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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.
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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