Pacific Mercantile Bancorp Reports Third Quarter 2017 Operating Results

Third Quarter Summary
  • Net income of $3.8 million, or $0.16 per share
  • Total new loan commitments of $70.6 million and loan fundings of $51.4 million
  • Average loans increased $38.3 million, or 15.6% annualized
  • Nonperforming assets decreased 54.0% from June 30, 2017
  • Classified assets decreased 39.6% from June 30, 2017 to 1.6% of total assets
  • Total past due loans decreased 72.8% from June 30, 2017

COSTA MESA, Calif., Oct. 23, 2017 (GLOBE NEWSWIRE) -- Pacific Mercantile Bancorp (NASDAQ:PMBC), the holding company of Pacific Mercantile Bank (the "Bank"), a wholly owned banking subsidiary, and PM Asset Resolution, Inc. ("PMAR"), a wholly owned non-bank subsidiary, today reported its financial results for the three and nine months ended September 30, 2017.

For the third quarter of 2017, the Company reported net income of $3.8 million, or $0.16 per share. This compares with net income of $2.5 million, or $0.11 per share, in the second quarter of 2017, and a net loss of $30.5 million, or $1.33 per share, in the third quarter of 2016. The increase in net income, as compared to the three months ended June 30, 2017, is primarily attributable to an increase in net interest income.  The increase in net interest income is a result of a higher average loan balance for the three months ended September 30, 2017 as compared to the three months ended June 30, 2017 and the recovery of $1.1 million in interest income on one loan relationship that paid off during the quarter which was on nonaccrual status.

Commenting on the results, Tom Vertin, President & CEO of Pacific Mercantile Bancorp, said, "We delivered another quarter of improved profitability driven by higher revenue, greater operating efficiencies and notable improvement in asset quality.  We continue to add new operating companies to our client base, although our overall level of balance sheet growth in the third quarter was impacted by payoffs of non-performing loans, seasonal paydowns in lines and seasonal use of funds by a number of our depositors.  We have a very healthy pipeline that we believe should result in a higher level of client acquisition in the fourth quarter.  As we continue to add quality assets and drive additional operating leverage, we anticipate further improvement in our level of profitability."

Results of Operations

The following table shows our operating results for the three and nine months ended September 30, 2017, as compared to the three months ended June 30, 2017 and the three and nine months ended September 30, 2016. The discussion below highlights the key factors contributing to the changes shown in the following table.
  Three Months Ended   Nine Months Ended September 30,
  September 30, 2017   June 30, 2017   September 30, 2016   2017   2016
  ($ in thousands)
Total interest income $ 14,025     $ 12,132     $ 10,598     $ 37,761     $ 30,388  
Total interest expense 2,020     1,736     1,409     5,289     4,015  
Net interest income 12,005     10,396     9,189     32,472     26,373  
Provision for loan and lease losses         10,730         19,870  
Total noninterest income 964     1,431     1,054     3,364     2,671  
Total noninterest expense 9,176     9,262     9,687     27,649     27,135  
Income tax provision 37     64     20,352     150     16,991  
Net income (loss) $ 3,756     $ 2,501     $ (30,526 )   $ 8,037     $ (34,952 )

Net Interest Income

Q3 2017 vs Q2 2017. Net interest income increased $1.6 million, or 15.5%, for the three months ended September 30, 2017 as compared to the three months ended June 30, 2017 primarily as a result of:
  • An increase in interest income of $1.9 million, or 15.6%, primarily attributable to an increase in interest earned on loans as a result of a higher average balance and an increase in the average yield on loans during the three months ended September 30, 2017 as compared to the three months ended June 30, 2017 and the recovery of $1.1 million in interest income on one loan relationship that paid off during the quarter which was on nonaccrual status; partially offset by
  • An increase in interest expense of $284 thousand, or 16.4%, primarily attributable to an increase in the volume of and rates of interest paid on our deposits for the three months ended September 30, 2017 as compared to the three months ended June 30, 2017, which was primarily the result of our decision to increase the rate of interest paid on our certificates of deposit to increase our liquidity.

Our net interest margin increased to 4.06% for the three months ended September 30, 2017 as compared to 3.63% for the three months ended June 30, 2017 primarily as a result of a favorable shift in the mix of interest-earning assets for the three months ended September 30, 2017 as compared to the three months ended June 30, 2017 and the recovery of $1.1 million in interest income on one loan relationship that paid off during the quarter which was on nonaccrual status.

Q3 2017 vs Q3 2016. Net interest income increased $2.8 million, or 30.6%, for the three months ended September 30, 2017 as compared to the three months ended September 30, 2016 primarily as a result of:

  • An increase in interest income of $3.4 million, or 32.3%, primarily attributable to an increase in interest earned on loans as a result of a higher average balance and an increase in the average yield on loans for the three months ended September 30, 2017 as compared to the three months ended September 30, 2016 and the recovery of $1.1 million in interest income on one loan relationship that paid off during the quarter which was on nonaccrual status; partially offset by
  • An increase in interest expense of $611 thousand, or 43.4%, primarily attributable to an increase in the volume of and rates of interest paid on our deposits for the three months ended September 30, 2017 as compared to the three months ended September 30, 2016 due to new client acquisition and the actions of the Federal Reserve Board to raise short-term interest rates by 75 basis points since the fourth quarter of 2016.

YTD 2017 vs YTD 2016. Net interest income increased $6.1 million, or 23.1%, for the nine months ended September 30, 2017 as compared to the nine months ended September 30, 2016, primarily as a result of:
  • An increase in interest income of $7.4 million, or 24.3%, primarily attributable to an increase in interest earned on loans as a result of a higher average loan balance and an increase in the average yield on loans for the nine months ended September 30, 2017 as compared to the nine months ended September 30, 2016 and the recovery of $1.1 million in interest income on one loan relationship that paid off during the quarter which was on nonaccrual status; partially offset by
  • An increase in interest expense of $1.3 million, or 31.7%, primarily attributable to an increase in the volume of and rates of interest paid on our deposits for the nine months ended September 30, 2017 as compared to the nine months ended September 30, 2016 due to new client acquisition and the actions of the Federal Reserve Board to raise short-term interest rates by 75 basis points since the fourth quarter of 2016.

Provision for Loan and Lease Losses

Q3 2017 vs Q2 2017. We recorded no provision for loan and lease losses during either the three months ended September 30, 2017 or June 30, 2017 due primarily to reserves for new loans being offset by a decline in the level of classified assets. During the three months ended September 30, 2017, we had net charge-offs of $2.1 million, compared with net recoveries of $384 thousand for the three months ended June 30, 2017.

Q3 2017 vs Q3 2016.  We recorded no provision for loan and lease losses during the three months ended September 30, 2017, as compared to a provision for loan and lease losses of $10.7 million recorded during the three months ended September 30, 2016.  There was no provision for the third quarter of 2017 due primarily to reserves for new loan growth being offset by a decline in the level of classified assets. We recorded a $10.7 million provision for loan and lease losses in the third quarter of 2016 due to downgrades and charge-offs on loans that exceeded recoveries during the third quarter of 2016.

YTD 2017 vs YTD 2016. We recorded no provision for loan and lease losses during the nine months ended September 30, 2017 as compared to a provision for loan and lease losses of $19.9 million recorded during the nine months ended September 30, 2016. We recorded no provision for loan and lease losses during the nine months ended September 30, 2017 due primarily to reserves for new loan growth being offset by a decline in the level of classified assets. We recorded a provision for loan and lease losses of $19.9 million for the nine months ended September 30, 2016 primarily as a result of new loan growth and downgrades and charge-offs on several loans that exceeded recoveries during the nine months ended September 30, 2016.

Noninterest Income

Q3 2017 vs Q2 2017. Noninterest income decreased $467 thousand, or 32.6%, for the three months ended September 30, 2017 as compared to the three months ended June 30, 2017, primarily resulting from the recovery of appraisal fees and legal expenses related to a problem loan that paid off during the second quarter of 2017.

Q3 2017 vs Q3 2016. Noninterest income decreased by $90 thousand, or 8.5%, for the three months ended September 30, 2017 as compared to the three months ended September 30, 2016, primarily as a result of $340 thousand in recoveries during the third quarter of 2016 that exceeded the amount previously charged off against the allowance for loan and lease losses ("ALLL"), which was partially offset by an increase in loan servicing and referral fees during the third quarter of 2017.

YTD 2017 vs YTD 2016. Noninterest income increased $693 thousand, or 25.9%, for the nine months ended September 30, 2017 as compared to the nine months ended September 30, 2016, primarily as a result of:
  • The recovery of $373 thousand in recoveries during the second quarter of 2017 that exceeded the amount previously charged off against the ALLL; and
  • An increase in loan servicing and referral fees during the nine months ended September 30, 2017 as compared to the same period in 2016; partially offset by
  • A decrease of $40 thousand in net gain on sale of small business administration loans for the nine months ended September 30, 2017 as compared to the same period in 2016.

Noninterest Expense

Q3 2017 vs Q2 2017. Noninterest expense decreased $86 thousand, or 0.9%, for the three months ended September 30, 2017 as compared to the three months ended June 30, 2017, primarily as a result of a decrease in our loan-related expenses, which was partially offset by an increase in our salary expense during the third quarter of 2017.

Q3 2017 vs Q3 2016. Noninterest expense decreased $511 thousand, or 5.3%, for the three months ended September 30, 2017 as compared to the three months ended September 30, 2016, primarily as a result of:
  • A decrease of $152 thousand in our professional fees primarily related to lower accounting fees in 2017;
  • A decrease of $157 thousand in loan-related expenses as a result of the reversal of our mortgage repurchase reserve; and
  • A decrease of $135 thousand in occupancy expenses as a result of moving costs incurred in the prior year period associated with the transition of a few of our locations from full-service branches to loan production offices, which expenses were not incurred during the three months ended September 30, 2017.

YTD 2017 vs YTD 2016. Noninterest expense increased $514 thousand, or 1.9%, for the nine months ended September 30, 2017 as compared to the nine months ended September 30, 2016, primarily as a result of an increase of $665 thousand in our professional fees attributable to an increase in accounting and legal fees during the nine months ended September 30, 2017.

Income tax provision (benefit)

For the three and nine months ended September 30, 2017, we had income tax expense of $37 thousand and $150 thousand, respectively. The income tax expense for the three and nine months ended September 30, 2017 represents the payment to the State of California for the cost of doing business within the state and an estimated alternative minimum tax payment. No additional income tax expense was recorded as a result of our net operating loss carryforward. Accounting rules specify that management must evaluate the deferred tax asset on a recurring basis to determine whether enough positive evidence exists to determine whether it is more-likely-than-not that the deferred tax asset will be available to offset or reduce future taxes.  The tax code allows net operating losses to be carried forward for 20 years from the date of the loss, and while management believes that the Company will be able to realize the deferred tax asset within the period that our net operating losses may be carried forward, we are unable to assert the timing as to when that realization will occur.  Due to the hierarchy of evidence that the accounting rules specify, management determined that the valuation allowance of $21.7 million that was previously established on the balance of our deferred tax asset was still required at September 30, 2017.

For the three and nine months ended September 30, 2016, we had income tax expense of $20.4 million and $17.0 million, respectively, as a result of the establishment of a full valuation allowance during the three months ended September 30, 2016 on the balance of our deferred tax asset, which includes current and historical losses that may be used to offset taxes on future profits. Negative evidence included the significant losses incurred during the second and third quarters of 2016, an increase in our nonperforming assets from December 31, 2015 to September 30, 2016, a cumulative three-year loss position, and our accumulated deficit. Positive evidence included our forecast of our taxable income, the time period in which we have to utilize our deferred tax asset and the current economic conditions. While management believed that the Company would be able to realize the deferred tax asset within the period that our net operating losses may be carried forward, we were unable to assert the timing as to when that realization would occur. As a result of this conclusion and due to the hierarchy of evidence that the accounting rules specify, a valuation allowance was recorded as of September 30, 2016 to offset the deferred tax asset.

Balance Sheet Information

Loans

As indicated in the table below, at September 30, 2017 gross loans totaled approximately $1.0 billion, which represented a decrease of $2.2 million, or 0.2%, compared to gross loans outstanding at June 30, 2017, and an increase of $93.5 million, or 9.9%, compared to gross loans outstanding at December 31, 2016. The following table sets forth the composition, by loan category, of our loan portfolio at September 30, 2017, June 30, 2017 and December 31, 2016.
  September 30, 2017   June 30, 2017   December 31, 2016
  Amount   Percent of Total Loans   Amount   Percent of Total Loans   Amount   Percent of Total Loans
  ($ in thousands)
Commercial loans $ 364,242     35.0 %   $ 366,259     35.1 %   $ 333,376     35.2 %
Commercial real estate loans - owner occupied 211,514     20.3 %   209,724     20.1 %   214,420     22.7 %
Commercial real estate loans - all other 235,319     22.6 %   240,653     23.1 %   173,223     18.3 %
Residential mortgage loans - multi-family 123,698     11.9 %   126,061     12.1 %   130,930     13.8 %
Residential mortgage loans - single family 27,983     2.7 %   30,678     2.9 %   34,527     3.6 %
Construction and land development loans 28,461     2.7 %   21,601     2.1 %   18,485     2.0 %
Consumer loans 48,801     4.7 %   47,243     4.5 %   41,563     4.4 %
Gross loans $ 1,040,018     100.0 %   $ 1,042,219     100.0 %   $ 946,524     100.0 %

The decrease of $2.2 million in gross loans during the third quarter of 2017 was primarily a result of $30.4 million in payoffs, which included $9.5 million of loans that were previously on nonaccrual status, partially offset by new loan growth during the same period. During the third quarter of 2017, we secured new commercial loan commitments of $49.0 million, of which $32.7 million were funded at September 30, 2017. Our total commercial loan commitments increased to $614.1 million at September 30, 2017 from $587.8 million at June 30, 2017, while the utilization rate of commercial commitments increased to 59.4% at September 30, 2017 from 59.3% at June 30, 2017.

Deposits

  September 30, 2017   June 30, 2017   December 31, 2016
Type of Deposit ($ in thousands)
Noninterest-bearing checking accounts $ 320,248     $ 343,956     $ 332,573  
Interest-bearing checking accounts 92,467     103,136     75,366  
Money market and savings deposits 314,002     328,469     335,453  
Certificates of deposit 327,803     291,143     257,908  
    Totals $ 1,054,520     $ 1,066,704     $ 1,001,300  

The decrease in our total deposits from June 30, 2017 to September 30, 2017 is primarily attributable to a decrease of $34.4 million in our checking accounts and a decrease of $14.5 million in money market and savings deposits, partially offset by an increase of $36.7 million in our certificates of deposit. The increase in our certificates of deposit is primarily the result of our decision to increase the rate of interest paid on our certificates of deposit to increase our liquidity. As a result of the aforementioned increase in certificates of deposits, lower priced core deposits decreased to 69% of total deposits, while higher priced certificates of deposit increased to 31% at September 30, 2017, as compared to 73% and 27% of total deposits, respectively, at June 30, 2017.

Asset Quality

Nonperforming Assets
  2017   2016
September 30   June 30   March 31   December 31   September 30
  ($ in thousands)
Total non-performing loans $ 10,279     $ 22,393     $ 25,659     $ 24,897     $ 27,079  
Other non-performing assets 95     181     58          
Total non-performing assets $ 10,374     $ 22,574     $ 25,717     $ 24,897     $ 27,079  
90-day past due loans $ 2,212     $ 12,261     $ 15,838     $ 14,949     $ 9,674  
Total classified assets $ 19,116     $ 31,623     $ 37,114     $ 53,901     $ 68,489  
Allowance for loan and lease losses $ 15,048     $ 17,178     $ 16,794     $ 16,801     $ 16,642  
Allowance for loan and lease losses /gross loans 1.45 %   1.65 %   1.77 %   1.78 %   1.91 %
Allowance for loan and lease losses /total assets 1.25 %   1.42 %   1.42 %   1.47 %   1.55 %
Ratio of allowance for loan and lease losses to nonperforming loans 146.40 %   76.71 %   65.45 %   67.48 %   61.46 %
Ratio of nonperforming assets to total assets 0.86 %   1.86 %   2.18 %   2.18 %   2.52 %
Net quarterly charge-offs (recoveries) to gross loans 0.20 %   (0.04 )%   %   (0.02 )%   0.86 %

Nonperforming assets at September 30, 2017 decreased $12.2 million from June 30, 2017 primarily as a result of a decrease in non-performing loans in the third quarter of 2017. The decrease in our non-performing loans resulted primarily from $9.8 million of payoffs or paydowns on our nonaccrual loans, upgrades of $711 thousand, charge-offs of $1.9 million, and the transfer of $37 thousand to other foreclosed assets, partially offset by the addition of one new loan totaling $393 thousand during the three months ended September 30, 2017.

Our classified assets decreased by $12.5 million from $31.6 million at June 30, 2017 to $19.1 million at September 30, 2017.  The decrease is primarily related to principal payments of $10.0 million, upgrades of $2.4 million and charge-offs of $2.3 million during the three months ended September 30, 2017, partially offset by $2.2 million of additions during the same period. 

During the three months ended September 30, 2016, the Company downgraded $48 million in loans as part of a comprehensive credit review. During the year subsequent to September 30, 2016, the Company has received $33.7 million in principal payments, net of advances, on these loans, $5.5 million in loan upgrades have been made and $1.6 million in charge-offs, accounting for 85% of the total amount of loans downgraded during the third quarter of 2016. These loan upgrades were reviewed and confirmed by third parties during the first half of 2017. The Company anticipates the progress on the remaining $7.2 million in loan downgrades taken in the third quarter of 2016 to be reflected in our results in future reporting periods, and cannot predict the timing as to when these credits will be resolved.

Allowance for loan and lease losses
  2017   2016
September 30   June 30   March 31   December 31   September 30
  ($ in thousands)
Balance at beginning of quarter $ 17,178     $ 16,794     $ 16,801     $ 16,642     $ 13,429  
Charge offs (2,275 )   (556 )   (456 )   (113 )   (7,723 )
Recoveries 145     940     449     272     206  
Provision                 10,730  
Balance at end of quarter $ 15,048     $ 17,178     $ 16,794     $ 16,801     $ 16,642  

At September 30, 2017, the ALLL totaled $15.0 million, which was approximately $2.1 million less than at June 30, 2017 and $1.6 million less than at September 30, 2016.  The ALLL activity during the three months ended September 30, 2017 included net charge-offs of $2.1 million. There was no provision for loan and lease losses during the period, primarily attributable to reserves for new loans being offset by a decline in classified assets. Of the $2.3 million in gross charge-offs during the three months ended September 30, 2017, $1.6 million related to one loan relationship that was previously on nonaccrual status. The ratio of the ALLL-to-total loans outstanding as of September 30, 2017 was 1.45% as compared to 1.65% and 1.91% as of June 30, 2017 and September 30, 2016, respectively. 

Capital Resources

At September 30, 2017, we had total regulatory capital on a consolidated basis of $142.4 million, and the Bank had total regulatory capital of $134.4 million.  The ratio of the Bank's total capital-to-risk weighted assets, which is the principal federal bank regulatory measure of the financial strength of banking institutions, was 11.6% and, as a result, the Bank continued to be classified, under federal bank regulatory guidelines, as a "well-capitalized" banking institution, which is the highest of the capital standards established by federal banking regulatory authorities.

The following table sets forth the regulatory capital and capital ratios of the Company (on a consolidated basis) and the Bank (on a stand-alone basis) at September 30, 2017, as compared to the regulatory requirements that must be met for a banking institution to be rated as a well-capitalized institution.
  Actual At September 30, 2017   Federal Regulatory Requirement to be Rated Well-Capitalized
  Amount   Ratio   Amount   Ratio
  ($ in thousands)
Total Capital to Risk Weighted Assets:              
Company $ 142,421     12.2 %   N/A   N/A
Bank 134,355     11.6 %   $ 116,371   At least 10.0
Common Equity Tier 1 Capital to Risk Weighted Assets:              
Company $ 110,839     9.5 %   N/A   N/A
Bank 119,799     10.3 %   $ 75,641   At least 6.5
Tier 1 Capital to Risk Weighted Assets:              
Company $ 127,839     11.0 %   N/A   N/A
Bank 119,799     10.3 %   $ 93,096   At least 8.0
Tier 1 Capital to Average Assets:              
Company $ 127,839     10.8 %   N/A   N/A
Bank 119,799     10.2 %   $ 58,967   At least 5.0

About Pacific Mercantile Bancorp

Pacific Mercantile Bancorp (NASDAQ:PMBC) is the parent holding company of Pacific Mercantile Bank, which opened for business March 1, 1999. The Bank, which is an FDIC insured, California state-chartered bank and a member of the Federal Reserve System, provides a wide range of commercial banking services to businesses, business professionals and individual clients. The Bank is headquartered in Orange County and operates a total of nine offices in Southern California, located in Orange, Los Angeles, San Diego, and San Bernardino counties. The Bank offers tailored flexible solutions for its clients including an array of loan and deposit products, sophisticated cash management services, and comprehensive online banking services accessible at www.pmbank.com.

Forward-Looking Information

This news release contains statements regarding our expectations, beliefs and views about our future financial performance and our business, trends and expectations regarding the markets in which we operate, and our future plans. Those statements, which include the quotation from management, constitute "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, can be identified by the fact that they do not relate strictly to historical or current facts. Often, they include words such as "believe," "expect," "anticipate," "intend," "plan," "estimate," "project," or words of similar meaning, or future or conditional verbs such as "will," "would," "should," "could," or "may." Forward-looking statements are based on current information available to us and our assumptions about future events over which we do not have control.  Moreover, our business and our markets are subject to a number of risks and uncertainties which could cause our actual financial performance in the future, and the future performance of our markets (which can affect both our financial performance and the market prices of our shares), to differ, possibly materially, from our expectations as set forth in the forward-looking statements contained in this news release.

In addition to the risk of incurring loan losses and provision for loan losses, which is an inherent risk of the banking business, these risks and uncertainties include, but are not limited to, the following: the risk that the credit quality of our borrowers declines; potential declines in the value of the collateral for secured loans; the risk that steps we have taken to strengthen our overall credit administration are not effective; the risk of a downturn in the United States economy, and domestic or international economic conditions, which could cause us to incur additional loan losses and adversely affect our results of operations in the future; the risk that our interest margins and, therefore, our net interest income will be adversely affected by changes in prevailing interest rates; the risk that we will not succeed in further reducing our remaining nonperforming assets, in which event we would face the prospect of further loan charge-offs and write-downs of assets; the risk that we will not be able to manage our interest rate risks effectively, in which event our operating results could be harmed; the prospect of changes in government regulation of banking and other financial services organizations, which could impact our costs of doing business and restrict our ability to take advantage of business and growth opportunities; the risk that our efforts to develop a robust commercial banking platform may not succeed; and the risk that we may be unable to realize our expected level of increasing deposit inflows.  Readers of this news release are encouraged to review the additional information regarding these and other risks and uncertainties to which our business is subject that is contained in our Annual Report on Form 10-K for the year ended December 31, 2016, which is on file with the Securities and Exchange Commission ("SEC") and will be set forth in our Quarterly Report on Form 10-Q for the three months ended September 30, 2017, which we expect to file with the SEC during the fourth quarter of 2017.

Due to these and other risks and uncertainties to which our business is subject, you are cautioned not to place undue reliance on the forward-looking statements contained in this news release, which speak only as of its date, or to make predictions about our future financial performance based solely on our historical financial performance. We disclaim any obligation to update or revise any of the forward-looking statements as a result of new information, future events or otherwise, except as may be required by law.

CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars and numbers of shares in thousands, except per share data)
(Unaudited)
 
  Three Months Ended   Nine Months Ended
  September 30, 2017   June 30, 2017   September 30, 2016   Sep '17 vs Jun '17 % Change   Sep '17 vs Sep '16 % Change   September 30, 2017   September 30, 2016   % Change
Total interest income $ 14,025     $ 12,132     $ 10,598     15.6 %   32.3 %   $ 37,761     $ 30,388     24.3 %
Total interest expense 2,020     1,736     1,409     16.4 %   43.4 %   5,289     4,015     31.7 %
Net interest income 12,005     10,396     9,189     15.5 %   30.6 %   32,472     26,373     23.1 %
Provision for loan and lease losses         10,730     %   (100.0 )%       19,870     (100.0 )%
Net interest income (loss) after provision for loan and lease losses 12,005     10,396     (1,541 )   15.5 %   (879.0 )%   32,472     6,503     399.3 %
Non-interest income:                              
Service fees on deposits and other banking services 346     332     279     4.2 %   24.0 %   985     801     23.0 %
Net gain on sale of small business administration loans             %   %       40     (100.0 )%
Net (loss) gain on sale of other assets (16 )           (100.0 )%   (100.0 )%   (14 )       (100.0 )%
Other non-interest income 634     1,099     775     (42.3 )%   (18.2 )%   2,393     1,830     30.8 %
Total non-interest income 964     1,431     1,054     (32.6 )%   (8.5 )%   3,364     2,671     25.9 %
Non-interest expense:                              
Salaries and employee benefits 5,796     5,662     5,727     2.4 %   1.2 %   17,171     16,920     1.5 %
Occupancy and equipment 1,089     1,054     1,296     3.3 %   (16.0 )%   3,206     3,706     (13.5 )%
Professional Fees 958     1,032     1,110     (7.2 )%   (13.7 )%   3,100     2,435     27.3 %
OREO expenses             %   %       (70 )   (100.0 )%
FDIC Expense 294     262     229     12.2 %   28.4 %   859     675     27.3 %
Other non-interest expense 1,039     1,252     1,325     (17.0 )%   (21.6 )%   3,313     3,469     (4.5 )%
Total non-interest expense 9,176     9,262     9,687     (0.9 )%   (5.3 )%   27,649     27,135     1.9 %
Income (loss) before income taxes 3,793     2,565     (10,174 )   47.9 %   (137.3 )%   8,187     (17,961 )   (145.6 )%
Income tax expense 37     64     20,352     (42.2 )%   (99.8 )%   150     16,991     (99.1 )%
Net income (loss) $ 3,756     $ 2,501     $ (30,526 )   50.2 %   (112.3 )%   $ 8,037     $ (34,952 )   (123.0 )%
Basic income per common share:                              
Net income (loss) available to common shareholders $ 0.16     $ 0.11     $ (1.33 )   45.5 %   (112.0 )%   $ 0.35     $ (1.52 )   (123.0 )%
Diluted income per common share:                              
Net income (loss) available to common shareholders $ 0.16     $ 0.11     $ (1.33 )   45.5 %   (112.0 )%   $ 0.35     $ (1.52 )   (123.0 )%
Weighted average number of common shares outstanding:                              
Basic 23,193     23,187     22,996     %   0.9 %   23,173     22,944     1.0 %
Diluted 23,331     23,296     22,996     0.2 %   1.5 %   23,290     22,944     1.5 %
Ratios from continuing operations (1):                              
Return on average assets 1.26 %   0.86 %   (10.66 )%           0.93 %   (4.24 )%    
Return on average equity 13.82 %   9.60 %   (92.18 )%           10.22 %   (34.80 )%    
Efficiency ratio 70.75 %   78.31 %   94.57 %           77.15 %   93.43 %    

____________________

(1) Ratios and net interest margin for the three and nine months ended September 30, 2017, June 30, 2017 and September 30, 2016 have been annualized.

CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Dollars in thousands, except share and book value data)
(Unaudited)
 
ASSETS September 30, 2017   December 31, 2016   Increase/ (Decrease)  
     
Cash and due from banks $ 15,186     $ 16,789     (9.5 )%  
Interest bearing deposits with financial institutions (1) 92,687     122,056     (24.1 )%  
Interest bearing time deposits 3,419     3,669     (6.8 )%  
Investment securities (including stock) 49,725     51,650     (3.7 )%  
Loans (net of allowances of $15,048 and $16,801, respectively) 1,027,896     931,525     10.3 %  
Other assets 16,048     15,000     7.0 %  
Total assets $ 1,204,961     $ 1,140,689     5.6 %  
LIABILITIES AND SHAREHOLDERS' EQUITY            
Non-interest bearing deposits $ 320,248     $ 332,573     (3.7 )%  
Interest bearing deposits            
Interest checking 92,467     75,366     22.7 %  
Savings/money market 314,002     335,453     (6.4 )%  
Certificates of deposit 327,803     257,908     27.1 %  
Total interest bearing deposits 734,272     668,727     9.8 %  
    Total deposits 1,054,520     1,001,300     5.3 %  
Other borrowings 15,000     15,000     %  
Other liabilities 7,655     7,143     7.2 %  
Junior subordinated debentures 17,527     17,527     %  
Total liabilities 1,094,702     1,040,970     5.2 %  
Shareholders' equity 110,259     99,719     10.6 %  
    Total Liabilities and Shareholders' Equity $ 1,204,961     $ 1,140,689     5.6 %  
Tangible book value per share $ 4.75     $ 4.33     9.7 %  
Tangible book value per share, as adjusted (2) $ 4.79     $ 4.41     8.6 %  
Shares outstanding 23,188,650     23,004,668     0.8 %  

____________________

(1) Interest bearing deposits held in the Bank's account maintained at the Federal Reserve Bank.(2) Excludes accumulated other comprehensive income/loss, which is included in shareholders' equity.

CONSOLIDATED AVERAGE BALANCES AND YIELD DATA
(Dollars in thousands)
(Unaudited)
 
  Three Months Ended
  September 30, 2017   June 30, 2017   September 30, 2016
  Average Balance   Interest Earned/ Paid   Average Yield/ Rate   Average Balance   Interest Earned/ Paid   Average Yield/ Rate   Average Balance   Interest Earned/ Paid   Average Yield/ Rate
Interest earning assets                                  
Short-term investments (1) $ 104,968     $ 335     1.27 %   $ 117,482     $ 305     1.04 %   $ 188,982     $ 244     0.51 %
Securities available for sale and stock (2) 49,033     304     2.46 %   50,144     283     2.26 %   56,457     356     2.51 %
Loans (3) 1,019,253     13,386     5.21 %   980,987     11,544     4.72 %   857,784     9,998     4.64 %
Total interest-earning assets 1,173,254     14,025     4.74 %   1,148,613     12,132     4.24 %   1,103,223     10,598     3.82 %
Noninterest-earning assets                                  
Cash and due from banks 13,801             14,598             14,462          
All other assets (2,099 )           (1,887 )           21,784          
Total assets 1,184,956             1,161,324             1,139,469          
Interest-bearing liabilities:                                  
Interest-bearing checking accounts $ 93,597     $ 104     0.44 %   $ 95,543     $ 85     0.36 %   $ 57,614     $ 41     0.28 %
Money market and savings accounts 323,825     761     0.93 %   343,445     689     0.80 %   326,666     520     0.63 %
Certificates of deposit 304,404     980     1.28 %   277,264     797     1.15 %   267,590     679     1.01 %
Other borrowings 652     2     1.22 %   209         %   9,293     24     1.03 %
Junior subordinated debentures 17,527     173     3.92 %   17,527     165     3.78 %   17,527     145     3.29 %
Total interest bearing liabilities 740,005     2,020     1.08 %   733,988     1,736     0.95 %   678,690     1,409     0.83 %
Noninterest bearing liabilities                                  
Demand deposits 329,168             315,483             322,768          
Accrued expenses and other liabilities 7,959             7,314             6,274          
Shareholders' equity 107,824             104,539             131,737          
Total liabilities and shareholders' equity 1,184,956             1,161,324             1,139,469          
Net interest income     $ 12,005             $ 10,396             9,189      
Net interest income/spread         3.66 %           3.29 %           2.99 %
Net interest margin         4.06 %           3.63 %           3.31 %

(1) Short-term investments consist of federal funds sold and interest bearing deposits that we maintain at other financial institutions.(2) Stock consists of Federal Home Loan Bank stock and Federal Reserve Bank of San Francisco stock.(3) Loans include the average balance of nonaccrual loans.
  Nine Months Ended
  September 30, 2017   September 30, 2016
  Average Balance   Interest Earned/ Paid   Average Yield/ Rate   Average Balance   Interest Earned/ Paid   Average Yield/ Rate
Interest earning assets                      
Short-term investments (1) $ 117,128     $ 904     1.03 %   $ 160,346     $ 613     0.51 %
Securities available for sale and stock (2) 50,032     930     2.49 %   58,293     1,075     2.46 %
Loans (3) 981,504     35,927     4.89 %   847,833     28,700     4.52 %
Total interest-earning assets 1,148,664     37,761     4.40 %   1,066,472     30,388     3.81 %
Noninterest-earning assets                      
Cash and due from banks 14,297             15,610          
All other assets (1,711 )           20,057          
Total assets 1,161,250             1,102,139          
Interest-bearing liabilities:                      
Interest-bearing checking accounts $ 88,962     $ 254     0.38 %   $ 54,993     $ 108     0.26 %
Money market and savings accounts 340,464     2,080     0.82 %   324,222     1,481     0.61 %
Certificates of deposit 279,630     2,458     1.18 %   264,457     1,924     0.97 %
Other borrowings 399     3     1.01 %   9,785     74     1.01 %
Junior subordinated debentures 17,527     494     3.77 %   17,527     428     3.26 %
Total interest bearing liabilities 726,982     5,289     0.97 %   670,984     4,015     0.80 %
Noninterest bearing liabilities                      
Demand deposits 321,808             290,830          
Accrued expenses and other liabilities 7,359             6,156          
Shareholders' equity 105,101             134,169          
Total liabilities and shareholders' equity 1,161,250             1,102,139          
Net interest income     $ 32,472             $ 26,373      
Net interest income/spread         3.43 %           3.01 %
Net interest margin         3.78 %           3.30 %

(1) Short-term investments consist of federal funds sold and interest bearing deposits that we maintain at other financial institutions.(2) Stock consists of Federal Home Loan Bank stock and Federal Reserve Bank of San Francisco stock.(3) Loans include the average balance of nonaccrual loans.
For more information contactCurt Christianssen, Chief Financial Officer, 714-438-2500

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