Central Valley Community Bancorp
Annual Report 2016

Plain-text annual report

DEEPLY ROOTED FOR THRIVING GROWTH, YEAR AFTER YEAR Central Valley Community Bancorp enjoyed record growth in 2016, reaping the fruits of a successful year by Central Valley Community Bank. Much of today’s growth stems from our deeply rooted business relationships – a long-term investment that is now coming to fruition in our expanded service area, additional team members and customers, new products and remodeled facilities. Look for the Bank to continue flourishing throughout the San Joaquin Valley and Greater Sacramento Region. TO OUR SHAREHOLDERS As Central Valley Community Bancorp looks back on 2016, it is with celebration for another successful year and optimism for the bright future unfolding, thanks to the strategic vision that has guided us from the beginning. 2016: Snapshots of Strength The Company’s positive performance trends continued in 2016, evidenced by the year-over-year growth of loans and deposits – a reflection of the Bank team’s hard work and customer referrals. Our strategic focus continues to improve the Company’s financial metrics, while deepening and expanding client relationships. Total average assets for the year ended December 31, 2016, were $1,321,007,000 compared to $1,222,526,000 for the year ended December 31, 2015, an increase of $98,481,000 (8.06%). Total average loans were $646,573,000 for the year ended December 31, 2016, an increase of $59,811,000 over the $586,762,000 for the year ended December 31, 2015. Total average deposits increased $78,433,000, or 7.36%, to $1,144,231,000 for the year ended December 31, 2016, compared to $1,065,798,000 for the same period in 2015. Additionally, the Company was pleased to declare cash dividends to shareholders of record in each of the four quarters of 2016. The positive growth trend in revenue, loans and deposits illustrates the tremendous dedication of our team, customers, shareholders and communities. Still, despite the above average rainfall experienced so far in 2017, we continue to monitor the agricultural risk throughout the San Joaquin Valley due to various impacts on farming. The Bank is well-positioned to build upon business growth opportunities throughout our footprint, particularly in the Greater Sacramento region. Economic indicators are trending positively throughout our service area, and a renewed sense of optimism has been expressed from both the business community and consumers alike. This trend translates into opportunities for our Company. A Successful Merger The Bank completed a merger with Sierra Vista Bank in 2016 – a key step in our strategy of increasing our Greater Sacramento presence. The addition of the Sierra Vista Bank team enhances our position as a solid financial alternative in Greater Sacramento, and the added full-service offices in Folsom, Fair Oaks and Cameron Park allow Central Valley Community Bank to provide long-term opportunities for our businesses, customers, employees and communities. Leadership Arrivals & Remembrances Built on a foundation of shared values and strategic vision, Central Valley Community Bank has enjoyed 37 years of consistently strong leadership. While the faces may occasionally change, the commitment to our customers, shareholders, employees and communities has remained unwavering. The Bank was pleased to add to Gary D. Gall to the Board of Directors in 2016, upon completion of the Sierra Vista Bank merger. His knowledge of community business banking in the Greater Sacramento region has already opened the door to new opportunities for our commercial lending team. In 2016, we were saddened to lose one of the Bank’s Founding Directors, Wanda Rogers, former President of Rogers Helicopters, Inc. Wanda served as a Founding Director and Chairman of the Board from 1979-1998, and also chaired the loan committee. Recently Central Valley Community Bank lost another Founding Director, Joe Weirick. A strong advocate for small businesses and residents of the Central Sierras, Joe served Central Valley Community Bank for over 37 years. Throughout his life, Joe devoted himself to family, friends, business and his community, and he will be missed by all. The Changing Face of Banking The Bank kept pace with the evolving financial landscape, driven in part by the rise in online and mobile banking, by responding with strategic branch changes in 2016, consolidating one of our Fresno branches into a nearby office. Looking forward in 2017, the Bank’s Gold River commercial banking office will be relocated to a new, full-service banking office located in Greater Sacramento’s Roseville community in April, so we may better serve our growing business and personal banking customers with branch operations and a commercial banking team in one convenient location. Recognized & Respected in our Industry The Company was added to the Russell 2000® Index in 2016, a leading equity benchmark of US-based companies widely used by investment managers and institutional investors, leading to more interest in our stock and increased volume being traded. The Bank achieved “Premier” performance from The Findley Reports in 2016 – the firm’s second-highest performance rating, based upon 2015 operating results. 2 Additionally, the Bank earned a 5-Star Superior rating from Bauer Financial based on 2016 financial results, the highest distinction from this respected financial rating agency. Community Reinvestment Act advocacy continues to be a priority including ongoing work with nonprofit, tribal and government organizations to provide training in financial literacy, technical assistance with financial matters, credit counseling, low-cost checking and savings accounts for those with no banking experience, and economic development expertise for important neighborhood revitalization projects. Awards & Honors Central Valley Community Bank was one of only 45 organizations across the country selected by NASDAQ and EverFi to receive the prestigious Innovation in Financial Education Award. Through our partnership with EverFi, the Bank volunteers with high schools to provide financial instruction using digital education modules supported by team members in the classroom. In 2016, Central Valley Community Bank was honored as “Best Business Bank” for the third consecutive year and “Best Company to Work For” for the second consecutive year in The Business Journal’s “Best of Central Valley Business Readers’ Choice Awards” for Fresno, Madera, Kings and Tulare Counties. Customer Convenience & Security Since 2014, the Bank has sought customer input on various aspects of our customer service through our Voice of the Customer program. Our customer satisfaction and performance scores continued to exceed our expectations in 2016, improving over 2015. The program will continue in 2017. In 2016, Central Valley Community Bank added the MoneyPass® ATM Network free of a surcharge, giving our customers access to over 25,000 ATMs nationwide. Mobile Deposit for personal and business banking customers became available in 2016, giving mobile app users the convenience of depositing checks using their device’s camera. Investing in Relationships & Community Service Central Valley Community Bank has always been an advocate for family businesses and a partner in our communities. From providing superior customer service and charitable giving to offering competitive financial products and education, we demonstrate our commitment daily by meeting the unique needs of each customer. Our partnership with the University of the Pacific Institute for Family Business expanded in 2016 to include a dedicated resource center that helps family businesses address common issues and meet challenges through interactive forums, workshops and events. Insurance Against Cyberattacks Educating customers on their need for Cyber Risk Insurance was a priority in 2016. As digital systems dominate the business marketplace, the risk to data security is at an all-time high. To help our customers protect themselves, the Bank offers a referral program to a variety of Cyber Risk Insurance options, from data restoration services to equipment replacement, financial loss prevention to ongoing monitoring services and more. Celebrating a Decade of Document Shredding One of the Bank’s most-utilized identity protection efforts turned ten years old in 2016. Our Free Document Shredding Events were held at 16 Central Valley Community Bank offices, allowing businesses and individuals to securely shred confidential files during the data-sensitive period around tax season, in addition to learning more about all ranges of identity protection and cybersecurity. At select events, partner Valley Crime Stoppers provided additional resources to support crime prevention. 2017 Outlook Loan growth and expense management will be our focus in 2017, as well as building non-interest income lines of business. Beyond these financial performance goals is the ongoing teamwork exhibited by our people, who truly pulled together for our customers in 2016 and are taking our service to new heights in 2017. Outstanding individuals and teams are the heartbeat of our Bank, and we are continuing to recruit, train and reward more of them in 2017. While we are on the lookout for market growth opportunities in 2017, we are also looking inward at improving efficiency. All team members are evaluating current practices and considering new technologies to improve the customer experience and create shareholder value. As you can see, we have much to be grateful for – and loyal supporters like you are at the top of the list. All of us on the Central Valley Community Bancorp Board of Directors want to thank our shareholders, employees, customers and communities for the trust you’ve placed in us, and for the privilege of serving the financial needs of this special place we call home. Daniel J. Doyle Chairman of the Board, Central Valley Community Bancorp Central Valley Community Bank James M. Ford President & CEO, Central Valley Community Bancorp Central Valley Community Bank 3 OUR STRONG HISTORY Central Valley Community Bank, founded in 1979, is a California State chartered bank with deposit accounts insured by the Federal Deposit Insurance Corporation (FDIC). The Bank commenced operations on January 10, 1980, in Clovis, California, with 12 professional bankers and beginning assets of $2,000,000. The common stock of the Company trades on the NASDAQ stock exchange under the symbol CVCY. A History Of Strength – A Heart Of Service Central Valley Community Bank now operates 22 full-service offices in 17 communities within the San Joaquin Valley and Greater Sacramento Region and employs over 320 team members. Offices are located in Cameron Park, Clovis, Exeter, Fair Oaks, Folsom, Fresno, Gold River, Kerman, Lodi, Madera, Merced, Modesto, Oakhurst, Prather, Stockton, Tracy and Visalia. Additionally, the Bank operates Commercial Real Estate, SBA and Agribusiness Lending Departments. Central Valley Investment Services are provided by Investment Centers of America, Inc. With assets exceeding $1.4 billion as of December 31, 2016, Central Valley Community Bank has grown into a well-capitalized institution, with a proven track record of financial strength, security and stability. Yet despite the Bank’s growth, it has remained true to its original “roots” – a commitment to its core values of integrity, trustworthiness, caring, loyalty, leadership and teamwork. Central Valley Community Bank distinguishes itself from other financial institutions through its 37-year track record of strength, security, client advocacy and the values that have guided the Bank since its opening. The Bank’s unique brand of personalized service has strategically grown throughout California’s San Joaquin Valley and Greater Sacramento Region. Guided by a hands-on Board of Directors and a seasoned Executive Management Team, the Bank continues to focus on personalized service, customer referrals and employee satisfaction. Central Valley Community Bank’s strong foundation, concern for its team and training opportunities at all levels has afforded the ongoing addition and retention of high-quality employees. Always On The Leading Edge Of Security & Convenience Central Valley Community Bank maintains state-of-the-art data processing and information systems, and offers a complete line of innovative and competitive business and personal deposit and loan products. Through FDIC insurance, customer deposits for all insurable accounts are protected up to $250,000. For maximum convenience, personal services are available through Personal Online Banking with Bill Pay, Mobile Banking, Mobile Deposit, Popmoney (person-to-person payments) and eStatements, in addition to Business Online Banking services for businesses of all sizes including Bill Pay, Mobile Banking, Mobile Deposit, eStatements and custom-tailored Cash Management services. In addition, ATMs are located at all offices, customers have free access to ATMs within MoneyPass® Network, BankLine provides 24-hour telephone banking, and extended days and banking hours are offered at select offices. A Proud Reputation Built On Personal Relationships Central Valley Community Bank has built a reputation for superior banking service by offering personalized “relationship banking” for businesses, professionals and individuals. Serving the business community has always been 4 a primary focus for the Bank, which continues to expand its commercial banking team to serve even more customers. Central Valley Community Bank’s experienced banking professionals live and work in the local community, and have a deep understanding of the marketplace. As a result, the Bank has remained an active business lender and is proud to be a Preferred SBA Lender. At Central Valley Community Bank you will find the secure lending power of a big bank plus the stable values and relationships of a community bank. From small manufacturers to large agribusiness organizations, healthcare companies to service industries and everything in between, Central Valley Community Bank is always ready to leverage its strength, experience and commitment to help businesses thrive – even in the toughest economic times – by offering tailored lending products. Central Valley Community Bank is dedicated to providing outstanding value to customers by increasing and enhancing its products and services, while emphasizing needs-based consulting within the branch environment. Serving both new and long-time customers continues to be an important factor in the Bank’s growth, as demonstrated in ongoing customer referrals. Dependable values and security are important to banking customers, and the Bank is well-positioned to provide them, with an ongoing emphasis on privacy, safety and convenience. Supporting Our Communities In So Many Ways Focused on investing in the communities it serves, the Bank annually supports a wide variety of organizations with financial donations and the talents and energy of its people. Additionally, Bank management serves in leadership positions for civic and philanthropic organizations as well as industry groups at the state and national levels. Providing leadership-by-example sets the pace for the entire team who are committed to improving and strengthening the quality of life in the communities where they live, work and raise their families. This is evidenced by The Business Journal’s “Best of Central Valley Business Reader’s Choice Awards” where the Bank was honored as “Best Business Bank” for the third consecutive year and “Best Company to Work For” for the second consecutive year in the four-county Central Valley. A Firm Foundation For Building A Strong Future Thanks to the vision of Central Valley Community Bancorp, as well as the leadership of its Board of Directors, the Bank has grown steadily and sensibly for nearly four decades, keeping pace with the needs of its customers and the communities it serves, all while retaining the local leadership and values that formed the Bank’s firm foundation. Daniel J. Doyle Chairman of the Board, Central Valley Community Bancorp Central Valley Community Bank James M. Ford President and CEO, Central Valley Community Bancorp Central Valley Community Bank Daniel N. Cunningham Lead Independent Director, Central Valley Community Bancorp Central Valley Community Bank Director, Quinn Group Inc. Steven D. McDonald Secretary of the Board, Central Valley Community Bancorp Central Valley Community Bank President, McDonald Properties, Inc. B O A R D O F D I R E C TO R S Investing In Relationships Since 1980 William S. Smittcamp President/Owner, Wawona Frozen Foods Joseph B. Weirick Investments Passed Away February, 2017 F.T. “Tommy” Elliott, IV Owner, Wileman Bros. & Elliott, Inc. Kaweah Container, Inc. Gary D. Gall Retired Bank Executive Louis C. McMurray President, Charles McMurray Co. Edwin S. Darden, Jr. Architect, Darden Architects, Inc. 5 YOUR TRUSTED TEAM PROVIDING THE SERVICE YOU DESERVE At Central Valley Community Bank, we work hard to cultivate a culture of trust. The seeds of trust are planted in our people through collaboration, communication and living our company values: leadership, caring, integrity, teamwork, loyalty and trustworthiness. Trust blossoms in how those values are nurtured and protected and in how we advocate for our customers with our uniquely personal approach to service and our ability to provide business solutions to customer needs. Whether guiding the next generation of a family-owned business, helping students with financial literacy or leading a small business forum, trust is earned in many ways at Central Valley Community Bank. No wonder so many of our customers refer us to their colleagues and family members. Holding Company & Bank Officers James M. Ford President and CEO David A. Kinross Executive Vice President, Chief Financial Officer Patrick J. Carman Executive Vice President, Chief Credit Officer Bank Executive Officers Gary D. Quisenberry Executive Vice President, Commercial and Business Banking Lydia E. Shaw Executive Vice President, Community Banking Independent Auditors Crowe Horwath LLP, Sacramento, CA Counsel Buchalter, A Professional Corporation, Sacramento, CA Senior Vice Presidents Lawrence Cardoso Senior Vice President, Regional Manager Cathy Chatoian Senior Vice President, Cash Management Team Leader Christopher Clark Senior Vice President, Senior Credit Officer Terry Crawford Senior Vice President, Agribusiness Team Leader Dawn Crusinberry Senior Vice President, Controller Constantine Makayed Senior Vice President, Senior Risk Manager Jeff Pace Senior Vice President, Real Estate Team Leader Gina Peragine Senior Vice President, Loan Servicing Karen Smith Senior Vice President, Regional Manager Mark Smith Senior Vice President, Central Valley Commercial Team Leader Daniel Demmers Senior Vice President, Director of Information Technology Dorothy Thomas Senior Vice President, SBA Manager Teresa Gilio Senior Vice President, Central Operations Marci Madsen Senior Vice President, Human Resources Theodore Thome Senior Vice President, Mid-Valley Commercial Team Leader Rick Whitsell Senior Vice President, Sacramento Regional Manager 6 Exceptional Employees Each year Central Valley Community Bank’s top-performing team members are recognized. The 2016 President’s Award included: Linda Jones Personal Banker Mindy Martin Vice President, Mortgage Loan Officer Mission Statement As A Full Service Bank, We Are Committed To: Providing a full range of financial services desired by our customers, while providing superior customer service delivered in a highly professional and personal manner. Maintaining a positive work environment and investing in each individual to “be the best they can be.” Contributing to the quality of life in the communities we serve. The 2016 Circle of Elite included: Continuing to maximize shareholder value. Erik Emde Small Business/Consumer Loan Underwriter Aaron Page Vice President, Credit Officer Lynne Greenlee Commercial Loan Support Specialist Fatima Phillips Electronic Banking Supervisor Erik Meza Deposit Services Utility Shannon Millican Financial Services Representative Carina Nava Assistant Vice President, Customer Service Manager Erin Probasco Vice President, Agribusiness Relationship Officer Chanti Suong Network Associate Ramina Ushana Vice President, Branch Manager Being the “Bank of Choice” for customers and employees! Core Values Leadership Caring Integrity Teamwork Loyalty Trustworthiness The 2016 Team Awards included: Community Banking Team: Commercial Banking Team: Support Team: Fresno Downtown Office Real Estate Department Cash Management Team Central Valley Community Bank Executive Management From Left to Right: Patrick J. Carman, Gary D. Quisenberry, James M. Ford, Lydia E. Shaw and David A. Kinross 7 T R E N D A N A LY S I S Central Valley Community Bancorp 2 8 1 , 5 1 $ 4 6 9 , 0 1 $ 0 5 2 , 8 $ 0 2 5 , 7 $ 4 9 2 , 5 $ 5 7 0 $ . 7 7 0 $ . 8 4 . 0 $ 3 7 5 , 6 4 6 $ 2 6 7 , 6 8 5 $ 9 2 5 , 9 3 5 $ 3 3 . 1 $ 0 0 . 1 $ 3 8 4 , 4 5 4 $ 0 4 0 , 5 0 4 $ 2012 2013 2014 2015 2016 2012 2013 2014 2015 2016 2012 2013 2014 2015 2016 Net Income (In Thousands) Diluted Earnings Per Share Average Total Loans (In Thousands) , 7 0 0 1 2 3 1 $ , , 1 3 2 4 4 1 1 $ , 8 9 7 , 5 6 0 , 1 $ 0 6 5 , 6 0 0 , 1 $ , 3 9 4 8 4 8 $ 1 0 6 , 9 1 7 $ 6 2 5 , 2 2 2 , 1 $ , 3 8 4 7 5 1 1 $ , 4 2 9 , 6 8 9 $ 8 7 0 , 3 5 8 $ % 4 8 . 9 % 2 1 . 8 % 6 5 . 6 % 9 8 . 6 % 6 0 . 4 2012 2013 2014 2015 2016 2012 2013 2014 2015 2016 2012 2013 2014 2015 2016 Average Total Deposits (In Thousands) Return on Shareholders’ Equity Average Total Assets (In Thousands) 8 C O M PA R AT I V E S TO C K P R I C E P E R F O R M A N C E Central Valley Community Bancorp Total Return Performance Index Value 397.82 Central Valley Community Bancorp 235.36 265.56 SNL NASDAQ Bank Index 212.83 213.30 171.31 161.52 177.42 191.53 196.45 Russell 2000 169.43 161.95 143.71 119.19 116.35 100.00 100.00 100.00 2011 2012 2013 2014 2015 2016 Note: The graph above shows the cumulative total shareholder return on Central Valley Community Bancorp common stock compared to the cumulative total returns for the Russell 2000 Index and the SNL NASDAQ Bank Index, measured as of the last trading day of each year shown. The graph assumes an investment of $100 on December 31, 2011 and reinvestment of dividends on the date of payment without commissions. The performance graph represents past performance and should not be considered to be an indication of future stock performance. The stock price performance shown above should not be indicative of potential future stock price performance. Source: SNL Financial LC 9 CENTRAL VALLEY COMMUNITY BANCORP AND SUBSIDIARY Consolidated Balance Sheets December 31, 2016 and 2015 (In thousands, except share amounts) ASSETS Cash and due from banks Interest-earning deposits in other banks Federal funds sold Total cash and cash equivalents Available-for-sale investment securities (Amortized cost of $548,640 at December 31, 2016 and $470,080 at December 31, 2015) Held-to-maturity investment securities (Fair value of $35,142 at December 31, 2015) Loans, less allowance for credit losses of $9,326 at December 31, 2016 and $9,610 at December 31, 2015 Bank premises and equipment, net Bank owned life insurance Federal Home Loan Bank stock Goodwill Core deposit intangibles Accrued interest receivable and other assets Total assets LIABILITIES AND SHAREHOLDERS’ EQUITY Deposits: Non-interest bearing Interest bearing Total deposits Short-term borrowings Junior subordinated deferrable interest debentures Accrued interest payable and other liabilities Total liabilities Commitments and contingencies (Note 13) Shareholders’ equity: Preferred stock, no par value, $1,000 per share liquidation preference; 10,000,000 shares authorized, none issued and outstanding Common stock, no par value; 80,000,000 shares authorized; issued and outstanding: 12,143,815 at December 31, 2016 and 10,996,773 at December 31, 2015 Retained earnings Accumulated other comprehensive (loss) income, net of tax Total shareholders’ equity $ $ $ 2016 2015 $ 28,185 10,368 15 38,568 547,749 - 747,302 9,407 23,189 5,594 40,231 1,383 29,900 23,339 70,988 290 94,617 477,554 31,712 588,501 9,292 20,702 4,823 29,917 1,024 18,594 1,443,323 $ 1,276,736 $ 495,815 760,164 1,255,979 400 5,155 17,756 428,773 687,494 1,116,267 - 5,155 15,991 1,279,290 1,137,413 - 71,645 92,904 (516) 164,033 - 54,424 80,437 4,462 139,323 Total liabilities and shareholders’ equity $ 1,443,323 $ 1,276,736 The accompanying notes are an integral part of these consolidated financial statements. 10 CENTRAL VALLEY COMMUNITY BANCORP AND SUBSIDIARY Consolidated Statements of Income For the Years Ended December 31, 2016, 2015, and 2014 (In thousands, except per share amounts) 2016 2015 2014 INTEREST INCOME: Interest and fees on loans Interest on deposits in other banks Interest and dividends on investment securities: Taxable Exempt from Federal income taxes Total interest income INTEREST EXPENSE: Interest on deposits Interest on junior subordinated deferrable interest debentures Total interest expense Net interest income before provision for credit losses (REVERSAL OF) PROVISION FOR CREDIT LOSSES Net interest income after provision for credit losses NON-INTEREST INCOME: Service charges Appreciation in cash surrender value of bank owned life insurance Interchange fees Loan placement fees Net realized gains on sales and calls of investment securities Other-than-temporary impairment loss on investment securities Federal Home Loan Bank dividends Other income Total non-interest income NON-INTEREST EXPENSES: Salaries and employee benefits Occupancy and equipment Regulatory assessments Data processing expense Professional services ATM/Debit card expenses License & maintenance contracts Directors’ expenses Advertising Internet banking expenses Acquisition and integration expenses Amortization of core deposit intangibles Other expense Total non-interest expenses Income before provision for income taxes PROVISION (BENEFIT) FOR INCOME TAXES Net income available to common shareholders Basic earnings per common share Diluted earnings per common share Cash dividends per common share $ $ $ $ $ 34,051 289 5,876 6,460 46,676 975 121 1,096 45,580 (5,850) 51,430 3,022 558 1,228 1,083 1,920 (136) 630 1,286 9,591 21,881 4,754 642 1,707 1,258 633 531 530 576 678 1,782 149 3,801 38,922 22,099 6,917 15,182 1.34 1.33 0.24 $ $ $ $ $ 30,504 210 4,793 6,315 41,822 948 99 1,047 40,775 600 40,175 3,070 596 1,197 1,042 1,495 - 580 1,407 9,387 20,836 4,669 1,059 1,139 1,504 548 520 439 608 709 - 320 3,665 36,016 13,546 2,582 10,964 1.00 1.00 0.18 $ $ $ $ $ The accompanying notes are an integral part of these consolidated financial statements. 29,493 176 5,538 5,832 41,039 1,060 96 1,156 39,883 7,985 31,898 3,280 614 1,205 544 904 - 327 1,290 8,164 19,721 4,835 762 1,820 1,176 624 488 501 589 520 - 337 3,965 35,338 4,724 (570) 5,294 0.48 0.48 0.20 11 CENTRAL VALLEY COMMUNITY BANCORP AND SUBSIDIARY Consolidated Statements of Comprehensive Income For the Years Ended December 31, 2016, 2015, and 2014 (In thousands) NET INCOME Other Comprehensive Income (Loss): Unrealized gains (losses) on securities: Unrealized holdings (losses) gains arising during the period Less: reclassification for net gains included in net income Less: reclassification for other-than-temporary impairment loss included in net income Transfer of investment securities from held-to-maturity to available-for-sale Amortization of net unrealized gains transferred Other comprehensive (loss) income, before tax Tax benefit (expense) related to items of other comprehensive income Total other comprehensive (loss) income Comprehensive income 2016 2015 2014 $ 15,182 $ 10,964 $ 5,294 (9,924) 1,224 (136) 2,647 (64) (8,429) 3,451 (4,978) 59 1,481 - - (78) (1,500) 585 (915) $ 10,204 $ 10,049 $ 13,847 904 - - (21) 12,922 (5,259) 7,663 12,957 The accompanying notes are an integral part of these consolidated financial statements. 12 CENTRAL VALLEY COMMUNITY BANCORP AND SUBSIDIARY Consolidated Statements of Changes in Shareholders’ Equity For the Years Ended December 31, 2016, 2015, and 2014 (In thousands, except share amounts) Balance, January 1, 2014 Net income Other comprehensive income Restricted stock granted, forfeited and related tax benefit Cash dividend ($0.20 per common share) Stock-based compensation expense Stock options exercised and related tax benefit Balance, December 31, 2014 Net income Other comprehensive loss Restricted stock granted, forfeited and related tax benefit Stock-based compensation expense Cash dividend ($0.18 per common share) Stock options exercised and related tax benefit Balance, December 31, 2015 Net income Other comprehensive loss Stock issued for acquisition Restricted stock granted, forfeited and related tax benefit Stock-based compensation expense Cash dividend ($0.24 per common share) Stock options exercised and related tax benefit Common Stock Shares Amount Retained Earnings Accumulated Other Comprehensive Income (Loss) (Net of Taxes) Total Shareholders’ Equity 10,914,680 - - 56,850 - - 8,910 10,980,440 - - 7,263 - - 9,070 10,996,773 - - 1,058,851 52,911 - - 35,280 $ $ 53,981 - - - - 173 62 54,216 - - (96) 238 - 66 54,424 - - 16,678 (2) 284 - 261 $ 68,348 5,294 - - (2,190) - - 71,452 10,964 - - - (1,979) - 80,437 15,182 - - - (2,715) - $ (2,286) - 7,663 - - - - 5,377 - (915) - - - - 4,462 - (4,978) - - - - 120,043 5,294 7,663 - (2,190) 173 62 131,045 10,964 (915) (96) 238 (1,979) 66 139,323 15,182 (4,978) 16,678 (2) 284 (2,715) 261 Balance, December 31, 2016 12,143,815 $ 71,645 $ 92,904 $ (516) $ 164,033 The accompanying notes are an integral part of these consolidated financial statements. 13 CENTRAL VALLEY COMMUNITY BANCORP AND SUBSIDIARY Consolidated Statements of Cash Flows For the Years Ended December 31, 2016, 2015, and 2014 (In thousands) 2016 2015 2014 CASH FLOWS FROM OPERATING ACTIVITIES: Net income Adjustments to reconcile net income to net cash provided by operating activities: Net decrease in deferred loan costs Depreciation Accretion Amortization Stock-based compensation Excess tax benefit from exercise of stock options (Reversal of ) provision for credit losses Other than temporary impairment losses on investment securities Net realized gains on sales and calls of available-for-sale investment securities Net realized gains on sales or calls of held-to-maturity investment securities Net loss on sale and disposal of equipment Net gain on sale of other real estate owned Increase in bank owned life insurance, net of expenses Net gain on bank owned life insurance Net (increase) decrease in accrued interest receivable and other assets Net increase (decrease) in accrued interest payable and other liabilities Benefit (provision) for deferred income taxes Net cash provided by operating activities CASH FLOWS FROM INVESTING ACTIVITIES: Net cash and cash equivalents acquired in acquisition Purchases of available-for-sale investment securities Proceeds from sales or calls of available-for-sale investment securities Proceeds from sales or calls of held-to-maturity investment securities Proceeds from maturity and principal repayment of available-for-sale investment securities Net increase in loans Proceeds from sale of other real estate owned Purchases of premises and equipment Purchases of bank owned life insurance FHLB stock purchased Proceeds from bank owned life insurance Proceeds from sale of premises and equipment Net cash used in investing activities CASH FLOWS FROM FINANCING ACTIVITIES: Net increase in demand, interest-bearing and savings deposits Net decrease in time deposits Proceeds of borrowings from other financial institutions Proceeds from exercise of stock options Excess tax benefit from exercise of stock options Cash dividend payments on common stock Net cash (used in) provided by financing activities (Decrease) increase in cash and cash equivalents CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR CASH AND CASH EQUIVALENTS AT END OF YEAR SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash paid during the year for: Interest Income taxes Non-cash investing and financing activities: Transfer of securities from held-to-maturity to available-for-sale Unrealized gain on transfer of securities from held-to-maturity to available-for-sale Transfer of securities from available-for-sale to held-to-maturity Unrealized gain on transfer of securities from available-for-sale to held-to-maturity Foreclosure of loan collateral and recognition of other real estate owned Transfer of loans to other assets Assumption of debt related to foreclosure of other real estate owned Common stock issued in Sierra Vista Bank acquisition The accompanying notes are an integral part of these consolidated financial statements. 14 $ 15,182 $ 10,964 $ (851) 1,320 (1,142) 7,912 284 (30) (5,850) 136 (1,224) (696) 4 - (558) (190) (4,711) 821 2,592 12,999 13,241 (278,664) 167,163 9,257 50,531 (29,930) - (861) - - 928 7 (68,328) 26,372 (25,038) 400 231 30 (2,715) (720) (56,049) 94,617 (270) 1,392 (1,196) 8,024 238 (6) 600 - (1,481) (14) 6 (11) (596) (345) 2,109 (963) (933) 17,518 - (198,851) 93,167 810 53,593 (24,776) 359 (741) (325) (32) 1,365 - (75,431) 90,732 (13,617) - 60 6 (1,979) 75,202 17,289 77,328 $ $ $ $ $ $ $ $ $ $ $ 38,568 $ 94,617 $ 1,053 5,840 23,131 526 - - - 363 - 16,678 $ $ $ $ $ $ $ $ $ $ 1,059 1,865 - - - - 227 - 121 - $ $ $ $ $ $ $ $ $ $ 5,294 (305) 1,355 (1,015) 7,949 173 (7) 7,985 - (904) - 201 (63) (614) - (3,021) 537 (408) 17,157 - (146,468) 79,757 - 52,665 (69,047) 488 (1,328) (900) (292) - 363 (84,762) 50,643 (15,634) - 55 7 (2,190) 32,881 (34,724) 112,052 77,328 1,171 1,360 - - 31,346 163 235 - - - Notes to Consolidated Financial Statements 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES General - Central Valley Community Bancorp (the ‘‘Company’’) was incorporated on February 7, 2000 and subsequently obtained approval from the Board of Governors of the Federal Reserve System to be a bank holding company in connection with its acquisition of Central Valley Community Bank (the ‘‘Bank’’). The Company became the sole shareholder of the Bank on November 15, 2000 in a statutory merger, pursuant to which each outstanding share of the Bank’s common stock was exchanged for one share of common stock of the Company. Service 1st Capital Trust I (the Trust) is a business trust formed by Service 1st for the sole purpose of issuing trust preferred securities. The Company succeeded to all the rights and obligations of Service 1st in connection with the acquisition of Service 1st. The Trust is a wholly-owned subsidiary of the Company. The Bank operates 22 full service offices throughout California’s San Joaquin Valley and Greater Sacramento Region. The Bank’s primary source of revenue is providing loans to customers who are predominately small and middle-market businesses and individuals. The deposits of the Bank are insured by the Federal Deposit Insurance Corporation (FDIC) up to applicable legal limits. Depositors’ accounts at an insured depository institution, including all non-interest bearing transactions accounts, will be insured by the FDIC up to the standard maximum deposit insurance amount of $250,000 for each deposit insurance ownership category. The accounting and reporting policies of Central Valley Community Bancorp and Subsidiary conform with accounting principles generally accepted in the United States of America and prevailing practices within the banking industry. Management has determined that because all of the banking products and services offered by the Company are available in each branch of the Bank, all branches are located within the same economic environment and management does not allocate resources based on the performance of different lending or transaction activities, it is appropriate to aggregate the Bank branches and report them as a single operating segment. No customer accounts for more than 10 percent of revenues for the Company or the Bank. Principles of Consolidation - The consolidated financial statements include the accounts of the Company and the consolidated accounts of its wholly-owned subsidiary, the Bank. lntercompany transactions and balances are eliminated in consolidation. For financial reporting purposes, Service 1st Capital Trust I, is a wholly-owned subsidiary acquired in the merger of Service 1st Bancorp and formed for the exclusive purpose of issuing trust preferred securities. The Company is not considered the primary beneficiary of this trust (variable interest entity), therefore the trust is not consolidated in the Company’s financial statements, but rather the subordinated debentures are shown as a liability on the Company’s consolidated financial statements. The Company’s investment in the common stock of the Trust is included in accrued interest receivable and other assets on the consolidated balance sheet. Use of Estimates - The preparation of these financial statements in accordance with U.S. Generally Accepted Accounting Principles requires management to make estimates and judgments that affect the reported amount of assets, liabilities, revenues and expenses. On an ongoing basis, management evaluates the estimates used. Estimates are based upon historical experience, current economic conditions and other factors that management considers reasonable under the circumstances. These estimates result in judgments regarding the carrying values of assets and liabilities when these values are not readily available from other sources, as well as assessing and identifying the accounting treatments of contingencies and commitments. These estimates and assumptions affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results may differ from these estimates under different assumptions. Cash and Cash Equivalents - For the purpose of the statement of cash flows, cash, due from banks with maturities less than 90 days, interest-earning deposits in other banks, and Federal funds sold are considered to be cash equivalents. Generally, Federal funds are sold and purchased for one-day periods. Net cash flows are reported for customer loan and deposit transactions, interest-bearing deposits in other banks, and Federal funds purchased. Investment Securities - Investments are classified into the following categories: • Available-for-sale securities, reported at fair value, with unrealized gains and losses excluded from earnings and reported, net of taxes, as accumulated other comprehensive income (loss) within shareholders’ equity. • Held-to-maturity securities, which management has the positive intent and ability to hold to maturity, reported at amortized cost, adjusted for the accretion of discounts and amortization of premiums. Management determines the appropriate classification of its investments at the time of purchase and may only change the classification in certain limited circumstances. All transfers between categories are accounted for at fair value in the period which the transfer occurs. For the year ended December 31, 2016 management transferred $23.1 million of securities from held-to-maturity to available-for-sale. During the year ended December 31, 2015, there were no transfers between categories. Due to the 2016 transfer, management is precluded from utilizing the held-to-maturity designation until the second quarter of 2018. Gains or losses on the sale of investment securities are computed on the specific identification method. Interest earned on investment securities is reported in interest income, net of applicable adjustments for accretion of discounts and amortization of premiums. Premiums and discounts on securities are amortized or accreted on the level yield method without anticipating prepayments, except for mortgage backed securities where prepayments are anticipated. An investment security is impaired when its carrying value is greater than its fair value. Investment securities that are impaired are evaluated on at least a quarterly basis and more frequently when economic or market conditions warrant such an evaluation to determine whether such a decline in their fair value is other than temporary. Management utilizes criteria such as the magnitude and duration of the decline and the intent and ability of the Company to retain its investment in the securities for a period of time sufficient to allow for an anticipated recovery in fair value, in addition to the reasons underlying the decline, to determine whether the loss in value is other than temporary. The term ‘‘other than temporary’’ is not intended to indicate that the decline is permanent, but indicates that the prospect for a near-term recovery of value is not necessarily favorable, or that there is a lack of evidence to support a realizable value equal to or greater than the carrying value of the investment. Once a decline in value is determined to be other than temporary, and management does not intend to sell the security or it is more likely than not that the Company will not be required to sell the security before recovery, for debt securities, only the portion of the impairment loss representing credit exposure is recognized as a charge to earnings, with the balance recognized as a charge to other comprehensive income. If management intends to sell the security or it is more likely than not that the Company will be required to sell the security before recovering its forecasted cost, the entire impairment loss is recognized as a charge to earnings. Loans - All loans that management has the intent and ability to hold for the foreseeable future or until maturity or payoff are stated at principal balances outstanding net of deferred loan fees and costs, and the allowance for credit losses. Interest is accrued daily based upon outstanding loan principal balances. However, when a loan becomes impaired and the future collectability of interest and principal is in serious doubt, the loan is placed on nonaccrual status and the accrual of interest income is suspended. Any loan 90 days or more delinquent is automatically placed on nonaccrual status. Any interest accrued but unpaid is charged against income. Subsequent payments on these loans, or payments received on nonaccrual loans for which the ultimate collectability of principal is not in doubt, are applied first to principal until fully collected and then to interest. Interest income on loans is discontinued at the time the loan is 90 days delinquent unless the loan is well-secured and in process of collection. Consumer and credit card loans are typically charged off no later than 90 days past due. Past due status is based on the contractual terms of the loan. In all cases, loans are placed on nonaccrual or charged-off at an earlier date if collection of principal or interest is considered doubtful. A loan placed on non-accrual status may be restored to accrual status when principal and interest are no longer past due and unpaid, or the loan otherwise becomes both well secured and in the process of collection. When a loan is brought current, the Company must also have a reasonable assurance that the obligor has the ability to meet all contractual obligations in the future, that the loan will be repaid within a reasonable period of time, and that a minimum of six months of satisfactory repayment performance has occurred. Substantially all loan origination fees, commitment fees, direct loan origination costs and purchase premiums and discounts on loans are deferred and recognized as an adjustment of yield, and amortized to interest income over the contractual term of the loan. The unamortized balance of deferred fees and costs is reported as a component of net loans. 15 Notes to Consolidated Financial Statements 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Acquired loans and Leases - Loans and leases acquired through purchase or through a business combination are recorded at their fair value at the acquisition date. Credit discounts are included in the determination of fair value; therefore, an allowance for loan and lease losses is not recorded at the acquisition date. Should the Company’s allowance for credit losses methodology indicate that the credit discount associated with acquired, non-purchased credit impaired loans, is no longer sufficient to cover probable losses inherent in those loans, the Company will establish an allowance for those loans through a charge to provision for credit losses. At the time of an acquisition, we evaluate loans to determine if they are purchase credit impaired loans. Purchased credit impaired loans are those acquired loans with evidence of credit deterioration for which it was probable at acquisition that we would be unable to collect all contractual payments. We make this determination by considering past due and/or nonaccrual status, prior designation of a troubled debt restructuring, or other factors that may suggest we will not be able to collect all contractual payments. Purchased credit impaired loans are initially recorded at fair value with the difference between fair value and estimated future cash flows accreted over the expected cash flow period as income only to the extent we can reasonably estimate the timing and amount of future cash flows. In this case, these loans would be classified as accruing. In the event we are unable to reasonably estimate timing and amount of future cash flows, or if the loan is acquired primarily for the rewards of ownership of the underlying collateral, the loan is classified as non-accrual. An acquired loan previously classified by the seller as a troubled debt restructuring is no longer classified as such at the date of acquisition. Past due status is reported based on contractual payment status. All loans not otherwise classified as purchase credit impaired are recorded at fair value with the discount to contractual value accreted over the life of the loan. Allowance for Credit Losses - The allowance for credit losses (the ‘‘allowance’’) is a valuation allowance for probable incurred credit losses in the Company’s loan portfolio. The allowance is established through a provision for credit losses which is charged to expense. Additions to the allowance are made to maintain the adequacy of the total allowance after credit losses and loan growth. Credit exposures determined to be uncollectible are charged against the allowance. Cash received on previously charged off amounts is recorded as a recovery to the allowance. The overall allowance consists of two primary components, specific reserves related to impaired loans and general reserves for inherent losses related to loans that are not impaired. A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect all amounts due, including principal and interest, according to the contractual terms of the original agreement. Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed. Loans determined to be impaired are individually evaluated for impairment. When a loan is impaired, the Company measures impairment based on the present value of expected future cash flows discounted at the loan’s effective interest rate, except that as a practical expedient, it may measure impairment based on a loan’s observable market price, or the fair value of the collateral if the loan is collateral dependent. A loan is collateral dependent if the repayment of the loan is expected to come solely from the sale or operation of underlying collateral. A restructuring of a debt constitutes a troubled debt restructuring (TDR) if the Company for economic or legal reasons related to the debtor’s financial difficulties grants a concession to the debtor that it would not otherwise consider. Restructured workout loans typically present an elevated level of credit risk as the borrowers are not able to perform according to the original contractual terms. Loans that are reported as TDRs are considered impaired and measured for impairment as described above. When determining the allowance for loan losses on acquired loans, we bifurcate the allowance between legacy loans and acquired loans. Loans remain designated as acquired until either (i) loan is renewed or (ii) loan is substantially modified whereby modification results in a new loan. When determining the 16 allowance on acquired loans, the Company estimates probable incurred credit losses as compared to the Company’s recorded investment, with the recorded investment being net of any unaccreted discounts from the acquisition. The determination of the general reserve for loans that are not impaired is based on estimates made by management, including but not limited to, consideration of a simple average of historical losses by portfolio segment (and in certain cases peer loss data) over the most recent 20 quarters, and qualitative factors including economic trends in the Company’s service areas, industry experience and trends, geographic concentrations, estimated collateral values, the Company’s underwriting policies, the character of the loan portfolio, and probable losses inherent in the portfolio taken as a whole. The Company segregates the allowance by portfolio segment. These portfolio segments include commercial, real estate, and consumer loans. The relative significance of risk considerations vary by portfolio segment. For commercial and real estate loans, the primary risk consideration is a borrower’s ability to generate sufficient cash flows to repay their loan. Secondary considerations include the creditworthiness of guarantors and the valuation of collateral. In addition to the creditworthiness of a borrower, the type and location of real estate collateral is an important risk factor for real estate loans. The primary risk considerations for consumer loans are a borrower’s personal cash flow and liquidity, as well as collateral value. The allowance for credit losses attributable to each portfolio segment, which includes both impaired loans and loans that are not impaired, is combined to determine the Company’s overall allowance, which is included on the consolidated balance sheet. Commercial: Commercial and industrial - Commercial and industrial loans are generally underwritten to existing cash flows of operating businesses. Additionally, economic trends influenced by unemployment rates and other key economic indicators are closely correlated to the credit quality of these loans. Past due payments may indicate the borrower’s capacity to repay their obligations may be deteriorating. Agricultural land and production - Loans secured by crop production and livestock are especially vulnerable to two risk factors that are largely outside the control of Company and borrowers: commodity prices and weather conditions. Real Estate: Owner-occupied commercial real estate - Real estate collateral secured by commercial or professional properties with repayment arising from the owner’s business cash flows. To meet this classification, the owner’s operation must occupy no less than 50% of the real estate held. Financial profitability and capacity to meet the cyclical nature of the industry and related real estate market over a significant timeframe is essential. Real estate construction and other land loans - Land and construction loans generally possess a higher inherent risk of loss than other real estate portfolio segments. A major risk arises from the necessity to complete projects within specified costs and time lines. Trends in the construction industry significantly impact the credit quality of these loans, as demand drives construction activity. In addition, trends in real estate values significantly impact the credit quality of these loans, as property values determine the economic viability of construction projects. Agricultural real estate - Agricultural loans secured by real estate generally possess a higher inherent risk of loss caused by changes in concentration of permanent plantings, government subsidies, and the value of the U.S. dollar affecting the export of commodities. Investor commercial real estate - Investor commercial real estate loans generally possess a higher inherent risk of loss than other real estate portfolio segments, except land and construction loans. Adverse economic developments or an overbuilt market impact commercial real estate projects and may result in troubled loans. Trends in vacancy rates of commercial properties impact the credit quality of these loans. High vacancy rates reduce operating revenues and the ability for properties to produce sufficient cash flows to service debt obligations. Notes to Consolidated Financial Statements 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Other real estate - Primarily loans secured by agricultural real estate for development and production of permanent plantings that have not reached maximum yields. Also real estate loans where agricultural vertical integration exists in packing and shipping of commodities. Risk is primarily based on the liquidity of the borrower to sustain payment during the development period. Consumer: Equity loans and lines of credit - The degree of risk in residential real estate lending depends primarily on the loan amount in relation to collateral value, the interest rate and the borrower’s ability to repay in an orderly fashion. These loans generally possess a lower inherent risk of loss than other real estate portfolio segments. Economic trends determined by unemployment rates and other key economic indicators are closely correlated to the credit quality of these loans. Weak economic trends may indicate that the borrowers’ capacity to repay their obligations may be deteriorating. Installment and other consumer loans - An installment loan portfolio is usually comprised of a large number of small loans scheduled to be amortized over a specific period. Most installment loans are made directly for consumer purchases. Other consumer loans include credit card and other open ended unsecured consumer loans. Credit cards and open ended unsecured loans generally have a higher rate of default than all other portfolio segments and are also impacted by weak economic conditions and trends. Credit cards and open ended unsecured loans in homogeneous loan portfolio segments are not evaluated for specific impairment. Although management believes the allowance to be adequate, ultimate losses may vary from its estimates. At least quarterly, the Board of Directors reviews the adequacy of the allowance, including consideration of the relative risks in the portfolio, current economic conditions and other factors. If the Board of Directors and management determine that changes are warranted based on those reviews, the allowance is adjusted. In addition, the Company’s primary regulators, the FDIC and California Department of Business Oversight, as an integral part of their examination process, review the adequacy of the allowance. These regulatory agencies may require additions to the allowance based on their judgment about information available at the time of their examinations. Risk Rating - The Company assigns a risk rating to all loans, and periodically performs detailed reviews of all such loans over a certain threshold to identify credit risks and to assess the overall collectability of the portfolio. The most recent review of risk rating was completed in December 2016. These risk ratings are also subject to examination by independent specialists engaged by the Company, and the Company’s regulators. During these internal reviews, management monitors and analyzes the financial condition of borrowers and guarantors, trends in the industries in which borrowers operate and the fair values of collateral securing these loans. These credit quality indicators are used to assign a risk rating to each individual loan. The risk ratings can be grouped into five major categories, defined as follows: Pass - A pass loan is a strong credit with no existing or known potential weaknesses deserving of management’s close attention. Special Mention - A special mention loan has potential weaknesses that deserve management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or in the Company’s credit position at some future date. Special Mention loans are not adversely classified and do not expose the Company to sufficient risk to warrant adverse classification. Substandard - A substandard loan is not adequately protected by the current sound worth and paying capacity of the borrower or the value of the collateral pledged, if any. Loans classified as substandard have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. Well-defined weaknesses include a project’s lack of marketability, inadequate cash flow or collateral support, failure to complete construction on time, or the project’s failure to fulfill economic expectations. They are characterized by the distinct possibility that the Company will sustain some loss if the deficiencies are not corrected. Doubtful - Loans classified doubtful have all the weaknesses inherent in those classified as substandard with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently known facts, conditions and values, highly questionable and improbable. The possibility of loss is extremely high, but because of certain important and reasonably specific pending factors, which may work to the advantage and strengthening of the asset, its classification as an estimated loss is deferred until its more exact status may be determined. Pending factors include proposed merger, acquisition, or liquidation procedures, capital injection, perfecting liens on additional collateral, and refinancing plans. Doubtful classification is considered temporary and short term. Loss - Loans classified as loss are considered uncollectible and charged off immediately. The general reserve component of the allowance for credit losses also consists of reserve factors that are based on management’s assessment of the following for each portfolio segment: (1) inherent credit risk, (2) historical losses and (3) other qualitative factors including economic trends in the Company’s service areas, industry experience and trends, geographic concentrations, estimated collateral values, the Company’s underwriting policies, the character of the loan portfolio, and probable losses inherent in the portfolio taken as a whole. Inherent credit risk and qualitative reserve factors are inherently subjective and are driven by the repayment risk associated with each class of loans. Bank Premises and Equipment - Land is carried at cost. Bank premises and equipment are carried at cost less accumulated depreciation. Depreciation is determined using the straight-line method over the estimated useful lives of the related assets. The useful lives of Bank premises are estimated to be between twenty and forty years. The useful lives of improvements to Bank premises, furniture, fixtures and equipment are estimated to be three to ten years. Leasehold improvements are amortized over the life of the asset or the term of the related lease, whichever is shorter. When assets are sold or otherwise disposed of, the cost and related accumulated depreciation are removed from the accounts, and any resulting gain or loss is recognized in income for the period. The cost of maintenance and repairs is charged to expense as incurred. The Bank evaluates premises and equipment for financial impairment as events or changes in circumstances indicate that the carrying amount of such assets may not be fully recoverable. Federal Home Loan Bank (FHLB) Stock - The Bank is a member of the FHLB system. Members are required to own a certain amount of stock based on the level of borrowings and other factors, and may invest in additional amounts. FHLB stock is carried at cost, classified as a restricted security, and periodically evaluated for impairment based on ultimate recovery of par value. Both cash and stock dividends are reported as income. Investments in Low Income Housing Tax Credit Funds - The Bank has invested in limited partnerships that were formed to develop and operate affordable housing projects for low or moderate income tenants throughout California. Our ownership in each limited partnership is less than two percent. In accordance with ASU No. 2014-01, Investments—Equity Method and Joint Ventures (Topic 323), we elected to account for the investments in qualified affordable housing tax credit funds using the proportional amortization method. Under the proportional amortization method, the initial cost of the investment is amortized in proportion to the tax credits and other tax benefits received and the net investment performance is recognized as part of income tax expense (benefit). Each of the partnerships must meet the regulatory minimum requirements for affordable housing for a minimum 15-year compliance period to fully utilize the tax credits. If the partnerships cease to qualify during the compliance period, the credit may be denied for any period in which the project is not in compliance and a portion of the credit previously taken is subject to recapture with interest. The investment in Low Income Housing Tax Credit Funds is reported as part of other assets. Other Real Estate Owned - Other real estate owned (OREO) is comprised of property acquired through foreclosure proceedings or acceptance of deeds-in-lieu of foreclosure. Losses recognized at the time of acquiring property in full or partial satisfaction of debt are charged against the allowance for credit losses. OREO, when acquired, is initially recorded at fair value less estimated disposition costs, establishing a new cost basis. Fair value of OREO is generally based on an independent appraisal of the property. Subsequent to initial measurement, OREO 17 Notes to Consolidated Financial Statements 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) is carried at the lower of the recorded investment or fair value less disposition costs. If fair value declines subsequent to foreclosure, a valuation allowance is recorded through noninterest expense. Revenues and expenses associated with OREO are reported as a component of noninterest expense when incurred. Foreclosed Assets - Assets acquired through or instead of loan foreclosure are initially recorded at fair value less costs to sell when acquired, establishing a new cost basis. If fair value declines subsequent to foreclosure, a valuation allowance is recorded through operations. Operating costs after acquisition are expensed. Gains and losses on disposition are included in noninterest expense. The carrying value of foreclosed assets was $362,000 at December 31, 2016, and is included in other assets on the consolidated balance sheets. No foreclosed assets were recorded at December 31, 2015. Bank Owned Life Insurance - The Company has purchased life insurance policies on certain key executives. Company owned life insurance is recorded at the amount that can be realized under the insurance contract at the balance sheet date, which is the cash surrender value adjusted for other charges or other amounts due that are probable at settlement. Business Combinations - The Company accounts for acquisitions of businesses using the acquisition method of accounting. Under the acquisition method, assets and liabilities assumed are recorded at their estimated fair values at the date of acquisition. Management utilizes various valuation techniques included discounted cash flow analyses to determine these fair values. Any excess of the purchase price over amounts allocated to the acquired assets, including identifiable intangible assets, and liabilities assumed is recorded as goodwill. Goodwill - Business combinations involving the Bank’s acquisition of the equity interests or net assets of another enterprise give rise to goodwill. Total goodwill at December 31, 2016 and 2015 represents the excess of the cost of Sierra Vista Bank, Visalia Community Bank, Service 1st Bancorp and Bank of Madera County over the net of the amounts assigned to assets acquired and liabilities assumed in the transactions accounted for under the purchase method of accounting. The value of goodwill is ultimately derived from the Bank’s ability to generate net earnings after the acquisitions. A decline in net earnings could be indicative of a decline in the fair value of goodwill and result in impairment. For that reason, goodwill is assessed at least annually for impairment. The Company has selected September 30 as the date to perform the annual impairment test. Management assessed qualitative factors including performance trends and noted no factors indicating goodwill impairment. Goodwill is also tested for impairment between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of the Company below its carrying amount. No such events or circumstances arose during the fourth quarter of 2016, so goodwill was not required to be retested. Goodwill is the only intangible asset with an indefinite life on our balance sheet. Intangible Assets - The intangible assets at December 31, 2016 represent the estimated fair value of the core deposit relationships acquired in the acquisition of Sierra Vista Bank in 2016, and the 2013 acquisition of Visalia Community Bank. Core deposit intangibles are being amortized using the straight-line method over an estimated life of ten years from the date of acquisition. Management evaluates the remaining useful lives quarterly to determine whether events or circumstances warrant a revision to the remaining periods of amortization. Based on the evaluation, no changes to the remaining useful lives was required. Management performed an annual impairment test on core deposit intangibles as of September 30, 2016 and determined no impairment was necessary. Core deposit intangibles are also tested for impairment between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value below its carrying amount. No such events or circumstances arose during the fourth quarter of 2016, so core deposit intangibles were not required to be retested. Loan Commitments and Related Financial Instruments - Financial instruments include off-balance sheet credit instruments, such as commitments to make loans and commercial letters of credit, issued to meet customer financing needs. The face amount of these items represents the exposure to loss, before considering 18 customer collateral or ability to repay. Such financial instruments are recorded when they are funded. Income Taxes - The Company files its income taxes on a consolidated basis with its Subsidiary. The allocation of income tax expense represents each entity’s proportionate share of the consolidated provision for income taxes. Income tax expense represents the total of the current year income tax due or refundable and the change in deferred tax assets and liabilities. Deferred tax assets and liabilities are recognized for the tax consequences of temporary differences between the reported amounts of assets and liabilities and their tax bases. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment. On the balance sheet, net deferred tax assets are included in accrued interest receivable and other assets. The realization of deferred income tax assets is assessed and a valuation allowance is recorded if it is ‘‘more likely than not’’ that all or a portion of the deferred tax assets will not be realized. ‘‘More likely than not’’ is defined as greater than a 50% chance. All available evidence, both positive and negative is considered to determine whether, based on the weight of that evidence, a valuation allowance is needed. Accounting for Uncertainty in Income Taxes - The Company uses a comprehensive model for recognizing, measuring, presenting and disclosing in the financial statements tax positions taken or expected to be taken on a tax return. A tax position is recognized as a benefit only if it is more likely than not that the tax position would be sustained in a tax examination, with a tax examination being presumed to occur. The amount recognized is the largest amount of tax benefit that is greater than 50% likely of being realized on examination. For tax positions not meeting the more likely than not test, no tax benefit is recorded. Interest expense and penalties associated with unrecognized tax benefits, if any, are classified as income tax expense in the consolidated statement of income. Retirement Plans - Employee 401(k) plan expense is the amount of employer matching contributions. Profit sharing plan expense is the amount of employer contributions. Contributions to the profit sharing plan are determined at the discretion of the Board of Directors. Deferred compensation and supplemental retirement plan expense is allocated over years of service. Earnings Per Common Share - Basic earnings per common share (EPS), which excludes dilution, is computed by dividing income available to common shareholders (net income after deducting dividends, if any, on preferred stock and accretion of discount) by the weighted-average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock, such as stock options or warrants, result in the issuance of common stock which shares in the earnings of the Company. All data with respect to computing earnings per share is retroactively adjusted to reflect stock dividends and splits and the treasury stock method is applied to determine the dilutive effect of stock options in computing diluted EPS. Comprehensive Income - Comprehensive income consists of net income and other comprehensive income. Other comprehensive income includes unrealized gains and losses on securities available for sale which are also recognized as separate components of equity. Loss Contingencies - Loss contingencies, including claims and legal actions arising in the ordinary course of business, are recorded as liabilities when the likelihood of loss is probable and an amount or range of loss can be reasonably estimated. Management does not believe there are such matters that will have a material effect on the financial statements. Restrictions on Cash: - Cash on hand or on deposit with the Federal Reserve Bank was required to meet regulatory reserve and clearing requirements. Share-Based Compensation - Compensation cost is recognized for stock options and restricted stock awards issued to employees, based on the fair value of these awards at the date of grant. A Black-Scholes-Merton model is utilized to estimate the fair value of stock options, while the market price of the Company’s common stock at the date of grant is used for restricted stock awards. Compensation cost is recognized over the required service period, generally defined as the vesting period. For awards with graded vesting, compensation cost Notes to Consolidated Financial Statements 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) is recognized on a straight-line basis over the requisite service period for the entire award. The cash flows from the tax benefits resulting from tax deductions in excess of the compensation cost recognized for those options (excess tax benefits) are classified as cash flows from financing activity in the statement of cash flows. Excess tax benefits for the years ended December 31, 2016, 2015, and 2014 were $30,000, $6,000, and $7,000, respectively. Dividend Restriction: - Banking regulations require maintaining certain capital levels and may limit the dividends paid by the Bank to the Company or by the Company to shareholders. Fair Value of Financial Instruments - Fair values of financial instruments are estimated using relevant market information and other assumptions, as more fully disclosed in Note 3. Fair value estimates involve uncertainties and matters of significant judgment regarding interest rates, credit risk, prepayments, and other factors, especially in the absence of broad markets for particular items. Changes in assumptions or in market conditions could significantly affect these estimates. Recently Issued Accounting Standards: FASB Accounting Standards Update (ASU) 2016-01 - Financial Instruments— Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities, was issued January 2016. ASU 2016-01 addresses certain aspects of recognition, measurement presentation, and disclosure of financial instruments by making targeted improvements to GAAP as follows: (1) require equity investments (except those accounted for under the equity method of accounting or those that result in consolidation of the investee) to be measured at fair value with changes in fair value recognized in net income. However, an entity may choose to measure equity investments that do not have readily determinable fair values at cost minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for the identical or a similar investment of the same issuer; (2) simplify the impairment assessment of equity investments without readily determinable fair values by requiring a qualitative assessment to identify impairment. When a qualitative assessment indicates that impairment exists, an entity is required to measure the investment at fair value; (3) eliminate the requirement to disclose the fair value of financial instruments measured at amortized cost for entities that are not public business entities; (4) eliminate the requirement for public business entities to disclose the method(s) and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost on the balance sheet; (5) require public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes; (6) require an entity to present separately in other comprehensive income the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk when the entity has elected to measure the liability at fair value in accordance with the fair value option for financial instruments; (7) require separate presentation of financial assets and financial liabilities by measurement category and form of financial asset (that is, securities or loans and receivables) on the balance sheet or the accompanying notes to the financial statements; and (8) clarify that an entity should evaluate the need for a valuation allowance on a deferred tax asset related to available-for-sale securities in combination with the entity’s other deferred tax assets. ASU No. 2016-01 is effective for interim and annual reporting periods beginning after December 15, 2017. Early application is permitted as of the beginning of the fiscal year of adoption only for provisions (3) and (6) above. Early adoption of the other provisions mentioned above is not permitted. The Company has performed a preliminary evaluation of the provisions of ASU No. 2016-01. Based on this evaluation, the Company has determined that ASU No. 2016-01 is not expected to have a material impact on the Company’s financial position, results of operations or cash flows. FASB Accounting Standards Update (ASU) 2016-02 - Leases—Overall (Subtopic 845): was issued February 2016. Under the new guidance, lessees will be required to recognize the following for all leases (with the exception of short-term leases): 1) a lease liability, which is the present value of a lessee’s obligation to make lease payments, and 2) a right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term. Lessor accounting under the new guidance remains largely unchanged as it is substantially equivalent to existing guidance for sales-type leases, direct financing leases, and operating leases. Leveraged leases have been eliminated, although lessors can continue to account for existing leveraged leases using the current accounting guidance. Other limited changes were made to align lessor accounting with the lessee accounting model and the new revenue recognition standard. All entities will classify leases to determine how to recognize lease-related revenue and expense. Quantitative and qualitative disclosures will be required by lessees and lessors to meet the objective of enabling users of financial statements to assess the amount, timing, and uncertainty of cash flows arising from leases. The intention is to require enough information to supplement the amounts recorded in the financial statements so that users can understand more about the nature of an entity’s leasing activities. ASU No. 2016-02 is effective for interim and annual reporting periods beginning after December 15, 2018; early adoption is permitted. All entities are required to use a modified retrospective approach for leases that exist or are entered into after the beginning of the earliest comparative period in the financial statements. They have the option to use certain relief; full retrospective application is prohibited. The Company is currently evaluating the provisions of ASU No. 2016-02. The Company has determined that the provisions of ASU No. 2016-02 may result in an increase in assets to recognize the present value of the lease obligations with a corresponding increase in liabilities, however, the Company does not expect this to have a material impact on the Company’s results of operations. FASB Accounting Standards Update (ASU) 2016-09 - Compensation—Stock Compensation (Subtopic 718): Improvements to Employee Share-Based Payment Accounting, was issued March 2016. This ASU includes provisions intended to simplify various aspects related to how share-based payments are accounted for and presented in the financial statements. Some of the key provisions of this new ASU include: (1) companies will no longer record excess tax benefits and certain tax deficiencies in additional paid-in capital (‘‘APIC’’). Instead, they will record all excess tax benefits and tax deficiencies as income tax expense or benefit in the income statement, and APIC pools will be eliminated. The guidance also eliminates the requirement that excess tax benefits be realized before companies can recognize them. In addition, the guidance requires companies to present excess tax benefits as an operating activity on the statement of cash flows rather than as a financing activity; (2) increase the amount an employer can withhold to cover income taxes on awards and still qualify for the exception to liability classification for shares used to satisfy the employer’s statutory income tax withholding obligation. The new guidance will also require an employer to classify the cash paid to a tax authority when shares are withheld to satisfy its statutory income tax withholding obligation as a financing activity on its statement of cash flows (current guidance did not specify how these cash flows should be classified); and (3) permit companies to make an accounting policy election for the impact of forfeitures on the recognition of expense for share- based payment awards. Forfeitures can be estimated, as required today, or recognized when they occur. ASU No. 2016-09 is effective for interim and annual reporting periods beginning after December 15, 2016. Early adoption was permitted, but all of the guidance must be adopted in the same period. The Company has evaluated the provisions of ASU No. 2016-09 to determine the potential impact of the new standard and has determined that it is not expected to have a material impact on the Company’s financial position, results of operations or cash flows. FASB Accounting Standards Update (ASU) 2016-13 - Measurement of Credit Losses on Financial Instruments (Subtopic 326): Financial Instruments—Credit Losses was issued June 2016. This ASU significantly changes how entities will measure credit losses for most financial assets and certain other instruments that aren’t measured at fair value through net income. In issuing the standard, the FASB is responding to criticism that today’s guidance delays recognition of credit losses. The standard will replace today’s ‘‘incurred loss’’ approach with an ‘‘expected loss’’ model. The new model, referred to as the current expected credit loss (‘‘CECL’’) model, will apply to: (1) financial assets subject to credit losses and measured at amortized cost, and (2) certain off-balance sheet credit exposures. This includes, but is not limited to, loans, leases, held-to-maturity securities, loan commitments, and financial guarantees. The CECL model does not apply to available-for-sale (‘‘AFS’’) debt securities. For AFS debt securities with unrealized losses, entities will measure credit losses in a manner similar to what they do today, except that the losses will be recognized as allowances rather than reductions in the amortized cost of the securities. As a result, entities will recognize improvements 19 Notes to Consolidated Financial Statements 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) to estimated credit losses immediately in earnings rather than as interest income over time, as they do today. The ASU also simplifies the accounting model for purchased credit-impaired debt securities and loans. ASU 2016-13 also expands the disclosure requirements regarding an entity’s assumptions, models, and methods for estimating the allowance for loan and lease losses. In addition, entities will need to disclose the amortized cost balance for each class of financial asset by credit quality indicator, disaggregated by the year of origination. ASU No. 2016-13 is effective for interim and annual reporting periods beginning after December 15, 2019; early adoption is permitted for interim and annual reporting periods beginning after December 15, 2018. Entities will apply the standard’s provisions as a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is effective (i.e., modified retrospective approach). While the Company is currently evaluating the provisions of ASU No. 2016-13 to determine the potential impact the new standard will have on the Company’s Consolidated Financial Statements, it has taken steps to prepare for the implementation when it becomes effective, such as forming an internal task force, gathering pertinent data, consulting with outside professionals, and evaluating its current IT systems. 2. ACQUISITION OF SIERRA VISTA BANK Effective October 1, 2016, the Company acquired Sierra Vista Bank, headquartered in Folsom, California, wherein Sierra Vista Bank, with one branch in Folsom, one branch in Fair Oaks, and one branch in Cameron Park, merged with and into Central Valley Community Bancorp’s subsidiary, Central Valley Community Bank, in a combined cash and stock transaction. Sierra Vista Bank’s assets (unaudited) as of October 1, 2016 totaled approximately $155.154 million. The acquired assets and liabilities were recorded at fair value at the date of acquisition. Under the terms of the merger agreement, the Company issued an aggregate of approximately 1.059 million shares of its common stock and cash totaling approximately $9.469 million to the former shareholders of Sierra Vista Bank. In accordance with GAAP guidance for business combinations, the Company recorded $10.314 million of goodwill and $508,000 of other intangible assets on the acquisition date. The other intangible assets are primarily related to core deposits and are being amortized using a straight-line method over a period of ten years with no significant residual value. For tax purposes, purchase accounting adjustments including goodwill are all non-taxable and/or non-deductible. Acquisition related costs of $1,782,000 are included in the income statement for the year ended December 31, 2016. The acquisition was consistent with the Company’s strategy to build a regional presence in Central California. The acquisition offers the Company the opportunity to increase profitability by introducing existing products and services to the acquired customer base as well as add new customers in the expanded region. Goodwill arising from the acquisition consisted largely of synergies and the cost savings resulting from the combined operations. The following table summarizes the consideration paid for Sierra Vista Bank and the amounts of the assets acquired and liabilities assumed recognized at the acquisition date (in thousands): Merger consideration: Cash Common stock issued Fair Value of Total Consideration Transferred Recognized amounts of identifiable assets acquired and liabilities assumed: Cash and cash equivalents Loans, net Core deposit intangible Premises and equipment Federal Home Loan Bank stock Deferred taxes and taxes receivable Bank owned life insurance Other assets Total assets acquired Deposits Deposit premium Other liabilities Total liabilities assumed Total identifiable net assets Goodwill $ 9,468 16,793 $ 26,261 $ 22,709 122,533 508 586 771 4,417 2,664 966 155,154 138,236 142 829 139,207 15,947 $ 10,314 The fair value of net assets acquired includes fair value adjustments to certain loans that were not considered impaired as of the acquisition date. The fair value adjustments were determined using discounted contractual cash flows. As such, these loans were not considered impaired at the acquisition date and were not subject to the guidance relating to purchased credit impaired loans, which have shown evidence of credit deterioration since origination. Loans acquired that were not subject to these requirements include non-impaired loans and customer receivables with a fair value and gross contractual amounts receivable of $121,902,000 and $124,396,000, respectively, on the date of acquisition. See Note 5 for discussion of purchased credit impaired loans. Pro Forma Results of Operations The accompanying consolidated financial statements include the accounts of Sierra Vista Bank since October 1, 2016. The following table presents pro forma results of operations information for the periods presented as if the acquisition had occurred on January 1, 2015 after giving effect to certain adjustments. The unaudited pro forma results of operations for the years ended December 31, 2016 and 2015 include the historical accounts of the Company and Sierra Vista Bank and pro forma adjustments as may be required, including the amortization of intangibles with definite lives and the amortization or accretion of any premiums or discounts arising from fair value adjustments for assets acquired and liabilities assumed. The pro forma information is intended for informational purposes only and is not necessarily indicative of the Company’s future operating results or operating results that would have occurred had the acquisition been completed at the beginning of 2015. No assumptions have been applied to the 20 Notes to Consolidated Financial Statements 2. ACQUISITION OF SIERRA VISTA BANK (Continued) The estimated carrying and fair values of the Company’s financial instruments pro forma results of operations regarding possible revenue enhancements, expense efficiencies or asset dispositions. (In thousands, except per-share amounts): Net interest income Provision for credit losses Non-interest income Non-interest expense Income before provision for income taxes Provision for income taxes Net income For the Years Ended December 31, 2016 2015 $50,491 (5,750) 9,930 47,350 18,821 5,817 $46,499 645 9,912 40,971 14,795 3,101 $13,004 $11,694 Net income available to common shareholders $13,004 $11,694 Basic earnings per common share Diluted earnings per common share $ $ 1.15 1.14 $ $ 1.07 1.06 3. FAIR VALUE MEASUREMENTS Fair Value Hierarchy Fair value is the exchange price that would be received for an asset or paid to transfer a liability (exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. In accordance with applicable guidance, the Company groups its assets and liabilities measured at fair value in three levels, based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value. Valuations within these levels are based upon: Level - 1 Quoted market prices (unadjusted) for identical instruments traded in active exchange markets that the Company has the ability to access as of the measurement date. Level - 2 Quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques for which all significant assumptions are observable or can be corroborated by observable market data. Level - 3 Model-based techniques that use at least one significant assumption not observable in the market. These unobservable assumptions reflect the Company’s estimates of assumptions that market participants would use on pricing the asset or liability. Valuation techniques include management judgment and estimation which may be significant. Management monitors the availability of observable market data to assess the appropriate classification of financial instruments within the fair value hierarchy. Changes in economic conditions or model-based valuation techniques may require the transfer of financial instruments from one fair value level to another. In such instances, we report the transfer at the beginning of the reporting period. are as follows (in thousands): December 31, 2016 Fair Value Level 1 Level 2 Level 3 Total Carrying Amount Financial assets: Cash and due from banks $ 28,185 $ 28,185 $ - $ - $ 28,185 Interest-earning deposits in other banks Federal funds sold Available-for-sale investment securities Loans, net Federal Home Loan Bank stock Accrued interest receivable Financial liabilities: Deposits Short-term borrowings Junior subordinated deferrable interest debentures Accrued interest payable Financial assets: Cash and due from banks Interest-earning deposits in other banks Federal funds sold Available-for-sale 10,368 15 10,368 15 - - - - 10,368 15 547,749 747,302 7,416 - 540,333 - - 761,023 547,749 761,023 5,594 7,885 N/A N/A N/A N/A 26 4,517 3,342 7,885 1,255,979 1,099,200 - 400 156,711 400 - 1,255,911 400 - 5,155 144 - - - 3,235 3,235 111 33 144 December 31, 2015 Fair Value Level 1 Level 2 Level 3 Total Carrying Amount $ 23,339 $ 23,339 $ - $ - $ 23,339 70,988 290 70,988 290 - - - - - 70,988 290 477,554 investment securities 477,554 7,536 470,018 Held-to-maturity investment securities Loans, net Federal Home Loan Bank stock Accrued interest receivable Financial liabilities: Deposits Junior subordinated deferrable interest debentures Accrued interest payable 31,712 588,501 - - 35,142 - - 585,737 35,142 585,737 4,823 N/A N/A N/A N/A 6,355 27 3,414 2,914 6,355 1,116,267 976,433 139,353 - 1,115,786 5,155 101 - - - 76 3,200 3,200 25 101 These estimates do not reflect any premium or discount that could result from offering the Company’s entire holdings of a particular financial instrument for sale at one time, nor do they attempt to estimate the value of anticipated future business related to the instruments. In addition, the tax ramifications related to the realization of unrealized gains and losses can have a significant effect on fair value estimates and have not been considered in any of these estimates. 21 Notes to Consolidated Financial Statements 3. FAIR VALUE MEASUREMENTS (Continued) These estimates are made at a specific point in time based on relevant market data and information about the financial instruments. Because no market exists for a significant portion of the Company’s financial instruments, fair value estimates are based on judgments regarding current economic conditions, risk characteristics of various financial instruments and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions could significantly affect the fair values presented. The methods and assumptions used to estimate fair values are described as follows: (a) Cash and Cash Equivalents - The carrying amounts of cash and due from banks, interest-earning deposits in other banks, and Federal funds sold approximate fair values and are classified as Level 1. (b) Investment Securities - Investment securities in Level 1 are mutual funds and fair values are based on quoted market prices for identical instruments traded in active markets. Fair values for investment securities classified in Level 2 are based on quoted market prices for similar securities in active markets. For securities where quoted prices or market prices of similar securities are not available, fair values are calculated using discounted cash flows or other market indicators. (c) Loans - Fair values of loans are estimated as follows: For variable rate loans that reprice frequently and with no significant change in credit risk, fair values are based on carrying values resulting in a Level 3 classification. Purchased credit impaired (PCI) loans are measured at estimated fair value on the date of acquisition. Carrying value is calculated as the present value of expected cash flows and approximates fair value. Fair values for other loans are estimated using discounted cash flow analyses, using interest rates currently being offered for loans with similar terms to borrowers of similar credit quality resulting in a Level 3 classification. Impaired loans are initially valued at the lower of cost or fair value. Impaired loans carried at fair value generally receive specific allocations of the allowance for credit losses. For collateral dependent loans, fair value is commonly based on recent real estate appraisals. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. Adjustments are routinely made in the appraisal process by the independent appraisers to adjust for differences between the comparable sales and income data available. Such adjustments are usually significant and typically result in a Level 3 classification of the inputs for determining fair value. Non-real estate collateral may be valued using an appraisal, net book value per the borrower’s financial statements, or aging reports, adjusted or discounted based on management’s historical knowledge, changes in market conditions from the time of the valuation, and management’s expertise and knowledge of the client and client’s business, resulting in a Level 3 fair value classification. Impaired loans are evaluated on a quarterly basis for additional impairment and adjusted accordingly. The methods utilized to estimate the fair value of loans do not necessarily represent an exit price. (d) FHLB Stock - It is not practicable to determine the fair value of FHLB stock due to restrictions placed on its transferability. e) Other real estate owned - OREO is measured at fair value less estimated costs to sell when acquired, establishing a new cost basis. Fair value is commonly based on recent real estate appraisals. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. Adjustments are routinely made in the appraisal process to adjust for differences between the comparable sales and income data available. The Company records OREO as non-recurring with level 3 measurement inputs. (f) Deposits - Fair value of demand deposit, savings, and money market accounts are, by definition, equal to the amount payable on demand at the reporting date (i.e., their carrying amount) resulting in a Level 1 classification. Fair value for fixed and variable rate certificates of deposit are estimated using discounted cash flow analyses using interest rates offered at each reporting date by the Company for certificates with similar remaining maturities resulting in a Level 2 classification. (g) Short-Term Borrowings - The carrying amounts of federal funds purchased, borrowings under repurchase agreements, and other short-term borrowings, 22 generally maturing within ninety days, approximate their fair values resulting in a Level 2 classification. (h) Other Borrowings - The fair values of the Company’s long-term borrowings are estimated using discounted cash flow analyses based on the current borrowing rates for similar types of borrowing arrangements resulting in a Level 2 classification. The fair values of the Company’s Subordinated Debentures are estimated using discounted cash flow analyses based on the current borrowing rates for similar types of borrowing arrangements resulting in a Level 3 classification. (i) Accrued Interest Receivable/Payable - The fair value of accrued interest receivable and payable is based on the fair value hierarchy of the related asset or liability. (j) Off-Balance Sheet Instruments - Fair values for off-balance sheet, credit-related financial instruments are based on fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the counterparties’ credit standing. The fair value of commitments is not material. Assets Recorded at Fair Value The following tables present information about the Company’s assets and liabilities measured at fair value on a recurring and non-recurring basis as of December 31, 2016: Recurring Basis The Company is required or permitted to record the following assets at fair value on a recurring basis under other accounting pronouncements (in thousands): Fair Value Level 1 Level 2 Level 3 Available-for-sale investment securities Debt Securities: U.S. Government agencies $ Obligations of states and political subdivisions U.S. Government sponsored entities and agencies collateralized by residential mortgage obligations Private label residential mortgage backed securities Other equity securities Total assets measured at fair value on a recurring basis 68,970 $ - $ 68,970 $ 290,299 178,221 - - 290,299 178,221 2,843 7,416 - 7,416 2,843 - $ 547,749 $ 7,416 $ 540,333 $ - - - - - - Securities in Level 1 are mutual funds and fair values are based on quoted market prices for identical instruments traded in active markets. Fair values for available-for-sale investment securities in Level 2 are based on quoted market prices for similar securities in active markets. For securities where quoted prices or market prices of similar securities are not available, fair values are calculated using discounted cash flows or other market indicators. Management evaluates the significance of transfers between levels based upon the nature of the financial instrument and size of the transfer relative to total assets, total liabilities or total earnings. During the year ended December 31, 2016, no transfers between levels occurred. There were no Level 3 assets measured at fair value on a recurring basis at December 31, 2016. Also there were no liabilities measured at fair value on a recurring basis at December 31, 2016. Notes to Consolidated Financial Statements 3. FAIR VALUE MEASUREMENTS (Continued) Non-recurring Basis The following two tables present information about the Company’s assets and liabilities measured at fair value on a recurring and nonrecurring basis as of December 31, 2015: The Company may be required, from time to time, to measure certain assets and liabilities at fair value on a non-recurring basis. These include the following assets and liabilities that are measured at the lower of cost or fair value that were recognized at fair value which was below cost at December 31, 2016 (in thousands): Recurring Basis The Company is required or permitted to record the following assets at fair value on a recurring basis under other accounting pronouncements (in thousands): Fair Value Level 1 Level 2 Level 3 Fair Value Level 1 Level 2 Level 3 Impaired loans: Consumer: Equity loans and lines of credit $ 47 $ - $ - $ Total impaired loans Other repossessed assets 47 362 - - - - 47 47 362 Total assets measured at fair value on a non-recurring basis $ 409 $ - $ - $ 409 At the time a loan is considered impaired, it is valued at the lower of cost or fair value. Impaired loans carried at fair value generally receive specific allocations of the allowance for credit losses. For collateral dependent loans, fair value is commonly based on recent real estate appraisals. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. Adjustments are routinely made in the appraisal process by the independent appraisers to adjust for differences between the comparable sales and income data available. Such adjustments are usually significant and typically result in a Level 3 classification of the inputs for determining fair value. Non-real estate collateral may be valued using an appraisal, net book value per the borrower’s financial statements, or aging reports, adjusted or discounted based on management’s historical knowledge, changes in market conditions from the time of the valuation, and management’s expertise and knowledge of the client and client’s business, resulting in a Level 3 fair value classification. The fair value of impaired loans is based on the fair value of the collateral. Impaired loans were determined to be collateral dependent and categorized as Level 3 due to ongoing real estate market conditions resulting in inactive market data, which in turn required the use of unobservable inputs and assumptions in fair value measurements. Impaired loans evaluated under the discounted cash flow method are excluded from the table above. The discounted cash flow method as prescribed by ASC 310 is not a fair value measurement since the discount rate utilized is the loan’s effective interest rate which is not a market rate. There were no changes in valuation techniques used during the year ended December 31, 2016. Appraisals for collateral-dependent impaired loans are performed by certified general appraisers (for commercial properties) or certified residential appraisers (for residential properties) whose qualifications and licenses have been reviewed and verified by the Company. Once received, the assumptions and approaches utilized in the appraisal as well as the overall resulting fair value is compared with independent data sources such as recent market data or industry-wide statistics. Impaired loans that are measured for impairment using the fair value of the collateral for collateral dependent loans, had a principal balance of $62,000 with a valuation allowance of $15,000 at December 31, 2016, and a resulting fair value of $47,000. The valuation allowance represents specific allocations for the allowance for credit losses for impaired loans. During the year ended December 31, 2016 specific allocation for the allowance for credit losses related to loans carried at fair value was $15,000, compared to none during the year ended December 31, 2015. There were no net charge-offs related to loans carried at fair value at December 31, 2016 and 2015. There were no liabilities measured at fair value on a non-recurring basis at December 31, 2016. Available-for-sale securities Debt Securities: U.S. Government agencies $ Obligations of states and political subdivisions U.S. Government sponsored entities and agencies collateralized by residential mortgage obligations Private label residential mortgage backed securities Other equity securities 52,901 $ - $ 52,901 $ 188,268 225,259 - - 188,268 225,259 3,590 7,536 - 7,536 3,590 - Total assets measured at fair value on a recurring basis $ 477,554 $ 7,536 $ 470,018 $ - - - - - - Securities in Level 1 are mutual funds and fair values are based on quoted market prices for identical instruments traded in active markets. Fair values for available-for-sale investment securities in Level 2 are based on quoted market prices for similar securities in active markets. For securities where quoted prices or market prices of similar securities are not available, fair values are calculated using discounted cash flows or other market indicators. There were no Level 3 assets measured at fair value on a recurring basis at December 31, 2015. Also there were no liabilities measured at fair value on a recurring basis at December 31, 2015. Non-recurring Basis The Company may be required, from time to time, to measure certain assets and liabilities at fair value on a non-recurring basis. These include the following assets and liabilities that are measured at the lower of cost or fair value that were recognized at fair value which was below cost at December 31, 2015 (in thousands): Fair Value Level 1 Level 2 Level 3 Impaired loans: Consumer: Equity loans and lines of credit Total consumer 132 132 - - - - Total impaired loans $ 132 $ - $ - $ 132 132 132 Total assets measured at fair value on a non-recurring basis $ 132 $ - $ - $ 132 At the time a loan is considered impaired, it is valued at the lower of cost or fair value. Impaired loans carried at fair value generally receive specific allocations 23 Notes to Consolidated Financial Statements 3. FAIR VALUE MEASUREMENTS (Continued) of the allowance for credit losses. For collateral dependent real estate loans, fair value is commonly based on recent real estate appraisals. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. Adjustments are routinely made in the appraisal process by the independent appraisers to adjust for differences between the comparable sales and income data available. Such adjustments are usually significant and typically result in a Level 3 classification of the inputs for determining fair value. Non-real estate collateral may be valued using an appraisal, net book value per the borrower’s financial statements, or aging reports, adjusted or discounted based on management’s historical knowledge, changes in market conditions from the time of the valuation, and management’s expertise and knowledge of the client and client’s business, resulting in a Level 3 fair value classification. The fair value of impaired loans is based on the fair value of the collateral. Impaired loans were determined to be collateral dependent and categorized as Level 3 due to ongoing real estate market conditions resulting in inactive market data, which in turn required the use of unobservable inputs and assumptions in fair value measurements. Impaired loans evaluated under the discounted cash flow method are excluded from the table above. The discounted cash flow method as prescribed by ASC Topic 310 is not a fair value measurement since the discount rate utilized is the loan’s effective interest rate which is not a market rate. There were no changes in valuation techniques used during the year ended December 31, 2015. Appraisals for collateral-dependent impaired loans are performed by certified general appraisers (for commercial properties) or certified residential appraisers (for residential properties) whose qualifications and licenses have been reviewed and verified by the Company. Once received, the assumptions and approaches utilized in the appraisal as well as the overall resulting fair value is compared with independent data sources such as recent market data or industry-wide statistics. Impaired loans that are measured for impairment using the fair value of the collateral for collateral dependent loans had a principal balance of $166,000 with a valuation allowance of $34,000 at December 31, 2015, and a resulting fair value of $132,000. The valuation allowance represents specific allocations for the allowance for credit losses for impaired loans. During the year ended December 31, 2015, there was no provision for credit losses related to loans carried at fair value. During the year ended December 31, 2015, there was no net charge-offs related to loans carried at fair value. There were no liabilities measured at fair value on a non-recurring basis at December 31, 2015 4. INVESTMENT SECURITIES The fair value of the available-for-sale investment portfolio reflected an unrealized loss of $891,000 at December 31, 2016 compared to an unrealized gain of $7,474,000 at December 31, 2015. The unrealized (loss)/gain recorded is net of $(375,000) and $3,076,000 in tax (benefits) liabilities as accumulated other comprehensive income within shareholders’ equity at December 31, 2016 and 2015, respectively. 24 The following tables set forth the carrying values and estimated fair values of our investment securities portfolio at the dates indicated (in thousands): December 31, 2016 Gross Amortized Unrealized Unrealized Gains Losses Gross Cost Estimated Fair Value Available-for-Sale Securities Debt Securities: U.S. Government agencies $ Obligations of states and political subdivisions U.S. Government sponsored entities and agencies collateralized by residential mortgage obligations Private label residential mortgage backed securities Other equity securities 69,005 $ 242 $ (277) $ 68,970 288,543 6,109 (4,353) 290,299 181,785 484 (4,048) 178,221 1,807 7,500 1,036 - - (84) 2,843 7,416 $ 548,640 $ 7,871 $ (8,762) $ 547,749 December 31, 2015 Gross Amortized Unrealized Unrealized Gains Losses Gross Cost Estimated Fair Value Available-for-Sale Securities Debt Securities: U.S. Government agencies $ Obligations of states and political subdivisions U.S. Government sponsored entities and agencies collateralized by residential mortgage obligations Private label residential mortgage backed securities Other equity securities 52,803 $ 315 $ (217) $ 52,901 181,785 6,779 (296) 188,268 225,636 1,042 (1,419) 225,259 2,356 7,500 1,234 36 - - 3,590 7,536 $ 470,080 $ 9,406 $ (1,932) $ 477,554 December 31, 2015 Gross Amortized Unrealized Unrealized Gains Losses Gross Cost Estimated Fair Value Held-to-Maturity Securities Debt securities: Obligations of states and political subdivisions $ 31,712 $ 3,431 $ (1) $ 35,142 Notes to Consolidated Financial Statements 4. INVESTMENT SECURITIES (Continued) During 2014, to better manage our interest rate risk, the Company transferred from available-for-sale to held-to-maturity selected municipal securities in our portfolio having a book value of approximately $31 million, a market value of approximately $32 million, and a net unrecognized gain of approximately $163,000. This transfer was completed after careful consideration of our intent and ability to hold these securities to maturity. During the first quarter of 2016, management sold certain investment securities of which management identified that five of the 13 securities sold were previously designated as held-to-maturity (HTM). Through an oversight during the portfolio restructuring analysis related to this transaction, management unintentionally sold these five HTM securities. The book value of the HTM securities sold was $8.5 million. The gain realized on the sale of the HTM securities was $696,000. As such, management was required to reclassify the remaining HTM securities with a fair value of $23.1 million to the AFS designation. At December 31, 2016 and December 31, 2015 the remaining unaccreted balance of these HTM securities associated with the original transfer from AFS to HTM and included in accumulated other comprehensive income was $0 and $64,000, respectively. Proceeds and gross realized gains (losses) on investment securities for the years ended December 31, 2016, 2015, and 2014 are shown below (in thousands): December 31, 2015 Less than 12 Months 12 Months or More Total Fair Value Unrealized Losses Fair Value Unrealized Losses Fair Value Unrealized Losses Available-for-Sale Securities Debt Securities: U.S. Government agencies $ 21,348 $ Obligations of states and political subdivisions 40,016 (125) $ 3,954 $ (92) $ 25,302 $ (217) (296) - - 40,016 (296) U.S. Government sponsored entities and agencies collateralized by residential mortgage obligations 124,688 (1,109) 16,234 (310) 140,922 (1,419) $ 186,052 $ (1,530) $ 20,188 $ (402) $ 206,240 $ (1,932) December 31, 2015 Less than 12 Months 12 Months or More Total Fair Value Unrealized Losses Fair Value Unrealized Losses Fair Value Unrealized Losses Years Ended December 31, 2016 2015 2014 Held-to-Maturity Securities Debt Securities: Obligations of states Available-for-Sale Securities Proceeds from sales or calls Gross realized gains from sales or calls Gross realized losses from sales or calls Held-to-Maturity Securities Proceeds from sales and calls Gross realized gains from sales or calls $ $ 167,163 2,223 $ $ (999) $ $ $ 93,167 1,715 $ (234) $ 79,757 1,754 (850) $ $ 9,257 696 $ $ 810 14 $ $ - - Losses recognized in 2016, 2015, and 2014 were incurred in order to reposition the investment securities portfolio based on the current rate environment. The securities which were sold at a loss were acquired when the rate environment was not as volatile. The securities which were sold were primarily purchased several years ago to serve a purpose in the rate environment in which the securities were purchased. The Company addressed risks in the security portfolio by selling these securities and using the proceeds to purchase securities that fit with the Company’s current risk profile. The provision (benefit) for income taxes includes $515,000, $615,000, and $372,000 income tax impact from the reclassification of unrealized net gains on available-for-sale securities to realized net gains on available-for-sale securities for the years ended December 31, 2016, 2015, and 2014, respectively. Investment securities with unrealized losses at December 31, 2016 and 2015 are summarized and classified according to the duration of the loss period as follows (in thousands): December 31, 2016 Less than 12 Months 12 Months or More Total Fair Value Unrealized Losses Fair Value Unrealized Losses Fair Value Unrealized Losses Available-for-Sale Securities Debt Securities: U.S. Government agencies $ 34,586 $ Obligations of states and political subdivisions 122,522 (198) $ 10,438 $ (79) $ 45,024 $ (277) (4,353) - - 122,522 (4,353) U.S. Government sponsored entities and agencies collateralized by residential mortgage obligations Other equity securities 118,719 7,416 (3,866) (84) 7,666 - (182) - 126,385 7,416 (4,048) (84) $ 283,243 $ (8,501) $ 18,104 $ (261) $ 301,347 $ (8,762) and political subdivisions $ 1,053 $ (1) $ - $ - $ 1,053 $ (1) We periodically evaluate each investment security for other-than-temporary impairment, relying primarily on industry analyst reports, observation of market conditions and interest rate fluctuations. The portion of the impairment that is attributable to a shortage in the present value of expected future cash flows relative to the amortized cost should be recorded as a current period charge to earnings. The discount rate in this analysis is the original yield expected at time of purchase. As of December 31, 2016, the Company performed an analysis of the investment portfolio to determine whether any of the investments held in the portfolio had an other-than-temporary impairment (OTTI). Management evaluated all investment securities with an unrealized loss at December 31, 2016, and identified those that had an unrealized loss for at least a consecutive 12 month period, which had an unrealized loss at December 31, 2016 greater than 10% of the recorded book value on that date, or which had an unrealized loss of more than $10,000. Management also analyzed any securities that may have been downgraded by credit rating agencies. For those bonds that met the evaluation criteria, management obtained and reviewed the most recently published national credit ratings for those bonds. For those bonds that were obligations of states and political subdivisions with an investment grade rating by the rating agencies, management also evaluated the financial condition of the municipality and any applicable municipal bond insurance provider and concluded during March 2016 that a $136,000 credit related impairment related to one security with a fair value of $2,995,000 and a pre-impairment amortized cost of $3,131,000 existed. The Company recorded an other-than-temporary impairment loss of $136,000 during the twelve months ended December 31, 2016. There were no OTTI losses recorded during the twelve months ended December 31, 2015. U.S. Government Agencies - At December 31, 2016, the Company held 21 U.S. Government agency securities of which seven were in a loss position for less than 12 months and four were in a loss position and had been in a loss position for 12 months or more. The unrealized losses on the Company’s investments in U.S. Government Agencies were caused by interest rate changes. The contractual terms of those investments do not permit the issuer to settle the securities at a price less than the amortized costs of the investment. Because the decline in market value is attributable to changes in interest rates and not credit quality, and because the Company does not intend to sell, and it is more likely than not that it will not be required to sell those investments until a recovery of fair value, which may be maturity, the Company does not consider those investments to be other-than-temporarily impaired at December 31, 2016. 25 Notes to Consolidated Financial Statements 4. INVESTMENT SECURITIES (Continued) Obligations of States and Political Subdivisions - At December 31, 2016, the Company held 172 obligations of states and political subdivision securities of which 57 were in a loss position for less than 12 months and none were in a loss position or had been in a loss position for 12 months or more. The unrealized losses on the Company’s investments in obligations of states and political subdivision securities were caused by interest rate changes. Because the decline in market value is attributable to changes in interest rates and not credit quality, and because the Company does not intend to sell, and it is more likely than not that it will not be required to sell those investments until a recovery of fair value, which may be maturity, the Company does not consider those investments to be other-than-temporarily impaired at December 31, 2016. U.S. Government Sponsored Entities and Agencies Collateralized by Residential Mortgage Obligations - At December 31, 2016, the Company held 147 U.S. Government sponsored entity and agency securities collateralized by residential mortgage obligation securities of which 34 were in a loss position for less than 12 months and nine in a loss position for more than 12 months. The unrealized losses on the Company’s investments in U.S. Government sponsored entity and agencies collateralized by residential mortgage obligations were caused by interest rate changes. The contractual cash flows of those investments are guaranteed or supported by an agency or sponsored entity of the U.S. Government. Accordingly, it is expected that the securities would not be settled at a price less than the amortized cost of the Company’s investment. Because the decline in market value is attributable to changes in interest rates and not credit quality, and because the Company does not intend to sell, and it is more likely than not that it will not be required to sell those investments until a recovery of fair value, which may be maturity, the Company does not consider those investments to be other-than-temporarily impaired at December 31, 2016. Private Label Residential Mortgage Backed Securities - At December 31, 2016, the Company had a total of 16 PLRMBS with a remaining principal balance of $1,807,000 and a gross and net unrealized gain of approximately $1,036,000. None of these securities had an unrealized loss at December 31, 2016. Twelve of these PLRMBS with a remaining principal balance of $2,707,000 had credit ratings below investment grade. The Company continues to monitor these securities for changes in credit ratings or other indications of credit deterioration. The following table provides a rollforward for the years ended December 31, 2016 and 2015 of investment securities credit losses recorded in earnings (in thousands). The beginning balance represents the credit loss component for which OTTI occurred on debt securities in prior periods. Additions represent the first time a debt security was credit impaired or when subsequent credit impairments have occurred on securities for which OTTI credit losses have been previously recognized. Years ended December 31, Beginning balance of credit losses recognized Amounts related to credit loss for which an OTTI charge was not previously recognized Realized losses for securities sold Ending balance of credit losses recognized $ $ 747 $ 747 136 (9) - - 874 $ 747 The amortized cost and estimated fair value of investment securities at December 31, 2016 and 2015 by contractual maturity are shown in the two tables below (in thousands). Expected maturities will differ from contractual maturities because the issuers of the securities may have the right to call or prepay obligations with or without call or prepayment penalties. 26 2016 2015 Consumer: December 31, 2016 December 31, 2015 Available-for-Sale Held-to-Maturity Available-for-Sale Amortized Estimated Amortized Estimated Amortized Estimated Fair Value Fair Value Fair Value Cost Cost Cost Within one year After one year through five years After five years through ten years After ten years $ - $ - $ 15,145 35,667 237,731 15,484 35,614 239,201 - $ - - 31,712 - $ - - 35,142 - $ 12,297 37,376 132,112 - 12,695 38,397 137,176 288,543 290,299 31,712 35,142 181,785 188,268 Investment securities not due at a single maturity date: U.S. Government agencies U.S. Government sponsored entities and agencies collateralized by residential mortgage obligations Private label residential mortgage backed securities Other equity securities 69,005 68,970 181,785 178,221 1,807 7,500 2,843 7,416 - - - - - - - - 52,803 52,901 225,636 225,259 2,356 7,500 3,590 7,536 $ 548,640 $ 547,749 $ 31,712 $ 35,142 $ 470,080 $ 477,554 Investment securities with amortized costs totaling $86,418,000 and $116,268,000 and fair values totaling $88,903,000 and $119,773,000 were pledged as collateral for borrowing arrangements, public funds and for other purposes at December 31, 2016 and 2015, respectively. 5. LOANS AND ALLOWANCE FOR CREDIT LOSSES Outstanding loans are summarized as follows (in thousands): Loan Type Commercial: Commercial and industrial Agricultural land and production % of December 31, Total loans 2016 % of December 31, Total loans 2015 $ 88,652 11.7% $ 102,197 17.1% 25,509 3.4% 30,472 5.1% Total commercial 114,161 15.1% 132,669 22.2% Real estate: Owner occupied Real estate construction and other land loans Commercial real estate Agricultural real estate Other real estate Total real estate Equity loans and lines of credit Consumer and installment Total consumer Net deferred origination costs Total gross loans Allowance for credit losses 191,665 25.3% 168,910 28.2% 69,200 184,225 86,761 18,945 550,796 9.1% 24.3% 11.5% 2.7% 72.9% 38,685 117,244 74,867 10,520 410,226 6.5% 19.6% 12.5% 1.8% 68.6% 64,494 8.5% 42,296 7.1% 25,910 90,404 3.5% 12.0% 12,503 54,799 2.1% 9.2% 1,267 756,628 (9,326) 100.0% 417 598,111 (9,610) 100.0% Total loans $ 747,302 $ 588,501 At December 31, 2016 and 2015, loans originated under Small Business Administration (SBA) programs totaling $16,590,000 and $10,704,000, respectively, were included in the real estate and commercial categories. Approximately $270,539,000 in loans were pledged under a blanket lien as collateral to the FHLB for the Bank’s remaining borrowing capacity of $173,992,000 as of December 31, 2016. The Bank’s credit limit varies according Notes to Consolidated Financial Statements 5. LOANS AND ALLOWANCE FOR CREDIT LOSSES (Continued) Loans acquired during each year for which it was probable at acquisition that to the amount and composition of the investment and loan portfolios pledged as collateral. Salaries and employee benefits totaling $2,344,000, $2,056,000, and $1,657,000 have been deferred as loan origination costs for the years ended December 31, 2016, 2015, and 2014, respectively. Purchased Credit Impaired Loans At December 31, 2016, the Company had loans that were acquired in acquisitions, for which there was, at acquisition, evidence of deterioration of credit quality since origination and for which it was probable, at acquisition, that all contractually required payments would not be collected. There were no such loans at December 31, 2015. The carrying amount of those loans is included in the balance sheet amounts of loans receivable at December 31. The amounts of loans at December 31 are as follows (in thousands): Commercial Outstanding balance Carrying amount, net of allowance of $0 December 31, 2016 2015 $ $ $ 612 612 612 $ $ $ - - - Purchased credit impaired (PCI) loans are recorded at the amount paid, such that there is no carryover of the seller’s allowance for loan losses. The Company estimates the amount and timing of expected cash flows for each loan and the expected cash flows in excess of amount paid is recorded as interest income over the remaining life of the loan (accretable yield). The excess of the loan’s contractual principal and interest over expected cash flows is not recorded (nonaccretable difference). Over the life of the loan, expected cash flows continue to be estimated. If the present value of expected cash flows is less than the carrying amount, a loss is recorded. If the present value of expected cash flows is greater than the carrying amount, it is recognized as part of future interest income. Accretable yield, or income expected to be collected for the year ended December 31, 2016, 2015, and 2014 is as follows (in thousands): Years ended December 31, 2016 2015 2014 Balance at beginning of year New loans acquired Accretion of income Reclassification from non-accretable difference Disposals Balance at end of year $ $ - - - - - - $ $ - - - - - - $ $ 94 - (907) 813 - - all contractually required payments would not be collected are as follows (in thousands): December 31, 2016 2015 Contractually required payments receivable on PCI loans at acquisition: Commercial Total Cash flows expected to be collected at acquisition Fair value of acquired loans at acquisition $ $ $ $ 982 982 693 631 $ $ $ $ Certain of the loans acquired by the Company that are within the scope of Topic ASC 310-30 are not accounted for using the income recognition model of the Topic because the Company cannot reliably estimate cash flows expected to be collected. The carrying amounts of such loans (which are included in the carrying amount, net of allowance, described above) are as follows. Loans acquired during the year Loans at the end of the year Allowance for Credit Losses December 31, 2016 2015 $ $ 631 612 $ $ - - - - - - The allowance for credit losses (the ‘‘allowance’’) is a valuation allowance for probable incurred credit losses in the Company’s loan portfolio. The allowance is established through a provision for credit losses which is charged to expense. Additions to the allowance are expected to maintain the adequacy of the total allowance after credit losses and loan growth. Credit exposures determined to be uncollectible are charged against the allowance. Cash received on previously charged-off credits is recorded as a recovery to the allowance. The overall allowance consists of two primary components, specific reserves related to impaired loans and general reserves for probable incurred losses related to loans that are not impaired. For all portfolio segments, the determination of the general reserve for loans that are not impaired is based on estimates made by management, including but not limited to, consideration of historical losses by portfolio segment (and in certain cases peer loss data) over the most recent 20 quarters, and qualitative factors including economic trends in the Company’s service areas, industry experience and trends, geographic concentrations, estimated collateral values, the Company’s underwriting policies, the character of the loan portfolio, and probable losses inherent in the portfolio taken as a whole. Changes in the allowance for credit losses were as follows (in thousands): Balance, beginning of year (Reversal of ) Provision charged to operations Losses charged to allowance Recoveries Years Ended December 31, 2016 2015 2014 $ 9,610 $ 8,308 $ 9,208 (5,850) (883) 6,449 600 (961) 1,663 7,985 (9,834) 949 Balance, end of year $ 9,326 $ 9,610 $ 8,308 27 Notes to Consolidated Financial Statements 5. LOANS AND ALLOWANCE FOR CREDIT LOSSES (Continued) The following table shows the summary of activities for the allowance for credit losses as of and for the years ended December 31, 2016, 2015, and 2014 by portfolio segment (in thousands): Allowance for credit losses: Beginning balance, January 1, 2016 (Reversal of ) Provision charged to operations Losses charged to allowance Recoveries Ending balance, December 31, 2016 Allowance for credit losses: Beginning balance, January 1, 2015 Provision charged to operations Losses charged to allowance Recoveries Ending balance, December 31, 2015 Allowance for credit losses: Beginning balance, January 1, 2014 Provision charged to operations Losses charged to allowance Recoveries Ending balance, December 31, 2014 Commercial Real Estate Consumer Unallocated Total $ $ $ $ $ $ $ $ $ $ $ 3,562 (6,048) (621) 5,287 2,180 3,130 190 (802) 1,044 3,562 2,444 9,660 (9,145) 171 $ $ $ $ $ 5,204 11 - 985 6,200 4,058 1,114 - 32 5,204 5,174 (1,447) (183) 514 $ $ $ $ $ 734 203 (262) 177 852 1,078 (772) (159) 587 734 1,168 152 (506) 264 $ $ $ $ $ 110 (16) - - 94 42 68 - - 110 422 (380) — — 9,610 (5,850) (883) 6,449 9,326 8,308 600 (961) 1,663 9,610 9,208 7,985 (9,834) 949 3,130 $ 4,058 $ 1,078 $ 42 $ 8,308 The following is a summary of the allowance for credit losses by impairment methodology and portfolio segment as of December 31, 2016 and December 31, 2015 (in thousands): Allowance for credit losses: Ending balance, December 31, 2016 Ending balance: individually evaluated for impairment Ending balance: collectively evaluated for impairment Ending balance, December 31, 2015 Ending balance: individually evaluated for impairment Ending balance: collectively evaluated for impairment Commercial Real Estate Consumer Unallocated Total $ $ $ $ $ $ 2,180 3 2,177 3,562 1 3,561 $ $ $ $ $ $ 6,200 241 5,959 5,204 128 5,076 $ $ $ $ $ $ 852 63 789 734 35 699 $ $ $ $ $ $ 94 - 94 110 - 110 $ $ $ $ $ $ 9,326 307 9,019 9,610 164 9,446 The following table shows the ending balances of loans as of December 31, 2016 and December 31, 2015 by portfolio segment and by impairment methodology (in thousands): Loans: Ending balance, December 31, 2016 Ending balance: individually evaluated for impairment Ending balance: collectively evaluated for impairment Loans: Ending balance, December 31, 2015 Ending balance: individually evaluated for impairment Ending balance: collectively evaluated for impairment 28 Commercial Real Estate Consumer Total $ $ $ $ $ $ 114,161 487 113,674 132,669 30 132,639 $ $ $ $ $ $ 550,796 4,238 546,558 410,226 5,199 405,027 $ $ $ $ $ $ 90,404 544 89,860 54,799 1,470 53,329 $ $ $ $ $ $ 755,361 5,269 750,092 597,694 6,699 590,995 Notes to Consolidated Financial Statements 5. LOANS AND ALLOWANCE FOR CREDIT LOSSES (Continued) The following table shows the loan portfolio by class allocated by management’s internal risk ratings at December 31, 2016 (in thousands): Pass Special Mention Substandard Doubtful Total Commercial: Commercial and industrial Agricultural land and production Real Estate: Owner occupied Real estate construction and other land loans Commercial real estate Agricultural real estate Other real estate Consumer: Equity loans and lines of credit Consumer and installment $ 75,212 16,562 $ 907 8,681 $ 184,987 62,538 179,966 49,270 18,779 62,782 25,890 2,865 5,259 1,548 10,390 166 95 - $ 12,533 266 3,813 1,403 2,711 27,101 - 1,617 20 Total $ 675,986 $ 29,911 $ 49,464 $ - - - - - - - - - - $ 88,652 25,509 191,665 69,200 184,225 86,761 18,945 64,494 25,910 $ 755,361 The following table shows the loan portfolio by class allocated by management’s internally assigned risk grade ratings at December 31, 2015 (in thousands): Pass Special Mention Substandard Doubtful Total Commercial: Commercial and industrial Agricultural land and production Real Estate: Owner occupied Real estate construction and other land loans Commercial real estate Agricultural real estate Other real estate Consumer: Equity loans and lines of credit Consumer and installment $ 77,783 20,422 $ 22,607 - $ 1,807 10,050 $ 163,570 34,916 110,833 66,347 10,520 40,332 12,488 3,785 644 1,683 - - - - 1,555 3,125 4,728 8,520 - 1,964 15 Total $ 537,211 $ 28,719 $ 31,764 $ The following table shows an aging analysis of the loan portfolio by class and the time past due at December 31, 2016 (in thousands): 30-59 Days Past Due 60-89 Days Past Due Greater Than 90 Days Past Due Total Past Due Current Total Loans Recorded Investment > 90 Days Accruing Commercial: Commercial and industrial Agricultural land and $ production Real estate: Owner occupied Real estate construction and other land loans Commercial real estate Agricultural real estate Other real estate Consumer: Equity loans and lines of credit Consumer and installment $ - - 87 - 565 - - 62 38 Total $ 752 $ - - - - - - - 48 - 48 $ $ - - - - - - - - - - $ - - 87 - 565 - - 110 38 $ 88,652 $ 88,652 $ 25,509 25,509 191,578 191,665 69,200 183,660 86,761 18,945 64,384 25,872 69,200 184,225 86,761 18,945 64,494 25,910 $ 800 $ 754,561 $ 755,361 $ - - - - - - - - - - - - - - - - - - - - $ 102,197 30,472 168,910 38,685 117,244 74,867 10,520 42,296 12,503 $ 597,694 $ Non- accrual 447 - 107 - 1,082 - - 526 18 $ 2,180 29 Notes to Consolidated Financial Statements 5. LOANS AND ALLOWANCE FOR CREDIT LOSSES (Continued) The following table shows an aging analysis of the loan portfolio by class and the time past due at December 31, 2015 (in thousands): Greater Than 90 Days Past Due $ 30-59 Days Past Due 60-89 Days Past Due Commercial: Commercial and industrial Agricultural land and $ production Real estate: Owner occupied Real estate construction and other land loans Commercial real estate Agricultural real estate Other real estate Consumer: Equity loans and lines of credit Consumer and installment $ - - - - 98 - - - 38 - - - - - - - 166 - Total $ 136 $ 166 $ Total Past Due Current Total Loans Recorded Investment > 90 Days Accruing Non- accrual - - - - - - - - - - $ - - - - 98 - - 166 38 $ 102,197 $ 102,197 $ 30,472 30,472 168,910 168,910 38,685 117,146 74,867 10,520 42,130 12,465 38,685 117,244 74,867 10,520 42,296 12,503 $ 302 $ 597,392 $ 597,694 $ - - - - - - - - - $ $ 29 - 347 - 567 - - 1,457 13 2,413 The following table shows information related to impaired loans by class at The following table shows information related to impaired loans by class at December 31, 2016 (in thousands): December 31, 2015 (in thousands): Recorded Investment Unpaid Principal Balance Related Allowance Recorded Investment Unpaid Principal Balance Related Allowance With no related allowance recorded: Commercial: Commercial and industrial $ 447 $ 612 $ Real estate: Owner occupied Commercial real estate Total real estate Consumer: Equity loans and lines of credit Consumer and installment Total consumer Total with no related allowance recorded With an allowance recorded: Commercial: Commercial and industrial Real estate: Real estate construction and other land loans Commercial real estate Total real estate Consumer: Equity loans and lines of credit Consumer and installment Total consumer Total with an allowance recorded Total 107 827 934 167 6 173 111 967 1,078 234 9 243 1,554 1,933 40 40 2,222 1,082 3,304 359 12 371 2,222 1,146 3,368 364 12 376 3,715 5,269 $ 3,784 5,717 $ $ With no related allowance recorded: Commercial: Commercial and industrial $ - $ 1 $ Real estate: Owner occupied Real estate construction and other land loans Commercial real estate Total real estate Consumer: Equity loans and lines of credit Total with no related allowance recorded With an allowance recorded: Commercial: Commercial and industrial Real estate: Owner occupied Commercial real estate Total real estate Consumer: Equity loans and lines of credit Consumer and installment Total consumer Total with an allowance recorded Total 166 3,125 1,162 4,453 1,291 5,744 30 180 566 746 166 13 179 955 $ 6,699 $ 245 3,125 1,302 4,672 1,991 6,664 33 212 588 800 179 15 194 1,027 7,691 $ - - - - - - - 1 18 110 128 33 2 35 164 164 The recorded investment in loans excludes accrued interest receivable and net loan origination fees, due to immateriality. - - - - - - - - 3 79 162 241 61 2 63 307 307 The recorded investment in loans excludes accrued interest receivable and net loan origination fees, due to immateriality. 30 Notes to Consolidated Financial Statements 5. LOANS AND ALLOWANCE FOR CREDIT LOSSES (Continued) The following presents by class, information related to the average recorded investment and interest income recognized on impaired loans for the years ended December 31, 2016, 2015, and 2014 (in thousands): Year Ended December 31, 2016 Year Ended December 31, 2015 Year Ended December 31, 2014 Average Recorded Investment Interest Income Recognized Average Recorded Investment Interest Income Recognized Average Recorded Investment Interest Income Recognized With no related allowance recorded: Commercial: Commercial and industrial Agricultural land and production Total commercial Real estate: Owner occupied Real estate construction and other land loans Commercial real estate Agricultural real estate Other real estate Total real estate Consumer: Equity loans and lines of credit Consumer and installment Total consumer $ $ 115 42 157 $ - - - 162 2,393 903 173 - 3,631 598 41 639 - 196 55 - - 251 - - - Total with no related allowance recorded 4,427 251 With an allowance recorded: Commercial: Commercial and industrial Agricultural land and production Total commercial Real estate: Owner occupied Real estate construction and other land loans Commercial real estate Total real estate Consumer: Equity loans and lines of credit Consumer and installment Total consumer Total with an allowance recorded Total 441 104 545 120 171 548 839 203 19 222 1,606 6,033 $ 3 - 3 - - - - - - - 3 2,921 - 2,921 770 1,266 1,939 211 - 4,186 1,858 - 1,858 8,965 243 - 243 190 2,297 753 3,240 328 16 344 3,827 $ $ - - - $ 638 - 638 231 79 - - - 310 - - - 310 - - - - - - - - - - - 2,063 1,276 574 28 - 3,941 1,826 8 1,834 6,413 423 - 423 264 3,782 214 4,260 303 27 330 5,013 - - - 2 24 - - - 26 - - - 26 - - - - 267 55 322 - - - 322 348 $ 254 $ 12,792 $ 310 $ 11,426 $ Foregone interest on nonaccrual loans totaled $245,000, $340,000, and $716,000 for the years ended December 31, 2016, 2015, and 2014, respectively. Interest income recognized on cash basis during the years presented above was not considered significant for financial reporting purposes. Troubled Debt Restructurings: As of December 31, 2016 and 2015, the Company has a recorded investment in troubled debt restructurings of $3,109,000 and, $5,623,000, respectively. The Company has allocated $82,000 and $1,000 of specific reserves for those loans at December 31, 2016 and 2015, respectively. The Company has committed to lend no additional amounts as of December 31, 2016 to customers with outstanding loans that are classified as troubled debt restructurings. For the years ended December 31, 2016 and 2015 the terms of certain loans were modified as troubled debt restructurings. The modification of the terms of such loans included one or a combination of the following: a reduction of the stated interest rate of the loan or an extension of the maturity date at a stated rate of interest lower than the current market rate for new debt with similar risk. During the same periods, there were no troubled debt restructurings in which the amount of principal or accrued interest owed from the borrower were forgiven. 31 Notes to Consolidated Financial Statements 5. LOANS AND ALLOWANCE FOR CREDIT LOSSES (Continued) The following table presents loans by class modified as troubled debt restructurings that occurred during the year ended December 31, 2016 (dollars in thousands): Troubled Debt Restructurings: Commercial: Commercial and industrial Pre- Modification Outstanding Recorded Investment (1) Number of Loans Principal Modification Post Modification Outstanding Recorded Investment (2) Outstanding Recorded Investment 2 $ 45 $ - $ 45 $ 40 (1) Amounts represent the recorded investment in loans before recognizing effects of the TDR, if any. (2) Balance outstanding after principal modification, if any borrower reduction to recorded investment. The following table presents loans by class modified as troubled debt restructurings that occurred during the year ended December 31, 2015 (dollars in thousands): Troubled Debt Restructurings: Commercial: Commercial and Industrial Number of Loans Pre-Modification Outstanding Recorded Investment (1) Principal Modification Post Modification Outstanding Recorded Investment (2) Outstanding Recorded Investment 2 $ 42 $ - $ 42 $ 30 (1) Amounts represent the recorded investment in loans before recognizing effects of the TDR, if any. (2) Balance outstanding after principal modification, if any borrower reduction to recorded investment. A loan is considered to be in payment default once it is 90 days contractually 7. OTHER REAL ESTATE OWNED past due under the modified terms. There were no defaults on troubled debt restructurings within 12 months following the modification during the years ended December 31, 2016 and 2015. 6. BANK PREMISES AND EQUIPMENT Bank premises and equipment consisted of the following (in thousands): Land Buildings and improvements Furniture, fixtures and equipment Leasehold improvements Less accumulated depreciation and amortization December 31, 2016 2015 $ $ 1,131 6,680 11,521 4,100 23,432 1,131 6,680 10,539 4,005 22,355 (14,025) (13,063) $ 9,407 $ 9,292 Depreciation and amortization included in occupancy and equipment expense totaled $1,320,000, $1,392,000 and $1,355,000 for the years ended December 31, 2016, 2015, and 2014, respectively. The Company had no other real estate owned (OREO) at December 31, 2016 or December 31, 2015. The table below provides a summary of the change in other real estate owned (OREO) balances for the years ended December 31, 2016 and 2015 (in thousands): Balance, beginning of year Additions 1st lien assumed upon foreclosure Dispositions Write-downs Net gain on dispositions Balance, end of year December 31, 2016 2015 $ $ - - - - - - - $ $ - 227 121 (359) - 11 - As of December 31, 2016 and December 31, 2015 the Bank had no OREO properties. In 2015, the Bank foreclosed on one property collateralized by real estate. Proceeds from OREO sales totaled $359,000 during 2015. The Company realized $11,000 in net gains from the sale of all properties. 32 Notes to Consolidated Financial Statements 8. GOODWILL AND INTANGIBLE ASSETS 9. DEPOSITS The change in goodwill during the years ended December 31, 2016, 2015, and 2014 is as follows (in thousands): Interest-bearing deposits consisted of the following (in thousands): 2016 2015 2014 Balance, beginning of year Acquired goodwill Impairment Balance, end of year $ $ 29,917 10,314 - 40,231 $ $ 29,917 - - 29,917 $ $ 29,917 - - 29,917 Business combinations involving the Company’s acquisition of the equity interests or net assets of another enterprise give rise to goodwill. Total goodwill at December 31, 2016 and 2015 was $40,231,000 and 29,917,000, respectively. Total goodwill at December 31, 2016 consisted of $10,314,000, $6,340,000, $14,643,000, and $8,934,000 representing the excess of the cost of Sierra Vista Bank, Visalia Community Bank, Service 1st Bancorp and Bank of Madera County, respectively, over the net of the amounts assigned to assets acquired and liabilities assumed in the transactions accounted for under the purchase method of accounting. The value of goodwill is ultimately derived from the Company’s ability to generate net earnings after the acquisitions and is not deductible for tax purposes. A decline in net earnings could be indicative of a decline in the fair value of goodwill and result in impairment. For that reason, goodwill is assessed at least annually for impairment. The Company has selected September 30 as the date to perform the annual impairment test. Management assessed qualitative factors including performance trends and noted no factors indicating goodwill impairment. Goodwill is also tested for impairment between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of the Company below its carrying amount. No such events or circumstances arose during the fourth quarter of 2016, so goodwill was not required to be retested. The intangible assets at December 31, 2016 represent the estimated fair value of the core deposit relationships acquired in the acquisition of Sierra Vista Bank in 2016 of $508,000 and the 2013 acquisition of Visalia Community Bank of $1,365,000. Core deposit intangibles are being amortized using the straight-line method over an estimated life of ten years from the date of acquisition. At December 31, 2016, the weighted average remaining amortization period is ten years. The carrying value of intangible assets at December 31, 2016 was $1,383,000, net of $490,000 in accumulated amortization expense. The carrying value at December 31, 2015 was $1,024,000, net of $1,741,000 in accumulated amortization expense. Management evaluates the remaining useful lives quarterly to determine whether events or circumstances warrant a revision to the remaining periods of amortization. Based on the evaluation, no changes to the remaining useful lives was required. Management performed an annual impairment test on core deposit intangibles as of September 30, 2016 and determined no impairment was necessary. Amortization expense recognized was $149,000 for 2016, $320,000 for 2015, and $337,000 for 2014. The following table summarizes the Company’s estimated core deposit intangible amortization expense for each of the next five years (in thousands): Years Ending December 31, 2017 2018 2019 2020 2021 Thereafter Total Estimated Core Deposit Intangible Amortization $ $ 188 188 188 188 188 443 1,383 Savings Money market NOW accounts Time, $250,000 or more Time, under $250,000 December 31, 2016 2015 $ $ 105,098 250,749 247,623 39,284 117,410 81,383 239,241 227,167 42,149 97,554 $ 760,164 $ 687,494 Aggregate annual maturities of time deposits are as follows (in thousands): Years Ending December 31, 2017 2018 2019 2020 2021 Thereafter $ 133,669 15,582 3,506 1,752 1,473 712 $ 156,694 Interest expense recognized on interest-bearing deposits consisted of the following (in thousands): Savings Money market NOW accounts Time certificates of deposit Years Ended December 31, 2016 2015 2014 $ $ $ 27 133 290 525 $ 30 141 231 546 32 174 209 645 975 $ 948 $ 1,060 10. BORROWING ARRANGEMENTS Federal Home Loan Bank Advances - As of December 31, 2016 and 2015, the Company had no Federal Home Loan Bank (FHLB) of San Francisco advances. Approximately $270,539,000 in loans were pledged under a blanket lien as collateral to the FHLB for the Bank’s remaining borrowing capacity of $173,992,000 as of December 31, 2016. FHLB advances are also secured by investment securities with amortized costs totaling $584,000 and $750,000 and market values totaling $637,000 and $825,000 at December 31, 2016 and 2015, respectively. The Bank’s credit limit varies according to the amount and composition of the investment and loan portfolios pledged as collateral. Lines of Credit - The Bank had unsecured lines of credit with its correspondent banks which, in the aggregate, amounted to $40,000,000 at December 31, 2016 and 2015, at interest rates which vary with market conditions. As of December 31, 2016, the Company had $400,000 in Federal funds purchased. The Company had no overnight borrowings outstanding under these credit facilities at December 31, 2015. Federal Reserve Line of Credit - The Bank has a line of credit in the amount of $9,102,000 and $2,328,000 with the Federal Reserve Bank of San Francisco (FRB) at December 31, 2016 and 2015, respectively, which bears interest at the prevailing discount rate collateralized by investment securities with amortized costs totaling $2,407,000 and $2,578,000 and market values totaling $2,436,000 and $2,598,000, respectively. At December 31, 2016 and 2015, the Bank had no outstanding borrowings with the FRB. 33 Notes to Consolidated Financial Statements 11. JUNIOR SUBORDINATED DEFERRABLE INTEREST DEBENTURES Service 1st Capital Trust I is a Delaware business trust formed by Service 1st. The Company succeeded to all of the rights and obligations of Service 1st in connection with the merger with Service 1st as of November 12, 2008. The Trust was formed on August 17, 2006 for the sole purpose of issuing trust preferred securities fully and unconditionally guaranteed by Service 1st. Under applicable regulatory guidance, the amount of trust preferred securities that is eligible as Tier 1 capital is limited to 25% of the Company’s Tier 1 capital on a pro forma basis. At December 31, 2016, all of the trust preferred securities that have been issued qualify as Tier 1 capital. The trust preferred securities mature on October 7, 2036, are redeemable at the Company’s option, and require quarterly distributions by the Trust to the holder of the trust preferred securities at a variable interest rate which will adjust quarterly to equal the three month LIBOR plus 1.60%. The Trust used the proceeds from the sale of the trust preferred securities to purchase approximately $5,155,000 in aggregate principal amount of Service 1st’s junior subordinated notes (the Notes). The Notes bear interest at the same variable interest rate during the same quarterly periods as the trust preferred securities. The Notes are redeemable by the Company on any January 7, April 7, July 7, or October 7 or at any time within 90 days following the occurrence of certain events, such as: (i) a change in the regulatory capital treatment of the Notes (ii) in the event the Trust is deemed an investment company or (iii) upon the occurrence of certain adverse tax events. In each such case, the Company may redeem the Notes for their aggregate principal amount, plus any accrued but unpaid interest. The Notes may be declared immediately due and payable at the election of the trustee or holders of 25% of the aggregate principal amount of outstanding Notes in the event that the Company defaults in the payment of any interest following the nonpayment of any such interest for 20 or more consecutive quarterly periods. Holders of the trust preferred securities are entitled to a cumulative cash distribution on the liquidation amount of $1,000 per security. For each January 7, April 7, July 7 or October 7 of each year, the rate will be adjusted to equal the three month LIBOR plus 1.60%. As of December 31, 2016, the rate was 2.48%. Interest expense recognized by the Company for the years ended December 31, 2016, 2015, and 2014 was $121,000, $99,000 and $96,000, respectively. 12. INCOME TAXES The provision for (benefit from) income taxes for the years ended December 31, 2016, 2015, and 2014 consisted of the following (in thousands): 2016 Current Deferred Provision for income taxes 2015 Current Deferred Provision for (benefit from) income taxes 2014 Current Deferred Provision for (benefit from) income taxes $ $ $ $ $ $ Federal State Total 3,720 1,100 4,820 2,945 (1,208) 1,737 (125) (397) $ $ $ $ $ 605 1,492 2,097 570 275 845 (37) (11) $ $ $ $ $ 4,325 2,592 6,917 3,515 (933) 2,582 (162) (408) (522) $ (48) $ (570) The determination of the amount of deferred income tax assets which are more likely than not to be realized is primarily dependent on projections of future earnings, which are subject to uncertainty and estimates that may change 34 given economic conditions and other factors. The realization of deferred income tax assets is assessed and a valuation allowance is recorded if it is more likely than not that all or a portion of the deferred tax asset will not be realized. More likely than not is defined as greater than a 50% chance. All available evidence, both positive and negative is considered to determine whether, based on the weight of the evidence, a valuation allowance is needed. Thus, Management concludes no valuation allowance is necessary against deferred tax assets, Deferred tax assets (liabilities) consisted of the following (in thousands): Deferred tax assets: Allowance for credit losses Deferred compensation Unrealized loss on available-for-sale investment securities Net operating loss carryovers Bank premises and equipment Mark-to-market adjustment Other deferred Other-than-temporary impairment Loan and investment impairment State Enterprise Zone credit carry-forward Alternative minimum tax credit Partnership income State taxes Total deferred tax assets Deferred tax liabilities: Finance leases Unrealized gain on available-for-sale investment securities Core deposit intangible FHLB stock Loan origination costs Bank premises and equipment Total deferred tax liabilities $ December 31, 2016 2015 $ 3,267 5,304 375 3,816 - 167 338 273 1,285 209 2,438 114 297 3,823 5,038 - 75 351 96 313 267 721 1,067 3,525 87 266 17,883 15,629 (474) - (582) (327) (918) (71) (2,372) (921) (3,076) (421) (319) (664) - (5,401) Net deferred tax assets $ 15,511 $ 10,228 The provision for income taxes differs from amounts computed by applying the statutory Federal income tax rates to operating income before income taxes. The significant items comprising these differences for the years ended December 31, 2016, 2015, and 2014 consisted of the following: Federal income tax, at statutory rate State taxes, net of Federal tax benefit Tax exempt investment security income, net Bank owned life insurance, net Change in uncertain tax positions Other Effective tax rate 2016 2015 2014 35.0 % 34.0 % 34.0 % 7.0 % 4.1 % (0.7)% (10.3)% (1.1)% 0.1 % 0.6 % 31.3 % (15.9)% (2.5)% 0.8 % (1.4)% 19.1 % (42.2)% (3.9)% - % 0.8 % (12.0)% As of December 31, 2016, the Company had Federal and California net operating loss (‘‘NOL’’) carry-forwards of $9,001,000 and $9,442,000, respectively. These NOLs were acquired through business combinations and are subject to IRC 382 and begin expiring in 2028 and 2017, for federal and California purposes, respectively. While they are subject to IRC Section 382, management has determined that all of the NOLs are more than likely than not to be utilized. At December 31, 2016, the Company had a Federal Alternative Minimum Tax credit of approximately $2,438,000 which does not expire. The Company had Notes to Consolidated Financial Statements 12. INCOME TAXES (Continued) Enterprise Zone Credits of approximately $316,000 which begin expiring in 2023. The Company and its Subsidiary file income tax returns in the U.S. federal and California jurisdictions. The Company conducts all of its business activities in the State of California. There are no pending U.S. federal or California Franchise Tax Board income tax examinations by those taxing authorities. The Company is no longer subject to the examination by U.S. federal taxing authorities for the years ended before December 31, 2013 and by the state and local taxing authorities for the years ended before December 31, 2012. A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows (in thousands): Balance, beginning of year Additions based on tax positions related to prior years Reductions for tax positions of prior years Balance, end of year December 31, 2016 2015 $ $ 286 $ 44 (32) 298 $ 180 106 - 286 This represents the amount of unrecognized tax benefits that, if recognized, would favorably affect the effective income tax rate in future periods. The Company does expect the amount of unrecognized tax benefits to decrease in the next 12 months due to closure of statues of limitation s in the taxing jurisdictions. During the years ended December 31, 2016 and 2015, the Company recorded $44,000 and $106,000, respectively, in interest or penalties related to uncertain tax positions. During the year ended December 31, 2014, the Company did not recognize any interest or penalties related to uncertain tax positions. 13. COMMITMENTS AND CONTINGENCIES Leases - The Bank leases certain of its branch facilities and administrative offices under noncancelable operating leases. Rental expense included in occupancy and equipment and other expenses totaled $2,300,000, $2,273,000 and $2,391,000 for the years ended December 31, 2016, 2015, and 2014, respectively. Future minimum lease payments on noncancelable operating leases are as follows (in thousands): Years Ending December 31, 2017 2018 2019 2020 2021 Thereafter $ 2,350 2,057 1,441 1,274 993 1,425 $ 9,540 Federal Reserve Requirements - Banks are required to maintain reserves with the Federal Reserve Bank equal to a percentage of their reservable deposits. The amount of such reserve balances required at December 31, 2016 was $4,575,000. Correspondent Banking Agreements - The Bank maintains funds on deposit with other federally insured financial institutions under correspondent banking agreements. Uninsured deposits totaled $10,645,000 at December 31, 2016. Financial Instruments With Off-Balance-Sheet Risk - The Bank is a party to financial instruments with off-balance-sheet risk in the normal course of business in order to meet the financing needs of its customers and to reduce its own exposure to fluctuations in interest rates. These financial instruments consist of commitments to extend credit and standby letters of credit. These instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized on the balance sheet. The Bank’s exposure to credit loss in the event of nonperformance by the other party for commitments to extend credit and standby letters of credit is represented by the contractual amount of those instruments. The Bank uses the same credit policies in making commitments and standby letters of credit as it does for loans included on the balance sheet. The following financial instruments represent off-balance-sheet credit risk (in thousands): Commitments to extend credit Standby letters of credit December 31, 2016 2015 $ $ 257,557 1,858 $ $ 215,952 1,214 Commitments to extend credit consist primarily of unfunded commercial loan commitments and revolving lines of credit, single-family residential equity lines of credit and commercial real estate construction loans. Construction loans are established under standard underwriting guidelines and policies and are secured by deeds of trust, with disbursements made over the course of construction. Commercial revolving lines of credit have a high degree of industry diversification. 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. Standby letters of credit are generally secured and are issued by the Bank to guarantee the financial obligation or performance of a customer to a third party. The credit risk involved in issuing standby letters of credit is essentially the same as that involved in extending loans to customers. The fair value of the liability related to these standby letters of credit, which represents the fees received for issuing the guarantees, was not significant at December 31, 2016 and 2015. The Company recognizes these fees as revenue over the term of the commitment or when the commitment is used. At December 31, 2016, commercial loan commitments represent 55% of total commitments and are generally secured by collateral other than real estate or unsecured. Real estate loan commitments represent 35% of total commitments and are generally secured by property with a loan-to-value ratio not to exceed 80%. Consumer loan commitments represent the remaining 10% of total commitments and are generally unsecured. In addition, the majority of the Bank’s loan commitments have variable interest rates. At December 31, 2016 and 2015, the balance of a contingent allocation for probable loan loss experience on unfunded obligations was $125,000 and $150,000, respectively. The contingent allocation for probable loan loss experience on unfunded obligations is calculated by management using an appropriate, systematic, and consistently applied process. While related to credit losses, this allocation is not a part of the ALLL and is considered separately as a liability for accounting and regulatory reporting purposes. Changes in this contingent allocation are recorded in other non-interest expense. Concentrations of Credit Risk - At December 31, 2016, in management’s judgment, a concentration of loans existed in commercial loans and real-estate- related loans, representing approximately 96.5% of total loans of which 15.1% were commercial and 81.4% were real-estate-related. At December 31, 2015, in management’s judgment, a concentration of loans existed in commercial loans and real-estate-related loans, representing approximately 97.9% of total loans of which 22.2% were commercial and 75.7% were real-estate-related. Management believes the loans within these concentrations have no more than the typical risks of collectability. However, in light of the current economic environment, additional declines in the performance of the economy in general, or a continued decline in real estate values or drought-related decline in agricultural business in the Company’s primary market area could have an adverse impact on collectability, increase the level of real-estate-related nonperforming loans, or have other adverse effects which alone or in the aggregate could have a material adverse effect on the financial condition, results of operations and cash flows of the Company. Contingencies - The Company is subject to legal proceedings and claims which arise in the ordinary course of business. In the opinion of management, the amount of ultimate liability with respect to such actions will not materially affect 35 Notes to Consolidated Financial Statements 13. COMMITMENTS AND CONTINGENCIES (Continued) the consolidated financial position or consolidated results of operations of the Company. 14. SHAREHOLDERS’ EQUITY Regulatory Capital - The Company and the Bank are subject to certain regulatory capital requirements administered by the Board of Governors of the Federal Reserve System and the FDIC. Failure to meet these minimum capital requirements could result in mandatory or, discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company’s consolidated financial statements. The Company and the Bank each meet specific capital guidelines that involve quantitative measures of their respective assets, liabilities and certain off-balance- sheet items as calculated under regulatory accounting practices. These quantitative measures are established by regulation and require that the Company and the Bank maintain minimum amounts and ratios of total and Tier 1 capital to risk-weighted assets and of Tier 1 capital to average assets. Capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors. The Bank is also subject to additional capital guidelines under the regulatory framework for prompt corrective action. To be categorized as well capitalized, the Bank must maintain minimum total risk-based, Tier 1 risk-based and Tier 1 leverage ratios as set forth in the following table. The most recent notification from the FDIC categorized the Bank as well capitalized under these guidelines. Management knows of no conditions or events since that notification that would change the Bank’s category. Capital ratios are reviewed by Management on a regular basis to ensure that capital exceeds the prescribed regulatory minimums and is adequate to meet our anticipated future needs. For all periods presented, the Bank’s ratios exceed the regulatory definition of ‘‘well capitalized’’ under the regulatory framework for prompt correct action and the Company’s ratios exceed the required minimum ratios for capital adequacy purposes. Effective January 1, 2015, bank holding companies with consolidated assets of $1 billion or more and banks like Central Valley Community Bank must comply with new minimum capital ratio requirements to be phased-in between January 1, 2015 and January 1, 2019, which consist of the following: (i) a new common equity Tier 1 capital to total risk weighted assets ratio of 4.5%; (ii) a Tier 1 capital to total risk weighted assets ratio of 6% (increased from 4%); (iii) a total capital to total risk weighted assets ratio of 8% (unchanged from current rules); and (iv) a Tier 1 capital to adjusted average total assets (‘‘leverage’’) ratio of 4%. In addition, a ‘‘capital conversation buffer’’ is established which, when fully phased-in, will require maintenance of a minimum of 2.5% of common equity Tier 1 capital to total risk weighted assets in excess of the regulatory minimum capital ratio requirements described above. The 2.5% buffer will increase the minimum capital ratios to (i) a common equity Tier 1 capital ratio of 7.0%, (ii) a Tier 1 capital ratio of 8.5%, and (iii) a total capital ratio of 10.5%. The new buffer requirement will be phased-in between January 1, 2016 and January 1, 2019. The capital conservation buffer as of December 31, 2016 was 0.625%. If the capital ratio levels of a banking organization fall below the capital conservation buffer amount, the organization will be subject to limitations on (i) the payment of dividends; (ii) discretionary bonus payments; (iii) discretionary payments under Tier 1 instruments; and (iv) engaging in share repurchases. Management believes that the Company and the Bank met all their capital adequacy requirements as of December 31, 2016 and 2015. There are no conditions or events since those notifications that management believes have changed those categories. The capital ratios for the Company and the Bank are presented in the table below (exclusive of the capital conservation buffer). 36 Tier 1 Leverage Ratio Central Valley Community Bancorp and Subsidiary Minimum regulatory requirement Central Valley Community Bank Minimum requirement for ‘‘Well-Capitalized’’ institution Minimum regulatory requirement Common Equity Tier 1 Ratio Central Valley Community Bancorp and Subsidiary Minimum regulatory requirement Central Valley Community Bank Minimum requirement for ‘‘Well-Capitalized’’ institution Minimum regulatory requirement Tier 1 Risk-Based Capital Ratio Central Valley Community Bancorp and Subsidiary Minimum regulatory requirement Central Valley Community Bank Minimum requirement for ‘‘Well-Capitalized’’ institution Minimum regulatory requirement Total Risk-Based Capital Ratio Central Valley Community Bancorp and Subsidiary Minimum regulatory requirement Central Valley Community Bank Minimum requirement for ‘‘Well-Capitalized’’ institution Minimum regulatory requirement December 31, 2016 December 31, 2015 Amount Ratio Amount Ratio (Dollars in thousands) $ 122,601 $ 56,057 $ 121,079 8.75% $ 105,825 4.00% $ 48,950 8.64% $ 104,878 $ 70,080 $ 56,064 5.00% $ 61,148 4.00% $ 48,918 8.65% 4.00% 8.58% 5.00% 4.00% $ 120,080 $ 43,426 $ 121,079 12.48% $ 103,152 4.50% $ 34,650 12.59% $ 104,878 13.44% 4.50% 13.67% $ 62,665 $ 43,383 6.50% $ 50,017 4.50% $ 34,627 6.50% 4.50% $ 122,601 $ 57,901 $ 121,079 12.74% $ 105,825 6.00% $ 46,200 12.59% $ 104,878 13.79% 6.00% 13.67% $ 77,126 $ 57,845 8.00% $ 61,560 6.00% $ 46,170 8.00% 6.00% $ 132,052 $ 77,202 $ 130,530 13.72% $ 115,466 8.00% $ 61,601 13.57% $ 114,513 15.04% 8.00% 14.93% $ 96,408 $ 77,126 10.00% $ 76,949 8.00% $ 61,560 10.00% 8.00% Dividends - During 2016, the Bank declared and paid cash dividends to the Company in the amount of $13,010,000 in connection with the SVB acquisition, and cash dividends to the Company’s shareholders approved by the Company’s Board of Directors. The Bank may not pay any dividend that would cause it to be deemed not ‘‘well capitalized’’ under applicable banking laws and regulations. The Company declared and paid a total of $2,715,000 or $0.24 per common share cash dividend to shareholders of record during the year ended December 31, 2016. During 2015, the Bank declared and paid cash dividends to the Company in the amount of $2,260,000, connection with cash dividends to the Company’s shareholders approved by the Company’s Board of Directors. The Company declared and paid a total of $1,979,000 or $0.18 per common share cash dividend to shareholders of record during the year ended December 31, 2015. During 2014, the Bank declared and paid cash dividends to the Company in the amount of $2,350,000, in connection with the cash dividends approved by the Company’s Board of Directors. The Company declared and paid a total of $2,190,000 or $0.20 per common share cash dividend to shareholders of record during the year ended December 31, 2014. The Company’s primary source of income with which to pay cash dividends is dividends from the Bank. The California Financial Code restricts the total amount of dividends payable by a bank at any time without obtaining the prior approval of the California Department of Business Oversight to the lesser of (1) the Bank’s retained earnings or (2) the Bank’s net income for its last three fiscal years, less distributions made to shareholders during the same three-year period. At December 31, 2016, $15,257,000 of the Bank’s retained earnings were free of these restrictions. Notes to Consolidated Financial Statements 14. SHAREHOLDERS’ EQUITY (Continued) A reconciliation of the numerators and denominators of the basic and diluted earnings per common share computations is as follows (in thousands, except share and per share amounts): For the Years Ended December 31, 2016 2015 2014 Basic Earnings Per Common Share: Net income Weighted average shares outstanding $ 15,182 11,331,166 $ 10,964 10,931,927 $ 5,294 10,919,235 Net income per common share $ 1.34 $ 1.00 $ 0.48 Diluted Earnings Per Common Share: Net income Weighted average shares outstanding Effect of dilutive stock options and $ 15,182 11,331,166 $ 10,964 10,931,927 $ 5,294 10,919,235 warrants 104,283 83,836 80,703 Weighted average shares of common stock and common stock equivalents Net income per diluted common share 11,435,449 11,015,763 10,999,938 $ 1.33 $ 1.00 $ 0.48 No outstanding options and restricted stock awards were anti-dilutive at December 31, 2016. Outstanding options and restricted stock of 26,704 and 170,585 were not factored into the calculation of dilutive stock options at December 31, 2015, and 2014, respectively, because they were anti-dilutive. 15. SHARED-BASED COMPENSATION On December 31, 2016, the Company had three share-based compensation plans, which are described below. The Plans do not provide for the settlement of awards in cash and new shares are issued upon option exercise or restricted share grants. The Central Valley Community Bancorp 2000 Stock Option Plan (2000 Plan) expired on November 15, 2010. The Central Valley Community Bancorp 2005 Omnibus Incentive Plan (2005 Plan) was adopted in May 2005 and expired March 16, 2015. While outstanding arrangements to issue shares under these plans, including options, continue in force until their expiration, no new options will be granted under these plans. The plans require that the exercise price may not be less than the fair market value of the stock at the date the option is granted, and that the option price must be paid in full at the time it is exercised. The options and awards under the plans expire on dates determined by the Board of Directors, but not later than ten years from the date of grant. The vesting period for the options, restricted common stock awards and option related stock appreciation rights is determined by the Board of Directors and is generally over five years. In May 2015, the Company adopted the Central Valley Community Bancorp 2015 Omnibus Incentive Plan (2015 Plan). The plan provides for awards in the form of incentive stock options, non-statutory stock options, stock appreciation rights, and restricted stock. The plan also allows for performance awards that may be in the form of cash or shares of the Company, including restricted stock. The 2015 plan requires that the exercise price may not be less than the fair market value of the stock at the date the option is granted, and that the option price must be paid in full at the time it is exercised. The options and awards under the plan expire on dates determined by the Board of Directors, but not later than ten years from the date of grant. The vesting period for the options, restricted common stock awards and option related stock appreciation rights is determined by the Board of Directors and is generally over five years. The maximum number of shares that can be issued with respect to all awards under the plan is 875,000. Currently under the 2015 Plan, there are 829,200 shares remain reserved for future grants as of December 31, 2016. For the years ended December 31, 2016, 2015, and 2014, the compensation cost recognized for share-based compensation was $284,000, $238,000, and $173,000, respectively. The recognized tax benefit for share-based compensation expense was $44,000, $14,000, and $12,000 for 2016, 2015, and 2014, respectively. Stock Options - The Company bases the fair value of the options granted on the date of grant using a Black-Scholes Merton option pricing model that uses assumptions based on expected option life and the level of estimated forfeitures, expected stock volatility, risk free interest rate, and dividend yield. The expected term and level of estimated forfeitures of the Company’s options are based on the Company’s own historical experience. Stock volatility is based on the historical volatility of the Company’s stock. The risk-free rate is based on the U. S. Treasury yield curve for the periods within the contractual life of the options in effect at the time of grant. The compensation cost for options granted is based on the weighted average grant date fair value per share. No options to purchase shares of the Company’s common stock were granted during the years ending December 31, 2016, 2015 and 2014 from any of the Company’s stock based compensation plans. A summary of the combined activity of the Plans for the year ended December 31, 2016 follows (dollars in thousands, except per share amounts): Weighted Average Exercise Price Weighted Average Remaining Contractual Term (Years) Shares Aggregate Intrinsic Value 240,695 $ (35,280) $ (3,200) $ 6.83 6.55 8.77 202,215 $ 6.87 3.26 $ 2,647 201,347 $ 6.87 3.25 $ 2,636 187,105 $ 6.78 3.06 $ 2,466 Options outstanding at January 1, 2016 Options exercised Options forfeited Options outstanding at December 31, 2016 Options vested or expected to vest at December 31, 2016 Options exercisable at December 31, 2016 Information related to the stock option plan during each year follows (in thousands): 2016 2015 2014 Intrinsic value of options exercised Cash received from options exercised Excess tax benefit realized for option exercises $ $ $ 235 231 30 $ $ $ 42 60 6 $ $ $ 45 55 7 As of December 31, 2016, there was $32,000 of total unrecognized compensation cost related to non-vested stock options granted under all Plans. The cost is expected to be recognized over a weighted average period of 0.70 years. The total fair value of options vested was $15,220 and $91,000 for the years ended December 31, 2016 and 2015, respectively. 37 Notes to Consolidated Financial Statements 15. SHARED-BASED COMPENSATION (Continued) Restricted Common Stock Awards - The 2005 Plan and 2015 Plan provide for the issuance of shares to directors and officers. Restricted common stock grants typically vest over a five-year period. Restricted common stock (all of which are shares of our common stock) is subject to forfeiture if employment terminates prior to vesting. The cost of these awards is recognized over the vesting period of the awards based on the fair value of our common stock on the date of the grant. The following table summarizes restricted stock activity for the year ended December 31, 2016 as follows: Nonvested outstanding shares at January 1, 2016 Granted Vested Forfeited Nonvested outstanding shares at December 31, 2016 Weighted Average Grant Date Fair Value $ $ $ $ $ 12.34 14.10 12.38 12.95 13.35 Shares 53,028 54,650 (12,438) (1,739) 93,501 During the years ended December 31, 2016, 2015 and 2014, 54,650, 9,268 and 57,330 shares of restricted common stock were granted from outstanding grants under the 2005 and 2015 Plans. The restricted common stock had a weighted average fair value of $14.10, $10.79 and $12.68 per share on the date of grant during the years ended December 31, 2016, 2015 and 2014, respectively. These restricted common stock awards vest 20% after Year 1. Thereafter, 20% of the remaining restricted stock will vest on each anniversary of the initial award commencement date and will be fully vested on the fifth such anniversary. As of December 31, 2016, there were 93,501 shares of restricted stock that are nonvested and expected to vest. Share-based compensation cost charged against income for restricted stock awards was $235,000 for the year ended December 31, 2016, $161,000 for the year ended December 31, 2015, and $82,000 for the year ended December 31, 2014. As of December 31, 2016, there was $1,035,000 of total unrecognized compensation cost related to nonvested restricted common stock. Restricted stock compensation expense is recognized on a straight-line basis over the vesting period. This cost is expected to be recognized over a weighted average remaining period of 3.74 years and will be adjusted for subsequent changes in estimated forfeitures. Restricted common stock awards had an intrinsic value of $1,866,000 at December 31, 2016. 16. EMPLOYEE BENEFITS 401(k) and Profit Sharing Plan - The Bank has established a 401(k) and profit sharing plan. The 401(k) plan covers substantially all employees who have completed a one-month employment period. Participants in the profit sharing plan are eligible to receive employer contributions after completion of 2 years of service. Bank contributions to the profit sharing plan are determined at the discretion of the Board of Directors. Participants are automatically vested 100% in all employer contributions. The Bank contributed $380,000 and $270,000 to the profit sharing plan in 2016 and 2015, respectively. There was no contribution by the Bank to the profit sharing plan in 2014. Additionally, the Bank may elect to make a matching contribution to the participants’ 401(k) plan accounts. The amount to be contributed is announced by the Bank at the beginning of the plan year. For the years ended December 31, 2016, 2015, and 2014, the Bank made a 100% matching contribution on all deferred amounts up to 3% of eligible compensation and a 50% matching contribution on all deferred amounts above 3% to a maximum of 5%. For the years ended December 31, 2016, 2015, and 2014, the Bank made matching contributions totaling $604,000, $585,000, and $499,000, respectively. Deferred Compensation Plans - The Bank has a nonqualified Deferred Compensation Plan which provides directors with an unfunded, deferred 38 compensation program. Under the plan, eligible participants may elect to defer some or all of their current compensation or director fees. Deferred amounts earn interest at an annual rate determined by the Board of Directors (3.09% at December 31, 2016). At December 31, 2016 and 2015, the total net deferrals included in accrued interest payable and other liabilities were $3,440,000 and $3,238,000, respectively. In connection with the implementation of the above plan, single premium universal life insurance policies on the life of each participant were purchased by the Bank, which is the beneficiary and owner of the policies. The cash surrender value of the policies totaled $3,297,000 and $3,949,000 and at December 31, 2016 and 2015, respectively. Income recognized on these policies, net of related expenses, for the years ended December 31, 2016, 2015, and 2014, was $83,000, $105,000, and $103,000, respectively. In October 2015, the Board of Directors of the Company and the Bank adopted a board resolution to create the Central Valley Community Bank Executive Deferred Compensation Plan (the Executive Plan). Pursuant to the Executive Plan, all eligible executives of the Bank may elect to defer up to 50 percent of their compensation for each deferral year. Deferred amounts earn interest at an annual rate determined by the Board of Directors (3.09% at December 31, 2016). At December 31, 2016, the total net deferrals included in accrued interest payable and other liabilities were $52,000. No deferrals were made during the year ended December 31, 2015. Salary Continuation Plans - The Board of Directors approved salary continuation plans for certain key executives during 2002 and subsequently amended the plans in 2006. Under these plans, the Bank is obligated to provide the executives with annual benefits for 15 years after retirement. These benefits are substantially equivalent to those available under split-dollar life insurance policies purchased by the Bank on the life of the executives. The expense recognized under these plans for the years ended December 31, 2016, 2015, and 2014, totaled $489,000, $447,000, and $537,000, respectively. Accrued compensation payable under the salary continuation plans totaled $5,572,000 and $5,419,000 at December 31, 2016 and 2015, respectively. In connection with these plans, the Bank purchased single premium life insurance policies with cash surrender values totaling $6,196,000 and $6,037,000 at December 31, 2016 and 2015, respectively. Income recognized on these policies, net of related expense, for the years ended December 31, 2016, 2015, and 2014 totaled $159,000, $167,000, and $166,000, respectively. In connection with the acquisition of Service 1st Bank and Visalia Community Bank (VCB), the Bank assumed a liability for the estimated present value of future benefits payable to former key executives of Service 1st and VCB . The liability relates to change in control benefits associated with Service 1st’s and VCB’s salary continuation plans. The benefits are payable to the individuals when they reach retirement age. At December 31, 2016 and 2015, the total amount of the liability was $2,788,000 and $2,822,000, respectively. Expense recognized by the Bank in 2016, 2015 and 2014 associated with these plans was $120,000, $78,000, and $233,000, respectively. These benefits are substantially equivalent to those available under split-dollar life insurance policies acquired. These single premium life insurance policies had cash surrender values totaling $11,014,000, and $10,716,000 at December 31, 2016 and 2015, respectively. Income recognized on these policies, net of related expenses, for the years ended December 31, 2016, 2015, and 2014, was $298,000, $194,000, and $345,000, respectively. The current annual tax-free interest rate on all life insurance policies is 4.14%. 17. LOANS TO RELATED PARTIES During the normal course of business, the Bank enters into loans with related parties, including executive officers and directors. The following is a summary of the aggregate activity involving related-party borrowers (in thousands): Balance, January 1, 2016 Disbursements Amounts repaid Balance, December 31, 2016 Undisbursed commitments to related parties, December 31, 2016 $ $ $ 6,406 1,501 (1,182) 6,725 1,807 Notes to Consolidated Financial Statements 18. PARENT ONLY CONDENSED FINANCIAL STATEMENTS CONDENSED BALANCE SHEETS December 31, 2016 and 2015 (In thousands) ASSETS Cash and cash equivalents Investment in Bank subsidiary Other assets Total assets LIABILITIES AND SHAREHOLDERS’ EQUITY Liabilities: Junior subordinated debentures due to subsidiary grantor trust Other liabilities Total liabilities Shareholders’ equity: Common stock Retained earnings Accumulated other comprehensive (loss) income, net of tax Total shareholders’ equity Total liabilities and shareholders’ equity 2016 2015 $ 887 167,666 790 $ 584 143,531 454 $ 169,343 $ 144,569 $ $ 5,155 155 5,310 71,645 92,904 (516) 5,155 91 5,246 54,424 80,437 4,462 164,033 139,323 $ 169,343 $ 144,569 CONDENSED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME For the Years Ended December 31, 2016, 2015, and 2014 (In thousands) 2016 2015 2014 Income: Dividends declared by Subsidiary - eliminated in consolidation Other income Total income Expenses: Interest on junior subordinated deferrable interest debentures Professional fees Other expenses Total expenses Income before equity in undistributed net income of Subsidiary Equity in undistributed net income of Subsidiary, net of distributions Income before income tax benefit Benefit from income taxes Income available to common shareholders Comprehensive income $ $ $ 13,010 4 13,014 121 133 779 1,033 11,981 2,852 14,833 349 15,182 10,204 $ $ $ 2,260 3 2,263 99 156 411 666 1,597 9,080 10,677 287 10,964 10,049 $ $ $ 2,350 3 2,353 96 187 389 672 1,681 3,325 5,006 288 5,294 12,957 39 Notes to Consolidated Financial Statements 18. PARENT ONLY CONDENSED FINANCIAL STATEMENTS (Continued) CONDENSED STATEMENTS OF CASH FLOWS For the Years Ended December 31, 2016, 2015, and 2014 (In thousands) Cash flows from operating activities: Net income Adjustments to reconcile net income to net cash provided by operating activities: Undistributed net income of subsidiary, net of distributions Stock-based compensation Tax benefit from exercise of stock options Net (increase) decrease in other assets Net increase (decrease) in other liabilities Benefit from deferred income taxes Net cash provided by operating activities Cash flows used in investing activities: Investment in subsidiary Cash flows from financing activities: Cash dividend payments on common stock Proceeds from exercise of stock options Tax benefit from exercise of stock options Net cash used in financing activities Increase (decrease) in cash and cash equivalents Cash and cash equivalents at beginning of year Cash and cash equivalents at end of year Supplemental Disclosure of Cash Flow Information: Cash paid during the year for interest Non-cash investing and financing activities: Common stock issued in Sierra Vista Bank acquisition 2016 2015 2014 $ 15,182 $ 10,964 $ 5,294 (2,852) 284 (30) (405) 64 98 12,341 (9,584) (2,715) 231 30 (2,454) 303 584 887 112 16,678 $ $ $ (9,080) 238 (6) 50 (32) (5) 2,129 - (1,979) 60 6 (1,913) 216 368 584 97 - $ $ $ (3,325) 173 (7) (50) 34 (8) 2,111 - (2,190) 55 7 (2,128) (17) 385 368 194 - $ $ $ 40 Supplementary Financial Information The following supplementary financial information is not a part of the Company’s financial statements. Unaudited Quarterly Statement of Operations Data (In thousands, except per share amounts) Q4 2016 Q3 2016 Q2 2016 Q1 2016 Q4 2015 Q3 2015 Q2 2015 Q1 2015 Net interest income (Reversal of ) Provision for credit losses Net interest income after provision for credit losses Other non-interest income Net realized gains on investment securities Total non-interest expense Provision for (benefit from) income taxes Net income Net income available to common shareholders Basic earnings per share Diluted earnings per share $ 12,773 $ - 12,773 2,154 84 10,913 1,492 10,995 $ (1,000) 11,208 $ (4,600) 10,604 $ (250) 11,995 1,849 286 9,655 1,361 15,808 2,094 420 9,377 2,887 10,854 1,574 1,130 8,977 1,177 10,638 $ - 10,638 1,842 37 9,003 611 10,352 $ 100 10,065 $ 500 10,252 1,722 - 9,028 429 9,565 2,364 732 8,697 886 2,606 $ 3,114 $ 6,058 $ 3,404 $ 2,903 $ 2,517 $ 3,078 $ 9,720 - 9,720 1,965 726 9,288 657 2,466 2,606 $ 3,114 $ 6,058 $ 3,403 $ 2,903 $ 2,517 $ 3,078 $ 2,466 0.21 $ 0.28 $ 0.55 $ 0.31 $ 0.27 $ 0.23 $ 0.28 $ 0.21 $ 0.28 $ 0.55 $ 0.31 $ 0.26 $ 0.23 $ 0.28 $ 0.23 0.22 $ $ $ $ The results for the fourth quarter 2016 include the results of the assets and liabilities acquired from Sierra Vista Bank in addition to the continued organic growth of the Company. 41 Financial Statements and Supplementary Data. Management’s Report on Internal Control Over Financial Reporting The Shareholders and Board of Directors Central Valley Community Bancorp and Subsidiary Fresno, California The management of Central Valley Community Bancorp is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is defined in Rule 13a-15(f ) promulgated under the Securities Exchange Act of 1934 as a process designed by, or under the supervision of our Chief Executive Officer and Chief Financial Officer and effected by the board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of consolidated financial statements for external purposes in accordance with U.S. generally accepted accounting principles and includes those policies and procedures that: * our assets: Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of * Provide reasonable assurance that transactions are recorded as necessary to permit preparation of consolidated financial statements in accordance with U.S. generally accepted accounting principles, and that our receipts and expenditures are being made only in accordance with authorizations of our management and directors; and * Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on the consolidated financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Management assessed the effectiveness of our internal control over financial reporting as of December 31, 2016. In making this assessment, management used the criteria issued in the 2013 Internal Control-Integrated Framework (Framework) established and updated by the Committee of Sponsoring Organizations of the Treadway Commission (‘‘COSO’’). Based on that assessment, the Company’s management believes that, as of December 31, 2016, our internal control over financial reporting is effective based on those criteria. Crowe Horwath LLP, the independent registered public accounting firm that audited the Company’s consolidated financial statements included in the Annual Report on Form 10-K for the year ended December 31, 2016, has issued an audit report on the effectiveness of the Company’s internal control over financial reporting in accordance with the standards of the Public Company Accounting Oversight Board that appears on the next page. 42 Report of Independent Registered Public Accounting Firm The Shareholders and Board of Directors Central Valley Community Bancorp and Subsidiary Fresno, California We have audited the accompanying consolidated balance sheets of Central Valley Community Bancorp and subsidiary (the ‘‘Company’’) as of December 31, 2016 and 2015, and the related consolidated statements of income, comprehensive income, changes in shareholders’ equity, and cash flows for each of the three years in the period ended December 31, 2016. We also have audited the Company’s internal control over financial reporting as of December 31, 2016, based on criteria established in the 2013 Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’s management is responsible for these financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on these financial statements and an opinion on the Company’s internal control over financial reporting based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions. A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Central Valley Community Bancorp and subsidiary as of December 31, 2016 and 2015, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2016 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, Central Valley Community Bancorp and subsidiary maintained, in all material respects, effective internal control over financial reporting as of December 31, 2016, based on criteria established in the 2013 Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Sacramento, California March 29, 2017 43 Selected Consolidated Financial Data Statements of Income Total interest income Total interest expense Net interest income before provision for credit losses (Reversal of ) Provision for credit losses Net interest income after provision for credit losses Non-interest income Non-interest expenses Income before provision for (benefit from) income taxes Provision for (benefit from) income taxes Net income Preferred stock dividends and accretion of discount Net income available to common shareholders Basic earnings per share Diluted earnings per share Cash dividends declared per common share Balances at end of year: Investment securities, Federal funds sold and deposits in other banks Net loans Total deposits Total assets Shareholders’ equity Earning assets Average balances: Investment securities, Federal funds sold and deposits in other banks Net loans Total deposits Total assets Shareholders’ equity Earning assets Years Ended December 31, (In thousands, except per share amounts) 2016 2015 2014 2013 2012 $ 46,676 $ 1,096 41,822 $ 1,047 41,039 $ 1,156 34,836 $ 1,385 45,580 (5,850) 51,430 9,591 38,922 22,099 6,917 15,182 - 40,775 600 40,175 9,387 36,016 13,546 2,582 10,964 - 39,883 7,985 31,898 8,164 35,338 4,724 (570) 5,294 - 33,451 - 33,451 7,831 31,685 9,597 1,347 8,250 350 15,182 $ 10,964 $ 5,294 $ 7,900 $ 1.34 $ 1.00 $ 0.48 $ 0.77 $ 1.33 $ 1.00 $ 0.48 $ 0.77 $ 0.24 $ 0.18 $ 0.20 $ 0.20 $ 31,820 1,883 29,937 700 29,237 7,242 27,274 9,205 1,685 7,520 350 7,170 0.75 0.75 0.05 December 31, (In thousands) 2016 2015 2014 2013 2012 558,132 $ 747,302 1,255,979 1,443,323 164,033 1,319,065 580,544 $ 588,501 1,116,267 1,276,736 139,323 1,173,591 520,511 $ 564,280 1,039,152 1,192,183 131,045 1,074,942 529,398 $ 503,149 1,004,143 1,145,635 120,043 1,042,552 424,516 385,185 751,432 890,228 117,665 801,098 560,860 $ 636,475 1,144,231 1,321,007 154,325 1,210,082 529,046 $ 577,784 1,065,798 1,222,526 135,062 1,112,758 513,866 $ 531,382 1,006,560 1,157,483 130,414 1,052,097 445,859 $ 444,770 848,493 986,924 119,746 895,330 368,818 394,675 719,601 853,078 114,561 766,937 $ $ $ $ $ $ Data from 2016 reflects the partial year impact of the acquisition of Sierra Vista Bank on October 1, 2016. Data from 2013 reflects the partial year impact of the acquisition of Visalia Community Bank on July 1, 2013. 44 Management’s Discussion and Analysis of Financial Condition and Results of Operations. Management’s discussion and analysis should be read in conjunction with the Company’s audited Consolidated Financial Statements, including the Notes thereto, in Item 8 of this Annual Report. Certain matters discussed in this report constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. All statements contained herein that are not historical facts, such as statements regarding the Company’s current business strategy and the Company’s plans for future development and operations, are based upon current expectations. These statements are forward-looking in nature and involve a number of risks and uncertainties. Such risks and uncertainties include, but are not limited to (1) significant increases in competitive pressure in the banking industry; (2) the impact of changes in interest rates; (3) a decline in economic conditions in the Central Valley; (4) the Company’s ability to continue its internal growth at historical rates; (5) the Company’s ability to maintain its net interest margin; (6) the decline quality of the Company’s earning assets; (7) decline in credit quality; (8) changes in the regulatory environment; (9) fluctuations in the real estate market; (10) changes in business conditions and inflation; (11) changes in securities markets (12) risks associated with acquisitions, relating to difficulty in integrating combined operations and related negative impact on earnings, and incurrence of substantial expenses. Therefore, the information set forth in such forward-looking statements should be carefully considered when evaluating the business prospects of the Company. When the Company uses in this Annual Report the words ‘‘anticipate,’’ ‘‘estimate,’’ ‘‘expect,’’ ‘‘project,’’ ‘‘intend,’’ ‘‘commit,’’ ‘‘believe’’ and similar expressions, the Company intends to identify forward-looking statements. Such statements are not guarantees of performance and are subject to certain risks, uncertainties and assumptions, including those described in this Annual Report. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those anticipated, estimated, expected, projected, intended, committed or believed. The future results and shareholder values of the Company may differ materially from those expressed in these forward-looking statements. Many of the factors that will determine these results and values are beyond the Company’s ability to control or predict. For those statements, the Company claims the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995. See also the discussion of risk factors in Item 1A, ‘‘Risk Factors.’’ We are not able to predict all the factors that may affect future results. You should not place undue reliance on any forward looking statement, which speaks only as of the date of this Report on Form 10-K. Except as required by applicable laws or regulations, we do not undertake any obligation to update or revise any forward looking statement, whether as a result of new information, future events or otherwise. INTRODUCTION Central Valley Community Bancorp (NASDAQ: CVCY) (the Company) was incorporated on February 7, 2000. The formation of the holding company offered the Company more flexibility in meeting the long-term needs of customers, shareholders, and the communities it serves. The Company currently has one bank subsidiary, Central Valley Community Bank (the Bank) and one business trust subsidiary, Service 1st Capital Trust 1. The Company and Sierra Vista Bank (SVB) completed a merger under which SVB was merged with and into the Bank on October 1, 2016. SVB had one branch in Folsom, one branch in Fair Oaks, and one branch in Cameron Park which continue to be operated by the Bank. The Company’s market area includes the central valley area from Sacramento, California to Bakersfield, California. During 2016, we focused on asset quality and capital adequacy due to the uncertainty created by the economy. We also focused on assuring that competitive products and services were made available to our clients while adjusting to the many new laws and regulations that affect the banking industry. As of December 31, 2016, the Bank operated 22 full-service offices. The Bank has a Real Estate Division, an Agribusiness Center and an SBA Lending Division in Fresno. All real estate related transactions are conducted and processed through the Real Estate Division, including interim construction loans for single family residences and commercial buildings. We offer permanent single family residential loans through our mortgage broker services. The SVB acquisition added total assets, at fair value, of approximately $155.15 million, $122.53 million in loans, at fair value, and $138.38 million in deposits, at fair value, at October 1, 2016. SVB’s results of operations have been included in the Company’s results of operations beginning October 1, 2016. The one-time pre-tax severance, retention, acquisition and integration costs totaled $1.78 million for the year ended December 31, 2016. ECONOMIC CONDITIONS The economy in California’s Central Valley had been negatively impacted by the recession that began in 2007 and the related real estate market and the slowdown in residential construction. The recession impacted most industries in our market area. Initially, housing values throughout the nation and especially in the Central Valley decreased dramatically, which in turn negatively affected the personal net worth of much of the population in our service area. Over the last several years the economy, as evidenced by the California and Central Valley unemployment rates, and housing prices have shown slow but steady improvement. Housing in the Central Valley continues to be relatively more affordable than the major metropolitan areas in California. Agriculture and agricultural related businesses remain a critical part of the Central Valley’s economy. The Valley’s agricultural production is widely diversified, producing nuts, vegetables, fruit, cattle, dairy products, and cotton. The continued future success of agriculture related businesses is highly dependent on the availability of water and is subject to fluctuation in worldwide commodity prices, currency exchanges, and demand. From time to time, California experiences severe droughts, which could significantly harm the business of our customers and the credit quality of the loans to those customers. We closely monitor the water resources and the related issues affecting our customers, and will remain vigilant for signs of deterioration within the loan portfolio in an effort to manage credit quality and work with borrowers where possible to mitigate any losses. OVERVIEW Diluted earnings per share (EPS) for the year ended December 31, 2016 was $1.33 compared to $1.00 and $0.48 for the years ended December 31, 2015 and 2014, respectively. Net income for 2016 was $15,182,000 compared to $10,964,000 and $5,294,000 for the years ended December 31, 2015 and 2014, respectively. The increase in net income and EPS was primarily driven by a decrease in provision for credit losses, an increase in net interest income, and an increase in non-interest income offset by increases in non-interest expense and the provision for income taxes in 2016 compared to 2015. Total assets at December 31, 2016 were $1,443,323,000 compared to $1,276,736,000 at December 31, 2015. Return on average equity for 2016 was 9.84% compared to 8.12% and 4.06% for 2015 and 2014, respectively. Return on average assets for 2016 was 1.15% compared to 0.90% and 0.46% for 2015 and 2014, respectively. Total equity was $164,033,000 at December 31, 2016 compared to $139,323,000 at December 31, 2015. The increase in equity in 2016 compared to 2015 was primarily driven by the issuance of stock in connection with the Sierra Vista Bank acquisition, as well as the retention of earnings, net of dividends paid, partially offset by a decrease in unrealized gains on available-for-sale securities recorded in accumulated other comprehensive income (AOCI). Average total loans increased $59,811,000 or 10.19% to $646,573,000 in 2016 compared to $586,762,000 in 2015. In 2016, we recorded a reverse provision for $5,850,000 for credit losses compared to a provision for $600,000 in 2015 and $7,985,000 in 2014. The Company had nonperforming assets, consisting of $2,180,000 in nonaccrual loans and $362,000 in repossessed assets, totaling $2,542,000 at December 31, 2016. At December 31, 2015, nonperforming assets totaled $2,413,000. Net recoveries (charge-offs) for 2016 were $5,566,000 compared to $702,000 for 2015 and $(8,885,000) for 2014. Refer to ‘‘Asset Quality’’ below for further information. Key Factors in Evaluating Financial Condition and Operating Performance In evaluating our financial condition and operating performance, we focus on several key factors including: • Return to our shareholders; • Return on average assets; • Development of revenue streams, including net interest income and non-interest income; 45 Management’s Discussion and Analysis of Financial Condition and Results of Operations. OVERVIEW (Continued) • Asset quality; • Asset growth; • Capital adequacy; • Operating efficiency; and • Liquidity. Return to Our Shareholders One measure of our return to our shareholders is the return on average equity (ROE). ROE is a ratio that measures net income divided by average shareholders’ equity. Our ROE was 9.84% for the year ended 2016 compared to 8.12% and 4.06% for the years ended 2015 and 2014, respectively. Our net income for the year ended December 31, 2016 increased $4,218,000 compared to 2015 and increased $5,670,000 in 2015 compared to 2014. During 2016, net income increased due to a decrease in the provision for credit losses, increases in net interest income, and increases in non-interest income, partially offset by an increase in tax expense and increases in non-interest expenses, compared to 2015. Net interest income increased primarily because of increases in loan and investment income, offset by increases in interest expense on deposits. During 2016, our net interest margin (NIM) increased 8 basis points to 4.09% compared to 2015. Our net interest margin increased as a result of yield changes, asset mix changes, and an increase in average earning assets, partially offset by an increase in interest-bearing liabilities. Net interest income during 2016 was positively impacted by the collection of nonaccrual loans which resulted in a recovery of interest income of approximately $657,000. The recovery was partially offset by reversal of approximately $71,000 in interest income on loans placed on nonaccrual during the year. Net interest income during 2015 was positively impacted by the collection of non-accrual loan which resulted in a recovery of interest income of approximately $431,000. The recovery was partially offset by reversal of approximately $7,000 in interest income on loans put on nonaccrual during the year. During the year ended 2016, the increase in non-interest income was primarily driven by a $425,000 increase in net realized gains on sales and calls of investment securities, an increase in loan placement fees of $41,000, a $50,000 increase in Federal Home Loan Bank dividends, a $31,000 increase in interchange fees, partially offset by a $48,000 decrease in service charge income, and a $121,000 decrease in other income, in 2016 compared to 2015. The Company also realized $190,000 and $345,000 tax-free gains related to the collection of life insurance proceeds in 2016 and 2015, respectively, which are included in other non-interest income. In addition, the Company recorded an other-than-temporary impairment loss of $136,000 during the year ended December 31, 2016. Non-interest expenses increased in 2016 compared to 2015 primarily due to the SVB acquisition. The net increase year over year was a result of increases in salary and employee benefit expenses of $1,045,000, increase in acquisition and integration expenses of $1,782,000, data processing expenses of $568,000, occupancy and equipment expenses of $85,000, ATM/Debit card expenses of $85,000, partially offset by a decrease in Internet banking expenses of $31,000, a decrease of regulatory assessments of $417,000, advertising fees of $32,000, professional services of $246,000, and amortization of core deposit intangibles of $171,000. Basic EPS was $1.34 for 2016 compared to $1.00 and $0.48 for 2015 and 2014, respectively. Diluted EPS was $1.33 for 2016 compared to $1.00 and $0.48 for 2015 and 2014, respectively. The increase in EPS for 2016 is primarily due to the increase in net income. We experienced an increase in capital due to increases in retained earnings and from the issuance of common stock as a result of the Sierra Vista Bank acquisition, offset by a decrease in accumulated other comprehensive income. data includes bank holding companies in central California with assets from $600 million to $2.5 billion. Development of Revenue Streams Over the past several years, we have focused on not only our net income, but improving the consistency of our revenue streams in order to create more predictable future earnings and reduce the effect of changes in our operating environment on our net income. Specifically, we have focused on net interest income through a variety of strategies, including increases in average interest earning assets, and minimizing the effects of the recent interest rate decline on our net interest margin by focusing on core deposits and managing the cost of funds. Our net interest margin (fully tax equivalent basis) was 4.09% for the year ended December 31, 2016, compared to 4.01% and 4.11% for the years ended December 31, 2015 and 2014, respectively. We experienced an increase in 2016 net interest margin compared to 2015, resulting from the increase in loan and investment yields. The effective tax equivalent yield on total earning assets increased 8 basis points, while the cost of total interest-bearing liabilities and total deposits remained unchanged. Our cost of total deposits in 2016 and 2015 was 0.09% compared to 0.11% for the same period in 2014. Our net interest income before provision for credit losses increased $4,805,000 or 11.78% to $45,580,000 for the year ended 2016 compared to $40,775,000 and $39,883,000 for the years ended 2015 and 2014, respectively. Our non-interest income is generally made up of service charges and fees on deposit accounts, fee income from loan placements, appreciation in cash surrender value of bank owned life insurance, and net gains from sales and calls of investment securities. Non-interest income in 2016 increased $204,000 or 2.17% to $9,591,000 compared to $9,387,000 in 2015 and $8,164,000 in 2014. The increase resulted primarily from increases in net realized gains on sales and calls of investment securities, loan placement fees, interchange fees, and Federal Home Loan Bank dividends, partially offset by a decrease in service charge income, appreciation in cash surrender value of bank owned life insurance, and gain on sale of other real estate owned compared to 2015. Customer service charges decreased $48,000 or 1.56% to $3,022,000 in 2016 compared to $3,070,000 and $3,280,000 in 2015 and 2014, respectively. Further detail on non-interest income is provided below. Asset Quality For all banks and bank holding companies, asset quality has a significant impact on the overall financial condition and results of operations. Asset quality is measured in terms of classified and nonperforming loans, and is a key element in estimating the future earnings of a company. Total nonperforming assets were $2,542,000 and $2,413,000 at December 31, 2016 and 2015, respectively. Nonperforming assets totaled 0.34% of gross loans as of December 31, 2016 and 0.40% of gross loans as of December 31, 2015. The nonperforming assets for 2016 includes repossessed asset of $362,000 compared to no repossessed asset at December 31, 2015. The Company had no other real estate owned (OREO) at December 31, 2016 or December 31, 2015. Management maintains certain loans that have been brought current by the borrower (less than 30 days delinquent) on nonaccrual status until such time as management has determined that the loans are likely to remain current in future periods. The ratio of nonperforming loans to total loans was 0.29% as of December 31, 2016 and 0.40% as of December 31, 2015. The allowance for credit losses as a percentage of outstanding loan balance was 1.23% as of December 31, 2016 and 1.61% as of December 31, 2015. The ratio of net recoveries to average loans was 0.86% as of December 31, 2016 and 0.12% as of December 31, 2015. Asset Growth Return on Average Assets Our return on average assets (ROA) is a ratio that measures our performance compared with other banks and bank holding companies. Our ROA for the year ended 2016 was 1.15% compared to 0.90% and 0.46% for the years ended December 31, 2015 and 2014, respectively. The 2016 increase in ROA is primarily due to the increase in net income. Annualized ROA for our peer group was 0.99% at December 31, 2016. Peer group information from SNL Financial As revenues from both net interest income and non-interest income are a function of asset size, the continued growth in assets has a direct impact in increasing net income and therefore ROE and ROA. The majority of our assets are loans and investment securities, and the majority of our liabilities are deposits, and therefore the ability to generate deposits as a funding source for loans and investments is fundamental to our asset growth. Total assets increased 13.05% during 2016 to $1,443,323,000 as of December 31, 2016 from $1,276,736,000 as of December 31, 2015. Total gross loans increased 26.50% to 46 Management’s Discussion and Analysis of Financial Condition and Results of Operations. OVERVIEW (Continued) $756,628,000 as of December 31, 2016, compared to $598,111,000 at December 31, 2015. Total investment securities and Federal funds sold increased 7.50% to $547,764,000 as of December 31, 2016 compared to $509,556,000 as of December 31, 2015. Total deposits increased 12.52% to $1,255,979,000 as of December 31, 2016 compared to $1,116,267,000 as of December 31, 2015. Our loan to deposit ratio at December 31, 2016 was 60.24% compared to 53.58% at December 31, 2015. The loan to deposit ratio of our peers was 78.96% at December 31, 2016. The growth information above includes the results of our acquisition of Sierra Vista Bank which added approximately $122,533,000 in net loans and $138,236,000 in deposits during 2016. Capital Adequacy At December 31, 2016, we had a total capital to risk-weighted assets ratio of 13.72%, a Tier 1 risk-based capital ratio of 12.74%, common equity Tier 1 ratio of 12.48%, and a leverage ratio of 8.75%. At December 31, 2015, we had a total capital to risk-weighted assets ratio of 15.04%, a Tier 1 risk-based capital ratio of 13.79% and a leverage ratio of 8.65%. At December 31, 2016, on a stand-alone basis, the Bank had a total risk-based capital ratio of 13.57%, a Tier 1 risk based capital ratio of 12.59%, common equity Tier 1 ratio of 12.59%, and a leverage ratio of 8.64%. At December 31, 2015, the Bank had a total risk-based capital ratio of 14.93%, Tier 1 risk-based capital of 13.67% and a leverage ratio of 8.58%. Note 14 of the audited Consolidated Financial Statements provides more detailed information concerning the Company’s capital amounts and ratios. As of January 1, 2015, along with other community banking organizations, the Company and the Bank became subject to new capital requirements, and certain provisions of the new rules are being phased in through 2019 under the Dodd-Frank Act and Basel III. The Company’s consolidated capital ratios exceeded regulatory guidelines and the Bank’s capital ratios exceeded the regulatory guidelines for a well-capitalized financial institution under the Basel III regulatory requirements at December 31, 2016. Operating Efficiency Operating efficiency is the measure of how efficiently earnings before taxes are generated as a percentage of revenue. A lower ratio represents greater efficiency. The Company’s efficiency ratio (operating expenses, excluding amortization of intangibles and foreclosed property expense, divided by net interest income plus non-interest income, excluding net gains and losses from sale of securities) was 68.45% for 2016 compared to 69.22% for 2015 and 69.33% for 2014. The improvement in the efficiency ratio in 2016 is due to the growth in revenues outpacing the growth in non-interest expense. The increase in the efficiency ratio in 2015 compared to 2014 is due to the growth in revenues outpacing the growth in non-interest expense. The Company’s net interest income before provision for credit losses plus non-interest income increased 9.99% to $55,171,000 in 2016 compared to $50,162,000 in 2015 and $48,047,000 in 2014, while operating expenses increased 8.07% in 2016, 1.92% in 2015, and 11.53% in 2014. Liquidity Liquidity management involves our ability to meet cash flow requirements arising from fluctuations in deposit levels and demands of daily operations, which include providing for customers’ credit needs, funding of securities purchases, and ongoing repayment of borrowings. Our liquidity is actively managed on a daily basis and reviewed periodically by our management and Directors’ Asset/Liability Committee. This process is intended to ensure the maintenance of sufficient funds to meet our needs, including adequate cash flows for off-balance sheet commitments. Our primary sources of liquidity are derived from financing activities which include the acceptance of customer and, to a lesser extent, broker deposits, Federal funds facilities and advances from the Federal Home Loan Bank of San Francisco. We have available unsecured lines of credit with correspondent banks totaling approximately $40,000,000 and secured borrowing lines of approximately $351,713,000 with the Federal Home Loan Bank. These funding sources are augmented by collection of principal and interest on loans, the routine maturities and pay downs of securities from our investment securities portfolio, the stability of our core deposits, and the ability to sell investment securities. Primary uses of funds include origination and purchases of loans, withdrawals of and interest payments on deposits, purchases of investment securities, and payment of operating expenses. We had liquid assets (cash and due from banks, interest-earning deposits in other banks, Federal funds sold and available-for-sale securities) totaling $586,317,000 or 40.62% of total assets at December 31, 2016 and $572,171,000 or 44.82% of total assets as of December 31, 2015. RESULTS OF OPERATIONS NET INCOME Net income was $15,182,000 in 2016 compared to $10,964,000 and $5,294,000 in 2015 and 2014, respectively. Basic earnings per share was $1.34, $1.00, and $0.48 for 2016, 2015, and 2014, respectively. Diluted earnings per share was $1.33, $1.00, and $0.48 for 2016, 2015, and 2014, respectively. ROE was 9.84% for 2016 compared to 8.12% for 2015 and 4.06% for 2014. ROA for 2016 was 1.15% compared to 0.90% for 2015 and 0.46% for 2014. The increase in net income for 2016 compared to 2015 can be attributed to a decrease in the provision for credit losses, an increase in net interest income, and an increase in non-interest income, partially offset by an increase in provision for income taxes and an increase in non-interest expense including acquisition and integration expenses related to the SVB acquisition. The increase in net income for 2015 compared to 2014 was primarily attributed to a decrease in the provision for credit losses, and an increase in non-interest income, partially offset by an increase in provision for income taxes and an increase in non-interest expense. INTEREST INCOME AND EXPENSE Net interest income is the most significant component of our income from operations. Net interest income (the interest rate spread) is the difference between the gross interest and fees earned on the loan and investment portfolios and the interest paid on deposits and other borrowings. Net interest income depends on the volume of and interest rate earned on interest-earning assets and the volume of and interest rate paid on interest-bearing liabilities. The following table sets forth a summary of average balances with corresponding interest income and interest expense as well as average yield and cost information for the periods presented. Average balances are derived from daily balances, and nonaccrual loans are not included as interest-earning assets for purposes of this table. 47 Management’s Discussion and Analysis of Financial Condition and Results of Operations. INTEREST INCOME AND EXPENSE (Continued) Year Ended December 31, 2016 Interest Income/ Expense Average Interest Rate Average Balance Year Ended December 31, 2015 Interest Income/ Expense Average Interest Rate Average Balance Year Ended December 31, 2014 Interest Income/ Expense Average Interest Rate Average Balance SCHEDULE OF AVERAGE BALANCES, AVERAGE YIELDS AND RATES (Dollars in thousands) ASSETS Interest-earning deposits in other banks Securities Taxable securities Non-taxable securities (1) Total investment securities Federal funds sold Total securities and interest-earning deposits Loans (2) (3) Federal Home Loan Bank stock $ 53,514 $ 289 0.54% $ 64,963 $ 209 0.32% $ 53,781 $ 175 313,006 194,224 507,230 116 560,860 644,282 4,940 5,876 9,787 15,663 - 15,952 34,051 630 50,633 1.88% 5.04% 3.09% 0.51% 2.84% 5.29% 12.75% 4.18% 4,793 9,569 14,362 1 14,572 30,504 580 45,656 1.68% 5.37% 3.10% 0.25% 2.75% 5.27% 12.05% 4.10% 285,585 178,247 463,832 251 529,046 578,899 4,813 1,112,758 $ (8,978) 7,863 25,019 9,664 76,200 296,014 163,778 459,792 293 513,866 533,531 4,700 1,052,097 $ (8,147) 5,998 23,905 10,511 73,119 Total interest-earning assets 1,210,082 $ Allowance for credit losses Nonaccrual loans Cash and due from banks Bank premises and equipment Other non-earning assets (10,098) 2,291 23,840 9,053 85,839 Total average assets $ 1,321,007 $ 1,222,526 $ 1,157,483 LIABILITIES AND SHAREHOLDERS’ EQUITY Interest-bearing liabilities: Savings and NOW accounts Money market accounts Time certificates of deposit Total interest-bearing deposits Other borrowed funds $ 337,804 $ 249,620 139,656 727,080 5,157 317 133 525 975 121 Total interest-bearing liabilities 732,237 $ 1,096 Non-interest bearing demand deposits Other liabilities Shareholders’ equity 417,151 17,294 154,325 Total average liabilities and shareholders’ equity $ 1,321,007 0.09% 0.05% 0.38% 0.13% 2.35% 0.15% $ 300,741 $ 227,743 149,383 677,867 5,156 261 141 546 948 99 683,023 $ 1,047 0.09% 0.06% 0.37% 0.14% 1.89% 0.15% 387,931 16,510 135,062 $ 265,751 $ 229,769 162,218 657,738 5,155 662,893 $ 348,822 15,354 130,414 $ 1,222,526 $ 1,157,483 5,538 8,837 14,375 1 14,551 29,493 327 44,371 241 174 645 1,060 96 1,156 0.32% 1.87% 5.40% 3.13% 0.25% 2.83% 5.53% 6.96% 4.22% 0.09% 0.08% 0.40% 0.16% 1.83% 0.17% Interest income and rate earned on average earning assets Interest expense and interest cost related to average interest- bearing liabilities Net interest income and net interest margin (4) $ 50,633 4.18% $ 45,656 4.10% $ 44,371 4.22% 1,096 0.15% 1,047 0.15% 1,156 0.17% $ 49,537 4.09% $ 44,609 4.01% $ 43,215 4.11% (1) Interest income is calculated on a fully tax equivalent basis, which includes Federal tax benefits relating to income earned on municipal bonds totaling $3,327, $3,254, and $3,005 in 2016, 2015, and 2014, respectively. (2) Loan interest income includes loan fees of $134 in 2016, $255 in 2015, and $272 in 2014. (3) Average loans do not include nonaccrual loans. (4) Net interest margin is computed by dividing net interest income by total average interest-earning assets. 48 Management’s Discussion and Analysis of Financial Condition and Results of Operations. INTEREST INCOME AND EXPENSE (Continued) The following table sets forth a summary of the changes in interest income and interest expense due to changes in average asset and liability balances (volume) and changes in average interest rates for the periods indicated. The change in interest due to both rate and volume has been allocated to the change in rate. For the Years Ended December 31, 2016 Compared to 2015 For the Years Ended December 31, 2015 Compared to 2014 Volume Rate Net Volume Rate Net (In thousands) $ (36) $ 116 $ 80 $ 36 $ (2) $ 34 460 857 623 (639) 1,083 218 (195) 780 (550) (48) (745) 732 1,317 (1) 3,446 16 (16) - 101 34 1,301 (1) 3,547 50 585 - 2,507 7 (598) - (1,496) 246 (13) - 1,011 253 4,742 235 4,977 3,135 (1,850) 1,285 46 (36) 10 - 10 2 14 16 22 38 48 30 (22) (53) (23) 1 26 22 48 (43) (46) (89) 2 (13) (99) (112) 3 (22) (87) (109) Changes in Volume/Rate Increase (decrease) due to changes in: Interest income: Interest-earning deposits in other banks Investment securities: Taxable Non-taxable (1) Total investment securities Federal funds sold Loans FHLB Stock Total earning assets (1) Interest expense: Deposits: Savings, NOW and MMA Time certificate of deposits Total interest-bearing deposits Other borrowed funds Total interest bearing liabilities Net interest income (1) $ 4,732 $ 197 $ 4,929 $ 3,157 $ (1,763) $ 1,394 (1) Computed on a tax equivalent basis for securities exempt from federal income taxes. Interest and fee income from loans increased $3,547,000 or 11.63% in 2016 compared to 2015. Interest and fee income from loans increased $1,011,000 or 3.43% in 2015 compared to 2014. The increase in 2016 is primarily attributable to an increase in average total loans outstanding, as well as an increase in the yield on loans by 2 basis points. The net interest income during 2016 was positively impacted by the SVB acquisition in addition to the collection of nonaccrual loans which resulted in a recovery of interest income of approximately $657,000. The recovery was partially offset by reversal of approximately $71,000 in interest income on loans placed on nonaccrual status during the year. Interest income during 2015 was positively impacted by the collection of nonaccrual loans which resulted in a recovery of interest income of approximately $431,000. The recovery was partially offset by reversal of approximately $7,000 in interest income on loans placed on nonaccrual status during the year. Average total loans for 2016 increased $59,811,000 to $646,573,000 compared to $586,762,000 for 2015 and $539,529,000 for 2014. Of the increase in 2016, approximately $31.6 million was attributed to organic growth and approximately $28.2 million from the acquisition of SVB. The yield on loans for 2016 was 5.29% compared to 5.27% and 5.53% for 2015 and 2014, respectively. Interest income from total investments on a non tax-equivalent basis, (total investments include investment securities, Federal funds sold, interest-bearing deposits in other banks, and other securities), increased $1,307,000 or 11.55% in 2016 compared to 2015. The yield on average investments increased 9 basis points to 2.84% for the year ended December 31, 2016 from 2.75% for the year ended December 31, 2015. Average total investments increased $31,814,000 to $560,860,000 in 2016 compared to $529,046,000 in 2015. In 2015, total investment income on a non tax-equivalent basis decreased $228,000 or 1.97% compared to 2014. A significant portion of the investment portfolio is mortgage-backed securities (MBS) and collateralized mortgage obligations (CMOs). At December 31, 2016, we held $181,064,000 or 33.06% of the total market value of the investment portfolio in MBS and CMOs with an average yield of 1.88%. We invest in Collateralized Mortgage Obligations (CMO) and Mortgage Backed Securities, (MBS) as part of our overall strategy to increase our net interest margin. CMOs and MBS by their nature are affected by prepayments which are impacted by changes in interest rates. In a normal declining rate environment, prepayments from MBS and CMOs would be expected to increase and the expected life of the investment would be expected to shorten. Conversely, if interest rates increase, prepayments normally would be expected to decline and the average life of the MBS and CMOs would be expected to extend. However, in the current economic environment, prepayments may not behave according to historical norms. Premium amortization and discount accretion of these investments affects our net interest income. Our management monitors the prepayment speed of these investments and adjusts premium amortization and discount accretion based on several factors. These factors include the type of investment, the investment structure, interest rates, interest rates on new mortgage loans, expectation of interest rate changes, current economic conditions, the level of principal remaining on the bond, the bond coupon rate, the bond origination date, and volume of available bonds in market. The calculation of premium amortization and discount accretion is by nature inexact, and represents management’s best estimate of principal pay downs inherent in the total investment portfolio. The cumulative net of tax effect of the change in market value of the available-for-sale investment portfolio as of December 31, 2016 was an unrealized loss of $516,000 and is reflected in the Company’s equity. At December 31, 2016, the average life of the investment portfolio was 6.18 years and the market value reflected a pre-tax unrealized loss of $891,000. Management reviews market value declines on individual investment securities to determine whether they represent other-than-temporary impairment (OTTI). For the year ended December 31, 2016, OTTI was recorded in the amount of $136,000. For the years ended December 31, 2015 and 2014, no OTTI was recorded. Future deterioration in the market values of our investment securities may require the Company to recognize additional OTTI losses. A component of the Company’s strategic plan has been to use its investment portfolio to offset, in part, its interest rate risk relating to variable rate loans. Measured at December 31, 2016, an immediate rate increase of 200 basis points would result in an estimated decrease in the market value of the investment portfolio by approximately $(43,123,000). Conversely, with an immediate rate decrease of 200 basis points, the estimated increase in the market value of the investment portfolio would be $40,501,000. The modeling environment assumes management would take no action during an immediate shock of 200 basis points. However, the Company uses those increments to measure its interest rate risk in accordance with regulatory requirements and to measure the possible future risk in the investment portfolio. For further discussion of the Company’s market risk, refer to Quantitative and Qualitative Disclosures about Market Risk. Management’s review of all investments before purchase includes an analysis of how the security will perform under several interest rate scenarios to monitor whether investments are consistent with our investment policy. The policy addresses issues of average life, duration, and concentration guidelines, prohibited investments, impairment, and prohibited practices. Total interest income in 2016 increased $4,854,000 to $46,676,000 compared to $41,822,000 in 2015 and $41,039,000 in 2014. The increase was the result of yield changes, asset mix changes, and an increase in average earning assets, partially offset by an increase in interest-bearing liabilities. The tax equivalent yield on interest earning assets increased to 4.18% for the year ended December 31, 2016 from 4.10% for the year ended December 31, 2015. Average interest earning assets increased to $1,210,082,000 for the year ended December 31, 2016 compared to $1,112,758,000 for the year ended December 31, 2015. Average interest-earning deposits in other banks decreased $11,449,000 comparing 2016 to 2015. Average yield on these deposits was 0.54% compared to 0.32% on December 31, 2016 and December 31, 2015 respectively. Average investments and interest-earning deposits increased $31,814,000 but the tax equivalent yield on those assets increased 9 basis points. Average total loans increased $59,811,000 and the yield on average loans increased 2 basis points. 49 Management’s Discussion and Analysis of Financial Condition and Results of Operations. INTEREST INCOME AND EXPENSE (Continued) The increase in total interest income total for 2015 was the result of yield changes, asset mix changes, and an increase in average earning assets, partially offset by an increase in interest-bearing liabilities. The yield on interest-earning assets increased to 4.10% for the year ended December 31, 2015 from 4.22% for the year ended December 31, 2014. Average interest-earning assets increased to $1,112,758,000 for the year ended December 31, 2015 compared to $1,052,097,000 for the year ended December 31, 2014. Interest expense on deposits in 2016 increased $27,000 or 2.85% to $975,000 compared to $948,000 in 2015 and $1,060,000 in 2014. The increase in interest expense in 2016 compared to 2015 was a result of the deposits acquired in the fourth quarter acquisition of Sierra Vista Bank. The yield on interest-bearing deposits decreased 1 basis points to 0.13% in 2016 from 0.14% in 2015. The decrease in interest expense in 2015 compared to 2014 was due to repricing of interest-bearing deposits, which decreased 2 basis points to 0.14% in 2015 from 0.16% in 2014. Average interest-bearing deposits were $727,080,000 for 2016 compared to $677,867,000 and $657,738,000 for 2015 and 2014, respectively. The increases in average interest-bearing deposits in 2016 and 2015 was the result of organic growth and the SVB acquisition in 2016. Average other borrowings were $5,157,000 with an effective rate of 2.35% for 2016 compared to $5,156,000 with an effective rate of 1.89% for 2015. In 2014, the average other borrowings were $5,155,000 with an effective rate of 1.83%. Included in other borrowings are the junior subordinated deferrable interest debentures acquired from Service 1st, advances on lines of credit, advances from the Federal Home Loan Bank (FHLB), and overnight borrowings. The debentures were acquired in the merger with Service 1st and carry a floating rate based on the three month LIBOR plus a margin of 1.60%. The rate was 2.48% for 2016, 1.92% for 2015, and 1.83% for 2014. The cost of all interest-bearing liabilities remained unchanged at 0.15% basis points for 2016 and 2015 compared to 0.17% for 2014. The cost of total deposits remained unchanged at 0.09% for the year ended December 31, 2016 and December 31, 2015 compared to 0.11% for the year ended 2014. Average demand deposits increased 7.53% to $417,151,000 in 2016 compared to $387,931,000 for 2015 and $348,822,000 for 2014. The ratio of non-interest demand deposits to total deposits increased to 36.46% for 2016 compared to 36.40% and 34.65% for 2015 and 2014, respectively. Net interest income before provision for credit losses for 2016 increased $4,805,000 or 11.78% to $45,580,000 compared to $40,775,000 for 2015 and $39,883,000 for 2014. The increase in 2016 was due to the increase in average earning assets while the yield on interest bearing liabilities remained unchanged. Our net interest margin (NIM) increased 8 basis points. Yield on interest earning assets increased 8 basis points. The change in the mix of average interest earning assets also affected NIM. Interest-earning deposits in other banks and investment securities, which tend to have lower effective yields, increased reflective of the Federal Reserve rate increase. Net interest income before provision for credit losses increased $892,000 in 2015 compared to 2014, mainly due to the increase in average earning assets and a 2 basis point decrease in the average interest rate on interest-bearing deposits, partially offset by the decrease in the average rate on earning assets. Average interest-earning assets were $1,210,082,000 for the year ended December 31, 2016 with a NIM of 4.09% compared to $1,112,758,000 with a NIM of 4.01% in 2015, and $1,052,097,000 with a NIM of 4.11% in 2014. For a discussion of the repricing of our assets and liabilities, refer to Quantitative and Qualitative Disclosure about Market Risk. PROVISION FOR CREDIT LOSSES We provide for probable incurred credit losses through a charge to operating income based upon the composition of the loan portfolio, delinquency levels, historical losses and nonperforming assets, economic and environmental conditions and other factors which, in management’s judgment, deserve recognition in estimating credit losses. Loans are charged off when they are considered uncollectible or when continuance as an active earning bank asset is not warranted. The establishment of an adequate credit allowance is based on both an accurate risk rating system and loan portfolio management tools. The Board has 50 established initial responsibility for the accuracy of credit risk grades with the individual credit officer. The grading is then submitted to the Chief Credit Officer (CCO), who reviews the grades for accuracy and gives final approval. The CCO is not involved in loan originations. The risk grading and reserve allocation is analyzed quarterly by the Senior Risk Manager, CCO, Chief Financial Officer, and Board; and at least annually by a third party credit reviewer and by various regulatory agencies. Quarterly, the Senior Risk Manager and the CCO set the specific reserve for all adversely risk-graded credits. This process includes the utilization of loan delinquency reports, classified asset reports, collateral analysis, and portfolio concentration reports to assist in accurately assessing credit risk and establishing appropriate reserves. Reserves are also allocated to credits that are not impaired based on inherent risk in those loans. The allowance for credit losses is reviewed at least quarterly by the Board’s Audit/Compliance Committee and by the Board of Directors. Reserves are allocated to loan portfolio categories using percentages which are based on both historical risk elements such as delinquencies and losses and predictive risk elements such as economic, competitive and environmental factors. We have adopted the specific reserve approach to allocate reserves to each impaired credit for the purpose of estimating potential loss exposure. Although the allowance for credit losses is allocated to various portfolio categories, it is general in nature and available for the loan portfolio in its entirety. Changes in the allowance for credit losses may be required based on the results of independent loan portfolio examinations, regulatory agency examinations, or our own internal review process. Additions are also required when, in management’s judgment, the allowance does not properly reflect the portfolio’s probable loss exposure. Management believes that all adjustments, if any, to the allowance for credit losses are supported by the timely and consistent application of methodologies and processes resulting in detailed documentation of the allowance of the allowance calculation and other portfolio trending analysis. The allocation of the allowance for credit losses is set forth below (in thousands): Loan Type Commercial: December 31, 2016 December 31, 2015 Commercial and industrial Agricultural land and production $ Owner occupied Real estate construction and other land loans Commercial real estate Agricultural real estate Other real estate Consumer: Equity loans and lines of credit Consumer and installment Unallocated reserves $ 1,884 296 1,408 698 1,969 1,969 156 483 369 94 3,143 419 1,556 694 1,686 1,149 119 500 234 110 Total allowance for credit losses $ 9,326 $ 9,610 Loans are charged to the allowance for credit losses when the loans are deemed uncollectible. It is the policy of management to make additions to the allowance so that it remains adequate to cover all probable incurred credit losses that exist in the portfolio at that time. We assign qualitative and environmental factors (Q factors) to each loan category. Q factors include reserves held for the effects of lending policies, economic trends, and portfolio trends along with other dynamics which may cause additional stress to the portfolio. Managing credits identified through the risk evaluation methodology includes developing a business strategy with the customer to mitigate our potential losses. Management continues to monitor these credits with a view to identifying as early as possible when, and to what extent, additional provisions may be necessary. While the overall level of loans with an internal risk rating of substandard has increased by $17.7 million or 55.7% to $49.5 million at December 31, 2016 from $31.8 million at December 31, 2015, the classification of those loans has migrated from Agricultural land and production to Agricultural real estate. Management believes that the additional collateral obtained related to these classified assets provides the Company with a reduced NET INTEREST INCOME BEFORE PROVISION FOR CREDIT LOSSES Real estate: Management’s Discussion and Analysis of Financial Condition and Results of Operations. PROVISION FOR CREDIT LOSSES (Continued) risk of loss if a default event was to occur. The increase in substandard loans related to acquired SVB loans was $4.0 million at December 31, 2016. In addition, the level of commercial and industrial loans graded special mention or worse have substantially declined from $24.4 million at December 31, 2015 to $13.4 million at December 31, 2016. However, as of December 31, 2016, 2016, $12.5 million of the $13.4 million are graded substandard as compared to the $1.8 million of the $24.4 million as of December 31, 2015. Management believes that the level of allowance for loan losses allocated to Commercial and Real estate loans has been adjusted accordingly. During the year ended December 31, 2016, the company recorded a reverse provision for credit losses of $5,850,000 compared to a provision of $600,000 and $7,985,000 for the same periods in 2015 and 2014, respectively. The reversal from the allowance for credit losses is primarily the result of $5,566,000 in net loan loss recoveries and our assessment of the overall adequacy of the allowance for credit losses considering a number of factors as discussed in the ‘‘Allowance for Credit Losses’’ section. During the years ended December 31, 2016, 2015 and 2014 the Company had net charge-offs (recoveries) totaling $(5,566,000), $(702,000), and $8,885,000 respectively. The net charge-off (recovery) ratio, which reflects net charge-offs (recoveries) to average loans, was (0.86)%, (0.12)% and 1.65% for 2016, 2015, and 2014, respectively. Nonperforming loans were $2,180,000 and $2,413,000 at December 31, 2016 and 2015, respectively. Nonperforming loans as a percentage of total loans were 0.29% at December 31, 2016 compared to 0.40% at December 31, 2015. The Company had no other real estate owned at December 31, 2016, December 31, 2015, and December 31, 2014. The carrying value of foreclosed assets was $362,000 at December 31, 2016, and is included in other assets on the consolidated balance sheets. No foreclosed assets were recorded at December 31, 2015 and December 31, 2014. We had no loans past due, not including nonaccrual loans at December 31, 2016 compared to $136,000 at December 31, 2015. Excluding 2014, the Company has seen a decline in the amount of non-performing loans to an amount more in line with historical levels before the recession triggered by the financial crisis of 2008. Notwithstanding improvements in the economy, we anticipate weakness in economic conditions on national, state and local levels to continue. Continued economic pressures may negatively impact the financial condition of borrowers to whom the Company has extended credit and as a result we may be required to make further significant provisions to the allowance for credit losses in the future. Many farmers and ranchers have instituted improved farming practices including planting less acreage, as part of the mitigation for the cost of water delivery and the expense of pumping. We continue to closely monitor the water and the related issues affecting our customers. We have been and will continue to be proactive in looking for signs of deterioration within the loan portfolio in an effort to manage credit quality and work with borrowers where possible to mitigate any further losses. As of December 31, 2016, there were $49.5 million in classified loans of which $27.1 million related to agricultural real estate, $12.5 million to commercial and industrial loans, $3.8 million to real estate owner occupied, $1.4 million to real estate construction, and $2.7 million to commercial real estate. This compares to $31.8 million in classified loans as of December 31, 2015 of which $8.5 million related to agricultural real estate, $3.1 million to real estate construction, $1.8 million to commercial and industrial, $10.1 million to agricultural production, and $4.7 million to commercial real estate. The reduction in classified agricultural production loans relates to the refinance of a single loan which is now secured by agricultural real estate. The increase in classified agricultural real estate relates primarily to this single borrower with multiple loans totaling approximately $20.0 million which continues to perform under the terms of the loan agreements, while management has observed and continues to monitor some indications of deterioration in the borrower’s overall financial condition. These changes in classified loans contributed to the shift in the amount of allowance for credit losses allocated between commercial loans and real estate loans. As of December 31, 2016, we believe, based on all current and available information, the allowance for credit losses is adequate to absorb probable incurred losses within the loan portfolio; however, no assurance can be given that we may not sustain charge-offs which are in excess of the allowance in any given period. Refer to ‘‘Allowance for Credit Losses’’ below for further information. NET INTEREST INCOME AFTER PROVISION FOR CREDIT LOSSES Net interest income, after the provision for credit losses was $51,430,000 for 2016 compared to $40,175,000 and $31,898,000 for 2015 and 2014, respectively. NON-INTEREST INCOME Non-interest income is comprised of customer service charges, gains on sales and calls of investment securities, income from appreciation in cash surrender value of bank owned life insurance, loan placement fees, Federal Home Loan Bank dividends, and other income. Non-interest income was $9,591,000 in 2016 compared to $9,387,000 and $8,164,000 in 2015 and 2014, respectively. The $204,000 or 2.17% increase in non-interest income in 2016 was due to increases in net realized gains on sales and calls of investment securities, loan placement fees, Federal Home Loan Bank dividends, and interchange fees compared to 2015, partially offset by a decrease in service charge income, appreciation in cash surrender value of bank owned life insurance, gain on other real estate owned, and other income. The $1,223,000 or 14.98% increases in non-interest income in 2015 compared to 2014 was due to increases in net realized gains on sales and calls of investment securities, loan placement fees, Federal Home Loan Bank dividends, and other income, partially offset by a decrease in service charge income, interchange fees, and appreciation in cash surrender value of bank owned life insurance. Customer service charges decreased $48,000 to $3,022,000 in 2016 compared to $3,070,000 in 2015 and $3,280,000 in 2014. The decrease in 2016 from 2015 and in 2015 from 2014 was the result of lower NSF fees and lower analyzed service charge fee income. During the year ended December 31, 2016, we realized net gains on sales and calls of investment securities of $1,920,000. In 2016, we recorded an other-than-temporary impairment loss of $136,000 as compared to none during the year ended December 31, 2015, and 2014. In 2015, we realized a net gain of $1,495,000 compared to a net gain of $904,000 in 2014 from sales and calls of investment securities. The net gains in 2016, 2015, and 2014 were the results of partial restructuring of the investment portfolio designed to improve the future performance of the portfolio. See Footnote 4 to the audited Consolidated Financial Statements for more detail. Income from the appreciation in cash surrender value of bank owned life insurance (BOLI) totaled $558,000 in 2016 compared to $596,000 and $614,000 in 2015 and 2014, respectively. The Bank’s salary continuation and deferred compensation plans and the related BOLI are used as a retention tool for directors and key executives of the Bank. Interchange fees totaled $1,228,000 in 2016 compared to $1,197,000 and $1,205,000 in 2015 and 2014, respectively. Part of the increases in 2016 was attributable to the SVB acquisition. We earn loan placement fees from the brokerage of single-family residential mortgage loans provided for the convenience of our customers. Loan placement fees increased $41,000 in 2016 to $1,083,000 compared to $1,042,000 in 2015 and $544,000 in 2014. Fees were higher in 2016 compared to 2015 and 2014. Refinancing and new mortgage activity increased in 2016 and in 2015. In competing for mortgage loans in our market, we continue to see the historically low mortgage rates and first time home buyer tax incentives driving business in the mortgage market. The Bank holds stock from the Federal Home Loan Bank in relationship with its borrowing capacity and generally receives quarterly dividends. As of December 31, 2016, we held $5,594,000 in FHLB stock compared to $4,823,000 at December 31, 2015. Dividends in 2016 increased to $630,000 compared to $580,000 in 2015 and $327,000 in 2014. Other income decreased to $1,286,000 in 2016 compared to $1,407,000 and $1,290,000 in 2015 and 2014, respectively. The period-to-period decrease in 2016 compared to 2015 was primarily due to the decrease in realized tax-free gain of $190,000 compared to $345,000 related to the collection of life insurance proceeds which is included in other income. 51 Management’s Discussion and Analysis of Financial Condition and Results of Operations. NON-INTEREST EXPENSES Salaries and employee benefits, occupancy and equipment, regulatory assessments, acquisition and integration-related expenses, data processing expenses, ATM/Debit card expenses, license and maintenance contract expenses, and professional services (consisting of audit, accounting, consulting and legal fees) are the major categories of non-interest expenses. Non-interest expenses increased $2,906,000 or 8.07% to $38,922,000 in 2016 compared to $36,016,000 in 2015, and $35,338,000 in 2014. The net increase period-over-period is primarily due to the SVB acquisition and integration expenses of $1,782,000 and various items discussed below. Our efficiency ratio, measured as the percentage of non-interest expenses (exclusive of amortization of core deposit intangibles, other real estate owned, and repossessed asset expenses) to net interest income before provision for credit losses plus non-interest income (exclusive of realized gains or losses on sale and calls of investments) was 68.45% for 2016 compared to 69.22% for 2015 and 69.33% for 2014. The improvement in the efficiency ratio in 2016 and 2015 is due to the growth in revenues outpacing the growth in non-interest expense. Salaries and employee benefits increased $1,045,000 or 5.02% to $21,881,000 in 2016 compared to $20,836,000 in 2015 and $19,721,000 in 2014. Full time equivalents were 277 for the year ended December 31, 2016 compared to 273 for the year ended December 31, 2015. The increase in salaries and employee benefits in 2016 compared to 2015 is a result of higher overall salary and benefit expenses; however, direct loan origination costs including salaries and employee benefits, which are capitalized and expensed as an adjustment to interest and fees on loans increased during 2016 compared to 2015. The SVB acquisition attributed to approximately $426,000 of the increase in 2016. For the years ended December 31, 2016, 2015, and 2014, the compensation cost recognized for share based compensation was $284,000, $238,000 and $173,000, respectively. As of December 31, 2016, there was $1,067,000 of total unrecognized compensation cost related to non-vested share-based compensation arrangements granted under all plans. The cost is expected to be recognized over a weighted average period of 3.70 years. See Notes 1 and 15 to the audited Consolidated Financial Statements for more detail. No options to purchase shares of the Company’s common stock were issued during the years ending December 31, 2016 and 2015. Restricted stock awards of 54,650 shares and 9,268 shares were awarded in 2016 and 2015, respectively. Occupancy and equipment expense increased $85,000 or 1.82% to $4,754,000 in 2016 compared to $4,669,000 in 2015 and $4,835,000 in 2014. The addition of three new branches from the SVB acquisition resulted in approximately $68,000 increase in rent expense. The decrease in 2015 was the result of the closure of an ATM location in Visalia. The Company made no changes in depreciation expense methodology. Regulatory assessments decreased $417,000 or 39.38% to $642,000 in 2016 compared to $1,059,000 and $762,000 in 2015 and 2014, respectively. The assessment base for calculating the amount owed is average assets minus average tangible equity. Beginning in the third quarter of 2016, the FDIC approved a final rule revising DIF assessment formulas which resulted in lower assessments for the Company. The higher assessment rate in 2015 was a result of changes in credit quality ratios used in determining the assessment rate along with higher average assets. Data processing expenses were $1,707,000 in 2016 compared to $1,139,000 in 2015 and $1,820,000 in 2014. The $568,000 or 49.87% increase in 2016 primarily resulted from transitioning to a new provider for data transmission. Acquisition and integration expenses related to the SVB merger were $1,782,000 in 2016 compared to none in 2015. Professional services decreased $246,000 in 2016 compared to 2015. Amortization of core deposit intangibles was $149,000 for 2016, $320,000 for 2015, and $337,000 for 2014. During 2016, amortization expense related to SVB core deposit intangible (CDI) was $12,000, and amortization expense related to VCB CDI was $137,000. During 2015, amortization expense related to Service 1st Bank CDI was $183,000, and amortization expense related to VCB CDI was $137,000. During 2014, amortization expense related to Service 1st Bank CDI was $200,000, and amortization expense related to VCB CDI was $137,000. ATM/Debit card expenses increased $85,000 to $633,000 for the year ended December 31, 2016 compared to $548,000 in 2015 and $624,000 in 2014. License and maintenance contracts increased $11,000 to $531,000 for the year ended December 31, 2016 compared to $520,000 and $488,000 in 2015 and 52 2014, respectively. Other non-interest expenses decreased $136,000 or 3.71% to $3,801,000 in 2016 compared to $3,665,000 in 2015 and $3,965,000 in 2014. The following table describes significant components of other non-interest expense as a percentage of average assets. For the years ended December 31, % Other Expense Average Assets 2016 % Other Expense Average Assets 2015 % Other Expense Average Assets 2014 $ Stationery/supplies Amortization of software Director fees and related expenses Telephone Postage Armored courier fees Risk management expense Loss on sale or write-down of assets Donations Personnel other Credit card expense Education/training General insurance Appraisal fees Operating losses Other Total other non-interest expense (Dollars in thousands) 0.02% $ 0.02% 0.03% 0.03% 0.02% 0.02% 0.01% -% 0.01% 0.01% 0.01% 0.01% 0.01% 0.01% 0.01% 0.07% 269 240 306 292 212 218 163 6 185 173 124 148 150 66 56 1,057 0.02% $ 0.02% 0.03% 0.02% 0.02% 0.02% 0.01% -% 0.02% 0.01% 0.01% 0.01% 0.01% 0.01% -% 0.09% 266 224 262 230 238 221 207 201 179 154 95 135 141 130 53 1,229 247 257 333 357 200 227 150 4 171 161 196 154 159 86 175 924 0.02% 0.02% 0.02% 0.02% 0.02% 0.01% 0.01% -% 0.01% 0.01% 0.01% 0.01% 0.01% 0.01% 0.01% 0.14% $ 3,801 0.29% $ 3,665 0.30% $ 3,965 0.32% PROVISION FOR INCOME TAXES Our effective income tax rate was 31.3% for 2016 compared to 19.1% for 2015 and (12.0)% for 2014. The Company reported an income tax provision (benefit) of $6,917,000, $2,582,000, and $(570,000) for the years ended December 31, 2016, 2015, and 2014, respectively. The effective tax rate in 2016 was affected by the large negative provision for credit losses which resulted in higher pretax and taxable income and also diluted the impact of the Company’s tax exempt municipal bonds and other tax planning strategies. In addition, changes in the Company’s effective tax rate, other than changes in the level of income before taxes, were due in part to changes in tax law which limited the use of various tax credits and incentives beginning in 2014. FINANCIAL CONDITION SUMMARY OF CHANGES IN CONSOLIDATED BALANCE SHEETS December 31, 2016 compared to December 31, 2015. Total assets were $1,443,323,000 as of December 31, 2016, compared to $1,276,736,000 as of December 31, 2015, an increase of 13.05% or $166,587,000. Total gross loans were $756,628,000 as of December 31, 2016, compared to $598,111,000 as of December 31, 2015, an increase of $158,517,000 or 26.50%. The total investment portfolio (including Federal funds sold and interest-earning deposits in other banks) decreased 3.86% or $22,412,000 to $558,132,000. Total deposits increased 12.52% or $139,712,000 to $1,255,979,000 as of December 31, 2016, compared to $1,116,267,000 as of December 31, 2015. Shareholders’ equity increased $24,710,000 or 17.74% to $164,033,000 as of December 31, 2016, compared to $139,323,000 as of December 31, 2015. The increase in shareholders’ equity was driven by the issuance of stock in connection with the Sierra Vista Bank acquisition, as well as the retention of earnings, net of dividends paid, partially offset by a decrease in unrealized gains on available-for-sale securities recorded in accumulated other comprehensive income (AOCI). Accrued interest payable and other liabilities were $17,756,000 as of December 31, 2016, compared to $15,991,000 as of December 31, 2015, an increase of $1,765,000. Management’s Discussion and Analysis of Financial Condition and Results of Operations. FAIR VALUE The Company measures the fair value of its financial instruments utilizing a hierarchical framework associated with the level of observable pricing scenarios utilized in measuring financial instruments at fair value. The degree of judgment utilized in measuring the fair value of financial instruments generally correlates to the level of the observable pricing scenario. Financial instruments with readily available actively quoted prices or for which fair value can be measured from actively quoted prices generally will have a higher degree of observable pricing and a lesser degree of judgment utilized in measuring fair value. Conversely, financial instruments rarely traded or not quoted will generally have little or no observable pricing and a higher degree of judgment utilized in measuring fair value. Observable pricing scenarios are impacted by a number of factors, including the type of financial instrument, whether the financial instrument is new to the market and not yet established and the characteristics specific to the transaction. See Note 3 of the Notes to Consolidated Financial Statements for additional information about the level of pricing transparency associated with financial instruments carried at fair value. INVESTMENTS The following table reflects the balances for each category of securities at year end: Available-for-Sale Securities (In thousands) U.S. Government agencies Obligations of states and political subdivisions U.S. Government sponsored entities and agencies collateralized by residential mortgage obligations Private label residential mortgage backed securities Other equity securities Amortized Cost at December 31, 2016 2015 2014 $ 69,005 $ 52,803 $ 33,088 288,543 181,785 143,343 181,785 225,636 236,629 1,807 7,500 2,356 7,500 3,079 7,500 Total Available-for-Sale Securities $ 548,640 $ 470,080 $ 423,639 Held-to-Maturity Securities (In thousands) Obligations of states and political subdivisions 2016 2015 2014 $ - $ 31,712 $ 31,964 Our investment portfolio consists primarily of U.S. Government sponsored entities and agencies collateralized by residential mortgage backed obligations and obligations of states and political subdivision securities and are classified at the date of acquisition as available-for-sale or held-to-maturity. As of December 31, 2016, investment securities with a fair value of $88,903,000, or 16.23% of our investment securities portfolio, were held as collateral for public funds, short and long-term borrowings, treasury, tax, and for other purposes. Our investment policies are established by the Board of Directors and implemented by our Investment/Asset Liability Committee. They are designed primarily to provide and maintain liquidity, to enable us to meet our pledging requirements for public money and borrowing arrangements, to generate a favorable return on investments without incurring undue interest rate and credit risk, and to complement our lending activities. The level of our investment portfolio is generally considered higher than our peers due primarily to a comparatively low loan-to-deposit ratio. Our loan-to-deposit ratio at December 31, 2016 was 60.24% compared to 53.58% at December 31, 2015. The loan to deposit ratio of our peers was 78.96% at December 31, 2016. Peer group information from SNL Financial data includes bank holding companies in central California with assets from $600 million to $2.5 billion. The total investment portfolio, including Federal funds sold and interest-earning deposits in other banks, decreased 3.86% or $22,412,000 to $558,132,000 at December 31, 2016, from $580,544,000 at December 31, 2015. The market value of the portfolio reflected an unrealized loss of $891,000 at December 31, 2016, compared to an unrealized gain of $7,474,000 at December 31, 2015. Losses recognized in 2016, 2015, and 2014 were incurred in order to reposition the investment securities portfolio based on the current rate environment. The securities which were sold at a loss were acquired when the rate environment was not as volatile. The securities which were sold were primarily purchased several years ago to serve a purpose in the rate environment in which the securities were purchased. The Company is addressing risks in the security portfolio by selling these securities and using proceeds to purchase securities that fit with the Company’s current risk profile. During 2014, to better manage our interest rate risk, the Company transferred from available-for-sale to held-to-maturity selected municipal securities in our portfolio having a book value of approximately $31 million, a market value of approximately $32 million, and a net unrecognized gain of approximately $163,000. This transfer was completed after careful consideration of our intent and ability to hold these securities to maturity. During the first quarter of 2016, management sold certain investment securities of which management identified that five of the 13 securities sold were previously designated as held-to-maturity (HTM). Through an oversight during the portfolio restructuring analysis related to this transaction, management unintentionally sold these five HTM securities. The book value of the HTM securities sold was $8.5 million. The gain realized on the sale of the HTM securities was $696,000. As such, management was required to reclassify the remaining HTM securities with a fair value of $23.1 million to the AFS designation. At December 31, 2016 and December 31, 2015 the remaining unaccreted balance of these HTM securities associated with the original transfer from AFS to HTM and included in accumulated other comprehensive income was $0 and $64,000, respectively. We periodically evaluate each investment security for other-than-temporary impairment, relying primarily on industry analyst reports, observation of market conditions and interest rate fluctuations. The portion of the impairment that is attributable to a shortage in the present value of expected future cash flows relative to the amortized cost should be recorded as a current period charge to earnings. The discount rate in this analysis is the original yield expected at time of purchase. As of December 31, 2016, the Company performed an analysis of the investment portfolio to determine whether any of the investments held in the portfolio had an other-than-temporary impairment (OTTI). Management evaluated all investment securities with an unrealized loss at December 31, 2016, and identified those that had an unrealized loss for at least a consecutive 12 month period, which had an unrealized loss at December 31, 2016 greater than 10% of the recorded book value on that date, or which had an unrealized loss of more than $10,000. Management also analyzed any securities that may have been downgraded by credit rating agencies. For those bonds that met the evaluation criteria, management obtained and reviewed the most recently published national credit ratings for those bonds. For those bonds that were obligations of states and political subdivisions with an investment grade rating by the rating agencies, management also evaluated the financial condition of the municipality and any applicable municipal bond insurance provider and concluded during March 2016 that a $136,000 credit related impairment related to one security with a fair value of $2,995,000 and a pre-impairment amortized cost of $3,131,000 existed. The Company recorded an other-than-temporary impairment loss of $136,000 during the twelve months ended December 31, 2016. There were no OTTI losses recorded during the twelve months ended December 31, 2015. At December 31, 2016, the Company had a total of 16 PLRMBS with a remaining principal balance of $1,807,000 and a net unrealized gain of approximately $1,036,000. Twelve of these PLRMBS with a remaining principal balance of $2,707,000 had credit ratings below investment grade. The Company continues to monitor these securities for changes in credit ratings or other indications of credit deterioration. No credit related OTTI charges related to PLRMBS were recorded during the year ended December 31, 2016. 53 Management’s Discussion and Analysis of Financial Condition and Results of Operations. INVESTMENTS (Continued) The amortized cost, maturities and weighted average yield of investment securities at December 31, 2016 are summarized in the following table. (Dollars in thousands) Available-for-Sale Securities Debt securities (1) U.S. Government agencies $ Obligations of states and political subdivisions (2) U.S. Government sponsored entities and agencies collateralized by residential mortgage obligations In one year or less After one through five years After five through ten years After ten years Total Amount Yield(1) Amount Yield(1) Amount Yield(1) Amount Yield(1) Amount Yield(1) - - - - - - $ - - $ 10,745 4.40% $ 58,260 4.30% $ 69,005 4.31% 15,145 3.49% 35,667 3.97% 237,731 4.78% 288,543 4.61% 2,709 4.54% 3,190 3.48% 175,886 3.81% 181,785 3.81% Private label residential mortgage backed securities Other equity securities - 7,500 7,500 $ - 2.27% 142 - 4.74% - 4 - 5.00% - 1,661 - 5.91% - 1,807 7,500 2.27% $ 17,996 3.66% $ 49,606 4.03% $ 473,538 4.36% $ 548,640 5.81% 2.27% 4.31% (1) Expected maturities will differ from contractual maturities because the issuers of the securities may have the right to call or prepay obligations with or without call or prepayment penalties. Expected maturities will also differ from contractual maturities due to unscheduled principal pay downs. (2) Not computed on a tax equivalent basis. LOANS Total gross loans increased $158,517,000 or 26.50% to $756,628,000 as of December 31, 2016, compared to $598,111,000 as of December 31, 2015. The following table sets forth information concerning the composition of our loan portfolio as of and for the years ended December 31, 2016, 2015, 2014, 2013, and 2012. Loan Type (Dollars in thousands) Commercial: 2016 2015 2014 2013 2012 Amount % of Total Loans Amount % of Total Loans Amount % of Total Loans Amount % of Total Loans Amount % of Total Loans Commercial and industrial Agricultural land and production $ 88,652 25,509 11.7% $ 3.4% Total commercial 114,161 15.1% 102,197 30,472 132,669 17.1% $ 5.1% 89,007 39,140 15.5% $ 6.8% 87,082 31,649 17.0% $ 6.1% 77,956 26,599 22.2% 128,147 22.3% 118,731 23.1% 104,555 19.7% 6.7% 26.4% Real estate: Owner occupied Real estate-construction and other land loans Commercial real estate Agricultural real estate Other real estate Total real estate Consumer: Equity loans and lines of credit Consumer and installment Total consumer Deferred loan fees, net Total gross loans (1) Allowance for credit losses Total loans (1) (1) Includes nonaccrual loans of: $ $ 191,665 25.3% 168,910 28.2% 176,804 30.9% 156,781 30.6% 114,444 28.9% 69,200 184,225 86,761 18,945 550,796 64,494 25,910 90,404 1,267 756,628 (9,326) 747,302 2,180 9.1% 24.3% 11.5% 2.7% 72.9% 8.5% 3.5% 12.0% 100.0% $ $ 38,685 117,244 74,867 10,520 410,226 42,296 12,503 54,799 417 598,111 (9,610) 588,501 2,413 6.5% 19.6% 12.5% 1.8% 68.6% 7.1% 2.1% 9.2% 100.0% $ $ 38,923 106,788 57,501 6,611 386,627 47,575 10,093 57,668 146 572,588 (8,308) 564,280 14,052 6.8% 18.7% 10.0% 1.2% 67.6% 8.3% 1.8% 10.1% 100.0% $ $ 42,329 86,117 44,164 4,548 333,939 48,594 11,252 59,846 (159) 512,357 (9,208) 503,149 7,586 8.3% 16.8% 8.6% 0.9% 65.2% 9.5% 2.2% 11.7% 100.0% $ $ 33,199 53,797 28,400 8,098 237,938 42,932 10,346 53,278 (453) 395,318 (10,133) 385,185 9,695 8.4% 13.6% 7.2% 2.0% 60.1% 10.9% 2.6% 13.5% 100.0% 54 Management’s Discussion and Analysis of Financial Condition and Results of Operations. LOANS (Continued) At December 31, 2016, loans acquired in the SVB and VCB acquisitions had a balance of $168,296,000, of which $7,239,000 were commercial loans, $129,520,000 were real estate loans, and $31,537,000 were consumer loans. At December 31, 2015, loans acquired in the VCB acquisition had a balance of $62,395,000, of which $1,617,000 were commercial loans, $51,576,000 were real estate loans, and $9,202,000 were consumer loans. At December 31, 2016, in management’s judgment, a concentration of loans existed in commercial loans and real-estate-related loans, representing approximately 96.5% of total loans of which 15.1% were commercial and 81.4% were real-estate-related. This level of concentration is consistent with 97.9% at December 31, 2015. Although we believe the loans within this concentration have no more than the normal risk of collectability, a substantial decline in the performance of the economy in general or a decline in real estate values in our primary market areas, in particular, could have an adverse impact on collectability, increase the level of real estate-related nonperforming loans, or have other adverse effects which alone or in the aggregate could have a material adverse effect on our business, financial condition, results of operations and cash flows. The Company was not involved in any sub-prime mortgage lending activities at December 31, 2016 and 2015. We believe that our commercial real estate loan underwriting policies and practices result in prudent extensions of credit, but recognize that our lending activities result in relatively high reported commercial real estate lending levels. Commercial real estate loans include certain loans which represent low to moderate risk and certain loans with higher risks. The Board of Directors review and approve concentration limits and exceptions to limitations of concentration are reported to the Board of Directors at least quarterly. LOAN MATURITIES The following table presents information concerning loan maturities and sensitivity to changes in interest rates of the indicated categories of our loan portfolio, as well as loans in those categories maturing after one year that have fixed or floating interest rates at December 31, 2016. (In thousands) Loan Maturities: Commercial and agricultural Real estate construction and other land loans Other real estate Consumer and installment Sensitivity to Changes in Interest Rates: Loans with fixed interest rates Loans with floating interest rates (1) (1) Includes floating rate loans which are currently at their floor rate in accordance with their respective One Year or Less After One Through Five Years After Five Years Total $ $ $ $ $ 73,243 55,809 47,152 9,994 186,198 56,936 129,262 186,198 26,084 $ $ $ $ $ 21,694 4,162 69,067 8,464 103,387 67,120 36,268 103,388 32,228 $ $ $ $ $ 19,224 9,229 365,377 71,946 465,776 59,980 405,795 465,775 284,506 $ $ $ $ $ 114,161 69,200 481,596 90,404 755,361 184,036 571,325 755,361 342,818 loan agreement NONPERFORMING ASSETS Nonperforming assets consist of nonperforming loans, other real estate owned (OREO), and repossessed assets. Nonperforming loans are those loans which have (i) been placed on nonaccrual status; (ii) been classified as doubtful under our asset classification system; or (iii) become contractually past due 90 days or more with respect to principal or interest and have not been restructured or otherwise placed on nonaccrual status. A loan is classified as nonaccrual when 1) it is maintained on a cash basis because of deterioration in the financial condition of the borrower; 2) payment in full of principal or interest under the original contractual terms is not expected; or 3) principal or interest has been in default for a period of 90 days or more unless the loan is both well secured and in the process of collection. We measure all loans placed on nonaccrual status for impairment based on the fair value of the underlying collateral or the net present value of the expected cash flows. Our consolidated financial statements are prepared on the accrual basis of accounting, including the recognition of interest income on loans. Interest income from nonaccrual loans is recorded only if collection of principal in full is not in doubt and when cash payments, if any, are received. Loans are placed on nonaccrual status and any accrued but unpaid interest income is reversed and charged against income when the payment of interest or principal is 90 days or more past due. Loans in the nonaccrual category are treated as nonaccrual loans even though we may ultimately recover all or a portion of the interest due. These loans return to accrual status when the loan becomes contractually current, future collectability of amounts due is reasonably assured, and a minimum of six months of satisfactory principal repayment performance has occurred. See Note 5 of the Company’s audited Consolidated Financial Statements in Item 8 of this Annual Report. At December 31, 2016, total nonperforming assets totaled $2,542,000, or 0.18% of total assets, compared to $2,413,000, or 0.19% of total assets at December 31, 2015. Total nonperforming assets at December 31, 2016, included nonaccrual loans totaling $2,180,000, no OREO, and $362,000 in repossessed assets. Nonperforming assets at December 31, 2015 consisted of $2,413,000 in nonaccrual loans, no OREO, and no repossessed assets. At December 31, 2016, we had one loan considered a troubled debt restructuring (‘‘TDR’’) totaling $20,000 which is included in nonaccrual loans compared to four TDRs totaling $1,337,000 at December 31, 2015. We have no outstanding commitments to lend additional funds to any of these borrowers. See Note 5 of the Company’s audited Consolidated Financial Statements in Item 8 of this Annual Report concerning our recorded investment in loans for which impairment has been recognized. A summary of nonaccrual, restructured, and past due loans at December 31, 2016, 2015, 2014, 2013, and 2012 is set forth below. The Company had no loans past due more than 90 days and still accruing interest at December 31, 2016 and 2015. Management is not aware of any potential problem loans, which were current and accruing at December 31, 2016, where serious doubt exists as to the ability of the borrower to comply with the present repayment terms. Management can give no assurance that nonaccrual and other nonperforming loans will not increase in the future. 55 Management’s Discussion and Analysis of Financial Condition and Results of Operations. Composition of Nonaccrual, Past Due and Restructured Loans NONPERFORMING ASSETS (Continued) (As of December 31, dollars in thousands) Nonaccrual Loans: Commercial and industrial Owner occupied real estate Agricultural real estate Commercial real estate Equity loans and line of credit Consumer and installment Restructured loans (non-accruing): Commercial and industrial Owner occupied Real estate construction and other land loans Commercial real estate Equity loans and line of credit Consumer and Installment Total nonaccrual Accruing loans past due 90 days or more Total nonperforming loans Interest foregone Nonperforming loans to total loans Accruing loans past due 90 days or more Accruing troubled debt restructurings Ratio of nonperforming loans to allowance for credit losses Loans considered to be impaired Related allowance for credit losses on impaired loans 2016 2015 2014 2013 2012 $ $ $ $ $ $ $ 447 87 - 1,082 526 18 - 20 - - - - 2,180 - 2,180 245 0.29% - 3,089 23.38% 5,269 307 $ $ $ $ $ $ $ - 324 - 567 172 13 29 23 - - 1,285 - 2,413 - 2,413 340 0.40% - 4,286 25.11% 6,699 164 $ $ $ $ $ $ $ 7,265 1,363 360 1,468 1,751 19 - - 547 - 1,279 - 14,052 - 14,052 716 2.45% - 4,774 169.14% 18,826 612 $ $ $ $ $ $ $ 335 1,777 - 158 721 - 1,192 384 1,450 - 1,565 4 7,586 - 7,586 661 1.48% - 5,771 82.38% 13,357 1,007 $ $ $ $ $ $ $ - 213 - - 237 - - 1,362 6,288 - 1,595 - 9,695 - 9,695 693 2.45% - 7,410 95.68% 17,105 510 As of December 31, 2016 and 2015, we had impaired loans totaling $5,269,000 and $6,699,000, respectively. We measure our impaired loans by using the fair value of the collateral if the loan is collateral dependent and the present value of the expected future cash flows discounted at the loan’s original contractual interest rate if the loan is not collateral dependent. Impaired loans are identified from internal credit review reports, past due reports, overdraft listings, and third party reports of examination. Borrowers experiencing problems such as operating losses, marginal working capital, inadequate cash flow or business interruptions which jeopardize collection of the loan are also reviewed for possible impairment classification. A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect all amounts due, including principal and interest, according to the contractual terms of the original agreement. Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed. Loans determined to be impaired are individually evaluated for impairment. When a loan is impaired, the Company measures impairment based on the present value of expected future cash flows discounted at the loan’s effective interest rate, except that as a practical expedient, it may measure impairment based on a loan’s observable market price, or the fair value of the collateral if the loan is collateral dependent. A loan is collateral dependent if the repayment of the loan is expected to be provided solely by the underlying collateral. For collateral dependent loans secured by real estate, we obtain external appraisals which are updated at least annually to determine the fair value of the collateral, and we record an immediate charge off for the difference between the book value of the loan and the appraised value less selling costs of the collateral. We perform quarterly internal reviews on substandard loans. We place loans on nonaccrual status and classify them as impaired when it becomes probable that we will not receive interest and principal under the original contractual terms, or when loans are delinquent 90 days or more, unless the loan is both well secured and in the process of collection. Management maintains certain loans that have been brought current by the borrower (less than 30 days delinquent) on nonaccrual status until such time as management has determined that the loans are likely to remain current in future periods. Foregone interest on nonaccrual loans totaled $245,000 for the year ended December 31, 2016 of which $2,000 was attributable to troubled debt restructurings. Foregone interest on nonaccrual loans totaled $340,000 and $716,000 for the years ended December 31, 2015 and 2014, respectively of which $104,000 and $139,000 was attributable to troubled debt restructurings, respectively. 56 Management’s Discussion and Analysis of Financial Condition and Results of Operations. NONPERFORMING ASSETS (Continued) The following table provides a reconciliation of the change in non-accrual loans for the year ended December 31, 2016. (In thousands) Non-accrual loans: Commercial and industrial Real estate Real estate construction and land development Agricultural real estate Equity loans and lines of credit Consumer Restructured loans (non-accruing): Commercial and industrial Real estate Real estate construction and land development Equity loans and lines of credit Total non-accrual Balances December 31, 2015 Additions to Nonaccrual Loans Net Pay Downs Transfer to Foreclosed Collateral Returns to Accrual Status Charge Offs Balances December 31, 2016 $ $ - 891 - - 172 13 29 23 - 1,285 2,413 $ 1,741 832 $ - - 608 72 - - - - (405) (387) - - (128) (8) (29) (3) - (1,285) $ $ (321) - $ - (167) $ (568) - 447 1,169 - - - (41) - - - - - - (30) - - - - - - - (96) (18) - - - - - - 526 18 - 20 - - $ 3,253 $ (2,245) $ (362) $ (197) $ (682) $ 2,180 The following table provides a summary of the annual change in the OREO balance: (In thousands) Balance, beginning of year Additions 1st lien assumed upon foreclosure Dispositions Write-downs Net gain on disposition Balance, end of year Years Ended December 31, 2016 2015 $ $ - - - - - - - $ $ - 227 121 (359) - 11 - OREO represents real property taken either through foreclosure or through a deed in lieu thereof from the borrower. OREO is carried at the lesser of cost or fair market value less selling costs. As of December 31, 2016 the Bank had no OREO properties. The carrying value of foreclosed assets was $362,000 at December 31, 2016, and is included in other assets on the consolidated balance sheets. No foreclosed assets were recorded at December 31, 2015. As of December 31, 2015 the Bank had no OREO properties. In 2015, the Bank foreclosed on one property collateralized by real estate. Proceeds from OREO sales totaled $359,000 during 2015. The Company realized $11,000 in net gains from the sale of all properties. ALLOWANCE FOR CREDIT LOSSES We have established a methodology for determining the adequacy of the allowance for credit losses made up of general and specific allocations. The methodology is set forth in a formal policy and takes into consideration the need for an overall allowance for credit losses as well as specific allowances that are tied to individual loans. The allowance for credit losses is an estimate of probable incurred credit losses in the Company’s loan portfolio. The allowance consists of two primary components, specific reserves related to impaired loans and general reserves for probable incurred losses related to loans that are not impaired. For all portfolio segments, the determination of the general reserve for loans that are not impaired is based on estimates made by management, including but not limited to, consideration of historical losses by portfolio segment (and in certain cases peer loss data) over the most recent 20 quarters, and qualitative factors including economic trends in the Company’s service areas, industry experience and trends, geographic concentrations, estimated collateral values, the Company’s underwriting policies, the character of the loan portfolio, and probable losses incurred in the portfolio taken as a whole. Management has determined that the most recent 20 quarters was an appropriate look-back period based on several factors including the current global economic uncertainty and various national and local economic indicators, and a time period sufficient to capture enough data due to the size of the portfolio to produce statistically accurate historical loss calculations. We believe this period is an appropriate look-back period. In originating loans, we recognize that losses will be experienced and that the risk of loss will vary with, among other things, the type of loan being made, the creditworthiness of the borrower over the term of the loan, general economic conditions and, in the case of a secured loan, the quality of the collateral securing the loan. The allowance is increased by provisions charged against earnings and recoveries, and reduced by net loan charge offs. Loans are charged off when they are deemed to be uncollectible, or partially charged off when portions of a loan are deemed to be uncollectible. Recoveries are generally recorded only when cash payments are received. The allowance for credit losses is maintained to cover probable incurred credit losses in the loan portfolio. The responsibility for the review of our assets and the determination of the adequacy lies with management and our Audit Committee. They delegate the authority to the Senior Risk Manager and the Chief Credit Officer (CCO) to determine the loss reserve ratio for each type of asset and to review, at least quarterly, the adequacy of the allowance based on an evaluation of the portfolio, past experience, prevailing market conditions, amount of government guarantees, concentration in loan types and other relevant factors. The allowance for credit losses is an estimate of the probable incurred credit losses in our loan and lease portfolio. The allowance is based on principles of accounting: (1) losses accrued for on loans when they are probable of occurring and can be reasonably estimated and (2) losses accrued based on the differences between the value of collateral, present value of future cash flows or values that are observable in the secondary market and the loan balance. Management adheres to an internal asset review system and loss allowance methodology designed to provide for timely recognition of problem assets and adequate valuation allowances to cover probable incurred losses. The Bank’s asset monitoring process includes the use of asset classifications to segregate the assets, largely loans and real estate, into various risk categories. The Bank uses the various asset classifications as a means of measuring risk and determining the adequacy of valuation allowances by using a nine-grade system to classify assets. In general, all credit facilities exceeding 90 days of delinquency require classification and are placed on nonaccrual. 57 395,771 405,040 11,396 (123) - (217) (319) (1,430) (761) (2,850) 515 - 45 - - 327 887 (1,963) 700 10,133 2.56% (0.48)% Management’s Discussion and Analysis of Financial Condition and Results of Operations. ALLOWANCE FOR CREDIT LOSSES (Continued) The following table summarizes the Company’s loan loss experience, as well as provisions and recoveries (charge-offs) to the allowance and certain pertinent ratios for the periods indicated: (Dollars in thousands) Loans outstanding at December 31, Average loans outstanding during the year Allowance for credit losses: Balance at beginning of year Deduct loans charged off: Commercial and industrial Agricultural production Owner occupied Real estate construction and other land loans Commercial real estate Consumer loans Total loans charged off Add recoveries of loans previously charged off: Commercial and industrial Agricultural production Owner occupied Real estate construction and other land loans Commercial real estate Consumer loans Total recoveries Net recoveries (charge offs) (Reversal) Provision charged to credit losses 2016 2015 2014 2013 2012 $ $ $ $ $ $ 755,361 646,573 9,610 (621) - - - - (262) (883) 3,656 1,631 - 702 283 177 6,449 5,566 (5,850) $ $ $ 597,694 586,762 8,308 (802) - - - - (159) (961) 954 90 - 32 - 587 1,663 702 600 $ $ $ 572,442 539,529 9,208 (7,423) (1,722) (183) - - (506) (9,834) 171 - 150 364 - 264 949 (8,885) 7,985 $ $ $ 512,516 454,483 10,133 (713) - (281) - (4) (448) (1,446) 315 - - 16 - 190 521 (925) - Balance at end of year $ 9,326 $ 9,610 $ 8,308 $ 9,208 $ Allowance for credit losses as a percentage of outstanding loan balance Net recoveries (charge offs) to average loans outstanding 1.23% 0.86% 1.61% 0.12% 1.45% (1.65)% 1.80% (0.20)% Managing credits identified through the risk evaluation methodology includes developing a business strategy with the customer to mitigate our losses. Our management continues to monitor these credits with a view to identifying as early as possible when, and to what extent, additional provisions may be necessary. The allowance for credit losses is reviewed at least quarterly by the Bank’s and our Board of Directors’ Audit/Compliance Committee. Reserves are allocated to loan portfolio segments using percentages which are based on both historical risk elements such as delinquencies and losses and predictive risk elements such as economic, competitive and environmental factors. We have adopted the specific reserve approach to allocate reserves to each impaired asset for the purpose of estimating potential loss exposure. Although the allowance for credit losses is allocated to various portfolio categories, it is general in nature and available for the loan portfolio in its entirety. Additions may be required based on the results of independent loan portfolio examinations, regulatory agency examinations, or our own internal review process. Additions are also required when, in management’s judgment, the reserve does not properly reflect the potential loss exposure. 58 Management’s Discussion and Analysis of Financial Condition and Results of Operations. ALLOWANCE FOR CREDIT LOSSES (Continued) The allocation of the allowance for credit losses is set forth below: 2016 2015 2014 2013 2012 Percent of Loans in Each Category to Total Loans Amount Percent of Loans in Each Category to Total Loans Amount Percent of Loans in Each Category to Total Loans Amount Percent of Loans in Each Category to Total Loans Amount Percent of Loans in Each Category to Total Loans Amount 1,884 296 1,408 698 1,969 1,969 156 483 369 94 11.7% $ 3.4% 25.3% 9.1% 24.3% 11.5% 2.7% 8.5% 3.5% 3,143 419 1,556 694 1,686 1,149 119 500 234 110 17.1% $ 5.1% 28.2% 6.5% 19.6% 12.5% 1.8% 7.1% 2.1% 2,753 377 1,380 837 1,201 564 76 811 267 42 15.5% $ 6.8% 30.9% 6.8% 18.7% 10% 1.2% 8.3% 1.8% 1,928 516 1,697 1,289 1,406 672 110 874 294 422 17% $ 6.1% 30.6% 8.3% 16.8% 8.6% 0.9% 9.5% 2.2% 2,071 605 2,153 1,035 1,886 646 157 1,158 383 39 19.7% 6.7% 28.9% 8.4% 13.6% 7.2% 2% 10.9% 2.6% Loan Type (Dollars in thousands) Commercial: Commercial and industrial Agricultural land and production Real estate: Owner occupied Real estate construction and other land $ loans Commercial real estate Agricultural real estate Other real estate Consumer: Equity loans and lines of credit Consumer and installment Unallocated reserves Total allowance for credit losses $ 9,326 100% $ 9,610 100% $ 8,308 100% $ 9,208 100% $ 10,133 100% Loans are charged to the allowance for credit losses when the loans are deemed uncollectible. It is the policy of management to make additions to the allowance so that it remains adequate to cover all probable loan charge offs that exist in the portfolio at that time. We assign qualitative and environmental factors (Q factors) to each loan category. Q factors include reserves held for the effects of lending policies, economic trends, and portfolio trends along with other dynamics which may cause additional stress to the portfolio. As of December 31, 2016, the allowance for credit losses (ALLL) stood at $9,326,000, compared to $9,610,000 at December 31, 2015, a net decrease of $284,000. The decrease in the ALLL was due to net recoveries and a reverse provision for credit losses during the year ended December 31, 2016 which was necessitated by management’s observations and assumptions about the existing credit quality of the loan portfolio. Net recoveries totaled $5,566,000 while the reversal of provision for credit losses was $5,850,000. The balance of classified loans and loans graded special mention, totaled $49,464,000 and $29,911,000 at December 31, 2016 and $31,764,000 and $28,719,000 at December 31, 2015. This increase in classified loans necessitated additional allocation within the ALLL; however it was offset by improvements in qualitative factors (moderating drought conditions), as well as relative improvements in loss trends, past dues, and other credit variables, causing the allowance level to decrease. The balance of undisbursed commitments to extend credit on construction and other loans and letters of credit was $259,415,000 as of December 31, 2016, compared to $217,166,000 as of December 31, 2015. At December 31, 2016 and 2015, the balance of a contingent allocation for probable loan loss experience on unfunded obligations was $125,000 and $150,000, respectively. The contingent allocation for probable loan loss experience on unfunded obligations is calculated by management using an appropriate, systematic, and consistently applied process. While related to credit losses, this allocation is not a part of ALLL and is considered separately as a liability for accounting and regulatory reporting purposes. Risks and uncertainties exist in all lending transactions and our management and Directors’ Loan Committee have established reserve levels based on economic uncertainties and other risks that exist as of each reporting period. The ALLL as a percentage of total loans was 1.23% at December 31, 2016, and 1.61% at December 31, 2015. Total loans include SVB and VCB loans that were recorded at fair value in connection with the acquisitions of $168,296,000 at December 31, 2016 and $62,395,000 at December 31, 2015. Excluding these acquired loans from the calculation, the ALLL to total gross loans was 1.59% and 1.79% as of December 31, 2016 and 2015, respectively and general reserves associated with non-impaired loans to total non-impaired loans was 1.55% and 1.79%, respectively. The loan portfolio acquired in the mergers was booked at fair value with no associated allocation in the ALLL. The size of the fair value discount remains adequate for all non-impaired acquired loans; therefore, there is no associated allocation in the ALLL. The Company’s loan portfolio balances in 2016 increased through organic growth and the acquisition of SVB. Management believes that the change in the allowance for credit losses to total loans ratios is directionally consistent with the composition of loans and the level of nonperforming and classified loans, partially offset by the general economic conditions experienced in the central California communities serviced by the Company and recent improvements in real estate collateral values. The determination of the general reserve for loans that are not impaired is based on estimates made by management, including but not limited to, consideration of historical losses (or peer data) by portfolio segment over the most recent 20 quarters, and qualitative factors. Assumptions regarding the collateral value of various under-performing loans may affect the level and allocation of the allowance for credit losses in future periods. The allowance may also be affected by trends in the amount of charge offs experienced or expected trends within different loan portfolios. However, the total reserve rates on non-impaired loans include qualitative factors which are systematically derived and consistently applied to reflect conservatively estimated losses from loss contingencies at the date of the financial statements. Based on the above considerations and given recent changes in historical charge-off rates included in the ALLL modeling and the changes in other factors, management determined that the ALLL was appropriate as of December 31, 2016. Non-performing loans totaled $2,180,000 as of December 31, 2016, and $2,413,000 as of December 31, 2015. The allowance for credit losses as a percentage of nonperforming loans was 427.80% and 398.26% as of December 31, 2016 and December 31, 2015, respectively. In addition, management believes that the likelihood of recoveries on previously charged-off loans continues to improve based on the collection efforts of management combined with improvements in the value of real estate which serves as the primary source of collateral for loans. Management believes the allowance at December 31, 2016 is adequate based upon its ongoing analysis of the loan portfolio, historical loss trends and other factors. However, no assurance can be given that the Company may not sustain charge-offs which are in excess of the allowance in any given period. GOODWILL AND INTANGIBLE ASSETS Business combinations involving the Bank’s acquisition of the equity interests or net assets of another enterprise give rise to goodwill. Total goodwill at December 31, 2016 was $40,231,000 consisting of $10,314,000, $6,340,000, $14,643,000 and $8,934,000 representing the excess of the cost of Sierra Vista Bank, Visalia Community Bank, Service 1st Bancorp and Bank of Madera County, respectively, over the net amounts assigned to assets acquired and liabilities assumed in the transactions accounted for under the purchase method 59 Management’s Discussion and Analysis of Financial Condition and Results of Operations. GOODWILL AND INTANGIBLE ASSETS (Continued) DEPOSITS AND BORROWINGS The Bank’s deposits are insured by the Federal Deposit Insurance Corporation (FDIC) up to applicable legal limits. All of a depositor’s accounts at an insured depository institution, including all non-interest bearing transactions accounts, will be insured by the FDIC up to the standard maximum deposit insurance amount of $250,000 for each deposit insurance ownership category. Total deposits increased $139,712,000 or 12.52% to $1,255,979,000 as of December 31, 2016, compared to $1,116,267,000 as of December 31, 2015. Interest-bearing deposits increased $72,670,000 or 10.57% to $760,164,000 as of December 31, 2016, compared to $687,494,000 as of December 31, 2015. Non-interest bearing deposits increased $67,042,000 or 15.64% to $495,815,000 as of December 31, 2016, compared to $428,773,000 as of December 31, 2015. In conjunction with the acquisition of Sierra Vista Bank the Company acquired total interest bearing deposits of $82,197,000, consisting of $10,292,000, $24,704,000, $41,887,000 and $5,314,000 in NOW, MMA, Time and Savings deposits, respectively, and $56,039,000 in non-interest bearing deposits. Average non-interest bearing deposits to average total deposits was 36.46% for the year ended December 31, 2016 compared to 36.40% for the same period in 2015. Our total market share of deposits in Fresno, Madera, San Joaquin, and Tulare counties was 3.76% in 2016 compared to 3.77% in 2015 based on FDIC deposit market share information published as of June 2016. The composition of the deposits and average interest rates paid at December 31, 2016 and December 31, 2015 is summarized in the table below. (Dollars in thousands) NOW accounts MMA accounts Time deposits Savings deposits Total interest-bearing Non-interest bearing % of % of December 31, Total Effective December 31, Total Effective 2016 Deposits Rate 2015 Deposits Rate $ 247,623 250,749 156,694 105,098 760,164 495,815 19.7% 0.12% $ 19.9% 0.05% 12.5% 0.38% 8.4% 0.03% 60.5% 0.13% 39.5% 227,167 239,241 139,703 81,383 687,494 428,773 20.4% 0.10% 21.4% 0.06% 12.5% 0.37% 7.3% 0.04% 61.6% 0.14% 38.4% Total deposits $ 1,255,979 100.0% $ 1,116,267 100.0% of accounting. The value of goodwill is ultimately derived from the Bank’s ability to generate net earnings after the acquisitions and is not deductible for tax purposes. A significant decline in net earnings could be indicative of a decline in the fair value of goodwill and result in impairment. For that reason, goodwill is assessed at least annually for impairment. The Company has selected September 30 as the date to perform the annual impairment test. Management assessed qualitative factors including performance trends and noted no factors indicating goodwill impairment. Goodwill is also tested for impairment between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of the Company below its carrying amount. No such events or circumstances arose during the fourth quarter of 2016; therefore, goodwill was not required to be retested. The intangible assets at December 31, 2016 represent the estimated fair value of the core deposit relationships acquired in the 2016 acquisition of Sierra Vista Bank of $508,000 and the 2013 acquisition of Visalia Community Bank of $1,365,000. Core deposit intangibles are being amortized using the straight-line method over an estimated life of ten years from the date of acquisition. The carrying value of intangible assets at December 31, 2016 was $1,383,000, net of $490,000 in accumulated amortization expense. The carrying value at December 31, 2015 was $1,024,000, net of $1,741,000 in accumulated amortization expense. Management evaluates the remaining useful lives quarterly to determine whether events or circumstances warrant a revision to the remaining periods of amortization. Based on the evaluation, no changes to the remaining useful lives was required. Management performed an annual impairment test on core deposit intangibles as of September 30, 2016 and determined no impairment was necessary. In addition, management determined that no events had occurred between the annual evaluation date and December 31, 2016 which would necessitate further analysis. Amortization expense recognized was $149,000 for 2016, $320,000 for 2015 and $337,000 for 2014. The following table summarizes the Company’s estimated core deposit intangible amortization expense for each of the next five years (in thousands): Years Ending December 31, 2017 2018 2019 2020 2021 Thereafter Total Estimated Core Deposit Intangible Amortization $ $ 188 188 188 188 188 443 1,383 We have no known foreign deposits. The following table sets forth the average amount of and the average rate paid on certain deposit categories which were in excess of 10% of average total deposits for the years ended December 31, 2016, 2015, and 2014. 2016 2015 2014 Balance Rate Balance Rate Balance Rate $ $ $ $ $ 246,770 249,620 139,656 417,151 0.12% $ 222,839 0.10% $ 197,630 0.05% $ 227,743 0.06% $ 229,769 0.38% $ 149,383 0.37% $ 162,218 - $ 387,931 - $ 348,822 1,144,231 0.09% $ 1,065,798 0.09% $ 1,006,560 0.11% 0.08% 0.40% - 0.11% (Dollars in thousands) NOW accounts Money market accounts Time certificates of deposit Non-interest bearing demand Total deposits 60 Management’s Discussion and Analysis of Financial Condition and Results of Operations. DEPOSITS AND BORROWINGS (Continued) The following table sets forth certain financial ratios for the years ended December 31, 2016, 2015, and 2014. The following table sets forth the maturity of time certificates of deposit and other time deposits of $100,000 or more at December 31, 2016. (In thousands) Three months or less Over 3 through 6 months Over 6 through 12 months Over 12 months $ $ 34,009 20,108 41,186 14,893 110,196 Net income: To average assets To average shareholders’ equity Dividends declared per share to net income per share Average shareholders’ equity to average assets 2016 2015 2014 1.15% 9.84% 0.90% 8.12% 0.46% 4.06% 19.20% 18.00% 41.67% 11.68% 11.05% 11.27% There were no short-term or long-term FHLB borrowings as of December 31, 2016 or December 31, 2015. We maintain a line of credit with the FHLB collateralized by government securities and loans. Refer to Liquidity section below for further discussion of FHLB advances. The Bank had unsecured lines of credit with its correspondent banks which, in the aggregate, amounted to $40,000,000 at December 31, 2016 and 2015, at interest rates which vary with market conditions. As of December 31, 2016, the Company had $400,000 in Federal funds purchased. The Company had no overnight borrowings outstanding under these credit facilities at December 31, 2015. CAPITAL RESOURCES Capital serves as a source of funds and helps protect depositors and shareholders against potential losses. Historically, the primary sources of capital for the Company have been internally generated capital through retained earnings and the issuance of common and preferred stock. The Company has historically maintained substantial levels of capital. The assessment of capital adequacy is dependent on several factors including asset quality, earnings trends, liquidity and economic conditions. Maintenance of adequate capital levels is integral to providing stability to the Company. The Company needs to maintain substantial levels of regulatory capital to give it maximum flexibility in the changing regulatory environment and to respond to changes in the market and economic conditions. Our shareholders’ equity was $164,033,000 as of December 31, 2016, compared to $139,323,000 as of December 31, 2015. The increase in shareholders’ equity is the result of an increase in retained earnings from our net income of $15,182,000, the issuance of stock in connection with the Sierra Vista Bank acquisition in the amount of $16,678,000, the exercise of stock options, including the related tax benefit of $261,000, and the effect of share-based compensation expense of $284,000, partially offset by common stock cash dividends of $2,715,000 and a decrease in accumulated other comprehensive income (AOCI) of $4,978,000. During 2016, the Bank declared and paid cash dividends to the Company in the amount of $13,010,000 in connection with the cash dividends to the Company’s shareholders approved by the Company’s Board of Directors and the cash portion of the SVB transaction. The Bank may not pay any dividend that would cause it to be deemed not ‘‘well capitalized’’ under applicable banking laws and regulations. The Company declared and paid a total of $2,715,000 or $0.24 per common share cash dividend to shareholders of record during the year ended December 31, 2016. During 2015, the Bank declared and paid cash dividends to the Company in the amount of $2,260,000 in connection with the cash dividends to the Company’s shareholders approved by the Company’s Board of Directors. The Company declared and paid a total of $1,979,000 or $0.18 per common share cash dividend to shareholders of record during the year ended December 31, 2015. During 2014, the Bank declared and paid cash dividends to the Company in the amount of $2,350,000 in connection with the cash dividends to the Company’s shareholders approved by the Company’s Board of Directors. The Company declared and paid a total of $2,190,000 or $0.20 per common share cash dividend to shareholders of record during the year ended December 31, 2014. Management considers capital requirements as part of its strategic planning process. The strategic plan calls for continuing increases in assets and liabilities, and the capital required may therefore be in excess of retained earnings. The ability to obtain capital is dependent upon the capital markets as well as our performance. Management regularly evaluates sources of capital and the timing required to meet its strategic objectives. The assessment of capital adequacy is dependent on several factors including asset quality, earnings trends, liquidity and economic conditions. Maintenance of adequate capital levels is integral to providing stability to the Company. The Company needs to maintain substantial levels of regulatory capital to give it maximum flexibility in the changing regulatory environment and to respond to changes in the market and economic conditions including acquisition opportunities. The Board of Governors, the FDIC and other federal banking agencies have issued risk-based capital adequacy guidelines intended to provide a measure of capital adequacy that reflects the degree of risk associated with a banking organization’s operations for both transactions reported on the balance sheet as assets, and transactions, such as letters of credit and recourse arrangements, which are reported as off-balance-sheet items. Under these guidelines, nominal dollar amounts of assets and credit equivalent amounts of off-balance-sheet items are multiplied by one of several risk adjustment percentages, which range from 0% for assets with low credit risk, such as certain U.S. government securities, to 100% for assets with relatively higher credit risk, such as business loans. A banking organization’s risk-based capital ratios are obtained by dividing its qualifying capital by its total risk-adjusted assets and off-balance-sheet items. The regulators measure risk-adjusted assets and off-balance-sheet items against both total qualifying capital (the sum of Tier 1 capital and limited amounts of Tier 2 capital) and Tier 1 capital. Tier 1 capital consists of common stock, retained earnings, noncumulative perpetual preferred stock and minority interests in certain subsidiaries, less most other intangible assets. Tier 2 capital may consist of a limited amount of the allowance for possible loan and lease losses and certain other instruments with some characteristics of equity. The inclusion of elements of Tier 2 capital is subject to certain other requirements and limitations of the federal banking agencies. In December 2010, the Internal Basel Committee on Bank Supervision (‘‘Basel Committee’’) released its final framework for strengthening international capital and liquidity regulation, now officially identified as ‘‘Basel III,’’ which, when fully phased-in, requires bank holding companies and their bank subsidiaries to maintain substantially more capital than currently required, with a greater emphasis on common equity. In July 2013, the U.S. banking agencies approved the U.S. version of Basel III. The federal bank regulatory agencies adopted version of Basel III revises the risk-based and leverage capital requirements and the method for calculating risk-weighted assets to make them consistent with Basel III and to meet the requirements of the Dodd-Frank Act. Although many of the rules contained in these final regulations are applicable only to large, internationally active banks, some of them apply on a phased in basis to all banking organizations, including the Company and the Bank. Among other things, the rules establish a new minimum common equity Tier 1 ratio (4.5% of risk-weighted assets), a higher minimum Tier 1 risk-based capital requirement (6.0% of risk-weighted assets) and a minimum non-risk-based leverage ratio (4.00% eliminating a 3.00% exception for higher rated banks). The new additional capital conservation buffer of 2.5% of risk weighted assets over each of the required capital ratios will be phased in from 2016 to 2019 and must be met to avoid limitations on the ability of the Company and the Bank to pay dividends, repurchase shares or pay discretionary bonuses. The additional ‘‘countercyclical capital buffer’’ is also required for larger and more complex institutions. The new rules assign higher risk weighting to exposures that are more than 90 days past due or are on 61 Management’s Discussion and Analysis of Financial Condition and Results of Operations. CAPITAL RESOURCES (Continued) nonaccrual status and certain commercial real estate facilities that finance the acquisition, development or construction of real property. The rules also change the permitted composition of Tier 1 capital to exclude trust preferred securities, mortgage servicing rights and certain deferred tax assets and include unrealized gains and losses on available for sale debt and equity securities (through a one-time opt out option for Standardized Banks (banks with less than $250 billion of total consolidated assets and less than $10 billion of foreign exposures) which the Company and the Bank elected at March 31, 2015. The rules, including alternative requirements for smaller community financial institutions like the Company and the Bank, will be phased in through 2019. The implementation of the Basel III framework commenced on January 1, 2015. As of December 31, 2016 and 2015, the Company and the Bank met or exceeded all of their capital requirements inclusive of the capital buffer. A bank that does not achieve and maintain the required capital levels may be issued a capital directive by the FDIC to ensure the maintenance of required capital levels. As discussed above, the Company and the Bank are required to maintain certain levels of capital. The following table presents the Company’s and the Bank’s Regulatory capital ratios (excluding capital conservation buffer) as of December 31, 2016 and 2015. Tier 1 Leverage Ratio Central Valley Community Bancorp and Subsidiary Minimum regulatory requirement Central Valley Community Bank Minimum requirement for ‘‘Well-Capitalized’’ institution Minimum regulatory requirement Common Equity Tier 1 Ratio Central Valley Community Bancorp and Subsidiary Minimum regulatory requirement Central Valley Community Bank Minimum requirement for ‘‘Well-Capitalized’’ institution Minimum regulatory requirement Tier 1 Risk-Based Capital Ratio Central Valley Community Bancorp and Subsidiary Minimum regulatory requirement Central Valley Community Bank Minimum requirement for ‘‘Well-Capitalized’’ institution Minimum regulatory requirement Total Risk-Based Capital Ratio Central Valley Community Bancorp and Subsidiary Minimum regulatory requirement Central Valley Community Bank Minimum requirement for ‘‘Well-Capitalized’’ institution Minimum regulatory requirement December 31, 2016 December 31, 2015 Amount Ratio Amount Ratio (Dollars in thousands) $ 122,601 $ 56,057 $ 121,079 8.75% $ 105,825 4.00% $ 48,950 8.64% $ 104,878 $ $ 70,080 56,064 5.00% $ 4.00% $ 61,148 48,918 $ 120,080 $ 43,426 $ 121,079 12.48% $ 103,152 34,650 12.59% $ 104,878 4.50% $ $ $ 62,665 43,383 6.50% $ 4.50% $ 50,017 34,627 $ 122,601 $ 57,901 $ 121,079 12.74% $ 105,825 46,200 12.59% $ 104,878 6.00% $ $ $ 77,126 57,845 8.00% $ 6.00% $ 61,560 46,170 $ 132,052 $ 77,202 $ 130,530 13.72% $ 115,466 61,601 13.57% $ 114,513 8.00% $ $ $ 96,408 77,126 10.00% $ 8.00% $ 76,949 61,560 8.65% 4.00% 8.58% 5.00% 4.00% 13.44% 4.50% 13.67% 6.50% 4.50% 13.79% 6.00% 13.67% 8.00% 6.00% 15.04% 8.00% 14.93% 10.00% 8.00% The Company succeeded to all of the rights and obligations of the Service 1st Capital Trust I, a Delaware business trust, in connection with the acquisition of Service 1st as of November 12, 2008. The Trust was formed on August 17, 2006 for the sole purpose of issuing trust preferred securities fully and unconditionally guaranteed by Service 1st. Under applicable regulatory guidance, the amount of trust preferred securities that is eligible as Tier 1 capital is limited to 25% of the Company’s Tier 1 capital on a pro forma basis. At December 31, 2016, all of the trust preferred securities that have been issued qualify as Tier 1 capital. The trust preferred securities mature on October 7, 2036, are redeemable at the Company’s option beginning five years after issuance, and require quarterly distributions by the Trust to the holder of the trust preferred securities at a variable interest rate which will adjust quarterly to equal the three month LIBOR plus 1.60%. The Trust used the proceeds from the sale of the trust preferred securities to purchase approximately $5,155,000 in aggregate principal amount of Service 1st’s junior subordinated notes (the Notes). The Notes bear interest at the same variable interest rate during the same quarterly periods as the trust preferred securities. The Notes are redeemable by the Company on any January 7, April 7, July 7, or October 7 on or after October 7, 2012 or at any time within 90 days following the occurrence of certain events, such as: (i) a change in the regulatory capital treatment of the Notes (ii) in the event the Trust is deemed an investment company or (iii) upon the occurrence of certain adverse tax events. In each such case, the Company may redeem the Notes for their aggregate principal amount, plus any accrued but unpaid interest. The Notes may be declared immediately due and payable at the election of the trustee or holders of 25% of the aggregate principal amount of outstanding Notes in the event that the Company defaults in the payment of any interest following the nonpayment of any such interest for 20 or more consecutive quarterly periods. Holders of the trust preferred securities are entitled to a cumulative cash distribution on the liquidation amount of $1,000 per security. For each January 7, April 7, July 7 or October 7 of each year, the rate will be adjusted to equal the three month LIBOR plus 1.60%. As of December 31, 2016, the rate was 2.48%. Interest expense recognized by the Company for the years ended December 31, 2016, 2015, and 2014 was $121,000, $99,000 and $96,000, respectively. LIQUIDITY Liquidity management involves our ability to meet cash flow requirements arising from fluctuations in deposit levels and demands of daily operations, which include funding of securities purchases, providing for customers’ credit needs and ongoing repayment of borrowings. Our liquidity is actively managed on a daily basis and reviewed periodically by our management and Director’s Asset/Liability Committees. This process is intended to ensure the maintenance of sufficient funds to meet our needs, including adequate cash flows for off-balance sheet commitments. Our primary sources of liquidity are derived from financing activities which include the acceptance of customer and, to a lesser extent, broker deposits, Federal funds facilities and advances from the Federal Home Loan Bank of San Francisco (FHLB). These funding sources are augmented by payments of principal and interest on loans, the routine maturities and pay downs of securities from the securities portfolio, the stability of our core deposits and the ability to sell investment securities. As of December 31, 2016, the Company had unpledged securities totaling $458,846,000 available as a secondary source of liquidity and total cash and cash equivalents of $38,568,000. Cash and cash equivalents at December 31, 2016 decreased 59.24% compared to December 31, 2015. Primary uses of funds include withdrawal of and interest payments on deposits, origination and purchases of loans, purchases of investment securities, and payment of operating expenses. Due to the negative impact of the slow economic recovery, we have been cautiously managing our asset quality. Consequently, expanding our loan portfolio or finding adequate investments to utilize some of our excess liquidity has been difficult in the current economic environment. As a means of augmenting our liquidity, we have established Federal funds lines with various correspondent banks. At December 31, 2016, our available borrowing capacity includes approximately $40,000,000 in Federal funds lines with our correspondent banks and $351,713,000 in unused FHLB advances. At December 31, 2016, we were not aware of any information that was reasonably likely to have a material effect on our liquidity position. 62 Management’s Discussion and Analysis of Financial Condition and Results of Operations. LIQUIDITY (Continued) The following table reflects the Company’s credit lines, balances outstanding, and pledged collateral at December 31, 2016 and 2015: Credit Lines (In thousands) Unsecured Credit Lines (interest rate varies with market): Credit limit Balance outstanding Federal Home Loan Bank (interest rate at prevailing interest rate): Credit limit Balance outstanding Collateral pledged Fair value of collateral Federal Reserve Bank (interest rate at prevailing discount interest rate): Credit limit Balance outstanding Collateral pledged Fair value of collateral December 31, December 31, 2016 2015 $ $ $ $ $ $ $ $ $ 40,000 $ 400 $ 40,000 - 351,713 - $ 175,160 $ 175,218 $ 308,356 - 215,223 215,307 9,102 $ - $ 2,407 $ 2,436 $ 2,328 - 2,578 2,598 The liquidity of our parent company, Central Valley Community Bancorp, is primarily dependent on the payment of cash dividends by its subsidiary, Central Valley Community Bank, subject to limitations imposed by regulations. OFF-BALANCE SHEET ITEMS In the normal course of business, the Company is a party to financial instruments with off-balance sheet risk. These financial instruments include commitments to extend credit and standby letters of credit. Such financial instruments are recorded in the financial statements when they are funded or related fees are incurred or received. The balance of commitments to extend credit on undisbursed construction and other loans and letters of credit was $259,415,000 as of December 31, 2016 compared to $217,166,000 as of December 31, 2015. For a more detailed discussion of these financial instruments, see Note 13 to the audited Consolidated Financial Statements in this Annual Report. Contractual Obligations The contractual obligations of the Company, summarized by type of obligation and contractual maturity, at December 31, 2016, are as follows: trust preferred securities mature on October 7, 2036, and are redeemable quarterly at the Company’s option. In the ordinary course of business, the Company is party to various operating leases. For operating leases, the dollar balances reflected in the table above are categorized by the due date of the lease payments. Operating leases represent the total minimum lease payments under non-cancelable operating leases. CRITICAL ACCOUNTING POLICIES The Securities and Exchange Commission (SEC) has issued disclosure guidance for ‘‘critical accounting policies.’’ The SEC defines ‘‘critical accounting policies’’ as those that require application of management’s most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain and may change in future periods. Our accounting policies are integral to understanding the results reported. Our significant accounting policies are described in detail in Note 1 in the audited Consolidated Financial Statements. Not all of the significant accounting policies presented in Note 1 of the audited Consolidated Financial Statements in this Annual Report require management to make difficult, subjective or complex judgments or estimates. Use of Estimates The preparation of these financial statements requires management to make estimates and judgments that affect the reported amount of assets, liabilities, revenues and expenses. On an ongoing basis, management evaluates the estimates used. Estimates are based upon historical experience, current economic conditions and other factors that management considers reasonable under the circumstances. These estimates result in judgments regarding the carrying values of assets and liabilities when these values are not readily available from other sources, as well as assessing and identifying the accounting treatments of contingencies and commitments. These estimates and assumptions affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results may differ from these estimates under different assumptions. Accounting Principles Generally Accepted in the United States of America Our financial statements are prepared in accordance with accounting principles generally accepted in the United States of America (GAAP). We follow accounting policies typical to the commercial banking industry and in compliance with various regulation and guidelines as established by the Public Company Accounting Oversight Board (PCAOB), Financial Accounting Standards Board (FASB), the American Institute of Certified Public Accountants (AICPA), and the Bank’s primary federal regulator, the FDIC. The following is a brief description of our current accounting policies involving significant management judgments. Less Than One Year One to Three Years Three to Five Years After Five Years Total Allowance for Credit Losses (In thousands) Deposits Subordinated debentures Operating leases $ 1,232,953 $ 19,089 $ 3,225 $ 712 $ 1,255,979 - 2,350 - 3,498 - 2,267 5,155 1,425 5,155 9,540 Total $ 1,235,303 $ 22,587 $ 5,492 $ 7,292 $ 1,270,674 Deposits represent both non-interest bearing and interest bearing deposits. Interest bearing deposits include interest bearing transaction accounts, money market and savings deposits and certificates of deposit. Deposits with indeterminate maturities, such as demand, savings and money market accounts are reflected as obligations due in less than one year. Subordinated debentures represent notes issued to a capital trust which was formed solely for the purpose of issuing trust preferred securities. These subordinated debentures were acquired as a part of the merger with Service 1st. The aggregate amount indicated above represents the full amount of the contractual obligation. All of these securities are variable rate instruments. The Our most significant management accounting estimate is the appropriate level for the allowance for credit losses. The allowance for credit losses is an estimate of probable incurred credit losses in the Company’s loan portfolio. The adequacy of the allowance is monitored on an on-going basis and is based on our management’s evaluation of numerous factors. These factors include the quality of the current loan portfolio, the trend in the loan portfolio’s risk ratings, current economic conditions, loan concentrations, loan growth rates, past-due and nonperforming trends, evaluation of specific loss estimates for all significant problem loans, historical charge-off and recovery experience and other pertinent information. See Note 1 to the audited Consolidated Financial Statements in this Annual Report for more detail regarding our allowance for credit losses. The calculation of the allowance for credit losses is by nature inexact, as the allowance represents our management’s best estimate of the probable losses inherent in our credit portfolios at the reporting date. These credit losses will occur in the future, and as such cannot be determined with absolute certainty at the reporting date. 63 Management’s Discussion and Analysis of Financial Condition and Results of Operations. CRITICAL ACCOUNTING POLICIES (Continued) Impairment of Investment Securities Investment securities are impaired when the amortized cost exceeds fair value. Investment securities are evaluated for impairment on at least a quarterly basis and more frequently when economic or market conditions warrant such an evaluation to determine whether a decline in their value is other than temporary. Management utilizes criteria such as the magnitude and duration of the decline and the intent and ability of the Company to retain its investment in the securities for a period of time sufficient to allow for an anticipated recovery in fair value, in addition to the reasons underlying the decline, to determine whether the loss in value is other than temporary. The term ‘‘other than temporary’’ is not intended to indicate that the decline is permanent, but indicates that the prospect for a near-term recovery of value is not necessarily favorable, or that there is a lack of evidence to support a realizable value equal to or greater than the carrying value of the investment. Once a decline in value is determined to be other-than-temporary and we do not intend to sell the security or it is more likely than not that we will not be required to sell the security before recovery, only the portion of the impairment loss representing credit exposure is recognized as a charge to earnings, with the balance recognized as a charge to other comprehensive income. If management intends to sell the security or it is more likely than not that we will be required to sell the security before recovering its forecasted cost, the entire impairment loss is recognized as a charge to earnings. Goodwill Business combinations involving the Company’s acquisition of the equity interests or net assets of another enterprise or the assumption of net liabilities in an acquisition of branches constituting a business may give rise to goodwill. Goodwill represents the excess of the cost of an acquired entity over the net of the amounts assigned to assets acquired and liabilities assumed in transactions accounted for under the purchase method of accounting. The value of goodwill is ultimately derived from the Company’s ability to generate net earnings after the acquisition. A decline in net earnings could be indicative of a decline in the fair value of goodwill and result in impairment. For that reason, goodwill is assessed for impairment at a reporting unit level at least annually or more often if an event occurs or circumstances change that would more likely than not reduce the fair value of the Company below its carrying amount. While the Company believes all assumptions utilized in its assessment of goodwill for impairment are reasonable and appropriate, changes could cause the Company to record impairment in the future. Accounting for Income Taxes The Company files its income taxes on a consolidated basis with its subsidiary. The allocation of income tax expense (benefit) represents each entity’s proportionate share of the consolidated provision for income taxes. Deferred tax assets and liabilities are recognized for the tax consequences of temporary differences between the reported amounts of assets and liabilities and their tax bases. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment. On the balance sheet, net deferred tax assets are included in accrued interest receivable and other assets. The determination of the amount of deferred income tax assets which are more likely than not to be realized is primarily dependent on projections of future earnings, which are subject to uncertainty and estimates that may change given economic conditions and other factors. The realization of deferred income tax assets is assessed and a valuation allowance is recorded if is ‘‘more likely than not’’ that all or a portion of the deferred tax asset will not be realized. ‘‘More likely than not’’ is defined as greater than a 50% chance. All available evidence, both positive and negative is considered to determine whether, based on the weight of that evidence, a valuation allowance is needed. Only tax positions that meet the more-likely-than-not recognition threshold are recognized. The benefit of a tax position is recognized in the financial statements in the period during which, based on all available evidence, management believes it is more likely than not that the position will be sustained upon examination, including the resolution of appeals or litigation processes, if any. Tax positions taken are not offset or aggregated with other positions. Tax positions that meet the more-likely-than-not recognition threshold are measured as the largest amount of tax benefit that is more than 50 percent likely of being realized upon settlement with the applicable taxing authority. The portion of the benefits associated with tax positions taken that exceeds the amount measured as described above is reflected as a liability for unrecognized tax benefits in the accompanying balance sheet along with any associated interest and penalties that would be payable to the taxing authorities upon examination. Interest expense and penalties associated with unrecognized tax benefits are classified as income tax expense in the consolidated statement of income. INFLATION The impact of inflation on a financial institution differs significantly from that exerted on other industries primarily because the assets and liabilities of financial institutions consist largely of monetary items. However, financial institutions are affected by inflation in part through non-interest expenses, such as salaries and occupancy expenses, and to some extent by changes in interest rates. At December 31, 2016, we do not believe that inflation will have a material impact on our consolidated financial position or results of operations. However, if inflation concerns cause short term rates to rise in the near future, we may benefit by immediate repricing of a portion of our loan portfolio. Refer to Quantitative and Qualitative Disclosures About Market Risk for further discussion. 64 Quantitative and Qualitative Disclosures About Market Risk Interest rate risk (IRR) and credit risk constitute the two greatest sources of financial exposure for insured financial institutions that operate like we do. IRR represents the impact that changes in absolute and relative levels of market interest rates may have upon our net interest income (NII). Changes in the NII are the result of changes in the net interest spread between interest-earning assets and interest-bearing liabilities (timing risk), the relationship between various rates (basis risk), and changes in the shape of the yield curve. We realize income principally from the differential or spread between the interest earned on loans, investments, other interest-earning assets and the interest incurred on deposits and borrowings. The volumes and yields on loans, deposits and borrowings are affected by market interest rates. As of December 31, 2016, 75.64% of our loan portfolio was tied to adjustable-rate indices. The majority of our adjustable rate loans are tied to prime and reprice within 90 days. However, in the current low rate environment, several of our loans, tied to prime, are at their floors and will not reprice until prime plus the factor is greater than the floor. The majority of our time deposits have a fixed rate of interest. As of December 31, 2016, 85.39% of our time deposits matures within one year or less. Changes in the market level of interest rates directly and immediately affect our interest spread, and therefore profitability. Sharp and significant changes to market rates can cause the interest spread to shrink or expand significantly in the near term, principally because of the timing differences between the adjustable rate loans and the maturities (and therefore repricing) of the deposits and borrowings. the level of interest income and interest expense recorded on a large portion of the Company’s assets and liabilities, and the market value of all interest earning assets and interest bearing liabilities, other than those which possess a short term to maturity. Virtually all of the Company’s interest earning assets and interest bearing liabilities are located at the Bank level. Thus, virtually all of the Company’s interest rate risk exposure lies at the Bank level other than $5.2 million in subordinated debentures issued by the Company’s subsidiary Service 1st Capital Trust I. As a result, all significant interest rate risk procedures are performed at the Bank level. The fundamental objective of the Company’s management of its assets and liabilities is to maximize the Company’s economic value while maintaining adequate liquidity and an exposure to interest rate risk deemed by management to be acceptable. Management believes an acceptable degree of exposure to interest rate risk results from the management of assets and liabilities through maturities, pricing and mix to attempt to neutralize the potential impact of changes in market interest rates. The Company’s profitability is dependent to a large extent upon its net interest income, which is the difference between its interest income on interest earning assets, such as loans and investments, and its interest expense on interest bearing liabilities, such as deposits and borrowings. The Company is subject to interest rate risk to the degree that its interest earning assets re-price differently than its interest bearing liabilities. The Company manages its mix of assets and liabilities with the goals of limiting its exposure to interest rate risk, ensuring adequate liquidity, and coordinating its sources and uses of funds. Our management and Board of Directors’ Asset/Liability Committees (ALCO) The Company seeks to control interest rate risk exposure in a manner that will are responsible for managing our assets and liabilities in a manner that balances profitability, IRR and various other risks including liquidity. The ALCO operates under policies and within risk limits prescribed, reviewed, and approved by the Board of Directors. The ALCO seeks to stabilize our NII by matching rate-sensitive assets and liabilities through maintaining the maturity and repricing of these assets and liabilities at appropriate levels given the interest rate environment. When the amount of rate-sensitive liabilities exceeds rate-sensitive assets within specified time periods, NII generally will be negatively impacted by an increasing interest rate environment and positively impacted by a decreasing interest rate environment. Conversely, when the amount of rate-sensitive assets exceeds the amount of rate-sensitive liabilities within specified time periods, net interest income will generally be positively impacted by an increasing interest rate environment and negatively impacted by a decreasing interest rate environment. In recent years, we have shifted our mix of assets from consisting primarily of loans to a current mix that is approximately half loans and half securities, none of which are held for trading purposes. The value of these securities is subject to interest rate risk, which we must monitor and manage successfully in order to prevent declines in value of these assets if interest rates rise in the future. The speed and velocity of the repricing of assets and liabilities will also contribute to the effects on our NII, as will the presence or absence of periodic and lifetime interest rate caps and floors. Simulation of earnings is the primary tool used to measure the sensitivity of earnings to interest rate changes. Earnings simulations are produced using a software model that is based on actual cash flows and repricing characteristics for all of our financial instruments and incorporates market-based assumptions regarding the impact of changing interest rates on current volumes of applicable financial instruments. Interest rate simulations provide us with an estimate of both the dollar amount and percentage change in NII under various rate scenarios. All assets and liabilities are normally subjected to up to 400 basis point increases and decreases in interest rates in 100 basis point increments. Under each interest rate scenario, we project our net interest income. From these results, we can then develop alternatives in dealing with the tolerance thresholds. The assets and liabilities of a financial institution are primarily monetary in nature. As such they represent obligations to pay or receive fixed and determinable amounts of money that are not affected by future changes in prices. Generally, the impact of inflation on a financial institution is reflected by fluctuations in interest rates, the ability of customers to repay their obligations and upward pressure on operating expenses. Although inflationary pressures are not considered to be of any particular hindrance in the current economic environment, they may have an impact on the company’s future earnings in the event those pressures become more prevalent. As a financial institution, the Company’s primary component of market risk is interest rate volatility. Fluctuations in interest rates will ultimately impact both allow for adequate levels of earnings and capital over a range of possible interest rate environments. The Company has adopted formal policies and practices to monitor and manage interest rate risk exposure. Management believes historically it has effectively managed the effect of changes in interest rates on its operating results and believes that it can continue to manage the short-term effects of interest rate changes under various interest rate scenarios. Management employs asset and liability management software and engages consultants to measure the Company’s exposure to future changes in interest rates. The software measures the expected cash flows and re-pricing of each financial asset/liability separately in measuring the Company’s interest rate sensitivity. Based on the results of the software’s output, management believes the Company’s balance sheet is evenly matched over the short term and slightly asset sensitive over the longer term as of December 31, 2016. This means that the Company would expect (all other things being equal) to experience a limited change in its net interest income if rates rise or fall. The level of potential or expected change indicated by the tables below is considered acceptable by management and is compliant with the Company’s ALCO policies. Management will continue to perform this analysis each quarter. The hypothetical impacts of sudden interest rate movements applied to the Company’s asset and liability balances are modeled quarterly. The results of these models indicate how much of the Company’s net interest income is ‘‘at risk’’ from various rate changes over a one year horizon. This exercise is valuable in identifying risk exposures. Management believes the results for the Company’s December 31, 2016 balances indicate that the net interest income at risk over a one year time horizon for a 100 basis points (‘‘bps’’), 200 bps, 300 bps, and 400 bps rate increase and a 100 bps decrease is acceptable to management and within policy guidelines at this time. Given the low interest rate environment, 200 bps, 300 bps, and 400 bps decreases are not considered a realistic possibility and are therefore not modeled. The results in the table below indicate the change in net interest income the Company would expect to see as of December 31, 2016, if interest rates were to change in the amounts set forth: Sensitivity Analysis of Impact of Rate Changes on Interest Income $ Change from % Change from Hypothetical Change in Rates (Dollars in thousands) Up 400 bps Up 300 bps Up 200 bps Up 100 bps Unchanged Down 100 bps Rates at Projected Net December 31, December 31, 2016 Interest Income Rates at 2016 $ 64,907 $ 62,135 59,381 56,651 54,119 51,686 10,788 8,016 5,262 2,532 - (2,433) 19.93% 14.81% 9.72% 4.68% - (4.50)% 65 Quantitative and Qualitative Disclosures About Market Risk It is important to note that the above table is a summary of several forecasts and actual results may vary from any of the forecasted amounts and such difference may be material and adverse. The forecasts are based on estimates and assumptions made by management, and that may turn out to be different, and may change over time. Factors affecting these estimates and assumptions include, but are not limited to: 1) competitor behavior, 2) economic conditions both locally and nationally, 3) actions taken by the Federal Reserve Board, 4) customer behavior and 5) management’s responses to each of the foregoing. Factors that vary significantly from the assumptions and estimates may have material and adverse effects on the Company’s net interest income; therefore, the results of this analysis should not be relied upon as indicative of actual future results. The following table shows management’s estimates of how the loan portfolio is segregated between variable-daily, variable other than daily and fixed rate loans, and estimates of re-pricing opportunities for the entire loan portfolio at December 31, 2016 and 2015: Rate Type (Dollars in thousands) Variable rate Fixed rate December 31, 2016 December 31, 2015 Balance Percent of Total Balance Percent of Total $ 571,325 184,036 75.64% $ 471,757 24.36% 126,354 78.87% 21.13% Total gross loans $ 755,361 100.00% $ 598,111 100.00% Approximately 75.64% of our loan portfolio is tied to adjustable rate indices and 34.09% of our loan portfolio reprices within 90 days. As of December 31, 2016, we had 2,511 commercial and real estate loans totaling $444,796,000 with floors ranging from 3.25% to 7.50% and ceilings ranging from 7.00% to 30.00%. The following table shows the repricing categories of the Company’s loan portfolio at December 31, 2016 and 2015: Repricing (Dollars in thousands) < 1 Year 1-3 Years 3-5 Years > 5 Years December 31, 2016 December 31, 2015 Balance $ 309,397 153,680 183,834 108,450 Percent of Total Balance Percent of Total 40.95% $ 250,705 20.35% 124,385 24.34% 139,417 83,604 14.36% 41.91% 20.80% 23.31% 13.98% Total gross loans $ 755,361 100.00% $ 598,111 100.00% Assumptions are inherently uncertain, and, consequently, the model cannot precisely measure net interest income or precisely predict the impact of changes in interest rates on net interest income. Actual results will differ from simulated results due to timing, magnitude and frequency of interest rate changes, as well as changes in market conditions and management strategies which might moderate the negative consequences of interest rate deviations. 66 Stock Price Information The Company’s common stock is listed for trading on the NASDAQ Capital Market under the ticker symbol CVCY. As of March 7, 2017, the Company had approximately 971 shareholders of record. The following table shows the high and low sales prices for the common stock for each quarter as reported by NASDAQ. Quarter Ended March 31, 2015 June 30, 2015 September 30, 2015 December 31, 2015 March 31, 2016 June 30, 2016 September 30, 2016 December 31, 2016 $ $ Sales Prices for the Company’s Common Stock High 12.16 12.35 12.50 12.50 12.49 14.64 16.42 20.00 Low 9.55 10.25 10.66 10.51 9.45 10.78 13.30 13.75 The Company paid $0.24 and $0.18 per year in common share cash dividends in 2016 and 2015, respectively. The Company’s primary source of income with which to pay cash dividends are dividends from the Bank. The Bank would not pay any dividend that would cause it to be deemed not “well capitalized” under applicable banking laws and regulations. See Note 14 in the audited Consolidated Financial Statements of this Annual Report. SHAREHOLDER INQUIRIES Inquiries regarding Central Valley Community Bancorp’s accounting, internal accounting controls or auditing concerns should be directed to Steven D. McDonald, chairman of the Board of Directors’ Audit Committee, at steve.mcdonald@cvcb.com, anonymously at www.ethicspoint.com or by calling Ethics Point, Inc. at (866) 294-9588. General inquiries about the Company or the Bank should be directed to Le-Ann Ruiz, Corporate Secretary at (800) 298-1775. 67 WHERE GIVING BACK IS SECOND NATURE At Central Valley Community Bank, giving back to our communities is a natural part of who we are and what we do. We live, work and raise families here, just like our customers. So we invest regularly to help tackle the challenges facing the San Joaquin Valley and Greater Sacramento Region. And our people give generously of their time and talents to support community causes and build the vitality of local businesses. In every Bank branch, our community pride is in full bloom as we partner with these worthwhile organizations throughout this special region we call home. Naturally. Ag Lenders Society of California Alzheimer’s Foundation of America Alzheimer’s Society American Bankers Association American Cancer Society American Heart Association American Institute of Certified Public Accountants American Red Cross Arts Consortium Association of Commercial Real Estate Boys and Girls Clubs of Fresno County Boys & Girls Clubs of the Sequoias Building Industry Association of Tulare and Kings County Business Network International Business Organization of Old Town California Armenian Home California Bankers Association California Chamber of Commerce California Community Builders Inc. California Farm Bureau Federation California Medical Group California State University, Fresno California State University, Fresno – Alumni Association California State University, Fresno – Craig School of Business California State University, Fresno – Maddy Institute California State University, Fresno – University Business Center California State University, Fresno – Bulldog Foundation Carnegie Arts Center Celebrant Singers Center for Land-Based Learning Central California Society for Prevention of Cruelty to Animals Central California Women’s Conference Central Sierra Historical Society Central Valley Chapter of the Risk Management Association Central Valley Christian School Central Valley Community Foundation Central Valley SCORE Central Valley Sons of Italy Foundation Certified Development Corporation of Tulare County City of Exeter Community Services Clovis American Legion Post #147 Clovis Chamber of Commerce Clovis Community Foundation Clovis Museum Clovis Rodeo Association Coarsegold Chamber of Commerce Community Food Bank Court Appointed Special Advocates of Fresno & Madera Counties 68 Court Appointed Special Advocates of Sacramento County Court Appointed Special Advocates of Stanislaus County Court Appointed Special Advocates of El Dorado County Delta College Foundation Department of Consumer Affairs Doug McDonald Scholarship Downtown Visalia Foundation Eastern Fresno County Historical Society Eastern Madera County Chamber of Commerce Economic Development Corporation El Concilo El Dorado Food Bank El Dorado Park Community Development Corporation Emergency Food Bank of Greater Stockton Environmental Bankers Association Exceptional Parents Children’s Center Unlimited Executives Association of Tulare County Exeter Ag Boosters Exeter Chamber of Commerce Exeter Eels Swim Team Exeter Sober Graduation Inc. Fair Oaks Chamber of Commerce Fair Oaks Historical Society Fig Garden Swim & Racquet Club Financial Credit Networks, Inc. Financial Services Information Sharing and Analysis Center Folsom Family Expo Folsom Historic Society Folsom, El Dorado & Sacramento Historical Railroad Association Foundation for Clovis Schools Foundation for Fresno County Public Library Fresno Area Hispanic Foundation Fresno Art Museum Fresno Association of REALTORS Fresno Business Council Fresno City & County Chamber of Commerce Fresno County Economic Development Corporation Fresno County Farm Bureau Fresno Fire Chiefs Foundation Fresno Metro Black Chamber of Commerce Fresno Philharmonic Fresno Rescue Mission Fresno Temple Church of God in Christ Fresno Women’s Trade Club Give Every Child a Chance Grand Theatre Center for the Arts Greater Fresno Area Chamber of Commerce Greater Merced Chamber of Commerce (CONTINUED) Greater Stockton Chamber of Commerce Habitat for Humanity of Tulare County Hands in the Community Hands on Central California Hinds Hospice Independent Community Bankers of America Joint Services Honors Command Junior League of San Joaquin County Kaweah Delta Health Care District Kaweah Delta Hospital Foundation Kerman Boys Basketball Boosters Kerman Chamber of Commerce Kerman Youth Soccer League Kids for Christmas Kings & Tulare County Homeless Alliance Kings County Farm Bureau KVIE Public Television Latinas Unidas Leadership Stockton Leukemia & Lymphoma Society Central California Chapter LifeSTEPS Lions Clubs International Lodi Chamber of Commerce Lodi Police Foundation Lodi Tokay Rotary Club LOEL Center & Gardens Madera Association of REALTORS Madera Chamber of Commerce Madera Community Hospital Foundation Madera County Food Bank Marjaree Mason Center Merced County Association of REALTORS Merced County Chamber of Commerce Merced County Fair Merced County Farm Bureau Merced County Food Bank Merced Police Officers’ Association Modesto Chamber of Commerce Modesto Christian School Momentum Dance Academy Mountain Community Recreation Foundation National Association of Government Guaranteed Lenders National Association of Mortgage Brokers National Rotary Association Networking for Women of Tulare County North State Building Industry Association Oakdale Educational Foundation Oakhurst Area Chamber of Commerce Oakhurst Community Center Oakhurst Sierra Sunrise Rotary Opening Doors Inc. Parenting Network Pine Ridge Elementary Boosters Placerville Kiwanis Club Poverello House Powerhouse Ministries Rainbow School Reach Out and Read San Joaquin Redwood Ranger Bank Booster Club Regents of the University of California Relay For Life Rocklin Youth Soccer Club Roseville Area Chamber of Commerce Rotary Club of Cameron Park Rotary Club of Clovis Rotary Club of Folsom Rotary Club of Fresno Rotary Club of Kerman Rotary Club of Madera Rotary Club of Merced Rotary Club of North Stockton Rotary Club of Sacramento Rotary International Sacramento Food Bank & Family Services Sacramento Master Singers Sacramento Metropolitan Chamber of Commerce Sacramento Regional Builders Exchange San Joaquin County Farm Bureau San Joaquin River Parkway and Conservation Trust, Inc. San Joaquin Valley Town Hall Second Harvest Food Bank Sequoia Council of the Boy Scouts of America Sierra Foothill Conservancy Sierra High School Future Farmers of America Sierra Lions Club Sierra Women’s Service Club Signature User Group SKP Park of the Sierras Society for Human Resource Management Society of St. Vincent De Paul Soroptimist International of Madera Soroptimist International of the Sierras Inc. Southeast Fresno Community Economic Development Association Stanislaus County Farm Bureau Stockton Athletic Hall of Fame Stockton Shelter for the Homeless Stockton Sunrise Rotary Club The Bank CEO Network The Buddhist Church of Stockton The Downtown Fresno Partnership The Exeter Art Gallery and Museum The Glass Slipper The Risk Management Association – Central Valley Chapter The Risk Management Association – Fresno Chapter The Risk Management Association – Sacramento Chapter The Roman Catholic Diocese of Fresno The Salvation Army Tracy Chamber of Commerce Tracy High School Sports Boosters Tracy Sunrise Rotary Traver Joint Elementary District Trusted Advisory Group Tulare County Economic Development Corporation Tulare County Farm Bureau Tulare Kings Hispanic Chamber of Commerce Twin Lakes Food Bank United Way California Capital Region United Way of Fresno and Madera Counties United Way of Merced County United Way of San Joaquin County United Way of Stanislaus County United Way of Tulare County University of the Pacific Valley Children’s Hospital Alegria Guild Valley Children’s Hospital Foundation Valley Children’s Hospital La Feliz Guild Valley Children’s Hospital La Sierra Guild Valley Crime Stoppers Visalia Breakfast Lions Club Visalia Chamber of Commerce Visalia Economic Development Corporation Visalia Enforcers Association Visalia Police Activities League Visalia Senior Center Visalia Sunset Rotary Club West Fresno Family Resource Center West Visalia Kiwanis Club Western Payments Alliance 69 Notes 70 Notes 71 Fresno Downtown 2404 Tulare Street Fresno, CA 93721 (559) 268-6806 River Park 8375 North Fresno Street Fresno, CA 93720 (559) 447-3350 Kerman 360 South Madera Avenue Kerman, CA 93630 (559) 842-2265 Lodi 1901 West Kettleman Lane, Suite 100 Lodi, CA 95242 (209) 333-5000 Madera 1919 Howard Road Madera, CA 93637 (559) 673-0395 Merced 3337 G Street, Suite B Merced, CA 95340 (209) 725-2820 Modesto 2020 Standiford Avenue, Suite H Modesto, CA 95350 (209) 576-1402 Oakhurst 40004 Highway 41, Suite 101 Oakhurst, CA 93644 (559) 642-2265 Prather 29430 Auberry Road Prather, CA 93651 (559) 855-4100 Roseville 2999 Douglas Boulevard, Suite 160 Roseville, CA 95661 (916) 859-2550 Stockton 2800 West March Lane, Suite 120 Stockton, CA 95219 (209) 956-7800 Tracy 60 West 10th Street Tracy, CA 95376 (209) 830-6995 Visalia Caldwell 2245 West Caldwell Avenue Visalia, CA 93277 (559) 737-5641 Floral 120 North Floral Street Visalia, CA 93291 (559) 625-8733 Mission Oaks Plaza 5412 Avenida de los Robles Visalia, CA 93291 (559) 730-2851 Business Lending 7100 North Financial Drive, Suite 101 Fresno, CA 93720 (559) 298-1775 (800) 298-1775 Agribusiness 1044 East Herndon Avenue, Suite 106 Fresno, CA 93720 (559) 323-3493 Real Estate 1044 East Herndon Avenue, Suite 106 Fresno, CA 93720 (559) 323-3365 SBA Lending 1044 East Herndon Avenue, Suite 106 Fresno, CA 93720 (559) 323-3384 Investing In Relationships. www.cvcb.com Customer Service (800) 298-1775 (559) 298-1775 Cameron Park 3311 Coach Lane Cameron Park, CA 95682 (530) 676-3400 Clovis Clovis Main 600 Pollasky Avenue Clovis, CA 93612 (559) 323-3480 Herndon & Fowler 1795 Herndon Avenue, Suite 101 Clovis, CA 93611 (559) 323-2200 Exeter 300 East Pine Street Exeter, CA 93221 (559) 594-9919 Fair Oaks 10123 Fair Oaks Boulevard Fair Oaks, CA 95628 (916) 293-4910 Folsom 1710 Prairie City Road, Suite 100 Folsom, CA 95630 (916) 850-1500 Fresno Corporate Office 7100 North Financial Drive, Suite 101 Fresno, CA 93720 (559) 298-1775 Fig Garden Village 5180 North Palm, Suite 105 Fresno, CA 93704 (559) 221-2760 72 

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