WASHINGTON BUSINESS BANK

REPORT OF INDEPENDENT AUDITORS AND FINANCIAL STATEMENTS

WASHINGTON BUSINESS BANK

December 31, 2018 and 2017

Table of Contents

Report of Independent Auditors

Financial Statements Statements of financial condition Statements of income Statements of comprehensive income Statements of changes in shareholders' equity Statements of cash flows Notes to financial statements

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2 3 4 5 6 7?30

Report of Independent Auditors

Board of Directors Washington Business Bank

Report on the Financial Statements

We have audited the accompanying financial statements of Washington Business Bank, which comprise the statements of financial condition as of December 31, 2018 and 2017, and the related statements of income, comprehensive income, changes in shareholders' equity, and cash flows for the years then ended, and the related notes to the financial statements.

Management's Responsibility for the Financial Statements

Management is responsible for the preparation and fair presentation of these financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error.

Auditor's Responsibility

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

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

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

Opinion

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Washington Business Bank as of December 31, 2018 and 2017, and the results of its operations and its cash flows for the years then ended in accordance with accounting principles generally accepted in the United States of America.

Everett, Washington February 15, 2019

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Washington Business Bank

Statements of Financial Condition (dollars in thousands)

ASSETS

December 31,

2018

2017

(Restated -

Note 13)

Cash and due from banks Federal funds sold

$

988

$

958

5,758

1,026

Total cash and cash equivalents

6,746

1,984

Interest-bearing deposits in banks Securities available-for-sale, at fair value Federal Home Loan Bank (FHLB) stock

2,265 87

294

5,650 149 282

Loans receivable Allowance for loan losses

76,053 (611)

68,300 (506)

Net loans

75,442

67,794

Accrued interest receivable Premises and equipment, net Other assets

Total assets

223 1,789

232

195 1,857

254

$

87,078

$

78,165

LIABILITIES AND SHAREHOLDERS' EQUITY

LIABILITIES Customer deposits Accrued interest payable FHLB borrowings Other liabilities

$

72,359

$

64,213

75

29

5,000

5,000

232

207

Total liabilities

77,666

69,449

COMMITMENTS AND CONTINGENCIES (NOTE 8)

SHAREHOLDERS' EQUITY Preferred stock (no par value), 1,000,000 shares authorized, no shares issued or outstanding in 2018 and 2017 Common stock ($1 par value), 10,000,000 shares authorized, 668,157 and 676,459 shares issued and outstanding in 2018 and 2017, respectively Additional paid-in capital Retained earnings Accumulated other comprehensive income, net of tax

Total shareholders' equity

-

668 7,288 1,456

-

9,412

-

676 7,359

679 2

8,716

Total liabilities and shareholders' equity

$

87,078

$

78,165

See accompanying notes.

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Washington Business Bank

Statements of Income (dollars in thousands)

INTEREST INCOME Loans and fees Federal funds sold and interest-bearing deposits in banks Dividends Securities available-for-sale

Total interest income

INTEREST EXPENSE Deposits FHLB borrowings

Total interest expense

Net interest income

PROVISION FOR LOAN LOSSES

Net interest income after provision for loan losses

NONINTEREST INCOME Service charges on deposit accounts Other fee income

Total noninterest income

NONINTEREST EXPENSE Salaries and employee benefits Occupancy Data processing Furniture and equipment Other

Total noninterest expense

Income before provision for income taxes

PROVISION FOR INCOME TAXES

NET INCOME

Years Ended December 31,

2018

2017

(Restated -

Note 13)

$

4,133 $

3,557

135

60

29

21

3

4

4,300

3,642

764 92

856 3,444

100 3,344

414 76

490 3,152

16 3,136

84

100

9

6

93

106

1,494 150 124 71 615

1,427 154 118 70 770

2,454

2,539

983

703

206

256

$

777 $

447

3

See accompanying notes.

Washington Business Bank

Statements of Comprehensive Income (dollars in thousands)

NET INCOME Other comprehensive income

Unrealized holding loss on securities available-for-sale (net of tax benefit of $1 and $0 for 2018 and 2017, respectively)

COMPREHENSIVE INCOME

Years Ended December 31,

2018

2017

(Restated -

Note 13)

$

777 $

447

(2)

(1)

$

775 $

446

See accompanying notes.

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Washington Business Bank

Statements of Changes in Shareholders' Equity (dollars in thousands)

BALANCE, December 31, 2016 Net income Unrealized loss on securities, net of tax Vested restricted stock Repurchased shares Stock-based compensation

BALANCE, December 31, 2017 Net income Unrealized loss on securities, net of tax Vested restricted stock Repurchased shares Exercised stock options Stock-based compensation

BALANCE, December 31, 2018

Common Stock

Additional

Shares Amount Paid-In-Capital

Retained Earnings (Restated Note 13)

Accumulated Other

Comprehensive Income (Loss)

Total Shareholders'

Equity (Restated -

Note 13)

710,824 $ 711 $

-

-

7,623 $ -

232 $ 447

3$ -

8,569 447

-

-

-

-

6,000

6

(6)

-

(40,365)

(41)

(366)

-

-

-

108

-

(1)

(1)

-

-

-

(407)

-

108

676,459

676

7,359

679

-

-

-

777

2

8,716

-

777

-

-

-

-

6,670

7

(7)

-

(26,347)

(26)

(293)

-

11,375

11

121

-

-

-

108

-

(2)

(2)

-

-

-

(319)

-

132

-

108

668,157 $ 668 $

7,288 $

1,456

-

$

9,412

5

See accompanying notes.

Washington Business Bank

Statements of Cash Flows (dollars in thousands)

CASH FLOWS FROM OPERATING ACTIVITIES Net income Adjustments to reconcile net income to net cash from operating activities Provision for loan losses Deferred income (benefit) tax (Gain) loss on sale of other real estate owned Depreciation and amortization Stock-based compensation expense Changes in operating assets and liabilities Accrued interest payable Accrued interest receivable Other assets Other liabilities

Net cash from operating activities

CASH FLOWS FROM INVESTING ACTIVITIES Activity in securities available-for-sale Maturities, prepayments, and calls Decrease (Increase) in interest-bearing deposits with banks Increase in loans made to customers, net of principal collections Proceeds from sale of other real estate owned (Purchase) Redemption of FHLB stock Purchases of premises and equipment

Net cash from investing activities

CASH FLOWS FROM FINANCING ACTIVITIES Net increase in deposits Repayment of FHLB borrowings Advances of FHLB borrowings Repurchase of stock Proceeds from exercise of stock options

Net cash from financing activities

NET INCREASE (DECREASE) IN CASH

CASH AND CASH EQUIVALENTS, beginning of year

CASH AND CASH EQUIVALENTS, end of year

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION Cash paid during the year for Taxes Interest

SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES

Change in fair value of securities available-for-sale Net loans transferred to real estate owned

Years Ended December 31,

2018

2017

(Restated -

Note 13)

$

777

$

447

100

16

(25)

12

(144)

-

79

80

108

108

46

16

(28)

(20)

28

25

25

(12)

966

672

62 3,385 (8,178)

591 (12) (11)

(4,163)

46 (5,088) (8,274)

109 1

(58)

(13,264)

8,146 (3,000) 3,000

(319) 132

10,308 (2,000) 2,000

(407) -

7,959

9,901

4,762

(2,691)

1,984

4,675

$

6,746

$

1,984

$

215

$

260

$

810

$

474

$

(3)

$

1

$

430

$

-

See accompanying notes.

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