Communities First Financial Corporation
Annual Report 2019

Plain-text annual report

COMMUNITIES FIRST FINANCIAL CORPORATION CONSOLIDATED FINANCIAL STATEMENTS December 31, 2019 and 2018 COMMUNITIES FIRST FINANCIAL CORPORATION CONSOLIDATED FINANCIAL STATEMENTS December 31, 2019 and 2018 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 8 Crowe LLP Independent Member Crowe Global 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, 2019 and 2018, and the related consolidated statements of income, comprehensive income, changes in shareholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2019, and the related notes to consolidated 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 consolidated financial statements referred to above present fairly, in all material respects, the financial position of Communities First Financial Corporation as of December 31, 2019 and 2018, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2019 in accordance with accounting principles generally accepted in the United States of America. Sacramento, California March 26, 2020 Crowe LLP COMMUNITIES FIRST FINANCIAL CORPORATION CONSOLIDATED BALANCE SHEETS For the Years Ended December 31, 2019 and 2018 ASSETS Cash and due from banks Federal funds sold Interest-bearing deposits in banks 2019 2018 $ 13,082,026 $ 18,057,000 499,207 10,699,827 26,437,000 5,244,561 Total cash and cash equivalents 31,638,233 42,381,388 Certificates of deposit Securities available-for-sale Securities held-to-maturity (fair value $11,853,279 and $12,203,541 as of December 31, 2019 and 2018, respectively) Loans held for sale Loans, net of allowance (allowance of $4,541,693 and $4,048,891 as of December 31, 2019 and 2018, respectively) SBIC investments and correspondent bank stock, at cost Cash surrender value of life insurance Premises and equipment, net Interest receivable and other assets 9,914,000 97,629,269 10,906,000 83,856,984 11,528,903 13,200,981 12,091,875 4,080,500 358,692,120 2,612,138 7,991,321 228,554 4,956,824 299,502,561 2,434,241 7,780,366 285,946 3,888,975 Total assets $ 538,392,343 $ 467,208,836 LIABILITIES AND SHAREHOLDERS' EQUITY Deposits Interest payable and other liabilities $ 482,873,457 $ 424,345,524 2,148,928 3,558,181 Total liabilities 486,431,638 426,494,452 Commitments and contingencies (Note 12) Shareholders’ equity: Common stock - 5,000,000 shares authorized, no par value; 2,940,996 and 2,858,172 shares issued and outstanding in 2019 and 2018, respectively Retained earnings Accumulated other comprehensive income (loss) 29,868,851 21,909,217 182,637 28,453,102 12,707,859 (446,577) Total shareholders' equity 51,960,705 40,714,384 Total liabilities and shareholders' equity $ 538,392,343 $ 467,208,836 See accompanying notes to the consolidated financial statements. 2. COMMUNITIES FIRST FINANCIAL CORPORATION CONSOLIDATED STATEMENTS OF INCOME For the Years Ended December 31, 2019, 2018, and 2017 2019 2018 2017 Interest Income: Loans, including fees Taxable investment securities Tax-exempt investment securities Federal funds sold and other $ 19,505,534 2,555,163 63,339 1,031,683 $ 15,661,655 2,117,868 70,062 1,025,266 $ 13,109,730 1,383,957 166,226 527,848 Total interest income 23,155,719 18,874,851 15,187,761 Interest Expense Savings deposits, NOW, and money market accounts Time deposits Other borrowings Total interest expense 617,172 421,852 3,350 1,042,374 316,709 313,336 8 630,053 235,118 241,517 4 476,639 Net interest income 22,113,345 18,244,798 14,711,122 Provision for loan losses 645,000 950,000 825,000 Net interest income after provision for loan losses 21,468,345 17,294,798 13,886,122 Non-interest income: Service charges on deposits Merchant services Gain (loss) on sale of investment securities Gain on sale of loans Income from life insurance Other 680,162 1,575,953 5,862 1,307,510 210,955 269,881 531,513 595,955 (14,137) 106,067 904,006 279,256 454,113 521,659 119,412 465,104 72,190 294,590 Total non-interest income 4,050,323 2,402,660 1,927,068 Non-interest expenses: Salaries and employee benefits Occupancy and equipment Regulatory assessments Data processing fees Professional fees Marketing and business promotion Director fees and stock-based compensation Other expenses 8,009,324 799,231 129,600 846,545 811,504 678,326 279,300 1,330,191 6,390,733 773,906 292,769 1,137,148 547,619 877,635 228,297 1,019,796 5,384,920 664,325 281,600 661,744 467,937 458,050 387,838 866,470 Total non-interest expenses 12,884,021 11,267,903 9,172,884 Income before income taxes 12,634,647 8,429,555 6,640,306 Provision for income taxes 3,433,289 2,180,010 2,956,608 Net income Net income per share - basic Net income per share - diluted $ $ $ 9,201,358 3.14 3.09 $ $ $ 6,249,545 2.19 2.14 $ $ $ See accompanying notes to the consolidated financial statements. 3,683,698 1.31 1.28 3. COMMUNITIES FIRST FINANCIAL CORPORATION CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME For the Years Ended December 31, 2019, 2018, and 2017 Net income $ 9,201,358 $ 6,249,545 $ 3,683,698 2019 2018 2017 Other comprehensive income (loss): Available for sale securities: Unrealized holding gains (losses) during ‐ ‐ the year Reclassification adjustment for (gains) losses realized in net income 899,124 (760,874) 60,666 (5,862) 14,137 (119,412) Net unrealized gains (losses) 893,262 (746,737) (58,746) Income tax (expense) benefit (264,048) 220,735 36,985 Other comprehensive income (loss) 629,214 (526,002) (21,761) Total comprehensive income $ 9,830,572 $ 5,723,543 $ 3,661,937 See accompanying notes to the consolidated financial statements. 4. COMMUNITIES FIRST FINANCIAL CORPORATION CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY For the years ended December 31, 2019, 2018, and 2017 Common Stock Shares Amount Retained Earnings Accumulated Other Comprehensive Income (Loss) Total Shareholders’ Equity Balances, January 1, 2017 2,732,043 $ 27,054,127 $ 2,774,616 $ 101,186 $ 29,929,929 Issuance of common stock Stock based compensation Exercise of stock options Net issuance of restricted stock awards Net income Other comprehensive loss 43,800 - 20,300 41,170 - - 521,220 383,920 75,809 - - - - - - - 3,683,698 - - - - - - (21,761) 521,220 383,920 75,809 - 3,683,698 (21,761) Balances, December 31, 2017 2,837,313 $ 28,035,076 $ 6,458,314 $ 79,425 $ 34,572,815 Stock based compensation Exercise of stock options Net issuance of restricted stock awards Net income Other comprehensive loss - 151 20,708 - - 418,026 - - - - - - - 6,249,545 - - - - - (526,002) 418,026 - - 6,249,545 (526,002) Balances, December 31, 2018 2,858,172 $ 28,453,102 $12,707,859 $ (446,577) $ 40,714,384 Issuance of common stock Stock based compensation Exercise of stock options Net issuance of restricted stock awards Net income Other comprehensive income 34,100 - 23,126 25,598 - - 731,104 536,695 147,950 - - - - - - - 9,201,358 - - - - - - 629,214 731,104 536,695 147,950 - 9,201,358 629,214 Balances, December 31, 2019 2,940,996 $ 29,868,851 $21,909,217 $ 182,637 $ 51,960,705 See accompanying notes to the consolidated financial statements. 5. COMMUNITIES FIRST FINANCIAL CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS For the Years Ended December 31, 2019, 2018, and 2017 Cash flows from operating activities Net income Adjustments to reconcile net income to net cash From operating activities: 2019 2018 2017 $ 9,201,358 $ 6,249,545 $ 3,683,698 Depreciation of premises and equipment Amortization and accretion on securities available for sale, net Amortization and accretion on securities held to maturity, net Provision for loan losses (Gain) loss 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 expense Increase in value of life insurance Increase in interest receivable Increase in interest payable and other liabilities (Increase) decrease in other assets 176,310 601,546 117,130 645,000 (5,862) (1,307,509) 51,863,353 (60,990,600) 536,695 (210,955) (517,466) 1,409,253 (814,431) 158,140 691,825 1,509 950,000 14,137 (106,067) - (4,080,500) 418,026 (221,418) (344,458) 704,577 413,573 113,773 752,232 - 825,000 (119,412) (465,104) 5,297,089 (4,831,985) 383,920 (72,190) (369,778) 171,755 (44,884) Net cash provided by operating activities 703,822 4,848,889 5,324,114 Cash flow from investing activities ‐ ‐ sale sale securities for (1,243,000) 1,242,000 993,000 (40,294,600) Purchase of certificates of deposit Proceeds from maturities of certificates of deposit Proceeds from sales of certificates of deposit Purchase of available for Proceeds from maturities of available securities 25,845,881 Proceeds from sale of available 974,011 (3,454,958) Purchase of held-to-maturity securities Proceeds from maturities of held-to-maturity securities 3,900,800 Net increase in loans (58,520,283) Purchase of SBIC investments and correspondent bank stock Purchase of company owned life insurance Proceeds from company owned life insurance Purchases of premises and equipment (177,897) - - (118,918) sale securities for ‐ ‐ ‐ ‐ (9,165,000) 492,000 2,966,000 (30,584,088) 17,183,027 755,000 (12,122,261) 28,877 (39,842,863) (198,456) - 513,242 (174,126) (748,000) 748,000 - (24,260,786) 9,514,210 7,720,311 - - (37,079,363) (325,403) (8,000,000) - (216,003) Net cash used in investing activities (70,853,964) (70,148,648) (52,647,034) Cash flows from financing activities Net increase in demand deposits and savings accounts Net increase (decrease) in time deposits Net proceeds from exercise of stock options Cash proceeds from issuance of common stock 55,634,971 2,892,962 147,950 731,104 61,949,710 (9,004,721) - - 36,809,014 2,260,817 75,809 521,220 Net cash provided by financing activities 59,406,987 52,944,989 39,666,860 Net change in cash and cash equivalents (10,743,155) (12,354,770) (7,656,060) Cash and cash equivalents, beginning of year 42,381,388 54,736,158 62,392,218 Cash and cash equivalents, end of year $ 31,638,233 $ 42,381,388 $ 54,736,158 (Continued) 6. COMMUNITIES FIRST FINANCIAL CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued) For the Years Ended December 31, 2019, 2018, and 2017 Supplemental disclosures of cash flow information: Interest paid Taxes paid Operating cash flows from operating leases Non-cash investing and financing activities: Initial recognition of operating lease right-of-use assets Right-of-use assets obtained in exchange for new operating lease liabilities $ $ $ $ $ 1,027,924 3,840,000 481,625 1,001,361 76,577 $ $ $ $ $ 622,485 2,130,000 - - - $ $ $ $ $ 447,646 2,430,000 - - - See accompanying notes to the consolidated financial statements. 7. COMMUNITIES FIRST FINANCIAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2019 and 2018 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. In September 2018 the Bank opened a loan production office in Torrance, California, and in October 2019 opened a SBA production office in San Diego, 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: In December 2019, a novel strain of coronavirus surfaced in Wuhan, China, and has spread around the world, with resulting business and social disruption. The coronavirus was declared a Public Health Emergency of International Concern by the World Health Organization on January 30, 2020 and on March 11, 2020 was declared a pandemic. The operations and business results of the Company could be materially adversely affected. Significant estimates as disclosed in Note 1, including the allowance for loan losses may be materially adversely impacted by local, state and national restrictions and events designed to contain the coronavirus. The magnitude of the impact is likely dependent upon the length and severity of the disruption. The Company has evaluated the effects of subsequent events for recognition and disclosure through March 26, 2020, 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. (Continued) 8. COMMUNITIES FIRST FINANCIAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2019 and 2018 NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) As of December 31, 2019, and 2018, 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, 2019 and 2018. 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. Securities: Held-to-maturity securities consist of U.S. agency securities and mortgage-backed securities not classified as trading securities or available-for-sale securities. These securities are carried at amortized cost when management has the positive intent and ability to hold them to maturity. 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 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 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. 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. 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, 2019, 2018, and 2017 salaries and employee benefits expense totaling $382,758, $152,784, and $143,711, respectively, were deferred as loan origination costs. (Continued) 9. COMMUNITIES FIRST FINANCIAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2019 and 2018 NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) 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. 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, 2019 and 2018 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. (Continued) 10. COMMUNITIES FIRST FINANCIAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2019 and 2018 NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) 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. 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 Company held stock in the FHLB totaling $1,505,500 and $1,434,600 at December 31, 2019 and 2018, 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, 2019 and 2018. Correspondent bank stock accounts on the consolidated balance sheet include The Independent Bankers Bank (TIB) stock of $225,147 and Pacific Coast Bankers’ Bank (PCBB) stock of $400,000 at December 31, 2019 and 2018. TIB and PCBB stock are carried at cost and were not considered impaired as of December 31, 2019 and 2018. 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 $113,146 and $74,494 and the Central Valley Fund III of $360,000 and $300,000 at December 31, 2019 and 2018, respectively. These investments are carried at cost and were not considered impaired as of December 31, 2019 and 2018. 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 $224,272, $352,449, and $244,235 for the years ended December 31, 2019, 2018, and 2017, 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 operating expenses. As of December 31, 2019 and 2018 there was no other real estate owned by the Company. Loans Held for Sale: Loans held for sale are reported at the lower of cost or fair value. Cost generally approximates market value, given the short duration of these assets. Net unrealized losses, if any, are recorded as a valuation allowance and charged to earnings. (Continued) 11. COMMUNITIES FIRST FINANCIAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2019 and 2018 NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) 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. 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. In accordance with accounting standards, the Company has assessed its tax positions and has concluded there are no unrecognized tax benefits at December 31, 2019 and 2018. The Company recognizes interest accrued and penalties related to unrecognized tax benefits in tax expense. During the years ended December 31, 2019 and 2018, 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 2015. 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 15 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 12. Such financial instruments are recorded in the consolidated financial statements when they are funded or related fees are incurred or received. (Continued) 12. COMMUNITIES FIRST FINANCIAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2019 and 2018 NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) 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 13 for additional information on the Company’s stock option plan. 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. 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. 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, 2019 and 2018 were $100,296 and $147,773, respectively. No impairment charges were recorded for the years ended December 31, 2019 or 2018 related to servicing assets. Reclassifications: Certain reclassifications have been made to the prior year consolidated financial statements to conform to the classifications used in 2019. Reclassifications had no effect on prior year net income or shareholders’ equity. (Continued) 13. COMMUNITIES FIRST FINANCIAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2019 and 2018 NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Adoption of New Accounting Standards: On January 1, 2019, the Company adopted ASU 2016-02 “Leases (Topic 842)” and subsequent amendments thereto, which requires the Company to recognize most leases on the balance sheet. We adopted the standard under a modified retrospective approach as of the date of adoption and elected to apply several of the available practical expedients, including: •Carry-over of historical lease determination and lease classification conclusions •Carry-over of historical initial direct cost balances for existing leases •Accounting for leases and non-lease components in contracts in which the Company is a lessee as a single lease component Adoption of the leasing standard resulted in the recognition of operating right-of-use assets of $978,708, and operating lease liabilities of $1,001,361 as of January 1, 2019. These amounts were determined based on the present value of remaining minimum lease payments, discounted using the Company’s incremental borrowing rate as of the date of adoption. There was no material impact to the timing of expense or income recognition in the Company’s Consolidated Income Statements. Prior periods were not restated and continue to be presented under legacy GAAP. Disclosures about the Company’s leasing activities are presented in Note 5 – Leases. Newly Issued Not Yet Effective Accounting Standards: FASB Accounting Standards Update (ASU) 2016-13 - Measurement of Credit Losses on Financial Instruments (Subtopic 326): Financial Instruments - Credit Losses, commonly referred to as “CECL,” was issued June 2016. The provisions of the update eliminate the probable initial recognition threshold under current GAAP which requires reserves to be based on an incurred loss methodology. Under CECL, reserves required for financial assets measured at amortized cost will reflect an organization’s estimate of all expected credit losses over the contractual term of the financial asset and thereby require the use of reasonable and supportable forecasts to estimate future credit losses. Because CECL encompasses all financial assets carried at amortized cost, the requirement that reserves be established based on an organization’s reasonable and supportable estimate of expected credit losses extends to held to maturity (“HTM”) debt securities. Under the provisions of the update, credit losses recognized on available for sale (“AFS”) debt securities will be presented as an allowance as opposed to a write-down. In addition, CECL will modify the accounting for purchased loans, with credit deterioration since origination, so that reserves are established at the date of acquisition for purchased loans. Under current GAAP a purchased loan’s contractual balance is adjusted to fair value through a credit discount and no reserve is recorded on the purchased loan upon acquisition. Since under CECL reserves will be established for purchased loans at the time of acquisition, the accounting for purchased loans is made more comparable to the accounting for originated loans. Finally, increased disclosure requirements under CECL require organizations to present the currently required credit quality disclosures disaggregated by the year of origination or vintage. The FASB expects that the evaluation of underwriting standards and credit quality trends by financial statement users will be enhanced with the additional vintage disclosures. The Company is required to adopt ASU 2016-13 on January 1, 2023. (Continued) 14. COMMUNITIES FIRST FINANCIAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2019 and 2018 NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) The Company has formed an internal task force that is responsible for oversight of the Company’s implementation strategy for compliance with provisions of the new standard. The Company has also established a project management governance process to manage the implementation across affected disciplines. An external provider specializing in community bank loss driver and CECL reserving model design as well as other related consulting services has been retained, and we have begun to evaluate potential CECL modeling alternatives. As part of this process, the Company has determined potential loan pool segmentation and sub-segmentation under CECL, as well as begun to evaluate the key economic loss drivers for each segment. While the Company is currently unable to reasonably estimate the impact of adopting this new guidance, management expects the impact of adoption will be significantly influenced by the composition and quality of the Company’s loans and investment securities as well as the economic conditions as of the date of adoption. The Company also anticipates significant changes to the processes and procedures for calculating the reserve for credit losses and continues to evaluate the potential impact on our consolidated financial statements. NOTE 2 – INVESTMENT SECURITIES The amortized cost and estimated fair values of securities are as follows: Available for sale: U.S. government and agency ‐ ‐ securities Mortgage State and municipal agencies backed securities ‐ Held-to-Maturity: U.S. government and agency securities Mortgage backed securities Gross Gross Estimated Amortized Unrealized Unrealized Cost Gains Losses Fair Value 2019 $ 44,033,294 $ 39,752,715 13,583,980 252,622 $ 266,010 81,032 (154,393) $ (113,979) (72,012) 44,131,523 39,904,746 13,593,000 $ 97,369,989 $ 599,664 $ (340,384) $ 97,629,269 Amortized Cost Gross Unrecognized Gains Gross Unrecognized Losses Estimated Fair Value 2019 $ 3,786,236 $ 7,742,667 79,673 $ 244,703 - $ - 3,865,909 7,987,370 ‐ $ 11,528,903 $ 324,376 $ - $ 11,853,279 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 2018 $ 50,145,139 $ 26,776,144 7,569,683 184,843 $ 54,964 47,598 (490,536) $ (327,426) (103,425) 49,839,446 26,503,682 7,513,856 $ 84,490,966 $ 287,405 $ (921,387) $ 83,856,984 (Continued) 15. COMMUNITIES FIRST FINANCIAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2019 and 2018 NOTE 2 – INVESTMENT SECURITIES (Continued) Amortized Cost Gross Unrecognized Gains Gross Unrecognized Losses Estimated Fair Value 2018 Held-to-Maturity: U.S. government and agency securities Mortgage backed securities $ 922,437 $ 11,169,438 5,203 $ 113,333 - $ (6,870) 927,640 11,275,901 ‐ $ 12,091,875 $ 118,536 $ (6,870) $ 12,203,541 The amortized cost and estimated fair value of all investment securities as of December 31, 2019 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. Available-for-sale Within One Year One to Five Years Five to Ten Years Beyond Ten Years U.S. government and agency securities Mortgage-backed securities Held-to-maturity U.S. government and agency securities Mortgage-backed securities Amortized Estimated Fair Value $ 507,490 $ 1,197,634 2,555,630 9,323,226 44,033,294 39,752,715 510,480 1,191,407 2,601,565 9,289,548 44,131,523 39,904,746 $ 97,369,989 $ 97,629,269 Amortized Estimated Fair Value $ 3,786,236 $ 7,742,667 3,865,909 7,987,370 $ 11,528,903 $ 11,853,279 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: 2019 Available-for-sale U.S. government and agency securities Mortgage backed securities State and municipal agencies 12 months or more less than 12 Months Total Fair Value Unrealized Loss Fair Value Unrealized Loss Fair Value Unrealized Loss $ 9,814,084 $ 1,053,107 (117,915) $ 11,118,888 $ (3,380) 17,285,138 (36,478) $ 20,932,972 $ (110,599) 18,338,245 (154,393) (113,979) 1,503,595 (24,829) 7,464,103 (47,183) 8,967,698 (72,012) $ 12,370,786 $ (146,124) $ 35,868,129 $ (194,260) $ 48,238,915 $ (340,384) As of December 31, 2019 no held-to-maturity securities were in a loss position. (Continued) 16. COMMUNITIES FIRST FINANCIAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2019 and 2018 NOTE 2 – INVESTMENT SECURITIES (Continued) 2018 Available-for-sale U.S. government and agency securities Mortgage backed securities State and municipal agencies 2018 Held-to-maturity U.S. government and agency securities Mortgage backed securities 12 months or more less than 12 Months Total Fair Value Unrealized Loss Fair Value Unrealized Loss Fair Value Unrealized Loss $ 17,437,705 $ 10,901,696 (373,987) $ 16,036,259 $ (247,441) 8,357,598 (116,549) $ 33,473,964 $ (79,985) 19,259,294 (490,536) (327,426) 2,946,329 (92,884) 1,589,515 (10,541) 4,535,844 (103,425) $ 31,285,730 $ (714,312) $ 25,983,372 $ (207,075) $ 57,269,102 $ (921,387) 12 months or more less than 12 Months Total Fair Value Unrealized Loss Fair Value Unrealized Loss Fair Value Unrealized Loss $ $ - $ - - $ - $ - - $ - $ - $ - 3,554,902 (6,870) 3,554,902 (6,870) - $ 3,554,902 $ (6,870) $ 3,554,902 $ (6,870) Certain investment securities shown in the previous table currently have fair values less than amortized cost and therefore contain unrealized losses. The Company 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 Company 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, 2019 and 2018 and has determined that no securities are other than temporarily impaired. The Company does not have the intent to sell the investments that are impaired, and it is more likely than not that the Company will not be required to sell those investments before recovery of the amortized cost basis. The Company 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, 2019, there were 36 investment securities with a value of $12,370,786 that were in a loss position for more than 12 months. The Company 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 proceeds from sales and calls of investment securities and the associated gains and losses are listed below: 2019 2018 2017 Proceeds Gross gains Gross losses $ $ 974,011 11,050 5,188 $ 755,000 - 14,137 7,720,311 137,849 18,437 (Continued) 17. COMMUNITIES FIRST FINANCIAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2019 and 2018 NOTE 2 – INVESTMENT SECURITIES (Continued) Investment securities carried at approximately $15,265,000 and $8,708,000 at December 31, 2019 and 2018, respectively, were pledged to secure public deposits or other purposes as permitted or required by law. At year-end 2019 and 2018, there were no holdings of securities of any one issuer, other than the U.S. Government and its agencies, in an amount greater than 10% of shareholders’ equity. 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 2019 2018 $ 155,922,834 $ 145,503,208 101,666,857 17,794,333 10,349,961 28,080,467 15,273 145,233,717 17,649,016 10,289,733 34,130,787 8,981 363,235,068 303,410,099 (4,541,693) (1,255) (4,048,891) 141,353 Loans, net of allowance $ 358,692,120 $ 299,502,561 The Company’s loan portfolio consists primarily of loans to borrowers within Fresno County, California. All of the Company’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 Company’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) 18. COMMUNITIES FIRST FINANCIAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2019 and 2018 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 Company’s commercial real estate portfolio are diverse in terms of type and industries operating within the properties. This diversity helps reduce the Company’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. Information related to impaired loans as of the year ended consisted of the following: December 31, 2019 Commercial and Industrial Commercial Land and Real Estate Construction Real Estate Agriculture Residential Consumer Total Recorded investment in impaired loans: With no specific allowance recorded With specific allowance recorded $ 118,412 $ - Total recorded investment In impaired loans $ 118,412 $ Unpaid principal balance of impaired loans: With no specific allowance recorded With specific allowance recorded $ 118,412 $ - 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 $ $ $ $ 118,412 $ - $ - $ - - $ - $ - - $ - $ - $ - - $ - $ - - $ - $ - $ 500,784 $ - $ 619,196 - - - - - $ 500,784 $ - $ 619,196 - $ 500,784 $ - $ 619,196 - - - - - $ 500,784 $ - $ 619,196 - $ - $ - $ - 248,516 $ - $ 105,690 $ - $ 1,003,348 $ - $ 1,357,554 11,607 $ - $ - $ - $ - $ - $ 11,607 (Continued) 19. COMMUNITIES FIRST FINANCIAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2019 and 2018 NOTE 3 – LOANS (Continued) December 31, 2018 Commercial and Industrial Commercial Land and Real Estate Construction Real Estate Agriculture Residential Consumer Total Recorded investment in impaired loans: With no specific allowance recorded With specific allowance recorded $ 129,471 $ - $ 423,621 $ - $ 2,505,465 $ - $ 3,058,557 - - - - - - - Total recorded investment In impaired loans $ 129,471 $ - $ 423,621 $ - $ 2,505,465 $ - $ 3,058,557 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 $ 129,471 $ - $ 423,621 $ - $ 2,505,465 $ - $ 3,058,557 - - - - - - - $ $ $ $ 129,471 $ - $ 423,621 $ - $ 2,505,465 $ - $ 3,058,557 - $ - $ - $ - $ - $ - $ - 48,507 $ - $ 423,621 $ - $ 2,505,465 $ - $ 2,977,593 50,051 $ - $ - $ - $ 822 $ - $ 50,873 The Company 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: 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 Company’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. 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 Company’s credit position at some future date. Special Mention assets are not adversely classified and do not expose the Company 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. (Continued) 20. COMMUNITIES FIRST FINANCIAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2019 and 2018 NOTE 3 – LOANS (Continued) 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 Company 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 analysis is to be charged off. The following tables summarizes the loan portfolio by credit quality and product and/or collateral type as of December 31, 2019 and 2018: December 31, 2019 Grade: Commercial & industrial Commercial real estate Land & construction Residential real estate Agriculture Consumer Pass Special Mention Substandard Doubtful Total $ 153,865,835 $ 143,895,973 17,649,016 10,289,733 32,638,190 8,981 311,687 $ 1,745,312 $ 1,337,744 - - 991,813 - - - - 500,784 - - $ 155,922,834 - 145,233,717 17,649,016 - 10,289,733 - 34,130,787 - 8,981 - Total $ 358,347,728 $ 2,641,244 $ 2,246,096 $ - $ 363,235,068 December 31, 2018 Grade: Commercial & industrial Commercial real estate Land & construction Residential real estate Agriculture Consumer Pass Special Mention Substandard Doubtful Total $ 144,403,368 $ 101,666,857 17,371,575 10,349,961 23,823,514 15,273 321,020 $ 778,820 $ - - - 1,752,311 - - 422,758 - 2,504,642 - - $ 145,503,208 - 101,666,857 17,794,333 - 10,349,961 - 28,080,467 - 15,273 - Total $ 297,630,548 $ 2,073,331 $ 3,706,220 $ - $ 303,410,099 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 2019 2018 $ 118,412 $ - - - 500,784 - 292,670 - 422,758 - 2,504,642 - $ 619,196 $ 3,220,070 (Continued) 21. COMMUNITIES FIRST FINANCIAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2019 and 2018 NOTE 3 – LOANS (Continued) The following table is an aging analysis of loans, segregated by class of loans, as of December 31, 2019: 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 Commercial & Industrial Commercial Real Estate Land & Construction Residential Real Estate Agriculture Consumer $ 6,168 $ 314,224 $ 118,412 $ 114,293 - - - - - - - - - - - - 500,784 - 438,804 $ 155,484,030 $ 155,922,834 $ 114,293 145,119,424 145,233,717 17,649,016 10,289,733 34,130,787 8,981 17,649,016 10,289,733 33,630,003 8,981 - - 500,784 - Total $ 120,461 $ 314,224 $ 619,196 $ 1,053,881 $ 362,181,187 $ 363,235,068 $ The following table is an aging analysis of loans, segregated by class of loans, as of December 31, 2018: - - - - - - - 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 Commercial & Industrial Commercial Real Estate Land & Construction Residential Real Estate Agriculture Consumer $ 278,636 $ 118,082 - - - - 129,472 $ 163,198 $ - - - - - - 422,758 - 2,504,642 - 571,306 $ 144,931,902 $ 145,503,208 $ 118,082 101,548,775 101,666,857 17,794,333 422,758 10,349,961 - 28,080,467 2,504,642 15,273 - 17,371,575 10,349,961 25,575,825 15,273 Total $ 396,718 $ 129,472 $ 3,090,598 $ 3,616,788 $ 299,793,311 $ 303,410,099 $ - - - - - - - As of December 31, 2019, the Company has a recorded investment in troubled debt restructurings of $500,784. There was one modification made during the period ended December 31, 2019 that was considered a troubled debt restructuring. There were no troubled debt restructurings as of December 31, 2018 or 2017. The Company has evaluated the outstanding debt and has not allocated any specific allowance for this loan at December 31, 2019 and has not committed to lend additional amounts to the borrower. The modification of the terms of the agriculture loan performed during the year ended December 31, 2019, included a change in the payment amount, interest rate and an extension of the maturity date. The extension was for one year. The loan had a pre-modification and post-modification outstanding recorded investment of $500,874. There were no payment defaults on troubled debt restructurings within 12 months following the modification during the year ended December 31, 2019. A loan is considered to be in payment default once it is 90 days contractually past due under the modified terms. In order to determine whether a borrower is experiencing financial difficulty, an evaluation is performed of the probability that the borrower will be in payment default on any of its debt in the foreseeable future without the modification. This evaluation is performed under the Company’s internal underwriting policy. (Continued) 22. COMMUNITIES FIRST FINANCIAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2019 and 2018 NOTE 3 – LOANS (Continued) The following table summarizes the Company’s allowance for loan losses for the year ended December 31, 2019 by loan product and collateral type: Commercial and Industrial Commercial Real Estate Land and Construction Residential Real Estate Agriculture Consumer Unallocated Total Allowance for loan losses: Beginning balance Charge-offs Recoveries Provision $ $ 2,684,885 (163,198) - (306,575) 862,017 - - 707,684 $ 129,062 - - 93,918 $ 38,304 - - 4,270 $ 88,524 $ - - (77,599) $ 70 - 11,000 (11,042) 246,029 - - 234,344 $ 4,048,891 (163,198) 11,000 645,000 Ending balance $ 2,215,112 $ 1,569,701 $ 222,980 $ 42,574 $ 10,925 $ 28 $ 480,373 $ 4,541,693 Period-end amount allocated to: Loans individually evaluated for impairment Loans collectively evaluated for impairment $ - $ - $ - $ - $ - $ - $ - $ - 2,215,112 1,569,701 222,980 42,574 10,925 28 480,373 4,541,693 Ending Balance $ 2,215,112 $ 1,569,701 $ 222,980 $ 42,574 $ 10,925 $ 28 $ 480,373 $ 4,541,693 Loans: Individually evaluated for impairment Collectively evaluated for impairment $ 118,412 $ - $ - $ - $ 500,784 $ - $ 155,804,422 145,233,717 17,649,016 10,289,733 33,630,003 8,981 Ending balance $155,922,834 $145,233,717 $ 17,649,016 $ 10,289,733 $ 34,130,787 $ 8,981 $ - - - $ 619,196 362,615,872 $363,235,068 (Continued) 23. COMMUNITIES FIRST FINANCIAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2019 and 2018 NOTE 3 – LOANS (Continued) The following table summarizes the Company’s allowance for loan losses for the year ended December 31, 2018 by loan product and collateral type: Commercial and Industrial Commercial Real Estate Land and Construction Residential Real Estate Agriculture Consumer Unallocated Total Allowance for loan losses: Beginning balance Charge-offs Recoveries Provision $ $ 1,825,936 (271,561) - 1,130,510 450,949 - - 411,068 $ $ 187,656 - - (58,594) 92,828 - - (54,524) $ 31,122 $ - - 57,402 54 - 7,000 (6,984) $ 774,907 - - (528,878) $ 3,363,452 (271,561) 7,000 950,000 Ending balance $ 2,684,885 $ 862,017 $ 129,062 $ 38,304 $ 88,524 $ 70 $ 246,029 $ 4,048,891 Period-end amount allocated to: Loans individually evaluated for impairment Loans collectively evaluated for impairment $ - $ - $ - $ - $ - $ - $ - $ - 2,684,885 862,017 129,062 38,304 88,524 70 246,029 4,048,891 Ending Balance $ 2,684,885 $ 862,017 $ 129,062 $ 38,304 $ 88,524 $ 70 $ 246,029 $ 4,048,891 Loans: Individually evaluated for impairment Collectively evaluated for impairment $ 129,471 $ - $ 423,621 $ - $ 2,505,465 $ - $ 145,373,737 101,666,857 17,370,712 10,349,961 25,575,002 15,273 Ending balance $145,503,208 $101,666,857 $ 17,794,333 $ 10,349,961 $ 28,080,467 $ 15,273 $ - - - $ 3,058,557 300,351,542 $303,410,099 (Continued) 24. COMMUNITIES FIRST FINANCIAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2019 and 2018 NOTE 3 – LOANS (Continued) The following table summarizes the Company’s allowance for loan losses for the year ended December 31, 2017 by loan product and collateral type: Commercial and Industrial Commercial Real Estate Land and Construction Residential Real Estate Agriculture Consumer Unallocated Total Allowance for loan losses: Beginning balance Charge-offs Recoveries Provision $ $ 1,881,520 (368,038) 26,267 286,187 457,384 - - (6,435) $ $ 229,849 - - (42,193) 70,510 - - 22,318 $ 116,855 $ - - (85,733) $ 70 - - (16) 124,035 - - 650,872 $ 2,880,223 (368,038) 26,267 825,000 Ending balance $ 1,825,936 $ 450,949 $ 187,656 $ 92,828 $ 31,122 $ 54 $ 774,907 $ 3,363,452 Period-end amount allocated to: Loans individually evaluated for impairment Loans collectively evaluated for impairment $ - $ - $ - $ - $ - $ - $ - $ - 1,825,936 450,949 187,656 92,828 31,122 54 774,907 3,363,452 Ending Balance $ 1,825,936 $ 450,949 $ 187,656 $ 92,828 $ 31,122 $ 54 $ 774,907 $ 3,363,452 Loans: Individually evaluated for impairment Collectively evaluated for impairment $ - $ - $ 422,758 $ - $ 2,506,941 $ - $ 133,928,596 76,306,248 17,692,413 14,224,548 18,778,189 9,904 Ending balance $133,928,596 $ 76,306,248 $ 18,115,171 $ 14,224,548 $ 21,285,130 $ 9,904 $ - - - $ 2,929,699 260,939,898 $263,869,597 (Continued) 25. COMMUNITIES FIRST FINANCIAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2019 and 2018 NOTE 4 – PREMISES AND EQUIPMENT A summary of premises and equipment is as follows: Leasehold improvements Furniture, fixtures, and equipment Computer equipment 2019 2018 $ 953,603 $ 771,826 693,984 949,481 748,424 602,590 2,419,413 2,300,495 Less accumulated depreciation (2,190,859) (2,014,549) $ 228,554 $ 285,946 Depreciation expense amounted to $176,310, $158,140, and $113,773 for the years ending December 31, 2019, 2018, and 2017, respectively. NOTE 5 – LEASES The Company leases its offices under noncancelable operating leases with terms extending through 2022. Leases with an initial term of twelve months or less are not recorded on the balance sheet. Operating lease cost is comprised of lease expense recognized on a straight-line basis, the amortization of the right-of-use asset and the implicit interest accreted on the operating lease liability. Operating lease cost is included in occupancy and equipment expense on our consolidated statements of income. We evaluate the lease term by assuming the exercise of options to the extent that they are reasonably assured and those option periods covered by an option to terminate the lease, if deemed not reasonably certain to be exercised. The lease term is used to determine the straight-line expense and limits the depreciable life of any related leasehold improvements. Certain leases require us to pay real estate taxes, insurance, maintenance and other operating expenses associated with the leased premises. These expenses are classified in occupancy and equipment expense on our consolidated statements of income, but are not included in operating lease cost below. We calculate the lease liability using a discount rate that represents our incremental borrowing rate at the lease commencement date. At December 31, 2019, the future undiscounted lease payments under non-cancellable operating lease commitments for the Company’s offices were as follows: 2020 2021 2022 2023 2024 Thereafter Total undiscounted lease payment Less: imputed interest $ 514,679 116,881 23,152 - - - 654,712 21,477 Net lease liabilities $ 633,265 (Continued) 26. COMMUNITIES FIRST FINANCIAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2019 and 2018 NOTE 5 – LEASES (Continued) The table below summarizes the total lease cost for the twelve months ended December 31, 2019: Operating lease cost Variable lease cost $ 476,652 24,774 $ 501,426 The table below summarizes other information related to the Company’s operating leases for the twelve months ending December 31, 2019: Weighted average remaining lease term, in years Weighted average discount rate 1.41 4.50% The table below shows operating lease right-of-use assets and operating lease liabilities, and the associated balance sheet classifications, as of December 31, 2019: Operating lease right-of-use assets Operating lease liabilities Balance Sheet Classification Interest receivable and other assets Interest payable and other liabilities $ 2019 615,585 633,265 Total lease cost included in occupancy and equipment was $501,426, $506,030, and $427,293 for the years ended December 31, 2019, 2018, and 2017, respectively. NOTE 6 – DEPOSITS Customer deposits were as follows: interest bearing demand Non Savings, NOW, and money market accounts Time deposits under $250,000 Time deposits $250,000 and over ‐ ‐ 2019 2018 $ 307,530,614 $ 263,817,752 124,434,441 22,269,747 13,823,584 136,356,551 21,767,182 17,219,110 $ 482,873,457 $ 424,345,524 (Continued) 27. COMMUNITIES FIRST FINANCIAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2019 and 2018 NOTE 6 – DEPOSITS (Continued) At December 31, 2019, the scheduled maturities of time deposits are as follows: 2020 2021 2022 2023 2024 Thereafter $ 32,366,512 5,406,105 367,787 428,442 417,446 - $ 38,986,292 NOTE 7 – BORROWING ARRANGEMENTS The Company may borrow up to an aggregate of $29,500,000 overnight on an unsecured basis from three correspondent banks. The Company may also borrow up to approximately $135,000,000 from the Federal Home Loan Bank of San Francisco, subject to providing collateral and fulfilling other conditions of the credit facility. The Company has pledged investment securities of approximately $15,635,000 for the credit facility at Federal Home Loan Bank of San Francisco. The Company 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 2019, and 2018, no 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, 2019, there was no amount outstanding under this arrangement. NOTE 8 – 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, 2019, 2018, and 2017 contributions to the ESOP were $420,000, $310,000, and $343,014, respectively. The ESOP held 164,789 and 136,176 shares of common stock as of December 31, 2019 and 2018, respectively, and there were no unearned shares of common stock held by the ESOP at December 31, 2019 and 2018. 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, 2019, 2018, and 2017. (Continued) 28. COMMUNITIES FIRST FINANCIAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2019 and 2018 NOTE 8 – EMPLOYEE BENEFITS (Continued) 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 was $306,706, $284,120, and $89,911 for the years ended December 31, 2019, 2018 and 2017, respectively. Accrued compensation payable under the salary continuations plan totaled $680,737, $374,031 and $89,911 at December 31, 2019, 2018 and 2017 and is included in interest payable and other liabilities on the Company’s balance sheet. NOTE 9 – INCOME TAXES The provision for income taxes for the years ended December 31 consists of the following: 2019 2018 2017 Current Federal State Deferred Federal State Remeasurement of deferred tax assets and deferred tax liabilities at reduced federal corporate tax rate $ 2,391,112 $ 1,659,081 $ 1,862,165 730,961 1,416,438 914,424 3,807,550 2,573,505 2,593,126 (270,779) (103,482) (258,603) (134,892) 65,373 (32,603) - - 330,712 (374,261) (393,495) 363,482 Provision $ 3,433,289 $ 2,180,010 $ 2,956,608 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 $330,712 for the year ended December 31, 2017. Deferred taxes are a result of differences between income tax accounting and generally accepted accounting principles with respect to income and expense recognition. (Continued) 29. COMMUNITIES FIRST FINANCIAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2019 and 2018 NOTE 9 – INCOME TAXES (Continued) 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: Deferred tax assets: operating expenses based compensation Pre Depreciation ‐ Allowance for loan losses Stock Deferred compensation State tax deferral Unrealized losses on available Non-accrual loan interest Lease Liability ‐ for sale securities ‐ ‐ Other Deferred tax liabilities: Unrealized gains on available Lease financing receivable Right-of-use asset ‐ Other for sale securities ‐ 2019 2018 $ 12,293 $ 133,442 972,595 71,352 201,250 296,955 - 255 187,216 233,884 24,587 121,635 819,645 95,128 110,577 195,717 187,428 - - 128,287 2,109,241 1,683,004 (76,653) (154,591) (181,989) (146,708) - (151,159) - (92,724) (559,940) (243,883) Net deferred income tax asset $ 1,549,301 $ 1,439,121 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, 2018, 2017, and 2016 are open to audit by the federal authorities and income tax returns for the years ended December 31, 2018, 2017, 2016, and 2015, are open to audit by state authorities. As of December 31, 2019, 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. NOTE 10 – RELATED PARTY TRANSACTIONS The Company has granted loans to certain directors and their related interests with which they are associated. The balance of these loans outstanding was approximately $730,000 and $836,000 at December 31, 2019 and 2018, respectively. Deposits from certain directors, officers, and their related interests with which they are associated, held by the Company at December 31, 2019 and 2018, amounted to approximately $4,791,000 and $5,597,000, respectively. (Continued) 30. COMMUNITIES FIRST FINANCIAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2019 and 2018 NOTE 11 – EARNINGS PER SHARE (EPS) Earnings per share for the years ended December 31 were computed as follows: 2019 2018 2017 Basic earnings per share: Net income available to common shareholders Weighted average common shares outstanding $ 9,201,358 $ 6,249,545 $ 3,683,698 2,927,317 2,855,761 2,816,454 Basic earnings per share $ 3.14 $ 2,19 $ 1.31 Diluted earnings per share: Net income available to common shareholders, diluted $ 9,201,358 $ 6,249,545 $ 3,683,698 Weighted average common shares outstanding Effect of dilutive stock options 2,927,317 54,999 2,855,761 64,975 2,816,454 55,079 Adjusted weighted average common shares outstanding, diluted 2,982,316 2,920,736 2,871,533 Diluted earnings per share $ 3.09 $ 2.14 $ 1.28 At December 31, 2019, 2018 and 2017, there were 20,841, 42,561, and 52,957 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 12– COMMITMENTS In the ordinary course of business, the Company 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 Company’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 Company uses the same credit policies in making commitments as it does for loans reflected in the consolidated financial statements. (Continued) 31. COMMUNITIES FIRST FINANCIAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2019 and 2018 NOTE 12 – COMMITMENTS (Continued) As of December 31, 2019, and 2018, the Company had the following outstanding financial commitments whose contractual amount represents credit risk: Commitments to extend credit Letters of credit 2019 2018 $ 94,703,950 $ 999,771 77,433,577 1,005,658 $ 95,703,721 $ 78,439,235 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 Company evaluates each client’s credit worthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Company, is based on management’s credit evaluation of the customer. The majority of the Company’s commitments to extend credit and standby letters of credit are secured by real estate. NOTE 13 – STOCK-BASED COMPENSATION The Company’s 2005 Equity Based Compensation Plan (the 2005 Plan) was approved by its shareholders in February 2006. Under the terms of the 2005 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 2005 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 (the 2015 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. . In May 2019, the shareholders approved the Directors Equity Compensation Plan, which added an additional 75,000 shares available to be granted beyond those already approved under the 2005 and 2015 plans. There are 849,782 shares authorized under the plans. 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 2015 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 $536,695, $418,026, and $383,920 in 2019, 2018, and 2017, 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 term of the options. (Continued) 32. COMMUNITIES FIRST FINANCIAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2019 and 2018 NOTE 13 – STOCK-BASED COMPENSATION (Continued) A summary of the status of stock options that have been granted by the Company as of December 31, 2019, 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 107,536 Granted Exercised Forfeited, expired, or returned to Plan through cashless exercise Outstanding at end of year Options exercisable $ $ 8.95 3.1 years $ 1,166,281 - - (23,126) $ 10.94 (8,570) $ 75,840 75,840 $ $ 9.48 8.84 8.84 2.2 years $ 1,509,834 2.2 years $ 1,509,834 As of December 31, 2019, there was no unrecognized compensation cost related to the outstanding stock options. 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, 2019 Granted Vested Forfeited Non-vested at December 31, 2019 47,161 $ 25,798 (29,584) (200) 43,175 $ 16.22 23.20 16.40 19.95 20.25 As of December 31, 2019, there was approximately $533,118 of total unrecognized compensation cost related to the outstanding restricted stock grants that will be recognized over a weighted average period of 1.3 years. (Continued) 33. COMMUNITIES FIRST FINANCIAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2019 and 2018 NOTE 14 – SHAREHOLDERS’ EQUITY 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 net unrealized gain or loss on available for sale securities is not included in computing regulatory capital. Management believes as of December 31, 2019, the Company and Bank meet 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 2019 and 2018, 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 institution’s category. Actual and required capital amounts and ratios, excluding the capital conservation buffer, are presented below (dollar amounts in thousands): December 31, 2019: 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) December 31, 2018: 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) Actual Amount Ratio For Capital Adequacy Purposes Ratio Amount To be Well-Capitalized Under Prompt Corrective Action Provisions Amount Ratio 50,691 14.9% $ 15,309 >4.5% $ 22,114 >6.5% 54,961 16.1% $ 27,310 >8.0% $ 34,137 >10.0% 50,691 14.9% $ 20,412 >6.0% $ 27,217 >8.0% 50,691 9.4% $ 21,571 >4.0% $ 26,963 >5.0% 40,918 15.3% $ 12,000 >4.5% $ 17,333 >6.5% 44,260 16.6% $ 21,333 >8.0% $ 26,667 >10.0% 40,918 15.3% $ 16,000 >6.0% $ 21,333 >8.0% 40,918 8.7% $ 18,732 >4.0% $ 23,415 >5.0% $ $ $ $ $ $ $ $ (Continued) 34. COMMUNITIES FIRST FINANCIAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2019 and 2018 NOTE 14 – 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 12, 2019, the Company issued 34,100 shares of its common stock totaling $731,104 as the Company’s ESOP contribution for 2019. NOTE 15 – 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 Company 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 Company 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, 2019 and 2018. (Continued) 35. COMMUNITIES FIRST FINANCIAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2019 and 2018 NOTE 15 – FAIR VALUE (Continued) The following table summarizes the Company’s assets that were measured at fair value on a recurring basis at December 31, 2019: Description of Assets Securities available for sale U.S. government and agency ‐ securities Mortgage State and municipal agencies ‐ backed securities ‐ Total Quoted Prices in Active Markets For Identical Assets (Level 1) December 31, 2019 Significant Significant Other Observable Unobservable Inputs (Level 2) Inputs (Level 3) $ 44,131,523 39,904,746 13,593,000 $ $ 97,629,269 $ - - - - $ 44,131,523 39,904,746 13,593,000 $ $ 97,629,269 $ - - - - The following table summarizes the Company’s assets that were measured at fair value on a recurring basis at December 31, 2018: Description of Assets Securities available for sale U.S. government and agency ‐ securities Mortgage State and municipal agencies ‐ backed securities ‐ Total Quoted Prices in Active Markets For Identical Assets (Level 1) December 31, 2018 Significant Other Significant Observable Unobservable Inputs (Level 2) Inputs (Level 3) $ 49,839,446 26,503,682 7,513,856 $ $ 83,856,984 $ - - - - $ 49,839,446 26,503,682 7,513,856 $ $ 83,856,984 $ - - - - 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. 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. (Continued) 36. COMMUNITIES FIRST FINANCIAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2019 and 2018 NOTE 15 – 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 and SBIC investments approximates carrying value. The estimated fair values of financial instruments disclosed below follow the guidance in ASU 2016-01 which prescribes an “exit price” approach in estimating and disclosing fair value of financial instruments incorporating discounts for credit, liquidity, and marketability factors. 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): 2019 2018 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 held-to-maturity Loans held for sale Loans, net SBIC investments Interest receivable Financial liabilities: Deposits Interest payable 31,638 $ 9,914 11,529 13,201 358,692 473 2,457 31,638 9,914 11,853 13,201 352,877 473 2,457 Level 1 $ Level 2 Level 2 Level 3 Level 3 Level 2 Level 2 42,381 $ 10,906 12,092 4,081 299,503 374 1,939 42,381 10,906 12,204 4,081 295,939 374 1,939 482,873 40 450,902 40 Level 2 Level 2 424,346 25 387,220 25 Level 1 Level 2 Level 2 Level 3 Level 3 Level 2 Level 2 Level 2 Level 2 37. 

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