Oak Valley Bancorp Commitments Disclosure

NOTE 12 — COMMITMENTS AND CONTINGENT LIABILITIES

 

The Company is obligated for rental payments under certain operating lease agreements, some of which contain renewal options and escalation clauses that provide for increased rentals. Total rental expense for the years ended December 31, 2025 and 2024, was $1,608,000 and $1,542,000, respectively.

 

We have historically entered into a number of lease arrangements under which we are the lessee. Most of our office leases include one or more optional renewal periods. The Company has not elected the hindsight practical expedient and therefore potential payments related to future lease renewal options are not reflected in the ROU asset and lease liability. Generally, all of the lease contracts have annual rent payment increases, some of which are based on the Consumer Price Index and others are fixed increases that are set forth within the contracts. The majority of our lease contracts are gross leases, in which a single monthly payment includes the lessor’s property and casualty insurance costs, property taxes, and common area maintenance associated with the property.

 

The Company determined the operating lease liability for new lease agreements and renewal options in 2025 and 2024 by calculating the present value of future cash payments, excluding any future renewal options as it was not reasonably certain that they will be exercised. A discount rate was applied to the cash obligation schedule to calculate the present value of the operating lease liability. The discount rate was based on our incremental borrowing rate through our line of credit with the FHLB, for the borrowing term that was equal to the term of each lease. As of December 31, 2025, the weighted average remaining term of the lease contracts was 5.7 years, and the weighted average discount rate used to calculate the present value of the operating lease liability was 3.15%. As of December 31, 2024, the weighted average remaining term of the lease contracts was 6.6 years, and the weighted average discount rate used to calculate the present value of the operating lease liability was 3.24%. The operating lease liability totaled $7,619,000 and $7,013,000 as of December 31, 2025 and 2024, respectively, and is included in interest payable and other liabilities in the consolidated balance sheet. The ROU asset totaled $7,239,000 and $6,663,000 as of December 31, 2025 and 2024, respectively, is recorded in interest receivable and other assets on the consolidated balance sheet.

 

At December 31, 2025, the future minimum commitments under these operating leases are as follows (in thousands):

 

Year ending December 31,
2026		$	1,626
2027			1,535
2028			1,516
2029			1,374
2030			1,133
Thereafter			1,475
		$	8,659
Reconciling items:
Present value discount			(1,040	)
Present value of lease liabilities		$	7,619

 

The Company is a party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit in the form of loans or through standby letters of credit. These instruments involve, to varying degrees, elements of credit and interest-rate risk in excess of the amount recognized in the balance sheet. The contract amounts of those instruments reflect the extent of involvement the Company has in particular classes of financial instruments.

 

The Company’s exposure to credit loss in the event of non-performance by the other party to the financial instrument for commitments to extend credit and standby letters of credit is represented by the contractual amount of those instruments. The Company uses the same credit policies in making commitments and conditional obligations as it does for on-balance-sheet instruments.

 

Financial instruments at December 31, 2025 whose contract amounts represent credit risk:

 

		Contract
(in thousands)		Amount
Undisbursed loan commitments		$	195,467
Checking reserve			793
Equity lines			18,617
Standby letters of credit			4,115
		$	218,992

 

 

Commitments to extend credit, including undisbursed loan commitments and equity lines, are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Company evaluates each customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Company upon extension of credit, is based on management’s credit evaluation. Collateral held varies but may include accounts receivable, inventory, property, plant, equipment and income-producing commercial properties.

 

Checking reserves are lines of credit associated consumer deposit accounts that meet qualification standards for extension of credit if the deposit account were to become overdraft.

 

Standby letters of credit are conditional commitments issued by the Company to guarantee the performance of a customer to a third party. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers.