banking on business · stockton business banking center. our expansion into the northern central...

MISSION BANCORP

Annual Report2019

Banking on Business

1 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 1 9

Banking on Business“The importance of having a relationship with any bank in business is knowing

they are your partner, can handle your business needs, and can be there for

you as you grow. My relationship with Mission Bank and the Lancaster team

allows me to operate safely in what I would consider an otherwise competitive

financial environment.” Mark Norris, President, California Compaction Corporation

Table of Contents

Letter to Shareholders

Customer Testimonials

Board of Directors and Mission Bank Team

Shareholder Information

Report of Independent Auditors and Consolidated

Financial Statements

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Letter to Shareholders

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 1 9

Mission Bank was born when a group of

local business leaders imagined a bank that

could better serve the needs of local

Bakersfield businesses. When Mission Bank

opened in October 1998, it had $5 million in

capital and a single office in downtown

Bakersfield. In just seven months, Mission

Bank had achieved positive earnings. This

began a steady course of more than 80

consecutive profitable quarters for Mission

Bank, starting in April 1999 and continuing

through today.

2019 marked Mission Bank’s 21st

anniversary. Since its inception, Mission

Bank has grown to $84 million in capital and

$850 million in assets, with eight locations

in four counties. Our success over the last

two decades is undoubtedly due to our

loyal customers. We are honored to work

side-by-side with the brightest leaders of the

community to move business plans from

dream to reality to profit. These efforts don’t

just benefit the Bank; they also fuel and

support prosperity in cities across California.

We are pleased to report that Mission

Bancorp and our wholly owned subsidiary,

Mission Bank, experienced a year of

tremendous success in 2019. Our focus

remains relentlessly aimed at increasing

intrinsic value. Increases to the company’s

intrinsic value are driven by an ability to earn

a high return on equity (ROE), retain those

earnings, and reinvest them into the business

at a high ROE. In 2019, Mission Bank

achieved industry-leading results with an

18.09% ROE and a 1.78% ROA. Though it is

true that the market may or may not reflect

the underlying intrinsic value of the Bank on

a particular day or over a short period, the

Bank’s stock price will move according to

intrinsic value over a five to ten-year period.

For this reason, market-driven stock price

inflation is not particularly remarkable.

However, our ability to increase intrinsic value

is an achievement that shareholders can

celebrate. Growth in intrinsic value is precisely

how long-term stock value increases are

generated, a feat that Mission Bank has

accomplished consistently.

Recognizing that the entire banking industry

(including ourselves) is hyper-focused on

growing deposits, we’ll start there. In 2019,

the Bank’s demand deposits grew by nearly

$100 million (or 32%) to $407 million. This

included the addition of 877 new business

checking accounts. At year-end, demand

deposits represented 54% of total deposits,

more than double the industry average. Total

deposits grew 28% to $759 million. These

growth rates (combined with a high percentage

of DDA) gives us an extremely low cost of

funds. Put simply, if deposit growth was

the Superbowl,we just put up a score of

75-0. This tremendous achievement was

accomplished through an intentional focus

on relationship banking aimed at partnering

with the highest caliber businesses, investors,

and professionals.

How do we attract these customers? The old-fashioned way–through hard work, diligent focus, and exceptional customerservice. Our business banking model is unique and it’s yielding extraordinary results.

Fueled by strong relationships with business

owners, professionals, and organizational

leaders in our primary markets, Mission


Bancorp grew net income and earnings per

share by 15.2% to $13.7 million, and 12.8%

to $7.21, respectively. Our secret to long-term

success and consistent earnings growth in

double-digit percentages is simple: foster

strong banking relationships. The best indicators

of growing relationships are demand deposits

and business accounts.

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 2019, we were able to grow

the loan portfolio into ranges that lead

industry averages, while still maintaining an

acceptable risk profile. Last year, loans grew

by 19% to $654 million.

Our exceptional team of business bankers

and relationship managers recognize the value

of both demand deposits and loans and

remain dedicated to growing each of those

components. If you see our hard-working

team members, please say “thank you.” The

numbers we are able to consistently report

are due to the superior effort and skill they

demonstrate on a daily basis.

Beginning in 2008, the banking industry

faced strong headwinds of ultra-low interest

rates and increased regulatory burden.

However, in 2017, we started to see some

relief in both categories. In 2018, those

headwinds turned to tailwinds, particularly

with interest rates. 2019 presented a bit of

a roller coaster. The margin expanded for the

first half of the year, then reversed course

and declined in the second half, landing at

4.71%. This number is well above industry

standards and is driven by our low-cost

deposits. Growing deposits 30% while

maintaining 54% of those in DDA accounts

is the goose that laid the golden egg.

Strong financial performance starts with a strong leadership team. A brief summary of the 2019 highlights spearheaded by our outstanding managers and other important developments over the past year includes the following:

• Led by our Regional President Bryan

Easterly, business in Ventura County is booming.

By the end of our second year, we reached

more than $114 million in outstanding loans

and $42 million in demand deposits. These

results aren’t just impressive, they are

astonishing. Most banks opening a de novo

office in a new market would be thrilled to

achieve a third of this success. Having Bryan

and the Ventura team on our side is like

drafting LeBron, Jordan, Curry and a few others

at the peak of their careers. Unstoppable!

• The Central Valley team remained

focused on delivering significant growth and

identifying key opportunities in a competitive

market. Led by Regional President Samy

Abiaoui, total deposits grew 18% to $402

million, while DDA deposits grew by 19%

to $220 million! Additionally, loans in the

region grew by 8% to $418 million. These are

phenomenal results which are driven by our

relationship managers and business bankers

earning customer trust through consistent

and reliable advice. It is worth noting that

this growth was achieved at a time when the

banking industry overall only grew deposit

and loans by single digits. Once again, our

team continues to outpace the industry.

• Regional President Tom Lescher leads

our phenomenal team in the High Desert

Region. The High Desert continues to

experience tremendous customer growth,

particularly in the Antelope Valley market. Our


Lancaster BBC grew total deposits by 37%

to $166 million! We are without question the

largest (and best) business bank in Lancaster.

Deposits in the High Desert Region grew 32%

to $242 million. Since the merger of Mission

Bank and Mojave Desert Bank, our deposit

franchise in the Antelope Valley is up 250%.

• In late 2018, we added John Lozano as

our Regional President in the newly established

Stockton Business Banking Center. Our

expansion into the northern central valley

lowers our risk profile through diversification.

More importantly, moving into Stockton

allows us to take advantage of a market that

currently lacks the business banking services

we can provide. In our first year and a half,

the team has secured more than $22 million

in loans. Both John and his customer base

are tailor-made for Mission Bank and we are

well-positioned to capitalize on this synergy.

• Our Ag Division grew substantially in

2019. Led by Division Manager Rob Hallum,

we added $20 million in Ag loans/commit-

ments and $15 million in loans to the Farmer

Mac program. The Farmer Mac program

allows us to leverage our industry expertise

and offer 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 has achieved growth by focusing on

working with 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 Heidi Crowe. Once again, Mission

Bank was recognized as the top institutional

partner to local SBA 504 provider Mid State

Development Corporation. In 2019, we

generated an impressive $769 thousand in

7a premium revenue, up from $443 thousand

in 2018. We are proud to report that Mission

Bank is the only local bank in each of our

markets with the Preferred Lender designation.

As a Preferred Lender, Mission Bank can

approve 7a loans internally, avoiding the

SBA-approval process that can add up to

30-45 days. In a world where time is money,

borrowers appreciate the value of an

immediate answer.

• Led by Jason Castle, our Chief Financial

Officer and Sheldon Ralph, our Chief Adminis-

trative Officer, our back-office team continues

to improve efficiency and build necessary

infrastructure in areas of compliance, IT,

accounting, finance, and budgeting. In 2019,

the measure of overhead relative to assets

was 2.55%, and we expect this to decline as

we expand our business banking model.

Controlling expenses allows us to deploy

resources in customer-focused areas such

as technology, products, and services. In

turn, those investments pay off in increased

customer loyalty and the strong banking

relationships that form the foundation of

our Company.

• Led by Chief Credit Officer, Mike Congdon,

our credit culture remains a key ingredient

of our success. Credit quality continues to

be strong, even during a time of record loan

growth. Non-performing loans (i.e., loans on

non-accrual or more than 90 days past due)

represented 0.14% of total loans at year-end.

This number remains extremely low. We

continue to make provision expenses in line

with our record loan growth, in contrast to

some of our fellow bankers whose provision

may be lower due to lack of loan growth.

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 profes-

sionals 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: $8 billion in assets by

2028. Earn an after-tax ROA of 1.60% and

after-tax ROE of 18%.

In 2019, we exceeded both ROA and ROE

targets! While we celebrate this success, we

also recognize that we must work hard to

maintain our achievements as we continue to

grow. The good news for our shareholders is

that our team is up to the challenge ahead

and is well on the way to making those goals

a reality.

As always, we thank both our team and

our customers. Together they are the driving

force behind our success and growing

shareholder value. We also take this

opportunity to thank our shareholders for

their long-term commitment to our Company.

Here’s looking forward to an exciting and

profitable 2020.


Bruce Beretta

Chairman of the Board

A. J. Antongiovanni

President and CEO

• Mission 1031 Exchange continues to be

a tremendous source of customer growth,

not just for exchange customers, but for new

bank customers. Through 2019, we have acted

as the qualified intermediary on more than

$2 billion of property value associated with

exchanges! Our advantage continues to be

safety of exchange funds and extraordinarily

responsive customer service.

• At Mission, our regulatory mantra is

100% Compliance. Our team continues to

meet and exceed regulatory expectations,

recognizing that this is our ticket to focusing

on continued growth. Led by our Compliance

Officer, Esmeralda Rivas, we continue to have

positive, collaborative relationships with our

regulators. Building mutual respect with the

regulators benefits the Bank tremendously

and we appreciate that they recognize our

unrelenting focus on compliance.

• The accomplishments and efficiency

noted above have not come at the cost of

investing in our team. Diana Wolf, our Director

of Human Capital, has led the way in

developing our most valuable resource, the

Mission Bank team members. In hard costs

alone, we have invested more than half a

million dollars in training and development.

The value of this investment is demonstrated

in the excellence of our team’s results. We

remain committed to a work culture that

fosters long-term gains through an intentional

investment in human capital.

Banking on Business“Banking on Business means that both the bank and our business are

working together as a team on a common goal and supporting one another

through business growth. Mission takes a strong interest when it comes to

seeing and learning how we do our business. Their teamwork and customer

service are both exceptional.” John McCalip and Richard Banks, All American Drilling, Inc.


All American Drilling

John McCalip is president of All American

Drilling, Inc., a Santa Maria-based drilling

company that has acquired Fisher Pump and

Well Service. Focused on drilling new water

supply wells for municipal, domestic and

agricultural use, the company also is heavily

involved in servicing downhole and above

ground pumping equipment associated with

water wells and water systems. Founded

with one rig in 2008 as All West Drilling, the

company has grown to five drilling rigs and

eight pump service rigs. McCalip, and vice

president Richard Banks, selected Mission

and bankers Bryan Easterly, Jason Ritchey

and Megan Petti for the company’s financial

services “because of their great success rate

with SBA loans and their willingness to work

with us. It’s really important to have a good

relationship with everyone at the bank. There

are many instances when a specific individual

is needed to resolve problems.”

Opposite page:

From left: Workers flank Banker Megan Petti with John McCalip of All American

Drilling, Inc., and Banker Jason Ritchey.

“Mission Bank shares

our company’s focus

on excellence and our

bankers Scott, Samy

and Mike continually

strive to improve service.

We appreciate the latest

technologies they offer

and their unwavering

protection of our portfolio

as they bank on our

business.”

Brooke and Brad AntonioniTrans-West Services, Inc.

Trans-West Services

Brooke and Brad Antonioni are president and

vice president of Bakersfield-based Trans-West

Security Services, Inc., Trans-West Services,

Inc. and FormForce, Inc. With 45 years of

experience, it’s the largest local security

company in Kern County. Services include

vehicle and foot patrol, access control, front

desk/admin security, alarm response, special

event security and camera monitoring.

Trans-West Services provide janitorial,

maintenance and day porter services, as well

as backup power through its Direct Power

Division. FormForce is a software company

offering custom web and mobile platforms to

translate paper forms and procedures into

digital forms and processes. Involving all

team members in the planning and delivering

of services is central to our company’s culture.

“Bankers Scott Black, Samy Abiaoui and Mike

Congdon demonstrate that same responsive,

supportive business culture to Mission’s

customers. That’s important to us.”

From left: Brooke and Brad Antonioni of Trans-West Services with Banker

Scott Black.


California CompactionCorporation

Aubin Industries

Phil Aubin is president of Aubin Industries,

Inc. He and his wife Linda started a

manufacturing company that specialized in

casters and wheels for the material handling

industry 25 years ago in Tracy, California. A

tool and die maker and machinist by trade,

Phil has been in manufacturing for the last

45 years. The company is a leader of

ergonomically patented products satisfying

industrial and institutional markets throughout

a variety of industries including: aerospace,

automotive, pharmaceutical, medical, and

electronic. They work with many Fortune

100 companies and distribute across the

United States. Aubin has worked with banker

John Lozano for 14 years. “John knows

my business inside and out. He has an

understanding and knowledge of my business.

I like the flexibility and support Mission

Bank gives John, especially now that we are

advancing our product line to many more

new markets.”

From left: Phil Aubin with Aubin Industries, Inc., and Banker John Lozano.

Opposite page

From left: Bankers Sheldon Ralph, Naomi Guzman and Carmen Roberts are

next to Mark Norris with California Compaction Corporation and sons Ryan

Husbands and Kevin Mifflin, with Banker Tom Lescher.

Mark Norris is president of California

Compaction Corporation. A 32 year old

family-owned enterprise, CCC is a full-service

engineering site development contractor

where Norris works alongside his sons Ryan

Husbands and Kevin Mifflin. The robust

company handles commercial and residential

projects ranging in size from 25 residential lot

developments to 5,500 acre solar projects.

Norris turned to Mission Bank because of

relationships. “They are large enough to

handle most needs, yet small enough to know

the names and understand the needs of their

clients. The Lancaster branch team is a group

of highly trained and savvy bankers who know

how to build relationships for lifetimes and

not just as clients. I can go into the Lancaster

branch and know everyone in the place. The

last bank I dealt with the branch manager

didn’t even know who I was.”

“Banking on business

says to me Mission

Bank has an optimistic

view of our economy

and the future. I need a

bank that has vision

and understands the

needs of our growing

company. We need the

right people behind us

to support our growth,

and Mission Bank’s

optimistic view fits.”

Phil Aubin, PresidentAubin Industries, Inc.

Banking on Business“Banking on Business means the bank is forward looking and available for

the continued growth of my businesses. I like working with Carmen because

of her smile, positive attitude and willingness to drop what she’s doing to

help me. I appreciate Tom and Sheldon because they find answers with

nothing more than a phone call. They’re truly a remarkable team.”

Mark Norris, President, California Compaction Corporation

Banking on Business“Banking on business is really a combination of things. Rob is reliable and

doesn’t play games. He’s like a partner who brings really helpful ideas to the

table. I honestly feel like it’s a two-way street as partners between my company

and Mission Bank. I hope to grow with them.” Arnie Kirschenmann, President, Cal Grape, Inc.

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Cal Grape

Arnie Kirschenmann is president of Cal Grape,

Inc. Twenty years ago, the family-owned

company primarily grew potatoes. They now

grow almonds and several varieties of citrus,

in addition to table grapes. Kirschenmann

learned farming from his father, Arnold, who

took him into the fields every day when he

was a teen and the farm grew potatoes,

carrots, wheat, and other row crops. Today

he works alongside his son, Gunner, who

returned after graduating with a Bachelor of

Science degree in viticulture from CSU Fresno

in 2016. Kirschenmann chose Mission Bank

because they were a good fit and he’s worked

a long time with banker Rob Hallum. “You

want to know you can count on your bank. I

have a comfort level with Rob. He has integrity

and honesty. He brings a lot to the table.”

From left: Gunner Kirschenmann with father Arnie Kirschenmann of

Cal Grape. Inc., and Banker Rob Hallum.


“Time spent with the

Mission Bank team

is truly collaborative.

We often discuss how

we can work together

to solve a problem, or

reach a goal for Ventura

Orthopedics Medical

Group. From day one,

I’ve always felt like the

team at Mission has

been available for me

and all of Ventura Ortho

to work together.”

John Hughes, Chief Financial OfficerVentura Orthopedics Medical Group, Inc.

Ventura Orthopedics

John Hughes is the chief financial officer of

Ventura Orthopedics Medical Group, Inc.,

an independent physician-owned medical

practice specializing in orthopedics and other

muscular skeletal care services, including

pain management, physical therapy and

occupational therapy. To implement a fully

integrated approach to orthopedics, therapy,

radiology and MRI services are housed in its

Ventura, Oxnard, Camarillo, Thousand Oaks

and Simi Valley clinics. Proud of its community

involvement, Ventura Orthopedics Medical

Group traces its roots back to the 1930s. It

is one of the region’s oldest group practices.

Mission Bank’s strong community bank

reputation is one reason the group selected

Mission and its bankers Bryan Easterly and

Megan Petti to meet its financial needs.

“There is a confidence in knowing they are

well-respected within our community and that

they support our brand to provide excellent

medical care.”

From left: John Hughes with Ventura Orthopedics and Banker Megan Petti.

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Banking on Business“Serving local business always seems to be at the core of what Mission Bank

does. Bryan and Megan exhibit this focus and have the flexibility to deliver

the services necessary without adding excessive bureaucracy or hurdles to

get done what is needed through our banking relationship. They are available

as banking partners to help us achieve our business goals so we can help

our clients get back into their game.” John Hughes, Chief Financial Officer, Ventura Orthopedics Medical Group, Inc.

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A. J. ANTONGIOVANNIPresident andChief Executive Officer

ELENA ECHEVERRIAChief of Staff

MICHAEL CONGDONChief Credit Officer

JASON CASTLEChief Financial Officer

SHELDON RALPHChief Administrative Officer

STUART ANNABLECredit Administrator

DIANA WOLFDirector of Human Capital

WILLIE SHOFFNERManager of OrganizationalExcellence

ROB HALLUMAg Division Manager

HEIDI CROWESBA Division Manager

SAMY ABIAOUIRegional President

TOM LESCHERRegional President

BRYAN EASTERLYRegional President

JOHN LOZANORegional President

Mission Bancorp Directors

A. J. ANTONGIOVANNIPresident and Chief Executive OfficerMission Bancorp/Bank

J. BRYAN BATEYPresidentRosedale Homes, Inc.

BRUCE L. BERETTAChairmanMission Bancorp/BankPresidentAg Wise Enterprises, Inc.

JOHN BIDARTVice ChairmanMission Bancorp/BankPartnerBidart Dairy, LLC

DONICE BOYLANPresidentB & B Surplus, Inc.

ARNOLD T. CATTANIChairman Emeritus and Current DirectorMission Bancorp/Bank

PARAMJIT S. DOSANJHManaging PartnerDosanjh Brothers, LLCGolden Gem Farms, LLC

RICHARD E. FANUCCHIExecutive Vice PresidentMission Bank

CURTIS E. FLOYD, ESQPresidentCurtis E. Floyd,A Professional Law Corporation

MARY JANE WILSONPresident and Chief Executive OfficerWZI. Inc.

Mission Bank Team


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Shareholder Information

STOCK TRANSFER AGENT AND REGISTRAR

Computershare Trust Co., Inc.462 South 4th Street, Suite 1600Louisville, KY 40202T: 1.800.962.4284

INDEPENDENT AUDITORS

Crowe, LLP400 Capitol Mall, Suite 1400Sacramento, CA 95814-4498T: 916.441.1000F: 916.441.1110

STOCK LISTING

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

INVESTOR AND SHAREHOLDER INFORMATION

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

D. A. DavidsonMichael Natzic and Katy EhlersCommunity Bank & Wealth Management GroupT: 800.288.2811


Report of Independent Auditors and

Consolidated Financial Statements for

Mission Bancorp

December 31, 2019 and 2018


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 9–51

Crowe LLP Independent Member Crowe Global

(Continued)

INDEPENDENT AUDITOR'S REPORT

To the Shareholders and Board of Directors Mission Bancorp Bakersfield, California

Report on the Financial Statements

We have audited the accompanying consolidated financial statements of Mission Bancorp, which comprise the consolidated balance sheet as of December 31, 2019, and the related consolidated statements of income, comprehensive income, changes in shareholders’ equity, and cash flows for the year then ended, and the related notes to the consolidated financial statements.

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 the preparation and fair presentation of consolidated financial statements that are free from material misstatement, whether due to fraud or error.

Auditor’s Responsibility

Our responsibility is to express an opinion on these consolidated financial statements based on our audit. We conducted our audit in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement.

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements.

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.

1

Opinion

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Mission Bancorp as of December 31, 2019, and the results of its operations and its cash flows for the year then ended in accordance with accounting principles generally accepted in the United States of America.

Other Matter

The consolidated financial statements of Mission Bancorp as of December 31, 2018, were audited by other auditors whose report dated March 11, 2019, expressed an unmodified opinion on those statements.

Crowe LLPSacramento, California March 9, 2020

2

3

CONSOLIDATED FINANCIAL STATEMENTS

4 See accompanying notes.

MISSION BANCORPCONSOLIDATED BALANCE SHEETS

2019 2018

Cash and cash due from banks 21,607,943$ 19,340,741$ Interest earning deposits in other banks 69,400,813 36,410,058

Total cash and cash equivalents 91,008,756 55,750,799

Interest earning deposits maturing over ninety days 8,833,000 9,331,000 Restricted cash and interest earning deposits 3,097,945 2,561,867 Investment securities available-for-sale, at fair value 70,412,479 52,626,138 Loans, net 645,016,123 543,006,270 Premises and equipment, net 4,760,452 2,876,802 Bank owned life insurance 11,062,659 10,319,514 Deferred tax asset, net 2,965,056 3,104,439 Interest receivable and other assets 12,853,130 9,252,879

TOTAL ASSETS 850,009,600$ 688,829,708$

Deposits Noninterest-bearing demand 407,428,002$ 307,551,960$

Savings, NOW, exchange, and escrow 89,007,078 83,616,778 Money market 206,065,304 151,733,841 Time deposits 56,013,527 48,102,046

Total deposits 758,513,911 591,004,625

FHLB borrowings - 25,000,000 Interest payable and other liabilities 8,777,113 5,775,875

Total liabilities 767,291,024 621,780,500

COMMITMENTS AND CONTINGENCIES (NOTE 14)

SHAREHOLDERS' EQUITYCommon stock - 10,000,000 shares authorized;

no par value; 1,899,402 and 1,786,042 shares issued and outstanding at December 31, 2019

and 2018, respectively 38,902,016 30,805,075 Retained earnings 43,761,528 37,212,204 Accumulated other comprehensive gain (loss) 55,032 (978,071)

Total Mission Bancorp shareholders' equity 82,718,576 67,039,208 Noncontrolling interest - 10,000

Total shareholders' equity 82,718,576 67,049,208

TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY 850,009,600$ 688,829,708$

DECEMBER 31,

ASSETS

LIABILITIES AND SHAREHOLDERS' EQUITY

See accompanying notes. 5

MISSION BANCORPCONSOLIDATED STATEMENTS OF INCOME

2019 2018

INTEREST INCOMEInterest and fees on loans 33,218,790$ 27,352,761$ Interest on investment securities 1,264,203 1,203,217 Other interest income 1,946,454 1,180,459

Total interest income 36,429,447 29,736,437

INTEREST EXPENSEInterest on other deposits 1,085,133 548,403 Interest on time deposits 1,019,262 430,281 FHLB borrowings 31,873 70,687

Total interest expense 2,136,268 1,049,371

NET INTEREST INCOME 34,293,179 28,687,066

PROVISION FOR LOAN LOSSES 1,692,500 1,006,552

NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 32,600,679 27,680,514

NON-INTEREST INCOMEGain on sale of premises and equipment 101,656 1,449,605 Service charges, fees, and other income 5,374,631 4,858,767

Total non-interest income 5,476,287 6,308,372

NON-INTEREST EXPENSESSalaries, wages, and employee benefits 11,793,396 10,417,647 Professional services 2,502,334 1,857,446 Occupancy and equipment expenses 1,919,596 1,493,922 Data processing and communication expenses 1,091,845 1,093,863 Other expenses 2,176,977 1,932,387

Total non-interest expenses 19,484,148 16,795,265

NET INCOME BEFORE PROVISION FOR INCOME TAXES 18,592,818 17,193,621 PROVISION FOR INCOME TAXES 4,933,315 4,430,901

NET INCOME 13,659,503 12,762,720 LESS NET INCOME ATTRIBUTABLE TO THE

NONCONTROLLING INTEREST - 909,059

NET INCOME AVAILABLE TO COMMON SHAREHOLDERS 13,659,503$ 11,853,661$

EARNINGS PER SHARE AVAILABLE TO COMMON SHAREHOLDERS - BASIC 7.21$ 6.39$ EARNINGS PER SHARE AVAILABLE TO COMMON SHAREHOLDERS - DILUTED 6.88$ 6.12$

YEARS ENDED DECEMBER 31,


MISSION BANCORPCONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

2019 2018

NET INCOME 13,659,503$ 12,762,720$ OTHER COMPREHENSIVE GAIN (LOSS), net of tax

Change in unrealized gain (loss) on securities available-for-sale, net of taxes of $433,539 in 2019

and $136,954 in 2018 1,031,121 (326,355) Reclassification adjustment for loss included in net

income, net of income tax benefit of $832 in 2019and $44,956 in 2018 1,982 107,129

Total change in unrealized gain (loss) on securities available-for-sale 1,033,103 (219,226)

TOTAL COMPREHENSIVE INCOME 14,692,606 12,543,494 Less comprehensive income attributable to the

noncontrolling interest - 909,059

COMPREHENSIVE INCOME ATTRIBUTABLE TOMISSION BANCORP 14,692,606$ 11,634,435$


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MISSION BANCORPCONSOLIDATED STATEMENTS OF CASH FLOWS

2019 2018

CASH FLOWS FROM OPERATING ACTIVITIESNet income 13,659,503$ 12,762,720$ Adjustments to reconcile net income to net cash from operating activities

Provision for loan losses 1,692,500 1,006,552 Depreciation and amortization of premises and equipment 479,541 363,329 Accretion of deferred loan fees and costs, net (233,195) (130,898) Accretion income recognized on acquired loans (161,100) (161,226) Accretion and amortization on investments 390,149 502,508 Deferred tax expense (308,115) (1,201,071) Stock-based compensation 563,018 314,982 Unrealized (gain) loss on equity securities (13,959) 9,559 Realized loss on sale of securities 2,814 152,085 Gain on sale of premises and equipment (101,656) (1,449,605) Increase in cash surrender value of bank owned life insurance (243,145) (243,932) Net change in:

Interest receivable and other assets (481,413) 2,021,621 Interest payable and other liabilities 255,917 737,651

Net cash provided by operating activities 15,500,859 14,684,275

CASH FLOWS FROM INVESTING ACTIVITIESIncrease in restricted cash and interest earning deposits (536,078) (1,322,391) Purchases of available-for-sale investments (38,975,087) (9,537,123) Proceeds from sales, repayments and maturities of available-for-sale

investments 22,262,425 22,192,468 Net (increase) decrease in interest earning deposits maturing over ninety days 498,000 (9,331,000) Net increase in loans (103,308,058) (80,242,281) Purchases of premises and equipment (2,367,987) (524,245) Purchase of bank owned life insurance (500,000) - Proceeds from sales of premises and equipment 1,080 2,965,845 Purchase of FHLB stock and FRB stock (223,800) (479,350)

Net cash used in investing activities (123,149,505) (76,278,077)

CASH FLOWS FROM FINANCING ACTIVITIESNet increase in demand deposits and transaction accounts 159,597,804 13,509,132 Net increase in time deposits 7,911,482 59,805 Net proceeds (payments) from FHLB borrowings (25,000,000) 25,000,000 Distributions to noncontrolling interest holders (10,000) (882,865) Fractional shares cancelled (12,720) (10,489) Proceeds from exercises of stock options 420,037 175,784 Proceeds from issuance of common stock - 1,450,718

Net cash provided by financing activities 142,906,603 39,302,085

Change in cash and cash equivalents 35,257,957 (22,291,717) Beginning of year 55,750,799 78,042,516

End of year 91,008,756$ 55,750,799$

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATIONInterest paid 2,131,440$ 1,013,408$ Taxes paid 4,450,000 3,450,000

SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND FINANCING ACTIVITIES

Change in unrealized gain (loss) on securities available for sale 1,466,643$ (311,224)$ Lease liabilities arising from obtaining right-of-use assets 2,867,120$ -$


MISSION BANCORPNOTES TO CONSOLIDATED FINANCIAL STATEMENTS

9

Note 1 – Summary of Significant Accounting Policies Nature of operations – Mission Bancorp (the Company) was incorporated on January 31, 2001 and subsequently obtained approval from the Board of Governors of the Federal Reserve System to be a bank holding company in connection with its acquisition of Mission Bank (the Bank). The Company became 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 nine full-service facilities, one located in Shafter, California, three located in Bakersfield, California, three located in the Mojave Desert area, California, one located in Ventura, California, and one located in Stockton, California. The Bank generates commercial, mortgage, and consumer loans and receives deposits from customers located primarily in the California counties of Kern, Los Angeles, Ventura and San Joaquin. On August 22, 2007, the Company organized Mission 1031 Exchange, LLC, a California Limited Liability Company, 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 build an office building to house the Company’s Shafter service facility and a medical office. Double W, LLC, is equally owned at fifty percent each by the Company and an independent third party. The noncontrolling interest amounts included in the accompanying consolidated financial statements relate to this independent third party. Double W, LLC sold its office building and ceased operations during 2018 and was dissolved in 2019. In November 2016, the Company organized Mission Community Development, LLC (MCD, LLC), a California Limited Liability Company, to facilitate and promote growth in low-income communities. MCD, LLC submitted an application with the Community Development Financial Institutions Fund and has qualified as a Community Development Entity that provides investment capital to low-income communities. MCD, LLC applied for New Market Tax Credit allocations in 2018 and 2019. No tax credit allocations were received in 2019 and 2018. MCD, LLC is a wholly owned subsidiary of Mission Bancorp. In June 2017, the Company organized Nosbig 88, Inc. a Nevada Corporation, to allow the entities of the Company to participate in a pooled-risk sharing group. Nosbig 88, Inc. is a wholly-owned subsidiary of the Company that provides property and casualty insurance coverage to the Company, the Bank and the Company’s subsidiaries, and reinsurance to eight other third-party insurance captives, for which insurance may not be currently available or economically feasible in the insurance marketplace. Nosbig 88, Inc. generates insurance premium income that is chargeable to each of the other entities in the consolidated group. This premium income and the related charges are eliminated upon consolidation within the accompanying consolidated financial statements.


10

Note 1 – Summary of Significant Accounting Policies (continued) Basis of presentation and consolidation – The accompanying consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States of America (GAAP) and general practices within the banking industry. The consolidated financial statements of the Company include the accounts of the Company, the Bank, Mission 1031 Exchange, LLC, Double W, LLC, Mission Community Development, LLC., and Nosbig 88, Inc. All significant intercompany balances and transactions have been eliminated in consolidation.

Reclassifications – Certain reclassifications have been made to the 2019 and 2018 consolidated financial statements to conform to the current year presentation. These reclassifications have no effect on previously reported net income or total shareholders’ equity of the Company. Subsequent events – Subsequent events are events or transactions that occur after the consolidated balance sheet date but before consolidated financial statements are issued. The Company recognizes in the consolidated financial statements the effects of all subsequent events that provide additional evidence about conditions that existed at the date of the consolidated balance sheet, including the estimates inherent in the process of preparing the consolidated financial statements. The Company’s consolidated financial statements do not recognize subsequent events that provide evidence about conditions that did not exist at the date of the consolidated 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 9, 2020, 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 accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the consolidated balance sheets, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant change in the near term relate to the determination of the allowance for loan losses, 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 any individual party; however, the Company’s lending is primarily concentrated in the California counties of Kern, Los Angeles, Ventura and San Joaquin. As of December 31, 2019 and 2018, the Company has cash deposits at other financial institutions in excess of the Federal Deposit Insurance Corporation insured limits. However, the Company places these deposits with major financial institutions and monitors the financial condition of these institutions.


11

Note 1 – Summary of Significant Accounting Policies (continued)

Business combinations – Business combinations are accounted for under the acquisition method of accounting in accordance with ASC 805, Business Combinations. Under the acquisition method, the acquiring entity in a business combination recognizes the acquired assets and assumed liabilities, regardless of the percentage owned, at their estimated fair values as of the date of acquisition. Any excess of the purchase price over the fair value of net assets and other identifiable intangible assets acquired is recorded as goodwill. Assets acquired and liabilities assumed from contingencies must also be recognized at fair value, if the fair value can be determined during the measurement period. Results of operations of an acquired business are included in the consolidated statements of income from the date of acquisition. Acquisition related costs, including conversion, 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 maturities of less than ninety days. Banking regulations require that banks maintain a percentage of their deposits as reserves in cash or on deposit with the Federal Reserve Bank. The Bank was in compliance with its reserve requirements as of December 31, 2019. Interest earning deposits in other banks – Interest earning deposits in other banks are carried at amortized cost and include certificates of deposits in major financial institutions located throughout the United States of America. Restricted cash and interest earning deposits – The Company’s subsidiary Nosbig, 88, Inc. has cash balances and interest earning deposits that are restricted in use for paying potential insurance claims. Investment securities – Debt 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, are classified as available-for-sale. These assets are carried at fair value. Fair value is determined using public market prices, dealer quotes, and prices obtained from independent pricing services that may be derived from observable and unobservable market inputs. Unrealized gains and losses, net of tax, are excluded from earnings and are reported as a separate component of shareholders’ equity until realized. Debt securities that management has the ability and intent to hold to maturity are classified as held-to-maturity and carried at amortized cost. Equity securities with readily determinable fair values are carried at fair value with the change in fair value recognized in net income. The total equity securities carried at fair value at December 31, 2019 and 2018 totaled $521,399 and $506,383, respectively. This amount is included as a component of interest receivable and other assets on the consolidated balance sheets. The total unrealized gain(loss) included in net income on these securities for the years ended December 31, 2019 and 2018 was $13,959 and ($9,559), respectively. Equity securities without readily determinable fair values are carried at cost, minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for an identical or similar investment.


12

Note 1 – Summary of Significant Accounting Policies (continued) Interest income from the investment securities portfolio is accrued as earned including the accretion of discounts 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 effective interest 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 expected maturity date of the investment security. Realized gains or losses on the sale of investments and mortgage-backed securities are reported in earnings as of the trade date and determined using the amortized cost of the specific security sold. The gain or loss recognized on any security sold prior to maturity is based on the difference between principal proceeds and this amortized cost. Declines in the fair 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 based upon factors such as the creditworthiness of the issuers/guarantors, the underlying collateral, if applicable, and the continuing performance of the securities. Management also evaluates other facts and circumstances that may be indicative of impairment. This includes, but is not limited to, an evaluation of the 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 contractual terms of the security, other-than-temporary impairment (OTTI) is considered to have occurred. When OTTI occurs, the cost basis of the security is written down to its fair value (as the new cost basis) and the write-down is accounted for as a realized loss. In assessing whether impairment represents OTTI, the Company must consider whether it intends to sell a security or if it is likely that they would be required to sell the security before recovery of the amortized cost basis of the investment, which may be at maturity. For debt securities, if the Company intends to sell the security or it is likely that a sale of the security may be required before recovering the cost basis, the entire impairment loss would be recognized in earnings as OTTI.

If the Company does not intend to sell the security, it is not likely the sale of the security will be required, and the Company does not expect to recover the entire amortized cost basis of the security, only the portion of the impairment loss that is credit related would be recognized in earnings. In such cases, the amount of impairment recognized is measured as the difference between the amortized cost basis and the present value of the cash flows expected to be collected. Projected cash flows are discounted by the original or current effective interest rate depending on the nature of the security being measured for potential OTTI. The remaining impairment related to other factors, and the difference between the present value of the cash flows expected to be collected and fair value, is recognized as a charge to other comprehensive income (OCI).


13


Investments in common stock, substantially restricted – In June 2015, the Company became a member 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 amount equivalent to six percent of the Company’s capital and surplus. The Company is also a member of the Federal Home Loan Bank of San Francisco (FHLB). As a member of the FHLB, the Company is required to purchase FHLB stock in accordance with its advances, securities, and deposit agreement. The Company also invests in the stock of Pacific Coast Bankers Bank (PCBB) and Texas Independent Bank (TIB) in connection with its advance and correspondent banking arrangements with PCBB and TIB. At December 31, 2019 and 2018, the Company held $100 thousand each of PCBB stock and TIB stock. PCBB and TIB stock is restricted as to purchase, sale, and redemption. As of December 31, 2019 and 2018, the Company held $452 thousand and $441 thousand, respectively, of FRB stock. The amount of FRB stock held is evaluated quarterly to determine if additional shares are required to be purchased or cancelled based on the Company’s capital and surplus. At December 31, 2019 and 2018, the Company held $3.0 million and $2.8 million, respectively, of shares of FHLB stock. The Company evaluates its investment in FHLB stock for impairment on a periodic basis and has not recorded an impairment on its investment of FHLB stock during 2019 and 2018. 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 balance sheets as of December 31, 2019 and 2018.

Originated loans – Loans receivable that management has the intent and ability to hold for the foreseeable future or until maturity or payoff are stated at the amount of unpaid principal, reduced by an 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 origination fees, net of certain direct origination costs, are capitalized and recognized as an adjustment of the yield over the life of the related loan using the effective interest method.

The accrual of interest on originated loans is discontinued at the time the loan becomes 90 days delinquent unless the credit is well secured and in process of collection. In some cases, loans can be placed on nonaccrual status or charged-off at an earlier date if collection of principal or interest is considered doubtful. Other personal loans are typically charged off no later than 180 days past due. Subsequent collections of interest are applied to unpaid principal balances or included in interest income based upon management's assessment of the likelihood that principal will be collected.


14

Note 1 – Summary of Significant Accounting Policies (continued) When a loan is placed on non-accrual status, previously accrued and uncollected interest is reversed from income and all amortization of deferred fees and costs is ceased. Loans on nonaccrual are charged off, 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 of any eventual payoff. Payments received on nonaccrual loans are applied first to the principal not charged off. If the loan has had a partial charge off or was charged off, the payment received after the recorded balance has been paid off is applied as a recovery to the allowance for loan losses. Once a loan is on nonaccrual, it is generally not returned to accrual status until: (i) all past due principal and interest amounts 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 collect all principal and interest amounts due according to the loan's contractual terms based upon available information and events. Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. The amount of the valuation allowance for impaired loans is determined by comparing the recorded investment in each loan with its value measured by one of three methods: (i) the estimated present value of total expected future cash flows, discounted at the loan’s effective interest rate; (ii) the loan's observable market price, if available from a secondary market; or (iii) by the fair value of the underlying collateral if the loan is collateral dependent. If the value of an impaired loan (measured based on one of the 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 charge to 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 a borrower 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, or providing a lower interest rate than would be normally available for a transaction of similar risk. As a result of these concessions, restructured loans are impaired as the Company will not collect all amounts due, 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 the present 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 a specific component to be provided for in the allowance for loan losses.

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. Subsequent to acquisition, if the Company's allowance for loan and lease losses methodology indicates that the credit discount associated with acquired, non-purchased credit impaired loans, is no longer sufficient to cover probable losses inherent in those loans, the Company establishes an allowance for those loans through a charge to provision for loan and lease losses.


15

Note 1 – Summary of Significant Accounting Policies (continued) Acquired loans are evaluated upon 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 all contractually required payments. The Company has elected to account for purchased impaired loans by pooling loans with common risk characteristics. The Company estimates the amount and timing of expected cash flows for each loan within a pool. The expected cash flow in excess of the loan's carrying value, which is the fair value on the date of acquisition, is referred to as the accretable yield, and is recorded as interest income over the remaining expected life of the loan. The excess of the loan's contractual principal and interest over expected cash flows is referred to as the non-accretable difference and is representative of contractual amounts the Company does not expect to collect. The non-accretable difference is not recorded in the Company's consolidated financial statements. Subsequent to the acquisition date, any increases in expected cash flows of the pool over those expected at the purchase date in excess of fair value are adjusted through an increase to the accretable yield on a prospective basis. Any subsequent decreases in expected cash flows of the pool attributable to 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 the loan at the acquisition date is amortized or accreted to interest income over the estimated life of the loans. Subsequent to the acquisition, if the probable and estimable losses on purchased non-impaired loans exceed the amount of the remaining unaccreted discount the excess is established as part of the allowance for loan losses.

Allowance for loan losses – The allowance for loan losses is maintained at a level which, in Management’s judgement is adequate to absorb probable credit losses inherent in the loan portfolio as of the consolidated balance sheet date. Loan losses are charged against the allowance when management believes the uncollectability of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance. The Company performs regular internal and external reviews of the loan portfolio to confirm the credit quality of the portfolio and the adherence to underwriting standards. All loans are assigned a risk rating that is reassessed periodically during the credit review process. These risk rating categories are the primary 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 upon management’s periodic review of the collectability of the loans that considers historical experience, the nature and volume of the loan portfolio, adverse situations that may affect the borrower’s ability to repay, estimated value of any underlying collateral, and prevailing economic conditions. The evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available. Accordingly, the Bank also engages an independent third party on a yearly basis to validate the Bank’s allowance for loan losses model and methodology.


16

Note 1 – Summary of Significant Accounting Policies (continued) The allowance consists of specific and general components. The specific component relates to loans that are 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 that loan. The general component covers all other loans not specifically identified as impaired and is based on historical loss experience adjusted for qualitative factors. Furthermore, the Bank may also maintain an unallocated reserve to provide for other credit losses in the portfolio that may not have been contemplated in the Bank’s loss factors. Qualitative factors are assigned by management based on national and local economic trends, effects of the changes in the value of underlying collateral, trends in volume 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 as competition and regulatory requirements.

Transfers of financial assets – The Company has entered into certain participation agreements with other 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 have been isolated from the Company, (2) the transferee has the right to pledge or exchange the assets (or beneficial 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 the Company on the sale of these interests for the years ended December 31, 2019 and 2018.

Premises and equipment – Premises and equipment are stated at cost, less accumulated depreciation or amortization recognized on a straight-line basis. Building and land improvements are amortized over the shorter of the life of a related lease or the estimated useful life of the improvement; and furniture, fixtures, and equipment are generally depreciated over five years. Gains and losses on the disposition of premises and equipment are included in the results of operations. Expenditures for betterments or major repairs are capitalized, while repairs and maintenance are charged to the results of operations as incurred. The Company reviews long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amounts of such assets may not be recoverable. If the sum of the expected future cash flows is less than the stated amount of the asset, an impairment loss is recognized for the difference 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 Company is the owner and beneficiary of these policies. BOLI is recorded as an asset in the accompanying consolidatedbalance sheets at its cash surrender value, net of applicable surrender changes. Increases in the cash value of these policies, as well as insurance proceeds received, are recorded in non-interest income and are not subject to income tax.


17


Income taxes – The Company uses the asset and liability method to account for income taxes. The objective of the asset and liability method is to establish deferred tax assets and liabilities for the temporary 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 or settled.

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 is required 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 the consolidated financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. Benefits from tax positions are recognized in the consolidated financial statements only when it is more likely than not that the tax position will be sustained upon examination by the appropriate taxing authority that would have full knowledge of all relevant information. A tax position that meets the more-likely-than-not recognition threshold is measured at the largest amount of benefit that 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 information becomes available. The Company recognizes interest and penalties associated with uncertain tax positions as components of other expenses in the consolidated statements of income. Deferred income tax assets represent amounts available to reduce income taxes payable on taxable income in future years. Such assets arise because of temporary differences between the financial reporting and tax bases of assets and liabilities, as well as from net operating loss and tax credit carryforwards. The Company evaluates the recoverability of these future tax deductions by assessing the 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 and short and long-range business forecasts to provide insight. Although realization is not assured for the remaining deferred income tax assets, the Company believes it is more likely than not the deferred tax assets will be fully recoverable within the applicable statutory expiration periods. However, deferred tax assets could be reduced in the near term if estimates of taxable income are significantly reduced or available tax planning strategies are no longer viable. Advertising expense – Advertising costs are expensed as incurred and amounted to $61 thousand and $40 thousand in 2019 and 2018, respectively.

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


18


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

Comprehensive income – Accounting principles require that recognized revenue, expenses, gains, and losses be included in net income. Certain changes in shareholders’ equity from non-owner sources, such as unrealized gains and losses on available-for-sale securities, are reported within comprehensive income and are reflected as a separate component of the equity section of the consolidated balance sheets. For the years ended December 31, 2019 and 2018, change in unrealized gain (loss) on securities was the only item in other comprehensive income.

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

Earnings per share – Earnings per share (EPS) amounts have been computed using both the weighted average number of shares outstanding of common stock for the purposes of computing basic earnings per share and the weighted average number of shares outstanding of common stock plus dilutive common stock equivalents for the purpose of computing diluted earnings per share. Basic earnings per share is computed by dividing net income by the weighted average number of common shares outstanding for the period. Basic EPS excludes the dilutive effect that could occur if any securities or other contracts to issue common stock were exercised or converted into or resulted in the issuance of common stock. Diluted EPS is computed using the treasury stock method by dividing net income available to common shareholders by the sum of the weighted average number of common shares outstanding for the period plus the number of additional common shares that would have been outstanding if the potentially dilutive common shares had been issued. The dilutive calculation excludes -0- options outstanding for the years ended December 31, 2019 and 2018, for which the exercise price exceeded the average market price of the Company’s common stock during those years.


19


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

2019 2018

Basic earnings per shareNet income available to common shareholders 13,659,503$ 11,853,661$

Divided by weighted average shares outstanding 1,893,417 1,855,673

Basic earnings per share 7.21$ 6.39$

Diluted earnings per shareNet income available to common shareholders 13,659,503$ 11,853,661$

Weighted average shares outstanding 1,893,417 1,855,673

Effect of dilutive securities - stock options and unvested restricted stock 92,764 82,100

Divided by weighted average shares outstanding,including potentially dilutive effect of stock options 1,986,181 1,937,773

Diluted earnings per share 6.88$ 6.12$

For the year ended December 31, 2019, the weighted average shares outstanding and effect of dilutive securities in the table above have been adjusted for a five percent stock dividend declared on April 18, 2019. For the year ended December 31, 2018, the weighted average shares outstanding and effect of dilutive securities in the table above have been adjusted for five percent stock dividends declared on April 19, 2018 and April 18, 2019. Fair value measurements – Fair value is 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 fair values for financial instruments recorded on a recurring and nonrecurring basis are included in Note 15.


20


Recently issued accounting pronouncements – On January 1, 2019, the Company adopted Accounting Standards Update (ASU) No. 2016-02, Leases (Topic 842) and subsequent amendments, which require lessees to recognize a lease liability and a right-of-use asset for all leases (other than short term leases). The Company adopted the ASU using the modified retrospective approach and did not apply available practical expedients. The adoption of this ASU resulted in the recognition of operating right-of-use assets and operating lease liabilities of $1,554,364. These amounts were determined based on the present value of remaining lease payments, discounted using the Company’s incremental borrowing rate as of the date of adoption. There was no material impact to the timing of expense or income recognition in the consolidated financial statements. Prior periods were not restated and continue to be presented under legacy generally accepted accounting principles. The adoption also resulted in an adjustment to retained earnings as of January 1, 2019 of $16,427. On January 1, 2018, the Company adopted ASU 2014-09, Revenue from Contracts with Customers and all subsequent amendments to the ASU (collectively, “ASC 606”), which (i) creates a single framework for recognizing revenue from contracts with customers that fall within its scope and (ii) revises when it is appropriate to recognize a gain (loss) from the transfer of nonfinancial assets, such as OREO. To determine revenue recognition for arrangements that an entity determines are within the scope of Topic 606, the Company performs the following five steps: (i) identify the contract(s) with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenue when (or as) the Company satisfies a performance obligation. The majority of the Company’s revenues come from interest and dividend income that are outside the scope of ASC 606. The Company’s services that fall within the scope of ASC 606 are presented within non-interest income and are recognized as revenue as the Company satisfies its obligation to the customer. Services within the scope of ASC 606 include deposit service charges, NSF charges, ATM service charges and transaction fees, IRC Section 1031 exchange fees and other miscellaneous fees. The Company adopted ASC 606 using the modified retrospective method applied to all contracts not completed as of January 1, 2018. The adoption of ASC 606 did not result in a material change to the accounting for any of the in-scope revenue streams; as such, no cumulative effect adjustment was recorded.


21

Note 1 – Summary of Significant Accounting Policies (continued) 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 financial reporting 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 expected credit 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 but will continue to use judgment to determine which loss estimation method is appropriate for their circumstances. The ASU requires enhanced disclosures to help investors and other financial statement users better understand significant estimates and judgments used in estimating credit losses, as well as the credit quality and underwriting standards of an organization's portfolio. These disclosures include qualitative and quantitative requirements that provide additional information about the amounts recorded in the financial statements. In addition, the ASU amends the accounting for credit losses on available-for-sale debt securities and purchased financial assets with credit deterioration. The ASU is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2022. 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 as follows at December 31:

Amortized Cost

Gross Unrealized

Gains

Gross Unrealized

LossesEstimated Fair

ValueAvailable-for-sale

Municipal bonds 9,616,946$ 139,773$ (30,700)$ 9,726,019$ Mortgage-backed securities, government sponsored entities 52,580,783 188,011 (244,771) 52,524,023 Mortgage-backed securities, non-government sponsored entities 2,116,032 56,362 - 2,172,394 SBA loan pools 6,012,537 15,738 (38,232) 5,990,043

70,326,298$ 399,884$ (313,703)$ 70,412,479$

Amortized Cost

Gross Unrealized

Gains

Gross Unrealized

LossesEstimated Fair

ValueAvailable-for-sale

Municipal bonds 5,551,268$ 4,111$ (45,397)$ 5,509,982$ Mortgage-backed securities , government sponsored entities 43,515,791 5,184 (1,322,747) 42,198,228 SBA loan pools 4,939,540 18,149 (39,761) 4,917,928

54,006,599$ 27,444$ (1,407,905)$ 52,626,138$

2019

2018


23

Note 2 – Investment Securities (continued) Information pertaining to available-for-sale securities with gross unrealized losses, aggregated by investment type and length of time that individual securities have been in a continuous unrealized loss position at December 31 is as follows:

Fair Value Unrealized

Losses Fair Value Unrealized


LossesAvailable-for-sale

Municipal bonds 2,890,392$ (30,700)$ -$ -$ 2,890,392$ (30,700)$ Mortgage backed securities, government sponsored entities 17,400,220 (120,932) 14,307,037 (123,839) 31,707,257 (244,771) SBA loan pools 1,063,631 (6,349) 2,431,827 (31,883) 3,495,458 (38,232)

21,354,243$ (157,981)$ 16,738,864$ (155,722)$ 38,093,107$ (313,703)$

Fair Value Unrealized



LossesAvailable-for-sale

Municipal bonds 2,072,391$ (25,051)$ 1,003,414$ (20,346)$ 3,075,805$ (45,397)$ Mortgage backed securities, government sponsored entities 2,188,688 (9,920) 39,332,454 (1,312,827) 41,521,142 (1,322,747) SBA loan pools 2,013,656 (27,660) 1,245,037 (12,101) 3,258,693 (39,761)

6,274,735$ (62,631)$ 41,580,905$ (1,345,274)$ 47,855,640$ (1,407,905)$

2019

2018Less Than 12 Months 12 Months or More Total

Less Than 12 Months 12 Months or More Total

There were 78 and 118 available-for-sale securities in an unrealized loss position as of December 31, 2019 and 2018, respectively. Of this amount, there were 71 and 107 mortgage-backed securities in an unrealized loss position for greater than twelve months as of December 31, 2019 and 2018, respectively. The Company has the ability and intent to hold these debt securities for a period of time sufficient for a recovery of cost. The issuers of these securities have not, to the Company’s knowledge, established any cause for default on these securities at December 31, 2019. The Company does not have any securities that were considered to be other than temporarily impaired in 2019 or 2018. The amortized cost and market values of securities at December 31, 2019, by contractual maturity, are shown in the following table. Expected and actual maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without prepayment penalties.


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Note 2 – Investment Securities (continued)

Estimated Fair

Amortized Cost Value

Due in one year or less 2,348,130$ 2,350,017$ Due from one to five years 32,251,267 32,086,273 Due in more than five years 35,726,901 35,976,189

70,326,298$ 70,412,479$

December 31, 2019Available-for-Sale

For the year ended December 31, 2019, the Company sold $10.3 million of mortgage-backed securities and municipal bonds for a net loss of $3 thousand. For the year ended December 31, 2018, the Company sold $7.8 million of mortgage-backed securities and municipal bonds for a net loss of $152 thousand. As of December 31, 2019 and 2018, securities pledged as collateral for borrowings and to secure U.S. Government, state and local agencies, and trust deposits as required by contract or law were $23.1 million and $22.3 million, respectively. Note 3 – Loans and Allowance for Loan Losses The major classifications of loans are summarized as follows at December 31:

2019 2018Loans secured by real estate

Construction and land development 28,653,908$ 25,670,133$ Non-farm non-residential properties 355,820,854 304,430,274 Residential properties 53,352,510 55,118,491 Farm land 80,005,740 78,168,680

Agricultural production 19,234,388 9,886,969 Commercial and industrial loans and other 117,406,112 77,356,710

Gross loans 654,473,512 550,631,257

LessAllowance for loan losses 8,060,851 6,423,877 Deferred loan fees, net 1,396,538 1,201,110

Net loans 645,016,123$ 543,006,270$


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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 borrowers with a proven track record of performance, capacity to generate repayment, possess assets outside of subject collateral, and have guarantor financial strength. The loans are evaluated based on current appraisals with historical and future value trends. Loans are dependent upon the success of the project and the financial resources of the borrower and guarantor that are independent of the project. In most cases, 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 significant portion of the loans are owner occupied, where the subject collateral is used in the operations of the borrower’s business. Underwriting standards for these loans include, but are not limited to, borrower reputation and historical performance, conservative loan to value ratios based on appraised values, conservative debt service coverage ratios based on appraised net operating income, underlying cash flow 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.

Residential properties – Residential property loans are made to a select group of local home owners and investors purchasing single family residences (1-4 units) for rental income. The home owner loans are 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 appraised values, 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 2019 or 2018. The investor loans are made to local investors. Underwriting standards for these loans include, but are not limited to, borrower reputation and historical performance, conservative loan to value ratios based on appraised values, conservative debt service coverage ratios based on appraised net operating income, underlying cash flow 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. 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, borrower reputation and historical performance, conservative loan to value ratios based on appraised values, conservative debt service coverage ratios based on appraised net operating income, underlying cash flow 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 business operations and proceeds are used for the growing of crops. Underwriting standards for these loans include, but are not limited to, borrower reputation and historical performance, conservative advance rate against crop inventory, crops in the process of being grown, underlying cash flow of the borrower, and financial resources of the guarantors. In most cases, the guarantor provides an additional source of repayment. Commercial and industrial loans – Commercial and industrial loans are made to a wide segment of local borrowers in a diverse cross section of industries. These loans are made to finance the ongoing business operations including accounts receivable, equipment acquisition, inventory, and other business purposes. Some of these loans made to the most financially strong borrowers are unsecured. Underwriting standards for these loans include, but are not limited to historical performance, conservative advance rate against collateral types, conservative debt service coverage ratios, underlying cash flow of the borrower, and financial resources of the guarantors. In most cases, the guarantor provides an additional source of repayment. Gross loan balances shown in the table below are net of fair value discounts related to acquired loans. Discounts arise when the Company acquires loan portfolios in business combinations and the acquired loans are recorded at estimated fair value. Discounts on ASC 310-30 Loans (loans considered to be impaired at the time of acquisition) are allocated between accretable and nonaccretable portions based on estimated cash flows. The following table presents the expected cash flows and carrying value of ASC 310-30 loans, net of allowance for loan losses, of $-0- as of December 31:

2019 2018Loans secured by real estate

Non-farm non-residential properties 1,324,309$ 1,867,725$ Residential properties 900,988 950,718

Undiscounted cash flows expected to be collected 2,225,297 2,818,443

Accretable yield (724,314) (876,441)

Carrying value of ASC 310-30 Loans 1,500,983$ 1,942,002$


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Note 3 – Loans and Allowance for Loan Losses (continued) The following table presents the changes in the accretable yield related to ASC 310-30 loans for the years ended December 31:

2019 2018

Beginning balance 876,441$ 914,162$ Accretion to interest income (160,050) (161,226) Change in expected cash flows, net 7,923 123,505

Ending Balance 724,314$ 876,441$

The adequacy of the allowance for loan losses is determined by the Company’s management based upon evaluation and review of credit quality of the loan portfolio, consideration of historical loss experience, relevant internal and external factors that affect the collection of a loan, and other pertinent factors. The allowance for loan loss analysis is a formula methodology based upon various loan pools and five year analysis of historical losses associated with those pools. The Company uses a risk rating methodology that assigns risk ratings ranging from 1 to 9 where a higher rating represents a higher risk. Management believes that the allowance for loan losses was adequate as of December 31, 2019. However, there is no assurance that future loan losses will not exceed the levels provided for in the allowance for loan losses and could possibly result in additional charges to the provision for loan and lease losses. In addition, bank regulatory authorities, as part of their periodic examination of the Company, may require additional charges to the provision for loan losses in future periods if warranted as a result of their review. A significant decline in real estate market values may require an increase in the allowance for loan losses. A prolonged drop in oil prices, or continued drought conditions, may require an increase in the allowance for loan losses. The Bank does have exposure to companies in both the oil and agriculture industries. While there have been signs of improving economic trends in our markets, further deterioration (due in part or no part to the items above) in the Company’s markets may adversely affect its loan portfolio and may lead to additional charges to the provision for loan losses. The Company is a commercial bank and relies heavily on commercial borrowers. The ultimate repayment of these loans is dependent, to a certain degree, on the local economy and real estate market. However, the Company manages and controls credit risk by diversifying its portfolio by loan type, borrower type, and industry concentration within the commercial borrower population. The following tables present by portfolio segment, the activity in the allowance for loan losses for the years ended December 31, 2019 and 2018. The tables also present by portfolio segment, the balance and activity in the allowance for loan losses disaggregated on the basis of the Company's impairment measurement method and the related recorded investment in loans as of and for the years ended December 31, 2019 and 2018.


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Note 3 – Loans and Allowance for Loan Losses (continued) Recorded investment is defined as the unpaid principal balance, net of deferred fees and costs, premiums, discounts, accrued interest, and may also reflect a previous write-down of the investment. However, recorded investment for the Company approximates unpaid principal balance, net of previous write-downs, as the other components are not deemed material.

Construction and Land

Development

Non-farm and Non-residential

PropertiesResidential Properties Farm Land

Agricultural Production

Commercial and Industrial and

Other Unallocated Total

ALLOWANCE FOR LOAN LOSSES

Beginning balance 256,702$ 3,522,189$ 540,001$ 707,488$ 139,407$ 790,538$ 467,552$ 6,423,877$ Provision 101,244 399,900 10,823 212,578 151,519 885,803 (69,367) 1,692,500 Recoveries - - 5,934 - - 167 - 6,101 Charge-offs - - - - - (61,627) - (61,627)

Ending balance 357,946$ 3,922,089$ 556,758$ 920,066$ 290,926$ 1,614,881$ 398,185$ 8,060,851$

Ending balance, individuallyevaluated for impairment -$ -$ -$ -$ -$ -$ 195,439$ 195,439$

Ending balance, collectivelyevaluated for impairment 357,946$ 3,922,089$ 556,758$ 920,066$ 290,926$ 1,614,881$ 202,746$ 7,865,412$

Ending balance, loans acquired withdeteriorated credit quality (ASC 310-30 Loans) -$ -$ -$ -$ -$ -$ -$ -$

LOANS

Ending balance 28,653,908$ 355,820,854$ 53,352,510$ 80,005,740$ 19,234,388$ 117,406,112$ -$ 654,473,512$

Ending balance, individually evaluated for impairment 18,267$ 703,914$ -$ -$ -$ 208,069$ -$ 930,250$

Ending balance, collectivelyevaluated for impairment 28,635,641$ 354,327,020$ 52,641,447$ 80,005,740$ 19,234,388$ 117,198,043$ -$ 652,042,279$

Ending balance, loans acquired withdeteriorated credit quality (ASC 310-30 Loans) -$ 789,920$ 711,063$ -$ -$ -$ -$ 1,500,983$

Construction and Land

Development

Non-farm and Non-residential

PropertiesResidential Properties Farm Land

Agricultural Production

Commercial and Industrial and

Other Unallocated Total

ALLOWANCE FOR LOAN LOSSES

Beginning balance 225,351$ 2,871,593$ 503,338$ 847,333$ 111,575$ 663,323$ 190,094$ 5,412,607$ Provision 31,351 650,596 32,426 (139,845) 27,832 126,734 277,458 1,006,552 Recoveries - - 4,237 - - 481 - 4,718

Ending balance 256,702$ 3,522,189$ 540,001$ 707,488$ 139,407$ 790,538$ 467,552$ 6,423,877$

Ending balance, individuallyevaluated for impairment -$ 33,289$ -$ -$ -$ -$ -$ 33,289$

Ending balance, collectivelyevaluated for impairment 256,702$ 3,488,900$ 540,001$ 707,488$ 139,407$ 790,538$ 467,552$ 6,390,588$

Ending balance, loans acquired withdeteriorated credit quality (ASC 310-30 Loans) -$ -$ -$ -$ -$ -$ -$ -$

LOANS

Ending balance 25,670,133$ 304,430,274$ 55,118,491$ 78,168,680$ 9,886,969$ 77,356,710$ -$ 550,631,257$

Ending balance, individually evaluated for impairment 29,475$ 176,569$ -$ -$ -$ 40$ -$ 206,084$

Ending balance, collectivelyevaluated for impairment 25,640,658$ 303,019,832$ 54,410,362$ 78,168,680$ 9,886,969$ 77,356,670$ -$ 548,483,171$

Ending balance, loans acquired withdeteriorated credit quality (ASC 310-30 Loans) -$ 1,233,873$ 708,129$ -$ -$ -$ -$ 1,942,002$

Allowance for Credit Losses and Recorded Investment in LoansAs of and for the Year Ended December 31, 2019

Allowance for Credit Losses and Recorded Investment in LoansAs of and for the Year Ended December 31, 2018


29

Note 3 – Loans and Allowance for Loan Losses (continued) As a result of the Company's geographical concentration, there may be an increase in the credit risk associated with the Company's loans. While management believes that the allowance for loan losses at December 31, 2019 and 2018 is adequate to absorb probable losses inherent in the Company's loan portfolio, a downturn in the economy may adversely impact asset quality and require future additions to the allowance for loan losses. To the extent that such events occur, the impact on the adequacy of the Company's allowance for loan losses will be reported in the Company's consolidated financial statements in the period of occurrence. Credit quality indicators – As previously noted, the Company uses several credit quality indicators to manage credit risk in an ongoing manner. The Company's primary credit quality indicators are used as an internal credit risk rating system that rates loans and leases into pass/watch, special mention, substandard, or doubtful/loss categories. Credit risk ratings are applied individually to all loans that have significant or unique credit characteristics that benefit from a case-by-case evaluation. The following are the definitions of the Company's credit quality indicators: Pass – Loans in all classes that comprise the commercial and consumer portfolio segments that are not adversely rated, are contractually current as to principal and interest, and are otherwise in compliance with the contractual terms of the loan or lease agreement. Management believes that there is a low likelihood of loss related to those loans that are considered pass. Watch – The loan has lower than average but still acceptable credit risk. The borrower may have higher leverage, less certain but viable repayment sources, have limited financial reserves, and may possess weaknesses that can be adequately mitigated through collateral, structural, or other credit enhancement. Management weakness could be evident. Borrower might be more susceptible to market forces. Special mention – Loans classified as special mention have a potential weakness that deserves management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or of the Company’s credit position at some future date. Substandard – Loans classified as substandard are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans so classified have a well-defined weakness or weaknesses that jeopardize the repayment of the debt. They are characterized by the distinct possibility that the Company will sustain some loss if the deficiencies are not corrected. Doubtful/loss – Loans classified as doubtful have all the weaknesses inherent in those classified as substandard, with the added characteristic that the weaknesses make collection or repayment in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable. The possibility of loss is extremely high, but because of certain important and reasonably specific pending factors, which may work towards strengthening of the asset, classification as a loss (and immediate charge off) is deferred until more exact status may be determined. In certain circumstances, a doubtful rating will be temporary, while the Company is awaiting an updated collateral valuation.


30

Note 3 – Loans and Allowance for Loan Losses (continued) In these cases, once the collateral is valued and appropriate margin applied, the remaining un-collateralized portion will be charged off. The remaining balance, properly margined, may then be upgraded to substandard, but must remain on non-accrual. A loss rating is assigned to loans considered un-collectible and of such little value that the continuance as an asset is not warranted. This rating does not mean that the loan has no recovery or salvage value, but rather that the loan should be charged off now, even though partial or full recovery may be possible in the future. The Company’s credit quality indicators are periodically updated on a case-by-case basis. The following tables present by loan type and by credit quality indicator, the recorded investment in the Company’s loans as of December 31:

Pass/WatchSpecial

Mention Substandard Doubtful/Loss Impaired TotalLoans secured by real estate

Construction and land development 28,635,641$ -$ -$ -$ 18,267$ 28,653,908$ Non-farm non-residential properties 352,942,518 932,891 451,611 - 703,914 355,030,934 Residential properties 52,641,447 - - - - 52,641,447 Farm land 79,902,143 103,597 - - - 80,005,740

Agricultural production 18,314,388 920,000 - - - 19,234,388 Commercial and industrial loans and other 116,232,394 965,649 - - 208,069 117,406,112

Total 648,668,531$ 2,922,137$ 451,611$ -$ 930,250$ 652,972,529

ASC 310-30 Loans 1,500,983

Total 654,473,512$

Pass/WatchSpecial

Mention Substandard Doubtful/Loss Impaired TotalLoans secured by real estate

Construction and land development 25,640,658$ -$ -$ -$ 29,475$ 25,670,133$ Non-farm non-residential properties 302,165,335 383,173 471,324 - 176,569 303,196,401$ Residential properties 54,410,362 - - - - 54,410,362$ Farm land 77,180,306 - 988,374 - - 78,168,680$

Agricultural production 9,886,969 - - - - 9,886,969$ Commercial and industrial loans and other 77,055,687 300,983 - - 40 77,356,710$

Total 546,339,317$ 684,156$ 1,459,698$ -$ 206,084$ 548,689,255

ASC 310-30 Loans 1,942,002

Total 550,631,257$

2019

2018


31

Note 3 – Loans and Allowance for Loan Losses (continued) Aging analysis, impaired loans, and troubled debt restructurings – The following tables present by loan type, an aging analysis and the recorded investment in past due loans still accruing interest and nonaccrual loans as of December 31:

Greater30-59 Days 60-89 Days Than Total Past Total Loans

Past Due Past Due 90 Days Nonaccrual Due Current ReceivablesLoans secured by real estate

Construction and land development -$ -$ -$ 18,267$ 18,267$ 28,635,641$ 28,653,908$ Non-farm non-residential properties - - - 703,914 703,914 354,327,020 355,030,934 Residential properties - - - - - 52,641,447 52,641,447 Farm land - - - - - 80,005,740 80,005,740

Agricultural production - - - - - 19,234,388 19,234,388 Commercial and industrial loans

and other 19,786 - - 208,069 227,855 117,178,257 117,406,112 Total 19,786$ -$ -$ 930,250$ 950,036$ 652,022,493$ 652,972,529

ASC 310-30 Loans 1,500,983

Total 654,473,512$

Greater30-59 Days 60-89 Days Than Total Past Total Loans

Past Due Past Due 90 Days Nonaccrual Due Current ReceivablesLoans secured by real estate

Construction and land development -$ -$ -$ 29,475$ 29,475$ 25,640,658$ 25,670,133$ Non-farm non-residential properties - - - 176,569 176,569$ 303,019,832 303,196,401 Residential properties - - - - - 54,410,362 54,410,362 Farm land - - - - - 78,168,680 78,168,680

Agricultural production - - - - - 9,886,969 9,886,969 Commercial and industrial loans

and other - - - 40 40 77,356,670 77,356,710 Total -$ -$ -$ 206,084$ 206,084$ 548,483,171$ 548,689,255

ASC 310-30 Loans 1,942,002

Total 550,631,257$

2019

2018

If interest on non-accrual loans had been recognized under the terms of the original agreements, interest income would have increased approximately $17 thousand and $47 thousand for the years ended December 31, 2019 and 2018, respectively.


32

Note 3 – Loans and Allowance for Loan Losses (continued) Per the Company’s policy, a loan is considered impaired when it is probable that the Company will be unable to collect all amounts due according to the original contractual terms of the loan agreement. Impaired loans and related allowance for loan losses is comprised of the following at December 31:

Unpaid Average InterestRecorded Principal Related Recorded Income

Investment Balance Allowance Investment RecognizedWith no related allowance recorded

Loans secured by real estateConstruction and land development 18,267$ 22,491$ -$ 24,138$ -$ Non-farm non-residential properties 703,914 771,767 - 189,601 - Farmland - - - - - Residential properties - - - - -

Agricultural production - - - - - Commercial and industrial loans and other - - - - -

722,181 794,258 - 213,739 -

With an allowance recordedLoans secured by real estate

Construction and land development - - - - - Non-farm non-residential properties - - - - - Farmland - - - - - Residential properties - - - - -

Agricultural production - - - - - Commercial and industrial loans and other 208,069 208,069 195,439 16,005 -

208,069 208,069 195,439 16,005 -

930,250 1,002,327 195,439 229,744 -

ASC 310-30 Loans 1,500,983 1,785,863 - 1,786,879 160,050

Total 2,431,233$ 2,788,190$ 195,439$ 2,016,623$ 160,050$

Unpaid Average InterestRecorded Principal Related Recorded Income

Investment Balance Allowance Investment RecognizedWith no related allowance recorded

Loans secured by real estateConstruction and land development 29,475$ 31,527$ -$ 41,251$ 1,432$ Non-farm non-residential properties 28,135 30,354 - 22,390 - Farmland - - - 312,566 - Residential properties - - - - -

Agricultural production - - - - - Commercial and industrial loans and other 40 1,687 - 2,469 -

57,650 63,568 - 378,676 1,432

With an allowance recordedLoans secured by real estate - - - 12,614 946

Construction and land development 148,434 200,714 33,289 156,499 - Non-farm non-residential properties - - - - - Farmland - - - - - Residential properties

Agricultural production - - - - - Commercial and industrial loans and other - - - - -

148,434 200,714 33,289 169,113 946

206,084 264,282 33,289 547,789 2,378

ASC 310-30 Loans 1,942,002 2,250,707 - 2,118,337 161,226

Total 2,148,086$ 2,514,989$ 33,289$ 2,666,126$ 163,604$

As of and for the Year Ended December 31, 2018

As of and for the Year Ended December 31, 2019

During 2019 and 2018, approximately $16 thousand and $228 thousand in interest was recognized on the above loans on a cash basis.


33

Note 3 – Loans and Allowance for Loan Losses (continued) Troubled debt restructurings – The Company offers a variety of modifications to borrowers that are considered troubled debt restructurings. The modification categories offered can generally be described in the following categories: Rate modification – A modification in which the interest rate is changed. Term modification – A modification in which the maturity date, timing of payments, or frequency of payments is changed. Interest only modification – A modification in which the loan is converted to interest only payments for a period of time. Paymentmodification – A modification in which the dollar amount of the payment is changed, other than an interest only modification described above. Combination modification – Any other type of modification, including the use of multiple categories above. No troubled debt restructurings occurred in 2019 or 2018. There were no commitments to lend additional funds to borrowers involved in troubled debt restructurings outstanding as of December 31, 2019 and 2018. During the years ended December 31, 2019 and 2018, there were no payment defaults during the period for loans modified as troubled debt restructurings within the previous twelve months.


34

Note 4 – Premises and Equipment Premises and equipment is comprised of the following at December 31:

2019 2018

Land 788,000$ 788,000$ Buildings 1,202,000 1,202,000 Furniture, fixtures, and equipment 3,411,601 2,542,012 Software 277,502 277,502 Building and land improvements 2,270,361 1,202,083

7,949,464 6,011,597 Less accumulated depreciation and amortization (3,189,012) (3,134,795)

4,760,452$ 2,876,802$

Depreciation and amortization expense for the years ended December 31, 2019 and 2018 amounted to $480 thousand and $363 thousand, respectively. Note 5 – Leases

The Company enters into leases in the normal course of business primarily for financial centers, office operations and equipment which have been classified as operating leases. The Company’s leases have remaining terms that run through August 2026, some of which include renewal options to extend the lease for up to five years and some of which include options to terminate the lease. The Company includes lease extension and termination options in the lease term if, after considering relevant economic factors, it is reasonably certain the Company will exercise the option. The Company has elected not to recognize leases with original lease terms of 12 months or less on the consolidated balance sheets. Leases are classified as operating or finance leases at the lease commencement date. Lease expense for operating leases and short-term leases is recognized on a straight-line basis over the term of the lease. Right-of-use assets represent the Company’s right to use an underlying asset for the lease term and lease liabilities represent the obligation to make lease payments arising from the lease. Right-of-use assets and lease liabilities are recognized at the lease commencement date based on the estimated present value of lease payments over the term lease. The Company uses its incremental borrowing rate at lease commencement to calculate the present value of lease payments when the rate implicit in a lease is not known. The Company’s incremental borrowing rate is based on the FHLB advance rate, adjusted for the lease term.


35

Note 5 – Leases (continued) As of December 31, 2019, the Company has operating right-of-use assets in the amount of $2,280,057, which is included in interest receivable and other assets on the consolidated balance sheets. As of December 31, 2019, the Company has operating lease liabilities in the amount of $2,311,216, which is included in interest payable and other liabilities on the consolidated balance sheets. The total lease costs incurred for the years ended December 31, 2019 was $699,016. This consisted of $539,262 of operating lease costs and $159,754 of short-term lease costs. Future undiscounted lease payments for operating leases with initial terms of one year or more as of December 31, 2019 are as follows:

Year ending December 31,2020 575,534$ 2021 558,810 2022 519,649 2023 393,781 2024 166,899 Thereafter 233,038 Total undiscounted lease payments 2,447,711 Less: imputed interest 136,495 Net lease liabilities 2,311,216$

Supplemental lease information The weighted average remaining lease term for operating leases at December 31, 2019 was 4 years. The weighted average discount rate for operating leases at December 31, 2019 was 2.74%.

Cash paid for amounts included in the measurement of operating lease liabilities totaled $617,760 for the year ended December 31, 2019. Right-of-use assets obtained in exchange for new operating leases totaled $2,867,120 for the year ended December 31, 2019.


36

Note 6 – Deposits Time deposits consisted of following at December 31:

2019 2018

Time deposits under $250,000 23,514,334$ 41,887,804$ Time deposits $250,000 and over 32,499,193 6,214,242

Total 56,013,527$ 48,102,046$

The scheduled maturities of time deposits as of December 31, 2019 are as follows:

Year ending December 31,2020 49,023,443$ 2021 3,776,617 2022 3,047,229 2023 166,238

56,013,527$

Note 7 – Borrowings At December 31, 2019, the Company had three lines of credit with three different banks with a total borrowing capacity of $42.0 million. The lines have variable interest rates based on the individual lending bank’s daily federal fund rates and are due on demand. These are uncommitted lines under which availability is subject to federal fund balances of the issuing banks. The Company had no outstanding balances related to any of these lines of credit as of December 31, 2019 and 2018. In addition, the Company had $213.4 million and $154.1 million of available borrowing capacity from the FHLB at December 31, 2019 and 2018, respectively, based upon loans available to be pledged. Borrowings from FHLB are collateralized by the Company’s loans receivable. At December 31, 2019, $449.6 million in loans were pledged as collateral to the FHLB for the borrowings. The Company had no outstanding balance on this line as of December 31, 2019. The Company had an outstanding advance balance of $25.0 million on this line as of December 31, 2018, which was fully repaid in January 2019. At December 31, 2019, the Company also had a $15.0 million letter of credit maturing October 2020.


37

Note 8 – Income Taxes The components of income tax provision consisted of the following for the years ended December 31:

2019 2018

CurrentFederal 3,171,705$ 3,599,688$ State 2,069,725 2,032,285

5,241,430 5,631,973

Deferred Federal (107,679) (910,706) State (200,436) (290,366)

(308,115) (1,201,072)

Provision for income taxes 4,933,315$ 4,430,901$

The provisions for income taxes in 2019 and 2018 resulted in effective tax rates of 26.6% and 26.0%, respectively, of income before income taxes. Effective tax rates differ from the Federal statutory rate of 21% applied to income before income taxes due to the following:

Statutory federal income tax rate 3,904,492$ 21.0% 3,610,660$ 21.0%State franchise tax, net of federal benefit 1,451,545 7.8% 1,160,723 7.1%Tax exempt interest and non-taxable income (339,353) -1.8% (324,758) -2.0%Stock based compensation (97,896) -0.5% 42,221 0.3%Other 14,527 0.1% (57,945) -0.4%

4,933,315$ 26.6% 4,430,901$ 26.0%

20182019


38

Note 8 – Income Taxes (continued) The following is a summary of the components of the net deferred tax asset at December 31:

2019 2018

Deferred tax assetsAllowance for loan losses 2,284,297$ 1,703,153$ Lease liabilities 683,279 - Deferred compensation 619,674 478,992 State tax 434,642 426,780 Salary continuation expense 322,193 308,864 Accrued vacation 131,262 109,977 Stock based compensation 100,126 - Gain on sale of premises and equipment 97,181 127,137 Purchase accounting adjustments 20,644 7,652 Unrealized loss on investment securities - 423,794 Depreciation and amortization - 232,179 Other 93,583 69,049

Total deferred tax assets 4,786,881 3,887,577

Deferred tax liabilitiesRight of use assets (674,067) - Deferred loan costs (572,983) (421,107) Prepaid expenses (389,661) (335,709) Depreciation and amortization (130,350) - Unrealized gain on investment securities (23,703) - Other (31,061) (26,322)

Net deferred tax asset 2,965,056$ 3,104,439$

The realization of the Company’s deferred tax assets is dependent upon future taxable income and the future reversal of deferred tax liabilities. Management has evaluated the likelihood of the realization of its deferred tax assets and has determined that no valuation allowance is appropriate at December 31, 2019 and 2018, since management believes it is more likely than not that the deferred tax assets will be realized. The Company had no unrecognized tax benefits at December 31, 2019 and 2018 and does not expect the total amount of unrecognized tax benefits to significantly increase in the next twelve months. The Company recognizes interest accrued and penalties related to unrecognized tax benefits in tax expense. During the years ended December 31, 2019 and 2018, the Company recognized no interest and penalties. The Company is no longer subject to U.S. federal tax authority examinations for the years before 2016 and California State tax authority examinations for years before 2015.


39

Note 9 – Employee Benefit Plans The employees of Mission Bancorp are covered under a 401(k) defined contribution plan that was established in January 1999. All employees of the Company who are 21 years of age or older and have completed 6 months of service are eligible to participate in the plan. Eligible employees may defer up to limits established by the Internal Revenue Code. The Company matches employee contributions on a discretionary basis. The Company’s matching contribution of the 401(k) plan for the years ended December 31, 2019 and 2018 were $193 thousand and $171 thousand, respectively. During 2004, the Company implemented a Salary Continuation Plan (SCP). The SCP is a non-qualified plan in which the Company agrees to pay key executives additional benefits in the future, usually at retirement, in return for satisfactory performance by the executive. The SCP is an unfunded plan and is designed to recover its costs through the use of a life insurance policy on each of the participants. As of December 31, 2019 and 2018, approximately $1.1 million and $1.0 million, respectively, had been accrued in conjunction with these agreements and are reflected on the consolidated balance sheets as a component of interest payable and other liabilities. In order to fund the SCP plan, the Company purchased life insurance policies in which it is the owner and the beneficiary. Aggregate cash surrender values of these policies were $11.1 million and $10.3 million at December 31, 2019 and 2018, respectively, and comprise bank owned life insurance on the consolidated balance sheets. The Company has a non-qualified deferred compensation plan (the Plan) for key executives. Under the Plan, the Company contributes amounts annually per the agreements for each executive. These amounts vest over periods of time and are payable once the executive has met certain requirements per the agreements. As of December 31, 2019 and 2018, the Company had a payable related to Plan of approximately $273 thousand and $149 thousand, respectively. These amounts are reflected on the consolidated balance sheets as a component of interest payable and other liabilities. Note 10 – Stock Based Compensation In 2016, the Board of Directors and shareholders of the Company approved and adopted the 2016 Ominbus Plan (the Plan). This Plan replaced the 2010 Stock Option Plan. The Plan permits the grant of nonstatutory options, incentive stock options, stock appreciation rights, restricted stock awards and restricted stock units (individually or collectively referred to as an “Equity Award”). The purpose of the Plan is to attract and retain the best available personnel for positions of substantial responsibility, to provide additional incentive to Directors and Employees of the Company and its subsidiaries and to promote the overall success of the Company’s business. Options granted under the Plan may be Incentive Stock Options or Nonstatutory Stock Options, as determined by the Administrator at the time of grant of an Option and subject to the applicable provisions of Section 422 of the Code and the regulations promulgated thereunder. In addition, Stock Appreciation Rights, Restricted Stock Awards and Restricted Stock Units (which may or may not include a Dividend Equivalent) may be granted under the Plan to Directors and Employees. The Options, Stock Appreciation Rights, Restricted Stock Awards and Restricted Stock Units offered pursuant to the Plan are a matter of separate inducement and are not in lieu of salary or other compensation. The Plan provides for a maximum of 200,000 shares of authorized common stock be available for grant, adjusted for stock dividends and stock splits declared since Plan inception. To date, the Company has granted incentive stock options, restricted stock awards, and restricted stock units.


40

Note 10 – Stock Based Compensation (continued) Equity Awards available for grant under the 2016 Omnibus Plan amounted to 126,690 and 145,756 as of December 31, 2019 and 2018, respectively. The fair value of each option grant was estimated on the date of grant using the Black-Scholes option-pricing model using the assumptions shown in the following table. The expected volatility was based on the volatility of the Company’s stock price over a period commensurate with the expected term of the option. The Company uses historical data on option exercises to determine the expected term within the valuation model. The risk-free rate for the expected term of the option is based upon the U.S. Treasury yield curve at the time of option grant. An expected dividend yield was not considered in the option pricing formula since the Company has not paid cash dividends and has no current plans to do so in the future. The fair value of each restricted stock grant approximated the trading value of the Company’s stock on the date of grant. The assumptions used to estimate the fair value of stock options granted for the years ended December 31, were as follows:

2019 2018

Risk free interest rate 1.66% - 2.59% 2.83% - 3.03%Weighted-average expected life 6.5 Years 6.5 YearsVolatility 18.5% - 19.9% 19.2% - 19.7%Dividends None None

At December 31, 2019, the estimated unrecognized pretax compensation expense related to nonvested options was $727 thousand which will be realized over a weighted average period of 2.1 years. Future expense related to stock option awards would be impacted by new awards and/or modifications, repurchases and forfeitures of existing awards.


41

Note 10 – Stock Based Compensation (continued) A summary of option activity and changes during the year is presented below, as of and for the year ended December 31. Opening balances in the table below have been adjusted for a 5% stock dividend declared during 2019:

Weighted-Average

Shares Exercise Price

Outstanding at beginning of year 211,394 27.06$ Granted 26,714 76.14 Exercised (19,387) 21.67 Expired or Forfeited (7,136) 66.92

Outstanding at end of year 211,585 32.31

Options exercisable 141,852 24.04

Weighted-average fair value ofoptions granted during the year 18.09$

2019

During 2019 and 2018, the Company awarded stock options with an aggregate fair value of $479 thousand and $399 thousand, respectively. The fair value of stock options that vested in 2019 and 2018 was $407 thousand and $221 thousand, respectively. The compensation cost has been reported in non-interest expense within the consolidated statements of income. In 2019, employees exercised 19,387 options at a price of $420 thousand, which had an intrinsic value of $1.14 million. In 2018, employees exercised 7,351 options at a price of $175 thousand, which had an intrinsic value of $331 thousand. In 2019, the Company realized $182 thousand of tax benefits from the exercises and subsequent disqualifying dispositions of incentive stock options by employees. The Company did not realize any significant tax benefit from options exercised in 2018.


42

Note 10 – Stock Based Compensation (continued) All outstanding options as of December 31, 2019 are expected to vest. The following tables summarize information about options outstanding at December 31. Opening balances in the table below have been adjusted for a 5% stock dividend declared during both 2019 and 2018:

Exercise PriceNumber

Outstanding

Weighted- Average Exercise

Price

Weighted- Average

Remaining Contractual

Life Number

Exercisable


Price

Weighted- Average


Life

$16.85 - $18.80 79,481 18.41$ 2.78 79,481 19.17$ 2.78 $20.92 - $76.19 132,104 40.67 6.59 62,371 30.26 5.78

211,585 32.31 5.16 141,852 24.04 4.10

11,362,724$ 8,790,230$

Exercise PriceNumber

Outstanding


Price

Weighted- Average


Life Number

Exercisable


Price

Weighted- Average


Life

$16.85 - $18.80 88,032 18.35$ 3.66 88,032 18.35$ 3.66 $21.96 - $66.67 123,362 33.28 7.31 50,904 25.43 6.21

211,394 27.06 5.79 138,936 20.94 4.59

10,688,053$ 7,874,337$ Aggregate intrinsic value

Options Outstanding

Options Outstanding

2019

2018

Options Exercisable

Options Exercisable

Aggregate intrinsic value


43

Note 10 – Stock Based Compensation (continued)

Restricted Stock

For the years ended December 31, 2019 and 2018, the Company issued 5,276 shares and 4,040 shares of restricted stock at average grant date fair values of $76.23 and $61.11 per share, which approximated the fair value of the Company’s common stock on the date of grant. The restricted stock vests ratably over a five-year period beginning on the first anniversary date. During the year ended December 31, 2019, 2,242 shares vested and 948 shares were forfeited. As of January 1, 2019, the total amount of nonvested shares was 9,046 with a weighted average price of $47.83 per share. As of December 31, 2019, 4,421 total shares of restricted stock had vested and 11,132 shares were nonvested. The weighted average price of nonvested shares was $59.97 per share at December 31, 2019. Compensation expense related to the grant of restricted stock for the years ended December 31, 2019 and 2018 totaled $156 thousand and $94 thousand, respectively. The compensation cost has been reported in non-interest expense within the consolidated statements of income. The aggregate intrinsic value of outstanding restricted stock grants was $521 thousand as of December 31, 2019 and $415 thousand as of December 31, 2018. The estimated unrecognized pretax compensation expense related to nonvested restricted stock was $546 thousand as of December 31, 2019, which will be realized over the next five years. Future expense related to restricted stock awards would be impacted by new awards and/or modifications, repurchases and forfeitures of existing awards. Note 11 – Other Expenses Other expenses are comprised of the following for the years ended December 31:

2019 2018

Marketing and business development 956,601$ 848,405$ Insurance and regulatory assessments 299,707 341,708 Loan related expenses 267,996 224,996 Other expenses 652,673 517,278

2,176,977$ 1,932,387$


44

Note 12 – Non Interest Income and Revenue from Contracts with Customers All of the Company’s revenue from contracts with customers within the scope of ASC 606 is recognized in non-interest income. Revenues that fall within the scope of ASC 606 include service charges and fee income and revenue from various sources included in other income. The Company earns fees from its deposit customers for account maintenance, transaction-based activity and overdraft services. Account maintenance fees consist primarily of account fees and analyzed account fees charged on deposit accounts on a monthly basis. The performance obligation is satisfied, and the fees are recognized on a monthly basis as the service period is completed. Transaction-based fees on deposit accounts are charged to deposit customers for specific services provided to the customer, such as non-sufficient funds fees, overdraft fees, and wire fees. The performance obligation is completed as the transaction occurs and the fees are recognized at the time each specific service is provided to the customer. The Company earns fees for IRC 1031 exchange services provided to customers. IRC 1031 exchange fee income is recognized at the completion of the exchange. Gains (losses) on sale of securities and premiums on sale of loans do not fall within the scope of ASC 606. Other income includes income from various sources and is recognized when the performance obligation is complete. Non-interest income is comprised of the following for the years ended December 31:

2019 2018

Service charges and fee income 3,696,135$ 3,950,568$ Loss on sale of securities (2,814) (152,085) Premiums on sale of loans 806,131 442,658 Other income 875,179 617,626

5,374,631$ 4,858,767$

Note 13 – Transactions with Related Parties In the ordinary course of business, the Company enters into transactions with certain directors, officers, shareholders, and certain affiliates of the Company. As part of its normal banking activities, the Company has extended credit to and received deposits from certain members of its Board of Directors, major shareholders, officers, as well as entities with which these individuals are associated.


45

Note 13 – Transactions with Related Parties (continued) The following table presents a summary of aggregate activity involving related party borrowers for the years ended December 31, 2019 and 2018. Activities on lines of credit are included on a net basis.

2019 2018

Loans outstanding at beginning of year $ 9,790,832 $ 11,725,556 New loans and advances 2,010,699 2,048,990 Less loan repayments (4,237,756) (3,983,714)

Loans outstanding at end of year $ 7,563,775 $ 9,790,832

At December 31, 2019 and 2018, deposits of related parties amounted to $43 million and $45 million, respectively.

Management believes these transactions were made in the ordinary course of business. Each loan to related parties has been approved by the Board of Directors. Note 14 – Commitments and Contingencies The Company is a party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit. These instruments involve, to varying degrees, elements of credit risk in excess of the amount recognized on the consolidated balance sheet. To mitigate this risk posed by these off-balance sheet exposures, the Company has established an off-balance sheet reserve totaling $101 thousand and $75 thousand as of December 31, 2019 and 2018, respectively, included in interest payable and other liabilities in the accompanying consolidated balance sheets. The Company's exposure to loan 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 Company uses the same credit policies in making commitments and conditional obligations as it does for on-balance sheet instruments. A summary of the contractual or notional amounts of the Company's significant off-balance sheet financial instruments is as follows:

2019 2018

Commitments to extend credit 187,463,896$ 127,985,472$ Standby letters of credit 14,237,956 11,678,526

201,701,852$ 139,663,998$


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Note 14 – Commitments and Contingencies (continued) Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Company evaluates each customer's credit worthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Company upon extension of credit, is based on management's credit evaluation. Collateral held varies but may include receivables, inventory, property, plant, and equipment, residential properties, and income-producing commercial properties. Standby letters of credit are conditional commitments issued by the Company to guarantee the performance of a customer to a third party. Those guarantees are preliminarily issued to support public and private borrowing arrangements, including commercial paper, bond financing, and similar transactions. Litigation – In the ordinary course of business, the Company becomes involved in litigation. Management believes, based upon opinions of legal counsel, that the disposition of all suits pending against the Company will not have a material adverse effect on its financial position or results of income. Lease commitments – The Company leases office locations and equipment which have been classified as operating leases. These lease agreements call for various monthly payments expiring at dates through the year 2026. Rental expense for the year ended December 31, 2018 amounted to $481 thousand. See Note 5 for operating leases subsequent to the adoption of ASC 842.

Note 15 – Fair Value of Financial Instruments Fair value measurements within the Accounting Standards Codification defines fair value, establishes a framework for measuring fair value under GAAP, and expands disclosures about fair value measurement. Fair value measurements apply to all financial assets and liabilities that are being measured and reported at fair value on a recurring and non-recurring basis. The fair value of a financial instrument is the amount at which the asset or obligation could be exchanged in a current transaction between willing parties, other than in a forced or liquidation sale. Fair value estimates are made at a specific point in time based on relevant market information and information about the financial instrument. These estimates do not reflect any premium or discount that could result from offering for sale at one time the entire holdings of a particular financial instrument. Because no market value exists for a significant portion of the financial instruments, fair value estimates are based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments, and other factors. These estimates are subjective in nature, involve uncertainties and matters of judgment and, therefore, cannot be determined with precision. Changes in assumptions could significantly affect the estimates.


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Note 15 – Fair Value of Financial Instruments (continued) A three-level hierarchy is used for disclosure of assets and liabilities recorded at fair value. The classification of assets and liabilities within the hierarchy is based on whether the inputs to the valuation methodology used for measurement are observable or unobservable. Observable inputs reflect market-derived or market-based information obtained from independent sources, while unobservable inputs reflect our estimates about market data. In general, fair values determined by level 1 inputs utilize quoted prices (unadjusted) for identical instruments that are highly liquid, observable and actively traded in over-the-counter markets. Fair values determined by level 2 inputs utilize inputs other than quoted prices included in level 1 that are observable for the asset or liability, either directly or indirectly. Level 2 inputs include 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 whose inputs are observable and can be corroborated by market data. Level 3 inputs are unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, the level in the fair value hierarchy within which the fair value measurement in its entirety falls has been determined based on the lowest level input that is significant to the fair value measurement in its entirety. The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the asset or liability.


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Note 15 – Fair Value of Financial Instruments (continued) The tables below present information about the Company’s assets measured at fair value on a recurring and nonrecurring basis as of December 31, 2019 and 2018, respectively, and indicate the fair value hierarchy of the valuation techniques utilized by the Company to determine such fair value:

Total Level 1 Level 2 Level 3RECURRING ITEMS

Municipal securities 9,726,019$ -$ 9,726,019$ -$ Mortgage backed securities, government sponsored entities 52,524,023 - 52,524,023 - Mortgage backed securities, non-government sponsored entities 2,172,394 - 2,172,394 - SBA loan pools 5,990,043 - 5,990,043 - Equity securities 521,399 - 521,399 -

70,933,878$ -$ 70,933,878$ -$

NONRECURRING ITEMSImpaired loans, net 734,811$ -$ -$ 734,811$

Total Level 1 Level 2 Level 3RECURRING ITEMS

Municipal securities 5,509,982$ -$ 5,509,982$ -$ Mortgage backed securities, government sponsored entities 42,198,228 - 42,198,228 - SBA loan pools 4,917,928 - 4,917,928 - Equity securities 506,383 - 506,383 -

53,132,521$ -$ 53,132,521$ -$

2019

2018

The following methods were used to estimate the fair value of each class of financial instruments above: Securities available for sale – The table above presents the balance of available-for-sale securities, which is measured at fair value on a recurring basis. An independent third party performs market valuations of the Company’s available-for-sale securities using several sources. The techniques include pricing models that vary based on the type of asset being valued and incorporate available trade, bid, and other market information. The market valuation sources include observable market inputs and are considered level 2 inputs for purposes of determining the fair values. Impaired loans – The table above represents the Company’s impaired loans for which impairment was recognized during the period. These loans are measured at fair value on a nonrecurring basis. All of these loans are collateral dependent loans and the Company measures such impaired loans based on the fair value of their collateral. The fair value of each loan’s collateral is generally based on estimated market prices from an independently prepared appraisal, which is then adjusted for the cost related to liquidating such collateral.


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Note 15 – Fair Value of Financial Instruments (continued) The Company generally uses a 10% discount for selling costs, which is applied to all properties, regardless of size. Appraised values may be adjusted to reflect changes in market conditions that have occurred subsequent to the appraisal date, or for revised estimates regarding the timing or cost of the property sale. These adjustments are based on qualitative judgments made by management on a case-by-case basis. There have been no significant changes in the valuation techniques during the years ended December 31, 2019 and 2018. The following tables present information about the level in the fair value hierarchy for the Company’s assets and liabilities that are not measured at fair value as of December 31, 2019 and 2018. The valuation of loans receivable held for investment was impacted by the adoption of ASU 2016-01. In accordance with ASU 2016-01, the fair value of loans held for investment is estimated using discounted cash flow analyses. The discount rates used to determine fair value use interest rate spreads that reflect factors such as liquidity, credit, and nonperformance risk of the loans. Loans are considered a Level 3 classification. Transfers between levels of the fair value hierarchy are recognized on the actual date of the events or circumstances that caused the transfer, which generally corresponds to the Company’s quarterly valuation process. During the years ended December 31, 2019 and 2018, there were no transfers between levels of the fair value hierarchy.

Carrying Value Estimated Fair

Value Level 1 Level 2 Level 3Financial assets

Cash and cash equivalents 91,008,756$ 91,008,756$ 91,008,756$ -$ -$ Interest earning deposits in other banks 8,833,000 8,833,000 - 8,833,000 - Loans, net 645,016,123 640,195,000 - - 640,195,000 Investments in common stock, substantially restricted 3,679,850 3,679,850 - 3,679,850 - Interest receivable 3,032,106 3,032,106 - 3,032,106 -

Financial liabilitiesDeposits, with no stated maturity 702,500,384$ 702,500,384$ -$ 702,500,384$ -$ Time deposits 56,013,527 56,077,000 - 56,077,000 - Interest payable 72,314 72,314 - 72,314 -

Carrying Value Estimated Fair

Value Level 1 Level 2 Level 3Financial assets

Cash and cash equivalents 55,750,799$ 55,750,799$ 55,750,799$ -$ -$ Interest earning deposits in other banks 9,331,000 9,331,000 - 9,331,000 - Loans, net 543,006,270 521,382,500 - - 521,382,500 Investments in common stock, substantially restricted 3,456,050 3,456,050 - 3,456,050 - Interest receivable 2,558,291 2,558,291 - 2,558,291 -

Financial liabilitiesDeposits, with no stated maturity 542,902,579$ 542,902,579$ -$ 542,902,579$ -$ Time deposits 48,102,046 48,033,000 - 48,033,000 - FHLB borrowings 25,000,000 25,000,000 25,000,000 Interest payable 67,486 67,486 - 67,486 -

Fair Value Measurements Using

2019Fair Value Measurements Using

2018


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Note 16 – Regulatory Matters The Bank is subject to various regulatory capital requirements administered by federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory, and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company’s consolidated financial statements. Under capital adequacy guidelines and the regulatory framework for Prompt Corrective Action, the Bank must meet specific capital guidelines that involve quantitative measures of the Bank's assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. The Bank's capital amounts and classifications 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 ratios of Total and Tier I capital to risk-weighted assets and of Tier I capital to average assets. As of December 31, 2019, management believes that the Bank meets all capital adequacy requirements to which it is subject. As of December 31, 2019, the most recent notification from the Federal Deposit Insurance Corporation categorized the Bank as well capitalized under the regulatory framework. To be categorized as well capitalized, the Bank must maintain minimum total risk-based, Tier I risk-based, and Tier I leverage ratios as set forth in the table below. There are no conditions or events since that notification that management believes have changed the Bank's category. The Bank’s actual capital amounts and ratios computed in accordance with bank regulatory requirements as of December 31, 2019 and 2018 are as follows.

Amount Ratio Amount Ratio Amount RatioAs of December 31, 2019

Total capital to risk-weighted assets 87,568,000$ 12.01% 58,349,920$ 8.00% 72,937,400$ 10.00%Common equity Tier 1 capital to risk-weighted assets

79,406,000 10.89% 32,821,830 4.50% 47,409,310 6.50%

Tier 1 capital to risk-weighted assets 79,406,000 10.89% 43,762,440 6.00% 58,349,920 8.00%Tier 1 capital to average assets 79,406,000 9.61% 33,079,360 4.00% 41,349,200 5.00%

As of December 31, 2018Total capital to risk-weighted assets 71,936,000$ 11.79% 48,810,160$ 8.00% 61,012,700$ 10.00%Common equity Tier 1 capital to risk-weighted assets

65,437,000 10.73% 27,455,715 4.50% 39,658,255 6.50%

Tier 1 capital to risk-weighted assets 65,437,000 10.73% 36,607,620 6.00% 48,810,160 8.00%Tier 1 capital to average assets 65,437,000 9.54% 27,482,680 4.00% 34,353,350 5.00%

Amount of Capital Required

Minimum Capital Requirement

Minimum To Be Well Capitalized Under Prompt Corrective Action Provisions

The Federal Reserve and the Federal Deposit Insurance Corporation approved final capital rules in July 2013 that substantially amend the existing capital rules for banks. These new rules reflect, in part, certain standards initially adopted by the Basel Committee on Banking Supervision in December 2010 (which standards are commonly referred to as Basel III) as well as requirements contemplated by the Dodd-Frank Act.


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Note 16 – Regulatory Matters (continued) Under the new capital rules, the Bank is required to meet certain minimum capital requirements that differ from previous requirements. The rules implement a new capital ratio of common equity Tier 1 capital to risk-weighted assets. Common equity Tier 1 capital generally consists of retained earnings and common stock (subject to certain adjustments) as well as accumulated other comprehensive income (AOCI), except to the extent that the Bank exercises a one-time irrevocable option to exclude certain components of AOCI as of March 31, 2015. The Bank was required to establish a “conservation buffer,” consisting of a common equity Tier 1 capital amount equal to 2.5% of risk-weighted assets, which was phased in as of January 1, 2019. An institution that does not meet the conservation buffer will be subject to restrictions on certain activities including payment of dividends, stock repurchases, and discretionary bonuses to executive officers. The Prompt Corrective Action rules are modified to include the common equity Tier 1 capital ratio and to increase the Tier 1 capital ratio requirements for the various thresholds. For example, the requirements for the Bank to be considered well capitalized under the rules will be a 5.0% leverage ratio, a 6.5% common equity Tier 1 capital ratio, an 8.0% Tier 1 capital ratio, and a 10.0% total capital ratio. To be adequately capitalized, those ratios are 8.0%, 4.0%, 4.5%, and 6.0%, respectively. The rules modify the manner in which certain capital elements are determined. The rules make changes to the methods of calculating the risk-weighting of certain assets, which in turn affects the calculation of the risk-weighted capital ratios. Higher risk weights are assigned to various categories of assets, including commercial real estate loans, credit facilities that finance the acquisition, development or construction of real property, certain exposures or credit that are 90 days past due or are nonaccrual, securitization exposures, and in certain cases mortgage servicing rights and deferred tax assets. The Bank was required to comply with the new capital rules on January 1, 2015, with a measurement date of March 31, 2015. The conservation buffer was phased-in beginning in 2016 and took full effect on January 1, 2019. Certain calculations under the rules will also have phase-in periods.

Banking on Business

BAKERSFIELD1301 17th StreetBakersfield, CA 93301661.859.2500

LANCASTER43830 20th Street WestLancaster, CA 93534661.949.9038

MOJAVE15773 K StreetMojave, CA 93501661.824.2200

RIDGECREST1450 N. Norma StreetRidgecrest, CA 93555760.446.3576

RIVERWALK11200 River Run BlvdSuite 101Bakersfield, CA 93311661.410.6021

SHAFTER1110 E. Lerdo HighwayShafter, CA 93263 661.237.6500

STOCKTON3121 W. March LaneSuite 210Stockton, CA 95219209.323.6100

VENTURA1500 Palma DriveVentura, CA 93303805.601.8555

Mission Bank | Business Banking Centers

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