Suncrest Bank Annual Report 2015

Plain-text annual report

2015 Annual Report We’re the bank where local matters. Kingsburg Branch 1580 Draper Street (559) 802-1070 Porterville Branch 65 West Olive Ave (559) 306-1300 Visalia Branch 400 West Center Ave (559) 802-1000 Yuba City Branch 700 Plumas St. (530) 674-8900 Fresno Office 2014 S Tulare Street Suite 406 (559) 286-9621 www.suncrestbank.com Top 2002015 Healthiest Banks by DepositAccounts.com Top 5 Reasons to Invest in Suncrest Stock Premier Management Team With Equity Profitability with Improving Operating Leverage Attractive Market for Community Banking Positioned for Continued Business Expansion Fewer and Fewer Community Banks Table of Contents 02 04 06 08 20 22 23 25 26 27 28 30 30 Board of Directors Dear Shareholders and Customers Committed to Community Growth Strategy Introduction 08 Growth in Foundation Markets Open in New Locations Open Businesses Not Branches Specialize in Critical Sectors Seek Out Acquisitions 10 12 14 16 18 2015 Marketing & Advertising Campaigns Financial Statements Independent Auditor’s Report 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 ii Board of Directors David C. Crinklaw Dave is a resident of Exeter, with business interests throughout the Central Valley. Dave sold his home construction business in 2000 and now specializes in commercial construction. He also farms grapes in Fresno and Tulare counties and manages a farm services company serving the Central Valley. William A. Benneyan, Chairman Bill was born and educated in Fresno, CA, and is a graduate of California State University, Fresno. He has lived in the Visalia, Lindsay and Fresno areas his entire life. Bill is a Certiﬁed Public Accountant and owned a CPA practice in Lindsay and Visalia. Bill is also a custom home builder and is currently the President of Benart S&L Custom Homes. Bill is the former Vice-Chairman of Mineral King National Bank, a highly successful community bank in Visalia that sold to Vallicorp in 1994 and served on the Vallicorp Board of Directors until its sale to Westamerica Bank. Bill then served on the Central Valley Advisory Board for Westamerica Bank. 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. Gary E. Esajian Gary has lived in the Lemoore area most of his life. He farms in Kings, Fresno and Tulare counties and manages real estate development interests here and in San Luis Obispo County. Gary serves on the Board of the Westlands Water District and the San Joaquin Valley Cotton Board, and is active in local farm bureaus and chambers of commerce. Florencio “Frank” Paredez A native of Tulare County, Frank graduated from College of the Sequoias and farms in the Exeter area. He owns a packing- house 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. Ciaran McMullan, President & CEO Ciaran is a native of the agricultural north west of Northern Ireland. He held senior roles in banking in Europe and Australia before moving to the U.S., where he served as Chairman of the Great Western Bancorporation, CEO of National Australia Bank Americas based in the Midwest, and as a Managing Director with Capello Capital Corporation in California. His expertise is in agribusiness and small business banking, and in developing and building banking businesses. He is a graduate of Stirling University and Shefﬁeld Hallam University in the UK, and attended Harvard Business School’s Executive Education Program in Agribusiness. 2 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. Marc R. Schuil, Vice Chairman 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. Daniel C. Jacuzzi A lifelong resident of the Yuba-Sutter area, Dan is a real estate broker and owner of Century 21 Select Real Estate, Select School of Real Estate, Stanford Mortgage, Select Property Management and Coldwell Banker Select of Nevada. His companies employ nearly 1,000 people throughout Northern California, Lake Tahoe and Northern Nevada.Dan was named Realtor Broker of the Year in 1995 and 1999, and his brokerage ﬁrm has been recognized by Realtor Magazine as one of the “Top 100 Largest Real Estate Firms” in the nation. He is an active member of the Association of Realtors in Sacramento, El Dorado, Placer, Butte, Yuba and Sutter counties. 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. Dale B. Margosian Born in Dinuba, Dale is a longtime resident of Porterville and a graduate of California State University, Fresno. He has managed a thriving CPA practice in Porterville for over 28 years and participates in many civic organizations. Matthew B. Pomeroy Born and raised in Yuba City, Matt has been a self-employed contractor with Pomeroy Construction for 20 years, building custom homes in the Yuba County foothills. Matt and his brother, Jarrod, took over their family farming operation in 2011, growing peaches, prunes and walnuts. Matt was a founding board member of Sutter Community Bank. He built his own home in the foothills and enjoys spending time with his wife and two sons. 3 Dear Shareholders and Customers, 2015 was a great year for Suncrest Bank. Proﬁtability with Improving Operating Leverage We achieved outstanding ﬁscal results while continuing to The bank has delivered 17 straight quarters of proﬁtability, effectively execute on our stated “5 in 5” strategic growth has a simple, common equity capital structure with no plan. At December 31, 2015, our assets totaled $296.9 debt, and a clean and high yielding loan portfolio. We which is an increase of $108.3 million, or 57% over the have improved our Efﬁciency Ratio every year since prior year’s ending balance. Our loan portfolio grew by the formation of the bank and will continue to carefully $83.1 million to $208.3 million, a 67% increase over 2014, manage non-interest expenses as we grow. Since the and our total deposits grew by $90.3 million and ended appointment of new management and establishment the year at $256.7 million, a 54% increase over the prior of our ﬁve year plan in the fall of 2013, we have been year. Our pretax earnings continue to improve in line with investing in growing our balance sheet, and have been our strategic growth trajectory, and were $1,637,715 for one of the fastest growing banks in the country over the 2015, an increase of 120% over the prior year. This is an last two years. Despite that rapid growth we have still excellent result particularly given that we had one-time managed to increase our ROAA over the period, and every expenses of approximately $600,000 associated with year since booking our Deferred Tax Asset in December our acquisition of Sutter Community Bank in December, 2013. We will continue to deliver improved operating and we opened our third full service branch in the city leverage as we grow. of Kingsburg, CA in June. In this year’s annual report we have provided more detail behind the key elements of our strategic plan, and have laid out below why we believe Suncrest Bank continues to be an excellent investment for both new and existing shareholders. Premier Leadership Team with Equity Attractive Market for Community Banking We are in a very attractive market for community banking with signiﬁcantly less big bank competition than the major metro areas. Despite positive economic growth throughout the Central Valley, many national banks including Citibank, JP Morgan Chase and Bank of America We have a highly effective leadership team with a unique are actively closing branches, immediately beneﬁting combination of international experience and hands-on, local banks like Suncrest. In addition, we have developed community bank management capability, who have invested their own capital into the bank. Our Chief a highly valuable niche expertise in agribusiness banking, and are one of only six California based banks1 that are Executive Ofﬁcer and Chief Credit Ofﬁcer have worked focused on the agricultural sector, despite the state in international banking in Europe, South America and contributing over 12% of the nation’s agricultural GDP. Australia as well as many years in the community banking and agribusiness lending sectors in the US. Management and Board together own almost 18% of the total shares outstanding, which in turn helps create a tight alignment between the bank’s strategic growth objectives and our focus on improving shareholder value. 1 Banks with farm loan concentrations of > 20% 4 Positioned for Continued Business Expansion Since completing our capital raise of $13.5 million in April 2015, we have been putting those funds to good use, increasing our lending staff from two to nine, opening a third branch, making our ﬁrst whole- of-bank acquisition, and signiﬁcantly expanding the geographic markets we can target. The bank is signiﬁcantly better positioned for proﬁtable growth $1,500,000 $1,000,000 $500,000 $0 -$500,000 -$1,000,000 -$1,5000,000 -$2,000,000 -$2,500,000 Income Before Taxes today than it was prior to completing our capital raise. 2008 2009 2010 2011 2012 2013 2014 2015 Fewer and Fewer Community Banks The number of independent community banks in California, and the wider US, continues to decline. Since Suncrest Bank was formed in 2008, the number of community banks2 in the US has decreased from 7225 to 54803, and in the State of California it has declined from 240 to 1373. In addition, the number of new “de-novo” banks being formed has dropped dramatically. Prior to the Global Financial Crisis, there was an average of 75 to 100 new banks formed every year. Since 2011, there have only been ﬁve new banks chartered in total, across the entire country. Basic supply and demand economics dictate that the fewer community banks there are the more valuable they will become. In closing, we thank the Board of Directors for their continued guidance and commitment, and our shareholders and customers for their investment and support. William A. Benneyan Chairman Ciaran McMullan President & CEO 2 Banks with less than $1 billion in total assets 3 Source: Bankshape and Dominic Coey $300,000,000 $250,000,000 $200,000,000 $150,000,000 $100,000,000 $50,000,000 $0 200% 175% 150% 125% 100% 75% 50% 25% 0% 3% 2% 1% 0% -1% -2% -3% Asset Growth 2008 2009 2010 2011 2012 2013 2014 2015 685% Efficiency Ratio 86.34% 83.62% 77.04% 2008 2009 2010 2011 2012 2013 2014 2015 LTM Return on Assets (ROAA) 0.24% 0.41% -15.08% 2008 2009 2010 2011 2012 20131 2014 2015 1 2013 includes the impact of the DTA 5 Committed to Community Porterville High School Academy Of Business Advisory Board Chairman Casa Of Tulare County Fundraiser In Visalia Back To School Drive Donated School Supplies To Schools In East Porterville Bake Sale For Alex Customer’s Daughter Diagnosed With Cancer Banking Class For Special Needs Kids Lindurst High School Bethlehem Center Fundraisers Bible Study Fellowship International Group Leader Boys And Girls Club Donation Boys And Girls Club Of Porterville Porterville Chamber Of Commerce Business Partner For A Day Casa Of Tulare County Total Contributions: Approximately $50,000 Central Valley Score South Valley Financial Consultant Chamber Of Commerce Porterville Iris Festival Chili Cook-Off Church Of Visalia County Center Rotary Ride To End Polio, Visalia Volunteer Delta Kappa Lota: Live Oak, Ca Fundraising For Scholarships Divisidero Middle School Band Boosters Yuba City Downtown Business Association Downtown Visalia Taste Of Downtown Downtown Visalian’s Executive Board Entrepreneurs Of Association Committee Exeter Chamber Fall Festival Family Crisis Center Donation Of Prize Money From Lindsay Q’ue’n For Kids Decorating Contest Family Crisis Center Christmas Fundraiser Future Farmers Of America Advisor Porterville High School Pathways Academy Of Business Project Judge Heritage Foundation Transport A Vehicle Hispanic Chamber Of Commerce Board Member Judy Sarber Blood Drive Kcaps: Kingsburg Community Assistance Program Services Kingsburg Care Center 6 Kingsburg Chamber Of Commerce Kingsburg Girls Softball League Kingsburg Harvest Moon Festival Las Madrinas Visalia Fundraiser Lindsay Rib Cook-Off Lions Club Member, Spaghetti Feed And Installation Dinner Los Malandrenes Foundation Board Member Monache High School Dress For Success National Association Government Guaranteed Lending Small Bank West Committee Board Member Networking For Women Member And Past President National Junior Basketball Board Of Directors Porterville Adult Day Services Fundraiser Auction Porterville Adult Day Services Board, Finance Committee, Masquerade Ball Fundraiser Set-Up / Decorate, Fundraiser Ticket Sales Porterville High School Baseball Dinner, Final Project Judging, Freshman Orientation, Pab Car Sales/ Finance Exercise Porterville Breakfast Lions Porterville Chamber Of Commerce Porterville Fair Board, Livestock Auction Porterville Mariachi Academy Foundation Dinners, Parades, Programs & Events Porterville Unifed School District Pathways 8 Oversight Committee Que’n For Kids Lindsay Rib Cook-Off Reaching Higher Board Member Retrouvaille Risk Management Association Board Secretary, Chairman Of Events And Planning Rolling For Ring Necks Vet Support Ronald Mcdonald House Charities Of The Central Valley Rotary Casino Night Small Business Association Fresno District Ofﬁce Speaker At Community Outreach Trainings Shannon Ranch Elementary School Sierra View District Hospital Donation, Gala Soroptimist International Of Visalia Member/Past President, Spring Fling Fundraiser, Ruby Awards Committee Visalia Chamber Of Commerce Board Member, Steering Committee, Golf Committee, Facilitator, Man/Woman Of The Year Committee Visalia Community Church Of Christ Praise And Worship Team Visalia Country Club Board Member Visalia Economic Development Corp Board Member Visalia Emergency Aid Decorated For Christmas Tree Auction Race Against Hunger Visalia Rescue Mission Motor Cycle Run Visalia Sunset Rotary Charter Member/President Elect, Adventure Ark Fundraiser Western Bank Decorating Contest Wine And Cheese Walk Young Entrepreneurs Academy Instructor Yuba Sutter Fair St Annes School Spring Dinner Strathmore High School Football Boosters Dinners, Concessions & Fundraisers Suncrest Vip Event Teach Children To Save Various Schools Toys For Tots Tulare County Farm Bureau Scholarship Dinner Tulare Kings Hispanic Chamber Member United Way Of Tulare County Board Member United Way Yuba City Event Committee Elegant Soiree Wine Event, Spectacular Run 5K, Bishop Pumpkin Wine Event University Presbyterian Church Board Property Finance Committee Member Valley Small Business Development Corporation Loan Committee Member Vandalia 4-H Visalia AYSO Coach/Referee Visalia Cal Ripken Little League Baseball 3,217 TOTA L HOURS O F S E RVICE Volunteered For 99 ORGANIZATIONS 7 GROWTH STRATEGY: Introduction Our 5 in 5 Growth Strategy Growth in Foundation Markets Following the appointment of new management in the second quarter of 2013, both Board and Management began working KEY OBJECTIVE together, over the course of three strategic planning workshops, to develop the bank’s new ﬁve year plan. In the fall of 2013, we ﬁnalized the new plan and set a target of growing to $500 million in assets within ﬁve years, coining the term “5 in 5” as representative of that ambitious goal. Grow market share to 8% to 10% in foundation locations Open in New Locations In determining this goal, we took into account a number of critical factors including; (1) the fact that larger (>$500M) asset KEY OBJECTIVE Open in 2 to 3 new, strategically banks tend to trade at higher multiples than smaller (<$500M) attractive locations banks, (2) what was realistic in terms of market share growth in the bank’s only two locations at that time (e.g. Porterville and Visalia) within that ﬁve year time frame, and (3) what additional Open Businesses Not Branches growth might be possible should the bank be able to broaden its geographic footprint and range of industry sectors it serves. This new strategic plan, comprised of the ﬁve overarching and interconnected programs summarized in the chart opposite, has been delivering real results. We have increased net loans by over 150% of what they were at the end of the ﬁrst quarter of 2013, and at a compound annual growth rate of 40%. We have increased total deposits by nearly 200%, at a CAGR of 49%. KEY OBJECTIVE Become a positive economic influence in each community we serve Specialize in Critical Sectors We have increased total revenue from $4.5M to just over $9.4M, KEY OBJECTIVE a compound annual growth rate of nearly 31%, and we have Build expertise in sectors critical to the almost tripled our earnings net of provisions to $1.43M, a CAGR Central Valley economy. of nearly 38%. In addition, in 2015, Suncrest Bank was the 6th fastest growing bank in California based on percentage change in total assets, and in the top 1% of fastest growing banks in the Seek Out Acquisitions country, coming 64th out of nearly 7000 banks nationally. KEY OBJECTIVE Achieve scale and improve operating efficiencies through M&A. 8 6th fastest growing bank IN CA OUT OF 194 64th fastest growing bank IN THE US OUT OF APPROX. 7000 Rank Name Percent Rank Name State Percent 1 2 3 4 5 6 Rancho Santa Fe Thrift & Loan Association 136.05 62 Live Oak Banking Company NC 59.07 CIT Bank, National Association 100.71 63 United Fidelity Bank, F.S.B. IN 57.85 First Foundation Bank 91.45 64 Suncrest Bank Plaza Bank 88.53 65 United Community Bank Pacific Commerce Bank 62.22 66 Business First Bank Suncrest Bank 57.38 67 Pilgrim Bank CA WI LA TX 57.38 57.34 56.97 56.28 Source: BankShape and Dominic Coey Source: BankShape and Dominic Coey Net Loans Total Deposits $250,000 $200,000 $150,000 $100,000 $50,000 0 % 0 .2 R : 4 G A C $82,178 $208,310 $300,000 $250,000 $200,000 $150,000 $100,000 $50,000 0 % 8.7 R: 4 G A C $86,256 $256,677 3/31/2013 12/31/2015 3/31/2013 12/31/2015 Total Revenue Pre-Provision Net Income $9,410 $10,000 $8,000 $6,000 $4,000 $2,000 0 % 0 . 6 R : 3 G A C $4,512 $1,600 $1,400 $1,200 $1,000 $800 $600 $40 $200 0 $1,431 8 . 0 % R : 3 G A C $590 3/31/2013 LTM 12/31/2015 LTM 3/31/2013 LTM 12/31/2015 LTM Source: SNL Financial, Company Management. 9 GROWTH STRATEGY: Growth in Foundation Markets The cornerstone of our growth plan is to consolidate and grow our presence in our two foundation markets of Visalia and Porterville, aiming to achieve a deposit market share of 8 to 10% in each. Through a combination of targeted marketing, identifying and recruiting the best local staff, improving our products and digital offerings, and living our values of community support and involvement, we have continued to improve our market share every year. Since June 2013 our percentage share of the local deposit market has increased by over 75% in Visalia, from 2.67% to 4.63%, and we have improved our ranking from 12th to 9th largest local bank. In Porterville, our market share has increased by over 88% from 3.85% to 7.25%. , and our ranking among all other banks has improved from 7th to 5th. This focus on building our business in our core markets has allowed us to outpace all of our locally headquartered1 community bank competitors. Over the two year period from 12/31/13 to 12/31/15, Suncrest grew its total deposits by 81.78%2 and its gross loans by 69.71%2. This analysis excludes the impact of the deposits and loans added through our acquisition of Sutter Community Bank. In addition, we are also developing a new ﬂagship branch for the Visalia market, in a more prominent downtown location right on Main Street, where we have acquired the former Citibank Building. This is an important next step in continuing to penetrate the local deposit market. We expect to open the new facility in late 2016. Strong Core Balance Sheet - Growth Relative to Peers Suncrest Bank Security First Bank Valley Business Bank Fresno First Bank United Security Bank Premier Valley Bank Murphy Bank 81.78% 69.71% 59.23% 49.73% 40.71% 25.90% 26.56% 38.45% 36.22% 30.37% 31.13% 10.85% 14.63% 9.77% % Loan Growth 2014 & 2015 % Deposit Growth 2014 & 2015 1 Community banks with < $1 billion in assets headquartered in Fresno or Tulare County 2 Excludes the impact of the deposits and loans added through our acquisition of Sutter Community Bank 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 10 Visalia Deposit Market Share Increased by over 73% Visalia Branch Growth 2014 11th 4.24% 2015 9th 4.63% 2 013 12th 2.67% Based on FDIC deposit market share data and bank ranking by city Porterville Deposit Market Share Increased by over 88% Porterville Branch Growth 2015 5th 7.25% 201 4 7th 5.15% 2013 7th 3.85% Based on FDIC deposit market share data and bank ranking by city 10% 5% 0% 10% 5% 0% 11 GROWTH STRATEGY: Open in New Locations Potential new locations must have certain In March of 2016 we took our ﬁ rst steps into the characteristics that make them attractive to us; they Fresno market, establishing what’s commonly referred should represent a realistic opportunity for Suncrest to as a “Loan Production Ofﬁ ce” or LPO in that City. to win new deposit or loan business, the local While not being a full service branch, an LPO allows economies should be underpinned by industries we us to originate and approve new loans, originate new understand , they should represent an opportunity deposit accounts, and more conveniently serve our for us to further diversify our loan portfolio, and existing Fresno based borrowers. Our new facility they should display positive trends in key socio- is also much more accessible for a number of our demographic indicators in particular, population lending and credit staff who live in Fresno, and no growth, median income, employment and retail sales. longer have to make the ninety minute daily round trip In June of 2015, we moved quickly to take advantage journey to Visalia. of the opportunity to open our third full service branch in the City of Kingsburg, following the closures of both Citibank and JP. Morgan Chase in that community. Known as Central California’s Swedish Village, the city’s population has grown by 27% since 2000 while median household income has grown over 31%. Kingsburg is an ideal ﬁ t with Suncrest’s growth strategy, and we look forward to many successful years serving that community. 2 NEW LOCATIONS Suncrest expanded its geographic footprint with two signiﬁ cant strategic moves into Fresno County 12 KINGSBURG KINGSBURG • Deposit market of over $130 million • Deposit market of over $130 million • Only two other competitors • Only two other competitors • Suncrest the only community bank • Suncrest the only community bank • Reached $8.2 million in deposits • Reached $8.2 million in deposits by 12/31/15 by 12/31/15 FRESNO FRESNO • Deposit market of over $9.8 billion • Deposit market of over $9.8 billion • Two community banks sold to out of area • Two community banks sold to out of area banking groups in 20151 banking groups in 20151 • Suncrest plans to open a full service branch • Suncrest plans to open a full service branch in the future in the future 1 Premier Valley Bank was acquired by Heartland Financial from Iowa and Security First Bank announced its intention to sell to an LA based group. 13 GROWTH STRATEGY: Open Businesses, Not Branches At Suncrest Bank, we know we only succeed when the communities we serve succeed. How we do business, reﬂ ects this belief. Open “businesses not branches” describes our approach to how we manage and operate our branches, how we contribute to the social and economic life of the communities we serve, and the ideas behind the introduction of our local Market President role. Each Suncrest location is led by a local Market President, together with a dedicated team of individuals, all with deep roots in their communities and a real understanding of the unique aspects of where they live and work. Our Market President role has responsibility for all branch operations, local staff, local marketing, managing branch proﬁ tability, growing both sides of the balance sheet, and – critically – they are speciﬁ cally remunerated on gathering deposits locally and lending locally, to support the growth of small business and ensure the economic health and prosperity of their local communities. In short, our approach is designed to keep more money re-circulating in the local economies of each of the communities we serve. This is often referred to as the local multiplier effect. Local Multiplier Effect Economic studies have shown how shopping at local, independent businesses is not just a nice thing to do, but is truly one of the best ways to strengthen and sustainably grow our local economies. The data shows that through buying locally we can create more jobs and retain more of the wealth created at home, where it belongs. A 2012 study undertaken by Civic Economics found that the local retailers return an average of 52 percent of their revenue to the local economy, compared with just 16 percent for the chain retailers. Similarly, locally owned restaurants re-circulate an average of 79 percent of their revenues, compared to 30 percent for national chain eateries. Banking with a local bank - that runs its branches like local businesses in the way we do - achieves exactly the same result. We invest deposits through loans to increase local business capacity, which in turn allows local businesses and their employees to increase deposits and savings through their success. This virtuous cycle is a key driver in creating jobs and an enduring well-being for all members of our local Valley communities. Each member of our staff wears the “Bank Local” pin shown below, and carries credit card sized versions of the “Top 6 Reasons” shown opposite, as a reminder of the importance of this element of our strategy. 14 The Top 6 Reasons To Shop, Dine & Do Business Local 1. More Money Re-Circulates In Our Local Communities 2. Non Profits Receive Greater Support 3. Most New Jobs Are Provided By Local Businesses 4. Unique Businesses Are Part Of Our Distinctive Character 5. Local Business Owners Invest In Our Community 6. Customer Service Is Often Better The Top 6 Reasons To Bank Local 1. We Give You The Same Services At A Lower Cost 2. We Put Your Money To Work Growing Your Local Economy 3. Decisions Are Made Locally, By People Who Live Locally 4. We Share Your Commitment To Your Community 5. We Won’t Gamble Your Money Away On Wall Street 6. You Can Be Proud Of Where You Bank 15 GROWTH STRATEGY: Specialize in Critical Sectors We think it is critical to have a well-diversiﬁ ed portfolio but also to specialize in proﬁ table niches, fundamental to the Central Valley economy, where we can develop expertise and where barriers to entry can be high in terms of knowledge and talent. Competing on price alone is not a viable strategy therefore, in order to remain competitive, we are not only maintaining and building our reputation for exemplary customer service but have also developed deep expertise in two particular business sectors. These sectors are Farming and Agribusiness, and Government Guaranteed Lending, in particular the Small Business Administration and USDA Loan Programs. Nobody knows more about local business and SBA loans than Suncrest Bank. A Small Business Administration loan is a great way to expand your business, purchase real estate, acquire equipment, or make renovations to your facilities. As a leading SBA lender with years of experience, Suncrest Bank can guide you through the process and help your business rise to the next level. • Loans up to $5 million to qualified borrowers • Loans to Purchase Fixed Assets and Debt Refinance • Inventory and Working Capital • Business Acquisition and Real Estate Loans • Flexible terms with fixed rates and longer maturities • Preferred Lender Status • SBA Express Loan program streamlines the process • Suncrest Bank is one of the fastest growing banks in California • Regularly rated 5 Stars for safety by Bauer Financial Craig Howells VP SBA Lending 559-802-1066 www.suncrestbank.com GOVERNMENT GUARANTEED LENDING Our Government Guaranteed Lending group has the ability to offer a range of products that are important to the Valleys small businesses and farmers including Farmer Mac, FSA, SBA, USDA and the Cal. Cap program. We have Preferred Lender status with the Small Business Administration and specialize in both the 504 and 7a products. Jan and Charlie Chrisman, SBA Loan Customers 16 AGRIBUSINESS The Central Valley is one of the world’s most productive agricultural regions with more than 230 crops being grown here. The State of California contributes over 12% of the nation’s agricultural GDP, with over 65% of the total California farmgate being produced in the Central Valley. Agriculture is critical to our local economy and as such we believe it is equally critical to understand that industry, and to support the people and businesses who work in it. In 2014 we launched a new brand and separate division called Suncrest Agribusiness dedicated to serving farmers, ranchers and agribusinesses throughout the Valley, and today we have an extremely well diversiﬁ ed agricultural portfolio, comprised of crop production lines and agricultural real estate, in both the North and South Valley, and across multiple crop types including nuts, citrus, grapes, tree fruit and rice. Victor Mendes, Ag Banking Customer & Shareholder You’re good at growing. We’re good at growing businesses. We’re the local ag loan experts. At Suncrest Bank, we don’t send loan applications to a distant committee for final approval. Our knowledgeable, experienced loan advisors make the decisions right here in the Central Valley so you get a fast answer. • Loans up to $8 million to qualified borrowers • Quick, local decision making • Suncrest Bank is one of the fastest growing banks in California • Agricultural Real Estate Loans, Production Finance, Development Loans, Equipment Financing and Leasing • Fixed rate products with maturities from 5 years to 25 years • Regularly rated 5 Stars for safety by Bauer Financial Mike Flynn Agribusiness Manager 559-802-1002 www.suncrestbank.com 17 GROWTH STRATEGY: Seek Out Acquisitions In December of 2015 we completed the acquisition in locations where the major cities, communities, of Sutter Community Bank in Yuba City. We believe industries and agri-sectors have very similar that it is both prudent and sensible for the Bank characteristics to our current locations. to consider acquisition and merger opportunities that are consistent with our strategy, improve our Ideal Geographic Fit core funding position, have a positive impact on Yuba City is an agricultural community with very our earnings, strengthen our balance sheet, and do similar socio-demographics to the communities we not lead to increased risks and ﬁ nancial problems. have already been successful in. The Yuba-Sutter Moreover, the growth and expansion of the Bank area has a different mix of crop types than in our in general, whether it be through mergers and southern footprint giving us the opportunity to acquisitions, de-novo branching or normal organic further diversify our ag lending portfolio, and the growth, will be focused on locations and industry impacts of the drought are much less severe than sectors that our Board and Management understand in the South Valley helping to de-concentrate our very well, and have solid experience in. On this basis, exposure to that particular climatic risk. we believe that we are very well equipped to grow Core Balance Sheet Growth Combined Bank Suncrest 12/31/14 Suncrest Legacy Bank 12/31/151 Organic Growth Rate Suncrest/Sutter 12/31/15 Merger Growth Rate Millions Total Assets Deposits Loans Leverage Ratio 188.6 166.4 124.5 11.06 Improved Shareholder Value TBVPS EPS 8.26 0.18 230.5 199.1 160.4 12.97 7.983 0.202 22% 20% 29% 17.3% (3.4%)4 11.1% 296.9 256.7 208.3 12.18 57% 54% 67% 10.1% Merger Dilution/ Accretion Effects 7.88 0.25 (1.25%)5 20%6 1 Estimated Suncrest standalone 12/31 position 2 Estimated EPS excluding merger expenses and bargain purchase gain 3 TBVPS at 11/30/15 4 TBVPS reduction during 2015 due to $13.5 M of new capital raised at $7 per share 5 TBVPS dilution from 11/30/15 6 EPS accretion from estimated Legacy Bank EPS at 12/31/15 18 Excellent Capability and Cultural Fit Systems conversion was completed over the The bank had deep existing expertise in farming and weekend of Jan 8th and two former Sutter Directors agribusiness, a strong capital position and low cost, have joined our Main Board. In addition, a new Local core deposits. They too were focused on building capability in the same critical industry sectors of Yuba-Sutter Board has been formed comprised of the remaining Sutter Community Bank Directors, and we Ag and SBA Lending and had a well-diversiﬁ ed and have also appointed a New Market President to lead high yielding loan portfolio, with a relatively small our business in the Yuba-Sutter Community. non-performing component. Most importantly, the staff and leadership of Sutter Community Bank were genuinely committed to the same core principles of good community banking. Extremely Positive Deal Economics The deal was an all-stock transaction allowing us to maintain our capital levels post deal, which was critically important given how strong our organic growth has and will continue to be. The price was determined based on a book-for-book exchange ratio which we felt was fair to both sides. In terms of shareholder value, the deal was extremely positive, being immediately accretive to EPS (even with deal costs included), and less than 1.3% tangible book value dilution. Hello, Yuba City. SuncrestBank.com We’re the bank where local matters. Tim Cole Commercial Banking & Agribusiness Manager Mary Chavez Compliance Officer We’re the Bank Where Local Matters. Becoming part of the local community really matters at Suncrest Bank. That's why you'll find the same friendly faces you know and trust to greet you at our doors. For all your personal banking, business banking and commercial lending needs stop by and see us in downtown Yuba City. MEET YOUR YUBA CITY TEAM (L-R) Diana Armstrong Lending Support Specialist Patricia Rogers Customer Service Representative Glenna Mathews Customer Service Manager Sophie Jurado Business Customer Service Representative Marcella Honig Sr. Relationship Manager Aman Bains Market President Lisa Laswell Sr. Relationship Manager Mary Anderson Operations Manager Parm Pamma Financial Analyst Cindy Stroup Lending Support Specialist Not pictured Sandy Beaver Customer Service Representative Samantha Trotter Customer Service Representative Yuba City Branch 700 Plumas Street (530) 674-8900 www.suncrestbank.com 19 2015 Marketing & Advertising Campaigns Top Healthiest Banks 2002015 by DepositAccounts.com We’re the Bank Where Local Matters. Being part of the local community really matters at Suncrest Bank. That's why you'll find the same friendly faces you know and trust to greet you at our doors. For all your personal banking, business banking and commercial lending needs stop by and see us in downtown Visalia. MEET YOUR VISALIA TEAM (L-R) Brooke Reed Customer Service Manager Cathy Huff Relationship Manager Craig Howells Manager SBA & USDA Lending Tracy Cizek Lending Support Lupe Garcia Branch Manager Barbra Hood Sr. Relationship Manager Cesar Gutierrez Commercial Banking Manager Vicki Evans Customer Service Representative Kathleen Bernardo Customer Service Representative Mike Flynn Manager Agribusiness Lending Leah Herron (Not present) Customer Service Representative Visalia Branch 400 West Center Ave (559) 802-1000 www.suncrestbank.com Growth is good. Healthy growth is even better. At Suncrest Bank, we’re proud of our growth. We’re even prouder of the way we’ve grown—staying strong through good times and bad. In fact, for the second year in a row, Suncrest Bank has been named one of the 200 Healthiest Banks in America by DepositAccounts.com. Suncrest Bank is one of only 49 banks in the United States to have received this distinction for two consecutive years. Suncrest Bank where Growing is Great and Growing Strong is even better! Visalia Branch 400 West Center Ave (559) 802-1000 Porterville Branch 65 West Olive Ave (559) 306-1300 Kingsburg Branch 1580 Draper Street (559) 802-1070 www.suncrestbank.com Deposits in a snap. Safe. Secure. Convenient. Introducing Mobile Deposits from Suncrest Bank, the easy way to deposit checks from anywhere, anytime using your mobile device. Just snap a picture of the front and back of your endorsed check. It’s that simple. The App is free! Sign up for Suncrest Mobile Banking today. Download the App from the Apple App Store® or Google Play Store® Top Healthiest Banks 2002015 by DepositAccounts.com Kingsburg Branch 1580 Draper Street (559) 802-1070 Porterville Branch 65 West Olive Ave (559) 306-1300 Visalia Branch 400 West Center Ave (559) 802-1000 Yuba City Branch 700 Plumas St. (530) 674-8900 www.suncrestbank.com 20 WE’RE THE BANK FOR PEOPLE LIKE YOU. At Suncrest your loan requests are approved locally in a quick and timely manner. Our experienced loan advisors have deep knowledge of Yuba City and will work with you to customize a program to achieve your business goals. • Loans up to $10 million to qualified borrowers • Commercial Real Estate Loans • Lines of Credit • Inventory and Working Capital Loans • Equipment financing and leasing programs • Fixed rate products with maturities from 5 years to 25 years • Regularly rated 5 Stars for safety by Bauer Financial yuba city kingsburg porterville visalia % APY* 1.50 on balances up to $25,001 (cid:76)(cid:73)(cid:3)(cid:84)(cid:88)(cid:68)(cid:79)(cid:76)(cid:223)(cid:70)(cid:68)(cid:87)(cid:76)(cid:82)(cid:81)(cid:86)(cid:3)(cid:68)(cid:85)(cid:72)(cid:3)(cid:80)(cid:72)(cid:87) % APY* 0.01 on all balances even if (cid:84)(cid:88)(cid:68)(cid:79)(cid:76)(cid:223)(cid:70)(cid:68)(cid:87)(cid:76)(cid:82)(cid:81)(cid:86)(cid:3)(cid:68)(cid:85)(cid:72)(cid:81)(cid:206)(cid:87)(cid:3)(cid:80)(cid:72)(cid:87) And it’s easy to earn our highest rates... 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(cid:68)(cid:79)(cid:79)(cid:3)(cid:46)(cid:68)(cid:86)(cid:68)(cid:86)(cid:68)(cid:3)(cid:68)(cid:70)(cid:70)(cid:82)(cid:88)(cid:81)(cid:87)(cid:86)(cid:17)(cid:3)(cid:46)(cid:68)(cid:86)(cid:68)(cid:86)(cid:68)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:46)(cid:68)(cid:86)(cid:68)(cid:86)(cid:68)(cid:3)(cid:38)(cid:68)(cid:86)(cid:75)(cid:3)(cid:68)(cid:85)(cid:72)(cid:3)(cid:87)(cid:85)(cid:68)(cid:71)(cid:72)(cid:80)(cid:68)(cid:85)(cid:78)(cid:86)(cid:3)(cid:82)(cid:73)(cid:3)(cid:37)(cid:68)(cid:81)(cid:70)(cid:57)(cid:88)(cid:72)(cid:15)(cid:3)(cid:47)(cid:87)(cid:71)(cid:17)(cid:15)(cid:3)(cid:85)(cid:72)(cid:74)(cid:76)(cid:86)(cid:87)(cid:72)(cid:85)(cid:72)(cid:71)(cid:3)(cid:76)(cid:81)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:56)(cid:17)(cid:54)(cid:17)(cid:36)(cid:17) Free Kasasa checking rewards you in ways you might not think a community bank could. But the best part is, you don’t have to go to some big bank to get it. Open your account online at www.suncrestbank.com Or visit us at Kingsburg Branch 1580 Draper Street | 559- 802-1070 www.suncrestbank.com *APY = Annual Percentage Yield. APYs accurate as of 2/16/16. Rates may change after account is opened. Minimum to open is $50.*If qualifications are met each monthly qualification cycle: (1) balances up to $25,001 receive APY of 1.50%; and, (2) balances over $25,001 earn 0.40% interest rate on portion of balance over $25,001, resulting in 1.50% - 0.58% APY depending on the balance. If qualifications are not met, all balances earn 0.01% APY. Qualifications during each monthly qualification cycle are as follows: at least 10 debit card purchases must post and settle the Kasasa Cash account, account must be enrolled and receive e-statement notice, and at least 1 bill pay or ACH automatic debit transaction must post and settle the Kasasa Cash account. Transactions may take one or more banking days from the date transaction was made to post to and settle the account. ATM-processed transactions do not count towards qualifying debit card transactions. Transfers between your accounts with us do not count as qualifying transactions. “Monthly Qualification Cycle” means a period beginning one day prior to the first day of the current statement cycle through one day prior to the close of the current statement cycle. Limit one account per SSN. Available to personal accounts only. Nationwide ATM fees waived up to five times per statement cycle. Nonsufficient funds fees and miscellaneous fees apply to all Kasasa accounts. Kasasa, Kasasa Cash, Kasasa Cash Back and Kasasa Tunes are trademarks of BancVue, Ltd., registered in the U.S.A. We’re growing quickly. So can you. Suncrest Bank is one of the fastest growing banks in the United States. We can put that same success to work for you. At Suncrest your loan requests are approved locally in a quick and timely manner. Our experienced loan advisors have deep knowledge of the Central Valley and will work with you to customize a program to achieve your business goals. Caesar Gutierrez Commercial Banking Manager 559-802-1048 1.50% APY* On Kasasa Cash balances up to $25,001.00 if qualiﬁcations are met .01 % APY* On all Kasasa Cash balances if qualiﬁcations are not met * APY = Annual Percentage Yield. APYs accurate as of 2-16-16. Rates may change after account is opened. Minimum to open is $50. If qualifications are met each monthly qualification cycle: (1) balances up to $25,001.00 receive APY of 1.50%; and, (2) balances over $25,001.00 earn 0.40% interest rate on portion of balance over $25,001.00, resulting in 1.50% - 0.58% APY depending on the balance. If qualifications are not met, all balances earn 0.01% APY. Qualifications during each monthly qualification cycle are as follows: at least 10 debit card purchases must post and settle the Kasasa Cash account, account must be enrolled and receive e-statement notice, and at least 1 bill pay or ACH automatic debit transaction must post and settle the Kasasa Cash account. Transactions may take one or more banking days from the date transaction was made to post to and settle the account. ATM-processed transactions do not count towards qualifying debit card transactions. Transfers between your accounts with us do not count as qualifying transactions. “Monthly Qualification Cycle” means a period beginning one day prior to the first day of the current statement cycle through one day prior to the close of the current statement cycle. Limit one account per SSN. Available to personal accounts only. Nationwide ATM fees waived up to five times per statement cycle. Nonsufficient funds fees and miscellaneous fees apply to all Kasasa accounts. Open your account online at: www.suncrestbank.com Plus, have ATM fees waived nationwide.* • Loans up to $8 million to qualified borrowers • Commercial Real Estate Loans • Agricultural Real Estate Loans, Production Finance, Development Loans, Equipment Financing and Leasing • Lines of Credit • Inventory and Working Capital Loans • Flexible terms with fixed rates and longer maturities • Regularly rated 5 Stars for safety by Bauer Financial Top Healthiest Banks 2002015 by DepositAccounts.com www.suncrestbank.com 21 Table of Financial Statements 19 20 Independent Auditor’s Report On The Financial Statements Financial Statements 20 Statements of Financial Condition 22 Statements of Income 23 24 25 26 Statements of Comprehensive Income Statement of Changes in Shareholders’ Equity Statements of Cash Flows Notes to Financial Statements 22 (cid:1) Vavrinek, Trine, Day & Co., LLP Certified Public Accountants (cid:1) (cid:14)(cid:2)(cid:9)(cid:13)(cid:5)(cid:1)(cid:12)(cid:7)(cid:5)(cid:1)(cid:4)(cid:8)(cid:6)(cid:6)(cid:5)(cid:11)(cid:5)(cid:10)(cid:3)(cid:5)(cid:1) INDEPENDENT AUDITOR'S REPORT 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, 2015 and 2014, 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, 2015 and 2014, 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 24, 2016 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 (cid:1) (cid:1)• 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 (cid:1)(cid:1) 23 FINANCIAL STATEMENTS: Statements of Financial Condition December 31, 2015 & 2014 Assets Cash and Due from Banks Federal Funds Sold 2015 2014 5,370,556 $4,648,094 8,691,000 15,821,000 Interest-Bearing Deposits in Other Banks 10,000,000 - Total Cash and Cash Equivalents 24,061,556 20,469,094 Investment Securities Available for Sale 54,342,949 40,516,442 Loans: Real Estate - Other 163,553,994 93,374,513 Construction and Land Development 4,945,745 3,858,822 Commercial and Industrial Consumer Total Loans Deferred Loan Fees, Net of Costs Allowance for Loan Losses Net Loans 39,530,750 26,469,066 807,079 1,534,781 208,837,568 125,237,182 (458,940) (359,393) (2,245,566) (1,723,391) 206,133,062 123,154,398 Federal Home Loan Bank and Other Bank Stock, at Cost 1,465,968 2,770,478 649,092 2,080,857 637,510 583,396 - - 3,507,000 2,217,000 428,000 1,444,149 - 1,059,812 $296,883,111 $188,637,652 Premises and Equipment Other Real Estate Owned Bank Owned Life Insurance Net Deferred Tax Assets Core Deposit Intangible Accrued Interest and Other Assets *The accompanying notes are an integral part of these ﬁnancial statements. 24 Liability & Shareholders’ Equity Deposits: 2015 2014 Noninterest-bearing Demand $84,064,420 $55,502,263 Savings, NOW and Money Market Accounts 114,593,224 69,994,695 Time Deposits Under $250,000 31,588,069 19,355,396 Time Deposits $250,000 and Over 26,431,525 21,564,510 Total Deposits 256,677,238 166,416,864 Accrued Interest and Other Liabilities 874,392 342,596 Total Liabilities 257,551,630 166,759,460 Commitments and Contingencies - Notes E and K Shareholders' Equity: Preferred Stock - No par value, 10,000,000 Shares Authorized, None Outstanding Common Stock - No par value, 25,000,000 Shares Authorized Shares Issued and Outstanding, 4,999,895 in 2015 and 2,649,634 in 2014 Additional Paid-in Capital Accumulated Deficit Accumulated Other Comprehensive Income Loss - Net - - 40,653,892 24,126,478 1,703,561 1,614,538 (2,942,986) (3,851,640) Unrealized Loss on Securities Available for Sale, Net of Taxes of $57,668 in 2015 and $7,772 in 2014 (82,986) (11,184) Total Shareholders’ Equity 39,331,481 21,878,192 $296,883,111 $188,637,652 *The accompanying notes are an integral part of these ﬁnancial statements. 25 FINANCIAL STATEMENTS: Statements of Income For the Years Ended December 31, 2015 & 2014 Interest Income Interest and Fees on Loans $8,196,445 $5,988,234 2015 2014 Interest on Investment Securities Interest on Federal Funds Sold and Other Total Interest Income Interest Expense Interest on Savings Deposits, NOW and Money Market Accounts Interest on Time Deposits Interest on Other Borrowings Total Interest Expense Net Interest Income Provision for Loan Losses 725,238 118,602 415,522 76,308 9,040,285 6,480,064 161,343 176,515 226,177 272,420 5 387,525 8,652,760 522,275 6 448,941 6,031,123 314,400 Net Interest Income After Provision For Loan Losses 8,130,485 5,716,723 Noninterest Income Service Charges, Fees, and Other Income 201,997 133,908 Bargain Purchase Gain on Acquisition of Sutter Community Bank Gain on Sale of Securities Gain on Sale of Loans Noninterest Expense 314,499 - - 240,378 756,874 11,485 237,084 382,477 Salaries and Employee Benefits 4,182,051 3,018,770 Occupancy Expenses Equipment Expenses Other Expenses Income Before Taxes Income Taxes Net Income Net Income Per Share - Basic Net Income Per Share - Diluted 704,671 180,299 641,153 175,592 2,182,623 1,518,064 7,249,644 5,353,579 1,637,715 745,621 729,061 350,054 $908,654 $395,567 $0.25 $0.25 $0.18 $0.18 *The accompanying notes are an integral part of these ﬁnancial statements. 26 FINANCIAL STATEMENTS: Statements of Comprehensive Income For the Years Ended December 31, 2015 & 2014 2015 2014 $908,654 $395,567 Net Income Other Comprehensive Income (Loss) Unrealized Gains and Losses on Securities Available for Sale Change in Net Unrealized Gain (Loss) (121,698) Reclassification of Gain Recognized in Net Income, Net - Income Taxes (Benefit): Change in Net Unrealized Gain (Loss) (121,698) (49,896) Reclassification of Gain Recognized in Net Income, Net - Total Other Comprehensive Income (Loss) (49,896) (71,802) 107,307 (11,485) 95,822 43,996 (4,709) 39,287 56,535 Total Comprehensive Income $836,852 $452,102 *The accompanying notes are an integral part of these ﬁnancial statements. 27 FINANCIAL STATEMENTS: Statements of Changes in Shareholders’ Equity For the Years Ended December 31, 2015 & 2014 Common Stock Number of Shares Amount Additional Paid-in Capital Accumulated Deficit Accumulated Other Comprehensive Income (Loss) Total Balance January 1, 2014 1,915,902 $19,146,645 $1,519,254 $(4,247,207) $(67,719) $16,350,973 Net Income Stock-based Compensation Issuance of Stock to Employees in Exchange for Services Rendered Issuance of Common Stock, net of Expenses of $153,529 Other Comprehensive Income, Net of Taxes 395,567 141,382 6,980 46,098 (46,098) 726,752 4,933,735 395,567 141,382 - 4,933,735 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 Net Income Stock-based Compensation Issuance of Stock to Employees in Exchange for Services Rendered Issuance of Common Stock, net of Expenses of $324,959 Issuance of Stock in the Acquisition of Sutter Community Bank Other Comprehensive Loss, Net of Taxes 908,654 185,413 13,770 96,390 (96,390) 1,192,075 8,019,566 1,144,416 8,411,458 908,654 185,413 - 8,019,566 8,411,458 (71,802) (71,802) Balance at December 31, 2015 4,999,895 $40,653,892 $1,703,561 $(2,942,986) $(82,986) $39,331,481 *The accompanying notes are an integral part of these ﬁnancial statements. 28 FINANCIAL STATEMENTS: Statements of Cash Flows For the Years Ended December 31, 2015 & 2014 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 Gain on Sale of Securities Gain on Sale of Loans 2015 2014 $908,654 $395,567 242,997 185,413 522,275 332,000 - 218,299 141,382 314,400 345,000 (11,485) (240,378) (237,084) Loans Originated for Sale (2,310,293) (2,327,174) Proceeds from Sale of Loans 2,587,287 2,578,580 Bargain Purchase Gain (314,499) - Other Items 354,114 (433,553) Net Cash From Operating Activities 2,267,570 983,932 Investing Activities Purchase of Available-for-Sale Securities (39,770,988) (38,733,211) Maturities of Available-for-Sale Securities 27,548,880 10,934,781 Proceeds from Sale of Available-for-Sale Securities - 1,993,315 Net Increase in Loans (37,381,921) (30,764,740) Purchase of Federal Home Loan Bank Stock (427,700) (43,800) Cash Acquired in Acquisition 14,489,998 - Purchase of Premises and Equipment (2,353,093) (103,091) Net Cash From Investing Activities (37,894,824) (56,716,746) Financing Activities Net Increase in Demand Deposits and Savings Accounts 31,374,390 43,550,419 Net Change in Time Deposits (174,240) 13,336,697 Proceeds from Issuance of Common Stock, Net 8,019,566 4,933,735 Net Cash From Financing Activities 39,219,716 61,820,851 Net Increase in Cash and Cash Equivalents 3,592,462 6,088,037 Cash and Cash Equivalents at Beginning of Year 20,469,094 14,381,057 Cash and Cash Equivalents at End of Year $24,061,556 $20,469,094 Supplemental Disclosures of Cash Flow Information Interest Paid Taxes Paid $371,072 $450,025 $455,000 - *The accompanying notes are an integral part of these ﬁnancial statements. 29 FINANCIAL STATEMENTS: Notes to Financial Statements December 31, 2015 & 2014 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 four full-service branches in Visalia, Porterville, Kingsburg and Yuba City, 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 Central Valleys of California. Subsequent Events The Bank has evaluated subsequent events for recognition and disclosure through February 24, 2016, 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, 2015. 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. 30 Notes to Financial Statements Note A - Summary of Signiﬁcant Accounting Policies - Continued portions thereof, are uncollectible. This methodology for determining charge-offs is consistently applied to each segment. Net unrealized losses are recognized through a valuation allowance by charges to income. Gains or losses realized on the sales of loans are recognized at the time of sale and are determined by the difference between the net sales proceeds and the carrying value of the loans sold, adjusted for any servicing asset or liability. Gains and losses on sales of loans are included in noninterest income. Loans Loans receivable that management has the intent and ability to hold for the foreseeable future or until maturity or payoff are reported at their outstanding unpaid principal balances reduced by any charge-offs or speciﬁc valuation accounts and net of deferred fees or costs on originated loans, or unamortized premiums or discounts on purchased loans. Loan origination fees and certain direct origination costs are capitalized and recognized as an adjustment of the yield of the related loan. Loans on which the accrual of interest has been discontinued are designated as nonaccrual loans. The accrual of interest on loans is discontinued when principal or interest is past due 90 days based on the contractual terms of the loan or when, in the opinion of management, there is reasonable doubt as to collectability. When loans are placed on nonaccrual status, all interest previously accrued but not collected is reversed against current period interest income. Income on nonaccrual loans is subsequently recognized only to the extent that cash is received and the loan’s principal balance is deemed collectible. Interest accruals are resumed on such loans only when they are brought current with respect to interest and principal and when, in the judgment of management, the loans are estimated to be fully collectible as to all principal and interest. Allowance for Loan Losses The allowance for loan losses is a valuation allowance for probable incurred credit losses. Loan losses are charged against the allowance when management believes the uncollectability of a loan balance is conﬁrmed. Subsequent recoveries, if any, are credited to the allowance. Management estimates the allowance balance required using past loan loss experience, the nature and volume of the portfolio, information about speciﬁc borrower situations and estimated collateral values, economic conditions, and other factors. Allocations of the allowance may be made for speciﬁc loans, but the entire allowance is available for any loan that, in management’s judgment, should be charged off. Amounts are charged-off when available information conﬁrms that speciﬁc loans or 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 loss experience. Qualitative factors include consideration of the following: changes in lending policies and procedures; changes in economic conditions; changes in the nature and volume of the portfolio; changes in the experience, ability and depth of lending management and other relevant staff; changes in the volume and severity of past due, nonaccrual and other adversely graded loans; changes in the loan review system; changes in the value of the underlying collateral for collateral-dependent loans; concentrations of credit and the effect of other external factors such as competition and legal and regulatory requirements. 31 Notes to Financial Statements Note A - Summary of Signiﬁcant Accounting Policies - Continued 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. Certain Acquired Loans As part of business acquisition, the Bank acquired certain loans that have shown evidence of credit deterioration since origination. These acquired loans are recorded at the allocated fair value, such that there is no carryover of the seller’s allowance for loan losses. Such acquired loans are accounted for individually. The Bank estimates the amount and timing of expected cash ﬂows for each purchased loan, and the expected cash ﬂows in excess of the allocated fair value is recorded as interest income over the remaining life of the loan (accretable yield). The excess of the loan’s contractual principal and interest over expected cash ﬂows is not recorded (non-accretable difference). Over the life of the loan, expected cash ﬂows continue to be estimated. If the present value of expected cash ﬂows is less than the carrying amount, a loss is recorded through the allowance for loan losses. If the present value of expected cash ﬂows is greater than the carrying amount, it is recognized as part of future interest income. 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. Other Real Estate Owned Real estate acquired by foreclosure or deed in lieu of foreclosure is recorded at fair value at the date of foreclosure, establishing a new cost basis by a charge to the allowance for loan losses, if necessary. Other real estate owned is carried at the lower of 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. As of December 31, 2015 other real estate owned consisted of vacant land. The Bank did not have any foreclosures in process as of December 31, 2015. Premises and Equipment Land is carried at cost. 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 and forty years for premises. 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. Other Intangible Assets Other intangible assets consist of core deposit intangible assets arising from a whole bank acquisition. They are initially measured at fair value and then amortized over their estimated useful lives of approximately seven years. Amortization expense in 2015 was $0. Future amortization expense for the next ﬁve years is approximately $54,000 per year. 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. 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 L for additional information on the Bank’s stock option plan. Advertising Costs The Bank expenses the costs of advertising in the period incurred. Income Taxes Deferred income taxes are computed using the asset and liability method, which recognizes a liability or asset representing the tax effects, based on current tax law, of future deductible or taxable amounts attributable to events that have been recognized in the ﬁnancial statements. A valuation allowance is established to reduce the deferred tax asset to the level at which it is “more likely than not” that the tax asset or beneﬁts will be realized. Realization of tax beneﬁts of deductible temporary differences and operating 32 Notes to Financial Statements Note A - Summary of Signiﬁcant Accounting Policies - Continued loss carryforwards depends on having sufﬁcient taxable income of an appropriate character within the carry forward 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. 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 K. Such ﬁnancial instruments are recorded in the ﬁnancial statements when they are funded or related fees are incurred or received. Fair Value Measurement Fair value is the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Current accounting guidance establishes a fair value hierarchy, which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The guidance describes three levels of inputs that may be used to measure fair value: Level 1: Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date. Level 2: Signiﬁcant other observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data. Level 3: Signiﬁcant unobservable inputs that reﬂect a Bank’s own assumptions about the assumptions that market participants would use in pricing an asset or liability. See Note N for more information and disclosures relating to the Bank’s fair value measurements. Reclassiﬁcations Certain reclassiﬁcations have been made in the 2014 ﬁnancial statements to conform to the presentation used in 2015. These reclassiﬁcations had no impact of the Bank’s previously reported ﬁnancial statements. Adopted Accounting Guidance 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 the property 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 did not have a material impact on the Bank’s ﬁnancial statements. Recent Accounting Guidance Not Yet Effective 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 33 Notes to Financial Statements Note A - Summary of Signiﬁcant Accounting Policies - Continued 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. These amendments are effective for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period. Early adoption is permitted only as of annual reporting periods beginning after December 15, 2016, including interim reporting periods within that period. The Bank is currently evaluating the effects of ASU 2014-09 on its ﬁnancial statements and disclosures, if any. On January 5, 2016, the FASB issued Accounting Standards Update 2016-01, Financial Instruments–Overall: Recognition and Measurement of Financial Assets and Financial Liabilities. Changes made to the current measurement model primarily affect the accounting for equity securities with readily determinable fair values, where changes in fair value will impact earnings instead of other comprehensive income. The accounting for other ﬁnancial instruments, such as loans, investments in debt securities, and ﬁnancial liabilities is largely unchanged. The Update also changes the presentation and disclosure requirements for ﬁnancial instruments including a requirement that public business entities use exit price when measuring the fair value of ﬁnancial instruments measured at amortized cost for disclosure purposes. This Update is generally effective for public business entities in ﬁscal years beginning after December 15, 2017, including interim periods within those ﬁscal years. The Bank is currently evaluating the effects of ASU 2016-01 on its ﬁnancial statements and disclosures, if any. period, which can extend for up to one year after the closing date of the transaction. While additional signiﬁcant changes to the closing date fair values are not expected, any information relative to the changes in these fair values will be evaluated to determine if such changes are due to events and circumstances that existed as of the acquisition date. On December 11, 2015, the Bank acquired all the assets and assumed all the liabilities of Sutter Community Bank (“SCB”) in exchange for Bank stock. The Bank issued 1,144,416 shares of Bank common stock with a fair value of $7.35 per share total transaction value of approximately $8,411,000. SCB operated one branch in Yuba City, California. The Bank acquired SCB as the location and culture ﬁt within the Bank’s strategic plans for expansion. A bargain purchase gain totaling $314,499 resulted from the acquisition and is included as a component of noninterest income in the statements of income. For loans acquired from SCB, the contractual amounts due, expected cash ﬂows to be collected and fair value as of December 11, 2015 were as follows (dollar amounts in thousands): Purchased Credit- Impaired All Other Acquired Loans Contractual Amounts Due Cash Flows not Expected to be Collected Expected Cash Flows Interest Component of Expected Cash Flows Fair Value of Acquired Loans $ $ 2,554 364 2,190 237 1,953 60,193 - 60,193 15,945 44,248 $ $ In accordance with generally accepted accounting principles there was no carryover of the allowance for loan losses that had been previously recorded by SCB. The following table represents the assets acquired and liabilities assumed of SCB as of December 11, 2015 and the fair value adjustments and the amounts recorded by the Bank in 2015 under the acquisition method of accounting (dollar amounts in thousands): SCB Book Value Fair Value Adjustments Fair Value Note B - Acquisition The Bank accounted for the following acquisition under the acquisition method of accounting. The acquired assets, assumed liabilities and identiﬁable intangible assets were recorded at their respective acquisition date fair values. The Bank determined the fair value of the securities, loans, core deposit intangible and deposits with the assistance of third party valuations. The fair value of other real estate owned (“OREO”) was based on appraisals. The estimated fair value in this acquisition is subject to reﬁnement as additional information relative to the closing date fair values become available through the measurement ASSETS ACQUIRED Cash and Cash Equivalents Investment Securities Loans, Gross Allowance for Loan Losses Other Bank Stock Premises and Equipment Bank Owned Life Insurance Other Real Estate Owned Deferred Tax Assets Core Deposit Intangible Accrued Interest and Other Assets Total Assets Acquired LIABILITIES ASSUMED Deposits Other Liabilities Total Liabilities Assumed Excess of Assets Acquired Over Liabilities Assumed Stock Consideration Recorded Gain on Acquisition 34 $ ( 14,490 1,906 47,538 1,493) 398 86 2,076 1,171 1,495 - 558 68,225 $ - ( 81) 1,337) ( 1,493 - - - 522) 77 428 219) 161) ( $( ( $ 14,490 1,825 46,201 - 398 86 2,076 649 1,572 428 339 68,064 $ $ $ 58,977 287 59,264 $ ( 84 10) 74 $ 59,061 277 59,338 8,961 68,225 $ ( $( 235) 161) 8,726 8,411 315 $ Notes to Financial Statements Note C - Investment Securities Debt and equity securities have been classiﬁed in the statements of ﬁnancial condition according to management’s intent. The amortized cost of securities and their approximate fair values at December 31 were as follows: De cember 31, 2015 Available-for-Sale Securities: U.S. Government and Agency Securities Mortgaged-Backed Securities De cember 31, 2014 Available-for-Sale Securities: U.S. Government and Agency Securities Mortgaged-Backed Securities Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Fair Value $ 27,505,350 $ 15,261 $( 76,102) $ 27,444,509 26,978,253 116,815 ( 196,628) 26,898,440 $ 54,483,603 $ 132,076 $( 272,730) $ 54,342,949 $ 28,742,398 $ 28,941 $( 84,452) $ 28,686,887 11,793,000 41,983 ( 5,428) 11,829,555 $ 40,535,398 $ 70,924 $( 89,880) $ 40,516,442 The amortized cost and estimated fair value of all investment securities as of December 31, 2015 by expected maturities are shown below. Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. No securities were sold in 2015. Gross realized gains in 2014 on sales of available-for-sale securities were $11,485. Available-for-Sale Securities Amortized Cost Fair Value As of December 31, 2015, the Bank has three 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 $7.3 million were pledged to the Federal Home Loan Bank as discussed in Note G. Securities with a fair value of $17.5 million were pledged to secure public monies and for other purposes as required by law. Note D - Loans The Bank’s loan portfolio consists primarily of loans to borrowers within the Central Valleys of California. Although the Bank seeks to avoid concentrations of loans to a single industry or based upon a single class of collateral, real estate and real estate associated businesses are among the principal industries in the Bank’s market area and, as a result, the Bank’s loan and collateral portfolios are, to some degree, concentrated in those industries. A summary of the changes in the allowance for loan losses as of December 31 follows: Due within One Year Due from One Year to Five Years Due from Five to Ten Years Due after Ten Years $ 15,868,339 12,574,643 4,636,520 21,404,101 $ 15,858,293 12,530,696 4,695,174 21,258,786 Balance at Beginning of Year Additions to the Allowance Charged to Expense Recoveries on Loans Charged-Off 2015 2014 $ 1,723,391 522,275 - 2,245,666 $ 1,417,381 314,400 - 1,731,781 $ 54,483,603 $ 54,342,949 Less Loans Charged-Off ( 100) ( 8,390) $ 2,245,566 $ 1,723,391 The gross unrealized loss and related estimated fair value of investment securities that have been in a continuous loss position for less than twelve months and over twelve months at December 31, 2015 and 2014, are as follows: December 31, 2015: U.S. Government and Agency Securities Mortgaged-Backed Securities December 31, 2014: U.S. Government and Agency Securities Mortgaged-Backed Securities Less than Twelve Months Unrealized Losses Fair Value Over Twelve Months Total Unrealized Losses Fair Value Unrealized Losses Fair Value $( 64,634) $ 13,176,698 $( 11,468) $ 1,488,330 $( 76,102) $ 14,665,028 (196,628) 20,970,132 - - (196,628) 20,970,132 $( 261,262) $ 34,146,830 $( 11,468) $ 1,488,330 $( 272,730) $ 35,635,160 $( 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 35 Notes to Financial Statements Note D - Loans - Continued The following table presents the activity in the allowance for loan losses for the year 2015 and 2014 and the recorded investment in loans and impairment method as of December 31, 2015 and 2014 by portfolio segment: Impaired - A loan is considered impaired, when, based on current information and events, it is probable that the Bank will be unable to collect all amounts due according to the contractual terms of the loan agreement. Additionally, all loans classiﬁed as troubled debt restructurings are considered impaired. The risk category of loans by class of loans was as follows as of December 31, 2015: December 31, 2015 Pass Special Mention Substandard Impaired Total Real Estate Other: Commercial Farmland 1-4 Family Residential Multifamily Residential Construction and Land Development Commercial and Industrial Consumer $ 63,087,928 57,045,546 26,575,768 10,477,245 4,661,388 39,324,577 802,538 $ 432,121 - - - - 10,456 - $ 2,002,513 - 619,303 - 42,794 112,183 - $ 3,313,570 - - - 241,563 83,534 4,541 $ 68,836,132 57,045,546 27,195,071 10,477,245 4,945,745 39,530,750 807,079 $ 201,974,990 $ 442,577 $ 2,776,793 $ 3,643,208 $ 208,837,568 The risk category of loans by class of loans was as follows as of December 31, 2014: December 31, 2014 Pass Special Mention Substandard Impaired Total 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 Past due and nonaccrual loans presented by loan class were as follows as of December 31, 2015 and 2014: December 31, 2015 Real Estate Other: Commercial Farmland 1-4 Family Residential Multifamily Residential Construction and Land Development Commercial and Industrial Consumer December 31, 2014 Real Estate Other: Commercial Farmland 1-4 Family Residential Multifamily Residential Construction and Land Development Commercial and Industrial Consumer 30-59 Days Past Due $ - - - - 39,125 - Still Accruing 60-89 Days Past Due - $ - - - - - - Over 90 Days Past Due Nonaccrual - $ - - - - - - $ 2,566,890 - 33,201 - 241,563 185,896 4,541 $ 39,125 $ - $ - $ 3,032,091 $ - - - - 23,947 - $ - - 180,000 - - - - $ - - - - - - - $ - - - - 313,322 35,100 - $ 23,947 $ 180,000 $ - $ 348,422 December 31, 2015 Allowance for Loan Losses: Beginning of Year Provisions Charge-offs Recoveries Real Estate - Other Construction and Land Development Commercial and Industrial Consumer Total $ 1,167,486 353,698 - - $ ( 48,676 1,539) - - $ 474,196 138,809 (100) - $ 33,033 31,307 - - $ 1,723,391 522,275 (100) - End of Year Reserves: $ 1,521,184 $ 47,137 $ 612,905 $ 64,340 $ 2,245,566 Specific General Purchased Credit Impaired Loans - $ 1,521,184 - - $ 47,137 - - $ 612,905 - - $ 64,340 - $ - 2,245,566 - Loans Evaluated for Impairment: Individually Collectively Purchased Credit Impaired Loans December 31, 2014 Allowance for Loan Losses: Beginning of Year Provisions Charge-offs Recoveries $ 1,521,184 $ 47,137 $ 612,905 $ 64,340 $ 2,245,566 $ 3,313,570 158,612,919 1,627,505 $ 241,563 4,704,182 - $ 83,534 39,350,625 96,591 $ 4,541 802,538 - $ 3,643,208 203,470,264 1,724,096 $ 163,553,994 $ 4,945,745 $ 39,530,750 $ 807,079 $ 208,837,568 $ 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) - End of Year Reserves: $ 1,167,486 $ 48,676 $ 474,196 $ 33,033 $ 1,723,391 Specific General - $ 1,167,486 - $ 48,676 $ 35,100 439,096 - $ 33,033 $ 35,100 1,688,291 Loans Evaluated for Impairment: Individually Collectively $ 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 The Bank categorizes loans into risk categories based on relevant information about the ability of borrowers to service their debt such as current ﬁnancial information, historical payment experience, collateral adequacy, credit documentation, and current economic trends, among other factors. The Bank analyzes loans individually by classifying the loans as to credit risk. This analysis typically includes larger, non-homogeneous loans such as commercial real estate and commercial and industrial loans. This analysis is performed on an ongoing basis as new information is obtained. The Bank uses the following deﬁnitions for risk ratings: Pass - Loans classiﬁed as pass include loans not meeting the risk ratings deﬁned below. Special Mention - Loans classiﬁed as special mention have a potential weakness that deserves management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or of the institution’s credit position at some future date. Substandard - Loans classiﬁed as substandard are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans so classiﬁed have a well-deﬁned weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the institution will sustain some loss if the deﬁciencies are not corrected. 36 Notes to Financial Statements Note D - Loans - Continued Information relating to individually impaired loans presented by class of loans was as follows as of December 31, 2015 and 2014: Impaired Loans Unpaid Principal Balance Recorded Without Specific With Specific Allowance Allowance Investment Related Allowance Average Recorded Investment Interest Income Recognized $ $ $ $ $ 3,910,827 - - - 331,898 141,960 6,470 4,391,155 3,313,570 - - - 241,563 83,534 4,541 3,643,208 3,313,570 - - - 241,563 83,534 4,541 3,643,208 - $ - - - - - - $ - - $ - - - - - - $ - 2,059,000 - - - 20,000 7,000 500 2,086,500 $ $ $ $ $ 138,708 - - - - - - 138,708 December 31, 2015 Real Estate Other: Commercial Farmland 1-4 Family Residential Multifamily Residential Construction and Land Development Commercial and Industrial Consumer December 31, 2014 Real Estate Other: Commercial Farmland 1-4 Family Residential Multifamily Residential Construction and Land Development Commercial and Industrial Consumer - $ - - - 486,434 43,490 - - $ - - - 313,322 35,100 - - $ - - - 313,322 - - - $ - - - - 35,100 - - $ - - - - 35,100 - - $ - - - 359,000 30,000 - - $ - - - - - - $ 529,924 $ 348,422 $ 313,322 $ 35,100 $ 35,100 $ 389,000 $ - 2016 2017 2018 2019 2020 Thereafter $ 392,000 190,000 172,000 173,000 174,000 2,002,000 $ 3,103,000 The Bank has operating leases for branches than will expire at various dates through June 2035. The leases include provisions for periodic rent increases as well as payment by the lessee of certain operating expenses. The leases also include provisions for options to extend the lease. The rental expense relating to the leases and other short term rentals was approximately $344,000 and $316,000 for the years ended December 31, 2015 and 2014, respectively. At December 31, 2015, the future lease rental payable under noncancellable operating lease commitments for the branches was as follows: The outstanding balance and carrying amount of purchased credit impaired loans as of December 31, 2015 were as follows: Outstanding Balance Carrying Amount 2015 2,511,906 1,724,096 $ $ The minimum rental payments shown above are given for the existing lease obligations and are not a forecast of future rental expense. The change in accretable discount on purchased credit impaired loans during the period was as follows: Note F - Deposits At December 31, 2015, the scheduled maturities of time deposits are as follows: 2016 2017 2018 2019 2020 $ 51,131,035 1,616,204 1,241,526 3,509,731 521,098 $ 58,019,594 Balance at January 1 New Loans Purchased Accretion of Income Reversals (Sales and Foreclosures) Restructuring as TDR Transfer to Nonaccretable Discount Balance at December 31 2015 $ - 236,707 - - - 215,070) 21,637 ( $ Income is not recognized on certain purchased loans if the Bank cannot reasonably estimate cash ﬂows expected to be collected. The carrying amount of such loans was $1,297,746 at December 31, 2015. Note E - Premises and Equipment A summary of premises and equipment as of December 31 follows: 2015 2014 Land Building Leasehold Improvements Furniture, Fixtures, and Equipment Less Accumulated Depreciation and Amortization $ 600,000 1,317,517 1,362,552 1,262,844 4,542,913 1,772,435) ( - $ - 1,195,113 917,743 2,112,856 1,529,460) ( $ 2,770,478 $ 583,396 37 Notes to Financial Statements Note G - Other Borrowings The Bank may borrow up to $9.4 million overnight on an unsecured basis from its correspondent banks. As of December 31, 2015, 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 borrow up to approximately $22.0 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 $7.3 million of investment securities as collateral for this line. As of December 31, 2015 the Bank had no amounts outstanding under this arrangement. Note H - Other Expenses Other expenses as of December 31 are comprised of the following: Professional Fees Data Processing Office Expenses Marketing and Business Promotion Insurance Regulatory Assessments Other Expenses 2015 2014 $ 817,560 533,983 213,832 170,806 47,533 150,418 248,491 $ 524,181 279,750 177,370 174,338 43,416 126,283 192,726 $ 2,182,623 $ 1,518,064 Note I - Income Taxes The provision (beneﬁt) for income taxes for the years ended December 31, consists of the following: Current: Federal State Deferred 2015 2014 $ 296,019 101,042 397,061 332,000 $ - 5,054 5,054 345,000 $ 729,061 $ 350,054 The Bank is subject to federal income tax and franchise tax of the state of California. Income tax returns for the years ending after December 31, 2011 are open to audit by the federal authorities and income tax returns for the years ending after December 31, 2010 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. 38 As of December 31, 2015, the Bank has net operating loss carryforwards of approximately $1,771,000 for California franchise tax purposes. The use of the net operating loss carryforwards is limited by Section 382 of the Internal Revenue Service Code to $219,000 per year. California net operating loss carryforwards, to the extent not used will begin to expire in 2028. A comparison of the federal statutory income tax rates to the Bank’s effective income tax rates follows: 2015 2014 Amount Rate Amount Rate Statutory Federal Tax State Tax, Net of Federal Benefit Stock-based Compensation Merger Expenses Bargain Purchase Gain Other Items, Net $ ( 557,000 117,000 30,000 70,000 107,000) 62,061 34.0% 7.1% 1.8% 4.3% 6.5%) 3.8% ( $ 254,000 59,000 18,000 - - 19,054 34.1% 7.9% 2.4% - - 2.6% Actual Tax Expense (Benefit) $ 729,061 44.5% $ 350,054 47.0% Deferred taxes are a result of differences between income tax accounting and generally accepted accounting principles with respect to income and expense recognition. The following is a summary of the components of the net deferred tax asset accounts recognized in the accompanying statement of ﬁnancial condition at December 31: Deferred Tax Assets: Pre-Opening Expenses Allowance for Loan Losses Due to Tax Limitations Depreciation Differences Other Real Estate Owned Differences Operating Loss Carryforwards Unrealized Loss on Available-for-Sale Securities Stock-Based Compensation Purchase Accounting Adjustments Other Assets and Liabilities Deferred Tax Liabilities: Other Assets and Liabilities 2015 2014 $ 432,000 756,000 252,000 713,000 149,000 58,000 352,000 469,000 510,000 3,691,000 $ 367,000 694,000 192,000 - 481,000 8,000 352,000 - 233,000 2,327,000 ( ( 184,000) 184,000) ( ( 110,000) 110,000) Net Deferred Tax Assets $ 3,507,000 $ 2,217,000 Note J - 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, 2015 and 2014 was approximately $5,383,000 and $4,707,000, 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, 2015 and 2014 amounted to approximately $26,512,000 and $25,547,000, respectively. Notes to Financial Statements Note K - Commitments In the ordinary course of business, the Bank enters into ﬁnancial commitments to meet the ﬁnancing needs of its customers. Those instruments involve to varying degrees, elements of credit and interest rate risk not recognized in the Bank’s ﬁnancial statements. The Bank’s exposure to loan loss in the event of nonperformance on commitments to extend credit and standby letters of credit is represented by the contractual amount of those instruments. The Bank uses the same credit policies in making commitments as it does for loans reﬂected in the ﬁnancial statements. As of December 31, 2015 and 2014, the Bank had the following outstanding ﬁnancial commitments whose contractual amount represents credit risk: Commitments to Extend Credit $ 33,130,000 $ 17,072,000 2015 2014 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. The Bank is involved in various litigation, which has arisen in the ordinary course of its business. In the opinion of management, the disposition of such pending litigation will not have material effect on the Bank’s ﬁnancial statements. Note L - Stock-Based Compensation Plans The Bank’s 2007 Stock Option Plan was approved by its shareholders in July 2008. Under the terms of the 2007 Stock Option Plan, ofﬁcers and key employees may be granted both nonqualiﬁed and incentive stock options and directors and organizers, who are not also an ofﬁcer or employee, may only be granted nonqualiﬁed stock options. This plan was replaced by the 2013 Omnibus Stock Incentive Plan. The Bank’s 2013 Omnibus Stock Incentive Plan (“2013 Plan”) was approved by its shareholders in May 2013. Under the terms of the 2013 Plan, ofﬁcers and key employees may be granted both nonqualiﬁed and incentive stock options and directors and other consultants, who are not also an ofﬁcer or employee, may only be granted nonqualiﬁed stock options. The 2013 Plan also permits the grant of stock appreciation rights (“SARs”), restricted shares, deferred shares, performance shares and performance unit awards. The 2013 Plan provides for the total number of awards of common stock that may be issued over the term of the plan not to exceed 573,533 shares, of which a maximum of 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 $185,413 and $141,382 for the periods ended December 31, 2015 and 2014. The Bank also recognized income tax beneﬁts related to stock-based compensation of $40,263 in 2015 and $35,876 in 2014. 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: 2015 2014 Expected Volatility Expected Term Expected Dividends Risk Free Rate Grant Date Fair Value 43.28% 6.04 Years None 1.23% 3.00 $ 42.50% 6.06 Years None 1.21% 2.85 $ Since the Bank has a limited amount of historical stock activity the expected volatility is based on the historical volatility of similar banks that have a longer trading history. The expected term represents the estimated average period of time that the options remain outstanding. Since the Bank does not have sufﬁcient historical data on the exercise of stock options, the expected terms is based on the “simpliﬁed” method that measures the expected term as the average of the vesting period and the contractual term. The risk free rate of return reﬂects the grant date interest rate offered for a comparable U.S. Treasury bonds over the expected term of the options. 39 Notes to Financial Statements Note L - Stock-Based Compensation Plans - Continued A summary of the status of the Bank’s stock options as of December 31, 2015 and changes during the year ended thereon is presented below: Note M - Earnings Per Share (“EPS”) The following is a reconciliation of net income and shares outstanding to the income and number of shares used to compute EPS: Weighted- Average Exercise Price 9.51 $ 10.00 $ $ 7.05 $ - $ 10.00 Shares ( 371,980 90,000) 134,000 - 6,250) ( Outstanding at Beginning of Year Cancelled Granted Exercised Forfeited Weighted- Average Remaining Contractual Term Aggregate Intrinsic Value Net Income as Reported Shares Outstanding at Year-End Impact of Weighting Shares Issued During the Year 2015 2014 Income Shares Income Shares $ 908,654 $ 395,567 4,999,895 (1,304,389) 3,695,506 12,252 3,707,758 395,567 $ 395,567 2,649,634 (446,025) 2,203,609 4,082 2,207,691 Used in Basic EPS 908,654 Dilutive Effect of Outstanding Deferred Shares Used in Dilutive EPS $ 908,654 Outstanding at End of Year 409,730 $ 8.59 5.51 Years $ 69,000 Options Exercisable 250,380 $ 9.57 3.10 Years $ 19,000 As of December 31, 2015, there was approximately $292,000 of total unrecognized compensation cost related to the outstanding stock options that will be recognized over a weighted-average period of 2.1 years. During 2015 the Bank cancelled 90,000 options with a weighted-average exercise price of $10.00 held by directors and granted 90,000 options that expire in ten years and vest over three years. This is treated as a modiﬁcation and the incremental increase in the fair value was $1.83 per option. Additional compensation expense of $13,725 was recognized in 2015 as a result of the modiﬁcation. A summary of the status of the Bank’s deferred share awards as of December 31, 2015 and changes during the year ended thereon is presented below: Weighted- Average Grant-Date Fair Value Shares Nonvested at January 1, 2015 New Deferred Share Awards Shares Vested and Issued Shares Forfeited 30,155 2,408 13,770) 385) ( ( $ $ $ $ 7.00 7.00 6.60 7.00 Nonvested at December 31, 2015 18,408 $ 7.00 As of December 31, 2015 there was approximately $54,000 of unrecognized compensation cost related to the restricted stock grants that will be recognized over a weighted-average period of 1 year. The fair value of shares issued in 2015 and 2014 was approximately $111,000 and $51,000, respectively. As of December 31, 2015 and 2014 there were 385,730 and 371,930, respectively, stock options that could potentially dilute earnings per share in the future that were not included in the computation of diluted earnings per shares because to do so would have been antidilutive. Note N - Fair Value Measurement The following is a description of valuation methodologies used for assets and liabilities recorded at fair value: Securities The fair values of securities available for sale are determined by matrix pricing, which is a mathematical technique used widely in the industry to value debt securities without relying exclusively on quoted prices for speciﬁc securities but rather by relying on the securities’ relationship to other benchmark quoted securities (Level 2). Collateral-Dependent Impaired Loans: The Bank does not record loans at fair value on a recurring basis. However, from time to time, fair value adjustments are recorded on these loans to reﬂect partial write-downs, through charge-offs or speciﬁc reserve allowances, that are based on the current appraised or market-quoted value of the underlying collateral. The fair value estimates for collateral-dependent impaired loans are generally based on recent real estate appraisals or broker opinions, obtained from independent third parties, which are frequently adjusted by management to reﬂect current conditions and estimated selling costs (Level 3). Other Real Estate Owned: Nonrecurring adjustments to certain commercial and residential real estate properties classiﬁed as other real estate owned (“OREO”) are measured at the lower of carrying amount or fair value, less costs to sell. Fair values are generally based on third party appraisals or broker opinions, which are frequently adjusted by management to reﬂect current conditions and estimated selling costs, resulting in a Level 3 classiﬁcation. In cases where the carrying amount exceeds the fair value, less costs to sell, an impairment loss is recognized. 40 Notes to Financial Statements Note N - Fair Value Measurement - Continued Appraisals for other real estate owned are performed by certiﬁed general appraisers whose qualiﬁcations and licenses have been reviewed and veriﬁed by the Bank. Once received, a member of the loan department reviews the assumptions and approaches utilized in the appraisal as well as the overall resulting fair value. The Bank also determines what additional adjustments, if any, should be made to the appraisal values on any remaining other real estate owned to arrive at fair value. No signiﬁcant adjustments to appraised values have been made as a result of this process as of December 31, 2015. The following table provides the hierarchy and fair value for each major category of assets and liabilities measured at fair value at December 31, 2015: Fair value estimates are based on ﬁnancial instruments both on and off the balance sheet without attempting to estimate the value of anticipated future business and the value of assets and liabilities that are not considered ﬁnancial instruments. Additionally, tax consequences related to the realization of the unrealized gains and losses can have a potential effect on fair value estimates and have not been considered in many of the estimates. The following methods and assumptions were used to estimate the fair value of signiﬁcant ﬁnancial instruments not previously presented: Cash and Cash Equivalents The carrying amounts reported in the balance sheet for cash and cash equivalents approximate the fair values of those assets due to the short-term nature of the assets. Fair Value Measurements Using: Level 2 Level 3 Level 1 Total Total Losses December 31, 2015 Assets measured at fair value on a recurring basis Securities Available for Sale Value on a Non-recurring Basis Other Real Estate Owned, Net December 31, 2014 Assets measured at fair value on a recurring basis Securities Available for Sale $ - $ 54,342,949 $ - $ 54,342,949 $ - $ - $ - $ 649,092 $ 649,092 $ - $ - $ 40,516,442 $ - $ 40,516,442 $ - Loans For variable rate loans that re-price frequently and with 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 terms to borrowers with similar credit quality. Quantitative information about the Bank’s nonrecurring Level 3 fair value measurements as of December 31, 2015 is as follows: December 31, 2015 Amount Valuation Technique Fair Value Unobservable Input Range Other Real Estate Owned $ 649,092 Third Party Appraisals Liquidation and Selling Costs 8% to 50% Note O - Fair Value of Financial Instruments The fair value of a ﬁnancial instrument is the amount at which the asset or obligation could be exchanged in a current transaction between willing parties, other than in a forced or liquidation sale. Fair value estimates are made at a speciﬁc point in time based on relevant market information and information about the ﬁnancial instrument. These estimates do not reﬂect any premium or discount that could result from offering for sale at one time the entire holdings of a particular ﬁnancial instrument. Because no market value exists for a signiﬁcant portion of the ﬁnancial instruments, fair value estimates are based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of various ﬁnancial instruments, and other factors. These estimates are subjective in nature, involve uncertainties and matters of judgment and, therefore, cannot be determined with precision. Changes in assumptions could signiﬁcantly affect the estimates. 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. Noninterest-Bearing and Interest Bearing Demand Deposits The fair values for noninterest-bearing deposits and 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 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 currently charged to enter into similar agreements. The fair value of these ﬁnancial instruments is not material. 41 Quantitative measures established by regulation to ensure capital adequacy require the Bank to maintain minimum amounts and ratios (set forth in the table below) of total, Tier 1 and CET1 capital (as deﬁned in the regulations) to risk-weighted assets (as deﬁned), and of Tier 1 capital (as deﬁned) to average assets (as deﬁned). Management believes, as of December 31, 2015 and 2014, that the Bank meets all capital adequacy requirements. As of December 31, 2015, the most recent notiﬁcation from the FDIC categorized the Bank as well capitalized under the regulatory framework for prompt corrective action (there are no conditions or events since that notiﬁcation that management believes have changed the Bank’s category). To be categorized as well capitalized, the Bank must maintain minimum ratios as set forth in the table below. The following table also sets forth the Bank’s actual capital amounts and ratios (dollar amounts in thousands): Amount of Capital Required Actual For Capital Adequacy Purposes To Be Well- Capitalized Under Prompt Corrective Provisions Amount Ratio Amount Ratio Amount Ratio As of December 31, 2015: Total Capital (to Risk-Weighted Assets) Tier 1 Capital (to Risk-Weighted Assets) CET1 Capital (to Risk-Weighted Assets) Tier 1 Capital (to Average Assets) $38,237 $35,983 $35,983 $35,983 15.7% 14.8% 14.8% 12.2% $19,464 $14,598 $10,949 $11,816 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 8.0% 6.0% 4.5% 4.0% 8.0% 4.0% 4.0% $24,330 $19,464 $15,815 $14,770 10.0% 8.0% 6.5% 5.0% $14,893 10.0% $8,936 $9,101 6.0% 5.0% The California Financial Code provides that a bank may not make a cash distribution to its shareholders in excess of the lesser of the bank’s undivided proﬁts or the bank’s net income for its last three ﬁscal years less the amount of any distribution made to the bank’s shareholders during the same period. Notes to Financial Statements Note O - Fair Value of Financial Instruments - Continued The fair value hierarchy level and estimated fair value of signiﬁcant ﬁnancial instruments at December 31, 2015 and 2014 are summarized as follows (dollar amount 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 2015 2014 Fair Value Hierarchy Carrying Value Fair Value Carrying Value Fair Value Level 1 Level 2 Level 2 $ 24,062 54,343 206,133 1,466 $ 20,062 54,343 205,266 N/A $ 20,469 40,516 123,154 638 $ 20,469 40,516 123,019 N/A Level 1 Level 2 198,658 58,019 198,658 57,918 125,497 40,920 125,497 40,901 Note P - Employee Beneﬁt Plan The Bank adopted a 401(k) Plan for its employees in 2008. Under the plan, eligible employees may defer a portion of their salaries. The plan also provides for a non-elective discretionary contribution by the Bank. The Bank made no contributions for 2015 or 2014. Note Q - Regulatory Matters The Bank is subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory - and possibly additional discretionary - actions by regulators that, if undertaken, could have a direct material effect on the Bank’s ﬁnancial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet speciﬁc capital guidelines that involve quantitative measures of their assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. The capital amounts and classiﬁcation are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. In July, 2013, the federal bank regulatory agencies approved the ﬁnal rules implementing the Basel Committee on Banking Supervision’s capital guidelines for U.S. banks. The new rules became effective on January 1, 2015, with certain of the requirements phased-in over a multi-year schedule, and fully phased in by January 1, 2019. The rules include a new common equity Tier 1 (“CET1”) capital to risk-weighted assets ratio with minimums for capital adequacy and prompt corrective action purposes of 4.5% and 6.5%, respectively. The net unrealized gain or loss on available for sale securities is not included in computing regulatory capital. Capital amounts and ratios for December 31, 2014 are calculated using Basel I rules. 42 xliv Top 5 Reasons to Invest in Suncrest Stock Premier Management Team With Equity Profitability with Improving Operating Leverage Attractive Market for Community Banking Positioned for Continued Business Expansion Fewer and Fewer Community Banks 2015 Annual Report We’re the bank where local matters. Kingsburg Branch 1580 Draper Street (559) 802-1070 Porterville Branch 65 West Olive Ave (559) 306-1300 Visalia Branch 400 West Center Ave (559) 802-1000 Yuba City Branch 700 Plumas St. (530) 674-8900 Fresno Office 2014 S Tulare Street Suite 406 (559) 286-9621 www.suncrestbank.com Top 2002015 Healthiest Banks by DepositAccounts.com

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