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.
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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