Local. Responsive. Reliable. Local. R esponsive. R eliable. · Eugene (Gene) Voiland Eugene Voiland...

Local. Responsive. Reliable.

2 0 1 9 A N N U A L R E P O R T

Local. Responsive. Reliable.

2 0 1 9 A N N U A L R E P O R T

Greg Bynum

Greg Bynum has been a director of Valley Republic Bank since 2008 and has served on the Company’s Board of Directors since its formation in 2016. Mr. Bynum is the CEO and majority owner of a closely held family business, Bynum Inc, a full service real estate development, management, and brokerage firm headquartered in Bakersfield California. The firm was established in 1981.

Annette DavisAnnette Davis has been a director of Valley Republic Bank since 2008 and has served on the Company’s Board of Directors since its formation in 2016. Mrs. Davis is the president of Adavco, Inc., one of the main land development companies in Bakersfield. She co-founded the company in 1982.

Michael Hair, Sr., D.D.S.

Michael F. Hair, Sr., D.D.S. has been a director of Valley Republic Bank since 2015 and has served on the Com-pany’s Board of Directors since its formation in 2016. Dr. Hair founded dental practices in Wasco, McFarland, and Taft and practiced dentistry for over 20 years. He is presently involved in residential and commercial real estate development and has built over 2,300 homes and numerous commercial projects throughout California, Nevada, Arizona, and Idaho.

Bruce JayBruce Jay has been a director of Valley Republic Bank since 2008 and a Director of the Company since its inception in 2016. He was the President and Chief Executive Officer of Valley Republic Bank from its inception in 2008 and the Company from its inception in 2016 until his retirement on March 31, 2019. His prior banking experience includes 22 years of executive management experience with Bank of Stockdale and its successor, Valley Independent Bank, as well as three years of de novo bank experience at Bank of Santa Clarita. Mr. Jay is a CPA and is a member of the American Institute of CPAs and the Colorado Society of CPAs.

Anthony Leggio

Anthony Leggio has been a director of Valley Republic Bank since 2008 and has served on the Company’s Board of Directors since its formation in 2016. Mr. Leggio is a business attorney. From 1977 to 2001, he was an attorney with the Bakersfield law firm of Clifford & Brown where he served as Principal/Managing Partner. Mr. Leggio served as Vice-President/General Counsel of Wm. Bolthouse Farms from 2001-2005. He currently serves as the president of Bolthouse Properties, LLC, and as a director of Tejon Ranch Company.

Angelo Mazzei

Angelo Mazzei has been a director of Valley Republic Bank since 2008 and has served on the Company’s Board of Directors since its formation in 2016. Mr. Mazzei is the founder and CEO/Chairman of Mazzei Injector Corporation, in Bakersfield, California. Founded in 1978, the company manufactures and distributes patented high-efficiency venturi injectors and related equipment. The products are distributed worldwide for a variety of uses in agricultural irrigation, recreational waters, industrial and municipal drinking water treatment, and wastewater management.

Willy Reyneveld

Willy Reyneveld has been a director of Valley Republic Bank since 2008 and has served on the Company’s Board of Directors since its formation in 2016. Mr. Reyneveld is the President/CEO of W. Reyneveld Construction Inc., which he founded in 1994. The company specializes in super flat concrete floors for warehouses. In addi-tion, Mr. Reyneveld has developed several industrial real estate projects in Bakersfield.

Carlos Sanchez

Carlos Sanchez has been a director of Valley Republic Bank since 2008 and has served on the Company’s Board of Directors since its formation in 2016. Mr. Sanchez is a realtor in Kern County, with over 27 years of experience in real estate sales. He has worked for Realty World Skyway, RE/MAX Golden Empire, Coldwell Banker Preferred Realtors, and he is currently the co-owner and broker of record for Solutions Realty.

Shawn Shambaugh,M.D.

Shawn Shambaugh, M.D. has been a director of Valley Republic Bank since 2008 and has served on the Company’s Board of Directors since its formation in 2016. Dr. Shambaugh has been a physician specializing in oncology for over 25 years. He is also the Diagnostic Laboratory Director with Comprehensive Blood and Cancer Center and serves as the Medical Director of the Houchin Community Blood Bank. He is a director of another community bank headquartered in Los Angeles County.

James Schuler, M.D.

James Shuler, M.D. has been a director of Valley Republic Bank since 2008 and has served on the Company’s Board of Directors since its formation in 2016. Dr. Shuler was the founder and president of Empire Eye and Laser Center in Bakersfield from 1998-2007. Dr. Shuler also founded and served as the Medical Director of Empire Surgery Center, specializing in ophthalmic and orthopedic surgery. Dr. Shuler currently performs plastic surgery at Bakersfield Eye Institute and is a consultant for Anthem Blue Cross of California.

Geraud Smith

Geraud Smith has been the President & Chief Executive Officer at Valley Republic Bank, and a director of the Company since March 1, 2019. Mr. Smith is an accomplished banker with over 20 years of commercial banking experience with a focus on real estate, oil and gas, and agriculture. Before joining the Bank, Mr. Smith was a regional manager for a large national bank with responsibilities over the Central Coast, Central Valley, and Southern California.

Warner WilliamsWarner Williams has been a director of Valley Republic Bank since 2008 and has served on the Company’s Board of Directors since its formation in 2016. Mr. Williams is President of Warner M Williams LLC. The compa-ny provides consulting for energy related activities organizational design, succession planning and leadership coaching. He is the retired VP of Chevron North America Exploration and Production, in charge of Chevron’s operations in Louisiana from 2009-2014. He has worked for over 40 years in the energy industry in both domestic and international locations. He holds a BS degree in Petroleum Engineering from New Mexico School of Mines and an MS degree in Petroleum Engineering from USC.

Eugene (Gene) Voiland

Eugene Voiland has served as Chairman of the Board of Directors for Valley Republic Bank since 2008 and as the Chairman of the Board of the Company since its formation in 2016. He is the retired President and CEO of Aera Energy LLC. In addition to being a management consultant, he serves on a number of local and state-wide nonprofit and for-profit boards including Saltchuk Resources, Inc. and Berry Petro-leum Company, LLC. Mr. Voiland is a 1969 graduate of Washington State University with a BS degree in Chemical Engineering. He’s a member of WSU’s Foundation Board of Governors and Chairman of the Foundation Investment Committee.

Board of Directors

Executives and Management

Left to right: Geraud Smith, President and CEO

Stephen M. Annis, CRPExecutive Vice President and Chief Operating Officer

Jack Smith, Executive Vice PresidentChief Credit Officer

Philip McLaughlin, Executive Vice President

Left to right (sitting): Janet Hepp, SVP-Loans; Garth Corrigan, SVP-Chief Financial Officer;Aytom Salomon, VP-Oil & Gas;John Etchison, SVP-Agribusiness;Marcy Unruh, SVP-Administration/HR;Sarah Watkins, VP-Business Develop-ment; Mary Jane Damian, SVP-Director of Operations

Left to right (standing):Jennifer Meadors, VP-Sr. Risk Manager; Daniel Cardenas, VP-Chief Information Officer; Patrick Johns, VP-Sr. Portfolio Manager; Margie Schwartz, VP-Compliance Manager;Brian Sabin, VP-Loans; Rasmus Jensen, VP-Credit Manager; Davin Jensen, VP-Sr. Credit Analyst;Cameron Holder, VP-Sr. Credit Manager; Shane York, VP-Branch Manager; Michele Jasso, VP-Adminis-tration; Cathy Davies, VP-Branch Operations; Heather Sullivan, Sr. Portfolio Manager

Not pictured:Karen Campbell, VP-Credit Admin-istration Specialist; Voni Humphreys, VP-Treasury Manager; Millie Rodri-guez, VP-Loan Applications Adminis-trator

Not pictured (Fresno LPO):Jeff Pace, SVP-Market President;Kathryn Miller, VP-Loans

Report to Shareholders

Management

Executives We are pleased to report that Valley Republic Bancorp (the Com-pany), and its wholly-owned subsidiary, Valley Republic Bank (the Bank), reported record earnings and growth for 2019. The Company continued its trend of achieving double digit growth in assets, loans, and deposits, as well as a year-over-year increase in net income. This was accomplished as market interest rates declined 75 basis points during 2019.

Some of the key financial highlights for 2019 compared to 2018 include: • Net income increased 9% • Net loans increased by 20% • Total deposits increased by 18% • Total assets increased by 20%

The Company reported year to date net income of $9,737,000 at December 31, 2019, compared to $8,952,000 in 2018, an in-crease of 9%. Basic earnings per share increased from $2.29 at the end of 2018 to $2.36 at the end of 2019; diluted earnings per share were $2.33 for this year, compared to $2.14 at the end of last year. The Company’s return on assets and return on equity was 1.22% and 12.16%, respectively.

Total assets were $939.1 million at the end of 2019, compared to $779.9 million at year-end 2018, representing an increase of 20%. Total deposits increased by 18% to $828.8 million at year-end, compared to $703.7 million at the end of 2018. Total net loans were $616.4 million at the end of 2019, representing an increase of 20% compared to the prior year-end.

The following table highlights these financial results in comparison to our peers: VRB Peers* ROA 1.22% 1.15%ROE 12.16% 10.34%Asset Growth 20.00% 6.97%Deposit Growth 18.00% 7.02%Loan Growth 20.00% 6.08%*As of December 31, 2019. Source: BankPointTM Executive Report

In February 2019, Valley Republic Bank celebrated its 10-year an-niversary. The first 10-years were marked by great success and to ensure the Company is well-positioned for the next 10-years, several key investments were made in 2019. These investments will enable the Company to expand its market share, increase income opportunities, meet heightened regulatory requirements, and ensure we are able to maintain our unwavering commit-ment to providing uncommon customer service as we continue to grow. Some of the specific investments include:

• Successfully launched an Oil and Gas Division, headed by a team of bankers who are highly respected for their unique expertise in this dynamic market segment; • Opened a Loan Production Office in Fresno, staffed by

a group of dedicated bankers with deep roots in the Fresno business community; • Relocated our Delano Branch office into a new facility located in the heart of one of Delano’s most active and growing areas; • Successfully raised $20 million in subordinated debt, which will provide additional capital for the Bank, in support of the Bank’s anticipated future growth; • Added several credit, compliance, and risk-focused team members, so as to support the Bank’s continued growth while maintaining the proper adherence to all regulatory and business best practices; • Implemented a Lean Process Improvement program, designed to streamline and enhance the efficiency and effectiveness of the Bank’s operations and lending processes.

Another major milestone achieved during 2019 was the comple-tion of the executive management transition that was reported last year. With the planned retirement of our Company’s found-ing President and Chief Executive Officer, Bruce Jay, Geraud Smith assumed the role of President and Chief Executive Officer of the Company and the Bank on March 1, 2019. This significant management transition was completed with minimal disruption to our customers, shareholders and employees.

The Company accomplished record financial results, experi-enced leadership change, initiated process improvement, and achieved significant growth. This has established a solid founda-tion for our future growth and success.

We are proud of our financial performance this year. At the end of 2019, Valley Republic Bank was ranked in the top 17% of all U.S. banks, as measured by asset size, an increase of three percent-age points over our ranking at the end of 2018.

Valley Republic Bank has performed remarkably well during its first eleven years of operation, and we believe the best is yet to come. As the Bank moves toward the next milestone of growth and profitability, we remain firmly committed to those values that have been the underlying foundation for everything we have ac-complished and for all that we seek to accomplish in the future, namely, to be singularly focused on providing a level of service that is uncommon, proactively caring for our customers and our community, and maintaining the highest standards of honesty and integrity in everything we do.

Thank you for your continued confidence and support.

GERAUD SMITH, President & CEOEUGENE VOILAND, Chairman, Board of Directors

Valley Republic Bancorp

The Ag Business Group

Led by John Etchison, the bank’s Ag Business Group

continues to make us proud. The team’s unprecedented

ag lending experience has earned us valued partnerships

throughout the Central Valley. Whether it’s a local farm,

vineyard, orchard, ranch, dairy, or other agricultural

business, we continue to be the valued partner of choice.

We applaud the Group’s continued commitment to

provide experienced, trusted advice, winning strategies,

and support to one of the Valley’s most important

industry sectors.

Meet the team: Angelica Serrato, Administrative Assistant; Brandon Gallardo, Credit

Analyst; John Etchison, SVP-Agribusiness; Tim Hay, Senior Credit Analyst; Eliza Hernandez, AVP- Agribusiness Loan Specialist; Davin Jensen,

VP-Senior Credit Analyst; Eric Schoenheide, Credit Analyst

Now in Fresno!

In 2019, we expanded our San Joaquin Valley presence

north to Fresno. The team, with over 60 years of

combined banking experience, is now serving clients from

the new Loan Production Office. We’re looking forward

to an exciting future with our neighbors to the north.

As we grow, our local values remain.

Meet the team:

Samantha Soler, AVP–Treasury Relationship Manager; Jeff Pace, Market President; Geraud Smith, CEO & President;

Katie Miller,VP–Loan Officer

“Valley Republic Bank has exceeded our expectations through the full transition and implementation by providing a level of customer service that we did not have with

our previous bank.”

Philip & Mark MelkonianMelkonian Enterprises, Inc.

Established in 1973 by Suren Melkonian, Melkonian

Enterprises is now a third-generation family owned

farming, dehydrating, and dried fruit processing

company.

Aside from farming grapes and apricots, the company

also dehydrates and processes dried apricots, peaches,

nectarines, pears, plums, and raisins.

As the family operation continues to expand, working

with a bank who understands the local agriculture

market is imperative for their future.

Valley Republic Bank is committed to our community and improving the quality of life locally.

We are proud to have supported the followingKern County organizations in 2019.

Alzheimer’s Disease Association of Kern County

American Cancer Society

American Legion

Bakersfield Association of Realtors

Bakersfield Condors

Bakersfield Museum of Art

Bakersfield Prayer Breakfast

Bakersfield Sikh Women’s Association

Bakersfield SPCA

Bakersfield West Rotary

Bethany Services

Blind Children Fund

Boy Scouts of America

Buttonwillow Lions Club

Cal Society of CPAs

California State University,

Bakersfield John Brock Award

California State University, Bakersfield Roadrunner Athletics

CASA of Kern County

Chabad of Bakersfield

Delano Chamber of Commerce

Delano Elks Lodge

Future Farmers of America Foundation

Garden Pathways

Global Family

Greater Bakersfield Chamber of Commerce

Greater Delano Area Youth Foundation

Guitar Masters

Hail Mary Club

Highland High School

Instrumental Music Boosters

Hoffmann Hospice

Independence High School

Influencers Bakersfield

Jim Burke Education Foundation

JJ’s Legacy

Josh Farler Foundation

Kern Autism Society

Kern Community Foundation

Kern County 4-H

Kern County Builders Exchange

Kern County Economic Development Corporation

Kern County Fire Department

Kern County Hispanic Chamber of Commerce

Kern County Housing and Opportunity Foundation

Kern Energy Foundation

Kern Medical Foundation

Knights Football

Kiwanis Club

Latina Leaders

League of Dreams

Mid State Development Corporation

Monsignor Leddi Golf Tournament

Morning Star Fresh Food Ministry

Music Jam

NAMI, Kern County

Pacific Stars Baseball

Renegade Helmet Club

Seats for Soldiers

Soroptimist of Delano

South High School, Robotics Team

St. John’s Lutheran School

Teen Challenge

The Cat People

The Mission at Kern County

Tulare Basin Wetlands Association

Varner Family Foundation

Water Association of Kern County

Youth Connection

Financial Highlights Financial Highlights

Dollars in thousands, except per share dataNET INCOMENET INCOME BEFORE TAXESBASIC EPS**BOOK VALUE PER SHARE**

*Compound Annual Growth Rate.**Per Share Data has been adjusted to give retroactive effect to the stock dividend that was delcared in 2017.

2018$ 8,952$ 11,310$ 2.29$ 16.87

2019$ 9,737$ 11,511$ 2.36$ 18.59

2017$ 5,247$ 9,240$ 1.40$ 14.94

2016$ 4,471$ 6,637$ 1.21$ 13.60

2015 $ 3,540$ 5,299$ 0.96$ 12.36

CAGR* 28.78% 21.40% 25.15% 10.74%

BOOK VALUEPER SHARE

$ 18.59$ 12.36

BASIC EPS

$ 2.36$ 0.96

NET INCOMEBEFORE TAXES

11,5115,299

2015 - 20192015 - 20192015 - 20192015 - 2019

NET INCOME

3,540 9,737

Dollars in thousands, except per share dataTOTAL ASSETSNET LOANSTOTAL DEPOSITSTOTAL SHAREHOLDERS’ EQUITY

2018$ 779,854$ 514,697$ 703,658$ 67,153

2019$ 939,085$ 616,420$ 828,794$ 77,584

2017$ 667,625$ 441,743$ 603,270$ 56,427

2016$ 579,055$ 384,548 $ 518,500$ 50,479

2015$ 490,502$ 316,255$ 435,487$ 45,659

NET LOANS

616,420316,255

TOTAL DEPOSITS

828,794435,487

TOTAL ASSETS

939,085490,502

TOTAL SHAREHOLDERS’ EQUITY

77,58445,659

2015 - 2019 2015 - 20192015 - 2019 2015 - 2019

*Compound Annual Growth Rate.

CAGR* 17.63% 18.16% 17.45% 14.17%

“Valley Republic Bank has become an invaluable strategic partner who intimately

understands the energy and construction business sectors.”

Craig BonnaChief Executive Officer

RHC - Robert Heely Construction

Founded in 1977, RHC has expanded from California

to Texas and New Mexico offering industrial construc-

tion and maintenance services. The team is focused

on delivering projects with the highest quality, on

schedule, and in the safest manner. RHC’s expertise is

in field and plant mechanical and maintenance, heavy

civil, concrete, and well abandonment services.

VALLEY REPUBLIC BANCORP AND SUBSIDIARY

CONSOLIDATED FINANCIAL STATEMENTS WITH

INDEPENDENT AUDITOR'S REPORT

DECEMBER 31, 2019 AND 2018

The Oil and Gas Group

In 2018, we created a team solely dedicated to serving

clients in an industry that is one of California’s strongest

economic drivers – oil and gas. We’re proud of the

tremendous success it’s had in just over a year’s time and

thank our shareholders for the continued support of

our efforts to grow strategically, while maintaining our

core values.

The group complemented the substantial existing oil

and gas expertise of Board Chairman, Eugene Voiland,

former CEO of AERA Energy LLC, and Director Warner

Williams, former VP of Chevron. Aytom Salomon leads

the division.

Serving Californians - from California.

Meet the team: Eugene Voiland, Chairman, Board of Directors; Aytom Salomon,

VP–Oil and Gas Group; Geraud Smith, President & CEO; Anthony Esparza, AVP-Senior Credit Analyst

CONTENTS

INDEPENDENT AUDITOR'S REPORT ON THE FINANCIAL STATEMENTS 1

FINANCIAL STATEMENTS

Consolidated Balance Sheets 3 Consolidated Statements of Income 4 Consolidated Statements of Comprehensive Income 5 Consolidated Statement of Changes in Shareholders' Equity 6 Consolidated Statements of Cash Flows 7 Notes to Consolidated Financial Statements 9

What inspires you, inspires us. | eidebailly.com

25231 Paseo De Alicia, Ste. 100 | Laguna Hills, CA 92653-4615 | T 949.768.0833 | F 949.768.8408 | EOE

1

Independent Auditor’s Report To the Board of Directors and Shareholders of Valley Republic Bancorp and Subsidiary Bakersfield, California Report on the Consolidated Financial Statements We have audited the accompanying consolidated financial statements of Valley Republic Bancorp and Subsidiary, which comprise the consolidated balance sheets as of December 31, 2019, and the related consolidated statements of income, comprehensive income, changes in shareholders’ equity, and cash flows for the year then ended, and the related notes to the consolidated financial statements. Management’s Responsibility for the Consolidated Financial Statements Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of consolidated financial statements that are free from material misstatement, whether due to fraud or error. Auditor’s Responsibility Our responsibility is to express an opinion on these consolidated financial statements based on our audit. We conducted our audit in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.

2

Opinion In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Valley Republic Bancorp and Subsidiary as of December 31, 2019, and the results of their operations and their cash flows for the year then ended in accordance with accounting principles generally accepted in the United States of America. Other Matter The consolidated financial statements of Valley Republic Bancorp and Subsidiary as of and for the year ended December 31, 2018, were audited by Vavrinek, Trine, Day & Co. LLP, who joined Eide Bailly LLP on July 22, 2019, and whose report dated February 19, 2019, expressed an unmodified opinion on those statements.

Laguna Hills, California February 18, 2020


CONSOLIDATED BALANCE SHEETS DECEMBER 31, 2019 AND 2018

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

3

2019 2018ASSETSCash and Due from Banks 15,776,000$ 10,531,000$ Interest-Bearing Deposits in Other Banks 90,533,000 64,291,000

Total Cash and Cash Equivalents 106,309,000 74,822,000

Debt Securities Available-for-Sale 174,461,000 101,712,000 Debt Securities Held-to-Maturity - 52,488,000

Total Debt Securities 174,461,000 154,200,000

Loans, Net of Deferred Fees and Costs 624,768,000 521,628,000 Allowance for Loan Losses 8,348,000) ( 6,931,000) (

Net Loans 616,420,000 514,697,000

Federal Home Loan Bank Stock, at Cost 3,297,000 2,812,000 Premises and Equipment 2,256,000 2,048,000 Bank Owned Life Insurance 10,714,000 10,479,000 Right of Use Asset 5,583,000 - Accrued Interest and Other Assets 20,045,000 20,796,000

TOTAL ASSETS 939,085,000$ 779,854,000$

LIABILITIES AND SHAREHOLDERS' EQUITYDeposits:

Noninterest-Bearing 288,387,000$ 287,409,000$ Interest-Bearing 540,407,000 416,249,000

Total Deposits 828,794,000 703,658,000 Operating Lease Liability 5,800,000 - Long-Term Debt, Net of Issuance Costs 19,705,000 - Accrued Interest and Other Liabilities 7,202,000 9,043,000

TOTAL LIABILITIES 861,501,000 712,701,000

Commitments and Contingencies - Note E and K

Shareholders' Equity:Common Stock - No par value, 50,000,000 Shares Authorized,

Shares Issued and Outstanding - 4,172,850 and 3,979,489 in 2019 and 2018 47,645,000 45,626,000 Additional Paid-in Capital 726,000 1,374,000 Retained Earnings 29,612,000 20,880,000 Accumulated Other Comprehensive Loss - Net Unrealized

Loss on Investment Securities, Net of Tax of $168,000 and $286,000 in 2019 and 2018, Respectively 399,000) ( 727,000) (

TOTAL SHAREHOLDERS' EQUITY 77,584,000 67,153,000

TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY 939,085,000$ 779,854,000$


CONSOLIDATED STATEMENTS OF INCOME FOR THE YEARS ENDED DECEMBER 31, 2019 AND 2018


4

2019 2018INTEREST INCOME

Interest and Fees on Loans 28,555,000$ 22,485,000$ Interest on Debt Securities 3,740,000 2,875,000Interest on Federal Funds Sold and Other 1,841,000 1,160,000

Total Interest Income 34,136,000 26,520,000

INTEREST EXPENSEInterest on Savings, Money Market, and Transaction Accounts 5,134,000 2,468,000Interest on Time Deposits 1,280,000 895,000Interest on Long-Term Debt 909,000 -

Total Interest Expense 7,323,000 3,363,000

Net Interest Income 26,813,000 23,157,000Provision for Loan Losses 1,404,000 805,000Net Interest Income After Provision For Loan Losses 25,409,000 22,352,000

NONINTEREST INCOMEService Charges and Fees on Deposit Accounts 510,000 508,000Net Gain on Sales of Available-for-Sale Securities 489,000 - Fees on Brokered Loans 69,000 191,000Servicing Income 775,000 981,000Earnings on Bank Owned Life Insurance 235,000 244,000Other Noninterest Income 343,000 315,000

Total Noninterest Income 2,421,000 2,239,000

NONINTEREST EXPENSESalaries and Employee Benefits 10,342,000 8,224,000Occupancy and Equipment Expense 1,737,000 1,474,000Other Expenses 4,240,000 3,583,000

Total Noninterest Expense 16,319,000 13,281,000

Income Before Income Taxes 11,511,000 11,310,000Income Taxes 1,774,000 2,358,000

NET INCOME 9,737,000$ 8,952,000$

NET INCOME PER SHARE - BASIC 2.36$ 2.29$

NET INCOME PER SHARE - DILUTED 2.33$ 2.14$


CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME FOR THE YEARS ENDED DECEMBER 31, 2019 AND 2018


5

2019 2018

Net Income 9,737,000$ 8,952,000$

OTHER COMPREHENSIVE INCOME (LOSS):Unrealized Gain and Loss on Securities Available for Sale:

Change in Net Unrealized Gain (Loss) 935,000 432,000) ( Reclassification of (Gain) Loss Recognized in Net Income 489,000) ( -

446,000 432,000) ( Income Tax Expense (Benefit): Change in Net Unrealized Gain (Loss) 263,000 118,000) ( Reclassification of Gain Recognized in Net Income 145,000) ( -

118,000 118,000) (

TOTAL OTHER COMPREHENSIVE INCOME (LOSS) 328,000 314,000) (

TOTAL COMPREHENSIVE INCOME 10,065,000$ 8,638,000$


CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY FOR THE YEARS ENDED DECEMBER 31, 2019 AND 2018


6

Accumulated

Common Stock Other

Number of Additional Retained Comprehensive

Shares Amount Paid-in Capital Earnings Income (Loss) Total

Balance January 1, 2018 3,778,138 43,167,000$ 1,745,000$ 11,928,000$ 413,000)$( 56,427,000$

Net Income 8,952,000 8,952,000

Stock-based Compensation 556,000 556,000

Vested Stock Awards 14,243 392,000 392,000) ( -

Exercise of Stock Options 187,108 2,067,000 535,000) ( 1,532,000

Other Comprehensive

Loss, Net of Taxes 314,000) ( 314,000) (

Balance at December 31, 2018 3,979,489 45,626,000 1,374,000 20,880,000 727,000) ( 67,153,000

Net Income 9,737,000 9,737,000

Stock-based Compensation 825,000 825,000

Vested Stock Awards 20,097 639,000 639,000) ( -

Exercise of Stock Options 214,350 1,771,000 834,000) ( 937,000

Repurchase of Shares for Witholding

of Taxes on Share-based Award (41,086) 391,000) ( 1,005,000) ( 1,396,000) (

Other Comprehensive

Income, Net of Taxes 328,000 328,000

Balance at December 31, 2019 4,172,850 47,645,000$ 726,000$ 29,612,000$ 399,000)$( 77,584,000$


CONSOLIDATED STATEMENTS OF CASH FLOWS DECEMBER 31, 2019 AND 2018


7

2019 2018OPERATING ACTIVITIES

Net Income 9,737,000$ 8,952,000$ Adjustments to Reconcile Net Income to Net Cash

From Operating Activities:Depreciation 495,000 459,000 Stock-based Compensation 825,000 556,000 Provision for Loan Losses 1,404,000 805,000 Gain on Sale of Debt Securities Available-for-Sale 489,000) ( - Net Amortization of Premium on Debt Securities 678,000 741,000 Net Increase in Bank Owned Life Insurance 235,000) ( 244,000) ( Deferred Income Taxes 982,000) ( 229,000) ( Other Items 1,906,000 1,039,000

Total Adjustments 3,602,000 3,127,000 Net Cash From Operating Activities 13,339,000 12,079,000

INVESTING ACTIVITIESDebt Securities Available-for-Sale:

Sales 48,843,000 10,534,000 Maturities, prepayment and calls 39,308,000 6,152,000 Purchases 115,614,000) ( 37,131,000) (

Debt Securities Held-to-Maturity:Maturities, prepayment and calls 7,460,000 5,530,000 Purchases - 6,007,000) (

Net Increase in Loans to Customers 103,127,000) ( 73,759,000) ( Purchase of Federal Home Loan Bank Stock 485,000) ( 448,000) ( Purchases of Premises and Equipment, net 703,000) ( 969,000) ( Investment in Qualified Affordable Housing Projects 1,916,000) ( 2,848,000) (

Net Cash From Investing Activities 126,234,000) ( 98,946,000) (


CONSOLIDATED STATEMENTS OF CASH FLOWS - Continued DECEMBER 31, 2019 AND 2018


8

2019 2018FINANCING ACTIVITIES

Net Increase in Demand Deposits and Savings Accounts 127,435,000$ 80,769,000$Net (Decrease) Increase in Time Deposits 2,299,000) ( 19,619,000 Proceeds from Issuance of Subordinated Debt 19,705,000 - Proceeds from Exercise of Stock Options including Tax Benefits 937,000 1,532,000 Repurchase of Shares for Witholding of Taxes on Share-based Payments 1,396,000) ( -

Net Cash From Financing Activities 144,382,000 101,920,000

Net Increase in Cash and Cash Equivalents 31,487,000 15,053,000 Cash and Cash Equivalents at Beginning of Period 74,822,000 59,769,000

CASH AND CASH EQUIVALENTS AT END OF PERIOD 106,309,000$ 74,822,000$

Supplemental Disclosures of Cash Flow Information:Interest Paid 7,310,000$ 3,296,000$ Taxes Paid 1,335,000$ 1,225,000$

Supplemental noncash disclosures:Transfer of Debt Securities Held-to-Maturity to Debt Securities Available-for-Sale 44,697,000$ -$ Operating Lease Liabilities Arising from Obtaining Right-of-Use Assets 6,173,000$ -$


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2019 AND 2018

9

NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation

The financial statements include the accounts of Valley Republic Bancorp ("VRB") and its wholly owned subsidiary, Valley Republic Bank ("Bank"), collectively referred to herein as the "Company." All significant intercompany transactions have been eliminated.

VRB has no significant business activity other than its investment in Valley Republic Bank. Accordingly, no separate financial information on VRB is provided.

Nature of Operations

The Bank was incorporated in the State of California and organized as a single operating segment that operates four full-service branches in Bakersfield and Delano, California and a Loan Production Office in Fresno, California. The Bank's primary source of revenue is providing loans to customers, who are predominately small and middle-market businesses and individuals located primarily in Kern County, California.

Subsequent Events

The Company has evaluated subsequent events for recognition and disclosure through February 18, 2020, which is the date the financial statements were available to be issued.

Use of Estimates in the Preparation of Financial Statements

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Material estimate that is particularly susceptible to significant changes in the near term relates to the determination of the allowance for loan losses.

Cash and Cash Equivalents

For purposes of reporting cash flows, cash and cash equivalents include cash, due from banks and federal funds sold. Generally, federal funds are sold for periods of less than ninety days.

Cash and Due from Banks

Banking regulations require that banks maintain a percentage of their deposits as reserves in cash or on deposit with the Federal Reserve Bank. The Company was in compliance with its reserve requirements as of December 31, 2019 and 2018.

The Company maintains amounts due from banks, which may exceed federally insured limits. The Company has not experienced any losses in such accounts.



10

NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued

Debt Securities

Debt securities are classified in three categories and accounted for as follows: debt securities that the Bank has the positive intent and ability to hold to maturity are classified as held-to-maturity and are measured at amortized cost; debt securities bought and held principally for the purpose of selling in the near term are classified as trading securities and are measured at fair value, with unrealized gains and losses included in earnings; debt securities not classified as either held-to-maturity or trading securities are deemed as available-for-sale and are measured at fair value, with unrealized gains and losses, net of applicable taxes, reported in a separate component of shareholders' equity. Gains or losses on sales of debt securities are determined on the specific identification method. Premiums and discounts are amortized or accreted using the interest method over the expected lives of the related securities.

Management evaluates debt securities for other-than-temporary impairment ("OTTI") on at least a quarterly basis and more frequently when economic or market conditions warrant such an evaluation. For debt securities in an unrealized loss position, management considers the extent and duration of the unrealized loss, and the financial condition and near-term prospects of the issuer. Management also assesses whether it intends to sell, or it is more likely than not that it will be required to sell, a debt security in an unrealized loss position before recovery of its amortized cost basis. If either of the criteria regarding intent or requirement to sell is met, the entire difference between amortized cost and fair value is recognized as impairment through earnings. For debt securities that do not meet the aforementioned criteria, the amount of impairment is split into two components as follows: OTTI related to credit loss, which must be recognized in the income statement and OTTI related to other factors, which is recognized in other comprehensive income. The credit loss is defined as the difference between the present value of the cash flows expected to be collected and the amortized cost basis.

Loans

Loans receivable that management has the intent and ability to hold for the foreseeable future or until maturity or payoff are reported at their outstanding unpaid principal balances reduced by any charge-offs or specific valuation accounts and net of deferred fees or costs on originated loans, or unamortized premiums or discounts on purchased loans. Loan origination fees and certain direct origination costs are capitalized and recognized as an adjustment of the yield of the related loan. Amortization of deferred loan fees is discontinued when a loan is placed on nonaccrual status.

Loans on which the accrual of interest has been discontinued are designated as nonaccrual loans. The accrual of interest on loans is discontinued when principal or interest is past due 90 days based on the contractual terms of the loan or when, in the opinion of management, there is reasonable doubt as to collectability. When loans are placed on nonaccrual status, all interest previously accrued but not collected is reversed against current period interest income. Income on nonaccrual loans is subsequently recognized only to the extent that cash is received and the loan's principal balance is deemed collectible. Interest accruals are resumed on such loans only when they are brought current with respect to interest and principal and when, in the judgment of management, the loans are estimated to be fully collectible as to all principal and interest.



11


Allowance for Loan Losses

The allowance for loan losses is a valuation allowance for probable incurred credit losses. Loan losses are charged against the allowance when management believes the uncollectability of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance. Management estimates the allowance balance required using past loan loss experience, the nature and volume of the portfolio, information about specific borrower situations and estimated collateral values, economic conditions, and other factors. Allocations of the allowance may be made for specific loans, but the entire allowance is available for any loan that, in management's judgment, should be charged off. Amounts are charged-off when available information confirms that specific loans or portions thereof, are uncollectable. This methodology for determining charge-offs is consistently applied to each segment.

The Company determines a separate allowance for each portfolio segment. The allowance consists of specific and general reserves. Specific reserves relate to loans that are individually classified as impaired. A loan is impaired when, based on current information and events, it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the loan agreement. Factors considered in determining impairment include payment status, collateral value, and the probability of collecting all amounts when due. Measurement of impairment is based on the expected future cash flows of an impaired loan, which are to be discounted at the loan's effective interest rate, or measured by reference to an observable market value, if one exists, or the fair value of the collateral for a collateral-dependent loan. The Company selects the measurement method on a loan-by-loan basis except that collateral-dependent loans for which foreclosure is probable are measured at the fair value of the collateral.

The Company recognizes interest income on impaired loans based on its existing methods of recognizing interest income on nonaccrual loans. Loans, for which the terms have been modified resulting in a concession, and for which the borrower is experiencing financial difficulties, are considered troubled debt restructurings and classified as impaired with measurement of impairment as described above.

If a loan is impaired, a portion of the allowance is allocated so that the loan is reported, net, at the present value of estimated future cash flows using the loan's existing rate or at the fair value of collateral if repayment is expected solely from the collateral.

General reserves cover non-impaired loans and are based on historical loss rates for each portfolio segment, adjusted for the effects of qualitative or environmental factors that are likely to cause estimated credit losses as of the evaluation date to differ from the portfolio segment's historical loss experience. Qualitative factors include consideration of the following: changes in lending policies and procedures; changes in economic conditions, changes in the nature and volume of the portfolio; changes in the experience, ability and depth of lending management and other relevant staff; changes in the volume and severity of past due, nonaccrual and other adversely graded loans; changes in the loan review system; changes in the value of the underlying collateral for collateral-dependent loans; concentrations of credit and the effect of other external factors such as competition and legal and regulatory requirements.

Portfolio segments identified by the Company include real estate, commercial and industrial, agriculture, loans to municipalities and consumer loans. Relevant risk characteristics for these portfolio segments generally include debt service coverage, loan-to-value ratios and financial performance on non-consumer loans and debt-to-income, collateral type and loan-to-value ratios for consumer loans.



12


Allowance for Credit Losses on Off-Balance Sheet Credit Exposures

The Bank also maintains a separate allowance for off-balance sheet commitments. Management estimates anticipated losses using historical data and utilization assumptions. The Allowance for off-balance sheet commitments totaled $209,000 at December 31, 2019 and $115,000 at December 31, 2018 and is included in other liabilities on the balance sheet.

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 the amount or range of loss can be reasonably estimated. Management does not believe there now are such matters that will have a material effect on the financial statements.

Premises and Equipment

Premises and equipment are carried at cost less accumulated depreciation and amortization. Depreciation is computed using the straight-line method over the estimated useful lives, which ranges from three to seven years for furniture and equipment. Leasehold improvements are amortized using the straight-line method over the estimated useful lives of the improvements or the remaining lease term, whichever is shorter. Expenditures for betterments or major repairs are capitalized and those for ordinary repairs and maintenance are charged to operations as incurred.

Leases

The Company determines if an arrangement contains a lease at contract inception and recognize right-of-use ("ROU") assets and operating lease liabilities based on the present value of lease payments over the lease term. While operating leases may include options to extend the term, the Company does not take into account the options in calculating the ROU asset and lease liability unless it is reasonably certain such options will be reasonably exercised. The present value of lease payments is determined based on the Company’s incremental borrowing rate and other information available at lease commencement. Leases with an initial term of 12 months or less are not recorded in the consolidated balance sheets. Lease expense is recognized on a straight-line basis over the lease term. The Company has elected to account for lease agreements with lease and non-lease components as a single lease component. Refer to - Accounting Standards Adopted in 2019 below and Note E - Leases for further discussion on the Company’s leasing arrangements and related accounting.

FHLB Stock and Other Investments

The Bank is a member of the Federal Home Loan Bank ("FHLB") system. Members are required to own a certain amount of stock based on the level of borrowings and other factors, and may invest in additional amounts. FHLB stock is carried at cost, classified as a restricted security, and periodically evaluated for impairment based on the ultimate recovery of par value.



13

NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES – Continued

FHLB Stock and Other Investments - Continued

Effective with the adoption of ASU 2016-01 on January 1, 2018, the Company is accounting for equity securities with readily determinable fair values at fair value, with changes recognized through earnings, instead of other comprehensive income. The carrying value of equity securities with readily determinable fair values as of December 31, 2019 was $37,000 and unrealized gains of $8,000 recognized in income during the year. The carrying value of equity securities with readily determinable fair values as of December 31, 2018 was $28,000 and unrealized gains of $22,000 recognized in income during the year.

Pursuant to the adoption of ASU 2016-01 on January 1, 2018, the Company elected the measurement alternative for measuring equity securities without readily determinable fair values at cost less impairment (if any), plus or minus observable price changes in orderly transactions. The carrying amount of equity securities without readily determinable fair values was $105,000 and $105,000 as of December 31, 2019 and 2018, respectively, and includes investment in bankers’ bank stock.

Bank Owned Life Insurance

Bank owned life insurance is recorded at the amount that can be realized under insurance contracts at the date of the statement of financial condition, which is the cash surrender value adjusted for other charges or other amounts due that are probable at settlement.

Derivatives

The Company entered into interest rate swap derivative transactions to convert fixed rate loans to floating rate (fair value hedges). The specific terms and notional amounts of the interest rate swaps are consistent with the underlying hedged instruments. For a fair value hedge, the gain or loss on the derivative, as well as the offsetting loss or gain on the hedged item, are recognized in current earnings as fair values change. Changes in the fair value of derivatives that are not highly effective in hedging the changes in fair value of the hedged item are recognized immediately in current earnings.

Net cash settlements on derivatives that qualify for hedge accounting are recorded in interest income or interest expense, based on the item being hedged. Net cash settlements on derivatives that do not qualify for hedge accounting are reported in non-interest income.

The Company formally documents the relationship between derivatives and the hedged items, as well as the risk-management objective and the strategy for undertaking hedge transactions at the inception of the hedging relationship. This documentation includes linking the fair value hedge to specific assets and liabilities on the statement of condition. The Company also formally assesses, both at the hedge’s inception and on an ongoing basis, whether the derivative instruments that are used are highly effective in offsetting changes in fair values of the hedged item. The Company discontinues hedge accounting when it determines that the derivative is no longer effective in offsetting changes in the fair value of the hedged item, the derivative is settled or terminates or treatment of the derivative as a hedge is no longer appropriate or intended.



14


Derivatives - Continued

All interest rate swaps were terminated in 2019. When hedge accounting is discontinued, subsequent changes in fair value of the derivative are recorded as non-interest income. When a fair value hedge is discontinued, the hedged asset or liability is no longer adjusted for changes in fair value and the existing basis adjustment is amortized or accreted over the remaining life of the asset or liability. The basis adjustment at termination was $161,000.

Revenue Recognition – Noninterest Income

The Company adopted the provisions of ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606),on January 1, 2018 and all subsequent ASUs that modified Topic 606. Results for reporting periods beginning after December 31, 2017 are presented under Topic 606, while prior period amounts have not been adjusted and continue to be reported in accordance with Topic 605. The Company recognizes revenue as it is earned and noted no impact to its revenue recognition policies as a result of the adoption of ASU 2014-09. All of the Company’s revenue from contracts with customers within the scope of ASC 606 is recognized in non-interest income.

In accordance with Topic 606, revenues are recognized when control of promised goods or services is transferred to customers in an amount that reflects the consideration the Company expects to be entitled to in exchange for those goods or services. To determine revenue recognition for arrangements that an entity determines are within the scope of Topic 606, the Company performs the following five steps: (i) identify the contract(s) with a customer; (ii) identify the performance obligation in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligation in the contract; and (v) recognize revenue when (or as) the Company satisfies a performance obligation. The Company only applies the five-step model to contracts when it is probable that the entity will collect the consideration it is entitled to in exchange for the goods or services it transfers to the customer. At contract inception, once the contract is determined to be within the scope of Topic 606, the Company assesses the goods or services that are promised within each contract and identifies those that contain performance obligation, and assesses whether each promised good or service is distinct. The Company then recognizes as revenue the amount of the transaction price that is allocated to the respective performance obligation when (or as) the performance obligation is satisfied.

The following is a discussion of key revenues within the scope of the new revenue guidance.

Service Charges and Fees on Deposit Accounts

The Company earns fees from its deposit customers for account maintenance, transaction-based and overdraft services. Account maintenance fees consist primarily of account fees and analyzed account fees charged on deposit accounts on a monthly basis. The performance obligation is satisfied and the fees are recognized on a monthly basis as the service period is completed. Transaction-based fees on deposits accounts are charged to deposit customers for specific services provided to the customer, such as non-sufficient funds fees, overdraft fees, and wire fees. The performance obligation is completed as the transaction occurs and the fees are recognized at the time each specific service is provided to the customer.



15


Revenue Recognition – Noninterest Income - Continued

Servicing Income

The Company earns fees on loans serviced for Farmer Mac by acting as the field servicer. As field servicer, the Company is responsible for direct contact with borrowers and performs certain other servicing functions such as annual inspections. The performance obligation is satisfied and the fees are recognized as the service period is completed.

Advertising Costs

The Company expenses the costs of advertising in the period incurred.

Stock-based Compensation

The Company recognizes the cost of employee services received in exchange for awards of stock options, or other equity instruments, based on the grant-date fair value of those awards. A Black-Scholes 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.

Compensation cost is recognized over the period which an employee is required to provide services in exchange for the award, generally the vesting period, on a straight-line basis. The Company has elected to account for forfeitures of stock-based awards as they occur. Excess tax benefits and tax deficiencies relating to stock-based compensation are recorded as income tax expense or benefit in the income statement when incurred.

See Note N for additional information on the Company's stock-based compensation plan.

Income Taxes

Deferred income taxes are computed using the asset and liability method, which recognizes a liability or asset representing the tax effects, based on current tax law, of future deductible or taxable amounts attributable to events that have been recognized in the financial statements. A valuation allowance is established to reduce the deferred tax asset to the level at which it is "more likely than not" that the tax asset or benefits will be realized. Realization of tax benefits of deductible temporary differences and operating loss carryforwards depends on having sufficient taxable income of an appropriate character within the carryforward periods.

The Company has adopted guidance issued by the Financial Accounting Standards Board ("FASB") that clarifies the accounting for uncertainty in tax positions taken or expected to be taken on a tax return and provides that the tax effects from an uncertain tax position can be recognized in the financial statements only if, based on its merits, the position is more likely than not to be sustained on audit by the taxing authorities. Interest and penalties related to uncertain tax positions are recorded as part of income tax expense.

The Company has elected to account for its limited liability investments in qualified affordable housing projects using the proportional amortization method. The Company amortizes the initial cost of the investment in proportion to the tax credits and other tax benefits received. The Company recognizes the net investment performance in the income statement as a component of income tax expense or (benefit).



16

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued

Earnings Per Share ("EPS")

Basic EPS excludes dilution and is computed by dividing income available to common stockholders by the weighted-average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the earnings of the entity.

Comprehensive Income

Changes in unrealized gains and losses on debt securities is the only component of accumulated other comprehensive income for the Company. The amount reclassified out of other accumulated comprehensive income relating to realized gains (losses) on securities available for sale was $489,000 and $0 for 2019 and 2018, with the related tax expense (benefit) of $145,000 and $0, respectively.

Reclassifications

Certain reclassifications have been made in the 2018 financial statements to conform to the presentation used in 2019. These reclassifications had no impact on the Company's previously reported net income or shareholders’ equity.

Financial Instruments

In the ordinary course of business, the Company has entered into off-balance sheet financial instruments consisting of commitments to extend credit, commercial letters of credit, and standby letters of credit as described in Note K. Such financial instruments are recorded in the financial statements when they are funded or related fees are incurred or received.

Fair Value Measurement

Fair value is the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Current accounting guidance establishes a fair value hierarchy, which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The guidance describes three levels of inputs that may be used to measure fair value:

Level 1: Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date.

Level 2: Significant other observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.

Level 3: Significant unobservable inputs that reflect a Company's own assumptions about the assumptions that market participants would use in pricing an asset or liability.

See Note N for more information and disclosures relating to the Company's fair value measurements.



17


Recently Adopted Accounting Pronouncements

In February 2016, the FASB issued Accounting Standards Update (ASU) 2016-02, Leases (Topic 842), and ASU 2018-11, Leases (Topic 842): Targeted Improvements. The new guidance establishes the principles to report transparent and economically neutral information about the assets and liabilities that arise from leases. Entities are required to recognize ROU assets and lease liabilities that arise from leases in the balance sheet and to disclose qualitative and quantitative information about lease transactions, such as information about variable lease payments and options to renew and terminate leases. Under the amendments in ASU 2018-11, entities may elect not to recast the comparative periods presented when transitioning to the new leasing standard.

Adoption of the leasing standard resulted in the recognition of operating right-of-use assets of $5,783,000 and associated lease liability as of January 1, 2019. The Company/Bank elected to apply the package of practical expedients which permits entities to not reassess: (i) whether any expired or existing contracts contain a lease; (ii) lease classification for any expired or existing leases; and (iii) whether initial direct costs for any existing leases qualify for capitalization under the amended guidance. The Company also elected not to include short-term leases (leases with initial terms of twelve months or less) on the consolidated balance sheets. Disclosures about the Company’s leasing activities are presented in Note E – Leases.

In August 2017, the FASB issued ASU 2017-12, Derivatives and Hedging (Topic 850), the objective of which is to improve the financial reporting of hedging relationships to better portray the economic results of an entity’s risk management activities in its financial statements. In addition, the amendments in this Update make certain targeted improvements to simplify the application and disclosure of the hedge accounting guidance in current general accepted accounting principles. For public business entities, the amendments in this Update are effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. For all other entities, the amendments are effective for fiscal years beginning after December 15, 2019, and interim periods beginning after December 15, 2020. Early application is permitted in any period after issuance. For cash flow and net investment hedges existing at the date of adoption, an entity should apply a cumulative-effect adjustment related to eliminating the separate measurement of ineffectiveness to accumulated other comprehensive income with a corresponding adjustment to the opening balance of retained earnings as of the beginning of the fiscal year that an entity adopts the amendments in this Update. The amended presentation and disclosure guidance is required only prospectively. The adoption of ASU 2017-12 did not have a material impact on the Company’s consolidated financial statements.

Recent Accounting Guidance Not Yet Effective

In June 2016, the FASB issued ASU No. 2016-13, Measurement of Credit Losses on Financial Instruments (Topic 326). This ASU significantly changes how entities will measure credit losses for most financial assets and certain other instruments that aren’t measured at fair value through net income. In issuing the standard, the FASB is responding to criticism that today’s guidance delays recognition of credit losses. The standard will replace today’s “incurred loss” approach with an “expected loss” model. The new model, referred to as the current expected credit loss (“CECL”) model, will apply to: (1) financial assets subject to credit losses and measured at amortized cost, and (2) certain off-balance sheet credit exposures. This includes, but is not limited to, loans, leases, held-to-maturity securities, loan commitments, and financial guarantees. The CECL model does not apply to available-for-sale (“AFS”) debt securities. ASU 2016-13 also expands the disclosure requirements regarding an entity’s assumptions, models, and methods for estimating the allowance for loan and lease losses.



18


Recent Accounting Guidance Not Yet Effective - Continued

In addition, public business entities will need to disclose the amortized cost balance for each class of financial asset by credit quality indicator, disaggregated by the year of origination. ASU No. 2016-13 is effective for interim and annual reporting periods beginning after December 15, 2022 for all entities, other than SEC filers that do not qualify as a Smaller Reporting Company as defined by the SEC. Entities will apply the standard’s provisions as a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is effective (i.e., modified retrospective approach). The Company is currently evaluating the provisions of ASU No. 2016-13 for potential impact on its financial statements and disclosures.

In August 2018, the FASB issued ASU No. 2018-13, Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement. This ASU eliminates, adds and modifies certain disclosure requirements for fair value measurements. Among the changes, entities will no longer be required to disclose the amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy, but will be required to disclose the range and weighted average used to develop significant unobservable inputs for Level 3 fair value measurements. ASU No. 2018-13 is effective for all entities for interim and annual reporting periods beginning after December 15, 2019. Early adoption is permitted. As ASU No. 2018-13 only revises disclosure requirements, it will not have a material impact on the Company’s consolidated financial statements.

NOTE B - DEBT SECURITIES

Debt securities have been classified in the balance sheet according to management's intent. The amortized cost of securities and their approximate fair values at December 31 were as follows:

Gross GrossAmortized Unrealized Unrealized Fair

December 31, 2019 Cost Gains Losses ValueAvailable-for-Sale Securities:

U.S. Government and Agency Securities 20,250,000$ 1,000$ 18,000)$( 20,233,000$

U.S. Agency Mortgaged-Backed Securities 69,880,000 941,000 130,000) ( 70,691,000 SBA Securities 8,684,000 - 70,000) ( 8,614,000 Municipal Securities 45,285,000 2,000 943,000) ( 44,344,000 Corporate Securities 2,000,000 - - 2,000,000 Non-Agency Mortgage-Backed

and Asset-Backed Securities 20,249,000 - 350,000) ( 19,899,000 Other Securities 8,680,000 - - 8,680,000 Total Available-for-Sale securities 175,028,000 944,000 1,511,000) ( 174,461,000

Total Investment Securities 175,028,000$ 944,000$ 1,511,000)$( 174,461,000$



19

NOTE B - DEBT SECURITIES - Continued

0

The amortized cost and estimated fair value of all debt securities as of December 31, 2019 by expected maturities are shown below. Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

Gross GrossAmortized Unrealized Unrealized Fair

December 31, 2018 Cost Gains Losses ValueAvailable-for-Sale Securities:

U.S. Government and Agency Securities 6,293,000$ 17,000$ -$ 6,310,000$

U.S. Agency Mortgaged-Backed Securities 54,323,000 39,000 877,000) ( 53,485,000 SBA Securities 10,345,000 - 96,000) ( 10,249,000 Municipal Securities 4,964,000 92,000 - 5,056,000 Corporate Securities 2,000,000 - 188,000) ( 1,812,000 Other Securities 24,800,000 - - 24,800,000

Total Available-for-Sale securities 102,725,000$ 148,000$ 1,161,000)$( 101,712,000$

Held-to-Maturity Securities:U.S. Government and

Agency Securities 33,238,000$ -$ 443,000)$( 32,795,000$ U.S. Agency Mortgaged-Backed Securities 3,838,000 - 51,000) ( 3,787,000 Municipal Securities 15,412,000 158,000 5,000) ( 15,565,000 Total Held-to-Maturity Securities 52,488,000 158,000 (499,000) 52,147,000

Total Investment Securities 155,213,000$ 306,000$ (1,660,000)$ 153,859,000$

Amortized FairCost Value

Available-for-Sale SecuritiesDue within One Year 25,626,000$ 25,609,000$ Due from One to Five Years 55,917,000 56,110,000Due from Five to Ten Years 71,979,000 71,861,000Due after Ten Years 21,506,000 20,881,000

Total Available-for-Sale Securities 175,028,000$ 174,461,000$



20


At December 31, 2019 and 2018, the Company had 42 and 40 debt securities with unrealized losses, respectively. The following table presents information pertaining to these securities aggregated by investment category and length of time that individual securities have been in a continuous loss position:

As of December 31, 2019, the Company had 42 debt securities where the estimated fair value had decreased 1.5% from the Company's amortized cost. The decrease in price is due to changes in interest rates and does not have any credit components or other loss components. Management has the intent and ability to retain its investment for a period of time sufficient to allow for any anticipated recovery. The fair value is expected to recover as the bonds approach maturity.

Gross realized gains and losses on sales of available-for-sale debt securities was $722,000 and $233,000 in 2019. Proceeds from the sales of available-for-sale securities during 2019 were $45,889,000. There were no sales of Available-for-sale debt securities during 2018.

The Company has pledged investment securities with a market value of $37,254,000 to secure public deposits. The Company has pledged investment securities with a market value of $53,661,000 as collateral for a line of credit with FHLB. See Note F for more information and disclosures relating to this borrowing line.

Unrealized Estimated Unrealized Estimated Unrealized EstimatedDecember 31, 2019 Losses Fair Value Losses Fair Value Losses Fair Value

U.S. Government and Agency Securities 5,000)$( 2,995,000$ 13,000)$( 9,987,000$ 18,000)$( 12,982,000$ U.S. Agency Mortgage-

Backed Securities 116,000) ( 23,846,000 14,000) ( 1,928,000 130,000) ( 25,774,000SBA Securities - - 70,000) ( 8,512,000 70,000) ( 8,512,000 Municipal Securities 943,000) ( 38,389,000 - - 943,000) ( 38,389,000Non-Agency Mortgage-Backed

and Asset-Backed Securities 350,000) ( 19,899,000 - - 350,000) ( 19,899,000

1,414,000)$( 85,129,000$ 97,000)$( 20,427,000$ 1,511,000)$( 105,556,000$

December 31, 2018U.S. Government and Agency Securities 3,000)$( 3,974,000$ 440,000)$( 30,808,000$ (443,000)$ 34,782,000$ U.S. Agency Mortgage-

Backed Securities 109,000) ( 13,618,000 819,000) ( 32,098,000 928,000) ( 45,716,000SBA Securities 49,000) ( 8,003,000 47,000) ( 2,246,000 96,000) ( 10,249,000Municipal Securities 2,000) ( 2,008,000 3,000) ( 311,000 5,000) ( 2,319,000 Corporate Securities 188,000) ( 1,812,000 - - 188,000) ( 1,812,000

351,000)$( 29,415,000$ 1,309,000)$( 65,463,000$ 1,660,000)$( 94,878,000$

Less than Twelve Months Twelve Months or More Total



21


In 2019, all of the Company’s securities that were classified as held-to-maturity were transferred to securities available-for-sale. The transfer of these securities was effected in order to help the Company better manage its interest rate risk exposure due to the significant growth of the Bank and changes in interest rates that occurred during the year. The transfer of the securities will allow the Company more flexibility in managing its investment portfolio and interest rate risk profile. The securities that were transferred from held-to-maturity to available-for-sale had a carrying value of $44,697,000, a fair value of $45,065,000, and an unrealized gain of $368,000 at the time of transfer. Subsequent to the transfer from securities held-to-maturity to securities available for sale, certain of these securities were sold. The amount of securities previously classified as held-to-maturity that were sold had a carrying value of $9,705,000 and a fair value of $9,970,000, which resulted in a realized gain of $265,000. The bank had no held-to-maturity securities at December 31, 2019.

NOTE C - LOANS

The Company's loan portfolio consists primarily of loans to borrowers within Kern County. Although the Company seeks to avoid concentrations of loans to a single industry or based upon a single class of collateral, real estate and real estate associated businesses are among the principal industries in the Company's market area and, as a result, the Company's loan and collateral portfolios are, to some degree, concentrated in those industries.

At December 31, the composition of the loan portfolio is as follows: 2019 2018

Real Estate:Construction and Land Development 56,068,000$ 46,419,000$ 1-4 Family Residential 44,313,000 53,157,000Multifamily Residential 2,181,000 1,116,000Secured by Farm Land 70,449,000 67,919,000Commercial Real Estate 295,588,000 247,122,000

Total Real Estate Loans 468,599,000 415,733,000Commercial and Industrial 116,073,000 72,563,000Agriculture 38,155,000 30,558,000Loans to Municipalities 54,000 119,000Consumer and Other 1,360,000 2,401,000

Total Loans 624,241,000 521,374,000

Deferred Loan Costs (Fees), Net 527,000 254,000Loans, Net of Deferred Costs and Fees 624,768,000 521,628,000Allowance for Loan Losses 8,348,000) ( 6,931,000) (

Net Loans 616,420,000$ 514,697,000$



22

NOTE C – LOANS - Continued

A summary of the changes in the allowance for loan losses as of December 31 follows:

The following tables present the activity in the allowance for loan losses for the year 2019 and 2018, and the recorded investment in loans and impairment method as of December 31, 2019 and 2018 by portfolio segment:

2019 2018

Balance at Beginning of Year 6,931,000$ 6,116,000$ Additions to the Allowance Charged to Expense 1,404,000 805,000Recoveries on Loans Charged Off 13,000 10,000

8,348,000 6,931,000

Less Loans Charged Off - -

8,348,000$ 6,931,000$

CommercialDecember 31, 2019 Real Estate and Industrial Agriculture Total

Allowance for Loan Losses:Beginning of Year 5,134,000$ 1,288,000$ 446,000$ 1,000$ 62,000$ 6,931,000$ Provisions 894,000 519,000 23,000 - 32,000) ( 1,404,000 Charge-offs - - - - - - Recoveries - 13,000 - - - 13,000

End of Year 6,028,000$ 1,820,000$ 469,000$ 1,000$ 30,000$ 8,348,000$

Reserves: Specific -$ -$ -$ -$ -$ -$ General 6,028,000 1,820,000 469,000 1,000 30,000 8,348,000

6,028,000$ 1,820,000$ 469,000$ 1,000$ 30,000$ 8,348,000$

Loans Evaluated for Impairment: Individually 245,000$ -$ -$ -$ -$ 245,000$ Collectively 468,354,000 116,073,000 38,155,000 54,000 1,360,000 623,996,000

468,599,000$ 116,073,000$ 38,155,000$ 54,000$ 1,360,000$ 624,241,000$

Loans to Municipalities

Consumerand Other



23

NOTE C - LOANS - Continued

The Company categorizes loans into risk categories based on relevant information about the ability of borrowers to service their debt such as current financial information, historical payment experience, collateral adequacy, credit documentation, and current economic trends, among other factors. The Company analyzes loans individually by classifying the loans as to credit risk. This analysis typically includes larger, non-homogeneous loans such as commercial real estate and commercial and industrial loans. This analysis is performed on an ongoing basis as new information is obtained. The Company uses the following definitions for risk ratings:

Pass - Loans classified as pass include loans not meeting the risk ratings defined below.

Special Mention - Loans classified as special mention have a potential weakness that deserves management's close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or of the institution's credit position at some future date.

Substandard - Loans classified as substandard are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans so classified have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected.

Impaired - 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 according to the contractual terms of the loan agreement. Additionally, all loans classified as troubled debt restructurings are considered impaired.

CommercialDecember 31, 2018 Real Estate and Industrial Agriculture Total

Allowance for Loan Losses:Beginning of Year 4,225,000$ 1,431,000$ 340,000$ 50,000$ 70,000$ 6,116,000$ Provisions 909,000 153,000) ( 106,000 49,000) ( 8,000) ( 805,000 Charge-offs - - - - - - Recoveries - 10,000 - - - 10,000

End of Year 5,134,000$ 1,288,000$ 446,000$ 1,000$ 62,000$ 6,931,000$

Reserves: Specific -$ -$ -$ -$ -$ -$ General 5,134,000 1,288,000 446,000 1,000 62,000 6,931,000

5,134,000$ 1,288,000$ 446,000$ 1,000$ 62,000$ 6,931,000$

Loans Evaluated for Impairment: Individually 251,000$ -$ -$ -$ -$ 251,000$ Collectively 415,482,000 72,563,000 30,558,000 119,000 2,401,000 521,123,000

415,733,000$ 72,563,000$ 30,558,000$ 119,000$ 2,401,000$ 521,374,000$

Loans to Municipalities

Consumerand Other



24


The following tables present the risk category of loans by class of loans as of December 31, 2019 and 2018:

SpecialDecember 31, 2019 Pass Mention Substandard Impaired Total

Real Estate:Construction and Land Development 56,068,000$ -$ -$ -$ 56,068,000$1-4 Family Residential 42,390,000 1,678,000 - 245,000 44,313,000Multifamily Residential 2,181,000 - - - 2,181,000Secured by Farm Land 70,449,000 - - - 70,449,000Commercial Real Estate 294,208,000 58,000 1,322,000 - 295,588,000

Commercial and Industrial 114,477,000 1,596,000 - - 116,073,000Agriculture 37,925,000 230,000 - - 38,155,000Loans to Municipalities 54,000 - - - 54,000Consumer and Other 1,360,000 - - - 1,360,000

619,112,000$ 3,562,000$ 1,322,000$ 245,000$ 624,241,000$

SpecialDecember 31, 2018 Pass Mention Substandard Impaired Total

Real Estate:Construction and Land Development 46,419,000$ -$ -$ -$ 46,419,000$1-4 Family Residential 52,906,000 - - 251,000 53,157,000Multifamily Residential 1,116,000 - - - 1,116,000Secured by Farm Land 67,919,000 - - - 67,919,000Commercial Real Estate 243,926,000 556,000 2,640,000 - 247,122,000

Commercial and Industrial 70,396,000 - 2,167,000 - 72,563,000Agriculture 30,558,000 - - - 30,558,000Loans to Municipalities 119,000 - - - 119,000Consumer and Other 2,401,000 - - - 2,401,000

515,760,000$ 556,000$ 4,807,000$ 251,000$ 521,374,000$



25


The following tables present the aging of the recorded investment in past due loans as of December 31, 2019 and 2018:

30-59 Days 60-89 Days Over 89 Days Total Past Due Total Loans December 31, 2019 Past Due Past Due Past Due Nonaccrual & Nonaccrual Current Receivables

Real Estate:Construction and Land Development 8,879,000$ -$ 1,400,000$ -$ 10,279,000$ 45,789,000$ 56,068,000$ 1-4 Family Residential 300,000 - - - 300,000 44,013,000 44,313,000Multifamily Residential - - - - - 2,181,000 2,181,000 Secured by Farm Land - - - - - 70,449,000 70,449,000Commercial Real Estate - - - - - 295,588,000 295,588,000

Commercial and Industrial 483,000 - 182,000 - 665,000 115,408,000 116,073,000Agriculture - - - - - 38,155,000 38,155,000Loans to Municipalities - - - - - 54,000 54,000 Consumer and Other - - - - - 1,360,000 1,360,000

9,662,000$ -$ 1,582,000$ -$ 11,244,000$ 612,997,000$ 624,241,000$

Still Accruing

30-59 Days 60-89 Days Over 89 Days Total Past Due Total Loans December 31, 2018 Past Due Past Due Past Due Nonaccrual & Nonaccrual Current Receivables

Real Estate:Construction and Land Development -$ -$ -$ -$ -$ 46,419,000$ 46,419,000$ 1-4 Family Residential - - - - - 53,157,000 53,157,000Multifamily Residential - - - - - 1,116,000 1,116,000 Secured by Farm Land - - - - - 67,919,000 67,919,000Commercial Real Estate - - - - - 247,122,000 247,122,000

Commercial and Industrial - - - - - 72,563,000 72,563,000Agriculture - - - - - 30,558,000 30,558,000Loans to Municipalities - - - - - 119,000 119,000 Consumer and Other - - - - - 2,401,000 2,401,000

-$ -$ -$ -$ -$ 521,374,000$ 521,374,000$

Still Accruing



26


Information relating to individually impaired loans presented by class of loans was as follows as of December 31:

The Company has not allocated specific reserves to customers whose loan terms have been modified in troubled debt restructurings as of December 31, 2019 and 2018. The Company has committed to lend no additional amounts to customers with outstanding loans that are classified as troubled debt restructurings as of December 31, 2019. No loans have been modified during 2019 and 2018.

Unpaid Average InterestPrincipal Recorded Without Specific With Specific Related Recorded Income

December 31, 2019 Balance Investment Allowance Allowance Allowance Investment RecognizedReal Estate: Construction and Land Development -$ -$ -$ -$ -$ -$ -$ 1-4 Family Residential 245,000 245,000 245,000 - - 248,000 12,000 Multifamily Residential - - - - - - - Secured by Farm Land - - - - - - - Commercial Real Estate - - - - - - - Commercial and Industrial - - - - - - - Agriculture - - - - - - - Loans to Municipalities - - - - - - - Consumer - - - - - - -

245,000$ 245,000$ 245,000$ -$ -$ 248,000$ 12,000$

December 31, 2018Real Estate: Construction and Land Development -$ -$ -$ -$ -$ -$ -$ 1-4 Family Residential 251,000 251,000 251,000 - - 254,000 12,000 Multifamily Residential - - - - - - - Secured by Farm Land - - - - - - - Commercial Real Estate - - - - - - - Commercial and Industrial - - - - - - - Agriculture - - - - - - - Loans to Municipalities - - - - - - - Consumer - - - - - - -

251,000$ 251,000$ 251,000$ -$ -$ 254,000$ 12,000$

Impaired Loans



27

NOTE D - PREMISES AND EQUIPMENT

A summary of premises and equipment as of December 31 follows:

NOTE E - LEASES

ASU 2016-02, Leases (Topic 842), and related amendments were adopted on January 1, 2019, using the modified retrospective transition method whereby comparative periods were not restated. No cumulative effect adjustment to the opening balance of retained earnings was required. The Company elected the package of practical expedients permitted under the new standard, which allowed carry forward historical lease classifications, account for lease and nonlease components as a single lease component, and not to recognize a right of use asset and lease liability for short-term leases.

The Company enters into leases in the normal course of business. The Company has entered into a lease for its main office and six additional suites, which will expire in February 2028. The Company has entered into a lease for a branch in northwest Bakersfield, CA that will expire January 31, 2026. The Company has leased a branch location in southwest Bakersfield, CA from a Limited Liability Company which includes a director as a member. The lease commenced in 2012 and will expire ten years after the commencement of the lease. Refer to Note I – Related Party Transactions, for additional information regarding this lease. The Company entered into a lease for a temporary branch location in Delano, CA in February 2017 that expired in 2019. The company also entered into a lease for a permanent branch location in Delano, CA in March 2017 that will expire in 2023. The Company has entered into a lease for a Loan Production Office in Fresno. The lease commenced in 2019 and expire in 2024. These leases include provisions for periodic rent increases as well as payment by the lessee of certain operating expenses. These leases also include provisions for options to extend the lease. Rental expense relating to these leases and other short term rentals was approximately $932,000 and $750,000 for the years ended December 31, 2019 and 2018, respectively. The Company’s leases do not include residual value guarantees or covenants.

The Company includes lease extension and termination options in the lease term if, after considering relevant economic factors, it is reasonably certain the Company will exercise the option. The Company does not have any leases with an original lease term of 12 months or less (short-term leases) on the Company’s balance sheet.

Leases are classified as operating or finance leases at the lease commencement date. Lease expense for operating leases is recognized on a straight-line basis over the lease term. Right-of-use assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments arising from the lease. Right-of-use assets and lease liabilities are recognized at the lease commencement date based on the estimated present value of lease payments over the lease term.

2019 2018

Furniture, Fixtures, and Equipment 2,223,000$ 1,854,000$ Leasehold Improvements 2,854,000 2,520,000

5,077,000 4,374,000Less Accumulated Depreciation and Amortization 2,821,000) ( 2,326,000) (

2,256,000$ 2,048,000$



28

NOTE E – LEASES - Continued

The Company uses its incremental borrowing rate at lease commencement to calculate the present value of lease payments when the rate implicit in a lease is not known. The incremental borrowing rate is estimated using the Company’s applicable borrowing rates and lease term.

Right-of-use assets and lease liabilities by lease type, and the associated balance sheet classifications, are as follows:

The Company elected, for all classes of underlying assets, not to separate lease and non-lease components and instead to account for them as a single lease component. Variable lease cost primarily represents variable payments such as common area maintenance and utilities. The following table represents lease costs and other lease information for the year ended December 31, 2019: The components of total lease cost were as follows for the period ending:

2019Operating Lease Right-of-Use Assets 5,583,000$

Operating Lease Liabilities 5,800,000$

Weighted Average Remaining Lease Term, in Years 7.79

Weighted Average Discount Rate 5.95%

2019Operating Lease Cost 922,000$ Variable Lease Cost 10,000Short-term Lease Cost -Total Lease Costs 932,000$

Other Information:

Cash Paid for Amounts Included in the Measurement of Lease Liabilities 857,000$

Right-of-Use Assets Obtained in Exchange for Lease Obligations 6,173,000$



29

NOTE E – LEASES - Continued

Future undiscounted lease payments for operating leases with initial terms of one year or more as of December 31, 2019 are as follows:

NOTE F - DEPOSITS

Deposits consist of the following at December 31:

At December 31, 2019, the scheduled maturities of time deposits were as follows:

As of December 31, 2019, the Company's ten largest deposit relationships represent approximately 20% of the total outstanding deposits of the Company. Within this group, the five largest relationships represent approximately 11% of the Company's total deposits.

Year Ending 20192020 929,000$ 2021 956,0002022 958,0002023 914,0002024 846,000Thereafter 2,732,000Total Lease Payments 7,335,000

Less Imputed Interest (1,535,000)Present Value of Net Future Minimum Lease Payments 5,800,000$

2019 2018Deposits: Noninterest-Bearing Demand Deposits 288,387,000$ 287,409,000$

Interest-Bearing Demand Deposits 90,945,000 58,386,000 Savings, NOW and Money Market Accounts 387,406,000 293,508,000 Time Deposits Under $250,000 20,389,000 18,640,000 Time Deposits $250,000 and Over 41,667,000 45,715,000

Total Deposits 828,794,000$ 703,658,000$

2020 56,977,000$ 2021 4,782,0002022 297,000

62,056,000$



30

NOTE G - OTHER BORROWINGS

The Company may borrow up to $25,000,000 overnight on an unsecured basis from two correspondent banks. As of December 31, 2019 and 2018, no amounts were outstanding under these arrangements.

As of December 31, 2019, the Company had an available line of credit with the Federal Home Loan Bank of San Francisco ("FHLB") secured by the assets of the Company. Under the securities-backed credit program, the Company may borrow up to $50,839,000 against pledged investment securities with a market value of $53,661,000 as collateral for this line. Under the standard credit program, the Company may borrow up to $49,829,000 against eligible loan collateral of $199,317,000. Advances are subject to providing adequate collateral and continued compliance with the Advances and Security Agreement and other eligibility requirements established by the FHLB. As of December 31, 2019 no advances were outstanding under this arrangement.

On March 29, 2019 the Company issued a $20,000,000 unsecured subordinated note, net of placement costs of $295,000, for net proceeds of $19,705,000. The note provides for a quarterly interest payments at a fixed rate of 6% for five years and then will have a floating rate of three month LIBOR plus 3.52% until maturity. The note matures March 29, 2029 and is redeemable on or after the fifth anniversary of issuance.

NOTE H - INCOME TAXES

The provision for income taxes for the years ended December 31, consists of the following:

2019 2018Current: Federal 457,000$ 243,000$ State 800,000 823,000

1,257,000 1,066,000 Deferred 982,000) ( 229,000) ( Amortization of Qualified Affordable Housing Projects 1,499,000 1,521,000

1,774,000$ 2,358,000$



31

NOTE H - INCOME TAXES - Continued

Deferred taxes are a result of differences between income tax accounting and generally accepted accounting principles with respect to income and expense recognition. The following is a summary of the components of the net deferred tax asset accounts recognized in the accompanying statement of financial condition at December 31:

The Company is subject to federal income tax and franchise tax of the state of California. Income tax returns for the years ended after December 31, 2015 and 2014 are open to audit by the federal and state authorities, respectively. The Company does not expect the total amount of unrecognized tax benefits to significantly increase or decrease within the next twelve months.

The Company agreed to invest $15,991,000 in low income housing projects limited liability partnerships. The Company recognized gross low income housing tax credits and other tax benefits in the amount of $1,726,000 and $1,590,000 in 2019 and 2018, respectively. The Company accounts for the investment using the proportional amortization method and as of December 31, 2019 and 2018 the unamortized balance of the investment was $10,716,000 and $12,215,000, respectively. During the years ended December 31, 2019 and 2018, the Company recognized amortization expense of $1,499,000 and $1,521,000, respectively, which was included within income tax expense on the consolidated statements of income. The Company has included in other liabilities the future equity contributions to the low income housing project. Total unfunded commitments related to low income housing projects amounted to $2,463,000 and $4,379,000 and of December 31, 2019 and 2018, respectively.

2019 2018Deferred Tax Assets: Pre-Opening Expenses 122,000$ 148,000$ Allowance for Loan Losses Due to Tax Limitations 2,468,000 1,960,000 Market Value Adjustment on Investment Securities 167,000 286,000 Deferred Compensation 857,000 698,000 Stock-based Compensation 122,000 220,000 Other Assets and Liabilities 845,000 350,000

4,581,000 3,662,000

Deferred Tax Liabilities: Depreciation Differences 40,000) ( 62,000) (

Deferred Loan Costs 735,000) ( 652,000) ( Other Assets and Liabilities 245,000) ( 250,000) (

1,020,000) ( 964,000) (

Net Deferred Tax Assets (Liabilities) 3,561,000$ 2,698,000$



33

NOTE J - RELATED PARTY TRANSACTIONS

In the ordinary course of business, the Company has extended credit to and received deposits from certain members of its Board of Directors and Executive Officers and companies in which they have an interest. These related parties had outstanding deposits at the Company approximating $41,583,000 and $47,131,000, and outstanding loans of $24,604,000 and $34,687,000, at December 31, 2019 and 2018, respectively.

With regard to the lease for the branch, as discussed in Note E, independent counsel represented the Company in the lease negotiations and the director's involvement was made known to the Board of Directors. The director abstained from the discussions regarding the branch lease as well as the vote on the lease. The Board believes that the terms of the lease are no less favorable to the Company than could have been obtained from an independent third party.

At December 31, 2019, the future lease payments to the related party included in Note E were as follows:

NOTE K - EARNINGS PER SHARE ("EPS")

The following is a reconciliation of net income and shares outstanding to the income and number of shares used to compute EPS:

Year Ending 20192020 89,000$ 2021 89,0002022 66,0002023 -2024 -Thereafter -Total Lease Payments 244,000

Less Imputed Interest (20,000)Present Value of Net Future Minimum Lease Payments 224,000$

Income Shares Income Shares

Net Income as Reported 9,737,000$ 8,952,000$ Weighted Average Shares Outstanding During the Year 4,129,798 3,903,510

Used in Basic EPS 9,737,000 4,129,798 8,952,000 3,903,510Dilutive Effect of Outstanding Stock Options and Stock Grants 55,496 288,580

Used in Dilutive EPS 9,737,000$ 4,185,294 8,952,000$ 4,192,090

2019 2018



34

NOTE K - EARNINGS PER SHARE ("EPS") – Continued

At December 31, 2019 and 2018 there were 50,000 and 50,000 stock options that could potentially dilute earnings per share in the future that were not included in the computation of diluted earnings per share because to do so would have been antidilutive.

NOTE L - COMMITMENTS

In the ordinary course of business, the Company enters into financial commitments to meet the financing needs of its customers. Those instruments involve, to varying degrees, elements of credit and interest rate risk not recognized in the Company's financial statements.

The Company's exposure to loan loss in the event of nonperformance on commitments to extend credit and standby letters of credit is represented by the contractual amount of those instruments. The Company uses the same credit policies in making commitments as it does for loans reflected in the financial statements.

As of December 31, 2019 and 2018, the Company had the following outstanding financial commitments whose contractual amount represents credit risk:

Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Since many of the commitments are expected to expire without being drawn upon, the total amounts do not necessarily represent future cash requirements. The Company evaluates each client's credit worthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Company, is based on management's credit evaluation of the customer. The majority of the Company's commitments to extend credit and standby letters of credit are secured by real estate, equipment, or personal property.

The Company has entered into deferred compensation agreements with certain key officers. Under these agreements the Company is obligated to provide, upon retirement, a 15 year benefit to the officers. The annual benefits range from $75,000 to $100,000. The Company expenses annually an amount sufficient to accrue the present value of the benefits to be paid to the officer. The expense associated with these agreements was approximately $537,000 in 2019 and $488,000 in 2018.

NOTE M - EMPLOYEE BENEFIT PLAN

The Company adopted a 401(k) Plan for its employees in 2010. Under the plan, eligible employees may defer a portion of their salaries. The plan also provides for a matching contribution by the Company. The Company made contributions of $188,000 and $169,000 for 2019 and 2018, respectively.

2019 2018

Commitments to Extend Credit 243,983,000$ 212,675,000$



35

NOTE N - STOCK-BASED COMPENSATION

The Valley Republic Bancorp 2016 Omnibus Equity Incentive Plan (the “2016 Plan”) was approved by shareholders in April 2016. The 2016 Plan reserves 1,050,000 shares for issuance. The 2016 Plan provides for grants of stock options and restricted share awards to employees, non-employee directors and consultants. Stock options granted to employees may be both nonqualifed and incentive stock options. Stock options are granted at a price no less than 100% of the fair market value of the stock on the date of grant. Equity awards generally vest over three to five years and stock options expire no later than ten years from the date of grant. The 2016 Plan provides for accelerated vesting if there is a change of control, as defined in the Plan.

The Company recognized stock-based compensation expense of $825,000 and $556,000 in 2019 and 2018, respectively. The Company also recognized income tax benefits related to stock-based compensation of $248,000 in 2019 and $167,000 in 2018. In 2019, the company repurchased 41,086 shares with an aggregate fair value of $1,396,000 to satisfy employee’s tax withholding requirements. No shares were repurchased in 2018.

The fair value of each option grant was estimated on the date of grant using the Black-Scholes option pricing model with the weighted-average assumptions presented below:

The expected volatility is based on the historical volatility of the Bank. The expected term represents the estimated average period of time that the options remain outstanding. Since the Bank does not have sufficient historical data on the exercise of stock options, the expected term is based on the “simplified” method that measures the expected term as the average of the vesting period and the contractual term. The risk free rate of return reflects the grant date interest rate offered for zero coupon U.S. Treasury bonds over the expected term of the options. No stock options were granted in 2019.

A summary of the status of the Company's stock option plan as of December 31, 2019 and changes during the period ended thereon is presented below:

2018

Expected Volatility 14.2%Expected Term 6.25 YrsExpected Dividends NoneRisk Free Rate 2.76%Weighted-Average Grant Date Fair Value 7.61$

Average Remaining AggregateExercise Contractual Intrinsic

Shares Price Term ValueOutstanding at Beginning of Year 390,405 13.40$ Granted - -$ Exercised 266,577) ( 9.83$ Forfeited 1,050) ( 12.38$

Outstanding at End of Year 122,778 22.02$ 4.70 571,000$

Options Exercisable 85,278 15.81$ 2.96 870,000$



36

NOTE N - STOCK-BASED COMPENSATION - Continued

As of December 31, 2019, there was $254,000 of total unrecognized compensation cost related to the outstanding stock options that will be recognized over a weighted-average period of approximately 2.6 years. The intrinsic value of stock options exercised during 2019 and 2018 amounted to $6,190,000 and $4,161,000, respectively.

A summary of the Company's nonvested stock grant activity under the 2016 Plan as of December 31, 2019 and changes during the year then ended are as follows:

As of December 31, 2019 there was $1,053,000 of total unrecognized compensation cost related to nonvested stock grants that will be recognized over a weighted-average period of 2.9 years. The total fair value of shares vested during the years ended December 31, 2019 and 2018 was approximately $604,000 and $453,000, respectively.

NOTE O - FAIR VALUE MEASUREMENT

The following is a description of valuation methodologies used for assets and liabilities recorded at fair value:

Securities: The fair values of securities available-for-sale are determined by matrix pricing, which is a mathematical technique used widely in the industry to value debt securities without relying exclusively on quoted prices for specific securities but rather by relying on the securities' relationship to other benchmark quoted securities (Level 2).

Derivatives: The fair values of derivatives are based on valuation models using observable market data as of the measurement date (Level 2). Our derivatives are traded in an over-the-counter market where quoted market prices are not always available. Therefore, the fair values of derivatives are determined using quantitative models that utilize multiple market inputs. The inputs will vary based on the type of derivative but could include interest rates, prices and indices to generate continuous yield or pricing curves, prepayment rates, and volatility factors to value the position. The majority of market inputs are actively quoted and can be validated through external sources, including brokers, market transactions and third-party pricing services.

Weighted- Average

Grant DateShares Fair Value

Nonvested at Beginning of Year 25,927 30.10$ Restricted Stock Awards 36,861 32.03$ Shares Vested and Issued 20,097) ( 31.78$ Shares Forfeited 1,050) ( 30.38$

Nonvested at End of Year 41,641 30.94$



37

NOTE O - FAIR VALUE MEASUREMENT - Continued

The following table provides a hierarchy and fair value for each major category of assets and liabilities measured at fair value at December 31:

NOTE P - FAIR VALUE OF FINANCIAL INSTRUMENTS

The fair value of a financial instrument is the amount at which the asset or obligation could be exchanged in a current transaction between willing parties, other than in a forced or liquidation sale. Fair value estimates are made at a specific point in time based on relevant market information and information about the financial instrument. These estimates do not reflect any premium or discount that could result from offering for sale at one time the entire holdings of a particular financial instrument. Because no market value exists for a significant portion of the financial instruments, fair value estimates are based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments, and other factors. These estimates are subjective in nature, involve uncertainties and matters of judgment and, therefore, cannot be determined with precision. Changes in assumptions could significantly affect the estimates.

Fair value estimates are based on financial instruments both on and off the balance sheet without attempting to estimate the value of anticipated future business and the value of assets and liabilities that are not considered financial instruments. Additionally, tax consequences related to the realization of the unrealized gains and losses can have a potential effect on fair value estimates and have not been considered in many of the estimates.

December 31, 2019 Level 1 Level 2 Level 3 TotalAssets measured at fair value on a recurring basis

Available-for-Sale Securities -$ 174,461,000$ -$ 174,461,000$

December 31, 2018Assets measured at fair value on a recurring basis

Available-for-Sale Securities -$ 101,712,000$ -$ 101,712,000$Derivatives -$ 898,000$ -$ 898,000$

Fair Value Measurements Using



38

NOTE P - FAIR VALUE OF FINANCIAL INSTRUMENTS - Continued

The fair value hierarchy level and estimated fair value of financial instruments at December 31, 2019 and 2018 are summarized as follows:

NOTE Q - DERIVATIVES

The Company utilizes interest rate swap agreements as part of its asset liability management strategy to help manage its interest rate risk position. The notional amount of the interest rate swaps does not represent the amount exchanged by the parties. The amount exchanged is determined by reference to the notional amount and the other terms of the individual interest rate swap agreements.

The following table reflects the fair value hedges included in the Income Statement as of December 31:

The following table reflects the fair value hedge included in the Balance Sheets as of December 31:

All interest rate swaps were terminated during 2019 and no swaps were outstanding at December 31, 2019.

2018Fair Value Carrying Fair Carrying FairHierarchy Value Value Value Value

Financial Assets: Cash and Cash Equivelants Level 1 106,309,000$ 106,309,000$ 74,822,000$ 74,822,000$ Investment Securities Level 2 174,461,000 174,461,000 154,200,000 153,662,000 Loans, net Level 3 616,420,000 615,518,000 514,697,000 514,218,000 Federal Home Loan Bank Stock N/A 3,297,000 N/A 2,812,000 N/A Interest Rate Swap Agreements Level 2 - - 898,000 898,000 Accrued Interest Receivable Level 2 4,160,000 4,160,000 3,427,000 3,427,000

Financial Liabilities: Deposits Level 2 828,794,000 828,637,000 703,658,000 703,362,000

Subordinated Debt Level 2 19,705,000 20,137,000 - - Accrued Interest Payable Level 2 108,000 108,000 95,000 95,000

2019

Interest Rate Swaps Location 2019 2018Change in Fair Value on Interest Rate Swaps Hedging Loans Interest Income 74,000$ 49,000$

Notional Notional Amount Fair Value Amount Fair Value

Included in Other Assets: Interest Rate Swaps Related to Loans -$ -$ 17,701,000$ 898,000$

2019 2018



39

NOTE R - REGULATORY MATTERS

The Bank is subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory - and possibly additional discretionary - actions by regulators that, if undertaken, could have a direct material effect on the Company's financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of their assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. The capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.

In July, 2013, the federal bank regulatory agencies approved the final rules implementing the Basel Committee on Banking Supervision's capital guidelines for U.S. banks (Basel III rules). The new rules became effective on January 1, 2015, with certain of the requirements phased-in over a multi-year schedule, and fully phased in by January 1, 2019. Under the Basel III rules, the Bank must hold a capital conservation buffer of 2.50% above the adequately capitalized risk-based capital ratios. The net unrealized gain or loss on available-for-sale securities is not included in computing regulatory capital.

Quantitative measures established by regulation to ensure capital adequacy require the Bank to maintain minimum amounts and ratios (set forth in the table below) of total, Tier 1 and CET1 capital (as defined in the regulations) to risk-weighted assets (as defined), and of Tier 1 capital (as defined) to average assets (as defined). Management believes, as of December 31, 2019 and 2018, that the Bank meets all capital adequacy requirements.

As of December 31, 2019 and 2018, the most recent notification from the FDIC categorized the Bank as well capitalized under the regulatory framework for prompt corrective action (there are no conditions or events since that notification that management believes have changed the Bank's category). To be categorized as well capitalized, the Bank must maintain minimum ratios as set forth in the table below.

The following table also sets forth the Bank's actual capital amounts and ratios:

Amount of Capital RequiredTo Be Well-Capitalized

For Capital Under PromptAdequacy Corrective

Actual Purposes ProvisionsAmount Ratio Amount Ratio Amount Ratio

As of December 31, 2019: Total Capital (to Risk-Weighted Assets) $103,642,000 13.12% $63,189,000 8.00% $78,987,000 10.00% Tier 1 Capital (to Risk-Weighted Assets) $95,089,000 12.04% $47,392,000 6.00% $63,189,000 8.00% CET1 Capital (to Risk-Weighted Assets) $95,089,000 12.04% $35,544,000 4.50% $51,341,000 6.50% Tier 1 Capital (to Average Assets) $95,089,000 10.41% $36,551,000 4.00% $45,689,000 5.00%

As of December 31, 2018: Total Capital (to Risk-Weighted Assets) $74,214,000 11.48% $51,727,000 8.00% $64,659,000 10.00% Tier 1 Capital (to Risk-Weighted Assets) $67,168,000 10.39% $38,795,000 6.00% $51,727,000 8.00% CET1 Capital (to Risk-Weighted Assets) $67,168,000 10.39% $29,096,000 4.50% $42,028,000 6.50% Tier 1 Capital (to Average Assets) $67,168,000 8.65% $31,072,000 4.00% $38,840,000 5.00%



40

NOTE R - REGULATORY MATTERS - Continued

The California Financial Code provides that a Company may not make a cash distribution to its shareholders in excess of the lesser of the Company’s undivided profits or the Company’s net income for the last three fiscal years less the amount of any distribution made to the Company’s shareholders during the same period. In addition, the Company and Bank may not pay dividends that would result in its capital levels being reduced below the minimum requirements shown above.

The Company is not subject to similar regulatory capital requirements because its consolidated assets do not exceed $3 billion, the minimum asset size criteria for bank holding companies subject to those requirements.

Valley Republic Bancorp(VLLX)

LOCAL VRBSTOCK INFORMATION

David Westerfeld

Stifel

5060 California Avenue, Suite 1140

Bakersfield, CA 93309

661.321.7300

877.816.9087

TRANSFER AGENT

Broadridge Corporate Issuer Solutions, Inc.

P.O. Box 1342

Brentwood, NY 11717

855.449.0975

720.378.5970

[email protected]

MARKET MAKER

Michael Natzic

D.A. Davidson & Co.

P.O. Box 1688

Big Bear Lake, CA 92315-1688

800.288.2811

[email protected]

Jacob Forney

Raymond James

One Embarcadero Center, Suite 650

San Francisco, CA 94111

800.800.4693

[email protected]

Joey Warmenhoven or Tom Thiel

JWTT Inc.

1231 NW Hoyt St., Suite 206

Portland, OR 97209

971.323.0700

[email protected] or [email protected]

LEGAL COUNSEL

S. Alan Rosen

Duane Morris, LLP

865 South Figueroa Street, Suite 3100

Los Angeles, CA 90017-5450

213.689.7461

AUDITORS

Ken E. Johnson, CPA

Eide Bailly, LLP

25231 Paseo De Alicia, Suite 100

Laguna Hills, CA 92653

949.768.0833

valleyrepublic.bank

5000 California Avenue, Suite 110, Bakersfield

4300 Coffee Road, Suite A6, Bakersfield

11330 Ming Avenue, Suite 400, Bakersfield

500 Woollomes Avenue, Suite 101, Delano

Business Banking Center7541 N Remington Avenue, Fresno

661.371.2000

Local. Responsive. Reliable. Local. R esponsive. R eliable. · Eugene (Gene) Voiland Eugene Voiland...

Documents

Transcript of Local. Responsive. Reliable. Local. R esponsive. R eliable. · Eugene (Gene) Voiland Eugene Voiland...