UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

☒	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended ~~September~~March 3031, ~~2016~~2017

☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

CU BANCORP

(Exact name of registrant as specified in its charter)

Commission File Number 001-35683


California		90-0779788
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

818 West 7^th Street, Suite 220 Los Angeles, California		90017
(Address of principal executive offices)		(Zip Code)

(213) 430-7000

(Registrant’s telephone number, including area code)

Not applicable

(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large Accelerated Filer ☐ Accelerated Filer ☒ Non Accelerated Filer ☐ Smaller ~~reporting~~Reporting ~~company~~Company ☐ Emerging Growth Company ☒

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☒

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

As of ~~November~~May 1, ~~2016~~2017 the number of of shares outstanding of the registrant’s no par value Common Stock was 17,~~678~~833,438.

Page 1 of 7772

CU BANCORP

~~September~~March 3031, ~~2016~~2017 FORM 10-Q

TABLE OF CONTENTS

PART I. FINANCIAL INFORMATION

	ITEM 1.	Financial Statements
		Consolidated Balance Sheets September 30, 2016 (Unaudited) and December 31, 2015	3
		Consolidated Balance Sheets March 31, 2017 (Unaudited) and December 31, 2016	3
		Consolidated Statements of Income Three and Nine Months Ended September 30, 2016 and 2015 (Unaudited)	4
		Consolidated Statements of Income Three Months Ended March 31, 2017 and 2016 (Unaudited)	4
		Consolidated Statements of Comprehensive Income Three and Nine Months Ended September 30, 2016 and 2015 (Unaudited)	5
		Consolidated Statements of Comprehensive Income Three Months Ended March 31, 2017 and 2016 (Unaudited)	5
		Consolidated Statements of Changes in Shareholders’ Equity Nine Months Ended September 30, 2016 and 2015 (Unaudited)	6
		Consolidated Statements of Changes in Shareholders’ Equity Three Months Ended March 31, 2017 and 2016 (Unaudited)	6
		Consolidated Statements of Cash Flows Nine Months Ended September 30, 2016 and 2015 (Unaudited)	7
		Consolidated Statements of Cash Flows Three Months Ended March 31, 2017 and 2016 (Unaudited)	7
		Notes to the Consolidated Financial Statements (Unaudited)	9
	ITEM 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	4240
		Overview	4542
		Results of Operations	5047
		Financial Condition	6156
		Liquidity	6661
		Dividends	6863
		Regulatory Matters	6964
	ITEM 3.	Quantitative and Qualitative Disclosures About Market Risk	7267
	ITEM 4.	Controls and Procedures	7469
PART II. OTHER INFORMATION
	ITEM 1.	Legal Proceedings	7570
	ITEM 1A.	Risk Factors	7570
	ITEM 2.	Unregistered Sales of Equity Securities and Use of Proceeds	7570
	ITEM 3.	Defaults Upon Senior Securities	7570
	ITEM 4.	Mine Safety Disclosures	7570
	ITEM 5.	Other Information	7671
	ITEM 6.	Exhibits	7671
	Signatures		7772

Page 2 of 7772

CU BANCORP

CONSOLIDATED BALANCE SHEETS

(Dollars in thousands, except share data)

	September 30,2016			December 31,2015
	March 31,2017			December 31,2016
	(Unaudited)			(Audited)
ASSETS
Cash and due from banks	$	4751,~~701~~168		$	5041,~~960~~281
Interest earning deposits in other financial institutions		~~244~~313,~~205~~609			~~171~~167,~~103~~789
Total cash and cash equivalents		~~291~~364,~~906~~777			~~222~~209,~~063~~070
Certificates of deposit in other financial institutions		5148,~~490~~795			5651,~~860~~245
Investment securities available-for-sale, at fair value		~~375~~469,~~094~~399			~~315~~469,~~785~~950
Investment securities held-to-maturity, at amortized cost		40,~~073~~945			42,~~036~~027
Total investment securities		~~415~~510,~~167~~344			~~357~~511,~~821~~977
Loans		12,~~974~~046,~~941~~138			12,~~833~~050,~~163~~226
Allowance for loan loss		(1819,~~371~~605	)		(1519,~~682~~374	)
Net loans		12,~~956~~026,~~570~~533			12,~~817~~030,~~481~~852
Premises and equipment, net		43,~~354~~946			54,~~139~~184
Deferred tax assets, net		15,~~614~~329			17,~~033~~181
Other real estate owned, net		—			325
Goodwill		64,603			64,603
Core deposit and leasehold right intangibles, net		65,~~665~~970			76,~~671~~300
Bank owned life insurance		5063,~~889~~595			4951,~~912~~216
Accrued interest receivable and other assets		3539,~~914~~376			3548,~~734~~132
Total Assets	$	23,~~893~~143,~~172~~268		$	2,~~634~~994,~~642~~760
LIABILITIES AND SHAREHOLDERS’ EQUITY
LIABILITIES
Non-interest bearing demand deposits	$	1,~~399~~485,~~320~~730		$	1,~~288~~400,~~085~~097
Interest bearing transaction accounts		~~284~~346,~~154~~279			~~261~~332,~~123~~702
Money market and savings deposits		~~786~~892,~~882~~143			~~679~~845,~~081~~110
Certificates of deposit		3530,~~033~~623			5829,~~502~~480
Total deposits		2,~~505~~754,~~389~~775			2,~~286~~607,~~791~~389
Securities sold under agreements to repurchase		2411,~~251~~939			1418,~~360~~816
Subordinated debentures, net		9,~~817~~896			9,~~697~~856
Accrued interest payable and other liabilities		20,~~785~~210			1620,~~987~~514
Total Liabilities		2,~~560~~796,~~242~~820			2,~~327~~656,~~835~~575
Commitments and Contingencies (Note 13)
SHAREHOLDERS’ EQUITY
Serial Preferred Stock – authorized, 50,000,000 shares:Series A, non-cumulative perpetual preferred stock, $1,000 per share liquidation preference, 16,400 shares authorized, 16,400 shares issued and outstanding at September 30, 2016 and December 31, 2015, respectively		17,021			16,995
Serial Preferred Stock – authorized, 50,000,000 shares:Series A, non-cumulative perpetual preferred stock, $1,000 per share liquidation preference, 16,400 shares authorized, 16,400 shares issued and outstanding at March 31, 2017 and December 31, 2016, respectively		16,887			16,995
Common stock – authorized, 75,000,000 shares no par value, 17,673,438 and 17,175,389 shares issued and outstanding at September 30, 2016 and December 31, 2015, respectively		234,383			230,688
Common stock – authorized, 75,000,000 shares no par value, 17,834,183 and 17,759,006 shares issued and outstanding at March 31, 2017 and December 31, 2016, respectively		236,308			235,873
Additional paid-in capital		2425,~~847~~462			2325,~~017~~213
Retained earnings		5670,~~296~~645			3663,~~923~~163
Accumulated other comprehensive income (loss)		383			(816	)
Accumulated other comprehensive loss		(2,854	)		(3,019	)
Total Shareholders’ Equity		~~332~~346,~~930~~448			~~306~~338,~~807~~185
Total Liabilities and Shareholders’ Equity	$	23,~~893~~143,~~172~~268		$	2,~~634~~994,~~642~~760

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

Page 3 of 7772

CU BANCORP

CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

(Dollars in thousands, except per share data)

	Three MonthsEndedSeptember 30,				Nine MonthsEndedSeptember 30,
	Three Months EndedMarch 31,
	2016		2015		2016		2015
	2017		2016
Interest Income
Interest and fees on loans	$	2324,~~958~~432	$	2122,~~689~~578	$	~~69,701~~	$	~~62,239~~
Interest on investment securities		12,~~419~~041		1,~~124~~232		~~4,066~~		~~3,355~~
Interest on interest bearing deposits in other financial institutions		~~478~~710		~~293~~439		~~1,334~~		~~741~~
Total Interest Income		2527,~~855~~183		2324,~~106~~249		~~75,101~~		~~66,335~~
Interest Expense
Interest on interest bearing transaction accounts		~~102~~157		~~105~~99		~~300~~		~~303~~
Interest on money market and savings deposits		~~524~~670		~~427~~511		~~1,519~~		~~1,218~~
Interest on certificates of deposit		4626		5333		~~110~~		~~150~~
Interest on securities sold under agreements to repurchase		139		911		38		21
Interest on subordinated debentures		~~122~~130		~~110~~117		~~359~~		~~326~~
Total Interest Expense		~~807~~992		~~704~~771		~~2,326~~		~~2,018~~
Net Interest Income		2526,~~048~~191		2223,~~402~~478		~~72,775~~		~~64,317~~
Provision for loan losses		~~697~~—		~~705~~622		~~2,382~~		~~2,831~~
Net Interest Income After Provision For Loan Losses		2426,~~351~~191		2122,~~697~~856		~~70,393~~		~~61,486~~
Non-Interest Income
Gain on sale of securities, net		141		—		~~141~~		—
Gain on sale of SBA loans, net		~~189~~202		~~640~~554		~~1,228~~		~~1,278~~
Deposit account service charge income		1,~~210~~160		1,~~159~~189		~~3,621~~		~~3,453~~
Other non-interest income		1,~~518~~332		1,~~189~~077		~~3,863~~		~~3,960~~
Total Non-Interest Income		32,~~058~~835		2,~~988~~820		~~8,853~~		~~8,691~~
Non-Interest Expense
Salaries and employee benefits (includes stock based compensation expense of $939 and $810 for the three months, and $2,664 and $2,130 for the nine months ended September 30, 2016 and 2015, respectively)		10,335		9,744		30,409		28,175
Salaries and employee benefits (includes stock based compensation expense of $773 and $834 for the three months ended March 31, 2017 and 2016, respectively)		11,061		10,153
Occupancy		1,~~673~~489		1,~~465~~436		~~4,548~~		~~4,300~~
Data processing		~~657~~656		~~596~~618		~~1,910~~		~~1,872~~
Legal and professional		1,~~434~~009		~~412~~475		~~2,560~~		~~1,914~~
FDIC deposit assessment		~~389~~446		~~370~~350		~~1,098~~		~~1,054~~
Merger expenses		—		146		—		498
OREO loss and expenses		—		79
OREO loss and expenses		2		153		85		179
Office services expenses		380		403
Office services expenses		413		383		1,136		1,204
Other operating expenses		1,652		1,673
Other operating expenses		1,864		1,798		5,297		5,696
Total Non-Interest Expense		16,693		15,187
Total Non-Interest Expense		16,767		15,067		47,043		44,892
Net Income Before Provision for Income Tax Expense		12,333		10,489
Net Income Before Provision for Income Tax Expense		10,642		9,618		32,203		25,285
Provision for income tax expense		4,550		3,905
Provision for income tax expense		4,059		3,355		11,916		9,556
Net Income		7,783		6,584
Net Income		6,583		6,263		20,287		15,729
Preferred stock dividends and discount accretion		301		303
Preferred stock dividends and discount accretion		304		293		914		877
Net Income Available to Common Shareholders	$	7,482	$	6,281
Net Income available to common shareholders	$	6,279	$	5,970	$	19,373	$	14,852
Earnings Per Share
Earnings Per Share
Basic earnings per share	$	0.43	$	0.37
Basic earnings per share	$	0.36	$	0.36	$	1.13	$	0.90
Diluted earnings per share	$	0.42	$	0.36
Diluted earnings per share	$	0.36	$	0.35	$	1.11	$	0.88

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

Page 4 of 7772

CU BANCORP

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

(Dollars in thousands)

	Three MonthsEndedSeptember 30,					Nine MonthsEndedSeptember 30,
	Three MonthsEndedMarch 31,
	2016			2015		2016			2015
	2017			2016
Net Income	$	67,~~583~~783		$	6,~~263~~584	$	~~20,287~~		$	~~15,729~~
Other Comprehensive Income, net of tax:
Net change in unrealized gain (loss) on available-for-sale investment securities, net of tax		(313	)		311		1,281			73
Net change in unrealized gain on available-for-sale investment securities, net of tax		247			769
Reclassification of (gain) loss on investment securities available-for-sale to net income, net of tax		(82	)		—		(82	)		—
Reclassification of gain on investment securities available-for-sale to net income, net of tax		(82	)		—
Other Comprehensive Income (Loss)		(395	)		311		1,199			73
Other Comprehensive Income		165			769
Comprehensive Income	$	67,~~188~~948		$	67,~~574~~353	$	~~21,486~~		$	~~15,802~~

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

Page 5 of 7772

CU BANCORP

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

(Unaudited)

(Dollars in thousands)

	Preferred Stock					Common Stock
	IssuedandOutstandingShares		Amount			IssuedandOutstandingShares			Amount		AdditionalPaid-inCapital			RetainedEarnings			~~AccumulatedOtherComprehensiveIncome (Loss)~~AccumulatedOtherComprehensiveLoss			TotalShareholders’Equity
Balance at December 31, 2014		16,400	$	16,004			16,683,856		$	226,389	$	19,748		$	16,861		$	190		$	279,192
Net issuance of restricted stock		—		—			68,625			—		—			—			—			—
Exercise of stock options		—		—			158,315			1,434		—			—			—			1,434
Stock based compensation expense		—		—			—			—		2,130			—			—			2,130
Restricted stock repurchase		—		—			(39,860	)		—		(856	)		—			—			(856	)
Excess tax benefit – stock based compensation		—		—			—			—		788			—			—			788
Preferred stock dividends and discount accretion		—		735			—			—		—			(877	)		—			(142	)
Net income		—		—			—			—		—			15,729			—			15,729
Other comprehensive income		—		—			—			—		—			—			73			73
Balance at September 30, 2015		16,400	$	16,739			16,870,936		$	227,823	$	21,810		$	31,713		$	263		$	298,348
Balance at December 31, 2015		16,400	$	16,995			17,175,389		$	230,688	$	23,017		$	36,923		$	(816	)	$	306,807
Net issuance of restricted stock		—		—			~~121~~37,~~434~~809			—		—			—			—			—
Exercise of stock options		—		—			~~411~~189,~~964~~489			31,~~695~~438		—			—			—			31,~~695~~438
Stock based compensation expense		—		—			—			—		~~2,664~~834			—			—			~~2,664~~834
Restricted stock repurchase		—		—			(3513,~~349~~304	)		—		(~~834~~294	)		—			—			(~~834~~294	)
Excess tax benefit – stock based compensation		—		—			—			—		772			—			—			772
Preferred stock dividends and discount accretion		—		153			—			—		—			(303	)		—			(150	)
Reclassification of excess tax benefits (1)												(772	)								(772	)
Net income		—		—			—			—		—			6,584			—			6,287
Preferred stock dividends and discount accretion		—		26			—			—		—			(914	)		—			(888	)
Other comprehensive income		—		—			—			—		—			—			769			769
Net income		—		—			—			—		—			20,287			—			20,287
Balance at March 31, 2016		16,400	$	17,148			17,389,383		$	232,126	$	23,557		$	43,204		$	(47	)	$	315,988
Other comprehensive income		—		—			—			—		—			—			1,199			1,199
Balance at December 31, 2016		16,400	$	16,955			17,759,006		$	235,873	$	25,213		$	63,163		$	(3,019	)	$	338,185
Balance at September 30, 2016		16,400	$	17,021			17,673,438		$	234,383	$	24,847		$	56,296		$	383		$	332,930
Net issuance of restricted stock		—		—			60,531			—		—			—			—			—
Exercise of stock options		—		—			27,942			435		—			—			—			435
Stock based compensation expense		—		—			—			—		773			—			—			773
Restricted stock repurchase		—		—			(13,296	)		—		(524	)		—			—			(524	)
Preferred stock dividends and net premium amortization		—		(68	)		—			—		—			(301	)		—			(369	)
Net income		—		—			—			—		—			7,783			—			7,783
Other comprehensive income		—		—			—			—		—			—			165			165
Balance at March 31, 2017		16,400	$	16,887			17,834,183		$	236,308	$	25,462		$	70,645		$	(2,854	)	$	346,448

(1) Represents the reclassification from additional paid-in capital to provision for income tax expense during the first two quarters of 2016, related to the Company’s early adoption of ASU 2016-09. See Note 2, Recent Accounting Pronouncements, for additional information.

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

Page 6 of 7772

CU BANCORP

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(Dollars in thousands)

	Nine Months EndedSeptember 30,
	Three Months EndedMarch 31,
	2016			2015
	2017			2016
Cash flows from operating activities:
Net income:	$	207,~~287~~783		$	156,~~729~~584
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses		~~2,382~~—			~~2,831~~622
Provision for unfunded loan commitments		~~169~~—			87102
Stock based compensation expense		~~2,664~~773			~~2,130~~834
Depreciation		~~1,064~~341			~~1,062~~361
Net accretion of discounts/premiums for loans acquired and deferred loan fees/costs		(62,~~751~~240	)		(62,~~553~~140	)
Net amortization from investment securities		31,~~126~~505			21,~~343~~009
Increase in bank owned life insurance		(~~977~~379	)		(~~947~~323	)
Amortization of core deposit intangibles		~~961~~284			~~1,262~~321
Amortization of time deposit premium		(2	)		(10	)
Net accretion of leasehold right intangible asset and liabilities		(34	)		(22	)
Net (accretion) amortization of leasehold right intangible asset and liabilities		(174	)		4
Accretion of subordinated debenture discount		40			40
Accretion of subordinated debenture discount		119			119
Loss on sale of OREO		—			14
Loss on disposal of fixed assets		30			—
Valuation write-downs on OREO		—			133
Loss on sale of OREO		14			—
Gain on sale of securities, net		(141	)		—
Gain on sale of SBA loans, net		(~~1,228~~202	)		(~~1,278~~554	)
Decrease (increase) in deferred tax assets		549			(790	)
Decrease in deferred tax assets		1,732			2,381
Decrease (increase) in accrued interest receivable and other assets		~~(180~~8,756	)		~~2,484~~(272	)
Increase (decrease) in accrued interest payable and other liabilities		~~3,811~~54			(~~327~~1,622	)
Net excess in tax benefit on stock compensation		—			(788	)
Increase (decrease) in fair value of derivative swap liability		(279	)		561
Increase in fair value of derivative swap liability		35			591
Net cash provided by operating activities		17,993			7,896
Net cash provided by operating activities		25,758			18,082
Cash flows from investing activities:
Purchases of investment securities		(~~118~~32,~~124~~586	)		(5711,~~597~~312	)
Proceeds from sales of investment securities		410,~~519~~601			—
Proceeds from repayment and maturities from investment securities		55,346			30,135
Proceeds from repayment and maturities of investment securities		22,540			13,696
Loans originated, net of principal payments		(133,492	)		(139,844	)
Net loan principal payments (net of loan originations)		6,761			(33,080	)
Purchases of premises and equipment		(~~309~~103	)		(~~666~~58	)
Proceeds from sale of OREO		~~311~~—			—311
Net decrease in certificates of deposit in other financial institutions		52,~~370~~450			172,~~759~~940
Purchase of bank owned life insurance		—(12,000	)		~~(9,869~~—	)
Net cash used in investing activities		(~~186~~2,~~379~~337	)		(~~160~~27,~~082~~503	)
Cash flows from financing activities:
Net increase in Non-interest bearing demand deposits		111,235			215,714
Net increase in non-interest bearing demand deposits		85,633			24,213
Net increase in Interest bearing transaction accounts		23,031			51,309
Net increase (decrease) in interest bearing transaction accounts		13,577			(3,142	)
Net increase in Money market and savings deposits		107,801			47,617
Net increase in money market and savings deposits		47,033			71,717
Net decrease in Certificates of deposit		(23,467	)		(2,510	)
Net increase (decrease) in certificates of deposit		1,143			(3,694	)
Net increase in Securities sold under agreements to repurchase		9,891			7,287
Net increase (decrease) in securities sold under agreements to repurchase		(6,877	)		7,607
Net proceeds from stock options exercised		~~3,695~~435			1,~~434~~438
Restricted stock repurchase		(~~834~~524	)		(~~856~~294	)
Dividends paid on preferred stock		(~~888~~369	)		(~~142~~150	)
Net excess in tax benefit on stock compensation		—			788
Net cash provided by financing activities		140,051			97,695
Net cash provided by financing activities		230,464			320,641
Net increase in cash and cash equivalents		155,707			78,088
Net increase in cash and cash equivalents		69,843			178,641
Cash and cash equivalents, beginning of period		209,070			222,063
Cash and cash equivalents, beginning of period		222,063			132,586
Cash and cash equivalents, end of period	$	364,777		$	300,151
Cash and cash equivalents, end of period	$	291,906		$	311,227

Page 7 of 7772

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

CU BANCORP


	Three Months Ended March 31,
	2017		2016
Supplemental disclosures of cash flow information:
Cash paid for interest	$	943	$	782
Net cash paid for taxes	$	—	$	1,710
Supplemental disclosures of non-cash investing activities:
Net change in unrealized gain on available-for-sale investment securities, net of tax	$	247	$	769

~~CONSOLIDATED~~Page ~~STATEMENTS~~8 OFof 72 ~~CASH FLOWS (Continued)~~

(Unaudited)

(Dollars in thousands)

	Nine Months EndedSeptember 30,
	2016		2015
Supplemental disclosures of cash flow information:
Cash paid for interest	$	2,469	$	2,127
Net cash paid for taxes	$	7,319	$	6,767
Supplemental disclosures of non-cash investing activities:
Net change in unrealized gain on available-for-sale investment securities, net of tax	$	1,199	$	73
Loans transferred to other real estate owned	$	—	$	575

Page 8 of 77

CU BANCORP

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

~~September~~March 3031, ~~2016~~2017

(Unaudited)

Note 1 - Basis of Financial Statement Presentation

CU Bancorp (the “Company”) is a bank holding company whose operating subsidiary is California United Bank. As a bank holding company, CU Bancorp is subject to regulation of the Federal Reserve Board (“FRB”). The term “Company”, as used throughout this document, refers to the consolidated financial statements of CU Bancorp and California United Bank.

California United Bank (the “Bank”) is a full-service commercial business bank offering a broad range of banking products and services including: deposit services, lending and cash management to small and medium-sized businesses, to non-profit organizations, to business principals and entrepreneurs, to the professional community, including attorneys, certified public accountants, financial advisors, healthcare providers and investors. The Bank opened for business in 2005. Its ~~current~~ headquarters office is located in Los Angeles, California. As a state chartered non-member bank, the Bank is subject to regulation by the California Department of Business Oversight (“DBO”) and the Federal Deposit Insurance Corporation (“FDIC”). The deposits of the Bank are insured by the FDIC to the maximum amount allowed by law.

The consolidated financial statements include the accounts of the Company and the Bank. Significant intercompany items have been eliminated in consolidation. The accounting and reporting policies of the Company conform to U.S. generally accepted accounting principles (“GAAP”) and pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”).

CU Bancorp is the common shareholder of Premier Commercial Statutory Trust I, Premier Commercial Statutory Trust II, and Premier Commercial Statutory Trust III~~, entities which were acquired in the merger with Premier Commercial Bancorp (“PC Bancorp”)~~. These trusts were established for the sole purpose of issuing trust preferred securities and do not meet the criteria for consolidation. For more detail, see Note 8 – Borrowings and Subordinated Debentures.

Certain information and footnote disclosures presented in the annual consolidated financial statements are not included in the interim consolidated financial statements. Accordingly, the accompanying unaudited interim consolidated financial statements should be read in conjunction with the ~~2015~~2016 Annual Report on Form 10-K. In the opinion of management, the accompanying interim consolidated financial statements contain all necessary adjustments of a normal recurring nature, to present fairly the consolidated financial position of the Company and the results of its operations for the interim periods presented.

Use of Estimates in the Preparation of Consolidated Financial Statements

The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. In addition, these accounting principles require the disclosure of contingent assets and liabilities as of the date of the consolidated financial statements.

Estimates that are particularly susceptible to significant change relate to the determination of the allowance for loan loss and various assets and liabilities measured at fair value on a recurring and nonrecurring basis. While management uses the most current available information to recognize losses on loans, future additions to the allowance for loan loss may be necessary based on, among other factors, changes in local economic conditions. In addition, regulatory agencies, as an integral part of their examination process, periodically review the Company’s allowance for loan loss. Regulatory agencies may require the Company to recognize changes to the allowance for loan loss based on their judgment about information available to them at the time of their examination.

Business Segments

The Company is organized and operates as a single reporting segment, principally engaged in commercial business banking. The Company conducts its lending and deposit operations through nine full service branch offices located in Los Angeles, Orange, Ventura and San Bernardino counties.

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Note 2 - Recent Accounting Pronouncements

Accounting Standards Adopted in 2016

In March 2016, the FASB issued Accounting Standards Update (“ASU”) 2016-09, Compensation – Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting, to reduce the complexity of certain aspects of the accounting for employee share-based payment transactions. As a result of this ASU, changes applicable to all entities include: 1) The threshold to qualify for equity classification would permit withholding up to the maximum individual statutory tax rate in the applicable jurisdictions. Also, the ASU provides that cash paid by an employer when directly withholding shares for tax-withholding purposes would be classified as a financing activity on the statement of cash flows; 2) An entity would be allowed to make an entity-wide accounting policy election to either estimate the number of awards that are expected to vest or account for forfeitures when they occur; 3) All excess tax benefits and tax deficiencies would be recognized as income tax expense or benefit in the income statement. An entity also would recognize excess tax benefits regardless of whether the benefit reduces taxes payable in the current period. Further, excess tax benefits would not be separated from other income tax cash flows and thus would be classified along with other cash flows as an operating activity. ASU 2016-09 is effective for public entities for interim and annual periods beginning after December 15, 2016. In the third quarter of 2016, the Company elected the early adoption of this standard which requires the Company to reflect the adjustments resulting from the adoption effective January 1, 2016, the beginning of the annual period that includes the interim period of adoption. Adoption of this standard had the following impact on the Company’s consolidated financial statements:

• Excess tax benefits are recognized in the provision for income tax expense rather than through additional paid-in capital. The Company’s early adoption of ASU 2016-09 resulted in the reclassification of $772 thousand from additional paid-in capital to provision for income tax expense during the first two quarters of 2016. During the third quarter of 2016, the Company recognized a benefit of $142 thousand in provision for income tax expense for the excess tax benefits that occurred between July 1, 2016 and September 30, 2016. These tax benefits reduced the Company’s effective tax rate by 1.33% and 2.84% for the three months and nine months ended September 30, 2016. The Company had no previously unrecognized excess tax benefits.

• Excess tax benefits are presented as operating activities rather than as an inflow from financing activities and an outflow from operating activities in the consolidated statements of cash flows. The Company’s early adoption of ASU 2016-09 resulted in the prospective presentation of $914 thousand of excess tax benefits included in the change of accrued interest payable and other liabilities under operating activities in the consolidated statement of cash flows for the nine months ended September 30, 2016.

• Employee taxes paid when an employer withholds shares for tax-withholding purposes continue to be presented as financing activities in the consolidated statements of cash flows. The Company had no awards receiving liability treatment as a result of the guidance in effect prior to ASU 2016-09. Therefore, the change from minimum to up to maximum statutory rate on tax withholdings had no impact to the consolidated financial statements as a result of the early adoption. However, withheld taxes may be higher than the minimum tax rate beginning in July 2016.

• Forfeitures are accounted for when they occur.

Recent Accounting Standards Not Yet Effective

In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-09, Revenue from Contracts with Customers (Topic 606), which replaced almost all existing revenue recognition guidance ~~for~~in ~~contracts~~current toGAAP. ~~provide~~However, ~~goods~~the oreffects ~~services~~of tothe ~~customers~~new ~~and~~revenue ~~amended~~recognition ~~existing~~ guidance ~~related to recognition of gains and losses~~ on the ~~sale~~financial statements of ~~certain~~reporting ~~nonfinancial~~entities in ~~assets~~the ~~such~~financial asinstitution ~~real~~industry ~~estate.~~will ~~ASU~~be ~~2014-09~~somewhat ~~established~~limited abecause, ~~principles-based approach~~for tothe ~~recognizing~~most ~~revenue~~part, ~~that~~financial ~~applies~~instruments toand ~~all~~related ~~contracts~~contractual ~~other~~rights ~~than~~and ~~those~~obligations ~~covered~~are byexcluded ~~other~~from ~~authoritative~~its ~~GAAP guidance~~scope. ~~Quantitative~~As ~~and qualitative disclosures regarding the nature~~such, ~~amount,~~it ~~timing~~is ~~and~~anticipated ~~uncertainty~~that ofinterest ~~revenue~~income recognition and ~~cash~~measurement, ~~flows~~the ~~were also~~largest ~~required.~~source ~~ASU~~of ~~2014-09~~revenue ~~was to be effective~~ for ~~interim~~the ~~and annual periods beginning after December 15~~Company, ~~2016~~will ~~and~~not ~~was to~~ be ~~applied~~impacted onby ~~either~~Accounting aStandards ~~modified~~Codification ~~retrospective~~(“ASC”) orTopic ~~full retrospective basis~~606. ~~In August 2015~~However, the ~~FASB~~recognition ~~issued~~and ~~ASU~~measurement ~~2015-14 which~~of ~~defers~~certain ~~the original effective date for all entities by one year. Public business entities should apply the guidance in ASU 2015~~non-14interest toincome ~~annual~~items ~~reporting~~such ~~periods~~as ~~beginning~~gain ~~after~~on ~~December 15, 2017, including interim reporting periods within~~sale ~~that reporting period. Earlier application is permitted only as~~ of ~~annual~~other ~~reporting~~real ~~periods~~estate ~~beginning~~owned ~~after~~and ~~December 15,~~deposit-related ~~2016~~fees, ~~including~~could ~~interim~~be ~~reporting~~affected ~~periods~~by ~~within~~ASC ~~that~~Topic ~~reporting period~~606. ~~The Company is currently evaluating the impact of this ASU on its consolidated financial statements.~~

InUnder ~~January~~current ~~2016~~U.S. GAAP, when full consideration is not expected and financing is required by the ~~FASB~~buyer ~~issued~~to ~~ASU~~purchase ~~2016-01~~the property, ~~Financial~~there ~~Instruments–Overall: Recognition~~are ~~and~~very ~~Measurement~~prescriptive ofrequirements ~~Financial~~in ~~Assets~~determining when foreclosed real estate property sold by an institution should be derecognized and ~~Financial~~a ~~Liabilities~~gain or loss be recognized. ~~Changes~~The new guidance that will be applied to ~~the~~these ~~current~~sales ~~GAAP~~is ~~model~~more ~~primarily~~principles ~~affect~~based. For example, as it pertains to the ~~accounting~~criteria for ~~equity~~determining ~~investments,~~how ~~financial~~a ~~liabilities~~contract should be accounted for under the ~~fair~~new ~~value~~guidance, ~~option~~judgment will need to be exercised in evaluating if: (a) a commitment on the buyer’s part exists, (b) collection is probable in circumstances where the initial investment is minimal and (c) the ~~presentation~~buyer has obtained control of the asset, including the significant risks and rewards of the ownership. If there is no commitment on the buyer’s part, collection is not probable or the buyer has not obtained control of the asset, then a gain cannot be recognized under the new guidance. The initial investment ~~disclosure~~requirement ~~requirements~~for the buyer along with the various methods for ~~financial~~profit ~~instruments~~recognition are no longer applicable when the new guidance goes into effect. InThe ~~addition,~~Company will revise its current policy on the ~~FASB~~recognition ~~clarified~~and measurement of gain on sale of other real estate owned to be consistent with the new guidance, ~~related~~but does not expect the new guidance to have a significant impact on the ~~valuation~~consolidated ~~allowance~~financial ~~assessment~~statements of the Company when ~~recognizing~~adopted. Since the inception of the Company, the level of other real estate owned has been very low and in almost all cases, full consideration was received at the time of sale and financing by the Company was not provided.

~~Page~~For 10deposit-related fees, considering the straightforward nature of the arrangements with the Company’s deposits customers, the Company 77does not expect the recognition and measurement outcomes of deposit-related fees to be significant differently under the new guidance compared to current GAAP.

ASU 2014-09 was to be effective for interim and annual periods beginning after December 15, 2016 and was to be applied on either a modified retrospective or full retrospective basis. In August 2015, the FASB issued ASU 2015-14 which defers the original effective date for all entities by one year. Public business entities should apply the guidance in ASU 2015-14 to annual reporting periods beginning after December 15, 2017, including interim reporting periods within that reporting period. Earlier application is permitted only as of annual reporting periods beginning after December 15, 2016, including interim reporting periods within that reporting period. The Company does not expect this ASU to have a material impact on the Company’s consolidated financial statements when adopted on January 1, 2018.

In January 2016, the FASB issued ASU 2016-01, Financial Instruments–Overall: Recognition and Measurement of Financial Assets and Financial Liabilities. Changes to the current GAAP model primarily affect the accounting for equity investments, financial liabilities under the fair value option, and the presentation and disclosure requirements for financial instruments. The most far-reaching ramification of this ASU is the elimination of the available-for-sale classification for equity securities and the requirement to carry most equity securities at fair value through net income. In addition, the FASB clarified guidance related to the valuation allowance assessment when recognizing deferred tax assets resulting from unrealized losses on available-for-sale debt securities. The accounting for other financial instruments, such as loans, investments in debt securities, and financial liabilities is largely unchanged. The classification and measurement guidance will be effective for public business entities in fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. Entities can early adopt the provision to record fair value changes for financial liabilities under the fair value option resulting from instrument-specific credit risk in other comprehensive income. Early adoption of these provisions can be elected for all financial statements of fiscal years and interim periods that have not yet been issued or that have not yet been made available for issuance.

The Company does not have any equity securities in its available-for-sale portfolio, but only investments in the common stock of PCBB, TIB and the FHLB, the Company’s correspondent banks. Under the current accounting policy, the Company’s investments in these common stock are carried at cost because a readily determinable fair value does not exist for these investments. Under ASU 2016-01, investment in FHLB is specifically excluded from the requirement that equity

Page 10 of 72

~~deferred tax assets resulting from unrealized losses on available-for-sale debt~~ securities. ~~The~~are ~~accounting~~to ~~for~~be ~~other~~measured ~~financial~~at ~~instruments,~~fair ~~such~~value aswith ~~loans,~~unrealized ~~investments~~holding ingains ~~debt securities,~~ and ~~financial~~ ~~liabilities~~losses isreflected ~~largely~~in ~~unchanged~~net income. ~~The~~Furthermore, ~~classification~~the ~~and~~ASU ~~measurement~~allows ~~guidance~~entities ~~will~~to bemake ~~effective~~an ~~for~~irrevocable ~~public~~practicality ~~business~~exception whereby entities incan ~~fiscal~~make ~~years~~an ~~beginning after December 15~~election, ~~2017,~~on ~~including~~a ~~interim~~security-by-security ~~periods~~basis, ~~within~~to ~~those~~account ~~fiscal~~for ~~years. Entities~~equity ~~can~~securities ~~early~~that ~~adopt~~do ~~the~~not ~~provision~~have toreadily ~~record~~determinable fair value ~~changes~~at ~~for~~cost, ~~financial~~with ~~liabilities~~adjustments ~~under~~to ~~the~~ fair value ~~option~~when ~~resulting~~an ~~from~~observable ~~instrument-specific~~price ~~credit~~change ~~risk~~occurs inor ~~other~~impairment ~~comprehensive income~~is identified. ~~Early~~As ~~adoption~~such, ofthe ~~these~~Company ~~provisions~~intends ~~can~~to becontinue ~~elected for~~to ~~all~~measure ~~financial~~its ~~statements~~investments ofin ~~fiscal~~Pacific ~~years~~Coast ~~and~~Banker’s ~~interim~~Bank ~~periods~~(“PCBB”), ~~that~~Texas ~~have~~Independent ~~not~~Bank ~~yet~~(“TIB”) ~~been~~and ~~issued~~Federal orHome ~~that~~Loan ~~have~~Bank ~~not~~(“FHLB”) ~~yet~~common ~~been~~stock ~~made~~at ~~available~~cost ~~for~~upon adoption ~~issuance~~on January 1, 2018. The Company isdoes ~~currently~~not ~~evaluating~~expect ~~the~~this ~~impact~~ASU ofto ~~this~~have ~~ASU~~a material impact on ~~its~~the Company’s consolidated financial statements when adopted.

In February 2016, the FASB issued ASU 2016-02, Leases ~~(Topic 842)~~. The most significant change for lessees is the requirement under the new guidance to recognize right-of-use assets and lease liabilities for all leases not considered short-term leases. By definition, a short-term lease is one in which: (a) the lease term is 12 months or less and (b) there is not an option to purchase the underlying asset that the lessee is reasonably certain to exercise. For short-term leases, lessees may elect an accounting policy by class of underlying asset under which right-of-use assets and lease liabilities are not recognized and lease payments are generally recognized as expense over the lease term on a straight-line basis. ~~This~~Furthermore, this change will result in lessees recognizing right-of-use assets and lease liabilities for most leases currently accounted for as operating leases under the legacy lease accounting guidance. Examples of changes in the new guidance affecting both lessees and lessors include: (a) defining initial direct costs to only include those incremental costs that would not have been incurred if the lease had not been entered into, (b) requiring related party leases to be accounted for based on their legally enforceable terms and conditions, (c) eliminating the additional requirements that must be applied today to leases involving real estate and (d) revising the circumstances under which the transfer contract in a sale-leaseback transaction should be accounted for as the sale of an asset by the seller-lessee and the purchase of an asset by the buyer-lessor. In addition, both lessees and lessors are subject to new disclosure requirements. ASU 2016-02 is effective for public entities for interim and annual periods beginning after December 15, 2018. ~~The Company is currently evaluating the impact of this ASU on its consolidated financial statements.~~

InAs ~~June,~~of ~~2016~~March 31, ~~the FASB issued ASU 2016-13~~2017, ~~Financial Instruments~~ ~~– Credit Losses (Topic 326), which introduces new guidance for~~ the ~~accounting~~Company ~~for~~has ~~credit~~10 ~~losses~~operating onleases instruments within its scope. The new guidance introduces an approach based on expected losses to estimate credit losses on certain types of financial instruments. It also modifies the impairment model for ~~available-for-sale~~10 ~~(AFS)~~locations ~~debt~~under ~~securities~~contract ~~and~~with ~~provides for~~ a ~~simplified~~term ~~accounting~~greater ~~model~~than ~~for~~12 ~~purchased~~months ~~financial assets~~ with ~~credit deterioration since their~~future ~~origination.~~lease ~~Current~~payments ~~expected~~totaling ~~credit~~$11 ~~losses~~million. ~~(“CECL”)~~At ~~model~~adoption date, ~~will apply to: (1)~~January ~~financial~~1, ~~assets~~2019, ~~subject~~the toCompany ~~credit~~will ~~losses~~recognize ~~and~~a ~~measured~~lease atliability ~~amortized~~for ~~cost,~~the ~~and~~present ~~(2) certain~~value ~~off-balance~~of ~~sheet~~future ~~credit~~lease ~~exposures. This includes loans, held-to-maturity debt securities, loan~~ commitments, ~~financial guarantees,~~ and ~~net~~a ~~investments~~right inof ~~leases,~~use ~~as well as reinsurance and trade receivables~~asset. ~~Upon~~The ~~initial~~recognized ~~recognition~~right of ~~the~~use ~~exposure,~~asset ~~the~~relating ~~CECL model requires an entity~~ to ~~estimate the credit~~ ~~losses~~operating ~~expected~~leases ~~over~~will ~~the~~consist ~~life~~ of anthe ~~exposure~~present ~~(or~~value ~~pool~~ of ~~exposures).~~future ~~The~~lease ~~estimate~~commitments, ofunamortized ~~expected~~initial ~~credit~~direct ~~losses (ECL) should consider historical information~~costs, ~~current~~prepaid ~~information~~rent, and ~~reasonable~~the ~~and~~related ~~supportable~~unamortized ~~forecasts,~~balance ~~including~~of ~~estimates~~lease ~~of prepayments~~incentives. ~~Financial~~The ~~instruments~~discount ~~with~~rate ~~similar~~used ~~risk~~to ~~characteristics~~present ~~should~~value befuture ~~grouped~~lease ~~together~~payments will ~~when~~be ~~estimating~~the ~~ECL.~~Company’s ~~ASU~~incremental ~~2016-13~~borrowing israte ~~effective~~at ~~for~~the ~~public~~time ~~entities~~of ~~for interim and annual periods beginning after December 15, 2019~~adoption. ~~Early application~~The ofCompany ~~the guidance~~ will betake ~~permitted~~a ~~for~~modified ~~all~~retrospective ~~entities~~transition ~~for~~approach ~~fiscal~~with ~~years~~application ~~beginning~~in ~~after~~all ~~December 15,~~comparative ~~2018, including interim~~ periods ~~within those fiscal years~~presented. The Company isdoes ~~currently~~not ~~evaluating~~expect ~~the~~this ~~impact~~ASU ofto ~~this~~have ~~ASU~~a material impact on ~~its~~ the Company’s consolidated financial statements when adopted.

In ~~August,~~June 2016, the FASB issued ASU 2016-1513, Financial ~~Statement~~Instruments of– ~~Cash~~Credit ~~Flows~~Losses (Topic ~~230~~326):, ~~Classification~~which introduces new guidance for the accounting for credit losses on instruments within its scope. The new guidance introduces an approach based on expected losses to estimate credit losses on certain types of ~~Certain~~financial ~~Cash~~instruments. ~~Receipts~~It ~~and~~also ~~Cash~~modifies ~~Payments~~the impairment model for available-for-sale (AFS) debt securities and provides for a ~~consensus~~simplified accounting model for purchased financial assets with credit deterioration since their origination. Current expected credit losses (“CECL”) model, will apply to: (1) financial assets subject to credit losses and measured at amortized cost, and (2) certain off-balance sheet credit exposures. This includes loans, held-to-maturity debt securities, loan commitments, financial guarantees, and net investments in leases, as well as reinsurance and trade receivables. Upon initial recognition of the ~~FASB~~exposure, ~~Emerging~~the ~~Issues~~CECL ~~Task~~model ~~Force~~requires an entity to estimate the credit losses expected over the life of an exposure (or pool of exposures). The estimate of expected credit losses (ECL) should consider historical information, ~~which~~current ~~addresses~~information, ~~eight~~and ~~classification~~reasonable ~~issues~~and ~~related~~supportable toforecasts, including estimates of prepayments. Financial instruments with similar risk characteristics should be grouped together when estimating ECL. ASU 2016-13 is effective for public entities for interim and annual periods beginning after December 15, 2019. Early application of the ~~statement~~guidance will be permitted for all entities for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Upon adoption, the Company expects the level of ~~cash~~ECL ~~flows:~~will likely be higher, however, the Company is still in the early stages of developing an implementation plan and evaluating the magnitude of the increase and the impact of this ASU on its consolidated financial statements.

In August 2016, the FASB issued ASU 2016-15, Statement of Cash flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments (a consensus of the FASB Emerging Issues Task Force), which addresses eight classification issues related to the statement of cash flows:

•

Debt prepayment of debt extinguishment costs

•

Settlement of zero-coupon bonds

•

Contingent consideration payments made after a business combination

•

Proceeds from the settlement of insurance claims

•

Proceeds from the settlement of corporate-owned life insurance policies, including bank-owned life insurance policies

Page 11 of 72

•

Distributions received from equity method investees

•

Beneficial interests in securitization transactions

•

Separately identifiable cash flows and application of the predominance principle

ASU 2016-15 is effective for public business entities for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. Early adoption is permitted, including adoption in an interim period. The Company isdoes ~~currently~~not ~~evaluating~~expect the ~~impact~~adoption of ~~this~~ this ASU to have a material effect on its consolidated financial statements.

~~Page~~In 11November 2016, the FASB issued ASU 2016-18, Statement of 77Cash flows (Topic 230): Restricted Cash (a consensus of the FASB Emerging Issues Task Force). The new standard requires that the statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. Entities will also be required to reconcile such total to amounts on the balance sheet and disclose the nature of the restrictions. ASU 2016-18 is effective for public business entities for financial statements issued for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. Early adoption is permitted, including adoption in an interim period. The Company does not expect the adoption of this ASU to have a material effect on its consolidated financial statements.

In January 2017, the FASB issued ASU 2017-01, Business Combinations (Topic 805): Clarifying the Definition of Business, which provides guidance on evaluating whether transactions should be accounted for as acquisitions or disposals of assets or businesses. The new standard clarifies that when substantially all of the fair value of gross assets acquired is concentrated in a single asset, or a group of similar assets, the asset acquired would not represent a business. The new ASU introduces this initial required screen, if met, eliminates the need for further assessment. For public business entities with a calendar year end, the standard is effective in 2018. Early adoption is permitted, including adoption in an interim period. The Company does not expect the adoption of this ASU to have a material effect on its consolidated financial statements.

In January 2017, the FASB issued ASU 2017-04, Intangibles–Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment, which simplifies the accounting for goodwill impairment. ASU 2017-04 eliminates step two from the goodwill impairment test, which measures the amount of impairment loss, if any. Instead, an entity should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value. The loss recognized should not exceed the total amount of goodwill allocated to said reporting unit. For public business entities with a calendar year end, the standard is effective for annual and any interim impairment tests for periods beginning after December 15, 2019. The Company does not expect the adoption of this ASU to have a material effect on its consolidated financial statements.

In March 2017, the FASB issued ASU 2017-08, Receivables–Nonrefundable Fees and Other Costs (Topic 310): Premium Amortization on Purchased Callable Debt Securities, which shortens the period of amortization of the premium on certain callable debt securities to the earliest call date. ASU 2017-08 applies to securities that have explicit, non-contingent call features that are callable at fixed prices and on preset dates. Securities purchased at a discount and mortgage-backed securities in which early repayment is based on prepayment of the underlying assets of the security are outside the scope of ASU 2017-08. For public business entities, the standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. Early adoption is permitted, including adoption in an interim period, and applied on a modified retrospective basis through a cumulative-effect adjustment directly to retained earnings as of the beginning of the period of adoption. The Company does not expect the adoption of this ASU to have a material effect on its consolidated financial statements.

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Note 3 - Computation of Book Value and Tangible Book Value per Common Share

Book value per common share was calculated by dividing total shareholders’ equity less preferred stock, by the number of common shares issued and outstanding. Tangible book value per common share was calculated by dividing tangible common equity, by the number of common shares issued and outstanding. The tables below present the computation of book value and tangible book value per common share as of the dates indicated (dollars in thousands, except share and per share data):

	September 30,2016		December 31,2015
	March 31,2017		December 31,2016
Total Shareholders’ Equity	$	~~332~~346,~~930~~448	$	~~306~~338,~~807~~185
Less: Preferred stock		1716,~~021~~887		16,~~995~~955
Less: Goodwill		64,603		64,603
Less: Core deposit and leasehold right intangibles, net		65,~~665~~970		76,~~671~~300
Tangible common equity	$	~~244~~258,~~641~~988	$	~~217~~250,~~538~~327
Common shares issued and outstanding		17,~~673~~834,~~438~~183		17,~~175~~759,~~389~~006
Book value per common share	$	1718.8748	$	1618.8709
Tangible book value per common share	$	1314.8452	$	1214.6710

Note 4 - Computation of Earnings per Common Share

~~On July 1, 2016, and effective January 1, 2016, the Company early adopted ASU 2016-09 which provides improvements to the accounting for employee share-based payments.~~ In calculating potential common shares used to determine diluted earnings per share, U.S. GAAP requires ~~the Company to use the treasury stock method. The new standard requires~~ that assumed proceeds under the treasury stock method ~~be modified~~ to exclude the amount of excess tax benefits that would have been recognized in additional paid-in capital. The early adoption had a favorable impact of $0.01 per share for both basic and diluted earnings per common share for the three months ended September 30, 2016, and a favorable impact of $0.06 and $0.05 per share for basic and diluted earnings per common share, respectively, for the nine months ended September 30, 2016. See Note 2. Recent Accounting Pronouncements for additional information.

Basic and diluted earnings per common share were determined by dividing net income available to common shareholders by the applicable basic and diluted weighted average common shares outstanding. The following table shows weighted average basic common shares outstanding, potential dilutive shares related to stock options, unvested restricted stock, and weighted average diluted shares for the periods indicated (dollars in thousands, except share and per share data):

Three Months EndedSeptember 30,

Nine Months EndedSeptember 30,

Three Months EndedMarch 31,

2016

2015

2016

2015

2017

2016

Net Income

67,~~583~~783

6,~~263~~584

~~20,287~~

~~15,729~~

Less: Preferred stock dividends and discount accretion

~~304~~301

~~293~~303

~~914~~

~~877~~

Net Income available to common shareholders

67,~~279~~482

56,~~970~~281

~~19,373~~

~~14,852~~

Weighted average basic common shares outstanding

17,~~339~~532,~~491~~104

1617,~~541~~041,~~380~~427

~~17,197,117~~

~~16,477,206~~

Dilutive effect of potential common share issuances from stock options and restricted stock

~~265~~224,~~896~~351

~~456~~375,~~684~~733

~~312,458~~

~~446,296~~

Weighted average diluted common shares outstanding

17,~~605~~756,~~387~~455

1617,~~998~~417,~~064~~160

~~17,509,575~~

~~16,923,502~~

Income per common share

Basic

0.3643

0.3637

~~1.13~~

~~0.90~~

Diluted

0.3642

0.3536

~~1.11~~

~~0.88~~

Anti-dilutive shares not included in the calculation of diluted earnings per share

—4,150

—3,000

~~1,000~~

~~43,259~~

Page 1213 of 7772

Note 5 - Investment Securities

The investment securities portfolio has been classified into two categories: available-for-sale (“AFS”) and held-to-maturity (“HTM”).

The following tables present the amortized cost, gross unrealized gains and losses, and fair values of investment securities by major category as of the dates indicated (dollars in thousands):

			Gross Unrealized
September 30, 2016	AmortizedCost		Gains		Losses		Fair MarketValue
March 31, 2017	AmortizedCost		Gains		Losses		Fair MarketValue
Available-for-sale:
Available-for-sale investment securities:
U.S. Govt Agency and Sponsored Agency - Note Securities	$	710,~~003~~000	$	1—	$	—44	$	79,~~004~~956
U.S. Govt Agency - SBA Securities		~~107~~121,~~759~~855		~~582~~146		~~367~~687		~~107~~121,~~974~~314
U.S. Govt Agency - GNMA Mortgage-Backed Securities		2521,~~123~~122		~~207~~56		~~116~~283		2520,~~214~~895
U.S. Govt Sponsored Agency - CMO & Mortgage-Backed Securities		~~146~~250,~~632~~344		~~1,030~~75		~~424~~3,902		~~147~~246,~~238~~517
Corporate Securities		501		1		—		502
Asset Backed Securities		6,913		4		142		6,775
Asset Backed Securities		7,303		—		281		7,022
U.S. Treasury Notes		64,089		—		147		63,942
U.S. Treasury Notes		80,112		65		37		80,140
Total available-for-sale		474,323		281		5,205		469,399
Total available-for-sale		374,433		1,886		1,225		375,094
Held-to-maturity investment securities:
Held-to-maturity:
Municipal Securities		40,945		229		15		41,159
Municipal Securities		40,073		620		2		40,691
Total held-to-maturity		40,945		229		15		41,159
Total held-to-maturity		40,073		620		2		40,691
								0
Total investment securities	$	~~414~~515,~~506~~268	$	~~2,506~~510	$	15,~~227~~220	$	~~415~~510,~~785~~558

			Gross Unrealized
December 31, 2015	AmortizedCost		Gains		Losses		Fair MarketValue
December 31, 2016	AmortizedCost		Gains		Losses		Fair MarketValue
Available-for-sale:
Available-for-sale investment securities:
U.S. Govt Agency and Sponsored Agency - Note Securities	$	110,~~014~~000	$	—	$	—31	$	19,~~014~~969
U.S. Govt Agency - SBA Securities		93123,~~674~~224		~~399~~365		~~583~~739		93122,~~490~~850
U.S. Govt Agency - GNMA Mortgage-Backed Securities		3022,~~916~~565		~~202~~70		~~418~~265		3022,~~700~~370
U.S. Govt Sponsored Agency - CMO & Mortgage-Backed Securities		97243,~~693~~159		~~250~~92		~~789~~4,351		97238,~~154~~900
Corporate Securities		4,016		7		—		4,023
Asset Backed Securities		7,111		—		215		6,896
Municipal Securities		1,010		1		—		1,011
U.S. Treasury Notes		69,101		7		143		68,965
Asset Backed Securities		7,890		—		243		7,647
Total available-for-sale		475,160		534		5,744		469,950
U.S. Treasury Notes		80,981		—		235		80,746
Held-to-maturity investment securities:
Total available-for-sale		317,194		859		2,268		315,785
Municipal Securities		42,027		69		159		41,937
Held-to-maturity:
Total held-to-maturity		42,027		69		159		41,937
Municipal Securities		42,036		335		32		42,339
Total investment securities	$	517,187	$	603	$	5,903	$	511,887
Total held-to-maturity		42,036		335		32		42,339
Total investment securities	$	359,230	$	1,194	$	2,300	$	358,124

Page 1314 of 7772

The Company’s investment securities portfolio at ~~September~~March 3031, ~~2016~~2017 consists of A-rated or or above investment-grade securities. At ~~September~~March 3031, ~~2016~~2017 and December 31, ~~2015~~2016, securities with a market value of $~~194~~219 million and $~~197~~205 million, respectively, were pledged as collateral for securities sold under agreements to repurchase, public deposits, outstanding standby letters of credit, bankruptcy deposits, and other purposes as required by various statutes and agreements. See Note 8 – Borrowings and Subordinated Debentures.

The following tables present the gross unrealized losses and fair values of AFS and HTM investment securities that were in unrealized loss positions, summarized and classified according to the duration of the loss period as of the dates indicated (dollars in thousands).

	< 12 ContinuousMonths				> 12 ContinuousMonths				Total
September 30, 2016	FairValue		GrossUnrealizedLoss		FairValue		GrossUnrealizedLoss		FairValue		GrossUnrealizedLoss
March 31, 2017	FairValue		GrossUnrealizedLoss		FairValue		GrossUnrealizedLoss		FairValue		GrossUnrealizedLoss
Available-for-sale investment securities:
U.S. Govt. Agency SBA Securities	$	46,340	$	184	$	19,285	$	183	$	65,625	$	367
U.S. Govt Agency and Sponsored Agency – Note Securities	$	9,956	$	44	$	—	$	—	$	9,956	$	44
U.S. Govt. Agency – GNMA Mortgage-Backed Securities		2,521		27		8,878		89		11,399		116
U.S. Govt. Agency SBA Securities		58,673		422		37,546		265		96,219		687
U.S. Govt. Sponsored Agency – CMO & Mortgage-Backed Securities		41,497		292		11,498		132		52,995		424
U.S. Govt. Agency – GNMA Mortgage-Backed Securities		9,191		108		7,725		175		16,916		283
Asset Backed Securities		—		—		7,022		281		7,022		281
U.S. Govt. Sponsored Agency – CMO & Mortgage-Backed Securities		217,719		3,821		7,689		81		225,408		3,902
U.S Treasury Notes		10,098		37		—		—		10,098		37
Asset Backed Securities		—		—		4,782		142		4,782		142
Total available-for-sale investment securities	$	100,456	$	540	$	46,683	$	685	$	147,139	$	1,225
U.S Treasury Notes		63,943		147		—		—		63,943		147
Total available-for-sale	$	359,482	$	4,542	$	57,742	$	663	$	417,224	$	5,205
Held-to-maturity investment securities:
Municipal Securities	$	~~700~~7,162	$	114	$	~~313~~307	$	1	$	17,~~013~~469	$	215
Total held-to-maturity investment securities	$	700	$	1	$	313	$	1	$	1,013	$	2
Total held-to-maturity	$	7,162	$	14	$	307	$	1	$	7,469	$	15

	< 12 ContinuousMonths				> 12 ContinuousMonths				Total
December 31, 2015	FairValue		GrossUnrealizedLoss		FairValue		GrossUnrealizedLoss		FairValue		GrossUnrealizedLoss
December 31, 2016	FairValue		GrossUnrealizedLoss		FairValue		GrossUnrealizedLoss		FairValue		GrossUnrealizedLoss
Available-for-sale investment securities:
U.S. Govt. Agency SBA Securities	$	53,852	$	428	$	7,935	$	154	$	61,787	$	582
U.S. Govt Agency and Sponsored Agency – Note Securities	$	9,969	$	31	$	—	$	—	$	9,969	$	31
U.S. Govt. Agency – GNMA Mortgage-Backed Securities		5,417		47		14,296		371		19,713		418
U.S. Govt Agency – SBA Securities		54,302	$	451		39,322		288		93,624		739
U.S. Govt. Sponsored Agency – CMO & Mortgage-Backed Securities		67,475		564		10,024		225		77,499		789
U.S. Govt Agency – GNMA Mortgage-Backed Securities		6,652		98		8,264		167		14,916		265
Asset Backed Securities		2,928		54		4,719		190		7,647		244
U.S. Govt Sponsored Agency – CMO & Mortgage-Backed Securities		215,138		4,172		10,879		179		226,017		4,351
U.S Treasury Notes		80,745		235		—		—		80,745		235
Asset Backed Securities		—		—		6,896		215		6,896		215
Total available-for-sale investment securities	$	210,417	$	1,328	$	36,974	$	940	$	247,391	$	2,268
U.S. Treasury Notes		51,972		143		—		—		51,972		143
Total available-for-sale	$	338,033	$	4,895	$	65,361	$	849	$	403,394	$	5,744
Held-to-maturity investment securities:
Municipal Securities	$	528,~~669~~673	$	16158	$	~~2,392~~310	$	161	$	828,~~061~~983	$	32159
Total held-to-maturity investment securities	$	5,669	$	16	$	2,392	$	16	$	8,061	$	32
Total held-to-maturity	$	28,673	$	158	$	310	$	1	$	28,983	$	159

The unrealized losses in each of the above categories are associated with the general fluctuation of market interest rates and are not an indication of any deterioration in the credit quality of the security issuers. Further, the Company does not intend to sell these securities and is not more-likely-than-not to be required to sell the securities before the recovery of its amortized cost basis. Accordingly, the Company had no securities that were classified as other-than-temporarily impaired at ~~September~~March 3031, ~~2016~~2017 or December 31, ~~2015~~2016, and did not recognize any impairment charges in the consolidated statements of income.

Page 1415 of 7772

The amortized cost, fair value and the weighted average yield of debt securities at ~~September~~March 3031, ~~2016~~2017, are reflected in the table below (dollars in thousands). Maturity categories are determined as follows:

•

U.S. Govt. Agency, U.S. Treasury Notes and U.S. Govt. Sponsored Agency bonds and notes – maturity date

•

U.S. Govt. Sponsored Agency CMO or Mortgage-Backed Securities, U.S. Govt. Agency GNMA Mortgage-Backed Securities, Asset Backed Securities and U.S. Gov. Agency SBA Securities – estimated cash flow taking into account estimated pre-payment speeds

• ~~Investment grade Corporate Bonds and~~ Municipal Securities – the earlier of the maturity date or the expected call date

Although, U.S. Government Agency and U.S. Government Sponsored Agency Mortgage-Backed and CMO securities have contractual maturities through 2048, the expected maturity will differ from the contractual maturities because borrowers or issuers may have the right to prepay such obligations without penalties.

	September 30, 2016
	March 31, 2017
Maturities Schedule of Securities (Dollars in thousands)	AmortizedCost		~~Fair Value~~FairValue		WeightedAverageYield
Available-for-sale:
Available-for-sale investment securities:
Due through one year	$	9951,~~048~~271	$	9951,~~243~~239		10.2187	%
Due after one year through five years		~~170~~37,~~285~~098		~~170~~36,~~343~~794		1.4502	%
Due after five years through ten years		7964,~~234~~322		7963,~~523~~545		1.9379	%
Due after ten years		25321,~~866~~632		25317,~~985~~821		2.3002	%
Total available-for-sale	$	~~374~~474,~~433~~323	$	~~375~~469,~~094~~399		1.5478	%
Held-to-maturity:
Held-to-maturity investment securities:
Due through one year	$	2,~~950~~148	$	2,~~956~~149		1.4908	%
Due after one year through five years		3635,~~389~~402		3635,~~972~~600		1.5963	%
Due after five years through ten years		~~734~~1,924		~~763~~1,921		1.9788	%
Total held-to-maturity	$	40,073	$	40,691		1.59	%
Due after ten years		1,471		1,489		3.36	%
Total investment securities	$	414,506	$	415,785		1.55	%
Total held-to-maturity	$	40,945	$	41,159		1.68	%
Total investment securities	$	515,269	$	510,558		1.77	%

The weighted average yields in the above table are based on effective rates of book balances at the end of the period.

Investment in Federal Home Loan Bank (FHLB) Common Stock

The Company’s investment in the common stock of the FHLB of San Francisco is carried at cost and was $9.21 million at ~~September~~March 3031, ~~2016~~ 2017 and $89.01 million at December 31, ~~2015~~2016. The investment in FHLB stock is included in accrued interest receivable and other assets in the consolidated balance sheets and is periodically evaluated for impairment. Based on the capital adequacy of of the FHLB and its overall financial condition, no impairment losses have been recorded.

See Note 8 - Borrowings and Subordinated Debentures for a detailed discussion regarding the Company’s borrowings and the related requirements to hold FHLB common stock.

Page 1516 of 7772

Note 6 - Loans

The following table presents the composition of the Company’s loan portfolio as of the dates indicated (dollars in thousands):

	September 30,2016		December 31,2015
	March 31, 2017
Commercial and Industrial Loans:	$	499,439	$	537,368
	Principal		Net UnaccretedDiscounts,Net DeferredFees			Total
Loans Secured by Real Estate:
Commercial and Industrial Loans:	$	486,646	$	(2,366	)	$	484,280
Owner-Occupied Nonresidential Properties		430,218		407,979
Loans Secured by Real Estate:
Other Nonresidential Properties		610,267		533,168
Owner-Occupied Nonresidential Properties		439,730		(3,461	)		436,269
Construction, Land Development and Other Land		172,441		125,832
Other Nonresidential Properties		694,637		(5,622	)		689,015
1-4 Family Residential Properties		122,955		114,525
Construction, Land Development and Other Land		193,613		(1,041	)		192,572
Multifamily Residential Properties		100,003		71,179
1-4 Family Residential Properties		119,853		(1,585	)		118,268
Total Loans Secured by Real Estate		1,435,884		1,252,683
Multifamily Residential Properties		95,854		(371	)		95,483
Other Loans:		39,618		43,112
Total Loans Secured by Real Estate		1,543,687		(12,080	)		1,531,607
Total Loans	$	1,974,941	$	1,833,163
Other Loans:		30,451		(200	)		30,251
Total Loans	$	2,060,784	$	(14,646	)	$	2,046,138

Loan balances in the table above include net deferred fees and net discounts for a total of $17 million and $22 million as of September 30, 2016 and December 31, 2015, respectively.


	December 31, 2016
	Principal		Net Unaccreted Discounts, Net Deferred Fees			Total
*Commercial and Industrial Loans:*	$	505,374	$	(2,737	)	$	502,637
*Loans Secured by Real Estate:*
Owner-Occupied Nonresidential Properties		455,120		(3,798	)		451,322
Other Nonresidential Properties		635,856		(5,693	)		630,163
Construction, Land Development and Other Land		195,215		(1,156	)		194,059
1-4 Family Residential Properties		129,261		(2,097	)		127,164
Multifamily Residential Properties		110,336		(478	)		109,858

Total Loans Secured by Real Estate		1,525,788		(13,222	)		1,512,566

*Other Loans:*		35,246		(223	)		35,023

Total Loans	$	2,066,408	$	(16,182	)	$	2,050,226

Small Business Administration Loans

Included in the loan portfolio is $3129 million in loans that were originated under the guidelines of the Small Business Administration (“SBA”) program of which $5 million is guaranteed. The total portfolio of the SBA contractual loan balances serviced by the Company at ~~September~~March 3031, ~~2016~~2017 was $~~109~~102 million, of which $7873 million has been sold.

At ~~September~~March 3031, ~~2016~~2017, there were no loans classified as held for sale. At ~~September~~March 3031, ~~2016~~2017, the balance of SBA 7a loans originated during the quarter is $~~425~~421 thousand, of which $~~319~~316 thousand is guaranteed by the SBA. The Company does not currently plan on selling these loans, but it may choose to do so in the future.

Page 1617 of 7772

Allowance for Loan Loss

The following table is a summary of the activity for the allowance for loan loss for the periods indicated (dollars in thousands):

	Three Months EndedSeptember 30,						Nine Months EndedSeptember 30,
	Three Months EndedMarch 31,
	2016			2015			2016			2015
	2017			2016
Allowance for loan loss at beginning of period	$	1819,~~476~~374		$	1415,~~124~~682		$	~~15,682~~		$	~~12,610~~
Provision for loan losses		~~697~~—			~~705~~622			~~2,382~~			~~2,831~~
Net (charge-offs) recoveries:
Charge-offs		~~(807~~—	)		~~(42~~—	)		~~(827~~	)		~~(933~~	)
Recoveries		5231			~~178~~241			~~1,134~~			~~457~~
Net (charge-offs) recoveries		~~(802~~231	)		~~136~~241			~~307~~			~~(476~~	)
Allowance for loan loss at end of period	$	1819,~~371~~605		$	1416,~~965~~545		$	~~18,371~~		$	~~14,965~~
Net (charge-offs) recoveries to average loans		(0.0401	)%		0.01	%		~~0.02~~	%		~~(0.03~~	)%

	September 30,2016			December 31,2015
	March 31,2017			December 31,2016
Allowance for loan loss to total loans		0.9396	%		0.8694	%
Allowance for loan loss to total loans accounted for at historical cost, which excludes loans and the related allowance for loans acquired through acquisition		1.20	%		1.25	%

Page 17 of 77

The following tables present, by portfolio segment, the changes in the allowance for loan loss and the recorded investment in loans as of the dates and for the periods indicated (dollars in thousands):

	CommercialandIndustrial			Construction,LandDevelopmentandOther Land		CommercialandOtherReal Estate			Other			Total
Three Months Ended September 30, 2016
Three Months Ended March 31, 2017
Allowance for loan loss – Beginning balance	$	87,~~381~~130		$	23,~~724~~084	$	68,~~567~~487		$	~~804~~673		$	1819,~~476~~374
Provision for loan losses		(~~559~~497	)		4563		~~1,294~~739			(83305	)		~~697~~—
Net (charge-offs) recoveries:
Charge-offs		~~(807~~—	)		—		—			—			~~(807~~—	)
Recoveries		3229			—		2			—			5231
Net (charge-offs) recoveries		~~(804~~229	)		—		2			—			~~(802~~231	)
Ending balance	$	76,~~018~~862		$	23,~~769~~147	$	79,~~863~~228		$	~~721~~368		$	1819,~~371~~605
Three Months Ended September 30, 2015
Allowance for loan loss – Beginning balance	$	6,244		$	1,607	$	5,799		$	474		$	14,124
Provision for loan losses		181			371		143			10			705
Net (charge-offs) recoveries:
Charge-offs		—			—		(42	)		—			(42	)
Recoveries		177			—		1			—			178
Net (charge-offs) recoveries		177			—		(41	)		—			136
Ending balance	$	6,602		$	1,978	$	5,901		$	484		$	14,965

	CommercialandIndustrial			Construction,LandDevelopmentandOther Land		CommercialandOtherReal Estate			Other			Total
Nine Months Ended September 30, 2016
Three Months Ended March 31, 2016
Allowance for loan loss – Beginning balance	$	5,924		$	2,076	$	6,821		$	861		$	15,682
Provision for loan losses		~~791~~561			~~693~~635		~~1,038~~(448	)		(~~140~~126	)		~~2,382~~622
Net (charge-offs) recoveries:
Charge-offs		~~(827~~—	)		—		—			—			~~(827~~—	)
Recoveries		~~1,130~~240			—		41			—			~~1,134~~241
Net recoveries		303			—		4			—			307
Net (charge-offs) recoveries		240			—		1			—			241
Ending balance	$	76,~~018~~725		$	2,~~769~~711	$	76,~~863~~374		$	~~721~~735		$	1816,~~371~~545
Nine Months Ended September 30, 2015
Allowance for loan loss – Beginning balance	$	5,864		$	1,684	$	4,802		$	260		$	12,610
Provision for loan losses		1,176			294		1,137			224			2,831
Net (charge-offs) recoveries:
Charge-offs		(891	)		—		(42	)		—			(933	)
Recoveries		453			—		4			—			457
Net (charge-offs)		(438	)		—		(38	)		—			(476	)
Ending balance	$	6,602		$	1,978	$	5,901		$	484		$	14,965

Page 18 of 7772

The following tables present both the allowance for loan loss and the associated loan balance classified by loan portfolio segment and by credit evaluation methodology (dollars in thousands):

CommercialandIndustrial

Construction,~~LandDevelopmentandOther~~LandDevelopmentand ~~Land~~OtherLand

CommercialandOtherReal Estate

Other

Total

September 30, 2016

March 31, 2017

Allowance for loan loss:

Individually evaluated for impairment

—

Collectively evaluated for impairment

76,~~018~~862

23,~~769~~147

79,~~863~~228

~~721~~368

1819,~~371~~605

Purchased credit impaired (loans acquired with deteriorated credit quality)

—

Total Allowance for Loan Loss

76,~~018~~862

23,~~769~~147

79,~~863~~228

~~721~~368

1819,~~371~~605

Loans receivable:

Individually evaluated for impairment

~~456~~243

—

~~252~~239

—

~~708~~482

Collectively evaluated for impairment

~~498~~483,~~669~~758

~~172~~192,~~441~~572

1,~~261~~337,~~789~~572

3930,~~618~~251

12,~~972~~044,~~517~~153

Purchased credit impaired (loans acquired with deteriorated credit quality)

~~314~~279

—

1,~~402~~224

—

1,~~716~~503

Total Loans Receivable

~~499~~484,~~439~~280

~~172~~192,~~441~~572

1,~~263~~339,~~443~~035

3930,~~618~~251

12,~~974~~046,~~941~~138

CommercialandIndustrial

Construction,~~LandDevelopmentandOther~~LandDevelopmentand ~~Land~~OtherLand

CommercialandOtherReal Estate

Other

Total

December 31, 2015

December 31, 2016

Allowance for loan loss:

Individually evaluated for impairment

—

Collectively evaluated for impairment

57,~~924~~130

23,~~076~~084

68,~~821~~487

~~861~~673

1519,~~682~~374

Purchased credit impaired (loans acquired with deteriorated credit quality)

—

Total Allowance for Loan Loss

57,~~924~~130

23,~~076~~084

68,~~821~~487

~~861~~673

1519,~~682~~374

Loans receivable:

Individually evaluated for impairment

~~558~~378

—

~~649~~245

—

~~1,207~~623

Collectively evaluated for impairment

~~536~~501,~~333~~960

~~125~~194,~~832~~059

1,~~124~~316,~~667~~849

4335,~~112~~023

12,~~829~~047,~~944~~891

Purchased credit impaired (loans acquired with deteriorated credit quality)

~~477~~299

—

1,~~535~~413

—

21,~~012~~712

Total Loans Receivable

~~537~~502,~~368~~637

~~125~~194,~~832~~059

1,~~126~~318,~~851~~507

4335,~~112~~023

12,~~833~~050,~~163~~226

Page 19 of 7772

Credit Quality of Loans

The Company utilizes an internal loan classification system as a means of reporting problem and potential problem loans. Under the Company’s loan risk rating system, loans are classified as “Pass,” with problem and potential problem loans as “Special Mention,” “Substandard,” “Doubtful” and “Loss”. Individual loan risk ratings are updated continuously or at any time the situation warrants. In addition, management regularly reviews problem loans to determine whether any loan requires a classification change, in accordance with the Company’s policy and applicable regulations. The grading analysis estimates the capability of the borrower to repay the contractual obligations of the loan agreements as scheduled or at all. The internal loan classification risk grading system is based on experiences with similarly graded loans.

The Company’s internally assigned grades are as follows:

•

Pass – loans which are protected by the current net worth and paying capacity of the obligor or by the value of the underlying collateral. There are several different levels of Pass rated credits, including “Watch” which is considered a transitory grade for pass rated loans that require greater monitoring. Loans not meeting the criteria of special mention, substandard, doubtful or loss that have been analyzed individually as part of the above described process are considered to be pass-rated loans.

•

Special Mention – loans where a potential weakness or risk exists, which could cause a more serious problem if not corrected. Special Mention loans do not currently expose the Company to sufficient risk to warrant classification as a Substandard, Doubtful or Loss classification, but possess weaknesses that deserve management’s close attention.

•

Substandard – loans that have a well-defined weakness based on objective evidence and can be characterized by the distinct possibility that the Company will sustain some loss if the deficiencies are not corrected.

•

Doubtful – loans classified as doubtful have all the weaknesses inherent in those classified as substandard with the added characteristic that the weaknesses present make collection or liquidation in full, on the basis of currently existing facts, conditions and values, highly questionable and improbable.

•

Loss – loans classified as a loss are considered uncollectible, or of such value that continuance as an asset is not warranted.

The following tables present the risk category of loans by class of loans based on the most recent internal loan classification as of the dates indicated (dollars in thousands):

	CommercialandIndustrial		Construction,LandDevelopmentandOther Land		CommercialandOtherReal Estate		Other		Total
September 30, 2016
March 31, 2017
Pass	$	~~445~~438,~~172~~605	$	~~172~~192,~~441~~572	$	1,~~234~~315,~~950~~830	$	3630,~~701~~124	$	1,~~889~~977,~~264~~131
Special Mention		1820,~~939~~672		—		47,~~747~~028		—38		2327,~~686~~738
Substandard		3525,~~328~~003		—		2316,~~746~~177		~~2,917~~89		6141,~~991~~269
Doubtful		—		—		—		—		—
Total	$	~~499~~484,~~439~~280	$	~~172~~192,~~441~~572	$	1,~~263~~339,~~443~~035	$	3930,~~618~~251	$	12,~~974~~046,~~941~~138
December 31, 2015
Pass	$	503,006	$	125,832	$	1,101,548	$	40,132	$	1,770,518
Special Mention		16,041		—		6,494		43		22,578
Substandard		18,321		—		18,809		2,937		40,067
Doubtful		—		—		—		—		—
Total	$	537,368	$	125,832	$	1,126,851	$	43,112	$	1,833,163

Page 20 of 77


	Commercial and Industrial		Construction, Land Development and Other Land		Commercial and Other Real Estate		Other		Total
December 31, 2016
Pass	$	456,885	$	194,059	$	1,288,154	$	32,128	$	1,971,226
Special Mention		12,774		—		7,557		—		20,331
Substandard		32,978		—		22,796		2,895		58,669
Doubtful		—		—		—		—		—

Total	$	502,637	$	194,059	$	1,318,507	$	35,023	$	2,050,226

Page 20 of 72

Aging Analysis of Past Due and Non-Accrual Loans

The following tables present an aging analysis of the recorded investment of past due loans and non-accrual loans as of the dates indicated (dollars in thousands):

	31-60DaysPast Due		61-90DaysPast Due		Greaterthan90 DaysPast DueandAccruing		TotalPast DueandAccruing		TotalNonAccrual		Current		Total Loans
September 30, 2016
March 31, 2017
Commercial and Industrial	$	—86	$	—	$	—	$	—86	$	~~769~~521	$	~~498~~483,~~670~~673	$	~~499~~484,~~439~~280
Construction, Land Development and Other Land		—		—		—		—		—		~~172~~192,~~441~~572		~~172~~192,~~441~~572
Commercial and Other Real Estate		—209		—		—		—209		~~454~~239		1,~~262~~338,~~989~~587		1,~~263~~339,~~443~~035
Other		—		—		—		—		—		3930,~~618~~251		3930,~~618~~251
Total	$	—295	$	—0	$	—	$	—295	$	~~1,223~~760	$	12,~~973~~045,~~718~~083	$	12,~~974~~046,~~941~~138

	31-60DaysPast Due		61-90DaysPast Due		Greaterthan90 DaysPast DueandAccruing		TotalPast DueandAccruing		TotalNonAccrual		Current		Total Loans
December 31, 2015
December 31, 2016
Commercial and Industrial	$	—	$	—	$	—	$	—	$	~~1,032~~675	$	~~536~~501,~~336~~962	$	~~537~~502,~~368~~637
Construction, Land Development and Other Land		—		—		—		—		—		~~125~~194,~~832~~059		~~125~~194,~~832~~059
Commercial and Other Real Estate		—212		—		—		—212		~~1,019~~447		1,~~125~~317,~~832~~848		1,~~126~~318,~~851~~507
Other		—		—		—		—		—		4335,~~112~~023		4335,~~112~~023
Total	$	—212	$	—	$	—	$	—212	$	21,~~051~~122	$	12,~~831~~048,~~112~~892	$	12,~~833~~050,~~163~~226

Page 21 of 77

Impaired Loans

A loan is identified as impaired when it is probable that interest and principal will not be collected according to the contractual terms of the original loan agreement. Generally, these loans are rated substandard or worse. Most impaired loans are classified as nonaccrual. However, there are some loans that are designated impaired due to doubt regarding collectability according to contractual terms, but are both fully secured by collateral and are current in their interest and principal payments. These impaired loans that are not classified as nonaccrual continue to pay as agreed. Impaired loans are measured for allowance requirements based on the present value of expected future cash flows discounted at the loan’s effective interest rate or, as a practical expedient, at the loan’s observable market price or the fair value of the collateral if the loan is collateral dependent. The amount of an impairment allowance, if any and any subsequent changes are charged against the allowance for loan loss. In certain cases, portions of impaired loans are charged-off to the fair value of the loan instead of establishing a valuation allowance and are included, when applicable, in the table below as impaired loans “with no specific allowance recorded.” The valuation allowance disclosed below is included in the allowance for loan loss reported in the consolidated balance sheets as of September 30, 2016 and December 31, 2015.

~~The following~~Impaired ~~tables~~loans ~~present,~~are bymeasured ~~loan~~for ~~portfolio~~allowance ~~segment,~~requirements ~~the~~based ~~recorded~~on ~~investment~~the ~~and~~present ~~unpaid~~value ~~principal~~of ~~balances~~expected ~~for~~future ~~impaired~~cash ~~loans~~flows ~~with~~discounted at the ~~associated~~loan’s effective ~~allowance~~interest ~~amount~~rate or, ifas ~~applicable~~a practical expedient, ~~for~~at the ~~dates~~loan’s ~~and~~observable ~~periods~~market ~~indicated~~price ~~(dollars~~or inthe ~~thousands).~~fair ~~This~~value ~~table excludes~~of ~~purchased~~the ~~credit~~collateral ~~impaired~~if ~~loans~~the ~~(loans~~loan ~~acquired~~is incollateral ~~acquisitions~~dependent. The ~~with~~amount ~~deteriorated~~of ~~credit~~an ~~quality)~~impairment ofallowance, ~~$1.7~~if ~~million~~any and ~~$2.0~~any ~~million~~subsequent atchanges are ~~September 30,~~charged ~~2016~~against ~~and~~the ~~December 31,~~allowance ~~2015,~~for ~~respectively.~~loan loss.

	September 30, 2016						December 31, 2015
	RecordedInvestment		UnpaidPrincipalBalance		RelatedAllowance		RecordedInvestment		UnpaidPrincipalBalance		RelatedAllowance
With no specific allowance recorded:
Commercial and Industrial	$	456	$	1,402	$	—	$	558	$	1,027	$	—
Commercial and Other Real Estate		252		286		—		649		692		—
With an allowance recorded:
Commercial and Industrial		—		—		—		—		—		—
Total
Commercial and Industrial		456		1,402		—		558		1,027		—
Commercial and Other Real Estate		252		286		—		649		692		—
Total	$	708	$	1,688	$	—	$	1,207	$	1,719	$	—

A valuation allowance is established for an impaired loan when the fair value of the loan is less than the recorded investment. In certain cases, portions of impaired loans are charged-off to the fair value of the loan instead of establishing a valuation allowance and are included, when applicable, in the table below as impaired loans “with no specific allowance recorded.” The valuation allowance disclosed below is included in the allowance for loan loss reported in the consolidated balance sheets as of March 31, 2017 and December 31, 2016.

	Three Months EndedSeptember 30,								Nine Months EndedSeptember 30,
	2016				2015				2016				2015
	AverageRecordedInvestment		InterestIncomeRecognized		AverageRecordedInvestment		InterestIncomeRecognized		AverageRecordedInvestment		InterestIncomeRecognized		AverageRecordedInvestment		InterestIncomeRecognized
With no specific allowance recorded:
Commercial and Industrial	$	418	$	—	$	2,118	$	—	$	396	$	—	$	1,757	$	—
Commercial and Other Real Estate		252		—		99		—		254		—		104		—
With a specific allowance recorded:
Commercial and Industrial		—		—		1,328		—		—		—		1,328		—
Commercial and Other Real Estate		—		—		413		—		—		—		550		—
Total:
Commercial and Industrial		418		—		3,446		—		396		—		3,085		—
Commercial and Other Real Estate		252		—		512		—		254		—		654		—
Total	$	670	$	—	$	3,958	$	—	$	650	$	—	$	3,739	$	—

Page 21 of 72

Page 22 of 77

The following tables present, by loan portfolio segment, the recorded investment and unpaid principal balances for impaired loans with the associated allowance amount, if applicable, for the dates and periods indicated (dollars in thousands). This table excludes purchased credit impaired loans (loans acquired in acquisitions with deteriorated credit quality) of $1.5 million and $1.7 million at March 31, 2017 and December 31, 2016, respectively.


	March 31, 2017						December 31, 2016
	Recorded Investment		Unpaid Principal Balance		Related Allowance		Recorded Investment		Unpaid Principal Balance		Related Allowance
With no specific allowance recorded:
Commercial and Industrial	$	243	$	639	$	—	$	378	$	1,383	$	—
Commercial and Other Real Estate		239		277		—		245		282		—
With an allowance recorded:
Commercial and Industrial		—		—		—		—		—		—
Total
Commercial and Industrial		243		639		—		378		1,383		—
Commercial and Other Real Estate		239		277		—		245		282		—

Total	$	482	$	916	$	—	$	623	$	1,665	$	—


	Three Months Ended March 31,
	2017				2016
	Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
With no specific allowance recorded:
Commercial and Industrial	$	245	$	—	$	256	$	—
Commercial and Other Real Estate		242		—		666		—
With a specific allowance recorded:
Commercial and Industrial		—		—		—		—
Total:
Commercial and Industrial		245		—		256		—
Commercial and Other Real Estate		242		—		666		—

Total	$	487	$	—	$	922	$	—

The following is a summary of additional information pertaining to impaired loans for the periods indicated (dollars in thousands):

	Three Months EndedSeptember 30,				Nine Months EndedSeptember 30,
	Three Months EndedMarch 31,
	2016		2015		2016		2015
	2017		2016
Interest foregone on impaired loans	$	2213	$	8125	$	68	$	~~238~~
Cash collections applied to reduce principal balance	$	~~230~~21	$	2324	$	~~282~~	$	~~186~~
Interest income recognized on cash collections	$	—	$	—	$	—	$	—

Page 22 of 72

Troubled Debt Restructuring

The Company’s loan portfolio contains certain loans that have been modified in a Troubled Debt Restructuring (“TDR”), where economic concessions have been granted to borrowers experiencing financial difficulties. Loans are restructured in an effort to maximize collections. Economic concessions can include: reductions to the stated interest rate, payment extensions, principal forgiveness or other actions.

The modification process includes evaluation of impairment based on the present value of expected future cash flows, discounted at the effective interest rate of the original loan agreement, except when the sole (remaining) source of repayment for the loan is the operation or liquidation of the loan collateral. In these cases, management uses the current fair value of the collateral, less selling costs, to evaluate the loan for impairment. If management determines that the value of the modified loan is less than the recorded investment in the loan (net of previous charge-offs and unamortized premium or discount) impairment is recognized through a specific allowance or a charge-off.

The following tables include the recorded investment and unpaid principal balances for troubled debt restructured loans at ~~September~~March 3031, ~~2016~~2017 and ~~December~~March 31, ~~2015~~2016 (dollars in thousands). These tables include TDR loans that were purchased credit impaired (“PCI”). TDR loans that are non-PCI loans are included in the Impaired Loans tables above. As of ~~September~~March 3031, ~~2016~~2017, there were two PCI loans that are considered to be TDR loans with a recorded investment of $~~115~~92 thousand and unpaid principal balances of $~~287~~ 258 thousand.

	As of and for theThree Months EndedSeptember 30, 2016						As of and for theNine Months EndedSeptember 30, 2016
	As of and for theThree Months EndedMarch 31, 2017
	RecordedInvestment		UnpaidPrincipalBalance		InterestIncomeRecognized		~~RecordedInvestment~~		~~UnpaidPrincipalBalance~~		~~InterestIncomeRecognized~~
Commercial and Industrial	$	~~533~~319	$	~~1,230~~534	$	—	$	~~533~~	$	~~1,230~~	$	—
Total	$	~~533~~319	$	~~1,230~~534	$	—	$	~~533~~	$	~~1,230~~	$	—
	As of and for theThree Months EndedSeptember 30, 2015						As of and for theNine Months EndedSeptember 30, 2015
	RecordedInvestment		UnpaidPrincipalBalance		InterestIncomeRecognized		RecordedInvestment		UnpaidPrincipalBalance		InterestIncomeRecognized
Commercial and Industrial	$	1,780	$	2,385	$	—	$	1,780	$	2,385	$	—
Commercial and Other Real Estate		99		105		—		99		105		—
Total	$	1,879	$	2,490	$	—	$	1,879	$	2,490	$	—

Page 23 of 77


	As of and for the Three Months Ended March 31, 2016
	Recorded Investment		Unpaid Principal Balance		Interest Income Recognized
Commercial and Industrial	$	393	$	615	$	—

Total	$	393	$	615	$	—

~~Table~~There ofwere ~~Contents~~no loans restructured during the three months ended March 31, 2017 or March 31, 2016.

	As of and for theTwelve Months EndedDecember 31, 2015
	RecordedInvestment		UnpaidPrincipalBalance		InterestIncomeRecognized
Commercial and Industrial	$	627	$	1,363	$	—
Total	$	627	$	1,363	$	—

There have been no defaulted restructured loans during the three months ended March 31, 2017 or March 31, 2016 for loans that were restructured in the preceding 12-month periods.

The following table shows the pre- and post-modification recorded investment in TDR loans by loan segment that have occurred during the periods indicated (dollars in thousands):

	Three Months EndedSeptember 30,
	2016						2015
	NumberofLoans		Pre-ModificationRecordedInvestment		Post-ModificationRecordedInvestment		NumberofLoans		Pre-ModificationRecordedInvestment		Post-ModificationRecordedInvestment
Troubled Debt Restructured Loans:
Commercial and Industrial		1	$	650	$	184		3	$	1,335	$	1,335
Total		1	$	650	$	184		3	$	1,335	$	1,335

	Nine Months EndedSeptember 30,
	2016						2015
	NumberofLoans		Pre-ModificationRecordedInvestment		Post-ModificationRecordedInvestment		NumberofLoans		Pre-ModificationRecordedInvestment		Post-ModificationRecordedInvestment
Troubled Debt Restructured Loans:
Commercial and Industrial		1	$	650	$	184		3	$	1,335	$	1,335
Total		1	$	650	$	184		3	$	1,335	$	1,335

There have been no payment defaults in the three or nine months ended September 30, 2016 or September 30, 2015 subsequent to modification on troubled debt restructured loans that have been modified within the last twelve months.

Loans are restructured in an effort to maximize collections. Impairment analyses are performed on the Company’s troubled debt restructured loans in conjunction with the normal allowance for loan loss process. The Company’s troubled debt restructured loans are analyzed to ensure adequate cash flow or collateral supports the outstanding loan balance.

There were no commitments to lend additional funds to borrowers whose terms have been modified in troubled debt restructurings at ~~September 30,~~ ~~2016 or December~~March 31, ~~2015~~2017.

Page 23 of 72

Loans Acquired Through Acquisition

The following table reflects the accretable net discount for acquired loans for the periods indicated (dollars in thousands):

	Three Months EndedSeptember 30,						Nine Months EndedSeptember 30,
	Three Months EndedMarch 31,
	2016			2015			2016			2015
	2017			2016
Balance, beginning of period	$	119,~~928~~611		$	1814,~~255~~610		$	~~14,610~~		$	~~21,402~~
Accretion, included in interest income		(1,~~229~~115	)		(1,~~463~~133	)		~~(3,879~~	)		~~(4,140~~	)
Reclassifications to non-accretable yield		—			(57	)		~~(32~~	)		~~(475~~	)
Balance, end of period	$	108,~~699~~496		$	1613,~~787~~470		$	~~10,699~~		$	~~16,787~~

Page 24 of 77

The above table reflects the fair value adjustment on the loans acquired from mergers that will be amortized to loan interest income based on the effective yield method over the remaining life of the loans. These amounts do not include the fair value adjustments on the purchased credit impaired loans acquired from mergers.

Purchased Credit Impaired Loans

PCI loans are acquired loans with evidence of deterioration of credit quality since origination and it is probable at the acquisition date, that the Company will not be able to collect all contractually required amounts.

When the timing and/or amounts of expected cash flows on such loans are not reasonably estimable, no interest is accreted and the loan is reported as a non-accrual loan; otherwise, if the timing and amounts of expected cash flows for PCI loans are reasonably estimable, then interest is accreted and the loans are reported as accruing loans.

The non-accretable difference represents the difference between the undiscounted contractual cash flows and the undiscounted expected cash flows, and also reflects the estimated credit losses in the acquired loan portfolio at the acquisition date and can fluctuate due to changes in expected cash flows during the life of the PCI loans.

The following table reflects the outstanding balance and related carrying value of PCI loans as of the dates indicated (dollars in thousands):

	September 30, 2016				December 31, 2015
	March 31, 2017				December 31, 2016
	Unpaid PrincipalBalance		CarryingValue		Unpaid PrincipalBalance		CarryingValue
Commercial and Industrial	$	~~639~~594	$	~~314~~279	$	~~2,331~~622	$	~~477~~299
Commercial and Other Real Estate		21,~~007~~596		1,~~402~~224		21,~~250~~997		1,~~535~~413
Other		—		—		61		—
Total	$	2,190	$	1,503	$	2,619	$	1,712
Total	$	2,646	$	1,716	$	4,642	$	2,012

The following table reflects the activities in the accretable net discount for PCI loans for the period indicated (dollars in thousands):

	Three Months EndedSeptember 30,						Nine Months EndedSeptember 30,
	Three Months EndedMarch 31,
	2016			2015			2016			2015
	2017			2016
Balance, beginning of period	$	~~205~~161		$	~~286~~246		$	~~246~~		$	~~324~~
Accretion, included in interest income		(2223	)		(20	)		~~(63~~	)		~~(58~~	)
Reclassifications from non-accretable yield		—			—			—			—
Balance, end of period	$	~~183~~138		$	~~266~~226		$	~~183~~		$	~~266~~

~~Note~~Page 724 –of 72 ~~Qualified Affordable Housing Project Investments~~

The Company’s investment in Qualified Affordable Housing Projects that generate Low Income Housing Tax Credits (“LIHTC”) was $3.4 million at September 30, 2016 and $3.7 million at December 31, 2015. The funding liability for the LIHTC at September 30, 2016 was $647 thousand compared to $1.1 million at December 31, 2015. The amount of tax credits and other tax benefits recognized was $143 thousand and $436 thousand for the three and nine months ended September 30, 2016 and $146 thousand and $436 thousand for the three and nine months ended September 30, 2015, respectively. Further, the amount of amortization expense included in the provision for income taxes was $112 thousand and $336 thousand for the three and nine months ended September 30, 2016 and $114 thousand and $343 thousand for the three and nine months ended September 30, 2015, respectively. These investments and related tax credits are described more fully in Note 11 – Qualified Affordable Housing Project Investments in the Company’s Form 10-K for the year ended December 31, 2015.

Page 25 of 77

Note 7 – Qualified Affordable Housing Project Investments

The Company’s investment in Qualified Affordable Housing Projects that generate Low Income Housing Tax Credits (“LIHTC”) was $6.1 million at March 31, 2017 and $6.2 million at December 31, 2016. The funding liability for the LIHTC at March 31, 2017 and December 31, 2016 was $3.4 million. The amount of tax credits and other tax benefits recognized was $560 thousand and $573 thousand for the three months ended March 31, 2017 and March 31, 2016, respectively. Further, the amount of amortization expense included in the provision for income taxes was $439 thousand and $448 thousand for the three months ended March 31, 2017 and March 31, 2016, respectively.

Note 8 - Borrowings and Subordinated Debentures

Securities Sold Under Agreements to Repurchase

The Company enters into certain transactions, the legal form of which are sales of securities under agreements to repurchase (“Repos”) at a later date at a set price. Securities sold under agreements to repurchase generally mature within 1 day to 180 days from the issue date and are routinely renewed.

As discussed in Note 5 – Investment Securities, the Company has pledged certain investments as collateral for these agreements. Securities with a fair value of $5550 million and $4748 million were pledged to secure the Repos at ~~September~~March 3031, ~~2016~~2017 and December 31, ~~2015~~2016, respectively.

The tables below describe the terms and maturity of the Company’s securities sold under agreements to repurchase as of the dates indicated (dollars in thousands):

September 30, 2016

March 31, 2017

Date Issued

Amount

Interest Rate

OriginalTerm

Maturity Date

September 30, 2016

24,251

0.10% – 0.25%

3 days

October 3, 2016

March 31, 2017

11,939

0.20% – 0.25%

3 days

April 3, 2017

Total

2411,~~251~~939

0.24%

December 31, 2015

December 31, 2016

Date Issued

Amount

Interest Rate

OriginalTerm

Maturity Date

December 31, 2015

14,360

0.08% – 0.25%

4 days

January 4, 2016

December 31, 2016

18,816

0.2% – 0.25%

4 days

January 4, 2017

Total

1418,~~360~~816

0.1925%

FHLB Borrowings

The Company maintains a secured credit facility with the FHLB, allowing the Company to borrow on an overnight and term basis. The Company’s credit facility with the FHLB is $~~694~~749 million, which represents approximately 25% of the Bank’s total assets, as reported by the Bank in its ~~June~~December 3031, 2016 Federal Financial Institution Examination Council (“FFIEC”) Call Report.

As of ~~September~~March 3031, ~~2016~~2017, the Company had $~~953~~1 ~~million~~billion of loan collateral pledged with the FHLB which provides $~~633~~688 million in borrowing capacity. The Company also has $1716 million in investment securities pledged with the FHLB toserving ~~support~~as ~~this~~collateral ~~credit~~for ~~facility~~an additional $14 million in borrowing capacity. In addition, the Company must maintain an investment in the capital stock of the FHLB. Under the FHLB Act, the FHLB has a statutory lien on the FHLB capital stock that the Company owns and the FHLB capital stock serves as further collateral under the borrowing line.

The Company had no outstanding advances (borrowings) with the FHLB as of ~~September~~March 3031, ~~2016~~2017 or December 31, ~~2015~~2016.

Page 25 of 72

Subordinated Debentures

The following table summarizes the terms of each issuance of subordinated debentures outstanding as of the dates indicated (dollars in thousands):

September 30, 2016

March 31, 2017

Series

Amount(in thousands)

IssuanceDate

MaturityDate

Rate Index

CurrentRate

Next ResetDate

Trust I

6,186

12/10/04

03/15/35

3 month LIBOR + 2.05

23.9018

1206/15/1617

Trust II

3,093

12/23/05

03/15/36

3 month LIBOR + 1.75

2.6088

1206/15/1617

Trust III

3,093

06/30/06

09/18/36

3 month LIBOR + 1.85

2.7098

1206/15/1617

Subtotal

12,372

Unamortized fair value adjustment

(2,~~555~~476

)

Net

9,~~817~~896

December 31, 2016

Series

Amount(in thousands)

IssuanceDate

MaturityDate

Rate Index

CurrentRate

Next ResetDate

Trust I

6,186

12/10/04

03/15/35

3 month LIBOR + 2.05

3.01

03/15/17

Trust II

3,093

12/23/05

03/15/36

3 month LIBOR + 1.75

2.71

03/15/17

Trust III

3,093

06/30/06

09/18/36

3 month LIBOR + 1.85

2.81

03/15/17

Subtotal

12,372

Unamortized fair value adjustment

(2,516

)

Net

9,856

~~Page~~The 26Company had an aggregate outstanding contractual balance of $12.4 million in subordinated debentures at 77March 31, 2017. These subordinated debentures were acquired as part of the PC Bancorp merger and were issued to trusts originally established by PC Bancorp, which in turn issued trust preferred securities. These subordinated debentures were issued in three separate series. Each issuance had a maturity of 30 years from their approximate date of issue. All three subordinated debentures are variable rate instruments that reprice quarterly based on the three month London Interbank Offered Rate (“LIBOR”) plus a margin (see tables above). All three subordinated debentures had their interest rates reset in March 2017 at the current three month LIBOR plus their index, and will continue to reprice quarterly through their maturity date. All three subordinated debentures are currently callable at par with no prepayment penalties.

December 31, 2015
Series	Amount(in thousands)			IssuanceDate		MaturityDate		Rate Index			CurrentRate			Next ResetDate
Trust I	$	6,186			12/10/04		03/15/35		3 month LIBOR + 2.05	%		2.56	%		03/15/16
Trust II		3,093			12/23/05		03/15/36		3 month LIBOR + 1.75	%		2.26	%		03/15/16
Trust III		3,093			06/30/06		09/18/36		3 month LIBOR + 1.85	%		2.36	%		03/15/16
Subtotal		12,372
Unamortized fair value adjustment		(2,675	)
Net	$	9,697

The Company had an aggregate outstanding contractual balance of $12.4 million in subordinated debentures at September 30, 2016. These subordinated debentures were acquired as part of the PC Bancorp merger and were issued to trusts originally established by PC Bancorp, which in turn issued trust preferred securities. These subordinated debentures were issued in three separate series. Each issuance had a maturity of 30 years from their approximate date of issue. All three subordinated debentures are variable rate instruments that reprice quarterly based on the three month London Interbank Offered Rate (“LIBOR”) plus a margin (see tables above). All three subordinated debentures had their interest rates reset in September 2016 at the current three month LIBOR plus their index, and will continue to reprice quarterly through their maturity date. All three subordinated debentures are currently callable at par with no prepayment penalties.

Under Dodd Frank, trust preferred securities are excluded from Tier 1 capital, unless such securities were issued prior to May 19, 2010 by a bank holding company with less than $15 billion in assets. CU Bancorp assumed approximately $12.4 million of junior subordinated debt securities issued to various business trust subsidiaries of PC Bancorp and funded through the issuance of approximately $12.0 million of floating rate capital trust preferred securities. These junior subordinated debt securities were issued prior to May 19, 2010. Because CU Bancorp has less than $15 billion in assets, the trust preferred securities that CU Bancorp assumed from PC Bancorp continue to be included in Tier 1 capital, subject to a limit of 25% of Tier 1 capital elements.

Interest payments made by the Company on subordinated debentures are considered dividend payments under FRB regulations. Notification to the FRB is required prior to the Company declaring and paying a dividend during any period in which the Company’s quarterly net earnings are insufficient to fund the dividend amount. This notification requirement is included in regulatory guidance regarding safety and soundness surrounding capital and includes other non-financial measures such as asset quality, financial condition, capital adequacy, liquidity, future earnings projections, capital planning and credit concentrations. Should the FRB object to the dividend payments, the Company would be precluded from paying interest on the subordinated debentures after giving notice within 15 days before the payment date. Payments would not commence until approval is received or the Company no longer needs to provide notice under applicable guidance. The Company has the right, assuming no default has occurred, to defer payments of interest on the subordinated debentures at any time for a period not to exceed 20 consecutive quarters. The Company has not deferred any interest payments.

Page 26 of 72

Note 9 - Derivative Financial Instruments

The Company is exposed to certain risks relating to its ongoing business operations and utilizes interest rate swap agreements (“swaps”) as part of its asset/liability management strategy to help manage its interest rate risk position. The Company has two counterparty banks.

Derivative Financial Instruments Acquired from 1^st Enterprise Bank

At ~~September~~March 3031, ~~2016~~2017, the Company has ~~twelve~~eleven interest rate swap agreements with customers and ~~twelve~~eleven offsetting interest-rate swaps with a a counterparty bank. The swap agreements are not designated as hedging instruments. The purpose of entering into offsetting derivatives not designated as a hedging instrument is to provide the Company a variable-rate loan receivable and provide the customer the financial effects of a fixed-rate loan without creating significant interest rate risk in the Company’s earnings.

The structure of the swaps is as follows: The Company enters into a swap with its customers to allow them to convert variable rate loans to fixed rate loans, and at the same time, the Company enters into a swap with the counterparty bank to allow the Company to pass on the interest-rate risk associated with fixed rate loans. The net effect of the transaction allows the Company to receive interest on the loan from the customer at a variable rate based on LIBOR plus a spread. The changes in the fair value of the swaps primarily offset each other and therefore should not have a significant impact on the Company’s results of operations. The interest rate swap derivatives acquired from 1st Enterprise Bank are subject to a master netting arrangement with one counterparty bank. None of the derivative assets and liabilities are offset in the balance sheet.

~~Page~~The 27Company believes the risk of loss associated with counterparty borrowers relating to interest rate swaps is mitigated as the loans with 77swaps are underwritten to take into account potential additional exposure, although there can be no assurances in this regard since the performance of the swaps is subject to market and counterparty risk. At March 31, 2017 and December 31, 2016, the total notional amount of the Company’s swaps with the counterparty bank was $21 million and $24 million, respectively. The outstanding swaps have remaining maturities of up to 5 years as of March 31, 2017.

changes in the fair value of the swaps primarily offset each other and therefore should not have a significant impact on the Company’s results of operations. The interest rate swap derivatives acquired from 1st Enterprise Bank are subject to a master netting arrangement with one counterparty bank. None of the derivative assets and liabilities are offset in the balance sheet.

The Company believes the risk of loss associated with counterparty borrowers relating to interest rate swaps is mitigated as the loans with swaps are underwritten to take into account potential additional exposure, although there can be no assurances in this regard since the performance of the swaps is subject to market and counterparty risk. At September 30, 2016 and December 31, 2015, the total notional amount of the Company’s swaps with the counterparty bank was $27 million and $28 million, respectively.

The following tables present the fair values of the asset and liability of the Company’s derivative instruments acquired from 1^st Enterprise Bank as of the dates and periods indicated (dollars in thousands):

	September 30,2016		December 31,2015
	Asset Derivatives
Interest rate swap contracts fair value	$	1,484	$	881
	March 31,2017		December 31,2016
Balance sheet location		Accrued InterestReceivable and OtherAssets		Accrued InterestReceivable and OtherAssets
Interest rate swap contracts fair value	$	421	$	523
	September 30,2016		December 31,2015
Balance sheet location		Accrued Interest Receivable and Other Assets		Accrued Interest Receivable and Other Assets
Interest rate swap contracts fair value	$	1,484	$	881
	Liability Derivatives
	March 31,2017		December 31,2016
Interest rate swap contracts fair value	$	421	$	523
Balance sheet location		Accrued InterestPayable and OtherLiabilities		Accrued InterestPayable and OtherLiabilities

Page 27 of 72

Derivative Financial Instruments Acquired from PC Bancorp

At ~~September~~March 3031, ~~2016~~2017, the Company also has ~~sixteen~~fourteen pay-fixed, receive-variable, interest rate swaps with one counterparty bank that are designed to convert fixed rate loans into variable rate loans.

The following table presents the notional amount and the fair values of the asset and liability of the Company’s derivative instruments acquired from PC Bancorp as of the dates indicated (dollars in thousands):

	Fair Value Hedges
	Liability Derivatives
	September 30,2016		December 31,2015
	March 31,2017		December 31,2016
Total interest rate contracts notional amount	$	22,001	$	25,938
Fair Value Hedges
Total interest rate contracts notional amount	$	17,392	$	17,642
Derivatives not designated as hedging instruments:
Interest rate swap contracts fair value	$	~~156~~40	$	~~313~~95
Derivatives designated as hedging instruments:
Interest rate swap contracts fair value		~~940~~467		~~1,351~~589
Total interest rate contracts fair value	$	~~1,096~~507	$	~~1,664~~684
Balance sheet location		AccruedInterest Payableand OtherLiabilities		AccruedInterest Payableand OtherLiabilities

Page 28 of 77

The Effect of Derivative Instruments on the Consolidated Statements of Income

The following table summarizes the effect of derivative financial instruments on the consolidated statements of income for the periods indicated (dollars in thousands):

	Three Months EndedSeptember 30,						Nine Months EndedSeptember 30,
	Three Months EndedMarch 31,
	2016			2015			2016			2015
	2017			2016
Derivatives not designated as hedging instruments:
Interest rate swap contracts – loans
Increase in fair value of interest rate swap contracts	$	6655		$	4139		$	~~156~~		$	~~124~~
Payments on interest rate swap contracts on loans		(6054	)		(6661	)		~~(181~~	)		~~(198~~	)
Net decrease in other non-interest income		6			(25	)		(25	)		(74	)
Net increase (decrease) in other non-interest income		1			(22	)
Derivatives designated as hedging instruments:
Interest rate swap contracts – loans
Increase in fair value of interest rate swap contracts	$	~~249~~122		$	~~142~~23		$	~~412~~		$	~~583~~
Increase (decrease) in fair value of hedged loans		(6812	)		~~191~~212			~~215~~			~~279~~
Payment on interest rate swap contracts on loans		(~~202~~114	)		(~~275~~230	)		~~(657~~	)		~~(846~~	)
Net decrease in interest income on loans	$	(21	)	$	58		$	(30	)	$	16
Net increase (decrease) in interest income on loans	$	(4	)	$	5

Under all of the Company’s interest rate swap contracts, the Company is required to pledge and maintain collateral for the credit support under these agreements. At ~~September~~March 3031, ~~2016~~2017, the Company has pledged $21.37 million in investment securities, $2.7 million in certificates of deposit, for a total of $54.04 million, as collateral under the swap agreements.

Page 2928 of 7772

Note 10 – Balance Sheet Offsetting

Assets and liabilities relating to certain financial instruments, including derivatives, and securities sold under repurchase agreements (“Repos”), may be eligible for offset in the consolidated balance sheets as permitted under accounting guidance. The Company’s interest rate swap derivatives are subject to a master bilateral netting and offsetting arrangement under specific conditions as defined within a master agreement governing all interest rate swap contracts that the Company and the counterparty banks have entered into. In addition, the master agreement under which the interest rate contracts have been written require the pledging of assets by the Company based on certain risk thresholds. The Company has pledged a certificate of deposit and investment securities as collateral under the swap agreements. The pledged collateral under the swap agreements are reported in the Company’s consolidated balance sheets, unless the Company defaults under the master agreement. The Company currently does not net or offset the interest rate swap contracts in its consolidated balance sheets, as reflected within the table below.

The Company’s securities sold under repurchase agreements represent transactions the Company has entered into with several deposit customers. These transactions represent the sale of securities on an overnight or on a term basis to our deposit customers under an agreement to repurchase the securities from the customers the next business day or at maturity. There is an individual contract for each customer with only one transaction per customer. There is no master agreement that provides for the netting arrangement or the offsetting of these individual transactions or for the netting of collateral positions. The Company does not net or offset the Repos in its consolidated balance sheets as reflected within the table below.

The table below presents the Company’s financial instruments that may be eligible for offsetting which include securities sold under agreements to repurchase that have no enforceable master netting arrangement and derivative securities that could be offset in the consolidated financial statements due to an enforceable master netting arrangement (dollars in thousands):

GrossAmountsRecognizedin theConsolidatedBalanceSheets

GrossAmountsOffset in theConsolidatedBalanceSheets

Net Amountsof Assets /LiabilitiesPresentedin theConsolidatedBalanceSheets

Gross AmountsNot Offset in theConsolidated Balance Sheets

Net Amount(Collateralover liabilitybalancerequired tobe pledged)

FinancialInstruments

CollateralPledged

September 30, 2016

March 31, 2017

Financial Assets:

Interest rate swap contracts fair value (See Note 9 – Derivative Financial Instruments)

~~1,484~~421

—

~~1,484~~421

—

Total

~~1,484~~421

—

~~1,484~~421

—

Financial Liabilities:

Interest rate swap contracts fair value (See Note 9 – Derivative Financial Instruments)

~~2,580~~928

—

~~2,580~~928

54,~~041~~451

23,~~461~~523

Securities sold under agreements to repurchase (See Note 8 – Borrowings and Subordinated Debentures)

2411,~~251~~939

—

2411,~~251~~939

5549,~~250~~901

3037,~~999~~962

Total

2612,~~831~~867

—

2612,~~831~~867

6054,~~291~~352

3341,~~460~~485

Page 3029 of 7772

GrossAmountsRecognizedin theConsolidatedBalanceSheets

GrossAmountsOffset in theConsolidatedBalanceSheets

Net Amountsof Assets /LiabilitiesPresentedin theConsolidatedBalanceSheets

Gross AmountsNot Offset in theConsolidated Balance Sheets

Net Amount(Collateralover liabilitybalancerequired tobe pledged)

FinancialInstruments

CollateralPledged

December 31, 2015

December 31, 2016

Financial Assets:

Interest rate swap contracts fair value (See Note 9 – Derivative Financial Instruments)

~~881~~523

—

~~881~~523

—

Total

~~881~~523

—

~~881~~523

—

Financial Liabilities:

Interest rate swap contracts fair value (See Note 9 – Derivative Financial Instruments)

21,~~545~~207

—

21,~~545~~207

4,~~759~~555

23,~~214~~348

Securities sold under agreements to repurchase (See Note 8 – Borrowings and Subordinated Debentures)

1418,~~360~~816

—

1418,~~360~~816

4648,~~596~~204

3229,~~236~~388

Total

1620,~~905~~023

—

1620,~~905~~023

5152,~~355~~759

3432,~~450~~736

Note 11 - Stock Options and Restricted Stock

Equity Compensation Plans

The Company’s 2007 Equity and Incentive Plan (“Equity Plan”) was adopted by the Company in 2007 and replaced two prior equity compensation plans. The Equity Plan provides for significant flexibility in determining the types and terms of awards that may be made to participants. The Equity Plan was revised and approved by the Company’s shareholders in 2011 and adopted by the Company as part of the Bank holding company reorganization. This plan is designed to promote the interest of the Company in aiding the Company to attract and retain employees, officers and non-employee directors who are expected to contribute to the future success of the organization. ~~The Equity Plan is intended to provide participants with incentives to maximize their efforts on behalf of the Company through stock-based awards that provide an opportunity for stock ownership.~~ This plan provides the Company with a flexible equity incentive compensation program, which allows the Company to grant stock options, restricted stock, restricted stock award units and performance units. Certain options and share awards provide for accelerated vesting, if there is a change in control, as defined in the Equity Plan. ~~These plans are described more fully in Note 16 - Stock Options and Restricted Stock in the Company’s Form 10-K for the year ended December 31, 2015.~~

~~On July 1,~~At ~~2016, and effective January~~March 131, ~~2016,~~2017 ~~the~~future ~~Company~~compensation ~~early~~expense ~~adopted~~related ~~ASU 2016-09 which provides improvements~~ to ~~the~~unvested ~~accounting~~restricted ~~for~~stock ~~employee~~grants ~~share-based~~are ~~payments.~~reflected ~~See~~in ~~Note~~the 2.table ~~Recent~~below ~~Accounting~~(dollars ~~Pronouncements for additional information.~~in thousands):

At September 30, 2016, future compensation expense related to unvested restricted stock grants are reflected in the table below (dollars in thousands):


Future Restricted Stock Expense
Remainder of 2017	$	2,451
2018		1,596
2019		539
2020		171
Thereafter		22

Total	$	4,779

Future Restricted Stock Expense
Remainder of 2016	$	842
2017		1,910
2018		667
2019		185
Thereafter		36
Total	$	3,640

At March 31, 2017, the weighted-average period over which the total compensation cost related to unvested restricted stock grants not yet recognized is 2.75 years.

Page 3130 of 7772

At September 30, 2016, the weighted-average period over which the total compensation cost related to unvested restricted stock grants not yet recognized is 2.5 years. There was no future compensation expense related to unvested stock options as of September 30, 2016. All stock options outstanding at September 30, 2016 are vested.

Stock Options

The following table summarizes the share option activity under the plans as of the date and for the period indicated:

	Shares			WeightedAverageExercisePrice		WeightedAverageRemainingContractualTerm(in years)		AggregateIntrinsicValue(in thousands)
Outstanding stock options at December 31, 2015		557,471		$	10.57		0.8	$	8,248
Outstanding stock options at December 31, 2016		47,697		$	12.69		1.43	$	1,102
Granted		—
Exercised		(~~411~~27,~~964~~942	)
Forfeited		—
Expired		~~(4,500~~—	)
Outstanding stock options at September 30, 2016		141,007		$	14.87		0.8	$	1,121
Outstanding stock options at March 31, 2017		19,755		$	8.67		2.13	$	612
Exercisable options at September 30, 2016		141,007		$	14.87		0.8	$	1,121
Exercisable options at March 31, 2017		19,755		$	8.67		2.13	$	612
Unvested options at September 30, 2016		—		$	—		—	$	—
Unvested options at March 31, 2017		—

The total intrinsic value of options exercised during the three months ended ~~September~~March 3031, ~~2016~~2017 and ~~2015 was $127 thousand and $606 thousand, respectively, and during the nine months ended September 30,~~ 2016 ~~and 2015,~~ was $~~5.7~~642 ~~million~~thousand and $12.9 million, respectively.

Restricted Stock

The weighted-average grant-date fair value per share in the table below is calculated by taking the total aggregate cost of the restricted shares issued divided by the number of shares of restricted stock issued. The aggregate cost of the restricted stock was calculated by multiplying the number of shares granted at each of the grant dates by the closing stock price of the Company’s common stock on the date of the grant. The following table summarizes the restricted stock activity under the Equity Plan for the period indicated:

	Number of Shares			Weighted-AverageGrant-Date Fair Valueper Share
Restricted Stock:
Unvested at December 31, 2015		311,458		$	19.29
Unvested at December 31, 2016		282,082		$	21.98
Granted		~~132~~65,~~809~~615			2338.1204
Vested		(8730,~~031~~582	)		1720.5387
Cancelled and forfeited		(11,375	)		20.88
Forfeited		(5,084	)		21.59
Unvested at September 30, 2016		345,861		$	21.37
Unvested at March 31, 2017		312,031		$	25.79

Restricted stock compensation expense was $~~939~~773 thousand and $~~745~~834 thousand for the three month period ended ~~September~~March 3031, ~~2016~~2017 and ~~2015, respectively, and $2.7 million and $2.0 million for the nine month period ended September 30,~~ 2016 ~~and 2015~~, respectively. Restricted stock awards reflected in the table above are valued at the closing stock price on the date of grant and are expensed to stock based compensation expense over the period for which the related service is performed. In 2015, the Company granted 40 thousand shares of Restricted Stock Unit (“RSU”) under the Equity Plan to one of its executive officers. Such grant is reflected in the table above. The shares of common stock underlying the 40 thousand shares of RSU will not be issued until the RSUs vest and meet certain conditions as stipulated in the RSU agreement and are not included in the Company’s shares issued and outstanding as of ~~September~~March 3031, ~~2016~~2017. The RSUs are valued at the closing stock price on the date of grant and are expensed to stock based compensation expense over the period for which the related service is performed.

Page 3231 of 7772

Note 12 -– Shareholders’ Equity

Common Stock

Holders of shares of the Company’s common stock are entitled to one vote for each share held of record on all matters voted upon by shareholders. Furthermore, the holders of the Company’s common stock have no preemptive rights to subscribe for new issue securities, and shares of the Company’s common stock are not subject to redemption, conversion, or sinking fund provisions.

With respect to the payment of dividends, after the preferential dividends upon all other classes and series of stock entitled thereto have been paid or declared and set apart for payment, then the holders of the Company’s common stock are entitled to such dividends as may be declared by the Company’s board of directors out of funds legally available under the laws of the State of California.

Upon the Company’s liquidation or dissolution, the assets legally available for distribution to holders of the Company’s shares of common stock, after payment of all the Company’s obligations and payment of any liquidation preference of all other classes and series of stock entitled thereto, including the Company’s preferred stock, are distributable ratably among the holders of the Company’s common stock.

During ~~2016~~2017, the Company issued ~~411~~27,~~964~~942 shares of stock from the exercise of stock options ~~for~~ for a total value of $~~3.7~~435 ~~million~~thousand. The Company also issued ~~132~~65,~~809~~615 shares of restricted stock to the Company’s directors and employees, ~~cancelled 11~~5,~~375~~084 shares of unvested restricted stock were forfeited related to employee turnover and ~~cancelled 35~~13,~~349~~ 296 shares that had a value of $~~834~~524 thousand were repurchased when employees elected to pay their tax obligation via the repurchase of the stock by the Company. The Equity Plan, as amended, allows employees to make an election to have a portion of their restricted ~~stock~~ stock that became vested during the year repurchased by the Company to provide funds to pay the employee’s tax obligation related to the vesting of the stock.

Preferred Stock

The Company completed the merger with 1st Enterprise on November 30, 2014. As part of the Merger Agreement, 16,400 shares of preferred stock issued by 1st Enterprise as part of the Small Business Lending Fund (SBLF) program of the United States Department of the Treasury was converted into 16,400 CU Bancorp preferred shares with substantially identical terms. CU Bancorp Preferred Stock has a liquidation preference amount of $1 thousand per share, designated as the Company’s Non-Cumulative Perpetual Preferred Stock, Series A. The U.S. Department of the Treasury is the sole holder of all outstanding shares of CU Bancorp Preferred Stock. The CU Bancorp Preferred Stock had an estimated life of four years and the fair value was $16 million at the merger date, resulting in a net discount of $479 thousand. The life-to-date ~~and the year-to-date~~ accretion on the net discount as of ~~September~~ March 3031, ~~2016~~2017 is ~~are~~ $1.10 million ~~and $26 thousand, respectively~~. The net carrying value of the CU Bancorp Preferred Stock is $17 million ($16 million plus of $0.65 million net premium) as of ~~September~~March 3031, ~~2016~~2017.

Dividends on the Company’s Series A Preferred Stock are payable quarterly in arrears if authorized and declared by the Company’s board of directors out of legally available funds, on a non-cumulative basis, on the $1 thousand per share liquidation preference amount. Dividends are payable on January 1, April 1, July 1 and October 1 of each year. The current coupon dividend rate was adjusted to 9% on March 1, 2016 through perpetuity. However, the dividend yield through November 30, 2018 approximates 7% as a result of business combination accounting. Dividends on the Series A Preferred Stock are non-cumulative. There is no sinking fund with respect to dividends on the Series A Preferred Stock. So long as the Company’s Series A Preferred Stock remains outstanding, the Company may declare and pay dividends on the common stock only if full dividends on all outstanding shares of Series A Preferred Stock for the most recently completed dividend period have been or are contemporaneously declared and paid. In the event of any voluntary or involuntary liquidation, dissolution or winding up of the affairs of the Company, holders of the Series A Preferred Stock will be entitled to receive for each share of Series A Preferred Stock, out of the Company’s assets or proceeds available for distribution to the Company’s shareholders, subject to any rights of the Company’s creditors, before any distribution of assets or proceeds is made to or set aside for the holders of the common stock, payment of an amount equal to the sum of (i) the $1 thousand liquidation preference amount per share and (ii) the amount of any accrued and unpaid dividends on the Series A Preferred Stock. To the extent the assets or proceeds available for distribution to shareholders are not sufficient to fully pay the liquidation payments owing to the holders of the Series A Preferred Stock and the holders of any other class or series of the stock ranking equally with the Series A Preferred Stock, the holders of the Series A Preferred Stock and such the Company’s stock will share ratably in the distribution. Holders of the Series A Preferred Stock have no right to exchange or convert their shares into common stock or any other securities and do not have voting rights.

Page 3332 of 7772

Accumulated Other Comprehensive Income (Loss)

The following table presents the changes in accumulated other comprehensive ~~income (~~loss) by component for the periods indicated (dollars in thousands):

	Three Months Ended September 30,						ConsolidatedStatement of Income Line Item for Reclassified Items
	Three Months Ended March 31,						Consolidated Statement of Income Line Item for Reclassified Items
	2016			2015
	2017			2016
Beginning balance, net of tax	$	~~778~~(3,019	)	$	(48816	)
Net unrealized gain (loss) arising during the period		(540	)		536
Net unrealized gain arising during the period		426			1,328
Related tax effect		~~227~~(179	)		(~~225~~559	)
Reclassification of (gain) loss on investment securities available-for-sale to net income		(141	)		—		Gain on sale of securities, net
Reclassification of gain on investment securities available-for-sale to net income		(141	)		—		Gain on sale of securities, net
Related tax effect		59			—		Provision for income tax expense
Other Comprehensive Income (Loss)		(395	)		311
Other Comprehensive Income		165			769
Ending balance	$	~~383~~(2,854	)	$	~~263~~(47	)
	Nine Months Ended September 30,						ConsolidatedStatement of Income Line Item for Reclassified Items
	2016			2015
Beginning balance, net of tax	$	(816	)	$	190
Net unrealized gain (loss) arising during the period		2,210			121
Related tax effect		(929	)		(48	)
Reclassification of (gain) loss on investment securities available-for-sale to net income		(141	)		—		Gain on sale of securities, net
Related tax effect		59			—		Provision for income tax expense
Other Comprehensive Income (Loss)		1,199			73
Ending balance	$	383		$	263

Note 13 - Commitments and Contingencies

Litigation

From time to time the Company is a party to claims and legal proceedings arising in the ordinary course of business. The Company accrues for any probable loss contingencies that are estimable and discloses any material losses. As of ~~September~~March 3031, ~~2016~~2017, there were no legal proceedings against the Company the outcome of which are expected to have a material adverse impact on the Company’s financial position, results of operations or cash flows, as a whole.

Page 34 of 77

Financial Instruments with Off Balance Sheet Risk

~~See Note 21 – Commitments and Contingencies in the Company’s Form 10-K for the year ended December 31, 2015.~~ Financial instruments with off balance sheet risk include commitments to extend credit of $~~920~~986 million and $~~806~~1 ~~million~~billion at ~~September~~March 3031, ~~2016~~ 2017 and December 31, ~~2015~~2016, respectively. Included in the aforementioned commitments were standby letters of credit outstanding of $8785 million ~~and $73 million~~ at ~~September~~March 3031, ~~2016~~2017 and December 31, ~~2015~~2016. The Company also has a reserve for estimated losses on unfunded loan commitments of $~~778~~886 thousand ~~and $608 thousand~~ at ~~September~~March 3031, ~~2016~~ 2017 and December 31, ~~2015, respectively~~2016. These ~~reserves~~balances are included in other liabilities on the consolidated balance sheets.

Note 14 - Fair Value Information

Fair Value ~~Measurement~~ Hierarchy

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in the principal or most advantageous market for an asset or liability in an orderly transaction between market participants at the measurement date. ~~ASC~~The ~~Topic~~Company ~~825~~groups ~~requires~~its ~~disclosure of the fair value of~~ financial assets and financial liabilities, ~~including those financial assets and financial liabilities that are not~~ measured ~~and reported~~ at fair value onin athree ~~recurring~~levels, ~~basis~~based or on athe markets ~~non-recurring~~in ~~basis. The~~which ~~methodologies for estimating~~ the ~~fair value of financial~~ assets and ~~financial~~ liabilities ~~that~~ are ~~recorded at~~traded ~~fair~~and ~~value,~~the ~~and~~reliability ~~those~~of ~~that~~the ~~are~~assumptions ~~not~~used ~~recorded~~to atdetermine fair value,. These levels are ~~discussed~~as ~~below.~~follows:

In accordance with accounting guidance, the Company groups its financial assets and financial liabilities measured at fair value in three levels, based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value. These levels are as follows:

•

Level 1 – Observable unadjusted quoted market prices in active markets for identical assets and liabilities that the reporting entity has the ability to access at the measurement date.

• Level 2 – Significant other observable market based inputs, other than Level 1 prices such as quoted prices for similar assets or liabilities or unobservable inputs that are corroborated by market data. This includes quoted prices in markets that are not active, or other inputs that are observable or can be corroborated by observable market data, either directly or indirectly. This would include those financial instruments that are valued using models or other valuation methodologies where substantially all of the assumptions are observable in the marketplace, can be derived from observable market data or are supported by observable levels at which transactions are executed in the marketplace.

Page 33 of 72

quoted prices in markets that are not active, or other inputs that are observable or can be corroborated by observable market data, either directly or indirectly. This would include those financial instruments that are valued using models or other valuation methodologies where substantially all of the assumptions are observable in the marketplace, can be derived from observable market data or are supported by observable levels at which transactions are executed in the marketplace.

•

Level 3 – Significant unobservable inputs that reflect a reporting entity’s evaluation about the assumptions that market participants would use in pricing an asset or liability. Assets measured utilizing level 3 are for positions that are not traded in active markets or are subject to transfer restrictions, and or where valuations are adjusted to reflect illiquidity and or non-transferability. These assumptions are not corroborated by market data. This is comprised of financial instruments whose fair value is estimated based on internally developed models or methodologies utilizing significant inputs that are generally less readily observable from objective sources. Management uses a combination of reviews of the underlying financial statements, appraisals and management’s judgment regarding credit quality to determine the value of the financial asset or liability.

A financial instrument’s level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement. Management maximizes the use of observable inputs and attempts to minimize the use of unobservable inputs when determining fair value measurements. The following is a description of both the general and specific valuation methodologies used for certain instruments measured at fair value, as well as the general classification of these instruments pursuant to the valuation hierarchy.

~~Cash~~Securities available-for-sale and ~~due~~interest ~~from~~rate ~~banks:~~swaps ~~The~~are ~~carrying~~recorded ~~amount~~at isfair ~~assumed~~value toon bea ~~the~~recurring basis. Additionally, certain assets are not measured at fair value ~~because~~on an ongoing basis, but are subject to fair value adjustments in certain circumstances, for example, when there is evidence of impairment. These include assets that are measured at the ~~liquidity~~lower of ~~these~~cost ~~instruments~~or fair value, such as other real estate owned, SBA servicing asset and impaired loans that are collateral dependent.

~~Interest~~The ~~earning~~estimated ~~deposits~~fair invalue ~~other~~amounts ~~financial~~have ~~institutions:~~been determined ~~The~~by ~~carrying~~the ~~amount~~Company using available market information and appropriate valuation methodologies. However, considerable judgment is ~~assumed~~required to bedevelop the estimates of fair value. ~~given~~Accordingly, the ~~short-term~~estimates ~~nature~~presented below are not necessarily indicative of ~~these~~the ~~deposits~~amounts the Company could have realized in a current market exchange as of March 31, 2017. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts.

~~Investment~~Recurring ~~Securities~~Fair ~~Available-for-Sale~~Value ~~and Held-to-Maturity:~~Measurements The fair value of securities available-for-sale and held-to-maturity may be determined by obtaining quoted prices in active markets, when available, from nationally recognized securities exchanges (Level 1 financial assets). If quoted market prices are not available, the fair value is determined by

~~Page~~The 35valuation methodologies for estimating the fair value of financial assets and financial liabilities measured and reported at fair value on 77a recurring basis are discussed below.

Investment Securities Available-for-Sale: The fair value of investment securities available-for-sale are primarily based on price indications provided by nationally recognized, independent pricing sources utilized by the Company’s bond accounting system provider. The fair value of investment securities may be determined by obtaining quoted prices for identical assets in active markets at measurement date (Level 1 financial assets). The Company’s investments in U.S. Treasury Notes are Level 1 financial assets. For the Company’s investments in U.S. Agency and U.S. Sponsored Agency issued debt securities (callable and non-callable notes), mortgage backed securities guaranteed by those agencies, collateralized mortgage obligations issued by those agencies and corporate bond securities, the fair value may be determined by obtaining quoted market prices for similar assets in active markets at measurement date (Level 2 financial assets), or if quoted market prices are not available, the pricing sources may determine fair value by matrix pricing. Matrix pricing is a mathematical technique widely used in the securities industry to value debt securities without relying exclusively on quoted prices for the specific securities but rather by relying on the securities’ relationship to other benchmark quoted securities which are observable market inputs (Level 2 financial assets). The pricing sources may also determine the fair value of certain debt securities by using an option adjusted spread model with observable inputs such as the treasury yield curve and other interest rate assumptions. Other observable inputs utilized in these alternative valuation techniques or models when quoted prices are not available include benchmark yields, reported trades, broker/dealer quotes, issuer spreads, benchmark securities, bids, offers and reference data. In cases where significant credit valuation adjustments are incorporated into the estimation of fair value, reported amounts are classified as Level 3 financial assets.

Interest Rate Swap Contracts: The fair value of the interest rate swap contracts are provided by independent third party vendors that specialize in interest rate risk management and fair value analysis using a model that utilizes current market data to estimate cash flows of the interest rate swaps utilizing the future London Interbank Offered Rate (“LIBOR”) yield curve for accruing and the future Overnight Index Swap Rate (“OIS”) yield curve for discounting through the maturity date

Page 34 of 72

~~matrix~~of ~~pricing, which is a mathematical technique widely used in~~ the ~~securities~~interest ~~industry~~rate toswap ~~value~~contract. ~~debt~~The ~~securities~~future ~~without~~LIBOR ~~relying~~yield ~~exclusively~~curve onis ~~quoted prices for~~ the ~~specific~~primary ~~securities~~input ~~but rather~~in bythe ~~relying~~valuation onof the ~~securities’~~interest ~~relationship~~rate toswap ~~other benchmark quoted securities which are observable market inputs (Level 2 financial assets)~~contracts. ~~Debt~~Both ~~securities’~~the ~~pricing~~LIBOR isand ~~generally~~OIS ~~obtained~~yield ~~from~~curves ~~one~~are ~~of the matrix pricing models~~readily ~~developed~~observable ~~from~~in ~~one of~~ the ~~three national pricing agencies~~marketplace. InAccordingly, ~~cases~~the ~~where~~interest ~~significant~~rate ~~credit~~swap ~~valuation~~contracts ~~adjustments~~ are ~~incorporated~~classified ~~into~~within ~~the~~Level ~~estimation~~2 of the fair value, ~~reported amounts are classified as Level 3 financial assets~~hierarchy.

~~Securities~~The ~~classified~~following astable ~~available-for-sale~~presents ~~are~~the ~~accounted~~financial ~~for~~assets ~~at their current fair value rather than amortized historical cost. Unrealized gains or losses are excluded from net income~~ and ~~reported~~financial asliabilities anmeasured ~~amount~~at ~~net~~fair ofvalue ~~taxes~~on as a ~~separate~~recurring ~~component~~basis ~~of accumulated other comprehensive income included in shareholders’ equity. Securities classified~~ as ~~held-to-maturity~~of ~~are~~the ~~accounted for at their~~dates ~~amortized~~indicated, ~~historical~~segregated ~~cost.~~by Asthe level of ~~each~~the ~~reporting~~valuation ~~date,~~inputs ~~both~~within the ~~available-for-sale~~fair ~~and~~value ~~held-to-maturity~~hierarchy ~~securities~~utilized ~~are~~to ~~evaluated~~measure ~~for~~fair ~~OTTI~~value on(dollars anin ~~individual~~thousands): ~~basis.~~

The Company considers the inputs utilized to fair value the available-for-sale and held-to-maturity investment securities to be observable market inputs and classified these financial assets within the Level 2 fair value hierarchy. Management bases the fair value for these investments primarily on third party price indications provided by independent pricing sources utilized by the Company’s bond accounting system to obtain market pricing on its individual securities. Vining Sparks, who provides the Company with its bond accounting system, utilizes pricing from three independent third party pricing sources for pricing of securities. These third party pricing sources utilize quoted market prices, or when quoted market prices are not available, the fair values are estimated using nationally recognized third-party vendor pricing models, of which the inputs are observable. However, the fair value reported may not be indicative of the amounts that could be realized in an actual market exchange.


	Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Financial Assets – March 31, 2017
Investment securities available-for-sale:
U.S. Govt Agency and Sponsored Agency – Note Securities	$	9,956	$	—	$	9,956		—
U.S. Govt Agency – SBA Securities		121,314		—		121,314		—
U.S. Govt Agency – GNMA Mortgage-Backed Securities		20,895		—		20,895		—
U.S. Govt Sponsored Agency – CMO & Mortgage-Backed Securities		246,517		—		246,517		—
Asset Backed Securities		6,775		—		6,775		—
U.S. Treasury Notes		63,942		63,942		—		—
Interest Rate Swap Contracts		421		—		421		—

	$	469,820	$	63,942	$	405,878	$	—

Financial Liabilities – March 31, 2017
Interest Rate Swap Contracts	$	928	$	—	$	928	$	—
Financial Assets – December 31, 2016
Investment securities available-for-sale:
U.S. Govt Agency and Sponsored Agency – Note Securities	$	9,969	$	—	$	9,969		—
U.S. Govt Agency – SBA Securities		122,850		—		122,850		—
U.S. Govt Agency – GNMA Mortgage-Backed Securities		22,370		—		22,370		—
U.S. Govt Sponsored Agency – CMO & Mortgage-Backed Securities		238,900		—		238,900		—
Asset Backed Securities		6,896		—		6,896		—
U.S. Treasury Notes		68,965		68,965		—		—
Interest Rate Swap Contracts		523		—		523		—

	$	470,473	$	68,965	$	401,508	$	—

Financial Liabilities – December 31, 2016
Interest Rate Swap Contracts	$	1,207	$	—	$	1,207	$	—

~~The~~At ~~fair~~March 31, ~~value~~2017 ofand December 31, 2016, the Company’s ~~U.S. Agency~~had ~~and~~no ~~available-for-sale~~financial ~~and~~assets ~~held-to-maturity~~or ~~investment~~liabilities ~~securities~~that were ~~are~~measured ~~calculated~~at ~~using~~fair anvalue ~~option~~on ~~adjusted~~a ~~spread~~recurring ~~model~~basis ~~from~~that ~~one~~required of the ~~nationally~~use ~~recognized~~of ~~third-party~~significant ~~pricing~~unobservable ~~models~~inputs (Level 3). ~~Depending~~Furthermore, onthere ~~the~~were ~~assumptions~~no ~~used~~transfers ~~and~~of ~~the~~assets ~~treasury~~either ~~yield curve~~between Level 1 and ~~other~~Level ~~interest~~2 ~~rate~~nor ~~assumptions,~~in or out of Level 3 of the fair value hierarchy ~~could~~for ~~vary~~assets ~~significantly~~measured inon a recurring basis for the ~~near~~periods ~~term~~ended March 31, 2017 or December 31, 2016.

~~Loans:~~Page ~~The~~35 fair value for loans is estimated by discounting the expected future cash flows using current interest rates at which similar loans would be made to borrowers with similar credit ratings for the same remaining maturities. Loans are segregated by type such as commercial and industrial, commercial real estate, construction and other loans with similar credit characteristics and are further segmented into fixed and variable interest rate loan categories. Expected future cash flows are projected based on contractual cash flows, adjusted for estimated credit losses and estimated prepayments. The inputs utilized in determining the fair value of ~~loans are unobservable and accordingly, these financial assets are classified within Level 3 of the fair value~~ ~~hierarchy.~~72

Impaired Loans: The fair value of impaired loans is determined based on an evaluation at the time the loan is originally identified as impaired, and periodically thereafter, at the lower of cost or fair value. Fair value on impaired loans is measured based on the value of the collateral securing these loans, less costs to sell, if the loan is collateral dependent, or based on the cash flows for non-collateral dependent loans discounted at the loan’s original effective rate. Collateral dependent loans may be secured by either real estate and/or business assets including equipment, inventory and/or accounts receivable and is determined based on appraisals performed by qualified licensed appraisers hired by the Company. Appraised and reported values may be discounted based on management’s historical knowledge, changes in market conditions from the time of valuation, and/or management’s expertise and knowledge of the client and client’s business. Such discounts are typically significant and unobservable. For unsecured loans, the estimated future cash flows of the business or borrower, discounted at the loan’s original effective rate, are used in determining the fair value. Impaired loans are reviewed and evaluated on at least a quarterly basis for additional impairment and adjusted accordingly, based on the same factors identified above. The inputs utilized in determining the fair value of impaired loans are unobservable and accordingly, these financial assets are classified within Level 3 of the fair value hierarchy.

Interest Rate Swap Contracts:

The fair value of the interest rate swap contracts are provided by independent third party vendors that specialize in interest rate risk management and fair value analysis using a model that utilizes current market data to estimate cash flows of the interest rate swaps utilizing the future London Interbank Offered Rate (“LIBOR”) yield curve for accruing and the future Overnight Index Swap Rate (“OIS”) yield curve for discounting through the maturity date of the interest rate swap contract. The future LIBOR yield curve is the primary input in the valuation of the interest rate swap contracts. Both the LIBOR and OIS yield curves are readily observable in the marketplace. Accordingly, the interest rate swap contracts are classified within Level 2 of the fair value hierarchy.

Page 36 of 77

Nonrecurring Fair Value Measurements

The valuation methodologies for estimating the fair value of certain assets measured and reported at fair value on a nonrecurring basis are discussed below.

Other Real Estate Owned: The fair value of other real estate owned is generally based on real estate appraisals (unless more current market information is available) less estimated costs to sell. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. Adjustments are routinely made in the appraisal process by the appraisers to adjust for differences between the comparable sales and income data available. Such adjustments are typically significant. The inputs utilized in determining the fair value of other real estate owned are unobservable and accordingly, these financial assets are classified within Level 3 of the fair value hierarchy.

SBA Servicing Asset: AThe SBA servicing asset is ~~recorded~~amortized atover ~~fair~~the ~~value~~estimated ~~upon~~life of the ~~sale~~loans ofbased on an ~~SBA~~effective ~~loan~~yield approach. ~~The~~In ~~fair~~addition, ~~value~~the ofCompany’s ~~this~~servicing asset is ~~based~~evaluated ~~on the~~regularly ~~estimated~~for ~~discounted~~impairment by discounting the estimated future cash flows ~~utilizing~~using market -based discount rates and ~~estimated~~ prepayment speeds. The discount rate was based on the current U.S. Treasury yield curve, plus a spread for marketplace risk associated with these assets. Prepayment speeds were ~~selected~~determined based on the historical prepayments of ~~similar~~the Company’s SBA ~~pools~~loans. The prepayment speeds determine the timing of the cash flows. The SBA servicing asset is amortized over the contractual life of the loans based on an effective yield approach. In addition, the Company’s servicing asset is evaluated regularly for impairment by discounting the estimated future cash flows using market-based discount rates and prepayment speeds. If the calculated present value of the servicing asset declines below the Company’s current carrying value, the servicing asset is written down to its present value. Based on the Company’s methodology in its valuation of the SBA servicing asset, the current carrying value is estimated to approximate the fair value. The inputs utilized in determining the fair value of SBA servicing asset are unobservable and accordingly, these financial assets are classified within Level 3 of the fair value hierarchy.

Impaired Loans: The fair value of impaired loans is determined based on an evaluation at the time the loan is originally identified as impaired, and periodically thereafter, at the lower of cost or fair value. Fair value on impaired loans is measured based on the value of the collateral securing these loans, less costs to sell, if the loan is collateral dependent, or based on the discounted cash flows for non-collateral dependent loans. Collateral on collateral dependent loans may be real estate and/or business assets including equipment, inventory and/or accounts receivable and is determined based on appraisals performed by qualified licensed appraisers hired by the Company. Appraised and reported values may be discounted based on management’s historical knowledge, changes in market conditions from the time of valuation, and/or management’s expertise and knowledge of the client and client’s business. Such discounts are typically significant and unobservable. For unsecured loans, the estimated future discounted cash flows of the business or borrower, are used in evaluating the fair value. Impaired loans are reviewed and evaluated on at least a quarterly basis for additional impairment and adjusted accordingly, based on the same factors identified above. The inputs utilized in determining the fair value of impaired loans are unobservable and accordingly, these financial assets are classified within Level 3 of the fair value hierarchy.

Page 36 of 72

The following table presents the balances of assets measured at fair value on a non-recurring basis by level within the fair value hierarchy as of the dates indicated (dollars in thousands):


	Net Carrying Amount		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Financial Assets – March 31, 2017
SBA Servicing Asset	$	876	$	—	$	—	$	876

Total	$	876	$	—	$	—	$	876


	Net Carrying Amount		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Financial Assets – December 31, 2016
Collateral dependent impaired loans with specific valuation allowance and/or partial charge-offs (non-purchased credit impaired loans)	$	73	$	—	$	—	$	73
SBA Servicing Asset		940		—		—		940

Total	$	1,013	$	—	$	—	$	1,013

There were no transfers of assets either between Level 1 and Level 2 nor in or out of Level 3 of the fair value hierarchy for assets measured on a non-recurring basis for the periods ended March 31, 2017 or December 31, 2016.

The following table presents the significant unobservable inputs used in the fair value measurements for Level 3 assets measured at fair value on a non-recurring basis as of the dates indicated (dollars in thousands):


	Fair Value		Valuation Methodology	Unobservable Valuation Inputs	Unobservable Valuation Input Values
Financial Assets – March 31, 2017
				Discount Rates	13%
SBA Servicing Asset	$	876	Discounted Cash Flow	Estimated Average Remaining Life of SBA Portfolio	39 months

Total	$	876


	Fair Value		Valuation Methodology	Unobservable Valuation Inputs	Unobservable Valuation Input Values
Financial Assets – December 31, 2016
Collateral dependent impaired loans with specific valuation allowance and/or partial charge-off	$	73	Credit loss estimate of aged accounts receivable collateral	Credit loss factors on aging of accounts receivable collateral	20%
				Discount Rates	13%
SBA Servicing Asset		940	Discounted Cash Flow	Estimated Average Remaining Life of SBA Portfolio	39 months

Total	$	1,013

Page 37 of 72

Fair Value of Financial Instruments

The following are the valuation methodologies utilized for estimating the fair value of certain financial instruments presented in the tables below.

Cash and due from banks: The carrying amount is assumed to be the fair value because of the liquidity of these instruments.

Interest earning deposits in other financial institutions: The carrying amount is assumed to be the fair value given the short-term nature of these deposits.

Investment Securities Held-to-Maturity: The fair value of investment securities held-to-maturity are based on price indications provided by nationally recognized, independent pricing sources utilized by the Company’s bond accounting system provider. The Company’s held-to-maturity portfolio consists of municipal securities only. The fair value of the municipal securities are calculated using proprietary pricing models or matrices with inputs such as market information (MSRB reported trade data, bids, offers, new issue data) and benchmark curves (Treasury, Swap, Libor and AAA municipal yield curve). These inputs are observable and as such, municipal securities are classified within the Level 2 fair value hierarchy.

Loans: The fair value for loans is estimated by discounting the expected future cash flows using current interest rates at which similar loans would be made to borrowers with similar credit ratings for the same remaining maturities, adjusted for the allowance for loan loss. Loans are segregated by type such as commercial and industrial, commercial real estate, construction and other loans with similar credit characteristics and are further segmented into fixed and variable interest rate loan categories. Expected future cash flows are projected based on contractual cash flows, adjusted for estimated prepayments. The inputs utilized in determining the fair value of loans are unobservable and accordingly, these financial assets are classified within Level 3 of the fair value hierarchy.

Bank owned life insurance: The carrying amount of bank owned life insurance represents the total cash surrender value of each policy, which approximates fair value.

FHLB Stock: FHLB stock has no trading market, and is required as part of membership and is redeemable at par. FHLB is recorded at cost, which approximates fair value.

Non-Maturing Deposits: The fair values for non-maturing deposits (deposits with no contractual termination date), which include non-interest bearing demand deposits, interest bearing transaction accounts, money market deposits and savings accounts are equal to their carrying amounts, which represent the amounts payable on demand. Because the carrying value and fair value are by definition identical, and accordingly non-maturity deposits are classified within Level 1 of the fair value hierarchy, these balances are not listed in the following tables.

Maturing Deposits: The fair values of fixed maturity certificates of deposit (time deposits) are estimated using a discounted cash flow calculation that applies current market deposit interest rates to the Company’s current certificates of deposit interest rates for similar term certificates. The inputs utilized in determining the fair value of maturing deposits are observable and accordingly, these financial liabilities are classified within Level 2 of the fair value hierarchy.

Securities Sold under Agreements to Repurchase (“Repos”): The fair value of securities sold under agreements to repurchase is estimated based on the discounted value of future cash flows expected to be paid on the deposits. The carrying amounts of Repos with maturities of 90 days or less approximate their fair values. The fair value of Repos with maturities greater than 90 days is estimated based on the discounted value of the contractual future cash flows. The inputs utilized in determining the fair value of securities sold under agreements to repurchase are observable and accordingly, these financial liabilities are classified within Level 2 of the fair value hierarchy.

Subordinated Debentures: The fair value of the three variable rate subordinated debentures (“debentures”) is estimated using a discounted cash flow calculation that applies the three month LIBOR plus the margin index at ~~September~~March 3031, ~~2016~~2017, to the cash flows from the debentures, based on the actual interest rate the debentures were accruing at ~~September~~March 3031, ~~2016~~2017. ~~Because~~ Because all three of the debentures re-priced on ~~September~~March 15, ~~2016~~2017 based on the current three month LIBOR index rate plus the index margin at that date, and with relatively little to no change in the three month LIBOR index rate from the re-pricing date through ~~September~~March 3031, ~~2016~~2017, the current face value of the debentures and their calculated fair value are approximately equal. The inputs utilized in determining the fair value of subordinated debentures are observable and accordingly, these financial liabilities are classified within Level 2 of the fair value hierarchy.

~~Fair~~Page ~~Value~~38 of ~~Commitments:~~72 Loan commitments that are priced on an index plus a margin to a market rate of interest are reported at the carrying value of the loan commitment. Loan commitments on which the committed fixed interest rate is less than the current market rate were insignificant at September 30, 2016 and December 31, 2015.

Page 37 of 77

~~Assets~~Fair ~~and~~Value ~~Liabilities~~of ~~Measured~~Commitments: atLoan ~~Fair~~commitments ~~Value~~that are priced on an index plus a ~~Recurring~~margin to ~~Basis~~a market rate of interest are reported at the carrying value of the loan commitment. Loan commitments on which the committed fixed interest rate is less than the current market rate were insignificant at March 31, 2017 and December 31, 2016.

The ~~following~~ table ~~summarizes~~below presents the ~~financial~~carrying ~~assets~~amounts and ~~financial liabilities measured at~~ fair ~~value~~values ~~on a recurring basis as~~ of ~~the~~certain ~~dates indicated,~~financial ~~segregated~~instruments bybased ~~the~~on ~~level~~their ~~of the valuation inputs within the~~ fair value hierarchy indicated ~~utilized to measure fair value~~ (dollars in thousands):

	FairValue		Quoted Pricesin ActiveMarkets forIdentical Assets(Level 1)		SignificantOtherObservableInputs(Level 2)		SignificantUnobservableInputs(Level 3)
					Fair Value Measurements
Financial Assets – September 30, 2016
	CarryingAmount		Estimated FairValue		Quoted Pricesin ActiveMarkets forIdentical Assets(Level 1)		SignificantOtherObservableInputs(Level 2)		SignificantUnobservableInputs(Level 3)
Investment securities available-for-sale	$	375,094	$	—	$	375,094	$	—
March 31, 2017
Interest Rate Swap Contracts		1,484		—		1,484		—
Financial Assets
Financial Liabilities – September 30, 2016
Cash and due from banks	$	51,168	$	51,168	$	51,168	$	—	$	—
Interest Rate Swap Contracts	$	2,580	$	—	$	2,580	$	—
Interest earning deposits in other financial institutions		313,609		313,609		313,609		—		—
Financial Assets – December 31, 2015
Investment securities held-to-maturity		40,945		41,159		—		41,159		—
Investment securities available-for-sale	$	315,785	$	—	$	315,785	$	—
Loans, net		2,026,533		2,044,209		—		—		2,044,209
Interest Rate Swap Contracts		881		—		881		—
Bank owned life insurance		63,595		63,595		—		—		63,595
Financial Liabilities – December 31, 2015
FHLB Stock		9,182		9,182		—		—		9,182
Interest Rate Swap Contracts	$	2,545	$	—	$	2,545	$	—
Financial Liabilities
Certificates of deposit		30,623		30,625		—		30,625		—
Securities sold under agreements to repurchase		11,939		11,939		—		11,939		—
Subordinated debentures		9,896		12,372		—		12,372		—
December 31, 2016
Financial Assets
Cash and due from banks	$	41,281	$	41,281	$	41,281	$	—	$	—
Interest earning deposits in other financial institutions		167,789		167,789		167,789		—		—
Investment securities held-to-maturity		42,027		41,937		—		41,937		—
Loans, net		2,030,852		2,054,701		—		—		2,054,701
Bank owned life insurance		51,216		51,216		—		—		51,216
FHLB Stock		9,182		9,182		—		—		9,182
Financial Liabilities
Certificates of deposit		29,480		29,480		—		29,480		—
Securities sold under agreements to repurchase		18,816		18,816		—		18,816		—
Subordinated debentures		9,856		12,372		—		12,372		—

AtNote ~~September 30,~~15 ~~2016~~- ~~and~~Subsequent atEvents December 31, 2015 the Company had no financial assets or liabilities that were measured at fair value on a recurring basis that required the use of significant unobservable inputs (Level 3). Additionally, there were no transfers of assets either between Level 1 and Level 2 nor in or out of Level 3 of the fair value hierarchy for assets measured on a recurring basis for the period ended September 30, 2016.

~~Page~~On 38April 5, 2017, the Company entered into an Agreement and Plan of Merger (the “Merger Agreement”) with PacWest Bancorp 77(“PacWest”), wherein CU Bancorp will merge with and into PacWest (the “Merger”), with PacWest surviving the Merger. Immediately following the Merger, CU Bancorp’s wholly-owned bank subsidiary, California United Bank, will merge with and into PacWest’s wholly-owned bank subsidiary, Pacific Western Bank (the “Bank Merger”). Pacific Western Bank will be the surviving bank in the Bank Merger. The Merger Agreement was approved and adopted by the Board of Directors of each of CU Bancorp and PacWest.

Management of the Company has evaluated events that have occurred subsequent to March 31, 2017 and have concluded there are no subsequent events that would require recognition in the accompanying consolidated financial statements.

Page 39 of 72

Assets Measured at Fair Value on a Non-recurring Basis

The Company may be required periodically, to measure certain financial assets and financial liabilities at fair value on a nonrecurring basis, that is, the instruments are not measured at fair value on an ongoing basis, but are subject to fair value adjustments in certain circumstances (for example, when there is evidence of impairment). These include assets that are measured at the lower of cost or fair value that were recognized at fair value below cost at the end of or during the period.

There were no transfers of assets either between Level 1 and Level 2 nor in or out of Level 3 of the fair value hierarchy for assets measured on a non-recurring basis during the three or nine months ended September 30, 2016.

The following table presents the balances of assets and liabilities measured at fair value on a non-recurring basis by caption and by level within the fair value hierarchy as of the dates indicated (dollars in thousands):

	FairValue		Quoted Pricesin ActiveMarkets forIdentical Assets(Level 1)		SignificantOtherObservableInputs(Level 2)		SignificantUnobservableInputs(Level 3)
Financial Assets – September 30, 2016
Collateral dependent impaired loans with specific valuation allowance and/or partial charge-offs (non-purchased credit impaired loans)	$	242	$	—	$	—	$	242
Other real estate owned		—		—		—		—
Total	$	242	$	—	$	—	$	242
Financial Assets – December 31, 2015
Collateral dependent impaired loans with specific valuation allowance and/or partial charge-offs (non-purchased credit impaired loans)	$	—	$	—	$	—	$	—
Other real estate owned		325		—		—		325
Total	$	325	$	—	$	—	$	325

The following table presents the significant unobservable inputs used in the fair value measurements for Level 3 assets and liabilities measured at fair value on a recurring or non-recurring basis as of the dates indicated (dollars in thousands):

	FairValue		Valuation Methodology	Valuation Model and/orFactors	UnobservableInput Values
Financial Assets – September 30, 2016
Collateral dependent impaired loans with specific valuation allowance and/or partial charge-off	$	58	Balance represents 100% guaranty by the SBA	Not Applicable	Not Applicable
		184	Assignment of expected proceeds from collateral sale	Not Applicable	Not Applicable
Total	$	242
Financial Assets – December 31, 2015
Collateral dependent impaired loans with specific valuation allowance and/or partial charge-off	$	—	—	—	—
Other real estate owned	$	325	Broker opinion of value	Sales approach Estimated selling costs	6%
Total	$	325

Page 39 of 77

Fair Value of Financial Assets and Liabilities

ASC Topic 825, “Financial Instruments,” requires disclosure of the estimated fair value of certain financial instruments and the methods and significant assumptions used to estimate such fair values. Additionally, certain financial instruments and all nonfinancial instruments are excluded from the applicable disclosure requirements. The estimated fair value amounts have been determined by the Company using available market information and appropriate valuation methodologies. However, considerable judgment is required to develop the estimates of fair value. Accordingly, the estimates presented below are not necessarily indicative of the amounts the Company could have realized in a current market exchange as of September 30, 2016 and December 31, 2015. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts. The description of the valuation methodologies used for financial assets and liabilities recorded at fair value and for those not recorded at fair value has been described above.

The table below presents the carrying values and estimated fair values of certain financial instruments based on their fair value hierarchy indicated (dollars in thousands):

					Fair Value Measurements
	CarryingAmount		Estimated FairValue		Quoted Pricesin ActiveMarkets forIdentical Assets(Level 1)		SignificantOtherObservableInputs(Level 2)		SignificantUnobservableInputs(Level 3)
September 30, 2016
Financial Assets
Cash and due from banks	$	47,701	$	47,701	$	47,701	$	—	$	—
Interest earning deposits in other financial institutions		244,205		244,205		244,205		—		—
Investment securities available-for-sale		375,094		375,094		—		375,094		—
Investment securities held-to-maturity		40,073		40,691		—		40,691		—
Loans, net		1,956,570		1,993,667		—		—		1,993,667
Interest rate swap contracts		1,484		1,484		—		1,484		—
Financial Liabilities
Certificates of deposit		35,033		35,033		—		35,033		—
Securities sold under agreements to repurchase		24,251		24,251		—		24,251		—
Subordinated debentures		9,817		12,372		—		12,372		—
Interest rate swap contracts		2,580		2,580		—		2,580		—
December 31, 2015
Financial Assets
Cash and due from banks	$	50,960	$	50,960	$	50,960	$	—	$	—
Interest earning deposits in other financial institutions		171,103		171,103		171,103		—		—
Investment securities available-for-sale		315,785		315,785		—		315,785		—
Investment securities held-to-maturity		42,036		42,339		—		42,339		—
Loans, net		1,817,481		1,851,220		—		—		1,851,220
Interest rate swap contracts		881		881		—		881		—
Financial Liabilities										—
Certificates of deposit		58,502		58,502		—		58,502		—
Securities sold under agreements to repurchase		14,360		14,360		—		14,360		—
Subordinated debentures		9,697		12,372		—		12,372		—
Interest rate swap contracts		2,545		2,545		—		2,545		—

Page 40 of 77

Note 15 – Subsequent Events

We have evaluated events that have occurred subsequent to September 30, 2016 and have concluded there are no subsequent events that would require disclosure or recognition in the accompanying interim consolidated financial statements.

Page 41 of 77

ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

See “Cautionary Statement for Purposes of the “Safe Harbor” Provisions of the Private Securities Litigation Reform Act of 1995” below relating to “forward-looking” statements included in this report.

The following is management’s discussion and analysis of the major factors that influenced the results of the operations and financial condition of CU Bancorp, (“the Company”) for the current period. This analysis should be read in conjunction ~~with~~ with the audited financial statements and accompanying notes included in the Company’s ~~2015~~2016 Annual Report on Form 10-K and with the unaudited financial statements and notes as set forth in this report.

CAUTIONARY STATEMENT FOR PURPOSES OF THE “SAFE HARBOR” PROVISIONS OF THE

PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995

~~Statements~~In ~~contained~~addition into the historical information, this Quarterly Report on Form 10-Q (this “Report”) ~~that~~includes are not historical facts or that discuss our expectations, beliefs or views regarding our future operations or future financial performance, or financial or other trends in our business or in the markets in which we operate, constitute “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). We ~~have~~Those ~~made~~sections of the Securities Act and the Exchange Act provide a “safe harbor” for forward-looking statements into ~~this document~~encourage companies to provide prospective information about ~~the~~their ~~Company,~~financial ~~for~~performance ~~which~~so ~~the~~long as ~~Company~~they ~~claims~~provide ~~the~~meaningful, ~~protection~~cautionary ofstatements ~~the~~identifying ~~safe~~important ~~harbor~~factors ~~provisions~~that ~~contained~~could incause ~~the~~actual ~~Private~~results ~~Securities~~to ~~Litigation~~differ ~~Reform~~significantly ~~Act~~from ofprojected ~~1995~~results.

The Company’s forward-looking statements include descriptions of management’s plans or objectives for future operations, products or services, and forecasts of the Company’s revenues, earnings or other measures of economic performance. These forward-looking statements involve risks and uncertainties and are based on the beliefs and assumptions of management and on the information available to management at the time that this report was prepared and can be identified by the fact that they do not relate strictly to historical or current facts. They often include the words “believe,” “expect,” “intend,” “estimate,” “approximate,” “anticipate,” “project,” “assume,” “~~believe,” “~~plan,” “predict,” “likely,” or variations of these words as well as words of similar meaning, or future or conditional verbs such as “will,” “would,” “should,” “could,” or “may.”

~~Although~~We wemake ~~believe~~forward-looking ~~that~~statements ~~management’s~~as ~~assumptions~~set ~~are~~forth ~~reasonable,~~above ~~they~~and ~~are~~regarding ~~not~~projected ~~guarantees~~sources of ~~future~~funds, ~~performance~~the ~~and~~pending ~~some~~merger ~~will~~between ~~inevitably~~the Company and ~~prove~~PacWest toBancorp, bedividends, ~~incorrect.~~adequacy Asof aour ~~result~~allowance for loan loss and provision for loan loss, our ~~actual~~loan ~~future~~portfolio ~~results~~and ~~can~~subsequent becharge-offs. ~~expected~~Forward-looking tostatements ~~differ~~involve ~~from~~substantial ~~management’s~~risks ~~expectations~~and uncertainties, ~~and~~many ~~those~~of ~~differences~~which ~~may~~are bedifficult ~~material~~to predict and ~~adverse~~are togenerally ~~the~~beyond ~~Company’s~~our ~~business,~~control. There are many factors that could cause actual results ofto ~~operations~~differ materially from those contemplated by these forward-looking statements. Risks and uncertainties that could cause our financial performance ~~condition.~~to ~~Accordingly,~~differ ~~investors~~materially ~~should~~from ~~use~~our ~~caution~~goals, inplans, ~~relying~~expectations onand projections expressed in forward-looking statements toinclude ~~anticipate~~those ~~future~~set ~~results~~forth orin ~~trends.~~our filings with the SEC, Item 1A of our Annual Report on Form 10-K, and the following:

~~We make~~• ~~forward-looking~~Current ~~statements as set forth above~~ and ~~regarding~~future ~~projected~~economic ~~sources of funds, availability of acquisition~~ and ~~growth~~market ~~opportunities,~~conditions ~~dividends,~~in ~~adequacy~~the ofUnited ~~our~~States ~~allowance~~generally ~~for~~or ~~loan~~in ~~losses~~the ~~and~~communities ~~provision~~we ~~for loan losses~~serve, ~~our~~including ~~loan~~the ~~portfolio and~~effects ~~subsequent~~of ~~charge-offs~~declines ~~and~~in ~~our~~property ~~consent order with federal and state regulatory agencies (“Consent Order”). Forward-looking statements involve substantial risks and uncertainties~~values, ~~many~~high ofunemployment ~~which~~rates ~~are difficult to predict~~ and ~~are generally~~overall ~~beyond~~slowdowns our control. There are many factors that could cause actual results to differ materially from those contemplated by these forward-looking statements. Risks and uncertainties that could cause our financial performance to differ materially from our goals, plans, expectations and projections expressed in ~~forward-looking~~economic ~~statements include those set forth in our filings with the SEC, Item 1A of our Annual Report on Form 10-K, and the following:~~ growth.

• Current and future economic and market conditions in the United States generally or in the communities we serve, including the effects of declines in property values, high unemployment rates and overall slowdowns in economic growth should these events occur.

•

The effects of trade, monetary and fiscal policies and laws.

•

Possible losses of businesses and population in the Los Angeles, Orange, Ventura, San Bernardino or Riverside Counties.

• Loss of customer checking and money-market account deposits as customers pursue other higher-yield investments~~, particularly in a rising interest rate environment~~.

•

Possible changes in consumer and business spending and saving habits and the related effect on our ability to increase assets and to attract deposits.

•

Competitive market pricing factors.

~~Page~~• 42Deterioration ~~of 77~~in economic conditions that could result in increased loan losses.

•

Risks associated with concentrations, including but not limited to concentration in real estate related loans and concentrations in deposits.

•

Loss of significant customers.

•

A continued low interest rate environment or interest rate volatility.

•

Possible changes in the creditworthiness of customers and the possible impairment of the collectability of loans.

•

Changes in the speed of loan prepayments, loan origination and sale volumes, loan loss provisions, charge offs or actual loan losses.

•

Compression of our net interest margin.

Page 40 of 72

• ~~Deterioration~~Stability inof ~~economic~~funding ~~conditions~~sources ~~that~~and ~~could~~continued ~~result~~availability inof ~~increased loan losses~~borrowings.

• Risks associated with concentrations in real estate related loans.

• Risks associated with concentrations in deposits.

• Loss of significant customers.

• Market interest rate volatility.

• Possible changes in the creditworthiness of customers and the possible impairment of the collectability of loans.

• Changes in the speed of loan prepayments, loan origination and sale volumes, loan loss provisions, charge offs or actual loan losses.

• Compression of our net interest margin.

• Stability of funding sources and continued availability of borrowings to the extent necessary.

•

Changes in legal or regulatory requirements.

• The inability of our ~~internal~~risk ~~disclosure~~management controls ~~and procedures~~ to prevent or detect all errors or fraudulent acts.

• Inability of our framework to manage risks associated with our business, including but not limited to operational risk, regulatory risk, cyber risk, liquidity risk, customer risk and credit risk, to mitigate all risk or loss to us.

• Our ability to keep pace with technological changes, including our ability to identify and address cyber-security risks such as data security breaches, “denial of service” attacks, “hacking”, account takeover, ransomware and identity theft.

•

The effects of man-made and natural disasters, including, but not limited to earthquakes, floods, droughts, brush fires, tornadoes and hurricanes.

• The effect of labor and port slowdowns on small businesses.

• Risks of loss of funding for the Small Business Administration (“SBA”), or SBA loan programs, or changes in those programs.

• Lack of take-out financing or problems with sales or lease-up with respect to our construction loans.

•

Our ability to recruit and retain key management and staff.

• ~~Availability~~The ability to complete the proposed merger between the Company and PacWest Bancorp, including obtaining regulatory approvals and approval by the shareholders of the Company, or any future transaction, successfully integrating such acquired entities, or achieving expected beneficial synergies and/or ~~competition~~operating ~~for~~efficiencies, ~~acquisition~~in ~~opportunities~~each case within expected time-frames or at all.

•

Significant decline in the market value of the Company that could result in an impairment of goodwill.

•

Changes in PacWest Bancorp’s stock price before completion of the merger, including as a result of the financial performance of PacWest Bancorp before closing.

•

Regulatory limits on the Bank’s ability to pay dividends to the Company.

•

The uncertainty of obtaining regulatory approval for various merger and acquisition opportunities.

•

New accounting pronouncements.

• The impact of ~~the~~federal ~~Dodd-Frank Wall Street Reform~~ and ~~Consumer~~state ~~Protection~~laws ~~Act (“Dodd-Frank Act”)~~ and ~~related rules and~~ regulations on the Company’s business operations and competitiveness.

•

Our ability to comply with applicable capital and liquidity requirements (including the finalized Basel III capital standards), including our ability to generate capital internally or raise capital on favorable terms.

• Increased regulation of the securities markets, including the securities of the Company, whether pursuant to the Sarbanes-Oxley Act of 2002, or otherwise.

• Our ability to demonstrate compliance with the Consent Order to the satisfaction of the FDIC and the California Department of Business Oversight (CDBO).

• The possibility that any expansionary activities or new products or services will be impeded while the FDIC and CDBO’s joint Consent Order remains outstanding.

• Our ability to employ and retain additional qualified BSA staff or third parties.

• Our ability to comply with the requirements set forth in the Consent Order

•

The effects of any damage to our reputation resulting from developments related to any of the items identified above.

~~Page~~For 43a more detailed discussion of 77 some of these risks and uncertainties, see the Company’s Annual Report on Form 10-K for the year ended December 31, 2016 and particularly, Item 1A, titled “Risk Factors.”

Forward-looking statements speak only as of the date they are made. The Company does not undertake to update forward-looking statements to reflect circumstances or events that occur after the date the forward-looking statements are made or to reflect the occurrence of unanticipated events and specifically disclaims any obligation to revise or update such forward looking statements for any reason, except as may be required by applicable law. You should consider any forward looking statements in light of this explanation, and we caution you about relying on forward-looking statements.

~~For~~Page a41 ~~more complete discussion~~ of ~~these risks and uncertainties, see the Company’s Annual Report on Form 10-K~~ ~~for~~72 ~~the year ended December 31, 2015 and particularly, Item 1A, titled “Risk Factors.”~~

Page 44 of 77

OVERVIEW

California United Bank (the “Bank”) is a full-service commercial business bank offering a broad range of banking products ~~and~~ and services including: deposit services, lending and cash management to small and medium-sized businesses in Los Angeles, Orange, Ventura, San Bernardino and Riverside counties, to non-profit organizations, to business principals and entrepreneurs, and to the professional community, including attorneys, certified public accountants, financial advisors, healthcare providers and investors. The Bank opened for business in 2005, with its current headquarters office located in Los Angeles, California. As a state chartered non-member bank, the Bank is subject to regulation by the California Department of Business Oversight, (the “DBO”) and the Federal Deposit Insurance Corporation (“FDIC”). The deposits of the Bank are insured by the FDIC, to the maximum amount allowed by law.

Total assets increased $~~259~~ 149 million or 105% from ~~December~~ December 31, ~~2015~~2016 to $23.9 1 billion mainly due to deposit growth of $~~219~~ 147 million and net income of $~~20 million~~7.8 ~~Loan~~million. ~~growth~~During ~~during~~ the ~~nine~~three months ended ~~September~~March 31, 302017, ~~2016~~the ~~was~~Company ~~concentrated~~had ~~primarily~~$33 million inof ~~Other~~net ~~Nonresidential~~organic ~~Property~~loan ~~loans~~production. ofPay ~~$77 million,~~downs ~~Construction,~~in ~~Land~~the ~~Development~~acquired ~~and~~loan ~~Other~~portfolios ~~Land~~were ~~loans~~approximately of $47 37 million, during ~~multifamily~~the ~~residential~~same ~~properties~~quarter. ~~loans~~Loans ofsecured ~~$29~~by ~~million~~real ~~and~~estate ~~Owner-Occupied~~grew ~~Nonresidential~~$19 million ~~Properties~~in ~~loans~~the first quarter of ~~$22~~2017, ~~million~~compared to the prior quarter, ~~offset~~with byall aof ~~$38~~the ~~million~~growth ~~decrease~~coming in ~~Commercial and~~other ~~Industrial~~nonresidential ~~loans~~properties. At ~~September 30~~March 31, ~~2016~~2017, commercial and industrial loans, and owner-occupied real estate loans combined were $~~930~~ 921 million or 4745% of total loans, compared to $~~945~~ 954 million or 5247% of total loans at December 31, 2016.

Funding the Company’s ~~loan~~asset growth for the ~~nine~~three months ended ~~September 30~~March 31, ~~2016~~2017 were increases in non-interest bearing demand deposits of $~~111~~86 million, interest bearing transaction accounts of $14 million, and money market and savings deposits of $~~108~~ 47 million. At both ~~September 30~~March 31, ~~2016~~2017 and December 31, ~~2015~~2016, non-interest bearing deposits represented 5654% of total deposits. Tangible book value per common share was $1314.8452, $1214.6710 and $1213.4205 at ~~September 30~~March 31, ~~2016~~2017, December 31, ~~2015~~2016 and ~~September 30~~ March 31, ~~2015~~2016, respectively.

Recent Development

On April 5, 2017, the Company entered into an Agreement and Plan of Merger (the “Merger Agreement”) with PacWest Bancorp (“PacWest”), wherein CU Bancorp will merge with and into PacWest (the “Merger”), with PacWest surviving the Merger. Immediately following the Merger, CU Bancorp’s wholly-owned bank subsidiary, California United Bank, will merge with and into PacWest’s wholly-owned bank subsidiary, Pacific Western Bank (the “Bank Merger”). Pacific Western Bank will be the surviving bank in the Bank Merger. The Merger Agreement was approved and adopted by the Board of Directors of each of CU Bancorp and PacWest. Under terms of the agreement, CU Bancorp shareholders will receive 0.5308 shares of PacWest common stock and $12.00 in cash for each share of CU Bancorp.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

The discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”). The preparation of these consolidated financial statements requires management to make estimates and judgments that affect the reported amounts of assets and liabilities, revenues and expenses, and related disclosures of contingent assets and liabilities at the date of our financial statements. Actual results may differ from these estimates under different assumptions or conditions.

Various elements of our accounting policies, by their nature, are inherently subject to estimation techniques, valuation assumptions, and other subjective assessments. We have identified several accounting policies that, due to judgments, estimates, and assumptions inherent in those policies, are essential to an understanding of our consolidated financial statements. These policies relate to the accounting for business combinations, evaluation of goodwill for impairment, methodologies that determine our allowance for loan loss, the valuation of impaired loans, the classification and valuation of investment securities, accounting for derivatives financial instruments and hedging activities, and accounting for income taxes.

~~Our~~Page ~~critical~~42 ~~accounting policies are described in greater detail in our 2015 Annual Report on Form 10-K, Item 7 – Management’s Discussion and Analysis~~ of Financial Condition and Results of Operations – Critical Accounting Policies and Estimates. We believe that our most critical accounting policies upon which our financial condition depends, and which involve the most ~~complex~~72 ~~or subjective decisions or assessment, are as follows:~~

Business Combinations

The Company has a number of fair value adjustments recorded within the consolidated financial statements that relate to the business combinations with California Oaks State Bank “COSB”, Premier Commercial Bancorp “PC Bancorp” and 1st Enterprise Bank “1st Enterprise” on December 31, 2010, July 31, 2012 and November 30, 2014, respectively. These fair value adjustments include goodwill, fair value adjustments on loans, core deposit intangible assets, other intangible

Page 45 of 77

~~assets,~~Our ~~fair~~critical ~~value~~accounting ~~adjustments~~policies toare ~~acquired~~described ~~lease~~in ~~obligations,~~greater ~~fair~~detail ~~value~~in ~~adjustments~~our to2016 ~~certificates~~Annual ofReport ~~deposit and fair value adjustments~~ on ~~derivatives. The assets and liabilities acquired~~ ~~through~~Form ~~acquisitions~~10-K, ~~have~~Item ~~been~~7 ~~accounted~~– ~~for~~Management’s atDiscussion ~~fair~~and ~~value~~Analysis as of ~~the~~Financial ~~date~~Condition ofand ~~the~~Results ~~acquisition. The goodwill that was recorded on the transactions represented the excess~~ of ~~the~~Operations ~~purchase~~– ~~price~~Critical ~~over~~Accounting ~~the~~Policies ~~fair~~and ~~value of net assets acquired~~Estimates. ~~Goodwill~~ isWe ~~not~~believe ~~amortized~~that ~~and~~our ismost ~~reviewed~~critical accounting ~~for~~policies ~~impairment~~upon onwhich ~~October~~our ~~1st~~financial ofcondition ~~each~~depends, ~~year. If~~and anwhich ~~event~~involve ~~occurs or circumstances change that result in~~ the ~~Company’s~~most ~~fair~~complex ~~value~~or ~~declining~~subjective ~~below~~decisions ~~its~~or ~~book value~~assessment, ~~the~~are ~~Company~~as ~~would perform~~follows: ~~an impairment analysis at that time.~~

~~Based~~Business onCombinations ~~the Company’s 2015 goodwill impairment analysis, no impairment to goodwill has occurred. The Company is a sole reporting unit for evaluation of goodwill.~~

The ~~core~~Company ~~deposit~~has ~~intangibles~~a onnumber ~~non-maturing~~of ~~deposits~~fair value adjustments recorded within the consolidated financial statements that at March 31, 2017 that ~~which~~relate ~~represent~~to the ~~intangible~~business combinations with California Oaks State Bank “COSB”, Premier Commercial Bancorp “PC Bancorp” and 1st Enterprise Bank “1st Enterprise” on December 31, 2010, July 31, 2012 and November 30, 2014, respectively. These fair value ofadjustments ~~depositor~~include ~~relationships~~fair ~~resulting~~value ~~from~~adjustments on loans, core deposit intangible assets, other intangible assets, fair value adjustments to acquired lease obligations, and fair value adjustments on derivatives. The assets and liabilities ~~assumed~~acquired through acquisitions, ~~are~~have ~~being~~been ~~amortized~~accounted ~~over~~for ~~the~~at ~~projected~~fair ~~useful~~value ~~lives~~as of the ~~deposits~~date of the acquisition. The ~~weighted~~goodwill ~~average~~that ~~remaining~~was ~~life~~recorded ofon the ~~core~~ ~~deposit~~transactions ~~intangible~~represented isthe ~~estimated~~excess atof ~~approximately~~the 5purchase ~~years~~price atover ~~September~~the ~~30,~~fair ~~2016~~value of net assets acquired. ~~Core~~ ~~deposit~~Goodwill ~~intangibles~~is ~~are~~not amortized and is reviewed for impairment ~~whenever~~on ~~events~~October or1st ~~changes~~of ineach year. If an event occurs or circumstances ~~indicate~~change that result in the ~~carrying~~Company’s fair value ~~may~~declining ~~not~~below beits ~~recoverable~~book value, the Company would perform an impairment analysis at that time.

Based on the Company’s 2016 goodwill impairment analysis, no impairment to goodwill has occurred. The Company is a sole reporting unit for evaluation of goodwill.

The core deposit intangibles on non-maturing deposits, which represent the intangible value of depositor relationships resulting from deposit liabilities assumed through acquisitions, are being amortized over the projected useful lives of the deposits. The weighted average remaining life of the core deposit intangible is estimated at approximately 5 years at March 31, 2017. Core deposit intangibles are reviewed for impairment whenever events or changes in circumstances indicate that the carrying value may not be recoverable.

Loans acquired through acquisition are recorded at fair value at acquisition date without a carryover of the related Allowance. Purchased Credit Impaired (“PCI”) loans are acquired loans with evidence of deterioration of credit quality since origination and it is probable, at the acquisition date, that the Company will not be able to collect all contractually required amounts. When the timing and/or amounts of expected cash flows on such loans are not reasonably estimable, no interest is accreted and the loan is reported as a non-accrual loan; otherwise, if the timing and amounts of expected cash flows for PCI loans are reasonably estimable, then interest is accreted and the loans are reported as accruing loans. The non-accretable difference represents the difference between the undiscounted contractual cash flows and the undiscounted expected cash flows, and also reflects the estimated credit losses in the acquired loan portfolio at the acquisition date and can fluctuate due to changes in expected cash flows during the life of the PCI loans. For non-PCI loans, loan fair value adjustments consist of an interest rate premium or discount and a credit component on each individual loan and are amortized to loan interest income based on the effective yield method over the remaining life of the loans. Subsequent decreases to the expected cash flows for both PCI and non-PCI loans will result in a provision for loan losses.

Allowance for Loan Loss

The allowance for loan loss (“Allowance”) is established by a provision for loan losses that is charged against income, increased by charges to expense and decreased by charge-offs (net of recoveries). Loan charge-offs are charged against the Allowance when management believes the collectability of loan principal becomes unlikely. Subsequent recoveries, if any, are credited to the Allowance.

The Allowance is an amount that management believes will be adequate to absorb estimated charge-offs related to specifically identified loans, as well as probable loan charge-offs inherent in the balance of the loan portfolio, based on an evaluation of the collectability of existing loans and prior loss experience. Management carefully monitors changing economic conditions, the concentrations of loan categories and collateral, the financial condition of the borrowers, the history of the loan portfolio, as well as historical peer group loan loss data to determine the adequacy of the Allowance. The Allowance is based upon estimates, and actual charge-offs may vary from the estimates. No assurance can be given that adverse future economic conditions will not lead to delinquent loans, increases in the provision for loan losses and/or charge-offs. These evaluations are inherently subjective, as they require estimates that are susceptible to significant revisions as conditions change. In addition, regulatory agencies, as an integral part of their examination process, may require ~~changes~~additions to the Allowance based on their judgment about information available at the time of their examinations. Management believes that the Allowance as of ~~September 30~~March 31, ~~2016~~2017 is adequate to absorb known and probable losses inherent in the loan portfolio.

~~The~~Page ~~Allowance~~43 ~~consists~~ of ~~specific and general components. The specific component relates to loans that are categorized as impaired. For~~ ~~loans~~72 that are categorized as impaired, a specific allowance is established when the fair value of the impaired loan is lower than the recorded investment of that loan. The general component covers non-impaired loans and is based on the type of loan and historical charge-off experience adjusted for qualitative factors.

While the general allowance covers all non-impaired loans and is based on historical loss experience adjusted for the various qualitative factors, the change in the Allowance from one reporting period to the next may not directly correlate to the rate of change of nonperforming loans for the following reasons:

Page 46 of 77

The Allowance consists of specific and general components. The specific component relates to loans that are categorized as impaired. For loans that are categorized as impaired, a specific allowance is established when the realizable value of the impaired loan is lower than the recorded investment of that loan. The general component covers non-impaired loans and is based on the type of loan and historical charge-off experience adjusted for qualitative factors.

While the general allowance covers all non-impaired loans and is based on historical loss experience adjusted for the various qualitative factors as discussed in Note 6 – Loans, the change in the Allowance from one reporting period to the next may not directly correlate to the rate of change of nonperforming loans for the following reasons:

•

A loan moving from the impaired performing status to an impaired non-performing status does not mandate an automatic increase in allowance. The individual loan is evaluated for a specific allowance requirement when the loan moves to the impaired status, not when the loan moves to non-performing status. In addition, the impaired loan is reevaluated at each subsequent reporting period. Impairment is measured based on the present value of the expected future cash flows discounted at the loan’s effective interest rate, except that as a practical expedient, the Company may measure impairment based on the loan’s observable market price or the fair value of the collateral if the loan is collateral dependent.

• Not all impaired loans require a specific allowance. The payment performance of the borrower may require an impaired classification, but the collateral evaluation may support adequate collateral coverage. For a number of impaired loans in which borrower performance is in question, the collateral coverage may be sufficient. In those instances, ~~neither~~ a ~~general allowance nor a~~ specific allowance is not assessed.

Investment Securities

The Company currently classifies its investment securities under the available-for-sale and held-to-maturity classifications. Under the available-for-sale classification, securities can be sold in response to certain conditions, such as changes in interest rates, changes in the credit quality of the securities, when the credit quality of a security does not conform with current investment policy guidelines, fluctuations in deposit levels or loan demand or need to restructure the portfolio to better match the maturity or interest rate characteristics of liabilities with assets. Securities classified as available-for-sale are accounted for at their current fair value rather than amortized cost. Unrealized gains or losses are excluded from net income and reported as a separate component of accumulated other comprehensive income (loss) included in shareholders’ equity. ~~Under~~If the ~~held-to-maturity classification, if the~~ Company has the intent and the ability at the time of purchase to hold ~~these~~certain securities until maturity, they are classified as held-to-maturity and are stated at amortized cost.

As of each reporting date, the Company evaluates the securities portfolio to determine if there has been an other-than-temporary impairment (“OTTI”) on each of the individual securities in the investment securities portfolio. If it is probable that the Company will be unable to collect all amounts due according to the contractual terms of a debt security not impaired at acquisition, an OTTI shall be considered to have occurred. Once an OTTI is considered to have occurred, the credit portion of the loss is required to be recognized in current earnings, while the non-credit portion of the loss is recorded as a separate component of shareholders’ equity.

In estimating whether an other-than-temporary impairment loss has occurred, management considers, among other things, (i) the length of time and the extent to which the fair value has been less than cost, (ii) the financial condition and near-term prospects of the issuer, (iii) the current liquidity and volatility of the market for each of the individual security categories, (iv) the current slope and shape of the Treasury yield curve, along with where the economy is in the current interest rate cycle, (v) the spread differential between the current spread and the long-term average spread for that security category, (vi) the projected cash flows from the specific security type, (vii) any financial guarantee and financial condition of the guarantor and (viii) the intent and ability of the Company to retain its investment in the issue for a period of time sufficient to allow for any anticipated recovery in fair value.

If it’s determined that an OTTI exists on a debt security, the Company then determines if (a) it intends to sell the security or (b) it is more likely than not that it will be required to sell the security before its anticipated recovery. If either of the conditions is met, the Company will recognize the amount of the OTTI in earnings equal to the difference between the security’s fair value and its adjusted cost basis. If neither of the conditions is met, the Company determines (a) the amount of the impairment related to credit loss and (b) the amount of the impairment due to all other factors. The difference between the present value of the cash flows expected to be collected and the amortized cost basis is the credit loss. The credit loss is the portion of the other-than-temporary impairment that is recognized in earnings and is a reduction to the cost basis of the security. The portion of total impairment related to all other factors is included in other comprehensive income. Significant judgment is required in this analysis that includes, but is not limited to assumptions regarding the collectability of principal and interest, future default rates, future prepayment speeds, the amount of current delinquencies that will result in defaults and the amount of eventual recoveries expected on the underlying collateral.

~~Realized~~Page ~~gains~~44 ~~and losses on sales~~ of ~~securities are recognized in earnings at the time of sale and are determined on a~~ ~~specific-identification~~72 basis. Purchase premiums and discounts are recognized in interest income using the interest method over the expected maturity term of the securities. For mortgage-backed securities, the amortization or accretion is based on estimated average lives of the securities. The lives of these securities can fluctuate based on the amount of prepayments received on the underlying collateral of the securities. The amount of prepayments varies from time to time based on the interest rate environment and the rate of turnover of mortgages.

Page 47 of 77

security. The portion of total impairment related to all other factors is included in other comprehensive income. Significant judgment is required in this analysis that includes, but is not limited to assumptions regarding the collectability of principal and interest, future default rates, future prepayment speeds, the amount of current delinquencies that will result in defaults and the amount of eventual recoveries expected on the underlying collateral.

Realized gains and losses on sales of securities are recognized in earnings at the time of sale and are determined on a specific-identification basis. Purchase premiums and discounts are recognized in interest income using the interest method over the expected maturity term of the securities. For mortgage-backed securities, the amortization or accretion is based on estimated average lives of the securities. The lives of these securities can fluctuate based on the amount of prepayments received on the underlying collateral of the securities. The amount of prepayments varies from time to time based on the interest rate environment and the rate of turnover of mortgages.

Derivative Financial Instruments and Hedging Activities

All derivative instruments (interest rate swap contracts) ~~were~~are recognized on the consolidated balance sheet at their current fair value. ~~For~~Every ~~derivatives designated as fair value hedges, changes in the fair value of the~~ derivative and hedged item related to the hedged risk are recognized in earnings. Accounting Standards Codification (“ASC”) Topic 815 establishes the accounting and reporting standards requiring that every derivative instrument (including certain derivative instruments embedded in other contracts) is required to be recorded in the balance sheet as either an asset or liability measured at its fair value. ASC Topic 815 requires that changes in the derivative’s fair value be recognized currently in earnings unless specific hedge accounting criteria are met. Accounting for qualifying hedges allows a derivative’s gains and losses to offset related results on the hedged item in the income statement, and requires that a company must formally document, designate and assess the effectiveness of transactions that receive hedge accounting.

On the date a derivative contract is entered into by the Company, the Company will designate the derivative contract as either a fair value hedge (i.e. a hedge of the fair value of a recognized asset or liability), a cash flow hedge (i.e. a hedge of the variability of cash flows to be received or paid related to a recognized asset or liability), or a stand-alone derivative (i.e. an instrument with no hedging designation). For a derivative designated as a fair value hedge, the changes in the fair value of the derivative and of the hedged item attributable to the hedged risk are recognized in earnings. If the derivative is designated as a cash flow hedge, the effective portions of changes in the fair value of the derivative are recorded in other comprehensive income and are recognized in the income statement when the hedged item affects earnings. Changes in the fair value of derivatives that do not qualify for hedge accounting are reported currently in earnings, as other non-interest income. At inception and on an ongoing basis, the derivatives that are used in hedging transactions are ~~evaluated~~assessed for effectiveness as to how effective they are in offsetting changes in fair values or cash flows of hedged items.

The Company will discontinue hedge accounting prospectively when it is determined that the derivative is no longer effective in offsetting change in the fair value of the hedged item, the derivative expires or is sold, is terminated, or management determines that designation of the derivative as a hedging instrument is no longer appropriate. When hedge accounting is discontinued, the Company will continue to carry the derivative on the balance sheet at its fair value (if applicable), but will no longer adjust the hedged asset or liability for changes in fair value. The adjustments of the carrying amount of the hedged asset or liability will be accounted for in the same manner as other components of the carrying amount of that asset or liability, and the adjustments are amortized to interest income over the remaining life of the hedged item upon the termination of hedge accounting.

Income Taxes

The Company provides for current federal and state income taxes payable and for deferred taxes that result from differences between financial accounting rules and tax laws governing the timing of recognition of various income and expense items. The Company recognizes deferred income tax assets and liabilities for the future tax effects of such temporary differences based on the difference between the financial statement and tax bases of the existing assets and liabilities using the statutory rate expected in the years in which the differences are expected to reverse. The effect on deferred taxes of any enacted change in tax rates is recognized in income in the period that includes the enactment date. A valuation allowance is established to the extent necessary to reduce the deferred tax asset to the level at which it is “more likely than not” that the tax assets or benefits will be realized. Realization of tax benefits for deductible temporary differences and loss carryforwards depends on having sufficient taxable income of an appropriate character within the carryback and carryforward period and that current tax law will allow for the realization of those tax benefits.

The Company is required to account for uncertainty associated with the tax positions it has taken or expects to be taken on past, current and future tax returns. Where there may be a degree of uncertainty as to the tax realization of an item, the Company may only record the tax effects (expense or benefits) from an uncertain tax position in the consolidated financial statements if, based on its merits, the position is more likely than not to be sustained on audit by the taxing authorities. Management does not believe that it has any material uncertain tax positions taken to date that are not more likely than not to be realized. Interest and penalties related to uncertain tax positions are recorded as part of other operating expense.

Page 4845 of 7772

~~Current~~ financial ~~Accounting~~statements ~~Developments~~if, based on its merits, the position is more likely than not to be sustained on audit by the taxing authorities. The Company does not believe that it has any material uncertain tax positions taken to date that are not more likely than not to be realized. Interest and penalties related to uncertain tax positions are recorded as part of other operating expense.

InPage ~~March~~46 ~~2016, the FASB issued ASU 2016-09, Compensation – Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting, to reduce the complexity~~ of certain aspects of the accounting for employee share-based payment transactions. In the third quarter of 2016, the Company elected the early adoption of this standard which requires the Company to reflect the ~~adjustments~~72 resulting from the adoption effective January 1, 2016, the beginning of the annual period that includes the interim period of adoption. The most significant impact of the new guidance resulted in recognition of excess tax benefits within the provision for income tax expense, which resulted in an increase to net income available to common shareholders and earnings per share. For additional information and the impact of the adoption, see Note 2, “Recent Accounting Pronouncements,” in Item 1. “Financial Statements.”

Page 49 of 77

RESULTS OF OPERATIONS

Key Performance Measures

The following table presents key performance measures for the periods indicated and the dollar and percentage changes between the periods (dollars in thousands, except per share data):

	Three Months Ended September 30,												Nine Months Ended September 30,
	Three Months Ended March 31,
	Amounts						Increase(Decrease)						~~Amounts~~						~~Increase(Decrease)~~
	2016			2015			$			%			2016			2015			$			%
	2017			2016			$			%
Net Income Available to Common Shareholders	$	67,~~279~~482		$	56,~~970~~281		$	~~309~~1,201			519.1812	%	$	~~19,373~~		$	~~14,852~~		$	~~4,521~~			~~30.44~~	%
Earnings per share
Basic	$	0.3643		$	0.3637		$	—0.06			—16.22	%	$	~~1.13~~		$	~~0.90~~		$	~~0.23~~			~~25.56~~	%
Diluted	$	0.3642		$	0.3536		$	0.0106			216.8667	%	$	~~1.11~~		$	~~0.88~~		$	~~0.23~~			~~26.14~~	%
Return on average assets (1)		0.8797	%		0.93	%		(0.0604	)%		(64.4530	)%		~~0.93~~	%		~~0.82~~	%		~~0.11~~	%		~~13.41~~	%
Return on average tangible common equity (2)		1011.3087	%		11.4829	%		(10.1858	)%		~~(10~~5.2814	)%		~~11.10~~	%		~~9.95~~	%		~~1.15~~	%		~~11.56~~	%
Net interest margin (3)		3.7267	%		3.7977	%		(0.0710	)%		(12.8565	)%		~~3.77~~	%		~~3.87~~	%		~~(0.10~~	)%		~~(2.58~~	)%
Efficiency ratio (4)		5957.9679	%		5957.3475	%		0.6204	%		10.0407	%		~~57.73~~	%		~~61.49~~	%		~~(3.76~~	)%		~~(6.11~~	)%

(1)	Return on average assets is calculated by dividing net income available to common shareholders by the average assets for the period.

(2)	Return on average tangible common equity is calculated by dividing the Company’s net income available to common shareholders by average tangible common equity for the period. See the tables for return on average tangible common equity calculation and reconciliation to average common equity.

(3)	Net interest margin represents net interest income as a percent of interest earning assets.

(4)	Efficiency ratio represents non-interest expense as a percent of net interest income plus non-interest income, excluding gain on sale of securities, net.

Non-GAAP Financial Measure - Average Tangible Common Equity (TCE) Calculation and Reconciliation to Total Average Shareholders’ Equity

The Company utilizes the term TCE, a non-GAAP financial measure. The Company’s management believes TCE is useful because it is a measure utilized by both regulators and market analysts in evaluating the Company’s financial condition and capital strength. TCE represents common shareholders’ equity less goodwill and certain intangible assets. Return on Average Tangible Common Equity represents annualized net income available to common shareholders as a percent of average tangible common equity. A calculation of the Company’s Return on Average Tangible Common Equity is provided in the table below for the periods indicated (dollars in thousands):

	Three Months EndedSeptember 30,						Nine Months EndedSeptember 30,
	Three Months EndedMarch 31,
	2016			2015			2016			2015
	2017			2016
Average Tangible Common Equity Calculation
Total average shareholders’ equity	$	~~331~~343,~~024~~217		$	~~295~~313,~~189~~014		$	~~322,056~~		$	~~288,719~~
Less: Average serial preferred stock		1716,~~063~~930			1617,~~565~~088			~~17,092~~			~~16,329~~
Less: Average goodwill		64,603			6364,~~950~~603			~~64,603~~			~~63,959~~
Less: Average core deposit and leasehold right intangibles		6,~~792~~132			87,~~423~~515			~~7,149~~			~~8,885~~
Average Tangible Common Equity	$	~~242~~255,~~566~~552		$	~~206~~223,~~251~~808		$	~~233,212~~		$	~~199,546~~
Annualized Net Income Available to Common Shareholders	$	2430,~~980~~344		$	2325,~~685~~262		$	~~25,878~~		$	~~19,857~~
Return on Average Tangible Common Equity		1011.3087	%		11.4829	%		~~11.10~~	%		~~9.95~~	%

Page 5047 of 7772

Operations Performance Summary

Three Months Ended ~~September 30~~March 31, ~~2016~~2017 Compared to Three Months Ended ~~September 30~~March 31, ~~2015~~2016

Net income available to common shareholders for the three months ended ~~September 30~~March 31, ~~2016~~2017 was $67.3 5 million, or $0.3642 per diluted share, compared to $6.0 3 million, or $0.3536 per diluted share for the three months ended ~~September 30~~March 31, ~~2015~~2016. Net income increased 18% over prior year and earnings per share increased 17% over prior year. The $~~309~~1.2 million ~~thousand~~ increase, or ~~5.2~~19%, was primarily due to a $23.3 million increase in ~~loan~~net interest income, ~~which~~after isprovision ~~the~~for ~~result of the Company’s strong organic~~ loan ~~growth since the prior period~~losses, offset by a $1.7 5 million, ~~or 11.3%~~ increase in non-interest expense. ~~Included~~and a $645 thousand increase in provision ~~the~~for income tax expense. The increase ofin ~~non-~~net interest ~~expense~~income ~~were~~after ~~one-time~~provision ~~expenses~~for ofloan $1losses was mainly driven by strong organic loan growth.2 ~~million~~The increase in income tax expense is directionally consistent with the ~~three~~increase ~~months~~in ~~ended~~profitability ~~September~~while ~~30,~~the ~~2016,~~effective oftax ~~which~~rates ~~$957~~are ~~thousand~~comparable ~~were~~for ~~BSA~~both ~~compliance~~periods. ~~expenses~~Non-interest ~~related~~income tohad ~~the~~a ~~Consent~~modest ~~Order,~~increase ~~and~~of $~~203~~ 15 thousand inor ~~one-time~~0.5% ~~expenses~~and ~~associated~~non-interest ~~with~~expense ~~the~~had ~~closing~~an increase ~~the~~of ~~Company’s~~$1.5 million, ~~Simi~~or ~~Valley administrative office~~9.9%. Salaries and other benefits expense increased $~~462~~ 969 thousand, or 510.24%, as the Company’s active full-time equivalent employees grew to ~~285~~294 at ~~September 30~~March 31, ~~2016~~2017, an increase of 1921 from ~~September 30, 2015.~~March ~~There were no merger expenses in the three months ended September 30~~31, 2016~~, compared to $146 thousand in the year-ago period~~.

~~Nine~~Page ~~Months~~48 ~~Ended September 30, 2016 Compared to Nine Months~~of ~~Ended~~72 ~~September 30, 2015~~

Net income available to common shareholders for the nine months ended September 30, 2016 was $19.4 million, or $1.11 per diluted share, compared to $14.9 million, or $0.88 per diluted share for the nine months ended September 30, 2015. The $4.5 million increase, or 30.4%, was primarily driven by an increase in interest income on loans of $7.5 million, or 12.0 %, which is the result of the Company’s strong organic loan growth since the prior period, offset by a $2.2 million increase in non-interest expense. Non-interest income increased slightly by $162 thousand or 1.9% while non-interest expense had an increase of $2.2 million, or 4.8%. Included in the increase of non-interest expense were one-time expenses of $1.2 million in the three months ended September 30, 2016, of which $957 thousand were BSA compliance expenses related to the Consent Order, and $203 thousand in one-time expenses associated with the closing the Company’s Simi Valley administrative office. Salaries and other benefits expense increased $1.7 million, or 6.5%, as the Company’s active full-time equivalent employees grew to 285 at September 30, 2016, an increase of 19 from September 30, 2015. Further, as a result of the early adoption of ASU 2016-09 on July 1, 2016, effective January 1, 2016, excess tax benefits of $914 thousand was recognized as a reduction to provision for income tax expense for the nine months ended September 30, 2016. For additional information and the impact of the adoption, see Note 2, “Recent Accounting Pronouncements,” in Item 1. “Financial Statements.”

Page 51 of 77

Average Balances, Interest Income and Expense, Yields and Rates

Three ~~and Nine~~ Months Ended ~~September 30~~March 31, ~~2016~~2017 and ~~2015~~2016

The following tables present the Company’s average balance sheets, together with the total dollar amounts of interest income and interest expense and the weighted average interest yield/rate for the periods presented. All average balances are daily average balances (dollars in thousands).

	Three Months Ended
	September 30, 2016							September 30, 2015
	March 31, 2017							March 31, 2016
	AverageBalance		Interest		AverageYield/Rate (65)			AverageBalance		Interest		AverageYield/Rate (65)
Interest Earning Assets:
Deposits in other financial institutions	$	317,678	$	478		0.59	%	$	329,640	$	293		0.35	%
Loans (1)	$	2,043,693	$	24,432		4.85	%	$	1,849,201	$	22,578		4.91	%
Investment securities (1)		392,454		1,419		1.45	%		281,476		1,124		1.60	%
Investment securities (2)		518,303		2,041		1.58	%		352,929		1,232		1.40	%
Loans (2)		1,965,509		23,958		4.85	%		1,735,977		21,689		4.96	%
Deposits in other financial institutions		334,660		710		0.85	%		301,402		439		0.58	%
Total interest earning assets		2,~~675~~896,~~641~~656		2527,~~855~~183		3.8481	%		2,~~347~~503,~~093~~532		2324,~~106~~249		3.9190	%
Non-interest earning assets		~~209~~218,~~981~~536							~~212~~214,~~301~~581
Total Assets	$	23,~~885~~115,~~622~~192						$	2,~~559~~718,~~394~~113
Interest Bearing Liabilities:
Interest bearing transaction accounts	$	~~278~~339,~~983~~230	$	~~102~~157		0.1419	%	$	~~268~~270,~~877~~796	$	~~105~~99		0.15	%
Money market and savings deposits		~~789~~878,~~208~~035		~~524~~670		0.2631	%		~~701~~726,~~189~~681		~~427~~511		0.2428	%
Certificates of deposit		4629,~~197~~626		4626		0.3936	%		6155,~~243~~920		5333		0.3424	%
Total interest bearing deposits		1,~~114~~246,~~388~~891		~~672~~853		0.2428	%		1,~~031~~053,~~309~~397		~~585~~643		0.2325	%
Securities sold under agreements to repurchase		2115,~~893~~017		139		0.24	%		1520,~~306~~540		911		0.2322	%
Subordinated debentures		9,~~831~~877		~~122~~130		45.8626	%		9,~~703~~719		~~110~~117		4.4476	%
Total interest bearing liabilities		1,146,112		807		0.28	%		1,056,318		704		0.26	%
Total borrowings		24,894		139		2.26	%		30,259		128		1.70	%
Non-interest bearing demand deposits		1,389,196							1,190,170
Total interest bearing liabilities		1,271,785		992		0.32	%		1,083,656		771		0.29	%
Total funding sources		2,535,308							2,246,488
Non-interest bearing demand deposits		1,480,366							1,305,018
Non-interest bearing liabilities		19,290							17,717
Total funding sources		2,752,151							2,388,674
Shareholders’ Equity		331,024							295,189
Non-interest bearing liabilities		19,824							16,425
Total Liabilities and Shareholders’ Equity	$	2,885,622						$	2,559,394
Shareholders’ Equity		343,217							313,014
Excess of interest earning assets over funding sources	$	140,333						$	100,605
Total Liabilities and Shareholders’ Equity	$	3,115,192						$	2,718,113
Net interest income			$	25,048						$	22,402
Excess of interest earning assets over funding sources	$	144,505						$	114,858
Net interest rate spread (3)						3.56	%						3.65	%
Net interest income			$	26,191						$	23,478
Net interest margin (4)						3.72	%						3.79	%
Net interest margin (3)						3.67	%						3.77	%
Core net interest margin (5)						3.60	%						3.64	%
Core net interest margin (4)						3.53	%						3.67	%

(1) Average balances of ~~investment~~loans ~~securities available-for-sale~~ are ~~presented~~calculated onnet anof ~~amortized~~deferred ~~cost~~loan ~~basis~~fees and ~~thus~~fair dovalue ~~not~~discounts, ~~include~~but ~~the~~would ~~unrealized~~include ~~market~~non-accrual ~~gain~~loans orwhich ~~loss~~have ona ~~the~~zero ~~securities~~yield.

(2) Average balances of ~~loans~~investment securities available-for-sale are ~~calculated~~presented ~~net~~on ofan ~~deferred~~amortized ~~loan~~cost ~~fees~~basis and ~~fair~~thus ~~value~~do ~~discounts,~~not ~~but~~include ~~would~~the ~~include~~unrealized ~~non-accrual~~market ~~loans~~gain ~~which~~or ~~have~~loss aon ~~zero~~the ~~yield~~securities.

(3) Net interest ~~rate~~margin ~~spread~~is ~~represents~~computed ~~the~~by ~~yield~~dividing ~~earned~~net ~~on average total~~ interest ~~earning~~income ~~assets~~by ~~less the rate paid on~~ average total interest ~~bearing~~earning ~~liabilities~~assets.

(4) ~~Net~~Core net interest margin is computed by dividing annualized net interest income, excluding accelerated accretion of fair value discounts earned on early loan payoffs of acquired loans and interest recovered or reversed on non-accrual loans or other significant items based on management’s judgement, by average total interest -earning assets. See the reconciliation table for core net interest margin.

(5) Core net interest margin is computed by dividing annualized net interest income, excluding accelerated accretion of fair value discounts earned on early loan payoffs of acquired loans and interest recovered or reversed on non-accrual loans or other significant items based on management’s judgement, by average total interest-earning assetsAnnualized. ~~See the reconciliation table for core net interest margin.~~

~~(6)~~Page ~~Annualized.~~49 of 72

Page 52 of 77

	Nine Months Ended
	September 30, 2016							September 30, 2015
	AverageBalance		Interest		AverageYield/Rate (6)			AverageBalance		Interest		AverageYield/Rate (6)
Interest Earning Assets:
Deposits in other financial institutions	$	297,943	$	1,334		0.59	%	$	264,560	$	741		0.37	%
Investment securities (1)		373,493		4,066		1.45	%		272,820		3,355		1.64	%
Loans (2)		1,908,097		69,701		4.88	%		1,686,967		62,239		4.93	%
Total interest earning assets		2,579,533		75,101		3.89	%		2,224,347		66,335		3.99	%
Non-interest earning assets		211,295							209,094
Total Assets	$	2,790,828						$	2,433,441
Interest Bearing Liabilities:
Interest bearing transaction accounts	$	279,386	$	300		0.14	%	$	254,092	$	303		0.16	%
Money market and savings deposits		752,138		1,519		0.27	%		681,852		1,218		0.24	%
Certificates of deposit		51,839		110		0.28	%		61,875		150		0.32	%
Total interest bearing deposits		1,083,363		1,929		0.24	%		997,819		1,671		0.22	%
Securities sold under agreements to repurchase		22,550		38		0.23	%		12,896		21		0.22	%
Subordinated debentures		9,770		359		4.83	%		9,624		326		4.47	%
Total interest bearing liabilities		1,115,683		2,326		0.28	%		1,020,339		2,018		0.26	%
Non-interest bearing demand deposits		1,335,878							1,106,491
Total funding sources		2,451,561							2,126,830
Non-interest bearing liabilities		17,211							17,892
Shareholders’ Equity		322,056							288,719
Total Liabilities and Shareholders’ Equity	$	2,790,828						$	2,433,441
Excess of interest earning assets over funding sources	$	127,972						$	97,517
Net interest income			$	72,775						$	64,317
Net interest rate spread (3)						3.61	%						3.73	%
Net interest margin (4)						3.77	%						3.87	%
Core net interest margin (5)						3.65	%						3.77	%

(1) Average balances of investment securities available-for-sale are presented on an amortized cost basis and thus do not include the unrealized market gain or loss on the securities.

(2) Average balances of loans are calculated net of deferred loan fees and fair value discounts, but would include non-accrual loans which have a zero yield.

(3) Net interest rate spread represents the yield earned on average total interest earning assets less the rate paid on average total interest bearing liabilities.

(4) Net interest margin is computed by dividing net interest income by average total interest earning assets.

(5) Core net interest margin is computed by dividing annualized net interest income, excluding accelerated accretion of fair value discounts earned on early loan payoffs of acquired loans and interest recovered or reversed on non-accrual loans or other significant items based on management’s judgement, by average total interest-earning assets. See the reconciliation table for core net interest margin.

(6) Annualized.

Page 53 of 77

Net Changes in Average Balances, Composition, Yields and Rates

Three ~~and Nine~~ Months Ended ~~September 30~~March 31, ~~2016~~2017 and ~~2015~~2016

The following tables set forth the composition of average interest earning assets and average interest bearing liabilities by category and by the percentage of each category to the total for the periods indicated, including the change in average balance, composition, and yield/rate between these respective periods (dollars in thousands):

	Three Months Ended September 30,
	Three Months Ended March 31,
	2016								2015								Increase (Decrease)
	2017								2016								Increase (Decrease)
	AverageBalance		% ofTotal			AverageYield/Rate (65)			AverageBalance		% ofTotal			AverageYield/Rate (65)			AverageBalance			% ofTotal			AverageYield/Rate (65)
Interest Earning Assets:
Deposits in other financial institutions	$	317,678		11.9	%		0.59	%	$	329,640		14.0	%		0.35	%	$	(11,962	)		(2.1	)%		0.24	%
Loans (1)	$	2,043,693		70.6	%		4.85	%	$	1,849,201		73.9	%		4.91	%	$	194,492			(3.3	)%		(0.06	)%
Investment securities (1)		392,454		14.7	%		1.45	%		281,476		12.0	%		1.60	%		110,978			2.7	%		(0.15	)%
Investment securities (2)		518,303		17.9	%		1.58	%		352,929		14.1	%		1.40	%		165,374			3.8	%		0.18	%
Loans (2)		1,965,509		73.4	%		4.85	%		1,735,977		74.0	%		4.96	%		229,532			(0.6	)%		(0.11	)%
Deposits in other financial institutions		334,660		11.5	%		0.85	%		301,402		12.0	%		0.58	%		33,258			(0.5	)%		0.27	%
Total interest earning assets	$	2,~~675~~896,~~641~~656		100	%		3.8481	%	$	2,~~347~~503,~~093~~532		100.0	%		3.9190	%	$	~~328~~393,~~548~~124						(0.0709	)%
Interest Bearing Liabilities:
Non-interest bearing demand deposits	$	1,~~389~~480,~~196~~366		5453.8	%				$	1,~~190~~305,~~170~~018		5354.06	%				$	~~199~~175,~~026~~348			1(0.8	)%
Interest bearing transaction accounts		~~278~~339,~~983~~230		1112.03	%		0.1419	%		~~268~~270,~~877~~796		1211.04	%		0.15	%		1068,~~106~~434			~~(1.~~0.9	)%		(0.0104	)%
Money market and savings deposits		~~789~~878,~~208~~035		31.19	%		0.2631	%		~~701~~726,~~189~~681		3130.24	%		0.2428	%		88151,~~019~~354			~~(0.~~1.5	)%		0.0203	%
Certificates of deposit		4629,~~197~~626		1.81	%		0.3936	%		6155,~~243~~920		2.73	%		0.3424	%		(1526,~~046~~294	)		(01.92	)%		0.0512	%
Total deposits		2,~~503~~727,~~584~~257		9899.71	%		0.1113	%		2,~~221~~358,~~479~~415		98.97	%		0.1011	%		~~282~~368,~~105~~842			(0.24	)%		0.0102	%
Securities sold under agreements to repurchase		2115,~~893~~017		0.95	%		0.24	%		1520,~~306~~540		0.79	%		0.2322	%		6(5,~~587~~523	)		(0.24	)%		0.0102	%
Subordinated debentures		9,~~831~~877		0.4	%		45.8626	%		9,~~703~~719		0.4	%		4.4476	%		~~128~~158			—	%		0.4250	%
Total borrowings		3124,~~724~~894		10.39	%		12.6926	%		2530,~~009~~259		1.13	%		1.8970	%		6(5,~~715~~365	)		(0.24	)%		(0.2056	)%
Total funding sources	$	2,~~535~~752,~~308~~151		100	%		0.1315	%	$	2,~~246~~388,~~488~~674		100.0	%		0.1213	%	$	~~288~~363,~~820~~477						0.0102	%
Excess of interest earning assets over funding sources	$	~~140~~144,~~333~~505							$	~~100~~114,~~605~~858							$	3929,~~728~~647
Net interest rate spread (3)							3.56	%							3.65	%								(0.09	)%
Net interest margin (3)							3.67	%							3.77	%								(0.10	)%
Net interest margin (4)							3.72	%							3.79	%								(0.07	)%
Core net interest margin (4)							3.53	%							3.67	%								(0.14	)%
Core net interest margin (5)							3.60	%							3.64	%								(0.04	)%

~~(6)~~Page ~~Annualized.~~50 of 72

Page 54 of 77

	Nine Months Ended September 30,
	2016								2015								Increase (Decrease)
	AverageBalance		% ofTotal			AverageYield/Rate (6)			AverageBalance		% ofTotal			AverageYield/Rate (6)			AverageBalance			% ofTotal			AverageYield/Rate (6)
Interest Earning Assets:
Deposits in other financial institutions	$	297,943		11.5	%		0.59	%	$	264,560		11.9	%		0.37	%	$	33,383			(0.4	)%		0.22	%
Investment securities (1)		373,493		14.5	%		1.45	%		272,820		12.3	%		1.64	%		100,673			2.2	%		(0.19	)%
Loans (2)		1,908,097		74.0	%		4.88	%		1,686,967		75.8	%		4.93	%		221,130			(1.8	)%		(0.05	)%
Total interest earning assets	$	2,579,533		100	%		3.89	%	$	2,224,347		100.0	%		3.99	%	$	355,186						(0.10	)%
Interest Bearing Liabilities:
Non-interest bearing demand deposits	$	1,335,878		54.5	%				$	1,106,491		52.0	%				$	229,387			2.5	%
Interest bearing transaction accounts		279,386		11.4	%		0.14	%		254,092		11.9	%		0.16	%		25,294			(0.5	)%		(0.02	)%
Money market and savings deposits		752,138		30.7	%		0.27	%		681,852		32.1	%		0.24	%		70,286			(1.4	)%		0.03	%
Certificates of deposit		51,839		2.1	%		0.28	%		61,875		2.9	%		0.32	%		(10,036	)		(0.8	)%		(0.04	)%
Total deposits		2,419,241		98.7	%		0.11	%		2,104,310		98.9	%		0.11	%		314,931			(0.2	)%		—	%
Securities sold under agreements to repurchase		22,550		0.9	%		0.23	%		12,896		0.6	%		0.22	%		9,654			0.3	%		(0.01	)%
Subordinated debentures		9,770		0.4	%		4.83	%		9,624		0.5	%		4.47	%		146			(0.1	)%		0.36	%
Total borrowings		32,320		1.3	%		1.64	%		22,520		1.1	%		2.06	%		9,800			0.2	%		(0.42	)%
Total funding sources	$	2,451,561		100	%		0.13	%	$	2,126,830		100.0	%		0.13	%	$	324,731						—	%
Excess of interest earning assets over funding sources	$	127,972							$	97,517							$	30,455
Net interest rate spread (3)							3.61	%							3.73	%								(0.12	)%
Net interest margin (4)							3.77	%							3.87	%								(0.10	)%
Core net interest margin (5)							3.65	%							3.77	%								(0.12	)%

(1) Average balances of investment securities available-for-sale are presented on an amortized cost basis and thus do not include the unrealized market gain or loss on the securities.

(2) Average balances of loans are calculated net of deferred loan fees and fair value discounts, but would include non-accrual loans which have a zero yield.

(3) Net interest rate spread represents the yield earned on average total interest earning assets less the rate paid on average total interest bearing liabilities.

(4) Net interest margin is computed by dividing net interest income by average total interest earning assets.

(5) Core net interest margin is computed by dividing annualized net interest income, excluding accelerated accretion of fair value discounts earned on early loan payoffs of acquired loans and interest recovered or reversed on non-accrual loans or other significant items based on management’s judgement, by average total interest-earning assets. See the reconciliation table for core net interest margin.

(6) Annualized.

Page 55 of 77

Volume and Rate Variance Analysis of Net Interest Income

Three ~~and Nine~~ Months Ended ~~September 30~~March 31, ~~2016~~2017 and ~~2015~~2016

The following table presents the dollar amount of changes in interest income and interest expense due to changes in average balances of interest earning assets and interest bearing liabilities and changes in interest rates. For each category of interest earning assets and interest bearing liabilities, information is provided on changes attributable to: (i) changes in volume (i.e. changes in average balance multiplied by prior period rate) and (ii) changes in rate (i.e. changes in rate multiplied by prior period average balance). For purposes of this table, changes attributable to both rate and volume which cannot be segregated have been allocated proportionately based on the absolute dollar amounts of the changes due to volume and rate (dollars in thousands):

	Three Months EndedSeptember 30,2016 vs. 2015
	Three Months EndedMarch 31,2017 vs. 2016
	Increase (Decrease)Due To
	Volume			Rate			Total
Interest Income
Loans	$	2,~~797~~130		$	(~~528~~276	)	$	21,~~269~~854
Deposits in other financial institutions		(9	)		194			185
Investment securities		576			233			809
Investment securities		440			(145	)		295
Deposits in other financial institutions		50			221			271
Total interest income		32,~~228~~756			~~(479~~178	)		2,~~749~~934
Interest Expense
Interest bearing transaction accounts		425			(733	)		(358	)
Money market and savings deposits		5698			4161			97159
Certificates of deposit		(1317	)		610			(7	)
Total deposits		47106			40104			87210
Securities sold under agreements to repurchase		(3	)		1			4(2	)
Subordinated debentures, net		21			1012			1213
Total borrowings		5(2	)		1113			1611
Total interest expense		52104			51117			~~103~~221
Net Interest Income	$	32,~~176~~652		$	~~(530~~61	)	$	2,~~646~~713

	Nine Months EndedSeptember 30,2016 vs. 2015
	Increase (Decrease)Due To
	Volume			Rate			Total
Interest Income
Loans	$	8,178		$	(716	)	$	7,462
Deposits in other financial institutions		98			495			593
Investment securities		1,258			(547	)		711
Total interest income		9,534			(768	)		8,766
Interest Expense
Interest bearing transaction accounts		32			(35	)		(3	)
Money market and savings deposits		130			171			301
Certificates of deposit		(24	)		(16	)		(40	)
Total deposits		138			120			258
Securities sold under agreements to repurchase		15			2			17
Subordinated debentures, net		6			27			33
Total borrowings		21			29			50
Total interest expense		159			149			308
Net Interest Income	$	9,375		$	(917	)	$	8,458

Page 51 of 72

Page 56 of 77

Non-GAAP Financial Measure - Reconciliation of Core Net Interest Income and Core Net Interest Margin to Net Interest Income and Net Interest Margin

The following table represents a reconciliation of GAAP net interest margin to core net interest margin (a non-GAAP financial measure) used by the Company. The table presents the information for the periods indicated (dollars in thousands):

	Three Months EndedSeptember 30,						Nine Months EndedSeptember 30,
	Three Months EndedMarch 31,
	2016			2015			2016			2015
	2017			2016
Net Interest Income	$	2526,~~048~~191		$	2223,~~402~~478		$	~~72,775~~		$	~~64,317~~
Less:
Accelerated accretion of fair value adjustment on early loan payoffs and other associated payoff benefits on acquired loans		806			881			2,362			1,666
Other income recognition due to early payoffs		306			123
Core Net Interest Income	$	24,242		$	21,521		$	70,413		$	62,651
Accelerated accretion of fair value adjustment on early loan payoffs of acquired loans		688			528
Net interest margin		3.72	%		3.79	%		3.77	%		3.87	%
Core Net Interest Income	$	25,197		$	22,827
Core net interest margin		3.60	%		3.64	%		3.65	%		3.77	%
Net interest margin		3.67	%		3.77	%
Core net interest margin		3.53	%		3.67	%

Composition of Net Deferred Loan Fees, ~~Costs~~ and Net Fair Value Discounts

The following table reflects the composition of the net deferred loan fees, costs and fair value discounts at ~~September 30~~March 31, ~~2016~~2017 and ~~December~~ December 31, ~~2015~~2016 (dollars in thousands):

	September 30,2016		December 31,2015
	March 31,2017		December 31,2016
Accretable loan discount	$	108,~~882~~634	$	149,~~856~~772
Non-Accretable loan discount		~~424~~347		~~2,061~~390
Remaining loan discount on acquired loans		118,~~306~~981		1610,~~917~~162
Net deferred loan fees on organic loans		5,~~548~~629		45,~~575~~830
Total	$	1614,~~854~~610	$	2115,~~492~~992

Three Months Ended ~~September 30~~March 31, ~~2016~~2017 Compared to Three Months Ended ~~September 30~~March 31, ~~2015~~2016

~~The~~Net ~~net~~ interest margin decreased 710 basis points to 3.7267% for the three months ended ~~September 30~~March 31, ~~2016~~2017, compared to 3.7977% for the three months ended ~~September 30~~March 31, ~~2015~~2016. The decrease in net interest margin is primarily due to average loans being a lower percentage of interest -earning assets for the quarter ended ~~September 30~~March 31, ~~2016~~2017 than for the same quarter a year ago, due to strong ~~growth~~ growth in average deposits. Additionally, the existing low interest rate environment continues to contribute to the loan yield compression, as new loans have been originated at lower interest rates than those loans that have been paid off in ~~2015 and 2016. Loan yield compression has been mitigated as real estate loans become a higher percentage of~~ the ~~loan~~first ~~mix~~quarter than commercial and industrial loans. Loan yields on real estate loans including construction loans are typically higher than the yields on commercial and industrial loans. The net interest margin for both quarters was positively impacted by the recognition of ~~fair value discounts earned on early payoffs of acquired loans~~2017. For the quarter ended ~~September~~March 31, 302017, ~~2016,~~ the Company recorded $~~629~~ 688 thousand in discounts earned on early loan payoffs of acquired loans and other associated payoff benefits of $~~177~~ 306 thousand, which had a positive impact on the net interest margin of 1214 basis points. For the quarter ended ~~September 30~~March 31, ~~2015~~2016, the Company recorded $~~560~~ 528 thousand in discounts earned on early loan payoffs of acquired loans and other associated payoff benefits of $~~321~~ 123 thousand, which had a positive impact on the net interest margin of 15 11 basis points. Despite a prime rate increase in December 2016, the average rate on paid off loans is higher than the rate on new loans.

~~Nine~~Page ~~Months~~52 ~~Ended~~of 72 ~~September 30, 2016 Compared to Nine Months Ended September 30, 2015~~

The net interest margin decreased 10 basis points to 3.77% for the nine months ended September 30, 2016, compared to 3.87% for the nine months ended September 30, 2015. The decrease in net interest margin is primarily due to average loans being a lower percentage of interest earning assets. The existing low interest rate environment continues to

Page 57 of 77

contribute to the loan yield compression, as new loans have been originated at lower interest rates than those loans that have been paid off in 2015 and 2016. For the nine months ended September 30, 2016, the Company recorded $1.9 million in discounts earned on early loan payoffs of acquired loans and other associated payoff benefits of $462 thousand, which had a positive impact on the net interest margin of 12 basis points. For the nine months ended September 30, 2015, the Company recorded $1.1 million in discounts earned on early loan payoffs of acquired loans and other associated payoff benefits of $522 thousand, which had a positive impact on the net interest margin of 11 basis points.

Provision for Loan Losses

Provision for loan losses for the three months ended ~~September 30~~March 31, ~~2016~~2017 was ~~$697~~zero ~~thousand~~ compared to $~~705~~ 622 thousand for the three months ended ~~September 30~~March 31, ~~2015~~2016. The Company had $66 33 million of net organic loan growth for the quarter ended ~~September 30~~March 31, ~~2016~~2017, compared to $89 90 million for the same quarter a year ago. The Company also had less substandard loans at March 31, 2017. Net ~~charge-offs~~recoveries for the three months ended ~~September 30~~March 31, ~~2016~~ 2017 were $~~802~~ 231 thousand, compared to net recoveries of $~~136~~ 241 thousand in ~~2015~~2016.

Provision for loan losses for the nine months ended September 30, 2016 was $2.4 million, compared to $2.8 million for the nine months ended September 30, 2015. The Company had $277 million of net organic loan growth for the nine months ended September 30, 2016, compared to $246 million for the nine months ended September 30, 2015. Net recoveries for the nine months ended September 30, 2016 were $307 thousand compared to net charge-offs of $476 thousand in 2015. See further discussion in Balance Sheet Analysis, Allowance for Loan Loss.

Non-Interest Income

The following table lists the major components of the Company’s non-interest income for the periods indicated (dollars in thousands):

	Three Months EndedSeptember 30,				Increase(Decrease)						Nine Months EndedSeptember 30,				Increase(Decrease)
	Three Months EndedMarch 31,				Increase(Decrease)
	2016		2015		$			%			2016		2015		$			%
	2017		2016		$			%
Gain on sale of securities, net	$	141		—	$	141			—100	%	$	~~141~~	$	—	$	~~141~~			—	%
Gain on sale of SBA loans, net		~~189~~202		~~640~~554		(~~451~~352	)		(7063.5	)%		~~1,228~~		~~1,278~~		~~(50~~	)		~~(3.9~~	)%
Deposit account service charge income		1,~~210~~161		1,~~159~~189		51(28	)		4(2.4	)%		~~3,621~~		~~3,453~~		~~168~~			~~4.9~~	%
Letters of credit income		~~279~~286		~~187~~270		9216			495.29	%		~~844~~		~~506~~		~~338~~			~~66.8~~	%
Transaction referral income		278		—		278			100	%		308		408		(100	)		(24.5	)%
Interchange fees		147		113		34			30.1	%
Dividend income in equity securities		~~222~~213		~~409~~151		~~(187~~62	)		~~(45~~41.71	)%		~~593~~		~~1,106~~		~~(513~~	)		~~(46.4~~	)%
BOLI income		~~328~~379		~~333~~323		(556	)		(117.53	)%		~~976~~		~~947~~		29			~~3.1~~	%
Other non-interest income		~~411~~306		~~260~~220		~~151~~86			5839.1	%		~~1,142~~		~~993~~		~~149~~			~~15.0~~	%
Total Non-Interest Income	$	32,~~058~~835	$	2,~~988~~820	$	7015			20.35	%	$	~~8,853~~	$	~~8,691~~	$	~~162~~			~~1.9~~	%

Three Months Ended ~~September 30~~March 31, ~~2016~~2017 Compared to Three Months Ended ~~September 30~~March 31, ~~2015~~2016

Non-interest income increased $70 15 thousand or 20.35% to $32.1 84 million for the three months ended ~~September 30~~March 31, ~~2016~~2017 compared to $32.0 82 million for the three months ended ~~September 30~~March 31, ~~2015~~2016. The ~~increase~~Company’s isgain ~~primarily~~on ~~driven~~sale byof aSBA ~~$278~~loans ~~thousand~~as ~~increase~~of inMarch 31, ~~transaction~~2017 ~~referral~~was ~~income~~$202 thousand, acompared ~~$141~~to $554 thousand as of March 31, ~~gain~~2016; onthe ~~sale~~gain ofwas ~~securities,~~lower adue ~~$92~~to ~~thousand~~the ~~increase~~average inloan ~~letters~~size ofbeing ~~credit~~smaller. ~~income,~~Decrease ~~offset~~of ~~by a~~ $~~451~~ 352 thousand ~~decrease~~ in gain on sale of SBA loans. ~~The~~as ~~$640 thousand gain on sale~~ of ~~SBA loans in the three months ended September 30~~March 31, ~~2015~~2017 was ~~the~~offset ~~highest~~by inincreases ~~Company~~of ~~history.~~$62 thousand ~~The increase~~ in ~~non-interest~~stock ~~income~~dividends ~~for the three months ended~~and ~~September 30, 2016 is further offset by a~~ $~~187~~ 56 thousand ~~decrease~~ in ~~dividend~~ income ~~related to the Company’s investment in FHLB stock. In light of the consistent increase in the quarterly dividend rate~~ from ~~the~~Bank ~~FHLB~~owned inlife ~~2015~~insurance, ~~the~~compared ~~Company began~~ to ~~accrue for~~ the ~~dividend~~same asperiod ~~it was earned beginning~~ in ~~the third quarter of 2015~~2016. ~~Previously~~The ~~the~~Bank ~~Company~~purchased ~~recorded~~additional ~~the~~BOLI ~~dividend as income~~ in ~~the~~February ~~period~~of ~~received;~~2017. ~~as a result~~Additionally, the ~~accrual~~Company ofrealized ~~$200~~a $141 thousand ~~for~~gain ~~the~~on ~~dividend~~sale ~~earned~~of insecurities ~~the~~as ~~third quarter~~ of ~~2015~~ March 31, ~~which~~2017 ~~was~~whereas ~~received~~as ~~early in~~ the ~~fourth~~Company ~~quarter~~had ofno ~~2015,~~comparable ~~overlapped~~gain ~~with~~on ~~the~~sale ~~second quarter dividend payment~~ of ~~$200~~securities ~~thousand received and recorded~~ as ~~income early in the third quarter~~ of ~~2015~~March 31, 2016.

Page 5853 of 7772

Nine Months Ended September 30, 2016 Compared to Nine Months Ended September 30, 2015

Non-interest income increased $162 thousand or 1.9% to $8.9 million for the nine months ended September 30, 2016 compared to $8.7 million for the nine months ended September 30, 2015. This change was mainly due to a $338 thousand increase in letters of credit income, a $168 thousand increase in deposit account service charge income and a $141 increase in gain on sale of securities, offset by a $100 thousand decrease of transactional referral income and a $513 thousand decrease of dividend income related to the Company’s investment in FHLB stock. The decrease in dividend income is due to a $296 thousand special dividend received from the FHLB in the second quarter of 2015, coupled with the recognition of two quarters of dividend in the third quarter of 2015, as mentioned in the previous paragraph.

Non-Interest Expense

The following table lists the major components of the Company’s non-interest expense for the periods indicated (dollars in thousands):

	Three Months EndedSeptember 30,				Increase(Decrease)						Nine Months EndedSeptember 30,				Increase(Decrease)
	Three Months EndedMarch 31,				Increase(Decrease)
	2016		2015		$			%			2016		2015		$			%
	2017		2016		$			%
Salaries and employee benefits	$	910,~~396~~288	$	89,~~934~~319	$	~~462~~969			510.24	%	$	~~27,745~~	$	~~26,045~~	$	~~1,700~~			~~6.5~~	%
Stock based compensation expense		~~939~~773		~~810~~834		~~129~~(61	)		15(7.93	)%		~~2,664~~		~~2,130~~		~~534~~			~~25.1~~	%
Occupancy		1,~~673~~489		1,~~465~~436		~~208~~53			143.27	%		~~4,548~~		~~4,300~~		~~248~~			~~5.8~~	%
Data processing		~~657~~656		~~596~~618		6138			106.21	%		~~1,910~~		~~1,872~~		38			~~2.0~~	%
Legal and professional		1,~~434~~009		~~412~~475		~~1,022~~534			~~248~~112.14	%		~~2,560~~		~~1,914~~		~~646~~			~~33.8~~	%
FDIC deposit assessment		~~389~~446		~~370~~350		1996			527.14	%		~~1,098~~		~~1,054~~		44			~~4.2~~	%
Merger related expenses		—		146		(146	)		(100	)%		—		498		(498	)		(100	)%
OREO loss and expenses		—		79		(79	)		(100	)%
OREO loss and expenses		2		153		(151	)		(98.7	)%		85		179		(94	)		(52.5	)%
Office services expenses		380		403		(23	)		(5.7	)%
Office services expenses		413		383		30			7.8	%		1,136		1,204		(68	)		(5.6	)%
Core deposit intangible amortization		284		321		(37	)		(11.5	)%
Core deposit intangible amortization		320		419		(99	)		(23.6	)%		961		1,262		(301	)		(23.9	)%
Other operating expenses		1,368		1,352		16			1.2	%
Other operating expenses		1,544		1,379		165			11.97	%		4,336		4,434		(98	)		(2.2	)%
Total Non-Interest Expense	$	16,693	$	15,187	$	1,506			9.9	%
Total Non-Interest Expense	$	16,767	$	15,067	$	1,700			11.3	%	$	47,043	$	44,892	$	2,151			4.8	%

Three Months Ended ~~September 30~~March 31, ~~2016~~2017 Compared to Three Months Ended ~~September 30~~March 31, ~~2015~~2016

Non-interest expense increased by $1.7 5 million or 119.39% to $16.8 7 million for the three months ended ~~September 30~~March 31, ~~2016~~2017 compared to $15.1 2 million for the three months ended ~~September 30~~March 31, ~~2015~~2016. The increase was largely related to the increases in salaries and employee benefits and legal and professional fees. The increase in salaries and other benefits expense is attributable to the increase in the Company’s ~~recorded~~active ~~one~~full-time ~~expenses~~equivalent ofemployees, ~~$1.2~~which ~~million~~grew into ~~the~~294 ~~third~~at ~~quarter~~ March 31, 2017, an increase of 21 from March 31, 2016, of which ~~$957~~13 ~~thousand~~ were BSA ~~expenses~~ related ~~to the Consent Order,~~ and ~~$203~~6 ~~thousand~~were in deposit ~~one-time~~support ~~expenses~~services. ~~associated~~Legal ~~with~~and ~~closing~~professional ~~the~~fee ~~Company’s~~expense ~~Simi~~increased ~~Valley~~by ~~administrative~~$534 ~~office.~~as ~~The~~compared ~~following~~to ~~table~~the ~~shows~~quarter ~~the~~ended ~~Company’s various~~March 31, ~~non-recurring~~2016, ~~non-interest~~primarily ~~expense~~ related to the ~~Consent~~impending ~~Order~~merger and ~~the~~nonrecurring ~~Simi~~consulting ~~Valley~~costs ~~office~~associated ~~closure~~with ~~for~~ the ~~three~~BSA ~~months~~Consent ~~ended September 30, 2016:~~ Order.

Nonrecurring Costs Associated with BSA and Office Closure	Three MonthsEndedSeptember 30,2016
Non-Interest Expense
Salaries and employee benefits	$	106,090
Occupancy		246,673
Legal and professional		601,822
FDIC deposit assessment		15,000
Other operating expenses		190,717
Total Non-Interest Expense	$	1,160,302

Page 54 of 72

Further, the increase in salaries and other benefits expense is attributable to the increase in the Company’s active full-time equivalent employees, which grew to 285 at September 30, 2016, an increase of 19 from September 30, 2015, with the majority of the increase attributable to the hiring of seven full-time equivalent employees near the end of the second quarter of 2016 and the hiring of an additional five in the third quarter of 2016. These hires were made in order to support the high level of customer service CUB provides, as well as address expanding regulatory and compliance requirements.

Page 59 of 77

There were no merger expenses in the three months ended September 30, 2016, compared to $146 thousand in the year-ago period.

Nine Months Ended September 30, 2016 Compared to Nine Months Ended September 30, 2015

Non-interest expense increased $2.1 million or 4.8% to $47.0 million for the nine months ended September 30, 2016 compared to $44.9 million for the nine months ended September 30, 2015. The increase was largely related to increases in salaries and employee benefits and legal and professional fees, offset by decreases in merger related expenses and core deposit intangible amortization. The following table shows the Company’s various non-recurring, non-interest expense related to the Consent Order and the Simi Valley office closure for the nine months ended September 30, 2016:

Nonrecurring Costs Associated with BSA and Office Closure	Nine MonthsEndedSeptember 30,2016
Non-Interest Expense
Salaries and employee benefits	$	106,090
Occupancy		246,673
Legal and professional		606,822
FDIC deposit assessment		15,000
Other operating expenses		288,485
Total Non-Interest Expense	$	1,263,070

Income Taxes

The Company’s effective tax rate is impacted by BOLI income and interest income from tax exempt securities and loans which are excluded from taxable income, and ~~beginning in 2016, deductions from~~ excess tax benefits from ~~the~~ exercise or vesting of share-based awards. In the third quarter of 2016, the Company elected the early adoption of ASU 2016-09, retroactively effective as of January 1, 2016. As a result of this new standard, excess tax benefits from exercise or vesting of share-based awards are ~~now~~ included as a reduction in provision for income tax expense in the period in which the exercise or vesting occurs. The ~~impact of such excess tax benefits reduced the Company’s~~ effective tax rate ~~from 39.5% to 38.1%~~ for the three months ended ~~September 30~~March 31, ~~2016,~~2017 ~~and~~was ~~from 39~~36.89% compared to 37.02% for the ~~nine months ended September 30, 2016. For the~~ three months ~~and the nine months~~ ended ~~September 30~~March 31, 2016~~, the number of options exercised were 15,000 and 411,964, respectively~~. The tax rate will have more volatility, depending on the volume of vestings and exercises as well as the associated excess tax benefits generated. ~~For~~The ~~additional~~amount ~~information~~of excess tax benefits were $424 thousand and ~~the~~$297 ~~impact~~thousand offor the ~~adoption,~~periods ~~see~~ended ~~Note~~March 231, ~~“Recent~~2017 ~~Accounting Pronouncements~~and 2016,” respectively. Without the excess tax benefits in ~~Item~~the 1.quarter ~~“Financial~~ended ~~Statements~~March 31, 2017, the effective tax rate would have been 40%.” In addition, the Company has invested in Qualified Affordable Housing Projects “LIHTC” that generate tax credits and benefits for the Company.

The ~~effective tax rate for the three months ended September 30, 2016 was 38.1% compared to 34.9% for the three months ended September 30, 2015. For the three months ended September 30, 2015, the~~ Company recognized a combined one-time benefit of $465 thousand primarily relating to the filing of the final 1st Enterprise tax returns and the CU Bancorp tax return for the year ended December 31, 2014. The effective tax rate for the nine months ended September 30, 2016 was 37.0% compared to 37.8% for the nine months ended September 30, 2015. The Company operates in the Federal and California jurisdictions and the blended statutory tax rate for Federal and California income taxes is 42.05%.

Page 6055 of 7772

FINANCIAL CONDITION

Balance Sheet Analysis

Total assets increased $~~259~~ 149 million during the ~~nine~~three months ended ~~September 30~~March 31, ~~2016~~2017, to $23.9 1 billion ~~with~~due anto ~~increase of $70 million in cash and cash equivalents,~~ an increase of $57 147 million in ~~investment securities, and an increase of $142 million in loans~~deposits. ~~The~~ ~~increase~~Loans inwere ~~loans~~flat from the end of the prior year ~~was~~as ~~due~~the tonet organic loan ~~growth. Net~~production ~~organic loan growth~~ during the period ~~was~~of $~~277~~ 33 million, ~~partially~~was offset by $~~135~~ 37 million of ~~pay~~payoffs/paydowns ~~downs~~ in the acquired loan portfolios from the COSB, PC Bancorp acquisitions and the 1st Enterprise merger.

Funding the asset growth for the Company for the first ~~nine~~three months of ~~2016~~2017 was the growth in deposits of $~~219~~ 147 million and net income of $~~20 million~~7.8 million. Further, the deposit growth of $~~219~~ 147 million is the result of aan $~~111~~ 86 million increase in non-interest bearing deposits, a $14 million increase in interest bearing transaction deposits and a ~~$108~~ $47 million increase in money market and savings deposits. Non-interest bearing deposits represented 5654% of total deposits at both ~~September 30~~March 31, ~~2016~~2017, and December 31, ~~2015~~2016.

Lending

The following table presents the composition of the loan portfolio at the dates indicated (dollars in thousands):

	September 30,2016					December 31,2015
	March 31,2017					December 31,2016
	Amount		% of Total			Amount		% of Total
Commercial and Industrial Loans:	$	~~499~~484,~~439~~280		2524	%	$	~~537~~502,~~368~~637		2925	%
Loans Secured by Real Estate:
Owner-Occupied Nonresidential Properties		~~430~~436,~~218~~269		2221	%		~~407~~451,~~979~~322		2322	%
Other Nonresidential Properties		~~610~~689,~~267~~015		3134	%		~~533~~630,~~168~~163		2931	%
Construction, Land Development and Other Land		~~172~~192,~~441~~572		9	%		~~125~~194,~~832~~059		79	%
1-4 Family Residential Properties		~~122~~118,~~955~~268		6	%		~~114~~127,~~525~~164		6	%
Multifamily Residential Properties		~~100~~95,~~003~~483		5	%		71109,~~179~~858		45	%
Total Loans Secured by Real Estate		1,~~435~~531,~~884~~607		7375	%		1,~~252~~512,~~683~~566		6973	%
Other Loans:		3930,~~618~~251		21	%		4335,~~112~~023		2	%
Total Loans	$	12,~~974~~046,~~941~~138		100	%	$	12,~~833~~050,~~163~~226		100	%

Page 6156 of 7772

The following table is a breakout of the Company’s gross loans stratified by the industry concentration of the borrower by their respective NAICS code at the dates indicated (dollars in thousands):

	September 30,2016					December 31,2015
	March 31,2017					December 31,2016
	Amount		% of Total			Amount		% of Total
Real Estate	$	1,~~008~~139,~~655~~458		5156	%	$	~~857~~1,~~021~~096,377		4753	%
Manufacturing		~~172~~166,~~659~~127		98	%		~~174~~180,~~773~~217		109	%
Construction		~~161~~123,~~393~~241		86	%		~~161~~140,~~618~~270		97	%
Wholesale		115,546		6	%		134,093		7	%
Hotel/Lodging		129,912		6	%		120,760		6	%
Hotel/Lodging		119,200		6	%		105,741		6	%
Wholesale		117,165		6	%		117,444		6	%
Finance		9571,~~212~~093		53	%		8783,~~734~~061		54	%
Professional Services		5651,~~646~~763		3	%		6058,~~952~~766		3	%
Healthcare		50,091		3	%		47,293		3	%
Other Services		45,660		2	%		50,425		2	%
Other Services		45,621		2	%		45,002		3	%
Healthcare		45,092		2	%		46,184		2	%
Retail		29,134		2	%		38,928		2	%
Information		34,441		2	%		32,014		2	%
Restaurant/Food Service		24,109		1	%		26,226		1	%
Retail		28,840		1	%		28,938		1	%
Administrative Services		19,385		1	%		23,736		1	%
Restaurant/Food Service		24,149		1	%		24,118		1	%
Transportation		1720,~~739~~500		1	%		2219,~~237~~857		1	%
Information		29,094		1	%		20,171		1	%
Administrative Services		14,966		1	%		17,090		1	%
Education		8,671		—	%		9,244		1	%
Entertainment		11,747		1	%		13,569		1	%
Management		7,120		—	%		8,137		—	%
Education		11,474		1	%		10,370		1	%
Entertainment		9,805		1	%		6,188		—	%
Management		5,490		—	%		6,455		—	%
Other		45,~~861~~020		—	%		4,~~069~~311		—	%
Total Loans	$	12,~~974~~046,~~941~~139		100	%	$	12,~~833~~050,~~163~~226		100	%

The Company’s loan origination and lending activities continue to be focused primarily on direct contact with its borrowers through the Company’s relationship managers and/or executive officers. We continue to establish new relationships and expand our current business. Total loans were $2.0 billion at ~~September 30~~March 31, ~~2016~~2017, ana ~~increase~~decrease of $~~142~~ 4 million or 70.720%, from $12.8 1 billion at December 31, ~~2015~~2016. ~~The~~ ~~Company~~An ~~had~~overall ~~approximately~~trend ~~$277~~was ~~million~~a higher level of ~~net~~paid ~~organic~~off ~~loan~~loans ~~growth,~~this ~~which~~quarter ~~was~~especially ~~partially~~in ~~offset~~commercial byand ~~approximately~~industrial ~~$135~~loans ~~million~~of inwhich ~~loan~~some ~~pay~~were ~~downs~~due ~~from~~to the ~~acquired~~sale ~~loan portfolios~~of the business. ~~The~~ ~~increase~~During the infirst ~~total~~quarter ~~loans~~of ~~from~~2017, the ~~end~~Company had $33 million of ~~the~~net ~~prior~~organic ~~year~~loan ~~included~~production, awhich ~~$22~~was ~~million~~offset ~~increase~~by inapproximately ~~the~~$37 million ~~owner-occupied~~in ~~non-residential~~loan ~~properties~~payoffs/paydowns ~~portfolio,~~from athe ~~$77~~acquired ~~million~~loan ~~increase~~portfolios induring the ~~other~~same ~~nonresidential~~period. ~~real~~Loans ~~estate~~secured ~~properties~~by real ~~portfolio,~~estate agrew $47 19 million ~~increase~~ in the ~~construction,~~first ~~land~~quarter ~~development~~of ~~and~~2017, ~~other~~compared ~~land~~to ~~portfolio~~the prior quarter, ~~and~~with aall ~~$29~~of ~~million~~the ~~increase~~growth coming in ~~the~~other ~~multifamily~~nonresidential ~~residential~~ properties ~~portfolio~~. ~~These~~ ~~increases~~This ~~were~~increase was offset by a decrease of $38 18 million in commercial and industrial loans. The yields on new loans originated during the first ~~three~~quarter ~~quarters~~ of ~~2016~~2017 have averaged 4.1317%.

~~While~~The ~~commercial and industrial loans declined by $38 million from December 31, 2015, the~~ Company’s total commercial line of credit commitments ~~have~~ ~~remained~~and ~~stable~~related atdisbursed ~~$887~~funds ~~million~~decreased atby ~~both~~$21 million ~~September~~and ~~30,~~$16 million ~~2016~~from ~~and~~ December 31, ~~2015~~2016, ~~and~~respectively, ~~the~~resulting ~~Company’s~~in ~~commercial~~a ~~and~~utilization ~~industrial~~rate ~~line~~ of ~~credit utilization was 45~~40% at ~~September 30~~March 31, ~~2016~~2017, ~~and~~the ~~46%~~same as ~~of December 31, 2015. The decrease in commercial and industrial loans was due to various reasons including~~ the ~~sale~~end of ~~two of our customer’s businesses during~~ the ~~second quarter of 2016, and the loss of two relationships in the third quarter, one which was risk rated substandard,~~previous ~~and the other where a competitor offered an aggressive structure that we chose not to match~~quarter. Due to the dynamic nature of commercial and industrial lending, actual credit utilization may experience ebbs and flows.

Commercial and industrial loans and owner-occupied real estate loans combined were $~~930~~ 921 million or 4745% of total loans at ~~September 30~~March 31, ~~2016,~~ 2017, compared to $~~945~~ 954 million or 5247% at December 31, ~~2015~~2016. Of the total commercial and industrial loans, 18% and 19% was unsecured at ~~both September 30~~March 31, ~~2016~~2017 and December 31, ~~2015~~2016, respectively.

Other non-residential loans increased by $77 59 million from the end of the prior year, the largest of which included one new hotel loan ~~near~~located ~~Disneyland~~in ofFresno for $15 9 million ~~originated~~and ~~during~~four ~~the~~new ~~third~~loans ~~quarter~~for a total of ~~2016.~~$25 ~~The~~million ~~Company~~on ~~originates~~diverse ~~other~~types of non-residential ~~loans~~facilities ~~with~~located ~~well-structured~~in ~~terms~~Los ~~and~~Angeles ~~guarantees,~~County ~~primarily~~and Orange ~~collateralized~~County bywith ~~commercial~~the ~~buildings. Multifamily~~highest ~~residential~~loan ~~properties increased~~to byvalue ~~$29~~of ~~million,~~65%. ~~primarily~~The ~~related~~Company tooriginates ~~three~~other ~~new~~non-residential loans ~~totaling~~with ~~$18~~well-structured ~~million~~terms ~~in Los Angeles County~~ and ~~one~~guarantees, ~~loan~~primarily ofcollateralized $8by ~~million~~commercial ~~in San Bernardino County~~buildings.

~~Page~~The 62Company ofhad 53 commercial banking relationship managers and 8 commercial real estate relationship managers at March 31, 2017. This 77compares to 57 commercial banking relationship managers and 9 commercial real estate relationship managers at December 31, 2016 as the Bank experienced some retirements in 2017.

The Company provides commercial loans, including working capital and equipment financing, real estate loans, including residential and construction and consumer loans, generally to business principals, entrepreneurs and professionals. The Company currently does not offer residential mortgages to consumers other than home equity lines of credit. In addition,

Page 57 of 72

~~Included~~ we inhave ~~loan~~not ~~growth~~made ~~from~~any ~~the~~loans ~~end~~to offinance ~~the~~leveraged ~~prior~~buyouts. ~~year~~The ~~was~~Company’s areal ~~$47~~estate ~~million~~construction ~~increase~~loans inare ~~the construction~~primarily ~~lending~~short-term ~~portfolio,~~loans ~~which~~made ~~primarily~~to ~~consists~~finance the construction of 1-4 single family and multifamily ~~construction~~residential ~~projects~~properties. inOn ~~Los~~occasion, ~~Angeles~~the ~~County~~Company ~~undertaken~~originates byloans ~~customers~~to ~~that~~finance ~~have~~the ~~long~~construction of single family residences to established developers and owner-~~term~~occupiers. The Company’s construction lending is to known relationships, doing projects the builder/developer has experience with, and the majority are with recourse and are rarely speculative in nature. The Company’s credit approval process includes an examination of the collateral, cash flow and debt service coverage of the loan, as well as the financial condition and credit references of the borrower and guarantors, where applicable. The Company’s senior management is actively involved in its lending activities, collateral valuation and review process. The Company obtains independent third party appraisals of loans secured by real property as required by applicable federal law and regulations. There is also a Board of Directors Loan Committee (“BODLC”) comprised of senior management and outside directors that monitors the loan portfolio on at least a quarterly basis.

The Company had 55 commercial banking relationship managers and 9 commercial real estate relationship managers at September 30, 2016. This compares to 53 commercial banking relationship managers and 9 commercial real estate relationship managers at December 31, 2015.

The Company provides commercial loans, including working capital and equipment financing, real estate loans, including construction and consumer loans, generally to business principals, entrepreneurs and professionals. The Company currently does not offer residential mortgages to consumers other than home equity lines of credit. In addition, we have not made any loans to finance leveraged buyouts. The Company’s real estate construction loans are primarily short-term loans made to finance the construction of 1-4 single family and multifamily residential properties. On occasion, the Company originates loans to finance the construction of single family residences to established developers and owner-occupiers. The Company’s construction lending is to known relationships, doing projects the builder/developer has experience with, and the majority are with recourse and are rarely speculative in nature. The Company’s credit approval process includes an examination of the collateral, cash flow and debt service coverage of the loan, as well as the financial condition and credit references of the borrower and guarantors, where applicable. The Company’s senior management is actively involved in its lending activities, collateral valuation and review process. The Company obtains independent third party appraisals of loans secured by real property as required by applicable federal law and regulations. There is also a Board of Directors Loan Committee (“BODLC”) comprised of senior management and outside directors that monitors the loan portfolio on at least a quarterly basis.

The Company believes that it manages credit risk closely in its loan portfolio and uses a variety of policy and procedure guidelines and analytical tools to achieve its asset quality objectives.

We do not have any concentrations in our loan portfolio except for the level of loans that are secured by real estate and the level of loans to the real estate industry as presented in the tables above. Although the Bank’s real estate concentration this quarter ending ~~September 30~~March 31, ~~2016~~2017 exceeds 300% of total risk based capital, the Company has maintained its relationship based approach to lending which has resulted in nominal charge-off experience in the real estate portfolio since the Company’s inception. ~~Management~~ Management plans to continue originating the same quality real estate loans that are currently included in its loan portfolio.

Page 6358 of 7772

Allowance for Loan Loss

The Allowance increased by $~~105~~ 231 thousand, to $18 20 million during the quarter ended ~~September 30~~March 31, ~~2016~~2017, due to anet ~~provision~~recoveries ~~for loan losses~~ of $~~697~~ 231 thousand ~~with net charge-offs of $802 thousand~~. The Allowance as a percentage of total loans was 0.9396% at ~~September 30~~March 31, ~~2016~~2017 and 0.8694% at December 31, ~~2015~~2016. ~~The~~ ~~increase in the allowance ratio is primarily due to net organic loan growth.~~ The Allowance as a percentage of loans (excluding loan balances and the related Allowance on loans acquired through acquisition) was 1.2017% and 1.2518%, respectively, at ~~September 30~~March 31, ~~2016~~2017 and December 31, ~~2015~~2016. ~~The~~ ~~decrease~~During in the ~~allowance~~ ~~ratio~~first ~~related~~quarter toof ~~organic~~2017, ~~loans~~net ~~was~~organic ~~directly~~loan ~~attributable~~production towas ~~the~~$33 million ~~strong~~offset ~~credit~~by ~~performance~~$37 million of ~~the~~payoffs/paydowns ~~loan portfolio~~ in ~~2016, which reflects~~ the acquired ~~Company’s~~loan ~~continuing commitment to prudent underwriting and credit management~~portfolios.

The Company’s management considered the following factors in evaluating the allowance for loan loss at ~~September 30~~ March 31, ~~2016~~2017:

• During the ~~nine~~three months ended ~~September~~March 3031, ~~2016~~2017 there were ~~five~~no loan charge-offs ~~totaling $827 thousand~~ and loan recoveries of $~~1.1~~231 ~~million. Of the $1.1 million recoveries, $800~~ thousand ~~was related to an acquired construction loan~~.

• There were ~~eleven~~eight non-accrual loans totaling $~~1.2~~760 ~~million~~thousand with no specific allowance required at ~~September~~March 3031, ~~2016~~2017, with none individually exceeded $300 thousand

•

Reduced level of substandard loans from December 31, 2016

•

The overall growth and composition of the loan portfolio

•

Changes to the overall economic conditions within the markets in which the Company makes loans

•

Concentrations within the loan portfolio

•

The remaining fair value adjustments on loans acquired through acquisition

Management has considered various material elements of potential risk within the loan portfolio, including classified credits, pools of loans with similar characteristics, economic factors, trends in the loan portfolio and changes in the Company’s lending policies, procedures and underwriting criteria. In addition, management recognized the potential for unforeseen events to occur when evaluating the qualitative factors in all categories of its analysis.

The Company analyzes historical net charge-offs in various loan portfolio segments when evaluating the allowance. For loan segments without a meaningful historical loss experience, the analysis is adjusted to consider regulatory peer group loss experience in those loan segments. The loss analysis is then adjusted for qualitative factors that may have an impact on loss experience in the particular loan segments.

The Allowance and the reserve for unfunded loan commitments are significant estimates that can and do change based on management’s process in analyzing the loan portfolio and on management’s assumptions about specific borrowers and applicable economic and environmental conditions, among other factors. In considering all of the above factors, management believes that the Allowance at ~~September 30~~March 31, ~~2016~~2017 is adequate. Although the Company maintains its Allowance at a level which it considers adequate to provide for probable loan losses, there can be no assurance that such losses will not exceed the estimated amounts, thereby adversely affecting future results of operations.

The following table is a summary of the activity for the Allowance as of the dates and for the periods indicated (dollars in thousands):

	Three Months EndedSeptember 30,						Nine Months EndedSeptember 30,
	Three Months EndedMarch 31,
	2016			2015			2016			2015
	2017			2016
Allowance for loan loss at beginning of period	$	1819,~~476~~374		$	1415,~~124~~682		$	~~15,682~~		$	~~12,610~~
Provision for loan losses		~~697~~—			~~705~~622			~~2,382~~			~~2,831~~
Net (charge-offs) recoveries:
Charge-offs		~~(807~~—	)		~~(42~~—	)		~~(827~~	)		~~(933~~	)
Recoveries		5231			~~178~~241			~~1,134~~			~~457~~
Net (charge-offs) recoveries		(802	)		136			307			(476	)
Net recoveries		231			241
Allowance for loan loss at end of period	$	1819,~~371~~605		$	1416,~~965~~545		$	~~18,371~~		$	~~14,965~~
Net (charge-offs) recoveries to average loans		(0.04	)%		0.01	%		0.02	%		(0.03	)%
Net recoveries to average loans		0.01	%		0.01	%

Page 6459 of 7772

The following is a summary of our asset quality data and key ratios at the dates indicated (dollars in thousands):

	September 30,2016			December 31,2015
	March 31,2017			December 31,2016
Loans originated by the Bank on non-accrual	$	—		$	89—
Loans acquired through acquisition that are on non-accrual		1,223			1,962
Loans acquired through acquisition on non-accrual		760			1,122
Total non-accrual loans		~~1,223~~760			21,~~051~~122
Other Real Estate Owned		—			~~325~~—
Total non-performing assets	$	~~1,223~~760		$	21,~~376~~122
Net charge-offs (recoveries) year to date	$	(~~307~~231	)	$	~~2,009~~(428	)
Non-accrual loans to total loans		0.0604	%		0.1105	%
Total non-performing assets to total assets		0.0402	%		0.0904	%
Allowance for loan losses to total loans		0.9396	%		0.8694	%
Allowance for loan losses to total loans accounted at historical cost, which excludes loans acquired by acquisition		1.2017	%		1.2518	%
Allowance for loan losses to non-accrual loans accounted at historical cost, which excludes non-accrual loans acquired by acquisition and related allowance		—			~~17583~~—	%
Allowance for loan losses to total non-accrual loans		~~1503~~2580	%		~~764~~1726	%

Deposits

The following table presents the balance of each major category of deposits at the dates indicated (dollars in thousands):

	September 30,2016					December 31,2015
	March 31,2017					December 31,2016
	Amount		% of Total			Amount		% of Total
Non-interest bearing demand deposits	$	1,~~399~~485,~~320~~730		5654	%	$	1,~~288~~400,~~085~~097		5654	%
Interest bearing transaction accounts		~~284~~346,~~154~~279		1113	%		~~261~~332,~~123~~702		1113	%
Money market and savings deposits		~~786~~892,~~882~~143		32	%		~~679~~845,~~081~~110		3032	%
Certificates of deposit		3530,~~033~~623		1	%		5829,~~502~~480		31	%
Total deposits	$	2,~~505~~754,~~389~~775		100	%	$	2,~~286~~607,~~791~~389		100	%

Total deposits increased $~~219~~ 147 million to $2.5 8 billion at ~~September 30~~March 31, ~~2016~~2017, primarily due to a an $~~111~~ 86 million increase in non-interest bearing demand deposits, a $~~108~~ 47 million increase in money market and savings deposits, a $23 14 million increase in interest bearing transaction accounts,. Certificates ~~offset by a decrease~~ of ~~$23~~deposit ~~million~~remained ~~in certificates of deposit~~stable. The strong growth in deposits during this period came primarily from existing relationships. We believe some of the increase in total deposits during the first quarter of 2017 is likely related to customers accumulating cash in anticipation of federal and state income tax payments, as well as county property taxes in California. The average size of non-interest bearing and money market accounts continued to grow in the first quarter of 2017. Non-interest bearing deposits represented 5654% of total deposits at ~~September 30~~March 31, ~~2016~~2017 and December 31, ~~2015~~2016.

Management believes one of the strengths of the Company continues to be its core deposit franchise with a cost of deposits of 0.1113% for the three ~~and nine~~ months ended ~~September 30~~March 31, ~~2016~~2017. The Company only realized a small increase in its costs despite three increases in the prime rate since December 2015.

Page 6560 of 7772

LIQUIDITY

The following table provides a summary of the Bank’s primary and secondary liquidity levels at the dates indicated (dollars in thousands):

	September 30,2016			December 31,2015
	March 31,2017			December 31,2016
	Amount			Amount
Primary Liquidity-On Balance Sheet:
Cash and due from banks	$	4751,~~701~~168		$	5041,~~960~~281
Interest earning deposits in other financial institutions		~~244~~313,~~205~~610			~~171~~167,~~103~~789
Investment securities available-for-sale		~~375~~469,~~094~~399			~~315~~469,~~785~~950
Less: pledged cash and due from banks		—			—
Less: pledged investment securities		(~~194~~219,~~485~~210	)		(~~197~~204,~~251~~855	)
Total primary liquidity	$	~~472~~614,~~515~~967		$	~~340~~474,~~597~~165
Ratio of primary liquidity to total deposits		1822.932	%		1418.919	%
Additional Liquidity Not Included In Primary Liquidity:
Certificates of deposit in other financial institutions	$	5148,~~490~~795		$	5651,~~860~~245
Less: Certificate of deposits pledged		(2,731	)		(2,731	)
Total additional liquidity	$	4846,~~759~~064		$	5448,~~129~~514
Secondary Liquidity-Off-Balance Sheet:
Secondary Liquidity-Off Balance Sheet:
Available Borrowing Capacity:
Total secured borrowing capacity with FHLB	$	~~694~~688,~~084~~055		$	~~544~~657,~~132~~955
Fed Funds borrowing lines		72,000			72,000
Secured credit line with the FRBSF		724,~~802~~703			1825,~~708~~489
Total secondary liquidity	$	~~773~~784,~~886~~758		$	~~634~~755,~~840~~444

~~As of September 30, 2016, the Company’s primary sources of liquidity consisted of the balances reflected in the table above.~~ The Company’s primary overnight liquidity consisted of cash and due from banks and interest earning deposits at financial institutions. The amount of funds maintained directly with the Federal Reserve included in interest earning deposits in other financial institutions was $~~172~~ 225 million and $~~102~~ 90 million, at ~~September 30~~March 31, ~~2016~~2017 and December 31, ~~2015~~2016, respectively. The next source of liquidity is the money market accounts at other banks. Furthermore, the Company has collateralized borrowings and unsecured borrowing facilities. In addition, the Company has $49 46 million in unpledged certificates of deposits in other financial institutions where the average maturity is approximately 6 months that could be utilized over time to supplement the liquidity needs of the Company.

The Company’s long term source of funding has come from the liability side of the balance sheet and has historically been through the growth in non-interest bearing and interest bearing core deposits from new and existing customers. Additional sources of funds from the Company’s asset side of the balance sheet include payments of principal and interest on loans and investment securities. While maturities and scheduled principal amortization on loans are a reasonably predictable source of funds, deposit flows and loan prepayments are greatly influenced by the level of interest rates, economic conditions and competition.

As an additional source of liquidity, the Company maintains credit facilities in the form of Fed Funds Borrowing Lines of $72 million with its primary correspondent banks for the purchase of overnight Federal funds. The lines are subject to availability of funds and have restrictions as to the number of days used, consecutively and in total during a month, $5 million of these credit facilities require the pledging of investment securities.

The Company has established a secured credit facility with the FHLB of San Francisco which allows the Bank to borrow up to 25% of the Bank’s total assets, which equates to a credit line of approximately $~~694~~ 749 million at ~~September 30~~March 31, ~~2016~~2017. The Company currently has no outstanding borrowings with the FHLB. As of ~~September 30~~March 31, ~~2016~~2017, the Company had $~~953~~1 billion ~~million~~ of loan collateral pledged with the FHLB. This level of loan collateral would provide the Company with $~~633~~ 688 million in borrowing capacity. The Company also had $17 16 million in securities pledged with the FHLB serving as collateral for an additional $16 14 million in borrowing capacity. Any amount of borrowings in excess of ~~the~~ $~~649~~ 702 million, up to the Company’s ~~borrowing capacity of $694 million, would require the Company to pledge additional collateral. In addition, the Company must~~

Page 6661 of 7772

borrowing capacity of $749 million, would require the Company to pledge additional collateral. In addition, the Company must maintain a certain investment in the common stock of the FHLB. The Company’s investment in the common stock of the FHLB is $9 million at ~~September 30~~March 31, ~~2016~~2017. This level of capital would allow the Company to borrow up to $340 million of the $~~649~~ 749 million. Any advances from the FHLB in excess of the $340 million would require additional purchases of FHLB common stock.

The Company maintains a secured credit facility with the Federal Reserve Bank of San Francisco (“FRBSF”) which is collateralized by investment securities pledged with the FRBSF. At ~~September 30~~March 31, ~~2016~~2017, the Company’s available borrowing capacity was $8 25 million.

The Company maintains investments in short term certificates of deposit with other financial institutions, with an average remaining maturity of approximately 6 months, with various balances maturing monthly. The Company had balances of $51 49 million and $57 51 million at ~~September 30~~March 31, ~~2016~~2017 and December 31, ~~2015~~2016, respectively. At ~~September 30~~March 31, ~~2016~~2017, $2.7 million of the Company’s certificates of deposit with other financial institutions were pledged as collateral as credit support for the interest rate swap contracts and are not available as a source of liquidity.

The Company’s commitments to extend credit (off-balance sheet liquidity risk) are agreements to lend funds to customers as long as there are no covenant violations as established in the loan agreement. The total commitment amounts do not necessarily represent future cash requirements. Financial instruments with off-balance sheet risk for the Company include both undisbursed loan commitments, as well as undisbursed letters of credit. The Company’s exposure to extend credit was $~~920~~ 986 million and $~~806~~1 billion ~~million~~ at ~~September 30~~March 31, ~~2016~~2017 and December 31, ~~2015~~2016, respectively.

The holding company liquidity on a stand-alone basis was $8.7 9 million and $69.8 7 million, in cash on deposit at the Bank, at ~~September 30~~March 31, ~~2016~~ 2017 and December 31, ~~2015~~2016, respectively. Management believes this amount of cash is currently sufficient to fund the holding company’s cash flow needs over at least the next twelve to twenty-four months.

Page 6762 of 7772

DIVIDENDS

To date, the Company has not paid any cash dividends on its common stock. Payment of stock or cash dividends in the future will depend upon earnings, liquidity, financial condition and other factors deemed relevant by our Board of Directors. Notification to the FRB is required prior to declaring and paying a dividend to shareholders that exceeds earnings for the period for which the dividend is being paid. This notification requirement is included in regulatory guidance regarding safety and soundness surrounding capital and includes other non-financial measures such as asset quality, financial condition, capital adequacy, liquidity, future earnings projections, capital planning and credit concentrations. Should the FRB object to dividend payments, the Company would be precluded from declaring and paying dividends, until approval is received or the Company no longer needs to provide notice under applicable guidance.

California law also limits the Company’s ability to pay dividends. A corporation may make a distribution/dividend from retained earnings to the extent that the retained earnings exceed (a) the amount of the distribution plus (b) the amount if any, of dividends in arrears on shares with preferential dividend rights. Alternatively, a corporation may make a distribution/dividend, if, immediately after the distribution, the value of its assets equals or exceeds the sum of (a) its total liabilities plus (b) the liquidation preference of any shares which have a preference upon dissolution over the rights of shareholders receiving the distribution/dividend.

The Bank is subject to certain restrictions on the amount of dividends that may be declared without regulatory approval. Such dividends shall not exceed the lesser of the Bank’s retained earnings or net income for its last three fiscal years (less any distributions to the shareholder made during such period). In addition, the Bank may not pay dividends that would result in its capital being reduced below the minimum requirements for capital adequacy purposes.

As of ~~September 30~~March 31, ~~2016~~2017, both CU Bancorp “the holding company” and the Bank had positive retained earnings and positive net income that would allow either of them to declare and pay a dividend as of ~~September 30~~March 31, ~~2016~~2017. However, neither the holding company nor the Bank has plans to declare and pay a cash dividend on the common stock at the current time.

The Company has a program to repurchase a portion of an employee’s outstanding restricted stock upon the vesting of this restricted stock, but only in amounts necessary to cover the employee tax withholding obligations at the option of the restricted stockholder (employee). ~~Beginning~~ ~~in July 2016, withheld taxes may be higher than the minimum tax rate as a result of the Company’s early adoption of ASU 2016-09.~~ This program was designed to provide the Bank’s employees with the financial ability to cover their tax liability obligation associated with the vesting of their restricted stock at the date of vesting. These transactions under the State of California Corporations Code are defined as distributions to shareholders.

Page 6863 of 7772

REGULATORY MATTERS

Capital Resources

The Company’s objective is to maintain a level of capital that will support sustained asset and loan growth, provide for anticipated credit risks, and ensure that regulatory guidelines and industry standards are met. The Company and the Bank are subject to certain minimum capital adequacy and minimum well capitalized category guidelines adopted by the FRB and the FDIC. These guidelines relate primarily to the Tier 1 leverage ratio, the Common Equity Tier 1 Ratio (“CET1”), the Tier 1 risk-based capital ratio, and the Total risk-based capital ratio.

On October 26, 2015, the Company filed a Form S-3 registration statement for offerings up to $100 million of certain types of securities. If drawn on, proceeds from the offering could be used for general corporate purposes. The registration statement represents capital resources available to the Company as the registration statement is deemed to be effective by the Securities Exchange Commission (SEC) and will be available for three years.

At ~~September~~ 30March 31, ~~2016~~2017, the respective capital ratios of the Company and the Bank exceeded the minimum percentage requirements to be deemed “well-capitalized” for Prompt Corrective Action (“PCA”) purpose and the Basel III minimum capital ratios with ~~buffer~~the ~~(effective~~phase-in ~~January~~2017 1,buffer ~~2016)~~ under the current capital guidelines. The following tables present the regulatory capital ratios requirements and the actual capitalization levels of the Company and the Bank as of the dates indicated (dollars in thousands):

CU Bancorp

	September 30,2016			December 31,2015			WellCapitalized			Basel IIIMinimum withBuffer
	March 31,2017			December 31,2016			WellCapitalized			Basel IIIMinimum withBuffer
	Amount			Amount			(greater than or equal to)
Regulatory Capital Ratios:
Tier 1 leverage ratio		9.8363	%		9.6772	%		5.0	%		NA
Common Equity Tier 1 ratio		9.7786	%		9.61	%		6.5	%		5.~~125~~75	%
Total Tier 1 risk-based capital ratio		10.9094	%		10.8568	%		8.0	%		67.~~625~~25	%
Total risk-based capital ratio		11.6670	%		11.5444	%		10.0	%		89.~~625~~25	%
Regulatory Capital Data:
Common Equity Tier 1	$	~~248~~264,~~219~~608		$	~~223~~257,~~977~~105
Total Tier 1 capital		~~276~~293,~~945~~364			~~252~~285,~~681~~843
Total risk-based capital		~~296~~313,~~094~~855			~~268~~306,~~971~~103
Average total assets*		23,~~818~~047,~~315~~385			2,~~611~~940,~~774~~790
Risk-weighted assets		2,~~540~~682,~~431~~389			2,~~329~~675,~~770~~987

*	Represents the average total assets for calculation of the leverage ratio

California United Bank

	September 30,2016			December 31,2015			WellCapitalized			Basel IIIMinimum withBuffer
	March 31,2017			December 31,2016			WellCapitalized			Basel IIIMinimum withBuffer
	Amount			Amount			(greater than or equal to)
Regulatory Capital Ratios:
Tier 1 leverage ratio		9.4630	%		9.3435	%		5.0	%		NA
Common Equity Tier 1 ratio		10.5053	%		10.4728	%		6.5	%		5.~~125~~75	%
Total Tier 1 risk-based capital ratio		10.5053	%		10.4728	%		8.0	%		67.~~625~~25	%
Total risk-based capital ratio		11.2530	%		11.1704	%		10.0	%		89.~~625~~25	%
Regulatory Capital Data:
Common Equity Tier 1	$	~~266~~283,~~751~~381		$	~~234~~275,~~989~~151
Tier 1 capital		~~266~~283,~~751~~381			~~243~~275,~~989~~151
Total risk-based capital		~~285~~303,~~900~~872			~~260~~295,~~279~~411
Average total assets*		23,~~818~~048,~~604~~063			2,~~612~~941,~~206~~253
Risk-weighted assets		2,~~541~~690,~~033~~240			2,~~329~~677,~~798~~030

*	Represents the average total assets for calculation of the leverage ratio

Page 6964 of 7772

In July 2013, the federal bank regulatory agencies adopted final regulations which revised their risk-based and leverage capital requirements for banking organizations to meet requirements of Dodd-Frank and to implement international agreements reached by the Basel Committee on Banking Supervision intended to improve both the quality and quantity of banking organizations’ capital (“Basel III”). Dodd-Frank required the Federal Reserve to apply consolidated capital requirements to depository institution holding companies that are no less stringent than those currently applied to depository institutions.

The following are among the requirements that were phased-in beginning January 1, 2015 under the new capital rules:

•

an increase in the minimum Tier 1 capital ratio from 4.00% to 6.00% of risk-weighted assets;

•

a new category and a required 4.50% of risk-weighted assets ratio is established for CET1 as a subset of Tier 1 capital limited to common equity;

•

a minimum non-risk-based leverage ratio is set at 4.00%;

•

changes in the permitted composition of Tier 1 capital to exclude trust preferred securities (however, trust preferred securities issued prior to May 19, 2010 by a bank holding company with less than $15 billion in assets, such as CU Bancorp, continues to be included in Tier 1 capital, subject to a limit of 25% of Tier 1 capital elements; see further discussion below), mortgage servicing rights and certain deferred tax assets and include unrealized gains and losses on available-for-sale debt and equity securities;

•

the risk-weights of certain assets for purposes of calculating the risk-based capital ratios are changed for high volatility commercial real estate acquisition, development and construction loans, certain past due non-residential mortgage loans and certain mortgage-backed and other securities exposures;

•

an additional “countercyclical capital buffer” is required for larger and more complex institutions; and

•

a new additional capital conservation buffer of 2.5% of risk weighted assets over the period from 2016 to 2019 must be met to avoid limitations on the ability of the Company and the Bank to pay dividends, repurchase shares or pay discretionary bonuses.

Including the capital conservation buffer of 2.5%, the new final capital rule ~~will~~resulted ~~result~~ in the following minimum ratios: (i) a Tier 1 capital ratio of 8.5%, (ii) a common equity Tier 1 capital ratio of 7.0%, and (iii) a total capital ratio of 10.5%. The new capital conservation buffer requirement phase-in began in January 2016 at 0.625% of risk-weighted assets and will increase each year by 0.625% until fully implemented in January 2019. While the final capital rule sets higher regulatory capital standards for the Company and the Bank, bank regulators may also continue their past policies of expecting banks to maintain additional capital beyond the new minimum requirements. The implementation of the final capital rules or more stringent requirements to maintain higher levels of capital or to maintain higher levels of liquid assets could adversely impact the Company’s net income and return on equity, restrict the ability to pay dividends or executive bonuses and require the raising of additional capital.

Under Dodd Frank, trust preferred securities are excluded from Tier 1 capital, unless such securities were issued prior to May 19, 2010 by a bank holding company with less than $15 billion in assets. CU Bancorp assumed approximately $12.4 million of junior subordinated debt securities issued to various business trust subsidiaries of Premier Commercial Bancorp and funded through the issuance of approximately $12.0 million of floating rate capital trust preferred securities. These junior subordinated debt securities were issued prior to May 19, 2010. Because CU Bancorp has less than $15 billion in assets, the trust preferred securities that CU Bancorp assumed from Premier Commercial Bancorp continues to be included in Tier 1 capital, subject to a limit of 25% of Tier 1 capital elements.

The Company also currently includes in its Tier 1 capital an amount of Non-Cumulative Perpetual Preferred Stock, Series A issued under the SBLF program. The U.S. Department of the Treasury is the sole holder of all outstanding shares of CU Bancorp Preferred Stock. Under the Final Rule, the CU Bancorp Preferred Stock continues to be included in Tier 1 Risk-Based Capital because non-cumulative perpetual preferred stock remained classified as Tier 1 capital following the enactment of Dodd Frank.

Dodd-Frank Wall Street Reform and Consumer Protection Act

For a discussion regarding the implementation of the Dodd-Frank Wall Street Reform and Consumer Protection Act, see the Company’s December 31, ~~2015~~2016 Form 10K, Part I, Item 1 – Business – Supervision and Regulation – Legislation and Regulatory Developments – Dodd Frank Wall Street Reform and Consumer Protection Act.

Page 7065 of 7772

Consent Order

On September 23, 2016, California United Bank (the “Bank”), the wholly owned subsidiary of CU Bancorp (the “Company”) entered into a Stipulation to the Issuance of a Consent Order with its bank regulatory agencies, the Federal Deposit Insurance Corporation (“FDIC”) and the California Department of Business Oversight (“CDBO”), consenting to the issuance of a consent order (the “Consent Order”) relating to weaknesses in the Bank’s Bank Secrecy Act and Anti-Money Laundering (collectively “BSA”) compliance program. In consenting to the issuance of the Consent Order, the Bank did not admit or deny any charges of unsafe or unsound banking practices related to the BSA compliance program.

Under the terms of the Consent Order the Bank and/or its Board of Directors is required to take certain actions which include, but are not limited to: a) Increasing Board supervision of the BSA compliance program; b) Notification to the regulatory agencies prior to appointment of a new BSA Officer or the executive to whom the BSA Officer reports; c) Formulation of a written action plan describing the actions to be taken to correct BSA/AML related deficiencies, a revised, written BSA/AML compliance program and review and enhancement of the Bank’s BSA risk assessment; d) Performance of a review of BSA staffing needs; e) Enhancement of internal controls to ensure full compliance with the BSA; f) Establishment of an independent testing program for compliance with the BSA rules and regulations; and g) Obtaining regulatory agency consent for expansionary activities such as new branches, offices, delivery channels, products and services.

The Consent Order isresulted ~~expected to result~~ in additional BSA compliance expenses for the Bank and the Company. It may also have the effect of limiting or delaying the Bank’s and the Company’s ability to obtain regulatory approval for certain expansionary activities, to the extent desired by the Company. The Consent Order does not otherwise impact the Bank’s business activities outside of BSA. The Consent Order does not require the Bank to pay any civil money penalty or require additional capital. The Consent Order will remain in effect and be enforceable until it is modified, terminated, suspended or set aside by the FDIC and the CBDO. Management and the Board have expressed their full intention to continue their efforts to comply with all parts of the Consent Order ~~at the earliest possible date~~.

Number of Employees

The number of active full-time equivalent employees increased from ~~266~~288 at December 31, ~~2015~~2016 to ~~285~~294 at ~~September 30~~March 31, ~~2016~~ 2017.

Page 7166 of 7772

ITEM 3. Quantitative and Qualitative Disclosures about Market Risk

The Company’s primary market risk is interest rate risk. Interest rate risk is the potential for economic losses due to future interest rate changes. These economic losses can be reflected as a loss of future net interest income and/or a loss of current fair market values. The objective is to measure the effect on net interest income and to adjust the balance sheet to minimize the inherent risk while at the same time maximizing income. Management realizes certain risks are inherent and that the goal is to identify and minimize the risks. To mitigate interest rate risk, the structure of the Company’s balance sheet is managed with the objective of correlating the movements of interest rates on loans and investments with those of deposits and borrowings.

The Company’s exposure to interest rate risk is reviewed by the Company’s management Asset/Liability Committee formally on a quarterly basis and on an ongoing basis. The main tool used to monitor interest rate risk is a dynamic simulation model that quantifies the estimated exposure of net interest income to sustained interest rate changes. The simulation model estimates the impact of changing interest rates on interest income from all interest earning assets and interest expense paid on all interest bearing liabilities reflected on the Company’s balance sheet. This sensitivity analysis is compared to the Company’s policy limits, which specify a maximum tolerance level for net interest income exposure over a one-year horizon assuming no balance sheet growth, given a 400 basis point upward (maximum) and 300 basis point downward (maximum) shift in interest rates, in 100 basis point increments.

At ~~September 30~~March 31, ~~2016~~2017, the Company had ~~sixteen~~fourteen pay-fixed, receive-variable interest rate contracts that were designed to convert fixed rate loans into variable rate loans. ~~Fourteen~~ Twelve of these swap ~~contacts~~contracts are designated as fair value hedges. For additional information on these interest rate contracts, see Note 9 – Derivative Financial Instruments located in Part I, Item 1.— - Notes to the Consolidated Financial Statements.

The Company has no market risk sensitive instruments held for trading purposes. Management believes that the Company’s market risk is reasonable at this time.

The following depicts the Company’s net interest income sensitivity analysis as of ~~September 30~~March 31, ~~2016~~2017 (dollars in thousands):

Simulated Rate Changes	Estimated Net Interest Income Sensitivity
+ 400 basis points		3227.10	%	$	2826,~~769~~644
+ 100 basis points		7.9	%	$	7,115
+ 200 basis points		13.5	%	$	13,262
- 200 basis points (1)		(7.9	)%	$	(7,042	)
+ 100 basis points		6.7	%	$	6,646
- 200 basis points (1)		(12.6	)%	$	(12,372	)

(1) The simulated rate change under the -200 basis points ~~reflected~~in ~~above~~the ~~actually~~table above reflects ~~only~~an aaverage ~~maximum~~ negative 5043 basis points ~~or less decline in actual rates based~~ on ~~the~~interest ~~current~~earning ~~targeted~~assets ~~Fed~~primarily ~~Funds~~due ~~target rate by the government of 0.25%~~ to ~~0.50%.~~floors ~~The~~on ~~-200~~loans ~~simulation~~and ~~model~~ reflects repricing of liabilities of ~~less~~a ~~than~~negative ~~0.25%~~6 bps due to the Company paying ~~significantly~~ less than 25 basis points on its deposit accounts~~, and higher downward repricing of the Company’s interest earning assets in the -200 simulation model~~.

The Company is currently asset sensitive. The estimated sensitivity does not necessarily represent our forecast and the results may not be indicative of actual changes to our net interest income. These estimates are based upon a number of assumptions including: the nature and timing of interest rate levels including yield curve shape, prepayments on loans and securities, pricing strategies on loans and deposits and replacement of asset and liability cash flows. The effective duration of the Company’s investment securities portfolio is approximately 12.60 years at ~~September 30~~March 31, ~~2016~~2017, compared to 2.16 years at December 31, ~~2015~~2016. Management considers the current effective duration to be relatively low and future purchases may increase this measurement if doing so will provide increased earnings while keeping ~~the~~risk ~~duration near 2~~low. While the assumptions used are based on current economic and local market conditions, there is no assurance as to the predictive nature of these conditions including how customer preferences or competitor influences might change.

Variable rate loans make up 7372% of the loan portfolio. Of the total variable rate loans, 5347% are tied to the Prime index with $~~589~~ 660 million subject to repricing within 30 days of a 25 basis point increase in Prime rate. However, the Company has floors on some of its loans. At ~~September 30~~March 31, ~~2016~~2017, 4033% of variable rate loans are at their floor, and thus an increase in the underlying index may not necessarily result in an increase in the coupon until the loan index plus margin exceeds that floor. The remaining 4753% of the variable rate loans are tied to other indexes with longer repricing frequencies such as the Treasury index and the LIBOR index. ~~The~~ ~~increase~~Only in13% ~~the~~of ~~LIBOR~~our variable rate ~~during~~loans ~~2016~~are ~~has~~tied ~~not~~to ~~had~~the anLIBOR ~~effect~~index. onOther ~~our~~variable ~~loan~~rate ~~yields~~assets astied ~~only~~to ~~13%~~Prime ofare ~~our~~the ~~variable~~balances ~~rate~~at ~~loans~~the ~~are~~Federal ~~tied~~Reserve toBank ~~the~~of $225 million and $108 million of SBA variable ~~LIBOR~~rate ~~index~~investment securities.

Page 7267 of 7772

An additional tool used less frequently by management to monitor interest rate risk includes the standard GAP report, which measures the estimated difference between the amount of interest-sensitive assets and interest-sensitive liabilities anticipated to mature or reprice during future periods, based on certain assumptions. In general, the GAP report presents the carrying amounts of these assets and liabilities in a particular period based on either the date that they first reprice, for variable rate products, or the maturity date, for fixed rate products.

The Company’s static GAP as of ~~September 30~~March 31, ~~2016~~2017, is not materially different from that reported at December 31, ~~2015~~2016 and is thus ~~not~~ not included in this 10-Q. See the Company’s Static Gap reports under “Item7A-Quantitative and Qualitative Disclosures about Market Risk” in the Company’s ~~2015~~2016 Annual Report on Form 10-K.

Page 7368 of 7772

ITEM 4. Controls and Procedures

a) Evaluation of disclosure controls and procedures

We carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of our fiscal year. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures are effective in ensuring that information required to be disclosed by us in reports that we file or submit under the Exchange Act (i) is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and (ii) is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer to allow timely decisions regarding required disclosure.

b) Changes in internal controls over financial reporting

There have been no changes in our internal controls over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act) identified during the fiscal quarter that ended ~~September 30~~March 31, ~~2016~~2017 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Page 7469 of 7772

PART II – OTHER INFORMATION

ITEM 1. Legal Proceedings

From time to time the Company is involved in certain legal actions arising from normal business activities. The Company believes the ultimate resolution of all pending legal actions will not have a material effect on the financial statements of the Company.

ITEM 1A. Risk Factors

In addition to the other information set forth in this Quarterly Report on Form 10-Q, you should carefully consider the risk factors discussed under “Part I. Item 1A. Risk Factors” included in our ~~2015~~2016 Annual Report on Form 10-K for the year ended December 31, ~~2015~~2016. These risk factors could materially and adversely affect our business, financial condition, liquidity, results of operations and capital position, and could cause our actual results to differ materially from our historical results or the results contemplated by the forward-looking statements contained in this Quarterly Report on Form 10-Q. Additional Risk Factors have been set out below in this Quarterly Report on Form 10-Q relative to the Consent Order between the Bank and the FDIC and CDBO disclosed in the Company’s 8-K filing on September 26, 2016.

The Company and the Bank are operating under enhanced regulatory supervision that could materially and adversely affect our business.

On September 23, 2016, California United Bank (the “Bank”), the wholly owned subsidiary of the Company entered into a Stipulation to the Issuance of a Consent Order with its bank regulatory agencies, the Federal Deposit Insurance Corporation (“FDIC”) and the California Department of Business Oversight (“CDBO”), consenting to the issuance of a consent order (the “Consent Order”) relating to weaknesses in the Bank’s Bank Secrecy Act and Anti-Money Laundering (collectively “BSA”) compliance program.

Our failure to comply with the Consent Order may result in additional regulatory action, including civil money penalties against the Bank and its officers and directors or enforcement of the Consent Order through court proceedings, which could have a material and adverse effect on our business, results of operations, financial condition, cash flows and stock price.

ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds

None.

ITEM 3. Defaults upon Senior Securities

None.

ITEM 4. Mine Safety Disclosures

Not applicable.

Page 7570 of 7772

ITEM 5. Other Information

(a) None.

(b) None.

ITEM 6. Exhibits

(a) Index to Exhibits

ExhibitNumber		Description
3.2⌂		Amended and Restated Bylaws of California United Bank
2.1		Agreement and Plan of Merger, dated as of April 5, 2017, by and between PacWest Bancorp and CU Bancorp1
3.1		Articles of Incorporation of CU Bancorp2
3.2		Bylaws of CU Bancorp3
3.3		Certificate of Determination of Non-Cumulative Perpetual Preferred Stock, Series A of CU Bancorp4
31.1⌂		Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2⌂		Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1⌂		Certification of Chief Executive Officer and Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101.INS⌂		XBRL Instance Document
101.SCH⌂		XBRL Taxonomy Extension Schema Document
101.CAL⌂		XBRL Taxonomy Calculation Linkbase Document
101.LAB⌂		XBRL Taxonomy Label Linkbase Document
101 DEF⌂		XBRL Taxonomy Extension Definition Linkbase Document
101.PRE⌂		XBRL Taxonomy Presentation Linkbase Document

⌂	Attached hereto

~~Page~~1 76Incorporated ~~of 77~~by reference from Exhibit 2.1 to CU Bancorp Current Report on Form 8-K filed April 7, 2017.

²	Incorporated by reference from Exhibit 3.1 to CU Bancorp Registration Statement on Form S-4 filed April 13, 2012.

³	Incorporated by reference from Exhibit 3.2 to CU Bancorp Quarterly Report on Form 10-Q filed November 8, 2016.

⁴	Incorporated by reference from Exhibit 3.3 to CU Bancorp Current Report on Form 8-K filed November 24, 2014.

Page 71 of 72

SIGNATURES

Pursuant to the requirements of the Security Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

CU BANCORP

Date: November 8, 2016				/s/ DAVID I. RAINER
Date: May 9, 2017				/s/ DAVID I. RAINER
				David I. Rainer
				Chief Executive Officer
Date: November 8, 2016				/s/ KAREN A. SCHOENBAUM
Date: May 9, 2017				/s/ KAREN A. SCHOENBAUM
				Karen A. Schoenbaum
				Chief Financial Officer

Page 7772 of 7772

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Filing Compare · CU Bancorp