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Umpqua7690 N. Palm Avenue, Fresno, California 93711 559.439.0200 WWW.FRESNOFIRSTBANK.COM Message from the President & CEO To Our Shareholders, In 2017, the Bank achieved stellar results in regards to our key metrics. One of our main strategic initiatives is to become a top 1% performing community bank, and we are well on our way to that end. We surpassed an important milestone this year by growing past $400 million in assets. Our single branch market model is a core strength, so it is important for us to achieve these mile- stones and validate the potential of our business model. Our team’s focused approach brought us success in all aspects of our business and during the year total assets grew 12%, to $407.4 million, total deposits grew 12%, to $371.4 million, total loans increased 16%, to $263.9 million and total after-tax profit increased 20% to $3.7 million. The changes coming out of Washington will bring positive news to our industry through tax reform and regulatory amendments. The new corporate tax rate will have an immediate favorable impact to our core earnings starting in 2018, however, regulatory changes take a bit longer to work through the system so we will wait to see the actual impact in the coming year. In March of this year, the Bank announced the retirement of our Chairman and founding Board member, David Price. He has been instrumental in developing the culture of the Bank, which is rooted in the idea that by giving staff a “stake in the outcome” through our ESOP, the perfor- mance of the Bank, the level of service for our customers and the return for our shareholders will exceed the market. His leadership, enthusiasm and commitment to our vision and values have been a driving force behind our success. Dave will be succeeded by Mark Saleh, who has been our Vice-Chairman for the past 8 years. Through the smooth execution of our Board’s succession plan, we are very encouraged by the opportunities lying ahead. The Bank’s share price hit all-time highs throughout 2017 backed by our consistently strong fi- nancial results. The team (employee owners through our ESOP) is proud of our performance and happy to see that the market is finally recognizing the value of our franchise through our share price. Thank you all for your continued support and we look forward to a great year in 2018. Steve Miller President & CEO Mission Statement We safeguard, invest, and move capital. Vision Statement We believe people deserve the opportunity to achieve their aspirations and personal success. Core Values Teamwork: • We value our diverse strengths, hold ourselves and each other accountable, and have each other’s back. Relationship: • We build trust by being respectful and transparent with each other and our clients. Authentic: • We are honest, humble and have the courage to be vulnerable. Commitment: • We are resourceful, responsive and strive for excellence with pride of ownership. “We strive to be the best company our employees ever work for, the best bank our customers ever do business with, and the best investment our shareholders ever make!” CFST Employee/Owner Chairman of the Board & Founding Director In 2005, we opened Fresno First Bank. A great day, following nine months of organizing and soliciting investors for our share offerings. Our original Board of Directors; Gary Cocola, Morris Garcia, Jack Holt, Robert Kubo, Mark Saleh, Joel Slonski, Al Smith, and Daniel Suchy, pulled together and our shares were oversubscribed, which was outstanding in my opinion. Our mission from day one was to develop a culture of shared employee ownership, utilizing the benefits of the Employee Stock Ownership Plan (ESOP). I believe our culture was the major factor that helped us profit even during the recession period of 2008-2011. Fresno First Bank was recognized by the Great Game of Business with the All Star Award in 2015. In addition, Forbes Magazine recognized Fresno First Bank, in their March 2016 issue, as one of the outstanding 25 small businesses in the United States. I personally, had the pleasure to visit Forbes in New York City in 2017 to accept the award. This was a great honor to accept on behalf of the employees, shareholders, and Board of Directors. The time has come for me to step down as Chairman of the Board. It has been a great honor and pleasure working with my fellow board members and representing the shareholders. Without the shareholders, none of this would have been possible. Per our organization's succession plan, Mark Saleh will become chairman, continuing the culture and leadership we have strived for since the beginning. We all have faith in him. Thank you for the privilege of serving as your Chairman of the Board for the past 13 years. Dave Price Chairman of the Board Marketing Highlights Fresno First Bank is Central California’s #1 SBA Community Bank Lender Five Years Running Fresno First Bank has been declared the top Community Bank SBA Lender for the 15 county Fresno District for the fifth consecutive year. Fresno First Bank approved 37 SBA 7(a) loans totaling $16.7 million and participated in SBA 504 loan approvals during the year which will yield approximately $15.6 million in additional loans to small businesses in Central California. “The credit for this recognition goes to our team. Their dedication and hard work has allowed us to keep the top community bank lender spot in the Fresno District,” said Michael Fanucchi, our Senior Vice President. “As a Preferred SBA lender, we are committed to the SBA Program,” said Fanucchi. “Our experienced team works with a broad base of loans, including franchises and changes of ownership.” Education and Training Fresno First Bank partnered with California State University, Fresno to provide internships, scholarships and through team member participation on the Craig School of Business Board. We also provided education and assistance to members of Fresno SCORE through seminars to educate local entrepreneurs on starting a business. Two team members were accepted into the Fresno Chamber of Commerce’s Leadership Fresno Program and are learning about Fresno, its leaders, and how to affect changes in the community. Fresno State University Football Tailgates Fresno First Bank is a proud supporter of the Fresno State Athletic program. The Bank’s Tailgate space has become a popular spot in the White Lot. We proudly welcome our customers to attend these events. Community Involvement Fresno First Bank team members adopted the Community Food Bank as their charity of choice in 2017. We participated in 6 events ranging from food drives to warehouse work days. In addition to the Fresno Community Food Bank, Fresno First Bank supported a variety of community partners in 2017 with monetary donations, volunteer hours, and training and education. From the Heart Association, to local teen sports, to Exceptional Parents Unlimited, our team members have proven that we live our values by putting our community first. Fresno First Bank team members supporting the Heart Association Wear Red Day. Team Building Fresno First Bank encourages our team members to have fun and build strong relationships inside and outside of the bank. The team showcased their skills through many team building activities. Financial Highlights Financial Highlights the the Our earnings start with top-line revenue we generate. Our primary revenue source is the net interest income we earn from the loans and investments, less interest we pay depositors. Additional revenue is generated from services we provide and premiums from loans we sell. We consider Core Revenue the above less unusual or “one off” items such as gains, or losses, from the sale of securities or other assets which occur occasionally but are not part of our normal operations. Core Revenue $ in thousands $20,000 $15,000 $10,000 $5,000 $0 In 2017, gross core revenue increased 16% compared to 2016. Over the last 5 years core revenue has doubled to $16.5 million. 2013 2014 2015 2016 2017 Interest Income Non-Interest Income Pre-Tax, Pre-Provison Income $ in thousands $8,000 $7,000 $6,000 $5,000 $4,000 $3,000 $2,000 2013 2014 2015 2016 2017 Pre-Tax, Pre-Provision Income Pre-tax, pre-provision income may be one of the best measures of the trend in operating performance as it excludes the provision for loans losses, which can be notoriously volatile based on credit quality changes and portfolio growth rates, and taxes which can vary year to year based on differences in operating activities, tax expense accruals, and changes in tax rates. In 2017, pre-tax, pre-provision income increased 17% compared to 2016 and since 2012 (over the past 5 years) is up 170%. Net Income $ in thousands $4,000 $3,500 $3,000 $2,500 $2,000 $1,500 $1,000 $500 $0 2013 2014 2015 2016 2017 Net Income Net income after tax is the bottom line number. For 2017, net income increased 20% to $3.7 million, or $1.28 per share, compared to $3.1 million, or $1.12 per share for 2016. With the signing into law of the Tax Cuts and Jobs Act of 2017, generally accepted tax accounting principles require deferred assets (DTAs) on corporate balance sheets be revalued to reflect the net present value of the future tax benefits based on the new 21% top rate, which replaces the 35% top rate. As a result of this accounting change, the Company made a one-time adjustment to the value of its DTAs causing a tax expense of $331,000. The following table presents a year-to-year comparison of key financial results before the one-time adjustment. Excluding the DTA adjustment, net income increased 30% for the year. Comparison of 2017 vs. 2016 without the effect of the accounting adjustment to deferred tax assets Year to Date as of: SELECT FINANCIAL INFORMATION AND RATIOS (unaudited) Dec. 31, 2017 Dec. 31, 2016 Percent Change Income before DTA adjustment $ 4,008 $ 3,074 Basic earnings per share before DTA $ 1.42 $ 1.13 Fully diluted earnings per share before DTA $ 1.39 $ 1.12 Return on average assets before DTA Return on average equity before DTA 1.09% 12.23% .98% 10.90% 30% 26% 25% 11% 12% In 2017, the Company continued its robust, organic growth. Total assets increased 12% to $407.4 million at December 31, 2017 compared to $363.5 million at December 31, 2016. Total loans grew 16% to $263.9 million at December 31, 2017 from $227.7 million a year ago. Total deposits increased 12% to $371.4 million at December 31, 2017 compared to $332.3 million from a year earlier. $450 $400 $350 $300 $250 $200 $150 $100 $50 $0 Balance Sheet ($ in millions) 2013 2014 2015 2016 2017 Net Loans Deposits Total Assets $40 $35 $30 $25 $20 $15 $10 $5 $0 Capital and Leverage Ratio ($ in millions) 10.00% 9.50% 9.00% 8.50% 8.00% 7.50% 7.00% 2013 2014 2015 2016 2017 Total Capital Capital to Assets - Leverage Ratio the Board Capital management is a key part of our business that management and take very seriously. We strive to retain enough capital to maintain well capitalized designations under regulatory guidelines and provide for growth while balancing returns for our shareholders. Net shareholder’s equity increased to $34.6 million at December 31, 2017 compared to $30.0 million a year ago at December 31, 2016. The leverage ratio also frequently referred to as the Tangible Common Equity (TCE) Ratio increased from 8.23% at December 31, 2016 to 8.49% at year-end 2017. Our return on shareholders’ equity in 2017 increased to 11.4% from 10.9% in 2016. The Book value per common share increased 11% to $12.18 at December 31, 2017 compared to $10.96 one year ago. Our core deposit portfolio is the strength of our franchise and our team shares a common goal of driving new DDA account acquisition. demand Noninterest-bearing deposits to $199.0 million at increased 17% December 31, 2017, representing 54% of total deposits compared to $169.5 million or 51% of total deposits one year ago. $400 $300 $200 $100 $0 Strong Deposit Base ($ in millions) 2013 2014 2015 2016 2017 Non-Interest Bearing Interest Checking Savings Money Market Certificates of Deposit $300 $200 $100 $0 Diversified Loan Portfolio ($ in millions) 2013 2014 2015 2016 2017 Residential RE Land and Construction Commercial RE Agriculture Commercial & Industrial representing 51% of The loan portfolio grew by 16% to $263.9 million at December 31, 2017 from $227.7 million one year ago. The portfolio is well diversified with commercial and industrial loans totaling $133.9 million, loans at December 31, 2017. Commercial real estate (CRE) loans totaled $76.3 million, or 29% of total loans. Agriculture and land loans totaled $21.3 million, or 8% of loans, residential loans were $14.2 million, or 5% of loans, and real estate construction and land development loans were $18.1 million, or 7% of loans. total Of note, $86.9 million, or 33%, of the loan portfolio are loans guaranteed by US Government programs including the SBA, USDA and FSA. At January 1, 2017, our stock was trading at $11.50 rising to $19.55 at year end, a 70% increase. As of March 23, 2018 our stock was trading at $20.95. COMMUNITIES FIRST FINANCIAL CORPORATION CONSOLIDATED FINANCIAL STATEMENTS December 31, 2017 and 2016 COMMUNITIES FIRST FINANCIAL CORPORATION CONSOLIDATED FINANCIAL STATEMENTS December 31, 2017 and 2016 CONTENTS INDEPENDENT AUDITOR’S REPORT ................................................................................................ 1 CONSOLIDATED FINANCIAL STATEMENTS: CONSOLIDATED BALANCE SHEETS .......................................................................................... CONSOLIDATED STATEMENTS OF INCOME ............................................................................ CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME ........................................... CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY ...................... CONSOLIDATED STATEMENTS OF CASH FLOWS ................................................................... NOTES TO CONSOLIDATED FINANCIAL STATEMENTS .......................................................... 2 3 4 5 6 7 Crowe Horwath LLP Independent Member Crowe Horwath International INDEPENDENT AUDITOR'S REPORT To the Shareholders and Board of Directors Communities First Financial Corporation Fresno, California Report on the Financial Statements We have audited the accompanying consolidated financial statements of Communities First Financial Corporation, which comprise the consolidated balance sheets as of December 31, 2017 and 2016, and the related consolidated statements of income, comprehensive income, changes in shareholders’ equity, and cash flows for the years then ended, and the related notes to the financial statements. Management’s Responsibility for the Financial Statements Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of consolidated financial statements that are free from material misstatement, whether due to fraud or error. Auditor’s Responsibility Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. Opinion In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Communities First Financial Corporation as of December 31, 2017 and 2016, and the results of its operations and its cash flows for the years then ended in accordance with accounting principles generally accepted in the United States of America. Sacramento, California March 29, 2018 Crowe Horwath LLP 1. COMMUNITIES FIRST FINANCIAL CORPORATION CONSOLIDATED BALANCE SHEETS For the Years Ended December 31, 2017 and 2016 COMMUNITIES FIRST FINANCIAL CORPORATION CONSOLIDATED BALANCE SHEETS For the Years Ended December 31, 2017 and 2016 2017 2016 2017 2016 ASSETS Cash and due from banks Federal funds sold Interest-bearing deposits in banks $ 5,731,158 $ 43,765,000 5,240,000 6,879,474 52,604,573 2,908,171 ASSETS Cash and due from banks Federal funds sold Interest-bearing deposits in banks $ 5,731,158 $ 43,765,000 5,240,000 6,879,474 52,604,573 2,908,171 Total cash and cash equivalents 54,736,158 62,392,218 Total cash and cash equivalents 54,736,158 62,392,218 Certificates of deposit Securities available-for-sale Loans, net SBIC investments and correspondent bank stock, at cost Cash surrender value of life insurance Premises and equipment Interest receivable and other assets 5,199,000 72,663,649 260,609,698 2,243,609 8,072,190 269,960 3,623,438 Certificates of deposit 5,199,000 Securities available-for-sale 66,291,965 Loans, net 224,355,335 SBIC investments and correspondent bank stock, at cost 1,918,206 Cash surrender value of life insurance - Premises and equipment 167,730 Interest receivable and other assets 3,208,776 5,199,000 72,663,649 260,609,698 2,243,609 8,072,190 269,960 3,623,438 5,199,000 66,291,965 224,355,335 1,918,206 - 167,730 3,208,776 Total assets $ 407,417,702 $ 363,533,230 Total assets $ 407,417,702 $ 363,533,230 LIABILITIES AND SHAREHOLDERS' EQUITY Deposits Interest payable and other liabilities $ 371,400,535 $ 332,330,704 1,272,597 LIABILITIES AND SHAREHOLDERS' EQUITY Deposits Interest payable and other liabilities 1,444,352 $ 371,400,535 $ 332,330,704 1,272,597 1,444,352 Total liabilities 372,844,887 333,603,301 Total liabilities 372,844,887 333,603,301 Commitments and contingencies (Notes 4 and 11) Commitments and contingencies (Notes 4 and 11) Shareholders’ equity: Common stock - 5,000,000 shares authorized, no par value; 2,837,313 and 2,732,043 shares issued and outstanding in 2017 and 2016, respectively Additional paid-in capital Retained earnings Accumulated other comprehensive income Shareholders’ equity: 26,634,874 1,400,202 6,458,314 79,425 25,943,065 1,111,062 2,774,616 101,186 Common stock - 5,000,000 shares authorized, no par value; 2,837,313 and 2,732,043 shares issued and outstanding in 2017 and 2016, respectively Additional paid-in capital Retained earnings Accumulated other comprehensive income 26,634,874 1,400,202 6,458,314 79,425 25,943,065 1,111,062 2,774,616 101,186 Total shareholders' equity 34,572,815 29,929,929 Total shareholders' equity 34,572,815 29,929,929 Total liabilities and shareholders' equity $ 407,417,702 $ 363,533,230 Total liabilities and shareholders' equity $ 407,417,702 $ 363,533,230 See accompanying notes to the financial statements. See accompanying notes to the financial statements. 2. 2. COMMUNITIES FIRST FINANCIAL CORPORATION CONSOLIDATED STATEMENTS OF INCOME For the Years Ended December 31, 2017 and 2016 Interest Income: Interest and fees on loan Interest on investment securities Interest on federal funds sold and other 2017 2016 $ 13,109,730 1,550,183 527,848 $ 11,220,145 1,351,668 362,454 Total interest income 15,187,761 12,934,267 Interest Expense Interest on savings deposits, NOW, and money market accounts Interest on time deposits Interest on other borrowings Total interest expense Net interest income Provision for loan losses 235,118 241,517 4 476,639 225,882 230,797 1,242 457,921 14,711,122 12,476,346 825,000 1,266,000 Net interest income after provision for loan losses 13,886,122 11,210,346 Non-interest income: Service charges on deposits Gain on sale of investment securities Gain on sale of loans Increase in cash surrender value of life insurance Other 975,772 119,412 465,104 72,190 294,590 845,866 7,569 669,053 - 211,125 Total non-interest income 1,927,068 1,733,613 Non-interest expenses: Salaries and employee benefits Occupancy and equipment expenses Regulatory assessments Data processing fees Professional fees Marketing and business promotion Director fees and stock-based compensation Other expenses 5,384,920 664,325 281,600 661,744 467,937 458,050 387,838 866,470 4,606,768 515,668 202,900 558,765 434,913 315,649 274,623 912,685 Total non-interest expenses 9,172,884 7,821,970 Income before income taxes 6,640,306 5,121,989 Provision for income taxes 2,956,608 2,046,880 Net income Net income per share - basic Net income per share - diluted $ $ $ 3,683,698 1.31 1.28 $ $ $ See accompanying notes to the financial statements. 3,075,109 1.13 1.12 3. COMMUNITIES FIRST FINANCIAL CORPORATION CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME For the Years Ended December 31, 2017 and 2016 COMMUNITIES FIRST FINANCIAL CORPORATION CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME For the Years Ended December 31, 2017 and 2016 Net income $ 3,683,698 $ 3,075,109 Net income $ 3,683,698 $ 3,075,109 2017 2016 2017 2016 Other comprehensive income (loss): Available for sale securities: Other comprehensive income (loss): Available for sale securities: Unrealized holding gains (losses) during the year Reclassification adjustment for gains realized ‐ ‐ in net income 60,666 (434,418) (119,412) (7,569) Unrealized holding gains (losses) during the year Reclassification adjustment for gains realized in net income ‐ ‐ Net unrealized losses (58,746) (441,987) Net unrealized losses Income tax benefit Other comprehensive loss 36,985 181,215 Income tax benefit (21,761) (260,772) Other comprehensive loss 60,666 (434,418) (119,412) (7,569) (58,746) (441,987) 36,985 181,215 (21,761) (260,772) Total comprehensive income $ 3,661,937 $ 2,814,337 Total comprehensive income $ 3,661,937 $ 2,814,337 See accompanying notes to the financial statements. See accompanying notes to the financial statements. 4. 4. I Balances, January 1, 2016 N O T A R O P R O C Stock based compensation L A Exercise of stock options C Net issuance of restricted stock awards N A N Other comprehensive loss F I I I I Net income Net income T S Balances, December 31, 2016 R F Issuance of common stock S E Stock based compensation T Exercise of stock options N U M M Other comprehensive loss O C Balances, December 31, 2017 I I Issuance of restricted stock awards I Y T U Q E ’ S R E D L O H E R A H S N S E G N A H C F O S T N E M E T A T S D E T A D I L O S N O C 6 1 0 2 d n a 7 1 0 2 , 1 3 r e b m e c e D d e d n e s r a e y e h t r o F ’ l s r e d o h e r a h S l t a o T , 0 4 8 7 7 9 6 2 , y t i u q E - - 2 5 7 7 3 1 , , 9 0 1 5 7 0 3 , - - - - r e h O t i e v s n e h e r p m o C ) s s o L ( e m o c n I $ 8 5 9 , 1 6 3 $ l t d e a u m u c c A ) 2 7 7 0 6 2 ( , ) 2 7 7 0 6 2 ( , , 9 2 9 9 2 9 9 2 , - 0 2 2 1 2 5 , , 0 2 9 3 8 3 9 0 8 5 7 , , 8 9 6 3 8 6 3 , - - - - - 6 8 1 1 0 1 , . 5 ) 1 6 7 1 2 ( , ) 1 6 7 1 2 ( , , 5 1 8 2 7 5 4 3 , $ 5 2 4 9 7 , $ - - COMMUNITIES FIRST FINANCIAL CORPORATION 6 1 6 CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY 4 For the years ended December 31, 2017 and 2016 7 7 2 9 0 1 5 7 0 3 4 1 3 8 5 4 6 8 9 6 3 8 6 3 d e n a - - - - - - - , , , , t , , , , i , ) 3 9 4 0 0 3 ( i s g n n r a E e R $ 4 8 9 , 3 3 0 , 1 $ 1 9 3 , 2 8 8 , 5 2 $ 7 1 4 , 8 9 6 , 2 l a n o i t i d d A l a t i p a C n i - d a P i t n u o m A s e r a h S k c o t S n o m m o C 2 6 0 , 1 1 1 , 1 5 6 0 , 3 4 9 , 5 2 3 4 0 , 2 3 7 , 2 - 2 5 7 , 7 3 1 - - ) 4 7 6 , 0 6 ( Shares Common Stock - ) 0 8 7 , 4 9 ( Amount 0 2 9 , 3 8 3 $ - - - 2 0 2 , 0 Additional 0 4 Paid-in Capital , 1 Retained Earnings Accumulated Other Comprehensive Shareholders’ Income (Loss) $ 1,033,984 $ (300,493) $ 361,958 $ 26,977,840 l - - - - - 2,698,417 $ 25,882,391 $ 4 7 6 , 0 6 9 8 5 , 0 60,674 7 1 0 2 2 , 1 2 5 7,126 26,500 - - - - - 4 7 137,752 8 , 4 (60,674) 3 6 , 6 2 - - - $ - - - - 6 2,732,043 2 1 , 7 - - - - 0 0 5 , 6 2 43,800 - 20,300 41,170 - - 25,943,065 - - 0 0 0 7 0 0 1 3 8 , , , 1 0 3 4 2 4 521,220 - 170,589 - - - - 1,111,062 3 1 3 , 7 3 - 8 , 383,920 2 (94,780) - - - - - - 3,075,109 - - - - - (260,772) 2,774,616 101,186 - - - - 3,683,698 - - - - - - (21,761) Total . s t n e Equity m e t a t s i 29,929,929 a c n 137,752 a n - i f - e h 3,075,109 t o t (260,772) s e t o n g n y 521,220 n a 383,920 p m 75,809 o - c c a 3,683,698 e (21,761) e S i 2,837,313 $ 26,634,874 $ 1,400,202 $ 6,458,314 $ 79,425 $ 34,572,815 s d r a w a k c o t s d e t c i r t s e r f o e c n a u s s i e m o c n i t e N t e N s s o l i e v s n e h e r p m o c r e h O t n o i t a s n e p m o c d e s a b k c o S t s n o i t p o k c o t s i f o e s c r e x E 6 1 0 2 , 1 y r a u n a J , s e c n a a B l s d r a w a k c o t s d e t c i r t s e r f o e c n a u s s I s s o l i e v s n e h e r p m o c r e h O t e m o c n i t e N k c o t s n o m m o c f o e c n a u s s I n o i t a s n e p m o c d e s a b k c o S t s n o i t p o k c o t s i f o e s c r e x E 7 1 0 2 , 1 3 r e b m e c e D , s e c n a a B l 6 1 0 2 , 1 3 r e b m e c e D , s e c n a a B l See accompanying notes to the financial statements. 5. Cash flows from operating activities Net income Adjustments to reconcile net income to net cash from operating activities: equipment Depreciation and amortization of premises and Amortization and accretion of premiums and discounts on securities available for sale, net Provision for loan losses Gain on sale of investment securities Gain on sale of loans held for sale Proceeds from sale of loans held for sale Originations of loans held for sale Stock based compensation Increase in value of life insurance Increase in interest receivable Increase (decrease) in interest payable and other liabilities Net (increase) decrease in other assets Cash flow from investing activities Purchase of certificates of deposit Proceeds from maturities of certificates of deposit Purchase of available for sale securities Proceeds from maturities of available for sale securities Proceeds from sale of available for sale securities ‐ ‐ Net increase in loans ‐ ‐ Purchase of SBIC investments and correspondent bank stock ‐ ‐ Purchase of company owned life insurance Purchases of premises and equipment 752,232 825,000 (119,412) (465,104) 5,297,089 (4,831,985) 383,920 (72,190) (369,778) 171,755 (44,884) (748,000) 748,000 (24,260,786) 9,514,210 7,720,311 (37,079,363) (325,403) (8,000,000) (144,429) 36,809,014 2,260,817 75,809 521,220 COMMUNITIES FIRST FINANCIAL CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS For the Years Ended December 31, 2017 and 2016 COMMUNITIES FIRST FINANCIAL CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS For the Years Ended December 31, 2017 and 2016 2017 2016 2017 2016 $ 3,683,698 $ 3,075,109 Net income Adjustments to reconcile net income to net cash from operating activities: Cash flows from operating activities $ 3,683,698 $ 3,075,109 42,199 95,526 777,223 1,266,000 (7,569) (669,053) 8,977,095 (8,308,042) 137,752 - (437,459) (370,605) 930,295 Depreciation and amortization of premises and equipment Amortization and accretion of premiums and discounts on securities available for sale, net Provision for loan losses Gain on sale of investment securities Gain on sale of loans held for sale Proceeds from sale of loans held for sale Originations of loans held for sale Stock based compensation Increase in value of life insurance Increase in interest receivable Increase (decrease) in interest payable and other liabilities Net (increase) decrease in other assets 42,199 95,526 752,232 825,000 (119,412) (465,104) 5,297,089 (4,831,985) 383,920 (72,190) (369,778) 171,755 (44,884) 777,223 1,266,000 (7,569) (669,053) 8,977,095 (8,308,042) 137,752 - (437,459) (370,605) 930,295 Net cash provided by operating activities 5,252,540 5,466,272 Net cash provided by operating activities 5,252,540 5,466,272 Cash flow from investing activities (250,000) 746,000 (9,050,487) 10,503,189 - (40,782,287) (269,031) - (95,692) for Purchase of certificates of deposit Proceeds from maturities of certificates of deposit Purchase of available Proceeds from maturities of available ‐ Proceeds from sale of available Net increase in loans ‐ Purchase of SBIC investments and correspondent bank stock Purchase of company owned life insurance Purchases of premises and equipment sale securities for sale securities sale securities for ‐ ‐ ‐ ‐ (748,000) 748,000 (24,260,786) 9,514,210 7,720,311 (37,079,363) (325,403) (8,000,000) (144,429) (250,000) 746,000 (9,050,487) 10,503,189 - (40,782,287) (269,031) - (95,692) Net cash used in investing activities (52,575,460) (39,198,308) Net cash used in investing activities (52,575,460) (39,198,308) Cash flows from financing activities Net increase in demand deposits and savings accounts Net increase in time deposits Net proceeds from exercise of stock options Cash proceeds from issuance of common stock Cash flows from financing activities 60,701,815 3,517,579 - - Net increase in demand deposits and savings accounts Net increase in time deposits Net proceeds from exercise of stock options Cash proceeds from issuance of common stock 36,809,014 2,260,817 75,809 521,220 60,701,815 3,517,579 - - Net cash provided by financing activities 39,666,860 64,219,394 Net cash provided by financing activities 39,666,860 64,219,394 Net (decrease) increase in cash and cash equivalents (7,656,060) 30,487,358 Net (decrease) increase in cash and cash equivalents (7,656,060) 30,487,358 Cash and cash equivalents, beginning of year 62,392,218 31,904,860 Cash and cash equivalents, beginning of year 62,392,218 31,904,860 Cash and cash equivalents, end of year 54,736,158 $ 62,392,218 Cash and cash equivalents, end of year Supplemental disclosures of cash flow information: Supplemental disclosures of cash flow information: Interest paid Taxes paid 447,646 2,430,000 $ $ 450,866 1,670,000 Interest paid Taxes paid $ $ $ $ $ $ 54,736,158 $ 62,392,218 447,646 2,430,000 $ $ 450,866 1,670,000 See accompanying notes to the financial statements. See accompanying notes to the financial statements. 6. 6. COMMUNITIES FIRST FINANCIAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2017 and 2016 NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The accounting and reporting policies of Communities First Financial Corporation (the Company) conform to accounting principles generally accepted in the United States of America and general practices within the banking industry. A summary of the significant accounting policies applied in the preparation of the accompanying consolidated financial statements is as follows: Nature of Operations: On November 7, 2014 (the Effective Date), a bank holding company reorganization was completed whereby Communities First Financial Corporation became the parent holding company of Fresno First Bank (the Bank). On the Effective Date, each of the Bank’s outstanding shares of common stock converted into an equal number of shares of common stock of Communities First Financial Corporation, and the Bank became its wholly-owned subsidiary. The Company’s administrative headquarters is based in Fresno, California. The Bank is incorporated in the state of California and organized as a single operating segment that operates one full-service office in Fresno, California. The Bank’s primary source of revenue is providing loans to customers, who are predominately small and middle-market businesses and individuals. Subsequent Events: The Company has evaluated the effects of subsequent events that have occurred after the period ending December 31, 2017 and through March 29, 2018 which is the date the consolidated financial statements were available to be issued. Consolidation: The consolidated financial statements include the accounts of Communities First Financial Corporation and its wholly owned subsidiary, Fresno First Bank. Intercompany accounts and transactions have been eliminated in consolidation. Use of Estimates: In preparing consolidated financial statements in conformity with generally accepted accounting principles, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities, and the disclosure of contingent assets and liabilities at the date of the consolidated financial statements, and revenues and expenses during the reported year. Actual results could differ from those estimates. Concentrations of Credit Risk: Assets and liabilities that subject the Company to concentrations of credit risk consist of cash balances at other banks, loans, and deposits. Most of the Company’s customers are located within Fresno County and the surrounding areas. The Company’s primary lending products are discussed in Note 3 to the consolidated financial statements. The Company did not have any significant concentrations in its business with any one customer or industry. The Company obtains what it believes to be sufficient collateral to secure potential losses on loans. The extent and value of collateral varies based on the details underlying each loan agreement. As of December 31, 2017, and 2016, the Company has cash deposits at other financial institutions in excess of FDIC insured limits. However, as the Company places these deposits with major financial institutions and monitors the financial condition of these institutions, management believes the risk of loss to be minimal. Banking regulations require that banks maintain a percentage of their deposits as reserves in cash or on deposit with the Federal Reserve Bank. The Company complied with the reserve requirements as of December 31, 2017 and 2016. Cash and Cash Equivalents: For purposes of reporting cash flows, cash equivalents include cash, due from banks, interest-bearing deposits in financial institutions with maturities of 90 days or less, and federal funds sold. Generally, federal funds are sold for one-day periods and interest-bearing deposits are for periods of 90 days or less. (Continued) 7. COMMUNITIES FIRST FINANCIAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2017 and 2016 COMMUNITIES FIRST FINANCIAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2017 and 2016 NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Securities Available-For-Sale: Available-for-sale securities consist of U.S. agency securities, obligations of states and political subdivisions, mortgage-backed securities, and other securities not classified as trading securities or held-to-maturity securities. These securities are carried at estimated fair value with unrealized holding gains and losses, net of tax, reported as a separate component of accumulated other comprehensive income, until realized. Gains and losses on the sale of available-for-sale securities are determined using the specific identification method. The amortization of premiums and accretion of discounts are recognized as adjustments to interest income using the interest method over the period to call or maturity. Securities Available-For-Sale: Available-for-sale securities consist of U.S. agency securities, obligations of states and political subdivisions, mortgage-backed securities, and other securities not classified as trading securities or held-to-maturity securities. These securities are carried at estimated fair value with unrealized holding gains and losses, net of tax, reported as a separate component of accumulated other comprehensive income, until realized. Gains and losses on the sale of available-for-sale securities are determined using the specific identification method. The amortization of premiums and accretion of discounts are recognized as adjustments to interest income using the interest method over the period to call or maturity. Investments with fair values that are less than amortized cost are considered impaired. Impairment may result from either a decline in the financial condition of the issuing entity or, in the case of fixed interest rate investments, from rising interest rates. At each financial statement date, management assesses each investment to determine if impaired investments are temporarily impaired or if the impairment is other than temporary. This assessment includes a determination of whether the Company intends to sell the security, or if it is more likely than not that the Company will be required to sell the security before recovery of its amortized cost basis less any current-period credit losses. For debt securities that are considered other than temporarily impaired and that the Company does not intend to sell and will not be required to sell prior to recovery of the amortized cost basis, the amount of impairment is separated into the amount that is credit Investments with fair values that are less than amortized cost are considered impaired. Impairment may result from either a decline in the financial condition of the issuing entity or, in the case of fixed interest rate investments, from rising interest rates. At each financial statement date, management assesses each investment to determine if impaired investments are temporarily impaired or if the impairment is other than temporary. This assessment includes a determination of whether the Company intends to sell the security, or if it is more likely than not that the Company will be required to sell the security before recovery of its amortized cost basis less any current-period credit losses. For debt securities that are considered other than temporarily impaired and that the Company does not intend to sell and will not be required to sell prior to recovery of the amortized cost basis, the amount of impairment is separated into the amount that is credit related (credit loss component) and the amount due to all other factors. related (credit loss component) and the amount due to all other factors. The credit loss component is recognized in earnings and is calculated as the difference between the security’s amortized cost basis and the present value of its expected future cash flows. The remaining difference between the security’s fair value and the present value of the future expected cash flows is deemed to be due to factors that are not credit related and is recognized in other comprehensive income. The credit loss component is recognized in earnings and is calculated as the difference between the security’s amortized cost basis and the present value of its expected future cash flows. The remaining difference between the security’s fair value and the present value of the future expected cash flows is deemed to be due to factors that are not credit related and is recognized in other comprehensive income. Loans: Loans are reported at the principal amount outstanding, net of deferred loan fees and costs and the allowance for loan losses. Unearned discounts on installment loans are recognized as income over the terms of the loans. Interest on other loans is calculated by using the simple interest method on the daily balance of Loans: Loans are reported at the principal amount outstanding, net of deferred loan fees and costs and the allowance for loan losses. Unearned discounts on installment loans are recognized as income over the terms of the loans. Interest on other loans is calculated by using the simple interest method on the daily balance of the principal amount outstanding. the principal amount outstanding. Loan fees, net of certain direct costs of origination, are deferred and amortized over the contractual term of the loan as an adjustment to the interest yield. During the years ended December 31, 2017 and 2016, salaries and employee benefits expense totaling $143,711 and $125,208, respectively, were deferred as loan Loan fees, net of certain direct costs of origination, are deferred and amortized over the contractual term of the loan as an adjustment to the interest yield. During the years ended December 31, 2017 and 2016, salaries and employee benefits expense totaling $143,711 and $125,208, respectively, were deferred as loan origination costs. origination costs. Loans on which the accrual of interest has been discontinued are designated as non-accrual loans. Accrual of interest on loans is discontinued either when reasonable doubt exists as to the full and timely collection of interest or principal or when a loan becomes contractually past due by 90 days or more with respect to interest or principal. When a loan is placed on non-accrual status, all interest previously accrued, but not collected, is reversed against current period interest income. Income on such loans is then recognized only to the extent that cash is received and where the future collection of principal is probable. Interest accruals are resumed on such loans only when they are brought fully current with respect to interest and principal and when, in the judgment of management, the loans are estimated to be fully collectible as to both principal and Loans on which the accrual of interest has been discontinued are designated as non-accrual loans. Accrual of interest on loans is discontinued either when reasonable doubt exists as to the full and timely collection of interest or principal or when a loan becomes contractually past due by 90 days or more with respect to interest or principal. When a loan is placed on non-accrual status, all interest previously accrued, but not collected, is reversed against current period interest income. Income on such loans is then recognized only to the extent that cash is received and where the future collection of principal is probable. Interest accruals are resumed on such loans only when they are brought fully current with respect to interest and principal and when, in the judgment of management, the loans are estimated to be fully collectible as to both principal and interest. interest. (Continued) (Continued) 8. 8. COMMUNITIES FIRST FINANCIAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2017 and 2016 NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Allowance for loan losses: The allowance for loan losses is established through a provision for loan losses charged to operations. Loan losses are charged against the allowance for loan losses when management believes that the collectability of the principal is unlikely. Subsequent recoveries of previously charged off amounts, if any, are credited to the allowance. Management employs a systematic methodology for determining the allowance for loan losses. On a regular basis, management reviews the credit quality of the loan portfolio and considers problem and delinquent loans, existing general economic conditions affecting the key lending areas of the Company, credit quality trends, collateral values, loan volumes and concentrations, seasoning of the loan portfolio, specific industry conditions, recent loss experience, duration of the current business cycle, bank regulatory examination results, and findings of the Company’s internal credit examiners. The allowance for loan losses at December 31, 2017 and 2016 reflects management's estimate of probable incurred losses in the portfolio. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available. The allowance consists of specific, general, and unallocated components. The specific component relates to loans that are classified as impaired. Impaired loans, as defined, are measured based on the present value of expected future cash flows discounted at the loan’s effective interest rate or the fair value of the collateral if the loan is collateral dependent. The general component relates to non-impaired loans and is based on historical loss experience and loss history experienced by the Company’s peers when the Company did not have losses in a particular loan class, adjusted for qualitative factors impacting the loan portfolio. An unallocated component is maintained to cover uncertainties that could affect management’s estimate of probable losses. The unallocated component of the allowance reflects the margin of imprecision inherent in the underlying assumptions used in the methodologies for estimating specific and general losses in the portfolio. The Company considers a loan impaired when it is probable that all amounts of principal and interest due will not be collected according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, borrower’s ability to repay, credit worthiness, 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, current credit worthiness, and the amount of the shortfall in relation to the principal and interest owed. Troubled Debt Restructuring: In situations where, for economic or legal reasons related to a borrower’s financial difficulties, the Company grants a concession to the borrower that it would not otherwise consider, the related loan is classified as a troubled debt restructuring. The Company measures any loss on the troubled debt restructuring in accordance with the guidance concerning impaired loans set forth above. Additionally, loans modified in troubled debt restructurings are generally placed on non-accrual status at the time of restructuring. These loans are returned to accrual status after the borrower demonstrates performance with the modified terms for a sustained period of time (generally six months) and has the capacity to continue to perform in accordance with the modified terms of the restructured debt. (Continued) 9. COMMUNITIES FIRST FINANCIAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2017 and 2016 COMMUNITIES FIRST FINANCIAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2017 and 2016 NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) SBIC Investments and Correspondent Bank Stock: The Company is a member of the Federal Home Loan Bank (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. The Bank held stock in the FHLB totaling $1,200,000 and $1,128,100 at December 31, 2017 and 2016, respectively. FHLB stock is carried at cost, classified as a restricted security, and periodically evaluated for impairment based on the ultimate recovery of par value. Both cash and stock dividends are reported as income. FHLB stock was not considered impaired as of December 31, 2017 and 2016. Correspondent bank stock accounts on the consolidated balance sheet include The Independent Bankers Bank (TIB) stock of $228,137 and $228,137 and Pacific Coast Bankers’ Bank (PCBB) stock of $400,000 and $400,000 at December 31, 2017 and 2016, respectively. TIB and PCBB stock are carried at cost and were not considered impaired as of December 31, 2017 and 2016. The Company has made certain investments in Small Business Development Corporations (SBICs). SBIC investments on the consolidated balance sheet include the Caltius Fund V of $197,648 and $161,969 and the Central Valley Fund III of $210,000 and $0 at December 31, 2017 and 2016, respectively. These investments are carried at cost and were not considered impaired as of December 31, 2017 and 2016. SBIC Investments and Correspondent Bank Stock: The Company is a member of the Federal Home Loan Bank (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. The Bank held stock in the FHLB totaling $1,200,000 and $1,128,100 at December 31, 2017 and 2016, respectively. FHLB stock is carried at cost, classified as a restricted security, and periodically evaluated for impairment based on the ultimate recovery of par value. Both cash and stock dividends are reported as income. FHLB stock was not considered impaired as of December 31, 2017 and 2016. Correspondent bank stock accounts on the consolidated balance sheet include The Independent Bankers Bank (TIB) stock of $228,137 and $228,137 and Pacific Coast Bankers’ Bank (PCBB) stock of $400,000 and $400,000 at December 31, 2017 and 2016, respectively. TIB and PCBB stock are carried at cost and were not considered impaired as of December 31, 2017 and 2016. The Company has made certain investments in Small Business Development Corporations (SBICs). SBIC investments on the consolidated balance sheet include the Caltius Fund V of $197,648 and $161,969 and the Central Valley Fund III of $210,000 and $0 at December 31, 2017 and 2016, respectively. These investments are carried at cost and were not considered impaired as of December 31, 2017 and 2016. Premises and Equipment: Premises and equipment are carried at cost less accumulated depreciation and amortization. Depreciation is computed using the straight-line method over the estimated useful lives, which range from three to seven years for computer equipment, equipment, furniture, and fixtures. Leasehold improvements are amortized using the straight-line method over the estimated useful lives of the improvements or the remaining lease term, whichever is shorter. Expenditures for betterments or major repairs are capitalized and those for ordinary repairs and maintenance are charged to operations as incurred. Premises and Equipment: Premises and equipment are carried at cost less accumulated depreciation and amortization. Depreciation is computed using the straight-line method over the estimated useful lives, which range from three to seven years for computer equipment, equipment, furniture, and fixtures. Leasehold improvements are amortized using the straight-line method over the estimated useful lives of the improvements or the remaining lease term, whichever is shorter. Expenditures for betterments or major repairs are capitalized and those for ordinary repairs and maintenance are charged to operations as incurred. Advertising Costs: The Company expenses the costs of advertising in the year incurred. Advertising expense was $244,235 and $184,438 for the years ended December 31, 2017 and 2016, respectively. Advertising Costs: The Company expenses the costs of advertising in the year incurred. Advertising expense was $244,235 and $184,438 for the years ended December 31, 2017 and 2016, respectively. Other Real Estate Owned: Real estate acquired by foreclosure or deed in lieu of foreclosure is recorded at fair value at the date of foreclosure, establishing a new cost basis by a charge to the allowance for loan losses, if necessary. Fair value is based on current appraisals less estimated selling costs. Any subsequent write-downs are charged against operating expenses and recognized as a valuation allowance. Operating expenses of such properties, net of related income, and gains and losses on their disposition are included in Other Real Estate Owned: Real estate acquired by foreclosure or deed in lieu of foreclosure is recorded at fair value at the date of foreclosure, establishing a new cost basis by a charge to the allowance for loan losses, if necessary. Fair value is based on current appraisals less estimated selling costs. Any subsequent write-downs are charged against operating expenses and recognized as a valuation allowance. Operating expenses of such properties, net of related income, and gains and losses on their disposition are included in other operating expenses. other operating expenses. Loans Held for Sale: Loans held for sale include mortgage loans and are reported at the lower of cost or market value. Cost generally approximates market value, given the short duration of these assets. Gains or losses on the sale of loans that are held for sale are recognized at the time of the sale, subject to the expiration of any warranty or recourse provisions and determined by the difference between net sale proceeds and the net book value of the loans, plus the estimated fair value of any retained mortgage servicing rights, less the estimated discount associated with the unguaranteed portion of the sold loan that is Loans Held for Sale: Loans held for sale include mortgage loans and are reported at the lower of cost or market value. Cost generally approximates market value, given the short duration of these assets. Gains or losses on the sale of loans that are held for sale are recognized at the time of the sale, subject to the expiration of any warranty or recourse provisions and determined by the difference between net sale proceeds and the net book value of the loans, plus the estimated fair value of any retained mortgage servicing rights, less the estimated discount associated with the unguaranteed portion of the sold loan that is retained. retained. Income Taxes: The Company uses the asset and liability method to account for income taxes. Under such method, deferred tax assets and liabilities are recognized for the future tax consequences of differences between the consolidated financial statement carrying amounts of existing assets and liabilities and their respective tax basis (temporary differences). Deferred tax assets and liabilities are reflected at currently enacted income tax rates applicable to the period in which the deferred tax assets or liabilities are expected to be realized or settled. As changes in tax laws or rates are enacted, deferred tax assets and liabilities are Income Taxes: The Company uses the asset and liability method to account for income taxes. Under such method, deferred tax assets and liabilities are recognized for the future tax consequences of differences between the consolidated financial statement carrying amounts of existing assets and liabilities and their respective tax basis (temporary differences). Deferred tax assets and liabilities are reflected at currently enacted income tax rates applicable to the period in which the deferred tax assets or liabilities are expected to be realized or settled. As changes in tax laws or rates are enacted, deferred tax assets and liabilities are adjusted through the provision for income taxes in the period of enactment. adjusted through the provision for income taxes in the period of enactment. A valuation allowance against net deferred tax assets is established to the extent that it is more likely than not A valuation allowance against net deferred tax assets is established to the extent that it is more likely than not that the benefits associated with the deferred tax assets will not be fully realized. that the benefits associated with the deferred tax assets will not be fully realized. (Continued) (Continued) 10. 10. COMMUNITIES FIRST FINANCIAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2017 and 2016 NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) In accordance with accounting standards, the Company has assessed its tax positions and has concluded there are no unrecognized tax benefits at December 31, 2017 and 2016. The Company recognizes interest accrued and penalties related to unrecognized tax benefits in tax expense. During the years ended December 31, 2017 and 2016, the Company recognized no interest and penalties. The Company files a consolidated tax return in the U.S. federal jurisdiction and with the state of California and has a tax sharing agreement with the Bank. The Company is subject to U.S. federal and state income tax examinations by tax authorities for years beginning 2013. Comprehensive Income: Changes in unrealized gains and losses on available-for-sale securities are the only component of accumulated other comprehensive income for the Company. Fair Value Measurement: Fair value is the exchange price that would be received for an asset or paid to transfer a liability (an 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. Current accounting guidance establishes a fair value hierarchy, which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The guidance describes three levels of inputs that may be used to measure fair value: Level 1 - Quoted prices (unadjusted) for identical assets or liabilities in active markets, that the entity has the ability to access as of the measurement date. Level 2 - Significant other observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data. Level 3 - Significant unobservable inputs that reflect a Company’s own assumptions about the assumptions that market participants would use in pricing an asset or a liability. See Note 14 for more information and disclosures relating to the Company’s fair value measurements. Financial Instruments: In the ordinary course of business, the Company has entered into off-balance sheet financial instruments consisting of commitments to extend credit, commercial letters of credit, and standby letters of credit as described in Note 11. Such financial instruments are recorded in the consolidated financial statements when they are funded or related fees are incurred or received. Earnings per Share (EPS): Basic EPS excludes dilution and is computed by dividing income available to common stockholders 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, were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the earnings of the entity. The treasury stock method is applied to determine the dilutive effect of stock options when computing diluted earnings per share. Stock-Based Compensation: The Company recognizes the cost of employee services received in exchange for awards of stock options, or other equity instruments, based on the grant-date fair value of those awards. This cost is recognized over the period that an employee is required to provide services in exchange for the award, generally the vesting period. See Note 12 for additional information on the Company’s stock option plan. (Continued) 11. COMMUNITIES FIRST FINANCIAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2017 and 2016 COMMUNITIES FIRST FINANCIAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2017 and 2016 NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Transfers of Financial Assets: Transfers of financial assets are accounted for as sales when control over the assets has been surrendered. Control over transferred assets is deemed to be surrendered when: (1) the assets have been isolated from the Company, (2) the transferee obtains the right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange the transferred assets, and (3) the Company does not maintain effective control over the transferred assets through an agreement to repurchase Transfers of Financial Assets: Transfers of financial assets are accounted for as sales when control over the assets has been surrendered. Control over transferred assets is deemed to be surrendered when: (1) the assets have been isolated from the Company, (2) the transferee obtains the right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange the transferred assets, and (3) the Company does not maintain effective control over the transferred assets through an agreement to repurchase them before their maturity. them before their maturity. Servicing Rights: The Company sells or transfers loans, including the guaranteed portion of various government agencies’ loans (with servicing retained) for cash proceeds equal to the principal amount of loans, as adjusted to yield interest to the investor based upon the current market rates. The Company records an asset representing the right to service a loan for others when it sells a loan and retains the servicing rights. The carrying value of the loan is allocated between the loan and the servicing rights, based on their relative fair values. The fair value of servicing rights is estimated by discounting estimated future cash flows from servicing using discount rates that approximate current market rates and estimated prepayment rates. Servicing Rights: The Company sells or transfers loans, including the guaranteed portion of various government agencies’ loans (with servicing retained) for cash proceeds equal to the principal amount of loans, as adjusted to yield interest to the investor based upon the current market rates. The Company records an asset representing the right to service a loan for others when it sells a loan and retains the servicing rights. The carrying value of the loan is allocated between the loan and the servicing rights, based on their relative fair values. The fair value of servicing rights is estimated by discounting estimated future cash flows from servicing using discount rates that approximate current market rates and estimated prepayment rates. Servicing rights are included in other assets on the consolidated balance sheets. Servicing rights are included in other assets on the consolidated balance sheets. The servicing rights are initially measured at fair value and amortized in proportion to and over the period of the estimated net servicing income assuming prepayments. Additionally, management assesses the servicing rights for impairment as of each financial reporting date. For purposes of evaluating and measuring impairment, servicing rights are based on a discounted cash flow methodology, current prepayment speeds, and market discount rates. Any impairment is measured as the amount by which the carrying value of servicing rights for a stratum exceeds its fair value. The carrying value of servicing rights at December 31, 2017 and 2016 were $190,403 and $211,112, respectively. No impairment charges were recorded for the The servicing rights are initially measured at fair value and amortized in proportion to and over the period of the estimated net servicing income assuming prepayments. Additionally, management assesses the servicing rights for impairment as of each financial reporting date. For purposes of evaluating and measuring impairment, servicing rights are based on a discounted cash flow methodology, current prepayment speeds, and market discount rates. Any impairment is measured as the amount by which the carrying value of servicing rights for a stratum exceeds its fair value. The carrying value of servicing rights at December 31, 2017 and 2016 were $190,403 and $211,112, respectively. No impairment charges were recorded for the years ended December 31, 2017 or 2016 related to servicing assets. years ended December 31, 2017 or 2016 related to servicing assets. Reclassifications: Certain reclassifications have been made to the 2016 consolidated financial statements to Reclassifications: Certain reclassifications have been made to the 2016 consolidated financial statements to conform to the classifications used in 2017. conform to the classifications used in 2017. (Continued) (Continued) 12. 12. COMMUNITIES FIRST FINANCIAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2017 and 2016 NOTE 2 – INVESTMENT SECURITIES The amortized cost and estimated fair values of securities available-for-sale are as follows: Available for sale: U.S. government and agency ‐ ‐ securities Mortgage State and municipal agencies backed securities ‐ Available for sale: U.S. government and agency ‐ ‐ securities Mortgage State and municipal agencies backed securities ‐ Gross Gross Estimated Amortized Unrealized Unrealized Cost Gains Losses Fair Value 2017 $ 42,017,880 $ 21,994,134 8,538,880 397,002 $ 34,591 93,567 (214,712) $ (131,101) (66,592) 42,200,170 21,897,624 8,565,855 $ 72,550,894 $ 525,160 $ (412,405) $ 72,663,649 Gross Gross Estimated Amortized Unrealized Unrealized Cost Gains Losses Fair Value 2016 $ 26,734,673 $ 24,589,003 14,796,788 316,034 $ 85,338 192,351 (61,966) $ (230,683) (129,573) 26,988,741 24,443,658 14,859,566 $ 66,120,464 $ 593,723 $ (422,222) $ 66,291,965 The amortized cost and estimated fair value of all investment securities as of December 31, 2017 by contractual maturities are shown below. Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. Within One Year One to Five Years Five to Ten Years Beyond Ten Years Amortized Estimated Fair Value $ 926,312 $ 13,587,107 18,466,966 39,570,509 927,845 13,585,201 18,378,761 39,771,842 $ 72,550,894 $ 72,663,649 (Continued) 13. 2017 U.S. government and agency securities State and municipal agencies 2016 U.S. government and agency securities State and municipal agencies COMMUNITIES FIRST FINANCIAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2017 and 2016 COMMUNITIES FIRST FINANCIAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2017 and 2016 NOTE 2 – INVESTMENT SECURITIES (Continued) NOTE 2 – INVESTMENT SECURITIES (Continued) The gross unrealized loss and related estimated fair value of investment securities that have been in a continuous loss position for less than twelve months and over twelve months are as follows: The gross unrealized loss and related estimated fair value of investment securities that have been in a continuous loss position for less than twelve months and over twelve months are as follows: 12 months or more less than 12 Months Total 12 months or more less than 12 Months Total Fair Value Unrealized Unrealized Loss Loss Fair Value Fair Value Unrealized Loss 2017 Fair Value Unrealized Loss Fair Value Unrealized Loss Fair Value Unrealized Loss Mortgage backed securities 2,289,158 (60,640) 11,294,326 $ 1,728,232 $ (17,896) $ 19,747,080 $ (196,816) $ 21,475,312 $ (70,461) 13,583,484 (214,712) (131,101) U.S. government and agency securities Mortgage backed securities 2,591,021 (56,704) 1,251,194 (9,888) 3,842,215 (66,592) State and municipal agencies $ 1,728,232 $ 2,289,158 (17,896) $ 19,747,080 $ (60,640) 11,294,326 (196,816) $ 21,475,312 $ (70,461) 13,583,484 (214,712) (131,101) 2,591,021 (56,704) 1,251,194 (9,888) 3,842,215 (66,592) $ 6,608,411 $ (135,240) $ 32,292,600 $ (277,165) $ 38,901,011 $ (412,405) $ 6,608,411 $ (135,240) $ 32,292,600 $ (277,165) $ 38,901,011 $ (412,405) 12 months or more less than 12 Months Total 12 months or more less than 12 Months Total Fair Value Unrealized Unrealized Loss Loss Fair Value Fair Value Unrealized Loss 2016 Fair Value Unrealized Loss Fair Value Unrealized Loss Fair Value Unrealized Loss Mortgage backed securities 966,765 (28,822) 13,625,902 (201,861) 14,592,667 $ 3,182,873 $ (22,234) $ 6,999,060 $ (39,732) $ 10,181,933 $ (61,966) (230,683) U.S. government and agency securities Mortgage backed securities - - 5,558,961 (129,573) 5,558,961 (129,573) State and municipal agencies $ 3,182,873 $ 966,765 (22,234) $ 6,999,060 $ (28,822) 13,625,902 (39,732) $ 10,181,933 $ (201,861) 14,592,667 (61,966) (230,683) - - 5,558,961 (129,573) 5,558,961 (129,573) $ 4,149,638 $ (51,056) $ 26,183,923 $ (371,166) $ 30,333,561 $ (422,222) $ 4,149,638 $ (51,056) $ 26,183,923 $ (371,166) $ 30,333,561 $ (422,222) Certain investment securities shown in the previous table currently have fair values less than amortized cost and therefore contain unrealized losses. The Bank considers a number of factors including, but not limited to: (a) the length of time and the extent to which the fair value has been less than the amortized cost, (b) the financial condition and near-term prospects of the issuer, (c) the intent and ability of the Bank to retain its investment for a period of time sufficient to allow for an anticipated recovery in value, (d) whether the debtor is current on interest and principal payments, and (e) general market conditions and the industry-or sector- specific outlook. Management has evaluated all securities at December 31, 2017 and 2016 and has Certain investment securities shown in the previous table currently have fair values less than amortized cost and therefore contain unrealized losses. The Bank considers a number of factors including, but not limited to: (a) the length of time and the extent to which the fair value has been less than the amortized cost, (b) the financial condition and near-term prospects of the issuer, (c) the intent and ability of the Bank to retain its investment for a period of time sufficient to allow for an anticipated recovery in value, (d) whether the debtor is current on interest and principal payments, and (e) general market conditions and the industry-or sector- specific outlook. Management has evaluated all securities at December 31, 2017 and 2016 and has determined that no securities are other than temporarily impaired. determined that no securities are other than temporarily impaired. The Bank does not have the intent to sell the investments that are impaired, and it is more likely than not that the Bank will not be required to sell those investments before recovery of the amortized cost basis. The Bank has evaluated these securities and has determined that the decline in value is temporary and is related to the change in market interest rates since purchase. The decline in value is not related to any issuer or industry- specific event. These temporary unrealized losses relate principally to current interest rates for similar types of securities. In analyzing an issuer’s financial condition, management considers whether the securities are issued by the federal government or its agencies, whether downgrades by bond rating agencies have occurred, and the results of reviews of the issuer’s financial condition. At December 31, 2017, there were 15 investment securities with a value of $6,608,000 that were in a loss position for more than 12 months. At December 31, 2016, there were 12 investment securities with a value of $4,150,000 that were in a loss position for more than 12 months. The Bank anticipates full recovery of amortized cost with respect to these securities at maturity or sooner in the event of a more favorable market interest rate environment. The Bank does not have the intent to sell the investments that are impaired, and it is more likely than not that the Bank will not be required to sell those investments before recovery of the amortized cost basis. The Bank has evaluated these securities and has determined that the decline in value is temporary and is related to the change in market interest rates since purchase. The decline in value is not related to any issuer or industry- specific event. These temporary unrealized losses relate principally to current interest rates for similar types of securities. In analyzing an issuer’s financial condition, management considers whether the securities are issued by the federal government or its agencies, whether downgrades by bond rating agencies have occurred, and the results of reviews of the issuer’s financial condition. At December 31, 2017, there were 15 investment securities with a value of $6,608,000 that were in a loss position for more than 12 months. At December 31, 2016, there were 12 investment securities with a value of $4,150,000 that were in a loss position for more than 12 months. The Bank anticipates full recovery of amortized cost with respect to these securities at maturity or sooner in the event of a more favorable market interest rate environment. (Continued) (Continued) 14. 14. COMMUNITIES FIRST FINANCIAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2017 and 2016 NOTE 2 – INVESTMENT SECURITIES (Continued) Proceeds from the sales of investment securities totaled $7,720,311 and $0 during the years ended December 31, 2017 and 2016, respectively. Gross realized gains totaled $137,849 and $7,569 during 2017 and 2016, respectively. Gross realized losses totaled $18,437 and $0 during 2017 and 2016, respectively. Investment securities carried at approximately $13,590,000 and $15,031,000 at December 31, 2017 and 2016, respectively, were pledged to secure public deposits or other purposes as permitted or required by law. NOTE 3 – LOANS Major classifications of loans are as follows: Commercial and industrial Commercial real estate Land and construction Residential real estate Agriculture Consumer Allowance for loan losses Deferred loan fees and costs, net 2017 2016 $ 133,928,596 $ 100,488,896 76,560,970 14,086,527 13,643,268 22,869,834 12,791 76,306,248 18,115,171 14,224,548 21,285,130 9,904 263,869,597 227,662,286 (3,363,452) 103,553 (2,880,223) (426,728) $ 260,609,698 $ 224,355,335 The Bank’s loan portfolio consists primarily of loans to borrowers within Fresno County, California. All of the Bank’s loans are underwritten by evaluating the borrower’s character, cash flow, collateral, and credit worthiness and, for commercial and business loans, managerial and operational experience. Underwriting standards are designed to promote relationship banking rather than transactional banking. Commercial and industrial loans are primarily made to commercial and business enterprises for working capital, equipment purchases, acquisition, partner/management buyout, growth and expansion, and any other permissible purposes. The Bank’s management examines current and projected cash flow to determine the ability of the borrower to repay its obligations as agreed. Commercial loans are primarily made based on the identified cash flow of the borrower and secondarily on the underlying collateral provided by the borrower. The cash flow of borrowers, however, may not be as expected and the collateral securing these loans may fluctuate in value. Most commercial loans are secured by the assets being financed or other business assets such as equipment, accounts receivable, or inventory and may incorporate personal guarantees or personal assets as collateral; however, some loans may be made on an unsecured basis. (Continued) 15. COMMUNITIES FIRST FINANCIAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2017 and 2016 COMMUNITIES FIRST FINANCIAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2017 and 2016 NOTE 3 – LOANS (Continued) NOTE 3 – LOANS (Continued) Commercial real estate loans are primarily made to owner-users of the property or investors with current tenants in the property. Commercial real estate loans are subject to underwriting standards and processes similar to commercial loans. These loans are viewed primarily as cash flow loans and secondarily as loans secured by real estate. Commercial real estate lending typically involves higher loan principal amounts and the repayment of these loans is generally largely dependent on the successful operation of the property securing the loan or the business conducted on the property securing the loan. Commercial real estate loans may be more adversely affected by conditions in the real estate markets or in the general economy. The properties securing the Bank’s commercial real estate portfolio are diverse in terms of type and industries operating within the properties. This diversity helps reduce the Bank’s exposure to adverse economic events that affect any single market or industry. Management monitors and evaluates commercial real estate loans Commercial real estate loans are primarily made to owner-users of the property or investors with current tenants in the property. Commercial real estate loans are subject to underwriting standards and processes similar to commercial loans. These loans are viewed primarily as cash flow loans and secondarily as loans secured by real estate. Commercial real estate lending typically involves higher loan principal amounts and the repayment of these loans is generally largely dependent on the successful operation of the property securing the loan or the business conducted on the property securing the loan. Commercial real estate loans may be more adversely affected by conditions in the real estate markets or in the general economy. The properties securing the Bank’s commercial real estate portfolio are diverse in terms of type and industries operating within the properties. This diversity helps reduce the Bank’s exposure to adverse economic events that affect any single market or industry. Management monitors and evaluates commercial real estate loans based on collateral type, geography, industry, and risk grade criteria. based on collateral type, geography, industry, and risk grade criteria. Land and construction loans are primarily made to borrowers who are using the property for their own purposes. Land loans are made with amortizing repayment terms to borrowers with proven, historic cash flow sufficient to repay the loan. Collateral values are based on the current “as is” market value of the property. Construction loans are made based on the borrower’s historic and projected cash flow. Risk arises from the necessity to complete projects within specified cost and time limits. Trends in the construction industry may also 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 Land and construction loans are primarily made to borrowers who are using the property for their own purposes. Land loans are made with amortizing repayment terms to borrowers with proven, historic cash flow sufficient to repay the loan. Collateral values are based on the current “as is” market value of the property. Construction loans are made based on the borrower’s historic and projected cash flow. Risk arises from the necessity to complete projects within specified cost and time limits. Trends in the construction industry may also 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 future construction projects. viability of future construction projects. Residential real estate loans are primarily made to individuals and business enterprises for the purchase or refinance of residential 1-to-4 family properties for investment purposes. Residential real estate loans are underwritten similar to commercial and industrial and commercial real loans. Residential real estate loans may be more adversely affected by conditions in the real estate markets or in the general economy. Residential real estate loans are primarily made to individuals and business enterprises for the purchase or refinance of residential 1-to-4 family properties for investment purposes. Residential real estate loans are underwritten similar to commercial and industrial and commercial real loans. Residential real estate loans may be more adversely affected by conditions in the real estate markets or in the general economy. Agricultural loans are primarily made to producers of agricultural products. Agricultural loans are subject to underwriting standards and processes similar to commercial loans. These loans are viewed primarily as cash flow loans and secondarily as loans secured by real estate and/or agricultural commodities. Agricultural real estate lending typically involves higher loan principal amounts and the repayment of these loans is generally largely dependent on the successful operation of the property securing the loan or the business conducted on the property securing the loan. Agricultural crop loans may be more adversely affected by conditions in the weather or in the general economy. The properties securing the Bank’s agricultural portfolio are diverse in terms of type of crop. This diversity helps reduce the Bank’s exposure to adverse economic events that affect any single commodity. Management monitors and evaluates agricultural real estate loans based on collateral, Agricultural loans are primarily made to producers of agricultural products. Agricultural loans are subject to underwriting standards and processes similar to commercial loans. These loans are viewed primarily as cash flow loans and secondarily as loans secured by real estate and/or agricultural commodities. Agricultural real estate lending typically involves higher loan principal amounts and the repayment of these loans is generally largely dependent on the successful operation of the property securing the loan or the business conducted on the property securing the loan. Agricultural crop loans may be more adversely affected by conditions in the weather or in the general economy. The properties securing the Bank’s agricultural portfolio are diverse in terms of type of crop. This diversity helps reduce the Bank’s exposure to adverse economic events that affect any single commodity. Management monitors and evaluates agricultural real estate loans based on collateral, crop type, geography, and risk grade criteria. crop type, geography, and risk grade criteria. The Bank utilizes an independent third-party loan review consultant to review and validate the credit risk program on a periodic basis. Results of these reviews are presented to management and the Bank’s Board of Directors. The loan review process complements and reinforces the risk identification and assessment decisions made by lenders and credit personnel, as well as the Bank’s policies and procedures The Bank utilizes an independent third-party loan review consultant to review and validate the credit risk program on a periodic basis. Results of these reviews are presented to management and the Bank’s Board of Directors. The loan review process complements and reinforces the risk identification and assessment decisions made by lenders and credit personnel, as well as the Bank’s policies and procedures (Continued) (Continued) 16. 16. COMMUNITIES FIRST FINANCIAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2017 and 2016 NOTE 3 – LOANS (Continued) Information related to impaired loans as of December 31, 2017 and for the year ended consisted of the following: Commercial and Industrial Commercial Land and Residential Real Estate Construction Real Estate Agriculture Consumer Total Recorded investment in impaired loans: With no specific allowance recorded With specific allowance recorded $ - $ - - $ 422,758 $ - $ 2,506,941 $ - $ 2,929,699 - - - - - - Total recorded investment In impaired loans $ Unpaid principal balance of impaired loans: - $ - $ 422,758 $ - $ 2,506,941 $ - $ 2,929,699 With no specific allowance recorded With specific allowance recorded Total unpaid principal balance of impaired loans Specific allowance Average recorded investment in impaired loans during the year Interest income recognized on impaired loans during the year $ $ $ $ $ - $ - - $ - $ 15,330 $ 854 $ - $ 422,758 $ - $ 2,506,941 $ - $ 2,929,699 - - - - - - - $ 422,758 $ - $ 2,506,941 $ - $ 2,929,699 - $ - $ - $ - $ - $ - $ - $ - $ - - $ 1,880,211 $ - $ 1,895,541 11,905 $ - $ 12,274 $ - $ 25,033 Information related to impaired loans as of December 31, 2016 and for the year ended consisted of the following: Commercial and Industrial Commercial Land and Residential Real Estate Construction Real Estate Agriculture Consumer Total Recorded investment in impaired loans: With no specific allowance recorded With specific allowance recorded $ - $ 325,660 Total recorded investment In impaired loans $ 325,660 $ Unpaid principal balance of impaired loans: With no specific allowance recorded With specific allowance recorded Total unpaid principal balance of impaired loans Specific allowance Average recorded investment in impaired loans during the year Interest income recognized on impaired loans during the year $ $ $ $ $ - $ 325,660 325,660 $ 15,227 $ 540,877 $ - $ - $ - - $ - $ - - $ - $ - $ - $ - $ - - $ - - $ - $ - $ - - $ - $ - $ - $ - $ - - $ - $ - $ - $ - $ - - $ - $ - - $ - $ - $ - $ (Continued) - $ - - 325,660 - $ 325,660 - $ - - 325,660 - $ 325,660 - $ 15,227 - $ 540,877 - $ - 17. COMMUNITIES FIRST FINANCIAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2017 and 2016 COMMUNITIES FIRST FINANCIAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2017 and 2016 NOTE 3 – LOANS (Continued) NOTE 3 – LOANS (Continued) The Bank has established a loan risk rating system to measure and monitor the quality of the loan portfolio. All loans are assigned a risk rating from the inception of the loan until the loan is paid off. The primary loan The Bank has established a loan risk rating system to measure and monitor the quality of the loan portfolio. All loans are assigned a risk rating from the inception of the loan until the loan is paid off. The primary loan grades are as follows: grades are as follows: Loans rated Pass – These are loans to borrowers with satisfactory financial support, repayment capacity, and credit strength. Borrowers in this category demonstrate fundamentally sound financial positions, repayment capacity, credit history, and management expertise. Loans in this category must have an identifiable and stable source of repayment and meet the Bank’s policy regarding debt service coverage ratios. These borrowers are capable of sustaining normal economic, market, or operational setbacks without significant financial impacts. Financial ratios and trends are acceptable. Negative external industry factors are generally not present. The loan may be secured, unsecured, or supported by non-real estate collateral for which the value is more difficult to determine and/or marketability is more uncertain. These loans carry a normal degree of risk. The borrowers have the capacity to perform according to terms; any deviation from historic Loans rated Pass – These are loans to borrowers with satisfactory financial support, repayment capacity, and credit strength. Borrowers in this category demonstrate fundamentally sound financial positions, repayment capacity, credit history, and management expertise. Loans in this category must have an identifiable and stable source of repayment and meet the Bank’s policy regarding debt service coverage ratios. These borrowers are capable of sustaining normal economic, market, or operational setbacks without significant financial impacts. Financial ratios and trends are acceptable. Negative external industry factors are generally not present. The loan may be secured, unsecured, or supported by non-real estate collateral for which the value is more difficult to determine and/or marketability is more uncertain. These loans carry a normal degree of risk. The borrowers have the capacity to perform according to terms; any deviation from historic performance is limited and temporary. performance is limited and temporary. Loans rated Special Mention – These are loans that have potential weaknesses that deserve management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the asset or in the Bank’s credit position at some future date. Special Mention assets are not adversely classified and do not expose the Bank to sufficient risk to warrant adverse classification. These loans exhibit a more weakened condition than Pass loans, but not to the degree where they would be considered substandard. These loans show definite signs of deterioration or weakness, and the likelihood of correction is somewhat questionable. Weaknesses might include significant earnings decline, collection of accounts receivable is slowing, delayed accounts payable, greater dependency on line usage, and covenants Loans rated Special Mention – These are loans that have potential weaknesses that deserve management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the asset or in the Bank’s credit position at some future date. Special Mention assets are not adversely classified and do not expose the Bank to sufficient risk to warrant adverse classification. These loans exhibit a more weakened condition than Pass loans, but not to the degree where they would be considered substandard. These loans show definite signs of deterioration or weakness, and the likelihood of correction is somewhat questionable. Weaknesses might include significant earnings decline, collection of accounts receivable is slowing, delayed accounts payable, greater dependency on line usage, and covenants not being met and/or waived for short periods. not being met and/or waived for short periods. Loans rated Substandard – These are loans that are inadequately protected by the current sound worth and paying capacity of the borrower or by the collateral pledged, if any. These loans have a well-defined weakness or weaknesses that jeopardize the liquidation of the loan. They are characterized by the distinct Loans rated Substandard – These are loans that are inadequately protected by the current sound worth and paying capacity of the borrower or by the collateral pledged, if any. These loans have a well-defined weakness or weaknesses that jeopardize the liquidation of the loan. They are characterized by the distinct possibility that the Bank will sustain some loss if the deficiencies are not corrected. possibility that the Bank will sustain some loss if the deficiencies are not corrected. Loans rated Doubtful – These are loans that have all the weaknesses inherent in a loan classified as Substandard with the added characteristic that the weaknesses make the collection or liquidation in full, on the basis of currently known facts, conditions and values, highly questionable, and improbable. These loans have a high probability of loss due to significant deterioration in financial condition of the borrower and collateral value pledged, if any. The borrower is unable to demonstrate the ability to strengthen their financial condition within a reasonable time; therefore, close supervision is required and the loan is placed on non- accrual. The risk of loss is measured by an impairment analysis; any loss exposure determined through this Loans rated Doubtful – These are loans that have all the weaknesses inherent in a loan classified as Substandard with the added characteristic that the weaknesses make the collection or liquidation in full, on the basis of currently known facts, conditions and values, highly questionable, and improbable. These loans have a high probability of loss due to significant deterioration in financial condition of the borrower and collateral value pledged, if any. The borrower is unable to demonstrate the ability to strengthen their financial condition within a reasonable time; therefore, close supervision is required and the loan is placed on non- accrual. The risk of loss is measured by an impairment analysis; any loss exposure determined through this analysis is to be charged off. analysis is to be charged off. (Continued) (Continued) 18. 18. COMMUNITIES FIRST FINANCIAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2017 and 2016 NOTE 3 – LOANS (Continued) The following table summarizes the loan portfolio by credit quality and product and/or collateral type as of December 31, 2017: Grade: Commercial & industrial Commercial real estate Land & construction Residential real estate Agriculture Consumer Pass Special Mention Substandard Doubtful Total $ 133,928,596 $ 76,306,248 17,692,413 14,224,548 18,778,189 9,904 - $ - - - - - - $ - 422,758 - 2,506,941 - - $ 133,928,596 76,306,248 - 18,115,171 - 14,224,548 - 21,285,130 - 9,904 - Total $ 260,939,898 $ - $ $2,929,699 $ - $ 263,869,597 The following table summarizes the loan portfolio by credit quality and product and/or collateral type as of December 31, 2016: Grade: Commercial & industrial Commercial real estate Land & construction Residential real estate Agriculture Consumer Pass Special Mention Substandard Doubtful Total $ 100,042,403 $ 76,560,970 13,798,468 13,350,771 19,499,618 12,791 - - 288,059 - 3,370,216 - $151,493 $ - - 292,497 - - 295,000 $100,488,896 76,560,970 14,086,527 13,643,268 22,869,834 12,791 - - - - - Total $ 223,265,021 $ 3,658,275 $ 443,990 $ 295,000 $227,662,286 Year end non-accrual loans, segregated by class, are as follows: Commercial and industrial Commercial real estate Land and construction Residential real estate Agriculture Consumer 2017 2016 $ - $ - 422,758 - 2,506,941 - 295,000 - - - - - $ 2,929,699 $ 295,000 (Continued) 19. $ $ $ $ - $ - - - - - - $ - $ - - - - - - $ Commercial & Industrial Commercial Real Estate Land & Construction Residential Real Estate Agriculture Consumer Total Commercial & Industrial Commercial Real Estate Land & Construction Residential Real Estate Agriculture Consumer Total off in 2017. COMMUNITIES FIRST FINANCIAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2017 and 2016 COMMUNITIES FIRST FINANCIAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2017 and 2016 NOTE 3 – LOANS (Continued) NOTE 3 – LOANS (Continued) The following table is an aging analysis of loans, segregated by class of loans, as of December 31, 2017: The following table is an aging analysis of loans, segregated by class of loans, as of December 31, 2017: 30 59 Days 60 89 Days Greater Than Past Due ‐ Past Due ‐ 90 Days Total Past Due Current Recorded Investment> 90 Days and Accruing Total Loans 30 59 Days ‐ Past Due 60 89 Days ‐ Past Due Greater Than 90 Days Total Past Due Current Recorded Investment> 90 Days and Accruing Total Loans - $ - - - - - 422,758 422,758 2,506,941 2,506,941 - $ - - - - $ 133,928,596 $ 133,928,596 $ - - - 76,306,248 17,692,413 14,224,548 18,778,189 9,904 76,306,248 18,115,171 14,224,548 21,285,130 9,904 Commercial & Industrial Commercial Real Estate Land & Construction Residential Real Estate Agriculture Consumer - - - - - - - $ 2,929,699 $ 2,929,699 $ 260,939,898 $ 263,869,597 $ - Total $ $ - $ - - - - - - $ - $ - - - - - - $ - 422,758 - 2,506,941 - - $ 133,928,596 $ 133,928,596 $ - 422,758 - 2,506,941 - 76,306,248 18,115,171 14,224,548 21,285,130 9,904 76,306,248 17,692,413 14,224,548 18,778,189 9,904 - $ 2,929,699 $ 2,929,699 $ 260,939,898 $ 263,869,597 $ - - - - - - - The following table is an aging analysis of loans, segregated by class of loans, as of December 31, 2016: The following table is an aging analysis of loans, segregated by class of loans, as of December 31, 2016: 30 59 Days 60 89 Days Greater Than Past Due ‐ Past Due ‐ 90 Days Total Past Due Current Recorded Investment> 90 Days and Accruing Total Loans 30 59 Days ‐ Past Due 60 89 Days ‐ Past Due Greater Than 90 Days Total Past Due Current Recorded Investment> 90 Days and Accruing Total Loans - $ 295,000 $ - - - - - - - 76,560,970 295,000 $ 100,193,896 $ 100,488,896 $ 76,560,970 14,086,527 13,643,268 22,869,834 12,791 13,643,268 14,086,527 22,869,834 12,791 - - - Commercial & Industrial Commercial Real Estate Land & Construction Residential Real Estate Agriculture Consumer - - - - - - - - - - - - $ 295,000 $ 295,000 $ 227,367,286 $ 227,662,286 $ - Total $ $ - $ - - - - - - $ - $ - - - - - 295,000 $ - - - - - 295,000 $ 100,193,896 $ 100,488,896 $ 76,560,970 14,086,527 13,643,268 22,869,834 12,791 76,560,970 14,086,527 13,643,268 22,869,834 12,791 - - - - - - $ 295,000 $ 295,000 $ 227,367,286 $ 227,662,286 $ - - - - - - - There were no loans modified and considered troubled debt restructurings during 2017. During 2016, there was one loan totaling $30,983 considered a troubled debt restructuring. That loan was subsequently charged There were no loans modified and considered troubled debt restructurings during 2017. During 2016, there was one loan totaling $30,983 considered a troubled debt restructuring. That loan was subsequently charged off in 2017. At December 31, 2017 the Bank has no loans considered troubled debt restructurings. At December 31, 2017 the Bank has no loans considered troubled debt restructurings. (Continued) (Continued) 20. 20. l t a o T t d e a c o l l a n U : e p y t l a r e t a l l o c r e m u s n o C d n a t c u d o r p n a o l y b 7 1 0 2 , 1 3 r e b m e c e D d e d n e l a i t n e d s e R i d n a d n a L l i a c r e m m o C l i a c r e m m o C , ) 8 3 0 8 6 3 ( 7 6 2 6 2 , 0 0 0 5 2 8 , - - 2 7 8 0 5 6 , , 3 2 2 0 8 8 2 , $ 5 3 0 4 2 1 , $ - - 0 7 ) 6 1 ( , 2 5 4 3 6 3 3 , $ 7 0 9 4 7 7 , $ 4 5 - $ - $ - , 2 5 4 3 6 3 3 , , 2 5 4 3 6 3 3 , 7 0 9 4 7 7 , $ 7 0 9 4 7 7 , $ 4 5 4 5 . 1 2 , 9 9 6 9 2 9 2 , $ , 8 9 8 9 3 9 0 6 2 , , 7 9 5 9 6 8 3 6 2 $ , - - - $ - $ , 1 4 9 6 0 5 , 2 $ 4 0 9 9 , $ , 0 3 1 5 8 2 , 1 2 4 0 9 9 , , 9 8 1 8 7 7 , 8 1 - 8 4 5 Consumer , 4 2 2 , 4 1 8 4 5 , 4 2 2 , 4 1 70 $ - - 1 7 (16) 1 , 5 1 54 1 , 8 1 - - 6 8 5 5 (85,733) 6 7 , , 7 2 8 2 31,122 $ 1 4 3 1 4 , 2 9 6 , 7 1 Unallocated Total $ 124,035 - - 650,872 ) $ 2,880,223 d e (368,038) u n 26,267 n 825,000 o C i t ( $ 774,907 $ 3,363,452 $ $ $ - $ - 9 4 9 , 31,122 0 5 4 31,122 $ $ $ 8 4 2 , 6 0 3 , 6 7 - 8 4 2 , 54 6 0 3 , 6 54 7 $ $ - $ - 774,907 3,363,452 $ 774,907 $ 3,363,452 NOTE 3 – LOANS (Continued) The following table summarizes the Bank’s allowance for loan losses for the year ended December 31, 2017 by loan product and collateral type: $ $ $ $ I I I I d n a 6 1 0 2 S T N N O E T M A E R T O A T P S R Commercial O L and Industrial A C C L N A A C 1,881,520 N 7 N 1 (368,038) F A 0 2 N D 26,267 E F 1 286,187 T 3 T A S D 1,825,936 R L O F S S N E O T C N O U T M 1,825,936 S M E O T 1,825,936 C O N r e b m e c e D - I I I I I , $ $ $ $ COMMUNITIES FIRST FINANCIAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2017 and 2016 $ $ $ $ - - 5 5 8 6 1 1 , ) 3 3 7 5 8 ( , 2 2 1 1 3 , - 2 2 1 1 3 , 2 2 1 , 1 3 e r u t l u c i r g A Commercial Real Estate - - e Land and t a Construction t s E 0 1 5 , 0 7 8 1 3 , 2 2 Residential Real Estate 8 8 2 2 8 8 Agriculture , , 2 2 9 9 $ $ $ 116,855 $ $ $ $ $ $ $ 457,384 - r - a e (6,435) y e h 450,949 t r o f s e s s o l - n a o 450,949 l r o f 450,949 e c n a w o l a e R $ n o i t c u r $ t s n o C $ e t a t s E l a $ e R 229,849 $ - - (42,193) 9 4 8 , 9 2 187,656 2 - - $ - - - 4 8 3 , 187,656 7 5 4 187,656 $ ) 3 9 1 , 2 4 ( $ $ ) 5 3 4 , 6 ( $ $ $ - 70,510 $ - - 22,318 - 92,828 $ - - 92,828 92,828 $ - - $ 8 2 8 , 2 9 6 5 6 , 7 8 1 $ 9 4 9 , 0 5 4 $ 6 3 9 , 5 2 8 , 1 6 5 6 , 7 8 $ 1 $ 9 4 9 , 0 5 4 $ Allowance for loan losses: Beginning balance Charge-offs Recoveries Provision Ending balance Period-end amount allocated to: Loans individually evaluated for impairment Loans collectively evaluated for impairment Ending Balance Loans: Individually evaluated for impairment Collectively evaluated for impairment Ending balance $ - $ l l a - 133,928,596 $ 133,928,596 76,306,248 $ 76,306,248 ’ s k n a B e h t ) d e u n i t n o C ( S N A O L – 3 E T O N s e z i r a m m u s e b a t g n w o i l l l o f e h T 7 8 1 , 6 8 2 7 6 2 , 6 2 l ) 8 3 0 , 8 6 3 ( 0 2 422,758 5 , 1 8 8 , 1 a $ i r t s u d 17,692,413 n I d n $ 18,115,171 a $ 14,224,548 $ 14,224,548 $ $ - 6 6 3 3 $ 2,506,941 $ 9 9 , , 5 5 2 2 18,778,189 8 8 , , 1 1 $ 21,285,130 $ $ $ 6 9 5 , 8 2 9 , 3 3 1 - 6 9 5 , 8 2 9,904 9 , 3 3 1 9,904 $ $ $ - - - $ 2,929,699 260,939,898 $263,869,597 : s e s s o l n a o l r o f e c n a w o l l i l s f f s e i r e v o c e R e c n a a b g n n n g e (Continued) B o - e g r a h C n o s v o r P i i i l e c n a a b g n d n E i A : o t d e t a c o l l a t n u o m a d n e - d o i r e P d e t a u a v e y l l l i a u d v d n i i s n a o L l d e t a u a v e y e v i t c e l l l o c s n a o L t n e m r i a p m i r o f t n e m r i a p m i r o f d e t a u a v e y l l l i a u d v d n I i l e c n a a B g n d n E i : s n a o L t n e m r i a p m i r o f l d e t a u a v e y e v i t c e l l l o C t n e m r i a p m i r o f l e c n a a b g n d n E i 21. , 0 9 3 6 5 5 3 , l t a o T 4 6 6 8 8 , , ) 5 0 3 3 6 9 1 ( , , 4 7 4 8 9 1 1 , , 3 2 2 0 8 8 2 , : e p y t l a r e t a l l o c COMMUNITIES FIRST FINANCIAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2017 and 2016 The following table summarizes the Bank’s allowance for loan losses for the year ended December 31, 2016 by loan product and collateral type: Commercial and Industrial Commercial Real Estate Land and Construction Residential Real Estate Agriculture Consumer Unallocated $ 1,751,728 $ 204,286 $ 186,141 $ 75,411 $ 135,664 $ 211 $ 1,202,949 (1,961,105) 21,138 2,069,759 - - 253,098 43,708 (18,809) (1,078,914) - - - 67,526 (72,427) - - (2,200) - 2,059 Ending balance $ 1,881,520 $ 457,384 $ 229,849 $ 70,510 $ 116,855 $ 70 $ 124,035 $ 15,433 $ - $ - $ - $ - $ - $ 1,866,087 457,384 229,849 70,510 116,855 70 124,035 Ending Balance $ 1,881,519 $ 457,384 $ 229,849 $ 70,510 $ 116,855 $ 70 $ 124,035 NOTE 3 – LOANS (Continued) Allowance for loan losses: Beginning balance Charge-offs Recoveries Provision Period-end amount allocated to: Loans individually evaluated for impairment Loans collectively evaluated for impairment Loans: Individually evaluated for impairment Collectively evaluated for impairment - - - - - - I I I I d n a 6 1 0 2 S T N N O E T M A E R T O A T P S R O L Total A C C L N A A C $ 3,556,390 N 7 N 1 (1,963,305) F A 0 2 N 88,664 D E F 1,198,474 T T A S D $ 2,880,223 R L O F S S N E O T C 15,433 N O U T M S M E O T $ 2,880,223 C O N 2,864,790 r e b m e c e D 1 3 $ I I I I I , $ 325,866 $ - $ - $ - $ - $ - $ $ 325,866 100,163,030 76,560,970 14,086,527 13,643,268 22,869,834 12,791 227,336,420 Ending balance $100,488,896 $ 76,560,970 $ 14,086,527 $ 13,643,268 $ 22,869,834 $ 12,791 $ $227,662,286 (Continued) ) d e u n i t n o C ( S N A O L – 3 E T O N 22. d n a t c u d o r p n a o l y b 6 1 0 2 , 1 3 r e b m e c e D d e d n e r a e y e h t r o f s e s s o l n a o l r o f e c n a w o l l a ’ s k n a B e h t s e z i r a m m u s e b a t g n w o i l l l o f e h T t d e a c o l l a n U r e m u s n o C e r u t l u c i r g A l a i t n e d s e R i e t a t s E l a e R d n a d n a L n o i t c u r t s n o C l i a c r e m m o C l i a c r e m m o C e t a t s E l a e R l a i r t s u d n I d n a : s e s s o l n a o l r o f e c n a w o l l A $ , 9 4 9 2 0 2 1 , - - ) 4 1 9 8 7 0 , , 1 ( $ 1 1 2 ) 0 0 2 2 ( , - 9 5 0 2 , $ 4 6 6 5 3 1 , $ 1 1 4 , 5 7 $ 1 4 1 , 6 8 1 $ 6 8 2 , 4 0 2 $ 8 2 7 , 1 5 7 , 1 $ - - ) 9 0 8 8 1 ( , - 6 2 5 , 7 6 ) 7 2 4 , 2 7 ( - - - - 8 0 7 , 3 4 8 9 0 , 3 5 2 ) 5 0 1 , 1 6 9 , 1 ( 8 3 1 , 1 2 9 5 7 , 9 6 0 , 2 $ 5 3 0 4 2 1 , $ 0 7 $ 5 5 8 6 1 1 , $ 0 1 5 , 0 7 $ 9 4 8 , 9 2 2 $ 4 8 3 , 7 5 4 $ 0 2 5 , 1 8 8 , 1 $ : o t d e t a c o l l a t n u o m a d n e - d o i r e P l e c n a a b g n d n E i s f f o - e g r a h C s e i r e v o c e R i i n o s v o r P l e c n a a b g n n n g e B i i . 2 2 ) d e u n i t n o C ( 3 3 4 5 1 , $ - $ - $ - $ - $ - $ - $ 3 3 4 , 5 1 $ , 0 9 7 4 6 8 2 , , 3 2 2 0 8 8 2 , 5 3 0 4 2 1 , $ 5 3 0 4 2 1 , $ 0 7 0 7 5 5 8 6 1 1 , 0 1 5 , 0 7 9 4 8 , 9 2 2 4 8 3 , 7 5 4 7 8 0 , 6 6 8 , 1 $ 5 5 8 6 1 1 , $ 0 1 5 , 0 7 $ 9 4 8 , 9 2 2 $ 4 8 3 , 7 5 4 $ 9 1 5 , 1 8 8 , 1 $ , 6 6 8 5 2 3 $ , 0 2 4 6 3 3 7 2 2 , , 6 8 2 2 6 6 7 2 2 $ , - - - $ - $ - $ - $ - $ - $ 6 6 8 , 5 2 3 $ $ 1 9 7 2 1 , $ , 4 3 8 9 6 8 , 2 2 $ 8 6 2 , 3 4 6 , 3 1 $ 7 2 5 , 6 8 0 , 4 1 $ 0 7 9 , 0 6 5 , 6 7 $ 6 9 8 , 8 8 4 , 0 0 1 $ 1 9 7 2 1 , , 4 3 8 9 6 8 , 2 2 8 6 2 , 3 4 6 , 3 1 7 2 5 , 6 8 0 , 4 1 0 7 9 , 0 6 5 , 6 7 0 3 0 , 3 6 1 , 0 0 1 d e t a u a v e y l l l i a u d v d n i i s n a o L t n e m r i a p m i r o f l d e t a u a v e y e v i t c e l l l o c s n a o L t n e m r i a p m i r o f d e t a u a v e y l l l i a u d v d n I i l e c n a a B g n d n E i : s n a o L l d e t a u a v e y e v i t c e l l l o C t n e m r i a p m i r o f t n e m r i a p m i r o f l e c n a a b g n d n E i COMMUNITIES FIRST FINANCIAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2017 and 2016 NOTE 4 – PREMISES AND EQUIPMENT A summary of premises and equipment is as follows: Leasehold improvements Furniture, fixtures, and equipment Computer equipment 2017 2016 $ 949,481 $ 691,168 461,120 1,220,352 598,887 863,059 2,101,769 2,682,298 Less accumulated depreciation and amortization (1,831,809) (2,514,568) $ 269,960 $ 167,730 In January 2016 the Bank exercised the first of two potential five-year lease extensions for its main banking and administrative offices. The Bank is responsible for common area maintenance, taxes, and insurance to the extent they exceed the base year amounts. The current lease extension expires on January 31, 2021. In August 2016 the Bank entered into a new lease for additional office space in a building adjacent to the main office. The lease term is for four years and will commenced in March 2017 and will expire in 2021. Depreciation and amortization expense amount to $113,773 and $95,526 for the years ending December 31, 2017 and 2016, respectively. At December 31, 2017, the future lease rental payable under non-cancellable operating lease commitments for the Bank’s main and administrative offices were as follows: 2018 2019 2020 2021 Thereafter $ 451,735 463,753 476,936 57,361 - $ 1,449,786 The minimum rental payments shown above are given for the existing lease obligations and are not a forecast of future rental expense. Total rental expense was approximately $427,293 and $333,726 for the years ended December 31, 2017 and 2016 respectively. (Continued) 23. COMMUNITIES FIRST FINANCIAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2017 and 2016 COMMUNITIES FIRST FINANCIAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2017 and 2016 NOTE 5 – DEPOSITS Customer deposits were as follows: NOTE 5 – DEPOSITS Customer deposits were as follows: Non interest bearing demand Savings, NOW, and money market accounts Time deposits under $250,000 ‐ ‐ Time deposits $250,000 and over 2017 2016 127,384,112 $ 198,918,372 $ 169,538,554 119,954,916 24,611,921 18,225,313 16,630,000 28,468,051 $ 371,400,535 $ 332,330,704 interest bearing demand Non Savings, NOW, and money market accounts Time deposits under $250,000 Time deposits $250,000 and over ‐ ‐ 2017 2016 $ 198,918,372 $ 169,538,554 119,954,916 24,611,921 18,225,313 127,384,112 28,468,051 16,630,000 $ 371,400,535 $ 332,330,704 At December 31, 2017, the scheduled maturities of time deposits are as follows: At December 31, 2017, the scheduled maturities of time deposits are as follows: 2018 2019 2020 2021 2022 Thereafter $ 37,828,904 4,667,026 914,724 1,323,120 364,277 - $ 45,098,051 2018 2019 2020 2021 2022 Thereafter $ 37,828,904 4,667,026 914,724 1,323,120 364,277 - $ 45,098,051 NOTE 6 – BORROWING ARRANGEMENTS NOTE 6 – BORROWING ARRANGEMENTS The Bank may borrow up to $22,000,000 overnight on an unsecured basis from three correspondent banks. The Bank may also borrow up to approximately $101,000,000 from the Federal Home Loan Bank of San Francisco, subject to providing collateral and fulfilling other conditions of the credit facility. The Bank has pledged investment securities of approximately $13,590,000 for the credit facility at Federal Home Loan Bank of San Francisco. The Bank may also borrow from the Federal Reserve Bank of San Francisco, subject to fulfilling other conditions of the credit facility and providing collateral. As of December 2017, and 2016, no The Bank may borrow up to $22,000,000 overnight on an unsecured basis from three correspondent banks. The Bank may also borrow up to approximately $101,000,000 from the Federal Home Loan Bank of San Francisco, subject to providing collateral and fulfilling other conditions of the credit facility. The Bank has pledged investment securities of approximately $13,590,000 for the credit facility at Federal Home Loan Bank of San Francisco. The Bank may also borrow from the Federal Reserve Bank of San Francisco, subject to fulfilling other conditions of the credit facility and providing collateral. As of December 2017, and 2016, no amounts were outstanding under these arrangements. amounts were outstanding under these arrangements. The Company has a line of credit with TIB under which it can borrow up to $7,500,000 for general corporate purposes. The line is secured by a pledge of the underlying stock the Company holds of Fresno First Bank. As of December 31, 2017, there was no amount outstanding under this arrangement. The Company has a line of credit with TIB under which it can borrow up to $7,500,000 for general corporate purposes. The line is secured by a pledge of the underlying stock the Company holds of Fresno First Bank. As of December 31, 2017, there was no amount outstanding under this arrangement. NOTE 7 – EMPLOYEE BENEFITS NOTE 7 – EMPLOYEE BENEFITS The Company sponsors an employee stock ownership plan (ESOP) for eligible employees. Eligibility begins after an employee has attained the age of 21 and completed one year of service, as defined in the ESOP documents. Under the ESOP, the Company contributes a discretionary amount to the ESOP for the purchase of the Company’s stock, to be held in trust for each participant to be distributed later in accordance with the ESOP. For the years ended December 31, 2017 and 2016, contributions to the ESOP were $343,014 and $237,252, respectively. The ESOP held 146,769 and 103,069 shares of common stock as of December 31, The Company sponsors an employee stock ownership plan (ESOP) for eligible employees. Eligibility begins after an employee has attained the age of 21 and completed one year of service, as defined in the ESOP documents. Under the ESOP, the Company contributes a discretionary amount to the ESOP for the purchase of the Company’s stock, to be held in trust for each participant to be distributed later in accordance with the ESOP. For the years ended December 31, 2017 and 2016, contributions to the ESOP were $343,014 and $237,252, respectively. The ESOP held 146,769 and 103,069 shares of common stock as of December 31, (Continued) (Continued) 24. 24. COMMUNITIES FIRST FINANCIAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2017 and 2016 NOTE 7 – EMPLOYEE BENEFITS (Continued) 2017 and 2016, respectively and there were no unearned shares of common stock held by the ESOP at December 31, 2017 and 2016. The Company sponsors a 401(k) plan for the benefit of its employees. The Company can match employee contributions and make additional contributions annually as determined by the Board of Directors. The Company made no contributions for the years ended December 31, 2017 and 2016. The Board of Directors approved a salary continuation plan for certain executives during 2017. Under the Plan the Company is obligated to provide executives with annual benefits after retirement. The estimated present value of these future benefits is accrued from the effective date of the plan and is expensed over the years of service. The expense recognized under this plan for the year ended December 31, 2017 totaled $89,911. Accrued compensation payable under the salary continuations plan totaled $89,911 at December 31, 2017 and is included in interest payable and other liabilities on the Company’s balance sheet. NOTE 8 – INCOME TAXES The provision for income taxes for the years ended December 31 consists of the following: Current Federal State Deferred Federal State Remeasurement of deferred tax assets and deferred tax liabilities at reduced federal corporate tax rate 2017 2016 $ 1,862,165 $ 1,386,395 491,485 730,961 2,593,126 1,877,880 65,373 (32,603) 112,116 56,884 330,712 - 363,482 169,000 Provision $ 2,956,608 $ 2,046,880 On December 22, 2017, H.R.1, commonly known as the Tax Cuts and Jobs Act of 2017 (the "Act") was signed into law. Among other things, the Act reduces our corporate federal tax rate from 34% to 21% effective January 1, 2018. As a result, we are required to re-measure, through income tax expense, our deferred tax assets and liabilities using the enacted rate at which we expect them to be recovered or settled. The re- measurement of our net deferred tax asset resulted in additional income tax expense of approximately $330,712. (Continued) 25. COMMUNITIES FIRST FINANCIAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2017 and 2016 COMMUNITIES FIRST FINANCIAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2017 and 2016 NOTE 8 – INCOME TAXES (Continued) NOTE 8 – INCOME TAXES (Continued) Deferred taxes are a result of differences between income tax accounting and generally accepted accounting Deferred taxes are a result of differences between income tax accounting and generally accepted accounting principles with respect to income and expense recognition. principles with respect to income and expense recognition. The following is a summary of the components of the net deferred tax asset accounts included in interest receivable and other assets in the accompanying consolidated balance sheets at December 31: The following is a summary of the components of the net deferred tax asset accounts included in interest receivable and other assets in the accompanying consolidated balance sheets at December 31: Allowance for loan losses due to tax limitations ‐ Deferred tax assets: Pre operating expenses Depreciation differences Stock based compensation Deferred compensation State tax deferral ‐ Non-accrual loan interest Other Deferred tax liabilities: Unrealized gains on available for sale securities Lease financing receivable Other ‐ ‐ 2017 2016 Deferred tax assets: $ 36,882 $ 132,856 538,790 61,019 26,581 156,645 44,676 72,542 68,458 300,826 538,893 35,159 - 167,105 57,715 173,959 1,069,991 1,342,115 (33,334) (131,067) (80,726) (70,315) - (120,435) (245,127) (190,750) Pre operating expenses Depreciation differences ‐ Allowance for loan losses due to tax limitations Stock Deferred compensation State tax deferral Non-accrual loan interest based compensation ‐ Other Deferred tax liabilities: Unrealized gains on available Lease financing receivable Other for sale securities ‐ ‐ 2017 2016 $ 36,882 $ 132,856 538,790 61,019 26,581 156,645 44,676 72,542 68,458 300,826 538,893 35,159 - 167,105 57,715 173,959 1,069,991 1,342,115 (33,334) (131,067) (80,726) (70,315) - (120,435) (245,127) (190,750) Net deferred income tax asset $ 824,864 $ 1,151,365 Net deferred income tax asset $ 824,864 $ 1,151,365 The Company is subject to federal income tax and franchise tax of the state of California. Income tax returns for the years ended December 31, 2016, 2015, and 2014 are open to audit by the federal authorities and income tax returns for the years ended December 31, 2016, 2015, 2014, and 2013, are open to audit by state authorities. As of December 31, 2017, the Company does not have any unrecognized tax benefits. The Company does not expect unrecognized tax benefits to significantly increase or decrease within the next 12 The Company is subject to federal income tax and franchise tax of the state of California. Income tax returns for the years ended December 31, 2016, 2015, and 2014 are open to audit by the federal authorities and income tax returns for the years ended December 31, 2016, 2015, 2014, and 2013, are open to audit by state authorities. As of December 31, 2017, the Company does not have any unrecognized tax benefits. The Company does not expect unrecognized tax benefits to significantly increase or decrease within the next 12 months. months. NOTE 9 – RELATED PARTY TRANSACTIONS NOTE 9 – RELATED PARTY TRANSACTIONS The Bank has granted loans to certain directors and their related interests with which they are associated. The balance of these loans outstanding was approximately $638,000 and $514,000 at December 31, 2017 The Bank has granted loans to certain directors and their related interests with which they are associated. The balance of these loans outstanding was approximately $638,000 and $514,000 at December 31, 2017 and 2016, respectively. and 2016, respectively. Deposits from certain directors, officers, and their related interests with which they are associated, held by the Bank at December 31, 2017 and 2016, amounted to approximately $4,451,000 and $5,049,000, respectively. Deposits from certain directors, officers, and their related interests with which they are associated, held by the Bank at December 31, 2017 and 2016, amounted to approximately $4,451,000 and $5,049,000, respectively. (Continued) (Continued) 26. 26. COMMUNITIES FIRST FINANCIAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2017 and 2016 NOTE 10 – EARNINGS PER SHARE (EPS) Earnings per share for the years ended December 31 were computed as follows: 2017 2016 Basic earnings per share: Net income available to common shareholders $ 3,683,698 $ 3,075,109 Weighted average common shares outstanding Weighted average restricted stock 2,746,382 70,072 2,728,600 40,125 Weighted average common shares and restricted Stock outstanding 2,816,454 2,728,600 Basic earnings per share $ 1.31 $ 1.13 Diluted earnings per share: Net income available to common shareholders, diluted $ 3,683,698 $ 3,075,109 Weighted average common shares outstanding Effect of dilutive stock options 2,816,454 55,079 2,728,600 23,643 Adjusted weighted average common shares outstanding, diluted 2,871,533 2,752,243 Diluted earnings per share $ 1.28 $ 1.12 At December 31, 2017 and 2016, there were 52,957 and 99,246 stock options respectively that could potentially dilute earnings per share in the future that were not included in the computation of diluted earnings per share. NOTE 11– COMMITMENTS In the ordinary course of business, the Bank enters into financial commitments to meet the financing needs of its customers. These financial commitments include commitments to extend credit and standby letters of credit. Those instruments involve, to varying degrees, elements of credit and interest rate risk not recognized in the Company’s consolidated financial statements. The Bank’s exposure to loan loss in the event of non-performance on 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 as it does for loans reflected in the consolidated financial statements. (Continued) 27. COMMUNITIES FIRST FINANCIAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2017 and 2016 COMMUNITIES FIRST FINANCIAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2017 and 2016 NOTE 11 – COMMITMENTS (Continued) NOTE 11 – COMMITMENTS (Continued) As of December 31, 2017, and 2016, the Bank had the following outstanding financial commitments whose As of December 31, 2017, and 2016, the Bank had the following outstanding financial commitments whose contractual amount represents credit risk: contractual amount represents credit risk: Commitments to extend credit Letters of credit $ 61,180,483 $ 1,577,000 66,615,942 3,392,000 Commitments to extend credit Letters of credit $ 62,757,483 $ 70,007,942 2017 2016 2017 2016 $ 61,180,483 $ 1,577,000 66,615,942 3,392,000 $ 62,757,483 $ 70,007,942 Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Since many of the commitments are expected to expire without being drawn upon, the total amounts do not necessarily represent future cash requirements. The Bank evaluates each client’s credit worthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Bank, is based on management’s credit evaluation of the customer. The majority of the Bank’s commitments to extend credit and standby letters of credit are secured by real estate. Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Since many of the commitments are expected to expire without being drawn upon, the total amounts do not necessarily represent future cash requirements. The Bank evaluates each client’s credit worthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Bank, is based on management’s credit evaluation of the customer. The majority of the Bank’s commitments to extend credit and standby letters of credit are secured by real estate. NOTE 12 – STOCK-BASED COMPENSATION NOTE 12 – STOCK-BASED COMPENSATION The Company’s 2005 Equity Based Compensation Plan (the Plan) was approved by its shareholders in February 2006. Under the terms of the Plan, officers and key employees may be granted both non-qualified, incentive stock options and restricted stock awards, and directors, who are not also an officer or employee, may only be granted non-qualified stock options and restricted stock awards. The Plan provides for a maximum number of shares that may be awarded to eligible employees and directors not to exceed 495,000 shares. In July 2012, the shareholders approved an additional 183,000 shares to be added to the Plan increasing the total to 678,000 shares. In July 2015 the Shareholders approved the 2015 Equity Based Compensation Plan to replace the 2005 plan which was due to expire at the end of 10 years. Upon approval, the remaining unallocated shares in the 2005 Plan were transferred into the 2015 Plan for future grants. No new shares were added to the 2015 Plan beyond those already approved under the 2005 plan. There are 774,782 shares authorized under the Plan. The total number of shares authorized has been retroactively adjusted for the effect of stock dividends. Stock options are granted at a price not less than 100% of the fair market value of the stock on the date of grant. Stock options expire no later than ten years from the date of the grant and all equity-based awards generally vest over three years. The Plan provides for accelerated vesting if there is a change of control, as defined in the Plan. The Company recognized stock-based The Company’s 2005 Equity Based Compensation Plan (the Plan) was approved by its shareholders in February 2006. Under the terms of the Plan, officers and key employees may be granted both non-qualified, incentive stock options and restricted stock awards, and directors, who are not also an officer or employee, may only be granted non-qualified stock options and restricted stock awards. The Plan provides for a maximum number of shares that may be awarded to eligible employees and directors not to exceed 495,000 shares. In July 2012, the shareholders approved an additional 183,000 shares to be added to the Plan increasing the total to 678,000 shares. In July 2015 the Shareholders approved the 2015 Equity Based Compensation Plan to replace the 2005 plan which was due to expire at the end of 10 years. Upon approval, the remaining unallocated shares in the 2005 Plan were transferred into the 2015 Plan for future grants. No new shares were added to the 2015 Plan beyond those already approved under the 2005 plan. There are 774,782 shares authorized under the Plan. The total number of shares authorized has been retroactively adjusted for the effect of stock dividends. Stock options are granted at a price not less than 100% of the fair market value of the stock on the date of grant. Stock options expire no later than ten years from the date of the grant and all equity-based awards generally vest over three years. The Plan provides for accelerated vesting if there is a change of control, as defined in the Plan. The Company recognized stock-based compensation cost of $383,920 and $137,752 in 2017 and 2016, respectively. compensation cost of $383,920 and $137,752 in 2017 and 2016, respectively. Since the Company has a limited amount of historical stock activity, the expected volatility is based on the historical volatility of similar banks that have a longer trading history. The expected term represents the estimated average period of time that the options remain outstanding. Since the Company does not have sufficient historical data on the exercise of stock options, the expected term is based on the “simplified” method that measures the expected term as the average of the vesting period and the contractual term. The risk-free rate of return reflects the grant date interest rate offered for U.S. Treasury bonds over the expected Since the Company has a limited amount of historical stock activity, the expected volatility is based on the historical volatility of similar banks that have a longer trading history. The expected term represents the estimated average period of time that the options remain outstanding. Since the Company does not have sufficient historical data on the exercise of stock options, the expected term is based on the “simplified” method that measures the expected term as the average of the vesting period and the contractual term. The risk-free rate of return reflects the grant date interest rate offered for U.S. Treasury bonds over the expected term of the options. term of the options. (Continued) (Continued) 28. 28. COMMUNITIES FIRST FINANCIAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2017 and 2016 NOTE 12 – STOCK-BASED COMPENSATION (Continued) A summary of the status of stock options that have been granted by the Company as of December 31, 2017, and changes during the year ending thereon, is presented below: Weighted Average Exercise Price Weighted Average Remaining Contractual Term Aggregate Intrinsic Value Shares Outstanding at beginning of year 139,840 Granted Exercised Forfeited, expired, or returned to Plan through cashless exercise Outstanding at end of year Options exercisable $ $ 8.88 4.3 years $ 366,312 - - (20,300) $ 8.49 (11,504) $ 108,036 106,702 $ $ 8.75 8.95 8.94 4.1 years $ 1,144,695 4.1 years $ 1,132,443 Included in the stock options exercised during 2017, there were 1,053 shares that represent cashless stock option exercises, 10,247 shares which represent exercises where previously owned shares were tendered in lieu of cash, and 9,000 shares exercised for cash. As of December 31, 2017, there was approximately $800 of total unrecognized compensation cost related to the outstanding stock options that will be recognized over a weighted average period of 5 months. Share Award Plan: The Equity Compensation Plan provides for the issuance of restricted shares to directors and officers. Compensation expense is recognized over the vesting period of the awards based on the fair value of the stock at the issue date. The fair value of the stock was determined based on the closing price listed for the Company’s stock on the date of grant. A summary of changes in the Company’s non-vested restricted share grants for the year follows: Non-vested at January 1, 2017 Granted Vested Forfeited Non-vested at December 31, 2017 36,501 $ 41,170 (23,828) - 53,843 $ 10.18 13.36 10.91 - 12.29 As of December 31, 2017, there was approximately $458,700 of total unrecognized compensation cost related to the outstanding restricted stock grants that will be recognized over a weighted average period of 1.7 years. (Continued) 29. COMMUNITIES FIRST FINANCIAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2017 and 2016 COMMUNITIES FIRST FINANCIAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2017 and 2016 NOTE 13 – SHAREHOLDERS’ EQUITY NOTE 13 – SHAREHOLDERS’ EQUITY Regulatory Capital: Regulatory Capital: Banks are subject to regulatory capital requirements administered by federal banking agencies. Capital adequacy guidelines and prompt corrective action regulations, involve quantitative measures of assets, liabilities, and certain off-balance-sheet items calculated under regulatory accounting practices. Capital amounts and classifications are also subject to qualitative judgments by regulators. Failure to meet capital requirements can initiate regulatory action. The final rules implementing Basel Committee on Banking Supervision’s capital guidelines for U.S. banks (Basel III rules) became effective for the Company on January 1, 2015 with full compliance with all of the requirements being phased in over a multi-year schedule, and fully phased in by January 1, 2019. Under the Basel III rules, the Company must hold a capital conservation buffer above the adequately capitalized risk-based ratios. The capital conservation buffer is being phased in from 0.0% for 2015 to 2.5% by 2019. The capital conservation buffer for 2016 was .625% and for 2017 is 1.25%. The net unrealized gain or loss on available for sale securities is not included in computing regulatory capital. Management believes as of December 31, 2017, the Company and Bank meet Banks are subject to regulatory capital requirements administered by federal banking agencies. Capital adequacy guidelines and prompt corrective action regulations, involve quantitative measures of assets, liabilities, and certain off-balance-sheet items calculated under regulatory accounting practices. Capital amounts and classifications are also subject to qualitative judgments by regulators. Failure to meet capital requirements can initiate regulatory action. The final rules implementing Basel Committee on Banking Supervision’s capital guidelines for U.S. banks (Basel III rules) became effective for the Company on January 1, 2015 with full compliance with all of the requirements being phased in over a multi-year schedule, and fully phased in by January 1, 2019. Under the Basel III rules, the Company must hold a capital conservation buffer above the adequately capitalized risk-based ratios. The capital conservation buffer is being phased in from 0.0% for 2015 to 2.5% by 2019. The capital conservation buffer for 2016 was .625% and for 2017 is 1.25%. The net unrealized gain or loss on available for sale securities is not included in computing regulatory capital. Management believes as of December 31, 2017, the Company and Bank meet all capital adequacy requirements to which they are subject. all capital adequacy requirements to which they are subject. Prompt corrective action regulations provide five classifications: well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized, and critically undercapitalized, although these terms are not used to represent overall financial condition. If adequately capitalized, regulatory approval is required to accept brokered deposits. If undercapitalized, capital distributions are limited, as is asset growth and expansion, and capital restoration plans are required. At year-end 2017 and 2016, the most recent regulatory notifications categorized the Bank as well capitalized under the regulatory framework for prompt corrective Prompt corrective action regulations provide five classifications: well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized, and critically undercapitalized, although these terms are not used to represent overall financial condition. If adequately capitalized, regulatory approval is required to accept brokered deposits. If undercapitalized, capital distributions are limited, as is asset growth and expansion, and capital restoration plans are required. At year-end 2017 and 2016, the most recent regulatory notifications categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. There are no conditions or events since that notification that management believes have changed the There are no conditions or events since that notification that management believes have changed the institution’s category. Actual and required capital amounts and ratios, excluding the capital conservation buffer, are presented Actual and required capital amounts and ratios, excluding the capital conservation buffer, are presented below (dollar amounts in thousands): below (dollar amounts in thousands): action. institution’s category. Actual Amount Ratio For Capital Adequacy Purposes Amount Ratio To be Well-Capitalized Under Prompt Corrective Action Provisions Amount Ratio Actual Amount Ratio For Capital Adequacy Purposes Ratio Amount To be Well-Capitalized Under Prompt Corrective Action Provisions Amount Ratio December 31, 2017: Common Equity Tier I Capital December 31, 2017: Common Equity Tier I Capital (to Risk Weighted Assets) Total Capital Tier I Capital Tier I Capital (to Average Assets) December 31, 2016: Common Equity Tier I Capital (to Risk Weighted Assets) Total Capital Tier I Capital Tier I Capital (to Average Assets) ‐ ‐ ‐ ‐ ‐ ‐ $ $ $ $ $ $ $ $ 34,210 15.6% $ 9,838 >4.5% $ 14,211 >6.5% (to Risk Weighted Assets) 36,952 16.9% $ 17,490 >8.0% $ 21,863 >10.0% (to Risk Weighted Assets) 34,210 15.6% $ 13,118 >6.0% $ 17,490 >8.0% 34,210 8.6% $ 15,912 >4.0% $ 19,890 >5.0% 29,597 14.8% $ 8,981 >4.5% $ 12,972 >6.5% (to Risk Weighted Assets) 32,097 16.1% $ 15,966 >8.0% $ 19,958 >10.0% (to Risk Weighted Assets) 29,597 14.8% $ 11,975 >6.0% $ 15,966 >8.0% 29,597 8.4% $ 14,014 >4.0% $ 17,517 >5.0% Weighted Assets) (to Risk Total Capital (to Risk Tier I Capital (to Risk Tier I Capital (to Average Assets) ‐ ‐ Weighted Assets) ‐ Weighted Assets) December 31, 2016: Common Equity Tier I Capital Weighted Assets) (to Risk Total Capital (to Risk Tier I Capital (to Risk Tier I Capital (to Average Assets) ‐ ‐ Weighted Assets) ‐ Weighted Assets) $ $ $ $ $ $ $ $ 34,210 15.6% $ 9,838 >4.5% $ 14,211 >6.5% 36,952 16.9% $ 17,490 >8.0% $ 21,863 >10.0% 34,210 15.6% $ 13,118 >6.0% $ 17,490 >8.0% 34,210 8.6% $ 15,912 >4.0% $ 19,890 >5.0% 29,597 14.8% $ 8,981 >4.5% $ 12,972 >6.5% 32,097 16.1% $ 15,966 >8.0% $ 19,958 >10.0% 29,597 14.8% $ 11,975 >6.0% $ 15,966 >8.0% 29,597 8.4% $ 14,014 >4.0% $ 17,517 >5.0% (Continued) (Continued) 30. 30. COMMUNITIES FIRST FINANCIAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2017 and 2016 NOTE 13 – SHAREHOLDERS’ EQUITY (Continued) Dividends: The California Financial Code provides that a bank may not make a cash distribution to its shareholders in excess of the lessor of the bank’s undivided profits or the bank’s net income for its last three fiscal years less any distributions made to shareholders during the same period without the approval in advance of the Commissioner of the California Department of Business Oversight. Common Stock: On February 24, 2017, the Company issued 43,800 shares of its common stock totaling $521,220 as the Company’s ESOP contribution for the years of 2016 and 2017. NOTE 14 – FAIR VALUE The following is a description of valuation methodologies used for assets and liabilities recorded at fair value: Securities – The fair values of securities available-for-sale are determined matrix pricing, which is a mathematical technique used widely in the industry to value debt securities without relying exclusively on quoted prices for specific securities, but rather by relying on the securities’ relationship to other benchmark securities (Level 2). Loans Held for Sale – The Bank does not record loans held for sale at fair value on a recurring basis. Loans held for sale are carried at the lower of cost or fair value. The fair value of loans held for sale is based on what secondary markets are currently offering for portfolios with similar characteristics (Level 2). Collateral-Dependent Impaired Loans – The Bank does not record loans at fair value on a recurring basis. However, from time to time, fair value adjustments are recorded on these loans to reflect: (1) partial write-downs, through charge offs or specific reserve allowances, that are based on the current appraised or market-quoted value of the underlying collateral, or (2) the full charge off of the loan carrying value. In some cases, the properties for which market quotes or appraisal values have been obtained are located in areas where comparable sales data is limited, outdated, or unavailable. Fair value estimates for collateral-dependent impaired loans are obtained from real estate brokers or other third-party consultants. Adjustments are routinely made in the appraisal process by the appraisers to adjust for differences between the comparable sales and income data available. There were no collateral-dependent impaired loans measured at fair value at December 31, 2017 and 2016. (Continued) 31. COMMUNITIES FIRST FINANCIAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2017 and 2016 COMMUNITIES FIRST FINANCIAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2017 and 2016 NOTE 14 – FAIR VALUE (Continued) NOTE 14 – FAIR VALUE (Continued) The following table summarizes the Company’s assets that were measured at fair value on a recurring basis The following table summarizes the Company’s assets that were measured at fair value on a recurring basis at December 31, 2017: at December 31, 2017: Description of Assets December 31, Assets 2017 (Level 1) Inputs (Level 2) Quoted Prices in Significant Active Markets Other For Identical Observable Significant Unobservable Inputs Description of Assets Quoted Prices in Active Markets For Identical Assets (Level 1) December 31, 2017 Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs Securities available for sale (recurring) U.S. government and agency securities ‐ ‐ Mortgage backed securities State and municipal agencies ‐ Total $ 42,200,170 21,897,624 8,565,855 $ $ 42,200,170 21,897,624 8,565,855 $ $ 72,663,649 $ $ 72,663,649 $ Securities available for sale (recurring) - - - - U.S. government and agency ‐ ‐ securities Mortgage backed securities State and municipal agencies ‐ Total $ 42,200,170 21,897,624 8,565,855 $ $ 72,663,649 $ - - - - $ 42,200,170 21,897,624 8,565,855 $ $ 72,663,649 $ - - - - The following table summarizes the Company’s assets that were measured at fair value on a recurring and The following table summarizes the Company’s assets that were measured at fair value on a recurring and non-recurring basis at December 31, 2016: non-recurring basis at December 31, 2016: Description of Assets December 31, Assets 2016 (Level 1) Inputs (Level 2) Quoted Prices in Significant Active Markets Other For Identical Observable Significant Unobservable Inputs Description of Assets Quoted Prices in Active Markets For Identical Assets (Level 1) December 31, 2016 Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs Securities available for sale (recurring) U.S. government and agency securities ‐ ‐ Mortgage backed securities State and municipal agencies ‐ Total $ 26,988,741 24,443,658 14,859,566 $ $ 26,988,741 24,443,658 14,859,566 $ $ 66,291,965 $ $ 66,291,965 $ Securities available for sale (recurring) - - - - U.S. government and agency ‐ ‐ securities Mortgage backed securities State and municipal agencies ‐ Total $ 26,988,741 24,443,658 14,859,566 $ $ 66,291,965 $ - - - - $ 26,988,741 24,443,658 14,859,566 $ $ 66,291,965 $ - - - - The fair value of a financial instrument is the amount at which the asset or obligation could be exchanged in a current transaction between willing parties, other than in a forced or liquidation sale. Fair value estimates are made at a specific point in time based on relevant market information and information about the financial instrument. These estimates do not reflect any premium or discount that could result from offering for sale at one time the entire holdings of a particular financial instrument. Because no market value exists for a significant portion of the financial instruments, fair value estimates are based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments, and other factors. These estimates are subjective in nature, involve uncertainties and matters of judgment and, therefore, cannot be determined with precision. Changes in assumptions could significantly affect the The fair value of a financial instrument is the amount at which the asset or obligation could be exchanged in a current transaction between willing parties, other than in a forced or liquidation sale. Fair value estimates are made at a specific point in time based on relevant market information and information about the financial instrument. These estimates do not reflect any premium or discount that could result from offering for sale at one time the entire holdings of a particular financial instrument. Because no market value exists for a significant portion of the financial instruments, fair value estimates are based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments, and other factors. These estimates are subjective in nature, involve uncertainties and matters of judgment and, therefore, cannot be determined with precision. Changes in assumptions could significantly affect the estimates. estimates. Fair value estimates are based on financial instruments both on and off the balance sheet without attempting to estimate the value of anticipated future business and the value of assets and liabilities that are not considered financial instruments. Additionally, tax consequences related to the realization of the unrealized gains and losses can have a potential effect on fair value estimates and have not been considered in many of Fair value estimates are based on financial instruments both on and off the balance sheet without attempting to estimate the value of anticipated future business and the value of assets and liabilities that are not considered financial instruments. Additionally, tax consequences related to the realization of the unrealized gains and losses can have a potential effect on fair value estimates and have not been considered in many of the estimates the estimates (Continued) (Continued) 32. 32. - - - - - - - - COMMUNITIES FIRST FINANCIAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2017 and 2016 NOTE 14 – FAIR VALUE (Continued) The following methods and assumptions were used by the Company in estimating fair values of financial instruments: Financial Assets – The carrying amounts of cash, short-term investments due from customers on acceptances, and bank acceptances outstanding are considered to approximate fair value. Short-term investments include federal funds sold, securities purchased under agreements to resell, and interest-bearing deposits with banks. The fair values of securities available for sale are generally based on matric pricing, which is a mathematical technique used widely in the industry to value debt securities without relying exclusively on quoted prices for specific securities, but rather by relying on the securities’ relationship to other benchmark securities. The fair value of variable loans that reprice frequently and that have experienced no significant change in credit risk is based on carrying values. The fair values for all other loans are estimated using discounted cash flow analyses and interest rates currently being offered for loans with similar terms to borrowers with similar credit quality. Loans are generally expected to be held to maturity and any unrealized gains or losses are not expected to be realized. Fair value for correspondent bank stock is not practical to determine due to restrictions on transferability. Fair value for interest receivable approximates its carrying value. Financial Liabilities – The carrying amounts of deposit liabilities payable on demand, commercial paper, and other borrowed funds are considered to approximate fair value. For fixed maturity deposits, fair value is estimated by discounting estimated future cash flows using currently offered rates for deposits of similar remaining maturities. The fair value of interest payable approximates its carrying amount. Off-Balance Sheet Financial Instruments – The fair value of commitments to extend credit and standby letters of credit is estimated using the fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the credit standing of the counterparties. The fair value of the commitments is not material. The carrying amounts and estimated fair value of financial instruments not carried at fair value at December 31 are summarized as follows (in thousands): 2017 2016 Carrying Amount Estimated Fair Value Carrying Amount Fair Value Hierarchy Estimated Fair Value Fair Value Hierarchy Financial assets: Cash and cash equivalents Certificates of deposit $ Securities available-for-sale Loans, net SBIC investments and correspondent bank stock Interest receivable Financial liabilities: Deposits Interest payable 54,736 $ 5,199 72,664 260,610 54,736 5,316 72,664 258,519 Level 1 $ Level 2 Level 2 Level 3 62,392 $ 5,199 66,292 224,355 62,392 5,361 66,292 224,041 2,244 1,595 N/A 1,595 N/A Level 2 1,918 1,410 N/A 1,410 371,401 18 343,415 18 Level 2 Level 2 332,331 25 313,789 25 Level 1 Level 2 Level 2 Level 3 N/A Level 2 Level 2 Level 2 33. This page intentionally left blank Annual Meeting of Shareholders Fort Washington Country Club Tuesday, May 15, 2018 5:30 p.m. 10272 N. Millbrook Fresno, CA 93730 Corporate Office: Transfer Agent: Communities First Financial Corp. 7690 N. Palm Avenue, Suite 101 Fresno, CA 93711 559.439.0200 Continental Stock Transfer & Trust Co. 1 State Street Plaza 30th Floor New York, NY 10004 212.509.4000 Independent Auditors: Legal Counsel: Crowe Horwath, LLP 400 Capitol Mall, Suite 1400 Sacramento, CA 95814 916.441.1000 Stuart & Moore 641 Higuera Street, Suite 302 San Luis Obispo, CA 93401 805.545.8590 Stock Facilitators: Michael Natzic – D A Davidson & Co. 800.288.2811 Steven Levenson –Western Financial Corporation 619.234.3235 Michael Sammon - Fig Partners, LLC 312.242.0433 This page intentionally left blank 7690 N. Palm Avenue, Fresno, California 93711 559.439.0200 WWW.FRESNOFIRSTBANK.COM
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