mission bankcorp annual report 2017are demand deposits and business accounts. in 2017, the...

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OUR V IS IONBusiness owners, organizational leaders

and professionals desire to bank with us

because of our reputation.

ANNUAL REPORT 2017

MISSION BANCORP ANNUAL REPORT 2017

Letter to Shareholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2

Mission Bank Customer Testimonials . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6

7 76

11

11

8

9 10

12

9

Board of Directors and Mission Bank Leadership . . . . . . . . . . . . . . . . . . . . . . . . 13

Shareholder Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14

Report of Independent Auditors and Consolidated Financial Statements . . . . . . . 15

Our Culture

TO OUR SHAREHOLDERS,

** As a result of the Trump tax cut (the “Tax Cuts and Jobs Act”), which was passed in late 2017, Mission Bancorp immediately took a write down of its deferred tax assets of $772,000 in December. This was common amongst banks such as ours, is an accounting anomaly, and is not reflective of our true performance. Thus, all figures below are reported on a Non-GAAP basis, as if the write down had not occurred. Going forward, the Company should experience an increase in after tax net income as the corporate rate has been lowered from 35% to 21%. By the end of 2018, we expect to recapture over 100% of the deferred tax asset write down through a reduction of income tax expense. **

We are pleased to report that Mission Bancorp and our wholly owned subsidiary, Mission Bank, experienced another year of tremendous success in 2017. Fueled by strong relationships with business owners, professionals and organizational leaders in our primary markets, Mission Bancorp grew net income by 36% to $6.9 million and earnings per share by 35% to $4.11.

Our secret to long-term success and consistent earnings growth in double-digit percentages is simple: foster strong banking relationships. The best indicators of growing relationships are demand deposits and business accounts. In 2017, the Company’s demand deposits grew 18% to $291 million and we added 280 new business checking accounts. At year-end, demand deposits represented 50% of total deposits, which is more than double the industry average. We achieved this through an intentional focus on relationship banking aimed at partnering with our market’s highest caliber businesses, investors, and professionals. How do we attract these customers? The old-fashioned way--through hard work, diligent focus, and exceptional customer service.

Developing strong banking relationships has resulted in new opportunities for high-caliber loans. Customers who have business credit needs contact Mission Bank as lending needs arise. In 2017, growing the loan portfolio, with an acceptable risk profile, remained our greatest opportunity to improve earnings. Last year, gross loans grew by 23% to $470 million.

2 • M I S S I O N B A N C O R P A N N U A L R E P O R T 2 0 17

Our exceptional team of business bankers and relationship managers recognize the value of demand deposits and loans and remain dedicated to growing each of those components. When you see our hard-working team members, please say “thank you”. The numbers we are able to report are due to the superior effort and skill demonstrated by our team on a daily basis.

Since 2008, the banking industry has been facing the strong head winds of ultra-low interest rates and increasing regulatory burdens. However, in 2017 we started to see some relief in both categories. Our net interest margin expanded by 10% to 4.08% and Congress is starting to ease regulation (or at least slow down the pace of new regulation). As a result, Mission Bancorp, along with many others in the industry, benefitted.

Although margin expansion and regulatory relief have benefitted bank stocks recently, Mission is not focused on stock price. Instead, our focus remains relentlessly aimed at increasing intrinsic value. Increases to the company’s intrinsic value are driven by our ability to earn a high return on equity (ROE), retain those earnings, and reinvest them into the business at a high ROE. Over the last five years, our ROE has improved from 7.2% to 13.6%, which puts us in the top 10-15% of all banks in California. On any given day, or for a period of a few years, the market may or may not reflect the underlying intrinsic value of the Bank. However, over a five to ten-year period, the Bank’s stock price will move according to the intrinsic value. A market driven stock price inflation is not something to get too excited about, since the stock price could drop the next day. But an ability to increase intrinsic value, which we have demonstrated consistently, is something that our shareholders should celebrate.

Strong financial performance starts with a strong leadership team. Following are some highlights spearheaded by our outstanding managers, as well as a recap of other important developments from 2017:

• In 2017, we added Jason Castle as chief financial officer. Jason brings more than 15 years of experience and a personal value system that aligns with the Company’s core values. We are fortunate to have Jason and his impact was immediate. Jason is an industry veteran that brings us a level of experience which is highly sought after for any bank.

• Also in 2017, we added Bryan Easterly as our regional president in the newly established Coastal Region. Our expansion into Ventura County allows us to take advantage of a changing market place that is in need of a business bank delivering the types of service we provide. Bryan and his team started in November in a temporary location. By the end of the year, we had more than $5 million in loans outstanding and $2 million in demand deposits. Bryan and his customer base are tailor-made for Mission Bank. Importantly, expanding into the Coastal Region also lowers our risk profile through diversification. The Coast taps into industries driven by different economic factors relative to our other markets. Truly, the Coast demonstrates that magical combination of growing loans, while simultaneously lowering risk.

M I S S I O N B A N C O R P A N N U A L R E P O R T 2 0 17 • 3

• Led by Chief Credit Officer Mike Congdon, our credit culture is a key ingredient of our success. Credit quality continues to be strong, even during a time of record loan growth. Non-performing loans, which are loans on non-accrual or more than 90 days past due, were 0.92% of total loans at year end. This number remains extremely low and included a single loan in excess of $4 million that was paid in full by the end of January. We continue to make provision expenses in line with the loan growth. This is in contrast to some of our fellow bankers, whose provision is lower due to lack of loan growth.

• Our Ag Division grew by leaps and bounds in 2017. Led by Division Manager Rob Hallum, we added $44 million in Ag loans/commitments and added $6 million in loans to the Farmer Mac program. The Farmer Mac program allows us to leverage our expertise in the industry and offer very competitive fixed-rate financing at amounts up to $50 million. Even during a record drought and volatile commodity prices in almonds, hay and other crops, Mission Bancorp can grow by focusing on doing business with the best local farmers who have a proven ability to operate through cycles.

• The Company also made significant strides in our SBA Division, led by Division Manager Matt Damian. Once again, Matt was recognized as the top individual lender and Mission Bank was the top institutional partner to local SBA 504 provider Mid-State Development Corporation. We generated $315,000 in 7a premium revenue, which is up from $14,000 in 2016. We are proud to report that Mission Bank is the only local bank in each of our markets with the Preferred Lender designation. As a Preferred Lender we can approve 7a loans internally, as opposed to sending them to the SBA for approval, which can add 30-45 days to the process. In a world where time is money, borrowers appreciate the value of an immediate answer.

• The Central Valley team remained focused on delivering impressive growth and identifying key opportunities in a competitive market. Led by Regional President Samy Abiaoui, total gross loans in the region grew by 24% to $260 million. The numbers don’t lie. At a time when the banking industry grew loans by single digits, our team continued to excel. In the face of fierce competition for quality loans, we offered attractive fixed-rate loans to key customers. Although this increases the Bank’s interest rate risk, we offset the risk of rising rates by maintaining a short investment portfolio and have developed an interest rate SWAP program. This is a prime example of how Mission Bank employs strategies that benefit our customers instead of benefitting the bond market participants. These actions display our committed efforts to improve Main Street rather than Wall Street.

• Tom Lescher leads our phenomenal team in the High Desert Region, which continues to experience tremendous customer growth, particularly in the Antelope Valley market. Total gross loans in the region grew 4% to $104 million and demand deposits in our Lancaster BBC grew by 41% to $66 million. Since the merger of Mission Bank and Mojave Desert Bank four and a half years ago, our deposit franchise in the Antelope Valley has more than doubled.


• Led by Sheldon Ralph, our chief administrative officer, our back-office team continues to improve efficiency and product offerings. This measure of overhead relative to revenue was down to 55% in 2017 from 59% in 2016. An efficiency ratio in the 50 percent range is phenomenal! This trend is significant and allows us to deploy our resources in areas that are customer focused. We continue to reinvest in new technology, products and services, and expect these investments to pay off in increased customer loyalty and stronger banking relationships. In 2017, we introduced digital signing for loans and deposit accounts, enhanced online banking capabilities, and mobile remote capture for businesses.

• Efficiency has not come at the cost of investing in our team. Diana Wolf, our manager of human capital, has led the way over the last three years in developing our most valuable resource, the Mission Bank team members. In hard costs alone, we have invested more than half a million dollars in training and development. The value of this investment is demonstrated in the excellence of our team’s results. The Company remains committed to a work culture that recognizes the long-term benefits that flow from investing in human capital.

The foundation of our continued success is our people and our culture. We define our culture with a Vision, Purpose, Values and Goals.

Our Vision: Mission Bank is the best business bank in California. Our brand represents the highest quality people and service. Business owners, organizational leaders, and professionals desire to bank with us because of our reputation.

Our Purpose: To fuel and grow vibrant and prosperous communities.

Our Values: Integrity, Drive, Ownership and Collaboration.

Our Long Term Goals: $1 billion in assets by 2021. Earn an after-tax ROA of 1.50% and after-tax ROE of 15%.

In 2017, we improved both ROA and ROE ratios. However, we recognize that we still have work to do in order to achieve our long-term targets. The good news for our shareholders is that our team is up to the challenge ahead and is well on the way to making those goals a reality.

As always, we thank both our team and our customers. They are the driving force behind our success and are the key components in growing shareholder value. We also thank our shareholders for their long-term commitment to our Company. Here’s looking forward to an exciting and profitable 2018.

Arnold T. Cattani A.J. AntongiovanniChairman of the Board President and CEO


MOJAVE AIR & SPACE PORT

Karina Drees is the chief executive officer and general manager of the Mojave Air & Space Port, a general

aviation airport that has evolved into a premier flight test facility and commercial spaceport. She relies on

Mission Bank and its bankers Erma Martin and Tom Lescher to help her organization maintain her customer

base and grow the airport. “We always desire to do business with companies that have a good reputation,”

Drees says. “

6

From left: Banker Erma Martin with Karina Quelet of Mojave Air & Space Port, and Banker Tom Lescher.

KERN RADIOLOGY

Bill Ziemann is the chief financial

officer of Kern Radiology, a physician-

owned healthcare corporation

celebrating its 50th year in Bakersfield.

“Because diagnostic imaging

equipment can run from $25,000 to

well over $2 million, Kern Radiology

needs a financial partner that

understands our needs and shares our

vision of growth and service,” says

Ziemann, adding that Mission has

helped Kern Radiology as it has grown

from one imaging center to its present

four. “I have been working with Samy

Abiaoui and the Mission staff since day

one. They have taken the time to learn

our business and develop solutions to

our banking needs.”

From left: Banker Samy Abiaoui and Bill Ziemann with Kern Radiology.

ACTION SPORTS

Kerry Ryan at Action Sports knows

the value of a good reputation.

Over three decades, his Bakersfield

specialty sporting goods store has

built a reputation for focusing on

bicycles, seasonal winter sporting

equipment, rock climbing and

outdoor equipment. “When I wanted

to expand, no ‘big’ bank could be

bothered,” says Ryan. “Rob at

Mission Bank just walked right in and

asked what my dreams were. He put

some financing together that helped

me. Mission Bank really stepped up

to the plate. Banker Eric Shumate

continues that support today. They

are all the essence of the word

“community” when it comes

to banking.”

From left: Banker Eric Shumate with Kerry Ryan and his dog Suki of Action Sports.

INDIAN WELLS VALLEY WATER DISTRICT

General Manager Don Zdeba at the Indian Wells Valley Water District is responsible for providing water to more

than 12,000 residential and commercial customers within a nearly 38-mile region that includes Ridgecrest and

portions of San Bernardino County. The district relies on Mission Bank and local banker Solomon Rajaratnam for

financial services to help implement cost-saving programs, such as the recent installation of six solar panel sites.

“When we needed financing for our $8 million solar project, Mission Bank was competitive,” Zdeba says, noting

his board of directors desire to support local businesses when possible.

8

From left: Banker Solomon Rajaratnam and Don Zdeba with Indian Wells Valley Water District.

MADEWEST BREWING COMPANY

Lifelong friends Mike Morrison

and Seth Gibson are founders

of Ventura’s MadeWest Brewing

Company, a production

microbrewery that opened in 2016

and serves Southern California. “I

am very familiar with the advantages

of having a good relationship with a

local bank. We chose Mission Bank

based on the employees, especially

banker Bryan Easterly, at the local

branch,” Gibson says. “Running

a small business takes endless

amounts of time and effort. It is good

to know that we have a bank behind

us with similar values and culture.”From left: Banker Bryan Easterly with Seth Gibson and Mike Morrison of MadeWest Brewing Company.

GARY LITTLE CONSTRUCTION, INC.

Gary and Debbie Little’s family-owned

company has seen large growth since

1989. As a general contractor, Gary

Little Construction, Inc. specializes in

commercial and industrial projects.

Much of their work includes Lockheed

Martin, Northrop Grumman and

Six Flags Magic Mountain. Bankers

Carmen Roberts and Tom Lescher

enjoy the trust and confidence of Gary

and his son, Mike Thompson. “Money

is a very important tool. When you feel

comfortable with bankers, it’s easier,”

note Gary and Mike. “When we call up

Mission Bank and say we need to do

something, they respond quickly like

they really care. Other banks get back

to you next month.” From left: Mike Thompson and father Gary Little from Gary Little Construction, Inc. flank Banker Carmen Roberts.

BAKERSFIELD CONDORS

Matthew Riley is president of the Bakersfield Condors, a professional hockey team and sports entertainment

enterprise that is celebrating its 20th season. “Just the people at Mission Bank make the difference,” Riley says,

explaining why the Condors value their relationship with bankers Samy Abiaoui and Kevin Trihey. “They are nice

folks who are willing to help, bend over backwards, and do what it takes to get the job done. They also presented

networking opportunities that have positioned us in a good light, where we have been able to gain more clients.”

From left: Banker Kevin Trihey with Matthew Riley of the Bakersfield Condors and Banker Samy Abiaoui at a Condors’ practice.

10

SHAFTER URGENT CARE

Dr. Ayodeji Ayeni provides medical

care for children at Shafter

Pediatrics and urgent care for

adults and children at Shafter

Urgent Care. “Mission Bank has

been there for us as a local bank to

help us grow,” Ayeni says, noting

that people are increasingly turning

to urgent care centers to avoid the

long waits associated with ERs.

“I have been working with banker

Matt Damian since 2014. There

is a real drive at Mission Bank to

assist local businesses to grow

and succeed. Mission Bank went to

great lengths to secure funding for

our building project.”

ARNIE RODIO

Arnie Rodio is an entrepreneur

who has built several successful

businesses over the last 40 years.

His areas of focus include industrial

commercial development, utilities,

plumbing, general construction and

code compliance. Looking for “a fast

response time to take advantage

of opportunities,” Rodio says is

why he selected Mission Bank and

bankers Jeff Johnson, Carmen

Roberts and Tom Lescher. He was

attracted by the bank’s reputation

for high performance. They are the

“complete package, which is what

you need, and that includes the staff

having an open and friendly attitude

that makes you feel welcome.”

From left: Dr. Ayodeji Ayeni with Shafter Urgent Care and Banker Matt Damian.

From left: Banker Jeff Johnson, Lynell Rodio and Arnie Rodio, and Banker Tom Lescher walk inside one of the Rodio’s rental buildings that features a street office façade designed by Mr. Rodio.

CROP MANAGEMENT COMPANY, INC.

Matt and John Fisher are the fourth generation to operate a diversified family farming operation that began with

a commercial spray rig and a few acres of land in Delano and now includes four Valley locations, thousands of

acres planted in citrus, and freight brokerage, trucking and propane businesses. “Relationships are what have

and will continue to allow us to succeed in farming,” say the Fishers, noting that the same types of relationships

attracted their family to Mission Bank and banker Rob Hallum. “Rob communicates well, and understands

farming and what makes our world work. He has a ‘can do’ attitude.”

12

From left: Matt Fisher, Banker Richard Fanucchi, John Fisher IV, Banker Rob Hallum and John Fisher V walk in a citrus grove as the elder Fisher describes how his grandfather began farming.

A.J. ANTONGIOVANNIPresident and CEOMission Bancorp/Bank

J. BRYAN BATEYPresidentMadison Builders, Inc.

BRUCE L. BERETTAPresidentAg Wise Enterprises, Inc.

JOHN BIDARTPartnerBidart Dairy, LLC

M I S S I O N B A N C O R P D I R E C T O R S

DONICE BOYLANPresidentB & B Surplus, Inc.

ARNOLD T. CATTANIChairmanMission Bancorp/Bank

SALVADOR CHIPRESOwnerSalvador Chipres Construction

PARAMJIT S. DOSANJHManaging PartnerDosanjh Brothers, LLCGolden Gem Farms, LLC

RICHARD E. FANUCCHIExecutive Vice PresidentMission Bank

CURTIS E. FLOYD, ESQPresidentCurtis E. Floyd, A Professional Law Corporation

MARY JANE WILSONPresident and CEOWZI, Inc.

M I S S I O N B A N K

A.J. ANTONGIOVANNIPresident and CEOMission Bank

MICHAEL CONGDONSenior Vice PresidentChief Credit Officer

JASON CASTLESenior Vice PresidentChief Financial Officer

STUART ANNABLESenior Vice PresidentCredit Administrator

SHELDON RALPHSenior Vice PresidentChief Administrative Officer

DIANA WOLFAssistant Vice PresidentManager of Human Capital

CENTRAL VALLEY REGION

SAMY ABIAOUIRegional PresidentCentral Valley Region

JUANA WILSONBusiness Banker Lead Shafter Business Banking Center

LISA BOYDSTUNVice President, Manager of OperationsBakersfield Business Banking Center

BRANDON HERNANDEZBusiness Banker LeadRiverwalk Business Banking Center

ROSALIA REYESBusiness Banker LeadGreenfield Business Banking Center

HIGH DESERT REGION

TOM LESCHERRegional PresidentHigh Desert Region

ERMA MARTINAssistant Vice President, ManagerMojave Business Banking Center

SOLOMON RAJARATNAMVice President, ManagerRidgecrest Business Banking Center

CARMEN ROBERTSSenior Vice President, ManagerLancaster Business Banking Center

COASTAL REGION

BRYAN EASTERLYRegional PresidentCoastal Region

AG DIVISION

ROB HALLUMSenior Vice PresidentAg Division Manager

RICHARD E. FANUCCHIExecutive Vice PresidentBusiness Development OfficerAg Division

SBA DIVISION

MATT DAMIANSenior Vice PresidentSBA Division Manager

1031 EXCHANGE

BILLIE SUE RECORDSSenior Vice President Senior Exchange OfficerMission Bank 1031 Exchange


S H A R E H O L D E R I N F O R M A T I O N

STOCK TRANSFER AGENT & REGISTRAR

Computershare Trust Co., Inc.462 South 4th Street, Suite 1600Louisville, KY 40202T: 1.800.962.4284

INDEPENDENT AUDITORS

Moss Adams LLP10960 Wilshire Blvd., Suite 1100Los Angeles, CA 90024T: 310.477.0450 F: 310.477.8424

STOCK LISTING

The company’s common stock is traded on the OTCQB Market under the symbol “MSBC.”

INVESTOR & SHAREHOLDER INFORMATION

Requests for information by shareholders and investors interested in Mission Bancorp Inc. may contact:

Crowell, Weedon & Co.Troy Norlander or Michael NatzicCommunity Banking GroupT: 800.288.2811


Report of Independent Auditors and Consolidated Financial Statements for

Mission Bancorp

December 31, 2017 and 2016

CONTENTS PAGEREPORTOFINDEPENDENTAUDITORS 1–2CONSOLIDATEDFINANCIALSTATEMENTS Consolidatedbalancesheets 4 Consolidatedstatementsofincome 5 Consolidatedstatementsofcomprehensiveincome 6 Consolidatedstatementsofchangesinshareholders’equity 7 Consolidatedstatementsofcashflows 8 Notestoconsolidatedfinancialstatements 9–49

1

Report of Independent Auditors The Board of Directors Mission Bancorp Report on the Financial Statements

We have audited the accompanying consolidated financial statements of Mission Bancorp and its subsidiaries, which comprise the consolidated balance sheets as of December 31, 2017 and 2016, and the related consolidated statements of income, comprehensive income, changes in shareholders’ equity, and cash flows for the years then ended, and the related notes to the consolidated financial statements. Management’s Responsibility for the Financial Statements

Management is responsible for the preparation and fair presentation of these consolidated 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 consolidated 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 consolidated financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the consolidated 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 consolidated 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 consolidated financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.

2

Opinion

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Mission Bancorp and its subsidiaries as of December 31, 2017 and 2016, and the results of their operations and their cash flows for the years then ended in accordance with accounting principles generally accepted in the United States of America.

Los Angeles, California March 12, 2018

3

CONSOLIDATEDFINANCIALSTATEMENTS

4 Seeaccompanyingnotes.

MISSIONBANCORPCONSOLIDATEDBALANCESHEETS

2017 2016

Cashandcashduefrombanks 70,691,737$ 61,241,344$Interestearningdepositsinotherbanks 7,350,779 29,878,000

Totalcashandcashequivalents 78,042,516 91,119,344

Interestearningdepositsmaturingoverninetydays ‐ 5,395,000Restrictedcashandinterestearningdeposits 1,239,476 ‐Investmentsecuritiesavailable‐for‐sale,atfairvalue 66,731,805 62,261,807Loans,net 463,478,417 375,595,814Premisesandequipment,net 3,704,765 3,945,341Bankownedlifeinsurance 10,075,582 9,821,284Deferredtaxasset 1,793,508 2,763,286Interestreceivableandotherassets 10,338,176 7,389,320

TOTALASSETS 635,404,245$ 558,291,196$

Deposits Noninterest‐bearingdemand 291,069,875$ 246,741,039$

Savings,NOW,exchange,andescrow 109,313,774 101,716,889Moneymarket 129,009,799 112,953,575Timedeposits 48,042,240 27,113,751

Totaldeposits 577,435,688 488,525,254

FHLBborrowings ‐ 20,000,000

Interestpayableandotherliabilities 4,510,863 2,700,816

Totalliabilities 581,946,551 511,226,070

COMMITMENTSANDCONTINGENCIES(NOTE13)

SHAREHOLDERS'EQUITYCommonstock‐10,000,000sharesauthorized;

noparvalue;1,670,128and1,576,201shares

issuedandoutstandingatDecember31,2017and2016,respectively 23,462,639 20,193,552

Retainedearnings 30,638,278 27,371,706Accumulatedothercomprehensiveloss (627,029) (487,650)

TotalMissionBancorpshareholders'equity 53,473,888 47,077,608

Noncontrollingdeficit (16,194) (12,482)

Totalshareholders'equity 53,457,694 47,065,126

TOTALLIABILITIESANDSHAREHOLDERS'EQUITY 635,404,245$ 558,291,196$

DECEMBER31,

ASSETS

LIABILITIESANDSHAREHOLDERS'EQUITY

Seeaccompanyingnotes. 5

MISSIONBANCORPCONSOLIDATEDSTATEMENTSOFINCOME

2017 2016

INTERESTINCOMEInterestandfeesonloans 21,110,255$ 16,845,893$Interestoninvestmentsecurities 1,280,917 1,095,223Otherinterestincome 626,776 644,043

Totalinterestincome 23,017,948 18,585,159

INTERESTEXPENSEInterestonotherdeposits 336,869 272,318Interestontimedeposits 181,582 72,855FHLBborrowings 145,320 88,596

Totalinterestexpense 663,771 433,769

NETINTERESTINCOME 22,354,177 18,151,390

PROVISIONFORLOANLOSSES 1,062,646 645,878

NETINTERESTINCOMEAFTERPROVISIONFORLOANLOSSES 21,291,531 17,505,512

NON‐INTERESTINCOMEServicecharges,fees,andotherincome 4,717,167 4,571,259

NON‐INTERESTEXPENSESSalaries,wages,andemployeebenefits 8,977,482 8,076,727Professionalservices 1,872,551 1,394,201Occupancyandequipmentexpenses 1,339,466 1,356,654Dataprocessingandcommunicationexpenses 1,028,615 947,179Otherexpenses 1,556,748 1,771,508

Totalnon‐interestexpenses 14,774,862 13,546,269

NETINCOMEBEFOREPROVISIONFORINCOMETAXES 11,233,836 8,530,502PROVISIONFORINCOMETAXES 5,085,608 3,429,408

NETINCOME 6,148,228 5,101,094LESSNETINCOMEATTRIBUTABLETOTHE

NONCONTROLLINGINTEREST 54,288 47,676

NETINCOMEAVAILABLETOCOMMONSHAREHOLDERS 6,093,940$ 5,053,418$

EARNINGSPERSHAREAVAILABLETOCOMMONSHAREHOLDERS‐BASIC 3.66$ 3.21$EARNINGSPERSHAREAVAILABLETOCOMMONSHAREHOLDERS‐DILUTED 3.52$ 3.15$

YEARSENDEDDECEMBER31,


MISSIONBANCORPCONSOLIDATEDSTATEMENTSOFCOMPREHENSIVEINCOME

2017 2016

NETINCOME 6,148,228$ 5,101,094$OTHERCOMPREHENSIVELOSS,netoftax

Changeinunrealizedlossonsecuritiesavailable‐for‐sale,netoftaxesof$118,304in2017

and$279,158in2016 (139,379) (377,251)Reclassificationadjustmentforgainincluded

innetincome,netoftaxesof$12,508in2016 ‐ (16,902)Totalchangeinunrealizedlossonsecurities

available‐for‐sale (139,379) (394,153)

TOTALCOMPREHENSIVEINCOME 6,008,849 4,706,941Lesscomprehensiveincomeattributabletothe

noncontrollinginterest 54,288 47,676

COMPREHENSIVEINCOMEATTRIBUTABLETOMISSIONBANCORP 5,954,561$ 4,659,265$


Seeaccompanyingnotes. 7

MISSIONBANCORPCONSOLIDATEDSTATEMENTSOFCHANGESINSHAREHOLDERS’EQUITY

Accumulated TotalMission

NumberofShares Amount

RetainedEarnings

OtherComprehensive

Income

BancorpShareholders'

EquityNoncontrolling

Interest

TotalShareholders'

Equity

BALANCE,December31,2015 1,497,815 17,764,741$ 24,459,457$ (93,497)$ 42,130,701$ (3,158)$ 42,127,543$

Stockbasedcompensation ‐ 180,187 ‐ ‐ 180,187 ‐ 180,187

Changeinnoncontrollinginterest ‐ ‐ ‐ ‐ ‐ (57,000) (57,000)

Netincome ‐ ‐ 5,053,418 ‐ 5,053,418 47,676 5,101,094

5%stockdividend 74,891 2,141,169 (2,141,169) ‐ ‐ ‐ ‐

Fractionalsharescancelled (152) (5,045) ‐ ‐ (5,045) ‐ (5,045)

Optionsexercised 3,647 112,500 ‐ ‐ 112,500 ‐ 112,500

Othercomprehensiveloss,net ‐ ‐ ‐ (394,153) (394,153) ‐ (394,153)

BALANCE,December31,2016 1,576,201 20,193,552 27,371,706 (487,650) 47,077,608 (12,482) 47,065,126

Stockbasedcompensation ‐ 228,828 ‐ ‐ 228,828 ‐ 228,828

Changeinnoncontrollinginterest ‐ ‐ ‐ ‐ ‐ (58,000) (58,000)

Netincome ‐ ‐ 6,093,940 ‐ 6,093,940 54,288 6,148,228

5%stockdividend 79,216 2,827,368 (2,827,368) ‐ ‐ ‐ ‐

Fractionalsharescancelled (155) (6,709) ‐ ‐ (6,709) ‐ (6,709)

Issuanceofrestrictedshareawards 7,562 ‐ ‐ ‐ ‐ ‐ ‐

Optionsexercised 7,304 219,600 ‐ ‐ 219,600 ‐ 219,600

Othercomprehensiveloss,net ‐ ‐ ‐ (139,379) (139,379) ‐ (139,379)

BALANCE,December31,2017 1,670,128 23,462,639$ 30,638,278$ (627,029)$ 53,473,888$ (16,194)$ 53,457,694$

CommonStock

YEARSENDEDDECEMBER31,2017AND2016


MISSIONBANCORPCONSOLIDATEDSTATEMENTSOFCASHFLOWS

2017 2016

CASHFLOWSFROMOPERATINGACTIVITIESNetincome 6,148,228$ 5,101,094$AdjustmentstoreconcilenetincometonetcashfromoperatingactivitiesProvisionforloanlosses 1,062,646 645,878Depreciationandamortizationofpremisesandequipment 381,246 419,802Accretionofdeferredloanfeesandcosts,net (163,409) (158,355)Accretionofdiscountonacquiredandpurchasedloans,net (305,773) (366,458)Amortizationofpremiumsanddiscountsoninvestments,net 683,394 691,878Deferredtaxexpense 1,065,022 498,000Stock‐basedcompensation 228,828 180,187Increaseincashsurrendervalueofbankownedlifeinsurance (254,298) (222,844)Realizedgainonsaleofsecurities ‐ (29,410)NetchangeinInterestreceivableandotherassets (2,539,456) (1,761,261)Interestpayableandotherliabilities 1,810,046 (308,607)

Netcashprovidedbyoperatingactivities 8,116,474 4,689,904

CASHFLOWSFROMINVESTINGACTIVITIESIncreaseinrestrictedcashandinterestearningdeposits (1,239,476) ‐Purchasesofavailable‐for‐saleinvestments (24,351,353) (22,471,486)Proceedsfromrepaymentsandmaturitiesofavailable‐for‐saleinvestments 18,963,338 21,646,504

Netdecreaseininterestearningdepositsmaturingoverninetydays 5,395,000 24,577,000Netincreaseinloans (88,476,066) (76,535,706)Purchasesofpremisesandequipment (140,670) (137,530)Purchaseofbankownedlifeinsurance ‐ (1,500,000)PurchaseofFederalHomeLoanBankstock (409,400) (161,100)

Netcashusedininvestingactivities (90,258,627) (54,582,318)

CASHFLOWSFROMFINANCINGACTIVITIESNetincreaseindemanddepositsandsavingsaccounts 67,981,945 40,117,777Netincrease(decrease)intimedeposits 20,928,489 (1,693,295)Netproceeds(payments)fromFHLBborrowings (20,000,000) 20,000,000Distributionstononcontrollinginterestholders (58,000) (57,000)Fractionalsharescancelled (6,709) (5,045)Proceedsfromexercisesofstockoptions 219,600 112,500

Netcashprovidedbyfinancingactivities 69,065,325 58,474,937

Increase(decrease)incashandcashequivalents (13,076,828) 8,582,523Beginningofyear 91,119,344 82,536,821

Endofyear 78,042,516$ 91,119,344$

SUPPLEMENTALDISCLOSURESOFCASHFLOWINFORMATIONInterestpaid 678,641$ 433,631$Taxespaid 4,700,000 4,253,000

SUPPLEMENTALDISCLOSURESOFNONCASHINVESTINGANDFINANCINGACTIVITIESChangeinunrealizedgainonsecuritiesavailableforsale (234,623)$ (685,819)$Loantransferredintootherrealestateowned ‐ 359,497


MISSIONBANCORPNOTESTOCONSOLIDATEDFINANCIALSTATEMENTS

9

Note1–SummaryofSignificantAccountingPoliciesNatureofoperations –MissionBancorp (the Company)was incorporated on January 31, 2001 andsubsequentlyobtainedapprovalfromtheBoardofGovernorsoftheFederalReserveSystemtobeabankholdingcompanyinconnectionwithitsacquisitionofMissionBank(theBank).TheCompanybecamethesoleshareholderoftheBankinJune2002.TheBankisastatecharteredfinancialinstitutionincorporatedinCaliforniaonApril29,1998.TheBankcommencedbankingoperationsonOctober7,1998.TheBankmaintains seven full service facilities, one located in Shafter, California, three located in Bakersfield,California, and three located in the Mojave Desert area, California. The Bank generates commercial,mortgage, and consumer loans and receives deposits from customers located primarily in CaliforniacountiesofKernandLosAngeles.OnAugust22,2007,theCompanyorganizedMission1031Exchange,LLC,aCaliforniaLimitedLiabilityCompany,tofacilitateIRSCodeSection1031propertyexchangetransactions.Mission1031Exchange,LLCisawhollyownedsubsidiaryofMissionBancorp.InAugust2008,theCompanyorganizedDoubleW,LLC,aCaliforniaLimitedLiabilityCompany,tobuildanofficebuildingtohousetheCompany’sShafterservicefacilityandamedicaloffice.DoubleW,LLC,isequallyownedatfiftypercenteachbytheCompanyandanindependentthirdparty.Thenoncontrollinginterest amounts included in the accompanying consolidated financial statements relate to thisindependentthirdparty.InNovember2016,theCompanyorganizedMissionCommunityDevelopment,LLC,aCaliforniaLimitedLiabilityCompany, to facilitateandpromotegrowth in low‐incomecommunities. MissionCommunityDevelopment,LLChassubmittedanapplicationwiththeCommunityDevelopmentFinancialInstitutionsFund to qualify as a CommunityDevelopment Entity that provides investment capital to low‐incomecommunities. This application is still under review at December 31, 2017. Mission CommunityDevelopment,LLCisawhollyownedsubsidiaryofMissionBancorp.InJune2017,theCompanyorganizedNosbig88,Inc.aNevadaCorporation,toallowtheentitiesoftheCompanytoparticipateinapooled‐risksharinggroup.Nosbig88,Inc.isawholly‐ownedsubsidiaryoftheCompanythatprovidespropertyandcasualtyinsurancecoveragetotheCompany,theBankandtheCompany’ssubsidiaries,andreinsurancetotenotherthird‐partyinsurancecaptives,forwhichinsurancemaynotbecurrentlyavailableoreconomically feasible in the insurancemarketplace. Nosbig88, Inc.generatesinsurancepremiumincomethatischargeabletoeachoftheotherentitiesintheconsolidatedgroup. This premium income and the related charges are eliminated upon consolidation within theaccompanyingconsolidatedfinancialstatements.Basisofpresentationandconsolidation–Theaccompanying consolidated financial statementsareprepared inaccordancewithaccountingprinciplesgenerallyaccepted in theUnitedStatesofAmerica(GAAP)andgeneralpracticeswithinthebankingindustry.TheconsolidatedfinancialstatementsoftheCompanyincludetheaccountsoftheCompany,theBank,Mission1031Exchange,LLC,DoubleW,LLC,MissionCommunityDevelopment,LLC., andNosbig88, Inc.All significant intercompanybalancesandtransactionshavebeeneliminatedinconsolidation.


10

Note1–SummaryofSignificantAccountingPolicies(continued)Reclassifications–Certainreclassificationshavebeenmadetothe2017and2016consolidatedfinancialstatements to conform to the current year presentation. These reclassifications have no effect onpreviouslyreportednetincomeortotalshareholders’equityoftheCompany.Subsequentevents–Subsequent events are events or transactions thatoccur after the consolidatedbalancesheetdatebutbeforeconsolidatedfinancialstatementsareissued.TheCompanyrecognizesintheconsolidatedfinancialstatementstheeffectsofallsubsequenteventsthatprovideadditionalevidenceabout conditions that existed at the date of the consolidated balance sheet, including the estimatesinherentintheprocessofpreparingtheconsolidatedfinancialstatements.TheCompany’sconsolidatedfinancialstatementsdonotrecognizesubsequenteventsthatprovideevidenceaboutconditionsthatdidnotexistatthedateoftheconsolidatedbalancesheetbutaroseaftertheconsolidatedbalancesheetdateandbeforeconsolidatedfinancialstatementsareissued.TheCompanyhasevaluatedsubsequenteventsthroughMarch12,2018,which is thedate theconsolidated financial statementswereavailable tobeissued.Useofestimates–ThepreparationofconsolidatedfinancialstatementsinconformitywithaccountingprinciplesgenerallyacceptedintheUnitedStatesofAmericarequiresmanagementtomakeestimatesandassumptionsthataffectthereportedamountsofassetsandliabilities,thedisclosureofcontingentassetsandliabilitiesatthedateoftheconsolidatedbalancesheets,andthereportedamountsofrevenuesandexpensesduringthereportingperiod.Actualresultscoulddifferfromthoseestimates.Materialestimatesthatareparticularlysusceptibletosignificantchangeintheneartermrelatetothedetermination of the allowance for loan losses, cash flow projections associatedwith acquired loans,valuationofinvestmentsecurities,share‐basedcompensation,andvaluationofdeferredtaxassets.Actualresultscoulddifferfromtheestimatedamounts.Concentrationsofcreditrisk–TheCompanyhasnosignificantconcentrationsofcreditriskwithanyindividualparty;however,theCompany’slendingisprimarilyconcentratedinCaliforniacountiesofKernandLosAngeles.AsofDecember31,2017and2016,theCompanyhascashdepositsatotherfinancialinstitutionsinexcessoftheFederalDepositInsuranceCorporationinsuredlimits.However,theCompanyplacesthesedepositswithmajorfinancialinstitutionsandmonitorsthefinancialconditionoftheseinstitutions.Businesscombinations –Business combinations are accounted for under the acquisitionmethod ofaccounting in accordance with ASC 805, Business Combinations. Under the acquisition method, theacquiring entity in a business combination recognizes the acquired assets and assumed liabilities,regardlessofthepercentageowned,attheirestimatedfairvaluesasofthedateofacquisition.Anyexcessofthepurchasepriceoverthefairvalueofnetassetsandotheridentifiableintangibleassetsacquiredisrecordedasgoodwill.Assetsacquiredandliabilitiesassumedfromcontingenciesmustalsoberecognizedatfairvalue,ifthefairvaluecanbedeterminedduringthemeasurementperiod.Resultsofoperationsofanacquiredbusinessareincludedintheconsolidatedstatementsofincomefromthedateofacquisition.Acquisitionrelatedcosts,includingconversion,areexpensedasincurred.


11

Note1–SummaryofSignificantAccountingPolicies(continued)Cashandcashequivalents–Forpurposesofthestatementsofcashflows,cashandcashequivalentsincludecashandbalancesduefrombanks,andfederalfundssold,allofwhichhaveoriginalmaturitiesoflessthanninetydays.BankingregulationsrequirethatbanksmaintainapercentageoftheirdepositsasreservesincashorondepositwiththeFederalReserveBank.TheBankwasincompliancewithitsreserverequirementsasofDecember31,2017.Interestearningdeposits inotherbanks– Interest earning deposits in other banks are carried atamortizedcostandincludecertificatesofdepositsinmajorfinancialinstitutionslocatedthroughouttheUnitedStatesofAmerica.Restrictedcashandinterestearningdeposits–TheCompany’ssubsidiaryNosbig,88,Inc.hascashbalancesandinterestearningdepositsthatarerestrictedinuseforpayingpotentialinsuranceclaims.Investment securities – Debt and equity securities that will be held for indefinite periods of time,includingsecuritiesthatmaybesoldinresponsetochangesinmarketinterestorprepaymentrates,needsforliquidity,andchangesintheavailabilityofandtheyieldofalternativeinvestments,areclassifiedasavailable‐for‐sale.Theseassets are carriedat fair value. Fair value isdeterminedusingpublicmarketprices,dealerquotes,andpricesobtainedfromindependentpricingservicesthatmaybederivedfromobservableandunobservablemarketinputs.Unrealizedgainsandlosses,netoftax,areexcludedfromearningsandarereportedasaseparatecomponentofshareholders’equityuntilrealized.Debtandequitysecuritiesthatmanagementhastheabilityandintenttoholdtomaturityareclassifiedasheld‐to‐maturityandcarriedatamortizedcost.Interestincomefromtheinvestmentsecuritiesportfolioisaccruedasearnedincludingtheaccretionofdiscountsandtheamortizationofpremiumsbasedontheoriginalcostofeachsecurityowned.Discountsandpremiumsareaccretedandamortizedonamethodthatapproximatestheeffectiveinterestmethodto thematurity date of the securitywith the exception ofmortgage‐backed securities. Discounts andpremiumsonmortgagebackedsecuritiesareaccretedandamortizedtotheexpectedmaturitydateoftheinvestmentsecurity.Realizedgainsorlossesonthesaleofinvestmentsandmortgage‐backedsecuritiesare reported in earningsasof the tradedateanddeterminedusing theamortized costof the specificsecuritysold.Thegainorlossrecognizedonanysecuritysoldpriortomaturityisbasedonthedifferencebetweenprincipalproceedsandthisamortizedcost.Declinesinthefairvalueofindividualavailable‐for‐salesecuritiesbelowtheircostthataredeemedotherthantemporaryarereflectedinresultsofincomeasrealizedlosses.Managementperformsregularimpairmentanalysesonthesecuritiesportfolio.Theevaluationisbasedupon factors such as the creditworthiness of the issuers/guarantors, the underlying collateral, ifapplicable,andthecontinuingperformanceofthesecurities.Managementalsoevaluatesotherfactsandcircumstancesthatmaybeindicativeofimpairment.Thisincludes,butisnotlimitedto,anevaluationofthetypeofsecurity,lengthoftimeandextenttowhichthefairvaluehasbeenlessthancost,andnear‐termprospectsoftheissuer.


12

Note1–SummaryofSignificantAccountingPolicies(continued)IfitisprobablethattheCompanywillbeunabletocollectallamountsdueaccordingtothecontractualtermsof thesecurity,other‐than‐temporary impairment(OTTI) isconsideredtohaveoccurred.WhenOTTIoccurs,thecostbasisofthesecurityiswrittendowntoitsfairvalue(asthenewcostbasis)andthewrite‐downisaccountedforasarealizedloss.InassessingwhetherimpairmentrepresentsOTTI,theCompanymustconsiderwhetheritintendstosellasecurityorifitislikelythattheywouldberequiredto sell the security before recovery of the amortized cost basis of the investment, which may be atmaturity.Fordebtsecurities,iftheCompanyintendstosellthesecurityoritislikelythatasaleofthesecuritymayberequiredbeforerecoveringthecostbasis,theentireimpairmentlosswouldberecognizedinearningsasOTTI.IftheCompanydoesnotintendtosellthesecurity,itisnotlikelythesaleofthesecuritywillberequired,and theCompanydoesnot expect to recover the entire amortized cost basis of the security, only theportionoftheimpairmentlossthatiscreditrelatedwouldberecognizedinearnings.Insuchcases,theamountofimpairmentrecognizedismeasuredasthedifferencebetweentheamortizedcostbasisandthepresentvalueofthecashflowsexpectedtobecollected.Projectedcashflowsarediscountedbytheoriginalorcurrenteffectiveinterestratedependingonthenatureof the securitybeingmeasured forpotentialOTTI.The remaining impairment related tootherfactors,andthedifferencebetweenthepresentvalueofthecashflowsexpectedtobecollectedandfairvalue,isrecognizedasachargetoothercomprehensiveincome(OCI).Investments in common stock, substantially restricted – In June 2015, the Company became amemberoftheFederalReserveBankofSanFrancisco(FRB)andisnowundertheirregulatoryoversight.MembershipintheFederalReserveSystemrequiresmemberstoholdstockinanamountequivalenttosixpercentoftheCompany’scapitalandsurplus.TheCompanyisalsoamemberoftheFederalHomeLoanBankofSanFrancisco(FHLB).AsamemberoftheFHLB,theCompanyisrequiredtopurchaseFHLBstockinaccordancewithitsadvances,securities,anddepositagreement.TheCompanyalsoinvestsinthestockofPacificCoastBankersBank(PCBB)andTexas IndependentBank(TIB) inconnectionwith itsadvanceandcorrespondentbankingarrangementswithPCBBandTIB.AtDecember31,2017and2016,theCompanyheld$100,000and$100,000,respectively,eachofPCBBstockandTIBstock.PCBBandTIBstockisrestrictedastopurchase,sale,andredemption.AsofDecember31,2017and2016,theCompanyheld$381thousandand$361thousand,respectively,ofFRBstock.TheamountofFRBstockheldisevaluatedquarterlytodetermineifadditionalsharesarerequiredtobepurchasedorcancelledbasedontheCompany’scapitalandsurplus.AtDecember31,2017and2016,theCompanyheld$2.4millionand$2.0million,respectively,ofsharesofFHLB.TheCompanyevaluatesitsinvestmentinFHLBstockforimpairmentonaperiodicbasisandhasnotrecordedanimpairmentonitsinvestmentofFHLBstockduring2017and2016.


13

Note1–SummaryofSignificantAccountingPolicies(continued)The investments in FRB stock, FHLB stock, TIB stock, and PCBB stock are carried as cost methodinvestments and are reportedwithin interest receivable andother assets in the consolidatedbalancesheetsasofDecember31,2017and2016.Originated loans – Loans receivable that management has the intent and ability to hold for theforeseeablefutureoruntilmaturityorpayoffarestatedattheamountofunpaidprincipal,reducedbyanallowanceforloanlossesandnetdeferredloanfeesandcosts.Interestincomeonloansiscalculatedbythesimple‐interestmethodondailybalancesoftheprincipalamountoutstanding.Loanoriginationfees,netofcertaindirectoriginationcosts,arecapitalizedandrecognizedasanadjustmentoftheyieldoverthelifeoftherelatedloanusingtheeffectiveinterestmethod.The accrual of interest on originated loans is discontinued at the time the loan becomes 90 daysdelinquentunlessthecreditiswellsecuredandinprocessofcollection.Insomecases,loanscanbeplacedonnonaccrualstatusorcharged‐offatanearlierdateifcollectionofprincipalorinterestisconsidereddoubtful. Other personal loans are typically charged off no later than 180 days past due. Subsequentcollectionsofinterestareappliedtounpaidprincipalbalancesorincludedininterestincomebaseduponmanagement'sassessmentofthelikelihoodthatprincipalwillbecollected.Whenaloanisplacedonnon‐accrualstatus,previouslyaccruedanduncollectedinterestisreversedfromincomeandallamortizationofdeferredfeesandcostsisceased.Loansonnonaccrualarechargedoff,orpartiallychargedoff,whenoneoftwoconditionsispresent:(i)ithasbeendeterminedthatalloraportionofanassetisuncollectible;or(ii)whenthereisanuncertaintyastothesourceortimingofanyeventualpayoff.Paymentsreceivedonnonaccrualloansareappliedfirsttotheprincipalnotchargedoff.Iftheloanhashadapartialchargeofforwaschargedoff,thepaymentreceivedaftertherecordedbalancehasbeenpaidoffisappliedasarecoverytotheallowanceforloanlosses.Oncealoanisonnonaccrual,itisgenerallynotreturnedtoaccrualstatusuntil:(i)allpastdueprincipalandinterestamountscontractuallyduearereasonablyassuredofrepaymentwithinareasonableperiod;and(ii)therehasbeenasustainedperiodofrepaymentperformance(generallysixmonths)bytheborrower.AnoriginatedloanisconsideredimpairedwhenitisprobablethattheCompanywillnotbeabletocollectall principal and interest amounts due according to the loan's contractual terms based upon availableinformationandevents.Factorsconsideredbymanagementindeterminingimpairmentincludepaymentstatus,collateralvalue,andtheprobabilityofcollectingscheduledprincipalandinterestpaymentswhendue.Theamountofthevaluationallowanceforimpairedloansisdeterminedbycomparingtherecordedinvestmentineachloanwithitsvaluemeasuredbyoneofthreemethods:(i)theestimatedpresentvalueoftotalexpectedfuturecashflows,discountedattheloan’seffectiveinterestrate;(ii)theloan'sobservablemarketprice,ifavailablefromasecondarymarket;or(iii)bythefairvalueoftheunderlyingcollateraliftheloaniscollateraldependent.Ifthevalueofanimpairedloan(measuredbasedononeofthemethodsdescribed above) is less than its recorded investment, a specific valuation allowance (impairmentallowance)isestablishedasacomponentoftheallowanceforloanlossesthroughachargetotheprovisionfor loan losses. Subsequent permitted adjustments to the impairment allowance are made through acorrespondingchargeorcredittotheprovisionforloanlosses.


14

Note1–SummaryofSignificantAccountingPolicies(continued)Loansarereportedastroubleddebtrestructurings(TDR)whentheCompanygrantsaconcessiontoaborrower experiencing financial difficulties that itwould not otherwise consider. Examples of such aconcessionincludeforgivenessofprincipaloraccruedinterest,extendingthematuritydate,orprovidingalowerinterestratethanwouldbenormallyavailableforatransactionofsimilarrisk.Asaresultoftheseconcessions, restructured loans are impaired as the Company will not collect all amounts due, bothprincipalandinterest,inaccordancewiththetermsoftheoriginalloanagreement.Impairmentreservesonnon‐collateraldependentrestructuredloansaremeasuredbycomparingthepresentvalueofexpectedfuturecashflowsontherestructuredloansdiscountedattheinterestrateoftheoriginalloanagreementto the loan’scarryingvalue.These impairment reservesare recognizedasa specific component tobeprovidedforintheallowanceforloanlosses.Acquiredloans–Purchasedloansarerecordedattheirfairvalueattheacquisitiondate.Creditdiscountsareincludedinthedeterminationoffairvalue;therefore,anallowanceforloanlossesisnotrecordedatthe acquisitiondate. Subsequent to acquisition, if theCompany's allowance for loan and lease lossesmethodologyindicatesthatthecreditdiscountassociatedwithacquired,non‐purchasedcreditimpairedloans,isnolongersufficienttocoverprobablelossesinherentinthoseloans,theCompanyestablishesanallowanceforthoseloansthroughachargetoprovisionforloanandleaselosses.Acquiredloansareevaluateduponacquisitionandclassifiedaseitherpurchasedimpairedorpurchasednon‐impaired (nonASC 310‐30 Loans). Purchased impaired loans, accounted for under ASC 310‐30,LoansandDebtSecuritiesAcquiredwithDeterioratedCreditQuality (ASC310‐30Loans), reflect creditdeteriorationsinceoriginationsuchthatitisprobableatacquisitionthattheCompanywillbeunabletocollectallcontractuallyrequiredpayments.TheCompanyhaselectedtoaccountforpurchasedimpairedloansbypoolingloanswithcommonriskcharacteristics.TheCompanyestimatestheamountandtimingofexpectedcashflowsforeachloanwithinapool.Theexpectedcashflowinexcessoftheloan'scarryingvalue,which is the fair value on the date of acquisition, is referred to as the accretable yield, and isrecorded as interest income over the remaining expected life of the loan. The excess of the loan'scontractualprincipalandinterestoverexpectedcashflowsisreferredtoasthenon‐accretabledifference,andisrepresentativeofcontractualamountstheCompanydoesnotexpecttocollect.Thenon‐accretabledifference is not recorded in the Company's consolidated financial statements. Subsequent to theacquisitiondate,anyincreasesinexpectedcashflowsofthepooloverthoseexpectedatthepurchasedateinexcessoffairvalueareadjustedthroughanincreasetotheaccretableyieldonaprospectivebasis.Anysubsequent decreases in expected cash flows of the pool attributable to credit deterioration arerecognizedbyrecordingaprovisionforloanlosses.FornonASC310‐30Loans,thedifferencebetweenthefairvalueandunpaidprincipalbalanceoftheloanattheacquisitiondateisamortizedoraccretedtointerest incomeovertheestimatedlifeoftheloans.Subsequent to the acquisition, if theprobable andestimable losses onpurchasednon‐impaired loansexceedtheamountoftheremainingunaccreteddiscounttheexcessisestablishedaspartoftheallowanceforloanlosses.


15

Note1–SummaryofSignificantAccountingPolicies(continued)Allowance for loan losses–Theprovision for loan losses charged to the results of operations is anamountsufficienttobringtheallowanceforloanlossestoanestimatedbalanceconsideredadequatetoabsorbprobablelossesinherentintheportfolioatthedateoftheconsolidatedfinancialstatements.Loanlossesarechargedagainsttheallowancewhenmanagementbelievestheuncollectabilityofaloanbalanceisconfirmed.Subsequentrecoveries,ifany,arecreditedtotheallowance.TheCompanyperformsregularinternalandexternalreviewsoftheloanportfoliotoconfirmthecreditqualityoftheportfolioandtheadherencetounderwritingstandards.Allloansareassignedariskratingthat is reassessed periodically during the credit review process. These risk rating categories are theprimaryfactorindetermininganappropriateamountfortheallowanceforloanlosses.The allowance for loan losses is evaluated on a regular basis by management and is based uponmanagement’speriodicreviewofthecollectabilityoftheloansthatconsidershistoricalexperience,thenatureandvolumeoftheloanportfolio,adversesituationsthatmayaffecttheborrower’sabilitytorepay,estimated value of any underlying collateral, and prevailing economic conditions. The evaluation isinherently subjective as it requires estimates that are susceptible to significant revision as moreinformationbecomesavailable.Accordingly,theBankalsoengagesanindependentthirdpartyonayearlybasistovalidatetheBank’sallowanceforloanlossesmodelandmethodology.Theallowanceconsistsofspecificandgeneralcomponents.Thespecificcomponentrelatestoloansthatareclassifiedasimpaired.Forsuchloans,anallowanceisestablishedwhenthediscountedcashflows,collateralvalue,orobservablemarketpriceoftheimpairedloanislowerthanthecarryingvalueofthatloan.Thegeneralcomponentcoversallotherloansnotspecificallyidentifiedasimpairedandisbasedonhistoricallossexperienceadjustedforqualitativefactors.Furthermore,theBankmayalsomaintainanunallocated reserve to provide for other credit losses in the portfolio that may not have beencontemplatedintheBank’slossfactors,suchasaprolongeddeclineinoilpricesorthecurrentdroughtsituationinCalifornia.Qualitativefactorsareassignedbymanagementbasedonnationalandlocaleconomictrends,effectsofthechangesinthevalueofunderlyingcollateral,trendsinvolumeandtermsofloans,effectsofchangesin lending policy, experience and depth ofmanagement, concentrations of credit, quality of the loanreviewsystemandeffectofexternalfactorssuchascompetitionandregulatoryrequirements.Transfersof financialassets–TheCompanyhasentered intocertainparticipationagreementswithotherorganizations.Transfersofanentirefinancialasset,agroupoffinancialassets,oraparticipatinginterest in an entire financial asset are accounted for as saleswhen control over the assets has beenrelinquished.Controlovertransferredassetsisdeemedtobesurrenderedwhen(1)theassetshavebeenisolatedfromtheCompany,(2)thetransfereehastherighttopledgeorexchangetheassets(orbeneficialinterests)itreceived,freeofconditionsthatconstrainitfromtakingadvantageofthatright,and(3)theCompanydoesnotmaintaineffectivecontroloverthetransferredfinancialassetsorthird‐partybeneficialinterestsrelatedtothosetransferredassets.NogainorlosshasbeenrecognizedbytheCompanyonthesaleoftheseinterestsfortheyearsendedDecember31,2017and2016.


16

Note1–SummaryofSignificantAccountingPolicies(continued)Premisesandequipment–Premisesandequipmentarestatedatcost,lessaccumulateddepreciationor amortization recognized on a straight‐line basis. Leasehold improvements are amortized over theshorterofthelifeoftheleaseortheestimatedusefullifeoftheleaseholdimprovement;andfurniture,fixtures,andequipmentaregenerallydepreciatedoverfiveyears.Gainsandlossesonthedispositionofpremisesandequipmentareincludedintheresultsofoperations.Expendituresforbettermentsormajorrepairs are capitalized, while repairs and maintenance are charged to the results of operations asincurred.TheCompanyreviews long‐livedassets for impairmentwhenevereventsorchanges incircumstancesindicatethatthecarryingamountsofsuchassetsmaynotberecoverable.Ifthesumoftheexpectedfuturecashflowsislessthanthestatedamountoftheasset,animpairmentlossisrecognizedforthedifferencebetweenthefairvalueoftheassetanditscarryingamount.Bankownedlifeinsurance–TheCompanyinvestsinBankOwnedLifeInsurance(BOLI).BOLIinvolvesthepurchasingoflifeinsurancebytheCompanyonachosengroupofemployees.TheCompanyistheownerandbeneficiaryofthesepolicies.BOLIisrecordedasanassetintheaccompanyingconsolidatedbalancesheetsatitscashsurrendervalue,netofapplicablesurrenderchanges.Increasesinthecashvalueofthesepolicies,aswellasinsuranceproceedsreceived,arerecordedinnon‐interestincomeandarenotsubjecttoincometax.Income taxes – The Company uses the asset and liability method to account for income taxes. Theobjective of the asset and liability method is to establish deferred tax assets and liabilities for thetemporarydifferencesbetweenthefinancialreportingbasisandtheincometaxbasisoftheCompany’sassets and liabilities at enacted tax rates expected to be in effectwhen such amounts are realized orsettled.TheCompany’sannualtaxrateisbasedonitsincome,statutorytaxrates,andtaxplanningopportunitiesavailable in which it operates. Tax laws are complex and subject to different interpretations by thetaxpayerandrespectivegovernmentaltaxingauthorities.Significantjudgmentisrequiredindeterminingtaxexpenseand inevaluating taxpositions, includingevaluatinguncertainties.Accounting for incometaxes prescribes a recognition threshold and a measurement attribute for the consolidated financialstatementrecognitionandmeasurementofataxpositiontakenorexpectedtobetakeninataxreturn.Benefitsfromtaxpositionsarerecognizedintheconsolidatedfinancialstatementsonlywhenitismorelikely than not that the tax position will be sustained upon examination by the appropriate taxingauthoritythatwouldhavefullknowledgeofallrelevantinformation.Ataxpositionthatmeetsthemore‐likely‐than‐notrecognitionthresholdismeasuredatthelargestamountofbenefitthatisgreaterthan50percentlikelyofbeingrealizeduponultimatesettlement.TheCompanyreviewsitstaxpositionsperiodicallyandadjuststhebalancesasnewinformationbecomesavailable. The Company recognizes interest and penalties associated with uncertain tax positions ascomponentsofotherexpensesintheconsolidatedstatementsofincome.


17

Note1–SummaryofSignificantAccountingPolicies(continued)Deferred income tax assets represent amounts available to reduce income taxes payable on taxableincomeinfutureyears.Suchassetsarisebecauseoftemporarydifferencesbetweenthefinancialreportingandtaxbasesofassetsandliabilities,aswellasfromnetoperatinglossandtaxcreditcarryforwards.TheCompanyevaluatestherecoverabilityofthesefuturetaxdeductionsbyassessingtheadequacyoffutureexpectedtaxableincomefromallsources,includingreversaloftaxabletemporarydifferences,forecastedoperatingearningsandavailabletaxplanningstrategies.Thesesourcesofincomeinherentlyrelyheavilyonestimates.TheCompanyuseshistorical experienceandshortand long‐rangebusiness forecasts toprovide insight.Althoughrealization isnot assured for the remainingdeferred income taxassets, theCompanybelievesitismorelikelythannotthedeferredtaxassetswillbefullyrecoverablewithintheapplicablestatutoryexpirationperiods.However,deferredtaxassetscouldbereducedintheneartermifestimatesoftaxableincomearesignificantlyreducedoravailabletaxplanningstrategiesarenolongerviable.Advertisingexpense–Advertisingcostsareexpensedasincurredandamountedto$38thousandand$98thousandin2017and2016,respectively.Off‐balancesheetfinancialinstruments–Intheordinarycourseofbusiness,theCompanyhasenteredinto off‐balance sheet agreements consisting of commitments to extend credit, commercial letters ofcredit,andstandbylettersofcredit.Suchfinancialinstrumentsarerecordedintheconsolidatedfinancialstatementswhentheyarefundedortherelatedfeesareincurredorreceived.Share‐basedcompensation–Share‐basedcompensationcostismeasuredatthegrantdatebasedontheestimated fair valueof the award and is recognized as expenseover the employee’s requisite serviceperiodforallstock‐basedawardsgranted,modified,orcancelled.ThefairvalueofstockoptionsisbeingmeasuredusingaBlack‐Scholespricingmodel.Comprehensiveincome–Accountingprinciplesrequirethatrecognizedrevenue,expenses,gains,andlossesbeincludedinnetincome.Certainchangesinshareholders’equityfromnon‐ownersources,suchasunrealizedgainsandlossesonavailable‐for‐salesecurities,arereportedwithincomprehensiveincomeandarereflectedasaseparatecomponentoftheequitysectionoftheconsolidatedbalancesheets.FortheyearsendedDecember31,2017and2016,changeinunrealizedlossonsecuritieswastheonlyitemin other comprehensive income. For the year ended December 31, 2016, the Company recorded areclassification adjustment of approximately $17 thousand for realized gains on available‐for‐salesecurities. There were no reclassification adjustments as there were no realized gains or losses onavailable‐for‐salesecuritiesduring2017.Commonstock–TheCompanyhasauthorized10,000,000sharesofcommonstock.Eachshareentitlestheholdertoonevote.Therearenodividendorliquidationpreferences,participationrights,callpricesordates,conversionpricesorrates,sinkingfundrequirements,orunusualvotingrightsassociatedwiththeseshares.


18

Note1–SummaryofSignificantAccountingPolicies(continued)Earningspershare–Earningspershare(EPS)amountshavebeencomputedusingboththeweightedaveragenumberofsharesoutstandingofcommonstockforthepurposesofcomputingbasicearningspershareandtheweightedaveragenumberofsharesoutstandingofcommonstockplusdilutivecommonstockequivalentsforthepurposeofcomputingdilutedearningspershare.Basicearningspershareiscomputedbydividingnetincomebytheweightedaveragenumberofcommonsharesoutstandingfortheperiod.BasicEPSexcludesthedilutiveeffectthatcouldoccurifanysecuritiesorothercontractstoissuecommonstockwereexercisedorconvertedintoorresultedintheissuanceofcommonstock.DilutedEPSiscomputedusingthetreasurystockmethodbydividingnetincomeavailabletocommonshareholdersbythesumoftheweightedaveragenumberofcommonsharesoutstandingfortheperiodplusthenumberofadditionalcommonsharesthatwouldhavebeenoutstandingifthepotentiallydilutivecommonshareshadbeen issued.Thedilutivecalculationexcludes7,500and15,821optionsoutstanding for theyearsendedDecember 31, 2017 and2016, respectively, forwhich the exercise price exceeded the averagemarketpriceoftheCompany’scommonstockduringthoseyears.Earningspershare–BasicanddilutedearningspersharearecalculatedasfollowsfortheyearsendedDecember31:

2017 2016

BasicearningspershareNetincomeavailabletocommonshareholders 6,093,940$ 5,053,418$

Dividedbyweightedaveragesharesoutstanding 1,662,956 1,574,547

Basicearningspershare 3.66$ 3.21$

DilutedearningspershareNetincomeavailabletocommonshareholders 6,093,940$ 5,053,418$

Weightedaveragesharesoutstanding 1,662,956 1,574,547

Effectofdilutivesecurities‐stockoptionsandunvestedrestrictedstock 65,831 30,644

Dividedbyweightedaveragesharesoutstanding,

includingpotentiallydilutiveeffectofstockoptionsandunvestedrestrictedstock 1,728,787 1,605,190

Dilutedearningspershare 3.52$ 3.15$


19

Note1–SummaryofSignificantAccountingPolicies(continued)FortheyearendedDecember31,2017,theweightedaveragesharesoutstandingandeffectofdilutivesecuritiesinthetableabovehavebeenadjustedforafivepercentstockdividenddeclaredonApril20,2017. For theyearendedDecember31,2016, theweightedaveragesharesoutstandingandeffectofdilutivesecuritiesinthetableabovehavebeenadjustedfortwoseparatefivepercentstockdividendsdeclaredonApril21,2016andApril20,2017.Fairvaluemeasurements–Fairvalue is theprice thatwouldbereceived tosellanassetorpaid totransferaliabilityinanorderlytransactionbetweenmarketparticipantsatthemeasurementdate.ThefairvaluesforfinancialinstrumentsrecordedonarecurringandnonrecurringbasisareincludedinNote14.Recentlyissuedaccountingpronouncements–InMay2014,theFinancialAccountingStandardsBoard("FASB") issued Accounting Standards Update ("ASU") No. 2014‐09,Revenue from Contracts withCustomers (Topic 606),which creates Topic 606 and supersedes Topic 605, RevenueRecognition. InAugust2015,FASBissuedASUNo.2015‐14,RevenuefromContractswithCustomers(Topic606),whichpostponedtheeffectivedateof2014‐09.MultipleASUsandinterpretativeguidancehavebeenissuedinconnectionwithASU2014‐09.ThecoreprincipleofTopic606 is thatanentityrecognizesrevenuetodepict the transfer of promised goods or services to customers in an amount that reflects theconsiderationtowhichtheentityexpectstobeentitledinexchangeforthosegoodsorservices.Ingeneral,thenewguidancerequirescompaniestousemorejudgmentandmakemoreestimatesthanundercurrentguidance,includingidentifyingperformanceobligationsinthecontract,estimatingtheamountofvariableconsideration to include in the transactionpriceandallocating the transactionprice toeachseparateperformance obligation. The standard is effective for public entities for interim and annual periodsbeginningafterDecember15,2017;earlyadoptionisnotpermitted.Forfinancialreportingpurposes,thestandardallowsforeitherfullretrospectiveadoption,meaningthestandardisappliedtoalloftheperiodspresented,ormodifiedretrospectiveadoption,meaningthestandardisappliedonlytothemostcurrentperiodpresentedinthefinancialstatementswiththecumulativeeffectofinitiallyapplyingthestandardrecognizedatthedateofinitialapplication.TheCompanyhasbeguntheirprocesstoimplementthisnewstandard.TheCompanyhasstartedbyreviewingallrevenuesourcestodeterminethesourcesthatareinscopeforthisguidance.Asabank,keyrevenuesources,suchasinterestincomehavebeenidentifiedasoutofscopeofthisnewguidance.TheCompanyisfinalizingitsevaluationoftheimpactofthisASUontheCompany'sconsolidatedfinancialstatementsanddoesnotanticipateanymaterialchangeasaresultoftheimplementationofthestandard.


20

Note1–SummaryofSignificantAccountingPolicies(continued)In January2016, theFASB issuedASUNo.2016‐01,Financial Instruments–Overall(Subtopic825‐10):RecognitionandMeasurementofFinancialAssetsandFinancialLiabilities.Thenewguidanceisintendedto improve the recognition and measurement of financial instruments. This ASU requires equityinvestments(exceptthoseaccountedforundertheequitymethodofaccounting,orthosethatresultinconsolidationoftheinvestee)tobemeasuredatfairvaluewithchangesinfairvaluerecognizedinnetincome.Inaddition,theamendmentrequirespublicbusinessentitiestousetheexitpricenotionwhenmeasuring the fair value of financial instruments for disclosure purposes and requires separatepresentationoffinancialassetsandfinancial liabilitiesbymeasurementcategoryandformoffinancialasset (i.e., securitiesor loansandreceivables)on thebalance sheetor theaccompanyingnotes to thefinancialstatements.ThisASUalsoeliminatestherequirementforpublicbusinessentitiestodisclosethemethod(s)andsignificantassumptionsusedtoestimatethefairvaluethatisrequiredtobedisclosedforfinancialinstrumentsmeasuredatamortizedcostonthebalancesheet.Theamendmentalsorequiresareporting organization to present separately in other comprehensive income the portion of the totalchangeinthefairvalueofaliabilityresultingfromachangeintheinstrumentspecificcreditrisk(alsoreferredtoas“owncredit”)whentheorganizationhaselectedtomeasurethe liabilityat fairvalue inaccordancewiththefairvalueoptionforfinancialinstruments.ASUNo.2016‐01iseffectiveforfinancialstatementsissuedforfiscalyearsbeginningafterDecember15,2017,andinterimperiodswithinthosefiscalyears.Earlyadoptionispermittedforcertainprovisions.TheCompanyexpectsthisASUtoimpactitsconsolidatedincomeandothercomprehensiveincomedisclosuresforthefairvalueofitsmutualfundinvestments.InFebruary2016,theFASBissuedASUNo.2016‐02,Leases(Topic842).TheamendmentsinthisASUrequirelesseestorecognizealeaseliabilityandarightofuseassetforallleases(otherthanshorttermleases).Lesseeswillnolongerbeprovidedwithasourceofoff‐balancesheetfinancing.Underthenewguidance,lessoraccountingislargelyunchanged.ASUNo.2016‐02iseffectiveforfinancialstatementsissuedforfiscalyearsbeginningafterDecember15,2018,andinterimperiodswithinthosefiscalyears.ASUNo.2016‐02shouldbeappliedusingamodifiedretrospectivetransitionapproachforleasesexistingat, or entered into after, the beginning of the earliest comparative period presented in the financialstatements.TheCompanyiscurrentlyevaluatingtheimpactofthisASUontheCompany'sconsolidatedfinancialstatements.In March 2016, the FASB issued ASU 2016‐09, “Compensation – Stock Compensation (Topic 718):Improvements to Employee Share‐Based Payment Accounting”. ASU 2016‐09 includes provisionsintended to simplify various aspects related to how share‐based payments are accounted for andpresented in the financial statements. The areas for simplification include income tax consequences,forfeitures,classificationofawardsaseitherequityor liabilitiesandclassificationonthestatementofcashflows.ASU2016‐09iseffectiveforfiscalyearsannualperiodsbeginningafterDecember15,2016,andinterimperiodswithinthosefiscalyear’sannualperiods.TheadoptionofASU2016‐09didnothaveamaterialimpactontheconsolidatedfinancialstatements.


21

Note1–SummaryofSignificantAccountingPolicies(continued)In June 2016, the FASB issued ASU No. 2016‐13,Financial Instruments—Credit Losses (Topic 326):Measurement of Credit Losses on Financial Instruments.The ASU is intended to improve financialreportingbyrequiringtimelierrecordingofcreditlossesonloansandotherfinancialinstrumentsheldbyfinancialinstitutionsandotherorganizations.TheASUrequiresthemeasurementofallexpectedcreditlosses for certain financial assets held at the reporting date based on historical experience, currentconditions,andreasonableandsupportableforecasts.Financialinstitutionsandotherorganizationswillnowuseforward‐lookinginformationtobetterinformtheircreditlossestimates,butwillcontinuetousejudgment todeterminewhich lossestimationmethod isappropriate for theircircumstances.TheASUrequiresenhanceddisclosurestohelpinvestorsandotherfinancialstatementusersbetterunderstandsignificant estimatesand judgmentsused inestimating credit losses, aswell as the creditquality andunderwriting standards of an organization's portfolio. These disclosures include qualitative andquantitative requirements that provide additional information about the amounts recorded in thefinancialstatements.Inaddition,theASUamendstheaccountingforcreditlossesonavailable‐for‐saledebtsecuritiesandpurchased financialassetswithcreditdeterioration.TheASU iseffective for fiscalyears,andinterimperiodswithinthosefiscalyears,beginningafterDecember15,2020.Earlyapplicationwillbepermittedforspecifiedperiods.TheCompanyisintheprocessofevaluatingtheimpactofthisASUontheCompany'sconsolidatedfinancialstatements.


22

Note2–InvestmentSecuritiesInvestmentsecuritieshavebeenclassifiedintheconsolidatedbalancesheetsaccordingtomanagement’sintent.ThecarryingamountsofsecuritiesandtheirapproximatefairvalueswereasfollowsatDecember31:

AmortizedCost

GrossUnrealizedGains

GrossUnrealizedLosses

EstimatedFairValue

Available‐for‐saleMunicipalbonds 5,012,760$ 22,527$ (18,335)$ 5,016,952$Mutualfundinvestments 511,038 ‐ (34,946) 476,092Mortgage‐backedsecurities 60,842,576 15,247 (1,069,768) 59,788,055SBAloanpools 1,469,615 ‐ (18,909) 1,450,706

67,835,989$ 37,774$ (1,141,958)$ 66,731,805$

AmortizedCost

GrossUnrealizedGains

GrossUnrealizedLosses

EstimatedFairValue

Available‐for‐saleMunicipalbonds 4,688,149$ 16,785$ (56,806)$ 4,648,128$Mutualfundinvestments 511,038 ‐ (32,823) 478,215Mortgage‐backedsecurities 55,890,516 30,948 (796,399) 55,125,065SBAloanpools 2,018,605 ‐ (8,206) 2,010,399

63,108,308$ 47,733$ (894,234)$ 62,261,807$

2017

2016


23

Note2–InvestmentSecurities(continued)Information pertaining to available‐for‐sale securities with gross unrealized losses, aggregated byinvestmenttypeandlengthoftimethatindividualsecuritieshavebeeninacontinuousunrealizedlosspositionatDecember31isasfollows:

FairValueUnrealizedLosses FairValue

UnrealizedLosses FairValue

UnrealizedLosses

Available‐for‐saleMunicipalbonds 748,274$ (9,229)$ 269,698$ (9,106)$ 1,017,972$ (18,335)$

Mutualfundinvestments ‐ ‐ 476,092 (34,946) 476,092 (34,946)

Mortgage‐backedsecurities 29,575,564 (395,739) 27,590,603 (674,029) 57,166,167 (1,069,768)

SBAloanpools 1,450,756 (18,909) ‐ ‐ 1,450,756 (18,909)

31,774,594$ (423,877)$ 28,336,393$ (718,081)$ 60,110,987$ (1,141,958)$

FairValueUnrealizedLosses FairValue

UnrealizedLosses FairValue

UnrealizedLosses

Available‐for‐saleMunicipalbonds 2,494,224$ (56,806)$ ‐$ ‐$ 2,494,224$ (56,806)$

Mutualfundinvestments ‐ ‐ 478,215 (32,823) 478,215 (32,823)

Mortgage‐backedsecurities 41,592,348 (705,716) 5,560,076 (90,683) 47,152,424 (796,399)

SBAloanpools ‐ ‐ 2,010,398 (8,206) 2,010,398 (8,206)

44,086,572$ (762,522)$ 8,048,689$ (131,712)$ 52,135,261$ (894,234)$

2017

2016

LessThan12Months 12MonthsorMore Total

LessThan12Months 12MonthsorMore Total

Therewere119and86available‐for‐salesecuritiesinanunrealizedlosspositionasofDecember31,2017and2016,respectively.Ofthisamount,therewere51and13mortgage‐backedsecuritiesinanunrealizedlosspositionforgreaterthantwelvemonthsasofDecember31,2017and2016,respectively.TheCompanyhastheabilityandintenttoholdthesedebtsecuritiesforaperiodoftimesufficientforarecoveryofcost.Theissuersofthesesecuritieshavenot,totheCompany’sknowledge,establishedanycausefordefaultonthesesecuritiesatDecember31,2017.TheCompanydoesnothaveanysecuritiesthatwereconsideredtobeotherthantemporarilyimpairedin2017or2016.TheamortizedcostandmarketvaluesofsecuritiesatDecember31,2017,bycontractualmaturity,areshownbelow.Expectedandactualmaturitiesmaydifferfromcontractualmaturitiesbecauseborrowersmayhavetherighttocallorprepayobligationswithorwithoutprepaymentpenalties.


24

Note2–InvestmentSecurities(continued)

EstimatedFair

AmortizedCost Value

Dueinoneyearorless 1,731,531$ 1,730,108$Duefromonetofiveyears 61,985,213 60,874,144Dueinmorethanfiveyears 4,119,245 4,127,553

67,835,989$ 66,731,805$

December31,2017Available‐for‐Sale

FortheyearendedDecember31,2017,therewerenosalesofinvestmentsecurities.FortheyearendedDecember 31, 2016, the Company sold $1.7 million of mortgage‐backed securities for a gain of $29thousand. AsofDecember31,2017and2016, securitiespledgedas collateral forborrowingsand tosecureU.S.Government,stateandlocalagencies,andtrustdepositsasrequiredbycontractorlawwere$17.5millionand$19.3million,respectively. Note3–LoansandAllowanceforLoanLossesThemajorclassificationsofloansaresummarizedasfollowsatDecember31:

2017 2016Loanssecuredbyrealestate

Constructionandlanddevelopment 19,297,927$ 18,249,562$Non‐farmnon‐residentialproperties 262,391,417 216,072,212Residentialproperties 46,499,382 45,628,968Farmland 77,744,482 53,485,526

Loanstofinanceagriculturalproductionandotherloanstofarmers 8,326,460 5,041,296

Commercialandindustrialloansandother 55,830,870 42,392,739

Grossloans 470,090,538 380,870,303

LessAllowanceforloanlosses 5,412,607 4,465,599Deferredloanfees,net 1,199,514 808,890

Netloans 463,478,417$ 375,595,814$


25

Note3–LoansandAllowanceforLoanLosses(continued)Belowisadiscussionofriskcharacteristicsrelevanttoeachportfoliosegment.Construction landdevelopment –Constructionand landdevelopment loansaremade toborrowerswithaproventrackrecordofperformance,capacity togeneraterepayment,possessassetsoutsideofsubject collateral, and have guarantor financial strength. The loans are evaluated based on currentappraisalswithhistoricalandfuturevaluetrends.Loansaredependentuponthesuccessoftheprojectandthefinancialresourcesoftheborrowerandguarantorthatareindependentoftheproject.Inmostcases,theguarantorprovidesanadditionalsourceofrepayment.Non‐farmnon‐residentialproperties(commercialrealestateloans)–Commercialrealestateloansaremadetoawidesectionoflocalborrowersinadiversecrosssectionofindustries.Asignificantportionoftheloansareowneroccupied,wherethesubjectcollateralisusedintheoperationsoftheborrower’sbusiness.Underwritingstandardsfortheseloansinclude,butarenotlimitedto,borrowerreputationandhistoricalperformance,conservativeloantovalueratiosbasedonappraisedvalues,conservativedebtservicecoverageratiosbasedonappraisednetoperatingincome,underlyingcashflowoftheborrower,borrower’sassetsoutsidethesubjectcollateral,andfinancialresourcesoftheguarantors.Inmostcases,theguarantorprovidesanadditionalsourceofrepayment.Residentialproperties–Residentialpropertyloansaremadetoaselectgroupoflocalhomeownersandinvestorspurchasingsinglefamilyresidences(1‐4units)forrentalincome.Thehomeownerloansaremadetoborrowersthataregenerallybusinessownersorcustomerswithabusinessbankingrelationshipwiththebank.Underwritingstandardsfortheseloansinclude,butarenotlimitedto,borrowerreputationandhistoricalperformance,conservativeloantovalueratiosbasedonappraisedvalues,underlyingcashflowoftheborrower,andtheborrower’sassetsoutsidethesubjectcollateral.TheBankdidnotoriginateanyconsumerresidentialloansin2017or2016.Theinvestorloansaremadetolocalinvestors.Underwritingstandardsfortheseloansinclude,butarenotlimitedto,borrowerreputationandhistoricalperformance,conservativeloantovalueratiosbasedonappraisedvalues,conservativedebtservicecoverageratiosbasedonappraisednetoperatingincome,underlying cash flow of the borrower, borrower’s assets outside the subject collateral, and financialresourcesoftheguarantors.Inmostcases,theguarantorprovidesanadditionalsourceofrepayment.Farmland–Farmlandloansaremadetoawidesectionoflocalborrowersinadiversecrosssectionofcrops.Asignificantportionoftheloansareowneroccupied,wherethesubjectcollateralisfarmedbytheborrower.Underwritingstandardsfortheseloansinclude,butarenot limitedto,borrowerreputationandhistoricalperformance, conservative loan tovalue ratiosbasedonappraisedvalues, conservativedebt service coverage ratios based on appraised net operating income, underlying cash flow of theborrower,borrower’sassetsoutsidethesubjectcollateral,andfinancialresourcesoftheguarantors.Inmostcases,theguarantorprovidesanadditionalsourceofrepayment.


26

Note3–LoansandAllowanceforLoanLosses(continued)Agriculturalproduction–Agriculturalproductionloansaremadetoawidesegmentoflocalborrowersinadiversecrosssectionofcrops.Theseloansaremadetofinancetheongoingbusinessoperationsandproceedsareusedforthegrowingofcrops.Underwritingstandardsfortheseloansinclude,butarenotlimited to, borrower reputation and historical performance, conservative advance rate against cropinventory, crops in the process of being grown, underlying cash flow of the borrower, and financialresourcesoftheguarantors.Inmostcases,theguarantorprovidesanadditionalsourceofrepayment.Commercialandindustrialloans–Commercialandindustrialloansaremadetoawidesegmentoflocalborrowersinadiversecrosssectionofindustries.Theseloansaremadetofinancetheongoingbusinessoperationsincludingaccountsreceivable,equipmentacquisition,inventory,andotherbusinesspurposes.Some of these loans made to the most financially strong borrowers are unsecured. Underwritingstandardsfortheseloansinclude,butarenotlimitedtohistoricalperformance,conservativeadvancerateagainstcollateraltypes,conservativedebtservicecoverageratios,underlyingcashflowoftheborrower,andfinancialresourcesoftheguarantors.Inmostcases,theguarantorprovidesanadditionalsourceofrepayment.Grossloanbalancesshowninthetablebelowarenetoffairvaluediscountsrelatedtoacquiredloans.DiscountsarisewhentheCompanyacquiresloanportfoliosinbusinesscombinationsandtheacquiredloans are recorded at estimated fair value. Discounts on ASC 310‐30 Loans (loans considered to beimpairedatthetimeofacquisition)areallocatedbetweenaccretableandnonaccretableportionsbasedonestimatedcashflows.The following table presents the expected cash flows and carrying value of ASC 310‐30 loans, net ofallowanceforloanlosses,of$11thousandand$124thousandasofDecember31:

2017 2016Loanssecuredbyrealestate

Non‐farmnon‐residentialproperties 2,915,429$ 3,577,874$Residentialproperties 174,660 1,096,198

Undiscountedcashflowsexpectedtobecollected 3,090,089 4,674,072

Accretableyield (914,162) (1,235,289)

CarryingvalueofASC310‐30Loans 2,175,927$ 3,438,783$


27

Note3–LoansandAllowanceforLoanLosses(continued)ThefollowingtablepresentsthechangesintheaccretableyieldrelatedtoASC310‐30loansfortheyearsendedDecember31:

2017 2016

Beginningbalance 1,235,289$ 1,538,659$Accretiontointerestincome (296,193) (330,430)Increaseinexpectedcashflows,net (24,934) 27,060

EndingBalance 914,162$ 1,235,289$

TheadequacyoftheallowanceforloanlossesisdeterminedbytheCompany’smanagementbaseduponevaluationandreviewofcreditqualityoftheloanportfolio,considerationofhistoricallossexperience,relevantinternalandexternalfactorsthataffectthecollectionofaloan,andotherpertinentfactors.Theallowanceforloanlossanalysisisaformulamethodologybaseduponvariousloanpoolsandfiveyearanalysisofhistoricallossesassociatedwiththosepools.TheCompanyusesariskratingmethodologythatassignsriskratingsrangingfrom1to9whereahigherratingrepresentsahigherrisk.ManagementbelievesthattheallowanceforloanlosseswasadequateasofDecember31,2017.However,thereisnoassurancethatfutureloanlosseswillnotexceedthelevelsprovidedforintheallowanceforloanlossesandcouldpossiblyresultinadditionalchargestotheprovisionforloanandleaselosses.Inaddition,bankregulatoryauthorities,aspartoftheirperiodicexaminationoftheCompany,mayrequireadditionalchargestotheprovisionforloanlossesinfutureperiodsifwarrantedasaresultoftheirreview.Asignificantdeclineinrealestatemarketvaluesmayrequireanincreaseintheallowanceforloanlosses.Aprolongeddropinoilprices,orcontinueddroughtconditions,mayrequireanincreaseintheallowancefor loan losses.TheBankdoeshaveexposure to companies inboth theoilandagriculture industries.Whiletherehavebeensignsofimprovingeconomictrendsinourmarkets,furtherdeterioration(dueinpartornoparttotheitemsabove)intheCompany’smarketsmayadverselyaffectitsloanportfolioandmayleadtoadditionalchargestotheprovisionforloanlosses.TheCompanyisacommercialbankandreliesheavilyoncommercialborrowers.Theultimaterepaymentoftheseloansisdependent,toacertaindegree,onthelocaleconomyandrealestatemarket.However,theCompanymanagesandcontrolscreditriskbydiversifyingitsportfoliobyloantype,borrowertype,andindustryconcentrationwithinthecommercialborrowerpopulation.Thefollowingtablespresentbyportfoliosegment,theactivityintheallowanceforloanlossesfortheyearsendedDecember31,2017and2016.Thetablesalsopresentbyportfoliosegment,thebalanceandactivityintheallowanceforloanlossesdisaggregatedonthebasisoftheCompany'simpairmentmeasurementmethodandtherelatedrecordedinvestmentinloansasofandfortheyearsendedDecember31,2017and2016.


28

Note3–LoansandAllowanceforLoanLosses(continued)Recordedinvestmentisdefinedastheunpaidprincipalbalance,netofdeferredfeesandcosts,premiums,discounts, accrued interest, andmay also reflect a previouswrite‐down of the investment. However,recorded investment for the Company approximates unpaid principal balance, net of previouswrite‐downs,astheothercomponentsarenotdeemedmaterial.

ConstructionandLand

Development

Non‐farmandNon‐residentialProperties

ResidentialProperties FarmLand

AgriculturalProduction

CommercialandIndustrialandOther Unallocated Total

ALLOWANCEFORLOANLOSSES

Beginningbalance 258,287$ 2,205,720$ 536,835$ 481,370$ 63,016$ 438,636$ 481,735$ 4,465,599$Provision (32,936) 789,564 (39,144) 365,963 48,559 222,281 (291,641) 1,062,646Recoveries ‐ ‐ 5,647 ‐ ‐ 2,406 ‐ 8,053Charge‐offs ‐ (123,691) ‐ ‐ ‐ ‐ ‐ (123,691)

Endingbalance 225,351$ 2,871,593$ 503,338$ 847,333$ 111,575$ 663,323$ 190,095$ 5,412,607$

Endingbalance,individuallyevaluatedforimpairment 179$ 33,289$ ‐$ ‐$ ‐$ ‐$ ‐$ 33,468$

Endingbalance,collectivelyevaluatedforimpairment 225,172$ 2,838,304$ 503,338$ 847,333$ 111,575$ 663,323$ 178,607$ 5,367,651$

Endingbalance,loansacquiredwithdeterioratedcreditquality(ASC310‐30Loans) ‐$ ‐$ ‐$ ‐$ ‐$ ‐$ 11,488$ 11,488$

LOANS

Endingbalance 19,297,927$ 262,391,417$ 46,499,382$ 77,744,482$ 8,326,460$ 55,830,870$ ‐$ 470,090,538$

Endingbalance,individuallyevaluatedforimpairment 55,016$ 165,210$ ‐$ 4,063,353$ ‐$ 4,898$ ‐$ 4,288,477$

Endingbalance,collectivelyevaluatedforimpairment 19,242,911$ 260,658,893$ 45,879,320$ 73,681,129$ 8,326,460$ 55,825,972$ ‐$ 463,614,685$

Endingbalance,loansacquiredwithdeterioratedcreditquality(ASC310‐30Loans) ‐$ 1,567,314$ 620,062$ ‐$ ‐$ ‐$ ‐$ 2,187,376$

ConstructionandLand

Development

Non‐farmandNon‐residentialProperties

ResidentialProperties FarmLand

AgriculturalProduction

CommercialandIndustrialandOther Unallocated Total

ALLOWANCEFORLOANLOSSES

Beginningbalance 330,547$ 1,622,202$ 539,349$ 306,809$ 57,355$ 373,638$ 427,973$ 3,657,873$Provision (72,260) 583,518 (158,736) 174,561 5,661 59,372 53,762 645,878Recoveries ‐ ‐ 156,222 ‐ ‐ 5,626 ‐ 161,848Charge‐offs ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐

Endingbalance 258,287$ 2,205,720$ 536,835$ 481,370$ 63,016$ 438,636$ 481,735$ 4,465,599$

Endingbalance,individuallyevaluatedforimpairment 10,628$ 45,588$ ‐$ ‐$ ‐$ ‐$ ‐$ 56,216$

Endingbalance,collectivelyevaluatedforimpairment 247,659$ 2,160,132$ 536,835$ 481,370$ 63,016$ 438,636$ 357,243$ 4,284,891$

Endingbalance,loansacquiredwithdeterioratedcreditquality(ASC310‐30Loans) ‐$ ‐$ ‐$ ‐$ ‐$ ‐$ 124,492$ 124,492$

LOANS

Endingbalance 18,249,562$ 216,072,212$ 45,628,968$ 53,485,526$ 5,041,296$ 42,392,739$ ‐$ 380,870,303$

Endingbalance,individuallyevaluatedforimpairment 172,228$ 180,588$ ‐$ 95,005$ ‐$ 81,111$ ‐$ 528,932$

Endingbalance,collectivelyevaluatedforimpairment 18,077,334$ 213,156,910$ 44,800,407$ 53,390,521$ 5,041,296$ 42,311,628$ ‐$ 376,778,096$

Endingbalance,loansacquiredwithdeterioratedcreditquality(ASC310‐30Loans) ‐$ 2,734,714$ 828,561$ ‐$ ‐$ ‐$ ‐$ 3,563,275$

AllowanceforCreditLossesandRecordedInvestmentinLoansAsofandfortheYearEndedDecember31,2017

AllowanceforCreditLossesandRecordedInvestmentinLoansAsofandfortheYearEndedDecember31,2016


29

Note3–LoansandAllowanceforLoanLosses(continued)As a result of the Company's geographical concentration, theremay be an increase in the credit riskassociatedwiththeCompany'sloans.WhilemanagementbelievesthattheallowanceforloanlossesatDecember 31, 2017 and 2016 is adequate to absorb probable losses inherent in the Company's loanportfolio,adownturnintheeconomymayadverselyimpactassetqualityandrequirefutureadditionstotheallowance for loanlosses.Totheextent thatsucheventsoccur, the impactontheadequacyof theCompany'sallowanceforloanlosseswillbereportedintheCompany'sconsolidatedfinancialstatementsintheperiodofoccurrence.Creditqualityindicators–Aspreviouslynoted,theCompanyusesseveralcreditqualityindicatorstomanagecreditriskinanongoingmanner.TheCompany'sprimarycreditqualityindicatorsareusedasaninternal credit risk rating system that rates loans and leases into pass/watch, special mention,substandard,ordoubtful/losscategories.Creditriskratingsareappliedindividuallytoallloansthathavesignificantoruniquecreditcharacteristicsthatbenefitfromacase‐by‐caseevaluation.ThefollowingarethedefinitionsoftheCompany'screditqualityindicators:Pass–Loansinallclassesthatcomprisethecommercialandconsumerportfoliosegmentsthatarenotadverselyrated,arecontractuallycurrentastoprincipalandinterest,andareotherwiseincompliancewith the contractual terms of the loan or lease agreement.Management believes that there is a lowlikelihoodoflossrelatedtothoseloansthatareconsideredpass.Watch–Theloanhaslowerthanaveragebutstillacceptablecreditrisk.Theborrowermayhavehigherleverage, less certain but viable repayment sources, have limited financial reserves, andmay possessweaknessesthatcanbeadequatelymitigatedthroughcollateral,structural,orothercreditenhancement.Managementweaknesscouldbeevident.Borrowermightbemoresusceptibletomarketforces.Special mention – Loans classified as special mention have a potential weakness that deservesmanagement’scloseattention.Ifleftuncorrected,thesepotentialweaknessesmayresultindeteriorationoftherepaymentprospectsfortheloanoroftheCompany’screditpositionatsomefuturedate.Substandard–Loansclassifiedassubstandardareinadequatelyprotectedbythecurrentnetworthandpayingcapacityoftheobligororofthecollateralpledged,ifany.Loanssoclassifiedhaveawell‐definedweaknessorweaknessesthatjeopardizetherepaymentofthedebt.TheyarecharacterizedbythedistinctpossibilitythattheCompanywillsustainsomelossifthedeficienciesarenotcorrected.Doubtful/loss – Loans classified as doubtful have all the weaknesses inherent in those classified assubstandard,withtheaddedcharacteristicthattheweaknessesmakecollectionorrepaymentinfull,onthe basis of currently existing facts, conditions, and values, highly questionable and improbable. Thepossibilityof loss isextremelyhigh,butbecauseofcertain importantandreasonablyspecificpendingfactors,whichmayworktowardsstrengtheningoftheasset,classificationasaloss(andimmediatechargeoff)isdeferreduntilmoreexactstatusmaybedetermined.Incertaincircumstances,adoubtfulratingwillbetemporary,whiletheCompanyisawaitinganupdatedcollateralvaluation.


30

Note3–LoansandAllowanceforLoanLosses(continued)In these cases, once the collateral is valued and appropriate margin applied, the remaining un‐collateralized portion will be charged off. The remaining balance, properly margined, may then beupgradedtosubstandard,butmustremainonnon‐accrual.Alossratingisassignedtoloansconsideredun‐collectibleandofsuchlittlevaluethatthecontinuanceasanassetisnotwarranted.Thisratingdoesnotmeanthattheloanhasnorecoveryorsalvagevalue,butratherthattheloanshouldbechargedoffnow,eventhoughpartialorfullrecoverymaybepossibleinthefuture.TheCompany’screditqualityindicatorsareperiodicallyupdatedonacase‐by‐casebasis.Thefollowingtablespresentby loantypeandbycreditquality indicator, therecorded investment in theCompany’sloansasofDecember31:

Pass/WatchSpecialMention Substandard Doubtful/Loss Impaired Total

LoanssecuredbyrealestateConstructionandlanddevelopment 19,202,958$ ‐$ 39,953$ ‐$ 55,016$ 19,297,927$Non‐farmnon‐residentialproperties 258,730,337 1,713,018 215,538 ‐ 165,210 260,824,103Residentialproperties 45,879,320 ‐ ‐ ‐ ‐ 45,879,320Farmland 73,681,129 ‐ ‐ ‐ 4,063,353 77,744,482

Loanstofinanceagriculturalproductionandotherloanstofarmers 8,326,460 ‐ ‐ ‐ ‐ 8,326,460

Commercialandindustrialloansandother 54,002,477 1,766,875 56,620 ‐ 4,898 55,830,870

Total 459,822,681$ 3,479,893$ 312,111$ ‐$ 4,288,477$ 467,903,162

ASC310‐30Loans 2,187,376

Total 470,090,538$

Pass/WatchSpecialMention Substandard Doubtful/Loss Impaired Total

LoanssecuredbyrealestateConstructionandlanddevelopment 18,030,877$ ‐$ 46,457$ ‐$ 172,228$ 18,249,562$Non‐farmnon‐residentialproperties 211,857,635 631,540 667,735 ‐ 180,588 213,337,498Residentialproperties 44,800,407 ‐ ‐ ‐ ‐ 44,800,407Farmland 53,390,521 ‐ ‐ ‐ 95,005 53,485,526

Loanstofinanceagriculturalproductionandotherloanstofarmers 5,041,296 ‐ ‐ ‐ ‐ 5,041,296

Commercialandindustrialloansandother 41,898,379 340,249 73,000 ‐ 81,111 42,392,739

Total 375,019,115$ 971,789$ 787,192$ ‐$ 528,932$ 377,307,028

ASC310‐30Loans 3,563,275

Total 380,870,303$

2017

2016


31

Note3–LoansandAllowanceforLoanLosses(continued)Aginganalysis,impairedloans,andtroubleddebtrestructurings–Thefollowingtablespresentbyloan type, anaginganalysis and the recorded investment inpastdue loans still accruing interest andnonaccrualloansasofDecember31:

Greater30‐59Days 60‐89Days Than TotalPast TotalLoansPastDue PastDue 90Days Nonaccrual Due Current Receivables

LoanssecuredbyrealestateConstructionandlanddevelopment 39,953$ ‐$ ‐$ ‐$ 39,953$ 19,257,974$ 19,297,927$Non‐farmnon‐residentialproperties 39,092 ‐ ‐ 165,210 204,302 260,619,801 260,824,103Residentialproperties ‐ ‐ ‐ ‐ ‐ 45,879,320 45,879,320Farmland ‐ ‐ ‐ 4,063,353 4,063,353 73,681,129 77,744,482

Loanstofinanceagriculturalproductionandotherloanstofarmers ‐ ‐ ‐ ‐ ‐ 8,326,460 8,326,460

Commercialandindustrialloansandother 30,765 ‐ ‐ 4,898 35,663 55,795,207 55,830,870

Total 109,810$ ‐$ ‐$ 4,233,461$ 4,343,271$ 463,559,891$ 467,903,162

ASC310‐30Loans 2,187,376

Total 470,090,538$

Greater30‐59Days 60‐89Days Than TotalPast TotalLoansPastDue PastDue 90Days Nonaccrual Due Current Receivables

LoanssecuredbyrealestateConstructionandlanddevelopment 46,456$ 104,784$ ‐$ ‐$ 151,240$ 18,098,322$ 18,249,562$Non‐farmnon‐residentialproperties 443,257 ‐ ‐ 180,588 623,845 212,713,653 213,337,498Residentialproperties 2,167 ‐ ‐ ‐ 2,167 44,798,240 44,800,407Farmland ‐ ‐ ‐ 95,005 95,005 53,390,521 53,485,526

Loanstofinanceagriculturalproductionandotherloanstofarmers ‐ ‐ ‐ ‐ ‐ 5,041,296 5,041,296

Commercialandindustrialloansandother 14,239 46,859 ‐ 81,111 142,209 42,250,530 42,392,739

Total 506,119$ 151,643$ ‐$ 356,704$ 1,014,466$ 376,292,562$ 377,307,028

ASC310‐30Loans 3,563,275

Total 380,870,303$

2017

2016

Ifinterestonnon‐accrualloanshadbeenrecognizedunderthetermsoftheoriginalagreements,interestincome would have increased approximately $51 thousand and $30 thousand for the years endedDecember31,2017and2016,respectively.


32

Note3–LoansandAllowanceforLoanLosses(continued)PertheCompany’spolicy,a loanisconsideredimpairedwhenit isprobablethattheCompanywillbeunable to collect all amounts due according to the original contractual terms of the loan agreement.ImpairedloansandrelatedallowanceforloanlossesiscomprisedofthefollowingatDecember31:

Unpaid Average InterestRecorded Principal Related Recorded IncomeInvestment Balance Allowance Investment Recognized

WithnorelatedallowancerecordedLoanssecuredbyrealestate

Constructionandlanddevelopment 34,018$ 34,018$ ‐$ 39,294$ 3,143$Non‐farmnon‐residentialproperties ‐ ‐ ‐ ‐ ‐

Farmland 4,063,353 4,063,353 ‐ 334,490 ‐

Residentialproperties ‐ ‐ ‐ ‐ ‐

Commercialandindustrialloansandother 4,898 6,248 ‐ 23,763 ‐

4,102,269 4,103,619 ‐ 397,547 3,143

WithanallowancerecordedLoanssecuredbyrealestate

Constructionandlanddevelopment 20,998 20,998 179 66,861 4,455

Non‐farmnon‐residentialproperties 165,210 204,108 33,289 173,060 ‐Farmland ‐ ‐ ‐ ‐ ‐

Residentialproperties ‐ ‐ ‐ ‐ ‐

Commercialandindustrialloansandother ‐ ‐ ‐ ‐ ‐

186,208 225,106 33,468 239,921 4,455

4,288,477 4,328,725 33,468 637,468 7,598

ASC310‐30Loans 2,187,376 2,360,390 11,448 3,363,758 296,193

Total 6,475,853$ 6,689,115$ 44,916$ 4,001,226$ 303,791$

Unpaid Average InterestRecorded Principal Related Recorded IncomeInvestment Balance Allowance Investment Recognized

WithnorelatedallowancerecordedLoanssecuredbyrealestate

Constructionandlanddevelopment 44,446$ 44,446$ ‐$ 49,317$ 3,945$

Non‐farmnon‐residentialproperties ‐ ‐ ‐ 107,714 5,834Farmland 95,005 95,005 ‐ 104,166 ‐

Residentialproperties ‐ ‐ ‐ 83,344 403Commercialandindustrialloansandother 81,111 81,818 ‐ 90,754 207

220,562 221,269 ‐ 435,295 10,389

WithanallowancerecordedLoanssecuredbyrealestate

Constructionandlanddevelopment 127,782 127,782 10,628 139,410 9,014

Non‐farmnon‐residentialproperties 180,588 208,899 45,588 189,513 ‐

Farmland ‐ ‐ ‐ ‐ ‐Residentialproperties ‐ ‐ ‐ ‐ ‐

Commercialandindustrialloansandother ‐ ‐ ‐ ‐ ‐

308,370 336,681 56,216 328,923 9,014

528,932 557,950 56,216 764,218 19,403

ASC310‐30Loans 3,563,275 3,676,006 124,492 3,878,474 330,430

Total 4,092,207$ 4,233,956$ 180,708$ 4,642,692$ 349,833$

AsofandfortheYearEndedDecember31,2016

AsofandfortheYearEndedDecember31,2017

During2017and2016,approximately$21thousandand$19thousandininterestwasrecognizedontheaboveloansonacashbasis.


33

Note3–LoansandAllowanceforLoanLosses(continued)Troubleddebtrestructurings–TheCompanyoffersavarietyofmodificationstoborrowersthatareconsideredtroubleddebtrestructurings.Themodificationcategoriesofferedcangenerallybedescribedinthefollowingcategories:Ratemodification–Amodificationinwhichtheinterestrateischanged.Termmodification –Amodification inwhich thematuritydate, timingof payments, or frequencyofpaymentsischanged.Interestonlymodification–Amodificationinwhichtheloanisconvertedtointerestonlypaymentsforaperiodoftime.Paymentmodification–Amodificationinwhichthedollaramountofthepaymentischanged,otherthananinterestonlymodificationdescribedabove.Combinationmodification–Anyother type ofmodification, including theuse ofmultiple categoriesabove.Notroubleddebtrestructuringsoccurredin2017or2016.TherewerenocommitmentstolendadditionalfundstoborrowersinvolvedintroubleddebtrestructuringsoutstandingasofDecember31,2017and2016.DuringtheyearsendedDecember31,2017and2016,therewerenopaymentdefaultsduringtheperiodforloansmodifiedastroubleddebtrestructuringswithintheprevioustwelvemonths.


34

Note4–PremisesandEquipmentPremisesandequipmentiscomprisedofthefollowingatDecember31:

2017 2016

Land 958,361$ 958,361$Buildings 2,571,202 2,571,202Furniture,fixtures,andequipment 2,375,749 2,428,832Software 196,507 192,836Leaseholdimprovements 1,050,896 1,035,374

7,152,715 7,186,605Lessaccumulateddepreciationandamortization (3,447,950) (3,241,264)

3,704,765$ 3,945,341$

DepreciationandamortizationexpensefortheyearsendedDecember31,2017and2016amountedto$381thousandand$420thousand,respectively.Note5–DepositsTimedepositsconsistedoffollowingatDecember31:

2017 2016

Timedepositsunder$250,000 38,206,674$ 18,493,207$Timedeposits$250,000andover 9,835,566 8,620,544

Total 48,042,240$ 27,113,751$

ThescheduledmaturitiesoftimedepositsasofDecember31,2017areasfollows:

YearendingDecember31,

2018 43,396,138$

2019 3,878,324

2020 704,961

2021 62,817

48,042,240$


35

Note6–BorrowingsAt December 31, 2017, the Company had two lines of credit with two different banks with a totalborrowingcapacityof$22.0million.Thelineshavevariableinterestratesbasedontheindividuallendingbank’s daily federal fund rates and are due on demand. These are uncommitted lines under whichavailabilityissubjecttofederalfundbalancesoftheissuingbanks.Inaddition,theCompanyhad$142.3millionand$110.4millionofavailableborrowingcapacityfromtheFHLBatDecember31,2017and2016,respectively,baseduponloansavailabletobepledged.TheCompanyhadnooutstandingadvancesrelatedto these lines of credit as ofDecember31, 2017.AtDecember31, 2016, theCompanyhad fixed‐rateadvancesof$20.0millionataweightedaverageinterestrateof0.49%dueinJanuary2017.Note7–IncomeTaxesThecomponentsofincometaxprovisionconsistedofthefollowingfortheyearsendedDecember31:

Theprovisionsfor incometaxes in2017and2016resultedineffectivetaxratesof45.3%and40.2%,respectively, of income before income taxes. Reconciliations of differences between income taxescomputedatthefederalstatutorytaxratesandincometaxesrecordedareasfollows:

Statutoryfederalincometaxrate 3,820,000$ 34.0% 2,900,000$ 34.0%

Statefranchisetax,netoffederalbenefit 745,000 6.6% 609,000 7.1%

Deferredtaxre‐measurementadjustment 772,000 6.9% ‐ 0.0%

Taxexemptinterestandnon‐taxableincome (342,000) ‐3.0% (130,000) ‐1.5%

Sharebasedcompensation 81,000 0.7% 74,000 0.9%

Other 10,000 0.1% (23,000) ‐0.3%

5,086,000$ 45.3% 3,430,000$ 40.2%

20162017

2017 2016

CurrentFederal 3,116,000$ 2,196,000$State 1,045,000 736,000

4,161,000 2,932,000

DeferredFederal 902,000 408,000State 23,000 90,000

925,000 498,000

Provisionforincometaxes 5,086,000$ 3,430,000$


36

Note7–IncomeTaxes(continued)TheTaxCutsandJobsActof2017wasenactedDecember22,2017,andchangedthefederalcorporatetaxrateto21%from35%,effectiveJanuary1,2018,andpreservedthefulldeductibilityofstatecorporatetaxes. Accordingly, the Company has recognized the effects of changes in tax laws and rates on thedeferred tax assets and liabilities as of December 31, 2017. The resulting adjustment of $772,000 todecreasethevalueofthenetdeferredtaxassetwasrecognizedbytheCompanyinDecember2017astaxexpense.ThefollowingisasummaryofthecomponentsofthenetdeferredtaxassetatDecember31:

2017 2016

DeferredtaxassetsAllowanceforloanlosses 1,366,000$ 1,319,000$

Salarycontinuationexpense 306,000 421,000

Depreciationandamortization 295,000 383,000

Deferredcompensation 46,000 28,000

Deferredloanfees ‐ 333,000

Statetax 219,000 250,000

Accruedvacation 94,000 104,000

Gainonsaleofpropertyandequipment 55,000 77,000

Unrealizedlossoninvestmentsecurities 314,000 359,000

Other 28,000 ‐

Totaldeferredtaxassets 2,723,000 3,274,000

DeferredtaxliabilitiesPrepaids (500,000) (408,000)

Deferredloanfees (345,000)

Purchaseaccountingadjustments (49,000) (71,000)

Other (35,000) (32,000)

Netdeferredtaxasset 1,794,000$ 2,763,000$

TherealizationoftheCompany’sdeferredtaxassetsisdependentuponfuturetaxableincomeandthefuturereversalofdeferredtaxliabilities.ManagementhasevaluatedthelikelihoodoftherealizationofitsdeferredtaxassetsandhasdeterminedthatnovaluationallowanceisappropriateatDecember31,2017and2016,sincemanagementbelievesitismorelikelythannotthatthedeferredtaxassetswillberealized.TheCompanyhadnounrecognizedtaxbenefitsatDecember31,2017and2016.TheCompanyrecognizesinterestaccruedandpenaltiesrelatedtounrecognizedtaxbenefitsintaxexpense.DuringtheyearsendedDecember31,2017and2016,theCompanyrecognizednointerestandpenalties.


37

Note8–EmployeeBenefitPlansThe employees of Mission Bancorp are covered under a 401(k) defined contribution plan that wasestablishedinJanuary1999.AllemployeesoftheCompanywhoare21yearsofageorolderandhavecompleted6monthsofserviceareeligibletoparticipateintheplan.Eligibleemployeesmaydeferuptolimits established by the Internal Revenue Code. The Companymatches employee contributions on adiscretionary basis. The Company’s matching contribution of the 401(k) plan for the years endedDecember31,2017and2016were$145thousandand$126thousand,respectively.During2004,theCompanyimplementedaSalaryContinuationPlan(SCP).TheSCPisanon‐qualifiedplaninwhichtheCompanyagreestopaykeyexecutivesadditionalbenefitsinthefuture,usuallyatretirement,inreturnforsatisfactoryperformancebytheexecutive.TheSCPisanunfundedplanandisdesignedtorecoveritscoststhroughtheuseofalifeinsurancepolicyoneachoftheparticipants.AsofDecember31,2017and2016,approximately$1.0millionhadbeenaccruedinconjunctionwiththeseagreementsandarereflectedontheconsolidatedbalancesheetsasacomponentofinterestpayableandotherliabilities.InordertofundtheSCPplan,theCompanypurchasedlifeinsurancepoliciesinwhichitistheownerandthebeneficiary.Aggregatecashsurrendervaluesofthesepolicieswere$10.1millionand$9.8millionatDecember31,2017and2016,respectively,andcomprisebankownedlifeinsuranceontheconsolidatedbalancesheets.Note9–StockBasedCompensationIn 2016, the Board of Directors and shareholders of the Company approved and adopted the 2016OminbusPlan(thePlan).ThisPlanreplacedthe2010StockOptionPlan.ThePlanpermitsthegrantofnonstatutory options, incentive stock options, stock appreciation rights, restricted stock awards andrestrictedstockunits(individuallyorcollectivelyreferredtoasan“EquityAward”).ThepurposeofthePlan is to attract and retain thebest availablepersonnel forpositionsof substantial responsibility, toprovide additional incentive to Directors and Employees of the Company and its subsidiaries and topromotetheoverallsuccessoftheCompany’sbusiness.OptionsgrantedunderthePlanmaybeIncentiveStockOptionsorNonstatutoryStockOptions,asdeterminedbytheAdministratoratthetimeofgrantofan Option and subject to the applicable provisions of Section 422 of the Code and the regulationspromulgatedthereunder.Inaddition,StockAppreciationRights,RestrictedStockAwardsandRestrictedStockUnits (whichmayormaynot includeaDividendEquivalent)maybegrantedunder thePlan toDirectors and Employees. The Options, Stock Appreciation Rights, Restricted Stock Awards andRestrictedStockUnitsofferedpursuanttothePlanareamatterofseparateinducementandarenotinlieuofsalaryorothercompensation.ThePlanprovidesforamaximumof200,000sharesofauthorizedcommonstockbeavailableforgrant.TodatetheCompanyhasonlygrantedincentivestockoptionsandrestrictedstock.EquityAwardsavailableforgrantamountedto153,296and187,928asofDecember31,2017and2016,respectively.ThefairvalueofeachoptiongrantwasestimatedonthedateofgrantusingtheBlack‐Scholesoption‐pricingmodelusingtheassumptionsshowninthefollowingtable.TheexpectedvolatilitywasbasedonthevolatilityoftheCompany’sstockpriceoveraperiodcommensuratewiththeexpectedtermoftheoption.TheCompanyuseshistoricaldataonoptionexercisestodeterminetheexpectedtermwithinthevaluationmodel.


38

Note9–StockBasedCompensation(continued)Therisk‐freeratefortheexpectedtermoftheoptionisbasedupontheU.S.Treasuryyieldcurveatthetimeofoptiongrant.AnexpecteddividendyieldwasnotconsideredintheoptionpricingformulasincetheCompanyhasnotpaidcashdividendsandhasnocurrentplanstodosointhefuture.ThefairvalueofeachrestrictedstockgrantapproximatedthetradingvalueoftheCompany’sstockonthedateofgrant.TheassumptionsusedtoestimatethefairvalueofstockoptionsgrantedfortheyearsendedDecember31,wereasfollows:

2017 2016

Riskfreeinterestrate 2.04%‐2.12% 1.37%Weighted‐averageexpectedlife 6.5Years 6.5YearsVolatility 19.0% 24.4%Dividends None None

Based solely on stock options outstanding at December 31, 2017, the estimated unrecognized pretaxcompensationexpenserelated tononvestedoptionswas$500thousandwhichwillberealizedoveraweightedaverageperiodof2.0years.Futureexpenserelatedtostockoptionawardswouldbeimpactedbynewawardsand/ormodifications,repurchasesandforfeituresofexistingawards.Asummaryofoptionactivityandchangesduringtheyearispresentedbelow,asofandfortheyearendedDecember31:

Weighted‐Average

Shares ExercisePrice

Outstandingatbeginningofyear 147,674 24.50$

Granted 30,322 41.67

Exercised (7,304) 29.76

Stockdividend 8,459 26.37

Expiredorforfeited ‐ ‐

Outstandingatendofyear 179,151 26.02

Optionsexercisable 107,469 22.13

Weighted‐averagefairvalueofoptionsgrantedduringtheyear 10.43$

2017


39

Note9–StockBasedCompensation(continued)During2017and2016,theCompanyawardedstockoptionswithanaggregatefairvalueof$317thousandand$94thousand,respectively.Thefairvalueofstockoptionsthatvestedin2017and2016was$187thousand and $169 thousand, respectively. The compensation cost has been reported in non‐interestexpensewithintheconsolidatedstatementsofincome.In2017,employeesexercised7,304optionsatapriceof$220thousand,whichhadanintrinsicvalueof$138,thousand.In2016,employeesexercised3,647optionsatapriceof$113thousand,whichhadanintrinsic valueof$15 thousand.TheCompanydidnot realize any significant taxbenefit fromoptionsexercisedin2017and2016.AlloutstandingoptionsasofDecember31,2017areexpectedtovest.ThefollowingtablessummarizeinformationaboutoptionsoutstandingatDecember31:

ExercisePriceNumber

Outstanding

Weighted‐AverageExercisePrice

Weighted‐AverageRemainingContractual

LifeNumber

Exercisable



Life

$18.57‐$20.73 81,121 20.07$ 4.64 72,902 20.05$ 4.57$23.06‐$47.00 98,030 30.95 7.51 34,567 26.53 5.80

179,151 26.02 6.21 107,469 22.13 4.96

6,087,342$ 4,069,513$

ExercisePriceNumber

Outstanding



LifeNumber

Exercisable



Life

$19.50‐$21.77 79,463 21.25$ 5.58 59,927 21.31$ 5.41$24.22‐$35.65 68,211 28.60 7.09 27,208 29.68 5.10

147,674 24.64 6.28 87,135 23.93 5.31

1,709,626$ 1,071,033$Aggregateintrinsicvalue

OptionsOutstanding

OptionsOutstanding

2017

2016

OptionsExercisable

OptionsExercisable

Aggregateintrinsicvalue


40

Note9–StockBasedCompensation(continued)Activityinnon‐vestedoptionsisasfollowsduringtheyearsendedDecember31:

Shares

Weighted‐AverageGrantDateFairValue Shares

Weighted‐AverageGrantDateFairValue

Non‐vestedoptions,beginningofyear 60,539 70,369Granted 31,463 8,820Vested (23,347) (22,169)Stockdividend 3,027 3,519Forfeited/expired/other ‐ ‐

Non‐vestedoptions,endofyear 71,682 8.70$ 60,539 10.61$

2017 2016

RestrictedStockFortheyearsendedDecember31,2017and2016,theCompanyissued4,310shares,and3,252sharesofrestrictedstockataveragegrantdatefairvaluesof$40.88and$33.00pershare,whichapproximatedthefairvalueoftheCompany’scommonstockonthedateofgrant.Therestrictedstockvestsratablyoverafive‐yearperiodbeginningonthefirstanniversarydate.AsofDecember31,2017,651sharesofrestrictedstockhadvestedand6,901sharesremainoutstanding.CompensationexpenserelatedtothegrantofrestrictedstockfortheyearsendedDecember31,2017and2016totaled$42thousandand$12thousand.Thecompensationcosthasbeenreportedinnon‐interestexpensewithintheconsolidatedstatementsofincome.Theaggregateintrinsicvalueofoutstandingrestrictedstockgrantswas$170thousandasofDecember31,2017and$10thousandasofDecember31,2016.The estimated unrecognized pretax compensation expense related to nonvested restricted stockwas$230thousandasofDecember31,2017,whichwillberealizedoverthenextfiveyears.Futureexpenserelatedtorestrictedstockawardswouldbeimpactedbynewawardsand/ormodifications,repurchasesandforfeituresofexistingawards.


41

Note10–OtherExpensesOtherexpensesarecomprisedofthefollowingfortheyearsendedDecember31:

2017 2016

Marketingandbusinessdevelopment 704,506$ 761,453$

Insuranceandregulatoryassessments 298,616 341,844

Loanrelatedexpenses 150,935 127,354

Otherexpenses 402,691 540,857

1,556,748$ 1,771,508$

Note11–Non‐InterestIncomeNon‐interestincomeiscomprisedofthefollowingfortheyearsendedDecember31:

2017 2016

Servicecharges 3,199,522$ 3,077,636$

Feeincome 629,169 606,409

Otherincome 888,476 887,214

4,717,167$ 4,571,259$

Note12–TransactionswithRelatedPartiesIntheordinarycourseofbusiness,theCompanyentersintotransactionswithcertaindirectors,officers,shareholders,andcertainaffiliatesoftheCompany.Aspartofitsnormalbankingactivities,theCompanyhasextendedcredittoandreceiveddepositsfromcertainmembersof itsBoardofDirectors,majorshareholders,officers,aswellasentitieswithwhichtheseindividualsareassociated.ThefollowingtablepresentsasummaryofaggregateactivityinvolvingrelatedpartyborrowersfortheyearsendedDecember31,2017and2016.Activitiesonlinesofcreditareincludedonanetbasis.

2017 2016

Loansoutstandingatbeginningofyear $10,486,169 $13,682,695Newloansandadvances 7,239,400 1,529,569Lessloanrepayments (6,000,013) (4,726,095)

Loansoutstandingatendofyear $11,725,556 $10,486,169

AtDecember31,2017and2016,depositsofrelatedpartiesamountedto$39millionand$52million,respectively.


42

Note12–TransactionswithRelatedParties(continued)Managementbelievesthesetransactionsweremadeintheordinarycourseofbusinessonsubstantiallythesametermsandconditions,includinginterestratesandcollateralrequirements,ascomparableloanswithothercustomers,anddidnot involvemore thannormalcredit riskorpresentotherunfavorablefeatures.EachloantorelatedpartieshasbeenapprovedbytheBoardofDirectors.Note13–CommitmentsandContingenciesThe Company is a party to financial instrumentswith off‐balance‐sheet risk in the normal course ofbusinesstomeetthefinancingneedsofitscustomers.Thesefinancialinstrumentsincludecommitmentstoextendcredit.Theseinstrumentsinvolve,tovaryingdegrees,elementsofcreditriskinexcessoftheamountrecognizedontheconsolidatedbalancesheet.Tomitigatethisriskposedbytheseoff‐balancesheetexposures,theCompanyhasestablishedanoff‐balancesheetreservetotaling$60thousandasofDecember31, 2017 and 2016, included in interest payable and other liabilities in the accompanyingconsolidatedbalancesheets.TheCompany'sexposuretoloanlossintheeventofnonperformancebytheotherpartytothefinancialinstrument for commitments to extend credit and standby letters of credit is represented by thecontractual amount of those instruments. The Company uses the same credit policies in makingcommitmentsandconditionalobligationsasitdoesforon‐balancesheetinstruments.AsummaryofthecontractualornotionalamountsoftheCompany'ssignificantoff‐balancesheetfinancialinstrumentsisasfollows:

2017 2016

Commitmentstoextendcredit 117,695,329$ 91,718,262$

Standbylettersofcredit 1,904,078 2,032,390

119,599,407$ 93,750,652$


43

Note13–CommitmentsandContingencies(continued)Commitmentstoextendcreditareagreementstolendtoacustomeraslongasthereisnoviolationofanycondition established in the contract. Commitments generally have fixed expiration dates or otherterminationclausesandmayrequirepaymentofafee.Sincemanyofthecommitmentsareexpectedtoexpirewithoutbeingdrawnupon,thetotalcommitmentamountsdonotnecessarilyrepresentfuturecashrequirements.TheCompanyevaluateseachcustomer'screditworthinessonacase‐by‐casebasis.Theamountofcollateralobtained,ifdeemednecessarybytheCompanyuponextensionofcredit,isbasedonmanagement'screditevaluation.Collateralheldvariesbutmayincludereceivables,inventory,property,plant, and equipment, residential properties, and income‐producing commercial properties. StandbylettersofcreditareconditionalcommitmentsissuedbytheCompanytoguaranteetheperformanceofacustomer to a third party. Those guarantees are preliminarily issued to support public and privateborrowingarrangements,includingcommercialpaper,bondfinancing,andsimilartransactions.Litigation–Intheordinarycourseofbusiness,theCompanybecomesinvolvedinlitigation.Managementbelieves, based upon opinions of legal counsel, that the disposition of all suits pending against theCompanywillnothaveamaterialadverseeffectonitsfinancialpositionorresultsofincome.Leasecommitments–TheCompanyleasesofficelocationsandequipmentwhichhavebeenclassifiedasoperatingleases.Theseleaseagreementscallforvariousmonthlypaymentsexpiringatdatesthroughtheyear2022.RentalexpensefortheyearsendedDecember31,2017and2016amountedto$325thousandand$435thousand,respectively.ThefollowingtableshowsfutureminimumpaymentsunderoperatingleaseswithtermsinexcessofoneyearasofDecember31:

YearendingDecember31,

2018 310,151$2019 99,8952020 100,2762021 92,4232022 59,058

661,803$


44

Note14–FairValueofFinancialInstrumentsFairvaluemeasurementswithintheAccountingStandardsCodificationdefinesfairvalue,establishesaframeworkformeasuringfairvalueunderGAAP,andexpandsdisclosuresaboutfairvaluemeasurement.Fairvaluemeasurementsapplytoallfinancialassetsandliabilitiesthatarebeingmeasuredandreportedatfairvalueonarecurringandnon‐recurringbasis.Thefairvalueofafinancialinstrumentistheamountatwhichtheassetorobligationcouldbeexchangedin a current transactionbetweenwillingparties, other than in a forcedor liquidation sale. Fair valueestimatesaremadeat a specificpoint in timebasedon relevantmarket informationand informationaboutthefinancialinstrument.Theseestimatesdonotreflectanypremiumordiscountthatcouldresultfromoffering for sale atone time theentireholdingsof aparticular financial instrument.Becausenomarketvalueexistsforasignificantportionofthefinancialinstruments,fairvalueestimatesarebasedonjudgmentsregardingfutureexpectedlossexperience,currenteconomicconditions,riskcharacteristicsofvarious financial instruments, and other factors. These estimates are subjective in nature, involveuncertaintiesandmattersofjudgmentand,therefore,cannotbedeterminedwithprecision.Changesinassumptionscouldsignificantlyaffecttheestimates.A three‐level hierarchy is used for disclosure of assets and liabilities recorded at fair value. Theclassificationofassetsandliabilitieswithinthehierarchyisbasedonwhethertheinputstothevaluationmethodologyusedformeasurementareobservableorunobservable.Observableinputsreflectmarket‐derived ormarket‐based information obtained from independent sources,while unobservable inputsreflectourestimatesaboutmarketdata.In general, fair values determined by level 1 inputs utilize quoted prices (unadjusted) for identicalinstrumentsthatarehighlyliquid,observableandactivelytradedinover‐the‐countermarkets.Fairvaluesdeterminedbylevel2inputsutilizeinputsotherthanquotedpricesincludedinlevel1thatareobservablefor the asset or liability, either directly or indirectly. Level 2 inputs includequoted prices for similarinstrumentsinactivemarkets,quotedpricesforidenticalorsimilarinstrumentsinmarketsthatarenotactiveandmodel‐derivedvaluationswhose inputsareobservableandcanbecorroboratedbymarketdata.Level3inputsareunobservableinputsthataresupportedbylittleornomarketactivityandthataresignificanttothefairvalueoftheassetsorliabilities.Incertaincases,theinputsusedtomeasurefairvaluemayfallintodifferentlevelsofthefairvaluehierarchy.Insuchcases,thelevelinthefairvaluehierarchywithinwhichthefairvaluemeasurementinitsentiretyfallshasbeendeterminedbasedonthelowestlevelinputthatissignificanttothefairvaluemeasurementinitsentirety.TheCompany’sassessmentofthesignificanceofaparticularinputtothefairvaluemeasurementinitsentiretyrequiresjudgment,andconsidersfactorsspecifictotheassetorliability.


45

Note14–FairValueofFinancialInstruments(continued)ThetablesbelowpresentinformationabouttheCompany’sassetsmeasuredatfairvalueonarecurringand nonrecurring basis as of December 31, 2017 and 2016, respectively, and indicate the fair valuehierarchyofthevaluationtechniquesutilizedbytheCompanytodeterminesuchfairvalue:

Total Level1 Level2 Level3RECURRINGITEMS

Municipalsecurities 5,016,952$ ‐$ 5,016,952$ ‐$Mutualfundinvestments 476,092 ‐ 476,092 ‐Mortgage‐backedsecurities 59,788,055 ‐ 59,788,055 ‐SBAloanpools 1,450,706 ‐ 1,450,706 ‐

66,731,805$ ‐$ 66,731,805$ ‐$

NONRECURRINGITEMSImpairedloans,net 4,255,009$ ‐$ ‐$ 4,255,009$

Total Level1 Level2 Level3RECURRINGITEMS

Municipalsecurities 4,648,128$ ‐$ 4,648,128$ ‐$Mutualfundinvestments 478,215 ‐ 478,215 ‐Mortgage‐backedsecurities 55,125,065 ‐ 55,125,065 ‐SBAloanpools 2,010,399 ‐ 2,010,399 ‐

62,261,807$ ‐$ 62,261,807$ ‐$

NONRECURRINGITEMSImpairedloans,net 472,716$ ‐$ ‐$ 472,716$

2017

2016

Thefollowingmethodswereusedtoestimatethefairvalueofeachclassoffinancialinstrumentsabove:Securitiesavailable‐for‐sale –The table above presents the balance of available‐for‐sale securities,which is measured at fair value on a recurring basis. An independent third party performs marketvaluationsoftheCompany’savailable‐for‐salesecuritiesusingseveralsources.Thetechniquesincludepricingmodelsthatvarybasedonthetypeofassetbeingvaluedandincorporateavailabletrade,bid,andother market information. The market valuation sources include observable market inputs and areconsideredlevel2inputsforpurposesofdeterminingthefairvalues.Impairedloans–ThetableaboverepresentstheCompany’simpairedloansforwhichimpairmentwasrecognizedduringtheperiod.Theseloansaremeasuredatfairvalueonanonrecurringbasis.AlloftheseloansarecollateraldependentloansandtheCompanymeasuressuchimpairedloansbasedonthefairvalueoftheircollateral.Thefairvalueofeachloan’scollateralisgenerallybasedonestimatedmarketpricesfromanindependentlypreparedappraisal,whichisthenadjustedforthecostrelatedtoliquidatingsuchcollateral.


46

Note14–FairValueofFinancialInstruments(continued)Impairedloans(continued)–TheCompanygenerallyusesa10%discountforsellingcosts,whichisappliedtoallproperties,regardlessofsize.Appraisedvaluesmaybeadjustedtoreflectchangesinmarketconditionsthathaveoccurredsubsequenttotheappraisaldate,orforrevisedestimatesregardingthetiming or cost of the property sale. These adjustments are based on qualitative judgmentsmade bymanagementonacase‐by‐casebasis.TherehavebeennosignificantchangesinthevaluationtechniquesduringtheyearsendedDecember31,2017and2016.The followingmethods and assumptionswereused to estimate the fair values of significant financialinstruments which are not measured at fair value in the consolidated financial statements atDecember31,2017and2016.Cashandcashequivalents–Thecarryingvalueofcashandcashequivalentsapproximatesthefairvalue.Interestearningdeposits inotherbanks–Interestearningdeposits inotherbanksarereportedattheir fair value based upon discounting estimated future cash flows using currently offered rates fordepositsofsimilarmaturities.Loans–TheCompany’sloanportfolioisheldforinvestmentpurposes.Includedintheportfolioareloanscategorizedasbeingimpaired.Fairvalueswerecalculatedbysortingtheportfoliobydifferentproductcategoriesandthenfurthersegmentedintofixedandvariable indexesandusingadiscountedpresentvaluemodel.ThemodelusestheTreasuryyieldcurve,LIBOR,orPrimerateasthebasistoderivea“risk‐free” ratemodified for credit quality. The allowance for loan losses is considered to be a reasonableestimateofloandiscountduetocreditrisk.Investments in common stock, substantially restricted–The carrying value of FHLB stock, PCBBstock,andTIBstockapproximatesfairvaluebasedontheredemptionprovisionsoftherespectivestock.Accruedinterest–Thecarryingamountsofaccruedinterestapproximatefairvalue.Deposits – The fair value of deposits with no stated maturity, such as noninterest‐bearing demanddeposits,savings,NOWaccounts,andmoneymarketaccounts,isequaltotheamountpayableondemandat thereportingdate(theircarryingamounts).The fairvalueofcertificatesofdeposit isbasedonthediscountedvalueofcontractualcashflows.Thediscountrateisestimatedusingtheratescurrentlyofferedfordepositsofsimilarremainingmaturities.Thefairvalueestimatesdonotincludethebenefitthatresultsfromthelow‐costfundingprovidedbythedepositliabilitiescomparedtothecostofborrowingfundsinthemarket.FHLBborrowings–ThecarryingvalueofFHLBborrowingsapproximatesthefairvalueasthematuritydateislessthan30days.


47

Note14–FairValueofFinancialInstruments(continued)Off‐balancesheetfinancialinstruments–ThefairvalueofcommitmentstoextendcreditisbaseduponthedifferencebetweentheinterestrateatwhichtheCompanyiscommittedtomaketheloansandthecurrentratesatwhichsimilarloanswouldbemadetoborrowerswithsimilarcreditratingsandforthesameremainingmaturities,adjustedfortheestimatedvolumeofloancommitmentsactuallyexpectedtoclose.ThefairvalueofcommitmentstoextendcreditandstandbylettersofcreditwerenotsignificantatDecember31,2017and2016,astheseinstrumentspredominantlyhaveadjustabletermsandareofashort‐termnature.Thefollowingtablespresent informationaboutthe level inthefairvaluehierarchyfortheCompany’sassetsandliabilitiesthatarenotmeasuredat fairvalueasofDecember31,2017and2016.Transfersbetweenlevelsofthefairvaluehierarchyarerecognizedontheactualdateoftheeventsorcircumstancesthat caused the transfer, which generally corresponds to the Company’s quarterly valuation process.DuringtheyearsendedDecember31,2017and2016,therewerenotransfersbetweenlevelsofthefairvaluehierarchy.

CarryingValueEstimatedFair

Value Level1 Level2 Level3Financialassets

Cashandcashequivalents 78,042,516$ 78,042,516$ 78,042,516$ ‐$ ‐$

Loans,net 463,478,417 459,145,530 ‐ ‐ 459,145,530

Investmentsincommonstock,

substantiallyrestricted 2,976,700 2,976,700 ‐ 2,976,700 ‐

Interestreceivable 1,935,753 1,935,753 ‐ 1,935,753 ‐

FinancialliabilitiesDeposits,withnostatedmaturity 529,393,448$ 529,393,448$ ‐$ 529,393,448$ ‐$Timedeposits 48,042,240 47,846,000 ‐ 47,846,000 ‐Interestpayable 31,523 31,523 ‐ 31,523 ‐

CarryingValueEstimatedFair

Value Level1 Level2 Level3Financialassets

Cashandcashequivalents 91,119,344$ 91,119,344$ 91,119,344$ ‐$ ‐$

Interestearningdepositsmaturingoverninetydays 5,395,000 5,395,000 ‐ 5,395,000 ‐

Loans,net 375,595,814 371,749,229 ‐ ‐ 371,749,229

Investmentsincommonstock,

substantiallyrestricted 2,567,300 2,567,300 ‐ 2,567,300 ‐

Interestreceivable 1,495,591 1,495,591 ‐ 1,495,591 ‐

FinancialliabilitiesDeposits,withnostatedmaturity 461,411,503$ 461,411,503$ ‐$ 461,411,503$ ‐$Timedeposits 27,113,751 27,014,000 ‐ 27,014,000 ‐FHLBborrowings 20,000,000 20,000,000 ‐ 20,000,000 ‐Interestpayable 46,393 46,393 ‐ 46,393 ‐

FairValueMeasurementsUsing

2017

FairValueMeasurementsUsing

2016


48

Note15–RegulatoryMattersTheBankissubjecttovariousregulatorycapitalrequirementsadministeredbyfederalbankingagencies.Failuretomeetminimumcapitalrequirementscaninitiatecertainmandatory,andpossiblyadditionaldiscretionary actions by regulators that, if undertaken, could have a direct material effect on theCompany’s consolidated financial statements. Under capital adequacy guidelines and the regulatoryframework for Prompt Corrective Action, the Bankmustmeet specific capital guidelines that involvequantitativemeasuresoftheBank'sassets, liabilities,andcertainoff‐balancesheetitemsascalculatedunderregulatoryaccountingpractices.TheBank'scapitalamountsandclassificationsarealsosubjecttoqualitativejudgmentsbytheregulatorsaboutcomponents,riskweightings,andotherfactors.QuantitativemeasuresestablishedbyregulationtoensurecapitaladequacyrequiretheBanktomaintainminimumratiosofTotalandTierIcapitaltorisk‐weightedassetsandofTierIcapitaltoaverageassets.AsofDecember31,2017,managementbelievesthattheBankmeetsallcapitaladequacyrequirementstowhichitissubject.AsofDecember31,2017,themostrecentnotificationfromtheFederalDepositInsuranceCorporationcategorized the Bank as well capitalized under the regulatory framework. To be categorized as wellcapitalized,theBankmustmaintainminimumtotalrisk‐based,TierIrisk‐based,andTierIleverageratiosassetforthinthetablebelow.TherearenoconditionsoreventssincethatnotificationthatmanagementbelieveshavechangedtheBank'scategory.TheBank’sactualcapitalamountsandratioscomputedinaccordancewithbankregulatoryrequirementsasofDecember31,2017and2016areasfollows.

Amount Ratio Amount Ratio Amount RatioAsofDecember31,2017

Totalcapitaltorisk‐weightedassets 58,072,000$ 11.08% 41,910,640$ 8.00% 52,388,300$ 10.00%

CommonequityTier1capitaltorisk‐weightedassets

52,599,000 10.04% 23,574,735 4.50% 34,052,395 6.50%

Tier1capitaltorisk‐weightedassets 52,599,000 10.04% 31,432,980 6.00% 41,910,640 8.00%Tier1capitaltoaverageassets 52,599,000 8.82% 23,847,560 4.00% 29,809,450 5.00%

AsofDecember31,2016

Totalcapitaltorisk‐weightedassets 50,875,000$ 11.95% 34,069,840$ 8.00% 42,587,300$ 10.00%

CommonequityTier1capitaltorisk‐weightedassets

46,349,000 10.88% 19,164,285 4.50% 27,681,745 6.50%

Tier1capitaltorisk‐weightedassets 46,349,000 10.88% 25,552,380 6.00% 34,069,840 8.00%Tier1capitaltoaverageassets 46,349,000 8.72% 21,263,600 4.00% 26,579,500 5.00%

AmountofCapitalRequired

MinimumCapitalRequirement

MinimumToBeWellCapitalizedUnderPromptCorrectiveActionProvisions

TheFederalReserveandtheFederalDepositInsuranceCorporationapprovedfinalcapitalrulesinJuly2013thatsubstantiallyamendtheexistingcapitalrulesforbanks.Thesenewrulesreflect,inpart,certainstandards initiallyadoptedbytheBaselCommitteeonBankingSupervisioninDecember2010(whichstandardsarecommonlyreferredtoasBaselIII)aswellasrequirementscontemplatedbytheDodd‐FrankAct.


49

Note15–RegulatoryMatters(continued)Underthenewcapitalrules,theBankwillberequiredtomeetcertainminimumcapitalrequirementsthatdifferfromcurrentcapitalrequirements.TherulesimplementanewcapitalratioofcommonequityTier1capitaltorisk‐weightedassets.CommonequityTier1capitalgenerallyconsistsofretainedearningsandcommonstock(subjecttocertainadjustments)aswellasaccumulatedothercomprehensiveincome(AOCI), except to the extent that theBank exercises a one‐time irrevocable option to exclude certaincomponentsofAOCIasofMarch31,2015.TheBankwillalsoberequiredtoestablisha“conservationbuffer,”consistingofacommonequityTier1capitalamountequalto2.5%ofrisk‐weightedassetstobephasedinby2019.Aninstitutionthatdoesnotmeettheconservationbufferwillbesubjecttorestrictionson certain activities includingpayment of dividends, stock repurchases, anddiscretionarybonuses toexecutiveofficers.ThePromptCorrectiveActionrulesaremodifiedtoincludethecommonequityTier1capitalratioandtoincreasetheTier1capitalratiorequirementsforthevariousthresholds.Forexample,therequirementsfor the Bank to be consideredwell capitalized under the ruleswill be a 5.0% leverage ratio, a 6.5%commonequityTier1capitalratio,an8.0%Tier1capitalratio,anda10.0%totalcapitalratio.Tobeadequatelycapitalized,thoseratiosare8.0%,4.0%,4.5%,and6.0%,respectively.Therulesmodifythemannerinwhichcertaincapitalelementsaredetermined.Therulesmakechangestothemethodsofcalculatingtherisk‐weightingofcertainassets,whichinturnaffectsthecalculationoftherisk‐weightedcapitalratios.Higherriskweightsareassignedtovariouscategoriesofassets,includingcommercialrealestateloans,creditfacilitiesthatfinancetheacquisition,developmentorconstructionofreal property, certain exposures or credit that are 90 days past due or are nonaccrual, securitizationexposures,andincertaincasesmortgageservicingrightsanddeferredtaxassets.TheBankwasrequiredtocomplywiththenewcapitalrulesonJanuary1,2015,withameasurementdateofMarch31,2015.Theconservationbufferwillbephased‐inbeginningin2016,andwilltakefulleffectonJanuary1,2019.Certaincalculationsundertheruleswillalsohavephase‐inperiods.



























B A K E R S F I E L D

1330 Truxtun Avenue Bakersfield, CA 93301

(661) 859-2500

G R E E N F I E L D

10 Panama Road Bakersfield, CA 93307

(661) 834-9772

L A N C A S T E R

43830 20th Street West Lancaster, CA 93534

(661) 949-9038

M O J A V E

15773 K Street Mojave, CA 93501

(661) 824-2200

R I D G E C R E S T

1450 N. Norma Street Ridgecrest, CA 93555

(760) 446-3576

R I V E R W A L K

11200 River Run Blvd., Suite 101 Bakersfield, CA 93311

(661) 410-6021

MISSION BANKBUSINESS BANKING CENTERS

S H A F T E R

1110 E. Lerdo Highway Shafter, CA 93263

(661) 237-6500

V E N T U R A

1500 Palma Drive Ventura, CA 93003

(805) 601-8555

mission bankcorp annual report 2017are demand deposits and business accounts. in 2017, the...

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