¨

Diluted earnings per share were  $0.26 for the second quarter of 2019, compared to $0.02 for the second quarter of 2018, and $0.28 for the first quarter of 2019.    Diluted earnings per share were  $0.54 for the first six months of 2019, compared to $0.24 for the six months of 2018.  

¨

The return on average tangible assets was 1.53%, and the return on average tangible equity was 15.94% for the second quarter of 2019,  compared to 0.12% and 1.49%, respectively, for the second quarter of 2018, and 1.63% and 17.90%, respectively, for the first quarter of 2019.  The return on average tangible assets was 1.58%, and the return on average tangible equity was 16.89%, for the first six months of 2019, compared to 0.69% and 8.43%, respectively, for the first six months of 2018.

¨

Net interest income, before provision for loan losses, increased 2% to $30.9 million for the second quarter of 2019, compared to $30.2 million for the second quarter of 2018, and remained relatively flat from $31.0 million for the first quarter of 2019.  Net interest income increased 10% to $62.0 million for the first six months of 2019, compared to $56.5 million for the first six months of 2018.

·

The fully tax equivalent (“FTE”) net interest margin improved by 8 basis points to 4.38%  for the second quarter of 2019, from 4.30% for the second quarter of 2018,  primarily due to the impact of increases in the prime rate and the rate on investment securities and overnight funds, and a higher average balance of investment securities, partially offset by a decrease in the average balance of Bay View Funding’s factored receivables, a higher cost of deposits, and a decline in the 

accretion of the loan purchase discount into loan interest income from the Company’s acquisitions.  The net interest margin for the second quarter of 2019 remained unchanged from 4.38% for the first quarter of 2019.

·

For the first six months of 2019, the net interest margin expanded 16 basis points to 4.38%, compared to 4.22% for the first six months of 2018, primarily due to a higher average balance of loans and securities, the impact of increases in the yields on loans, investment securities, and overnight funds, and an increase in the accretion of the loan purchase discount into loan interest income from the acquisitions, partially offset by an increase in the cost of deposits, and a decrease in the average balance of Bay View Funding’s factored receivables.

¨

The following tables present the average balance of loans outstanding, interest income, and the average yield for the periods indicated:

·

The average yield on the total loan portfolio increased to 5.96% for the second quarter of 2019, compared to 5.75% for the second quarter of 2018, primarily due to increases in the prime rate, partially offset by a  decrease in the accretion of the loan purchase discount into loan interest income from the acquisitions.

·

The average yield on the total loan portfolio increased to 5.96% for the second quarter of 2019, compared to 5.92% for the first quarter of 2019.

·

The average yield on the total loan portfolio increased to 5.94% for the six months ended June 30, 2019, compared to 5.76% for the six months ended June 30, 2018,  primarily due to increases in the prime rate, and an increase in the accretion of the loan purchase discount into loan interest income from the acquisitions.

·

The total purchase discount on loans from Focus Business Bank (“Focus”) loan portfolio was $5.4 million on the acquisition date of August 20, 2015, of which $486,000 remains outstanding as of June 30, 2019.  The total purchase discount on loans from Tri-Valley loan portfolio was $2.6 million on the acquisition date of April 6, 2018, of which $1.9 million remains

outstanding as of June 30, 2019.    The total purchase discount on loans from United American loan portfolio was $4.7 million on the acquisition date of May 4, 2018, of which $3.2 million remains outstanding as of June 30, 2019.

¨

The cost of total deposits increased to 0.31% for the second quarter of 2019, compared to 0.19% for the second quarter of 2018 and 0.28% for the first quarter of 2019.  The total cost of deposits was 0.30% for the six months ended June 30, 2019,  compared to 0.18% for the six months ended June 30, 2018.  

¨

There was a $740,000 credit to the provision for loan losses for the second quarter of 2019, compared to a $7.2 million provision for loan losses for the second quarter of 2018, and a $1.1 million credit to the provision for loan losses for the first quarter of 2019.  There was a $1.8 million credit to the provision for loan losses for the six months ended June 30, 2019, compared to a $7.7 million provision for loan losses for the six months ended June 30, 2018.  The higher provision for loan losses for the second quarter of 2018 and first six months of 2018 included a $6.1 million specific reserve for a lending relationship that was placed on nonaccrual during the second quarter of 2018 .

¨

Total noninterest income remained relatively flat at  $2.8 million for the second quarter of 2019, compared to the second quarter of 2018.   Noninterest income for the second quarter of 2018 included proceeds from a legal settlement, which was offset by higher service charges and fees on deposit accounts, and a higher gain on sale of securities for the second quarter of 2019.  Noninterest income increased to $2.8 million at June 30, 2019  from $2.5 million for the first quarter of 2019, primarily due to a $548,000 gain on sales of securities for the second quarter of 2019. 

·

For the six months ended June 30, 2019, noninterest income increased to $5.2 million, compared to $5.0 million for the six months ended June 30, 2018. The increase in noninterest income for the first six months of 2019, was primarily due to higher service charges and fees on deposit accounts, and a higher gain on sales of securities for the first six months of 2019, partially offset by lower gain on sales of Small Business Administration (“SBA”) loans for the first six months of 2019, and proceeds from a legal settlement in the first six months of 2018. 

·

The Company received $1.3 million proceeds from a legal settlement during the second quarter of 2018, of which $377,000 was recorded in other noninterest income, and $922,000 was credited to professional fees for recaptured legal fees previously paid by the Company.

¨

Total noninterest expense for the second quarter of 2019 decreased to  $18.4 million, compared to $24.9 million for the  second quarter of 2018, and increased from $17.9 million for the first quarter of 2019.  Noninterest expense for the six months ended June 30, 2019 decreased to  $36.4 million, compared to $40.9 million for the six months ended June 30, 2018.

·

The decrease in noninterest expense in the second quarter of 2019 and the first six months of 2019, compared to the respective periods in 2018 , was primarily due to costs related to the merger transactions with Tri-Valley and United American, partially offset by higher professional fees.  Other n oninterest expense included pre-tax acquisition and integration costs of $4.8 million and $5.4 million for the second quarter of 2018 and first six months of 2018, respectively. In addition, salaries and employee benefits included severance and retention expense of $3.4 million related to the Tri-Valley and United American acquisitions, for total severance, retention, acquisition and integration costs of $8.2 million for the second quarter of 2018 and $8.8 million first six months of 2018.  Professional fees for the second quarter of 2018 and first six months of 2018 included a recovery of $922,000 from a legal settlement.  Merger-related costs for both the second quarter of 2019 and the first six months of 2019 totaled $540,000 for the recently announced proposed merger with Presidio, which were included in other noninterest expense.

·

Salaries and employee benefits decreased 1% to $10.7 million for the second quarter of 2019, compared to $10.8 million for the first quarter of 2019.  Salaries and employee benefits are generally higher in the first quarter of each year due to the cyclical nature of payroll taxes, vacation accrual expense, and 401(k) matching; however, these lower expenses for the second quarter of 2019 were partially offset by annual salary increases that were effective at the beginning of the second quarter of 2019.

·

Full time equivalent employees were 309 at June 30, 2019,  303 at June 30, 2018, and 309 at March  31, 2019.

¨

The efficiency ratio was 54.76% for the second quarter of 2019, compared to 75.47% for the second quarter of 2018, and 53.47% for the first quarter of 2019.  The efficiency ratio for the six months ended June 30, 2019 was 54.12%, compared to 66.44% for

the six months ended June 30, 2018.  The efficiency ratio was higher in the second quarter and first six months of 2018 primarily due to costs related to the merger transactions with Tri-Valley and United American. 

¨

Income tax expense was $4.6 million for the second quarter of 2019, compared to income tax benefit of ($31,000) for the second quarter of 2018, and an income tax expense of $4.5 million for the first quarter of 2019.  Income tax expense for the six months ended June 30, 2019 was $9.1 million, compared to $3.2 million for the six months ended June 30, 2018.  The effective tax rate for the second quarter of 2019 was 28.9%, compared to (3.5%) for the second quarter of 2018, and 27.1% for the first quarter of 2019.    The effective tax rate was higher for the second quarter of 2019, compared to the first quarter of 2019, primarily due to the non-deductibility of some of the costs related to the proposed merger transaction with Presidio.  The effective tax rate for the six months ended June 30, 2019 was 28.0%, compared to 24.8% for the six months ended June 30, 2018.    

·

The difference in the effective tax rate for the periods reported compared to the combined Federal and state statutory tax rate of 29.6% is primarily the result of the Company’s investment in life insurance policies whose earnings are not subject to taxes, tax credits related to investments in low income housing limited partnerships (net of low income housing investment losses), and tax-exempt interest income earned on municipal bonds.

¨

Total assets remained relatively flat at $3.11 billion at June 30, 2019, compared to $3.12 billion at both June 30, 2018 and March 31, 2019. 

¨

Securities available-for-sale, at fair value, totaled $383.1 million at June 30 , 2019, compared to $335.9 million at June 30 , 2018, and $452.5 million at March  31, 2019.  At June 30 , 2019, the Company’s securities available-for-sale portfolio comprised $242.6 million of agency mortgage-backed securities (all issued by U.S. Government sponsored entities),  and $140.5 million of U.S. Treasury. The pre-tax unrealized gain on securities available-for-sale at June 30 , 2019 was $915,000, compared to a pre-tax unrealized loss on securities available-for-sale of ($10.8) million at June 30 , 2018, and a pre-tax unrealized loss on securities available-for-sale of ($2.9) million at March  31, 2019.  All other factors remaining the same, when market interest rates are rising, the Company will experience a lower unrealized gain (or a higher unrealized loss) on the securities portfolio.

·

During the second quarter of 2019, the Company sold $59.3 million of securities available-for-sale for a net gain of $548,000 .  The securities sold consisted of $41.9 million of agency mortgage-backed securities, $10.0 million of U.S. Treasury, and $7.4 million of U.S. Government sponsored entities debt securities.

¨

At June 30 , 2019, securities held-to-maturity, at amortized cost, totaled $351.4 million, compared to $388.6 million at June 30 , 2018, and $367.0 million at March 31, 2019.  At June 30 , 2019, the Company’s securities held-to-maturity portfolio comprised $267.5 million of agency mortgage-backed securities, and $83.9 million of tax-exempt municipal bonds.

¨

The loan portfolio remains well-diversified as reflected in the following table which summarizes the distribution of loans, excluding loans held-for-sale, and the percentage of distribution in each category for the periods indicated:

·

Loans, excluding loans held-for-sale, increased 2% to $1.88 billion at June 30, 2019, compared to $1.85 billion March 31, 2019.    Loans, excluding loans held-for-sale, decreased $78.9 million, or (4%), to $1.88 billion at June 30, 2019, compared to $1.96 billion at June 30, 2018, primarily due to a decline of $41.9 million in commercial loans (“C&I”),  $31.6 million in land and construction loans, $6.1 million in purchased commercial real estate (“CRE”) loans,  $5.2 million in home equity loans, and $5.1 million in purchased residential mortgages, partially offset by an increase of $13.1 million in CRE loans.

·

C&I line usage was 40% at June 30, 2019, compared to 37% at June 30 , 2018 and March 31, 2019 .

·

At June 30, 2019,  38% of the CRE loan portfolio was secured by owner-occupied real estate.

¨

The following table summarizes the allowance for loan losses (“ALLL”) for the periods indicated:

·

The ALLL was 1.42% of total loans at June 30 , 2019, compared to 1.36% at June 30 , 2018, and 1.48% at March 31, 2019.  The ALLL to total nonperforming loans was 156.49% at June 30 , 2019, compared to 100.45% at June 30 , 2018, and  157.77% at March 31, 2019.

·

Net recoveries totaled $53,000 for the second quarter of 2019, compared to net charge-offs of $673,000 for the second quarter of 2018, and net recoveries of $531,000 for the first quarter of 2019.   

¨

The following is a breakout of nonperforming assets (“NPAs”) at the periods indicated:

·

NPAs totaled  $17.0 million, or 0.55% of total assets, at June 30, 2019, compared to $26.5 million, or 0.85% of total assets, at June 30 , 2018, and $17.3 million, or 0.56% of total assets, at March 31, 2019. 

·

A large lending relationship was placed on nonaccrual during the second quarter of 2018.  At June 30, 2019, the recorded investment of this lending relationship was $10.8 million, and the Company had a $5.9 million specific loan loss reserve allocated for this lending relationship, compared to a recorded investment of $22.9 million, and a $6.1 million specific loan loss reserve allocated for this lending relationship at June 30, 2018, and a recorded investment of $10.8 million, and a $5.9 million specific loan loss reserve allocated for this lending relationship at March 31, 2019. 

·

There were no foreclosed assets at June 30 , 2019,   June 30 , 2018, or March 31, 2019. 

·

Classified assets were $31.2 million, or 1.00% of total assets, at June 30 , 2019, compared to $32.3 million, or 1.03% of total assets, at June 30 , 2018, and $25.2 million, 0.81% of total assets, at March 31, 2019 .  The increase in classified assets at June 30, 2019, compared to March 31, 2019, was primarily due to a commercial loan customer with a majority of loans being for CRE that were moved to classified assets, but still accruing, during the second quarter of 2019.

¨

On January 1, 2019, the Company adopted Accounting Standards Update (“ASU”) No. 2016-02, Leases (Topic 842) .  Under the new guidance, the Company recognizes the following for all leases, at the commencement date: (1) a lease liability, which is a lessee’s obligation to make lease payments arising from a lease, measured on a discounted basis; and (2) a right-of-use (“ROU”) asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term. While the new standard impacts lessors and lessees, the Company is impacted as a lessee of the offices and real estate used for operations.  The Company's lease agreements include options to renew at the Company's discretion. The extensions are not

reasonably certain to be exercised, therefore it was not considered in the calculation of the ROU asset and lease liability. Total assets and total liabilities were $7.4 million on its consolidated statement of financial condition at June 30, 2019, as a result of recognizing right-of-use assets, included in other assets, and lease liabilities, included in other liabilities, related to non-cancelable operating lease agreements for office space. 

¨

The following table summarizes the distribution of deposits and the percentage of distribution in each category for the periods indicated:

·

Total deposits decreased $61.1 million, or (2)%, to $2.62 billion at June 30 , 2019, compared to $2.68 billion at June 30 , 2018, and decreased $17.8 million or (1%) from $2.64 billion at March 31, 2019.    

·

Deposits, excluding all time deposits and CDARS deposits, decreased $48.1 million, or (2%), to $2.47 billion at June 30 , 2019, compared to $2.51 billion at June 30 , 2018,  and decreased $16.0 million or (1%) at June 30 , 2019, compared to $2.48 billion at March 31, 2019.

¨

The Company’s consolidated capital ratios exceeded regulatory guidelines and the Bank’s capital ratios exceeded the regulatory guidelines under the Basel III prompt corrective action (“PCA”) regulatory guidelines for a well-capitalized financial institution, and the Basel III minimum regulatory requirements at June 30 , 2019, as reflected in the following table:

(1)

Basel III minimum regulatory requirements for both the Company and the Bank include a 2.5% capital conservation buffer, except the leverage ratio.

¨

The following table reflects the components of accumulated other comprehensive loss, net of taxes, for the periods indicated:

¨

Tangible equity increased to $293.5 million at June 30, 2019, compared to $249.6 million at June 30, 2018, and $283.3 million at March  31, 2019.  Tangible book value per share was $6.75 at June 30, 2019, compared to $5.77 at June 30, 2018, and $6.54 at March 31, 2019.  

For the Quarter Ended:

Percent Change From:

For the Six Months Ended:

CONSOLIDATED INCOME STATEMENTS

June 30, 

March 31, 

June 30, 

March 31, 

June 30, 

June 30, 

June 30, 

Percent

(in $000’s, unaudited)

2019

2019

2018

2019

2018

2019

2018

Change

Interest income

$

33,489

$

33,449

$

31,980

%  

%

$

66,938

$

59,857

%

Interest expense

2,573

2,407

1,816

%  

%

4,980

3,345

%

       Net interest income before provision

   for loan losses

30,916

31,042

30,164

%  

%

61,958

56,512

%

Provision (credit) for loan losses

(740)

(1,061)

7,198

%  

%

(1,801)

7,704

%

Net interest income after provision

   for loan losses

31,656

32,103

22,966

%  

%

63,759

48,808

%

Noninterest income:

Service charges and fees on deposit accounts

1,177

1,161

972

%  

%

2,338

1,874

%

Gain on sales of securities

548

 —

179

N/A

%

548

266

%

Increase in cash surrender value of

  life insurance

333

330

237

%  

%

663

600

%

Servicing income

150

191

189

%  

%

341

370

%

Gain on sales of SBA loans

36

139

80

%  

%

175

315

%

Other

521

647

1,123

%  

%

1,168

1,550

%

Total noninterest income

2,765

2,468

2,780

%  

%

5,233

4,975

%

Noninterest expense:

Salaries and employee benefits

10,698

10,770

14,806

%  

%

21,468

24,583

%

Occupancy and equipment

1,578

1,506

1,262

%  

%

3,084

2,368

%

Professional fees

753

818

(289)

%  

%

1,571

395

%

Other

5,416

4,824

9,083

%  

%

10,240

13,506

%

Total noninterest expense

18,445

17,918

24,862

%  

%

36,363

40,852

%

Income before income taxes