Communities First Financial Corporation
Annual Report 2021

Plain-text annual report

2021 ANNUAL REPORT COMMUNITIES FIRST FINANCIAL CORPORATION CONSOLIDATED FINANCIAL STATEMENTS December 31, 2021, and 2020 COMMUNITIES FIRST FINANCIAL CORPORATION CONSOLIDATED FINANCIAL STATEMENTS December 31, 2021, and 2020 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 ........................................................... 3 4 5 6 7 9 Crowe LLP Independent Member Crowe Global INDEPENDENT AUDITOR'S REPORT To the Shareholders and Board of Directors Communities First Financial Corporation Fresno, California Opinion We have audited the consolidated financial statements of Communities First Financial Corporation, which comprise the consolidated balance sheets as of December 31, 2021 and 2020, and the related consolidated statements of income, comprehensive income, changes in shareholders’ equity, and cash flows for each of the three years in the period ended December 31, 2021, and the related notes to the financial statements. In our opinion, the accompanying consolidated financial statements present fairly, in all material respects, the financial position of Communities First Financial Corporation as of December 31, 2021 and 2020, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2021 in accordance with accounting principles generally accepted in the United States of America. Basis for Opinion We conducted our audits in accordance with auditing standards generally accepted in the United States of America (GAAS). Our responsibilities under those standards are further described in the Auditor’s Responsibilities for the Audit of the Financial Statements section of our report. We are required to be independent of Communities First Financial Corporation and to meet our other ethical responsibilities, in accordance with the relevant ethical requirements relating to our audits. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. Responsibilities of Management for the Financial Statements Management is responsible for the preparation and fair presentation of the consolidated financial statements in accordance with accounting principles generally accepted in the United States of America, and for 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. In preparing the consolidated financial statements, management is required to evaluate whether there are conditions or events, considered in the aggregate, that raise substantial doubt about Communities First Financial Corporation’s ability to continue as a going concern for one year from the date the consolidated financial statements are available to be issued. (Continued) 1. Auditor’s Responsibilities for the Audit of the Financial Statements Our objectives are to obtain reasonable assurance about whether the consolidated financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance is a high level of assurance but is not absolute assurance and therefore is not a guarantee that an audit conducted in accordance with GAAS will always detect a material misstatement when it exists. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control. Misstatements are considered material if there is a substantial likelihood that, individually or in the aggregate, they would influence the judgment made by a reasonable user based on the consolidated financial statements. In performing an audit in accordance with GAAS, we:  Exercise professional judgment and maintain professional skepticism throughout the audit.  Identify and assess the risks of material misstatement of the consolidated financial statements, whether due to fraud or error, and design and perform audit procedures responsive to those risks. Such procedures include examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements.  Obtain an understanding of internal control relevant to the audit 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 Communities First Financial Corporation’s internal control. Accordingly, no such opinion is expressed.  Evaluate the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluate the overall presentation of the consolidated financial statements.  Conclude whether, in our judgment, there are conditions or events, considered in the aggregate, that raise substantial doubt about Communities First Financial Corporation’s ability to continue as a going concern for a reasonable period of time. We are required to communicate with those charged with governance regarding, among other matters, the planned scope and timing of the audit, significant audit findings, and certain internal control–related matters that we identified during the audit. Sacramento, California March 25, 2022 Crowe LLP 2. COMMUNITIES FIRST FINANCIAL CORPORATION CONSOLIDATED BALANCE SHEETS For the Years Ended December 31, 2021 and 2020 ASSETS Cash and due from banks Interest-bearing deposits in banks 2021 2020 $ 14,764,323 $ 22,015,778 9,904,111 501,695 Total cash and cash equivalents 36,780,101 10,405,806 Certificates of deposit Debt Securities available-for-sale Debt Securities held-to-maturity (fair value $4,253,761 and $6,562,340 1,490,000 287,945,740 9,175,000 216,715,135 as of December 31, 2021 and 2020, respectively) 4,022,856 Loans held for sale 3,811,052 Loans, net of allowance (allowance of $9,784,751 and $7,848,312 6,092,426 - as of December 31, 2021 and 2020, respectively) SBIC investments and correspondent bank stock, at cost Cash surrender value of life insurance Premises and equipment, net Interest receivable and other assets 713,486,952 4,132,120 8,397,003 293,918 19,742,924 609,189,239 3,058,870 8,198,432 175,151 8,885,173 Total assets $ 1,080,102,666 $ 871,895,232 LIABILITIES AND SHAREHOLDERS' EQUITY Deposits Other borrowed funds Long term debt (net of issuance cost $716,622 and $874,409 as of December 31, 2021 and 2020, respectively) Interest payable and other liabilities Total liabilities Commitments and contingencies (Note 12) Shareholders’ equity: Common stock - 50,000,000 shares authorized, no par value: 3,070,307 and 3,004,331 shares issued and outstanding in 2021 and 2020, respectively Retained earnings Accumulated other comprehensive income $ 936,547,747 $ 726,254,437 31,000,000 - 39,283,378 14,979,468 39,125,591 6,967,963 990,810,593 803,347,991 32,486,001 53,948,186 2,857,886 30,997,325 33,421,467 4,128,449 Total shareholders' equity 89,292,073 68,547,241 Total liabilities and shareholders' equity $ 1,080,102,666 $ 871,895,232 See accompanying notes to the consolidated financial statements. 3. COMMUNITIES FIRST FINANCIAL CORPORATION CONSOLIDATED STATEMENTS OF INCOME For the Years Ended December 31, 2021, 2020 and 2019 Interest Income: Loans, including fees Taxable investment securities Tax-exempt investment securities Federal funds sold and other 2021 2020 2019 $ 34,527,201 5,066,562 1,621,460 342,168 $ 24,661,860 2,770,658 853,369 448,582 $ 19,505,534 2,555,163 63,339 1,031,683 Total interest income 41,557,391 28,734,469 23,155,719 Interest Expense Savings deposits, NOW, and money market accounts Time deposits Other borrowings Long term debt 599,946 257,733 3,569 1,857,786 585,211 377,901 33,087 295,464 617,172 421,852 3,350 - Total interest expense 2,719,034 1,291,663 1,042,374 Net interest income 38,838,357 27,442,806 22,113,345 Provision for loan losses 2,000,000 3,300,000 645,000 Net interest income after provision for loan losses Non-interest income: Service charges on deposits Merchant services Gain on sale/call of debt securities and certificates of deposits Gain on sale of loans Income from life insurance Other 36,838,357 24,142,806 21,468,345 2,079,552 3,999,782 294,998 2,983,961 198,571 413,718 938,179 3,959,270 60,147 1,490,713 207,111 417,460 680,162 1,575,953 5,862 1,307,510 210,955 269,881 Total non-interest income 9,970,582 7,072,880 4,050,323 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 11,515,812 826,969 277,340 898,548 1,257,526 781,280 413,780 2,619,641 9,695,829 822,859 299,520 814,692 1,259,269 670,516 384,748 1,560,370 8,009,324 799,231 129,600 846,545 811,504 678,326 279,300 1,330,191 Total non-interest expenses 18,590,896 15,507,803 12,884,021 Income before income taxes 28,218,043 15,707,883 12,634,647 Provision for income taxes 7,691,324 4,195,633 3,433,289 Net income Net income per share - basic Net income per share - diluted $ $ $ 20,526,719 6.69 6.62 $ $ $ 11,512,250 $ 9,201,358 3.84 3.79 $ 3.14 3.09 See accompanying notes to the consolidated financial statements. 4. COMMUNITIES FIRST FINANCIAL CORPORATION CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME For the Years Ended December 31, 2021, 2020 and 2019 2021 2020 2019 Net income $ 20,526,719 $ 11,512,250 $ 9,201,358 Other comprehensive income (loss): Available-for-sale securities: Unrealized holding (losses) gains during the year (1,820,785) 5,661,809 899,124 Reclassification adjustment for losses (gains) realized in net income from debt securities 17,036 (60,147) (5,862) Net unrealized (losses) gains (1,803,749) 5,601,662 893,262 Income tax benefit (expense) Other comprehensive (loss) income 533,186 (1,270,563) (1,655,850) (264,048) 3,945,812 629,214 Total comprehensive income $ 19,256,156 $ 15,458,062 $ 9,830,572 See accompanying notes to the consolidated financial statements. 5. COMMUNITIES FIRST FINANCIAL CORPORATION CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY For the Years Ended December 31, 2021, 2020 and 2019 Common Stock Shares Amount Retained Earnings Accumulated Other Comprehensive Income (Loss) Total Shareholders’ Equity Balances, January 1, 2019 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 loss 34,100 - 23,126 25,598 - - 731,104 536,695 147,950 - - - - - - - 9,201,358 - - - - - - 731,104 536,695 147,950 - 9,201,358 629,214 629,214 Balances, December 31, 2019 2,940,996 $ 29,868,851 $21,909,217 $ 182,637 $ 51,960,705 Issuance of common stock Stock based compensation Exercise of stock options Net issuance of restricted stock awards Net income Other comprehensive income 14,900 - 18,202 30,233 - - 432,547 673,863 22,064 - - - - - - - 11,512,250 - - - - - - 3,945,812 432,547 673,863 22,064 - 11,512,250 3,945,812 Balances, December 31, 2020 3,004,331 $ 30,997,325 $33,421,467 $ 4,128,449 $ 68,547,241 Issuance of common stock Stock based compensation Exercise of stock options Net issuance of restricted stock awards Net income Other comprehensive income 14,027 - 7,504 456,439 1,032,237 - 44,445 - - - - - - - - - 20,526,719 - 456,439 1,032,237 - - 20,526,719 (1,270,563) (1,270,563) - - - - - Balances, December 31, 2021 3,070,307 $ 32,486,001 $53,948,186 $ 2,857,886 $ 89,292,073 See accompanying notes to the consolidated financial statements. 6. COMMUNITIES FIRST FINANCIAL CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued) For the Years Ended December 31, 2021, 2020 and 2019 Cash flows from operating activities Net income Adjustments to reconcile net income to net cash From operating activities: 2021 2020 2019 $ 20,526,719 $ 11,512,250 $ 9,201,358 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 Loss/(Gain) on sale of available-for-sale securities Gain on sale of certificates of deposit Gain on called held-to-maturity 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 in other assets 137,006 1,487,449 14,932 2,000,000 17,036 (312,034) - (2,983,961) 27,172,029 (27,999,120) 1,032,237 (198,571) (345,496) 8,011,505 (9,821,281) 159,300 809,102 176,310 601,546 44,273 3,300,000 117,130 645,000 - - (60,147) (1,490,713) 52,581,848 (37,890,154) 673,863 (207,111) (2,386,676) 3,409,782 (3,197,523) (5,862) - - (1,307,509) 51,863,353 (60,990,600) 536,695 (210,955) (517,466) 1,409,253 (814,431) Net cash provided by operating activities 18,738,450 27,258,094 703,822 Cash flow from investing activities (250,000) 997,000 6,938,000 (96,106,353) Purchase of certificates of deposit Proceeds from maturities of certificates of deposit Proceeds from sales of certificates of deposit Purchase of available-for-sale securities Proceeds from maturities of available-for-sale 19,254,547 securities 2,625,000 Proceeds from sale/call of available-for-sale securities Purchase of held-to-maturity securities (1,500,000) Proceeds from maturities of held-to-maturity securities 3,554,637 (106,297,713) Net increase in loans Purchase of SBIC investments and correspondent bank stock Purchases of premises and equipment (1,073,250) (255,772) - - 739,000 (139,666,836) 22,873,530 2,500,000 - 5,452,351 (253,797,119) (446,732) (105,897) (1,243,000) 1,242,000 993,000 (40,294,600) 25,845,881 974,011 (3,454,958) 3,900,800 (58,520,283) (177,897) (118,918) Net cash used in investing activities (172,113,904) (362,451,703) (70,853,964) Cash flows from financing activities Net increase in demand deposits and savings accounts Net (decrease) increase in time deposits (Repayments) proceeds from short term borrowings 214,750,372 (4,457,062) 211,428,816 31,952,164 55,634,971 2,892,962 with the FHLB (31,000,000) - - 456,439 Proceeds from long term debt, net of issuance cost Net proceeds from exercise of stock options Cash proceeds from issuance of common stock 31,000,000 39,125,591 22,064 432,547 - - 147,950 731,104 Net cash provided by financing activities 179,749,749 313,961,182 59,406,987 Net change in cash and cash equivalents 26,374,295 (21,232,427) (10,743,155) See accompanying notes to the consolidated financial statements. 7. COMMUNITIES FIRST FINANCIAL CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued) For the Years Ended December 31, 2021, 2020 and 2019 Cash and cash equivalents, beginning of year 10,405,806 31,638,233 42,381,388 Cash and cash equivalents, end of year 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 $ $ $ $ $ $ 36,780,101 $ 10,405,806 $ 31,638,233 2,785,198 6,740,000 508,539 - - $ $ $ $ 1,039,425 5,400,000 514,679 $ $ $ 1,027,924 3,840,000 481,625 - $ 1,001,361 $ - $ 76,577 See accompanying notes to the consolidated financial statements. 8. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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 2020 the Bank opened a loan production office in Torrance, California, and in October 2021 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: The Company has evaluated the effects of subsequent events for recognition and disclosure through March 25, 2022, 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. The global pandemic resulting from the outbreak of the coronavirus (“COVID-19”) has substantially and negatively impacted the United States economy, created significant volatility and disruption in financial markets, and materially increased unemployment levels. In addition, the pandemic has resulted in temporary closures of businesses and the institution of social distancing and sheltering in place requirements in most states and communities. The Company has and could continue to experience adverse effects as a result of the impact of the COVID-19 pandemic. It is at least reasonably possible that information which was available to the Company at the date of the financial statements will change in the near term due to the COVID-19 pandemic and that the effect of the change could be material to the financial statements, including the allowance for loan losses. The extent to which the COVID-19 pandemic will impact the Company’s estimates and assumptions is highly uncertain. (Continued) 9. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Concentrations of Credit Risk: Assets and liabilities that subject the Company to concentrations of credit risk consist of cash balances at other banks, loans, and deposits. Most of the Company’s customers are located within Fresno County and the surrounding areas. The Company’s primary lending products are discussed in Note 3 to the consolidated financial statements. The Company did not have any significant concentrations in its business with any one customer or industry. The Company obtains what it believes to be sufficient collateral to secure potential losses on loans. The extent and value of collateral varies based on the details underlying each loan agreement. As of December 31, 2021, and 2020, 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. 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. Debt Securities: Held-to-maturity securities consist of U.S. agency securities and commercial and residential 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, commercial and residential 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. (Continued) 10. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) 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, 2021, 2020, and 2019 salaries and employee benefits expense totaling $1,018,033, $885,007, and $382,758, respectively, were deferred as loan origination costs. Loans on which the accrual of interest has been discontinued are designated as non-accrual loans. Accrual of interest on loans is discontinued either when reasonable doubt exists as to the full and timely collection of interest or principal or when a loan becomes contractually past due by 90 days or more with respect to interest or principal. When a loan is placed on non-accrual status, all interest previously accrued, but not collected, is reversed against current period interest income. Income on such loans is then recognized only to the extent that cash is received and where the future collection of principals 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, 2021 and 2020 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. (Continued) 11. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) The Company considers a loan impaired when it is probable that all amounts of principal and interest due will not be collected according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, borrower’s ability to repay, credit worthiness, collateral value, and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, current credit worthiness, and the amount of the shortfall in relation to the principal and interest owed. Troubled Debt Restructuring: In situations where, for economic or legal reasons related to a borrower’s financial difficulties, the Company grants a concession to the borrower that it would not otherwise consider, the related loan is classified as a troubled debt restructuring. The Company measures any loss on the troubled debt restructuring in accordance with the guidance concerning impaired loans set forth above. Additionally, loans modified in troubled debt restructurings are generally placed on non-accrual status at the time of restructuring. These loans are returned to accrual status after the borrower demonstrates performance with the modified terms for a sustained period of time (generally six months) and has the capacity to continue to perform in accordance with the modified terms of the restructured debt. 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 $2,800,100 and $1,877,000 at December 31, 2021 and 2020, 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, 2021 and 2020. 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, 2021 and 2020. TIB and PCBB stock are carried at cost and were not considered impaired as of December 31, 2021 and 2020. 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 $169,480 and $151,798, Caltius Fund VI of $60,000 and $0.00, and the Central Valley Fund III of $465,000 and $397,500 at December 31, 2021 and 2020, respectively. These investments are carried at cost and were not considered impaired as of December 31, 2021 and 2020. The Company held stock in Farmer Mac valued at $12,393 and $7,425 as of December 31, 2021 and 2020, respectively and periodically evaluated for impairment based on the ultimate recovery of the par value. 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. Cash Surrender Value of Life Insurance: The Company has purchased life insurance policies on certain key executives. Company owned life insurance is recorded at the amount that can be realized under the insurance contract at the balance sheet date, which is the cash surrender value adjusted for other charges or other amounts due that are probable at settlement. (Continued) 12. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) 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, 2021 and 2020 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. 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, 2021 and 2020. The Company recognizes interest accrued and penalties related to unrecognized tax benefits in tax expense. During the years ended December 31, 2021 and 2020, 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 2016. 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. 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. Fair Value of Financial Instruments: Fair values of financial instruments are estimated using relevant market information and other assumptions, as more fully disclosed in a separate note. Fair value estimates involve uncertainties and matters of significant judgment regarding interest rates, credit risk, prepayments, and other factors, especially in the absence of broad markets for particular items. Changes in assumptions or in market conditions could significantly affect these estimates. 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. (Continued) 13. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) 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, 2021 and 2020 were $178,779 and $92,582 respectively. No impairment charges were recorded for the years ended December 31, 2021 or 2020 related to servicing assets. The CARES Act and Regulatory Changes on TDR’s: On March 27, 2021, the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) was signed into law. Section 4013 of the CARES Act, “Temporary Relief from Troubled Debt Restructurings,” provides banks the option to temporarily suspend certain requirements under GAAP related to troubled debt restructurings (TDR) for a limited period of time to account for the effects of COVID-19. To qualify for Section 4013 of the CARES Act, borrowers must have been current at December 31, 2020. All modifications are eligible so long as they are executed between March 1, 2021 and the earlier of (i) December 31, 2021, or (ii) the 60th day after the end of the COVID-19 national emergency declared by the President of the U.S. Multiple modifications of the same credits are allowed and there is no cap on the duration of the modification. On December 21, 2021, certain provisions of the CARES Act, including the temporary suspension of certain requirements related to TDRs, were extended through December 31, 2021. See Note 3 of the footnotes to the consolidated financial statements for disclosure of the impact to date. In March 2021, various regulatory agencies, including the Board of Governors of the Federal Reserve System and the Federal Deposit Insurance Corporation, (“the agencies”) issued an interagency statement on loan modifications and reporting for financial institutions working with customers affected by the Coronavirus. The interagency statement was effective immediately and impacted accounting for loan modifications. The agencies confirmed with the staff of the FASB that short-term modifications made on a good faith basis in response to COVID-19 to borrowers who were current prior to any relief, are not to be considered TDRs. This includes short-term (e.g., six months) modifications such as payment deferrals, fee waivers, extensions of repayment terms, or other delays in payment that are insignificant. (Continued) 14. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Borrowers considered current are those that are less than 30 days past due on their contractual payments at the time a modification program is implemented. Almost all of the Company’s modifications fall under Section 4013 of the CARES Act and thus, the interagency statement has had very little impact on the Company to date. Investment in Low Income Housing Tax Credit Funds (LIHTC): The Bank has invested in limited partnerships that were formed to develop and operate affordable housing projects for low or moderate income tenants throughout California. Our ownership in each limited partnership is less than two percent. In accordance with ASU No. 2014-01, Investments - Equity Method and Joint Ventures (Topic 323), the Company elected to account for the investments in qualified affordable housing tax credit funds using the proportional amortization method. Under the proportional amortization method, the initial cost of the investment is amortized in proportion to the tax credits and other tax benefits received and the net investment performance is recognized as part of income tax expense (benefit). Each of the partnerships must meet the regulatory minimum requirements for affordable housing for a minimum 15-year compliance period to fully utilize the tax credits. If the partnerships cease to qualify during the compliance period, the credit may be denied for any period in which the project is not in compliance and a portion of the credit previously taken is subject to recapture with interest. The Company’s investment in Low Income Housing Tax Credit Funds is reported in other assets on the consolidated balance sheet. Reclassifications: Some items in the prior year financial statements were reclassified to conform to the current presentation. Reclassification had no effect on prior year net income or shareholders equity. 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. 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 drivers and CECL reserving model design as well as other related consulting services has been retained, and the Company has 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. (Continued) 15. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) 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. (Continued) 16. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 2 – DEBT SECURITIES The amortized cost and estimated fair values of debt securities are as follows: Available-for-sale: U.S. Treasury and federal agency U.S. government sponsored entities and agencies State and political subdivision Mortgage backed securities Other Domestic Debt Total Held to Maturity: U.S. government sponsoted entities and agencies Mortgage backed securities Total Available-for-sale: U.S. Treasury and federal agency U.S. government sponsoted entities and agencies State and political subdivision Mortgage backed securities Other Domestic Debt Total Held to Maturity: U.S. government sponsoted entities and agencies Mortgage backed securities Total Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Estimated Fair Value 2021 $ 11,816,327 $ 46,150 $ (106,556) $ 11,755,921 26,983,590 130,360,685 91,028,350 23,699,595 283,888,547 $ 473,352 3,839,146 515,284 221,427 5,095,359 $ (22,904) (625,654) (126,447) (156,605) (1,038,166) $ $ $ $ $ $ 27,434,038 133,574,177 91,417,187 23,764,417 287,945,740 1,439,950 2,582,906 4,022,856 $ 63,899 167,006 230,905 $ - $ - $ - $ $ 1,503,849 2,749,912 4,253,761 Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Estimated Fair Value 2020 - - - - $ $ 33,875,569 109,789,453 53,689,171 13,500,000 210,854,193 649,739 4,385,028 1,102,091 8,460 6,145,318 $ (117,779) (142,957) - (23,640) (284,376) $ $ 34,407,529 114,031,524 54,791,262 13,484,820 216,715,135 $ $ $ 2,135,407 3,957,019 6,092,426 $ 150,000 319,914 469,914 $ - - $ - $ $ 2,285,407 4,276,933 6,562,340 (Continued) 17. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 2 – DEBT SECURITIES (Continued) The amortized cost and estimated fair value of all debt securities as of December 31, 2021, 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 Amortized Estimated Fair Value $ - $ 10,059,542 28,918,582 126,898,483 - 9,962,029 29,092,014 130,040,472 $ 165,876,607 $ 169,094,515 U.S. government and agency securities Mortgage-backed securities Held-to-maturity U.S. government and agency securities Mortgage-backed securities 26,983,590 91,028,350 27,434,038 91,417,187 $ 283,888,547 $ 287,945,740 Amortized Estimated Fair Value $ 1,439,950 $ 2,582,906 1,503,849 2,749,912 $ 4,022,856 $ 4,253,761 The gross unrealized loss and related estimated fair value of debt securities that have been in a continuous loss position for less than twelve months and over twelve months are as follows: 2021 Available-for-sale Treasury securities U.S. government sponsored entities and agency securities State and municipal agencies Mortgage backed securities Other domestic debt 12 months or more less than 12 Months Total Fair Value Unrealized Loss Fair Value Unrealized Loss Fair Value Unrealized Loss $ - $ - $ 7,838,040 $ (106,556) $ 7,838,040 $ (106,556) 2,284,127 8,935,606 - - (9,926) 2,654,064 (195,248) 27,947,062 - 21,980,215 - 12,292,990 (12,978) 4,938,191 (430,406) 36,882,668 (126,447) 21,980,215 (156,605) 12,292,990 (22,904) (625,654) (126,447) (156,605) $ 11,219,733 $ (205,174) $ 72,712,371 $ (832,992) $ 83,932,104 $ (1,038,166) As of December 31, 2021 no held-to-maturity securities were in a loss position. (Continued) 18. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 2 – DEBT SECURITIES (Continued) 2020 Available-for-sale U.S. government sponsored entities and agency securities State and municipal agencies Mortgage backed securities Other domestic debt 12 months or more less than 12 Months Total Fair Value Unrealized Loss Fair Value Unrealized Loss Fair Value Unrealized Loss $ 12,300,089 $ 607,142 - - (108,903) $ 5,157,541 $ (1,095) 20,010,722 - 1,976,360 - - (8,876) $ 17,457,630 $ (141,862) 20,617,864 - 1,976,360 - (23,640) (117,779) (142,957) - (23,640) $ 12,907,231 $ (109,998) $ 27,144,623 $ (174,378) $ 40,051,854 $ (284,376) As of December 31, 2020 no held-to-maturity securities were in a loss position. Certain debt 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, 2021 and 2020 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, 2021, there were 20 debt securities with a value of $11,219,733 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 debt securities, and the associated gains and losses are listed below: 2021 2020 2019 Proceeds Gross gains Gross losses $ $ $ 2,625,000 $ $ 15,659 $ 32,695 2,500,000 60,147 - $ $ $ 974,011 11,050 5,188 Debt securities carried at approximately $44,121,000 and $38,973,000 at December 31, 2021 and 2020, respectively, were pledged to secure public deposits or other purposes as permitted or required by law. At year-end 2021 and 2020, there were no holdings of debt securities of any one issuer, other than the U.S. Government and its agencies, in an amount greater than 10% of shareholders’ equity. (Continued) 19. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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 2021 2020 $ 237,813,700 $ 332,226,787 226,245,729 15,753,941 13,506,555 33,025,564 7,068 382,022,730 31,916,574 17,150,076 57,347,882 1,898 726,252,860 620,765,644 (9,784,751) (2,981,157) (7,848,312) (3,728,093) Loans, net of allowance $ 713,486,952 $ 609,189,239 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. The Company participated in, and originated loans under, the Small Business Administrative Paycheck Protection Program (PPP) in both 2020 and 2021. Included in the commercial and industrial loans are PPP loans of approximately $52,594,000 and $159,941,000 at December 31, 2021 and 2020, respectively. During the year ended December 31, 2021, $131,547,000 of PPP loans were forgiven or paid off. The Company had deferred fees of $934,000 and $2,980,000 as of December 31, 2021 and 2020, respectively. The Company recognized total fee income related to PPP loans of $6,200,000 and $3,520,000 for the years ended December 31, 2021 and 2020, respectively. . (Continued) 20. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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, 2021 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 $ - $ - $ 2,920,105 9,652 Total recorded investment In impaired loans $ 2,920,105 $ 9,652 $ 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 $ $ $ $ $ - $ - $ 2,920,105 9,652 2,920,105 $ 9,652 $ 1,062,486 $ 9,652 $ 2,056,796 $ 7,239 $ - $ - $ - $ - - $ - $ - - $ - $ - $ - $ - $ - - $ - $ - - $ - $ - $ - $ - $ - - $ - $ - - $ - $ 0 $ - $ - $ - - 2,929,757 - $ 2,929,757 - $ - - 2,929,757 - $ 2,929,757 - $ 1,072,138 - $ 2,064,035 - $ - (Continued) 21. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 3 – LOANS (Continued) December 31, 2020 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 $ 408,563 $ 850,167 Total recorded investment In impaired loans $ 1,258,730 $ Unpaid principal balance of impaired loans: With no specific allowance recorded With specific allowance recorded $ 480,563 $ 850,167 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 $ $ $ $ 1,258,730 $ 221,521 $ 758,890 $ - $ - $ - - $ - $ - - $ - $ - $ - $ - $ - - $ - $ - - $ - $ - $ - $ - $ 430,159 $ - $ 838,722 - - - 850,167 - $ 430,159 $ - $ 1,688,889 - $ 430,159 $ - $ 838,722 - - - $ 850,167 - $ ,430,159 $ - $ 1,688,889 - $ - $ - $ 221,521 - $ 488,659 $ - $ 1,246,749 - $ - $ - $ - 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) 22. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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, 2021 and 2020: December 31, 2021 Grade: Commercial & industrial Commercial real estate Land & construction Residential real estate Agriculture Consumer Pass Special Mention Substandard Doubtful Total - $ 4,853,858 3,070,897 $ - $ 237,813,700 $ 234,742,803 $ - 382,022,730 377,159,220 - - - 31,916,574 31,916,574 17,150,076 17,150,076 57,347,882 - - - 57,347,882 1,898 9,652 1,898 - - - - - - Total $ 718,318,453 $ 4,853,858 $ 3,080,549 $ - $ 726,252,860 December 31, 2020 Grade: Commercial & industrial Commercial real estate Land & construction Residential real estate Agriculture Consumer Pass Special Mention Substandard Doubtful Total $ 320,623,931 $ 220,127,770 15,753,941 13,506,555 32,595,404 7,068 4,237,440 $ 7,365,417 $ - $ 332,226,787 6,117,959 - - 226,245,729 15,753,941 13,506,555 33,025,564 7,068 - - 430,159 - - - - - - - - - Total $ 602,614,669 $ 13,483,376 $ 4,667,599 $ - $ 620,765,644 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 2021 2020 $ 2,920,105 $ - - - 9,652 - 1,258,730 - - - 430,159 - $ 2,929,757 $ 1,688,889 (Continued) 23. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 3 – LOANS (Continued) The following table is an aging analysis of loans, segregated by class of loans, as of December 31, 2021: 30-59 Days 60-89 Days Past Due 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 $ 3,832,314 $ 254,357 $ 983,651 $ 5,070,322 $ 232,743,378 $ 237,813,700 $ - - - - - - - - - - 9,652 - - - - 9,652 382,013,078 382,022,730 31,916,574 17,150,076 57,347,882 1,898 31,916,574 17,150,076 57,347,882 1,898 - - - - Total $ 3,832,314 $ 254,357 $ 993,303 $ 5,079,974 $ 721,172,886 $ 726,252,860 $ The following table is an aging analysis of loans, segregated by class of loans, as of December 31, 2020: - - - - - - - 30-59 Days 60-89 Days Past Due 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 $ 322,752 $ 698,571 - - - - - $ 1,258,730 $ 1,581,482 $ 330,645,305 $ 332,226,787 $ 9,652 - - - - - - - 430,159 - 708,223 225,537,506 226,245,729 15,753,941 13,506,555 33,025,564 7,068 15,753,941 13,506,555 32,595,405 7,068 - - 430,159 - Total $ 1,021,323 $ 9,652 $ 1,688,889 $ 2,719,864 $ 618,045,780 $ 620,765,644 $ - - - - - - - The Company had a recorded investment in troubled debt restructurings of $0 and $430,159, as of December 31, 2021 and 2020, respectively. There were no modifications made during the periods ended December 31, 2021 and December 31, 2020, respectively. The Company had evaluated the outstanding debt and had not allocated any specific allowance for the one TDR loan at December 31, 2020 and had not committed to lend additional amounts to the borrower. There were no modifications of the terms of loans during the year ended December 31, 2021 and 2020. 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. The Bank is working with borrowers impacted by COVID-19 and providing temporary modifications to include interest only deferral or principal and interest deferral ranging from 3 months to 9 months. These modifications are excluded from troubled debt restructuring classification under Section 4013 of the CARES Act or under interagency guidance of the federal banking regulators. During 2020 the Bank modified 56 loans with outstanding balances of $23,522,494. As of December 31, 2020, 48 loans had returned to repayment status and there were 8 loans remaining with outstanding balances of $2,444,077. As of December 31, 2021 all modified loans had returned to normal repayment status. (Continued) 24. S T N E M E T A T S I I L A C N A N F D E T A D I L O S N O C O T S E T O N l a t o T d e t a c o l l a n U r e m u s n o C e r u t l u c i r g A l a i t n e d s e R i e t a t s E l a e R d n a d n a L n o i t c u r t s n o C l i a c r e m m o C e t a t s E l a e R l i a c r e m m o C l a i r t s u d n I d n a : e p y t l a r e t a l l o c d n a t c u d o r p n a o l y b 1 2 0 2 , 1 3 r e b m e c e D d e d n e r a e y e h t r o f s e s s o l n a o l r o f e c n a w o l l a ’ s y n a p m o C e h t s e z i r a m m u s l e b a t i g n w o l l o f e h T ) d e u n i t n o C ( S N A O L – 3 E T O N : s e s s o l n a o l r o f e c n a w o l l A - ) 1 6 5 , 3 6 ( - - 0 0 0 , 0 0 0 , 2 ) 5 9 5 , 8 6 4 ( 2 1 3 , 8 4 8 , 7 $ 4 2 4 , 7 1 6 $ - - 6 6 ) 6 5 ( - - - - - - - - - ) 1 6 5 , 3 6 ( 7 1 4 , 2 0 2 4 5 8 , 4 2 5 7 1 , 9 1 3 5 7 8 , 7 7 4 , 2 ) 0 7 6 , 5 5 5 ( s f f o - e g r a h C s e i r e v o c e R i n o s v o r i P $ 8 7 5 , 1 1 3 $ 6 0 8 , 9 3 1 $ 5 0 8 , 2 3 3 $ 6 5 6 , 3 8 8 , 2 $ 7 7 9 , 2 6 5 , 3 $ e c n a a b l i g n n n g e B i 1 5 7 , 4 8 7 , 9 $ 9 2 8 , 8 4 1 $ 0 1 $ 5 9 9 , 3 1 5 $ 0 6 6 , 4 6 1 $ 0 8 9 , 1 5 6 $ 1 3 5 , 1 6 3 , 5 $ 6 4 7 , 3 4 9 , 2 $ : o t d e t a c o l l a t n u o m a d n e - d o i r e P e c n a a b l i g n d n E 4 8 9 , 2 7 3 , 1 $ - $ - $ - $ - $ - $ 2 5 6 , 9 $ 2 3 3 , 3 6 3 , 1 $ t n e m r i a p m i r o f d e t a u a v e y l l l i a u d v d n i i s n a o L 7 6 7 , 1 1 4 , 8 9 2 8 , 8 4 1 1 5 7 , 4 8 7 , 9 $ 9 2 8 , 8 4 1 $ 0 1 0 1 5 9 9 , 3 1 5 0 6 6 , 4 6 1 0 8 9 , 1 5 6 9 7 8 , 1 5 3 , 5 4 1 4 , 0 8 5 , 1 t n e m r i a p m i r o f l d e t a u a v e y e v i t c e l l l o c s n a o L $ 5 9 9 , 1 3 5 $ 0 6 6 , 4 6 1 $ 0 8 9 , 1 5 6 $ 1 3 5 , 1 6 3 , 5 $ 6 4 7 , 3 4 9 , 2 $ l e c n a a B g n d n E i . 5 2 ) d e u n i t n o C ( 7 5 7 , 9 2 9 , 2 $ 3 0 1 , 3 2 3 , 3 2 7 0 6 8 , 2 5 2 , 6 2 7 $ - - - $ - $ - $ - $ - $ 2 5 6 , 9 $ 5 0 1 , 0 2 9 , 2 $ t n e m r i a p m i r o f d e t a u a v e y l l l i a u d v d n I i : s n a o L l d e t a u a v e y e v i t c e l l l o C $ 8 9 8 , 1 $ 2 8 8 , 7 4 3 , 7 5 $ 6 7 0 , 0 5 1 , 7 1 $ 4 7 5 , 6 1 9 , 1 3 $ 0 3 7 , 2 2 0 , 2 8 3 $ 0 0 7 , 3 1 8 , 7 3 2 $ 8 9 8 , 1 2 8 8 , 7 4 3 , 7 5 6 7 0 , 0 5 1 , 7 1 4 7 5 , 6 1 9 , 1 3 8 7 0 , 3 1 0 , 2 8 3 5 9 5 , 3 9 8 , 4 3 2 t n e m r i a p m i r o f e c n a a b l i g n d n E S T N E M E T A T S I I L A C N A N F D E T A D I L O S N O C O T S E T O N l a t o T d e t a c o l l a n U r e m u s n o C e r u t l u c i r g A l a i t n e d s e R i e t a t s E l a e R d n a d n a L n o i t c u r t s n o C l i a c r e m m o C e t a t s E l a e R l i a c r e m m o C l a i r t s u d n I d n a : e p y t l a r e t a l l o c d n a t c u d o r p n a o l y b 0 2 0 2 , 1 3 r e b m e c e D d e d n e r a e y e h t r o f s e s s o l n a o l r o f e c n a w o l l a ’ s y n a p m o C e h t s e z i r a m m u s l e b a t i g n w o l l o f e h T ) d e u n i t n o C ( S N A O L – 3 E T O N : s e s s o l n a o l r o f e c n a w o l l A ) 5 1 0 , 0 4 ( 4 3 6 , 6 4 0 0 0 , 0 0 3 , 3 - - 1 5 0 , 7 3 1 3 9 6 , 1 4 5 , 4 $ 3 7 3 , 0 8 4 $ - 8 2 0 0 0 , 6 ) 2 6 9 , 5 ( - - - - - - - - 3 5 6 , 0 0 3 2 3 2 , 7 9 5 2 8 , 9 0 1 5 5 9 , 3 1 3 , 1 ) 5 1 0 , 0 4 ( 4 3 6 , 0 4 6 4 2 , 7 4 3 , 1 s f f o - e g r a h C s e i r e v o c e R i n o s v o r i P $ 5 2 9 , 0 1 $ 4 7 5 , 2 4 $ 0 8 9 , 2 2 2 $ 1 0 7 , 9 6 5 , 1 $ 2 1 1 , 5 1 2 , 2 $ e c n a a b l i g n n n g e B i . 6 2 ) d e u n i t n o C ( 1 2 5 , 1 2 2 $ - $ - $ - $ - $ - $ - $ 1 2 5 , 1 2 2 $ t n e m r i a p m i r o f d e t a u a v e y l l l i a u d v d n i i s n a o L 2 1 3 , 8 4 8 , 7 $ 4 2 4 , 7 1 6 $ 6 6 $ 8 7 5 , 1 1 3 $ 6 0 8 , 9 3 1 $ 5 0 8 , 2 3 3 $ 6 5 6 , 3 8 8 , 2 $ 7 7 9 , 2 6 5 , 3 $ : o t d e t a c o l l a t n u o m a d n e - d o i r e P e c n a a b l i g n d n E 1 9 7 , 6 2 6 , 7 4 2 4 , 7 1 6 2 1 3 , 8 4 8 , 7 $ 4 2 4 , 7 1 6 $ 9 8 8 , 8 8 6 , 1 $ 5 5 7 , 6 7 0 , 9 1 6 4 4 6 , 5 6 7 , 0 2 6 $ - - - $ $ 6 6 6 6 - 8 7 5 , 1 1 3 6 0 8 , 9 3 1 5 0 8 , 2 3 3 6 5 6 , 3 8 8 , 2 6 5 4 , 1 4 3 , 3 t n e m r i a p m i r o f $ 8 7 5 , 1 1 3 $ 6 0 8 , 9 3 1 $ 5 0 8 , 2 3 3 $ 6 5 6 , 3 8 8 , 2 $ 7 7 9 , 2 6 5 , 3 $ l e c n a a B g n d n E i : s n a o L l d e t a u a v e y e v i t c e l l l o c s n a o L $ 9 5 1 , 0 3 4 $ - $ - $ - $ 0 3 7 , 8 5 2 , 1 $ t n e m r i a p m i r o f l d e t a u a v e y e v i t c e l l l o C d e t a u a v e y l l l i a u d v d n I i 8 6 0 , 7 5 0 4 , 5 9 5 , 2 3 5 5 5 , 6 0 5 , 3 1 1 4 9 , 3 5 7 , 5 1 9 2 7 , 5 4 2 , 6 2 2 7 5 0 , 8 6 9 , 0 3 3 8 6 0 , 7 $ 4 6 5 , 5 2 0 , 3 3 $ 5 5 5 , 6 0 5 , 3 1 $ 1 4 9 , 3 5 7 , 5 1 $ 9 2 7 , 5 4 2 , 6 2 2 $ 7 8 7 , 6 2 2 , 2 3 3 $ t n e m r i a p m i r o f e c n a a b l i g n d n E S T N E M E T A T S I I L A C N A N F D E T A D I L O S N O C O T S E T O N l a t o T d e t a c o l l a n U r e m u s n o C e r u t l u c i r g A l a i t n e d s e R i e t a t s E l a e R d n a d n a L n o i t c u r t s n o C l i a c r e m m o C e t a t s E l a e R l i a c r e m m o C l a i r t s u d n I d n a : e p y t l a r e t a l l o c d n a t c u d o r p n a o l y b 9 1 0 2 , 1 3 r e b m e c e D d e d n e r a e y e h t r o f s e s s o l n a o l r o f e c n a w o l l a ’ s y n a p m o C e h t s e z i r a m m u s l e b a t i g n w o l l o f e h T ) d e u n i t n o C ( S N A O L – 3 E T O N : s e s s o l n a o l r o f e c n a w o l l A $ 4 2 5 , 8 8 $ 4 0 3 , 8 3 $ 2 6 0 , 9 2 1 $ 7 1 0 , 2 6 8 $ 5 8 8 , 4 8 6 , 2 $ e c n a a b l i g n n n g e B i ) 8 9 1 , 3 6 1 ( 0 0 0 , 1 1 0 0 0 , 5 4 6 - - 4 4 3 , 4 3 2 1 9 8 , 8 4 0 , 4 $ 9 2 0 , 6 4 2 $ - 0 7 0 0 0 , 1 1 ) 2 4 0 , 1 1 ( - - ) 9 9 5 , 7 7 ( - $ - $ - $ - 3 9 6 , 1 4 5 , 4 $ 3 7 3 , 0 8 4 $ 8 2 $ 5 2 9 , 0 1 $ $ - - 0 7 2 , 4 4 7 5 , 2 4 - $ $ - - - - - ) 8 9 1 , 3 6 1 ( 8 1 9 , 3 9 4 8 6 , 7 0 7 ) 5 7 5 , 6 0 3 ( 0 8 9 , 2 2 2 $ 1 0 7 , 9 6 5 , 1 $ 2 1 1 , 5 1 2 , 2 $ s f f o - e g r a h C s e i r e v o c e R i n o s v o r i P : o t d e t a c o l l a t n u o m a d n e - d o i r e P e c n a a b l i g n d n E - $ - $ - $ t n e m r i a p m i r o f d e t a u a v e y l l l i a u d v d n i i s n a o L l d e t a u a v e y e v i t c e l l l o c s n a o L . 7 2 ) d e u n i t n o C ( 3 9 6 , 1 4 5 , 4 3 7 3 , 0 8 4 3 9 6 , 1 4 5 , 4 $ 3 7 3 , 0 8 4 $ 6 9 1 , 9 1 6 $ 2 7 8 , 5 1 6 , 2 6 3 8 6 0 , 5 3 2 , 3 6 3 $ - - - $ $ 8 2 8 2 - 5 2 9 , 0 1 4 7 5 , 2 4 0 8 9 , 2 2 2 1 0 7 , 9 6 5 , 1 2 1 1 , 5 1 2 , 2 t n e m r i a p m i r o f $ 5 2 9 , 0 1 $ 4 7 5 , 2 4 $ 0 8 9 , 2 2 2 $ 1 0 7 , 9 6 5 , 1 $ 2 1 1 , 5 1 2 , 2 $ l e c n a a B g n d n E i $ 4 8 7 , 0 0 5 $ - $ - $ - $ 2 1 4 , 8 1 1 $ t n e m r i a p m i r o f d e t a u a v e y l l l i a u d v d n I i : s n a o L l d e t a u a v e y e v i t c e l l l o C 1 8 9 , 8 3 0 0 , 0 3 6 , 3 3 3 3 7 , 9 8 2 , 0 1 6 1 0 , 9 4 6 , 7 1 7 1 7 , 3 3 2 , 5 4 1 2 2 4 , 4 0 8 , 5 5 1 1 8 9 , 8 $ 7 8 7 , 0 3 1 , 4 3 $ 3 3 7 , 9 8 2 , 0 1 $ 6 1 0 , 9 4 6 , 7 1 $ 7 1 7 , 3 3 2 , 5 4 1 $ 4 3 8 , 2 2 9 , 5 5 1 $ t n e m r i a p m i r o f e c n a a b l i g n d n E NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 4 – PREMISES AND EQUIPMENT A summary of premises and equipment is as follows: Leasehold improvements Furniture, fixtures, and equipment Computer equipment 2021 2020 $ 1,003,511 $ 880,648 891,504 954,581 777,169 793,560 2,775,663 2,525,310 Less accumulated depreciation (2,481,745) (2,350,159) $ 293,918 $ 175,151 Depreciation expense amounted to $137,006, $159,300, and $176,310 for the years ending December 31, 2021, 2020, and 2019, respectively. NOTE 5 – LEASES The Company leases its offices under noncancelable operating leases with terms extending through 2026. 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, 2021, the future undiscounted lease payments under non-cancellable operating lease commitments for the Company’s offices were as follows: 2022 2023 2024 2025 2026 Thereafter Total undiscounted lease payment Less: imputed interest $ 476,419 462,767 400,904 376,748 31,448 - 1,748,286 145,730 Net lease liabilities $ 1,602,556 (Continued) 28. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 5 – LEASES (Continued) The table below summarizes the total lease cost for the twelve months ended December 31: Operating lease cost Variable lease cost 2021 2020 $ $ 528,679 $ 38,953 496,662 33,661 567,632 $ 530,323 The table below summarizes other information related to the Company’s operating leases for the twelve months ending December 31: 2021 2020 Weighted average remaining lease term, in years Weighted average discount rate 3.81 4.50% 4.49 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, 2021: Balance Sheet Classification 2021 2020 Right-of-use assets Lease liabilities Interest receivable and other assets Interest payable and other liabilities $1,582,753 $1,602,556 $2,037,588 $2,037,251 Total lease cost included in occupancy and equipment was $567,632, $530,323, and $501,426 for the years ended December 31, 2021, 2020, and 2019, respectively. NOTE 6 – DEPOSITS Customer deposits were as follows: Non-interest-bearing demand Savings, NOW, and money market accounts Time deposits under $250,000 Time deposits $250,000 and over 2021 2020 $ 594,043,762 $ 446,920,285 208,395,696 46,208,983 24,729,473 276,022,591 45,229,884 21,251,510 $ 936,547,474 $ 726,254,437 At December 31, 2021, the scheduled maturities of time deposits are as follows: 2022 2023 2024 2025 2026 Thereafter $ 62,459,978 2,359,398 566,947 555,805 539,266 - $ 66,481,394 (Continued) 29. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 7 – BORROWING ARRANGEMENTS The Company may borrow up to an aggregate of $45,500,000 overnight on an unsecured basis from three correspondent banks. The Company may also borrow up to approximately $270,000,000 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 $36,951,000 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 2021, and 2020, no amounts were outstanding under these arrangements. As of December 31, 2021, the Company had no in advances outstanding from the Federal Home Loan Bank of San Francisco secured by pledged assets. 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, 2021, 2020, and 2019 contributions to the ESOP were $531,444, $433,000 and $420,000 respectively. The ESOP held 173,127, and 173,398 shares of common stock as of December 31, 2021 and 2020, respectively, and there were no unearned shares of common stock held by the ESOP at December 31, 2021 and 2020. 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, 2021, 2020, and 2019. 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 $223,486, $630,644, and $306,706 for the years ended December 31, 2021, 2020 and 2019, respectively. Accrued compensation payable under the salary continuation plan totaled $1,534,867, $1,311,381, and $680,737 at December 31, 2021, 2020 and 2019 and is included in interest payable and other liabilities on the Company’s balance sheet. (Continued) 30. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 9 – INCOME TAXES The provision for income taxes for the years ended December 31 consists of the following: 2021 2020 2019 Current Federal State Deferred Federal State $ 5,336,572 $ 3,553,967 $ 2,391,112 1,416,438 3,807,550 3,270,074 8,606,646 2,082,417 5,636,384 (664,832) (250,490) (1,010,588) (430,163) (270,779) (103,482) (915,322) (1,440,751) (374,261) Provision $ 7,691,324 $ 4,195,633 $ 3,433,289 Deferred taxes are a result of differences between income tax accounting and generally accepted accounting principles with respect to the timing of income and expense recognition. The following is a summary of the components of the net deferred tax asset accounts included in interest receivable and other assets in the accompanying consolidated balance sheets at December 31: Deferred tax assets: Depreciation Allowance for loan losses Stock-based compensation Deferred compensation State tax deferral Non-accrual loan interest Lease Liability Other Deferred tax liabilities: Unrealized gains on available-for-sale securities Lease financing receivable Right-of-use asset Other 2021 2020 $ 106,737 $ 140,148 2,056,089 152,765 387,691 437,043 - 604,271 224,793 2,741,776 250,863 453,762 681,504 13,454 473,773 145,726 4,867,595 4,002,800 (1,199,306) (142,010) (467,918) (275,640) (1,737,194) (148,445) (602,384) (185,266) (2,084,874) (2,673,289) Net deferred income tax asset $ 2,782,721 $ 1,329,511 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, 2021, 2020, and 2019 are open to audit by the federal authorities and income tax returns for the years ended December 31, 2020, 2019, 2018 and 2017, are open to audit by state authorities. As of December 31, 2021, 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. (Continued) 31. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 10 – RELATED PARTY TRANSACTIONS The Company has granted loans to certain directors, officers, and their related interests with which they are associated. The balance of these loans outstanding was approximately $3,618,000 and $701,000 at December 31, 2021 and 2020, respectively. Deposits from certain directors, officers, and their related interests with which they are associated, held by the Company at December 31, 2021 and 2020, amounted to approximately $7,198,000 and $6,686,000, respectively. NOTE 11 – EARNINGS PER SHARE (EPS) Earnings per share for the years ended December 31 were computed as follows: 2021 2020 2019 Basic earnings per share: Net income available to common shareholders Weighted average common shares outstanding $ 20,526,719 $ 11,512,250 $ 9,201,358 3,068,564 2,996,920 2,927,317 Basic earnings per share $ 6.69 $ 3.84 $ 3.14 Diluted earnings per share: Net income available to common shareholders, diluted $ 20,526,719 $ 11,512,250 $ 9,201,358 Weighted average common shares outstanding Effect of dilutive stock options 3,068,564 31,065 2,996,920 37,788 2,927,317 54,999 Adjusted weighted average common shares outstanding, diluted 3,099,629 3,034,708 2,982,316 Diluted earnings per share $ 6.62 $ 3.79 $ 3.09 At December 31, 2021, 2020 and 2019, there were 7,020, 10,797, and 20,841 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) 32. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 12 – COMMITMENTS (Continued) As of December 31, 2021, and 2020, the Company had the following outstanding financial commitments whose contractual amount represents credit risk: Commitments to extend credit Letters of credit 2021 2020 $ 169,356,510 $ 119,372,876 1,091,318 1,332,704 $ 170,689,214 $ 120,464,194 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 Plan) was approved by its shareholders in February 2006. Under the terms of the Plan, officers and key employees may be granted both non-qualified, incentive stock options and restricted stock awards, and directors, who are not also an officer or employee, may only be granted non-qualified stock options and restricted stock awards. The Plan provides for a maximum number of shares that may be awarded to eligible employees and directors not to exceed 495,000 shares. In July 2012, the shareholders approved an additional 183,000 shares to be added to the Plan increasing the total to 678,000 shares. In July 2015, the Shareholders approved the 2015 Equity Based Compensation Plan to replace the 2005 plan, which was due to expire at the end of 10 years. Upon approval, the remaining unallocated shares in the 2005 Plan were transferred into the 2015 Plan for future grants. 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 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 $1,032,237, $673,863, and $536,695 in 2021, 2020, and 2019, respectively. The total income tax benefit was $281,354, $179,991, and $145,839 for 2021, 2020 and 2019, respectively (Continued) 33. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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, 2021, 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 Granted Exercised Forfeited, expired, or returned to Plan through cashless exercise 48,585 $ - $ (7,504) $ 9.05 - 10.00 (2,996) $ 10.00 2.3 years $ 1,067,131 Outstanding at end of year 38,085 $ 8.78 1.3 years $ 1,836,355 Options exercisable 38,085 $ 8.78 1.3 years $ 1,836,355 As of December 31, 2021, 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, 2021 Granted Vested Forfeited Non-vested at December 31, 2021 47,118 $ 46,995 (27,448) (2,550) 64,115 $ 26.20 33.27 25.14 32.19 31.60 As of December 31, 2020, there was approximately $1,255,831 of total unrecognized compensation cost related to the outstanding restricted stock grants that will be recognized over a weighted average period of 1.5 years. (Continued) 34. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 14 – SUBORDINATED DEBT In November 2020, the Company issued, through a private placement, $40.0 million aggregate principal amount of its 4.25% fixed-to-floating rate subordinated notes. The transaction was structured in two tranches: (1) $30.0 million of its 4.25% Fixed-to-Floating Rate Subordinated Notes due 2030. The notes mature on November 15, 2030 and bear a fixed rate of interest of 4.25% for the first five years, payable semiannually in arrears beginning May 15, 2021. Beginning November 15, 2025, the interest rate will reset quarterly to a floating rate per annum equal to the then current 3-month term SOFR plus 407 basis points payable quarterly in arrears on February 15, May 15, August 15, and November 15 of each year to the maturity date or earlier redemption. On any scheduled interest payment date beginning November 15, 2025, the Company may, at its option, redeem the notes, in whole or in part, at the redemption price equal to 100% of the principal amount plus accrued and unpaid interest. (2) $10.0 million of its 4.25% Fixed-to-Floating Rate Subordinated Notes due 2035. The notes mature on November 15, 2035 and bear a fixed rate of interest of 4.25% for the first ten years, payable semiannually in arrears beginning May 15, 2021. Beginning November 15, 2030, the interest rate will reset quarterly to a floating rate per annum equal to the then current 3-month LIBOR plus 370 basis points payable quarterly, in arrears on February 15, May 15, August 15, and November 15 of each year to the maturity date or earlier redemption. On any scheduled interest payment date beginning November 15, 2030, the Company may, at its option, redeem the notes, in whole or in part, at the redemption price equal to 100% of the principal amount plus accrued and unpaid interest. The value of the subordinated debentures was reduced by $900,706 of debt issuance costs, which are being amortized on a straight-line basis through the earlier of the redemption option or maturity date of the subordinated debentures. All of the subordinated debentures may be included in Tier 2 capital under current regulatory guidelines and interpretations. NOTE 15 – 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, 2021, 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 2021 and 2020, the most recent regulatory notifications categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. (Continued) 35. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 15 – SHAREHOLDERS’ EQUITY (Continued) 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): Actual Amount Ratio For Capital Adequacy Purposes Ratio Amount To be Well-Capitalized under Prompt Corrective Action Provisions Amount Ratio 122,951 16.1% $ 34,354 >4.5% $ 49,622 >6.5% 132,497 17.4% $ 61,074 >8.0% $ 76,342 >10.0% 122,951 16.1% $ 45,805 >6.0% $ 61,074 >8.0% 122,951 11.4% $ 42,994 >4.0% $ 53,743 >5.0% 100,037 20.8% $ 21,674 >4.5% $ 31,306 >6.5% 106,080 22.0% $ 38,531 >8.0% $ 48,164 >10.0% 100,037 20.8% $ 28,898 >6.0% $ 38,531 >8.0% 100,037 11.6% $ 34,537 >4.0% $ 43,171 >5.0% December 31, 2021: Common Equity Tier I Capital (to Risk-Weighted Assets) Total Capital (to Risk-Weighted Assets) Tier I Capital (to Risk-Weighted Assets) Tier I Capital (to Average Assets) December 31, 2020: Common Equity Tier I Capital (to Risk-Weighted Assets) Total Capital (to Risk-Weighted Assets) Tier I Capital (to Risk-Weighted Assets) Tier I Capital (to Average Assets) $ $ $ $ $ $ $ $ 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 Department of Financial Protection & Innovation. Common Stock: On March 2, 2021, the Company issued 14,027 shares of its common stock totaling $456,438 as the Company’s ESOP contribution for 2021. On March 11, 2020, the Company issued 14,900 shares of its common stock totaling $432,547 as the Company’s ESOP contribution for 2020. (Continued) 36. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 16 – FAIR VALUE 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. The following is a description of valuation methodologies used for assets and liabilities recorded at fair value: Securities – The fair values of debt 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). 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 the loan carrying value. In some cases, the properties for which market quotes or appraisal values have been obtained are 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, 2021 and 2020. The following table summarizes the Company’s assets that were measured at fair value on a recurring basis at December 31, 2021: Quoted Prices in Active Markets For Identical Assets (Level 1) December 31, 2021 Significant Other Significant Observable Unobservable Inputs (Level 2) Inputs (Level 3) Description of Assets Debt Securities available-for-sale U.S. Treasury and federal agency U.S. government sponsored entities and agencies State and municipal agencies Mortgage-backed securities Other domestic debt $ 11,755,920 $ 27,434,037 133,574,179 91,417,187 23,764,417 Total $287.945,740 $ - - - - - - $ 11,755,920 $ 27,434,037 133,754,179 91,417,187 23,764,417 $287.945,740 $ (Continued) - - - - - - 37. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 16 – FAIR VALUE (Continued) The following table summarizes the Company’s assets that were measured at fair value on a recurring basis at December 31, 2020: Quoted Prices in Active Markets For Identical Assets (Level 1) December 31, 2020 Significant Other Significant Observable Unobservable Inputs (Level 2) Inputs (Level 3) Description of Assets Debt Securities available-for-sale U.S. government sponsored entities and agencies $ 34,407,529 114,031,524 State and municipal agencies 54,791,262 Mortgage-backed securities 13,484,820 Other domestic debt $ Total $216,715,135 $ - - - - - $ $ 34,407,529 114,031,524 54,791,262 13,484,820 $216,715,135 $ - - - - - 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) 38. NOTE 16 – 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 held to maturity 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. 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). 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 and long term debt, 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): 2021 2020 Carrying Estimated Fair Value Carrying Estimated Fair Value Amount Fair Value Hierarchy Amount 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 Long term debt Interest payable 36,780 $ 1,490 4,023 3,811 713,487 694 5,189 36,780 1,490 4,254 3,811 10,406 $ Level 1 $ 9,175 Level 2 6,092 Level 2 - Level 2 735,530 Level 3 609,189 549 Level 2 4,843 Level 2 694 5,189 10,406 8,992 6,562 - 621,451 549 4,843 936,548 39,283 226 957,147 39,283 226 Level 2 Level 3 Level 2 726,254 39,126 292 726,408 39,126 292 Level 1 Level 2 Level 2 Level 2 Level 3 Level 2 Level 2 Level 2 Level 3 Level 2 39. NOTE 17 – INVESTMENT IN LOW INCOME HOUSING TAX CREDIT FUNDS The Company invests in Low Income Housing Tax Credit “LIHTC” partnerships. At December 31, 2021, the investment balance for LIHTC partnerships was $8,000,000. These balances are reflected in accrued interest receivable and other assets on the consolidated balance sheets. Total unfunded commitments related to these partnerships totaled $7,818,795 at December 31, 2021 which is reflected in other liabilities on the consolidated balance sheet. The Company expects to fulfill these commitments during the year ending 2027. There were no LIHTC investments prior to 2021. During the year ended December 31, 2021, the Company recognized no amortization expense. NOTE 18 – REVENUE FROM CONTRACTS WITH CUSTOMERS All of the Company’s revenue from contracts with customers in the scope of ASC 606 is recognized within Non-Interest Income. The following table presents the Company’s sources of Non-Interest Income within the scope of ASC 606. 2021 2020 Non-interest income Service charges on deposits 636,522 Debit card interchange fees 506,434 301,657 3,959,270 Merchant Services 3,999,782 1,573,118 $ $ $ 6,079,334 $ 4,897,449 The remaining balance of non-interest income is made up of other income which includes gains (loss) on sale of securities, cash overs, sundry recoveries, gain on sale of assets, gain on sale of loans, cash surrender value of life insurance, referral fee income, and other misc. income totaling $3,891,248, which is outside the scope of ASC 606. Service Charges on Deposit Accounts: The Company earns fees from its deposit customers for transaction- based, account maintenance, and overdraft services. Transaction-based fees, which include services such as ATM use fees, stop payment charges, statement rendering, and ACH fees, are recognized at the time the transaction is executed as that is the point in time the Company fulfills the customer’s request. Account maintenance fees, which relate primarily to monthly maintenance, are earned over the course of a month, representing the period over which the Company satisfies the performance obligation. Overdraft fees are recognized at the point in time that the overdraft occurs. Service charges on deposits are withdrawn from the customer’s account balance. Debit Card Interchange Fees: The Company earns interchange fees from cardholder transactions conducted through the payment networks. Interchange fees from cardholder transactions represent a percentage of the underlying transaction value and are recognized daily. Merchant Service Income: The Company provides transaction processing services for business customers to allow the customer to collect payments via credit and debit card. The Company also sponsors Independent Sales Organizations (“ISO’s”) who provide these services to their clients. Fees charged represent a percentage of the underlying transaction value and are recognized daily, concurrently with the transaction processing services provided the merchant. 40. 

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