Local. Responsive. Reliable.®...member of the American Institute of CPAs and the Colorado Society of CPAs. Anthony Leggio Anthony Leggio has been a director of Valley Republic Bank

2 0 1 8 A N N U A L R E P O R T

Local. Responsive. Reliable.®

BOARD OF DIRECTORS

Greg BynumGreg Bynum has been a director of Valley Republic Bank since 2008 and has served on the Company’s Board of Directors since its formation in 2016. Mr. Bynum is the owner and CEO of Gregory D. Bynum and Associates, Inc., a full-service real estate development, management, brokerage, and appraisal/analysis �rm headquartered in Bakers�eld, California. His �rm was established in 1981.

Annette DavisAnnette Davis has been a director of Valley Republic Bank since 2008 and has served on the Company’s Board of Directors since its formation in 2016. Mrs. Davis is the president of Adavco, Inc., one of the main land development companies in Bakers�eld. She co-founded the company in 1982.

Eugene (Gene) VoilandEugene Voiland has served as Chairman of the Board of Directors for Valley Republic Bank since 2008 and as the Chairman of the Board of the Company since its formation in 2016. He is the retired President and CEO of Aera Energy LLC. In addition to being a management consultant, he serves on a number of local and state-wide nonpro�t and for-pro�t boards including Saltchuk Resources, Inc. and Berry Petroleum Company, LLC. Mr. Voiland is a 1969 graduate of Washington State University with a BS degree in Chemical Engineering. He’s a member of WSU’s Foundation Board of Governors and Chairman of the Foundation Investment Committee.

Michael Hair, Sr., D.D.S.Michael F. Hair, Sr., D.D.S. has been a director of Valley Republic Bank since 2015 and has served on the Company’s Board of Directors since its formation in 2016. Dr. Hair founded dental practices in Wasco, McFarland and Taft and practiced dentistry for over 20 years. He is presently involved in residential and commercial real estate development and has built over 2,300 homes and numerous commercial projects throughout California, Nevada, Arizona and Idaho.

Bruce JayBruce Jay has been the President, Chief Executive O�cer and a director of Valley Republic Bank since 2008 and has served as the President, Chief Executive O�cer and as a member of the Board of Direc-tors of the Company since its formation in 2016. His prior banking experience includes 22 years of executive management experience with Bank of Stockdale and its successor, Valley Independent Bank, as well as three years of de novo bank experience at Bank of Santa Clarita. Mr. Jay is a CPA and is a member of the American Institute of CPAs and the Colorado Society of CPAs.

Anthony LeggioAnthony Leggio has been a director of Valley Republic Bank since 2008 and has served on the Company’s Board of Directors since its formation in 2016. Mr. Leggio is a business attorney. From 1977 to 2001, he was an attorney with the Bakers�eld law �rm of Cli�ord & Brown where he served as Principal/Managing Partner. Mr. Leggio served as Vice-President/General Counsel of Wm. Bolthouse Farms from 2001-2005. He currently serves as the president of Bolthouse Properties, LLC, and as a director of Tejon Ranch Company.

BOARD OF DIRECTORS

Warner WilliamsWarner Williams has been a director of Valley Republic Bank since 2008 and has served on the Company’s Board of Directors since its formation in 2016. He is the retired VP of Chevron North America Exploration and Production, in charge of Chevron's operations in Louisiana and Alabama from 2009-2014. He has worked for over 40 years in the energy industry in both domestic and inter-national locations. He holds a BS degree in Petroleum Engineering from New Mexico School of Mines and an MS degree in Petroleum Engineering from USC. He is active in community a�airs and serves on several nonpro�t boards.

Angelo MazzeiAngelo Mazzei has been a director of Valley Republic Bank since 2008 and has served on the Company’s Board of Directors since its formation in 2016. Mr. Mazzei is the founder and CEO / Chairman of Mazzei Injector Corporation, in Bakers�eld, California. Founded in 1978, the company manufactures and distributes patented high-e�ciency venturi injectors and related equipment. �e products are distributed worldwide for a variety of uses in agricultural irrigation, recreational waters, industrial and municipal drinking water treatment, and wastewater management.

Willy ReyneveldWilly Reyneveld has been a director of Valley Republic Bank since 2008 and has served on the Company’s Board of Directors since its formation in 2016. Mr. Reyneveld is the President/CEO of W. Reyneveld Construction Inc., which he founded in 1994. �e company specializes in super �at concrete �oors for warehouses. In addition, Mr. Reyneveld has developed several industrial real estate projects in Bakers�eld.

Carlos SanchezCarlos Sanchez has been a director of Valley Republic Bank since 2008 and has served on the Company’s Board of Directors since its formation in 2016. Mr. Sanchez is a realtor in Kern County, with over 27 years of experience in real estate sales. He has worked for Realty World Skyway, RE/MAX Golden Empire, Coldwell Banker Preferred Realtors, and he is currently the co-owner and broker of record for Solutions Realty.

Shawn Shambaugh, M.D.Shawn Shambaugh, M.D. has been a director of Valley Republic Bank since 2008 and has served on the Company’s Board of Directors since its formation in 2016. Dr. Shambaugh has been a physician specializing in oncology for over 25 years. He is also the Diagnostic Laboratory Director with Com-prehensive Blood and Cancer Center and serves as the Medical Director of the Houchin Community Blood Bank. He is a director of another community bank headquartered in Los Angeles County.

James Shuler, M.D.James Shuler, M.D. has been a director of Valley Republic Bank since 2008 and has served on the Company’s Board of Directors since its formation in 2016. Dr. Shuler was the founder and president of Empire Eye and Laser Center in Bakers�eld from 1998-2007. Dr. Shuler also founded and served as the Medical Director of Empire Surgery Center, specializing in ophthalmic and orthopedic surgery. Dr. Shuler currently performs plastic surgery at Bakers�eld Eye Institute and is a consultant for Anthem Blue Cross of California.

EXECUTIVES AND MANAGEMENT

EXECUTIVES(From left to right)

Jack SmithExecutive Vice PresidentChief Credit O�cer

Philip McLaughlinExecutive Vice President

Stephen M. Annis, CRPExecutive Vice PresidentChief Financial O�cer

Bruce JayPresident and CEO

Geraud SmithSenior Executive Vice President

MANAGEMENTLeft to right (back):Jennifer Meadors, VP-Sr. Risk Manager; Cathy Davies, VP-Branch Operations Manager; Aytom Salomon, VP-Oil & Gas Group; Karen Campbell, VP-Credit Administration Specialist; Garth Corrigan, VP-Controller; Shane York, VP-Branch Manager (Grand Island Village); Davin Jensen, VP-Sr. Credit Analyst; Rick Brauer, VP-Branch Manager (Delano); Cameron Holder, VP-Sr. Credit Manager; John Etchison, SVP-Agribusiness; Voni Humphreys, VP-Central Operations Manager; Roxana Chavez, VP-Director of Loan Servicing

Left to right (front row):Margie Schwartz, VP-Compliance Manager; Janet Hepp, VP-Loans; Marcy Unruh, SVP-Administration/ HR; Mary Jane Damian, VP-BSA O�cer

Not pictured:Daniel Cardenas, VP-IT Manager; Brian Sabin, VP-Loans

BRUCE JAY, President & CEOEUGENE VOILAND, Chairman, Board of DirectorsValley Republic Bancorp

Dear Shareholders and Friends:

We are pleased to report that 2018 was another excep-tional year of performance for Valley Republic Bancorp (the Company). Valley Republic Bank (the Bank), a wholly owned subsidiary, opened for business on February 2, 2009. Out of approximately 5,500 banks throughout the US, the Bank was ranked in the top 20%, as measured by total assets, at December 31, 2018. Achieving this ranking in just 10 years is both remarkable and rare.

Highlights for Fiscal Year 2018 compared to Fiscal 2017 are as follows: Net Income: Increased 71% Net Loans: Increased 17% Deposits: Increased 17% Total Assets: Increased 17%

As we reported last year, the Company recorded a one-time write-down of Deferred Tax Assets of $943,000 to conform with Generally Accepted Accounting Principles. �is adjustment was due to the Jobs and Tax Act that was signed into law in December, 2018 which reduced the top federal tax rate for corporations from 35% to 21%, begin-ning in 2019. Excluding this adjustment, 2018 earnings increased 45% over 2017.

For the year ended December 31, 2018, pretax income was $11,310,000 compared to $9,240,000 in 2017, an increase of 22%. Net Income for 2018 was $8,952,000 compared to $5,247,000 for the prior year, an increase of 71%.

Total net loans were $514,700,000 at December 31, 2018, compared to $441,700,000 at the end of 2017, an increase of $73,000,000, or 17%. Total deposits increased by $100,400,000 to $703,700,000 during 2018, compared to $603,300,000 during 2017, or 17%. Total assets at December 31, 2018 were $779,900,000, an increase of $112,200,000, or 17%, compared to $667,600,000 at December 31, 2017. Total Shareholders’ Equity at December 31, 2018 was $67,200,000 compared to $56,400,000 at December 31, 2017, an increase of 19%. Since the inception of the Bank, the market equity, or Shareholder value, of the Bank’s stock has increased by approximately $24.00/share, or $100,000,000.

Two years ago we announced the opening of a new full-service branch in Delano. �e branch was purposely opened in a temporary site until construction could be completed on vacant land adjacent to the temporary location. Construction of the new branch o�ce commenced in mid-2018. We plan to relocate to the new facility,

located at the corner of Woollomes Ave and South Dover Parkway, in April, 2019.

During 2018, we began executing our succession plan in anticipation of Bruce Jay’s scheduled retirement in 2019. Previously, recruiting experts advised the Board of Direc-tors to initiate the search for the successor candidate approximately 12 months in advance of Jay’s scheduled retirement. We heeded that advice and commenced a search in the spring of 2018. Within 60 days, we were fortunate to identify a local candidate. After extensive vetting, we extended an o�er of employment to Geraud Smith, who accepted our o�er and commenced employ-ment at the Bank in July as a Senior Executive Vice Presi-dent. Geraud is a Fresno State University graduate and has worked for Wells Fargo for the past 20 years, 12 years in Fresno and the past 8 years in Bakers�eld. He was the regional manager of their Middle Market Banking Group with coverage in the south San Joaquin valley and parts of the Central Coast and Southern California. Since his arrival at the Bank, we’ve been very pleased with his integration into our culture and he has demonstrated the leadership skills to successfully lead the Bank for many years to come.

After allowing su�cient time for Geraud to prepare for a seamless transition into the President/CEO position, Bruce Jay was able to set a speci�c retirement date of March 31, 2019. Bruce was the lead organizer of Valley Republic Bank and has served as President/CEO since the Bank’s inception. He will remain on the Board of Direc-tors. In response to Bruce’s retirement decision, �e Board of Directors appointed Geraud to the position of President/CEO of both the Company and the Bank e�ec-tive March 1, 2019.

�e 10 years since the inception of the Bank has gone by quickly. We couldn’t be more pleased with the exceptional growth and performance of the Bank. Our vision was to create a local bank with an unprecedented level of relationship-based service for our customers along with a spirit of community reinvestment. We believe Valley Republic Bank has become Bakers�eld’s Premier Bank.

We thank each of you for your continued con�dence and support.

REPORT TO SHAREHOLDERS

We’re proud to now have a team solely dedicated to serving clients in an industry that is one of California’s strongest economic drivers – oil and gas.California oil and gas producers now have an alternative solution for banking services previously provided by banks in Texas, Oklahoma, and Colorado.

�is new team will complement the bank’s substantial existing oil and gas expertise of Board Chairman Eugene Voiland, former CEO of AERA Energy LLC and Director Warner Williams, former VP of Chevron. Aytom Salo-mon, will lead the new division.

As we grow, our local values remain.

Pictured (left to right):Eugene Voiland, Chairman, Board of Directors; Aytom Salomon, VP - Oil and Gas Group; Geraud Smith, Senior Executive Vice President; Anthony Esparza, AVP - Senior Credit Analyst

G R O U P Serving Californians – from California

Valley Republic Bank is committed to our community and improving the quality of life locally.

We are proud to have supported the following Kern County organizations in 2018.

Alzheimer’s Disease Association of Kern County

American Cancer Society

American Legion

American Slavonic Club, Delano

Bakers�eld Association of Realtors

Bakers�eld East Rotary

Bakers�eld Homeless Shelter, Bethany Services

Bakers�eld Memorial Hospital Foundation

Bakers�eld Museum of Art

Bakers�eld Police Activities League

Bakers�eld Symphony Orchestra

Bakers�eld West Rotary

Buttonwillow Lions

California Certi�ed Public Accountants

California Independent Producers Association

California State University, Bakers�eld Roadrunner Athletics

California State University, John Brock Award

California Veterans Assistance Foundation of Kern County

CBCC Foundation for Community Wellness

Community Action Partnership of Kern

Court Appointed Special Advocates of Kern County

Delano Chamber of Commerce

Delano Elk’s Club

Delano Junior Livestock

Delano Youth Football

Friends of the Fresno Fair

Garces Memorial High School

Garden Pathways

Global Family

Greater Bakers�eld Chamber of Commerce

Greater Delano Youth Foundation

Guitar Masters

Habitat for Humanity

Hail Mary Club

Highland High School

Hina Patel Foundation

Ho�mann Hospice

Housing Authority of Kern

Jim Burke Education Foundation

JJ’s Legacy

Kern Community Foundation

Kern County Builder's Exchange

Kern County Cancer Fund

Kern County Fair

Kern County Hispanic Chamber of Commerce

Kern County Junior Livestock

Kern County Law Enforcement

Kern County Water Association

Kern Economic Development Corporation

Kern Literacy Council

League of Dreams

Links for Life

Magdalene Hope

Mid-State Development

Renegade Helmet Football, Bakers�eld College

San Joaquin Community Hospital Foundation

Shafter High Booster Club

Soroptomist International, Delano

St. Francis School

St. John’s Lutheran School

Valley Fever Awareness

VH Families Foundation

Women Leaders in Business

MICHELLE AVILAExecutive Director

CBCC Foundation forCommunity Wellness

FINANCIAL HIGHLIGHTS

Dollars in thousands, except per share dataNET INCOMENET INCOME BEFORE TAXESBASIC EPS**BOOK VALUE PER SHARE**

*Compound Annual Growth Rate.**Per Share Data has been adjusted to give retroactive effect to the stock dividend that was delcared in 2017.

2018$ 8,952$ 11,310$ 2.29$ 16.87

2017$ 5,247$ 9,240$ 1.40$ 14.94

2016$ 4,471$ 6,637$ 1.21$ 13.60

2015 $ 3,540$ 5,299$ 0.96$ 12.36

2014$ 2,716$ 4,078$ 0.74$ 11.39

CAGR* 34.74% 29.05% 32.51% 10.32%

BOOK VALUEPER SHARE

$ 16.87$ 11.39

BASIC EPS

$ 2.29$ 0.74

NET INCOMEBEFORE TAXES

11,3104,078

2014 - 20182014 - 20182014 - 20182014 - 2018

NET INCOME

2,716 8,952

FINANCIAL HIGHLIGHTS

Dollars in thousands, except per share dataTOTAL ASSETSNET LOANSTOTAL DEPOSITSTOTAL SHAREHOLDERS’ EQUITY

2018$ 779,854$ 514,697$ 703,658$ 67,153

2017$ 667,625$ 441,743$ 603,270$ 56,427

2016$ 579,055$ 384,548 $ 518,500$ 50,479

2015$ 490,502$ 316,255$ 435,487$ 45,659

2014$ 421,258$ 244,368$ 375,871$ 41,863

NET LOANS

514,697244,368

TOTAL DEPOSITS

703,658375,871

TOTAL ASSETS

779,854421,258

TOTAL SHAREHOLDERS’ EQUITY

67,15341,863

2014 - 2018 2014 - 20182014 - 2018 2014 - 2018

*Compound Annual Growth Rate.

CAGR* 16.65% 20.47% 16.97% 12.54%

“We’re so happy to be building in Bakers�eld - and so grateful for the warm, local welcome we got from Valley Republic Bank.”

JEFF EITTREIM

Woodbridge Paci�c Group

When one of the Woodbridge Paci�c Group’s founding partners, Todd Cunningham, an East High School and Bakers�eld College graduate, heard that future residential development opportunities were available in Seven Oaks, he jumped on the opportunity to be involved.

�ree years later, Woodbridge Paci�c Group is sharing in the success of the Seven Oaks Master Plan, developed by Bolthouse Properties. Belcourt at Seven Oaks has a gorgeous new community center with a �tness center and pool, modern parks, and is connected to restaurants and neighborhood cultural spots.

“Valley Republic Bank was big enough to handle our volume. Hometown enough to really care.” — Je� Eittreim

VALLEY REPUBLIC BANCORP AND SUBSIDIARY

CONSOLIDATED FINANCIAL STATEMENTS

WITH INDEPENDENT AUDITOR'S REPORT

DECEMBER 31, 2018 AND 2017

CONTENTS INDEPENDENT AUDITOR'S REPORT ON THE FINANCIAL STATEMENTS 1 FINANCIAL STATEMENTS Consolidated Balance Sheets 2 Consolidated Statements of Income 3 Consolidated Statements of Comprehensive Income 4 Consolidated Statement of Changes in Shareholders' Equity 5 Consolidated Statements of Cash Flows 6 Notes to Consolidated Financial Statements 7

INDEPENDENT AUDITOR'S REPORT

Board of Directors and Shareholders of Valley Republic Bancorp and Subsidiary

Report on Financial Statements We have audited the accompanying financial statements of Valley Republic Bancorp and Subsidiary, which are comprised of the consolidated balance sheets as of December 31, 2018 and 2017, and the related consolidated statements of income, comprehensive income, changes in shareholders' equity and cash flows for the years then ended, and the related notes to the consolidated financial statements.

Management's Responsibility for the Financial Statements Management is responsible for the preparation and fair presentation of these 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 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 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.

Opinion In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Valley Republic Bancorp and Subsidiary as of December 31, 2018 and 2017, 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.

Laguna Hills, California February 19, 2019


CONSOLIDATED BALANCE SHEETS DECEMBER 31, 2018 AND 2017

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

2

2018 2017ASSETSCash and Due from Banks 10,531,000$ 9,039,000$ Interest-Bearing Deposits in Other Banks 64,291,000 50,730,000

Total Cash and Cash Equivalents 74,822,000 59,769,000

Time Deposits in Other Banks 24,800,000 30,952,000

Debt Securities Available-for-Sale 76,912,000 51,064,000 Debt Securities Held-to-Maturity 52,488,000 52,435,000

Total Debt Securities 129,400,000 103,499,000

Loans, Net of Deferred Fees and Costs 521,628,000 447,859,000 Allowance for Loan Losses 6,931,000) ( 6,116,000) (

Net Loans 514,697,000 441,743,000

Federal Home Loan Bank Stock, at Cost 2,812,000 2,364,000 Premises and Equipment 2,048,000 1,538,000 Bank Owned Life Insurance 10,479,000 10,235,000 Accrued Interest and Other Assets 20,796,000 17,525,000

TOTAL ASSETS 779,854,000$ 667,625,000$

LIABILITIES AND SHAREHOLDERS' EQUITYDeposits:

Noninterest-Bearing 287,409,000$ 245,892,000$ Interest-Bearing 416,249,000 357,378,000

Total Deposits 703,658,000 603,270,000 Accrued Interest and Other Liabilities 9,043,000 7,928,000

TOTAL LIABILITIES 712,701,000 611,198,000

Commitments and Contingencies - Note D and K

Shareholders' Equity:Common Stock - No par value, 50,000,000 Shares Authorized,

Shares Issued and Outstanding - 3,979,489 and 3,778,138 in 2018 and 2017 45,626,000 43,167,000 Additional Paid-in Capital 1,374,000 1,745,000 Retained Earnings 20,880,000 11,928,000 Accumulated Other Comprehensive Loss - Net Unrealized

Loss on Investment Securities, Net of Tax of $286,000 and $168,000 in 2018 and 2017, Respectively 727,000) ( 413,000) (

TOTAL SHAREHOLDERS' EQUITY 67,153,000 56,427,000

TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY 779,854,000$ 667,625,000$


CONSOLIDATED STATEMENTS OF INCOME FOR THE YEARS ENDED DECEMBER 31, 2018 AND 2017


3

2018 2017INTEREST INCOME

Interest and Fees on Loans 22,485,000$ 18,574,000$ Interest on Debt Securities 2,423,000 1,884,000 Interest on Federal Funds Sold and Other 1,612,000 888,000

Total Interest Income 26,520,000 21,346,000

INTEREST EXPENSEInterest on Savings, Money Market, and Transaction Accounts 2,468,000 1,175,000 Interest on Time Deposits 895,000 152,000

Total Interest Expense 3,363,000 1,327,000

Net Interest Income 23,157,000 20,019,000 Provision for Loan Losses 805,000 692,000 Net Interest Income After Provision For Loan Losses 22,352,000 19,327,000

NONINTEREST INCOMEService Charges and Fees on Deposit Accounts 475,000 476,000 Net Gain on Sales of Available-for-Sale Securities - 9,000 Fees on Brokered Loans 191,000 160,000 Servicing Income 981,000 564,000 Earnings on Bank Owned Life Insurance 244,000 260,000 Other Noninterest Income 348,000 319,000

Total Noninterest Income 2,239,000 1,788,000

NONINTEREST EXPENSESalaries and Employee Benefits 8,284,000 7,346,000 Occupancy and Equipment Expense 1,474,000 1,252,000 Other Expenses 3,523,000 3,277,000

Total Noninterest Expense 13,281,000 11,875,000

Income Before Income Taxes 11,310,000 9,240,000 Income Taxes 2,358,000 3,993,000

NET INCOME 8,952,000$ 5,247,000$

NET INCOME PER SHARE - BASIC 2.29$ 1.40$

NET INCOME PER SHARE - DILUTED 2.14$ 1.29$


CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME FOR THE YEARS ENDED DECEMBER 31, 2018 AND 2017


4

2018 2017

Net Income 8,952,000$ 5,247,000$

OTHER COMPREHENSIVE INCOME (LOSS): Unrealized Gain and Loss on Securities Available for Sale: Change in Net Unrealized Loss 432,000) ( 144,000) ( Reclassification of (Gain) Loss Recognized in Net Income - 9,000) (

432,000) ( 153,000) ( Income Tax Expense (Benefit): Change in Net Unrealized Loss 118,000) ( 58,000) ( Reclassification of Gain Recognized in Net Income - 4,000) (

118,000) ( 62,000) (

TOTAL OTHER COMPREHENSIVE LOSS 314,000) ( 91,000) (

TOTAL COMPREHENSIVE INCOME 8,638,000$ 5,156,000$


CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY FOR THE YEARS ENDED DECEMBER 31, 2018 AND 2017


5

Accumulated

Common Stock Other

Number of Additional Retained Comprehensive

Shares Amount Paid-in Capital Earnings Income (Loss) Total

Balance January 1, 2017 3,535,454 37,391,000$ 1,883,000$ 11,461,000$ 256,000)$( 50,479,000$

Net Income 5,247,000 5,247,000

Stock-based Compensation 330,000 330,000

Vested Stock Awards 17,828 316,000 316,000) ( -

Exercise of Stock Options 45,401 614,000 152,000) ( 462,000

Stock Dividend 179,455 4,846,000 4,846,000) ( -

Reclassification of Stranded Tax

Effects from Change in Tax Rate 66,000 66,000) ( -

Other Comprehensive

Loss, Net of Taxes 91,000) ( 91,000) (

Balance at December 31, 2017 3,778,138 43,167,000 1,745,000 11,928,000 413,000) ( 56,427,000

Net Income 8,952,000 8,952,000

Stock-based Compensation 556,000 556,000

Vested Stock Awards 14,243 392,000 392,000) ( -

Exercise of Stock Options 187,108 2,067,000 535,000) ( 1,532,000

Other Comprehensive

Loss, Net of Taxes 314,000) ( 314,000) (

Balance at December 31, 2018 3,979,489 45,626,000$ 1,374,000$ 20,880,000$ 727,000)$( 67,153,000$


CONSOLIDATED STATEMENTS OF CASH FLOWS DECEMBER 31, 2018 AND 2017


6

2018 2017OPERATING ACTIVITIES

Net Income 8,952,000$ 5,247,000$ Adjustments to Reconcile Net Income to Net Cash

From Operating Activities:Depreciation 459,000 443,000 Stock-based Compensation 556,000 330,000 Provision for Loan Losses 805,000 692,000 (Gain) on Sale of Securities Available for Sale - 9,000) ( Net Amortization of Premium on Securities 741,000 810,000 Net Increase in Bank Owned Life Insurance 244,000) ( 260,000) ( Deferred Income Taxes 229,000) ( 730,000 Other Items 1,039,000 954,000

Total Adjustments 3,127,000 3,690,000 Net Cash From Operating Activities 12,079,000 8,937,000

INVESTING ACTIVITIESNet Change in Time Deposits in Other Banks 6,152,000 1,488,000 Purchase of Investment Securities Available for Sale 37,131,000) ( 10,249,000) ( Purchase of Investment Securities Held to Maturity 6,007,000) ( 10,323,000) ( Maturities and Sales of Investment Securities Available for Sale 10,534,000 9,685,000 Maturities of Investment Securities Held to Maturity 5,530,000 1,055,000 Net Increase in Loans to Customers 73,759,000) ( 57,887,000) ( Purchase of Federal Home Loan Bank Stock 448,000) ( 126,000) ( Purchases of Premises and Equipment, net 969,000) ( 222,000) ( Investment in Qualified Affordable Housing Projects 2,848,000) ( 2,680,000) (

Net Cash From Investing Activities 98,946,000) ( 69,259,000) (

FINANCING ACTIVITIESNet Increase in Demand Deposits and Savings Accounts 80,769,000 45,893,000 Net Increase in Time Deposits 19,619,000 38,877,000 Proceeds from Exercise of Stock Options 1,532,000 462,000

Net Cash From Financing Activities 101,920,000 85,232,000

Net Increase in Cash and Cash Equivalents 15,053,000 24,910,000 Cash and Cash Equivalents at Beginning of Period 59,769,000 34,859,000

CASH AND CASH EQUIVALENTS AT END OF PERIOD 74,822,000$ 59,769,000$

Supplemental Disclosures of Cash Flow Information:Interest Paid 3,296,000$ 1,304,000$

Taxes Paid 1,225,000$ 2,145,000$


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2018 AND 2017

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NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Principles of Consolidation The financial statements include the accounts of Valley Republic Bancorp ("VRB") and its wholly owned subsidiary, Valley Republic Bank ("Bank"), collectively referred to herein as the "Company." All significant intercompany transactions have been eliminated. VRB has no significant business activity other than its investment in Valley Republic Bank. Accordingly, no separate financial information on VRB is provided. Nature of Operations The Bank was incorporated in the State of California and organized as a single operating segment that operates four full-service branches in Bakersfield and Delano, California. The Bank's primary source of revenue is providing loans to customers, who are predominately small and middle-market businesses and individuals located primarily in Kern County, California. Subsequent Events The Company has evaluated subsequent events for recognition and disclosure through February 19, 2019, which is the date the financial statements were available to be issued. Use of Estimates in the Preparation of Financial Statements The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Cash and Cash Equivalents For purposes of reporting cash flows, cash and cash equivalents include cash, due from banks 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. The Company was in compliance with its reserve requirements as of December 31, 2018 and 2017. The Company maintains amounts due from banks, which may exceed federally insured limits. The Company has not experienced any losses in such accounts.



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NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued Debt Securities Debt securities are classified in three categories and accounted for as follows: debt securities that the Bank has the positive intent and ability to hold to maturity are classified as held-to-maturity and are measured at amortized cost; debt securities bought and held principally for the purpose of selling in the near term are classified as trading securities and are measured at fair value, with unrealized gains and losses included in earnings; debt securities not classified as either held-to-maturity or trading securities are deemed as available-for-sale and are measured at fair value, with unrealized gains and losses, net of applicable taxes, reported in a separate component of shareholders' equity. Gains or losses on sales of debt securities are determined on the specific identification method. Premiums and discounts are amortized or accreted using the interest method over the expected lives of the related securities. Management evaluates debt securities for other-than-temporary impairment ("OTTI") on at least a quarterly basis and more frequently when economic or market conditions warrant such an evaluation. For debt 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 debt security in an unrealized loss position before recovery of its amortized cost basis. If either of the criteria regarding intent or requirement to sell is met, the entire difference between amortized cost and fair value is recognized as impairment through earnings. For debt securities that do not meet the aforementioned criteria, the amount of impairment is split into two components as follows: OTTI related to credit loss, which must be recognized in the income statement and OTTI related to other factors, which is recognized in other comprehensive income. The credit loss is defined as the difference between the present value of the cash flows expected to be collected and the amortized cost basis. Loans 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.



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NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued Allowance for Loan Losses The allowance for loan losses is a valuation allowance for probable incurred credit losses. Loan losses are charged against the allowance when management believes the uncollectability of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance. Management estimates the allowance balance required using past loan loss experience, the nature and volume of the portfolio, information about specific borrower situations and estimated collateral values, economic conditions, and other factors. Allocations of the allowance may be made for specific loans, but the entire allowance is available for any loan that, in management's judgment, should be charged off. Amounts are charged-off when available information confirms that specific loans or portions thereof, are uncollectable. 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. 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, commercial and industrial, agriculture, loans to municipalities 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 debt-to-income, collateral type and loan-to-value ratios for consumer loans.



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NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued Allowance for Credit Losses on Off-Balance Sheet Credit Exposures The Bank also maintains a separate allowance for off-balance sheet commitments. Management estimates anticipated losses using historical data and utilization assumptions. The Allowance for off-balance sheet commitments totaled $115,000 at December 31, 2018 and 2017, respectively, and is included in other liabilities on the balance sheet. Loss Contingencies Loss contingencies, including claims and legal actions arising in the ordinary course of business, are recorded as liabilities when the likelihood of loss is probable and the amount or range of loss can be reasonably estimated. Management does not believe there now are such matters that will have a material effect on the financial statements. Premises and Equipment 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. 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. FHLB Stock and Other Investments The Bank is a member of the Federal Home Loan Bank ("FHLB") system. Members are required to own a certain amount of stock based on the level of borrowings and other factors, and may invest in additional amounts. FHLB stock is carried at cost, classified as a restricted security, and periodically evaluated for impairment based on the ultimate recovery of par value. Effective with the adoption of ASU 2016-01 on January 1, 2018, the Company is accounting for equity securities with readily determinable fair values at fair value, with changes recognized through earnings, instead of other comprehensive income. The carrying value of equity securities with readily determinable fair values as of December 31, 2018 was $28,000 and unrealized gains of $22,000 recognized in income during the year. Pursuant to the adoption of ASU 2016-01 on January 1, 2018, the Company elected the measurement alternative for measuring equity securities without readily determinable fair values at cost less impairment (if any), plus or minus observable price changes in orderly transactions. The carrying amount of equity securities without readily determinable fair values is $105,000 as of December 31, 2018 and includes investment in bankers’ bank stock.



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NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES – Continued Company Owned Life Insurance Company owned life insurance is recorded at the amount that can be realized under insurance contracts at the date of the statement of financial condition, which is the cash surrender value adjusted for other charges or other amounts due that are probable at settlement. Derivatives The Company entered into interest rate swap derivative transactions to convert fixed rate loans to floating rate (fair value hedges). The specific terms and notional amounts of the interest rate swaps are consistent with the underlying hedged instruments. For a fair value hedge, the gain or loss on the derivative, as well as the offsetting loss or gain on the hedged item, are recognized in current earnings as fair values change. Changes in the fair value of derivatives that are not highly effective in hedging the changes in fair value of the hedged item are recognized immediately in current earnings. Net cash settlements on derivatives that qualify for hedge accounting are recorded in interest income or interest expense, based on the item being hedged. Net cash settlements on derivatives that do not qualify for hedge accounting are reported in non-interest income. The Company formally documents the relationship between derivatives and the hedged items, as well as the risk-management objective and the strategy for undertaking hedge transactions at the inception of the hedging relationship. This documentation includes linking the fair value hedge to specific assets and liabilities on the statement of condition. The Company also formally assesses, both at the hedge’s inception and on an ongoing basis, whether the derivative instruments that are used are highly effective in offsetting changes in fair values of the hedged item. The Company discontinues hedge accounting when it determines that the derivative is no longer effective in offsetting changes in the fair value of the hedged item, the derivative is settled or terminates or treatment of the derivative as a hedge is no longer appropriate or intended. When hedge accounting is discontinued, subsequent changes in fair value of the derivative are recorded as non-interest income. When a fair value hedge is discontinued, the hedged asset or liability is no longer adjusted for changes in fair value and the existing basis adjustment is amortized or accreted over the remaining life of the asset or liability. Revenue Recognition – Noninterest Income The Company adopted the provisions of ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606), on January 1, 2018 and all subsequent ASUs that modified Topic 606. Results for reporting periods beginning after December 31, 2017 are presented under Topic 606, while prior period amounts have not been adjusted and continue to be reported in accordance with Topic 605. The Company recognizes revenue as it is earned and noted no impact to its revenue recognition policies as a result of the adoption of ASU 2014-09. All of the Company’s revenue from contracts with customers within the scope of ASC 606 is recognized in non-interest income. In accordance with Topic 606, revenues are recognized when control of promised goods or services is transferred to customers in an amount that reflects the consideration the Company expects to be entitled to in exchange for those goods or services. To determine revenue recognition for arrangements that an entity determines are within the



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Revenue Recognition – Noninterest Income – Continued scope of Topic 606, the Company performs the following five steps: (i) identify the contract(s) with a customer; (ii) identify the performance obligation in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligation in the contract; and (v) recognize revenue when (or as) the Company satisfies a performance obligation. The Company only applies the five-step model to contracts when it is probable that the entity will collect the consideration it is entitled to in exchange for the goods or services it transfers to the customer. At contract inception, once the contract is determined to be within the scope of Topic 606, the Company assesses the goods or services that are promised within each contract and identifies those that contain performance obligation, and assesses whether each promised good or service is distinct. The Company then recognizes as revenue the amount of the transaction price that is allocated to the respective performance obligation when (or as) the performance obligation is satisfied. The following is a discussion of key revenues within the scope of the new revenue guidance.

Service Charges and Fees on Deposit Accounts The Company earns fees from its deposit customers for account maintenance, transaction-based and overdraft services. Account maintenance fees consist primarily of account fees and analyzed account fees charged on deposit accounts on a monthly basis. The performance obligation is satisfied and the fees are recognized on a monthly basis as the service period is completed. Transaction-based fees on deposits accounts are charged to deposit customers for specific services provided to the customer, such as non-sufficient funds fees, overdraft fees, and wire fees. The performance obligation is completed as the transaction occurs and the fees are recognized at the time each specific service is provided to the customer. Servicing Income on Brokered Loans The Company earns fees on loans serviced for Farmer Mac by acting as the field servicer. As field servicer, the Company is responsible for direct contact with borrowers and performs certain other servicing functions such as annual inspections. The performance obligation is satisfied and the fees are recognized as the service period is completed.

Advertising Costs The Company expenses the costs of advertising in the period incurred. 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. A Black-Scholes model is utilized to estimate the fair value of stock options, while the market price of the Company’s common stock at the date of grant is used for restricted stock awards.



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SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued Stock-Based Compensation - Continued Compensation cost is recognized over the period which an employee is required to provide services in exchange for the award, generally the vesting period, on a straight-line basis. The Company has elected to account for forfeitures of stock-based awards as they occur. Excess tax benefits and tax deficiencies relating to stock-based compensation are recorded as income tax expense or benefit in the income statement when incurred. See Note M for additional information on the Company's stock option plan. Income Taxes Deferred income taxes are computed using the asset and liability method, which recognizes a liability or asset representing the tax effects, based on current tax law, of future deductible or taxable amounts attributable to events that have been recognized in the financial statements. A valuation allowance is established to reduce the deferred tax asset to the level at which it is "more likely than not" that the tax asset or benefits will be realized. Realization of tax benefits of deductible temporary differences and operating loss carryforwards depends on having sufficient taxable income of an appropriate character within the carryforward periods. The 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 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. The Company has elected to account for its limited liability investments in qualified affordable housing projects using the proportional amortization method. The Company amortizes the initial cost of the investment in proportion to the tax credits and other tax benefits received. The Company recognizes the net investment performance in the income statement as a component of income tax expense or (benefit).



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NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued Earnings Per Share ("EPS") Basic EPS excludes dilution and is computed by dividing income available to common stockholders by the weighted-average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the earnings of the entity. Comprehensive Income Changes in unrealized gains and losses on investment securities is the only component of accumulated other comprehensive income for the Company. The amount reclassified out of other accumulated comprehensive income relating to realized gains (losses) on securities available for sale was $0 and $9,000 for 2018 and 2017, with the related tax expense (benefit) of $0 and $4,000, respectively. In February 2018, the FASB issued ASU 2018-02, Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income (“AOCI”). ASU 2018-02 allows entities to elect to reclassify stranded tax effects on items within AOCI, resulting from the new tax bill signed into law on December 22, 2017, to retained earnings. The Company elected to early adopt this new standard in 2017 and recorded a reclassification from AOCI to retained earnings in the amount of $66,000. Reclassifications Certain reclassifications have been made in the 2017 financial statements to conform to the presentation used in 2018. These reclassifications had no impact on the Company's previously reported financial statements. 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 K. Such financial instruments are recorded in the financial statements when they are funded or related fees are incurred or received. 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.



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NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued Fair Value Measurement - Continued

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 Company's own assumptions about the assumptions that market participants would use in pricing an asset or liability.

See Note N for more information and disclosures relating to the Company's fair value measurements. Recently Adopted Accounting Pronouncements In May 2014, the FASB issued ASU 2014-09 Revenue from Contracts with Customers, which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. The ASU replaces most existing revenue recognition guidance in GAAP. The new standard was effective for the Company on January 1, 2018. Adoption of ASU 2014-09 did not have a material impact on the Company’s consolidated financial statements and related disclosures as the Company’s primary sources of revenues are derived from interest and dividends earned on loans, investment securities, and other financial instruments that are not within the scope of ASU 2014-09. The Company’s revenue recognition pattern for revenue streams within the scope of ASU 2014-09, including but not limited to service charges on deposit accounts and gains/losses on the sale of loans, did not change significantly from current practice. The standard permits the use of either the full retrospective or modified retrospective transition method. The Company elected to use the modified retrospective transition method which requires application of ASU 2014-09 to uncompleted contracts at the date of adoption however, periods prior to the date of adoption were not retrospectively revised as the impact of the ASU on uncompleted contracts at the date of adoption was not material. In January 2016, the FASB issued ASU 2016-01, Financial Instruments–Overall: Recognition and Measurement of Financial Assets and Financial Liabilities. The new standard was effective for the Company on January 1, 2018. Adoption of ASU 2016-01 did not have a material impact on the Company’s financial statements. Changes made to the current measurement model primarily affect the accounting for equity securities with readily determinable fair values, where changes in fair value impact earnings instead of other comprehensive income. Equity securities without readily marketable fair values are to be carried at amortized cost, less impairment (if any) plus or minus changes resulting from observable price changes in orderly transactions for an identical investment or similar investment of the same issuer. The accounting for other financial instruments, such as loans, investments in debt securities, and financial liabilities is largely unchanged. Additionally, the Company refined the calculation used to determine the disclosed fair value of loans held for investment as part of adopting this standard reflecting an exit price notion instead of an entrance price. The refined calculation did not have a significant impact on fair value disclosures.



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NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued Recent Accounting Guidance Not Yet Effective In February 2016, the FASB issued Accounting Standards Update (ASU) 2016-02, 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-of-use 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 expects to record a right-of-use asset of $5,783,000 and associated lease liability. In June 2016, the FASB issued ASU No. 2016-13, Measurement of Credit Losses on Financial Instruments (Topic 326). This ASU significantly changes how entities will measure credit losses for most financial assets and certain other instruments that aren’t measured at fair value through net income. In issuing the standard, the FASB is responding to criticism that today’s guidance delays recognition of credit losses. The standard will replace today’s “incurred loss” approach with an “expected loss” model. The new model, referred to as the current expected credit loss (“CECL”) model, will apply to: (1) financial assets subject to credit losses and measured at amortized cost, and (2) certain off-balance sheet credit exposures. This includes, but is not limited to, loans, leases, held-to-maturity securities, loan commitments, and financial guarantees. The CECL model does not apply to available-for-sale (“AFS”) debt securities. For AFS debt securities with unrealized losses, entities will measure credit losses in a manner similar to what they do today, except that the losses will be recognized as allowances rather than reductions in the amortized cost of the securities. As a result, entities will recognize improvements to estimated credit losses immediately in earnings rather than as interest income over time, as they do today. The ASU also simplifies the accounting model for purchased credit-impaired debt securities and loans. ASU 2016-13 also expands the disclosure requirements regarding an entity’s assumptions, models, and methods for estimating the allowance for loan and lease losses. In addition, public business entities will need to disclose the amortized cost balance for each class of financial asset by credit quality indicator, disaggregated by the year of origination. ASU No. 2016-13 is effective for interim and annual reporting periods beginning after December 15, 2019 for SEC filers, one year later for non SEC filing public business entities and two years later for nonpublic business entities. Early adoption is permitted for interim and annual reporting periods beginning after December 15, 2018. Entities will apply the standard’s provisions as a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is effective (i.e., modified retrospective approach). The Company is currently evaluating the provisions of ASU No. 2016-13 for potential impact on its consolidated financial statements and disclosures.



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NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued Recent Accounting Guidance Not Yet Effective - Continued In August 2018, the FASB issued ASU No. 2018-13, Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement. This ASU eliminates, adds and modifies certain disclosure requirements for fair value measurements. Among the changes, entities will no longer be required to disclose the amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy, but will be required to disclose the range and weighted average used to develop significant unobservable inputs for Level 3 fair value measurements. ASU No. 2018-13 is effective for all entities for interim and annual reporting periods beginning after December 15, 2019. Early adoption is permitted. As ASU No. 2018-13 only revises disclosure requirements, it will not have a material impact on the Company’s Consolidated Financial Statements. In August 2017, the FASB issued ASU 2017-12, Derivatives and Hedging (Topic 850), the objective of which is to improve the financial reporting of hedging relationships to better portray the economic results of an entity’s risk management activities in its financial statements. In addition, the amendments in this Update make certain targeted improvements to simplify the application and disclosure of the hedge accounting guidance in current general accepted accounting principles. For public business entities, the amendments in this Update are effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. For all other entities, the amendments are effective for fiscal years beginning after December 15, 2019, and interim periods beginning after December 15, 2020. Early application is permitted in any period after issuance. For cash flow and net investment hedges existing at the date of adoption, an entity should apply a cumulative-effect adjustment related to eliminating the separate measurement of ineffectiveness to accumulated other comprehensive income with a corresponding adjustment to the opening balance of retained earnings as of the beginning of the fiscal year that an entity adopts the amendments in this Update. The amended presentation and disclosure guidance is required only prospectively. The Company is currently evaluating the impact the adoption of the standard will have on its consolidated financial statements and disclosures.



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NOTE B - DEBT SECURITIES Debt securities have been classified in the balance sheet according to management's intent. The amortized cost of securities and their approximate fair values at December 31 were as follows:

Gross Gross

Amortized Unrealized Unrealized Fair

December 31, 2018 Cost Gains Losses Value

Available-for-Sale Securities:

U.S. Government and

Agency Securities 22,174,000$ 42,000$ 43,000)$( 22,173,000$

Mortgaged-Backed

Securities 38,442,000 14,000 834,000) ( 37,622,000

SBA Securities 10,345,000 - 96,000) ( 10,249,000

Municipal Securities 4,964,000 92,000 - 5,056,000

Corporate Securities 2,000,000 - 188,000) ( 1,812,000 Total Available-for-Sale securities 77,925,000 148,000 1,161,000) ( 76,912,000

Held-to-Maturity Securities:

U.S. Government and

Agency Securities 37,076,000$ -$ 494,000)$( 36,582,000$ Municipal Securities 15,412,000 158,000 5,000) ( 15,565,000

Total Held-to-Maturity Securities 52,488,000 158,000 499,000) ( 52,147,000

Total Investment Securities 130,413,000$ 306,000$ 1,660,000)$( 129,059,000$

December 31, 2017

Available-for-Sale Securities:

Mortgaged-Backed

Securities 41,555,000 3,000 633,000) ( 40,925,000

SBA Securities 8,090,000 37,000 10,000) ( 8,117,000

Corporate Securities 2,000,000 22,000 - 2,022,000 Total Available-for-Sale securities 51,645,000 62,000 643,000) ( 51,064,000

Held-to-Maturity Securities:U.S. Government and

Agency Securities 33,247,000$ -$ 411,000)$( 32,836,000$

Municipal Securities 19,188,000 289,000 3,000) ( 19,474,000

Total Held-to-Maturity Securities 52,435,000 289,000 414,000) ( 52,310,000

Total Investment Securities 104,080,000$ 351,000$ 1,057,000)$( 103,374,000$



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NOTE B - DEBT SECURITIES - Continued The amortized cost and estimated fair value of all debt securities as of December 31, 2018 by expected maturities are shown below. Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

Amortized FairCost Value

Available-for-Sale SecuritiesDue within One Year 2,093,000$ 2,093,000$ Due from One to Five Years 55,320,000 54,400,000 Due from Five to Ten Years 20,512,000 20,419,000 Due after Ten Years - -

Total Available-for-Sale Securities 77,925,000 76,912,000

Held-to-Maturity SecuritiesDue within One Year 18,952,000 18,832,000 Due from One to Five Years 28,353,000 28,169,000 Due from Five to Ten Years 5,183,000 5,146,000 Due after Ten Years - -

Total Held-to-Maturity Securities 52,488,000 52,147,000

Total Investment Securities 130,413,000$ 129,059,000$



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NOTE B – DEBT SECURITIES - Continued At December 31, 2018 and 2017, the Company had 40 and 34 debt securities with unrealized losses, respectively. The following table presents information pertaining to these securities aggregated by investment category and length of time that individual securities have been in a continuous loss position:

As of December 31, 2018, the Company had 40 debt securities where the estimated fair value had decreased 1.3% from the Company's amortized cost. The decrease in price is due to changes in interest rates and does not have any credit components or other loss components. Management has the intent and ability to retain its investment for a period of time sufficient to allow for any anticipated recovery. The fair value is expected to recover as the bonds approach maturity. There were no sales of Available-for-sale debt securities during 2018. Gross realized gains and losses on sales of available-for-sale debt securities was $9,000 in 2017. Proceeds from the sales of available-for-sale securities during 2017 were $425,000. The Company has pledged investment securities with a market value of $19,954,000 to secure public deposits. The Company has pledged investment securities with a market value of $18,090,000 as collateral for a line of credit with FHLB. See Note F for more information and disclosures relating to this borrowing line.

Unrealized Estimated Unrealized Estimated Unrealized EstimatedDecember 31, 2018 Losses Fair Value Losses Fair Value Losses Fair Value

U.S. Government and Agency Securities 96,000)$( 14,128,000$ 441,000)$( 30,808,000$ 537,000)$( 44,936,000$ Mortgaged-Backed Securities 16,000) ( 3,464,000 818,000) ( 32,098,000 834,000) ( 35,562,000 SBA Securities 49,000) ( 8,003,000 47,000) ( 2,246,000 96,000) ( 10,249,000 Municipal Securities 2,000) ( 2,008,000 3,000) ( 311,000 5,000) ( 2,319,000 Corporates 188,000) ( 1,812,000 - - 188,000) ( 1,812,000

351,000)$( 29,415,000$ 1,309,000)$( 65,463,000$ 1,660,000)$( 94,878,000$

December 31, 2017U.S. Government and Agency Securities 100,000)$( 13,147,000$ 311,000)$( 19,689,000$ 411,000)$( 32,836,000$ Mortgaged-Backed Securities 195,000) ( 21,419,000 438,000) ( 19,303,000 633,000) ( 40,722,000 SBA Securities 10,000) ( 2,689,000 - - 10,000) ( 2,689,000 Municipal Securities 3,000) ( 2,372,000 - - 3,000) ( 2,372,000

308,000)$( 39,627,000$ 749,000)$( 38,992,000$ 1,057,000)$( 78,619,000$

Less than Twelve Months Twelve Months or More Total



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NOTE C - LOANS The Company's loan portfolio consists primarily of loans to borrowers within Kern County. 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. At December 31, the composition of the loan portfolio is as follows:

A summary of the changes in the allowance for loan losses as of December 31 follows:

2018 2017Real Estate:

Construction and Land Development 46,419,000$ 22,604,000$ 1-4 Family Residential 53,157,000 48,656,000 Multifamily Residential 1,116,000 834,000 Secured by Farm Land 67,919,000 67,724,000 Commercial Real Estate 247,122,000 212,547,000

Total Real Estate Loans 415,733,000 352,365,000

Commercial and Industrial 72,563,000 62,433,000 Agriculture 30,558,000 26,184,000 Loans to Municipalities 119,000 4,232,000 Consumer and Other 2,401,000 2,458,000

Total Loans 521,374,000 447,672,000

Deferred Loan Costs (Fees), Net 254,000 187,000

Loans, Net of Deferred Costs and Fees 521,628,000 447,859,000 Allowance for Loan Losses 6,931,000) ( 6,116,000) (

Net Loans 514,697,000$ 441,743,000$

2018 2017

Balance at Beginning of Year 6,116,000$ 5,485,000$ Additions to the Allowance Charged to Expense 805,000 692,000 Recoveries on Loans Charged Off 10,000 -

6,931,000 6,177,000

Less Loans Charged Off - 61,000) (

6,931,000$ 6,116,000$



22

NOTE C - LOANS - Continued The following table presents the activity in the allowance for loan losses for the year 2018 and 2017, and the recorded investment in loans and impairment method as of December 31, 2018 and 2017 by portfolio segment:

CommercialDecember 31, 2018 Real Estate and Industrial Agriculture Total

Allowance for Loan Losses:Beginning of Year 4,225,000$ 1,431,000$ 340,000$ 50,000$ 70,000$ 6,116,000$ Provisions 909,000 153,000) ( 106,000 49,000) ( 8,000) ( 805,000 Charge-offs - - - - - - Recoveries - 10,000 - - - 10,000

End of Year 5,134,000$ 1,288,000$ 446,000$ 1,000$ 62,000$ 6,931,000$

Reserves: Specific -$ -$ -$ -$ -$ -$ General 5,134,000 1,288,000 446,000 1,000 62,000 6,931,000

5,134,000$ 1,288,000$ 446,000$ 1,000$ 62,000$ 6,931,000$

Loans Evaluated for Impairment: Individually 251,000$ -$ -$ -$ -$ 251,000$ Collectively 415,482,000 72,563,000 30,558,000 119,000 2,401,000 521,123,000

415,733,000$ 72,563,000$ 30,558,000$ 119,000$ 2,401,000$ 521,374,000$

December 31, 2017Allowance for Loan Losses:Beginning of Year 4,172,000$ 942,000$ 254,000$ 74,000$ 43,000$ 5,485,000$ Provisions 53,000 550,000 86,000 24,000) ( 27,000 692,000 Charge-offs - (61,000) - - - (61,000) Recoveries - - - - - -

End of Year 4,225,000$ 1,431,000$ 340,000$ 50,000$ 70,000$ 6,116,000$

Reserves: Specific -$ -$ -$ -$ -$ -$ General 4,225,000 1,431,000 340,000 50,000 70,000 6,116,000

4,225,000$ 1,431,000$ 340,000$ 50,000$ 70,000$ 6,116,000$

Loans Evaluated for Impairment: Individually 257,000$ -$ -$ -$ -$ 257,000$ Collectively 352,108,000 62,433,000 26,184,000 4,232,000 2,458,000 447,415,000

352,365,000$ 62,433,000$ 26,184,000$ 4,232,000$ 2,458,000$ 447,672,000$

Loans to Municipalities

Consumerand Other



23

NOTE C - 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, 2018:

SpecialDecember 31, 2018 Pass Mention Substandard Impaired Total

Real Estate:

Construction and Land Development 46,419,000$ -$ -$ -$ 46,419,000$

1-4 Family Residential 52,906,000 - - 251,000 53,157,000

Multifamily Residential 1,116,000 - - - 1,116,000

Secured by Farm Land 67,919,000 - - - 67,919,000

Commercial Real Estate 243,926,000 556,000 2,640,000 - 247,122,000

Commercial and Industrial 70,396,000 2,167,000 - 72,563,000

Agriculture 30,558,000 - - - 30,558,000

Loans to Municipalities 119,000 - - - 119,000 Consumer and Other 2,401,000 - - - 2,401,000

515,760,000$ 556,000$ 4,807,000$ 251,000$ 521,374,000$



24

NOTE C - LOANS - Continued The risk category of loans by class of loans was as follows as of December 31, 2017:

The Company had no past due or nonaccrual loans as of December 31, 2018 and 2017.

SpecialDecember 31, 2017 Pass Mention Substandard Impaired Total

Real Estate:

Construction and Land Development 22,604,000$ -$ -$ -$ 22,604,000$

1-4 Family Residential 48,399,000 - - 257,000 48,656,000

Multifamily Residential 834,000 - - - 834,000

Secured by Farm Land 67,724,000 - - - 67,724,000

Commercial Real Estate 212,547,000 - - - 212,547,000

Commercial and Industrial 58,551,000 3,882,000 - - 62,433,000

Agriculture 26,184,000 - - - 26,184,000

Loans to Municipalities 4,232,000 - - - 4,232,000

Consumer and Other 2,458,000 - - - 2,458,000

443,533,000$ 3,882,000$ -$ 257,000$ 447,672,000$



25

NOTE C - LOANS - Continued Information relating to individually impaired loans presented by class of loans was as follows as of December 31:

The Company has not allocated specific reserves to customers whose loan terms have been modified in troubled debt restructurings as of December 31, 2018 and 2017. The Company has committed to lend no additional amounts to customers with outstanding loans that are classified as troubled debt restructurings as of December 31, 2018. No loans have been modified during 2018 and 2017.

Unpaid Average InterestPrincipal Recorded Without Specific With Specific Related Recorded Income

December 31, 2018 Balance Investment Allowance Allowance Allowance Investment RecognizedReal Estate: Construction and Land Development -$ -$ -$ -$ -$ -$ -$ 1-4 Family Residential 251,000 251,000 251,000 - - 254,000 12,000 Multifamily Residential - - - - - - - Secured by Farm Land - - - - - - - Commercial Real Estate - - - - - - - Commercial and Industrial - - - - - - - Agriculture - - - - - - - Loans to Municipalities - - - - - - - Consumer - - - - - - -

251,000$ 251,000$ 251,000$ -$ -$ 254,000$ 12,000$

December 31, 2017Real Estate: Construction and Land Development -$ -$ -$ -$ -$ -$ -$ 1-4 Family Residential 257,000 257,000 257,000 - - 259,000 12,000 Multifamily Residential - - - - - - - Secured by Farm Land - - - - - - - Commercial Real Estate - - - - - - - Commercial and Industrial - - - - - - - Agriculture - - - - - - - Loans to Municipalities - - - - - - - Consumer - - - - - - -

257,000$ 257,000$ 257,000$ -$ -$ 259,000$ 12,000$

Impaired Loans



26

NOTE D - PREMISES AND EQUIPMENT A summary of premises and equipment as of December 31 follows:

The Company has entered into a lease for its main office and five additional suites, which will expire in February 2021. The Company has entered into a lease for a branch in northwest Bakersfield, CA that will expire January 31, 2026. The Company has leased a branch location in southwest Bakersfield, CA from a Limited Liability Company which includes a director as a member. The lease commenced in 2012 and will expire ten years after the commencement of the lease. Refer to Note I – Related Party Transactions, for additional information regarding this lease. The Company entered into a lease for a temporary branch location in Delano, CA in February 2017 that will expire in 2019. The company also entered into a lease for a permanent branch location in Delano, CA in March 2017 that will expire in 2023. 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. Rental expense relating to these leases and other short term rentals was approximately $750,000 and $571,000 for the years ended December 31, 2018 and 2017, respectively. At December 31, 2018, the future lease rental payable under non-cancellable operating lease commitments for the Company's main office and additional suites was as follows:

The minimum rental payments shown above are given for the existing lease obligations and are not a forecast of future rental expense.

2018 2017

Furniture, Fixtures, and Equipment 1,854,000$ 1,536,000$ Leasehold Improvements 2,520,000 1,873,000

4,374,000 3,409,000 Less Accumulated Depreciation and Amortization 2,326,000) ( 1,871,000) (

2,048,000$ 1,538,000$

Related Party Other

2019 89,000$ 750,000$ 2020 89,000 771,000 2021 89,000 794,000 2022 66,000 813,000 2023 - 833,000

Thereafter - 3,426,000

333,000$ 7,387,000$



27

NOTE E - DEPOSITS Deposits consist of the following at December 31:

At December 31, 2018, the scheduled maturities of time deposits were as follows:

As of December 31, 2018, the Company's ten largest deposit relationships represent approximately 22% of the total outstanding deposits of the Company. Within this group, the five largest relationships represent approximately 12% of the Company's total deposits. Banks are required to maintain reserves with the Federal Reserve Bank equal to a specified percentage of their reservable deposits, less vault cash. The required reserve balances maintained at the Federal Reserve Bank at December 31, 2018 and 2017 were $0. NOTE F - OTHER BORROWINGS The Company may borrow up to $25,000,000 overnight on an unsecured basis from two correspondent banks. As of December 31, 2018 and 2017, no amounts were outstanding under these arrangements. As of December 31, 2018, the Company had an available line of credit with the Federal Home Loan Bank of San Francisco ("FHLB") secured by the assets of the Company. Under this line, the Company may borrow up to $17,521,000 subject to providing adequate collateral and continued compliance with the Advances and Security Agreement and other eligibility requirements established by the FHLB. The Company has pledged investment securities with a market value of $18,090,000 as collateral for this line. As of December 31, 2018 no advances were outstanding under this arrangement.

2018 2017Deposits: Noninterest-Bearing Demand Deposits 287,409,000$ 245,892,000$

Interest-Bearing Demand Deposits 58,386,000 46,743,000 Savings, NOW and Money Market Accounts 293,508,000 265,899,000 Time Deposits Under $250,000 18,640,000 9,369,000 Time Deposits $250,000 and Over 45,715,000 35,367,000

Total Deposits 703,658,000$ 603,270,000$

2019 62,741,000$ 2020 500,000 2021 973,000 2022 141,000

64,355,000$



28

NOTE G - INCOME TAXES The provision for income taxes for the years ended December 31, consists of the following:

Income tax expense for 2017 includes a downward adjustment of net deferred tax assets in the amount of $943,000, recorded as a result of the enactment of H.R.1 Tax Cuts and Jobs Act on December 22, 2017. The Act reduced the corporate Federal tax rate from 34% to 21% effective January 1, 2018. 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 statement of financial condition at December 31:

2018 2017Current: Federal 243,000$ 1,377,000$ State 823,000 786,000

1,066,000 2,163,000 Deferred 229,000) ( 213,000) ( Deferred Tax Asset Adjustment for Enacted Change in Tax Rate - 943,000 Amortization of Qualified Affordable Housing Projects 1,521,000 1,100,000

2,358,000$ 3,993,000$

2018 2017Deferred Tax Assets: Pre-Opening Expenses 148,000$ 174,000$ Allowance for Loan Losses Due to Tax Limitations 1,960,000 1,653,000 Market Value Adjustment on Investment Securities 286,000 168,000 Deferred Compensation 698,000 554,000 Stock-based Compensation 220,000 271,000 Other Assets and Liabilities 350,000 312,000

3,662,000 3,132,000

Deferred Tax Liabilities: Depreciation Differences 62,000) ( 81,000) (

Deferred Loan Costs 652,000) ( 532,000) ( Other Assets and Liabilities 250,000) ( 168,000) (

964,000) ( 781,000) (

Net Deferred Tax Assets (Liabilities) 2,698,000$ 2,351,000$



29

NOTE G - INCOME TAXES - Continued The Company is subject to federal income tax and franchise tax of the state of California. Income tax returns for the years ended after December 31, 2014 and 2013 are open to audit by the federal and state authorities, respectively. The Company does not expect the total amount of unrecognized tax benefits to significantly increase or decrease within the next twelve months. The Company agreed to invest $15,991,000 in low income housing projects limited liability partnerships. The Company recognized gross low income housing tax credits and other tax benefits in the amount of $1,590,000 and $1,346,000 in 2018 and 2017, respectively. The Company accounts for the investment using the proportional amortization method and as of December 31, 2018 and 2017 the unamortized balance of the investment was $12,215,000 and $10,745,000, respectively. During the years ended December 31, 2018 and 2017, the Company recognized amortization expense of $1,521,000 and $1,100,000, respectively, which was included within income tax expense on the consolidated statements of income. The Company has included in other liabilities the future equity contributions to the low income housing project. Total unfunded commitments related to low income housing projects amounted to $4,379,000 and $4,236,000 and of December 31, 2018 and 2017, respectively. A comparison of the federal statutory income tax rates to the Company's effective income tax rates follows:

Amount Rate Amount Rate

Statutory Federal Tax 2,375,000$ 21.0% 3,142,000$ 34.0% State Tax, Net of Federal Benefit 628,000 5.6% 514,000 5.6% Tax Impact from Enacted Change in Tax Rate - - 943,000 10.2% Tax Free Income 152,000) ( 1.2%) ( 279,000) ( 3.0%) ( Low Income Tax Benefits, Net 132,000) ( 1.4%) ( 246,000) ( 2.7%) ( Excess Tax Benefits from Stock-based Compensation 454,000) ( 4.0%) ( 190,000) ( 2.1%) ( Stock-based Compensation 4,000 0.1% 4,000 0.1% Other Items, Net 89,000 0.7% 105,000 1.1%

2,358,000$ 20.8% 3,993,000$ 43.2%

2018 2017



30

NOTE H - OTHER EXPENSES Other expenses as of December 31 are comprised of the following:

NOTE I - RELATED PARTY TRANSACTIONS In the ordinary course of business, the Company has extended credit to and received deposits from certain members of its Board of Directors and Executive Officers and companies in which they have an interest. These related parties had outstanding deposits at the Company approximating $47,131,000 and $33,250,000, and outstanding loans of $34,687,000 and $16,908,000, at December 31, 2018 and 2017, respectively. With regard to the lease for the branch, as discussed in Note D, independent counsel represented the Company in the lease negotiations and the director's involvement was made known to the Board of Directors. The director abstained from the discussions regarding the branch lease as well as the vote on the lease. The Board believes that the terms of the lease are no less favorable to the Company than could have been obtained from an independent third party.

2018 2017

Professional Fees 379,000$ 325,000$ Data Processing 1,046,000 916,000 Directors Fees 377,000 289,000 Office Expenses 304,000 296,000 Marketing and Business Promotion 303,000 368,000 Insurance 205,000 208,000 Other Expenses 909,000 875,000

3,523,000$ 3,277,000$



31

NOTE J - EARNINGS PER SHARE ("EPS") The following is a reconciliation of net income and shares outstanding to the income and number of shares used to compute EPS:

At December 31, 2018 and 2017 there were 50,000 and 0 stock options that could potentially dilute earnings per share in the future that were not included in the computation of diluted earnings per share because to do so would have been antidilutive. NOTE K - COMMITMENTS In the ordinary course of business, the Company enters into financial commitments to meet the financing needs of its customers. Those instruments involve, to varying degrees, elements of credit and interest rate risk not recognized in the Company's 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 financial statements. As of December 31, 2018 and 2017, the Company had the following outstanding financial commitments whose contractual amount represents credit risk:

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 and standby letters of credit are secured by real estate, equipment, or personal property.

Income Shares Income Shares

Net Income as Reported 8,952,000$ 5,247,000$ Weighted Average Shares Outstanding During the Year 3,903,510 3,738,372

Used in Basic EPS 8,952,000 3,903,510 5,247,000 3,738,372 Dilutive Effect of Outstanding Stock Options and Stock Grants 288,580 316,335

Used in Dilutive EPS 8,952,000$ 4,192,090 5,247,000$ 4,054,707

2018 2017

2018 2017

Commitments to Extend Credit 212,675,000$ 162,652,000$



32

NOTE K - COMMITMENTS - Continued The Company has entered into deferred compensation agreements with certain key officers. Under these agreements the Company is obligated to provide, upon retirement, a 15 year benefit to the officers. The annual benefits range from $75,000 to $100,000. The Company expenses annually an amount sufficient to accrue the present value of the benefits to be paid to the officer. The expense associated with these agreements was approximately $488,000 in 2018 and $462,000 in 2017. NOTE L - EMPLOYEE BENEFIT PLAN The Company adopted a 401(k) Plan for its employees in 2010. Under the plan, eligible employees may defer a portion of their salaries. The plan also provides for a matching contribution by the Company. The Company made contributions of $169,000 and $143,000 for 2018 and 2017, respectively. NOTE M - STOCK-BASED COMPENSATION The 2008 Stock Option Plan was approved by shareholders in February 2009. Under the terms of the 2008 Stock Option Plan, officers and key employees may be granted both nonqualified and incentive stock options and directors and organizers, who are not also an officer or employee, may only be granted nonqualified stock options. The Plan provides for options to purchase 737,937 shares of common stock at a price not less than 100% of the fair market value of the stock on the date of the grant. Stock options expire no later than ten years from the date of the grant and generally vest over three to five years. The Plan provides for accelerated vesting if there is a change of control, as defined in the Plan. During 2013 the Board of Directors adopted the Valley Republic 2013 Restricted Share Plan ("Restricted Share Plan"). Under the terms of the Restricted Share Plan, awards of restricted stock may be granted to employees and directors of the Company. The Restricted Share Plan provided for 299,542 shares of common stock that may be awarded. The shares will be issued upon vesting of the award. The awards generally will vest after the passage of time or performance criteria. The Restricted Share Plan provides for accelerated vesting if there is a change of control as defined in the Plan. The Valley Republic Bancorp 2016 Omnibus Equity Incentive Plan (the “2016 Plan”) was approved by shareholders in April 2016. The 2016 Plan reserves 1,050,000 shares for issuance. The 2016 Plan provides for grants of stock options and restricted share awards to employees, non-employee directors and consultants. Stock options granted to employees may be both nonqualifed and incentive stock options. Stock options are granted at a price no less than 100% of the fair market value of the stock on the date of grant. Equity awards generally vest over three to five years and stock options expire no later than ten years from the date of grant. The 2016 Plan provides for accelerated vesting if there is a change of control, as defined in the Plan.



33

NOTE M - STOCK-BASED COMPENSATION - Continued Upon adoption of the Valley Republic Bancorp 2016 Omnibus Equity Incentive Plan, both the 2008 Stock Option Plan and the 2013 Restricted Share Plan were terminated. All incentive stock options, non-qualified options, and restricted stock units outstanding under these two plans were assumed by the new 2016 Plan and were deducted from the 1,050,000 shares reserved under the 2016 Plan. The Company recognized stock-based compensation expense of $556,000 and $330,000 in 2018 and 2017, respectively. The Company also recognized income tax benefits related to stock-based compensation of $167,000 in 2018 and $131,000 in 2017. The fair value of each option grant was estimated on the date of grant using the Black-Scholes option pricing model with the weighted-average assumptions presented below:

The expected volatility is based on the historical volatility of the Bank. The expected term represents the estimated average period of time that the options remain outstanding. Since the Bank 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. No stock options were granted in 2017.

2018

Expected Volatility 14.2%Expected Term 6.25 YrsExpected Dividends NoneRisk Free Rate 2.76%Weighted-Average Grant Date Fair Value 7.61$



34

NOTE M - STOCK-BASED COMPENSATION - Continued A summary of the status of the Company's stock option plan as of December 31, 2018 and changes during the period ended thereon is presented below:

As of December 31, 2018, there was $349,000 of total unrecognized compensation cost related to the outstanding stock options that will be recognized over a weighted-average period of approximately 2.4 years. The intrinsic value of stock options exercised during 2018 and 2017 amounted to $4,161,000 and $672,000, respectively. A summary of the Company's nonvested stock grant activity under the 2016 Plan as of December 31, 2018 and changes during the year then ended are as follows:

As of December 31, 2018 there was $648,000 of total unrecognized compensation cost related to nonvested stock grants that will be recognized over a weighted-average period of 2.2 years. The total fair value of shares vested during the years ended December 31, 2018 and 2017 was approximately $453,000 and $448,000, respectively.

Weighted-Weighted- Average

Average Remaining AggregateExercise Contractual Intrinsic

Shares Price Term Value

Outstanding at Beginning of Year 544,555 10.22$ Granted 50,000 34.00$ Exercised 202,575) ( 9.90$ Forfeited 1,575) ( 11.43$

Outstanding at End of Year 390,405 13.40$ 2.04 7,068,000$

Options Exercisable 340,405 11.03$ 0.92 6,969,000$

Weighted- Average

Grant DateShares Fair Value

Nonvested at Beginning of Year 2,625 20.57$ Restricted Stock Awards 37,545 29.76$ Shares Vested and Issued 14,243) ( 27.61$ Shares Forfeited - -$

Nonvested at End of Year 25,927 30.10$



35

NOTE N - FAIR VALUE MEASUREMENT The following is a description of valuation methodologies used for assets and liabilities recorded at fair value: Securities: The fair values of securities available-for-sale are determined by matrix pricing, which is a mathematical technique used widely in the industry to value debt securities without relying exclusively on quoted prices for specific securities but rather by relying on the securities' relationship to other benchmark quoted securities (Level 2). Derivatives: The fair values of derivatives are based on valuation models using observable market data as of the measurement date (Level 2). Our derivatives are traded in an over-the-counter market where quoted market prices are not always available. Therefore, the fair values of derivatives are determined using quantitative models that utilize multiple market inputs. The inputs will vary based on the type of derivative but could include interest rates, prices and indices to generate continuous yield or pricing curves, prepayment rates, and volatility factors to value the position. The majority of market inputs are actively quoted and can be validated through external sources, including brokers, market transactions and third-party pricing services. The following table provides a hierarchy and fair value for each major category of assets and liabilities measured at fair value at December 31:

NOTE O - FAIR VALUE OF FINANCIAL INSTRUMENTS The fair value of a financial instrument is the amount at which the asset or obligation could be exchanged in a current transaction between willing parties, other than in a forced or liquidation sale. Fair value estimates are made at a specific point in time based on relevant market information and information about the financial instrument. These estimates do not reflect any premium or discount that could result from offering for sale at one time the entire holdings of a particular financial instrument. Because no market value exists for a significant portion of the financial instruments, fair value estimates are based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments, and other factors. These estimates are subjective in nature, involve uncertainties and matters of judgment and, therefore, cannot be determined with precision. Changes in assumptions could significantly affect the estimates.

December 31, 2018 Level 1 Level 2 Level 3 TotalAssets measured at fair value on a recurring basis

Available-for-Sale Securities -$ 76,912,000$ -$ 76,912,000$ Derivatives -$ 898,000$ -$ 898,000$

December 31, 2017

Assets measured at fair value on a recurring basis

Available-for-Sale Securities -$ 51,064,000$ -$ 51,064,000$ Derivatives -$ 701,000$ -$ 701,000$

Fair Value Measurements Using



36

NOTE O - FAIR VALUE OF FINANCIAL INSTRUMENTS – CONTINUED 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 to estimate the fair value of significant financial instruments not previously presented: Cash and Cash Equivalents The carrying amounts of cash and short term instruments approximate fair values. Time Deposits in Other Banks Fair values for time deposits with other banks are estimated using discounted cash flow analyses, using interest rates currently being offered with similar terms. Debt Securities See Fair Value Measurement discussion in Note N. Loans Fair values of loans, excluding loans held for sale, are based on the exit price notion set forth by ASU 2016-01 effective January 1, 2018 and estimated using discounted cash flow analyses. The estimation of fair values of loans results in a Level 3 classification as it requires various assumptions and considerable judgement to incorporate factors relevant when selling loans to market participants, such as funding costs, return requirements of likely buyers and performance expectations of the loans given the current market environment and quality of loans. Estimated fair value of loans carried at cost at December 31, 2017 were based on an entry price notion. Federal Home Loan Bank Stock The fair value of Federal Home Loan Bank Stock is not readily determinable due to the lack of its transferability. Deposits The fair values disclosed for demand deposits, including interest and non-interest demand accounts, savings, and certain types of money market accounts are, by definition based on carrying value. Fair value for fixed-rate certificates of deposit is estimated using a discounted cash flow calculation that applies interest rates currently being offered on certificates to a schedule of aggregate expected monthly maturities on time deposits. Early withdrawal of fixed-rate certificates of deposit is not expected to be significant Accrued Interest Receivable and Payable The fair value of accrued interest receivable and payable approximate their carrying amounts. 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.



37

NOTE O - FAIR VALUE OF FINANCIAL INSTRUMENTS - Continued The fair value hierarchy level and estimated fair value of financial instruments at December 31, 2018 and 2017 are summarized as follows:

NOTE P - DERIVATIVES The Company utilizes interest rate swap agreements as part of its asset liability management strategy to help manage its interest rate risk position. The notional amount of the interest rate swaps does not represent the amount exchanged by the parties. The amount exchanged is determined by reference to the notional amount and the other terms of the individual interest rate swap agreements. The following table reflects the fair value hedges included in the Income Statement as of December 31:

The following table reflects the fair value hedge included in the Balance Sheets as of December 31:

2018 2017Fair Value Carrying Fair Carrying FairHierarchy Value Value Value Value

Financial Assets: Cash and Cash Equivelants Level 1 74,822,000$ 74,822,000$ 59,769,000$ 59,769,000$ Time Deposits in Other Banks Level 1 24,800,000 24,631,000 30,952,000 30,736,000 Investment Securities Level 2 129,400,000 129,031,000 103,499,000 103,374,000 Loans, net Level 3 514,697,000 513,761,000 441,743,000 437,621,000 Federal Home Loan Bank Stock N/A 2,812,000 N/A 2,364,000 N/A Interest Rate Swap Agreements Level 2 898,000 898,000 701,000 701,000 Accrued Interest Receivable Level 2 3,427,000 3,427,000 2,723,000 2,723,000

Financial Liabilities: Deposits Level 2 703,658,000 703,362,000 603,270,000 602,857,000 Accrued Interest Payable Level 2 95,000 95,000 28,000 28,000

Interest Rate Swaps Location 2018 2017Change in Fair Value on Interest Rate Swaps Hedging Loans Interest Income 49,000$ 92,000)$(

Notional Notional Amount Fair Value Amount Fair Value

Included in Other Assets: Interest Rate Swaps Related to Loans 17,701,000$ 898,000$ 18,154,000$ 701,000$

2018 2017



38

NOTE Q - REGULATORY MATTERS The Bank is subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory - and possibly additional discretionary - actions by regulators that, if undertaken, could have a direct material effect on the Company's financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of their assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. The capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. In July, 2013, the federal bank regulatory agencies approved the final rules implementing the Basel Committee on Banking Supervision's capital guidelines for U.S. banks (Basel III rules). The new rules became effective on January 1, 2015, with certain of the requirements phased-in over a multi-year schedule, and fully phased in by January 1, 2019. Under the Basel III rules, the Bank must hold a capital conservation buffer above the adequately capitalized risk-based capital ratios. The capital conservation buffer is being phased in from 0.0% for 2015 to 2.50% by 2019. The capital conservation buffer for 2018 is 1.875%. The net unrealized gain or loss on available-for-sale securities is not included in computing regulatory capital. Quantitative measures established by regulation to ensure capital adequacy require the Bank to maintain minimum amounts and ratios (set forth in the table below) of total, Tier 1 and CET1 capital (as defined in the regulations) to risk-weighted assets (as defined), and of Tier 1 capital (as defined) to average assets (as defined). Management believes, as of December 31, 2018 and 2017, that the Bank meets all capital adequacy requirements. As of December 31, 2018 and 2017, the most recent notification from the FDIC categorized the Bank as well capitalized under the regulatory framework for prompt corrective action (there are no conditions or events since that notification that management believes have changed the Bank's category). To be categorized as well capitalized, the Bank must maintain minimum ratios as set forth in the table below.



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NOTE Q - REGULATORY MATTERS - Continued The following table also sets forth the Bank's actual capital amounts and ratios:

The California Financial Code provides that a Company 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 the last three fiscal years less the amount of any distribution made to the Company’s shareholders during the same period. In addition, the Company and Bank may not pay dividends that would result in its capital levels being reduced below the minimum requirements shown above. The Company is not subject to similar regulatory capital requirements because its consolidated assets do not exceed $3 billion, the minimum asset size criteria for bank holding companies subject to those requirements. NOTE R - STOCK DIVIDEND The Company declared a 5% stock dividend payable to the shareholders of Valley Republic Bancorp common stock. The 5% dividend was paid to shareholders of record as of December 15, 2017, and the dividend was issued on December 29, 2017. The per share data in the income statement and the footnotes have been adjusted to give effect to this dividend.

Amount of Capital RequiredTo Be Well-Capitalized

For Capital Under PromptAdequacy Corrective

Actual Purposes ProvisionsAmount Ratio Amount Ratio Amount Ratio

As of December 31, 2018: Total Capital (to Risk-Weighted Assets) $74,214,000 11.48% $51,727,000 8.00% $64,659,000 10.00% Tier 1 Capital (to Risk-Weighted Assets) $67,168,000 10.39% $38,795,000 6.00% $51,727,000 8.00% CET1 Capital (to Risk-Weighted Assets) $67,168,000 10.39% $29,096,000 4.50% $42,028,000 6.50% Tier 1 Capital (to Average Assets) $67,168,000 8.65% $31,072,000 4.00% $38,840,000 5.00%

As of December 31, 2017: Total Capital (to Risk-Weighted Assets) $62,838,000 11.57% $43,454,000 8.00% $54,317,000 10.00% Tier 1 Capital (to Risk-Weighted Assets) $56,607,000 10.42% $32,590,000 6.00% $43,454,000 8.00% CET1 Capital (to Risk-Weighted Assets) $56,607,000 10.42% $24,443,000 4.50% $35,306,000 6.50% Tier 1 Capital (to Average Assets) $56,607,000 8.48% $26,709,000 4.00% $33,386,000 5.00%

Valley Republic Bancorp(VLLX)

LOCAL VRBSTOCK INFORMATION

David WesterfeldStifel 5060 California Avenue, Suite 1140Bakers�eld, CA 93309661.321.7300877.816.9087

TRANSFER AGENT

Broadridge Corporate Issuer Solutions, Inc.P.O. Box 1342Brentwood, NY [email protected]

MARKET MAKER

Michael NatzicD.A. Davidson & Co.P.O. Box 1688Big Bear Lake, CA [email protected]

Jacob ForneyRaymond JamesOne Embarcadero Center, Suite 650San Francisco, CA [email protected]

LEGAL COUNSEL

S. Alan RosenDuane Morris LLP865 South Figueroa Street, Suite 3100Los Angeles, CA 90017-5450213.689.7461

AUDITORS

Ken E. Johnson, CPAVavrinek, Trine, Day & Co., L.L.P.25231 Paseo De Alicia, Suite 100Laguna Hills, CA 92653949.768.0833

Valley Republic Bancorp (VLLX)

Local. Responsive. Reliable.

valleyrepublicbank.com5000 California Avenue, Suite 110, Bakers�eld | 4300 Co�ee Road, Suite A6, Bakers�eld11330 Ming Avenue, Suite 400, Bakers�eld | 500 Woollomes Avenue, Suite 101, Delano

661.371.2000

Documents

Local. Responsive. Reliable.®...member of the American Institute of CPAs and the Colorado Society of CPAs. Anthony Leggio Anthony Leggio has been a director of Valley Republic Bank