Annual
RepoRt
RepoRt
Suncrestbank.com
Visalia Branch
400 West Center Avenue
Visalia, CA 93291
559.802.1000
Porterville Branch
65 West Olive Avenue
Porterville, CA 93257
559.306.1300
Administration
410 West Center Avenue
Suite 101
Visalia, CA 93291
559.802.1060
Suncrestbank.com
Visalia Branch
400 West Center Avenue
Visalia, CA 93291
559.802.1000
Porterville Branch
65 West Olive Avenue
Porterville, CA 93257
559.306.1300
Administration
410 West Center Avenue
Suite 101
Visalia, CA 93291
559.802.1060
SUNCREST BANK
NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2012 AND 2011
SUNCREST BANK
NOTE M - FAIR VALUE OF FINANCIAL INSTRUMENTS
also provides for a non-elective discretionary contribution by the Bank.
The Bank made no contributions for 2012 or 2011.
to the realization of the unrealized gains and losses can have a potential
effect on fair value estimates and have not been considered in many of
The following methods and assumptions were used to estimate the fair
value of significant financial instruments:
- Continued
the estimates.
Financial Assets
The carrying amounts of cash, short term investments, due from
customers on acceptances, and bank acceptances outstanding are
considered to approximate fair value. Short term investments include
federal funds sold, securities purchased under agreements to resell, and
interest bearing deposits with banks. The fair values of investment
securities, including available for sale, are generally based on matrix
pricing. The fair value of loans are estimated using a combination of
techniques, including discounting estimated future cash flows and quoted
market prices of similar instruments where available.
Financial Liabilities
The carrying amounts of deposit liabilities payable on demand,
commercial paper, and other borrowed funds are considered to
approximate fair value. For fixed maturity deposits, fair value is
estimated by discounting estimated future cash flows using currently
offered rates for deposits of similar remaining maturities. The fair value
of long term debt is based on rates currently available to the Bank for
debt with similar terms and remaining maturities.
Off-Balance Sheet Financial Instruments
The fair value of commitments to extend credit and standby letters of
credit is estimated using the fees currently charged to enter into similar
agreements. The fair value of these financial instruments is not material.
The fair value hierarchy level and estimated fair value of significant
financial instruments at December 31, 2012 and 2011 are summarized as
follows (dollar amounts in thousands):
2012
2011
Fair Value Carrying
Hierarchy
Value
Fair
Value
Carrying
Value
Fair
Value
Financial Assets:
Cash and Cash Equivalents Level 1
$
3,247
$
3,247
$
5,222
Investment Securities
Loans, net
Other Bank Stock
Level 1
Level 2
Level 2
14,722
78,890
561
14,722
78,892
561
15,130
68,543
464
$
5,222
15,130
68,543
464
Financial Liabilities:
Deposits
Federal Funds Purchased
Level 2
Level 2
84,782
84,782
78,044
78,044
700
700
-
-
NOTE O - REGULATORY MATTERS
The Bank is subject to various regulatory capital requirements
administered by the federal banking agencies. Failure to meet minimum
capital requirements can initiate certain mandatory - and possibly
additional discretionary - actions by regulators that, if undertaken, could
have a direct material effect on the 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 their assets, liabilities, and certain off-
balance-sheet items as calculated under regulatory accounting practices.
The capital amounts and classification are also subject to qualitative
judgments by the regulators about components, risk weightings, and
other factors.
Quantitative measures established by regulation to ensure capital
adequacy require the Bank to maintain minimum amounts and ratios (set
forth in the table below) of total and Tier 1 capital (as defined in the
regulations) to risk-weighted assets (as defined), and of Tier 1 capital
(as defined) to average assets (as defined). Management believes, as of
December 31, 2012 and 2011, that the Bank meets all capital adequacy
requirements.
As of December 31, 2012, the most recent notification from the FDIC
categorized the Bank as well capitalized under the regulatory framework
for prompt corrective action (there are no conditions or events since
that notification that management believes have changed the Bank’s
category). To be categorized as well capitalized, the Bank must maintain
minimum ratios as set forth in the table below.
The following table also sets forth the Bank’s actual capital amounts and
ratios (dollar amounts in thousands):
Amount of Capital Required
For Capital
Adequacy
Purposes
Actual
Ratio
Amount Ratio Amount Ratio
To Be Well-
Capitalized
Under Prompt
Corrective
Provisions
As of December 31, 2012:
Total Capital (to Risk-Weighted Assets)
$14,159
Tier 1 Capital (to Risk-Weighted Assets) $13,156
Tier 1 Capital (to Average Assets)
$13,156
16.3%
15.1%
12.5%
$6,977
$3,489
$4,227
8.0% $8,721
10.0%
4.0% $5,233
4.0% $5,284
6.0%
5.0%
As of December 31, 2011:
Total Capital (to Risk-Weighted Assets)
$13,572
Tier 1 Capital (to Risk-Weighted Assets) $12,699
Tier 1 Capital (to Average Assets)
$12,699
17.6%
16.5%
13.9%
$6,186
$3,093
$3,665
8.0% $7,733
10.0%
4.0% $4,640
4.0% $4,582
6.0%
5.0%
The California Financial Code provides that a Bank may not make a
cash distribution to its shareholders in excess of the lesser of the Bank’s
undivided profits or the Bank’s net income for its last three fiscal years
less the amount of any distribution made to the Bank’s shareholders
NOTE N - EMPLOYEE BENEFIT PLAN
The Bank adopted a 401(k) Plan for its employees in 2008. Under the
plan, eligible employees may defer a portion of their salaries. The plan
during the same period.
22
We went with Suncrest Bank for the SBA loan, but
eventually moved our accounts from a larger bank.
The relationship feels right. It’s warm and friendly
at the bank and staff members know us – like what
we try to do here. We no longer feel like a number.
Rande and Kim Payne
Co-Owners, Valhalla Restaurant
Suncrestbank.com
SUNCREST BANK
NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2012 AND 2011
SUNCREST BANK
Dear Shareholders
and Customers,
Suncrest Bank takes pride in meeting our mission
to be the premiere independent bank in our
region by effectively serving our clientele with
exceptional customer service while exceeding
customer expectations of their banking experience
and creating a secure investment opportunity for
our shareholders. Community is defined as a group
brought together for the greater good of something and, to Suncrest Bank, community
is the cornerstone of who we are as a bank.
We are working hard to create lifelong relationships with our customers in the
communities that we serve. Our customers benefit from decisions made locally and they
love the hometown service that our expert staff provides. I am very proud of each and
every one of our associates. They are the face of Suncrest Bank and they provide our
customers with special, personalized service. Their hard work provided the excellent
financial results that we enjoyed for the year ending December 31, 2012.
Our net income of $411,980 was an increase of $804,871 over the loss for the prior
year. This marks our first year of profitable operating results for each quarter. Our
assets increased $7,931,894 over the December 31, 2011, record year, and totaled
$99,122,016 at year end December 31, 2012. This was another year end record for
Suncrest Bank.
Net Income
NOTE K - STOCK OPTION PLAN
The Bank’s 2007 Stock Option Plan was approved by its shareholders
in July 2008. Under the terms of the 2007 Stock Option Plan, officers
estimated selling costs (Level 3).
and key employees may be granted both nonqualified and incentive
The following table provides the hierarchy and fair value for each major
stock options and directors and organizers, who are not also an officer
category of assets and liabilities measured at fair value at December 31,
or broker opinions, obtained from independent third parties, which are
frequently adjusted by management to reflect current conditions and
Fair Value Measurements Using:
Level 1
Level 2
Level 3
Total
or employee, may only be granted nonqualified stock options. The Plan
provides for options to purchase 573,473 shares of common stock at a
price not less than 100% of the fair market value of the stock on the date
of the grant. Stock options expire no later than ten years from the date of
the grant and generally vest over three to five years. The Plan provides
for accelerated vesting if there is a change of control, as defined in the
Plan. The Bank recognized stock-based compensation cost of $44,871
and $96,953 for the periods ended December 31, 2012 and 2011.
No stock options were granted in 2012 and 2011.
A summary of the status of the Bank’s stock option plan as of December
31, 2012 and changes during the year ended thereon is presented below:
December 31, 2012
Assets measured at fair value on
a recurring basis
Assets measured at fair value on
a non-recurring basis
December 31, 2011
Assets measured at fair value on
a recurring basis
Assets measured at fair value on
a non-recurring basis
Weighted-
Average
Weighted-
Average
Remaining
Exercise Contractual
Aggregate
Intrinsic
Value
Shares
Price
Term
in Thousands
2012:
Securities Available for Sale
-$
$
14,722,347
$
-
$
14,722,347
Other Real Estate Owned
-$
$
-
$
251,544
$
251,544
Securities Available for Sale
-$
$
15,130,342
$
-
$
15,130,342
Other Real Estate Owned
-$
$
-
$
251,544
$
251,544
At December 31, 2012 and 2011, other real estate owned, which is
measured at fair value less costs to sell, had a net carrying amount of
$251,544, after write-downs of $64,756 during 2011. There were no
write-downs in 2012.
Quantitative information about the Bank’s nonrecurring Level 3 fair
value measurements as of December 31, 2012 is as follows:
Other Real Estate Owned
$
251,544
Third Party Appraisals Selling Costs
Fair Value
Unobservable
Amount
Valuation Technique
Input
Range
10%
NOTE M - FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair value of a financial instrument is the amount at which the asset
or obligation could be exchanged in a current transaction between willing
made at a specific point in time based on relevant market information and
information about the financial instrument. These estimates do not reflect
any premium or discount that could result from offering for sale at one
time the entire holdings of a particular financial instrument. Because no
market value exists for a significant portion of the financial instruments,
fair value estimates are based on judgments regarding future expected
loss experience, current economic conditions, risk characteristics of
various financial instruments, and other factors. These estimates are
subjective in nature, involve uncertainties and matters of judgment and,
therefore, cannot be determined with precision. Changes in assumptions
could significantly affect the estimates.
Outstanding at Beginning of Year
465,804
-
-
$
9.87
$
-
$
-
$
10.00
(
74,300)
Granted
Exercised
Forfeited
Outstanding at End of Year
391,504
$
9.85
5.18 Years
$
-
Options Exercisable
377,504
$
9.91
5.09 Years
$
-
As of December 31, 2012, there was $21,795 of total unrecognized
compensation cost related to the outstanding stock options that will be
recognized over a weighted-average period of 1.35 years.
NOTE L - FAIR VALUE MEASUREMENT
and liabilities recorded at fair value:
Securities
The fair values of securities available for sale are determined by matrix
pricing, which is a mathematical technique used widely in the industry
to value debt securities without relying exclusively on quoted prices for
specific securities but rather by relying on the securities’ relationship to
other benchmark quoted securities (Level 2).
Other Real Estate Owned
Other real estate owned represents real estate that has been foreclosed
and adjusted to fair value. At the time of foreclosure, these assets are
The following is a description of valuation methodologies used for assets
parties, other than in a forced or liquidation sale. Fair value estimates are
2008
2009
2010
2011
2012
recorded at fair value less costs to sell, which becomes the asset’s new
Fair value estimates are based on financial instruments both on and off
basis. Any write-downs based on the asset’s fair value at the date of
the balance sheet without attempting to estimate the value of anticipated
foreclosure are charged to the allowance for loan losses. The fair value of
future business and the value of assets and liabilities that are not
other real estate owned is generally based on recent real estate appraisals
considered financial instruments. Additionally, tax consequences related
21
Table of
Contents
Board of Directors .....................
Staff & Officers ...........................
2
4
A Word from Our Customers ...
5
Audited Financial Statement
2012 and 2011 .............................
6
$500,000
$0
-$500,000
-$1,000,000
-$1,500,000
-$2,000,000
-$2,500,000
NOTE G - OTHER EXPENSES
Other expenses as of December 31 are comprised of the following:
Professional Fees
Data Processing
Office Expenses
Marketing and Business Promotion
Insurance
Regulatory Assessments
OREO Expenses
Other Expenses
2012
2011
$
403,768
$
406,633
258,654
133,549
69,077
31,413
99,957
2,882
69,612
237,498
127,594
77,096
23,673
118,761
69,487
83,315
$
1,068,912
$
1,144,057
NOTE H - INCOME TAXES
During 2012, the Bank recognized income tax expense of $800 comprised
of $207,800 of taxes accrued on current operating earnings reduced by
a $207,000 reduction in the valuation allowance against net deferred tax
assets established in prior years. The tax expense for the year ended
December 31, 2011 was the minimum franchise tax for the State of
California. The tax benefits related to the operating losses incurred
during the period ended December 31, 2011 were not recognized, as
respectively.
respectively.
realization of the benefits is dependent upon future income.
NOTE J - COMMITMENTS
operating loss carryforwards, to the extent not used will expire in 2030.
The Bank does not expect the total amount of unrecognized tax benefits
to significantly increase or decrease within the next twelve months.
The Bank is subject to federal income tax and franchise tax of the state of
California. Income tax returns for the periods ended December 31, 2011,
2010 and 2009 are open to audit by the federal authorities and income tax
returns for the years ended December 31, 2011, 2010, 2009 and 2008 are
open to audit by state authorities.
NOTE I - RELATED PARTY TRANSACTIONS
In the ordinary course of business, the Bank has granted loans to certain
directors and the companies with which they are associated. The total
outstanding principal and commitment of these loans at December
31, 2012 and 2011 was approximately $3,295,000 and $5,624,000,
Also, in the ordinary course of business, certain executive officers,
directors and companies with which they are associated have deposits
with the Bank. The balances of these deposits at December 31, 2012
and 2011 amounted to approximately $14,180,000 and $13,129,000,
In the ordinary course of business, the Bank enters into financial
commitments to meet the financing needs of its customers. Those
instruments involve to varying degrees, elements of credit and interest
rate risk not recognized in the Bank’s financial statements.
The Bank’s exposure to loan loss in the event of nonperformance on
commitments to extend credit and standby letters of credit is represented
by the contractual amount of those instruments. The Bank uses the same
credit policies in making commitments as it does for loans reflected in
the financial statements.
As of December 31, 2012 and 2011, the Bank had the following
outstanding financial commitments whose contractual amount represents
Deferred taxes are a result of differences between income tax accounting
and generally accepted accounting principles with respect to income and
expense recognition. The following is a summary of the components
of the net deferred tax asset accounts recognized in the accompanying
statement of financial condition at December 31:
2012
2011
$
455,000
$
498,000
1,081,000
1,505,000
539,000
100,000
386,000
386,000
498,000
43,000
402,000
258,000
Allowance for Loan Losses Due to Tax Limitations
Deferred Tax Assets:
Pre-Opening Expenses
Depreciation Differences
Operating Loss Carryforwards
Stock-Based Compensation
Other Assets and Liabilities
Valuation Allowance
Deferred Tax Liabilities:
Unrealized Gain on Available-for-Sale Securities
Other Assets and Liabilities
(
16,000)
(
118,000)
(
134,000)
(
19,000)
(
168,000)
(
187,000)
Net Deferred Tax Liabilities
$(
16,000)
$(
19,000)
2,947,000
3,204,000
credit risk:
(
2,829,000)
(
3,036,000)
2012
2011
Commitments to Extend Credit
$
6,296,000
$
7,379,000
Commitments to extend credit are agreements to lend to a customer as
long as there is no violation of any condition established in the contract.
Since many of the commitments are expected to expire without being
drawn upon, the total amounts do not necessarily represent future cash
SUNCREST BANK
NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2012 AND 2011
SUNCREST BANK
We continue to grow and expand our loan and deposit products.
Suncrest Bank is an exceptional agribusiness bank for growers,
packers and processors because our staff and Board of Directors
are rich in agribusiness experience. We are pleased to offer an
outstanding level of expertise to business and agri-business
borrowers of all types.
Our founding CEO/President and Director, Michael Wilson,
made a career change this year, stepping down as our CEO/
President and member of our Board of Directors. I, my co-
directors and the staff of Suncrest Bank wish Mike the best of
everything in the future and thank him for his years of excellent
service to our Bank.
I am grateful to the members of our Board of Directors, whose
hard work and dedication help make Suncrest Bank the success
that it is. I’d also like to extend a special recognition to Board
members Bob Lowery, who left the Board in August, and Steve
Worthley, who leaves the Board in April. Both provided Suncrest
Bank with outstanding service during their terms and we are a
stronger organization thanks to their participation and counsel.
We sincerely appreciate and thank each of you, our shareholders
and customers, for your continued support and referrals. You are
the reason we are in business, and we appreciate all you do for
us.
On behalf of Suncrest Bank, thank you.
Sincerely,
William A. Benneyan
Interim CEO/President
Chairman of the Board of Directors
Asset Growth
$120,000,000
$100,000,000
$80,000,000
$60,000,000
$40,000,000
$20,000,000
$0
The valuation allowance was established because the Bank has not
requirements. The Bank evaluates each client’s credit worthiness on
reported earnings sufficient enough to support the recognition of the
a case-by-case basis. The amount of collateral obtained if deemed
deferred tax assets. The Bank has net operating loss carryforwards of
necessary by the Bank is based on management’s credit evaluation of the
approximately $2,638,000 for federal income purposes and $2,576,000
customer. The majority of the Bank’s commitments to extend credit and
for California franchise tax purposes. Federal and California net
standby letters of credit are secured by real estate or cash, respectively.
2008
2009
2010
2011
2012
This letter includes forward-looking information, which is subject to the “safe harbor” created by Section 27A of the Securities Act of 1933,
as amended, and Section 21E of the Securities Exchange Act and the Private Securities Litigation Reform Act of 1995. When the Bank uses or
incorporates by reference in this letter the words “anticipate,” “estimate,” “expect,” “project,” “intend,” “commit,” “believe” and similar expressions, the
Company intends to identify forward-looking statements. Our actual results may differ materially from those projected in any forward-looking
statements, as they will depend on many factors about which we are unsure, including many factors which are beyond our control.
20
SUNCREST BANK
NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2012 AND 2011
SUNCREST BANK
Board of Directors
William A. Benneyan
Bill was born and educated in Fresno, CA, and is a graduate of California State University,
Fresno. He has lived in the Visalia, Lindsay and Fresno areas nearly his entire life. Bill is
a former Certified Public Accountant and owned a CPA practice in Lindsay and Visalia.
However, for the past 25 years, Bill has specialized in custom home construction. Bill is a
former Vice Chairman of Mineral King National Bank, a highly succesful community bank
in Visalia that sold to Vallicorp in 1994.
David C. Crinklaw
Dave is a resident of Reedley, with business interests throughout the Central Valley. Dave
sold his home construction business in 2000 and now specializes in commercial
construction. He also farms grapes in Fresno and Tulare counties and manages a farm
services company serving the Central Valley.
Gary E. Esajian
Gary has lived in the Lemoore area most of his life. He farms in Kings, Fresno and Tulare
counties and manages real estate development interests here and in San Luis Obispo
County. Gary serves on the Board of the Westlands Water District and the San Joaquin
Valley Cotton Board, and is active in local farm bureaus and chambers of commerce.
Thomas J. O’Sullivan
Tom was born in Chicago, but for the past 30 years has lived in the Porterville area, where
he operated a chain of grocery stores. Tom is a farmer and real estate investor and
volunteers with a variety of civic organizations.
Florencio “Frank” Paredez
A native of Tulare County, Frank graduated from College of the
Sequoias and farms in the Exeter area. He owns a packinghouse and the Hungry Hollow
Borrow Pit in Porterville and is active in local and San Francisco-based farmers’ markets.
Frank has been active on many boards of directors for organizations throughout Tulare
County.
At December 31, 2012, the future lease rental payable under
noncancellable operating lease commitments for the Bank’s main office
and Porterville office was as follows:
Construction and Land Development
646,039
555,256
607,000
NOTE C - LOANS - Continued
Information relating to individually impaired loans presented by class of
loans was as follows as of December 31, 2012 and 2011:
December 31, 2012
Balance
Investment
Allowance
Investment
Recognized
With No Related Allowance Recorded
$
754,370
$
650,948
$
$
710,000
$
Real Estate Other:
Commercial
Farmland
1-4 Family Residential
Multifamily Residential
Commercial and Industrial
Consumer
December 31, 2011
With No Related Allowance Recorded
Real Estate Other:
Commercial
Farmland
1-4 Family Residential
Multifamily Residential
Consumer
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
Construction and Land Development
Commercial and Industrial
695,000
41,436
695,000
41,436
2,303,000
193,000
$
812,779
$
812,779
$
$
813,000
$
$
1,400,409
$
1,206,204
$
-
$
1,317,000
$
-
Thereafter
2013
2014
2015
2016
2017
Related Party
Others
$
125,050
$
176,614
130,052
135,254
140,664
146,291
87,295
181,912
187,370
192,991
16,137
-
$
764,606
$
755,024
The minimum rental payments shown above are given for the existing
lease obligation and are not a forecast of future rental expense.
$
1,549,215
$
1,549,215
$
-
$
3,309,000
$
-
At December 31, 2012, the scheduled maturities of time deposits are as
There were no troubled debt restructurings during 2012 and 2011.
NOTE D - PREMISES AND EQUIPMENT
A summary of premises and equipment as of December 31 follows:
The Bank has entered into two leases for its main office and Porterville
Leasehold Improvements
Furniture, Fixtures, and Equipment
Less Accumulated Depreciation and Amortization
(
1,118,103)
(
920,777)
2012
2011
$
1,182,465
$
1,172,286
806,436
772,280
1,988,901
1,944,566
$
870,798
$
1,023,789
office, which will expire in January 2017 and July 2018, respectively.
The Bank leases it Porterville Office from two Directors of the Bank.
NOTE F - OTHER BORROWINGS
The Bank may borrow up to $9,400,000 overnight on an unsecured basis
from its correspondent banks. As of December 31, 2012, the Bank has
$700,000 outstanding with The Independent Bankers Bank. No amounts
were outstanding under these arrangements in 2011.
These leases include provisions for periodic rent increases as well as
In addition, the Bank is also a member of the Federal Home Loan Bank
payment by the lessee of certain operating expenses. These leases also
and has arranged secured borrowing lines with that institution. As of
include provisions for options to extend the lease. The rental expense
December 31, 2012, the Bank had pledged $4.5 million of investment
relating to these leases and other short term rentals was approximately
securities resulting in a borrowing capacity of approximately $4.4
$287,000 and $283,000 for the years ended December 31, 2012 and
million. As of December 31, 2012, no advances were outstanding under
2011, respectively.
this arrangement.
NOTE E - DEPOSITS
follows:
2013
2014
2015
2016
2017
$
14,393,385
1,747,000
765,393
1,306,430
1,240,062
$
19,452,270
2
19
SUNCREST BANK
NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2012 AND 2011
SUNCREST BANK
NOTE C - LOANS - Continued
The following table presents the activity in the allowance for loan losses
for the year 2012 and 2011 and the recorded investment in loans and
impairment method as of December 31, 2012 and 2011 by portfolio
segment:
December 31, 2012
Allowance for Loan Losses:
Beginning of Year
Provisions
Charge-offs
Recoveries
End of Year
Reserves:
Specific
General
December 31, 2011
Allowance for Loan Losses:
Beginning of Year
Provisions
Charge-offs
Recoveries
End of Year
Reserves:
Specific
General
Construction
Commercial
Real Estate -
and Land
and
Other
Development
Industrial
Consumer
Total
$
992,674
$
102,033
$
203,658
$
13,701
$
1,312,066
33,013
(17,847)
84,519
(39,935)
750
(685)
-
-
99,000
(39,935)
750
$
1,025,687
$
84,186
$
248,992
$
13,016
$
1,371,881
$
-
$
-
$
-
$
-
$
-
1,025,687
84,186
248,992
13,016
1,371,881
$
1,025,687
$
84,186
$
248,992
$
13,016
$
1,371,881
-
-
-
-
-
-
-
-
$
678,788
$
265,256
$
137,393
$
7,629
$
1,089,066
313,886
(163,223)
66,265
6,072
223,000
-
-
-
-
-
-
Substandard - Loans classified as substandard are inadequately
protected by the current net worth and paying capacity of the obligor or
of the collateral pledged, if any. Loans so classified have a well-defined
weakness or weaknesses that jeopardize the liquidation of the debt.
They are characterized by the distinct possibility that the institution will
sustain some loss if the deficiencies are not corrected.
Impaired - A loan is considered impaired, when, based on current
information and events, it is probable that the Bank will be unable
to collect all amounts due according to the contractual terms of the
loan agreement. Additionally, all loans classified as troubled debt
restructurings are considered impaired.
The risk category of loans by class of loans was as follows as of
December 31, 2012:
Real Estate Other:
Commercial
Farmland
1-4 Family Residential
Multifamily Residential
Construction and Land Development
Commercial and Industrial
Consumer
18,946,334
4,391,584
2,129,366
4,481,447
13,026,888
1,021,792
555,256
119,588
18,946,334
4,391,584
2,129,366
5,036,703
13,146,476
1,021,792
Loans Evaluated for Impairment:
Individually
Collectively
$
650,948
$
555,256
$
-
$
-
$
1,206,204
60,562,651
4,481,447
13,146,476
1,021,792
79,212,366
December 31, 2012
Pass
Substandard
Impaired
Total
Special
Mention
$
61,213,599
$
5,036,703
$
13,146,476
$
1,021,792
$
80,418,570
$
32,920,050
$
$
2,175,317
$
650,948
$
35,746,315
$
992,674
$
102,033
$
203,658
$
13,701
$
1,312,066
$
76,917,461
$
-
$
2,294,905
$
1,206,204
$
80,418,570
$
-
$
-
$
-
$
-
$
-
992,674
102,033
203,658
13,701
1,312,066
The risk category of loans by class of loans was as follows as of
$
992,674
$
102,033
$
203,658
$
13,701
$
1,312,066
December 31, 2011:
Loans Evaluated for Impairment:
Individually
Collectively
$
812,779
$
695,000
$
41,436
$
-
$
1,549,215
52,804,204
3,274,149
11,641,778
775,308
68,495,439
$
53,616,983
$
3,969,149
$
11,683,214
$
775,308
$
70,044,654
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, collateral
adequacy, credit documentation, and current economic trends, among
other factors. The Bank analyzes loans individually by classifying
the loans as to credit risk. This analysis typically includes larger, non-
homogeneous loans such as commercial real estate and commercial and
industrial loans. This analysis is performed on an ongoing basis as new
information is obtained. The Bank uses the following definitions for risk
December 31, 2011
Pass
Substandard
Impaired
Total
Special
Mention
$
30,838,227
$
$
2,260,760
$
812,779
$
33,911,766
Real Estate Other:
Commercial
Farmland
1-4 Family Residential
Multifamily Residential
Construction and Land Development
Commercial and Industrial
Consumer
13,070,619
4,460,526
2,174,072
3,274,149
11,468,805
775,308
172,973
695,000
41,436
13,070,619
4,460,526
2,174,072
3,969,149
11,683,214
775,308
$
66,061,706
$
-
$
2,433,733
$
1,549,215
$
70,044,654
Past due and nonaccrual loans presented by loan class were as follows as
of December 31, 2012 and 2011:
Still Accruing
30-59 Days
60-89 Days Over 90 Days
December 31, 2012
Past Due
Past Due
Past Due
Nonaccrual
$
$
$
-
$
650,948
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
ratings:
ratings defined below.
Pass - Loans classified as pass include loans not meeting the risk
Special Mention - Loans classified as special mention have a potential
weakness that deserves management’s close attention. If left uncorrected,
these potential weaknesses may result in deterioration of the repayment
prospects for the loan or of the institution’s credit position at some future
date.
Real Estate Other:
Commercial
Farmland
1-4 Family Residential
Multifamily Residential
Construction and Land Development
Commercial and Industrial
Consumer
December 31, 2011
Real Estate Other:
Commercial
Farmland
1-4 Family Residential
Multifamily Residential
Construction and Land Development
Commercial and Industrial
Consumer
$
$
$
-
$
1,206,204
$
$
$
-
$
812,779
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
555,256
695,000
41,436
Marc R. Schuil
Marc is a native of Reedley and a graduate of California State University, Fresno. He also
earned an MBA from the University of Southern California. Marc is an owner of Schuil
and Associates, a real estate brokerage firm specializing in agricultural real estate and
the dairies. Marc has been active in a variety of civic
organizations.
Eric M. Shannon
Eric’s family has been farming in the area for more than 100 years and Eric continues
that tradition. A graduate of UC Davis, Eric farms and is active in real estate development
projects in the Visalia area. He served as president of his Rotary Club and is active in
many other organizations.
Michael E. Thurlow
Mike is a native of the Reedley/Kingsburg area, and is a graduate of Reedley High,
Reedley College and California Poly, San Luis Obispo. Mike is an owner/manager of a
produce company that stores, packs and ships fruit raised in the South Valley. Mike is
active in the community personally and through his business.
Darrell E. Tunnell
Darrell was born in Terra Bella and raised in Porterville. As a student of College of the
Sequoias, he moved to Visalia, where he began working in the aircraft repair and
maintenance business. Today, he owns Aircraft Mechanical Services, Inc., the fixed-base
operator for the Visalia Airport. He is active in sports and in school and community
organizations.
J. Steven Worthley
Steve is a native and resident of Dinuba. He is a graduate of Occidental College and
earned his JD degree from the University of the Pacific-McGeorge School of Law. He is
a practicing attorney and current member, and former chairman, of the Tulare County
Board of Supervisors. He has been a very active member of many school,
civic and professional organizations.
$
$
$
-
$
1,549,215
Born in Dinuba, Dale is a longtime resident of Porterville and is a graduate of California State University, Fresno. He has
managed a thriving CPA practice in Porterville for over 27 years and participates in many civic organizations.
Dale B. Margosian (not pictured)
18
3
SUNCREST BANK
NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2012 AND 2011
SUNCREST BANK
Staff & Officers
Client Service
Representative
Kathleen Bernardo
VP/Operations Manager
Lisa Riso
Interim CEO
William Benneyan
Business Banking Specialist
Jennifer Noel
Client Service
Representative Vicki Evans
SVP/Operations
Administrator
Debra Bombard
VP/Loan Officer Loren Brooks
AVP/Human Resource Officer
Cynthia Paulus
AVP/Note Department
Manager Eileen Shine
Left
EVP/Chief Credit Officer
Dan McGregor
VP/Business
Manager Charlie Glenn
EVP/CFO Robert Moore III
VP/Operations Manager
Michelle Gletne
Right
Client Services
Representatives Allison
Moorhead, Lori Buecheler
and Christine Catalina, with
Business Development
Officer Gary Gostanian
Not pictured: Operations Specialist Susan Blanchard; Credit Analyst Tracy Cizek; Client Service
Representative Heather Fiori; Administration Operations Specialist Elia Havner; SBA Commercial
Processor/Closer Rosemary Leon; Note Department Assistant Karen Snow; Business Service Support
Specialist Adriana Vidales; Note Department Assistant Gloria Wilson
4
$
13,503,279
$
36,187
$(
2,696)
$
13,536,770
1,579,992
15,539
(
1,959)
1,593,572
$
15,083,271
$
51,726
$(
4,655)
$
15,130,342
17
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES - Continued
Stock-Based Compensation - Continued
period which an employee is required to provide services in exchange
for the award, generally the vesting period. See Note K for additional
information on the Bank’s stock option plan.
Reclassifications
Certain reclassifications have been made in the 2011 financial statements
to conform to the presentation used in 2012. These reclassifications had
no impact of the Bank’s previously reported financial statements.
Adoption of New Accounting Standards
In May, 2011, the FASB issued an amendment to achieve common
fair value measurement and disclosure requirements between U.S.
and International accounting principles. Overall, the guidance is
consistent with existing U.S. accounting principles; however, there are
some amendments that change a particular principle or requirement
for measuring fair value or for disclosing information about fair value
measurements. The amendment in this guidance was effective for interim
and annual reporting periods beginning after December 15, 2011. The
amendment did not significantly impact the Bank.
In September 2011, the FASB amended existing guidance and eliminated
the option to present the components of other comprehensive income as
part of the statement of changes in shareholder’s equity. The amendment
requires that comprehensive income be presented in either a single
continuous statement or in two separate consecutive statements. This
amendment was effective for interim and annual reporting periods
beginning after December 15, 2011. The adoption of this amendment
changed the presentation of comprehensive income included in these
financial statements.
NOTE B - INVESTMENT SECURITIES
Debt and equity securities have been classified in the statements of
financial condition according to management’s intent. The amortized
cost of securities and their approximate fair values at December 31 were
as follows:
Gross
Gross
Amortized
Unrealized Unrealized
Cost
Gains
Losses
Fair
Value
December 31, 2012
Available-for-Sale Securities:
U.S. Government and
Agency Securities
Mortgaged-Backed
Securities
December 31, 2011
Available-for-Sale Securities:
U.S. Government and
Agency Securities
Mortgaged-Backed
Securities
The amortized cost and estimated fair value of all investment securities
as of December 31, 2012 by expected maturities are shown below.
Expected maturities may differ from contractual maturities because
borrowers may have the right to call or prepay obligations with or
without call or prepayment penalties.
Available-for-Sale Securities
Amortized
Cost
Fair
Value
Due within One Year
$
4,873,149
$
4,890,714
Due from One Year to Five Years
9,810,179
9,831,633
$
14,683,328
$
14,722,347
As of December 31, 2012 and 2011 no investment security had been in
a continuous loss position for a period of more than twelve consecutive
months. Management does not intend to sell and it is not more likely
than not that management would be required to sell the securities prior
to their anticipated recovery, and the decline in fair value is due to
changes in interest rates. The fair value is expected to recover as the
bond approaches maturity.
Securities with a fair value of approximately $4.5 million at December
31, 2012 were pledged to the Federal Home Loan Bank to secure
borrowings as discussed in Note F.
NOTE C - LOANS
The Bank’s loan portfolio consists primarily of loans to borrowers
within the Southern Central Valley of California. Although the
Bank seeks to avoid concentrations of loans to a single industry or
based upon a single class of collateral, real estate and real estate
associated businesses are among the principal industries in the
Bank’s market area and, as a result, the Bank’s loan and collateral
portfolios are, to some degree, concentrated in those industries.
A summary of the changes in the allowance for loan losses as of
December 31 follows:
Balance at Beginning of Year
$
1,312,066
$
1,089,066
Additions to the Allowance Charged to Expense
223,000
2012
2011
99,000
750
1,411,816
1,312,066
-
-
$
1,371,881
$
1,312,066
$
13,784,705
$
40,511
$(
10,691)
$
13,814,525
Recoveries on Loans Charged Off
898,623
9,526
(
327)
907,822
$
14,683,328
$
50,037
$(
11,018)
$
14,722,347
Less Loans Charged Off
(
39,935)
SUNCREST BANK
NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2012 AND 2011
SUNCREST BANK
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING
Financial Instruments
POLICIES - Continued
Transfers of Financial Assets
Transfers of financial assets are accounted for as sales, when control
over the assets has been relinquished. Control over transferred assets is
deemed to be surrendered when the assets have been isolated from the
Bank, the transferee obtains the right (free of conditions that constrain
In the ordinary course of business, the Bank has entered into off-balance
sheet financial instruments consisting of commitments to extend credit,
commercial letters of credit, and standby letters of credit as described
in Note J. Such financial instruments are recorded in the financial
statements when they are funded or related fees are incurred or received.
it from taking advantage of that right) to pledge or exchange the
Earnings Per Share (“EPS”)
transferred assets, and the Bank does not maintain effective control over
the transferred assets through an agreement to repurchase them before
Basic EPS excludes dilution and is computed by dividing income
available to common stockholders by the weighted-average number
of common shares outstanding for the period. Diluted EPS reflects
the potential dilution that could occur if securities or other contracts to
issue common stock were exercised or converted into common stock or
their maturity.
Other Real Estate Owned
Real estate acquired by foreclosure or deed in lieu of foreclosure is
resulted in the issuance of common stock that then shared in the earnings
recorded at fair value at the date of foreclosure, establishing a new cost
of the entity. All of the outstanding stock options were not considered
basis by a charge to the allowance for loan losses, if necessary. Other
in computing diluted earnings per share for 2012 and 2011 because they
real estate owned is carried at the lower of the Bank’s carrying value
were antidilutive. Weighted-average shares used in the computation of
of the property or its fair value, less estimated carrying costs and costs
basic EPS were 1,911,777 in 2012 and 2011.
of disposition. Fair value is based on current appraisals less estimated
selling costs. Any subsequent write-downs are charged against operating
expenses. Operating expenses of such properties, net of related income,
and gains and losses on their disposition are included in other operating
expenses.
Income Taxes
Deferred income taxes are computed using the asset and liability method,
which recognizes a liability or asset representing the tax effects, based
on current tax law, of future deductible or taxable amounts attributable to
events that have been recognized in the financial statements. A valuation
allowance is established to reduce the deferred tax asset to the level at
which it is “more likely than not” that the tax asset or benefits will be
realized. Realization of tax benefits of deductible temporary differences
Fair Value Measurement
Fair value is the exchange price that would be received for an asset
or paid to transfer a liability (an exit price) in the principal or most
advantageous market for the asset or liability in an orderly transaction
between market participants on the measurement date. Current
accounting guidance establishes a fair value hierarchy, which requires
an entity to maximize the use of observable inputs and minimize
the use of unobservable inputs when measuring fair value. The guidance
describes three levels of inputs that may be used to measure fair value:
Level 1: Quoted prices (unadjusted) for identical assets or liabilities
in active markets that the entity has the ability to access as of the
measurement date.
and operating loss carryforwards depends on having sufficient taxable
Level 2: Significant other observable inputs other than Level 1 prices
income of an appropriate character within the carryforward periods.
The Bank has adopted guidance issued by the Financial Accounting
Standards Board (“FASB”) that clarifies the accounting for uncertainty
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.
in tax positions taken or expected to be taken on a tax return and provides
Level 3: Significant unobservable inputs that reflect a Bank’s own
that the tax effects from an uncertain tax position can be recognized in
assumptions about the assumptions that market participants would use
the financial statements only if, based on its merits, the position is more
in pricing an asset or liability.
likely than not to be sustained on audit by the taxing authorities. Interest
and penalties related to uncertain tax positions are recorded as part of
See Note L for more information and disclosures relating to the Bank’s
income tax expense.
Comprehensive Income
fair value measurements.
Stock-Based Compensation
Changes in unrealized gains and losses on available-for-sale securities
is the only component of accumulated other comprehensive income for
the Bank.
The Bank recognizes the cost of employee services received in exchange
for awards of stock options, or other equity instruments, based on the
grant-date fair value of those awards. This cost is recognized over the
The Suncrest Bank staff is wonderful.
They have expertise in agriculture and
banking, which the major banks can’t
offer – and they’re friendly!
It’s a great bank to work with.
Ron Quinn
Ronald B. Quinn & Company
16
5
Suncrestbank.com
SUNCREST BANK
NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2012 AND 2011
SUNCREST BANK
Table of Financial Statements
Independent auditor’s report on the financial statements ........
7
Financial statements
Statements of Financial Condition ...................................................
8
Statements of Operations ....................................................................
10
Statements of Comprehensive Income ...........................................
11
Statement of Changes in Shareholders’ Equity ............................
12
Statements of Cash Flows ....................................................................
13
Notes to Financial Statements ...........................................................
14
Suncrestbank.com
6
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES - Continued
loan is reported, net, at the present value of estimated future cash flows
using the loan’s existing rate or at the fair value of collateral if repayment
on nonaccrual status, all interest previously accrued but not collected is
is expected solely from the collateral.
reversed against current period interest income. Income on nonaccrual
loans is subsequently recognized only to the extent that cash is received
and the loan’s principal balance is deemed collectible. Interest accruals
are resumed on such loans only when they are brought current with respect
to interest and principal and when, in the judgment of management, the
loans are estimated to be fully collectible as to all principal and interest.
Allowance for Loan Losses
General reserves cover non-impaired loans and are based on peer bank
historical loss rates for each portfolio segment, adjusted for the effects
of qualitative or environmental factors that are likely to cause estimated
credit losses as of the evaluation date to differ from the portfolio segment’s
historical loss experience. Qualitative factors include consideration of
the following: changes in lending policies and procedures; changes in
economic conditions; changes in the nature and volume of the portfolio;
changes in the experience, ability and depth of lending management
The allowance for loan losses is a valuation allowance for probable
and other relevant staff; changes in the volume and severity of past due,
incurred credit losses. Loan losses are charged against the allowance
nonaccrual and other adversely graded loans; changes in the loan review
when management believes the uncollectability of a loan balance is
system; changes in the value of the underlying collateral for collateral-
confirmed. Subsequent recoveries, if any, are credited to the allowance.
dependent loans; concentrations of credit and the effect of other external
Management estimates the allowance balance required using past loan
factors such as competition and legal and regulatory requirements.
The Bank determines a separate allowance for each portfolio segment.
Premises and Equipment
loss experience, the nature and volume of the portfolio, information about
specific borrower situations and estimated collateral values, economic
conditions, and other factors. Allocations of the allowance may be made
for specific loans, but the entire allowance is available for any loan
that, in management’s judgment, should be charged off. Amounts are
charged-off when available information confirms that specific loans or
portions thereof, are uncollectible. This methodology for determining
charge-offs is consistently applied to each segment.
The allowance consists of specific and general reserves. Specific
reserves relate to loans that are individually classified as impaired. A
loan is impaired when, based on current information and events, it is
probable that the Bank will be unable to collect all amounts due according
to the contractual terms of the loan agreement. Factors considered in
determining impairment include payment status, collateral value and
the probability of collecting all amounts when due. Measurement of
impairment is based on the expected future cash flows of an impaired
loan, which are to be discounted at the loan’s effective interest rate,
or measured by reference to an observable market value, if one exists,
or the fair value of the collateral for a collateral-dependent loan. The
Bank selects the measurement method on a loan-by-loan basis except
that collateral-dependent loans for which foreclosure is probable are
measured at the fair value of the collateral.
The Bank recognizes interest income on impaired loans based on its
existing methods of recognizing interest income on nonaccrual loans.
Loans, for which the terms have been modified resulting in a concession,
and for which the borrower is experiencing financial difficulties, are
considered troubled debt restructurings and classified as impaired with
measurement of impairment as described above.
Portfolio segments identified by the Bank include real estate – other,
construction and land development, commercial and industrial, and
consumer loans. Relevant risk characteristics for these portfolio
segments generally include debt service coverage, loan-to-value ratios
and financial performance on non-consumer loans and credit scores,
debt-to income, collateral type and loan-to-value ratios for consumer
loans.
Premises and equipment are carried at cost less accumulated depreciation
and amortization. Depreciation is computed using the straight-line
method over the estimated useful lives, which ranges from three to
ten years for furniture and equipment. Leasehold improvements are
amortized using the straight-line method over the estimated useful lives
of the improvements or the remaining lease term, whichever is shorter.
Expenditures for betterments or major repairs are capitalized and those
for ordinary repairs and maintenance are charged to operations as
incurred.
Federal Home Loan Bank (“FHLB”) Stock
The Bank is a member of the FHLB system. Members are required to
own a certain amount of stock based on the level of borrowings and other
factors, and may invest in additional amounts. FHLB stock is carried
at cost, classified as a restricted security, and periodically evaluated for
impairment based on the ultimate recovery of par value. Both cash and
stock dividends are reported as income.
If a loan is impaired, a portion of the allowance is allocated so that the
The Bank expenses the costs of advertising in the period incurred.
Advertising Costs
15
SUNCREST BANK
NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2012 AND 2011
SUNCREST BANK
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NOTE A -
Nature of Operations
The Bank has been incorporated in the State of California and organized
as a single operating segment that operates two full-service branches
in Visalia and Porterville, California. The Bank’s primary source of
revenue is providing loans to customers, who are predominately small
and middle-market businesses and individuals located primarily in the
Southern Central Valley of California.
Subsequent Events
The Bank has evaluated subsequent events for recognition and disclosure
through February 13, 2013, which is the date the financial statements
were available to be issued.
Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities, disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts
of revenues and expenses during the reporting period. Actual results
could differ from those estimates.
Cash and Cash Equivalents
For purposes of reporting cash flows, cash and cash equivalents include
cash, due from banks and federal funds sold. Generally, federal funds are
sold for periods of less than ninety days.
Cash and Due from Banks
Banking regulations require that banks maintain a percentage of their
deposits as reserves in cash or on deposit with the Federal Reserve
Bank. The Bank was in compliance with its reserve requirements as of
The Bank maintains amounts due from banks, which may exceed
Loans
federally insured limits. The Bank has not experienced any losses in
December 31, 2012.
such accounts.
Investment Securities
as a separate component of other comprehensive income included in
shareholders’ equity. Premiums and discounts on held-to-maturity and
available-for-sale securities are amortized or accreted into income using
the interest method. Realized gains or losses of held-to-maturity or
available-for-sale securities are recorded using the specific identification
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; OTTI related to credit loss, which
must be recognized in the income statement and; OTTI related to other
factors, which is recognized in other comprehensive income. The
credit loss is defined as the difference between the present value of the
cash flows expected to be collected and the amortized cost basis. For
equity securities, the entire amount of impairment is recognized through
earnings.
Loans Held for Sale
Government Guaranteed loans originated and intended for sale in the
secondary market are carried at the lower of cost or estimated market
value in the aggregate. Net unrealized losses are recognized through a
valuation allowance by charges to income. Gains or losses realized on
the sales of loans are recognized at the time of sale and are determined
by the difference between the net sales proceeds and the carrying value
of the loans sold, adjusted for any servicing asset or liability. Gains and
losses on sales of loans are included in noninterest income.
Loans receivable that management has the intent and ability to hold for
the foreseeable future or until maturity or payoff are reported at their
outstanding unpaid principal balances reduced by any charge-offs or
specific valuation accounts and net of deferred fees or costs on originated
Bonds, notes, and debentures for which the Bank has the positive intent
loans, or unamortized premiums or discounts on purchased loans. Loan
and ability to hold to maturity are reported at cost, adjusted for premiums
origination fees and certain direct origination costs are capitalized and
and discounts that are recognized in interest income using the interest
recognized as an adjustment of the yield of the related loan.
method over the period of maturity.
Loans on which the accrual of interest has been discontinued are
Investments not classified as trading securities nor as held to maturity
designated as nonaccrual loans. The accrual of interest on loans is
securities are classified as available-for-sale securities and recorded at
discontinued when principal or interest is past due 90 days based on the
fair value. Unrealized gains or losses on available-for-sale securities
contractual terms of the loan or when, in the opinion of management,
are excluded from net income and reported as an amount net of taxes
there is reasonable doubt as to collectability. When loans are placed
Vavrinek, Trine, Day & Co., LLP
Certified Public Accountants
INDEPENDENT AUDITOR’S REPORT
V A L UE T H E D I F F E R E N CE
Board of Directors and Shareholders of
Suncrest Bank
We have audited the accompanying financial statements of Suncrest Bank, which are comprised of the
statements of financial condition as of December 31, 2012 and 2011, and the related statements of operations,
comprehensive income, changes in shareholders’ equity and cash flows for the years then ended, and the
related notes to the financial statements.
Management’s Responsibility for the Financial Statements
Management is responsible for the preparation and fair presentation of these financial statements in
accordance with accounting principles generally accepted in the United States of America; this includes the
design, implementation, and maintenance of internal control relevant to the preparation and fair presentation
of financial statements that are free from material misstatement, whether due to fraud or error.
Auditor’s Responsibility
Our responsibility is to express an opinion on these financial statements based on our audits. We conducted
our audits in accordance with auditing standards generally accepted in the United States of America. Those
standards require that we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free from material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the
financial statements. The procedures selected depend on the auditor’s judgment, including the assessment
of the risks of material misstatement of the financial statements, whether due to fraud or error. In making
those risk assessments, the auditor considers internal control relevant to the entity’s preparation and fair
presentation of the financial statements in order to design audit procedures that are appropriate in the
circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal
control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of
accounting policies used and the reasonableness of significant accounting estimates made by management,
as well as evaluating the overall presentation of the financial statements. We believe that the audit evidence
we have obtained is sufficient and appropriate to provide a basis for our audit opinion.
Opinion
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial
position of Suncrest Bank as of December 31, 2012 and 2011, and the results of its operations and its cash
flows for the years then ended in accordance with accounting principles generally accepted in the United
States of America.
Laguna Hills, California
February 13, 2013
25231 Paseo De Alicia, Suite 100 Laguna Hills, CA 92653 Tel: 949.768.0833 Fax: 949.768.8408 www.vtdcpa.com
F R E S N O •• L A G U N A H I L L S •• P A L O A L TO •• P L E A S A N T O N •• R A N C H O C U C A M O N G A •• R I V E R S I D E •• S A C R A M E N TO
14
7
SUNCREST BANK
SUNCREST BANK
STATEMENTS OF FINANCIAL CONDITION
DECEMBER 31, 2012 AND 2011
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2012 AND 2011
ASSETS
Cash and Due from Banks
Federal Funds Sold
TOTAL CASH AND CASH EQUIVALENTS
2012
2011
$
3,246,558
-
3,246,558
$
3,247,278
1,975,000
5,222,278
Investment Securities Available for Sale
14,722,347
15,130,342
Loans:
Real Estate - Other
Construction and Land Development
Commercial and Industrial
Consumer
Deferred Loan Fees, Net of Costs
Allowance for Loan Losses
TOTAL LOANS
NET LOANS
Premises and Equipment
Federal Home Loan Bank and Other Bank Stock, at Cost
Other Real Estate Owned
Accrued Interest and Other Assets
61,213,599
5,036,703
13,146,476
1,021,792
80,418,570
156,806)
1,371,881)
78,889,883
(
(
870,798
560,802
251,544
580,084
53,616,983
3,969,149
11,683,214
775,308
70,044,654
189,490)
1,312,066)
68,543,098
(
(
1,023,789
464,047
251,544
555,024
$
99,122,016
$
91,190,122
OPERATING ACTIVITIES
Net Income (Loss)
Adjustments to Reconcile Net Income (Loss) to Net Cash
From Operating Activities:
Depreciation and Amortization
Stock-based Compensation
Provision for Loan Losses
Write down of Other Real Estate Owned
Gain on Sale of Loans
Loans Originated for Sale
Proceeds from Sale of Loans
Other Items
NET CASH FROM OPERATING ACTIVITIES
INVESTING ACTIVITIES
Net Change in Interest-Bearing Deposits in Other Banks
Net Increase in Loans
Purchase of AFS Securities
Maturities of AFS Securities
Purchase of Federal Home Loan Bank Stock
Purchases of Premises and Equipment
NET CASH FROM INVESTING ACTIVITIES
FINANCING ACTIVITIES
Net Increase in Demand Deposits and Savings Accounts
Net Change in Time Deposits
Net Increase in Federal Funds Purchased
NET CASH FROM FINANCING ACTIVITIES
2012
2011
$
411,980
$(
392,891)
197,325
44,871
99,000
(
286,858)
(
3,136,432)
3,459,662
122,614
912,162
-
-
(
10,544,168)
(
14,099,757)
14,456,496
(
94,800)
(
44,334)
(
10,326,563)
9,931,679
(
3,192,998)
700,000
7,438,681
(
33,173)
250,456
96,953
223,000
64,756
-
-
182,209
391,310
480,543
(
14,804,904)
(
13,505,785)
10,917,564
(
133,500)
(
46,171)
(
17,092,253)
12,838,559
2,542,659
-
15,381,218
NET DECREASE IN CASH AND CASH EQUIVALENTS
(
1,975,720)
(
1,319,725)
Cash and Cash Equivalents at Beginning of Period
5,222,278
6,542,003
CASH AND CASH EQUIVALENTS AT END OF YEAR
$
3,246,558
$
5,222,278
Supplemental Disclosures of Cash Flow Information:
Interest Paid
Taxes Paid
$
414,410
$
800
$
427,886
$
800
The accompanying notes are an integral part of these financial statements.
The accompanying notes are an integral part of these financial statements.
8
13
SUNCREST BANK
SUNCREST BANK
STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2012 AND 2011
STATEMENTS OF FINANCIAL CONDITION
DECEMBER 31, 2012 AND 2011
Common Stock
Additional
Number of
Accumulated
Comprehensive
Shares
Amount
Deficit
Income
Total
Paid-in
Capital
Accumulated
Other
Balance December 31, 2010
1,911,777
$
19,117,770
$
1,337,482
$(
7,459,832)
$(
51,564)
$
12,943,856
Balance at December 31, 2011
1,911,777
19,117,770
1,434,435
(
7,852,723)
Net Loss
Stock-based Compensation
Change in Other Comprehensive
Income, Net of Taxes
Net Income
Stock-based Compensation
Change in Other Comprehensive
Income, Net of Taxes
96,953
44,871
(392,891)
411,980
79,336
27,772
(392,891)
96,953
79,336
12,727,254
411,980
44,871
(
4,751)
(
4,751)
Balance at December 31, 2012
1,911,777
$
19,117,770
$
1,479,306
$(
7,440,743)
$
23,021
$
13,179,354
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Noninterest-bearing Demand
Savings, NOW and Money Market Accounts
Time Deposits Under $100,000
Time Deposits $100,000 and Over
Federal Funds Purchased
Accrued Interest and Other Liabilities
TOTAL DEPOSITS
TOTAL LIABILITIES
Commitments and Contingencies - Notes D and J
Shareholders' Equity:
Preferred Stock - No par value, 10,000,000 Shares
Authorized, None Outstanding
Common Stock - No par value, 10,000,000 Shares Authorized,
Shares Issued and Outstanding, 1,911,777 in 2012 and 2011
Additional Paid-in Capital
Accumulated Deficit
Accumulated Other Comprehensive Income - Net Unrealized
Gain on Securities Available for Sale, Net of Taxes
of $15,998 in 2012 and $19,299 in 2011
TOTAL SHAREHOLDERS' EQUITY
2012
2011
$
23,830,513
41,499,630
3,977,553
15,474,717
84,782,413
700,000
460,249
85,942,662
$
22,431,923
32,966,541
4,094,915
18,550,353
78,043,732
-
419,136
78,462,868
-
-
-
-
19,117,770
1,479,306
7,440,743)
(
19,117,770
1,434,435
7,852,723)
(
23,021
13,179,354
27,772
12,727,254
$
99,122,016
$
91,190,122
The accompanying notes are an integral part of these financial statements.
The accompanying notes are an integral part of these financial statements.
12
9
SUNCREST BANK
SUNCREST BANK
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 2012 AND 2011
STATEMENTS OF COMPREHENSIVE INCOME
FOR THE YEARS ENDED DECEMBER 31, 2012 AND 2011
2012
2011
Net Income (Loss)
$
411,980
$
(392,891)
OTHER COMPREHENSIVE INCOME:
Unrealized Gains (Losses) on Securities Available for Sale
Income Tax Expense (Benefit)
TOTAL OTHER COMPREHENSIVE INCOME (LOSS)
(8,052)
(8,052)
(3,301)
(4,751)
98,635
98,635
19,299
79,336
TOTAL COMPREHENSIVE INCOME (LOSS)
$
407,229
$
(313,555)
INTEREST INCOME
Interest and Fees on Loans
Interest on Investment Securities
Interest on Federal Funds Sold and Other
TOTAL INTEREST INCOME
2012
2011
$
4,390,648
163,654
23,711
4,578,013
$
4,067,702
136,790
17,254
4,221,746
INTEREST EXPENSE
Interest on Savings Deposits, NOW and Money Market Accounts
Interest on Time Deposits
Interest on Other Borrowings
TOTAL INTEREST EXPENSE
217,459
195,724
38
413,221
205,299
221,233
-
426,532
NET INTEREST INCOME
4,164,792
3,795,214
Provision for Loan Losses
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES
99,000
223,000
4,065,792
3,572,214
NONINTEREST INCOME
Service Charges, Fees, and Other Income
Gain on Sale of Loans
NONINTEREST EXPENSE
Salaries and Employee Benefits
Occupancy Expenses
Equipment Expenses
Other Expenses
Income Taxes
INCOME (LOSS) BEFORE INCOME TAXES
43,438
286,858
330,296
2,153,622
563,196
197,578
1,068,912
3,983,308
412,780
800
77,559
33,173
110,732
2,132,046
565,336
233,598
1,144,057
4,075,037
392,091)
800
(
NET INCOME (LOSS)
$
411,980
$(
392,891)
NET INCOME (LOSS) PER SHARE - BASIC
$
0.22
$(
0.21)
NET INCOME (LOSS) PER SHARE - DILUTED
$
0.22
$(
0.21)
The accompanying notes are an integral part of these financial statements.
The accompanying notes are an integral part of these financial statements.
10
11
SUNCREST BANK
SUNCREST BANK
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 2012 AND 2011
STATEMENTS OF COMPREHENSIVE INCOME
FOR THE YEARS ENDED DECEMBER 31, 2012 AND 2011
2012
2011
2012
2011
$
4,390,648
$
4,067,702
Net Income (Loss)
$
411,980
$
(392,891)
OTHER COMPREHENSIVE INCOME:
Unrealized Gains (Losses) on Securities Available for Sale
Income Tax Expense (Benefit)
TOTAL OTHER COMPREHENSIVE INCOME (LOSS)
(8,052)
(8,052)
(3,301)
(4,751)
98,635
98,635
19,299
79,336
TOTAL COMPREHENSIVE INCOME (LOSS)
$
407,229
$
(313,555)
INTEREST INCOME
Interest and Fees on Loans
Interest on Investment Securities
Interest on Federal Funds Sold and Other
TOTAL INTEREST INCOME
Interest on Savings Deposits, NOW and Money Market Accounts
INTEREST EXPENSE
Interest on Time Deposits
Interest on Other Borrowings
TOTAL INTEREST EXPENSE
NET INTEREST INCOME
4,164,792
3,795,214
Provision for Loan Losses
99,000
223,000
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES
4,065,792
3,572,214
163,654
23,711
4,578,013
217,459
195,724
38
413,221
43,438
286,858
330,296
2,153,622
563,196
197,578
1,068,912
3,983,308
412,780
800
136,790
17,254
4,221,746
205,299
221,233
-
426,532
77,559
33,173
110,732
2,132,046
565,336
233,598
1,144,057
4,075,037
(
392,091)
800
NONINTEREST INCOME
Service Charges, Fees, and Other Income
Gain on Sale of Loans
NONINTEREST EXPENSE
Salaries and Employee Benefits
Occupancy Expenses
Equipment Expenses
Other Expenses
Income Taxes
INCOME (LOSS) BEFORE INCOME TAXES
NET INCOME (LOSS)
$
411,980
$(
392,891)
NET INCOME (LOSS) PER SHARE - BASIC
$
0.22
$(
0.21)
NET INCOME (LOSS) PER SHARE - DILUTED
$
0.22
$(
0.21)
The accompanying notes are an integral part of these financial statements.
The accompanying notes are an integral part of these financial statements.
10
11
SUNCREST BANK
SUNCREST BANK
STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2012 AND 2011
STATEMENTS OF FINANCIAL CONDITION
DECEMBER 31, 2012 AND 2011
Common Stock
Additional
Number of
Shares
Amount
Paid-in
Capital
Accumulated
Other
Accumulated
Comprehensive
Deficit
Income
Total
Balance December 31, 2010
1,911,777
$
19,117,770
$
1,337,482
$(
7,459,832)
$(
51,564)
$
12,943,856
Net Loss
Stock-based Compensation
Change in Other Comprehensive
Income, Net of Taxes
(392,891)
96,953
Balance at December 31, 2011
1,911,777
19,117,770
1,434,435
(
7,852,723)
Net Income
Stock-based Compensation
Change in Other Comprehensive
Income, Net of Taxes
411,980
44,871
79,336
27,772
(392,891)
96,953
79,336
12,727,254
411,980
44,871
(
4,751)
(
4,751)
Balance at December 31, 2012
1,911,777
$
19,117,770
$
1,479,306
$(
7,440,743)
$
23,021
$
13,179,354
TOTAL DEPOSITS
TOTAL LIABILITIES
85,942,662
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Noninterest-bearing Demand
Savings, NOW and Money Market Accounts
Time Deposits Under $100,000
Time Deposits $100,000 and Over
Federal Funds Purchased
Accrued Interest and Other Liabilities
Commitments and Contingencies - Notes D and J
Shareholders' Equity:
Preferred Stock - No par value, 10,000,000 Shares
Authorized, None Outstanding
Common Stock - No par value, 10,000,000 Shares Authorized,
Shares Issued and Outstanding, 1,911,777 in 2012 and 2011
Additional Paid-in Capital
Accumulated Deficit
Accumulated Other Comprehensive Income - Net Unrealized
Gain on Securities Available for Sale, Net of Taxes
of $15,998 in 2012 and $19,299 in 2011
TOTAL SHAREHOLDERS' EQUITY
2012
2011
$
23,830,513
$
22,431,923
41,499,630
3,977,553
15,474,717
84,782,413
700,000
460,249
-
-
32,966,541
4,094,915
18,550,353
78,043,732
419,136
78,462,868
-
-
-
19,117,770
1,479,306
19,117,770
1,434,435
(
7,440,743)
(
7,852,723)
23,021
13,179,354
27,772
12,727,254
$
99,122,016
$
91,190,122
The accompanying notes are an integral part of these financial statements.
The accompanying notes are an integral part of these financial statements.
12
9
SUNCREST BANK
SUNCREST BANK
STATEMENTS OF FINANCIAL CONDITION
DECEMBER 31, 2012 AND 2011
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2012 AND 2011
ASSETS
Cash and Due from Banks
Federal Funds Sold
TOTAL CASH AND CASH EQUIVALENTS
3,246,558
Investment Securities Available for Sale
14,722,347
15,130,342
Loans:
Real Estate - Other
Construction and Land Development
Commercial and Industrial
Consumer
Deferred Loan Fees, Net of Costs
Allowance for Loan Losses
TOTAL LOANS
NET LOANS
Premises and Equipment
Federal Home Loan Bank and Other Bank Stock, at Cost
Other Real Estate Owned
Accrued Interest and Other Assets
2012
2011
$
3,246,558
$
3,247,278
-
1,975,000
5,222,278
61,213,599
5,036,703
13,146,476
1,021,792
80,418,570
(
156,806)
(
1,371,881)
78,889,883
870,798
560,802
251,544
580,084
53,616,983
3,969,149
11,683,214
775,308
70,044,654
(
189,490)
(
1,312,066)
68,543,098
1,023,789
464,047
251,544
555,024
$
99,122,016
$
91,190,122
OPERATING ACTIVITIES
Net Income (Loss)
Adjustments to Reconcile Net Income (Loss) to Net Cash
From Operating Activities:
Depreciation and Amortization
Stock-based Compensation
Provision for Loan Losses
Write down of Other Real Estate Owned
Gain on Sale of Loans
Loans Originated for Sale
Proceeds from Sale of Loans
Other Items
NET CASH FROM OPERATING ACTIVITIES
INVESTING ACTIVITIES
Net Change in Interest-Bearing Deposits in Other Banks
Net Increase in Loans
Purchase of AFS Securities
Maturities of AFS Securities
Purchase of Federal Home Loan Bank Stock
Purchases of Premises and Equipment
NET CASH FROM INVESTING ACTIVITIES
2012
2011
$
411,980
$(
392,891)
197,325
44,871
99,000
-
286,858)
3,136,432)
3,459,662
122,614
912,162
(
(
(
250,456
96,953
223,000
64,756
33,173)
-
-
182,209
391,310
(
(
-
10,544,168)
14,099,757)
14,456,496
94,800)
44,334)
10,326,563)
(
(
(
(
(
480,543
14,804,904)
13,505,785)
10,917,564
133,500)
46,171)
17,092,253)
(
(
(
FINANCING ACTIVITIES
Net Increase in Demand Deposits and Savings Accounts
Net Change in Time Deposits
Net Increase in Federal Funds Purchased
NET CASH FROM FINANCING ACTIVITIES
(
9,931,679
3,192,998)
700,000
7,438,681
12,838,559
2,542,659
-
15,381,218
NET DECREASE IN CASH AND CASH EQUIVALENTS
Cash and Cash Equivalents at Beginning of Period
(
1,975,720)
5,222,278
(
1,319,725)
6,542,003
CASH AND CASH EQUIVALENTS AT END OF YEAR
$
3,246,558
$
5,222,278
Supplemental Disclosures of Cash Flow Information:
Interest Paid
Taxes Paid
$
$
414,410
800
$
$
427,886
800
The accompanying notes are an integral part of these financial statements.
The accompanying notes are an integral part of these financial statements.
8
13
SUNCREST BANK
NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2012 AND 2011
SUNCREST BANK
NOTE A -
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations
The Bank has been incorporated in the State of California and organized
as a single operating segment that operates two full-service branches
in Visalia and Porterville, California. The Bank’s primary source of
revenue is providing loans to customers, who are predominately small
and middle-market businesses and individuals located primarily in the
Southern Central Valley of California.
Subsequent Events
The Bank has evaluated subsequent events for recognition and disclosure
through February 13, 2013, which is the date the financial statements
were available to be issued.
Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities, disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts
of revenues and expenses during the reporting period. Actual results
could differ from those estimates.
Cash and Cash Equivalents
For purposes of reporting cash flows, cash and cash equivalents include
cash, due from banks and federal funds sold. Generally, federal funds are
sold for periods of less than ninety days.
Cash and Due from Banks
Banking regulations require that banks maintain a percentage of their
deposits as reserves in cash or on deposit with the Federal Reserve
Bank. The Bank was in compliance with its reserve requirements as of
December 31, 2012.
The Bank maintains amounts due from banks, which may exceed
federally insured limits. The Bank has not experienced any losses in
such accounts.
Investment Securities
Bonds, notes, and debentures for which the Bank has the positive intent
and ability to hold to maturity are reported at cost, adjusted for premiums
and discounts that are recognized in interest income using the interest
method over the period of maturity.
Investments not classified as trading securities nor as held to maturity
securities are classified as available-for-sale securities and recorded at
fair value. Unrealized gains or losses on available-for-sale securities
are excluded from net income and reported as an amount net of taxes
as a separate component of other comprehensive income included in
shareholders’ equity. Premiums and discounts on held-to-maturity and
available-for-sale securities are amortized or accreted into income using
the interest method. Realized gains or losses of held-to-maturity or
available-for-sale securities are recorded using the specific identification
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; OTTI related to credit loss, which
must be recognized in the income statement and; OTTI related to other
factors, which is recognized in other comprehensive income. The
credit loss is defined as the difference between the present value of the
cash flows expected to be collected and the amortized cost basis. For
equity securities, the entire amount of impairment is recognized through
earnings.
Loans Held for Sale
Government Guaranteed loans originated and intended for sale in the
secondary market are carried at the lower of cost or estimated market
value in the aggregate. Net unrealized losses are recognized through a
valuation allowance by charges to income. Gains or losses realized on
the sales of loans are recognized at the time of sale and are determined
by the difference between the net sales proceeds and the carrying value
of the loans sold, adjusted for any servicing asset or liability. Gains and
losses on sales of loans are included in noninterest income.
Loans
Loans receivable that management has the intent and ability to hold for
the foreseeable future or until maturity or payoff are reported at their
outstanding unpaid principal balances reduced by any charge-offs or
specific valuation accounts and net of deferred fees or costs on originated
loans, or unamortized premiums or discounts on purchased loans. Loan
origination fees and certain direct origination costs are capitalized and
recognized as an adjustment of the yield of the related loan.
Loans on which the accrual of interest has been discontinued are
designated as nonaccrual loans. The accrual of interest on loans is
discontinued when principal or interest is past due 90 days based on the
contractual terms of the loan or when, in the opinion of management,
there is reasonable doubt as to collectability. When loans are placed
Vavrinek, Trine, Day & Co., LLP
Certified Public Accountants
INDEPENDENT AUDITOR’S REPORT
V A L UE T H E D I F F E R E N CE
Board of Directors and Shareholders of
Suncrest Bank
We have audited the accompanying financial statements of Suncrest Bank, which are comprised of the
statements of financial condition as of December 31, 2012 and 2011, and the related statements of operations,
comprehensive income, changes in shareholders’ equity and cash flows for the years then ended, and the
related notes to the financial statements.
Management’s Responsibility for the Financial Statements
Management is responsible for the preparation and fair presentation of these financial statements in
accordance with accounting principles generally accepted in the United States of America; this includes the
design, implementation, and maintenance of internal control relevant to the preparation and fair presentation
of financial statements that are free from material misstatement, whether due to fraud or error.
Auditor’s Responsibility
Our responsibility is to express an opinion on these financial statements based on our audits. We conducted
our audits in accordance with auditing standards generally accepted in the United States of America. Those
standards require that we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free from material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the
financial statements. The procedures selected depend on the auditor’s judgment, including the assessment
of the risks of material misstatement of the financial statements, whether due to fraud or error. In making
those risk assessments, the auditor considers internal control relevant to the entity’s preparation and fair
presentation of the financial statements in order to design audit procedures that are appropriate in the
circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal
control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of
accounting policies used and the reasonableness of significant accounting estimates made by management,
as well as evaluating the overall presentation of the financial statements. We believe that the audit evidence
we have obtained is sufficient and appropriate to provide a basis for our audit opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial
position of Suncrest Bank as of December 31, 2012 and 2011, and the results of its operations and its cash
flows for the years then ended in accordance with accounting principles generally accepted in the United
Opinion
States of America.
Laguna Hills, California
February 13, 2013
25231 Paseo De Alicia, Suite 100 Laguna Hills, CA 92653 Tel: 949.768.0833 Fax: 949.768.8408 www.vtdcpa.com
F R E S N O •• L A G U N A H I L L S •• P A L O A L TO •• P L E A S A N T O N •• R A N C H O C U C A M O N G A •• R I V E R S I D E •• S A C R A M E N TO
14
7
SUNCREST BANK
NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2012 AND 2011
SUNCREST BANK
Table of Financial Statements
Independent auditor’s report on the financial statements ........
7
Financial statements
Statements of Financial Condition ...................................................
8
Statements of Operations ....................................................................
10
Statements of Comprehensive Income ...........................................
11
Statement of Changes in Shareholders’ Equity ............................
12
Statements of Cash Flows ....................................................................
13
Notes to Financial Statements ...........................................................
14
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES - Continued
on nonaccrual status, all interest previously accrued but not collected is
reversed against current period interest income. Income on nonaccrual
loans is subsequently recognized only to the extent that cash is received
and the loan’s principal balance is deemed collectible. Interest accruals
are resumed on such loans only when they are brought current with respect
to interest and principal and when, in the judgment of management, the
loans are estimated to be fully collectible as to all principal and interest.
Allowance for Loan Losses
The allowance for loan losses is a valuation allowance for probable
incurred credit losses. Loan losses are charged against the allowance
when management believes the uncollectability of a loan balance is
confirmed. Subsequent recoveries, if any, are credited to the allowance.
Management estimates the allowance balance required using past loan
loss experience, the nature and volume of the portfolio, information about
specific borrower situations and estimated collateral values, economic
conditions, and other factors. Allocations of the allowance may be made
for specific loans, but the entire allowance is available for any loan
that, in management’s judgment, should be charged off. Amounts are
charged-off when available information confirms that specific loans or
portions thereof, are uncollectible. This methodology for determining
charge-offs is consistently applied to each segment.
The Bank determines a separate allowance for each portfolio segment.
The allowance consists of specific and general reserves. Specific
reserves relate to loans that are individually classified as impaired. A
loan is impaired when, based on current information and events, it is
probable that the Bank will be unable to collect all amounts due according
to the contractual terms of the loan agreement. Factors considered in
determining impairment include payment status, collateral value and
the probability of collecting all amounts when due. Measurement of
impairment is based on the expected future cash flows of an impaired
loan, which are to be discounted at the loan’s effective interest rate,
or measured by reference to an observable market value, if one exists,
or the fair value of the collateral for a collateral-dependent loan. The
Bank selects the measurement method on a loan-by-loan basis except
that collateral-dependent loans for which foreclosure is probable are
measured at the fair value of the collateral.
The Bank recognizes interest income on impaired loans based on its
existing methods of recognizing interest income on nonaccrual loans.
Loans, for which the terms have been modified resulting in a concession,
and for which the borrower is experiencing financial difficulties, are
considered troubled debt restructurings and classified as impaired with
measurement of impairment as described above.
loan is reported, net, at the present value of estimated future cash flows
using the loan’s existing rate or at the fair value of collateral if repayment
is expected solely from the collateral.
General reserves cover non-impaired loans and are based on peer bank
historical loss rates for each portfolio segment, adjusted for the effects
of qualitative or environmental factors that are likely to cause estimated
credit losses as of the evaluation date to differ from the portfolio segment’s
historical loss experience. Qualitative factors include consideration of
the following: changes in lending policies and procedures; changes in
economic conditions; changes in the nature and volume of the portfolio;
changes in the experience, ability and depth of lending management
and other relevant staff; changes in the volume and severity of past due,
nonaccrual and other adversely graded loans; changes in the loan review
system; changes in the value of the underlying collateral for collateral-
dependent loans; concentrations of credit and the effect of other external
factors such as competition and legal and regulatory requirements.
Portfolio segments identified by the Bank include real estate – other,
construction and land development, commercial and industrial, and
consumer loans. Relevant risk characteristics for these portfolio
segments generally include debt service coverage, loan-to-value ratios
and financial performance on non-consumer loans and credit scores,
debt-to income, collateral type and loan-to-value ratios for consumer
loans.
Premises and Equipment
Premises and equipment are carried at cost less accumulated depreciation
and amortization. Depreciation is computed using the straight-line
method over the estimated useful lives, which ranges from three to
ten years for furniture and equipment. Leasehold improvements are
amortized using the straight-line method over the estimated useful lives
of the improvements or the remaining lease term, whichever is shorter.
Expenditures for betterments or major repairs are capitalized and those
for ordinary repairs and maintenance are charged to operations as
incurred.
Federal Home Loan Bank (“FHLB”) Stock
The Bank is a member of the FHLB system. Members are required to
own a certain amount of stock based on the level of borrowings and other
factors, and may invest in additional amounts. FHLB stock is carried
at cost, classified as a restricted security, and periodically evaluated for
impairment based on the ultimate recovery of par value. Both cash and
stock dividends are reported as income.
Advertising Costs
If a loan is impaired, a portion of the allowance is allocated so that the
The Bank expenses the costs of advertising in the period incurred.
Suncrestbank.com
6
15
SUNCREST BANK
NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2012 AND 2011
SUNCREST BANK
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES - Continued
Transfers of Financial Assets
Transfers of financial assets are accounted for as sales, when control
over the assets has been relinquished. Control over transferred assets is
deemed to be surrendered when the assets have been isolated from the
Bank, the transferee obtains the right (free of conditions that constrain
it from taking advantage of that right) to pledge or exchange the
transferred assets, and the Bank does not maintain effective control over
the transferred assets through an agreement to repurchase them before
their maturity.
Other Real Estate Owned
Real estate acquired by foreclosure or deed in lieu of foreclosure is
recorded at fair value at the date of foreclosure, establishing a new cost
basis by a charge to the allowance for loan losses, if necessary. Other
real estate owned is carried at the lower of the Bank’s carrying value
of the property or its fair value, less estimated carrying costs and costs
of disposition. Fair value is based on current appraisals less estimated
selling costs. Any subsequent write-downs are charged against operating
expenses. Operating expenses of such properties, net of related income,
and gains and losses on their disposition are included in other operating
expenses.
Income Taxes
Deferred income taxes are computed using the asset and liability method,
which recognizes a liability or asset representing the tax effects, based
on current tax law, of future deductible or taxable amounts attributable to
events that have been recognized in the financial statements. A valuation
allowance is established to reduce the deferred tax asset to the level at
which it is “more likely than not” that the tax asset or benefits will be
realized. Realization of tax benefits of deductible temporary differences
and operating loss carryforwards depends on having sufficient taxable
income of an appropriate character within the carryforward periods.
The Bank has adopted guidance issued by the Financial Accounting
Standards Board (“FASB”) that clarifies the accounting for uncertainty
in tax positions taken or expected to be taken on a tax return and provides
that the tax effects from an uncertain tax position can be recognized in
the financial statements only if, based on its merits, the position is more
likely than not to be sustained on audit by the taxing authorities. Interest
and penalties related to uncertain tax positions are recorded as part of
income tax expense.
Financial Instruments
In the ordinary course of business, the Bank has entered into off-balance
sheet financial instruments consisting of commitments to extend credit,
commercial letters of credit, and standby letters of credit as described
in Note J. Such financial instruments are recorded in the financial
statements when they are funded or related fees are incurred or received.
Earnings Per Share (“EPS”)
Basic EPS excludes dilution and is computed by dividing income
available to common stockholders by the weighted-average number
of common shares outstanding for the period. Diluted EPS reflects
the potential dilution that could occur if securities or other contracts to
issue common stock were exercised or converted into common stock or
resulted in the issuance of common stock that then shared in the earnings
of the entity. All of the outstanding stock options were not considered
in computing diluted earnings per share for 2012 and 2011 because they
were antidilutive. Weighted-average shares used in the computation of
basic EPS were 1,911,777 in 2012 and 2011.
Fair Value Measurement
Fair value is the exchange price that would be received for an asset
or paid to transfer a liability (an exit price) in the principal or most
advantageous market for the asset or liability in an orderly transaction
between market participants on the measurement date. Current
accounting guidance establishes a fair value hierarchy, which requires
an entity to maximize the use of observable inputs and minimize
the use of unobservable inputs when measuring fair value. The guidance
describes three levels of inputs that may be used to measure fair value:
Level 1: Quoted prices (unadjusted) for identical assets or liabilities
in active markets that the entity has the ability to access as of the
measurement date.
Level 2: Significant other observable inputs other than Level 1 prices
such as quoted prices for similar assets or liabilities; quoted prices in
markets that are not active; or other inputs that are observable or can
be corroborated by observable market data.
Level 3: Significant unobservable inputs that reflect a Bank’s own
assumptions about the assumptions that market participants would use
in pricing an asset or liability.
See Note L for more information and disclosures relating to the Bank’s
fair value measurements.
Comprehensive Income
Stock-Based Compensation
Changes in unrealized gains and losses on available-for-sale securities
is the only component of accumulated other comprehensive income for
the Bank.
The Bank recognizes the cost of employee services received in exchange
for awards of stock options, or other equity instruments, based on the
grant-date fair value of those awards. This cost is recognized over the
The Suncrest Bank staff is wonderful.
They have expertise in agriculture and
banking, which the major banks can’t
offer – and they’re friendly!
It’s a great bank to work with.
Ron Quinn
Ronald B. Quinn & Company
16
5
Suncrestbank.com
SUNCREST BANK
NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2012 AND 2011
SUNCREST BANK
Staff & Officers
Client Service
Representative
Kathleen Bernardo
VP/Operations Manager
Lisa Riso
Interim CEO
William Benneyan
Business Banking Specialist
Jennifer Noel
Client Service
Representative Vicki Evans
SVP/Operations
Administrator
Debra Bombard
VP/Loan Officer Loren Brooks
AVP/Human Resource Officer
Cynthia Paulus
AVP/Note Department
Manager Eileen Shine
EVP/Chief Credit Officer
Left
Dan McGregor
VP/Business
Manager Charlie Glenn
EVP/CFO Robert Moore III
VP/Operations Manager
Michelle Gletne
Right
Client Services
Representatives Allison
Moorhead, Lori Buecheler
and Christine Catalina, with
Business Development
Officer Gary Gostanian
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES - Continued
Stock-Based Compensation - Continued
period which an employee is required to provide services in exchange
for the award, generally the vesting period. See Note K for additional
information on the Bank’s stock option plan.
Reclassifications
Certain reclassifications have been made in the 2011 financial statements
to conform to the presentation used in 2012. These reclassifications had
no impact of the Bank’s previously reported financial statements.
Adoption of New Accounting Standards
In May, 2011, the FASB issued an amendment to achieve common
fair value measurement and disclosure requirements between U.S.
and International accounting principles. Overall, the guidance is
consistent with existing U.S. accounting principles; however, there are
some amendments that change a particular principle or requirement
for measuring fair value or for disclosing information about fair value
measurements. The amendment in this guidance was effective for interim
and annual reporting periods beginning after December 15, 2011. The
amendment did not significantly impact the Bank.
In September 2011, the FASB amended existing guidance and eliminated
the option to present the components of other comprehensive income as
part of the statement of changes in shareholder’s equity. The amendment
requires that comprehensive income be presented in either a single
continuous statement or in two separate consecutive statements. This
amendment was effective for interim and annual reporting periods
beginning after December 15, 2011. The adoption of this amendment
changed the presentation of comprehensive income included in these
financial statements.
NOTE B - INVESTMENT SECURITIES
Debt and equity securities have been classified in the statements of
financial condition according to management’s intent. The amortized
cost of securities and their approximate fair values at December 31 were
as follows:
Gross
Gross
Not pictured: Operations Specialist Susan Blanchard; Credit Analyst Tracy Cizek; Client Service
Representative Heather Fiori; Administration Operations Specialist Elia Havner; SBA Commercial
Processor/Closer Rosemary Leon; Note Department Assistant Karen Snow; Business Service Support
Specialist Adriana Vidales; Note Department Assistant Gloria Wilson
4
December 31, 2012
Available-for-Sale Securities:
U.S. Government and
Agency Securities
Mortgaged-Backed
Securities
December 31, 2011
Available-for-Sale Securities:
U.S. Government and
Agency Securities
Mortgaged-Backed
Securities
Amortized
Cost
Unrealized Unrealized
Gains
Losses
Fair
Value
$
13,784,705
$
40,511
$(
10,691)
$
13,814,525
898,623
9,526
(
327)
907,822
$
14,683,328
$
50,037
$(
11,018)
$
14,722,347
$
13,503,279
$
36,187
$(
2,696)
$
13,536,770
1,579,992
15,539
(
1,959)
1,593,572
$
15,083,271
$
51,726
$(
4,655)
$
15,130,342
17
The amortized cost and estimated fair value of all investment securities
as of December 31, 2012 by expected maturities are shown below.
Expected maturities may differ from contractual maturities because
borrowers may have the right to call or prepay obligations with or
without call or prepayment penalties.
Available-for-Sale Securities
Amortized
Cost
Fair
Value
Due within One Year
Due from One Year to Five Years
$
4,873,149
9,810,179
$
4,890,714
9,831,633
$
14,683,328
$
14,722,347
As of December 31, 2012 and 2011 no investment security had been in
a continuous loss position for a period of more than twelve consecutive
months. Management does not intend to sell and it is not more likely
than not that management would be required to sell the securities prior
to their anticipated recovery, and the decline in fair value is due to
changes in interest rates. The fair value is expected to recover as the
bond approaches maturity.
Securities with a fair value of approximately $4.5 million at December
31, 2012 were pledged to the Federal Home Loan Bank to secure
borrowings as discussed in Note F.
NOTE C - LOANS
The Bank’s loan portfolio consists primarily of loans to borrowers
within the Southern Central Valley of California. Although the
Bank seeks to avoid concentrations of loans to a single industry or
based upon a single class of collateral, real estate and real estate
associated businesses are among the principal industries in the
Bank’s market area and, as a result, the Bank’s loan and collateral
portfolios are, to some degree, concentrated in those industries.
A summary of the changes in the allowance for loan losses as of
December 31 follows:
Balance at Beginning of Year
Additions to the Allowance Charged to Expense
Recoveries on Loans Charged Off
2012
2011
$
1,312,066
99,000
750
1,411,816
$
1,089,066
223,000
-
1,312,066
Less Loans Charged Off
(
39,935)
-
$
1,371,881
$
1,312,066
SUNCREST BANK
NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2012 AND 2011
SUNCREST BANK
$
992,674
$
102,033
$
203,658
$
13,701
$
1,312,066
$
76,917,461
$
-
$
2,294,905
$
1,206,204
$
80,418,570
NOTE C - LOANS - Continued
The following table presents the activity in the allowance for loan losses
for the year 2012 and 2011 and the recorded investment in loans and
impairment method as of December 31, 2012 and 2011 by portfolio
segment:
December 31, 2012
Allowance for Loan Losses:
Beginning of Year
Provisions
Charge-offs
Recoveries
End of Year
Reserves:
Specific
General
Loans Evaluated for Impairment:
Individually
Collectively
December 31, 2011
Allowance for Loan Losses:
Beginning of Year
Provisions
Charge-offs
Recoveries
End of Year
Reserves:
Specific
General
Loans Evaluated for Impairment:
Individually
Collectively
Real Estate -
Other
Construction
and Land
Development
Commercial
and
Industrial
Consumer
Total
$
992,674
33,013
-
-
$
102,033
(17,847)
-
-
$
203,658
84,519
(39,935)
750
$
13,701
(685)
-
-
$
1,312,066
99,000
(39,935)
750
$
1,025,687
$
84,186
$
248,992
$
13,016
$
1,371,881
-
$
1,025,687
-
$
84,186
$
-
248,992
-
$
13,016
-
$
1,371,881
$
1,025,687
$
84,186
$
248,992
$
13,016
$
1,371,881
$
650,948
60,562,651
$
555,256
4,481,447
$
-
13,146,476
-
$
1,021,792
$
1,206,204
79,212,366
$
61,213,599
$
5,036,703
$
13,146,476
$
1,021,792
$
80,418,570
$
678,788
313,886
-
-
$
265,256
(163,223)
-
-
$
137,393
66,265
-
-
$
7,629
6,072
-
-
$
1,089,066
223,000
-
-
-
$
992,674
-
$
102,033
$
-
203,658
-
$
13,701
-
$
1,312,066
$
992,674
$
102,033
$
203,658
$
13,701
$
1,312,066
$
812,779
52,804,204
$
695,000
3,274,149
$
41,436
11,641,778
-
$
775,308
$
1,549,215
68,495,439
$
53,616,983
$
3,969,149
$
11,683,214
$
775,308
$
70,044,654
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, collateral
adequacy, credit documentation, and current economic trends, among
other factors. The Bank analyzes loans individually by classifying
the loans as to credit risk. This analysis typically includes larger, non-
homogeneous loans such as commercial real estate and commercial and
industrial loans. This analysis is performed on an ongoing basis as new
information is obtained. The Bank uses the following definitions for risk
ratings:
Pass - Loans classified as pass include loans not meeting the risk
ratings defined below.
Special Mention - Loans classified as special mention have a potential
weakness that deserves management’s close attention. If left uncorrected,
these potential weaknesses may result in deterioration of the repayment
prospects for the loan or of the institution’s credit position at some future
date.
Substandard - Loans classified as substandard are inadequately
protected by the current net worth and paying capacity of the obligor or
of the collateral pledged, if any. Loans so classified have a well-defined
weakness or weaknesses that jeopardize the liquidation of the debt.
They are characterized by the distinct possibility that the institution will
sustain some loss if the deficiencies are not corrected.
Impaired - A loan is considered impaired, when, based on current
information and events, it is probable that the Bank will be unable
to collect all amounts due according to the contractual terms of the
loan agreement. Additionally, all loans classified as troubled debt
restructurings are considered impaired.
The risk category of loans by class of loans was as follows as of
December 31, 2012:
December 31, 2012
Pass
Real Estate Other:
Commercial
Farmland
1-4 Family Residential
Multifamily Residential
Construction and Land Development
Commercial and Industrial
Consumer
32,920,050
$
18,946,334
4,391,584
2,129,366
4,481,447
13,026,888
1,021,792
Special
Mention
Substandard
Impaired
Total
$
-
-
-
-
-
-
-
2,175,317
$
-
-
-
-
119,588
-
$
650,948
-
-
-
555,256
-
-
35,746,315
$
18,946,334
4,391,584
2,129,366
5,036,703
13,146,476
1,021,792
The risk category of loans by class of loans was as follows as of
December 31, 2011:
December 31, 2011
Pass
Real Estate Other:
Commercial
Farmland
1-4 Family Residential
Multifamily Residential
Construction and Land Development
Commercial and Industrial
Consumer
30,838,227
$
13,070,619
4,460,526
2,174,072
3,274,149
11,468,805
775,308
Special
Mention
Substandard
Impaired
Total
$
-
-
-
-
-
-
-
2,260,760
$
-
-
-
-
172,973
-
$
812,779
-
-
-
695,000
41,436
-
33,911,766
$
13,070,619
4,460,526
2,174,072
3,969,149
11,683,214
775,308
$
66,061,706
$
-
$
2,433,733
$
1,549,215
$
70,044,654
Past due and nonaccrual loans presented by loan class were as follows as
of December 31, 2012 and 2011:
30-59 Days
Past Due
Still Accruing
60-89 Days Over 90 Days
Past Due
Past Due
Nonaccrual
$
650,948
-
-
-
555,256
-
-
$
-
-
-
-
-
-
-
December 31, 2012
Real Estate Other:
Commercial
Farmland
1-4 Family Residential
Multifamily Residential
Construction and Land Development
Commercial and Industrial
Consumer
December 31, 2011
Real Estate Other:
Commercial
Farmland
1-4 Family Residential
Multifamily Residential
Construction and Land Development
Commercial and Industrial
Consumer
$
$
$
$
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
$
$
$
$
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
$
-
$
1,206,204
$
-
-
-
-
-
-
-
$
812,779
-
-
-
695,000
41,436
-
$
-
$
1,549,215
Dale B. Margosian (not pictured)
Born in Dinuba, Dale is a longtime resident of Porterville and is a graduate of California State University, Fresno. He has
managed a thriving CPA practice in Porterville for over 27 years and participates in many civic organizations.
March R. Schuil
Marc is a native of Reedley and a graduate of California State University, Fresno. He also
earned an MBA from the University of Southern California. Marc is an owner of Schuil
and Associates, a real estate brokerage firm specializing in agricultural real estate and
the dairies. Marc has been active in a variety of civic
organizations.
Eric M. Shannon
Eric’s family has been farming in the area for more than 100 years and Eric continues
that tradition. A graduate of UC Davis, Eric farms and is active in real estate development
projects in the Visalia area. He served as president of his Rotary Club and is active in
many other organizations.
Michael E. Thurlow
Mike is a native of the Reedley/Kingsburg area, and is a graduate of Reedley High,
Reedley College and California Poly, San Luis Obispo. Mike is an owner/manager of a
produce company that stores, packs and ships fruit raised in the South Valley. Mike is
active in the community personally and through his business.
Darrell E. Tunnell
Darrell was born in Terra Bella and raised in Porterville. As a student of College of the
Sequoias, he moved to Visalia, where he began working in the aircraft repair and
maintenance business. Today, he owns Aircraft Mechanical Services, Inc., the fixed-base
operator for the Visalia Airport. He is active in sports and in school and community
organizations.
J. Steven Worthley
Steve is a native and resident of Dinuba. He is a graduate of Occidental College and
earned his JD degree from the University of the Pacific-McGeorge School of Law. He is
a practicing attorney and current member, and former chairman, of the Tulare County
Board of Supervisors. He has been a very active member of many school,
civic and professional organizations.
18
3
SUNCREST BANK
NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2012 AND 2011
SUNCREST BANK
Board of Directors
NOTE C - LOANS - Continued
Information relating to individually impaired loans presented by class of
loans was as follows as of December 31, 2012 and 2011:
At December 31, 2012, the future lease rental payable under
noncancellable operating lease commitments for the Bank’s main office
and Porterville office was as follows:
Balance
Investment
Allowance
Investment
Recognized
Related Party
Others
December 31, 2012
With No Related Allowance Recorded
Real Estate Other:
Commercial
Farmland
1-4 Family Residential
Multifamily Residential
Construction and Land Development
Commercial and Industrial
Consumer
December 31, 2011
With No Related Allowance Recorded
Real Estate Other:
Commercial
Farmland
1-4 Family Residential
Multifamily Residential
Construction and Land Development
Commercial and Industrial
Consumer
$
754,370
-
-
-
646,039
-
-
$
650,948
-
-
-
555,256
-
-
$
-
-
-
-
-
-
-
$
710,000
-
-
-
607,000
-
-
$
-
-
-
-
-
-
-
$
1,400,409
$
1,206,204
$
-
$
1,317,000
$
-
$
812,779
-
-
-
695,000
41,436
-
$
812,779
-
-
-
695,000
41,436
-
$
-
-
-
-
-
-
-
$
813,000
-
-
-
2,303,000
193,000
-
$
-
-
-
-
-
-
-
$
1,549,215
$
1,549,215
$
-
$
3,309,000
$
-
William A. Benneyan
Bill was born and educated in Fresno, CA, and is a graduate of California State University,
Fresno. He has lived in the Visalia, Lindsay and Fresno areas nearly his entire life. Bill is
a former Certified Public Accountant and owned a CPA practice in Lindsay and Visalia.
However, for the past 25 years, Bill has specialized in custom home construction. Bill is a
former Vice Chairman of Mineral King National Bank, a highly succesful community bank
in Visalia that sold to Vallicorp in 1994.
David C. Crinklaw
Dave is a resident of Reedley, with business interests throughout the Central Valley. Dave
sold his home construction business in 2000 and now specializes in commercial
construction. He also farms grapes in Fresno and Tulare counties and manages a farm
services company serving the Central Valley.
Gary E. Esajian
Gary has lived in the Lemoore area most of his life. He farms in Kings, Fresno and Tulare
counties and manages real estate development interests here and in San Luis Obispo
County. Gary serves on the Board of the Westlands Water District and the San Joaquin
Valley Cotton Board, and is active in local farm bureaus and chambers of commerce.
Thomas J. O’Sullivan
Tom was born in Chicago, but for the past 30 years has lived in the Porterville area, where
he operated a chain of grocery stores. Tom is a farmer and real estate investor and
volunteers with a variety of civic organizations.
Florencio “Frank” Paredez
A native of Tulare County, Frank graduated from College of the
Sequoias and farms in the Exeter area. He owns a packinghouse and the Hungry Hollow
Borrow Pit in Porterville and is active in local and San Francisco-based farmers’ markets.
Frank has been active on many boards of directors for organizations throughout Tulare
County.
There were no troubled debt restructurings during 2012 and 2011.
NOTE D - PREMISES AND EQUIPMENT
A summary of premises and equipment as of December 31 follows:
The Bank has entered into two leases for its main office and Porterville
Leasehold Improvements
Furniture, Fixtures, and Equipment
Less Accumulated Depreciation and Amortization
2012
2011
$
1,182,465
806,436
1,988,901
(
1,118,103)
$
1,172,286
772,280
1,944,566
(
920,777)
$
870,798
$
1,023,789
office, which will expire in January 2017 and July 2018, respectively.
The Bank leases it Porterville Office from two Directors of the Bank.
These leases include provisions for periodic rent increases as well as
payment by the lessee of certain operating expenses. These leases also
include provisions for options to extend the lease. The rental expense
relating to these leases and other short term rentals was approximately
$287,000 and $283,000 for the years ended December 31, 2012 and
2011, respectively.
2
19
2013
2014
2015
2016
2017
Thereafter
$
125,050
130,052
135,254
140,664
146,291
87,295
$
176,614
181,912
187,370
192,991
16,137
-
$
764,606
$
755,024
The minimum rental payments shown above are given for the existing
lease obligation and are not a forecast of future rental expense.
NOTE E - DEPOSITS
$
At December 31, 2012, the scheduled maturities of time deposits are as
follows:
2013
2014
2015
2016
2017
14,393,385
1,747,000
765,393
1,306,430
1,240,062
$
19,452,270
NOTE F - OTHER BORROWINGS
The Bank may borrow up to $9,400,000 overnight on an unsecured basis
from its correspondent banks. As of December 31, 2012, the Bank has
$700,000 outstanding with The Independent Bankers Bank. No amounts
were outstanding under these arrangements in 2011.
In addition, the Bank is also a member of the Federal Home Loan Bank
and has arranged secured borrowing lines with that institution. As of
December 31, 2012, the Bank had pledged $4.5 million of investment
securities resulting in a borrowing capacity of approximately $4.4
million. As of December 31, 2012, no advances were outstanding under
this arrangement.
SUNCREST BANK
NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2012 AND 2011
SUNCREST BANK
NOTE G - OTHER EXPENSES
Other expenses as of December 31 are comprised of the following:
2012
2011
Professional Fees
Data Processing
Office Expenses
Marketing and Business Promotion
Insurance
Regulatory Assessments
OREO Expenses
Other Expenses
$
403,768
258,654
133,549
69,077
31,413
99,957
2,882
69,612
$
406,633
237,498
127,594
77,096
23,673
118,761
69,487
83,315
$
1,068,912
$
1,144,057
NOTE H - INCOME TAXES
During 2012, the Bank recognized income tax expense of $800 comprised
of $207,800 of taxes accrued on current operating earnings reduced by
a $207,000 reduction in the valuation allowance against net deferred tax
assets established in prior years. The tax expense for the year ended
December 31, 2011 was the minimum franchise tax for the State of
California. The tax benefits related to the operating losses incurred
during the period ended December 31, 2011 were not recognized, as
realization of the benefits is dependent upon future income.
Deferred taxes are a result of differences between income tax accounting
and generally accepted accounting principles with respect to income and
expense recognition. The following is a summary of the components
of the net deferred tax asset accounts recognized in the accompanying
statement of financial condition at December 31:
Deferred Tax Assets:
Pre-Opening Expenses
Allowance for Loan Losses Due to Tax Limitations
Depreciation Differences
Operating Loss Carryforwards
Stock-Based Compensation
Other Assets and Liabilities
2012
2011
$
455,000
539,000
100,000
1,081,000
386,000
386,000
2,947,000
$
498,000
498,000
43,000
1,505,000
402,000
258,000
3,204,000
Valuation Allowance
(
2,829,000)
(
3,036,000)
Deferred Tax Liabilities:
Unrealized Gain on Available-for-Sale Securities
Other Assets and Liabilities
(
(
(
16,000)
118,000)
134,000)
(
(
(
19,000)
168,000)
187,000)
Net Deferred Tax Liabilities
$(
16,000)
$(
19,000)
The valuation allowance was established because the Bank has not
reported earnings sufficient enough to support the recognition of the
deferred tax assets. The Bank has net operating loss carryforwards of
approximately $2,638,000 for federal income purposes and $2,576,000
for California franchise tax purposes. Federal and California net
operating loss carryforwards, to the extent not used will expire in 2030.
The Bank does not expect the total amount of unrecognized tax benefits
to significantly increase or decrease within the next twelve months.
The Bank is subject to federal income tax and franchise tax of the state of
California. Income tax returns for the periods ended December 31, 2011,
2010 and 2009 are open to audit by the federal authorities and income tax
returns for the years ended December 31, 2011, 2010, 2009 and 2008 are
open to audit by state authorities.
NOTE I - RELATED PARTY TRANSACTIONS
In the ordinary course of business, the Bank has granted loans to certain
directors and the companies with which they are associated. The total
outstanding principal and commitment of these loans at December
31, 2012 and 2011 was approximately $3,295,000 and $5,624,000,
respectively.
Also, in the ordinary course of business, certain executive officers,
directors and companies with which they are associated have deposits
with the Bank. The balances of these deposits at December 31, 2012
and 2011 amounted to approximately $14,180,000 and $13,129,000,
respectively.
NOTE J - COMMITMENTS
In the ordinary course of business, the Bank enters into financial
commitments to meet the financing needs of its customers. Those
instruments involve to varying degrees, elements of credit and interest
rate risk not recognized in the Bank’s financial statements.
The Bank’s exposure to loan loss in the event of nonperformance on
commitments to extend credit and standby letters of credit is represented
by the contractual amount of those instruments. The Bank uses the same
credit policies in making commitments as it does for loans reflected in
the financial statements.
As of December 31, 2012 and 2011, the Bank had the following
outstanding financial commitments whose contractual amount represents
credit risk:
2012
2011
Commitments to Extend Credit
$
6,296,000
$
7,379,000
Commitments to extend credit are agreements to lend to a customer as
long as there is no violation of any condition established in the contract.
Since many of the commitments are expected to expire without being
drawn upon, the total amounts do not necessarily represent future cash
requirements. The Bank evaluates each client’s credit worthiness on
a case-by-case basis. The amount of collateral obtained if deemed
necessary by the Bank is based on management’s credit evaluation of the
customer. The majority of the Bank’s commitments to extend credit and
standby letters of credit are secured by real estate or cash, respectively.
20
We continue to grow and expand our loan and deposit products.
Worthley, who leaves the Board in April. Both provided Suncrest
Suncrest Bank is an exceptional agribusiness bank for growers,
Bank with outstanding service during their terms and we are a
packers and processors because our staff and Board of Directors
stronger organization thanks to their participation and counsel.
are rich in agribusiness experience. We are pleased to offer an
outstanding level of expertise to business and agri-business
borrowers of all types.
We sincerely appreciate and thank each of you, our shareholders
and customers, for your continued support and referrals. You are
the reason we are in business, and we appreciate all you do for
Our founding CEO/President and Director, Michael Wilson,
us.
made a career change this year, stepping down as our CEO/
On behalf of Suncrest Bank, thank you.
President and member of our Board of Directors. I, my co-
directors and the staff of Suncrest Bank wish Mike the best of
everything in the future and thank him for his years of excellent
Sincerely,
service to our Bank.
I am grateful to the members of our Board of Directors, whose
hard work and dedication help make Suncrest Bank the success
that it is. I’d also like to extend a special recognition to Board
members Bob Lowery, who left the Board in August, and Steve
William A. Benneyan
Interim CEO/President
Chairman of the Board of Directors
Asset Growth
$120,000,000
$100,000,000
$80,000,000
$60,000,000
$40,000,000
$20,000,000
$0
2008
2009
2010
2011
2012
This letter includes forward-looking information, which is subject to the “safe harbor” created by Section 27A of the Securities Act of 1933,
as amended, and Section 21E of the Securities Exchange Act and the Private Securities Litigation Reform Act of 1995. When the Bank uses or
incorporates by reference in this letter the words “anticipate,” “estimate,” “expect,” “project,” “intend,” “commit,” “believe” and similar expressions, the
Company intends to identify forward-looking statements. Our actual results may differ materially from those projected in any forward-looking
statements, as they will depend on many factors about which we are unsure, including many factors which are beyond our control.
SUNCREST BANK
NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2012 AND 2011
SUNCREST BANK
Dear Shareholders
and Customers,
Suncrest Bank takes pride in meeting our mission
to be the premiere independent bank in our
region by effectively serving our clientele with
exceptional customer service while exceeding
customer expectations of their banking experience
and creating a secure investment opportunity for
our shareholders. Community is defined as a group
NOTE K - STOCK OPTION PLAN
The Bank’s 2007 Stock Option Plan was approved by its shareholders
in July 2008. Under the terms of the 2007 Stock Option Plan, officers
and key employees may be granted both nonqualified and incentive
stock options and directors and organizers, who are not also an officer
or employee, may only be granted nonqualified stock options. The Plan
provides for options to purchase 573,473 shares of common stock at a
price not less than 100% of the fair market value of the stock on the date
of the grant. Stock options expire no later than ten years from the date of
the grant and generally vest over three to five years. The Plan provides
for accelerated vesting if there is a change of control, as defined in the
Plan. The Bank recognized stock-based compensation cost of $44,871
and $96,953 for the periods ended December 31, 2012 and 2011.
brought together for the greater good of something and, to Suncrest Bank, community
No stock options were granted in 2012 and 2011.
is the cornerstone of who we are as a bank.
We are working hard to create lifelong relationships with our customers in the
communities that we serve. Our customers benefit from decisions made locally and they
love the hometown service that our expert staff provides. I am very proud of each and
every one of our associates. They are the face of Suncrest Bank and they provide our
customers with special, personalized service. Their hard work provided the excellent
financial results that we enjoyed for the year ending December 31, 2012.
Our net income of $411,980 was an increase of $804,871 over the loss for the prior
year. This marks our first year of profitable operating results for each quarter. Our
assets increased $7,931,894 over the December 31, 2011, record year, and totaled
$99,122,016 at year end December 31, 2012. This was another year end record for
Table of
Contents
Board of Directors .....................
Staff & Officers ...........................
2
4
A Word from Our Customers ...
5
Audited Financial Statement
2012 and 2011 .............................
6
Suncrest Bank.
Net Income
$500,000
$0
-$500,000
-$1,000,000
-$1,500,000
-$2,000,000
-$2,500,000
2008
2009
2010
2011
2012
A summary of the status of the Bank’s stock option plan as of December
31, 2012 and changes during the year ended thereon is presented below:
Weighted-
Average
Weighted-
Average
Remaining
Exercise Contractual
Shares
Price
Term
Aggregate
Intrinsic
Value
in Thousands
Outstanding at Beginning of Year
Granted
Exercised
Forfeited
465,804
-
-
(
74,300)
9.87
$
-
$
$
-
$
10.00
Outstanding at End of Year
391,504
$
9.85
5.18 Years
$
-
Options Exercisable
377,504
$
9.91
5.09 Years
$
-
As of December 31, 2012, there was $21,795 of total unrecognized
compensation cost related to the outstanding stock options that will be
recognized over a weighted-average period of 1.35 years.
NOTE L - FAIR VALUE MEASUREMENT
The following is a description of valuation methodologies used for assets
and liabilities recorded at fair value:
Securities
The fair values of securities available for sale are determined by matrix
pricing, which is a mathematical technique used widely in the industry
to value debt securities without relying exclusively on quoted prices for
specific securities but rather by relying on the securities’ relationship to
other benchmark quoted securities (Level 2).
Other Real Estate Owned
Other real estate owned represents real estate that has been foreclosed
and adjusted to fair value. At the time of foreclosure, these assets are
recorded at fair value less costs to sell, which becomes the asset’s new
basis. Any write-downs based on the asset’s fair value at the date of
foreclosure are charged to the allowance for loan losses. The fair value of
other real estate owned is generally based on recent real estate appraisals
21
or broker opinions, obtained from independent third parties, which are
frequently adjusted by management to reflect current conditions and
estimated selling costs (Level 3).
The following table provides the hierarchy and fair value for each major
category of assets and liabilities measured at fair value at December 31,
Fair Value Measurements Using:
Level 3
Level 2
Level 1
Total
December 31, 2012
Assets measured at fair value on
a recurring basis
Securities Available for Sale
Assets measured at fair value on
a non-recurring basis
Other Real Estate Owned
December 31, 2011
Assets measured at fair value on
a recurring basis
Securities Available for Sale
Assets measured at fair value on
a non-recurring basis
Other Real Estate Owned
2012:
-$
$
14,722,347
$
-
$
14,722,347
-$
$
-
$
251,544
$
251,544
-$
$
15,130,342
$
-
$
15,130,342
-$
$
-
$
251,544
$
251,544
At December 31, 2012 and 2011, other real estate owned, which is
measured at fair value less costs to sell, had a net carrying amount of
$251,544, after write-downs of $64,756 during 2011. There were no
write-downs in 2012.
Quantitative information about the Bank’s nonrecurring Level 3 fair
value measurements as of December 31, 2012 is as follows:
Other Real Estate Owned
Fair Value
Amount
251,544
$
Valuation Technique
Third Party Appraisals Selling Costs
Unobservable
Input
Range
10%
NOTE M - FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair value of a financial instrument is the amount at which the asset
or obligation could be exchanged in a current transaction between willing
parties, other than in a forced or liquidation sale. Fair value estimates are
made at a specific point in time based on relevant market information and
information about the financial instrument. These estimates do not reflect
any premium or discount that could result from offering for sale at one
time the entire holdings of a particular financial instrument. Because no
market value exists for a significant portion of the financial instruments,
fair value estimates are based on judgments regarding future expected
loss experience, current economic conditions, risk characteristics of
various financial instruments, and other factors. These estimates are
subjective in nature, involve uncertainties and matters of judgment and,
therefore, cannot be determined with precision. Changes in assumptions
could significantly affect the estimates.
Fair value estimates are based on financial instruments both on and off
the balance sheet without attempting to estimate the value of anticipated
future business and the value of assets and liabilities that are not
considered financial instruments. Additionally, tax consequences related
SUNCREST BANK
NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2012 AND 2011
SUNCREST BANK
NOTE M - FAIR VALUE OF FINANCIAL INSTRUMENTS
- Continued
also provides for a non-elective discretionary contribution by the Bank.
The Bank made no contributions for 2012 or 2011.
to the realization of the unrealized gains and losses can have a potential
effect on fair value estimates and have not been considered in many of
the estimates.
The following methods and assumptions were used to estimate the fair
value of significant financial instruments:
Financial Assets
The carrying amounts of cash, short term investments, due from
customers on acceptances, and bank acceptances outstanding are
considered to approximate fair value. Short term investments include
federal funds sold, securities purchased under agreements to resell, and
interest bearing deposits with banks. The fair values of investment
securities, including available for sale, are generally based on matrix
pricing. The fair value of loans are estimated using a combination of
techniques, including discounting estimated future cash flows and quoted
market prices of similar instruments where available.
Financial Liabilities
The carrying amounts of deposit liabilities payable on demand,
commercial paper, and other borrowed funds are considered to
approximate fair value. For fixed maturity deposits, fair value is
estimated by discounting estimated future cash flows using currently
offered rates for deposits of similar remaining maturities. The fair value
of long term debt is based on rates currently available to the Bank for
debt with similar terms and remaining maturities.
Off-Balance Sheet Financial Instruments
The fair value of commitments to extend credit and standby letters of
credit is estimated using the fees currently charged to enter into similar
agreements. The fair value of these financial instruments is not material.
The fair value hierarchy level and estimated fair value of significant
financial instruments at December 31, 2012 and 2011 are summarized as
follows (dollar amounts in thousands):
2012
2011
Fair Value Carrying
Hierarchy
Value
Fair
Value
Carrying
Value
Fair
Value
Financial Assets:
Cash and Cash Equivalents Level 1
Level 1
Investment Securities
Level 2
Loans, net
Level 2
Other Bank Stock
3,247
$
14,722
78,890
561
$
3,247
14,722
78,892
561
5,222
$
15,130
68,543
464
5,222
$
15,130
68,543
464
Financial Liabilities:
Deposits
Federal Funds Purchased
Level 2
Level 2
84,782
700
84,782
700
78,044
-
78,044
-
NOTE N - EMPLOYEE BENEFIT PLAN
The Bank adopted a 401(k) Plan for its employees in 2008. Under the
plan, eligible employees may defer a portion of their salaries. The plan
22
NOTE O - REGULATORY MATTERS
The Bank is subject to various regulatory capital requirements
administered by the federal banking agencies. Failure to meet minimum
capital requirements can initiate certain mandatory - and possibly
additional discretionary - actions by regulators that, if undertaken, could
have a direct material effect on the 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 their assets, liabilities, and certain off-
balance-sheet items as calculated under regulatory accounting practices.
The capital amounts and classification are also subject to qualitative
judgments by the regulators about components, risk weightings, and
other factors.
Quantitative measures established by regulation to ensure capital
adequacy require the Bank to maintain minimum amounts and ratios (set
forth in the table below) of total and Tier 1 capital (as defined in the
regulations) to risk-weighted assets (as defined), and of Tier 1 capital
(as defined) to average assets (as defined). Management believes, as of
December 31, 2012 and 2011, that the Bank meets all capital adequacy
requirements.
As of December 31, 2012, the most recent notification from the FDIC
categorized the Bank as well capitalized under the regulatory framework
for prompt corrective action (there are no conditions or events since
that notification that management believes have changed the Bank’s
category). To be categorized as well capitalized, the Bank must maintain
minimum ratios as set forth in the table below.
The following table also sets forth the Bank’s actual capital amounts and
ratios (dollar amounts in thousands):
Amount of Capital Required
For Capital
Adequacy
Purposes
Actual
To Be Well-
Capitalized
Under Prompt
Corrective
Provisions
As of December 31, 2012:
Total Capital (to Risk-Weighted Assets)
$14,159
Tier 1 Capital (to Risk-Weighted Assets) $13,156
$13,156
Tier 1 Capital (to Average Assets)
Ratio
Amount Ratio Amount Ratio
16.3%
15.1%
12.5%
$6,977
$3,489
$4,227
8.0% $8,721
4.0% $5,233
4.0% $5,284
10.0%
6.0%
5.0%
As of December 31, 2011:
Total Capital (to Risk-Weighted Assets)
$13,572
Tier 1 Capital (to Risk-Weighted Assets) $12,699
$12,699
Tier 1 Capital (to Average Assets)
17.6%
16.5%
13.9%
$6,186
$3,093
$3,665
8.0% $7,733
4.0% $4,640
4.0% $4,582
10.0%
6.0%
5.0%
The California Financial Code provides that a Bank may not make a
cash distribution to its shareholders in excess of the lesser of the Bank’s
undivided profits or the Bank’s net income for its last three fiscal years
less the amount of any distribution made to the Bank’s shareholders
during the same period.
We went with Suncrest Bank for the SBA loan, but
eventually moved our accounts from a larger bank.
The relationship feels right. It’s warm and friendly
at the bank and staff members know us – like what
we try to do here. We no longer feel like a number.
Rande and Kim Payne
Co-Owners, Valhalla Restaurant
Suncrestbank.com
Annual
RepoRt
RepoRt