OUR CORE PURPOSE - Mission Bank · Glenn Bland founded Bakersield-based Bland Solar & Air more than three decades ago. The The company that designs, engineers and installs solar and

I MISSION BANCORP

I "Let our Experience work for you,,

OUR CORE PURPOSE To fuel and grow vibrant and prosperous communities

ANNUAL REPORT 2016

B R A V E R Y B R E W I N G C O M P A N Y Brian Avery laughs when he notes that his business partners, who include his father, Bart, and actor R. Lee Ermey, are twice his age. Ermey, a U.S. Marine Corps veteran, is best known for his role as Gunnery Sergeant in “Full Metal Jacket.” The young craft beer brewer heads a company that has far exceeded his and investors’ expectations and is positioning itself for even more growth. Located at 42705 8th St. West in Lancaster, the company’s name is a combination of Brian’s first and last names (Br and Avery), and recognizes the military’s strong Antelope Valley presence. Its many beers carry such labels as Allegiance IPA, Buster’s Brown, Old Rat, Semper Rye, Smoking Gun, Gunny’s Choice and Meritorious.

Since opening its doors on July 4, 2012, Bravery Brewing has enjoyed strong community support. But the craft brewing industry is a competitive one, and Brian Avery said he and his partners are pursuing a cautious business strategy with the help of Tom Lescher, Carmen Roberts and their team at Mission Bank. “We selected Mission Bank because we knew we would not receive the same TLC from larger regional or national banks. We like meeting people face-to-face, whether they are our customers or our bankers.”

Back from left: Bart Avery and Brian Avery of Bravery Brewery.

Seated from left: Bankers Tom Lescher and Carmen Roberts, with Sandra Avery of Bravery Brewery.

Growing Vibrant and Prosperous Communities

TO OUR SHAREHOLDERS,

We are pleased to report that Mission Bancorp and our wholly owned

subsidiary, Mission Bank, experienced another year of tremendous success

in 2016. Fueled by strong relationships with business owners, organizational

leaders and professionals in our primary markets, Mission Bancorp grew net

income by 36% to $5.1 million and earnings per share by 35% to $3.21.

Our secret to long-term success and consistent earnings growth in double-digit percentages is simple: grow strong banking relationships. The best indicators of growing relationships are demand deposits and business accounts. In 2016, the Bank’s demand deposits grew 3.8% to $247 million and we added 548 new business checking accounts. At year-end, demand deposits represented 51% of total deposits, which is more than double the industry average. We achieved this through an intentional focus on relationship banking aimed at partnerships with our market’s highest caliber businesses, investors and professionals. How do we attract these customers? The old-fashioned way — through hard work, diligent focus, and exceptional customer service.

Developing strong banking relationships has resulted in new opportunities for high-caliber loans. Customers who have business credit needs contact Mission Bank as lending needs arise. In 2016, growing the loan portfolio, with an acceptable risk profile, remained our greatest opportunity to improve earnings. Last year, gross loans grew by 26% to $381 million.

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

Since 2008, the banking industry has been facing the strong head winds of ultra-low interest rates and increasing regulatory burdens. The first of these caused the industry’s net interest margin, the difference between what we earn on loans and investments and what we pay on deposits, to be cut in half. The second has increased non-interest expense, or overhead, without corresponding increases in revenue. Generally speaking,

From left: Preet S. Bhattal of Woodspring Suites with Banker Kevin Trihey and Ajit Singh Bhattal of Woodspring Suites.

W O O D S P R I N G S U I T E S Ajit Singh Bhattal and his son, Preet, recently open the first Woodspring Suites franchise on the West Coast at 8311 East Brundage Lane in Bakersfield. The long-term, extended-stay hotel caters to a wide range of clients who spend days, weeks and maybe months in Bakersfield on business. The pair chose a Woodspring Suites franchise because the chain’s 216 hotels have a quality reputation, mainly in the Midwest and East.

With 27 years of retail experience, including the ownership of a successful truck stop, gas station, restaurant and convenience store franchises, the father and son turned to Kevin Trihey and his team at Mission Bank for financial support. “Because we want to grow, we need capital and a strong, responsive bank,” said Ajit Singh Bhattal. “I know the people at Mission Bank, up to the president. I like having access to management. Kevin is approachable. You can talk to him. He’s direct. He knows his stuff and gets it done. He is a go-getter with a good work ethic.”

when revenue is down and expenses are up, businesses rarely fare well. However, our ability to prosper in this challenging setting is evidence of our exceptional team, our keen focus and our recognition that small improvements can, when aggregated, produce very large results.

Although Trump’s election resulted in an increase in bank stocks recently, Mission Bank is not focused on stock price. Instead, our focus remains relentlessly aimed at increasing intrinsic value. The Company’s intrinsic value will increase based on our ability to earn a high return on equity (ROE), retain those earnings and reinvest them into the business at a high ROE. Over the last four years, our ROE has improved from 7.21% to 11.33%, which puts us in the top 20% of all banks in California. On any given day, or for a period of a few years, the market may or may not reflect the underlying intrinsic value of the Bank. However, over a five- to ten-year period, the Bank’s stock price will move according to the intrinsic value. A Trump-driven stock inflation is not something to get too excited about,

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M I S S I O N B A N C O R P A N N U A L R E P O R T 2 0 16 • 3

since the stock price could drop the next day. But an ability to increase intrinsic value, which we have demonstrated consistently, is something that our shareholders should be thrilled to hear.

Strong financial performance starts with a strong leadership team. Below is a list of highlights from our outstanding managers, as well as a recap of other important developments from 2016:

Led by Chief Credit Officer, Mike Congdon, our credit culture is a key ingredient of our secret sauce. Credit quality continues to be strong during this time of record loan growth. Non-performing loans, which are loans on non-accrual or more than 90 days past due, were 0.09% of total loans at year-end. This number remains extremely low. Per GAAP, the non-performing loan percentage excludes 310-30 purchased loans. We continue to make provision expenses in line with the loan growth. This is in contrast to some of our fellow bankers, who are reversing the loan provision, thereby turning an expense into revenue.

From left: Garry Richardson with Banker Rob Hallum and Kyle Richardson.

G A R R Y R I C H A R D S O N F A R M S Garry Richardson and his sons, Kyle and Eric, farm in the Mettler area, south of Bakersfield. Garry Richardson Farms is comprised of 900 acres of late-season stone fruit, 580 of those acres are peach orchards. About six years ago, he added two varieties of clementines, a hybrid between mandarin and sweet orange, to his farms. The family also operates Rich-Pak, a grower, packer and shipper of San Joaquin Valley clementines.

“To be successful, you have to have a bank that understands your challenges and potential,” Richardson says. “Most banks figure you can have one bad year. The big problem is that we can have multiple good and multiple bad years. Rob Hallum and Mission’s board understand that. They’re a smaller, community bank. Their feet and ears are a little closer to the ground. They’re in it for the long haul.”

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4 • M I S S I O N B A N C O R P A N N U A L R E P O R T 2 0 16

Our Ag Division grew by leaps and bounds in 2016. Led by Division Manager Rob Hallum, we added $39 million in ag loans/commitments and added $15 million of loans to the Farmer Mac program. The Farmer Mac program allows us to leverage our expertise in the industry and offer very competitive fixed-rate financing at amounts up to $50 million. Even during a record drought and volatile commodity prices in almonds, hay and other crops, Mission Bank can grow by focusing on doing business with the best local farmers who have a proven ability to operate through cycles.

The Company also made significant strides in our SBA Division, led by Division Manager Matt Damian. Once again, Matt was recognized as the top lender to local SBA 504 provider Mid-State Development Corporation. In addition, Mission Bank was recognized nationally as the second highest producing bank in our size category in America. We received preferred lender status with the SBA, and we are proud to report that Mission Bank is the only local bank in each of our markets with the preferred designation. As a Preferred Lender we can approve 7a loans internally, as opposed to

From left: Glenn Bland of Bland Solar & Air with Banker Scott Black.

B L A N D S O L A R & A I R Glenn Bland founded Bakersfield-based Bland Solar & Air more than three decades ago. The company that designs, engineers and installs solar and HVAC systems has grown to include showrooms in Bakersfield, Fresno, Clovis and Templeton.

Balancing expansion and cash flow in a highly competitive, challenging business can be difficult. Bland turned to Mission Bank for support. “Mission Bank has been there every step of the way. They offer services that no other bank would offer us.” Bland values his relationship with Scott Black and his team. “As a local businessman, you’re not just a number. Decisions are made in days, rather than the much longer time required when working with a bigger bank.”

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From left: Nathan and Larry Vasquez of Northern Digital with Banker Matt Damian.

N O R T H E R N D I G I T A L , I N C . Larry Vasquez is the CEO of Bakersfield-based Northern Digital, Inc. An experienced control systems engineer, he has grown the company that has served the oil industry for three decades. But the realities of the volatile energy business prompted Northern Digital to diversify. The company’s team of engineers now consults, and designs and develops a wide range of control systems for projects including dehydration facilities, water and waste treatment plants, gas plants, oil and gas refineries, and food processing facilities.

In 2015, Larry Vasquez began planning the construction of his company’s new 14,000-squarefoot headquarters building in southwest Bakersfield. He turned to Matt Damian and his team at Mission Bank for financial support. “I needed a bank that would be responsive and understanding of the challenges our niche company faces as it expands and refocuses. For me it’s all about building a relationship and commitment. And that’s what I found with the people at Mission Bank.”

sending them to the SBA for approval, which can add up to 30-45 days to the process. In a world where time is money, borrowers appreciate the value of an immediate answer.

The Central Valley team remained focused on delivering impressive growth and identifying key opportunities in a competitive market. Led by Regional President Samy Abiaoui, total gross loans in the region grew by 28% to $283 million. The numbers don’t lie. At a time when the banking industry grew loans by single digits, our team continued to excel. In the face of fierce competition for quality loans, we offered attractive fixed-rate loans to key customers. Although this increases the Bank’s interest rate risk, we offset the risk of rising rates by maintaining a short investment portfolio and have developed an interest rate SWAP program. This is a prime example of how Mission Bank employs strategies that benefit our customers instead of benefitting the bond market participants. These actions display our committed efforts to improve Main Street rather than Wall Street.

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From left: Ruby Matzke of Midas Pump and Supply with Banker Judy Hopkins.

M I D A S P U M P A N D S U P P L Y Midas Pump and Supply has been a mainstay in Kern County’s oilfields for more than three decades. Supplying and selling oil well pumping equipment, Midas was started by Roger Matzke, a Vietnam War veteran who died of cancer in 2003. Roger’s wife, Ruby Matzke, and their son, Jason, continued the Bakersfield company after Roger’s death. Ever since, they have been riding the highs and lows of oil prices.

Ruby needed an understanding and responsive bank to enable her to accommodate the changing needs and challenges experienced by her oil producing customers. She turned to Judy Hopkins and her team at Mission’s Shafter Business Banking Center. “Judy is really easy to work with. You can reach her any time. If I need anything, all I have to do is call her,” said Ruby. “If I need something, they are right there for me. They will work with me and we can work it out together. Everything comes out fine.”

Tom Lescher leads our phenomenal team in the High Desert Region, which continues to experience tremendous customer growth, particularly in the Antelope Valley and Ridgecrest markets. Total gross loans in the region grew 20% to $99 million and demand deposits in our Lancaster Business Banking Center grew by 36% to $45 million. Importantly, growth in the High Desert also lowers our risk profile through diversification. Unlike the Central Valley which is driven by agriculture and oil, the High Desert taps into industries such as energy, defense and aerospace. Truly, the High Desert demonstrates that magical combination of growing loans while simultaneously lowering risk.

At Mission Bank 1031 Exchange, Billie Sue Records and the team have been busy. In 2016, they contributed six figures to the bottom line for the first time. Since inception in 2008, we have handled more than one thousand exchanges with total aggregate property value of more than $1.2 billion! When selling an investment property, call Billie Sue for your “Get-out-of-IRS-Jail-Free” card.

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Even the most capable team in the world can’t get you around death, taxes and regulation. Right now, the regulatory headwinds are blowing at a gale force. Nevertheless, our team continues to streamline operations and deliver outstanding products and services at lower unit costs. The dedicated team at headquarters, led by Sheldon Ralph, has made progress in this area with our efficiency ratio. This measure of overhead relative to revenue was down to 59% in 2016 from 64% in 2015 and 68% in 2014. An efficiency ratio in the 50s, is phenomenal! This trend is significant and allows us to deploy our resources in areas that are customer-focused. We continue to reinvest in new technology, products and services and expect these investments to pay off in increased customer loyalty and stronger banking relationships.

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

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

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

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

Our Values: Integrity, Drive, Ownership and Collaboration.

Our Long Term Goals: $1 billion in assets by 2021. Earn an after-tax ROA of 1.50% and after-tax ROE of 15%. In 2015, although we improved both ratios, we are not at our goals. This means that we have work to do. The good news is that our team is up for the challenge.

We thank both our team and our customers. They are the driving force behind our success and are the key components in growing shareholder value. We also thank our shareholders for their long-term commitment to our company. Here’s looking forward to an exciting and profitable 2017.

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

8 • M I S S I O N B A N C O R P A N N U A L R E P O R T 2 0 16

From left: Banker Eric Shumate with Les and Scott DenHerder of HPS Mechanical, Inc.

H P S M E C H A N I C A L , I N C .

HPS Mechanical, Inc. has been in business since 1959, when it was founded in Bakersfield by Harry DenHerder as Harry’s Plumbing Service. With one truck used for service calls, Harry built his business on a foundation of respect and competence. Since his son, Les DenHerder, purchased the business in 1976, HPS Mechanical Inc. has expanded into new construction, pipelines, engineering and plumbing design. With offices in Bakersfield and San Diego, the company serves customers in Southern California and Nevada.

Les DenHerder credits the responsiveness of Eric Shumate and his team at Mission Bank for helping make his company a success. “Being local, Mission Bank knows our accountants and can answer questions directly. And when we need a quick response, Eric is willing to give it. For example, if our bonding company needs proof that we have a bank supporting us, Eric is willing to provide that proof personally.”


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

A.J. ANTONGIOVANNI President and Chief Executive Officer Mission Bancorp/Bank

J. BRYAN BATEY President Madison Builders, Inc

BRUCE L. BERETTA President Ag Wise Enterprises, Inc

JOHN BIDART Partner Bidart Dairy LLC

M I S S I O N B A N K

A.J. ANTONGIOVANNI President and Chief Executive Officer Mission Bank

MICHAEL CONGDON Senior Vice President Chief Credit Officer

STUART ANNABLE Senior Vice President Credit Administrator

SHELDON RALPH Senior Vice President Chief Administrative Officer

CENTRAL VALLEY REGION

SAMY ABIAOUI Regional President Central Valley Region

JUDY HOPKINS Vice President, Manager Shafter Business Banking Center

DONICE BOYLAN President B & B Surplus

ARNOLD T. CATTANI Charirman Mission Bancorp/Bank

SALVADOR CHIPRES Owner Salvador Chipres Construction

PARAMJIT S. DOSANJH Managing Partner Dosanjh Brothers Golden Gem Farms

LISA BOYDSTUN Vice President, Manager Bakersfield Business Banking Center

BRANDON HERNANDEZ Business Banker Riverwalk Business Banking Center

ROSALIA REYES Assistant Manager Greenfield Business Banking Center

HIGH DESERT REGION

TOM LESCHER Regional President High Desert Region

ERMA MARTIN Assistant Vice President, Manager Mojave Business Banking Center

SOLOMON RAJARATNAM Vice President, Manager Ridgecrest Business Banking Center

RICHARD E. FANUCCHI Executive Vice President Mission Bank

CURTIS E. FLOYD, ESQ President Curtis E. Floyd, A Professional Law Corporation

GEORGE NAGY Mission Bank

MARY JANE WILSON President & CEO WZI, Inc.

CARMEN ROBERTS Senior Vice President, Manager Lancaster Business Banking Center

AG DIVISION

ROB HALLUM Senior Vice President Ag Division Manager

RICHARD E. FANUCCHI Executive Vice President Business Development Officer Ag Division

SBA DIVISION

MATT DAMIAN Senior Vice President SBA Division Manager

1031 EXCHANGE

BILLIE SUE RECORDS Senior Vice President Senior Exchange Officer Mission Bank 1031 Exchange

MISSION BANCORP

I "Let our Experience work for you,,

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

STOCK TRANSFER AGENT & REGISTRAR

Computershare Trust Co., Inc. 350 Indiana Street, Suite 750 Golden, CO 80401 T: 303.262.0678 F: 312.601.2312

INDEPENDENT AUDITORS

Moss Adams LLP 10960 Wilshire Blvd., Suite 1100 Los Angeles, CA 90024 T: 310.477.0450 F: 310.477.8424

STOCK LISTING

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

INVESTOR & SHAREHOLDER INFORMATION

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

Crowell, Weedon & Co. Troy Norlander or Michael Natzic Community Banking Group T: 800.288.2811

Report of Independent Auditors and Consolidated Financial Statements for

Mission Bancorp December 31, 2016 and 2015

CONTENTS

PAGE

REPORT OF INDEPENDENT AUDITORS 1–2

CONSOLIDATED FINANCIAL STATEMENTS Consolidated balance sheets 4 Consolidated statements of income 5 Consolidated statements of comprehensive income 6 Consolidated statements of changes in shareholders’ equity 7 Consolidated statements of cash flows 8 Notes to consolidated financial statements 9–49

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GLOBAL ALLIANCE OF INDEPENDENT FIRMS

REPORT OF INDEPENDENT AUDITORS

TotheBoardofDirectorsMissionBancorp Report on the Financial Statements

We have audited the accompanying consolidated financial statements of Mission Bancorp and itssubsidiaries, which comprise the consolidated balance sheets as of December31, 2016 and 2015, andthe related consolidated statements of income, comprehensive income, changes in shareholders’ equity andcashflows fortheyearsthenended,andtherelatednotes tothe consolidatedfinancialstatements. Management’s Responsibility for the Financial Statements

Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to thepreparation and fair presentation of consolidated financial statements that are free from materialmisstatement, whetherduetofraudorerror. Auditor’s Responsibility

Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audits to obtain reasonableassuranceaboutwhethertheconsolidatedfinancial statements are freefrommaterialmisstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures inthe consolidated financial statements. The procedures selected depend on the auditor’s judgment,including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal controlrelevant to the entity’s preparation and fair presentation of the consolidated financial statements inorder 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 overallpresentationoftheconsolidated financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for ourauditopinion.

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MOSS-ADAMS LLP

Opinion

In our opinion, the consolidated financial statements referred to above present fairly, in all materialrespects, the financial position of Mission Bancorp and its subsidiaries as of December 31, 2016 and 2015, and the results of their operations and their cash flows for the years then ended in accordance with accounting principles generallyacceptedinthe UnitedStates ofAmerica.

Sacramento,CaliforniaMarch17,2017

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CONSOLIDATED FINANCIAL STATEMENTS

MISSION BANCORP CONSOLIDATED BALANCE SHEETS

ASSETS

DECEMBER 31, 2016 2015

Cash and cash due from banks $ 61,241,344 $ 58,961,821 Federal reserve excess balance 26,175,000 23,575,000

Total cash and cash equivalents 87,416,344 82,536,821

Interest bearing deposits in other banks Investment securities available-for-sale, at fair value

9,098,000 62,261,807

29,972,000 62,785,112

Loans, net Premises and equipment, net Bank owned life insurance Deferred tax asset

375,595,814 3,945,341 9,821,284 2,763,286

298,821,676 4,227,613 8,098,440 2,969,196

Interest receivable and other assets 7,389,320 5,826,456

TOTAL ASSETS $ 558,291,196 $ 495,237,314

LIABILITIES AND SHAREHOLDERS' EQUITY

DepositsNoninterest-bearing demand Savings, NOW, exchange, and escrow Money market Time deposits

$ 246,741,039 101,716,889 112,953,575

27,113,751

$ 237,641,726 84,443,132 99,208,868 28,807,046

Total deposits 488,525,254 450,100,772

FHLB borrowings 20,000,000 -Interest payable and other liabilities 2,700,816 3,008,999

Total liabilities 511,226,070 453,109,771

COMMITMENTS AND CONTINGENCIES (NOTE 13)

SHAREHOLDERS' EQUITY Common stock - 10,000,000 shares authorized;

no par value; 1,576,201 and 1,497,815 shares issued and outstanding at December 31, 2016

and 2015, respectively Retained earnings Accumulated other comprehensive loss

20,193,552 27,371,706

(487,650)

17,764,741 24,459,457

(93,497)

Total Mission Bancorp shareholders' equity 47,077,608 42,130,701 Noncontrolling (deficit) interest (12,482) (3,158)

Total shareholders' equity 47,065,126 42,127,543

TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 558,291,196 $ 495,237,314

See accompanying notes. 4

MISSION BANCORP CONSOLIDATED STATEMENTS OF INCOME

YEARS ENDED DECEMBER 31, 2016 2015

INTEREST INCOME Interest and fees on loans Interest on investment securities Other interest income

$ 16,845,893 1,578,708

160,558

$ 13,921,587 1,614,288

111,170

Total interest income 18,585,159 15,647,045

INTEREST EXPENSE Interest on other deposits Interest on time deposits FHLB borrowings

272,318 72,855 88,596

242,168 86,934

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Total interest expense 433,769 329,102

NET INTEREST INCOME 18,151,390 15,317,943

PROVISION FOR LOAN LOSSES 645,878 570,792

NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 17,505,512 14,747,151

NON-INTEREST INCOME Service charges, fees, and other income 4,571,259 4,087,452

NON-INTEREST EXPENSES Salaries, wages, and employee benefits Professional services Occupancy and equipment expenses Data processing and communication expenses Other expenses

8,076,727 1,394,201 1,356,654

947,179 1,771,508

7,461,454 1,428,178 1,347,286

899,482 1,350,725

Total non-interest expenses 13,546,269 12,487,125

NET INCOME BEFORE PROVISION FOR INCOME TAXES PROVISION FOR INCOME TAXES

8,530,502 3,429,408

6,347,478 2,580,322

NET INCOME LESS NET INCOME ATTRIBUTABLE TO THE

NONCONTROLLING INTEREST

5,101,094

47,676

3,767,156

40,876

NET INCOME AVAILABLE TO COMMON SHAREHOLDERS $ 5,053,418 $ 3,726,280

EARNINGS PER SHARE AVAILABLE TO COMMON SHAREHOLDERS - BASIC EARNINGS PER SHARE AVAILABLE TO COMMON SHAREHOLDERS - DILUTED

$ 3.21 $ 2.38

$ 3.15 $ 2.37


MISSION BANCORP CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME


NET INCOME OTHER COMPREHENSIVE LOSS, net of tax

Change in unrealized loss on securities available-for-sale, net of taxes of $279,158 in 2016

and $207,030 in 2015 Reclassification adjustment for gain included

in net income, net of taxes of $12,508 in 2016 Total change in unrealized loss on securities

available-for-sale

$ 5,101,094 $ 3,767,156

(377,251) (285,898)

(16,902) -

(394,153) (285,898)

TOTAL COMPREHENSIVE INCOME Less comprehensive income attributable to the

noncontrolling interest

4,706,941

47,676

3,481,258

40,876

COMPREHENSIVE INCOME ATTRIBUTABLE TO MISSION BANCORP $ 4,659,265 $ 3,440,382


MISSION BANCORP CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

YEARS ENDED DECEMBER 31, 2016 AND 2015 Common Stock Accumulated Total Mission

Other Bancorp Total Number of Retained Comprehensive Shareholders' Noncontrolling Shareholders'

Shares Amount Earnings Income Equity Interest Equity

BALANCE, December 31, 2014 1,416,442 15,507,617 22,630,599 192,401 38,330,617 6,466 38,337,083

Stock based compensation - 160,318 - - 160,318 - 160,318

Change in noncontrolling interest - - - - - (50,500) (50,500)

Net income - - 3,726,280 - 3,726,280 40,876 3,767,156

5% stock dividend 70,900 1,897,422 (1,897,422) - - - -

Fractional shares cancelled (184) (5,156) - - (5,156) - (5,156)

Options exercised 10,657 204,540 - - 204,540 - 204,540

Other comprehensive loss, net - - - (285,898) (285,898) - (285,898)

BALANCE, December 31, 2015 1,497,815 $ 17,764,741 $ 24,459,457 $ (93,497) $ 42,130,701 $ (3,158) $ 42,127,543

Stock based compensation - 180,187 - - 180,187 - 180,187

Change in noncontrolling interest - - - - - (57,000) (57,000)

Net income - - 5,053,418 - 5,053,418 47,676 5,101,094

5% stock dividend 74,891 2,141,169 (2,141,169) - - - -

Fractional shares cancelled (152) (5,045) - - (5,045) - (5,045)

Options exercised 3,647 112,500 - - 112,500 - 112,500

Other comprehensive loss, net - - - (394,153) (394,153) - (394,153)

BALANCE, December 31, 2016 (1) 1,576,201 $ 20,193,552 $ 27,371,706 $ (487,650) $ 47,077,608 $ (12,482) $ 47,065,126

(1) At December 31, 2016, shares outstanding excludes 3,252 unvested shares of restricted stock.


MISSION BANCORP CONSOLIDATED STATEMENTS OF CASH FLOWS

MISSION BANCORP CONSOLIDATED STATEMENTS OF CASH FLOWS


CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 5,101,094 $ 3,767,156 Adjustments to reconcile net income to net cash from operating activities

Provision for loan losses 645,878 570,792 Depreciation and amortization of premises and equipment Accretion of deferred loan fees and costs, net Accretion on ASC 310-20 loan discounts Accretion on ASC 310-30 loan discounts Amortization of premiums and discounts on investments, net Deferred tax expense (benefit) Stock-based compensation Increase in cash surrender value of bank owned life insurance Loss on disposition of premises and equipment Realized gain on sale of securities Net change in

Interest receivable and other assets Interest payable and other liabilities

419,802 (158,355)

(36,028) (330,430) 691,878 498,000 180,187

(222,844) -

(29,410)

(1,761,261) (308,607)

424,342 (170,790)

(91,766) (359,292) 706,556

(2,000) 160,318

(211,853) 7,709

-

(541,713) (121,022)

Net cash provided by operating activities 4,689,904 4,138,437

CASH FLOWS FROM INVESTING ACTIVITIES Purchases of available-for-sale investments Proceeds from repayments and maturities of available-for-sale

investments

(22,471,486)

21,646,504

(19,276,064)

20,051,692 Net decrease (increase) in interest bearing deposits in other banks Net increase in loans Purchases of premises and equipment Purchase of bank owned life insurance Purchase of Federal Home Loan Bank stock

20,874,000 (76,535,706)

(137,530) (1,500,000)

(161,100)

(10,120,000) (49,072,000)

(85,028) -

(131,400)

Net cash used in investing activities (58,285,318) (58,632,800)

CASH FLOWS FROM FINANCING ACTIVITIES Net increase in demand deposits and savings accounts Net decrease in time deposits Net proceeds from FHLB borrowings Distributions to noncontrolling interest holders Fractional shares cancelled Proceeds from exercises of stock options

40,117,777 (1,693,295) 20,000,000

(57,000) (5,045)

112,500

66,620,019 (1,544,812)

-(50,500)

(5,156) 204,540

Net cash provided by financing activities 58,474,937 65,224,091

Increase (decrease) in cash and cash equivalents Beginning of year

4,879,523 82,536,821

10,729,728 71,807,093

End of year $ 87,416,344 $ 82,536,821

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION Interest paid Taxes paid

SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING

$ 433,631 $ 328,966 4,253,000 2,575,000

AND FINANCING ACTIVITIES Change in unrealized gain on securities available for sale Loan transferred into other real estate owned

$ (685,819) 359,497

$ (492,928) -


MISSION BANCORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 1 – Summary of Significant Accounting Policies

Nature of operations – Mission Bancorp (the Company) was incorporated on January 31, 2001 andsubsequently obtained approval from the Board of Governors of the Federal Reserve System to be abank holding company in connection with its acquisition of Mission Bank (the Bank). The Companybecame the sole shareholder of the Bank in June 2002. The Bank is a state chartered financial institution incorporated in California on April 29, 1998. The Bank commenced banking operations on October 7,1998. The Bank maintains seven full service facilities, one located in Shafter, California, three located in Bakersfield, California, and three located in the Mojave Desert area, California. The Bank generates commercial, mortgage, and consumer loans and receives deposits from customers located primarily inCalifornia counties of Kern and Los Angeles.

On August 22, 2007, the Company organized Mission 1031 Exchange, LLC, a California Limited LiabilityCompany, to facilitate IRS Code Section 1031 property exchange transactions. Mission 1031 Exchange,LLC is a wholly owned subsidiary of Mission Bancorp.

In August 2008, the Company organized Double W, LLC, a California Limited Liability Company, to buildan office building to house the Company’s Shafter service facility and a medical office. Double W, LLC, isequally owned at fifty percent each by the Company and an independent third party. The noncontrollinginterest amounts included in the accompanying consolidated financial statements relate to this independent third party.

In November 2016, the Company organized Mission Community Development, LLC, a California LimitedLiability Company, to facilitate and promote growth in low-income communities. Mission CommunityDevelopment, LLC will submit an application with the Community Development Financial InstitutionsFund to qualify as a Community Development Entity that provides investment capital to low-incomecommunities. Mission Community Development, LLC is a wholly owned subsidiary of Mission Bancorp.

Basis of presentation and consolidation – The accompanying consolidated financial statements areprepared in accordance with accounting principles generally accepted in the United States of America(GAAP) and general practices within the banking industry. The consolidated financial statements of theCompany include the accounts of the Company, the Bank, Mission 1031 Exchange, LLC, Double W, LLC, and Mission Community Development, LLC. All significant intercompany balances and transactions havebeen eliminated in consolidation.

Reclassifications – Certain reclassifications have been made to the 2016 and 2015 consolidated financial statements to conform to the current year presentation. These reclassifications have no effecton previously reported net income or total shareholders’ equity of the Company.

Subsequent events – Subsequent events are events or transactions that occur after the consolidatedbalance sheet date but before consolidated financial statements are issued. The Company recognizes inthe consolidated financial statements the effects of all subsequent events that provide additionalevidence about conditions that existed at the date of the consolidated balance sheet, including theestimates inherent in the process of preparing the consolidated financial statements.

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Note 1 – Summary of Significant Accounting Policies (continued)

Subsequent events (continued) – The Company’s consolidated financial statements do not recognizesubsequent events that provide evidence about conditions that did not exist at the date of theconsolidated balance sheet but arose after the consolidated balance sheet date and before consolidated financial statements are issued. The Company has evaluated subsequent events through March 17, 2017, which is the date the consolidated financial statements were available to be issued.

Use of estimates – The preparation of consolidated financial statements in conformity with accountingprinciples generally accepted in the United States of America requires management to make estimatesand assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingentassets and liabilities at the date of the consolidated balance sheets, and the reported amounts ofrevenues and expenses during the reporting period. Actual results could differ from those estimates.

Material estimates that are particularly susceptible to significant change in the near term relate to thedetermination of the allowance for loan losses, cash flow projections associated with acquired loans,valuation of investment securities, share-based compensation, and valuation of deferred tax assets.Actual results could differ from the estimated amounts.

Concentrations of credit risk – The Company has no significant concentrations of credit risk with anyindividual party; however, the Company’s lending is primarily concentrated in California counties of Kern and Los Angeles.

As of December 31, 2016 and 2015, the Company has cash deposits at other financial institutions inexcess of the Federal Deposit Insurance Corporation insured limits. However, the Company places thesedeposits with major financial institutions and monitors the financial condition of these institutions.

Business combinations – Business combinations are accounted for under the acquisition method ofaccounting. Under the acquisition method, the acquiring entity in a business combination recognizes theacquired assets and assumed liabilities, regardless of the percentage owned, at their estimated fairvalues as of the date of acquisition. Any excess of the purchase price over the fair value of net assets andother identifiable intangible assets acquired is recorded as goodwill. To the extent the fair value of netassets acquired, including other identifiable assets, exceed the purchase price, a bargain purchase gain isrecognized. Assets acquired and liabilities assumed from contingencies must also be recognized at fairvalue, if the fair value can be determined during the measurement period. Results of operations of anacquired business are included in the consolidated statements of income from the date of acquisition.Acquisition related costs, including conversion and restructuring charges, are expensed as incurred.

Cash and cash equivalents – For purposes of the statements of cash flows, cash and cash equivalents include cash and balances due from banks, and federal funds sold, all of which have original maturitiesof less than ninety days. Banking regulations require that banks maintain a percentage of their depositsas reserves in cash or on deposit with the Federal Reserve Bank. The Bank was in compliance with itsreserve requirements as of December 31, 2016 and 2015.

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Interest bearing deposits in other banks – Interest bearing deposits in other banks are purchasedwith an original maturity date greater than ninety days and are carried at amortized cost. Interest-bearing deposits in other banks include certificates of deposits in major financial institutions locatedthroughout the United States of America.

Investment securities – Debt and equity securities that will be held for indefinite periods of time,including securities that may be sold in response to changes in market interest or prepayment rates,needs for liquidity, and changes in the availability of and the yield of alternative investments, areclassified as available-for-sale. These assets are carried at fair value. Fair value is determined usingpublic market prices, dealer quotes, and prices obtained from independent pricing services that may bederived from observable and unobservable market inputs. Unrealized gains and losses, net of tax, areexcluded from earnings and are reported as a separate component of shareholders’ equity until realized.Debt and equity securities that management has the ability and intent to hold to maturity are classifiedas held-to-maturity and carried at amortized cost.

Interest income from the investment securities portfolio is accrued as earned including the accretion ofdiscounts and the amortization of premiums based on the original cost of each security owned.Discounts and premiums are accreted and amortized on a method that approximates the effectiveinterest method to the maturity date of the security with the exception of mortgage-backed securities.Discounts and premiums on mortgage backed securities are accreted and amortized to the expectedmaturity date of the investment security. Realized gains or losses on the sale of investments andmortgage-backed securities are reported in earnings as of the trade date and determined using theamortized cost of the specific security sold. The gain or loss recognized on any security sold prior tomaturity is based on the difference between principal proceeds and this amortized cost. Declines in thefair value of individual available-for-sale securities below their cost that are deemed other than temporary are reflected in results of income as realized losses.

Management performs regular impairment analyses on the securities portfolio. The evaluation is basedupon factors such as the creditworthiness of the issuers/guarantors, the underlying collateral, ifapplicable, and the continuing performance of the securities. Management also evaluates other facts andcircumstances that may be indicative of impairment. This includes, but is not limited to, an evaluation ofthe type of security, length of time and extent to which the fair value has been less than cost, and near-term prospects of the issuer.

If it is probable that the Company will be unable to collect all amounts due according to the contractualterms of the security, other-than-temporary impairment (OTTI) is considered to have occurred. WhenOTTI occurs, the cost basis of the security is written down to its fair value (as the new cost basis) and thewrite-down is accounted for as a realized loss. In assessing whether impairment represents OTTI, theCompany must consider whether it intends to sell a security or if it is likely that they would be requiredto sell the security before recovery of the amortized cost basis of the investment, which may be atmaturity. For debt securities, if the Company intends to sell the security or it is likely that a sale of thesecurity may be required before recovering the cost basis, the entire impairment loss would berecognized in earnings as OTTI.

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Investment securities (continued) – If the Company does not intend to sell the security, it is not likelythe sale of the security will be required, and the Company does not expect to recover the entireamortized cost basis of the security, only the portion of the impairment loss that is credit related wouldbe recognized in earnings. In such cases, the amount of impairment recognized is measured as thedifference between the amortized cost basis and the present value of the cash flows expected to becollected.

Projected cash flows are discounted by the original or current effective interest rate depending on thenature of the security being measured for potential OTTI. The remaining impairment related to otherfactors, and the difference between the present value of the cash flows expected to be collected and fairvalue, is recognized as a charge to other comprehensive income (OCI).

Investments in common stock, substantially restricted – In June 2015, the Company became amember of the Federal Reserve Bank of San Francisco (FRB) and is now under their regulatory oversight. Membership in the Federal Reserve System requires members to hold stock in an amountequivalent to six percent of the Company’s capital and surplus. The Company is also a member of theFederal Home Loan Bank of San Francisco (FHLB). As a member of the FHLB, the Company is required topurchase FHLB stock in accordance with its advances, securities, and deposit agreement. The Companyalso invests in the stock of Pacific Coast Bankers Bank (PCBB) and Texas Independent Bank (TIB) inconnection with its advance and correspondent banking arrangements with PCBB and TIB. At December31, 2016 and 2015, the Company held $100,000 and $100,000, respectively, each of PCBB stock and TIB stock. PCBB and TIB stock is restricted as to purchase, sale, and redemption.

On June 1, 2015, the Company purchased $357,650 of FRB stock. As of December 31, 2016 and 2015, theCompany held $361,000 and $357,650, respectively, of FRB stock. The amount of FRB stock held isevaluated quarterly to determine if additional shares are required to be purchased or cancelled based onthe Company’s capital and surplus.

At December 31, 2016 and 2015, the Company held $2,006,300 and $1,845,200, respectively, of sharesof FHLB. The Company evaluates its investment in FHLB stock for impairment on a periodic basis andhas not recorded an impairment on its investment of FHLB stock during 2016 and 2015.

The investments in FRB stock, FHLB stock, TIB stock, and PCBB stock are carried as cost method investments and are reported within interest receivable and other assets in the consolidated balancesheets as of December 31, 2016 and 2015.

Originated loans – Loans receivable that management has the intent and ability to hold for theforeseeable future or until maturity or payoff are stated at the amount of unpaid principal, reduced byan allowance for loan losses and net deferred loan fees and costs. Interest income on loans is calculated by the simple-interest method on daily balances of the principal amount outstanding. Loan originationfees, net of certain direct origination costs, are capitalized and recognized as an adjustment of the yieldover the life of the related loan using the effective interest method.

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Originated loans (continued) – The accrual of interest on originated loans is discontinued at the timethe loan becomes 90 days delinquent unless the credit is well secured and in process of collection. Insome cases, loans can be placed on nonaccrual status or charged-off at an earlier date if collection ofprincipal or interest is considered doubtful. Other personal loans are typically charged off no later than180 days past due. Subsequent collections of interest are applied to unpaid principal balances orincluded in interest income based upon management's assessment of the likelihood that principal will be collected.

When a loan is placed on non-accrual status, previously accrued and uncollected interest is reversedfrom income and all amortization of deferred fees and costs is ceased. Loans on nonaccrual are chargedoff, or partially charged off, when one of two conditions is present: (i) it has been determined that all or a portion of an asset is uncollectible; or (ii) when there is an uncertainty as to the source or timing ofany eventual payoff. Payments received on nonaccrual loans are applied first to the principal notcharged off. If the loan has had a partial charge off or was charged off, the payment received after therecorded balance has been paid off is applied as a recovery to the allowance for loan losses. Once a loanis on nonaccrual, it is generally not returned to accrual status until: (i) all past due principal and interestamounts contractually due are reasonably assured of repayment within a reasonable period; and (ii)there has been a sustained period of repayment performance (generally six months) by the borrower.

An originated loan is considered impaired when it is probable that the Company will not be able to collectall principal and interest amounts due according to the loan's contractual terms based upon availableinformation and events. Factors considered by management in determining impairment include paymentstatus, collateral value, and the probability of collecting scheduled principal and interest payments whendue. The amount of the valuation allowance for impaired loans is determined by comparing the recordedinvestment in each loan with its value measured by one of three methods: (i) the estimated present valueof total expected future cash flows, discounted at the loan’s effective interest rate; (ii) the loan'sobservable market price, if available from a secondary market; or (iii) by the fair value of the underlyingcollateral if the loan is collateral dependent. If the value of an impaired loan (measured based on one ofthe methods described above) is less than its recorded investment, a specific valuation allowance (impairment allowance) is established as a component of the allowance for loan losses through a chargeto the provision for loan losses. Subsequent permitted adjustments to the impairment allowance are made through a corresponding charge or credit to the provision for loan losses.

Loans are reported as troubled debt restructurings (TDR) when the Company grants a concession to aborrower experiencing financial difficulties that it would not otherwise consider. Examples of such a concession include forgiveness of principal or accrued interest, extending the maturity date, orproviding a lower interest rate than would be normally available for a transaction of similar risk. As aresult of these concessions, restructured loans are impaired as the Company will not collect all amountsdue, both principal and interest, in accordance with the terms of the original loan agreement.Impairment reserves on non-collateral dependent restructured loans are measured by comparing thepresent value of expected future cash flows on the restructured loans discounted at the interest rate of the original loan agreement to the loan’s carrying value. These impairment reserves are recognized as aspecific component to be provided for in the allowance for loan losses.

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Acquired loans – Purchased loans are recorded at their fair value at the acquisition date. Credit discounts are included in the determination of fair value; therefore, an allowance for loan losses is not recorded at the acquisition date. The discount rates used for loans were based on current market ratesfor new originations of comparable loans, where available and include adjustments for liquidityconcerns. To the extent comparable market rates are not readily available, a discount rate was derivedbased on the assumptions of market participants' cost of funds, servicing costs and return requirements for comparable risk assets.

In either case, the discount rate does not include a factor for credit losses, as that has been considered in estimating the cash flows. The initial estimate of cash flows to be collected was derived from assumptions such as default rates, loss severities and prepayment speeds. Acquired loans are evaluatedupon acquisition and classified as either purchased impaired or purchased non-impaired (non ASC 310-30 Loans). Purchased impaired loans, accounted for under ASC 310-30, Loans and Debt Securities Acquired with Deteriorated Credit Quality (ASC 310-30 Loans), reflect credit deterioration since origination such that it is probable at acquisition that the Company will be unable to collect allcontractually required payments. These loans included loans on nonaccrual status and others identified to have credit risk during the due diligence process and discussions with management of the acquiredBank. Purchased impaired loans were aggregated into pools based on individually evaluated commonrisk characteristics, and aggregate expected cash flows were estimated for each pool. A pool isaccounted for as a single asset with a single interest rate, cumulative loss rate and cash flow expectation.The Company aggregated the ASC 310-30 Loans into different pools based on common risk characteristics such as risk rating, underlying collateral, type of interest rate (fixed or adjustable), typesof amortization, and other similar factors. A loan will be removed from a pool of loans only if the loan issold, foreclosed, or assets are received in full satisfaction of the loan and will be removed from the poolat its carrying value. If an individual loan is removed from a pool of loans, the difference between itsrelative carrying amount and assets received will be recognized in income immediately and would notaffect the effective yield used to recognize the accretable yield on the remaining pool.

If, at acquisition, the loans are collateral dependent and acquired primarily for the rewards of ownershipof the underlying collateral, or if cash flows expected to be collected cannot be reasonably estimated,accrual of income is inappropriate. For ASC 310-30 Loans aggregated into pools based on common riskcharacteristics, the determination of nonaccrual or accrual status is made at the pool level, not at theindividual level.

The cash flows expected to be received over the life of the pool were estimated by management. Thesecash flows were input into an ASC 310-30 compliant loan accounting system which calculates thecarrying values of the pools and underlying loans, book yields, effective interest income, and impairment, if any, based on actual and projected events. Default rates, loss severity, and prepaymentspeed assumptions will be periodically reassessed and updated within the accounting system to updatethe expectation of future cash flows. The excess of the cash flows expected to be collected over a pool’s carrying value is considered to be the accretable yield and is recognized as interest income over theestimated life of the loan or pool using the effective yield method. The accretable yield may change dueto changes in the timing and amounts of expected cash flows. Changes in the accretable yield arecalculated quarterly. 14



Acquired loans (continued) – The excess of the undiscounted contractual balances due over the cash flows expected to be collected is considered to be the nonaccretable difference. The nonaccretabledifference represents the estimate of the credit losses expected to occur and was considered indetermining the fair value of the loans as of the acquisition date. Subsequent to the acquisition date, anyincreases in expected cash flows of the pool over those expected at the purchase date in excess of fairvalue are adjusted through an increase to the accretable yield on a prospective basis. The purchasedimpaired loans acquired are and will continue to be subject to the Company’s internal and external credit review and monitoring. Any subsequent decreases in expected cash flows of the pool attributableto credit deterioration are recognized by recording a provision for loan losses.

For non ASC 310-30 Loans, the difference between the fair value and unpaid principal balance of theloan at the acquisition date is amortized or accreted to interest income over the estimated life of theloans. Subsequent to the acquisition, if the probable and estimable losses on purchased non-impairedloans exceed the amount of the remaining unaccreted discount the excess is established as part of theallowance for loan losses.

Allowance for loan losses – The provision for loan losses charged to the results of operations is anamount sufficient to bring the allowance for loan losses to an estimated balance considered adequate toabsorb probable losses inherent in the portfolio at the date of the consolidated financial statements.Loan losses are charged against the allowance when management believes the uncollectability of a loanbalance is confirmed. Subsequent recoveries, if any, are credited to the allowance.

The Company performs regular internal and external reviews of the loan portfolio to confirm the creditquality of the portfolio and the adherence to underwriting standards. All loans are assigned a risk ratingthat is reassessed periodically during the credit review process. These risk rating categories are theprimary factor in determining an appropriate amount for the allowance for loan losses.

The allowance for loan losses is evaluated on a regular basis by management and is based uponmanagement’s periodic review of the collectability of the loans that considers historical experience, thenature and volume of the loan portfolio, adverse situations that may affect the borrower’s ability torepay, estimated value of any underlying collateral, and prevailing economic conditions. The evaluationis inherently subjective as it requires estimates that are susceptible to significant revision as moreinformation becomes available. Accordingly, the Bank also engages an independent third party on ayearly basis to validate the Bank’s allowance for loan losses model and methodology.

The allowance consists of specific and general components. The specific component relates to loans thatare classified as impaired. For such loans, an allowance is established when the discounted cash flows, collateral value, or observable market price of the impaired loan is lower than the carrying value of thatloan. The general component covers all other loans not specifically identified as impaired and is basedon historical loss experience adjusted for qualitative factors. Furthermore, the Bank may also maintainan unallocated reserve to provide for other credit losses in the portfolio that may not have beencontemplated in the Bank’s loss factors, such as a prolonged decline in oil prices or the current drought situation in California.

15



Allowance for loan losses (continued) – Qualitative factors are assigned by management based onnational and local economic trends, effects of the changes in the value of underlying collateral, trends involume and terms of loans, effects of changes in lending policy, experience and depth of management,concentrations of credit, quality of the loan review system and effect of external factors such ascompetition and regulatory requirements.

Transfers of financial assets – The Company has entered into certain participation agreements withother organizations. Transfers of an entire financial asset, a group of financial assets, or a participating interest in an entire financial asset are accounted for as sales when control over the assets has been relinquished. Control over transferred assets is deemed to be surrendered when (1) the assets havebeen isolated from the Company, (2) the transferee has the right to pledge or exchange the assets (orbeneficial interests) it received, free of conditions that constrain it from taking advantage of that right,and (3) the Company does not maintain effective control over the transferred financial assets or third-party beneficial interests related to those transferred assets. No gain or loss has been recognized by theCompany on the sale of these interests through December 31, 2016 and 2015.

Premises and equipment – Premises and equipment are stated at cost, less accumulated depreciationor amortization recognized on a straight-line basis. Leasehold improvements are amortized over theshorter of the life of the lease or the estimated useful life of the leasehold improvement; and furniture,fixtures, and equipment are generally depreciated over five years. Gains and losses on the disposition ofpremises and equipment are included in the results of operations. Expenditures for betterments ormajor repairs are capitalized, while repairs and maintenance are charged to the results of operations asincurred.

The Company reviews long-lived assets for impairment whenever events or changes in circumstancesindicate that the carrying amounts of such assets may not be recoverable. If the sum of the expectedfuture cash flows is less than the stated amount of the asset, an impairment loss is recognized for thedifference between the fair value of the asset and its carrying amount.

Bank owned life insurance – The Company invests in Bank Owned Life Insurance (BOLI). BOLI involves the purchasing of life insurance by the Company on a chosen group of employees. The Companyis the owner and beneficiary of these policies. BOLI is recorded as an asset in the accompanyingconsolidated balance sheets at its cash surrender value, net of applicable surrender changes. Increasesin the cash value of these policies, as well as insurance proceeds received, are recorded in non-interestincome and are not subject to income tax.

16



Income taxes – The Company uses the asset and liability method to account for income taxes. Theobjective of the asset and liability method is to establish deferred tax assets and liabilities for thetemporary differences between the financial reporting basis and the income tax basis of the Company’s assets and liabilities at enacted tax rates expected to be in effect when such amounts are realized orsettled.

The Company’s annual tax rate is based on its income, statutory tax rates, and tax planning opportunities available in which it operates. Tax laws are complex and subject to different interpretations by the taxpayer and respective governmental taxing authorities. Significant judgment isrequired in determining tax expense and in evaluating tax positions, including evaluating uncertainties.Accounting for income taxes prescribes a recognition threshold and a measurement attribute for theconsolidated financial statement recognition and measurement of a tax position taken or expected to betaken in a tax return. Benefits from tax positions are recognized in the consolidated financial statementsonly when it is more likely than not that the tax position will be sustained upon examination by theappropriate taxing authority that would have full knowledge of all relevant information. A tax positionthat meets the more-likely-than-not recognition threshold is measured at the largest amount of benefitthat is greater than 50 percent likely of being realized upon ultimate settlement.

The Company reviews its tax positions periodically and adjusts the balances as new informationbecomes available. The Company recognizes interest and penalties associated with uncertain taxpositions as components of other expenses in the consolidated statements of income.

Deferred income tax assets represent amounts available to reduce income taxes payable on taxableincome in future years. Such assets arise because of temporary differences between the financialreporting and tax bases of assets and liabilities, as well as from net operating loss and tax creditcarryforwards. The Company evaluates the recoverability of these future tax deductions by assessingthe adequacy of future expected taxable income from all sources, including reversal of taxable temporary differences, forecasted operating earnings and available tax planning strategies. These sources of income inherently rely heavily on estimates. The Company uses historical experience andshort and long-range business forecasts to provide insight. Although realization is not assured for theremaining deferred income tax assets, the Company believes it is more likely than not the deferred taxassets will be fully recoverable within the applicable statutory expiration periods. However, deferred taxassets could be reduced in the near term if estimates of taxable income are significantly reduced oravailable tax planning strategies are no longer viable.

Advertising expense – Advertising costs are expensed as incurred and amounted to $97,665 and$63,633 in 2016 and 2015, respectively.

17



Off-balance sheet financial instruments – In the ordinary course of business, the Company hasentered into off-balance sheet agreements consisting of commitments to extend credit, commercialletters of credit, and standby letters of credit. Such financial instruments are recorded in the consolidated financial statements when they are funded or the related fees are incurred or received.

Share-based compensation – Share-based compensation cost is measured at the grant date based onthe estimated fair value of the award and is recognized as expense over the employee’s requisite serviceperiod for all stock-based awards granted, modified, or cancelled. The fair value of stock options is beingmeasured using a Black-Scholes pricing model.

Comprehensive income – Accounting principles require that recognized revenue, expenses, gains, andlosses be included in net income. Certain changes in shareholders’ equity from non-owner sources, suchas unrealized gains and losses on available-for-sale securities, are reported within comprehensiveincome and are reflected as a separate component of the equity section of the consolidated balancesheets. For the years ended December 31, 2016 and 2015, change in unrealized gains on securities wasthe only item of other comprehensive income. For the year ended December 31, 2016, the Companyrecorded a reclassification adjustment of $16,902 for realized gains on available-for-sale securities.There were no reclassification adjustments as there were no realized gains or losses on available-for-sale securities during 2015.

Common stock – The Company has authorized 10,000,000 shares of common stock. Each share entitlesthe holder to one vote. There are no dividend or liquidation preferences, participation rights, call pricesor dates, conversion prices or rates, sinking fund requirements, or unusual voting rights associated withthese shares.

Earnings per share – Earnings per share (EPS) amounts have been computed using both the weightedaverage number of shares outstanding of common stock for the purposes of computing basic earningsper share and the weighted average number of shares outstanding of common stock plus dilutivecommon stock equivalents for the purpose of computing diluted earnings per share. Basic earnings pershare is computed by dividing net income by the weighted average number of common sharesoutstanding for the period. Basic EPS excludes the dilutive effect that could occur if any securities orother contracts to issue common stock were exercised or converted into or resulted in the issuance of common stock. Diluted EPS is computed using the treasury stock method by dividing net incomeavailable to common shareholders by the sum of the weighted average number of common sharesoutstanding for the period plus the number of additional common shares that would have beenoutstanding if the potentially dilutive common shares had been issued. The dilutive calculation excludes15,821 and 47,435 options outstanding for the years ended December 31, 2016 and 2015, respectively,for which the exercise price exceeded the average market price of the Company’s common stock during those years.

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Earnings per share (continued) – Basic and diluted earnings per share are calculated as follows for the years ended December 31:

2016 2015

Basic earnings per shareNet income available to common shareholders $ 5,053,418 $ 3,726,280

Divided by weighted average shares outstanding 1,574,547 1,567,858

Basic earnings per share $ 3.21 $ 2.38

Diluted earnings per share Net income available to common shareholders $ 5,053,418 $ 3,726,280

Weighted average shares outstanding 1,574,547 1,567,858

Effect of dilutive securities - stock options andunvested restricted stock 30,644 2,774

Divided by weighted average shares outstanding, including potentially dilutive effect of stock optionsand unvested restricted stock 1,605,190 1,570,632

Diluted earnings per share $ 3.15 $ 2.37

For both the years ended December 31, 2016 and 2015, the weighted average shares outstanding andeffect of dilutive securities in the table above have been adjusted for a five percent stock dividenddeclared on April 21, 2016.

Fair value measurements – Fair value is the price that would be received to sell an asset or paid totransfer a liability in an orderly transaction between market participants at the measurement date. Thefair values for financial instruments recorded on a recurring and nonrecurring basis are included inNote 14.

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Recently issued accounting pronouncements – In May 2014, the Financial Accounting StandardsBoard ("FASB") issued Accounting Standards Update ("ASU") No. 2014-09, Revenue from Contracts withCustomers (Topic 606), which creates Topic 606 and supersedes Topic 605, Revenue Recognition. InAugust 2015, FASB issued ASU No. 2015-14, Revenue from Contracts with Customers (Topic 606), whichpostponed the effective date of 2014-09. Multiple ASUs and interpretative guidance have been issued inconnection with ASU 2014-09. The core principle of Topic 606 is that an entity recognizes revenue todepict the transfer of promised goods or services to customers in an amount that reflects theconsideration to which the entity expects to be entitled in exchange for those goods or services. Ingeneral, the new guidance requires companies to use more judgment and make more estimates thanunder current guidance, including identifying performance obligations in the contract, estimating theamount of variable consideration to include in the transaction price and allocating the transaction priceto each separate performance obligation. The standard is effective for public entities for interim andannual periods beginning after December 15, 2017; early adoption is not permitted. For financial reporting purposes, the standard allows for either full retrospective adoption, meaning the standard isapplied to all of the periods presented, or modified retrospective adoption, meaning the standard isapplied only to the most current period presented in the financial statements with the cumulative effectof initially applying the standard recognized at the date of initial application. The Company has beguntheir process to implement this new standard. The Company has started by reviewing all revenuesources to determine the sources that are in scope for this guidance. As a bank, key revenue sources,such as interest income have been identified as out of scope of this new guidance. The Company iscurrently evaluating the impact of this ASU on the Company's consolidated financial statements.

In January 2016, the FASB issued ASU No. 2016-01, Financial Instruments – Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities. The new guidance is intendedto improve the recognition and measurement of financial instruments. This ASU requires equityinvestments (except those accounted for under the equity method of accounting, or those that result inconsolidation of the investee) to be measured at fair value with changes in fair value recognized in netincome. In addition, the amendment requires public business entities to use the exit price notion whenmeasuring the fair value of financial instruments for disclosure purposes and requires separatepresentation of financial assets and financial liabilities by measurement category and form of financialasset (i.e., securities or loans and receivables) on the balance sheet or the accompanying notes to thefinancial statements. This ASU also eliminates the requirement for public business entities to disclosethe method(s) and significant assumptions used to estimate the fair value that is required to bedisclosed for financial instruments measured at amortized cost on the balance sheet. The amendment also requires a reporting organization to present separately in other comprehensive income the portionof the total change in the fair value of a liability resulting from a change in the instrument specific creditrisk (also referred to as “own credit”) when the organization has elected to measure the liability at fair value in accordance with the fair value option for financial instruments.

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Recently issued accounting pronouncements (continued) – ASU No. 2016-01 is effective for financial statements issued for fiscal years beginning after December 15, 2017, and interim periods within thosefiscal years. Early adoption is permitted for certain provisions. The Company expects this ASU to impactits consolidated income and other comprehensive income disclosures for the fair value of its mutualfund investments.

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842). The amendments in this ASU require lessees to recognize a lease liability and a right of use asset for all leases (other than short termleases). Lessees will no longer be provided with a source of off-balance sheet financing. Under the newguidance, lessor accounting is largely unchanged. ASU No. 2016-02 is effective for financial statementsissued for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years.ASU No. 2016-02 should be applied using a modified retrospective transition approach for leasesexisting at, or entered into after, the beginning of the earliest comparative period presented in thefinancial statements. The Company is currently evaluating the impact of this ASU on the Company's consolidated financial statements.

In March 2016, the FASB issued ASU 2016-09, “Compensation – Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting”. ASU 2016-09 includes provisionsintended to simplify various aspects related to how share-based payments are accounted for andpresented in the financial statements. The areas for simplification include income tax consequences,forfeitures, classification of awards as either equity or liabilities and classification on the statement ofcash flows. ASU 2016-09 is effective for fiscal years annual periods beginning after December 15, 2016,and interim periods within those fiscal years annual periods. Early adoption is permitted. Adoption of this standard is not expected to have a material impact on the Company’s consolidated financial statements.

In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments —Credit Losses (Topic 326):Measurement of Credit Losses on Financial Instruments. The ASU is intended to improve financialreporting by requiring timelier recording of credit losses on loans and other financial instruments held by financial institutions and other organizations. The ASU requires the measurement of all expectedcredit losses for certain financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. Financial institutions and other organizations will now use forward-looking information to better inform their credit loss estimates, butwill continue to use judgment to determine which loss estimation method is appropriate for theircircumstances. The ASU requires enhanced disclosures to help investors and other financial statementusers better understand significant estimates and judgments used in estimating credit losses, as well asthe credit quality and underwriting standards of an organization's portfolio. These disclosures includequalitative and quantitative requirements that provide additional information about the amountsrecorded in the financial statements. In addition, the ASU amends the accounting for credit losses onavailable-for-sale debt securities and purchased financial assets with credit deterioration. The ASU iseffective for fiscal years, and interim periods within those fiscal years, beginning after December 15,2020. Early application will be permitted for specified periods. The Company is in the process of evaluating the impact of this ASU on the Company's consolidated financial statements.

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Note 2 – Investment Securities

Investment securities have been classified in the consolidated balance sheets according to management’s intent. The carrying amounts of securities and their approximate fair values were asfollows at December 31:

Available-for-sale Municipal bonds Mutual fund investments Mortgage-backed securities SBA loan pools

Available-for-sale Municipal bonds Mutual fund investments Mortgage-backed securities Corporate bonds SBA loan pools

2016 Gross Gross

Amortized Unrealized Unrealized Estimated Fair Cost Gains Losses Value

$ 4,688,148 $ 16,785 $ (56,806) $ 4,648,128 511,038 - (32,823) 478,215

55,890,516 30,948 (796,399) 55,125,065 2,018,605 - (8,206) 2,010,399

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

2015 Gross Gross

Amortized Unrealized Unrealized Estimated Fair Cost Gains Losses Value

$ 2,929,080 $ 55,193 $ (640) $ 2,983,633 511,038 - (31,231) 479,807

52,789,552 122,144 (331,931) 52,579,765 4,538,610 37,434 - 4,576,044 2,177,514 - (11,651) 2,165,863

$ 62,945,794 $ 214,771 $ (375,453) $ 62,785,112

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Note 2 – Investment Securities (continued)

Information pertaining to available-for-sale securities with gross unrealized losses, aggregated byinvestment type and length of time that individual securities have been in a continuous unrealized lossposition at December 31 is as follows:

2016 Less Than 12 Months 12 Months or More Total

Unrealized Unrealized Unrealized Fair Value Losses Fair Value Losses Fair Value Losses

Available-for-sale Municipal bonds $ 2,494,224 $ (56,806) $ - $ - $ 2,494,224 $ (56,806) Mutual fund investments - - 478,215 (32,823) 478,215 (32,823) Mortgage-backed securities 41,592,348 (705,716) 5,560,076 (90,683) 47,152,424 (796,399) SBA loan pools - - 2,010,398 (8,206) 2,010,398 (8,206)

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

2015 Less Than 12 Months 12 Months or More Total

Unrealized Unrealized Unrealized Fair Value Losses Fair Value Losses Fair Value Losses

Available-for-sale Municipal bonds Mutual fund investments Mortgage-backed securities SBA loan pools

$ 522,007 -

29,900,245 2,165,863

$ (640) -

(249,095) (11,651)

$ -479,807

6,835,244 -

$ - $ 522,007 (31,231) 479,807 (82,836) 36,735,489

- 2,165,863

$ (640) (31,231)

(331,931) (11,651)

$32,588,115 $ (261,386) $ 7,315,051 $ (114,067) $39,903,166 $ (375,453)

There were 86 and 45 available-for-sale securities in an unrealized loss position as of December 31,2016 and 2015, respectively. Of this amount, there were 13 and nine mortgage-backed securities in anunrealized loss position for greater than twelve months as of December 31, 2016 and 2015, respectively.

The Company has the ability and intent to hold these debt securities for a period of time sufficient for arecovery of cost. The issuers of these securities have not, to the Company’s knowledge, established anycause for default on these securities at December 31, 2016. The Company does not have any securitiesthat were considered to be other than temporarily impaired in 2016 or 2015.

The amortized cost and market values of securities at December 31, 2016, by contractual maturity, areshown below. Expected and actual maturities may differ from contractual maturities because borrowersmay have the right to call or prepay obligations with or without prepayment penalties.

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Note 2 – Investment Securities (continued)

December 31, 2016 Available-for-Sale

Estimated Fair Amortized Cost Value

Due in one year or less Due from one to five years Due in more than five years

$ 2,587,920 $ 2,595,239 53,459,925 52,696,099

7,060,463 6,970,469

$ 63,108,308 $ 62,261,807

For the year ended December 31, 2016, the Company sold $1.7 million of mortgage-backed securities fora gain of $29,410. There were no sales of investment securities during the year ended December 31,2015. As of December 31, 2016 and 2015, securities pledged as collateral for borrowings and to secureU.S. Government, state and local agencies, and trust deposits as required by contract or law were$19,338,326 and $12,136,851, respectively.

Note 3 – Loans and Allowance for Loan Losses

The major classifications of loans are summarized as follows at December 31:

2016 2015 Loans secured by real estate

Construction and land development $ 18,249,562 $ 23,261,265 Non-farm non-residential properties 216,072,212 155,669,652 Residential properties 45,628,968 43,206,354 Farm land 53,485,526 40,907,903

Loans to finance agricultural production and other loans to farmers 5,041,296 4,588,394

Commercial and industrial loans and other 42,392,739 35,580,878

Gross loans 380,870,303 303,214,446

Less Allowance for loan losses 4,465,599 3,657,873 Deferred loan fees, net 808,890 734,897

Net loans $ 375,595,814 $ 298,821,676

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Note 3 – Loans and Allowance for Loan Losses (continued)

Below is a discussion of risk characteristics relevant to each portfolio segment.

Construction land development – Construction and land development loans are made to borrowerswith a proven track record of performance, capacity to generate repayment, possess assets outside ofsubject collateral, and have guarantor financial strength. The loans are evaluated based on currentappraisals with historical and future value trends. Loans are dependent upon the success of the projectand the financial resources of the borrower and guarantor that are independent of the project. In mostcases, the guarantor provides an additional source of repayment.

Non-farm non-residential properties (commercial real estate loans) – Commercial real estate loans are made to a wide section of local borrowers in a diverse cross section of industries. A significantportion of the loans are owner occupied, where the subject collateral is used in the operations of theborrower’s business. Underwriting standards for these loans include, but are not limited to, borrowerreputation and historical performance, conservative loan to value ratios based on appraised values,conservative debt service coverage ratios based on appraised net operating income, underlying cashflow of the borrower, borrower’s assets outside the subject collateral, and financial resources of theguarantors. In most cases, the guarantor provides an additional source of repayment.

Residential properties – Residential property loans are made to a select group of local home ownersand investors purchasing single family residences (1-4 units) for rental income. The home owner loansare made to borrowers that are generally business owners or customers with a business banking relationship with the bank. Underwriting standards for these loans include, but are not limited to,borrower reputation and historical performance, conservative loan to value ratios based on appraisedvalues, underlying cash flow of the borrower, and the borrower’s assets outside the subject collateral.The Bank did not originate any consumer residential loans in 2016 or 2015.

The investor loans are made to local investors. Underwriting standards for these loans include, but arenot limited to, borrower reputation and historical performance, conservative loan to value ratios basedon appraised values, conservative debt service coverage ratios based on appraised net operatingincome, underlying cash flow of the borrower, borrower’s assets outside the subject collateral, andfinancial resources of the guarantors. In most cases, the guarantor provides an additional source of repayment.

Farm land – Farm land loans are made to a wide section of local borrowers in a diverse cross section of crops. A significant portion of the loans are owner occupied, where the subject collateral is farmed by the borrower. Underwriting standards for these loans include, but are not limited to, borrowerreputation and historical performance, conservative loan to value ratios based on appraised values,conservative debt service coverage ratios based on appraised net operating income, underlying cashflow of the borrower, borrower’s assets outside the subject collateral, and financial resources of the guarantors. In most cases, the guarantor provides an additional source of repayment.

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Note 3 – Loans and Allowance for Loan Losses (continued)

Agricultural production – Agricultural production loans are made to a wide segment of local borrowers in a diverse cross section of crops. These loans are made to finance the ongoing businessoperations and proceeds are used for the growing of

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OUR CORE PURPOSE - Mission Bank · Glenn Bland founded Bakersield-based Bland Solar & Air more than three decades ago. The The company that designs, engineers and installs solar and