Tableof Contents

 

 

 

**UNITEDSTATES**

**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 endedJune 30, 2009**

** **

**OR**

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

 

**Commissionfile number 001-34142**

 

**OAKVALLEY BANCORP**

(Exact name ofregistrant as specified in its charter)

 

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

 

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

(Address ofprincipal executive offices)

 

**(209)848-2265**

Issuer’s telephonenumber

 

**Notapplicable**

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

 

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

 

Indicate by checkmark whether the registrant has submitted electronically and posted on itscorporate web site, if any, every Interactive Data File required to besubmitted and posted pursuant to Rule 405 of Regulation S-T during thepreceding 12 months (or for such shorter period that the registrant wasrequired to submit and post such files).  Yes o  No o

 

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

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

 

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

 

**APPLICABLEONLY TO CORPORATE ISSUERS**

 

State the number ofshares outstanding of each of the issuer’s classes of common stock, as of thelatest practicable date: 7,661,627 shares of common stock outstanding as of July 31, 2009.

 

 

 

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**OakValley Bancorp**

**June 30,2009**

 

**Index**

** **
| ** **                                                                                                                                                              | ** **                                                                                      | **Page**   |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------|-------------------------------------------------------------------------------------------------|------------|
| **PART I –  FINANCIAL INFORMATION**                                                                                                                           | 3                                                                                               |
|                                                                                                                                                                    |                                                                                            |       |
| **Item 1.**                                                                                                                                                             | **Financial Statements**                                                                        | 3          |
|                                                                                                                                                                    |                                                                                            |       |
| Condensed  Consolidated Balance Sheets at June 30, 2009, and December 31, 2008                                                                                | 4                                                                                               |
|                                                                                                                                                                    |                                                                                            |
| Condensed  Consolidated Statements of Operations for the Three and Six Month Periods  Ended June 30, 2009 and June 30, 2008                                   | 5                                                                                               |
|                                                                                                                                                                    |                                                                                            |
| Condensed Consolidated Statements of Changes of  Shareholders’ Equity for the Six-Month Period Ended June 30, 2009 and  the Year Ended December 31, 2008 | 6                                                                                               |
|                                                                                                                                                                    |                                                                                            |
| Condensed Consolidated Statements of Cash Flows for  the Six-Month Periods Ended June 30, 2009 and June 30, 2008                                              | 7                                                                                               |
|                                                                                                                                                                    |                                                                                            |
| Notes to Consolidated Financial Statements                                                                                                                              | 8                                                                                               |
|                                                                                                                                                                    |                                                                                            |       |
| **Item 2.**                                                                                                                                                             | **Management’s  Discussion and Analysis of Financial Condition and Results of Operations** | 17         |
| ** **                                                                                                                                                              | ** **                                                                                      | ** ** |
| **Item 3.**                                                                                                                                                             | **Quantitative  and Qualitative Disclosures About Market Risk**                                 | 31         |
| ** **                                                                                                                                                              | ** **                                                                                      | ** ** |
| **Item 4T.**                                                                                                                                                            | **Controls and  Procedures**                                                                    | 31         |
|                                                                                                                                                                    |                                                                                            |       |
| **PART II  – OTHER INFORMATION**                                                                                                                              | 32                                                                                              |
|                                                                                                                                                                    |                                                                                            |       |
| **Item 1.**                                                                                                                                                             | **Legal Proceedings**                                                                           | 32         |
| **Item 2.**                                                                                                                                                             | **Unregistered  Sales of Equity Securities and Use of Proceeds**                                | 32         |
| **Item 3.**                                                                                                                                                             | **Defaults Upon  Senior Securities**                                                            | 32         |
| **Item 4.**                                                                                                                                                             | **Submission of  Matters to a Vote of Security Holders**                                        | 32         |
| **Item 5.**                                                                                                                                                             | **Other Information**                                                                           | 32         |
| **Item 6.**                                                                                                                                                             | **Exhibits**                                                                                    | 33         |

 

2

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**PART I – FINANCIAL STATEMENTS**

 

**Item 1.Financial Statements**

 

3

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**OAKVALLEY BANCORP**

**CONDENSEDCONSOLIDATED BALANCE SHEETS (UNAUDITED)**

**AT JUNE30, 2009 AND DECEMBER 31, 2008**

** **
| ** **                                                                                                                                                                                 | ** ** | **June 30,** | ** **  | **December 31,** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------|-------------|-----------------------|------------|
| ** **                                                                                                                                                                                 | ** ** | **2009**          | ** **  | **2008**              | ** ** |
| **ASSETS**                                                                                                                                                                                 |       |              |        |                  |       |
| Cash  and due from banks                                                                                                                                                                   |       | $                 | 12,206,546  |                  | $          | 9,072,860 |   |
| Federal  funds sold                                                                                                                                                                        |       | 4,880,000         |        | 765,000               |       |
| Cash  and cash equivalents                                                                                                                                                                 |       | 17,086,546        |        | 9,837,860             |       |
|                                                                                                                                                                                       |       |              |        |                  |       |
| Securities  available for sale                                                                                                                                                             |       | 54,400,351        |        | 41,448,877            |       |
| Loans,  net of allowance for loan loss of $5,700,862 in 2009 and $5,569,496 in 2008                                                                                                        |       | 417,814,524       |        | 421,572,911           |       |
| Bank  premises and equipment, net                                                                                                                                                          |       | 10,620,464        |        | 11,093,967            |       |
| Other  real estate owned                                                                                                                                                                   |       | 2,813,082         |        | 2,745,575             |       |
| Accrued  interest and other assets                                                                                                                                                         |       | 22,871,107        |        | 21,503,821            |       |
|                                                                                                                                                                                       |       |              |        |                  |       |
|                                                                                                                                                                                       |       | $                 | 525,606,074 |                  | $          | 508,203,011 |   |
|                                                                                                                                                                                       |       |              |        |                  |       |
| **LIABILITIES AND  SHAREHOLDERS’ EQUITY**                                                                                                                                             | ** ** | ** **        | ** **  | ** **            | ** ** |
|                                                                                                                                                                                       |       |              |        |                  |       |
| Deposits                                                                                                                                                                                   |       | $                 | 419,940,758 |                  | $          | 378,248,467 |   |
| Accrued  interest and other liabilities                                                                                                                                                    |       | 2,935,252         |        | 2,968,465             |       |
| FHLB  advances                                                                                                                                                                             |       | 44,100,000        |        | 69,000,000            |       |
|                                                                                                                                                                                       |       |              |        |                  |       |
| Total  liabilities                                                                                                                                                                         |       | 466,976,010       |        | 450,216,932           |       |
|                                                                                                                                                                                       |       |              |        |                  |       |
| Shareholders’  equity                                                                                                                                                                 |       |              |        |                  |       |
| Preferred  stock, no par value; $1,000 per share liquidation preference, 10,000,000  shares authorized and 13,500 issued and outstanding at June 30, 2009 and  December 31, 2008 |       | 12,763,973        |        | 12,680,649            |       |
| Common  stock, no par value; 10,000,000 shares authorized and 7,661,627 shares issued  and outstanding at June 30, 2009 and December 31, 2008                                    |       | 23,863,331        |        | 23,863,331            |       |
| Additional  paid-in capital                                                                                                                                                                |       | 1,965,424         |        | 1,925,224             |       |
| Retained  earnings                                                                                                                                                                         |       | 19,037,025        |        | 19,226,645            |       |
| Accumulated  other comprehensive income, net of tax                                                                                                                                        |       | 1,000,311         |        | 290,230               |       |
|                                                                                                                                                                                       |       |              |        |                  |       |
| Total  shareholders’ equity                                                                                                                                                           |       | 58,630,064        |        | 57,986,079            |       |
|                                                                                                                                                                                       |       |              |        |                  |       |
|                                                                                                                                                                                       |       | $                 | 525,606,074 |                  | $          | 508,203,011 |   |

 

*Theaccompanying notes are an integral part of these consolidated financialstatements.*

 

4

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**OAKVALLEY BANCORP**

**CONDENSEDCONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)**

**FOR THETHREE AND SIX MONTH PERIODS ENDED JUNE 30, 2009 AND JUNE 30, 2008**

** **
| ** **                                           | ** ** | **3 MONTHS ENDED** | ** ** | **6 MONTHS ENDED** | ** ** |
|------------------------------------------------------|------------|--------------------|------------|--------------------|------------|
| ** **                                           | ** ** | **JUNE 30,**       | ** ** | **JUNE 30,**       | ** ** |
| ** **                                           | ** ** | **2009**           | ** ** | **2008**           | ** ** | **2009** | ** ** | **2008** | ** ** |
| Interest  and fees on loans                          |       | $                  | 6,716,008  |               | $          | 6,775,872 |   | $ | 13,312,216 |   | $ | 13,710,003 |   |
| Interest  on securities available for sale           |       | 676,522            |       | 408,651            |       | 1,288,679 |   | 803,331 |   |
| Interest  on federal funds sold                      |       | 692                |       | 4,472              |       | 1,596 |   | 9,577 |   |
| Interest  on deposits with banks                     |       | 869                |       | 308                |       | 1,632 |   | 1,026 |   |
| Total  interest income                               |       | 7,394,091          |       | 7,189,303          |       | 14,604,123 |   | 14,523,937 |   |
|                                                 |       |               |       |               |       |   |   |   |   |
| Deposits                                             |       | 1,349,347          |       | 1,710,446          |       | 2,673,266 |   | 3,868,004 |   |
| FHLB  advances                                       |       | 157,686            |       | 397,226            |       | 387,139 |   | 758,898 |   |
| Federal  funds purchased                             |       | 79                 |       | 944                |       | 343 |   | 7,316 |   |
| Total  interest expense                              |       | 1,507,112          |       | 2,108,616          |       | 3,060,748 |   | 4,634,218 |   |
|                                                 |       |               |       |               |       |   |   |   |   |
| Net  interest income                                 |       | 5,886,979          |       | 5,080,687          |       | 11,543,375 |   | 9,889,719 |   |
|                                                 |       |               |       |               |       |   |   |   |   |
| Provision  for loan losses                           |       | 2,137,012          |       | 440,000            |       | 4,037,012 |   | 585,000 |   |
|                                                 |       |               |       |               |       |   |   |   |   |
| Net  interest income after provision for loan losses |       | 3,749,967          |       | 4,640,687          |       | 7,506,363 |   | 9,304,719 |   |
|                                                 |       |               |       |               |       |   |   |   |   |
| Service  charges on deposits                         |       | 292,562            |       | 344,365            |       | 574,947 |   | 647,292 |   |
| Earnings  on cash surrender value of life insurance  |       | 101,057            |       | 99,242             |       | 202,114 |   | 180,518 |   |
| Mortgage  commissions                                |       | 46,472             |       | 21,719             |       | 89,017 |   | 71,449 |   |
| Other  income                                        |       | 207,286            |       | 207,043            |       | 379,607 |   | 386,693 |   |
| Total  non-interest income                           |       | 647,377            |       | 672,369            |       | 1,245,685 |   | 1,285,952 |   |
|                                                 |       |               |       |               |       |   |   |   |   |
| Salaries  and employee benefits                      |       | 1,865,341          |       | 2,434,975          |       | 3,915,225 |   | 4,881,402 |   |
| Occupancy  expenses                                  |       | 677,518            |       | 670,393            |       | 1,372,916 |   | 1,339,946 |   |
| Data  processing fees                                |       | 233,901            |       | 190,439            |       | 452,416 |   | 368,998 |   |
| OREO  expenses                                       |       | 933,724            |       | 451,078            |       | 1,058,752 |   | 451,078 |   |
| Assessments  (FDIC & DFI)                   |       | 299,124            |       | 89,578             |       | 437,086 |   | 171,896 |   |
| Other  operating expenses                            |       | 776,990            |       | 725,127            |       | 1,488,509 |   | 1,404,840 |   |
| Total  non-interest expense                          |       | 4,786,598          |       | 4,561,590          |       | 8,724,904 |   | 8,618,160 |   |
|                                                 |       |               |       |               |       |   |   |   |   |
| Net  (loss) income before provision for income taxes |       | (389,254           | )          | 751,466            |       | 27,144 |   | 1,972,511 |   |
|                                                 |       |               |       |               |       |   |   |   |   |
| (Benefit)  Provision for income taxes                |       | (344,191           | )          | 198,307            |       | (358,103 | ) | 643,555 |   |
|                                                 |       |               |       |               |       |   |   |   |   |
| Net  (loss) income                                   |       | $                  | (45,063    | )                  | $          | 553,159 |   | $ | 385,247 |   | $ | 1,328,956 |   |
|                                                 |       |               |       |               |       |   |   |   |   |
| Preferred  stock dividends and accretion             |       | 212,286            |       | 0                  |       | 422,697 |   | 0 |   |
| Net  (loss) income available to common shareholders  |       | $                  | (257,349   | )                  | $          | 553,159 |   | $ | (37,450 | ) | $ | 1,328,956 |   |
|                                                 |       |               |       |               |       |   |   |   |   |
| Net  (loss) income per common share                  |       | $                  | (0.03      | )                  | $          | 0.07 |   | $ | 0.00 |   | $ | 0.17 |   |
| Net  (loss) income per common diluted share          |       | $                  | (0.03      | )                  | $          | 0.07 |   | $ | 0.00 |   | $ | 0.17 |   |

 

*Theaccompanying notes are an integral part of these consolidated financialstatements.*

 

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**OAKVALLEY BANCORP**

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

**FOR THETHE YEAR ENDED DECEMBER 31, 2008 AND THE SIX-MONTH PERIOD ENDED JUNE 30, 2009**

** **
| ** **                                                                                        | ** ** | **YEAR  ENDED DECEMBER 31, 2008 AND THE SIX MONTH PERIOD ENDED JUNE 30, 2009** | ** ** |
|---------------------------------------------------------------------------------------------------|------------|--------------------------------------------------------------------------------|------------|
| ** **                                                                                        | ** ** | ** **                                                                     | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | **Accumulated** | ** ** | ** ** | ** ** |
| ** **                                                                                        | ** ** | ** **                                                                     | ** ** | ** ** | ** ** | ** ** | ** ** | **Additional** | ** ** | ** ** | ** ** | ** ** | ** ** | **Other** | ** ** | **Total** | ** ** |
| ** **                                                                                        | ** ** | **Common  Stock**                                                              | ** ** | **Preferred** | ** ** | **Paid-in** | ** ** | **Retained** | ** ** | **Comprehensive** | ** ** | **Comprehensive** | ** ** | **Shareholders’** | ** ** |
| ** **                                                                                        | ** ** | **Shares**                                                                     | ** ** | **Amount** | ** ** | **Stock** | ** ** | **Capital** | ** ** | **Earnings** | ** ** | **Income** | ** ** | **Income** | ** ** | **Equity** | ** ** |
|                                                                                              |       |                                                                           |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Balances,  January 1, 2008                                                                   |       | 7,607,780                                                                      |       | $ | 22,843,171 |   |   |   | $ | 1,748,380 |   | $ | 17,723,646 |   |   |   | $ | 46,193 |   | $ | 42,361,390 |   |
| Stock  options exercised                                                                          |       | 53,847                                                                         |       | 186,922 |   |   |   |   |   |   |   |   |   |   |   | 186,922 |   |
| Issuance  of preferred stock                                                                      |       |                                                                           |       |   |   | $ | 12,666,762 |   |   |   |   |   |   |   |   |   | 12,666,762 |   |
| Issuance  of TCPP warrants                                                                        |       |                                                                           |       | 833,238 |   |   |   |   |   |   |   |   |   |   |   | 833,238 |   |
| Preferred  stock accretion                                                                        |       |                                                                           |       |   |   | 13,887 |   |   |   | (13,887 | ) |   |   |   |   | 0 |   |
| Tax  benefit of stock options exercised                                                           |       |                                                                           |       |   |   |   |   | 54,195 |   |   |   |   |   |   |   | 54,195 |   |
| Cash  dividends ($0.075 per share)                                                                |       |                                                                           |       |   |   |   |   |   |   | (574,484 | ) |   |   |   |   | (574,484 | ) |
| Stock  based compensation                                                                         |       |                                                                           |       |   |   |   |   | 122,649 |   |   |   |   |   |   |   | 122,649 |   |
| 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 $158,664) |       |                                                                           |       |   |   |   |   |   |   |   |   | 244,037 |   | 244,037 |   | 244,037 |   |
| Net  income                                                                                       |       |                                                                           |       |   |   |   |   |   |   | 2,161,829 |   | 2,161,829 |   |   |   | 2,161,829 |   |
| Comprehensive  income                                                                             |       |                                                                           |       |   |   |   |   |   |   |   |   | $ | 2,405,866 |   |   |   |   |   |
| Balances,  December 31, 2008                                                                 |       | 7,661,627                                                                      |       | $ | 23,863,331 |   | $ | 12,680,649 |   | $ | 1,925,224 |   | $ | 19,226,645 |   |   |   | $ | 290,230 |   | $ | 57,986,079 |   |
| Preferred  stock accretion                                                                        |       |                                                                           |       |   |   | $ | 83,324 |   |   |   | $ | (83,324 | ) |   |   |   |   | 0 |   |
| Preferred  stock dividend payments                                                                |       |                                                                           |       |   |   |   |   |   |   | (300,000 | ) |   |   |   |   | (300,000 | ) |
| Cash  dividends ($0.025 per share)                                                                |       |                                                                           |       |   |   |   |   |   |   | (191,543 | ) |   |   |   |   | (191,543 | ) |
| Stock  based compensation                                                                         |       |                                                                           |       |   |   |   |   | 40,200 |   |   |   |   |   |   |   | 40,200 |   |
| Comprehensive  income                                                                             |       |                                                                           |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net  changes in unrealized gain on available-for-sale securities (net of income  tax of $461,670) |       |                                                                           |       |   |   |   |   |   |   |   |   | 710,081 |   | 710,081 |   | 710,081 |   |
| Net  income                                                                                       |       |                                                                           |       |   |   |   |   |   |   | 385,247 |   | 385,247 |   |   |   | 385,247 |   |
| Comprehensive  income                                                                             |       |                                                                           |       |   |   |   |   |   |   |   |   | $ | 1,095,328 |   |   |   |   |   |
| Balances,  June 30, 2009                                                                     |       | 7,661,627                                                                      |       | $ | 23,863,331 |   | $ | 12,763,973 |   | $ | 1,965,424 |   | $ | 19,037,025 |   |   |   | $ | 1,000,311 |   | $ | 58,630,064 |   |

 

*Theaccompanying notes are an integral part of these consolidated financialstatements.*

 

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**OAKVALLEY BANCORP**

**CONDENSED CONSOLIDATED STATEMENTS OFCASH FLOWS (UNAUDITED)**

**FOR THESIX-MONTH PERIODS ENDED JUNE 30, 2009 AND JUNE 30, 2008**

** **
| ** **                                                                                | ** ** | **6 MONTHS ENDED JUNE 30,** | ** ** |
|-------------------------------------------------------------------------------------------|------------|-----------------------------|------------|
| ** **                                                                                | ** ** | **2009**                    | ** ** | **2008** | ** ** |
| CASH FLOWS FROM OPERATING  ACTIVITIES:                                                    |       |                        |       |   |   |
| Net income                                                                                |       | $                           | 385,247    |   | $ | 1,328,956 |   |
| Adjustments to reconcile  net earnings to net cash from operating activities:             |       |                        |       |   |   |
| Provision for loan losses                                                                 |       | 4,037,012                   |       | 585,000 |   |
| Depreciation, amortization  and accretion, net                                            |       | 520,294                     |       | 563,236 |   |
| Stock-based compensation  expense                                                         |       | 40,200                      |       | 73,128 |   |
| Excess tax benefits from  stock-based payment arrangements                                |       | 0                           |       | (54,195 | ) |
| Loss on sale of premises  and equipment                                                   |       | 0                           |       | 1,434 |   |
| OREO write downs and  losses on sale                                                      |       | 909,189                     |       | 0 |   |
| Gain on called available  for sale securities                                             |       | (54,380                     | )          | 0 |   |
| Decrease in accrued  interest payable and other liabilities                               |       | (33,213                     | )          | (868,052 | ) |
| Decrease in accrued  interest receivable                                                  |       | 69,392                      |       | 244,281 |   |
| Increase in other assets                                                                  |       | (1,898,248                  | )          | (1,067,052 | ) |
| Net cash from operating  activities                                                       |       | 3,975,493                   |       | 806,736 |   |
|                                                                                      |       |                        |       |   |   |
| CASH FLOWS FROM INVESTING  ACTIVITIES:                                                    |       |                        |       |   |   |
| Purchases of available  for sale securities                                               |       | (15,674,108                 | )          | (6,459,330 | ) |
| Proceeds from maturities,  calls, and principal paydowns of securities available for sale |       | 3,971,251                   |       | 4,872,433 |   |
| Net increase in loans                                                                     |       | (1,464,888                  | )          | (17,103,135 | ) |
| Purchase of BOLI policies                                                                 |       | 0                           |       | (4,740,000 | ) |
| Proceeds from sale of  OREO                                                               |       | 209,467                     |       | 0 |   |
| Net purchases of premises  and equipment                                                  |       | (69,277                     | )          | (944,328 | ) |
| Net cash from investing  activities                                                       |       | (13,027,555                 | )          | (24,374,360 | ) |
|                                                                                      |       |                        |       |   |   |
| CASH FLOWS FROM FINANCING  ACTIVITIES:                                                    |       |                        |       |   |   |
| FHLB advanced funds                                                                       |       | 43,700,000                  |       | 151,294,000 |   |
| FHLB payments                                                                             |       | (68,600,000                 | )          | (110,894,000 | ) |
| Federal funds advances                                                                    |       | 7,655,000                   |       | (59,435,000 | ) |
| Federal funds payments                                                                    |       | (7,655,000                  | )          | 59,435,000 |   |
| Shareholder cash  dividends paid                                                          |       | (191,543                    | )          | 0 |   |
| Preferred stock dividend  payment                                                         |       | (300,000                    | )          | 0 |   |
| Net increase in demand  deposits and savings accounts                                     |       | 29,076,007                  |       | 8,038,661 |   |
| Net increase (decrease)  in time deposits                                                 |       | 12,616,284                  |       | (27,227,747 | ) |
| Excess tax benefits from  stock-based payment arrangements                                |       | 0                           |       | 54,195 |   |
| Proceeds from sale of  common stock and exercise of stock options                         |       | 0                           |       | 176,047 |   |
| Net cash from financing  activities                                                       |       | 16,300,748                  |       | 21,441,156 |   |
|                                                                                      |       |                        |       |   |   |
| NET (DECREASE) INCREASE  IN CASH AND CASH EQUIVALENTS                                     |       | 7,248,686                   |       | (2,126,468 | ) |
|                                                                                      |       |                        |       |   |   |
| CASH AND CASH  EQUIVALENTS, beginning of period                                           |       | 9,837,860                   |       | 14,202,951 |   |
|                                                                                      |       |                        |       |   |   |
| CASH AND CASH  EQUIVALENTS, end of period                                                 |       | $                           | 17,086,546 |   | $ | 12,076,483 |   |
|                                                                                      |       |                        |       |   |   |
|                                                                                      |       |                        |       |   |   |
| SUPPLEMENTAL DISCLOSURES  OF CASH FLOW INFORMATION:                                       |       |                        |       |   |   |
| Cash paid during the year  for:                                                           |       |                        |       |   |   |
| Interest                                                                                  |       | $                           | 1,637,974  |   | $ | 5,577,095 |   |
| Income taxes                                                                              |       | $                           | 1,014,000  |   | $ | 800,000 |   |
|                                                                                      |       |                        |       |   |   |
| NON-CASH INVESTING  ACTIVITIES:                                                           |       |                        |       |   |   |
| Real estate acquired  through foreclosure                                                 |       | $                           | 1,186,263  |   | $ | 3,547,193 |   |
| Net change in unrealized  gain/loss on available-for-sale securities                      |       | $                           | 1,171,751  |   | $ | (311,122 | ) |
|                                                                                      |       |                        |       |   |   |
| NON-CASH FINANCING  ACTIVITIES:                                                           |       |                        |       |   |   |
| Tax benefit from stock  options exercised                                                 |       | $                           | 0          |   | $ | 54,195 |   |
| Cumulative effect of  adopting EITF 06-04                                                 |       | $                           | 0          |   | $ | 119,842 |   |
| Accretion of preferred  stock                                                             |       | $                           | 83,324     |   | $ | 0 |   |

 

*Theaccompanying notes are an integral part of these consolidated financialstatements.*

 

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**OAKVALLEY BANCORP**

**NOTES TO CONDENSED CONSOLIDATEDFINANCIAL STATEMENTS**

 

**NOTE 1 –BASIS OF PRESENTATION**

 

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

 

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

 

Management has evaluatedsubsequent events for potential recognition and/or disclosure through theissuance date of this Form 10-Q, and has determined that there were nosubsequent events that require recognition or disclosure.

 

The interim consolidatedfinancial statements included in this report are unaudited but reflect alladjustments 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 three and six month periods ended June 30,2009 are not necessarily indicative of the results of a full year’soperations.  For further information,refer to the audited financial statements and footnotes included in the Company’sForm 10-K for the year ended December 31, 2008.

 

**NOTE 2 –CURRENT ACCOUNTING PRONOUNCEMENTS**

 

InFebruary 2008, the FASB issued Financial Accounting Standards Board StaffPosition FAS SFAS157-2 (FSP 157-2), Effective Date of FASB Statement No. 157.  FSP SFAS 157-2 delayed the Company’s January 1,2008, effective date of FAS 157 for all nonfinancial assets and nonfinancialliabilities, except those recognized or disclosed at fair value in thefinancial statements on a recurring basis (at least annually), until January 1,2009.  Implementation of this standarddid not have a material effect on the Company’s financial statements.

 

In March 2008, theFASB issued FASB Statement of Financial Accounting Standards**No. 161, DisclosuresAbout Derivative Instruments and Hedging Activities, an Amendment of FASBStatement No. 133 (SFAS 161).  SFAS 161amends SFAS 133, Accounting for Derivative Instruments and Hedging Activities,to amend and expand the disclosure requirements of SFAS 133 to providegreater transparency about (i) how and why an entity uses derivativeinstruments, (ii) how derivative instruments and related hedge items areaccounted for under SFAS 133 and its related interpretations, and (iii) howderivative instruments and related hedged items affect an entity’s financialposition, results of operations and cash flows. To meet those objectives,SFAS 161 requires qualitative disclosures about objectives and strategiesfor using derivatives, quantitative disclosures about fair value amounts ofgains and losses on derivative instruments and disclosures aboutcredit-risk-related contingent features in derivative agreements. SFAS 161is effective for the Company on January 1, 2009 and did not have asignificant impact on the Company’s financial statements.

 

In May 2008, theFASB issued FASB Statement of Financial Accounting Standards**No. 162, TheHierarchy of Generally Accepted Accounting Principles (SFAS 162).SFAS 162 identifies the sources of accounting principles and the frameworkfor selecting the principles to be used in the preparation of financialstatements of nongovernmental entities that are presented in conformity withgenerally accepted accounting principles (GAAP) in the United States (the GAAPhierarchy). The hierarchical guidance provided by SFAS 162 did not have asignificant impact on the Company’s financial statements.

 

In April 2009, theFASB issued Financial Accounting Standards Board Staff Position FAS SFAS 157-4(FSP SFAS 157-4), Determining FairValue When the Volume and Level of Activity for the Asset or Liability HaveSignificantly Decreased and Identifying Transactions That Are Not Orderly.FSP SFAS 157-4 affirms that the objective of fair value when the marketfor an asset is not active is the price that would be received to sell theasset in an orderly transaction, and clarifies and includes additional factorsfor determining whether there has been a significant decrease in marketactivity for an asset when the market for that asset is not active. FSP SFAS157-4 requires an entity to base its conclusion about whether a transaction wasnot orderly on the weight of the evidence. FSP SFAS 157-4 also amendedSFAS 157, Fair Value Measurements, to expand certain disclosurerequirements. The Company adopted the provisions of FSP SFAS 

 

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157-4 during the firstquarter of 2009. Adoption of FSP SFAS 157-4 did not significantly impactthe Company’s financial statements.

 

In April 2009, theFASB issued Financial Accounting Standards Board Staff Position FAS SFAS 115-2and SFAS 124-2 (FSP SFAS 115-2 andSFAS 124-2), Recognition and Presentation of Other-Than-Temporary Impairments.FSP SFAS 115-2 and SFAS 124-2 (i) changes existing guidance fordetermining whether an impairment is other than temporary to debt securitiesand (ii) replaces the existing requirement that the entity’s managementassert it has both the intent and ability to hold an impaired security untilrecovery with a requirement that management assert: (a) it does not havethe intent to sell the security; and (b) it is more likely than not itwill not have to sell the security before recovery of its cost basis. Under FSP SFAS 115-2 and SFAS 124-2, declines in the fair value of held-to-maturity andavailable-for-sale securities below their cost that are deemed to be other thantemporary are reflected in earnings as realized losses to the extent theimpairment is related to credit losses. The amount of the impairment related toother factors is recognized in other comprehensive income. The Company adoptedthe provisions of FSP SFAS 115-2 and SFAS 124-2 during the second quarterof 2009. Adoption of FSP SFAS 115-2 and SFAS 124-2 did not significantly impactthe Company’s financial statements.

 

In April 2009, theFASB issued Financial Accounting Standards Board Staff Position FAS SFAS 107-1and APB 28-1 (FSP SFAS 107-1 and APB28-1), Interim Disclosures about Fair Value of Financial Instruments.  FSP SFAS 107-1 and APB 28-1 amendsSFAS 107, Disclosures about Fair Value of Financial Instruments, torequire an entity to provide disclosures about fair value of financialinstruments in interim financial information and amends Accounting PrinciplesBoard (APB) Opinion No. 28, Interim Financial Reporting, torequire those disclosures in summarized financial information at interimreporting periods. Under FSP SFAS 107-1 and APB 28-1, a publiclytraded company shall include disclosures about the fair value of its financialinstruments whenever it issues summarized financial information for interimreporting periods. In addition, entities must disclose, in the body or in theaccompanying notes of its summarized financial information for interimreporting periods and in its financial statements for annual reporting periods,the fair value of all financial instruments for which it is practicable toestimate that value, whether recognized or not recognized in the statement offinancial position, as required by SFAS 107. The new interim disclosuresrequired by FSP SFAS 107-1 and APB 28-1 are included in the Company’sinterim financial statements beginning with the second quarter of 2009.

 

In May 2009, theFASB issued FASB Statement No. 165, Subsequent Events (“SFAS No. 165”,ASC 855), which establishes general standards of accounting for and disclosureof events that occur after the balance sheet date but before financialstatements are issued or are available to be issued. In particular, it setsforth: a) the period after the balance sheet date during which management of areporting entity should evaluate events or transactions that may occur forpotential recognition or disclosure in the financial statements; b) thecircumstances under which an entity should recognize events or transactionsoccurring after the balance sheet date in its financial statements; and c) thedisclosures that an entity should make about events or transactions thatoccurred after the balance sheet date. We have adopted SFAS No. 165 in thequarter ended June 30, 2009 and the adoption of SFAS No. 165 did nothave a significant impact on our financial condition or results of operations.

 

In June 2009, theFinancial Accounting Standards Board (“FASB”) issued FASB Statement No. 168,The FASB Accounting Standards Codification TM and the Hierarchy of GenerallyAccepted Accounting Principles (“SFAS No. 168”). SFAS No. 168establishes the FASB Accounting Standards Codification TM (the “Codification”or “ASC”) to become the source of authoritative U.S. generally acceptedaccounting principles (“U.S. GAAP”) recognized by the FASB to be applied bynongovernmental entities. Rules and interpretive releases of theSecurities and Exchange Commission (“SEC”) under authority of federal securitieslaws are also included in the Codification as sources of authoritative U.S.GAAP for SEC registrants. SFAS No. 168 and the Codification are effectivefor financial statements issued for interim and annual periods ending after September 15,2009.  When effective, the Codification will supersede all existingnon-SEC accounting and reporting standards. Following Statement 168, the FASBwill not issue new standards in the form of Statements, FASB Staff Positions,or Emerging Issues Task Force Abstracts. Instead, the FASB will issueAccounting Standards Updates, which will serve only to: (a) update theCodification; (b) provide background information about the guidance; and (c) providethe bases for conclusions on the change(s) in the Codification. We arefollowing the guidelines in the Codification effective July 1, 2009.

 

**NOTE 3 –SECURITIES**

 

The amortized cost andestimated fair values of debt securities as of June 30, 2009 are asfollows:

** **
| ** **                           | ** ** | **Amortized  Cost** | ** ** | **Gross  Unrealized  Gains** | ** ** | **Gross  Unrealized  Losses** | ** ** | **Estimated  Fair   Market Value** | ** ** |
|--------------------------------------|------------|---------------------|------------|------------------------------|------------|-------------------------------|------------|------------------------------------|------------|
| Available-for-sale  securities:      |       |                |       |                         |       |                          |       |                               |       |
| U.S.  agencies                       |       | $                   | 31,978,663 |                         | $          | 880,540                       |       | $                                  | (64,152    | ) | $ | 32,795,051 |   |
| Collateralized  mortgage obligations |       | 3,091,147           |       | 83,863                       |       | —                        |       | 3,175,010                          |       |
| Municipalities                       |       | 14,402,997          |       | 826,514                      |       | (35,116                       | )          | 15,194,395                         |       |
| SBA  Pools                           |       | 1,616,725           |       | —                       |       | (48,403                       | )          | 1,568,322                          |       |
| Asset-Back  Security                 |       | 152,603             |       | 3,205                        |       | —                        |       | 155,808                            |       |
| Mutual  Fund                         |       | 1,507,077           |       | 4,688                        |       |                          |       | 1,511,765                          |       |
|                                 |       | $                   | 52,749,212 |                         | $          | 1,798,810                     |       | $                                  | (147,671   | ) | $ | 54,400,351 |   |

 

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The following tables detail the gross unrealized losses and fair valuesaggregated by investment category and length of time that individual securitieshave been in a continuous unrealized loss position at June 30, 2009.

 
| ** **                                  | ** ** | **Less than 12 months** | ** ** | **12 months or more** | ** ** | **Total** | ** ** |
|---------------------------------------------|------------|----------------------------------------|------------|--------------------------------------|------------|-----------|------------|
| ** **                                  | ** ** | ** **                             | ** ** | **Unrealized**                       | ** ** | **Fair**  | ** ** | **Unrealized** | ** ** | ** ** | ** ** | **Unrealized** | ** ** |
| **Description  of Securities**              | ** ** | **Fair Value**                         | ** ** | **Loss**                             | ** ** | **Value** | ** ** | **Loss** | ** ** | **Fair Value** | ** ** | **Loss** | ** ** |
|                                        |       |                                   |       |                                 |       |      |       |   |   |   |   |   |   |
| U.S. agencies                               |       | $                                      | 3,188,655  |                                 | $          | (64,152   | )          | $ | — |   | $ | — |   | $ | 3,188,655 |   | $ | (64,152 | ) |
| Collateralized mortgage  obligations        |       | —                                 |       | —                               |       | —    |       | — |   | — |   | — |   |
| Municipalities                              |       | 3,862,681                              |       | (34,250                              | )          | 24,134    |       | (866 | ) | 3,886,815 |   | (35,116 | ) |
| SBA Pools                                   |       | —                                 |       | —                               |       | 1,568,322 |       | (48,403 | ) | 1,568,322 |   | (48,403 | ) |
| Asset Backed Securities                     |       | —                                 |       | —                               |       | —    |       | — |   | — |   | — |   |
| Total temporarily  impaired securities |       | $                                      | 7,051,336  |                                 | $          | (98,402   | )          | $ | 1,592,456 |   | $ | (49,269 | ) | $ | 8,643,792 |   | $ | (147,671 | ) |

 

At June 30, 2009, atotal of two SBA pools and one municipal security make up the total amount ofsecurities in an unrealized loss position for greater than 12 months.Management periodically evaluates each available-for-sale investment securityin an unrealized loss position to determine if the impairment is temporary orother than temporary. Management has determined that no investment security isother than temporarily impaired. The unrealized losses are due solely tointerest rate changes and the Bank has the ability and intent to hold allinvestment securities with identified impairments resulting from interest ratechanges to the earlier of the forecasted recovery or the maturity of theunderlying investment security.

 

The amortized cost andestimated fair value of debt securities at June 30, 2009, by contractualmaturity or call date, are shown below. Expected maturities will differ fromcontractual maturities because borrowers may have the right to call or prepayobligations with or without call or prepayment penalties.

 
| ** **                              | ** ** | ** **    | ** ** | **Estimated** | ** ** |
|-----------------------------------------|------------|---------------|------------|---------------|------------|
| ** **                              | ** ** | **Amortized** | ** ** | **Fair**      | ** ** |
| ** **                              | ** ** | **Cost**      | ** ** | **Value**     | ** ** |
| Available-for-sale  securities:         |       |          |       |          |       |
| Due  in one year or less                |       | $             | 340,000    |          | $          | 334,597 |   |
| Due  after one year through five years  |       | 1,334,882     |       | 1,363,653     |       |
| Due  after five years through ten years |       | 13,221,843    |       | 13,406,697    |       |
| Due  after ten years                    |       | 37,852,487    |       | 39,295,404    |       |
|                                    |       | $             | 52,749,212 |          | $          | 54,400,351 |   |

 

The amortized cost andestimated fair values of debt securities as of December 31, 2008, are asfollows:

 
| ** **                           | ** ** | **Amortized Cost** | ** ** | **Gross  Unrealized  Gains** | ** ** | **Gross Unrealized  Losses** | ** ** | **Estimated Fair  Market Value** | ** ** |
|--------------------------------------|------------|-------------------------|------------|------------------------------|------------|-----------------------------------|------------|--------------------------------------------|------------|
| ** **                           | ** ** | ** **              | ** ** | ** **                   | ** ** | ** **                        | ** ** | ** **                                 | ** ** |
| Available-for-sale  securities:      |       |                    |       |                         |       |                              |       |                                       |       |
| U.S.  agencies                       |       | $                       | 25,540,641 |                         | $          | 609,957                           |       | $                                          | (65,680    | ) | $ | 26,084,918 |   |
| Collateralized  mortgage obligations |       | 3,438,998               |       | 54,471                       |       | (8,861                            | )          | 3,484,608                                  |       |
| Municipalities                       |       | 9,970,961               |       | 14,829                       |       | (83,567                           | )          | 9,902,223                                  |       |
| SBA  Pools                           |       | 1,820,810               |       | —                       |       | (41,682                           | )          | 1,779,128                                  |       |
| Asset-Back  Security                 |       | 198,081                 |       | —                       |       | (81                               | )          | 198,000                                    |       |
|                                 |       | $                       | 40,969,491 |                         | $          | 679,257                           |       | $                                          | (199,871   | ) | $ | 41,448,877 |   |

 

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The following tables detail the gross unrealized losses and fair valuesaggregated by investment category and length of time that individual securitieshave been in a continuous unrealized loss position at December 31, 2008.

 
| ** **                                  | ** ** | **Less than 12 months** | ** ** | **12 months or more** | ** ** | **Total** | ** ** |
|---------------------------------------------|------------|----------------------------------------|------------|--------------------------------------|------------|-----------|------------|
| ** **                                  | ** ** | ** **                             | ** ** | **Unrealized**                       | ** ** | **Fair**  | ** ** | **Unrealized** | ** ** | ** ** | ** ** | **Unrealized** | ** ** |
| **Description  of Securities**              | ** ** | **Fair Value**                         | ** ** | **Loss**                             | ** ** | **Value** | ** ** | **Loss** | ** ** | **Fair Value** | ** ** | **Loss** | ** ** |
|                                        |       |                                   |       |                                 |       |      |       |   |   |   |   |   |   |
| U.S. agencies                               |       | $                                      | 2,900,405  |                                 | $          | (13,962   | )          | $ | 3,067,267 |   | $ | (51,718 | ) | $ | 5,967,672 |   | $ | (65,680 | ) |
| Collateralized mortgage  obligations        |       | 618,552                                |       | (2,109                               | )          | 1,085,704 |       | (6,752 | ) | 1,704,256 |   | (8,861 | ) |
| Municipalities                              |       | 9,357,996                              |       | (83,567                              | )          | —    |       | — |   | 9,357,996 |   | (83,567 | ) |
| SBA Pools                                   |       | —                                 |       | —                               |       | 1,626,502 |       | (41,682 | ) | 1,626,502 |   | (41,682 | ) |
| Asset Backed Securities                     |       | 198,000                                |       | (81                                  | )          | —    |       | — |   | 198,000 |   | (81 | ) |
| Total temporarily  impaired securities |       | $                                      | 13,074,953 |                                 | $          | (99,719   | )          | $ | 5,779,473 |   | $ | (100,152 | ) | $ | 18,854,426 |   | $ | (199,871 | ) |

 

At December 31,2008, a total of four U.S. agencies, one collateralized mortgage obligationsand two SBA pools make up the total amount of securities in an unrealized lossposition for greater than 12 months. Management periodically evaluates eachavailable-for-sale investment security in an unrealized loss position todetermine if the impairment is temporary or other than temporary. Managementhas determined that no investment security is other than temporarily impaired.The unrealized losses are due solely to interest rate changes and the Bank hasthe ability and intent to hold all investment securities with identifiedimpairments resulting from interest rate changes to the earlier of theforecasted recovery or the maturity of the underlying investment security.

 

There were no realizedgains or losses on sales of available-for-sale securities during 2009 and 2008,however the Company did recognize a gain of $54,380 for the six months ended June 30,2009 on certain available-for-sale securities that were partially called. Therewere no other sales of available-for-sale securities during 2009 and 2008.

 

Securities carried at$38,371,793 and $30,117,814 at June 30, 2009 and December 31, 2008,respectively, were pledged to secure deposits of public funds.

 

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**OAKVALLEY BANCORP**

**NOTESTO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

 

**NOTE 4 –LOANS**

 

Loan totals were asfollows:

 
| ** **                            | ** ** | **JUNE 30,** | ** **  | **DECEMBER 31,** | ** ** |
|---------------------------------------|------------|--------------|-------------|------------------|------------|
| ** **                            | ** ** | **2009**     | ** **  | **2008**         | ** ** |
| Loans                                 |       |         |        |             |       |
| Commercial real estate                |       | $            | 274,579,225 |             | $          | 268,741,826 |   |
| Commercial                            |       | 43,630,129   |        | 37,302,286       |       |
| Real estate construction              |       | 58,927,733   |        | 73,321,446       |       |
| Agriculture                           |       | 24,851,631   |        | 25,916,928       |       |
| Residential real estate  and consumer |       | 22,401,506   |        | 22,894,644       |       |
|                                  |       |         |        |             |       |
| Total gross loans                     |       | 424,390,224  |        | 428,177,130      |       |
|                                  |       |         |        |             |       |
| Less:                                 |       |         |        |             |       |
| Deferred loan fees and  costs, net    |       | (874,837     | )           | (1,034,723       | )          |
| Allowance for loan losses             |       | (5,700,862   | )           | (5,569,496       | )          |
|                                  |       |         |        |             |       |
| Net loans                             |       | $            | 417,814,524 |             | $          | 421,572,911 |   |

 

Changes in the allowancefor loan losses were as follows:

 
| ** **                                                            | ** ** | **JUNE 30,** | ** ** | **DECEMBER 31,** | ** ** |
|-----------------------------------------------------------------------|------------|--------------|------------|------------------|------------|
| ** **                                                            | ** ** | **2009**     | ** ** | **2008**         | ** ** |
|                                                                  |       |         |       |             |       |
| Balance, beginning of  year                                           |       | $            | 5,569,496  |             | $          | 4,506,753 |   |
| Provision charged to  operations                                      |       | 4,037,012    |       | 2,188,139        |       |
| Loans charged off                                                     |       | (3,907,886   | )          | (1,114,534       | )          |
| Loan recoveries                                                       |       | 2,240        |       | 4,745            |       |
| Reclassification of  reserve related to off-balance-sheet commitments |       | —       |       | (15,608          | )          |
|                                                                  |       |         |       |             |       |
| Balance, end of period                                                |       | $            | 5,700,862  |             | $          | 5,569,496 |   |

 

Effective July 1,2008, the expense associated with the allowance for off-balance-sheetcommitments is recorded separately as a component of other expenses.  In2008, the $15,608 reclassification from the allowance for loan losses to otherliabilities is a non-recurring adjustment.

 

The total recordedinvestment in impaired loans at June 30, 2009, was $7,364,249 which had aloan loss reserve of $452,416.  The total recorded investment in impairedloans at December 31, 2008, was $4,078,765 which had a loan loss reserveof $768,719.  No interest income was recognized on impaired loans, whileconsidered impaired during 2009 and 2008.  As of June 30, 2009, wehad undisbursed funding commitments on ****three**** impaired loans to ****one****borrower totaling $1,979,163.43 with maturity dates of********April 2010, May 2010and October 2010******.**

 

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**OAKVALLEY BANCORP**

**NOTESTO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

 

**NOTE 5 –OTHER REAL ESTATE OWNED**

 

As of June 30, 2009,seven loans with outstanding balances of $2,813,082 were reclassified to otherreal estate owned.

 

Real estate propertiesacquired through, or in lieu of, loan foreclosure are to be sold and areinitially recorded at the lower of carrying amount of the loan or fair value ofthe property at the date of foreclosure less selling costs.  Subsequent toforeclosure, valuations are periodically performed and any subject revisions inthe estimate of fair value are reported as adjustment to the carrying value ofthe 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 6–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 beprovided with a fixed annual retirement benefit for twenty years afterretirement. The Bank is also responsible for certain pre-retirement deathbenefits under the Plan. In connection with the implementation of the Plan, theBank purchased single premium life insurance policies on the life of each ofthe officers covered under the Plan. The Bank is the owner and partialbeneficiary of these life insurance policies. The assets of the Plan, underInternal Revenue Service regulations, are owned by the Bank and are availableto satisfy the Bank’s general creditors.

 

During January 2008the Bank awarded two of its directors a director retirement plan (“DRP”). Underthe DRP, the participants will be provided with a fixed annual retirementbenefit for ten years after retirement. The Bank is also responsible forcertain pre-retirement death benefits under the DRP. In connection with theimplementation of the DRP, the Bank purchased single premium life 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.

 

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

 

During January 2008,the Bank purchased $4.7 million in bank owned life insurance policies andentered into split-dollar life insurance agreements with certain officers anddirectors.  In connection with theimplementation of the split-dollar agreements, the Bank purchased singlepremium life insurance policies on the life of each of the officers anddirectors covered by the split-dollar life insurance agreements. The Bank isthe owner of the policies and the partial beneficiary in an amount equal to thecash surrender value of the policies.

 

The combined cashsurrender value of all Bank-owned life insurance policies recorded in otherassets on the balance sheet was $10,256,460 and $9,859,234 at June 30,2009 and December 31, 2008, respectively.

 

**NOTE 7 –FINANCIAL INSTRUMENTS**

 

**Fairvalues of financial instruments —** The financial statements include various estimatedfair value information as of June 30, 2009 and December 31, 2008.Such information, which pertains to the Bank’s financial instruments, does notpurport to represent the aggregate net fair value of the Bank. Further, thefair value estimates are based on various assumptions, methodologies, andsubjective considerations, which vary widely among different financialinstitutions and which are subject to change. The following methods andassumptions are used by the Bank.

 

*Cashand cash equivalents*— The carrying amounts of cash and cash equivalents approximate their fairvalue.

 

*Securities(including mortgage-backed securities)* — Fair values for securities are based on quotedmarket prices, where available. If quoted market prices are not available, fairvalues are based on quoted market prices of comparable instruments.

 

*Loansreceivable* — Forvariable-rate loans that reprice frequently and have no significant change incredit risk, fair values are based on carrying values. The fair values forother loans (e.g., real estate construction and mortgage, commercial, andinstallment loans) are estimated using discounted cash flow analyses, usinginterest rates currently being offered for loans with similar terms toborrowers of 

 

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similar credit quality.

 

*Depositliabilities* — Thefair values estimated for demand deposits (interest and non-interest checking,passbook savings, and certain types of money market accounts) are, bydefinition, equal to the amount payable on demand at the reporting date (i.e.their carrying amounts). The carrying amounts for variable-rate, fixed-termmoney market accounts and certificates of deposit approximate their fair valuesat the reporting date. Fair values for fixed-rate certificates of deposit areestimated using a discounted cash flow calculation that applies interest ratescurrently being offered on certificates to a schedule of the aggregate expectedmonthly maturities on time deposits.

 

*FederalHome Loan Bank (FHLB) advances* — Rates currently available to the Bank forborrowings with similar terms and remaining maturities are used to estimate thefair value of the existing debt.

 

*Accruedinterest* — Thecarrying amounts of accrued interest approximate their fair value.

 

*Off-balance-sheetinstruments* —Fair values for the Bank’s off-balance-sheet lending commitments are based onfees currently charged to enter into similar agreements, taking into accountthe remaining terms of the agreements and the credit standing of thecounterparties.

 

The estimated fair valuesof the Bank’s financial instruments at June 30, 2009 are as follows:

 
| ** **                                  | ** ** | ** **   | ** ** | **Estimated** | ** ** |
|---------------------------------------------|------------|--------------|------------|---------------|------------|
| ** **                                  | ** ** | **Carrying** | ** ** | **Fair**      | ** ** |
| ** **                                  | ** ** | **Amount**   | ** ** | **Value**     | ** ** |
| **Financial assets:**                       |       |         |       |          |       |
|                                        |       |         |       |          |       |
| Cash  and cash equivalents                  |       | $            | 17,086,546 |          | $          | 17,086,546 |   |
| Securities  available for sale              |       | 54,400,351   |       | 54,400,351    |       |
| Loans                                       |       | 424,390,224  |       | 442,308,938   |       |
| Accrued  interest receivable                |       | 1,816,967    |       | 1,816,967     |       |
|                                        |       |         |       |          |       |
| **Financial liabilities:**                  |       |         |       |          |       |
|                                        |       |         |       |          |       |
| Deposits                                    |       | (419,940,758 | )          | (421,403,568  | )          |
| FHLB  advance                               |       | (44,100,000  | )          | (44,241,120   | )          |
| Accrued  interest payable                   |       | (632,255     | )          | (632,255      | )          |
|                                        |       |         |       |          |       |
| **Off-balance-sheet assets (liabilities):** |       |         |       |          |       |
|                                        |       |         |       |          |       |
| Commitments  and standby letters of credit  |       |         |       | (607,317      | )          |
|                                             |            |              |            |               |            |  |  |

 

The estimated fair valuesof the Bank’s financial instruments at December 31, 2008 are as follows:

 
| ** **                                  | ** ** | ** **   | ** ** | **Estimated** | ** ** |
|---------------------------------------------|------------|--------------|------------|---------------|------------|
| ** **                                  | ** ** | **Carrying** | ** ** | **Fair**      | ** ** |
| ** **                                  | ** ** | **Amount**   | ** ** | **Value**     | ** ** |
| **Financial assets:**                       |       |         |       |          |       |
|                                        |       |         |       |          |       |
| Cash  and cash equivalents                  |       | $            | 9,837,860  |          | $          | 9,837,860 |   |
| Securities  available for sale              |       | 41,448,877   |       | 41,448,877    |       |
| Loans                                       |       | 428,177,130  |       | 429,344,847   |       |
| Accrued  interest receivable                |       | 1,886,359    |       | 1,886,359     |       |
|                                        |       |         |       |          |       |
| **Financial liabilities:**                  |       |         |       |          |       |
|                                        |       |         |       |          |       |
| Deposits                                    |       | (378,248,467 | )          | (378,041,128  | )          |
| FHLB  advance                               |       | (69,000,000  | )          | (69,103,323   | )          |
| Accrued  interest payable                   |       | (763,117     | )          | (763,117      | )          |
|                                        |       |         |       |          |       |
| **Off-balance-sheet assets (liabilities):** |       |         |       |          |       |
|                                        |       |         |       |          |       |
| Commitments  and standby letters of credit  |       |         |       | (630,751      | )          |
|                                             |            |              |            |               |            |  |  |

 

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**OAKVALLEY BANCORP**

**NOTESTO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

 

**NOTE 8– FAIRVALUE MEASUREMENTS**

 

SFAS No. 157, FairValue Measurements, which the Company adopted effective January 1, 2008,defines fair value, establishes a framework for measuring fair value,establishes a three-level valuation hierarchy for disclosure of fair valuemeasurement and enhances disclosure requirements for fair value measurements.The valuation hierarchy is based upon the transparency of inputs to thevaluation of an asset or liability as of the measurement date. The three levelsare defined as follow:

 

Level 1:  Inputs tothe valuation methodology are quoted prices (unadjusted) for identical assetsor liabilities in active markets.

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

Level 3:  Inputs tothe valuation methodology are unobservable and significant to the fair valuemeasurement.

 

In certain cases, theinputs used to measure fair value may fall into different levels of the fairvalue hierarchy.  In such cases, the level in the fair value hierarchywithin which the fair value measurement in its entirety falls has beendetermined based on the lowest level input that is significant to the fairvalue measurement in its entirety.  The Company’s assessment of thesignificance of a particular input to the fair value measurement in itsentirety requires judgment , and considers factors specific to the asset orliability.

 

Assets and liabilitiesmeasured at fair value on a recurring and non-recurring basis are summarizedbelow:

 
| ** **                                                 | ** ** | **Fair Value Measurements at June 30,  2009 Using** | ** ** |
|------------------------------------------------------------|------------|-----------------------------------------------------------------------------------|------------|
| ** **                                                 | ** ** | **June 30,  2009**                                                           | ** ** | **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                             |       | $                                                                                 | 54,400,351 |   | $ | — |   | $ | 54,400,351 |   | $ | — |   |
|                                                       |       |                                                                              |       |   |   |   |   |   |   |
| Assets  and liabilities measured on a non-recurring basis: |       |                                                                              |       |   |   |   |   |   |   |
| Impaired  Loans                                            |       | $                                                                                 | 6,911,831  |   | $ | — |   | $ | — |   | $ | 6,911,831 |   |
| Other  real estate owned                                   |       | $                                                                                 | 2,813,082  |   | $ | — |   | $ | — |   | $ | 2,813,082 |   |

 

The fair value ofsecurities available for sale equals quoted market price, if available. If quoted market prices are not available, fair value is determined usingquoted market prices for similar securities.  Changes in fair market valueare recorded in other comprehensive income net of tax.

 

SFAS No. 157 appliesto loans measured for impairment using the practical expedients permitted bySFAS No. 114, Accounting by Creditors for Impairment of a Loan, includingimpaired loans measured at an observable market price (if available), or at thefair value of the loan’s collateral (if the loan is collateral dependent). Fairvalue of the loan’s collateral, when the loan is dependent on collateral, isdetermined by appraisals or independent valuation which is then adjusted forthe cost related to liquidation of the collateral. At June 30, 2009,impaired loans had a principal balance of $7,364,247, with a valuationallowance of $452,416.  Upon beingclassified as impaired, charge offs were taken to reduce the balance of eachloan to an estimate of the collateral fair market value less cost to dispose.This estimate was a level 3 valuation.  There was no direct impact on theincome statement.  The charge-offs were recorded as a debit to theallowance for loan losses.

 

Fair value of other realestate owned is determined by appraisals or independent valuation which is thenadjusted for the cost related to liquidation of the property.  Total fair market value at June 30, 2009was $2,813,082 which was a level 3 valuation. There is a direct impact to the income statement as any market valuewrite downs are charged directly to operating expenses.  The Bank is required to perform thisvaluation every six months.

 

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**OAKVALLEY BANCORP**

**NOTESTO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

 

**NOTE 9 –EARNINGS (LOSS) PER SHARE**

 

The Bank computesearnings (loss) per share (“EPS”) in accordance with SFAS No. 128,*Earnings per Share.* SFAS No. 128requires the presentation of basic EPS, which does not consider the effect ofcommon stock equivalents and diluted EPS, which considers all dilutive commonstock equivalents.

 
| ** **                                                                           | ** ** | **THREE MONTHS ENDED** | ** ** |
|--------------------------------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                                           | ** ** | **JUNE  30,**                    | ** ** |
| **In thousands (except share and per  share amounts)** | ** ** | **2009**                         | ** ** | **2008** | ** ** |
| BASIC  EARNINGS (LOSS) PER SHARE                                                     |       |                             |       |   |   |
|                                                                                 |       |                             |       |   |   |
| Net  (loss) income available to common shareholders                                  |       | $                                | (257,349   | ) | $ | 553,159 |   |
| Weighted  average shares outstanding                                                 |       | 7,661,627                        |       | 7,641,534 |   |
| Net  (loss) income per share                                                         |       | $                                | (0.03      | ) | $ | 0.07 |   |
|                                                                                 |       |                             |       |   |   |
| DILUTED  EARNINGS (LOSS) PER SHARE                                                   |       |                             |       |   |   |
|                                                                                 |       |                             |       |   |   |
| Net  (loss) income available to common shareholders                                  |       | $                                | (257,349   | ) | $ | 553,159 |   |
| Weighted  average shares outstanding                                                 |       | 7,661,627                        |       | 7,641,534 |   |
| Effect  of dilutive stock options                                                    |       | —                           |       | 56,147 |   |
| Weighted  average shares of common stock and common stock equivalents                |       | 7,661,627                        |       | 7,697,681 |   |
| Net  (loss) income per diluted share                                                 |       | $                                | (0.03      | ) | $ | 0.07 |   |

 
| ** **                                                                           | ** ** | **SIX MONTHS ENDED** | ** ** |
|--------------------------------------------------------------------------------------|------------|--------------------------------|------------|
| ** **                                                                           | ** ** | **JUNE  30,**                  | ** ** |
| **In thousands (except share and per  share amounts)** | ** ** | **2009**                       | ** ** | **2008** | ** ** |
| BASIC  EARNINGS (LOSS) PER SHARE                                                     |       |                           |       |   |   |
|                                                                                 |       |                           |       |   |   |
| Net  (loss) income available to common shareholders                                  |       | $                              | (37,450    | ) | $ | 1,328,956 |   |
| Weighted  average shares outstanding                                                 |       | 7,661,627                      |       | 7,625,787 |   |
| Net  (loss) income per share                                                         |       | $                              | 0.00       |   | $ | 0.17 |   |
|                                                                                 |       |                           |       |   |   |
| DILUTED  EARNINGS (LOSS) PER SHARE                                                   |       |                           |       |   |   |
|                                                                                 |       |                           |       |   |   |
| Net  (loss) income available to common shareholders                                  |       | $                              | (37,450    | ) | $ | 1,328,956 |   |
| Weighted  average shares outstanding                                                 |       | 7,661,627                      |       | 7,625,787 |   |
| Effect  of dilutive stock options                                                    |       | —                         |       | 70,193 |   |
| Weighted  average shares of common stock and common stock equivalents                |       | 7,661,627                      |       | 7,695,980 |   |
| Net  (loss) income per diluted share                                                 |       | $                              | 0.00       |   | $ | 0.17 |   |

 

During the three and six monthperiods ended June 30, 2009, all of the Company’s weighted average stockoptions of 413,310 and 414,970, respectively, to purchase shares of commonstock were considered anti-dilutive because the Company recognized a net lossin both of these periods.  Prices rangedfrom $4.58 to $15.67 on the outstanding options.   Anti-dilutiveweighted average options of 257,623 and 123,571 were outstanding during thesame three and six month periods of 2008, respectively, with prices rangingfrom $7.51 to $15.67.  These options were not included in the computationof diluted EPS because the options’ exercise price was greater than the averagemarket price of the common shares. These options begin to expire in 2013.

 

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**Item2.   Management’s Discussion and Analysis of Financial Condition andResults 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 or that are referenced to elsewhere in this report, and with the auditedconsolidated financial statements and accompanying notes included in our 2008Annual Report.

 

**Forward-LookingStatements**

 

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

 

**CriticalAccounting Estimates**

 

The discussion andanalysis of our financial condition and results of operations is based upon ourfinancial statements, which have been prepared in accordance with accountingprinciples generally accepted in the United States of America. The preparationof these financial statements requires management to make estimates andjudgments that affect the reported amounts of assets and liabilities, revenuesand expenses, and related disclosures of contingent assets and liabilities atthe date of our financial statements. Actual results may differ from theseestimates under different assumptions or conditions.

 

*Allowancefor Loan Losses*

 

Accounting for allowancefor loan losses involves significant judgment and assumptions by management andis based on historical data and management’s view of the current economicenvironment. At least on a quarterly basis, our management reviews themethodology and adequacy of allowance for loan losses and reports itsassessment to the Board of Directors for its review and approval.

 

We base our allowance forloan losses on an estimation of probable losses inherent in our loan portfolio.Our methodology for assessing loan loss allowances are intended to reduce thedifferences between estimated and actual losses and involves a detailedanalysis of our loan portfolio in three phases:

 

· the specific review of individual loans,

 

· the segmenting and review of loan poolswith similar characteristics in accordance with SFAS No. 5, “Accountingfor Contingencies,” and

 

· our judgmental estimate based on varioussubjective factors.

 

The first phase of ourmethodology involves the specific review of individual loans to identify andmeasure impairment. We evaluate each loan by use of a risk rating system,except for homogeneous loans, such as automobile loans and home mortgages.Specific risk rated loans are deemed impaired if all amounts, includingprincipal and interest, will likely not be collected in accordance with thecontractual terms of the related loan agreement. Impairment for commercial andreal estate loans is measured either based on the present value of the loan’sexpected future cash flows or, if collection on the loan is collateraldependent, the estimated fair value of the collateral, less selling and holdingcosts.

 

The second phase involvesthe segmenting of the remainder of the risk rated loan portfolio into groups orpools of loans, together with loans with similar characteristics, forevaluation in accordance with SFAS No. 5. We determine the calculated lossratio to each loan pool based on its historical net losses and benchmark itagainst the levels of other peer banks.

 

In the third phase, weconsider relevant internal and external factors that may affect thecollectibility of loan portfolio and each group of loan pool. The factorsconsidered are, but are not limited to:

 

· concentration of credits,

 

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· 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 estimatesthe probable effect of such conditions based on our judgment, experience andknown or anticipated trends. Such estimation may be reflected as an additionalallowance to each group of loans, if necessary. Management reviews theseconditions with our senior credit officers. To the extent that any of theseconditions is evidenced by a specifically identifiable problem credit orportfolio segment as of the evaluation date, management’s estimate of theeffect of such condition may be reflected as a specific allowance applicable tosuch credit or portfolio segment. Where any of these conditions is notevidenced by a specific, identifiable problem credit or portfolio segment as ofthe evaluation date, management’s evaluation of the inherent loss related tosuch condition is reflected in the unallocated allowance.

 

Central to our creditrisk management and our assessment of appropriate loss allowance is our loanrisk rating system. Under this system, the originating credit officer assignsborrowers an initial risk rating based on a thorough analysis of each borrower’sfinancial capacity in conjunction with industry and economic trends. Approvalsare made based upon the amount of inherent credit risk specific to thetransaction and are reviewed for appropriateness by senior line and creditadministration personnel. Credits are monitored by line and creditadministration personnel for deterioration in a borrower’s financial conditionwhich may impact the ability of the borrower to perform under the contract.Although management has allocated a portion of the allowance to specific loans,specific loan pools, and off-balance sheet credit exposures (which are reportedseparately as part of other liabilities), the adequacy of the allowance isconsidered in its entirety.

 

*Non-AccrualLoan Policy*

 

Interest on loans iscredited to income as earned and is accrued only if deemed collectible. Accrualof interest is discontinued when a loan is over 90 days delinquent or ifmanagement believes that collection is highly uncertain. Generally, paymentsreceived on nonaccrual loans are recorded as principal reductions. Interestincome is recognized after all principal has been repaid or an improvement inthe condition of the loan has occurred that would warrant resumption ofinterest accruals.

 

*Stock-BasedCompensation*

 

The Company recognizes inthe income statement the grant-date fair value of stock options and otherequity-based forms of compensation issued to employees over the employees’requisite service period (generally the vesting period).  The Bank usesthe straight-line recognition of expenses for awards with graded vesting. The Bank utilizes a binomial pricing model for all grants.  Expected volatility is based on thehistorical volatility of the price of the Bank’s stock for the period equal tothe contractual stock option term. The Bank uses historical data to estimateoption exercise and stock option forfeiture rates within the valuation model.The expected 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.

 

*OtherReal Estate Owned*

 

Other real estate owned,which represents real estate acquired through foreclosure, or deed in lieu offoreclosure in satisfaction of commercial and real estate loans, is carried atthe lower of cost or estimated fair value less the estimated selling costs ofthe real estate. The fair value of the property is based upon a currentappraisal. The difference between the fair value of the real estate collateraland the 

 

18

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loan balance at the timeof transfer is recorded as a loan charge off if fair value is lower. Subsequentto foreclosure, management periodically performs valuations and the OREOproperty is carried at the lower of carrying value or fair value, less costs tosell. The  determination of a property’s estimated fair value incorporates(1) revenues projected 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**

 

Oak Valley Community Bankcommenced operations in May 1991.  We are an insured bank under theFederal Deposit Insurance Act and are a member of the Federal Reserve. Since its formation, the Bank has provided basic banking services toindividuals and business enterprises in Oakdale, California and the surroundingareas. The focus of the Bank is to offer a range of commercial banking servicesdesigned for both individuals and small to medium-sized businesses in the twomain areas of service of the Bank: the Central Valley and the Eastern Sierras.

 

The Bank offers a complement ofbusiness checking and savings accounts for its business customers.  TheBank also offers commercial and real estate loans, as well as lines ofcredit.  Real estate loans are generally of a short-term nature for bothresidential and commercial purposes.  Longer-term real estate loans aregenerally made with adjustable interest rates and contain normal provisions foracceleration.  The Bank introduced a mortgage-lending program, CommunityBank Lending Exchange (“CBLX”), at the beginning of 2003.  At June 30,2009, the Bank has originated $220 million in loans for funding by CBLX.

 

The Bank also offers otherservices for both individuals and businesses including online banking, remotedeposit capture, merchant services, night depository, extended hours, traveler’schecks, wire transfer of funds, note collection, and automated teller machinesin a national network.  The Bank does not currently offer internationalbanking or trust services although the Bank may make such services available tothe Bank’s customers through financial institutions with which the Bank hascorrespondent banking relationships.  The Bank does not offer stocktransfer services nor does it directly issue credit cards.

 

Effective July 3,2008, Oak Valley Community Bank became a subsidiary of Oak Valley Bancorp, anewly established 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 Bancorp.

 

**Overviewof Results of Operations and Financial Condition**

 

The purpose of thissummary is to provide an overview of the items management focuses on whenevaluating the condition of the Company and its success in implementing itsbusiness and shareholder value strategies. The Company’s business strategy isto operate the Bank as a well-capitalized, profitable and independent communityoriented bank.  The Company’s shareholders value strategy has threemajor themes: (1) enhancing shareholders’ value; (2) making itsretail banking franchise more valuable; and (3) efficiently utilizing itscapital.

 

Management believes thefollowing were important factors in the Company’s performance during thequarter ended June 30, 2009:

 
| · | The credit crisis  affecting the financial markets and residential housing that began in 2007  turned out to be just the flashpoint for a severe and prolonged recession.  While recently published economic data indicates that the current downturn  may be easing, the recession continues to affect the Company, the Bank, and  the financial industry generally, and it is not clear when or at what speed  the recession will end.                                                                                                                                                                                                                                                                                                                                                                                                      |
|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| · | The Company recognized  a net loss for common shareholders of $257,349 and $37,450 for the three and  six month periods ended June 30, 2009 as compared with net income  available to common shareholders of $553,159 and $1,328,956 for the same  periods in 2008.  The Company recognized a net loss before preferred  stock dividends and accretion of $45,063 for the second quarter of 2009 and  net income before preferred stock dividends and accretion of $385,247 for the  first six months of 2009. The factors contributing to these results will be  discussed below.                                                                                                                                                                                                                                                  |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| · | The Company recognized  expense of $212,286 and $422,697 in the second quarter and six month period  of 2009 associated with the accrual for preferred stock dividends and  accretion of the preferred stock discount in connection with the 13,500  shares of Series A Preferred Stock that the U.S. Treasury purchased from  the Company in December 2008 under the TARP Program. So long as such  preferred stock remains outstanding, it will pay quarterly cumulative  dividends at a rate of 5% per year for the first five years and thereafter at  a rate of 9% per year. No expense was recognized in the second quarter and  first six month period of 2008, as the Series A Preferred Stock was  issued in December 2008.                                                                                      |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| · | Net interest income  increased $806,292 or 15.9% and $1,653,656 or 16.7% for the three and six  month periods ended June 30, 2009, respectively, compared to the same  periods in 2008.  This increase was primarily due to the net interest  margin increase of 20 and 24 basis points and increases in average earning  assets of $55.4 million and $56.2 million for the three and six month periods  ended June 30, 2009, respectively, as compared to the same periods of  2008.  The net interest margin increase is attributable primarily to  liabilities repricing faster than assets in the declining rate environment as  described in further detail below.                                                                                                                                                   |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| · | The Company has taken  significant steps to reduce the risk of loan losses.   In the three  and six month period ended June 30, 2009, the provision for loan losses  increased by $1,697,012 and $3,452,012, respectively, compared to the same periods  in 2008. These increases were mainly due to management’s assessment of the  appropriate level for the allowance for loan losses, an increase in the level  of non-accrual loans and overall growth in gross loans. The Company continues  to monitor its loan portfolio with the objective of avoiding defaults or  write-downs.  Despite these actions, the possibility of additional  losses can not be eliminated, but the Board of Directors and all employees  continue to work hard to make the best of these continuing challenging conditions. |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| · | For the three and six  month periods ended June 30, 2009, non-interest income decreased by  $24,992 or 3.7% and $40,267 or 3.1% from the same periods in 2008,  respectively, primarily due to decreased service charges on deposits of  $51,803 and $72,345, as described below. The decrease in service charges on  deposits is mainly attributable to decreased NSF income.                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| · | Non-interest expense  increased by $225,008 or 4.9% and $106,744 or 1.2% for the three and six  month periods ended June 30,                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |

 

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|   | 2009, respectively, as  compared to the same periods in 2008, primarily due to write downs of OREO  property values which was offset by decreases in salaries and benefits as  described below.                                                                                                            |
|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                                                                                                                                       |
| · | Total assets increased  $17.4 million or 3.4% from December 31, 2008.  Total net loans  decreased by $3.8 million or 0.9% and investment securities increased by  $13.0 million or 31.2% from December 31, 2008 to June 30, 2009,  while deposits increased by $41.7 million or 11.0%. |

 

**IncomeSummary**

 

For the three and sixmonth periods ended June 30, 2009, the Company recorded net loss availableto shareholders of $257,349 and $37,450, a decrease of $810,508 and $1,366,406,respectively, as compared to the $553,159 and $1,328,956 for the same periodsin 2008.  Return on average assets (annualized) was -0.03% and 0.15% forthe second quarter and six month period of 2009, respectively, as compared with0.47% and 0.58% for the same periods in 2008.  Annualized return onaverage common equity was -2.24% and -0.17% for the second quarter and sixmonth period of 2009, respectively, as compared with 5.01% and 6.09% for thesame periods of 2008.

 

Net income beforeprovisions for income taxes and preferred stock dividends and accretion for thesecond quarter and six month period of 2009 was down $1,140,720 and $1,945,367from the comparable 2008 periods.  The income statement components ofthese variances are as follows:

 

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

***(In thousands)***

*** ***
| ** **                           | ** **   | **Effect on Pre-Tax  Income** | ** ** | **Effect on Pre-Tax  Income** | ** **   |
|--------------------------------------|--------------|-------------------------------|------------|-------------------------------|--------------|
| *** ***                         | *** *** | **Increase (Decrease)**       | ** ** | **Increase (Decrease)**       | *** *** |
| ** **                           | ** **   | **Three Months**         | ** ** | **Six Months**           | ** **   |
| Change from 2008 to 2009 in:         | ** **   | ** **                    | ** ** | ** **                    | ** **   |
| Net interest income                  |         | $                             | 806,292    |                          | $            | 1,653,656 |   |
| Provision for loan losses            |         | (1,697,012                    | )          | (3,452,012                    | )            |
| Non-interest income                  |         | (24,992                       | )          | (40,267                       | )            |
| Non-interest expense                 |         | (225,008                      | )          | (106,744                      | )            |
| Change in income before income taxes |         | $                             | (1,140,720 | )                             | $            | (1,945,367 | ) |

 

These variances will beexplained in the discussion below.

 

**NetInterest Income**

 

Net interest income isthe largest source of the Bank’s operating income.  For the three and sixmonth periods ended June 30, 2009, net interest income was $5.89 millionand $11.54 million, respectively, which represented an increase of $806,292 or15.9% and $1,653,656 or 16.7%, respectively, from the comparable periods in2008.

 

The net interest margin(net interest income as a percentage of average interest earning assets) was4.97% and 4.92% for the three and six month periods ended June 30, 2009,an increase of 20 and 24 basis points as compared to the same periods in2008.  The increase in the net interest margin in 2009 was primarilyattributable to the impact that the decline in market interest rates had on ourliability sensitive balance sheet which caused interest-bearing liabilities todecrease faster than the yields on earning assets.  The compression of the yield on interestearning assets was lessened due to a portion of our loan portfolio that was atthe contractual rate floors.  Inaddition, yield on investments increased by 131 and 127 basis points for thethree and six month periods ended June 30, 2009, respectively, as a resultof approximately $12.5 million in municipal securities purchased in the fourthquarter of 2008 and first quarter 2009 and the related fully taxable equivalentbenefit.

 

20

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The following tablesshows the relative impact of changes in average balances of interest earningassets and interest bearing liabilities, and interest rates earned and paid bythe Company on those assets and liabilities for the three and six month periodsended June 30, 2009 and 2008:

 

***Net Interest Analysis***

*(Dollarsin thousands)*

 
| ** **                                       | ** ** | **Three Months Ended  June 30, 2009** | ** ** | **Three Months Ended  June 30, 2008** | ** ** |
|--------------------------------------------------|------------|--------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                       | ** ** | **Average  Balance**                       | ** ** | **Interest  Income/  Exp**                 | ** ** | **Avg  Rate/  Yield** | ** ** | **Average  Balance** | ** ** | **Interest  Income/  Expense** | ** ** | **Avg  Rate/  Yield** | ** ** |
| **Assets:**                                      |       |                                       |       |                                       |       |   |   |   |   |   |   |   |   |
| Earning assets:                                  |       |                                       |       |                                       |       |   |   |   |   |   |   |   |   |
| Gross loans (1) (2)                         |       | $                                          | 428,797    |                                       | $          | 6,726 |   | 6.29 | % | $ | 393,044 |   | $ | 6,796 |   | 6.93 | % |
| Investment securities (2)                        |       | 52,402                                     |       | 783                                        |       | 5.99 | % | 35,041 |   | 409 |   | 4.68 | % |
| Federal funds sold                               |       | 1,497                                      |       | 1                                          |       | 0.19 | % | 867 |   | 4 |   | 2.07 | % |
| Interest-earning deposits                        |       | 1,738                                      |       | 1                                          |       | 0.20 | % | 95 |   | 0 |   | 1.27 | % |
| Total interest-earning  assets                   |       | 484,434                                    |       | 7,511                                      |       | 6.22 | % | 429,047 |   | 7,209 |   | 6.74 | % |
| Total noninterest earning  assets                |       | 37,975                                     |       |                                       |       |   |   | 37,796 |   |   |   |   |   |
| Total Assets                                     |       | 522,409                                    |       |                                       |       |   |   | 466,843 |   |   |   |   |   |
| **Liabilities  and Shareholders’ Equity:**  |       |                                       |       |                                       |       |   |   |   |   |   |   |   |   |
| Interest-bearing  liabilities:                   |       |                                       |       |                                       |       |   |   |   |   |   |   |   |   |
| Money market deposits                            |       | 175,067                                    |       | 652                                        |       | 1.49 | % | 143,698 |   | 842 |   | 2.35 | % |
| NOW deposits                                     |       | 57,317                                     |       | 70                                         |       | 0.49 | % | 56,367 |   | 101 |   | 0.72 | % |
| Savings deposits                                 |       | 15,057                                     |       | 33                                         |       | 0.87 | % | 17,993 |   | 73 |   | 1.62 | % |
| Time certificates of  deposit $100,000 or more   |       | 50,089                                     |       | 298                                        |       | 2.39 | % | 37,546 |   | 360 |   | 3.85 | % |
| Other time deposits                              |       | 54,961                                     |       | 296                                        |       | 2.16 | % | 39,684 |   | 335 |   | 3.38 | % |
| Other borrowings                                 |       | 45,961                                     |       | 158                                        |       | 1.38 | % | 64,550 |   | 398 |   | 2.47 | % |
| Total interest-bearing  liabilities              |       | 398,452                                    |       | 1,507                                      |       | 1.52 | % | 359,838 |   | 2,109 |   | 2.35 | % |
| Noninterest-bearing  liabilities:                |       |                                       |       |                                       |       |   |   |   |   |   |   |   |   |
| Noninterest-bearing  deposits                    |       | 61,533                                     |       |                                       |       |   |   | 60,034 |   |   |   |   |   |
| Other liabilities                                |       | 2,912                                      |       |                                       |       |   |   | 2,991 |   |   |   |   |   |
| Total noninterest-bearing  liabilities           |       | 64,444                                     |       |                                       |       |   |   | 63,025 |   |   |   |   |   |
| Shareholders’ equity                        |       | 59,512                                     |       |                                       |       |   |   | 43,980 |   |   |   |   |   |
| Total liabilities and  shareholders’ equity |       | $                                          | 522,409    |                                       |       |   |   |   | $ | 466,843 |   |   |   |   |   |
| Net interest income                              |       |                                       |       | $                                          | 6,004      |   |   |   |   |   | $ | 5,100 |   |   |   |
| Net interest spread (3)                          |       |                                       |       |                                       |       | 4.70 | % |   |   |   |   | 4.39 | % |
| Net interest margin (4)                          |       |                                       |       |                                       |       | 4.97 | % |   |   |   |   | 4.77 | % |

 

----

*(1) * Loan fees have been included in thecalculation of interest income.

 

*(2) *Yields on municipal securities and loanshave been adjusted to their fully-taxable equivalents, based on a federalmarginal tax rate of 34.0%.

 

*(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.

 

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| ** **                                       | ** ** | **Six months ended**   | ** ** | **Six months ended**            | ** ** |
|--------------------------------------------------|------------|------------------------|------------|---------------------------------|------------|
| ** **                                       | ** ** | **June 30, 2009** | ** ** | **June 30, 2008**          | ** ** |
| ** **                                       | ** ** | **Average  Balance**   | ** ** | **Interest  Income /  Expense** | ** ** | **Avg  Rate/  Yield** | ** ** | **Average  Balance** | ** ** | **Interest  Income /  Expense** | ** ** | **Avg  Rate/  Yield** | ** ** |
| **Assets:**                                      |       |                   |       |                            |       |   |   |   |   |   |   |   |   |
| Earning assets:                                  |       |                   |       |                            |       |   |   |   |   |   |   |   |   |
| Gross loans (1) (2)                         |       | $                      | 429,326    |                            | $          | 13,330 |   | 6.26 | % | $ | 390,570 |   | $ | 13,736 |   | 7.05 | % |
| Investment securities (2)                        |       | 49,716                 |       | 1,491                           |       | 6.05 | % | 34,212 |   | 816 |   | 4.78 | % |
| Federal funds sold                               |       | 1,440                  |       | 2                               |       | 0.22 | % | 732 |   | 10 |   | 2.62 | % |
| Interest-earning deposits                        |       | 1,619                  |       | 2                               |       | 0.20 | % | 394 |   | 1 |   | 0.52 | % |
| Total interest-earning  assets                   |       | 482,101                |       | 14,825                          |       | 6.20 | % | 425,908 |   | 14,563 |   | 6.86 | % |
| Total noninterest earning  assets                |       | 37,885                 |       |                            |       |   |   | 34,573 |   |   |   |   |   |
| Total Assets                                     |       | 519,986                |       |                            |       |   |   | 460,481 |   |   |   |   |   |
| **Liabilities  and Shareholders’ Equity:**  |       |                   |       |                            |       |   |   |   |   |   |   |   |   |
| Interest-bearing  liabilities:                   |       |                   |       |                            |       |   |   |   |   |   |   |   |   |
| Money market deposits                            |       | 169,323                |       | 1,281                           |       | 1.52 | % | 142,044 |   | 1,821 |   | 2.57 | % |
| NOW deposits                                     |       | 55,643                 |       | 145                             |       | 0.53 | % | 55,137 |   | 196 |   | 0.71 | % |
| Savings deposits                                 |       | 14,330                 |       | 67                              |       | 0.94 | % | 16,864 |   | 180 |   | 2.14 | % |
| Time certificates of  deposit $100,000 or more   |       | 46,049                 |       | 586                             |       | 2.57 | % | 42,573 |   | 887 |   | 4.18 | % |
| Other time deposits                              |       | 53,214                 |       | 595                             |       | 2.25 | % | 41,457 |   | 784 |   | 3.79 | % |
| Other borrowings                                 |       | 57,951                 |       | 387                             |       | 1.35 | % | 53,803 |   | 766 |   | 2.86 | % |
| Total interest-bearing  liabilities              |       | 396,510                |       | 3,061                           |       | 1.56 | % | 351,878 |   | 4,634 |   | 2.64 | % |
| Noninterest-bearing  liabilities:                |       |                   |       |                            |       |   |   |   |   |   |   |   |   |
| Noninterest-bearing  deposits                    |       | 61,409                 |       |                            |       |   |   | 61,916 |   |   |   |   |   |
| Other liabilities                                |       | 2,920                  |       |                            |       |   |   | 3,191 |   |   |   |   |   |
| Total noninterest-bearing  liabilities           |       | 64,3329                |       |                            |       |   |   | 65,107 |   |   |   |   |   |
| Shareholders’ equity                        |       | 59,144                 |       |                            |       |   |   | 43,496 |   |   |   |   |   |
| Total liabilities and  shareholders’ equity |       | $                      | 519,985    |                            |       |   |   |   | $ | 460,481 |   |   |   |   |   |
| Net interest income                              |       |                   |       | $                               | 11,764     |   |   |   |   |   | $ | 9,929 |   |   |   |
| Net interest spread (3)                          |       |                   |       |                            |       | 4.64 | % |   |   |   |   | 4.22 | % |
| Net interest margin (4)                          |       |                   |       |                            |       | 4.92 | % |   |   |   |   | 4.68 | % |

 

----

*(1) * Loan fees have been included in thecalculation of interest income.

 

*(2) *Yields on municipal securities and loanshave been adjusted to their fully-taxable equivalents, based on a federalmarginal tax rate of 34.0%.

 

*(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.

 

Shown in the followingtables are the relative impacts on net interest income of changes in theaverage outstanding balances (volume) of earning assets and interestbearing liabilities and the rates earned and paid by the Company on thoseassets and liabilities for the three and six month periods ended June 30,2009 and 2008.  Changes in interest income and expense that are notattributable specifically to either rate or volume are allocated to the ratecolumn below.

 

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***Rate / Volume Variance Analysis***

*(Inthousands)*

 
| ** **                         | ** ** | **For the Three Months Ended June 30,** | ** ** |
|------------------------------------|------------|----------------------------------------------|------------|
| ** **                         | ** ** | **2009 vs 2008**                             | ** ** |
| ** **                         | ** ** | **Increase (Decrease)**                      | ** ** |
| ** **                         | ** ** | **in interest income and expense**           | ** ** |
| ** **                         | ** ** | **due to changes in:**                       | ** ** |
| ** **                         | ** ** | **Volume**                                   | ** ** | **Rate** | ** ** | **Total** | ** ** |
| **Interest  income:**              |       |                                         |       |   |   |   |   |
| Gross loans (1)                    |       | $                                            | 618        |   | $ | (687 | ) | $ | (69 | ) |
| Investment securities              |       | 202                                          |       | 172 |   | 374 |   |
| Federal funds sold                 |       | 3                                            |       | (7 | ) | (4 | ) |
| Interest-earning deposits          |       | 5                                            |       | (4 | ) | 1 |   |
| **Total  interest income**         |       | **$**                                        | **828**    |   | **$** | **(526** | **)** | **$** | **302** |   |
|                               |       |                                         |       |   |   |   |   |
| **Interest  expense:**             |       |                                         |       |   |   |   |   |
| Money market deposits              |       | 184                                          |       | (373 | ) | (189 | ) |
| NOW deposits                       |       | 2                                            |       | (33 | ) | (31 | ) |
| Savings deposits                   |       | (12                                          | )          | (28 | ) | (40 | ) |
| Time CD $100K or more              |       | 120                                          |       | (182 | ) | (62 | ) |
| Other time deposits                |       | 129                                          |       | (167 | ) | (38 | ) |
| Other borrowings                   |       | (115                                         | )          | (127 | ) | (242 | ) |
| **Total  interest expense**        |       | **$**                                        | **308**    |   | **$** | **(910** | **)** | **$** | **(602** | **)** |
| ** **                         | ** ** | ** **                                   | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Change  in net interest income** |       | **$**                                        | **520**    |   | **$** | **384** |   | **$** | **904** |   |

 
| ** **                         | ** ** | **For the Six Months Ended  June 30,** | ** ** |
|------------------------------------|------------|---------------------------------------------|------------|
| ** **                         | ** ** | **2009 vs 2008**                            | ** ** |
| ** **                         | ** ** | **Increase (Decrease)**                     | ** ** |
| ** **                         | ** ** | **in interest income and  expense**         | ** ** |
| ** **                         | ** ** | **due to changes in:**                      | ** ** |
| ** **                         | ** ** | **Volume**                                  | ** ** | **Rate** | ** ** | **Total** | ** ** |
| **Interest  income:**              |       |                                        |       |   |   |   |   |
| Gross loans (1)                    |       | $                                           | 1,363      |   | $ | (1,769 | ) | $ | (406 | ) |
| Investment securities              |       | 370                                         |       | 306 |   | 676 |   |
| Federal funds sold                 |       | 9                                           |       | (17 | ) | (8 | ) |
| Interest-earning deposits          |       | 3                                           |       | (3 | ) | 0 |   |
| **Total  interest income**         |       | **$**                                       | **1,745**  |   | **$** | **(1,483** | **)** | **$** | **262** |   |
|                               |       |                                        |       |   |   |   |   |
| **Interest  expense:**             |       |                                        |       |   |   |   |   |
| Money market deposits              |       | 350                                         |       | (890 | ) | (540 | ) |
| NOW deposits                       |       | 2                                           |       | (53 | ) | (51 | ) |
| Savings deposits                   |       | (27                                         | )          | (86 | ) | (113 | ) |
| Time CD $100K or more              |       | 72                                          |       | (373 | ) | (301 | ) |
| Other time deposits                |       | 222                                         |       | (411 | ) | (189 | ) |
| Other borrowings                   |       | 59                                          |       | (438 | ) | (379 | ) |
| **Total  interest expense**        |       | **$**                                       | **678**    |   | **$** | **(2,251** | **)** | **$** | **(1,573** | **)** |
| ** **                         | ** ** | ** **                                  | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Change  in net interest income** |       | **$**                                       | **1,067**  |   | **$** | **768** |   | **$** | **1,835** |   |

 

----

*(1) * Loan fees have been included in thecalculation of interest income.

 

The table above reflectsthe market interest rate decline has impacted liabilities slightly more thanassets as indicated by the increase of $768,000 in net interest income due tothe rate change for the six month period of 2009.  The increased loanvolume and the overall change in mix of deposit balances contributed anincrease of $1,067,000 to net interest income.

 

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**Non-InterestIncome**

 

Non-interest incomerepresents service charges on deposit accounts and other non-interest relatedcharges and fees, including fees from the sale of loans.  For the threeand six month periods ended June 30, 2009, non-interest income was$647,377 and $1,245,685, a decrease of $24,992 or 3.7% and $40,267 or 3.1%,respectively, compared to the same periods in 2008.

 

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

 

***Non-Interest Income***

***(In thousands)***

 
| ** **                                          | ** ** | **For the Three Months Ended June 30,** | ** ** | **For the Six Months Ended June 30,** | ** ** |
|-----------------------------------------------------|------------|----------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                          | ** ** | **2009**                                     | ** ** | **2008**                                   | ** ** | **$ change** | ** ** | **%  change** | ** ** | **2009** | ** ** | **2008** | ** ** | **$ change** | ** ** | **%  change** | ** ** |
| Service charges on deposits                         |       | $                                            | 293        |                                       | $          | 344 |   | $ | (51 | ) | (14.8 | )% | $ | 575 |   | $ | 647 |   | $ | (72 | ) | (11.1 | )% |
| Earnings on cash surrender  value of life insurance |       | 101                                          |       | 99                                         |       | 2 |   | 2.0 | % | 202 |   | 181 |   | 21 |   | 11.6 | % |
| Mortgage commissions                                |       | 46                                           |       | 22                                         |       | 24 |   | 109.1 | % | 89 |   | 71 |   | 18 |   | 25.4 | % |
| Other                                               |       | 207                                          |       | 207                                        |       | 0 |   | 0.0 | % | 380 |   | 387 |   | (7 | ) | (1.8 | )% |
| Total Non-Interest Income                           |       | $                                            | 647        |                                       | $          | 672 |   | $ | (25 | ) | (3.7 | )% | $ | 1,246 |   | $ | 1,286 |   | $ | (40 | ) | (3.1 | )% |

 

Service charges ondeposits decreased by $51,803 or 14.8% and $72,345 or 11.1% in the three andsix month periods ended June 30, 2009, respectively, as compared to thesame periods in 2008.  The decrease isprimarily due to decreased NSF fee income.  Offsetting the decrease toservice charges on deposits, was an increase of $24,753 and $17,568 in mortgagecommissions for the three and six month periods ended June 30, 2009,respectively.  The Bank continues toexpand its offerings to the consumer and business depositor.

 

**Non-InterestExpense**

 

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

 

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

 

***Non-Interest Expense***

***(In thousands)***

 
| ** **                        | ** ** | **For the Three Months Ended June 30,** | ** ** | **For the Six Months Ended June 30,** | ** ** |
|-----------------------------------|------------|----------------------------------------------|------------|--------------------------------------------|------------|
| ** **                        | ** ** | **2009**                                     | ** ** | **2008**                                   | ** ** | **$ change** | ** ** | **%  change** | ** ** | **2009** | ** ** | **2008** | ** ** | **$ change** | ** ** | **%  change** | ** ** |
| Salaries and employee benefits    |       | $                                            | 1,865      |                                       | $          | 2,435 |   | $ | (570 | ) | (23.4 | )% | $ | 3,915 |   | $ | 4,881 |   | $ | (966 | ) | (19.8 | )% |
| Occupancy expenses                |       | 678                                          |       | 670                                        |       | 8 |   | 1.1 | % | 1,373 |   | 1,340 |   | 33 |   | 2.5 | % |
| Data processing fees              |       | 234                                          |       | 191                                        |       | 43 |   | 22.5 | % | 452 |   | 369 |   | 83 |   | 22.5 | % |
| OREO expenses                     |       | 934                                          |       | 451                                        |       | 483 |   | 107.0 | % | 1,059 |   | 451 |   | 608 |   | 134.7 | % |
| Assessments (FDIC & DFI) |       | 299                                          |       | 90                                         |       | 209 |   | 233.9 | % | 437 |   | 172 |   | 265 |   | 154.3 | % |
| Other operating expenses          |       | 777                                          |       | 725                                        |       | 52 |   | 7.2 | % | 1,488 |   | 1,405 |   | 83 |   | 6.0 | % |
| Total Non-Interest Expense        |       | $                                            | 4,787      |                                       | $          | 4,562 |   | $ | 225 |   | 4.9 | % | $ | 8,725 |   | $ | 8,618 |   | $ | 107 |   | 1.2 | % |

 

Non-interest expensesincreased by $225,008 or 4.9% and $106,744 or 1.2% for the three and six monthsended June 30, 2009, respectively, as compared to the same periods of2008.  Salaries and employee benefits decreased $569,634 and $966,177 forthe three and six months ended June 30, 2009, respectively, as compared tothe same periods of 2008 as a result of a reduction in full time equivalentemployees in effort to improve operating efficiency and an increase in deferredloan costs.  Data processing fees increased by $43,462 and $83,418 for thethree and six month periods 2009, respectively, compared to the same periods of2008, as a result of an increased number of transaction accounts.  FDIC and DFI assessments increased by$209,546 and $265,190, respectively, compared to the same three and six monthperiods of 2008.  OREO expenses were$933,724 and $1,058,752 in the second quarter and six month period of 2009,respectively, compared to $451,078 for both comparable periods of 2008.  These expenses resulted from various overheadcosts and market value write downs associated with the five propertiesclassified as other real estate owned.

 

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Management anticipatesthat noninterest expense will continue to increase as we continue togrow.  However, management remains committed to cost-control andefficiency, and we expect to keep these increases to a minimum relative togrowth.

 

**IncomeTaxes**

 

Provision for incometaxes for the three and six months ended June 30, 2009, was a net taxbenefit of $344,191 and $358,103, respectively, a decrease in expense of$542,498 or 273.6% and $1,001,658 or 155.6% from the same periods in2008.  The tax benefits the Company recognized are disproportionalcompared to pre-tax income assuming marginal tax rates or historical effectivetax rates are applied to pre-tax income. This is primarily due to tax credits from California Enterprise Zonesand low income housing projects as well as tax free-income on loans withinthese enterprise zones and municipal securities and loans that comprise alarger proportion of pre-tax income in 2009 as compared to 2008.  Certain tax credits and deductions arerecognized by the Company regardless of the amount of pre-tax income or loss,which further increases the tax benefit and exaggerates the effective taxrates.

 

**AssetQuality**

 

Nonperforming assetsconsist of loans on non-accrual status, loans 90 days or more past due andstill accruing interest, loans restructured, where the terms of repayment havebeen renegotiated resulting in a reduction or deferral of interest orprincipal, and other real estate owned (“OREO”).

 

Loans are generally placedon non-accrual status when they become 90 days past due, unless managementbelieves the loan is adequately collateralized and in the process ofcollection. The past due loans may or may not be adequately collateralized, butcollection efforts are continuously pursued. Loans may be restructured bymanagement when a borrower has experienced some changes in financial status,causing an inability to meet the original repayment terms, and where we believethe borrower will eventually overcome those circumstances and repay the loan infull. OREO consists of properties acquired by foreclosure or similar means andwhich management intends to offer for sale.

 

Non-accrual loans totaled$7.4 million at June 30, 2009, as compared to $4.1 million at December 31,2008.  The non-accrual loans as of June 30, 2009 are loans made tothree borrowers for purposes of real estate construction and commercial realestate.

 

OREO totaled $2.8 millionas of June 30, 2009 and consists of five properties that were acquiredthrough foreclosure including residential land lots and a commercial realestate property.

 

The following tablepresents information about the Company’s non-performing loans, including assetquality ratios as of June 30, 2009 and December 31, 2008:

 

***Non-Performing Assets***

*(inthousands)*

 
| ** **                                               | ** ** | **June 30,** | ** ** | **December 31,** | ** ** |
|----------------------------------------------------------|------------|-------------------|------------|-----------------------|------------|
| ** **                                               | ** ** | **2009**          | ** ** | **2008**              | ** ** |
| Loans  in nonaccrual status                              |       | $                 | 7,364      |                  | $          | 4,078 |   |
| Loans  past due 90 days or more and accruing             |       | —            |       | 643                   |       |
| Restructured  loans                                      |       | —            |       | —                |       |
| Total  nonperforming loans                               |       | 7,364             |       | 4,721                 |       |
| Other  real estate owned                                 |       | 2,813             |       | 2,746                 |       |
| Total  nonperforming assets                              |       | $                 | 10,177     |                  | $          | 7,467 |   |
|                                                     |       |              |       |                  |       |
| Allowance  for loan losses                               |       | $                 | 5,701      |                  | $          | 5,569 |   |
|                                                     |       |              |       |                  |       |
| Asset  quality ratios:                                   |       |              |       |                  |       |
| Non-performing  assets to total assets                   |       | 1.94              | %          | 1.47                  | %          |
| Non-performing  loans to total loans                     |       | 1.74              | %          | 1.10                  | %          |
| Allowance  for loan losses to total loans                |       | 1.34              | %          | 1.30                  | %          |
| Allowance  for loan losses to total non-performing loans |       | 77.41             | %          | 117.96                | %          |

 

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**Allowancefor Loan and Lease Losses**

 

In anticipation of creditrisk inherent in our lending business, we routinely set aside allowancesthrough charges to earnings. Such charges are not only made for the outstandingloan portfolio, but also for off-balance sheet items, such as commitments toextend credits or letters of credit. Charges made for the outstanding loanportfolio have been  credited to theallowance for loan losses, whereas charges for off-balance sheet items havebeen  credited to the reserve foroff-balance sheet items, which is presented as a component of otherliabilities.  The Bank recorded loan loss provisions of $2,137,012 and$4,037,012 for the three and six month periods in 2009, respectively, whichrepresented  a $1,697,012 and $3,452,012increase from the provisions recorded in the same periods of 2008.

 

The allowance for loanlosses increased by 2.4%, or $131,366, to $5.70 million at June 30,2009, as compared with $5.57 million at December 31, 2008.  TheBank recognized the increase in the allowance for loan losses during the firstsix months of the year due to the loan loss provision of $2.14 million whichwas offset by loan charge-offs.  The weak business climate adverselyimpacted the financial conditions of certain Bank clients in addition todecreases in collateral values which resulted in increased net loan charge-offsof $3.91 million for the first six months of 2009, compared to $759,000 for thefirst six months of 2008. The increase to the allowance for loan lossescombined with a slight decrease in our loan portfolio resulted in an increaseto the allowance for loan losses as a percentage of total loans to 1.34% at June 30,2009, as compared to 1.30% at December 31, 2008.

 

Management reviews theseconditions with our senior credit officers. To the extent that any of theseconditions may be attributed to a specifically identifiable problem credit orportfolio segment as of the evaluation date, management’s estimate of theeffect of such condition may be reflected as a specific allowance applicable tosuch credit or portfolio segment. Where any of these conditions may not beattributed to a specific, identifiable problem credit or portfolio segment asof the evaluation date, management’s evaluation of the inherent loss related tosuch condition is reflected in the unallocated allowance. Although managementhas allocated a portion of the allowance to specific loan categories, theadequacy of the allowance is considered in its entirety as appropriate from timeto time..

 

The following tableprovides an analysis of the changes in the ALLL for the six-month periods endedJune 30, 2009 and 2008:

 

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

*(dollarsin thousands)*

* *
| ** **                                                            | ** ** | **Six Months Ended** | ** ** |
|-----------------------------------------------------------------------|------------|--------------------------------|------------|
| ** **                                                            | ** ** | **June 30,**              | ** ** |
| ** **                                                            | ** ** | **2009**                       | ** ** | **2008** | ** ** |
| Balance at beginning of  period                                       |       | $                              | 5,569      |   | $ | 4,507 |   |
| Provision for loan losses                                             |       | 4,037                          |       | 585 |   |
| Loans charged off                                                     |       | (3,907                         | )          | (759 | ) |
| Recoveries of previous  charge-offs                                   |       | 2                              |       | 4 |   |
| Net charge-offs                                                       |       | (3,905                         | )          | (755 | ) |
| Reclassification of reserve related to  off-balance-sheet commitments |       | —                         |       | (16 | ) |
| Balance at end of period                                              |       | $                              | 5,701      |   | $ | 4,321 |   |
|                                                                  |       |                           |       |   |   |
| Allowance for loan losses  to total loans                             |       | 1.34                           | %          | 1.08 | % |
| Net charge-offs to  average loans (annualized)                        |       | 1.83                           | %          | 0.39 | % |
| Provision for loan losses  to average loans (annualized)              |       | 1.90                           | %          | 0.29 | % |

 

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

 

Although managementbelieves the allowance at June 30, 2009 was adequate to absorb probablelosses from any known and inherent risks in the portfolio, no assurance can begiven that economic conditions which adversely affect our service areas orother variables will not result in increased losses in the loan portfolio inthe future.

 

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**InvestmentActivities**

 

Investments are a keysource of interest income. Management of our investment portfolio is set inaccordance with strategies developed and overseen by our Investment Committee.Investment balances, including cash equivalents and interest-bearing depositsin other financial institutions, are subject to change over time based on ourasset/liability funding needs and interest rate risk management objectives. Ourliquidity levels take into consideration anticipated future cash flows and allavailable sources of credits, and are maintained at levels management believesare appropriate to assure future flexibility in meeting anticipated fundingneeds.

 

*CashEquivalents and Interest-bearing Deposits in other Financial Institutions*

 

The Bank holds federalfunds sold, unpledged available-for-sale securities and salable governmentguaranteed loans to help meet liquidity requirements and provide temporaryholdings until the funds can be otherwise deployed or invested. As of June 30,2009, and December 31, 2008, we had $17.1 million and $9.8 million,respectively, in cash and cash equivalents.

 

*InvestmentSecurities*

 

Management of ourinvestment securities portfolio focuses on providing an adequate level ofliquidity and establishing an interest rate-sensitive position, while earningan adequate level of investment income without taking undue risk. Investmentsecurities that we intend to hold until maturity are classified asheld-to-maturity securities, and all other investment securities are classifiedas available-for-sale.  Currently, all of our investment securities areclassified 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.

 

Management has evaluatedthe investment securities portfolio to determine if the impairment of anysecurity in an unrealized loss position is temporary or other thantemporary.  Management has determined that no investment security is otherthan temporarily impaired.  The unrealized losses are due solely tointerest rate changes.

 

**Deposits**

 

Total deposits at June 30,2009 were $419.9 million, a $41.7 million or 11.0% increase from the deposittotal of $378.2 million at December 31, 2008.  Average depositsincreased $40.0 million to $400.0 million for the six month period ended June 30,2009 as compared to the same period in 2008. We attracted deposits due to thesafety and soundness of the Bank and our focus on customer service.

 

***Deposits***

***(in thousands)***

 
| ** **      | ** ** | **June 30,** | ** ** | **December 31,** | ** ** | **Six month change** | ** ** |
|-----------------|------------|-------------------|------------|-----------------------|------------|----------------------|------------|
| ** **      | ** ** | **2009**          | ** ** | **2008**              | ** ** | **$**                | ** ** | **%** | ** ** |
| Demand          |       | $                 | 60,197     |                  | $          | 64,277               |       | $ | (4,080 | ) | (6.3 | )% |
| NOW             |       | 57,787            |       | 53,485                |       | 4,302                |       | 8.0 | % |
| MMDA            |       | 183,372           |       | 157,351               |       | 26,021               |       | 16.5 | % |
| Savings         |       | 15,366            |       | 12,532                |       | 2,834                |       | 22.6 | % |
| Time < 100K  |       | 46,120            |       | 46,563                |       | (443                 | )          | (1.0 | )% |
| Time > $100K |       | 57,099            |       | 44,040                |       | 13,059               |       | 29.7 | % |
|            |       | $                 | 419,941    |                  | $          | 378,248              |       | $ | 41,693 |   | 11.0 | % |

 

Because our client baseis comprised primarily of commercial and industrial accounts, individualaccount balances are generally higher than those of consumer-oriented banks.Three of our clients carry deposit balances of more than 1% of our totaldeposits, one of which had a deposit balance of more than 3% of total depositsat June 30, 2009.

 

Since our deposit growthstrategy emphasizes core deposit growth we have avoided relying on brokereddeposits as a consistent source of funds.  The only brokered deposits theBank holds are from CDARS, a certificate of deposit program that exchangesfunds with other network banks to offer full FDIC insurance coverage to thecustomer.  The Bank had $9.9 million in brokered deposits as of June 30,2009 as compared to $10.5 million at December 31, 2008.

 

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**Borrowings**

 

Although deposits are theprimary source of funds for our lending and investment activities and forgeneral business purposes, we may obtain advances from the Federal Home LoanBank of San Francisco (“FHLB”) as an alternative to retail deposit funds. Ouroutstanding FHLB advances decreased by $24.9 million at June 30, 2009 to$44.1 million, compared to $69.0 million at December 31, 2008 due to theincrease in deposits. See “Liquidity Management” below for the details on theFHLB borrowings program.

 

**CapitalRatios**

 

We are subject to variousregulatory capital requirements administered by federal banking agencies.Failure to meet minimum capital requirements can trigger regulatory actionsthat could have a material adverse effect on our financial statements andoperations. Under capital adequacy guidelines and the regulatory framework forprompt corrective action, we must meet specific capital guidelines that rely onquantitative measures of our assets, liabilities and certain off-balance-sheetitems as calculated under regulatory accounting practices. Our capital amountsand classification are also subject to qualitative judgments by the regulatorsabout components, risk weightings, and other factors.

 

The following table showsthe Oak Valley Community Bank’s and Oak Valley Bancorp’s capital ratios, ascalculated 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, 2009 and December 31,2008:

 

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

***(dollars in thousands)***

 
| ** **                                | ** ** | ** ** | ** ** | ** **           | ** ** | **Amount of Capital Required** | ** ** |
|-------------------------------------------|------------|------------|------------|----------------------|------------|-----------------------------------------------|------------|
| ** **                                | ** ** | ** ** | ** ** | ** **           | ** ** | **To Be**                                | ** ** | **To Be Adequately** | ** ** |
| ** **                                | ** ** | **Actual** | ** ** | **Well-Capitalized** | ** ** | **Capitalized**                               | ** ** |
| ** **                                | ** ** | **Amount** | ** ** | **Ratio**            | ** ** | **Amount**                                    | ** ** | **Ratio** | ** ** | **Amount** | ** ** | **Ratio** | ** ** |
| **As of June 30, 2009:**             |       |       |       |                 |       |                                          |       |   |   |   |   |   |   |
| Total  Capital (to Risk-Weighted Assets)  |       | $          | 63,335     |                 | 13.2       | %                                             | $          | 47,973 |   | 10 | % | $ | 38,379 |   | 8 | % |
| Tier  1 Capital (to Risk-Weighted Assets) |       | $          | 57,467     |                 | 12.0       | %                                             | $          | 28,784 |   | 6 | % | $ | 19,189 |   | 4 | % |
| Tier  1 Capital (to Average Assets)       |       | $          | 57,467     |                 | 11.0       | %                                             | $          | 26,114 |   | 5 | % | $ | 20,891 |   | 4 | % |
|                                      |       |       |       |                 |       |                                          |       |   |   |   |   |   |   |
| **As of December 31, 2008:**         |       |       |       |                 |       |                                          |       |   |   |   |   |   |   |
| Total  Capital (to Risk-Weighted Assets)  |       | $          | 63,379     |                 | 13.3       | %                                             | $          | 47,758 |   | 10 | % | $ | 38,206 |   | 8 | % |
| Tier  1 Capital (to Risk-Weighted Assets) |       | $          | 57,635     |                 | 12.1       | %                                             | $          | 28,655 |   | 6 | % | $ | 19,103 |   | 4 | % |
| Tier  1 Capital (to Average Assets)       |       | $          | 57,635     |                 | 11.8       | %                                             | $          | 24,492 |   | 5 | % | $ | 19,593 |   | 4 | % |

 

***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, 2009:**             |       |       |       |                 |       |                                          |       |   |   |   |   |   |   |
| Total  Capital (to Risk-Weighted Assets)  |       | $          | 63,498     |                 | 13.2       | %                                             | N/A        |   | N/A |   | $ | 38,389 |   | 8 | % |
| Tier  1 Capital (to Risk-Weighted Assets) |       | $          | 57,630     |                 | 12.0       | %                                             | N/A        |   | N/A |   | $ | 19,194 |   | 4 | % |
| Tier  1 Capital (to Average Assets)       |       | $          | 57,630     |                 | 11.0       | %                                             | N/A        |   | N/A |   | $ | 20,896 |   | 4 | % |
|                                      |       |       |       |                 |       |                                          |       |   |   |   |   |   |   |
| **As of December 31, 2008:**         |       |       |       |                 |       |                                          |       |   |   |   |   |   |   |
| Total  Capital (to Risk-Weighted Assets)  |       | $          | 63,440     |                 | 13.3       | %                                             | N/A        |   | N/A |   | $ | 38,211 |   | 8 | % |
| Tier  1 Capital (to Risk-Weighted Assets) |       | $          | 57,696     |                 | 12.1       | %                                             | N/A        |   | N/A |   | $ | 19,106 |   | 4 | % |
| Tier  1 Capital (to Average Assets)       |       | $          | 57,696     |                 | 11.8       | %                                             | N/A        |   | N/A |   | $ | 19,594 |   | 4 | % |

 

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**LiquidityManagement**

 

Since the Company is aholding company and does not conduct regular banking operations, its primarysources of liquidity are dividends from the Bank. Under the CaliforniaFinancial Code, payment of a dividend from the Bank to the Company isrestricted to the lesser of the Bank’s retained earnings or the amount of theBank’s undistributed net profits from the previous three fiscal years. Theprimary uses of funds for the Company are stockholder dividends, investment inthe Bank and ordinary operating expenses. Management anticipates that there will be sufficient earnings at theBank level to provide dividends to the Company to meet its funding requirementsfor the foreseeable future.

 

Maintenance of adequateliquidity requires that sufficient resources be available at all time to meetour cash flow requirements. Liquidity in a banking institution is requiredprimarily to provide for deposit withdrawals and the credit needs of itscustomers and to take advantage of investment opportunities as they arise.Liquidity management involves our ability to convert assets into cash or cashequivalents without incurring significant loss, and to raise cash or maintainfunds without incurring excessive additional cost. For this purpose, wemaintain a portion of our funds in cash and cash equivalents, salablegovernment guaranteed loans and securities available for sale. We obtain fundsfrom the repayment and maturity of loans as well as deposit inflows, investmentsecurity maturities and paydowns, Federal funds purchased, FHLB advances, andother borrowings.  Our primary uses offunds are the origination of loans, the purchase of investment securities,withdrawals of deposits, maturity of certificate of deposits, repayment ofborrowings and dividends to common and preferred stockholders. Our liquidassets at June 30, 2009 were $80.6 million compared to $60.9 million at December 31,2008.  Our liquidity level measured as the percentage of liquid assets tototal assets was 15.3% and 12.0% at June 30, 2009 and December 31,2008, respectively. We anticipate that cash and cash equivalents on hand andother sources of funds will provide adequate liquidity for our operating,investing and financing needs and our regulatory liquidity requirements for theforeseeable future. Management monitors our liquidity position daily, balancingloan funding/payments with changes in deposit activity and overnight investments.

 

As a secondary source ofliquidity, we rely on advances from the FHLB to supplement our supply oflendable funds and to meet deposit withdrawal requirements. Advances from theFHLB are typically secured by a portion of our loan portfolio. The FHLBdetermines limitations on the amount of advances by assigning a percentage toeach eligible loan category that will count towards the borrowing capacity. Asof June 30, 2009, our borrowing capacity from the FHLB was approximately$120.5 million and the outstanding balance was $44.1 million, orapproximately 37% of our borrowing capacity. We also maintain 2 lines of creditwith correspondent banks to purchase up to $20 million in federal funds,for which there were no advances as of June 30, 2009.

 

**Off-Balance-SheetArrangements**

 

During the ordinarycourse of business, we provide various forms of credit lines to meet thefinancing needs of our customers. These commitments, which represent a creditrisk to us, are not represented in any form on our balance sheets.

 

As of June 30, 2009and December 31, 2008, we had commitments to extend credit of $60.7million and $63.1 million, respectively, which includes obligations underletters of credit of $2.7 million and $3.5 million, respectively,

 

The effect on our revenues,expenses, cash flows and liquidity from the unused portion of the commitmentsto provide credit cannot be reasonably predicted because there is no guaranteethat the lines of credit will be used.

 

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**RecentLegislation and Other Regulatory Initiatives**

 

On February 17,2009, the American Recovery and Reinvestment Act of 2009 (“ARRA”) went intoeffect and amended certain provisions of the Emergency Economic StabilizationAct of 2008 (“EESA”), including replacing Section 111 of EESA in itsentirety.  The new Section 111 allows a participant in the TARP— Capital Purchase Program (“TARP-CPP”), such as the Company, to repay anyassistance previously received pursuant to the TARP-CPP without regard to thesource of replacement funds or any waiting period subject to consultation withthe appropriate Federal banking agency.  In addition, the new Section 111set forth in ARRA includes standards and requirements regarding executivecompensation and corporate governance.  On June 10, 2009,Treasury issued an interim final rule implementing and providing guidanceon the executive compensation and corporate governance provisions of EESA, asamended by ARRA. The regulations were published in the Federal Register on June 15,2009.  In addition, on July 1, 2009, the SEC published aproposed amendment to the proxy rules which would implement the ARRA’srequirement that TARP-CPP participants provide a separate shareholder vote toapprove the compensation of the company’s executives.  Together, theTreasury’s interim final rule and the SEC’s proposed rule do (orwould, in the case of the SEC’s proposed rule) impose:

 

·                  Limits on compensation that exclude incentives for theCompany’s Senior Executive Officers to take unnecessary and excessive risksthat threaten the value of the Company;

 

·                  A provision for the recovery of any bonus, retentionaward, or incentive compensation paid to the Company’s Senior ExecutiveOfficers or to any of the Company’s next twenty most highly compensatedemployees based on certain financial statements or other criteria that arelater found to be materially inaccurate;

 

·                  A prohibition on the Company from making any paymentsto the Senior Executive Officers or to any of the next five most highlycompensated employees for departure from the Company for any reason, except forpayments for services performed or benefits accrued;

 

·                  A prohibition on the Company’s ability to pay bonusesand certain other compensation to the Company’s Chief Executive Officer, exceptwith respect to certain restricted stock awards or to the extent that a bonusis required by a valid employment contract;

 

·                  A prohibition on any compensation plan that wouldencourage manipulation of the Company’s reported earnings for the purposes ofenhancing employee compensation;

 

·                  A requirement for the Company’s Chief ExecutiveOfficer and Chief Financial Officer to provide certain certifications regardingthe foregoing;

 

·                  Certain requirements with respect to the Company’sPersonnel and Compensation Committee;

 

·                  A requirement to adopt a company-wide policy regardingexcessive or luxury expenditures;

 

·                  A requirement to permit a nonbinding “say on pay”shareholder vote to be included in the Company’s proxy statement with respectto an annual meeting of stockholders; and

 

·                  Authorizing the Secretary of the Treasury to reviewcertain compensation paid to the Company’s Senior Executive Officers and thenext 20 most highly-compensated employees to determine whether any suchpayments were inconsistent with the purposes of the foregoing.

 

In light of theTreasury’s interim final rule and the SEC’s proposed rule, theCompany intends to evaluate and amend any employment agreements, benefitplans and other arrangements, and take any other action necessary to ensurecompliance with the applicable requirements.

 

The actions describedabove, together with additional actions announced by the Treasury and other regulatoryagencies continue to develop.  It is not clear at this time whatimpact EESA, ARRA, TARP, the Treasury’s interim final rule and the SEC’sproposed rule and other liquidity and funding initiatives of the Treasuryand other bank regulatory agencies that have been previously announced, and anyadditional programs that may be initiated in the future will have on thefinancial markets and the financial services industry.  The extremelevels of volatility and limited credit availability currently being experiencedcould continue to effect the U.S. banking industry and the broader U.S. andglobal economies, which will have an affect on all financial institutions,including the Company.  We cannot predict the full effect that thiswide-ranging legislation will have on the national economy or on financialinstitutions.

 

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**Item 3.****                                                                              ****Quantitative andQualitative Disclosures About Market Risk**

 

Not applicable.

 

**Item 4T.****                                                                      ****Controls and Procedures**

 

The Company’s ChiefExecutive Officer and its Chief Financial Officer, after evaluating theeffectiveness of the Company’s disclosure controls and procedures, as definedin Exchange Act Rules 13 a-15(e)and 15(d)-15(e) promulgatedunder the Exchange Act, as of the end of the period covered by this report (the“Evaluation Date”) have concluded that as of the Evaluation Date, the Company’sdisclosure controls and procedures were adequate and effective to ensure thatmaterial information relating to the Company would be made known to them byothers within the Company, particularly during the period in which this reportwas being prepared.  Disclosure controls and procedures are designed to ensurethat information required to be disclosed by us in the reports that we file orsubmit under the Exchange Act is recorded, processed, summarized and reportedwithin the time periods specified in the Securities and Exchange Commission’s rules andforms.  Disclosure controls and procedures include, without limitation,controls and procedures designed to ensure that information required to bedisclosed by us in the reports that we file under the Exchange Act isaccumulated and communicated to our management, including our Chief ExecutiveOfficer and Chief Financial Officer, as appropriate to allow timely decisionsregarding required disclosure.

 

There were no significantchange in the our internal control over financial reporting during the lastfiscal quarter that have materially affected, or are reasonably likely tomaterially affect, our internal control over financial reporting subsequent tothe Evaluation Date, nor there were any significant deficiencies or materialweaknesses in such controls requiring corrective actions.

 

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**PART II - OTHER INFORMATION**

 

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

 

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

 

**Item 1A.****                                                                     ****Risk Factors**

 

Not applicable.

 

**Item 2.****                                                                              ****Unregistered Sales ofEquity Securities and Use of Proceeds**

 

None.

 

**Item 3.****                                                                              ****Defaults Upon SeniorSecurities**

 

None.

 

**Item 4.****                                                                              ****Submission of Matters toa Vote of Security Holders**

 

The annual meetingof the shareholders of Oak Valley Bancorp was held on June 10, 2009. Threeproposals were submitted to a vote of the shareholders as described in the OakValley Bancorp’s proxy statement dated April 30, 2009. The following is abrief description of the matters voted upon, as well as the outcome of thevote:

 

1.               To elect ten members to serve on the Company’s Boardof Directors to hold office until the 2010 annual meeting of the shareholdersor until their successors are duly elected and qualified.

 
| **Nominee**          | ** ** | **For**   | ** ** | **Withheld** | ** ** |
|----------------------|------------|-----------|------------|--------------|------------|
| Donald Barton        |       | 4,275,604 |       | 745,984      |       |
| Christopher Courtney |       | 4,275,604 |       | 745,984      |       |
| James L. Gilbert     |       | 4,984,659 |       | 36,929       |       |
| Thomas A. Haidlen    |       | 4,275,604 |       | 745,984      |       |
| Michael Q. Jones     |       | 4,272,637 |       | 748,951      |       |
| Arne J. Knudsen      |       | 4,984,642 |       | 36,946       |       |
| Ronald C. Martin     |       | 4,275,604 |       | 745,984      |       |
| Roger M. Schrimp     |       | 4,275,604 |       | 745,984      |       |
| Danny L. Titus       |       | 4,275,604 |       | 745,984      |       |
| Richard J. Vaughn    |       | 4,275,604 |       | 745,984      |       |

 

2.               To ratify the appointment of Moss Adams LLP as ourauditors, to perform audit services for the year 2009.

 
| Votes For: |   | 5,001,434 |   |   |   |   |
|------------|--------|-----------|--------|--------|--------|--------|
| Against:   |   | 16,923    |   |   |   |   |
| Abstain:   |   | 3,231     |   |   |   |   |

 

3.               To approve the compensation of named executiveofficers, in a non-binding advisory vote as a result of the Company’sparticipation in the United States Treasury Capital Purchase Program:

 
| Votes For: |   | 4,179,401 |   |   |   |
|------------|--------|-----------|--------|--------|--------|
| Against:   |   | 825,559   |   |   |   |
| Abstain:   |   | 16,628    |   |   |   |

 

**Item 5.****                                                                              ****Other Information**

 

None.

 

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

 

The  following exhibits are filed as part of thisreport or hereby incorporated by reference to filings previously made with theSEC:

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

 

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**SIGNATURES**

 

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

 
| ** **                  | **Oak  Valley Bancorp** |
|-----------------------------|-------------------------|
| Date: August 13,  2009 | By:                     | /s/    RICHARD  A. MCCARTY |
| ** **                  | ** **              | **Richard  A. McCarty** |
| ** **                  | ** **              | **Executive  Vice President and Chief Financial Officer** |
|                        |                    | **(Principal  Financial Officer and duly authorized** |
|                        |                    | **signatory)** |

 

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**EXHIBITINDEX**

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

 

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