Suncrest Bank Annual Report 2014

Plain-text annual report

Suncrest Leadership Team Bob Moore Chief Financial Officer Ciaran McMullan President & CEO Doug Tribble Chief Operating Officer Peter Nutz Chief Credit Officer ———————————————— ———————————————— ———————————————— ———————————————— YEARS SERVED IN INDUSTRY: 30+ YEARS SERVED IN INDUSTRY: 22 YEARS SERVED IN INDUSTRY: 30+ YEARS SERVED IN INDUSTRY: 22 ———————————————— ———————————————— ———————————————— ———————————————— RELEVANT WORK EXPERIENCE: RELEVANT WORK EXPERIENCE: RELEVANT WORK EXPERIENCE: RELEVANT WORK EXPERIENCE: Instrumental in the establishment of Suncrest Bank • Previously CFO of 1st Bank Yuma • SVP / Investment Officer at Valley Independent Bank Previously CEO of National Australia Bank (NAB) Americas $15B group operating in the US and Brazil • Grew NAB Americas from zero assets in 2006 to $6B+ in 2010 • While CEO of NAB, completed four acquisitions, two international de-novo branches and one major joint venture • Previously served as Chairman of Great Western Bancorp (GWB) Previously EVP of Great Western Bank ($8B asset bank in the Midwest) • Oversaw growth of GWB from 6 branches and $125M in assets in 1995 to 185 branches and $8B+ assets in 2012 • Led 15 acquisitions and 9 de-novo branch start ups while at GWB Over 20 years of experience in credit risk management specializing in agribusiness • Previously EVP / Executive Credit Risk Director with Rabobank Group • Prior to Rabobank, Mr Nutz held various senior roles including Finance Director with the Offutt Companies and as a Credit Officer with the Farm Credit System • Led the post-acquisition integration of multiple credit divisions 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. Marc R. Schuil Marc is a co-founder of Schuil & Associates and has partnered with his two brothers, Mike Schuil and Rick Schuil for over 30 years. Marc earned a Bachelor of Science degree from Fresno State University and an MBA in Finance and Marketing from the University of Southern California. In addition to holding his broker’s license in the state of California, he is currently an active licensed broker in the states of California, Texas, Oklahoma, Arizona, Iowa, South Dakota, Oregon, Kansas, Colorado, and New Mexico. Marc’s strong investment and analytical skills have assisted him in evaluating proﬁt potentials of various agricultural opportunities. Marc has been involved 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 Polytechnic University, 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 Tunnell Darrell was born in Porterville and raised in Terra Bella. He moved to Visalia in 1979, where he began working in the aircraft repair and maintenance ﬁeld. In 1984 Darrell received his airframe and power plant certiﬁcate from the Federal Aviation Administration. Darrell has owned Aircraft Mechanical Services, Inc., which is the Visalia Airport ﬁxed base operator (FBO) since 1988. Darrell is active in many sports and is an active contributor to school and civic organizations. He is also a proud supporter of the American Cancer Society and Wounded Warrior Project. 3 Dear Shareholders and Customers On behalf of the Suncrest Bank Board of Directors, we are privileged to report our 2014 ﬁnancial results. This year those results were record breaking, as we experienced strong growth in loans, deposits and pre-tax income. We ended 2014 with total assets of $188.6 million, which surpasses our 2013 year-end of $126.3 million by 49.4%. This sharp increase set a record for Suncrest Bank, placing us in the top 1.5% of all US banks in terms of total asset growth, and making us the fastest growing bank in the Central Valley. Our portfolio grew 32.6% over the prior year, ending the year at $125.2 million, while our total deposits grew by 51.9%, ending the year at $166.4 million. Our Pre-tax earnings for the year are $745,621 which represents a 16.4% increase over 2013, and continues our impressive trend of proﬁtable growth, which now extends to thirteen consecutive quarters. This year was a “Foundation” year for Suncrest Bank as we established a new mission statement and made important strategic investments in people, products and services. Suncrest Bank’s community oriented business philosophy is encapsulated in our new Mission; “Helping to Build and Sustain Local Communities”. Our future success as an organization can only be attained if the communities we serve are also successful. The deposit dollars we raise locally are loaned back out to local businesses to help create a circle of success that is maximized when our communities shop local, dine local, do business local and bank local. to its team. Mr. Peter Nutz was appointed as the bank’s new Chief Credit Ofﬁcer after spending 13 years with Rabobank where he held various senior credit positions both here in the South Valley and overseas. While with Rabobank, Mr. Nutz served as EVP and Head of Ag Credit Risk for California and Senior Ag Credit Ofﬁcer for the entire US, chairing 12 nationwide regional credit committees based out of Fresno. We are thrilled to have someone with Peter’s experience and capabilities join our team. Mr. Nutz commenced employment in January 2015. This year we also hired two of the most talented young leaders in our communities. In Visalia, Mr. Nathan Halls joined us from Bank of the West as our Visalia Market President, and in Porterville Mr. Dustin Della joined us from Bank of the Sierra as our Porterville Market President. Nathan and Dustin did an outstanding job in 2014, helping us produce the growth results noted above and building a strong customer service culture in each of their markets. Mr. Craig Howells also joined the Suncrest family this year to head up our Government Guaranteed Lending (GGL) Group, specializing in SBA, USDA and a range of government supported loan products. Craig has been the leading GGL lending ofﬁcer in our region for many years, and in 2010 was the number one USDA B&I individual lender for the entire state of California. The investment we made in new products and services also contributed to our outstanding growth in 2014. Our new Online Banking system was a great enhancement for our customers. People are the most important ingredient to any successful business and throughout 2014 Suncrest Bank added a number of highly talented leaders The new features and functionality enabled us to double the number of users during the year. Business customers can now enjoy payroll 4 6 In closing, we thank the Board of Directors for their continued support and commitment to the proﬁtable growth of your bank. The foundation we have built in 2014 will provide the platform upon which we can continue our impressive momentum into 2015 and beyond. Thank you all for your continued support! William A.Benneyan, Chairman bbenneyan@suncrestbank.com Ciaran McMullan President & CEO cmcmullan@suncrestbank.com processing, remote deposit capabilities, positive pay, wire transfer and many other outstanding “ﬁngertip” features. We had exceptional response to the launch of our new Mobile Banking and Mobile Deposit products. Customers are now able to check balances, transfer funds, pay bills, deposit checks and much more from their smartphones. In 2014 we became the ﬁrst bank in California to offer the highly successful Kasasa checking account, with truly unique customer features and the best interest rates in our markets. Look for our next innovation, BaZing!, in 2015. We initiated a campaign to raise new investment capital in 2014, in order to support our continued strong growth and plans for the future. Thanks to many of you, this campaign has been a huge success with nearly $12 million either funded or committed to date. In order to help improve the liquidity of our shares, the bank upgraded its stock listing to the OTCQX in March 2015. This marketplace is the top-tier market for over-the-counter stocks operated by OTC Markets. Previously we had been listed on the OTCQB which is primarily for venture stocks. This move represents a signiﬁcant milestone in the history and evolution of our bank. 5 Our people make the difference Meet Our Staff All successful businesses have a common characteristic; they have great people working for them. In this regard, Suncrest Bank is no different. What sets us apart from other banks is that every Suncrest employee comes to work every day, not as an employee but as an owner. Every Suncrest employee owns shares in the company and annually shares in the performance based bonus pool, a portion of which is paid in the form of Suncrest Bank stock. As the bank continues to enjoy success and grows, our employee ownership stake will grow along with it. As company owners, our employees take great pride in providing a high level of service to the Suncrest customer base. It is this High Touch service, together with High Tech products, that forms the framework of our commitment to our customers. As owners, our employees also understand the commitment we must make to our communities to ensure they continue to thrive, grow stronger, and maintain a high quality of life. In 2014 our bank Directors and employees contributed over 2,300 hours of their time and talents to various community organizations and outreach efforts. The tremendous results achieved in 2014 reﬂect the efforts of our entire staff pulling together as a cohesive team to ensure we make good on these commitment to our communities. Leadership at the line level of the company was paramount to our success. Leaders like Dustin Della, Market President in Porterville: Nathan Halls, Market President in Visalia; Debbie Bombard, SVP Operations; and Lori Carabay, Note Department Supervisor; all contributed to a successful 2014. All of us at Suncrest Bank look forward to an exciting 2015! 6 Row 5: Nathan Halls, Ciaran McMullan, Dustin Della, William Benneyan, Frank Paredez, John Gossett, Doug Tribble Row 4: Lori Buecheler, Vicki Evans, Elia Havner, Ericka Melo, Kimberly Zack, Jennifer Noel, Christine Catalina Row 3: Cyndy Paulus, Barbra Hood, Kathleen Bernardo, Tracy Cizek, Brooke Reed, Robert Moore, Suzy Blanchard Row 2: Craig Howells, Karen Snow, Heather Fiori, Debbie Bombard, Lori Carabay Row 1: Michelle Gletne, Gary Gostanian, Rosemary Leon Not Pictured: Peter Nutz, Ashton Freeman, Katrina Puerner, Charlie Glenn, Adriana Vidales 7 Committed to Community Visalia Rescue Mission CASA YEA Program Farm Bureau Leadership Visalia Family Services of Visalia Success in Recovery United Way Porterville Fair Fraternal Order of Eagles Rotary Club Habitat for Humanity Visalia Unified School District Kaweah Delta Health Care District Visalia Community Church of Christ Women’s Ministry Visalia Chamber After Hours Octoberfest Taste of Downtown Visalia Community Church of Christ Worship Band Strathmore High School Football Boosters Porterville Mariachi Academy Foundation City of Porterville Soccer Porterville NJB Porterville Academy of Business Sequoia Chapter Trex Fraternity Porterville Lions Club Valley Children’s Hospital Porterville Chamber of Commerce Porterville National Junior Basketball Family Crisis Center Rotary Cancer Walk Toys for Tots Porterville Area Coordinating Council Veterans Day 5k Porterville Teach Children to Save Program Amvets Post 56 Ladies Auxiliary Veterans Activities City of Hope Kingsburg High School Campus Crusade for Christ Valley SBA Business Development Corporation Clay School Hume Lake Christian Camp Kingsburg Ag Boosters Visalia Community Rotary Foundation California Wine Grape Inspection Committee Imagine U Interactive Children’s Museum Visalia Sunset Rotary Downtown Visalia Visalia Economic Development Corp Sorotimist International of Visalia Networking for Women Tulare Kings Hispanic Chamber Reaching Higher Bible Study International American Youth Soccer Organization AWANA Sierra View District Hospital National Association of Guaranteed Govt Lenders 8 9 5 in 5 Growth Strategy On course to $500 million in assets The Suncrest goal of growing to $500 million in assets in ﬁve years is well underway. 2014 represented a foundation building year as we raised the necessary capital to support this ambitious growth agenda. We also hired top talent, improved our technology infrastructure and added new and exciting products. Our Executive Management Team has signiﬁcant experience not only in growing banks, but in building shareholder value in the process. The Team’s experience in growing organically, through acquisitions, and de novo start-ups is truly aligned with our Growth Strategy and with the objectives of our Board of Directors. Successfully Executing New Long-Term Growth Strategy The Company has established a detailed and highly executable plan for achieving near and long-term growth initiatives Growth in Current Locations > Open in New Strategically Attractive Locations > Open Businesses not Branches > Specialize in Critical Sectors > Seek Out Acquisitions KEY INITIATIVE: KEY INITIATIVE: KEY INITIATIVE: KEY INITIATIVE: KEY INITIATIVE: Grow market share to 8% - 10% by 2018 in both Visalia and Porterville from 4.3% and 5.4%, respectively as of June 2014 FDIC survey. Open new strategic locations over the next four years. Local branch president and decision making authority. • Supported by founding group of local business people, investors and community leaders. Build expertise in sectors critical to the Central Valley economy. • In particular, SBA, Agribusiness and Hispanic Business. Achieve scale and improve operating efﬁciencies through M&A. • Identify community banks that would be a good ﬁt for an acquisition or a strategic merger. 10 Growing through long-term customer relationships Growth for growth’s sake does not create long-term shareholder value. Long Term Proﬁtable Growth is creat- ed through a discipline of building strong, primary and long-lasting customer relationships. Those customers are the best advocates for our bank, and because of the value we provide to them, they readily refer us to their friends, neighbors, family and business associates. Through the prudent deployment of our customers’ deposits in the local communities we serve, we’re able to make a signiﬁcant contribution to both economic development and quality of life. This philosophy is at the core of the Suncrest Bank community banking values. New Team and Business Plan Exhibiting Real Progress ($ in thousands) Source: SNL Financial, Company Management. 11 5 in 5 Growth Strategy Building a strong loan portfolio in our local communities By prudently putting customer deposits to work in our local communities, Suncrest Bank has enhanced shareholder value over the long term. This has been the case even during some of the most difﬁcult economic times in our history. Our credit risk disciplines have remained strong, while we build a high quality loan portfolio with local small business customers, across multiple industry sectors. With some of the best lenders in Visalia and Porterville, the bank has achieved strong growth in a variety of industries. Our commitment to local businesses has led to our diverse portfolio mix of agricultural production, farm real estate, equipment ﬁnance, working capital lines, commercial real estate, SBA and USDA small business loans. The successful completion of our private placement of $15 million of common stock will give us a well capitalized balance sheet and the ﬁnancial strength to achieve our strategic goals. Prudent & Responsible Balance Sheet Growth • Well capitalized balance sheet will enable Suncrest to pursue both an organic and acquisitive growth strategy • Loan portfolio grew by over 50% since new management arrived, all during a period of stagnant loan growth nation-wide Well Capitalized Balance Sheet ($ in thousands) 12/31/20141 Offering Adjustments2 Pro Forma Total Equity $21,878 $9,417 $31,295 • Implemented stringent underwriting requirements to ensure TCE / TA 11.60% bank maintains excellent credit quality • Total loan charge-offs since inception <$100k Tier 1 Leverage Ratio 11.06% Tier 1 RBC Ratio Total RBC Ratio 13.52% 14.68% 15.80% 15.43% 19.59% 20.74% High Quality Loan Growth has been a Focus for the Management Team Source: SNL Financial, Company Call Reports, Company Management. 1 Includes $5.1 million closed as of 12/31/2014. 2 Remaining balance of $9.9 million, net of estimated 5% in offering expenses. Assumes $7.00 offering price, and initial 20% risk weighting on proceeds (risk weight of FHLB stock). 12 Growing efﬁciently and productively The ability to leverage our employees, technology and infrastructure as we grow will continue to create an operating environment that is efﬁcient and productive. This will be a key aspect of our future growth and will enable us to be highly competitive on loans and deposits, invest in new products and systems, add new business lines, and continue to add talented bankers. As always, our consistent expense control measures and continuous process improvement will remain key efﬁciency drivers. Improving Operating Efﬁciencies Driving Bottom Line Growth • Management’s emphasis on reducing operating expenses is helping drive bottom line growth • Suncrest can achieve greater economies of scale through organic growth as well as strategic acquisitions • Company has been able to keep overhead costs relatively ﬂat, even during a period of rapid growth • Assets per FTE has increased from $4,000M per at 12-31-2013 to $6,000M at 12-31-2014 Source: SNL Financial, Company Management. 13 Product Innovation Leading the way with popular new products In 2014 Suncrest Bank assumed a position of leadership by offering a variety of groundbreaking new products. We are proud to report that we were the ﬁrst bank in California to offer an exciting checking account called Kasasa CASH. Kasasa CASH is a free checking account that also pays the customer the highest interest rate in our markets. In addition, Kasasa CASH offers many free services including Online Banking, Mobile Banking, Mobile Deposit and Mobile Bill Pay. During the ﬁrst quarter of 2015, Suncrest will become the ﬁrst bank in California to offer the BaZing Checking product. BaZing Checking rewards customers with a wide range of beneﬁts, including a variety of discounts at local and national stores. Watch for more Value Beneﬁts for Suncrest customers! Technology Innovation was an important contributor to the bank’s growth in 2014. Our website was signiﬁcantly enhanced and now includes a convenient feature for customers to open accounts online without having to make a trip to the bank. The Suncrest Online Banking system was replaced with a modernized product that is very user friendly for both consumer and business customers. We are happy to report that since implementing the new system we have doubled the number of customers using the Online Banking product. We’re also happy to report that our Cash Management products are becoming much more widely used by our business customers. The products, which include Remote Deposit Capture, ACH Origination, Wire Transfer, Positive Pay, Investment and Loan Sweep accounts and Payroll Processing, are helping these important customers run their businesses more efﬁciently. Mobile Banking and Mobile Deposit were also added to our product menu during the fourth quarter of 2014 and the customer uptake of these convenient services has been excellent. 1614 Reaching out with effective marketing campaigns Mobile Banking - Campaign ad 2015 will see even more innovation as we continue to enhance and improve our customers’ experience with beneﬁcial products and services that afford greater convenience and satisfaction. Kasasa CASH - Newspaper ad 15 In 2014 we regularly communicated with our customers and stakeholders, utilizing a variety of media including local newspaper, magazines, Chamber of Commerce publications and direct mail channels. Particularly compelling was our series of business customer proﬁles. The colorful print ads supported Suncrest’s position as the local bank—helping individual business succeed while strengthening the overall local economy. Customer - Campaign ad Customer - Campaign ad Customer - Campaign ad 16 Bank Local Buy Local - Campaign ad Bank Local Buy Local - Campaign ad Business Solutions - Campaign ad Rawhide Congratulations - Newspaper ad 17 Table of Financial Statements 19 Independent auditor’s report on the financial statements 20 22 23 24 25 26 Statements of Financial Condition Statements of Income Statements of Comprehensive Income Statement of Changes in Shareholders’ Equity Statements of Cash Flows Notes to Financial Statements 2 0 1 4 18 Vavrinek, Trine, Day & Co., LLP Certiﬁed Public Accountants INDEPENDENT AUDITOR’S REPORT V A L U E T H E D I F F E R E N C E Board of Directors and Shareholders of Suncrest Bank Report on Financial Statements We have audited the accompanying ﬁnancial statements of Suncrest Bank, which are comprised of the statements of ﬁnancial condition as of December 31, 2014 and 2013, and the related statements of income, 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, 2014 and 2013, 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 25, 2015 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 T O ° 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 T O 19 SUNCREST BANK SUNCREST BANK STATEMENTS OF FINANCIAL CONDITION STATEMENTS OF FINANCIAL CONDITION DECEMBER 31, 2014 AND 2013 DECEMBER 31, 2014 AND 2013 ASSETS Cash and Due from Banks Federal Funds Sold TOTAL CASH AND CASH EQUIVALENTS 2014 2013 4,648,094 15,821,000 20,469,094 2,637,057 11,744,000 14,381,057 Investment Securities Available for Sale 40,516,442 14,620,321 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 Federal Home Loan Bank and Other Bank Stock, at Cost Premises and Equipment Net Deferred Tax Assets Accrued Interest and Other Assets 93,374,513 3,858,822 26,469,066 1,534,781 125,237,182 (359,393) (1,723,391) 123,154,398 637,510 583,396 2,217,000 1,059,812 69,831,369 2,247,079 21,167,596 1,181,442 94,427,486 (241,342) (1,417,381) 92,768,763 591,489 698,604 2,601,000 616,968 $ 188,637,652 $ 126,278,202 The accompanying notes are an integral part of these financial statements. The accompanying notes are an integral part of these ﬁnancial statements. 20 2 SUNCREST BANK SUNCREST BANK STATEMENTS OF FINANCIAL CONDITION DECEMBER 31, 2014 AND 2013 STATEMENTS OF FINANCIAL CONDITION DECEMBER 31, 2014 AND 2013 LIABILITIES AND SHAREHOLDERS' EQUITY Deposits: Noninterest-bearing Demand Savings, NOW and Money Market Accounts Time Deposits Under $250,000 Time Deposits $250,000 and Over 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, 2,649,634 in 2014 and 1,915,902 in 2013 Additional Paid-in Capital Accumulated Deficit Accumulated Other Comprehensive Income (Loss) - Net Unrealized Gain (Loss) on Securities Available for Sale, Net of Taxes of $(7,772) in 2014 and $(47,059) in 2013 TOTAL SHAREHOLDERS' EQUITY 2014 2013 $ 55,502,263 69,994,695 19,355,396 21,564,510 166,416,864 342,596 166,759,460 $ 34,162,947 47,783,592 25,708,209 1,875,000 109,529,748 397,481 109,927,229 - - - - 24,126,478 1,614,538 3,851,640) ( 19,146,645 1,519,254 4,247,207) ( ( 11,184) 21,878,192 (67,719) 16,350,973 $ 188,637,652 $ 126,278,202 The accompanying notes are an integral part of these financial statements. The accompanying notes are an integral part of these ﬁnancial statements. 21 3 SUNCREST BANK SUNCREST BANK STATEMENTS OF INCOME STATEMENTS OF INCOME FOR THE YEARS ENDED DECEMBER 31, 2014 AND 2013 FOR THE YEARS ENDED DECEMBER 31, 2014 AND 2013 INTEREST INCOME Interest and Fees on Loans Interest on Investment Securities Interest on Federal Funds Sold and Other TOTAL INTEREST INCOME 2014 2013 $ 5,988,234 415,522 76,308 6,480,064 $ 4,965,566 128,804 42,500 5,136,870 INTEREST EXPENSE Interest on Savings Deposits, NOW and Money Market Accounts Interest on Time Deposits Interest on Other Borrowings TOTAL INTEREST EXPENSE 176,515 272,420 6 448,941 193,365 203,029 3,929 400,323 NET INTEREST INCOME 6,031,123 4,736,547 Provision for Loan Losses 314,400 36,000 NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 5,716,723 4,700,547 NONINTEREST INCOME Service Charges, Fees, and Other Income Gain on Sale of Securities Gain on Sale of Loans NONINTEREST EXPENSE Salaries and Employee Benefits Occupancy Expenses Equipment Expenses Other Expenses Income Taxes (Benefit) INCOME BEFORE INCOME TAXES 133,908 11,485 237,084 382,477 3,018,770 641,153 175,592 1,518,064 5,353,579 745,621 350,054 179,354 - 36,730 216,084 2,351,011 577,022 171,168 1,176,894 4,276,095 640,536 2,553,000) ( NET INCOME $ 395,567 $ 3,193,536 NET INCOME PER SHARE - BASIC $ 0.18 $ 1.67 NET INCOME PER SHARE - DILUTED $ 0.18 $ 1.66 The accompanying notes are an integral part of these financial statements. The accompanying notes are an integral part of these ﬁnancial statements. 22 4 SUNCREST BANK SUNCREST BANK STATEMENTS OF COMPREHENSIVE INCOME FOR THE YEARS ENDED DECEMBER 31, 2014 AND 2013 STATEMENTS OF COMPREHENSIVE INCOME FOR THE YEARS ENDED DECEMBER 31, 2014 AND 2013 Net Income $ 395,567 $ 3,193,536 2014 2013 OTHER COMPREHENSIVE INCOME (LOSS): Unrealized Gains and Losses on Securities Available for Sale: Change in Net Unrealized Gain (Loss) Reclassification of Gain Recognized in Net Income, Net Income Taxes (Benefit): Change in Net Unrealized Gain (Loss) Reclassification of Gain Recognized in Net Income, Net ( 107,307 11,485) 95,822 ( 43,996 4,709) 39,287 ( ( 153,797) - 153,797) ( ( 63,057) - 63,057) TOTAL OTHER COMPREHENSIVE INCOME (LOSS) 56,535 ( 90,740) TOTAL COMPREHENSIVE INCOME $ 452,102 $ 3,102,796 The accompanying notes are an integral part of these financial statements. The accompanying notes are an integral part of these ﬁnancial statements. 23 5 SUNCREST BANK SUNCREST BANK STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY FOR THE YEARS ENDED DECEMBER 31, 2014 AND 2013 STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY FOR THE YEARS ENDED DECEMBER 31, 2014 AND 2013 Common Stock Additional Number of Shares Amount Paid-in Capital Accumulated Other Accumulated Comprehensive Deficit Income (Loss) Total Balance January 1, 2013 1,911,777 $ 19,117,770 $ 1,479,306 $( 7,440,743) $ 23,021 $ 13,179,354 Net Income 3,193,536 3,193,536 Stock-based Compensation 68,823 Issuance of Stock to Employees in Exchange for Services Rendered 4,125 28,875 ( 28,875) Other Comprehensive Income, Net of Taxes 68,823 - ( 90,740) ( 90,740) Balance at December 31, 2013 1,915,902 19,146,645 1,519,254 ( 4,247,207) ( 67,719) 16,350,973 Net Income 395,567 Stock-based Compensation 141,382 Issuance of Stock to Employees in Exchange for Services Rendered 6,980 46,098 ( 46,098) Issuance of Common Stock, net of Expenses of $153,529 726,752 4,933,735 395,567 141,382 - 4,933,735 Other Comprehensive Income, Net of Taxes 56,535 56,535 Balance at December 31, 2014 2,649,634 $ 24,126,478 $ 1,614,538 $( 3,851,640) $( 11,184) $ 21,878,192 The accompanying notes are an integral part of these financial statements. The accompanying notes are an integral part of these ﬁnancial statements. 6 24 SUNCREST BANK SUNCREST BANK STATEMENTS OF CASH FLOWS STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 2014 AND 2013 FOR THE YEARS ENDED DECEMBER 31, 2014 AND 2013 OPERATING ACTIVITIES Net Income Adjustments to Reconcile Net Income to Net Cash From Operating Activities: Depreciation and Amortization Stock-based Compensation Provision for Loan Losses Deferred Tax Expense (Benefit) Gain on Sale of Securities Gain on Sale 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 Purchase of Available-for-Sale Securities Maturities of Available-for-Sale Securities Proceeds from Sale of Available-for-Sale Securities Net Increase in Loans Purchase of Federal Home Loan Bank Stock Proceeds from Sale of Other Real Estate Owned Purchase 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 Change in Federal Funds Purchased Proceeds from Issuance of Common Stock, Net NET CASH FROM FINANCING ACTIVITIES NET INCREASE IN CASH AND CASH EQUIVALENTS Cash and Cash Equivalents at Beginning of Year 2014 2013 $ 395,567 $ 3,193,536 218,299 141,382 314,400 345,000 11,485) - 237,084) 2,327,174) 2,578,580 433,553) 983,932 ( ( ( ( ( 193,060 68,823 36,000 2,554,000) - 19,366) 36,730) 408,750) 451,645 67,802) 856,416 ( ( ( ( ( ( ( 38,733,211) 10,934,781 1,993,315 30,764,740) 43,800) - 103,091) 56,716,746) ( ( ( ( ( 4,475,950) 4,416,373 - 13,931,119) 28,600) 270,910 20,866) 13,769,252) ( ( 43,550,419 13,336,697 - 4,933,735 61,820,851 6,088,037 14,381,057 ( 16,616,396 8,130,939 700,000) - 24,047,335 11,134,499 3,246,558 CASH AND CASH EQUIVALENTS AT END OF YEAR $ 20,469,094 $ 14,381,057 Supplemental Disclosures of Cash Flow Information: Interest Paid Taxes Paid 450,025 $ $ - $ $ 398,794 15,000 The accompanying notes are an integral part of these ﬁnancial statements. 8 25 ! ! NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2014 AND 2013 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 25, 2015, 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, 2014. 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 26 NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2014 AND 2013 NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued 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 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 loan balance The allowance for loan losses is a valuation allowance for probable incurred credit losses. Loan losses are charged against the allowance when management believes is conﬁrmed. the uncollectability of a 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. If a loan is impaired, a portion of the allowance is allocated so that the loan is reported, net, at the present value of estimated future cash ﬂows using the loan’s existing rate or at the fair value of collateral if repayment is expected solely from the collateral. General reserves cover non-impaired loans and are based on 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 include loss experience. Qualitative factors 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. 27 NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2014 AND 2013 NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued 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. Stock-Based Compensation 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 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. Advertising Costs The Bank expenses the costs of advertising in the period incurred. Other Real Estate Owned Income Taxes 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 cost or fair value, less estimated costs to sell. 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. 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. 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. 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. Earnings Per Share (“EPS”) Basic EPS excludes dilution and is computed by dividing income available to common stockholders by the weighted- average number of common shares outstanding for the period. Diluted EPS reﬂects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the earnings of the entity. Comprehensive Income Changes in unrealized gains and losses on available-for- sale securities is the only component of accumulated other comprehensive income for the Bank. The amount reclassiﬁed 28 NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2014 AND 2013 NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued out of other accumulated comprehensive income relating to realized gains on sale of securities was $11,485 for 2014. The related tax effect for the reclassiﬁcation was $4,709 for 2014. 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. 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 M for more information and disclosures relating to the Bank’s fair value measurements. Reclassiﬁcations Certain reclassiﬁcations have been made in the 2013 ﬁnancial statements to conform to the presentation used in 2014. These reclassiﬁcations had no impact of the Bank’s previously reported ﬁnancial statements. Recent Accounting Guidance Not Yet Effective In January 2014, the FASB issued Accounting Standards Update (ASU) No. 2014-04, Receivables—Troubled Debt Restructurings by Creditors (Subtopic 310-40): Reclassiﬁcation of Residential Real Estate Collateralized Consumer Mortgage Loans upon Foreclosure, a consensus of the FASB Emerging Issues Task Force. This Update provides clariﬁcation as to when an in-substance repossession or foreclosure has occurred, i.e., the creditor is considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan and, therefore, the loan receivable should be derecognized and the real estate property should be recognized. Under ASU No. 2014-04, a creditor has received physical possession of residential real estate property collateralizing a consumer mortgage loan upon either (1) the creditor obtaining legal title to theproperty upon completion of a foreclosure or (2) the borrower conveying all interest in the property to the creditor to satisfy the loan through completion of a deed in lieu of foreclosure or a similar legal agreement. The Update also will require disclosure in annual and interim ﬁnancial statements of both (1) the amount of foreclosed residential real estate property held by the creditor and (2) the recorded investment in consumer mortgage loans collateralized by residential real estate property that are in the process of foreclosure according to local requirements of the applicable jurisdiction. The amendments in this Update are effective for interim and annual periods beginning after December 15, 2014. Adoption of this Update is not expected to have a material impact on the Bank’s ﬁnancial statements. In May 2014, the FASB issued Accounting Standards Update (ASU) No. 2014-09, Revenue from Contracts with Customers (Topic 606). This Update requires an entity to recognize revenue as performance obligations are met, in order to reﬂect the transfer of promised goods or services to customers in an amount that reﬂects the consideration the entity is entitled to receive for those goods or services. The following steps are applied in the updated guidance: (1) identify the contract(s) with a customer; (2) identify the performance obligations in the contract; (3) determine the transaction price; (4) allocate the transaction price to the performance obligations in the contract; and (5) recognize revenue when, or as, the entity satisﬁes a performance obligation. This Update is effective for interim and annual periods beginning after December 15, 2016 for public business entities and after December 15, 2017 for non public business entities. Early adoption of this Update is not permitted. The Bank is currently in the process of evaluating the impact of the adoption of this Update, but does not expect a material impact on the Bank’s ﬁnancial statements. 29 The following table presents the activity in the allowance for loan losses for the year 2014 and 2013 and the recorded investment in loans and impairment method as of December 31, 2014 and 2013 by portfolio segment: December 31, 2014 Real Estate - Construction Commercial and Land Development Consumer Industrial Other Total and 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, 2013 Allowance for Loan Losses: Beginning of Year Provisions Charge-offs Recoveries End of Year Reserves: Specific General Loans Evaluated for Impairment: Individually Collectively - - - - - - - - $ 1,094,629 $ 34,659 $ 275,196 $ 12,897 $ 1,417,381 72,857 14,017 207,390 (8,390) - 20,136 - - 314,400 (8,390) - $ 1,167,486 $ 48,676 $ 474,196 $ 33,033 $ 1,723,391 $ - $ - $ 35,100 $ - $ 35,100 1,167,486 48,676 439,096 33,033 1,688,291 $ 1,167,486 $ 48,676 $ 474,196 $ 33,033 $ 1,723,391 $ - $ 313,322 $ 35,100 $ - $ 348,422 93,374,513 3,545,500 26,433,966 1,534,781 124,888,760 $ 93,374,513 $ 3,858,822 $ 26,469,066 $ 1,534,781 $ 125,237,182 $ 1,025,687 $ 84,186 $ 248,992 $ 13,016 $ 1,371,881 68,942 ( 49,527) 16,704 ( 119) - 9,500 - - 36,000 - 9,500 $ 1,094,629 $ 34,659 $ 275,196 $ 12,897 $ 1,417,381 $ - $ - $ - $ - $ - 1,094,937 34,659 275,273 12,502 1,417,371 $ 1,094,937 $ 34,659 $ 275,273 $ 12,502 $ 1,417,371 $ - $ 441,114 $ - $ - $ 441,114 69,831,369 1,805,965 21,167,596 1,181,442 93,986,372 $ 69,831,369 $ 2,247,079 $ 21,167,596 $ 1,181,442 $ 94,427,486 financial credit documentation, and current The Bank categorizes loans into risk categories based on relevant information about the ability of borrowers to service their debt such as current information, historical payment experience, collateral adequacy, 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 deterioration of the repayment prospects for the loan or of the institution's credit position at some future date. potential weaknesses may result in NOTE B -‐ INVESTMENT SECURITIES -‐ Continued December 31, 2014: U.S. Government and Agency Securities Mortgaged-Backed Securities Less than Twelve Months Over Twelve Months Total Unrealized Losses Unrealized Unrealized Fair Value Losses Fair Value Losses Fair Value $( 40,533) $ 10,208,813 $( 43,919) $ 4,955,780 $( 84,452) $ 15,164,593 (5,428) 2,131,386 - - (5,428) 2,131,386 $( 45,961) $ 12,340,199 $( 43,919) $ 4,955,780 $( 89,880) $ 17,295,979 NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2014 AND 2013 96,891) 96,891) $( $( December 31, 2013: U.S. Government and Agency Securities $ 9,877,549 $( 27,899) $ 971,700 $( 124,790) $ 10,849,249 $ 9,877,549 $( 27,899) $ 971,700 $( 124,790) $ 10,849,249 NOTE A -‐ SUMMARY OF SIGNIFICANT ACCOUNTING NOTE A -‐ SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -‐ Continued POLICIES -‐ Continued NOTE B -‐ INVESTMENT SECURITIES NOTE B -‐ INVESTMENT SECURITIES NOTE B - INVESTMENT SECURITIES - Continued foreclosure or a similar foreclosure or a similar jurisdiction. The amendments property collateralizing a consumer mortgage loan loan receivable should be property collateralizing a consumer mortgage loan derecognized and the real estate property should be loan receivable should be recognized. Under ASU No. 2014-‐04, a creditor has derecognized and the real estate property should be received physical possession of residential real estate recognized. Under ASU No. 2014-‐04, a creditor has property collateralizing a consumer mortgage loan received physical possession of residential real estate upon either (1) the creditor obtaining legal title to the property collateralizing a consumer mortgage loan property upon completion of a foreclosure or (2) the upon either (1) the creditor obtaining legal title to the borrower conveying all interest in the property to the property upon completion of a foreclosure or (2) the creditor to satisfy the loan through completion of a borrower conveying all interest in the property to the legal creditor to satisfy the loan through completion of a agreement. The Update also will require disclosure in legal annual and interim financial statements of both (1) the agreement. The Update also will require disclosure in amount of foreclosed residential real estate property annual and interim financial statements of both (1) the held by the creditor and (2) the recorded investment amount of foreclosed residential real estate property loans collateralized by held by the creditor and (2) the recorded investment residential real estate property that are in the process loans collateralized by of foreclosure according to local requirements of the residential real estate property that are in the process in this jurisdiction. The amendments of foreclosure according to local requirements of the Update are effective for interim and annual periods in this beginning after December 15, 2014. Adoption of this Update are effective for interim and annual periods Update is not expected to have a material impact on beginning after December 15, 2014. Adoption of this Update is not expected to have a material impact on Revenue from Contracts In May 2014, the FASB issued Accounting Standards Revenue from Contracts In May 2014, the FASB issued Accounting Standards . This Update requires an as performance . This Update requires an obligations are met, in order to reflect the transfer of as performance promised goods or services to customers in an amount obligations are met, in order to reflect the transfer of that reflects the consideration the entity is entitled to promised goods or services to customers in an amount receive for those goods or services. The following that reflects the consideration the entity is entitled to steps are applied in the updated guidance: (1) identify receive for those goods or services. The following the contract(s) with a customer; (2) identify the steps are applied in the updated guidance: (1) identify performance obligations in the contract; (3) determine the contract(s) with a customer; (2) identify the the transaction price; (4) allocate the transaction price performance obligations in the contract; (3) determine to the performance obligations in the contract; and the transaction price; (4) allocate the transaction price (5) recognize revenue when, or as, the entity satisfies to the performance obligations in the contract; and a performance obligation. This Update is effective for (5) recognize revenue when, or as, the entity satisfies interim and annual periods beginning after December a performance obligation. This Update is effective for 15, 2016 for public business entities and after interim and annual periods beginning after December December 15, 2017 for non public business entities. 15, 2016 for public business entities and after Early adoption of this Update is not permitted. The Bank is currently in the process of evaluating the December 15, 2017 for non public business entities. impact of the adoption of this Update, but does not Early adoption of this Update is not permitted. The expect a material impact on the Bank's financial Bank is currently in the process of evaluating the impact of the adoption of this Update, but does not expect a material impact on the Bank's financial and, therefore, the and, therefore, the deed in lieu of deed in lieu of in consumer mortgage in consumer mortgage applicable applicable the Bank's financial statements. the Bank's financial statements. with Customers (Topic 606) Update (ASU) No. 2014-‐09, with Customers (Topic 606) Update (ASU) No. 2014-‐09, recognize to revenue entity entity to recognize revenue statements. statements. financial condition according financial condition according Debt and equity securities have been classified in the Debt and equity securities have been classiﬁed in the to statements of Debt and equity securities have been classified in the statements of ﬁnancial condition according to management’s management's intent. The amortized cost of securities to statements of intent. The amortized cost of securities and their approximate and their approximate fair values at December 31 management's intent. The amortized cost of securities fair values at December 31 were as follows: were as follows: and their approximate fair values at December 31 Fair Amortized were as follows: Value Cost Amortized December 31, 2014 Cost Available-for-Sale Securities: December 31, 2014 U.S. Government and Available-for-Sale Securities: Agency Securities U.S. Government and Mortgaged-Backed Agency Securities Securities Mortgaged-Backed Securities Gross Unrealized Gross Losses Unrealized Losses Gross Unrealized Gross Gains Unrealized Gains $ 40,535,398 11,793,000 89,880) 5,428) Fair Value 28,742,398 11,793,000 28,742,398 28,686,887 11,829,555 40,516,442 28,686,887 11,829,555 $( ( 84,452) 84,452) 28,941 41,983 70,924 28,941 41,983 5,428) ( $ $ $ $( $( $ $ $ $ $ December 31, 2013 Available-for-Sale Securities: December 31, 2013 U.S. Government and Available-for-Sale Securities: Agency Securities Mortgaged-Backed U.S. Government and Securities Agency Securities Mortgaged-Backed Securities $ 40,535,398 $ 70,924 $( 89,880) $ 40,516,442 $ 14,462,690 $ 8,274 $( 124,790) $ 14,346,174 $ 272,409 14,462,690 $ 8,274 1,738 $( 124,790) - $ 14,346,174 274,147 $ 14,735,099 272,409 $ 10,012 1,738 $( 124,790) - $ 14,620,321 274,147 $ 14,735,099 $ 10,012 $( 124,790) $ 14,620,321 The amortized cost and estimated fair value of all investment The amortized cost and estimated fair value of all securities as of December 31, 2014 by expected maturities investment securities as of December 31, 2014 by The amortized cost and estimated fair value of all are shown below. Expected maturities may differ from expected maturities are shown below. Expected investment securities as of December 31, 2014 by contractual maturities because borrowers may have the maturities may differ from contractual maturities expected maturities are shown below. Expected right to call or prepay obligations with or without call or because borrowers may have the right to call or maturities may differ from contractual maturities prepayment penalties. prepay obligations with or without call or prepayment because borrowers may have the right to call or penalties. prepay obligations with or without call or prepayment penalties. Due within One Year Due from One Year to Five Years Due within One Year Due from Five to Ten Years Due from One Year to Five Years Due after Ten Years Due from Five to Ten Years Due after Ten Years Available-for-Sale Securities Fair Amortized Available-for-Sale Securities Value Cost Fair Amortized Value Cost 22,487,565 $ 22,501,381 7,066,947 7,105,035 22,501,381 2,952,074 2,948,333 7,105,035 8,009,856 7,980,649 2,948,333 40,535,398 7,980,649 22,487,565 7,066,947 2,952,074 40,516,442 8,009,856 $ $ $ 40,535,398 40,516,442 Gross realized gains in 2014 on sales of available-for-sale securities were $11,485. No securities were sold in 2013. Gross realized gains in 2014 on sales of available-‐for-‐ sale securities were $11,485. No securities were sold The gross unrealized loss and related estimated fair value Gross realized gains in 2014 on sales of available-‐for-‐ in 2013. of investment securities that have been in a continuous sale securities were $11,485. No securities were sold loss position for less than twelve months and over twelve in 2013. The gross unrealized loss and related estimated fair months at December 31, 2014 and 2013, are as follows: NOTE B -‐ INVESTMENT SECURITIES -‐ Continued value of investment securities that have been in a The gross unrealized loss and related estimated fair continuous loss position for less than twelve months and over twelve months at December 31, 2014 and value of investment securities that have been in a 2013, are as follows: December 31, 2014: Fair Value continuous loss position for less than twelve months U.S. Government and and over twelve months at December 31, 2014 and Agency Securities 15,164,593 Mortgaged-Backed 2013, are as follows: 2,131,386 Securities Less than Twelve Months Unrealized Losses Unrealized Losses Unrealized Losses Over Twelve Months 10,208,813 Fair Value Fair Value 2,131,386 4,955,780 40,533) 43,919) 84,452) (5,428) (5,428) $( $( Total $( $ $ $ - - 12 12 December 31, 2013: U.S. Government and Agency Securities $( 45,961) $ 12,340,199 $( 43,919) $ 4,955,780 $( 89,880) $ 17,295,979 $( 96,891) $ 9,877,549 $( 27,899) $ 971,700 $( 124,790) $ 10,849,249 $( 96,891) $ 9,877,549 $( 27,899) $ 971,700 $( 124,790) $ 10,849,249 As of December 31, 2014 the Company has ten U.S. government agency securities that have been in an unrealized loss position over 12 months. Unrealized losses on these investment securities have not been recognized into income as 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 largely due to change in interest rates. The fair value is expected to recover as the bonds approach maturity. Securities with a fair value of approximately $17.4 million at December 31, 2014 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. Balance at Beginning of Year $ 1,417,381 $ 1,371,881 Additions to the Allowance Charged to Expense Recoveries on Loans Charged-Off 314,400 - 1,731,781 36,000 9,500 1,417,381 Less Loans Charged-Off ( 8,390) - $ 1,723,391 $ 1,417,381 As of December 31, 2014 the Company has ten U.S. As of December 31, 2014 the Company has ten U.S. government agency securities that have been in an unrealized government agency securities that have been in an loss position over 12 months. Unrealized losses on these unrealized loss position over 12 months. Unrealized investment securities have not been recognized into income losses on these investment securities have not been as management does not intend to sell, and it is not “more recognized into income as management does not likely than not” that management would be required to sell the intend to sell, and it is not "more likely than not" that securities prior to their anticipated recovery, and the decline management would be required to sell the securities in fair value is largely due to change in interest rates. The fair prior to their anticipated recovery, and the decline in value is expected to recover as the bonds approach maturity. fair value is largely due to change in interest rates. The fair value is expected to recover as the bonds Securities with a fair value of approximately $17.4 million at approach maturity. December 31, 2014 were pledged to the Federal Home Loan Bank to secure borrowings as discussed in Note F. Securities with a fair value of approximately $17.4 million at December 31, 2014 were pledged to the -––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––– Federal Home Loan Bank to secure borrowings as discussed in Note F. NOTE C -‐ LOANS NOTE C - LOANS The Bank’s loan portfolio consists primarily of loans to The Bank's loan portfolio consists primarily of loans to borrowers within the Southern Central Valley of California. borrowers within the Southern Central Valley of Although the Bank seeks to avoid concentrations of loans to Although the Bank seeks to avoid California. a single industry or based upon a single class of collateral, concentrations of loans to a single industry or based real estate and real estate associated businesses are among upon a single class of collateral, real estate and real the principal industries in the Bank’s market area and, as a estate associated businesses are among the principal result, the Bank’s loan and collateral portfolios are, to some industries in the Bank's market area and, as a result, degree, concentrated in those industries. 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: A summary of the changes in the allowance for loan losses as of December 31 follows: 2013 2014 Balance at Beginning of Year Additions to the Allowance Charged to Expense Recoveries on Loans Charged-Off $ 1,417,381 314,400 - 1,731,781 $ 1,371,881 36,000 9,500 1,417,381 Less Loans Charged-Off ( 8,390) - $ 1,723,391 $ 1,417,381 The following table presents the activity in the allowance for loan losses for the year 2014 and 2013 and the recorded investment in loans and impairment method as of December 31, 2014 and 2013 by portfolio segment: 13 The following table presents the activity in the allowance for loan losses for the year 2014 and 2013 and the recorded investment in loans and impairment method as of December 31, 2014 and 2013 by portfolio segment: December 31, 2014 Construction and Land Development Commercial and Industrial Real Estate - Other Consumer Total Allowance for Loan Losses: Beginning of Year Provisions Charge-offs Recoveries End of Year Reserves: Specific General $ 1,094,629 72,857 - - $ 34,659 14,017 - - $ 275,196 207,390 (8,390) - $ 12,897 20,136 - - $ 1,417,381 314,400 (8,390) - $ 1,167,486 $ 48,676 $ 474,196 $ 33,033 $ 1,723,391 $ - 1,167,486 $ - 48,676 $ 35,100 439,096 $ - 33,033 $ 35,100 1,688,291 $ 1,167,486 $ 48,676 $ 474,196 $ 33,033 $ 1,723,391 Loans Evaluated for Impairment: Individually Collectively 30 - $ 93,374,513 $ 313,322 3,545,500 $ 35,100 26,433,966 $ - 1,534,781 $ 348,422 124,888,760 $ 93,374,513 $ 3,858,822 $ 26,469,066 $ 1,534,781 $ 125,237,182 December 31, 2013 Allowance for Loan Losses: Beginning of Year Provisions Charge-offs Recoveries End of Year Reserves: Specific General Loans Evaluated for Impairment: Individually Collectively $ 1,025,687 68,942 - - $ ( 84,186 49,527) - - $ 248,992 16,704 - 9,500 $ ( 13,016 119) - - $ 1,371,881 36,000 - 9,500 $ 1,094,629 $ 34,659 $ 275,196 $ 12,897 $ 1,417,381 $ - $ - $ - $ - $ - 1,094,937 34,659 275,273 12,502 1,417,371 $ 1,094,937 $ 34,659 $ 275,273 $ 12,502 $ 1,417,371 $ - $ 441,114 $ - $ - $ 441,114 69,831,369 1,805,965 21,167,596 1,181,442 93,986,372 $ 69,831,369 $ 2,247,079 $ 21,167,596 $ 1,181,442 $ 94,427,486 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 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. 13 A summary of the changes in the allowance for loan losses as of December 31 follows: 2014 2013 definitions for risk ratings: Pass -‐ NOTE B -‐ INVESTMENT SECURITIES -‐ Continued December 31, 2014: U.S. Government and Agency Securities Mortgaged-Backed Securities December 31, 2013: U.S. Government and Agency Securities Less than Twelve Months Over Twelve Months Total Unrealized Losses Unrealized Fair Value Losses Fair Value Unrealized Losses Fair Value $( 40,533) $ 10,208,813 $( 43,919) $ 4,955,780 $( 84,452) $ 15,164,593 (5,428) 2,131,386 - - (5,428) 2,131,386 $( 45,961) $ 12,340,199 $( 43,919) $ 4,955,780 $( 89,880) $ 17,295,979 $( 96,891) $ 9,877,549 $( 27,899) $ 971,700 $( 124,790) $ 10,849,249 $( 96,891) $ 9,877,549 $( 27,899) $ 971,700 $( 124,790) $ 10,849,249 As of December 31, 2014 the Company has ten U.S. government agency securities that have been in an unrealized loss position over 12 months. Unrealized losses on these investment securities have not been recognized into income as 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 largely due to change in interest rates. The fair value is expected to recover as the bonds approach maturity. Securities with a fair value of approximately $17.4 million at December 31, 2014 were pledged to the Federal Home Loan Bank to secure borrowings as discussed in Note F. NOTE C -‐ LOANS California. The Bank's loan portfolio consists primarily of loans to borrowers within the Southern Central Valley of 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: 2014 2013 Balance at Beginning of Year Additions to the Allowance Charged to Expense Recoveries on Loans Charged-Off $ 1,417,381 314,400 - 1,731,781 $ 1,371,881 36,000 9,500 1,417,381 Less Loans Charged-Off ( 8,390) - $ 1,723,391 $ 1,417,381 13 Farmland Real Estate Other: Commercial Farmland Real Estate Other: Commercial December 31, 2014 December 31, 2014 Real Estate Other: Real Estate Other: Commercial Commercial Farmland Farmland 1-4 Family Residential 1-4 Family Residential Multifamily Residential Multifamily Residential Construction and Land Development Construction and Land Development Commercial and Industrial Consumer Commercial and Industrial Consumer December 31, 2013 December 31, 2013 30-59 Days 30-59 Days Past Due Past Due Still Accruing Still Accruing 60-89 Days 60-89 Days Past Due Past Due Over 90 Days Over 90 Days Past Due Past Due Nonaccrual Nonaccrual $ $ - - $ $ - - $ $ - - $ $ - - 180,000 180,000 - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 313,322 313,322 35,100 35,100 441,114 441,114 $ $ 23,947 23,947 $ $ 180,000 180,000 $ $ - - $ $ 348,422 348,422 $ $ 49,544 49,544 $ $ - - $ $ - - $ $ - - 196,196 196,196 250,000 250,000 $ $ 245,740 245,740 $ $ 250,000 250,000 $ $ - - $ $ 441,114 441,114 23,947 23,947 - - - - - - - - - - - - - - - - Unpaid Unpaid Principal Principal Balance Balance Recorded Without Specific With Specific Recorded Without Specific With Specific Related Related Investment Investment Allowance Allowance Allowance Allowance Allowance Allowance Investment Recognized Investment Recognized Average Average Recorded Recorded Interest Interest Income Income $ $ - - $ $ - - $ $ - - $ $ - - $ $ - - $ $ - - $ $ - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 486,434 486,434 43,490 43,490 313,322 313,322 35,100 35,100 313,322 313,322 35,100 35,100 35,100 35,100 359,000 359,000 30,000 30,000 $ 529,924 529,924 $ $ 348,422 348,422 $ $ 313,322 313,322 $ $ $ 35,100 35,100 $ 35,100 35,100 $ $ 389,000 389,000 $ $ $ - - $ $ - - $ $ - - $ $ - - $ $ - - $ $ - - $ 155,000 155,000 $ $ $ - - 574,169 574,169 441,114 441,114 441,114 441,114 486,000 486,000 $ 574,169 574,169 $ $ 441,114 441,114 $ $ 441,114 441,114 $ $ $ - - $ $ - - $ 641,000 641,000 $ $ $ - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 1-4 Family Residential Multifamily Residential 1-4 Family Residential Multifamily Residential Construction and Land Development Construction and Land Development Commercial and Industrial Consumer Commercial and Industrial Consumer Information relating to individually impaired loans Information relating to individually impaired loans presented by class of loans was as follows as of presented by class of loans was as follows as of December 31, 2014 and 2013: December 31, 2014 and 2013: Impaired Loans Impaired Loans December 31, 2014 December 31, 2014 Real Estate Other: Real Estate Other: Commercial Commercial Farmland Farmland 1-4 Family Residential 1-4 Family Residential Multifamily Residential Multifamily Residential Construction and Land Development Construction and Land Development Commercial and Industrial Commercial and Industrial Consumer Consumer December 31, 2013 December 31, 2013 Real Estate Other: Real Estate Other: Commercial Commercial Farmland Farmland 1-4 Family Residential 1-4 Family Residential Multifamily Residential Multifamily Residential Construction and Land Development Construction and Land Development Commercial and Industrial Commercial and Industrial Consumer Consumer There were no new troubled debt restructurings There were no new troubled debt restructurings during 2014 and 2013. during 2014 and 2013. NOTE D -‐ PREMISES AND EQUIPMENT NOTE D -‐ PREMISES AND EQUIPMENT A summary of premises and equipment as of A summary of premises and equipment as of December 31 follows: December 31 follows: 2014 2013 2014 2013 Leasehold Improvements Furniture, Fixtures, and Equipment Leasehold Improvements Furniture, Fixtures, and Equipment Less Accumulated Depreciation and Amortization Less Accumulated Depreciation and Amortization 1,195,113 1,195,113 917,743 917,743 2,112,856 2,112,856 (1,529,460) (1,529,460) 1,184,565 1,184,565 825,202 825,202 2,009,767 2,009,767 (1,311,163) (1,311,163) $ $ 583,396 583,396 $ $ 698,604 698,604 The Bank has entered into two leases for its main The Bank has entered into two leases for its main office and Porterville office, which will expire in office and Porterville office, which will expire in January 2017 and July 2018, respectively. The Bank January 2017 and July 2018, respectively. The Bank leases its Porterville Office from a Director of the Bank. leases its Porterville Office from a Director of the Bank. NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2014 AND 2013 NOTE C -‐ LOANS -‐ Continued NOTE C -‐ LOANS -‐ Continued Substandard Substandard that that jeopardize jeopardize -‐ Loans classified as substandard -‐ Loans classified as substandard are inadequately protected by the current net worth are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral and paying capacity of the obligor or of the collateral pledged, if any. Loans so classified have a well-‐defined pledged, if any. Loans so classified have a well-‐defined the weakness or weaknesses weakness or weaknesses the liquidation of the debt. They are characterized by the liquidation of the debt. They are characterized by the distinct possibility that the institution will sustain distinct possibility that the institution will sustain some loss if the deficiencies are not corrected. some loss if the deficiencies are not corrected. Impaired - A loan is considered impaired, when, based Impaired Impaired 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. -‐ A loan is considered impaired, when, -‐ A loan is considered impaired, when, is information and events, based on current is based on current information and events, probable that the Bank will be unable to collect all probable that the Bank will be unable to collect all amounts due according to the contractual terms of the amounts due according to the contractual terms of the loan agreement. Additionally, all loans classified as loan agreement. Additionally, all loans classified as troubled debt restructurings are considered impaired. troubled debt restructurings are considered impaired. The risk category of loans by class of loans was as follows as of December 31, 2014: The risk category of loans by class of loans was as The risk category of loans by class of loans was as follows as of December 31, 2014: follows as of December 31, 2014: Special Special Mention Mention Real Estate Other: Real Estate Other: Commercial Commercial Farmland Farmland 1-4 Family Residential 1-4 Family Residential Multifamily Residential Multifamily Residential Construction and Land Development Construction and Land Development Commercial and Industrial Commercial and Industrial Consumer Consumer - $ - $ - - - - - - 313,322 313,322 35,100 35,100 - - 44,602,318 $ 44,602,318 26,836,159 26,836,159 14,549,706 14,549,706 5,225,084 5,225,084 3,545,500 3,545,500 26,423,240 26,423,240 1,534,781 1,534,781 46,763,564 46,763,564 26,836,159 26,836,159 14,549,706 14,549,706 5,225,084 5,225,084 3,858,822 3,858,822 26,469,066 26,469,066 1,534,781 1,534,781 156,158 - - - - - - 156,158 - - - - - - - - - - 10,726 10,726 - - $ 2,005,088 - December 31, 2014 December 31, 2014 2,005,088 - Substandard Substandard it it Impaired Impaired Total Total Pass Pass $ $ $ $ $ $ 122,716,788 $ 122,716,788 $ $ 156,158 156,158 $ $ 2,015,814 2,015,814 $ $ 348,422 348,422 $ $ 125,237,182 125,237,182 $ December 31, 2013 December 31, 2013 The risk category of loans by class of loans was as follows as of December 31, 2013: The risk category of loans by class of loans was as The risk category of loans by class of loans was as follows as of December 31, 2013: follows as of December 31, 2013: Special Special Mention Mention Real Estate Other: Real Estate Other: Commercial Commercial Farmland Farmland 1-4 Family Residential 1-4 Family Residential Multifamily Residential Multifamily Residential Construction and Land Development Construction and Land Development Commercial and Industrial Commercial and Industrial Consumer Consumer 36,665,202 $ 36,665,202 23,775,360 23,775,360 3,836,525 3,836,525 2,284,613 2,284,613 1,805,965 1,805,965 21,110,298 21,110,298 1,181,442 1,181,442 39,934,871 39,934,871 23,775,360 23,775,360 3,836,525 3,836,525 2,284,613 2,284,613 2,247,079 2,247,079 21,167,596 21,167,596 1,181,442 1,181,442 - $ - - - 441,114 - - - $ - - - 441,114 - - $ 1,196,402 - - - - - - 1,196,402 - - - - - - - - - - 57,298 57,298 - - $ 2,073,267 - 2,073,267 - Substandard Substandard Impaired Impaired Total Total Pass Pass $ $ $ $ $ $ 90,659,405 90,659,405 $ $ 1,196,402 1,196,402 $ $ 2,130,565 2,130,565 $ $ 441,114 441,114 $ $ 94,427,486 94,427,486 $ Past due and nonaccrual loans presented by loan class were as follows as of December 31, 2014 and 2013: Past due and nonaccrual loans presented by loan class Past due and nonaccrual loans presented by loan class were as follows as of December 31, 2014 and 2013: were as follows as of December 31, 2014 and 2013: 30-59 Days Past Due Still Accruing 60-89 Days Past Due Over 90 Days Past Due December 31, 2014 Nonaccrual Real Estate Other: Commercial Farmland 1-4 Family Residential Multifamily Residential Construction and Land Development Commercial and Industrial Consumer December 31, 2013 Real Estate Other: Commercial Farmland 1-4 Family Residential Multifamily Residential Construction and Land Development Commercial and Industrial Consumer $ - - - - 23,947 - - $ - 180,000 - - - - - $ - - - - - - - $ - - - 313,322 35,100 - $ 23,947 $ 180,000 $ - $ 348,422 $ 49,544 - - - 196,196 - - $ - - - - 250,000 - - $ - - - - - - - $ - - - 441,114 - - $ 245,740 $ 250,000 $ - $ 441,114 14 14 Information relating to individually impaired loans presented by class of loans was as follows as of December 31, 2014 and 2013: Impaired Loans December 31, 2014 Real Estate Other: Commercial Farmland 1-4 Family Residential Multifamily Residential Construction and Land Development Commercial and Industrial Consumer December 31, 2013 Real Estate Other: Commercial Farmland 1-4 Family Residential Multifamily Residential Construction and Land Development Commercial and Industrial Consumer Unpaid Principal Balance Recorded Without Specific With Specific Investment Allowance Allowance - $ - - - 486,434 43,490 - 529,924 $ - $ - - - 313,322 35,100 - 348,422 $ - $ - - - 313,322 - - 313,322 $ - $ - - - - 35,100 - 35,100 $ Related Allowance - $ - - - - 35,100 - 35,100 $ Average Recorded Investment Recognized Interest Income - $ - - - 359,000 30,000 - 389,000 $ - $ - - - - - - $ - - $ - - - 574,169 - - - $ - - - 441,114 - - - $ - - - 441,114 - - - $ - - - - - - - $ - - - - - - $ 155,000 - - - 486,000 - $ - - - - - - - $ 574,169 $ 441,114 $ 441,114 $ - $ - $ 641,000 $ - The following table presents the activity in the allowance for loan losses for the year 2014 and 2013 NOTE C - LOANS - Continued and the recorded investment in loans and impairment method as of December 31, 2014 and 2013 by portfolio segment: December 31, 2014 Construction and Land Development Commercial and Industrial Real Estate - Other Consumer Total 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, 2013 Allowance for Loan Losses: Beginning of Year Provisions Charge-offs Recoveries End of Year Reserves: Specific General Loans Evaluated for Impairment: Individually Collectively $ 1,094,629 72,857 - - $ 34,659 14,017 - - $ 275,196 207,390 (8,390) - $ 12,897 20,136 - - $ 1,417,381 314,400 (8,390) - $ 1,167,486 $ 48,676 $ 474,196 $ 33,033 $ 1,723,391 $ - 1,167,486 $ - 48,676 $ 35,100 439,096 $ - 33,033 $ 35,100 1,688,291 $ 1,167,486 $ 48,676 $ 474,196 $ 33,033 $ 1,723,391 - $ 93,374,513 $ 313,322 3,545,500 $ 35,100 26,433,966 $ - 1,534,781 $ 348,422 124,888,760 $ 93,374,513 $ 3,858,822 $ 26,469,066 $ 1,534,781 $ 125,237,182 $ 1,025,687 68,942 - - $ ( 84,186 49,527) - - $ 248,992 16,704 - 9,500 $ ( 13,016 119) - - $ 1,371,881 36,000 - 9,500 $ 1,094,629 $ 34,659 $ 275,196 $ 12,897 $ 1,417,381 - $ 1,094,937 $ - 34,659 - $ 275,273 $ - 12,502 - $ 1,417,371 $ 1,094,937 $ 34,659 $ 275,273 $ 12,502 $ 1,417,371 $ - 69,831,369 $ 441,114 1,805,965 $ - 21,167,596 $ - 1,181,442 $ 441,114 93,986,372 $ 69,831,369 $ 2,247,079 $ 21,167,596 $ 1,181,442 $ 94,427,486 and Substandard credit documentation, The Bank categorizes loans into risk categories based on relevant information about the ability of borrowers to The Bank categorizes loans into risk categories based service their debt such as current ﬁnancial information, on relevant information about the ability of borrowers historical payment experience, collateral adequacy, credit financial to service their debt such as current documentation, and current economic trends, among other information, historical payment experience, collateral factors. The Bank analyzes loans individually by classifying current adequacy, the loans as to credit risk. This analysis typically includes larger, economic trends, among other factors. The Bank non-homogeneous loans such as commercial real estate and analyzes loans individually by classifying the loans as NOTE C -‐ LOANS -‐ Continued commercial and industrial loans. This analysis is performed to credit risk. This analysis typically includes larger, on an ongoing basis as new information is obtained. The Bank non-‐homogeneous loans such as commercial real uses the following deﬁnitions for risk ratings: estate and commercial and industrial loans. This -‐ Loans classified as substandard analysis is performed on an ongoing basis as new are inadequately protected by the current net worth information is obtained. The Bank uses the following and paying capacity of the obligor or of the collateral definitions for risk ratings: pledged, if any. Loans so classified have a well-‐defined the that weakness or weaknesses Loans classified as pass include loans not liquidation of the debt. They are characterized by the meeting the risk ratings defined below. distinct possibility that the institution will sustain result some loss if the deficiencies are not corrected. -‐ Loans classified as special mention have a potential weakness that deserves -‐ A loan is considered impaired, when, management's close attention. If left uncorrected, is information and events, based on current these in probable that the Bank will be unable to collect all deterioration of the repayment prospects for the loan amounts due according to the contractual terms of the or of the institution's credit position at some future loan agreement. Additionally, all loans classified as date. troubled debt restructurings are considered impaired. Pass: Loans classiﬁed as pass include loans not meeting the risk ratings deﬁned below. Pass -‐ Special Mention: Loans classiﬁed as special mention have a potential weakness that deserves management’s Special Mention close attention. If left uncorrected, these potential weaknesses may the Impaired 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 The risk category of loans by class of loans was as that the institution will sustain some loss if the follows as of December 31, 2014: Special deﬁciencies are not corrected. December 31, 2014 Mention potential weaknesses may in deterioration of jeopardize result Substandard Impaired it Total Pass Real Estate Other: Commercial Farmland 1-4 Family Residential Multifamily Residential Construction and Land Development Commercial and Industrial Consumer $ 44,602,318 26,836,159 14,549,706 5,225,084 3,545,500 26,423,240 1,534,781 $ 156,158 - - - - - - $ 2,005,088 - - - 10,726 - - $ - - - 313,322 35,100 - $ 46,763,564 26,836,159 14,549,706 5,225,084 3,858,822 26,469,066 1,534,781 $ 122,716,788 $ 156,158 $ 2,015,814 $ 348,422 $ 125,237,182 31 The risk category of loans by class of loans was as follows as of December 31, 2013: Special December 31, 2013 Pass Mention Substandard Impaired Total Real Estate Other: Commercial Farmland 1-4 Family Residential Multifamily Residential Construction and Land Development Commercial and Industrial Consumer 23,775,360 3,836,525 2,284,613 1,805,965 21,110,298 1,181,442 $ 36,665,202 $ 1,196,402 $ 2,073,267 $ - $ 39,934,871 - - - - - - - - - - - - - - - 23,775,360 3,836,525 2,284,613 2,247,079 21,167,596 1,181,442 $ 90,659,405 $ 1,196,402 $ 2,130,565 $ 441,114 $ 94,427,486 Past due and nonaccrual loans presented by loan class were as follows as of December 31, 2014 and 2013: Leasehold Improvements Furniture, Fixtures, and Equipment 441,114 57,298 during 2014 and 2013. NOTE D -‐ PREMISES AND EQUIPMENT There were no new troubled debt restructurings A summary of premises and equipment as of December 31 follows: 2014 2013 Less Accumulated Depreciation and Amortization (1,529,460) 1,195,113 917,743 2,112,856 1,184,565 825,202 2,009,767 (1,311,163) $ 583,396 $ 698,604 The Bank has entered into two leases for its main office and Porterville office, which will expire in January 2017 and July 2018, respectively. The Bank leases its Porterville Office from a Director of the Bank. 14 it it jeopardize jeopardize -‐ 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 -‐ Loans classified as substandard the are inadequately protected by the current net worth liquidation of the debt. They are characterized by the and paying capacity of the obligor or of the collateral distinct possibility that the institution will sustain pledged, if any. Loans so classified have a well-‐defined some loss if the deficiencies are not corrected. the liquidation of the debt. They are characterized by the -‐ A loan is considered impaired, when, distinct possibility that the institution will sustain is information and events, some loss if the deficiencies are not corrected. probable that the Bank will be unable to collect all amounts due according to the contractual terms of the -‐ A loan is considered impaired, when, loan agreement. Additionally, all loans classified as is information and events, troubled debt restructurings are considered impaired. probable that the Bank will be unable to collect all amounts due according to the contractual terms of the The risk category of loans by class of loans was as loan agreement. Additionally, all loans classified as troubled debt restructurings are considered impaired. NOTE C -‐ LOANS -‐ Continued Substandard NOTE C -‐ LOANS -‐ Continued Substandard weakness or weaknesses that Impaired weakness or weaknesses that based on current Impaired based on current follows as of December 31, 2014: Special December 31, 2014 Pass Mention Substandard $ 44,602,318 $ 156,158 $ 2,005,088 follows as of December 31, 2014: Multifamily Residential 5,225,084 Special - Real Estate Other: Commercial Farmland 1-4 Family Residential Construction and Land Development December 31, 2014 Real Estate Other: Commercial and Industrial Commercial Consumer Farmland 1-4 Family Residential Multifamily Residential Construction and Land Development Commercial and Industrial Consumer 26,836,159 14,549,706 Pass 3,545,500 26,423,240 $ 44,602,318 1,534,781 26,836,159 122,716,788 14,549,706 $ 5,225,084 3,545,500 26,423,240 1,534,781 Mention Substandard $ 156,158 $ 2,005,088 10,726 $ 156,158 $ 2,015,814 10,726 $ 122,716,788 $ 156,158 $ 2,015,814 $ 36,665,202 $ 1,196,402 $ 2,073,267 follows as of December 31, 2013: Multifamily Residential 2,284,613 Special - Construction and Land Development December 31, 2013 Mention Substandard - $ 36,665,202 1,181,442 $ 1,196,402 - $ 2,073,267 - $ 1,196,402 $ 2,130,565 Real Estate Other: Commercial Farmland 1-4 Family Residential Real Estate Other: Commercial and Industrial Commercial Consumer Farmland 1-4 Family Residential Multifamily Residential Construction and Land Development Commercial and Industrial Consumer 23,775,360 3,836,525 Pass 1,805,965 21,110,298 $ 23,775,360 90,659,405 3,836,525 2,284,613 1,805,965 21,110,298 1,181,442 $ 90,659,405 $ 1,196,402 $ 2,130,565 - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 57,298 57,298 46,763,564 The risk category of loans by class of loans was as 26,836,159 14,549,706 5,225,084 Total 3,858,822 26,469,066 46,763,564 1,534,781 26,836,159 125,237,182 14,549,706 5,225,084 3,858,822 26,469,066 1,534,781 39,934,871 The risk category of loans by class of loans was as 23,775,360 3,836,525 2,284,613 Total 2,247,079 21,167,596 39,934,871 1,181,442 23,775,360 94,427,486 3,836,525 2,284,613 2,247,079 21,167,596 1,181,442 125,237,182 The risk category of loans by class of loans was as follows as of December 31, 2013: Special December 31, 2013 Pass Mention Substandard Impaired Total - $ - - - Impaired 313,322 35,100 $ - - - 348,422 - - 313,322 35,100 - - $ - - - Impaired 441,114 - $ - - - 441,114 - - 441,114 - - 94,427,486 Past due and nonaccrual loans presented by loan class were as follows as of December 31, 2014 and 2013: Impaired 348,422 441,114 Total $ $ $ $ $ $ $ $ $ $ $ $ December 31, 2014 Past Due Past Due Nonaccrual Real Estate Other: Commercial $ - $ - $ - $ - Still Accruing 60-89 Days Over 90 Days 30-59 Days Past Due 30-59 Days Past Due - - - 23,947 $ - - $ 23,947 - - - 23,947 49,544 - - 23,947 - - 196,196 49,544 - $ $ $ December 31, 2014 Farmland 1-4 Family Residential Multifamily Residential Construction and Land Development Real Estate Other: Commercial and Industrial Commercial Consumer Farmland 1-4 Family Residential Multifamily Residential Construction and Land Development Real Estate Other: Commercial and Industrial Commercial Consumer Farmland December 31, 2013 1-4 Family Residential Multifamily Residential December 31, 2013 Construction and Land Development Real Estate Other: Commercial and Industrial Commercial Consumer Farmland $ - Still Accruing 180,000 60-89 Days - Past Due - - $ - - - 180,000 180,000 - - - - $ - - - 180,000 - - 250,000 $ - - - 250,000 - - - 250,000 - $ $ - - Over 90 Days - Past Due - - $ - - - $ - - - - - $ - - - - $ - - - - $ - - - $ - - - - - - $ - - - Nonaccrual 313,322 35,100 $ - - - 348,422 - - 313,322 35,100 - $ - - - 348,422 - 441,114 - $ - - - 441,114 - - 441,114 - - $ NOTE C - LOANS - Continued $ $ Construction and Land Development 1-4 Family Residential Multifamily Residential Commercial and Industrial Consumer 245,740 - - - Information relating to individually impaired loans presented 196,196 - by class of loans was as follows as of December 31, 2014 441,114 245,740 Information relating to individually impaired loans and 2013: presented by class of loans was as follows as of December 31, 2014 and 2013: $ - Impaired Loans 250,000 $ $ $ December 31, 2014 Information relating to individually impaired loans presented by class of loans was as follows as of December 31, 2014 and 2013: Allowance Allowance Recorded Without Specific With Specific Investment Related Allowance December 31, 2013 Real Estate Other: Commercial Farmland 1-4 Family Residential Multifamily Residential Construction and Land Development December 31, 2014 Commercial and Industrial Real Estate Other: Consumer Commercial Farmland 1-4 Family Residential Multifamily Residential Real Estate Other: Construction and Land Development Commercial Commercial and Industrial Farmland Consumer 1-4 Family Residential Multifamily Residential Construction and Land Development December 31, 2013 Commercial and Industrial Consumer Real Estate Other: Commercial Farmland 1-4 Family Residential Multifamily Residential Construction and Land Development Commercial and Industrial Consumer Unpaid Principal Balance - $ - - Unpaid - Principal 486,434 Balance 43,490 - $ - 529,924 $ - - - 486,434 - $ 43,490 - - - - 529,924 574,169 - - $ $ - $ 574,169 - - - 574,169 - - Impaired Loans - $ - $ - - - - - - Recorded Without Specific With Specific 313,322 - Allowance Investment 35,100 35,100 - - $ - $ - 35,100 348,422 $ $ - - - - - - - 313,322 - - $ $ 35,100 35,100 - - - - - - - - 35,100 348,422 441,114 - - - - - - $ - - - 313,322 Allowance - - $ - 313,322 $ - - - 313,322 - $ - - - - - 313,322 441,114 - - $ $ $ $ - $ 441,114 - - - 441,114 - - $ - $ 441,114 - - - 441,114 - - $ - $ - - - - - - - - $ - - - Related - Allowance 35,100 - $ - 35,100 $ - - - - - $ 35,100 - - - - 35,100 - - - $ $ - $ - - - - - - - Average Recorded Investment Recognized Interest Income Interest Income - $ - $ - - - - Average - - Recorded 359,000 - Investment Recognized 30,000 - - - $ - $ - - 389,000 $ $ - - - - - - - 359,000 - 155,000 $ - 30,000 - - - - - - - - $ - 389,000 486,000 - - - $ $ - $ $ 155,000 641,000 - - - 486,000 $ - $ - - - - - - - - $ $ $ $ 641,000 441,114 441,114 574,169 $ - $ - There were no new troubled debt restructurings during 2014 and 2013. There were no new troubled debt restructurings during 2014 and 2013. NOTE D -‐ PREMISES AND EQUIPMENT -––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––– There were no new troubled debt restructurings during 2014 and 2013. NOTE D -‐ PREMISES AND EQUIPMENT A summary of premises and equipment as of NOTE D - PREMISES AND EQUIPMENT December 31 follows: 2014 2013 $ - A summary of premises and equipment as of December Leasehold Improvements 1,184,565 31 follows: Furniture, Fixtures, and Equipment 825,202 A summary of premises and equipment as of 2,009,767 December 31 follows: 2013 Less Accumulated Depreciation and Amortization (1,311,163) 1,195,113 917,743 2,112,856 2014 (1,529,460) Past due and nonaccrual loans presented by loan class were as follows as of December 31, 2014 and 2013: Leasehold Improvements Furniture, Fixtures, and Equipment Less Accumulated Depreciation and Amortization $ 1,195,113 583,396 917,743 2,112,856 (1,529,460) $ 1,184,565 698,604 825,202 2,009,767 (1,311,163) $ 583,396 $ 698,604 The Bank has entered into two leases for its main office and Porterville office, which will expire in The Bank has entered into two leases for its main ofﬁce and January 2017 and July 2018, respectively. The Bank Porterville ofﬁce, which will expire in January 2017 and July leases its Porterville Office from a Director of the Bank. 2018, respectively. The Bank leases its Porterville Ofﬁce The Bank has entered into two leases for its main from a Director of the Bank. office and Porterville office, which will expire in January 2017 and July 2018, respectively. The Bank These leases include provisions for periodic rent increases leases its Porterville Office from a Director of the Bank. 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 $316,000 and $292,000 for the years ended December 31, 2014 and 2013, respectively. 14 14 NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2014 AND 2013 adequate and other the Advances and other adequate borrow up to approximately $47.2 million subject to providing the Advances compliance with borrow up to approximately $47.2 million subject to Agreement providing established by the FHLB. The Bank has pledged $17.4 compliance with million of investment securities for this line. As of Agreement December 31, 2014 the Bank had no amounts established by the FHLB. The Bank has pledged $17.4 outstanding under this arrangement. The Bank has million of investment securities for this line. As of $16 million of letters of credit that is secured by the December 31, 2014 the Bank had no amounts FHLB line. The letters of credit mature December 30, outstanding under this arrangement. The Bank has 2015. NOTE G -‐ OTHER EXPENSES $16 million of letters of credit that is secured by the FHLB line. The letters of credit mature December 30, 2015. NOTE G -‐ OTHER EXPENSES Other expenses as of December 31 are comprised of the following: Professional Fees Data Processing Other expenses as of December 31 are comprised of Office Expenses the following: Marketing and Business Promotion Insurance Regulatory Assessments Professional Fees OREO Expenses Data Processing Other Expenses Office Expenses Marketing and Business Promotion Insurance Regulatory Assessments OREO Expenses NOTE H -‐ INCOME TAXES Other Expenses collateral and continued and Security eligibility collateral requirements continued and and Security eligibility requirements 2014 2013 $ 524,181 $ 340,662 279,750 177,370 174,338 2014 43,416 126,283 $ 524,181 0 279,750 192,726 177,370 174,338 43,416 126,283 0 192,726 269,848 166,426 162,018 2013 32,838 101,960 $ 340,662 72 269,848 103,070 166,426 162,018 32,838 101,960 72 103,070 $ 1,518,064 $ 1,176,894 $ 1,518,064 $ 1,176,894 5,054 345,000 1,000 (2,554,000) $ 350,054 $ (2,553,000) 2014 2013 $ - $ - 5,054 5,054 345,000 1,000 1,000 (2,554,000) $ 350,054 $ (2,553,000) Deferred The provision (benefit) for income taxes for the years ended December 31, consists of the following: Current: Federal State The provision (benefit) for income taxes for the years NOTE H -‐ INCOME TAXES ended December 31, consists of the following: Current: Federal State $ $ 1,000 5,054 2014 2013 - - Deferred 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 Deferred taxes are a result of differences between condition at December 31: 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: NOTE D -‐ PREMISES AND EQUIPMENT -‐ Continued NOTE D -‐ PREMISES AND EQUIPMENT -‐ Continued leases also leases also These leases include provisions for periodic rent increases as well as payment by the lessee of certain operating expenses. These include These leases include provisions for periodic rent provisions for options to extend the lease. The rental increases as well as payment by the lessee of certain expense relating to these leases and other short term include operating expenses. These rentals was approximately $316,000 and $292,000 for provisions for options to extend the lease. The rental the years ended December 31, 2014 and 2013, expense relating to these leases and other short term respectively. At December 31, 2014, the future lease rental payable under rentals was approximately $316,000 and $292,000 for noncancellable operating lease commitments for the Bank’s At December 31, 2014, the future lease rental payable the years ended December 31, 2014 and 2013, main ofﬁce and Porterville ofﬁce was as follows: under noncancellable operating lease commitments respectively. for the Bank's main office and Porterville office was as follows: At December 31, 2014, the future lease rental payable under noncancellable operating lease commitments 214,637 for the Bank's main office and Porterville office was as 220,681 follows: 18,438 - 214,637 453,756 220,681 18,438 - The minimum rental payments shown above are given for the existing lease obligation and are not a forecast of future rental expense. 135,254 140,664 146,291 87,295 135,254 140,664 146,291 87,295 2015 2016 2017 2018 2015 2016 2017 2018 Related Party Related Party 509,504 453,756 Others 509,504 $ $ $ $ Others $ $ $ $ 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 -––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––– The minimum rental payments shown above are given for the existing lease obligation and are not a forecast NOTE E - DEPOSITS At December 31, 2014, the scheduled maturities of of future rental expense. NOTE E -‐ DEPOSITS time deposits are as follows: 2015 2016 2017 2018 2019 At December 31, 2014, the scheduled maturities of time deposits are as follows: 36,752,546 1,593,298 585,491 708,606 1,279,965 At December 31, 2014, the scheduled maturities of time deposits are as follows: $ NOTE F -‐ OTHER BORROWINGS 2015 2016 2017 2018 2019 $ 40,919,906 36,752,546 $ 1,593,298 585,491 708,606 1,279,965 $ 40,919,906 The Bank may borrow up to $9,400,000 overnight on an unsecured basis from its correspondent banks. As of December 31, 2014, the Bank has no amounts outstanding under these arrangements. -––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––– NOTE F -‐ OTHER BORROWINGS 15 NOTE F - OTHER BORROWINGS In addition, the Bank is also a member of the Federal Home Loan Bank (“FHLB”) and has arranged a secured The Bank may borrow up to $9,400,000 overnight on borrowing line with that institution, secured by the The Bank may borrow up to $9,400,000 overnight on an unsecured basis from its correspondent banks. As assets of the Bank. Under this line, the Bank may of December 31, 2014, the Bank has no amounts an unsecured basis from its correspondent banks. As of outstanding under these arrangements. December 31, 2014, the Bank has no amounts outstanding under these arrangements. In addition, the Bank is also a member of the Federal Home Loan Bank (“FHLB”) and has arranged a secured borrowing line with that institution, secured by the assets of the Bank. Under this line, the Bank may In addition, the Bank is also a member of the Federal Home Loan Bank (“FHLB”) and has arranged a secured borrowing line with that institution, secured by the assets of the Bank. Under this line, the Bank may borrow up to approximately $47.2 million subject to providing adequate collateral and continued compliance with the Advances and Security Agreement and other eligibility requirements established by the FHLB. The Bank has pledged $17.4 million of investment securities for this line. As of December 31, 2014 the Bank had no amounts outstanding under this arrangement. The Bank has $16 million of letters of credit that is secured by the FHLB line. The letters of credit mature December 30, 2015. 15 32 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, 2014 and 2013 was approximately $4,707,000 and $4,036,000, 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, 2014 and 2013 $25,547,000 and $16,140,000, respectively. NOTE J -‐ COMMITMENTS approximately amounted to 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. letters of credit The Bank's exposure to loan loss in the event of nonperformance on commitments to extend credit and standby contractual amount of those instruments. The Bank uses the same credit policies in making commitments it does as statements. NOTE J -‐ COMMITMENTS -‐ Continued is represented by the loans reflected financial in the for As of December 31, 2014 and 2013, the Bank had the following outstanding financial commitments whose contractual amount represents credit risk: 2014 2013 Commitments to Extend Credit $ 17,072,000 $ 13,274,000 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. evaluates each client's credit worthiness on a case-‐by-‐ case basis. The amount of collateral obtained if deemed necessary by 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. is based on The Bank the Bank NOTE D -‐ PREMISES AND EQUIPMENT -‐ Continued Deferred Tax Assets: Pre-Opening Expenses Allowance for Loan Losses Due to Tax Limitations Depreciation Differences Operating Loss Carryforwards Unrealized Loss on Available-for-Sale Securities Stock-Based Compensation Other Assets and Liabilities Deferred Tax Liabilities: Other Assets and Liabilities 2014 2013 $ 367,000 $ 411,000 694,000 192,000 481,000 8,000 352,000 233,000 568,000 147,000 975,000 47,000 349,000 223,000 2,327,000 2,720,000 ( 110,000) ( 110,000) ( 119,000) ( 119,000) Net Deferred Tax Assets (Liabilities) $ 2,217,000 $ 2,601,000 leases also leases also NOTE D -‐ PREMISES AND EQUIPMENT -‐ Continued These leases include provisions for periodic rent increases as well as payment by the lessee of certain include These leases include provisions for periodic rent provisions for options to extend the lease. The rental increases as well as payment by the lessee of certain expense relating to these leases and other short term include rentals was approximately $316,000 and $292,000 for provisions for options to extend the lease. The rental the years ended December 31, 2014 and 2013, expense relating to these leases and other short term rentals was approximately $316,000 and $292,000 for the years ended December 31, 2014 and 2013, At December 31, 2014, the future lease rental payable under noncancellable operating lease commitments for the Bank's main office and Porterville office was as At December 31, 2014, the future lease rental payable under noncancellable operating lease commitments for the Bank's main office and Porterville office was as operating expenses. These operating expenses. These respectively. respectively. follows: follows: 2015 2016 2017 2015 2018 2016 2017 2018 Related Party $ 135,254 Related Party 140,664 $ $ 146,291 135,254 87,295 140,664 509,504 146,291 87,295 214,637 220,681 18,438 214,637 - 220,681 453,756 18,438 - Others Others $ $ $ $ 509,504 $ 453,756 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 The minimum rental payments shown above are given for the existing lease obligation and are not a forecast At December 31, 2014, the scheduled maturities of At December 31, 2014, the scheduled maturities of 36,752,546 1,593,298 585,491 36,752,546 708,606 1,593,298 1,279,965 585,491 40,919,906 708,606 1,279,965 of future rental expense. NOTE E -‐ DEPOSITS time deposits are as follows: time deposits are as follows: 2015 2016 2017 2015 2018 2016 2019 2017 2018 2019 $ $ $ NOTE F -‐ OTHER BORROWINGS $ 40,919,906 NOTE F -‐ OTHER BORROWINGS outstanding under these arrangements. The Bank may borrow up to $9,400,000 overnight on an unsecured basis from its correspondent banks. As of December 31, 2014, the Bank has no amounts The Bank may borrow up to $9,400,000 overnight on an unsecured basis from its correspondent banks. As of December 31, 2014, the Bank has no amounts In addition, the Bank is also a member of the Federal Home Loan Bank (“FHLB”) and has arranged a secured borrowing line with that institution, secured by the In addition, the Bank is also a member of the Federal assets of the Bank. Under this line, the Bank may Home Loan Bank (“FHLB”) and has arranged a secured borrowing line with that institution, secured by the assets of the Bank. Under this line, the Bank may outstanding under these arrangements. and and adequate and other and other adequate collateral the Advances eligibility collateral the Advances eligibility borrow up to approximately $47.2 million subject to continued providing compliance with and Security borrow up to approximately $47.2 million subject to Agreement requirements continued providing established by the FHLB. The Bank has pledged $17.4 NOTES TO FINANCIAL STATEMENTS Security and compliance with million of investment securities for this line. As of DECEMBER 31, 2014 AND 2013 requirements Agreement December 31, 2014 the Bank had no amounts established by the FHLB. The Bank has pledged $17.4 outstanding under this arrangement. The Bank has million of investment securities for this line. As of $16 million of letters of credit that is secured by the December 31, 2014 the Bank had no amounts FHLB line. The letters of credit mature December 30, outstanding under this arrangement. The Bank has 2015. NOTE G -‐ OTHER EXPENSES NOTE G - OTHER EXPENSES $16 million of letters of credit that is secured by the FHLB line. The letters of credit mature December 30, Other expenses as of December 31 are comprised of the 2015. NOTE G -‐ OTHER EXPENSES following: Other expenses as of December 31 are comprised of the following: Bank has generated taxable income in 2013 and 2012. At December 31, 2013, management believed it was more likely than not that the deferred tax assets would be realized in the future based on its improving profitability, and reversed the valuation allowance. As of December 31, 2014, the Bank has net operating loss carryforwards of approximately $1,169,000 for federal the valuation allowance. As of December 31, 2014, the Bank for California income purposes and $1,166,000 has net operating loss carryforwards of approximately franchise tax purposes. Federal and California net $1,169,000 for federal income purposes and $1,166,000 for operating loss carryforwards, to the extent not used California franchise tax purposes. Federal and California will expire in 2030. NOTE H – INCOME TAXES -‐ Continued net operating loss carryforwards, to the extent not used will expire in 2030. 2013 2014 $ $ Professional Fees 340,662 Other expenses as of December 31 are comprised of 269,848 Data Processing the following: 2013 166,426 Office Expenses 162,018 Marketing and Business Promotion 340,662 Professional Fees 32,838 Insurance 269,848 Data Processing 101,960 Regulatory Assessments 166,426 Office Expenses 72 OREO Expenses 162,018 Marketing and Business Promotion 103,070 Other Expenses Insurance 32,838 101,960 Regulatory Assessments 1,176,894 72 OREO Expenses 103,070 Other Expenses -––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––– NOTE H -‐ INCOME TAXES 524,181 279,750 2014 177,370 174,338 524,181 43,416 279,750 126,283 177,370 0 174,338 192,726 43,416 126,283 1,518,064 0 192,726 1,176,894 1,518,064 $ $ $ $ $ $ NOTE H - INCOME TAXES NOTE H -‐ INCOME TAXES The provision (benefit) for income taxes for the years The provision (beneﬁt) for income taxes for the years ended ended December 31, consists of the following: Current: December 31, consists of the following: - $ Federal The provision (benefit) for income taxes for the years 1,000 State 1,000 2013 ended December 31, consists of the following: Deferred (2,554,000) Current: Federal State - $ 5,054 5,054 345,000 2014 2014 2013 $ - 350,054 $ 5,054 5,054 345,000 $ - (2,553,000) $ 1,000 1,000 (2,554,000) Deferred $ 350,054 $ (2,553,000) Deferred taxes are a result of differences between Deferred taxes are a result of differences between income tax tax accounting and generally accepted income accounting and generally accepted accounting principles with accounting principles with respect to income and Deferred taxes are a result of differences between respect to income and expense recognition. The following is expense recognition. The following is a summary of tax accounting and generally accepted income the components of the net deferred tax asset accounts a summary of the components of the net deferred tax asset accounting principles with respect to income and recognized in the accompanying statement of financial accounts recognized in the accompanying statement of expense recognition. The following is a summary of condition at December 31: ﬁnancial condition at December 31: the components of the net deferred tax asset accounts recognized in the accompanying statement of financial Deferred Tax Assets: condition at December 31: Pre-Opening Expenses Allowance for Loan Losses Due to Tax Limitations Depreciation Differences Operating Loss Carryforwards Unrealized Loss on Available-for-Sale Securities Stock-Based Compensation Other Assets and Liabilities $ $ 2014 2013 411,000 568,000 147,000 975,000 47,000 349,000 223,000 2,720,000 367,000 694,000 192,000 481,000 8,000 352,000 233,000 2,327,000 15 Deferred Tax Liabilities: Other Assets and Liabilities ( ( 110,000) 110,000) ( ( 119,000) 119,000) 15 Net Deferred Tax Assets (Liabilities) $ 2,217,000 $ 2,601,000 Bank has generated taxable income in 2013 and 2012. At December 31, 2013, management believed it was more likely than not that the deferred tax assets would be realized in Bank has generated taxable income in 2013 and 2012. the future based on its improving proﬁtability, and reversed At December 31, 2013, management believed it was more likely than not that the deferred tax assets would be realized in the future based on its improving profitability, and reversed the valuation allowance. As of December 31, 2014, the Bank has net operating loss carryforwards of approximately $1,169,000 for federal income purposes and $1,166,000 for California franchise tax purposes. Federal and California net operating loss carryforwards, to the extent not used will expire in 2030. NOTE H – INCOME TAXES -‐ Continued 33 The Bank is subject to federal income tax and franchise tax of the state of California. Income tax returns for the periods ended after December 31, 2010 are open to audit by the federal authorities and income tax returns for the years ended after December 31, 2009 are open to audit by state authorities. The Bank does not expect the total amount of unrecognized tax benefits to significantly increase or decrease within the next twelve months. A comparison of the federal statutory income tax rates to the Company's effective income tax rates follows: 2014 2013 Amount Rate Amount Rate Statutory Federal Tax State Tax, Net of Federal Benefit Reduction in Valuation Allowance Stock-based Compensation Other Items, Net $ 254,000 59,000 - 18,000 19,054 34.1% 7.9% - 2.4% 2.6% $ 218,000 46,000 8,000 4,000 34.0% 7.2% 1.2% 0.6% (2,829,000) ( 441.7%) Actual Tax Expense (Benefit) $ 350,054 47.0% $ (2,553,000) ( 398.7%) NOTE I -‐ RELATED PARTY TRANSACTIONS The Bank is subject to federal income tax and franchise tax The Bank is subject to federal income tax and of the state of California. Income tax returns for the periods franchise tax of the state of California. Income tax ended after December 31, 2010 are open to audit by the returns for the periods ended after December 31, 2010 federal authorities and income tax returns for the years are open to audit by the federal authorities and ended after December 31, 2009 are open to audit by state income tax returns for the years ended after December authorities. The Bank does not expect the total amount 31, 2009 are open to audit by state authorities. The of unrecognized tax beneﬁts to signiﬁcantly increase or total amount of Bank does not expect decrease within the next twelve months. unrecognized tax benefits to significantly increase or decrease within the next twelve months. A comparison of the federal statutory income tax rates to the Company’s effective income tax rates follows: A comparison of the federal statutory income tax rates to the Company's effective income tax rates follows: the 2014 2013 Amount Rate Amount Rate Statutory Federal Tax State Tax, Net of Federal Benefit Reduction in Valuation Allowance Stock-based Compensation Other Items, Net $ 254,000 59,000 - 18,000 19,054 34.1% 7.9% - 2.4% 2.6% $ 218,000 46,000 (2,829,000) 8,000 4,000 ( 34.0% 7.2% 441.7%) 1.2% 0.6% Actual Tax Expense (Benefit) $ 350,054 47.0% $ (2,553,000) ( 398.7%) -––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––– NOTE I -‐ RELATED PARTY TRANSACTIONS 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, 2014 and 2013 was approximately $4,707,000 and $4,036,000, respectively. 16 Also, in the ordinary course of business, certain executive ofﬁcers, directors and companies with which they are In the ordinary course of business, the Bank has associated have deposits with the Bank. The balances of granted loans to certain directors and the companies these deposits at December 31, 2014 and 2013 amounted to with which they are associated. The total outstanding approximately $25,547,000 and $16,140,000, respectively. principal and commitment of these loans at December 31, 2014 and 2013 was approximately $4,707,000 and -––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––– $4,036,000, respectively. Also, in the ordinary course of business, certain NOTE J - COMMITMENTS executive officers, directors and companies with which they are associated have deposits with the In the ordinary course of business, the Bank enters into Bank. The balances of these deposits at December 31, ﬁnancial commitments to meet the ﬁnancing needs of its approximately amounted and 2013 2014 customers. Those instruments involve to varying degrees, $25,547,000 and $16,140,000, respectively. NOTE J -‐ COMMITMENTS elements of credit and interest rate risk not recognized in the Bank’s ﬁnancial statements. to 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 is represented by the contractual amount of those instruments. The Bank uses the same credit policies in making commitments financial loans reflected as letters of credit it does in the for statements. NOTE J -‐ COMMITMENTS -‐ Continued As of December 31, 2014 and 2013, the Bank had the following outstanding financial commitments whose contractual amount represents credit risk: 2014 2013 Commitments to Extend Credit $ 17,072,000 $ 13,274,000 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. 16 Deferred Tax Assets: Pre-Opening Expenses Allowance for Loan Losses Due to Tax Limitations Depreciation Differences Operating Loss Carryforwards Unrealized Loss on Available-for-Sale Securities Stock-Based Compensation Other Assets and Liabilities Deferred Tax Liabilities: Other Assets and Liabilities 2014 2013 $ 367,000 $ 411,000 694,000 192,000 481,000 8,000 352,000 233,000 568,000 147,000 975,000 47,000 349,000 223,000 2,327,000 2,720,000 ( 110,000) ( 110,000) ( 119,000) ( 119,000) Net Deferred Tax Assets (Liabilities) $ 2,217,000 $ 2,601,000 Bank has generated taxable income in 2013 and 2012. At December 31, 2013, management believed it was more likely than not that the deferred tax assets would be realized in the future based on its improving profitability, and reversed the valuation allowance. As of December 31, 2014, the Bank has net operating loss carryforwards of approximately $1,169,000 for federal for California franchise tax purposes. Federal and California net operating loss carryforwards, to the extent not used income purposes and $1,166,000 will expire in 2030. NOTE H – INCOME TAXES -‐ Continued The Bank is subject to federal income tax and franchise tax of the state of California. Income tax returns for the periods ended after December 31, 2010 are open to audit by the federal authorities and income tax returns for the years ended after December 31, 2009 are open to audit by state authorities. The total amount of unrecognized tax benefits to significantly increase or Bank does not expect the decrease within the next twelve months. A comparison of the federal statutory income tax rates to the Company's effective income tax rates follows: 2013 Amount Rate 2014 Amount Rate Statutory Federal Tax State Tax, Net of Federal Benefit Reduction in Valuation Allowance Stock-based Compensation Other Items, Net $ 254,000 59,000 - 18,000 19,054 34.1% 7.9% - 2.4% 2.6% $ 218,000 46,000 (2,829,000) 8,000 4,000 ( 34.0% 7.2% 441.7%) 1.2% 0.6% Actual Tax Expense (Benefit) $ 350,054 47.0% $ (2,553,000) ( 398.7%) NOTE I -‐ RELATED PARTY TRANSACTIONS NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2014 AND 2013 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, 2014 and 2013 was approximately $4,707,000 and $4,036,000, 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, and 2013 2014 $25,547,000 and $16,140,000, respectively. NOTE J -‐ COMMITMENTS amounted to approximately 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. NOTE J - COMMITMENTS - Continued The Bank's exposure to loan loss in the event of nonperformance on commitments to extend credit and The Bank’s exposure to in the event of is represented by the standby nonperformance on commitments to extend credit and contractual amount of those instruments. The Bank standby letters of credit is represented by the contractual uses the same credit policies in making commitments amount of those instruments. The Bank uses the same financial loans reflected it does as credit policies in making commitments as it does for loans statements. NOTE J -‐ COMMITMENTS -‐ Continued reﬂected in the ﬁnancial statements. letters of credit in the loan loss for As of December 31, 2014 and 2013, the Bank had the following outstanding ﬁnancial commitments whose As of December 31, 2014 and 2013, the Bank had the contractual amount represents credit risk: following outstanding financial commitments whose contractual amount represents credit risk: 2014 2013 16 Commitments to Extend Credit $ 17,072,000 $ 13,274,000 the Bank Commitments to extend credit are agreements to lend NOTE K – STOCK-‐BASED COMPENSATION PLANS to a customer as long as there is no violation of any Commitments to extend credit are agreements to lend condition established in the contract. Since many of the to a customer as long as there is no violation of any commitments are expected to expire without being drawn NOTE K – STOCK-‐BASED COMPENSATION PLANS condition established in the contract. Since many of upon, the total amounts do not necessarily represent The Bank's 2007 Stock Option Plan was approved by the commitments are expected to expire without being future cash requirements. The Bank evaluates each client’s its shareholders in July 2008. Under the terms of the drawn upon, the total amounts do not necessarily credit worthiness on a case-by-case basis. The amount 2007 Stock Option Plan, officers and key employees The Bank represent future cash requirements. of collateral obtained if deemed necessary by the Bank is The Bank's 2007 Stock Option Plan was approved by may be granted both nonqualified and incentive stock evaluates each client's credit worthiness on a case-‐by-‐ based on management’s credit evaluation of the customer. its shareholders in July 2008. Under the terms of the options and directors and organizers, who are not also case basis. The amount of collateral obtained if 2007 Stock Option Plan, officers and key employees The majority of the Bank’s commitments to extend credit an officer or employee, may only be granted is based on deemed necessary by may be granted both nonqualified and incentive stock and standby letters of credit are secured by real estate or nonqualified stock options. This plan was replaced by management's credit evaluation of the customer. The options and directors and organizers, who are not also cash, respectively. the 2013 Omnibus Stock Incentive Plan. majority of the Bank's commitments to extend credit an officer or employee, may only be granted and standby letters of credit are secured by real estate nonqualified stock options. This plan was replaced by -––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––– The Bank's 2013 Omnibus Stock Incentive Plan ("2013 or cash, respectively. the 2013 Omnibus Stock Incentive Plan. Plan") was approved by its shareholders in May 2013. Under the terms of the 2013 Plan, officers and key NOTE K – STOCK-BASED COMPENSATION PLANS The Bank's 2013 Omnibus Stock Incentive Plan ("2013 employees may be granted both nonqualified and Plan") was approved by its shareholders in May 2013. incentive stock options and directors and other The Bank’s 2007 Stock Option Plan was approved by its Under the terms of the 2013 Plan, officers and key consultants, who are not also an officer or employee, shareholders in July 2008. Under the terms of the 2007 employees may be granted both nonqualified and may only be granted nonqualified stock options. The Stock Option Plan, ofﬁcers and key employees may be incentive stock options and directors and other 2013 Plan also permits the grant of stock appreciation granted both nonqualiﬁed and incentive stock options and consultants, who are not also an officer or employee, rights ("SARs"), restricted shares, deferred shares, directors and organizers, who are not also an ofﬁcer or may only be granted nonqualified stock options. The performance shares and performance unit awards. employee, may only be granted nonqualiﬁed stock options. 2013 Plan also permits the grant of stock appreciation The 2013 Plan provides for the total number of This plan was replaced by the 2013 Omnibus Stock Incentive Plan. rights ("SARs"), restricted shares, deferred shares, awards of common stock that may be issued over the performance shares and performance unit awards. term of the plan not to exceed 573,533 shares, of The Bank’s 2013 Omnibus Stock Incentive Plan (“2013 The 2013 Plan provides for the total number of which a maximum of 400,000 shares may be granted Plan”) was approved by its shareholders in May 2013. Under awards of common stock that may be issued over the as incentive stock options. The aggregated number of the terms of the 2013 Plan, ofﬁcers and key employees may term of the plan not to exceed 573,533 shares, of individual awards that may be granted to an be granted both nonqualiﬁed and incentive stock options which a maximum of 400,000 shares may be granted participant may not exceed 100,000 shares per year. and directors and other consultants, who are not also an as incentive stock options. The aggregated number of Stock options and performance share and unit awards ofﬁcer or employee, may only be granted nonqualiﬁed individual awards that may be granted to an are granted at a price not less than 100% of the fair stock options. The 2013 Plan also permits the grant of stock participant may not exceed 100,000 shares per year. market value of the stock on the date of grant. The appreciation rights (“SARs”), restricted shares, deferred Stock options and performance share and unit awards 2013 plan provides for accelerated vesting if there is a shares, performance shares and performance unit awards. are granted at a price not less than 100% of the fair change of control as defined in the 2013 Plan. Equity The 2013 Plan provides for the total number of awards of market value of the stock on the date of grant. The awards generally vest over three to five years. Stock common stock that may be issued over the term of the 2013 plan provides for accelerated vesting if there is a options expire no later than ten years from the date of plan not to exceed 573,533 shares, of which a maximum of change of control as defined in the 2013 Plan. Equity grant. awards generally vest over three to five years. Stock options expire no later than ten years from the date of The Bank recognized stock-‐based compensation cost grant. of $141,382 and $68,823 for the periods ended The Bank also December 31, 2014 and 2013. The Bank recognized stock-‐based compensation cost recognized income tax benefits related to stock-‐based of $141,382 and $68,823 for the periods ended compensation of $35,876 in 2014 and $18,466 in December 31, 2014 and 2013. The Bank also 2013. NOTE K – STOCK-‐BASED COMPENSATION PLANS -‐ recognized income tax benefits related to stock-‐based Continued compensation of $35,876 in 2014 and $18,466 in 2013. NOTE K – STOCK-‐BASED COMPENSATION PLANS -‐ Continued The fair value of each option grant was estimated on the date of grant using the Black-‐Scholes option pricing model with the weighted-‐average assumptions The fair value of each option grant was estimated on presented below: the date of grant using the Black-‐Scholes option pricing model with the weighted-‐average assumptions presented below: 400,000 shares may be granted as incentive stock options. The aggregated number of awards that may be granted to an individual participant may not exceed 100,000 shares per year. Stock options and performance share and unit awards are granted at a price not less than 100% of the fair market value of the stock on the date of grant. The 2013 plan provides for accelerated vesting if there is a change of control as deﬁned in the 2013 Plan. Equity awards generally vest over three to ﬁve years. Stock options expire no later than ten years from the date of grant. The Bank recognized stock-based compensation cost of $141,382 and $68,823 for the periods ended December 31, 2014 and 2013. The Bank also recognized income tax beneﬁts related to stock-based compensation of $35,876 in 2014 and $18,466 in 2013. The fair value of each option grant was estimated on the date of grant using the Black-Scholes option pricing model with the weighted-average assumptions presented below: 2013 2014 Expected Volatility Expected Term Expected Dividends Expected Volatility Risk Free Rate Expected Term Grant Date Fair Value Expected Dividends Risk Free Rate Grant Date Fair Value 42.50% 2014 6.06 Years None 42.50% 1.21% 6.06 Years 2.85 None 1.21% 2.85 $ $ 36.00% 2013 5.80 Years None 36.00% 1.10% 5.80 Years 2.42 None 1.10% 2.42 $ $ terms the expected the expected is based on Since the Bank has a limited amount of historical stock Since the Bank has a limited amount of historical stock is based on the activity the expected volatility activity the expected volatility is based on the historical historical volatility of similar banks that have a longer volatility of similar banks that have a longer trading history. Since the Bank has a limited amount of historical stock trading history. The expected term represents the The expected term represents the estimated average is based on the activity the expected volatility estimated average period of time that the options period of time that the options remain outstanding. Since historical volatility of similar banks that have a longer remain outstanding. Since the Bank does not have the Bank does not have sufﬁcient historical data on the trading history. The expected term represents the sufficient historical data on the exercise of stock estimated average period of time that the options exercise of stock options, the expected terms is based on the options, remain outstanding. Since the Bank does not have the “simpliﬁed” method that measures the expected term as "simplified" method that measures the expected term sufficient historical data on the exercise of stock the average of the vesting period and the contractual term. as the average of the vesting period and the the options, The risk free rate of return reﬂects the grant date interest contractual term. The risk free rate of return reflects "simplified" method that measures the expected term rate offered for a comparable U.S. Treasury bonds over the the grant date interest rate offered for a comparable as the average of the vesting period and the expected term of the options. U.S. Treasury bonds over the expected term of the contractual term. The risk free rate of return reflects options. A summary of the status of the Bank’s stock options as of the grant date interest rate offered for a comparable December 31, 2014 and changes during the year ended U.S. Treasury bonds over the expected term of the A summary of the status of the Bank's stock options as thereon is presented below: options. of December 31, 2014 and changes during the year ended thereon is presented below: A summary of the status of the Bank's stock options as Aggregate Weighted- Intrinsic Average of December 31, 2014 and changes during the year Value Exercise in Thousands Price ended thereon is presented below: Weighted- Outstanding at Beginning of Year $ 9.49 Average $ 6.72 Granted Exercise - Exercised $ Price $ 8.84 Forfeited Weighted- Average Remaining Contractual Term Weighted- Average Remaining Contractual Term Aggregate Intrinsic Value in Thousands is based on 406,980 8,000 - 43,000) terms Shares Shares ( Outstanding at Beginning of Year Outstanding at End of Year Granted Exercised Options Exercisable Forfeited 406,980 371,980 8,000 - 335,280 43,000) ( $ 9.49 $ 9.51 $ 6.72 $ - $ 9.76 $ 8.84 4.20 Years $ - 3.72 Years $ - Outstanding at End of Year 371,980 $ 9.51 4.20 Years $ - Options Exercisable 335,280 $ 9.76 3.72 Years $ - 34 As of December 31, 2014, there was approximately $66,000 of total unrecognized compensation cost related to the outstanding stock options that will be As of December 31, 2014, there was approximately recognized over a weighted-‐average period of 1.7 $66,000 of total unrecognized compensation cost years. NOTE K – STOCK-‐BASED COMPENSATION PLANS -‐ related to the outstanding stock options that will be Continued recognized over a weighted-‐average period of 1.7 years. NOTE K – STOCK-‐BASED COMPENSATION PLANS -‐ Continued A summary of the status of the Bank's deferred share awards as of December 31, 2014 and changes during the year ended thereon is presented below: A summary of the status of the Bank's deferred share awards as of December 31, 2014 and changes during the year ended thereon is presented below: 17 17 NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2014 AND 2013 NOTE K – STOCK-BASED COMPENSATION PLANS - Continued As of December 31, 2014, there was approximately $66,000 of total unrecognized compensation cost related to the outstanding stock options that will be recognized over a weighted-average period of 1.7 years. A summary of the status of the Bank’s deferred share awards NOTE K – STOCK-‐BASED COMPENSATION PLANS -‐ as of December 31, 2014 and changes during the year ended Continued thereon is presented below: NOTE K – STOCK-‐BASED COMPENSATION PLANS -‐ NOTE K – STOCK-‐BASED COMPENSATION PLANS -‐ Continued Continued Nonvested at January 1, 2014 New Deferred Share Awards Shares Vested and Issued Nonvested at January 1, 2014 Shares Forfeited Nonvested at January 1, 2014 New Deferred Share Awards New Deferred Share Awards Shares Vested and Issued Nonvested at December 31, 2014 Shares Vested and Issued Shares Forfeited Shares Forfeited Shares Shares ( ( 34,980 2,444 Shares 6,980) 34,980 289) 34,980 2,444 2,444 6,980) 30,155 6,980) 289) 289) ( ( ( ( Weighted- Average Grant-Date Weighted- Fair Value Weighted- Average Average Grant-Date 6.92 $ Grant-Date Fair Value $ 7.00 Fair Value 6.60 $ $ 6.92 $ 7.00 $ 7.00 $ 6.60 $ 7.00 $ 7.00 $ $ $ $ 6.92 7.00 6.60 7.00 7.00 7.00 30,155 30,155 $ $ issued Nonvested at December 31, 2014 Nonvested at December 31, 2014 As of December 31, 2014 there was approximately $154,000 of unrecognized compensation cost related to the restricted As of December 31, 2014 there was approximately stock grants that will be recognized over a weighted-average $154,000 of unrecognized compensation cost related period of 1.4 years. The fair value of shares issued in 2014 and to the restricted stock grants that will be recognized As of December 31, 2014 there was approximately 2013 was approximately $51,000 and $29,000, respectively. over a weighted-‐average period of 1.4 years. The fair As of December 31, 2014 there was approximately $154,000 of unrecognized compensation cost related in 2014 and 2013 was value of shares $154,000 of unrecognized compensation cost related to the restricted stock grants that will be recognized approximately $51,000 and $29,000, respectively. to the restricted stock grants that will be recognized -––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––– NOTE L -‐ EARNINGS PER SHARE ("EPS") over a weighted-‐average period of 1.4 years. The fair over a weighted-‐average period of 1.4 years. The fair in 2014 and 2013 was value of shares issued in 2014 and 2013 was issued value of shares approximately $51,000 and $29,000, respectively. NOTE L -‐ EARNINGS PER SHARE ("EPS") NOTE L - EARNINGS PER SHARE (“EPS”) approximately $51,000 and $29,000, respectively. NOTE L -‐ EARNINGS PER SHARE ("EPS") The following is a reconciliation of net income and The following is a reconciliation of net income and shares shares outstanding to the income and number of outstanding to the income and number of shares used to shares used to compute EPS: The following is a reconciliation of net income and Income compute EPS: The following is a reconciliation of net income and shares outstanding to the income and number of Net Income as Reported 395,567 shares outstanding to the income and number of Shares Outstanding at Year-End 1,915,902 shares used to compute EPS: Impact of Weighting Shares Income shares used to compute EPS: Issued During the Year Income 395,567 Net Income as Reported 395,567 Dilutive Effect of Outstanding Shares Outstanding at Year-End Net Income as Reported Deferred Shares Impact of Weighting Shares Shares Outstanding at Year-End Issued During the Year Impact of Weighting Shares Issued During the Year Dilutive Effect of Outstanding Deferred Shares Used in Dilutive EPS Used in Basic EPS 2,649,634 4,082 2,649,634 2,207,691 (446,025) 2,203,609 1,915,902 7,359 1,915,902 1,921,216 (2,045) 1,913,857 Shares (446,025) Shares 2,203,609 3,193,536 3,193,536 Used in Basic EPS Used in Basic EPS (2,045) Shares 1,913,857 395,567 395,567 Income 3,193,536 3,193,536 3,193,536 2,649,634 3,193,536 3,193,536 395,567 395,567 Income Income Shares Shares Shares 2014 2014 2014 2013 2013 2013 $ $ $ $ $ $ $ $ (446,025) 2,203,609 4,082 2,207,691 4,082 2,207,691 $ 3,193,536 $ 3,193,536 (2,045) 1,913,857 7,359 1,921,216 7,359 1,921,216 Dilutive Effect of Outstanding Deferred Shares Used in Dilutive EPS $ 395,567 Used in Dilutive EPS $ 395,567 following following following All stock options were excluded from the computation All stock options were excluded from the computation of of diluted earnings per share as their inclusion would diluted earnings per share as their inclusion would have have been anti-‐dilutive. NOTE M -‐ FAIR VALUE MEASUREMENT All stock options were excluded from the computation been anti-dilutive. All stock options were excluded from the computation of diluted earnings per share as their inclusion would of diluted earnings per share as their inclusion would have been anti-‐dilutive. NOTE M -‐ FAIR VALUE MEASUREMENT have been anti-‐dilutive. NOTE M -‐ FAIR VALUE MEASUREMENT The is a description of valuation methodologies used for assets and liabilities recorded at fair value: Securities is a description of valuation The is a description of valuation The methodologies used for assets and liabilities recorded methodologies used for assets and liabilities recorded at fair value: Securities 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 The fair values of securities available for sale are securities without relying exclusively on quoted prices The fair values of securities available for sale are determined by matrix pricing, which is a mathematical for specific securities but rather by relying on the determined by matrix pricing, which is a mathematical technique used widely in the industry to value debt securities' relationship to other benchmark quoted technique used widely in the industry to value debt securities without relying exclusively on quoted prices securities without relying exclusively on quoted prices for specific securities but rather by relying on the for specific securities but rather by relying on the securities' relationship to other benchmark quoted securities' relationship to other benchmark quoted 35 18 18 18 NOTE M - 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 securities (Level 2). by relying on the securities’ relationship to other benchmark quoted securities (Level 2). The following table provides the hierarchy and fair securities (Level 2). value for each major category of assets and liabilities securities (Level 2). The following table provides the hierarchy and fair value for measured at fair value at December 31, 2014: each major category of assets and liabilities measured at fair The following table provides the hierarchy and fair Level 1 The following table provides the hierarchy and fair value at December 31, 2014: December 31, 2014 value for each major category of assets and liabilities Assets measured at fair value on value for each major category of assets and liabilities measured at fair value at December 31, 2014: Fair Value Measurements Using: a recurring basis measured at fair value at December 31, 2014: Level 2 Level 3 Level 1 Fair Value Measurements Using: - 40,516,442 Securities Available for Sale $ - $ December 31, 2014 Level 3 Level 2 Level 1 Assets measured at fair value on December 31, 2013 a recurring basis Assets measured at fair value on Securities Available for Sale a recurring basis Securities Available for Sale Fair Value Measurements Using: Level 2 $ - - $ 40,516,442 14,620,321 $ 40,516,442 14,620,321 $ $ - - $ Total 40,516,442 40,516,442 40,516,442 $ - $ - Level 3 Total Total $ $ $ $ $ $ December 31, 2014 Assets measured at fair value on a recurring basis Securities Available for Sale December 31, 2013 Assets measured at fair value on a recurring basis Securities Available for Sale December 31, 2013 Assets measured at fair value on a recurring basis Securities Available for Sale NOTE N -‐ INSTRUMENTS $ - $ 14,620,321 $ - $ 14,620,321 $ - $ 14,620,321 FAIR VALUE OF $ - $ 14,620,321 FINANCIAL FINANCIAL FINANCIAL FAIR VALUE OF -‐ NOTE N -––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––– FAIR VALUE OF -‐ NOTE N INSTRUMENTS INSTRUMENTS The fair value of a financial instrument is the amount NOTE N - FAIR VALUE OF at which the asset or obligation could be exchanged in FINANCIAL INSTRUMENTS a current transaction between willing parties, other The fair value of a financial instrument is the amount Fair value than in a forced or liquidation sale. The fair value of a financial instrument is the amount at which the asset or obligation could be exchanged in The fair value of a ﬁnancial instrument is the amount at estimates are made at a specific point in time based on at which the asset or obligation could be exchanged in a current transaction between willing parties, other which the asset or obligation could be exchanged in a current relevant market information and information about a current transaction between willing parties, other Fair value than in a forced or liquidation sale. transaction between willing parties, other than in a forced or the financial instrument. These estimates do not Fair value than in a forced or liquidation sale. estimates are made at a specific point in time based on liquidation sale. Fair value estimates are made at a speciﬁc reflect any premium or discount that could result from estimates are made at a specific point in time based on relevant market information and information about point in time based on relevant market information and offering for sale at one time the entire holdings of a relevant market information and information about the financial instrument. These estimates do not information about the ﬁnancial instrument. These estimates particular financial instrument. Because no market the financial instrument. These estimates do not reflect any premium or discount that could result from do not reﬂect any premium or discount that could result from value exists for a significant portion of the financial reflect any premium or discount that could result from offering for sale at one time the entire holdings of a offering for sale at one time the entire holdings of a particular fair value estimates are based on instruments, offering for sale at one time the entire holdings of a particular financial instrument. Because no market instrument. Because no market value exists ﬁnancial judgments regarding future expected loss experience, particular financial instrument. Because no market value exists for a significant portion of the financial for a signiﬁcant portion of the ﬁnancial instruments, fair current economic conditions, risk characteristics of value exists for a significant portion of the financial fair value estimates are based on instruments, value estimates are based on judgments regarding future instruments, and other factors. various financial fair value estimates are based on instruments, judgments regarding future expected loss experience, These estimates are subjective in nature, involve expected loss experience, current economic conditions, risk judgments regarding future expected loss experience, current economic conditions, risk characteristics of uncertainties and matters of judgment and, therefore, characteristics of various ﬁnancial instruments, and other current economic conditions, risk characteristics of instruments, and other factors. various financial cannot be determined with precision. Changes in instruments, and other factors. various financial factors. These estimates are subjective in nature, involve These estimates are subjective in nature, involve assumptions could significantly affect the estimates. These estimates are subjective in nature, involve uncertainties and matters of judgment and, therefore, cannot uncertainties and matters of judgment and, therefore, uncertainties and matters of judgment and, therefore, be determined with precision. Changes in assumptions could cannot be determined with precision. Changes in financial Fair value estimates are based on cannot be determined with precision. Changes in signiﬁcantly affect the estimates. assumptions could significantly affect the estimates. instruments both on and off the balance sheet without assumptions could significantly affect the estimates. attempting to estimate the value of anticipated future financial Fair value estimates are based on business and the value of assets and liabilities that are financial Fair value estimates are based on instruments both on and off the balance sheet without not considered financial instruments. Additionally, tax instruments both on and off the balance sheet without attempting to estimate the value of anticipated future consequences related the to attempting to estimate the value of anticipated future business and the value of assets and liabilities that are unrealized gains and losses can have a potential effect business and the value of assets and liabilities that are not considered financial instruments. Additionally, tax on fair value estimates and have not been considered not considered financial instruments. Additionally, tax the to consequences related in many of the estimates. the to consequences related unrealized gains and losses can have a potential effect unrealized gains and losses can have a potential effect on fair value estimates and have not been considered The following methods and assumptions were used to on fair value estimates and have not been considered in many of the estimates. financial the estimate in many of the estimates. instruments not previously presented: The following methods and assumptions were used to The following methods and assumptions were used to financial estimate financial estimate instruments not previously presented: instruments not previously presented: fair value of significant fair value of significant the realization of the realization of fair value of significant the realization of the the NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2014 AND 2013 NOTE N - FAIR VALUE OF FINANCIAL INSTRUMENTS - Continued FAIR VALUE OF Cash and Cash Equivalents NOTE N -‐ INSTRUMENTS -‐ Continued Fair value estimates are based on ﬁnancial instruments both FINANCIAL on and off the balance sheet without attempting to estimate the value of anticipated future business and the value of assets and liabilities that are not considered ﬁnancial instruments. Additionally, tax consequences related to the realization of the unrealized gains and losses can have a potential effect on fair value estimates and have not been The carrying amounts reported in the balance sheet considered in many of the estimates. for cash and cash equivalents approximate the fair The following methods and assumptions were used to values of those assets due to the short-‐term nature of estimate the fair value of signiﬁcant ﬁnancial instruments the assets. Loans not previously presented: Cash and Cash Equivalents Loans For variable rate loans that re-‐price frequently and The carrying amounts reported in the balance sheet for cash with no significant change in credit risk, fair values are and cash equivalents approximate the fair values of those based on carrying amounts. The fair values for all assets due to the short-term nature of the assets. other loans are estimated using discounted cash flow analyses, using interest rates currently being offered for loans with similar terms to borrowers with similar For variable rate loans that re-price frequently and with credit quality. Federal Home Loan Bank Stock and Other Bank Stock no signiﬁcant change in credit risk, fair values are based on carrying amounts. The fair values for all other loans are estimated using discounted cash ﬂow analyses, using interest rates currently being offered for loans with similar The fair value of Federal Home Loan Bank Stock and other Bank stock is not readily determinable due to terms to borrowers with similar credit quality. the lack of its transferability. Noninterest-‐Bearing and Interest Bearing Demand Deposits Federal Home Loan Bank Stock and Other Bank Stock The fair value of Federal Home Loan Bank Stock and other Bank stock is not readily determinable due to the lack of its transferability. The fair values for noninterest-‐bearing deposits and interest-‐bearing demand deposits are equal to the Noninterest-Bearing and Interest Bearing Demand Deposits amount payable on demand at the reporting date, The fair values for noninterest-bearing deposits and which is the carrying amount. Interest-‐Bearing Time Deposits interest-bearing demand deposits are equal to the amount payable on demand at the reporting date, which is the carrying amount. Interest-Bearing Time Deposits The fair values for fixed rate certificates of deposits are estimated using a cash flow analysis, discounted at interest rates being offered at each reporting date by The fair values for ﬁxed rate certiﬁcates of deposits are the Bank for certificates with similar remaining estimated using a cash ﬂow analysis, discounted at interest maturities. Off-‐Balance Sheet Financial Instruments rates being offered at each reporting date by the Bank for certiﬁcates with similar 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 The fair value of commitments to extend credit and standby currently charged to enter into similar agreements. letters of credit is estimated using the fees currently The fair value of these financial instruments is not material. 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, 2014 and 2013 are summarized as follows (dollar amounts in thousands): The fair value hierarchy level and estimated fair value of signiﬁcant ﬁnancial instruments at December 31, 2014 and 2013 are summarized as follows (dollar amounts in thousands): Financial Assets: Cash and Cash Equivalents Investment Securities Loans, net FHLB and Other Bank Stock Financial Liabilities: Noninterest-Bearing and Interest-Bearing Demand Deposits Interest-Bearing Time Deposits 2014 2013 Fair Value Hierarchy Carrying Value Fair Value Carrying Value Fair Value Level 1 Level 2 Level 2 $ 20,469 40,516 123,154 638 $ 20,469 40,516 123,019 N/A $ 14,381 14,620 92,769 591 $ 14,381 14,620 92,772 N/A Level 1 Level 2 125,497 40,920 125,497 40,901 81,947 27,583 81,947 27,603 -––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––– NOTE O -‐ EMPLOYEE BENEFIT PLAN NOTE O - EMPLOYEE BENEFIT PLAN The Bank adopted a 401(k) Plan for its employees in 2008. The Bank adopted a 401(k) Plan for its employees in Under the plan, eligible employees may defer a portion 2008. Under the plan, eligible employees may defer a of their salaries. The plan also provides for a non-elective portion of their salaries. The plan also provides for a discretionary contribution by the Bank. The Bank made no non-‐elective discretionary contribution by the Bank. contributions for 2014 or 2013. The Bank made no contributions for 2014 or 2013. NOTE P -‐ REGULATORY MATTERS -––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––– Failure NOTE P - REGULATORY MATTERS The Bank is subject to various regulatory capital requirements administered by the federal banking to meet minimum capital agencies. requirements can initiate certain mandatory -‐ and The Bank is subject to various regulatory capital requirements -‐ actions by possibly additional discretionary administered by the federal banking agencies. Failure to meet regulators that, if undertaken, could have a direct minimum capital requirements can initiate certain mandatory material effect on the Bank's financial statements. - and possibly additional discretionary - actions by regulators Under capital adequacy guidelines and the regulatory that, if undertaken, could have a direct material effect on the framework for prompt corrective action, the Bank Bank’s ﬁnancial statements. Under capital adequacy guidelines must meet specific capital guidelines that involve and the regulatory framework for prompt corrective action, quantitative measures of their assets, liabilities, and the Bank must meet speciﬁc capital guidelines that involve certain off-‐balance-‐sheet items as calculated under quantitative measures of their assets, liabilities, and certain off- regulatory accounting practices. The capital amounts balance-sheet items as calculated under regulatory accounting and classification are also subject to qualitative practices. The capital amounts and classiﬁcation are also judgments by the regulators about components, risk subject to qualitative judgments by the regulators about weightings, and other factors. components, risk weightings, and other factors. Quantitative measures established by regulation to Quantitative measures established by regulation to ensure ensure capital adequacy require the Bank to maintain capital adequacy require the Bank to maintain minimum minimum amounts and ratios (set forth in the table amounts and ratios (set forth in the table below) of total and below) of total and Tier 1 capital (as defined in the Tier 1 capital (as deﬁned in the regulations) to risk-weighted regulations) to risk-‐weighted assets (as defined), and assets (as deﬁned), and of Tier 1 capital (as deﬁned) to of Tier 1 capital (as defined) to average assets (as average assets (as deﬁned). Management believes, as of defined). Management believes, as of December 31, December 31, 2014 and 2013, that the Bank meets all capital 2014 and 2013, that the Bank meets all capital adequacy requirements. adequacy requirements. As of December 31, 2014, 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 36 19 NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2014 AND 2013 NOTE P - REGULATORY MATTERS - Continued As of December 31, 2014, 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 capitalized, the Bank must maintain minimum ratios maintain minimum ratios as set forth in the table below. as set forth in the table below. The following table also sets forth the Bank’s actual capital The following table also sets forth the Bank's actual amounts and ratios (dollar amounts in thousands): in capital amounts and ratios (dollar amounts thousands): Amount of Capital Required Actual For Capital Adequacy Purposes To Be Well- Capitalized Under Prompt Corrective Provisions Amount Ratio Amount Ratio Amount Ratio As of December 31, 2014: Total Capital (to Risk-Weighted Assets) Tier 1 Capital (to Risk-Weighted Assets) Tier 1 Capital (to Average Assets) $21,860 $20,129 $20,129 14.7% 13.5% 11.1% $11,914 $5,957 $7,281 As of December 31, 2013: Total Capital (to Risk-Weighted Assets) Tier 1 Capital (to Risk-Weighted Assets) Tier 1 Capital (to Average Assets) $15,335 $14,158 $14,158 14.1% 13.0% 11.7% $8,828 $4,414 $4,952 8.0% 4.0% 4.0% 8.0% 4.0% 4.0% $14,893 10.0% $8,936 $9,101 6.0% 5.0% $11,035 10.0% $6,621 $6,190 6.0% 5.0% The California Financial Code provides that a Bank may not make a cash distribution to its shareholders in excess The California Financial Code provides that a Bank of the lesser of the Bank’s undivided proﬁts or the Bank’s may not make a cash distribution to its shareholders net income for its last three ﬁscal years less the amount of in excess of the lesser of the Bank's undivided profits any distribution made to the Bank’s shareholders during the or the Bank's net income for its last three fiscal years same period. less the amount of any distribution made to the Bank's shareholders during the same period. 37 20 Visalia Branch 400 West Center Avenue Visalia, CA 93291 559.802.1000 Porterville Branch 65 West Olive Avenue Porterville, CA 93257 559.306.1300 Suncrestbank.com

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