | ** ** | **Amount**                                    | ** ** | **Ratio** | ** ** | **Amount** | ** ** | **Ratio** | ** ** |
| **As of  September 30, 2008:**       |       |       |       |                 |       |                                          |       |   |   |   |   |   |   |
| Total Capital  (to Risk-Weighted Assets)  |       | $          | 48,880     |                 | 10.60      | %                                             | $          | 46,109 |   | 10 | % | $ | 36,887 |   | 8 | % |
| Tier 1 Capital  (to Risk-Weighted Assets) |       | $          | 44,049     |                 | 9.55       | %                                             | $          | 27,665 |   | 6 | % | $ | 18,444 |   | 4 | % |
| Tier 1 Capital  (to Average Assets)       |       | $          | 44,049     |                 | 9.14       | %                                             | $          | 24,108 |   | 5 | % | $ | 19,286 |   | 4 | % |
|                                      |       |       |       |                 |       |                                          |       |   |   |   |   |   |   |
| **As of  December 31, 2007:**        |       |       |       |                 |       |                                          |       |   |   |   |   |   |   |
| Total Capital  (to Risk-Weighted Assets)  |       | $          | 47,311     |                 | 11.13      | %                                             | $          | 42,493 |   | 10 | % | $ | 33,994 |   | 8 | % |
| Tier 1 Capital  (to Risk-Weighted Assets) |       | $          | 42,594     |                 | 10.02      | %                                             | $          | 25,496 |   | 6 | % | $ | 16,997 |   | 4 | % |
| Tier 1 Capital  (to Average Assets)       |       | $          | 42,594     |                 | 9.42       | %                                             | $          | 22,614 |   | 5 | % | $ | 18,092 |   | 4 | % |

 

**Liquidity Management**

 

Maintenance of adequate liquidity requires that sufficient resources beavailable at all time to meet our cash flow requirements. Liquidity in abanking institution is required primarily to provide for deposit withdrawalsand the credit needs of its customers and to take advantage of investment opportunitiesas they arise. Liquidity management involves our ability to convert assets intocash or cash equivalents without incurring significant loss, and to raise cashor maintain funds without incurring excessive additional cost. For thispurpose, we maintain a portion of our funds in cash and cash equivalents,salable government guaranteed loans and securities available for sale. Ourliquid assets at September 30, 2008 was $53.2 million compared to $59.9million at December 31, 2007.  Ourliquidity level measured as the percentage of liquid assets to total assets was10.9% and 13.2% at September 30, 2008 and December 31, 2007,respectively.

 

As a secondary source of liquidity, we rely on advances from the FHLBto supplement our supply of lendable funds and to meet deposit withdrawalrequirements. Advances from the FHLB are typically secured by a portion of ourloan portfolio. The FHLB determines limitations on the amount of advances byassigning a percentage to each eligible loan category that will count towardsthe borrowing capacity. As of September 30, 2008, our borrowing capacityfrom the FHLB was approximately $101 million and the 

 

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outstanding balance was $78 million, or approximately 77% of ourborrowing capacity. We also maintain 2 lines of credit with correspondent banksto purchase up to $20 million in federal funds, for which there were noadvances as of September 30, 2008.

 

**Off-Balance-SheetArrangements**

 

During the ordinary course of business, we provide various forms ofcredit 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 ourbalance sheets.

 

As of September 30, 2008 and December 31, 2007, we hadcommitments to extend credit of $67.1 million and $81.40 million, respectively,which includes obligations under letters of credit of $2.68 million and$1.14 million, respectively,

 

The effect on our revenues, expenses, cash flows and liquidity from theunused portion of the commitments to provide credit cannot be reasonablypredicted because there is no guarantee that the lines of credit will be used.

 

**Effectsof Inflation and Economic Issues**

 

Inflation primarily impacts us by its effect on interest rates. Ourprimary source of income is net interest income, which is affected by changesin interest rates. We attempt to limit the impact of inflation on our netinterest margin through management of rate-sensitive assets and liabilities andthe analysis of interest rate sensitivity. The effect of inflation on premisesand equipment as well as noninterest expenses has not been significant for theperiods covered in this report. Our business is generally not seasonal.

 

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**Item 3.****                                                                     Quantitativeand Qualitative Disclosures About Market Risk**

 

Not applicable.

 

**Item 4T.****                                                             Controlsand Procedures**

 

The Company’s ChiefExecutive Officer and its Chief Financial Officer, after evaluating theeffectiveness of the Company’s disclosure controls and procedures, as definedin Exchange Act Rules 13a-15(e) and 15(d)-15(e) promulgatedunder 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’sdisclosure controls and procedures were adequate and effective to ensure thatmaterial information relating to the Company would be made known to them byothers within the Company, particularly during the period in which this reportwas being prepared.  Disclosure controls and procedures are designed toensure that information required to be disclosed by us in the reports that wefile or submit under the Exchange Act is recorded, processed, summarized andreported within the time periods specified in the Securities and ExchangeCommission’s rules and forms.  Disclosure controls and proceduresinclude, without limitation, controls and procedures designed to ensure thatinformation required to be disclosed by us in the reports that we file underthe Exchange Act is accumulated and communicated to our management, including ourChief Executive Officer and Chief Financial Officer, as appropriate to allowtimely decisions regarding required disclosure.

 

There were no significantchanges in the Company’s internal controls or in other factors that couldsignificantly affect the Company’s internal controls over financial reportingin the first nine months of 2008.

 

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**PART II - OTHER INFORMATION**

 

**Item 1.****                                                                     Legal Proceedings**

 

There are no materiallegal proceedings to which the Company is a party or to which any of itsproperty is subject.

 

**Item 1A.****                                                            RiskFactors**

 

Not applicable.

 

**Item 2.****                                                                     UnregisteredSales of Equity Securities and Use of Proceeds**

 

On July 3, 2008, inconnection with the bank holding company reorganization between Oak ValleyCommunity Bank, Oak Valley Bancorp issued 7,658,252 shares of its common stockto the shareholders of Oak Valley Community Bank pursuant to an exemption underSection 3(a)(12) of the 1933 Securities Act, as amended.

 

**Item 3.****                                                                     DefaultsUpon Senior Securities**

 

None.

 

**Item 4.****                                                                     Submissionof Matters to a Vote of Security Holders**

 

None.

 

**Item 5.****                                                                     OtherInformation**

 

None.

 

**Item 6.****                                                                     Exhibits**

 
| **Exhibit** | ** ** | **Description**                                                                                                                                                                             |
|-------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ** **  | ** ** | ** **                                                                                                                                                                                  |
| 31.01       |       | Certification of Chief  Executive Officer pursuant to Exchange Act Rules 13a-14(a) and  15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act  of 2003     |
| 31.02       |       | Certification of Chief  Financial Officer pursuant to Exchange Act Rules 13a-14(a) and  15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act  of 2003     |
| 32.01       |       | Certifications of Chief  Executive Officer and Chief Financial Officer pursuant to 18 U.S.C.  Section 1350, as adopted pursuant to Section 906 of the  Sarbanes-Oxley Act of 2003 |

 

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**SIGNATURES**

 

Pursuant to therequirements of the Securities Exchange Act of 1934, as amended, the registranthas duly caused this report to be signed on its behalf by the undersignedthereunto duly authorized.

 
|                         | **Oak Valley Bancorp** |
|------------------------------|------------------------|
| Date: November 13, 2008 | By:                    | /s/    RICHARD  A. MCCARTY |
|                         | ** **             | **Richard  A. McCarty** |
|                         | ** **             | **Executive  Vice President and Chief Financial Officer** |
|                         | ** **             | **(Principal  Financial Officer and duly authorized   signatory)** |

 

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**EXHIBITINDEX**

 
| **Exhibit** | ** ** | **Description**                                                                                                                                                                             |
|-------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ** **  | ** ** | ** **                                                                                                                                                                                  |
| 31.01       |       | Certification of Chief  Executive Officer pursuant to Exchange Act Rules 13a-14(a) and  15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act  of 2003     |
|        |       |                                                                                                                                                                                        |
| 31.02       |       | Certification of Chief  Financial Officer pursuant to Exchange Act Rules 13a-14(a) and  15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act  of 2003     |
|        |       |                                                                                                                                                                                        |
| 32.01       |       | Certifications of Chief  Executive Officer and Chief Financial Officer pursuant to 18 U.S.C.  Section 1350, as adopted pursuant to Section 906 of the  Sarbanes-Oxley Act of 2003 |

 

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