Table of Contents

 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549 
FORM 10-K 
x  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the fiscal year ended December 31, 20152018 
OR
¨  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from             to 
Commission file number:  000-31977
CENTRAL VALLEY COMMUNITY BANCORP
(Exact name of registrant as specified in its charter)
CALIFORNIA 77-0539125
(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.)
7100 N. Financial Dr., Suite 101, Fresno, CA 93720
(Address of principal executive offices) (Zip Code)
 559-298-1775
(Registrant’s telephone number, including area code)
[None]
(Former name, former address and former fiscal year, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act:
NoneTitle of Each ClassName of Each Exchange on which Registered
Common Stock, no par value NASDAQ Capital Market
[Common Stock, $      par value per share][EXCHANGE]
Securities registered pursuant to Section 12(g) of the Act:  Common Stock, No Par ValueNone 
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes o No x 
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act.  Yes o No x 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes x No o 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulations S-T (232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes x No o 
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.   o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “smaller“emerging reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer  o
Accelerated filer  x
Non-accelerated filer  o(Do not check if a smaller reporting company)
Smaller reporting company  o
(Do not check if a smaller
Emerging reporting company)
company  o
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act  o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes o No  x 
As of June 30, 20152018, the aggregate market value of the registrant’s common stock held by non-affiliates of the registrant was $103,500,000$222,959,000 based on the price at which the stock was last sold on June 30, 2015.2018. 
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
Common Stock, No Par Value Outstanding at March 7, 20162019
[Common Stock, No par value per share] 11,015,92913,712,431
shares
 DOCUMENTS INCORPORATEDBY REFERENCE
DocumentParts into Which Incorporated
Proxy Statement for the Annual Meeting of Shareholders to be held May 18, 2016 (Proxy Statement)Part III
Portions of the Registrant’s definitive proxy statement to be filed with the Securities and Exchange Commission pursuant to Regulation 14A in connection with the 2019 Annual Meeting of Shareholders to be held on May 15, 2019 are incorporated by reference into Part III of this Report. The proxy statement will be filed with the Securities and Exchange Commission not later than 120 days after the Registrant’s fiscal year ended December 31, 2018.
 



TABLE OF CONTENTS
 
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   

 

 



ADDITIONAL INFORMATION; INQUIRIES
Under the Securities Exchange Act of 1934, Sections 13 and 15(d), periodic and current reports must be filed with the SEC.  We electronically file the following reports with the SEC:

Form 10-K — Annual Report;
Form 10-Q  — Quarterly Report;
Form 8-K  — Report of Unscheduled Material Events; and
Form DEF 14A — Proxy Statement.
We may file additional forms.  The SEC maintains an Internet site, www.sec.gov, in which all forms filed electronically may be accessed.  Additional shareholder information regarding the Company and our Directors is available on our website: www.cvcb.com.  None of the information on or hyperlinked from our website is incorporated into this Report.
Copies of the annual report on Form 10-K for the year ended December 31, 2015 may be obtained without charge upon written request to Dave Kinross, Chief Financial Officer, at the Company’s administrative offices,  7100 N. Financial Dr., Suite 101, Fresno, CA  93720.
Inquiries regarding Central Valley Community Bancorp’s accounting, internal controls or auditing concerns should be directed to Steven D. McDonald, chairman of the Board of Directors’ Audit Committee, at steve.mcdonald@cvcb.com or anonymously at www.ethicspoint.com or EthicsPoint, Inc. at 1-866-294-9588.
General inquiries about Central Valley Community Bancorp or Central Valley Community Bank should be directed to Cathy Ponte, Assistant Corporate Secretary at 1-800-298-1775.

PART I

ITEM 1 -DESCRIPTION OF BUSINESS
 
General
 
Central Valley Community Bancorp is a bank holding company registered under the Bank Holding Company Act of 1956, as amended (the Company)“Company”). The Company was incorporated on February 7, 2000 as a California corporation, for the purpose of becoming the holding company for Central Valley Community Bank (the Bank)“Bank”), formerly known as Clovis Community Bank, a California state chartered bank, through a corporate reorganization.  In the reorganization, the Bank became the wholly-owned subsidiary of the Company, and the shareholders of the Bank became the shareholders of the Company.  The Company is registered asmade a bank holding company underdecision in the first half of 2002 to change the name of its one subsidiary, Clovis Community Bank, Holding Company Act of 1956, as amended (the BHC Act), and is subject to supervision and regulation by the Board of Governors of the Federal Reserve System (the Board of Governors).Central Valley Community Bank.
At December 31, 20152018, we had onethe Bank was our only banking subsidiary,subsidiary.  The Bank is a multi-community bank that offers a full range of commercial banking services to small and medium size businesses, and their owners, managers and employees in the Bank.  Our principal business is to provide, through our banking subsidiary, financial services in our primary marketcentral valley area inof California.  We serve sevennine contiguous counties in California’s central valley including Fresno County, El Dorado County, Madera County, Merced County, Placer County, Sacramento County, San Joaquin County, Stanislaus County, and Tulare County, and their surrounding areas through the Bank.areas.  We do not currently conduct any operations other than through the Bank.  Unless the context otherwise requires, references to us“us,” “we,” or “our” refer to the Company and the Bank on a consolidated basis.  At December 31, 20152018, we had consolidated total assets of approximately $1,276,736,0001,537,836,000.  See Items 7 and 8, Management’s Discussion and Analysis of Financial Condition and Results of Operations, and Financial Statements.
Effective JulyOctober 1, 2013,2017, the Company and Visalia CommunityFolsom Lake Bank (VCB)(FLB) completed a merger under which Visalia CommunityFolsom Lake Bank, with two full-service offices, located in Folsom and Rancho Cordova (Sacramento County), merged with and into the Bank. Effective October 1, 2016, the Company and Sierra Vista Bank (SVB) completed a merger under which Sierra Vista Bank, with three full-service offices, located in VisaliaFolsom and one in Exeter,Fair Oaks (Sacramento County) and Cameron Park (El Dorado County), merged with and into the Bank.
On August 18, 2011,The Company is regulated by the Company entered into a Securities Purchase Agreement (SPA) with the Small Business Lending FundBoard of Governors of the United StatesFederal Reserve. The Bank is regulated by the California Department of Business Oversight and its primary Federal regulator is the Treasury (the Treasury), under which the Company issued 7,000 shares of Senior Non-Cumulative Perpetual Preferred Stock, Series C (Series C Preferred) to the Treasury for an aggregate purchase price of $7,000,000. Simultaneously, the Company agreed with Treasury under a Letter Agreement to redeem, for an aggregate price of $7,000,000, the 7,000 shares of the Company’s Series A Fixed Rate Cumulative Preferred Stock (Series A Stock) originally issued pursuant to the Treasury’s Capital Purchase Program (CPP) in 2009. The redemption of the Series A Stock resulted in an acceleration of the remaining discount booked at the time of the CPP transaction. In connection with the repurchase of the Series A Stock, the Company also repurchased the warrant (the Warrant) to purchase 79,037 shares of the Company’s common stock that was originally issued to Treasury in connection with the CPP transaction for total consideration of $185,000.
On December 31, 2013, the Company redeemed all 7,000 outstanding shares of its Series C Preferred from the Treasury, in exercise of its optional redemption rights pursuant to the terms of the Series C Preferred under the Company’s charter and the SPA. The Company paid the Treasury $7,087,500 in connection with the redemption, representing $1,000 per

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share of the Series C Preferred plus all accrued and unpaid dividends through the date of the redemption. The obligations of the Company under the SPA are terminated as a result of the redemption. No shares of Series C Preferred remain outstanding.Federal Deposit Insurance Corporation (“FDIC”).
As of March 1, 2016,2019, we had a total of 282309 employees and 272290 full time equivalent employees, including the employees of the Bank.
 
The Bank
 
The Bank was organized in 1979 and commenced business as a California state chartered bank in 1980.  The deposits of the Bank are insured by the Federal Deposit Insurance Corporation (the FDIC)FDIC up to applicable limits.  The Bank is not a member of the Federal Reserve System.
The Bank operates 21 full-service banking offices in Cameron Park, Clovis, Exeter, Fair Oaks, Folsom, Fresno, Kerman, Lodi, Madera, Merced, Modesto, Oakhurst, Prather, Rancho Cordova, Roseville, Sacramento, Stockton, Tracy, and Visalia. The Oakhurst and Madera branches were added through the Bank of Madera County merger in 2005.  The Tracy, Stockton and Lodi offices were added through the merger with Service 1st Bank in November of 2008.  The Exeter and Visalia offices were added through the Visalia Community Bank merger in 2013. The Bank has a Real Estate Division, an Agribusiness Center and an SBA Lending Division in Fresno.  All real estate related transactions are conducted and processed through the Real Estate Division, including interim construction loans for single family residences and commercial buildings.  We offer permanent single family residential loans through our mortgage broker services.  Our total market share of deposits in Fresno, Madera, and Tulare counties were 4.76% in 2015 compared to 4.81% in 2014 based on FDIC deposit market share information published as of June 30, 2015.
The Bank of Madera County (BMC) was merged with and into the Bank on January 1, 2005.  The transaction was a combination of cash and stock and was accounted for under the purchase method of accounting.  BMC had two branches in Madera County which continue to be operated by the Bank.
In November of 2008, the Company acquired Service 1st and its banking subsidiary, S1 Bank, adding three branches located in Tracy, Stockton and Lodi, California.
In 2009, we opened a new full service office in Merced, California and relocated our Oakhurst office to a new smaller facility in a more desirable location.
In 2010, the Company expanded the existing Modesto loan production office opened in 2007, to a larger full-service branch.
In 2013, the Company acquired Visalia Community Bank, adding four branches located in Exeter and Visalia, California.
Branch expansions provide the Company with opportunities to expand its loan and deposit base; however, based on past experience, management expects these new offices may initially have a negative impact on earnings until the volume of business grows to cover fixed overhead expenses.  The Bank anticipates additional future branch openings to meet the growing service needs of its customers, although none are planned during 2016. After extensive analysis combined with the rising popularity of online and mobile banking trends, the Company has chosen to consolidate the Sunnyside office into our Fresno Downtown office in April 2016.
The Bank conducts a commercial banking business, which includes accepting demand, savings and time deposits and making commercial, real estate and consumer loans.  It also provides domestic and international wire transfer services and provides safe deposit boxes and other customary banking services.  The Bank also has offeredoffers Internet banking since 2000.banking.  Internet banking consists of inquiry, account status, bill paying, account transfers, and cash management.  The Bank does not offer trust services or international banking services and does not currently plan to do so in the near future.
The Company terminated its interestBank has a Real Estate Division, an Agribusiness Center, and an SBA Lending Division in Central Valley Community Insurance Services, LLC (CVCIS) atFresno.  The Real Estate Division processes or assists in processing the beginningmajority of the third quarterBank's real estate related transactions, including interim construction loans for single family residences and commercial buildings.  We offer permanent single family residential loans through our mortgage broker services.  Our total market share of 2015.deposits in Fresno, Madera, San Joaquin, and Tulare counties was 3.42% in 2018 compared to 3.69% in 2017 based on FDIC deposit market share information published as of June 30, 2018. Our total market share in the other counties we operate in (El Dorado, Merced, Placer, Sacramento, and Stanislaus), was less than 1.00% in 2018 and 2017. We have a diversified loan portfolio. At December 31, 2018, we had total loans of $918,695,000.  Total commercial and industrial loans outstanding were $101,533,000, total agricultural land and production loans outstanding were $7,998,000, total real estate construction and other land loans outstanding were $101,606,000; total other real estate loans outstanding were $597,970,000, total equity loans and lines of credit were $69,958,000 and total consumer installment loans outstanding were $38,038,000.  Our loans are collateralized by real estate, listed securities, savings and time deposits, automobiles, inventory, accounts receivable, machinery and equipment.
In addition to acquisitions, we have experienced organic growth by expanding our branch network. Opening new branches provides us with opportunities to expand our loan and deposit base; however, based on past experience, management expects these new offices may initially have a negative impact on earnings until the volume of business grows to cover fixed overhead expenses.  Management of the Bank analyses its branch network on an ongoing basis to determine whether to open new branches or consolidate or eliminate existing branches in the future. In 2018, we consolidated three banking offices into

branches currently serving the same communities - one in Visalia, one in Tracy, and one in Folsom. In February 2017, the Bank established the Real Estate and Agribusiness Center Branch in Fresno, California. The Bank’s interestprivate banking office in CVCISGold River, California was originally establishedclosed in 2006 forlate April 2017. The Bank opened a full-service branch in Roseville, California the purpose of providing health, commercial property and casualty insurance products and services primarily to business customers. The operating results of CVCIS were not significant to the Company’s operations. The termination of this entity did not have a material impact on the Company’s financial statements.same weekend in April 2017.
Since August of 1995 the Bank has been a party to an agreement with Investment Centers of America, pursuant to which Investment Centers of America provides Bank customers with access to investment services. In connection with entering into this agreement,November 2017, the Bank adopted a policy intendedended its relationship with Investment Centers of America and entered into an agreement with Raymond James Financial Services, Inc. to complyprovide Bank customers with FDIC Regulation Section 337.4, which outlines the guidelines under which an insured non-member bank may be affiliated with a company that directly engages in the sale, distribution, or underwriting of stocks, bonds, debentures, notes, or other securities.access to investment services.
The Bank’s operating policy since its inception has emphasized serving the banking needs of individuals and the business and professional communities in the central valley area of California.  At December 31, 2015, we had total loans of $598,111,000.  Total commercial and industrial loans outstanding were $102,197,000, total agricultural land and production loans outstanding were $30,472,000, total real estate construction and other land loans outstanding were $38,685,000; total other real estate loans outstanding were $371,541,000, total equity loans and lines of credit were $42,296,000 and total consumer installment loans outstanding were $12,503,000.  We accept real estate, listed securities, savings and time deposits, automobiles, inventory, accounts receivable, machinery and equipment as collateral for loans.

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No individual or single group of related accounts is considered material in relation to the Bank’s assets or deposits, or in relation to theour overall business of the Company.  However, at December 31, 2015 approximately 75.7% of our loan portfolio held for investment consisted of real estate-related loans, including construction loans, equity loans and lines of credit and commercial loans secured by real estate and 22.2% consisted of commercial loans.  See Item 7 — Management’s Discussion and Analysis of Financial Condition and Results of Operations.  We believe that these concentrations are mitigated by the diversification of our loan portfolio among commercial, real estate and consumer loans.  In addition, our business activities currently are mainly concentrated in Fresno, Madera, Merced, Sacramento, San Joaquin, Stanislaus, and Tulare County, California.  Consequently, our results of operations and financial condition are dependent upon the general trends in this part of the California economy and, in particular, the residential and commercial real estate markets.  Further, our concentration of operations in this area of California exposes us to greater risk than other banking companies with a wider geographic base in the event of catastrophes, such as earthquakes, fires, droughts, and floods in this region, or as a result of energy shortages in California.
business.  Our deposits are attracted from individual and commercial customers.  A material portion of our deposits have not been obtained from a single person or a few persons, the loss of any one or more of which would not have a material adverse effect on our business.
In order However, at December 31, 2018 approximately 83.8% of our loan portfolio held for investment consisted of loans secured by real estate, including construction loans, equity loans and lines of credit and commercial loans secured by real estate and 12% consisted of commercial loans.  See Item 7 — Management’s Discussion and Analysis of Financial Condition and Results of Operations.  Currently, our business activities are primarily concentrated in Fresno, El Dorado, Madera, Merced, Sacramento, San Joaquin, Stanislaus, and Tulare Counties in California.  Consequently, our results of operations and financial condition are dependent upon the general economic trends in our market area and, in particular, the residential and commercial real estate markets.  Further, our concentration of operations in this area of California exposes us to attract loan and deposit business from individuals and small businesses, we maintain the following lobby hours at our branches:

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BranchMonday — ThursdayFridaySaturday
Clovis Main9:00 a.m. to 4:00 p.m.

Drive Up 8:00 a.m. to 5:30 p.m.
9:00 a.m. to 6:00 p.m.
Drive Up 8:00 a.m. to 6:00 p.m.
None
Fresno Downtown
9:00 a.m. to 4:00 p.m.
Walk-up window 8:00 a.m. to 9:00 a.m.
9:00 a.m. to 5:00 p.m.
Walk-up window 8:00 a.m. to 9:00 a.m.
None
Fig Garden Village9:00 a.m. to 5:00 p.m.9:00 a.m. to 6:00 p.m.9:00 a.m. to 1:00 p.m.
Herndon & Fowler
9:00 a.m. to 5:00 p.m.
Drive Up 8:30 a.m. to 5:30 p.m.
9:00 a.m. to 6:00 p.m.
Drive Up 8:30 a.m. to 6:00 p.m.
9:00 a.m. to 1:00 p.m.
Drive Up 9:00 a.m. to 1:00 p.m.
River Park
9:00 a.m. to 5:00 p.m.
Drive Up 9:00 a.m. to 5:30 p.m.
9:00 a.m. to 6:00 p.m.
Drive Up 9:00 a.m. to 6:00 p.m.
None
Sunnyside *
9:00 a.m. to 5:00 p.m.
Drive Up 8:30 a.m. to 5:00 p.m.
9:00 a.m. to 6:00 p.m.
Drive Up 8:30 a.m. to 6:00 p.m.
None
Kerman
9:00 a.m. to 5:00 p.m.
Drive Up 8:30 a.m. to 5:00 p.m.
9:00 a.m. to 6:00 p.m.
Drive Up 8:30 a.m. to 6:00 p.m.
None
Lodi9:00 a.m. to 5:00 p.m.9:00 a.m. to 6:00 p.m.None
Madera8:30 a.m. to 5:00 p.m.8:30 a.m. to 6:00 p.m.None
Merced9:00 a.m. to 5:00 p.m.9:00 a.m. to 6:00 p.m.None
Modesto
9:00 a.m. to 5:00 p.m.
Drive Up 8:30 a.m. to 5:00 p.m.
9:00 a.m. to 6:00 p.m.
Drive Up 8:30 a.m. to 6:00 p.m.
None
Oakhurst8:30 a.m. to 5:00 p.m.8:30 a.m. to 6:00 p.m.None
Prather (Foothill office)9:00 a.m. to 5:00 p.m.9:00 a.m. to 6:00 p.m.9:00 a.m. to 1:00 p.m.
Sacramento Private Banking9:00 a.m. to 4:00 p.m.9:00 a.m. to 4:00 p.m.None
Stockton9:00 a.m. to 5:00 p.m.9:00 a.m. to 6:00 p.m.None
Tracy9:00 a.m. to 5:00 p.m.9:00 a.m. to 6:00 p.m.None
Exeter
9:00 a.m. to 5:00 p.m.
Drive Up 8:30 a.m. to 5:30 p.m.
9:00 a.m. to 6:00 p.m.
Drive Up 8:30 a.m. to 6:00 p.m.
None
Caldwell
9:00 a.m. to 5:00 p.m.
Drive Up 8:30 a.m. to 5:30 p.m.
9:00 a.m. to 6:00 p.m.
Drive Up 8:30 a.m. to 6:00 p.m.
9:00 a.m. to 1:00 p.m.
Drive Up 9:00 a.m. to 1:00 p.m.
Floral9:00 a.m. to 5:00 p.m.9:00 a.m. to 6:00 p.m.None
Mission Oaks
9:00 a.m. to 5:00 p.m.
Drive Up 8:30 a.m. to 5:30 p.m.
9:00 a.m. to 6:00 p.m.
Drive Up 8:30 a.m. to 6:00 p.m.
None
Financial Drive8:00 a.m. to 5:00 p.m.8:00 a.m. to 5:00 p.m.None
* The Sunnyside office is scheduled for closure and consolidationgreater risk than other banking companies with the Fresno Downtown office in April 2016.a wider geographic base.

Automated teller machines operate at 19 branch locations. All operate 24 hours per day, seven days per week.  No automated teller machines are currently located at the Sacramento office.  Our Real Estate, Small Business Administration (SBA) Departments and Agribusiness office maintain business hours of 8:00 A.M. to 5:00 P.M., Monday through Friday, and extended hours are available upon customer request.

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To compete effectively, we rely substantially on local promotional activity, personal contacts by our officers, directors and employees, referrals by our shareholders, extended hours, personalized service and our reputation in the communities we serve.
In Fresno and Madera Counties, in addition to our 11 full-service branch locations serving the Bank’s primary service areas, as of June 30, 2015 there were 147 operating banking and credit union offices in our primary service area, which consists of the cities of Clovis, Fresno, Kerman, Oakhurst, Madera, and Prather, California. Prather does not contain any banking offices other than our office. The June 2015 FDIC Summary of Deposits report indicated the Company had 4.76% of the total deposits held by all depositories in Fresno County and 8.62% in Madera County.  In San Joaquin County, in addition to our three full service branch locations, as of June 30, 2015 there were 102 operating banking and credit union offices. The FDIC Summary of Deposits as of June 2015 report indicated the Company had 1.67% of total deposits held by all depositories in San Joaquin County. In Merced County, in addition to our one branch, as of June 30, 2015 there were 30 operating banking and credit union offices in our primary service area. In Sacramento County, in addition to our one branch, as of June 30, 2015 there were 225 operating banking and credit union offices in our primary service area.  In Stanislaus County, in addition to our one branch, there were 88 operating banking and credit union offices in our primary service area. In Tulare County, in addition to our four branches there were 55 operating banking and credit union offices in our primary service area. Business activity in our primary service area is oriented toward light industry, small business and agriculture.Competition

The banking business in California generally, and our primary service area specifically, is highly competitive with respect to both loans and deposits, and is dominated by a relatively small number of major banks with many offices operating over a wide geographic area.  Among the advantages such major banks have over us is their ability to finance wide-ranging advertising campaigns and to allocate their investment assets, including loans, to regions of higher yield and demand.  Major banks offer certain services such as international banking and trust services which we do not offer directly but which we usually can offer indirectly through correspondent institutions.  To compete effectively, we rely substantially on local promotional activity, personal contacts by our officers, directors and employees, referrals by our shareholders, extended hours, personalized service and our reputation in the communities we serve.
Our total market share of deposits in Fresno, Madera, San Joaquin, and Tulare counties was 3.42% in 2018 compared to 3.69% in 2017 based on FDIC deposit market share information published as of June 2018. In Fresno and Madera Counties, in addition byto our 10 full-service branch locations serving the Bank’s primary service areas, as of June 30, 2018 there were 135 operating banking and credit union offices in our primary service area, which consists of the cities of Clovis, Fresno, Kerman, Oakhurst, Madera, and Prather, California. Prather does not contain any banking offices other than our office. In San Joaquin County, in addition to our three full service branch locations, as of June 30, 2018 there were 97 operating banking and credit union offices. In Tulare County, in addition to our three branches there were 53 operating banking and credit union offices in our primary service area. Our total market share in the other counties we operate in (El Dorado, Merced, Placer, Sacramento, and Stanislaus), was less than 1.00% in 2018 and 2017.  In Merced County, in addition to our one branch, as of June 30, 2018 there were 28 operating banking and credit union offices in our primary service area. In Sacramento County, in addition to our three branches, as of June 30, 2018 there were 212 operating banking and credit union offices in our primary service area.  In Stanislaus County, in addition to our one branch, there were 85 operating banking and credit union offices in our primary service area. In El Dorado County, in addition to our one branch, there were 39 operating banking and credit union offices in our primary service area. In Placer County, in addition to our one branch, there were 93 operating banking and credit union offices in our primary service area. Business activity in our primary service area is oriented toward light industry, small business and agriculture.
By virtue of their greater total capitalization, suchlarger banks have substantially higher lending limits than we do.  Legal lending limits to an individual customer are limited to a percentage of our total capital. As of December 31, 2015,2018, the Bank’s legal lending limits to individual customers were $17,173,000$26,715,000 for unsecured loans and $28,622,000$44,525,000 for unsecured and secured loans combined. As of December 31, 2015 the Bank’s largest lending relationships totaled $139,205,000 on an unsecured basis and $85,890,000 on a secured basis.
For borrowers desiring loans in excess of the Bank’s lending limits, the Bank makes, and may in the futureseeks to make such loans on a participation basis with other community banks taking the amount of loans in excess of the Bank’s lending limits.  In other cases, the Bank may refer such borrowers to larger banks or other lendingfinancial institutions.
Other entities, both governmental and in private industry, seeking to raise capital through the issuance and sale of debt or equity securities also provide competition for us in the acquisition of deposits. Banks also compete with money market funds and other money market instruments, which are not subject to interest rate ceilings.  In recent years, increased competition has also developed from specialized finance and non-finance companies that offer wholesale finance, credit card, and other consumer finance services, including on-line banking services and personal finance software.  Competition for deposit and loan products remains strong, from both banking and non-banking firms, and affects the rates of those products as well as the terms on which they are offered to customers.

Technological innovation continues to contribute to greater competition in domestic and international financial services markets.  Technological innovation has, for example, made it possible for non-depository institutions to offer customers automated transfer payment services that previously have been traditional banking products.  In addition, customers now expect a choice of several delivery systems and channels, including telephone, mail, home computer, ATMs, remote deposit, mobile banking applications, self-service branches, and in-store branches.
Mergers between financial institutions have placed additional pressure on banks to streamline their operations, reduce expenses, and increase revenues to remain competitive.  In addition, competition has intensified due to federal and state interstate banking laws, which permit banking organizations to expand geographically with fewer restrictions than in the past.  Such laws allow banks to merge with other banks across state lines, thereby enabling banks to establish or expand banking operations in our market.  The competitive environment also is significantly impacted by federal and state legislation, which may make it easier for non-bank financial institutions to compete with us.

Statistical Disclosure
The information in the tables set out below should be read in conjunction with the Company’s audited consolidated financial statements and the notes thereto, and Management’s Discussion and Analysis of Financial Condition and Results of Operations, which are included in Items 7 and 8 of this annual report.
Distribution of Average Assets, Liabilities and Shareholders’ Equity; Interest Rates and Interest Differential
Table A sets forth our average consolidated balance sheets for the years ended December 31, 2015, 2014, and 2013 and an analysis of interest rates and the interest rate differential for the years then ended.  Table B sets forth the changes in interest income and interest expense in 2015 and 2014 resulting from changes in volume and changes in rates.

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Investment Portfolio
The book value (amortized cost) of investment securities at December 31, 2015, 2014, and 2013 and the book value, maturities and weighted average yield of investment securities at December 31, 2015 are set forth in Table C.
Loan Portfolio
The composition of the loan portfolio at December 31, 2015, 2014, 2013, 2012, and 2011, is summarized in Table D. Maturities and sensitivity to changes in interest rates in the loan portfolio at December 31, 2015 are summarized in Table E. Table F shows the composition of nonaccrual, past due and restructured loans at December 31, 2015, 2014, 2013, 2012, and 2011. Set forth in the text accompanying Table F is a discussion of the Company’s policy for placing loans on nonaccrual status.
Summary of Loan Loss Experience
Table G sets forth an analysis of loan loss experience as of and for the years ended December 31, 2015, 2014, 2013, 2012, and 2011.
Set forth in the text accompanying Table G is a description of the factors which influenced management’s judgment in determining the amount of the additions to the allowance charged to operating expense in each fiscal year, a table showing the allocation of the allowance for credit losses to the various types of loans in the portfolio, as well as a discussion of management’s policy for establishing and maintaining the allowance for credit losses.
Deposits
Table H sets forth the average amount of and the average rate paid on major deposit categories for the years ended December 31, 2015, 2014, and 2013. Table I sets forth the maturity of time certificates of deposit of $100,000 or more at December 31, 2015.
Return on Equity and Assets
Table J sets forth certain financial ratios for the years ended December 31, 2015, 2014, and 2013.


6


Table A
DISTRIBUTION OF AVERAGE ASSETS, LIABILITIES AND SHAREHOLDERS’
EQUITY; INTEREST RATES AND INTEREST DIFFERENTIAL
The following table sets forth consolidated average assets, liabilities and shareholders’ equity; interest income earned and interest expense paid; and the average yields earned or rates paid thereon for the years ended December 31, 2015, 2014, and 2013. The average balances reflect daily averages except nonaccrual loans, which were computed using quarterly averages.
  2015 2014 2013
(Dollars in thousands) 
Average
Balance
 
Interest
Income/
Expense
 
Average
Interest
Rate
 
Average
Balance
 
Interest
Income/
Expense
 
Average
Interest
Rate
 
Average
Balance
 
Interest
Income/
Expense
 
Average
Interest
Rate
ASSETS:  
  
  
  
  
  
  
  
  
Interest-earning deposits in other banks $64,963
 $209
 0.32% $53,781
 $175
 0.32% $46,672
 $164
 0.35%
Securities:                  
Taxable securities 285,585
 4,793
 1.68% 296,014
 5,538
 1.87% 235,487
 2,375
 1.01%
Non-taxable securities (1) 178,247
 9,569
 5.37% 163,778
 8,837
 5.40% 163,494
 8,755
 5.35%
Total investment securities 463,832
 14,362
 3.10% 459,792
 14,375
 3.13% 398,981
 11,130
 2.79%
Federal funds sold 251
 1
 0.25% 293
 1
 0.25% 206
 1
 0.25%
Total securities and interest-earning deposits 529,046
 14,572
 2.75% 513,866
 14,551
 2.83% 445,859
 11,295
 2.53%
Loans (2)(3) 578,899
 30,504
 5.27% 533,531
 29,493
 5.53% 445,300
 26,519
 5.96%
Federal Home Loan Bank stock 4,813
 580
 12.05% 4,700
 327
 6.96% 4,171
 177
 4.24%
Total interest-earning assets (1) 1,112,758
 $45,656
 4.10% 1,052,097
 $44,371
 4.22% 895,330
 $37,991
 4.24%
Allowance for credit losses (8,978)  
  
 (8,147)  
  
 (9,713)  
  
Nonaccrual loans 7,863
  
  
 5,998
  
  
 9,183
  
  
Other real estate owned 33
  
  
 36
  
  
 50
  
  
Cash and due from banks 25,019
  
  
 23,905
  
  
 21,296
  
  
Bank premises and equipment 9,664
  
  
 10,511
  
  
 7,816
  
  
Other non-earning assets 76,167
  
  
 73,083
  
  
 62,962
  
  
Total average assets $1,222,526
  
  
 $1,157,483
  
  
 $986,924
  
  

7


  2015 2014 2013
(Dollars in thousands) 
Average
Balance
 
Interest
Income/
Expense
 
Average
Interest
Rate
 
Average
Balance
 
Interest
Income/
Expense
 
Average
Interest
Rate
 
Average
Balance
 
Interest
Income/
Expense
 
Average
Interest
Rate
LIABILITIES AND SHAREHOLDERS’ EQUITY:  
  
  
  
  
  
  
  
  
Interest-bearing liabilities  
  
  
  
  
  
  
  
  
Interest-bearing deposits:  
  
  
  
  
  
  
  
  
Savings and NOW accounts $300,741
 $261
 0.09% $265,751
 $241
 0.09% $215,668
 $291
 0.13%
Money market accounts (MMA) 227,743
 141
 0.06% 229,769
 174
 0.08% 193,833
 229
 0.12%
Time certificates of deposit, under $100,000 59,810
 191
 0.32% 60,630
 228
 0.38% 48,729
 219
 0.45%
Time certificates of deposit, $100,000 and over 89,573
 355
 0.40% 101,588
 417
 0.41% 106,307
 531
 0.50%
Total interest-bearing deposits 677,867
 948
 0.14% 657,738
 1,060
 0.16% 564,537
 1,270
 0.22%
Other borrowed funds 5,156
 99
 1.89% 5,155
 96
 1.83% 5,645
 116
 2.05%
Total interest-bearing liabilities 683,023
 $1,047
 0.15% 662,893
 $1,156
 0.17% 570,182
 $1,386
 0.24%
Non-interest bearing demand deposits 387,931
  
  
 348,822
  
  
 283,956
  
  
Other liabilities 16,510
  
  
 15,354
  
  
 13,040
  
  
Shareholders’ equity 135,062
  
  
 130,414
  
  
 119,746
  
  
Total average liabilities and shareholders’ equity $1,222,526
  
  
 $1,157,483
  
  
 $986,924
  
  
Interest income and rate earned on average earning assets (1)  
 $45,656
 4.10%  
 $44,371
 4.22%  
 $37,991
 4.24%
Interest expense and interest cost related to average interest-bearing liabilities  
 1,047
 0.15%  
 1,156
 0.17%  
 1,386
 0.24%
Net interest income and net interest margin (4)  
 $44,609
 4.01%  
 $43,215
 4.11%  
 $36,605
 4.09%
(1)
Interest income is calculated on a fully tax equivalent basis, which includes Federal tax benefits relating to income earned on municipal bonds totaling $3,254, $3,005 and $2,977 in 2015, 2014 and 2013, respectively.
(2)
Loan interest income includes loan fees of $255 in 2015, $272 in 2014, and $320 in 2013.
(3)Average loans do not include nonaccrual loans.
(4)Net interest margin is computed by dividing net interest income by total average interest-earning assets.


8


Table B
VOLUME AND RATE ANALYSIS
The following table sets forth, for the years indicated, a summary of the changes in interest earned and interest paid resulting from changes in asset and liability volumes and changes in rates.  The change in interest due to both volume and rate has been allocated to change due to volume and rate in proportion to the relationship of absolute dollar amounts of change in each.
  Years Ended December 31,
  2015 Compared to 2014 2014 Compared to 2013
(In thousands) Volume Rate Net Volume Rate Net
Increase (decrease) due to changes in:  
  
  
  
  
  
Interest income:  
  
  
  
  
  
Interest-earning deposits in other banks $36
 $(2) $34
 $21
 $(10) $11
Investment securities:            
Taxable (195) (550) (745) 731
 2,432
 3,163
Non-taxable (1) 780
 (48) 732
 15
 67
 82
Total investment securities 585
 (598) (13) 746
 2,499
 3,245
Loans 2,507
 (1,496) 1,011
 4,479
 (1,505) 2,974
FHLB Stock 7
 246
 253
 25
 125
 150
Total earning assets (1) 3,135
 (1,850) 1,285
 5,271
 1,109
 6,380
Interest expense:  
  
  
  
  
  
Deposits:  
  
  
  
  
  
Savings, NOW and MMA 30
 (43) (13) 169
 (274) (105)
Time certificates of deposit under $100,000 (3) (34) (37) 27
 (18) 9
Time certificates of deposit $100,000 and over (50) (12) (62) (23) (91) (114)
Total interest-bearing deposits (23) (89) (112) 173
 (383) (210)
Other borrowed funds 1
 2
 3
 (10) (10) (20)
Total interest bearing liabilities (22) (87) (109) 163
 (393) (230)
Net interest income (1) $3,157
 $(1,763) $1,394
 $5,108
 $1,502
 $6,610
(1)Computed on a tax equivalent basis for securities exempt from federal income taxes.


9


Table C
INVESTMENT PORTFOLIO
The amortized cost of investment securities at December 31, 2015, 2014, and 2013 is set forth in the following table.  At December 31, 2015, we held no investment securities from any issuer which totaled over 10% of our shareholders’ equity.
Available-for-Sale Securities
Amortized Cost at December 31,
(In thousands)
2015
2014
2013
U.S. Government agencies $52,803
 $33,088
 18,172
Obligations of states and political subdivisions 181,785
 143,343
 162,018
U.S. Government sponsored entities and agencies collateralized by residential mortgage obligations 225,636
 236,629
 254,978
Private label residential mortgage backed securities 2,356
 3,079
 4,344
Other equity securities 7,500
 7,500
 7,596
Total Available-for-Sale Securities $470,080
 $423,639
 $447,108
Held-to-Maturity Securities Amortized Cost at December 31,
(In thousands) 2015 2014 2013
Obligations of states and political subdivisions $31,712
 $31,964
 $

The amortized cost, maturities and weighted average yield of investment securities at December 31, 2015 are summarized in the following table.
(Dollars in thousands) In one year or less 
After one through five
years
 After five through ten years After ten years Total
Available-for-Sale Securities Amount Yield(1) Amount Yield(1) Amount Yield(1) Amount Yield(1) Amount Yield(1)
Debt securities(2)  
  
  
  
  
  
  
  
  
  
U.S. Government agencies $
 
 $7,627
 1.94% $4,046
 4.33% $41,130
 3.96% $52,803
 3.70%
Obligations of states and political subdivisions 
 
 12,297
 3.02% 37,376
 3.82% 132,112
 4.87% 181,785
 4.53%
U.S. Government sponsored entities and agencies collateralized by residential mortgage obligations 3
 7.60% 30,331
 3.48% 20,810
 2.95% 174,492
 4.22% 225,636
 4.00%
Private label residential mortgage backed securities 
 
 212
 4.73% 6
 5.00% 2,138
 5.89% 2,356
 5.78%
Other equity securities 7,500
 2.13% 
 
 
 
 
 
 7,500
 2.13%
  $7,503
 2.32% $50,467
 3.14% $62,238
 3.56% $349,872
 4.44% $470,080
 4.18%

(Dollars in thousands) In one year or less After one through five years After five through ten years After ten years Total
Held-to-Maturity Securities Amount Yield(1) Amount Yield(1) Amount Yield(1) Amount Yield(1) Amount Yield(1)
Debt securities(2)  
  
  
  
  
  
  
  
  
  
Obligations of states and political subdivisions $
 % $
 % 
 % 31,712
 3.08% 31,712
 3.08%

(1)Not computed on a tax equivalent basis.
(2)Expected maturities will differ from contractual maturities because the issuers of the securities may have the right to call or prepay obligations with or without call or prepayment penalties.  Expected maturities will also differ from contractual maturities due to unscheduled principal pay downs.


10


Table D
LOAN PORTFOLIO
The composition of the loan portfolio at December 31, 2015, 2014, 2013, 2012, and 2011 is summarized in the table below.
(In thousands)  2015 2014
2013
2012
2011
Commercial:    
  
  
  
   Commercial and industrial $102,197
 $89,007
 $87,082
 $77,956
 $78,089
   Agricultural land and production 30,472
 39,140
 31,649
 26,599
 29,958
Total commercial 132,669
 128,147
 118,731
 104,555
 108,047
Real estate:          
   Owner occupied 168,910
 176,804
 156,781
 114,444
 113,183
   Real estate construction and other land loans 38,685
 38,923
 42,329
 33,199
 33,047
   Commercial real estate 117,244
 106,788
 86,117
 53,797
 62,523
   Agricultural real estate 74,867
 57,501
 44,164
 28,400
 42,596
   Other real estate 10,520
 6,611
 4,548
 8,098
 7,892
Total real estate 410,226
 386,627
 333,939
 237,938
 259,241
Consumer:          
   Equity loans and lines of credit 42,296
 47,575
 48,594
 42,932
 51,106
   Consumer and installment 12,503
 10,093
 11,252
 10,346
 9,765
Total consumer 54,799
 57,668
 59,846
 53,278
 60,871
Deferred loan costs (fees), net 417
 146
 (159) (453) (764)
Total gross loans (1) 598,111
 572,588
 512,357
 395,318
 427,395
Allowance for credit losses (9,610) (8,308) (9,208) (10,133) (11,396)
Total (1) $588,501
 $564,280
 $503,149
 $385,185
 $415,999
  2015 2014 2013 2012 2011
(1) Includes nonaccrual loans of: $2,413
 $14,052
 $7,586
 $9,695
 $14,434



11


Table E
LOAN MATURITIES AND SENSITIVITY TO CHANGES IN INTEREST RATES
The following table presents information concerning loan maturities and sensitivity to changes in interest rates of the indicated categories of our loan portfolio, as well as loans in those categories maturing after one year that have fixed or floating interest rates at December 31, 2015.
(In thousands) 
One Year or
Less
 
After One
Through Five
Years
 
After Five
Years
 Total
Loan Maturities:        
Commercial and agricultural $90,970
 $24,245
 $17,454
 $132,669
Real estate construction and other land loans 33,985
 3,504
 1,196
 38,685
Other real estate 27,348
 35,719
 308,474
 371,541
Consumer and installment 8,146
 10,295
 36,358
 54,799
  $160,449
 $73,763
 $363,482
 $597,694
Sensitivity to Changes in Interest Rates:  
  
  
  
Loans with fixed interest rates $32,353
 $47,006
 $46,578
 $125,937
Loans with floating interest rates (1) 128,096
 26,757
 316,904
 471,757
  $160,449
 $73,763
 $363,482
 $597,694
(In thousands) 
One Year or
Less
 
After One
Through Five
Years
 
After Five
Years
 Total
(1) Includes floating rate loans which are currently at their floor rate in accordance with their respective loan agreement $42,214
 $18,012
 $201,831
 $262,057


Table F
COMPOSITION OF NONACCRUAL, PAST DUE AND RESTRUCTURED LOANS
A summary of nonaccrual, restructured and past due loans at December 31, 2015, 2014, 2013, 2012, and 2011 is set forth below:
  December 31,
(Dollars in thousands) 2015 2014 2013 2012 2011
Nonaccrual $1,076
 $12,226
 $2,991
 $450
 $3,833
Restructured nonaccrual loans 1,337
 1,826
 4,595
 9,245
 10,601
  $2,413
 $14,052
 $7,586
 $9,695
 $14,434
Interest foregone $340
 $716
 $661
 $693
 $954
Accruing loans past due 90 days or more 
 
 
 
 
Accruing troubled debt restructurings $4,286
 $4,774
 $5,771
 $7,410
 $
Nonaccrual loans to total loans 0.40% 2.45% 1.48% 2.45% 3.38%

Our consolidated financial statements are prepared on the accrual basis of accounting, including the recognition of interest income on loans.  Interest income from nonaccrual loans is recorded only if collection of principal in full is not in doubt and when cash payments, if any, are received.
Loans are placed on nonaccrual status and any accrued but unpaid interest income is reversed and charged against income when the payment of interest or principal is 90 days or more past due.  Loans in the nonaccrual category are treated as nonaccrual loans even though we may ultimately recover all or a portion of the interest due.  These loans return to accrual status when the loan becomes contractually current, future collectability of amounts due is reasonably assured, and a minimum

12


of six months of satisfactory principal repayment performance has occurred.  See Note 5 of the Company’s audited Consolidated Financial Statements in Item 8 of this Annual Report.
Included in nonaccrual loans at December 31, 2015 were four loans totaling $1,337,000 that were considered troubled debt restructurings (TDRs).  None of these TDR loans were in default at December 31, 2015. There are no outstanding commitments to lend additional funds to any of these borrowers.  Included in nonaccrual loans at December 31, 2014 were three loans that totaled $1,826,000 that were considered to be TDRs at December 31, 2014. At December 31, 2013, the Company had ten loans totaling $4,595,000 that were on nonaccrual and considered TDR. The Company had seven loans at December 31, 2012 totaling $9,245,000 that were considered to be TDRs. As of December 31, 2011, the Company had six loans totaling $10,601,000 that were on nonaccrual and considered TDR. See Note 5 of the Company’s audited Consolidated Financial Statements in Item 8 of this Annual Report concerning our recorded investment in loans for which impairment has been recognized.  Impaired loans are identified from internal credit review reports, past due reports, overdraft listings, and third party reports of examination.  Borrowers experiencing problems such as operating losses, marginal working capital, inadequate cash flow or business interruptions which jeopardize collection of the loan are also reviewed for possible impairment classification. 
A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect all amounts due, including principal and interest, according to the contractual terms of the original agreement.  Factors considered by management in determining impairment include payment status, 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 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, and the amount of the shortfall in relation to the principal and interest owed. Loans determined to be impaired are individually evaluated for impairment.  When a loan is impaired, the Company measures impairment based on the present value of expected future cash flows discounted at the loan’s effective interest rate, except that as a practical expedient, it may measure impairment based on a loan’s observable market price, or the fair value of the collateral if the loan is collateral dependent.  A loan is collateral dependent if the repayment of the loan is expected to be provided solely by the underlying collateral.  We perform quarterly internal reviews on substandard loans.  We place loans on nonaccrual status and classify them as impaired when a reasonable doubt exists as to the collectability of interest and principal under the original contractual terms, or when loans are delinquent 90 days or more unless the loan is both well secured and in the process of collection.  Management maintains certain loans that have been brought current by the borrower (less than 30 days delinquent) on nonaccrual status until such time as management has determined that the loans are likely to remain current in future periods.  Foregone interest on nonaccrual loans totaled $340,000 for the year ended December 31, 2015 of which $104,000 was attributable to troubled debt restructurings. Foregone interest on nonaccrual loans was $716,000 and $661,000 for 2014 and 2013, respectively of which $139,000 and $279,000 was attributable to troubled debt restructurings, respectively. 
Other than as discussed above, as of December 31, 2015, we had no loans where known information about possible credit problems of borrowers caused management to have serious doubts as to the ability of such borrowers to comply with the present loan repayment terms and which may result in disclosure of such loans as impaired loans.


13


Table G
SUMMARY OF LOAN LOSS EXPERIENCE
The following table summarizes loan loss experience as of and for the years ended December 31, 2015, 2014, 2013, 2012, and 2011.
(Dollars in thousands) 2015 2014 2013 2012 2011
Loans outstanding at December 31, $597,694
 $572,442
 $512,516
 $395,771
 $428,159
Average loans outstanding during the year $586,762
 $539,529
 $454,483
 $405,040
 $428,291
Allowance for credit losses:    
      
Balance at beginning of year $8,308
 $9,208
 $10,133
 $11,396
 $11,014
Deduct loans charged off:          
Commercial and industrial (802) (7,423) (713) (123) (280)
Agricultural production 
 (1,722) 
 
 
Owner occupied 
 (183) (281) (217) 
Real estate construction and other land loans 
 
 
 (319) (286)
Commercial real estate 
 
 (4) (1,430) (26)
Consumer loans (159) (506) (448) (761) (940)
Total loans charged off (961) (9,834) (1,446) (2,850) (1,532)
Add recoveries of loans previously charged off:    
  
  
  
Commercial and industrial 954
 171
 315
 515
 286
Agricultural production 90
 
 
 
 
Owner occupied 
 150
 
 45
 
Real estate construction and other land loans 32
 364
 16
 
 52
Commercial real estate 
 
 
 
 176
Consumer loans 587
 264
 190
 327
 350
Total recoveries 1,663
 949
 521
 887
 864
Net recoveries (charge offs) 702
 (8,885) (925) (1,963) (668)
Add provision charged to operating expense 600
 7,985
 
 700
 1,050
Balance at end of year $9,610
 $8,308
 $9,208
 $10,133
 $11,396
Allowance for credit losses as a percentage of outstanding loan balance 1.61% 1.45 % 1.80 % 2.56 % 2.66 %
Net recoveries (charge offs) to average loans outstanding 0.12% (1.65)% (0.20)% (0.48)% (0.16)%

Managing credits identified through the risk evaluation methodology includes developing a business strategy with the customer to mitigate our losses.  Our management continues to monitor these credits with a view to identifying as early as possible when, and to what extent, additional provisions may be necessary. 
The allowance for credit losses is reviewed at least quarterly by the Bank’s and our Board of Directors’ Audit/Compliance Committee.  Reserves are allocated to loan portfolio segments using percentages which are based on both historical risk elements such as delinquencies and losses and predictive risk elements such as economic, competitive and environmental factors.  We have adopted the specific reserve approach to allocate reserves to each impaired asset for the purpose of estimating potential loss exposure.  Although the allowance for credit losses is allocated to various portfolio categories, it is general in nature and available for the loan portfolio in its entirety.  Additions may be required based on the results of independent loan portfolio examinations, regulatory agency examinations, or our own internal review process.  Additions are also required when, in management’s judgment, the reserve does not properly reflect the potential loss exposure. 
During the year ended December 31, 2015, the Company recorded a provision for credit losses of $600,000. The amount of provision is primarily the result of our assessment of the overall adequacy of the allowance for credit losses considering a number of factors, including the increase or decrease in the volume of outstanding loans and the level of net recoveries during the year. The provision of $7,985,000 in 2014 was recorded in connection with the partial charge off of a single commercial and agricultural relationship. Net charge-offs were $8,885,000 in 2014. No provision was added to the allowance for credit losses for the year ended December 31, 2013, and net charge-offs were $925,000. The provision for credit

14


losses for the year ended December 31, 2012 was $700,000 and net charge-offs were $1,963,000. For 2011, the provision was $1,050,000 and net charge offs which were $668,000.
Using the criteria on the previous page, the allocation of the allowance for credit losses is set forth below:
  2015 2014 2013 2012 2011
Loan Type (Dollars in thousands) AmountPercent
of Loans
in Each
Category
to Total
Loans
 AmountPercent
of Loans
in Each
Category
to Total
Loans
 AmountPercent
of Loans
in Each
Category
to Total
Loans
 AmountPercent
of Loans
in Each
Category
to Total
Loans
 AmountPercent
of Loans
in Each
Category
to Total
Loans
Commercial:               
Commercial and industrial 3,143
17.1% 2,753
15.5% 1,928
17% 2,071
19.7% 1,924
18.3%
Agricultural land and production 419
5.1% 377
6.8% 516
6.1% 605
6.7% 342
7%
Real estate:               
Owner occupied 1,556
28.2% 1,380
30.9% 1,697
30.6% 2,153
28.9% 1,578
26.4%
Real estate construction and other land loans 694
6.5% 837
6.8% 1,289
8.3% 1,035
8.4% 2,954
7.7%
Commercial real estate 1,686
19.6% 1,201
18.7% 1,406
16.8% 1,886
13.6% 2,043
14.6%
Agricultural real estate 1,149
12.5% 564
10% 672
8.6% 646
7.2% 489
9.9%
Other real estate 119
1.8% 76
1.2% 110
0.9% 157
2% 91
1.8%
Consumer:               
Equity loans and lines of credit 500
7.1% 811
8.3% 874
9.5% 1,158
10.9% 1,419
12%
Consumer and installment 234
2.1% 267
1.8% 294
2.2% 383
2.6% 417
2.3%
Unallocated reserves 110
  42
  422
  39
  139
 
Total allowance for credit losses $9,610
100% $8,308
100% $9,208
100% $10,133
100% $11,396
100%

Loans are charged to the allowance for credit losses when the loans are deemed uncollectible.  It is the policy of management to make additions to the allowance so that it remains adequate to cover all probable loan charge offs that exist in the portfolio at that time. We assign qualitative and environmental factors (Q factors) to each loan category. Q factors include reserves held for the effects of lending policies, economic trends, and portfolio trends along with other dynamics which may cause additional stress to the portfolio.

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Table H
DEPOSITS
We have no known foreign deposits.  The following table sets forth the average amount of and the average rate paid on certain deposit categories which were in excess of 10% of average total deposits for the years ended December 31, 2015, 2014, and 2013.
  2015 2014 2013
(Dollars in thousands) Balance Rate Balance Rate Balance Rate
NOW accounts $222,839
 0.10% $197,630
 0.11% $163,034
 0.15%
Money market accounts $227,743
 0.06% $229,769
 0.08% $193,833
 0.12%
Time certificates of deposit $149,383
 0.37% $162,218
 0.40% $155,036
 0.48%
Non-interest bearing demand $387,931
 
 $348,822
 
 $283,956
 
Total deposits $1,065,798
 0.09% $1,006,560
 0.11% $848,493
 0.15%

Table I
TIME DEPOSITS
The following table sets forth the maturity of time certificates of deposit and other time deposits of $100,000 or more at December 31, 2015.
(In thousands) 
Three months or less$33,923
Over 3 through 6 months18,195
Over 6 through 12 months20,980
Over 12 months20,412
 $93,510

Table J
FINANCIAL RATIOS
The following table sets forth certain financial ratios for the years ended December 31, 2015, 2014, and 2013.
 2015 2014 2013
Net income: 
  
  
To average assets0.90% 0.46% 0.84%
To average shareholders’ equity8.12% 4.06% 6.89%
Dividends declared per share to net income per share18.00% 41.67% 26.32%
Average shareholders’ equity to average assets11.05% 11.27% 12.13%

Supervision and Regulation
 
GENERAL
 
The bankingBanking is a complex, highly regulated industry. Regulation and financial services businesses in which we engage are highly regulated.  Such regulation is intended, among other things, to protect depositors whose deposits are insuredsupervision by the FDIC and the banking system as a whole.  The monetary and fiscal policies of the federal government and the policies of regulatory agencies, particularly the Board of Governors, also influence the commercial banking business.  The Board of Governors implements national monetary policies (with objectives such as curbing inflation and combating recession) by its open-market operations in United States Government securities, by adjusting the required level of reserves for financial intermediaries subject to its reserve requirements and by varying the discount rates applicable to borrowings by depository institutions.  The actions of the Board of Governors in these

16


areas influence the growth of bank loans, investments and deposits and also affect interest rates charged on loans and paid on deposits.  Indirectly such actions may also affect the ability of non-bank financial institutions to compete with the Bank.  The nature and impact of any future changes in monetary policies cannot be predicted.
The laws, regulations, and policies affecting financial services businesses are continuously under review by Congress and state legislatures, and federal and state banking agencies are intended to maintain a safe and sound banking system, protect depositors and the FDIC’s insurance fund, and to facilitate the conduct of sound monetary policy. In furtherance of these goals, Congress and the states have created several largely autonomous regulatory agencies.  From time to time, legislation isagencies and enacted which has the effect of increasing the cost of doing business, limiting or expanding permissible activities or affecting the competitive balance between banks and other financial intermediaries.  Proposals to change thenumerous laws and regulations governing the operations and taxation ofthat govern banks, bank holding companies and otherthe financial intermediaries are frequently made in Congress, inservices industry. Consequently, the growth and earnings performance of the Company can be affected not only by management decisions and general economic conditions, but also by the requirements of applicable state and federal statues, regulations and the policies of various governmental regulatory authorities, including the Federal Reserve, FDIC, the California legislatureDepartment of Business Oversight (DBO) and before variousthe Consumer Financial Protection Bureau (CFPB). Furthermore, tax laws administered by the Internal Revenue Service and state taxing authorities, accounting rules developed by the FASB, securities laws administered by the SEC and state securities authorities, anti-money laundering laws enforced by the U.S. Department of the Treasury, or Treasury, and mortgage related rules, including with respect to loan securitization and servicing by the U.S. Department of Housing and Urban Development and agencies such as Fannie Mae and Freddie Mac, also impact our business. The effect of these statutes, regulations, regulatory policies and rules are significant to our financial condition and results of operations. Further, the nature and extent of future legislative, regulatory or other changes affecting financial institutions are impossible to predict with any certainty.
Federal and state banking laws impose a comprehensive system of supervision, regulation and enforcement on the operations of banks, their holding companies and their affiliates. These laws are intended primarily for the protection of the FDIC’s Deposit Insurance Fund and bank customers rather than shareholders. Federal and state laws, and the related regulations of the bank regulatory agencies, affect, among other things, the scope of business, the kinds and amounts of investments banks may make, reserve requirements, capital levels relative to operations, the nature and amount of collateral for loans, the establishment of branches, the ability to merge, consolidate and acquire, dealings with insiders and affiliates and the payment of dividends.
This supervisory and regulatory framework subjects banks and bank holding companies to regular examination by their respective regulatory agencies, which results in examination reports and ratings that, while not publicly available, can affect the conduct and growth of their businesses. These examinations consider not only compliance with applicable laws and regulations, but also capital levels, asset quality and risk, management ability and performance, earnings, liquidity, and various other professional agencies.  Changes infactors. The regulatory agencies have broad discretion to impose restrictions and limitations on the operations of a regulated entity where the agencies determine, among other things, that such operations are unsafe or unsound, fail to comply with applicable law or are otherwise inconsistent with laws and regulations or with the supervisory policies of these agencies.
The following is a summary of the material elements of the supervisory and regulatory framework applicable to the Company and its bank subsidiary. It does not describe all of the statutes, regulations and regulatory policies that affect us cannot necessarily be predicted, but they may have a material effect on our businessapply, nor does it restate all of the requirements of those that are described. The descriptions are qualified in their entirety by reference to the particular statutory and earnings.regulatory provision.

 
BANK HOLDING COMPANY REGULATION
 
The Company, as a bank holding company, is subject to regulation under the Bank Holding Company Act of 1956, as amended (“BHC Act,Act”), and is subject to the supervision and examination of the Board of Governors.  Pursuant to the BHC Act, we are required to obtain the prior approval of the Board of Governors before we may acquire all or substantially all of the assets of any bank, or ownership or control of voting shares of any bank if, after giving effect to such acquisition, we would own or control, directly or indirectly, more than five percent of such bank.

Under the BHC Act, we may not engage in any business other than managing or controlling banks or furnishing services to our subsidiaries that the Board of Governors deems to be so closely related to banking as to be a proper incident to banking.  Bank holding companies that qualify and elect to be treated as “financial holding companies” may engage in a broad range of additional activities that are (i) financial in nature or incidental to such financial activities or (ii) complementary to a financial activity and do not pose a substantial risk to the safety and soundness of depository institutions or the financial system generally. These activities include securities underwriting and dealing, insurance underwriting and making merchant banking investments. We have not elected to be treated as a financial holding company and currently have no plans to make a financial holding company election.
We are also prohibited, with certain exceptions, from acquiring direct or indirect ownership or control of more than five percent of the voting shares of any company unless the company is engaged in banking activities or the Board of Governors determines that the activity is so closely related to banking to be a proper incident to banking.  The Board of Governors’ approval must be obtained before the shares of any such company can be acquired and, in certain cases, before any approved company can open new offices.
The BHC Act and regulations of the Board of Governors also impose certain constraints on the redemption or purchase by a bank holding company of its own shares of stock.
Our earnings and activities are affected by legislation, by actions of regulators, and by local legislative and administrative bodies and decisions of courts in the jurisdictions in which both the Company and the Bank conduct business.  For example, these include limitations on the ability of the Bank to pay dividends to the Company and the ability of the Company to pay dividends to its shareholders.  It is the policy of the Board of Governors that bank holding companies should pay cash dividends on common stock only out of income available over the past year and only if prospective earnings retention is consistent with the organization’s expected future needs and financial condition.  The policy provides that bank holding companies should not maintain a level of cash dividends that undermines the bank holding company’s ability to serve as a source of strength to its banking subsidiaries.  Various federal and state statutory provisions limit the amount of dividends that subsidiary banks can pay to their holding companies without regulatory approval.  In addition to these explicit limitations, the federal regulatory agencies are authorized to prohibit a banking subsidiary or bank holding company from engaging in an unsafe or unsound banking practice.  Depending upon the circumstances, the agencies could take the position that paying a dividend would constitute an unsafe or unsound banking practice.
In addition, banking subsidiaries of bank holding companies are subject to certain restrictions imposed by federal law in dealings with their holding companies and other affiliates.  Transactions between affiliates are subject to Sections 23A and 23B of the Federal Reserve Act. Regulation W codifies interpretive guidance with respect to affiliate transactions. Subject to certain exceptions set forth in the Federal Reserve Act and Regulation W, a bank can make a loan or extend credit to an affiliate, purchase or invest in the securities of an affiliate, purchase assets from an affiliate, accept securities of an affiliate as collateral security for a loan or extension of credit to any person or company, issue a guarantee, or accept letters of credit on behalf of an affiliate only if the aggregate amount of the above transactions of such subsidiary does not exceed 10 percent of such subsidiary’s capital stock and surplus on a per affiliate basis or 20 percent of such subsidiary’s capital stock and surplus on an aggregate affiliate basis.  Such transactions must be on terms and conditions that are consistent with safe and sound banking practices.practices and on terms that are not more favorable than those provided to a non-affiliate. A bank and its subsidiaries generally may not purchase a “low-quality asset,” as that term is defined in the Federal Reserve Act, from an affiliate.  Such restrictions also generally prevent a holding company and its other affiliates from borrowing from a banking subsidiary of the holding company unless the loans are secured by collateral.
A holding company and its banking subsidiaries are prohibited from engaging in certain tie-in arrangements in connection with any extension of credit, sale or lease of property or provision of services.  For example, with certain exceptions a bank may not condition an extension of credit on a customer obtaining other services provided by it, a holding company or any of its other bank affiliates, or on a promise by the customer not to obtain other services from a competitor.
The Board of Governors has cease and desist powers over parent bank holding companies and non-banking subsidiaries where actions of a parent bank holding company or its non-financial institution subsidiaries represent an unsafe or unsound practice or violation of law.  The Board of Governors has the authority to regulate debt obligations (other than commercial paper) issued by bank holding companies by imposing interest ceilings and reserve requirements on such debt obligations.

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We are also a bank holding company within the meaning of Section 3700 of the California Financial Code.  As such, we and our subsidiaries are subject to examination by the California Department of Business Oversight (DBO).
Further, we are required by the Board of Governors to maintain certain capital levels.  See “Capital Standards.”
 
REGULATION OF THE BANK

Banks are extensively regulated under both federal and state law.  The Bank, as a California state-chartered bank, is subject to primary supervision, regulation and periodic examination by the DBO and the FDIC.  The Bank is not a member of the Federal Reserve System, but is nevertheless subject to certain regulations of the Board of Governors.

If, as a result of an examination of a bank, the FDIC should determine that the financial condition, capital resources, asset quality, earnings prospects, management, liquidity, or other aspects of the Bank’s operations are unsatisfactory or that the Bank or its management is violating or has violated any law or regulation, various remedies are available to the FDIC. Such remedies include the power to enjoin “unsafe or unsound” practices, to require affirmative action to correct any conditions resulting from any violation or practice, to issue an administrative order that can be judicially enforced, to direct an increase in capital, to restrict the growth of the Bank, to assess civil monetary penalties, to remove officers and directors, and ultimately to terminate the Bank’s deposit insurance, which for a California chartered bank would result in a revocation of the Bank’s charter.  The DBO has many of the same remedial powers.
The Bank is a member of the FDIC, which currently insures customer deposits in each member bank to a maximum of $250,000 per depositor.  For this protection, the Bank is subject to the rules and regulations of the FDIC, and, as is the case with all insured banks, may be required to pay a semi-annual statutory assessment. All of a depositors’ accounts at an insured depository institution, including all non-interest bearing transactions accounts, will be insured by the FDIC up to the standard maximum deposit insurance amount of ($250,000)$250,000 for each deposit insurance ownership category.
Various requirements and restrictions under the laws of the State of California and the United States affect the operations of the Bank. State and federal statutes and regulations relate to many aspects of the Bank’s operations, including standards for safety and soundness, reserves against deposits, interest rates payable on deposits, loans, investments, mergers and acquisitions, borrowings, dividends, locations of branch offices, fair lending requirements, Community Reinvestment Act activities, and loans to affiliates.
Depositor Preference. In the event of the “liquidation or other resolution” of an insured depository institution, the claims of depositors of the institution, including the claims of the FDIC as subrogee of insured depositors, and certain claims for administrative expenses of the FDIC as a receiver, will have priority over other general unsecured claims against the institution. If an insured depository institution fails, insured and uninsured depositors along with the FDIC, will have priority in payment ahead of unsecured, non-deposit creditors including the parent bank holding company with respect to any extensions of credit they have made to such insured depository institution.
Brokered Deposit Restrictions. Well-capitalized institutions are not subject to limitations on brokered deposits, while an adequately capitalized institution is able to accept, renew or roll over brokered deposits only with a waiver from the FDIC and subject to certain restrictions on the yield paid on such deposits. Undercapitalized institutions are generally not permitted to accept, renew, or roll over brokered deposits. The Bank is eligible to accept brokered deposits without limitations.
Loans to Directors, Executive Officers and Principal Shareholders.The authority of the Bank to extend credit to its directors, executive officers and principal shareholders, including their immediate family members and corporations and other entities that they control, is subject to substantial restrictions and requirements under Sections 22(g) and 22(h) of the Federal Reserve Act and Regulation O promulgated thereunder, as well as the Sarbanes-Oxley Act of 2002. These statutes and regulations impose specific limits on the amount of loans the Bank may make to directors and other insiders, and specified approval procedures must be followed in making loans that exceed certain amounts. In addition, all loans the Bank makes to directors and other insiders must satisfy the following requirements:
the loans must be made on substantially the same terms, including interest rates and collateral, as prevailing at the time for comparable transactions with persons not affiliated with the Bank;
the Bank must follow credit underwriting procedures at least as stringent as those applicable to comparable transactions with persons who are not affiliated with the Bank; and
the loans must not involve a greater than normal risk of non-payment or include other features not favorable to the Bank.
Furthermore, the Bank must periodically report all loans made to directors and other insiders to the bank regulators, and these loans are closely scrutinized by the regulators for compliance with Sections 22(g) and 22(h) of the Federal Reserve Act and Regulation O. Each loan to directors or other insiders must be pre-approved by the Bank’s board of directors with the interested director abstaining from voting.
PAYMENT OF DIVIDENDS
 
THE COMPANY
 
Our shareholders are entitled to receive dividends when and as declared by our Board of Directors, out of funds legally available, subject to the dividends preference, if any, on preferred shares that may be outstanding, and also subject to the restrictions of the California Corporations Code.  See Note 14 of the Company’s audited Consolidated Financial Statements in Item 8 of this Annual Report concerning preferred stock issued through the Small Business Lending Fund of the United States Department of the Treasury on August 18, 2011. 
outstanding. The principal source of cash revenue to the Company is dividends received from the Bank.  The Bank’s ability to make dividend payments to the Company is subject to state and federal regulatory restrictions.
The Company’s ability to pay dividends to its shareholders is affected by both general corporate law considerations and the policies of the Federal Reserve applicable to bank holding companies. As a general matter, the Federal Reserve has indicated that the board of directors of a bank holding company should eliminate, defer or significantly reduce dividends to shareholders if: (i) the bank holding company’s net income available to shareholders for the past four quarters, net of dividends previously paid during that period, is not sufficient to fully fund the dividends; or (ii) the prospective rate of earnings retention

is inconsistent with the bank holding company’s capital needs and overall current and prospective financial condition. If the Company fails to adhere to these policies, the Federal Reserve could find that the Company is operating in an unsafe and unsound manner. See “Supervision and Regulation-Regulatory Capital Requirements” below.
Subject to exceptions for well-capitalized and well-managed holding companies, Federal Reserve regulations also require approval of holding company purchases and redemptions of its securities if the gross consideration paid exceeds 10 percent of consolidated net worth for any 12-month period. In addition, Federal Reserve policy requires that bank holding companies consult with and inform the Federal Reserve in advance of (i) redeeming or repurchasing capital instruments when experiencing financial weakness and (ii) redeeming or repurchasing common stock and perpetual preferred stock if the result will be a net reduction in the amount of such capital instruments outstanding for the quarter in which the reduction occurs.
As a California corporation, the Company is subject to the limitations of California law, which allows a corporation to distribute cash or property to shareholders, including a dividend or repurchase or redemption of shares, if the corporation meets either a retained earnings test or a “balance sheet” test. Under the retained earnings test, the Company may make a distribution from retained earnings to the extent that its retained earnings exceed the sum of (i) the amount of the distribution plus (ii) the amount, if any, of dividends in arrears on shares with preferential dividend rights. The Company may also make a distribution if, immediately after the distribution, the value of its assets equals or exceeds the sum of (a) its total liabilities plus (b) the liquidation preference of any shares which have a preference upon dissolution over the rights of shareholders receiving the distribution. Indebtedness is not considered a liability if the terms of such indebtedness provide that payment of principal and interest thereon are to be made only if, and to the extent that, a distribution to shareholders could be made under the balance sheet test. In addition, the Company may not make distributions if it is, or as a result of the distribution would be, likely to be unable to meet its liabilities (except those whose payment is otherwise adequately provided for) as they mature.
 
THE BANK
 
Dividends payable by the Bank to the Company are restricted under California law to the lesser of the Bank’s retained earnings, or the Bank’s net income for the latest three fiscal years, less dividends paid during that period, or, with the approval of the DBO, to the greater of the retained earnings of the Bank, the net income of the Bank for its last fiscal year or the net income of the Bank for its current fiscal year.
In addition to the regulations concerning minimum uniform capital adequacy requirements described below, the FDIC has established guidelines regarding the maintenance of an adequate allowance for credit losses.  Therefore, the future payment of cash dividends by the Bank will generally depend, in addition to regulatory constraints, upon the Bank’s earnings during any fiscal period, the assessment of the Board of Directors of the capital requirements of the Bank and other factors, including the maintenance of an adequate allowance for credit losses.
 
REGULATORY CAPITAL STANDARDSREQUIREMENTS
 
Banks and bank holding companies are subject to various capital requirements administered by state and federal banking agencies.  Capital adequacy guidelines 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 about components, risk weighting and other factors.

18


The Board of Governors, the FDIC and other federal banking agencies have issued risk-based capital adequacy guidelinesrequirements intended to provide a measure of capital adequacy that reflects the perceived degree of risk associated with a banking organization’s operations, both for both transactions reported on the balance sheet as assets and for transactions, such as letters of credit and recourse arrangements, whichthat are reportedrecorded as off-balance-sheetoff-balance sheet items. Under these guidelines, nominal dollar amounts of assets and credit equivalent amounts of off-balance-sheet items are multiplied by one of several risk adjustment percentages, which range from 0%In 2013, the bank regulatory agencies issued final rules (the “Basel III Capital Rules”) establishing a new comprehensive capital framework for assets with low credit risk, such as certain U.S. government securities, to 100% for assets with relatively higher credit risk, such as business loans.
A banking organization’s risk-based capital ratios are obtained by dividing its qualifying capital by its total risk-adjusted assets and off-balance-sheet items.organizations. The regulators measure risk-adjusted assets and off-balance-sheet items against both total qualifying capital (the sum of Tier 1 capital and limited amounts of Tier 2 capital) and Tier 1 capital.  Tier 1 capital consists of common stock, retained earnings, noncumulative perpetual preferred stock and minority interests in certain subsidiaries, less most other intangible assets.  Tier 2 capital may consist of a limited amount ofBasel III Capital Rules implement the allowance for possible loan and lease losses and certain other instruments with some characteristics of equity.  The inclusion of elements of Tier 2 capital is subject to certain other requirements and limitations of the federal banking agencies. 
InBasel Committee’s December 2010 the internal Basel Committee on Bank Supervision (“Basel Committee”) released its final framework for strengthening international capital standards and liquidity regulation, now officially identified as “Basel III,” which, when fully  phased-in,  would require bank holding companies and their bank subsidiaries to maintain substantially more capital than currently required, with a greater emphasis on common equity.certain provisions of the Dodd-Frank Act (“Dodd-Frank”). The Basel III capital framework, among other things: Capital Rules became effective on January 1, 2015.
introduces asThe Basel III Capital Rules require the Bank to comply with several minimum capital standards. The Bank must maintain a new capital measure, Common Equity Tier 1 (“CET1”), more commonly known in the United States as “Tier 1 Common,” and defines CET1 narrowly by requiring that most adjustments to regulatory capital measures be made to CET1 and not to the other components of capital, and expands the scope of the adjustments as compared to existing regulations;
when fully phased in, requires banks to maintain: (i) a newly adopted international standard, a minimumleverage ratio of at least 4.0%; a common equity Tier 1, which we refer to as CET1, to risk-weighted assets of 4.5%; a Tier 1 capital (that is, CET1 plus Additional Tier 1 capital) to risk-weighted assets of at least 4.5%,6.0% and a total capital (that is, Tier 1 capital plus a 2.5% “capital conservation buffer” (which is added to the 4.5% CET1 ratio as that buffer is phased in, effectively resulting in a minimum ratio of CET1Tier 2 capital) to risk-weighted assets of at least 7%8.0%. CET1 capital is generally defined as common stockholders’ equity and retained earnings. Tier 1 capital is generally defined as CET1 and Additional Tier 1 capital. Additional Tier 1 capital generally includes certain noncumulative perpetual preferred stock and related surplus and minority interests in equity accounts of consolidated subsidiaries. Total capital includes Tier 1 capital (CET1 capital plus Additional Tier 1 capital) and Tier 2 capital. Tier 2 capital is comprised of capital instruments and related surplus meeting specified requirements, and may include cumulative preferred stock and long-term perpetual preferred stock, mandatory convertible securities, intermediate preferred stock and subordinated debt. Also included in Tier 2 capital is the allowance for loan loss limited to a maximum of 1.25% of risk-weighted assets. We exercised the opt-out election regarding the treatment of Accumulated Other Comprehensive Income (“AOCI”); in part to avoid significant variations in our capital levels resulting from changes in the fair value of our available-for-sale investment securities portfolio as interest rates fluctuate. Institutions that have not exercised the AOCI opt-out have AOCI incorporated into CET1 capital (including unrealized gains and losses on available-for-sale-securities). The calculation of all types of regulatory capital is subject to deductions and adjustments specified in the regulations.

The Basel III Capital Rules provide for a number of deductions from and adjustments to CET1. These include, for example, the requirement that (i) mortgage servicing rights, (ii) deferred tax assets arising from temporary differences that could not be realized through net operating loss carrybacks, and (iii) significant investments in non-consolidated financial entities be deducted from CET1 to the extent that any one such category exceeds 10% of CET1 or all such items, in the aggregate, exceed 15% of CET1. Implementation of the deductions and other adjustments to CET1 began on January 1, 2015 and would be phased-in over a four-year period (beginning at 40% on January 1, 2015 and an additional “SIFI20% per year thereafter).
In addition to establishing the minimum regulatory capital requirements, the Basel III Capital Rules limit capital distributions and certain discretionary bonus payments to management if an institution does not hold a “capital conservation buffer” for those large institutions deemedconsisting of an additional 2.5% of CET1, on top of the minimum risk-weighted asset ratios. The capital conservation buffer is designed to be systemically important, rangingabsorb losses during periods of economic stress. The capital conservation buffer requirement was being phased in over a four-year period beginning on January 1, 2016 at 0.625%, increasing by 0.625% each January 1 until it reached 2.5% on January 1, 2019.
On Aug. 28, 2018, the Federal Reserve issued an interim final rule, “Small Bank Holding Company and Savings and Loan Holding Company Policy Statement and Related Regulations; Changes to Reporting Requirements,” as required by the Economic Growth, Regulatory Relief, and Consumer Protection Act (EGRRCPA). The rule expands the applicability of its small-bank holding company policy statement from 1.0%$1 billion to 2.5%$3 billion total consolidated assets. The policy statement also applies to savings and loan holding companies with total consolidated assets of less than $3 billion. The final rule exempts holding companies with total consolidated assets of less than $3 billionfrom consolidated capital requirements.
In 2018, banking organizations are required to maintain a CET1 capital ratio of at least 6.375%, a Tier 1 capital ratio of at least 7.875%, and upa total capital ratio of at least 9.875% to 3.5% underavoid limitations on capital distributions and certain conditions; (iii)discretionary incentive compensation payments. As phased-in on January 1, 2019, the Bank is required to meet minimum Tier 1 leverage ratio of 4.0%, a minimum ratioCET1 to risk-weighted assets of 4.5% (7% with the capital conservation buffer), a Tier 1 capital to risk-weighted assets of at least 6.0%, plus (8.5% including the capital conservation buffer (which is added to the 6.0% Tier 1 capital ratio as that buffer is phased in, effectively resulting inbuffer) and a minimum Tier 1 capital ratio of 8.5% upon full implementation); (iv) a minimum ratio of Total (that is, Tier 1 plus Tier 2)total capital to risk-weighted assets of at least 8.0%, plus (10.5% including the capital conservation buffer (which is added tobuffer).
In determining the 8.0% totalamount of risk-weighted assets for purposes of calculating risk-based capital ratio as that buffer is phased in, effectively resulting inratios, a minimum total capital ratio of 10.5% upon full implementation); and (v) as a newly adopted international standard, a minimum leverage ratio of 3%, calculated as the ratio of Tier 1 capital to balance sheet exposures plusbank’s assets, including certain off-balance sheet exposures (asassets (e.g., recourse obligations, direct credit substitutes, residual interests), are multiplied by a risk weight factor assigned by the average for each quarter of the month-end ratios for the quarter); and
an additional “countercyclical capital buffer,” generally to be imposed when national regulators determine that excess aggregate credit growth becomes associated with a buildup of systemic risk, that would be a CET1 add-on to the capital conservation bufferregulations based on perceived risks inherent in the rangetype of asset. As a result, higher levels of capital are required for asset categories believed to present greater risk. For example, a risk weight of 0% is assigned to 2.5% when fully implemented.

In July 2013, thecash and U.S. banking agencies approved the U.S. versiongovernment securities, a risk weight of Basel III.50% is generally assigned to prudently underwritten first lien 1-4 family residential mortgages, a risk weight of 100% is assigned to commercial and consumer loans, a risk weight of 150% is assigned to certain past due loans and a risk weight of between 0% to 600% is assigned to permissible equity interests, depending on certain specified factors. The federal bank regulatory agencies adopted version of Basel III revisesCapital Rules increased the risk-based and leverage capital requirements and the methodrisk weights for calculating risk-weighted assets to make them consistent with Basel III and to meet the requirementsa variety of the Dodd-Frank Act.  Although many of the rules contained in these final regulations are applicable only to large, internationally active banks, some of them apply on a phased in basis to all banking organizations,asset classes, including the Company and the Bank.  Among other things, the rules establish a new minimum common equity Tier 1 ratio (4.5% of risk-weighted assets), a higher minimum Tier 1 risk-based capital requirement (6.0% of risk-weighted assets) and a minimum non-risk-based leverage ratio (4.00% eliminating a 3.00% exception for higher rated banks). The new additional capital conservation buffer of 2.5% of risk weighted assets over each of the required capital ratios will be phased in from 2016 to 2019 and must be met to avoid limitations on the ability of the Company and the Bank to pay dividends, repurchase shares or pay discretionary bonuses.  The additional “countercyclical capital buffer” is also required for larger and more complex institutions.  The new rules assign higher risk weighting to exposures that are more than 90 days past due or are on nonaccrual status and certain commercial real estate facilitiesmortgages. Additional aspects of the Basel III Capital Rules’ risk weighting requirements that financeare relevant to the Bank include:
assigning exposures secured by single-family residential properties to either a 50% risk weight for first-lien mortgages that meet prudent underwriting standards or a 100% risk weight category for all other mortgages;
providing for a 20% credit conversion factor for the unused portion of a commitment with an original maturity of one year or less that is not unconditionally cancellable (increased from 0% under the previous risk-based capital rules);
assigning a 150% risk weight to all exposures that are nonaccrual or 90 days or more past due (increased from 100% under the previous risk-based capital rules), except for those secured by single-family residential properties, which will be assigned a 100% risk weight, consistent with the Basel I risk-based capital rules;
applying a 150% risk weight instead of a 100% risk weight for certain high volatility CRE acquisition, development orand construction of real property.  The rules also changeloans; and
applying a 250% risk weight to the permitted compositionportion of Tier 1 capital to exclude trust preferred securities, mortgage servicing rights and certain deferred tax assets and include unrealized gains and losses on availablearising from temporary differences that could not be realized through net operating loss carrybacks that are not deducted from CET1 capital (increased from 100% under the previous Basel I risk-based capital rules).
As of December 31, 2018, the Bank’s capital ratios exceeded the minimum capital adequacy guideline percentage requirements of the federal banking agencies for sale debt and equity securities (with a one-time opt out option for Standardized Banks (banks with less than $250 billion of total consolidated assets and less than $10 billion of foreign exposures) which the Company and the Bank intend to exercise).  The rules, including alternative requirements for smaller community financial“well capitalized” institutions like the Company and the Bank, would be phased in through 2019.  The implementation ofunder the Basel III framework commenced on January 1, 2015. 

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A bank that does not achieve and maintain the required capital levels may be issued a capital directive by the FDIC to ensure the maintenance of required capital levels.  As discussed above, the Company and the Bank are required to maintain certain levels of capital.  The regulatory capital guidelines as well as the actual capitalization for the Bank and the CompanyCapital Rules on a consolidated basis as of December 31, 2015 are as follows:fully phased-in basis.

 Requirement Actual
 Adequately Capitalized For the Bank to be Well Capitalized Bank Company
Total risk-based capital ratio8.00% 10.00% 14.93% 15.04%
Tier 1 risk-based capital ratio6.00% 8.00% 13.67% 13.79%
Common equity tier 1 ratio4.50% 6.50% 13.67% 13.44%
Tier 1 leverage capital ratio4.00% 5.00% 8.58% 8.65%
BANK SECRECY ACT/ANTI-MONEY LAUNDERING REGULATIONS
 

VOLCKER RULE

The final rules adopted on December 10, 2013, to implement a partFinancial Recordkeeping and Reporting of the Dodd-FrankCurrency and Foreign Transactions Act of 1970 is commonly referred to as the “Volcker Rule”Bank Secrecy Act (BSA), would prohibit insured depositorywhich has been frequently updated. The purpose of BSA is to require financial institutions to maintain certain records and companies affiliated with insured depository institutions (“banking entities”) from engagingfile certain reports that have a high degree of usefulness in short-term proprietary trading of certain securities, derivatives, commodity futurescriminal, tax and options on these instruments, for their own account. The final rules also impose limits on banking entities’ investments in,regulatory investigations or proceedings and other relationships with, hedge funds or private equity funds. These rules became effective on April 1, 2014.  Certain collateralized debt obligations (“CDOs”), securities backed by trust preferred securities which were initially defined as covered funds subject to the investment prohibitions, have been exempted to address the concern that many community banks holding such CDOs securities may have been required to recognize significant losses on those securities.
Like the Dodd-Frank Act, the final rules provide exemptions for certain activities, including market making, underwriting, hedging, trading in government obligations, insurance company activities, and organizing and offering hedge funds or private equity funds. The final rules also clarify that certain activities are not prohibited, including acting as agent, broker, or custodian.
The compliance requirements under the final rules vary based on the size of the banking entity and the scope of activities conducted. Banking entities with significant trading operations will be required to establish a detailed compliance program and their CEOs will be required to attest that the program is reasonably designed to achieve compliance with the final rule. Independent testing and analysis ofimplement an institution’s compliance program will also be required. The final rules reduce the burden on smaller, less-complex institutions by limiting their compliance and reporting requirements. Additionally, a banking entity that does not engage in covered trading activities will not need to establish a complianceanti-money laundering program. The Company and the Bank held no investment positions at December 31, 2015 that were subject to the final rule.  Therefore, while these new rules may require us to conduct certain internal analysis and reporting, we believe that they will not require any material changes in our operations or business.

USA PATRIOT ACT
On October 26, 2001, President Bush signedUnder the Uniting and Strengthening

America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism (USA PATRIOT) Act of 2001.  The USA PATRIOT Act also made significant changes to2001 the Bank Secrecy Act.  Under the USA PATRIOT Act, financialBSA regulation was amended. Financial institutions are subject to prohibitions against specified financial transactions and account relationships as well as enhanced due diligence and of identifying customers when establishing new relationships and standards in their dealings with high risk customers, foreign financial institutions, and foreign customers.  For example,individuals and entities. The Customer Due Diligence (CDD) final rule, which was effective in 2018, also amended the enhanced due diligence policies, procedures,BSA regulation. The CDD rule aims to improve financial transparency and prevent criminals and terrorists from misusing companies to disguise their illicit activities and launder their ill-gotten gains. The Bank has extensive controls generallyin place to comply with these requirements.

OFFICE OF FOREIGN ASSETS CONTROL

The Office of Foreign Assets Control (OFAC), is a financial intelligence and enforcement agency of the U.S. Treasury Department. It administers and enforces economic and trade sanctions based on U.S. foreign policy and national security goals against targeted foreign countries and regimes. The OFAC regulations require financial institutions to take reasonable steps:
* To conduct enhanced scrutinyblock or reject payments, transfers, withdrawals or other dealings with respect to accounts and assets of account relationshipscountries that are identified by the president as being a threat to guard against money launderingnational security. This may also include dealings with accounts and assets of nationals of a sanctioned country and with other specially designated individuals (such as designated narcotics traffickers). Financial institutions are also required to report any suspicious transaction;
* To ascertain the identityall blocked transactions to OFAC within 10 business days of the nominal and beneficial owners of, and the source of funds deposited into, each account as neededoccurrence. The Bank has extensive controls in place to guard against money laundering and report any suspicious transactions;comply with these requirements.
* To ascertain for any foreign bank, the shares of which are not publicly traded, the identity of the owners of the foreign bank, and the nature and extent of the ownership interest of each such owner; and.
* To ascertain whether any foreign bank provides correspondent accounts to other foreign banks and, if so, the identity of those foreign banks and related due diligence information.
Under the USA PATRIOT Act, financial institutions are to establish anti-money laundering programs to enhance their Bank Secrecy Act program.  The USA PATRIOT Act sets forth minimum standards for these programs, including:

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* The development of internal policies, procedures, and controls;SAFEGUARDING OF CUSTOMER INFORMATION AND PRIVACY
* The designation of a compliance officer;
* An ongoing employee training program; and
* An independent audit function to test the programs.
Bank management believes that the Bank is currently in compliance with the US PATRIOT Act.
FINANCIAL SERVICES MODERNIZATION LEGISLATION
On November 12, 1999, President Clinton signed into law the Gramm-Leach-Bliley Act, also known as the Financial Services Modernization Act.  This legislation eliminated many of the barriers that have separated the insurance, securities and banking industries since the Great Depression.  The federal banking agencies (the Board of Governors, FDIC and the Office of the Comptroller of the Currency) among others, continue to draft regulations to implement the Gramm-Leach-Bliley Act.  The Gramm-Leach-Bliley Act is the result of a decade of debate in the Congress regarding a fundamental reformation of the nation’s financial system.  The law is subdivided into seven titles, by functional area.
The major provisions of the Gramm-Leach-Bliley Act are:
FINANCIAL HOLDING COMPANIES AND FINANCIAL ACTIVITIES.  Title I establishes a comprehensive framework to permit affiliations among commercial banks, insurance companies, securities firms,Federal Reserve and other financial service providers by revising and expanding the BHC Act framework to permit a holding company system to engage in a full range of financial activities through qualification as a new entity known as a financial holding company.
Final regulationsbank regulatory agencies have adopted by the FDIC in January 2001, in the form of amendments to Part 362 of the FDIC rules and regulations, provide the frameworkguidelines for subsidiaries of state nonmember banks to engage in financial activities that the Gramm-Leach-Bliley Act permits national banks to conduct through a financial subsidiary.
Activities permissible for financial subsidiaries of national banks, and, pursuant to Section 362 of the FDIC rules and regulations, also permissible for financial subsidiaries of state nonmember banks, include, but are not limited to, the following:  (a) Lending, exchanging, transferring, investing for others, or safeguarding money or securities; (b) Insuring, guaranteeing, or indemnifying against loss, harm, damage, illness, disability, or death, or providing and issuing annuities, and acting as principal, agent, or broker for purposes of the foregoing, in any State; (c) Providing financial, investment, or economic advisory services, including advising an investment company; (d) Issuing or selling instruments representing interests in pools of assets permissible for a bank to hold directly; and (e) Underwriting, dealing in, or making a market in securities.
SECURITIES ACTIVITIES. Title II narrows the exemptions from the securities laws previously enjoyed by banks and creates a new, voluntary investment bank holding company.  The Board of Governors and the SEC continue to work together to draft rules governing certain securities activities of banks.
INSURANCE ACTIVITIES. Title III restates the proposition that the states are the functional regulators for all insurance activities, including the insurance activities of federally-chartered banks, and bars the states from prohibiting insurance activities by depository institutions.
PRIVACY. Under Title V, federal banking regulators were required to adopt rules that have limited the ability of banks and otherconfidential, personal customer information. These guidelines require financial institutions to disclose non-publiccreate, implement and maintain a comprehensive written information security program designed to ensure the security and confidentiality of customer information, protect against any anticipated threats or hazards to the security or integrity of such information and protect against unauthorized access to or use of such information that could result in substantial harm or inconvenience to any customer. The Bank has adopted a customer information security program to comply with such requirements.
Financial institutions are also required to implement policies and procedures regarding the disclosure of nonpublic personal information about consumers to nonaffiliatednon-affiliated third parties. These limitations require disclosure of privacy policies to consumers and, in some circumstances, allow consumers to prevent disclosure of certain personal information to a nonaffiliated third party.  Federal banking regulators issued final rules on May 10, 2000 to implement the privacy provisions of Title V. Under the rules,In general, financial institutions must provide:
* initial noticesprovide explanations to customers about their privacyconsumers on policies describingand procedures regarding the conditions under which they may disclosedisclosure of such nonpublic personal information to nonaffiliated third parties and, affiliates;
* annual notices of theirexcept as otherwise required by law, prohibits disclosing such information. The Bank has implemented privacy policies addressing these restrictions which are distributed regularly to current customers;all existing and
* a reasonable method for new customers to “opt out” of disclosures to nonaffiliated third parties.
Compliance with these rules was mandatory after July 1, 2001.  The Company and the Bank were in full compliance with the rules as of or prior to their respective effective dates.
SAFEGUARDING CONFIDENTIAL CUSTOMER INFORMATION.  Under Title V, federal banking regulators are required to adopt rules requiring financial institutions to implement a program to protect confidential customer information.  In January 2000, the federal banking agencies adopted guidelines requiring financial institutions to establish an information security program.
The Bank implemented a security program appropriate to its size and complexity and the nature and scope of its operations prior to the July 1, 2001 effective date of the regulatory guidelines, and since initial implementation has, as necessary, updated and improved that program.Bank.

COMMUNITY REINVESTMENT ACT SUNSHINE REQUIREMENTS.

The Community Reinvestment Act (CRA) is intended to encourage insured depository institutions, while operating safely and soundly, to help meet the credit needs of their communities. The CRA specifically directs the federal bank regulatory agencies, in examining insured depository institutions, to assess their record of helping to meet the credit needs of their entire community, including low-and moderate-income neighborhoods, consistent with safe and sound banking practices. The CRA further requires the agencies to take a financial institution’s record of meeting its community credit needs into account when evaluating applications for, among other things, domestic branches, consummating mergers or acquisitions or holding company formations. The federal banking agencies have adopted final regulations implementing Section 711 of Title VII of the Gramm-Leach-Bliley Act, the Sunshine Requirements.  The regulations require nongovernmental entities or persons and insured depository institutions and affiliates that are parties to written agreements made in connectionwhich measure a bank’s compliance with the fulfillment of the institution’sits CRA obligations on a performance based evaluation system. This system bases CRA ratings on an institution’s actual lending service and investment performance rather than the extent to make availablewhich the institution conducts needs assessments, documents community outreach or complies with other procedural requirements. The ratings range from “outstanding” to the public and the federal banking agencies a copylow of each agreement.  Neither the Company nor the“substantial noncompliance.” The Bank ishad a party to any agreement that would be the subjectCRA rating of reporting pursuant to the CRA Sunshine Requirements.

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The Company continues to evaluate the strategic opportunities presented by the broad powers granted to bank holding companies that elect to be treated as financial holding companies.  In the event that the Company determines that access to the broader powers of a financial holding company is in the best interests of the Company, its shareholders and the Bank, the Company will file the appropriate election with the Board of Governors.most recent regulatory examination.
The Company and the Bank intend to comply with all provisions of the Gramm-Leach-Bliley Act and all implementing regulations as they become effective.

CONSUMER PROTECTION LAWS AND REGULATIONS
 
The bank regulatory agencies are focusing greater attention on compliance with consumer protection laws and their implementing regulations.  Examination and enforcement have become more intense in nature, and insured institutions have been advised to monitor carefully compliance with such laws and regulations.  The Dodd-Frank Act transferred rulemaking authority for many consumer protection laws from various Federal agencies to the Consumer Financial Protection Bureau (CFPB). The Bank is subject to many federal consumer protection statutes and regulations, some of which are discussed below.
The Community Reinvestment Act (CRA) is intended to encourage insured depository institutions, while operating safely and soundly, to help meet the credit needs of their communities.  The CRA specifically directs the federal regulatory agencies, in examining insured depository institutions, to assess a bank’s record of helping meet the credit needs of its entire community, including low- and moderate-income neighborhoods, consistent with safe and sound banking practices.  The CRA further requires the agencies to take a financial institution’s record of meeting its community credit needs into account when evaluating applications for, among other things, domestic branches, mergers or acquisitions, or holding company formations.  The agencies use the CRA assessment factors in order to provide a rating to the financial institution.  The ratings range from a high of “outstanding” to a low of “substantial noncompliance.”  The Bank was last examined for CRA compliance by its primary regulator, the FDIC, as of February 2013.
The Equal Credit Opportunity Act (ECOA) generally prohibits discrimination in any credit transaction, whether for consumer or business purposes, on the basis of race, color, religion, national origin, sex, marital status, age, receipt of income from public assistance programs, or good faith exercise of any rights under the Consumer Credit Protection Act.
The Truth in Lending Act (TILA) is designed to ensure that credit terms are disclosed in a meaningful way so that consumers may compare credit terms more readily and knowledgeably.  As a result of the TILA, all creditors must use the same

credit terminology to express rates and payments, including the annual percentage rate, the finance charge, the amount financed, the total of payments and the payment schedule, among other things.
The Fair Housing Act (FH Act) regulates many practices, including making it unlawful for any lender to discriminate in its housing-related lending activities against any person because of race, color, religion, national origin, sex, handicap or familial status.  A number of lending practices have been found by the courts to be, or may be considered, illegal under the FH Act, including some that are not specifically mentioned in the FH Act itself.
The Home Mortgage Disclosure Act (HMDA) grew out of public concern over credit shortages in certain urban neighborhoods and provides public information that will help show whether financial institutions are serving the housing credit needs of the neighborhoods and communities in which they are located.  The HMDA also includes a “fair lending” aspect that requires the collection and disclosure of data about applicant and borrower characteristics as a way of identifying possible discriminatory lending patterns and enforcing anti-discrimination statutes.
Finally, the Real Estate Settlement Procedures Act (RESPA) requires lenders to provide borrowers with disclosures regarding the nature and cost of real estate settlements.  Also, RESPA prohibits certain abusive practices, such as kickbacks, and places limitations on the amount of escrow accounts.  Penalties under the above laws may include fines, reimbursements and other civil money penalties.
Due to heightened regulatory concern related to compliance with the CRA, TILA, FH Act, ECOA, HMDA and RESPA generally, the Bank may incur additional compliance costs or be required to expend additional funds for investments in its local community.

CONSUMER FINANCIAL PROTECTION BUREAU

Dodd-Frank created a new, independent federal agency, the Consumer Financial Protection Bureau (CFPB), which was granted broad rulemaking, supervisory and enforcement powers under various federal consumer financial protection laws. The CFPB is also authorized to engage in consumer financial education, track consumer complaints, request data and promote the availability of financial services to underserved consumers and communities. Although all institutions are subject to rules adopted by the CFPB and examination by the CFPB in conjunction with examinations by the institution’s primary federal regulator, the CFPB has primary examination and enforcement authority over institutions with assets of $10 billion or more. The FDIC has primary responsibility for examination of the Bank and enforcement with respect to federal consumer protection laws so long as the Bank has total consolidated assets of less than $10 billion, and state authorities are responsible for monitoring our compliance with all state consumer laws. The CFPB also has the authority to require reports from institutions with less than $10 billion in assets, such as the Bank, to support the CFPB in implementing federal consumer protection laws, supporting examination activities, and assessing and detecting risks to consumers and financial markets.
The consumer protection provisions of Dodd-Frank and the examination, supervision and enforcement of those laws and implementing regulations by the CFPB have created a more intense and complex environment for consumer finance regulation. The CFPB has significant authority to implement and enforce federal consumer finance laws, including the Truth in Lending Act, the Equal Credit Opportunity Act and new requirements for financial services products provided for in Dodd-Frank, as well as the authority to identify and prohibit unfair, deceptive or abusive acts and practices. The review of products and practices to prevent such acts and practices is a continuing focus of the CFPB, and of banking regulators more broadly. The ultimate impact of this heightened scrutiny is uncertain but could result in changes to pricing, practices, products and procedures. It could also result in increased costs related to regulatory oversight, supervision and examination, additional remediation efforts and possible penalties. In addition, Dodd-Frank provides the CFPB with broad supervisory, examination and enforcement authority over various consumer financial products and services, including the ability to require reimbursements and other payments to customers for alleged legal violations and to impose significant penalties, as well as injunctive relief that prohibits lenders from engaging in allegedly unlawful practices. The CFPB also has the authority to obtain cease and desist orders providing for affirmative relief or monetary penalties. Dodd-Frank does not prevent states from adopting stricter consumer protection standards. State regulation of financial products and potential enforcement actions could also adversely affect our business, financial condition or results of operations.

DEPOSIT INSURANCE

The FDIC is an independent federal agency that insures deposits up to prescribed statutory limits of federally insured banks and savings institutions and safeguards the safety and soundness of the banking and savings industries. The FDIC insures the Bank’s customer deposits through the Deposit Insurance Fund (the “DIF”) up to prescribed limits for each depositor. Pursuant to Dodd-Frank, the maximum deposit insurance amount was increased to $250,000. The amount of FDIC assessments paid by each DIF member institution is based on its relative risk of default as measured by regulatory capital ratios and other supervisory factors.
The Bank is subject to deposit insurance assessments to maintain the DIF. In October 2010, the FDIC adopted a revised restoration plan to ensure that the DIF’s designated reserve ratio (“DRR”) reaches 1.35% of insured deposits by September 30, 2020, the deadline mandated by Dodd-Frank. However, financial institutions like the Bank with assets of less

than $10 billion are exempted from the cost of this increase. The restoration plan proposed an increase in the DRR to 2% of estimated insured deposits as a long-term goal for the fund. The FDIC also proposed future assessment rate reductions in lieu of dividends when the DRR reaches 1.5% or greater. On September 30, 2018, the DIF reached 1.36%. Because the reserve ratio has exceeded 1.35%, two deposit insurance assessment changes occurred under the FDIC regulations: 1) surcharges on large banks (total consolidated assets of $10 billion or more) ended; the last surcharge on large banks was collected on December 28, 2018. and 2) small banks (total consolidated assets of less than $10 billion) were awarded assessment credits for the portion of their assessments that contributed to the growth in the reserve ratio from 1.15% to 1.35%, to be applied when the reserve ratio is at least 1.38%.
We are generally unable to control the amount of premiums that we are required to pay for FDIC insurance. If there are additional bank or financial institution failures or if the FDIC otherwise determines, we may be required to pay even higher FDIC premiums than the recently increased levels. These announced increases and any future increases in FDIC insurance premiums may have a material and adverse effect on our earnings and could have a material adverse effect on the value of or market for our common stock.
In addition to DIF assessments, banks must pay quarterly assessments that are applied to the retirement of Financing Corporation (“FICO”) bonds issued in the 1980’s to assist in the recovery of the savings and loan industry. The FICO assessment amount fluctuates quarterly, but was 0.00035% of average total assets less average tangible equity for the third quarter of 2018. As of the date of this report, the Company had not received the FICO assessment for the fourth quarter of 2018. Those assessments will continue until the Financing Corporation bonds mature in 2019.
The FDIC may terminate a depository institution’s deposit insurance upon a finding that the institution’s financial condition is unsafe or unsound or that the institution has engaged in unsafe or unsound practices that pose a risk to the DIF or that may prejudice the interest of the bank’s depositors. The termination of deposit insurance for a bank would also result in the revocation of the bank’s charter by the DBO.
CALIFORNIA FINANCIAL INFORMATION PRIVACY ACT/FAIR CREDIT REPORTING ACT
 
In 1970, the Federal Fair Credit Reporting Act (the FCRA) was enacted to insure the confidentiality, accuracy, relevancy and proper utilization of consumer credit report information.  Under the framework of the FCRA, the United States has developed a highly advanced and efficient credit reporting system.  The information contained in that broad system is used by financial institutions, retailers and other creditors of every size in making a wide variety of decisions regarding financial transactions.  Employers and law enforcement agencies have also made wide use of the information collected and maintained in databases made possible by the FCRA.  The FCRA affirmatively preempts state law in a number of areas, including the ability of entities affiliated by common ownership to share and exchange information freely, and the requirements on credit bureaus to reinvestigate the contents of reports in response to consumer complaints, among others.
The California Financial Information Privacy Act, which was enacted in 2003, requires a financial institution to provide specific information to a consumer related to the sharing of that consumer’s nonpublic personal information.  The Act

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allows a consumer to direct the financial institution not to share his or her nonpublic personal information with affiliated or nonaffiliated companies with which a financial institution has contracted to provide financial products and services, and requires that permission from each such consumer be acquired by a financial institution prior to sharing such information.
The FACT Act, (Fair and Accurate Credit Transaction Act) became law in 2003, effectively extending and amending provisions of the Fair Credit Reporting Act (FCRA).  The FACT Act created many new responsibilities for consumer reporting agencies and users of consumer reports.  It contains many new consumer disclosure requirements as well as provisions to address identity theft.

CHECK 21 ACT
On December 22, 2003, the Board of Governors amended Regulation CC and its commentary to implement the Check Clearing for the 21st Century Act (Check 21 Act).  The Check 21 Act became effective on October 28, 2004.
To facilitate check truncation and electronic check exchange, the Check 21 Act authorizes a new negotiable instrument called a “substitute check” and provides that a properly prepared substitute check is the legal equivalent of the original check for all purposes.  A substitute check is a paper reproduction of the original check that can be processed just like the original check.  The Check 21 Act does not require any bank to create substitute checks or to accept checks electronically.  The amendments: 1) set forth the requirements of the Check 21 Act that applies to banks; 2) provide a model disclosure and model notices relating to substitute checks; and 3) set forth bank endorsement and identification requirements for substitute checks.
The Bank has been imaging its customers’ checks since 2000.  Check 21 Act has had limited impact on the Bank.
OtherOTHER PENDING AND PROPOSED LEGISLATION
 
Other legislationlegislative and regulatory initiatives which has been orcould affect the Company and the Bank and the banking industry in general may be proposed toor introduced before the United States Congress, and the California Legislaturelegislature and other governmental bodies in the future. Such proposals, if enacted, may further alter the structure, regulation and competitive relationship among financial institutions, and may subject the Company or the Bank to increased regulation, disclosure and reporting requirements. In addition, the various banking regulatory agencies often adopt new rules and regulations which may be proposed by the Board of Governors, FDICto implement and the DBO may affect our business.enforce existing legislation. It cannot be predicted whether, any pending or proposed legislation or regulations will be adopted or the effectin what form, any such legislation or regulations may be enacted or the extent to which the business of the Company or the Bank would be affected thereby.
Many aspects of the Dodd-Frank Act are subject to continued rulemaking and will take effect over several years, making it difficult to anticipate the overall financial impact on us. Although the reforms primarily target systemically important financial service providers, the Dodd-Frank Act’s influence has and is expected to continue to filter down in varying degrees to smaller institutions over time. We will continue to evaluate the effect of the Dodd-Frank Act; however, in many respects, the ultimate impact of the Dodd-Frank Act will not be fully known for years, and no current assurance may be given that the Dodd-Frank Act, or any other new legislative changes, will not have upon our business.a negative impact on the results of operations and financial condition of the Company and the Bank.

ADDITIONAL INFORMATION
 
Copies of the annual report on Form 10-K for the year ended December 31, 2018 may be obtained without charge upon written request to David A. Kinross, Chief Financial Officer, at the Company’s administrative offices,  7100 N. Financial Dr., Suite 101, Fresno, CA  93720. The Form 10-K is available on our website: www.cvcb.com.
Inquiries regarding Central Valley Community Bancorp’s accounting, internal controls or auditing concerns should be directed to Steven D. McDonald, chairman of the Board of Directors’ Audit Committee, at steve.mcdonald@cvcb.com or anonymously at www.ethicspoint.com or EthicsPoint, Inc. at 1-866-294-9588.
General inquiries about Central Valley Community Bancorp or Central Valley Community Bank should be directed to LeAnn Ruiz, Assistant Corporate Secretary at 1-800-298-1775.
ITEM 1A -RISK FACTORS
 
An investment in our common stock is subject to risks inherent to our business.  The material risks and uncertainties that Managementmanagement believes may affect our business are described below.  Before making an investment decision, you should carefully consider the risks and uncertainties described below together with all of the other information included or incorporated by reference in this Annual Report.  The risks and uncertainties described below are not the only ones facing our business.  Additional risks and uncertainties that Managementmanagement is not aware of or focused on or that Managementmanagement currently deems immaterial may also impair our business operations.  This Annual Report is qualified in its entirety by these risk factors.
 
If any of the following risks actually occur, our financial condition and results of operations could be materially and adversely affected.  If this were to happen, the value of our common stock could decline significantly, and you could lose all or part of your investment.
 
Worsening economic conditions could adversely affect our business.
The economic conditions in the United States in general and within California and in our operating markets have not fully recovered from the economic downturn of 2007 through 2010.  Unemployment nationwide and in California increased significantly through this economic downturn and has returned to more normal historical levels, however, there is no certainty that these levels will continue in the future.  Availability of credit and consumer spending, real estate values, and consumer confidence have all been adversely affected.  The volatility of the capital markets and the credit, capital and liquidity problems confronting the U.S. financial system have not been resolved despite massive government expenditures and legislative efforts to stabilize the U.S. financial system.  There is no assurance that such conditions will improve or be resolved in the foreseeable future.
The Bank conducts banking operationsoperation principally in California’s Central Valley. As a result,The Central Valley is largely dependent on agriculture. The agricultural economy in the Central Valley is therefore important to our financial condition,performance, results of operationsoperation and cash flowsflows. We are subject to changesalso dependent in the economic conditions in California’s Central Valley.  Our business results are dependent ina large part upon the business activity, population growth, income levels deposits and real estate activity in this market area. A downturn in agriculture and the Central Valley, and continued adverse economic conditionsagricultural related businesses could have a material adverse effect upon us.  In addition,our business, results of operation and financial condition. The agricultural industry has been affected by declines in prices and the rates of price growth for various crops and other agricultural commodities. Similarly, weaker prices could reduce the cash flows generated by farms and the value of agricultural land in our local markets and thereby increase the risk of default by our borrowers or reduce the foreclosure value of agricultural land and equipment that serve as collateral of our loans. Further declines in commodity prices or collateral values may increase the incidence of default by our borrowers. Moreover, weaker prices might threaten farming operations in the Central Valley, remains largely dependent on agriculture.  Areducing market demand for agricultural lending. In particular, farm income has seen recent declines, and in line with the downturn in agriculture and agricultural related business could indirectly and adversely affect our results of operations and financial condition. Since the beginning of 2014, California has been experiencing a severe drought. If the drought significantly harms the business of our customers, the credit quality of the loans to those customers could decline as a specific consequence of the drought.farm income, farmland prices are coming under pressure.

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We can provide no assurance that economic conditions in the United States in general and in the State of California and within our operating markets will not further deteriorate or that such deterioration will not materially and adversely affect us.  A further deterioration in economic conditions locally, regionally or nationally could result in a further economic downturn in the Central Valley with the following consequences, any of which could further adversely affect our business:
loan delinquencies and defaults may increase;
problem assets and foreclosures may increase;
demand for our products and services may decline;
low cost or noninterest bearing deposits may decrease;
collateral for loans may decline in value, in turn reducing customers’ borrowing power, and reducing the value of assets and collateral as sources of repayment of existing loans;
foreclosed assets may not be able to be sold;
volatile securities market conditions could adversely affect valuations of investment portfolio assets; and
reputational risk may increase due to public sentiment regarding the banking industry.
 
Non-performing assets take significant timeGovernmental monetary policies and intervention to resolve and adversely affect our results of operations andstabilize the U.S. financial condition.
At December 31, 2015, our non-performing loans and leases were 0.40% of total loans and leases compared to 2.45% at December 31, 2014, and 1.48% at December 31, 2013, and our non-performing assets (which include foreclosed real estate) were 0.19% of total assets compared to 1.18% at December 31, 2014.  The allowance for credit losses as a percentage of non-performing loans and leases was 398.26% as of December 31, 2015 compared to 59.12% at December 31, 2014.  Non-performing assets adversely affect our net income in various ways.  We generally do not record interest income on non-performing loans or other real estate owned, thereby adversely affecting our income and increasing our loan administration costs.  When we take collateral in foreclosures and similar proceedings, we are required to mark the related asset to the then fair value of the collateral, whichsystem may ultimately result in a loss.  An increase in the level of non-performing assets increases our risk profile and may impact the capital levels our regulators believe are appropriate in light of the ensuing risk profile, which could result in a request to reduce our level of non-performing assets.  When we reduce problem assets through loan sales, workouts, restructurings and otherwise, decreases in the value of the underlying collateral, or in these borrowers’ performance or financial condition, whether or not due to economic and market conditions beyond our control, could adversely affect our business resultsand are beyond our control.
The business of operationsbanking is affected significantly by the fiscal and financial condition.  In addition,monetary policies of the resolutionFederal government and its agencies. Such policies are beyond our control. We are particularly affected by the policies established by the Federal Reserve Board in relation to the supply of non-performing assets requires significant commitmentsmoney and credit in the United States. The instruments of time from management and our directors, whichmonetary policy available to the

Federal Reserve Board can be detrimentalused in varying degrees and combinations to directly affect the performanceavailability of their other responsibilities.  Therebank loans and deposits, as well as the interest rates charged on loans and paid on deposits, and this can be no assurance that we will not experience future increases in non-performing assets or that the disposition of such non-performing assets will not adversely affectand does have a material effect on our profitability.business.
 
Tightening of credit markets and liquidity risk could adversely affect our business, financial condition and results of operations.
A tightening of the credit markets or any inability to obtain adequate funds for continued loan growth at an acceptable cost could adversely affect our asset growth and liquidity position and, therefore, our earnings capability.  In addition to core deposit growth, maturity of investment securities and loan and lease payments, we also rely on alternative funding sources including unsecured borrowing lines with correspondent banks, secured borrowing lines with the Federal Home Loan Bank of San Francisco and the Federal Reserve Bank of San Francisco, and public time certificates of deposits.  Our ability to access these sources could be impaired by deterioration in our financial condition as well as factors that are not specific to us, such as a disruption in the financial markets or negative views and expectations for the financial services industry or serious dislocation in the general credit markets.  In the event such a disruption should occur, our ability to access these sources could be adversely affected, both as to price and availability, which would limit or potentially raise the cost of the funds available to us.

WeLiquidity risks could affect operations and jeopardize our business, financial condition, and results of operations.
Liquidity is essential to our business. An inability to raise funds through deposits, borrowings, the sale of loans and/or investment securities and from other sources could have a concentration risksubstantial negative effect on our liquidity. Our most important source of funds consists of our customer deposits. Such deposit balances can decrease when customers perceive alternative investments, such as the stock market, as providing a better risk/return tradeoff. If customers move money out of bank deposits and into other investments, we could lose a relatively low cost source of funds, which would require us to seek wholesale funding alternatives in order to continue to grow, thereby increasing our funding costs and reducing our net interest income and net income. Any decline in available funding could adversely impact our ability to continue to implement our strategic plan, including our ability to originate loans, invest in securities, meet our expenses, or to fulfill obligations such as repaying our borrowings or meeting deposit withdrawal demands, any of which could have a material adverse impact on our liquidity, business, financial condition and results of operations.
Because a significant portion of our loan portfolio is comprised of real estate related loans.loans, negative changes in the economy affecting real estate values and liquidity could impair the value of collateral securing our real estate loans and result in loan and other losses.
At December 31, 20152018, $453770 million, or 75.70%83.80% of our total loan and lease portfolio, consisted of real estate related loans. Substantially allThe real estate securing our loan portfolio is concentrated in California. The market value of our real property collateral is locatedestate can fluctuate significantly in our operating marketsa short period of time as a result of market conditions in the Central Valleygeographic area in California.  Inwhich the past decade, deteriorating economic conditions in California and in our operating markets adversely affected commercial and residential real estate values;is located. As a return of such conditions could harm the performance of the Company’s real estate related loans, as could a continuing substantial decline in commercial and residentialresult, adverse developments affecting real estate values in our primary market areas could increase the credit risk associated with our real estate loan portfolio. The market value of real estate can fluctuate significantly in a short period of time as a result of natural disastersmarket conditions in the geographic area in which the real estate is located. Real estate values and real estate markets are generally affected by changes in national, regional or local economic conditions, the rate of unemployment, fluctuations in interest rates and the availability of loans to potential purchasers, changes in tax laws and other governmental statutes, regulations and policies and acts of nature, such as earthquakes fires, drought, and floods.natural disasters. Adverse changes affecting real estate values and the liquidity of real estate in one or more of our markets could increase the credit risk associated with our loan portfolio, significantly impair the value of property pledged as collateral on loans and affect our ability to sell the collateral upon foreclosure without a loss or additional losses, which could result in losses that would adversely affect profitability. Such declines and losses would have a decline in values could have anmaterial adverse impact on us by limiting repaymentour business, results of defaulted loans through saleoperations and growth prospects. In addition, if hazardous or toxic substances are found on properties pledged as collateral, the value of commercial and residentialthe real estate collateralcould be impaired. If we foreclose on and bytake title to such properties, we may be liable for remediation costs, as well as for personal injury and property damage. Environmental laws may require us to incur substantial expenses to address unknown liabilities and may materially reduce the affected property’s value or limit our ability to use or sell the affected property.

Supervisory guidance on commercial real estate concentrations could restrict our activities and impose financial requirements or limits on the conduct of our business.
As a likely increasepart of their regulatory oversight, the federal regulators have issued the CRE Concentration Guidance on sound risk management practices with respect to a financial institution’s concentrations in commercial real estate lending activities. These guidelines were issued in response to the agencies’ concerns that rising commercial real estate, or CRE, concentrations might expose institutions to unanticipated earnings and capital volatility in the numberevent of defaulted loansadverse changes in the commercial real estate market. Existing guidance reinforces and enhances existing regulations and guidelines for safe and sound real estate lending by providing supervisory criteria, including numerical indicators to assist in identifying institutions with potentially significant commercial real estate loan concentrations that may warrant greater supervisory scrutiny. The guidance does not limit banks’ commercial real estate lending, but rather guides institutions in developing risk management practices and levels of

capital that are commensurate with the level and nature of their commercial real estate concentrations. The CRE Concentration Guidance identifies certain concentration levels that, if exceeded, will expose the institution to additional supervisory analysis with regard to the extentinstitution’s CRE concentration risk. The CRE Concentration Guidance is designed to promote appropriate levels of capital and sound loan and risk management practices for institutions with a concentration of CRE loans. In general, the CRE Concentration Guidance establishes the following supervisory criteria as preliminary indications of possible CRE concentration risk: (i) the institution’s total construction, land development and other land loans represent 100% or more of total risk-based capital; or (ii) total CRE loans as defined in the regulatory guidelines represent 300% or more of total risk-based capital, and the institution’s CRE loan portfolio has increased by 50% or more during the prior 36-month period. Pursuant to the CRE Concentration Guidelines, loans secured by owner occupied commercial real estate are not included for purposes of CRE Concentration calculation. We believe that our underwriting policies, management information systems, independent credit administration process, and monitoring of real estate loan concentrations are currently sufficient to address the financial conditionCRE Concentration Guidance.
Small Business Administration lending is an important part of our borrowersbusiness. Our SBA lending program is dependent upon the U.S. federal government, and we face specific risks associated with originating SBA loans.
Our SBA lending program is dependent upon the U.S. federal government. As an approved participant in the SBA Preferred Lender’s Program (an “SBA Preferred Lender”), we enable our clients to obtain SBA loans without being subject to the potentially lengthy SBA approval process necessary for lenders that are not SBA Preferred Lenders. The SBA periodically reviews the lending operations of participating lenders to assess, among other things, whether the lender exhibits prudent risk management. When weaknesses are identified, the SBA may request corrective actions or impose enforcement actions, including revocation of the lender’s SBA Preferred Lender status. If we lose our status as an SBA Preferred Lender, we may lose some or all of our customers to lenders who are SBA Preferred Lenders, and as a result we could experience a material adverse effect to our financial results. Any changes to the SBA program, including but not limited to changes to the level of guarantee provided by the federal government on SBA loans, changes to program specific rules impacting volume eligibility under the guaranty program, as well as changes to the program amounts authorized by Congress may also have a material adverse effect on our business. In addition, any default by the U.S. government on its obligations or any prolonged government shutdown could, among other things, impede our ability to originate SBA loans or sell such loans in the secondary market, which could materially adversely affected by such a declineaffect our business, results of operations and financial condition.
The laws, regulations and standard operating procedures that are applicable to SBA loan products may change in values.  The adversethe future. We cannot predict the effects of these changes on our business and profitability. Because government regulation greatly affects the foregoing matters uponbusiness and financial results of all commercial banks and bank holding companies and especially our real estate portfolio could necessitate a material increaseorganization, changes in the provision for loanlaws, regulations and lease losses.procedures applicable to SBA loans could adversely affect our ability to operate profitably.

If our allowance for credit losses is not sufficient to cover actual loan losses, our earnings could decrease.

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Our loan customers may not repay their loans according to the terms of these loans, and the collateral securing the payment of these loans may be insufficient to assure repayment.  We may experience significant credit losses that could have a material adverse effect on our operating results.  We make various assumptions and judgments about the collectability of our loan portfolio, including the creditworthiness of our borrowers and the value of the real estate and other assets serving as collateral for the repayment of many of our loans. In determiningWe maintain an allowance for loan losses for probable incurred losses in our loan portfolio. The allowance is established through a provision for loan losses based on management’s evaluation of the risks inherent in the loan portfolio and the general economy. The allowance is also appropriately increased for new loan growth. The allowance is based upon a number of factors, including the size of the allowance, we rely on ourloan portfolio, asset classifications, economic trends, industry experience and our evaluationtrends, industry and geographic concentrations, estimated collateral values, management’s assessment of economic conditions.the credit risk inherent in the portfolio, historical loan loss experience and loan underwriting policies. The allowance is only an estimate of the probable incurred losses in the loan portfolio and may not represent actual losses realized over time, either of losses in excess of the allowance or of losses less than the allowance. If our assumptions prove to be incorrect, our current allowance maymy not be sufficient to cover future loan losses and adjustments may be necessary to allow for different economic conditions or adverse developments in our loan portfolio.  Significant additions to our allowance would materially decrease our net income.
In addition, federal and state regulatorsOur bank regulatory agencies will periodically review our allowance for creditloan losses and the value attributed to nonaccrual loans or to real estate acquired through foreclosure and may require us to increaseadjust our provisiondetermination of the value for these items. These adjustments may adversely affect our business, financial condition and results of operations.

Non-performing assets take significant time to resolve and adversely affect our results of operations and financial condition.
At December 31, 2018, our non-performing loans and leases were 0.30% of total loans and leases compared to 0.32% at December 31, 2017, and 0.29% at December 31, 2016, and our non-performing assets (which include foreclosed real estate) were 0.18% of total assets compared to 0.18% at December 31, 2017.  The allowance for credit losses as a percentage of non-performing loans and leases was 332.26% as of December 31, 2018 compared to 305.32% at December 31, 2017.  Non-performing assets adversely affect our net income in various ways.  We generally do not record interest income on non-

performing loans or recognize furtherother real estate owned, thereby adversely affecting our income and increasing our loan charge-offs, based on judgments different than thoseadministration costs.  When we make.  Anytake collateral in foreclosures and similar proceedings, we are required to mark the related asset to the then fair value of the collateral, which may ultimately result in a loss.  An increase in the level of non-performing assets increases our allowancerisk profile and may impact the capital levels our regulators believe are appropriate in light of the ensuing risk profile, which could result in a request to reduce our level of non-performing assets.  When we reduce problem assets through loan sales, workouts, restructurings and otherwise, decreases in the value of the underlying collateral, or charge-offs as required byin these regulatory agenciesborrowers’ performance or financial condition, whether or not due to economic and market conditions beyond our control, could have a negative effect on us.adversely affect our business, results of operations and financial condition.  In addition, the resolution of non-performing assets requires significant commitments of time from management and our directors, which can be detrimental to the performance of their other responsibilities.  There can be no assurance that we will not experience future increases in non-performing assets or that the disposition of such non-performing assets will not adversely affect our profitability.
 
Our focus on lending to small to mid-sized community-based businesses may increase our credit risk.
Commercial real estate and commercial business loans generally are considered riskier than single-family residential loans because they have larger balances to a single borrower or group of related borrowers.  Commercial real estate and commercial business loans involve risks because the borrowers’ ability to repay the loans typically depends primarily on the successful operation of the businesses or the properties securing the loans.  Most of the Bank’s commercial real estate and commercial business loans are made to small to medium sized businesses who may have a heightened vulnerability to economic conditions.  Moreover, a portion of these loans have been made by us in recent years and the borrowers may not have experienced a complete business or economic cycle.  Furthermore, the deterioration of our borrowers’ businesses may hinder their ability to repay their loans with us, which could adversely affect our results of operations.
 
Fluctuations in interest rates could reduce our profitability.
We realize income primarily from the difference between interest earned on loans and securities and the interest paid on deposits and borrowings.  We expect that we will periodically experience “gaps” in the interest rate sensitivities of our assets and liabilities, meaning that either our interest-bearing liabilities will be more sensitive to changes in market interest rates than our interest-earning assets, or vice versa. In either event, if market interest rates should move contrary to our position, this “gap” will work against us, and our earnings may be negatively affected.
We are unable to predict fluctuations of market interest rates, which are affected by the following factors:factors outside our control:
inflation;
recession;
competition;
a rise in unemployment;
tightening money supply;
international disorder; and
instability in domestic and foreign financial markets.
Our asset/liability management strategy, which is designed to address the risk from changes in market interest rates and the shape of the yield curve, may not prevent changes in interest rates from having a material adverse effect on our results of operations and financial condition. In recent years, we have shifted our mix of assets from consisting primarily of loans to a currentmore balanced mix that is approximately halfof loans and half securities. The value of these securities is subject to interest rate risk, which we must monitor and manage successfully in order to prevent declines in value of these assets if interest rates rise in the future.

Additionally, increasing levels of competition in the banking and financial services business may decrease our net interest spread as well as net interest margin by forcing us to offer lower lending interest rates and pay higher deposit interest rates. Although we believe our current level of interest rate sensitivity is reasonable, significant fluctuations in interest rates (such as a sudden and substantial increase in Prime and Overnight Fed Funds rates) as well as increasing competition may require us to increase rates on deposits at a faster pace than the yield we receive on interest earning assets increases. The impact of any sudden and substantial move in interest rates and/or increased competition may have an adverse effect on our business, results of operations and financial condition as our net interest income (including the net interest spread and margin) may be negatively impacted.
Governmental monetary policies and intervention to stabilize the U.S. financial system mayFurthermore, a sustained decrease in market interest rates could adversely affect our businessearnings. When interest rates decline borrowers tend to refinance higher-rate, fixed-rate loans to lower rates, prepaying their existing loans. Under those circumstances we would not be able to reinvest those prepayments in assets earning interest rates as high as the rates on the prepaid loans. In addition, our commercial real estate and are beyond our control.
The business of banking is affected significantly bycommercial loans, which carry interest rates that, in general, adjust in accordance with changes in the fiscal and monetary policies of the Federal government and its agencies. Such policies are beyond our control.prime rate, will adjust to lower rates. We are particularlyalso significantly affected by the policies establishedlevel of loan demand available in our market. The inability to make sufficient loans directly affects the interest income we earn. Lower loan demand will generally result in lower interest income realized as we place funds in lower yielding investments.


As a result of the Dodd-Frank Act and recent rulemaking, we are subject to more stringent capital requirements.
In July 2013, the U.S. federal banking authorities approved the implementation of the Basel III regulatory capital reforms, or Basel III, and issued rules effecting certain changes required by the Federal Reserve Board in relationDodd-Frank Act. Basel III is applicable to the supply of money and credit in the United States. The instruments of monetary policy availableall U.S. banks that are subject to the Federal Reserve Board can be used in varying degrees and combinations to directly affect the availability of bank loans and deposits,minimum capital requirements as well as to bank and saving and loan holding companies, other than “small bank holding companies” (generally bank holding companies with consolidated assets of less than $1.0 billion). Basel III not only increases most of the interest rates chargedrequired minimum regulatory capital ratios, it introduces a new common equity Tier 1 capital ratio and the concept of a capital conservation buffer. Basel III also expands the current definition of capital by establishing additional criteria that capital instruments must meet to be considered additional Tier 1 and Tier 2 capital. In order to be a “well-capitalized” depository institution under the new regime, an institution must maintain a common equity Tier 1 capital ratio of 6.5% or more; a Tier 1 capital ratio of 8% or more; a total capital ratio of 10% or more; and a Tier 1 leverage ratio of 5% or more. The Basel III capital rules became effective as applied to the Company and the Bank on loans and paid on deposits, and this can and does haveJanuary 1, 2015 with a material effectphase-in period that generally extends through January 1, 2019 for many of the changes.
The failure to meet applicable regulatory capital requirements could result in one or more of our regulators placing limitations or conditions on our business.activities, including our growth initiatives, or restricting the commencement of new activities, and could affect customer and investor confidence, our costs of funds and FDIC insurance costs, our ability to pay dividends on our common stock, our ability to make acquisitions, and our business, results of operations and financial conditions, generally.

Competition with other financial institutions could adversely affect our profitability.
We face vigorous competition from banks and other financial institutions, including savings institutions, finance companies and credit unions.  A number of these banks and other financial institutions have substantially greater resources and lending limits, larger branch systems and a wider array of banking services.  To a limited extent, we also compete with other providers of financial services, such as money market mutual funds, brokerage firms, consumer finance companies and insurance companies.  This competition may reduce or limit our margins on banking services, reduce our market share and

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adversely affect our results of operations and financial condition.  Additionally, we face competition primarily from other banks in attracting, developing and retaining qualified banking professionals.
Recently, several new banks have opened in our service areas.  We are seeing price competition from these new banks, as they work to establish their markets.  The existence of competitors, large and small, is a normal and expected part of our operations, but in responding to the particular short-term impact on business of new entrants to the marketplace, we could see a negative impact on revenue and income.  Moreover, these near term impacts could be accentuated by the seasonal impact on revenue and income generated by the borrowing and deposit habits of the agricultural community that comprises a significant component of our customer base.

Technology implementation problems or computer system failures could adversely affect us.is continually changing and we must effectively implement new technologies.
Our future growth prospects will be highly dependent on our ability to implement changes in technology that affect the delivery of banking services such as the increased demand for computer access to bank accounts and the availability to perform banking transactions electronically.  Our ability to compete will depend upon our ability to continue to adapt technology on a timely and cost-effective basis to meet such demands.  In addition, our business and operations could be susceptible to adverse effects from computer failures, communication and energy disruption, and activities such as fraud of unethical individuals with the technological ability to cause disruptions or failures of our data processing system.
 
If our information systems were to experience a system failure, our business and reputation could suffer.
We rely heavily on communications and information systems to conduct our business. The computer systems and network infrastructure we use could be vulnerable to unforeseen problems. Our operations are dependent upon our ability to minimize service disruptions by protecting our computer equipment, systems, and network infrastructure from physical damage due to fire, power loss, telecommunications failure or a similar catastrophic event. We have protective measures in place to prevent or limit the effect of the failure or interruption of our information systems, and will continue to upgrade our security technology and update procedures to help prevent such events. However, if such failures or interruptions were to occur, they could result in damage to our reputation, a loss of customers, increased regulatory scrutiny, or possible exposure to financial liability, any of which could have a material adverse effect on our business, financial condition and results of operations.

The occurrence of fraudulent activity, breaches or failures of our information security controls or cybersecurity-related incidents could have a material adverse effect on our business, financial condition and results of operations.
As a financial institution we are susceptible to fraudulent activity, information security breaches and cybersecurity-related incidents that may be committed against us or our customers which may result in financial losses or increased costs to us or our customers, disclosure or misuse of our information or our customer information, misappropriation of assets, privacy breaches against our customers, litigation, or damage to our reputation. Such fraudulent activity may take many forms, including check fraud, electronic fraud, wire fraud, on-line banking, phishing, social engineering and other dishonest acts. Information security breaches and cybersecurity-related incidents may include fraudulent or unauthorized access to systems used by us or our customers, denial or degradation of service attacks, and malware or other technological difficultiescyber-attacks. In recent periods,

there continues to be a rise in electronic fraudulent activity, security breaches and cyber-attacks within the financial services industry, especially in the commercial banking sector due to cyber criminals targeting commercial bank accounts. Consistent with industry trends we have also experienced an increase in attempted electronic fraudulent activity, security breaches and cybersecurity-related incidents in recent periods. Moreover, in recent periods, several large corporations, including financial institutions and retail companies, have suffered major data breaches, in some cases exposing not only confidential and proprietary corporate information, but also sensitive financial and other personal information of their customers and employees and subjecting them to potential fraudulent activity. Some of our customers may have been affected by these breaches which increase their risks of identity theft, credit card fraud and other fraudulent activity that could adversely affectinvolve their accounts with us.
We cannot beInformation pertaining to us and our customers is maintained and transactions are executed on the networks and systems of ours, our customers and certain that the continued implementation of safeguards will eliminate the riskour third party partners, such as our online banking or core systems. The secure maintenance and transmission of vulnerabilityconfidential information as well as execution of transactions over these systems are essential to technological difficultiesprotect us and our customers against fraud and security breaches and to maintain our customers’ confidence. Breaches of information security also may occur, and in infrequent, incidental, cases have occurred, through intentional or failuresunintentional acts by those having access to our systems or ensure the absence ofour customers’ or counterparties’ confidential information, including employees. In addition, increases in criminal activity levels and sophistication, advances in computer capabilities, new discoveries, vulnerabilities in third-party technologies (including browsers and operating systems) or other developments could result in a compromise or breach of information security.  We willthe technology, processes and controls that we use to prevent fraudulent transactions and to protect data about us, our customers and underlying transactions as well as the technology used by our customers to access our systems. Although we have developed and continue to rely oninvest in systems and processes that are designed to detect and prevent security breaches and cyber-attacks and periodically test our security, our inability to anticipate, or failure to adequately mitigate, breaches of security could result in: losses to us or our customers; our loss of business and/or customers; damage to our reputation; the servicesincurrence of various vendors who provide data processing and communicationadditional expenses; disruption to our business; our inability to grow our online services to the banking industry.  Nonetheless, if information security is compromised or other technology difficultiesbusinesses; additional regulatory scrutiny or failures occur atpenalties; or our exposure to civil litigation and possible financial liability - any of which could have a material adverse effect on our business, financial condition and results of operations.
More generally, publicized information concerning security and cyber-related problems could inhibit the Bankuse or with onegrowth of electronic or web-based applications or solutions as a means of conducting commercial transactions. Such publicity may also cause damage to our vendors, information may be lost or misappropriated, servicesreputation as a financial institution. As a result, our business, financial condition and results of operations may be interrupted and the Bank could be exposed to claims from its customers as a result.adversely affected.
 
Our controls over financial reporting and related governance procedures may fail or be circumvented.
Management regularly reviews and updates our internal control over financial reporting, disclosure controls and procedures, and corporate governance policies and procedures.  We maintain controls and procedures to mitigate risks such as processing system failures or errors and customer or employee fraud, and we maintain insurance coverage for certain of these risks.  Any system of controls and procedures, however well designed and operated, is based in part on certain assumptions and provides only reasonable, not absolute, assurances that the objectives of the system are met.  Events could occur which are not prevented or detected by our internal controls, are not insured against, or are in excess of our insurance limits.  Any failure or circumvention of our controls and procedures, or failure to comply with regulations related to controls and procedures, could have an adverse effect on our business.

We may not be successful in raising additional capital needed in the future.
If additional capital is needed in the future as a result of losses, our business strategy or regulatory requirements, there is no assurance that our efforts to raise such additional capital will be successful or that shares sold in the future will be sold at prices or on terms equal to or better than theThe current market price.  The inability to raise additional capital when needed or at prices and terms acceptable to us could adversely affect our ability to implement our business strategies.
The effects of legislation in response to currentexpected credit conditions may adversely affect us.
Legislation that has or may be passed at the Federal level and/orloss standard established by the StateFinancial Accounting Standards Board will require significant data requirements and changes to methodologies.
In the aftermath of California in responsethe 2007-2008 financial crisis, the Financial Accounting Standards Board, or FASB, decided to current conditions affecting credit markets could cause us to experience higher creditreview how banks estimate losses if such legislation reduces the amount that the Bank’s borrowers are otherwise contractually required to pay under existing loan contracts.  Such legislation could also result in the imposition of limitations upon the Bank’s ability to foreclose on property or other collateral or make foreclosure less economically feasible.  Such events could result in increased loan and lease losses and require a material increase in the allowance for credit loss calculation, and it issued the final Current Expected Credit Loss, or CECL, standard on June 16, 2016. Currently, the impairment model used by financial institutions is based on incurred losses, and loans are recognized as impaired when there is no longer an assumption that future cash flows will be collected in full under the originally contracted terms. This model will be replaced by the CECL model that will become effective for the Bank for the fiscal year beginning after December 15, 2019 in which financial institutions will be required to use historical information, current conditions and reasonable forecasts to estimate the expected loss over the life of the loan. Management established a task force to begin the implementation process. The transition to the CECL model will require significantly greater data requirements and changes to methodologies to accurately account for expected losses. The Bank will likely be required to increase its allowance for credit losses as a result of the implementation of CECL. An increase in the allowance would increase the provision for credit losses, decreasing net income and retained earnings.
On April 13, 2018, the Federal Reserve Board, FDIC, and Office of the Comptroller of the Currency issued a Notice of Proposed Rulemaking regarding the implementation of CECL methodology for allowances and related adjustments to regulatory capital rules. This proposed rule is subject to a 60-day comment period but, if implemented as proposed, the primary impact would be that the Bank would be able to phase in over three years the adverse effects on regulatory capital that may result from the adoption of CECL. As stated above, the Bank will be required to adopt CECL beginning in the first fiscal year beginning after December 15, 2019.

We have a significant deferred tax asset and cannot assure that it will be fully realized.
Deferred tax assets and liabilities are the expected future tax amounts for the temporary differences between the carrying amounts and tax basis of assets and liabilities computed using enacted tax rates. We regularly assess available positive and negative evidence to determine whether it is more likely than not that our net deferred tax asset will be realized. Realization of a deferred tax asset requires us to apply significant judgment and is inherently speculative because it requires estimates that cannot be made with certainty. At December 31, 2018, we had a net deferred tax asset of $11.183 million. If we were to determine at some point in the future that we will not achieve sufficient future taxable income to realize our net deferred tax asset, we would be required, under generally accepted accounting principles, to establish a full or partial valuation allowance which would require us to incur a charge to operations for the period in which the determination was made.
 
The effects of changes to FDIC insurance coverage limits are uncertain and increased premiums may adversely affect us.
The Bank’s deposits are insured by the Federal Deposit Insurance Corporation (FDIC) up to applicable legal limits. All of a depositors’ accounts at an insured depository institution, including all non-interest bearing transactions accounts, will be insured by the FDIC up to the standard maximum deposit insurance amount of ($250,000) for each deposit insurance ownership category.
Increases in FDIC insurance premiums will add to our cost of operations and could have a significant impact on the Bank.  Depending on any future losses that the FDIC insurance fund may suffer due to failed institutions, there can be no assurance that there will not be additional significant premium increases in order to replenish the fund.
On February 7, 2011, the FDIC Board of Directors adopted the final rule, which redefined the deposit insurance assessment base as required by the Consumer Protection Act (Dodd-Frank),Dodd-Frank, and makes changes to assessment rates, implements Dodd-Frank’s Deposit Insurance Fund (DIF) dividend provisions, and revises the risk based assessment system for all large institutions.  The final rule redefined the deposit insurance assessment base as average consolidated total assets minus average tangible equity, defined as Tier 1 capital. The rule lowerslowered overall assessment rates in order to generate the same approximate amount of revenue under the new larger base as was raised under the old base.  In 2016, the FDIC board of directors approved a final rule revising DIF assessment formulas for community banks with less than $10 billion in assets that have been FDIC-insured for at least five years. The revised method better reflects risks and helps ensure that banks that take on greater risks pay more for deposit insurance than their less risk counterparts. The method change is revenue-neutral meaning aggregate assessment rate in totalrevenue collected from established small banks is

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approximately one-third. The range of initial assessment rates for all institutions declines to between 2.5 and 9 basis points on the broader base for banks in the lowest risk category,3 cents and 30 to 45 basis points for banks incents per $100 of the highest risk category.assessment base from between 5 cents and 35 cents.

InWe have and in the future we may be required to recognize impairment with respect to investment securities, including the FHLB stock we hold.
Our securities portfolio contains whole loan private mortgage-backed securities and currently includes securities with unrecognized losses and securities that have been downgraded to below investment grade by national rating agencies.  We may continue to observe declines in the fair market value of these securities.  We evaluate the securities portfolio for any other-than-temporary impairment each reporting period, as required by generally accepted accounting principles. Numerous factors, including the lack of liquidity for re-sales of certain securities, the absence of reliable pricing information for securities, adverse changes in the business climate, adverse regulatory actions or unanticipated changes in the competitive environment, could have a negative effect on our securities portfolio and results of operations in future periods. There can be no assurance, however, that future evaluations of the securities portfolio will not require us to recognize further impairment charges with respect to these and other holdings.
In addition, as a condition to membership in the Federal Home Loan Bank of San Francisco (the FHLB), we are required to purchase and hold a certain amount of FHLB stock.  Our stock purchase requirement is based, in part, upon the outstanding principal balance of advances from the FHLB. At December 31, 20152018, we held stock in the FHLB totaling $4,823,0006,843,000. as compared to our minimum required stock holding of $6,200,000.  The FHLB stock held by us is carried at cost and is subject to recoverability testing under applicable accounting standards.  To date, the FHLB has not discontinued the distribution of dividends on its shares.  However, there can be no assurance the FHLB’s dividend paying practices will continue.  As of December 31, 20152018, we did not recognize an impairment charge related to our FHLB stock holdings.  There can be no assurance, however, that future negative changes to the financial condition of the FHLB may not require us to recognize an impairment charge with respect to such holdings.
 

If the goodwill we have recorded in connection with our acquisitions becomes impaired, it could have an adverse impact on our earnings and capital.
At December 31, 20152018, we had approximately $29,917,00053,777,000 of goodwill on our balance sheet attributable to our acquisitions of the Bank of Madera County in January 2005, Service 1st Bancorp in November 2008, and Visalia Community Bank in July 2013.2013, Sierra Vista Bank in October 2016, and Folsom Lake Bank in October 2017.  In accordance with generally accepted accounting principles, our goodwill is not amortized but rather evaluated for impairment on an annual basis or more frequently if events or circumstances indicate that a potential impairment exists.  Such evaluation is based on a variety of factors, including the quoted price of our common stock, market prices of the common stock of other banking organizations, common stock trading multiples, discounted cash flows, and data from comparable acquisitions.  There can be no assurance that future evaluations of goodwill will not result in findings of impairment and write-downs, which could be material.
 
We may not be successful in raising additional capital needed in the future.
We may need to raise additional capital in the future to provide us with sufficient capital resources and liquidity to meet our commitments and business strategies. Our ability to raise additional capital, if needed, will depend on, among other things, conditions in the capital markets at that time which are outside of our control, and our financial performance. We cannot be assured that such capital will be available to us on acceptable terms or at all. Any occurrence that may limit our access to the capital markets may adversely affect our capital costs and our ability to raise capital. Moreover, if we need to raise capital in the future, we may have to do so when many other financial institutions are also seeking to raise capital and would have to compete with those institutions for investors. An inability to raise additional capital on acceptable terms when needed could have a material adverse effect on our business, results of operations and financial condition.

We may raise additional capital, which could have a dilutive effect on the existing holders of our common stock and adversely affect the market price of our common stock.
We are not restricted from issuing additional shares of common stock or securities that are convertible into or exchangeable for, or that represent the right to receive, common stock.  We frequently evaluate opportunities to access the capital markets taking into account our regulatory capital ratios, financial condition and other relevant considerations, and subject to market conditions, we may take further capital actions.  Such actions could include, among other things, the issuance of additional shares of common stock in public or private transactions in order to further increase our capital levels above the requirements for a well-capitalized institution established by the Federal bank regulatory agencies as well as other regulatory targets.
The issuance of any additional shares of common stock or securities convertible into or exchangeable for common stock or that represent the right to receive common stock, or the exercise of such securities including, without limitation, securities issued upon exercise of outstanding stock options under our stock option plans, could be substantially dilutive to shareholders of our common stock.  With the exception of one major shareholder, holders of our shares of common stock have no preemptive rights that entitle holders to purchase their pro rata share of any offering of shares of any class or series and, therefore, such sales or offerings could result in increased dilution to our shareholders.  The market price of our common stock could decline as a result of sales of shares of our common stock or the perception that such sales could occur.
The price of our common stock may fluctuate significantly, and this may make it difficult for you to resell shares of common stock owned by you at times or at prices you find attractive.
The stock market and, in particular, the market for financial institution stocks, has experienced significant volatility, which, in recent quarters, has reached unprecedented levels.  In some cases, the markets have produced downward pressure on stock prices for certain issuers without regard to those issuers’ underlying financial strength.  As a result, the trading volume in our common stock may fluctuate more than usual and cause significant price variations to occur.  This may make it difficult for you to resell shares of common stock owned by you at times or at prices you find attractive.  The low trading volume in our common shares on the NASDAQ Capital Market means that our shares may have less liquidity than other publicly traded companies.  We cannot ensure that the volume of trading in our common shares will be maintained or will increase in the future.

27


The trading price of the shares of our common stock will depend on many factors, which may change from time to time and which may be beyond our control, including, without limitation, our financial condition, performance, creditworthiness and prospects, future sales or offerings of our equity or equity related securities, and other factors identified above in the forward-looking statement discussion under the section titled “Cautionary Statements Regarding Forward-Looking Statements” and below.  These broad market fluctuations have adversely affected and may continue to adversely affect the market price of our common stock. Among the factors that could affect our stock price are:
actual or anticipated quarterly fluctuations in our operating results and financial condition;
changes in financial estimates or publication of research reports and recommendations by financial analysts or actions taken by rating agencies with respect to our common stock or those of other financial institutions;
failure to meet analysts’ revenue or earnings estimates;
speculation in the press or investment community generally or relating to our reputation, our market area, our competitors or the financial services industry in general;
strategic actions by us or our competitors, such as acquisitions, restructurings, dispositions or financings;
actions by our current shareholders, including sales of common stock by existing shareholders and/or directors and executive officers;
fluctuations in the stock price and operating results of our competitors;
future sales of our equity, equity-related or debt securities;
changes in the frequency or amount of dividends or share repurchases;
proposed or adopted regulatory changes or developments;
anticipated or pending investigations, proceedings, or litigation that involves or affects us;
trading activities in our common stock, including short-selling;
domestic and international economic factors unrelated to our performance; and
general market conditions and, in particular, developments related to market conditions for the financial services industry.
A significant decline in our stock price could result in substantial losses for individual shareholders.
 
We may not be able to maintain our historical growth rate which may adversely impact our results of operations and financial condition.
We have initiated internal asset growth programs, completed various acquisitions and opened additional offices in the past few years.  We may not be able to sustain our historical rate of asset growth or may not even be able to grow at all.  We may not be able to obtain the financing necessary to fund additional asset growth and may not be able to find suitable candidates for acquisition.  Various factors, such as economic conditions and competition, may impede or prohibit the opening of new branch offices.  Further, our inability to attract and retain experienced bankers may adversely affect our internal asset growth.  A significant decrease in our historical rate of asset growth may adversely impact our results of operations and financial condition.
 
We may be unable to complete future acquisitions, and once complete, may not be able to integrate our acquisitions successfully.
Our growth strategy includes our desire to acquire other financial institutions.  We may not be able to complete any future acquisitions and, for completed acquisitions, we may not be able to successfully integrate the operations, management, products and services of the entities we acquire.  We may not realize expected cost savings or make revenue enhancements.  Following each acquisition, we must expend substantial managerial, operating, financial and other resources to integrate these entities.  In particular, we may be required to install and standardize adequate operational and control systems, deploy or modify equipment, implement marketing efforts in new as well as existing locations and employ and maintain qualified personnel.  Our failure to successfully integrate the entities we acquire into our existing operations may adversely affect our financial condition and results of operations.
 

Our ability to maintain our reputation is critical to the success of our business, and the failure to do so may materially adversely affect our business and the value of our common stock.
We are a community bank, and our reputation is one of the most valuable components of our business. Threats to our reputation can come from many sources, including adverse sentiment about financial institutions generally, unethical practices, employee misconduct, failure to deliver minimum standards of service or quality, compliance deficiencies, and questionable or fraudulent activities of our customers. Negative publicity regarding our business, employees, or customers, with or without merit, may result in the loss of customers, investors and employees, costly litigation, a decline in revenues and increased governmental regulation. If our reputation is negatively affected, by the actions of our employees or otherwise, our business and, therefore, our operating results and the value of our common stock may be materially adversely affected.

Our risk management framework may not be effective in mitigating risks and/or losses to us.
Our risk management framework is comprised of various processes, systems and strategies, and is designed to manage the types of risk to which we are subject, including, among others, credit, market, liquidity, interest rate and compliance. Our framework also includes financial or other modeling methodologies that involve management assumptions and judgment. Our risk management framework may not be effective under all circumstances and may not adequately mitigate any risk or loss to us. If our risk management framework is not effective, we could suffer unexpected losses and our business, financial condition, results of operations or growth prospects could be materially and adversely affected. We may also be subject to potentially adverse regulatory consequences.

We operate in a highly regulated environment and may be adversely affected by changes in federal and local laws and regulations.
We are subject to extensive regulation, supervision and examination by federal and state banking authorities.  Any change in applicable regulations or federal or state legislation could have a substantial impact on us and our operations.  Additional legislation and regulations may be enacted or adopted in the future that could significantly affect our powers, authority and operations, which could have a material adverse effect on our financial condition and results of operations.  Further, regulators have significant discretion and power to prevent or remedy unsafe or unsound practices or violations of laws by banks and bank holding companies in the performance of their supervisory and enforcement duties.  The exercise of this regulatory discretion and power may have a negative impact on us.
 

28

TableThe price of Contentsour common stock may fluctuate significantly, and this may make it difficult for you to resell shares of common stock owned by you at times or at prices you find attractive.

The stock market and, in particular, the market for financial institution stocks, has experienced significant volatility, which, in recent quarters, has reached unprecedented levels.  In some cases, the markets have produced downward pressure on stock prices for certain issuers without regard to those issuers’ underlying financial strength.  As a result, the trading volume in our common stock may fluctuate more than usual and cause significant price variations to occur.  This may make it difficult for you to resell shares of common stock owned by you at times or at prices you find attractive.  The low trading volume in our common shares on the NASDAQ Capital Market means that our shares may have less liquidity than other publicly traded companies.  We are experiencing an influxcannot ensure that the volume of locally based competitiontrading in our common shares will be maintained or will increase in the future.
The trading price of the shares of our common stock will depend on many factors, which may change from time to time and which may be beyond our control, including, without limitation, our financial condition, performance, creditworthiness and prospects, future sales or offerings of our equity or equity related securities, and other factors identified above in the forward-looking statement discussion under the section titled “Cautionary Statements Regarding Forward-Looking Statements” and below.  These broad market fluctuations have adversely affected and may continue to adversely affect the market price of our common stock. Among the factors that could affect near term results.our stock price are:
Recently, several new banks have openedactual or anticipated quarterly fluctuations in our service areas.  We are seeingoperating results and financial condition;
changes in financial estimates or publication of research reports and recommendations by financial analysts or actions taken by rating agencies with respect to our common stock or those of other financial institutions;
failure to meet analysts’ revenue or earnings estimates;
speculation in the press or investment community generally or relating to our reputation, our market area, our competitors or the financial services industry in general;
strategic actions by us or our competitors, such as acquisitions, restructurings, dispositions or financings;
actions by our current shareholders, including sales of common stock by existing shareholders and/or directors and executive officers;
fluctuations in the stock price competition from these new banks, as they work to establish their markets.  The existence of competitors, large and small, is a normal and expected partoperating results of our operations, but in responding to the particular short-term impact on business of new entrants to the marketplace, we could see a negative impact on revenue and income.  Moreover, these near term impacts could be accentuated by the seasonal impact on revenue and income generated by the borrowing and deposit habits of the agricultural community that comprises a significant componentcompetitors;
future sales of our customer base.equity, equity-related or debt securities;

changes in the frequency or amount of dividends or share repurchases;
proposed or adopted regulatory changes or developments;
anticipated or pending investigations, proceedings, or litigation that involves or affects us;
trading activities in our common stock, including short-selling;
domestic and international economic factors unrelated to our performance; and
general market conditions and, in particular, developments related to market conditions for the financial services industry.
A significant decline in our stock price could result in substantial losses for individual shareholders.

ITEM 1B -UNRESOLVED STAFF COMMENTS

Not applicableapplicable.

ITEM 2 -DESCRIPTION OF PROPERTY.PROPERTY
 
The Company owns the property on which the Main Office, a full-service branch offices are situated at the following California locations: the Clovis Main office is located in Clovis, California.  In addition, the Company owns the property on which the Foothill Office, a full-service branch office is located in Prather, California, the property on which the Modesto office, a full-service branch office, is located in Modesto, California, the property on which the Kerman Office, a full-service branch office, is located in Kerman, California, the property on which the Floral office a full-service branch office, is located in Visalia, California, and the property on which the Exeter office, a full service branch office, is located in Exeter, California.office.
All other property is leased by the Company, including the principal executive offices in Fresno.  This facility houses the Company’s corporate offices, comprised of various departments, including accounting, information services, human resources, real estate department, loan servicing, credit administration, branch support operations, and compliance.
The Company continually evaluates the suitability and adequacy of the Company’s offices and has a program of relocating or remodeling them as necessary to be efficient and attractive facilities.  The Sunnyside office is scheduled for closure and consolidation with the Fresno Downtown office in April 2016.  Management believes that its remaining existing facilities are adequate for its present purposes.
Properties owned by the Bank are held without loans or encumbrances.  All of the property leased is leased directly from independent parties.  Management considers the terms and conditions of each of the existing leases to be in the aggregate favorable to the CompanySee Note 1312 of the Company’s audited Consolidated Financial Statements in Item 8 of this Annual Report.
 
ITEM 3 -LEGAL PROCEEDINGS.PROCEEDINGS
 
The Company is subject to legal proceedings and claims which arise in the ordinary course of business.  In the opinion of management, the amount of ultimate liability with respect to such actions will not materially affect the consolidated financial position or consolidated results of operations of the Company.
None of our directors, officers, affiliates, more than 5% shareholders or any associates of these persons is a party adverse to the Company or the Bank or has a material interest adverse to the Company or the Bank in any material legal proceeding.
 
ITEM 4 -MINE SAFETY DISCLOSURES

None to report.
  

PART II

ITEM 5 -MARKET FOR COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.SECURITIES
 
Our common stock is listed for trading on the Nasdaq Capital Market under the ticker symbol CVCY.  As of March 7, 20162019, we had approximately 9431,020 shareholders of record.
The following table shows the high and low sales prices for the common stock for each quarter as reported by NASDAQ.The NASDAQ Stock Market and cash dividend payment for each quarter presented.
 
Common Stock Prices and Dividends

29


 

Quarter 1
2014
 Quarter 2
2014
 Quarter 3
2014
 Quarter 4
2014
 Quarter 1
2015
 Quarter 2
2015
 Quarter 3
2015
 Quarter 4
2015
Quarter 1
2017
 Quarter 2
2017
 Quarter 3
2017
 Quarter 4
2017
 Quarter 1
2018
 Quarter 2
2018
 Quarter 3
2018
 Quarter 4
2018
High$11.90
 $13.90
 $13.46
 $11.61
 12.16
 12.35
 12.50
 12.50
$22.44
 $23.94
 $23.28
 $22.75
 $21.70
 $22.34
 $22.14
 $21.89
Low$10.67
 $10.61
 $10.63
 $10.45
 9.55
 10.25
 10.66
 10.51
$18.42
 $17.62
 $18.57
 $19.06
 $18.05
 $19.02
 $20.82
 $15.66
Dividends per share$0.06
 $0.06
 $0.06
 $0.06
 $0.07
 $0.07
 $0.08
 $0.09
 
We paid $0.18 and $0.20 per common share cash dividends of $0.31 and $0.24 per share in 20152018 and 2014,2017, respectively. The Company’s primary source of income with which to pay cash dividends is dividends from the Bank.  The Bank would not pay any dividend that would cause it to be deemed not “well capitalized” under applicable banking laws and regulations.  See Note 1413 in the audited Consolidated Financial Statements in Item 8 of this Annual Report.
The amount of future dividends will depend upon our earnings, financial condition, capital requirements and other factors, and will be determined by our board of directors on a quarterly basis. It is Federal Reserve policy that bank holding companies generally pay dividends on common stock only out of income available over the past year, and only if prospective earnings retention is consistent with the organization’s expected future needs and financial condition. It is also Federal Reserve policy that bank holding companies not maintain dividend levels that undermine the holding company’s ability to be a source of strength to its banking subsidiaries. Additionally, in consideration of the current financial and economic environment, the Federal Reserve has indicated that bank holding companies should carefully review their dividend policy and has discouraged payment ratios that are at maximum allowable levels unless both asset quality and capital are very strong. Under the federal Prompt Corrective Action regulations, the Federal Reserve or the FDIC may prohibit a bank holding company from paying any dividends if the holding company’s bank subsidiary is classified as undercapitalized.
As a holding company, our ability to pay cash dividends is affected by the ability of our bank subsidiary, to pay cash dividends. The ability of the Bank (and our ability) to pay cash dividends in the future and the amount of any such cash dividends is and could be in the future further influenced by bank regulatory requirements and approvals and capital guidelines.
The decision whether to pay dividends will be made by our board of directors in light of conditions then existing, including factors such as our results of operations, financial condition, business conditions, regulatory capital requirements and covenants under any applicable contractual arrangements, including agreements with regulatory authorities.
The Company has outstanding trust preferred securities from special purpose trust and accompanying subordinated debt. The subordinated debt is senior to our shares of common stock. As a result, we must make payments on the subordinated debt before any dividends can be paid on our common stock. Under the terms of the subordinated debt, we may defer interest payments for up to five years. If the Company should ever defer such interest payments, we would be prohibited from declaring or paying any cash dividends on any shares of our common stock.
For information on the statutory and regulatory limitations on the ability of the Company to pay dividends and on the Bank to pay dividends to Company see “Item 1 - Business - Supervision and Regulation - Dividends.”
ISSUER PURCHASES OF EQUITY SECURITIES
 
Not ApplicableA summary of the repurchase activity of the Company’s common stock for the fourth quarter of the year ended December 31, 2018 follows.
Period Total number of shares purchased Average price paid per share Total number of shares purchased as part of publicly announced plans (1) (2) Approximate dollar value of shares that may yet be purchased under current plans (in thousands)
10/1/2018 - 10/31/2018 
 $
 
 $10,000
11/1/2018 - 11/30/2018 
 
 
 10,000
12/1/2018 - 12/31/2018 47,862
 18.68
 47,862
 9,106
Total 47,862
 $18.68
 47,862
  
(1) The Company approved a stock repurchase program effective July 18, 2018 with the intent to purchase up to $10,000,000 worth of the Company’s outstanding common stock, or approximately 470,810 shares. During the year ended December 31, 2018, the Company repurchased and retired a total of 47,862 shares at an approximate cost of $894,000. As adopted, the stock repurchase program will expire on July 18, 2019.
(2) All share repurchases were effected in accordance with the safe harbor provisions of Rule 10b-18 of the Securities Exchange Act.


EQUITY COMPENSATION PLAN INFORMATION
 
The following chart sets forth information for the year ended December 31, 20152018, regarding equity based compensation plans of the Company.
 
Number of
securities to be
issued upon
exercise of
outstanding
options, warrants
and rights
 
Weighted-
average exercise
price of
outstanding
options, warrants
and rights
 
Number of securities
remaining available
for future issuance
under equity
compensation plans
(excluding securities
reflected in column
(a))
  
Number of
securities to be
issued upon
exercise of
outstanding
options, warrants
and rights
 
Weighted-
average exercise
price of
outstanding
options, warrants
and rights
 
Number of securities
remaining available
for future issuance
under equity
compensation plans
(excluding securities
reflected in column
(a))
 
Plan Category (a) (b) (c)  (a) (b) (c) 
Equity compensation plans approved by security holders 240,695
(1)$6.83
 241,760
(2) 154,440
(1)$8.68
 809,996
(2)
Equity compensation plans not approved by security holders N/A
 N/A
 N/A
  N/A
 N/A
 N/A
 
Total 240,695
 $6.83
 241,760
  154,440
 $8.68
 809,996
 
(1)    Under the Central Valley Community Bancorp 2015 Omnibus Incentive Plan (2015 Plan) and the Central Valley Community Bancorp 2005 Omnibus Incentive Plan (2005 Plan), the Company is authorized to issue restricted stock awards. Restricted stock awards are not included in the total in column (a). During 2015, the Company issued 9,268 shares of restricted stock. During 2014, the Company entered into an agreement with an executive to issue $100,000 of restricted stock per year during each of 2015 and 2016 (based on then-prevailing market prices). At December 31, 2015, there were 53,028 shares of restricted stock issued and outstanding. See Note 1514 in the audited Consolidated Financial Statements in Item 8 of this Annual Report.
(2)    Includes securities available for issuance of stock options and restricted stock.

At December 31, 2018, there were 63,529 shares of restricted common stock issued and outstanding. No options to purchase shares of the Company’s common stock were issued during the years endingended December 31, 20152018 and 20142017 from any of the Company’s stock based compensation plans. During the year ended December 31, 2015, 9,2682018, 22,204 shares of restricted common stock were granted fromunder the 2005 Plan as compared to 57,3302015 Plan. No restricted common stock shares were granted during the year endingended December 31, 2014.2017.

ITEM 6 -SELECTED CONSOLIDATED FINANCIAL DATA


30

Table of Contents

 Years Ended December 31, Years Ended December 31,
(In thousands, except per share amounts) 2015 2014 2013 2012 2011
(In thousands, except per-share amounts) 2018 2017 2016 2015 2014
Statements of Income  
  
  
  
  
  
  
  
  
  
Total interest income $41,822
 $41,039
 $34,836
 $31,820
 $31,820
 $64,187
 $57,376
 $46,676
 $41,822
 $41,039
Total interest expense 1,047
 1,156
 1,385
 1,883
 2,942
 1,484
 1,137
 1,096
 1,047
 1,156
Net interest income before provision for credit losses 40,775
 39,883
 33,451
 29,937
 31,357
 62,703
 56,239
 45,580
 40,775
 39,883
Provision for credit losses 600
 7,985
 
 700
 1,050
Provision for (reversal of) credit losses 50
 (1,150) (5,850) 600
 7,985
Net interest income after provision for credit losses 40,175
 31,898
 33,451
 29,237
 30,307
 62,653
 57,389
 51,430
 40,175
 31,898
Non-interest income 9,387
 8,164
 7,831
 7,242
 6,271
 10,324
 10,836
 9,591
 9,387
 8,164
Non-interest expenses 36,016
 35,338
 31,685
 27,274
 28,240
 45,068
 44,406
 38,922
 36,016
 35,338
Income before provision for (benefit from) income taxes 13,546
 4,724
 9,597
 9,205
 8,338
 27,909
 23,819
 22,099
 13,546
 4,724
Provision for (benefit from) income taxes 2,582
 (570) 1,347
 1,685
 1,861
 6,620
 9,793
 6,917
 2,582
 (570)
Net income 10,964
 5,294
 8,250
 7,520
 6,477
 $21,289
 $14,026
 $15,182
 $10,964
 $5,294
Preferred stock dividends and accretion of discount 
 
 350
 350
 486
Net income available to common shareholders $10,964
 $5,294
 $7,900
 $7,170
 $5,991
Basic earnings per share $1.00
 $0.48
 $0.77
 $0.75
 $0.63
 $1.55
 $1.12
 $1.34
 $1.00
 $0.48
Diluted earnings per share $1.00
 $0.48
 $0.77
 $0.75
 $0.63
 $1.54
 $1.10
 $1.33
 $1.00
 $0.48
Cash dividends declared per common share $0.18
 $0.20
 $0.20
 $0.05
 $
 $0.31
 $0.24
 $0.24
 $0.18
 $0.20
 

 December 31, December 31,
(In thousands) 2015 2014 2013 2012 2011 2018 2017 2016 2015 2014
Balances at end of year:  
  
  
  
  
  
  
  
  
  
Investment securities, Federal funds sold and deposits in other banks $580,544
 $520,511
 $529,398
 $424,516
 $353,808
 $477,932
 $604,801
 $558,132
 $580,544
 $520,511
Net loans 588,501
 564,280
 503,149
 385,185
 415,999
 909,591
 891,901
 747,302
 588,501
 564,280
Total deposits 1,116,267
 1,039,152
 1,004,143
 751,432
 712,986
 1,282,298
 1,425,687
 1,255,979
 1,116,267
 1,039,152
Total assets 1,276,736
 1,192,183
 1,145,635
 890,228
 849,023
 1,537,836
 1,661,655
 1,443,323
 1,276,736
 1,192,183
Shareholders’ equity 139,323
 131,045
 120,043
 117,665
 107,482
 219,738
 209,559
 164,033
 139,323
 131,045
Earning assets 1,173,591
 1,074,942
 1,042.552
 801,098
 762,654
 1,406,987
 1,505,436
 1,319,065
 1,173,591
 1,074,942
Average balances:  
  
  
  
  
  
  
  
  
  
Investment securities, Federal funds sold and deposits in other banks $529,046
 $513,866
 $445,859
 $368,818
 $299,935
 $526,606
 $568,426
 $560,860
 $529,046
 $513,866
Net loans 577,784
 531,382
 444,770
 394,675
 417,273
 903,204
 784,085
 636,475
 577,784
 531,382
Total deposits 1,065,798
 1,006,560
 848,493
 719,601
 677,789
 1,333,754
 1,284,305
 1,144,231
 1,065,798
 1,006,560
Total assets 1,222,526
 1,157,483
 986,924
 853,078
 800,178
 1,577,410
 1,491,696
 1,321,007
 1,222,526
 1,157,483
Shareholders’ equity 135,062
 130,414
 119,746
 114,561
 103,386
 211,324
 182,507
 154,325
 135,062
 130,414
Earning assets 1,112,758
 1,052,097
 895,330
 766,937
 715,862
 1,435,025
 1,358,930
 1,205,142
 1,112,758
 1,052,097
 
Data from 20132017 reflects the partial year impact of the acquisition of Visalia CommunityFolsom Lake Bank on JulyOctober 1, 2013.

31

Table2017. Data from 2016 reflects the partial year impact of Contentsthe acquisition of Sierra Vista Bank on October 1, 2016.



ITEM 7 -MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

Management’s discussion and analysis should be read in conjunction with the Company’s audited Consolidated Financial Statements, including the Notes thereto, in Item 8 of this Annual Report.
 
Certain matters discussed in this report constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.  All statements contained herein that are not historical facts, such as statements regarding the Company’s current business strategy and the Company’s plans for future development and operations, are based upon current expectations.  These statements are forward-looking in nature and involve a number of risks and uncertainties.  Such risks and uncertainties include, but are not limited to (1) significant increases in competitive pressure in the banking industry; (2) the impact of changes in interest rates,rates; (3) a decline in economic conditions atin the international, national or local level on the Company’s results of operations,Central Valley; (4) the Company’s ability to continue its internal growth at historical rates,rates; (5) the Company’s ability to maintain its net interest margin, andmargin; (6) the decline quality of the Company’s earning assets; (3)(7) decline in credit quality; (8) changes in the regulatory environment; (4)(9) fluctuations in the real estate market; (5)(10) changes in business conditions and inflation; (6)(11) changes in securities markets (7)(12) risks associated with acquisitions, relating to difficulty in integrating combined operations and related negative impact on earnings, and incurrence of substantial expenses.  Therefore, the information set forth in such forward-looking statements should be carefully considered when evaluating the business prospects of the Company.
 
When the Company uses in this Annual Report the words “anticipate,” “estimate,” “expect,” “project,” “intend,” “commit,” “believe” and similar expressions, the Company intends to identify forward-looking statements.  Such statements are not guarantees of performance and are subject to certain risks, uncertainties and assumptions, including those described in this Annual Report.  Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those anticipated, estimated, expected, projected, intended, committed or believed.  The future results and shareholder values of the Company may differ materially from those expressed in these forward-looking statements.  Many of the factors that will determine these results and values are beyond the Company’s ability to control or predict. For those statements, the Company claims the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995.  See also the discussion of risk factors in Item 1A, “Risk Factors.”

We are not able to predict all the factors that may affect future results. You should not place undue reliance on any forward looking statement, which speaks only as of the date of this Report on Form 10-K. Except as required by applicable laws or regulations, we do not undertake any obligation to update or revise any forward looking statement, whether as a result of new information, future events or otherwise.

INTRODUCTION
 
Central Valley Community Bancorp (NASDAQ: CVCY) (the Company) was incorporated on February 7, 2000.  The formation of the holding company offered the Company more flexibility in meeting the long-term needs of customers, shareholders, and the communities it serves.  The Company currently has one bank subsidiary, Central Valley Community Bank (the Bank) and one business trust subsidiary, Service 1st Capital Trust 1. The Bank of Madera County (BMC) was merged with and into the Bank on January 1, 2005.  BMC had two branches in Madera County which continue to be operated by the Bank.  After the close of business on November 12, 2008, Service 1st Bancorp (Service 1st) was merged with and into the Company, and Service 1st Bank was merged with and into the Bank.  Service 1st Bank had three branches in Stockton, Tracy, and Lodi which continue to be operated by the Bank.  Service 1st Capital Trust 1 (the Trust) is a business trust formed for the purpose of issuing trust preferred securities.  The Company succeeded to all the rights and obligations of Service 1st in connection with the acquisition of Service 1st.  The Trust is a subsidiary of the Company. Effective July 1, 2013, the Company and Visalia Community Bank (VCB) completed a merger under which VCB was merged with and into the Bank. VCB had three full-service offices in Visalia and one in Exeter which continue to be operated by the Bank. The Company’s market area includes the central valley area from Sacramento, California to Bakersfield, California.
During 20152018, we focused on asset quality and capital adequacy due to the uncertainty created by the economy.  We also focused on assuring that competitive products and services were made available to our clients while adjusting to the many new laws and regulations that affect the banking industry.
As of December 31, 2015,2018, the Bank operated 21 full-service offices. The Sunnyside office is scheduled for closure and consolidation with the Fresno Downtown office in April 2016. The Bank has a Real Estate Division, an Agribusiness Center and an SBA Lending Division in Fresno.  AllThe Real Estate Division processes or assists in processing the majority of the Bank's real estate related transactions, are conducted and processed through the Real Estate Division, including interim construction loans for single family residences and commercial buildings. We offer permanent single family residential loans through our mortgage broker services.
 

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ECONOMIC CONDITIONS
 
The economy in California’s Central Valley had been negatively impacted by the recession that began in 2007 and the related real estate market and the slowdown in residential construction. The recession impacted most industries in our market area.  Initially, housing values throughout the nation and especially in the Central Valley decreased dramatically, which in turn negatively affected the personal net worth of much of the population in our service area. Over the last several years the economy, as evidenced by the California and Central Valley unemployment rates, and housing prices have shown slow but steady improvement.  Housing in the Central Valley continues to be relatively more affordable than the major metropolitan areas in California.

Agriculture and agricultural related businesses remain a critical part of the Central Valley’s economy.  The Valley’s agricultural production is widely diversified, producing nuts, vegetables, fruit, cattle, dairy products, and cotton.  The continued future success of agriculture related businesses is highly dependent on the availability of water and is subject to fluctuation in worldwide commodity prices, currency exchanges, and demand. Since the beginning of 2012,From time to time, California has been experiencing aexperiences severe drought. If the droughtdroughts or adverse weather issues, which could significantly harmsharm the business of our customers and the credit quality of the loans to those customers could decline as a specific consequence of the drought.customers. We closely monitoredmonitor the water resources and the related issues affecting our customers, in 2015 and 2014, and we will continue to remain vigilant for signs of deterioration within the loan portfolio in an effort to manage credit quality and work with borrowers where possible to mitigate any losses.
An additional negative affect on the agricultural is the “Tariff War”, especially with China. The increased tariffs on agricultural products by China has an adverse effect on demand potentially causing financial difficulty for farmers. We are closely monitoring how the agricultural industry is adapting through developing new markets for their products.
OVERVIEW
 
Diluted earnings per share (EPS) for the year ended December 31, 20152018 was $1.001.54 compared to $0.481.10 and $0.771.33 for the years ended December 31, 20142017 and 20132016, respectively.  Net income for 20152018 was $10,964,00021,289,000 compared to $5,294,00014,026,000 and $8,250,00015,182,000 for the years ended December 31, 20142017 and 2013,2016, respectively.  The increase in net income and EPS was primarily driven by a decrease in provision for credit losses, anthe increase in net interest income and andecrease in provision for income taxes, offset by the increase in non-interest income offset by increasesexpense, increase in provision for credit losses, and decrease in non-interest expenseincome in 20152018 compared to 20142017. Total assets at December 31, 20152018 were $1,276,736,0001,537,836,000 compared to $1,192,183,0001,661,655,000 at December 31, 20142017.
Return on average equity for 20152018 was 8.12%10.07% compared to 4.06%7.69% and 6.89%9.84% for 20142017 and 20132016, respectively.  Return on average assets for 20152018 was 0.90%1.35% compared to 0.46%0.94% and 0.84%1.15% for 20142017 and 20132016, respectively.  Total equity was $139,323,000219,738,000 at December 31, 20152018 compared to $131,045,000209,559,000 at December 31, 20142017.  The increase in equity in 20152018 compared to 20142017 was primarily driven by the retention of earnings, net of dividends paid, offset by a decrease in unrealized gains on available-for-sale securities, net of estimated taxes, recorded in accumulated other comprehensive income (AOCI).
Average total loans increased $47,233,000118,785,000 or 8.75%14.97% to $586,762,000912,128,000 in 20152018 compared to $539,529,000793,343,000 in 20142017.  In 20152018, we recorded $600,000a provision for credit losses of $50,000 compared to a reverse provision of $7,985,0001,150,000 in 20142017 and a reverse provision of none$5,850,000 in 20132016.  The Company had nonperforming assets consisting entirely of $2,740,000 in nonaccrual loans totaling $2,413,000 at December 31, 20152018.  At December 31, 20142017, nonperforming assets totaled $14,052,0002,945,000.  Net loan loss recoveries (charge-offs) for 20152018 were $702,000$276,000 compared to $(8,885,000)$602,000 for 20142017 and $(925,000)$5,566,000 for 2013.2016.  Refer to “Asset Quality” below for further information.

Dividend Declared

On January 23, 2019, the Board of Directors declared a $0.10 per share cash dividend payable on February 23, 2019 to shareholders of record as of February 8, 2019.
  
Key Factors in Evaluating Financial Condition and Operating Performance
 
As a publicly traded community bank holding company,In evaluating our financial condition and operating performance, we focus on several key factors including:

Return to our shareholders;
Return on average assets;
Development of revenue streams, including net interest income and non-interest income;
Asset quality;
Asset growth;
Capital adequacy;
Operating efficiency; and
Liquidity.
 
Return to Our Shareholders
 
One measure of our return to our shareholders is the return on average equity (ROE).  ROE is a ratio that measures net income divided by average shareholders’ equity. Our ROE was 8.12%10.07% for the year ended 20152018 compared to 4.06%7.69% and 6.89%9.84% for the years ended 20142017 and 20132016, respectively.  In 2015, compared to 2014 we experienced an increase in net income primarily driven by a decrease in provision for credit losses and an increase in non-interest income, offset by an increase in provision for income taxes and an increase in non-interest expenses. We experienced an increase in capital due to increases in retained earnings offset by a decrease in accumulated other comprehensive income. 
Our net income for the year ended December 31, 20152018 increased $5,670,0007,263,000 compared to 20142017 and decreased $2,956,000$1,156,000 in 20142017 compared to 20132016.  During 20152018, net income compared to 2017 was positively impacted by the decrease in tax expense. 2017 was negatively impacted by the re-measurement of our deferred tax asset and corresponding increase in tax

expense. Also contributing to the increase during increase2018d due to a decrease was an increase in net interest income, partially offset by an increase in the provision for credit losses,

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increases in net interest income, and increases an increase in non-interest income, partially offset by an increase in tax expense and increasesa decrease in non-interest expenses, compared toincome. 
2014Net interest income increasedincreased primarily because of increasesincreases in loan and investment income, and decreasesoffset by increases in interest expense on deposits. NetThe impact to interest income from the accretion of the loan marks on acquired loans was an increase of $1,158,000 and $1,048,000 for the years ended December 31, 2018 and 2017, respectively. For 2018, our net interest margin (NIM) increased four basis points to 4.44% compared to 2017.  Our net interest margin increased as a result of yield changes, increase in interest rates, asset mix changes, and an increase in average earning assets, partiallyassets. The increase in net interest margin in the period-to-period comparison resulted primarily from the increase in the effective yield on interest earning deposits in other banks and Federal Funds sold, offset by an increasethe decrease in interest-bearing liabilities.the effective yield on average investment securities, and the decrease in the yield on the Company’s loan portfolio. Net interest income during 20152018 was positively impacted by the collection of nonaccrual loans which resulted in a recovery of interest income of approximately $431,000.$720,000. The recovery was partially offset by reversal of approximately $7,000$222,000 in interest income on loans putplaced on nonaccrual during the year. Net interest income during 20142017 was positively impacted by the collection in full of a non-accrual loan of $1,870,000nonaccrual loans which resulted in a net recovery of foregone interest income of $879,000,approximately $1,325,000. The recovery in 2017 was partially offset by the reversal of approximately $237,000$12,000 in interest income associated withon loans placed on nonaccrual status during the year. During the year ended
Non-interest income decreased 4.72% in 2015, the non-interest income increase2018 wascompared to 2017 primarily driven bydue to a $591,000 increase$1,488,000 decrease in net realized gains on sales and calls of investment securities and a decrease in service charge income of $67,000. The decrease in non-interest income was offset by a net gain of $462,000 on the sale of the Company’s credit card portfolio, an increase in loan placement feesappreciation in cash surrender value of $498,000,bank owned life insurance of $74,000, and a $253,000$147,000 increase in Federal Home Loan Bank dividends, and a $345,000 gain on life insurance which is included in other income, partially offset by a $210,000 decrease in service charge income, a $176,000 decrease in other income, a decrease of $52,000 in gains on the sale of other real estate owned, and a $8,000 decrease in interchange fees, in 2015 compared to 2014.dividends.
Non-interest expenses increased $662,000 or 1.49% to $45,068,000 in 20152018 compared to $44,406,000 in 20142017. The net increase year over year was primarily dueattributable to increasesthe FLB acquisition, which resulted in salaryincreases in salaries and employee benefit expensesbenefits of $1,115,000, internet banking expenses of $189,000, professional services of $328,000, regulatory assessments of $297,000, and advertising fees of $19,000, partially offset by decreases of data processing expenses of $681,000,$1,483,000, occupancy and equipment expenses of $166,000, ATM/Debit card expenses$786,000, operating losses of $76,000,$302,000, information technology of $295,000, advertising fees of $120,000, and amortization of core deposit intangibles of $17,000. During 2015, our net interest margin (NIM) $221,000,offset by decreased 10 basis points to 4.01% in acquisition and integration expenses of $1,611,000, a decrease of $124,000 in credit card expenses, a decrease of $132,000 in directors’ expenses, and a decrease of $74,000 in data processing expenses, in 2018 compared to 2014.2017. The Company recorded an income tax provision of $6,620,000 for the year ended December 31, 2018, compared to $9,793,000 for the year ended December 31, 2017. The Company recognized additional tax expense in 2017 in the amount of $3,535,000 related to a tax law change enacted in 2017. Basic EPS was $1.00$1.55 for 20152018 compared to $0.48$1.12 and $0.77$1.34 for 20142017 and 2013,2016, respectively.  Diluted EPS was $1.001.54 for 20152018 compared to $0.481.10 and $0.771.33 for 20142017 and 20132016, respectively.  The increase in EPS infor 20152018 wasis primarily due primarily to the increase in net income.

Return on Average Assets
 
Our return on average assets (ROA) is a ratio that measures our performance compared with other banks and bank holding companies.  Our ROA for the year ended 20152018 was 0.90%1.35% compared to 0.46%0.94% and 0.84%1.15% for the years ended December 31, 20142017 and 20132016, respectively.  The 20152018 increase in ROA is primarily due to the increase in net income.  Annualized ROA for our peer group was 1.16%1.31% at December 31, 2015.2018.  Peer group information from SNL Financial data includes bank holding companies in central California with assets from $600 million to $2.5$3.5 billion.
 
Development of Revenue Streams
 
Over the past several years, we have focused on not only our net income, but improving the consistency of our revenue streams in order to create more predictable future earnings and reduce the effect of changes in our operating environment on our net income.  Specially,Specifically, we have focused on net interest income through a variety of processes,strategies, including increases in average interest earning assets, and minimizing the effects of the recent interest rate declinechanges on our net interest margin by focusing on core deposits and managing the cost of funds.  Our net interest margin (fully tax equivalent basis) was 4.01%4.44% for the year ended December 31, 20152018, compared to 4.11%4.40% and 4.09%4.06% for the years ended December 31, 20142017 and 20132016, respectively.  We experienced aan decreaseincrease in 20152018 net interest margin compared to 2014,2017, resulting from the declineincrease in the effective yield on interest earning deposits in other banks and Federal Funds sold, offset by the decrease in the effective yield on average investment securities, and the decrease in the yield on the Company’s loan and investment yields.portfolio.  The effective tax equivalent yield on total earning assets decreased 12increased six basis points, while the cost of total interest-bearing liabilities decreased 2 basis points andincreased slightly to 0.19% for the cost of total deposits decreased 2 basis points.year ended December 31, 2018. Our cost of total deposits in 20152018 and 2017 was 0.09% and 0.08%, respectively, compared to 0.11%0.09% for the same period in 2014 and 0.15% for the year ended December 31, 2013.2016. Our net interest income before provision for credit losses increased $892,000increased $6,464,000 or 2.24%11.49% to $40,775,000$62,703,000 for the year ended 20152018 compared to $39,883,000$56,239,000 and $33,451,000$45,580,000 for the years ended 20142017 and 2013,2016, respectively.
Our non-interest income is generally made up of service charges and fees on deposit accounts, fee income from loan placements, appreciation in cash surrender value of bank owned life insurance, and net gains from sales and calls of investment securities.  Non-interest income in 20152018 increasedecreased $1,223,000512,000 or 14.98%4.72% to $9,387,00010,324,000 compared to $8,164,00010,836,000 in 20142017 and

$7,831,0009,591,000 in 20132016.  The increasedecrease resulted primarily from increasesdecreases in net realized gains on sales and calls of investment securities loan placement fees, and Federal Home Loan Bank dividends,service charge income, partially offset by a decreaseincrease in service charge income,loan placement fees, net gain on the sale of the Company’s credit card portfolio, interchange fees, appreciation in cash surrender value of bank owned life insurance, and gain on sale of other real estate ownedFederal Home Loan Bank dividends compared to 20142017. Customer service charges decreased $210,000 or 6.40% to $3,070,000 in 2015 compared to $3,280,000 and $3,156,000 in 2014 and 2013, respectively.  Further detail on non-interest income is provided below.
 
Asset Quality
 
For all banks and bank holding companies, asset quality has a significant impact on the overall financial condition and results of operations.  Asset quality is measured in terms of percentage of totalclassified and nonperforming loans, and total assets, and is a key element in estimating the future earnings of a company.  Total nonperforming assets were $2,413,0002,740,000 and $14,052,0002,945,000 at December 31, 20152018 and 20142017, respectively.  Nonperforming assets totaled 0.40%0.30% of gross loans as of December 31, 20152018 and 2.45%0.33% of gross

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loans as of December 31, 20142017. Nonperforming loans were $2,740,000 and $2,875,000 at December 31, 2018 and 2017, respectively.  The Company had no other real estate owned (OREO) at December 31, 2015 or 2018, December 31, 2014.2017, and December 31, 2016. The carrying value of foreclosed assets was $70,000 at December 31, 2017, and is included in other assets on the consolidated balance sheets. No foreclosed assets were recorded at December 31, 2018 or December 31, 2016. Management maintains certain loans that have been brought current by the borrower (less than 30 days delinquent) on nonaccrual status until such time as management has determined that the loans are likely to remain current in future periods.
The ratio of nonperforming loans to total loans was 0.30% as of December 31, 2018 and 0.32% as of December 31, 2017. The allowance for credit losses as a percentage of outstanding loan balance was 0.99% as of December 31, 2018 and 0.98% as of December 31, 2017. The ratio of net recoveries to average loans was 0.03% as of December 31, 2018 and 0.08% as of December 31, 2017.
 
Asset Growth
 
As revenues from both net interest income and non-interest income are a function of asset size, the continued growth in assets has a direct impact in increasing net income and therefore ROE and ROA.  The majority of our assets are loans and investment securities, and the majority of our liabilities are deposits, and therefore the ability to generate deposits as a funding source for loans and investments is fundamental to our asset growth.  Total assets increasedecreased 7.09%7.45% during 20152018 to $1,276,736,0001,537,836,000 as of December 31, 20152018 from $1,192,183,0001,661,655,000 as of December 31, 20142017.  Total gross loans increased 4.46%2.00% to $598,111,000918,695,000 as of December 31, 20152018, compared to $572,588,000900,679,000 at December 31, 20142017.  Total investment securities and Federal funds sold increasedecreased 9.61%13.18% to $509,556,000471,207,000 as of December 31, 20152018 compared to $464,865,000542,721,000 as of December 31, 20142017.  Total deposits increasedecreased 7.42%10.06% to $1,116,267,0001,282,298,000 as of December 31, 20152018 compared to $1,039,152,0001,425,687,000 as of December 31, 20142017.  Our loan to deposit ratio at December 31, 20152018 was 53.58%71.64% compared to 55.10%63.18% at December 31, 20142017.  The loan to deposit ratio of our peers was 75.73%82.00% at December 31, 2015.2018. Peer group information from S&P Global Market Intelligence data includes bank holding companies in central California with assets from $600 million to $3.5 billion.

Capital Adequacy
 
At December 31, 20152018, we had a total capital to risk-weighted assets ratio of 15.04%16.44%, a Tier 1 risk-based capital ratio of 13.79%15.59%, common equity Tier 1 ratio of 13.44%15.13%, and a leverage ratio of 8.65%11.48%.  At December 31, 20142017, we had a total capital to risk-weighted assets ratio of 14.88%14.07%, a Tier 1 risk-based capital ratio of 13.67%13.28%, common equity Tier 1 ratio of 12.90%, and a leverage ratio of 8.36%9.71%.  At December 31, 20152018, on a stand-alone basis, the Bank had a total risk-based capital ratio of 14.93%16.23%, a Tier 1 risk based capital ratio of 13.67%15.38%, common equity Tier 1 ratio of 13.67%15.38%, and a leverage ratio of 8.58%11.32%.  At December 31, 20142017, the Bank had a total risk-based capital ratio of 14.80%13.74%, Tier 1 risk-based capital of 13.59%12.96% and a leverage ratio of 8.31%9.46%Note 1413 of the audited Consolidated Financial Statements provides more detailed information concerning the Company’s capital amounts and ratios. EffectiveAs of January 1, 2015, bank holding companies with consolidated assets of $1 billion or more were required($3 Billion or more effective August 30, 2018) and banks like Central Valley Community Bank became subject to comply with new minimum capital ratio requirements, to be phased-in between January 1, 2015 and January 1, 2019, which consistcertain provisions of the following: (i)new rules are being phased in through 2019 under the Dodd-Frank Act and Basel III. As of December 31, 2018, the Bank met or exceeded all of their capital requirements inclusive of the capital buffer. The Bank’s capital ratios exceeded the regulatory guidelines for a new common equity Tier 1 capital to total risk weighted assets ratio of 4.5%; (ii) a Tier 1 capital to total risk weighted assets ratio of 6% (increased from 4%); (iii) a total capital to total risk weighted assets ratio of 8% (unchanged from current rules); and (iv) a Tier 1 capital to adjusted average total assets (“leverage”) ratio of 4%.well-capitalized financial institution under the Basel III regulatory requirements at December 31, 2018.


Operating Efficiency
 
Operating efficiency is the measure of how efficiently earnings before taxes are generated as a percentage of revenue.  A lower ratio represents greater efficiency.  The Company’s efficiency ratio (operating expenses, excluding amortization of intangibles and foreclosed property expense, divided by net interest income plus non-interest income, excluding net gains and losses from sale of securities) was 69.24%61.23% for 20152018 compared to 69.42%62.03% for 20142017 and 73.06%64.72% for 2013.2016.  The improvement in the efficiency ratioratios in 20152018 is due to the growth in revenues outpacing the growth in non-interest expense. The increase in the efficiency ratio in 2014 compared to 2013 isand 2017 was due to the growth in revenues outpacing the growth in non-interest expense. The Company’s net interest income before provision for credit losses plus non-interest income increased 4.40%8.87% to $50,162,00073,027,000 in 20152018 compared to $48,047,00067,075,000 in 20142017 and $41,282,00055,171,000 in 20132016, while operating expenses increased 1.92%1.49% in 20152018, 11.53%14.09% in 20142017, and 16.17%8.07% in 2013.2016.
 
Liquidity

Liquidity management involves our ability to meet cash flow requirements arising from fluctuations in deposit levels and demands of daily operations, which include providing for customers’ credit needs, funding of securities purchases, and ongoing repayment of borrowings. Our liquidity is actively managed on a daily basis and reviewed periodically by our management and Directors’ Asset/Liability Committee. This process is intended to ensure the maintenance of sufficient funds to meet our needs, including adequate cash flows for off-balance sheet commitments. Our primary sources of liquidity are derived from financing activities which include the acceptance of customer and, to a lesser extent, broker deposits, Federal funds facilities and advances from the Federal Home Loan Bank of San Francisco.  We have available unsecured lines of credit with correspondent banks totaling approximately $40,000,000 and secured borrowing lines of approximately $308,356,000286,934,000 with the Federal Home Loan Bank. These funding sources are augmented by collection of principal and interest on loans, the routine maturities and pay downs of securities from our investment securities portfolio, the stability of our core deposits, and the ability to sell investment securities.  Primary uses of funds include origination and purchases of loans, withdrawals of and interest payments on deposits, purchases of investment securities, and payment of operating expenses.

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We had liquid assets (cash and due from banks, interest-earning deposits in other banks, Federal funds sold, equity securities, and available-for-sale securities) totaling $572,171,000502,886,000 or 44.82%32.70% of total assets at December 31, 20152018 and $509,863,000643,087,000 or 42.77%38.70% of total assets as of December 31, 20142017.


RESULTS OF OPERATIONS
 
Net Income
 
Net income was $10,964,00021,289,000 in 20152018 compared to $5,294,00014,026,000 and $8,250,00015,182,000 in 20142017 and 20132016, respectively.  Basic earnings per share was $1.001.55, $0.481.12, and $0.771.34 for 20152018, 20142017, and 20132016, respectively.  Diluted earnings per share was $1.001.54, $0.481.10, and $0.771.33 for 20152018, 20142017, and 20132016, respectively.  ROE was 8.12%10.07% for 20152018 compared to 4.06%7.69% for 20142017 and 6.89%9.84% for 20132016.  ROA for 20152018 was 0.90%1.35% compared to 0.46%0.94% for 20142017 and 0.84%1.15% for 20132016.
The increase in net income for 20152018 compared to 20142017 can bewas primarily due to a decrease in provision for income taxes and an increase in net interest income, partially offset by an increase in the provision for credit losses, an increase in non-interest expense and a decrease in non-interest income. The decrease in net income for 2017 compared to 2016 was primarily attributed to a decreasean increase in provision for income taxes and an increase in non-interest expense, partially offset by an increase in the provision for credit losses, an increase in net interest income, and an increase in non-interest income, partially offset by an increase in provision for income taxes and an increase in non-interest expense. The decrease in net income for 2014 compared to 2013 can be attributed to an increase in the provision for credit losses and an increase in non-interest expense, partially offset by an increase in net-interest income before provision for credit losses, an increase in non-interest income, and a decrease in provision for income taxes.income.

Interest Income and Expense
 
Net interest income is the most significant component of our income from operations.  Net interest income (the interest rate spread) is the difference between the gross interest and fees earned on the loan and investment portfolios and the interest paid on deposits and other borrowings.  Net interest income depends on the volume of and interest rate earned on interest-earning assets and the volume of and interest rate paid on interest-bearing liabilities.
 
The following table sets forth a summary of average balances with corresponding interest income and interest expense as well as average yield and cost information for the periods presented.  Average balances are derived from daily balances, and nonaccrual loans are not included as interest-earning assets for purposes of this table.


36


SCHEDULE OF AVERAGE BALANCES, AVERAGE YIELDS AND RATES
 Year Ended December 31, 2015 Year Ended December 31, 2014 Year Ended December 31, 2013 Year Ended December 31, 2018 Year Ended December 31, 2017 Year Ended December 31, 2016
(Dollars in thousands) 
Average
Balance
 
Interest
Income/
Expense
 
Average
Interest
Rate
 
Average
Balance
 
Interest
Income/
Expense
 
Average
Interest
Rate
 
Average
Balance
 
Interest
Income/
Expense
 
Average
Interest
Rate
 
Average
Balance
 
Interest
Income/
Expense
 
Average
Interest
Rate
 
Average
Balance
 
Interest
Income/
Expense
 
Average
Interest
Rate
 
Average
Balance
 
Interest
Income/
Expense
 
Average
Interest
Rate
ASSETS  
  
  
  
  
  
        
  
  
  
  
  
      
Interest-earning deposits in other banks $64,963
 $209
 0.32% $53,781
 $175
 0.32% $46,672
 $164
 0.35% $24,055
 $459
 1.91% $36,709
 $424
 1.16% $53,514
 $289
 0.54%
Securities                                    
Taxable securities 285,585
 4,793
 1.68% 296,014
 5,538
 1.87% 235,487
 2,375
 1.01% 391,549
 10,254
 2.62% 310,876
 6,526
 2.10% 313,006
 5,876
 1.88%
Non-taxable securities (1) 178,247
 9,569
 5.37% 163,778
 8,837
 5.40% 163,494
 8,755
 5.35% 110,962
 4,478
 4.04% 220,806
 10,443
 4.73% 194,224
 9,787
 5.04%
Total investment securities 463,832
 14,362
 3.10% 459,792
 14,375
 3.13% 398,981
 11,130
 2.79% 502,511
 14,732
 2.93% 531,682
 16,969
 3.19% 507,230
 15,663
 3.09%
Federal funds sold 251
 1
 0.25% 293
 1
 0.25% 206
 1
 0.25% 40
 1
 2.10% 35
 
 1.50% 116
 
 0.51%
Total securities and interest-earning deposits 529,046
 14,572
 2.75% 513,866
 14,551
 2.83% 445,859
 11,295
 2.53% 526,606
 15,192
 2.88% 568,426
 17,393
 3.06% 560,860
 15,952
 2.84%
Loans (2) (3) 578,899
 30,504
 5.27% 533,531
 29,493
 5.53% 445,300
 26,519
 5.96% 908,419
 49,936
 5.50% 790,504
 43,534
 5.51% 644,282
 34,051
 5.29%
Federal Home Loan Bank stock 4,813
 580
 12.05% 4,700
 327
 6.96% 4,171
 177
 4.24%
Total interest-earning assets 1,112,758
 $45,656
 4.10% 1,052,097
 $44,371
 4.22% 895,330
 $37,991
 4.24% 1,435,025
 $65,128
 4.54% 1,358,930
 $60,927
 4.48% 1,205,142
 $50,003
 4.15%
Allowance for credit losses (8,978)  
  
 (8,147)  
  
 (9,713)     (8,924)  
  
 (9,258)  
  
 (10,098)    
Nonaccrual loans 7,863
  
  
 5,998
  
  
 9,183
     3,709
  
  
 2,839
  
  
 2,291
    
Other real estate owned 33
  
  
 36
  
  
 50
    
Cash and due from banks 25,019
  
  
 23,905
  
  
 21,296
     27,199
  
  
 24,989
  
  
 23,840
    
Bank premises and equipment 9,664
  
  
 10,511
  
  
 7,816
     9,148
  
  
 9,310
  
  
 9,053
    
Other non-earning assets 76,167
  
  
 73,083
  
  
 62,962
    
Other assets 111,253
  
  
 104,886
  
  
 90,779
    
Total average assets $1,222,526
  
  
 $1,157,483
  
  
 $986,924
     $1,577,410
  
  
 $1,491,696
  
  
 $1,321,007
    
LIABILITIES AND SHAREHOLDERS’ EQUITY  
  
  
  
  
  
        
  
  
  
  
  
      
Interest-bearing liabilities:  
  
  
  
  
  
        
  
  
  
  
  
      
Savings and NOW accounts $300,741
 $261
 0.09% $265,751
 $241
 0.09% $215,668
 $291
 0.13% $383,667
 $451
 0.12% $382,071
 $350
 0.09% $337,804
 $317
 0.09%
Money market accounts 227,743
 141
 0.06% 229,769
 174
 0.08% 193,833
 229
 0.12% 285,568
 419
 0.15% 264,581
 211
 0.08% 249,620
 133
 0.05%
Time certificates of deposit, under $100,000 59,810
 191
 0.32% 60,630
 228
 0.38% 48,729
 219
 0.45%
Time certificates of deposit, $100,000 and over 89,573
 355
 0.40% 101,588
 417
 0.41% 106,307
 531
 0.50%
Time certificates of deposit 111,214
 283
 0.25% 137,666
 408
 0.30% 139,656
 525
 0.38%
Total interest-bearing deposits 677,867
 948
 0.14% 657,738
 1,060
 0.16% 564,537
 1,270
 0.22% 780,449
 1,153
 0.15% 784,318
 969
 0.12% 727,080
 975
 0.13%
Other borrowed funds 5,156
 99
 1.89% 5,155
 96
 1.83% 5,645
 116
 2.05% 12,180
 331
 2.72% 6,930
 168
 2.42% 5,157
 121
 2.35%
Total interest-bearing liabilities 683,023
 $1,047
 0.15% 662,893
 $1,156
 0.17% 570,182
 $1,386
 0.24% 792,629
 $1,484
 0.19% 791,248
 $1,137
 0.14% 732,237
 $1,096
 0.15%
Non-interest bearing demand deposits 387,931
  
  
 348,822
  
  
 283,956
     553,305
  
  
 499,987
  
  
 417,151
    
Other liabilities 16,510
  
  
 15,354
  
  
 13,040
     20,152
  
  
 17,954
  
  
 17,294
    
Shareholders’ equity 135,062
  
  
 130,414
  
  
 119,746
     211,324
  
  
 182,507
  
  
 154,325
    
Total average liabilities and shareholders’ equity $1,222,526
  
  
 $1,157,483
  
  
 $986,924
     $1,577,410
  
  
 $1,491,696
  
  
 $1,321,007
    
Interest income and rate earned on average earning assets  
 $45,656
 4.10%  
 $44,371
 4.22%   $37,991
 4.24%  
 $65,128
 4.54%  
 $60,927
 4.48%   $50,003
 4.15%
Interest expense and interest cost related to average interest-bearing liabilities  
 1,047
 0.15%  
 1,156
 0.17%   1,386
 0.24%  
 1,484
 0.19%  
 1,137
 0.14%   1,096
 0.15%
Net interest income and net interest margin (4)  
 $44,609
 4.01%  
 $43,215
 4.11%   $36,605
 4.09%  
 $63,644
 4.44%  
 $59,790
 4.40%   $48,907
 4.06%


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(1)
Interest income is calculated on a fully tax equivalent basis, which includes Federal tax benefits relating to income earned on municipal bonds totaling $3,254, $3,005,$940, $3,551, and $2,977$3,327 in 2015, 2014,2018, 2017, and 2013,2016, respectively.
(2)
Loan interest income includes loan fees of $255$397 in 2015, $2722018, $684 in 2014,2017, and $320$134 in 2013.
2016.
(3)Average loans do not include nonaccrual loans.
(4)Net interest margin is computed by dividing net interest income by total average interest-earning assets.

The following table sets forth a summary of the changes in interest income and interest expense due to changes in average asset and liability balances (volume) and changes in average interest rates for the periods indicated. The change in interest due to both rate and volume has been allocated to the change in rate.
Changes in Volume/Rate For the Years Ended December 31, 2015 Compared to 2014 For the Years Ended December 31, 2014 Compared to 2013 For the Years Ended December 31, 2018 Compared to 2017 For the Years Ended December 31, 2017 Compared to 2016
(In thousands) Volume Rate Net Volume Rate Net Volume Rate Net Volume Rate Net
Increase (decrease) due to changes in:  
  
  
        
  
  
      
Interest income:  
  
  
        
  
  
      
Interest-earning deposits in other banks $36
 $(2) $34
 $21
 $(10) $11
 $(146) $181
 $35
 $(90) $225
 $135
Investment securities:                        
Taxable (195) (550) (745) 731
 2,432
 3,163
 1,694
 2,034
 3,728
 (39) 689
 650
Non-taxable (1) 780
 (48) 732
 15
 67
 82
 (5,196) (769) (5,965) 1,339
 (683) 656
Total investment securities 585
 (598) (13) 746
 2,499
 3,245
 (3,502) 1,265
 (2,237) 1,300
 6
 1,306
Federal funds sold 
 
 
 
 
 
 1
 
 1
 
 
 
Loans 2,507
 (1,496) 1,011
 4,479
 (1,505) 2,974
 6,493
 (91) 6,402
 7,728
 1,755
 9,483
FHLB Stock 7
 246
 253
 25
 125
 150
 
 
 
 123
 (310) (187)
Total earning assets (1) 3,135
 (1,850) 1,285
 5,271
 1,109
 6,380
 2,846
 1,355
 4,201
 9,061
 1,676
 10,737
Interest expense:  
  
  
  
  
  
  
  
  
  
  
  
Deposits:  
  
  
  
  
  
  
  
  
  
  
  
Savings, NOW and MMA 30
 (43) (13) 169
 (274) (105) 17
 292
 309
 49
 62
 111
Certificates of deposit under $100,000 (3) (34) (37) 27
 (18) 9
Certificates of deposit $100,000 and over (50) (12) (62) (23) (91) (114)
Time certificate of deposits (78) (47) (125) (7) (110) (117)
Total interest-bearing deposits (23) (89) (112) 173
 (383) (210) (61) 245
 184
 42
 (48) (6)
Other borrowed funds 1
 2
 3
 (10) (10) (20) 127
 36
 163
 41
 6
 47
Total interest bearing liabilities (22) (87) (109) 163
 (393) (230) 66
 281
 347
 83
 (42) 41
Net interest income (1) $3,157
 $(1,763) $1,394
 $5,108
 $1,502
 $6,610
 $2,780
 $1,074
 $3,854
 $8,978
 $1,718
 $10,696
(1) Computed on a tax equivalent basis for securities exempt from federal income taxes.

Interest and fee income from loans increased $1,011,0006,402,000 or 3.43%14.71% in 20152018 compared to 20142017.  Interest and fee income from loans increased $2,974,0009,483,000 or 11.21%27.85% in 20142017 compared to 20132016.  The increase in 20152018 is primarily attributable to an increase in average total loans outstanding, offset by a 26 basis point slight decrease in the yield on loans.  Interestloans by one basis point. The net interest income during 20152018 was positively impacted by the FLB acquisition in addition to the collection of nonaccrual loans which resulted in a recovery of interest income of approximately $720,000. The recovery was partially offset by reversal of approximately $222,000 in interest income on loans placed on nonaccrual status during the year. Net interest income during 2017 was positively impacted by the collection of nonaccrual loans which resulted in a recovery of interest income of approximately $431,000.$1,325,000. The recovery was partially offset by reversal of approximately $7,000$12,000 in interest income on loans putplaced on nonaccrual status during the year. The increase in 2014 is attributable to a increase in average total loans outstanding offset by a 43 basis point decrease in the yield on loans. Interest and fee income from loans during 2014 was positively impacted by the collection in full of nonaccrual loans totaling $1,870,000 which resulted in a recovery of net interest income of approximately $642,000. 
Average total loans for 2015increased $47,233,0002018 increased $118,785,000 to $586,762,000$912,128,000 compared to $539,529,000$793,343,000 for 20142017 and $454,483,000$646,573,000 for 2013.2016.  The yield on loans for 20152018 was 5.27%5.50% compared to 5.53%5.51% and 5.96%5.29% for 20142017 and 2013,2016, respectively. The impact to interest income from the accretion of the loan marks on acquired loans was an increase of $1,158,000 and $1,048,000 for the years ended December 31, 2018 and 2017, respectively.
Interest income from total investments on a non tax-equivalent basis, (total investments include investment securities, Federal funds sold, interest-bearing deposits in other banks, and other securities), decreaseincreased $228,000409,000 or 1.97%2.95% in 20152018 compared to 20142017. The yield on average investments decreased 818 basis points to 2.75%2.88% for the year ended December 31, 20152018 from 2.83%3.06% for the year ended December 31, 20142017. Average total investments increasedecreased $15,180,00041,820,000 to $529,046,000526,606,000 in 20152018 compared to $513,866,000568,426,000 in 20142017.  In 20142017, total investment income on a non tax-equivalent basis increased $3,229,0001,217,000 or 38.82%9.64% compared to 20132016.
AOur investment portfolio consists primarily of securities issued by U.S. Government sponsored entities and agencies collateralized by mortgage backed obligations and obligations of states and political subdivision securities. However, a significant portion of the investment portfolio is mortgage-backed securities (MBS) and collateralized mortgage obligations (CMOs).  At December 31, 20152018, we held $228,849,000361,080,000 or 44.94%77.83% of the total market value of the investment portfolio in MBS and CMOs with an average yield of 1.80%2.81%.  We invest in Collateralized Mortgage Obligations (CMO)CMOs and

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Mortgage Backed Securities, (MBS) MBS as part of theour overall strategy to increase our net interest margin.  CMOs and MBS by their nature react toare affected by prepayments which are impacted by changes in interest rates.  In a normal declining rate environment, prepayments from MBS and CMOs would be expected to increase and the

expected life of the investment would be expected to shorten.  Conversely, if interest rates increase, prepayments normally would be expected to decline and the average life of the MBS and CMOs would be expected to extend.  However, in the current economic environment, prepayments may not behave according to historical norms.  Premium amortization and discount accretion of these investments affects our net interest income.  Our management monitors the prepayment speedtrends of these investments and adjusts premium amortization and discount accretion based on several factors.  These factors include the type of investment, the investment structure, interest rates, interest rates on new mortgage loans, expectation of interest rate changes, current economic conditions, the level of principal remaining on the bond, the bond coupon rate, the bond origination date, and volume of available bonds in market.  The calculation of premium amortization and discount accretion is by nature inexact, and represents management’s best estimate of principal pay downs inherent in the total investment portfolio.
The cumulative net of taxnet-of-tax effect of the change in market value of the available-for-sale investment portfolio as of December 31, 20152018 was an unrealized gainloss of $4,462,000$4,407,000 and is reflected in the Company’s equity.  At December 31, 20152018, the average lifeeffective duration of the investment portfolio was 5.773.54 years and the market value reflected a pre-tax unrealized gainloss of $7,474,0006,257,000.  Management reviews market value declines on individual investment securities to determine whether they represent other-than-temporary impairment (OTTI). For the years ended December 31, 20152018 and 2014,2017, no OTTI was recorded. For the year ended December 31, 2013,2016, OTTI was recorded in the amount of $17,000.$136,000. Future deterioration in the market values of our investment securities may require the Company to recognize additional OTTI losses.
A component of the Company’s strategic plan has been to use its investment portfolio to offset, in part, its interest rate risk relating to variable rate loans.  Measured at December 31, 20152018, an immediate rate increase of 200 basis points would result in an estimated decrease in the market value of the investment portfolio by approximately $37,255,00033,989,000.  Conversely, with an immediate rate decrease of 200 basis points, the estimated increase in the market value of the investment portfolio would be $31,622,00032,468,000.  The modeling environment assumes management would take no action during an immediate shock of 200 basis points.  However, the Company uses those increments to measure its interest rate risk in accordance with regulatory requirements and to measure the possible future risk in the investment portfolio.  For further discussion of the Company’s market risk, refer to Quantitative and Qualitative Disclosures about Market Risk.
Management’s review of all investments before purchase includes an analysis of how the security will perform under several interest rate scenarios to monitor whether investments are consistent with our investment policy.  The policy addresses issues of average life, duration, and concentration guidelines, prohibited investments, impairment, and prohibited practices.
Total interest income in 2015increased $783,0002018 increased $6,811,000 to $41,822,000$64,187,000 compared to $41,039,000$57,376,000 in 20142017 and $34,836,000$46,676,000 in 2013.2016.  The increase was the result of yield changes, increase in interest rates, asset mix changes, and an increase in average earning assets.  The tax-equivalent yield on interest earning assets increased to 4.54% for the year ended December 31, 2018 from 4.48% for the year ended December 31, 2017.  Average interest earning assets increased to $1,435,025,000 for the year ended December 31, 2018 compared to $1,358,930,000 for the year ended December 31, 2017.  Average interest-earning deposits in other banks decreased $12,654,000 comparing 2018 to 2017.  Average yield on these deposits was 1.91% compared to 1.16% on December 31, 2018 and December 31, 2017 respectively.  Average investments and interest-earning deposits decreased $41,820,000 but the tax equivalent yield on those assets decreased 18 basis points.  Average total loans increased $118,785,000 and the yield on average loans decreased one basis point.
The increase in total interest income for 2017 was the result of yield changes, asset mix changes, and an increase in average earning assets, partially offset by an increase in interest-bearing liabilities.  The tax equivalent yield on interest earning assets decreased to 4.10% for the year ended December 31, 2015 from 4.22% for the year ended December 31, 2014.  Average interest earning assets increased to $1,112,758,000 for the year ended December 31, 2015 compared to $1,052,097,000 for the year ended December 31, 2014.  Average interest-earning deposits in other banks increased $11,182,000 comparing 2015 to 2014.  Average yield on these deposits was 0.32%.  Average investments and interest-earning deposits increased $15,180,000 but the tax equivalent yield on those assets decreased 8 basis points.  Average total loans increased $47,233,000 and the yield on average loans decreased 26 basis points.
Impacting the increase in total interest income in 2014 was the collection of approximately $642,000 of net foregone interest, asset mix changes, and increase in average earning assets, partially offset by an increase in interest-bearing liabilities.assets. The yield on interest-earning assets decreasedincreased to 4.22% for the year ended December 31, 2014 from 4.24%4.48% for the year ended December 31, 2013.  Average interest-earning assets increased to $1,052,097,000 for the year ended December 31, 2014 compared to $895,330,0002017 from 4.15% for the year ended December 31, 2013. 2016.  Average interest-earning assets increased to $1,358,930,000 for the year ended December 31, 2017 compared to $1,205,142,000 for the year ended December 31, 2016. 
Interest expense on deposits in 2015decreased $112,0002018 increased $184,000 or 10.57%18.99% to $948,000$1,153,000 compared to $1,060,000$969,000 in 20142017 and $1,270,000 in 2013.  The decrease in interest expense in 2015increased as compared to 2014 was primarily due to the repricing of$975,000 in 2016.  The yield on interest-bearing deposits which decreased 2increased 3 basis points to 0.14%0.15% in 20152018 from 0.16%0.12% in 2014.2017.  The decrease in interest expense in 2014 compared to 2013 was due to repricing ofyield on interest-bearing deposits which decreased 6one basis pointspoint to 0.16%0.12% in 20142017 from 0.22%0.13% in 2013.2016.  Average interest-bearing deposits were $677,867,000$780,449,000 for 20152018 compared to $657,738,000$784,318,000 and $564,537,000$727,080,000 for 20142017 and 2013,2016, respectively. The increases in average interest-bearing deposits in 2015 and 2014 was the result of organic growth.
Average other borrowings were $5,156,000$12,180,000 with an effective rate of 1.89%2.72% for 20152018 compared to $5,155,000$6,930,000 with an effective rate of 1.83%2.42% for 2014.2017.  In 2013,2016, the average other borrowings were $5,645,000$5,157,000 with an effective rate of 2.05%2.35%.  Included in other borrowings are the junior subordinated deferrable interest debentures acquired from Service 1st, advances on lines of credit, and advances from the Federal Home Loan Bank (FHLB)., and overnight borrowings.  The debentures were acquired in the merger with Service 1st and carry a floating rate based on the three month LIBOR plus a margin of 1.60%. The rate was 1.92%4.04% for 2015, 1.83%2018, 2.96% for 2014,2017, and 1.84%2.48% for 2013.2016.
The cost of all of our interest-bearing liabilities decreased 2was 0.19% and 0.14% basis points to 0.15%for 20152018 and 2017, respectively, compared to 0.17%0.15% for 2014 and 0.24% for 2013.2016.  The cost of total deposits decreasedincreased to 0.09% for the year ended December 31, 20152018, compared to

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0.11% 0.08% and 0.15%0.09% for the years ended December 31, 20142017 and 2013,2016, respectively.  Average demand deposits increased 11.21%increased 10.66% to $387,931,000$553,305,000 in 20152018 compared to $348,822,000$499,987,000 for 20142017 and $283,956,000$417,151,000 for 2013.2016. The ratio of average non-interest demand deposits to average total deposits increased to 36.40%41.48% for 20152018 compared to 34.65%38.93% and 33.47%36.46% for 20142017 and 2013,2016, respectively.
 

Net Interest Income before Provision for Credit Losses
 
Net interest income before provision for credit losses for 20152018 increased $892,0006,464,000 or 2.24%11.49% to $40,775,00062,703,000 compared to $39,883,00056,239,000 for 20142017 and $33,451,00045,580,000 for 20132016.  The increase in 20152018 was due to the increase in average earning assets and 2while the yield on interest bearing liabilities increased 5 basis point decrease in the average interest rate on interest-bearing deposits, partially offset by the decrease in the average rate on earning assets.point. Our net interest margin (NIM) decreaseincreased 104 basis points. Yield on interest earning assets decreaseincreased 12 basis points while the effective rate on interest bearing liabilities decreased 26 basis points. The change in the mix of average interest earning assets also affected NIM.  Interest-earningThe increase in net interest margin in the period-to-period comparison resulted primarily from the increase in the effective yield on interest earning deposits in other banks and Federal Funds sold, offset by the decrease in the effective yield on average investment securities, which tend to have lower effective yields, increased.and the decrease in the yield on the Company’s loan portfolio.  Net interest income before provision for credit losses increased $6,432,000$10,659,000 in 20142017 compared to 20132016, mainlyprimarily due to the increase in average earning assets and 7 basis point decrease in the average interest rate on deposits liabilities.assets. Average interest-earning assets were $1,112,758,0001,435,025,000 for the year ended December 31, 20152018 with a NIM of 4.01%4.44% compared to $1,052,097,0001,358,930,000 with a NIM of 4.11%4.40% in 20142017, and $895,330,0001,205,142,000 with a NIM of 4.09%4.06% in 20132016.  For a discussion of the repricing of our assets and liabilities, refer to Quantitative and Qualitative Disclosure about Market Risk.

Provision for Credit Losses
 
We provide for probable incurred credit losses through a charge to operating income based upon the change in balance and composition of the loan portfolio, delinquency levels, historical losses and nonperforming assets, economic and environmental conditions and other factors which, in management’s judgment, deserve recognition in estimating credit losses.  Loans are charged off when they are considered uncollectible or of such little value thatwhen continuance as an active earning bank asset is not warranted.
The establishment of an adequate credit allowance is based on both an accurate risk rating system and loan portfolio management tools.  The Board hasof Directors have established initial responsibility for the accuracy of credit risk grades with the individual credit officer.  The gradingCredit Review Officer (CRO) will review loans to ensure the accuracy of the risk grade and is then submittedempowered to the Chief Credit Officer (CCO), who reviews the grades for accuracy and gives final approval.change any risk grade, as appropriate. The CCOCRO is not involved in loan originations. Quarterly, the credit officers must certify the current risk grade of the loans in their portfolio. The risk grading and reserve allocation is analyzedCRO reviews the certifications. At least quarterly by the Senior Risk Manager, CCO, Chief Financial Officer, and Board;CRO reports his activities to the Board of Directors Audit Committee; and at least annually the loan portfolio is reviewed by a third party credit reviewer and by various regulatory agencies.
Quarterly, the Senior Risk Manager and the CCO setChief Credit Officer (CCO) sets the specific reserve for all adversely risk-gradedimpaired credits.  Additionally, the CCO is responsible to ensure that the general reserves on non-impaired loans are properly set each quarter.  This process includes the utilization of loan delinquency reports, classified asset reports, collateral analysis and portfolio concentration reports to assist in accurately assessing credit risk and establishing appropriate reserves. Reserves are also allocated to credits that are not impaired based on inherent risk in those loans.
The allowance for credit losses is reviewed at least quarterly by the Board’s Audit/ComplianceBoard of Directors Audit Committee and by the Board of Directors.  ReservesGeneral reserves are allocated to loan portfolio categories using percentages which are based on both historical risk elements such as delinquencies and losses and predictive risk elements such as economic, competitive and environmental factors.  We have adopted the specific reserve approach to allocate reserves to each impaired credit for the purpose of estimating potential loss exposure.  Although the allowance for credit losses is allocated to various portfolio categories, it is general in nature and available for the loan portfolio in its entirety.  Changes in the allowance for credit losses may be required based on the results of independent loan portfolio examinations, regulatory agency examinations, or our own internal review process.  Additions are also required when, in management’s judgment, the allowance does not properly reflect the portfolio’s probable loss exposure. Management believes that all adjustments, if any, to the allowance for credit losses are supported by the timely and consistent application of methodologies and processes resulting in detailed documentation of the allowance of the allowance calculation and other portfolio trending analysis.


The allocation of the allowance for credit losses is set forth below:below (in thousands):

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Loan Type (Dollars in thousands) December 31, 2015 December 31, 2014
Loan Type  December 31, 2018 December 31, 2017
Commercial:        
Commercial and industrial $3,143
 $2,753
 $1,604
 $1,784
Agricultural land and production 419
 377
Agricultural production 67
 287
Real estate:        
Owner occupied 1,556
 1,380
 1,131
 1,252
Real estate construction and other land loans 694
 837
 1,271
 1,004
Commercial real estate 1,686
 1,201
 3,017
 1,958
Agricultural real estate 1,149
 564
 947
 1,441
Other real estate 119
 76
 173
 140
Consumer:        
Equity loans and lines of credit 500
 811
 419
 464
Consumer and installment 234
 267
 407
 361
Unallocated reserves 110
 42
 68
 87
Total allowance for credit losses $9,610
 $8,308
 $9,104
 $8,778
 
Loans are charged to the allowance for credit losses when the loans are deemed uncollectible.  It is the policy of management to make additions to the allowance so that it remains adequate to cover all probable incurred credit losses that exist in the portfolio at that time. We assign qualitative and environmental factors (Q factors) to each loan category. Q factors include reserves held for the effects of lending policies, economic trends, and portfolio trends along with other dynamics which may cause additional stress to the portfolio.
Managing high-risk credits identified through the risk evaluation methodology includes developing a business strategy with the customer to mitigate our potential losses.  Management continues to monitor these credits with a view to identifying as early as possible when, and to what extent, additional provisions may be necessary. Management believes that the level of allowance for loan losses allocated to commercial and real estate loans has been adjusted accordingly.
There were $600,000 additions madeDuring the year ended December 31, 2018, the Company recorded a provision for credit losses of $50,000 compared to a reverse provision of $1,150,000 and a reverse provision of $5,850,000 for the same periods in 2017 and 2016, respectively. The recorded provision and reverse provisions to the allowance for credit losses in 2015, compared to $7,985,000 and none for the same periods in 2014 and 2013, respectively.  These provisions are primarily the result of our assessment of the overall adequacy of the allowance for credit losses considering a number of factors as discussed in the “Allowance for Credit Losses” section below.  section.
During the fourth quarter of 2014, the Company recorded a provision for credit losses of approximately $8.4 million in connection with the partial charge-off of a single commercial and agricultural relationship. The Company is actively working to collect all balances legally owed to the Company. The Company plans to continue to track and identify any expenses, net of recoveries, associated with the collection efforts of this commercial and agricultural relationship. For the yearyears ended December 31, 20152018, 2017 and 2014, collection expenses related to this relationship totaled $436,000 and $27,000, respectively.
During the year ended December 31, 2015,2016 the Company had net recoveries totaling $702,000 compared to net charge-offs of $8,885,000$276,000, $602,000, and $925,000 for the same periods in 2014 and 2013,$5,566,000, respectively. The net charge-off (recovery) ratio, which reflects net charge-offs (recoveries) to average loans, was (0.12)(0.03)%, 1.65%(0.08)% and 0.20%(0.86)% for 2015, 2014,2018, 2017, and 2013,2016, respectively.
Nonperforming loans were $2,413,000$2,740,000 and $14,052,000$2,875,000 at December 31, 20152018 and 2014,2017, respectively.  Nonperforming loans as a percentage of total loans were 0.40%0.30% at December 31, 20152018 compared to 2.45%0.32% at December 31, 2014.2017.  The Company had no other real estate owned at December 31, 20152018, December 31, 2017, and December 31, 2014 as compared to $190,0002016. The carrying value of foreclosed assets was $70,000 at December 31, 2013.
We2017, and is included in other assets on the consolidated balance sheets. No foreclosed assets were recorded at December 31, 2018 or December 31, 2016. At December 31, 2018, we had $1,208,000 loans past due, not including nonaccrual loans totaling $136,000compared to $1,281,000 loans past due at December 31, 2015 compared to $336,000 at December 31, 2014.  Excluding 2014, the Company has seen a decline in the amount of non-performing loans to an amount more in line with historical levels before the recession triggered by the financial crisis of 2008.2017. 
Notwithstanding improvements in the economy, we anticipate weakness in economic conditions on national, state and local levels to continue.  Continued economicEconomic pressures may negatively impact the financial condition of borrowers to whom the Company has extended credit and as a result when negative economic conditions are anticipated, we may be required to make further significant provisions to the allowance for credit losseslosses. The Bank conducts banking operation principally in California’s Central Valley. The Central Valley is largely dependent on agriculture. The agricultural economy in the future.  ManyCentral Valley is therefore important to our financial performance, results of operation and cash flows. We are also dependent in a large part upon the business activity, population growth, income levels and real estate activity in this market area. A downturn in agriculture and the agricultural related businesses could have a material adverse effect our business, results of operation and financial condition. The agricultural industry has been affected by declines in prices and the rates of price growth for various crops grownand other agricultural commodities. Similarly, weaker prices could reduce the cash flows generated by farms and the value of agricultural land in our local markets and thereby increase the risk of default by our borrowers or reduce the foreclosure value of agricultural land and equipment that serve as collateral of our loans. Further declines in commodity prices or collateral values may increase the incidence of default by our borrowers. Moreover, weaker prices might threaten farming operations in the Central Valley, customers have been harvestedreducing market demand for agricultural lending. In particular, farm income has seen recent declines, and in line with preliminary results demonstrating that California’s drought and unusual weather patterns have had an impact with lower crop yields compared to the previous year for certain crops. Many farmers and ranchers have instituted improved farming practices including planting less acreage, as part of the mitigation for the cost of water delivery and the expense of pumping. We closely monitored the water and the related issues affecting our customersdownturn in 2015 and 2014. farm income, farmland prices are coming under pressure.

We have been and will continue to be proactive in looking for signs of deterioration within the loan portfolio in an effort to manage credit quality and work with borrowers where possible to mitigate any further losses.
As of December 31, 2015,2018, there were $28.4 million in classified loans of which $19.2 million related to agricultural real estate, $2.6 million to commercial and industrial loans, $0.9 million to real estate owner occupied, $3.0 million to real estate construction, and $1.1 million to commercial real estate. This compares to $50.0 million in classified loans as of December 31, 2017 of which $26.5 million related to agricultural real estate, $3.9 million to real estate construction, $7.9 million to commercial and industrial, $3.9 million to agricultural production, and $3.4 million to commercial real estate.
As of December 31, 2018, we believe, based on all current and available information, the allowance for credit losses is adequate to absorb probable incurred losses within the loan portfolio; however, no assurance can be given that we may not

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sustain charge-offs which are in excess of the allowance in any given period.  Refer to “Allowance for Credit Losses” below for further information.
 
Net Interest Income after Provision for Credit Losses
 
Net interest income, after the provision for credit losses of $600,000 in 2015, $7,985,000 in 2014, and none in 2013, was $40,175,00062,653,000 for 20152018 compared to $31,898,00057,389,000 and $33,451,00051,430,000 for 20142017 and 20132016, respectively.
 
Non-Interest Income 

Non-interest income is comprised of customer service charges, gains on sales and calls of investment securities, income from appreciation in cash surrender value of bank owned life insurance, loan placement fees, Federal Home Loan Bank dividends, and other income.  Non-interest income was $9,387,00010,324,000 in 20152018 compared to $8,164,00010,836,000 and $7,831,0009,591,000 in 20142017 and 20132016, respectively. The $1,223,000512,000 or 14.98%4.72% decrease in non-interest income in 2018 resulted primarily from decreases in net realized gains on sales and calls of investment securities and service charge income, partially offset by a increase in loan placement fees, net gain on the sale of the Company’s credit card portfolio, interchange fees, appreciation in cash surrender value of bank owned life insurance, and Federal Home Loan Bank dividends compared to 2017. The $1,245,00 or 12.98% increases in non-interest income in 2017 compared to 2016 was due to increases in net realized gains on sales and calls of investment securities, loan placementservice charge income, interchange fees, Federal Home Loan Bank dividends, and other income, compared to the comparable 2014 period, partially offset by a decrease in service charge income, interchange fees, and appreciation in cash surrender value of bank owned life insurance. The $333,000 or 4.25% increases in non-interest income comparing 2014 to 2013 was due to increases in service charge income, interchange fees, appreciation in cash surrender value of bank owned life insurance, Federal Home Loan Bank dividends, and gain on sale of other real estate owned, partially offset by gains on sales and calls of investment securities and loan placement fees.
Customer service charges decreased $210,00067,000 to $3,070,0002,986,000 in 20152018 compared to $3,280,0003,053,000 in 20142017 and $3,156,0002,849,000 in 20132016.  The decrease in 2015 from 2014, is due to lower analyzed service charge fee income. The increase in 20142017 from 2013 is mainly due to increases2016 resulted from increase in overdraftour customer base from the SVB and analyzed service charge fee income.FLB acquisitions.
During the year ended December 31, 2015,2018, we realized net gains on sales and calls of investment securities of $1,495,000. In 20141,314,000, we realized a net gain ofcompared to $904,0002,802,000 compared to a net gain ofin 2017 and $1,265,0001,920,000 in 20132016 from sales. In 2016, we recorded an other-than-temporary impairment loss of $136,000 as compared to none during the years ended December 31, 2018, and calls of investment securities.2017. The net gains in 20152018, 20142017, and 20132016 were the results of partial restructuring of the investment portfolio designed to improve the future performance of the portfolio.  See FootnoteNote 4 to the audited Consolidated Financial Statements for more detail.
Income from the appreciation in cash surrender value of bank owned life insurance (BOLI) totaled $596,000695,000 in 20152018 compared to $614,000621,000 and $495,000558,000 in 20142017 and 20132016, respectively.  The Bank’s salary continuation and deferred compensation plans and the related BOLI are used as a retention tooltools for directors and key executives of the Bank.
Interchange fees totaled $1,197,000$1,462,000 in 20152018 compared to $1,205,000$1,458,000 and $962,000$1,228,000 in 20142017 and 20132016, respectively. Part of the increases in 2014 is2018 and 2017 was attributable to the VCB acquisition.FLB and SVB acquisitions.
We earn loan placement fees from the brokerage of single-family residential mortgage loans provided for the convenience of our customers.  Loan placement fees increased $498,0002,000 in 20152018 to $1,042,000708,000 compared to $544,000706,000 in 20142017 and $677,0001,083,000 in 20132016Fees were higher in 2015 compared to 2014 and 2013. Refinancing and new mortgage activity increased in 2015 and decreased slightly in 2014. We continue to see the historically low mortgage rates and first time home buyer tax incentives.
The Bank holds stock from the Federal Home Loan Bank in relationship with its borrowing capacity and generally receives quarterly dividends.  As of December 31, 2015,2018 and 2017, we held $4,823,0006,843,000 in FHLB stock compared to $4,791,000 at December 31, 2014.stock.  Dividends in 20152018 increased to $580,000590,000 compared to $327,000443,000 in 20142017 and $177,000630,000 in 20132016.
A net gain of $462,000 on the sale of the Company’s credit card portfolio was recorded during the year ended December 31, 2018. Other income increased to $1,396,000$2,107,000 in 20152018 compared to $1,227,000$1,753,000 and $1,099,000$1,459,000 in 20142017 and 2013,2016, respectively. The period-to-period increase in 2015 compared to 2014 was primarily due to increases in electronic funds transfer fee income and non-customer check cashing fees. In addition, the Company realized a $345,000 tax-free gain related to the collection of life insurance proceeds in June 2015 which is included in Other income.

Non-Interest Expenses
 
Salaries and employee benefits, occupancy and equipment, regulatory assessments, acquisition and integration-related expenses, data processing expenses, ATM/Debit card expenses, license and maintenance contract expenses, information technology, and professional services (consisting of audit, accounting, consulting and legal fees) are the major categories of non-interest expenses.  Non-interest expenses increased $678,000662,000 or 1.92%1.49% to $36,016,00045,068,000 in 20152018 compared to $35,338,00044,406,000 in 20142017, and $31,685,00038,922,000 in 20132016. The net increase period-over-period is primarily due to the FLB and SVB acquisitions. Various items are discussed below.

Our efficiency ratio, measured as the percentage of non-interest expenses (exclusive of amortization of core deposit intangibles, and other real estate owned, and repossessed asset expenses) to net interest income before provision for credit losses plus non-interest income (exclusive of realized gains or losses on sale and calls of investments) was 69.24%61.23% for 20152018 compared to 69.42%62.03% for 20142017 and 73.06%64.72% for 2013.2016. The improvement in the efficiency ratio in 20152018 and 2017 is due to the growth in revenues outpacing the growth in non-interest expense. The improvement in the efficiency ratio in 2014 compared to 2013 is also due to the growth in revenues outpacing the growth in non-interest expense.

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Salaries and employee benefits increased $1,115,000increased $1,483,000 or 5.65%5.99% to $20,836,00026,221,000 in 20152018 compared to $19,721,00024,738,000 in 20142017 and $17,427,00021,881,000 in 20132016.  Full time equivalents were 273316 for the year ended December 31, 20152018 compared to 271334 for the year ended December 31, 20142017. In addition, theThe increase in 2015 assalaries and employee benefits in 2018 compared to 20142017 is a result of higher commissions on loan originations, group health insurance expensesoverall salary and profit sharingbenefit expenses. The Company had no profit sharing expense in 2014. 2015 also had higher loan origination costs which reduce the Company’s total salaries and employee benefits.
At December 31, 2015, we had three share based compensation plans under which compensation expense is recognized based on the estimated fair value of the awards at the date of the grant. In May 2015, the Company adopted the Central Valley Community Bancorp 2015 Omnibus Incentive Plan (2015 Plan). The plan provides for awards in the form of incentive stock options, non-statutory stock options, stock appreciation rights, and restricted stock. The plan also allows for performance awards that may be in the form of cash or shares of the Company, including restricted stock. Currently under the 2015 Plan, there are 875,000 shares remain reserved for future grants as of December 31, 2015.  The Central Valley Community Bancorp 2000 Stock Option Plan (2000 Plan) for which 80,045 shares remain reserved for issuance for options already granted under incentive and nonstatutory agreements. This plan expired in November 2010 and no new options will be granted under this plan.  The Central Valley Community Bancorp 2005 Omnibus Incentive Plan (2005 Plan) provided for awards in the form of incentive stock options, non-statutory stock options, stock appreciation rights, and restricted stock.  Currently under the 2005 Plan, there are 213,678 shares reserved for issuance for options and restricted stock awards already committed to be granted to employees and directors under incentive and nonstatutory agreements. The 2005 Plan expired May 16, 2015 and no additional grants will be made under this plan.
The Company bases the fair value of the options previously granted on the date of grant using a Black-Scholes-Merton option pricing model that uses assumptions based on expected option life, the level of estimated forfeitures, expected stock volatility and the risk-free interest rate.  Stock volatility is based on the historical volatility of the Company’s stock.  The risk-free rate is based on the U.S. Treasury yield curve and the expected term of the options.  The expected term of the options represents the period that the Company’s options are expected to be outstanding.
For the years ended December 31, 2015, 2014,2018, 2017, and 2013,2016, the compensation cost recognized for share based compensation was $238,000, $173,000$482,000, $384,000 and $98,000,$284,000, respectively.
As of December 31, 2015,2018, there was $86,000$677,000 of total unrecognized compensation cost related to non-vested share-based compensation arrangements granted under all plans.  The cost is expected to be recognized over a weighted average period of 1.722.04 years.  See Notes 1 and 1514 to the audited Consolidated Financial Statements for more detail.
No options to purchase shares of the Company’s common stock were issued during the years ending December 31, 20152018 and 2014.
During the year ended December 31, 2015, 9,268 shares of restricted2017. Restricted common stock awards of 22,204 shares were granted from the 2005 Plan. Theawarded in 2018. No restricted common stock had a fair market value of $10.79 per share on the date of grant. As of December 31, 2015, there was $554,000 of total unrecognized compensation cost related to nonvested restricted common stock.  Restricted stock compensation expense is recognized on a straight-line basis over the vesting period. This cost is expected to be recognized over a weighted average remaining period of 3.58 years and will be adjusted for subsequent changesshares were awarded in estimated forfeitures.2017.
Occupancy and equipment expense decreasedincreased $166,000786,000 or 3.43%15.16% to $4,669,0005,972,000 in 20152018 compared to $4,835,0005,186,000 in 20142017 and $4,109,0004,754,000 in 20132016. The decreasenet increase year over year was primarily attributable to the FLB acquisition and consolidation of three branches in 2015 wasaddition to increased contract repairs through out the resultentire Company. The addition of five new branches from the closure ofFLB and SVB acquisitions resulted in an ATM location in Visalia. Theapproximately $338,000 increase in 2014 was primarily duerent expense in 2017 as compared to increases in rent and depreciation expense for the premises acquired from VCB.2016. The Company made no changes in its depreciation expense methodology.
Regulatory assessments increasedwere $297,000 or 38.98% to $1,059,000619,000 in 20152018 compared to $762,000652,000 and $696,000642,000 in 20142017 and 2013,2016, respectively.  The assessment base for calculating the amount owed is average assets minus average tangible equity. The increaseBeginning in regulatorythe third quarter of 2016, the FDIC approved a final rule revising DIF assessment formulas which resulted in lower assessments was a result offor the Company. 2017 and 2016 were higher assessment rate which was a result of changes in credit quality ratios used in determiningas compared to 2018 due to the assessment rate along with higher average assets.additional assessments on the acquired institutions.
Data processing expenses were $1,139,0001,666,000 in 20152018 compared to $1,820,0001,740,000 in 20142017 and $1,383,0001,707,000 in 20132016.  The $681,00074,000 or 37.42%4.25% decrease in 20152018, is from the consolidation of processes after the conversion of the acquired institutions was a result of highercompleted in 2018. Acquisition and integration expenses in 2014 which related to final conversion from VCB platformsthe FLB and largely due to the renegotiation of data processing contracts which became effective January 1, 2015. The $437,000 or 31.60% increaseSVB mergers were $217,000 in 20142018 compared to $1,828,000 in 2017 and $1,782,000 in 2016. Professional services decreased $34,000 in 20132018 is the result of increased processing charges relatedcompared to the VCB acquisition and an increase of accounts and services provided to our customers and branches.2017.
Amortization of core deposit intangibles was $320,000455,000 for 20152018, $337,000234,000 for 20142017, and $268,000$149,000 for 20132016. During 2015,2018, amortization expense related to Service 1st BankFLB core deposit intangible (CDI) was $183,000,$247,000, amortization expense related to SVB core deposit intangible (CDI) was $72,000, and amortization expense related to VCB CDI was $136,000. During 2017, amortization expense related to FLB CDI was $47,000, SVB CDI was $50,000 and amortization expense related to VCB CDI was $137,000. During 2014,2016, amortization expense related to Service 1st Bank core deposit intangible (CDI)SVB CDI was $200,000,$12,000, and amortization expense related to VCB CDI was $137,000. During 2013, amortization expense related to Service 1st Bank core deposit intangible (CDI) was $200,000, and amortization expense related to VCB CDI was $68,000.
ATM/Debit card expenses decreased $76,000$11,000 to $548,000$739,000 for the year ended December 31, 20152018 compared to $624,000$750,000 in 20142017 and $527,000$633,000 in 20132016License and maintenance contractsInformation technology expenses increased $32,000$295,000 to $520,000$1,113,000 for the year ended December 31, 20152018 compared to $488,000$818,000 and $472,000$531,000 in 20142017 and 20132016, respectively.  Other non-interest expenses decreased $362,000375,000 or 8.11%7.48% to $4,104,0004,636,000 in 20152018 compared to $4,466,0005,011,000 in 20142017 and $3,866,0003,801,000 in 20132016.
 

43


The following table describes significant components of other non-interest expense as a percentage of average assets.
For the years ended December 31,
(Dollars in thousands)
 
Other
Expense
2015
 
%
Average
Assets
 
Other
Expense
2014
 
%
Average
Assets
 
Other
Expense
2013
 
%
Average
Assets
 
Other
Expense
2018
 
%
Average
Assets
 
Other
Expense
2017
 
%
Average
Assets
 
Other
Expense
2016
 
%
Average
Assets
Stationery/supplies $269
 0.02% $266
 0.02% $257
 0.02% $281
 0.02% $292
 0.02% $247
 0.02%
Amortization of software 240
 0.02% 224
 0.02% 243
 0.02% 303
 0.02% 289
 0.02% 257
 0.02%
Director fees and related expenses 306
 0.03% 262
 0.02% 233
 0.02%
Telephone 292
 0.02% 230
 0.02% 219
 0.02% 217
 0.01% 265
 0.02% 357
 0.03%
Alarm 101
 0.01% 130
 0.01% 103
 0.01%
Postage 212
 0.02% 238
 0.02% 202
 0.02% 209
 0.01% 205
 0.01% 200
 0.02%
Armored courier fees 218
 0.02% 221
 0.02% 155
 0.01% 274
 0.02% 266
 0.02% 227
 0.02%
Risk management expense 163
 0.01% 207
 0.02% 155
 0.01% 195
 0.01% 207
 0.01% 150
 0.01%
Loss (gain) on sale or write-down of assets 6
 % 201
 0.02% (1) %
Loss on sale or write-down of assets 2
 % 187
 0.01% 4
 %
Donations 185
 0.02% 179
 0.02% 160
 0.01% 243
 0.02% 249
 0.02% 171
 0.01%
Personnel other 173
 0.01% 154
 0.01% 122
 0.01% 167
 0.01% 259
 0.02% 161
 0.01%
Credit card expense 121
 0.01% 245
 0.02% 196
 0.01%
Education/training 148
 0.01% 135
 0.01% 135
 0.01% 172
 0.01% 174
 0.01% 154
 0.01%
Loan related expenses 77
 % 132
 0.01% 35
 %
General insurance 150
 0.01% 141
 0.01% 126
 0.01% 165
 0.01% 159
 0.01% 159
 0.01%
Appraisal fees 66
 0.01% 130
 0.01% 89
 0.01%
Travel and mileage Expense 267
 0.02% 211
 0.01% 146
 0.01%
Operating losses 56
 % 53
 % 67
 0.01% 452
 0.03% 150
 0.01% 175
 0.01%
Shareholder services 129
 0.01% 102
 0.01% 83
 0.01%
Other 1,620
 0.13% 1,825
 0.16% 1,704
 0.15% 1,261
 0.08% 1,489
 0.10% 976
 0.07%
Total other non-interest expense $4,104
 0.34% $4,466
 0.39% $3,866
 0.34% $4,636
 0.29% $5,011
 0.34% $3,801
 0.29%
 
Provision for Income Taxes
 
Our effective income tax rate was 19.1%23.7% for 20152018 compared to (12.0)%41.1% for 20142017 and 14.1%31.3% for 20132016.  The Company reported an income tax provision (benefit) of $2,582,0006,620,000, $(570,000)9,793,000, and $1,347,0006,917,000 for the years ended December 31, 20152018, 20142017, and 20132016, respectively.  ChangesWith the Tax Cuts and Jobs Act (the “Act”) enacted on December 22, 2017, the Company’s federal income tax rate changed from 35% to 21% effective as of the beginning of 2018. The decrease in the Company’s effective tax rate other than changeswas the result of the change in the level of income before taxes were due in part to changesfederal rate offset by a sizable decrease in tax law which limited the use of various tax credits and incentive beginning in 2014 and the ratio of non-taxable income to total income before taxes.

Preferred Stock Dividends and Accretion
On August 18, 2011, the Company entered into a Securities Purchase Agreement (SPA) with the Small Business Lending Fund of the United States Department of the Treasury (the Treasury), under which the Company issued 7,000 shares of Senior Non-Cumulative Perpetual Preferred Stock, Series C (Series C Preferred) to the Treasury for an aggregate purchase price of $7,000,000. Simultaneously, the Company agreed with Treasury under a Letter Agreement to redeem, for an aggregate price of $7,000,000, the 7,000 shares of the Company’s Series A Fixed Rate Cumulative Preferred Stock (Series A Stock) originally issued pursuant to the Treasury’s Capital Purchase Program (CPP) in 2009. The redemption of the Series A Stock resulted in an acceleration of the remaining discount booked at the time of the CPP transaction. In connection with the repurchase of the Series A Stock, the Company also repurchased the warrant (the Warrant) to purchase 79,037 shares of the Company’s common stock that was originally issued to Treasury in connection with the CPP transaction for total consideration of $185,000.
On December 31, 2013, the Company redeemed all 7,000 outstanding shares of its Series C Preferred from the Treasury, in exercise of its optional redemption rights pursuant to the terms of the Series C Preferred under the Company’s charter and the SPA. The Company paid the Treasury $7,087,500 in connection with the redemption, representing $1,000 per share of the Series C Preferred plus all accrued and unpaid dividends through the date of the redemption. The obligations of the Company under the SPA are terminated asexempt interest. As a result of the redemption. No additional sharesenactment of Series C Preferred are outstanding.
We accrued preferred stock dividendsthe Act the federal tax rate applied to the TreasuryCompany’s deferred taxes was adjusted as of December 31, 2017 to reflect the 2018 tax rates (the rates at which the deferred tax items are expected to reverse). The change to the tax rates (including the rate change applied to deferred taxes reflected in other comprehensive income and accretioncertain tax-advantaged investments as reflected in other assets) resulted in an increase to the Company’s tax provision of $3,535,000 in 2017. As part of the issuance discountAct for tax years beginning after December 31, 2017, alternative minimum tax credit carryforwards are refundable and are expected to be fully refunded by 2022. As such, they are not dependent on future taxable income to be realized and have been classified as an other receivable. The effective tax rate in 2016 was affected by the large negative provision for credit losses which resulted in higher pretax and taxable income and also diluted the impact of the Company’s tax exempt municipal bonds and other tax planning strategies.
Some items of income and expense are recognized in different years for tax purposes than when applying generally accepted accounting principles leading to timing differences between the Company’s actual tax liability, and the amount accrued for this liability based on book income. These temporary differences comprise the “deferred” portion of the Company’s tax expense or benefit, which is accumulated on the Company’s books as a deferred tax asset or deferred tax liability until such time as they reverse.
Realization of the Company’s deferred tax assets is primarily dependent upon the Company generating sufficient future taxable income to obtain benefit from the reversal of net deductible temporary differences and the utilization of tax credit carryforwards and the net operating loss carryforwards for Federal and California state income tax purposes. The amount of deferred tax assets considered realizable is subject to adjustment in future periods based on estimates of future taxable income. Under generally accepted accounting principles a valuation allowance is required to be recognized if it is “more likely than not” that the deferred tax assets will not be realized. The determination of the realization of the deferred tax assets is highly subjective and dependent upon judgment concerning management’s evaluation of both positive and negative evidence, including forecasts of future income, cumulative losses, applicable tax planning strategies, and assessments of current and future economic and business conditions.
The Company had the net deferred tax assets of $11.183 million and $8.024 million at December 31, 2018 and 2017,

respectively. After consideration of the matters in the amount of $350,000 duringpreceding paragraph, the year endedCompany determined that it is more likely than not that the net deferred tax assets at December 31, 2013.2018 and 2017 will be fully realized in future years.

FINANCIAL CONDITION
 
Summary of Changes in Consolidated Balance Sheets
  

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Table of Contents

December 31, 2015 compared to December 31, 2014.
Total assets were $1,276,736,0001,537,836,000 as of December 31, 20152018, compared to $1,192,183,0001,661,655,000 as of December 31, 20142017, ana increasedecrease of 7.09%7.45% or $84,553,000123,819,000.  Total gross loans were $598,111,000918,695,000 as of December 31, 20152018, compared to $572,588,000900,679,000 as of December 31, 20142017, an increase of $25,523,00018,016,000 or 4.46%2.00%.  The total investment portfolio (including Federal funds sold and interest-earning deposits in other banks) increasedecreased 11.53%20.98% or $60,033,000126,869,000 to $580,544,000477,932,000.  Total deposits increasedecreased 7.42%10.06% or $77,115,000143,389,000 to $1,116,267,000$1,282,298,000 as of December 31, 2015,2018, compared to $1,039,152,000$1,425,687,000 as of December 31, 2014.2017.  Shareholders’ equity increased $8,278,000increased $10,179,000 or 6.32%4.86% to $139,323,000$219,738,000 as of December 31, 2015,2018, compared to $131,045,000$209,559,000 as of December 31, 2014.2017. The increase in shareholders’ equity was driven by the retention of earnings, net of dividends paid, partially offset by a decrease in net unrealized gains on available-for-sale investment(AFS) securities recorded, net of estimated taxes, in accumulated other comprehensive income (AOCI). Accrued interest payable and other liabilities were $15,991,000$20,645,000 as of December 31, 2015,2018, compared to $16,831,000$21,254,000 as of December 31, 2014,2017, a decrease of $840,000.$609,000.

Fair Value
 
The Company measures the fair valuesvalue of its financial instruments utilizing a hierarchical framework associated with the level of observable pricing scenarios utilized in measuring financial instruments at fair value.  The degree of judgment utilized in measuring the fair value of financial instruments generally correlates to the level of the observable pricing scenario.  Financial instruments with readily available actively quoted prices or for which fair value can be measured from actively quoted prices generally will have a higher degree of observable pricing and a lesser degree of judgment utilized in measuring fair value.  Conversely, financial instruments rarely traded or not quoted will generally have little or no observable pricing and a higher degree of judgment utilized in measuring fair value.  Observable pricing scenarios are impacted by a number of factors, including the type of financial instrument, whether the financial instrument is new to the market and not yet established and the characteristics specific to the transaction.
 See Note 3 of the Notes to Consolidated Financial Statements for additional information about the level of pricing transparency associated with financial instruments carried at fair value.
 
Investments
 
The following table reflects the balances for each category of securities at year end:
Available-for-Sale Securities Amortized Cost at December 31,
(In thousands) 2018 2017 2016
Treasuries $
 $
 $
U.S. Government agencies 21,723
 65,994
 69,005
Obligations of states and political subdivisions 79,886
 136,955
 288,543
U.S. Government sponsored entities and agencies collateralized by residential mortgage obligations 239,388
 237,210
 181,785
Private label mortgage and asset backed securities 129,165
 91,033
 1,807
Total Available-for-Sale Securities $470,162
 $531,192
 $541,140

Our investment portfolio consists primarily of U.S. Government sponsored entities and agencies collateralized by residential mortgage backed obligations and obligations of states and political subdivision securities and are classified at the date of acquisition as available-for-sale or held-to-maturity.  As of December 31, 20152018, investment securities with a fair value of $118,400,00079,662,000, or 23.25%17.17% of our investment securities portfolio, were held as collateral for public funds, short and long-term borrowings, treasury, tax, and for other purposes.  Our investment policies are established by the Board of Directors and implemented by our Investment/Asset Liability Committee.  They are designed primarily to provide and maintain liquidity, to enable us to meet our pledging requirements for public money and borrowing arrangements, to generate a favorable return on investments without incurring undue interest rate and credit risk, and to complement our lending activities.
The level of ourOur investment portfolio as a percentage of total assets is generally considered higher than our peers due primarily to aour comparatively low loan-to-deposit ratio.  Our loan-to-deposit ratio at December 31, 20152018 was 53.58%71.64% compared to 55.10%63.18% at December 31, 20142017.  The loan to deposit ratio of our peers was 75.73%82.00% at December 31, 2015.2018.  Peer group information from SNL Financial

S&P Global Market Intelligence data includes bank holding companies in central California with assets from $600 million to $2.5$3.5 billion. The total investment portfolio, including Federal funds sold and interest-earning deposits in other banks, increasedecreased 11.53%20.98% or $60,033,000126,869,000 to $580,544,000477,932,000 at December 31, 20152018, from $520,511,000604,801,000 at December 31, 20142017.  The market value of the portfolio reflected an unrealized gainloss of $7,474,0006,257,000 at December 31, 20152018, compared to an unrealized gain of $8,896,0004,089,000 at December 31, 20142017.
Losses recognized in 2015, 2014,2018, 2017, and 20132016 were incurred in order to reposition the investment securities portfolio based on the current rate environment.  The securities which were sold at a loss were acquired when the rate environment was not as volatile.  The securities which were sold were primarily purchased strategically several years ago to serve a purpose in view of the rate environment in which the securities were purchased.at that time.  The Company is addressing risks in the security portfolio by selling these securities and using proceeds to purchase securities that fit withmeet the Company’s current risk profile.
On January 20, 2016, management sold certain investment securities with a book value of $23.0 million in a routine restructuring of the investment portfolio. Through the proper operation of the Company’s internal control process related to investment securities, management discovered after the transaction settled that five of the 13 securities sold were previously designated as Held to Maturity (HTM). The book value of the HTM securities sold was $8.0 million. The gain realized on the sale of the HTM securities was $648,000. The Company will reclassify the remaining HTM securities as Available for Sale as of January 20, 2016.
We periodically evaluate each investment security for other-than-temporary impairment, relying primarily on industry analyst reports, observation of market conditions and interest rate fluctuations. The portion of the impairment that is

45


attributable to a shortage in the present value of expected future cash flows relative to the amortized cost should be recorded as a current period charge to earnings. The discount rate in this analysis is the original yield expected at time of purchase.
As of December 31, 2015,2018, the Company performed an analysis of the investment portfolio to determine whether any of the investments held in the portfolio had an other-than-temporary impairment (OTTI). Management evaluated all investment securities with an unrealized loss at December 31, 2015,2018, and identified those that had an unrealized loss for at least a consecutive 12 month period, which had an unrealized loss at December 31, 20152018 greater than 10% of the recorded book value on that date, or which had an unrealized loss of more than $10,000.  Management also analyzed any securities that may have been downgraded by credit rating agencies.
For those bondssecurities that met the evaluation criteria, management obtained and reviewed the most recently published national credit ratings for those bonds.securities.  For those bondssecurities that were municipal debt securitiesobligations of states and political subdivisions with an investment grade rating by the rating agencies, management also evaluated the financial condition of the municipality and any applicable municipal bond insurance provider and concluded during March 2016 that noa $136,000 credit related impairment related to one security with a fair value of $2,995,000 and a pre-impairment amortized cost of $3,131,000 existed. The Company recorded an other-than-temporary impairment loss of $136,000 during the twelve months ended December 31, 2016. There were no OTTI losses recorded during the twelve months ended December 31, 2018 or December 31, 2017.  
At December 31, 20152018, the Company had a total of 1736 PLRMBSprivate label mortgage backed securities (PLMBS) with a remaining principal balance of $2,356,000129,165,000 and a net unrealized gainloss of approximately $1,234,0003,016,000NineEight of these PLRMBSPLMBS with a remaining principal balance of $2,094,0001,137,000 had credit ratings below investment grade.  The Company continues to monitor these securities for changes in credit ratings or other indications of credit deterioration. No credit related OTTI charges related to PLRMBSPLMBS were recorded during the yearyears ended December 31, 20152018. or December 31, 2017.
See Note 4 to the audited Consolidated Financial Statements for carrying valuesThe amortized cost, maturities and estimated fair valuesweighted average yield of our investment securities portfolio.at December 31, 2018 are summarized in the following table.
(Dollars in thousands) In one year or less 
After one through five
years
 After five through ten years After ten years Total
Available-for-Sale Securities Amount Yield(1) Amount Yield(1) Amount Yield(1) Amount Yield(1) Amount Yield(1)
Debt securities(1)  
  
  
  
  
  
  
  
  
  
U.S. Government agencies $
 
 $
 
 $5,591
 6.16% $16,132
 5.48% $21,723
 5.65%
Obligations of states and political subdivisions (2) 
 
 2,769
 2.13% 21,831
 4.24% 55,286
 4.56% 79,886
 4.39%
U.S. Government sponsored entities and agencies collateralized by residential mortgage obligations 
 
 136
 5.90% 266
 5.18% 238,987
 3.93% 239,389
 3.94%
Private label residential mortgage and asset backed securities 47
 4.75% 
 % 15
 7.22% 129,102
 3.74% 129,164
 3.74%
  $47
 4.75% $2,905
 2.31% $27,703
 4.63% $439,507
 4.15% $470,162
 4.04%

(1)Expected maturities will differ from contractual maturities because the issuers of the securities may have the right to call or prepay obligations with or without call or prepayment penalties.  Expected maturities will also differ from contractual maturities due to unscheduled principal pay downs.
(2)Not computed on a tax equivalent basis.

Loans
 
Total gross loans increased $25,523,00018,016,000 or 4.46%2.00% to $598,111,000918,695,000 as of December 31, 20152018, compared to $572,588,000900,679,000 as of December 31, 20142017.
 

The following table sets forth information concerning the composition of our loan portfolio as of and for the years ended December 31,2018, 2017, 2016, 2015, 2014, 2013, 2012, and 20112014.
 2015 2014 2013 2012 2011 2018 2017 2016 2015 2014
Loan Type (Dollars in thousands) Amount % of Total Loans Amount % of Total Loans Amount % of Total Loans Amount % of Total Loans Amount % of Total Loans Amount % of Total Loans Amount % of Total Loans Amount % of Total Loans Amount % of Total Loans Amount % of Total Loans
Commercial:  
  
  
  
              
  
  
  
            
Commercial and industrial $102,197
 17.1% $89,007
 15.5% $87,082
 17.0% $77,956
 19.7% $78,089
 18.3% $101,533
 11.1% $100,856
 11.2% $88,652
 11.7% $102,197
 17.1% $89,007
 15.5%
Agricultural land and production 30,472
 5.1% 39,140
 6.8% 31,649
 6.1% 26,599
 6.7% 29,958
 7.0%
Agricultural production 7,998
 0.9% 14,956
 1.7% 25,509
 3.4% 30,472
 5.1% 39,140
 6.8%
Total commercial 132,669
 22.2% 128,147
 22.3% 118,731
 23.1% 104,555
 26.4% 108,047
 25.3% 109,531
 12.0% 115,812
 12.9% 114,161
 15.1% 132,669
 22.2% 128,147
 22.3%
Real estate:  
  
  
  
              
  
  
  
            
Owner occupied 168,910
 28.2% 176,804
 30.9% 156,781
 30.6% 114,444
 28.9% 113,183
 26.4% 183,169
 19.9% 204,452
 22.7% 191,665
 25.3% 168,910
 28.2% 176,804
 30.9%
Real estate-construction and other land loans 38,685
 6.5% 38,923
 6.8% 42,329
 8.3% 33,199
 8.4% 33,047
 7.7% 101,606
 11.1% 96,460
 10.7% 69,200
 9.1% 38,685
 6.5% 38,923
 6.8%
Commercial real estate 117,244
 19.6% 106,788
 18.7% 86,117
 16.8% 53,797
 13.6% 62,523
 14.6% 305,118
 33.2% 269,254
 29.9% 184,225
 24.3% 117,244
 19.6% 106,788
 18.7%
Agricultural real estate 74,867
 12.5% 57,501
 10.0% 44,164
 8.6% 28,400
 7.2% 42,596
 9.9% 76,884
 8.4% 76,081
 8.4% 86,761
 11.5% 74,867
 12.5% 57,501
 10.0%
Other real estate 10,520
 1.8% 6,611
 1.2% 4,548
 0.9% 8,098
 2.0% 7,892
 1.8% 32,799
 3.6% 31,220
 3.5% 18,945
 2.7% 10,520
 1.8% 6,611
 1.2%
Total real estate 410,226
 68.6% 386,627
 67.6% 333,939
 65.2% 237,938
 60.1% 259,241
 60.4% 699,576
 76.2% 677,467
 75.2% 550,796
 72.9% 410,226
 68.6% 386,627
 67.6%
Consumer:  
  
  
  
              
  
  
  
            
Equity loans and lines of credit 42,296
 7.1% 47,575
 8.3% 48,594
 9.5% 42,932
 10.9% 51,106
 12.0% 69,958
 7.6% 76,404
 8.5% 64,494
 8.5% 42,296
 7.1% 47,575
 8.3%
Consumer and installment 12,503
 2.1% 10,093
 1.8% 11,252
 2.2% 10,346
 2.6% 9,765
 2.3% 38,038
 4.2% 29,637
 3.4% 25,910
 3.5% 12,503
 2.1% 10,093
 1.8%
Total consumer 54,799
 9.2% 57,668
 10.1% 59,846
 11.7% 53,278
 13.5% 60,871
 14.3% 107,996
 11.8% 106,041
 11.9% 90,404
 12.0% 54,799
 9.2% 57,668
 10.1%
Deferred loan fees, net 417
  
 146
  
 (159)   (453)   (764)   1,592
  
 1,359
  
 1,267
   417
   146
  
Total gross loans(1) 598,111
 100.0% 572,588
 100.0% 512,357
 100.0% 395,318
 100.0% 427,395
 100.0% 918,695
 100.0% 900,679
 100.0% 756,628
 100.0% 598,111
 100.0% 572,588
 100.0%
Allowance for credit losses (9,610)  
 (8,308)  
 (9,208)   (10,133)   (11,396)   (9,104)  
 (8,778)  
 (9,326)   (9,610)   (8,308)  
Total loans(1) $588,501
  
 $564,280
  
 $503,149
   $385,185
   $415,999
   $909,591
  
 $891,901
  
 $747,302
   $588,501
   $564,280
  
                    
(1) Includes nonaccrual loans of: $2,740
   $2,875
   $2,180
   $2,413
   $14,052
  

At December 31, 20152018, loans acquired in the FLB, SVB and VCB acquisitionacquisitions had a balance of $62,395,000,$189,719,000, of which $1,617,000$5,875,000 were commercial loans, $51,576,000$158,025,000 were real estate loans, and $9,202,000$25,819,000 were consumer loans. Atloans, and at December 31, 20142017, the acquired loans acquired in the VCB acquisition had a balance of $77,882,000,$243,712,000, of which $3,590,000$12,554,000 were commercial loans, $62,792,000$197,004,000 were real estate loans, and $11,500,000$34,154,000 were consumer loans.
At December 31, 20152018, in management’s judgment, a concentration of loans existed in commercial loans and real-estate-related loans, representing approximately 97.9%95.8% of total loans of which 22.2%12% were commercial and 75.7%83.8% were real-estate-related.  This level of concentration is consistent with 98.2%96.6% at December 31, 20142017.  Although we believe the loans

46


within this concentration have no more than the normal risk of collectability, a substantial further decline in the performance of the economy in general or a further decline in real estate values in our primary market areas, in particular, could have an adverse impact on collectability, increase the level of real estate-related nonperforming loans, or have other adverse effects which alone or in the aggregate could have a material adverse effect on our business, financial condition, results of operations and cash flows.  The Company was not involved in any sub-prime mortgage lending activities atduring the years ended December 31, 20152018 and 20142017.
We believe that our commercial real estate loan underwriting policies and practices result in prudent extensions of credit, but recognize that our lending activities result in relatively high reported commercial real estate lending levels.  Commercial real estate loans include certain loans which represent low to moderate risk and certain loans with higher risks.
The Board of Directors review and approve concentration limits and exceptions to limitations of concentration are reported to the Board of Directors at least quarterly.
 
Loan Maturities
The following table presents information concerning loan maturities and sensitivity to changes in interest rates of the indicated categories of our loan portfolio, as well as loans in those categories maturing after one year that have fixed or floating interest rates at December 31, 2018.


(In thousands) (net of deferred costs) One Year or
Less
 After One
Through Five
Years
 After Five
Years
 Total
Loan Maturities:        
Commercial and agricultural $58,040
 $25,372
 $26,119
 $109,531
Real estate construction and other land loans 89,665
 9,687
 3,130
 102,482
Other real estate 29,220
 117,222
 450,652
 597,094
Consumer and installment 9,730
 13,724
 84,542
 107,996
  $186,655
 $166,005
 $564,443
 $917,103
Sensitivity to Changes in Interest Rates:  
  
  
  
Loans with fixed interest rates $78,692
 $93,650
 $80,448
 $252,790
Loans with floating interest rates (1) 107,962
 72,355
 483,996
 664,313
  $186,654
 $166,005
 $564,444
 $917,103
         
(1) Includes floating rate loans which are currently at their floor rate in accordance with their respective loan agreement $3,424
 $12,659
 $357,319
 $373,402

Nonperforming Assets

Nonperforming assets consist of nonperforming loans, other real estate owned (OREO), and repossessed assets. Nonperforming loans are those loans which have (i) been placed on nonaccrual status; (ii) been classified as doubtful under our asset classification system; or (iii) become contractually past due 90 days or more that are still accruingwith respect to principal or interest loansand have not been restructured or otherwise placed on nonaccrual status, and foreclosed propertystatus. A loan is classified as Other Real Estate Owned (OREO).nonaccrual when 1) it is maintained on a cash basis because of deterioration in the financial condition of the borrower; 2) payment in full of principal or interest under the original contractual terms is not expected; or 3) principal or interest has been in default for a period of 90 days or more unless the loan is both well secured and in the process of collection. We measure all loans placed on nonaccrual status for impairment based on the fair value of the underlying collateral or the net present value of the expected cash flows.
Our consolidated financial statements are prepared on the accrual basis of accounting, including the recognition of interest income on loans.  Interest income from nonaccrual loans is recorded only if collection of principal in full is not in doubt and when cash payments, if any, are received.
Loans are placed on nonaccrual status and any accrued but unpaid interest income is reversed and charged against income when the payment of interest or principal is 90 days or more past due.  Loans in the nonaccrual category are treated as nonaccrual loans even though we may ultimately recover all or a portion of the interest due.  These loans return to accrual status when the loan becomes contractually current, future collectability of amounts due is reasonably assured, and a minimum of six months of satisfactory principal repayment performance has occurred.  See Note 5 of the Company’s audited Consolidated Financial Statements in Item 8 of this Annual Report.
At December 31, 20152018, total nonperforming assets totaled $2,413,0002,740,000, or 0.19%0.18% of total assets, compared to $14,052,0002,945,000, or 1.18%0.18% of total assets at December 31, 20142017.  Nonperforming assets totaled 0.30% of gross loans as of December 31, 2018 and 0.33% of gross loans as of December 31, 2017. Total nonperforming assets at December 31, 20152018, included nonaccrual loans totaling $2,413,0002,740,000, no OREO, and no repossessed assets. Nonperforming assets at December 31, 20142017 consisted of $14,052,0002,875,000 in nonaccrual loans, no OREO, and no$70,000 in repossessed assets. At December 31, 20152018, we had four loansone loan considered a troubled debt restructuringsrestructuring (“TDRs”TDR”) totaling $1,337,00050,000 which areis included in nonaccrual loans compared to three TDRsone TDR totaling $1,826,000$59,000 at December 31, 20142017. We have no outstanding commitments to lend additional funds to any of these borrowers. See Note 5 of the Company’s audited Consolidated Financial Statements in Item 8 of this Annual Report concerning our recorded investment in loans for which impairment has been recognized. 
A summary of nonaccrual, restructured, and past due loans at December 31, 2018, 2017, 2016, 2015, and 2014 is set forth below.  The Company had no loans past due more than 90 days and still accruing interest at December 31, 20152018 and 20142017.  Management is not aware of any potential problem loans, which were current and accruing at December 31, 20152018, where serious doubt exists as to the ability of the borrower to comply with the present repayment terms.  Management can give no assurance that nonaccrual and other nonperforming loans will not increase in the future.

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Composition of Nonaccrual, Past Due and Restructured Loans
 
(As of December 31, dollars in thousands) 2015 2014 2013 2012 2011
(As of December 31, Dollars in thousands) 2018 2017 2016 2015 2014
Nonaccrual Loans:  
  
        
  
      
Commercial and industrial $
 $7,265
 $335
 $
 $267
 $298
 $356
 $447
 $
 $7,265
Owner occupied 324
 1,363
 1,777
 213
 353
Owner occupied real estate 215
 
 87
 324
 1,363
Real estate construction and other land loans 1,439
 1,397
 
 
 
Agricultural real estate 
 360
 
 
 
 
 
 
 
 360
Commercial real estate 567
 1,468
 158
 
 2,434
 418
 976
 1,082
 567
 1,468
Equity loans and line of credit 172
 1,751
 721
 237
 705
 320
 87
 526
 172
 1,751
Consumer and installment 13
 19
 
 
 74
 
 
 18
 13
 19
Restructured loans (non-accruing):  
  
        
  
      
Commercial and industrial 29
 
 1,192
 
 
 
 
 
 29
 
Owner occupied 23
 
 384
 1,362
 1,019
 
 
 20
 23
 
Real estate construction and other land loans 
 547
 1,450
 6,288
 6,823
 
 
 
 
 547
Commercial real estate 
 
 
 
 1,110
Equity loans and line of credit 1,285
 1,279
 1,565
 1,595
 1,649
 50
 59
 
 1,285
 1,279
Consumer and Installment 
 
 4
 
 
Total nonaccrual 2,413
 14,052
 7,586
 9,695
 14,434
 2,740
 2,875
 2,180
 2,413
 14,052
Accruing loans past due 90 days or more 
 
 
 
 
 
 
 
 
 
Total nonperforming loans $2,413
 $14,052
 $7,586
 $9,695
 $14,434
 $2,740
 $2,875
 $2,180
 $2,413
 $14,052
                    
Interest foregone $267
 $210
 $245
 $340
 $716
Nonperforming loans to total loans 0.40% 2.45% 1.48% 2.45% 3.38% 0.30% 0.32% 0.29% 0.40% 2.45%
Accruing loans past due 90 days or more $
 $
 $
 $
 $
Accruing troubled debt restructurings $3,170
 $3,491
 $3,089
 $4,774
 $4,774
Ratio of nonperforming loans to allowance for credit losses 25.11% 169.14% 82.38% 95.68% 126.66% 30.10% 32.75% 23.38% 25.11% 169.14%
Loans considered to be impaired $6,699
 $18,826
 $13,357
 $17,105
 $23,644
 $5,909
 $6,366
 $5,269
 $6,699
 $18,826
Related allowance for credit losses on impaired loans $164
 $612
 $1,007
 $510
 $4,368
 $90
 $36
 $307
 $164
 $612
 
As of December 31, 2018 and 2017, we had impaired loans totaling $5,909,000 and $6,366,000, respectively.  We measure our impaired loans by using the fair value of the collateral if the loan is collateral dependent and the present value of the expected future cash flows discounted at the loan’s original contractual interest rate if the loan is not collateral dependent.  AsImpaired loans are identified from internal credit review reports, past due reports, overdraft listings, and third party reports of December 31, 2015examination.  Borrowers experiencing problems such as operating losses, marginal working capital, inadequate cash flow or business interruptions which jeopardize collection of the loan are also reviewed for possible impairment classification.  A loan is considered impaired when, based on current information and 2014, we hadevents, it is probable that the Company will be unable to collect all amounts due, including principal and interest, according to the contractual terms of the original agreement.  Factors considered by management in determining impairment include payment status, 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 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, and the amount of the shortfall in relation to the principal and interest owed. Loans determined to be impaired loans totaling $6,699,000 and $18,826,000, respectively.are individually evaluated for impairment.  When a loan is impaired, the Company measures impairment based on the present value of expected future cash flows discounted at the loan’s effective interest rate, except that as a practical expedient, it may measure impairment based on a loan’s observable market price, or the fair value of the collateral if the loan is collateral dependent.  A loan is collateral dependent if the repayment of the loan is expected to be provided solely by the underlying collateral.  For collateral dependent loans secured by real estate, we obtain external appraisals which are updated at least annually to determine the fair value of the collateral, and we record an immediate charge off for the difference between the book value of the loan and the appraised value less selling costs value of the collateral.  We perform quarterly internal reviews on substandard loans. 

We place loans on nonaccrual status and classify them as impaired when it becomes probable that we will not receive interest and principal under the original contractual terms, or when loans are delinquent 90 days or more, unless the loan is both well secured and in the process of collection.  Management maintains certain loans that have been brought current by the borrower (less than 30 days delinquent) on nonaccrual status until such time as management has determined that the loans are likely to remain current in future periods.  Foregone interest on nonaccrual loans totaled $340,000$267,000 for the year ended December 31, 20152018 of which $104,000$4,000 was attributable to troubled debt restructurings. Foregone interest on nonaccrual loans totaled $716,000$210,000 and $661,000$245,000 for the years ended December 31, 20142017 and 20132016, respectively of which $139,000$17,000 and $279,000$2,000 was attributable to troubled debt restructurings, respectively.


48


The following table provides a reconciliation of the change in non-accrual loans for the year ended December 31, 20152018.
(Dollars in thousands) Balances December 31, 2014 Additions to Nonaccrual Loans Net Pay Downs Transfer to Foreclosed Collateral - OREO Returns to Accrual Status Charge Offs Balances December 31, 2015
Non-accrual loans:              
Commercial and industrial $7,209
 $190
 $(6,620) $
 $
 $(779) $
Real estate 2,831
 720
 (2,660) 
 
 
 891
Real estate construction and land development 
 53
 (53) 
 
 
 
Agricultural real estate 360
 
 (360) 
 
 
 
Equity loans and lines of credit 1,751
 152
 (1,364) (227) (111) (29) 172
Consumer 19
 3
 (6) 
 
 (3) 13
Restructured loans (non-accruing):             
Commercial and industrial 56
 
 (27) 
 
 
 29
Real estate 
 25
 (2) ��
 
 
 23
Real estate construction and land development 547
 
 (547) 
 
 
 
Equity loans and lines of credit 1,279
 41
 (35) 
 
 
 1,285
Total non-accrual $14,052
 $1,184
 $(11,674) $(227) $(111) $(811) $2,413

The following table provides a summary of the annual change in the OREO balance:
  Years Ended December 31,
(Dollars in thousands) 2015 2014
Balance, beginning of year $
 $190
Additions 227
 235
1st lien assumed upon foreclosure 121
 
Dispositions (359) (488)
Write-downs 
 
Net gain on disposition 11
 63
Balance, end of year $
 $
(In thousands) Balances December 31, 2017 Additions to Nonaccrual Loans Net Pay Downs Transfer to Foreclosed Collateral Returns to Accrual Status Charge Offs Balances December 31, 2018
Non-accrual loans:              
Commercial and industrial $356
 $40
 $(98) $
 $
 $
 $298
Real estate 976
 1,379
 (1,252) 
 (470) 
 633
Real estate construction and other land loans 1,397
 42
 
 
 
 
 1,439
Equity loans and lines of credit 87
 283
 (42) 
 (8) 
 320
Consumer 
 12
 
 
 
 (12) 
Restructured loans (non-accruing):             
Equity loans and lines of credit 59
 
 (9) 
 
 
 50
Total non-accrual $2,875
 $1,756
 $(1,401) $
 $(478) $(12) $2,740

OREO represents real property taken either through foreclosure or through a deed in lieu thereof from the borrower. OREO is carried at the lesser of cost or fair market value less selling costs. As of December 31, 20152018 and December 31, 2017, the Bank had no OREO properties. In 2015, the Bank foreclosed on one property collateralized by real estate. Proceeds from OREO sales totaled $359,000 during 2015. The Company realized $11,000held no repossessed assets at December 31, 2018 compared to $70,000 at December 31, 2017, which is included in net gains fromother assets on the sale of all properties.consolidated balance sheets.
As of December 31, 20142016 the Bank had no OREO properties. In 2014, the BankThe carrying vale of foreclosed on one property collateralized by real estate. Proceeds from OREO sales totaled $488,000 during 2014. The Company realized $63,000 in net gains from the sale of all properties.assets was $362,000 at December 31, 2016.

Allowance for Credit Losses

We have established a methodology for the determination ofdetermining the adequacy of the allowance for credit losses made up of general and specific allocations.  The methodology is set forth in a formal policy and takes into consideration the need for an overall allowance for credit losses as well as specific allowances that are tied to individual loans.  The allowance for credit losses is an estimate of probable incurred credit losses in the Company’s loan portfolio. The allowance consists of two primary components, specific reserves related to impaired loans and general reserves for probable incurred losses related to loans that are not impaired.

49


For all portfolio segments, the determination of the general reserve for loans that are not impaired is based on estimates made by management including, but not limited to, consideration of historical losses by portfolio segment (and in certain cases peer loss data) over the most recent 20 quarters, and qualitative factors including economic trends in the Company’s service areas, industry experience and trends, geographic concentrations, estimated collateral values, the Company’s underwriting policies, the character of the loan portfolio, and probable losses incurred in the portfolio taken as a whole. Management has determined that the most recent 20 quarters was an appropriate look backlook-back period based on several factors including the current global economic uncertainty and various national and local economic indicators, and a time period sufficient to capture enough data due to the size of the portfolio to produce statistically accurate historical loss calculations. We believe this period is an appropriate look backlook-back period.
In originating loans, we recognize that losses will be experienced and that the risk of loss will vary with, among other things, the type of loan being made, the creditworthiness of the borrower over the term of the loan, general economic conditions and, in the case of a secured loan, the quality of the collateral securing the loan.  The allowance is increased by provisions charged against earnings and recoveries, and reduced by net loan charge offs.  Loans are charged off when they are deemed to be uncollectible, or partially charged off when portions of a loan are deemed to be uncollectible.  Recoveries are generally recorded only when cash payments are received.
The allowance for credit losses is maintained to cover probable incurred credit losses in the loan portfolio.  The responsibility for the review of our assets and the determination of the adequacy lies with management and our AuditAudit/

Compliance Committee.  They delegate the authority to the Senior Risk Manager and the Chief Credit Officer (CCO) to determine the loss reserve ratio for each type of asset and to review, at least quarterly, the adequacy of the allowance based on an evaluation of the portfolio, past experience, prevailing market conditions, amount of government guarantees, concentration in loan types and other relevant factors.
The allowance for credit losses is an estimate of the probable incurred credit losses in our loan and lease portfolio.  The allowance is based on principles of accounting: (1) ASC 450-20 which requires losses to be accrued for on loans when they are probable of occurring and can be reasonably estimated and (2) ASC 310-10 which requires that losses be accrued based on the differences between the value of collateral, present value of future cash flows or values that are observable in the secondary market and the loan balance.
Management adheres to an internal asset review system and loss allowance methodology designed to provide for timely recognition of problem assets and adequate valuation allowances to cover probable incurred losses.  The Bank’s asset monitoring process includes the use of asset classifications to segregate the assets, largely loans and real estate, into various risk categories.  The Bank uses the various asset classifications as a means of measuring risk and determining the adequacy of valuation allowances by using a nine-grade system to classify assets.  In general, all credit facilities exceeding 90 days of delinquency require classification and are placed on nonaccrual.
The following table sets forth information regarding oursummarizes the Company’s loan loss experience, as well as provisions and recoveries (charge-offs) to the allowance for credit losses at the dates and certain pertinent ratios for the periods indicated:
  Years Ended December 31,
(Dollars in thousands) 2015 2014
Balance, beginning of year $8,308
 $9,208
Provision charged to operations 600
 7,985
Losses charged to allowance (961) (9,834)
Recoveries 1,663
 949
Balance, end of year $9,610
 $8,308
Allowance for credit losses to total loans 1.61% 1.45%
(Dollars in thousands) 2018 2017 2016 2015 2014
Loans outstanding at December 31, $917,103
 $899,320
 $755,361
 $597,694
 $572,442
Average loans outstanding during the year $912,128
 $793,343
 $646,573
 $586,762
 $539,529
Allowance for credit losses:    
      
Balance at beginning of year $8,778
 $9,326
 $9,610
 $8,308
 $9,208
Deduct loans charged off:          
Commercial and industrial (94) (197) (621) (802) (7,423)
Agricultural production 
 (10) 
 
 (1,722)
Owner occupied 
 (22) 
 
 (183)
Commercial real estate 
 
 
 
 
Consumer loans (116) (235) (262) (159) (506)
Total loans charged off (210) (464) (883) (961) (9,834)
Add recoveries of loans previously charged off:    
  
  
  
Commercial and industrial 207
 850
 3,656
 954
 171
Agricultural production 
 10
 1,631
 90
 
Owner occupied 21
 49
 
 
 150
Real estate construction and other land loans 
 
 702
 32
 364
Commercial real estate 81
 17
 283
 
 
Consumer loans 177
 140
 177
 587
 264
Total recoveries 486
 1,066
 6,449
 1,663
 949
Net recoveries (charge offs) 276
 602
 5,566
 702
 (8,885)
(Reversal) Provision charged to credit losses 50
 (1,150) (5,850) 600
 7,985
Balance at end of year $9,104
 $8,778

$9,326

$9,610

$8,308
Allowance for credit losses as a percentage of outstanding loan balance 0.99% 0.98% 1.23% 1.61% 1.45 %
Net recoveries (charge offs) to average loans outstanding 0.03% 0.08% 0.86% 0.12% (1.65)%

Managing credits identified through the risk evaluation methodology includes developing a business strategy with the customer to mitigate our losses.  Our management continues to monitor these credits with a view to identifying as early as possible when, and to what extent, additional provisions may be necessary. 
The allowance for credit losses is reviewed at least quarterly by the Bank’s and our Board of Directors’ Audit/Compliance Committee.  Reserves are allocated to loan portfolio segments using percentages which are based on both historical risk elements such as delinquencies and losses and predictive risk elements such as economic, competitive and environmental factors.  We have adopted the specific reserve approach to allocate reserves to each impaired asset for the purpose of estimating potential loss exposure.  Although the allowance for credit losses is allocated to various portfolio

categories, it is general in nature and available for the loan portfolio in its entirety.  Additions may be required based on the results of independent loan portfolio examinations, regulatory agency examinations, or our own internal review process.  Additions are also required when, in management’s judgment, the reserve does not properly reflect the potential loss exposure.

The allocation of the allowance for credit losses is set forth below:
  2018 2017 2016 2015 2014
Loan Type 
(Dollars in thousands)
 Amount Percent
of Loans
in Each
Category
to Total
Loans
 Amount Percent
of Loans
in Each
Category
to Total
Loans
 Amount Percent
of Loans
in Each
Category
to Total
Loans
 Amount Percent
of Loans
in Each
Category
to Total
Loans
 Amount Percent
of Loans
in Each
Category
to Total
Loans
Commercial:                    
Commercial and industrial $1,604
 11.1% $1,784
 11.2% $1,884
 11.7% $3,143
 17.1% $2,753
 15.5%
Agricultural production 67
 0.9% 287
 1.7% 296
 3.4% 419
 5.1% 377
 6.8%
Real estate:                    
Owner occupied 1,131
 19.9% 1,252
 22.7% 1,408
 25.3% 1,556
 28.2% 1,380
 30.9%
Real estate construction and other land loans 1,271
 11.1% 1,004
 10.7% 698
 9.1% 694
 6.5% 837
 6.8%
Commercial real estate 3,017
 33.2% 1,958
 29.9% 1,969
 24.3% 1,686
 19.6% 1,201
 18.7%
Agricultural real estate 947
 8.4% 1,441
 8.4% 1,969
 11.5% 1,149
 12.5% 564
 10%
Other real estate 173
 3.6% 140
 3.5% 156
 2.7% 119
 1.8% 76
 1.2%
Consumer:                    
Equity loans and lines of credit 419
 7.6% 464
 8.5% 483
 8.5% 500
 7.1% 811
 8.3%
Consumer and installment 407
 4.2% 361
 3.4% 369
 3.5% 234
 2.1% 267
 1.8%
Unallocated reserves 68
   87
   94
   110
   42
  
Total allowance for credit losses $9,104
 100% $8,778
 100.0% $9,326
 100% $9,610
 100% $8,308
 100%

Loans are charged to the allowance for credit losses when the loans are deemed uncollectible.  It is the policy of management to make additions to the allowance so that it remains adequate to cover all probable loan charge offs that exist in the portfolio at that time. We assign qualitative and environmental factors (Q factors) to each loan category. Q factors include reserves held for the effects of lending policies, economic trends, and portfolio trends along with other dynamics which may cause additional stress to the portfolio.
As of December 31, 2015,2018, the allowance for credit losses (ALLL) stood at $9,610,000,was $9,104,000, compared to $8,308,000$8,778,000 at December 31, 2014,2017, a net increase of $1,302,000.$326,000.  The increase in the ALLL was due to net recoveries and by a provision for credit losses during the year ended December 31, 20152018, the retention of which was necessitated by management’s observations and assumptions about the existing credit quality of the loan portfolio.  Net recoveries totaled $702,000$276,000 while the provision for credit losses was $600,000.$50,000. The balance of classified loans and loans graded special mention, totaled $31,764,000$28,394,000 and $28,719,000$26,254,000 at December 31, 20152018 and $33,758,000$49,998,000 and $8,663,000$21,908,000 at December 31, 2014.2017.  The balance of undisbursed commitments to extend credit on construction and other loans and letters of credit was $217,166,000312,274,000 as of December 31, 20152018, compared to $214,131,000350,141,000 as of December 31, 20142017. At December 31, 20152018 and 2014,2017, the balance of a contingent allocation for probable loan loss experience on unfunded obligations was $150,000225,000 and $165,000,$326,000, respectively. The contingent allocation for probable loan loss experience on unfunded obligations is calculated by management using an appropriate, systematic, and consistently applied process.  While related to credit losses, this allocation is not a part of ALLL and is considered separately as a liability for accounting and regulatory reporting purposes.  Risks and uncertainties exist in

50


all lending transactions and our management and Directors’ Loan Committee have established reserve levels based on economic uncertainties and other risks that exist as of each reporting period.
The ALLL as a percentage of total loans was 1.61%0.99% at December 31, 2015,2018, and 1.45%0.98% at December 31, 2014.2017. Total loans include FLB, SVB and VCB loans that were recorded at fair value in connection with the acquisitionacquisitions of $62,395,000$189,719,000 at December 31, 20152018 and $77,882,000$243,712,000 at December 31, 2014.2017. Excluding these VCBacquired loans from the calculation, the ALLL to total gross loans was 1.79%1.25% and 1.68%1.34% as of December 31, 20152018 and 2014,2017, respectively, and general reserves associated with non-impaired loans to total non-impaired loans was 1.79%1.25% and 1.62%1.34%, respectively. The loan portfolio acquired in the VCB mergermergers was booked at fair value with no associated allocation in the ALLL.  The size of the fair value discount remains adequate for all non-impaired acquired loans; therefore, there is no associated allocation in the ALLL. While non-performing loans improved substantially during 2015, the liquidation of collateral associated with a single commercial and agricultural relationship that was charged down to its net realizable value during the year ended December 31, 2014, the migration of special mention loans from $8,663,000 to $28,719,000 and changes in qualitative factors during the year ended December 31, 2015 gave rise to the need for additional general loan loss reserves.
The Company’s loan portfolio balances in 20152018 increased from 2017 through organic growth.  The higherManagement believes that the change in the allowance for credit losses to total loans ratioratios is supporteddirectionally consistent with the composition of loans

and the level of nonperforming and classified loans, partially offset by the recent acceleration of growth rates of loans includedgeneral economic conditions experienced in the ALLL as well as the high loss experienced in 2014. During the fourth quarter of 2014,central California communities serviced by the Company recorded a provision for credit losses of approximately $8.4 millionand recent improvements in connection with the partial charge-off of a single commercial and agricultural relationship. The Company is actively working to collect all balances legally owed to the Company. The Company plans to continue to track and identify any expenses, net of recoveries, associated with the collection efforts of this commercial and agricultural relationship, and management of the Company continues to work to minimize any future losses related to this credit. For the year ended December 31, 2015, collection expenses related to this relationship totaled $436,000 as compared to $27,000 in 2014.real estate collateral values.
The determination of the general reserve for loans that are not impaired is based on estimates made by management including, but not limited to, consideration of historical losses (or peer data) by portfolio segment over the most recent 20 quarters, and qualitative factors. Assumptions regarding the collateral value of various under-performing loans may affect the level and allocation of the allowance for credit losses in future periods.  The allowance may also be affected by trends in the amount of charge offs experienced or expected trends within different loan portfolios. However, the total reserve rates on non-impaired loans include qualitative factors which are systematically derived and consistently applied to reflect conservatively estimated losses from loss contingencies at the date of the financial statements. Based on the above considerations and given recent changes in historical charge-off rates included in the ALLL modeling and the changes in other factors, management determined that the ALLL was appropriate as of December 31, 2015.2018.
Non-performing loans totaled $2,413,0002,740,000 as of December 31, 20152018, and $14,052,0002,875,000 as of December 31, 20142017.  The allowance for credit losses as a percentage of nonperforming loans was 398.26%332.26% and 59.12%305.32% as of December 31, 20152018 and December 31, 20142017, respectively.  In addition, management believes that the likelihood of recoveries on previously charged-off loans continues to improve based on the collection efforts of management combined with improvements in the value of real estate which serves as the primary source of collateral for loans. Management believes the allowance at December 31, 20152018 is adequate based upon its ongoing analysis of the loan portfolio, historical loss trends and other factors.  However, no assurance can be given that the Company may not sustain charge-offs which are in excess of the allowance in any given period.

Goodwill and Intangible Assets
 
Business combinations involving the Bank’s acquisition of the equity interests or net assets of another enterprise give rise to goodwill.  Total goodwill at December 31, 20152018 was $29,917,00053,777,000 consisting of $13,466,000, $10,394,000, $6,340,000, $14,643,000 and $8,934,000 representing the excess of the cost of Folsom Lake Bank, Sierra Vista Bank, Visalia Community Bank, Service 1st Bancorp, and Bank of Madera County, respectively, over the net of the amounts assigned to assets acquired and liabilities assumed in the transactions accounted for under the purchase method of accounting.  The value of goodwill is ultimately derived from the Bank’s ability to generate net earnings after the acquisitions and is not deductible for tax purposes.  A significant decline in net earnings could be indicative of a decline in the fair value of goodwill and result in impairment.  For that reason, goodwill is assessed at least annually for impairment.
The Company has selected September 30 as the date to perform the annual impairment test. Management assessed qualitative factors including performance trends and noted no factors indicating goodwill impairment.
Goodwill is also tested for impairment between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of the Company below its carrying amount.  No such events or circumstances arose during the fourth quarter of 20152018, so; therefore, goodwill was not required to be retested.
The intangible assets at December 31, 20152018 represent the estimated fair value of the core deposit relationships acquired in the 20082017 acquisition of Service 1stFolsom Lake Bank of $1,400,000$1,879,000, the 2016 acquisition of Sierra Vista Bank of $508,000 and the 2013 acquisition of Visalia Community Bank of $1,365,000.  Core deposit intangibles are being amortized using the straight-line method over an estimated life of sevenP5Y to

51

Table of Contents

ten years from the date of acquisition.  The carrying value of intangible assets at December 31, 20152018 was $1,024,0002,572,000, net of $1,741,0001,180,000 in accumulated amortization expense.  The carrying value at December 31, 20142017 was $1,344,0003,027,000, net of $1,421,000725,000 in accumulated amortization expense.  Management evaluates the remaining useful lives quarterly to determine whether events or circumstances warrant a revision to the remaining periods of amortization.  Based on the evaluation, no changes to the remaining useful lives was required.  Management performed an annual impairment test on core deposit intangibles as of September 30, 20152018 and determined no impairment was necessary. In addition, management determined that no events had occurred between the annual evaluation date and December 31, 20152018 which would necessitate further analysis. Amortization expense recognized was $320,000455,000 for 20152018, $337,000234,000 for 20142017 and $268,000$149,000 for 20132016.

The following table summarizes the Company’s estimated core deposit intangible amortization expense for each of the next five years (in thousands):
Years Ending December 31, Estimated Core Deposit Intangible Amortization Estimated Core Deposit Intangible Amortization
2016 $137
2017 137
2018 137
2019 137
 $696
2020 137
 696
2021 661
2022 453
2023 66
Thereafter 339
 
Total $1,024
 $2,572

 ��Deposits and Borrowings
 
The Bank’s deposits are insured by the Federal Deposit Insurance Corporation (FDIC) up to applicable legal limits. All of a depositor’s accounts at an insured depository institution, including all non-interest bearing transactions accounts, will be insured by the FDIC up to the standard maximum deposit insurance amount of $250,000 for each deposit insurance ownership category.
Total deposits increasedecreased $77,115,000143,389,000 or 7.42%10.06% to $1,116,267,0001,282,298,000 as of December 31, 20152018, compared to $1,039,152,0001,425,687,000 as of December 31, 20142017.  Interest-bearing deposits increasedecreased $24,744,000109,007,000 or 3.73%12.97% to $687,494,000731,641,000 as of December 31, 20152018, compared to $662,750,000840,648,000 as of December 31, 20142017.  Non-interest bearing deposits increasedecreased $52,371,00034,382,000 or 13.91%5.88% to $428,773,000550,657,000 as of December 31, 20152018, compared to $376,402,000585,039,000 as of December 31, 20142017.  Average non-interest bearing deposits to average total deposits was 36.40%41.48% for the year ended December 31, 20152018 compared to 34.65%38.93% for the same period in 20142017. OurBased on FDIC deposit market share information published as of June 2018, our total market share of deposits in Fresno, Madera, San Joaquin, and Tulare counties was 3.77%3.42% in 20152018 compared to 3.81%3.69% in 20142017 based on FDIC deposit. Our total market share information published as of June in the other counties we operate in (El Dorado, Merced, Placer, Sacramento, and Stanislaus), was less than 1.00% in 2018 and 2017.2015.
The composition of the deposits and average interest rates paid at December 31, 20152018 and December 31, 20142017 is summarized in the table below.
(Dollars in thousands) December 31,
2015
 
% of Total
Deposits
 
Effective
Rate
 December 31,
2014
 
% of Total
Deposits
 
Effective
Rate
 December 31,
2018
 
% of Total
Deposits
 
Effective
Rate
 December 31,
2017
 
% of Total
Deposits
 
Effective
Rate
NOW accounts $227,167
 20.4% 0.10% $209,781
 20.2% 0.11% $252,439
 19.7% 0.16% $296,406
 20.8% 0.12%
MMA accounts 239,241
 21.4% 0.06% 228,268
 22.0% 0.08% 267,820
 20.9% 0.15% 299,638
 21.0% 0.08%
Time deposits 139,703
 12.5% 0.37% 153,320
 14.7% 0.40% 96,817
 7.6% 0.25% 128,070
 9.0% 0.30%
Savings deposits 81,383
 7.3% 0.04% 71,381
 6.9% 0.05% 114,565
 8.9% 0.03% 116,534
 8.2% 0.03%
Total interest-bearing 687,494
 61.6% 0.14% 662,750
 63.8% 0.16% 731,641
 57.1% 0.15% 840,648
 59.0% 0.12%
Non-interest bearing 428,773
 38.4%  
 376,402
 36.2%  
 550,657
 42.9%  
 585,039
 41.0%  
Total deposits $1,116,267
 100.0%  
 $1,039,152
 100.0%  
 $1,282,298
 100.0%  
 $1,425,687
 100.0%  

ThereWe have no known foreign deposits.  The following table sets forth the average amount of and the average rate paid on certain deposit categories which were in excess of 10% of average total deposits for the years ended noDecember 31, 2018, 2017, and 2016.
  2018 2017 2016
(Dollars in thousands) Balance Rate Balance Rate Balance Rate
Savings and NOW accounts 383,667
 0.12% 382,071
 0.09% 337,804
 0.09%
Money market accounts $285,568
 0.15% $264,581
 0.08% $249,620
 0.05%
Time certificates of deposit $111,214
 0.25% $137,666
 0.30% $139,656
 0.38%
Non-interest bearing demand $553,305
 
 $499,987
 
 $417,151
 
Total deposits $1,333,754
 0.09% $1,284,305
 0.08% $1,144,231
 0.09%


The following table sets forth the maturity of time certificates of deposit and other time deposits of $100,000 or more at December 31, 2018.
(In thousands) 
Three months or less$21,069
Over 3 through 6 months10,775
Over 6 through 12 months13,813
Over 12 months17,459
 $63,116

As of December 31, 2018, the Company had $10,000,000 short-term Federal Home Loan Bank (FHLB) of San Francisco advances. As of December 31, 2017, the Company had no short-term or long-term FHLB borrowings as of December 31, 2015 and December 31, 2014.borrowings. We maintain a line of credit with the FHLB collateralized by government securities and loans.  Refer to Liquidity section below for further discussion of FHLB advances.
The Company succeededBank had unsecured lines of credit with its correspondent banks which, in the aggregate, amounted to all of the rights and obligations of Service 1st Capital Trust I, a Delaware business trust, in connection with the acquisition of Service 1st as of November 12, 2008.  The Trust was formed on August 17, 2006 for the sole purpose of issuing trust preferred securities fully and unconditionally guaranteed by Service 1st.  Under applicable

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regulatory guidance, the amount of trust preferred securities that is eligible as Tier 1 capital is limited to 25% of the Company’s Tier 1 capital on a pro forma basis.  At $40,000,000 at December 31, 2015, all2018 and 2017, at interest rates which vary with market conditions. As of the trust preferred securities that have been issued qualify as Tier 1 capital.  The trust preferred securities mature on October 7, 2036, are redeemable at the Company’s option beginning after five years,December 31, 2018 and require quarterly distributions by the Trust to the holder of the trust preferred securities at a variable interest rate which will adjust quarterly to equal the three month LIBOR plus 1.60%.
The Trust used the proceeds from the sale of the trust preferred securities to purchase approximately $5,155,000 in aggregate principal amount of Service 1st’s junior subordinated notes (the Notes).  The Notes bear interest at the same variable interest rate during the same quarterly periods as the trust preferred securities.  The Notes are redeemable by2017, the Company on any January 7, April 7, July 7, or October 7 on or after October 7, 2012 or at any time within 90 days following the occurrence of certain events, such as: (i) a change in the regulatory capital treatment of the Notes (ii) in the event the Trust is deemed an investment company or (iii) upon the occurrence of certain adverse tax events.  In each such case, the Company may redeem the Notes for their aggregate principal amount, plus any accrued but unpaid interest.had no overnight borrowings outstanding under these credit facilities.
The Notes may be declared immediately due and payable at the election of the trustee or holders of 25% of the aggregate principal amount of outstanding Notes in the event that the Company defaults in the payment of any interest following the nonpayment of any such interest for 20 or more consecutive quarterly periods.  Holders of the trust preferred securities are entitled to a cumulative cash distribution on the liquidation amount of $1,000 per security.  For each January 7, April 7, July 7 or October 7 of each year, the rate will be adjusted to equal the three month LIBOR plus 1.60%.  As of December 31, 2015, the rate was 1.92%.  Interest expense recognized by the Company for the years ended December 31, 2015, 2014, and 2013 was $99,000, $96,000 and $98,000, respectively.
Capital Resources
 
Capital serves as a source of funds and helps protect depositors and shareholders against potential losses.  Historically, the primary sourcesources of capital for the Company hashave been internally generated capital through retained earnings.earnings and the issuance of common and preferred stock. 
The Company has historically maintained substantial levels of capital.  The assessment of capital adequacy is dependent on several factors including asset quality, earnings trends, liquidity and economic conditions.  Maintenance of adequate capital levels is integral to providing stability to the Company.  The Company needs to maintain substantial levels of regulatory capital to give it maximum flexibility in the changing regulatory environment and to respond to changes in the market and economic conditions.
Our shareholders’ equity was $139,323,000219,738,000 as of December 31, 20152018, compared to $131,045,000209,559,000 as of December 31, 20142017.  The increase in shareholders’ equity is the result of an increase in retained earnings from our net income of $10,964,00021,289,000, the exercise of stock options, including the related tax benefit of $66,000738,000, and the effect of share basedshare-based compensation expense of $238,000482,000, stock issued under employee stock purchase plan of $211,000, offset by common stock cash dividends of $1,979,000 and a decrease in accumulated other comprehensive income (AOCI) of $915,000.$7,233,000, payment of common stock cash dividends of $4,270,000, repurchase and retirement of common stock of $894,000, and cumulative effect of accounting change on equity securities of $144,000.
During 2015,2018, the Bank declared and paid cash dividends to the Company in the amount of $2,260,000$2,850,000 in connection with the cash dividends to the Company’s shareholders approved by the Company’s Board of Directors. The Bank may not pay any dividend that would cause it to be deemed not “well capitalized” under applicable banking laws and regulations. The Company declared and paid a total of $1,979,000 or $0.18 per common share cash dividend to shareholders of record during the year ended December 31, 2015.
During 2014, the Bank declared and paid cash dividends to the Company in the amount of $2,350,000 in connection with the cash dividends to the Company’s shareholders approved by the Company’s Board of Directors. The Bank may not pay any dividend that would cause it to be deemed not “well capitalized” under applicable banking laws and regulations. The Company declared and paid a total of $2,190,000 or $0.20 per common share cash dividend to shareholders of record during the year ended December 31, 2014.
During 2013, the Bank declared and paid cash dividends to the Company of $18,000,000, in connection with the VCB acquisition, the Series C Preferred redemption, and cash dividends to the Company’s shareholders approved by the Company’s Board of Directors. The Company declared and paid a total of $2,048,000$4,270,000 or $0.20$0.31 per common share cash dividend to shareholders of record during the year ended December 31, 2018.
During 2017, the Bank declared and paid cash dividends to the Company in the amount of $3,133,000 in connection with the cash dividends to the Company’s shareholders approved by the Company’s Board of Directors. The Company declared and paid a total of $3,010,000 or $0.24 per common share cash dividend to shareholders of record during the year ended December 31, 2013.2017.
During 2016, the Bank declared and paid cash dividends to the Company in the amount of $13,010,000 in connection with the cash dividends to the Company’s shareholders approved by the Company’s Board of Directors and the cash portion of the SVB transaction. The Company declared and paid a total of $2,715,000 or $0.24 per common share cash dividend to shareholders of record during the year ended December 31, 2016.
The following table sets forth certain financial ratios for the years ended December 31, 2018, 2017, and 2016.
 2018 2017 2016
Net income: 
  
  
To average assets1.35% 0.94% 1.15%
To average shareholders’ equity10.07% 7.69% 9.84%
Dividends declared per share to net income per share20.00% 23.53% 19.20%
Average shareholders’ equity to average assets13.40% 12.23% 11.68%


Management considers capital requirements as part of its strategic planning process.  The strategic plan calls for continuing increases in assets and liabilities, and the capital required may therefore be in excess of retained earnings.  The ability to obtain capital is dependent upon the capital markets as well as our performance.  Management regularly evaluates sources of capital and the timing required to meet its strategic objectives. The assessment of capital adequacy is dependent on several factors including asset quality, earnings trends, liquidity and economic conditions.  Maintenance of adequate capital levels is integral to providing stability to the Company.  The Company needs to maintain substantial levels of regulatory capital to give it maximum flexibility in the changing regulatory environment and to respond to changes in the market and economic conditions including acquisition opportunities.
The Board of Governors, the FDIC and other federal banking agencies have issued risk-based capital adequacy guidelines intended to provide a measure of capital adequacy that reflects the degree of risk associated with a banking organization’s operations for both transactions reported on the balance sheet as assets, and transactions, such as letters of

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credit and recourse arrangements, which are reported as off-balance-sheet items. Under these guidelines, nominal dollar amounts of assets and credit equivalent amounts of off-balance-sheet items are multiplied by one of several risk adjustment percentages, which range from 0% for assets with low credit risk, such as certain U.S. government securities, to 100% for assets with relatively higher credit risk, such as business loans.
A banking organization’s risk-based capital ratios are obtained by dividing its qualifying capital by its total risk-adjusted assets and off-balance-sheet items.  The regulators measure risk-adjusted assets and off-balance-sheet items against both total qualifying capital (the sum of Tier 1 capital and limited amounts of Tier 2 capital) and Tier 1 capital.  Tier 1 capital consists of common stock, retained earnings, noncumulative perpetual preferred stock and minority interests in certain subsidiaries, less most other intangible assets.  Tier 2 capital may consist of a limited amount of the allowance for possible loan and lease losses and certain other instruments with some characteristics of equity.  The inclusion of elements of Tier 2 capital is subject to certain other requirements and limitations of the federal banking agencies. 
In December 2010, the internal Basel Committee on Bank Supervision (“Basel Committee”) released its final framework for strengthening international capital and liquidity regulation, now officially identified as “Basel III,” which, when fully  phased-in,  would require bank holding companies and their bank subsidiaries to maintain substantially more capital than currently required, with a greater emphasis on common equity. The Basel III capital framework, among other things: 
introduces as a new capital measure, Common Equity Tier 1 (“CET1”), more commonly known in the United States as “Tier 1 Common,” and defines CET1 narrowly by requiring that most adjustments to regulatory capital measures be made to CET1 and not to the other components of capital, and expands the scope of the adjustments as compared to existing regulations;
when fully phased in, requires banks to maintain: (i) a newly adopted international standard, a minimum ratio of CET1 to risk-weighted assets of at least 4.5%, plus a 2.5% “capital conservation buffer” (which is added to the 4.5% CET1 ratio as that buffer is phased in, effectively resulting in a minimum ratio of CET1 to risk-weighted assets of at least 7%); (ii) an additional “SIFI buffer” for those large institutions deemed to be systemically important, ranging from 1.0% to 2.5%, and up to 3.5% under certain conditions; (iii) a minimum ratio of Tier 1 capital to risk-weighted assets of at least 6.0%, plus the capital conservation buffer (which is added to the 6.0% Tier 1 capital ratio as that buffer is phased in, effectively resulting in a minimum Tier 1 capital ratio of 8.5% upon full implementation); (iv) a minimum ratio of Total (that is, Tier 1 plus Tier 2) capital to risk-weighted assets of at least 8.0%, plus the capital conservation buffer (which is added to the 8.0% total capital ratio as that buffer is phased in, effectively resulting in a minimum total capital ratio of 10.5% upon full implementation); and (v) as a newly adopted international standard, a minimum leverage ratio of 3%, calculated as the ratio of Tier 1 capital to balance sheet exposures plus certain off-balance sheet exposures (as the average for each quarter of the month-end ratios for the quarter); and
an additional “countercyclical capital buffer,” generally to be imposed when national regulators determine that excess aggregate credit growth becomes associated with a buildup of systemic risk, that would be a CET1 add-on to the capital conservation buffer in the range of 0% to 2.5% when fully implemented.

In July 2013, the U.S. banking agencies approved the U.S. version of Basel III. The federal bank regulatory agencies adopted version of Basel III revises the risk-based and leverage capital requirements and the method for calculating risk-weighted assets to make them consistent with Basel III and to meet the requirements of the Dodd-Frank Act.  Although many of the rules contained in these final regulations are applicable only to large, internationally active banks, some of them apply on a phased in basis to all banking organizations, including the Company and the Bank.  Among other things, the rules establish a new minimum common equity Tier 1 ratio (4.5% of risk-weighted assets), a higher minimum Tier 1 risk-based capital requirement (6.0% of risk-weighted assets) and a minimum non-risk-based leverage ratio (4.00% eliminating a 3.00% exception for higher rated banks). The new additional capital conservation buffer of 2.5% of risk weighted assets over each of the required capital ratios will be phased in from 2016 to 2019 and must be met to avoid limitations on the ability of the Company and the Bank to pay dividends, repurchase shares or pay discretionary bonuses.  The additional “countercyclical capital buffer” is also required for larger and more complex institutions.  The new rules assign higher risk weighting to exposures that are more than 90 days past due or are on nonaccrual status and certain commercial real estate facilities that finance the acquisition, development or construction of real property.  The rules also change the permitted composition of Tier 1 capital to exclude trust preferred securities, mortgage servicing rights and certain deferred tax assets and include unrealized gains and losses on available for sale debt and equity securities (with a one-time opt out option for Standardized Banks (banks with less than $250 billion of total consolidated assets and less than $10 billion of foreign exposures) which the Company and the Bank intend to exercise).  The rules, including alternative requirements for smaller community financial institutions like the Company and the Bank, would be phased in through 2019.  The implementation of the Basel III framework commenced on January 1, 2015. 
A bank that does not achieve and maintain the required capital levels may be issued a capital directive by the FDIC to ensure the maintenance of required capital levels.  As discussed above, the Company and the Bank are required to maintain certain levels of capital. 

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The following table presents the Company’s and the Bank’s Regulatoryregulatory capital ratios as of December 31, 2018 and December 31, 2017.
(Dollars in thousands) Actual Ratio Minimum regulatory requirement (1)
December 31, 2018 Amount Ratio Amount Ratio
Tier 1 Leverage Ratio $171,149
 11.48% N/A N/A
Common Equity Tier 1 Ratio (CET 1) $166,149
 15.13% N/A N/A
Tier 1 Risk-Based Capital Ratio $171,149
 15.59% N/A N/A
Total Risk-Based Capital Ratio $180,478
 16.44% N/A N/A
         
December 31, 2017        
Tier 1 Leverage Ratio $153,676
 9.71% $63,338
 4.00%
Common Equity Tier 1 Ratio (CET 1) $149,186
 12.90% $52,081
 5.75%
Tier 1 Risk-Based Capital Ratio $153,676
 13.28% $69,441
 7.25%
Total Risk-Based Capital Ratio $162,780
 14.07% $92,588
 9.25%
(1) The 2017 minimum regulatory requirement threshold includes the capital conservation buffer of 1.250%.

The following table presents the Bank’s regulatory capital ratios as of December 31, 2018 and December 31, 2017
(Dollars in thousands) Actual Ratio Minimum regulatory requirement (1)
December 31, 2018 Amount Ratio Amount Ratio
Tier 1 Leverage Ratio $168,770
 11.32% $59,639
 4.00%
Common Equity Tier 1 Ratio (CET 1) $168,770
 15.38% $49,388
 6.38%
Tier 1 Risk-Based Capital Ratio $168,770
 15.38% $65,850
 7.88%
Total Risk-Based Capital Ratio $178,099
 16.23% $87,800
 9.88%
         
December 31, 2017        
Tier 1 Leverage Ratio $149,779
 9.46% $63,332
 4.00%
Common Equity Tier 1 Ratio (CET 1) $149,779
 12.96% $52,040
 5.75%
Tier 1 Risk-Based Capital Ratio $149,779
 12.96% $69,387
 7.25%
Total Risk-Based Capital Ratio $158,882
 13.74% $92,516
 9.25%
(1) The 2018 and 2017 minimum regulatory requirement threshold includes the capital conservation buffer of 1.250% and 0.625%, respectively. These ratios are not reflected on a fully phased-in basis, which will occur in January 2019.

The Company succeeded to all of the rights and obligations of the Service 1st Capital Trust I, a Delaware business trust, in connection with the acquisition of Service 1st as of November 12, 2008.  The Trust was formed on August 17, 2006 for the sole purpose of issuing trust preferred securities fully and unconditionally guaranteed by Service 1st.  Under applicable regulatory guidance, the amount of trust preferred securities that is eligible as Tier 1 capital is limited to 25% of the Company’s Tier 1 capital on a pro forma basis.  At December 31, 2018, all of the trust preferred securities that have been issued qualify as Tier 1 capital.  The trust preferred securities mature on October 7, 2036, are redeemable at the Company’s option beginning five years after issuance, and require quarterly distributions by the Trust to the holder of the trust preferred securities at a variable interest rate which will adjust quarterly to equal the three month LIBOR plus 1.60%.

The Trust used the proceeds from the sale of the trust preferred securities to purchase approximately $5,155,000 in aggregate principal amount of Service 1st’s junior subordinated notes (the Notes).  The Notes bear interest at the same variable interest rate during the same quarterly periods as the trust preferred securities.  The Notes are redeemable by the Company on any January 7, April 7, July 7, or October 7 on or after October 7, 2012 or at any time within 90 days following the occurrence of certain events, such as: (i) a change in the regulatory capital treatment of the Notes (ii) in the event the Trust is deemed an investment company or (iii) upon the occurrence of certain adverse tax events.  In each such case, the Company may redeem the Notes for their aggregate principal amount, plus any accrued but unpaid interest.
The Notes may be declared immediately due and payable at the election of the trustee or holders of 25% of the aggregate principal amount of outstanding Notes in the event that the Company defaults in the payment of any interest following the nonpayment of any such interest for 20 or more consecutive quarterly periods.  Holders of the trust preferred securities are entitled to a cumulative cash distribution on the liquidation amount of $1,000 per security.  For each January 7, April 7, July 7 or October 7 of each year, the rate will be adjusted to equal the three month LIBOR plus 1.60%.  As of December 31, 2018, the rate was 4.04%.  Interest expense recognized by the Company for the years ended December 31, 20152018, 2017, and 2016 was $199,000, $147,000 and $121,000, respectively.December 31, 2014.
  December 31, 2015 December 31, 2014
(Dollars in thousands) Amount Ratio Amount Ratio
Tier 1 Leverage Ratio  
  
  
  
Central Valley Community Bancorp and Subsidiary $105,825
 8.65% $95,936
 8.36%
Minimum regulatory requirement $48,950
 4.00% $45,894
 4.00%
Central Valley Community Bank $104,878
 8.58% $95,298
 8.31%
Minimum requirement for “Well-Capitalized” institution $61,148
 5.00% $57,341
 5.00%
Minimum regulatory requirement $48,918
 4.00% $45,873
 4.00%
Common Equity Tier 1 Ratio        
Central Valley Community Bancorp and Subsidiary $103,152
 13.44% N/A N/A
Minimum regulatory requirement $34,650
 4.50% N/A N/A
Central Valley Community Bank $104,878
 13.67% N/A N/A
Minimum requirement for “Well-Capitalized” institution $50,017
 6.50% N/A N/A
Minimum regulatory requirement $34,627
 4.50% N/A N/A
Tier 1 Risk-Based Capital Ratio  
  
  
  
Central Valley Community Bancorp and Subsidiary $105,825
 13.79% $95,936
 13.67%
Minimum regulatory requirement $46,200
 6.00% $28,075
 4.00%
Central Valley Community Bank $104,878
 13.67% $95,298
 13.59%
Minimum requirement for “Well-Capitalized” institution $61,560
 8.00% $42,080
 6.00%
Minimum regulatory requirement $46,170
 6.00% $28,053
 4.00%
Total Risk-Based Capital Ratio  
  
  
  
Central Valley Community Bancorp and Subsidiary $115,466
 15.04% $104,447
 14.88%
Minimum regulatory requirement $61,601
 8.00% $56,150
 8.00%
Central Valley Community Bank $114,513
 14.93% $103,809
 14.80%
Minimum requirement for “Well-Capitalized” institution $76,949
 10.00% $70,133
 10.00%
Minimum regulatory requirement $61,560
 8.00% $56,106
 8.00%



LIQUIDITY
 
Liquidity management involves our ability to meet cash flow requirements arising from fluctuations in deposit levels and demands of daily operations, which include funding of securities purchases, providing for customers’ credit needs and ongoing repayment of borrowings.  Our liquidity is actively managed on a daily basis and reviewed periodically by our management and Director’sDirectors’ Asset/Liability Committees.  This process is intended to ensure the maintenance of sufficient funds to meet our needs, including adequate cash flows for off-balance sheet commitments.
Our primary sources of liquidity are derived from financing activities which include the acceptance of customer and, to a lesser extent, broker deposits, Federal funds facilities and advances from the Federal Home Loan Bank of San Francisco (FHLB).  These funding sources are augmented by payments of principal and interest on loans, the routine maturities and pay downs of securities from the securities portfolio, the stability of our core deposits and the ability to sell investment securities.  As of December 31, 20152018, the Company had unpledged securities totaling $394,296,000391,497,000 available as a secondary source of liquidity and total cash and cash equivalents of $94,617,00031,727,000.  Cash and cash equivalents at December 31, 20152018 increasedecreased 22.36%68.39% compared to December 31, 20142017.  Primary uses of funds include withdrawal of and interest payments on deposits, origination and purchases of loans, purchases of investment securities, and payment of operating expenses. Due to the negative impact of the slow economic recovery, we have been cautiously managing our asset quality.  Consequently, expanding our loan portfolio or finding adequate investments to utilize some of our excess liquidity has been difficult in the current economic environment.
As a means of augmentingTo augment our liquidity, we have established Federal funds lines with various correspondent banks.  At December 31, 20152018, our available borrowing capacity includes approximately $40,000,000 in Federal funds lines with our

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correspondent banks and $308,356,000$286,934,000 in unused FHLB advances.  At December 31, 20152018, we were not aware of any information that was reasonably likely to have a material effect on our liquidity position. 
The following table reflects the Company’s credit lines, balances outstanding, and pledged collateral at December 31, 20152018 and 20142017:
Credit Lines (In thousands) December 31, 2015 December 31, 2014 December 31, 2018 December 31, 2017
Unsecured Credit Lines (interest rate varies with market):  
  
  
  
Credit limit $40,000
 $40,000
 $40,000
 $40,000
Balance outstanding $
 $
 $
 $
Federal Home Loan Bank (interest rate at prevailing interest rate):  
  
  
  
Credit limit $308,356
 $290,851
 286,934
 234,689
Balance outstanding $
 $
 $10,000
 $
Collateral pledged $215,223
 $183,036
 $448,083
 $357,393
Fair value of collateral $215,307
 $183,171
 $399,027
 $316,160
Federal Reserve Bank (interest rate at prevailing discount interest rate):  
  
  
  
Credit limit $2,328
 $2,441
 $4,364
 $6,740
Balance outstanding $
 $
 $
 $
Collateral pledged $2,578
 $2,729
 $4,498
 $7,431
Fair value of collateral $2,598
 $2,757
 $4,475
 $7,437
 

The liquidity of our parent company, Central Valley Community Bancorp, is primarily dependent on the payment of cash dividends by its subsidiary, Central Valley Community Bank, subject to limitations imposed by state and federal regulations.

OFF-BALANCE SHEET ITEMS
 
In the normal course of business, the Company is a party to financial instruments with off-balance sheet risk.  These financial instruments include commitments to extend credit and standby letters of credit.  Such financial instruments are recorded in the financial statements when they are funded or related fees are incurred or received.  The balance of commitments to extend credit on undisbursed construction and other loans and letters of credit was $217,166,000312,274,000 as of December 31, 20152018 compared to $214,131,000350,141,000 as of December 31, 20142017.  For a more detailed discussion of these financial instruments, see Note 1312 to the audited Consolidated Financial Statements in this Annual Report.

Contractual Obligations

The contractual obligations of the Company, summarized by type of obligation and contractual maturity, atDecember 31, 2018, are as follows:
(In thousands)Less Than One Year One to Three Years Three to Five Years After Five Years Total
Deposits$1,257,349
 $21,318
 $2,521
 $1,110
 $1,282,298
Subordinated notes
 
 
 5,155
 5,155
Operating leases2,384
 3,883
 3,000
 4,334
 13,601
Total$1,259,733
 $25,201
 $5,521
 $10,599
 $1,301,054

Deposits represent both non-interest bearing and interest bearing deposits. Interest bearing deposits include interest bearing transaction accounts, money market and savings deposits and certificates of deposit. Deposits with indeterminate maturities, such as demand, savings and money market accounts are reflected as obligations due in less than one year.
Subordinated notes issued to a capital trust which was formed solely for the purpose of issuing trust preferred securities. These subordinated notes were acquired as a part of the merger with Service 1st. The aggregate amount indicated above represents the full amount of the contractual obligation. All of these securities are variable rate instruments. The trust preferred securities mature on October 7, 2036, and are redeemable quarterly at the Company’s option.
In the ordinary course of business, the Company is party to various operating leases.  For a more detailed discussionoperating leases, the dollar balances reflected in the table above are categorized by the due date of these financial instruments, see Note 13 to the audited Consolidated Financial Statements in this Annual Report.lease payments. Operating leases represent the total minimum lease payments under non-cancelable operating leases.

CRITICAL ACCOUNTING POLICIES
 
The Securitiespreparation of financial statements in accordance with the accounting principles generally accepted in the United States (“U.S. GAAP”) requires management to make a number of judgments, estimates and Exchange Commission (SEC) has issued disclosure guidance for “criticalassumptions that affect the reported amount of assets, liabilities, income and expense in the financial statements. Various elements of our accounting policies.”  The SEC defines “critical accounting policies” as those that requirepolicies, by their nature, involve the application of management’s most difficult, subjective or complex judgments, often as a resulthighly sensitive and judgmental estimates and assumptions. Some of the needthese policies and estimates relate to make estimates about the effect of matters that are inherently uncertainhighly complex and may changecontain inherent uncertainties. It is possible that, in future periods.some instances, different estimates and assumptions could reasonably have been made and used by management, instead of those we applied, which might have produced different results that could have had a material effect on the financial statements.
OurWe have identified the following accounting policies and estimates that, due to the inherent judgments and assumptions and the potential sensitivity of the financial statements to those judgments and assumptions, are integralcritical to an understanding of our financial statements. We believe that the results reported.  Our significantjudgments, estimates and assumptions used in the preparation of the Company’s financial statements are appropriate. For a further description of our accounting policies, are described in detail insee Note 1 Summary of Significant Accounting Policiesin the audited Consolidated Financial Statements.  Not all of the significant accounting policies presented in Note 1 of the audited Consolidated Financial Statementsfinancial statements included in this Annual Report require management to make difficult, subjective or complex judgments or estimates.Form 10‑K.
 
Use of Estimates
 
The preparation of these financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and judgmentsassumptions that affect the reported amount of assets, liabilities, revenues and expenses.  On an ongoing basis, management evaluates the estimates used.  Estimates are based upon historical experience, current economic conditions and other factors that management considers reasonable under the circumstances.
These estimates result in judgments regarding the carrying valuesamounts of assets and liabilities when these values are not readily available from other sources, as well as assessing and identifying the accounting treatmentsdisclosure of contingencies and commitments.  These estimates and assumptions affect the reported amounts ofcontingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results maycould differ from these estimates under different assumptions.

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Accounting Principles Generally Accepted in the United States of Americathose estimates.
 
Our financial statements are prepared in accordance with accounting principles generally accepted in the United States of America (GAAP).
We follow accounting policies typical to the commercial banking industry and in compliance with various regulation and guidelines as established by the Public Company Accounting Oversight Board (PCAOB), Financial Accounting Standards Board (FASB), the American Institute of Certified Public Accountants (AICPA), and the Bank’s primary federal regulator, the FDIC.  The following is a brief description of our current accounting policies involving significant management judgments.

Allowance for Credit Losses
 
Our most significant management accounting estimate is the appropriate level for the allowance for credit losses.  The allowance for credit losses is an estimate of probable incurred credit losses in the Company’s loan portfolio. Loans are charged‑off against the allowance when management believes the uncollectibility of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance for credit losses. Management’s methodology for estimating the allowance balance consists of several key elements, which include specific allowances on individual impaired loans and the formula driven allowances on pools of loans with similar risks. The adequacyallowance is only an estimate of the inherent loss in the loan portfolio and may not represent actual losses realized over time, either of losses in excess of the allowance or of losses less than the allowance. Our accounting for estimated loan losses is monitoreddiscussed and disclosed primarily in Note 1 and 5 to the consolidated financial statements under the heading “Allowance for Credit Losses” .

Business Combinations
The Company accounts for acquisitions of businesses using the acquisition method of accounting. Under the acquisition method, assets acquired and liabilities assumed are recorded at their estimated fair values at the date of acquisition. This fair value may differ from the cost basis recorded on the acquired institution’s financial statements. Management performs an on-going basisinitial assessment to determine which assets and liabilities must be designated for fair value analysis. Management typically engages experts in the field of valuation to perform the valuation of significant assets and liabilities and, after assessing the resulting fair value computation, will utilize such value in computing the initial purchase accounting adjustments for the acquired assets. It is based on our management’s evaluation of numerous factors.  These factors includepossible that these values could be viewed differently through alternative valuation approaches or if performed by different experts. Management is responsible for determining that the qualityvalues derived by experts are reasonable. Any excess of the current loan portfolio,purchase price over amounts allocated to the trend inacquired assets, including identifiable intangible assets, and liabilities assumed is recorded as goodwill. The fair values of assets acquired and liabilities assumed are subject to adjustment during the loan portfolio’s risk ratings, current economic conditions, loan concentrations, loan growth rates, past-due and nonperforming trends, evaluation of specific loss estimatesfirst twelve months after the acquisition date if additional information becomes available to indicate a more accurate or appropriate value for all significant problem loans, historical charge-off and recovery experience and other pertinent information.an asset or liability. See Note 1 to- under the audited Consolidated Financial Statementsheading “Business Combinations, and Note 7Goodwill and Intangible Assets in the financial statements in this Annual Report for more detail regarding our allowance for credit losses.Form 10‑K.
The calculation of the allowance for credit losses is by nature inexact, as the allowance represents our management’s best estimate of the probable losses inherent in our credit portfolios at the reporting date.  These credit losses will occur in the future, and as such cannot be determined with absolute certainty at the reporting date.

Impairment of Investment Securities
 
Investment securities are impaired when the amortized cost exceeds fair value.  Investment securitiesGoodwill and Other Intangible Assets
Goodwill and intangible assets are evaluated at least annually for impairment on at least a quarterly basis andor more frequently whenif events or circumstances, such as changes in economic or market conditions, warrant such an evaluation to determine whetherindicate that impairment may exist. When required, the goodwill impairment test involves a decline in their valuetwo-step process. The first test for goodwill impairment is other than temporary.  Management utilizes criteria such asdone by comparing the magnitude and duration of the decline and the intent and ability of the Company to retain its investment in the securities for a period of time sufficient to allow for an anticipated recovery inreporting unit’s aggregate fair value in addition to its carrying value. Absent other indicators of impairment, if the reasons underlyingaggregate fair value exceeds the decline, to determine whether the loss incarrying value, is other than temporary.  The term “other than temporary”goodwill is not intended to indicate that the declineconsidered impaired and no additional analysis is permanent, but indicates that the prospect for a near-term recovery of value is not necessarily favorable, or that there is a lack of evidence to support a realizable value equal to or greater thannecessary. If the carrying value of the investment.  Oncereporting unit were to exceed the aggregate fair value, a declinesecond test would be performed to measure the amount of impairment loss, if any. To measure any impairment loss, the implied fair value would be determined in the same manner as if the reporting unit were being acquired in a business combination. If the implied fair value of goodwill is determinedless than the recorded goodwill, an impairment charge would be recorded for the difference.
During 2011, the Financial Accounting Standards Board issued Accounting Standards Update (“ASU”) 2011-08, Intangibles-Goodwill and Other (Topic 350).  Under the ASU, an entity is not required to be other-than-temporary and we do not intend to sellcalculate the security orfair value of a reporting unit unless the entity determines that it is more likely than not that we will not be required to sellits fair value is less than its carrying amount. Thus, before the security before recovery, only the portion of the impairment loss representing credit exposure is recognized as a charge to earnings, with the balance recognized as a charge to other comprehensive income.  If management intends to sell the security or it is more likely than not that we will be required to sell the security before recovering its forecasted cost, the entire impairment loss is recognized as a charge to earnings.
Goodwill
Business combinations involving the Company’s acquisition of the equity interests or net assets of another enterprise or the assumption of net liabilities in an acquisition of branches constituting a business may give rise to goodwill.  Goodwill represents the excess of the cost of an acquired entity over the net of the amounts assigned to assets acquired and liabilities assumed in transactions accounted for under the purchase method of accounting.  The valuefirst step of goodwill is ultimately derived fromimpairment, the Company’s abilityentity has the option to generate net earnings afterfirst assess qualitative factors to determine whether the acquisition.  A decline in net earnings could be indicativeexistence of events or circumstances leads to a decline indetermination that the fair value of goodwill is less than carrying value. The qualitative assessment includes, but is not limited to, macroeconomic and result in impairment.  For that reason, goodwill is assessed for impairment at a reporting unit level at least annually or more often if an event occursState of California economic conditions, industry and market conditions and trends, the Company’s financial performance, market capitalization, stock price, and any Company-specific events relevant to the assessment. If after assessing the totality of events or circumstances, change that would more likely than not reduce the fair value of the Company below its carrying amount.  While the Company believes all assumptions utilized in its assessment of goodwill for impairment are reasonable and appropriate, changes could cause the Company to record impairment in the future.
Accounting for Income Taxes
The Company files its income taxes on a consolidated basis with its subsidiary.  The allocation of income tax expense (benefit) represents each entity’s proportionate share of the consolidated provision for income taxes.
Deferred tax assets and liabilities are recognized for the tax consequences of temporary differences between the reported amounts of assets and liabilities and their tax bases.  Deferred tax assets and liabilities are adjusted for the effects of

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changes in tax laws and rates on the date of enactment.  On the balance sheet, net deferred tax assets are included in accrued interest receivable and other assets.
The determination of the amount of deferred income tax assets which are more likely than not to be realized is primarily dependent on projections of future earnings, which are subject to uncertainty and estimates that may change given economic conditions and other factors.  The realization of deferred income tax assets is assessed and a valuation allowance is recorded if is “more likely than not” that all or a portion of the deferred tax asset will not be realized.  “More likely than not” is defined as greater than a 50% chance.  All available evidence, both positive and negative is considered to determine whether, based on the weight of that evidence, a valuation allowance is needed.
Only tax positions that meet the more-likely-than-not recognition threshold are recognized.  The benefit of a tax position is recognized in the financial statements in the period during which, based on all available evidence, management believesan entity determines it is not more likely than not that the position will be sustained upon examination,fair value of a reporting unit is less than its carrying amount, then performing the two-step process is unnecessary. As of December 31, 2018, based on our qualitative assessment, there were no reporting units where we believed that it was more likely than not that the fair value of a reporting unit was less than its carrying amount, including the resolutiongoodwill. As a result, we had no reporting units where there was a reasonable possibility of appeals or litigation processes, if any.  Tax positions taken are not offset or aggregated with other positions.  Tax positions that meet the more-likely-than-not recognition threshold are measured as the largest amount of tax benefit that is more than 50 percent likely of being realized upon settlement with the applicable taxing authority.  The portionfailing Step 1 of the benefits associated with tax positions taken that exceeds the amount measured as described above is reflected as a liability for unrecognized tax benefitsgoodwill impairment test.
See Note 7“Goodwill and Intangible Assets” in the accompanying balance sheet along with any associated interest and penalties that would be payable to the taxing authorities upon examination.  Interest expense and penalties associated with unrecognized tax benefits are classified as income tax expensefinancial statements in the consolidated statement of income.this Form 10‑K for further discussion.
 
INFLATION
 
The impact of inflation on a financial institution differs significantly from that exerted on other industries primarily because the assets and liabilities of financial institutions consist largely of monetary items.  However, financial institutions are affected by inflation in part through non-interest expenses, such as salaries and occupancy expenses, and to some extent by changes in interest rates.

At December 31, 20152018, we do not believe that inflation will have a material impact on our consolidated financial position or results of operations.  However, if inflation concerns cause short term rates to rise in the near future, we may benefit by immediate repricing of a portion of our loan portfolio.  Refer to Quantitative and Qualitative Disclosures About Market Risk section for further discussion.

ITEM 7A -             QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 
Interest rate risk (IRR) and credit risk constitute the two greatest sources of financial exposure for insured financial institutions that operate like we do.  IRR represents the impact that changes in absolute and relative levels of market interest rates may have upon our net interest income (NII).  Changes in the NII are the result of changes in the net interest spread between interest-earning assets and interest-bearing liabilities (timing risk), the relationship between various rates (basis risk), and changes in the shape of the yield curve.
We realize income principally from the differential or spread between the interest earned on loans, investments, other interest-earning assets and the interest incurred on deposits and borrowings.  The volumes and yields on loans, deposits and borrowings are affected by market interest rates.  As of December 31, 2015, 78.87%2018, 72.44% of our loan portfolio was tied to adjustable-rate indices.  The majority of our adjustable rate loans are tied to prime and reprice within 90 days.  However, in the current low rate environment, severalSeveral of our loans, tied to prime, are at their floors and will not reprice until prime plus the factor is greater than the floor.  The majority of our time deposits have a fixed rate of interest.  As of December 31, 2015, 77.77%2018, 75.36% of our time deposits maturesmature within one year or less. 
Changes in the market level of interest rates directly and immediately affect our interest spread, and therefore profitability.  Sharp and significant changes to market rates can cause the interest spread to shrink or expand significantly in the near term, principally because of the timing differences between the adjustable rate loans and the maturities (and therefore repricing) of the deposits and borrowings.
Our management and Board of Directors’ Asset/Liability Committees (ALCO) are responsible for managing our assets and liabilities in a manner that balances profitability, IRR and various other risks including liquidity.  The ALCO operates under policies and within risk limits prescribed, reviewed, and approved by the Board of Directors.
The ALCO seeks to stabilize our NII by matching rate-sensitive assets and liabilities through maintaining the maturity and repricing of these assets and liabilities at appropriate levels given the interest rate environment.  When the amount of rate-sensitive liabilities exceeds rate-sensitive assets within specified time periods, NII generally will be negatively impacted by an increasing interest rate environment and positively impacted by a decreasing interest rate environment.  Conversely, when the amount of rate-sensitive assets exceeds the amount of rate-sensitive liabilities within specified time periods, net interest income will generally be positively impacted by an increasing interest rate environment and negatively impacted by a decreasing interest rate environment.  In recent years, we have shifted ourOur mix of assets from consistingconsists primarily of loans to a current mix that is approximately half loans and half securities, none of which are held for trading purposes. The value of these securities is subject to interest rate risk, which we must monitor and manage successfully in order to prevent declines in value of these

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assets if interest rates rise in the future. The speed and velocity of the repricing of assets and liabilities will also contribute to the effects on our NII, as will the presence or absence of periodic and lifetime interest rate caps and floors.
Simulation of earnings is the primary tool used to measure the sensitivity of earnings to interest rate changes.  Earnings simulations are produced using a software model that is based on actual cash flows and repricing characteristics for all of our financial instruments and incorporates market-based assumptions regarding the impact of changing interest rates on current volumes of applicable financial instruments.
Interest rate simulations provide us with an estimate of both the dollar amount and percentage change in NII under various rate scenarios.  All assets and liabilities are normally subjected to up to 400 basis point increases and decreases in interest rates in 100 basis point increments.  Under each interest rate scenario, we project our net interest income.  From these results, we can then develop alternatives in dealing with the tolerance thresholds.
The assets and liabilities of a financial institution are primarily monetary in nature. As such they represent obligations to pay or receive fixed and determinable amounts of money that are not affected by future changes in prices. Generally, the impact of inflation on a financial institution is reflected by fluctuations in interest rates, the ability of customers to repay their obligations and upward pressure on operating expenses. Although inflationary pressures are not considered to be of any particular hindrance in the current economic environment, they may have an impact on the company’s future earnings in the event those pressures become more prevalent.
As a financial institution, the Company’s primary component of market risk is interest rate volatility. Fluctuations in interest rates will ultimately impact both the level of interest income and interest expense recorded on a large portion of the Company’s assets and liabilities, and the market value of all interest earning assets and interest bearing liabilities, other than those which possess a short term to maturity. Virtually all of the Company’s interest earning assets and interest bearing liabilities are located at the Bank level. Thus, virtually all of the Company’s interest rate risk exposure lies at the Bank level other than $5.2 million in subordinated debenturesnotes issued by the Company’s subsidiary, Service 1st1st Capital Trust I. As a result, all significant interest rate risk procedures are performed at the Bank level.

The fundamental objective of the Company’s management of its assets and liabilities is to maximize the Company’s economic value while maintaining adequate liquidity and an exposure to interest rate risk deemed by management to be acceptable. Management believes an acceptable degree of exposure to interest rate risk results from the management of assets and liabilities through maturities, pricing and mix to attempt to neutralize the potential impact of changes in market interest rates. The Company’s profitability is dependent to a large extent upon its net interest income, which is the difference between its interest income on interest earning assets, such as loans and investments, and its interest expense on interest bearing liabilities, such as deposits and borrowings. The Company is subject to interest rate risk to the degree that its interest earning assets re-price differently than its interest bearing liabilities. The Company manages its mix of assets and liabilities with the goals of limiting its exposure to interest rate risk, ensuring adequate liquidity, and coordinating its sources and uses of funds.
The Company seeks to control interest rate risk exposure in a manner that will allow for adequate levels of earnings and capital over a range of possible interest rate environments. The Company has adopted formal policies and practices to monitor and manage interest rate risk exposure. Management believes historically it has effectively managed the effect of changes in interest rates on its operating results and believes that it can continue to manage the short-term effects of interest rate changes under various interest rate scenarios.
Management employs asset and liability management software and engages consultants to measure the Company’s exposure to future changes in interest rates. The software measures the expected cash flows and re-pricing of each financial asset/liability separately in measuring the Company’s interest rate sensitivity. Based on the results of the software’s output, management believes the Company’s balance sheet is evenly matched over the short term and slightly asset sensitive over the longer term as of December 31, 2015.2018. This means that the Company would expect (all other things being equal) to experience a limited change in its net interest income if rates rise or fall. The level of potential or expected change indicated by the tables below is considered acceptable by management and is compliant with the Company’s ALCO policies. Management will continue to perform this analysis each quarter.
The hypothetical impacts of sudden interest rate movements applied to the Company’s asset and liability balances are modeled quarterly. The results of these models indicate how much of the Company’s net interest income is “at risk” from various rate changes over a one year horizon. This exercise is valuable in identifying risk exposures. Management believes the results for the Company’s December 31, 20152018 balances indicate that the net interest income at risk over a one year time horizon for a 100 basis points (“bps”), 200 bps, 300 bps, and 400 bps rate increase and a 100 bps decrease is acceptable to management and within policy guidelines at this time. Given the low interest rate environment, 200 bps, 300 bps, and 400 bps decreases are not considered a realistic possibility and are therefore not modeled.
The results in the table below indicate the change in net interest income the Company would expect to see as of December 31, 2015,2018, if interest rates were to change in the amounts set forth:
 

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Sensitivity Analysis of Impact of Rate Changes on Interest Income
Hypothetical Change in Rates (Dollars in thousands) Projected Net Interest Income $  Change from Rates at December 31, 2015 % Change from Rates at December 31, 2015 Projected Net Interest Income $  Change from Rates at December 31, 2018 % Change from Rates at December 31, 2018
Up 400 bps $46,532
 $4,328
 10.25 % $67,200
 $2,300
 3.54 %
Up 300 bps 45,429
 3,225
 7.64 % 66,500
 1,600
 2.47 %
Up 200 bps 44,323
 2,119
 5.02 % 65,500
 600
 0.92 %
Up 100 bps 43,233
 1,029
 2.44 % 65,200
 300
 0.46 %
Unchanged 42,204
 
 
 64,900
 
 
Down 100 bps 40,844
 (1,360) (3.22)% 60,900
 (4,000) (6.16)%

It is important to note that the above table is a summary of several forecasts and actual results may vary from any of the forecasted amounts and such difference may be material and adverse. The forecasts are based on estimates and assumptions made by management, and that may turn out to be different, and may change over time. Factors affecting these estimates and assumptions include, but are not limited to: 1) competitor behavior, 2) economic conditions both locally and nationally, 3) actions taken by the Federal Reserve Board, 4) customer behavior and 5) management’s responses to each of the foregoing. Factors that vary significantly from the assumptions and estimates may have material and adverse effects on the Company’s net interest income; therefore, the results of this analysis should not be relied upon as indicative of actual future results.

The following table shows management’s estimates of how the loan portfolio is segregated between variable-daily, variable other than daily and fixed rate loans, and estimates of re-pricing opportunities for the entire loan portfolio at December 31, 20152018 and 2014:2017:
 December 31, 2015 December 31, 2014 December 31, 2018 December 31, 2017
Rate Type (Dollars in thousands) Balance Percent of Total Balance Percent of Total Balance Percent of Total Balance Percent of Total
Variable rate $471,757
 78.87% $455,735
 79.59% $664,313
 72.44% $634,900
 70.60%
Fixed rate 126,354
 21.13% 116,853
 20.41% 252,790
 27.56% 264,420
 29.40%
Total gross loans $598,111
 100.00% $572,588
 100.00% $917,103
 100.00% $899,320
 100.00%

Approximately 78.87%72.44% of our loan portfolio is tied to adjustable rate indices and 38.67%32.35% of our loan portfolio reprices within 90 days.  As of December 31, 2015,2018, we had 1,4532,041 commercial and real estate loans totaling $348,180,000$546,984,000 with floors ranging from 3.25% to 7.50% and ceilings ranging from 7.00%6.00% to 30.00%.
The following table shows the repricing categories of the Company’s loan portfolio at December 31, 20152018 and 2014:2017:
 December 31, 2015 December 31, 2014 December 31, 2018 December 31, 2017
Repricing (Dollars in thousands) Balance Percent of Total Balance Percent of Total Balance Percent of Total Balance Percent of Total
< 1 Year $250,705
 41.91% $253,221
 44.22% $334,910
 36.52% $318,985
 35.46%
1-3 Years 124,385
 20.80% 115,022
 20.09% 199,004
 21.70% 177,545
 19.74%
3-5 Years 139,417
 23.31% 120,065
 20.97% 261,299
 28.49% 200,471
 22.29%
> 5 Years 83,604
 13.98% 84,280
 14.72% 121,890
 13.29% 202,319
 22.50%
Total gross loans $598,111
 100.00% $572,588
 100.00% $917,103
 100.00% $899,320
 99.99%
Assumptions are inherently uncertain, and, consequently, the model cannot precisely measure net interest income or precisely predict the impact of changes in interest rates on net interest income.  Actual results will differ from simulated results due to timing, magnitude and frequency of interest rate changes, as well as changes in market conditions and management strategies which might moderate the negative consequences of interest rate deviations.

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ITEM 8 -FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
The Shareholders and Board of Directors
Central Valley Community Bancorp and Subsidiary
Fresno, California

The management of Central Valley Community Bancorp is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is defined in Rule 13a-15(f) promulgated under the Securities Exchange Act of 1934 as a process designed by, or under the supervision of our Chief Executive Officer and Chief Financial Officer and effected by the board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of consolidated financial statements for external purposes in accordance with U.S. generally accepted accounting principles and includes those policies and procedures that:

*    Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of our assets:

*    Provide reasonable assurance that transactions are recorded as necessary to permit preparation of consolidated financial statements in accordance with U.S. generally accepted accounting principles, and that our receipts and expenditures are being made only in accordance with authorizations of our management and directors; and

*    Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on the consolidated financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Management assessed the effectiveness of our internal control over financial reporting as of December 31, 2015. In making this assessment, management used the criteria issued in the 2013 Internal Control-Integrated Framework (Framework) established and updated by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). Based on that assessment, the Company’s management believes that, as of December 31, 2015, our internal control over financial reporting is effective based on those criteria.

Crowe Horwath LLP, the independent registered public accounting firm that audited the Company’s consolidated financial statements included in the Annual Report on Form 10-K for the year ended December 31, 2015, has issued an audit report on the effectiveness of the Company’s internal control over financial reporting in accordance with the standards of the Public Company Accounting Oversight Board that appears on the next page.

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
The Shareholders and Board of Directors
Central Valley Community Bancorp and Subsidiary
Fresno, California

 
Opinions on the Financial Statements and Internal Control over Financial Reporting

We have audited the accompanying consolidated balance sheets of Central Valley Community Bancorp and subsidiarySubsidiary (the “Company”) as of December 31, 20152018 and 2014, and2017, the related consolidated statements of income, comprehensive income, changes in shareholders’ equity, and cash flows for each of the three years in the three-year period ended December 31, 2015.2018, and the related notes (collectively referred to as the “financial statements”). We also have audited the Company’s internal control over financial reporting as of December 31, 2015,2018, based on criteria established in the 2013 Internal Control - Integrated FrameworkFramework: (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2018 and 2017, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2018 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2018, based on criteria established in Internal Control - Integrated Framework: (2013) issued by COSO.

Basis for Opinions

The Company’s management is responsible for these financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management'sManagement’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on thesethe Company’s financial statements and an opinion on the Company’s internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) ("PCAOB") and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States).PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.

Our audits of the financial statements included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence supportingregarding the amounts and disclosures in the financial statements, assessingstatements. Our audits also included evaluating the accounting principles used and significant estimates made by management, andas well as evaluating the overall presentation of the financial statement presentation.statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.

Definition and Limitations of Internal Control Over Financial Reporting

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the

company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Central Valley Community Bancorp and subsidiary as of December 31, 2015 and 2014, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2015 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, Central Valley Community Bancorp and subsidiary maintained, in all material respects, effective internal control over financial reporting as of December 31, 2015, based on criteria established in the 2013 Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).


 /s/ Crowe Horwath LLP
We have served as the Company’s auditor since 2011.
  
Sacramento, California 
March 15, 20168, 2019 


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CENTRAL VALLEY COMMUNITY BANCORP AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS 
December 31, 20152018 and 20142017
(In thousands, except share amounts) 2015 2014 2018 2017
ASSETS  
  
  
  
Cash and due from banks $23,339
 $21,316
 $24,954
 $38,286
Interest-earning deposits in other banks 70,988
 55,646
 6,725
 62,080
Federal funds sold 290
 366
 48
 17
Total cash and cash equivalents 94,617
 77,328
 31,727
 100,383
Available-for-sale investment securities (Amortized cost of $470,080 at December 31, 2015 and $423,639 at December 31, 2014) 477,554
 432,535
Held-to-maturity investment securities (Fair value of $35,142 at December 31, 2015 and $35,096 at December 31, 2014) 31,712
 31,964
Loans, less allowance for credit losses of $9,610 at December 31, 2015 and $8,308 at December 31, 2014 588,501
 564,280
Available-for-sale debt securities 463,905
 535,281
Equity securities 7,254
 7,423
Loans, less allowance for credit losses of $9,104 at December 31, 2018 and $8,778 at December 31, 2017 909,591
 891,901
Bank premises and equipment, net 9,292
 9,949
 8,484
 9,398
Bank owned life insurance 20,702
 20,957
 28,502
 27,807
Federal Home Loan Bank stock 4,823
 4,791
 6,843
 6,843
Goodwill 29,917
 29,917
 53,777
 53,777
Core deposit intangibles 1,024
 1,344
 2,572
 3,027
Accrued interest receivable and other assets 18,594
 19,118
 25,181
 25,815
Total assets $1,276,736
 $1,192,183
 $1,537,836
 $1,661,655
LIABILITIES AND SHAREHOLDERS’ EQUITY  
  
  
  
Deposits:  
  
  
  
Non-interest bearing $428,773
 $376,402
 $550,657
 $585,039
Interest bearing 687,494
 662,750
 731,641
 840,648
Total deposits 1,116,267
 1,039,152
 1,282,298
 1,425,687
Short-term borrowings 10,000
 
Junior subordinated deferrable interest debentures 5,155
 5,155
 5,155
 5,155
Accrued interest payable and other liabilities 15,991
 16,831
 20,645
 21,254
Total liabilities 1,137,413
 1,061,138
 1,318,098
 1,452,096
Commitments and contingencies (Note 13) 

 

Commitments and contingencies (Note 12) 

 

Shareholders’ equity:
  
  
  
  
Preferred stock, no par value, $1,000 per share liquidation preference; 10,000,000 shares authorized, none issued and outstanding 
 
Common stock, no par value; 80,000,000 shares authorized; issued and outstanding: 10,996,773 at December 31, 2015 and 10,980,440 at December 31, 2014 54,424
 54,216
Preferred stock, no par value; 10,000,000 shares authorized, none issued and outstanding 
 
Common stock, no par value; 80,000,000 shares authorized; issued and outstanding: 13,754,965 at December 31, 2018 and 13,696,722 at December 31, 2017 103,851
 103,314
Retained earnings 80,437
 71,452
 120,294
 103,419
Accumulated other comprehensive income, net of tax 4,462
 5,377
Accumulated other comprehensive (loss) income, net of tax (4,407) 2,826
Total shareholders’ equity 139,323
 131,045
 219,738
 209,559
Total liabilities and shareholders’ equity $1,276,736
 $1,192,183
 $1,537,836
 $1,661,655
The accompanying notes are an integral part of these consolidated financial statements.

63


CENTRAL VALLEY COMMUNITY BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME 
For the Years Ended December 31, 2015, 2014,2018, 2017, and 20132016
(In thousands, except per share amounts) 2015 2014 2013 2018 2017 2016
Interest income:  
  
  
  
  
  
Interest and fees on loans $30,504
 $29,493
 $26,519
 $49,936
 $43,534
 $34,051
Interest on deposits in other banks 210
 176
 164
 459
 424
 289
Interest and dividends on investment securities:            
Taxable 4,793
 5,538
 2,375
 10,254
 6,526
 5,876
Exempt from Federal income taxes 6,315
 5,832
 5,778
 3,538
 6,892
 6,460
Total interest income 41,822
 41,039
 34,836
 64,187
 57,376
 46,676
Interest expense:  
  
  
  
  
  
Interest on deposits 948
 1,060
 1,270
 1,153
 969
 975
Interest on junior subordinated deferrable interest debentures 99
 96
 98
 199
 147
 121
Other 
 
 17
 132
 21
 
Total interest expense 1,047
 1,156
 1,385
 1,484
 1,137
 1,096
Net interest income before provision for credit losses 40,775
 39,883
 33,451
 62,703
 56,239
 45,580
Provision for credit losses 600
 7,985
 
(Reversal of) Provision for credit losses 50
 (1,150) (5,850)
Net interest income after provision for credit losses 40,175
 31,898
 33,451
 62,653
 57,389
 51,430
Non-interest income:  
  
  
  
  
  
Service charges 3,070
 3,280
 3,156
 2,986
 3,053
 2,849
Appreciation in cash surrender value of bank owned life insurance 596
 614
 495
 695
 621
 558
Interchange fees 1,197
 1,205
 962
 1,462
 1,458
 1,228
Loan placement fees 1,042
 544
 677
 708
 706
 1,083
Gain on disposal of other real estate owned 11
 63
 
Net realized gain on sale of credit card portfolio 462
 
 
Net realized gains on sales and calls of investment securities 1,495
 904
 1,265
 1,314
 2,802
 1,920
Other-than-temporary impairment loss on investment securities 
 
 (136)
Federal Home Loan Bank dividends 580
 327
 177
 590
 443
 630
Other income 1,396
 1,227
 1,099
 2,107
 1,753
 1,459
Total non-interest income 9,387
 8,164
 7,831
 10,324
 10,836
 9,591
Non-interest expenses:  
  
  
  
  
  
Salaries and employee benefits 20,836
 19,721
 17,427
 26,221
 24,738
 21,881
Occupancy and equipment 4,669
 4,835
 4,109
 5,972
 5,186
 4,754
Regulatory assessments 1,059
 762
 696
 619
 652
 642
Data processing expense 1,139
 1,820
 1,383
 1,666
 1,740
 1,707
Professional services 1,475
 1,509
 1,258
ATM/Debit card expenses 548
 624
 527
 739
 750
 633
License & maintenance contracts 520
 488
 472
Information technology 1,113
 818
 531
Directors’ expenses 465
 597
 530
Advertising 608
 589
 476
 758
 638
 576
Professional services 1,504
 1,176
 1,088
Internet banking expenses 709
 520
 397
 732
 705
 678
Acquisition and integration 
 
 976
Acquisition and integration expenses 217
 1,828
 1,782
Amortization of core deposit intangibles 320
 337
 268
 455
 234
 149
Other expense 4,104
 4,466
 3,866
 4,636
 5,011
 3,801
Total non-interest expenses 36,016
 35,338
 31,685
 45,068
 44,406
 38,922
Income before provision for income taxes 13,546
 4,724
 9,597
 27,909
 23,819
 22,099
Provision (benefit) for income taxes 2,582
 (570) 1,347
Provision for income taxes 6,620
 9,793
 6,917
Net income $10,964
 $5,294
 $8,250
 $21,289
 $14,026
 $15,182
Preferred stock dividends and accretion 
 
 350
Net income available to common shareholders $10,964
 $5,294
 $7,900
      
Basic earnings per common share $1.00
 $0.48
 $0.77
 $1.55
 $1.12
 $1.34
Diluted earnings per common share $1.00
 $0.48
 $0.77
 $1.54
 $1.10
 $1.33
Cash dividends per common share $0.18
 $0.20
 $0.20
 $0.31
 $0.24
 $0.24
The accompanying notes are an integral part of these consolidated financial statements.

64


CENTRAL VALLEY COMMUNITY BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

For the Years Ended December 31, 2015, 2014,2018, 2017, and 20132016
(In thousands) 2015 2014 2013
Net income $10,964
 $5,294
 8,250
Other comprehensive income (loss):      
Unrealized gains (losses) on securities:      
Unrealized holding gains (losses) 59
 13,847
 (15,510)
Less: reclassification for net gains included in net income 1,481
 904
 1,265
Amortization of net unrealized gains transferred during the period (78) (21) 
Other comprehensive income (loss), before tax (1,500) 12,922
 (16,775)
Tax (expense) benefit related to items of other comprehensive income 585
 (5,259) 6,903
Total other comprehensive income (loss) (915) 7,663
 (9,872)
Comprehensive income (loss) $10,049
 $12,957
 $(1,622)
(In thousands) 2018 2017 2016
Net income $21,289
 $14,026
 $15,182
Other Comprehensive Income (Loss):      
Unrealized gains (losses) on securities:      
Unrealized holdings (losses) gains arising during the period (9,159) 7,705
 (9,924)
Less: reclassification for net gains included in net income 1,314
 2,802
 1,224
Less: reclassification for other-than-temporary impairment loss included in net income 
 
 (136)
Transfer of investment securities from held-to-maturity to available-for-sale 
 
 2,647
Amortization of net unrealized gains transferred 
 
 (64)
Other comprehensive (loss) income, before tax (10,473) 4,903
 (8,429)
Tax benefit (expense) related to items of other comprehensive income 3,096
 (2,062) 3,451
Total other comprehensive (loss) income (7,377) 2,841
 (4,978)
Comprehensive income $13,912
 $16,867
 $10,204
The accompanying notes are an integral part of these consolidated financial statements.



65


CENTRAL VALLEY COMMUNITY BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
 
For the Years Ended December 31, 2015, 2014,2018, 2017, and 20132016
 Preferred Stock Common Stock   
Accumulated
Other
Comprehensive Income (Loss)
(Net of Taxes)
 Total Shareholders’ Equity Common Stock   
Accumulated
Other
Comprehensive Income (Loss)
(Net of Taxes)
 Total Shareholders’ Equity
 Series C     Retained Earnings      Retained Earnings 
(In thousands, except share amounts) Shares Amount Shares Amount 
Accumulated
Other
Comprehensive Income (Loss)
(Net of Taxes)
 Shares Amount 
Accumulated
Other
Comprehensive Income (Loss)
(Net of Taxes)
Balance, January 1, 2013 7,000
 $7,000
 9,558,746
 $40,583
 $62,496
 $7,586
$117,665
Balance, January 1, 2016 10,996,773
 $54,424
 $80,437
 $4,462
$139,323
Net income 
 
 
 
 8,250
 
 8,250
 
 
 15,182
 
 15,182
Other comprehensive loss 
 
 
 
 
 (9,872) (9,872) 
 
 
 (4,978) (4,978)
Redemption of preferred stock Series C (7,000) (7,000) 
 
 
 
 (7,000)
Cash dividend ($0.20 per common share) 
 
 
 
 (2,048) 
 (2,048)
Restricted stock granted, forfeited and related tax benefit 52,911
 (2) 
 
 (2)
Cash dividend ($0.24 per common share) 
 
 (2,715) 
 (2,715)
Stock issued for acquisition 
 
 1,262,605
 12,494
 
 
 12,494
 1,058,851
 16,678
 
 
 16,678
Stock-based compensation expense 
 
 
 98
 
 
 98
 
 284
 
 
 284
Stock options exercised and related tax benefit 
 
 93,329
 806
 
 
 806
 35,280
 261
 
 
 261
Preferred stock dividends and accretion 
 
 
 
 (350) 
 (350)
Balance, December 31, 2013 
 
 10,914,680
 53,981
 68,348
 (2,286)
120,043
Balance, December 31, 2016 12,143,815
 71,645
 92,904
 (516)
164,033
Net income 
 
 
 
 5,294
 
 5,294
 
 
 14,026
 
 14,026
Other comprehensive income 
 
 
 
 
 7,663
 7,663
 
 
 
 2,841
 2,841
Restricted stock granted, forfeited and related tax benefit 
 
 56,850
 
 
 
 
Reclassification associated with the adoption of ASU 2018-02 
 
 (501) 501
 
Stock issued under employee stock purchase plan 2,441
 45
 
 
 45
Restricted stock granted, (forfeited) and related tax benefit (2,360) 
     
Stock issued for acquisition 1,276,888
 28,405
 
 
 28,405
Stock-based compensation expense 
 
 
 173
 
 
 173
 
 384
 
 
 384
Cash dividend ($0.20 per common share) 
 
 
 
 (2,190) 
 (2,190)
Cash dividend ($0.24 per common share) 
 
 (3,010) 
 (3,010)
Stock options exercised and related tax benefit 
 
 8,910
 62
 
 
 62
 275,938
 2,835
 
 
 2,835
Balance, December 31, 2014 
 
 10,980,440
 54,216
 71,452
 5,377
 131,045
Balance, December 31, 2017 13,696,722
 103,314
 103,419
 2,826
 209,559
Cumulative effect of equity securities gains reclassified 
 
 (144) 144
 
Adjusted Balance, January 1, 2018 13,696,722
 103,314
 103,275
 2,970
 209,559
Net income 
 
 
 
 10,964
 
 10,964
 
 
 21,289
 
 21,289
Other comprehensive loss 
 
 
 
 
 (915) (915) 
 
 
 (7,377) (7,377)
Restricted stock granted, forfeited and related tax benefit 
 
 7,263
 (96) 
 
 (96)
Restricted stock granted, (forfeited) and related tax benefit 20,494
 
 
 
 
Stock issued under employee stock purchase plan 11,581
 211
 
 
 211
Stock-based compensation expense 
 
 
 238
 
 
 238
 
 482
 
 
 482
Cash dividend ($0.18 per common share) 
 
 
 
 (1,979) 
 (1,979)
Cash dividend ($0.31 per common share) 
 
 (4,270) 
 (4,270)
Stock options exercised and related tax benefit 
 
 9,070
 66
 
 
 66
 74,030
 738
 
 
 738
Balance, December 31, 2015 
 $
 10,996,773
 $54,424
 $80,437
 $4,462
 $139,323
Repurchase and retirement of common stock (47,862) (894) 
 
 (894)
Balance, December 31, 2018 13,754,965
 $103,851
 $120,294
 $(4,407) $219,738
 
The accompanying notes are an integral part of these consolidated financial statements.

66


CENTRAL VALLEY COMMUNITY BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended December 31, 2015, 2014, and 2013
CENTRAL VALLEY COMMUNITY BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended December 31, 2018, 2017, and 2016
CENTRAL VALLEY COMMUNITY BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended December 31, 2018, 2017, and 2016
(In thousands) 2015 2014 2013 2018 2017 2016
Cash flows from operating activities:  
  
  
  
  
  
Net income $10,964
 $5,294
 $8,250
 $21,289
 $14,026
 $15,182
Adjustments to reconcile net income to net cash provided by operating activities:      
      
Net decrease in deferred loan fees (270) (305) (294)
Net decrease (increase) in deferred loan costs 233
 (92) (851)
Depreciation 1,392
 1,355
 1,133
 1,703
 1,429
 1,320
Accretion (1,196) (1,015) (852) (898) (766) (1,142)
Amortization 8,024
 7,949
 9,179
 6,457
 8,519
 7,912
Stock-based compensation 238
 173
 98
 482
 384
 284
Excess tax benefit from exercise of stock options (6) (7) (17) 
 
 (30)
Provision for credit losses 600
 7,985
 
Provision for (reversal of) credit losses 50
 (1,150) (5,850)
Other than temporary impairment losses on investment securities 
 
 136
Net realized gains on sales and calls of available-for-sale investment securities (1,481) (904) (1,265) (1,314) (2,802) (1,224)
Net realized gains on calls of held-to-maturity investment securities (14) 
 
Net loss (gain) on sale and disposal of equipment 6
 201
 (1)
Net gain on sale of other real estate owned (11) (63) 
Net realized gains on sales or calls of held-to-maturity investment securities 
 
 (696)
Net loss on sale and disposal of equipment 2
 
 4
Write down of equity investments 42
 
 
Increase in bank owned life insurance, net of expenses (596) (614) (495) (695) (621) (558)
Net gain on sale of credit card portfolio (462) 
 
Net gain on bank owned life insurance (345) 
 
 
 
 (190)
Net decrease (increase) in accrued interest receivable and other assets 2,109
 (3,021) 410
 3,218
 (2,263) (4,711)
Net decrease in prepaid FDIC Assessments 
 
 1,542
Net (decrease) increase in accrued interest payable and other liabilities (963) 537
 (1,805) (599) 1,370
 821
Benefit for deferred income taxes (933) (408) (296) 403
 7,184
 2,592
Net cash provided by operating activities 17,518
 17,157
 15,587
 29,911
 25,218
 12,999
Cash Flows From Investing Activities:  
  
  
  
  
  
Net cash and cash equivalents acquired in acquisition 
 
 40,935
Net cash and cash equivalents acquired in acquisitions 
 26,279
 13,241
Purchases of available-for-sale investment securities (198,851) (146,468) (222,668) (225,970) (226,740) (278,664)
Proceeds from sales or calls of available-for-sale investment securities 93,167
 79,757
 88,146
 246,824
 228,405
 167,163
Proceeds from calls of held-to-maturity investment securities 810
 
 
Proceeds from sales or calls of held-to-maturity investment securities 
 
 9,257
Proceeds from maturity and principal repayment of available-for-sale investment securities 53,593
 52,665
 76,512
 36,495
 44,956
 50,531
Proceeds from sale of credit card portfolio 2,954
 
 
Net increase in loans (24,776) (69,047) (4,393) (20,477) (25,542) (29,930)
Proceeds from sale of other real estate owned 359
 488
 263
Purchases of premises and equipment (741) (1,328) (1,159) (791) (859) (861)
Purchases of bank owned life insurance (325) (900) 
FHLB stock (purchased) redeemed (32) (292) 48
Proceeds from bank owned life insurance 1,365
 
 
 
 
 928
Proceeds from sale of premises and equipment 
 363
 1
 
 
 7
Net cash used in investing activities (75,431) (84,762) (22,315)
Net cash provided by (used in) investing activities 39,035
 46,499
 (68,328)
Cash Flows From Financing Activities:  
  
  
  
  
  
Net increase in demand, interest-bearing and savings deposits 90,732
 50,643
 75,663
Net (decrease) increase in time deposits (13,617) (15,634) 2,841
Net (decrease) increase in demand, interest-bearing and savings deposits (112,134) 45,672
 26,372
Net decrease in time deposits (31,253) (48,044) (25,038)
Proceeds from short-term borrowings from Federal Home Loan Bank 568,500
 
 
Repayments of short-term borrowings to Federal Home Loan Bank 
 
 (4,000) (558,500) (7,000) 
Redemption of preferred stock Series C 
 
 (7,000)
Proceeds of borrowings from other financial institutions 19,705
 
 400
Repayments of borrowings from other financial institutions (19,705) (400) 
Purchase and retirement of common stock (894) 
 
Proceeds from stock issued under employee stock purchase plan 211
 45
 
Proceeds from exercise of stock options 60
 55
 789
 738
 2,835
 231
Excess tax benefit from exercise of stock options 6
 7
 17
 
 
 30
Cash dividend payments on common stock (1,979) (2,190) (2,048) (4,270) (3,010) (2,715)
Cash dividend payments on preferred stock 
 
 (438)
Net cash provided by financing activities 75,202
 32,881
 65,824
Increase (decrease) in cash and cash equivalents 17,289
 (34,724) 59,096
Net cash used in financing activities (137,602) (9,902) (720)
(Decrease) increase in cash and cash equivalents (68,656) 61,815
 (56,049)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 77,328
 112,052
 52,956
 100,383
 38,568
 94,617
CASH AND CASH EQUIVALENTS AT END OF YEAR $94,617
 $77,328
 $112,052
 $31,727
 $100,383
 $38,568
            
      
      

67


CENTRAL VALLEY COMMUNITY BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(continued)
For the Years Ended December 31, 2015, 2014, and 2013
CENTRAL VALLEY COMMUNITY BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(continued)
For the Years Ended December 31, 2018, 2017, and 2016
CENTRAL VALLEY COMMUNITY BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(continued)
For the Years Ended December 31, 2018, 2017, and 2016
(In thousands) 2015 2014 2013 2018 2017 2016
      
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:            
Cash paid during the year for:            
Interest $1,059
 $1,171
 $1,430
 $1,460
 $1,171
 $1,053
Income taxes $1,865
 $1,360
 $1,790
 $2,700
 $4,720
 $5,840
Non-cash investing and financing activities:            
Transfer of securities from available-for-sale to held-to-maturity $
 $31,346
 $
Unrealized gain on transfer of securities from available-for-sale to held-to-maturity $
 $163
 $
Foreclosure of loan collateral and recognition of other real estate owned $227
 $235
 $190
Assumption of debt related to foreclosure of other real estate owned $121
 $
 $
Common stock issued in Visalia Community Bank acquisition $
 $
 $12,494
Transfer of securities from held-to-maturity to available-for-sale $
 $
 $23,131
Unrealized gain on transfer of securities from held-to-maturity to available-for-sale $
 $
 $526
Transfer of loans to other assets $
 $
 $363
Common stock issued in acquisitions $
 $28,405
 $16,678

The accompanying notes are an integral part of these consolidated financial statements.

68


Central Valley Community Bancorp and Subsidiary
Notes to Consolidated Financial Statements

1.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 
General - Central Valley Community Bancorp (the “Company”) was incorporated on February 7, 2000 and subsequently obtained approval from the Board of Governors of the Federal Reserve System to be a bank holding company in connection with its acquisition of Central Valley Community Bank (the “Bank”).  The Company became the sole shareholder of the Bank on November 15, 2000 in a statutory merger, pursuant to which each outstanding share of the Bank’s common stock was exchanged for one share of common stock of the Company.
Service 1st Capital Trust I (the Trust) is a business trust formed by Service 1st for the sole purpose of issuing trust preferred securities.  The Company succeeded to all the rights and obligations of Service 1st in connection with the acquisition of Service 1st.  The Trust is a wholly-owned subsidiary of the Company.
The Bank operates 21 full service offices in Clovis, Exeter, Fresno, Kerman, Lodi, Madera, Merced, Modesto, Oakhurst, Prather,throughout California’s San Joaquin Valley and Greater Sacramento Stockton, Tracy, and Visalia, California.Region.  The Bank’s primary source of revenue is providing loans to customers who are predominately small and middle-market businesses and individuals.
The deposits of the Bank are insured by the Federal Deposit Insurance Corporation (FDIC) up to applicable legal limits. Depositors’ accounts at an insured depository institution, including all non-interest bearing transactions accounts, will be insured by the FDIC up to the standard maximum deposit insurance amount of $250,000 for each deposit insurance ownership category.
The accounting and reporting policies of Central Valley Community Bancorpthe Company and Subsidiarythe Bank conform with accounting principles generally accepted in the United States of America and prevailing practices within the banking industry.
Management has determined that because all of the banking products and services offered by the Company are available in each branch of the Bank, all branches are located within the same economic environment and management does not allocate resources based on the performance of different lending or transaction activities, it is appropriate to aggregate the Bank branches and report them as a single operating segment.  No customer accounts for more than 10 percent of revenues for the Company or the Bank.
 
Principles of Consolidation - The consolidated financial statements include the accounts of the Company and the consolidated accounts of its wholly-owned subsidiary, the Bank. Intercompany transactions and balances are eliminated in consolidation.
For financial reporting purposes, Service 1st1st Capital Trust I, is a wholly-owned subsidiary acquired in the merger of Service 1st Bancorp and formed for the exclusive purpose of issuing trust preferred securities. The Company is not considered the primary beneficiary of this trust (variable interest entity), therefore the trust is not consolidated in the Company’s financial statements, but rather the subordinated debentures are shown as a liability on the Company’s consolidated financial statements.  The Company’s investment in the common stock of the Trust is included in accrued interest receivable and other assets on the consolidated balance sheet. 
 
Use of Estimates - The preparation of these financial statements in accordance with U.S. Generally Accepted Accounting Principlesgenerally accepted accounting principles requires management to make estimates and judgments that affect the reported amount of assets, liabilities, revenues and expenses.  On an ongoing basis, management evaluates the estimates used.  Estimates are based upon historical experience, current economic conditions and other factors that management considers reasonable under the circumstances.
These estimates result in judgments regarding the carrying values of assets and liabilities when these values are not readily available from other sources, as well as assessing and identifying the accounting treatments of contingencies and commitments.  These estimates and assumptions affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results may differ from these estimates under different assumptions.
 
Cash and Cash Equivalents - For the purpose of the statement of cash flows, cash, due from banks with maturities less than 90 days, interest-earning deposits in other banks, and Federal funds sold are considered to be cash equivalents.  Generally, Federal funds are sold and purchased for one-day periods. Net cash flows are reported for customer loan and deposit transactions, interest-bearing deposits in other banks, and Federal funds purchased.

Investment Securities - Investments are classified into the following categories:
 
Available-for-sale securities, reported at fair value, with unrealized gains and losses excluded from earnings and reported, net of taxes, as accumulated other comprehensive income (loss) within shareholders’ equity.
 
Held-to-maturity securities, which management has the positive intent and ability to hold to maturity, reported at amortized cost, adjusted for the accretion of discounts and amortization of premiums.
 

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Management determines the appropriate classification of its investments at the time of purchase and may only change the classification in certain limited circumstances.  All transfers between categories are accounted for at fair value in the period which the transfer occurs. For the year ended December 31, 2015, there were no transfers between categories. During the year ended December 31, 2014 management transferred $31,346,000 of securities from available-for-sale to held-to-maturity.2018, there were no transfers between categories.
Gains or losses on the sale of investment securities are computed on the specific identification method.  Interest earned on investment securities is reported in interest income, net of applicable adjustments for accretion of discounts and amortization of premiums. Premiums and discounts on securities are amortized or accreted on the level yield method without anticipating prepayments, except for mortgage backed securities where prepayments are anticipated.
An investment security is impaired when its carrying value is greater than its fair value.  Investment securities that are impaired are evaluated on at least a quarterly basis and more frequently when economic or market conditions warrant such an evaluation to determine whether such a decline in their fair value is other than temporary.  Management utilizes criteria such as the magnitude and duration of the decline and the intent and ability of the Company to retain its investment in the securities for a period of time sufficient to allow for an anticipated recovery in fair value, in addition to the reasons underlying the decline, to determine whether the loss in value is other than temporary.  The term “other than temporary” is not intended to indicate that the decline is permanent, but indicates that the prospect for a near-term recovery of value is not necessarily favorable, or that there is a lack of evidence to support a realizable value equal to or greater than the carrying value of the investment.  Once a decline in value is determined to be other than temporary, and management does not intend to sell the security or it is more likely than not that the Company will not be required to sell the security before recovery, for debt securities, only the portion of the impairment loss representing credit exposure is recognized as a charge to earnings, with the balance recognized as a charge to other comprehensive income.  If management intends to sell the security or it is more likely than not that the Company will be required to sell the security before recovering its forecasted cost, the entire impairment loss is recognized as a charge to earnings.

Loans - For allAll loans that management has the intent and ability to hold for the foreseeable future or until maturity or payoff are stated at principal balances outstanding net of deferred loan fees and costs, and the allowance for credit losses.  Interest is accrued daily based upon outstanding loan principal balances.  However, for all loans when in the opinion of management, loans are considereda loan becomes impaired and the future collectability of interest and principal is in serious doubt, athe loan is placed on nonaccrual status and the accrual of interest income is suspended.  Any loan delinquent 90 days or more delinquent is automatically placed on nonaccrual status. Any interest accrued but unpaid is charged against income.  Payments received are applied to reduce principal to ensure collection.  Subsequent payments on these loans, or payments received on nonaccrual loans for which the ultimate collectability of principal is not in doubt, are applied first to principal until fully collected and then to interest.
Interest income on mortgage and commercial loans is discontinued at the time the loan is 90 days delinquent unless the loan is well-secured and in process of collection. Consumer and credit card loans are typically charged off no later than 90 days past due. Past due status is based on the contractual terms of the loan. In all cases, loans are placed on nonaccrual or charged-off at an earlier date if collection of principal or interest is considered doubtful. Loans past due 90 days still on accrual are individually evaluated and deemed to be well secured, with no loss potential, and expected to be fully paid or brought current within a reasonable time. A loan is moved to non-accrual status in accordance with the Company’s policy, typically after 90 days of non-payment. A loan placed on non-accrual status may be restored to accrual status when principal and interest are no longer past due and unpaid, or the loan otherwise becomes both well secured and in the process of collection. When a loan is brought current, the Company must also have a reasonable assurance that the obligor has the ability to meet all contractual obligations in the future, that the loan will be repaid within a reasonable period of time, and that a minimum of six months of satisfactory repayment performance has occurred.
Substantially all loan origination fees, commitment fees, direct loan origination costs and purchase premiums and discounts on loans are deferred and recognized as an adjustment of yield, and amortized to interest income over the contractual term of the loan.  The unamortized balance of deferred fees and costs is reported as a component of net loans.

Acquired loans and Leases - Loans and leases acquired through purchase or through a business combination are recorded at their fair value at the acquisition date.  Credit discounts are included in the determination of fair value; therefore, an allowance for loan and lease losses is not recorded at the acquisition date.  Should the Company’s allowance for credit losses methodology indicate that the credit discount associated with acquired, non-purchased credit impaired loans, is no longer sufficient to cover probable losses inherent in those loans, the Company will establish an allowance for those loans through a charge to provision for credit losses.  At the time of an acquisition, we evaluate loans to determine if they are purchase credit impaired loans. Purchased credit impaired loans are those acquired loans with evidence of credit deterioration for which collection of all contractual payments was not considered probable at the date of acquisition. This determination is made by considering past due and/or nonaccrual status, prior designation of a troubled debt restructuring, or other factors that may suggest we will not be able to collect all contractual payments. Purchased credit impaired loans are initially recorded at fair value with the difference between fair value and estimated future cash flows accreted over the expected cash flow period as income only to the extent we can reasonably estimate the timing and amount of future cash flows. In this case, these loans would be classified as accruing. In the event we are unable to reasonably estimate the timing and amount of future cash flows, or if the loan is acquired primarily for the rewards of ownership of the underlying collateral, the loan is classified as non-accrual. An acquired loan previously classified by the seller as a troubled debt restructuring is no longer classified as such at the date of acquisition. Past due status is reported based on contractual payment status.

All loans not otherwise classified as purchase credit impaired are recorded at fair value with the discount to contractual value accreted over the life of the loan.

Allowance for Credit Losses - The allowance for credit losses (the “allowance”) is a valuation allowance for probable incurred credit losses in the Company’s loan portfolio.  The allowance is established through a provision for credit losses which is charged to expense.  Additions to the allowance are expectedmade to maintain the adequacy of the total allowance after credit losses and loan growth.  Credit exposures determined to be uncollectible are charged against the allowance.  Cash received on previously charged off amounts is recorded as a recovery to the allowance.  The overall allowance consists of two primary components, specific reserves related to impaired loans and general reserves for inherent losses related to loans that are not impaired.
For all loan classes, aA loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect all amounts due, including principal and interest, according to the contractual terms of the original agreement. Factors considered by management in determining impairment include payment status, 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

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the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed. Loans determined to be impaired are individually evaluated for impairment.  When a loan is impaired, the Company measures impairment based on the present value of expected future cash flows discounted at the loan’s effective interest rate, except that as a practical expedient, it may measure impairment based on a loan’s observable market price, or the fair value of the collateral if the loan is collateral dependent.  A loan is collateral dependent if the repayment of the loan is expected to be providedcome solely byfrom the sale or operation of underlying collateral.
A restructuring of a debt constitutes a troubled debt restructuring (TDR) if the Company for economic or legal reasons related to the debtor’s financial difficulties grants a concession to the debtor that it would not otherwise consider.  Restructured workout loans typically present an elevated level of credit risk as the borrowers are not able to perform according to the original contractual terms.  Loans that are reported as TDRs are considered impaired and measured for impairment as described above. For TDRs that subsequently default, the Company determines the amount of reserve in accordance with the accounting policy for
When determining the allowance for credit losses.
At December 31, 2013,loan losses on acquired loans, we bifurcate the allowance between legacy loans and acquired loans. Loans remain designated as acquired until either (i) loan is renewed or (ii) loan is substantially modified whereby modification results in a new loan. When determining the allowance on acquired loans, the Company had loans that were acquired in an acquisition, for which there was, at acquisition, evidence of deterioration ofestimates probable incurred credit quality since origination and for which it was probable, at acquisition, that all contractually required payments would not be collected. These purchased credit impaired loans are recorded at the amount paid, such that there is no carryover of the seller’s allowance for loan losses. After acquisition, losses are recognized by an increase inas compared to the Company’s allowance for credit losses. The Company estimatesrecorded investment, with the amount and timingrecorded investment being net of expected cash flows for each loan andany unaccreted discounts from the expected cash flows in excess of amount paid is recorded as interest income over the remaining life of the loan (accretable yield). The excess of the loan’s contractual principal and interest over expected cash flows is not recorded (nonaccretable difference). Over the life of the loan, expected cash flows continue to be estimated. If the present value of expected cash flows is less than the carrying amount, a loss is recorded. If the present value of expected cash flows is greater than the carrying amount, it is recognized as part of future interest income. At December 31, 2014, the Company no longer had any purchased credit impaired loans.acquisition.
For all portfolio segments, theThe determination of the general reserve for loans that are not impaired is based on estimates made by management, including but not limited to, consideration of a simple average of historical losses by portfolio segment (and in certain cases peer loss data) over the most recent 20 quarters, and qualitative factors including economic trends in the Company’s service areas, industry experience and trends, geographic concentrations, estimated collateral values, the Company’s underwriting policies, the character of the loan portfolio, and probable losses inherent in the portfolio taken as a whole.
The Company maintains a separatesegregates the allowance for eachby portfolio segment.  These portfolio segments include commercial, real estate, and consumer loans.  The relative significance of risk considerations vary by portfolio segment. For commercial and real estate loans, the primary risk consideration is a borrower’s ability to generate sufficient cash flows to repay their loan. Secondary considerations include the creditworthiness of guarantors and the valuation of collateral. In addition to the creditworthiness of a borrower, the type and location of real estate collateral is an important risk factor for real estate loans. The primary risk considerations for consumer loans are a borrower’s personal cash flow and liquidity, as well as collateral value. The allowance for credit losses attributable to each portfolio segment, which includes both impaired loans and loans that are not impaired, is combined to determine the Company’s overall allowance, which is included on the consolidated balance sheet.
The Company assigns a risk rating to all loans, and periodically performs detailed reviews of all such loans over a certain threshold to identify credit risks and to assess the overall collectability of the portfolio. The most recent review of risk rating was completed in December 2015. These risk ratings are also subject to examination by independent specialists engaged by the Company, and the Company’s regulators.  During these internal reviews, management monitors and analyzes the financial condition of borrowers and guarantors, trends in the industries in which borrowers operate and the fair values of collateral securing these loans.  These credit quality indicators are used to assign a risk rating to each individual loan.  The risk ratings can be grouped into five major categories, defined as follows:
Pass — A pass loan is a strong credit with no existing or known potential weaknesses deserving of management’s close attention.
Special Mention — A special mention loan has potential weaknesses that deserve management’s close attention.  If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or in the Company’s credit position at some future date.  Special Mention loans are not adversely classified and do not expose the Company to sufficient risk to warrant adverse classification.
Substandard — A substandard loan is not adequately protected by the current sound worth and paying capacity of the borrower or the value of the collateral pledged, if any.  Loans classified as substandard have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt.  Well-defined weaknesses include a project’s lack of marketability, inadequate cash flow or collateral support, failure to complete construction on time, or the project’s failure to fulfill economic expectations.  They are characterized by the distinct possibility that the Company will sustain some loss if the deficiencies are not corrected.
Doubtful — Loans classified doubtful have all the weaknesses inherent in those classified as substandard with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently known facts, conditions

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and values, highly questionable and improbable.  The possibility of loss is extremely high, but because of certain important and reasonably specific pending factors, which may work to the advantage and strengthening of the asset, its classification as an estimated loss is deferred until its more exact status may be determined.  Pending factors include proposed merger, acquisition, or liquidation procedures, capital injection, perfecting liens on additional collateral, and refinancing plans.  Doubtful classification is considered temporary and short term.
Loss — Loans classified as loss are considered uncollectible and charged off immediately.
The general reserve component of the allowance for credit losses also consists of reserve factors that are based on management’s assessment of the following for each portfolio segment: (1) inherent credit risk, (2) historical losses and (3) other qualitative factors including economic trends in the Company’s service areas, industry experience and trends, geographic concentrations, estimated collateral values, the Company’s underwriting policies, the character of the loan portfolio, and probable losses inherent in the portfolio taken as a whole.  Inherent credit risk and qualitative reserve factors are inherently subjective and are driven by the repayment risk associated with each class of loans described below.

Commercial:
Commercial and industrial - Commercial and industrial loans are generally underwritten to existing cash flows of operating businesses.  Debt coverage is provided by business cash flows andAdditionally, economic trends influenced by unemployment rates and other key economic indicators are closely correlated to the credit quality of these loans. Past due receivablespayments may indicate the borrower’s capacity to repay their obligations may be deteriorating.
Agricultural land and production - Loans secured by crop production and livestock are especially vulnerable to two risk factors that are largely outside the control of Company and borrowers: commodity prices and weather conditions.

Real Estate:
Owner OccupiedOwner-occupied commercial real estate - Real estate collateral secured by commercial or professional properties with repayment arising from the owner’s business cash flows.  To meet this classification, the owner’s operation must occupy no less than 50% of the real estate held.  Financial profitability and capacity to meet the cyclical nature of the industry and related real estate market over a significant timeframe is essential.

Real estate construction and other land loans - Land and construction loans generally possess a higher inherent risk of loss than other real estate portfolio segments.  A major risk arises from the necessity to complete projects within specified costs and time lines.  Trends in the construction industry significantly impact the credit quality of these loans, as demand drives construction activity.  In addition, trends in real estate values significantly impact the credit quality of these loans, as property values determine the economic viability of construction projects.
Agricultural real estate - Agricultural loans secured by real estate generally possess a higher inherent risk of loss caused by changes in concentration of permanent plantings, government subsidies, and the value of the U.S. dollar affecting the export of commodities.
CommercialInvestor commercial real estate — Commercial- Investor commercial real estate loans generally possess a higher inherent risk of loss than other real estate portfolio segments, except land and construction loans.  Adverse economic developments or an overbuilt market impact commercial real estate projects and may result in troubled loans.  Trends in vacancy rates of commercial properties impact the credit quality of these loans.  High vacancy rates reduce operating revenues and the ability for properties to produce sufficient cash flows to service debt obligations.
Other real estate - Primarily loans secured by agricultural real estate for development and production of permanent plantings that have not reached maximum yields.  Also real estate loans where agricultural vertical integration exists in packing and shipping of commodities.  Risk is primarily based on the liquidity of the borrower to sustain payment during the development period. In addition, weather conditions and commodity prices within obligor’s existing agricultural production may affect repayment.

Consumer:
Equity loans and lines of credit - The degree of risk in residential real estate lending depends primarily on the loan amount in relation to collateral value, the interest rate and the borrower’s ability to repay in an orderly fashion.  These loans generally possess a lower inherent risk of loss than other real estate portfolio segments.  Economic trends determined by unemployment rates and other key economic indicators are closely correlated to the credit quality of these loans.  Weak economic trends may indicate that the borrowers’ capacity to repay their obligations may be deteriorating.
ConsumerInstallment and installmentother consumer loans - An installment loan portfolio is usually comprised of a large number of small loans scheduled to be amortized over a specific period.  Most installment loans are made directly for consumer purchases, but businesspurchases. Other consumer loans granted for the purchase of heavy equipment or industrial vehicles may also be included. Consumer loans include credit card and other open ended unsecured consumer receivables. Credit card receivables and openloans. Open ended unsecured receivablesloans generally have a higher rate of default than all other portfolio segments and are also impacted by weak economic conditions and trends.  Credit card receivables and openOpen ended unsecured receivablesloans in homogeneous loan portfolio segments are not evaluated for specific impairment.

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Although management believes the allowance to be adequate, ultimate losses may vary from its estimates.  At least quarterly, the Board of Directors reviews the adequacy of the allowance, including consideration of the relative risks in the portfolio, current economic conditions and other factors.  If the Board of Directors and management determine that changes are warranted based on those reviews, the allowance is adjusted.  In addition, the Company’s primary regulators, the FDIC and California Department of Business Oversight, as an integral part of their examination process, review the adequacy of the allowance.  These regulatory agencies may require additions to the allowance based on their judgment about information available at the time of their examinations.

Risk Rating - The Company assigns a risk rating to all loans, and periodically performs detailed reviews of all such loans over a certain threshold to identify credit risks and to assess the overall collectability of the portfolio. The most recent review of risk rating was completed in December 2018. These risk ratings are also subject to examination by independent specialists engaged by the Company, and the Company’s regulators.  During these internal reviews, management monitors and analyzes the financial condition of borrowers and guarantors, trends in the industries in which borrowers operate and the fair values of collateral securing these loans.  These credit quality indicators are used to assign a risk rating to each individual loan.  The risk ratings can be grouped into five major categories, defined as follows:
Pass - A pass loan is a strong credit with no existing or known potential weaknesses deserving of management’s close attention.
Special Mention - A special mention loan has potential weaknesses that deserve management’s close attention.  If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or in the Company’s credit position at some future date.  Special Mention loans are not adversely classified and do not expose the Company to sufficient risk to warrant adverse classification.
Substandard - A substandard loan is not adequately protected by the current sound worth and paying capacity of the borrower or the value of the collateral pledged, if any.  Loans classified as substandard have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt.  Well-defined weaknesses include a project’s lack of marketability, inadequate cash flow or collateral support, failure to complete construction on time, or the project’s failure to fulfill economic expectations.  They are characterized by the distinct possibility that the Company will sustain some loss if the deficiencies are not corrected.
Doubtful - Loans classified doubtful have all the weaknesses inherent in those classified as substandard with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently known facts, conditions and values, highly questionable and improbable.  The possibility of loss is extremely high, but because of certain important and

reasonably specific pending factors, which may work to the advantage and strengthening of the asset, its classification as an estimated loss is deferred until its more exact status may be determined.  Pending factors include proposed merger, acquisition, or liquidation procedures, capital injection, perfecting liens on additional collateral, and refinancing plans.  Doubtful classification is considered temporary and short term.
Loss - Loans classified as loss are considered uncollectible and charged off immediately.
The general reserve component of the allowance for credit losses also consists of reserve factors that are based on management’s assessment of the following for each portfolio segment: (1) inherent credit risk, (2) historical losses and (3) other qualitative factors including economic trends in the Company’s service areas, industry experience and trends, geographic concentrations, estimated collateral values, the Company’s underwriting policies, the character of the loan portfolio, and probable losses inherent in the portfolio taken as a whole.  Inherent credit risk and qualitative reserve factors are inherently subjective and are driven by the repayment risk associated with each class of loans.

Bank Premises and Equipment - Land is carried at cost. Bank premises and equipment are carried at cost less accumulated depreciation.  Depreciation is determined using the straight-line method over the estimated useful lives of the related assets.  The useful lives of Bank premises are estimated to be between twenty and forty years.  The useful lives of improvements to Bank premises, furniture, fixtures and equipment are estimated to be three to ten years. Leasehold improvements are amortized over the life of the asset or the term of the related lease, whichever is shorter.  When assets are sold or otherwise disposed of, the cost and related accumulated depreciation are removed from the accounts, and any resulting gain or loss is recognized in income for the period.  The cost of maintenance and repairs is charged to expense as incurred.
The Bank evaluates premises and equipment for financial impairment as events or changes in circumstances indicate that the carrying amount of such assets may not be fully recoverable.
 
Federal Home Loan Bank (FHLB) Stock - The Bank is a member of the 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. FHLB stock is carried at cost, classified as a restricted security, and periodically evaluated for impairment based on ultimate recovery of par value. Both cash and stock dividends are reported as income.

Investments in Low Income Housing Tax Credit Funds - The Bank has invested in limited partnerships that were formed to develop and operate affordable housing projects for low or moderate income tenants throughout California. Our ownership in each limited partnership is less than two percent. In accordance with ASU No. 2014-01, Investments - Equity Method and JointVentures (Topic 323), we 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.

Other Real Estate Owned - Other real estate owned (OREO) is comprised of property acquired through foreclosure proceedings or acceptance of deeds-in-lieu of foreclosure.  Losses recognized at the time of acquiring property in full or partial satisfaction of debt are charged against the allowance for credit losses.  OREO, when acquired, is initially recorded at fair value less estimated disposition costs, establishing a new cost basis.  Fair value of OREO is generally based on an independent appraisal of the property.  Subsequent to initial measurement, OREO is carried at the lower of the recorded investment or fair value less disposition costs.  If fair value declines subsequent to foreclosure, a valuation allowance is recorded through noninterest expense. Revenues and expenses associated with OREO are reported as a component of noninterest expense when incurred.

Foreclosed Assets - Assets acquired through or instead of loan foreclosure are initially recorded at fair value less costs to sell when acquired, establishing a new cost basis. If fair value declines subsequent to foreclosure, a valuation allowance is recorded through operations. Operating costs after acquisition are expensed. Gains and losses on disposition are included in noninterest expense. The carrying value of foreclosed assets was $0 at December 31, 2018 and $70,000 at December 31, 2017, and is included in other assets on the consolidated balance sheets.
 
Bank Owned 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.

Business Combinations - The Company accounts for acquisitions of businesses using the acquisition method of accounting. Under the acquisition method, assets and liabilities assumed are recorded at their estimated fair values at the date of acquisition.

Management utilizes various valuation techniques included discounted cash flow analyses to determine these fair values. Any excess of the purchase price over amounts allocated to the acquired assets, including identifiable intangible assets, and liabilities assumed is recorded as goodwill.

Goodwill - Business combinations involving the Bank’s acquisition of the equity interests or net assets of another enterprise give rise to goodwill.  Total goodwill at December 31, 20152018 and 20142017 represents the excess of the costpurchase price of Visalia Community Bank, Service 1st Bancorp and Bank of Madera Countyacquired businesses over the net fair value of the amounts assigned toassets, including identified intangible assets, acquired and liabilities assumed in the transactions accounted for under the purchase method of accounting.  The value of goodwill is ultimately derived from the Bank’s ability to generate net earnings after the acquisitions and is not deductible for tax purposes.acquisitions.  A decline in net earnings could be indicative of a decline in the fair value of goodwill and result in impairment.  For that reason, goodwill is assessed at least annually for impairment.
The Company has selected September 30 as the date to perform the annual impairment test. Management assessed qualitative factors including performance trends and noted no factors indicating goodwill impairment. Goodwill is also tested for impairment between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of the Company below its carrying amount.  No such events or circumstances arose during the fourth quarter of 20152018, so goodwill was not required to be retested. Goodwill is the only intangible asset with an indefinite life on our balance sheet.
 
Intangible Assets - The intangible assets at December 31, 20152018 represent the estimated fair value of the core deposit relationships acquired in the acquisition of Service 1st Bank in 2008, and the 2013 acquisition of Visalia Community Bank.business combinations. Core deposit intangibles are being amortized using the straight-line method over an estimated life of seven -five to ten years from the date of acquisition.  Management evaluates the remaining useful lives quarterly to determine whether events or circumstances warrant a revision to the remaining periods of amortization.  Based on the evaluation, no changes to the remaining useful lives was required.  Management performed an annual impairment test on core deposit intangibles as of September 30, 20152018 and determined no impairment was necessary. Core deposit intangibles are also tested for impairment between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value below its carrying amount.  No such events or circumstances arose during the fourth quarter of 20152018, so core deposit intangibles were not required to be retested. 
 

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Loan Commitments and Related Financial Instruments - Financial instruments include off‑balance sheet credit instruments, such as commitments to make loans and commercial letters of credit, issued to meet customer financing needs. The face amount of these items represents the exposure to loss, before considering customer collateral or ability to repay. Such financial instruments are recorded when they are funded.

Income Taxes - The Company files its income taxes on a consolidated basis with its Subsidiary.the Bank.  The allocation of income tax expense represents each entity’s proportionate share of the consolidated provision for income taxes.
Income tax expense represents the total of the current year income tax due or refundable and the change in deferred tax assets and liabilities. Deferred tax assets and liabilities are recognized for the tax consequences of temporary differences between the reported amounts of assets and liabilities and their tax bases.  Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment.  On the balance sheet, net deferred tax assets are included in accrued interest receivable and other assets.
The realization of deferred income tax assets is assessed and a valuation allowance is recorded if it is “more likely than not” that all or a portion of the deferred tax assets will not be realized.  “More likely than not” is defined as greater than a 50% chance.  All available evidence, both positive and negative is considered to determine whether, based on the weight of that evidence, a valuation allowance is needed. 
 
Accounting for Uncertainty in Income Taxes - The Company uses a comprehensive model for recognizing, measuring, presenting and disclosing in the financial statements tax positions taken or expected to be taken on a tax return.  A tax position is recognized as a benefit only if it is more likely than not that the tax position would be sustained in a tax examination, with a tax examination being presumed to occur.  The amount recognized is the largest amount of tax benefit that is greater than 50% likely of being realized on examination.  For tax positions not meeting the more likely than not test, no tax benefit is recorded.
Interest expense and penalties associated with unrecognized tax benefits, if any, are classified as income tax expense in the consolidated statement of income.

Retirement Plans - Employee 401(k) plan expense is the amount of employer matching contributions. Profit sharing plan expense is the amount of employer contributions. Contributions to the profit sharing plan are determined at the discretion of the Board of Directors. Deferred compensation and supplemental retirement plan expense is allocated over years of service.

Earnings Per Common Share - Basic earnings per common share (EPS), which excludes dilution, is computed by dividing income available to common shareholders (net income after deducting dividends, if any, on preferred stock and accretion of discount) 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 or warrants, result in the

issuance of common stock which shares in the earnings of the Company.  All data with respect to computing earnings per share is retroactively adjusted to reflect stock dividends and splits and the treasury stock method is applied to determine the dilutive effect of stock options in computing diluted EPS.
 
Comprehensive Income - Comprehensive income consists of net income and other comprehensive income. Other comprehensive income includes unrealized gains and losses on securities available for sale which are also recognized as separate components of equity.

Loss Contingencies - Loss contingencies, including claims and legal actions arising in the ordinary course of business, are recorded as liabilities when the likelihood of loss is probable and an amount or range of loss can be reasonably estimated. Management does not believe there are such matters that will have a material effect on the financial statements.

Restrictions on Cash:Cash - Cash on hand or on deposit with the Federal Reserve Bank was required to meet regulatory reserve and clearing requirements.

Share-Based Compensation - Compensation cost is recognized for stock options and restricted stock awards issued to employees, based on the fair value of these awards at the date of grant. A Black-Scholes-Merton model is utilized to estimate the fair value of stock options, while the market price of the Company’s common stock at the date of grant is used for restricted stock awards.
Additionally, the compensation expense for the Company’s employee stock ownership plan is based on the market price of the shares as they are committed to be released to participant accounts. Compensation cost is recognized over the required service period, generally defined as the vesting period. For awards with graded vesting, compensation cost is recognized on a straight-line basis over the requisite service period for the entire award.
The cash flows from the tax benefits resulting from tax deductions in excess of the compensation cost recognized for those options (excess tax benefits) are classified as cash flows from financing activity in the statement of cash flows.  Excess tax benefits for the years ended December 31, 2015, 2014, and 2013 were $6,000, $7,000, and $17,000, respectively.


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Dividend Restriction:Restriction - Banking regulations require maintaining certain capital levels and may limit the dividends paid by the Bank to the Company or by the Company to shareholders.

Fair Value of Financial Instruments - Fair values of financial instruments are estimated using relevant market information and other assumptions, as more fully disclosed in Note 3. 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.
Reclassifications - Some items in the prior years’ financial statements were reclassified to conform to the current presentation. Reclassifications had no effect on prior years’ net income or shareholders’ equity.

Recently Issued Accounting Standards:

FASB Accounting Standards Update (ASU) 2015-032014-09 - Interest-ImputationRevenue from Contracts with Customers(Topic 606): Revenue from Contracts with Customers was issued in May 2014. This ASU is the result of Interest (Subtopic 835-30) - Simplifyinga joint project initiated by the PresentationFASB and the International Accounting Standards Board (IASB) to clarify the principles for recognizing revenue, and to develop common revenue standards and disclosure requirements that would: (1) remove inconsistencies and weaknesses in revenue requirements; (2) provide a more robust framework for addressing revenue issues; (3) improve comparability of Debt Issuance Costs: ASU 2015-03 requiresrevenue recognition practices across entities, industries, jurisdictions, and capital markets; (4) provide more useful information to users of financial statements through improved disclosures; and (5) simplify the debt issuance costs relatedpreparation of financial statements by reducing the number of requirements to awhich an entity must refer. The guidance affects any entity that either enters into contracts with customers to transfer goods or services or enters into contracts for the transfer of nonfinancial assets. The core principle is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The guidance provides steps to follow to achieve the core principle. An entity should disclose sufficient information to enable users of financial statements to understand the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. Qualitative and quantitative information is required with regard to contracts with customers, significant judgments and changes in judgments, and assets recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. The recognition and measurement guidance for debt issuance costs is not affected by the amendments into obtain or fulfill a contract. This ASU 2015-03. ASU 2015-03 will beis effective for theannual reporting periods beginning after December 15, 2017, including interim periods therein, with early adoption permitted for reporting periods beginning after December 15, 2016. The Company adopted ASU 2014-09 on January 1, 2016,2018 utilizing the modified retrospective approach. Since the guidance does not apply to revenue associated with financial instruments such as loans and isinvestments, which are accounted for under other provisions of GAAP, there was no impact to interest income, our largest component of income. The Company adopted this ASU effective January 1, 2018 and it did not expected to have a significantmaterial impact on the Company’s consolidated financial statements.position, cash flows or results of operations. No cumulative adjustment was required upon adoption.

FASB Accounting Standards Update (ASU) 2015-16 - Business Combinations (Subtopic 805) - SimplifyingThe Company performed an overall assessment of revenue streams potentially affected by the Accounting for Measurement-Period Adjustments: ASU, 2015-16 requires that adjustmentsincluding certain deposit related fees and interchange fees, to provisional amountsdetermine the potential impact of this guidance on our consolidated financial statements. Approximately 90% of our revenue, including all of our net interest income and a portion of our noninterest income, is out of

scope of the guidance. The contracts that are identified duringin scope of the measurement periodguidance are primarily related to service charges and fees on deposit accounts, debit card fees, ATM processing fees, and other service charges, commissions and fees. We have completed analyzing the individual contracts in scope and determined our revenue recognition practices within the scope of the ASU as described below did not change in any material regard upon adoption of the ASU.

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 business combination be recognized inmonth, representing the reporting period inover which the adjustment amountsCompany satisfies the performance obligation. Overdraft fees are determined. Furthermore, the income statement effects of such adjustments, if any, must be calculated as if the accounting had been completedrecognized at the acquisition date.point in time that the overdraft occurs. Service charges on deposits are withdrawn from the customer’s account balance.

Merchant and Debit Card Fees: The portionCompany earns interchange fees from cardholder transactions conducted through the payment networks. Interchange fees from cardholder transactions represent a percentage of the amount recorded in current-period earnings that would have been recorded in previous reporting periods ifunderlying transaction value and are recognized daily, concurrently with the adjustmenttransaction processing services provided to the provisional amounts had been recognized as of the acquisition date is required to be reported separately on the face of the income statement, or disclosed within the footnotes to the financial statements. Under previous guidance, adjustments to provisional amounts identified during the measurement period are to be recognized retrospectively. ASU 2015-16 is effective for the Company on January 1, 2016 and is not expected to have a significant impact on the Company’s consolidated financial statements.cardholder.

FASB Accounting Standards Update (ASU) 2016-01 - Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities, was issued January 2016. ASU 2016-01 addresses certain aspectsThe main provisions of recognition, measurement presentation,the update are to eliminate the available-for-sale classification of accounting for equity securities and disclosureto adjust the fair value disclosures for financial instruments carried at amortized costs such that the disclosed fair values represent an exit price as opposed to an entry price. The provisions of financial instruments. Most notablythis update will require that equity securities be carried at fair market value on the ASUbalance sheet and any periodic changes in value will be adjustments to the income statementstatement. A practical expedient is provided for equity securities without a readily determinable fair value, such that these securities can be carried at cost less any impairment. ASU No. 2016-01 was effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. The impact of equity investments heldadoption of this ASU by the Company was not material, but did result in a reclassification of an equity investment from securities available-for-sale to equity securities. The Company was required to adopt the ASU provisions on January 1, 2018, and the requirement for those equity securities with readily determinable fair values, the Company elected the modified retrospective transition approach with a cumulative effect adjustment to use the balance sheet. The impact of the adoption of this accounting standard on the Company’s consolidated financial statements will be subject to the price volatility of the equity investments. As a result of the adoption, $144,000 of after-tax unrealized losses on equity securities was reclassified on January 1, 2018, from accumulated other comprehensive income to beginning retained earnings. In addition, the fair value disclosures for financial instruments in Note 3 are computed using an exit price notion when measuringas required by the ASU.

FASB Accounting Standards Update (ASU) 2016-02 - Leases - Overall (Subtopic 845), was issued February 2016. ASU 2016-02 will, among other things, require lessees to recognize a lease liability, which is a lessee's obligation to make lease payments arising from a lease, measured on a discounted basis; and a right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term. ASU 2016-02 does not significantly change lease accounting requirements applicable to lessors; however, certain changes were made to align, where necessary, lessor accounting with the lessee accounting model and ASC Topic 606, “Revenue from Contracts with Customers.” ASU 2016-02 will be effective for us on January 1, 2019 and initially required transition using a modified retrospective approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. In July 2018, the FASB issued ASU 2018-11, “Leases (Topic 842) - Targeted Improvements,” which, among other things, provides an additional transition method that would allow entities to not apply the guidance in ASU 2016-02 in the comparative periods presented in the financial statements and instead recognize a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. In December 2018, the FASB also issued ASU 2018-20, “Leases (Topic 842) - Narrow-Scope Improvements for Lessors,” which provides for certain policy elections and changes lessor accounting for sales and similar taxes and certain lessor costs. As of January 1, 2019, the Company adopted ASU 2016-02 and has recorded a right-of-use asset and lease liability of approximately $10 million on the balance sheet for its operating leases where it is a lessee. We elected to apply certain practical expedients provided under ASU 2016-02 whereby we will not reassess(i) whether any expired or existing contracts are or contain leases, (ii) the lease classification for any expired or existing leases and (iii) initial direct costs for any existing leases. We also do not expect to apply the recognition requirements of ASU 2016-02 to any short-term leases (as defined by related accounting guidance). We expect to account for lease and non-lease components separately because such amounts are readily determinable under our lease contracts and because we expect this election will result in a lower impact on our balance sheet.

FASB Accounting Standards Update (ASU) 2016-13 - Measurement of Credit Losses on Financial Instruments (Subtopic 326): Financial Instruments - Credit Losses, commonly referred to as “CECL,” was issued June 2016. The provisions of the update eliminate the probable initial recognition threshold under current GAAP which requires reserves to be based on an incurred loss

methodology. Under CECL, reserves required for financial assets measured at amortized cost will reflect an organization’s estimate of all expected credit losses over the contractual term of the financial asset and thereby require the use of reasonable and supportable forecasts to estimate future credit losses. Because CECL encompasses all financial assets carried at amortized cost, the requirement that reserves be established based on an organization’s reasonable and supportable estimate of expected credit losses extends to held to maturity (“HTM”) debt securities. Under the provisions of the update, credit losses recognized on available for sale (“AFS”) debt securities will be presented as an allowance as opposed to a write-down. In addition, CECL will modify the accounting for purchased loans, with credit deterioration since origination, so that reserves are established at the date of acquisition for purchased loans. Under current GAAP a purchased loan’s contractual balance is adjusted to fair value through a credit discount and no reserve is recorded on the purchased loan upon acquisition. Since under CECL reserves will be established for purchased loans at the time of acquisition, the accounting for purchased loans is made more comparable to the accounting for originated loans. Finally, increased disclosure requirements under CECL require organizations to present the currently required credit quality disclosures disaggregated by the year of origination or vintage. The FASB expects that the evaluation of underwriting standards and credit quality trends by financial statement users will be enhanced with the additional vintage disclosures. For public business entities that are SEC filers, the amendments of the update will become effective beginning January 1, 2020.

The Company has formed an internal task force that is responsible for oversight of the Company’s implementation strategy for compliance with provisions of the new standard. The Company has also established a project management governance process to manage the implementation across affected disciplines. An external provider specializing in community bank loss driver and CECL reserving model design as well as other related consulting services has been retained, and we have begun to evaluate potential CECL modeling alternatives. As part of this process, the Company has determined potential loan pool segmentation and sub-segmentation under CECL, as well as begun to evaluate the key economic loss drivers for each segment. Further, the Company has begun developing internal controls around the CECL process, data, calculations and implementation. The Company presently plans to generate and evaluate model scenarios under CECL in tandem with its current reserving processes for interim and annual reporting periods in 2019. While the Company is currently unable to reasonably estimate the impact of adopting this new guidance, management expects the impact of adoption will be significantly influenced by the composition and quality of the Company’s loans and investment securities as well as the economic conditions as of the date of adoption. The Company also anticipates significant changes to the processes and procedures for calculating the reserve for credit losses and continues to evaluate the potential impact on our consolidated financial statements.

FASB Accounting Standards Update (ASU) 2017-04 - Intangibles Goodwill and Other (Subtopic 350): Simplifying the Test for Goodwill Impairment, was issued January 2017. The provisions of the update eliminate the existing second step of the goodwill impairment test which provides for the allocation of reporting unit fair value among existing assets and liabilities, with the net leftover amount representing the implied fair value of goodwill. In replacement of the existing goodwill impairment rule, the update will provide that impairment should be recognized as the excess of any of the reporting unit’s goodwill over the fair value of financial instruments for disclosure purposes. The Company will be required to adoptthe reporting unit. Under the provisions of this update, the amount of the impairment is limited to the carrying value of the reporting unit’s goodwill. For public business entities that are SEC filers, the amendments of the update will become effective in fiscal years beginning after December 15, 2019 with earlier adoption permitted. The Company adopted ASU 2016-012017-04 effective during the first quarter of 2019 and it did not have a material impact on the Company’s financial position, results of operations or cash flows.

FASB Accounting Standards Update (ASU) 2017-08 - Receivables - Nonrefundable Fees and Other Costs (Subtopic 310-20): Premium Amortization on Purchased Callable Debt Securities, was issued March 2017. The provisions of the update require premiums recognized upon the purchase of callable debt securities to be amortized to the earliest call date in order to avoid losses recognized upon call. For public business entities that are SEC filers, the amendments of the update will become effective in fiscal years beginning after December 15, 2018. The Company adopted this ASU effective January 1, 2019 and it did not have a material impact on the Company’s financial position, results of operations or cash flows.

FASB Accounting Standards Update (ASU) 2017-09 - Compensation - Stock Compensation (Subtopic 718): Scope ofModification Accounting, was issued May 2017. The amendments in ASU 2017-09 provide guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting. An entity should account for the effects of a modification unless all of the following conditions are met: the fair value of the modified award is the same as the fair value of the original award immediately before the original award is modified; the vesting conditions of the modified award are the same as the vesting conditions of the original award immediately before the original award is modified; and the classification of the modified award as an equity instrument or a liability instrument is the same as the classification of the original award immediately before the original award is modified. The amendments in this Update should be applied prospectively to an award modified on or after the adoption date. The amendments in this Update are effective for annual periods, and interim periods within those annual periods, beginning after December 31, 2017. The Company adopted this ASU effective January 1, 2018 and it did not have a material impact on the Company’s Consolidated Financial Statements.

FASB Accounting Standards Update (ASU) 2018-13 - Fair Value Measurement (Subtopic 820): Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement, was issued August 2018. The primary focus of ASU 2018-13 is to improve the effectiveness of the disclosure requirements for fair value measurements. The changes affect all companies that are required to include fair value measurement disclosures. In general, the amendments in ASU 2018-13 are effective for all entities for fiscal years and interim periods within those fiscal years, beginning after December 15, 2019. An entity is permitted to early adopt the removed or modified disclosures upon the issuance of ASU 2018-13 and may delay adoption of the additional disclosures, which are required for public companies only, until their effective date. Management is currently evaluating the impact that this ASUthese changes will have on the Company’s consolidated financial statements.statements and disclosures.


2. ACQUISITION OF VISALIA COMMUNITY BANKACQUISITIONS

Effective JulyOn October 1, 2013,2017, the Company acquired Visalia Communitycompleted the acquisition of Folsom Lake Bank headquartered in Visalia, California, wherein Visalia Community(“FLB”) for an aggregate transaction value of $28,475,000. FLB was merged into the Bank, with three branches in Visalia andone branch in Exeter, merged with and into Central Valley Community Bancorp’s subsidiary, Central Valley Community Bank, in a combined cash and stock transaction. Visalia Community Bank’s assets (unaudited) as of July 1, 2013 totaled approximately $197.621 million. The acquired assets and liabilities were recorded at fair value at the date of acquisition.
Under the terms of the merger agreement, the Company issued an aggregate of approximately 1.263 million1,276,888 shares of its common stock and cash totaling approximately $11.05 million to the former shareholders of Visalia Community Bank. Each Visalia Community Bank common shareholder of record atFLB. The Company also assumed the effective time ofoutstanding FLB stock options. With the merger became entitled to receive 2.971 shares of common stock ofFLB acquisition, the Company for eachadded two full service branches, located in Folsom, and Rancho Cordova, California. The FLB Roseville branch was consolidated with the Company’s Roseville branch in October 2017. FLB’s assets as of their shares of Visalia Community Bank common stock.October 1, 2017 totaled approximately $196,148,000.
In accordance with GAAP guidance for business combinations, the Company recorded $6.34 million$13,466,000 of goodwill and $1.4 million$1,879,000 of other intangible assets on the acquisition date. The other intangible assets are primarily related to core deposits and are being amortized using a straight-line method over a period of tenfive years with no significant residual value. For tax purposes, purchase accounting adjustments including goodwill are all non-taxable and/or non-deductible. Acquisition related costs of $217,000 and $1,828,000 are included in the income statement for the years ended December 31, 2018 and 2017, respectively.
The acquisition was consistent with the Company’s strategy to build a regional presence in Central California. The acquisition offers the Company the opportunity to increase profitability by introducing existing products and services to the acquired customer base as well as add new customers in the expanded region. Goodwill arising from the acquisition consisted largely of synergies and the expected cost savings resulting from the combined operations.
The following table summarizes the consideration paid for FLB and the amounts of the assets acquired and liabilities assumed recognized at the acquisition date (in thousands):


75

Merger consideration: 
Common stock issued$28,475
Fair Value of Total Consideration Transferred$28,475
  
Recognized amounts of identifiable assets acquired and liabilities assumed: 
Cash and cash equivalents$26,279
Loans, net117,815
Investments41,280
Core deposit intangible1,879
Premises and equipment561
Federal Home Loan Bank stock1,559
Deferred taxes and taxes receivable2,186
Bank owned life insurance3,997
Other assets592
Total assets acquired196,148
Deposits171,948
Deposit premium132
Short-term borrowings - Federal Home Loan Bank7,000
Other liabilities2,059
Total liabilities assumed181,139
Total identifiable net assets15,009
Goodwill$13,466
The fair value of net assets acquired includes fair value adjustments to certain loans that were not considered impaired as of the acquisition date. The fair value adjustments were determined using discounted contractual cash flows. As such, these loans were not considered impaired at the acquisition date and were not subject to the guidance relating to purchased credit impaired loans, which have shown evidence of credit deterioration since origination. Loans acquired that were not subject to these requirements include non-impaired loans and customer receivables with a fair value and gross contractual amounts receivable of $117,815,000 and $121,872,000, respectively, on the date of acquisition. See Note 5 for discussion of purchased credit impaired loans.
On October 1, 2016, the Company acquired Sierra Vista Bank, headquartered in Folsom, California, wherein Sierra Vista Bank, with one branch in Folsom, one branch in Fair Oaks, and one branch in Cameron Park, merged with and into Central Valley Community Bancorp’s subsidiary, Central Valley Community Bank, in a combined cash and stock transaction. Sierra Vista Bank’s assets as of October 1, 2016 totaled approximately $155,154,000. The acquired assets and liabilities were recorded at fair value at the date of acquisition. Under the terms of the merger agreement, the Company issued an aggregate of approximately 1,058,851 shares of its common stock and cash totaling approximately $9,468,000 to the former shareholders of Sierra Vista Bank.
In accordance with GAAP guidance for business combinations, the Company recorded $10,314,000 of goodwill and $508,000 of other intangible assets on the acquisition date. The other intangible assets are primarily related to core deposits and are being amortized using a straight-line method over a period of five years with no significant residual value. For tax purposes, purchase accounting adjustments including goodwill are all non-taxable and/or non-deductible. Acquisition related costs of $1,782,000 are included in the income statement for the year ended December 31, 2016.
The acquisition was consistent with the Company’s strategy to build a regional presence in Central California. The acquisition offers the Company the opportunity to increase profitability by introducing existing products and services to the acquired customer base as well as add new customers in the expanded region. Goodwill arising from the acquisition consisted largely of synergies and the cost savings resulting from the combined operations.
The following table summarizes the consideration paid for Sierra Vista Bank and the amounts of the assets acquired and liabilities assumed recognized at the acquisition date (in thousands):





Pro Forma Results of Operations

The accompanying consolidated financial statements include the accounts of Visalia CommunitySierra Vista Bank since JulyOctober 1, 2013.2016 and Folsom Lake Bank since October 1, 2017. The following table presents pro forma results of operations information for the periods presented as if the acquisitionacquisitions had occurred on January 1, 20132016 after giving effect to certain adjustments. The unaudited pro forma results of operations for the yearyears ended December 31, 20132017 and 2016 include the historical accounts of the Company, Folsom Lake Bank, and Visalia CommunitySierra Vista Bank and pro forma adjustments as may be required, including the amortization of intangibles with definite lives and the amortization or accretion of any premiums or discounts arising from fair value adjustments for assets acquired and liabilities assumed. The pro forma information is intended for informational purposes only and is not necessarily indicative of the Company’s future operating results or operating results that would have occurred had the acquisitionacquisitions been completed at the beginning of 2013.each respective year. No assumptions have been applied to the pro forma results of operations regarding possible revenue enhancements, expense efficiencies or asset dispositions. (In thousands, except per shareper-share amounts):

 For the Year Ended December 31, For the Years Ended December 31,
 2013 2017 2016
Net interest income $36,773
 $61,059
 $56,531
Provision for credit losses 298
Provision for (reversal of) credit losses (1,150) (5,800)
Non-interest income 8,576
 11,240
 10,205
Non-interest expense 36,917
 51,415
 52,131
Income before provision for income taxes 8,134
 22,034
 20,405
Provision for income taxes 783
 9,168
 6,381
Net income $7,351
 $12,866
 $14,024
Preferred stock dividends and accretion 350
Net income available to common shareholders $7,001
 $12,866
 $14,024
Basic earnings per common share $0.68
 $1.03
 $1.24
Diluted earnings per common share $0.68
 $1.01
 $1.23

3.FAIR VALUE MEASUREMENTS
 
Fair Value Hierarchy
 
Fair value is the exchange price that would be received for an asset or paid to transfer a liability (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. In accordance with applicable guidance, the Company groups its assets and liabilities measured at fair value in three levels, based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value.  Valuations within these levels are based upon:
 
Level 1 — Quoted market prices (unadjusted) for identical instruments traded in active exchange markets that the Company has the ability to access as of the measurement date.
 
Level 2 — Quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques for which all significant assumptions are observable or can be corroborated by observable market data.
 
Level 3 — Model-based techniques that use at least one significant assumption not observable in the market.  These unobservable assumptions reflect the Company’s estimates of assumptions that market participants would use on pricing the asset or liability.  Valuation techniques include management judgment and estimation which may be significant.

Management monitors the availability of observable market data to assess the appropriate classification of financial instruments within the fair value hierarchy. Changes in economic conditions or model-based valuation techniques may require the transfer of financial instruments from one fair value level to another. In such instances, we report the transfer at the beginning of the reporting period.

The estimated carrying and fair values of the Company’s financial instruments are as follows (in thousands):

76


 December 31, 2015 December 31, 2018
 
Carrying
Amount
 Fair Value 
Carrying
Amount
 Fair Value
 Level 1 Level 2 Level 3 Total Level 1 Level 2 Level 3 Total
Financial assets:  
  
  
    
  
  
  
    
Cash and due from banks $23,339
 $23,339
 $
 $
 $23,339
 $24,954
 $24,954
 $
 $
 $24,954
Interest-earning deposits in other banks 70,988
 70,988
 
 
 70,988
 6,725
 6,725
 
 
 6,725
Federal funds sold 290
 290
 
 
 290
 48
 48
 
 
 48
Available-for-sale investment securities 477,554
 7,536
 470,018
 
 477,554
 463,905
 
 463,905
 
 463,905
Held-to-maturity investment securities 31,712
 
 35,142
 
 35,142
Equity securities 7,254
 7,254
   7,254
Loans, net 588,501
 
 
 585,737
 585,737
 909,591
 
 
 899,214
 899,214
Federal Home Loan Bank stock 4,823
 N/A
 N/A
 N/A
 N/A
 6,843
 N/A
 N/A
 N/A
 N/A
Accrued interest receivable 6,355
 27
 3,414
 2,914
 6,355
 6,429
 32
 2,323
 4,074
 6,429
Financial liabilities:  
  
  
    
  
  
  
    
Deposits 1,116,267
 976,433
 139,353
 
 1,115,786
 1,282,298
 1,031,369
 95,633
 
 1,127,002
Short-term borrowings 10,000
 
 10,000
 
 10,000
Junior subordinated deferrable interest debentures 5,155
 
 
 3,200
 3,200
 5,155
 
 
 4,114
 4,114
Accrued interest payable 101
 
 76
 25
 101
 134
 
 81
 53
 134

 December 31, 2014 December 31, 2017
 
Carrying
Amount
 Fair Value 
Carrying
Amount
 Fair Value
 Level 1 Level 2 Level 3 Total Level 1 Level 2 Level 3 Total
Financial assets:                    
Cash and due from banks $21,316
 $21,316
 $
 $
 $21,316
 $38,286
 $38,286
 $
 $
 $38,286
Interest-earning deposits in other banks 55,646
 55,646
 
 
 55,646
 62,080
 62,080
 
 
 62,080
Federal funds sold 366
 366
 
 
 366
 17
 17
 
 
 17
Available-for-sale investment securities 432,535
 7,585
 424,950
 
 432,535
 535,281
 
 535,281
 
 535,281
Held-to-maturity investment securities 31,964
 
 35,096
 
 35,096
Equity securities 7,423
 7,423
 
 
 7,423
Loans, net 564,280
 
 
 564,667
 564,667
 891,901
 
 
 899,191
 899,191
Federal Home Loan Bank stock 4,791
 N/A
 N/A
 N/A
 N/A
 6,843
 N/A
 N/A
 N/A
 N/A
Accrued interest receivable 5,793
 25
 3,212
 2,556
 5,793
 7,168
 57
 3,256
 3,855
 7,168
Financial liabilities:          
          
Deposits 1,039,152
 885,704
 153,475
 
 1,039,179
 1,425,687
 1,296,048
 127,966
 
 1,424,014
Junior subordinated deferrable interest debentures 5,155
 
 
 3,119
 3,119
 5,155
 
 
 3,550
 3,550
Accrued interest payable 114
 
 90
 24
 114
 110
 
 72
 38
 110
 
These estimates do not reflect any premium or discount that could result from offering the Company’s entire holdings of a particular financial instrument for sale at one time, nor do they attempt to estimate the value of anticipated future business related to the instruments.  In addition, the tax ramifications related to the realization of unrealized gains and losses can have a significant effect on fair value estimates and have not been considered in any of these estimates.
These estimates are made at a specific point in time based on relevant market data and information about the financial instruments.  Because no market exists for a significant portion of the Company’s financial instruments, fair value estimates are based on judgments regarding current economic conditions, risk characteristics of various financial instruments and other factors.  These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision.  Changes in assumptions could significantly affect the fair values presented.
The methods and assumptions used to estimate fair values are described as follows:

(a) Cash and Cash Equivalents The carrying amounts of cash and due from banks, interest-earning deposits in other banks, and Federal funds sold approximate fair values and are classified as Level 1.


(b) Investment Securities — Investment securities in Level 1 are mutual funds and fair values are based on quoted market prices for identical instruments traded in active markets. Fair values for investment securities classified in Level 2 are based on quoted market prices for similar securities in active markets. For securities where quoted prices or market prices of similar securities are not available, fair values are calculated using discounted cash flows or other market indicators.

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Table of Contents


(c) Loans — Fair values of loans are estimated as follows: For variable rate loans that reprice frequently and with no significant change in credit risk, fair values are based on carrying values resulting in a Level 3 classification. Purchased credit impaired (PCI) loans are measured at estimated fair value on the date of acquisition. Carrying value is calculated as the present value of expected cash flows and approximates fair value.value and included in Level 3. Fair values for other loans are estimated using discounted cash flow analyses, using interest rates currently being offered for loans with similar terms to borrowers of similar credit quality resulting in a Level 3 classification. Impaired loans are initially valued at the lower of cost or fair value. Impaired loans carried at fair value generally receive specific allocations of the allowance for credit losses. For collateral dependent real estate loans, fair value is commonly based on recent real estate appraisals. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. Adjustments are routinely made in the appraisal process by the independent appraisers to adjust for differences between the comparable sales and income data available. Such adjustments are usually significant and typically result in a Level 3 classification of the inputs for determining fair value. Non-real estate collateral may be valued using an appraisal, net book value per the borrower’s financial statements, or aging reports, adjusted or discounted based on management’s historical knowledge, changes in market conditions from the time of the valuation, and management’s expertise and knowledge of the client and client’s business, resulting in a Level 3 fair value classification. Impaired loans are evaluated on a quarterly basis for additional impairment and adjusted accordingly. The methods utilized to estimateestimated fair values of financial instruments disclosed above as of December 31, 2018 follow the guidance in ASU 2016-01 which prescribes an “exit price” approach in estimating and disclosing fair value of loans do not necessarily representfinancial instruments incorporating discounts for credit, liquidity, and marketability factors. The fair values shown as of December 31, 2017 use an exit price.“entry price” approach.

(d) FHLB Stock — It is not practicable to determine the fair value of FHLB stock due to restrictions placed on its transferability.

e) Other real estate owned — OREO is measured at fair value less estimated costs to sell when acquired, establishing a new cost basis. Fair value is commonly based on recent real estate appraisals. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. Adjustments are routinely made in the appraisal process to adjust for differences between the comparable sales and income data available. The Company records OREO as non-recurring with level 3 measurement inputs.

(f)(e) Deposits — Fair value of demand deposit, savings, and money market accounts are, by definition, equal to the amount payable on demand at the reporting date (i.e., their carrying amount) resulting in a Level 1 classification. Fair value for fixed and variable rate certificates of deposit are estimated using discounted cash flow analyses using interest rates offered at each reporting date by the Company for certificates with similar remaining maturities resulting in a Level 2 classification.

(g)(f) Short-Term Borrowings — The carrying amounts of federal funds purchased, borrowings under repurchase agreements, and other short-term borrowings, generally maturing within ninety days, approximate their fair values resulting in a Level 2 classification.

(h) Other Borrowings — The fair values of the Company’s long-term borrowings are estimated using discounted cash flow analyses based on the current borrowing rates for similar types of borrowing arrangements resulting in a Level 2 classification.

The fair values of the Company’s Subordinated Debentures are estimated using discounted cash flow analyses based on the current borrowing rates for similar types of borrowing arrangements resulting in a Level 3 classification.

(i)(g) Accrued Interest Receivable/Payable — The fair value of accrued interest receivable and payable is based on the fair value hierarchy of the related asset or liability.

(j)(h) Off-Balance Sheet Instruments — Fair values for off-balance sheet, credit-related financial instruments are based on fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the counterparties’ credit standing. The fair value of commitments is not material.
 
Assets Recorded at Fair Value
 
The following tables present information about the Company’s assets and liabilities measured at fair value on a recurring and non-recurring basis as of December 31, 2015:2018:
 

78


Recurring Basis
 
The Company is required or permitted to record the following assets at fair value on a recurring basis under other accounting pronouncements (in thousands):
 Fair Value Level 1 Level 2 Level 3 Fair Value Level 1 Level 2 Level 3
Available-for-sale investment securities  
  
  
  
  
  
  
  
Debt Securities:  
  
  
  
  
  
  
  
U.S. Government agencies $52,901
 $
 $52,901
 $
 $21,321
 $
 $21,321
 $
Obligations of states and political subdivisions 188,268
 
 188,268
 
 81,504
 
 81,504
 
U.S. Government sponsored entities and agencies collateralized by residential mortgage obligations 225,259
 
 225,259
 
 234,930
 
 234,930
 
Private label residential mortgage backed securities 3,590
 
 3,590
 
Other equity securities 7,536
 7,536
 
 
Private label mortgage and asset backed securities 126,150
 
 126,150
 
Equity Securities 7,254
 7,254
  
Total assets measured at fair value on a recurring basis $477,554
 $7,536
 $470,018
 $
 $471,159
 $7,254
 $463,905
 $
 
Securities in Level 1 are mutual funds and fair values are based on quoted market prices for identical instruments traded in active markets.  Fair values for available-for-sale investment securities in Level 2 are based on quoted market prices for similar securities in active markets. For securities where quoted prices or market prices of similar securities are not available, fair values are calculated using discounted cash flows or other market indicators.
Management evaluates the significance of transfers between levels based upon the nature of the financial instrument and size of the transfer relative to total assets, total liabilities or total earnings. During the year ended December 31, 20152018, no transfers between levels occurred.
There were no Level 3 assets measured at fair value on a recurring basis at December 31, 20152018. Also there were no liabilities measured at fair value on a recurring basis at December 31, 20152018.
 
Non-recurring Basis
 
The Company may be required, from time to time, to measure certain assets and liabilities at fair value on a non-recurring basis.  These include the following assets and liabilities that are measured at the lower of cost or fair value that were recognized at fair value which was below cost at December 31, 20152018 (in thousands):
  Fair Value Level 1 Level 2 Level 3
Impaired loans:        
Consumer:        
Equity loans and lines of credit $132
 $
 $
 $132
Total consumer 132
 
 
 132
Total impaired loans 132
 
 
 132
Total assets measured at fair value on a non-recurring basis $132
 $
 $
 $132
  Fair Value Level 1 Level 2 Level 3
Impaired loans:        
Real estate:        
Commercial real estate $134
 $
 $
 $134
Total assets measured at fair value on a non-recurring basis $134
 $
 $
 $134

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At the time a loan is considered impaired, it is valued at the lower of cost or fair value. Impaired loans carried at fair value generally receive specific allocations of the allowance for credit losses. For collateral dependent loans, fair value is commonly based on recent real estate appraisals. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. Adjustments are routinely made in the appraisal process by the independent appraisers to adjust for differences between the comparable sales and income data available. Such adjustments are usually significant and typically result in a Level 3 classification of the inputs for determining fair value. Non-real estate collateral may be valued using an appraisal, net book value per the borrower’s financial statements, or aging reports, adjusted or discounted based on management’s historical knowledge, changes in market conditions from the time of the valuation, and management’s expertise and knowledge of the client and client’s business, resulting in a Level 3 fair value classification. The fair value of impaired loans is based on the fair value of the collateral. Impaired loans were determined to be collateral dependent and categorized as Level 3 due to ongoing real estate market conditions resulting in inactive market data, which in turn required the use of unobservable inputs and assumptions in fair value measurements. Impaired loans evaluated under the discounted cash flow method are excluded from the table above. The discounted cash flow method as prescribed by ASC 310 is not a fair value measurement since the discount rate utilized is the loan’s effective interest rate which is not a market rate. There were no changes in valuation techniques used during the year ended December 31, 20152018.
Appraisals for collateral-dependent impaired loans are performed by certified general appraisers (for commercial properties) or certified residential appraisers (for residential properties) whose qualifications and licenses have been reviewed and

verified by the Company. Once received, the assumptions and approaches utilized in the appraisal as well as the overall resulting fair value is compared with independent data sources such as recent market data or industry-wide statistics.
Impaired loans that are measured for impairment using the fair value of the collateral for collateral dependent loans in which the collateral value did not exceed the loan balance had a principal balance of $166,000$161,000 with a valuation allowance of $34,000$27,000 at December 31, 2015, and2018, resulting in a resulting fair value of $132,000.$134,000. The valuation allowance representsrepresent specific allocationsallocation for the allowance for credit losses for impaired loans.
During the year ended December 31, 2015 there was no provision2018 specific allocation for the allowance for credit losses related to loans carried at fair value was $27,000, compared to a provision of $3,921,000 fornone during the year ended December 31, 2014. During the year ended December 31, 2015 there2017. There were no net charge-offs related to loans carried at fair value compared to $3,539,000 of charge-offs for the year endedat December 31, 2014.2018 and 2017.
There were no liabilities measured at fair value on a non-recurring basis at December 31, 20152018.

The following two tables present information about the Company’s assets and liabilities measured at fair value on a recurring and nonrecurring basis as of December 31, 20142017:

Recurring Basis

The Company is required or permitted to record the following assets at fair value on a recurring basis under other accounting pronouncements (in thousands):
 Fair Value Level 1 Level 2 Level 3 Fair Value Level 1 Level 2 Level 3
Available-for-sale securities  
  
  
  
  
  
  
  
Debt Securities:  
  
  
  
  
  
  
  
U.S. Government agencies $33,090
 $
 $33,090
 $
 $66,587
 $
 $66,587
 $
Obligations of states and political subdivisions 149,295
 
 149,295
 
 143,105
 
 143,105
 
U.S. Government sponsored entities and agencies collateralized by residential mortgage obligations 237,872
 
 237,872
 
 234,908
 
 234,908
 
Private label residential mortgage backed securities 4,693
 
 4,693
 
Private label residential mortgage and asset backed securities 90,681
 
 90,681
 
Other equity securities 7,585
 7,585
 
 
 7,423
 7,423
 
 
Total assets measured at fair value on a recurring basis $432,535
 $7,585
 $424,950
 $
 $542,704
 $7,423
 $535,281
 $
 
Securities in Level 1 are mutual funds and fair values are based on quoted market prices for identical instruments traded in active markets.  Fair values for available-for-sale investment securities in Level 2 are based on quoted market prices for similar securities in active markets. For securities where quoted prices or market prices of similar securities are not available, fair values are calculated using discounted cash flows or other market indicators.
Management evaluates the significance of transfers between levels based upon the nature of the financial instrument and size of the transfer relative to total assets, total liabilities or total earnings. During the year ended December 31, 2017, no transfers between levels occurred.
There were no Level 3 assets measured at fair value on a recurring basis at December 31, 20142017. Also there were no liabilities measured at fair value on a recurring basis at December 31, 20142017.

Non-recurring Basis
 

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The Company may be required, from time to time, to measure certain assets and liabilities at fair value on a non-recurring basis.  These include the following assets and liabilities that are measured at the lower of cost or fair value that were recognized at fair value which was below cost at December 31, 20142017 (in thousands):
  Fair Value Level 1 Level 2 Level 3
Impaired loans:  
  
  
  
Commercial:        
Commercial and industrial $7,019
 $
 $
 $7,019
Total commercial 7,019
 
 
 7,019
Consumer:        
Equity loans and lines of credit 777
 
 
 777
Total consumer 777
 
 
 777
Total impaired loans $7,796
 $

$

$7,796
Total assets measured at fair value on a non-recurring basis $7,796
 $
 $
 $7,796
  Fair Value Level 1 Level 2 Level 3
Other repossessed assets $70
 $
 $
 $70
Total assets measured at fair value on a non-recurring basis $70
 $
 $
 $70

ImpairedAs of December 31, 2017, there were no loans that are measured for impairment using the fair value of the collateral for collateral dependent loans had a principal balance of $8,239,000 with a valuation allowance of $443,000 at December 31, 2014, and a resulting fair value of $7,796,000. The valuation allowance represents specific allocations for the allowance for credit losses for impaired loans.
The following table presents quantitative information about level 3 fair value measurements for financial instrumentsThere were no liabilities measured at fair value on a non-recurring basis at December 31, 2014 (dollars in thousands):
Description Fair Value Valuation Technique(s) Significant Unobservable Input(s) Range (Weighted Average)
Commercial and industrial $7,019
 Sales comparison Appraiser adjustments on sales comparable data 0.00%-6.00%
    Management estimates Management adjustments for depreciation in values depending on property types 8.00%-25.00%
Equity loans and lines of credit $777
 Sales comparison Appraiser adjustments on sales comparable data 0.00%-3.50%
    Management estimates Management adjustments for depreciation in values depending on property types 11.00%
2017.


4.INVESTMENT SECURITIES
  
The fair value of the available-for-sale investment portfolio reflected an unrealized gainloss of $7,474,000$(6,257,000) at December 31, 20152018 compared to an unrealized gain of $8,896,000$4,089,000 at December 31, 20142017. The unrealized (loss)/gain recorded is net of $3,076,000(1,850,000) and $3,661,0001,186,000 in tax (benefits) liabilities as accumulated other comprehensive income within shareholders’ equity at December 31, 20152018 and 20142017, respectively.

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The following tables set forth the carrying values and estimated fair values of our investment securities portfolio at the dates indicated (in thousands):
December 31, 2015December 31, 2018
Amortized
Cost
 
Gross Unrealized
Gains
 
Gross Unrealized
Losses
 
Estimated
Fair Value
Amortized
Cost
 
Gross Unrealized
Gains
 
Gross Unrealized
Losses
 
Estimated
Fair Value
Available-for-Sale Securities              
Debt Securities:              
U.S. Government agencies$52,803
 $315
 $(217) $52,901
$21,723
 $
 $(402) $21,321
Obligations of states and political subdivisions181,785
 6,779
 (296) 188,268
79,886
 2,205
 (587) 81,504
U.S. Government sponsored entities and agencies collateralized by residential mortgage obligations225,636
 1,042
 (1,419) 225,259
239,388
 253
 (4,711) 234,930
Private label residential mortgage backed securities2,356
 1,234
 
 3,590
Other equity securities7,500
 36
 
 7,536
Private label mortgage and asset backed securities129,165
 756
 (3,771) 126,150
$470,080
 $9,406
 $(1,932) $477,554
$470,162
 $3,214
 $(9,471) $463,905

 December 31, 2015
Held-to-Maturity Securities
Amortized
Cost
 
Gross Unrealized
Gains
 
Gross Unrealized
Losses
 
Estimated
 Fair Value
Debt securities: 
  
  
  
Obligations of states and political subdivisions$31,712
 $3,431
 $(1) $35,142

December 31, 2014December 31, 2017
Amortized
Cost
 
Gross Unrealized
 Gains
 
Gross Unrealized 
Losses
 
Estimated
 Fair Value
Amortized
Cost
 
Gross Unrealized
 Gains
 
Gross Unrealized 
Losses
 
Estimated
 Fair Value
Available-for-Sale Securities              
Debt Securities: 
  
  
  
 
  
  
  
U.S. Government agencies$33,088
 $245
 $(243) $33,090
$65,994
 $667
 $(74) $66,587
Obligations of states and political subdivisions143,343
 6,266
 (314) 149,295
136,955
 6,240
 (90) 143,105
U.S. Government sponsored entities and agencies collateralized by residential mortgage obligations236,629
 2,033
 (790) 237,872
237,210
 601
 (2,903) 234,908
Private label residential mortgage backed securities3,079
 1,614
 
 4,693
Other equity securities7,500
 85
 
 7,585
Private label mortgage and asset backed securities91,033
 924
 (1,276) 90,681
`$423,639
 $10,243
 $(1,347) $432,535
$531,192
 $8,432
 $(4,343) $535,281
 
 December 31, 2014
Held-to-Maturity Securities
Amortized
Cost
 
Gross Unrealized
Gains
 
Gross Unrealized
Losses
 
Estimated
 Fair Value
Debt securities: 
  
  
  
Obligations of states and political subdivisions$31,964
 $3,138
 $(6) $35,096

During 2014, the Company transferred from available-for-sale to held-to-maturity selected municipal securities having a book value of $31,346,000, and a market value of $31,509,000, including a net unrealized gain of $163,000. During the year ended and at December 31, 2015, accretion of this unrealized gain totaling $78,000 was recorded as interest income and the remaining balance of unamortized unrealized gains of $64,000 is included as a component of accumulated other comprehensive income in shareholders’ equity. During the year ended and at December 31, 2014, accretion of this unrealized gain totaling $21,000 was recorded as interest income and the remaining balance of unamortized unrealized gains of $142,000 is included as a component of accumulated other comprehensive income in shareholders’ equity.

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Proceeds and gross realized gains (losses) on investment securities for the years ended December 31, 2015, 2014,2018, 2017, and 20132016 are shown below (in thousands):
 Years Ended December 31, Years Ended December 31,
 2015 2014 2013 2018 2017 2016
Available-for-Sale Securities  
  
  
  
  
  
Proceeds from sales or calls $93,167
 $79,757
 $88,146
 $246,824
 $228,405
 $167,163
Gross realized gains from sales or calls $1,715
 $1,754
 $2,728
 $1,976
 $4,701
 $2,223
Gross realized losses from sales or calls $(234) $(850) $(1,463) $(662) $(1,899) $(999)
Held-to-Maturity Securities            
Proceeds from calls $810
 $
 $
Gross realized gains from calls $14
 $
 $
Proceeds from sales and calls $
 $
 $9,257
Gross realized gains from sales or calls $
 $
 $696

Losses recognized in 2015, 2014,2018, 2017, and 20132016 were incurred in order to reposition the investment securities portfolio based on the current rate environment. The securities which were sold at a loss were acquired when the rate environment was not as volatile. The securities which were sold were primarily purchased several years ago to serve a purpose in the rate environment in which the securities were purchased. The Company addressed risks in the security portfolio by selling these securities and using the proceeds to purchase securities that fit with the Company’s current risk profile.

The provision (benefit) for income taxes includes $615,000, $372,000,$388,000, $1,178,000, and $521,000$515,000 income tax impact from the reclassification of unrealized net gains on available-for-sale securities to realized net gains on available-for-sale securities for the years ended December 31, 2015, 2014,2018, 2017, and 20132016, respectively.
Investment securities with unrealized losses at December 31, 20152018 and 20142017 are summarized and classified according to the duration of the loss period as follows (in thousands):
December 31, 2015December 31, 2018
Less than 12 Months 12 Months or More TotalLess than 12 Months 12 Months or More Total
Fair
Value
 
Unrealized
Losses
 
Fair
Value
 
Unrealized
Losses
 
Fair
Value
 
Unrealized
Losses
Fair
Value
 
Unrealized
Losses
 
Fair
Value
 
Unrealized
Losses
 
Fair
Value
 
Unrealized
Losses
Available-for-Sale Securities 
  
  
  
  
  
 
  
  
  
  
  
Debt Securities: 
  
  
  
  
  
 
  
  
  
  
  
U.S. Government agencies$21,348
 $(125) $3,954
 $(92) $25,302
 $(217)$14,891
 $(254) $6,430
 $(148) $21,321
 $(402)
Obligations of states and political subdivisions40,016
 (296) 
 
 40,016
 (296)10,056
 (99) 22,945
 (488) 33,001
 (587)
U.S. Government sponsored entities and agencies collateralized by residential mortgage obligations124,688
 (1,109) 16,234
 (310) 140,922
 (1,419)61,866
 (424) 124,673
 (4,287) 186,539
 (4,711)
Private label residential mortgage and asset backed securities31,325
 (195) 84,784
 (3,576) 116,109
 (3,771)
$186,052
 $(1,530) $20,188
 $(402) $206,240
 $(1,932)$118,138
 $(972) $238,832
 $(8,499) $356,970
 $(9,471)
 
 December 31, 2015
 Less than 12 Months 12 Months or More Total
 
Fair
Value
 
Unrealized
Losses
 
Fair
Value
 
Unrealized
Losses
 
Fair
Value
 
Unrealized
Losses
Held-to-Maturity Securities 
  
  
  
  
  
Debt Securities: 
  
  
  
  
  
Obligations of states and political subdivisions$1,053
 $(1) $
 $
 $1,053
 $(1)


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December 31, 2014December 31, 2017
Less than 12 Months 12 Months or More TotalLess than 12 Months 12 Months or More Total
Fair
Value
 
Unrealized
Losses
 
Fair
Value
 
Unrealized
Losses
 
Fair
Value
 
Unrealized
Losses
Fair
Value
 
Unrealized
Losses
 
Fair
Value
 
Unrealized
Losses
 
Fair
Value
 
Unrealized
Losses
Available-for-Sale Securities 
  
  
  
  
  
 
  
  
  
  
  
Debt Securities: 
  
  
  
  
  
 
  
  
  
  
  
U.S. Government agencies$10,950
 $(193) $1,737
 $(50) $12,687
 $(243)$8,201
 $(47) $6,741
 $(27) $14,942
 $(74)
Obligations of states and political subdivisions16,776
 (89) 15,290
 (225) 32,066
 (314)1,627
 (3) 3,357
 (87) 4,984
 (90)
U.S. Government sponsored entities and agencies collateralized by residential mortgage obligations52,905
 (420) 31,000
 (370) 83,905
 (790)82,604
 (822) 64,488
 (2,081) 147,092
 (2,903)
Private label residential mortgage backed securities88,312
 (1,276) 
 
 88,312
 (1,276)
$80,631
 $(702) $48,027
 $(645) $128,658
 $(1,347)$180,744
 $(2,148) $74,586
 $(2,195) $255,330
 $(4,343)
 
 December 31, 2014
 Less than 12 Months 12 Months or More Total
 
Fair
Value
 
Unrealized
Losses
 
Fair
Value
 
Unrealized
Losses
 
Fair
Value
 
Unrealized
Losses
Held-to-Maturity Securities           
Debt Securities:           
Obligations of states and political subdivisions$1,067
 $(6) $
 $
 $1,067
 $(6)

We periodically evaluate each investment security for other-than-temporary impairment, relying primarily on industry analyst reports, observation of market conditions and interest rate fluctuations. The portion of the impairment that is attributable to a shortage in the present value of expected future cash flows relative to the amortized cost should be recorded as a current period charge to earnings. The discount rate in this analysis is the original yield expected at time of purchase.
As of December 31, 2015,2018, the Company performed an analysis of the investment portfolio to determine whether any of the investments held in the portfolio had an other-than-temporary impairment (OTTI). Management evaluated all investment securities with an unrealized loss at December 31, 2015,2018, and identified those that had an unrealized loss for at least a consecutive 12 month period, which had an unrealized loss at December 31, 20152018 greater than 10% of the recorded book value on that date, or which had an unrealized loss of more than $10,000.  Management also analyzed any securities that may have been downgraded by credit rating agencies.
For those bonds that met the evaluation criteria, management obtained and reviewed the most recently published national credit ratings for those bonds.  For those bonds that were municipal debt securitiesobligations of states and political subdivisions with an investment grade rating by the rating agencies, management also evaluated the financial condition of the municipality and any applicable municipal bond insurance provider and concluded during March 2016 that noa $136,000 credit related impairment related to one security with a fair value of $2,995,000 and a pre-impairment amortized cost of $3,131,000 existed. The Company recorded an other-than-temporary impairment loss of $136,000 during the twelve months ended December 31, 2016. There were no OTTI losses recorded during the twelve months ended December 31, 2018 or December 31,2017.  
    
U.S. Government Agencies - At December 31, 20152018, the Company held 17six U.S. Government agency securities of which sevenfour were in a loss position for less than 12 months and onetwo waswere in a loss position and hashad been in a loss position for 12 months or more. The unrealized losses on the Company’s investments in U.S. Government Agencies were caused by interest rate

changes. The contractual terms of those investments do not permit the issuer to settle the securities at a price less than the amortized costs of the investment. Because the decline in market value is attributable to changes in interest rates and not credit quality, and because the Company does not intend to sell, and it is more likely than not that it will not be required to sell those investments until a recovery of fair value, which may be maturity, the Company does not consider those investments to be other-than-temporarily impaired at December 31, 20152018.

Obligations of States and Political Subdivisions - At December 31, 20152018, the Company held 15452 obligations of states and political subdivision securities of which 13two were in a loss position for less than 12 months and noneeight were in a loss position and haveor had been in a loss position for 12 months or more. The unrealized losses on the Company’s investments in obligations of states and political subdivision securities were caused by interest rate changes. Because the decline in market value is attributable to changes in interest rates and not credit quality, and because the Company does not intend to sell, and it is more likely than not that it will not be required to sell those investments until a recovery of fair value, which may be maturity, the Company does not consider those investments to be other-than-temporarily impaired at December 31, 20152018.

U.S. Government Sponsored Entities and Agencies Collateralized by Residential Mortgage Obligations - At December 31, 20152018, the Company held 186137 U.S. Government sponsored entity and agency securities collateralized by residential mortgage obligation securities of which 4823 were in a loss position for less than 12 months and 1460 have been in a loss position for more than 12

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months. The unrealized losses on the Company’s investments in U.S. Government sponsored entity and agencies collateralized by residential mortgage obligations were caused by interest rate changes. The contractual cash flows of those investments are guaranteed or supported by an agency or sponsored entity of the U.S. Government. Accordingly, it is expected that the securities would not be settled at a price less than the amortized cost of the Company’s investment. Because the decline in market value is attributable to changes in interest rates and not credit quality, and because the Company does not intend to sell, and it is more likely than not that it will not be required to sell those investments until a recovery of fair value, which may be maturity, the Company does not consider those investments to be other-than-temporarily impaired at December 31, 20152018.

Private Label Residential Mortgage and Asset Backed Securities - At December 31, 20152018, the Company had a total of 1736 PLRMBSPLMBS with a remaining principal balance of $2,356,000129,165,000 and a gross and net unrealized gainloss of approximately $1,234,0003,016,000NoneSeven of these securities had an unrealizedwere in a loss position for less than 12 months and 18 have been in a loss position for more than 12 months at December 31, 20152018NineEight of these PLRMBSPLMBS with a remaining principal balance of $2,094,0001,137,000 had credit ratings below investment grade. The Company continues to monitor these securities for changes in credit ratings or other indications of credit deterioration. Because the decline in market value is attributable to changes in interest rates and not credit quality, and because the Company does not intend to sell, and it is more likely than not that it will not be required to sell those investments until a recovery of fair value, which may be maturity, the Company does not consider those investments to be other-than-temporarily impaired at December 31, 2018.

The following table provides a rollforward for the years ended December 31, 20152018 and 20142017 of investment securities credit losses recorded in earnings (in thousands). The beginning balance represents the credit loss component for which OTTI occurred on debt securities in prior periods.  Additions represent the first time a debt security was credit impaired or when subsequent credit impairments have occurred on securities for which OTTI credit losses have been previously recognized.
 Years ended December 31, Years ended December 31,
 2015 2014 2018 2017
Beginning balance of credit losses recognized $747
 800
 $874
 $874
Amounts related to credit loss for which an OTTI charge was not previously recognized 
 
 
 
Change in value attributable to other factors 
 (53)
Realized losses for securities sold 
 
Ending balance of credit losses recognized $747
 $747
 $874
 $874
 
The amortized cost and estimated fair value of available-for-sale investment securities at December 31, 20152018 and 20142017 by contractual maturity are shown in the two tables below (in thousands).  Expected maturities will differ from contractual maturities because the issuers of the securities may have the right to call or prepay obligations with or without call or prepayment penalties.
  December 31, 2015
Available-for-Sale Securities 
Amortized 
Cost
 
Estimated 
Fair Value
Within one year $
 $
After one year through five years 12,297
 12,695
After five years through ten years 37,376
 38,397
After ten years 132,112
 137,176
  181,785
 188,268
Investment securities not due at a single maturity date:  
  
U.S. Government agencies 52,803
 52,901
U.S. Government sponsored entities and agencies collateralized by residential mortgage obligations 225,636
 225,259
Private label residential mortgage backed securities 2,356
 3,590
Other equity securities 7,500
 7,536
  $470,080
 $477,554

 December 31, 2015 December 31, 2018 December 31, 2017
Held-to-Maturity Securities 
Amortized 
Cost
 
Estimated 
Fair Value
 
Amortized 
Cost
 
Estimated 
Fair Value
 
Amortized 
Cost
 
Estimated 
Fair Value
Within one year $
 $
 $1,893
 $1,914
After one year through five years 2,769
 2,899
 7,149
 7,316
After five years through ten years 21,831
 22,278
 22,043
 22,696
After ten years 31,712
 35,142
 55,286
 56,327
 105,870
 111,179
 79,886
 81,504
 136,955
 143,105
Investment securities not due at a single maturity date:  
  
    
Treasuries 
 
 
 
U.S. Government agencies 21,723
 21,321
 65,994
 66,587
U.S. Government sponsored entities and agencies collateralized by residential mortgage obligations 239,388
 234,930
 237,210
 234,908
Private label mortgage and asset backed securities 129,165
 126,150
 91,033
 90,681
 $470,162
 $463,905
 $531,192
 $535,281
 
Investment securities with amortized costs totaling $116,268,00080,001,000 and $96,490,00088,930,000 and fair values totaling $119,773,00079,662,000 and $100,747,00090,541,000 were pledged as collateral for borrowing arrangements, public funds and for other purposes at December 31, 20152018 and 20142017, respectively.  

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5. LOANS AND ALLOWANCE FOR CREDIT LOSSES

Outstanding loans are summarized as follows (in thousands):
Loan Type  December 31,
2015
 % of Total 
loans
 December 31,
2014
 % of Total 
loans
 December 31,
2018
 % of Total 
loans
 December 31,
2017
 % of Total 
loans
Commercial:  
  
  
  
  
  
  
  
Commercial and industrial $102,197
 17.1% $89,007
 15.5% $101,533
 11.1% $100,856
 11.2%
Agricultural land and production 30,472
 5.1% 39,140
 6.8%
Agricultural production 7,998
 0.9% 14,956
 1.7%
Total commercial 132,669
 22.2% 128,147
 22.3% 109,531
 12.0% 115,812
 12.9%
Real estate:                
Owner occupied 168,910
 28.2% 176,804
 30.9% 183,169
 19.9% 204,452
 22.7%
Real estate construction and other land loans 38,685
 6.5% 38,923
 6.8% 101,606
 11.1% 96,460
 10.7%
Commercial real estate 117,244
 19.6% 106,788
 18.7% 305,118
 33.2% 269,254
 29.9%
Agricultural real estate 74,867
 12.5% 57,501
 10.0% 76,884
 8.4% 76,081
 8.4%
Other real estate 10,520
 1.8% 6,611
 1.2% 32,799
 3.6% 31,220
 3.5%
Total real estate 410,226
 68.6% 386,627
 67.6%
 699,576
 76.2% 677,467
 75.2%
Consumer:                
Equity loans and lines of credit 42,296
 7.1% 47,575
 8.3% 69,958
 7.6% 76,404
 8.5%
Consumer and installment 12,503
 2.1% 10,093
 1.8% 38,038
 4.2% 29,637
 3.4%
Total consumer 54,799
 9.2% 57,668
 10.1% 107,996
 11.8% 106,041
 11.9%
Net deferred origination costs 417
   146
   1,592
   1,359
  
Total gross loans 598,111
 100.0% 572,588
 100.0% 918,695
 100.0% 900,679
 100.0%
Allowance for credit losses (9,610)  
 (8,308)  
 (9,104)  
 (8,778)  
Total loans $588,501
  
 $564,280
  
 $909,591
  
 $891,901
  

At December 31, 20152018 and 20142017, loans originated under Small Business Administration (SBA) programs totaling $10,704,00022,297,000 and $8,782,00025,925,000, respectively, were included in the real estate and commercial categories. Approximately $215,223,000$447,757,000 in loans were pledged under a blanket lien as collateral to the FHLB for the Bank’s remaining borrowing

capacity of $308,356,000$286,934,000 as of December 31, 2015.2018.  The Bank’s credit limit varies according to the amount and composition of the investment and loan portfolios pledged as collateral.
Salaries and employee benefits totaling $2,056,0002,453,000, $1,657,0002,593,000, and $1,373,0002,344,000 have been deferred as loan origination costs for the years ended December 31, 2015, 2014,2018, 2017, and 20132016, respectively.

Purchased Credit Impaired Loans

At December 31, 2013, the Company had loans that were acquired in an acquisition, for which there was, at acquisition, evidence of deterioration of credit quality since origination and for which it was probable, at acquisition, that all contractually required payments would not be collected. There were no such loans outstanding at December 31, 2015 and 2014.
Purchased credit impaired (PCI) loans are recorded at the amount paid, such that there is no carryover of the seller’s allowance for loan losses. The Company estimates the amount and timing of expected cash flows for each loan and the expected cash flows in excess of amount paid is recorded as interest income over the remaining life of the loan (accretable yield). The excess of the loan’s contractual principal and interest over expected cash flows is not recorded (nonaccretable difference). Over the life of the loan, expected cash flows continue to be estimated. If the present value of expected cash flows is less than the carrying amount, a loss is recorded. If the present value of expected cash flows is greater than the carrying amount, it is recognized as part of future interest income.
Accretable yield, or income expected to be collected for the year ended December 31, 2015, 2014, and 2013 is as follows (in thousands):

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  Years ended December 31,
  2015 2014 2013
Balance at beginning of year $
 $94
 $
New loans acquired 
 
 105
Accretion of income 
 (907) (124)
Reclassification from non-accretable difference 
 813
 113
Disposals 
 
 
Balance at end of year $
 $
 $94

Allowance for Credit Losses

The allowance for credit losses (the “allowance”) is a valuation allowance for probable incurred credit losses in the Company’s loan portfolio. The allowance is established through a provision for credit losses which is charged to expense. Additions to the allowance are expected to maintain the adequacy of the total allowance after credit losses and loan growth. Credit exposures determined to be uncollectible are charged against the allowance. Cash received on previously charged-off credits is recorded as a recovery to the allowance. The overall allowance consists of two primary components, specific reserves related to impaired loans and general reserves for probable incurred losses related to loans that are not impaired.
For all portfolio segments, the determination of the general reserve for loans that are not impaired is based on estimates made by management, including but not limited to, consideration of historical losses by portfolio segment (and in certain cases peer loss data) over the most recent 20 quarters, and qualitative factors including economic trends in the Company’s service areas, industry experience and trends, geographic concentrations, estimated collateral values, the Company’s underwriting policies, the character of the loan portfolio, and probable losses inherent in the portfolio taken as a whole.

Changes in the allowance for credit losses were as follows (in thousands):
 Years Ended December 31, Years Ended December 31,
 2015 2014 2013 2018 2017 2016
Balance, beginning of year $8,308
 $9,208
 $10,133
 $8,778
 $9,326
 $9,610
Provision charged to operations 600
 7,985
 
Provision (reversal) charged to operations 50
 (1,150) (5,850)
Losses charged to allowance (961) (9,834) (1,446) (210) (464) (883)
Recoveries 1,663
 949
 521
 486
 1,066
 6,449
Balance, end of year $9,610
 $8,308
 $9,208
 $9,104
 $8,778
 $9,326

The following table shows the summary of activities for the allowance for credit losses as of and for the years ended December 31, 20152018, 2017, and 20142016 by portfolio segment (in thousands):
 Commercial Real Estate Consumer Unallocated Total Commercial Real Estate Consumer Unallocated Total
Allowance for credit losses:  
  
  
  
  
  
  
  
  
  
Beginning balance, January 1, 2015 $3,130
 $4,058
 $1,078
 $42
 $8,308
Provision charged to operations 190
 1,114
 (772) 68
 600
Beginning balance, January 1, 2018 $2,071
 $5,795
 $825
 $87
 $8,778
(Reversal) provision charged to operations (513) 642
 (60) (19) 50
Losses charged to allowance (802) 
 (159) 
 (961) (94) 
 (116) 
 (210)
Recoveries 1,044
 32
 587
 
 1,663
 207
 102
 177
 
 486
Ending balance, December 31, 2015 $3,562
 $5,204
 $734
 $110
 $9,610
Ending balance, December 31, 2018 $1,671
 $6,539
 $826
 $68
 $9,104
                    
Allowance for credit losses:  
  
  
  
  
  
  
  
  
  
Beginning balance, January 1, 2014 $2,444
 $5,174
 $1,168
 $422
 $9,208
Provision charged to operations 9,660
 (1,447) 152
 (380) 7,985
Beginning balance, January 1, 2017 $2,180
 $6,200
 $852
 $94
 $9,326
(Reversal) provision charged to operations (762) (449) 68
 (7) (1,150)
Losses charged to allowance (9,145) (183) (506) 
 (9,834) (207) (22) (235) 
 (464)
Recoveries 171
 514
 264
 
 949
 860
 66
 140
 
 1,066
Ending balance, December 31, 2014 $3,130
 $4,058
 $1,078
 $42
 $8,308
Ending balance, December 31, 2017 $2,071
 $5,795
 $825
 $87
 $8,778
          
Allowance for credit losses:  
  
  
  
  
Beginning balance, January 1, 2016 $3,562
 $5,204
 $734
 $110
 $9,610
(Reversal) provision charged to operations (6,048) 11
 203
 (16) (5,850)
Losses charged to allowance (621) 
 (262) 
 (883)
Recoveries 5,287
 985
 177
 
 6,449
Ending balance, December 31, 2016 $2,180
 $6,200
 $852
 $94
 $9,326


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The following is a summary of the allowance for credit losses by impairment methodology and portfolio segment as of December 31, 20152018 and December 31, 20142017 (in thousands):
 Commercial Real Estate Consumer Unallocated Total Commercial Real Estate Consumer Unallocated Total
Allowance for credit losses:  
  
  
  
  
  
  
  
  
  
Ending balance, December 31, 2015 $3,562
 $5,204
 $734
 $110
 $9,610
Ending balance, December 31, 2018 $1,671
 $6,539
 $826
 $68
 $9,104
Ending balance: individually evaluated for impairment $1
 $128
 $35
 $
 $164
 $9
 $27
 $54
 $
 $90
Ending balance: collectively evaluated for impairment $3,561
 $5,076
 $699
 $110
 $9,446
 $1,662
 $6,512
 $772
 $68
 $9,014
                    
Ending balance, December 31, 2014 $3,130
 $4,058
 $1,078
 $42
 $8,308
Ending balance, December 31, 2017 $2,071
 $5,795
 $825
 $87
 $8,778
Ending balance: individually evaluated for impairment $230
 $162
 $220
 $
 $612
 $1
 $1
 $34
 $
 $36
Ending balance: collectively evaluated for impairment $2,900
 $3,896
 $858
 $42
 $7,696
 $2,070
 $5,794
 $791
 $87
 $8,742

The following table shows the ending balances of loans as of December 31, 20152018 and December 31, 20142017 by portfolio segment and by impairment methodology (in thousands):
 Commercial Real Estate Consumer Total Commercial Real Estate Consumer Total
Loans:  
  
  
  
  
  
  
  
Ending balance, December 31, 2015 $132,669
 $410,226
 $54,799
 $597,694
Ending balance, December 31, 2018 $109,531
 $699,576
 $107,996
 $917,103
Ending balance: individually evaluated for impairment $30
 $5,199
 $1,470
 $6,699
 $348
 $4,215
 $1,346
 $5,909
Ending balance: collectively evaluated for impairment $132,639
 $405,027
 $53,329
 $590,995
 $109,183
 $695,361
 $106,650
 $911,194
                
Loans:  
  
  
  
  
  
  
  
Ending balance, December 31, 2014 $128,147
 $386,627
 $57,668
 $572,442
Ending balance, December 31, 2017 $115,812
 $677,467
 $106,041
 $899,320
Ending balance: individually evaluated for impairment $7,268
 $8,512
 $3,046
 $18,826
 $377
 $4,846
 $1,143
 $6,366
Ending balance: collectively evaluated for impairment $120,879
 $378,115
 $54,622
 $553,616
 $115,435
 $672,621
 $104,898
 $892,954

The following table shows the loan portfolio by class allocated by management’s internal risk ratings at December 31, 20152018 (in thousands):
 Pass Special Mention Substandard Doubtful Total Pass Special Mention Substandard Doubtful Total
Commercial:                    
Commercial and industrial $77,783
 $22,607
 $1,807
 $
 $102,197
 $86,876
 $12,072
 $2,585
 $
 $101,533
Agricultural land and production 20,422
 
 10,050
 
 30,472
Agricultural production 5,955
 2,043
 
 
 7,998
Real Estate:                    
Owner occupied 163,570
 3,785
 1,555
 
 168,910
 179,214
 3,056
 899
 
 183,169
Real estate construction and other land loans 34,916
 644
 3,125
 
 38,685
 95,301
 3,270
 3,035
 
 101,606
Commercial real estate 110,833
 1,683
 4,728
 
 117,244
 298,714
 5,268
 1,136
 
 305,118
Agricultural real estate 66,347
 
 8,520
 
 74,867
 57,544
 165
 19,175
 
 76,884
Other real estate 10,520
 
 
 
 10,520
 32,799
 
 
 
 32,799
Consumer:                    
Equity loans and lines of credit 40,332
 
 1,964
 
 42,296
 68,016
 380
 1,562
 
 69,958
Consumer and installment 12,488
 
 15
 
 12,503
 38,036
 
 2
 
 38,038
Total $537,211
 $28,719
 $31,764
 $
 $597,694
 $862,455
 $26,254
 $28,394
 $
 $917,103


88


The following table shows the loan portfolio by class allocated by management’s internally assigned risk grade ratings at December 31, 20142017 (in thousands):
 Pass Special Mention Substandard Doubtful Total Pass Special Mention Substandard Doubtful Total
Commercial:                    
Commercial and industrial $78,333
 $2,345
 $8,329
 $
 $89,007
 $84,745
 $8,217
 $7,894
 $
 $100,856
Agricultural land and production 39,140
 
 
 
 39,140
Agricultural production 10,848
 206
 3,902
 
 14,956
Real Estate:                    
Owner occupied 170,568
 2,778
 3,458
 
 176,804
 196,838
 4,795
 2,819
 
 204,452
Real estate construction and other land loans 32,114
 1,130
 5,679
 
 38,923
 90,927
 1,625
 3,908
 
 96,460
Commercial real estate 95,831
 215
 10,742
 
 106,788
 261,746
 4,147
 3,361
 
 269,254
Agricultural real estate 55,018
 2,123
 360
 
 57,501
 48,274
 1,270
 26,537
 
 76,081
Other real estate 6,611
 
 
 
 6,611
 29,867
 1,165
 188
 
 31,220
Consumer:                    
Equity loans and lines of credit 42,334
 72
 5,169
 
 47,575
 74,535
 483
 1,386
 
 76,404
Consumer and installment 10,072
 
 21
 
 10,093
 29,634
 
 3
 
 29,637
Total $530,021
 $8,663
 $33,758
 $
 $572,442
 $827,414
 $21,908
 $49,998
 $
 $899,320

The following table shows an aging analysis of the loan portfolio by class and the time past due at December 31, 20152018 (in thousands):
 
30-59 Days
Past Due
 
60-89
Days Past
Due
 
Greater
Than
 90 Days
Past Due
 
Total Past
Due
 Current 
Total
Loans
 
Recorded
Investment
> 90 Days
Accruing
 Non-accrual 
30-59 Days
Past Due
 
60-89
Days Past
Due
 
Greater
Than
 90 Days
Past Due
 
Total Past
Due
 Current 
Total
Loans
 
Recorded
Investment
> 90 Days
Accruing
 Non-accrual
Commercial:  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
Commercial and industrial $
 $
 $
 $
 $102,197
 $102,197
 $
 $29
 $255
 $
 $
 $255
 $101,278
 $101,533
 $
 $298
Agricultural land and production 
 
 
 
 30,472
 30,472
 
 
Agricultural production 
 
 
 
 7,998
 7,998
 
 
Real estate: 
  
  
 

 
 
  
   
  
  
 

 
 
  
  
Owner occupied 
 
 
 
 168,910
 168,910
 
 347
 215
 
 
 215
 182,954
 183,169
 
 215
Real estate construction and other land loans 
 
 
 
 38,685
 38,685
 
 
 
 
 1,439
 1,439
 100,167
 101,606
 
 1,439
Commercial real estate 98
 
 
 98
 117,146
 117,244
 
 567
 
 
 
 
 305,118
 305,118
 
 418
Agricultural real estate 
 
 
 
 74,867
 74,867
 
 
 
 
 
 
 76,884
 76,884
 
 
Other real estate 
 
 
 
 10,520
 10,520
 
 
 
 
 
 
 32,799
 32,799
 
 
Consumer:    
  
 

 
 
  
      
  
 

 
 
  
  
Equity loans and lines of credit 
 166
 
 166
 42,130
 42,296
 
 1,457
 953
 
 
 953
 69,005
 69,958
 
 370
Consumer and installment 38
 
 
 38
 12,465
 12,503
 
 13
 7
 
 
 7
 38,031
 38,038
 
 
Total $136
 $166
 $
 $302
 $597,392
 $597,694
 $
 $2,413
 $1,430
 $
 $1,439
 $2,869
 $914,234
 $917,103
 $
 $2,740
 

89


The following table shows an aging analysis of the loan portfolio by class and the time past due at December 31, 20142017 (in thousands):
 
30-59 Days
Past Due
 
60-89
Days Past
Due
 
Greater
Than
 90 Days
Past Due
 
Total Past
Due
 Current 
Total
Loans
 
Recorded
Investment
> 90 Days
Accruing
 
Non-
accrual
 
30-59 Days
Past Due
 
60-89
Days Past
Due
 
Greater
Than
 90 Days
Past Due
 
Total Past
Due
 Current 
Total
Loans
 
Recorded
Investment
> 90 Days
Accruing
 
Non-
accrual
Commercial:  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
Commercial and industrial $172
 $88
 $
 $260
 $88,747
 $89,007
 $
 $7,265
 $
 $
 $
 $
 $100,856
 $100,856
 $
 $356
Agricultural land and production 
 
 
 
 39,140
 39,140
 
 
Agricultural production 
 
 
 
 14,956
 14,956
 
 
Real estate: 
  
  
    
 
  
   
  
  
    
 
  
  
Owner occupied 164
 
 249
 413
 176,391
 176,804
 
 1,363
 
 
 
 
 204,452
 204,452
 
 
Real estate construction and other land loans 547
 
 
 547
 38,376
 38,923
 
 547
 
 
 1,397
 1,397
 95,063
 96,460
 
 1,397
Commercial real estate 
 
 
 
 106,788
 106,788
 
 1,468
 
 
 
 
 269,254
 269,254
 
 976
Agricultural real estate 
 
 
 
 57,501
 57,501
 
 360
 
 
 
 
 76,081
 76,081
 
 
Other real estate 
 
 
 
 6,611
 6,611
 
 
 
 1,165
 
 1,165
 30,055
 31,220
 
 
Consumer:  
  
  
    
 
  
    
  
  
    
 
  
  
Equity loans and lines of credit 
 
 227
 227
 47,348
 47,575
 
 3,030
 149
 
 
 149
 76,255
 76,404
 
 146
Consumer and installment 30
 
 
 30
 10,063
 10,093
 
 19
 26
 
 
 26
 29,611
 29,637
 
 
Total $913
 $88
 $476
 $1,477
 $570,965
 $572,442
 $
 $14,052
 $175
 $1,165
 $1,397
 $2,737
 $896,583
 $899,320
 $
 $2,875
 

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The following table shows information related to impaired loans by class at December 31, 20152018 (in thousands):
 
Recorded
Investment
 
Unpaid
Principal
Balance
 
Related
Allowance
 
Recorded
Investment
 
Unpaid
Principal
Balance
 
Related
Allowance
With no related allowance recorded:  
  
  
  
  
  
Commercial:  
  
  
  
  
  
Commercial and industrial $
 $1
 $
 $259
 $493
 $
Real estate:  
  
  
  
  
  
Owner occupied 166
 245
 
 215
 215
 
Real estate construction and other land loans 3,125
 3,125
 
 2,613
 2,676
 
Commercial real estate 1,162
 1,302
 
 1,182
 1,414
 
Total real estate 4,453
 4,672
 
 4,010
 4,305
 
Consumer:  
  
  
  
  
  
Equity loans and lines of credit 1,291
 1,991
 
 248
 285
 
Total with no related allowance recorded 5,744
 6,664
 
 4,517
 5,083
 
            
With an allowance recorded:  
  
  
  
  
  
Commercial:  
  
  
  
  
  
Commercial and industrial 30
 33
 1
 89
 90
 9
Real estate:  
  
  
  
  
  
Owner occupied 180
 212
 18
Commercial real estate 566
 588
 110
 161
 162
 27
Agricultural real estate 44
 44
 
Total real estate 746
 800
 128
 205
 206
 27
Consumer:  
  
  
  
  
  
Equity loans and lines of credit 166
 179
 33
 1,098
 1,103
 54
Consumer and installment 13
 15
 2
Total consumer 179
 194
 35
Total with an allowance recorded 955
 1,027
 164
 1,392
 1,399
 90
Total $6,699
 $7,691
 $164
 $5,909
 $6,482
 $90

The recorded investment in loans excludes accrued interest receivable and net loan origination fees, due to immateriality.

91


The following table shows information related to impaired loans by class at December 31, 20142017 (in thousands):
 
Recorded
Investment
 
Unpaid
Principal
Balance
 
Related
Allowance
 
Recorded
Investment
 
Unpaid
Principal
Balance
 
Related
Allowance
With no related allowance recorded:  
  
  
  
  
  
Commercial:  
  
  
  
  
  
Commercial and industrial $6,440
 $9,991
 $
 $355
 $553
 $
Agricultural land and production 
 1,722
 
Total commercial 6,440
 11,713
 
Real estate:  
  
  
  
  
  
Owner occupied 1,188
 1,255
 
Real estate construction and other land loans 547
 799
 
 3,023
 3,085
 
Commercial real estate 1,794
 1,794
 
 1,772
 2,040
 
Agricultural real estate 360
 360
 
Total real estate 3,889
 4,208
 
 4,795
 5,125
 
Consumer:  
  
  
  
  
  
Equity loans and lines of credit 2,019
 2,707
 
 146
 206
 
Total with no related allowance recorded 12,348
 18,628
 
 5,296
 5,884
 
            
With an allowance recorded:  
  
  
  
  
  
Commercial:  
  
  
  
  
  
Commercial and industrial 828
 835
 230
 22
 22
 1
Real estate:  
  
  
  
  
  
Owner occupied 199
 219
 30
Real estate construction and other land loans 3,542
 3,542
 72
Commercial real estate 882
 1,022
 60
Total real estate 4,623
 4,783
 162
Agricultural real estate 51
 51
 1
Consumer:  
  
  
  
  
  
Equity loans and lines of credit 1,008
 1,026
 217
 997
 997
 34
Consumer and installment 19
 21
 3
Total consumer 1,027
 1,047
 220
Total with an allowance recorded 6,478
 6,665
 612
 1,070
 1,070
 36
Total $18,826
 $25,293
 $612
 $6,366
 $6,954
 $36
 
The recorded investment in loans excludes accrued interest receivable and net loan origination fees, due to immateriality.

92


The following presents by class, information related to the average recorded investment and interest income recognized on impaired loans for the years ended December 31, 2015, 2014,2018, 2017, and 20132016 (in thousands):
 
Year Ended
December 31, 2015
 
Year Ended
December 31, 2014
 
Year Ended
December 31, 2013
 
Year Ended
December 31, 2018
 
Year Ended
December 31, 2017
 
Year Ended
December 31, 2016
 
Average
Recorded
Investment
 
Interest
Income
Recognized
 
Average
Recorded
Investment
 
Interest
Income
Recognized
 
Average
Recorded
Investment
 
Interest
Income
Recognized
 
Average
Recorded
Investment
 
Interest
Income
Recognized
 
Average
Recorded
Investment
 
Interest
Income
Recognized
 
Average
Recorded
Investment
 
Interest
Income
Recognized
With no related allowance recorded:  
  
  
  
  
  
  
  
  
  
  
  
Commercial:  
  
  
  
  
  
  
  
  
  
  
  
Commercial and industrial $2,921
 $
 $638
 $
 $329
 $
 $311
 $
 $404
 $
 $115
 $
Agricultural production 
 
 
 
 42
 
Total commercial 2,921
 
 638
 
 329
 
 311
 
 404
 
 157
 
Real estate:  
  
  
  
  
  
  
  
  
  
  
  
Owner occupied 770
 231
 2,063
 2
 2,321
 
 17
 
 24
 
 162
 
Real estate construction and other land loans 1,266
 79
 1,276
 24
 2,342
 
 2,857
 85
 1,228
 114
 2,393
 196
Commercial real estate 1,939
 
 574
 
 279
 
 1,542
 51
 1,370
 53
 903
 55
Agricultural real estate 211
 
 28
 
 
 
 1,173
 159
 
 
 173
 
Other real estate 702
 
 
 
 
 
Total real estate 4,186
 310
 3,941
 26
 4,942
 
 6,291
 295
 2,622
 167
 3,631
 251
Consumer:  
  
  
  
  
  
  
  
  
  
  
  
Equity loans and lines of credit 1,858
 
 1,826
 
 1,998
 
 217
 
 132
 
 598
 
Consumer and installment 
 
 8
 
 9
 
 
 
 6
 
 41
 
Total consumer 1,858
 
 1,834
 
 2,007
 
 217
 
 138
 
 639
 
Total with no related allowance recorded 8,965
 310
 6,413
 26
 7,278
 
 6,819
 295
 3,164
 167
 4,427
 251
 
  
  
  
  
  
 
  
  
  
  
  
With an allowance recorded: 
  
  
  
  
  
 
  
  
  
  
  
Commercial: 1,624,000
 178,000
 721,000
 
 721,000
 
           
Commercial and industrial 243
 
 423
 
 1,309
 111
 55
 4
 38
 1
 441
 3
Agricultural production 
 
 
 
 104
 
Total commercial 243
 
 423
 
 1,309
 111
 55
 4
 38
 1
 545
 3
Real estate:  
 
   
   
  
 
   
   
Owner occupied 190
 
 264
 
 997
 86
 
 
 
 
 120
 
Real estate construction and other land loans 2,297
 
 3,782
 267
 4,295
 329
 
 
 1,827
 
 171
 
Commercial real estate 753
 
 214
 55
 
 47
 200
 12
 470
 
 548
 
Agricultural real estate 49
 3
 43
 3
 
 
Other real estate 86
 
 
 
 
 
Total real estate 3,240
 
 4,260
 322
 5,292
 462
 335
 15
 2,340
 3
 839
 
Consumer:  
  
  
  
  
  
  
  
  
  
  
  
Equity loans and lines of credit 328
 
 303
 
 489
 
 1,054
 57
 239
 32
 203
 
Consumer and installment 16
 
 27
 
 
 
 3
 
 1
 
 19
 
Total consumer 344
 
 330
 
 489
 
 1,057
 57
 240
 32
 222
 
Total with an allowance recorded 3,827
 
 5,013
 322
 7,090
 573
 1,447
 76
 2,618
 36
 1,606
 3
Total $12,792
 $310
 $11,426
 $348
 $14,368
 $573
 $8,266
 $371
 $5,782
 $203
 $6,033
 $254

Foregone interest on nonaccrual loans totaled $340,000, $716,000,$267,000, $210,000, and $661,000$245,000 for the years ended December 31, 2015, 2014,2018, 2017, and 2013,2016, respectively. Interest income recognized on cash basis during the years presented above was not considered significant for financial reporting purposes.
    

Troubled Debt Restructurings:

As of December 31, 20152018 and 20142017, the Company has a recorded investment in troubled debt restructurings of $5,623,000$3,220,000 and, $6,600,000,$3,551,000, respectively. The Company has allocated $1,000$50,000 and $132,000$36,000 of specific reserves for those loans at December 31, 20152018 and 20142017, respectively. The Company has committed to lend no additional amounts as of December 31, 20152018 to customers with outstanding loans that are classified as troubled debt restructurings.
For the years ended December 31, 20152018, 2017, and 20142016 the terms of certain loans were modified as troubled debt restructurings. The modification of the terms of such loans included one or a combination of the following: a reduction of the stated interest rate of the loan or an extension of the maturity date at a stated rate of interest lower than the current market rate

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for new debt with similar risk. During the same periods, there were no troubled debt restructurings in which the amount of principal or accrued interest owed from the borrower were forgiven.
The following table presents loans by class modified as troubled debt restructurings that occurred during the year ended December 31, 20152018 (in(dollars in thousands):
Troubled Debt Restructurings: Number of Loans Pre-Modification Outstanding Recorded Investment (1) Principal Modification Post Modification Outstanding Recorded Investment (2) Outstanding Recorded Investment Number of Loans Pre-Modification Outstanding Recorded Investment (1) Principal Modification Post Modification Outstanding Recorded Investment (2) Outstanding Recorded Investment
Commercial:                    
Commercial and industrial 2
 $42
 $
 $42
 $30
 1
 $38
 $
 $38
 $30
Real Estate:          
Real Estate - Commercial 1
 $166
 $
 $166
 $161
Total
2
 $204
 $
 $204
 $191
(1)Amounts represent the recorded investment in loans before recognizing effects of the TDR, if any.
(2)Balance outstanding after principal modification, if any borrower reduction to recorded investment.

The following table presents loans by class modified as troubled debt restructurings that occurred during the year ended December 31, 20142017 (in(dollars in thousands):
Troubled Debt Restructurings: Number of Loans Pre-Modification Outstanding Recorded Investment (1) Principal Modification Post Modification Outstanding Recorded Investment (2) Outstanding Recorded Investment Number of Loans Pre-Modification Outstanding Recorded Investment (1) Principal Modification Post Modification Outstanding Recorded Investment (2) Outstanding Recorded Investment
Commercial:          
Commercial and Industrial 1
 $25
 $
 $25
 $25
Real Estate:          
Agricultural real estate 1
 59
 
 59
 51
Consumer                    
Equity loans and line of credit 1
 7
 
 7
 4
 2
 490
 
 1,066
 1,059
Total 2
 $32
 $
 $32
 $29
 3
 $549
 $
 $1,125
 $1,110
(1)Amounts represent the recorded investment in loans before recognizing effects of the TDR, if any.
(2)Balance outstanding after principal modification, if any borrower reduction to recorded investment.

The following table presents loans by class modified as troubled debt restructurings that occurred during the year ended December 31, 2016 (dollars in thousands):
Troubled Debt Restructurings: Number of Loans Pre-Modification Outstanding Recorded Investment (1) Principal Modification Post Modification Outstanding Recorded Investment (2) Outstanding Recorded Investment
Commercial:          
Commercial and Industrial 2
 $45
 $
 $45
 $40
(1)Amounts represent the recorded investment in loans before recognizing effects of the TDR, if any.
(2)Balance outstanding after principal modification, if any borrower reduction to recorded investment.

A loan is considered to be in payment default once it is 90 days contractually past due under the modified terms. There were no defaults on troubled debt restructurings within 12 months following the modification during the years ended December 31, 20152018, 2017, and 2014.2016.


6.BANK PREMISES AND EQUIPMENT
 
Bank premises and equipment consisted of the following (in thousands): 
 December 31, December 31,
 2015 2014 2018 2017
Land $1,131
 $1,131
 $1,131
 $1,131
Buildings and improvements 6,680
 6,545
 6,753
 6,754
Furniture, fixtures and equipment 10,539
 9,943
 12,665
 12,345
Leasehold improvements 4,005
 4,055
 4,369
 4,594
 22,355
 21,674
 24,918
 24,824
Less accumulated depreciation and amortization (13,063) (11,725) (16,434) (15,426)
 $9,292
 $9,949
 $8,484
 $9,398
 
Depreciation and amortization included in occupancy and equipment expense totaled $1,392,0001,703,000, $1,355,0001,429,000 and $1,133,0001,320,000 for the years ended December 31, 2015, 2014,2018, 2017, and 20132016, respectively.



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7.OTHER REAL ESTATE OWNED
The Company had no other real estate owned (OREO) at December 31, 2015 or December 31, 2014. The table below provides a summary of the change in other real estate owned (OREO) balances for the years ended December 31, 2015 and 2014 (in thousands):
  December 31,
  2015
2014
Balance, beginning of year $
 $190
Additions 227
 235
1st lien assumed upon foreclosure 121
 
Dispositions (359) (488)
Write-downs 
 
Net gain on dispositions 11
 63
Balance, end of year $
 $

As of December 31, 2015 the Bank had no OREO properties. In 2015, the Bank foreclosed on one property collateralized by real estate. Proceeds from OREO sales totaled $359,000 during 2015. The Company realized $11,000 in net gains from the sale of all properties.
As of December 31, 2014 the Bank had no OREO properties. In 2014, the Bank foreclosed on one property collateralized by real estate. Proceeds from OREO sales totaled $488,000 during 2015. The Company realized $63,000 in net gains from the sale of all properties.


8.7.  GOODWILL AND INTANGIBLE ASSETS
 
The change in goodwill during the years ended December 31, 2015, 2014,2018, 2017, and 20132016 is as follows (in thousands):
2015 2014 20132018 2017 2016
Balance, beginning of year$29,917
 $29,917
 $23,577
$53,777
 $40,231
 $29,917
Acquired goodwill
 
 6,340

 13,546
 10,314
Impairment
 
 

 
 
Balance, end of year$29,917
 $29,917
 $29,917
$53,777
 $53,777
 $40,231

Business combinations involving the Company’s acquisition of the equity interests or net assets of another enterprise give rise to goodwill. Total goodwill at December 31, 20152018 and 20142017 was $29,917,00053,777,000. Total goodwill at December 31, 20152018 consisted of $13,466,000, $10,394,000, $6,340,000, $14,643,000, and $8,934,000 representing the excess of the cost of Folsom Lake Bank, Sierra Vista Bank, Visalia Community Bank, Service 1st Bancorp, and Bank of Madera County, respectively, over the net of the amounts assigned to assets acquired and liabilities assumed in the transactions accounted for under the purchase method of accounting.  The value of goodwill is ultimately derived from the Company’s ability to generate net earnings after the acquisitions and is not deductible for tax purposes.  A decline in net earnings could be indicative of a decline in the fair value of goodwill and result in impairment.  For that reason, goodwill is assessed at least annually for impairment.
The Company has selected September 30 as the date to perform the annual impairment test. Management assessed qualitative factors including performance trends and noted no factors indicating goodwill impairment.
Goodwill is also tested for impairment between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of the Company below its carrying amount.  No such events or circumstances arose during the fourth quarter of 20152018, so goodwill was not required to be retested.
The intangible assets at December 31, 20152018 represent the estimated fair value of the core deposit relationships acquired in the acquisition of Service 1stFolsom Lake Bank in 20082017 of $1,400,000$1,879,000, Sierra Vista Bank in 2016 of $508,000 and the 2013 acquisition of Visalia Community Bank of $1,365,000.  Core deposit intangibles are being amortized using the straight-line method over an estimated life of sevenfive to ten years from the date of acquisition. At December 31, 20152018, the weighted average remaining amortization period is sevenfour years.  The carrying value of intangible assets at December 31, 20152018 was $1,024,0002,572,000, net of $1,741,0001,180,000 in accumulated amortization expense.  The carrying value at December 31, 20142017 was $1,344,0003,027,000, net of $1,421,000725,000 in accumulated amortization expense.  Management evaluates the remaining useful lives quarterly to determine whether events or circumstances warrant a revision to the remaining periods of amortization.  Based on the evaluation, no changes to the remaining useful lives was required.  Management performed an annual impairment test on core deposit intangibles as of September 30, 20152018 and determined no

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impairment was necessary.  Amortization expense recognized was $320,000455,000 for 20152018, $337,000$234,000 for 20142017, and $268,000$149,000 for 20132016.


The following table summarizes the Company’s estimated core deposit intangible amortization expense for each of the next five years (in thousands):
Years Ending December 31, Estimated Core Deposit Intangible Amortization Estimated Core Deposit Intangible Amortization
2016 $137
2017 137
2018 137
2019 137
 $696
2020 137
 696
2021 661
2022 453
2023 66
Thereafter 339
 
Total $1,024
 $2,572
 

9.DEPOSITS
8. DEPOSITS
 
Interest-bearing deposits consisted of the following (in thousands):
 December 31, December 31,
 2015 2014 2018 2017
Savings $81,383
 $71,381
 $114,565
 $116,534
Money market 239,241
 228,268
 267,820
 299,638
NOW accounts 227,167
 209,781
 252,439
 296,406
Time, $250,000 or more 42,149
 45,792
 30,902
 34,441
Time, under $250,000 97,554
 107,528
 65,915
 93,629
 $687,494
 $662,750
 $731,641
 $840,648

Aggregate annual maturities of time deposits are as follows (in thousands):
Years Ending December 31,    
2016 $108,380
2017 19,485
2018 7,874
2019 1,630
 $71,869
2020 1,693
 18,880
2021 2,437
2022 1,429
2023 1,092
Thereafter 641
 1,110
 $139,703
 $96,817
 
Interest expense recognized on interest-bearing deposits consisted of the following (in thousands):
 Years Ended December 31, Years Ended December 31,
 2015 2014 2013 2018 2017 2016
Savings $30
 $32
 $40
 $37
 $33
 $27
Money market 141
 174
 229
 419
 211
 133
NOW accounts 231
 209
 251
 414
 317
 290
Time certificates of deposit 546
 645
 750
 283
 408
 525
 $948
 $1,060
 $1,270
 $1,153
 $969
 $975



969. BORROWING ARRANGEMENTS

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10.BORROWING ARRANGEMENTS
 
Federal Home Loan Bank Advances - As of December 31, 2015 and 2014,2018, the Company had no$10,000,000 in Federal Home Loan Bank (FHLB) of San Francisco advances. As of December 31, 2017, the Company had no FHLB advances.
Approximately $215,223,000447,757,000 in loans were pledged under a blanket lien as collateral to the FHLB for the Bank’s remaining borrowing capacity of $308,356,000$286,934,000 as of December 31, 20152018. FHLB advances are also secured by investment securities with amortized costs totaling $750,000326,000 and $1,256,000416,000 and market values totaling $825,000337,000 and $1,364,000440,000 at December 31, 20152018 and 20142017, respectively.  The Bank’s credit limit varies according to the amount and composition of the investment and loan portfolios pledged as collateral.
As of December 31, 2015 and 2014, the Company had no Federal funds purchased.

Lines of Credit - The Bank had unsecured lines of credit with its correspondent banks which, in the aggregate, amounted to $40,000,000 at December 31, 20152018 and 2014,2017, at interest rates which vary with market conditions. As of December 31, 2018 and 2017, the Company had no in Federal funds purchased.

Federal Reserve Line of Credit - The Bank also hadhas a line of credit in the amount of $2,328,0004,364,000 and $2,441,0006,740,000 with the Federal Reserve Bank of San Francisco (FRB) at December 31, 20152018 and 20142017, respectively, which bears interest at the prevailing discount rate collateralized by investment securities with amortized costs totaling $2,578,0004,498,000 and $2,729,0007,431,000 and market values totaling $2,598,0004,475,000 and $2,757,0007,437,000, respectively.  At December 31, 20152018 and 20142017, the Bank had no outstanding short-term borrowings under these lines of credit.with the FRB.

 
11.JUNIOR SUBORDINATED DEFERRABLE INTEREST DEBENTURES
10. JUNIOR SUBORDINATED DEFERRABLE INTEREST DEBENTURES
 
Service 1st Capital Trust I is a Delaware business trust formed by Service 1st.  The Company succeeded to all of the rights and obligations of Service 1st in connection with the merger with Service 1st as of November 12, 2008.  The Trust was formed on August 17, 2006 for the sole purpose of issuing trust preferred securities fully and unconditionally guaranteed by Service 1st.  Under applicable regulatory guidance, the amount of trust preferred securities that is eligible as Tier 1 capital is limited to 25% of the Company’s Tier 1 capital on a pro forma basis.  At December 31, 20152018, all of the trust preferred securities that have been issued qualify as Tier 1 capital.  The trust preferred securities mature on October 7, 2036, are redeemable at the Company’s option, and require quarterly distributions by the Trust to the holder of the trust preferred securities at a variable interest rate which will adjust quarterly to equal the three month LIBOR plus 1.60%.
The Trust used the proceeds from the sale of the trust preferred securities to purchase approximately $5,155,000 in aggregate principal amount of Service 1st’s junior subordinated notes (the Notes).  The Notes bear interest at the same variable interest rate during the same quarterly periods as the trust preferred securities.  The Notes are redeemable by the Company on any January 7, April 7, July 7, or October 7 or at any time within 90 days following the occurrence of certain events, such as: (i) a change in the regulatory capital treatment of the Notes (ii) in the event the Trust is deemed an investment company or (iii) upon the occurrence of certain adverse tax events.  In each such case, the Company may redeem the Notes for their aggregate principal amount, plus any accrued but unpaid interest.
The Notes may be declared immediately due and payable at the election of the trustee or holders of 25% of the aggregate principal amount of outstanding Notes in the event that the Company defaults in the payment of any interest following the nonpayment of any such interest for 20 or more consecutive quarterly periods.
Holders of the trust preferred securities are entitled to a cumulative cash distribution on the liquidation amount of $1,000 per security.  For each January 7, April 7, July 7 or October 7 of each year, the rate will be adjusted to equal the three month LIBOR plus 1.60%.  As of December 31, 20152018, the rate was 1.92%4.04%.  Interest expense recognized by the Company for the years ended December 31, 2015, 2014,2018, 2017, and 20132016 was $99,000199,000, $96,000147,000 and $98,000121,000, respectively.

 

9711. INCOME TAXES

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12.INCOME TAXES
 
The provision for (benefit from) income taxes for the years ended December 31, 2015, 2014,2018, 2017, and 20132016 consisted of the following (in thousands):
 Federal State Total Federal State Total
2015      
2018      
Current $2,945
 $570
 $3,515
 $3,995
 $2,689
 $6,684
Deferred (1,208) 275
 (933) (140) 76
 (64)
Provision for income taxes $1,737
 $845
 $2,582
 $3,855
 $2,765
 $6,620
2014      
2017      
Current $(125) $(37) $(162) $1,188
 $1,224
 $2,412
Deferred (397) (11) (408) 3,328
 518
 3,846
Benefit from income taxes $(522) $(48) $(570)
2013      
Re-measurement resulting from Tax Act 3,535
 
 3,535
Provision for income taxes $8,051
 $1,742
 $9,793
2016      
Current $2,217
 $(445) $1,772
 $3,720
 $605
 $4,325
Deferred (645) 220
 (425) 1,100
 1,492
 2,592
Provision for (benefit from) income taxes $1,572
 $(225) $1,347
Provision for income taxes $4,820
 $2,097
 $6,917
 
The determination of the amount of deferred income tax assets which are more likely than not to be realized is primarily dependent on projections of future earnings, which are subject to uncertainty and estimates that may change given economic conditions and other factors.  The realization of deferred income tax assets is assessed and a valuation allowance is recorded if it is more likely than not that all or a portion of the deferred tax asset will not be realized.  More likely than not is defined as greater than a 50% chance.  All available evidence, both positive and negative is considered to determine whether, based on the weight of the evidence, a valuation allowance is needed.  The Company established aThus, Management concludes no valuation allowance is necessary against deferred tax valuation allowance in the amount $20,000 as of December 31, 2014 for California capital loss carry-forwards. The California capital loss carry-forward expired in 2015 unutilized; thus, the deferred balance as well as the related valuation allowance was written off as of December 31, 2015.assets.

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Deferred tax assets (liabilities) consisted of the following (in thousands):
 December 31, December 31,
 2015 2014 2018 2017
Deferred tax assets:  
  
  
  
Allowance for credit losses $3,823
 $3,188
 $2,380
 $2,100
Deferred compensation 5,038
 4,979
 4,347
 4,415
Unrealized loss on available-for-sale investment securities 1,850
 
Net operating loss carryovers 75
 698
 2,407
 2,549
Bank premises and equipment 351
 186
Mark-to-market adjustment 96
 98
 53
 87
Other deferred 313
 511
Other deferred tax assets 445
 386
Other-than-temporary impairment 267
 267
 192
 192
Loan and investment impairment 721
 887
 1,450
 1,793
State Enterprise Zone credit carry-forward 1,067
 1,444
State capital loss carry-forward 
 20
Alternative minimum tax credit 3,525
 3,338
Partnership income 87
 70
 55
 68
State taxes 266
 1
 575
 375
Total deferred tax assets 15,629
 15,687
 13,754
 11,965
Valuation allowance 
 (20)
Net deferred tax asset after valuation allowance 15,629
 15,667
Deferred tax liabilities:  
  
  
  
Finance leases (921) (1,871) (173) (365)
Unrealized gain on available-for-sale investment securities (3,076) (3,661) 
 (1,186)
Core deposit intangible (421) (553) (760) (895)
FHLB stock (319) (319) (234) (234)
Loan origination costs (664) (553) (891) (783)
Bank premises and equipment (513) (478)
Total deferred tax liabilities (5,401) (6,957) (2,571) (3,941)
Net deferred tax assets $10,228
 $8,710
 $11,183
 $8,024

The provision for income taxes differs from amounts computed by applying the statutory Federal income tax rates to operating income before income taxes.  The significant items comprising these differences for the years ended December 31, 2015, 2014,2018, 2017, and 20132016 consisted of the following:
2015 2014 20132018 2017 2016
Federal income tax, at statutory rate34.0 % 34.0 % 34.0 %21.0 % 35.0 % 35.0 %
State taxes, net of Federal tax benefit4.1 % (0.7)% 0.4 %7.8 % 4.8 % 6.2 %
Tax exempt investment security income, net(15.9)% (42.2)% (20.5)%(2.7)% (10.1)% (10.3)%
Bank owned life insurance, net(2.5)% (3.9)% (1.8)%(0.6)% (0.8)% (1.1)%
Solar credits(0.7)% (2.4)% (1.4)%
Compensation - Stock Compensation(0.6)% (2.8)%  %
Re-measurement resulting from Tax Act % 14.8 %  %
Change in uncertain tax positions0.8 %  % (1.4)%(0.3)% (0.9)% 0.1 %
Change in prior year estimates(3.1)% 0.1 % 1.4 %
Other2.4 % 3.1 % 3.4 %(0.9)% 1.1 % 1.4 %
Effective tax rate19.1 % (12.0)% 14.1 %23.7 % 41.1 % 31.3 %
 
AtAs of December 31, 20152018, the Company had no Federal and California net operating loss (“NOL”) carry-forwards. At December 31, 2015, the Company had a Federal Alternative Minimum Tax creditcarry-forwards of approximately $3,525,000 which does not expire,$8,049,000 and a California NOL of $1,046,000, from prior$8,372,000, respectively. These NOLs were acquired through business combinations that isand are subject to Internal Revenue Code (IRC) Sec.IRC 382 annual limitations.  The California NOL will begin to expire in 2027. The Company had Enterprise Zone Credits of approximately $1,596,000 whichand begin expiring in 2023. In addition,2028, for federal and California purposes. While they are subject to IRC Section 382, management has determined that all of the NOLs are more than likely than not to be utilized.
As a result of the enactment of the Tax Cuts and Jobs Act (the “ Tax Act”) on December 22, 2017, the federal tax rate applied to the Company’s net deferred tax assets were re-measured to reflect the 2018 tax rates (the rates at which the deferred tax items are expected to reverse). The change to the tax rates (including the rate change applied to deferred taxes reflected in other comprehensive income and certain tax-advantaged investments as reflected in other assets) resulted in an increase to the Company’s 2017 tax provision of $3,535,000. As part of the Tax Act for tax years beginning after December 31, 2017, alternative minimum tax credit carryforwards are and not dependent on future income. As such, they have been classified as a current tax receivable rather than a deferred tax asset. As of December 31, 2018, the alternative minimum tax credit

carryforwards have been fully utilized. ASU 2016-09, “Compensation-Stock Compensation (718) Improvements to Employee Share-Based Payment Accounting” requires the Company had a California capital loss carry-forward

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Tableto recognize all excess tax benefits or tax deficiencies through the income statement as income tax expense/benefit. A tax benefit of Contents

of $282,000 which expired at$165,000 was recognized during the end of 2015 unutilized. As such, the deferred balance as well as the related valuation allowance for this carry-forward was written off as of year ended December 31, 2015.2018 and a benefit of $853,000 was recognized during the year ended December 31, 2017.
The Company and its Subsidiarysubsidiary file income tax returns in the U.S. federal and California jurisdictions.  The Company conducts all of its business activities in the State of California.  At December 31, 2015, the Company had one state income tax examination in process by the California Franchise Tax Board for the years ended December 31, 2011 and 2012. The outcome of the examination is not settled. There are no pending U.S. federal or localCalifornia Franchise Tax Board income tax examinations by those taxing authorities.  The Company is no longer subject to the examination by U.S. federal taxing authorities for the years ended before December 31, 20122015 and by the state and local taxing authorities for the years ended before December 31, 2011.
2014. A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows (in thousands):
December 31,December 31,
2015 20142018 2017
Balance, beginning of year$180
 $180
$83
 $298
Additions based on tax positions related to prior years106
 

 
Reductions for tax positions of prior years
 
Reductions due to the statute of limitations for tax positions of prior years(83) (215)
Balance, end of year$286
 $180
$
 $83
 
This representsAs of December 31, 2018, the amount ofCompany has no unrecognized tax benefits that, if recognized, would favorably affect the effective income tax rate in future periods. The Companyand does not expect the total amount of unrecognized tax benefitsthis to significantly increase or decreasechange in the next twelve12 months.
During the yearyears ended December 31, 2015,2018 and 2017, the Company recorded $106,000 inno interest or penalties related to uncertain tax positions. During the years ended December 31, 2014 and 2013, the Company did not recognize any interest or penalties related to uncertain tax positions. 


13.COMMITMENTS AND CONTINGENCIES
12. COMMITMENTS AND CONTINGENCIES
 
Leases - The Bank leases certain of its branch facilities and administrative offices under noncancelable operating leases.  Rental expense included in occupancy and equipment and other expenses totaled $2,273,0002,735,000, $2,391,0002,533,000 and $2,123,000$2,300,000 for the years ended December 31, 2015, 2014,2018, 2017, and 20132016, respectively.
Future minimum lease payments on noncancelable operating leases are as follows (in thousands):
Years Ending December 31,  
2016$2,243
20171,955
20181,747
20191,280
$2,384
20201,124
2,078
20211,805
20221,552
20231,448
Thereafter2,216
4,334
$10,565
$13,601

Federal Reserve Requirements - Banks are required to maintain reserves with the Federal Reserve Bank equal to a percentage of their reservable deposits. The amount of such reserve balances required at December 31, 20152018 was $800,000.$14,858,000.
 
Correspondent Banking Agreements - The Bank maintains funds on deposit with other federally insured financial institutions under correspondent banking agreements. Uninsured deposits totaled $21,853,000$372,000 at December 31, 20152018.
 
Financial Instruments With Off-Balance-Sheet Risk - The Bank is a party to financial instruments with off-balance-sheet risk in the normal course of business in order to meet the financing needs of its customers and to reduce its own exposure to fluctuations in interest rates.  These financial instruments consist of commitments to extend credit and standby letters of credit.  These instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized on the balance sheet.
The Bank’s exposure to credit loss in the event of nonperformance by the other party for commitments to extend credit and standby letters of credit is represented by the contractual amount of those instruments.  The Bank uses the same credit policies in making commitments and standby letters of credit as it does for loans included on the balance sheet.

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The following financial instruments represent off-balance-sheet credit risk (in thousands):
 December 31, December 31,
 2015 2014 2018 2017
Commitments to extend credit $215,952
 $212,501
 $309,824
 $347,001
Standby letters of credit $1,214
 $1,630
 $2,450
 $3,140
 
Commitments to extend credit consist primarily of unfunded commercial loan commitments and revolving lines of credit, single-family residential equity lines of credit and commercial and residential real estate construction loans.  Construction loans are established under standard underwriting guidelines and policies and are secured by deeds of trust, with disbursements made over the course of construction.  Commercial revolving lines of credit have a high degree of industry diversification.  Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee.  Since many of the commitments are expected to expire without being fully drawn upon, the total commitment amounts do not necessarily represent future cash requirements.  Standby letters of credit are generally secured and are issued by the Bank to guarantee the financial obligation or performance of a customer to a third party.  The credit risk involved in issuing standby letters of credit is essentially the same as that involved in extending loans to customers.  The fair value of the liability related to these standby letters of credit, which represents the fees received for issuing the guarantees, was not significant at December 31, 20152018 and 20142017.  The Company recognizes these fees as revenue over the term of the commitment or when the commitment is used.
At December 31, 20152018, commercial loan commitments represent 61%54% of total commitments and are generally secured by collateral other than real estate or unsecured.  Real estate loan commitments represent 28%39% of total commitments and are generally secured by property with a loan-to-value ratio not to exceed 80%.  Consumer loan commitments represent the remaining 11%7% of total commitments and are generally unsecured.  In addition, the majority of the Bank’s loan commitments have variable interest rates.
At December 31, 20152018 and 2014,2017, the balance of a contingent allocation for probable loan loss experience on unfunded obligations was $150,000225,000 and $165,000,$326,000, respectively. The contingent allocation for probable loan loss experience on unfunded obligations is calculated by management using an appropriate, systematic, and consistently applied process.  While related to credit losses, this allocation is not a part of the ALLL and is considered separately as a liability for accounting and regulatory reporting purposes. Changes in this contingent allocation are recorded in other non-interest expense.

Concentrations of Credit Risk - At December 31, 20152018, in management’s judgment, a concentration of loans existed in commercial loans and real-estate-related loans, representing approximately 97.9%95.8% of total loans of which 22.2%12% were commercial and 75.7%83.8% were real-estate-related.
At December 31, 20142017, in management’s judgment, a concentration of loans existed in commercial loans and real-estate-related loans, representing approximately 98.2%96.6% of total loans of which 22.3%12.9% were commercial and 75.9%83.7% were real-estate-related.
Management believes the loans within these concentrations have no more than the typical risks of collectability.  However, in light of the current economic environment, additional declines in the performance of the economy in general, or a continued decline in real estate values or drought-related decline in agricultural business in the Company’s primary market area could have an adverse impact on collectability, increase the level of real-estate-related nonperforming loans, or have other adverse effects which alone or in the aggregate could have a material adverse effect on the financial condition, results of operations and cash flows of the Company.
 
Contingencies - The Company is subject to legal proceedings and claims which arise in the ordinary course of business.  In the opinion of management, the amount of ultimate liability with respect to such actions will not materially affect the consolidated financial position or consolidated results of operations of the Company.


14.SHAREHOLDERS’ EQUITY
13. SHAREHOLDERS’ EQUITY
 
Regulatory Capital - The Company and the Bank are subject to certain regulatory capital requirements administered by the Board of Governors of the Federal Reserve System and the FDIC.  Failure to meet these minimum capital requirements could result in mandatory or, discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company’s consolidated financial statements.
The Company and the Bank each meet specific capital guidelines that involve quantitative measures of their respective assets, liabilities and certain off-balance-sheet items as calculated under regulatory accounting practices.  These quantitative measures are established by regulation and require that the CompanyThe Company’s and the Bank maintain minimum amounts and ratios of total and Tier 1Bank’s capital to risk-weighted assets and of Tier 1 capital to average assets.  Capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors.

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The Bank is also subject to additional capital guidelines under the regulatory framework for prompt corrective action.  To be categorized as well capitalized, the Bank must maintain minimum total risk-based, Tier 1 risk-based and Tier 1 leverage ratios as set forth in the following table.  The most recent notification from the FDIC categorized the Bank as well capitalized under these guidelines.  Management knows of no conditions or events since that notification that would change the Bank’s category.
Capital ratios are reviewed by Management on a regular basis to ensure that capital exceeds the prescribed regulatory minimums and is adequate to meet our anticipated future needs. For all periods presented, the Bank’s ratios exceed the regulatory definition of well capitalized under the regulatory framework for prompt correct action and the Company’s ratios exceed the required minimum ratios for capital adequacy purposes.
Effective January 1, 2015, bank holding companies with consolidated assets of $1 billion or more ($3 Billion or more effective August 30, 2018) and banks like Central Valley Community Bank must comply with new minimum capital ratio requirements to be phased-in between January 1, 2015 and January 1, 2019, which consist of the following: (i) a new common equity Tier 1 capital to total risk weighted assets ratio of 4.5%; (ii) a Tier 1 capital to total risk weighted assets ratio of 6% (increased from 4%); (iii) a total capital to total risk weighted assets ratio of 8% (unchanged from current rules); and (iv) a Tier 1 capital to adjusted average total assets (“leverage”) ratio of 4%.
In addition, a “capital conversation buffer” is established which, when fully phased-in, will require maintenance of a minimum of 2.5% of common equity Tier 1 capital to total risk weighted assets in excess of the regulatory minimum capital ratio requirements described above. The 2.5% buffer will increase the minimum capital ratios to (i) a common equity Tier 1 capital ratio of 7.0%, (ii) a Tier 1 capital ratio of 8.5%, and (iii) a total capital ratio of 10.5%. The new buffer requirement will beis being phased-in between January 1, 2016 and January 1, 2019. The capital conservation buffer as of December 31, 2018 was 1.875% and 1.250% as of December 31, 2017. If the capital ratio levels of a banking organization fall below the capital conservation buffer amount, the organization will be subject to limitations on (i) the payment of dividends; (ii) discretionary bonus payments; (iii) discretionary payments under Tier 1 instruments; and (iv) engaging in share repurchases.
Management believes that the Company and the Bank met all their capital adequacy requirements as of December 31, 20152018 and 2014.2017.  There are no conditions or events since those notifications that management believes have changed those categories. The capital ratios for the Company and the Bank under the new capital framework are presented in the table below.below (exclusive of the capital conservation buffer).

The following table presents the Company’s and the Bank’s actual capital ratios as of December 31, 2018 and December 31, 2017, as well as the minimum capital ratios for capital adequacy for the Bank.
  December 31, 2015 December 31, 2014
(Dollars in thousands) Amount Ratio Amount Ratio
Tier 1 Leverage Ratio  
  
  
  
Central Valley Community Bancorp and Subsidiary $105,825
 8.65% $95,936
 8.36%
Minimum regulatory requirement $48,950
 4.00% $45,894
 4.00%
Central Valley Community Bank $104,878
 8.58% $95,298
 8.31%
Minimum requirement for “Well-Capitalized” institution $61,148
 5.00% $57,341
 5.00%
Minimum regulatory requirement $48,918
 4.00% $45,873
 4.00%
Common Equity Tier 1 Ratio        
Central Valley Community Bancorp and Subsidiary $103,152
 13.44% N/A N/A
Minimum regulatory requirement $34,650
 4.50% N/A N/A
Central Valley Community Bank $104,878
 13.67% N/A N/A
Minimum requirement for “Well-Capitalized” institution $50,017
 6.50% N/A N/A
Minimum regulatory requirement $34,627
 4.50% N/A N/A
Tier 1 Risk-Based Capital Ratio  
  
  
  
Central Valley Community Bancorp and Subsidiary $105,825
 13.79% $95,936
 13.67%
Minimum regulatory requirement $46,200
 6.00% $28,075
 4.00%
Central Valley Community Bank $104,878
 13.67% $95,298
 13.59%
Minimum requirement for “Well-Capitalized” institution $61,560
 8.00% $42,080
 6.00%
Minimum regulatory requirement $46,170
 6.00% $28,053
 4.00%
Total Risk-Based Capital Ratio  
  
  
  
Central Valley Community Bancorp and Subsidiary $115,466
 15.04% $104,447
 14.88%
Minimum regulatory requirement $61,601
 8.00% $56,150
 8.00%
Central Valley Community Bank $114,513
 14.93% $103,809
 14.80%
Minimum requirement for “Well-Capitalized” institution $76,949
 10.00% $70,133
 10.00%
Minimum regulatory requirement $61,560
 8.00% $56,106
 8.00%
(Dollars in thousands) Actual Ratio Minimum regulatory requirement (1)
December 31, 2018 Amount Ratio Amount Ratio
Tier 1 Leverage Ratio $171,149
 11.48% N/A N/A
Common Equity Tier 1 Ratio (CET 1) $166,149
 15.13% N/A N/A
Tier 1 Risk-Based Capital Ratio $171,149
 15.59% N/A N/A
Total Risk-Based Capital Ratio $180,478
 16.44% N/A N/A
         
December 31, 2017        
Tier 1 Leverage Ratio $153,676
 9.71% $63,338
 4.00%
Common Equity Tier 1 Ratio (CET 1) $149,186
 12.90% $52,081
 5.75%
Tier 1 Risk-Based Capital Ratio $153,676
 13.28% $69,441
 7.25%
Total Risk-Based Capital Ratio $162,780
 14.07% $92,588
 9.25%
(1) The 2017 minimum regulatory requirement threshold includes the capital conservation buffer of 1.250%.


The following table presents the Bank’s regulatory capital ratios as of December 31, 2018 and December 31, 2017.
(Dollars in thousands) Actual Ratio Minimum regulatory requirement (1)
December 31, 2018 Amount Ratio Amount Ratio
Tier 1 Leverage Ratio $168,770
 11.32% $59,639
 4.00%
Common Equity Tier 1 Ratio (CET 1) $168,770
 15.38% $49,388
 6.38%
Tier 1 Risk-Based Capital Ratio $168,770
 15.38% $65,850
 7.88%
Total Risk-Based Capital Ratio $178,099
 16.23% $87,800
 9.88%
         
December 31, 2017        
Tier 1 Leverage Ratio $149,779
 9.46% $63,332
 4.00%
Common Equity Tier 1 Ratio (CET 1) $149,779
 12.96% $52,040
 5.75%
Tier 1 Risk-Based Capital Ratio $149,779
 12.96% $69,387
 7.25%
Total Risk-Based Capital Ratio $158,882
 13.74% $92,516
 9.25%
(1) The 2018 and 2017 minimum regulatory requirement threshold includes the capital conservation buffer of 1.250% and 0.625%, respectively. These ratios are not reflected on a fully phased-in basis, which will occur in January 2019.

Dividends - During 2015,2018, the Bank declared and paid cash dividends to the Company in the amount of $2,260,000$2,850,000 in connection with the cash dividends to the Company’s shareholders approved by the Company’s Board of Directors. The Bank may not pay any dividend that would cause it to be deemed not “well capitalized” under applicable banking laws and regulations.

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The Company declared and paid a total of $1,979,000$4,270,000 or $0.18$0.31 per common share cash dividend to shareholders of record during the year ended December 31, 20152018.
During 2014,2017, the Bank declared and paid cash dividends to the Company in the amount of $2,350,0003,133,000, in connection with the cash dividends to the Company’s shareholders approved by the Company’s Board of Directors. The Company declared and paid a total of $2,190,0003,010,000 or $0.200.24 per common share cash dividend to shareholders of record during the year ended December 31, 2014.2017.
During 2013,2016, the Bank declared and paid cash dividends to the Company in the amount of $18,000,000,$13,010,000, in connection with the VCBSVB acquisition, the Series C Preferred redemption, and cash dividends approved by the Company’s Board of Directors. The Company declared and paid a total of $2,048,000$2,715,000 or $0.20$0.24 per common share cash dividend to shareholders of record during the year ended December 31, 2013.2016.
The Company’s primary source of income with which to pay cash dividends is dividends from the Bank.  The California Financial Code restricts the total amount of dividends payable by a bank at any time without obtaining the prior approval of the California Department of Business Oversight to the lesser of (1) the bank’sBank’s retained earnings or (2) the Bank’s net income for its last three fiscal years, less distributions made to shareholders during the same three-year period. At December 31, 20152018, $2,991,000$33,036,000 of the Bank’s retained earnings were free of these restrictions.

Capital Purchase Program — Small Business Lending Fund - On August 18, 2011, the Company entered into a Securities Purchase Agreement (SPA) with the Small Business Lending Fund of the United States Department of the Treasury (the Treasury), under which the Company issued 7,000 shares of Senior Non-Cumulative Perpetual Preferred Stock, Series C (Series C Preferred) to the Treasury for an aggregate purchase price of $7,000,000. Simultaneously, the Company agreed with Treasury under a Letter Agreement to redeem, for an aggregate price of $7,000,000, the 7,000 shares of the Company’s Series A Fixed Rate Cumulative Preferred Stock (Series A Stock) originally issued pursuant to the Treasury’s Capital Purchase Program (CPP) in 2009. The redemption of the Series A Stock resulted in an acceleration of the remaining discount booked at the time of the CPP transaction. In connection with the repurchase of the Series A Stock, the Company also repurchased the warrant (the Warrant) to purchase 79,037 shares of the Company’s common stock that was originally issued to Treasury in connection with the CPP transaction for total consideration of $185,000.
On December 31, 2013, the Company redeemed all 7,000 outstanding shares of its Series C Preferred from the Treasury, in exercise of its optional redemption rights pursuant to the terms of the Series C Preferred under the Company’s charter and the SPA. The Company paid the Treasury $7,087,500 in connection with the redemption, representing $1,000 per share of the Series C Preferred plus all accrued and unpaid dividends through the date of the redemption. The obligations of the Company under the SPA are terminated as a result of the redemption. No additional shares of Series C Preferred are outstanding.

A reconciliation of the numerators and denominators of the basic and diluted earnings per common share computations is as follows (in thousands, except share and per shareper-share amounts):
 For the Years Ended December 31, For the Years Ended December 31,
 2015 2014 2013 2018 2017 2016
Basic Earnings Per Common Share:  
  
  
  
  
  
Net income $10,964
 $5,294
 $8,250
 $21,289
 $14,026
 $15,182
Less: Preferred stock dividends and accretion 
 
 (350)
Income available to common shareholders $10,964
 $5,294
 $7,900
Weighted average shares outstanding 10,931,927
 10,919,235
 10,245,448
 13,699,823
 12,472,095
 11,331,166
Net income per common share $1.00
 $0.48
 $0.77
 $1.55
 $1.12
 $1.34
Diluted Earnings Per Common Share:  
  
  
  
  
  
Net income $10,964
 $5,294
 $8,250
 $21,289
 $14,026
 $15,182
Less: Preferred stock dividends and accretion 
 
 (350)
Income available to common shareholders $10,964
 $5,294
 $7,900
Weighted average shares outstanding 10,931,927
 10,919,235
 10,245,448
 13,699,823
 12,472,095
 11,331,166
Effect of dilutive stock options and warrants 83,836
 80,703
 62,592
 129,171
 250,255
 104,283
Weighted average shares of common stock and common stock equivalents 11,015,763
 10,999,938
 10,308,040
 13,828,994
 12,722,350
 11,435,449
Net income per diluted common share $1.00
 $0.48
 $0.77
 $1.54
 $1.10
 $1.33
 

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Table of Contents

OutstandingNo outstanding options and restricted stock and warrants of 26,704, 170,585, and 202,355awards were not factored into the calculation of dilutive stock optionsanti-dilutive at December 31, 2015, 2014,2018, 2017, and 2013, respectively, because they were anti-dilutive.2016.


15.SHARED-BASED COMPENSATION
14. SHARED-BASED COMPENSATION
 
On December 31, 20152018, the Company had threefive share-based compensation plans, which are described below. The Plans do not provide for the settlement of awards in cash and new shares are issued upon option exercise or restricted share grants. 
On November 15, 2000, the Company adopted, and subsequently amended on December 20, 2000, theThe Central Valley Community Bancorp 2000 Stock Option Plan (2000 Plan) for which 80,045 shares remain reserved for issuance for options already granted to employees and directors under incentive and nonstatutory agreements. In May 2005, the Company adopted theexpired on November 15, 2010. The Central Valley Community Bancorp 2005 Omnibus Incentive Plan (2005 Plan) for which 213,678 shares remain reserved for issuance for options already committed to be granted to employeeswas adopted in May 2005 and directors under incentive and nonstatutory agreements. The 2005 plan expired on March 16, 2015. While outstanding arrangements to issue shares under these plans, including options, continue in force until their expiration, no new options will be granted under these plans. The plans require that the exercise price may not be less than the fair market value of the stock at the date the option is granted, and that the option price must be paid in full at the time it is exercised. The options and awards under the plans expire on dates determined by the Board of Directors, but not later than ten years from the date of grant. The vesting period for the options, restricted common stock awards and option related stock appreciation rights is determined by the Board of Directors and is generally over five years.
In May 2015, the Company adopted the Central Valley Community Bancorp 2015 Omnibus Incentive Plan (2015 Plan). The plan provides for awards in the form of incentive stock options, non-statutory stock options, stock appreciation rights, and restricted stock. The plan also allows for performance awards that may be in the form of cash or shares of the Company, including restricted stock. The 2015 plan requires that the exercise price may not be less than the fair market value of the stock at the date the option is granted, and that the option price must be paid in full at the time it is exercised. The options and awards under the plan expire on dates determined by the Board of Directors, but not later than ten years from the date of grant. The vesting period for the options, restricted common stock awards and option related stock appreciation rights is determined by the Board of Directors and is generally over one to five years. The maximum number of shares that can be issued with respect to all awards under the plan is 875,000. Currently under the 2015 Plan, there are 875,000809,996 shares remain reserved for future grants as of December 31, 2015.2018.
Effective June 2, 2017, the Company adopted an Employee Stock Purchase Plan whereby our employees may purchase Company common shares through payroll deductions of between one percent and 15 percent of pay in each pay period. Shares are purchased at the end of an offering period at a discount of 10 percent from the lower of the closing market price on the Offering Date (first trading day of each offering period) or the Investment Date (last trading day of each offering period). The plan calls for 500,000 common shares to be set aside for employee purchases, and there were 485,978 shares available for future purchase under the plan as of December 31, 2018.
In October 2017, the Company adopted the Folsom Lake Bank 2007 Equity Incentive Plan (2007 Plan). The plan provides for awards in the form of incentive stock options, non-statutory stock options, stock appreciation rights, and restricted stock. While outstanding arrangements to issue shares under this plan, including options, continue in force until their expiration, no new options will be granted under this plan. The options and awards under the plan expire on dates determined by the Board of Directors, but not later than ten years from the date of grant. The vesting period for the options, restricted common stock awards and option related stock appreciation rights is determined by the Board of Directors and is generally over five years. The maximum number of shares that can be issued with respect to all awards under the plan is 313,360.
For the years ended December 31, 2015, 2014,2018, 2017, and 20132016, the compensation cost recognized for share-based compensation was $238,000482,000, $173,000384,000, and $98,000284,000, respectively. The recognized tax benefit for share-based compensation expense was $14,000142,000, $12,000805,000, and $28,00044,000 for 20152018, 20142017, and 20132016, respectively.

Stock Options - The Company bases the fair value of the options granted on the date of grant using a Black-Scholes Merton option pricing model that uses assumptions based on expected option life and the level of estimated forfeitures, expected stock volatility, risk free interest rate, and dividend yield.  The expected term and level of estimated forfeitures of the Company’s options are based on the Company’s own historical experience.  Stock volatility is based on the historical volatility of the Company’s stock.  The risk-free rate is based on the U. S. Treasury yield curve for the periods within the contractual life of the options in effect at the time of grant.  The compensation cost for options granted is based on the weighted average grant date fair value per share.
No options to purchase shares of the Company’s common stock were granted during the years ending December 31, 2015, 20142018, 2017 and 20132016 from any of the Company’s stock based compensation plans.

A summary of the combined activity of the Plans forduring the yearyears then ended December 31, 2015 followsis presented below (dollars in thousands, except per shareper-share amounts):
  Shares Weighted 
Average
Exercise
Price
 Weighted
Average
Remaining
Contractual
Term (Years)
 Aggregate
Intrinsic Value
Options outstanding at January 1, 2015 368,360
 $8.89
    
Options exercised (9,070) $6.64
    
Options forfeited (118,595) $13.25
    
Options outstanding at December 31, 2015 240,695
 $6.83
 4.06 $1,251
Options vested or expected to vest at December 31, 2015 238,746
 $6.82
 4.04 $1,243
Options exercisable at December 31, 2015 208,375
 $6.65
 3.65 $1,122
  Shares Weighted 
Average
Exercise
Price
 Weighted
Average
Remaining
Contractual
Term (Years)
 Aggregate
Intrinsic Value
Options outstanding at January 1, 2016 240,695
 $6.83
    
Options exercised (35,280) $6.55
    
Options forfeited (3,200) $8.77
    
Options outstanding at December 31, 2016 202,215
 $6.87
 3.26 $2,647
Options assumed in acquisition 313,360
 $11.79
    
Options exercised (281,125) $10.47
    
Options forfeited (1,580) $8.11
    
Options outstanding at December 31, 2017 232,870
 $9.13
 2.87 $2,574
Options exercised (74,030) $9.97
    
Options forfeited (4,400) $10.85
    
Options outstanding at December 31, 2018 154,440
 $8.68
 2.81 $1,554
Options vested or expected to vest at December 31, 2018 154,440
 $8.68
 2.81 $1,554
Options exercisable at December 31, 2018 154,440
 $8.68
 2.81 $1,554
 

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Information related to the stock option plan during each year follows (in thousands):
 2015 2014 2013 2018 2017 2016
Intrinsic value of options exercised $42
 $45
 $82
 $767
 $2,807
 $235
Cash received from options exercised $60
 $55
 $789
 $738
 $2,835
 $231
Excess tax benefit realized for option exercises $6
 $7
 $17
 $142
 $805
 $30

As of December 31, 20152018, there wasis $86,000no of total unrecognized compensation cost related to non-vested share-based compensation arrangementsstock options granted under all Plans. The cost is expected to be recognized over a weighted average period of 1.72 years.All options are fully vested. The total fair value of options vested was $91,000 and $99,000170,000 for the yearsyear ended December 31, 2015 and 20142017, respectively.

Restricted Common Stock Awards - The 2005 Plan and 2015 Plan provide for the issuance of shares to directors and officers. Restricted common stock grants typically vest over a one to five-year period. Restricted common stock (all of which are shares of our common stock) is subject to forfeiture if employment terminates prior to vesting. The cost of these awards is recognized over the vesting period of the awards based on the fair value of our common stock on the date of the grant.

The following table summarizespresents the restricted common stock activity forduring the year ended December 31, 2015 as follows: years presented: 
 Shares 
Weighted
Average
Grant Date Fair Value
 Shares 
Weighted
Average
Grant Date Fair Value
Nonvested outstanding shares at January 1, 2015 56,850
 $12.68
Nonvested outstanding shares at January 1, 2016 53,028
 $12.34
Granted 9,268
 $10.79
 54,650
 $14.10
Vested (11,085) $12.67
 (12,438) $12.38
Forfeited (2,005) $12.95
 (1,739) $12.95
Nonvested outstanding shares at December 31, 2015 53,028
 $12.34
Nonvested outstanding shares at December 31, 2016 93,501
 $13.35
Vested (27,373) $13.34
Forfeited (2,360) $14.07
Nonvested outstanding shares at December 31, 2017 63,768
 $13.33
Granted 22,204
 $20.76
Vested (20,733) $13.09
Forfeited (1,710) $14.37
Nonvested outstanding shares at December 31, 2018 63,529
 $15.98

During the years ended December 31, 20152018, 2017, and 2014, 9,2682016, 22,204, 0, and 57,33054,650 shares of restricted common stock were granted from outstanding grants under the 2005 Plan.and 2015 Plans. The restricted common stock had a weighted average fair value of $10.79$20.76, and $12.68$14.10 per share on the date of grant during the years ended December 31, 20152018 and 2014,2016, respectively. TheseThe shares awarded to employees and directors under the restricted common stock awardsagreements vest 20% after Year 1. Thereafter, 20%on applicable vesting dates only to the extent the recipient of the remaining restricted stock will vest on each anniversaryshares is then an employee or a director of the initial award commencement dateCompany or one of its subsidiaries, and each recipient will be fullyforfeit all of the shares that have not vested on the fifth such anniversary.date his or her employment or service is terminated.
As of December 31, 20152018, there were 53,02863,529 shares of restricted stock that are nonvested and expected to vest. Share-based compensation cost charged against income for restricted stock awards was $161,000$459,000 for the year ended December 31, 20152018, and $82,000$349,000 for the year ended December 31, 2014.2017, and $235,000 for the year ended December 31, 2016.
As of December 31, 20152018, there was $554,000$677,000 of total unrecognized compensation cost related to nonvested restricted common stock.  Restricted stock compensation expense is recognized on a straight-line basis over the vesting period. This cost is expected to be recognized over a weighted average remaining period of 3.582.04 years and will be adjusted for subsequent changes in estimated forfeitures. Restricted common stock awards had an intrinsic value of $638,000$1,308,000 at December 31, 20152018.


16.EMPLOYEE BENEFITS
15. EMPLOYEE BENEFITS
 
401(k) and Profit Sharing Plan - The Bank has established a 401(k) and profit sharing plan.  The 401(k) plan covers substantially all employees who have completed a one-month employment period.  Participants in the profit sharing plan are eligible to receive employer contributions after completion of 2 years of service.  Bank contributions to the profit sharing plan are determined at the discretion of the Board of Directors.  Participants are automatically vested 100% in all employer contributions.  The Bank contributed $270,000$900,000, $600,000, and $225,000$380,000 to the profit sharing plan in 20152018, 2017, and 2013,2016, respectively.  There was no contribution by the Bank to the profit sharing plan in 2014.
Additionally, the Bank may elect to make a matching contribution to the participants’ 401(k) plan accounts.  The amount to be contributed is announced by the Bank at the beginning of the plan year.  For the years ended December 31, 2015, 2014,2018, 2017, and 20132016, the Bank made a 100% matching contribution on all deferred amounts up to 3% of eligible compensation and a 50% matching contribution on all deferred amounts above 3% to a maximum of 5%.  For the years ended December 31, 2015, 2014,2018, 2017, and 20132016, the Bank made matching contributions totaling $585,000748,000, $499,000686,000, and $382,000604,000, respectively.

Deferred Compensation Plans - The Bank has a nonqualified Deferred Compensation Plan which provides directors with an unfunded, deferred compensation program.  Under the plan, eligible participants may elect to defer some or all of their current

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compensation or director fees.  Deferred amounts earn interest at an annual rate determined by the Board of Directors (3.24%3.12% at December 31, 20152018).  At December 31, 20152018 and 20142017, the total net deferrals included in accrued interest payable and other liabilities were $3,238,0003,842,000 and $3,154,0003,713,000, respectively.
In connection with the implementation of the above plan, single premium universal life insurance policies on the life of each participant were purchased by the Bank, which is the beneficiary and owner of the policies.  The cash surrender value of the policies totaled $3,949,0009,436,000 and $3,519,0009,187,000 and at December 31, 20152018 and 20142017, respectively.  Income recognized on

these policies, net of related expenses, for the years ended December 31, 2015, 2014,2018, 2017, and 20132016, was $105,000249,000, $103,000255,000, and $108,000242,000, respectively.
In October 2105,2015, the Board of Directors of the Company and the Bank adopted a board resolution to create the Central Valley Community Bank Executive Deferred Compensation Plan (the Executive Plan). Pursuant to the Executive Plan, all eligible executives of the Bank may elect to defer up to 50 percent of their compensation for each deferral year. Deferred amounts earn interest at an annual rate determined by the Board of Directors. No deferrals were made during the year endedDirectors (3.12% at December 31, 2015.2018).  At December 31, 2018 and 2017, the total net deferrals included in accrued interest payable and other liabilities were $129,000 and $86,000, respectively.
 
Salary Continuation Plans - The Board of Directors has approved salary continuation plans for certain key executives during 2002 and subsequently amended the plans in 2006.executives.  Under these plans, the Bank is obligated to provide the executives with annual benefits for 10-15 years after retirement.  In connection with the acquisitions of Folsom Lake Bank (FLB), Service 1st Bank, and Visalia Community Bank (VCB), the Bank assumed a liability for the estimated present value of future benefits payable to former key executives of FLB, Service 1st, and VCB.  The liability relates to change in control benefits associated with their salary continuation plans.  The benefits are payable to the individuals when they reach retirement age. These benefits are substantially equivalent to those available under split-dollar life insurance policies purchased by the Bank on the life of the executives.  The expense recognized under these plans for the years ended December 31, 2015, 2014,2018, 2017, and 2013,2016, totaled $447,000, $537,000,$15,000, $561,000, and $581,000,$489,000, respectively.  Accrued compensation payable under the salary continuation plans totaled $5,419,0009,816,000 and $5,283,0005,786,000 at December 31, 20152018 and 20142017, respectively. These benefits are substantially equivalent to those available under split-dollar life insurance policies acquired.
In connection with these plans, the Bank purchased single premiumsingle-premium life insurance policies with cash surrender values totaling $6,037,000$19,066,000 and $5,870,000$18,620,000 at December 31, 20152018 and 20142017, respectively.  Income recognized on these policies, net of related expense, for the years ended December 31, 2015, 2014,2018, 2017, and 20132016 totaled $167,000446,000, $166,000366,000, and $145,000316,000, respectively.
In connection withEmployee Stock Purchase Plan - During 2017, the acquisition of Service 1st Bank and Visalia Community Bank (VCB),Company adopted an Employee Stock Purchase Plan which allows employees to purchase the Bank assumedCompany’s stock at a liability for the estimated presentdiscount to fair market value of future benefits payable to former key executives of Service 1st and VCB.  The liability relates to change in control benefits associated with Service 1st’s and VCB’s salary continuation plans.  The benefits are payable to the individuals when they reach retirement age.  At December 31, 2015 and 2014, the total amountas of the liability was $2,822,000date of purchase. The Company bears all costs of administering the plan, including broker’s fees, commissions, postage and $2,898,000, respectively.  Expense recognized by the Bank in 2015, 2014 and 2013 associated with these plans was $78,000, $233,000, and $202,000, respectively.  These benefits are substantially equivalent to those available under split-dollar life insurance policies acquired.  These single premium life insurance policies had cash surrender values totaling $10,716,000, and $11,568,000 at December 31, 2015 and 2014, respectively.  Income recognized on these policies, net of related expenses, for the years ended December 31, 2015, 2014, and 2013, was $194,000, $345,000, and $241,000, respectively.
The current annual tax-free interest rate on all life insurance policies is 4.49%.other costs actually incurred.


17.LOANS TO RELATED PARTIES
16. LOANS TO RELATED PARTIES
 
During the normal course of business, the Bank enters into loans with related parties, including executive officers and directors.  The following is a summary of the aggregate activity involving related-party borrowers (in thousands):
Balance, January 1, 2015$1,778
Disbursements5,514
Amounts repaid(886)
Balance, December 31, 2015$6,406
  
Undisbursed commitments to related parties, December 31, 2015$1,954
Balance, January 1, 2018$11,885
Disbursements622
Amounts repaid(769)
Balance, December 31, 2018$11,738
Undisbursed commitments to related parties, December 31, 2018$1,442

 

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18.17. PARENT ONLY CONDENSED FINANCIAL STATEMENTS
 
CONDENSED BALANCE SHEETS
 
December 31, 20152018 and 20142017

(In thousands) 2015 2014 2018 2017
ASSETS  
  
  
  
Cash and cash equivalents $584
 $368
 $2,326
 $3,296
Investment in Bank subsidiary 143,531
 135,366
 222,514
 210,816
Other assets 454
 589
 367
 750
Total assets $144,569
 $136,323
 $225,207
 $214,862
LIABILITIES AND SHAREHOLDERS’ EQUITY  
  
  
  
Liabilities:  
  
  
  
Junior subordinated debentures due to subsidiary grantor trust $5,155
 $5,155
 $5,155
 $5,155
Other liabilities 91
 123
 314
 148
Total liabilities 5,246
 5,278
 5,469
 5,303
Shareholders’ equity:  
  
  
  
Common stock 54,424
 54,216
 103,851
 103,314
Retained earnings 80,437
 71,452
 120,294
 103,419
Accumulated other comprehensive income, net of tax 4,462
 5,377
Accumulated other comprehensive (loss) income, net of tax (4,407) 2,826
Total shareholders’ equity 139,323
 131,045
 219,738
 209,559
Total liabilities and shareholders’ equity $144,569
 $136,323
 $225,207
 $214,862


107


CONDENSED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
 
For the Years Ended December 31, 2015, 2014,2018, 2017, and 20132016

(In thousands) 2015 2014 2013 2018 2017 2016
Income:  
  
  
  
  
  
Dividends declared by Subsidiary - eliminated in consolidation $2,260
 $2,350
 $18,000
 $2,850
 $3,133
 $13,010
Other income 3
 3
 5
 6
 4
 4
Total income 2,263
 2,353
 18,005
 2,856
 3,137
 13,014
Expenses:  
  
  
  
  
  
Interest on junior subordinated deferrable interest debentures 99
 96
 98
 199
 147
 121
Professional fees 156
 187
 102
 217
 231
 133
Other expenses 411
 389
 424
 548
 1,019
 779
Total expenses 666
 672
 624
 964
 1,397
 1,033
Income before equity in undistributed net income of Subsidiary 1,597
 1,681
 17,381
 1,892
 1,740
 11,981
Equity in undistributed net income of Subsidiary, net of distributions 9,080
 3,325
 (9,414) 19,075
 11,754
 2,852
Income before income tax benefit 10,677
 5,006
 7,967
 20,967
 13,494
 14,833
Benefit from income taxes 287
 288
 283
 322
 532
 349
Net income 10,964
 5,294
 8,250
 $21,289
 $14,026
 $15,182
Preferred stock dividend and accretion of discount 
 
 350
Income available to common shareholders $10,964
 $5,294
 $7,900
            
Comprehensive income (loss) $10,049
 $12,957
 $(1,622)
Comprehensive income $13,912
 $16,867
 $10,204


108


CONDENSED STATEMENTS OF CASH FLOWS
For the Years Ended December 31, 2015, 2014,2018, 2017, and 20132016
 
(In thousands) 2015 2014 2013 2018 2017 2016
Cash flows from operating activities:  
  
  
  
  
  
Net income $10,964
 $5,294
 $8,250
 $21,289
 $14,026
 $15,182
Adjustments to reconcile net income to net cash provided by operating activities:      
      
Undistributed net income of subsidiary, net of distributions (9,080) (3,325) 9,414
 (19,075) (11,754) (2,852)
Stock-based compensation 238
 173
 98
 482
 384
 284
Tax benefit from exercise of stock options (6) (7) (17) 
 
 (30)
Net (increase) decrease in other assets 50
 (50) 86
Net decrease (increase) in other assets 372
 (114) (405)
Net increase (decrease) in other liabilities (32) 34
 (198) 166
 (7) 64
Benefit from deferred income taxes (5) (8) (18)
Benefit for deferred income taxes 11
 155
 98
Net cash provided by operating activities 2,129
 2,111
 17,615
 3,245
 2,690
 12,341
Cash flows used in investing activities:  
  
  
  
  
  
Investment in subsidiary 
 
 (11,358) 
 (151) (9,584)
Cash flows from financing activities:  
  
  
  
  
  
Cash dividend payments on common stock (1,979) (2,190) (2,048) (4,270) (3,010) (2,715)
Cash dividend payments on preferred stock 
 
 (437)
Purchase and retirement of common stock (894) 
 
Proceeds from exercise of stock options 60
 55
 789
 738
 2,880
 231
Redemption of preferred stock Series C 
 
 (7,000)
Tax benefit from exercise of stock options 6
 7
 17
Proceeds from stock issued under employee stock purchase plan 211
 
 
Excess tax benefit from exercise of stock options 
 
 30
Net cash used in financing activities (1,913) (2,128) (8,679) (4,215) (130) (2,454)
Increase (decrease) in cash and cash equivalents 216
 (17) (2,422)
(Decrease) increase in cash and cash equivalents (970) 2,409
 303
Cash and cash equivalents at beginning of year 368
 385
 2,807
 3,296
 887
 584
Cash and cash equivalents at end of year $584
 $368
 $385
 $2,326
 $3,296
 $887
            
Supplemental Disclosure of Cash Flow Information:            
Cash paid during the year for interest $97
 $194
 $125
 $185
 $142
 $112
Non-cash investing and financing activities:    
  
    
  
Common stock issued in Visalia Community Bank acquisition $
 $
 $12,494
Common stock issued in acquisitions $
 $28,405
 $16,678


19. SUBSEQUENT EVENT

On January 20, 2016, management sold certain investment securities with a book value of $23.0 million in a routine restructuring of the investment portfolio. Through the proper operation of the Company’s internal control process related to investment securities, management discovered after the transaction settled that five of the 13 securities sold were previously designated as Held to Maturity (HTM). The book value of the HTM securities sold was $8.0 million. The gain realized on the sale of the HTM securities was $648,000. The Company will reclassify the remaining HTM securities as Available for Sale as of January 20, 2016.



109


SUPPLEMENTARY FINANCIAL INFORMATION
 
The following supplementary financial information is not a part of the Company’s financial statements.
 
Unaudited Quarterly Statement of Operations Data
(Dollars inIn thousands, except per share data)amounts)
 
 Q4 2015 Q3 2015 Q2 2015 Q1 2015 Q4 2014 Q3 2014 Q2 2014 Q1 2014
Net interest income$10,638
 $10,352
 $10,065
 $9,720
 $10,005
 $9,876
 $9,905
 $10,099
Provision for credit losses
 100
 500
 
 8,385
 
 (400) 
Net interest income after provision for credit losses10,638
 10,252
 9,565
 9,720
 1,620
 9,876
 10,305
 10,099
Other non-interest income1,842
 1,722
 2,364
 1,965
 1,752
 1,821
 1,980
 1,708
Net realized gains on investment securities37
 
 732
 726
 331
 240
 64
 269
Total non-interest expense9,003
 9,028
 8,697
 9,288
 8,819
 9,051
 8,734
 8,736
Provision for (benefit from)income taxes611
 429
 886
 657
 (2,750) 535
 922
 724
Net income (loss)$2,903
 $2,517
 $3,078
 $2,466
 $(2,366) $2,351
 $2,693
 $2,616
Net income (loss) available to common shareholders$2,903
 $2,517
 $3,078
 $2,466
 $(2,366) $2,351
 $2,693
 $2,616
Basic earnings (loss) per share$0.27
 $0.23
 $0.28
 $0.23
 $(0.22) $0.22
 $0.25
 $0.24
Diluted earnings (loss) per share$0.26
 $0.23
 $0.28
 $0.22
 $(0.22) $0.21
 $0.24
 $0.24
 Q4 2018 Q3 2018 Q2 2018 Q1 2018 Q4 2017 Q3 2017 Q2 2017 Q1 2017
Net interest income$15,973
 $15,907
 $15,397
 $15,426
 $15,567
 $13,578
 $13,786
 $13,308
Provision for (Reversal of) credit losses
 
 50
 
 
 (900) (150) (100)
Net interest income after provision for credit losses15,973
 15,907
 15,347
 15,426
 15,567
 14,478
 13,936
 13,408
Other non-interest income2,367
 2,083
 2,604
 1,956
 1,947
 2,385
 1,939
 1,763
Net realized gains (losses) on investment securities37
 380
 82
 815
 (6) 169
 2,157
 482
Total non-interest expense11,410
 10,791
 11,499
 11,368
 13,109
 10,394
 10,789
 10,114
Provision for income taxes1,686
 1,827
 1,569
 1,538
 4,064
 2,144
 2,295
 1,290
Net income$5,281
 $5,752
 $4,965
 $5,291
 $335
 $4,494
 $4,948
 $4,249
Basic earnings per share$0.38
 $0.42
 $0.36
 $0.39
 $0.02
 $0.37
 $0.41
 $0.35
Diluted earnings per share$0.38
 $0.42
 $0.36
 $0.39
 $0.02
 $0.36
 $0.40
 $0.35

The results for the fourth quarter 2017 include the results of the assets and liabilities acquired from Folsom Lake Bank in addition to the continued organic growth of the Company. The Company recorded additional tax expense of $3.54 million in the fourth quarter of 2017 related to the Tax Cuts and Jobs Act, which required the Company to re-measure its net deferred tax assets and resulted in a reduction in diluted earnings per share of $0.26 in the quarter and $0.28 for the year.

ITEM 9 -CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.

Not Applicable.

ITEM 9A -CONTROLS AND PROCEDURES
 
Based on their(a) Evaluation of Disclosure Controls and Procedures

Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the Exchange Act), as of the end of the period covered by this Annual Reportreport.
In designing and evaluating our disclosure controls and procedures, management recognizes that any disclosure controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. In addition, the design of disclosure controls and procedures must reflect the fact that there are resource constraints and that management is required to apply its judgment in evaluating the benefits of possible controls and procedures relative to their costs.
Based on Form 10-K (as required by paragraph (b) of Rule 13a-15 under the Securities Exchange Act of 1934 (the Exchange Act)), the Registrant’smanagement’s evaluation, our principal executive officer and principal financial officer have concluded that the Registrant’sour disclosure controls and procedures (as defined in Rules 13a-15(e) under the Exchange Act) wereare designed to, and are effective to, ensureprovide assurance at a reasonable level that the information we are required to be disclosed by the Companydisclose in reports that it fileswe file or submitssubmit under the Exchange Act wasis recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms.forms, and that such information is accumulated and communicated to our management, including our chief executive officer and chief financial officer, as appropriate, to allow timely decisions regarding required disclosures.
 
See “MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING”
(b) Management’s Report on Internal Control Over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as set forth
such term is defined in Exchange Act Rules 13a- l 5(f) and 15d-15(f). Under the supervision and with the participation of our management, including our chief executive officer and chief financial officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting as of December 31, 2018 based on page 61.the guidelines established in the Internal Control--Integrated Framework (2013 framework) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Our internal control over financial reporting includes policies and procedures that provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external reporting purposes in accordance with U.S. generally accepted accounting principles.
Based on the results of our evaluation, our management concluded that our internal control over financial reporting was effective as of December 31, 2018. We reviewed the results of management’s assessment with our Audit Committee.
The effectiveness of our internal control over financial reporting as of December 31, 2018 has been audited by Crowe LLP, an independent registered public accounting firm, as stated in its report which is included in Item 8 of this Annual Report on Form 10-K.

(c) Changes in Internal Control over Financial Reporting

There have not been anywere no changes in the Company’s internal control over financial reporting that occurred during the quarter ended December 31, 20152018, that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting. The report

(d) Inherent Limitations on Effectiveness of Crowe Horwath LLP on the Company’sControls

Our management, including our chief executive officer and chief financial officer, do not expect that our disclosure controls or our internal control over financial reporting will prevent all errors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision making can be faulty, and that breakdowns can occur because of a simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people or by management override of the controls. The design of any system of controls is set forth on page 62.also based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions; over time, controls may become inadequate because of changes in conditions, or the degree of compliance with policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.

110

Table of Contents

CENTRAL VALLEY COMMUNITY BANCORP
Date:March 15, 2016By:/s/ James M. Ford
James M. Ford
President and Chief Executive Officer
(principal executive officer)
Date:March 15, 2016By:/s/ David A. Kinross
David A. Kinross
Executive Vice President and Chief Financial Officer
(principal accounting officer and principal financial officer)
ITEM 9B -OTHER INFORMATION
 
Not Applicable.
 
PART III

ITEM 10 -DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT.

For information concerning directors and executive officers of the Company, see “ELECTION OF DIRECTORS OF THE COMPANY” in the definitive Proxy Statement for the Company’s 20162019 Annual Meeting of Shareholders to be filed pursuant to Regulation 14A (the Proxy Statement), which section of the Proxy Statement is incorporated herein by reference.
 
Section 16(a) Beneficial Ownership Reporting Compliance
 
Section 16(a) of the Securities Exchange Act of 1934 requires the Company’s officers and directors, and persons who own more than 10% of a registered class of the Company’s equity securities, to file reports of ownership and changes in ownership with the FDIC.  Officers, directors and greater than 10% shareholders are required by SEC regulations to furnish the Company with copies of all Section 16(a) forms they file. 

Based solely on its review of the copies of such forms received by it, or written representations from certain reporting persons that no Forms 4 and 5 were required for those persons, the Company believes that for the 20152018 fiscal year the officers and directors of the Company complied with all applicable filing requirements.
 
ITEM 11 -EXECUTIVE COMPENSATION.
 
The information required by this Item can be found in the Company’s Definitive Proxy Statement under the captions “Executive Compensation” andwhich section of the Proxy Statement is incorporated herein by this reference incorporated herein.reference.
 
ITEM 12 -SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS.
 
For information concerning security ownership of certain beneficial owners and management, see “PRINCIPAL SHAREHOLDERS” and “ELECTION OF DIRECTORS OF THE COMPANY” in the Company’s Definitive Proxy Statement, which sections of the Proxy Statement are incorporated herein by reference.
 
ITEM 13 -CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
 
For information concerning certain relationships and related transactions, see “CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS” and “INDEBTEDNESS OF MANAGEMENT” in the Company’s Definitive Proxy Statement, which sections of the Proxy Statement are incorporated herein by reference.
 

111


ITEM 14 -PRINCIPAL ACCOUNTING FEES AND SERVICES
 
For information concerning principal accounting fees and services, see “PRINCIPAL ACCOUNTING FEES AND SERVICES” in the Company’s Definitive Proxy Statement, which section of the Proxy Statement is incorporated herein by reference.
 
PART IV

ITEM 15 EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

(a)(1) FINANCIAL STATEMENTS

The Financial Statements of the Company and the Report of Independent Registered Public Accounting Firm are set forth in Part II, Item 8 and incorporated by reference herein.

(a)(2) FINANCIAL STATEMENT SCHEDULES

All schedules to the Financial Statements are omitted because of the absence of the conditions under which they are required or because the required information is included in the Financial Statements or accompanying notes.

(a)(3) EXHIBITS

See “Index to Exhibits”

(b) EXHIBITS

The exhibit list required by this Item is incorporated by reference to the Exhibit Index included in this report.
ITEM 16     FORM 10-K SUMMARY

 Omitted at registrant’s option


INDEX TO EXHIBITS 
Exhibit
NumberExhibit
2.1
2.2
2.3
2.4
2.5
3.1
3.2
3.2
3.3
3.5
3.6
4.1

4.2
10.1
10.2
10.3
10.4
10.5
10.6
10.7
10.8
10.9
10.10
10.11
10.12
10.13
10.14

10.15
10.16
10.17
10.18
10.19
10.20
10.21
10.22
10.23
10.24
10.25
10.26

10.27
10.28
10.29
10.30
10.31
10.32
10.33
10.34
10.35
10.36
10.37

10.38
10.39
10.40
10.41
10.42
10.43
10.44
10.45
10.46
10.47
10.48
10.49
10.50

10.51
10.52
10.53
10.54
10.55
10.56
10.57
10.58
10.59
10.60
10.61
10.62
10.63

10.64
10.65
10.66
10.67
10.68
10.69
10.70
10.71
10.72
10.73
10.74
10.75
10.76

10.77
10.78
10.79
10.80
10.81
10.82
10.83
10.84
21
22N/A
23
24
31.1
31.2
32.1
32.2
101.INSXBRL Instance Document
101.SCHXBRL Taxonomy Extension Schema Document

101.CALXBRL Taxonomy Extension Calculation Document
101.DEFXBRL Taxonomy Extension Definition Linkbase
101.LABXBRL Taxonomy Extension Labels Linkbase Document
101.PREXBRL Taxonomy Extension Presentation Link Document
ITEM 15 -EXHIBITS
(a)  EXHIBITS*              Management contract and compensatory plans.


    
See Index to Exhibits of this Form 10-K.

112


SIGNATURES
 
Pursuant to the requirements of Section 13 of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
 
  CENTRAL VALLEY COMMUNITY BANCORP
   
   
Date:March 15, 20168, 2019 By:/s/ James M. Ford
  James M. Ford
  President and Chief Executive Officer
  (principal executive officer)
   
Date:March 15, 20168, 2019 By:/s/ David A. Kinross
  David A. Kinross
  Executive Vice President and Chief Financial Officer
  (principal accounting officer and principal financial officer)

POWER OF ATTORNEY AND SIGNATURES

KNOW ALL PERSONS BY THESE PRESENT, that each person whose signature appears below constitutes and appoints James M. Ford, his or her attorney-in-fact, each with the power of substitution, for him or her in any and all capacities, to sign any amendments to this Annual Report on Form 10-K, and to file the same, with exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, hereby ratifying and confirming all that said attorney-in-fact, or his or her substitute or substitutes, may do or cause to be done by virtue hereof.

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

113


 
/s/ James M. Ford Date: March 15, 20168, 2019
James M. Ford,  
President and Chief Executive Officer and Director (principal executive officer)  
   
/s/ David A. Kinross Date: March 15, 20168, 2019
David A. Kinross,  
Executive Vice President and Chief Financial Officer  
(principal accounting officer and principal financial officer)  
   
/s/ Daniel J. Doyle * Date: March 15, 20168, 2019
Daniel J. Doyle,  
Chairman of the Board and Director  
   
/s/ Daniel N. Cunningham * Date: March 15, 20168, 2019
Daniel N. Cunningham, Lead Independent Director  
   
/s/ Edwin S. Darden * Date: March 15, 20168, 2019
Edwin S. Darden, Director  
   
/s/ F.T. “Tommy” Elliott, IV * Date: March 15, 20168, 2019
F.T. “Tommy” Elliott, IV, Director  
   
Steven D. McDonald */s/ Robert J. Flautt Date: March 15, 20168, 2019
Robert J. Flautt, Director
/s/ Gary D. GallDate: March 8, 2019
Gary D. Gall, Director
/s/ Steven D. McDonaldDate: March 8, 2019
Steven D. McDonald, Director  
   
/s/ Louis McMurray * Date: March 15, 20168, 2019
Louis McMurray, Director  
   
William S. Smittcamp */s/ Karen Musson Date: March 15, 20168, 2019
Karen Musson, Director
/s/ William S. SmittcampDate: March 8, 2019
William S. Smittcamp, Director  
   
Joseph B. Weirick *Date: March 15, 2016
Joseph B. Weirick, Director
* By/s/ James M. FordDate: March 15, 2016
James M. Ford, as Attorney-in-fact
    

114


INDEX TO EXHIBITS 
Exhibit
NumberExhibit
2.1Agreement and Plan of Reorganization by and between Central Valley Community Bancorp and Bank of Madera County dated as of July 19, 2004 as amended to reflect amendments at Section 2.5 dated September 29, 2004, incorporated by reference to Appendix A to the proxy statement-prospectus contained in the Registration Statement on Form S-4, Registration Statement No. 333-118534, effective as of November 4, 2004.
2.2
Reorganization Agreement and Plan of Merger by and among Central Valley Community Bancorp, Central Valley Community Bank, Service 1st Bancorp, and Service 1st Bank dated as of May 28, 2008 as amended as of August 21, 2008, incorporated by reference to Appendix A to the proxy statement-prospectus contained in the Registration Statement on Form S-4, Registration Statement No. 333-152151, effective date September 9, 2008.
2.3Agreement and Plan of Reorganization and Merger dated December 19, 2012, by and among Central Valley Community Bancorp, Central Valley Community Bank and Visalia Community Bank (24)
3.1Certificate of Determination for Preferred Stock (20).
3.1.1Articles of Incorporation of the Company. (1)
3.1.2Certificate of Amendment of Articles of Incorporation, dated July 6, 2000. (2)
3.1.3Certificate of Amendment of Articles of Incorporation, dated January 6, 2003 (incorporated herein by reference to Exhibit 3.1.3 to Registrant’s Annual report on Form 10-KSB for the year ended December 31, 2003, filed March 26, 2004.
3.1.4Certificate of Amendment of Articles of Incorporation, dated October 31, 2005 (incorporated herein by reference to Exhibit 3.(I) to Registrant’s Quarterly report on Form 10-Q for the quarter ended September 30, 2005, filed November 14, 2005.
3.1.5Certificate of Determination of Series A Fixed Rate Cumulative Perpetual Preferred Stock, dated January 16, 2009 (incorporated herein by reference to Exhibit 3.1 to Registrant’s Report on Form 8-K dated January 30, 2009).
3.1.6Certificate of Determination of Series B Adjustable Rate Non-cumulative Perpetual Preferred Stock dated December 22, 2009 (incorporated herein by reference to Exhibit 3.2 to Registrant’s Report on Form 8-K dated December 22, 2009).
3.2Bylaws of the Company as amended to date. (25)
4.1Form of Stock Purchase Agreement dated as of December 22, 2009 (incorporated herein by reference to Exhibit 4.1 to Registrant’s Report on Form 8-K dated December 22, 2009).
4.2Form of Stock Purchase Agreement dated as of December 22, 2009 (incorporated herein by reference to Exhibit 4.2 to Registrant’s Report on Form 8-K dated December 22, 2009).
9N/A
10.1Central Valley Community Bancorp 2000 Stock Option Plan. (3) *

115


10.2Central Valley Community Bancorp Incentive Stock Option Agreement. (2) *
10.3Central Valley Community Bancorp Non-Statutory Stock Option Agreement. (2) *
10.4Clovis Community Bank 1992 Stock Option Plan. (2) *
10.5Clovis Community Bank Incentive Stock Option Agreement. (2) *
10.6Clovis Community Bank Non-Statutory Stock Option Agreement. (2) *
10.7Clovis Community Bank Amended and Restated Salary Deferral Plan, effective January 1, 1997. (2) *
10.8Amendment Number One to the Clovis Community Bank Amended and Restated Salary Deferral Plan, effective January 1, 1997. (2) *
10.9Amendment Number Two to the Clovis Community Bank Amended and Restated Salary Deferral Plan, effective January 1, 1997. (2) *
10.10Deferred Fee Agreement by and between Clovest Corporation and Daniel N. Cunningham. (2) *
10.11Deferred Fee Agreement by and between Clovest Corporation and Steven McDonald. (2) *
10.12Deferred Fee Agreement by and between Clovest Corporation and Louis McMurray. (2) *
10.13Deferred Fee Agreement by and between Clovest Corporation and Wanda Lee Rogers. (16) *
10.14Deferred Fee Agreement by and between Clovest Corporation and William S. Smittcamp. (2) *
10.15Clovis Community Bank 1999 Senior Management Incentive Plan. (2) *
10.16Employment Agreement by and between Clovis Community Bank and Daniel J. Doyle dated May 11, 1998. (2) *
10.17[reserved]
10.18[reserved]
10.19Salary Continuation Agreement by and between Clovis Community Bank and Daniel J. Doyle, dated June 7, 2000. (2)*
10.20Salary Continuation Agreement by and between Clovis Community Bank and Gayle Graham, dated June 7, 2000. (2) *
10.21Salary Continuation Agreement by and between Clovis Community Bank and Gary Quisenberry, dated June 7, 2000. (2) *
10.22Salary Continuation Agreement by and between Clovis Community Bank and Tom Sommer, dated June 7, 2000. (2) *

116


10.23Clovis Community Bank Amended and Restated Deferred Fee Agreement for Daniel N. Cunningham. (2)*
10.24Clovis Community Bank Amended and Restated Deferred Fee Agreement for Steven McDonald. (2) *
10.25Clovis Community Bank Amended and Restated Deferred Fee Agreement for Louis McMurray. (2) *
10.26Clovis Community Bank Amended and Restated Deferred Fee Agreement for Wanda Lee Rogers. (2) *
10.27Clovis Community Bank Amended and Restated Deferred Fee Agreement for William S. Smittcamp. (2) *
10.28Life Insurance Endorsement Method Split Dollar Plan Agreement by and between Clovis Community Bank and Daniel J. Doyle, dated June 21, 2000. (2) *
10.29Life Insurance Endorsement Method Split Dollar Plan Agreement by and between Clovis Community Bank and Dorothy Graham, dated June 21, 2000. (3) *
10.30Life Insurance Endorsement Method Split Dollar Plan Agreement by and between Clovis Community Bank and Gary Quisenberry, dated June 21, 2000. (3) *
10.31Life Insurance Endorsement Method Split Dollar Plan Agreement by and between Clovis Community Bank and Tom Sommer, dated June 21, 2000. (3) *
10.32Salary Continuation Agreement by and between Clovis Community Bank and Shirley Wilburn, dated April 1, 2001. (5) *
10.33Life Insurance Endorsement Method Split Dollar Plan Agreement by and between Clovis Community Bank and Shirley Wilburn, dated April 1, 2001. (5) *
10.34Director Deferred Fee Agreement by and between Clovis Community Bank and Edwin S. Darden. Jr., effective August 1, 2001. (6) *
10.35Addendum A, Clovis Community Bank Split Dollar Agreement and Endorsement by and between Clovis Community Bank and Edwin S. Darden Jr., effective November 29, 2001. (6) *
10.36Form of Second Amended and Restated Director Deferred Fee Agreement by and between Clovis Community Bank and Daniel N. Cunningham, Steven McDonald, Louis McMurray, Wanda Lee Rogers and William S. Smittcamp, effective February 13, 2002. (7) *
10.37Schedule A, Participants’ Normal Retirement Age and Form of Benefit Elected to Second Amended and Restated Director Deferred Fee Agreement by and between Clovis Community Bank and Daniel N. Cunningham, Steven McDonald, Louis McMurray, Wanda Lee Rogers and William S. Smittcamp, effective February 13, 2002 . (7) *
10.38Addendum A, Clovis Community Bank Split Dollar Agreement and Endorsement by and between Clovis Community Bank and Daniel N. Cunningham, Steven McDonald, Louis McMurray, Wanda Lee Rogers and William S. Smittcamp, effective February 13, 2002. (7) *
10.39Schedule B, Participants and Their Executive Interest in Clovis Community Bank Split Dollar Agreement and Endorsement, by and between Clovis Community Bank and Daniel N. Cunningham, Steven McDonald, Louis McMurray, Wanda Lee Rogers and William S. Smittcamp, effective February 13, 2002. (7) *
10.40Central Valley Community Bank Employee and Director Preferred Interest Bonus Plan. (7) *

117


10.41Amendment No. 1 to Employment Agreement by and between Central Valley Community Bank and Daniel J. Doyle effective July 17, 2002. (8) *
10.42Amendment No. 1 to Salary Continuation Agreement by and between Central Valley Community Bank and Daniel J. Doyle effective October 16, 2002. (9)*
10.43Form of Amendment to the Split Dollar Agreement and Policy Endorsement with Central Valley Community Bank by and between Central Valley Community Bank f/k/a Clovis Community Bank and Daniel N. Cunningham, Steven McDonald, Louis McMurray, Wanda Lee Rogers and William S. Smittcamp, effective January 1, 2003. (10)*
10.44Schedule C, Participants and life insurance policies in Central Valley Community Bank Amended Split Dollar Agreement and Policy Endorsement by and between Central Valley Community Bank f/k/a Clovis Community Bank and Daniel N. Cunningham, Steven McDonald, Louis McMurray, Wanda Lee Rogers and William S. Smittcamp, effective January 1, 2003. (10)*
10.45Amendment No. 2 to Executive Salary Continuation Agreement by and between Central Valley Community Bank, f/k/a Clovis Community Bank, and Daniel J. Doyle. (11)*
10.46Amendment No. 1 to Endorsement Split Dollar Plan Agreement by and between Central Valley Community Bank, f/k/a Clovis Community Bank, and Daniel J. Doyle. (11)*
10.47Second Amendment to the Clovest Corporation Director Deferred Compensation Plan Agreement Dated November 14, 1996 by and between Clovest Corporation and Daniel N. Cunningham effective October 31, 2003. (12)*
10.48Second Amendment to the Clovest Corporation Director Deferred Compensation Plan Agreement Dated November 14, 1996 by and between Clovest Corporation and William S. Smittcamp effective October 31, 2003. (12)*
10.49Second Amendment to the Clovest Corporation Director Deferred Compensation Plan Agreement Dated November 14, 1996 by and between Clovest Corporation and Louis McMurray effective October 31, 2003. (12)*
10.50Second Amendment to the Clovest Corporation Director Deferred Compensation Plan Agreement Dated November 14, 1996 by and between Clovest Corporation and Wanda Lee Rogers effective October 31, 2003. (12)*
10.51Business Loan Agreement and Pledge Agreement dated as of December 17, 2004, between Central Valley Community Bancorp and Bank of the West. (13)
10.52Form of Amendment No. 1 To Salary Continuation Agreement dated June 7, 2000 by and between Central Valley Community Bank and Gayle Graham, Gary Quisenberry, Tom Sommer and Shirley Wilburn effective February 1, 2005. (14)*
10.53Exhibit 1 to Amendment No. 1 to Salary Continuation Agreement by and between Central Valley Community Bank and Gayle Graham effective February 1, 2005. (14)*
10.54Exhibit 1 to Amendment No. 1 to Salary Continuation Agreement by and between Central Valley Community Bank and Gary Quisenberry effective February 1, 2005. (14)*
10.56Exhibit 1 to Amendment No. 1 to Salary Continuation Agreement by and between Central Valley Community Bank and Tom Sommer effective February 1, 2005. (14)*

118


10.57Exhibit 1 to Amendment No. 1 to Salary Continuation Agreement by and between Central Valley Community Bank and Shirley Wilburn effective February 1, 2005. (14)*
10.58Form of Amendment No. 1 To Life Insurance Endorsement Method Split Dollar Plan Agreement by and between Central Valley Community Bank and Gayle Graham, Gary Quisenberry and Tom Sommer effective February 1, 2005. (14)*
10.59Exhibit B to Amendment No. 1 To Life Insurance Endorsement Method Split Dollar Plan Agreement by and between Central Valley Community Bank and Gayle Graham effective February 1, 2005. (14)*
10.60Exhibit B to Amendment No. 1 To Life Insurance Endorsement Method Split Dollar Plan Agreement by and between Central Valley Community Bank and Gary Quisenberry effective February 1, 2005. (14)*
10.61Exhibit B to Amendment No. 1 To Life Insurance Endorsement Method Split Dollar Plan Agreement by and between Central Valley Community Bank and Tom Sommer effective February 1, 2005. (14)*
10.62Amendment No. 1 To Life Insurance Endorsement Method Split Dollar Plan Agreement by and between Central Valley Community Bank and Shirley Wilburn effective February 1, 2005. (14)*
10.63Amendment No. 3 To Salary Continuation Agreement by and between Central Valley Community Bank and Daniel Doyle effective February 1, 2005. (14)*
10.64Central Valley Community Bancorp 2005 Omnibus Incentive Plan (incorporated by reference from Appendix A to the Registrant’s proxy statement filed April 5, 2005. (14)*
10.65Life Insurance Endorsement Method Split Dollar Plan Agreement by and between Central Valley Community Bank and David Kinross, dated July 1, 2006.(15)*
10.66Executive Salary Continuation Agreement by and between Central Valley Community Bank and David Kinross, dated July 1, 2006. (15)*
10.67Amended and Restated Life Insurance Endorsement Method Split Dollar Plan Agreement by and between Central Valley Community Bank and Daniel J. Doyle, dated December 31, 2006. (16)*
10.68Amended and Restated Executive Salary Continuation Agreement by and between Central Valley Community Bank and Daniel J. Doyle, dated December 31, 2006. (16)*
10.69Amended Life Insurance Endorsement Method Split Dollar Plan Agreement by and between Central Valley Community Bank and Shirley Wilburn, dated December 31, 2006. (16)*
10.70Amended Executive Salary Continuation Agreement by and between Central Valley Community Bank and Shirley Wilburn, dated December 31, 2006. (16)*
10.71Amendment No. 2 To Life Insurance Endorsement Method Split Dollar Plan Agreement by and between Central Valley Community Bank and Gayle Graham, dated December 20, 2006. (16)*
10.72Amendment No. 2 To Salary Continuation Agreement by and between Central Valley Community Bank and Gayle Graham, dated December 20, 2006. (16)*
10.73Amended Life Insurance Endorsement Method Split Dollar Agreement by and between Central Valley Community Bank and David Kinross, dated March 1, 2007. (16)*

119


10.74Amended Executive Salary Continuation Agreement by and between Central Valley Community Bank and David Kinross, dated March 1, 2007. (16)*
10.75Amended Life Insurance Endorsement Method Split Dollar Agreement by and between Central Valley Community Bank and Tom Sommer, dated March 1, 2007. (16)*
10.76Amended Executive Salary Continuation Agreement by and between Central Valley Community Bank and Tom Sommer, dated March 1, 2007. (16)*
10.77Amended Life Insurance Endorsement Method Split Dollar Agreement by and between Central Valley Community Bank and Gary Quisenberry, dated March 1, 2007. (16)*
10.78Amended Executive Salary Continuation Agreement by and between Central Valley Community Bank and Gary Quisenberry, dated March 1, 2007. (16)*
10.79Life Insurance Endorsement Method Split Dollar Plan Agreement by and between Central Valley Community Bank and Lydia E. Shaw, dated January 2, 2008.(17)*
10.80Executive Salary Continuation Agreement by and between Central Valley Community Bank and Lydia E. Shaw, dated January 2, 2008. (17)*
10.81Form of Salary Continuation Agreement Amendment dated March 1, 2008 by and between Central Valley Community Bank and David Kinross, Tom Sommer, Lydia Shaw and Gary Quisenberry. (17)*
10.82Salary Continuation Agreement Amendment dated March 1, 2008 by and between Central Valley Community Bank and Daniel J. Doyle. (17)*
10.83Form of Second Amendment to the Director Deferred Compensation Agreement effective January 1, 2009 by and between Central Valley Community Bank and Daniel N. Cunningham, Edwin S. Darden, Jr., Steven D. McDonald, Louis C. McMurray, William S. Smittcamp and Wanda L. Rogers. (Filed as Exhibits to Quarterly Report on Form 10-Q for the quarter ended September 30, 2009 and incorporated herein by reference).
10.84Second Executive Salary Continuation Agreement effective April 1, 2010 by and between Central Valley Community Bank and Thomas Sommer. (19)*
10.85Second Executive Salary Continuation Agreement effective April 1, 2010 by and between Central Valley Community Bank and Gary Quisenberry. (19)*
10.86Securities Purchase Agreement, dated August 18, 2011, between the Company and the United States Department of Treasury. (20)
10.87Letter Agreement, dated August 18, 2011, between the Company and the United States Department of Treasury. (20)
10.88Share Exchange Agreement, dated August 23, 2011, among the Company and Patriot Financial Partners, L.P. and Patriot Financial Partners Parallel, L.P. (20)
10.89Second Amended and Restated Executive Salary Continuation Agreement effective July 1, 2011, by and between Central Valley Community Bank and Daniel J. Doyle. (20)*
10.90Second Amended and Restated Life Insurance Method Split Dollar Plan Agreement effective July 1, 2011, by and between Central Valley Community Bank and Daniel J. Doyle. (20)*

120


10.91Amended Executive Salary Continuation Agreement effective January 1, 2012, by and between Central Valley Community Bank and Lydia Shaw. (21)*
10.92Amended Life Insurance Endorsement Method Split Dollar Agreement effective January 1, 2012, by and between Central Valley Community Bank and Lydia Shaw. (21)*
10.93Second Amended Executive Salary Continuation Agreement effective January 1, 2012, by and between Central Valley Community Bank and David Kinross. (21)*
10.94Second Amended Life Insurance Endorsement Method Split Dollar Agreement effective January 1, 2012, by and between Central Valley Community Bank and David Kinross. (21)*
10.95Amended Second Executive Salary Continuation Agreement effective January 1, 2012, by and between Central Valley Community Bank and Gary Quisenberry. (21)*
10.96Second Amended Life Insurance Endorsement Method Split Dollar Agreement effective January 1, 2012, by and between Central Valley Community Bank and Gary Quisenberry. (21)*
10.97Amended Second Executive Salary Continuation Agreement effective January 1, 2012, by and between Central Valley Community Bank and Tom Sommer. (21)*
10.98Second Amended Life Insurance Endorsement Method Split Dollar Agreement effective January 1, 2012, by and between Central Valley Community Bank and Tom Sommer. (21)*
10.99Amended Split Dollar Plan Agreement and Endorsement effective March 21, 2012, by and between Central Valley Community Bank and William S. Smittcamp. (22)*
10.100Amended Split Dollar Plan Agreement and Endorsement effective March 21, 2012, by and between Central Valley Community Bank and Daniel N. Cunningham. (22)*
10.101Amended Split Dollar Plan Agreement and Endorsement effective March 21, 2012, by and between Central Valley Community Bank and Louis McMurray. (22)*
10.102Amended Split Dollar Plan Agreement and Endorsement effective March 21, 2012, by and between Central Valley Community Bank and Steven D. McDonald. (22)*
10.103Amended Split Dollar Plan Agreement and Endorsement effective March 21, 2012, by and between Central Valley Community Bank and Edwin S. Darden. (22)*
10.104Amended Split Dollar Plan Agreement and Endorsement effective December 18, 2013, by and between Central Valley Community Bank and Daniel N. Cunningham. (23)*
10.105Amended Split Dollar Plan Agreement and Endorsement effective December 18, 2013, by and between Central Valley Community Bank and Edwin S. Darden. (23)*
10.106Amended Split Dollar Plan Agreement and Endorsement effective December 18, 2013, by and between Central Valley Community Bank and Louis McMurray. (23)*
10.107Amended Split Dollar Plan Agreement and Endorsement effective December 18, 2013, by and between Central Valley Community Bank and Steven D. McDonald. (23)*

121


10.108Amended Split Dollar Plan Agreement and Endorsement effective December 18, 2013, by and between Central Valley Community Bank and William S. Smittcamp. (23)*
10.109Employment Agreement by and between Central Valley Community Bank and James M. Ford dated January 23, 2014. (23) *
10.110Central Valley Community Bank Executive Deferred Compensation Plan dated October 21, 2015. (26) *
11N/A
12N/A
13N/A
16N/A
18N/A
21Subsidiaries.
22N/A
23Consent of Crowe Horwath LLP
24Power of Attorney
31.1Rule 13a-14(a) [Section 302] Certification Of Principal Executive Officer
31.2Rule 13a-14(a) [Section 302] Certification Of Principal Financial Officer
32.1Certification of Principal Executive Officer pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of the Sarbanes Oxley Act of 2002
32.2Certification of Principal Financial Officer pursuant to 18 U.S.C. Section 1350. As Adopted Pursuant to Section 906 of the Sarbanes Oxley Act of 2002
101.INSXBRL Instance Document
101.SCHXBRL Taxonomy Extension Schema Document
101.CALXBRL Taxonomy Extension Calculation Document
101.DEFXBRL Taxonomy Extension Definition Linkbase
101.LABXBRL Taxonomy Extension Labels Linkbase Document
101.PREXBRL Taxonomy Extension Presentation Link Document

122


*              Management contract and compensatory plans.

(1)Filed as Exhibit 3.1.1 to the Annual Report on Form 10-KSB for the year ended December 31, 2000 (the 2000 Form 10-KSB) and incorporated herein by reference.

(2)Filed as Exhibits to the 2000 Form 10-KSB and incorporated herein by reference.

(3)Attached as Exhibit 99.1 to Registration Statement No. 333-52384 on Form S-8 filed by the Registrant (the 2000 Plan S-8 Registration Statement) and incorporated herein by reference.

(4)Attached as Exhibit 99.1 to Registration Statement No. 333-50276 on Form S-8 filed by the Registrant (the 1992 Plan S-8 Registration Statement) and incorporated herein by reference.

(5)Filed as Exhibits to the Quarterly Report on Form 10-QSB for the quarter ended June 30, 2001 and incorporated herein by reference.

(6)Filed as Exhibits to the Annual Report on Form 10-KSB for the year ended December 31, 2001 and incorporated herein by reference.

(7)Filed as Exhibits to the Quarterly Report on Form 10-QSB for the quarter ended June 30, 2002 and incorporated herein by reference.

(8)Filed as Exhibit 10.41 to the Quarterly Report on Form 10-QSB for the quarter ended September 30, 2002 and incorporated herein by reference.

(9)Filed as Exhibit 10.42 to the Annual Report on Form 10-KSB for the year ended December 31, 2002 and incorporated herein by reference.

(10)Filed as Exhibits to the Quarterly Report on Form 10-QSB for the quarter ended March 31, 2003 and incorporated herein by reference.

(11)Filed as Exhibits to the Quarterly Report on Form 10-QSB for the quarter ended September, 30 2003 and incorporated herein by reference.

(12)Filed as Exhibits to the Annual Report on Form 10-KSB for the year ended December 31, 2003, filed March 26, 2004 and incorporated herein by reference.

(13)Filed as Exhibits to the Annual Report on Form 10-KSB for the year ended December 31, 2004, filed March 24, 2005 and incorporated herein by reference.

(14)Filed as Exhibits to the Quarterly Report on Form 10-Q for the quarter ended June, 30 2005 and incorporated herein by reference.

(15)Filed as Exhibits to the Quarterly Report on Form 10-Q for the quarter ended June, 30 2006 and incorporated herein by reference.

(16)Filed as Exhibits to the Annual Report on Form 10-K for the year ended December 31, 2006, filed March 28, 2007 and incorporated herein by reference

(17)Filed as Exhibits to Annual Report on Form 10-K for the year ended December 31, 2007, filed March 5, 2008 and incorporated herein by reference

(18)Filed as Exhibits to Annual Report on Form 10-K for the year ended December 31, 2008, filed March 19, 2009 and incorporated herein by reference


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(19)Filed as Exhibits to the Quarterly Report on Form 10-Q for the quarter ended March 31, 2010 and incorporated herein by reference.

(20)Filed as Exhibits to the Quarterly Report on Form 10-Q for the quarter ended September 30, 2011 and incorporated herein by reference.

(21)Filed as Exhibit to Annual Report on Form 10K for the year ended December 31, 2011, filed March 21, 2012 and incorporated herein by reference.

(22)Filed as Exhibits to the Quarterly Report on Form 10-Q for the quarter ended March 31, 2012 and incorporated herein by reference.

(23)Filed as Exhibits to Annual Report on Form 10K for the year ended December 31, 2013, filed March 21, 2014 and incorporated herein by reference.

(24)Filed as Exhibit to Registration Statement on Form S-4 No. 333-187260, filed March 14, 2013.

(25)Filed as Exhibits to Annual Report on Form 10K for the year ended December 31, 2014, filed March 10, 2015 and incorporated herein by reference.

(26)
Filed as Exhibit to Annual Report on Form 10K for the year ended December 31, 2015, filed March 15, 2016 filed here.



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