Willamette Community Bank fee income 129,490126,974 Other 30,24639,636 ... ("commitments") are also evaluated for impairment under ASC topic Loss Contingencies. Commitments are pooled

Report of Independent Auditors and Financial Statements for

Willamette Community Bank

December 31, 2015 and 2014

WILLAMETTE COMMUNITY BANK TABLE OF CONTENTS

For the Years Ended December 31, 2015 and 2014

PAGE REPORT OF INDEPENDENT AUDITORS 1–2 FINANCIAL STATEMENTS Statements of financial condition 3 Statements of income and comprehensive income 4 Statements of changes in shareholders’ equity 5 Statements of cash flows 6 Notes to financial statements 7–25

1

REPORTOFINDEPENDENTAUDITORSTotheBoardofDirectorsandShareholdersofWillametteCommunityBankReportonFinancialStatementsWe have audited the accompanying financial statements of Willamette Community Bank, whichcomprisethebalancesheetsasofDecember31,2015and2014,andtherelatedstatementsofincomeandcomprehensive income,changes inshareholders’equity,andcash flowsfor theyearsthenended,andtherelatednotestothefinancialstatements.Management’sResponsibilityfortheFinancialStatementsManagement is responsible for the preparation and fair presentation of these financial statements inaccordancewithaccountingprinciplesgenerallyacceptedintheUnitedStatesofAmerica;thisincludesthe design, implementation andmaintenance of internal control relevant to the preparation and fairpresentationoffinancialstatementsthatarefreefrommaterialmisstatements,whetherduetofraudorerror.Auditor’sResponsibilityOur responsibility is to express an opinion on these financial statements based on our audits. Weconductedouraudits inaccordancewithauditingstandardsgenerallyacceptedintheUnitedStatesofAmerica.Thosestandardsrequirethatweplanandperformtheauditstoobtainreasonableassuranceaboutwhetherthefinancialstatementsarefreeofmaterialmisstatement.Anauditinvolvesperformingprocedurestoobtainauditevidenceabouttheamountsanddisclosuresinthe financial statements. The procedures selected depend on the auditor’s judgment, including theassessmentof the risksofmaterialmisstatementof the financial statements,whetherdue to fraudorerror. Inmakingthoseriskassessments, theauditorconsiders internalcontrolrelevanttotheentity’spreparationand fairpresentationof the financial statements inorder todesignauditprocedures thatare appropriate in the circumstances, but not for the purpose of expressing an opinion on theeffectivenessoftheentity’sinternalcontrol.Accordingly,weexpressnosuchopinion.

2

REPORTOFINDEPENDENTAUDITORS(continued)An audit also includes evaluating the appropriateness of accounting policies used and thereasonableness of significant accounting estimates made by management, as well as evaluating theoverallpresentationofthefinancialstatements.Webelievethattheauditevidencewehaveobtainedissufficientandappropriatetoprovideabasisforourauditopinion.OpinionIn our opinion, the financial statements referred to above present fairly, in allmaterial respects, thebalancesheetsofWillametteCommunityBankasofDecember31,2015and2014,andtheresultsofitsoperations and its cash flows for the years then ended in conformity with accounting principlesgenerallyacceptedintheUnitedStatesofAmerica.Portland,OregonFebruary29,2016

See accompanying notes. 3

WILLAMETTE COMMUNITY BANK STATEMENTS OF FINANCIAL CONDITION

December 31, 2015 and 2014

2015 2014

Cash and cash equivalents:Cash and due from banks 2,149,111$ 1,983,924$ Due from Federal Reserve Bank, interest-bearing 5,585,000 1,670,000

Total cash and cash equivalents 7,734,111 3,653,924 Investment securities, available for sale 11,240,128 17,712,671 Investment securities, held to maturity 4,501,176 2,988,484 Loans, net 72,864,459 67,382,128 Pacific Coast Bankers' Bank (PCBB) stock 100,000 100,000 Federal Home Loan Bank (FHLB) stock 113,300 55,600 Premises and equipment, net 1,457,414 1,549,818 Accrued interest and other assets 871,383 897,813

Total assets 98,881,971$ 94,340,438$

LIABILITIESDeposits:

Demand 21,346,989$ 20,270,164$ Interest-bearing demand 9,239,406 8,715,166 Money market 44,174,897 35,688,168 Savings 6,654,427 6,645,327 Time 6,881,645 12,948,569

Total deposits 88,297,364 84,267,394

Accrued interest and other liabilities 56,262 115,468

Total liabilities 88,353,626 84,382,862

Commitments and contingencies (Notes 9 and 15)

SHAREHOLDERS' EQUITYCommon stock, no par value, 10,000,000 shares authorized,

998,999 shares issued and outstanding at December 31, 2015 and 2014. 8,681,680 8,681,680 Accumulated surplus 1,852,456 1,261,986 Accumulated other comprehensive income (loss) (5,791) 13,910

Total shareholders' equity 10,528,345 9,957,576

Total liabilities and shareholders' equity 98,881,971$ 94,340,438$

ASSETS

LIABILITIES AND SHAREHOLDERS' EQUITY


WILLAMETTE COMMUNITY BANK STATEMENTS OF INCOME AND COMPREHENSIVE INCOME

Years Ended December 31, 2015 and 2014

2015 2014

INTEREST INCOME Interest and fees on loans 3,915,539$ 3,732,158$ Taxable interest on investment securities 221,123 302,876 Non-taxable interest on investment securities 120,531 88,270 Other interest income 23,718 26,692

Total interest income 4,280,911 4,149,996

INTEREST EXPENSE Deposits:

Interest-bearing demand, money market and savings 114,581 170,566 Time 52,359 134,678

Borrowing 14 -

Total interest expense 166,954 305,244

Net interest income 4,113,957 3,844,752 Loan loss provision (recovery) (100,000) 238,000

Net interest income after loan loss provision 4,213,957 3,606,752

NON-INTEREST INCOME Service charges on deposit accounts 76,014 68,044 Interchange fee income 126,974 129,490 Other 39,636 30,246

Total non-interest income 242,624 227,780

NON-INTEREST EXPENSE 3,563,311 3,574,723

Income before income taxes 893,270 259,809 Provision for income taxes 302,800 73,700

NET INCOME 590,470 186,109

OTHER COMPREHENSIVE INCOME (LOSS)Unrealized holding gains (losses) during period (28,550) 192,284 Reclassification adjustment for amounts included in net income (1,300) -

Other comprehensive income (loss) before income taxes (29,850) 192,284 Income tax expense (benefit) related to items of other comprehensive income (loss) (10,149) 72,053

Other comprehensive income (loss), net of tax (19,701) 120,231

Comprehensive income 570,769$ 306,340$

Basic and diluted earnings per common share 0.59$ 0.19$

Weighted average common shares outstanding: Basic and diluted 998,999 981,620


WILLAMETTE COMMUNITY BANK STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY


Number of shares

Common stock

Retained earnings

Accumulated other

comprehensive income (loss)

Total shareholders'

equity

Balances at December 31, 2013 882,467 7,870,413$ 1,258,730$ (106,321)$ 9,022,822$

Net income - - 186,109 - 186,109

Other comprehensive income - - - 120,231 120,231

Issuance of common stock 88,827 628,414 628,414

Stock dividend 27,705 182,853 (182,853) - -

Balances at December 31, 2014 998,999 8,681,680 1,261,986 13,910 9,957,576

Net income - - 590,470 - 590,470

Other comprehensive loss - - - (19,701) (19,701)

Balances at December 31, 2015 998,999 8,681,680$ 1,852,456$ (5,791)$ 10,528,345$


WILLAMETTE COMMUNITY BANK STATEMENTS OF CASH FLOWS


2015 2014CASH FLOWS FROM OPERATING ACTIVITIES Net income 590,470$ 186,109$ Adjustments to reconcile net income to net cash provided by operating activities: Loan loss provision (recovery) (100,000) 238,000 Deferred income taxes 73,728 (117,686) Depreciation and amortization 142,403 157,754 Net amortization of premiums/discounts on investment securities 176,078 201,065 Gains on sales of securities (1,300) - Loss on other real estate owned 4,203 5,000 Loss on disposition of equipment 982 780 Changes in certain assets and liabilities: Accrued interest and other assets (48,107) (34,304) Accrued interest and other liabilities (59,206) 8,668

Net cash provided by operating activities 779,251 645,386

CASH FLOWS FROM INVESTING ACTIVITIES Investment securities available for sale: Purchases - (9,238,523) Sales 557,283 - Maturities, early redemptions and principal reductions 5,725,560 7,120,763 Investment securities held to maturity: Purchases (1,527,621) (2,999,469) Net increase in loans (5,382,331) (5,121,028) Sale of other real estate owned 6,797 - Purchases of computer software (6,977) (5,638) Purchases of premises and equipment (44,045) (17,390) (Purchase) sale of FHLB stock (57,700) 500

Net cash (used in) investing activities (729,034) (10,260,785)

CASH FLOWS FROM FINANCING ACTIVITIES Net increase in deposits 4,029,970 7,163,745 Issuance of common stock - 628,414

Net cash provided by financing activities 4,029,970 7,792,159

Net change in cash and cash equivalents 4,080,187 (1,823,240) Cash and cash equivalents at beginning of year 3,653,924 5,477,164

Cash and cash equivalents at end of year 7,734,111$ 3,653,924$

Supplemental disclosure of cash flow information: Cash paid for interest 175,043$ 312,922$

Cash paid for income taxes 228,628$ 177,129$

WILLAMETTE COMMUNITY BANK

NOTES TO FINANCIAL STATEMENTS Years Ended December 31, 2015 and 2014

7

1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Organization Willamette Community Bank (the Bank) is a state-chartered, FDIC-insured institution headquartered at 333

Lyon St. SE, Albany, Oregon. The Bank offers a full range of traditional banking products and services, primarily to business, professional and consumer customers located in Linn, Benton and Marion counties of Oregon. The Bank is subject to the regulations of certain federal and state agencies and undergoes periodic examination by those regulatory authorities.

Method of accounting The Bank prepares its financial statements in conformity with accounting principles generally accepted in the

United States and prevailing practices within the banking industry. The Bank uses the accrual method of accounting, which recognizes income when earned and expenses when incurred. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the Bank’s financial statements. Actual results could differ from those estimated.

Cash and cash equivalents For purposes of reporting cash flows, cash and cash equivalents include cash on hand, amounts due from

banks, interest-bearing deposits and federal funds sold.

Investment securities Available for sale - Investment securities available for sale are reported at fair value with changes in unrealized

gains and losses excluded from earnings and reported in shareholders’ equity as other comprehensive income or loss, net of income taxes.

Held to maturity – Investment securities held to maturity for which the Bank has the intent and ability to hold

to maturity are reported at cost, adjusted for premiums and discounts recognized into interest income. Gains and losses on sales of investment securities are recognized on a specific identification basis. Premiums

and discounts on investment securities are recognized into interest income using the interest method over the life of the security.

Declines in the fair value of individual investment securities below their cost that result in other-than-

temporary impairment would result in write-downs of those securities to their fair value. Any write-downs would also be included in earnings as realized losses.

Loans and the allowance for loan losses

Loans are reported at their outstanding principal balance less the allowance for loan losses and unearned income (deferred loan fees).



8

1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) The Bank has established a systematic and consistently applied process to determine and maintain an

adequate allowance for loan losses (allowance), also known as the loan loss reserve, in accordance with generally accepted accounting principles and regulatory guidance. The allowance amounts and related loss provisions are determined based on management’s current assessment of loan portfolio quality and include consideration of all known relevant internal and external factors affecting loan quality. The Bank’s methodology for evaluating allowance adequacy primarily involves following the requirements of Accounting Standards Codification ("ASC") topics Loss Contingencies and Loan Impairment. Certain loans are individually evaluated for impairment pursuant to ASC topic Loan Impairment. A loan is considered impaired when, based on current information and events, management believes it is probable that all amounts due will not be collected according to the contractual terms of the loan agreement. Loan impairment is measured based either on the present value of expected future cash flows discounted at the loan’s effective interest rate or, as a practical expedient, at the observable market price of the loan or the fair value of the collateral if the loan is collateral dependent. For purposes of determining the allowance for loan losses, all troubled-debt-restructured loans are treated as impaired. Loans that are individually impaired are excluded from the Loss Contingencies component of the allowance methodology. Under ASC topic Loss Contingencies, loans not individually impaired are pooled by assigned credit risk ratings and collectively evaluated for impairment by applying appropriate loss allocation factors to each risk-rating loan pool. Unfunded loan commitments ("commitments") are also evaluated for impairment under ASC topic Loss Contingencies. Commitments are pooled by assigned credit risk ratings with adversely-rated pools evaluated for impairment by applying the same loss allocation factors as those applied to loans. The commitment reserve is maintained as a separate liability account. The commitment loss provision is recognized into the reserve through non-interest expense rather than the loan loss provision. The commitment loss provisions (recoveries) for 2015 and 2014 were ($9,500) and $5,000, respectively. The Bank's historical charge-off experience is the primary basis supporting the loss allocation factors used to estimate collective impairment.

In determining allowance adequacy, management also subjectively evaluates certain current environmental factors, which may result in further adjustments to the allowance. Those factors include:

Problem loan trends. Charge-off and recovery trends. Trends in volume and terms of loans. Effects of any changes in risk selection and underwriting standards, and other changes in

lending policies, procedures and practices. Experience, ability and depth of lending management and other relevant staff. National and local economic trends and conditions. Industry conditions. Effects and changes in credit concentrations.

The allowance is based on estimates, and ultimate losses may vary from current estimates. The allowance is increased by charges to income (loss provisions) and decreased by charge-offs, net of recoveries. Loans are charged against the allowance when management believes that collection of the principal is unlikely. Regulatory agencies, as an integral part of their examination process, periodically review the Bank’s allowance. Such agencies may require the Bank to recognize additions to the allowance based on their assessment of the information available to them at the time of their examination.



9

1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Loan origination fees, net of loan origination costs, are deferred and recognized as an adjustment of yield

over the life of the related loan.

Interest income on all loans is accrued as earned using the simple interest method. Accrual of interest is discontinued when the repayment of principal and interest is doubtful or when a loan is 90 days past due unless it is well secured and in the process of collection. A loan is considered past due when a contractually-required payment is 30 days or more beyond the payment due date. When the accrual of interest is discontinued, all unpaid, accrued interest is reversed. If appropriate, interest income on these loans is recognized on a cash basis until the loan qualifies for return to accrual status. Loans are returned to accrual status when principal and interest are contractually current and future payments are reasonably assured.

Pacific Coast Bankers’ Bank and Federal Home Loan Bank Stock

The Bank’s investment in Pacific Coast Bankers’ Bank (PCBB) and Federal Home Loan Bank (FHLB)

stock is carried at cost, which approximates fair value.

PCBB stock is not publicly traded and is subject to resale restrictions. Ownership is limited by statute to depository institutions or holding companies of depository institutions.

FHLB stock is not publicly traded and is subject to redemption restrictions. Ownership is limited to FHLB member financial institutions.

Premises and equipment, computer software

Premises and equipment are stated at cost, less accumulated depreciation. Depreciation is computed using

the straight-line method over the estimated useful lives of five to 39 years. For consistency with regulatory reporting requirements, most computer software is included in other assets at cost, less accumulated amortization. Software amortization is computed using the straight-line method over three years and is included in data processing expenses.

Income taxes

Deferred tax assets and liabilities are reflected at currently enacted income tax rates applicable to the period

in which the deferred tax assets or liabilities will be realized or settled. As changes in tax laws or rates are enacted, deferred tax assets and liabilities are adjusted through the provision for income taxes. Management has evaluated tax positions taken and has determined that any uncertainty in those positions would not have a material effect on the financial statements. If applicable, the Bank would recognize interest accrued for income-tax liabilities in interest expense and income-tax penalties in operating expenses. The Bank's tax years ending December 31, 2013, 2014 and 2015 remain subject to examination by major tax jurisdictions.



10

2. INVESTMENT SECURITIES

Investment securities available for sale consisted of the following at December 31, 2015:

Gross Gross

Amoritzed unrealized unrealized Estimated

Description cost gains losses fair value

U.S. government agency notes $ 500,000 $ - $ (970) $ 499,030

U.S. government agency mortgaged-backed securities 912,873 - (6,164) 906,709

U.S. government/government agency collateralized mortgage obligations 9,836,029 35,268 (36,908) 9,834,389

$ 11,248,902 $ 35,268 $ (44,042) $ 11,240,128

Investment securities available for sale consisted of the following at December 31, 2014:

Gross Gross

Amortized unrealized unrealized Estimated


U.S. government agency notes $ 500,000 $ - $ (2,086) $ 497,914 U.S. government agency mortgage-backed securities 1,266,032 4,160 (2,596) 1,267,596 U.S. government/government agency collateralized mortgage obligations 15,925,563 77,011 (55,413) 15,947,161

$ 17,691,595 $ 81,171 $ (60,095) $ 17,712,671

Investment securities held to maturity consisted of the following at December 31, 2015:

Gross Gross



Municipal bonds - general obligation $ 2,831,023 $ 142,814 $ - $ 2,973,837

Municipal bonds - revenue 1,670,153 108,142 - 1,778,295

$ 4,501,176 $ 250,956 $ - $ 4,752,132

Investment securities held to maturity consisted of the following at December 31, 2014.

Gross Gross



Municipal bonds - general obligation $ 2,089,486 $ 119,699 $ - $ 2,209,185

Municipal bonds - revenue 898,998 68,063 - 967,061

$ 2,988,484 $ 187,762 $ - $ 3,176,246



11

2. INVESTMENT SECURITIES (Continued)

Investment securities with unrealized losses at December 31, 2015 were as follows: Continuous unrealized loss Continuous unrealized loss for less than 12 months for more than 12 months Total Unrealized Unrealized Unrealized Description Fair value loss Fair value loss Fair value loss Agency $ 499,030 $ (970) $ - $ - $ 499,030 $ (970) Mortgage-backed 906,709 (6,164) - - 906,709 (6,164) Collateralized mortgage obligations 3,077,404 (19,508) 779,384 (17,400) 3,856,788 (36,908) $ 4,483,143 $ (26,642) $ 779,384 $ (17,400) $ 5,262,527 $ (44,042) Investment securities with unrealized losses at December 31, 2014 were as follows: Continuous unrealized loss Continuous unrealized loss for less than 12 months for more than 12 months Total Unrealized Unrealized Unrealized Description Fair value loss Fair value loss Fair value loss Agency $ 497,914 $ (2,086) $ - $ - $ 497,914 $ (2,086) Mortgage-backed - - 366,731 (2,596) 366,731 (2,596) Collateralized mortgage obligations 4,385,799 (27,664) 1,326,597 (27,749) 5,712,396 (55,413) $ 4,883,713 $ (29,750) $ 1,693,328 $ (30,345) $6,577,041 $ (60,095) All securities held are investment grade with no credit losses anticipated. Management believes that unrealized losses are solely due to market conditions and temporary in nature. The Bank currently has the ability to hold these securities until maturity or until market conditions favorably affect value.



12

2. INVESTMENT SECURITIES (Continued)

The amortized cost and estimated fair value of investment securities at December 31, 2015, by contractual maturity, 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 Estimated Investment securities available for sale: cost fair value Due in one year or less $ - $ - Due after one through five years 500,000 499,030 Due after five through ten years - - Due after ten years - - Collateralized mortgage obligations and mortgaged-backed securities 10,748,902 10,741,098

11,248,902 11,240,128 Investment securities held to maturity: Due in one year or less - - Due after one through five years - - Due after five through ten years - - Due after ten years 4,501,176 4,752,132

Total $ 15,750,078 $ 15,992,260

At December 31, 2015, securities available for sale totaling approximately $1,995,000 and securities held to maturity totaling approximately $3,730,000 were pledged to support public deposits. At December 31, 2014, securities available for sale totaling approximately $3,802,000 and all securities held to maturity were pledged to support public deposits.

3. LOANS AND ALLOWANCE FOR LOAN LOSSES

Loans consisted of the following at December 31, 2015 and 2014: 2015 2014

Real estate $ 56,195,083 $ 49,869,221 Commercial 13,008,136 13,491,493 Agricultural 3,933,142 3,377,906 Consumer 680,453 1,185,441 Other and overdrafts 279,754 755,255

74,096,568 68,679,316 Less unearned loan fees (302,939) (270,539) Less allowance for loan losses (929,170) (1,026,649)

Loans, net $ 72,864,459 $ 67,382,128



13

3. LOANS AND ALLOWANCE FOR LOAN LOSSES (Continued)

Transactions in the allowance for loan losses for the years ended December 31, 2015 and 2014 were as follows:

Real Estate Commercial Agricultural Consumer Other Total

Balance at December 31, 2013 603,818 137,681 26,541 12,584 8,025 788,649

Loan loss provision (recovery) 237,000 (17,000) - 20,000 (2,000) 238,000

Loans charged off - - - - - -

Loan recoveries - - - - - -

Balance at December 31, 2014 840,818 120,681 26,541 32,584 6,025 1,026,649

Loan loss provision (recovery) (103,000) (1,000) 10,000 (3,000) (3,000) (100,000)

Loans charged off - - - (16,084) - (16,084)

Loan recoveries - 18,605 - - - 18,605

Balance at December 31, 2015 737,818 138,286 36,541 13,500 3,025 929,170

The allowance for loan losses has been determined based on loans that are individually evaluated for impairment and all other loans that are collectively evaluated as follows: 2015 2014 Loans individually evaluated for impairment $ 23,600 $ 24,100 Collectively evaluated 905,570 1,002,549 Total $ 929,170 $ 1,026,649

A commercial loan with a balance of $86,130 and a consumer loan with a balance of $16,703 were in non-accrual status as of December 31, 2015. Two consumer loans totaling $44,080 were in non-accrual status as of December 31, 2014. An aged analysis of past due loans as of December 31, 2015 and 2014 is as follows:

Over Over 90

30-89 Days 90 Days Total Total Days and

2015 Past Due Past Due Past Due Current Loans Accruing

Real estate $ - $ - $ - $ 56,195,083 $ 56,195,083 -$ Commercial - - - 13,008,136 13,008,136 - Agricultural - - - 3,933,142 3,933,142 - Consumer - - - 680,453 680,453 - Other and overdrafts - - - 279,754 279,754 -

Total $ - $ - $ - $ 74,096,568 $ 74,096,568 $ - 2014

Real estate $ 495,256 $ - $ 495,256 $ 49,373,965 $ 49,869,221 -$ Commercial 20,537 - 20,537 13,470,956 13,491,493 - Agricultural - - - 3,377,906 3,377,906 - Consumer - 23,960 23,960 1,161,481 1,185,441 - Other and overdrafts - - - 755,255 755,255 -

Total $ 515,793 $ 23,960 $ 539,753 $ 68,139,563 $ 68,679,316 $ -



14


Impaired loans as of December 31, 2015 and 2014 were as follows:

2015

Recorded

Investment

Unpaid

Principal

Balance

Related

Allowance

Average

Recorded

Investment

Interest Income

Recognized

With no related allowance recorded: Real estate $ 1,437,782 $ 1,437,782 $ - $ 1,418,335 $ 87,251 Commercial 73,555 73,555 - 91,914 6,520 With a related allowance recorded: Real estate 44,388 44,388 600 45,155 2,639 Commercial 187,865 192,541 15,800 206,343 8,080 Consumer 28,688 32,331 7,200 31,435 520

$ 1,772,278 $ 1,780,597 $ 23,600 $ 1,793,182 $ 105,010

2014With no related allowance recorded: Real estate $ 324,826 $ 324,826 $ - $ 327,415 $ 24,269 Commercial 138,308 138,308 - 150,873 10,077 With a related allowance recorded: Commercial 152,317 152,317 700 187,120 12,413 Consumer 58,053 58,053 23,400 65,436 2,758

$ 673,504 $ 673,504 $ 24,100 $ 730,844 $ 49,517

Credit quality indicators - The Bank's risk-rating methodology assigns risk ratings ranging from 1 (lowest risk) to 8 (highest risk) with the categories generally described as follows:

Pass (risk rated 1 through 4) – These loans include those with minimal risk to those with minor deficiencies and requiring increased monitoring but still with acceptable credit risk.

Special Mention (risk rated 5) – A Special Mention loan has potential weaknesses that deserve management's close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or in the Bank's credit position at some future date. Special Mention loans are not adversely classified and do not expose the Bank to sufficient risk to warrant adverse classification.

Substandard (risk rated 6) – Substandard loans are inadequately protected by the current sound 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 Bank will sustain some loss if the deficiencies are not corrected.

Doubtful (risk rated 7) – Loans classified Doubtful have all the weaknesses inherent in those classified Substandard with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently known facts, conditions and values, highly questionable and improbable.

Loss (risk rated 8) – Loans classified Loss are considered uncollectible and of such little value that their continuance as bankable assets is not warranted. This classification does not mean that the loan has absolutely no recovery or salvage value but rather it is not practical or desirable to defer writing off this basically worthless asset even though partial recovery may be affected in the future.



15


Loans by credit quality indicators as of December 31, 2015 and 2014 were as follows:

2015 Real Estate Commercial Agricultural Consumer Other

Grade: Pass $ 54,439,043 $ 12,802,824 $ 3,933,142 $ 651,765 $ 279,754 Special mention 123,426 - - - - Substandard 1,632,614 205,312 - 28,688 - Doubtful - - - - - Loss - - - - -

Total $ 56,195,083 $ 13,008,136 $ 3,933,142 $ 680,453 $ 279,754 2014

Grade: Pass $ 46,235,114 $ 13,149,050 $ 3,369,578 $ 1,127,387 $ 755,255 Special mention 593,450 - - - - Substandard 3,040,657 342,443 8,328 58,054 - Doubtful - - - - - Loss - - - - -

Total $ 49,869,221 $ 13,491,493 $ 3,377,906 $ 1,185,441 $ 755,255 Troubled debt restructurings – A troubled debt restructuring occurs when a creditor, for economic or legal reasons related to the debtor's financial difficulties, makes a concession to a debtor that it would not otherwise consider. Concessions granted by the Bank to date have been limited to modifications of note terms, which have included only below-market interest rates and/or extended repayment periods. At December 31, 2015 and 2014, $1,755,575 and $629,422 in loans were classified as troubled debt restructurings. Newly restructured loans during the years ended December 31, 2015 and 2014 were as follows:

2015

Number

of

Contracts

Outstanding

Recorded

Investment

Before

Modification

Outstanding

Recorded

Investment After

Modification

Concession(s)

Granted

Impairment

Amount at

December 31

Real estate 2 $ 1,284,959 $ 1,357,670 Note term(s) $ 600 Commercial and agricultural 3 218,359 218,359 Note term(s) 15,700

Total $ 1,503,318 $ 1,576,029 $ 16,300

2014Real estate 1 $ 191,448 $ 191,448 Note term(s) $ - Consumer 1 14,936 14,936 Note term(s) 400

$ 206,384 $ 206,384 $ 400

During 2015 and 2014, no troubled debt restructurings had a payment default within 12 months of the restructure date. One troubled debt restructuring with a recorded investment of $86,130 was in non-accrual status as of December 31, 2015. No troubled debt restructurings were in non-accrual status as of December 31, 2014. There were no available commitments to lend additional funds at December 31, 2015 and 2014.



16

4. PREMISES AND EQUIPMENT

Premises and equipment consisted of the following at December 31, 2015 and 2014: 2015 2014

Land and improvements $ 336,939 $ 336,939 Leasehold improvements 435,410 435,411 Building 1,097,164 1,093,374 Furniture and equipment 812,724 822,747

2,682,237 2,688,471 Less accumulated depreciation (1,224,823) (1,138,653)

Premises and equipment, net $ 1,457,414 $ 1,549,818

Depreciation expense was $135,467 and $150,109 for the years ended December 31, 2015 and 2014, respectively. Software amortization expense was $6,936 and $7,645 for the years ended December 31, 2015 and 2014, respectively.

5. TIME DEPOSITS There were no time deposits of $250,000 or more at December 31, 2015. Time deposits of $250,000 or

more totaled $1,319,271 at December 31, 2014. At December 31, 2015, the scheduled annual maturities of all time deposits were as follows:

2016 $ 5,417,953 2017 1,021,281 2018 260,735 2019 109,426 2020 72,250 Total $ 6,881,645 6. BORROWINGS

The Bank had no borrowings outstanding at December 31, 2015 and 2014.

At December 31, 2015, the Bank had borrowing availability of approximately $2,755,000 under its borrowing facility with the Federal Home Loan Bank of Des Moines. That facility is secured by multifamily, residential-mortgage loans that had a total carrying amount of approximately $4,300,000 at December 31, 2015. In addition, the Bank maintains an unsecured $3,000,000 federal funds facility with its primary correspondent bank, Pacific Coast Bankers’ Bank. Both facilities were fully available at December 31, 2015. The Bank also maintains a discount-window, primary-credit facility with the Federal Reserve Bank of San Francisco, which had a fully available borrowing limit of approximately $5,870,000 at December 31, 2015. The discount window facility is secured by commercial real estate loans and commercial loans that had a total carrying amount of approximately $11,955,000 at December 31, 2015.



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7. NON-INTEREST EXPENSE Non-interest expense consisted of the following for the years ended December 31, 2015 and 2014:

2015 2014

Salaries and employee benefits $ 1,946,377 $ 1,841,335 Premises and equipment 587,022 579,865 Data processing 395,589 421,592 Business development 43,625 73,084 Legal and professional 124,840 142,350 Other 465,858 516,497

Total non-interest expense $ 3,563,311 $ 3,574,723

8. PROVISION FOR INCOME TAXES

The provision for income taxes in the statements of income was as follows:

2015 2014 Current

Federal $ 186,718 $ 165,199 State 46,275 37,937 Less state tax credits (8,375) (11,750) 224,618 191,386

Deferred

Federal 63,782 (96,006) State 14,400 (21,680) 78,182 (117,686)

$ 302,800 $ 73,700

Reconciliation between the provision for taxes on income and the expected provision from applying federal statutory rates to income before taxes is as follows: 2015 2014

Expected tax at statutory rates $ 303,712 $ 88,335 State taxes, net of federal benefit 38,911 11,317 Tax exempt income (37,067) (14,871) Other (2,756) (11,081) $ 302,800 $ 73,700



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8. PROVISION FOR INCOME TAXES (Continued)

The deferred tax effect of each significant item that created deferred assets is as follows:

2015 2014

Allowance for loan losses and other reserves $ 317,570 $ 359,570 State tax credits 31,932 74,795 Market adjustment on investment securities available for sale 2,983 (8,084) Accrued interest receivable (153,839) (136,116) Prepaid expenses (55,877) (48,627) Difference in depreciation (900) (21,662) Accrued interest payable 1,087 4,190 Accrued expenses 16,540 23,289 Valuation adjustment on other real estate owned - 18,592

Total deferred tax assets $ 159,496 $ 265,947

9. OFF-BALANCE-SHEET FINANCIAL INSTRUMENTS

In the ordinary course of business, the Bank enters into various transactions that currently include commitments to extend credit and a standby letter of credit, which are not included in the accompanying statements of financial condition. The Bank applies the same credit standards to these commitments as it uses in all of its lending processes and includes these commitments in its lending risk evaluations. The Bank’s exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit and standby letters of credit is represented by the contractual amount of those instruments.

The Bank’s off-balance-sheet financial instruments at December 31, 2015 and 2014 were as follows:

2015 2014

Commitments to extend credit by type: Real estate $ 5,847,300 $ 5,704,195 Commercial 8,231,729 6,263,087 Agricultural 3,126,803 2,914,505 Consumer 158,345 199,769 Other 1,226,015 684,075 Standby letter of credit 17,000 17,000

Total commitments $ 18,607,192 $ 15,782,631

Commitments to extend credit are agreements to lend to customers. These commitments have specified interest rates and generally have fixed expiration dates but may be terminated by the Bank if certain conditions of the contract are violated. Although subject to drawdown, some of these commitments may expire or terminate without funding. Therefore, the total commitment amounts do not necessarily represent future cash requirements. Collateral relating to these commitments varies, but may include cash, accounts receivable, inventories, equipment, securities and real estate.



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9. OFF-BALANCE-SHEET FINANCIAL INSTRUMENTS (Continued)

Standby letters of credit are conditional commitments issued by the Bank to guarantee the performance of a customer to a third party, and the credit risk involved is the possibility a customer may be unable to repay the Bank in the event the letter of credit is drawn down due to performance default. Collateral relating to these commitments varies, but may include cash, accounts receivable, inventories, equipment, securities and real estate. The Bank maintains a reserve for off-balance-sheet credit exposure representing management's recognition of the assumed risks of extending credit. The reserve for off-balance-sheet credit exposure totaled $500 and $10,000 at December 31, 2015 and 2014 respectively, and is included with accrued interest and other liabilities in the accompanying statements of financial condition.

10. ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS

Fair value is defined as the price that would be received to sell an asset, or paid to transfer a liability, in an orderly transaction between market participants at the measurement date. The Bank uses third-party pricing vendors, quoted market prices or present value techniques to estimate the fair values of its fixed-rate financial instruments. These valuation techniques are based on observable and unobservable inputs, which create the following fair value hierarchy: Level 1 – Quoted prices in active markets for identical assets or liabilities.

Level 2 – Quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active and model-derived valuations based on observable inputs or value drivers. Level 3 – Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the asset or liability. Unobservable inputs are used to measure fair value to the extent that observable inputs are not available.

The carrying amounts of variable- and administered-rate financial instruments are generally considered reasonable estimates of fair value. Investment securities available for sale are the only financial instruments carried at fair value on a recurring basis by the Bank. Valuation methods require considerable judgment, and the resulting estimates of fair value can be significantly affected by the assumptions made and methods used. Accordingly, the estimates provided herein do not necessarily indicate amounts that could be realized in a current market exchange. Fair value measurements of loans and deposits based on Level 3 inputs are produced internally by the Bank's Chief Financial Officer solely to satisfy disclosure requirements. In addition, as the Bank normally intends to hold the majority of its financial instruments until maturity, it does not expect to realize most of the estimated amounts disclosed. The disclosures also do not include estimated fair value amounts for items that are not defined as financial instruments but which have significant value. These include such off-balance-sheet items as core deposit intangibles. During 2015 and 2014 there were no transfers of assets or liabilities among the three levels of the fair value hierarchy.



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10. ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued)

Because the estimated fair value disclosures exclude certain financial instruments and all non-financial assets, any aggregation of the fair value amounts presented is not indicative of the underlying value of the Bank.

The Bank used the following methods and assumptions to estimate the fair value of its financial instruments:

Cash and cash equivalents: The carrying amount approximates the estimated fair value. Investment securities: The estimated fair value was provided by the Bank’s bond accounting service, Vining-Sparks IBG, L.P (“Vining Sparks”). To evaluate the Bank's bond-portfolio pricing, Vining Sparks uses third-party pricing vendors. Loans: The fair value of fixed-rate loans was generally estimated by discounting their anticipated cash flows using the assumed current market rate applicable to the overall weighted-average years to re-pricing. Variable-rate loans, including those currently at contractual floor rates, were fair valued at par. Resulting amounts were adjusted to estimate the effects of changes in credit quality of borrowers since the loans were originated.

PCBB and FHLB stock: The carrying amounts approximated fair value.

Deposits: The estimated fair value of deposits with no defined maturities, consisting of transaction and savings accounts, is represented by the amounts payable on demand at the reporting date. The estimated fair value of fixed-rate time deposits was calculated using a present-value technique applying FDIC-reported, national-average rates corresponding to the weighted-average maturities of the portfolio.



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10. ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued)

The estimated fair values of the Bank’s significant on-balance-sheet financial instruments at December 31, 2015 and 2014 were as follows:

Fair value measurements at reporting date using

Carrying value

Quoted prices in

active markets for

identical assets

(Level 1)

Significant other

observable inputs

(Level 2)

Significant unobservable

inputs (Level 3)

December 31, 2015 Financial assets: Cash and cash equivalents $ 7,734,111 $ 7,734,111 $ - $ - Available-for-sale securities

11,240,128 - 11,240,128 -

Held-to-maturity securities 4,501,176 - 4,752,132 - Loans, net 72,864,459 - - 72,219,459 PCBB stock 100,000 - 100,000 - FHLB stock 113,300 - 113,300 - Total $96,553,174 $ 7,734,111 $16,205,560 $72,219,459 Financial liabilities: Deposits $88,297,364 $ - $ - $88,312,664 December 31, 2014 Financial assets: Cash and cash equivalents $ 3,653,924 $ 3,353,924 $ - $ - Available-for-sale securities

17,712,671 - 17,712,671 -

Held-to-maturity securities 2,988,484 3,176,246 Loans, net 67,382,128 - - 66,865,128 PCBB stock 100,000 - 100,000 - FHLB stock 55,600 - 55,600 - Total $91,892,807 $ 3,353,924 $21,044,517 $66,865,128 Financial liabilities: Deposits $84,267,394 $ - $ - $84,333,394



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11. TRANSACTIONS WITH RELATED PARTIES Certain directors (and the companies with which they are associated) are customers of, and have had banking

transactions with, the Bank in the ordinary course of business. In addition, the Bank expects to continue to have such banking transactions in the future. All loans and commitments to loans to such parties are generally made on the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with other persons. In the opinion of management, these transactions do not involve more than normal credit risk or present any other unfavorable features.

Activity with respect to loans to directors and their affiliates for the years ended December 31, 2015 and 2014 were as follows:

Balance at December 31, 2013 $ 2,418,752 Additions or renewals - Amounts collected (216,921) Balance at December 31, 2014 2,201,831 Additions or renewals - Amounts collected (120,067) Balance at December 31, 2015 $ 2,081,764

At December 31 2015, there were no unused commitments to extend credit to Directors and their affiliates. At December 31, 2015 and 2014, related-party deposits held by the Bank totaled $1,409,097 and $1,876,570, respectively.

12. STOCK WARRANTS As part of the Bank’s initial stock offering, common stock warrants were issued to each purchaser of the

Bank’s common stock at a rate of one warrant for every five shares purchased. Additionally, seed capital investors received warrants at a rate of one warrant for every share purchased to the extent of seed capital invested. The warrants entitle holders to purchase one additional share of common stock at a stock-dividend-adjusted price of $9.71 until expiration on May 5, 2013. In September 2011, the Bank's Board of Directors approved an extension of the expiration date to May 5, 2016. Warrants outstanding totaled a stock-dividend-adjusted 101,816 at December 31, 2015.



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13. BASIC AND DILUTED EARNINGS PER COMMON SHARE

The Bank’s basic earnings per common share is computed by dividing net income by the weighted-average number of common shares outstanding during the period. The Bank’s diluted earnings per common share is computed by dividing net income by the weighted-average number of common shares outstanding plus dilutive common shares related to stock warrants. The effect of common shares related to stock warrants outstanding at December 31, 2015 and 2014 was anti-dilutive.

The numerator and denominator used in computing basic earnings per common share for the years ended December 31, 2015 and 2014 were as follows:

2015 Net Income(numerator)

Shares(denominator)

Per-share amount

Basic and diluted earnings per common share $ 590,470 998,999

$ 0.59

2014 Net Income(numerator)

Shares(denominator)

Per-share amount

Basic and diluted earnings per common share $ 186,109 981,620

$ 0.19

14. REGULATORY MATTERS The Bank is subject to the regulations of certain federal and state agencies, and receives periodic examinations

by those regulatory authorities. In addition, 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 Bank’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 assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. The Bank’s capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors.

Quantitative measures established by regulation to ensure capital adequacy require the Bank to maintain

minimum amounts and ratios (set forth in the tables below) of total and Tier I capital to risk-weighted assets, and of Tier I capital to average assets (all as defined in the regulation). Management believes, as of December 31, 2015, that the Bank met all regulatory capital adequacy requirements.

As of December 31, 2015, the Bank was well capitalized under the regulatory framework. There were no

conditions or events that management believes would change the Bank’s regulatory capital categorization.



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14. REGULATORY MATTERS (Continued) The Bank’s actual and required capital amounts and ratios are presented in the table below:

Actual

Regulatory minimum to be “adequately capitalized” under prompt corrective

action provisions

Regulatory minimum to be “well

capitalized” under prompt corrective

action provisions Amounts Amounts Amounts (In thousands) Ratios (In thousands) Ratios (In thousands) Ratios December 31, 2015 Total capital to risk-weighted assets $11,458 13.5% $6,743 8.0% $8,429 10.0% Tier 1 capital to risk-weighted assets $10,528 12.4% $5,057 6.0% $6,743 8.0% Common equity tier 1 to risk-weighted assets

$10,528 12.4% $3,793 4.5% $5,479 6.5%

Tier 1 capital to average assets $10,528 10.8% $3,919 4.0% $4,898 5.0% December 31, 2014 Total capital to risk-weighted assets $10,762 14.3% $5,954 8.0% $7,443 10.0% Tier 1 capital to risk-weighted assets $9,740 13.1% $2,977 4.0% $4,466 6.0% Tier 1 capital to average assets $9,740 10.0% $3,890 4.0% $4,862 5.0%

In July, 2013 the FDIC approved substantial revisions to the existing capital rules for banks. The revisions added a new common equity Tier 1 capital ratio, changed various thresholds for capital-ratio requirements, modified the calculation of certain risk-weighted assets and established a new capital conservation buffer, which, if not met, will restrict certain activities including payment of dividends, stock repurchases and discretionary bonuses to executive officers. Compliance with most revisions was required beginning January 1, 2015 with an initial measurement date of March 31, 2015 (March Call Report). The conservation buffer will be phased-in beginning in 2016 and will be fully effective on January 1, 2019. The changes are not expected to have a material adverse effect on the Bank’s capitalization under the regulatory framework.



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15. COMMITMENTS AND CONTINGENCIES The Bank has a non-cancelable operating lease for its Lebanon Branch facility. The lease commenced March

20, 2008 with an initial lease term of 10 years and four consecutive options to renew for five years each. At December 31, 2015, the minimum rental payments due under the lease were as follows:

2016 $ 43,284 2017 43,872 2018 9,749 2019 - Thereafter - Total $ 96,905

The lease includes additional contingent rental payments for the drive-up service area and the Bank’s share of property taxes and operating expenses. Total rent expense pursuant to operating leases was $68,211 and $64,786 in 2015 and 2014, respectively. The 2015 total included contingent rentals of $11,169.

In the ordinary course of business, the Bank may become subject to certain claims and legal action. Management is not aware of any such matters that would have a material adverse effect on the financial condition of the Bank.

16. EMPLOYEE BENEFIT PLAN

The Bank has a defined contribution retirement plan (401(k)) that covers most full-time employees who

meet plan eligibility requirements. The plan allows employees to make elective contributions within specified limits on a tax-deferred basis. The plan also allows the Bank to make matching as well as non-elective contributions to the plan. Except for “safe harbor” and non-discrimination purposes, Bank contributions are subject to a 20% per year vesting requirement. The Bank’s contributions to the plan for the years ended December 31, 2015 and 2014 totaled $55,142 and $44,872, respectively.

17. SUBSEQUENT EVENTS

Management has evaluated subsequent events through February 29, 2016, which is the date the financial statements became available to be issued, and no subsequent events occurred requiring accrual or disclosure.

Documents

Willamette Community Bank fee income 129,490126,974 Other 30,24639,636 ... ("commitments") are also evaluated for impairment under ASC topic Loss Contingencies. Commitments are pooled