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.