Fresno Branch
663 West Nees Ave.
(559) 225-1700
Kingsburg Branch
1580 Draper St.
(559) 802-1070
Porterville Branch
65 West Olive Ave.
(559) 306-1300
Visalia Branch
501 West Main St.
(559) 802-1000
Yuba City Branch
700 Plumas St.
(530) 674-8900
www.suncrestbank.com
2016 Annual Report
2017
Table Of Contents
02
Board of Directors
04
Dear Shareholders and Customers
09
Independent Auditor’s Report
10
Financial Statements
10
Statements of Financial Condition
12
Statements of Income
13
Statements of Comprehensive Income
14
Statement of Changes in Shareholders’ Equity
15
Statements of Cash Flows
16
Notes to Financial Statements
Board of Directors
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.
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.
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.
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.
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.
Florencio “Frank” Paredez
A native of Tulare County, Frank graduated
from College of the Sequoias and farms in
the Exeter area. He owns a packinghouse
and the Hungry Hollow Borrow Pit in
Porterville and is active in local and
San Francisco-based farmers’ markets.
Frank has been active on many boards of
directors for organizations throughout
Tulare County.
2
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.
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.
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.
Eric Wilkins
Eric was formerly the Vice Chairman of Security First Bank, and
was born and raised in Fresno. He received an Associates of
Arts degree from Santa Barbara City College and his Bachelor
of Political Science degree from University of California, Santa
Barbara. Eric, along with his family, owns and operates Wilkins
Enterprises. The company specializes in the development,
construction and management of office and industrial buildings
in the Central Valley. Eric holds a license as a real estate
broker from the State of California and an “A” class general
engineering contractor’s license also issued by the State. He
sat as chair of the Oakhurst Citizens Advisory Committee
and has been a member of the public relations committee for
Madera County Maintenance District 22, and is a member
of the Eastern Madera County Chamber of Commerce. He is
also a member of the National Association of Realtors and the
California Association of Realtors.
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,
On behalf of the Suncrest Bank Board of Directors, we are pleased to present our
annual report for 2016. It has been a truly remarkable year for our bank.
Named to the OTCQX Top 50 Stocks for 2016
This year our strategic plan has really started to pay-off
in terms of our stock market performance, with Suncrest
Bank being named to the 2017 OTCQX® Best 50 List. This
is an annual ranking of the top 50 U.S. and international
companies traded on the OTCQX market. The ranking
is calculated based on an equal weighting of one-year
total shareholder return and average daily dollar volume
growth in the calendar year 2016. Suncrest Bank was
ranked number 15 on the list, ranking us as the second best
performing bank stock on the OTCQX market.
Record Breaking Results
We also had a record breaking year in terms of our financial
results. At December 31, 2016, our assets totaled $447.7 million
which is an increase of $150.8 million, or 51% over the prior
years ending balance. Our loan portfolio grew by $98.9 million
to $307.7 million, a 47 % increase over 2015, and our total
deposits grew by $132.3 million and ended the year at $389.0
million, a 52% increase over the prior year. Our net income for
the year was $1,733,000 or $2,263,000 excluding one-time
expenses associated with our acquisition of Security First Bank
in December 2016. Both our Return on Average Assets (ROAA)
and our Efficiency Ratio have continued to improve in line with our
strategic growth trajectory and were 0.49% (or 0.69% excluding
one-time expenses) and 76.7% (or 71.3% excluding one-time
expenses) respectively.
Income Before Taxes
$3.945m
$3.161m
$1.638m
100%
75%
50%
25%
0%
Efficiency Ratio
77.0%
76.7%
71.3%
2012 2013 2014 2015 2016 2016
Excluding
Merger
Expenses
Actual
2012 2013 2014 2015 2016 2016
Excluding
Merger
Expenses
Actual
Asset Growth
$447.7m
$296.9m
3.00%
2.50%
2.00%
1.50%
1.00%
0.50%
0%
LTM Return on Assets (ROAA)
0.69%
0.41%
0.49%
2012 2013 2014 2015 2016
2012 20131 2014 2015 2016 2016
Excluding
Merger
Expenses
Actual
1 2013 includes the impact of the DTA
$4,000,000
$3,000,000
$2,000,000
$1,000,000
$0
$500,000,000
$400,000,000
$300,000,000
$200,000,000
$100,000,000
$0
4
One of the fastest growing banks in country
In the fall of 2013, we set for ourselves the ambitious target of reaching $500 million
in total assets within five years. We are 90% of the way to reaching that goal with
nearly two years to spare, and have grown our total assets by 348% since 20132. This
outstanding growth rate places Suncrest Bank as the 23rd fastest growing bank in the
US and 3rd fastest growing bank in the State of California, and is a testament to the
hard work and dedication of our Board, management and entire employee group.
2 % growth in total assets from 3/31/13 to 12/31/16
3rd
fastest growing bank
23rd
fastest growing bank
IN CA OUT OF APPROX. 190 SINCE 20132
IN THE US OUT OF APPROX. 6,800 SINCE 20132
Rank
Name
Percent
Rank
Name
State
Percent
1
2
3
4
5
Banc of California
First Foundation Bank
Suncrest Bank
Premier Business Bank
Pacific Western Bank
569
359
348
347
314
21
First Foundation Bank
CA
359
22
Sunshine Bank
23
Suncrest Bank
24
Premier Business Bank
25
ConnectOne Bank
FL
CA
CA
NJ
355
348
347
340
Efficiency Ratio
Source: Bankshape www.bankshape.com
Source: Bankshape www.bankshape.com
77.0%
76.7%
71.3%
Actual
Excluding
Merger
Expenses
LTM Return on Assets (ROAA)
Prudent and Profitable Growth
Through this period of rapid growth we have
steadily improved the credit quality of our portfolio.
In fact, the legacy Suncrest Bank has had less than
$100,000 in net charge-offs since its inception. We
did acquire a small distressed loan pool as a result
of our acquisition of Sutter Community Bank in
December 2015, consisting of approximately $3.8
million in non-performing loans and $0.6 million in
OREO, and we have been able to manage that down
significantly and non-performing assets improved
to 0.47% of total assets at December 31, 2016.
NPLs / Total Loans
Gross Loans
Loan Growth & Credit Quality
$350
$300
$250
$200
$150
$100
$50
$0
Acquisition of
Security First
Acquisition
of Sutter
Q2
‘13
Q3
‘13
Q4
‘13
Q1
‘14
Q2
‘14
Q3
‘14
Q4
‘14
Q1
‘15
Q2
‘15
Q3
‘15
Q4
‘15
Q1
‘16
Q2
‘16
Q3
‘16
Q4
‘16
2.50%
2.00%
1.50%
1.00%
0.50%
0.00%
5
2012 2013 2014 2015 2016 2016
2012 2013 2014 2015 2016 2016
$4,000,000
$3,000,000
$2,000,000
$1,000,000
$0
$500,000,000
$400,000,000
$300,000,000
$200,000,000
$100,000,000
$0
Income Before Taxes
$3.945m
$3.161m
$1.638m
Actual
Excluding
Merger
Expenses
Asset Growth
$447.7m
$296.9m
100%
75%
50%
25%
0%
3.00%
2.50%
2.00%
1.50%
1.00%
0.50%
0%
2012 2013 2014 2015 2016
2012 20131 2014 2015 2016 2016
0.69%
0.41%
0.49%
Actual
Excluding
Merger
Expenses
1 2013 includes the impact of the DTA
Prudent and Profitable Growth (continued)
In addition, we have been able to maintain an average loan
yield of approximately 5.5% throughout this same period of
rapid growth, while significantly reducing our average cost of
deposits by over 20 basis points.
Loan Trends
Yield on Loans
Total Loans ($mm)
Q1
‘13
Q2
‘13
Q3
‘13
Q4
‘13
Q1
‘14
Q2
‘14
Q3
‘14
Q4
‘14
Q1
‘15
Q2
‘15
Q3
‘15
Q4
‘15
Q1
‘16
Q2
‘16
Q3
‘16
Q4
‘16
Deposit Trends
Cost of Funds
Average Deposits ($mm)
6.40%
6.00%
5.60%
5.20%
4.80%
0.50%
0.40%
0.30%
0.20%
0.10%
0.00%
$400
$300
$200
$100
$0
$500
$400
$300
$200
$100
$0
Q1
‘13
Q2
‘13
Q3
‘13
Q4
‘13
Q1
‘14
Q2
‘14
Q3
‘14
Q4
‘14
Q1
‘15
Q2
‘15
Q3
‘15
Q4
‘15
Q1
‘16
Q2
‘16
Q3
‘16
Q4
‘16
Acquisition of Security First Bank
In December of 2016, we completed the acquisition of Security
First Bank in Fresno, California, welcoming their shareholders,
customers and staff to the Suncrest family. Former Vice
Chairman, Eric Wilkins joined the Board of Suncrest Bank and
former President and CEO, Steve Jones, joined us as our Chief
Operating Officer. A number of the former Security First Bank
Board Directors have also established a local advisory Board to
support our Fresno market team as they continue to build our
business in that community. The transaction was attractively
priced and structured for both sets of shareholders. We
minimized dilution for existing shareholders, with pre-merger
tangible book value per share expected to be earned back in just
over one year, and Security First Bank shareholders, who opted
to take stock in the transaction, have seen a 67% increase in the
value of their holdings based on a 12/30/16 closing price for
SBKK of $10.50.
Our Local Market Business Model
At the heart of our success has been our Local Market Business
Model. We have four distinct market areas – Visalia-Kingsburg,
Porterville, Yuba-Sutter and Fresno – each one led by a Market
President, with considerable local decision making authority,
focused on growing only locally sourced deposits that are in turn
6
only used to fund small business and ag lending in their respective
markets. In each market, we have either Main Board Directors or Local
Advisory Board Directors and these Directors actively support their
Market Presidents in the building of their businesses. In many ways,
each of our main branches feel and operate like standalone community
banks run by people from the local area, for people in the local area,
supported by a group of local community leaders. This model has
been in place since early 2014 for both Visalia and Porterville and in
that time we have increased our market share3 from 2.67% to 5.36%
in Visalia (growth of 101%) and from 3.85% to 8.18% in Porterville
(growth of 112%). The model has been in place in Yuba–Sutter since
January of 2016, just after we acquired Sutter Community Bank, and
we are currently in the process of implementing it in Fresno, following
the acquisition of Security First Bank in December of 2016. Our market
share in each of those communities is 3.65% and 0.64%4 respectively
and we expect to see similar growth rates to those achieved in our
Visalia and Porterville markets, over the next three years.
The Future of Community Banking
We designed our Local Market Business Model by leaning heavily on
the lessons of the past and the way banking “used to be”, back in the
day when your local branch manager could make decisions on the spot
and all your banking and lending needs could be served in one place.
However, that doesn’t mean we are living in the past. We are equally
committed to ensuring we make the best use of modern technology
to serve our customer needs quickly and effectively, and that we
continue to innovate how our products and services are delivered to the
customers and communities we serve. We believe our new state-of the
art flagship branch in downtown Visalia reflects this commitment and
represents the future of community banking, where simple transactions
are executed effortlessly using new digital technology but where
important conversations about your financial needs are held face-to-
face in a welcoming, modern and community focused environment. The
new branch, which we will use as a template to make improvements
throughout our network, includes a commercial coffee shop and café,
an open plan layout utilizing cash recycler stations rather than the
traditional teller line, paperless iPad enabled new account opening,
and a giant video wall and community presentation space that our
clients and local community can utilize for meetings and audio-visual
presentations to help support their own businesses or local events.
We believe this combination of technology together with face-to-face
interaction truly is the future of community banking.
In closing, we want to thank our Board of Directors for their continued
guidance and commitment, and all our shareholders and customers for
their ongoing investment and support.
William A. Benneyan
Chairman
Ciaran McMullan
President & CEO
3 Source: www.FDIC.gov. Market share data as at 6/30/13 compared to 6/30/16
4 Source: www.FDIC.gov. Market share data as at 6/30/16
Ciaran McMullan
President & CEO
This statement has not been reviewed, or confirmed for accuracy
or relevance, by the Federal Deposit Insurance Corporation.
7
Table Of Financial Statements
09
Independent Auditor’s Report
10
Financial Statements
10
Statements of Financial Condition
12
Statements of Income
13
Statements of Comprehensive Income
14
Statement of Changes in Shareholders’ Equity
15
Statements of Cash Flows
16
Notes to Financial Statements
8
Vavrinek, Trine, Day & Co., LLP
Certified Public Accountants
INDEPENDENT AUDITOR'S REPORT
V A L U E T H E D I F F E R E N C E
Board of Directors and Shareholders of
Suncrest Bank
Report on Financial Statements
We have audited the accompanying financial statements of Suncrest Bank, which are comprised of the statements
of financial condition as of December 31, 2016 and 2015, 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, 2016 and 2015, 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
March 29, 2017
25231 Paseo De Alicia, Suite 100 Laguna Hills, CA 92653 Tel: 949.768.0833 Fax: 949.768.8408 www.vtdcpa.com
1
9
FINANCIAL STATEMENTS:
Statements of Financial Condition
December 31, 2016 & 2015
Assets
Assets
Cash and Due from Banks
Federal Funds Sold
2016
2015
$15,567,875
$5,370,556
36,979,000
8,691,000
Interest-Bearing Deposits in Other Banks
10,000,000
10,000,000
Total Cash and Cash Equivalents
62,546,875
24,061,556
Investment Securities Available for Sale
53,567,064
54,342,949
Loans:
Real Estate - Other
229,229,127
163,553,994
Construction and Land Development
14,276,680
4,945,745
Commercial and Industrial
Consumer
Total Loans
63,878,883
39,530,750
352,881
807,079
307,737,571
208,837,568
Deferred Loan Fees, Net of Costs
(219,817)
(458,940)
Allowance for Loan Losses
Net Loans
(2,496,163)
(2,245,566)
305,021,591
206,133,062
Federal Home Loan Bank and Other Bank Stock, at Cost
3,152,891
1,465,968
Premises and Equipment
Other Real Estate Owned
Bank Owned Life Insurance
Net Deferred Tax Assets
Goodwill
Core Deposit Intangible
4,218,360
2,778,028
788,842
649,092
5,114,446
2,080,857
5,661,000
3,507,000
3,325,220
1,576,611
-
428,000
Accrued Interest and Other Assets
2,679,728
1,436,599
$447,652,628
$296,883,111
*The accompanying notes are an integral part of these financial statements.
10
Liability & Shareholders’ Equity
Liabilities And Shareholders' Equity
Deposits:
2016
2015
Noninterest-bearing Demand
$122,835,165
$84,064,420
Savings, NOW and Money Market Accounts
181,779,826
114,593,224
Time Deposits Under $250,000
44,831,946
31,588,069
Time Deposits $250,000 and Over
39,539,342
26,431,525
Total Deposits
388,986,279
256,677,238
Accrued Interest and Other Liabilities
1,375,691
874,392
Total Liabilities
390,361,970
257,551,630
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,
6,979,497 in 2016 and 4,999,895 in 2015
Additional Paid-in Capital
Accumulated Deficit
Accumulated Other Comprehensive
Income Loss - Net
-
-
57,046,519
40,653,892
1,851,183
1,703,561
(1,210,042)
(2,942,986)
Unrealized Loss on Securities Available for Sale,
Net of Taxes of $275,882 in 2016 and $57,668 in 2015
(397,002)
(82,986)
Total Shareholders’ Equity
57,290,658
39,331,481
$447,652,628
$296,883,111
*The accompanying notes are an integral part of these financial statements.
11
FINANCIAL STATEMENTS:
Statements of Income
For the Years Ended December 31, 2016 & 2015
Income
Interest Income
Interest and Fees on Loans
$12,905,528
$8,196,445
2016
2015
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
861,307
336,770
725,238
118,602
14,103,605
9,040,285
203,798
161,343
448,644
3,806
656,248
226,177
5
387,525
13,447,357
8,652,760
235,000
522,275
Net Interest Income After Provision For Loan Losses
13,212,357
8,130,485
Noninterest Income
Service Charges, Fees, and Other Income
535,563
201,997
Bargain Purchase Gain on Acquisition
of Sutter Community Bank
Gain on Sale of Loans
Noninterest Expense
-
314,499
568,612
240,378
1,104,175
756,874
Salaries and Employee Benefits
6,092,427
4,182,051
Occupancy Expenses
Equipment Expenses
Other Expenses
Income Before Taxes
Income Taxes
Net Income
Net Income Per Share - Basic
Net Income Per Share - Diluted
962,162
370,703
704,671
180,299
3,730,596
2,182,623
11,155,888
7,249,644
3,160,644
1,637,715
1,427,700
729,061
$1,732,944
$908,654
$0.34
$0.34
$0.25
$0.25
*The accompanying notes are an integral part of these financial statements.
12
FINANCIAL STATEMENTS:
Statements of
Comprehensive Income
For the Years Ended December 31, 2016 & 2015
Comprehensive Income
Net Income
Other Comprehensive Income (Loss)
Unrealized Gains and Losses on
Securities Available for Sale
Change in Net Unrealized Loss
Income Taxes (Benefit):
Change in Net Unrealized Loss
2016
2015
$1,732,944
$908,654
(532,230)
(532,230)
(121,698)
(121,698)
(218,214)
(218,214)
(49,896)
(49,896)
Total Other Comprehensive Loss
(314,016)
(71,802)
Total Comprehensive Income
$1,418,928
$836,852
*The accompanying notes are an integral part of these financial statements.
13
FINANCIAL STATEMENTS:
Statements of Changes in
Shareholders’ Equity
For the Years Ended December 31, 2016 & 2015
Statements of Changes in Shareholders’ Equity
Common Stock
Number of
Shares
Amount
Additional
Paid-in Capital
Accumulated
Deficit
Accumulated
Other
Comprehensive
Loss
Total
Balance January 1, 2015
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
908,654
185,413
13,770
96,390
(96,390)
1,192,075
8,019,566
Issuance of Common Stock in the
Acquisition of Sutter Community Bank
1,144,416
8,411,458
Other Comprehensive
Loss, Net of Taxes
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
Net Income
Stock-based Compensation
1,732,944
283,432
Stock Options Exercised
23,000
145,050
Issuance of Stock to Employees
in Exchange for Services Rendered
Issuance of Common Stock, net
of Expenses of $338,904
Issuance of Stock in the Acquisition
of Security First Bank
Other Comprehensive
Loss, Net of Taxes
19,330
135,810
(135,810)
848,486
6,661,105
1,088,786
9,450,662
1,732,944
283,432
145,050
-
6,661,105
9,450,662
(314,016)
(314,0162)
Balance at December 31, 2016
6,979,497
$57,046,519
$1,851,183
$(1,210,042)
$(397,002)
$57,290,658
*The accompanying notes are an integral part of these financial statements.
14
FINANCIAL STATEMENTS:
Statements of Cash Flows
For the Years Ended December 31, 2016 & 2015
Cash Flows
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
2016
2015
$1,732,944
$908,654
546,429
283,432
235,000
242,997
185,413
522,275
Deferred Tax (Benefit) Expense
(196,000)
332,000
Earnings on Bank owned Life Insurance
Gain on Sale of Other Real Estate Owned
(62,710)
(13,028)
(4,938)
-
Gain on Sale of Loans
(568,612)
(240,378)
Loans Originated for Sale
(6,255,627)
(2,310,293)
Proceeds from Sale of Loans
6,881,592
2,587,287
Bargain Purchase Gain
Other Items
-
(314,499)
(412,572)
359,052
Net Cash From Operating Activities
2,170,848
2,267,570
Investing Activities
Purchase of Available-for-Sale Securities
(21,078,836)
(39,770,988)
Maturities of Available-for-Sale Securities
30,660,376
27,548,880
Net Increase in Loans
(20,576,128)
(37,381,921)
Purchase of Federal Home Loan Bank Stock
(299,100)
(427,700)
Proceeds from Sale of Other Real Estate Owned
26,278
-
Cash (Paid) Acquired in Acquisition
(3,441,268)
14,489,998
Purchase of Premises and Equipment
(1,869,458)
(2,353,093)
Net Cash From Investing Activities
(16,578,136)
(37,894,824)
Financing Activities
Net Increase in Demand Deposits and Savings Accounts
26,196,602
31,374,390
Net Change in Time Deposits
19,889,850
(174,240)
Proceeds from Issuance of Common Stock, Net
6,661,105
8,019,566
Proceeds from Exercise of Stock Options
145,050
-
Net Cash From Financing Activities
52,892,607
39,219,716
Net Increase in Cash and Cash Equivalents
38,485,319
3,592,462
Cash and Cash Equivalents at Beginning of Year
24,061,556
20,469,094
Cash and Cash Equivalents at End of Year
$62,546,875
$24,061,556
Supplemental Disclosures of Cash Flow Information
Interest Paid
Taxes Paid
$639,386
$371,072
$2,005,000
$455,000
*The accompanying notes are an integral part of these financial statements.
15
FINANCIAL STATEMENTS:
Notes to Financial Statements
December 31, 2016 & 2015
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 five full-
service branches in Visalia, Porterville, Kingsburg, Fresno 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 Valley of California.
Subsequent Events
The Bank has evaluated subsequent events for recognition
and disclosure through March 29, 2017, 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, interest bearing deposits with
original maturity of 90 days or less and federal funds sold.
Generally, federal funds are sold for periods of 90 days or less.
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, 2016.
The Bank maintains amounts due from banks, which may
exceed federally insured limits. The Bank has not experienced
any losses in such accounts.
Investment Securities
Bonds, notes, and debentures for which the Bank has the
positive intent and ability to hold to maturity are reported
at cost, adjusted for premiums and discounts that are
recognized in interest income using the interest method over
the period of maturity.
Investments not classified as trading securities nor as held-
to-maturity securities are classified as available-for-sale
securities and recorded at fair value. Unrealized gains or
losses on available-for-sale securities are excluded from net
income and reported as an amount net of taxes as a separate
component of other comprehensive income included in
shareholders’ equity. Premiums and discounts on held-to-
maturity and available-for-sale securities are amortized or
accreted into income using the interest method. Realized gains
or losses of held-to-maturity or available-for-sale securities
are recorded using the specific identification method.
Management evaluates securities for other-than-temporary
impairment (“OTTI”) on at least a quarterly basis, and more
frequently when economic or market conditions warrant
such an evaluation. For securities in an unrealized loss
position, management considers the extent and duration of
the unrealized loss, and the financial condition and near-
term prospects of the issuer. Management also assesses
whether it intends to sell, or it is more likely than not that
it will be required to sell, a security in an unrealized loss
position before recovery of its amortized cost basis. If either
of the criteria regarding intent or requirement to sell is met,
the entire difference between amortized cost and fair value
is recognized as impairment through earnings. For debt
securities that do not meet the aforementioned criteria, the
amount of impairment is split into two components as follows;
OTTI related to credit loss, which must be recognized in the
income statement and; OTTI related to other factors, which
is recognized in other comprehensive income. The credit loss
is defined as the difference between the present value of the
cash flows expected to be collected and the amortized cost
basis. For equity securities, the entire amount of impairment is
recognized through earnings.
Loans Held for Sale
Government Guaranteed loans originated and intended for
sale in the secondary market are carried at the lower of cost
or estimated market value in the aggregate. Net unrealized
losses are recognized through a valuation allowance by
16
Notes to Financial Statements
Note A - Summary of Significant
Accounting Policies - Continued
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 portions thereof, are
uncollectible. This methodology for determining charge-offs
is consistently applied to each segment.
The Bank determines a separate allowance for each portfolio
segment. The allowance consists of specific and general
reserves. Specific reserves relate to loans that are individually
classified as impaired. A loan is impaired when, based on current
information and events, it is probable that the Bank will be
unable to collect all amounts due according to the contractual
terms of the loan agreement. Factors considered in determining
impairment include payment status, collateral value and the
probability of collecting all amounts when due. Measurement
of impairment is based on the expected future cash flows of an
impaired loan, which are to be discounted at the loan’s effective
interest rate, or measured by reference to an observable market
value, if one exists, or the fair value of the collateral for a
collateral-dependent loan. The Bank selects the measurement
method on a loan-by-loan basis except that collateral-dependent
loans for which foreclosure is probable are measured at the fair
value of the collateral.
The Bank recognizes interest income on impaired loans
based on its existing methods of recognizing interest income
on nonaccrual loans. Loans, for which the terms have been
modified resulting in a concession, and for which the borrower is
experiencing financial difficulties, are considered troubled debt
restructurings and classified as impaired with measurement of
impairment as described above.
If a loan is impaired, a portion of the allowance is allocated so
that the loan is reported, net, at the present value of estimated
future cash flows using the loan’s existing rate or at the fair value
of collateral if repayment is expected solely from the collateral.
General reserves cover non-impaired loans and are based
on peer bank historical loss rates for each portfolio segment,
adjusted for the effects of qualitative or environmental factors
that are likely to cause estimated credit losses as of the
evaluation date to differ from the portfolio segment’s historical
loss experience. Qualitative factors include consideration of the
following: changes in lending policies and procedures; changes
in economic conditions; changes in the nature and volume of
the portfolio; changes in the experience, ability and depth of
lending management and other relevant staff; changes in the
volume and severity of past due, nonaccrual and other adversely
graded loans; changes in the loan review system; changes in the
value of the underlying collateral for collateral-dependent loans;
concentrations of credit and the effect of other external factors
such as competition and legal and regulatory requirements.
Portfolio segments identified by the Bank include real estate –
other, construction and land development, commercial and
industrial, and consumer loans. Relevant risk characteristics
for these portfolio segments generally include debt service
coverage, loan-to-value ratios and financial performance on non-
consumer loans and credit scores, debt-to income, collateral type
and loan-to-value ratios for consumer loans.
17
Notes to Financial Statements
Note A - Summary of Significant
Accounting Policies - Continued
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, 2016 other real estate owned consisted
of vacant land and commercial real estate. The Bank did not
have any foreclosures in process as of December 31, 2016.
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.
Goodwill and Other Intangible Assets
Goodwill is generally determined as the excess of the fair
value of the consideration transferred, plus the fair value of
any noncontrolling interests in the acquiree, over the fair
value of the net assets acquired and liabilities assumed as of
the acquisition date. Goodwill and intangible assets acquired
in a purchase business combination and determined to
have an indefinite useful lives are not amortized, but tested
for impairment at least annually. The Bank has selected
December 31 as the date to perform the annual impairment
test. Intangible assets with definite useful lives are amortized
over their estimated useful lives to their estimated residual
values. Goodwill is the only intangible asset with an indefinite
life on the balance sheet.
Other intangible assets consist of core deposit intangible
assets arising from whole bank acquisitions. They are
initially measured at fair value and then amortized over
their estimated useful lives of approximately seven years.
Amortization expense in 2016 was $65,000 and in 2015 was
$0. Future amortization expense for the next five years is
approximately $208,000 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.
Income Taxes
Deferred income taxes are computed using the asset
and liability method, which recognizes a liability or asset
representing the tax effects, based on current tax law, of
future deductible or taxable amounts attributable to events
that have been recognized in the financial statements. A
valuation allowance is established to reduce the deferred tax
asset to the level at which it is “more likely than not”
that the tax asset or benefits will be realized. Realization
of tax benefits of deductible temporary differences and
operating loss carryforwards depends on having sufficient
taxable income of an appropriate character within the
carryforward periods.
The Bank has adopted guidance issued by the Financial
Accounting Standards Board (“FASB”) that clarifies the
accounting for uncertainty in tax positions taken or expected
18
Notes to Financial Statements
Note A - Summary of Significant
Accounting Policies - Continued
unobservable inputs when measuring fair value. The guidance
describes three levels of inputs that may be used to measure
fair value:
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.
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.
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
Level1: Quoted prices (unadjusted) for identical assets or
liabilities in active markets that the entity has the ability to
access as of the measurement date.
Level2: 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.
Level3: 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 2015 financial
statements to conform to the presentation used in 2016.
These reclassifications had no impact of the Bank’s previously
reported financial statements.
Recent Accounting Guidance Not Yet Effective
In May 2014, the Financial Accounting Standards Board
(“FASB”) issued Accounting Standards Update (“ASU”)
No. 2014-09, Revenue from Contracts with Customers (Topic
606). This Update requires an entity to recognize revenue
as performance obligations are met, in order to reflect the
transfer of promised goods or services to customers in an
amount that reflects the consideration the entity is entitled to
receive for those goods or services. The following steps are
applied in the updated guidance: (1) identify the contract(s)
with a customer; (2) identify the performance obligations in
the contract; (3) determine the transaction price; (4) allocate
the transaction price to the performance obligations in the
contract; and (5) recognize revenue when, or as, the entity
satisfies a performance obligation. These amendments are
effective for public business entities for annual reporting
periods beginning after December 15, 2017, including interim
periods within that reporting period and one year later for
nonpublic business entities. 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.
In January 2016, the FASB issued ASU 2016-01, Financial
Instruments-Overall: Recognition and Measurement of Financial
Assets and Financial Liabilities (Subtopic 825-10). Changes
made to the current measurement model primarily affect
the accounting for equity securities and readily determinable
fair values, where changes in fair value will impact earnings
instead of other comprehensive income.
19
Notes to Financial Statements
Note A - Summary of Significant
Accounting Policies - Continued
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 are
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 and one year later for nonpublic
business entities. The Bank is currently evaluating the effects
of ASU 2016-01 on its financial statements and disclosures.
In February 2016, the FASB issued Accounting Standards
Update (ASU) 2016-02, Leases (Topic 842). The most
significant change for lessees is the requirement under the
new guidance to recognize right-of-use assets and lease
liabilities for all leases not considered short-term leases, which
is generally defined as a lease term of less than 12 months.
This change will result in lessees recognizing right-of-use
assets and lease liabilities for most leases currently accounted
for as operating leases under current lease accounting
guidance. The amendments in this Update are effective for
interim and annual periods beginning after December 15, 2018
for public business entities and one year later for all other
entities. The Bank is currently evaluating the effects of ASU
2016-02 on its financial statements and disclosures.
In March 2016, the FASB issued ASU 2016-09, Improvements
to Employee Share-Based Payment Accounting (Topic 718). ASU
2016-09 includes provisions intended to simplify various
aspects related to how share-based payments are accounted
for and presented in the financial statements. Under ASU
2016-09, excess tax benefits and certain tax deficiencies will
no longer be recorded in additional paid-in capital (“APIC”).
Instead, they will record all excess tax benefits and tax
deficiencies as income tax expense or benefit in the income
statement, and APIC pools will be eliminated. In addition,
the guidance requires excess tax benefits be presented as
an operating activity on the statement of cash flows rather
than as a financing activity. ASU 2016-09 also permits an
accounting policy election for the impact of forfeitures on
the recognition of expense for share-based payment awards.
Forfeitures can be estimated, as required today, or recognized
when they occur. This guidance is effective for public business
entities for interim and annual reporting periods beginning
after December 15, 2016 and for nonpublic business entities
annual reporting periods beginning after December 15, 2017
and interim periods within the reporting periods beginning
after December 15, 2018. Early adoption is permitted, but all
of the guidance must be adopted in the same period.
The Bank is currently evaluating the provisions of ASU
2016-09 to determine the potential impact on its financial
statements and disclosures.
In June 2016, the FASB issued ASU No. 2016-13, Measurement
of Credit Losses on Financial Instruments (Topic 326). This ASU
significantly changes how entities will measure credit losses
for most financial assets and certain other instruments that
aren’t measured at fair value through net income. In issuing
the standard, the FASB is responding to criticism that today’s
guidance delays recognition of credit losses. The standard will
replace today’s “incurred loss” approach with an “expected
loss” model. The new model, referred to as the current
expected credit loss (“CECL”) model, will apply to: (1) financial
assets subject to credit losses and measured at amortized
cost, and (2) certain off-balance sheet credit exposures. This
includes, but is not limited to, loans, leases, held-to-maturity
securities, loan commitments, and financial guarantees. The
CECL model does not apply to available-for-sale (“AFS”) debt
securities. For AFS debt securities with unrealized losses,
entities will measure credit losses in a manner similar to what
they do today, except that the losses will be recognized as
allowances rather than reductions in the amortized cost of the
securities. As a result, entities will recognize improvements to
estimated credit losses immediately in earnings rather than
as interest income over time, as they do today. The ASU also
simplifies the accounting model for purchased credit-impaired
debt securities and loans. ASU 2016-13 also expands the
disclosure requirements regarding an entity’s assumptions,
models, and methods for estimating the allowance for loan
and lease losses. In addition, public business entities will
need to disclose the amortized cost balance for each class of
financial asset by credit quality indicator, disaggregated by the
year of origination. ASU No. 2016-13 is effective for interim
and annual reporting periods beginning after December 15,
2019 for SEC filers, one year later for non SEC filing public
business entities and annual reporting periods beginning
after December 15, 2020 for nonpublic business entities and
interim periods within the reporting periods beginning after
December 15, 2021. Early adoption is permitted for interim and
annual reporting periods beginning after December 15, 2018.
Entities will apply the standard’s provisions as a cumulative-
effect adjustment to retained earnings as of the beginning of
the first reporting period in which the guidance is effective
(i.e., modified retrospective approach). The Bank is currently
evaluating the provisions of ASU No. 2016-13 for potential
impact on its financial statements.
Note B - Acquisitions
The Bank accounted for the following acquisitions under
the acquisition method of accounting. The acquired assets,
assumed liabilities and identifiable intangible assets were
recorded at their respective acquisition date fair values.
20
Notes to Financial Statements
Note B - Acquisitions -Continued
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 these acquisitions is subject to
refinement as additional information relative to the closing
date fair values become available through the measurement
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.
Acquisition of Security First Bank
On December 16, 2016, the Bank acquired all the assets and
assumed all the liabilities of Security First Bank (“SFB”) in
exchange for Bank stock and cash. The Bank issued 1,088,786
shares of Bank common stock with a fair value of $8.68 per
share and cash in the amount of $8,982,500, for a total
transaction value of approximately $18.4 million. SFB
operated one branch in Fresno, California. The Bank acquired
SFB as the location and culture fit within the Bank’s strategic
plans for expansion.
Goodwill in the amount of $3.3 million was recognized in
this acquisition. Goodwill represents the future economic
benefits arising from net assets acquired that are not
individually identified and separately recognized and is
attributable to synergies expected to be derived from the
combination of the two entities. Goodwill is not deductible
for income tax purposes.
For loans acquired from SFB, the contractual amounts due,
expected cash flows to be collected and fair value as of
December 16, 2016 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
$
$
3,294
538
2,756
117
2,639
91,638
-
91,638
15,544
76,094
$
$
The following table represents the assets acquired and
liabilities assumed of SFB as of December 16, 2016 and the
fair value adjustments and the amounts recorded by the Bank
in 2016 under the acquisition method of accounting (dollar
amounts in thousands):
SFB
Book Value
Fair Value
Adjustments
Fair
Value
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 and Cash Consideration
Recorded as Goodwill on Acquisition
$
(
5,541
9,428
80,401
1,719)
1,385
25
2,971
188
2,372
-
501
101,093
(
-
$
-
1,668)
1,719
-
-
-
35)
577)
1,214
-
653
(
(
$
$
5,541
9,428
78,733
-
1,385
25
2,971
153
1,795
1,214
501
101,746
$
$
$
86,206
426
86,632
$
(
16
10)
6
$
86,222
416
86,638
14,461
101,093
$
$
647
653
15,108
18,433
3,325)
$(
Acquisition of Sutter Community Bank
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 SFB or SCB.
21
Notes to Financial Statements
Note B - Acquisitions - Continued
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
Due within One Year
Due from One Year to Five Years
Due from Five to Ten Years
Due after Ten Years
Available-for-Sale Securities
Amortized
Cost
Fair
Value
$
3,501,823
17,512,654
29,371,547
3,853,924
54,239,948
$
$
3,499,622
17,160,646
29,135,294
3,771,502
53,567,064
$
No securities were sold during 2016 and 2015.
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, 2016 and 2015, are as follows:
December 31, 2016
U.S. Government and
Agency Securities
Mortgaged-Backed
Securities
December 31, 2015
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
$(
374,985)
$
18,088,742
$(
1,565)
$
498,435
$(
376,550)
$
18,587,177
(367,969)
742,954)
$(
21,629,266
39,718,008
$
-
1,565)
$(
-
498,435
$
(367,969)
744,519)
$(
21,629,266
40,216,443
$
$(
64,634)
$
13,176,698
$(
11,468)
$
1,488,330
$(
76,102)
$
14,665,028
(196,628)
261,262)
$(
20,970,132
34,146,830
$
-
11,468)
$(
-
1,488,330
$
(196,628)
272,730)
$(
20,970,132
35,635,160
$
As of December 31, 2016, the Bank has one U.S. government
agency security that has been in an unrealized loss position
over 12 months. The unrealized loss on this investment security
has 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 security prior to its
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 bond approaches maturity.
Securities with a fair value of approximately $3.5 million were
pledged to the Federal Home Loan Bank as discussed in Note G.
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.
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
$
(
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
$
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:
December 31, 2016
Available-for-Sale Securities:
U.S. Government and
Agency Securities
Mortgaged-Backed
Securities
Obligations of State and Political
Subdivisions
December 31, 2015
Available-for-Sale Securities:
U.S. Government and
Agency Securities
Mortgaged-Backed
Securities
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Fair
Value
$
19,963,727
$
810
$(
376,550)
$
19,587,987
34,052,938
70,825
(
367,969)
33,755,794
223,283
54,239,948
$
-
71,635
$
-
744,519)
$(
223,283
53,567,064
$
$
27,505,350
$
15,261
$(
76,102)
$
27,444,509
26,978,253
54,483,603
$
116,815
132,076
$
(
$(
196,628)
272,730)
26,898,440
54,342,949
$
The amortized cost and estimated fair value of all investment
securities as of December 31, 2016 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.
22
Notes to Financial Statements
Note D - Loans -Continued
A summary of the changes in the allowance for loan losses as
of December 31 follows:
Balance at Beginning of Year
Additions to the Allowance Charged to Expense
Recoveries on Loans Charged-Off
Less Loans Charged-Off
2016
2015
$
2,245,566
235,000
15,597
2,496,163
$
1,723,391
522,275
-
2,245,666
-
2,496,163
$
(
$
100)
2,245,566
The following table presents the activity in the allowance
for loan losses for the year 2016 and 2015 and the recorded
investment in loans and impairment method as of December
31, 2016 and 2015 by portfolio segment:
Substandard- Loans classified as substandard are
inadequately protected by the current net worth and paying
capacity of the obligor or of the collateral pledged, if any. Loans
so classified have a well-defined weakness or weaknesses that
jeopardize the liquidation of the debt. They are characterized
by the distinct possibility that the institution will sustain some
loss if the deficiencies are not corrected.
Impaired-A loan is considered impaired, when, based on
current information and events, it is probable that the Bank
will be unable to collect all amounts due according to the
contractual terms of the loan agreement. Additionally,
all loans classified as troubled debt restructurings are
considered impaired.
The risk category of loans by class of loans was as follows as of
December 31, 2016:
Real Estate -
Other
Construction
and Land
Development
Commercial
and
Industrial
Consumer
Total
The risk category of loans by class of loans was as follows as of
December 31, 2015:
$
$
$
1,521,184
225,011
-
-
1,746,195
47,137
15,458
-
-
62,595
612,905
22,230
-
15,597
650,732
$
(
64,340
27,699)
-
-
36,641
$
2,245,566
235,000
-
15,597
2,496,163
$
$
$
$
$
December 31, 2016
Pass
Special
Mention
Substandard
Impaired
Total
$
-
1,746,195
-
1,746,195
$
-
$
62,595
-
62,595
$
-
$
650,732
-
650,732
$
-
$
36,641
-
36,641
$
-
$
2,496,163
-
2,496,163
$
$
1,039,740
224,115,715
4,073,672
229,229,127
$
-
$
14,276,680
-
14,276,680
$
$
40,256
63,727,194
111,433
63,878,883
$
$
10,318
342,563
-
352,881
$
$
1,090,314
302,462,152
4,185,105
307,737,571
$
Real Estate Other:
Commercial
Farmland
1-4 Family Residential
Multifamily Residential
Construction and Land Development
Commercial and Industrial
Consumer
$
109,194,259
55,832,554
38,218,578
16,346,739
14,123,109
63,227,310
342,563
297,285,112
$
$
$
$
$
1,024,221
-
-
-
127,446
348,271
-
1,499,938
7,036,696
-
536,340
-
26,125
263,046
-
7,862,207
1,039,740
-
-
-
-
40,256
10,318
1,090,314
$
$
$
$
118,294,916
55,832,554
38,754,918
16,346,739
14,276,680
63,878,883
352,881
307,737,571
December 31, 2016
Allowance for Loan Losses:
Beginning of Year
Provisions
Charge-offs
Recoveries
End of Year Reserves:
Specific
General
Purchased Credit Impaired Loans
Loans Evaluated for Impairment:
Individually
Collectively
Purchased Credit Impaired Loans
December 31, 2015
Allowance for Loan Losses:
Beginning of Year
Provisions
Charge-offs
Recoveries
End of Year Reserves:
Specific
General
Purchased Credit Impaired Loans
Loans Evaluated for Impairment:
Individually
Collectively
Purchased Credit Impaired Loans
$
1,167,486
353,698
-
-
1,521,184
$
(
48,676
1,539)
-
-
47,137
$
$
$
474,196
138,809
(100)
-
612,905
33,033
31,307
-
-
64,340
1,723,391
522,275
(100)
-
2,245,566
$
$
$
$
$
$
-
1,521,184
-
1,521,184
$
-
$
47,137
-
47,137
$
-
$
612,905
-
612,905
$
-
$
64,340
-
64,340
$
-
$
2,245,566
-
2,245,566
$
$
3,313,570
158,612,919
1,627,505
163,553,994
$
$
241,563
4,704,182
-
4,945,745
$
$
83,534
39,350,625
96,591
39,530,750
$
$
4,541
802,538
-
807,079
$
$
3,643,208
203,470,264
1,724,096
208,837,568
$
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.
SpecialMention- 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.
Past due and nonaccrual loans presented by loan class were as
follows as of December 31, 2016 and 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
$
201,974,990
$
$
$
$
432,121
-
-
-
-
10,456
-
442,577
2,002,513
-
619,303
-
42,794
112,183
-
2,776,793
3,313,570
-
-
-
241,563
83,534
4,541
3,643,208
$
$
$
$
68,836,132
57,045,546
27,195,071
10,477,245
4,945,745
39,530,750
807,079
208,837,568
December 31, 2016
Real Estate Other:
Commercial
Farmland
1-4 Family Residential
Multifamily Residential
Construction and Land Development
Commercial and Industrial
Consumer
December 31, 2015
Real Estate Other:
Commercial
Farmland
1-4 Family Residential
Multifamily Residential
Construction and Land Development
Commercial and Industrial
Consumer
30-59 Days
Past Due
$
-
-
-
-
10,000
-
10,000
$
$
-
-
-
-
39,125
-
39,125
$
$
$
Still Accruing
60-89 Days
Past Due
749,934
-
-
-
185,958
-
33,494
969,386
$
Over 90 Days
Past Due
-
$
-
-
-
-
-
-
$
-
-
$
-
-
-
-
-
-
$
-
-
$
-
-
-
-
-
-
$
-
Nonaccrual
1,039,740
-
-
-
-
40,256
10,318
1,090,314
2,566,890
-
33,201
-
241,563
185,896
4,541
3,032,091
$
$
$
23
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, 2016 and 2015:
December 31, 2016
Real Estate Other:
Commercial
Farmland
1-4 Family Residential
Multifamily Residential
Construction and Land Development
Commercial and Industrial
Consumer
December 31, 2015
Real Estate Other:
Commercial
Farmland
1-4 Family Residential
Multifamily Residential
Construction and Land Development
Commercial and Industrial
Consumer
Impaired Loans
Unpaid
Principal
Balance
Recorded Without Specific With Specific
Allowance
Investment
Allowance
Related
Allowance
Average
Recorded
Investment
Interest
Income
Recognized
$
2,040,093
-
-
-
-
50,602
10,651
2,101,346
$
1,039,740
-
-
-
-
40,256
10,318
1,090,314
$
1,039,740
-
-
-
-
40,256
10,318
1,090,314
$
$
$
$
$
$
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
$
$
-
-
-
-
-
-
-
$
-
$
-
-
-
-
-
-
-
$
-
-
$
-
-
-
-
-
-
$
-
-
$
-
-
-
-
-
-
$
-
$
1,125,531
-
-
-
-
22,932
2,880
1,151,343
$
$
2,059,000
-
-
-
20,000
7,000
500
2,086,500
$
$
-
-
-
-
-
-
-
$
-
$
$
138,708
-
-
-
-
-
-
138,708
The outstanding balance and carrying amount of
purchased credit impaired loans as of December 31, 2016
were as follows:
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
$429,000 and $344,000 for the years ended December 31,
2016 and 2015, respectively.
At December 31, 2016, the future lease rental payable under
noncancellable operating lease commitments for the branches
was as follows:
2017
2018
2019
2020
2021
Thereafter
$
410,906
370,088
338,351
345,624
174,842
1,826,878
3,466,689
$
Outstanding Balance
Carrying Amount
2016
5,841,817
4,185,105
$
$
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:
2016
2015
Note F - Deposits
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
$
$
21,637
43,556
-
-
-
-
65,193
$
-
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 $3.8 million
and $1.3 million at December 31, 2016 and 2015, respectively.
Note E - Premises and Equipment
A summary of premises and equipment as of
December 31 follows:
2016
2015
$
$
600,000
1,317,529
1,398,649
1,285,554
1,722,704
6,324,436
2,106,076)
4,218,360
(
$
600,000
1,317,517
1,362,552
1,262,844
7,550
4,550,463
1,772,435)
2,778,028
(
$
Land
Building
Leasehold Improvements
Furniture, Fixtures, and Equipment
Construction in Progress
Less Accumulated Depreciation and Amortization
24
At December 31, 2016, the scheduled maturities of time
deposits are as follows:
2017
2018
2019
2020
2021
$
72,829,859
3,044,313
1,600,234
292,439
6,604,443
84,371,288
$
Note G - Other Borrowings
The Bank may borrow up to $22.5 million overnight on
an unsecured basis from its correspondent banks. As of
December 31, 2016, 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 $95.7
million subject to providing adequate collateral and continued
compliance with the Advances and Security Agreement and
other eligibility requirements established by the FHLB.
Notes to Financial Statements
Note G - Other Borrowings - Continued
A comparison of the federal statutory income tax rates to the
Bank’s effective income tax rates follows:
The Bank has pledged $3.5 million of investment securities
and $215.1 million of loans as collateral for this line. As of
December 31, 2016 the Bank had a $22.0 million
outstanding Letter of Credit under this arrangement to
secure public monies.
Statutory Federal Tax
State Tax, Net of Federal Benefit
Stock-based Compensation
Merger Expenses
Bargain Purchase Gain
Other Items, Net
Actual Tax Expense (Benefit)
2016
2015
Amount
Rate
Amount
Rate
$
$
1,075,000
238,000
9,000
57,000
-
48,700
1,427,700
34.0%
7.5%
0.3%
1.8%
-
1.5%
45.1%
$
557,000
117,000
30,000
70,000
107,000)
62,061
729,061
(
$
34.0%
7.1%
1.8%
4.3%
6.5%)
3.8%
44.5%
(
Note H - Other Expenses
Other expenses as of December 31 are comprised
of the following:
2016
2015
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:
$
$
1,501,888
858,393
248,945
397,390
75,249
200,689
448,042
3,730,596
817,560
533,983
213,832
170,806
47,533
150,418
248,491
2,182,623
$
$
Professional Fees
Data Processing
Office Expenses
Marketing and Business Promotion
Insurance
Regulatory Assessments
Other Expenses
Note I - Income Taxes
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
Nonaccrual Differences
Purchase Accounting Adjustments
Other Assets and Liabilities
The provision (benefit) for income taxes for the years ended
December 31, consists of the following:
Deferred Tax Liabilities:
Other Assets and Liabilities
2016
2015
2016
2015
$
416,000
326,000
332,000
787,000
1,884,000
276,000
409,000
389,000
651,000
550,000
6,020,000
$
432,000
756,000
252,000
713,000
149,000
58,000
352,000
240,000
469,000
270,000
3,691,000
(
(
$
359,000)
359,000)
5,661,000
(
(
$
184,000)
184,000)
3,507,000
Current:
Federal
State
Deferred
$
$
1,246,518
377,182
1,623,700
(196,000)
1,427,700
296,019
101,042
397,061
332,000
729,061
$
$
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, 2012 are open to audit by the federal
authorities and income tax returns for the years ending after
December 31, 2011 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.
As of December 31, 2016, the Bank has net operating loss
carryforwards of approximately $4,000,000 and $7,318,000
for Federal and California franchise tax purposes, respectively.
The use of the net operating loss carry forwards is limited by
Section 382 of the Internal Revenue Service Code and ranges
from $219,000 per year to $321,000 per year. California net
operating loss carryforwards, to the extent not used will begin
to expire in 2028.
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, 2016 and 2015 was approximately
$5,441,000 and $5,383,000, 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, 2016 and 2015 amounted to
approximately $22.9 million and $26.5 million, respectively.
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.
25
Notes to Financial Statements
Note K - Commitments - Continued
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, 2016 and 2015, the Bank had the following
outstanding financial commitments whose contractual
amount represents credit risk:
2016
2015
Commitments to Extend Credit
$
47,009,000
$
33,130,000
Commitments to extend credit are agreements to lend to
a customer as long as there is no violation of any condition
established in the contract. Since many of the commitments
are expected to expire without being drawn upon, the
total amounts do not necessarily represent future cash
requirements. The Bank evaluates each client’s credit
worthiness on a case-by-case basis. The amount of collateral
obtained if deemed necessary by the Bank is based on
management’s credit evaluation of the customer. The
majority of the Bank’s commitments to extend credit
and standby letters of credit are secured by real estate or
cash, respectively.
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
$283,000 and $185,000 for the periods ended December 31,
2016 and 2015. The Bank also recognized income tax benefits
related to stock-based compensation of $105,000 in 2016 and
$40,000 in 2015.
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:
2016
2015
Expected Volatility
Expected Term
Expected Dividends
Risk Free Rate
Grant Date Fair Value
36.00%
6.25 Years
None
1.25%
2.80
$
43.28%
6.04 Years
None
1.23%
3.00
$
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.
A summary of the status of the Bank’s stock options as of
December 31, 2016 and changes during the year ended thereon
is presented below:
Weighted-
Average
Exercise
Price
Weighted-
Average
Remaining
Contractual
Term
Aggregate
Intrinsic
Value
Shares
Outstanding at Beginning of Year
Cancelled
Granted
Exercised
Forfeited
Outstanding at End of Year
409,730
-
5,000
23,000)
32,000)
359,730
(
(
8.59
$
$
-
$
7.50
$
6.31
$
9.81
$
8.61
4.66 Years
$
680,965
Options Exercisable
256,730
$
9.24
3.10 Years
$
324,715
26
Notes to Financial Statements
Note L - Stock-Based Compensation Plans -
Continued
As of December 31, 2016, there was approximately $204,000
of total unrecognized compensation cost related to the
outstanding stock options that will be recognized over a
weighted-average period of 1.76 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 $55,000 and $14,000
was recognized in 2016 and 2015, respectively, as a result of
the modification.
A summary of the status of the Bank’s deferred share awards
as of December 31, 2016 and changes during the year ended
thereon is presented below:
Weighted-
Average
Grant-Date
Fair Value
Shares
Nonvested at January 1, 2016
New Deferred Share Awards
Shares Vested and Issued
Shares Forfeited
Nonvested at December 31, 2016
18,408
48,931
19,330)
78)
47,931
(
(
$
$
$
$
$
7.00
8.04
7.03
7.00
8.05
As of December 31, 2016 there was approximately $293,000
of unrecognized compensation cost related to the restricted
stock grants that will be recognized over a weighted-average
period of 3.4 years. The fair value of shares issued in 2016 and
2015 was approximately $138,000 and $111,000, respectively.
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:
2016
2015
Income
Shares
Income
Shares
$
1,732,944
$
908,654
Net Income as Reported
Shares Outstanding at Year-End
Impact of Weighting Shares
Issued During the Year
Used in Basic EPS
1,732,944
Dilutive Effect of Outstanding
Deferred Shares
Used in Dilutive EPS
$
1,732,944
6,979,497
(1,873,829)
5,105,669
12,118
5,117,787
908,654
$
908,654
4,999,895
(1,304,389)
3,695,506
12,252
3,707,758
As of December 31, 2016 and 2015 there were 359,730 and
385,730, 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).
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.
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, 2016.
The following table provides the hierarchy and fair value for
each major category of assets and liabilities measured at fair
value at December 31:
Fair Value Measurements Using:
Level 2
Level 3
Level 1
Total
Total
Losses
December 31, 2016
Assets measured at fair value on
a recurring basis
Securities Available for Sale
Assets Measured at Fair Value
on a Non-recurring Basis
Other Real Estate Owned, Net
December 31, 2015
Assets measured at fair value on
a recurring basis
Securities Available for Sale
Assets Measured at Fair Value
on a Non-recurring Basis
Other Real Estate Owned, Net
$
-
$
53,567,064
$
-
$
53,567,064
$
-
$
-
$
-
$
788,842
$
788,842
$
-
$
-
$
54,342,949
$
-
$
54,342,949
$
-
$
-
$
-
$
649,092
$
649,092
$
-
Quantitative information about the Bank’s nonrecurring Level
3 fair value measurements as of December 31 is as follows:
December 31, 2016
Fair Value
Amount
Valuation Technique
Unobservable
Input
Range
Other Real Estate Owned
$
788,842
Third Party Appraisals
Liquidation and Selling Costs
8% to 50%
December 31, 2015
Other Real Estate Owned
$
649,092
Third Party Appraisals
Liquidation and Selling Costs
8% to 50%
27
Notes to Financial Statements
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.
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.
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.
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.
The fair value hierarchy level and estimated fair value of
significant financial instruments at December 31, 2016 and
2015 are summarized as follows (dollar amounts in thousands):
Financial Assets:
Cash and Cash Equivalents
Investment Securities
Loans, net
FHLB and Other Bank Stock
Financial Liabilities:
Noninterest-Bearing and Interest-Bearing
Demand Deposits
Interest-Bearing Time Deposits
2016
2015
Fair Value
Hierarchy
Carrying
Value
Fair
Value
Carrying
Value
Fair
Value
Level 1
Level 2
Level 2
$
62,547
53,567
305,022
3,153
$
62,547
53,567
303,888
N/A
$
24,062
54,343
206,133
1,466
$
24,062
54,343
205,266
N/A
Level 1
Level 2
304,615
84,371
304,615
84,134
198,658
58,019
198,658
57,918
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 $42,000 in
contributions for 2016 and no contributions for 2015.
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 $42,000 in
contributions for 2016 and no contributions for 2015.
28
Notes to Financial Statements
Note Q - Regulatory Matters
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
As of December 31, 2016:
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)
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)
Amount
Ratio
Amount
Ratio
Amount
Ratio
$54,599
$52,095
$52,095
$52,095
$41,357
$39,103
$39,103
$39,103
14.5%
13.9%
13.9%
11.7%
17.0%
16.1%
16.1%
13.2%
$30,074
$22,555
$16,917
$17,811
$19,464
$14,598
$10,949
$11,882
8.0% $37,592
6.0% $30,074
4.5% $24,435
4.0% $22,264
8.0% $24,330
6.0% $19,464
4.5% $15,815
4.0% $14,852
10.0%
8.0%
6.5%
5.0%
10.0%
8.0%
6.5%
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.
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 (Basel III rules).
The new rules, Basel III, 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. Under the
Basel III rules, the Bank must hold a capital conservation
buffer above the adequately capitalized risk-based capital
ratios. The capital conservation buffer is being phased in
from 0.0% in 2015 to 2.5% by 2019. The capital conservation
buffer for 2016 is 0.625%. The net unrealized gain or loss
on available for sale securities is not included in computing
regulatory capital.
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, 2016 and 2015, that the Bank meets all capital
adequacy requirements.
As of December 31, 2016, 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.
29
Fresno Branch
663 West Nees Ave.
(559) 225-1700
Kingsburg Branch
1580 Draper St.
(559) 802-1070
Porterville Branch
65 West Olive Ave.
(559) 306-1300
Visalia Branch
501 West Main St.
(559) 802-1000
Yuba City Branch
700 Plumas St.
(530) 674-8900
www.suncrestbank.com
2016 Annual Report