Table of 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 June 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 mark whether the issuer (1) hasfiled all reports required to be filed by Section 13 or 15(d) of theExchange Act during the past 12 months (or for such shorter period that theregistrant was required to file such reports), and (2) has been subject tosuch filing requirements for the past 90 days.  Yes   **x**  No   **o**

 

Indicateby check mark whether the registrant is a large accelerated filer, an acceleratedfiler, a non-accelerated filer, or a smaller reporting company. See definitionsof “large accelerated filer,” “accelerated filer,” and “smaller reportingcompany” in Rule 12b-2 of 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 mark whether the registrant is ashell company (as defined in Rule 12b-2 of the Exchange Act).  Yes   **o**  No   **x**

 

**APPLICABLEONLY TO CORPORATE ISSUERS**

 

State the number of shares outstanding of each of theissuer’s classes of common equity, as of the latest practicable date: **7,658,252 shares of common stock outstanding as of August 13,2008.**

 

 

 

----

Table of Contents

 

**OakValley Bancorp**

**June 30,2008**

 

**Index**

** **
| ** **                                   | **Page**                                                                                                                                                            |
|----------------------------------------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| **PART I – FINANCIAL INFORMATION** |                                                                                                                                                                |
|                                         |                                                                                                                                                                |
| **Item 1.**                                  | **Financial Statements**                                                                                                                                            |   |
|                                         |                                                                                                                                                                |   |
|                                         | Condensed  Consolidated Balance Sheets at June 30,  2008, December 31, 2007                                                                               | 3 |
|                                         |                                                                                                                                                                |   |
|                                         | Condensed Consolidated  Statements of Earnings for the  Three and Six Month Periods Ended June 30, 2008 and 2007                                               | 4 |
|                                         |                                                                                                                                                                |   |
|                                         | Condensed  Consolidated Statements of Changes of Shareholders’ Equity for the Six-Month Period Ended  June 30, 2008 and Year Ended December 31, 2007 | 5 |
|                                         |                                                                                                                                                                |   |
|                                         | Condensed  Consolidated Statements of Cash Flows for the Six-Month Periods Ended  June 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**                                                                     | 10 |
| ** **                                   | ** **                                                                                                                                                          | ** ** |
| **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**                                                                                                                                               | 30 |
| **Item 6.**                                  | **Exhibits**                                                                                                                                                        | 30 |
|                                              |                                                                                                                                                                     |  |  |

 

2

----

Table of Contents

 

**PART I**

 

**Item1.     Financial Statements**

 

**OAK VALLEYCOMMUNITY BANK**

**CONDENSED BALANCE SHEETS (UNAUDITED)**

 
| ** **                                                                                                                                                                               | ** ** | **June 30,** | ** **  | **December 31,** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------|-------------|-----------------------|------------|
| ** **                                                                                                                                                                               | ** ** | **2008**          | ** **  | **2007**              | ** ** |
| **ASSETS**                                                                                                                                                                               |       |              |        |                  |       |
| ** **                                                                                                                                                                               |       |              |        |                  |       |
| Cash and due from banks                                                                                                                                                                  |       | $                 | 11,331,483  |                  | $          | 10,397,951 |   |
| Federal funds sold                                                                                                                                                                       |       | 745,000           |        | 3,805,000             |       |
|                                                                                                                                                                                     |       |              |        |                  |       |
| Cash and cash equivalents                                                                                                                                                                |       | 12,076,483        |        | 14,202,951            |       |
|                                                                                                                                                                                     |       |              |        |                  |       |
| Securities available for sale                                                                                                                                                            |       | 34,652,428        |        | 33,372,624            |       |
| Loans, net                                                                                                                                                                               |       | 395,234,968       |        | 382,264,026           |       |
| Bank premises and equipment, net                                                                                                                                                         |       | 10,484,249        |        | 10,108,620            |       |
| Other real estate owned                                                                                                                                                                  |       | 3,547,193         |        | —                |       |
| Accrued interest and other assets                                                                                                                                                        |       | 20,099,500        |        | 14,310,569            |       |
|                                                                                                                                                                                     |       |              |        |                  |       |
|                                                                                                                                                                                     |       | $                 | 476,094,821 |                  | $          | 454,258,790 |   |
|                                                                                                                                                                                     |       |              |        |                  |       |
| **LIABILITIES AND SHAREHOLDERS’  EQUITY**                                                                                                                                           | ** ** | ** **        | ** **  | ** **            | ** ** |
|                                                                                                                                                                                     |       |              |        |                  |       |
| Deposits                                                                                                                                                                                 |       | $                 | 358,158,690 |                  | $          | 377,347,776 |   |
| Accrued interest and other liabilities                                                                                                                                                   |       | 2,801,414         |        | 3,549,624             |       |
| FHLB advances                                                                                                                                                                            |       | 71,400,000        |        | 31,000,000            |       |
|                                                                                                                                                                                     |       |              |        |                  |       |
| Total liabilities                                                                                                                                                                        |       | 432,360,104       |        | 411,897,400           |       |
|                                                                                                                                                                                     |       |              |        |                  |       |
| Shareholders’ equity                                                                                                                                                                |       |              |        |                  |       |
| Preferred stock, no par value; 10,000,000 sharesauthorized,  none issued or outstanding                                                                                                  |       | —            |        | —                |       |
| Common stock, no par value; 10,000,000shares  authorized and 7,658,252 shares and7,607,780  shares issued and outstanding at June 30, 2008and  December 31, 2007, respectively |       | 23,019,218        |        | 22,843,171            |       |
| Additional paid-in capital                                                                                                                                                               |       | 1,875,703         |        | 1,748,380             |       |
| Retained earnings                                                                                                                                                                        |       | 18,982,143        |        | 17,723,646            |       |
| Accumulated other comprehensive income (loss), net of tax                                                                                                                                |       | (142,347          | )           | 46,193                |       |
|                                                                                                                                                                                     |       |              |        |                  |       |
| Total shareholders’ equity                                                                                                                                                          |       | 43,734,717        |        | 42,361,390            |       |
|                                                                                                                                                                                     |       |              |        |                  |       |
|                                                                                                                                                                                     |       | $                 | 476,094,821 |                  | $          | 454,258,790 |   |

 

*Seeaccompanying notes*

 

3

----

Table ofContents

 

**OAK VALLEYCOMMUNITY BANK**

**CONDENSED STATEMENTS OF EARNINGS (UNAUDITED)**

 
| ** **                                          | ** ** | **3 MONTHS ENDED** | ** ** | **6 MONTHS ENDED** | ** ** |
|-----------------------------------------------------|------------|------------------------------|------------|------------------------------|------------|
| ** **                                          | ** ** | **JUNE 30,**            | ** ** | **JUNE 30,**            | ** ** |
| ** **                                          | ** ** | **2008**                     | ** ** | **2007**                     | ** ** | **2008** | ** ** | **2007** | ** ** |
|                                                |       |                         |       |                         |       |   |   |   |   |
| Interest and fees on loans                          |       | $                            | 6,775,872  |                         | $          | 7,620,178 |   | $ | 13,710,003 |   | $ | 15,133,407 |   |
| Interest on securities available for sale           |       | 408,651                      |       | 407,888                      |       | 803,331 |   | 793,861 |   |
| Interest on federal funds sold                      |       | 4,472                        |       | 59,734                       |       | 9,577 |   | 86,334 |   |
| Interest on deposits with banks                     |       | 308                          |       | 1,119                        |       | 1,026 |   | 2,789 |   |
|                                                |       |                         |       |                         |       |   |   |   |   |
|                                                |       | 7,189,303                    |       | 8,088,919                    |       | 14,523,937 |   | 16,016,391 |   |
|                                                |       |                         |       |                         |       |   |   |   |   |
| Deposits                                            |       | 1,710,446                    |       | 2,849,178                    |       | 3,868,004 |   | 5,586,235 |   |
| FHLB advances                                       |       | 397,226                      |       | 578,475                      |       | 758,898 |   | 1,146,787 |   |
| Federal funds purchased                             |       | 944                          |       | 8,637                        |       | 7,316 |   | 28,912 |   |
|                                                |       |                         |       |                         |       |   |   |   |   |
|                                                |       | 2,108,616                    |       | 3,436,290                    |       | 4,634,218 |   | 6,761,934 |   |
|                                                |       |                         |       |                         |       |   |   |   |   |
| Net interest income                                 |       | 5,080,687                    |       | 4,652,629                    |       | 9,889,719 |   | 9,254,457 |   |
|                                                |       |                         |       |                         |       |   |   |   |   |
| Provision for loan losses                           |       | 440,000                      |       | 120,000                      |       | 585,000 |   | 290,000 |   |
|                                                |       |                         |       |                         |       |   |   |   |   |
| Net interest income after provision for loan losses |       | 4,640,687                    |       | 4,532,629                    |       | 9,304,719 |   | 8,964,457 |   |
|                                                |       |                         |       |                         |       |   |   |   |   |
| Service charges on deposits                         |       | 344,365                      |       | 274,683                      |       | 647,292 |   | 540,130 |   |
| Earnings on cash surrender value of life insurance  |       | 99,242                       |       | 43,615                       |       | 180,518 |   | 87,230 |   |
| Mortgage commissions                                |       | 21,719                       |       | 52,180                       |       | 71,449 |   | 152,464 |   |
| Other                                               |       | 207,043                      |       | 172,370                      |       | 386,693 |   | 293,518 |   |
|                                                |       |                         |       |                         |       |   |   |   |   |
|                                                |       | 672,369                      |       | 542,848                      |       | 1,285,952 |   | 1,073,342 |   |
|                                                |       |                         |       |                         |       |   |   |   |   |
| Salaries and employee benefits                      |       | 2,434,975                    |       | 2,075,082                    |       | 4,881,402 |   | 4,153,081 |   |
| Occupancy expenses                                  |       | 670,393                      |       | 555,161                      |       | 1,339,946 |   | 1,053,180 |   |
| Data processing fees                                |       | 190,439                      |       | 107,965                      |       | 368,998 |   | 216,095 |   |
| Telephone expenses                                  |       | 72,884                       |       | 62,095                       |       | 144,382 |   | 124,029 |   |
| Other operating expenses                            |       | 1,192,899                    |       | 641,874                      |       | 1,883,432 |   | 1,206,568 |   |
|                                                |       |                         |       |                         |       |   |   |   |   |
|                                                |       | 4,561,590                    |       | 3,442,177                    |       | 8,618,160 |   | 6,752,953 |   |
|                                                |       |                         |       |                         |       |   |   |   |   |
| Earnings before provision for income taxes          |       | 751,466                      |       | 1,633,300                    |       | 1,972,511 |   | 3,284,846 |   |
|                                                |       |                         |       |                         |       |   |   |   |   |
| Provision for income taxes                          |       | 198,307                      |       | 630,000                      |       | 643,555 |   | 1,280,000 |   |
|                                                |       |                         |       |                         |       |   |   |   |   |
| NET EARNINGS                                        |       | $                            | 553,159    |                         | $          | 1,003,300 |   | $ | 1,328,956 |   | $ | 2,004,846 |   |
|                                                |       |                         |       |                         |       |   |   |   |   |
| Net Earnings Per Share                              |       | $                            | 0.07       |                         | $          | 0.14 |   | $ | 0.17 |   | $ | 0.28 |   |
| Net Earnings Per Share - assuming dilution          |       | $                            | 0.07       |                         | $          | 0.14 |   | $ | 0.17 |   | $ | 0.27 |   |

 

*See accompanying notes*

 

4

----

Table ofContents

 

**OAK VALLEYCOMMUNITY BANK**

**CONDENSED STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY(UNAUDITED)**

 
| ** **                                                                                        | ** ** | **YEAR ENDED DECEMBER 31, 2007 AND THE SIX MONTH PERIOD ENDED JUNE 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 | ) | $ | 24,188,929 |   |
| Stock offering                                                                                    |       | 456,431                                                                                                                                        |       | 5,020,739 |   |   |   |   |   |   |   |   |   | 5,020,739 |   |
| Stock offering  expense                                                                           |       |                                                                                                                                           |       | (25,000 | ) |   |   |   |   |   |   |   |   | (25,000 | ) |
| Stock options  exercised                                                                          |       | 48,106                                                                                                                                         |       | 198,957 |   |   |   |   |   |   |   |   |   | 198,957 |   |
| Tax benefit of  stock options exercised                                                           |       |                                                                                                                                           |       |   |   | 116,303 |   |   |   |   |   |   |   | 116,303 |   |
| Cash dividends  ($0.19 per share)                                                                 |       |                                                                                                                                           |       |   |   |   |   | (1,444,697 | ) |   |   |   |   | (1,444,697 | ) |
| Stock based  compensation                                                                         |       |                                                                                                                                           |       |   |   | 130,073 |   |   |   |   |   |   |   | 130,073 |   |
| Comprehensive  income                                                                             |       |                                                                                                                                           |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Net changes in  unrealized gain on available-for-sale securities (net of income tax of  $163,169) |       |                                                                                                                                           |       |   |   |   |   |   |   | $ | 250,965 |   | 250,965 |   | 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 |   |
| Stock based  compensation                                                                         |       |                                                                                                                                           |       |   |   | 73,128 |   |   |   |   |   |   |   | 73,128 |   |
| Cumulative effect  of adopting EITF 06-04                                                         |       |                                                                                                                                           |       |   |   |   |   | (70,459 | ) |   |   |   |   | (70,459 | ) |
| Comprehensive  income                                                                             |       |                                                                                                                                           |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Net changes in  unrealized gain on available-for-sale securities (net of income tax of  $122,584) |       |                                                                                                                                           |       |   |   |   |   |   |   | $ | (188,540 | ) | (188,540 | ) | (188,540 | ) |
| Net earnings                                                                                      |       |                                                                                                                                           |       |   |   |   |   | 1,328,956 |   | 1,328,956 |   |   |   | 1,328,956 |   |
| Comprehensive  income                                                                             |       |                                                                                                                                           |       |   |   |   |   |   |   | $ | 1,140,416 |   |   |   |   |   |
| Balances,  June 30, 2008                                                                     |       | 7,658,252                                                                                                                                      |       | 23,019,218 |   | $ | 1,875,703 |   | $ | 18,982,143 |   |   |   | $ | (142,347 | ) | $ | 43,734,717 |   |

 

5

----

Table ofContents

 

**OAK VALLEY COMMUNITY BANK**

**CONDENSEDSTATEMENTS OF CASH FLOWS (UNAUDITED)**

 
| ** **                                                                                | ** ** | **6 MONTHS ENDED  JUNE 30,** | ** ** |
|-------------------------------------------------------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                                                                | ** ** | **2008**                                    | ** ** | **2007** | ** ** |
|                                                                                      |       |                                        |       |   |   |
| CASH FLOWS FROM OPERATING ACTIVITIES:                                                     |       |                                        |       |   |   |
| Net earnings                                                                              |       | $                                           | 1,328,956  |   | $ | 2,004,846 |   |
| Adjustments to reconcile net earnings to net cash from operating  activities:             |       |                                        |       |   |   |
| Provision for loan losses                                                                 |       | 585,000                                     |       | 290,000 |   |
| Depreciation, amortization and accretion, net                                             |       | 563,236                                     |       | 489,517 |   |
| Stock-based compensation expense                                                          |       | 73,128                                      |       | 65,409 |   |
| Excess tax benefits from stock-based payment arrangements                                 |       | (54,195                                     | )          | (56,453 | ) |
| Loss (Gain) on sale of premises and equipment                                             |       | 1,434                                       |       | (14,400 | ) |
| Decrease (increase) in accrued interest receivable                                        |       | 244,281                                     |       | (110,559 | ) |
| Decrease in accrued interest payable and other liabilities                                |       | (868,052                                    | )          | (5,526,061 | ) |
| Increase in other assets                                                                  |       | (1,067,052                                  | )          | (2,554,761 | ) |
|                                                                                      |       |                                        |       |   |   |
| Net cash from operating activities                                                        |       | 806,736                                     |       | (5,412,462 | ) |
|                                                                                      |       |                                        |       |   |   |
| CASH FLOWS FROM INVESTING ACTIVITIES:                                                     |       |                                        |       |   |   |
| Purchases of securities available for sale                                                |       | (6,459,330                                  | )          | (10,963,565 | ) |
| Proceeds from maturities, calls, and principal paydowns of securities  available for sale |       | 4,872,433                                   |       | 11,888,590 |   |
| Net (increase) decrease in loans                                                          |       | (17,103,135                                 | )          | 1,559,985 |   |
| Purchase of BOLI policies                                                                 |       | (4,740,000                                  | )          | — |   |
| Proceeds from sales of premises and equipment                                             |       | —                                      |       | 14,400 |   |
| Net purchases of premises and equipment                                                   |       | (944,328                                    | )          | (4,253,604 | ) |
|                                                                                      |       |                                        |       |   |   |
| Net cash from investing activities                                                        |       | (24,374,360                                 | )          | (1,754,194 | ) |
|                                                                                      |       |                                        |       |   |   |
| CASH FLOWS FROM FINANCING ACTIVITIES:                                                     |       |                                        |       |   |   |
| FHLB advanced funds                                                                       |       | 151,294,000                                 |       | 61,874,000 |   |
| FHLB payments                                                                             |       | (110,894,000                                | )          | (66,124,000 | ) |
| Federal funds advances                                                                    |       | 59,435,000                                  |       | (124,760,000 | ) |
| Federal funds payments                                                                    |       | (59,435,000                                 | )          | 130,160,000 |   |
| Net increase in demand deposits and savings accounts                                      |       | 8,038,661                                   |       | 2,994,642 |   |
| Net decrease in time deposits                                                             |       | (27,227,747                                 | )          | (17,360,595 | ) |
| Excess tax benefits from stock-based payment arrangements                                 |       | 54,195                                      |       | 56,453 |   |
| Proceeds from sale of common stock and exercise of stock options                          |       | 176,047                                     |       | 2,920,881 |   |
|                                                                                      |       |                                        |       |   |   |
| Net cash from financing activities                                                        |       | 21,441,156                                  |       | (10,238,619 | ) |
|                                                                                      |       |                                        |       |   |   |
| NET DECREASE IN CASH AND CASH EQUIVALENTS                                                 |       | (2,126,468                                  | )          | (17,405,275 | ) |
|                                                                                      |       |                                        |       |   |   |
| CASH AND CASH EQUIVALENTS,  beginning of period                                           |       | 14,202,951                                  |       | 27,819,177 |   |
|                                                                                      |       |                                        |       |   |   |
| CASH AND CASH EQUIVALENTS,  end of period                                                 |       | $                                           | 12,076,483 |   | $ | 10,413,902 |   |
|                                                                                      |       |                                        |       |   |   |
| SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:                                        |       |                                        |       |   |   |
| Cash paid during the period for:                                                          |       |                                        |       |   |   |
| Interest                                                                                  |       | $                                           | 5,577,095  |   | $ | 7,306,871 |   |
| Income taxes                                                                              |       | $                                           | 800,000    |   | $ | 1,139,000 |   |
|                                                                                      |       |                                        |       |   |   |
| NON-CASH INVESTING ACTIVITIES:                                                            |       |                                        |       |   |   |
| Real estate acquired through foreclosure                                                  |       | $                                           | 3,547,193  |   | $ | 0 |   |
| Net change in unrealized gain/loss on available-for-sale securities                       |       | $                                           | (311,122   | ) | $ | (304,791 | ) |
|                                                                                      |       |                                        |       |   |   |
| NON-CASH INVESTING ACTIVITIES:                                                            |       |                                        |       |   |   |
| Tax benefit from stock options exercised                                                  |       | $                                           | 54,195     |   | $ | 56,453 |   |
| Cumulative effect of adopting EITF 06-04                                                  |       | $                                           | 119,842    |   | $ | 0 |   |

 

*See accompanying notes*

 

6

----

Table ofContents

 

**OAK VALLEY COMMUNITY BANK**

**NOTES TOCONDENSED FINANCIAL STATEMENTS**

 

**NOTE 1 – BASIS OF PRESENTATION**

 

OnJuly 3, 2008 (the “Effective Date”), a bank holding company reorganizationwas completed whereby Oak Valley Bancorp became the parent holding company forOak Valley Community Bank ( the “Bank”). On the Effective Date, eachoutstanding share of the Bank was converted into one share of Oak ValleyBancorp and the Bank became a wholly-owned subsidiary of the holding company.The condensed financial statements and accompanying footnotes are presented asif the reorganization occurred as of the earliest periods presented and areconsistent with those of Oak Valley Community Bank, since prior to theEffective Date, Oak Valley Bancorp had no material assets, liabilities oroperations.

 

Theaccounting principles followed by the Company and the methods of applying theseprinciples conform with accounting principles generally accepted in the UnitedStates of America (GAAP) and with general practices within the bankingindustry. In preparing financial statements in conformity with GAAP, managementis required to make estimates and assumptions that affect the reported amountsin the financial statements. Actual results could differ significantly fromthose estimates. Material estimates common to the banking industry that areparticularly susceptible to significant change in the near term include, butare not limited to, the determination of the allowance for loan losses, theestimation of compensation expense related to stock options granted toemployees and directors, and valuation allowances associated with deferred taxassets, the recognition of which are based on future taxable income.

 

Theinterim financial statements included in this report are unaudited but reflectall adjustments which, in the opinion of management, are necessary for a fairpresentation of the financial position and results of operations for theinterim periods presented. All such adjustments are of a normal recurringnature. The results of operations for the six month period ended June 30,2008 are not necessarily indicative of the results of a full year’s operations.For further information, refer to the audited financial statements andfootnotes included in the Company’s annual report for the year ended December 31,2007.

 

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

 

**Change in accounting principle –** During 2008 inconjunction with the Company’s filing of a Form 10 registration statementwith the SEC, the Company made a change in accounting principle and adoptedStaff Accounting Bulletin (SAB) No. 108. As a result, the Company recordedadjustments to its deferred tax assets and also recorded a liability related tolease agreements that include fixed rent escalation clauses.

 

In accordance with Statementof Financial Accounting Standards (SFAS) No. 154, Accounting Changes andCorrection of Errors the Company adjusted its financial statements to apply SABNo. 108 retrospectively. As a result of the change in accountingprinciple, the following adjustments to the financial statements were made:

 

·                  Accruedinterest and other assets decreased by $144,586 at December 31, 2007.

·                  Accruedinterest and other liabilities increased by $134,030 at December 31, 2007.

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

 

7

----

Table of Contents

 

**OAKVALLEY COMMUNITY BANK**

**NOTES TOCONDENSED FINANCIAL STATEMENTS**

 

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

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

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

 

InSeptember 2006, the Financial Accounting Standards Board, or FASB, issued StatementNo. 157, “Fair Value Measurements” (SFAS 157). SFAS No. 157 defines thefair value, establishes a framework for measuring fair value and expandsdisclosure of fair value measurements. SFAS No. 157 applies under otheraccounting pronouncements that require or permit fair value measurements andaccordingly, 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.

 

InFebruary 2007, the FASB issued SFAS 159, “The Fair Value Option forFinancial Assets and Financial Liabilities - Including an Amendment of FASBStatement No. 115”. SFAS 159 permits an entity to choose to measure manyfinancial instruments and certain other items at fair value. Most of theprovisions of SFAS 159 are elective; however, the amendment to SFAS 115, “Accountingfor Certain Investments in Debt and Equity Securities”, applies to all entitieswith available for sale or trading securities. For financial instrumentselected to be accounted for at fair value, an entity will report the unrealizedgains and losses in earnings. We adopted SFAS No. 159 on January 1,2008. We chose not to elect the option to measure the fair value of eligiblefinancial assets and liabilities at fair value.

 

In September 2006 theEmerging Issues Task Force (“EITF”) ratified EITF issue 06-04, “Accounting for Deferred Compensation andPostretirement Benefit Aspect of Endorsement Split-Dollar Life InsuranceArrangements”. This ruling provides that the Company should recognize aliability for future benefits based on the agreements held with employees. Theissue was effective for fiscal years beginning after December 17, 2007. TheCompany adopted this pronouncement effective January 1, 2008 and hasrecorded an initial liability of $119,842 with an offsetting adjustment toretained earnings of $70,459 and deferred taxes of $49,383, pursuant to thisaccounting pronouncement.

 

8

----

Table of Contents

 

**OAKVALLEY COMMUNITY BANK**

**NOTES TOCONDENSED FINANCIAL STATEMENTS**

 

**NOTE 3 – LOANS**

 

Loan totals wereas follows:

 
| ** **                           | ** ** | **JUNE 30,** | ** **  | **DECEMBER 31,** | ** ** |
|--------------------------------------|------------|-------------------|-------------|-----------------------|------------|
| ** **                           | ** ** | **2008**          | ** **  | **2007**              | ** ** |
| Loans                                |       |              |        |                  |       |
| Commercial real estate               |       | $                 | 225,393,458 |                  | $          | 208,309,072 |   |
| Commercial                           |       | 37,302,915        |        | 45,496,794            |       |
| Real estate construction             |       | 89,087,305        |        | 83,173,030            |       |
| Agriculture                          |       | 26,976,136        |        | 31,429,970            |       |
| Residential real estate and consumer |       | 21,777,312        |        | 19,400,263            |       |
|                                 |       |              |        |                  |       |
| Total loans                          |       | 400,537,126       |        | 387,809,129           |       |
|                                 |       |              |        |                  |       |
| Less:                                |       |              |        |                  |       |
| Deferred loan fees and costs, net    |       | (981,283          | )           | (1,038,350            | )          |
| Allowance for loan losses            |       | (4,320,885        | )           | (4,506,753            | )          |
|                                 |       |              |        |                  |       |
| Net loans                            |       | $                 | 395,234,968 |                  | $          | 382,264,026 |   |

 

Changes in the allowance for loan losses were as follows:

 
| ** **                                                           | ** ** | **JUNE 30,** | ** ** | **DECEMBER 31,** | ** ** |
|----------------------------------------------------------------------|------------|-------------------|------------|-----------------------|------------|
| ** **                                                           | ** ** | **2008**          | ** ** | **2007**              | ** ** |
|                                                                 |       |              |       |                  |       |
| Balance, beginning of period                                         |       | $                 | 4,506,753  |                  | $          | 4,341,062 |   |
| Provision charged to operations                                      |       | 585,000           |       | 555,000               |       |
| Loans charged off                                                    |       | (759,003          | )          | (401,510              | )          |
| Loan recoveries                                                      |       | 3,743             |       | 4,275                 |       |
| Reclassification of reserve related to off-balance-sheet commitments |       | (15,608           | )          | 7,926                 |       |
|                                                                 |       |              |       |                  |       |
| Balance, end of period                                               |       | $                 | 4,320,885  |                  | $          | 4,506,753 |   |

 

9

----

Table of Contents

 

**OAK VALLEY COMMUNITY BANK**

**NOTES TOCONDENSED FINANCIAL STATEMENTS**

 

**NOTE 3 – LOANS (CONTINUED)**

 

The total recordedinvestment in impaired loans at June, 2008, was $2,887,670. The total recordedinvestment in impaired loans at December 31, 2007, was $9,087,462. Nointerest income was recognized on impaired loans, while considered impairedduring 2008 and 2007.

 

**NOTE4 – OTHER REAL ESTATE OWNED**

 

As of June 30, 2008, two loans with outstanding balances of$3,547,193 were reclassified to other real estate owned.

 

Real estate properties acquired through, or in lieu of, loanforeclosure are to be sold and are initially recorded at the lower of carryingamount of the loan or fair value of the property at the date of foreclosure. Subsequentto foreclosure, valuations are periodically performed and any subject revisionsin the estimate of fair value are reported as adjustment to the carrying valueof the real estate, provided the adjusted carrying amount does not exceed theoriginal amount at foreclosure. Revenues and expenses from operations andchanges in the valuation allowance are included in other operating expenses.

 

**NOTE 5 – OTHER POST-RETIREMENT BENEFIT PLANS**

 

During January 2008,the Bank has awarded certain officers a salary continuation plan (the “Plan”). Under the Plan, the participants will be 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 for certainpre-retirement death benefits under the DRP. In connection with theimplementation of the DRP, the Bank purchased single premium life insurancepolicies on the life of each director covered under the DRP. The Bank is theowner and partial beneficiary of these life insurance policies. The assets ofthe DRP, under Internal Revenue Service regulations, are the property of theBank and are available to satisfy the Bank’s general creditors.

 

Futurecompensation under both plans is earned for services rendered throughretirement. The Bank accrues for the salary continuation liability based onanticipated years of service and vesting schedules provided under the plans.The Bank’s current benefit liability is determined based on vesting and thepresent value of the benefits at a corresponding discount rate. The discountrate used is an equivalent rate for investment-grade bonds with lives matchingthose of the service periods remaining for the salary continuation contracts,which average approximately 20 years.

 

DuringJanuary 2008, the Bank entered into split-dollar life insurance agreementswith certain officers. In connection with the implementation of thesplit-dollar agreements, the Bank purchased single

 

10

----

Table ofContents

 

**OAK VALLEY COMMUNITY BANK**

**NOTES TOCONDENSED FINANCIAL STATEMENTS**

 

premiumlife insurance policies on the life of each of the officers covered by thesplit-dollar life insurance agreements. The Bank is the owner of the policiesand the partial beneficiary in an amount equal to the cash surrender value ofthe policies.

 

Thecombined cash surrender value of all Bank-owned life insurance policies was$9,669,748 and $4,749,230 at June 30, 2008 and December 31, 2007,respectively.

 

11

----

Table ofContents

 

**OAK VALLEY COMMUNITY BANK**

**NOTES TOCONDENSED FINANCIAL STATEMENTS**

 

**NOTE 6 – 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 methodology are quoted prices (unadjusted) foridentical assets or liabilities in active markets.

Level2: Inputs to the valuation methodology include quoted prices for similar assetsand liabilities in active markets and inputs that are observable for the assetor liability, either directly or indirectly, for substantially the full term ofthe financial instrument.

Level3: Inputs to the valuation methodology are unobservable and significant to thefair value measurement.

 

Incertain cases, the inputs used to measure fair value may fall into differentlevels of the fair value hierarchy. In such cases, the level in the fair valuehierarchy within which the fair value measurement in its entirety falls hasbeen determined based on the lowest level input that is significant to the fairvalue 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 June 30, 2008 Using** | ** ** |
|-----------------------------------------------------------|------------|---------------------------------------------------------------------------------------|------------|
| ** **                                                | ** ** | **June 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                             |       | $                                                                                     | 34,652,428 |   | $ | 1,751,865 |   | $ | 32,900,563 |   | $ | — |   |
|                                                      |       |                                                                                  |       |   |   |   |   |   |   |
| Assets and liabilities measured on a non-recurring basis: |       |                                                                                  |       |   |   |   |   |   |   |
| Impaired Loans                                            |       | $                                                                                     | 2,719,459  |   | $ | — |   | $ | — |   | $ | 2,719,459 |   |

 

Thefair value of securities available for sale equals quoted market price, ifavailable. If quoted market prices are not available, fair value is determinedusing quoted market prices for similar securities. Changes in fair market valueare recorded in other comprehensive income. SFAS No. 157 applies to

 

12

----

Table ofContents

 

**OAK VALLEY COMMUNITY BANK**

**NOTES TOCONDENSED FINANCIAL STATEMENTS**

 

loansmeasured for impairment using the practical expedients permitted by SFAS No. 114,**Accountingby Creditors for Impairment of a Loan, including impaired loans measuredat an observable market price (if available), or at the fair value of the loan’scollateral (if the loan is collateral dependent). Fair value of the loan’scollateral, when the loan is dependent on collateral, is determined byappraisals or independent valuation which is then adjusted for the cost relatedto liquidation of the collateral. At June 30, 2008, impaired loans had aprincipal balance of $2,887,670, with a valuation allowance of $168,211 at June 30,2008. Upon being classified as impaired, charge offs were taken to reduce thebalance of each loan to an estimate of the collateral fair market value lesscost to dispose. This estimate was a level 3 valuation. There was no directimpact on the income statement. The charge-offs were recorded as a debit to theallowance for loan losses.

 

**NOTE 7 – EARNINGS PER SHARE**

 

The Bank computes earningsper share (“EPS”) in accordance with SFAS No. 128, *Earnings perShare.* SFAS No. 128 requires the presentation of basic EPS,which does not consider the effect of common stock equivalents and diluted EPS,which considers all dilutive common stock equivalents.

 
| ** **                                                           | ** ** | **THREE MONTHS ENDED** | ** ** | **SIX MONTHS ENDED** | ** ** |
|----------------------------------------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| **In thousands (except share and per**      | ** ** | **JUNE 30,**                | ** ** | **JUNE 30,**              | ** ** |
| **share amounts)**                                              | ** ** | **2008**                         | ** ** | **2007**                       | ** ** | **2008** | ** ** | **2007** | ** ** |
| BASIC EARNINGS PER SHARE:                                            |       |                             |       |                           |       |   |   |   |   |
|                                                                 |       |                             |       |                           |       |   |   |   |   |
| Net income                                                           |       | $                                | 553,159    |                           | $          | 1,003,300 |   | $ | 1,328,956 |   | $ | 2,004,846 |   |
| Weighted average shares outstanding                                  |       | 7,641,534                        |       | 7,167,879                      |       | 7,625,787 |   | 7,138,564 |   |
| Net income per share                                                 |       | $                                | 0.07       |                           | $          | 0.14 |   | $ | 0.17 |   | $ | 0.28 |   |
|                                                                 |       |                             |       |                           |       |   |   |   |   |
| DILUTED EARNINGS PER SHARE:                                          |       |                             |       |                           |       |   |   |   |   |
|                                                                 |       |                             |       |                           |       |   |   |   |   |
| Net income                                                           |       | $                                | 553,159    |                           | $          | 1,003,300 |   | $ | 1,328,956 |   | $ | 2,004,846 |   |
| Weighted average shares outstanding                                  |       | 7,641,534                        |       | 7,167,879                      |       | 7,625,787 |   | 7,138,564 |   |
| Effect of dilutive stock options                                     |       | 56,147                           |       | 174,111                        |       | 70,193 |   | 179,069 |   |
| Weighted average shares of common Stock and common stock equivalents |       | 7,697,681                        |       | 7,341,990                      |       | 7,695,980 |   | 7,317,633 |   |
| Net income per diluted share                                         |       | $                                | 0.07       |                           | $          | 0.14 |   | $ | 0.17 |   | $ | 0.27 |   |

 

Duringthe three and six month periods ended June 30, 2008, weighted averageoptions to purchase 257,623 and 123,571 shares of common stock, respectively,in prices ranging from $7.51 to $15.67 were outstanding . Weighted averageoptions of 101,500 and 101,284, respectively, were outstanding during the samethree and six month periods of 2007 with prices ranging from $12.23 to $15.67. Theywere not included in the computation of diluted EPS because the options’exercise price was greater than the average market price of the common shares.These options begin to expire in 2015.

 

13

----

Table ofContents

 

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

 

The following discussionexplains the significant factors affecting our operations and financialposition for the periods presented. The discussion should be read inconjunction with our financial statements and the notes related thereto whichappear elsewhere in this report.

 

**Forward-Looking Statements**

 

*Some matters discussed in this Form 10-Qmay be “forward-looking statements” within the meaning of the PrivateLitigation Reform Act of 1995 and therefore may involve risks, uncertaintiesand other factors which may cause our actual results to be materially differentfrom the results expressed or implied by our forward-looking statements. These statements generally appear with words such as “anticipate,” “believe,” “estimate,”“may,” “intend,” and “expect.”  Although management believes that theassumptions and expectations reflected in such forward-looking statements arereasonable, it can give no assurance that such expectations will prove to becorrect.  Factors that could cause actual results to differ from resultsdiscussed in forward-looking statements include, but are not limited to:economic conditions (both generally and in the markets where the Bankoperates); competition from other providers of financial services offered bythe Bank; government regulation and legislation; changes in interest rates;material unforeseen changes in the financial stability and liquidity of theBank’s credit customers; and other risks as may be detailed from time to timein the Company’s filings with the Securities and Exchange Commission, all ofwhich are difficult to predict and which may be beyond the control of theCompany or the Bank.  The Company undertakes no obligation to reviseforward-looking statements to reflect events or changes after the date of thisdiscussion or to reflect the occurrence of unanticipated events.*

 

**Critical Accounting Estimates**

 

The discussion and analysis of our financial conditionand results of operations is based upon our financial statements, which havebeen prepared in accordance with accounting principles generally accepted inthe United States of America. The preparation of these financial statementsrequires management to make estimates and judgments that effect the reportedamounts of assets and liabilities, revenues and expenses, and relateddisclosures of contingent assets and liabilities at the date of our financialstatements. Actual results may differ from these estimates under differentassumptions or conditions.

 

*Allowance for Loan Losses*

 

Accounting for allowance for loan losses involvessignificant judgment and assumptions by management and is based on historicaldata and management’s view of the current economic environment. At least on aquarterly basis, our management reviews the methodology and adequacy ofallowance for loan losses and reports its assessment to the Board of Directorsfor its review and approval.

 

We base our allowance for loan losses on an estimationof probable losses inherent in our loan portfolio. Our methodology forassessing loan loss allowances are intended to reduce the differences betweenestimated and actual losses and involves a detailed analysis of our loanportfolio in three phases:

 

·**the specific review of individual loans,

 

·**the segmenting and review of loan pools with similarcharacteristics in accordance with SFAS No. 5, “Accounting forContingencies,” and

 

·**our judgmental estimate based on various subjectivefactors:

 

The first phase of our methodology involves thespecific review of individual loans to identify and measure impairment. Weevaluate each loan by use of a risk rating system, except for homogeneousloans, such as automobile loans and home mortgages. Specific risk rated loansare deemed impaired if all amounts, including principal and interest, willlikely not be collected in accordance with the contractual terms of the relatedloan agreement. Impairment for commercial and real estate loans is measuredeither based on the present value of the loan’s expected future cash flows or,if collection on the loan is collateral dependent, the estimated fair value ofthe collateral, less selling and holding costs.

 

The second phase involves the segmenting of theremainder of the risk rated loan portfolio into groups or pools of loans,together with loans with similar characteristics, for evaluation in accordancewith SFAS No. 5. We determine the calculated loss ratio to each loan poolbased on its historical net losses and benchmark it against the levels of otherpeer banks.

 

In the third phase, we consider relevant internal andexternal factors that may affect the collectibility of loan portfolio and eachgroup of loan pool. The factors considered are, but are not limited to:

 

·**concentration of credits,

 

14

----

 

Table of Contents

 

·**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 suchconditions based on our judgment, experience and known or anticipated trends.Such estimation may be reflected as an additional allowance to each group ofloans, if necessary. Management reviews these conditions with our senior creditofficers. To the extent that any of these conditions is evidenced by aspecifically identifiable problem credit or portfolio segment as of theevaluation date, management’s estimate of the effect of such condition may bereflected as a specific allowance applicable to such credit or portfoliosegment. Where any of these conditions is not evidenced by a specific,identifiable problem credit or portfolio segment as of the evaluation date,management’s evaluation of the inherent loss related to such condition isreflected in the unallocated allowance

 

Central to our credit risk management and ourassessment of appropriate loss allowance is our loan risk rating system. Underthis system, the originating credit officer assigns borrowers an initial riskrating based on a thorough analysis of each borrower’s financial capacity inconjunction with industry and economic trends. Approvals are made based uponthe amount of inherent credit risk specific to the transaction and are reviewedfor appropriateness by senior line and credit administration personnel. Creditsare monitored by line and credit administration personnel for deterioration ina borrower’s financial condition which may impact the ability of the borrowerto perform under the contract. Although management has allocated a portion ofthe allowance to specific loans, specific loan pools, and off-balance sheetcredit exposures (which are reported separately as part of other liabilities),the adequacy of the allowance is considered in its entirety.

 

*Non-Accrual Loan Policy*

 

Interest on loans is credited to income as earned andis accrued only if deemed collectible. Accrual of interest is discontinued whena loan is over 90 days delinquent or if management believes thatcollection is highly uncertain. Generally, payments received on nonaccrualloans are recorded as principal reductions. Interest income is recognized afterall principal has been repaid or an improvement in the condition of the loanhas occurred that would warrant resumption of interest accruals.

 

*Stock-Based Compensation*

 

Effective January 1, 2006, the Bank adopted theprovisions of Statement of Financial Accounting Standards (“SFAS”) No. 123R,*Share Based Payments,*a revisionto the previously issued guidance on accounting for stock options and otherforms of equity-based compensation. SFAS No. 123R requires companies torecognize in the income statement the grant-date fair value of stock optionsand other equity-based forms of compensation issued to employees over theemployees’ requisite service period (generally the vesting period).  The Bank has adopted SFAS No. 123R usingthe modified prospective method which means that the unvested portion ofpreviously granted awards and any awards that are granted or modified after thedate of adoption will be measured and accounted for under the provisions ofSFAS No. 123R. Accordingly, financial statement amounts for prior periodshave not been restated to reflect the fair value method of recognizingcompensation cost relating to stock options. The Bank will continue to usestraight-line recognition of expenses for awards with graded vesting.  The Bank utilizes a binomial pricing modelfor all grants. Expected volatility is based on the historical volatility ofthe price of the Bank’s stock. The Bank uses historical data to estimate optionexercise and stock option forfeiture rates within the valuation model. Theexpected term of options granted for the binomial model is derived fromapplying a historical suboptimal exercise factor to the contractual term of thegrant. For binomial pricing, the risk-free rate for periods is equal to theU.S. Treasury yield at the time of grant and commensurate with the contractualterm of the grant.

 

15

----

Table of Contents

 

*Other Real Estate Owned*

 

Other real estate owned, which represents real estateacquired through foreclosure, or deed in lieu of foreclosure in satisfaction ofcommercial and real estate loans, is carried at the lower of cost or estimatedfair value less the estimated selling costs of the real estate. The fair valueof the property is based upon a current appraisal. The difference between thefair value of the real estate collateral and the loan balance at the time oftransfer is recorded as a loan charge off if fair value is lower. Subsequent toforeclosure, management periodically performs valuations and the OREO propertyis carried at the lower of carrying value or fair value, less costs to sell.The determination of a property’s estimated fair value incorporates (1) revenuesprojected to be realized from disposal of the property, (2) constructionand renovation costs, (3) marketing and transaction costs, and (4) holdingcosts (e.g., property taxes, insurance and homeowners’ association dues). Anysubsequent declines in the fair value of the OREO property after the date oftransfer are recorded through a write-down of the asset. Any subsequentoperating expenses or income, reduction in estimated fair values, and gains orlosses on disposition of such properties are charged or credited to currentoperations.

 

**Introduction**

 

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

 

**Overview of Results of Operations andFinancial Condition**

 

·                  The Company recognized net income of$553,159 and $1,328,956 for the three and six month periods ended June 30,2008 as compared with $1,003,300 and $2,004,846 for the same periods in 2007,respectively.  The factors resulting inthis decrease will be discussed below.

 

·                   Net interest income increased $428,058 or 9.2% and$635,262 or 6.9% for the three and six month periods ended June 30, 2008,respectively, compared to the same periods in 2007.  These increases were primarily due toincreases in the net interest margin of 30 and 20 basis points for the threeand six month periods ended June 30, 2008, respectively.  The netinterest margin increase is attributable primarily to liabilities repricingfaster than assets in the current declining rate environment and a reduction ofhigh cost certificates of deposit which were replaced by core deposits and FHLBadvances with a lower interest rate.

 

·                   The provision for loan losses in the three and sixmonth periods ended June 30, 2008 increased by $320,000 and $295,000,respectively, compared to the same periods in 2007, due to loan growth, anincrease in the level of non-accrual loans and management’s assessment of theappropriate level for the allowance for loan losses.

 

·                   For the three and six month periods ended June 30,2008, non-interest income increased by $129,521 or 23.9% and $212,610 or 19.8%,respectively, from the same period in 2007, primarily due to increased servicecharges on deposits as described below.

 

·                   Non-interest expense increased by $1.12 million or32.5% and $1.87 million or 27.6%, for the three and six month periods ended June 30,2008, respectively, as compared to the same periods in 2007, principally due toincreased costs for salaries and benefits and a $451,000 OREO market valuewrite down recorded in the second quarter of 2008.

 

·                   Total assets increased by $21.8 million or 4.8% (9.6%annualized), from December 31, 2007.  Total net loans increased by$12.97 million, or 3.4% (6.8% annualized), from December 31, 2007 to June 30,2008, while deposits decreased by $19.2 million or 5.1% (10.2% annualized).

 

**Income Summary**

 

For the three and six month periods ended June 30,2008, the Company recorded net income of $553,159 and $1,328,956, a decrease of$450,141 and $675,890, respectively, as compared to the $1,003,300 and$2,004,846 in net income for the same periods in 2007.  Return on averageassets (annualized) was 0.47% and 0.58% for the second quarter and six monthperiod of 2008, respectively, as compared with 0.90% and 0.91% for the sameperiods of 2007.  Annualized return on average equity was 5.01% and 6.09%for the second quarter and six month period of 2008, respectively, as comparedwith 11.04% and 11.27% for the same periods of 2007.

 

Earnings before provisions for income taxes for thesecond quarter and six month period of 2008 was down $881,834 and $1,312,335,respectively from the comparable 2007 periods.  The income statementcomponents of these variances are as follows:

 

16

----

Table of Contents

 

***Pre-Tax IncomeVariance Summary***

***(In thousands)***

*** ***
| ** **                           | ** ** | **Effect on Pre-Tax  Income** | ** ** | **Effect on Pre-Tax  Income** | ** ** |
|--------------------------------------|------------|-----------------------------------------|------------|-----------------------------------------|------------|
| ** **                           | ** ** | **Increase (Decrease)**            | ** ** | **Increase (Decrease)**            | ** ** |
| ** **                           | ** ** | **Three Months**                   | ** ** | **Six Months**                     | ** ** |
| Change from 2007 to 2008 in:         | ** ** | ** **                              | ** ** | ** **                              | ** ** |
| Net interest income                  |       | $                                       | 428        |                                    | $          | 635 |   |
| Provision for loan losses            |       | (320                                    | )          | (295                                    | )          |
| Non-interest income                  |       | 131                                     |       | 213                                     |       |
| Non-interest expense                 |       | (1,121                                  | )          | (1,865                                  | )          |
| Change in income before income taxes |       | $                                       | (882       | )                                       | $          | (1,312 | ) |

 

These variances will be explained in the discussionbelow.

 

**Net Interest Income**

 

Net interest income is the largest source of the Bank’soperating income.  For the three and six month period ended June 30,2008, net interest income was $5.08 million and $9.89 million, respectively, anincrease of $428,000 or 9.2% and $635,000 or 6.9% from the comparable periodsin 2007.

 

The net interest margin (net interest income as apercentage of average interest earning assets) was 4.77% and 4.68%,respectively, for the three and six month periods ended June 30, 2008, anincrease of 30 and 20 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 oninterest-bearing liabilities to decrease faster than the rate on earningassets.

 

17

----

Table of Contents

 

The following tables shows the relative impact ofchanges in average balances of interest earning assets and interest bearingliabilities, and interest rates earned and paid by the Company and the Bank onthose assets and liabilities for the three and six month periods ended June 30,2008 and 2007:

 

***Net InterestAnalysis***

*(Dollars in thousands)*

* *
| ** **                                      | ** ** | **Three Months Ended June 30, 2008** | ** ** | **Three Months Ended June 30, 2007** | ** **  |
|-------------------------------------------------|------------|---------------------------------------------------------------|------------|---------------------------------------------------------------|-------------|
| ** **                                      | ** ** | **Average  Balance**                                          | ** ** | **Interest  Income/  Expens**                                 | ** **  | **Avg  Rate/  Yield** | ** ** | **Average  Balance** | ** ** | **Interest  Income/  Expense** | ** ** | **Avg  Rate/  Yield** | ** ** |
| **Assets:**                                     |       |                                                          |       |                                                          |        |   |   |   |   |   |   |   |   |
| Earning assets:                                 |       |                                                          |       |                                                          |        |   |   |   |   |   |   |   |   |
| Gross loans (1) (2)                        |       | $                                                             | 393,044    |                                                          | $           | 6,796 |   | 6.93 | % | $ | 380,748 |   | $ | 7,637 |   | 8.05 | % |
| Investment securities (2)                       |       | 35,041                                                        |       | 409                                                           |        | 4.68 | % | 34,988 |   | 420 |   | 4.81 | % |
| Federal funds sold                              |       | 867                                                           |       | 4                                                             |        | 2.07 | % | 4,510 |   | 60 |   | 5.31 | % |
| Interest-earning deposits                       |       | 95                                                            |       | 0                                                             |        | 1.27 | % | 91 |   | 1 |   | 4.94 | % |
| Total interest-earning assets                   |       | 429,047                                                       |       | 7,209                                                         |        | 6.74 | % | 420,336 |   | 8,118 |   | 7.75 | % |
| Total noninterest earning assets                |       | 37,796                                                        |       |                                                          |        |   |   | 26,802 |   |   |   |   |   |
| Total Assets                                    |       | 466,843                                                       |       |                                                          |        |   |   | 444,615 |   |   |   |   |   |
| **Liabilities and Shareholders’ Equity:**  |       |                                                          |       |                                                          |        |   |   |   |   |   |   |   |   |
| Interest-bearing liabilities:                   |       |                                                          |       |                                                          |        |   |   |   |   |   |   |   |   |
| Money market deposits                           |       | 143,698                                                       |       | 842                                                           |        | 2.35 | % | 121,969 |   | 1,150 |   | 3.78 | % |
| NOW deposits                                    |       | 56,367                                                        |       | 101                                                           |        | 0.72 | % | 52,969 |   | 148 |   | 1.12 | % |
| Savings deposits                                |       | 17,993                                                        |       | 73                                                            |        | 1.62 | % | 17,208 |   | 140 |   | 3.27 | % |
| Time certificates of deposit $100,000 or more   |       | 37,546                                                        |       | 360                                                           |        | 3.85 | % | 66,457 |   | 823 |   | 4.97 | % |
| Other time deposits                             |       | 39,684                                                        |       | 335                                                           |        | 3.38 | % | 49,235 |   | 588 |   | 4.79 | % |
| Other borrowings                                |       | 64,550                                                        |       | 398                                                           |        | 2.47 | % | 43,916 |   | 587 |   | 5.36 | % |
| Total interest-bearing liabilities              |       | 359,839                                                       |       | 2,109                                                         |        | 2.35 | % | 351,754 |   | 3,436 |   | 3.92 | % |
| Noninterest-bearing liabilities:                |       |                                                          |       |                                                          |        |   |   |   |   |   |   |   |   |
| Noninterest-bearing deposits                    |       | 60,034                                                        |       |                                                          |        |   |   | 55,348 |   |   |   |   |   |
| Other liabilities                               |       | 2,991                                                         |       |                                                          |        |   |   | 3,580 |   |   |   |   |   |
| Total noninterest-bearing liabilities           |       | 63,025                                                        |       |                                                          |        |   |   | 58,929 |   |   |   |   |   |
| Shareholders’ equity                       |       | 43,980                                                        |       |                                                          |        |   |   | 36,456 |   |   |   |   |   |
| Total liabilities and shareholders’ equity |       | $                                                             | 466,843    |                                                          |        |   |   |   | $ | 447,138 |   |   |   |   |   |
| Net interest income                             |       |                                                          |       | $                                                             |  5,100 |   |   |   |   |   | $ |  4,681 |   |   |   |
| Net interest spread(3)                          |       |                                                          |       |                                                          |        | 4.39 | % |   |   |   |   | 3.83 | % |
| Net interest margin(4)                          |       |                                                          |       |                                                          |        | 4.77 | % |   |   |   |   | 4.47 | % |

 

----

*(1) * Loan fees have been included in thecalculation of interest income. Loan fees were approximately $271,000 and$326,000 for the three months ended June 30, 2008 and 2007, respectively.  Loans are net of the allowance for loanlosses, deferred fees, unearned income, and related direct costs.

 

*(2) *Yields on municipal securities and loanshave been adjusted to their fully-taxable equivalents based on a federal Marginaltax rate of 34%.

 

*(3) *Represents the average rate earned oninterest-earning assets less the average rate paid on interest-bearingliabilities.

 

*(4) *Represents net interest income as apercentage of average interest-earning assets.

 

18

----

Table of Contents

 
| ** **                                      | ** ** | **Six months ended June 30, 2008** | ** ** | **Six Months Ended June 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)                        |       | $                                                           | 390,570    |                                                        | $          | 13,736 |   | 7.05 | % | $ | 380,632 |   | $ | 15,167 |   | 7.99 | % |
| Investment securities (2)                       |       | 34,212                                                      |       | 816                                                         |       | 4.78 | % | 35,396 |   | 818 |   | 4.64 | % |
| Federal funds sold                              |       | 732                                                         |       | 10                                                          |       | 2.62 | % | 3,272 |   | 86 |   | 5.29 | % |
| Interest-earning deposits                       |       | 395                                                         |       | 1                                                           |       | 0.52 | % | 124 |   | 3 |   | 4.50 | % |
| Total interest-earning assets                   |       | 425,908                                                     |       | 14,563                                                      |       | 6.86 | % | 419,424 |   | 16,075 |   | 7.69 | % |
| Total noninterest earning assets                |       | 34,573                                                      |       |                                                        |       |   |   | 25 |   |   |   |   |   |
| Total Assets                                    |       | 460,481                                                     |       |                                                        |       |   |   | 444,615 |   |   |   |   |   |
| **Liabilities and Shareholders’ Equity:**  |       |                                                        |       |                                                        |       |   |   |   |   |   |   |   |   |
| Interest-bearing liabilities:                   |       |                                                        |       |                                                        |       |   |   |   |   |   |   |   |   |
| Money market deposits                           |       | 142,044                                                     |       | 1,821                                                       |       | 2.57 | % | 117,745 |   | 2,124 |   | 3.62 | % |
| NOW deposits                                    |       | 55,137                                                      |       | 196                                                         |       | 0.71 | % | 53,187 |   | 296 |   | 1.12 | % |
| Savings deposits                                |       | 16,864                                                      |       | 180                                                         |       | 2.14 | % | 16,546 |   | 282 |   | 3.42 | % |
| Time certificates of deposit $100,000 or more   |       | 42,573                                                      |       | 887                                                         |       | 4.18 | % | 69,725 |   | 1,715 |   | 4.93 | % |
| Other time deposits                             |       | 41,457                                                      |       | 784                                                         |       | 3.79 | % | 49,658 |   | 1,169 |   | 4.72 | % |
| Other borrowings                                |       | 53,803                                                      |       | 766                                                         |       | 2.86 | % | 44,830 |   | 1,176 |   | 5.26 | % |
| Total interest-bearing liabilities              |       | 351,878                                                     |       | 4,634                                                       |       | 2.64 | % | 351,691 |   | 6,762 |   | 3.86 | % |
| Noninterest-bearing liabilities:                |       |                                                        |       |                                                        |       |   |   |   |   |   |   |   |   |
| Noninterest-bearing deposits                    |       | 61,916                                                      |       |                                                        |       |   |   | 53,457 |   |   |   |   |   |
| Other liabilities                               |       | 3,191                                                       |       |                                                        |       |   |   | 3,582 |   |   |   |   |   |
| Total noninterest-bearing liabilities           |       | 65,107                                                      |       |                                                        |       |   |   | 57,039 |   |   |   |   |   |
| Shareholders’ equity                       |       | 43,496                                                      |       |                                                        |       |   |   | 35,886 |   |   |   |   |   |
| Total liabilities and shareholders’ equity |       | $                                                           | 460,481    |                                                        |       |   |   |   | $ | 444,615 |   |   |   |   |   |
| Net interest income                             |       |                                                        |       | $                                                           | 9,929      |   |   |   |   |   | $ | 9,313 |   |   |   |
| Net interest spread(3)                          |       |                                                        |       |                                                        |       | 4.22 | % |   |   |   |   | 3.83 | % |
| Net interest margin(4)                          |       |                                                        |       |                                                        |       | 4.68 | % |   |   |   |   | 4.45 | % |

 

----

*(1) * Loan fees have been included in thecalculation of interest income. Loan fees were approximately $549,000 and$687,000 for the six months ended June 30, 2008 and 2007, respectively.Loans are net of the allowance for loan losses, deferred fees, unearned income,and related direct costs.

 

*(2) *Yields on municipal securities and loanshave been adjusted to their fully-taxable equivalents based on a federalMarginal tax rate of 34%.

 

*(3) *Represents the average rate earned oninterest-earning assets less the average rate paid on interest-bearingliabilities.

 

*(4) *Represents net interest income as a percentageof average interest-earning assets.

 

19

----

Table of Contents

 

Shown in the following tables are the relative impactson net interest income of changes in the average outstanding balances(volume) of earning assets and interest bearing liabilities and the ratesearned and paid by the Company on those assets and liabilities for the threeand six month periods ended June 30, 2008 and 2007.  Changes ininterest income and expense that are not attributable specifically to eitherrate or volume are allocated proportionately among both variances.

 

***Rate / VolumeVariance Analysis***

*(In thousands)*

* *
| ** **                        | ** ** | **For the Three Months Ended June 30,** | ** ** |
|-----------------------------------|------------|-----------------------------------------------------------------------|------------|
| ** **                        | ** ** | **2008 vs 2007**                                            | ** ** |
| ** **                        | ** ** | **Increase (Decrease)**                                          | ** ** |
| ** **                        | ** ** | **in interest income and expense**                | ** ** |
| ** **                        | ** ** | **due to changes in:**                                 | ** ** |
| ** **                        | ** ** | **Volume**                                                            | ** ** | **Rate** | ** ** | **Total** | ** ** |
| **Interest income:**              |       |                                                                  |       |   |   |   |   |
| Gross loans (1)                   |       | $                                                                     | 247        |   | $ | (1,088 | ) | $ | (841 | ) |
| Investment securities             |       | 1                                                                     |       | (12 | ) | (11 | ) |
| Federal funds sold                |       | (48                                                                   | )          | (7 | ) | (55 | ) |
| Interest-earning deposits         |       | 0                                                                     |       | (1 | ) | (1 | ) |
| **Total interest income**         | ** ** | $                                                                     | **200**    | ** ** | $ | **(1,108** | **)** | $ | **(908** | **)** |
|                              |       |                                                                  |       |   |   |   |   |
| **Interest expense:**             |       |                                                                  |       |   |   |   |   |
| Money market deposits             |       | 205                                                                   |       | (514 | ) | (309 | ) |
| NOW deposits                      |       | 9                                                                     |       | (56 | ) | (47 | ) |
| Savings deposits                  |       | 6                                                                     |       | (74 | ) | (68 | ) |
| Time CD $100K or more             |       | (358                                                                  | )          | (105 | ) | (463 | ) |
| Other time deposits               |       | (114                                                                  | )          | (139 | ) | (253 | ) |
| Other borrowings                  |       | 276                                                                   |       | (463 | ) | (187 | ) |
| **Total interest expense**        | ** ** | $                                                                     | **24**     | ** ** | $ | **(1,351** | **)** | $ | **(1,327** | **)** |
| ** **                        | ** ** | ** **                                                            | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Change in net interest income** | ** ** | $                                                                     | **176**    | ** ** | $ | **243** | ** ** | $ | **419** | ** ** |

 

----

*(1) * Loan fees have been included in thecalculation of interest income. Loan fees were approximately $271,000 and$326,000 for the three months ended June 30, 2008 and 2007,respectively.  Loans are net of theallowance for loan losses, deferred fees, unearned income, and related directcosts.

 

20

----

Table of Contents

 

**Rate/Volume Analysis of Net InterestIncome**

(in thousands)

 
| ** **                        | ** ** | **For the Six Months Ended June 30,** | ** ** |
|-----------------------------------|------------|---------------------------------------------------------------------|------------|
| ** **                        | ** ** | **2008 vs 2007**                                          | ** ** |
| ** **                        | ** ** | **Increase (Decrease)**                                        | ** ** |
| ** **                        | ** ** | **in interest income and expense**              | ** ** |
| ** **                        | ** ** | **due to changes in:**                               | ** ** |
| ** **                        | ** ** | **Volume**                                                          | ** ** | **Rate** | ** ** | **Total** | ** ** |
| **Interest income:**              |       |                                                                |       |   |   |   |   |
| Gross loans (1)                   |       | $                                                                   | 396        |   | $ | (1,827 | ) | $ | (1,431 | ) |
| Investment securities             |       | (27                                                                 | )          | 25 |   | (2 | ) |
| Federal funds sold                |       | (67                                                                 | )          | (10 | ) | (77 | ) |
| Interest-earning deposits         |       | 6                                                                   |       | (8 | ) | (2 | ) |
| **Total interest income**         | ** ** | **$**                                                               | **308**    | ** ** | **$** | **(1,820** | **)** | **$** | **(1,512** | **)** |
|                              |       |                                                                |       |   |   |   |   |
| **Interest expense:**             |       |                                                                |       |   |   |   |   |
| Money market deposits             |       | $                                                                   | 438        |   | $ | (742 | ) | $ | (304 | ) |
| NOW deposits                      |       | 11                                                                  |       | (110 | ) | (99 | ) |
| Savings deposits                  |       | 5                                                                   |       | (108 | ) | (103 | ) |
| Time CD $100K or more             |       | (668                                                                | )          | (161 | ) | (829 | ) |
| Other time deposits               |       | (193                                                                | )          | (192 | ) | (385 | ) |
| Other borrowings                  |       | 235                                                                 |       | (643 | ) | (408 | ) |
| **Total interest expense**        | ** ** | **$**                                                               | **(172**   | **)** | **$** | **(1,956** | **)** | **$** | **(2,128** | **)** |
| ** **                        | ** ** | ** **                                                          | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Change in net interest income** | ** ** | **$**                                                               | **480**    | ** ** | **$** | **136** | ** ** | **$** | **616** | ** ** |

 

----

*(1) * Loan fees have been included in thecalculation of interest income. Loan fees were approximately $549,000 and$687,000 for the six months ended June 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 reflects the rates decline hasimpacted liabilities slightly more than assets as indicated by the increase of$136,000 in net interest income due to the rate change.  The increased loan volume and the overallchange in mix of deposit balances contributed an increase of $480,000 to netinterest margin.

 

**Non-Interest Income**

 

Non-interest income represents service charges ondeposit accounts and other non-interest related charges and fees, includingfees from the sale of loans.  For the three and six month period ended June 30,2008, non-interest income was $672,369 and $1,285,952, an increase of $129,521or 23.9% and $212,610 or 19.8%, respectively, from the same period in 2007.

 

The following table shows the major components ofnon-interest income:

 

***Non-Interest Income***

***(In thousands)***

 

**Non-InterestIncome**

 
| ** **                             | ** ** | **For the Three Months Ended June 30,** | ** ** | **For the Six Months Ended June 30,** | ** ** |
|----------------------------------------|------------|-----------------------------------------------------------------------|------------|---------------------------------------------------------------------|------------|
| ** **                             | ** ** | **2008**                                                              | ** ** | **2007**                                                            | ** ** | **$ chg** | ** ** | **% chg** | ** ** | **2008** | ** ** | **2007** | ** ** | **$ chg** | ** ** | **% chg** | ** ** |
| Service charges on deposits            |       | $                                                                     | 344        |                                                                | $          | 275 |   | $ | 69 |   | 25.4 | % | $ | 647 |   | $ | 540 |   | $ | 107 |   | 19.8 | % |
| Earnings on cash surrender of life ins |       | 99                                                                    |       | 44                                                                  |       | 55 |   | 127.5 | % | 181 |   | 87 |   | 94 |   | 106.9 | % |
| Mortgage commissions                   |       | 22                                                                    |       | 52                                                                  |       | (30 | ) | (58.4 | )% | 71 |   | 152 |   | (81 | ) | (53.1 | )% |
| Other                                  |       | 207                                                                   |       | 172                                                                 |       | 35 |   | 20.1 | % | 387 |   | 294 |   | 93 |   | 31.7 | % |
|                                   |       | $                                                                     | 672        |                                                                | $          | 543 |   | $ | 129 |   | 23.9 | % | $ | 1,286 |   | $ | 1,073 |   | $ | 213 |   | 19.8 | % |

 

21

----

Table of Contents

 

Service charges on deposits increased by $69,000 or25.4% and $107,000 or 19.8% in the three and six month periods ended June 30,2008, respectively, as compared to the same periods in 2007, which is primarilydue to increases in the number of demand deposit accounts opened during thefirst six months of 2008.  The Bankcontinues to expand its offerings to the consumer and business depositor.Currently, the Bank is pursuing a strategy to increase its core deposit basefurther by expanding the Bank’s offering of remote deposit capture products aswell as cash management products for current and prospective businessdepositors.  In addition, Earnings oncash surrender of life insurance increased by $55,000 and 94,000 as a result ofthe $4.74 million invested in additional life insurance policies on certainofficers and directors during the first quarter of 2008.

 

**Non-Interest Expense**

 

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

 

The following table shows the major components ofnon-interest expenses:

 

***Non-InterestExpense***

***(In thousands)***

 
| ** **                     | ** ** | **For the Three Months Ended June 30,** | ** ** | **For the Six Months Ended June 30,** | ** ** |
|--------------------------------|------------|-----------------------------------------------------------------------|------------|---------------------------------------------------------------------|------------|
| ** **                     | ** ** | **2008**                                                              | ** ** | **2007**                                                            | ** ** | **$** | ** change** | ** ** | **%  change** | ** ** | **2008** | ** ** | **2007** | ** ** | **$** | ** change** | ** ** | **%  change** | ** ** |
| Salaries and employee benefits |       | $                                                                     | 2,435      |                                                                | $          | 2,075 |   | $ | 360 |   | 17.3 | % | $ | 4,881 |   | $ | 4,153 |   | $ | 728 |   | 17.5 | % |
| Occupancy expenses             |       | 670                                                                   |       | 555                                                                 |       | 115 |   | 20.8 | % | 1,340 |   | 1,053 |   | 287 |   | 27.2 | % |
| Data processing fees           |       | 191                                                                   |       | 108                                                                 |       | 83 |   | 76.4 | % | 369 |   | 216 |   | 153 |   | 70.8 | % |
| Telephone expenses             |       | 73                                                                    |       | 62                                                                  |       | 11 |   | 17.4 | % | 144 |   | 124 |   | 20 |   | 16.4 | % |
| Other operating expenses       |       | 1,193                                                                 |       | 642                                                                 |       | 551 |   | 85.8 | % | 1,884 |   | 1,207 |   | 677 |   | 56.1 | % |
|                           |       | $                                                                     | 4,562      |                                                                | $          | 3,442 |   | $ | 1,120 |   | 32.5 | % | $ | 8,618 |   | $ | 6,753 |   | $ | 1,865 |   | 27.6 | % |

 

Non-interest expenses increased by $1.12 million or32.5% and $1.87 million or 27.6% for the three and six months ended June 30,2008, as compared to the same periods of 2007. Salaries and employee benefits increased $360,000 and $728,000 for thethree and six months ended June 30, 2008, as compared to the same periodsof 2007 as a result of additional facilities, in Stockton and Oakdale, andcorresponding branch personnel, as well as continued additions to the Bank’sadministrative and support personnel, positioning the Bank for continuedgrowth.  These additional facilities werethe primary reason for the increase in occupancy expense of $115,000 and$287,000 for the three and six months ended June 30, 2008, as compared tothe same periods of 2007.

 

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

 

**Income Taxes**

 

Income tax expense for the three and six months ended June 30,2008, were $198,307 and $643,555, respectively, a decrease of $431,693 or 68.5%and $636,445 or 49.7% for the same periods in 2007.  The effective taxrate (income tax expense as a percentage of pre-tax income) for the secondquarter and six month period of 2008 was 26.4% and 32.6%, respectively,compared with 38.6% and 39.0% for the same period in 2007.  The disparitybetween the effective tax rates in 2008 as compared to 2007 is primarily due totax credits from California Enterprise Zones and low income housing projects aswell as tax free-income on loans within these enterprise zones and municipalsecurities and loans that comprise a larger proportion of pre-tax income in2008 as compared to 2007.

 

**Balance Sheet Analysis**

 

At June 30, 2008, consolidated assets totaled$476.1 million, as compared with $454.3 million at December 31,2007.  This represents an increase of $21.8 million (a 9.6% annual rate)since December of 2007.  Total net loans increased $12.97 million (a6.8% annual rate) over that period, while deposits decreased $19.2 million(10.2% annualized) and shareholders’ equity increased $1.4 million over thatsame period.

 

22

----

Table of Contents

 

**Asset Quality**

 

Nonperforming assets consist of loans on non-accrualstatus, loans 90 days or more past due and still accruing interest, loansrestructured, where the terms of repayment have been renegotiated resulting ina reduction or deferral of interest or principal, and other real estate owned (“OREO”).

 

Loans are generally placed on non-accrual status whenthey become 90 days past due, unless management believes the loan isadequately collateralized and in the process of collection. The past due loansmay or may not be adequately collateralized, but collection efforts arecontinuously pursued. Loans may be restructured by management when a borrowerhas experienced some changes in financial status, causing an inability to meetthe original repayment terms, and where we believe the borrower will eventuallyovercome those circumstances and repay the loan in full. OREO consists of propertiesacquired by foreclosure or similar means and which management intends to offerfor sale.

 

Non-accrual loans totaled $2.89 million at June 30,2008, as compared to $9.09 million at December 31, 2007.  The non-accrual loans as of June 30,2008 are loans made to 3 borrowers all for the purpose of residentialconstruction.

 

OREO totals $3.55 million as of June 30, 2008 andconsists of two properties that were acquired through foreclosure includingresidential land lots and a commercial real estate property.

 

The following table presents information about theCompany’s non-performing loans, including asset quality ratios as of June 30,2008 and December 31, 2007:

 

***Non-PerformingAssets***

*(in thousands)*

* *
| ** **                                              | ** ** | **June 30** | ** ** | **December 31** | ** ** |
|---------------------------------------------------------|------------|------------------|------------|----------------------|------------|
| ** **                                              | ** ** | **2008**         | ** ** | **2007**             | ** ** |
| Loans in nonaccrual status                              |       | $                | 2,888      |                 | $          | 9,087 |   |
| Loans past due 90 days or more and accruing             |       | 12               |       | 721                  |       |
| Restructured loans                                      |       | —           |       | —               |       |
| Total nonperforming loans                               |       | 2,900            |       | 9,808                |       |
| Other real estate owned                                 |       | 3,547            |       |                 |       |
| Total nonperforming assets                              |       | $                | 6,447      |                 | $          | 9,808 |   |
|                                                    |       |             |       |                 |       |
| Allowance for loan losses                               |       | $                | 4,321      |                 | $          | 4,507 |   |
|                                                    |       |             |       |                 |       |
| Asset quality ratios:                                   |       |             |       |                 |       |
| Non-performing assets to total assets                   |       | 1.35             | %          | 2.16                 | %          |
| Non-performing loans to total loans                     |       | 0.72             | %          | 2.54                 | %          |
| Allowance for loan losses to total loans                |       | 1.08             | %          | 1.16                 | %          |
| Allowance for loan losses to total non-performing loans |       | 149              | %          | 46                   | %          |

 

23

----

Table of Contents

 

**Allowance for Loan and Lease Losses**

 

In anticipation of credit risk inherent in our lendingbusiness, we set aside allowances through charges to earnings. Such chargeswere not only made for the outstanding loan portfolio, but also for off-balancesheet items, such as commitments to extend credits or letters of credit. Thecharges made for the outstanding loan portfolio were credited to the allowancefor loan losses, whereas charges for off-balance sheet items were credited tothe reserve for off-balance sheet items, which is presented as a component ofother liabilities.  The Bank recordedloan loss provisions of $440,000 and $585,000 for the three and six monthperiods in 2008, respectively, a $320,000 and $295,000 increase from theprovisions recorded in the same periods of 2007.

 

The allowance for loan losses decreased by 4.1%, or$186,000, to $4.32 million at June 30, 2008, as compared with$4.51 million at December 31, 2007. Despite the increases in loan loss provisions, chargeoffs associatedwith non-accrual loans resulted in the net decrease in the allowance for loanlosses, as of June 30, 2008.  Theweak business climate adversely impacted the financial conditions of certainclients and increased our net loan charge-off to $755,000, for the first sixmonths of 2008, compared to $8,000 for the first six months of 2007. The growthof our loan portfolio has contributed to lower the allowance for loan losses asa percentage of total loans to1.08% at June 30, 2008 as compared to 1.16%at December 31, 2007.

 

Management reviews these conditions with our seniorcredit officers. To the extent that any of these conditions is evidenced by aspecifically identifiable problem credit or portfolio segment as of theevaluation date, management’s estimate of the effect of such condition may bereflected as a specific allowance applicable to such credit or portfoliosegment. Where any of these conditions is not evidenced by a specific,identifiable problem credit or portfolio segment as of the evaluation date,management’s evaluation of the inherent loss related to such condition isreflected in the unallocated allowance. Although management has allocated aportion of the allowance to specific loan categories, the adequacy of theallowance is considered in its entirety.

 

The following table provides an analysis of thechanges in the ALLL for the three-month periods ended June 30, 2008 and2007:

 

***Allowance for Loanand Lease Losses***

*(dollars in thousands)*

* *
| ** **                                                           | ** ** | **Six Months Ended** | ** ** |
|----------------------------------------------------------------------|------------|--------------------------------|------------|
| ** **                                                           | ** ** | **June 30,**              | ** ** |
| ** **                                                           | ** ** | **2008**                       | ** ** | **2007** | ** ** |
| Balance at beginning of period                                       |       | $                              | 4,507      |   | $ | 4,341 |   |
| Provision for loan losses                                            |       | 585                            |       | 290 |   |
| Loans charged off                                                    |       | (759                           | )          | (43 | ) |
| Recoveries of previous charge-offs                                   |       | 4                              |       | 35 |   |
| Net charge-offs                                                      |       | (755                           | )          | (8 | ) |
| Reclassification of reserve related to off-balance-sheet commitments |       | (16                            | )          | 23 |   |
| Balance at end of period                                             |       | $                              | 4,321      |   | $ | 4,600 |   |
|                                                                 |       |                           |       |   |   |
| Allowance for loan losses as a percentage of:                        |       |                           |       |   |   |
| Period end loans                                                     |       | 1.08                           | %          | 1.22 | % |
| Non-performing loans                                                 |       | 149.04                         | %          | N/A |   |
| As a percentage of average loans (annualized):                       |       |                           |       |   |   |
| Net charge-offs                                                      |       | .39                            | %          | .00 | % |
| Provision for loan losses                                            |       | .29                            | %          | .14 | % |

 

The Bank makes provisions for loan losses whenrequired to bring the total allowance for loan and lease losses to a leveldeemed appropriate for the level of risk in the loan portfolio.  At leastquarterly, management conducts an assessment of the overall quality of the loanportfolio and general economic trends in the local market.  Thedetermination of the appropriate level for the allowance is based on thatreview, considering such factors as historical experience, the volume and typeof lending conducted, the amount of and identified potential loss associatedwith specific nonperforming loans, regulatory policies, general economicconditions, and other factors related to the collectibility of loans in theportfolio.

 

Although management believes the allowance at June 30,2008 was adequate to absorb potential losses from any known and inherent risksin the portfolio, no assurance can be given that economic conditions whichadversely affect our service areas or other variables will not result inincreased losses in the loan portfolio in the future.

 

24

----

Table of Contents

 

**Investment Activities**

 

Investments are a key source of interest income.Management of our investment portfolio is set in accordance with strategiesdeveloped and overseen by our Investment Committee. Investment balances,including cash equivalents and interest-bearing deposits in other financialinstitutions, are subject to change over time based on our asset/liabilityfunding needs and interest rate risk management objectives. Our liquiditylevels take into consideration anticipated future cash flows and all availablesources of credits and are maintained at levels management believes areappropriate to assure future flexibility in meeting anticipated funding needs.

 

*Cash Equivalents andInterest-bearing Deposits in other Financial Institutions*

 

The Bank holds federal funds sold, unpledgedavailable-for-sale securities and salable government guaranteed loans to helpmeet liquidity requirements and provide temporary holdings until the funds canbe otherwise deployed or invested. As of June 30, 2008, and December 31,2007, we had $0.75 million, and $3.81 million, respectively, in federalfunds sold.

 

*Investment Securities*

 

Management of our investment securities portfoliofocuses on providing an adequate level of liquidity and establishing aninterest rate-sensitive position, while earning an adequate level of investmentincome without taking undue risk. Investment securities that we intend to holduntil maturity are classified as held-to-maturity securities, and all otherinvestment securities are classified as available-for-sale.  Currently, all of our investment securitiesare classified as available-for-sale. The carrying values of available-for-saleinvestment securities are adjusted for unrealized gains or losses as avaluation allowance and any gain or loss is reported on an after-tax basis as acomponent of other comprehensive income.

 

**Deposits**

 

Total deposits at June 30, 2008 were $358.2million, a $19.2 million or 5.1% decrease from the deposit total of $377.3million at December 31, 2007. The average deposits remained flat at $360million for the six month period ended June 30, 2008 and 2007.

 

**Deposits**

**(in thousands)**

 
| ** **               | ** ** | ** **                  | ** **  | **December 31,** | ** ** | **Six months change** | ** ** |
|--------------------------|------------|-----------------------------|-------------|-----------------------|------------|---------------------------------|------------|
| ** **               | ** ** | **June 30, 2008** | ** **  | **2007**              | ** ** | **$**                           | ** ** | **%** | ** ** |
|                     |       |                        |        |                  |       |                            |       |   |   |
| Demand                   |       | $                           | 59,368      |                  | $          | 68,151                          |       | $ | (8,783 | ) | (12.9 | )% |
|                     |       |                        |        |                  |       |                            |       |   |   |
| NOW                      |       | 56,073                      |        | 54,497                |       | 1,576                           |       | 2.9 | % |
|                     |       |                        |        |                  |       |                            |       |   |   |
| Money Market             |       | 152,706                     |        | 138,414               |       | 14,292                          |       | 10.3 | % |
|                     |       |                        |        |                  |       |                            |       |   |   |
| Savings                  |       | 17,395                      |        | 16,438                |       | 957                             |       | 5.8 | % |
|                     |       |                        |        |                  |       |                            |       |   |   |
| Time Deposits < 100K  |       | 28,841                      |        | 42,228                |       | (13,387                         | )          | (31.7 | )% |
|                     |       |                        |        |                  |       |                            |       |   |   |
| Time Deposits > $100K |       | 43,776                      |        | 57,620                |       | (13,844                         | )          | (24.0 | )% |
|                     |       |                        |        |                  |       |                            |       |   |   |
| ** **               | ** ** | **$**                       | **358,159** | ** **            | **$**      | **377,348**                     | ** ** | **$** | **(19,189** | **)** | **(5.1** | **)%** |

 

Because our client base is comprised primarily ofcommercial and industrial accounts, individual account balances are generallyhigher than those of consumer-oriented banks. A number of clients carry depositbalances of more than 1% of our total deposits, but only one customer had adeposit balance of more than 3% of total deposits at June 30, 2008.

 

Since our deposit growth strategy emphasizes coredeposit growth we have avoided relying on brokered deposits as a consistentsource of funds.  We had no brokereddeposits as of June 30, 2008 or December 31, 2007.

 

25

----

Table of Contents

 

**Borrowings**

 

Although deposits are the primary source of funds forour lending and investment activities and for general business purposes, we mayobtain advances from the Federal Home Loan Bank of San Francisco (“FHLB”) as analternative to retail deposit funds. Our outstanding FHLB advances increased by$40.4 million at June 30, 2008, to $71.4 million, compared to $31.0 million at December 31, 2007 dueto the decrease in deposits. See “Liquidity Management” below for the detailson the FHLB borrowings program.

 

**Capital Ratios**

 

We are subject to various regulatory capitalrequirements administered by federal banking agencies. Failure to meet minimumcapital requirements can trigger regulatory actions that could have a materialadverse effect on our financial statements and operations. Under capitaladequacy guidelines and the regulatory framework for prompt corrective action,we must meet specific capital guidelines that rely on quantitative measures ofour assets, liabilities and certain off-balance-sheet items as calculated underregulatory accounting practices. Our capital amounts and classification arealso subject to qualitative judgments by the regulators about components, riskweightings, and other factors.

 

The following table shows the Bank’s capital ratios,as calculated under regulatory guidelines, compared to the regulatory minimumcapital ratios and the regulatory minimum capital ratios needed to qualify as a“well-capitalized” institution at June 30, 2008, December 31, 2007:

 

***Oak Valley Bancorp 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 June 30, 2008:**            |       |       |       |                 |       |                                          |       |   |   |   |   |   |   |
| Total Capital (to Risk-Weighted Assets)  |       | $          | 48,423     |                 | 10.90      | %                                             | $          | 44,434 |   | 10 | % | $ | 35,548 |   | 8 | % |
| Tier 1 Capital (to Risk-Weighted Assets) |       | $          | 43,877     |                 | 9.87       | %                                             | $          | 26,661 |   | 6 | % | $ | 17,774 |   | 4 | % |
| Tier 1 Capital (to Average Assets)       |       | $          | 43,877     |                 | 9.40       | %                                             | $          | 23,342 |   | 5 | % | $ | 18,674 |   | 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 thatsufficient resources be available at all time to meet our cash flowrequirements. Liquidity in a banking institution is required primarily toprovide for deposit withdrawals and the credit needs of its customers and totake advantage of investment opportunities as they arise. Liquidity managementinvolves our ability to convert assets into cash or cash equivalents withoutincurring significant loss, and to raise cash or maintain funds withoutincurring excessive additional cost. For this purpose, we maintain a portion ofour funds in cash and cash equivalents, loans and securities available forsale. Our liquid assets at June 30, 2008 was $56.4 million compared to$59.9 million at December 31, 2007. Our liquidity level measured as the percentage of liquid assets to totalassets was 11.8% and 13.2% at June 30, 2008 and December 31, 2007,respectively.

 

26

----

Table of Contents

 

As a secondary source of liquidity, we rely onadvances from the FHLB to supplement our supply of lendable funds and to meetdeposit withdrawal requirements. Advances from the FHLB are typically securedby a portion of our loan portfolio. The FHLB determines limitations on theamount of advances by assigning a percentage to each eligible loan categorythat will count towards the borrowing capacity. As of June 30, 2008, ourborrowing capacity from the FHLB was approximately $95 million and theoutstanding balance was $71.4 million, or approximately 75% of ourborrowing capacity. We also maintain 2 lines of credit with correspondent banksto purchase up to $20 million in federal funds.

 

**Off-Balance-Sheet Arrangements**

 

During the ordinary course of business, we providevarious forms of credit lines to meet the financing needs of our customers.These commitments, which represent a credit risk to us, are not represented inany form on our balance sheets.

 

As of June 30, 2008 and December 31, 2007,we had commitments to extend credit of $83.7 million and $81.40 million,respectively, which includes obligations under letters of credit of $2.68million and $1.14 million, respectively,

 

The effect on our revenues, expenses, cash flows andliquidity from the unused portion of the commitments to provide credit cannotbe reasonably predicted because there is no guarantee that the lines of credit willbe used.

 

**Effects of Inflation and EconomicIssues**

 

Inflation primarily impacts us by its effect oninterest rates. Our primary source of income is net interest income, which isaffected by changes in interest rates. We attempt to limit the impact of inflationon our net interest margin through management of rate-sensitive assets andliabilities and the analysis of interest rate sensitivity. The effect ofinflation on premises and equipment as well as noninterest expenses has notbeen significant for the periods covered in this report. Our business isgenerally not seasonal.

 

27

----

Table of Contents

 

**Item3.****                                                                    ****Quantitative andQualitative Disclosures About Market Risk**

 

Not applicable.

 

**Item4T.****                                                            ****Controls and Procedures**

 

The Company’s Chief Executive Officer and its ChiefFinancial Officer, after evaluating the effectiveness of the Company’sdisclosure controls and procedures, as defined in Exchange Act Rules 13a-15(e) and15(d)-15(e) promulgated under the Exchange Act, as of the end of theperiod covered by this report (the “Evaluation Date”) have concluded that as ofthe Evaluation Date, the Company’s disclosure controls and procedures wereadequate and effective to ensure that material information relating to theCompany would be made known to them by others within the Company, particularlyduring the period in which this report was being prepared.  Disclosurecontrols and procedures are designed to ensure that information required to bedisclosed by us in the reports that we file or submit under the Exchange Act isrecorded, processed, summarized and reported within the time periods specifiedin the Securities and Exchange Commission’s rules and forms. Disclosure controls and procedures include, without limitation, controls andprocedures designed to ensure that information required to be disclosed by usin the reports that we file under the Exchange Act is accumulated andcommunicated to our management, including our Chief Executive Officer and ChiefFinancial Officer, as appropriate to allow timely decisions regarding requireddisclosure.

 

There were no significant changes in the Company’sinternal controls or in other factors that could significantly affect theCompany’s internal controls over financial reporting in the first six months of2008.

 

28

----

Table of Contents

 

**PART II- OTHER INFORMATION**

 

**Item1.****                                                                    ****Legal Proceedings**

 

There are no material legal proceedings to which theCompany is a party or to which any of its property is subject.

 

**Item1A.****                                                           ****Risk Factors**

 

Not applicable.

 

**Item2.****                                                                    ****Unregistered Sales ofEquity Securities and Use of Proceeds**

 

On April 1, 2008, in connection with its initialcapitalization, Oak Valley Bancorp issued 100 shares of its common stock toRonald C. Martin and 100 shares of its common stock to Christopher Courtneypursuant to an exemption under Section 4(2) of the 1933 SecuritiesAct, as amended.

 

**Item3.****                                                                    ****Defaults Upon SeniorSecurities**

 

None.

 

**Item4.****                                                                    ****Submission of Matters toa Vote of Security Holders**

 

 The annual meeting of the shareholders of OakValley Community Bank, our wholly owned subsidiary, was held on June 16,2008. Three proposals were submitted to a vote of the shareholders.  The following is a brief description of thematters voted upon, as well as the outcome of each vote:

 

1.               To elect ten members to serve on the Company’s Boardof Directors for a term of one year:

 
| **Nominee**          | ** ** | **For**   | ** ** | **Withheld** | ** ** |
|----------------------|------------|-----------|------------|--------------|------------|
| Donald Barton        |       | 5,694,022 |       | 121,217      |       |
| Christopher Courtney |       | 5,708,968 |       | 106,271      |       |
| James L. Gilbert     |       | 5,731,904 |       | 83,335       |       |
| Thomas A. Haidlen    |       | 5,733,667 |       | 81,572       |       |
| Michael Q. Jones     |       | 5,726,477 |       | 88,762       |       |
| Arne J. Knudsen      |       | 5,720,314 |       | 94,925       |       |
| Ronald C. Martin     |       | 5,715,748 |       | 99,491       |       |
| Roger M. Schrimp     |       | 5,722,067 |       | 93,172       |       |
| Danny L. Titus       |       | 5,744,908 |       | 70,331       |       |
| Richard J. Vaughn    |       | 5,750,386 |       | 64,853       |       |

 

2. To approve a plan of merger and reorganizationpursuant to which Oak Valley Bancorp would become the holding company for OakValley Community Bank and each outstanding share of Bank common stock will beconverted into one share of common stock of Oak Valley Bancorp, as follows:

 
| Votes For: |   | 4,166,111 |   |
|------------|--------|-----------|--------|
| Against:   |   | 120,658   |   |
| Abstain:   |   | 29,612    |   |

 

3.               To ratify the appointment of Moss Adams LLP as theBank’s independent auditors:

 
| Votes For: |   | 5,772,708 |   |
|------------|--------|-----------|--------|
| Against:   |   | 11,690    |   |
| Abstain:   |   | 30,841    |   |

 

29

----

Table of Contents

 

**Item5.****                                                                    ****Other Information**

 

None.

 

**Item6.****                                                                    ****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 |

 

30

----

Table of Contents

 

**SIGNATURES**

 

Pursuant to the requirements of the SecuritiesExchange Act of 1934, as amended, the registrant has duly caused this report tobe signed on its behalf by the undersigned thereunto duly authorized.

 
|                       | **Oak Valley Bancorp** |
|----------------------------|------------------------|
| Date: August 14, 2008 | By:                    | /s/    RICHARD  A. MCCARTY |
|                       | ** **             | **Richard  A. McCarty** |
|                       | ** **             | **Executive  Vice President and Chief Financial Officer** |
|                       | ** **             | **(Principal  Financial Officer and duly authorized  signatory)** |

 

31

----

Table of Contents

 

**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 |

 

32

----