Summit State Bank : Form 10-Q~Quarterly Report

FEDERAL DEPOSIT INSURANCE CORPORATION

Washington, D.C. 20429

FORM 10-Q

• QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 2024

or

• TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ______________ to ______________

FDIC Certificate No. 32203

Summit State Bank

(Exact Name of Registrant as Specified in its Charter)

California	94-2878925
(State of Incorporation)	(I.R.S. Employer Identification No.)
500 Bicentennial Way, Santa Rosa, CA 95403	707-568-6000
(Address of Principal Executive Offices)	(Registrant's Telephone Number, Including Area Code)

N/A

(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class		Trading Symbol(s)	Name of each exchange on which registered
Common Stock		SSBI	The NASDAQ Stock Market LLC
	APPLICABLE ONLY TO CORPORATE ISSUERS

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the

Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for the past 90 days.	Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be
submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such	☐
shorter period that the registrant was required to submit such files).	Yes ☒ No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer,

smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated
filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer ☐	Accelerated filer ☐
Non-accelerated filer ☒	Smaller reporting company ☒
Emerging growth company ☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.☐

Indicate by check mark if the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No☒

APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PRECEDING FIVE YEARS:

Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court.

Yes ☐ No ☐

As of March 15, 2024, there were 6,784,099 shares of common stock outstanding.

SUMMIT STATE BANK

	TABLE OF CONTENTS
PART I FINANCIAL INFORMATION
Item 1	Financial Statements
	Balance Sheets (unaudited)	3
	Statements of Income (unaudited)	4
	Statements of Comprehensive Income (unaudited)	5
	Statements of Changes in Shareholders' Equity (unaudited)	6
	Statements of Cash Flows (unaudited)	7
	Notes to Financial Statements (unaudited)	8
Item 2	Management's Discussion and Analysis of Financial Condition	38
	and Results of Operations
Item 3	Quantitative and Qualitative Disclosures about Market Risk	53
Item 4	Controls and Procedures	54
PART II OTHER INFORMATION
Item 1	Legal Proceedings	55
Item 1A	Risk Factors	55
Item 1B	Cybersecurity	55
Item 2	Unregistered Sales of Equity Securities and Use of Proceeds	57
Item 3	Defaults Upon Senior Securities	57
Item 4	Mine Safety Disclosures	57
Item 5	Other Information	57
Item 6	Exhibit Index	57
SIGNATURES		58
EXHIBITS		59

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Part I Financial Information

Item 1 Financial Statements

SUMMIT STATE BANK

BALANCE SHEETS

(In thousands except share data)

		March 31, 2024		December 31, 2023
		(Unaudited)			(1)
ASSETS
Cash and due from banks	$	37,712	$	57,789
Investment securities:
Available-for-sale, less allowance for credit losses of $53 and $58
(at fair value; amortized cost of $96,973 as of March 31, 2024
and $97,034 as of December 31, 2023)		83,832			84,546
Loans, less allowance for credit losses of $15,487 and $15,221		917,685			938,626
Bank premises and equipment, net		5,287			5,316
Investment in Federal Home Loan Bank stock (FHLB), at cost		5,541			5,541
Goodwill		4,119			4,119
Affordable housing tax credit investments		8,165			8,405
Accrued interest receivable and other assets		17,850			18,166
Total assets	$	1,080,191	$	1,122,508
LIABILITIES AND
SHAREHOLDERS' EQUITY
Deposits:
Demand - non interest-bearing	$	179,328	$	201,909
Demand - interest-bearing		222,313			244,748
Savings		48,214			54,352
Money market		222,153			212,278
Time deposits that meet or exceed the FDIC insurance limit		65,763			63,159
Other time deposits		201,431			233,247
Total deposits		939,202			1,009,693
FHLB advances		28,600			-
Junior subordinated debt, net		5,924			5,920
Affordable housing commitment		4,094			4,094
Accrued interest payable and other liabilities		4,493			5,123
Total liabilities		982,313			1,024,830
Commitments and contingencies (Note 6)
Shareholders' equity
Common stock, no par value; shares authorized - 30,000,000 shares;
issued and outstanding 6,784,099 as of March 31, 2024 and 6,784,099
as of December 31, 2023		37,552			37,471
Retained earnings		69,539			68,957
Accumulated other comprehensive loss, net		(9,213)			(8,750)
Total shareholders' equity		97,878			97,678
Total liabilities and shareholders' equity	$	1,080,191		$	1,122,508

(1) Information derived from audited financial statements.

The accompanying notes are an integral part of these unaudited financial statements.

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SUMMIT STATE BANK

STATEMENTS OF INCOME

(In thousands except earnings per share data)

		Three Months Ended
		March 31, 2024			March 31, 2023
		(unaudited)			(unaudited)
Interest and dividend income:
Interest and fees on loans	$	13,274	$	12,939
Interest on deposits with banks		362			906
Interest on investment securities		712			719
Dividends on FHLB stock		129			84
Total interest and dividend income		14,477			14,648
Interest expense:
Deposits		6,786			4,400
FHLB advances		190			119
Junior subordinated debt		94			94
Total interest expense		7,070			4,613
Net interest income before provision for credit losses		7,407			10,035
(Reversal of) provision for credit losses on loans		(15)			400
(Reversal of) provision for credit losses on unfunded loan commitments		(65)			(33)
(Reversal of) provision for credit losses on investments		(5)			-
Net interest income after provision for (reversal of) credit losses
on loans, unfunded loan commitments and investments		7,492			9,668
Non-interest income:
Service charges on deposit accounts		233			208
Rental income		60			39
Net gain on loan sales		514			1,435
Other income		141			279
Total non-interest income		948			1,961
Non-interest expense:
Salaries and employee benefits		4,182			3,793
Occupancy and equipment		485			452
Other expenses		1,733			1,573
Total non-interest expense		6,400			5,818
Income before provision for income taxes		2,040			5,811
Provision for income taxes		645			1,695
Net income	$	1,395		$	4,116
Basic earnings per common share	$	0.21	$	0.62
Diluted earnings per common share	$	0.21	$	0.62
Basic weighted average shares of common stock outstanding		6,698			6,688
Diluted weighted average shares of common stock outstanding		6,698			6,688

The accompanying notes are an integral part of these unaudited financial statements.

4

SUMMIT STATE BANK

STATEMENTS OF COMPREHENSIVE INCOME

(In thousands)

Three Months Ended

				March 31, 2024
				(unaudited)
Net income	$	1,395
Change in securities available-for-sale:
Unrealized holding (losses) gains on available-for-sale securities
arising during the period		(658)
Net unrealized (losses) gains, before provision for income tax		(658)
Income tax benefit (expense)			195
Total other comprehensive (loss) income, net of tax			(463)
Comprehensive income	$	932

March 31, 2023

(unaudited)

$ 4,116

1,121

1,121

(332)

789

$ 4,905

The accompanying notes are an integral part of these unaudited financial statements.

5

SUMMIT STATE BANK

STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY

For the Three Months Ended

March 31, 2023 and 2024

(Unaudited)

																		Accumulated
																			Other		Total
	Common Stock						Retained	Comprehensive	Shareholders'
(In thousands except per share data)	Shares						Amount					Earnings						Loss			Equity
Balance, January 1, 2023	6,732,699	$	37,179	$	61,386	$	(10,019)		$	88,546
Net income	-						-						4,116						-			4,116
Other comprehensive income, net of tax	-						-						-						789			789
Stock based compensation - restricted stock	-						38						-						-			38
Cash dividends - $0.12 per share	-						-						(824)						-			(824)
Balance, March 31, 2023	6,732,699		$	37,217		$	64,678		$	(9,230)		$	92,665
Balance, January 1, 2024	6,784,099	$	37,471	$	68,957	$	(8,750)		$	97,678
Net income	-						-						1,395						-			1,395
Other comprehensive loss, net of tax	-						-						-						(463)			(463)
Stock based compensation - restricted stock	-						81						-						-			81
Cash dividends - $0.12 per share	-						-						(813)						-			(813)
Balance, March 31, 2024	6,784,099		$	37,552		$	69,539		$	(9,213)		$	97,878

The accompanying notes are an integral part of these unaudited financial statements.

6

SUMMIT STATE BANK

STATEMENTS OF CASH FLOWS

Three Months Ended March 31,

(In thousands)		2024
	(unaudited)
Cash flows from operating activities:
Net income	$	1,395
Adjustments to reconcile net income to net cash from (used in) operating activities:
Depreciation and amortization		102
Securities amortization and accretion, net		(8)
Accretion of net deferred loan fees		(445)
(Reversal of) provision for credit losses on loans		(15)
(Reversal of) provision for credit losses on unfunded loan commitments		(65)
Reversal of credit losses on investments		(5)
Net gain on loan sales		(514)
Amortization of debt issuance cost related to junior subordinated debt		4
Amortization of affordable housing tax credit investment		240
Net change in accrued interest receivable and other assets		511
Net change in accrued interest payable and other liabilities		49
Share-based compensation expense		(533)
Net cash from (used in) operating activities		716
Cash flows from investing activities:
Proceeds from calls and maturities of available-for-sale investment securities		69
Loan origination and principal collections, net		12,031
Proceeds from sales of loans other than loans originated for resale		9,884
Purchases of bank premises and equipment, net		(73)
Cash paid for affordable housing tax credit commitment		-
Net cash provided by investing activities		21,911
Cash flows from (used in) financing activities:
Net change in demand, savings and money market deposits		(41,279)
Net change in certificates of deposit		(29,212)
Net change in short term FHLB advances		28,600
Dividends paid on common stock		(813)
Net cash (used in) from financing activities		(42,704)
Net change in cash and cash equivalents		(20,077)
Cash and cash equivalents at beginning of period		57,789
Cash and cash equivalents at end of period	$	37,712
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest	$	7,187
Non-Cash Investing and Financing Activities:
Net unrealized (losses) gains on available-for-sale securities	$	(658)

2023

(unaudited)

$ 4,116

94

(2)

(826)

400

(33)

-

(1,435)

4

108

1,900

(6,766)

(361)

(2,801)

67

(20,553)

28,498

(140)

(242)

7,630

(1,912)

54,909

(18,000)

(824)

34,173

39,002

77,567

$ 116,569

$	4,063
$	1,121

The accompanying notes are an integral part of these unaudited financial statements.

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SUMMIT STATE BANK

NOTES TO FINANCIAL STATEMENTS (UNAUDITED)

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

General

On January 15, 1999, Summit State Bank (the "Bank") received authority to transact business as a California state-chartered commercial bank and is subject to regulation, supervision and examination by the State of California Department of Financial Protection & Innovation and the Federal Deposit Insurance Corporation. The Bank was incorporated on December 20, 1982 under the name Summit Savings. The Bank provides a variety of banking services to individuals and businesses in its primary service area of Sonoma County, California. The Bank's branch locations include Santa Rosa, Petaluma, Rohnert Park, and Healdsburg. The Bank offers depository and lending services primarily to meet the needs of its business, nonprofit organization and individual clientele. These services include a variety of transaction, money market, savings and time deposit account alternatives. The Bank's lending activities are directed primarily towards commercial real estate, construction and business loans.

The financial statements as of March 31, 2024 and for the three months ended March 31, 2024 and 2023 are unaudited. In the opinion of management, these unaudited financial statements contain all adjustments, consisting only of normal recurring accruals necessary to present fairly the financial statements of the Bank.

The accompanying unaudited interim financial statements have been prepared in accordance with U.S. Generally Accepted Accounting Principles for interim financial information and Article 8 of Regulation S-X of the Securities and Exchange Commission. Operating results for the three months ended March 31, 2024 are not necessarily indicative of the results that may be expected for the year ending December 31, 2024. These unaudited financial statements do not include all disclosures associated with the Bank's annual financial statements and notes thereto and accordingly, should be read in conjunction with the financial statements and notes thereto included in the Bank's Annual Report for the year ended December 31, 2023 on Form 10-K, on file with the FDIC (the Form 10-K may also be found at www.summitstatebank.com).

The accompanying accounting and reporting policies of the Bank conform to U.S. Generally Accepted Accounting Principles and prevailing practices within the banking industry.

Use of Estimates

The preparation of financial statements in conformity with U.S. Generally Accepted Accounting Principles requires management to make estimates and assumptions. These estimates and assumptions affect the reported amounts of 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 these estimates. The allowance for credit losses, goodwill impairment, fair values of investment securities and the determination of potential impairment of affordable housing tax credit investment are particularly subject to change.

Operating Segments

While the Bank's chief decision makers monitor the revenue streams of the Bank's various products and services, operations are managed, and financial performance is evaluated on a bank-

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wide basis. Operating segments are aggregated into one segment for purposes of financial reporting.

Cash and Cash Equivalents

For the purpose of the statement of cash flows, the Bank considers cash and due from banks with original maturities under 90 days and Federal funds sold to be cash equivalents. Generally, Federal funds are sold for one-day periods. Net cash flows are reported for customer loan and deposit transactions, time deposits in banks and short-term borrowings with an original maturity of 90 days or less.

Investment Securities

Debt securities classified as available-for-sale are available for future liquidity requirements and may be sold prior to maturity. Purchase premiums and discounts are amortized in interest income using the interest method to the earlier of maturity of call date. Debt securities classified as available- for-sale are measured at fair value and unrealized holding gains and losses are excluded from earnings and reported net of tax as accumulated other comprehensive income (AOCI), a component of shareholders' equity, until realized. (See Note 9 Fair Value for a more complete discussion of accounting for the fair value of financial instruments.) Realized gains and losses on sale are computed on the specific identification method and are included in earnings on the trade date.

Allowance for Credit Losses - Available-for-Sale ("AFS") Debt Securities

For AFS debt securities in an unrealized loss position, the Bank first assesses whether it intends to sell, or is more likely than not that it will be required to sell the security before recovery of its amortized cost basis. If the Bank intends to sell the security or it is more likely than not that the Bank will be required to sell the security before recovering its cost basis, the entire impairment loss would be recognized in earnings. If the Bank does not intend to sell the security and it is not more likely that the Bank will be required to sell the security, the Bank evaluates whether the decline in fair value has resulted from credit losses or other factors. In making this assessment, management considers the extent to which fair value is less than amortized cost, any changes to the rating of the security by a rating agency, and adverse conditions specifically related to the security, among other factors. If this assessment indicates that a credit loss exists, the present value of cash flows expected to be collected from the security are compared to the amortized cost basis of the security. Projected cash flows are discounted by the current effective interest rate. If the present value of cash flows expected to be collected is less than the amortized cost basis, a credit loss exists and an allowance for credit losses is recorded for the credit loss, limited by the amount that the fair value is less than the amortized cost basis. The remaining impairment related to all other factors, the difference between the present value of the cash flows expected to be collected and fair value, is recognized as a charge to AOCI.

Changes in the allowance for credit losses are recorded as provision for (or reversal of) credit loss expense. Losses are charged against the allowance when management believes the non- collectability of an AFS security is confirmed or when either of the criteria regarding intent or requirement to sell is met.

A debt security is placed on nonaccrual status at the time any principal or interest payments become greater than 90 days delinquent. Interest accrued but not received for a security placed on non-accrual is reversed against interest income. There were no accrued interest amounts reversed against interest income for the three months ended March 31, 2024 or 2023. Accrued interest receivable on available-for-sale debt securities totaled $730,000 at March 31, 2024 compared to

9

$551,000 at December 31, 2023 and is excluded from the estimate of credit losses as of March 31, 2024 and December 31, 2023.

Loans

Loans that management has the intent and ability to hold for the foreseeable future or until maturity are stated at principal balances outstanding, net of deferred loan origination fees and costs and the allowance for credit losses, adjusted for accretion of discounts or amortization of premiums. Interest is accrued daily based upon outstanding loan balances. However, for all loan classes, when in the opinion of management, the future collectability of interest and principal is in serious doubt, loans are placed on nonaccrual status and the accrual of interest income is suspended. Any interest previously accrued, but unpaid, is charged against income. Payments received are applied to reduce principal to the extent necessary to ensure collection. Subsequent payments on these loans, or payments received on nonaccrual loans for which the ultimate collectability of principal is not in doubt, are applied first to earned but unpaid interest and then to principal.

Non-accrual loans and loans past due 90 days still on accrual include both smaller balance homogeneous loans that are collectively evaluated, and collateral dependent loans that are individually evaluated for a required allowance for credit losses. A loan is moved to non-accrual status in accordance with the Bank's policy, typically after 90 days of non-payment.

For nonaccrual loans whose contractual terms have been restructured in a manner which grants a concession to a borrower experiencing financial difficulties, they are returned to accrual status when there has been a sustained period of repayment performance (generally, six consecutive monthly payments) according to the modified terms and there is reasonable assurance of repayment and of performance.

Allowance and Provision for Credit Losses - Loans and Leases

The allowance for credit losses is a valuation account that is deducted from the amortized cost basis of loans to present the net amount expected to be collected on the loans. The Bank has elected to exclude accrued interest receivable and deferred fees net of costs from the amortized cost basis in the estimate of the allowance for credit losses. The provision for credit losses reflects the amount required to maintain the allowance for credit losses at an appropriate level based upon management's evaluation of the adequacy of collective and individual loss reserves. The Bank's methodologies for determining the adequacy of allowance for credit losses are set forth in a formal policy and take into consideration the need for a valuation allowance for loans evaluated on a collective pool basis which have similar risk characteristics, as well as allowances that are tied to individual loans that do not share risk characteristics. The Bank increases its allowance for credit losses by charging provisions for credit losses on its statement of income. Losses related to specific assets are applied as a reduction of the carrying value of the assets and charged against the allowance for credit loss when management believes the non-collectability of a loan balance is confirmed. Recoveries on previously charged-off loans are credited to the allowance for credit losses.

Management conducts an assessment of the allowance for credit losses on a monthly basis and undertakes a more comprehensive evaluation quarterly. Management estimates the allowance for credit losses using relevant information, from internal and external sources, relating to past events, current conditions, and reasonable and supportable forecasts. The allowance for credit losses is maintained at a level sufficient to provide for expected credit losses over the life of the loan based on evaluating historical credit loss experience and making adjustments to historical loss information for differences in the specific risk characteristics in the current loan portfolio and economic

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