Suncrest Bank
Annual Report 2019

Plain-text annual report

SUNCREST BANK FINANCIAL STATEMENTS WITH INDEPENDENT AUDITOR'S REPORT DECEMBER 31, 2019 AND 2018             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 3 5 6 7 8 9 This statement has not been reviewed, or confirmed for accuracy or relevance, by the Federal Deposit Insurance Corporation.             Independent Auditor’s Report  The Board of Directors and Shareholders  Suncrest Bank   Visalia, California  Report on the Financial Statements  We have audited the accompanying financial statements of Suncrest Bank, which comprise the  statement of financial condition as of December 31, 2019, and the related statements of income,  comprehensive income, changes in shareholders’ equity, and cash flows for the year 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 audit. We  conducted our audit 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. What inspires you, inspires us. | eidebailly.com 25231 Paseo De Alicia, Ste. 100 | Laguna Hills, CA 92653‐4615 | T 949.768.0833 | F 949.768.8408 | EOE  1                            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, 2019, and the results of its operations and its cash flows for the  year then ended in accordance with accounting principles generally accepted in the United States of America.  Other Matter  The financial statements of Suncrest Bank as of and for the year ended December 31, 2018, were audited by  Vavrinek, Trine, Day & Co. LLP, who joined Eide Bailly LLP on July 22, 2019, and whose report dated March 27,  2019, expressed an unmodified opinion on those statements.  Laguna Hills, California  March 25, 2020  2             SUNCREST BANK STATEMENTS OF FINANCIAL CONDITION DECEMBER 31, 2019 AND 2018 ASSETS Cash and Due from Banks Federal Funds Sold Interest-Bearing Deposits in Other Banks TOTAL CASH AND CASH EQUIVALENTS 2019 2018 $ 9,163,176 19,330,000 23,999,812 52,492,988 $ 34,747,273 18,137,000 20,000,000 72,884,273 Debt Securities Available for Sale 195,799,866 137,719,068 Loans: Real Estate - Other Construction and Land Development Commercial and Industrial Municipal Leases Consumer Deferred Loan Costs, Net of Fees 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 524,711,894 42,530,379 78,346,239 21,461,996 185,556 667,236,064 242,929 5,488,657) 661,990,336 ( 5,471,141 6,613,709 313,720 8,492,003 2,564,000 38,989,566 3,194,010 8,976,800 984,898,139 $ 479,188,736 41,740,794 110,580,313 18,535,425 261,082 650,306,350 ( 159,936) ( 4,372,547) 645,773,867 5,453,891 6,014,471 313,720 8,284,240 4,139,000 38,989,566 3,974,505 5,130,273 928,676,874 $ The accompanying notes are an integral part of these financial statements. 3            SUNCREST BANK STATEMENTS OF FINANCIAL CONDITION DECEMBER 31, 2019 AND 2018 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 - Note L 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, 12,442,800 in 2019 and 12,420,300 in 2018 Additional Paid-in Capital Retained Earnings Accumulated Other Comprehensive Income (Loss) - Net Unrealized Gain (Loss) on Securities Available for Sale, Net of Taxes of ($579,761) in 2019 and $505,220 in 2018 TOTAL SHAREHOLDERS' EQUITY 2019 2018 $ 328,439,703 421,833,613 51,425,063 26,860,666 828,559,045 8,160,798 836,719,843 $ 292,174,413 386,793,012 60,029,435 52,020,824 791,017,684 4,622,643 795,640,327 - - 119,816,864 2,920,953 24,061,588 119,643,464 2,441,948 12,152,740 1,378,891 148,178,296 984,898,139 $ ( 1,201,605) 133,036,547 928,676,874 $ The accompanying notes are an integral part of these financial statements. 4            SUNCREST BANK STATEMENTS OF INCOME FOR THE YEARS ENDED DECEMBER 31, 2019 AND 2018 INTEREST INCOME Interest and Fees on Loans Interest on Debt Securities Interest on Federal Funds Sold and Other TOTAL INTEREST INCOME 2019 2018 $ 36,926,377 4,586,944 1,673,353 43,186,674 $ 30,336,366 2,899,825 1,252,639 34,488,830 INTEREST EXPENSE Interest on Savings Deposits, NOW and Money Market Accounts Interest on Time Deposits Interest on Other Borrowings TOTAL INTEREST EXPENSE 3,590,402 967,845 - 4,558,247 1,412,820 894,540 27,325 2,334,685 NET INTEREST INCOME 38,628,427 32,154,145 Provision for Loan Losses 2,100,000 1,270,000 NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 36,528,427 30,884,145 NONINTEREST INCOME Service Charges and Fees on Deposit Accounts Interchange Fees Gain on Sale of Loans Gain on Sale of Available-for-Sale Securities Earnings on Bank Owned Life Insurance Other Income NONINTEREST EXPENSE Salaries and Employee Benefits Occupancy Expenses Equipment Expenses Other Expenses Income Taxes INCOME BEFORE INCOME TAXES NET INCOME 432,326 456,429 50,012 29,536 207,763 300,554 1,476,620 11,398,002 1,658,939 590,909 7,819,249 21,467,099 16,537,948 4,629,100 11,908,848 $ 434,317 383,169 332,288 - 189,620 244,781 1,584,175 9,297,693 1,361,207 474,551 7,726,814 18,860,265 13,608,055 3,750,800 9,857,255 $ NET INCOME PER SHARE - BASIC $ 0.96 $ 0.95 NET INCOME PER SHARE - DILUTED $ 0.95 $ 0.94 The accompanying notes are an integral part of these financial statements. 5          SUNCREST BANK STATEMENTS OF COMPREHENSIVE INCOME FOR THE YEARS ENDED DECEMBER 31, 2019 AND 2018 OTHER COMPREHENSIVE GAIN (LOSS): Unrealized Gain (Loss) 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 Gain (Loss) Reclassification of Net Gain Recognized in Net Income TOTAL OTHER COMPREHENSIVE INCOME (LOSS) TOTAL COMPREHENSIVE INCOME 2019 2018 $ 11,908,848 $ 9,857,255 3,695,012 ( 651,045) ( 29,536) 3,665,476 - 651,045) ( 1,097,090 (12,110) 1,084,980 2,580,496 14,489,344 $ ( 192,709) - 192,709) 458,336) 9,398,919 ( ( $ The accompanying notes are an integral part of these financial statements. 6          SUNCREST BANK STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY FOR THE YEARS ENDED DECEMBER 31, 2019 AND 2018 Common Stock Number of Shares Amount Additional Paid-in Capital Retained Earnings Accumulated Other Comprehensive Income (Loss) Total Balance January 1, 2018 7,007,594 $ 57,279,494 $ 1,985,398 $ 2,295,485 $( 743,269) $ 60,817,108 Net Income Stock-based Compensation 9,857,255 582,281 Stock Options Exercised 162,556 1,614,560 Issuance of Stock to Employees in Exchange for Services Rendered 13,109 125,731 ( 125,731) Issuance of Stock in the Acquisition of Community Business Bank 2,874,089 36,788,340 Issuance of Common Stock Net of Expenses of $956,038 2,380,952 24,043,959 Repurchase of common Stock ( 18,000) ( 208,620) Other Comprehensive Loss, Net of Taxes 9,857,255 582,281 1,614,560 - 36,788,340 24,043,959 ( 208,620) ( 458,336) ( 458,336) Balance at December 31, 2018 12,420,300 119,643,464 2,441,948 12,152,740 ( 1,201,605) 133,036,547 Net Income Stock-based Compensation 533,655 Stock Options Exercised 16,000 118,750 Issuance of Stock to Employees in Exchange for Services Rendered 6,500 54,650 ( 54,650) 11,908,848 11,908,848 533,655 118,750 - Other Comprehensive Income, Net of Taxes Balance at December 31, 2019 12,442,800 $ 119,816,864 $ 2,920,953 $ 24,061,588 2,580,496 1,378,891 $ 2,580,496 148,178,296 $ The accompanying notes are an integral part of these financial statements. 7            SUNCREST BANK STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 2019 AND 2018 2019 2018 $ 11,908,848 $ 9,857,255 ( ( ( ( 629,639 533,655 2,100,000 490,000 207,763) 29,536) 50,012) 737,937) 798,595 780,495 1,269,111) 146,177 15,093,050 ( ( ( ( 94,196,038) 14,885,413 24,536,089 17,058,005) 17,250) - - 1,294,655) 73,144,446) ( ( 549,799 582,281 1,270,000 1,453,000 189,620) - 332,288) 3,524,784) 4,311,200 602,796 369,854) 976,703 15,186,488 ( ( ( ( ( 44,006,079) 7,952,901 52,606,407 46,790,347) 367,000) 1,546,800 22,601,769) 337,127) 51,996,214) ( ( ( ( ( ( 71,305,891 33,764,530) - - - 118,750 37,660,111 ( 20,391,285) 72,884,273 52,492,988 $ ( ( ( 80,444,571 17,634,784) 41,300,000) 208,620) 24,043,959 1,614,560 46,959,686 10,149,960 62,734,313 72,884,273 $ $ $ $ 4,575,000 4,090,000 3,674,000 $ 2,144,600 $ 1,830,000 $ - 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 Earnings on Bank Owned Life Insurance Gain on Sale of Available-for-Sale Securities 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 Net Change in FHLB Advances Repurchase of Common Stock 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 Supple me ntal Disclosures of Cash Flow Information: Interest Paid Taxes Paid Operating Lease Liabilities Arising from Obtaining ROU Assets The accompanying notes are an integral part of these financial statements. 8          SUNCREST BANK NOTES TO FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2019 AND 2018 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 seven full-service branches in Visalia, Porterville, Kingsburg, Fresno, Yuba City, West Sacramento and Lodi, 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 25, 2020, which is the date the financial statements were available to be issued. Subsequent to year-end, the Bank has loan customers who are expected to be negatively impacted by the effects of the world-wide coronavirus pandemic. The Bank is closely monitoring its loan portfolio, operations, liquidity, and capital resources and is actively working to minimize the current and future impact of this unprecedented situation. As of the date of issuance of these financial statements, the full impact to the Bank’s financial position is not known. 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, 2019. The Bank maintains amounts due from banks, which may exceed federally insured limits. The Bank has not experienced any losses in such accounts. Debt 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. 9            SUNCREST BANK NOTES TO FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2019 AND 2018 NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued Debt Securities - Continued Debt securities 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 debt 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. 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. 10            SUNCREST BANK NOTES TO FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2019 AND 2018 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. 11            SUNCREST BANK NOTES TO FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2019 AND 2018 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, municipal leases 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 $50,000 at December 31, 2019 and $45,000 at December 31, 2018, and is included in other liabilities on the balance sheet. 12                  SUNCREST BANK NOTES TO FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2019 AND 2018 NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued Federal Home Loan Bank and Other Bank Stock The Bank is a member of the Federal Home Loan Bank (“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. The investment in FHLB stock and other bank stock is carried at cost, classified as a restricted security and redeemable at par with certain restrictions. FHLB stock and other bank stock is periodically evaluated for impairment based on the ultimate recovery of par value. Both cash and stock dividends are reported as income. The Bank’s investment in FHLB stock was approximately $3.9 million and $3.8 million as of December 31, 2019 and 2018, respectively. The Bank’s investment in The Independent BankersBank (“TIB”) stock was approximately $1.2 million as of December 31, 2019 and 2018. The Bank’s investment in Pacific Coast Bankers Bank (“PCBB”) stock was approximately $400,000 as of December 31, 2019 and 2018. Pursuant to the adoption of Accounting Standards Update (“ASU”) 2016-01 on January 1, 2018, the Bank elected the measurement alternative for measuring equity securities without readily determinable fair values at cost less impairment, plus or minus observable price changes in orderly transactions. The carrying amount of equity securities without readily determinable fair values is $1.6 million as of December 31, 2019 and includes investments in PCBB and TIB. All bankers bank stock is recorded at cost. 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, 2019 other real estate owned consisted of vacant land. The Bank did not have any foreclosures in process of single-family residential property as of December 31, 2019. Bank Owned Life Insurance Bank owned life insurance is recorded at the amount that can be realized under the insurance contract at the statement of financial condition date, which is the cash surrender value adjusted for other charges or other amounts due that are probable at settlement. 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. 13            SUNCREST BANK NOTES TO FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2019 AND 2018 NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued Leases The Bank determines if an arrangement contains a lease at contract inception and recognizes right-of-use ("ROU") assets and operating lease liabilities based on the present value of lease payments over the lease term. While operating leases may include options to extend the term, the Bank does not take into account the options in calculating the ROU asset and lease liability unless it is reasonably certain such options will be reasonably exercised. The present value of lease payments is determined based on the Bank’s incremental borrowing rate and other information available at lease commencement. Leases with an initial term of 12 months or less are not recorded in the consolidated balance sheets. Lease expense is recognized on a straight-line basis over the lease term. The Bank has elected to account for lease agreements with lease and non-lease components as a single lease component. Refer to - Accounting Standards Adopted in 2019 below and Note F. Leases for further discussion on the Bank’s leasing arrangements and related accounting. 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 was approximately $780,000 and $603,000 in 2019 and 2018, respectively. Future amortization expense for the next five years is approximately $494,000 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. 14            SUNCREST BANK NOTES TO FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2019 AND 2018 NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued Revenue Recognition – Noninterest Income The Bank adopted the provisions of ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606), on January 1, 2018 and all subsequent ASUs that modified Topic 606. Results for reporting periods beginning after December 31, 2017 are presented under Topic 606, while prior period amounts have not been adjusted and continue to be reported in accordance with Topic 605. The Bank recognizes revenue as it is earned and noted no impact to its revenue recognition policies as a result of the adoption of ASU 2014-09. All of the Bank’s revenue from contracts with customers within the scope of Topic 606 is recognized in non-interest income. In accordance with Topic 606, revenues are recognized when control of promised goods or services is transferred to customers in an amount that reflects the consideration the Bank expects to be entitled to in exchange for those goods or services. To determine revenue recognition for arrangements that an entity determines are within the scope of Topic 606, the Bank performs the following five steps: (i) identify the contract(s) with a customer; (ii) identify the performance obligation in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligation in the contract; and (v) recognize revenue when (or as) the Bank satisfies a performance obligation. The Bank only applies the five-step model to contracts when it is probable that the entity will collect the consideration it is entitled to in exchange for the goods or services it transfers to the customer. At contract inception, once the contract is determined to be within the scope of Topic 606, the Bank assesses the goods or services that are promised within each contract and identifies those that contain performance obligation, and assesses whether each promised good or service is distinct. The Bank then recognizes as revenue the amount of the transaction price that is allocated to the respective performance obligation when (or as) the performance obligation is satisfied. The following is a discussion of key revenues within the scope of the new revenue guidance. Service Charges and Fees on Deposit Accounts The Bank earns fees from its deposit customers for account maintenance, transaction-based and overdraft services. Account maintenance fees consist primarily of account fees and analyzed account fees charged on deposit accounts on a monthly basis. The performance obligation is satisfied and the fees are recognized on a monthly basis as the service period is completed. Transaction-based fees on deposits accounts are charged to deposit customers for specific services provided to the customer, such as non-sufficient funds fees, overdraft fees, and wire fees. The performance obligation is completed as the transaction occurs and the fees are recognized at the time each specific service is provided to the customer. Interchange Fees Interchange fees represents fees earned when a debit card issued by the Bank is used. The Bank earns interchange fees from debit cardholder transactions through a payment network. Interchange fees from cardholder transactions represent a percentage of the underlying transaction value and are recognized daily, concurrently with the transaction processing services provided to the cardholder. The performance obligation is satisfied and the fees are earned when the cost of the transaction is charged to the card. Certain expenses directly associated with the debit card are recorded on a net basis with the fee income. 15            SUNCREST BANK NOTES TO FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2019 AND 2018 NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued Revenue Recognition – Noninterest Income - Continued Gains/Losses on Other Real Estate Owned (“OREO”) Sales Gains/losses on the sale of OREO are included in non-interest expense and are generally recognized when the performance obligation is complete. This is typically at delivery of control over the property to the buyer at the time of each real estate closing. 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 approximately $30,000 and $0 for 2019 and 2018, respectively. The related tax effect for the reclassification was approximately $12,000 and $0 for 2019 and 2018, respectively. 16            SUNCREST BANK NOTES TO FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2019 AND 2018 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 L. Such financial instruments are recorded in the financial statements when they are funded or related fees are incurred or received. Stock-Based Compensation Compensation cost is recognized for stock options and restricted stock awards issued to employees, based on the fair value of these awards at the date of grant. A Black-Scholes model is utilized to estimate the fair value of stock options, while the market price of the Bank’s common stock at the date of grant is used for restricted stock awards. Compensation cost is recognized over the required service period, generally defined as the vesting period, on a straight-line basis. The Bank has elected to account for forfeitures of stock-based awards as they occur. Excess tax benefits and tax deficiencies relating to stock-based compensation are recorded as income tax expense or benefit in the income statement when incurred. See Note M 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 O for more information and disclosures relating to the Bank's fair value measurements. 17            SUNCREST BANK NOTES TO FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2019 AND 2018 NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued Recently Adopted Accounting Guidance The Bank adopted ASU 2016-02, Leases (Topic 842) and ASU 2018-11, Leases (Topic 842): Targeted Improvements, referred to herein as Topic 842, effective January 1, 2019. The new guidance establishes the principles to report transparent and economically neutral information about the assets and liabilities that arise from leases. Entities are required to recognize ROU assets and lease liabilities that arise from leases in the balance sheet and to disclose qualitative and quantitative information about lease transactions, such as information about variable lease payments and options to renew and terminate leases. Under the amendments in ASU 2018-11, entities may elect not to recast the comparative periods presented when transitioning to the new leasing standard. Upon adoption, the Bank elected to use the modified retrospective transition approach and recorded ROU assets of $4.2 million and lease liabilities of $4.3 million at the date of adoption with no adjustment to opening equity. The Bank elected to apply the package of practical expedients which permits entities to not reassess: (i) whether any expired or existing contracts contain a lease; (ii) lease classification for any expired or existing leases; and (iii) whether initial direct costs for any existing leases qualify for capitalization under the amended guidance. The Company/Bank also elected not to include short-term leases (leases with initial terms of twelve months or less) on the consolidated balance sheets. Recent Accounting Guidance Not Yet Effective 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. 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, 2022 for all entities, other than SEC filers that do not qualify as a Smaller Reporting Company as defined by the SEC. 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 and disclosures. 18            SUNCREST BANK NOTES TO FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2019 AND 2018 NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES – Continued Recent Accounting Guidance Not Yet Effective - Continued 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 later for all other entities. The Bank is currently evaluating the effects of ASU 2017-04 on its financial statements and disclosures. In August 2018, the FASB issued ASU No. 2018-13, Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement. This ASU eliminates, adds and modifies certain disclosure requirements for fair value measurements. Among the changes, entities will no longer be required to disclose the amount of and the reasons for transfers between Level 1 and Level 2 of the fair value hierarchy, but will be required to disclose the range and weighted average used to develop significant unobservable inputs for Level 3 fair value measurements. ASU No. 2018-13 is effective for all entities for interim and annual reporting periods beginning after December 31, 2019. Early adoption is permitted. As ASU No. 2018-13 only revises disclosure requirements, it will not have a material impact on the Bank’s financial statements. 19            SUNCREST BANK NOTES TO FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2019 AND 2018 NOTE B - ACQUISITIONS The Bank accounted for the following acquisition under the acquisition method of accounting. The acquired assets, assumed liabilities and identifiable intangible assets were recorded at their respective acquisition date fair values. The Bank determined the fair value of the debt securities, loans, core deposit intangible and deposits with the assistance of third party valuations. The fair value of OREO was based on appraisals. Acquisition of CBBC Bancorp and its wholly-owned subsidiary Community Business Bank On May 21, 2018, the Bank acquired all the assets and assumed all the liabilities of CBBC Bancorp and its wholly- owned subsidiary Community Business Bank ("CBBC") in exchange for Bank stock and cash. The Bank issued 2,874,089 shares of Bank common stock with a fair value of $12.80 per share and cash in the amount of $30.2 million, for a total transaction value of approximately $67.0 million. CBBC operated one branch in West Sacramento and one branch in Lodi, California. The Bank acquired CBBC as the location and culture fit within the Bank's strategic plans for expansion. Goodwill in the amount of $35.7 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 CBBC, the contractual amounts due, expected cash flows to be collected and fair value as of May 21, 2018 were as follows (dollar amounts in thousands): Contractual Amounts Due Cash Flows not Expected to be Collected Expected Cash Flows Interest Component of Expected Cash Flows Fair Value of Acquired Loans Purchased Credit- Impaired - $ - - - $ - All Other Acquired Loans $ 320,942 - 320,942 70,520 250,422 $ In accordance with generally accepted accounting principles there was no carryover of the allowance for loan losses that had been previously recorded CBBC. 20            SUNCREST BANK NOTES TO FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2019 AND 2018 NOTE B - ACQUISITIONS - Continued The following table represents the assets acquired and liabilities assumed of CBBC as of May 21, 2018 and the fair value adjustments and the amounts recorded by the Bank in 2018 under the acquisition method of accounting (dollar amounts in thousands): CBBC Book Value Fair Value Adjustments Fair Value ASSETS ACQUIRED Cash and Cash Equivalents Debt 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 $ ( 7,575 65,020 253,761 2,455) 1,934 323 2,856 1,618 1,134 - 1,558 333,324 $ - ( 207) ( 3,339) 2,455 - - - 71) 250) 3,264 - 1,852 ( ( $ $ 7,575 64,813 250,422 - 1,934 323 2,856 1,547 884 3,264 1,558 335,176 $ $ $ 260,588 43,052 303,640 $ ( 719 485) 234 $ 261,307 42,567 303,874 29,684 333,324 $ 1,618 1,852 $ 31,302 66,966 35,664) $( 21            SUNCREST BANK NOTES TO FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2019 AND 2018 NOTE B - ACQUISITIONS - Continued Supplemental pro forma disclosures The following supplemental pro forma information presents the financial results for the year ended December 31, 2018 as if the acquisition of CBBC, which was completed on May 21, 2018, and presents the net interest income and noninterest income, net income and net income per basic and diluted share as if the acquisition of CBBC was effective as of January 1, 2018. The unaudited pro forma financial information included in the table below is based on various estimates and is presented for informational purposes only and does not indicate the financial condition or results of operations of the combined company that would have been achieved for the periods presented had the transactions been completed as of the date indicated or that may be achieved in the future (dollar amounts in thousands). Net interest income and noninterest income Net income Net income per share: Basic Diluted Year ended December 31, 2018 $ 39,056 $ 8,260 $ $ 0.66 0.65 22            SUNCREST BANK NOTES TO FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2019 AND 2018 NOTE C - DEBT SECURITIES Debt 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: Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Fair Value Dece mbe r 31, 2019 Available -for-Sale Securitie s: U.S. Treasury Notes $ 3,994,853 $ 3,287 $ - $ 3,998,140 U.S. Government and Agency Securities Mortgaged-Backed Securities Corporate Debt Obligations of State and Political Subdivisions Other Investments Dece mbe r 31, 2018 Available -for-Sale Securitie s: U.S. Treasury Notes U.S. Government and Agency Securities Mortgaged-Backed Securities Corporate Debt Obligations of State and Political Subdivisions 7,464,286 3 ( 9,043) 7,455,246 162,246,071 3,000,000 2,635,271 94,596 ( 527,295) - 164,354,047 3,094,596 16,393,790 742,215 193,841,215 $ 96,236 42,651 2,872,044 $ ( $( 377,055) - 913,393) 16,112,971 784,866 195,799,866 $ $ 3,964,105 $ - $( 20,041) $ 3,944,064 16,464,025 - ( 344,090) 16,119,935 104,350,475 3,000,000 426,882 44,337 ( 1,545,971) - 103,231,386 3,044,337 11,647,288 139,425,893 $ - 471,219 $ ( $( 267,942) 2,178,044) 11,379,346 137,719,068 $ The amortized cost and estimated fair value of all debt securities as of December 31, 2019 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 $ $ 11,459,138 108,731,096 60,939,458 12,711,523 193,841,215 11,453,386 109,921,871 61,864,483 12,560,126 195,799,866 $ $ 23            SUNCREST BANK NOTES TO FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2019 AND 2018 NOTE C - DEBT SECURITIES - Continued The gross unrealized loss and related estimated fair value of debt securities that have been in a continuous loss position for less than twelve months and over twelve months at December 31, 2019 and 2018, are as follows: December 31, 2019 U.S. Government and Less than Twelve M onths Over Twelve M onths Total Unrealized Losses Fair Value Unrealized Losses Fair Value Unrealized Losses Fair Value Agency Securities $ - $ - $( 26,649) $ 8,955,777 $( 26,649) $ 8,955,777 M ortgaged-Backed Securities Obligations of State and ( 243,408) 40,846,115 ( 266,280) 18,928,200 ( 509,688) 59,774,315 Political Subdivisions ( 377,055) 13,749,911 - - ( 377,055) 13,749,911 $ (620,463) $ 54,596,026 $ (292,929) $ 27,883,977 $ (913,392) $ 82,480,003 December 31, 2018 U.S. Treasury Notes $( 20,041) $ 3,944,064 $ - $ - $( 20,041) $ 3,944,064 U.S. Government and Agency Securities M ortgaged-Backed - - ( 344,090) 16,119,935 ( 344,090) 16,119,935 Securities ( 49,750) 12,748,022 ( 1,496,221) 58,398,462 ( 1,545,971) 71,146,484 Obligations of State and Political Subdivisions ( 70,161) 2,227,710 ( 197,781) 9,151,636 ( 267,942) 11,379,346 $( 139,952) $ 18,919,796 $( 2,038,092) $ 83,670,033 $( 2,178,044) $ 102,589,829 As of December 31, 2019, the Bank has 7 U.S. government agency securities and 23 mortgage-backed securities that have been in an unrealized loss position over 12 months. The unrealized loss on these debt 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 $1.4 million were pledged to secure public funds. Gross realized gains and losses on sales of available-for-sale securities in 2019 were approximately $129,000 and ($99,000), respectively. There were no realized gains or losses on sales of available-for-sale securities in 2018. 24            SUNCREST BANK NOTES TO FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2019 AND 2018 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 2019 2018 $ 4,372,547 2,100,000 16,110 6,488,657 $ 3,412,669 1,270,000 9,400 4,692,069 ( $ 1,000,000) 5,488,657 ( $ 319,522) 4,372,547 The Bank also originates Small Business Administration (“SBA”) loans for potential sale to institutional investors. A portion of the Bank’s revenues are from origination of loans guaranteed by the SBA 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 $39.8 million and $43.0 million in loans previously sold to others as of December 31, 2019 and 2018, respectively. 25            SUNCREST BANK NOTES TO FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2019 AND 2018 NOTE D - LOANS - Continued The following table presents the activity in the allowance for loan losses for the year 2019 and 2018 and the recorded investment in loans and impairment method as of December 31, 2019 and 2018 by portfolio segment: December 31, 2019 Allowance for Loan Losses: Beginning of Year Provisions Charge-offs Recoveries End of Year Reserves: Specific General Loans Evaluated for Impairment: Individually Collectively December 31, 2018 Allowance for Loan Losses: Beginning of Year Provisions Charge-offs Recoveries End of Year Reserves: Specific General Loans Evaluated for Impairment: Individually Collectively Real Estate - Other Construction and Land Development Commercial and Industrial Municipal Leases/ Consumer Total $ $ $ $ $ 3,171,032 895,617 - - 4,066,649 1,068,308 1,011,963 1,000,000) ( 127,074 152,718 - 16,110 295,902 6,133 39,702 - - 45,835 ( $ $ $ 1,080,271 $ $ $ 273,941 3,792,708 4,066,649 - $ 295,902 295,902 $ $ 230,059 850,212 1,080,271 - $ 45,835 45,835 $ $ $ $ $ 4,372,547 2,100,000 1,000,000) 16,110 5,488,657 504,000 4,984,657 5,488,657 $ 2,546,232 $ 123,949 $ 2,515,541 $ - $ 5,185,722 522,165,662 524,711,894 $ 42,406,430 42,530,379 $ 75,830,698 78,346,239 $ 21,647,552 21,647,552 $ 662,050,342 667,236,064 $ $ $ $ 2,261,617 1,159,915 250,500) - 3,171,032 77,364 49,710 - - 127,074 1,052,735 60,573 45,000) - 1,068,308 $ ( ( 20,953 198) 24,022) 9,400 6,133 $ ( 3,412,669 1,270,000 319,522) 9,400 4,372,547 $ $ $ $ $ ( ( $ - 3,171,032 3,171,032 $ $ - 127,074 127,074 $ $ - 1,068,308 1,068,308 $ $ - 6,133 6,133 $ $ - 4,372,547 4,372,547 $ $ 430,748 $ 126,651 $ 226,541 $ - $ 783,940 478,757,988 479,188,736 $ 41,614,143 41,740,794 $ 110,353,772 110,580,313 $ 18,796,507 18,796,507 $ 649,522,410 650,306,350 $ As of December 31, 2019 and 2018, the Bank had unaccreted discount of $2.2 million and $3.5 million on acquired loans, respectively. 26            SUNCREST BANK NOTES TO FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2019 AND 2018 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, 2019: De ce mbe r 31, 2019 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 $ 285,636,811 140,308,214 44,378,455 46,969,544 42,406,430 74,391,591 21,647,552 655,738,597 $ $ $ $ $ 2,078,461 - - - - 989,935 - 3,068,396 1,697,323 1,096,855 - - - 449,171 - 3,243,349 154,021 2,392,211 - - 123,949 2,515,541 - 5,185,722 $ $ $ $ 289,566,616 143,797,280 44,378,455 46,969,544 42,530,379 78,346,238 21,647,552 667,236,064 27            SUNCREST BANK NOTES TO FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2019 AND 2018 NOTE D - LOANS - Continued The risk category of loans by class of loans was as follows as of December 31, 2018: Decembe r 31, 2018 Pass Special Mention Substandard Impaired Total Real Estate Other: Commercial Farmland 1-4 Family Residential Multifamily Residential Construction and Land Development Commercial and Industrial Municipal Leases Consumer $ $ $ $ $ 246,463,945 123,940,777 57,692,599 47,803,422 41,365,821 102,974,989 18,535,425 261,082 639,038,060 820,261 385,679 - - 248,322 198,936 - - 1,653,198 1,651,305 - - - - 7,179,847 - - 8,831,152 430,748 - - - 126,651 226,541 - - 783,940 249,366,259 124,326,456 57,692,599 47,803,422 41,740,794 110,580,313 18,535,425 261,082 650,306,350 $ $ $ $ $ Past due and nonaccrual loans presented by loan class were as follows as of December 31, 2019 and 2018: De ce mber 31, 2019 Real Estate Other: Commercial Farmland 1-4 Family Residential Multifamily Residential Construction and Land Development Commercial and Industrial Municipal Leases Consumer De ce mber 31, 2018 Real Estate Other: Commercial Farmland 1-4 Family Residential Multifamily Residential Construction and Land Development Commercial and Industrial Municipal Leases Consumer Over 90 Days Past Due Nonaccrual 30-59 Days Past Due - $ 227,805 - - - 825,146 - - 1,052,951 $ Still Accruing 60-89 Days Past Due - $ - - - - - - - $ - - $ - - - - - - - $ - - $ - - - - 485,627 - - 485,627 $ - $ - - - - 3,483 - - 3,483 $ - $ - - - - - - - $ - 28  $ 154,021 2,392,211 - - 123,949 2,515,541 - - 5,185,722 $ $ 430,748 - - - 126,651 226,541 - - 783,940 $           SUNCREST BANK NOTES TO FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2019 AND 2018 NOTE D - LOANS - Continued Information relating to individually impaired loans presented by class of loans was as follows as of December 31, 2019 and 2018: Dece mbe r 31, 2019 Real Estate Other: Commercial Farmland 1-4 Family Residential Multifamily Residential Construction and Land Development Commercial and Industrial Municipal Leases Consumer Dece mbe r 31, 2018 Real Estate Other: Commercial Farmland 1-4 Family Residential Multifamily Residential Construction and Land Development Commercial and Industrial Municipal Leases Consumer 157,827 2,393,165 - - 142,562 3,540,909 - - 6,234,463 438,350 - - - 126,651 226,541 - - 791,542 Impaired Loans Unpaid Principal Balance Recorded Without Specific With Specific Allowance Investment Allowance Related Allowance Average Recorded Investment Interest Income Recognized $ $ $ $ $ 154,021 2,392,211 - - 123,949 2,515,541 - - 5,185,722 $ - - - - 123,949 376,020 - - 499,969 $ 154,021 2,392,211 - - - 2,139,521 - - 4,685,753 16,567 257,306 - - - 230,127 - - 504,000 $ $ $ $ $ $ $ $ $ 430,748 - - - 126,651 226,541 - - 783,940 430,748 - - - 126,651 226,541 - - 783,940 - $ - - - - - - - $ - - $ - - - - - - - $ - $ $ $ $ 157,113 2,392,688 - - 125,300 3,306,266 - - 5,981,367 442,091 - - - 130,499 241,101 - - 813,691 $ - - - - - - - - $ - - $ - - - - - - - $ - 29            SUNCREST BANK NOTES TO FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2019 AND 2018 NOTE E - PREMISES AND EQUIPMENT A summary of premises and equipment as of December 31 follows: 2019 2018 Land Building Leasehold Improvements Furniture, Fixtures, and Equipment Construction in Progress Less Accumulated Depreciation and Amortization NOTE F – LEASES $ $ 600,000 4,681,527 1,092,251 2,546,687 22,839 8,943,304 2,329,595) 6,613,709 ( $ 600,000 4,291,115 631,574 2,236,353 21,163 7,780,205 1,765,734) 6,014,471 ( $ ASU 2016-02, Leases (Topic 842), and related amendments were adopted on January 1, 2019, using the modified retrospective transition method whereby comparative periods were not restated. No cumulative effect adjustment to the opening balance of retained earnings was required. The Bank elected the package of practical expedients permitted under the new standard, which allowed carry forward historical lease classifications, account for lease and nonlease components as a single lease component, and not to recognize a ROU asset and lease liability for short-term leases. The Bank has operating leases for branches that will expire at various dates through January 2044. 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 $859,000 and $644,000 for the years ended December 31, 2019 and 2018, respectively. Substantially all leases are operating leases for corporate offices, branch locations and loan production offices. The amount of the lease liability and ROU asset is impacted by the lease term and the discount rate applied to determine the present value of future lease payments. The remaining terms of operating leases will expire at various dates through January 2044. Most leases include one or more options to renew, with renewal terms that can extend the lease term by varying amounts. The exercise of renewal options is at the sole discretion of the Bank. Renewal option periods were not included in the measurement of ROU assets and lease liabilities as they are not considered reasonably certain of exercise. 30            SUNCREST BANK NOTES TO FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2019 AND 2018 NOTE F – LEASES - Continued Upon adoption of this standard, ROU assets of $4.2 million and lease liabilities of $4.3 million were recognized. The balance of ROU assets and lease liabilities are included in other assets and other liabilities on the balance sheet. The balance sheet and supplemental information at December 31, 2019 are shown below. Operating Lease Right-of-Use Assets Classifed as Accrued Interest and Other Assets Operating Lease Liabilities Classified as Accrued Interest and Other Liabilities Weighted Average Remaining Lease Term, in Years Weighted Average Discount Rate 2019 3,614,400 $ $ 3,673,600 13.12 5.50% The Bank elected, for all classes of underlying assets, not to separate lease and non-lease components and instead to account for them as a single lease component. Variable lease cost primarily represents variable payments such as common area maintenance and utilities. The following table represents lease costs and other lease information for the year ended December 31, 2019: Lease Costs: Operating Lease Cost Other Information - Operating Leases: 2019 $ 859,000 Cash Paid for Amounts Included in the Measurement of Lease Liabilities $ 818,300 Right-of-Use Assets Obtained in Exchange for Lease Obligations $ 3,614,400 31            SUNCREST BANK NOTES TO FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2019 AND 2018 NOTE F – LEASES – Continued Future undiscounted lease payments for operating leases with initial terms of one year or more as of December 31, 2019 are as follows: Year Ending 2020 2021 2022 2023 2024 Thereafter Total Lease Payments Less Imputed Interest Present Value of Net Future Minimum Lease Payments Operating Leases $ 791,100 552,400 383,200 381,100 385,000 2,754,900 5,247,700 (1,574,100) $ 3,673,600 NOTE G - DEPOSITS At December 31, 2019, the scheduled maturities of time deposits are as follows: 2020 2021 2022 2023 2024 $ 44,389,421 19,009,311 3,347,525 3,712,008 7,827,464 78,285,729 $ NOTE H - OTHER BORROWINGS The Bank may borrow up to $40.0 million overnight on an unsecured basis from its correspondent banks. As of December 31, 2019, the Bank has no amounts outstanding under these arrangements. In addition, the Bank is also a member of the Federal Home Loan Bank 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 $220.9 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 $460.4 million of loans as collateral for this line. As of December 31, 2019 the Bank had a $58.0 million outstanding Letter of Credit under this arrangement to secure public monies. 32            SUNCREST BANK NOTES TO FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2019 AND 2018 NOTE I - OTHER EXPENSES Other expenses as of December 31 are comprised of the following: Professional Fees Data Processing Office Expenses Marketing and Business Promotion Insurance Regulatory Assessments Core Deposit Intangible Amortization Other Expenses 2019 2018 $ 1,935,844 2,190,410 767,967 882,015 79,411 153,652 780,495 1,029,455 $ 2,037,307 2,820,954 488,328 634,831 90,261 338,114 602,796 714,223 $ 7,819,249 $ 7,726,814 NOTE J - INCOME TAXES The provision for income taxes for the years ended December 31, consists of the following: 2019 2018 Current: Federal State Deferred $ $ 2,556,100 1,583,000 4,139,100 490,000 4,629,100 1,387,646 910,154 2,297,800 1,453,000 3,750,800 $ $ As of December 31, 2019, the Bank has net operating loss carryforwards of approximately $3.2 million and $5.6 million 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. The net operating loss carryforwards have been reduced by the amount anticipated to expire unutilized under Section 382. Federal and California net operating loss carryforwards, to the extent not used will begin to expire in 2029. 33            SUNCREST BANK NOTES TO FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2019 AND 2018 NOTE J - INCOME TAXES - Continued A comparison of the federal statutory income tax rates to the Bank's effective income tax rates follows: 2019 2018 Amount Rate Amount Rate Statutory Federal Tax State Tax, Net of Federal Benefit Change in Tax Rate Tax-Exempt Interest Income Stock-based Compensation Merger Expenses Other Items, Net Actual Tax Expense $ ( 3,473,100 1,402,000 - 187,000) 12,000 - (71,000) 4,629,100 $ 21.0% 8.5% ( ( ( 1.1%) 0.1%) - 0.4%) 27.9% $ ( ( 2,858,000 1,200,000 185,000) 250,000) 39,000 35,000 53,800 3,750,800 $ ( ( 21.0% 8.8% 1.4%) 1.8%) 0.3% 0.3% 0.4% 27.6% 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 Other Real Estate Owned Differences Operating Loss Carryforwards Unrealized Loss on Available-for-Sale Securities Stock-Based Compensation Deferred Compensation Nonaccrual Differences Other Assets and Liabilities Deferred Tax Liabilities: Unrealized Gain on Available-for-Sale Securities Purchase Accounting Adjustments Depreciation Differences Other Assets and Liabilities Net Deferred Tax Assets 2019 2018 $ 157,000 980,000 440,000 1,162,000 - 350,000 730,000 123,000 1,858,000 5,800,000 $ 215,000 466,000 440,000 1,673,000 505,000 248,000 786,000 69,000 577,000 4,979,000 ( ( ( ( ( $ 580,000) 306,000) 401,000) 1,949,000) 3,236,000) 2,564,000 - 151,000) 233,000) 456,000) 840,000) 4,139,000 ( ( ( ( $ 34            SUNCREST BANK NOTES TO FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2019 AND 2018 NOTE J - INCOME TAXES - Continued 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, 2015 are open to audit by the federal authorities and income tax returns for the years ending after December 31, 2014 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. NOTE K - 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, 2019 and 2018 was approximately $20.6 million and $10.8 million, 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, 2019 and 2018 amounted to approximately $19.9 million and $30.4 million, respectively. NOTE L - 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, 2019 and 2018, the Bank had the following outstanding financial commitments whose contractual amount represents credit risk: Commitments to Extend Credit $ 93,337,000 $ 93,315,000 2019 2018 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. 35              SUNCREST BANK NOTES TO FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2019 AND 2018 NOTE M - 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 approximately $534,000 and $582,000 for the periods ended December 31, 2019 and 2018, respectively. The Bank also recognized income tax benefits related to stock- based compensation of approximately $133,000 in 2019 and $144,000 in 2018, respectively. For 2018, 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. There were no option grants issued in 2019. Expected Volatility Expected Term Expected Dividends Risk Free Rate Grant Date Fair Value 2018 20.63% 6.25 Years None 2.54% 3.02 $ Expected volatilities are based on historical volatilities of the Company’s common stock. The company uses historical data to estimate option exercise and post-vesting termination behavior. Employee and management options are tracked separately. The expected term of options granted is based on historical data and represents the period of time that options granted are expected to be outstanding, which takes into account that the options are not transferable. The risk-free interest rate for the expected term of the option is based on the U.S. Treasury yield curve in effect at the time of the grant. 36                SUNCREST BANK NOTES TO FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2019 AND 2018 NOTE M - STOCK-BASED COMPENSATION PLANS - Continued A summary of the status of the Bank's stock options as of December 31, 2019 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 980,050 - - 16,000) 13,000) 951,050 ( ( 9.71 $ $ - $ - $ 7.42 $ 10.00 $ 9.75 7.15 $ 1,834,000 Options Exercisable 433,250 $ 9.06 6.60 $ 1,134,000 As of December 31, 2019, there was approximately $1.3 million of total unrecognized compensation cost related to the outstanding stock options that will be recognized over a weighted-average period of 1.77 years. The aggregate intrinsic values of stock options exercised during the years ended December 31, 2019 and 2018 were approximately $119,000 and $336,000, respectively. 37              SUNCREST BANK NOTES TO FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2019 AND 2018 NOTE M - STOCK-BASED COMPENSATION PLANS - Continued A summary of the status of the Bank's deferred share awards as of December 31, 2019 and changes during the year ended thereon is presented below: Weighted- Average Grant-Date Fair Value $ - $ - $ 8.41 $ - $ 8.41 Shares ( 19,500 - 6,500) - 13,000 Nonvested at January 1, 2019 New Deferred Share Awards Shares Vested and Issued Shares Forfeited Nonvested at December 31, 2019 As of December 31, 2019 there was approximately $109,000 of unrecognized compensation cost related to the restricted stock grants that will be recognized over a weighted-average period of 1.9 years. The fair value of shares issued in 2019 and 2018 was approximately $74,200 and $152,000, respectively. NOTE N - EARNINGS PER SHARE The following is a reconciliation of net income and shares outstanding to the income and number of shares used to compute EPS: 2019 2018 Income Shares Income Shares $ 11,908,848 $ 9,857,255 Net Income as Reported Shares Outstanding at Year-End Impact of Weighting Shares Issued During the Year Used in Basic EPS 11,908,848 Dilutive Effect of Stock Options Dilutive Effect of Outstanding Deferred Shares Used in Dilutive EPS $ 11,908,848 12,442,800 ( 12,949) 12,429,851 30,788 9,857,255 10,581 12,471,220 $ 9,857,255 12,420,300 ( 2,040,785) 10,379,515 87,721 10,761 10,477,997 As of December 31, 2019 and 2018 there were 291,000 and 301,000, 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. 38            SUNCREST BANK NOTES TO FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2019 AND 2018 NOTE O - 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). OREO: Nonrecurring adjustments to certain commercial and residential real estate properties classified as 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, 2019. 39            SUNCREST BANK NOTES TO FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2019 AND 2018 NOTE O - 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 3 Level 1 Total Total Losses De ce mbe r 31, 2019 Asse ts me asure d at fair value on a re curring basis Securities Available for Sale Asse ts me asure d at fair value on a Non-re curring basis Collateral Dependent Impaired Loans, Net of Specific Reserves Other Real Estate Owned, Net De ce mbe r 31, 2018 Asse ts me asure d at fair value on a re curring basis Securities Available for Sale Asse ts me asure d at fair value on a Non-re curring basis Collateral Dependent Impaired Loans, Net of Specific Reserves Other Real Estate Owned, Net $ 3,998,140 $ 191,801,726 $ - $ 195,799,866 $ - $ - $ - $ - $ - $ $ 3,573,803 313,720 $ $ 3,573,803 313,720 $ - $ - $ 3,944,064 $ 133,775,004 $ - $ 137,719,068 $ - $ - $ - $ - $ - $ $ 783,940 313,720 $ $ 783,940 313,720 $ - $ - Quantitative information about the Bank's nonrecurring Level 3 fair value measurements as of December 31 is as follows: December 31, 2019 Collateral Dependent Impaired Loans, Net Other Real Estate Owned December 31, 2018 Collateral Dependent Impaired Loans, Net Other Real Estate Owned Fair Value Amount Valuation Technique Unobservable Input Range $ $ 3,573,803 313,720 Third Party Appraisals Liquidation and Selling Costs 8% to 20% Third Party Appraisals Liquidation and Selling Costs 8% to 50% $ $ 783,940 313,720 Third Party Appraisals Liquidation and Selling Costs 8% to 20% Third Party Appraisals Liquidation and Selling Costs 8% to 50% 40            SUNCREST BANK NOTES TO FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2019 AND 2018 NOTE P - 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 fair value hierarchy level and estimated fair value of significant financial instruments at December 31, 2019 and 2018 are summarized as follows (dollar amounts in thousands): Financial Asse ts: Cash and Cash Equivalents Debt Securities - US Treasury Debt Securities Loans, net FHLB and Other Bank Stock Financial Liabilitie s: Noninterest-Bearing and Interest-Bearing Demand Deposits Interest-Bearing Time Deposits Fair Value Hierarchy Carrying Value Fair Value Carrying Value Fair Value 2019 2018 Level 1 Level 1 Level 2 Level 2 $ 52,493 3,998 191,802 661,990 5,471 $ 52,493 3,998 191,802 660,953 N/A $ 72,884 3,944 133,775 645,774 5,454 $ 72,884 3,944 133,775 644,030 N/A Level 1 Level 2 750,273 78,286 750,273 77,800 678,967 112,050 678,967 109,565 41            SUNCREST BANK NOTES TO FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2019 AND 2018 NOTE Q - 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 approximately $360,000 in contributions for 2019 and approximately $252,000 in contributions for 2018. NOTE R - 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 2019 is 2.5%. 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, 2019 and 2018, that the Bank meets all capital adequacy requirements. As of December 31, 2019 and 2018, 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. 42            SUNCREST BANK NOTES TO FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2019 AND 2018 NOTE R - 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 As of December 31, 2019: 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, 2018: 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 $109,426 $103,887 $103,887 $103,887 $94,997 $90,579 $90,579 $90,579 14.8% 14.0% 14.0% 10.9% 13.1% 12.5% 12.5% 10.6% $59,280 $44,460 $33,345 $38,100 $57,855 $43,391 $32,543 $34,289 8.0% 6.0% 4.5% 4.0% 8.0% 6.0% 4.5% 4.0% $74,100 $59,280 $48,165 $47,625 $72,319 $57,855 $47,007 $42,862 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. 43            

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