t Community Valley Bank, we strive for excellence in all areas of service - to our customers and to our shareholders.

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1 2016 ANNUAL REPORT

2 award-winning t Community Valley Bank, we strive for excellence in all areas of service - to our customers and to our shareholders. JON A. EDNEY CEO

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12 REPORT OF INDEPENDENT AUDITORS To the Board of Directors and Shareholders of CMUV Bancorp and Subsidiary Report on Financial Statements We have audited the accompanying consolidated financial statements of CMUV Bancorp and Subsidiary (the Company ), which comprise the statement of financial condition as of December 31, 2016 and 2015 and the related statements of income, comprehensive income, changes in shareholders' equity, and cash flows for the years then ended, and the related notes to the consolidatedd financial statements. Management s Responsibility for the Financial Statements Management is responsible for the preparation and fair presentation of these consolidatedd 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 relevantt 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 thesee 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 audit to obtain reasonable assurance about whether the consolidated financial statements are freee 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 statementss 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 thatt the audit evidence obtained is sufficient and appropriate to provide a basis for our audit opinion. Opinion In our opinion, the consolidated financial statementss referred to above present fairly, in all material respects, the financial position of CMUV Bancorp and Subsidiary as of December 31, 2016 and 2015, 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. Scottsdale, Arizona February 27,

13 CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION December 31, ASSETS Cash and due from banks $ 21,270,707 $ 18,901,020 Federal funds sold 655,000 1,275,000 Total cash and cash equivalents 21,925,707 20,176,020 Interest-bearing deposits in other financial institutions 897, ,000 Investment securities available-for-sale 881,788 1,115,773 Investment securities held-to-maturity 1,499,186 1,518,323 Loans: Construction and land development 6,512,713 8,023,421 Commercial real estate and other 91,663,328 79,053,534 Commercial and industrial 20,465,021 17,180,241 Consumer 72, ,952 Total loans 118,713, ,395,148 Deferred loan fees, net of costs (15,658) (81,146) Allowance for loan losses (1,484,796) (1,385,637) Net loans 117,212, ,928,365 Federal Home Loan Bank Stock, at cost 505, ,100 Premises and equipment 4,179,404 4,293,464 Deferred tax assets 800,311 1,397,822 Bank owned life insurance 3,657,575 2,099,039 Accrued interest and other assets 869, ,274 $ 152,429,437 $ 135,670, See accompanying notes.

14 CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (CONTINUED) LIABILITIES AND SHAREHOLDERS EQUITY December 31, LIABILITIES Deposits: Noninterest-bearing demand $ 31,785,800 $ 29,821,335 Savings, NOW and money market accounts 55,016,597 55,360,473 Time deposits under $250,000 28,163,257 18,661,612 Time deposits $250,000 and over 16,171,766 15,427,146 Total deposits 131,137, ,270,566 Other borrowings 3,010,000 - Mortgage payable 377, ,887 Capital leases 3,428 6,815 Accrued interest and other liabilities 656, ,917 Total liabilities 135,185, ,034,185 COMMITMENTS AND CONTINGENCIES (NOTE 10) SHAREHOLDERS' EQUITY Common stock, 10,000,000 shares authorized, no par value; shares issued and outstanding 2,169,609 in 2016 and 2,150,254 in ,879,700 16,828,255 Additional paid-in capital 592, ,603 Accumulated deficit (219,953) (1,730,168) Accumulated other comprehensive (loss) income: Unrealized loss on available-for-sale securities (12,965) (8,837) Unrealized gain on securities transferred from availablefor-sale securities to held-to-maturity securities 4,505 6,142 Total shareholders' equity 17,244,261 15,635,995 Total liabilities and shareholders' equity $ 152,429,437 $ 135,670, See accompanying notes.

15 CONSOLIDATED STATEMENTS OF INCOME Years Ended December 31, INTEREST INCOME Interest and fees on loans $ 6,852,239 $ 5,983,846 Interest income on investments 66,736 66,412 Interest income on deposits at other institutions 94,826 58,159 Interest on Federal funds sold and other 65,159 51,657 Total interest income 7,078,960 6,160,074 INTEREST EXPENSE Interest on savings deposits, NOW and money market accounts 290, ,018 Interest on time deposits 494, ,990 Interest on borrowed funds 42,902 19,738 Interest on mortgage payable 18,796 22,003 Total interest expense 846, ,749 Net interest income 6,232,284 5,358,325 Provision for loan losses 90,000 - NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 6,142,284 5,358,325 NONINTEREST INCOME Service charges, fees, and other 116, ,840 Gain on sale of loans 931, ,762 Gain on sale of other real estate owned - 31,957 1,048, ,559 NONINTEREST EXPENSE Salaries and employee benefits 2,208,846 2,086,299 Occupancy and equipment expenses 399, ,670 Other expenses 2,005,179 1,868,305 4,613,709 4,380,274 INCOME BEFORE PROVISION FOR INCOME TAXES 2,577,231 1,648,610 Provision for income taxes 1,067, ,987 NET INCOME 1,510,215 1,134,623 Preferred stock dividends - (15,450) Net income available to common shareholders $ 1,510,215 $ 1,119,173 EARNINGS PER SHARE - BASIC $ 0.70 $ 0.57 EARNINGS PER SHARE - DILUTED $ 0.69 $ See accompanying notes.

16 CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME Years Ended December 31, NET INCOME $ 1,510,215 $ 1,134,623 OTHER COMPREHENSIVE (LOSS) INCOME Change in unrealized loss on securities available-for-sale (4,128) (4,066) Reclassification adjustment for loss on sale of investments available-for-sale included in net income - 10,039 Unrealized losses on securities transferred from available-for-sale category to held-to-maturity (1,637) (1,639) Total other comprehensive (loss) income (5,765) 4,334 TOTAL COMPREHENSIVE INCOME $ 1,504,450 $ 1,138,957 CMUV BANCORP AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS EQUITY Preferred Stock Common Stock Additional Number of Number of Paid-In Shares Amount Shares Amount Capital Accumulated Deficit Accumulated Other Comprehensive Income (Loss) Total BALANCE, December 31, ,800 $1,780,880 1,632,803 $14,304,457 $546,103 $(2,849,341) $(7,029) $13,775,070 Net income ,134,623-1,134,623 Stock-based compensation , ,620 Proceeds from issuance of common stock, net of issuance cost ,451 2,523, ,523,798 Repurchase of preferred stock (1,800) (1,780,880) - - (19,120) - - (1,800,000) Dividends on preferred stock (15,450) - (15,450) Change in other comprehensive income, net of taxes ,334 4,334 BALANCE, December 31, ,150,254 16,828, ,603 (1,730,168) (2,695) 15,635,995 Net income ,510,215-1,510,215 Stock-based compensation , ,371 Proceeds from issuance of common stock, net of issuance cost ,355 51, ,445 Change in other comprehensive loss, net of taxes (5,765) (5,765) BALANCE, December 31, $ - 2,169,609 $ 16,879,700 $ 592,974 $ (219, 953) $ (8,460) $ 17,244, See accompanying notes.

17 CONSOLIDATED STATEMENTS OF CASH FLOWS Years Ended December 31, CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 1,510,215 $ 1,134,623 Adjustments to reconcile net income to net cash provided by operating activities Depreciation and amortization 234, ,531 Provision for loan losses 90,000 - Gain on the sale of loans (931,745) (521,762) Appreciation of bank owned life insurance (58,536) (48,245) Federal Home Loan Bank stock dividends (70,500) - Deferred taxes 597, ,178 Stock-based compensation 52,371 13,620 Loss on sale of securities - 10,039 Gain on the sale of other real estate owned - (31,957) Other items 289,833 (242,606) Net cash provided by operating activities 1,713,678 1,064,421 CASH FLOWS FROM INVESTING ACTIVITIES Increase in deposits in other financial institutions - (249,000) Purchase of securities available-for-sale - (1,035,518) Maturities of securities available-for-sale 216, ,791 Proceeds from sales of securities available-for-sale - 181,574 Purchase of securities held-to-maturity - (1,022,251) Net increase in loans (26,106,113) (19,098,758) Purchase of Federal Home Loan Bank stock - (43,600) Purchases of bank owned life insurance (1,500,000) (1,000,000) Proceeds from sale of loans 12,663,324 7,158,544 Proceeds from the sale of other real estate owned - 163,281 Additions to premises and equipment (89,282) (90,419) Net cash used in investing activities (14,815,901) (14,567,356) CASH FLOWS FROM FINANCING ACTIVITIES Increase in demand deposits and savings accounts 1,620,589 10,831,657 Increase in time deposits 10,246,265 9,080,010 Issuance of common stock 51,445 2,523,798 Repurchase of preferred stock - (1,800,000) Change in other borrowings, net 3,010,000 (7,500,000) Payments for mortgage payable (73,002) (69,797) Payments for capital lease obligations (3,387) (8,478) Dividends paid on preferred stock - (15,450) Net cash provided by financing activities 14,851,910 13,041,740 INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 1,749,687 (461,195) CASH AND CASH EQUIVALENTS, beginning of year 20,176,020 20,637,215 CASH AND CASH EQUIVALENTS, end of year $ 21,925,707 $ 20,176, See accompanying notes.

18 CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED) Years Ended December 31, SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION Interest paid $ 844,596 $ 794,807 Taxes paid $ 177,895 $ - SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES Change in unrealized gain on securities available-for-sale $ (4,128) $ 5,973 Amortization of securities transferred from available-for-sale category to held-to-maturity $ (1,637) $ (1,639) Transfer of loans to other real estate owned $ - $ 1,505, See accompanying notes.

19 Note 1 Summary of Significant Accounting Policies Principles of consolidation The December 31, 2016 consolidated financial statements include the accounts of CMUV Bancorp and its wholly-owned subsidiary, Community Valley Bank (the Bank ), collectively referred to herein as the Company. All significant intercompany transactions have been eliminated. CMUV Bancorp has no significant business activity other than its investment in the Bank. Accordingly, no separate financial information on CMUV Bancorp is provided. The December 31, 2015 financial statements are not consolidated. On January 4, 2016, the Board of Governors of the Federal Reserve System approved the formation of CMUV Bancorp, as a Bank Holding Company. As a result of the formation, each share of Bank common stock was exchanged for a share of Company common stock, resulting in no change in control. The financial statements present the Company s 2016 consolidated results comparatively to the Bank s 2015 results as there were no significant business activities in 2016 other than the Bank s operations. Nature of operations The Company has been incorporated in the State of California and organized as a single operating segment that operates three full-service offices in El Centro, Brawley and Palm Desert, California. The Company's primary source of revenue is providing loans to customers, who are predominately small and middlemarket businesses and individuals. Subsequent events Subsequent events are events or transactions that occur after the balance sheet date but before the consolidated financial statements are available to be issued. The Company recognizes in the consolidated financial statements the effects of all subsequent events that provide additional evidence about conditions that existed at the date of the balance sheet, including the estimates inherent in the process of preparing the consolidated financial statements. The Company s consolidated financial statements do not recognize subsequent events that provide evidence about conditions that did not exist at the date of the balance sheet but arose after the balance sheet date and before consolidated financial statements are available to be issued. The Company has evaluated subsequent events for recognition and disclosure through February 27, 2017, which is the date the consolidated financial statements were available to be issued. Use of estimates in the preparation of financial statements The preparation of consolidated 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 consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant changes in the near term relate to the determination of the allowance for loan losses and deferred tax assets. Cash and cash equivalents For purposes of reporting cash flows, cash and cash equivalents include cash, due from banks and federal funds sold. Generally, federal funds are sold for periods of less than ninety days. 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. These deposits are interest bearing. The Company was in compliance with its reserve requirements as of December 31, 2016 and The Company maintains amounts due from banks, which may exceed federally insured limits. The Company has not experienced any losses in such accounts. 17

20 Note 1 Summary of Significant Accounting Policies (continued) Investment securities Bonds, notes, and debentures for which the Company has the positive intent and ability to hold to maturity are reported at cost, adjusted for premiums and discounts that are recognized in interest income using the interest method over the period 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 an amount net of taxes 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 available-for-sale securities are recorded using the specific identification method. 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. Loans Loans receivable that management has the intent and ability to hold for the foreseeable future or until maturity or payoff are reported at their outstanding unpaid principal balances reduced by any charge-offs or specific valuation accounts and net of deferred fees or costs on originated loans, or unamortized premiums or discounts on purchased loans. Loan origination fees and certain direct origination costs are capitalized and recognized as an adjustment of the yield of the related loan. Amortization of deferred loan fees is discontinued when a loan is placed on nonaccrual status. Loans on which the accrual of interest has been discontinued are designated as nonaccrual loans. The accrual of interest on loans is discontinued when principal or interest is past due 90 days based on the contractual terms of the loan or when, in the opinion of management, there is reasonable doubt as to collectability. When loans are placed on nonaccrual status, all interest previously accrued but not collected is reversed against current period interest income. Income on nonaccrual loans is subsequently recognized only to the extent that cash is received and the loan's principal balance is deemed collectible. Interest accruals are resumed on such loans only when they are brought current with respect to interest and principal and when, in the judgment of management, the loans are estimated to be fully collectible as to all principal and interest. 18

21 Note 1 Summary of Significant Accounting Policies (continued) 19 CMUV BANCORP AND SUBSIDIARY 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 a loan balance is confirmed as uncollectable. 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. 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. Smaller balance, homogeneous loans are collectively evaluated for impairment. General reserves cover non-impaired loans and are based on a combination of historical and peer group 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 construction and land development, commercial real estate, commercial and industrial, and consumer loans. Relevant risk characteristics for these portfolio segments generally include debt service coverage, loan-to-value ratios, and financial performance on non-consumer loans and credit scores, debt-to income, collateral type, and loan-to-value ratios for consumer loans.

22 Note 1 Summary of Significant Accounting Policies (continued) Premises and equipment Land is carried at cost. Premises and equipment are carried at cost less accumulated depreciation and amortization. Depreciation is computed using the straight-line method over the estimated useful lives, which ranges from three to seven years for furniture and equipment and from one to fifteen years for buildings. Leasehold improvements are amortized using the straight-line method over the estimated useful lives of the improvements, or the 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. Federal Home Loan Bank ( FHLB ) stock The Company is a member of the FHLB system. Members are required to own a certain amount of stock based on the level of borrowings and other factors, and may invest in additional amounts. FHLB stock is carried at cost, classified as a restricted security, and periodically evaluated for impairment based on the ultimate recovery of par value. Both cash and stock dividends are reported as income. 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 balance sheet date, which is the cash surrender value. Advertising costs The Company expenses the costs of advertising in the period incurred. Total advertising expenses were approximately $12,000 and $26,000 in 2016 and 2015, 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. Other real estate owned is carried at the lower of the Company's carrying value of the property or its fair value, less estimated carrying costs and costs of disposition. Fair value is based on current appraisals less estimated selling costs. Any subsequent write-downs are charged against operating expenses and recognized as a valuation allowance. Operating expenses of such properties, net of related income, and gains and losses on their disposition are included in other operating expenses. 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. Loan sales and servicing of financial assets The Company originates Small Business Administration ("SBA") and United States Department of Agriculture ("USDA") loans for sale in the secondary market. Servicing rights are recognized separately when they are acquired through sale of loans. Servicing rights are initially recorded at fair value with the income effect recorded in gain on sale of loans. Fair value is based on a valuation model that calculates the present value of estimated future cash flows from the servicing assets. The valuation model uses assumptions that market participants would use in estimating cash flows from servicing assets such as the cost to service, discount rates, and prepayment speeds. The Company compares the valuation model inputs and results to published industry data in order to validate the model results and assumptions. 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. 20

23 Note 1 Summary of Significant Accounting Policies (continued) CMUV BANCORP AND SUBSIDIARY Servicing assets are evaluated for impairment based upon the fair value of the rights compared to the carrying amount. Impairment is determined by stratifying rights into groupings based on predominant risk characteristics, such as interest rate, loan type and investor type. For purposes of measuring impairment, the Company has identified each servicing asset with the underlying loan being serviced. A valuation allowance is recorded where the fair value is below the carrying amount of the asset. 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 in income. The fair values of servicing rights are subject to significant fluctuations as a result of changes in estimated and actual prepayment speeds and changes in the discount rates. Servicing fee income which is reported on the income statement in service charges, fees, and other, is recorded for fees earned on servicing loans. The fees are based on a contractual percentage of the outstanding principal and recorded as income when earned. The amortization of servicing rights and changes in the valuation allowance are netted against loan servicing income. There were no loans held-for-sale at December 31, 2016 and 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 on audit 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 losses on available-for-sale securities and the change in the unrealized holding gain remaining from the transfer of available-for-sale securities to the held-to-maturity category are the only components of accumulated other comprehensive income for the Company. 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. Such financial instruments are recorded in the consolidated financial statements when they are funded or related fees are incurred or received. Earnings Per Share ( EPS ) Basic EPS excludes dilution and is computed by dividing income available to common stockholders by the weighted-average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution that could occur if stock options were exercised resulting in the issuance of common stock that then shared in the earnings of the entity. 21

24 Note 1 Summary of Significant Accounting Policies (continued) Fair value measurement Fair value is the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Current accounting guidance establishes a fair value hierarchy, which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The guidance describes three levels of inputs that may be used to measure fair value: Level 1 Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date. Level 2 Significant other observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data. Level 3 Significant unobservable inputs that reflect a bank's own assumptions about the assumptions that market participants would use in pricing an asset or liability. 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 which an employee is required to provide services in exchange for the award, generally the vesting period. Reclassifications Certain reclassifications have been made in the 2015 financial statements to conform to the presentation used in These reclassifications had no impact of the Company's previously reported equity or net income. Recently issued accounting pronouncements In May 2014, the FASB issued ASU No , Revenue from Contracts with Customers (Topic 606). ASU amended existing guidance related to revenue from contracts with customers. This amendment supersedes and replaces nearly all existing revenue recognition guidance, including industry-specific guidance, establishes a new control-based revenue recognition model, changes the basis for deciding when revenue is recognized over time or at a point in time, provides new and more detailed guidance on specific topics, and expands and improves disclosures about revenue. In addition, this amendment specifies the accounting for some costs to obtain or fulfill a contract with a customer. Subsequently, the FASB issued ASU No , Deferral of the Effective Date, ASU No , Principal versus Agent Considerations (Reporting Revenue Gross versus Net), ASU No , Identifying Performance Obligations and Licensing, and ASU No , Narrow-Scope Improvements and Practical Expedients as additional amendments under Revenue From Contracts with Customers (Topic 606). These amendments are effective for public business entities for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period. Early application is permitted only as of annual reporting periods beginning after December 15, 2016, including interim reporting periods within that period. The amendments should be applied retrospectively to all periods presented or retrospectively with the cumulativeeffect recognized at the date of initial application. The Company is currently evaluating the impact of these new accounting standards on the consolidated financial statements. 22

25 Note 1 Summary of Significant Accounting Policies (continued) CMUV BANCORP AND SUBSIDIARY In June 2014, the FASB issued ASU No , Compensation Stock Compensation (Topic 718) Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved After the Requisite Service Period. ASU requires that a performance target that affects vesting and that could be achieved after the requisite service period be treated as a performance condition. A reporting entity should apply existing guidance in Topic 718, Compensation Stock Compensation, as it relates to awards with performance conditions that affect vesting to account for such awards. The total amount of compensation cost recognized during and after the requisite service period should reflect the number of awards that are expected to vest and should be adjusted to reflect those awards that ultimately vest. The requisite service period ends when the employee can cease rendering service and still be eligible to vest in the award if the performance target is achieved. The amendments are effective for annual and interim reporting periods beginning after December 15, Early adoption is permitted. The adoption of ASU No did not have a material impact on the Company s consolidated financial statements. In August 2014, the FASB issued ASU No , Receivables Troubled Debt Restructurings by Creditors (Subtopic ): Classification of Certain Government-Guaranteed Mortgage Loans Upon Foreclosure. ASU requires a mortgage loan be derecognized and a separate other receivable be recognized upon foreclosure if the loan has a government guarantee that is not separable from the loan before foreclosure, the creditor has the intent to convey the real estate property to the guarantor and make a claim on the guarantee at the time of foreclosure and the creditor has the ability to recover under that claim and any amount of the claim that is determined on the basis of the fair value of the real estate is fixed at that time of foreclosure. Upon foreclosure, the separate other receivable should be measured based on the amount of the loan balance (principal and interest) expected to be recovered from the guarantor. The amendments are effective for annual and interim reporting periods beginning after December 15, Early adoption is permitted if the amendments under ASU have been adopted. The adoption of ASU No did not have a material impact on the Company s consolidated financial statements. In January 2016, the FASB issued ASU No , Financial Instruments Overall (Subtopic ): Recognition and Measurement of Financial Assets and Liabilities. ASU requires equity investments (except those accounted for under the equity method of accounting or those that result in consolidation of the investee) to be measured at fair value with changes in fair value recognized in net income. It requires public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes. It requires separate presentation of financial assets and financial liabilities by measurement category and form of financial asset (i.e. securities or loans and receivables). It eliminates the requirement for public business entities to disclose the method(s) and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost. These amendments are effective for public business entities for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. The new guidance permits early adoption of the own credit provision. In addition, the new guidance permits early adoption of the provision that exempts private companies from having to disclose fair value information about financial instruments measured at amortized cost. The Company is currently evaluating the impact of ASU on the consolidated financial statements. 23

26 Note 1 Summary of Significant Accounting Policies (continued) In February 2016, the FASB issued ASU No , Leases (Topic 842). ASU requires lessees recognize the following for all leases (with the exception of short-term leases) at the commencement date (1) A lease liability, which is a lessee s obligation to make lease payments arising from a lease, measured on a discounted basis; and (2) A right-of-use asset, which is an asset that represents the lessee s right to use, or control the use of, a specified asset for the lease term. Under the new guidance, lessor accounting is largely unchanged. Certain targeted improvements were made to align, where necessary, lessor accounting with the lessee accounting model and Topic 606, Revenue from Contracts with Customers. These amendments are effective for public business entities for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early application is permitted for all public business entities. Lessees (for capital and operating leases) and lessors (for sales-type, direct financing and operating leases) must apply a modified retrospective transition approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the consolidated financial statements. The modified retrospective approach would not require any transition accounting for leases that expired before the earliest comparative period presented. Lessees and lessors may not apply a full retrospective transition approach. The Company is currently evaluating the impact of ASU on the consolidated financial statements. In June 2016, the FASB issued ASU No , Financial Instruments Credit Losses (Topic 326). ASU replaces the current incurred loss model with an expected loss model, which is referred to as the current expected credit loss (CECL) model. The CECL model is applicable to the measurement of credit losses on financial assets measured at amortized cost, including loan receivables, held-to-maturity debt securities, and reinsurance receivables. It also applied to off-balance sheet credit exposures not accounted for as insurance (loan commitments, standby letters of credit, financial guarantees, and other similar instruments) and net investments in leases recognized by a lessor. These amendments are effective for public business entities that do not meet the definition of an SEC filer for fiscal years beginning after December 15, 2020, including interim periods within those fiscal years. For calendar year-end public business entities that are not SEC filers, it is effective for March 31, 2021 interim financial statements. All entities may early adopt for fiscal years beginning after December 15, 2018, including interim periods in those fiscal years. For debt securities with other-than-temporary impairment (OTTI), the guidance will be applied prospectively. Existing purchased credit impaired (PCI) assets will be grandfathered and classified as purchased credit deteriorated (PCD) assets at the date of adoption. The asset will be grossed up for the allowance for expected credit losses for all PCD assets at the date of adoption and will continue to recognize the noncredit discount in interest income based on the yield of such assets as of the adoption date. Subsequent changes in expected credit losses will be recorded through the allowance. For all other assets within the scope of CECL, a cumulative-effect adjustment will be recognized in retained earnings as of the beginning of the first reporting period in which the guidance is effective. The Company is currently evaluating the impact of ASU on the consolidated financial statements. 24

27 Note 2 Investment Securities Debt and equity securities have been classified in the statements of condition according to management's intent. The carrying amount of securities and their approximated fair values were as follows: December 31, 2016 Gross Gross Amortized Unrealized Unrealized Fair Available-for-Sale Securities Cost Gains Losses Value Mortgage-Backed Securities $ 894,753 $ - $ (12,965) $ 881,788 Held-to-Maturity Securities Municipal Securities $ 1,499,186 $ 26,493 $ (660) $ 1,525,019 December 31, 2015 Gross Gross Amortized Unrealized Unrealized Fair Available-for-Sale Securities Cost Gains Losses Value Mortgage-Backed Securities $ 1,124,610 $ - $ (8,837) $ 1,115,773 Held-to-Maturity Securities Municipal Securities $ 1,518,323 $ 56,974 $ - $ 1,575,297 The Company has not pledged any investment securities as of December 31, 2016 and As of December 31, 2016, investment securities available-for-sale consists of two mortgage-backed securities with fair values of $881,788 that mature between October 2026 and August The investment securities held-tomaturity consists of five municipal securities with fair values of $1,525,019 that mature between October 2019 and May As of December 31, 2015, investment securities available-for-sale consists of three mortgage-backed securities with fair values of $1,115,773 that mature between October 2026 and November The investment securities held-to-maturity consists of five municipal securities with fair values of $1,575,297 that mature between October 2019 and May In May 2011, the Company transferred the one municipal security it held from the available-for-sale category to the held-to-maturity category in order to better recognize the intent of the investment. The accounting guidance for transfers such as this requires the Company to continue to report the unrealized holding gain or loss at the date of the transfer as a separate component of shareholders' equity and amortize that amount over the remaining life of the security as an adjustment to the investment s amortized cost in a manner consistent with the amortization of any premium or discount. As of December 31, 2016, the security had a gross unrealized gain of $27,841, which includes a $4,505 gain included as a component of other comprehensive income. As of December 31, 2015, the security had a gross unrealized gain of $41,396, which includes a $6,142 gain included as a component of other comprehensive income. 25

28 Note 2 Investment Securities (continued) There were no sales of securities available-for-sale for the year ended December 31, There was $10,039 of realized gross losses on sales of securities available-for-sale for the year ended December 31, At December 31, 2016, the Company had no securities that had been in a continuous loss position for greater than twelve months. At December 31, 2015, the Company had one security with a fair market value of $181,296 with an unrealized loss of $1,527 that has been in a continuous loss position for greater than twelve months. These securities are guaranteed by the U.S. Government and therefore no credit loss is expected. As management does not intend to sell these securities, and it is likely that they will not be required to sell the securities before their anticipated recovery, no declines are deemed to be other-than-temporary. Note 3 Loans The Company's loan portfolio consists primarily of loans to borrowers within Imperial and Riverside Counties in California. Although the Company seeks to avoid concentrations of loans to a single industry or based upon a single class of collateral, real estate and real estate associated businesses are among the principal industries in the Company's market area and, as a result, the Company's loan and collateral portfolios are, to some degree, concentrated in those industries. The Company pledged part of the loan portfolio as collateral for Federal Home Loan Bank ("FHLB") Line of Credit. The loans pledged to FHLB totaled $25,652,000 and $18,222,000 at December 31, 2016 and 2015, respectively. A summary of the changes in the allowance for loan losses as of December 31 follows: Beginning balance $ 1,385,637 $ 1,388,366 Additions to the allowance charged to expense 90,000 - Loans charged-off (1,367) (54,859) Recoveries on loans charged-off 10,526 52,130 Ending balance $ 1,484,796 $ 1,385,637 26

29 Note 3 Loans (continued) The following table presents the activity in the allowance for loan losses for 2016, and the recorded investment in loans and impairment method as of December 31, 2016 by portfolio segment: Construction Commercial and Land Real Estate Commercial December 31, 2016 Development & Other & Industrial Consumer Total ALLOWANCE FOR LOAN LOSSES Beginning of year $ 130,615 $ 836,843 $ 273,138 $ 145,041 $ 1,385,637 Provisions (49,202) 309,827 (27,851) (142,774) 90,000 Charge-offs (1,367) (1,367) Recoveries ,526-10,526 End of year $ 81,413 $ 1,146,670 $ 255,813 $ 900 $ 1,484,796 Reserves: Specific $ - $ - $ - $ - $ - General 81,413 1,146, , ,484,796 $ 81,413 $ 1,146,670 $ 255,813 $ 900 $ 1,484,796 Loans Evaluated for Impairment: Individually $ - $ - $ 175,000 $ - $ 175,000 Collectively 6,512,713 91,663,328 20,290,021 72, ,538,353 $ 6,512,713 $ 91,663,328 $ 20,465,021 $ 72,291 $ 118,713,353 The following table presents the activity in the allowance for loan losses for 2015 and the recorded investment in loans and impairment method as of December 31, 2015 by portfolio segment: Construction Commercial and Land Real Estate Commercial December 31, 2015 Development & Other & Industrial Consumer Total ALLOWANCE FOR LOAN LOSSES Beginning of year $ 130,615 $ 786,971 $ 325,925 $ 144,855 $ 1,388,366 Provisions Charge-offs - - (54,804) (55) (54,859) Recoveries - 49,872 2, ,130 End of Year $ 130,615 $ 836,843 $ 273,138 $ 145,041 $ 1,385,637 Reserves: Specific $ - $ - $ 173,842 $ - $ 173,842 General 130, ,843 99, ,041 1,211,795 $ 130,615 $ 836,843 $ 273,138 $ 145,041 $ 1,385,637 Loans Evaluated for Impairment: Individually $ - $ 134,483 $ 1,516,357 $ - $ 1,650,840 Collectively 8,023,421 78,919,051 15,663, , ,744,308 $ 8,023,421 $ 79,053,534 $ 17,180,241 $ 137,952 $ 104,395,148 27

30 Note 3 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, non-homogeneous loans such as commercial real estate, and commercial and industrial loans. This analysis is performed on an ongoing basis as new information is obtained. The 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. The risk category of loans by class of loans was as follows as of December 31, 2016 and 2015: Special December 31, 2016 Pass Mention Substandard Impaired Total Construction and land development $ 6,512,713 $ - $ - $ - $ 6,512,713 Commercial real estate and other 90,411, , ,327-91,663,328 Commercial and industrial 19,319, , ,000 20,465,021 Consumer 72, ,291 $ 116,315,673 $ 290,437 $ 1,932,243 $ 175,000 $ 118,713,353 Special December 31, 2015 Pass Mention Substandard Impaired Total Construction and land development $ 8,023,421 $ - $ - $ - $ 8,023,421 Commercial real estate and other 76,557, ,221 2,064, ,483 79,053,534 Commercial and industrial 15,513, ,310 1,516,357 17,180,241 Consumer 137, ,952 $ 100,232,236 $ 297,221 $ 2,214,851 $ 1,650,840 $ 104,395,148 28

31 Note 3 Loans (continued) Past due and nonaccrual loans presented by loan class were as follows as of December 31, 2016 and 2015: Still Accruing Days Over 90 Days December 31, 2016 Past Due Past Due Nonaccrual Commercial and industrial $ 210,357 $ - $ 175,000 Gross loans $ 210,357 $ - $ 175,000 Still Accruing Days Over 90 Days December 31, 2015 Past Due Past Due Nonaccrual Commercial real estate and other $ - $ - $ 134,483 Commercial and industrial - - 1,516,357 Gross loans $ - $ - $1,650,840 Information relating to individually impaired loans presented by class of loans was as follows as of December 31, 2016 and 2015: Unpaid Average Interest Principal Recorded Related Recorded Income December 31, 2016 Balance Investment Allowance Investment Recognized With no Related Allowance Recorded Commercial and industrial $ 350,000 $ 175,000 $ - $ 175,000 $ - Unpaid Average Interest Principal Recorded Related Recorded Income December 31, 2015 Balance Investment Allowance Investment Recognized With no Related Allowance Recorded Commercial real estate and other $ 181,310 $ 134,483 $ - $ 218,490 $ - Commercial and industrial 1,098, , ,525 6,227 With an Allowance Recorded Commercial and industrial 955, , , ,984 61,048 $ 2,235,811 $ 1,650,840 $ 173,842 $ 1,853,999 $ 67,275 There was no interest income recognized on the cash basis in Interest income included above recognized on the cash basis amounted to $67,275 in The Company has no loans with terms that have been modified in troubled debt restructurings as of December 31, 2016 and

32 Note 3 Loans (continued) The Company purchases the guaranteed portion of SBA loans from the originating institution at a premium. At December 31, 2016 and 2015, the Company had approximately $6,053,000 and $3,131,000, respectively, in purchased SBA loans. The unamortized premium related to the purchase of these loans was approximately $368,000 and $206,000 as of December 31, 2016 and 2015, respectively. The Company also originates loans for sale to governmental agencies and institutional investors. At December 31, 2016 and 2015, the Company was servicing approximately $38,589,000 and $30,514,000, respectively, in SBA and USDA loans previously sold. The carrying value of servicing rights associated with these loans was approximately $321,000 and $284,000 as of December 31, 2016 and 2015, respectively. As of December 31, 2016 and 2015, the Company has recorded no impairment for servicing rights. Note 4 Premises and Equipment A summary of premises and equipment as of December 31 follows: Land $ 1,238,049 $ 1,238,049 Building and leasehold improvements 3,959,319 3,952,519 Furniture, fixtures, and equipment 935, ,504 Software 405, ,653 6,538,019 6,448,725 Less accumulated depreciation and amortization (2,358,615) (2,155,261) $ 4,179,404 $ 4,293,464 Depreciation expense totaled $203,342 and $212,288 for the years ending December 31, 2016 and 2015, respectively. The Company owns its administrative offices and two branch locations as of December 31, In September 2014, the Company entered into a lease agreement for a new branch located in Palm Desert, California. The lease expires in November 2017, and the Company, at its option, has the right to renew the lease for two additional threeyear terms. Future minimum lease payments under this lease are as follows: Year Ending December 31, 2017 $ 37,708 Future minimum lease payments $ 37,708 Total rent expense associated with the leased space described was approximately $45,000 and $40,000 for the years ended December 31, 2016 and 2015, respectively. 30

33 Note 5 Deposits At December 31, 2016, the scheduled maturities of time deposits are as follows: Due in one year or less $ 31,779,956 Due in over one year and less than three years 12,152,643 Due in over three years 402,424 $ 44,335,023 Note 6 Borrowing Arrangements The Company may borrow up to $5.5 million overnight on an unsecured basis from two of its correspondent banks. As of December 31, 2016 and 2015, no amounts were outstanding under this arrangement. The Company has a line with the Federal Home Loan Bank of San Francisco ("FHLBSF") secured by certain assets of the Company. As of December 31, 2016 and 2015, this line had a total borrowing capacity of approximately $21,296,000 and $15,649,000, respectively, and was collateralized by loans with a carrying value of approximately $25,652,000 and $18,222,000, respectively. As of December 31, 2015, the Company did not have any advances outstanding. As of December 31, 2016, the Company had advances outstanding under this agreement as follows: Interest Maturity Amount Rate Date $ 1,500, % 2/12/2021 1,500, % 3/27/2017 $ 3,000,000 On May 2, 2011, the Company entered into an agreement to purchase the property that is the site of the El Centro Branch and Administrative Offices for $1,530,000. One million of the price was financed by the seller through a mortgage note that provides for principal and interest at a rate of 4.5% to be paid by the Company monthly in the amount of $7,650. These payments began on June 2, 2011 and continue until February 1, Additional principal pay downs were made on this loan in May 2012 for $175,000 and August 2014 for $100,000. As of December 31, 2016 and 2015, the principal balance on this mortgage note totaled $377,885 and $450,887, respectively. The following is a summary of principal maturities payable by the Company on the mortgage note during the next five years: Principal Year Payment 2017 $ 76, , , , , $ 377,885

34 Note 6 Borrowing Arrangements (continued) On November 1, 2016, the Company entered into an agreement with a director to advance up to $100,000 to the Company. The agreement provides for a single payment of all principal and accrued interest at a rate of 4.5% be paid on November 1, 2017, the maturity date of the agreement. As of December 31, 2016, the Company had borrowed $10,000 under this agreement included in other borrowings. Note 7 Income Taxes The provisions for income taxes included in the statements of operations consist of the following: Current: Federal $ 439,194 $ (19,191) State 30,000 1, ,194 (18,191) Deferred Federal 210, ,451 State 386, , , ,178 $ 1,067,016 $ 513,987 Deferred taxes are a result of differences between income tax accounting and generally accepted accounting principles with respect to income and expense recognition. The following is a summary of the components of the net deferred tax asset accounts recognized in the accompanying statements of financial condition at December 31: Deferred Tax Assets: Pre-opening expenses $ 232,000 $ 272,000 Allowance for loan losses due to tax limitations 368, ,000 Stock-based compensation 56,000 84,000 Operating loss carryforwards 71, ,000 Other items 323, ,822 1,050,311 1,573,822 Deferred Tax Liabilities: Other items (250,000) (176,000) (250,000) (176,000) Net Deferred Tax Assets $ 800,311 $ 1,397,822 32

35 Note 7 Income Taxes (continued) A valuation allowance is required for deferred tax assets if, based on available evidence, it is more-likely-than-not that all or some portion of the asset will not be realized due to the inability to generate sufficient taxable income to use the benefit of the deferred tax asset. After evaluating the positive and negative evidence associated with the deferred tax asset, including the consideration of the Company s cumulative earnings over the recent three-year period, the Company determined that no valuation allowance was necessary at December 31, 2016 and The Company has net operating loss carryforwards of approximately $990,000 for California franchise tax purposes. California net operating loss carryforwards, to the extent not used, will expire in The Company records interest and penalties related to uncertain tax positions as part of income tax expense. There was no penalty or interest expense recorded as of December 31, 2016 and A comparison of the federal statutory income tax rates to the Company's effective income tax rates at December 31 follows: Amount Rate Amount Rate Tax expense at statutory rate $ 876, % $ 560, % State franchise tax, net of federal benefit 184, % 117, % Other items 7, % (163,013) -9.9% Actual tax expense $ 1,067, % $ 513, % The Company is subject to Federal income tax and franchise tax of the State of California. Income tax returns for the years ended December 31, 2015, 2014, and 2013 are open to audit by the federal authorities and income tax returns for the years ended December 31, 2015, 2014, 2013, and 2012 are open to audit by California authorities. Note 8 Other Expenses Other expenses for the years ended December 31 are comprised of the following: Data processing $ 513,584 $ 453,813 Loan broker fees 157,113 6,025 Director committee fees 220, ,000 Supervisory assessments 100,164 38,009 Other 1,014,220 1,206,458 $ 2,005,179 $ 1,868,305 33

36 Note 9 Earnings Per Share ( EPS ) The following is a reconciliation of net income and shares outstanding to the income available to common shareholders and number of shares used to compute EPS: Income Shares Income Shares Net income as reported $ 1,510,215 - $ 1,134,623 - Preferred stock dividend and accretion - - (15,450) - Shares outstanding at year end - 2,169,609-2,150,254 Impact of weighting shares issued during the year - (9,189) - (176,508) Used in basic EPS 1,510,215 2,160,420 1,119,173 1,973,746 Dilutive effect of outstanding stock options - 33,801-27,296 Used in diluted EPS $ 1,510,215 2,194,221 $ 1,119,173 2,001,042 There were no antidilutive stock options for 2016 and Note 10 Commitments and Contingencies In the ordinary course of business, the Company enters into financial commitments to meet the financing needs of its customers. These financial commitments include commitments to extend credit and standby letters of credit. Those instruments involve to varying degrees, elements of credit, and interest rate risk not recognized in the Company's consolidated financial statements. The Company's exposure to loan loss in the event of nonperformance on commitments to extend credit and standby letters of credit is represented by the contractual amount of those instruments. The Company uses the same credit policies in making commitments as it does for loans reflected in the consolidated financial statements. As of December 31, 2016 and 2015, the Company had the following outstanding financial commitments whose contractual amount represents credit risk: Commitments to extend credit $ 11,609,402 $ 6,950,774 Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Since many of the commitments are expected to expire without being drawn upon, the total amounts do not necessarily represent future cash requirements. The Company evaluates each client's credit worthiness on a case-by-case basis. The amount of collateral obtained if deemed necessary by the Company is based on management's credit evaluation of the customer. The majority of the Company's commitments to extend credit generally are secured by real estate. 34

37 Note 10 Commitments and Contingencies (continued) The Company is periodically a party to various legal actions normally associated with financial institutions, the aggregate effect of which, in management s and legal counsel s opinion, would not be material to the Company s financial condition. Note 11 Related-Party Transactions In the ordinary course of business, the Company has granted loans to certain executive officers and directors and the companies with which they are associated. In the Company's opinion, all loans and loan commitments to such parties are made on substantially the same terms including interest rates and collateral, as those prevailing at the time of comparable transactions with other persons. The total outstanding balance of these loans at December 31, 2016 and 2015 were approximately $1,660,000. Deposits from certain officers and directors and the companies with which they are associated held by the Company at December 31, 2016 and 2015 amounted to approximately $7,291,000 and $5,716,000, respectively. Note 12 Stock Option Plan In 2016, the Board of Directors and shareholders of the Company approved the 2016 Equity Incentive Plan (the Plan ), which replaced the expired 2007 Stock Option Plan. Under the terms of the Plan, employees may be granted both nonstatutory and incentive stock options, stock appreciation rights, restricted stock and restricted stock units. Directors and consultants may be granted nonstatutory stock options, stock appreciation rights, restricted stock and restricted stock units. The Plan provides for a maximum of 400,000 shares of common stock be available for grant. Nonstatutory and incentive stock options may be exercised at a price not less than 100% of the fair market value of the stock on the date of the grant, expire no later than ten years from the date of the grant and vest in accordance with the vesting schedule specified in the Award Agreement. The Plan provides for accelerated vesting at the discretion of the Board of Directors. Stock appreciation rights have a base price not less than 100% of the fair market value of the stock on the date of the grant, expire no later than ten years from the date of the grant and vest in accordance with the vesting schedule specified in the Award Agreement. The Company recognized stock-based compensation cost of $52,371 and $13,620 in 2016 and 2015, respectively. The fair value of each option grant was estimated on the date of grant using the Black-Scholes option pricing model with the following assumptions presented below: Expected volatility 35% 30% Expected term 6.5 Years 6.5 Years Expected dividends None None Risk free rate 2.01% 1.51% % Weighted-average grant date fair value $ 2.75 $ $

38 Note 12 Stock Option Plan (continued) Since the Company has a limited amount of historical stock activity the expected volatility is based on the historical volatility of similar banks that have a longer trading history. The expected term represents the estimated average period of time that the options remain outstanding. Since the Company does not have sufficient historical data on the exercise of stock options, the expected term is based on the "simplified" method that measures the expected term as the average of the vesting period and the contractual term. The risk free rate of return reflects the grant date interest rate offered for zero coupon U.S. Treasury bonds over the expected term of the options. A summary of the status of the Company's stock option plan as of December 31, 2016 and 2015 and changes during the years then ended is presented below: Weighted- Weighted- Average Average Remaining Aggregate Exercise Contractual Intrinsic December 31, 2016 Shares Price Term Value Outstanding at beginning of year 104,085 $ 4.84 Granted 40, Exercised (9,355) 5.50 Forfeited/expired (98) 5.00 Outstanding at end of year 135,226 $ Years $ 689,689 Options exercisable 110,551 $ Years $ 537,773 Weighted- Weighted- Average Average Remaining Aggregate Exercise Contractual Intrinsic December 31, 2015 Shares Price Term Value Outstanding at beginning of year 108,763 $ 4.75 Granted 10, Exercised (12,400) 4.22 Forfeited/expired (2,778) 4.28 Outstanding at end of year 104,085 $ Years $ 504,168 Options exercisable 88,225 $ Years $ 430,025 36

39 Note 12 Stock Option Plan (continued) The total intrinsic value of the options exercised during the year ended December 31, 2016 and 2015 were approximately $56,018 and $61,408, respectively. As of December 31, 2016, there was approximately $80,471 of total unrecognized compensation cost related to the outstanding stock options that will be recognized over a weighted-average period of 2.4 years. During the year ended December 31, 2016, the Company issued 10,000 shares of restricted stock, which vest over a period of five years. As of December 31, 2016, there was approximately $52,200 of total unrecognized compensation cost related to the outstanding restricted stock. Note 13 Fair Value Measurements The following is a description of valuation methodologies used for assets and liabilities recorded at fair value: Securities The fair values of securities available-for-sale are determined by obtaining quoted prices on nationally recognized securities exchanges (Level 1) or matrix pricing, which is a mathematical technique used widely in the industry to value debt securities without relying exclusively on quoted prices for specific securities but rather by relying on the securities' relationship to other benchmark quoted securities (Level 2). Collateral-dependent impaired loans The Company does not record loans at fair value on a recurring basis. However, from time to time, fair value adjustments are recorded on these loans to reflect partial write-downs, through charge-offs or specific reserve allowances, that are based on the fair value estimates of the underlying collateral. The fair value estimates for collateral-dependent impaired loans are generally based on recent real estate appraisals or broker opinions, obtained from independent third-parties, which are frequently adjusted by management to reflect current conditions and estimated selling costs (Level 3). The following table provides the hierarchy and fair value for each major category of assets and liabilities measured at fair value at December 31, 2016: Fair Value Measurements as of December 31, 2016 Using Level 1 Level 2 Level 3 Total Assets Measured at Fair Value on a Recurring Basis: Securities available-for-sale $ - $ 881,788 $ - $ 881,788 Assets Measured at Fair Value on a Nonrecurring Basis: Impaired loans $ - $ - $ 175,000 $ 175,000 The specific reserves for collateral-dependent loans are based on the fair value of the collateral less estimated costs to sell. For the year ended December 31, 2016, there were no specific reserves for impaired loans. 37

40 Note 13 Fair Value Measurements (continued) The following table provides the hierarchy and fair value for each major category of assets and liabilities measured at fair value at December 31, 2015: Fair Value Measurements as of December 31, 2015 Using Level 1 Level 2 Level 3 Total Assets Measured at Fair Value on a Recurring Basis: Securities available-for-sale $ - $ 1,115,773 $ - $ 1,115,773 Assets Measured at Fair Value on a Nonrecurring Basis: Impaired loans $ - $ - $ 1,650,840 $ 1,650,840 The specific reserves for collateral-dependent loans are based on the fair value of the collateral less estimated costs to sell. For the year ended December 31, 2015, specific reserves of $173,842 were calculated for impaired loans with an aggregate carrying amount of $816,526. There were no transfers of assets between Level 1 and Level 2 valuation measurements during the years ended December 31, 2016 and Quantitative information about the Company's nonrecurring Level 3 fair value measurements as of December 31, 2016 and 2015 is as follows: Weighted- Fair Value Valuation Unobservable Average December 31, 2016 Amount Technique Input Range Adjustment Impaired loans $ 175,000 Discounted Collateral 10% 10.0% Appraisals Discounts Fair Value Valuation Unobservable Average December 31, 2015 Amount Technique Input Range Adjustment Impaired loans $ 1,650,840 Discounted Collateral 0-25% 12.5% Appraisals Discounts 38

41 Note 14 Fair Value of Financial Instruments The fair value of a financial instrument is the amount at which the asset or obligation could be exchanged in a current transaction between willing parties, other than in a forced or liquidation sale. Fair value estimates are made at a specific point in time based on relevant market information and information about the financial instrument. These estimates do not reflect any premium or discount that could result from offering for sale at one time the entire holdings of a particular financial instrument. Because no market value exists for a significant portion of the financial instruments, fair value estimates are based on judgments regarding the current interest rate environment and future expected loss experience, economic conditions, cash flows and risk characteristics of various financial instruments, and other factors. These estimates are subjective in nature, involve uncertainties and matters of judgment and, therefore, cannot be determined with precision. Changes in assumptions could significantly affect the estimates. Fair value estimates are based on financial instruments both on and off the balance sheet without attempting to estimate the value of anticipated future business, and the value of assets and liabilities that are not considered financial instruments. Additionally, tax consequences related to the realization of the unrealized gains and losses can have a potential effect on fair value estimates and have not been considered in many of the estimates. The following methods and assumptions were used by the Company in estimating fair values of financial instruments: Financial assets The carrying amount of cash, short term investments, due from customers on acceptances, and bank acceptances outstanding are considered to approximate fair value. Short-term investments include federal funds sold and interest-bearing deposits with other banks. The determination of the fair value of investment securities is discussed in Note 2 and Note 13. The fair value of collateral dependent loans is discussed in Note 13. The carrying amount of loans, net of the allowance for loan losses is estimated to approximate fair value for purposes of this disclosure. The fair value of loans as estimated in this manner does not necessarily represent an exit price. Financial liabilities The carrying amounts of deposit liabilities payable on demand, and other borrowed funds are estimated to approximate fair value. For fixed maturity deposits, fair value is estimated by discounting estimated future cash flows using currently offered rates for deposits of similar remaining maturities. The fair value of long-term debt is based on rates currently available to the Company for debt with similar terms and remaining maturities. Off-balance sheet financial instruments The fair value of commitments to extend credit and standby letters of credit is estimated using the fees currently charged to enter into similar agreements. The fair value of these financial instruments is not material. 39

42 Note 14 Fair Value of Financial Instruments (continued) The fair value hierarchy level and estimated fair values of the Company's significant financial instruments are as follows as of December 31, 2016 and 2015 (dollars in thousands): Fair Value Carrying Fair Carrying Fair Hierarchy Amount Value Amount Value Assets Cash and cash equivalents Level 1 $ 21,926 $ 21,926 $ 20,176 $ 20,176 Interest-bearing deposits in other institutions Level Investment securities available-for-sale Level ,116 1,116 Investment securities held-to-maturity Level 2 1,499 1,525 1,518 1,575 Loans, net Level 3 117, , , ,928 Federal Home Loan Bank stock Level Bank owned life insurance Level 2 3,658 3,658 2,099 2,099 Liabilities Noninterest-bearing deposits Level 1 31,786 31,786 29,821 29,821 Interest-bearing deposits Level 2 99,352 99,352 89,449 89,449 Federal Home Loan Bank borrowings Level 2 3,000 3, Note 15 Regulatory Matters The Company is subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company's consolidated financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company must meet specific capital guidelines that involve quantitative measures of the Company's assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. The Company's capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. Quantitative measures established by regulation to ensure capital adequacy require the Company to maintain minimum amounts and ratios (set forth in the table below) of total and Tier 1 capital (as defined in the regulations) to risk-weighted assets (as defined), and of Tier 1 capital (as defined) to average assets (as defined). Management believes, as of December 31, 2016, that the Company meets all capital adequacy requirements to which it is subject. As of December 31, 2016, the most recent notification from the FDIC categorized the Company as well-capitalized under the regulatory framework for prompt corrective action (there are no conditions or events since that notification that management believes have changed the Company's category). 40

43 Note 15 Regulatory Matters (continued) To be categorized as well-capitalized, the Company must maintain minimum ratios as set forth in the table below. The following table also sets forth the Company's actual capital amounts and ratios (dollar amounts in thousands): For Capital Adequacy Purposes Amount of Capital Required To Be Well- Capitalized Under Prompt Corrective Actual Provisions As of December 31, 2016 Amount Ratio Amount Ratio Amount Ratio Total capital (to riskweighted assets) Consolidated $ 18, % $ 8, % N/A N/A Bank $ 18, % $ 8, % $ 10, % Tier 1 capital (to risk-weighted assets) Consolidated $ 17, % $ 6, % N/A N/A Bank $ 17, % $ 6, % $ 8, % Common equity Tier 1 Capital (to risk-weighted assets) Consolidated $ 17, % $ 4, % N/A N/A Bank $ 17, % $ 4, % $ 7, % Tier 1 capital (to average assets) Consolidated $ 17, % $ 5, % N/A N/A Bank $ 17, % $ 5, % $ 7, % As of December 31, 2015 Total capital (to riskweighted assets) Bank $ 16, % $ 8, % $ 10, % Tier 1 capital (to risk-weighted assets) Bank $ 15, % $ 6, % $ 8, % Common equity Tier 1 Capital (to risk-weighted assets) Bank $ 15, % $ 4, % $ 7, % Tier 1 capital (to average assets) Bank $ 15, % $ 5, % $ 6, % 41

44 Note 15 Regulatory Matters (continued) The California Financial Code provides that a bank may not make a cash distribution to its shareholders in excess of the lesser of the Company's undivided profits or the Company's net income for its last three fiscal years less the amount of any distribution made to the Company's shareholders during the same period. The Federal Reserve and the Federal Deposit Insurance Corporation approved final capital rules in July 2013, which substantially amend the existing capital rules for banks. These new rules reflect, in part, certain standards initially adopted by the Basel Committee on Banking Supervision in December 2010 (which standards are commonly referred to as Basel III ) as well as requirements contemplated by the Dodd-Frank Act. Under the new capital rules, the Company will be required to meet certain minimum capital requirements that differ from current capital requirements. The rules implement a new capital ratio of common equity Tier 1 capital to riskweighted assets. Common equity Tier 1 capital generally consists of retained earnings and common stock, subject to certain adjustments. The Company will also be required to establish a conservation buffer, consisting of a common equity Tier 1 capital amount equal to 2.5% of risk-weighted assets to be phased in by An institution that does not meet the conservation buffer will be subject to restrictions on certain activities including payment of dividends, stock repurchases, and discretionary bonuses to executive officers. The prompt corrective action rules are modified to include the common equity Tier 1 capital ratio and to increase the Tier 1 capital ratio requirements for the various thresholds. For example, the requirements for the Company to be considered well-capitalized under the rules will be a 5.0% leverage ratio, a 6.5% common equity Tier 1 capital ratio, an 8.0% Tier 1 capital ratio, and a 10.0% total capital ratio. To be adequately capitalized, those ratios are 4.0%, 4.5%, 6.0%, and 8.0%, respectively. The rules modify the manner in which certain capital elements are determined. The rules make changes to the methods of calculating the risk-weighting of certain assets, which in turn affects the calculation of the risk-weighted capital ratios. Higher risk weights are assigned to various categories of assets, including commercial real estate loans, credit facilities that finance the acquisition, development or construction of real property, certain exposures or credit that are 90 days past due or are nonaccrual, securitization exposures, and in certain cases mortgage servicing rights and deferred tax assets. The conservation buffer will be phased-in beginning in 2016, and will take full effect on January 1, Certain calculations under the rules will also have phase-in periods. Note 16 Preferred Stock In September 2011, as part of the United States Department of the Treasury's ("Treasury") Small Business Lending Fund ("SBLF"), the Company entered into a Small Business Lending Fund Securities Purchase Agreement ("SBLF Purchase Agreement") with the Treasury. Under the SBLF Purchase Agreement, the Company issued 2,400 shares of preferred stock series A to the Treasury and received $2,400,000 from the Treasury. The preferred stock series A shares qualify as Tier 1 capital and will pay quarterly dividends at a variable rate that can range from 1% to 9% and which will fluctuate based on the amount of change in outstanding small business lending and the amount of time that has elapsed before the funds are repaid to the Treasury. During 2015, the Company repurchased the remaining 1,800 preferred stock series A from the Treasury for $1,800,

45 Note 16 Preferred Stock (continued) Each quarter for the first ten quarters, the dividend rate will vary based on the percent change in outstanding small business loan balances. The rate computed in the tenth quarter will be the rate that is used for the next two years. After four and one-half years, the dividend rate will be 9% regardless of the change in small business loan balances. The initial dividend rate has been calculated at 1%. Dividends paid for the period ended December 31, 2015, were $15,450. Note 17 Other Comprehensive Income Details of other comprehensive income are as follows for the years ended December 31: Details about Accumulated Other Comprehensive Income Components Amount Reclassified for Accumulated Other Comprehensive Income Affected Line Item in the Statement Where Net Income is Presented 2016 Unrealized gains and losses on securities transferred from available-for-sale category to held-to-maturity Accretion of unrealized gains and losses, net $ (1,637) Investment securities held-to-maturity Details about Accumulated Other Comprehensive Income Components Amount Reclassified for Accumulated Other Comprehensive Income Affected Line Item in the Statement Where Net Income is Presented 2015 Unrealized gains and losses on securities available-for-sale Loss on sale of securities available-for-sale $ 10,039 Other expenses Unrealized gains and losses on securities transferred from available-for-sale category to held-to-maturity Accretion of unrealized gains and losses, net $ (1,639) Investment securities held-to-maturity 43

46 Note 17 Other Comprehensive Income (continued) The accumulated balances related to each component of other comprehensive income as of December 31 are as follows: Unrealized Gains and Losses on Securities Unrealized Gains Transferred from and Losses Available-for-Sale on Securities Category to Available-for-Sale Held-to-Maturity Total Balance, December 31, 2014 $ (14,810) $ 7,781 $ (7,029) Other comprehensive income (loss) before reclassification (4,066) - (4,066) Amounts reclassified from accumulated other comprehensive income (loss) 10,039 (1,639) 8,400 Net other comprehensive income (loss) 5,973 (1,639) 4,334 Balance, December 31, 2015 (8,837) 6,142 (2,695) Other comprehensive income (loss) before reclassification (4,128) - (4,128) Amounts reclassified from accumulated other comprehensive income (loss) - (1,637) (1,637) Net other comprehensive income (loss) (4,128) (1,637) (5,765) Balance, December 31, 2016 $ (12,965) $ 4,505 $ (8,460) 44

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