PACIFIC COMMERCE BANCORP & SUBSIDIARIES FINANCIAL STATEMENTS WITH INDEPENDENT AUDITOR'S REPORT DECEMBER 31, 2015 AND 2014

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1 PACIFIC COMMERCE BANCORP & SUBSIDIARIES FINANCIAL STATEMENTS WITH INDEPENDENT AUDITOR'S REPORT DECEMBER 31, 2015 AND 2014

2 CONTENTS INDEPENDENT AUDITOR'S REPORT ON THE FINANCIAL STATEMENTS 1 FINANCIAL STATEMENTS Consolidated Balance Sheets 3 Consolidated Statements of Income 5 Consolidated Statements of Comprehensive Income 6 Consolidated Statement of Changes in Shareholders' Equity 7 Consolidated Statements of Cash Flows 8 Notes to Consolidated Financial Statements 9 through 33

3 Vavrinek, Trine, Day & Co., LLP Certified Public Accountants V A L U E T H E D I F F E R E N C E Board of Directors and Shareholders of Pacific Commerce Bancorp and Subsidiaries Los Angeles, California INDEPENDENT AUDITOR'S REPORT We have audited the accompanying consolidated financial statements of Pacific Commerce Bancorp and Subsidiaries, which are comprised of the consolidated balance sheet as of December 31, 2015 and the related consolidated statements of income, comprehensive income, changes in shareholders' equity and cash flows for the year then ended and the related notes to the financial statements. Management's Responsibility for the Financial Statements Management is responsible for the preparation and fair presentation of these financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error. Auditor's Responsibility Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor's judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity's preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity's internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion Paseo De Alicia, Suite 100 Laguna Hills, CA Tel: Fax: F R E S N O L A G U N A H I L L S P A L O A L T O P L E A S A N T O N R A N C H O C U C A M O N G A R I V E R S I D E S A C R A M E N T O

4 Opinion In our opinion, the consolidated financial statements referred to above present fairly, in alll material respects, the financial position of Pacific Commercee Bancorp and Subsidiaries as of December 31, 2015 and the results of its operations and its cash flows for the year then ended in accordance with accounting principles generally accepted in the United States of America. Prior Period Financial Statements The financial statements of Pacific Commerce Bank and Subsidiary as of and for the year ended December 31, 2014, were audited by other auditors whose report dated March 25, 2015, expressed an unmodified opinion on those statements. Laguna Hills, California February 29, Paseo De Alicia, Suite 100 Laguna Hills, CA Tel: Fax: F R E S N O L A G U N A H I L L S P A L O A L T O P L E A S A N T O N R A N C H O C U C A M O N G A R I V E R S I D E S A C R A M E N T O

5 CONSOLIDATED BALANCE SHEETS ASSETS Cash and Due from Banks $ 4,488,000 $ 1,752,000 Interest Bearing Deposits with Other Banks 28,398,000 11,183,000 TOTAL CASH AND CASH EQUIVALENTS 32,886,000 12,935,000 Investment Securities Available for Sale 252, ,000 Loans: Real Estate 250,578, ,918,000 Commercial 56,343,000 45,809,000 TOTAL LOANS 306,921, ,727,000 Deferred Loan Fees, Net of Costs (176,000) (1,000) Allowance for Loan Losses (3,066,000) (3,379,000) NET LOANS 303,679, ,347,000 Investment in Restricted Common Stock 3,316,000 3,010,000 Premises and Equipment 677, ,000 Cash Surrender Value of Bank Owned Life Insurance 4,420,000 4,302,000 Deferred Tax Assets 2,241,000 3,201,000 Core Deposit Intangible 1,354,000 - Goodwill 2,343,000 - Accrued Interest and Other Assets 2,301,000 1,260,000 TOTAL ASSETS $ 353,469,000 $ 217,780,000 The accompanying notes are an integral part of these consolidated financial statements. 3

6 CONSOLIDATED BALANCE SHEETS (CONTINUED) LIABILITIES AND SHAREHOLDERS' EQUITY Deposits: Noninterest-Bearing Demand $ 111,964,000 $ 35,288,000 Interest-bearing demand 3,026,000 2,071,000 Savings and Money Market Accounts 90,089,000 68,510,000 Time Deposits Under $250,000 62,597,000 45,008,000 Time Deposits $250,000 and Over 15,860,000 14,650,000 TOTAL DEPOSITS 283,536, ,527,000 FHLB Advances 25,500,000 26,000,000 Note Payable, Net of Issuance Costs 3,930,000 - Accrued Interest and Other Liabilities 1,385,000 1,113,000 TOTAL LIABILITIES 314,351, ,640,000 Commitments and Contingencies - Notes 5 and Shareholders' Equity: Common Stock - No Par Value; 15,000,000 Shares Authorized, 6,543,701 and 4,461,255 Shares Issued and Outstanding at December 31, 2015 and 2014, respectively 39,448,000 27,505,000 Additional Paid-In Capital 1,713,000 1,163,000 Accumulated Deficit (2,047,000) (3,542,000) Accumulated Other Comprehensive Income - Unrealized Gain on Securities Available for Sale 4,000 14,000 TOTAL SHAREHOLDERS' EQUITY 39,118,000 25,140,000 TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 353,469,000 $ 217,780,000 The accompanying notes are an integral part of these consolidated financial statements. 4

7 CONSOLIDATED STATEMENTS OF INCOME FOR THE YEARS ENDED INTEREST INCOME Interest and Fees on Loans $ 12,798,000 $ 7,838,000 Interest on Fed Funds Sold and Interest-Bearing Deposits 63,000 36,000 Interest on Investment Securities 25,000 26,000 Dividends on Restricted Stock 326, ,000 TOTAL INTEREST INCOME 13,212,000 8,068,000 INTEREST EXPENSE Deposits 671, ,000 Borrowings 50,000 31,000 TOTAL INTEREST EXPENSE 721, ,000 NET INTEREST INCOME 12,491,000 7,620,000 Recapture of Loan Loss Provision (500,000) (1,500,000) NET INTEREST INCOME AFTER RECAPTURE OF LOAN LOSS PROVISION 12,991,000 9,120,000 NONINTEREST INCOME Service Charges, Fees and Other 224,000 76,000 Increase in Cash Surrender Value of Life Insurance 118, ,000 Gain on Sale of Loans 1,217, ,000 Gain on Sale of Other Real Estate Owned - 93,000 Servicing Income, Net of Amortization 341,000 23,000 Other Operating Income 434, ,000 2,334, ,000 NONINTEREST EXPENSE Salaries and Employee Benefits 6,090,000 3,946,000 Occupancy and Equipment 1,218, ,000 Merger Expenses 1,328, ,000 Other Expenses 3,890,000 2,509,000 12,526,000 7,516,000 INCOME BEFORE INCOME TAXES 2,799,000 2,474,000 Income Tax Expense 1,304, ,000 NET INCOME $ 1,495,000 $ 1,744,000 NET INCOME PER SHARE - BASIC $ 0.25 $ 0.39 NET INCOME PER SHARE - DILUTED $ 0.25 $ 0.39 The accompanying notes are an integral part of these consolidated financial statements. 5

8 CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME FOR THE YEARS ENDED Net Income $ 1,495,000 $ 1,744,000 Other Comprehensive Income (Loss): Change in Unrealized Gains on Securities (10,000) 5,000 TOTAL COMPREHENSIVE INCOME $ 1,485,000 $ 1,749,000 The accompanying notes are an integral part of these consolidated financial statements. 6

9 CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY FOR THE YEARS ENDED Accumulated Preferred Stock Common Stock Additional Other Number of Number of Paid-In Accumulated Comprehensive Shares Amount Shares Amount Capital Deficit Income Total Balance at January 1, ,263 $ 4,263,000 4,461,255 $ 27,505,000 $ 833,000 $ (6,405,000) $ 9,000 $ 26,205,000 Stock-based Compensation , ,000 Repurchase of Preferred Shares, Net of Discount (4,263) (4,263,000) ,119,000 - (3,144,000) Net Income ,744,000-1,744,000 Other Comprehensive Income ,000 5,000 Balance at December 31, ,461,255 27,505,000 1,163,000 (3,542,000) 14,000 25,140,000 Issuance of Stock Relating to Business Combination - - 1,989,472 11,678, ,678,000 Stock-based Compensation , ,000 Exercise of Stock Options, Including Tax Benefits of $77, , ,000 77, ,000 Net Income ,495,000-1,495,000 Other Comprehensive Income (Loss) (10,000) (10,000) Balance at December 31, $ - 6,543,701 $ 39,448,000 $ 1,713,000 $ (2,047,000) $ 4,000 $ 39,118,000 The accompanying notes are an integral part of these consolidated financial statements. 7

10 CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED OPERATING ACTIVITIES Net Income $ 1,495,000 $ 1,744,000 Adjustments to Reconcile Net Income to Net Cash From Operating Activities: Depreciation and Amortization 322,000 80,000 Recapture of Loan Loss Provision (500,000) (1,500,000) Stock-based Compensation 473, ,000 Gain on Sale of Loans (1,217,000) (449,000) Gain on Sale of Other Real Estate Owned - (93,000) Increase in CSV of Bank Owned Life Insurance (118,000) (118,000) Deferred Income Tax Expense 1,112, ,000 Other Items (210,000) (501,000) NET CASH FROM OPERATING ACTIVITIES 1,357, ,000 INVESTING ACTIVITIES Purchase (Redemption) of Investments in Restricted Stock 256,000 (1,452,000) Sales of Securities Available for Sale 3,565,000 - Maturities and Paydowns of Securities Available for Sale 337, ,000 Net Change in Loans (16,218,000) (49,745,000) Proceeds from Sale of Other Real Estate Owned - 879,000 Cash Acquired in Business Combination, Net 31,292,000 - Purchases of Premises and Equipment (304,000) (68,000) NET CASH FROM INVESTING ACTIVITIES 18,928,000 (49,775,000) FINANCING ACTIVITIES Net (Decrease) Increase in Deposits (4,029,000) 20,011,000 Change in FHLB Advances (500,000) 26,000,000 Proceeds from Issuance of Note Payable 3,930,000 - Stock Option Exercises 265,000 - Repurchase of Preferred Shares - (3,144,000) NET CASH FROM FINANCING ACTIVITIES (334,000) 42,867,000 INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 19,951,000 (6,472,000) Cash and Cash Equivalents at Beginning of Period 12,935,000 19,407,000 CASH AND CASH EQUIVALENTS AT END OF YEAR $ 32,886,000 $ 12,935,000 Supplemental Disclosures of Cash Flow Information: Interest Paid $ 704,000 $ 470,000 Taxes Paid (Refunded) $ (76,000) $ - Transfer of Loans to Other Real Estate Owned $ - $ 542,000 The accompanying notes are an integral part of these consolidated financial statements. 8

11 NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Nature of operations - The Company consists of Pacific Commerce Bancorp ( Bancorp ) and its whollyowned subsidiary Pacific Commerce Bank (the Bank ) and the Bank s wholly-owned subsidiary Pacific Commerce Bank Real Estate Holdings, LLC (collectively, the Company ). Pacific Commerce Bancorp was formed in 2015 as a one-bank holding company. Pacific Commerce Bank Real Estate Holdings, LLC was formed in 2012 for the sole purpose of holding real estate owned acquired through foreclosure. The Company provides financial services through five branches located in the Los Angeles and San Diego regions of Southern California. Its primary deposit products are checking, savings, and term certificate accounts, and its primary lending products are residential mortgage, commercial real estate, and commercial loans. Basis of presentation and consolidation - The accompanying consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States of America (GAAP) and general practices within the banking industry. The consolidated financial statements of the Company include the accounts of Pacific Commerce Bancorp, its wholly-owned subsidiary Pacific Commerce Bank and the Bank s wholly-owned subsidiary Pacific Commerce Bank Real Estate Holdings, LLC. All significant intercompany balances and transactions have been eliminated in consolidation. Subsequent events - The Company has evaluated subsequent events for recognition and disclosure through February 29, 2016, which is the date the financial statements were available to be issued. Use of estimates - The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Concentrations of credit risk - Assets and liabilities that subject the Company to concentrations of credit risk consist of cash balances at other banks, loans, and deposits. Most of the Company's customers are located within Los Angeles, San Diego and the surrounding metropolitan areas. The Company's primary lending products are discussed in Note 4 to the consolidated financial statements. Substantially all loans are secured by specific items of collateral, including business and consumer assets and commercial and residential real estate. Commercial loans are expected to be repaid from cash flow from operations of business. There are no significant concentrations of loans to any one industry or customer. However, the customers' ability to repay their loans is dependent on the real estate and general economic conditions in the Southern California area. The Company did not have any significant concentrations in its business with any one customer or industry. The Company obtains what it believes to be sufficient collateral to secure potential losses on loans. The extent and value of collateral varies based on the details underlying each loan agreement. Cash and cash equivalents - For purposes of reporting cash flows cash and cash equivalents include cash, deposits with other financial institutions with maturities of less than 90 days and federal funds sold. Generally, federal funds are sold for one day periods. 9

12 NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued Cash and due from banks - Banking regulations require that banks maintain a percentage of their deposits as reserves in cash or on deposit with the Federal Reserve Bank. The Company was in compliance with all reserve requirements as of December 31, 2015 and The Company maintains amounts due from banks, which may exceed federally insured limits. The Company has not experienced any losses in such accounts. Investment securities - Bonds, notes, and debentures for which the Company has the positive intent and ability to hold to maturity are classified as held to maturity and reported at amortized cost, adjusted for premiums and discounts that are recognized in interest income using the interest method over the period to maturity. Investments not classified as trading securities nor as held to maturity securities are classified as available for sale securities and recorded at fair value. Unrealized gains or losses on available for sale securities are excluded from net income and reported as a separate component of other comprehensive income included in shareholders' equity. Premiums or discounts on held to maturity and available for sale securities are amortized or accreted into income using the interest method. Realized gains or losses on sales of held to maturity or available for sale securities are recorded using the specific identification method. Investments with fair values that are less than amortized cost are considered impaired. Management evaluates securities for other-than-temporary impairment ("OTTI") on at least a quarterly basis, and more frequently when economic or market conditions warrant such an evaluation. For securities in an unrealized loss position, management considers the extent and duration of the unrealized loss and the financial condition and near-term prospects of the issuer. Management also assesses whether it intends to sell, or it is more likely than not that it will be required to sell, a security in an unrealized loss position before recovery of its amortized cost basis. If either of the criteria regarding intent or requirement to sell is met, the entire difference between amortized cost and fair value is recognized as impairment through earnings. For debt securities that do not meet the aforementioned criteria, the amount of impairment is split into two components as follows: OTTI related to credit loss, which must be recognized in the income statement, and OTTI related to other factors, which is recognized in other comprehensive income. The credit loss is defined as the difference between the present value of the cash flows expected to be collected and the amortized cost basis. For equity securities, the entire amount of impairment is recognized through earnings. Restricted stock - The Company has investments in the Federal Home Loan Bank ("FHLB") of San Francisco, Federal Reserve Bank ("FRB") of San Francisco, and Pacific Coast Bankers' Bank stock. These investments are classified as restricted securities carried at cost and periodically evaluated for impairment based on the ultimate recovery of par value. Both cash and stock dividends are reported as income. 10

13 NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued Loans - Loans receivable that management has the intent and ability to hold for the foreseeable future or until maturity or payoff are reported at their outstanding unpaid principal balances reduced by any charge-offs or specific valuation accounts and net of any deferred fees or costs on originated loans, or unamortized premiums or discounts on purchased loans. Loan origination fees and certain direct origination costs are deferred and recognized in interest income using the level-yield method without anticipating prepayments. Premiums and discounts on loans purchased are grouped by type and certain common risk characteristics and amortized or accreted as an adjustment of yield over the weighted-average remaining contractual lives of each group of loans, adjusted for prepayments when applicable, using methodologies which approximate the interest method. Loans on which the accrual of interest has been discontinued are designated as nonaccrual loans. The accrual of interest on loans is discontinued when principal or interest is past due 90 days or when, in the opinion of management, there is reasonable doubt as to collectibility based on contractual terms of the loan. When loans are placed on nonaccrual status, all interest previously accrued but not collected is reversed against current period interest income. Income on nonaccrual loans is subsequently recognized only to the extent that cash is received and the loan's principal balance is deemed collectible. Interest accruals are resumed on such loans only when they are brought current with respect to interest and principal and when, in the judgment of management, the loans are estimated to be fully collectible as to all principal and interest. Allowance for Loan Losses - The allowance for loan losses is a valuation allowance for probable incurred credit losses. Loan losses are charged against the allowance when management believes the uncollectibility of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance. Management estimates the allowance balance required using past loan loss experience, the nature and volume of the portfolio, information about specific borrower situations and estimated collateral values, economic conditions, and other factors. Allocations of the allowance may be made for specific loans, but the entire allowance is available for any loan that, in management's judgment, should be charged-off. Amounts are charged-off when available information confirms that specific loans or portions thereof, are uncollectible. This methodology for determining charge-offs is consistently applied to each segment. The Company determines a separate allowance for each portfolio segment. The allowance consists of specific and general reserves. Specific reserves relate to loans that are individually classified as impaired. A loan is impaired when, based on current information and events, it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the loan agreement. Factors considered in determining impairment include payment status, collateral value and the probability of collecting all amounts when due. Measurement of impairment is based on the expected future cash flows of an impaired loan, which are to be discounted at the loan's effective interest rate, or measured by reference to an observable market value, if one exists, or the fair value of the collateral for a collateral-dependent loan. The Company selects the measurement method on a loan-by-loan basis except that collateral-dependent loans for which foreclosure is probable are measured at the fair value of the collateral. 11

14 NOTES TO THE FINANCIAL STATEMENTS NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued Allowance for loan losses (Continued) - The Company recognizes interest income on impaired loans based on its existing methods of recognizing interest income on nonaccrual loans. Loans, for which the terms have been modified resulting in a concession, and for which the borrower is experiencing financial difficulties, are considered troubled debt restructurings and classified as impaired with measurement of impairment as described above. If a loan is impaired, a portion of the allowance is allocated so that the loan is reported, net, at the present value of estimated future cash flows using the loan's existing rate or at the fair value of collateral if repayment is expected solely from the collateral. General reserves cover non-impaired loans and are based on historical loss rates for each portfolio segment, adjusted for the effects of qualitative or environmental factors that are likely to cause estimated credit losses as of the evaluation date to differ from the portfolio segment's historical loss experience. Qualitative factors include consideration of the following: changes in lending policies and procedures; changes in economic conditions, changes in the nature and volume of the portfolio; changes in the experience, ability and depth of lending management and other relevant staff; changes in the volume and severity of past due, nonaccrual and other adversely graded loans; changes in the loan review system; changes in the value of the underlying collateral for collateral-dependent loans; concentrations of credit and the effect of other external factors such as competition and legal and regulatory requirements. Portfolio segments identified by the Company include real estate and commercial loans. Relevant risk characteristics for these portfolio segments generally include debt service coverage, loan-to-value ratios, and financial performance. Transfers of Financial Assets - Transfers of financial assets are accounted for as sales, when control over the assets has been relinquished. Control over transferred assets is deemed to be surrendered when the assets have been isolated from the Company, the transferee obtains the right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange the transferred assets, and the Company does not maintain effective control over the transferred assets through an agreement to repurchase them before their maturity. Gains on sales of Small Business Administration ( SBA ) loans totaled $1,217,000 and $449,000 in 2015 and 2014, respectively. Servicing Rights - When SBA loans are sold with servicing retained, servicing rights are initially recorded at fair value with the income statement effect recorded in gains on sales of loans. Fair value is based on a valuation model that calculates the present value of estimated future net servicing income. All classes of servicing assets are subsequently measured using the amortization method which requires servicing rights to be amortized into noninterest income in proportion to, and over the period of, the estimated future net servicing income of the underlying loans. Servicing rights are evaluated for impairment based upon the fair value of the rights as compared to carrying amount. Impairment is recognized through a valuation allowance for an individual grouping, to the extent that fair value is less than the carrying amount. If the Company later determines that all or a portion of the impairment no longer exists for a particular grouping, a reduction of the allowance may be recorded as an increase to income. No impairment was recognized as of December 31, Servicing fee income is recorded for fees earned for servicing loans is shown separately in the statements of income, net of amortization of mortgage servicing rights. Servicing fees are based on a contractual percentage of the outstanding principal. 12

15 NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued Premises and equipment - Premises and equipment are carried at cost less accumulated depreciation and amortization. Depreciation is computed using the straight line and declining balance methods based principally on the estimated useful lives of the assets, which range from three to ten years for furniture, equipment, and computer equipment. Leasehold improvements are amortized using the straight line method over the estimated useful lives of the improvements or the remaining lease term, whichever is shorter. Expenditures for betterments or major repairs are capitalized and those for ordinary repairs and maintenance are charged to operations as incurred. Bank owned life insurance - The Company has purchased life insurance policies on certain key executives. Bank owned life insurance is recorded at the amount that can be realized under the insurance contract at the consolidated balance sheet date, which is the cash surrender value adjusted for other charges or other amounts due that are probable at settlement. Advertising costs - The Company expenses the costs of advertising in the period incurred. Advertising expense was approximately $100,000 and $88,000 for the years ended December 31, 2015 and 2014, respectively. Other real estate owned - Real estate acquired by foreclosure, or deed in lieu of foreclosure, is recorded at fair value at the date of foreclosure, establishing a new cost basis by a charge to the allowance for loan losses, if necessary. Fair value is based on current appraisals less estimated selling costs. Any subsequent write-downs are charged against noninterest expenses and recognized as a valuation allowance. Operating expenses of such properties, net of related income, are included in other expenses. Gains and losses on disposition of such properties are included in noninterest income. Goodwill and Other Intangible Assets - Goodwill is generally determined as the excess of the fair value of the consideration transferred, plus the fair value of any noncontrolling interests in the acquiree, over the fair value of the net assets acquired and liabilities assumed as of the acquisition date. Goodwill resulting from whole bank acquisitions is not amortized, but tested for impairment at least annually. The Company has selected December 31 as the date to perform the annual impairment test. Goodwill amounted to $2,343,000 as of December 31, 2015 and is the only intangible asset with an indefinite life on the balance sheet. No impairment was recognized on goodwill during Other intangible assets consist of core deposit intangible ("CDI") assets arising from whole bank acquisitions. CDI assets are amortized on an accelerated method over their estimated useful life of approximately 10 years. CDI of $1,477,000 was recognized in the 2015 acquisition of Vibra Bank. The unamortized balance as of December 31, 2014 was $1,354,000. CDI amortization expense was $123,000 in Estimated CDI amortization expense for the next 5 years and thereafter, is as follows: CDI Amortization Schedule 2016 $ 167, , , , ,000 Thereafter $ 559,000 1,354,000 13

16 NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued Income taxes - Deferred income taxes are computed using the asset and liability method, which recognizes a liability or asset representing the tax effects, based on current tax law, of future deductible or taxable amounts attributable to events that have been recognized in the consolidated financial statements. A valuation allowance is established to reduce the deferred tax asset to the level at which it is more likely than not that the tax asset or benefits will be realized. Realization of tax benefits of deductible temporary differences and operating loss carryforwards depends on having sufficient taxable income of an appropriate character within the carryforward periods. The Company has adopted guidance issued by the Financial Accounting Standards Board ( FASB ) that clarifies the accounting for uncertainty in tax positions taken or expected to be taken on a tax return and provides that the tax effects from an uncertain tax position can be recognized in the consolidated financial statements only if, based on its merits, the position is more likely than not to be sustained by the taxing authorities. Interest and penalties related to uncertain tax positions are recorded as part of income tax expense. Comprehensive income - Changes in unrealized gains and losses on available for sale securities are the only component of accumulated other comprehensive income for the Company. Earnings per share ("EPS") - Earnings per share amounts have been computed using both the weighted average number of shares outstanding of common stock for the purposes of computing basic EPS and the weighted average number of shares outstanding of common stock plus dilutive common stock equivalents for the purpose of computing diluted EPS. Basic EPS is computed by dividing net income available to common shareholders by the weighted average number of common shares outstanding for the period. Basic EPS excludes the dilutive effect that could occur if any securities or other contracts to issue common stock were exercised or converted into or resulted in the issuance of common stock. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock, such as stock options, result in the issuance of common stock which shares in the earnings available to common shareholders of the bank. The treasury stock method is applied to determine the dilutive effect of stock options in computing dilutive earnings per share. The dilutive calculation excludes 739,038 and 506,000 options outstanding for the years ended December 31, 2015 and 2014, respectively, for which the exercise price plus the average unrecognized compensation exceeded the average market price of the Company s common stock during those years. Basic and diluted EPS are calculated as follows: BASIC EARNINGS PER SHARE Net Income $ 1,495,000 $ 1,744,000 Weighted Average Common Shares Outstanding 5,985,648 4,461,255 Basic Earnings Per Share $ 0.25 $ 0.39 DILUTED EARNINGS PER SHARE Net Income $ 1,495,000 $ 1,744,000 Weighted Average Common Shares Outstanding 5,985,648 4,461,255 Dilutive Effect of Stock Options 58,699 51,629 Weighted Average Shares Outstanding, Including Potentially Dilutive Effect of Stock Options 6,044,347 4,512,884 Dilutive Earnings Per Share $ 0.25 $

17 NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued Financial instruments - In the ordinary course of business, the Company has entered into off balance sheet financial instruments consisting of commitments to extend credit, commercial letters of credit, and standby letters of credit as described in Note 11. Such financial instruments are recorded in the consolidated financial statements when they are funded or related fees are incurred or received. Stock-based compensation - The Company recognizes the cost of employee services received in exchange for awards of stock options, or other equity instruments, based on the grant-date fair value of those awards. This cost is recognized over the period in which an employee is required to provide services in exchange for the award, generally the vesting period. See Note 12 for additional information on the Company's stock option plan. Fair value measurement - Fair value is the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Current accounting guidance establishes a fair value hierarchy, which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The guidance describes three levels of inputs that may be used to measure fair value: Level 1: Level 2: Level 3: Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date. Significant other observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data. Significant unobservable inputs that reflect a Company's own assumptions about the assumptions that market participants would use in pricing an asset or liability. See Notes 13 for more information and disclosures relating to the Company's fair value measurements. Reclassifications - Certain reclassifications have been made in the 2014 consolidated financial statements to conform to the presentation used in These reclassifications had no significant impact on the Company s previously reported financial position or results of operations. 15

18 NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued Recently Adopted Accounting Pronouncements - In January 2014, the FASB issued Accounting Standards Update (ASU) No , Receivables Troubled Debt Restructurings by Creditors (Subtopic ): Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans upon Foreclosure, a consensus of the FASB Emerging Issues Task Force. This Update provides clarification as to when an insubstance repossession or foreclosure has occurred, i.e., the creditor is considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan and, therefore, the loan receivable should be derecognized and the real estate property should be recognized. The Update also will require additional disclosures. The amendments in this Update are effective for interim and annual periods beginning after December 15, Adoption of this Update did not have a material impact on the Company s consolidated financial statements. Recent Accounting Pronouncements Not Yet Effective - In May 2014, the FASB issued Accounting Standards Update (ASU) No , Revenue from Contracts with Customers (Topic 606). This Update requires an entity to recognize revenue as performance obligations are met, in order to reflect the transfer of promised goods or services to customers in an amount that reflects the consideration the entity is entitled to receive for those goods or services. This update was originally effective for annual reporting periods beginning on or after December 15, 2016 and interim periods therein for public business entities and for annual reporting periods beginning on or after December 15, 2017 and for interim reporting periods within annual reporting periods beginning after December 15, 2018 for all other entities. In July 2015 the FASB issued ASU , which provided for a deferral of ASU effective dates for one year for all entities while also permitting early adoption as of annual reporting periods beginning after December 15, The Company is currently evaluating the effects of ASU on its financial statements and disclosures, if any. On January 5, 2016, the FASB issued Accounting Standards Update , Financial Instruments Overall: Recognition and Measurement of Financial Assets and Financial Liabilities (Subtopic ). Changes made to the current measurement model primarily affect the accounting for equity securities with readily determinable fair values, where changes in fair value will impact earnings instead of other comprehensive income. The accounting for other financial instruments, such as loans, investments in debt securities, and financial liabilities is largely unchanged. The Update also changes the presentation and disclosure requirements for financial instruments including a requirement that public business entities use exit price when measuring the fair value of financial instruments measured at amortized cost for disclosure purposes. This Update is generally effective for public business entities in fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. All other entities will have an additional year, but may early adopt coincident with the public business entity effective date. The Company is currently evaluating the effects of ASU on its financial statements and disclosures. On February 25, 2016, the Financial Accounting Standards Board issued Accounting Standards Update (ASU) , Leases (Topic 842). The most significant change for lessees is the requirement under the new guidance to recognize right-of-use assets and lease liabilities for all leases not considered short-term leases, which is generally defined as a lease term of less than 12 months. This change will result in lessees recognizing right-ofuse assets and lease liabilities for most leases currently accounted for as operating leases under current lease accounting guidance. The amendments in this Update are effective for interim and annual periods beginning after December 15, 2018 for public business entities and one year later for all other entities. The Company is currently evaluating the effects of ASU on its financial statements and disclosures. 16

19 NOTE 2 - ACQUISITION Vibra Bank Acquisition: On April 7, 2015, the Company acquired all the assets and assumed all the liabilities of Vibra Bank ("Vibra") in exchange for 1,989,472 shares of Company stock with a fair value of $5.87 per share and cash of $6.1 million. Vibra operated one branch in the San Diego metropolitan area. The Company acquired Vibra to strategically increase its existing presence in the San Diego area. Goodwill in the amount of $2,343,000 was recognized in this acquisition. Goodwill represents the future economic benefits arising from net assets acquired that are not individually identified and separately recognized and is attributable to synergies expected to be derived from the combination of the two entities. Goodwill is not deductible for income tax purposes. The following table represents the assets acquired and liabilities assumed of Vibra as of April 7, 2015 and the fair value adjustments and amounts recorded by the Company in 2015 under the acquisition method of accounting: Vibra Fair Value Fair Book Value Adjustments Value ASSETS ACQUIRED Cash and Cash Equivalents $ 37,400,000 $ - $ 37,400,000 Investment Securities 3,608,000 (33,000) 3,575,000 Loans, gross 94,281,000 (933,000) 93,348,000 Deferred Loan Fees (208,000) 208,000 - Allowance for Loan Losses (1,267,000) 1,267,000 - Bank Premises and Equipment 447,000 (11,000) 436,000 Deferred Tax Assets 1,101,000 (863,000) 238,000 Core Deposit Intangible - 1,477,000 1,477,000 Other Assets 1,817,000-1,817,000 Total Assets Acquired $ 137,179,000 $ 1,112,000 $ 138,291,000 LIABILITIES ASSUMED Deposits $ 121,929,000 $ 109,000 $ 122,038,000 Other Liabilities 771,000 38, ,000 Total Liabilities Assumed 122,700, , ,847,000 Excess of Assets Acquired Over Liabilities Assumed 14,479, ,000 15,444,000 $ 137,179,000 $ 1,112,000 Merger Consideration 17,787,000 Goodwill Recognized $ 2,343,000 The Company accounted for the transaction under the acquisition method of accounting which requires purchased assets and liabilities assumed to be recorded at their respective fair values at the date of acquisition. The Company determined the fair value of loans, leases, core deposit intangible and deposits with the assistance of a third party valuation. 17

20 NOTE 2 - ACQUISITION - Continued In many cases, the fair values of assets acquired and liabilities assumed were determined by estimating the cash flows expected to result from those assets and liabilities and discounting them at appropriate market rates. The most significant category of assets for which this procedure was used was that of acquired loans. The excess of expected cash flows above the fair value of the majority of loans will be accreted to interest income over the remaining lives of the loans in accordance with Financial Accounting Standards Board ( FASB ) Accounting Standards Codification ( ASC ) For loans acquired, the contractual amounts due, expected cash flows to be collected, interest component and fair value as of the respective acquisition dates were as follows: Acquired Loans Contractual Amounts Due $ 115,050,000 Cash Flows not Expected to be Collected - Expected Cash Flows 115,050,000 Interest Component of Expected Cash Flows 21,702,000 Fair Value of Acquired Loans $ 93,348,000 None of the loans acquired had evidence of deterioration of credit quality since origination for which it was probable, at acquisition, that the Company would be unable to collect all contractually required payments receivable. In accordance with generally accepted accounting principles there was no carryover of the allowance for loan losses that had been previously recorded by Vibra. NOTE 3 - INVESTMENT SECURITIES Debt and equity securities have been classified in the consolidated balance sheets according to management s intent. The carrying amount of securities and their estimated fair values were as follows as of December 31, 2015 and 2014: Available-for-Sale: Gross Gross Amortized Unrealized Unrealized Fair December 31, 2015 Cost Gains Losses Value U.S. Agency Mortgage- Backed Securities $ 248,000 $ 4,000 $ - $ 252,000 December 31, 2014 U.S. Agency Mortgage- Backed Securities $ 583,000 $ 14,000 $ - $ 597,000 All securities are expected to mature in three years or less, based on their estimated lives. During 2015 the Company received proceeds of $3,565,000 from the sale of securities available for sale, recognizing no gain or loss on the sale. During 2014 there were no sales of securities available for sale. 18

21 NOTE 4 - LOANS The following table presents the recorded investment in loans and impairment method as of December 31, 2015 and 2014 and the activity in the allowance for loan losses for the years then ended, by portfolio segment: December 31, 2015 Real Estate Commercial Total Allowance for Loan Losses: Beginning of Year $ 1,897,000 $ 1,482,000 $ 3,379,000 Provisions (Recaptures) 552,000 (1,052,000) (500,000) Recoveries - 188, ,000 Charge-offs - (1,000) (1,000) $ 2,449,000 $ 617,000 $ 3,066,000 End of Year Reserves: Individually $ - $ - $ - Collectively 2,449, ,000 3,066,000 $ 2,449,000 $ 617,000 $ 3,066,000 Evaluated for Impairment: Individually $ 1,546,000 $ 2,000 $ 1,548,000 Collectively 249,032,000 56,341, ,373,000 $ 250,578,000 $ 56,343,000 $ 306,921,000 December 31, 2014 Allowance for Loan Losses: Beginning of Year $ 2,517,000 $ 2,489,000 $ 5,006,000 Provisions (Recaptures) (620,000) (880,000) (1,500,000) Recoveries - 154, ,000 Charge-offs - (281,000) (281,000) $ 1,897,000 $ 1,482,000 $ 3,379,000 End of Year Reserves: Individually $ - $ 83,000 $ 83,000 Collectively 1,897,000 1,399,000 3,296,000 $ 1,897,000 $ 1,482,000 $ 3,379,000 Evaluated for Impairment: Individually $ 1,722,000 $ 83,000 $ 1,805,000 Collectively 148,196,000 45,726, ,922,000 $ 149,918,000 $ 45,809,000 $ 195,727,000 19

22 NOTE 4 - LOANS - Continued The Company categorizes loans into risk categories based on relevant information about the ability of borrowers to service their debt such as current financial information, historical payment experience, collateral adequacy, credit documentation, and current economic trends, among other factors. The Company analyzes loans individually by classifying the loans as to credit risk. This analysis typically includes larger, nonhomogeneous loans such as commercial real estate and commercial and industrial loans. This analysis is performed on an ongoing basis as new information is obtained. The Company uses the following definitions for risk ratings: Pass - Loans classified as pass include loans not meeting the risk ratings defined below. Special Mention - Loans classified as special mention have a potential weakness that deserves management's close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or of the institution s credit position at some future date. Substandard - Loans classified as substandard are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans so classified have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected. Impaired - A loan is considered impaired, when, based on current information and events, it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the loan agreement. Additionally, all loans classified as troubled debt restructurings are considered impaired. Based on the most recent analysis performed, the risk category of loans by class of loans is as follows as of December 31, 2015: Special December 31, 2015 Pass Mention Substandard Impaired Total Real Estate: Construction and Land Development $ 10,791,000 $ - $ - $ - $ 10,791,000 Multifamily 8,436, ,436,000 Residential Real Estate 45,174, ,174,000 Commercial and Other 181,365,000-3,266,000 1,546, ,177,000 Commercial 49,355, ,000 6,444,000 2,000 56,343,000 $ 295,121,000 $ 542,000 $ 9,710,000 $ 1,548,000 $ 306,921,000 20

23 NOTE 4 - LOANS - Continued The risk category of loans by class of loans is as follows as of December 31, 2014: Special December 31, 2014 Pass Mention Substandard Impaired Total Real Estate: Construction and Land Development $ 2,516,000 $ - $ - $ - $ 2,516,000 Multifamily 5,196, ,196,000 Residential Real Estate 19,221, ,221,000 Commercial and Other 120,212,000 1,031,000 20,000 1,722, ,985,000 Commercial 39,810,000 5,916,000-83,000 45,809,000 $ 186,955,000 $ 6,947,000 $ 20,000 $ 1,805,000 $ 195,727,000 Past due and non-accrual loans were as follows as of December 31, 2015 and 2014: Still Accruing Days Over 90 Days December 31, 2015 Past Due Past Due Nonaccrual Commercial Real Estate $ 73,000 $ - $ - Commercial - - 2,000 $ 73,000 $ - $ 2,000 Still Accruing Days Over 90 Days December 31, 2014 Past Due Past Due Nonaccrual Commercial Real Estate $ - $ - $ 137,000 Commercial ,000 $ - $ - $ 220,000 Impaired loan information is as follows as of and for the year ended December 31, 2015: Unpaid Average Principal Recorded Related Recorded Interest December 31, 2015 Balance Investment Allowance Investment Income With no Allowance Recorded Commercial Real Estate $ 1,702,000 $ 1,546,000 $ - $ 1,634,000 $ 80,000 Commercial 57,000 2,000-2,000 - $ 1,759,000 $ 1,548,000 $ - $ 1,636,000 $ 80,000 21

24 NOTE 4 - LOANS - Continued Impaired loan information is as follows as of and for the year ended December 31, 2014: Unpaid Average Principal Recorded Related Recorded Interest December 31, 2014 Balance Investment Allowance Investment Income With no Allowance Recorded Commercial Real Estate $ 1,901,000 $ 1,722,000 $ - $ 1,748,000 $ 80,000 With an Allowance Recorded Commercial $ 124,000 $ 83,000 $ 83,000 $ 131,000 $ 13,000 The Company had one outstanding loan classified as a troubled debt restructuring as of December 31, 2015 and 2014, in the amount of $1,546,000 and $1,586,000, respectively. The Company has allocated no specific reserves on that loan. The Company has committed to lend no additional amounts to customers with an outstanding loan that is classified as a troubled debt restructuring as of December 31, 2015 and During the year ended December 31, 2015 and 2014 there were no loans that were modified in a troubled debt restructuring. A discount of $933,000 was initially recorded against loans acquired in the Vibra Bank acquisition, of which $706,000 remains unaccreted as of December 31, NOTE 5 - PREMISES AND EQUIPMENT A summary of premises and equipment follows as of December 31: Leasehold Improvements $ 847,000 $ 619,000 Furniture, Fixtures, and Equipment 761, ,000 Computer Equipment 200,000 76,000 1,808,000 1,192,000 Less Accumulated Depreciation and Amortization (1,131,000) (1,064,000) $ 677,000 $ 128,000 Depreciation of premises and equipment was $191,000 and $64,000 for the years ended December 31, 2015 and 2014, respectively. The Company leases its main branch office and branch facilities and a loan operations center under various operating leases expiring through January These leases include provisions for periodic rent increases as well as payment by the lessee of certain operating expenses. These leases also include provisions for options to extend the lease. 22