2022 ANNUAL REPORT To Our Fellow Shareholders:
From the very beginning of Fresno First Bank, we understood that we must deliver value to our
shareholders. In fact, maximizing long-term shareholder value is a part of our board’s mission statement. We
started 2022, moving out of the COVID economy to one of rampant inflation and rising interest rates. This
presented challenges our bank has never faced before, and we are happy to report that our team met those
challenges head on, resulting in a stellar year!
Our branch-lite, technology-opportunistic, customer-centric business model yielded the highest returns ever in
the bank’s history. We ended 2022 with a Return on Average Assets of 2.45% and a Return on Average Equity
of 34.86% making us one of the highest performing banks in the country. Of course, the most important piece
of that model is our people. We continue to seek and attract the best talent in the business. This level of
talent, enabled us to deliver our services in an efficient and safe manner, resulting in another record year of
adding value to the company. Therefore, it is with a great sense of gratitude that we present our 2022 Annual
Report.
We are pleased to announce that we had record profits in 2022, with earnings of $26.52 million, an increase of
28% over 2021. Our asset growth was strong, ending the year at $1.3 billion reflecting a 21% growth rate over
2021. We accomplished this growth by expanding our customer base through our various acquisition
channels, as well as benefiting from the increasing interest rate environment. The key to success was our
team’s proactive work with our clients to meet their needs as interest rates continued to rise. In addition,
non-interest income increased 34% for the year ended 2022. This increase was driven by the high returns in
our merchant-services business.
We have built a strong franchise with a high level of noninterest-bearing deposits, a diversified loan portfolio,
and a high level of capital. As of December 31, 2022, the Bank had a 16.38% total capital ratio, a 15.36% Tier 1
capital ratio, a 15.36% common equity Tier 1 capital ratio, and an 11.68% Tier 1 leverage ratio, all of which
exceeded “well-capitalized” levels. We believe the combination of our core deposit franchise, conservative
lending, strong capital levels, and consistent non-interest income will continue to add value to our franchise in
the current environment and in the future. The combination of our core deposit franchise, conservative
lending and consistent non-interest income will continue to add value to our franchise in the future.
The year saw significant changes in our leadership as well. Two of our most valuable long-term
team members retired: Corporate Secretary Debbie Cameron, and CFO Steve Canfield. Debbie was with us
from the beginning over 17 years ago, and Steve was with us for over 15 years. We cannot thank them
enough for their invaluable contributions to our company and we wish them both the very best. We also
added a new director to the board, Heather Schwarm. Her expertise and experience are critical for our stage
of growth, and we look forward to her contributions as we continue to build our franchise.
By the time you read this letter, we will be full speed ahead in our rebranding project. Rebranding from
Fresno First Bank to FFB Bank is key to our strategy which allows us to reach far across the state and, in fact,
across the nation to enable our franchise to take advantage of market opportunities. We see this as an
exciting new chapter in our evolution. While the brand may change to FFB, our core values remain deeply
rooted in the Fresno area and San Joaquin Valley, which has been so good to us.
As we progress through 2023, we believe we are in a better position than ever to face the challenges ahead
and capitalize on the opportunities along the way. Fundamental to our success is the ownership culture that
will continue stronger than ever at FFB. So, we end this letter reaffirming our commitment to you,
our shareholders, to do our best to build shareholder value. As always, we sincerely thank you for your
continued support.
Sincerely,
Mark D. Saleh, Chairman of the Board
(559) 905-1104
Steve Miller, President & CEO
(818) 318-9716
COMMUNITIES FIRST FINANCIAL CORPORATION
CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2022, and 2021
COMMUNITIES FIRST FINANCIAL CORPORATION
CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2022, and 2021
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 ...................................................................
4
5
6
7
8
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ..........................................................
10
Crowe LLP
Independent Member Crowe Global
INDEPENDENT AUDITOR'S REPORT
To the Shareholders and Board of Directors
Communities First Financial Corporation
Fresno, California
Report on the Audit of the Financial Statements
Opinion
We have audited the consolidated financial statements of Communities First Financial Corporation, which
comprise the consolidated balance sheets as of December 31, 2022 and 2021, and the related consolidated
statements of income, comprehensive income, changes in shareholders’ equity, and cash flows for each of
the years in the three-year period ended December 31, 2022, 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, 2022 and 2021, and
the results of its operations and its cash flows for each of the years in the three-year period ended
December 31, 2022 in accordance with accounting principles generally accepted in the United States of
America.
We also have audited, in accordance with auditing standards generally accepted in the United States of
America, Communities First Financial Corporation’s internal control over financial reporting as of
December 31, 2022, based on criteria established in the Internal Control—Integrated Framework (2013),
issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) relevant to
reporting objectives for the express purpose of meeting the regulatory requirements of Section 112 of the
Federal Deposit Insurance Corporation Improvement Act (FDICIA) and our report dated March 23, 2023
expressed an unmodified opinion.
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.
(Continued)
1.
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.
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.
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 23, 2023
Crowe LLP
2.
COMMUNITIES FIRST FINANCIAL CORPORATION
CONSOLIDATED BALANCE SHEETS
For the Years Ended December 31, 2022 and 2021
(Dollar amounts in thousands except per share data)
ASSETS
Cash and due from banks
Interest-bearing deposits in banks
2022
2021
$
19,683 $
37,291
14,764
22,016
Total cash and cash equivalents
56,974
36,780
Certificates of deposit
Debt securities available-for-sale
Debt securities held-to-maturity (fair value $3,362 and $4,254
2,983
340,360
as of December 31, 2022 and 2021, respectively)
3,483
Loans held for sale 11,063
Loans, net of allowance (allowance of $9,914 and $9,785
as of December 31, 2022 and 2021, respectively)
SBIC investments and correspondent bank stock, at cost
Cash surrender value of life insurance
Premises and equipment, net
Interest receivable and other assets
832,639
5,554
8,592
404
32,412
1,490
287,946
4,023
3,811
713,487
4,132
8,397
294
19,743
Total assets
$
1,294,464 $
1,080,103
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits
Other borrowed funds
Long term debt (net of issuance cost $559 and $717 as of
December 31, 2022 and 2021, 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: 3,139,880 and 3,070,307 shares issued
and outstanding in 2022 and 2021, respectively
Retained earnings
Accumulated other comprehensive (loss) income
Total shareholders' equity
1,081,227 $
$
65,000
936,548
-
39,441
16,438
39,283
14,980
1,202,106
990,811
34,369
80,469
(22,480)
92,358
32,486
53,948
2,858
89,292
Total liabilities and shareholders' equity
$
1,294,464 $
1,080,103
See accompanying notes to the consolidated financial statements.
4.
COMMUNITIES FIRST FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
For the Years Ended December 31, 2022, 2021 and 2020
(Dollar amounts in thousands except per share data)
Interest Income:
Loans, including fees
Taxable investment securities
Tax-exempt investment securities
Federal funds sold and other
Total interest income
Interest Expense
Savings deposits, NOW, and
money market accounts
Time deposits
Other borrowings
Long term debt
Total interest expense
Net interest income
Provision for loan losses
Net interest income after
provision for loan losses
Non-interest income:
Service charges on deposits
Merchant services
(Loss) gain on available-for-sale
Securities
Gain on sale of loans
Income from life insurance
Other
Total non-interest income
Non-interest expenses:
Salaries and employee benefits
Occupancy and equipment
Regulatory assessments
Data processing fees
Professional fees
2022
$
2021
$
2020
$
24,662
2,771
853
449
28,735
585
378
33
296
1,292
27,443
3,300
34,527
5,067
1,621
342
41,557
600
258
4
1,858
2,720
38,837
2,000
39,666
8,276
2,175
1,027
51,144
817
251
132
1,858
3,058
48,086
300
47,786
36,837
24,143
2,756
8,435
(305)
1,613
195
645
13,339
15,341
1,124
433
1,625
1,515
954
499
3,566
2,080
4,000
295
2,984
199
414
9,972
11,516
827
277
899
1,258
781
414
2,619
938
3,959
60
1,491
207
418
7,073
9,696
823
300
815
1,259
671
385
1,559
Marketing and business promotion
Director fees and stock-based compensation
Other expenses
Total non-interest expenses 25,057 18,591 15,508
Income before income taxes
36,068
28,218 15,708
Provision for income taxes
Net income
Net income per share - basic
Net income per share - diluted
9,547
26,521
8.51
8.44
$
$
$
7,691
20,527
6.69
6.62
$
$
$
$
$
$
See accompanying notes to the consolidated financial statements.
4,196
11,512
3.84
3.79
5.
COMMUNITIES FIRST FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
For the Years Ended December 31, 2022, 2021 and 2020
(Dollar amounts in thousands except per share data)
Net income
$
26,521
$
20,527
$ 11,512
2022
2021
2020
Other comprehensive income (loss):
Available
for
sale securities:
Unrealized holding (losses) gains during
‐
‐
the year
Reclassification adjustment for losses
(gains) realized in net income from
debt securities
(36,276)
(1,821)
5,662
305 17
(60)
Net unrealized (losses) gains
(35,971)
(1,804)
5,602
Income tax benefit (expense)
Other comprehensive (loss) income
10,633
(25,338)
533 (1,656)
(1,271) 3,946
Total comprehensive income
$
1,183
$
19,256
$ 15,458
See accompanying notes to the consolidated financial statements.
6.
COMMUNITIES FIRST FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
For the Years Ended December 31, 2022, 2021 and 2020
(Dollar amounts in thousands except per share data)
Common Stock
Shares
Amount
Retained
Earnings
Comprehensive
Income (Loss)
Accumulated
Other
Total
Shareholders’
Equity
Balances, January 1, 2020
2,940,996 $
29,869 $
21,909 $
183 $
Issuance of common stock
Stock based compensation
Exercise of stock options
Restricted stock issuance
Net income
Other comprehensive income
14,900
-
18,202
30,233
-
-
433
674
22
-
-
-
-
-
-
-
11,512
-
-
-
-
-
-
3,946
Balances, December 31, 2020
3,004,331 $
30,998 $
33,421 $
4,129 $
Issuance of common stock
Stock based compensation
Exercise of stock options
Restricted stock issuance
Restricted stock forfeited
Net income
Other comprehensive loss
14,027
-
7,504
456
1,032
-
46,995 -
(2,550)
-
-
-
-
-
-
-
-
-
-
20,527
-
-
-
-
-
-
-
(1,271)
51,961
433
674
22
-
11,512
3,946
68,548
456
1,032
-
-
-
20,527
(1,271)
Balances, December 31, 2021
3,070,307 $
32,486 $
53,948 $
2,858 $
89,292
Issuance of common stock
Stock based compensation
Exercise of stock options
Restricted stock issuance
Restricted stock surrendered for tax liability
Restricted stock forfeited
Net income
Other comprehensive loss
681
1,612
(410)
40,966 -
11,525
-
30,121
(12,739)
(300)
-
-
-
-
-
-
-
-
-
-
-
-
26,521
-
-
-
-
-
-
-
-
(25,338)
681
1,612
(410)
-
-
-
26,521
(25,338)
Balances, December 31, 2022 3,139,880 $ 34,369 $ 80,469 $ (22,480) $ 92,358
See accompanying notes to the consolidated financial statements.
7.
COMMUNITIES FIRST FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended December 31, 2022, 2021 and 2020
Cash flows from operating activities
Net income
Adjustments to reconcile net income to net cash
From operating activities:
$
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 called held-to-maturity securities
Gain on sale of loans held for sale
Loss on disposal or premises and equipment
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
Net cash provided by
operating activities
Cash flow from investing activities
‐
for
sale securities
Purchase of certificates of deposit
Proceeds from maturities of certificates of deposit
Purchase of available
Proceeds from paydowns or maturities of available
‐
securities
Proceeds from sale/call of available
for
Purchase of held-to-maturity securities
‐
Proceeds from maturities of held-to-maturity securities
Net increase in loans
Purchase of SBIC investments and correspondent
bank stock
Purchases of premises and equipment
‐
sale securities
for
‐
‐
2022
2021
2020
26,521
$
20,527
$
11,512
198
1,874
3
300
305
-
(1,613)
2
62,917
(68,556)
1,612
(195)
(1,775)
137
1,487
15
2,000
(295)
-
(2,984)
-
27,172
(27,999)
1,032
(199)
(345)
1,458
(103)
8,012
(9,821)
159
809
44
3,300
-
(60)
(1,491)
-
52,582
(37,890)
674
(207)
(2,387)
3,410
(3,198)
22,948
18,739
27,257
(1,743)
-
(124,428)
sale
25,802
8,312
-
537
(119,452)
(1,422)
(310)
(250)
997
(96,106)
19,255
9,563
(1,500)
3,555
(106,298)
(1,073)
(256)
-
-
(139,667)
22,874
3,239
-
5,452
(253,797)
(447)
(106)
Net cash used in investing activities
(212,704)
(172,113)
(362,452)
Cash flows from financing activities
Net increase in demand deposits and
savings accounts
(Decrease) increase in time deposits
Proceeds (repayment) from short term borrowings
with the FHLB
Proceeds from long term debt, net of issuance cost
Net proceeds from exercise of stock options
Cash proceeds from issuance of common stock
156,038
(11,359)
65,000
-
(410)
681
214,750
(4,457)
(31,000)
-
-
456
211,429
31,952
31,000
39,126
22
433
Net cash provided by financing activities
209,950
179,749
313,962
Net change in cash and cash equivalents
20,194
26,375
(21,233)
See accompanying notes to the consolidated financial statements.
8.
COMMUNITIES FIRST FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended December 31, 2022, 2021 and 2020
Cash and cash equivalents, beginning of year
36,780
10,405
31,638
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
$
$
$
$
$
56,974
$
36,780 $
10,405
3,001
8,865
565
$
$
$
2,785
6,740
509
$
$
$
1,039
5,400
515
412
$
-
$ -
See accompanying notes to the consolidated financial statements.
9.
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, 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.
Effective March 13, 2023, the Bank changed its name from Fresno First Bank to FFB Bank.
The Bank is incorporated in the state of California and organized as a single operating segment that operates
one full-service office in Fresno, California. The Bank has an SBA production department and opened a loan
production office in Torrance, California in 2020. 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 23, 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, FFB 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.
Risks and Uncertainties: The lack of soundness of other financial institutions or financial market utilities may
adversely affect the Company. The Company’s ability to engage in routine funding and other transactions
could be adversely affected by the actions and commercial soundness of other financial institutions. Financial
institutions are interrelated because of trading, clearing, counterparty or other relationships. Defaults by, or
even rumors or questions about, one or more financial institutions or financial market utilities, or the financial
services industry generally, may lead to market-wide liquidity problems and losses of client, creditor and
counterparty confidence and could lead to losses or defaults by other financial institutions, or the Company.
Liquidity risk could impair the Company’s ability to fund operations and jeopardize its financial condition.
Liquidity is essential to the Company’s business. The Company relies on a variety of sources to meet its
potential liquidity demands. The Company is required to maintain enough liquidity to meet customer loan
requests, customer deposit maturities and withdrawals, payments on its debt obligations as they come due
and other cash commitments under both normal operating conditions and other unpredictable circumstances,
including events causing industry or general financial market stress. A tightening of the credit markets and the
inability to obtain adequate funding may negatively affect its liquidity, asset growth and, consequently,
earnings capability and capital levels. In addition to any deposit growth, and the sale of loans or investment
securities, maturity of investment securities and loan payments, the Company relies from time to time on
advances from the FHLB, FRB, unsecured lines of credit, and certain other wholesale funding sources to
meet liquidity demands. Liquidity position could be significantly constrained if the Company was unable to
access funds from its funding sources.
(Continued)
10.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
The Company’s access to funding sources, such as through its lines of credit, capital markets offerings,
borrowing from the FRB and FHLB, or from other third-parties, in amounts adequate to finance or capitalize
its activities, or on terms that are acceptable, could be impaired by factors that affect the Company directly or
the financial services industry or economy in general, such as disruptions in the financial markets or negative
views and expectations about the prospects for the financial services industry.
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, 2022, and 2021, 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.
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.
(Continued)
11.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
The remaining difference between the security’s fair value and the present value of the future expected cash
flows is deemed to be due to factors that are not credit related and is recognized in other comprehensive
income.
Loans: Loans are reported at the principal amount outstanding, net of deferred loan fees and costs and the
allowance for loan losses. Unearned discounts on installment loans are recognized as income over the terms
of the loans. Interest on other loans is calculated by using the simple interest method on the daily balance of
the principal amount outstanding.
Loan fees, net of certain direct costs of origination, are deferred and amortized over the contractual term of
the loan as an adjustment to the interest yield. During the years ended December 31, 2022, 2021, and 2020
salaries and employee benefits expense totaling $876,000, $1,018,000 and $885,000 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, 2022 and 2021 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)
12.
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 $3,873,000 and $2,800,000 at December 31, 2022 and 2021, 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, 2022 and 2021. Correspondent bank stock accounts on the consolidated
balance sheet include The Independent Bankers Bank (TIB) stock of $225,000 and Pacific Coast Bankers’
Bank (PCBB) stock of $400,000 at December 31, 2022 and 2021. TIB and PCBB stock are carried at cost
and were not considered impaired as of December 31, 2022 and 2021. The Company has made certain
investments in Small Business Development Corporations (SBICs). SBIC investments on the consolidated
balance sheet include $1,045,000 and $695,000, at December 31, 2022 and 2021, respectively. These
investments are carried at cost and were not considered impaired as of December 31, 2022 and 2021. The
Company held stock in Farmer Mac with a balance of at $11,000 and $12,000 as of December 31, 2022 and
2021, respectively and are 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.
Advertising Costs: The Company expenses the costs of advertising in the year incurred. Advertising expense
was $402,000, $231,000 and $448,000 for the years ended December 31, 2022, 2021, and 2020,
respectively.
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)
13.
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, 2022 and 2021 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, 2022 and 2021. The Company recognizes interest
accrued and penalties related to unrecognized tax benefits in tax expense. During the years ended
December 31, 2022, 2021, and 2020, the Company recognized no interest and penalties.
Comprehensive Income: Changes in unrealized gains and losses on available-for-sale securities are the only
component of accumulated other comprehensive income (loss) 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.
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 equity plan.
(Continued)
14.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Transfers of Financial Assets: Transfers of financial assets are accounted for as sales when control over the
assets has been surrendered. Control over transferred assets is deemed to be surrendered when: (1) the
assets have been isolated from the Company, (2) the transferee obtains the right (free of conditions that
constrain it from taking advantage of that right) to pledge or exchange the transferred assets, and (3) the
Company does not maintain effective control over the transferred assets through an agreement to repurchase
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,
2022 and 2021 were $204,000 and $179,000 respectively. No impairment charges were recorded for the
years ended December 31, 2022 or 2021 related to servicing assets.
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. The Bank’s 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.
(Continued)
15.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 – DEBT SECURITIES
The amortized cost and estimated fair values of debt securities are as follows:
2022
Amortized Cost
Gross Unrealized
Gains
Gross
Unrealized
Losses
Estimated Fair
Value
$
11,843
$
-
$
(1,297)
$
10,546
18,056
139,300
170,450
32,626
372,275
$
119
31
96
-
$
246
(389)
(21,198)
(6,679)
(2,598)
(32,161)
$
17,786
118,133
163,867
30,028
340,360
$
1,079
2,404
3,483
$
-
-
$
-
$
$
$
$
(54)
(67)
(121)
1,025
2,337
3,362
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
2021
Amortized Cost
Gross Unrealized
Gains
Gross
Unrealized
Losses
Estimated Fair
Value
$
11,816
$
47
$
(107)
$
11,756
26,985
130,361
91,028
23,700
283,890
$
473
3,839
515
221
5,095
$
(23)
(626)
(126)
(157)
(1,039)
$
27,435
133,574
91,417
23,764
287,946
$
1,440
2,583
4,023
$
64
167
231
$
-
-
$
-
1,504
2,750
4,254
$
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
(Continued)
16.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 – DEBT SECURITIES (Continued)
The amortized cost and estimated fair value of all investment securities as of December 31, 2022, 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
$
- $
12,126
39,200
132,443
-
11,253
35,774
111,680
$ 183,769 $ 158,707
U.S. government and agency securities
Mortgage-backed securities
Held-to-maturity
U.S. government and agency securities
Mortgage-backed securities
18,056
170,450
17,786
163,867
$
372,275 $
340,360
Amortized
Estimated
Fair Value
$
$
1,079 $
2,404
3,483 $
1,025
2,337
3,362
The gross unrealized loss and related estimated fair value of investment securities that have been in a
continuous loss position for less than twelve months and over twelve months are as follows:
2022
Treasury securities
U.S. government
sponsored entities
and agencies
State and political
subdivision
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
7,142
(815)
3,404
(482)
10,546
(1,297)
1,547
(49)
5,619
(340)
7,166
(389)
27,975
(8,472)
84,780
(12,726)
112,755
(21,198)
16,239
(1,157)
135,352
(5,522)
151,591
(6,679)
11,247
(1,124)
18,281
(1,474)
29,528
(2,598)
$
64,150
$
(11,617)
$
247,436
$
(20,544)
$
311,586
$ (32,161)
(Continued)
17.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 – DEBT SECURITIES (Continued)
12 months or more
Less than 12 months
Total
2021
Fair Value
Unrealized
Loss
Fair Value
Unrealized
Loss
Fair Value
Unrealized Loss
-
-
7,838
(107)
7,838
(107)
Treasury securities
U.S. government
sponsored entities and
agencies
State and political
subdivision
Mortgage backed
securities
2,284
8,936
(10)
(196)
-
-
2,654
(13)
27,947
(430)
21,980
12,293
(126)
(157)
4,938
36,883
21,980
12,293
(23)
(626)
(126)
(157)
Other Domestic Debt
-
-
$ 11,220
$ (206)
$ 72,712
$ (833)
$ 83,932
$ (1,039)
As of December 31, 2022, there were 4 held-to-maturity investment securities with a fair value of $3,362,000
and an unrealized loss of $121,000. These securities were in a loss position for less than 12 months and
there were no held-to-maturity securities in a loss position greater than 12 months. As of December 31, 2021,
no held-to-maturity securities were in a loss position.
Certain investment securities shown in the previous table currently have fair values less than amortized cost
and therefore contain unrealized losses. The Company considers a number of factors including, but not
limited to: (a) the length of time and the extent to which the fair value has been less than the amortized cost,
(b) the financial condition and near-term prospects of the issuer, (c) the intent and ability of the Company to
retain its investment for a period of time sufficient to allow for an anticipated recovery in value, (d) whether the
debtor is current on interest and principal payments, and (e) general market conditions and the industry-or
sector-specific outlook. Management has evaluated all securities at December 31, 2022 and 2021 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, 2022, there
were 56 investment securities with a value of $64,150,000 that were in a loss position for more than 12
months. The Company anticipates full recovery of amortized cost with respect to these securities at maturity
or sooner in the event of a more favorable market interest rate environment.
The proceeds from sales and calls of investment securities and the associated gains and losses are listed
below:
2022
2021
2020
Proceeds
Gross gains
Gross losses
$
$
(Continued)
8,312
7
312
$
$
$9,563
297
2
$
$
3,239
60
-
18.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 – DEBT SECURITIES (Continued)
Debt securities carried at approximately $257,192,000 and $44,121,000 at December 31, 2022 and 2021,
respectively, were pledged to secure public deposits, borrowing lines, or other purposes as permitted or
required by law.
At year-end 2022 and 2021, there were no holdings of securities of any one issuer, other than the U.S.
Government and its agencies, in an amount greater than 10% of shareholders’ equity.
NOTE 3 – LOANS
Major classifications of loans are as follows:
Commercial and industrial
Commercial real estate
Land and construction
Residential real estate
Agriculture
Consumer
Allowance for loan losses
Deferred loan fees and (costs), net
$
2022
2021
212,529 $
493,357
63,265
17,802
58,494
16
237,814
382,021
31,917
17,150
57,349
2
845,463
726,253
(9,914)
(2,910)
(9,785)
(2,981)
Loans, net of allowance
$
832,639 $
713,487
The Company’s loan portfolio consists primarily of loans to borrowers within Fresno County, California.
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.
Included in the commercial and industrial loans are loans originated under the Small Business Administrative
(SBA) programs throughout the years. In addition, the Company participated in the SBA Paycheck Protection
Program (PPP), which totaled $242,000 on December 31, 2022.
(Continued)
19.
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, 2022
Commercial
and
Industrial
Commercial Land and
Residential
Real Estate Construction Real Estate Agriculture Consumer
Total
Recorded investment in impaired loans:
With no specific allowance
recorded
With specific allowance
recorded
$
Total recorded investment
In impaired loans
$
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
$
$
$
$
$
- $
6,373
6,373 $
- $
6,373
6,373 $
1,667 $
4,086 $
- $
- $
-
- $
- $
-
- $
- $
- $
- $
- $
-
- $
- $
-
- $
- $
- $
- $
- $
-
- $
- $
-
- $
- $
- $
- $
- $
-
- $
- $
-
- $
- $
- $
- $
- $
-
-
6,373
- $
6,373
- $
-
- $
- $
- $
- $
-
6,373
6,373
1,667
4,086
-
(Continued)
20.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 – LOANS (Continued)
December 31, 2021
Commercial
and
Industrial
Commercial Land and
Residential
Real Estate Construction Real Estate Agriculture Consumer
Total
Recorded investment in impaired loans:
With no specific allowance
recorded
With specific allowance
recorded
$
- $
2,920
- $
10
Total recorded investment
In impaired loans
$
2,920 $
10 $
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
2,920 $
1,062 $
2,057 $
- $
- $
10
10 $
10 $
7 $
- $
- $
-
- $
- $
-
- $
- $
- $
- $
- $
-
- $
- $
-
- $
- $
- $
- $
- $
-
- $
- $
-
- $
- $
- $
- $
- $
-
-
2,930
- $
2,930
- $
-
- $
- $
- $
- $
-
2,930
2,930
1,072
2,064
-
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 inception 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)
21.
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 may 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, 2022 and 2021:
December 31, 2022
Grade:
Commercial & industrial
Commercial real estate
Land & construction
Residential real estate
Agriculture
Consumer
$
Pass
Special
Mention
Substandard
Doubtful
Total
7,422 $
201,903 $
490,338
63,265
17,802
-
58,494 -
-
212,529
3,204 $
3,019
493,357
- - - 63,265
17,802
58,494
16
-
- -
-
- $
-
16
-
-
Total
$
831,818 $
6,223 $
7,422 $
- $
845,463
December 31, 2021
Grade:
Commercial & industrial
Commercial real estate
Land & construction
Residential real estate
Agriculture
Consumer
$
Special
Special
Mention
Pass
Substandard
Doubtful
Total
- $
234,743 $
377,157
31,917
17,150
-
57,349 -
-
237,814
4,854
382,021
- - - 31,917
-
17,150
-
- - 57,349
2
-
-
3,071 $
10
- $
-
2
Total
$
718,318 $
4,854 $
3,081 $
- $
726,253
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
2022
2021
$
6,373 $
-
-
-
-
-
$
6,373 $
2,920
-
-
-
10
-
2,930
(Continued)
22.
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, 2022:
59
30
Days
‐
Past Due
89
60
Days
‐
Past Due
Greater
than
90 Days
Total
Past
Due
Current
Total
Loans
Investment >
90 Days and
Accruing
Commercial & Industrial
Commercial Real Estate
Land & Construction
Residential Real Estate
Agriculture
Consumer
$
364 $
-
-
-
-
-
397 $
-
-
-
-
-
11,962 $
12,723 $
-
-
-
27
-
-
-
-
27
-
11,962
212,529 $
199,806 $
-
493,357
493,357
63,265
-
63,265
17,802 17,802 -
27
58,494
58,467
-
16
16
Total
$
364 $
397 $
11,989 $
12,750 $
832,713 $
845,463 $
11,989
The Bank has purchased the government guaranteed portion of Small Business Administration (“SBA”)
and USDA loans originated by other banks. Many of these purchased loans were placed into a Direct
Registration (“DR”) form by the SBA’s transfer agent, Colson Inc. Under the DR program, Colson was
required to remit monthly payments to the investor holding the guaranteed balance, whether or not a
payment had actually been received from the borrower. When Colson lost the contract in 2020 as the
SBA’s fiscal transfer agent, they began transitioning servicing over to the new company called
Guidehouse. By late 2021, Guidehouse, under their contract with the SBA, declined to continue the DR
program. As a result, all payments under the DR, and several similar programs, were being held by
Guidehouse until the DR program could be unwound and the DR holdings converted into normal SBA
pass through certificates. In addition, Colson started requesting investors, who had received payments in
advance of the borrower, to return advanced funds before they would process the conversion of
certificates, which caused further delays. A reconciliation between Guidehouse, Colson and the Bank
has taken place, and all are in agreement. The Bank has submitted all paperwork and original certificates
to Colson | Guidehouse for processing and is awaiting reissue of the certificates and payment. The Bank
is fully guaranteed; however, until the unwind process is completed it will continue to carry these loans as
past due. As of December 31, 2022, the entire balance of $11,989,000 in loans 90 days past due and
accruing are fully guaranteed by the SBA.
Subsequent to year end, the balance of the loans greater than 90 days past due and still accruing has
been reduced to $7,601,000 due to payments received through March 23, 2023.
The following table is an aging analysis of loans, segregated by class of loans, as of December 31, 2021:
30
59
Days
‐
Past Due
60
89
Days
‐
Past Due
Greater
than
90 Days
Total
Past
Due
Current
Recorded
Investment >
90 Days and
Accruing
Total
Loans
Commercial & Industrial
Commercial Real Estate
Land & Construction
Residential Real Estate
Agriculture
Consumer
$
3,832 $
-
-
-
-
-
254 $
-
-
-
-
-
984 $
10
-
-
-
-
5,070 $
10
-
-
-
-
232,744 $
382,011
31,917
17,150
57,349
2
237,814 $
382,021
31,917
17,150
57,349
2
Total
$
3,832 $
254 $
994 $
5,080 $
721,173 $
726,253 $
-
-
-
-
-
-
-
The Company had no recorded investment in troubled debt restructurings for the years ended December 31,
2022 and 2021. There were no modifications made during the periods ended December 31, 2022 and
December 31, 2021, respectively.
(Continued)
23.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 – LOANS (Continued)
A loan is considered to be in payment default once it is 90 days contractually past due under the modified
terms. In order to determine whether a borrower is experiencing financial difficulty, an evaluation is performed
of the probability that the borrower will be in payment default on any of its debt in the foreseeable future
without the modification. This evaluation is performed under the Company’s internal underwriting policy.
(Continued)
24.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 – LOANS (Continued)
The following table summarizes the Company’s allowance for loan losses for the year ended December 31, 2022 by loan product and collateral type:
Commercial
and Industrial
Commercial
Real Estate
Land and
Construction
Residential
Real Estate
Agriculture
Consumer
Unallocated
Total
Allowance for loan losses:
Beginning balance
Charge-offs
Recoveries
Provision
$
$
2,943
(187)
16
2,029
$
5,362
-
-
(1,464)
$
652
-
-
329
$
165
-
-
(45)
514 $
-
-
(404)
Ending balance
$
4,801
$
3,898
$
981
$
120
$
110 $
Period-end amount allocated to:
Loans individually evaluated
for impairment
Loans collectively evaluated
for impairment
$
1,667
$
-
$
-
$
-
$
- $
3,134
3,898
981
120
110
Ending Balance
$
4,801
$
3,898
$
981
$
120
$
110 $
-
-
-
-
-
-
-
$
$
$
$
Loans:
Individually evaluated
for impairment
Collectively evaluated
for impairment
$
6,373
$
-
$
-
$
-
$
- $
-
$
206,156
493,357 63,265 17,802 58,494
16
Ending balance
$
212,529 $ 493,357 $ 63,265 $ 17,802 $ 58,494 $ 16 $
$
149
-
-
(145)
9,785
(187)
16
300
4
$
9,914
-
4
4
-
-
-
$
1,667
8,247
$
9,914
$
6,373
839,090
$
845,463
(Continued)
25.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 – LOANS (Continued)
The following table summarizes the Company’s allowance for loan losses for the year ended December 31, 2021 by loan product and collateral type:
Commercial
and Industrial
Commercial
Real Estate
Land and
Construction
Residential
Real Estate
Agriculture
Consumer
Unallocated
Total
Allowance for loan losses:
Beginning balance
Charge-offs
Recoveries
Provision
$
$
3,563
(64)
-
(556)
$
2,884
-
-
2,478
$
333
-
-
319
$
140
-
-
25
312 $
-
-
202
Ending balance
$
2,943
$
5,362
$
652
$
165
$
514 $
Period-end amount allocated to:
Loans individually evaluated
for impairment
Loans collectively evaluated
for impairment
$
1,363
$
10
$
-
$
-
$
- $
1,580
5,352
652
165
514
Ending Balance
$
2,943
$
5,362
$
652
$
165
$
514 $
-
-
-
-
-
-
-
-
$
$
$
$
Loans:
Individually evaluated
for impairment
Collectively evaluated
for impairment
$
2,920
$
10
$
-
$
-
$
- $
-
$
234,894
382,011
31,917
17,150
57,349
2
Ending balance
$
237,814
$ 382,021 $ 31,917 $ 17,150 $ 57,349 $ 2 $
$
617
-
-
(468)
7,849
(64)
-
2,000
149
$
9,785
-
$
1,373
149
8,412
149
$
9,785
-
-
-
$
2,930
723,323
$
726,253
(Continued)
.
26
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
2022
2021
$
1,004 $
932
1,136
3,072
1,004
881
891
2,776
Less accumulated depreciation
(2,668)
(2,482)
$
404 $
294
Depreciation expense amounted to $198,000, $137,000, and $159,000 for the years ending December 31,
2022, 2021, and 2020, 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, 2022, the future undiscounted lease payments under non-cancellable operating lease
commitments for the Company’s offices were as follows:
2023
2024
2025
2026
Thereafter
Total undiscounted lease payment
Less: imputed interest
$
490
490
490
83
-
1,553
141
Net lease liabilities
$
1,412
(Continued)
27.
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
2022 2021 2020
$ 660 $ 529 $ 497
$ 55 $ 39 $ 33
$ 715 $ 568 $ 530
The table below summarizes other information related to the Company’s operating leases for the twelve
months ending December 31:
2022 2021 2020
Weighted average remaining lease term, in years
Weighted average discount rate
2.80
5.01%
3.81 4.49
4.50% 4.50%
Balance Sheet Classification
2022
2021
Right-of-use assets
Lease liabilities
Interest receivable and other assets
Interest payable and other liabilities
$1,361
$1,412
$1,583
$1,603
Total lease cost included in occupancy and equipment was $715,000, $568,000, and $530,000 for the years
ended December 31, 2022, 2021, and 2020, respectively.
NOTE 6 – DEPOSITS
Customer deposits were as follows:
interest
bearing demand
Non
Savings, NOW, and money market accounts
Time deposits under $250,000
Time deposits $250,000 and over
‐
‐
2022
2021
$
737,078 $
289,028
29,541
25,580
594,044
276,023
45,230
21,251
$
1,081,227 $
936,548
At December 31, 2022, the scheduled maturities of time deposits are as follows:
2022
2023
2024
2025
2026
Thereafter
$
49,953
3,355
568
743
502
-
$
55,121
(Continued)
28.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7 – BORROWING ARRANGEMENTS
The Company had unsecured available lines of credit with correspondent banks for short-term borrowings
totaling $91,500,000 and $45,500,000 on December 31, 2022, and 2021, respectively. overnight on an
unsecured basis from three correspondent banks. In general, interest rates on these lines approximate the
federal funds target rate. There were no borrowings under these credit facilities on December 31, 2022, or
2021.
As of December 31, 2022 and 2021, the Company had available lines of credit with the Federal Home Loan
Bank of San Francisco totaling $244,139,000 and $187,276,000, respectively, based on eligible collateral of
certain loans and investment securities. As of December 31, 2022 and 2021, the Company had an available
line of credit with the Federal Reserve Bank of San Francisco totaling $212,363,000 and $36,951,000,
respectively, based on eligible collateral of certain loans and investment securities.
As of December 31, 2022, the Company had $55,000,000 in advances outstanding from the Federal Home
Loan Bank of San Francisco and $10,000,000 from the Federal Reserve Bank of San Francisco. As of
December 31, 2021, no amounts were outstanding under these arrangements.
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, 2022, 2021, and 2020 contributions to the ESOP were $681,000, $531,000 and
$433,000 respectively. The ESOP held 176,445, and 173,127 shares of common stock as of December 31, 2022,
and 2021, respectively, and there were no unearned shares of common stock held by the ESOP at December 31,
2022 and 2021.
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, 2022, 2021, and 2020.
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 $171,000, $223,000, and $631,000 for the years ended December 31,
2022, 2021, and 2020, respectively. Accrued compensation payable under the salary continuation plan totaled
$1,676,000, $1,535,000, and $1,311,000 at December 31, 2022, 2021, and 2020 and is included in interest
payable and other liabilities on the Company’s balance sheet.
(Continued)
29.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9 – INCOME TAXES
The provision for income taxes for the years ended December 31 consists of the following:
Current
Federal
State
Deferred
Federal
State
2022
2021
2020
$
6,223 $
3,585
9,808
(200)
(61)
5,336 $
3,270
8,606
(665)
(250)
3,554
2,082
5,636
(1,010)
(430)
(261)
(915)
(1,440)
Provision
$
9,547 $
7,691 $
4,196
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:
based compensation
Deferred tax assets
Depreciation
Allowance for loan losses
Stock
Deferred compensation
State tax deferral
Non-accrual loan interest
Lease Liability
Unrealized losses on available
‐
for
sale securities
Other
Deferred tax liabilities:
Unrealized gains on available
Lease financing receivable
Right-of-use asset
Deductible Prepaids
‐
Other
‐
‐
for
sale securities
‐
2022
2021
$ 77 $ 107
2,742
251
454
682
13
474
-
146
2,931
345
495
772
91
417
9,434
98
14,660
4,869
-
(128)
(402)
(72)
(381)
(1,199)
(142)
(468)
-
(276)
(983)
(2,085)
Net deferred income tax asset
$
13,677 $
2,784
The Company is subject to federal income tax and franchise tax of the state of California, as well as other
immaterial state taxing jurisdictions. Income tax returns for the years ended December 31, 2019 through
December 31, 2021 are open to audit by the federal authorities and income tax returns for the years ended
December 31, 2018 through December 31, 2021, are open to audit by state authorities. As of December 31,
2022, 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)
30.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 10 – RELATED PARTY TRANSACTIONS
The Company makes loans to certain directors, officers, and their related interests with which they are
associated. The balance of these loans outstanding was approximately $3,102,000 and $3,618,000 at
December 31, 2022 and 2021, respectively.
Deposits from certain directors, officers, and their related interests with which they are associated, held by the
Company at December 31, 2022 and 2021, totaled $7,364,000 and $7,198,000 respectively.
NOTE 11 – EARNINGS PER SHARE (EPS)
Earnings per share for the years ended December 31 were computed as follows:
2022
2021
2020
Basic earnings per share:
Net income available to common
shareholders (in thousands)
Weighted average common shares
outstanding
$
26,521 $
20,527 $
11,512
3,118,150
3,068,564
2,996,920
Basic earnings per share
$
8.51 $
6.69 $
3.84
Diluted earnings per share:
Net income available to common shareholders,
diluted (in thousands)
$
26,521 $
20,527 $
11,512
Weighted average common shares
outstanding
Effect of dilutive stock options
3,118,150
23,686
3,068,564
31,065
2,996,920
37,788
Adjusted weighted average common shares
outstanding, diluted
3,141,836 3,099,626
3,034,708
Diluted earnings per share
$
8.44 $
6.62 $
3.79
At December 31, 2022, 2021 and 2020, there were 1,288, 7,020, and 10,797 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.
(Continued)
31.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
As of December 31, 2022, and 2021, the Company had the following outstanding financial commitments
whose contractual amount represents credit risk:
Commitments to extend credit
Letters of credit
2022
2021
$
$
163,964 $
1,877
169,356
1,333
165,841 $
170,689
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 $1,612,000, $1,032,000, and $674,000 in 2022,
2021, and 2020, respectively. The total income tax benefit was $411,000, $281,000, and $180,000 for 2022,
2021, and 2020, respectively.
(Continued)
32.
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, 2022,
and changes during the year ending thereon, is presented below:
Weighted
Average
Exercise
Price
Weighted
Average
Remaining
Contractual
Term
Aggregate
Intrinsic
Value
Shares
38,085
-
$
$
8.78
1.18 years
$ 1,951,000
-
(30,121) $
8.22
(439) $
10.00
7,525
7,525
$
$
10.36
1.3 years
10.36
1.3 years
$
$
377,000
377,000
Outstanding at beginning of year
Granted
Exercised
Forfeited, expired, or returned to
Plan through cashless exercise
Outstanding at end of year
Options exercisable
As of December 31, 2022, 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, 2022
Granted
Vested
Forfeited
Non-vested at December 31, 2022
64,115 $
40,966
(37,968)
(300)
66,813 $
31.60
58.06
30.60
34.00
48.38
As of December 31, 2022, there was approximately $1,942,000 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)
33.
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 $901,000 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 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, 2022, 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 December 31, 2022 and 2021, the most recent
regulatory notifications categorized the Bank as well-capitalized under the regulatory framework for prompt
corrective action.
(Continued)
34.
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 for
the Bank 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
December 31, 2022:
Common Equity Tier I Capital
Weighted Assets)
(to Risk
Total Capital
(to Risk
Tier I Capital
(to Risk
Tier I Capital
(to Average Assets)
‐
‐
Weighted Assets)
‐
Weighted Assets)
December 31, 2021:
Common Equity Tier I Capital
Weighted Assets)
(to Risk
Total Capital
(to Risk
Tier I Capital
(to Risk
Tier I Capital
(to Average Assets)
‐
‐
Weighted Assets)
‐
Weighted Assets)
$
$
$
$
$
$
$
$
149,435
15.36% $
43,777
>4.5% $
63,233
>6.5%
159,369
16.38% $
77,825
>8.0% $
97,282
>10.0%
149,435
15.36% $
58,369
>6.0% $
77,826
>8.0%
149,435
11.68% $
51,158
>4.0% $
63,947
>5.0%
122,951
16.11% $
34,354
>4.5% $
49,622
>6.5%
132,497
17.36% $
61,074
>8.0% $
76,342
>10.0%
122,951
16.11% $
45,805
>6.0% $
61,074
>8.0%
122,951
11.44% $
42,994
>4.0% $
53,743
>5.0%
Dividends:
The California Financial Code provides that a bank may not make a cash distribution to its shareholders in
excess of the lessor of the bank’s undivided profits or the bank’s net income for its last three fiscal years less
any distributions made to shareholders during the same period without the approval in advance of the
Commissioner of the California Department of Financial Protection and Innovation.
Common Stock:
On February 15, 2022, the Company issued 11,525 shares of its common stock totaling $681,000 as the
Company’s ESOP contribution for 2022. On March 2, 2021, the Company issued 14,027 shares of its
common stock totaling $456,000 as the Company’s ESOP contribution for 2021
(Continued)
35.
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 was
one Commercial & Industrial collateral-dependent impaired loan with a balance of $1,782,000 measured at fair
value on a non-recurring basis at December 31, 2022. There were no collateral-dependent impaired loans
measured at fair value at December 31, 2021.
(Continued)
36.
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, 2022:
Description of Assets
Securities available
‐
sale
for
U.S. Treasury and federal agency
‐
U.S. government sponsored
entities and agencies
State and municipal agencies
Mortgage
Other domestic debt
‐
Total
backed securities
Quoted
Prices in
Active Markets
For Identical
Assets
(Level 1)
December 31,
2022
Significant
Significant
Other
Observable Unobservable
Inputs
(Level 2)
Inputs
(Level 3)
$
10,546
$
17,785
118,134
163,867
30,028
$ 340,360 $
-
-
-
-
-
-
$
10,546
$
17,785
118,134
163,867
30,028
$ 340,360 $
-
-
-
-
-
-
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
Securities available
for
sale
‐
U.S. Treasury and federal agency $ 11,756 $ - $ 11,756
‐
U.S. government sponsored
entities and agencies
State and municipal agencies
Mortgage
Other domestic debt
‐
Total
27,435
133,574
91,417
23,764
27,435
130,574
91,417
23,764
backed securities
287,946
287,946
-
-
-
-
$
$
$
-
$
$
-
-
-
-
-
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
(Continued)
37.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 16 – FAIR VALUE (Continued)
considered financial instruments. Additionally, tax consequences related to the realization of the unrealized
gains and losses can have a potential effect on fair value estimates and have not been considered in many of
the estimates.
The 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.
(Continued)
38.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 16 – FAIR VALUE (Continued)
The carrying amounts and estimated fair value of financial instruments not carried at fair value at
December 31 are summarized as follows (in thousands):
2022
2021
Carrying
Amount
Estimated Fair Value Carrying
Amount
Fair Value Hierarchy
Estimated Fair Value
Fair Value Hierarchy
Financial assets:
Cash and cash equivalents
Certificates of deposit
$
Securities held-to-maturity
Loans held for sale
Loans, net
SBIC investments
Interest receivable
Financial liabilities:
Deposits
Long term debt
Interest payable
56,974 $
2,983
3,483
11,063
832,639
1,044
6,964
1,081,227
39,441
283
56,974
2,983
3,363
11,063
827,842
1,044
6,964
945,427
34,221
283
Level 1 $
Level 2
Level 2
Level 2
Level 3
Level 2
Level 2
36,780 $
1,490
4,023
3,811
713,487
694
5,189
Level 2
Level 3
Level 2
936,548
39,283
226
36,780
1,490
4,254
3,811
735,530
694
5,189
957,147
39,283
226
Level 1
Level 2
Level 2
Level 2
Level 3
Level 2
Level 2
Level 2
Level 3
Level 2
NOTE 17 – INVESTMENT IN LOW INCOME HOUSING TAX CREDIT FUNDS
The Company invests in Low Income Housing Tax Credit “LIHTC” partnerships. At December 31, 2022, and
2021, the investment balance for LIHTC partnerships was $7,741,000 and $8,000,000 respectively. These
balances are reflected in interest receivable and other assets on the consolidated balance sheets. Total
unfunded commitments related to these partnerships totaled $7,948,000 at December 31, 2022 which is
reflected in interest payable and 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, 2022, the Company recorded amortization expense of $259,000, in
income tax expense. The Company recorded no amortization expense associated with the LIHTC for the year
ended December 31,2021. The recognized tax benefit for the year ended December 31, 2022, was $495,000.
The Company did not recognize any tax benefit associated with the LIHTC in the year end December 31,
2021.
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.
2022
2021 2020
Non-interest income
$ 2,217 $ 1,573 $ 637
Service charges on deposits
Debit card interchange fees 539 506 302
Merchant Services 8,435 4,000 3,959
$ 11,191 $ 6,079 $ 4,898
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 $2,148,000, which
is outside the scope of ASC 606.
39.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 18 – REVENUE FROM CONTRACTS WITH CUSTOMERS (Continued)
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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