2017 ANNUAL REPORT
FINANCIAL STATEMENTS
WITH
INDEPENDENT AUDITOR'S REPORT
Dear Shareholders and Customers,
On behalf of the Suncrest Bank Board of Directors, we are pleased to present our annual report for 2017. It has
been another outstanding year for our bank.
Celebrating Our Ten Year Anniversary
In 2017 the bank entered its tenth year of operation. We opened our doors at the height of the global financial
crisis and at a critical time for small businesses. Many banks were cutting off commercial lending and many were
exiting our local markets altogether. Suncrest’s mission then, as it is today, was to provide that vital financing to
help local small businesses grow and in turn help our communities grow. Since 2008 we have deployed over $500
million in capital into the small business sector across our local markets throughout the Central Valley.
A New Logo for A New Decade
As we enter our second decade we felt now was a good time to refresh and update our logo. We think the new
modern look and strong colors better reflect the capabilities, expertise and strength of the bank today while still
acknowledging our past and where we’ve come from by maintaining both the sun and mountains motif. We hope
you like it!
Another Record Breaking Year
In July of 2017 we surpassed $500 million in total assets for the first time in the bank’s history and at the end of
the year, our assets totaled $528.9 million which is an increase of $81.3 million, or 18.2% over the prior year’s
ending balance. Our loan portfolio grew by $45.9 million to $353.4 million, a 14.9 % increase over 2016, and our
total deposits grew by $77.9 million and ended the year at $466.9 million, a 20% increase over the prior year. Our
net income before tax for the year was $8.1 million an increase of 156.8% over 2016 and both our Return on
Average Assets (ROAA) and Efficiency Ratio have improved significantly in 2017 and were 0.96%1 and 59.3%
respectively.
OTCQX Top 50 Stock for Second Year Running
Suncrest was one of only nine companies to be named to the 2017 OTCQX® Best 50 List for the second year
running. 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 2017. In April of 2018 our stock price traded to an all-time high of
$12.80 with our average daily trading volume over the last twelve months regularly over 5,000 shares per day.
Fastest Growing Bank in California
In surpassing $500 million in total assets in the third quarter we achieved the ambitious “5 in 5” target that we set
ourselves back in late 2013, almost a year and a half ahead of schedule. In the period between 9/30/13 and
9/30/17 we increased our total assets by 427% making Suncrest Bank the fastest growing bank in the State of
California and the 13th fastest growing bank in the U.S. This remarkable result could not have been achieved
without the effort, commitment and enthusiasm our fantastic employees show each and every day.
Prudent and Profitable Growth
This impressive growth has been achieved while also improving both the credit quality of our loan portfolio and
the profitability of our balance sheet. At the end of 2017 our nonperforming assets (NPAs) stood at only 0.18% of
total assets or $0.97 million. We have also managed to maintain a healthy spread between loan yield and cost of
deposits. For the fourth quarter of 2017 our core loan yield2 was 5.44% and our cost of deposits was 0.23%.
1 Excludes one time impact of reduction in value of our net deferred tax asset due to Tax Reform
2 Core loan yield excludes the impact of discount accretion on acquired loans and recoveries
Top 200 Healthiest Banks
Based on data compiled in the fourth quarter of 2017, Suncrest Bank was named to the 2018
DepositAccounts.com (by Lending Tree) Top 200 list of Healthiest Banks in the United States. Suncrest achieved
an “A+” financial health rating making us one of the healthiest banks in the nation. DepositAccounts.com
evaluates the financial health of over 11,000 banks and credit unions in the U.S. and calculates a comprehensive
health score for each institution graded on several factors including capitalization, deposit growth, and loan-to-
reserve ratios. DepositAccounts.com is the largest and most comprehensive online publication in the U.S.
dedicated to banking and deposits product information for consumers.
Merger with Community Business Bank
In November 2017 we announced the signing of an agreement to merge with Community Business Bank (CBB)
headquartered in West Sacramento. This merger will be truly transformational for our company and once
completed we expect our total assets to be approximately $900 million. It will also significantly expand our
geographic footprint, adding branches in West Sacramento and Lodi, and a Loan Production Office in Roseville.
We will also welcome two highly experienced banking executives from CBB on to our board. We expect the
merger to close in the second quarter of 2018.
Our Local Market Business Model
We remain fully committed to our Local Market Business Model that has served us so well through our first 10
years of operation. That model is based on one simple philosophy that serving the needs of customers and small
businesses in each of our communities, and helping them to succeed by meeting their financial needs, is the best
way to help our bank succeed.
In closing, we want to thank our customers, shareholders, directors, management and employees for everything
they do to help make Suncrest Bank a great company to be part of.
William A. Benneyan
Chairman
Ciaran McMullan
President& CEO
CONTENTS
INDEPENDENT AUDITOR'S REPORT
ON THE FINANCIAL STATEMENTS
FINANCIAL STATEMENTS
Statements of Financial Condition
Statements of Income
Statements of Comprehensive Income
Statement of Changes in Shareholders' Equity
Statements of Cash Flows
Notes to Financial Statements
1
2
4
5
6
7
8
This statement has not been reviewed, or confirmed for accuracy or relevance, by the Federal Deposit Insurance Corporation.
INDEPENDENT AUDITOR'S REPORT
Board of Directors and Shareholders of
Suncrest Bank
Report on Financial Statements
We have audited the accompanying financial statements of Suncrest Bank, which are comprised of the statements
of financial condition as of December 31, 2017 and 2016, 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, 2017 and 2016, 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 28, 2018
1
25231 Paseo De Alicia, Suite 100, Laguna Hills, CA 92653
P 949.768.0833
F 949.768.8408
W vtdcpa.com
SUNCREST BANK
STATEMENTS OF FINANCIAL CONDITION
DECEMBER 31, 2017 AND 2016
ASSETS
Cash and Due from Banks
Federal Funds Sold
Interest-Bearing Deposits in Other Banks
TOTAL CASH AND CASH EQUIVALENTS
2017
2016
$
19,728,313
33,006,000
10,000,000
62,734,313
$
15,567,875
36,979,000
10,000,000
62,546,875
Investment Securities Available for Sale
90,368,057
53,567,064
Loans:
Real Estate - Other
Construction and Land Development
Commercial and Industrial
Consumer
Deferred Loan Fees, Net of Costs
Allowance for Loan Losses
TOTAL LOANS
NET LOANS
Federal Home Loan Bank and Other Bank Stock, at Cost
Premises and Equipment
Other Real Estate Owned
Bank Owned Life Insurance
Net Deferred Tax Assets
Goodwill
Core Deposit Intangible
Accrued Interest and Other Assets
282,056,497
12,383,517
59,374,124
247,067
354,061,205
(
693,011)
3,412,669)
(
349,955,525
3,152,891
5,904,262
313,720
5,238,821
3,108,000
3,325,220
1,313,301
3,503,278
528,917,388
$
229,229,127
14,276,680
63,878,883
352,881
307,737,571
(
219,817)
2,496,163)
(
305,021,591
3,152,891
4,218,360
788,842
5,114,446
5,661,000
3,325,220
1,576,611
2,679,728
447,652,628
$
The accompanying notes are an integral part of these financial statements.
2
SUNCREST BANK
STATEMENTS OF FINANCIAL CONDITION
DECEMBER 31, 2017 AND 2016
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Noninterest-bearing Demand
Savings, NOW and Money Market Accounts
Time Deposits Under $250,000
Time Deposits $250,000 and Over
Accrued Interest and Other Liabilities
TOTAL DEPOSITS
TOTAL LIABILITIES
Commitments and Contingencies - Notes 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, 7,007,594 in 2017 and
6,979,497 in 2016
Additional Paid-in Capital
Retained Earnings (Deficit)
Accumulated Other Comprehensive Income (Loss) - Net
Unrealized Loss on Securities Available for Sale,
Net of Taxes of $312,511 in 2017 and $275,882 in 2016
TOTAL SHAREHOLDERS' EQUITY
2017
2016
$
162,335,707
235,311,974
34,995,894
34,257,401
466,900,976
1,199,304
468,100,280
$
122,835,165
181,779,826
44,831,946
39,539,342
388,986,279
1,375,691
390,361,970
-
-
57,279,494
1,985,398
2,295,485
57,046,519
1,851,183
1,210,042)
(
(
743,269)
60,817,108
528,917,388
$
(
397,002)
57,290,658
447,652,628
$
The accompanying notes are an integral part of these financial statements.
3
SUNCREST BANK
STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 2017 AND 2016
INTEREST INCOME
Interest and Fees on Loans
Interest on Investment Securities
Interest on Federal Funds Sold and Other
TOTAL INTEREST INCOME
2017
2016
$
20,173,453
978,572
1,005,631
22,157,656
$
12,905,528
861,307
336,770
14,103,605
INTEREST EXPENSE
Interest on Savings Deposits, NOW and Money Market Accounts
Interest on Time Deposits
Interest on Other Borrowings
TOTAL INTEREST EXPENSE
507,232
518,576
-
1,025,808
203,798
448,644
3,806
656,248
NET INTEREST INCOME
21,131,848
13,447,357
Provision for Loan Losses
950,000
235,000
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES
20,181,848
13,212,357
NONINTEREST INCOME
Service Charges, Fees, and Other Income
Gain on Sale of Available-for-Sale Securities
Gain on Sale of Loans
NONINTEREST EXPENSE
Salaries and Employee Benefits
Occupancy Expenses
Equipment Expenses
Other Expenses
Income Taxes
INCOME BEFORE INCOME TAXES
NET INCOME
884,597
59,632
275,515
1,219,744
7,524,994
962,670
426,656
4,369,242
13,283,562
8,118,030
4,732,503
3,385,527
$
535,563
-
568,612
1,104,175
6,092,427
962,162
370,703
3,730,596
11,155,888
3,160,644
1,427,700
1,732,944
$
NET INCOME PER SHARE - BASIC
$
0.48
$
0.34
NET INCOME PER SHARE - DILUTED
$
0.48
$
0.34
The accompanying notes are an integral part of these financial statements.
4
SUNCREST BANK
STATEMENTS OF COMPREHENSIVE INCOME
FOR THE YEARS ENDED DECEMBER 31, 2017 AND 2016
Net Income
$
3,385,527
$
1,732,944
2017
2016
OTHER COMPREHENSIVE LOSS:
Unrealized Losses on Securities Available for Sale
Less Reclassification Adjustment for Net Realized Gain
on Available-for-Sale Securities Included in Net Income
Provision (Benefit) for Income Tax Expenses:
Change in Net Unrealized Loss
Reclassification of Net Gain Recognized in Net Income
TOTAL OTHER COMPREHENSIVE LOSS
TOTAL COMPREHENSIVE INCOME
(
323,264)
(
532,230)
(
(
59,632)
382,896)
-
532,230)
(
(
(
(
(
$
132,180)
24,449)
156,629)
226,267)
3,159,260
(
218,214)
-
218,214)
314,016)
1,418,928
(
(
$
The accompanying notes are an integral part of these financial statements.
5
SUNCREST BANK
STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2017 AND 2016
Common Stock
Number of
Shares
Amount
Additional
Paid-in
Capital
Retained
Earnings
(Deficit)
Accumulated
Other
Comprehensive
Loss
Total
Balance January 1, 2016
4,999,895
$
40,653,892
$
1,703,561
$(
2,942,986)
$(
82,986)
$
39,331,481
Net Income
1,732,944
Stock-based Compensation
283,432
Stock Options Exercised
23,000
145,050
Issuance of Stock to Employees
in Exchange for Services Rendered
19,330
135,810
(
135,810)
Issuance of Common Stock, net
of Expenses of $338,904
848,486
6,661,105
Issuance of Stock in the Acquisition
of Security First Bank
1,088,786
9,450,662
Other Comprehensive
Loss, Net of Taxes
1,732,944
283,432
145,050
-
6,661,105
9,450,662
(
314,016)
(
314,016)
Balance at December 31, 2016
6,979,497
57,046,519
1,851,183
(
1,210,042)
(
397,002)
57,290,658
Net Income
3,385,527
Stock-based Compensation
367,190
Issuance of Stock to Employees
in Exchange for Services Rendered
28,097
232,975
(
232,975)
3,385,527
367,190
-
-
120,000
(
120,000)
(
226,267)
(
226,267)
Reclassification of Stranded Tax
Effects from Change in Tax Rate
Other Comprehensive
Loss, Net of Taxes
Balance at December 31, 2017
7,007,594
$
57,279,494
$
1,985,398
$
2,295,485
$(
743,269)
$
60,817,108
The accompanying notes are an integral part of these financial statements.
6
SUNCREST BANK
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2017 AND 2016
OPERATING ACTIVITIES
Net Income
Adjustments to Reconcile Net Income to Net Cash
From Operating Activities:
Depreciation and Amortization
Stock-based Compensation
Provision for Loan Losses
Deferred Tax Expense (Benefit)
Earnings on Bank Owned Life Insurance
Gain on Sale of Available-for-Sale Securities
Gain on Sale of Other Real Estate Owned
Gain on Sale of Loans
Loans Originated for Sale
Proceeds from Sale of Loans
Core Deposit Intangible Amortization
Net Accretion of Discount on Loans Acquired
Other Items
NET CASH FROM OPERATING ACTIVITIES
INVESTING ACTIVITIES
Purchase of Available-for-Sale Securities
Maturities of Available-for-Sale Securities
Proceeds from Sale of Available-for-Sale Securities
Net Increase in Loans
Purchase of Federal Home Loan Bank Stock
Proceeds from Sale of Other Real Estate Owned
Cash Paid in Acquisition
Purchase of Premises and Equipment
NET CASH FROM INVESTING ACTIVITIES
FINANCING ACTIVITIES
Net Increase in Demand Deposits and Savings Accounts
Net Change in Time Deposits
Proceeds from Issuance of Common Stock, Net
Proceeds from Exercise of Stock Options
NET CASH FROM FINANCING ACTIVITIES
NET INCREASE IN CASH AND CASH EQUIVALENTS
Cash and Cash Equivalents at Beginning of Year
CASH AND CASH EQUIVALENTS AT END OF YEAR
Supplemental Disclosures of Cash Flow Information:
Interest Paid
Taxes Paid
The accompanying notes are an integral part of these financial statements.
7
2017
2016
$
3,385,527
$
1,732,944
(
(
(
(
(
410,057
367,190
950,000
2,710,000
124,375)
59,632)
2,175)
275,515)
2,947,920)
3,275,771
263,310
1,471,675)
809,626)
5,670,937
(
(
(
(
57,134,888)
10,460,055
9,423,034
44,527,735)
-
477,297
-
2,095,959)
83,398,196)
(
(
(
(
(
(
(
546,429
283,432
235,000
196,000)
62,710)
-
13,028)
568,612)
6,255,627)
6,881,592
65,389
336,126)
477,961)
1,834,722
(
(
(
(
(
21,078,836)
30,660,376
-
20,240,002)
299,100)
26,278
3,441,268)
1,869,458)
16,242,010)
(
(
(
(
93,032,690
15,117,993)
-
-
77,914,697
187,438
62,546,875
62,734,313
$
26,196,602
19,889,850
6,661,105
145,050
52,892,607
38,485,319
24,061,556
62,546,875
$
$
$
1,019,632
2,340,000
$
$
639,386
2,005,000
SUNCREST BANK
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2017 AND 2016
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 28, 2018, 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, 2017.
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.
8
SUNCREST BANK
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2017 AND 2016
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
Investment Securities - Continued
Investments not classified as trading securities nor as held-to-maturity securities are classified as available-for-
sale securities and recorded at fair value. Unrealized gains or losses on available-for-sale securities are excluded
from net income and reported as an amount net of taxes as a separate component of other comprehensive income
included in shareholders' equity. Premiums and discounts on held-to-maturity and available-for-sale securities are
amortized or accreted into income using the interest method. Realized gains or losses of held-to-maturity or
available-for-sale securities are recorded using the specific identification method.
Management evaluates securities for other-than-temporary impairment ("OTTI") on at least a quarterly basis, and
more frequently when economic or market conditions warrant such an evaluation. For securities in an unrealized
loss position, management considers the extent and duration of the unrealized loss, and the financial condition and
near-term prospects of the issuer. Management also assesses whether it intends to sell, or it is more likely than
not that it will be required to sell, a security in an unrealized loss position before recovery of its amortized cost
basis. If either of the criteria regarding intent or requirement to sell is met, the entire difference between amortized
cost and fair value is recognized as impairment through earnings. For debt securities that do not meet the
aforementioned criteria, the amount of impairment is split into two components as follows; OTTI related to credit
loss, which must be recognized in the income statement and; OTTI related to other factors, which is recognized in
other comprehensive income. The credit loss is defined as the difference between the present value of the cash
flows expected to be collected and the amortized cost basis. For equity securities, the entire amount of
impairment is recognized through earnings.
Loans Held for Sale
Government Guaranteed loans originated and intended for sale in the secondary market are carried at the lower of
cost or estimated market value in the aggregate. Net unrealized losses are recognized through a valuation
allowance by charges to income. Gains or losses realized on the sales of loans are recognized at the time of sale
and are determined by the difference between the net sales proceeds and the carrying value of the loans sold,
adjusted for any servicing asset or liability. Gains and losses on sales of loans are included in noninterest income.
Loans
Loans receivable that management has the intent and ability to hold for the foreseeable future or until maturity or
payoff are reported at their outstanding unpaid principal balances reduced by any charge-offs or specific valuation
accounts and net of deferred fees or costs on originated loans, or unamortized premiums or discounts on
purchased loans. Loan origination fees and certain direct origination costs are capitalized and recognized as an
adjustment of the yield of the related loan.
9
SUNCREST BANK
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2017 AND 2016
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
Loans - Continued
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.
10
SUNCREST BANK
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2017 AND 2016
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
Allowance for Loan Losses - Continued
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.
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.
Allowance for Credit Losses on Off-Balance Sheet Credit Exposures
The Bank also maintains a separate allowance for off-balance sheet commitments. Management estimates
anticipated losses using historical data and utilization assumptions. The allowance for off-balance sheet
commitments totaled $25,000 at December 31, 2017 and $8,254 at December 31, 2016, and is included in other
liabilities on the balance sheet.
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.
11
SUNCREST BANK
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2017 AND 2016
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
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, 2017 other real estate owned consisted of vacant land.
The Bank did not have any foreclosures in process as of December 31, 2017.
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 2017 was $263,000 and in 2016 was $65,000. Future amortization expense for the next
five years is approximately $184,000 per year.
Loss Contingencies
Loss contingencies, including claims and legal actions arising in the ordinary course of business, are recorded as
liabilities when the likelihood of loss is probable and an amount or range of loss can be reasonable estimated.
Management does not believe there now are such matters that will have a material effect on the financial
statements.
Advertising Costs
The Bank expenses the costs of advertising in the period incurred.
12
SUNCREST BANK
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2017 AND 2016
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
Transfers of Financial Assets
Transfers of financial assets are accounted for as sales, when control over the assets has been relinquished.
Control over transferred assets is deemed to be surrendered when the assets have been isolated from the Bank, the
transferee obtains the right (free of conditions that constrain it from taking advantage of that right) to pledge or
exchange the transferred assets, and the Bank does not maintain effective control over the transferred assets
through an agreement to repurchase them before their maturity.
Income Taxes
Deferred income taxes are computed using the asset and liability method, which recognizes a liability or asset
representing the tax effects, based on current tax law, of future deductible or taxable amounts attributable to
events that have been recognized in the financial statements. A valuation allowance is established to reduce the
deferred tax asset to the level at which it is "more likely than not" that the tax asset or benefits will be realized.
Realization of tax benefits of deductible temporary differences and operating loss carryforwards depends on
having sufficient taxable income of an appropriate character within the carryforward periods.
The Bank has adopted guidance issued by the Financial Accounting Standards Board ("FASB") that clarifies the
accounting for uncertainty in tax positions taken or expected to be taken on a tax return and provides that the tax
effects from an uncertain tax position can be recognized in the financial statements only if, based on its merits, the
position is more likely than not to be sustained on audit by the taxing authorities. Interest and penalties related to
uncertain tax positions are recorded as part of income tax expense.
Earnings Per Share ("EPS")
Basic EPS excludes dilution and is computed by dividing income available to common stockholders by the
weighted-average number of common shares outstanding for the period. Diluted EPS reflects the potential
dilution that could occur if securities or other contracts to issue common stock were exercised or converted into
common stock or resulted in the issuance of common stock that then shared in the earnings of the entity.
Comprehensive Income
Changes in unrealized gains and losses on available-for-sale securities is the only component of accumulated
other comprehensive income for the Bank. The amount reclassified out of other accumulated comprehensive
income relating to realized gains on sale of securities was $59,632 and $0 for 2017 and 2016, respectively. The
related tax effect for the reclassification was $24,449 and $0 for 2017 and 2016, respectively.
In February 2018, the FASB issued ASU 2018-02, Reclassification of Certain Tax Effects from Accumulated
Other Comprehensive Income (“AOCI”). ASU 2018-02 allows entities to elect to reclassify stranded tax effects
on items within AOCI, resulting from the new tax bill signed into law on December 22, 2017, to retained
earnings. The Bank elected to early adopt this new standard in 2017 and recorded a reclassification from AOCI to
retained earnings in the amount of $120,000.
13
SUNCREST BANK
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2017 AND 2016
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
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.
In March 2016, the FASB issued ASU 2016-09, Improvements to Employee Share-Based Payment Accounting
(Topic 718) and the Bank adopted this new standard in the current year. 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 are no longer recorded
in additional paid-in capital (“APIC”). Instead, all excess tax benefits and tax deficiencies are recorded as income
tax expense or benefit in the income statement. ASU 2016-09 also permits an accounting policy election, which
the Bank invoked, to account for forfeitures as they occur rather than estimating cost based on the number of
awards that are expected to vest.
See Note L for additional information on the Bank's stock option plan.
Fair Value Measurement
Fair value is the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in
the principal or most advantageous market for the asset or liability in an orderly transaction between market
participants on the measurement date. Current accounting guidance establishes a fair value hierarchy, which
requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when
measuring fair value. The guidance describes three levels of inputs that may be used to measure fair value:
Level 1: Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the
ability to access as of the measurement date.
Level 2: Significant other observable inputs other than Level 1 prices such as quoted prices for similar assets
or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be
corroborated by observable market data.
Level 3: Significant unobservable inputs that reflect a bank's own assumptions about the assumptions that
market participants would use in pricing an asset or liability.
See Note N for more information and disclosures relating to the Bank's fair value measurements.
14
SUNCREST BANK
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2017 AND 2016
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
Reclassifications
Certain reclassifications have been made in the 2016 financial statements to conform to the presentation used in
2017. 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 does not expect ASU 2014-
09 to have a material impact 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. The accounting for other financial
instruments, such as loans, investments in debt securities, and financial liabilities is largely unchanged. The
Update also changes the presentation and disclosure requirements for financial instruments including a
requirement that public business entities use exit price when measuring the fair value of financial instruments
measured at amortized cost for disclosure purposes. This Update is generally effective for public business entities
in fiscal years beginning after December 15, 2017, including interim periods within those fiscal years and one
year later for nonpublic business entities. The Bank does not expect ASU 2016-01 to have a material impact 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.
15
SUNCREST BANK
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2017 AND 2016
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
Recent Accounting Guidance Not Yet Effective - Continued
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.
In January 2017, the FASB issued ASU No. 2017-04, Intangibles – Goodwill and Other (Topic 350): Simplifying
the Accounting for Goodwill Impairment. This guidance removes Step 2 of the goodwill impairment test, which
requires a hypothetical purchase price allocation, and goodwill impairment will simply be the amount by which a
reporting unit’s carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. All other
goodwill impairment guidance will remain largely unchanged. Entities will continue to have the option to
perform a qualitative assessment to determine if a quantitative impairment test is necessary. The amendments in
this Update are required for public business entities and other entities that have goodwill reported in their
financial statements and have not elected the private company alternative for the subsequent measurement of
goodwill. ASU No. 2017-04 is effective for interim and annual reporting periods beginning after December 15,
2021 for public business entities who are not SEC filers and one year latter for all other entities. The Bank is
currently evaluating the effects of ASU 2017-04 on its consolidated financial statements and disclosures.
16
SUNCREST BANK
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2017 AND 2016
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. 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.
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
$
$
In accordance with generally accepted accounting principles there was no carryover of the allowance for loan
losses that had been previously recorded by SFB.
17
SUNCREST BANK
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2017 AND 2016
NOTE B - ACQUISITIONS - Continued
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)
$(
18
SUNCREST BANK
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2017 AND 2016
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, 2017
Available-for-Sale Securities:
U.S. Government and
Agency Securities
Mortgaged-Backed
Securities
Obligations of State and Political
Subdivisions
December 31, 2016
Available-for-Sale Securities:
U.S. Government and
Agency Securities
Mortgaged-Backed
Securities
Obligations of State and Political
Subdivisions
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Fair
Value
$
16,463,926
$
-
$(
330,768)
$
16,133,158
65,457,203
56,778
(
791,645)
64,722,336
9,502,708
91,423,837
$
31,054
87,832
$
(
$(
21,199)
1,143,612)
9,512,563
90,368,057
$
$
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
$
The amortized cost and estimated fair value of all investment securities as of December 31, 2017 by expected
maturities are shown below. Expected maturities may differ from contractual maturities because borrowers may
have the right to call or prepay obligations with or without call or prepayment penalties.
Available-for-Sale Securities
Amortized
Cost
Fair
Value
Due within One Year
Due from One Year to Five Years
Due from Five to Ten Years
Due after Ten Years
$
8,150
17,387,182
26,621,264
47,407,241
91,423,837
$
$
8,342
17,063,774
26,391,903
46,904,038
90,368,057
$
19
SUNCREST BANK
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2017 AND 2016
NOTE C - INVESTMENT SECURITIES - Continued
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, 2017 and 2016, are as follows:
December 31, 2017
U.S. Government and
Agency Securities
Mortgaged-Backed
Securities
Municipal Securities
December 31, 2016
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
$
-
$
-
$(
330,768)
$
16,133,158
$(
330,768)
$
16,133,158
(
559,180)
(21,199)
580,379)
$(
46,355,178
3,046,820
49,401,998
$
(
232,465)
-
563,233)
$(
10,657,056
-
26,790,214
$
(
791,645)
(21,199)
1,143,612)
$(
57,012,234
3,046,820
76,192,212
$
$(
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
$
As of December 31, 2017, the Bank has 15 U.S. government agency securities and 17 mortgage-backed securities
that have been in an unrealized loss position over 12 months. The unrealized loss on these investment securities
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 $764,000 were pledged to secure public funds.
Gross realized gains on sales of available-for-sale securities were $59,632 in 2017. No securities were sold
during 2016.
20
SUNCREST BANK
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2017 AND 2016
NOTE D - LOANS
The Bank's loan portfolio consists primarily of loans to borrowers within the Central Valley of California.
Although the Bank seeks to avoid concentrations of loans to a single industry or based upon a single class of
collateral, real estate and real estate associated businesses are among the principal industries in the Bank's market
area and, as a result, the Bank's loan and collateral portfolios are, to some degree, concentrated in those industries.
A summary of the changes in the allowance for loan losses as of December 31 follows:
Balance at Beginning of Year
Additions to the Allowance Charged to Expense
Recoveries on Loans Charged-Off
Less Loans Charged-Off
2017
2016
$
2,496,163
950,000
-
3,446,163
$
2,245,566
235,000
15,597
2,496,163
(
$
33,494)
3,412,669
-
2,496,163
$
The Bank also originates SBA loans for potential sale to institutional investors. A portion of the Bank’s revenues
are from origination of loans guaranteed by the Small Business Administration under its various programs and
sale of the guaranteed portions of the loans. Funding for these loans depends on annual appropriations by the
U.S. Congress. The Bank was servicing approximately $19,174,000 and $19,823,000 in loans previously sold as
of December 31, 2017 and 2016, respectively.
21
SUNCREST BANK
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2017 AND 2016
NOTE D - LOANS - Continued
The following table presents the activity in the allowance for loan losses for the year 2017 and 2016 and the
recorded investment in loans and impairment method as of December 31, 2017 and 2016 by portfolio segment:
December 31, 2017
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, 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
Real Estate -
Other
Construction
and Land
Development
Commercial
and
Industrial
Consumer
Total
$
$
$
$
$
1,746,195
515,422
-
-
2,261,617
62,595
14,769
-
-
77,364
650,732
402,003
-
-
1,052,735
36,641
17,806
(33,494)
-
20,953
2,496,163
950,000
(33,494)
-
3,412,669
$
$
$
$
$
$
-
2,261,617
-
2,261,617
$
-
$
77,364
-
77,364
$
$
245,572
807,163
-
1,052,735
$
$
-
281,163,384
893,113
282,056,497
$
$
134,346
12,249,171
-
12,383,517
$
$
450,829
58,851,293
72,002
59,374,124
$
$
-
20,953
-
20,953
$
$
-
247,067
-
247,067
$
$
245,572
3,167,097
-
3,412,669
$
$
585,175
352,510,915
965,115
354,061,205
$
$
$
$
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
$
$
$
$
$
$
-
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
$
As of December 31, 2017 and 2016, the Bank had unaccreted discount of $1,169,185 and $1,962,844 on acquired
loans, respectively.
22
SUNCREST BANK
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2017 AND 2016
NOTE D - LOANS - Continued
The Bank categorizes loans into risk categories based on relevant information about the ability of borrowers to
service their debt such as current financial information, historical payment experience, collateral adequacy, credit
documentation, and current economic trends, among other factors. The Bank analyzes loans individually by
classifying the loans as to credit risk. This analysis typically includes larger, non-homogeneous loans such as
commercial real estate and commercial and industrial loans. This analysis is performed on an ongoing basis as
new information is obtained. The Bank uses the following definitions for risk ratings:
Pass - Loans classified as pass include loans not meeting the risk ratings defined below.
Special Mention - Loans classified as special mention have a potential weakness that deserves management's
close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment
prospects for the loan or of the institution's credit position at some future date.
Substandard - Loans classified as substandard are inadequately protected by the current net worth and
paying capacity of the obligor or of the collateral pledged, if any. Loans so classified have a well-defined
weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct
possibility that the institution will sustain some loss if the deficiencies are not corrected.
Impaired - A loan is considered impaired, when, based on current information and events, it is probable that
the Bank will be unable to collect all amounts due according to the contractual terms of the loan agreement.
Additionally, all loans classified as troubled debt restructurings are considered impaired.
The risk category of loans by class of loans was as follows as of December 31, 2017:
December 31, 2017
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
$
140,470,951
71,581,960
45,261,076
18,398,062
11,989,155
58,649,155
247,067
346,597,426
$
$
$
395,621
2,921,448
-
106,538
260,016
154,640
-
3,838,263
2,920,841
-
-
-
-
119,500
-
3,040,341
-
$
-
-
-
134,346
450,829
-
585,175
$
$
$
143,787,413
74,503,408
45,261,076
18,504,600
12,383,517
59,374,124
247,067
354,061,205
$
$
23
SUNCREST BANK
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2017 AND 2016
NOTE D - LOANS - Continued
The risk category of loans by class of loans was as follows as of December 31, 2016:
December 31, 2016
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
$
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
Past due and nonaccrual loans presented by loan class were as follows as of December 31, 2017 and 2016:
December 31, 2017
Real Estate Other:
Commercial
Farmland
1-4 Family Residential
Multifamily Residential
Construction and Land Development
Commercial and Industrial
Consumer
December 31, 2016
Real Estate Other:
Commercial
Farmland
1-4 Family Residential
Multifamily Residential
Construction and Land Development
Commercial and Industrial
Consumer
30-59 Days
Past Due
$
-
73,799
-
-
444,256
1,320
519,375
$
$
-
-
-
-
10,000
-
10,000
$
Still Accruing
60-89 Days
Past Due
$
-
-
-
-
-
24,321
-
24,321
$
Over 90 Days
Past Due
$
-
-
-
-
-
-
-
$
-
Nonaccrual
$
-
-
-
-
134,346
522,831
-
657,177
$
$
$
749,934
-
-
-
185,958
-
33,494
969,386
$
-
-
-
-
-
-
-
$
-
1,039,740
-
-
-
-
40,256
10,318
1,090,314
$
$
24
SUNCREST BANK
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2017 AND 2016
NOTE D - LOANS - Continued
Information relating to individually impaired loans presented by class of loans was as follows as of
December 31, 2017 and 2016:
December 31, 2017
Real Estate Other:
Commercial
Farmland
1-4 Family Residential
Multifamily Residential
Construction and Land Development
Commercial and Industrial
Consumer
December 31, 2016
Real Estate Other:
Commercial
Farmland
1-4 Family Residential
Multifamily Residential
Construction and Land Development
Commercial and Industrial
Consumer
Unpaid
Principal
Balance
-
$
-
-
-
146,381
450,829
-
597,210
$
Impaired Loans
Recorded Without Specific With Specific
Allowance
Investment
Allowance
Related
Allowance
Average
Recorded
Investment
Interest
Income
Recognized
-
$
-
-
-
134,346
450,829
-
585,175
$
-
$
-
-
-
134,346
5,995
-
140,341
$
-
$
-
-
-
-
444,834
-
444,834
$
-
$
-
-
-
-
245,572
-
245,572
$
-
$
-
-
-
865,114
433,645
-
1,298,759
$
-
$
-
-
-
-
-
-
$
-
$
2,040,093
-
-
-
-
50,602
10,651
$
1,039,740
-
-
-
-
40,256
10,318
$
1,039,740
-
-
-
-
40,256
10,318
$
-
-
-
-
-
-
-
$
-
-
-
-
-
-
-
$
1,125,531
-
-
-
-
22,932
2,880
$
-
-
-
-
-
-
-
$
2,101,346
$
1,090,314
$
1,090,314
$
-
$
-
$
1,151,343
$
-
The outstanding balance and carrying amount of purchased credit impaired loans as of December 31, 2017 and
2016 were as follows:
Outstanding Balance
Carrying Amount
2017
1,201,693
965,115
$
$
2016
5,841,817
4,185,105
$
$
25
SUNCREST BANK
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2017 AND 2016
NOTE D - LOANS - Continued
The change in accretable discount on purchased credit impaired loans during the period was as follows:
2017
2016
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
$
65,193
-
(65,193)
-
-
-
$
-
$
$
21,637
43,556
-
-
-
-
65,193
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 $72,002 and $3.8 million at December 31, 2017 and
2016, respectively.
NOTE E - PREMISES AND EQUIPMENT
A summary of premises and equipment as of December 31 follows:
2017
2016
Land
Building
Leasehold Improvements
Furniture, Fixtures, and Equipment
Construction in Progress
Less Accumulated Depreciation and Amortization
$
$
600,000
4,261,720
554,719
1,693,696
10,063
7,120,198
1,215,936)
5,904,262
(
$
600,000
1,317,529
1,398,649
1,285,554
1,722,704
6,324,436
2,106,076)
4,218,360
(
$
The Bank has operating leases for branches that 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 $426,000 and $429,000 for the years ended December 31, 2017 and 2016,
respectively.
26
SUNCREST BANK
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2017 AND 2016
NOTE E - PREMISES AND EQUIPMENT - Continued
At December 31, 2017, the future lease rental payable under noncancellable operating lease commitments for the
branches was as follows:
2018
2019
2020
2021
2022
Thereafter
$
381,805
338,351
345,624
174,842
175,665
1,651,214
3,067,500
$
The minimum rental payments shown above are given for the existing lease obligations and are not a forecast of
future rental expense.
NOTE F - DEPOSITS
At December 31, 2017, the scheduled maturities of time deposits are as follows:
2018
2019
2020
2021
2022
$
8,434,001
48,778,704
2,833,904
43,724
9,162,962
69,253,295
$
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, 2017, 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 $137.1 million subject to providing adequate collateral and continued compliance with the
Advances and Security Agreement and other eligibility requirements established by the FHLB. The Bank has
pledged $285.6 million of loans as collateral for this line. As of December 31, 2017 the Bank had a $22.0 million
outstanding Letter of Credit under this arrangement to secure public monies.
27
SUNCREST BANK
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2017 AND 2016
NOTE H - OTHER EXPENSES
Other expenses as of December 31 are comprised of the following:
2017
2016
Professional Fees
Data Processing
Office Expenses
Marketing and Business Promotion
Insurance
Regulatory Assessments
Core Deposit Intangible Amortization
Other Expenses
NOTE I - INCOME TAXES
$
$
1,557,729
1,131,628
280,450
426,524
82,225
198,772
263,310
428,604
4,369,242
1,501,888
858,393
248,945
397,390
75,249
200,689
65,389
382,653
3,730,596
$
$
The provision (benefit) for income taxes for the years ended December 31, consists of the following:
2017
2016
Current:
Federal
State
Deferred
Deferred Tax Asset Adjustment for Enacted Change in Tax Rate
$
$
1,476,329
546,174
2,022,503
1,406,000
1,304,000
4,732,503
1,246,518
377,182
1,623,700
(196,000)
-
1,427,700
$
$
Income tax expense for 2017 includes a downward adjustment of net deferred assets in the amount of $1,304,000,
recorded as a result of the enactment of H.R.1 Tax Cuts and Jobs Act on December 31, 2017. The Act reduced
corporate Federal tax rates from 34% to 21% effective January 1, 2018.
As of December 31, 2017, the Bank has net operating loss carryforwards of approximately $3,687,000 and
$6,687,000 for Federal and California franchise tax purposes, respectively. The use of the net operating loss
carryforwards is limited by Section 382 of the Internal Revenue Service Code and ranges from $219,000 per year
to $314,000 per year. Federal and California net operating loss carryforwards, to the extent not used will begin to
expire in 2029.
28
SUNCREST BANK
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2017 AND 2016
NOTE I - INCOME TAXES - Continued
A comparison of the federal statutory income tax rates to the Bank's effective income tax rates follows:
2017
2016
Amount
Rate
Amount
Rate
Statutory Federal Tax
State Tax, Net of Federal Benefit
Change in Tax Rate
Stock-based Compensation
Merger Expenses
Other Items, Net
Actual Tax Expense (Benefit)
$
2,760,000
573,000
1,304,000
13,000
-
82,503
4,732,503
$
34.0%
7.1%
16.1%
0.2%
-
1.0%
58.4%
$
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%
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 statements of financial condition at December 31:
Deferred Tax Assets:
Pre-Opening Expenses
Allowance for Loan Losses Due to Tax Limitations
Depreciation Differences
Other Real Estate Owned Differences
Operating Loss Carryforwards
Unrealized Loss on Available-for-Sale Securities
Stock-Based Compensation
Nonaccrual Differences
Purchase Accounting Adjustments
Other Assets and Liabilities
Deferred Tax Liabilities:
Depreciation Differences
Other Assets and Liabilities
2017
2016
$
247,000
515,000
-
440,000
1,347,000
313,000
296,000
125,000
32,000
372,000
3,687,000
$
416,000
326,000
332,000
787,000
1,884,000
276,000
409,000
389,000
651,000
550,000
6,020,000
(
(
(
$
49,000)
530,000)
579,000)
3,108,000
-
359,000)
359,000)
5,661,000
(
(
$
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, 2013 are open to audit by the federal authorities and income tax returns for the
years ending after December 31, 2012 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.
29
SUNCREST BANK
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2017 AND 2016
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, 2017 and
2016 was approximately $5,484,000 and $5,441,000, 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, 2017 and 2016 amounted
to approximately $30.0 million and $22.9 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.
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, 2017 and 2016, the Bank had the following outstanding financial commitments whose
contractual amount represents credit risk:
Commitments to Extend Credit
$
63,923,000
$
47,009,000
2017
2016
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.
30
SUNCREST BANK
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2017 AND 2016
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 1,152,512 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 $367,000 and $283,000 for the periods ended
December 31, 2017 and 2016. The Bank also recognized income tax benefits related to stock-based
compensation of $134,000 in 2017 and $105,000 in 2016.
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:
2017
2016
Expected Volatility
Expected Term
Expected Dividends
Risk Free Rate
Grant Date Fair Value
22.20%
6.25 Years
None
1.93%
2.61
$
36.00%
6.25 Years
None
1.25%
2.80
$
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.
31
SUNCREST BANK
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2017 AND 2016
NOTE L - STOCK-BASED COMPENSATION PLANS - Continued
A summary of the status of the Bank's stock options as of December 31, 2017 and changes during the year ended
thereon is presented below:
Weighted-
Average
Exercise
Price
8.59
$
$
-
9.75
$
$
-
$
-
$
9.26
Shares
364,730
-
500,000
-
-
864,730
Weighted-
Average
Remaining
Contractual
Term
Aggregate
Intrinsic
Value
6.92 Years
$
1,564,000
Outstanding at Beginning of Year
Cancelled
Granted
Exercised
Forfeited
Outstanding at End of Year
Options Exercisable
319,730
$
8.97
3.29 Years
$
670,000
As of December 31, 2017, there was approximately $1.4 million of total unrecognized compensation cost related
to the outstanding stock options that will be recognized over a weighted-average period of 2.57 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 $55,000 was recognized in 2017 and 2016, respectively, as a result of the modification.
32
SUNCREST BANK
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2017 AND 2016
NOTE L - STOCK-BASED COMPENSATION PLANS - Continued
A summary of the status of the Bank's deferred share awards as of December 31, 2017 and changes during the
year ended thereon is presented below:
Weighted-
Average
Grant-Date
Fair Value
8.05
$
10.25
$
$
8.20
$
-
$
8.55
Shares
(
47,931
8,300
28,097)
-
28,134
Nonvested at January 1, 2017
New Deferred Share Awards
Shares Vested and Issued
Shares Forfeited
Nonvested at December 31, 2017
As of December 31, 2017 there was approximately $218,000 of unrecognized compensation cost related to the
restricted stock grants that will be recognized over a weighted-average period of 2.4 years. The fair value of
shares issued in 2017 and 2016 was approximately $291,000 and $138,000, 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:
2017
2016
Income
Shares
Income
Shares
$
3,385,527
$
1,732,944
Net Income as Reported
Shares Outstanding at Year-End
Impact of Weighting Shares
Issued During the Year
Used in Basic EPS
3,385,527
Dilutive Effect of Stock Options
Dilutive Effect of Outstanding
Deferred Shares
Used in Dilutive EPS
$
3,385,527
7,007,594
(8,950)
6,998,644
46,166
12,363
7,057,173
1,732,944
$
1,732,944
6,979,497
(1,873,829)
5,105,669
-
12,118
5,117,787
As of December 31, 2017 and 2016 there were 500,000 and 359,730, 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.
33
SUNCREST BANK
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2017 AND 2016
NOTE N - FAIR VALUE MEASUREMENT
The following is a description of valuation methodologies used for assets and liabilities recorded at fair value:
Securities:
The fair values of securities available for sale are determined by matrix pricing, which is a mathematical
technique used widely in the industry to value debt securities without relying exclusively on quoted prices for
specific securities but rather by relying on the securities' relationship to other benchmark quoted securities
(Level 2).
Collateral-Dependent Impaired Loans:
The Bank does not record loans at fair value on a recurring basis. However, from time to time, fair value
adjustments are recorded on these loans to reflect (1) partial write-downs, through charge-offs or specific reserve
allowances, that are based on the current appraised or market-quoted value of the underlying collateral. The fair
value estimates for collateral-dependent impaired loans are generally based on recent real estate appraisals or
broker opinions, obtained from independent third parties, which are frequently adjusted by management to reflect
current conditions and estimated selling costs (Level 3).
Other Real Estate Owned:
Nonrecurring adjustments to certain commercial and residential real estate properties classified as other real estate
owned ("OREO") are measured at the lower of carrying amount or fair value, less costs to sell. Fair values are
generally based on third party appraisals or broker opinions, which are frequently adjusted by management to
reflect current conditions and estimated selling costs, resulting in a Level 3 classification. In cases where the
carrying amount exceeds the fair value, less costs to sell, an impairment loss is recognized.
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, 2017.
34
SUNCREST BANK
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2017 AND 2016
NOTE N - FAIR VALUE MEASUREMENT - Continued
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 1
Level 3
Total
Total
Losses
December 31, 2017
Assets measured at fair value on
a recurring basis
Securities Available for Sale
Assets measured at fair value on
a Non-recurring basis
Collateral Dependent Impaired
Loans, Net of Specific Reserves
Other Real Estate Owned, Net
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
$
-
$
90,368,057
$
-
$
90,368,057
$
-
$
-
$
-
$
-
$
-
$
$
199,262
313,720
$
$
199,262
313,720
245,572
$
$
-
$
-
$
53,567,064
$
-
$
53,567,064
$
-
$
-
$
-
$
788,842
$
788,842
$
-
Quantitative information about the Bank's nonrecurring Level 3 fair value measurements as of December 31 is as
follows:
December 31, 2017
Collateral Dependent Impaired
Loans, Net
Other Real Estate Owned
December 31, 2016
Other Real Estate Owned
Fair Value
Amount Valuation Technique
Unobservable
Input
Range
$
$
199,262
313,720
Third Party Appraisals Liquidation and Selling Costs 8% to 20%
Third Party Appraisals Liquidation and Selling Costs 8% to 50%
$
788,842
Third Party Appraisals Liquidation and Selling Costs 8% to 50%
35
SUNCREST BANK
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2017 AND 2016
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.
36
SUNCREST BANK
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2017 AND 2016
NOTE O - FAIR VALUE OF FINANCIAL INSTRUMENTS - Continued
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, 2017
and 2016 are summarized as follows (dollar amounts in thousands):
2017
2016
Fair Value
Hierarchy
Carrying
Value
Fair
Value
Carrying
Value
Fair
Value
Level 1
Level 2
Level 2
$
62,734
90,368
349,955
3,153
$
62,734
90,368
348,982
N/A
$
62,547
53,567
305,022
3,153
$
62,547
53,567
303,888
N/A
Level 1
Level 2
397,648
69,253
397,648
68,480
304,615
84,371
304,615
84,134
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
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 $117,000 in contributions for 2017 and $42,000 in contributions for 2016.
37
SUNCREST BANK
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2017 AND 2016
NOTE Q - REGULATORY MATTERS
The Bank is subject to various regulatory capital requirements administered by the federal banking agencies.
Failure to meet minimum capital requirements can initiate certain mandatory - and possibly additional
discretionary - actions by regulators that, if undertaken, could have a direct material effect on the Bank's financial
statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the
Bank must meet specific capital guidelines that involve quantitative measures of their assets, liabilities, and
certain off-balance-sheet items as calculated under regulatory accounting practices. The capital amounts and
classification are also subject to qualitative judgments by the regulators about components, risk weightings, and
other factors.
In July, 2013, the federal bank regulatory agencies approved the final rules implementing the Basel Committee on
Banking Supervision's capital guidelines for U.S. banks (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 at the rate
of 0.625% per year from 0.0% in 2015 to 2.5% by January 1, 2019. The capital conservation buffer for 2017 is
1.25%. 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, 2017 and 2016, that the Bank meets all capital adequacy requirements.
As of December 31, 2017, 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.
38
SUNCREST BANK
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2017 AND 2016
NOTE Q - REGULATORY MATTERS - Continued
The following table also sets forth the Bank's actual capital amounts and ratios (dollar amounts in thousands):
Amount of Capital Required
Actual
For Capital
Adequacy
Purposes
To Be Well-
Capitalized
Under Prompt
Corrective
Provisions
Amount
Ratio
Amount
Ratio
Amount
Ratio
$59,213
$55,775
$55,775
$55,775
$54,599
$52,095
$52,095
$52,095
14.5%
13.6%
13.6%
10.6%
14.5%
13.9%
13.9%
11.7%
$32,729
$24,547
$18,410
$21,082
$30,074
$22,555
$16,917
$17,811
8.0%
6.0%
4.5%
4.0%
8.0%
6.0%
4.5%
4.0%
$40,912
$32,729
$26,593
$26,353
$37,592
$30,074
$24,435
$22,264
10.0%
8.0%
6.5%
5.0%
10.0%
8.0%
6.5%
5.0%
As of December 31, 2017:
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, 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)
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.
39