Summit State Bank
Annual Report 2017

Loading PDF...

More annual reports from Summit State Bank:

2023 Report
2022 Report
2021 Report
2020 Report
2019 Report

Share your feedback:


Plain-text annual report

Best Business Bank in Sonoma County NorthBay Biz Magazine Readers Poll Top Corporate Philanthropist North Bay Business Journal Business of the Year Healdsburg Chamber of Commerce One of the North Bay’s Best Places to Work North Bay Business Journal Financials at a Glance Letter to our Shareholders, Employees, Customers and Community Summit State Bank continues to improve our customer service platform by focusing on employees and processes to fuel solid and steady growth and commitment to our community. Hiring, training, and retaining strong professional staff and employing the latest technologies and systems will support our goals now and into the future. Growth in both core deposits and loan balances accelerated in the second half of 2017. The following will summarize our year in relation to our commitment to success related to our shareholders, employees, customers and community. We believe our employees are second to none in our competitive market. This allows us to better serve our customers and our community. Customer service is the key to our continued growth in loans and core deposits. Our staff enjoys special events tailored to promote teamwork and spirit while also having our support to engage in nonprofit and other community service. Diversity and individual thinking helps guide our hiring, training and promotion decision processes. The Bank consistently receives recognition for its philanthropy and outstanding workplace environment. The Board of Directors adopted a strategy of positioning the Bank for accelerated growth in the second quarter of 2016. A partial result was the increase in staffing and related expenses in relation to its current size of around $500 million in assets. Net income in 2016 and 2017 was off partially due to a lag in interest revenues produced by this added personnel expense. It wasn’t until the third and fourth quarters of 2017 that we experienced significant increases in our loan portfolio and core deposit growth. The Bank continues this strategy of increased staffing and other costs to support continued organic growth now and into the future. We have been able to attract and retain talent focused on the traditional community banking model. We continue to improve our processes by training and implementing technology improvements to meet the everchanging needs of our shareholders, employees, customers and community. Our Board continues to be diligent in stressing the importance of risk monitoring and adherence to sound banking principles. The Bank strives to create an environment where staff feels appreciated and supported. We encourage work/life balance and feel that employees are happier and more productive when they balance the hours they work with family and personal interests. Salaries and employee benefits (net of severance pay-related costs) increased around 28% from 2017 over 2016 while net interest income remained essentially the same. While the loan portfolio year-end balances increased 23% for 2017 over 2016, much of the related income earned was offset by additions to our Allowance for Loan Loss provisions related to this growth and we expect that 2018 will better reflect the net earnings side. Significant changes to tax law related to our business were enacted near the end of 2017 which prompted our Board to declare a special $2,000 bonus for every non-executive employee and raise our minimum wage to $15.00 per hour in December 2017, and at the same time caused a write-down of our deferred tax asset. Unfortunately, our organization and community were impacted in many ways by the North Bay wildfires that occurred in October 2017. In the aftermath, we worked diligently to ensure all our employees and their families were safe and provided for. Once we knew our team was safe, management and a core group of employees opened three of our five branch locations the day following the disaster, with the remaining branches open by the end of the week. We are especially proud of our team and their commitment to serve each other, our customers and community during these times. Soon after, we allocated an additional $50,000 in charitable donations to those organizations we felt most directly contributed to immediate relief, set up a disaster relief program to assist our employees and customers directly affected, and accommodated customers by waiving fees, deferring loan payments, and making quick temporary loans available to them. We anticipate that the steps taken in 2017 will result in improvements in financial reports in the future. Allan Hemphill Chairman of the Board James Brush President & CEO Executive Management Team Our well-rounded and knowledgeable Executive Management Team was strengthened with the addition of Genie Del Secco, Executive Vice President and Chief Operating Officer. Genie manages critical functions within the Bank which include branch administration, regulatory compliance, central operations, information technology, human resources and marketing. Genie joined the Bank in August of 2015 with more than 25 years of community banking experience. Collectively, our Executive Management Team has over 110 years of banking experience. James Brush President and Chief Executive Officer Dennis Kelley Executive Vice President and Chief Financial Officer Genie Del Secco Executive Vice President and Chief Operating Officer Brian Reed Executive Vice President and Chief Credit Officer Brandy Seppi Executive Vice President and Chief Lending Officer Board of Directors Allan J. Hemphill President Hemphill and Associates James E. Brush President and Chief Executive Officer Summit State Bank Jeffery B. Allen President Allen Land Design Josh C. Cox, Jr. Banking Consultant Josh Cox & Associates Bridget M. Doherty Co-owner Encore Events Rentals General Manager Cal-West Rentals Todd R. Fry Chief Accounting Officer Installed Building Products, Inc. Ronald A. Metcalfe Principal Call & Metcalfe Certified Public Accountants, P.C. Richard E. Pope Environmental Planning and Development Consultant SOMO Living, LLC Nicholas J. Rado President Rado Consulting Services Marshall T. Reynolds Chairman of the Board Champion Industries, Inc. John W. Wright Business Consultant Employee Engagement Photo courtesy of The Press Democrat. We have been fortunate to attract knowledgeable and customer service-oriented team members who enthusiastically serve our customers and community. We recognize the value of retaining quality employees and offer a rich benefits package, generous vacation time, volunteer time off, and a supportive work environment. Our Summit Day of Service gives every employee one work day a year to volunteer his or her time in the community on behalf of the Bank with any nonprofit organization in Sonoma County. This time could be spent sorting food at a food bank, helping seniors, tutoring youth, or donating any time to an organization the individual is passionate about. Our team participated in the annual Best Places to Work survey and based on how our employees rated the Bank, we once again earned this prestigious award for the eighth consecutive year. At the end of the year, the Board of Directors gave all non-executive employees a $2,000 bonus due to the beneficial nature of the corporate tax rate decrease. Community Commitment Our team is actively involved with the nonprofit community, and we are proud to share that in 2017, we donated more than 8.4% of our net profit to support our local nonprofit customers that truly make a difference in our community. In addition, many members of the Bank have taken leadership roles in our community by participating on a variety of nonprofit boards and committees including Burbank Housing, Children & Family Circle, Community Child Care Council (4Cs), Court Appointed Special Advocates (CASA) and the United Way of the Wine Country – to name a few. We are active members of our community. Summit has sponsored Sonoma County Women in Conversation since 2016 (above and right). We also participate in many local events such as The Human Race (below). “Summit has been a great local partner that has been there since the beginning and continues to grow with us.” A Better Sonoma County. That’s Our Business. Rogelio Perez, Perez Pallets Summit Customer Information About Summit State Bank Summit State Bank (the “Bank”) is a state-chartered commercial bank operating a traditional community banking business within our primary service area of Sonoma County in California. However, we consider loans from Northern California, including Marin, Napa, Sonoma and San Francisco counties. We operate through five depository offices located in Santa Rosa, Rohnert Park, Healdsburg and Petaluma. The Bank also has a loan production office in Roseville, California. The Bank was incorporated on December 20, 1982 and commenced operations as a California state- chartered savings and loan in 1982. On January 15, 1999, the Bank received authority to convert its charter to a California state-chartered commercial bank. On July 13, 2006, the Bank completed an underwritten initial public offering and listed its stock on the Nasdaq Global Market under the symbol SSBI. The Bank’s deposits are insured by the FDIC in accordance with the Federal Deposit Insurance Act and the related regulations of the FDIC. We provide a broad array of financial services to small to medium-sized businesses and their owners and employees, entrepreneurs, high net worth families, foundations, estates and individual consumers. We believe that our principal competitive advantages are personal service, flexibility and responsiveness to customer needs. Our lending activities are primarily focused on commercial real estate, construction, and business loans to our targeted clientele. We emphasize relationship banking and we believe we offer our customers many of the management capabilities of a large financial institution, together with the resourcefulness and superior customer service of a community bank. Through our branches and the use of technology, we offer a broad array of deposit products and services for both commercial and consumer customers, including electronic banking, cash management services and electronic bill payment. We provide a comprehensive set of loan products, such as commercial loans and leases, lines of credit, commercial real estate loans, Small Business Administration, or SBA, loans, residential mortgage loans, home equity lines of credit and construction loans. We believe that local decision-making ensures that our lending process is fast, efficient, and focused on maintaining our high credit quality and underwriting standards. Table of Contents Selected Financial Data __________________________________________________ 2 Management’s Discussion and Analysis of Financial Condition and Results of Operations ____________________________ 3 Stock Split Adjustment __________________________________________________ 3 Critical Accounting Policies and Estimates ___________________________________ 3 Overview ____________________________________________________________ 5 Results of Operations ___________________________________________________ 5 Net Income ___________________________________________________________ 5 Net Interest Income and Net Interest Margin ________________________________ 6 Provision for Loan Losses ________________________________________________ 8 Non-interest Income ___________________________________________________ 9 Non-interest Expenses __________________________________________________ 10 Provision for Income Taxes ______________________________________________ 12 Balance Sheet _________________________________________________________ 12 Investment Portfolio ____________________________________________________ 12 Loan Portfolio _________________________________________________________ 14 Loan Policies and Procedures _____________________________________________ 15 Nonperforming Assets __________________________________________________ 16 Allowance for Loan Losses _______________________________________________ 17 Deposits _____________________________________________________________ 20 Borrowings ___________________________________________________________ 21 Critical Accounting Policies and Estimates ___________________________________ 21 Quantitative and Qualitative Disclosures About Market Risk __ 22 Liquidity and Capital Resources ___________________________________________ 23 Impact of Inflation _____________________________________________________ 25 Summit State Bank and Subsidiary Consolidated Financial Statements ________________________________ 26 Report of Independent Registered Public Accounting Firm ______________________27 Summit State Bank and Subsidiary Notes to Consolidated Financial Statements _____34 Summary of Significant Accounting Policies _________________________________34 Investment Securities ___________________________________________________42 Loans _______________________________________________________________44 Other Real Estate Owned ________________________________________________50 Bank Premises and Equipment ___________________________________________51 Interest-Bearing Deposits _______________________________________________51 Borrowings ___________________________________________________________52 Federal Home Loan Bank Advances ________________________________________52 Income Taxes _________________________________________________________53 Commitments and Contingencies _________________________________________54 Shareholders’ Equity____________________________________________________56 Other Expenses _______________________________________________________60 Employee Benefit Plan __________________________________________________60 Related Party Transactions _______________________________________________60 Fair Value ____________________________________________________________61 Subsequent Events _____________________________________________________64 Quarterly Financial Data (Unaudited) ______________________________________64 Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities _________ 65 1 Summit State Bank | Annual Report 2017 (in thousands except per share data) Income stateme nt data: Interest income Net interest income before provision for (reversal of) loan losses Provision for (reversal of) loan losses T otal non-interest income T otal non-interest expense Income before provision for income taxes Provision for income taxes Net income Preferred dividend Net income available to common shareholders Se le cte d balance she et data: Assets Loans, net Earning assets Deposits Federal Home Loan Bank advances Shareholders' equity Balance sheet data - average Assets Loans, net Earning assets Deposits Federal Home Loan Bank advances Shareholders' equity Se le cte d per common share data: Earnings per common share - basic Earnings per common share - diluted Weighted average shares used to calculate earnings per common share - basic Weighted average shares used to calculate earnings per common share - diluted Common shares oustanding at year end Cash dividends per share Book value per common share Se le cte d ratios: Return on average common shareholders' equity Return on average assets Common dividend payout ratio Net interest margin Efficiency ratio (1) Average common shareholders' equity to average assets T ier 1 leverage capital ratio Nonperforming assets to total assets Nonperforming loans to total loans Net charge-offs (recoveries) to average loans Allowance for loan losses to total loans Selected Financial Data $ $ $ $ $ $ $ $ $ Year Ended December 31 2017 2016 2015 2014 2013 $ $ $ $ $ 20,713 18,572 520 1,715 13,845 5,922 2,630 3,292 - 3,292 610,864 437,594 599,619 533,513 15,000 59,677 534,534 381,289 523,475 420,070 52,429 59,987 0.55 0.54 $ $ $ $ 6,031 6,059 6,041 0.46 9.88 5.49% 0.62% 83.57% 3.55% 69.45% 11.22% 10.23% 0.45% 0.62% 0.01% 1.18% 19,907 18,673 - 2,021 12,245 8,449 3,482 4,967 - 4,967 513,704 354,638 502,121 384,251 68,900 58,622 510,829 363,545 502,381 391,001 58,659 59,326 0.83 0.82 6,005 6,036 6,020 0.38 9.74 8.37% 0.97% 46.43% 3.72% 61.22% 11.61% 11.08% 0.65% 0.93% (0.01)% 1.33% $ $ $ $ $ $ $ $ $ 18,573 17,637 (800) 2,645 10,823 10,259 4,229 6,030 92 5,938 513,365 343,217 501,192 397,246 55,800 57,325 485,396 314,806 474,751 372,778 46,102 65,061 0.99 0.98 5,979 6,048 5,979 0.38 9.59 10.60% 1.24% 38.67% 3.72% 53.78% 13.40% 10.53% 0.31% 0.46% (0.12%) 1.36% $ $ $ $ $ $ $ $ $ 17,933 16,917 (1,400) 1,995 10,982 9,330 3,845 5,485 138 5,347 459,675 279,798 444,550 355,259 35,000 67,580 460,774 289,948 445,977 358,278 36,341 64,864 0.90 0.89 5,973 6,038 5,973 0.35 9.03 10.44% 1.19% 39.31% 3.79% 58.81% 14.08% 13.72% 1.28% 0.64% (0.39)% 1.81% $ $ $ $ $ $ $ $ $ 17,841 16,566 50 1,668 10,833 7,351 3,030 4,321 253 4,068 454,074 282,667 433,283 341,268 48,500 61,630 441,583 279,326 426,819 342,406 35,437 62,480 0.68 0.68 5,952 5,992 5,972 0.34 8.03 8.33% 0.98% 49.19% 3.88% 59.67% 14.15% 13.22% 2.29% 1.95% 0.14% 1.88% (1) Efficiency ratio is commonly used in the Banking industry and is defined as non-interest expenses to net interest and non-interest income, net of securities gains (losses). 2 Summit State Bank | Annual Report 2017 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion provides additional information about the financial condition of the Bank at December 31, 2017 and 2016 and results of operations for the years ended December 31, 2017, 2016 and 2015. The following analysis should be read in conjunction with the consolidated financial statements of the Bank and the notes thereto prepared in accordance with accounting principles generally accepted in the United States. Stock Split Adjustment The Board of Directors declared a five-for-four stock split on January 23, 2017 to common shareholders of record on February 28, 2017, with an issuance date of March 14, 2017. The impact of this stock split has been retroactively applied to periods presented with adjustments to the number of common shares and per common share values as if the stock split had occurred as of the beginning of each period presented. Critical Accounting Policies and Estimates The discussion and analysis of the Bank’s results of operations and financial condition are based upon financial statements which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires the Bank’s management to make estimates and judgments that affect the reported amounts of assets and liabilities, income and expense, and the related disclosures of contingent assets and liabilities at the date of these financial statements. These estimates are discussed in more detail under “Critical Accounting Policies and Estimates.” The Bank believes these estimates and assumptions to be reasonably accurate; however, actual results may differ from these estimates under different assumptions or circumstances. Material estimates that are particularly susceptible to significant change in the near-term relate to the determination of the allowance for loan losses, consideration of goodwill impairment and consideration of potential other than temporary impairment on investment securities and other financial instruments. Allowance for Loan Losses. The allowance for loan losses is determined first and foremost by promptly identifying potential credit weaknesses that could jeopardize repayment. The Bank’s process for evaluating the adequacy of the allowance for loan losses includes determining estimated loss percentages for each credit based on the Bank’s historical loss experience and other factors in the Bank’s credit grading system and accompanying risk analysis for determining an adequate level of the allowance. The risks are assessed by rating each account based upon paying habits, loan to collateral value ratio, financial condition and level of classifications. The allowance for loan losses was $5,236,000 at December 31, 2017 compared to $4,765,000 at December 31, 2016. 3 Summit State Bank | Annual Report 2017 The Bank maintains the allowance for loan losses to provide for probable incurred losses in the loan portfolio. Additions to the allowance for loan losses are established through a provision charged to expense. All loans which are judged to be uncollectible are charged against the allowance while any recoveries are credited to the allowance. The Bank’s policy is to charge off any known losses at the time of determination. Any unsecured loan more than 90 days delinquent in payment of principal or interest and not in the process of collection is charged off in total. Secured loans are evaluated on a case-by-case basis to determine the ultimate loss potential to us subsequent to the liquidation of collateral. In those cases where we believe we are inadequately protected, a charge-off will generally be made to reduce the loan balance to a level equal to the liquidation value of the collateral unless we believe the collateral deficiency may be overcome by borrower cash flows. The Bank’s loan policy provides procedures designed to evaluate and assess the credit risk factors associated with the loan portfolio, to enable the Bank to assess such credit risk factors prior to granting new loans and to evaluate the sufficiency of the allowance for loan losses. The Bank conducts an assessment of the allowance on a monthly basis and undertakes a more critical evaluation quarterly. At the time of the quarterly review, the Board of Directors will examine and approve the adequacy of the allowance. The quarterly evaluation includes an assessment of the following factors: any external loan review and any recent regulatory examination, estimated potential loss exposure on each pool of loans, concentrations of credit, value of collateral, the level of delinquent and non-accrual loans, trends in loan volume, effects of any changes in lending policies and procedures, changes in lending personnel, current economic conditions at the local, state and national level and historical losses and recoveries. Goodwill. We assess the carrying value of our goodwill at least annually in order to determine if this intangible asset is impaired. In reviewing the carrying value of our goodwill, we assess the recoverability of such assets by evaluating the fair value of the related business unit. If the carrying amount of goodwill exceeds its fair value, an impairment loss is recognized for the amount of the excess and the carrying value of goodwill is reduced accordingly. Any impairment would be required to be recorded during the period identified. No impairment was recorded related to this intangible asset in 2017, 2016 or 2015. Investment Securities. We are obligated to assess, at each reporting date, whether there is an “other-than-temporary” impairment to our investment securities. Such impairment, if related to credit losses, must be recognized in current earnings rather than in other comprehensive income or loss, net of tax. We examine all individual securities that are in an unrealized loss position at each reporting date for other-than-temporary impairment (OTTI). Specific investment level factors we examine to assess impairment include, the severity and duration of the unrealized loss, the nature, financial condition and results of operations of the issuers of the securities and whether there has been any cause for default on the securities or any adverse change in the rating of the securities by the various rating agencies, as well as whether the decline in value is credit or liquidity related. Additionally, we reexamine our financial resources and our overall intent and ability to hold the securities until their fair values recover. There were no OTTI recorded in 2017, 2016 or 2015. We do not believe that we have any investment securities with material unrealized losses that would be deemed to be “other-than-temporarily impaired” as of December 31, 2017. Investment securities are discussed in more detail under “Investment Portfolio.” 4 Summit State Bank | Annual Report 2017 Overview The Bank is a community bank serving Sonoma, Napa, San Francisco and Marin counties in California. It operates through five depository offices located in Santa Rosa, Petaluma, Rohnert Park and Healdsburg. The Bank has a loan production office located in Roseville, California. The Bank was founded as a savings and loan in 1982 under the name Summit Savings. On January 15, 1999, the Bank converted its charter to a California state-chartered commercial bank and thereby became subject to regulation, supervision and examination by the California Department of Business Oversight and the FDIC. Results of Operations Years Ended December 31, 2017, 2016 and 2015 (The impact of the five-for-four stock split declared and issued in 2017, has been retroactively applied to periods presented with adjustments to the number of common shares and per common share values as if the stock split had occurred as of the beginning of each period presented.) The Bank’s primary source of income is net interest income, which is the difference between interest income and fees derived from earning assets and interest paid on liabilities which fund those assets. Net interest income, expressed as a percentage of total average interest earning assets, is referred to as the net interest margin. The Bank’s net interest income is affected by changes in the volume and mix of interest earning assets and interest bearing liabilities. It is also affected by changes in yields earned on interest earning assets and rates paid on interest bearing deposits and other borrowed funds. The Bank also generates non-interest income, including transactional fees, service charges, office lease income, gains and losses on investment securities and gains on sold government guaranteed loans originated by the Bank. Non-interest expenses consist primarily of employee compensation and benefits, occupancy and equipment expenses and other operating expenses. The Bank’s results of operations are also affected by its provision for loan losses. Results of operations may also be significantly affected by other factors including general economic and competitive conditions, mergers and acquisitions of other financial institutions within the Bank’s market area, changes in market interest rates, government policies, and actions of regulatory agencies. Net Income The Bank had net income and net income available for common stockholders of $3,292,000 or $0.54 per diluted share, for the year ended December 31, 2017 compared to net income and net income available for common stockholders of $4,967,000, or $0.82 per diluted share, for the year ended December 31, 2016, and net income of $6,030,000 and net income available for common stockholders of $5,938,000, or $0.98 per diluted share, for the year ended December 31, 2015. The return on average assets was 0.62%, 0.97% and 1.24% for the years ended December 31, 2017, 2016 and 2015, respectively. Although various factors affected the change in net income between the years which are discussed in the following sections of this Management’s Discussion 5 Summit State Bank | Annual Report 2017 and Analysis, the year 2015 benefited by the reversal of provisions for loan losses in the amount of $800,000. The return on average common equity was 5.49%, 8.37% and 10.60% for the years ended December 31, 2017, 2016 and 2015, respectively. The Board of Directors adopted a strategy of positioning the Bank for accelerated growth in the second quarter of 2016. A partial result of this strategic shift was the increase of staffing and related expenses to increase the Bank’s lending function. As interest revenues lag the increased personnel expenses as it is dependent on the increase in loans, this timing difference between the increased expenses and the increased interest income from greater loan totals was partly the cause for the decline in income during 2016 and 2017. Another cause for the decline in net income, among others, was a decline in the net interest margin during 2016 and 2017, as the Bank’s cost of interest- bearing liabilities increased due to changes in general market interest rates. Net Interest Income and Net Interest Margin Net interest income was $18,572,000 and the net interest margin was 3.55% for the year ended December 31, 2017, which represented a $101,000 or 0.5% decrease over 2016. For the year ended December 31, 2016, net interest income was $18,673,000 and the net interest margin was 3.72%, which was an increase of $1,036,000 or 5.9% over 2015. For the year ended December 31, 2015, net interest income was $17,637,000 and the net interest margin was 3.72%. At December 31, 2017, approximately 72% of the Bank’s assets were comprised of net loans and 14% were comprised of investment securities compared to 69% of net loans and 23% of investment securities at December 31, 2016. The yield on average interest earning assets was 3.96% for the years ended December 31, 2017 and December 31, 2016. Yields on new loans are dependent on competition for those loans, which can mitigate general interest rate changes brought on by Federal Reserve policy. The yield on average interest earning assets increased from 3.91% for the year ended December 31, 2015, primarily because of increased yields on the Bank’s federal funds sold and interest bearing deposits with banks, which experience rate adjustments as the Federal Reserve increases rates. The changes in the overall yield on average earning assets between the years was primarily attributable to the effects of changes in general market interest rates impacting the re-pricing of the Bank’s variable rate loan portfolio and calls on higher yielding government agency securities. In 2017, average earning assets increased 4.2% with average investment securities increasing 2.2% and average loans increasing 4.9%. In 2016, average earning assets increased 5.8% with average investment securities declining 14% and average loans increasing 15%. Net loans outstanding at December 31, 2017 was $437,594,000, a 23.4% increase over net loans at December 31, 2016. The difference in the percentage increase between net loans at year end compared to percentage increase for the average net loans for the year, is the result of the increase in net loans in 2017, primarily occurring during the second half of the year. 6 Summit State Bank | Annual Report 2017 For the year ended December 31, 2017, the cost of average interest-bearing liabilities was 0.60% compared with a cost of average interest bearing liabilities of 0.36% for the year ended December 31, 2016 and 0.28% for the year ended December 31, 2015. The changes in cost of funds have been driven by the changing market interest rates over the periods. Additionally, the Bank had increased the rates paid on time deposits with maturity terms of 18 months to 2 years, in order to attract and extend its liabilities during the period of rising rates. The following table presents condensed average balance sheet information for the Bank, together with interest rates earned and paid on the various sources and uses of its funds for each of the periods presented. Average balances are based on daily average balances. Nonaccrual loans are included in loans with any interest collected reflected on a cash basis. Average Balance Sheets and Analysis of Net Interest Income Year Ended De cember 31, 2016 Inte rest Income / Expe nse Average Rate Average Balance 2015 Average Rate Average Balance Intere st Income/ Expe nse Ave rage Rate (Dollars in thousands) Assets Interest earning assets: Federal funds sold Interest bearing deposits with banks T axable investment securities Dividends on FHLB Stock Loans, net of unearned income (1) T otal earning assets/interest income Non-earning assets Allowance for loan losses T otal assets Liabilities and Shareholders' Equity Interest-bearing liabilities: Deposits: Interest-bearing demand deposits Savings and money market T ime deposits FHLB advances T otal interest-bearing liabilities/interest expense Non interest-bearing deposits Other liabilities T otal liabilities Shareholders' equity T otal liabilities and shareholders' equity Average Balance $ 1,903 19,103 118,095 3,085 381,289 523,475 15,869 (4,810) 534,534 $ $ 63,217 85,057 155,662 52,429 356,365 116,134 2,048 474,547 59,987 534,534 $ 2017 Inte rest Income / Expe nse $ 17 162 3,126 232 17,176 20,713 0.89% 0.85% 2.65% 7.52% 4.50% 3.96% $ 1,864 18,504 115,505 2,963 363,545 502,381 13,199 (4,751) 510,829 $ $ 82 170 1,387 502 2,141 0.13% 0.20% 0.89% 0.96% 0.60% $ 58,098 82,523 142,749 58,659 342,029 107,631 1,843 451,503 59,326 510,829 $ $ 3 55 3,665 327 14,523 18,573 0.17% 0.28% 2.70% 12.09% 4.61% 3.91% $ 54 135 568 179 936 0.10% 0.15% 0.39% 0.39% 0.28% $ 7 82 2,912 357 16,549 19,907 0.37% 0.44% 2.52% 12.05% 4.55% 3.96% $ 65 86 704 379 1,234 0.11% 0.10% 0.49% 0.65% 0.36% $ 1,945 19,717 135,582 2,701 314,806 474,751 15,558 (4,913) 485,396 $ $ 53,883 90,315 144,175 46,102 334,475 84,405 1,455 420,335 65,061 485,396 $ Net interest income and margin (2) Net interest spread (3) $ 18,572 3.55% 3.36% $ 18,673 3.72% 3.60% $ 17,637 3.72% 3.63% (1) The net amortization of deferred fees and (costs) on loans included in interest income was $(196,000), $(118,000) and $(189,000) for the years ended December 31, 2017, 2016 and 2015, respectively. (2) Net interest margin is computed by dividing net interest income by average total earning assets. (3) Net interest spread is the difference between the average rate earned on average total earning assets and the average rate paid on average total interest-bearing liabilities. 7 The following table shows the change in interest income and interest expense and the amount of change attributable to variances in volume and rates. The unallocated change in rate or volume variance has been allocated between the rate and volume variances in proportion to the absolute dollar amount in the change of each. Volume and Yield/Rate Variances 2017 Compared to 2016 2016 Compared to 2015 Change Due to Change Due to (Dollars in thousands) Volume Rate Net Volume Rate Net Interest income: Federal funds sold Interest bearing deposits with banks T axable investment securities Dividends on FHLB Stock Loans, net T otal interest income Interest expense: Interest-bearing demand deposits Savings and money market T ime deposits FHLB advances T otal interest expense Increase (decrease) in net interest income $ $ $ $ - $ $ - 3 57 14 801 875 6 3 69 (37) 41 10 77 157 (139) (174) (69) 11 81 614 160 866 10 80 214 (125) 627 806 17 84 683 123 907 (3) (568) 32 2,221 1,682 4 (12) (6) 58 44 4 30 (185) (2) (195) (348) 7 (37) 142 142 254 4 27 (753) 30 2,026 1,334 11 (49) 136 200 298 $ 834 $ (935) $ (101) $ 1,638 $ (602) $ 1,036 Provision for Loan Losses The Bank maintains an allowance for loan losses for probable incurred losses that are expected as an incidental part of the banking business. Write-offs of loans are charged against the allowance for loan losses, which is adjusted periodically to reflect changes in the volume of outstanding loans and estimated losses due to changes in the financial condition of borrowers or the value of property securing nonperforming loans, or changes in general economic conditions and other qualitative factors. Additions to the allowance for loan losses are made through a charge against income referred to as the “provision for loan losses.” The Bank’s loan policy provides procedures designed to evaluate and assess the credit risk factors associated with the loan portfolio, to enable management to assess such credit risk factors prior to granting new loans and to evaluate the sufficiency of the allowance for loan losses. Management conducts an assessment of the allowance for loan losses on a monthly basis and undertakes a more critical evaluation quarterly. At the time of the quarterly review, the Board of Directors evaluates and formally approves the adequacy of the allowance. The quarterly evaluation includes an assessment of the following factors: any external loan review and regulatory examination, estimated probable loss exposure on each pool of loans, concentrations of credit, Summit State Bank | Annual Report 2017 The following table shows the change in interest income and interest expense and the amount of change attributable to variances in volume and rates. The unallocated change in rate or volume variance has been allocated between the rate and volume variances in proportion to the absolute dollar amount in the change of each. Volume and Yield/Rate Variances 2017 Compared to 2016 2016 Compared to 2015 Change Due to Change Due to (Dollars in thousands) Volume Rate Net Volume Rate Net Interest income: Federal funds sold $ Interest bearing deposits with banks T axable investment securities Dividends on FHLB Stock Loans, net T otal interest income Interest expense: Interest-bearing demand deposits Savings and money market T ime deposits FHLB advances T otal interest expense Increase (decrease) in net interest income $ - 3 57 14 801 875 6 3 69 (37) 41 10 77 157 (139) (174) (69) 11 81 614 160 866 $ 10 80 214 (125) 627 806 17 84 683 123 907 $ - $ (3) (568) 32 2,221 1,682 4 (12) (6) 58 44 4 30 (185) (2) (195) (348) 7 (37) 142 142 254 $ 4 27 (753) 30 2,026 1,334 11 (49) 136 200 298 $ 834 $ (935) $ (101) $ 1,638 $ (602) $ 1,036 Provision for Loan Losses The Bank maintains an allowance for loan losses for probable incurred losses that are expected as an incidental part of the banking business. Write-offs of loans are charged against the allowance for loan losses, which is adjusted periodically to reflect changes in the volume of outstanding loans and estimated losses due to changes in the financial condition of borrowers or the value of property securing nonperforming loans, or changes in general economic conditions and other qualitative factors. Additions to the allowance for loan losses are made through a charge against income referred to as the “provision for loan losses.” The Bank’s loan policy provides procedures designed to evaluate and assess the credit risk factors associated with the loan portfolio, to enable management to assess such credit risk factors prior to granting new loans and to evaluate the sufficiency of the allowance for loan losses. Management conducts an assessment of the allowance for loan losses on a monthly basis and undertakes a more critical evaluation quarterly. At the time of the quarterly review, the Board of Directors evaluates and formally approves the adequacy of the allowance. The quarterly evaluation includes an assessment of the following factors: any external loan review and regulatory examination, estimated probable loss exposure on each pool of loans, concentrations of credit, 8 Summit State Bank | Annual Report 2017 value of collateral, the level of delinquent and non-accrual loans, trends in loan volume, effects of any changes in the lending policies and procedures, changes in lending personnel, current economic conditions at the local, state and national level, and a migration analysis of historical losses and recoveries for the prior twelve quarters. At December 31, 2017, the Bank’s allowance for loan losses totaled $5,236,000 or 1.18% of outstanding loans, compared with an allowance for loan losses of $4,765,000, or 1.33% of outstanding loans at December 31, 2016 and $4,731,000, or 1.36% of outstanding loans at December 31, 2015. For the year ended December 31, 2017, the Bank recorded a $520,000 provision for loan losses, primarily due to the increase in loans outstanding. For the year ended December 31, 2016, there was no provision for loan losses and for the year ended December 31, 2015, the Bank reversed $800,000 in the Allowance for Loan Losses, which is recorded as a negative provision for loan losses in the Consolidated Statements of Income. The primary reason for no provision in 2016 and the reversal in 2015 were net recoveries of previously charged-off loans of $34,000 during 2016 and $388,000 during 2015. The decline in percentage of allowance for loan losses to loans outstanding was primarily due to the reduction in adversely classified and nonaccrual loans. Non-interest Income The following table summarizes non-interest income recorded for the years indicated. Non-interest Income (in thousands) Service charges on deposit accounts Rental income Net gain on loan sales Net securities gains Net gains on other real estate owned Other income Total non-interest income Year Ended December 31, 2016 2017 2015 $ $ $ 695 574 351 72 - 23 1,715 748 559 - 692 - 22 2,021 702 532 - 157 1,125 129 2,645 $ $ $ Service charges on deposit accounts were $695,000 for the year ended December 31, 2017, compared to $748,000 and $702,000 for the years ended December 31, 2016 and 2015. The Bank has experienced an increase in demand deposits, however deposit account activity service charges are dependent on the volume and types of transactions in the accounts. The Bank owns its headquarters building with approximately half of the office space leased to nonaffiliated tenants. The building space was fully leased for each of the years 2015 through 2017. Lease income from this office building was $574,000, $559,000 and $532,000 for the years ended December 31, 2017, 2016 and 2015. The leases have annual rent increases. Two of the three tenants in the building have lease maturities in December 2018. It is unknown at this time if the leases will be extended. 9 Summit State Bank | Annual Report 2017 Net securities gains can vary significantly from year to year based on the amount of investment securities sold or called and the net gain or loss realized. Additionally, gains or losses are highly dependent on the interest rate environment and its impacts on the fair market value of investment securities. In 2017, 2016 and 2015, the Bank sold or had calls on various government agency and corporate bonds with a net gain of $72,000 in 2017, $692,000 in 2016 and $157,000 in 2015. Net gains on other real estate owned arises when the Bank sells foreclosed properties. The gain of $1,125,000 recorded in 2015 was the result of one property sold. The Bank has no other real estate owned at December 31, 2017. In the second half of 2017, the Bank opened a loan production office in Roseville, California, which primarily focuses on loans partially guaranteed by the Small Business Administration (SBA) or United States Department of Agriculture (USDA). It also generates commercial real estate loans for the Banks portfolio. The guaranteed portions of the loans are sold, and a gain is recognized through a premium received on the sale. Total proceeds from sales of SBA guaranteed balances was $5,097,000 in 2017 with a gain recognized of $351,000. Non-interest Expenses The following table summarizes non-interest expenses recorded for the years indicated. Non-interest Expenses Year Ended December 31, (in thousands) 2017 2016 2015 Salaries and employee benefits $ 7,788 $ 6,562 $ 5,646 Occupancy and equipment Other expenses 1,503 4,554 1,229 4,454 1,313 3,864 T otal non-interest expenses $ 13,845 $ 12,245 $ 10,823 Non-interest expenses, also referred to as operating expenses, is commonly expressed as a percentage of average assets for the period and as a percentage of operating revenues, or the efficiency ratio. The efficiency ratio divides the non-interest expenses by total revenues, which is defined as net interest income plus non-interest income, excluding net security gains. The non- interest expenses as a percent of annual average assets for 2017 was 2.6% and was 2.4% for 2016 and 2.2% for 2015. The efficiency ratio for 2017 was 69.5% and was 61.2% for 2016 and 53.8% for 2015. The Bank realized a gain on the sale of other real estate owned in 2015 of $1,125,000. This gain resulted in a lower than normal efficiency ratio for 2015. The increases in the efficiency ratio in 2017 and 2016 were partly the result of increased expenses incurred as a result of the change in the Bank’s strategy to increase employee levels to drive a greater volume in loans. Additionally, the severance of the Bank’s former President and Chief Executive Officer in 2016 contributed to the higher efficiency ratio in that year. Salaries and employee benefits expense increased $1,226,000 or 19% in 2017 compared to 2016. The increase was primarily attributable to increased number of employees hired during the 10 Summit State Bank | Annual Report 2017 year and general salary and benefit increases. Salaries and employee benefits expense increased from 2015 to 2016 by $916,000 or 16% as a result of severance costs associated with the former President and Chief Executive Officer, increased number of employees hired during the year and general salary and benefit increases. Annual salaries and bonuses have increased during the years and have been partially offset by deferred loan origination costs attributable to loan generation during the years. The deferred loan origination costs netted against salaries and employee benefits were $1,141,000, $734,000 and $950,000 for the years ended December 31, 2017, 2016 and 2015. The Bank employed a total of 78, 74 and 67 employees as of December 31, 2017, 2016 and 2015. Occupancy and equipment expenses increased $274,000 or 22% in 2017 compared to 2016 and decreased $84,000 or 6.4% in 2016 compared to 2015. Occupancy expenses include costs incurred with the Bank’s owned headquarters building, four leased branch office buildings, an operations leased facility and a loan production office. The operations facility and loan production office leases commenced in 2017. The following table summarizes the categories of other expenses. Other Expenses Year Ended December 31, (in thousands) 2017 2016 2015 Data processing Professional fees Director fees and expenses Nasdaq listing and regulatory license expense Advertising and promotion Deposit and other insurance premiums Telephone and postage Other real estate owned expenses Other expenses $ $ $ 1,278 554 479 140 828 431 77 - 767 4,554 1,194 625 518 131 883 387 70 - 646 4,454 925 557 452 136 655 359 75 64 641 3,864 $ $ $ Data processing expenses are dependent on the Bank’s implementation of new electronic delivery platforms such as mobile banking, and per account and transaction expenses from the Bank’s third party data service provider, corresponding to the increase in the number of new deposit and loan customers. Professional fees vary depending on the use of legal, audit and consulting services. Director fees and expenses vary dependent on the number of directors, travel expenses incurred by directors for attendance of Board and number of committee meetings and director training expenses. Advertising and promotion expenses are dependent on the Bank’s business development activities and targeted nonprofit charity business customers. Miscellaneous other expenses are incurred as a result of general operations. 11 Provision for Income Taxes The Bank accrues income tax expense based on the anticipated tax rates during the financial period covered. The provision for income taxes for the years ended December 31, 2017, 2016 and 2015 was $2,630,000, $3,482,000 and $4,229,000. The combined effective Federal and State corporate income tax rates for the years ended December 31, 2017, 2016 and 2015 were 44.4%, 41.2% and 41.2%, respectively. The increase in effective tax rate in 2017 was the result of the enactment of the Tax Cuts and Jobs Act on December 22, 2017, which resulted in a write-down of the net deferred tax asset against 2017 earnings of $292,000. Balance Sheet December 31, 2017 and 2016 Investment Portfolio Securities classified as available-for-sale for accounting purposes are recorded at their fair value on the balance sheet. Securities classified as held-to-maturity are recorded at amortized cost. At December 31, 2017, investment securities comprised 14.2% of total assets and 14.5% of earning assets. At December 31, 2016, investment securities comprised 22.5% of total assets and 23.3% of earning assets. The decline in the percentage investments to total assets and earning assets was due to calls of bonds and bond sales that were incurred to partially fund the increase in the loan At December 31, 2017, there were $7,984,000 in investment securities classified as held-to- maturity and $7,976,000 at December 31, 2016. The increase in held-to-maturity securities was attributable to the accretion of the discount on the portfolio. Investment securities classified held- to-maturity are government sponsored agencies with interest rates that step-up over the life of the portfolio. bonds. Securities classified as available-for-sale were $78,770,000 and $107,771,000 for the 2017 and 2016 respective year ends. Changes in the fair value of available-for-sale securities (e.g., unrealized holding gains or losses) are reported as “other comprehensive income (loss),” net of tax, and carried as accumulated other comprehensive income or loss within shareholders’ equity until realized. The accumulated other comprehensive income was in an unrealized loss position of $597,000 at December 31, 2017 and $885,000 at December 31, 2016. The Bank utilizes the investment portfolio to manage liquidity and attract funding that requires collateralization. At December 31, 2017, investment securities with a fair value of $50,417,000, or 58% of the portfolio, were pledged to secure State of California and other municipal deposits. This compares to $29,097,000, or 25% of the portfolio pledged at December 31, 2016. At December 31, 2017, securities with a par value of $46,625,000 were callable within one year. Summit State Bank | Annual Report 2017 Provision for Income Taxes The Bank accrues income tax expense based on the anticipated tax rates during the financial period covered. The provision for income taxes for the years ended December 31, 2017, 2016 and 2015 was $2,630,000, $3,482,000 and $4,229,000. The combined effective Federal and State corporate income tax rates for the years ended December 31, 2017, 2016 and 2015 were 44.4%, 41.2% and 41.2%, respectively. The increase in effective tax rate in 2017 was the result of the enactment of the Tax Cuts and Jobs Act on December 22, 2017, which resulted in a write-down of the net deferred tax asset against 2017 earnings of $292,000. Balance Sheet December 31, 2017 and 2016 Investment Portfolio Securities classified as available-for-sale for accounting purposes are recorded at their fair value on the balance sheet. Securities classified as held-to-maturity are recorded at amortized cost. At December 31, 2017, investment securities comprised 14.2% of total assets and 14.5% of earning assets. At December 31, 2016, investment securities comprised 22.5% of total assets and 23.3% of earning assets. The decline in the percentage investments to total assets and earning assets was due to calls of bonds and bond sales that were incurred to partially fund the increase in the loan portfolio. At December 31, 2017, there were $7,984,000 in investment securities classified as held-to- maturity and $7,976,000 at December 31, 2016. The increase in held-to-maturity securities was attributable to the accretion of the discount on the portfolio. Investment securities classified held- to-maturity are government sponsored agencies with interest rates that step-up over the life of the bonds. Securities classified as available-for-sale were $78,770,000 and $107,771,000 for the 2017 and 2016 respective year ends. Changes in the fair value of available-for-sale securities (e.g., unrealized holding gains or losses) are reported as “other comprehensive income (loss),” net of tax, and carried as accumulated other comprehensive income or loss within shareholders’ equity until realized. The accumulated other comprehensive income was in an unrealized loss position of $597,000 at December 31, 2017 and $885,000 at December 31, 2016. The Bank utilizes the investment portfolio to manage liquidity and attract funding that requires collateralization. At December 31, 2017, investment securities with a fair value of $50,417,000, or 58% of the portfolio, were pledged to secure State of California and other municipal deposits. This compares to $29,097,000, or 25% of the portfolio pledged at December 31, 2016. At December 31, 2017, securities with a par value of $46,625,000 were callable within one year. 12 Summit State Bank | Annual Report 2017 The composition of the investment portfolio by major category and contracted maturities or repricing of debt investment securities at December 31, 2017 are shown below. Loan Portfolio Investment Securities December 31, (in thousands) 2017 2016 2015 Held-to-maturity: Government agencies Available-for-sale: U.S. Treasuries Government agencies Mortgage-backed securities - residential Corporate debt $ 7,984 $ 7,976 $ 5,988 $ 5,982 40,057 8,093 24,638 $ 7,990 53,444 9,096 37,241 $ 9,992 73,465 8,118 37,024 Total available-for-sale 78,770 107,771 128,599 Total investment securities $ 86,754 $ 115,747 $ 134,587 Contractual Maturity or Repricing Schedule and Weighted Average Yields of Securities As of December 31, 2017 Within One Year Carrying Amount Yield After One But Within Five Years After Five But Within Ten Years After Ten Years Carrying Amount Yield Carrying Amount Yield Carrying Amount Yield (in thousands) Held-to-maturity: Government agencies Available-for-sale: U.S. Treasuries Government agencies Mortgage-backed securities - residential Corporate debt Total available-for-sale Total investment securities $ 8,631 $ - - $ - $ 5,982 0.81% $ - - - 2,649 8,631 - - 3.79% 1.72% 1.72% - - 16,721 16,721 $ 16,721 - - - - 4.02% 4.02% 4.02% $ $ - - - - 34,576 2.63% - 5,268 39,844 $ 39,844 - 3.31% 2.72% 2.72% $ 7,984 2.10% $ - 5,481 8,093 - 13,574 $ 21,558 - 2.46% 2.97% - 2.76% 2.52% As of December 31, 2017, the Bank did not own securities of any single issuer (other than U.S. Government agencies) whose aggregate book value was in excess of 10% of the Bank’s total equity at the time of purchase. 13 Loan categories used in presentations in this report conform to the categorizations used by regulatory Call Reports as described by the instructions issued by the Federal Financial Interagency Examination Council (FFIEC). The following table shows the composition of the Bank’s loan portfolio by amount and percentage of total loans for each major loan category at the dates indicated. Loans December 31, (in thousands) 2017 % 2016 % 2015 % 2014 % 2013 % Commercial & agricultural (1) Real Estate - commercial Real estate - construction and land Real Estate - single family Real Estate - multifamily Consumer & lease financing $ 102,957 242,066 13,465 51,866 32,091 385 23.2% 54.7% 3.0% 11.7% 7.2% 0.1% $ 81,519 190,976 7,897 51,044 27,533 434 22.7% 53.1% 2.2% 14.2% 7.7% 0.1% $ 75,018 175,374 11,341 63,899 21,664 652 21.6% 50.4% 3.3% 18.4% 6.2% 0.2% $ 68,371 145,565 11,175 46,590 13,095 145 24.0% 51.1% 3.9% 16.4% 4.6% 0.1% $ 63,848 150,292 11,419 50,963 11,411 146 22.2% 52.2% 4.0% 17.7% 4.0% 0.1% 442,830 100% 359,403 100% 347,948 100% 284,941 100% 288,079 100% LESS: Allowance for Loan Losses T otal Loans, Net (5,236) $ 437,594 (4,765) $ 354,638 (4,731) $ 343,217 (5,143) $ 279,798 (5,412) $ 282,667 (1) Includes loans secured by farmland. The Bank experienced increased loan demand in 2017 and 2016. The 23% increase in net loans outstanding at December 31, 2017 compared to December 31, 2016, was primarily from the origination of commercial real estate and commercial & agricultural loans which often have larger dollar balances. At December 31, 2017, the Bank had approximately $60,075,000 in undisbursed loan commitments, of which approximately $26,511,000 related to real estate loan types. This compares with undisbursed commitments of approximately $46,109,000 at December 31, 2016, of which approximately $13,026,000 related to real estate loan types. At December 31, 2017 and 2016, there were $3,485,000 and $1,964,000, respectively, in standby letters of credit outstanding. The following table shows the maturity distribution of Real Estate Construction and Land and Commercial & Agricultural loans, including rate repricing intervals on variable rate loans, at December 31, 2017. In the following table, the term variable (generally referring to loans for which the interest rate will change immediately given a change in the underlying index) also includes loans with adjustable rates (loans for which the rate may change, but which are also limited in occurrence). Summit State Bank | Annual Report 2017 Loan Portfolio Loan categories used in presentations in this report conform to the categorizations used by regulatory Call Reports as described by the instructions issued by the Federal Financial Interagency Examination Council (FFIEC). The following table shows the composition of the Bank’s loan portfolio by amount and percentage of total loans for each major loan category at the dates indicated. (in thousands) 2017 % 2016 % December 31, 2015 % 2014 % 2013 % Loans Commercial & agricultural (1) Real Estate - commercial Real estate - construction and land Real Estate - single family Real Estate - multifamily Consumer & lease financing $ 102,957 242,066 13,465 51,866 32,091 385 23.2% 54.7% 3.0% 11.7% 7.2% 0.1% $ 81,519 190,976 7,897 51,044 27,533 434 22.7% 53.1% 2.2% 14.2% 7.7% 0.1% $ 75,018 175,374 11,341 63,899 21,664 652 21.6% 50.4% 3.3% 18.4% 6.2% 0.2% $ 68,371 145,565 11,175 46,590 13,095 145 24.0% 51.1% 3.9% 16.4% 4.6% 0.1% $ 63,848 150,292 11,419 50,963 11,411 146 22.2% 52.2% 4.0% 17.7% 4.0% 0.1% 442,830 100% 359,403 100% 347,948 100% 284,941 100% 288,079 100% LESS: Allowance for Loan Losses T otal Loans, Net (5,236) $ 437,594 (4,765) $ 354,638 (4,731) $ 343,217 (5,143) $ 279,798 (5,412) $ 282,667 (1) Includes loans secured by farmland. The Bank experienced increased loan demand in 2017 and 2016. The 23% increase in net loans outstanding at December 31, 2017 compared to December 31, 2016, was primarily from the origination of commercial real estate and commercial & agricultural loans which often have larger dollar balances. At December 31, 2017, the Bank had approximately $60,075,000 in undisbursed loan commitments, of which approximately $26,511,000 related to real estate loan types. This compares with undisbursed commitments of approximately $46,109,000 at December 31, 2016, of which approximately $13,026,000 related to real estate loan types. At December 31, 2017 and 2016, there were $3,485,000 and $1,964,000, respectively, in standby letters of credit outstanding. The following table shows the maturity distribution of Real Estate Construction and Land and Commercial & Agricultural loans, including rate repricing intervals on variable rate loans, at December 31, 2017. In the following table, the term variable (generally referring to loans for which the interest rate will change immediately given a change in the underlying index) also includes loans with adjustable rates (loans for which the rate may change, but which are also limited in occurrence). 14 Summit State Bank | Annual Report 2017 Loan Portfolio Maturity Structure at December 31, 2017 (in thousands) Within One Year After One But Within Five Years After Five Years T otal Real Estate - construction and land $ 13,028 $ 437 $ - $ 13,465 Commercial & agricultural 26,050 48,142 28,765 102,957 T otal Loans with: Fixed interest rates Floating interest rates T otal $ 39,078 $ 48,579 $ 28,765 $ 116,422 $ 11,532 $ 21,378 $ 21,865 $ 54,775 27,546 27,201 6,900 61,647 $ 39,078 $ 48,579 $ 28,765 $ 116,422 Loan Policies and Procedures The Bank’s underwriting practices include an analysis of the borrower’s management, current economic factors, the borrower’s ability to respond and adapt to economic changes outside its direct control and verification of primary and secondary sources of repayment. Risk within the loan portfolio is managed through the Bank’s loan policies and underwriting. These policies are reviewed and approved annually by the Board of Directors. • Management administers the loan policy, ensures proper loan documentation is maintained and develops the methodology for monitoring loan quality and the level of the allowance for loan losses and reports on these matters to the Board of Directors' Internal Asset Review Committee and the Board of Directors. • The Board of Directors' Loan Committee meets regularly to evaluate problem assets and the adequacy of the allowance for loan losses. The Committee also reviews and makes recommendations to the Board of Directors regarding the adequacy of the allowance for loan losses, and is responsible for ensuring that an independent third party reviews the loan portfolio at least annually. Resultant reports are sent to this Committee and to the Audit Committee. • The Board of Directors' Loan Committee is responsible for enforcement of the loan policy and has additional responsibilities which include approving loans or loan relationships for a customer that, when considered in the aggregate, exceed management's level of loan authority for that customer. • The Board of Directors' Audit Committee also engages a third party to perform a review of management's asset and liability practices to ensure compliance with the Bank's policies. • The Board of Directors retains overall responsibility for all loan functions and reviews material loan relationships. 15 Loan approvals are granted according to established policies, and lending officers are assigned approval authorities within their levels of training and experience. Interest rates reflect the risk inherent in loans and collateral is generally taken for purchase-money financing. Collateral may consist of accounts receivable, direct assignment of contracts, inventory, equipment and real estate. Unsecured loans may be made when warranted by the financial strength of the borrower. Nonperforming Assets Nonperforming assets consist of nonperforming loans and other real estate owned. Nonperforming loans are those for which the borrower fails to perform under the original terms of the obligation and consist of nonaccrual loans and accruing loans past due 90 days or more. Additionally, loans may be restructured due to deteriorating financial conditions and classified as troubled debt restructurings (TDRs). The TDR’s may or may not be the same as those listed as nonaccrual or 90 days or more past due loans. The following are the nonperforming assets for the respective periods: Nonperforming Assets December 31, (in thousands) 2017 2016 2015 2014 2013 Nonaccrual loans $ 2,730 $ 3,351 $ 1,610 $ 1,815 $ 5,614 Accruing loans past due 90 days or more Total nonperforming loans Other real estate owned Total nonperforming assets Nonperforming loans to total loans Nonperforming assets to total assets - 2,730 - 0.62% 0.45% - 3,351 - 0.93% 0.65% - - 1,610 0.46% 0.31% - 1,815 4,051 0.64% 1.28% - 5,614 4,771 1.95% 2.29% $ 2,730 $ 3,351 $ 1,610 $ 5,866 $ 10,385 Allowance for loan losses to nonperforming loans 191.79% 142.23% 293.86% 283.39% 96.40% Nonperforming loans at December 31, 2017, consisted of nine (9) loans to nine (9) customers. Nonperforming loans included commercial real estate loans totaling $1,665,000, loans collateralized by single and multifamily properties totaling $842,000 and $223,000 in commercial and agricultural loans. The Bank had no specific allowance for loan losses allocated to these loans due to the estimated value of underlying collateral. There was no other real estate owned at December 31, 2017 and 2016. The Bank may modify terms of loans to provide borrowers with relief if they are experiencing financial difficulty and may not be able to meet the original terms of the loan. These modifications classify the loan as a TDR. Loans that are classified as TDRs were $2,182,000 at December 31, 2017, of which $1,630,000 were considered performing loans and $552,000 are nonperforming loans and are included in the table above. The performing TDRs of $1,630,000 are primarily collateralized by single-family residential or commercial real estate properties. Summit State Bank | Annual Report 2017 Loan approvals are granted according to established policies, and lending officers are assigned approval authorities within their levels of training and experience. Interest rates reflect the risk inherent in loans and collateral is generally taken for purchase-money financing. Collateral may consist of accounts receivable, direct assignment of contracts, inventory, equipment and real estate. Unsecured loans may be made when warranted by the financial strength of the borrower. Nonperforming Assets Nonperforming assets consist of nonperforming loans and other real estate owned. Nonperforming loans are those for which the borrower fails to perform under the original terms of the obligation and consist of nonaccrual loans and accruing loans past due 90 days or more. Additionally, loans may be restructured due to deteriorating financial conditions and classified as troubled debt restructurings (TDRs). The TDR’s may or may not be the same as those listed as nonaccrual or 90 days or more past due loans. The following are the nonperforming assets for the respective periods: Nonperforming Assets December 31, (in thousands) 2017 2016 2015 2014 2013 Nonaccrual loans $ 2,730 $ 3,351 $ 1,610 $ 1,815 $ 5,614 Accruing loans past due 90 days or more - - - - - Total nonperforming loans Other real estate owned Total nonperforming assets Nonperforming loans to total loans Nonperforming assets to total assets 2,730 - 2,730 $ 0.62% 0.45% 3,351 - 3,351 $ 1,610 - 1,610 $ 1,815 4,051 5,866 $ 5,614 4,771 10,385 $ 0.93% 0.65% 0.46% 0.31% 0.64% 1.28% 1.95% 2.29% Allowance for loan losses to nonperforming loans 191.79% 142.23% 293.86% 283.39% 96.40% Nonperforming loans at December 31, 2017, consisted of nine (9) loans to nine (9) customers. Nonperforming loans included commercial real estate loans totaling $1,665,000, loans collateralized by single and multifamily properties totaling $842,000 and $223,000 in commercial and agricultural loans. The Bank had no specific allowance for loan losses allocated to these loans due to the estimated value of underlying collateral. There was no other real estate owned at December 31, 2017 and 2016. The Bank may modify terms of loans to provide borrowers with relief if they are experiencing financial difficulty and may not be able to meet the original terms of the loan. These modifications classify the loan as a TDR. Loans that are classified as TDRs were $2,182,000 at December 31, 2017, of which $1,630,000 were considered performing loans and $552,000 are nonperforming loans and are included in the table above. The performing TDRs of $1,630,000 are primarily collateralized by single-family residential or commercial real estate properties. 16 Summit State Bank | Annual Report 2017 Allowance for Loan Losses The Bank maintains the allowance for loan losses to provide for inherent losses in the loan portfolio. Additions to the allowance for loan losses are established through a provision charged to expense. All loans which are judged to be uncollectible are charged against the allowance while any recoveries are credited to the allowance. The Bank’s policy is to charge off any known losses at the time of determination. Any unsecured loan more than 90 days delinquent in payment of principal or interest and not in the process of collection is charged off in total. Secured loans are evaluated on a case-by-case basis to determine the ultimate loss potential to us subsequent to the liquidation of collateral. In those cases where we believe we are inadequately protected, a charge- off will be made to reduce the loan balance to a level equal to the liquidation value of the collateral. The Bank’s loan policy provides procedures designed to evaluate and assess the credit risk factors associated with the loan portfolio, to enable management to assess such credit risk factors prior to granting new loans and to evaluate the sufficiency of the allowance for loan losses. Management conducts an assessment of the allowance for loan losses on a monthly basis and undertakes a more critical evaluation quarterly. At the time of the quarterly review, the Board of Directors evaluates and approves the adequacy of the allowance. The quarterly evaluation includes an assessment of the following factors: any external loan review and regulatory examination, estimated probable loss exposure on each pool of loans, concentrations of credit, value of collateral, the level of delinquent and non-accrual loans, trends in loan volume, effects of any changes in lending policies and procedures, changes in lending personnel, current economic conditions at the local, state and national level and a migration analysis of historical losses and recoveries for the prior twelve quarters. 17 Summit State Bank | Annual Report 2017 The following table sets forth an analysis of the allowance for loan losses and provision for loan losses for the periods indicated. Summary of Activity in the Allowance for Loan Losses (Dollars in thousands) Year Ended December 31 Balance at beginning of period $ 4,765 $ 4,731 $ 5,143 $ 5,412 $ 5,749 2017 2016 2015 2014 2013 Charge-offs: Commercial & agricultural Real estate - commercial Real estate - construction and land Real Estate - single family Real Estate - multifamily Consumer & lease financing Total loans charged-off Recoveries: Commercial & agricultural Real estate - commercial Real estate - construction and land Real Estate - single family Real Estate - multifamily Consumer & lease financing Total recoveries Net loans charged-off (recovered) Provision for (reversal of) loan losses Allowance for loan losses - end of period 79 - - - - - 79 4 1 - 16 - 9 30 49 50 20 - - - - 70 76 6 - 14 - 8 104 (34) - - - - - 2 2 222 - - 135 - 33 390 (388) - 76 - - - 5 81 207 977 - 15 - 13 1,212 (1,131) 49 835 - - - - 884 459 - - 26 - 12 497 387 520 5,236 $ - 4,765 $ (800) 4,731 $ (1,400) 5,143 $ 50 5,412 $ Loans: Average loans outstanding during period, net of unearned income Total loans at end of period, net of unearned income Ratios: Net loans charged-off (recovered) to average net loans Net loans charged-off (recovered) to total loans Allowance for loan losses to average net loans Allowance for loan losses to total loans Net loans charged-off (recovered) to beginning allowance for loan losses Net loans charged-off (recovered) to provision for loan losses (1) $ $ 381,289 442,830 $ $ 363,545 359,403 $ $ 314,806 347,948 $ $ 289,948 284,941 $ $ 279,326 288,079 0.01% 0.01% 1.37% 1.18% 1.03% 9.42% (0.01)% (0.01)% 1.31% 1.33% (0.12)% (0.11)% 1.50% 1.36% (0.39)% (0.40)% 1.77% 1.80% (0.72)% (7.54)% (20.90)% 0.14% 0.13% 1.94% 1.88% 6.73% NM NM NM 774.00% (1) Not meaningful 18 Summit State Bank | Annual Report 2017 The following table summarizes the allocation of the allowance for loan losses by loan category and the amount of loans in each category as a percentage of total loans in each category as of the end of each year presented. The allocated and unallocated portions of the allowance for loan losses are available to the entire portfolio. Deposits Allocation of Allowance for Loan Losses Year Ended December 31, 2017 2016 2015 2014 2013 The following table sets forth total deposits by type. (in thousands) Commercial & agricultural Real estate - commercial Real estate - construction and land Real estate - single family units Real estate - multifamily Consumer & lease financing Unallocated Amount of Category Loans to Total Loans Allowance Allocation 23.2% $ 744 1,764 54.7% 266 3.0% 577 11.7% 330 7.2% 19 0.1% 1,065 Amount of Category Loans to Total Loans 22.7% 53.1% 2.2% 14.2% 7.7% 0.1% Allowance Allocation $ 1,008 940 57 237 43 6 2,440 Amount of Category Loans to Total Loans 21.6% 50.4% 3.3% 18.4% 6.2% 0.2% Allowance Allocation $ 682 2,697 443 595 319 14 486 Allowance Allocation $ 534 1,861 216 141 13 10 2,368 Amount of Category Loans to Total Loans 24.0% 51.1% 3.9% 16.4% 4.6% 0.1% Allowance Allocation $ 562 2,955 379 214 272 15 1,015 Amount of Category Loans to Total Loans 22.2% 52.2% 4.0% 17.7% 4.0% 0.1% Total $ 5,236 100% $ 4,765 100% $ 4,731 100% $ 5,143 100% $ 5,412 100% The changes from year to year for the allocation by loan category are attributable to the growth of the category and management’s assessment of the quality of the individual loans within the category. Additionally, an other qualitative factors allocation is applied to each category of loans and represents various qualitative factors in the determination of the adequacy of the allowance for loan losses and includes the size of individual credits, concentrations and general economic conditions. Management considers these qualitative factors in their evaluation of the adequacy of the allowance for loan losses. The changes in the allowance allocations for the various loan categories at December 31, 2017 compared to December 31, 2016 were primarily attributable to the general increase in total loans in the categories and the level of the internally classified loans in each category. An unallocated allowance can arise from fluctuations in the amount of classified (“credit grades”) and specific allocations to nonperforming loans between periods. Management and the Board of Directors reviews the amount of and reasons for unallocated allowances and whether unallocated allowances have arisen due to periodic fluctuations in the credit grades or have arisen due to changes in qualitative factors or changes in lending strategies. If an unallocated allowance has arisen from other than periodic fluctuations in credit grades or other than potential temporary factors, then it may be determined that a portion of the allowance for loan losses should be reversed. In addition to the allowance for loan losses, the Bank maintains an allowance for losses for undisbursed loan commitments, which is reported in other liabilities on the consolidated balance sheets. This allowance was $160,000 at December 31, 2017 and $77,000 at December 31, 2016. 19 Deposits are the Bank’s primary source of funds. The Bank employs business development officers and branch office personnel to solicit commercial demand deposits. The Bank focuses on obtaining deposits from the communities it serves but occasionally may accept deposits from outside its market area or receive brokered deposits. Deposits by Type Year Ended December 31, 2017 2016 Balance % of Total Balance % of Total Demand Accounts Savings and Money Market Time Deposits Total Deposits $ 256,603 109,666 167,244 $ 533,513 48.1% 20.6% 31.3% $ 174,546 80,450 129,255 $ 384,251 45.5% 20.9% 33.6% The Bank’s strategy is to increase its funding from local deposits and to lower its dependence on institutional funding such as brokered time deposits, State of California time deposits and FHLB borrowings. Strategies employed to increase local deposits include a nonprofit business account that provides a donation award for balances maintained and promoting rates of 18-month to two- year term time deposits. At the 2017-year end, the Bank received a large deposit of approximately $55 million which was held on deposit at the Federal Reserve Bank. Approximately $20 million of this deposit was retained after year end. The Bank offers local depositors with deposits in excess of $250,000 and who are concerned with FDIC insurance limits, a deposit placement service through a program called CDARS and ICS. Through this program amounts in excess of $250,000 can be placed in certificates of deposit or demand accounts at other institutions and the Bank receives reciprocal deposits from other institutions within the network. At December 31, 2017 and 2016, there were $16,150,000 and $22,387,000 in CDARS time deposits and $25,698,000 and $23,415,000 in ICS demand deposits, respectively. Although the originating depositors are local customers of the Bank, this exchange of deposits for the purposes of FFIEC Call Reports, are classified as brokered deposits. In addition to these deposits, the Bank had $28,059,000 and $20,052,000 at December 31, 2017 and 2016 in wholesale brokered deposits. Certain time deposits are received through a program run by the Treasurer of the State of California to place public deposits with community banks. At December 31, 2017 and 2016, the State of California had $48,500,000 in time deposits with the Bank with maturities of up to six months and collateralized by investment securities or mortgage loans. Summit State Bank | Annual Report 2017 Deposits Deposits are the Bank’s primary source of funds. The Bank employs business development officers and branch office personnel to solicit commercial demand deposits. The Bank focuses on obtaining deposits from the communities it serves but occasionally may accept deposits from outside its market area or receive brokered deposits. The following table sets forth total deposits by type. Deposits by Type Year Ended December 31, 2017 2016 Balance % of Total Balance % of Total Demand Accounts Savings and Money Market Time Deposits Total Deposits $ 256,603 109,666 167,244 $ 533,513 48.1% 20.6% 31.3% $ 174,546 80,450 129,255 $ 384,251 45.5% 20.9% 33.6% The Bank’s strategy is to increase its funding from local deposits and to lower its dependence on institutional funding such as brokered time deposits, State of California time deposits and FHLB borrowings. Strategies employed to increase local deposits include a nonprofit business account that provides a donation award for balances maintained and promoting rates of 18-month to two- year term time deposits. At the 2017-year end, the Bank received a large deposit of approximately $55 million which was held on deposit at the Federal Reserve Bank. Approximately $20 million of this deposit was retained after year end. The Bank offers local depositors with deposits in excess of $250,000 and who are concerned with FDIC insurance limits, a deposit placement service through a program called CDARS and ICS. Through this program amounts in excess of $250,000 can be placed in certificates of deposit or demand accounts at other institutions and the Bank receives reciprocal deposits from other institutions within the network. At December 31, 2017 and 2016, there were $16,150,000 and $22,387,000 in CDARS time deposits and $25,698,000 and $23,415,000 in ICS demand deposits, respectively. Although the originating depositors are local customers of the Bank, this exchange of deposits for the purposes of FFIEC Call Reports, are classified as brokered deposits. In addition to these deposits, the Bank had $28,059,000 and $20,052,000 at December 31, 2017 and 2016 in wholesale brokered deposits. Certain time deposits are received through a program run by the Treasurer of the State of California to place public deposits with community banks. At December 31, 2017 and 2016, the State of California had $48,500,000 in time deposits with the Bank with maturities of up to six months and collateralized by investment securities or mortgage loans. 20 Summit State Bank | Annual Report 2017 The following table sets forth the average balances by deposit category and the interest cost for the periods indicated. Average Deposit Balances and Rates Paid Bank’s management to make estimates and judgments that affect the reported amounts of assets and liabilities, income and expense, and the related disclosures of contingent assets and liabilities at the date of these financial statements. See “Financial Statements and Supplementary Data” “Notes to Consolidated Financial Statements - Summary of Significant Accounting Policies” Year Ended December 31, QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 2017 2016 2015 (in thousands) Average Balance Average Rate Average Balance Average Rate Average Balance Average Rate Non interest-bearing demand deposits $ 116,134 Interest-bearing demand deposits Savings and money market Time certificates under $100,000 Time certificates $100,000 or over 63,217 85,057 49,035 106,627 $ 107,631 58,098 82,523 41,197 101,552 0.13% 0.20% 0.94% 0.87% $ 84,405 53,883 90,315 36,031 108,143 0.11% 0.10% 0.51% 0.48% Total deposits $ 420,070 0.39% $ 391,001 0.22% $ 372,777 0.10% 0.15% 0.28% 0.28% 0.16% The following table sets forth the maturities of time certificates of deposit of $100,000 or more outstanding at December 31, 2017 and 2016. Maturity of Time Deposits of $100,000 or More (in thousands) December 31, 2017 December 31, 2016 Time deposits of $100,000 or more maturing in: Three months or less Over three through six months Over six to twelve months Over twelve months Total time deposits of $100,000 or more $ $ 66,831 7,709 30,813 15,755 121,108 $ $ 56,031 13,116 14,537 11,584 95,268 Borrowings Borrowings were $15,000,000 and $68,900,000 at December 31, 2017 and 2016, respectively. Borrowings consisted of FHLB advances. At December 31, 2017, borrowings of $15,000,000 were due within one year. Management utilizes FHLB advances when the terms are deemed advantageous compared to raising time deposits and to manage overall liquidity. The decrease in FHLB advances were the result of additional deposits. Critical Accounting Policies and Estimates The discussion and analysis of the Bank’s results of operations and financial condition are based upon financial statements which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires the 21 The Bank monitors earning asset and deposit levels, developments and trends in interest rates, liquidity, capital adequacy and marketplace opportunities. Risks associated with interest rate changes and market risk are managed through the Bank’s Asset Liability and Investment Policies. These policies are reviewed and approved annually by the Board of Directors, and oversight is provided by the Asset Liability and Investment Committee of the Board. Management responds to all of these to protect and possibly enhance net interest income, while managing risks within acceptable levels as set forth in the Bank’s policies. In addition, alternative business plans and transactions are contemplated for their potential impact. This process is known as asset/liability management and is carried out by changing the maturities and relative proportions of the various types of loans, investments, deposits and borrowings in the ways described above. The tool most commonly used to manage and analyze the interest rate sensitivity of a bank is known as a computer simulation model. To quantify the extent of risks in both the Bank’s current position and in transactions it might make in the future, the Bank uses a model to simulate the impact of different interest rate scenarios on net interest income. The hypothetical impact of both sudden (up to an immediate change in interest rates of +/- 4.00%) and smaller incremental interest rate changes are modeled at least quarterly, representing the primary means the Bank uses for interest rate risk management decisions. The Bank is normally liability sensitive during a one-year period meaning that during one year, more liabilities will reprice than loans. Liability sensitive banks would expect an increase in the net interest margin if interest rates decline and the net interest margin to decline when rates increase. However various factors influence the change in the Bank’s margin when general market interest rates change. These factors include, but are not limited to, the growth and mix of new assets, deposit liabilities and borrowings, the extension or contraction of maturities of new and renewed assets and liabilities, the particular shape of the general economic yield curve, and the general influence on pricing by competition in the local market for loans and deposits. Additionally, when economic rates change, there is an immediate impact from loans that are tied to a daily “prime lending or other index rate.” The repricing of liabilities to offset this change requires time for deposits to mature and renew. Based strictly on maturing time deposits and borrowings, and without the other factors listed above, it normally will take three months for the Bank to reprice liabilities to offset a prime rate change. The Bank received a large deposit at the end of 2017 which made the Bank asset sensitive at December 31, 2017. At December 31, 2017, the computer simulation model for a +2.00% interest rate shock, results in the Bank’s net interest income for a twelve-month period to increase by 1.3% or $257,000. A negative 2.00% interest rate shock, results in the Bank’s net interest income for a twelve-month period to decline by 2.6% or $527,000. Elimination of the large deposit received at year end 2017, which was withdrawn in early 2018, results in the simulation model for a +2.00% Summit State Bank | Annual Report 2017 Bank’s management to make estimates and judgments that affect the reported amounts of assets and liabilities, income and expense, and the related disclosures of contingent assets and liabilities at the date of these financial statements. See “Financial Statements and Supplementary Data” “Notes to Consolidated Financial Statements - Summary of Significant Accounting Policies” QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Bank monitors earning asset and deposit levels, developments and trends in interest rates, liquidity, capital adequacy and marketplace opportunities. Risks associated with interest rate changes and market risk are managed through the Bank’s Asset Liability and Investment Policies. These policies are reviewed and approved annually by the Board of Directors, and oversight is provided by the Asset Liability and Investment Committee of the Board. Management responds to all of these to protect and possibly enhance net interest income, while managing risks within acceptable levels as set forth in the Bank’s policies. In addition, alternative business plans and transactions are contemplated for their potential impact. This process is known as asset/liability management and is carried out by changing the maturities and relative proportions of the various types of loans, investments, deposits and borrowings in the ways described above. The tool most commonly used to manage and analyze the interest rate sensitivity of a bank is known as a computer simulation model. To quantify the extent of risks in both the Bank’s current position and in transactions it might make in the future, the Bank uses a model to simulate the impact of different interest rate scenarios on net interest income. The hypothetical impact of both sudden (up to an immediate change in interest rates of +/- 4.00%) and smaller incremental interest rate changes are modeled at least quarterly, representing the primary means the Bank uses for interest rate risk management decisions. The Bank is normally liability sensitive during a one-year period meaning that during one year, more liabilities will reprice than loans. Liability sensitive banks would expect an increase in the net interest margin if interest rates decline and the net interest margin to decline when rates increase. However various factors influence the change in the Bank’s margin when general market interest rates change. These factors include, but are not limited to, the growth and mix of new assets, deposit liabilities and borrowings, the extension or contraction of maturities of new and renewed assets and liabilities, the particular shape of the general economic yield curve, and the general influence on pricing by competition in the local market for loans and deposits. Additionally, when economic rates change, there is an immediate impact from loans that are tied to a daily “prime lending or other index rate.” The repricing of liabilities to offset this change requires time for deposits to mature and renew. Based strictly on maturing time deposits and borrowings, and without the other factors listed above, it normally will take three months for the Bank to reprice liabilities to offset a prime rate change. The Bank received a large deposit at the end of 2017 which made the Bank asset sensitive at December 31, 2017. At December 31, 2017, the computer simulation model for a +2.00% interest rate shock, results in the Bank’s net interest income for a twelve-month period to increase by 1.3% or $257,000. A negative 2.00% interest rate shock, results in the Bank’s net interest income for a twelve-month period to decline by 2.6% or $527,000. Elimination of the large deposit received at year end 2017, which was withdrawn in early 2018, results in the simulation model for a +2.00% 22 Summit State Bank | Annual Report 2017 interest rate shock of a decline in net interest income for a twelve-month period by 3.6% or $743,000. Computer simulation models use information from the Bank’s loan and deposit system at a static point in time and bases the repricing of assets and liabilities on contractual terms, and certain assumptions as to movements of various rate indexes and management assumptions regarding when to reprice certain portfolios not linked to an index. The actual results experienced from interest rate changes can vary from the results of the simulation. T he Bank monitors a ratio called the economic value of equity which is the theoretical projected change in fair values of financial assets (loans, investment securities, deposits and borrowings) that may impact equity for a given change in interest rates. Major assumptions used in determining the fair values include maturities, repricing periods, and decay rates of non-maturity deposits. As the calculation is highly dependent on assumptions, as well as the change in the shape of the yield curve being modeled, it is not considered to be an exact calculation, but is used as an interest rate risk monitoring tool. The computer simulation model for a +2.00% non-parallel interest rate shock results in a 4.7% increase in the economic value of equity. A negative 2.00% non-parallel interest rate shock results in a 10.4% decline in the economic value of equity. When preparing its modeling, the Bank makes significant assumptions about the lag in the rate of change and impacts of optionality in various asset and liability categories. The Bank bases its assumptions on past experience and comparisons with other banks and tests the validity of its assumptions by reviewing actual results with past projected expectations annually. As the impact of changing interest rates depends on assumptions, actual experience can materially differ from projections. The purpose of the model is to forecast the likely impact in order for management to monitor exposures to interest rate risk and make adjustments to the balance sheet if needed. Liquidity and Capital Resources Maintenance of adequate liquidity requires that sufficient resources be available at all times to meet cash flow requirements of the Bank. Liquidity in a banking institution is required primarily to provide for deposit withdrawals and the credit needs of customers and to take advantage of lending and investment opportunities as they arise. A bank may achieve desired liquidity from both assets and liabilities. Cash and deposits held in other banks, federal funds sold, other short- term investments, maturing loans and investments, payments of principal and interest on loans and investments, and potential loan sales are sources of asset liquidity. Deposit growth and access to credit lines established with correspondent banks, primarily with the FHLB, Federal Reserve and access to brokered certificates of deposits are sources of liability liquidity. The Bank reviews its liquidity position on a regular basis based upon its current position and expected trends of loans and deposits. Management believes that the Bank maintains adequate sources of liquidity to meet its liquidity needs. The Bank’s liquid assets, defined as cash, deposits with banks, Federal funds sold and unpledged investment securities, totaled $107,035,000 and $112,987,000 at December 31, 2017 and December 31, 2016, respectively, and constituted 18% and 22%, respectively, of total assets on those dates. At December 31, 2017, the Bank had $161,753,000 in borrowing lines of credit from the FHLB and correspondent banks with $15,000,000 in outstanding advances from the FHLB. At December 23 Summit State Bank | Annual Report 2017 31, 2016, these lines of credit available were $141,550,000 with $68,900,000 in FHLB advances outstanding. The primary sources of cash during 2015, 2016 and 2017 were from cash generated from operating activities, sales, calls and maturities of investment securities, increases in deposit balances and changes in FHLB advances. Primary uses of cash were for loan originations, investment securities purchases and in 2017, for repayment of FHLB advances. Cash was primarily provided by $46.3 million in calls, maturities and sales of investment securities, $111.2 million in net change of demand, savings and money market deposits, $38 million in net change in certificates of deposit, $5.1 million from the sale of loans and operating activities of $4.2 million in 2017. Cash was used in 2017 primarily to purchase $17 million in investment securities, fund a $86.9 million net change in loans and fund a net change in FHLB advances of $53.9 million. Cash was primarily provided by $86.6 million in calls and maturities of investment securities, $13.5 million increase in demand, savings and money market deposits, $24.1 million in new FHLB advances and operating activities of $5.2 million in 2016. Cash was used in 2016 primarily to purchase $71 million in investment securities, fund a $10.8 million net change in loans, fund a net change of certificates of deposit of $26.5 million and repay $11 million in FHLB advances. Cash was primarily provided by $15.4 million in calls and maturities of investment securities, $27.9 million in net change of demand, savings and money market deposits, $14 million in net change in certificates of deposit, $35.8 million in new FHLB advances and operating activities of $4.5 million in 2015. Cash was used in 2015 primarily to purchase $19.5 million in investment securities, fund a $59.1 million net change in loans, repay $15 million in FHLB advances and $13.8 million to retire preferred stock. For additional information, please see the “Consolidated Statements of Cash Flows”. The Board of Directors recognizes that a strong capital position is vital to growth, continued profitability, and depositor and investor confidence. The policy of the Board of Directors is to maintain sufficient capital at not less than the “well-capitalized” thresholds established by banking regulators. However, in the current economic and regulatory environment the Bank has maintained capital ratios in excess of regulatory requirements. Shareholders’ equity also includes the Bank’s accumulated other comprehensive income or (loss), net of taxes of $(597,000) at December 31, 2017 and $(885,000) at December 31, 2016. Other comprehensive income (loss) reflects the fair value adjustment, net of tax, of investment securities classified as available-for-sale. This will fluctuate based on the amount of securities classified as available-for-sale and changes in market interest rates. Total shareholders’ equity was $59,677,000 at December 31, 2017 and $58,622,000 at December 31, 2016. Federal regulations establish guidelines for calculating “risk-adjusted” capital ratios and minimum ratio requirements. Under these regulations, banks are required to maintain a total capital ratio of 8.0%, common equity Tier 1 capital ratio of 4.5%, and Tier 1 risk-based capital (primarily shareholders’ equity) of at least 6.0% of risk-weighted assets. The Bank had a total capital ratio of 24 Summit State Bank | Annual Report 2017 12.7%, common equity Tier 1 capital and Tier 1 risk-based capital ratios of 11.6% at December 31, 2017 and was “well-capitalized” under the regulatory guidelines. In addition, regulators have adopted a minimum leverage ratio standard for Tier 1 capital to average assets. The minimum ratio for top-rated institutions may be as low as 4%. However, regulatory agencies have stated that most institutions should maintain ratios at least 1 to 2 percentage points above the 4% minimum. As of December 31, 2017, the Bank’s leverage ratio was 11.1%. Capital levels for the Bank remain above established regulatory capital requirements. The Bank excludes other comprehensive income for regulatory capital computations. Quarterly dividends are paid out of retained earnings. The Bank paid $0.46 or $2,751,000 in dividends on common stock during 2017 (adjusted for the 2017 five-for-four stock split). The California Financial Code restricts total dividend payment of any bank in any calendar year without permission of the California Department of Business Oversight, to the lesser of (1) the bank’s retained earnings or (2) the bank’s net income for its last three fiscal years, less distributions made to shareholders during the same three-year period. The Bank is not subject to this restriction based on its current dividend levels as of December 31, 2017. Although the Bank’s regulatory capital ratios are in excess of requirements and notwithstanding the requirements of the California Financial Code, the Board of Directors reviews and declares dividends on a quarterly basis and there is no assurance that future dividends will be declared. Impact of Inflation The primary impact of inflation on the Bank is its effect on interest rates. The Bank’s primary source of income is net interest income, which is affected by changes in interest rates. The Bank attempts to limit the impact of inflation on its net interest margin through management of rate- sensitive assets and liabilities and analyses of interest rate sensitivity. The effect of inflation on premises and equipment as well as on non-interest expenses has not been significant for the periods presented. 25 Summit State Bank | Annual Report 2017 SUMMIT STATE BANK AND SUBSIDIARY CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2017 AND 2016 AND FOR THE YEARS ENDED DECEMBER 31, 2017, 2016 and 2015 AND REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM 26 Summit State Bank | Annual Report 2017 Report of Independent Registered Public Accounting Firm To the Shareholders and the Board of Directors of Summit State Bank and Subsidiary Opinion on the Financial Statements We have audited the accompanying consolidated balance sheets of Summit State Bank and Subsidiary (the “Company”) as of December 31, 2017 and 2016, the related consolidated statements of income, comprehensive income, changes in shareholders’ equity, and cash flows for each of the three years in the period ended December 31, 2017, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the consolidated financial position of the Company as of December 31, 2017 and 2016, and the consolidated results of its operations and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America. Basis for Opinion These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures to respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion. /s/ Moss Adams LLP Sacramento, California March 16, 2018 We have served as the Company’s auditor since 2012. 27 Summit State Bank | Annual Report 2017 SUMMIT STATE BANK AND SUBSIDIARY CONSOLIDATED BALANCE SHEETS (In thousands except share data) ASSETS Cash and due from banks Federal funds sold Total cash and cash equivalents Time deposits with banks Investment securities: Held-to-maturity, at amortized cost Available-for-sale (at fair value; amortized cost of $79,617 in 2017 and $109,297 in 2016) Total investment securities Loans, less allowance for loan losses of $5,236 in 2017 and $4,765 in 2016 Bank premises and equipment, net Investment in Federal Home Loan Bank stock, at cost Goodwill Other Real Estate Owned Accrued interest receivable and other assets December 31, 2017 December 31, 2016 $ 68,814 2,000 70,814 $ 24,231 2,000 26,231 - 248 7,984 78,770 86,754 437,594 5,279 3,085 4,119 - 3,219 7,976 107,771 115,747 354,638 5,413 3,085 4,119 - 4,223 Total assets $ 610,864 $ 513,704 LIABILITIES AND SHAREHOLDERS' EQUITY Deposits: Demand - non interest-bearing Demand - interest-bearing Savings Money market Time deposits that meet or exceed the FDIC insurance limit Other time deposits Total deposits Federal Home Loan Bank advances Accrued interest payable and other liabilities Total liabilities Commitments and contingencies (Note 10) Shareholders' equity $ 190,861 65,742 30,102 79,564 68,927 98,317 533,513 $ 112,540 62,006 26,584 53,866 52,594 76,661 384,251 15,000 2,674 551,187 68,900 1,931 455,082 Preferred stock, no par value; 20,000,000 shares authorized; no shares issued and outstanding Common stock, no par value; shares authorized - 30,000,000 shares; issued and outstanding 6,041,475 in 2017 and 6,019,850 in 2016 Retained earnings Accumulated other comprehensive loss - 36,847 23,427 (597) - 36,726 22,781 (885) Total shareholders' equity Total liabilities and shareholders' equity 59,677 610,864 $ $ 58,622 513,704 The accompanying notes are an integral part of these audited consolidated financial statements. 28 SUMMIT STATE BANK AND SUBSIDIARY CO NSO LIDATED STATEMENTS O F CO MPREHENSIVE INCO ME (In thousands) Ye ar Ende d Dece mbe r 31, 2017 2016 2015 Net income $ 3,292 $ 4,967 $ 6,030 Change in securities available-for-sale: Unrealized holding gains (losses) on available-for-sale securites arising during the period Reclassification adjustment for gains realized in net income 751 (1,697) (200) on available-for-sale securities (72) (692) (157) Net unrealized gains (losses), before provision for income tax Provision for income tax benefit (expense) Total other comprehensive income (loss), net of tax Comprehensive income 679 (286) 393 (2,389) 1,003 (1,386) (357) 150 (207) $ 3,685 $ 3,581 $ 5,823 The accompanying notes are an integral part of these audited consolidated financial statements. Summit State Bank | Annual Report 2017 SUMMIT STATE BANK AND SUBSIDIARY CO NSO LIDATED STATEMENTS O F INCO ME (In thousands except earnings per share data) Interest income: Interest and fees on loans Interest on deposits with banks Interest on federal funds sold Interest on investment securities Dividends on FHLB stock T otal interest income Interest expense: Deposits Federal Home Loan Bank advances T otal interest expense Net interest income before provision for (recovery of) loan losses Provision for (recovery of) loan losses Net interest income after provision for (recovery of) loan losses Non-interest income: Service charges on deposit accounts Rental income Net gain on loan sales Net securities gain Net gain on other real estate owned Other income T otal non-interest income Non-interest expense: Salaries and employee benefits Occupancy and equipment Other expenses T otal non-interest expense Income before provision for income taxes Provision for income taxes Net income Less: preferred dividends Year Ended December 31, 2017 2016 2015 $ 17,176 162 17 3,126 232 20,713 $ 16,549 82 7 2,912 357 19,907 $ 14,523 55 3 3,665 327 18,573 1,639 502 2,141 18,572 520 18,052 695 574 351 72 - 23 1,715 7,788 1,503 4,554 13,845 5,922 2,630 855 379 1,234 18,673 - 18,673 748 559 - 692 - 22 2,021 6,562 1,229 4,454 12,245 8,449 3,482 757 179 936 17,637 (800) 18,437 702 532 - 157 1,125 129 2,645 5,646 1,313 3,864 10,823 10,259 4,229 $ 3,292 $ 4,967 $ 6,030 - - 92 Net income available for common shareholders $ 3,292 $ 4,967 $ 5,938 Basic earnings per common share Diluted earnings per common share $ $ 0.55 0.54 $ $ 0.83 0.82 $ $ 0.99 0.98 Basic weighted average shares of common stock outstanding Diluted weighted average shares of common stock outstanding 6,031 6,059 6,005 6,036 5,979 6,048 T he accompanying notes are an integral part of these audited consolidated financial statements. 29                   Summit State Bank | Annual Report 2017 SUMMIT STATE BANK AND SUBSIDIARY CO NSO LIDATED STATEMENTS O F CO MPREHENSIVE INCO ME (In thousands) Ye ar Ende d Dece mbe r 31, 2017 2016 2015 Net income $ 3,292 $ 4,967 $ 6,030 Change in securities available-for-sale: Unrealized holding gains (losses) on available-for-sale securites arising during the period Reclassification adjustment for gains realized in net income 751 (1,697) (200) on available-for-sale securities (72) (692) (157) Net unrealized gains (losses), before provision for income tax Provision for income tax benefit (expense) 679 (286) (2,389) 1,003 (357) 150 Total other comprehensive income (loss), net of tax Comprehensive income $ 393 3,685 $ (1,386) 3,581 $ (207) 5,823 The accompanying notes are an integral part of these audited consolidated financial statements. 30             Summit State Bank | Annual Report 2017 SUMMIT STATE BANK AND SUBSIDIARY C O NSO LIDATED STATEMENTS O F CHANGES IN SHAREHO LDERS' EQ UITY (In thousands e xce pt pe r share data) Balance, January 1, 2015 $ 13,666 5,973 $ 36,646 $ 16,560 $ 708 $ 67,580 Prefe rre d Stock Share s Amount C ommon Stock Retaine d Earnings Accumulate d O the r C ompre hensive Income (Loss) Total Shareholde rs' Equity (In thousands) 2017 2016 2015 Cash flows from operating activities: Net income $ 3,292 $ 4,967 $ 6,030 Net income Other comprehensive loss Stock-based compensation expense Retirement of preferred stock, net of issuance costs (13,666) Preferred stock dividends Exercise of stock options Cash dividends - $0.35 per share Balance, December 31, 2015 Net income Other comprehensive loss Stock-based compensation expense Exercise of stock options Cash dividends - $0.38 per share 24 34 6 6,030 (84) (92) (2,294) (207) 6,030 (207) 24 (13,750) (92) 34 (2,294) - 5,979 36,704 20,120 501 57,325 41 21 1 4,967 (2,306) (1,386) 4,967 (1,386) 21 1 (2,306) Balance, December 31, 2016 - 6,020 36,726 22,781 (885) 58,622 Net income Other comprehensive income T ax effect of reclass from accumulated other comprehensive income Exercise of stock options Cash dividends - $0.46 per share 21 121 3,292 105 (2,751) 393 (105) 3,292 393 - 121 (2,751) Balance, December 31, 2017 $ - 6,041 $ 36,847 $ 23,427 $ (597) $ 59,677 The accompanying notes are an integral part of these audited consolidated financial statements. 31 SUMMIT STATE BANK AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS Year Ended December 31, Adjustments to reconcile net income to net cash from operating activities: Depreciation and amortization Securities amortization and accretion, net Net change in deferred loan fees Provision for (reversal of) loan losses Net gain on other real estate owned Net securities gains Net gain on loan sales Deferred tax impairment due to tax rate change Net change in accrued interest receivable and other assets Net change in accrued interest payable and other liabilities Stock-based compensation expense Tax benefit from stock-based compensation Net cash from operating activities Cash flows from investing activities: Net change in time deposits with banks Purchases of held-to-maturity investment Purchases of available-for-sale investment securities securities Proceeds from sales of available-for-sale investment securities Proceeds from calls of held-to-maturity investment securities Proceeds from calls and maturities of available-for-sale investment securities Purchase of Federal Home Loan Bank stock Net change in loans Purchases of bank premises and equipment, net Proceeds from sales of loans Proceeds on sale of other real estate owned 339 387 (1,336) 520 - (72) (351) 292 531 743 - (103) 4,242 248 - - - - 36,721 9,605 (86,886) (205) 5,097 312 598 (615) (692) - - - - 1,696 (1,063) 21 - 5,224 496 (7,971) 878 6,000 80,673 (384) (10,806) (227) - - 390 599 (784) (800) (1,125) (157) - - (816) 1,158 24 - 4,519 496 (986) 3,459 5,000 10,363 (59,160) (85) - - 2,501 (16,971) (63,035) (18,522) Net cash from (used in) investing activities (52,391) 5,624 (56,934) (Continued)             Summit State Bank | Annual Report 2017 SUMMIT STATE BANK AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS Year Ended December 31, (In thousands) 2017 2016 2015 Cash flows from operating activities: Net income Adjustments to reconcile net income to net $ 3,292 $ 4,967 $ 6,030 cash from operating activities: Depreciation and amortization Securities amortization and accretion, net Net change in deferred loan fees Provision for (reversal of) loan losses Net gain on other real estate owned Net securities gains Net gain on loan sales Deferred tax impairment due to tax rate change Net change in accrued interest receivable and other assets Net change in accrued interest payable and other liabilities Stock-based compensation expense Tax benefit from stock-based compensation Net cash from operating activities Cash flows from investing activities: Net change in time deposits with banks Purchases of held-to-maturity investment securities Purchases of available-for-sale investment securities Proceeds from sales of available-for-sale investment securities Proceeds from calls of held-to-maturity investment securities Proceeds from calls and maturities of available-for-sale investment securities Purchase of Federal Home Loan Bank stock Net change in loans Purchases of bank premises and equipment, net Proceeds from sales of loans Proceeds on sale of other real estate owned Net cash from (used in) investing activities (Continued) 339 387 (1,336) 520 - (72) (351) 292 531 743 - (103) 4,242 248 - 312 598 (615) - - (692) - - 1,696 (1,063) 21 - 5,224 496 (7,971) 390 599 (784) (800) (1,125) (157) - - (816) 1,158 24 - 4,519 496 (986) (16,971) (63,035) (18,522) 36,721 - 9,605 - (86,886) (205) 5,097 - (52,391) 878 6,000 80,673 (384) (10,806) (227) - - 3,459 5,000 10,363 - (59,160) (85) - 2,501 5,624 (56,934) 32             Summit State Bank | Annual Report 2017 SUMMIT STATE BANK AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS Year Ended December 31, (In thousands) 2017 2016 2015 Cash flows from financing activities: Net change in demand, savings and money market deposits Net change in certificates of deposit Net change in short term Federal Home Loan Bank advances Issuance of long term Federal Home Loan Bank advances Repayment of long term Federal Home Loan Bank advances Retirement of preferred stock Dividends paid on common stock Dividends paid on preferred stock Proceeds from exercise of stock options Net cash from (used in) financing activities 111,273 37,989 (53,900) - - - (2,751) - 121 92,732 13,564 (26,559) 9,100 15,000 (11,000) - (2,306) - 1 27,942 14,045 35,800 - (15,000) (13,750) (2,294) (92) 34 (2,200) 46,685 Net change in cash and cash equivalents 44,583 8,648 (5,730) Cash and cash equivalents at beginning of year 26,231 17,583 23,313 Cash and cash equivalents at end of period $ 70,814 $ 26,231 $ 17,583 Supplemental disclosure of cash flow information: Cash paid during the period for: Interest Income taxes Noncash investing activities: $ $ 2,080 2,665 $ $ 1,260 3,590 $ $ 947 3,065 Financing of other real estate owned sale $ - $ - $ 2,675 The accompanying notes are an integral part of these audited consolidated financial statements. 33 Summit State Bank | Annual Report 2017 SUMMIT STATE BANK AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES General On January 15, 1999, Summit State Bank (the “Bank”) received authority to transact business as a California state-chartered commercial bank and is subject to regulation, supervision and examination by the California Department of Business Oversight and the Federal Deposit Insurance Corporation. The Bank was organized under a charter granted by the Department of Savings and Loan of the State of California under the name Summit Savings. The Bank was incorporated on December 20, 1982. The Bank converted to a federal savings bank under a charter granted by the Office of Thrift Supervision on May 24, 1990. The Bank provides a variety of banking services to individuals and businesses in its primary service area of Sonoma County, California. The Bank's branch locations include Santa Rosa, Petaluma, Rohnert Park and Healdsburg. The Bank offers depository and lending services primarily to meet the needs of its business and individual clientele. These services include a variety of transaction, money market, savings and time deposit account alternatives. The Bank's lending activities are directed primarily towards commercial real estate, construction and business loans. The Bank utilizes its subsidiary Alto Service Corporation for its deed of trust services. The accounting and reporting policies of the Bank and its subsidiary conform with accounting principles generally accepted in the United States of America and prevailing practices within the banking industry. Stock Split Adjustment The Board of Directors declared a five-for-four stock split on January 23, 2017 to common shareholders of record on February 28, 2017 and issued on March 14, 2017. The impact of this stock split has been retroactively applied to periods presented with adjustments to the number of common shares and per common share values as if the stock split had occurred as of the beginning of each period presented. Principles of Consolidation The consolidated financial statements include the accounts of the Bank and its wholly-owned subsidiary, Alto Service Corporation. All significant intercompany accounts and transactions have been eliminated in consolidation. Reclassification Some items in the prior year financial statements were reclassified to conform to the current presentation. Reclassifications had no effect on prior year net income or shareholders’ equity. Use of Estimates The preparation of financial statements in conformity with U.S. Generally Accepted Accounting Principles requires management to make estimates and assumptions. These estimates and assumptions affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates. The allowance for loan losses, goodwill impairment and fair values of investment securities and other financial instruments are particularly subject to change. 34 Summit State Bank | Annual Report 2017 Cash and Cash Equivalents For the purpose of the consolidated statement of cash flows, the Bank considers cash and due from banks with original maturities under 90 days and Federal funds sold to be cash equivalents. Generally, Federal funds are sold for one-day periods. Net cash flows are reported for customer loan and deposit transactions, time deposits in banks and short-term borrowings with an original maturity of 90 days or less. Investment Securities Investments are classified into the following categories: • • Available-for-sale securities, reported at fair value, with unrealized gains and losses excluded from earnings and reported, net of taxes, as accumulated other comprehensive income (loss) within shareholders' equity. Held-to-maturity securities, which management has the positive intent and ability to hold to maturity, reported at amortized cost, adjusted for the accretion of discounts and amortization of premiums. Management determines the appropriate classification of its investments at the time of purchase and may only change the classification in certain limited circumstances. All transfers between categories are accounted for at fair value. Gains or losses on the sale of investment securities are recorded on the trade date and are computed on the specific identification method. Interest earned on investment securities is reported in interest income, net of applicable adjustments for accretion of discounts and amortization of premiums on the level yield method. Management evaluates 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 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 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: 1) OTTI related to credit loss, which must be recognized in the income statement for available-for-sale and held-to-maturity investments and 2) OTTI related to other factors, which is recognized in other comprehensive income or (loss) for available-for-sale investments. 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. Investment in Federal Home Loan Bank Stock In order to borrow from the Federal Home Loan Bank of San Francisco (FHLB), the Bank is required to maintain an investment in the capital stock of the FHLB. The investment is carried at cost and is generally redeemable at par. Both cash and stock dividends are reported as income. Loans Loans that management has the intent and ability to hold for the foreseeable future or until maturity are stated at principal balances outstanding, net of deferred loan origination fees and costs and the allowance for loan losses, adjusted for accretion of discounts or amortization of premiums. Interest is accrued daily based upon outstanding loan balances. However, for all loan classes, when in the opinion of management, loans are considered to be impaired and the future collectability of interest and principal is in serious doubt, loans are placed on nonaccrual status and the accrual of interest income is suspended. Any interest previously accrued, but unpaid, is charged against income. Payments received are applied to reduce principal to the extent necessary to ensure collection. Subsequent payments on these loans, or payments received on nonaccrual 35 Summit State Bank | Annual Report 2017 loans for which the ultimate collectability of principal is not in doubt, are applied first to earned but unpaid interest and then to principal. Substantially all loan origination fees, commitment fees, direct loan origination costs and purchase premiums and discounts on loans are deferred and recognized in interest income using the level yield method, to be amortized to interest income over the contractual term of the loan. The unamortized balance of deferred fees and costs is reported as a component of net loans. Non-accrual loans and loans past due 90 days still on accrual include both smaller balance homogeneous loans that are collectively evaluated for impairment and individually classified impaired loans. A loan is moved to non-accrual status in accordance with the Bank’s policy, typically after 90 days of non-payment. For loans whose contractual terms have been restructured in a manner which grants a concession to a borrower experiencing financial difficulties (“troubled debt restructuring”), they are returned to accrual status when there has been a sustained period of repayment performance (generally, six consecutive monthly payments) according to the modified terms and there is reasonable assurance of repayment and of performance. 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 un-collectability of a loan balance is confirmed. Loans or portions of loans are charged off when there is a distinct probability of loss identified. A distinct probability of loss exists when it has been determined that any remaining sources of repayment are not sufficient to cover all outstanding principal. The probable loss is immediately calculated based on the value of the remaining sources of repayment and charged to the allowance for loan losses. 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. A loan is impaired when, based on current information and events, it is probable that the Bank will be unable to collect all amounts due according to the contractual terms of the loan agreement. Commercial & agricultural, real estate-commercial, real estate-construction and land, and real estate-multifamily loans are individually evaluated for impairment. Large groups of smaller balance homogeneous loans such as real estate-single family units and consumer & lease financing are collectively evaluated for impairment, and accordingly, they are not separately identified for impairment disclosures. Impaired loans are measured on the present value of expected future cash flows discounted at the loan’s original effective interest rate. As a practical expedient, impairment may be measured based on the loan’s observable market price or the fair value of the collateral if the loan is collateral dependent. When the measure of the impaired loan is less than the recorded investment in the loan, the impairment is recorded through an allocation of a portion of the allowance for loan losses. Loans, for which the terms have been modified granting concessions to the borrower that the Bank would not otherwise consider, and for which the borrower is experiencing financial difficulties, are considered troubled debt restructurings and classified as impaired. Troubled debt restructurings are measured at the present value of estimated future cash flows using the loan’s effective interest rate at inception. The allowance consists of specific and general components. The specific component relates to loans that are individually classified as impaired. The general component covers loans that are both non-impaired and non- classified and is based on historical loss experience adjusted for qualitative factors. The historical loss experience is determined by portfolio segment and is based on the actual loss history experienced by the Bank over the most recent eight years. This actual loss experience is supplemented with other economic factors based on the risks present for each portfolio segment. These economic factors include consideration of the following: levels of and trends in delinquencies and impaired loans; levels of and trends in charge- offs and recoveries; trends in volume and terms of loans; effects of any changes in risk selection and 36 Summit State Bank | Annual Report 2017 underwriting standards; other changes in lending policies, procedures, and practices; experience, ability, and depth of lending management and other relevant staff; national and local economic trends and conditions; industry conditions; and effects of changes in credit concentrations. The following portfolio segments have been identified: commercial & agricultural, real estate mortgage loans and consumer & lease financing. Real estate mortgage loans have been further classified according to the following risk characteristics: commercial, construction and land, single family units and multifamily units. Loan categories used in presentations in this report conform to the categorizations used by regulatory Called Reports as described by the instructions issued by the Federal Financial Interagency Examination Council (FFIEC). Commercial and Agricultural Loans - Commercial and agricultural credit is extended to commercial customers for use in normal business operations to finance working capital needs, equipment purchases, farm land, or other projects. The majority of these borrowers are customers doing business within our geographic regions. These loans are generally underwritten individually and secured with the assets of the company and the personal guarantee of the business owners. Commercial & agricultural loans are made based primarily on the historical and projected cash flow of the borrower and the underlying collateral provided by the borrowers. This category includes loans secured by farmland. Commercial and Multifamily Real Estate Loans - Commercial and multifamily real estate loans are subject to underwriting standards and processes similar to commercial loans. These loans are viewed primarily as cash flow loans and the repayment of these loans is largely dependent on the successful operation of the property. Loan performance may be adversely affected by factors impacting the general economy or conditions specific to the real estate market such as geographic location and property type. Construction and Land Real Estate Loans - Construction and land real estate loans are extended to qualified commercial and individual customers and are underwritten and secured by the assets of the company or individual. Commercial construction credits may also be secured with personal guarantees of the business owner. Credits are underwritten to meet the general credit policy criteria for current and projected cash flow coverage and loan-to-value. Terms for construction and land loans are typically of shorter duration and have more restrictive advance rates than similar commercial credit or single family residences. Both types of credit may be refinanced to a long –term loan upon completion of construction. The majority of these credits are with customers doing business within the Bank’s geographic region. Consumer and Lease Financing Loans - Consumer and lease financing loans are primarily comprised of loans made directly to consumers. These loans have a specific underwriting matrix which consists of several factors including debt to income, type of collateral and loan to collateral value, credit history and relationship to the borrower. Consumer and lease financing lending uses risk-based pricing in the underwriting process. Single Family Residential Loans - Single family residential mortgage loans represent loans to consumers for the purchase or refinance of a residence. These loans are generally financed up to 30 years, and in most cases, are extended to borrowers to finance their primary residence. Real estate market values at the time of origination directly affect the amount of credit extended, and in the event of default, subsequent changes in these values may impact the severity of losses. Additionally, commercial loans may be categorized as Single Family Residential if the loan is secured by a mortgage on a home. These loans are underwritten as described in Commercial and Agricultural Loans above and have terms such as interest rates and maturities as a standard Commercial Loan. The Bank is subject to periodic examinations by its federal and state regulatory examiners and may be required by such regulators to recognize additions to the allowance for loan losses based on their assessment of credit information available to them at the time of their examinations. The process of assessing the adequacy of the allowance for loan losses is necessarily subjective. Further, and particularly in times of economic downturns, it is reasonably possible that future credit losses may exceed historical loss levels and may also exceed management’s current estimates of incurred credit losses inherent within the loan portfolio. As such, there can be no assurance that future charge-offs will not exceed management’s current estimate of what constitutes a reasonable allowance for credit losses. 37 Summit State Bank | Annual Report 2017 Valuation of Goodwill Goodwill and intangible assets acquired in a purchase business combination and determined to have an indefinite useful life are not amortized, but tested for impairment at least annually. The Bank has selected September 30 as the date to perform the annual impairment test. Intangible assets with definite useful lives are amortized over their estimated useful lives to their estimated residual values. Goodwill is the only intangible asset with an indefinite life on our balance sheet. Management assesses the carrying value of our goodwill at least annually in order to determine if this intangible asset is impaired. In reviewing the carrying value of our goodwill, we assess the recoverability of such assets by evaluating the fair value of the related business unit. If the carrying amount of goodwill exceeds its fair value, an impairment loss is recognized for the amount of the excess and the carrying value of goodwill is reduced accordingly. Any impairment would be required to be recorded during the period identified. The annual evaluation of goodwill for impairment uses various estimates and assumptions. Management performed an assessment of qualitative factors impacting the Bank and determined goodwill was not impaired at December 31, 2017. Other Real Estate Owned Other real estate owned includes real estate acquired in full or partial settlement of loan obligations. When property is acquired, any excess of the Bank's recorded investment in the loan balance and accrued interest income over the estimated fair market value of the property, less costs to sell, is charged against the allowance for loan losses. A valuation allowance for losses on other real estate, if needed, is maintained to provide for declines in value. The allowance is established through a provision for losses on other real estate which is included in other expenses. Subsequent gains or losses on sales or write-downs resulting from impairment are recorded in other income or expenses as incurred. Operating costs after acquisition are expensed and any rental income from the properties are recorded as income. There was no other real estate owned at December 31, 2017 and 2016. Bank Premises and Equipment Land is carried at cost. Buildings, furniture, fixtures, and equipment are carried at cost less accumulated depreciation. Depreciation is determined using the straight-line method over the estimated useful lives of the related assets. The useful lives of buildings are estimated to be 39 years and furniture, fixtures and equipment are estimated to be 3 to 15 years. Leasehold improvements are amortized over the estimated useful life of the asset or the term of the related lease, whichever is shorter. When assets are sold or otherwise disposed of, the cost and related accumulated depreciation are removed from the accounts, and any resulting gain or loss is recognized in income for the period. The cost of maintenance and repairs is charged to expense as incurred. The Bank evaluates premises and equipment for financial impairment as events or changes in circumstances indicate that the carrying amount of such assets may not be fully recoverable. Income Taxes The Bank files its income taxes on a consolidated basis with its subsidiary. The allocation of income tax expense (benefit) represents each entity's proportionate share of the consolidated provision for income taxes. Income tax expense is the total of the current year income tax due or refundable and the change in deferred tax assets and liabilities. Deferred tax assets and liabilities are recognized for the tax consequences of temporary differences between the reported amounts of assets and liabilities and their tax basis. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment. A valuation allowance, if needed, reduces deferred tax assets to the amount expected to be realized. On the consolidated balance sheet, net deferred tax assets are included in accrued interest receivable and other assets. 38 Summit State Bank | Annual Report 2017 A tax position is recognized as a benefit only if it is "more likely than not" that the tax position would be sustained in a tax examination, with a tax examination being presumed to occur. The amount recognized is the largest amount of tax benefit that is greater than 50% likely of being realized on examination. For tax positions not meeting the "more likely than not" test, no tax benefit is recorded. The Bank recognizes interest and/or penalties related to income tax matters in income tax expense. The Bank has not accrued any potential interest and penalties as of December 31, 2017 and December 31, 2016 and for the three years ended December 31, 2017 for uncertainties related to income taxes. Earnings Per Common Share Basic earnings per common share (EPS), which excludes dilution, is computed by dividing income available to common shareholders by the weighted-average number of common shares outstanding for the period. Diluted earnings per share reflects the potential dilution that could occur if contracts to issue common stock, such as stock options, result in the issuance of common stock which shares in the earnings of the Bank. Stock options for 8,087, 26,198 and 66,869 shares of common stock were not considered in computing diluted earnings per share for 2017, 2016 and 2015 because they were anti-dilutive. The factors used in the earnings per common share computation follow: (in thousands except earnings per share) 2017 2016 2015 Basic Net income available for common shareholders $ 3,292 $ 4,967 $ 5,938 Weighted average common shares outstanding 6,031 6,005 5,979 Basic earnings per common share $ 0.55 $ 0.83 $ 0.99 Diluted Net income available for common shareholders $ 3,292 $ 4,967 $ 5,938 Weighted average common shares outstanding for basic earnings per common share Add: Dilutive effects of assumed exercises of stock options Average shares and dilutive potential common shares 6,031 6,005 5,979 28 31 69 6,059 6,036 6,048 Diluted earnings per common share $ 0.54 $ 0.82 $ 0.98 Stock-Based Compensation Compensation cost is recognized for stock options and stock appreciation rights (“SARs) granted to employees, based on the fair value of these awards at the date of grant. A Black-Scholes model is utilized to estimate the fair value of stock options and SARs. Compensation cost is recognized over the required service period, generally defined as the vesting period. Adoption of New Accounting Standards In January 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2016-01, Financial Instruments – Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities. The new guidance is intended to improve the recognition and measurement of financial instruments. This ASU requires equity investments (except those accounted for 39 Summit State Bank | Annual Report 2017 under the equity method of accounting, or those that result in consolidation of the investee) to be measured at fair value with changes in fair value recognized in net income. In addition, the amendment requires public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes and requires separate presentation of financial assets and financial liabilities by measurement category and form of financial asset (i.e., securities or loans and receivables) on the balance sheet or the accompanying notes to the financial statements. This ASU also eliminates the requirement for public business entities to disclose the method(s) and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost on the balance sheet. The amendment also requires a reporting organization to present separately in other comprehensive income the portion of the total change in the fair value of a liability resulting from a change in the instrument specific credit risk (also referred to as “own credit”) when the organization has elected to measure the liability at fair value in accordance with the fair value option for financial instruments. The ASU is effective for financial statements issued for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. Early adoption is permitted for certain provisions. The Bank does not anticipate any material impacts from the ASU’s adoption on the Bank’s consolidated financial statements. In February of 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842). This Update was issued to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. The core principle of Topic 842 is that a lessee should recognize the assets and liabilities that arise from leases. All leases create an asset and a liability for the lessee in accordance with FASB Concepts Statement No. 6, Elements of Financial Statements, and, therefore, recognition of those lease assets and lease liabilities represents an improvement over previous GAAP, which did not require lease assets and lease liabilities to be recognized for most leases. For public companies, the amendments in this update are effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Lease commitments will be reflected on the balance sheet as lease assets and lease liabilities. We are currently evaluating the provisions of this ASU to determine the potential impact the new standard will have on our consolidated financial statements. However, the Bank expects a significant new lease asset and related lease liability on the balance sheet due to the leased properties of the Bank that are accounted for under current operating lease guidance. In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606). In March 2016, the FASB issued ASU No. 2016-08, superseding most industry-specific revenue recognition guidance in the FASB Accounting Standards Codification. The core principle of the new guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The guidance identifies specific steps that entities should apply in order to achieve this principle. The ASU is effective for interim and annual periods beginning December 15, 2017 and must be applied retrospectively. Since the guidance does not apply to revenue associated with financial instruments, including loans and securities that are accounted for under other GAAP, we do not expect the new guidance to have a material impact on interest income. We have completed our overall assessment of noninterest income revenue streams and review of contracts potentially affected by the ASU and determined that the new guidance will not have a material impact on the Company’s consolidated financial position, results of operations or cash flows. As of April 1, 2016, the Bank adopted the FASB ASU No. 2016-09, Compensation – Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting. ASU 2016-09 seeks to simplify several aspects of the accounting for employee share-based payment transactions, including income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. As required by ASU 2016-09, all adjustments are reflected as of the beginning of the fiscal year, January 1, 2016. By applying this ASU, the Bank no longer adjusts common stock for the tax impact of shares released, instead the tax impact is recognized as tax expense in the period the shares are released. This simplifies the tracking of the excess tax benefits and deficiencies, but could cause volatility in tax expense for the periods presented. The statement of cash flows has been adjusted to reflect the provisions of this ASU. The application of this ASU did not have a material impact on the consolidated financial statements. 40 Summit State Bank | Annual Report 2017 In June of 2016, the FASB issued ASU No. 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. The amendments are intended to improve financial reporting by requiring timelier recording of credit losses on loans and other financial instruments held by financial institutions and other organizations. The ASU requires the measurement of all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. Financial institutions and other organizations will now use forward-looking information to better inform their credit loss estimates. Many of the loss estimation techniques applied today will still be permitted, although the inputs to those techniques will change to reflect the full amount of expected credit losses. Organizations will continue to use judgment to determine which loss estimation method is appropriate for their circumstances. The ASU requires enhanced disclosures to help investors and other financial statement users to better understand significant estimates and judgments used in estimating credit losses, as well as the credit quality and underwriting standards of an organization’s portfolio. These disclosures include qualitative and quantitative requirements that provide additional information about the amounts recorded in the financial statements. In addition, the ASU amends the accounting guidance for credit losses on available-for-sale debt securities and purchased financial assets with credit deterioration. The amendment is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. Early application will be permitted for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. We are currently evaluating the provisions of the ASU to determine the potential impact the new standard will have on our consolidated financial statements. In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments. This ASU provides guidance on how to present and classify eight specific cash flow issues in the statement of cash flows. The ASU is effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. Early adoption is permitted, including adoption in an interim period. The amendments should be applied using a retrospective transition method to each period presented, if practical. We do not expect this ASU to have a material impact on our financial condition or results of operations. In March 2017, the FASB issued ASU No. 2017-08, Receivables – Nonrefundable Fees and Other Costs (Subtopic 310-20), Premium Amortization on Purchased Callable Debt Securities. Under current GAAP, entities normally amortize the premium as an adjustment of yield over the contractual life of the instrument. This guidance shortens the amortization period for certain callable debt securities held at a premium to the earliest call date. This update is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. The adoption of this ASU is not expected to have a material impact on the Bank’s consolidated financial statements. In January of 2017, the FASB issued ASU No. 2017-04, Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. The amendments are intended to simplify the subsequent measurement of goodwill, and the amendments eliminate Step 2 from the goodwill impairment test. The annual, or interim, goodwill impairment test is performed by comparing the fair value of a reporting unit with its carrying amount. An impairment charge should be recognized for the amount by which the carrying amount exceeds the reporting unit’s fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. In addition, income tax effects from any tax deductible goodwill on the carrying amount of the reporting unit should be considered when measuring the goodwill impairment loss, if applicable. The amendments also eliminate the requirements for any reporting unit with a zero or negative carrying amount to perform a qualitative assessment and, if it fails that qualitative test, to perform Step 2 of the goodwill impairment test. An entity still has the option to perform the qualitative assessment for a reporting unit to determine if the quantitative impairment test is necessary. The amendments should be applied on a prospective basis. The nature of and reason for the change in accounting principle should be disclosed upon transition. The amendment is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. Early application will be permitted for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. Management does not anticipate any potential impact from the new standard on our consolidated financial statements. 41 Summit State Bank | Annual Report 2017 In February 2018, the FASB issued ASU No. 2018-02, Income Statement-Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income.” ASU 2018-02 was issued to address the income tax accounting treatment of the stranded tax effects within other comprehensive income due to the prohibition of backward tracing due to an income tax rate change that was initially recorded in other comprehensive income. This issue came about from the enactment of the Tax Cuts and Jobs Act on December 22, 2017 that changed the Company’s income tax rate from 35% to 21%. The ASU changed current accounting whereby an entity may elect to reclassify the stranded tax effect from accumulated other comprehensive income to retained earnings. The ASU is effective for periods beginning after December 15, 2018 although early adoption is permitted. The Bank determined it will early adopt ASU 2018-02 in 2017 and will reclassify its stranded tax debit of $105,000 within accumulated other comprehensive income to retained earnings at December 31, 2017. Operating segments While the Bank’s chief decision makers monitor the revenue streams of the Bank’s various products and services, operations are managed and financial performance is evaluated on a bank-wide basis. Operating segments are aggregated into one segment as operating results for all segments are substantially the same. 2. INVESTMENT SECURITIES The amortized costs and estimated fair value of investment securities at December 31, 2017 and 2016 consisted of the following: (in thousands) Held-to-maturity: December 31, 2017 Gross Unrealized Gains Gross Unrealized Losses Estimated Fair Value Amortized Cost Government agencies $ 7,984 $ - $ (114) $ 7,870 Government agencies $ 7,976 $ - $ (263) $ 7,713 Available-for-sale: U.S. Treasuries Government agencies Mortgage-backed securities - residential Corporate debt Total available-for-sale Total investment securities (in thousands) Held-to-maturity: Available-for-sale: U.S. Treasuries Government agencies Mortgage-backed securities - residential Corporate debt Total available-for-sale Total investment securities $ $ $ 6,006 41,247 8,159 24,205 79,617 87,601 - $ 75 9 608 692 692 $ (24) (1,265) (75) (175) (1,539) (1,653) 5,982 40,057 8,093 24,638 78,770 86,640 $ $ $ December 31, 2016 Gross Unrealized Gains Gross Unrealized Losses Estimated Fair Value Amortized Cost $ $ $ 8,018 55,438 9,184 36,657 109,297 117,273 $ 1 262 12 937 1,212 1,212 $ (29) (2,256) (100) (353) (2,738) (3,001) 7,990 53,444 9,096 37,241 107,771 115,484 $ $ $ 42 Summit State Bank | Annual Report 2017 The activity related to recorded gross gains and gross losses of investment securities for the years ended December 31, is reflected in the table below: (in thousands) 2017 2016 2015 Year Ended December 31 Proceeds from sales Proceeds from calls Gross realized gains on sales and calls Gross realized losses on sales and calls $ 36,721 $ 878 $ 3,459 2,798 556 (484) 37,933 744 (52) 3,469 218 (61) Net unrealized gains or (losses) on available-for-sale investment securities totaling $(847,000), $(1,526,000) and $864,000 are recorded, net of $(356,000), $(641,000) and $363,000 in tax expense or (benefit), as accumulated other comprehensive income within shareholders' equity at December 31, 2017, 2016 and 2015, respectively. There were 28 investment securities in a continuous unrealized loss position greater than 12 months at December 31, 2017. At December 31, 2017, the Bank held 17 investment securities which were in an unrealized loss position for less than twelve months. Management periodically evaluates each investment security for other than temporary impairment, relying primarily on industry analyst reports and observation of market conditions and interest rate fluctuations. All of the impairment appearing in the investment securities portfolio valuations is considered to be temporary. The measured impairment in the securities values is primarily attributable to changes in long-term interest rates, market shifts of the Treasury yield curve and other variable market and economic conditions. The measured impairment in securities values did not result from any significant or persistent deterioration in the underlying credit quality of any of the investments. The securities portfolio consists primarily of debt securities with non-contingent contractual cash flows. Full realization of the principal balance is expected upon final maturity. Management has the intent and ability to hold the securities until recovery of the carrying value, which could be at the final maturity. Investment securities with unrealized losses at December 31, 2017 and 2016 are summarized and classified according to the duration of the loss period as follows: December 31, 2017 Less than 12 Months 12 Months or More Total Fair Value Unrealized Losses Fair Value Unrealized Losses Fair Value Unrealized Losses $ - $ - $ 7,870 $ (114) $ 7,870 $ (114) (in thousands) Debt Securities: Held-to-maturity: Government agencies Available-for-sale: U.S. Treasuries Government agencies Mortgage-backed securities - residential Corporate debt Total available-for-sale Total investment securities - $ 8,566 7,617 2,505 18,688 18,688 $ - $ (93) (75) (45) (213) (213) $ 5,982 21,063 - 3,921 30,966 38,836 (24) (1,172) - (130) (1,326) (1,440) 5,982 29,629 7,617 6,426 49,654 57,524 (24) (1,265) (75) (175) (1,539) (1,653) $ $ $ $ $ $ $ $ December 31, 2016 Less than 12 Months 12 Months or More Total Fair Value Unrealized Losses Fair Value Unrealized Losses Fair Value Unrealized Losses $ 7,713 $ (263) $ - $ - $ 7,713 $ (263) $ $ $ $ 5,990 48,172 6,199 11,543 71,904 79,617 (29) (2,256) (100) (353) (2,738) (3,001) - $ - - - - $ - - $ - - - - $ - 5,990 48,172 6,199 11,543 71,904 79,617 $ $ $ $ (29) (2,256) (100) (353) (2,738) (3,001) (in thousands) Debt Securities: Held-to-maturity: Government agencies Available-for-sale: U.S. Treasuries Government agencies Mortgage-backed securities - residential Corporate debt Total available-for-sale Total investment securities 43 Summit State Bank | Annual Report 2017 The amortized cost and estimated fair value of investment securities at December 31, 2017 by contractual maturity are shown below. Expected maturities will differ from contractual maturities because the issuers of the securities may have the right to call or prepay obligations with or without call or prepayment penalties. (in thousands) Amortized Cost Fair Value Amortized Cost Fair Value Held-to-Maturity Available-for-Sale Within one year After one year through five years After five years through ten years After ten years Investment securities not due at a single maturity date: Mortgage-backed securities - residential $ $ - - - 7,984 7,984 - 7,984 $ $ - - - 7,870 7,870 - $ 7,870 $ 8,625 16,208 40,635 5,990 71,458 8,159 79,617 $ 8,631 16,721 39,844 5,481 70,677 8,093 $ 78,770 Investment securities with amortized costs totaling $51,386,000 and $29,404,000 and estimated fair values totaling $50,417,000 and $29,097,000 were pledged to secure State of California and other municipal deposits at December 31, 2017 and 2016 (see Note 6). 3. LOANS Outstanding loans are summarized as follows: (in thousands) Commercial & agricultural Real estate - commercial Real estate - construction and land Real estate - single family Real estate - multifamily Consumer & lease financing Allowance for loan losses December 31, 2017 December 31, 2016 $ $ 102,957 242,066 13,465 51,866 32,091 385 442,830 (5,236) 437,594 81,519 190,976 7,897 51,044 27,533 434 359,403 (4,765) 354,638 $ $ 44 Summit State Bank | Annual Report 2017 Changes in the allocation of allowance for loan losses by loan class for the years ended December 31, 2017, 2016 and 2015 are as follows: (in thousands) Year Ended December 31, 2017 Balance at December 31, 2016 Provision (reversal) Charge- offs Recoveries Balance at December 31, 2017 Commercial & agricultural Real estate - commercial Real estate - construction and land Real estate - single family Real estate - multifamily Consumer & lease financing Unallocated Total $ $ 744 1,764 266 577 330 19 1,065 4,765 $ 13 932 177 2 (11) (14) (579) 520 $ $ (79) - - - - - - (79) $ $ 4 1 - 16 - 9 - 30 $ $ 682 2,697 443 595 319 14 486 5,236 $ (in thousands) Year Ended December 31, 2016 Balance at December 31, 2015 Provision (reversal) Charge- offs Recoveries Balance at December 31, 2016 Commercial & agricultural Real estate - commercial Real estate - construction and land Real estate - single family Real estate - multifamily Consumer & lease financing Unallocated Total $ $ 1,008 940 57 237 43 6 2,440 4,731 $ (290) 838 209 326 287 5 (1,375) - $ $ $ (50) (20) - - - - - (70) $ $ 76 6 - 14 - 8 - 104 $ $ 744 1,764 266 577 330 19 1,065 4,765 (in thousands) Year Ended December 31, 2015 Balance at December 31, 2014 Provision (reversal) Charge- offs Recoveries Balance at December 31, 2015 $ 252 (921) (159) (39) 30 (35) 72 (800) $ $ - - - - - (2) - (2) $ $ 222 - - 135 - 33 - 390 $ $ 1,008 940 57 237 43 6 2,440 4,731 $ Commercial & agricultural Real estate - commercial Real estate - construction and land Real estate - single family Real estate - multifamily Consumer & lease financing Unallocated Total $ $ 534 1,861 216 141 13 10 2,368 5,143 45 Summit State Bank | Annual Report 2017 The following table presents the balance in the allowance for loan losses and loan balances by class and based on impairment method as of December 31, 2017 and 2016: (in thousands) December 31, 2017 Allowance for Loan Losses: Loans: Individually Evaluated for Impairment Collectively Evaluated for Impairment T otal Ending Allowance Balance Loans Individually Evaluated for Impairment Loans Collectively Evaluated for Impairment Commercial & agricultural Real estate - commercial $ Real estate - construction and land Real estate - single family Real estate - multifamily Consumer & lease financing Unallocated - - - - - - - $ 682 $ 2,697 443 595 319 14 486 $ 682 2,697 443 595 319 14 486 $ 404 1,655 - 1,125 - - - 102,553 240,411 13,465 50,741 32,091 385 - T otal Ending Loans Balance $ 102,957 242,066 13,465 51,866 32,091 385 - T otal $ - $ 5,236 $ 5,236 $ 3,184 $ 439,646 $ 442,830 (in thousands) December 31, 2016 Allowance for Loan Losses: Loans: Individually Evaluated for Impairment Collectively Evaluated for Impairment T otal Ending Allowance Balance Loans Individually Evaluated for Impairment Loans Collectively Evaluated for Impairment Commercial & agricultural $ 337 $ 407 $ Real estate - commercial Real estate - construction and land Real estate - single family Real estate - multifamily Consumer & lease financing Unallocated - - - - - - 1,764 266 577 330 19 1,065 744 1,764 266 577 330 19 1,065 $ 1,646 $ 3,450 - 1,791 149 - - 79,873 187,526 7,897 49,253 27,384 434 - T otal Ending Loans Balance $ 81,519 190,976 7,897 51,044 27,533 434 - T otal $ 337 $ 4,428 $ 4,765 $ 7,036 $ 352,367 $ 359,403 The recorded investment in the aforementioned disclosure and the next several disclosures do not include accrued interest receivable and net deferred fees because such amounts are not considered material. Accrued interest receivable for the total loan portfolio was $1,408,000 and $1,078,000 and net deferred loan fees (costs) were $(133,000) and $(192,000) as of December 31, 2017 and 2016. 46 Summit State Bank | Annual Report 2017 The following table presents impaired loans individually evaluated for impairment by class of loans: (in thousands) December 31, 2017 Recorded investment in impaired loans: Commercial & agricultural Real estate - commercial Real estate - construction and land Real estate - single family Real estate - multifamily Consumer & lease financing Total With no related allowance recorded $ 627 $ 2,071 $ With an allowance recorded Total recorded investment in impaired loans - - $ 627 $ 2,071 $ Unpaid principal balance of impaired loans: With no related allowance recorded $ 746 $ 2,202 $ With an allowance recorded Total unpaid principal balance of impaired loans - - $ 746 $ 2,202 $ Allowance for loan losses allocation $ - $ - $ Average recorded investment in impaired loans during the year ended December 31, 2017 Interest income recognized on impaired loans during the year ended December 31, 2017 964 43 3,438 161 December 31, 2016 Recorded investment in impaired loans: With no related allowance recorded $ 1,309 $ 3,450 $ With an allowance recorded Total recorded investment in impaired loans 337 - $ 1,646 $ 3,450 $ Unpaid principal balance of impaired loans: With no related allowance recorded $ 1,337 $ 3,450 $ With an allowance recorded 337 - Total unpaid principal balance of impaired loans $ 1,674 $ 3,450 $ Allowance for loan losses allocation $ 337 $ - $ Average recorded investment in impaired loans during the year ended December 31, 2016 Interest income recognized on impaired loans during the year ended December 31, 2016 Average recorded investment in impaired loans during the year ended December 31, 2015 Interest income recognized on impaired loans during the year ended December 31, 2015 2,335 2,973 70 176 1,287 8,110 46 368 $ $ $ $ $ $ $ $ $ $ - - - - - - - - - - - - - - - - - - 8 1 1,532 $ 130 $ - - 1,532 $ 130 $ 1,610 $ 184 $ - - - - $ 4,360 - $ 4,360 $ 4,742 - - - - 1,610 $ 184 $ - $ - $ 1,706 52 139 - - - - $ 4,742 $ - 6,247 - 256 1,791 $ 149 $ - - 1,791 $ 149 $ 1,791 $ 149 $ - - 1,791 $ 149 $ - $ - $ 1,534 53 1,505 60 159 - 180 - - - - - - - - - - - - $ 6,699 337 $ 7,036 $ 6,727 337 $ 7,064 $ 337 7,001 299 11,090 475 47 Summit State Bank | Annual Report 2017 The following table presents the recorded investment in nonaccrual loans and loans past due over 90 days still accruing by class of loans as of December 31, 2017 and 2016: (in thousands) Nonaccrual Loans Past Due Over 90 Days Still Accruing Loans Past Due Over 90 Days Still Accruing Nonaccrual December 31, 2017 December 31, 2016 Commercial & agricultural Real estate - commercial Real estate - construction and land Real estate - single family Real estate - multifamily Consumer & lease financing Total $ $ 223 1,665 - 712 130 - 2,730 $ $ - - - - - - - $ 826 1,419 - 957 149 - 3,351 $ $ $ - - - - - - - The following table presents the aging of the recorded investment in past due loans, inclusive of nonaccrual loans, as of December 31, 2017 by class of loans: (in thousands) 30 - 59 Days Past Due 60 - 89 Days Past Due Greater Than 90 Days Past Due Total Past Due Loans Not Past Due Commercial & agricultural Real estate - commercial Real estate - construction and land Real estate - single family Real estate - multifamily Consumer & lease financing $ 100 1,317 - 138 - - $ - 222 - - - - $ 192 194 - 304 - - $ 292 1,733 - 442 - - $ 102,665 240,333 13,465 51,424 32,091 385 Total $ 102,957 242,066 13,465 51,866 32,091 385 Total $ 1,555 $ 222 $ 690 $ 2,467 $ 440,363 $ 442,830 The following table presents the aging of the recorded investment in past due loans, inclusive of nonaccrual loans, as of December 31, 2016 by class of loans: (in thousands) 30 - 59 Days Past Due 60 - 89 Days Past Due Greater Than 90 Days Past Due Total Past Due Loans Not Past Due Commercial & agricultural Real estate - commercial Real estate - construction and land Real estate - single family Real estate - multifamily Consumer & lease financing $ 169 - - 50 - - $ Total $ 219 $ - - - - - - - $ 612 208 - 421 - - $ 781 208 - 471 - - $ 80,738 190,768 7,897 50,573 27,533 434 Total $ 81,519 190,976 7,897 51,044 27,533 434 $ 1,241 $ 1,460 $ 357,943 $ 359,403 A loan is considered past due if a scheduled payment of interest or principal that is due is unpaid for 30 days or more. Troubled Debt Restructurings From time to time, the Bank may agree to modify the contractual terms of a borrower’s loan. In cases where such modifications represent a concession to a borrower experiencing financial difficulty, the modification is 48 Summit State Bank | Annual Report 2017 considered a troubled debt restructuring (“TDR”). At December 31, 2017 and 2016, loans modified in a TDR totaled $2,182,000 and $3,670,000 which are included in the impaired loan disclosures above. The total TDRs includes $552,000 and $322,000 that are also included in nonperforming loans at December 31, 2017 and 2016. TDRs had specific loss allocations of $0 as of December 31, 2017 and 2016. There was one real estate – single family residence loan modified as a troubled debt restructuring during the year ended December 31, 2017. The pre-modification and post-modification balance of the restructured loan was $234,000. The loan was modified to term it out over 60 months. There were no loans modified as troubled debt restructurings during the year ended December 31, 2016. No additional allowances or charge-offs resulted from loans modified as troubled debt restructurings during the years ended December 31, 2017 and 2016. There were no loans modified as troubled debt restructurings for which there was a payment default within twelve months following the modification during the years ended December 31, 2017 and 2016. A loan is considered to be in payment default once it is 90 days contractually past due under the modified terms. In order to determine whether a borrower is experiencing financial difficulty, an evaluation is performed of the probability that the borrower will be in payment default on any of its debt in the foreseeable future without the modification. This evaluation is performed under the Bank’s internal underwriting policy. Credit Quality Indicators The Bank 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, credit documentation, public information, and current economic trends, among other factors. The Bank analyzes loans individually by classifying the loans as to credit risk. This analysis is performed on a quarterly basis for loans in excess of $250,000. Smaller balances are graded at origination and updated based on payment status and other information obtained from borrowers. The Bank uses the following definitions for risk ratings: SPECIAL MENTION- Loans in this category are considered "criticized" from a regulatory point of view but are not considered "classified" until the risk classification becomes substandard or worse. Loans in this category represent above average risk and potential weakness which may, if not corrected, weaken the loan and threaten repayment at some future date. SUBSTANDARD- Loans in this category have well defined weakness that jeopardize full repayment of the debt, although loss does not seem likely. Loss potential does not have to exist in individual loans in the Substandard classification, but will be apparent in the aggregate. Typically, these loans have not met repayment plans as agreed. The primary source of repayment may have failed to materialize; repayment may be dependent on collateral liquidation or other secondary sources. Bankrupt borrowers and those with continuously past due payments are considered substandard. DOUBTFUL- Loans in this category have all the characteristics of substandard loans with the added weakness that payment in full or liquidation in full is highly questionable and improbable. The possibility of loss is extremely high, but because of certain important and reasonably specific pending factors, which may work to the strengthening of the loan, its classification as an estimated loss is deferred until the amount of the loss may be more accurately determined. PASS- Loans not meeting any of the three criteria above that are analyzed individually as part of the above described process are considered to be pass rated loans. 49 Summit State Bank | Annual Report 2017 Based on recent analysis performed as of December 31, 2017 and 2016, the risk category of loans by class of loans is as follows: 2017 (in thousands) Commercial & agricultural Real estate - commercial Real estate - construction and land Real estate - single family Real estate - multifamily Consumer & lease financing Pass $ 94,105 237,189 13,465 51,154 31,961 385 Special Mention $ - 3,211 - - - - Substandard Doubtful Total $ 8,852 1,666 - 712 130 - $ - - - - - - $ 102,957 242,066 13,465 51,866 32,091 385 Total $ 428,259 $ 3,211 $ 11,360 $ - $ 442,830 2016 (in thousands) Commercial & agricultural Real estate - commercial Real estate - construction and land Real estate - single family Real estate - multifamily Consumer & lease financing Pass $ 69,652 179,540 7,897 49,726 26,765 434 Special Mention $ 501 3,299 - - - - Substandard Doubtful Total $ 11,366 8,137 - 1,318 768 - $ - - - - - - $ 81,519 190,976 7,897 51,044 27,533 434 Total $ 334,014 $ 3,800 $ 21,589 $ - $ 359,403 Salaries and employee benefits totaling $1,141,000, $734,000 and $950,000 have been deferred as loan origination costs for the years ended December 31, 2017, 2016 and 2015, respectively. Loans totaling $242,215,000 and $216,673,000 were pledged to secure borrowings with the Federal Home Loan Bank or State of California time deposits at December 31, 2017 and 2016, respectively (see Notes 6 and 8). 4. OTHER REAL ESTATE OWNED There was no other real estate owned (OREO) at year end December 31, 2017 and 2016. Sales of OREO properties resulted in net gains of $0 in 2017, $0 in 2016, and $1,125,000 in 2015. Operating income, net of rental expenses, on OREO was $0 for the years ended December 31, 2017 and 2016 and $54,000 for the year ended December 31, 2015. The OREO sold in 2015 was partially financed by the Bank with a loan of $2,675,000, which represented 66% of the book value and 52% of the sales price of the OREO. 50 Summit State Bank | Annual Report 2017 5. BANK PREMISES AND EQUIPMENT Bank premises and equipment consisted of the following: December 31, (in thousands) 2017 2016 Land Building Furniture, fixtures and equipment Leasehold improvements Less accumulated depreciation and amortization $ 1,184 7,597 2,389 798 11,968 $ 1,184 7,590 2,305 781 11,860 (6,689) 5,279 $ (6,447) 5,413 $ Depreciation and amortization included in occupancy and equipment expense totaled $339,000, $312,000 and $390,000 for the years ended December 31, 2017, 2016 and 2015, respectively. 6. INTEREST-BEARING DEPOSITS The aggregate amount of maturities of all time deposits is as follows: Year Ending December 31, 2018 2019 2020 2021 2022 Thereafter (in thousands) $ 146,676 19,928 294 146 181 19 167,244 $ Interest expense recognized on interest-bearing deposits was as follows: Year Ended December 31, (in thousands) 2017 2016 2015 Interest-bearing demand Savings Money market Time deposits $ 82 27 143 1,387 1,639 $ $ $ 65 10 76 704 855 $ 54 8 127 568 757 $ 51 Summit State Bank | Annual Report 2017 Significant deposit relationships included $48,500,000 at December 31, 2017 and 2016 of public deposits from the State of California with maturity terms of three to six months. Brokered deposits included in deposits were $69,907,000 and $65,854,000 at December 31, 2017 and 2016, of which $41,848,000 and $45,802,000 were through reciprocal deposit programs that are classified as brokered deposits by the FFIEC. 7. BORROWINGS The Bank has a total of $21,000,000 in Federal funds lines of credit with four correspondent banks at December 31, 2017 with interest payable at the then current rate. The Bank maintains a letter of credit facility totaling $4,000,000 with a correspondent bank to guarantee international letters of credit issued to certain customers. There are $3,485,000 and $1,964,000 of letters of credit issued on behalf of the Bank’s customers as of December 31, 2017 and 2016, respectively. There were no borrowings outstanding under the Federal funds lines of credit as of December 31, 2017 or 2016. 8. FEDERAL HOME LOAN BANK ADVANCES Each advance is payable at its maturity date, with a prepayment penalty for fixed rate advances. The advances were collateralized by $232,030,000 and $202,810,000 of loans under a blanket lien arrangement at December 31, 2017 and 2016. Based on this collateral the Bank was eligible to borrow up to a total of $140,753,000 and $120,551,000 of which $125,753,000 and $31,650,000 was available for additional advances as of December 31, 2017 and 2016. Advance balances averaged $52,429,000 in 2017 and $58,659,000 in 2016. Advances from the Federal Home Loan Bank were $15,000,000 at December 31, 2017, with maturity in February 2018 at a fixed rate of 1.00%. Advances were $68,900,000 at December 31, 2016, with maturities from January 2017 through February 2018 and fixed rates from 0.55% to 1.00%, averaging 0.70%. At December 31, 2017, FHLB fixed rate advances are scheduled to mature as follows: (in thousands) Weighted Average Interest Rate December 31, 2017 Due on or before December 31, 2018 1.00% $ 15,000 $ 15,000 52 Summit State Bank | Annual Report 2017 9. INCOME TAXES The provision for income taxes for the years ended December 31, 2017, 2016 and 2015 consisted of the following: (in thousands) 2017 Current Deferred Provision for income taxes Federal State Total $ $ 1,973 (36) 1,937 $ $ 785 (92) 693 $ $ 2,758 (128) 2,630 2016 Federal State Total Current Deferred Provision for income taxes 2015 Current Deferred $ $ 2,115 450 2,565 $ $ 766 151 917 $ $ 2,881 601 3,482 Federal State Total $ $ 2,238 877 3,115 $ 941 173 1,114 $ $ $ 3,179 1,050 4,229 Deferred tax assets (liabilities) are comprised of the following: (in thousands) Deferred tax assets: Allowance for loan losses Future benefit of state tax deduction Net unrealized losses on available-for-sale investment securities Other accruals Total deferred tax assets Deferred tax liabilities: Federal Home Loan Bank stock dividends Deferred loan costs Prepaid expenses and other Bank premises and equipment December 31, 2017 2016 $ 817 232 $ 598 326 251 149 1,449 (64) (548) (31) (196) 640 103 1,667 (89) (572) (102) (138) Total deferred tax liabilities Net deferred tax assets (839) 610 $ (901) 766 $ 53 Summit State Bank | Annual Report 2017 The provision for income taxes differs from amounts computed by applying the statutory Federal income tax rates to operating income before income taxes. The significant items comprising these differences for the years ended December 31, 2017, 2016 and 2015 consisted of the following: 2017 2016 2015 (in thousands) Amount Rate % Amount Rate % Amount Rate % Federal income tax expense, at statutory rate State franchise tax expense, net of Federal tax effect and other Impact of Tax Cut and Jobs Act Total income tax expense $ 2,013 34.0% $ 2,873 34.0% $ 3,488 325 292 2,630 $ 5.5% 4.9% 44.4% 609 - 3,482 $ 7.2% - 41.2% 741 - 4,229 $ 34.0% 7.2% - 41.2% The Bank’s 2017 results include the impact of the enactment of the Tax Cuts and Jobs Act, which was signed into law on December 22, 2017. The law includes significant changes to the U.S. corporate tax system, including a Federal corporate rate change reduction from 35% to 21%. In 2017, the Bank applied this newly enacted corporate federal income tax of 21%, resulting in approximately a $292 thousand increase to tax expense for the deferred tax asset writedown. The final impact of the tax rate change may differ due to changes in assumptions made by the Bank or actions the Bank may take as a result of tax reform. The Bank had no unrecognized tax benefits and recorded no interest and penalties for the years ended December 31, 2017 and 2016. The Bank does not expect a significant change in unrecognized tax benefits in the next twelve months. The Bank and its subsidiary are subject to U.S. federal income tax as well as income tax of the State of California. The Bank is no longer subject to examination by federal taxing authorities for tax years 2014 and prior and by California taxing authorities for tax years 2013 and prior. 10. COMMITMENTS AND CONTINGENCIES Leases The Bank leases various equipment and offices under non-cancelable operating leases. These leases include various renewal and termination options and rental adjustment provisions. Rental expense included in occupancy and equipment expense totaled $428,000, $297,000 and $288,000 for the years ended December 31, 2017, 2016 and 2015, respectively. Future minimum lease payments for the next five years are as follows: Year Ending December 31, 2018 2019 2020 2021 2022 (in thousands) 406 $ 395 284 144 22 1,251 $ 54 Summit State Bank | Annual Report 2017 The Bank has operating leases with third parties for office space in its head office building. The leases are for periods from four to five years and contain renewal options. Rental income totaled $574,000, $559,000 and $532,000 for the years ended December 31, 2017, 2016 and 2015 respectively. Minimum future non- cancellable lease payments from these operating leases are as follows: Year Ending December 31, 2018 2019 2020 2021 2022 (in thousands) 561 $ 148 152 157 39 1,057 $ Federal Reserve Requirements Banks are required to maintain reserves with the Federal Reserve Bank equal to a percentage of their reservable deposits less vault cash. The reserve requirement was $8,168,000 and $7,580,000 as of December 31, 2017 and 2016. Financial Instruments with Off-Balance-Sheet Risk The Bank is a party to financial instruments with off-balance-sheet risk in the normal course of business in order to meet the financing needs of its clients and to reduce its own exposure to fluctuations in interest rates. These financial instruments consist of commitments to extend credit and standby letters of credit. These instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized on the consolidated balance sheets. The Bank's exposure to credit loss in the event of nonperformance by the other party for commitments to extend credit and standby letters of credit is represented by the contractual amount of those instruments. The Bank uses the same credit policies in making commitments and standby letters of credit as it does for loans included on the consolidated balance sheets. The contractual amounts of financial instruments with off-balance-sheet risk at year end were as follows: December 31, (in thousands) 2017 Fixed Rate Variable Rate Commitments to make loans Unused lines of credit Standby letters of credit $ 1,686 7,559 - $ 18,549 52,516 3,485 2016 Fixed Rate $ 3,090 13,665 - Variable Rate $ 4,638 32,444 1,964 Commitments to extend credit are agreements to lend to a client as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since some of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Bank evaluates each client's creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Bank upon extension of the credit, is based on management's credit evaluation of the borrower. Collateral held relating to these commitments varies, but may include 55 Summit State Bank | Annual Report 2017 securities, equipment, accounts receivable, inventory and deeds of trust on residential real estate and income- producing commercial properties. Standby letters of credit are conditional commitments issued by the Bank to guarantee the performance of a client to a third party. The credit risk involved in issuing standby letters of credit is essentially the same as that involved in extending loans to clients. The fair value of the liability related to these standby letters of credit, which represents the fees received for issuing the guarantees, was not significant at December 31, 2017 and 2016. The Bank recognizes these fees as revenue over the term of the commitment or when the commitment is used. At December 31, 2017, real estate loan commitments represent 44% of total commitments and are generally secured by property with a loan-to-value ratio not to exceed 80%. Commercial loan commitments represent approximately 56% of total commitments and are generally secured by collateral other than real estate or are unsecured. The FHLB issued a $20,000,000 letter of credit on the Bank’s behalf to pledge for deposits from the State of California. The letter of credit expired in May 2017. Concentrations of Credit Risk The Bank's business activity is primarily with clients located within Northern California. Although the Bank has a diversified loan portfolio, a significant portion of its clients' ability to repay loans is dependent upon the real estate market and various economic factors within Sonoma County. Generally, loans are secured by various forms of collateral. The Bank's loan policy requires sufficient collateral be obtained as necessary to meet the Bank's relative risk criteria for each borrower. The Bank's collateral consists primarily of real estate, accounts receivable, inventory and other financial instruments. Correspondent Banking Agreements The Bank maintains funds on deposit with other federally insured financial institutions under correspondent banking agreements, and $1,430,000 in deposits were uninsured at December 31, 2017. Contingencies The Bank is subject to legal proceedings and claims which arise in the ordinary course of business. In the opinion of management, the amount of ultimate liability with respect to such actions will not materially affect the consolidated financial condition or results of operations of the Bank. 11. SHAREHOLDERS' EQUITY Regulatory Capital The Bank is subject to certain regulatory capital requirements administered by the Federal Deposit Insurance Corporation (FDIC). Failure to meet these 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 Bank'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 the Bank's consolidated assets, liabilities and certain off-balance-sheet items as calculated under regulatory accounting practices. The Bank's capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors. On July 2, 2013, the federal banking agencies substantially amended the regulatory risk-based capital rules applicable to the Bank. Effective January 1, 2015 the revised rules create “Common equity tier 1,” a new measure of regulatory capital closer to pure tangible common equity than the present Tier 1 definition. The required minimum risk-based capital ratio for Common equity tier 1 is 4.5 percent and with a 2.5 percent capital conservation buffer. The revised capital rules require the Bank to meet the capital conservation buffer 56 Summit State Bank | Annual Report 2017 requirement by 2019 in order to avoid constraints on capital distributions, such as dividends and equity repurchases, and certain bonus compensation for executive officers. These new capital rules also change the risk-weights of certain assets for purposes of the risk-based capital ratios and phase out certain instruments as qualifying capital. When the new capital rule is fully phased in, the minimum capital requirements plus the conservation buffer will exceed the well-capitalized thresholds. This 0.5 percentage-point cushion allows institutions to dip into a portion of their capital conservation buffer before reaching a status that is considered less than well capitalized for prompt corrective action purposes. Quantitative measures established by regulation to ensure capital adequacy require the Bank to maintain minimum amounts and ratios of total and Tier 1 capital to risk-weighted assets and of Tier 1 capital to average assets. Each of these components is defined in the regulations. Management believes that the Bank met all its capital adequacy requirements as of December 31, 2017 and 2016. At December 31, 2017, the Bank is considered well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized, the Bank must maintain minimum common equity Tier 1 capital, total risk-based, Tier 1 risk-based and Tier 1 leverage ratios as set forth below. The Bank elected not to include Other Accumulated Comprehensive Income in the regulatory capital calculations. The Bank’s actual and required capital amounts and ratios consisted of the following: (in thousands) Amount Ratio Amount Ratio 2017 2016 Common Equity Tier 1 Capital Ratio Summit State Bank $ 56,089 11.6% $ 55,388 13.5% Minimum requirement with capital conservation buffer (1) Minimum requirement for "Well-Capitalized" institution Minimum regulatory requirement $ $ $ 33,891 31,471 21,787 7.0% 6.5% 4.5% $ $ $ 28,775 26,719 18,498 7.0% 6.5% 4.5% Tier 1 Capital Ratio Summit State Bank $ 56,089 11.6% $ 55,388 13.5% Minimum requirement with capital conservation buffer (1) Minimum requirement for "Well-Capitalized" institution Minimum regulatory requirement $ $ $ 41,154 38,733 29,050 8.5% 8.0% 6.0% $ $ $ 34,941 32,886 24,664 8.5% 8.0% 6.0% Total Capital Ratio Summit State Bank $ 61,485 12.7% $ 60,230 14.7% Minimum requirement with capital conservation buffer (1) Minimum requirement for "Well-Capitalized" institution Minimum regulatory requirement $ $ $ 50,837 48,416 38,733 10.5% 10.0% 8.0% $ $ $ 43,162 41,107 32,886 10.5% 10.0% 8.0% Tier 1 Leverage Ratio Summit State Bank $ 56,089 10.2% $ 55,388 11.1% Minimum requirement for "Well-Capitalized" institution Minimum regulatory requirement $ $ 27,406 21,925 5.0% 4.0% $ $ 25,001 20,001 5.0% 4.0% (1) Includes 2.5% capital conservation buffer effective January 1, 2019. 57 Summit State Bank | Annual Report 2017 Dividends Upon declaration by the Board of Directors, all shareholders of record will be entitled to receive dividends. The California Financial Code restricts the total dividend payment of any bank in any calendar year without permission of the California Department of Business Oversight, to the lesser of (1) the Bank's retained earnings or (2) the Bank's net income for its last three fiscal years, less distributions made to shareholders during the same three-year period. At December 31, 2017, the current regular dividend of $0.12 per quarter is not subject to the foregoing restrictions and approval. Preferred Stock On August 4, 2011, the Bank issued 13,750 shares for $13,750,000 of Fixed Rate Non-cumulative Perpetual Preferred Stock, Series B (the “Preferred Stock”), which was recorded net of $84,000 in issuance costs. The Preferred Stock was issued under the Small Business Lending Fund (SBLF) of the U.S. Department of the Treasury and had an initial non-cumulative dividend rate of 5% per annum. The dividend rate was adjusted lower each quarter depending on increases that occur in qualifying loans as described in the SBLF program. The Preferred Stock was redeemed at par value of $13,750,000 on August 31, 2015. Stock-Based Compensation Plans The Bank has a 2007 and a 2013 Stock Option Plan (stock option plan or the Plan), which are shareholder- approved, with each Plan permitting the grant of share options to its employees for up to 187,500 shares of common stock. Option awards are generally granted with an exercise price equal to the market price of the Bank’s common stock at the date of grant; those option awards have vesting periods of 5 years unless otherwise approved by the Board of Directors and have 10-year contractual terms. As of December 31, 2017, there were 187,500 shares available for future grants under the 2013 Plan. The Bank has granted Stock Appreciation Rights (“SARs”) in 2017 and 2016 to key employees. The SARs provide long-term incentives to the employees by providing a cash payment of the difference between the market price of the Bank’s common stock at time of exercise and the price at the grant date. The expiration of the SARs are ten years and each has an annual vesting of 20% for the first five years. The compensation expense is accrued each reporting period as a liability. The fair value of each option and SARs award is estimated on the date of grant using a closed form option valuation (Black-Scholes) model that uses the assumptions noted in the table below. Expected volatilities are based on historical volatilities of an index consisting of financial institution stocks which should approximate the future volatility of the Bank’s common stock. The Bank uses historical data to estimate option and SARs exercise and post-vesting termination behavior. Employee and management options are tracked separately. The expected term of options and SARs granted is based on historical data and represents the period of time that options and SARs granted are expected to be outstanding, which takes into account that the options and SARs are not transferable. The risk-free interest rate for the expected term of the option and SARs is based on the U.S. Treasury yield curve in effect at the time of the grant. The dividend yield of the Bank’s common stock is used as of the date of the grant. For the years ended December 31, 2017 and 2016, there was $17,000 and $24,000 in compensation costs related to non-vested stock options and SARs granted. As of December 31, 2017 and 2016, there was $118,000 and $68,000 of total unrecognized compensation costs related to non-vested stock options and SARs granted. At December 31, 2017, there were 35,625 vested options outstanding with a range of exercise prices of $4.40 to $5.02 and 21,625 options exercised with a range of exercise prices of $4.00 to $8.74 during the year. 58 Summit State Bank | Annual Report 2017 Information related to the stock option plan follows: 2017 2016 2015 Intrinsic value of options exercised Cash received from option exercises Tax benefit realized from option exercises Weighted average fair value of options granted $ 161,000 121,000 67,000 - $ 447,000 1,000 12,000 - $ 27,000 34,000 11,000 - A summary of the activity in the stock option plan follows: Shares Weighted Average Exercise Price Weighted Average Remaining Contractual Term Aggregate Intrinsic Value Year Ended December 31, 2017 Outstanding at beginning of the year Granted Exercised Forfeited or expired Outstanding at end of the year Vested or expected to vest Exercisable at end of year Year Ended December 31, 2016 Outstanding at beginning of the year Granted Exercised Forfeited or expired Outstanding at end of the year Vested or expected to vest Exercisable at end of year Year Ended December 31, 2015 Outstanding at beginning of the year Granted Exercised Forfeited or expired Outstanding at end of the year Vested or expected to vest Exercisable at end of year 57,250 - (21,625) - 35,625 35,625 35,625 136,395 - (79,145) - 57,250 57,250 57,250 145,395 - (6,000) (3,000) 136,395 136,395 123,145 $ $ $ $ $ $ $ $ $ $ $ $ 5.04 - 5.62 - 4.69 4.69 4.69 5.16 - 5.26 - 5.04 5.04 5.04 5.17 - 5.74 4.40 5.16 5.16 5.25 2 years 2 years 2 years $ $ $ 282,000 282,000 282,000 3 years 3 years 3 years $ $ $ 398,000 398,000 398,000 4 years 4 years 4 years $ $ $ 797,000 797,000 710,000 59 Summit State Bank | Annual Report 2017 A summary of the activity for the SARs agreements follows: Shares Weighted Average Exercise Price Weighted Average Remaining Contractual Term Aggregate Intrinsic Value Year Ended December 31, 2017 Outstanding at beginning of the year Granted Exercised Forfeited or expired Outstanding at end of the year Vested or expected to vest Exercisable at end of year Year Ended December 31, 2016 Outstanding at beginning of the year Granted Exercised Forfeited or expired Outstanding at end of the year Vested or expected to vest Exercisable at end of year 25,000 20,000 - - 45,000 45,000 5,000 - 25,000 - - 25,000 25,000 - $ $ $ $ $ $ $ $ 11.60 12.50 - - 12.00 12.00 11.60 - 11.60 - - 11.60 11.60 - 9 years 9 years 9 years $ $ $ 132,000 132,000 14,000 10 years 10 years - $ $ $ 71,000 71,000 - 12. OTHER EXPENSES Other expenses consisted of the following: (in thousands) 2017 2016 2015 Year Ended December 31, Data processing Professional fees Director fees and expenses Nasdaq listing and regulatory license expense Advertising and promotion Deposit and other insurance premiums Telephone and postage Other real estate owned expenses Other expenses 13. EMPLOYEE BENEFIT PLAN 401(k) Employee Savings Plan $ $ $ 1,278 554 479 140 828 431 77 - 767 4,554 1,194 625 518 131 883 387 70 - 646 4,454 925 557 452 136 655 359 75 64 641 3,864 $ $ $ The Bank has a 401(k) Employee Savings Plan (the "Plan"), qualified under the Internal Revenue Code (Code), whereby participants may defer a percentage of their compensation, but not in excess of the maximum allowed under the Code. Bank contributions, as determined by the Board of Directors, are discretionary and vest immediately. Contributions by the Bank totaled $175,000, $137,000 and $129,000 for the years ended December 31, 2017, 2016 and 2015, respectively. 14. RELATED PARTY TRANSACTIONS During the normal course of business, the Bank enters into loans with related parties, including executive officers and directors. Other changes are the result of changes in related parties during the year. The following 60 Summit State Bank | Annual Report 2017 is a summary of the aggregate activity involving related party borrowers. These loans are made at arm’s length and are consistent with what other borrowers receive. 2017 2016 (in thousands) Balance, January 1 New borrowings Change in related parties Amounts repaid Balance, December 31 $ $ 6,531 4,097 - (2,130) 8,498 4,857 20 2,758 (1,104) 6,531 $ $ Undisbursed commitments to related parties $ 1,960 $ 1,822 At December 31, 2017 and 2016, deposits of related parties amounted to $5,112,000 and $4,920,000, respectively. 15. FAIR VALUE Accounting standards establish 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 standard 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 reporting entity’s own assumptions about the assumptions that market participants would use in pricing an asset or liability. The fair values of most securities available for sale are determined by matrix pricing, which is a mathematical technique widely used in the industry to value debt securities without relying exclusively on quoted prices for the specific securities but rather by relying on the securities’ relationship to other benchmark quoted securities (Level 2 inputs). The fair value of impaired loans that are collateral dependent are generally based on real estate appraisals. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. Adjustments are routinely made in the appraisal process by the appraisers to adjust for differences between the comparable sales and income data available. Such adjustments are usually significant and typically result in a Level 3 classification of the inputs for determining fair value. Estimated fair values are disclosed for financial instruments for which it is practicable to estimate fair value. These estimates are made at a specific point in time based on relevant market data and information about the financial instruments. These estimates do not reflect any premium or discount that could result from offering the Bank's entire holdings of a particular financial instrument for sale at one time, nor do they attempt to estimate the value of anticipated future business related to the instruments. In addition, the tax ramifications related to the realization of unrealized gains and losses can have a significant effect on fair value estimates and have not been considered in any of these estimates. 61 Summit State Bank | Annual Report 2017 Because no active market exists for a significant portion of the Bank's financial instruments, fair value estimates are based on judgments regarding current economic conditions, risk characteristics of various financial instruments and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions could significantly affect the fair values presented. The following methods and assumptions were used by the Bank to estimate the fair value of its financial instruments at December 31, 2017 and 2016: Cash and cash equivalents: For cash and cash equivalents consisting of cash, due from banks and federal funds sold, the carrying amount is estimated to be fair value. Time deposits with banks: Fair values for fixed-rate certificates of deposit are estimated using a discounted cash flow analysis using interest rates being offered at each reporting date for certificates with similar maturities. Investment securities: For investment securities, fair values are based on quoted market prices, where available. If quoted market prices are not available, fair values are estimated using quoted market prices for similar securities and indications of value provided by brokers. The carrying amount of accrued interest receivable approximates its fair value. Loans, net of allowance: For variable-rate loans that reprice frequently with no significant change in credit risk, fair values are based on carrying values. Fair values for other loans are estimated using discounted cash flow analyses, using interest rates being offered at each reporting date for loans with similar terms to borrowers of comparable creditworthiness (without considering widening credit spreads due to market illiquidity). The allowance for loan losses is considered to be a reasonable estimate of discount for credit risk. The carrying amount of accrued interest receivable approximates its fair value. Federal Home Loan Bank stock: The fair value for Federal Home Loan Bank Stock is subject to restrictions on its transferability. It is redeemable only by the Federal Home Loan Bank at par value of $100 per share. Deposits: The fair values for demand deposits are, by definition, equal to the amount payable on demand at the reporting date represented by their carrying amount. Fair values for fixed-rate certificates of deposit are estimated using a discounted cash flow analysis using interest rates being offered at each reporting date for certificates with similar remaining maturities. The carrying amount of accrued interest payable approximates its fair value. Short-term borrowings and long-term debt: The fair values of fixed rate borrowings are estimated using a discounted cash flow analysis that applies interest rates being offered on similar debt instruments. The fair values of variable rate borrowings are based on carrying value. The carrying amount of accrued interest payable approximates its fair value. Commitments to fund loans/standby letters of credit: The fair values of commitments are estimated using the fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the present creditworthiness of the counterparties. The differences between the carrying value of commitments to fund loans or standby letters of credit and their fair value are not significant and, therefore, are not included in the following table. 62 Summit State Bank | Annual Report 2017 The following table presents a summary of the carrying value and fair value by level of financial instruments on the Bank’s consolidated balance sheet at December 31, 2017 and 2016: (in thousands) Financial assets: December 31, 2017 December 31, 2016 Carrying Amount Fair Value Fair Value Hierarchy Carrying Amount Fair Value Fair Value Hierarchy Cash and due from banks Federal funds sold Time deposits with banks Investment securities - held-to-maturity Investment securities - available-for-sale Loans, net of allowance Investment in FHLB stock Accrued interest receivable $ 68,814 2,000 - 7,984 78,770 437,594 3,085 1,960 $ 68,814 2,000 - 7,870 78,770 450,626 3,085 1,960 Financial liabilities: Deposits FHLB advances Accrued interest payable $ 533,513 15,000 136 $ 532,976 15,000 136 Level 1 Level 1 Level 2 Level 2 Level 2 Level 3 Level 2 Level 1 Level 2 Level 2 Level 1 $ 24,231 2,000 248 7,976 107,771 354,638 3,085 1,871 $ 24,231 2,000 248 7,713 107,771 357,511 3,085 1,871 $ 384,251 68,900 74 $ 383,964 68,924 74 Level 1 Level 1 Level 2 Level 2 Level 2 Level 3 Level 2 Level 1 Level 2 Level 2 Level 1 Assets Measured on a Recurring Basis Assets measured at fair value on a recurring basis are summarized below: Fair Value Measurements at December 31, 2017 (In thousands) Quoted Prices in Active Markets for Identical Assets (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) December 31, 2017 Assets: Securities available-for-sale: U.S. Treasuries Government agencies Mortgage-backed securities - residential Corporate debt Total securities available-for-sale $ $ 5,982 40,057 8,093 24,638 78,770 $ $ - - - - - $ $ 5,982 40,057 8,093 24,638 78,770 $ $ - - - - - Assets: Securities available-for-sale: U.S. Treasuries Government agencies Mortgage-backed securities - residential Corporate debt Total securities available-for-sale December 31, 2016 $ $ 7,990 53,444 9,096 37,241 107,771 Fair Value Measurements at December 31, 2016 (In thousands) Quoted Prices in Active Markets for Identical Assets (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) $ $ - - - - - $ $ 7,990 53,444 9,096 37,241 107,771 $ $ - - - - - There were no significant transfers between Level 1 and Level 2 or Level 3 during 2017 and 2016. 63 Summit State Bank | Annual Report 2017 Assets Measured on a Non-Recurring Basis No assets were measured at fair value on a non-recurring basis at December 31, 2017 or 2016. Fair value estimates are determined as of a specific point in time utilizing quoted market prices, where available, or various assumptions and estimates. As the assumptions and estimates change, the fair value of the financial instruments will change. The use of assumptions and various techniques, as well as the absence of secondary markets for certain financial instruments, will likely reduce the comparability of value disclosures between companies. Impaired loans are valued at the fair value less estimated disposal costs of collateral. Impaired loans with specific loss allocations had a principal balance of $0 with a valuation allowance of $0 at December 31, 2017. Impaired loans with specific loss allocations had a principal balance of $337,000 with a valuation allowance of $337,000 at December 31, 2016. 16. SUBSEQUENT EVENTS Subsequent events are events or transactions that occur after the consolidated balance sheet date but before the consolidated financial statements are issued. The Bank recognizes in the consolidated financial statements the effects of all subsequent events that provide additional evidence about conditions that existed at the date of the consolidated balance sheet, including these estimates inherent in the process of preparing the consolidated financial statements. The Bank’s consolidated financial statements do not recognize subsequent events that provide evidence about conditions that did not exist at the date of the balance sheet but arose after the balance sheet date and before consolidated financial statements are available to be issued. The Bank has evaluated subsequent events after December 31, 2017 for potential recognition and disclosure matters. On January 22, 2018, the Board of Directors declared a $0.12 per common share cash dividend to shareholders of record at the close of business on February 16, 2018, that was paid on February 23, 2018. 17. QUARTERLY FINANCIAL DATA (Unaudited) 2017 Earnings Per Common Share (in thousands except EPS data) Interest Income Net Interest Income Net Income Basic Diluted First quarter Second quarter Third quarter Fourth quarter $ 4,832 4,981 5,186 5,714 $ 4,450 4,487 4,382 4,733 $ 881 930 1,001 480 $ 0.15 0.15 0.17 0.08 $ 0.15 0.15 0.17 0.07 2016 Earnings Per Common Share Interest Income Net Interest Income Net Income Basic Diluted First quarter Second quarter Third quarter Fourth quarter $ 5,034 5,058 4,844 4,971 $ 4,703 4,756 4,545 4,669 $ 1,328 1,254 1,198 1,187 $ 0.22 0.21 0.20 0.20 $ 0.22 0.21 0.19 0.20 64 Summit State Bank | Annual Report 2017 MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES The Bank’s common stock trades on the NASDAQ under the symbol “SSBI.” The quotations shown below reflect for the periods indicated the high and low closing sales prices for our common stock as reported by NASDAQ. For the quarter ended December 31, 2017 September 30, 2017 June 30, 2017 March 31, 2017 December 31, 2016 September 30, 2016 June 30, 2016 March 31, 2016 $ High (1) 13.00 13.48 13.35 14.32 12.00 11.12 11.36 11.15 $ Low (1) 12.10 12.25 12.70 11.83 10.52 10.55 10.58 10.48 Cash dividends declared (1) $ 0.12 0.12 0.12 0.096 0.096 0.096 0.096 0.096 (1) Adjusted for the 2017 five-for-four stock split. There were 157 common stock shareholders of record at December 31, 2017. 65 Nonprofit Partner Program Just one of the ways Summit supports our community is our Nonprofit Partner Program. Nonprofit customers earn up to 0.95% on their non interest-bearing operating accounts. We also work to support our nonprofit partners as board members and volunteers. A Better Sonoma County. That’s Our Business. As a community bank, Summit State Bank is proud to donate part of our net profit each year to support our local nonprofits and charitable organizations that make a difference in our community. In 2017 we donated more than 8.4% of our net profit!A Better Sonoma County.That’s Our Business. A 2017 Report would not be complete without addressing the firestorm. As a community bank, we are mandated to be prepared for disasters. Even with all the planning, nothing fully prepared us for the disaster we woke to on the morning of October 9th. Several employees, customers and business owners lost everything they owned, and our community was in crisis. We are proud of how the Summit family performed during this time. Our employees and management team rallied to be there for our employees, our customers and our community from early hours of the first morning to the months that have followed. We know that the road to recovery will be long, but together, we’ll be a better Sonoma County. Company Contact Information Nasdaq: SSBI Summit State Bank P.O. Box 6188 Santa Rosa, CA 95406 707/568-6000 Corporate Secretary: Barbara Gradman Transfer Agent: Computershare 462 South 4th Street Suite 1600 Louisville, KY 40202 800/962-4284 Investor Information: See “Investor Relations” on our website. www.SummitStateBank.com Bicentennial 500 Bicentennial Way Suite 101 Santa Rosa, CA 95403 707/568-6100 Montgomery Village 2300 Midway Drive Santa Rosa, CA 95405 707/568-4975 Rohnert Park 10 Raley’s Towne Centre Rohnert Park, CA 94928 707/568-4955 Healdsburg 1001 Vine Street Healdsburg, CA 95448 707/433-5959 Petaluma 100 Petaluma Blvd. S. Suite A Petaluma, CA 94952 707/283-1120

Continue reading text version or see original annual report in PDF format above