10-Q

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 June 30, 2019
OR
☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                          to

Commission file number 000‑23877

Heritage Commerce Corp

(Exact name of Registrant as Specified in its Charter)

California (State or Other Jurisdiction of Incorporation or Organization)	77‑0469558 (I.R.S. Employer Identification No.)
150 Almaden Boulevard, San Jose, California (Address of Principal Executive Offices)	95113 (Zip Code)

(408) 947‑6900

(Registrant’s Telephone Number, Including Area Code)

N/A

(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class:	Trading Symbol:	Name of each exchange on which registered:
Common Stock, No Par Value	HTBK	The NASDAQ Stock Market LLC

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 every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S‑T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).  YES ☒  NO ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer ☐	Accelerated filer ☒	Non‑accelerated filer ☐	Smaller reporting 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 ☒

The Registrant had 43,498,606 shares of Common Stock outstanding on July 30, 2019.

HERITAGE COMMERCE CORP

QUARTERLY REPORT ON FORM 10‑Q

TABLE OF CONTENTS

		Page No.
Cautionary Note on Forward‑Looking Statements		3
Part I. FINANCIAL INFORMATION
Item 1.	Consolidated Financial Statements (unaudited)	5
	Consolidated Balance Sheets	5
	Consolidated Statements of Income	6
	Consolidated Statements of Comprehensive Income	7
	Consolidated Statements of Changes in Shareholders’ Equity	8
	Consolidated Statements of Cash Flows	9
	Notes to Unaudited Consolidated Financial Statements	10
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	44
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	80
Item 4.	Controls and Procedures	80
PART II. OTHER INFORMATION
Item 1.	Legal Proceedings	81
Item 1A.	Risk Factors	81
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	81
Item 3.	Defaults Upon Senior Securities	81
Item 4.	Mine Safety Disclosures	81
Item 5.	Other Information	81
Item 6.	Exhibits	81
SIGNATURES		82

2

Cautionary Note Regarding Forward‑Looking Statements

This Report on Form 10‑Q contains various statements that may constitute forward‑looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, Rule 175 promulgated thereunder, and Section 21E of the Securities Exchange Act of 1934, as amended, Rule 3b‑6 promulgated thereunder and are intended to be covered by the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Any statements about our expectations, beliefs, plans, objectives, assumptions or future events or performance are not historical facts and may be forward‑looking. These forward‑looking statements often can be, but are not always, identified by the use of words such as “assume,” “expect,” “intend,” “plan,” “project,” “believe,” “estimate,” “predict,” “anticipate,” “may,” “might,” “should,” “could,” “goal,” “potential” and similar expressions. We base these forward‑looking statements on our current expectations and projections about future events, our assumptions regarding these events and our knowledge of facts at the time the statements are made. These statements include statements relating to our projected growth, anticipated future financial performance, and management’s long‑term performance goals, as well as statements relating to the anticipated effects on results of operations and financial condition.

These forward‑looking statements are subject to various risks and uncertainties that may be outside our control and our actual results could differ materially from our projected results. In addition, our past results of operations do not necessarily indicate our future results. The forward‑looking statements could be affected by many factors, including but not limited to:

· 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 and overall slowdowns in economic growth should these events occur;

· effects of and changes in trade, monetary and fiscal policies and laws, including the interest rate policies of the Federal Open Market Committee of the Federal Reserve Board;

· our ability to anticipate interest rate changes and manage interest rate risk;

· changes in inflation, interest rates, and market liquidity which may impact interest margins and impact funding sources;

· volatility in credit and equity markets and its effect on the global economy;

· our ability to effectively compete with other banks and financial services companies and the effects of competition in the financial services industry on our business;

· our ability to achieve loan growth and attract deposits;

· risks associated with concentrations in commercial and real estate related loans;

· the relative strength or weakness of the commercial and real estate markets where our borrowers are located;

· other than temporary impairment charges to our securities portfolio;

· changes in the level of nonperforming assets and charge offs and other credit quality measures, and their impact on the adequacy of the Company’s allowance for loan losses and the Company’s provision for loan losses;

· increased capital requirements for our continued growth or as imposed by banking regulators, which may require us to raise capital at a time when capital is not available on favorable terms if at all;

· regulatory limits on Heritage Bank of Commerce’s ability to pay dividends to the holding company;

· changes in our capital management policies, including those regarding business combinations, dividends, and share repurchases;

3

· operational issues stemming from, and/or capital spending necessitated by, the potential need to adapt to industry changes in information technology systems, on which we are highly dependent;

· our inability to attract, recruit,  and retain qualified officers and other personnel could harm our ability to implement our strategic plan, impair our relationships with customers and adversely affect our business, and results of operations;

· the potential increase in reserves and allowance for loan loss as a result of the transition to the current expected credit loss standard (“CECL”) established by the Financial Accounting Standards Board to account for future expected credit losses;

· possible impairment of our goodwill and other intangible assets;

· possible  adjustment of the valuation of our deferred tax assets;

· 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” and identity theft;

· inability of our framework to manage risks associated with our business, including operational risk and credit risk;

· risks of loss of funding of Small Business Administration or SBA loan programs, or changes in those programs;

· compliance with governmental and regulatory requirements, including the Dodd-Frank Act and others relating to banking, consumer protection, securities , accounting and tax matters;

· significant changes in applicable laws and regulations, including those concerning taxes, banking and securities;

· effect of changes in accounting policies and practices, as may be adopted by the regulatory agencies, as well as the Public Company Accounting Oversight Board, the Financial Accounting Standards Board and other accounting standard setters;

· costs and effects of legal and regulatory developments, including resolution of legal proceedings or regulatory or other governmental inquiries, and the results of regulatory examinations or reviews;

· availability and competition for acquisition opportunities;

· risks resulting from domestic terrorism;

· risks of natural disasters (including earthquakes) and other events beyond our control;

· the expected cost savings, synergies and other financial benefits from the Presidio Bank acquisition  might not be realized within the expected time frames or at all; the actual merger-related costs for the transaction may be higher than estimated; governmental approval of the Presidio Bank acquisition may not be obtained or adverse regulatory conditions may be imposed in connection with governmental approvals of the acquisition; conditions to the closing of the Presidio Bank acquisition may not be satisfied; Presidio’s shareholders may fail to provide the requisite consents to approve the consummation of the acquisition; the Company’s  shareholders may fail to approve the issuance of the Company’s common stock in connection with the proposed Presidio Bank acquisition); and 

· our success in managing the risks involved in the foregoing 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. You should consider any forward looking statements in light of this explanation, and we caution you about relying on forward-looking statements.

4

Part I—FINANCIAL INFORMATION

ITEM 1—CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

HERITAGE COMMERCE CORP

CONSOLIDATED BALANCE SHEETS (Unaudited)

	June 30,		December 31,
	2019		2018
	(Dollars in thousands)
Assets
Cash and due from banks	$	36,302	$	30,273
Other investments and interest-bearing deposits in other financial institutions		239,710		134,295
Total cash and cash equivalents		276,012		164,568
Securities available-for-sale, at fair value		383,156		459,043
Securities held-to-maturity, at amortized cost (fair value of $351,467 at
June 30, 2019 and $366,175 at December 31, 2018)		351,399		377,198
Loans held-for-sale - SBA, at lower of cost or fair value, including deferred costs		5,202		2,649
Loans, net of deferred fees		1,877,767		1,886,405
Allowance for loan losses		(26,631)		(27,848)
Loans, net		1,851,136		1,858,557
Federal Home Loan Bank and Federal Reserve Bank stock and other investments, at cost		25,226		25,216
Company-owned life insurance		62,522		61,859
Premises and equipment, net		6,975		7,137
Goodwill		83,753		83,753
Other intangible assets		10,900		12,007
Accrued interest receivable and other assets		51,750		44,575
Total assets	$	3,108,031	$	3,096,562
Liabilities and Shareholders' Equity
Liabilities:
Deposits:
Demand, noninterest-bearing	$	994,082	$	1,021,582
Demand, interest-bearing		682,114		702,000
Savings and money market		788,832		754,277
Time deposits - under $250		53,351		58,661
Time deposits - $250 and over		88,519		86,114
CDARS - interest-bearing demand, money market and time deposits		15,575		14,898
Total deposits		2,622,473		2,637,532
Subordinated debt, net of issuance costs		39,461		39,369
Accrued interest payable and other liabilities		57,989		52,195
Total liabilities		2,719,923		2,729,096
Shareholders' equity:
Preferred stock, no par value; 10,000,000 shares authorized; none issued and outstanding
at June 30, 2019 and December 31, 2018		—		—
Common stock, no par value; 60,000,000 shares authorized; 43,498,406 shares issued
and outstanding at June 30, 2019 and 43,288,750 shares issued and
outstanding at December 31, 2018		302,305		300,844
Retained earnings		92,105		79,003
Accumulated other comprehensive loss		(6,302)		(12,381)
Total shareholders' equity		388,108		367,466
Total liabilities and shareholders' equity	$	3,108,031	$	3,096,562

See notes to unaudited consolidated financial statements

5

HERITAGE COMMERCE CORP

CONSOLIDATED STATEMENTS OF INCOME (Unaudited)

	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2019		2018		2019		2018
	(Dollars in thousands, except per share amounts)
Interest income:
Loans, including fees	$	27,251	$	26,355	$	54,058	$	48,639
Securities, taxable		4,136		3,767		8,645		7,629
Securities, exempt from Federal tax		546		560		1,094		1,120
Other investments, interest-bearing deposits
in other financial institutions and Federal funds sold		1,556		1,298		3,141		2,469
Total interest income		33,489		31,980		66,938		59,857
Interest expense:
Deposits		1,995		1,239		3,831		2,197
Subordinated debt		577		577		1,148		1,148
Other borrowings		1		—		1		—
Total interest expense		2,573		1,816		4,980		3,345
Net interest income before provision for loan losses		30,916		30,164		61,958		56,512
Provision (credit) for loan losses		(740)		7,198		(1,801)		7,704
Net interest income after provision for loan losses		31,656		22,966		63,759		48,808
Noninterest income:
Service charges and fees on deposit accounts		1,177		972		2,338		1,874
Gain on sales of securities		548		179		548		266
Increase in cash surrender value of life insurance		333		237		663		600
Servicing income		150		189		341		370
Gain on sales of SBA loans		36		80		175		315
Other		521		1,123		1,168		1,550
Total noninterest income		2,765		2,780		5,233		4,975
Noninterest expense:
Salaries and employee benefits		10,698		14,496		21,468		23,963
Occupancy and equipment		1,578		1,262		3,084		2,368
Professional fees		753		(289)		1,571		395
Other		5,416		9,393		10,240		14,126
Total noninterest expense		18,445		24,862		36,363		40,852
Income before income taxes		15,976		884		32,629		12,931
Income tax expense		4,623		(31)		9,130		3,207
Net income	$	11,353	$	915	$	23,499	$	9,724
Earnings per common share:
Basic	$	0.26	$	0.02	$	0.54	$	0.24
Diluted	$	0.26	$	0.02	$	0.54	$	0.24

See notes to unaudited consolidated financial statements

6

HERITAGE COMMERCE CORP

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)

	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2019		2018		2019		2018
		(Dollars in thousands)
Net income	$	11,353	$	915	$	23,499	$	9,724
Other comprehensive income:
Change in net unrealized holding (losses) gains on available-for-sale
securities and I/O strips		4,333		(1,144)		9,204		(9,129)
Deferred income taxes		(1,261)		332		(2,728)		2,647
Change in net unamortized unrealized gain on securities available-for-
sale that were reclassified to securities held-to-maturity		(13)		(11)		(39)		(22)
Deferred income taxes		4		3		12		6
Reclassification adjustment for gains realized in income		(548)		(179)		(548)		(266)
Deferred income taxes		162		53		162		79
Change in unrealized (losses) gains on securities and I/O strips, net of
deferred income taxes		2,677		(946)		6,063		(6,685)
Change in net pension and other benefit plan liability adjustment		11		51		23		101
Deferred income taxes		(3)		(15)		(7)		(30)
Change in pension and other benefit plan liability, net of
deferred income taxes		8		36		16		71
Other comprehensive income (loss)		2,685		(910)		6,079		(6,614)
Total comprehensive income	$	14,038	$	5	$	29,578	$	3,110

See notes to unaudited consolidated financial statements

7

HERITAGE COMMERCE CORP

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY (Unaudited)

						Accumulated
						Other		Total
	Common Stock			Retained		Comprehensive		Shareholders’
	Shares	Amount		Earnings		Loss		Equity
	(Dollars in thousands)
Balance, January 1, 2018	38,200,883	$	218,355	$	62,136	$	(9,252)	$	271,239
Net income	—		—		8,809		—		8,809
Other comprehensive loss	—		—		—		(5,704)		(5,704)
Amortization of restricted stock awards,
net of forfeitures and taxes	—		228		—		—		228
Cash dividend declared $0.11 per share	—		—		(4,206)		—		(4,206)
Stock option expense, net of forfeitures and taxes	—		176		—		—		176
Stock options exercised	68,906		449		—		—		449
Balance, March 31, 2018	38,269,789		219,208		66,739		(14,956)		270,991
Net income	—		—		915		—		915
Other comprehensive loss	—		—		—		(910)		(910)
Issuance of common shares to acquire
Tri-Valley Bank	1,889,613		30,725		—		—		30,725
Issuance of common shares to acquire
United American Bank	2,826,032		47,280		—		—
Issuance of restricted stock awards, net	97,818		—		—		—		47,280
Amortization of restricted stock awards,
net of forfeitures	—		283		—		—		283
Cash dividend declared $0.11 per share	—		—		(4,743)		—		(4,743)
Stock option expense, net of forfeitures and taxes	—		175		—		—		175
Stock options exercised	138,932		1,553		—		—		1,553
Balance, June 30, 2018	43,222,184	$	299,224	$	62,911	$	(15,866)	$	346,269
Balance, January 1, 2019	43,288,750	$	300,844	$	79,003	$	(12,381)	$	367,466
Net income	—		—		12,146		—		12,146
Other comprehensive income	—		—		—		3,394		3,394
Amortization of restricted stock awards,
net of forfeitures and taxes	—		271		—		—		271
Cash dividend declared $0.12 per share	—		—		(5,196)		—		(5,196)
Stock option expense, net of forfeitures and taxes	—		166		—		—		166
Stock options exercised	35,003		269		—		—		269
Balance, March 31, 2019	43,323,753		301,550		85,953		(8,987)		378,516
Net income	—		—		11,353		—		11,353
Other comprehensive income	—		—		—		2,685		2,685
Issuance of restricted stock awards, net	134,653		—		—		—		—
Amortization of restricted stock awards,
net of forfeitures and taxes	—		303		—		—		303
Cash dividend declared $0.12 per share	—		—		(5,201)		—		(5,201)
Stock option expense, net of forfeitures and taxes	—		155		—		—		155
Stock options exercised	40,000		297		—		—		297
Balance, June 30, 2019	43,498,406	$	302,305	$	92,105	$	(6,302)	$	388,108

See notes to unaudited consolidated financial statements

8

HERITAGE COMMERCE CORP

CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

	Six Months Ended
	June 30,
	2019		2018
	(Dollars in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	23,499	$	9,724
Adjustments to reconcile net income to net cash provided by operating activities:
Amortization of discounts and premiums on securities		1,132		2,120
(Gain) on sale of securities available-for-sale		(548)		(266)
(Gain) on sale of SBA loans		(175)		(315)
Proceeds from sale of SBA loans originated for sale		2,528		4,139
SBA loans originated for sale		(4,906)		(6,150)
Provision (credit) for loan losses		(1,801)		7,704
Increase in cash surrender value of life insurance		(663)		(600)
Depreciation and amortization		401		380
Amortization of other intangible assets		1,107		705
Stock option expense, net		321		351
Amortization of restricted stock awards, net		574		511
Amortization of subordinated debt issuance costs		92		92
Effect of changes in:
Accrued interest receivable and other assets		(186)		(2,724)
Accrued interest payable and other liabilities		(3,767)		1,004
Net cash provided by operating activities		17,608		16,675
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of securities available-for-sale		—		(15,193)
Purchase of securities held-to-maturity		—		(16,906)
Maturities/paydowns/calls of securities available-for-sale		24,868		30,343
Maturities/paydowns/calls of securities held-to-maturity		25,007		25,655
Proceeds from sales of securities available-for-sale		59,878		94,291
Net change in loans		9,222		(38,218)
Changes in Federal Home Loan Bank stock and other investments		(10)		(2,132)
Purchase of premises and equipment		(239)		(32)
Cash received in bank acquisition, net of cash paid		—		36,028
Net cash provided by investing activities		118,726		113,836
CASH FLOWS FROM FINANCING ACTIVITIES:
Net change in deposits		(15,059)		(215,998)
Exercise of stock options		566		2,002
Payment of cash dividends		(10,397)		(8,949)
Net cash used in financing activities		(24,890)		(222,945)
Net increase (decrease) in cash and cash equivalents		111,444		(92,434)
Cash and cash equivalents, beginning of period		164,568		316,222
Cash and cash equivalents, end of period	$	276,012	$	223,788
Supplemental disclosures of cash flow information:
Interest paid	$	4,733	$	3,306
Income taxes paid		10,891		8,663
Supplemental schedule of non-cash activity:
Due to broker for securities purchased	$	—	$	—
Recording of right to use assets in exchange for lease obligations		9,566
Summary of assets acquired and liabilities assumed through acquisitions:
Cash and cash equivalents, net of cash paid	$	—	$	36,028
Securities avaiable-for-sale		—		63,723
Net loans		—		336,446
Premises and equipment, net		—		350
Goodwill		—		38,089
Other intangible assets		—		8,361
Other assets, net		—		14,736
Deposits		—		(416,628)
Other borrowings		—		(62)
Other liabilities		—		(3,038)
Common stock issued to acquire Tri-Valley Bank and United American Bank		—		78,005

See notes to unaudited consolidated financial statements

9

HERITAGE COMMERCE CORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2019

(Unaudited)

1) Basis of Presentation

The unaudited consolidated financial statements of Heritage Commerce Corp (the “Company” or “HCC”) and its wholly owned subsidiary, Heritage Bank of Commerce (“HBC”), have been prepared pursuant to the rules and regulations for reporting on Form 10-Q. Accordingly, certain information and notes required by accounting principles generally accepted in the United States of America (“GAAP”) for annual financial statements are not included herein. The interim statements should be read in conjunction with the consolidated financial statements and notes that were included in the Company’s Form 10-K for the year ended December 31, 2018.

HBC is a commercial bank serving customers primarily located in Santa Clara, Alameda, Contra Costa, San Benito, and San Mateo counties of California. CSNK Working Capital Finance Corp. a California corporation, dba Bay View Funding (“Bay View Funding”) is a wholly owned subsidiary of HBC, and provides business-essential working capital factoring financing to various industries throughout the United States. No customer accounts for more than 10% of revenue for HBC or the Company. The Company reports its results for two segments: banking and factoring. The Company’s management uses segment results in its operating and strategic planning.

In management’s opinion, all adjustments necessary for a fair presentation of these consolidated financial statements have been included and are of a normal and recurring nature. All intercompany transactions and balances have been eliminated.

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ significantly from these estimates.

The results for the three and six months ended June 30, 2019 are not necessarily indicative of the results expected for any subsequent period or for the entire year ending December 31, 2019.

Business Combinations

The Company accounts for acquisitions of businesses using the acquisition method of accounting. Under the acquisition method, assets acquired and liabilities assumed are recorded at their estimated fair values at the date of acquisition. Management utilizes various valuation techniques including discounted cash flow analyses to determine these fair values. Any excess of the purchase price over amounts allocated to the acquired assets, including identifiable intangible assets, and liabilities assumed is recorded as goodwill.

Goodwill and Other Intangible Assets

Goodwill resulted from the acquisition of Tri-Valley Bank (“Tri-Valley”) on April 6, 2018 and United American Bank (“United American”) on May 4, 2018, and from acquisitions in prior years. Goodwill represents the excess of the purchase price over the fair value of acquired tangible assets and liabilities and identifiable intangible assets. Goodwill is assessed at least annually for impairment and any such impairment is recognized in the period identified.

Other intangible assets consist of core deposit intangible assets and a below market value lease intangible asset, arising from the United American and Tri-Valley acquisitions. They are initially measured at fair value and then are amortized over their estimated useful lives. The core deposit intangible assets from the acquisitions of United American and Tri-Valley are being amortized on an accelerated method over ten years. The below market value lease intangible assets are being amortized on the straight line method over three years for United American and eleven years for Tri-Valley. 

10

Reclassifications

              Certain reclassifications of prior year balances have been made to conform to the current year presentation. These reclassifications had no impact on the Company’s consolidated financial position, results of operations or net change in cash and cash equivalents.

Adoption of New Accounting Standards

In February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016-02, “Leases (Topic 842)”. The pronouncement affects all entities that are participants to leasing agreements. From a lessee accounting perspective, the ASU requires a lessee to recognize assets and liabilities on the balance sheet for operating leases and changes many key definitions, including the definition of a lease. The ASU includes a short-term lease exception for leases with a term of twelve months or less, in which a lessee can make an accounting policy election not to recognize lease assets and lease liabilities. The Company has elected this short-term lease exception.  Lessees will continue to differentiate between finance leases (previously referred to as capital leases) and operating leases, using classification criteria that are substantially similar to the previous guidance. For lessees, the recognition, measurement, and presentation of expenses and cash flows arising from a lease have not significantly changed from previous GAAP. From a lessor accounting perspective, the guidance is largely unchanged, except for targeted improvements to align with new terminology under lessee accounting and with the updated revenue recognition guidance in Topic 606.  The ASU includes additional quantitative and qualitative disclosures required by lessees and lessors to help users better understand the amount, timing, and uncertainty of cash flows arising from leases. ASU No. 2016-02 is effective for fiscal years beginning after December 31, 2018, and interim periods within those fiscal years. Lessees and lessors are required to recognize and measure leases at the beginning of the earliest period presented using a modified retrospective approach.

In July 2018, the FASB issued ASU No. 2018-11, “Leases (Topic 842) - Targeted Improvements” to provide entities with relief from the costs of implementing certain aspects of the new leasing standard. Specifically, under the amendments in ASU No. 2018-11 entities may elect not to recast the comparative periods presented when transitioning to the new leasing standard, and lessors may elect not to separate lease and non-lease components when certain conditions are met. As the Company elected the transition option provided in ASU No. 2018-11, the modified retrospective approach was applied on January 1, 2019 (as opposed to January 1, 2017). The Company also elected certain practical expedients provided under ASU No. 2016-02 whereby we will not reassess (i) whether any expired or existing contracts are or contain leases, (ii) the lease classification for any expired or existing leases and (iii) initial direct costs for any existing leases. In December 2018, the FASB issued ASU No. 2018-20, “Leases (Topic 842): Narrow-Scope Improvements for Lessors,” which provides targeted improvements and clarification to guidance with FASB ASC Topic 842 specific to lessors. The amendments of ASU No. 2018-20 have the same effective date as ASU 2016-02 and may be applied either retrospectively or prospectively to all new and existing leases. The Company obtained a third-party software application which provides lease accounting under the guidelines of FASB ASC Topic 842.

The amendments of ASU No. 2016-02 and subsequently issued ASUs, which provided additional guidance and clarifications to various aspects of FASB ASC Topic 842, became effective for the Company on January 1, 2019.  At the adoption date, the Company reported increase assets and liabilities of approximately $9.6 million on its consolidated balance sheet as a result of recognizing right-of-use assets and lease liabilities related to non-cancellable operating lease agreements for office space. The adoption of this guidance did not have a material impact to its Consolidated Statetements of Income or Cash Flows. See Note 17 – Leases for more information.

In March 2017, the FASB issued ASU 2017-08, Premium Amortization on Purchased Callable Debt Securities. This update shortens the amortization period of certain callable debt securities held at a premium to the earliest call date.  The amendments in this update were effective for the Company on January 1, 2019.  The amendments are applied on a modified retrospective basis through a cumulative-effect adjustment to retained earnings as of the beginning of the period of adoption and the Company is required to provide change in accounting principle disclosures. The Company adopted the new guidance on January 1, 2019, and there was no material impact to the financial statements and no cumulative adjustments were made.

11

Newly Issued, but not yet Effective Accounting Standards

In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments – Credit Losses: Measurement of Credit Losses on Financial Instruments. The standard is the final guidance on the new current expected credit loss (“CECL”) model. The amendments in this update replace the incurred loss impairment methodology in current GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to estimate future credit loss estimates. As CECL encompasses all financial assets carried at amortized cost, the requirement that reserves be established based on an organization’s reasonable and supportable estimate of expected credit losses extends to held-to-maturity debt securities.  The guidance allows for a modified retrospective approach with a cumulative effect adjustment to the balance sheet upon adoption (charge to retained earnings instead of the income statement). The new guidance is effective for public business entities for fiscal years, and interim periods within those years, beginning after December 15, 2019. While early application is permitted for fiscal years beginning after December 15, 2018, the Company plans to adopt this standard on January 1, 2020. The Company has established a company-wide, cross-functional governance structure, which oversees overall strategy for implementation of CECL. We are currently evaluating various loss methodologies to determine their correlation to our various loan categories historical performance. The Company has completed the data validation and is currently parallel processing during the third and fourth quarters of 2019 our existing allowance for loan loss model with CECL prior to implementation. The Company is focused on completing model validation, refining assumptions and continued review of the models. The Company also continues to focus on researching and resolving interpretive accounting issues in the ASU, contemplating various related accounting policies, developing processes and related controls and considering various reporting disclosures. The magnitude of the change in the Company’s allowance for loan losses at the adoption date will depend upon the nature and characteristics of the portfolio at the adoption date, as well as macroeconomic conditions and forecasts at that time.

In January 2017, the FASB issued accounting standards ASU No. 2017-04, Simplifying the Test for Goodwill Impairment. The provisions of the update eliminate the existing second step of the goodwill impairment test which provides for the allocation of reporting unit fair value among existing assets and liabilities, with the net remaining amount representing the implied fair value of goodwill. In replacement of the existing goodwill impairment rule, the update will provide that impairment should be recognized as the excess of any of the reporting unit’s goodwill over the fair value of the reporting unit. Under the provisions of this update, the amount of the impairment is limited to the carrying value of the reporting unit’s goodwill. For public business entities that are SEC filers, the amendments of the update will become effective in fiscal years beginning after December 15, 2019. Management does not expect the requirements of this update to have a material impact on the Company’s financial position, results of operations or cash flows.

2) Shareholders’ Equity and Earnings Per Share

Basic earnings per common share is computed by dividing net income by the weighted average common shares outstanding. Diluted earnings per share reflect potential dilution from outstanding stock options using the treasury stock method. There were 826,445 and 305,500 stock options for the three months ended June 30, 2019 and 2018, and 826,445, and 318,606 for the six months ended June 30, 2019 and 2018, respectively, considered to be antidilutive and excluded from the computation of diluted earnings per share. A reconciliation of these factors used in computing basic and diluted earnings per common share is as follows:

	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2019		2018		2019		2018
	(Dollars in thousands, except per share amounts)
Net income	$	11,353	$	915	$	23,499	$	9,724
Weighted average common shares outstanding for basic
earnings per common share		43,202,562		41,925,616		43,155,360		40,083,056
Dilutive potential common shares		518,889		583,058		539,757		577,027
Shares used in computing diluted earnings per common share		43,721,451		42,508,674		43,695,117		40,660,083
Basic earnings per share	$	0.26	$	0.02	$	0.54	$	0.24
Diluted earnings per share	$	0.26	$	0.02	$	0.54	$	0.24

12

3) Accumulated Other Comprehensive Income (Loss) (“AOCI”)

The following table reflects the changes in AOCI by component for the periods indicated:

	Three Months Ended June 30, 2019 and 2018
			Unamortized
			Unrealized
	Unrealized		Gain on
	Gains (Losses) on		Available-
	Available-		for-Sale		Defined
	for-Sale		Securities		Benefit
	Securities		Reclassified		Pension
	and I/O		to Held-to-		Plan
	Strips(1)		Maturity		Items		Total
	(Dollars in thousands)
Beginning balance April 1, 2019, net of taxes	$	(1,603)	$	326	$	(7,710)	$	(8,987)
Other comprehensive income (loss) before reclassification,
net of taxes		3,072		—		(7)		3,065
Amounts reclassified from other comprehensive income (loss),
net of taxes		(386)		(9)		15		(380)
Net current period other comprehensive income (loss),
net of taxes		2,686		(9)		8		2,685
Ending balance June 30, 2019, net of taxes	$	1,083	$	317	$	(7,702)	$	(6,302)
Beginning balance April 1, 2018, net of taxes	$	(6,093)	$	367	$	(9,230)	$	(14,956)
Other comprehensive (loss) before reclassification,		(812)		—		(4)		(816)
net of taxes
Amounts reclassified from other comprehensive income (loss),		(126)		(8)		40		(94)
net of taxes
Net current period other comprehensive income (loss),
net of taxes		(938)		(8)		36		(910)
Ending balance June 30, 2018, net of taxes	$	(7,031)	$	359	$	(9,194)	$	(15,866)

(1) This AOCI component is included in the computation of net periodic benefit cost (see Note 9—Benefit Plans) and includes split-dollar life insurance benefit plan.

13

	Six Months Ended June 30, 2019 and 2018
			Unamortized
			Unrealized
	Unrealized		Gain on
	Gains (Losses) on		Available-
	Available-		for-Sale		Defined
	for-Sale		Securities		Benefit
	Securities		Reclassified		Pension
	and I/O		to Held-to-		Plan
	Strips		Maturity		Items		Total
	(Dollars in thousands)
Beginning balance January 1, 2019, net of taxes	$	(5,007)	$	344	$	(7,718)	$	(12,381)
Other comprehensive income (loss) before reclassification,
net of taxes		6,476		—		(14)		6,462
Amounts reclassified from other comprehensive income (loss),
net of taxes		(386)		(27)		30		(383)
Net current period other comprehensive income (loss),
net of taxes		6,090		(27)		16		6,079
Ending balance June 30, 2019, net of taxes	$	1,083	$	317	$	(7,702)	$	(6,302)
Beginning balance January 1, 2018, net of taxes	$	(362)	$	375	$	(9,265)	$	(9,252)
Other comprehensive (loss) before reclassification,
net of taxes		(6,482)		—		(9)		(6,491)
Amounts reclassified from other comprehensive income (loss),
net of taxes		(187)		(16)		80		(123)
Net current period other comprehensive income (loss),
net of taxes		(6,669)		(16)		71		(6,614)
Ending balance June 30, 2018, net of taxes	$	(7,031)	$	359	$	(9,194)	$	(15,866)

(1) This AOCI component is included in the computation of net periodic benefit cost (see Note 9—Benefit Plans) and includes split-dollar life insurance benefit plan.

14

	Amounts Reclassified from
	AOCI(1)
	Three Months Ended
	June 30,				Affected Line Item Where
Details About AOCI Components	2019		2018		Net Income is Presented
	(Dollars in thousands)
Unrealized gains on available-for-sale securities
and I/O strips	$	548	$	179	Gain on sales of securities
		(162)		(53)	Income tax expense
		386		126	Net of tax
Amortization of unrealized gain on securities available-
for-sale that were reclassified to securities
held-to-maturity		13		11	Interest income on taxable securities
		(4)		(3)	Income tax expense
		9		8	Net of tax
Amortization of defined benefit pension plan items (1)
Prior transition obligation		24		16
Actuarial losses		(46)		(73)
		(22)		(57)	Other noninterest expense
		7		17	Income tax benefit
		(15)		(40)	Net of tax
Total reclassification for the period	$	380	$	94

	Amounts Reclassified from
	AOCI(1)
	Six Months Ended
	June 30,				Affected Line Item Where
Details About AOCI Components	2019		2018		Net Income is Presented
	(Dollars in thousands)
Unrealized gains on available-for-sale securities
and I/O strips	$	548	$	266	Gain on sales of securities
		(162)		(79)	Income tax expense
		386		187	Net of tax
Amortization of unrealized gain on securities
available-for-sale that were reclassified to securities
held-to-maturity		39		22	Interest income on taxable securities
		(12)		(6)	Income tax expense
		27		16	Net of tax
Amortization of defined benefit pension plan items (1)
Prior transition obligation		49		32
Actuarial losses		(92)		(146)
		(43)		(114)	Other noninterest expense
		13		34	Income tax benefit
		(30)		(80)	Net of tax
Total reclassification from AOCI for the period	$	383	$	123

(1) This AOCI component is included in the computation of net periodic benefit cost (see Note 9—Benefit Plans) and includes split-dollar life insurance benefit plan.

15

4) Securities

The amortized cost and estimated fair value of securities at June 30, 2019 and December 31, 2018 were as follows:

			Gross		Gross		Estimated
	Amortized		Unrealized		Unrealized		Fair
June 30, 2019	Cost		Gains		(Losses)		Value
	(Dollars in thousands)
Securities available-for-sale:
Agency mortgage-backed securities	$	243,861	$	327	$	(1,541)	$	242,647
U.S. Treasury		138,379		2,130		—		140,509
Total	$	382,240	$	2,457	$	(1,541)	$	383,156
Securities held-to-maturity:
Agency mortgage-backed securities	$	267,514	$	694	$	(1,673)	$	266,535
Municipals - exempt from Federal tax		83,885		1,105		(58)		84,932
Total	$	351,399	$	1,799	$	(1,731)	$	351,467

			Gross		Gross		Estimated
	Amortized		Unrealized		Unrealized		Fair
December 31, 2018	Cost		Gains		(Losses)		Value
	(Dollars in thousands)
Securities available-for-sale:
Agency mortgage-backed securities	$	311,523	$	98	$	(8,767)	$	302,854
U.S. Treasury		147,823		930		—		148,753
U.S. Government sponsored entities		7,433		4		(1)		7,436
Total	$	466,779	$	1,032	$	(8,768)	$	459,043
Securities held-to-maturity:
Agency mortgage-backed securities	$	291,241	$	59	$	(9,153)	$	282,147
Municipals - exempt from Federal tax		85,957		312		(2,241)		84,028
Total	$	377,198	$	371	$	(11,394)	$	366,175

Securities with unrealized losses at June 30, 2019 and December 31, 2018, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position are as follows:

	Less Than 12 Months				12 Months or More				Total
	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
June 30, 2019	Value		(Losses)		Value		(Losses)		Value		(Losses)
	(Dollars in thousands)
Securities available-for-sale:
Agency mortgage-backed securities	$	—	$	—	$	198,443	$	(1,541)	$	198,443	$	(1,541)
Total	$	—	$	—	$	198,443	$	(1,541)	$	198,443	$	(1,541)
Securities held-to-maturity:
Agency mortgage-backed securities	$	—	$	—	$	174,138	$	(1,673)	$	174,138	$	(1,673)
Municipals - exempt from Federal tax		150		(1)		7,790		(57)		7,940		(58)
Total	$	150	$	(1)	$	181,928	$	(1,730)	$	182,078	$	(1,731)

16

	Less Than 12 Months				12 Months or More				Total
	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
December 31, 2018	Value		(Losses)		Value		(Losses)		Value		(Losses)
	(Dollars in thousands)
Securities available-for-sale:
Agency mortgage-backed securities	$	3,868	$	(21)	$	281,082	$	(8,746)	$	284,950	$	(8,767)
U.S. Government sponsored entities		3,974		(1)		—		—		3,974		(1)
Total	$	7,842	$	(22)	$	281,082	$	(8,746)	$	288,924	$	(8,768)
Securities held-to-maturity:
Agency mortgage-backed securities	$	16,088	$	(103)	$	255,917	$	(9,050)	$	272,005	$	(9,153)
Municipals - exempt from Federal tax		5,019		(27)		57,301		(2,214)		62,320		(2,241)
Total	$	21,107	$	(130)	$	313,218	$	(11,264)	$	334,325	$	(11,394)

There were no holdings of securities of any one issuer, other than the U.S. Government and its sponsored entities, in an amount greater than 10% of shareholders’ equity. At June 30, 2019, the Company held 471 securities (151 available-for-sale and 320 held‑to‑maturity), of which 170 had fair values below amortized cost. At June 30, 2019, there were $198,443,000 of agency mortgage-back securities available-for-sale, $174,138,000 of agency mortgage-backed securities held-to-maturity, and $7,790,000 of municipal bonds held-to-maturity, carried with an unrealized loss for 12 months or more. The total unrealized loss for securities 12 months or more was $3,271,000 at June 30, 2019. The unrealized losses were due to higher interest rates. The issuers are of high credit quality and all principal amounts are expected to be paid when securities mature. The fair value is expected to recover as the securities approach their maturity date and/or market rates decline. The Company does not believe that it is more likely than not that the Company will be required to sell a security in an unrealized loss position prior to recovery in value. The Company does not consider these securities to be other than temporarily impaired at June 30, 2019.

The proceeds from sales of securities and the resulting gains and losses were as follows for the periods indicated:

	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2019		2018		2019		2018
	(Dollars in thousands)
Proceeds	$	59,878	$	55,537	$	59,878	$	94,291
Gross gains		608		193		608		1,243
Gross losses		(60)		(14)		(60)		(977)

The amortized cost and estimated fair values of securities as of June 30, 2019  are shown by contractual maturity below. The expected maturities will differ from contractual maturities if borrowers have the right to call or pre‑pay obligations with or without call or pre‑payment penalties. Securities not due at a single maturity date are shown separately.

	Available-for-sale
	Amortized		Estimated
	Cost		Fair Value
	(Dollars in thousands)
Due after 3 months through one year	$	14,858	$	14,956
Due after one through five years		123,521		125,553
Agency mortgage-backed securities		243,861		242,647
Total	$	382,240	$	383,156

17

	Held-to-maturity
	Amortized		Estimated
	Cost		Fair Value
	(Dollars in thousands)
Due 3 months or less	$	281		281
Due after 3 months through one year		487		488
Due after one through five years		5,193		5,306
Due after five through ten years		28,561		29,087
Due after ten years		49,363		49,770
Agency mortgage-backed securities		267,514		266,535
Total	$	351,399	$	351,467

Securities with amortized cost of $32,884,000 and $44,730,000 as of  June 30, 2019 and December 31, 2018 were pledged to secure public deposits and for other purposes as required or permitted by law or contract.

5) Loans

Loans were as follows for the periods indicated:

	June 30,		December 31,
	2019		2018
	(Dollars in thousands)
Loans held-for-investment:
Commercial	$	567,529	$	597,763
Real estate:
CRE		1,037,885		994,067
Land and construction		97,297		122,358
Home equity		116,057		109,112
Residential mortgages		48,944		50,979
Consumer		10,279		12,453
Loans		1,877,991		1,886,732
Deferred loan fees, net		(224)		(327)
Loans, net of deferred fees		1,877,767		1,886,405
Allowance for loan losses		(26,631)		(27,848)
Loans, net	$	1,851,136	$	1,858,557

At June 30, 2019, total net loans included in the table above include $27,015,000, $96,222,000 and $160,480,000, of the loans acquired in the Focus Business Bank (“Focus”), Tri-Valley, and United American acquisitions that were not purchased credit impaired loans, respectively. At December 31, 2018, total net loans included in the table above include $36,958,000, $111,952,000 and $181,453,000, of the loans acquired in the Focus, Tri-Valley, and United American acquisitions, respectively, that were not purchased credit impaired loans.

There was a $740,000 credit to the provision for loan losses for the second quarter of 2019, and a $1,801,000 credit to the provision for loan losses for the first six months of 2019,  compared to a provision for loan losses of $7,198,000 for the second quarter of 2018, and $7,704,000 for the first six months of 2018. Net recoveries totaled $53,000 for the second quarter of 2019,  and $584,000 for the first six months of 2019, compared to net charge-offs of $673,000 for the second quarter of 2018, and $698,000 for the first six months of 2018.

18

Changes in the allowance for loan losses were as follows for the periods indicated:

	Three Months Ended June 30, 2019
	Commercial		Real Estate		Consumer		Total
	(Dollars in thousands)
Beginning of period balance	$	15,557	$	11,671	$	90	$	27,318
Charge-offs		(76)		—		—		(76)
Recoveries		87		42		—		129
Net recoveries		11		42		—		53
Provision (credit) for loan losses		(334)		(406)		—		(740)
End of period balance	$	15,234	$	11,307	$	90	$	26,631

	Three Months Ended June 30, 2018
	Commercial		Real Estate		Consumer		Total
	(Dollars in thousands)
Beginning of period balance	$	11,165	$	8,858	$	116	$	20,139
Charge-offs		(870)		—		—		(870)
Recoveries		175		22		—		197
Net (charge-offs) recoveries		(695)		22		—		(673)
Provision for loan losses		7,052		140		6		7,198
End of period balance	$	17,522	$	9,020	$	122	$	26,664

	Six Months Ended June 30, 2019
	Commercial		Real Estate		Consumer		Total
	(Dollars in thousands)
Beginning of period balance	$	17,061	$	10,671	$	116	$	27,848
Charge-offs		(302)		—				(302)
Recoveries		802		84		—		886
Net recoveries		500		84		—		584
Provision (credit) for loan losses		(2,327)		552		(26)		(1,801)
End of period balance	$	15,234	$	11,307	$	90	$	26,631

	Six Months Ended June 30, 2018
	Commercial		Real Estate		Consumer		Total
	(Dollars in thousands)
Beginning of period balance	$	10,608	$	8,950	$	100	$	19,658
Charge-offs		(1,115)		—		—		(1,115)
Recoveries		332		85		—		417
Net (charge-offs) recoveries		(783)		85		—		(698)
Provision (credit) for loan losses		7,697		(15)		22		7,704
End of period balance	$	17,522	$	9,020	$	122	$	26,664

The following table presents the balance in the allowance for loan losses and the recorded investment in loans by portfolio segment, based on the impairment method at the following period‑ends:

	June 30, 2019
	Commercial		Real Estate		Consumer		Total
	(Dollars in thousands)
Allowance for loan losses:
Ending allowance balance attributable to loans:
Individually evaluated for impairment	$	6,351	$	186	$	—	$	6,537
Collectively evaluated for impairment		8,883		11,121		90		20,094
Total allowance balance	$	15,234	$	11,307	$	90	$	26,631
Loans:
Individually evaluated for impairment	$	8,370	$	8,823	$	—	$	17,193
Collectively evaluated for impairment		559,159		1,291,360		10,279		1,860,798
Total loan balance	$	567,529	$	1,300,183	$	10,279	$	1,877,991

19

	December 31, 2018
	Commercial		Real Estate		Consumer		Total
	(Dollars in thousands)
Allowance for loan losses:
Ending allowance balance attributable to loans:
Individually evaluated for impairment	$	6,944	$	—	$	—	$	6,944
Collectively evaluated for impairment		10,117		10,671		116		20,904
Total allowance balance	$	17,061	$	10,671	$	116	$	27,848
Loans:
Individually evaluated for impairment	$	9,495	$	5,645	$	—	$	15,140
Collectively evaluated for impairment		588,268		1,270,871		12,453		1,871,592
Total loan balance	$	597,763	$	1,276,516	$	12,453	$	1,886,732

The following table presents loans held-for-investment individually evaluated for impairment by class of loans as of June 30, 2019 and December 31, 2018. The recorded investment included in the following table represents loan principal net of any partial charge-offs recognized on the loans. The unpaid principal balance represents the recorded balance prior to any partial charge-offs. The recorded investment in consumer loans collateralized by residential real estate property that are in process of foreclosure according to local requirements of the applicable jurisdiction are not material as of the periods indicated:

	June 30, 2019						December 31, 2018
					Allowance						Allowance
	Unpaid				for Loan		Unpaid				for Loan
	Principal		Recorded		Losses		Principal		Recorded		Losses
	Balance		Investment		Allocated		Balance		Investment		Allocated
	(Dollars in thousands)
With no related allowance recorded:
Commercial	$	1,504	$	1,504	$	—	$	1,849	$	1,849	$	—
Real estate:
CRE		3,349		3,349		—		5,094		5,094		—
Land and construction		—		—		—		—		—		—
Home Equity		381		381		—		551		551		—
Total with no related allowance recorded		5,234		5,234		—		7,494		7,494		—
With an allowance recorded:
Commercial		6,866		6,866		6,351		7,646		7,646		6,944
Real estate:
Commercial		5,093		5,093		186		—		—		—
Total with an allowance recorded		11,959		11,959		6,537		7,646		7,646		6,944
Total	$	17,193	$	17,193	$	6,537	$	15,140	$	15,140	$	6,944

The following tables present interest recognized and cash‑basis interest earned on impaired loans for the periods indicated:

	Three Months Ended June 30, 2019
			Real Estate
					Land and		Home
	Commercial		CRE		Construction		Equity		Consumer		Total
	(Dollars in thousands)
Average of impaired loans during the period	$	8,453	$	8,442	$	—	$	460	$	—	$	17,355
Interest income during impairment	$	—	$	—	$	—	$	—	$	—	$	—
Cash-basis interest recognized	$	—	$	—	$	—	$	—	$	—	$	—

20

	Three Months Ended June 30, 2018
			Real Estate
					Land and		Home
	Commercial		CRE		Construction		Equity		Consumer		Total
	(Dollars in thousands)
Average of impaired loans during the period	$	11,803	$	3,151	$	—	$	470	$	—	$	15,424
Interest income during impairment	$	—	$	—	$	—	$	—	$	—	$	—
Cash-basis interest recognized	$	—	$	—	$	—	$	—	$	—	$	—

	Six Months Ended June 30, 2019
			Real Estate
					Land and		Home
	Commercial		CRE		Construction		Equity		Consumer		Total
	(Dollars in thousands)
Average of impaired loans during the period	$	8,800	$	7,326	$	—	$	490	$	—	$	16,616
Interest income during impairment	$	—	$	—	$	—	$	—	$	—	$	—
Cash-basis interest recognized	$	—	$	—	$	—	$	—	$	—	$	—

	Six Months Ended June 30, 2018
			Real Estate
					Land and		Home
	Commercial		CRE		Construction		Equity		Consumer		Total
	(Dollars in thousands)
Average of impaired loans during the period	$	8,460	$	2,268	$	40	$	439	$	—	$	11,207
Interest income during impairment	$	—	$	—	$	—	$	—	$	—	$	—
Cash-basis interest recognized	$	—	$	—	$	—	$	—	$	—	$	—

Nonperforming loans include both smaller dollar balance homogenous loans that are collectively evaluated for impairment and individually classified loans. Nonperforming loans were as follows at period‑end:

	June 30,				December 31,
	2019		2018		2018
	(Dollars in thousands)
Nonaccrual loans - held-for-investment	$	15,695	$	26,034	$	13,699
Restructured and loans over 90 days past due and still accruing		1,323		511		1,188
Total nonperforming loans		17,018		26,545		14,887
Other restructured loans		175		265		253
Total impaired loans	$	17,193	$	26,810	$	15,140

The following table presents the nonperforming loans by class for the periods indicated:

	June 30, 2019						December 31, 2018
				Restructured						Restructured
				and Loans						and Loans
				over 90 Days						over 90 Days
				Past Due						Past Due
				and Still						and Still
	Nonaccrual			Accruing	Total		Nonaccrual			Accruing	Total
	(Dollars in thousands)
Commercial	$	7,096	$	1,099	$	8,195	$	8,279	$	963	$	9,242
Real estate:
CRE		8,442		—		8,442		5,094		—		5,094
Home equity		157		224		381		326		225		551
Total	$	15,695	$	1,323	$	17,018	$	13,699	$	1,188	$	14,887

21

The following tables present the aging of past due loans by class for the periods indicated:

	June 30, 2019
	30 - 59		60 - 89		90 Days or
	Days		Days		Greater		Total		Loans Not
	Past Due		Past Due		Past Due		Past Due		Past Due		Total
	(Dollars in thousands)
Commercial	$	4,251	$	1,342	$	7,349	$	12,942	$	554,587	$	567,529
Real estate:
CRE		—		—		8,442		8,442		1,029,443		1,037,885
Land and construction		—		—		—		—		97,297		97,297
Home equity		157		—		—		157		115,900		116,057
Residential mortgages		—		—		—		—		48,944		48,944
Consumer		—		—		—		—		10,279		10,279
Total	$	4,408	$	1,342	$	15,791	$	21,541	$	1,856,450	$	1,877,991

	December 31, 2018
	30 - 59		60 - 89		90 Days or
	Days		Days		Greater		Total		Loans Not
	Past Due		Past Due		Past Due		Past Due		Past Due		Total
	(Dollars in thousands)
Commercial	$	5,698	$	1,916	$	1,258	$	8,872	$	588,891	$	597,763
Real estate:
CRE		—		—		—		—		994,067		994,067
Land and construction		—		—		—		—		122,358		122,358
Home equity				—		—		—		109,112		109,112
Residential mortgages		—		—		—		—		50,979		50,979
Consumer		1		—		—		1		12,452		12,453
Total	$	5,699	$	1,916	$	1,258	$	8,873	$	1,877,859	$	1,886,732

Past due loans 30 days or greater totaled $21,541,000 and $8,873,000 at June 30, 2019 and December 31, 2018, respectively, of which $15,001,000 and $430,000 were on nonaccrual, respectively. At June 30, 2019, there were also $694,000 of loans less than 30 days past due included in nonaccrual loans held-for-investment. At December 31, 2018, there were also $13,269,000 loans less than 30 days past due included in nonaccrual loans held-for-investment. Management’s classification of a loan as “nonaccrual” is an indication that there is reasonable doubt as to the full recovery of principal or interest on the loan. At that point, the Company stops accruing interest income, and reverses any uncollected interest that had been accrued as income. The Company begins recognizing interest income only as cash interest payments are received and it has been determined the collection of all outstanding principal is not in doubt. The loans may or may not be collateralized, and collection efforts are pursued.

Credit Quality Indicators

Concentrations of credit risk arise when a number of customers are engaged in similar business activities, or activities in the same geographic region, or have similar features that would cause their ability to meet contractual obligations to be similarly affected by changes in economic conditions. The Company’s loan portfolio is concentrated in commercial (primarily manufacturing, wholesale, and service) and real estate lending, with the remaining balance in consumer loans. While no specific industry concentration is considered significant, the Company’s lending operations are located in the Company’s market areas that are dependent on the technology and real estate industries and their supporting companies. Thus, the Company’s borrowers could be adversely impacted by a downturn in these sectors of the economy which could reduce the demand for loans and adversely impact the borrowers’ ability to repay their loans.

The Company categorizes loans into risk categories based on relevant information about the ability of borrowers to service their debt such as: current financial information, historical payment experience, credit documentation, public information, and current economic trends, among other factors. The Company analyzes loans individually by classifying the loans as to credit risk. This analysis is performed on a quarterly basis. Nonclassified loans generally include those

22

loans that are expected to be repaid in accordance with contractual loans terms. Classified loans are those loans that are assigned a substandard, substandard-nonaccrual, or doubtful risk rating using the following definitions:

Substandard.  Loans classified as substandard are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans so classified have a well‑defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected.

Substandard‑Nonaccrual.  Loans classified as substandard‑nonaccrual are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any, and it is probable that the Company will not receive payment of the full contractual principal and interest. Loans so classified have a well‑defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected. In addition, the Company no longer accrues interest on the loan because of the underlying weaknesses.

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

Loss.  Loans classified as loss are considered uncollectable or of so little value that their continuance as assets is not warranted. This classification does not necessarily mean that a loan has no recovery or salvage value; but rather, there is much doubt about whether, how much, or when the recovery would occur. Loans classified as loss are immediately charged off against the allowance for loan losses. Therefore, there is no balance to report as of June 30, 2019 and December 31, 2018.

The following table provides a summary of the loan portfolio by loan type and credit quality classification at period end:

	June 30, 2019						December 31, 2018
	Nonclassified		Classified		Total		Nonclassified		Classified		Total
	(Dollars in thousands)
Commercial	$	553,618		13,911	$	567,529	$	584,845	$	12,918	$	597,763
Real estate:
CRE		1,024,822		13,063		1,037,885		985,193		8,874		994,067
Land and construction		94,810		2,487		97,297		122,358		—		122,358
Home equity		114,342		1,715		116,057		107,495		1,617		109,112
Residential mortgages		48,944		—		48,944		50,979		—		50,979
Consumer		10,279		—		10,279		12,453		—		12,453
Total	$	1,846,815	$	31,176	$	1,877,991	$	1,863,323	$	23,409	$	1,886,732

Classified loans were $31,176,000, or 1.00% of total assets, at June 30, 2019, compared to $32,264,000, or 1.03% of total assets, at June 30, 2018 and $23,409,000, or 0.76% of total assets, at December 31, 2018. The increase in classified assets at June 30, 2019, compared to December 31, 2018, was primarily due to one CRE lending relationship that was moved to classified assets, but still accruing, during the second quarter of 2019. In order to determine whether a borrower is experiencing financial difficulty, an evaluation is performed of the probability that the borrower will be in payment default on any of its debt in the foreseeable future without the modification. This evaluation is performed in accordance with the Company’s underwriting policy.

The book balance of troubled debt restructurings at June 30, 2019 was $568,000, which included $17,000 of nonaccrual loans and $551,000 of accruing loans. The book balance of troubled debt restructurings at December 31, 2018 was $649,000, which included $36,000 of nonaccrual loans and $613,000 of accruing loans. Approximately $18,000 and $38,000 of specific reserves were established with respect to these loans as of June 30, 2019 and December 31, 2018, respectively.

The following table presents loans by class modified as troubled debt restructurings for the periods indicated:

23

	During the Three Months Ended
	June 30, 2019
				Pre-modification		Post-modification
		Number		Outstanding		Outstanding
		of		Recorded		Recorded
Troubled Debt Restructurings:		Contracts		Investment		Investment
	(Dollars in thousands)
Commercial		1	$	17	$	17
Total		1	$	17	$	17

	During the Six Months Ended
		June 30, 2019
				Pre-modification		Post-modification
		Number		Outstanding		Outstanding
		of		Recorded		Recorded
Troubled Debt Restructurings:		Contracts		Investment		Investment
	(Dollars in thousands)
Commercial		2	$	28	$	28
Total		2	$	28	$	28

	During the Three and Six Months Ended
		June 30, 2018
				Pre-modification		Post-modification
		Number		Outstanding		Outstanding
		of		Recorded		Recorded
Troubled Debt Restructurings:		Contracts		Investment		Investment
	(Dollars in thousands)
Commercial		2	$	224	$	224
Equity		1		225		225
Total		3	$	449	$	449

During the three and six months ended June 30, 2019, there were no new loans modified as troubled debt restructurings in which the amount of principal or accrued interest owed from the borrower was forgiven or which resulted in a charge-off or change to the allowance for loan losses.

A loan is considered to be in payment default when it is 30 days contractually past due under the modified terms. There were no defaults on troubled debt restructurings, within twelve months following the modification, during the three and six months ended June 30, 2019 and 2018.

A loan that is a troubled debt restructuring on nonaccrual status may return to accruing status after a period of at least six months of consecutive payments in accordance with the modified terms.

6) Business Combinations

On May 16, 2019, the Company and HBC entered into an Agreement and Plan of Merger and Reorganization (the “Merger Agreement”) with Presidio Bank, a California state-chartered commercial bank (“Presidio”), pursuant to which the Company will acquire Presidio in an all stock merger by merging Presidio with and into HBC (the “Merger”). HBC will survive the Merger and will continue the commercial banking operations of the combined bank following the Merger. The consideration payable to Presidio shareholders upon completion of the Merger (“Merger Consideration”) will consist of whole shares of the Company’s common stock, and cash in lieu of fractional shares of the Company’s common stock. Upon consummation of the Merger, each share of Presidio common stock outstanding immediately prior to the effective time of the Merger will be canceled and converted into the right to receive s fixed exchange ratio of  2.47 shares of the Company’s common stock (the “per share exchange ratio”). Presidio stock options will vest and the Company will assume the stock options which will then be adjusted for the per share exchange ratio. Each Presidio restricted stock unit will vest and be converted into shares of the Company’s common stock in accordance with the per share exchange ratio.

24

Heritage and Presidio will hold their respective special shareholder meetings on August 27, 2019 for shareholders of record as July 10, 2019.

On April 6, 2018, the Company completed its acquisition of Tri-Valley for a transaction value of $32,320,000. At closing the Company issued 1,889,613 shares of the Company’s common stock with an aggregate market value of $30,725,000 on the date of closing.  The number of shares issued was based on a fixed exchange ratio of 0.0489 of a share of the Company’s common stock for each outstanding share of Tri-Valley common stock. In addition, at closing the Company paid cash to the holder of a stock warrant and holders of outstanding stock options and related fees and fractional shares totaling $1,595,000.  The following table summarizes the consideration paid for Tri-Valley:

	(Dollars in thousands)
Cash paid for:
Warrant	$	889
Options		615
Other		91
Total cash paid		1,595
Issuance of 1,889,613 shares of common stock to Tri-
Valley shareholders at $16.26 per share at Closing		30,725
Total consideration	$	32,320

The following table summarizes the estimated fair values of the assets acquired and liabilities assumed at the date of acquisition.

		As					As
		Recorded		Fair			Recorded
		by		Value			at
		Tri-Valley		Adjustments			Acquisition
		(Dollars in thousands)
Assets acquired:
Cash and cash equivalents	$	21,757	$	1,153	(a)	$	22,910
Loans		123,532		(2,563)	(b)		120,969
Allowance for loan losses		(1,969)		1,969	(c)		—
Other intangible assets		—		1,978	(d)		1,978
Other assets, net		9,939		(2,894)	(e)		7,045
Total assets acquired	$	153,259	$	(357)			152,902
Liabilities assumed:
Deposits	$	135,351	$	37	(f)		135,388
Other liabilities		608		—			608
Total liabilities assumed	$	135,959	$	37			135,996
Net assets acquired							16,906
Purchase price							30,725
Goodwill recorded in the merger						$	13,819

Explanation of certain fair value related adjustments for the Tri-Valley acquisition:

(a)  Represents the cash acquired in the merger, the disposition of other real estate owned of $1,132,000, a gain on the sale of securities of $53,000, partially offset by invoices paid after closing for services prior to closing of $29,000, and cash paid for fractional shares in the transaction of $3,000. The remaining $1,592,000 of cash paid for the transaction is an adjustment to prepaid assets included in other assets, net.

(b)Represents the fair value adjustment to the net book value of loans, which includes an interest rate mark and credit mark adjustment.

(c)Represents the elimination of Tri-Valley’s allowance for loan losses.

25

(d)Represents intangible assets recorded to reflect the fair value of core deposits and a below market lease. The core deposit intangible asset was recorded as an identifiable intangible asset and is amortized on an accelerated basis over the estimated average life of the deposit base.  The below market lease intangible assets are amortized on the straight line method over eleven years.

(e)Represents an adjustment to net deferred tax assets resulting from the fair value adjustments related to the acquired assets, liabilities assumed and identifiable intangible assets recorded,and the disposition of other real estate owned.

(f)  Represents the fair value adjustment on time deposits, which was be accreted as a reduction of 

     interest expense.

Tri-Valley’s results of operations have been included in the Company’s results of operations beginning April 7, 2018.

On May 4, 2018, the Company completed its acquisition of United American for a transaction value of $56,417,000.  At closing the Company issued 2,826,032 shares of the Company’s common stock with an aggregate market value of $47,280,000 on the date of closing.  The number of shares issued was based on a fixed exchange ratio of 2.1644 of a share of the Company’s common stock for each outstanding share of United American common stock and each common stock equivalent underlying the United American Series D Preferred Stock and Series E Preferred Stock. The shareholders of the United American Series A Preferred Stock and Series B Preferred Stock received $1,000 cash for each share totaling $8,700,000 and $435,000, respectively.  In addition, the Company paid $2,000 in cash for fractional shares, for total cash consideration of $9,137,000.  The following table summarizes the consideration paid for United American:

	(Dollars in thousands)
Consideration paid:
Cash paid for:
Series A Preferred Stock	$	8,700
Series B Preferred Stock		435
Other		2
Total cash paid		9,137
Issuance of 2,826,032 shares of common stock to United
American shareholders at $16.73 per share at Closing		47,280
Total consideration	$	56,417

The following table summarizes the estimated fair values of the assets acquired and liabilities assumed at the date of acquisition.

26

		As					As
		Recorded		Fair			Recorded
		By		Value			at
		United American		Adjustments			Acquisition
		(Dollars in thousands)
Assets acquired:
Cash and cash equivalents	$	45,638	$	(32,520)	(a)	$	13,118
Securities available-for-sale		64,144		(421)	(b)		63,723
Loans		196,694		18,783	(c)		215,477
Allowance for loan losses		(2,952)		2,952	(d)		—
Other intangible assets		—		6,383	(e)		6,383
Other assets, net		9,119		(1,078)	(f)		8,041
Total assets acquired	$	312,643	$	(5,901)			306,742
Liabilities assumed:
Deposits	$	281,189	$	51	(g)		281,240
Other borrowings		62		—			62
Other liabilities		2,617		(187)	(h)		2,430
Total liabilities	$	283,868	$	(136)			283,732
Net assets acquired							23,010
Purchase price							47,280
Goodwill recorded in the merger						$	24,270

Explanation of certain fair value related adjustments for the United American acquisition:

(a) Represents the cash acquired in the merger, net of cash paid for the transaction of $9,137,000, the repurchase of $23,732,000 loan participations from ATBancorp, and $51,000 for invoices paid after closing for services prior to closing, partially offset by a tax refund of $400,000.

(b) Represents the fair value adjustment on investment securities available-for-sale.

(c) Represents the repurchase of $23,732,000 loan participations from ATBancorp, partially offset by the fair value adjustment to the net book value of loans of $4,680,000, which includes an interest rate mark and credit mark adjustment, and net charge-offs of $269,000 subsequent to closing.

(d) Represents the elimination of United American’s allowance for loan losses.

(e) Represents intangible assets recorded to reflect the fair value of core deposits and a below market lease. The core deposit intangible asset was recorded as an identifiable intangible asset and is amortized on an accelerated basis over the estimated average life of the deposit base.  The below market lease intangible assets are amortized on the straight line method over three years.

(f) Represents an adjustment to net deferred tax assets resulting from the fair value adjustments related to the acquired assets, liabilities assumed and identifiable intangible assets recorded.

(g) Represents the fair value adjustment on time deposits, which was be accreted as a reduction of interest expense.

(h) Represents the reversal of accrued accounts payable.

United American’s results of operations have been included in the Company’s results of operations beginning May 5, 2018.

The mergers provided the opportunity to combine three independent business banking franchises with similar philosophies and cultures into a combined $3.1 billion business bank based in San Jose, California. The pooling of the three banks’ resources and knowledge enhanced the Company’s capabilities, operational efficiencies, and community outreach. The Company also believes the combined bank is much better positioned to meet the needs of the Company’s customers, shareholders and the community.  The one time pre-tax severance, retention, acquisition and integration costs totaled $8,214,000 and $8,829,000 for the three months and six months ended June 30, 2018, respectively.

The fair value of net assets acquired includes fair value adjustments to certain receivables of which some were considered impaired and some were not considered impaired as of the acquisition date. The fair value adjustments were determined using discounted contractual cash flows, adjusted for expected losses and prepayments, where appropriate. The receivables that were not considered impaired at the acquisition date were not subject to the guidance relating to

27

purchased credit impaired loans, which have shown evidence of credit deterioration since origination. There were no PCI loans at June 30, 2019 and December 31, 2018.

Goodwill of $13,819,000 arising from the Tri-Valley acquisition and $24,270,000 from the United American acquisition is largely attributable to synergies and cost savings resulting from combining the operations of the companies. As these transactions were structured as a tax-free exchange, the goodwill will not be deductible for tax purposes. As of April 6, 2019 and May 4, 2019 the Company finalized its valuation of all assets acquired and liabilities assumed in its acquisition of Tri-Valley and United American, respectively, resulting in no material changes to acquisition accounting adjustments.

7) Goodwill and Other Intangible Assets

Goodwill

At June 30, 2019, the carrying value of goodwill was $83,753,000, which included $13,044,000 of goodwill related to its acquisition of Bay View Funding, $32,620,000 from its acquisition of Focus, $13,819,000 from its acquisition of Tri-Valley and $24,270,000 from its acquisition of United American.

Goodwill impairment exists when a reporting unit’s carrying value exceeds its fair value, which is determined through a qualitative assessment whether it is more likely than not that the fair value of equity of the reporting unit exceeds the carrying value (“Step Zero”). If the qualitative assessment indicates it is more likely than not that the fair value of equity of a reporting unit is less than book value, then a quantitative two-step impairment test is required. Step 1 includes the determination of the carrying value of the Company’s single reporting unit, including the existing goodwill and intangible assets, and estimating the fair value of the reporting unit. If the carrying amount of a reporting unit exceeds its fair value, the Company is required to perform a second step to the impairment test. Step 2 requires that the implied fair value of the reporting unit goodwill be compared to the carrying amount of that goodwill. If the carrying amount of the reporting unit goodwill exceeds the implied fair value of that goodwill, an impairment loss shall be recognized in an amount equal to that excess.

The Company completed its annual goodwill impairment analysis as of November 30, 2018 with the assistance of an independent valuation firm.  No events or circumstances since the November 30, 2018 annual impairment test were noted that would indicate it was more likely than not a goodwill impairment exists.

Other Intangible Assets

Other intangible assets acquired in the acquisition of United American in May 2018 included a core deposit intangible asset of $5,723,000, amortized on an accelerated method over its estimated useful life of 10 years, and a below market value lease intangible asset of $660,000,  amortized over its estimated useful life of 3 years. Accumulated amortization of the core deposit intangible and below market lease was $1,272,000 and $756,000 at June 30, 2019 and December 31, 2018, respectively.

Other intangible assets acquired in the acquisition of Tri-Valley in April 2018 include a core deposit intangible asset of $1,768,000, amortized on an accelerated method over its estimated useful life of 10 years, and a below market value lease intangible asset of $210,000,  amortized over its estimated useful life of 11 years. Accumulated amortization of the core deposit intangible and below market lease was $351,000 and $222,000 at June 30, 2019 and December 31, 2018, respectively.

The core deposit intangible asset acquired in the acquisition of Focus in August 2015 was $6,285,000. This asset is amortized on an accelerated method over its estimated useful life of 10 years. Accumulated amortization of this intangible asset was $3,137,000 and $2,770,000 at June 30, 2019 and December 31, 2018, respectively.

Other intangible assets acquired in the acquisition of Bay View Funding in November 2014 included a below market value lease intangible assets of $109,000, a non-compete agreement intangible asset of $250,000, and a customer relationship and brokered relationship intangible assets of $1,900,000, amortized over the 10 year estimated useful lives. Accumulated amortization of the customer relationship and brokered relationship intangible assets was $886,000 and $791,000 at June 30, 2019 and December 31, 2018, respectively.

28

Estimated amortization expense for 2019, the next five years and thereafter is as follows:

	United		United								Bay View Funding
	American		American		Tri-Valley		Tri-Valley		Focus		Customer&
	Core		Below		Core		Below		Core		Brokered		Total
	Deposit		Market		Deposit		Market		Deposit		Relationship		Amortization
Year	Intangible		Lease		Intangible		Lease		Intangible		Intangible		Expense
		(Dollars in thousands)
2019	$	777	$	255	$	240	$	18	$	734	$	190	$	2,214
2020		665		235		208		18		716		190		2,032
2021		602		—		184		18		596		190		1,590
2022		553		—		167		18		502		190		1,430
2023		521		—		158		18		420		190		1,307
2024		499		—		152		18		346		159		1,174
Thereafter		1,520		—		451		88		201		—		2,260
	$	5,137	$	490	$	1,560	$	196	$	3,515	$	1,109	$	12,007

Impairment testing of the intangible assets is performed at the individual asset level. Impairment exists if the carrying amount of the asset is not recoverable and exceeds its fair value at the date of the impairment test. For intangible assets, estimates of expected future cash flows (cash inflows less cash outflows) that are directly associated with an intangible asset are used to determine the fair value of that asset. Management makes certain estimates and assumptions in determining the expected future cash flows from core deposit and customer relationship intangibles including account attrition, expected lives, discount rates, interest rates, servicing costs and other factors. Significant changes in these estimates and assumptions could adversely impact the valuation of these intangible assets. If an impairment loss exists, the carrying amount of the intangible asset is adjusted to a new cost basis. The new cost basis is then amortized over the remaining useful life of the asset. Based on its assessment, management concluded that there was no impairment of intangible assets at June 30, 2019 and December 31, 2018.

8) Income Taxes

Some items of income and expense are recognized in one year for tax purposes, and another when applying generally accepted accounting principles, which leads to timing differences between the Company’s actual current tax liability and the amount accrued for this liability based on book income. These temporary differences comprise the “deferred” portion of the Company’s tax expense or benefit, which is accumulated on the Company’s books as a deferred tax asset or deferred tax liability until such time as they reverse.

Under generally accepted accounting principles, a valuation allowance is required if it is “more likely than not” that a deferred tax asset will not be realized. The determination of the realizability of the deferred tax assets is highly subjective and dependent upon judgment concerning management’s evaluation of both positive and negative evidence, including forecasts of future income, cumulative losses, applicable tax planning strategies, and assessments of current and future economic and business conditions.

The Company had net deferred tax assets of $22,813,000, and $27,089,000, at June 30, 2019 and December 31, 2018, respectively. After consideration of the matters in the preceding paragraph, the Company determined that it is more likely than not that the net deferred tax assets at June 30, 2019 and December 31, 2018 will be fully realized in future years.

29

The following table reflects the carrying amounts of the low income housing investments included in accrued interest receivable and other assets, and the future commitments included in accrued interest payable and other liabilities for the periods indicated:

	June 30,		December 31,
	2019		2018
	(Dollars in thousands)
Low income housing investments	$	3,144	$	3,172
Future commitments	$	273	$	273

The Company expects $14,000 of the future commitments to be paid in 2019, $14,000 in 2020, and $245,000 in 2021 through 2023.

For tax purposes, the Company had low income housing tax credits of $106,000 for the three months ended June 30, 2019 and June 30, 2018, and low income housing investment expense of $106,000 and $119,000, respectively.  For tax purposes, the Company had low income housing tax credits of $213,000 for the six months ended June 30, 2019 and June 30, 2018, and low income housing investment expense of $211,000 and $238,000, respectively.  The Company recognized low income housing investment expense as a component of income tax expense.

9) Benefit Plans

Supplemental Retirement Plan

The Company has a supplemental retirement plan (the “Plan”) covering some current and some former key employees and directors. The Plan is a nonqualified defined benefit plan. Benefits are unsecured as there are no Plan assets. The following table presents the amount of periodic cost recognized for the periods indicated:

	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2019		2018		2019		2018
	(Dollars in thousands)
Components of net periodic benefit cost:
Service cost	$	55	$	62	$	110	$	124
Interest cost		264		237		528		474
Amortization of net actuarial loss		46		73		92		146
Net periodic benefit cost	$	365	$	372	$	730	$	744

The components of net periodic benefit cost other than the service cost component are included in the line item “other noninterest expense” in the Consolidated Statements of Income. 

Split‑Dollar Life Insurance Benefit Plan

The Company maintains life insurance policies for some current and some former directors and officers that are subject to split‑dollar life insurance agreements. The following table sets forth the funded status of the split‑dollar life insurance benefits for the periods indicated:

	June 30,		December 31,
	2019		2018
	(Dollars in thousands)
Change in projected benefit obligation:
Projected benefit obligation at beginning of year	$	6,903	$	6,711
Interest cost		140		227
Actuarial loss (gain)		—		(35)
Projected benefit obligation at end of period	$	7,043	$	6,903

30

	June 30,		December 31,
	2019		2018
	(Dollars in thousands)
Net actuarial loss	$	2,666	$	2,573
Prior transition obligation		1,104		1,149
Accumulated other comprehensive loss	$	3,770	$	3,722

	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2019		2018		2019		2018
	(Dollars in thousands)
Amortization of prior transition obligation	$	(24)	$	(16)	$	(49)	$	(32)
Interest cost		70		56		140		113
Net periodic benefit cost	$	46	$	40	$	91	$	81

10) Fair Value

Accounting guidance establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard describes three levels of inputs that may be used to measure fair value:

Level 1: Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date.

Level 2: Significant other observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities in active markets; quoted prices for identical assets or liabilities in markets that are not active; or other inputs that are observable or can be corroborated by observable market data (for example, interest rates and yield curves observable at commonly quoted intervals, prepayment speeds, credit risks, and default rates).

Level 3: Significant unobservable inputs that reflect a reporting entity’s own assumptions about the assumptions that market participants would use in pricing an asset or liability.

Financial Assets and Liabilities Measured on a Recurring Basis

The fair values of securities available-for sale-are determined by obtaining quoted prices on nationally recognized securities exchanges (Level 1 inputs) or matrix pricing, which is a mathematical technique widely used in the 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 (Level 2 inputs).

31

The fair value of interest‑only (“I/O”) strip receivable assets is based on a valuation model used by a third party. The Company is able to compare the valuation model inputs and results to widely available published industry data for reasonableness (Level 2 inputs).

			Fair Value Measurements Using
					Significant
			Quoted Prices in		Other		Significant
			Active Markets for		Observable		Unobservable
			Identical Assets		Inputs		Inputs
	Balance		(Level 1)		(Level 2)		(Level 3)
	(Dollars in thousands)
Assets at June 30, 2019
Available-for-sale securities:
Agency mortgage-backed securities	$	242,647		—	$	242,647		—
U.S. Treasury		140,509		140,509		—		—
I/O strip receivables		572		—		572		—
Assets at December 31, 2018
Available-for-sale securities:
Agency mortgage-backed securities	$	302,854		—	$	302,854		—
U.S. Treasury		148,753		148,753		—		—
U.S. Government sponsored entities		7,436		—		7,436		—
I/O strip receivables		568		—		568		—

There were no transfers between Level 1 and Level 2 during the period for assets measured at fair value on a recurring basis.

Assets and Liabilities Measured on a Non‑Recurring Basis

The fair value of impaired loans with specific allocations of the allowance for loan losses is generally based on recent real estate appraisals. The 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 usually significant and typically result in a Level 3 classification of the inputs for determining fair value.

32

Foreclosed assets are valued at the time the loan is foreclosed upon and the asset is transferred to foreclosed assets. The fair value is based primarily on third party appraisals, less costs to sell. The appraisals may utilize a single valuation approach or a combination of approaches including the comparable sales and 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 and result in a Level 3 classification of the inputs for determining fair value.

			Fair Value Measurements Using
				Significant
			Quoted Prices in	Other	Significant
			Active Markets for	Observable	Unobservable
			Identical Assets	Inputs	Inputs
	Balance		(Level 1)	(Level 2)	(Level 3)
	(Dollars in thousands)
Assets at June 30, 2019
Impaired loans - held-for-investment:
Commercial	$	515	—	—	$	515
Real estate:
CRE		4,907	—	—		4,907
	$	5,422	—	—	$	5,422
Assets at December 31, 2018
Impaired loans - held-for-investment:
Commercial	$	702	—	—	$	702
	$	702	—	—	$	702

The following table shows the detail of the impaired loans held-for-investment and the impaired loans held‑for‑investment carried at fair value for the periods indicated:

	June 30, 2019		December 31, 2018
	(Dollars in thousands)
Impaired loans held-for-investment:
Book value of impaired loans held-for-investment carried at fair value	$	11,959	$	7,646
Book value of impaired loans held-for-investment carried at cost		5,234		7,494
Total impaired loans held-for-investment	$	17,193	$	15,140
Impaired loans held-for-investment carried at fair value:
Book value of impaired loans held-for-investment carried at fair value	$	11,959	$	7,646
Specific valuation allowance		(6,537)		(6,944)
Impaired loans held-for-investment carried at fair value, net	$	5,422	$	702

Impaired loans held‑for‑investment which are measured primarily for impairment using the fair value of the collateral were $17,193,000 at June 30, 2019.  In addition, these loans had a specific valuation allowance of $6,537,000 at June 30, 2019. Impaired loans held‑for‑investment totaling $11,959,000 at June 30, 2019, were carried at fair value as a result of partial charge‑offs and specific valuation allowances at period‑end. The remaining $5,234,000 of impaired loans were carried at cost at June 30, 2019, as the fair value of the collateral exceeded the cost basis of each respective loan. Partial charge‑offs and changes in specific valuation allowances during the first six months of 2019 on impaired loans held‑for‑investment carried at fair value at June 30, 2019 resulted in an additional credit to the provision for loan losses of $339,000.

At June 30, 2019, there were no foreclosed assets.

Impaired loans held‑for‑investment were $15,140,000 at December 31, 2018. In addition, these loans had a specific valuation allowance of $6,944,000 at December 31, 2018. Impaired loans held‑for‑investment totaling $7,646,000 at December 31, 2018 were carried at fair value as a result of partial charge‑offs and specific valuation allowances at year‑end. The remaining $7,494,000 of impaired loans were carried at cost at December 31, 2018, as the fair value of the collateral exceeded the cost basis of each respective loan. Partial charge‑offs and changes in specific valuation allowances during 2018 on impaired loans held‑for‑investment carried at fair value at December 31, 2018 resulted in an additional provision for loan losses of $7,042,000.

33

At December 31, 2018, there were no foreclosed assets.

The following table presents quantitative information about Level 3 fair value measurements for financial instruments measured at fair value on a non‑recurring basis at the periods indicated:

	June 30, 2019
			Valuation	Unobservable	Range
	Fair Value		Techniques	Inputs	(Weighted Average)
	(Dollars in thousands)
Impaired loans - held-for-investment:
Commercial	$	515	Market Approach	Discount adjustment for differences between comparable sales	Less than 1%
Real estate:
CRE		4,907	Market Approach	Discount adjustment for differences between comparable sales	Less than 1%

	December 31, 2018
			Valuation	Unobservable	Range
	Fair Value		Techniques	Inputs	(Weighted Average)
	(Dollars in thousands)
Impaired loans - held-for-investment:
Commercial	$	702	Market Approach	Discount adjustment for differences between comparable sales	0% to 1%

The Company obtains third party appraisals on its impaired loans held-for-investment and foreclosed assets to determine fair value. Generally, the third party appraisals apply the “market approach,” which is a valuation technique that uses prices and other relevant information generated by market transactions involving identical or comparable (that is, similar) assets, liabilities, or a group of assets and liabilities, such as a business. Adjustments are then made based on the type of property, age of appraisal, current status of property and other related factors to estimate the current value of collateral.

The carrying amounts and estimated fair values of financial instruments at June 30, 2019 are as follows:

			Estimated Fair Value
					Significant
			Quoted Prices in		Other		Significant
			Active Markets for		Observable		Unobservable
	Carrying		Identical Assets		Inputs		Inputs
	Amounts		(Level 1)		(Level 2)		(Level 3)		Total
	(Dollars in thousands)
Assets:
Cash and cash equivalents	$	276,012	$	276,012	$	—	$	—	$	276,012
Securities available-for-sale		383,156		140,509		242,647		—		383,156
Securities held-to-maturity		351,399		—		351,467		—		351,467
Loans (including loans held-for-sale), net		1,856,338		—		5,202		1,851,281		1,856,483
FHLB stock, FRB stock, and other
investments		25,226		—		—		—		N/A
Accrued interest receivable		9,248		553		2,045		6,650		9,248
I/O strips receivables		572		—		572		—		572
Liabilities:
Time deposits	$	143,807	$	—	$	144,242	$	—	$	144,242
Other deposits		2,478,666		—		2,478,666		—		2,478,666
Subordinated debt		39,461		—		40,361		—		40,361
Accrued interest payable		653		—		653		—		653

34

The carrying amounts and estimated fair values of the Company’s financial instruments at December 31, 2018:

			Estimated Fair Value
					Significant
			Quoted Prices in		Other		Significant
			Active Markets for		Observable		Unobservable
	Carrying		Identical Assets		Inputs		Inputs
	Amounts		(Level 1)		(Level 2)		(Level 3)		Total
	(Dollars in thousands)
Assets:
Cash and cash equivalents	$	164,568	$	164,568	$	—	$	—	$	164,568
Securities available-for-sale		459,043		148,753		310,290		—		459,043
Securities held-to-maturity		377,198		—		366,175		—		366,175
Loans (including loans held-for-sale), net		1,861,206		—		2,649		1,826,654		1,829,303
FHLB stock, FRB stock, and other
investments		25,216		—		—		—		N/A
Accrued interest receivable		9,577		597		2,274		6,706		9,577
I/O strips receivables		568		—		568		—		568
Liabilities:
Time deposits	$	147,560	$	—	$	147,916	$	—	$	147,916
Other deposits		2,489,972		—		2,489,972		—		2,489,972
Subordinated debt		39,369		—		38,969		—		38,969
Accrued interest payable		497		—		497		—		497

In accordance with our adoption of ASU 2016-01 in 2018, the methods utilized to measure the fair value of financial instruments at June 30, 2019 and December 31, 2018 represent an approximation of exit price, however, an actual exit price may differ.

11) Equity Plan

The Company maintained an Amended and Restated 2004 Equity Plan (the “2004 Plan”) for directors, officers, and key employees. The 2004 Plan was terminated on May 23, 2013. On May 23, 2013, the Company’s shareholders approved the 2013 Equity Incentive Plan (the “2013 Plan”). On May 25, 2017, the shareholders approved an amendment to the Heritage Commerce Corp 2013 Equity Incentive Plan to increase the number of shares available from 1,750,000 to 3,000,000 shares. The equity plans provide for the grant of incentive and nonqualified stock options and restricted stock. The equity plans provide that the option price for both incentive and nonqualified stock options will be determined by the Board of Directors at no less than the fair value at the date of grant. Options granted vest on a schedule determined by the Board of Directors at the time of grant. Generally options vest over four years. All options expire no later than ten years from the date of grant. Restricted stock is subject to time vesting. For the six months months ended June 30, 2019, the Company granted 296,500 shares of nonqualified stock options and 134,653 shares of restricted stock. There were 750,030 shares available for the issuance of equity awards under the 2013 Plan as of June 30, 2019.

Stock option activity under the equity plans is as follows:

				Weighted
		Weighted		Average
		Average		Remaining	Aggregate
	Number	Exercise		Contractual	Intrinsic
Total Stock Options	of Shares	Price		Life (Years)	Value
Outstanding at January 1, 2019	1,570,603	$	10.76
Granted	296,500	$	12.16
Exercised	(75,003)	$	7.55
Forfeited or expired	(18,677)	$	15.57
Outstanding at June 30, 2019	1,773,423	$	11.08	6.75	$	3,910,541
Vested or expected to vest	1,667,018			6.75	$	3,675,908
Exercisable at June 30, 2019	1,101,432			5.38	$	3,784,995

35

Information related to the equity plans for the periods indicated:

	Six Months Ended
	June 30,
	2019			2018
Intrinsic value of options exercised	$	392,127	$	1,466,731
Cash received from option exercise	$	566,197	$	2,001,837
Tax benefit realized from option exercises	$	102,786	$	430,357
Weighted average fair value of options granted	$	1.91	$	3.07

As of June 30, 2019, there was $1,582,000 of total unrecognized compensation cost related to nonvested stock options granted under the equity plans. That cost is expected to be recognized over a weighted‑average period of approximately 3.0 years.

The fair value of each option grant is estimated on the date of grant using the Black Scholes option pricing model that uses the assumptions noted in the following table, including the weighted average assumptions for the option grants for the periods indicated:

	Six Months Ended
	June 30,
	2019		2018
Expected life in months(1)	72		72
Volatility(1)	24	%	21	%
Weighted average risk-free interest rate(2)	2.24	%	2.87	%
Expected dividends(3)	3.95	%	2.62	%

(1) The expected life of employee stock options represents the weighted average period the stock options are expected to remain outstanding based on historical experience. Volatility is based on the historical volatility of the stock price over the same period of the expected life of the option.

(2) Based on the U.S. Treasury constant maturity interest rate with a term consistent with the expected life of the option granted.

(3) Each grant’s dividend yield is calculated by annualizing the most recent quarterly cash dividend and dividing that amount by the market price of the Company’s common stock as of the grant date

Restricted stock activity under the equity plans is as follows:

		Weighted
		AverageGrant
	Number	DateFair
Total Restricted Stock Award	of Shares	Value
Nonvested shares at January 1, 2019	193,298	$	11.04
Granted	134,653	$	12.16
Vested	(74,998)	$	12.43
Nonvested shares at June 30, 2019	252,953	$	11.23

As of June 30, 2019, there was $3,153,000 of total unrecognized compensation cost related to nonvested restricted stock awards granted under the equity plans. The cost is expected to be recognized over a weighted‑average period of approximately 2.49 years.

36

12) Subordinated Debt

On May 26, 2017, the Company completed an underwritten public offering of $40,000,000 aggregate principal amount of its fixed-to-floating rate subordinated notes (“Subordinated Debt”) due June 1, 2027. The Subordinated Debt initially bears a fixed interest rate of 5.25% per year. Commencing on June 1, 2022, the interest rate on the Subordinated Debt resets quarterly to the three-month LIBOR rate plus a spread of 336.5 basis points, payable quarterly in arrears.  Interest on the Subordinated Debt is payable semi-annually on June 1st and December 1st of each year through June 1, 2022 and quarterly thereafter on March 1st, June 1st, September 1st and December 1st of each year through the maturity date or early redemption date.  The Company at its option may redeem the Subordinated Debt, in whole or in part, on any interest payment date on or after June 1, 2022 without a premium.

13) Capital Requirements

The Company and its subsidiary bank are subject to various regulatory capital requirements administered by the banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory—and possibly additional discretionary—actions by regulators that, if undertaken, could have a direct material effect on the Company’s financial statements and operations. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and HBC must meet specific capital guidelines that involve quantitative measures of assets, liabilities, and certain off balance sheet items as calculated under regulatory accounting practices. Capital amounts and classifications are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. There are no conditions or events since June 30, 2019, that management believes have changed the categorization of the Company or HBC as “well-capitalized.” 

As of January 1, 2015, HCC and HBC along with other community banking organizations became subject to new capital requirements and certain provisions of the new rules will be phased in from 2015 through 2019. The Federal Banking regulators approved the new rules to implement the revised capital adequacy standards of the Basel Committee on Banking Supervision, commonly called Basel III, and address relevant provisions of The Dodd Frank Wall Street Reform and Consumer Protection Act of 2010, as amended. The new capital rules establish a “capital conservation buffer,” which must consist entirely of common equity Tier 1 capital. The capital conservation buffer is 2.5% of risk-weighted assets. The Company and HBC must maintain a capital conservation buffer above the minimum risk-based capital requirements in order to avoid certain limitations on capital distributions, stock repurchases and discretionary bonus payments to executive officers. The Company’s consolidated capital ratios and the Bank’s capital ratios exceeded the regulatory guidelines for a well-capitalized financial institution under the Basel III regulatory requirements at June 30, 2019.

Quantitative measures established by regulation to help ensure capital adequacy require the Company and HBC to maintain minimum amounts and ratios (set forth in the tables below) of total, Tier 1 capital, and common equity Tier 1 capital (as defined in the regulations) to risk weighted assets (as defined), and of Tier 1 capital to average assets (as defined). Management believes that, as of June 30, 2019 and December 31, 2018, the Company and HBC met all capital adequacy guidelines to which they were subject.

The Company’s consolidated capital amounts and ratios are presented in the following table, together with capital adequacy requirements, under the Basel III regulatory requirements as of June 30, 2019 and December 31, 2018.

37

						Required For
						Capital
						Adequacy
						Purposes
			Actual			Under Basel III
	Amount			Ratio		Amount		Ratio (1)
			(Dollars in thousands)
As of June 30, 2019
Total Capital	$	360,242		15.9	%	$	237,965	10.5	%
(to risk-weighted assets)
Tier 1 Capital	$	293,492		13.0	%	$	192,639	8.5	%
(to risk-weighted assets)
Common Equity Tier 1 Capital	$	293,492		13.0	%	$	158,644	7.0	%
(to risk-weighted assets)
Tier 1 Capital	$	293,492		9.9	%	$	118,865	4.0	%
(to average assets)

(1) Includes 2.5% capital conservation buffer, effective January 1, 2019, except the Tier 1 Capital to average assets ratio.

					Required For
					Capital
					Adequacy
					Purposes
	Actual				Under Basel III
	Amount		Ratio		Amount		Ratio (1)
		(Dollars in thousands)
As of December 31, 2018
Total Capital	$	344,597	15.0	%	$	227,514	9.875	%
(to risk-weighted assets)
Tier 1 Capital	$	276,675	12.0	%	$	181,435	7.875	%
(to risk-weighted assets)
Common Equity Tier 1 Capital	$	276,675	12.0	%	$	146,876	6.375	%
(to risk-weighted assets)
Tier 1 Capital	$	276,675	8.9	%	$	124,726	4.000	%
(to average assets)

(1) Includes 1.875% capital conservation buffer, effective January 1, 2018 except the Tier 1 Capital to average assets ratio.

HBC’s actual capital amounts and ratios are presented in the following table, together with capital adequacy requirements, under the Basel III regulatory requirements as of June 30, 2019, and December 31, 2018.

									Required For
									Capital
					To Be Well-Capitalized				Adequacy
					Under Basel III PCA Regulatory				Purposes
	Actual				Requirements				Under Basel III
	Amount		Ratio		Amount		Ratio		Amount		Ratio (1)
	(Dollars in thousands)
As of June 30, 2019
Total Capital	$	338,344	14.9	%	$	226,477	10.0	%	$	237,801	10.5	%
(to risk-weighted assets)
Tier 1 Capital	$	311,055	13.7	%	$	181,182	8.0	%	$	192,506	8.5	%
(to risk-weighted assets)
Common Equity Tier 1 Capital	$	311,055	13.7	%	$	147,210	6.5	%	$	158,534	7.0	%
(to risk-weighted assets)
Tier 1 Capital	$	311,055	10.5	%	$	148,505	5.0	%	$	118,804	4.0	%
(to average assets)

(1) Includes 2.5% capital conservation buffer, effective January 1, 2019, except the Tier 1 Capital to average assets ratio.

38

									Required For
									Capital
					To Be Well-Capitalized				Adequacy
					Under Basel III PCA Regulatory				Purposes
	Actual				Requirements				Under Basel III
	Amount		Ratio		Amount		Ratio		Amount		Ratio (1)
		(Dollars in thousands)
As of December 31, 2018
Total Capital	$	322,283	14.0	%	$	230,275	10.0	%	$	227,397	9.875	%
(to risk-weighted assets)
Tier 1 Capital	$	293,730	12.8	%	$	184,220	8.0	%	$	181,342	7.875	%
(to risk-weighted assets)
Common Equity Tier 1 Capital	$	293,730	12.8	%	$	149,679	6.5	%	$	146,800	6.375	%
(to risk-weighted assets)
Tier 1 Capital	$	293,730	9.4	%	$	155,832	5.0	%	$	124,666	4.000	%
(to average assets)

(1) Includes 1.875% capital conservation buffer, effective January 1, 2018, except the Tier 1 Capital to average assets ratio.

The Subordinated Debt, net of unamortized issuance costs, totaled $39,461,000 at June 30, 2019, and qualifies as Tier 2 capital for the Company under the guidelines established by the Federal Reserve Bank. 

Under California General Corporation Law, the holders of common stock are entitled to receive dividends when and as declared by the Board of Directors, out of funds legally available. The California Financial Code provides that a state licensed bank may not make a cash distribution to its shareholders in excess of the lesser of the following: (i) the bank’s retained earnings; or (ii) the bank’s net income for its last three fiscal years, less the amount of any distributions made by the bank to its shareholders during such period. However, a bank, with the prior approval of the Commissioner of the California Department of Business Oversight—Division of Financial Institutions (“DBO”) may make a distribution to its shareholders of an amount not to exceed the greater of (i) a bank’s retained earnings; (ii) its net income for its last fiscal year; or (iii) its net income for the current fiscal year. Also with the prior approval of the Commissioner of the DBO and the shareholders of the bank, the bank may make a distribution to its shareholders, as a reduction in capital of the bank. In the event that the Commissioner determines that the shareholders’ equity of a bank is inadequate or that the making of a distribution by a bank would be unsafe or unsound, the Commissioner may order a bank to refrain from making such a proposed distribution. As of June 30, 2019, HBC would not be required to obtain regulatory approval, and the amount available for cash dividends is $32,636,000. Similar restrictions applied to the amount and sum of loan advances and other transfers of funds from HBC to the parent company. During the second and first quarter of 2019, HBC distributed to HCC dividends of $5,500,000 and $5,000,000, respectively, for a total of $10,500,000 for the first six months of 2019.  

14) Loss Contingencies

The Company is involved in certain legal actions arising from normal business activities. Management, based upon the advice of legal counsel, believes the ultimate resolution of all pending legal actions will not have a material effect on the financial statements of the Company.

15) Revenue Recognition

On January 1, 2018, the Company adopted ASU No. 2014-09 (Topic 606) and all subsequent ASUs that modified Topic 606. Topic 606 does not apply to revenue associated with financial instruments, including revenue from loans and securities. In addition, certain noninterest income streams such as fees associated with mortgage servicing rights, financial guarantees, gain on sale of securities, bank-owned life insurance, gain on sales of SBA loans, and certain credit card fees are also not in scope of the new guidance. Topic 606 is applicable to noninterest revenue streams such as deposit related fees, interchange fees, and merchant income. However, the recognition of these revenue streams did not change significantly upon adoption of Topic 606. Substantially all of the Company’s revenue is generated from contracts with customers. The following noninterest income revenue streams are in-scope of Topic 606:

39

Service charges and fees on deposit accounts consist of account analysis fees (i.e., net fees earned on analyzed business and public checking accounts), monthly service fees, check orders, and other deposit account related fees. We sometimes charge customers fees that are not specifically related to the customer accessing its funds, such as account maintenance or dormancy fees. The amount of deposit fees assessed varies based on a number of factors, such as the type of customer and account, the quantity of transactions, and the size of the deposit balance. We charge, and in some circumstances do not charge, fees to earn additional revenue and influence certain customer behavior. An example would be where we do not charge a monthly service fee, or do not charge for certain transactions, for customers that have a high deposit balance. Deposit fees are considered either transactional in nature (such as wire transfers, nonsufficient fund fees, and stop payment orders) or non-transactional (such as account maintenance and dormancy fees). These fees are recognized as earned or as transactions occur and services are provided. Check orders and other deposit account related fees are largely transactional based and, therefore, the Company’s performance obligation is satisfied, and related revenue recognized, at a point in time. Payment for service charges on deposit accounts is primarily received immediately or in the following month through a direct charge to customers’ accounts.

The following presents noninterest income, segregated by revenue streams in-scope and out-of-scope of Topic 606, for the periods indicated:

	Three Months Ended
	June 30,
	2019		2018
	(Dollars in thousands)
Noninterest Income In-scope of Topic 606:
Service charges and fees on deposit accounts	$	1,177	$	972
Noninterest Income Out-of-scope of Topic 606		1,588		1,808
Total noninterest income	$	2,765	$	2,780

	Six Months Ended
	June 30,
	2019		2018
	(Dollars in thousands)
Noninterest Income In-scope of Topic 606:
Service charges and fees on deposit accounts	$	2,338	$	1,874
Noninterest Income Out-of-scope of Topic 606		2,895		3,101
Total noninterest income	$	5,233	$	4,975

16) Noninterest Expense

The following table sets forth the various components of the Company’s noninterest expense for the periods indicated:

	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2019		2018		2019		2018
	(Dollars in thousands)
Salaries and employee benefits	$	10,698	$	11,103	$	21,468	$	20,570
Occupancy and equipment		1,578		1,262		3,084		2,368
Professional fees		753		633		1,571		1,317
Data processing		732		622		1,411		976
Software subscriptions		556		599		1,145		1,192
Amortization of intangible assets		554		464		1,107		705
Merger-related costs (1)		540		8,214		540		8,829
Insurance expense		439		399		875		806
Recovery of legal fees (2)		—		(922)		—		(922)
Other		2,595		2,488		5,162		5,011
Total	$	18,445	$	24,862	$	36,363	$	40,852

40

(1) Severance and retention expense of $3,393,000 for both the second quarter and first six months of 2018 is included in Salaries and employee benefits in the Consolidated Statements of Income. Other acquisition and integration costs of $540,000 and $4,821,000 for the second quarter of 2019 and the second quarter of 2018, respectively, is included in Other noninterest expense in the Consolidated Statements of Income.  Other acquisition and integration costs of $540,000 and $5,436,000 for the first six months of 2019 and the first six months of 2018, respectively, is included in Other noninterest expense in the Consolidated Statements of Income.

(2) Included in Professional fees in the the Consolidated Statements of Income.

17) Leases

On January 1, 2019, the Company adopted 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. As of June 30, 2019, operating lease ROU assets, included in other assets, and lease liabilities, included in other liabilities, totaled $7,425,000. 

The following table presents the quantitative information for the Company’s leases:

		June 30,
		2019
	(Dollars in thousands)
Operating Lease Cost (Cost resulting from lease payments)	$	1,044
Operating Lease - Operating Cash Flows (Fixed Payments)	$	1,012
Operating Lease - ROU assets	$	7,425
Operating Lease - Liabilities	$	7,425
Weighted Average Lease Term - Operating Leases		3.40 years
Weighted Average Discount Rate - Operating Leases		5.25%

The following maturity analysis shows the undiscounted cash flows due on the Company’s operating lease abilities:

	(Dollars in thousands)
2019	$	2,020
2020		2,175
2021		1,403
2022		1,198
2023		660
Thereafter		703
Total undiscounted cash flows		8,159
Discount on cash flows		(734)
Total lease liability	$	7,425

In June of 2019, the Company entered in to a lease agreement for 54,910 square feet of office space in San Jose, California, commencing on February 1, 2020.  The Company intends to move its Bay View Funding office during the first quarter of 2020, and move the main office of HBC during the second quarter of 2020, to this new location.

41

18) Business Segment Information

The following presents the Company’s operating segments. The Company operates through two business segments: Banking segment and Factoring segment. Transactions between segments consist primarily of borrowed funds. Intersegment interest expense is allocated to the Factoring segment based on the Company’s prime rate and funding costs. The provision for loan loss is allocated based on the segment’s allowance for loan loss determination which considers the effects of charge-offs. Noninterest income and expense directly attributable to a segment are assigned to it. Taxes are paid on a consolidated basis and allocated for segment purposes. The Factoring segment includes only factoring originated by Bay View Funding.

	Three Months Ended June 30, 2019
	Banking(1)		Factoring		Consolidated
	(Dollars in thousands)
Interest income	$	30,521		2,968	$	33,489
Intersegment interest allocations		292		(292)		—
Total interest expense		2,573		—		2,573
Net interest income		28,240		2,676		30,916
Provision (credit) for loan losses		(744)		4		(740)
Net interest income after provision		28,984		2,672		31,656
Noninterest income		2,641		124		2,765
Noninterest expense		16,784		1,661		18,445
Intersegment expense allocations		132		(132)		—
Income before income taxes		14,973		1,003		15,976
Income tax (benefit) expense		4,327		296		4,623
Net income	$	10,646	$	707	$	11,353
Total assets	$	3,045,378	$	62,653	$	3,108,031
Loans, net of deferred fees	$	1,827,936	$	49,831	$	1,877,767
Goodwill	$	70,709	$	13,044	$	83,753

	Three Months Ended June 30, 2018
	Banking(1)		Factoring		Consolidated
	(Dollars in thousands)
Interest income	$	28,625		3,355	$	31,980
Intersegment interest allocations		376		(376)		—
Total interest expense		1,816		—		1,816
Net interest income		27,185		2,979		30,164
Provision for loan losses		7,141		57		7,198
Net interest income after provision		20,044		2,922		22,966
Noninterest income		2,531		249		2,780
Noninterest expense (2)		23,301		1,561		24,862
Intersegment expense allocations		227		(227)		—
Income before income taxes		(499)		1,383		884
Income tax expense		(440)		409		(31)
Net income	$	(59)	$	974	$	915
Total assets	$	3,044,221	$	78,986	$	3,123,207
Loans, net of deferred fees	$	1,893,147	$	63,486	$	1,956,633
Goodwill	$	71,373	$	13,044	$	84,417

(1) Includes the holding company’s results of operations

(2) The banking segment’s noninterest expense includes merger-related costs of $540,000 and $8,214,000, for the second quarter of 2019 and the second quarter of 2018, respectively

42

	Six Months Ended June 30, 2019
	Banking(1)		Factoring		Consolidated
	(Dollars in thousands)
Interest income	$	61,017	$	5,921	$	66,938
Intersegment interest allocations		606		(606)		—
Total interest expense		4,980		—		4,980
Net interest income		56,643		5,315		61,958
Provision for loan losses		(1,636)		(165)		(1,801)
Net interest income after provision		58,279		5,480		63,759
Noninterest income		4,873		360		5,233
Noninterest expense		32,985		3,378		36,363
Intersegment expense allocations		253		(253)		—
Income before income taxes		30,420		2,209		32,629
Income tax expense		8,477		653		9,130
Net income	$	21,943	$	1,556	$	23,499
Total assets	$	3,045,378	$	62,653	$	3,108,031
Loans, net of deferred fees	$	1,827,936	$	49,831	$	1,877,767
Goodwill	$	70,709	$	13,044	$	83,753

	Six Months Ended June 30, 2018
	Banking(1)		Factoring		Consolidated
	(Dollars in thousands)
Interest income	$	53,356	$	6,501	$	59,857
Intersegment interest allocations		703		(703)		—
Total interest expense		3,345		—		3,345
Net interest income		50,714		5,798		56,512
Provision for loan losses		7,629		75		7,704
Net interest income after provision		43,085		5,723		48,808
Noninterest income		4,617		358		4,975
Noninterest expense (2)		37,768		3,084		40,852
Intersegment expense allocations		402		(402)		—
Income before income taxes		10,336		2,595		12,931
Income tax expense		2,440		767		3,207
Net income	$	7,896	$	1,828	$	9,724
Total assets	$	3,044,221		78,986	$	3,123,207
Loans, net of deferred fees	$	1,893,147		63,486	$	1,956,633
Goodwill	$	71,373		13,044	$	84,417

(1) Includes the holding company’s results of operations

(2) The banking segment’s noninterest expense includes merger-related costs of $540,000 and $8,829,000, for the first six months of 2019 and the first six months of 2018, respectively

19) Subsequent Events

On July 25, 2019, the Company announced that its Board of Directors declared a $0.12 per share quarterly cash dividend to holders of common stock. The dividend will be paid on August 22, 2019 to shareholders of record on August 8, 2019.

43

ITEM 2—MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion provides information about the results of operations, financial condition, liquidity, and capital resources of Heritage Commerce Corp (the “Company” or “HCC”), its wholly‑owned subsidiary, Heritage Bank of Commerce (“HBC”), and HBC’s wholly‑owned subsidiary, CSNK Working Capital Finance Corp., a California Corporation, dba Bay View Funding (“Bay View Funding”). This information is intended to facilitate the understanding and assessment of significant changes and trends related to our financial condition and the results of operations. This discussion and analysis should be read in conjunction with our consolidated financial statements and the accompanying notes presented elsewhere in this report. Unless we state otherwise or the context indicates otherwise, references to the “Company,” “Heritage,” “we,” “us,” and “our,” in this Report on Form 10‑Q refer to Heritage Commerce Corp and its subsidiaries.

CRITICAL ACCOUNTING POLICIES

Critical accounting policies are discussed in our Form 10‑K for the year ended December 31, 2018. There are no changes to these policies as of June 30, 2019.  

EXECUTIVE SUMMARY

This summary is intended to identify the most important matters on which management focuses when it evaluates the financial condition and performance of the Company. When evaluating financial condition and performance, management looks at certain key metrics and measures. The Company’s evaluation includes comparisons with peer group financial institutions and its own performance objectives established in the internal planning process.

The primary activity of the Company is commercial banking. The Company’s operations are located entirely in  the general San Francisco Bay Area of California in the counties of Santa Clara, Alameda, Contra Costa, San Mateo, and San Benito. The largest city in this area is San Jose and the Company’s market includes the headquarters of a number of technology based companies in the region known commonly as Silicon Valley. The Company’s customers are primarily closely held businesses and professionals.

Performance Overview

For the three months ended June 30, 2019, net income was $11.4 million, or $0.26 per average diluted common share, compared to $915,000, or $0.02 per average diluted common share, for the three months ended June 30, 2018. The Company’s annualized return on average tangible assets was 1.53% and annualized return on average tangible equity was 15.94% for the three months ended June 30, 2019, compared to 0.12% and 1.49%, respectively, for the three months ended June 30, 2018.

For the six months ended June 30, 2019, net income was $23.5 million, or $0.54 per average diluted common share, compared to $9.7 million, or $0.24 per average diluted common share, for the six months ended June 30, 2018. The Company’s annualized return on average tangible assets was 1.58% and annualized return on average tangible equity was 16.89% for the six months ended June 30, 2019 compared to 0.69% and 8.43%, respectively, for the six months ended June 30, 2018.

Earnings for both the second quarter of 2019 and the first six months of 2019 included $540,000 of merger-related costs for the recently announced proposed merger with Presidio Bank (“Presidio”).  Earnings for the second quarter of 2018 and for the first six months of 2018 were reduced by merger-related costs of $8.2 million and $8.8 million, respectively.  These costs were associated with the acquisitions of Tri-Valley Bank (“Tri-Valley”) on April 6, 2018, and United American Bank (“United American”) on May 4, 2018.  In addition, the Company recorded a $6.1 million specific reserve for a lending relationship that was placed on nonaccrual during the second quarter of 2018. These costs were partially offset by a $1.3 million legal settlement recovery in the second quarter of 2018. 

Proposed Acquisition of Presidio Bank Update:

On May 16, 2019, the Company and HBC entered into an Agreement and Plan of Merger and Reorganization (the “Merger Agreement”) with Presidio Bank, a California state-chartered commercial bank (“Presidio”), pursuant to

44

which the Company will acquire Presidio in an all stock merger by merging Presidio with and into HBC (the “Merger”). HBC will survive the Merger and will continue the commercial banking operations of the combined bank following the Merger. The consideration payable to Presidio shareholders upon completion of the Merger (“Merger Consideration”) will consist of whole shares of the Company’s common stock, and cash in lieu of fractional shares of the Company’s common stock. Upon consummation of the Merger, each share of Presidio common stock outstanding immediately prior to the effective time of the Merger will be canceled and converted into the right to receive s fixed exchange ratio of  2.47 shares of the Company’s common stock (the “per share exchange ratio”). Presidio stock options will vest and the Company will assume the stock options which will then be adjusted for the per share exchange ratio. Each Presidio restricted stock unit will vest and be converted into shares of the Company’s common stock in accordance with the per share exchange ratio. Heritage and Presidio will hold their respective special shareholder meetings on August 27, 2019 for shareholders of record as July 10, 2019.

Tri-Valley Bank and United American Bank Mergers

The Company completed the merger of its wholly-owned bank subsidiary Heritage Bank of Commerce with Tri-Valley Bank (“Tri-Valley”) effective as of the close on April 6, 2018. Tri-Valley’s results of operations were included in the Company’s results of operations beginning April 7, 2018.

Tri-Valley was a full-service California state-chartered commercial bank with branches in San Ramon and Livermore, California and served businesses and individuals primarily in Contra Costa and Alameda counties in Northern California.  The Company closed the San Ramon office on July 13, 2018.

The Company completed the merger of its wholly-owned bank subsidiary Heritage Bank of Commerce with United American Bank (“United American”) effective as of the close on May 4, 2018. United American’s results of operations were included in the Company’s results of operations beginning May 5, 2018.

United American was a full-service commercial bank located in San Mateo County with full-service branches located in San Mateo, Redwood City and Half Moon Bay, California and serviced businesses, professionals and individuals.  The Company closed the Half Moon Bay office on August 10, 2018. 

Factoring Activities - Bay View Funding

Based in Santa Clara, California, Bay View Funding provides business-essential working capital factoring financing to various industries throughout the United States. The following table reflects selected financial information for Bay View Funding for the periods indicated:

	June 30,		June 30,
	2019		2018
	(Dollars in thousands)
Total factored receivables	$	49,831	$	63,486
Average factored receivables
For the three months ended	$	45,708	$	52,251
For the six months ended	$	47,097	$	50,670
Total full time equivalent employees		37		37

Second Quarter 2019 Highlights

The following are important factors that impacted the Company’s results of operations:

· 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, primarily due to the positive impact of rising interest rates. For the first six months of 2019, net interest income increased 10% to $62.0 million, compared to $56.5 million for the first six months of 2018, primarily due to the impact of the increase in loans and deposits from the Tri-Valley and United American acquisitions, and the positive impact of rising interest rates. 

45

· For the second quarter of 2019, the fully tax equivalent (“FTE”) net interest margin increased 8 basis points to 4.38% 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. 

· For the first six months of 2019, the net interest margin increased 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 average yield on the 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 Company’s legacy loan portfolio (excluding the purchased residential loans, purchased commercial real estate (“CRE”) loans, factored receivables portfolio, and accretion of the loan purchase discount from the acquisitions) increased 34 basis points for the second quarter of 2019, compared to the second quarter of 2018.

· The yield on the loan portfolio increased to 5.94% for the first six months of 2019, compared to 5.76% for the first six months of 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 yield on the Company’s legacy loan portfolio (excluding the purchased residential loans, purchased CRE loans, factored receivables portfolio, and accretion of the loan purchase discount from the acquisitions) increased 26 basis points for the first six months of 2019, compared to the first six months of 2018. 

· The accretion of the loan purchase discount into loan interest income from the acquisitions was $419,000 for the second quarter of 2019 compared to $669,000 for the second quarter of 2018.  The accretion of the loan purchase discount into loan interest income from the acquisitions was $873,000 for the first six months of 2019, compared to $726,000 for the first six months of 2018. 

· 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.

· 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 of for the second quarter of 2018.  For the six months ended June 30, 2019, there was a $1.8 million credit to the provision for loan losses, 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.

· 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

46

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. 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. 

· Noninterest 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, severance and retention expense totaled $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.

· The efficiency ratio for the scond quarter of 2019 was 54.76%, compared to 75.47% for the second quarter of 2018. 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.

· The income tax expense for the second quarter of 2019 was $4.6 million, compared to income tax benefit of ($31,000) for the second quarter of 2018.  The effective tax rate for the second quarter of 2019 was 28.9%, compared to (3.5%) for the second quarter of 2018. 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 six months ended June 30, 2019 was 28.0%, compared to 24.8% for the six months ended June 30, 2018.

The following are important factors in understanding our current financial condition and liquidity position:

· Cash, other investments and interest‑bearing deposits in other financial institutions and securities available‑for‑sale, at fair value, increased 18% to $659.2 million at June 30, 2019, from $559.7 million at June 30, 2018, and increased 6% from $623.6 million at December 31, 2018.

· 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 $377.2 million at December 31, 2018.

· 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”), $31.5 million in land and construction loans, $6.1 million in purchased 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. Loans, excluding loans held-for-sale, decreased $8.6 million to $1.88 billion at June 30, 2019, compared to $1.89 billion December 31, 2018.

· Nonperforming assets (“NPAs”) were $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 $14.9 million, or 0.48% of total assets, at December 31, 2018.  The increase in NPAs at June 30, 2019, compared to June 30, 2018, was primarily due to two lending relationships, which is discussed in more detail below under Credit Quality. 

47

· 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 $23.4 million, 0.76% of total assets, at December 31, 2018.  There were no foreclosed assets at June 30, 2019, June 30, 2018, and December 31, 2018.

· 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 $280,000 for the fourth quarter of 2018.

· The allowance for loan losses (“ALLL”) at June 30, 2019 was $26.6 million, or 1.42% of total loans, representing 156.49% of total nonperforming loans. The allowance for loan losses at June 30, 2018 was $26.7 million, or 1.36% of total loans, representing 100.45% of total nonperforming loans. The allowance for loan losses at December 31, 2018 was $27.8 million, or 1.48% of total loans, representing 187.06% of total nonperforming loans.

· 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. Total deposits deceased $15.1 million or (1%) from $2.64 billion at December 31, 2018. 

· 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.  Deposits, excluding all time deposits and CDARS deposits, at June 30, 2019 deceased $12.8 million, or (1%) compared to $2.48 billion at December 31, 2018.

· The ratio of noncore funding (which consists of time deposits of $250,000 and over, CDARS deposits, brokered deposits, securities under an agreement to repurchase, subordinated debt, and short‑term borrowings) to total assets was 4.62% at June 30, 2019, compared to 4.41% at June 30, 2018 and 4.53% at December 31, 2018.

· The loan to deposit ratio was 71.60% at June 30, 2019, compared to 72.91% at June 30, 2018, and 71.52% at December 31, 2018.

· The Company’s consolidated capital ratios exceeded regulatory guidelines and the Bank’s capital ratios exceeded the regulatory guidelines for a well‑capitalized financial institution under the Basel III regulatory requirements at June 30, 2019.

							Well-capitalized
	Heritage			Heritage			Financial Institution			Basel III Minimum
	Commerce			Bank of			Basel III PCA Regulatory			Regulatory
Capital Ratios	Corp			Commerce			Guidelines			Requirement(1)
Total Risk-Based		15.9	%		14.9	%		10.0	%		10.5	%
Tier 1 Risk-Based		13.0	%		13.7	%		8.0	%		8.5	%
Common Equity Tier 1 Risk-based		13.0	%		13.7	%		6.5	%		7.0	%
Leverage		9.9	%		10.5	%		5.0	%		4.0	%

(1) Fully phased in Basel III requirements for both HCC and HBC include a 2.5% capital conservation buffer, except the leverage ratio.

Deposits

The composition and cost of the Company’s deposit base are important in analyzing the Company’s net interest margin and balance sheet liquidity characteristics. The Company’s depositors are generally located in its primary market area. Depending on loan demand and other funding requirements, the Company also obtains deposits from wholesale sources including deposit brokers. HBC is a member of the Certificate of Deposit Account Registry Service (“CDARS”) program. The CDARS program allows customers with deposits in excess of FDIC insured limits to obtain coverage on time deposits through a network of banks within the CDARS program. The Company has a policy to monitor all deposits that may be sensitive to interest rate changes to help assure that liquidity risk does not become excessive due to concentrations.

48

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. Total deposits deceased $15.1 million or (1%) from $2.64 billion at December 31, 2018.  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.  Deposits, excluding all time deposits and CDARS deposits, at June 30, 2019 deceased $12.8 million, or (1%) compared to $2.48 billion at December 31, 2018.

Liquidity

Our liquidity position refers to our ability to maintain cash flows sufficient to fund operations and to meet obligations and other commitments in a timely fashion. The Company manages liquidity to be able to meet unexpected sudden changes in levels of its assets or deposit liabilities without maintaining excessive amounts of balance sheet liquidity. Excess balance sheet liquidity can negatively impact the Company’s interest margin. At June 30, 2019, we had $276.0 million in cash and cash equivalents and approximately $708.4 million in available borrowing capacity from various sources including the Federal Home Loan Bank (“FHLB”), the Federal Reserve Bank of San Francisco (“FRB”), Federal funds facilities with several financial institutions, and line of credit with a correspondent bank. The Company also had $701.0 million at fair value in unpledged securities available at June 30, 2019. Our loan to deposit ratio was 71.60% at June 30 2019, compared to 72.91% at June 30, 2018, and 71.52% at December 31, 2018.

Lending

Our lending business originates principally through our branch offices located in our primary markets. In addition, Bay View Funding provides factoring financing throughout the United States. Total 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 C&I, $31.5 million in land and construction loans, $6.1 million in purchased 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. Loans, excluding loans held-for-sale, decreased $8.6 million to $1.88 billion at June 30, 2019, compared to $1.89 billion December 31, 2018. The loan portfolio remains well-diversified with C&I loans accounting for 30% of the loan portfolio at June 30, 2019, which included $49.8 million of factored receivables. CRE loans accounted for 55% of the total loan portfolio, of which 38% were occupied by businesses that own them.  Land and construction loans accounted for 5% of total loans, consumer and home equity loans accounted for 7% of total loans, and residential mortgage loans accounted for the remaining 3% of total loans at June 30, 2019.  

Net Interest Income

The management of interest income and expense is fundamental to the performance of the Company. Net interest income, the difference between interest income and interest expense, is the largest component of the Company’s total revenue. Management closely monitors both total net interest income and the net interest margin (net interest income divided by average earning assets). 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, primarily due to the positive impact of rising interest rates. For the first six months of 2019, net interest income increased 10% to $62.0 million, compared to $56.5 million for the first six months of 2018, primarily due to the impact of the increase in loans and deposits from the Tri-Valley and United American acquisitions, and the positive impact of rising interest rates. 

The Company through its asset and liability policies and practices seeks to maximize net interest income without exposing the Company to an excessive level of interest rate risk. Interest rate risk is managed by monitoring the pricing, maturity and repricing options of all classes of interest‑bearing assets and liabilities. This is discussed in more detail under “Liquidity and Asset/Liability Management.” In addition, we believe there are measures and initiatives we can take to improve the net interest margin, including increasing loan rates, adding floors on floating rate loans, reducing nonperforming assets, managing deposit interest rates, and reducing higher cost deposits.

The net interest margin is also adversely impacted by the reversal of interest on nonaccrual loans and the reinvestment of loan payoffs into lower yielding investment securities and other short‑term investments.

Management of Credit Risk

We continue to identify, quantify, and manage our problem loans. Early identification of problem loans and potential future losses helps enable us to resolve credit issues with potentially less risk and ultimate losses. We maintain

49

an allowance for loan losses in an amount that we believe is adequate to absorb probable incurred losses in the portfolio. While we strive to carefully manage and monitor credit quality and to identify loans that may be deteriorating, circumstances can change at any time for loans included in the portfolio that may result in future losses, that as of the date of the financial statements have not yet been identified as potential problem loans. Through established credit practices, we adjust the allowance for loan losses accordingly. However, because future events are uncertain, there may be loans that will deteriorate, some of which could occur in an accelerated time‑frame. As a result, future additions to the allowance for loan losses may be necessary. Because the loan portfolio contains a number of commercial loans, commercial real estate, construction and land development loans with relatively large balances, deterioration in the credit quality of one or more of these loans may require a significant increase to the allowance for loan losses. Future additions to the allowance may also be required based on changes in the financial condition of borrowers. Additionally, Federal and state banking regulators, as an integral part of their supervisory function, periodically review our allowance for loan losses. These regulatory agencies may require us to recognize further loan loss provisions or charge‑offs based upon their judgments, which may be different from ours. Any increase in the allowance for loan losses would have an adverse effect, which may be material, on our financial condition and results of operation. Further discussion of the management of credit risk appears under “Provision for Loan Losses” and “Allowance for Loan Losses.”

In June 2016, the FASB issued new guidance on measurement of credit losses on financial instruments, which is the final guidance on the new current expected credit loss (“CECL”) model.  The new guidance will replace the incurred loss impairment methodology in current GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to estimate future credit loss estimates.  While early application is permitted for fiscal years beginning after December 15, 2018, the Company plans to adopt this standard on January 1, 2020. The Company has established a company-wide, cross-functional governance structure, which oversees overall strategy for implementation of CECL. The Company has completed the data validation and is currently parallel processing during the third and fourth quarters of 2019 our existing allowance for loan loss model with CECL prior to implementation. The Company is focused on completing model validation, refining assumptions and continued review of the models. The Company also continues to focus on researching and resolving interpretive accounting issues in the ASU, contemplating various related accounting policies, developing processes and related controls and considering various reporting disclosures.  The magnitude of the change in the Company’s allowance for loan losses at the adoption date will depend upon the nature and characteristics of the portfolio at the adoption date, as well as macroeconomic conditions and forecasts at that time. Further discussion of the adoption of CECL appears in Note 1 – Basis of Presentation – Newly Issued, but not yet Effective Accounting Standards in the financial statements in this Form 10-Q.

Noninterest Income

While net interest income remains the largest single component of total revenues, noninterest income is an important component. A portion of the Company’s noninterest income is associated with its SBA lending activity, consisting of gains on the sale of loans sold in the secondary market and servicing income from loans sold with servicing retained. Other sources of noninterest income include loan servicing fees, service charges and fees, cash surrender value from company owned life insurance policies, and gains on the sale of securities.

Noninterest Expense

Management considers the control of operating expenses to be a critical element of the Company’s performance. Total noninterest expense for the second quarter of 2019 was $18.4 million, compared to $24.9 million for the second quarter of 2018. Noninterest expense for the six months ended June 30, 2019 was $36.4 million, compared to $40.9 million for the six months ended June 30, 2018. The decrease in noninterest expense during the second quarter and the first six months of 2019, was primarily due to costs related to the merger transactions with Tri-Valley and United American during the second quarter and first six months of 2018, partially offset by higher professional fees as a result of a credit to professional fees for recaptured legal fees paid for by the Company during the second quarter of 2018, and merger related costs for both the second quarter and the first six months of 2019 for the recently announced proposed merger with Presidio. 

50

Capital Management

As part of its asset and liability management process, the Company continually assesses its capital position to take into consideration growth, expected earnings, risk profile and potential corporate activities that it may choose to pursue.

RESULTS OF OPERATIONS

The Company earns income from two primary sources. The first is net interest income, which is interest income generated by earning assets less interest expense on interest‑bearing liabilities. The second is noninterest income, which primarily consists of gains on the sale of loans, loan servicing fees, customer service charges and fees, the increase in cash surrender value of life insurance, and gains on the sale of securities. The majority of the Company’s noninterest expenses are operating costs that relate to providing a full range of banking and lending services to our customers.

Net Interest Income and Net Interest Margin

The level of net interest income depends on several factors in combination, including yields on earning assets, the cost of interest‑bearing liabilities, the relative volumes of earning assets and interest‑bearing liabilities, and the mix of products which comprise the Company’s earning assets, deposits, and other interest‑bearing liabilities. To maintain its net interest margin the Company must manage the relationship between interest earned and paid.

The following Distribution, Rate and Yield table presents the average amounts outstanding for the major categories of the Company’s balance sheet, the average interest rates earned or paid thereon, and the resulting net interest margin on average interest earning assets for the periods indicated. Average balances are based on daily averages.

51

Distribution, Rate and Yield

	Three Months Ended						Three Months Ended
	June 30, 2019						June 30, 2018
			Interest		Average				Interest		Average
	Average		Income /		Yield /		Average		Income /		Yield /
	Balance		Expense		Rate		Balance		Expense		Rate
	(Dollars in thousands)
Assets:
Loans, gross (1)(2)	$	1,835,474	$	27,251	5.96	%	$	1,838,411	$	26,355	5.75	%
Securities — taxable		707,710		4,136	2.34	%		668,243		3,767	2.26	%
Securities — exempt from Federal tax (3)		85,329		692	3.25	%		88,102		708	3.22	%
Other investments, interest-bearing deposits
in other financial institutions and Federal funds sold		216,164		1,556	2.89	%		232,030		1,298	2.24	%
Total interest earning assets		2,844,677		33,635	4.74	%		2,826,786		32,128	4.56	%
Cash and due from banks		37,051						38,949
Premises and equipment, net		7,050						7,368
Goodwill and other intangible assets		94,947						85,231
Other assets		86,318						88,232
Total assets	$	3,070,043					$	3,046,566
Liabilities and shareholders’ equity:
Deposits:
Demand, noninterest-bearing	$	1,001,914					$	991,902
Demand, interest-bearing		686,872		612	0.36	%		662,303		465	0.28	%
Savings and money market		744,475		1,034	0.56	%		793,846		619	0.31	%
Time deposits — under $100		19,267		22	0.46	%		22,650		23	0.41	%
Time deposits — $100 and over		126,303		326	1.04	%		136,048		129	0.38	%
CDARS — interest-bearing demand, money
market and time deposits		12,102		1	0.03	%		15,831		3	0.08	%
Total interest-bearing deposits		1,589,019		1,995	0.50	%		1,630,678		1,239	0.30	%
Total deposits		2,590,933		1,995	0.31	%		2,622,580		1,239	0.19	%
Subordinated debt, net of issuance costs		39,431		577	5.87	%		39,245		577	5.90	%
Short-term borrowings		104		1	3.86	%		110		—	0.00	%
Total interest-bearing liabilities		1,628,554		2,573	0.63	%		1,670,033		1,816	0.44	%
Total interest-bearing liabilities and demand,
noninterest-bearing / cost of funds		2,630,468		2,573	0.39	%		2,661,935		1,816	0.27	%
Other liabilities		58,970						53,421
Total liabilities		2,689,438						2,715,356
Shareholders’ equity		380,605						331,210
Total liabilities and shareholders’ equity	$	3,070,043					$	3,046,566
Net interest income / margin				31,062	4.38	%				30,312	4.30	%
Less tax equivalent adjustment				(146)						(148)
Net interest income			$	30,916					$	30,164

(1) Includes loans held‑for‑sale. Nonaccrual loans are included in average balance.

(2) Yield amounts earned on loans include fees and costs. The accretion of net deferred loan fees into loan interest income was $210,000 for the second quarter of 2019, compared to $32,000 for the second quarter of 2018.

(3) Reflects the fully tax equivalent adjustment for Federal tax-exempt income based on a 21%.

52

	Six Months Ended						Six Months Ended
	June 30, 2019						June 30, 2018
			Interest		Average				Interest		Average
	Average		Income /		Yield /		Average		Income /		Yield /
	Balance		Expense		Rate		Balance		Expense		Rate
Assets:
Loans, gross (1)(2)	$	1,836,277		54,058	5.94	%	$	1,704,246	$	48,639	5.76	%
Securities — taxable		724,406		8,645	2.41	%		681,549		7,629	2.26	%
Securities — exempt from Federal tax		85,634		1,386	3.26	%		88,285		1,418	3.24	%
Other investments, interest-bearing deposits
in other financial institutions and Federal funds sold		218,704		3,141	2.90	%		239,420		2,469	2.08	%
Total interest earning assets		2,865,021		67,230	4.73	%		2,713,500		60,155	4.47	%
Cash and due from banks		37,129						36,460
Premises and equipment, net		7,070						7,336
Goodwill and other intangible assets		95,249						68,293
Other assets		85,235						82,621
Total assets	$	3,089,704					$	2,908,210
Liabilities and shareholders’ equity:
Deposits:
Demand, noninterest-bearing	$	1,012,967					$	969,002
Demand, interest-bearing		694,246		1,230	0.36	%		635,562		768	0.24	%
Savings and money market		747,815		1,941	0.52	%		741,841		1,062	0.29	%
Time deposits — under $100		19,820		44	0.45	%		19,983		35	0.35	%
Time deposits — $100 and over		126,436		613	0.98	%		131,525		327	0.50	%
CDARS — interest-bearing demand, money
market and time deposits		12,709		3	0.05	%		16,144		5	0.06	%
Total interest-bearing deposits		1,601,026		3,831	0.48	%		1,545,055		2,197	0.29	%
Total deposits		2,613,993		3,831	0.30	%		2,514,057		2,197	0.18	%
Subordinated debt, net of issuance costs		39,408		1,148	5.87	%		39,215		1,148	5.90	%
Short-term borrowings		105		1	1.92	%		74		—	0.00	%
Total interest-bearing liabilities		1,640,539		4,980	0.61	%		1,584,344		3,345	0.43	%
Total interest-bearing liabilities and demand,
noninterest-bearing / cost of funds		2,653,506		4,980	0.38%	%		2,553,346		3,345	0.26	%
Other liabilities		60,447						53,921
Total liabilities		2,713,953						2,607,267
Shareholders’ equity		375,751						300,943
Total liabilities and shareholders’ equity	$	3,089,704					$	2,908,210
Net interest income / margin				62,250	4.38	%				56,810	4.22	%
Less tax equivalent adjustment				(292)						(298)
Net interest income			$	61,958					$	56,512

(1) Includes loans held‑for‑sale. Nonaccrual loans are included in average balance.

(2) Yield amounts earned on loans include fees and costs. The accretion of net deferred loan fees into loan interest income was $301,000 for the six months ended June 30, 2019, compared to $249,000 for the six months of 2018.

(3) Reflects the fully tax equivalent adjustment for Federal tax-exempt income based on a 21%.

53

Volume and Rate Variances

The Volume and Rate Variances table below sets forth the dollar difference in interest earned and paid for each major category of interest‑earning assets and interest‑bearing liabilities for the noted periods, and the amount of such change attributable to changes in average balances (volume) or changes in average interest rates. Volume variances are equal to the increase or decrease in the average balance times the prior period rate, and rate variances are equal to the increase or decrease in the average rate times the prior period average balance. Variances attributable to both rate and volume changes are equal to the change in rate times the change in average balance and are included below in the average volume column.

	Three Months Ended June 30,
	2019 vs. 2018
	Increase (Decrease)
	Due to Change in:
	Average		Average		Net
	Volume		Rate		Change
	(Dollars in thousands)
Income from the interest earning assets:
Loans, gross	$	(66)	$	962	$	896
Securities — taxable		237		132		369
Securities — exempt from Federal tax (1)		(22)		6		(16)
Other investments, interest-bearing deposits
in other financial institutions and Federal funds sold		(116)		374		258
Total interest income on interest-earning assets		33		1,474		1,507
Expense from the interest-bearing liabilities:
Demand, interest-bearing		18		129		147
Savings and money market		(80)		495		415
Time deposits — under $100		(4)		3		(1)
Time deposits — $100 and over		(27)		224		197
Time deposits — brokered		—		—		—
CDARS — interest-bearing demand, money market
and time deposits		—		(2)		(2)
Subordinated debt, net of issuance costs		3		(3)		—
Short-term borrowings		—		1		1
Total interest expense on interest-bearing liabilities		(90)		847		757
Net interest income	$	123	$	627		750
Less tax equivalent adjustment						2
Net interest income					$	752

(1) Reflects the fully tax equivalent adjustment for Federal tax-exempt income based on a 21%.

54

	Six Months Ended June 30,
	2019 vs. 2018
	Increase (Decrease)
	Due to Change in:
	Average		Average		Net
	Volume		Rate		Change
	(Dollars in thousands)
Income from the interest earning assets:
Loans, gross	$	3,858	$	1,561	$	5,419
Securities — taxable		500		516		1,016
Securities — exempt from Federal tax (1)		(41)		9		(32)
Other investments, interest-bearing deposits
in other financial institutions and Federal funds sold		(302)		974		672
Total interest income on interest-earning assets		4,015		3,060		7,075
Expense from the interest-bearing liabilities:
Demand, interest-bearing		95		367		462
Savings and money market		28		851		879
Time deposits — under $100		(1)		10		9
Time deposits — $100 and over		(26)		312		286
CDARS — interest-bearing demand, money market
and time deposits		(1)		(1)		(2)
Subordinated debt, net of issuance costs		6		(6)		—
Short-term borrowings		—		1		1
Total interest expense on interest-bearing liabilities		101		1,534		1,635
Net interest income	$	3,914	$	1,526		5,440
Less tax equivalent adjustment						6
Net interest income					$	5,446

(1) Reflects the fully tax equivalent adjustment for Federal tax-exempt income based on a 21%.

The Company’s net interest margin (FTE), expressed as a percentage of average earning assets, increased 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, and a decline in the accretion of the loan purchase discount into loan interest income from the Company’s acquisitions.  

For the first six months of 2019, the net interest margin increased 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.

The average yield on the 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 Company’s legacy loan portfolio (excluding the purchased residential loans, purchased CRE loans, factored receivables portfolio, and accretion of the loan purchase discount from the acquisitions) increased 34 basis points for the second quarter of 2019, compared to the second quarter of 2018.

The yield on the loan portfolio increased to 5.94% for the first six months of 2019, compared to 5.76% for the first six months of 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 yield on the Company’s legacy loan portfolio (excluding the purchased residential loans, purchased CRE loans, factored receivables portfolio, and accretion of the loan purchase discount from the acquisitions) increased 26 basis points for the first six months of 2019 compared to the first six months of 2018. 

55

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. The cost of total deposits was 0.30% for the six months of 2019, compared to 0.18% for the first six months of 2018.

Net interest income, before the 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, primarily due to the positive impact of rising interest rates. Net interest income increased 10% to $62.0 million for the six months ended June 30, 2019, compared to $56.5 million for the six months ended June 30, 2018, primarily due to the impact of the increase in loans and deposits from the Tri-Valley and United American acquisitions, and the positive impact of rising interest rates.

Provision for Loan Losses

Credit risk is inherent in the business of making loans. The Company establishes an allowance for loan losses through charges to earnings, which are presented in the statements of income as the provision for loan losses. Specifically identifiable and quantifiable known losses are promptly charged off against the allowance. The provision for loan losses is determined by conducting a quarterly evaluation of the adequacy of the Company’s allowance for loan losses and charging the shortfall or excess, if any, to the current quarter’s expense. This has the effect of creating variability in the amount and frequency of charges to the Company’s earnings. The provision for loan losses and level of allowance for each period are dependent upon many factors, including loan growth, net charge‑offs, changes in the composition of the loan portfolio, delinquencies, management’s assessment of the quality of the loan portfolio, the valuation of problem loans and the general economic conditions in the Company’s market area.

There was a $740,000 credit to the provision for loan losses for the second quarter of 2019, compared to a $7.2 millon provision for loan losses for the second quarter of 2018. For the six months ended June 30, 2019, there was a $1.8 million credit to the provision for loan losses 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. Provisions for loan losses are charged to operations to bring the allowance for loan losses to a level deemed appropriate by the Company based on the factors discussed under “Allowance for Loan Losses.”

The allowance for loan losses totaled $26.6 million, or 1.42% of total loans at June 30, 2019, compared to $26.7 million, or 1.36% of total loans at June 30, 2018, and $27.8 million, or 1.48% of total loans at December 31, 2018.  The allowance for loan losses to total nonperforming loans was 156.49% at June 30, 2019, compared to 100.45% at June 30, 2018, and 187.06% at December 31, 2018.  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 $280,000 for the fourth quarter of 2018.

Noninterest Income

The following table sets forth the various components of the Company’s noninterest income for the periods indicated:

					Increase
	Three Months Ended				(decrease)
	June 30,				2019 versus 2018
	2019		2018		Amount		Percent
	(Dollars in thousands)
Service charges and fees on deposit accounts	$	1,177	$	972	$	205	21	%
Gain on sales of securities		548		179		369	206	%
Increase in cash surrender value of life insurance		333		237		96	41	%
Servicing income		150		189		(39)	(21)	%
Gain on sales of SBA loans		36		80		(44)	(55)	%
Other		521		1,123		(602)	(54)	%
Total	$	2,765	$	2,780	$	(15)	(1)	%

56

					Increase
	Six Months Ended				(decrease)
	June 30,				2019 versus 2018
	2019		2018		Amount		Percent
	(Dollars in thousands)
Service charges and fees on deposit accounts	$	2,338	$	1,874	$	464	25	%
Gain on sales of securities		548		266		282	106	%
Increase in cash surrender value of life insurance		663		600		63	11	%
Servicing income		341		370		(29)	(8)	%
Gain on sales of SBA loans		175		315		(140)	(44)	%
Other		1,168		1,550		(382)	(25)	%
Total	$	5,233	$	4,975	$	258	5	%

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.  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 SBA loans for the first six months of 2019, and proceeds from a legal settlement in the first six months of 2018. 

Historically, a portion of the Company’s noninterest income has been associated with its SBA lending activity, as gains on the sale of loans sold in the secondary market and servicing income from loans sold with servicing rights retained. For the second quarter ended June 30, 2019, SBA loan sales resulted in a $36,000 gain, compared to a $80,000 gain on sales of SBA loans for the second quater ended June 30, 2018. For the six months ended June 30, 2019, SBA loan sales resulted in a $175,000 gain, compared to a $315,000 gain on sale of SBA loans for the six months ended June 30, 2018.

The servicing assets that result from the sales of SBA loans with servicing retained are amortized over the expected term of the loans using a method approximating the interest method. Servicing income generally declines as the respective loans are repaid.

Noninterest Expense

The following table indicates the percentage of noninterest expense in each category for the periods indicated:

					Increase
	Three Months Ended				(Decrease)
	June 30,				2019 versus 2018
	2019		2018		Amount		Percent
	(Dollars in thousands)
Salaries and employee benefits	$	10,698	$	11,103	$	(405)	(4)	%
Occupancy and equipment		1,578		1,262		316	25	%
Professional fees		753		633		120	19	%
Data processing		732		622		110	18	%
Software subscriptions		556		599		(43)	(7)	%
Amortization of intangible assets		554		464		90	19	%
Merger-related costs (1)		540		8,214		(7,674)	(93)	%
Insurance expense		439		399		40	10	%
Recovery of legal fees (2)		—		(922)		922	(100)	%
Other		2,595		2,488		107	4	%
Total	$	18,445	$	24,862	$	(6,417)	(26)	%

(1) Severance and retention expense of $3.4 milllion for the second quarter of 2018 is included in salaries and employee benefits in the Consolidated Statements of Income. Other acquisition and integration costs of $540,000 and $4.8 million for the second quarter of 2019 and the second quarter of 2018, respectively, is included in other noninterest expense in the Consolidated Statements of Income. 

(2) Included in professional fees in the the Consolidated Statements of Income

57

					Increase
	Six Months Ended				(Decrease)
	June 30,				2019 versus 2018
	2019		2018		Amount		Percent
	(Dollars in thousands)
Salaries and employee benefits	$	21,468	$	20,570	$	898	4	%
Occupancy and equipment		3,084		2,368		716	30	%
Professional fees		1,571		1,317		254	19	%
Data processing		1,411		976		435	45	%
Software subscriptions		1,145		1,192		(47)	(4)	%
Amortization of intangible assets		1,107		705		402	57	%
Merger-related costs (1)		540		8,829		(8,289)	(94)	%
Insurance expense		875		806		69	9	%
Recovery of legal fees (2)		—		(922)		922	(100)	%
Other		5,162		5,011		151	3	%
Total	$	36,363	$	40,852	$	(4,489)	(11)	%

Noninterest Expense by Category

	Three Months Ended June 30,
			Percent of				Percent of
	2019		Total		2018		Total
	(Dollars in thousands)
Salaries and employee benefits	$	10,698	58	%	$	11,103	45	%
Occupancy and equipment		1,578	9	%		1,262	5	%
Professional fees		753	4	%		633	3	%
Data processing		732	4	%		622	2	%
Software subscriptions		556	3	%		599	2	%
Amortization of intangible assets		554	3	%		464	2	%
Merger-related costs (1)		540	3	%		8,214	33	%
Insurance expense		439	2	%		399	2	%
Recovery of legal fees (2)		—	0	%		(922)	(4)	%
Other		2,595	14	%		2,488	10	%
Total	$	18,445	100	%	$	24,862	100	%

(1) Severance and retention expense of $3.4 milllion for both the second quarter and first six months of 2018 is included in salaries and employee benefits in the Consolidated Statements of Income. Other acquisition and integration costs of $540,000 and $4.8 million for the second quarter of 2019 and the second quarter of 2018, respectively, is included in other noninterest expense in the Consolidated Statements of Income.  Other acquisition and integration costs of $540,000 and $5.4 million for the first six months of 2019 and the first six months 2018, respectively, is included in other noninterest expense in the Consolidated Statements of Income.

(2) Included in professional fees in the the Consolidated Statements of Income

58

	Six Months Ended June 30,
	2019				2018
			Percent				Percent
	Amount		of Total		Amount		of Total
	(Dollars in thousands)
Salaries and employee benefits	$	21,468	59	%	$	20,570	50	%
Occupancy and equipment		3,084	9	%		2,368	6	%
Professional fees		1,571	4	%		1,317	3	%
Data processing		1,411	4	%		976	2	%
Software subscriptions		1,145	3	%		1,192	3	%
Amortization of intangible assets		1,107	3	%		705	2	%
Merger-related costs (1)		540	2	%		8,829	22	%
Insurance expense		875	2	%		806	2	%
Recovery of legal fees (2)		—	—	%		(922)	(2)	%
Other		5,162	14	%		5,011	12	%
Total	$	36,363	100	%	$	40,852	100	%

(1) Severance and retention expense of $3.4 milllion for both the second quarter and first six months of 2018 is included in salaries and employee benefits in the Consolidated Statements of Income. Other acquisition and integration costs of $540,000 and $4.8 million for the second quarter of 2019 and the second quarter of 2018, respectively, is included in other noninterest expense in the Consolidated Statements of Income.  Other acquisition and integration costs of $540,000 and $5.4 million for the first six months of 2019 and the first six months 2018, respectively, is included in other noninterest expense in the Consolidated Statements of Income.

(2) Included in professional fees in the the Consolidated Statements of Income

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.  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 data processing fees, amortization costs, and merger related costs for the recently announced proposed merger with Presidio. 

Noninterest expense included pre-tax acquisition and integration costs of $8.2 million and $8.8 million for the second quarter of 2018 and first six months of 2018, respectively, related to the Tri-Valley and United American acquisitions. 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. Full time equivalent employees were 309, 303, and 302 at June 30, 2019, June 30, 2018, and December 31, 2018, respectively.

Income Tax Expense

The Company computes its provision for income taxes on a quarterly basis. The effective tax rate is determined by applying the Company’s statutory income tax rates to pre‑tax book income as adjusted for permanent differences between pre‑tax book income and actual taxable income. These permanent differences include, but are not limited to, increases in the cash surrender value of life insurance policies, interest on tax‑exempt securities, certain expenses that are not allowed as tax deductions, and tax credits.

The following table shows the Company’s effective income tax rates for the periods indicated:

	June 30,				June 30,
	2019		2018		2019		2018
Effective income tax rate	28.9	%	(3.5)	%	28.0	%	24.8	%

The Company’s income tax expense for the second quarter of 2019 was $4.6 million, compared to income tax benefit of ($31,000) for the second quarter of 2018.  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. A year-to-date tax adjustment due to lower pre-

59

tax income for the second quarter of 2018, compared to the first quarter of 2018, resulted in a year-to-date tax adjustment resulting in an income tax benefit of ($31,000) and the effective tax rate of (3.5)% for the second quarter of 2018. 

Some items of income and expense are recognized in one year for tax purposes, and another when applying generally accepted accounting principles, which leads to timing differences between the Company’s actual tax liability, and the amount accrued for this liability based on book income. These temporary differences comprise the “deferred” portion of the Company’s tax expense or benefit, which is accumulated on the Company’s books as a deferred tax asset or deferred tax liability until such time as they reverse.

Realization of the Company’s deferred tax assets is primarily dependent upon the Company generating sufficient future taxable income to obtain benefit from the reversal of net deductible temporary differences and the utilization of tax credit carryforwards and the net operating loss carryforwards for Federal and state income tax purposes. The amount of deferred tax assets considered realizable is subject to adjustment in future periods based on estimates of future taxable income. Under generally accepted accounting principles a valuation allowance is required to be recognized if it is “more likely than not” that the deferred tax assets will not be realized. The determination of the realizability of the deferred tax assets is highly subjective and dependent upon judgment concerning management’s evaluation of both positive and negative evidence, including forecasts of future income, cumulative losses, applicable tax planning strategies, and assessments of current and future economic and business conditions.

The Company had net deferred tax assets of $22.8 million at June 30, 2019, $27.9 million at June 30, 2018,  and $27.1 million at December 31, 2018. After consideration of the matters in the preceding paragraph, the Company determined that it is more likely than not that the net deferred tax assets at June 30, 2019, June 30, 2018, and December 31, 2018 will be fully realized in future years.  

Business Segment Information

The following presents the Company’s operating segments. Transactions between segments consist primarily of borrowed funds. Intersegment interest expense is allocated to the Factoring segment based on the Company’s prime rate and funding costs. The provision for loan loss is allocated based on the segment’s allowance for loan loss determination which considers the effects of charge‑offs. Noninterest income and expense directly attributable to a segment are assigned to it. Taxes are paid on a consolidated basis and allocated for segment purposes. The Factoring segment includes only factoring originated by Bay View Funding.

	Three Months Ended June 30, 2019
	Banking(1)		Factoring		Consolidated
	(Dollars in thousands)
Interest income	$	30,521	$	2,968	$	33,489
Intersegment interest allocations		292		(292)		—
Total interest expense		2,573		—		2,573
Net interest income		28,240		2,676		30,916
Provision (credit) for loan losses		(744)		4		(740)
Net interest income after provision		28,984		2,672		31,656
Noninterest income		2,641		124		2,765
Noninterest expense		16,784		1,661		18,445
Intersegment expense allocations		132		(132)		—
Income before income taxes		14,973		1,003		15,976
Income tax expense		4,327		296		4,623
Net income	$	10,646	$	707	$	11,353
Total assets	$	3,045,378	$	62,653	$	3,108,031
Loans, net of deferred fees	$	1,827,936	$	49,831	$	1,877,767
Goodwill	$	70,709	$	13,044	$	83,753

(1) Includes the holding company’s results of operations

(2) The banking segment’s noninterest expense includes merger-related costs of $540,000 for the second  quarter of 2019

60

	Three Months Ended June 30, 2018
	Banking(1)		Factoring		Consolidated
	(Dollars in thousands)
Interest income	$	28,625	$	3,355	$	31,980
Intersegment interest allocations		376		(376)		—
Total interest expense		1,816		—		1,816
Net interest income		27,185		2,979		30,164
Provision for loan losses		7,141		57		7,198
Net interest income after provision		20,044		2,922		22,966
Noninterest income		2,531		249		2,780
Noninterest expense (2)		23,301		1,561		24,862
Intersegment expense allocations		227		(227)		—
Income before income taxes		(499)		1,383		884
Income tax expense		(440)		409		(31)
Net income	$	(59)	$	974	$	915
Total assets	$	3,044,221	$	78,986	$	3,123,207
Loans, net of deferred fees	$	1,893,147	$	63,486	$	1,956,633
Goodwill	$	71,373	$	13,044	$	84,417

(1) Includes the holding company’s results of operations

(2) The banking segment’s noninterest expense includes merger-related costs of $8,214,000 for the second quarter of 2018

	Six Months Ended June 30, 2019
	Banking(1)		Factoring		Consolidated
	(Dollars in thousands)
Interest income	$	61,017	$	5,921	$	66,938
Intersegment interest allocations		606		(606)		—
Total interest expense		4,980		—		4,980
Net interest income		56,643		5,315		61,958
Provision for loan losses		(1,636)		(165)		(1,801)
Net interest income after provision		58,279		5,480		63,759
Noninterest income		4,873		360		5,233
Noninterest expense		32,985		3,378		36,363
Intersegment expense allocations		253		(253)		—
Income before income taxes		30,420		2,209		32,629
Income tax expense		8,477		653		9,130
Net income	$	21,943	$	1,556	$	23,499
Total assets	$	3,045,378	$	62,653	$	3,108,031
Loans, net of deferred fees	$	1,827,936	$	49,831	$	1,877,767
Goodwill	$	70,709	$	13,044	$	83,753

(1) Includes the holding company’s results of operations

(2) The banking segment’s noninterest expense includes merger-related costs of $540,000 for the first six months of 2019

61

	Six Months Ended June 30, 2018
	Banking(1)		Factoring		Consolidated
	(Dollars in thousands)
Interest income	$	53,356	$	6,501	$	59,857
Intersegment interest allocations		703		(703)		—
Total interest expense		3,345		—		3,345
Net interest income		50,714		5,798		56,512
Provision for loan losses		7,629		75		7,704
Net interest income after provision		43,085		5,723		48,808
Noninterest income		4,617		358		4,975
Noninterest expense (2)		37,768		3,084		40,852
Intersegment expense allocations		402		(402)		—
Income before income taxes		10,336		2,595		12,931
Income tax expense		2,440		767		3,207
Net income	$	7,896	$	1,828	$	9,724
Total assets	$	3,044,221	$	78,986	$	3,123,207
Loans, net of deferred fees	$	1,893,147	$	63,486	$	1,956,633
Goodwill	$	71,373	$	13,044	$	84,417

(1) Includes the holding company’s results of operations

(2) The banking segment’s noninterest expense includes merger-related costs of $8,829,000 for the first six months of 2018

Banking.  Our banking segment’s net income was $10.6 million for the three months ended June 30, 2019, compared to net loss of ($59,000) for the three months ended June 30, 2018. Our banking segment’s net income was $21.9 million for the six months ended June 30, 2019, compared to $7.9 million for the six months ended June 30, 2018.

The banking segment’s earnings for the second quarter of 2018 and for the first six months of 2018, were negatively impacted by merger-related costs of $8.2 million and $8.8 million, respectively, associated with the acquisitions of Tri-Valley Bank and United American Bank, as well as a $6.1 million specific reserve for a lending relationship that was placed on nonaccrual during the second quarter of 2018. These higher costs for the respective periods in 2018 were partially offset by a $1.3 million legal settlement recovery during the second quarter of 2018, and $540,000 of merger-related cost for the recently announced proposed merger with Presidio for both the second quarter and first six months of 2019.  The increase in net interest income for the three and six months ended June 30, 2019, compared to the comparable periods in 2018, was primarily due to the impact of the increase in loans and deposits from the Tri-Valley and United American acquisitions and the positive impact of rising interest rates. The decrease in the provision for loan losses for the second quarter of 2019 and first six months of 2019, compared to the comparable periods in 2018 was primarily due to the $6.1 million specific reserve for a lending relationship that was placed on nonaccrual during 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.  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 SBA loans for the first six months of 2019, and proceeds from a legal settlement in the first six months of 2018.  The decrease in noninterest expense for the three months and six months ended June 30, 2019, was primarily due to merger-related costs for Tri-Valley Bank and United American Bank acquisitions for the second quarter and first six months of 2018. These costs were partially offset by a legal settlement recovery during the second quarter of 2018, and merger-related costs for the recently announced proposed merger with Presidio for the second quarter and first six months of 2019.    

Factoring.  Bay View Funding’s primary business operation is purchasing and collecting factored receivables. Factored receivables are receivables that have been transferred by the originating organization and typically have not been subject to previous collection efforts. In a factoring transaction Bay View Funding directly purchases the receivables generated by its clients at a discount to their face value. The transactions are structured to provide the clients with immediate working capital when there is a mismatch between payments to the client for a good and service and the payment of operating costs incurred to provide such good or service. The average life of the factored receivables was 37 days for the six months ended June 30, 2019, compared to 34 days for the six months ended June 30, 2018. The increase

62

in the average life of factored receivables was primarily due to more customers with selling terms greater than 30 days during the first six months 2019, compared to the first six months of 2018. Net interest income for the three months ended June 30, 2019, decreased to $2.7 million, compared to $3.0 million for the three months ended June 30, 2018, primarily due to a decrease in the average balance of factored receivables outstanding. For the six months ended June 30, 2019, net interest income decreased to $5.3 million compared to $5.8 milion for the six months ended June 30, 2018, primarily due to a decrease in the average yield on the factored receivables portfolio, and a decrease in the average balance of factored receivables outstanding.

FINANCIAL CONDITION

At June 30, 2019, total assets remained relatively flat at $3.11 billion, compared to $3.12 billion at June 30, 2018 and $3.10 billion at December 31, 2018.

Securities available‑for‑sale, at fair value, were $383.1 million at June 30, 2019, an increase of 14% from $335.9 million at June 30, 2018, and a decrease of (17%) from $459.0 million at December 31, 2018. Securities held‑to‑maturity, at amortized cost, were $351.4 million at June 30, 2019, a decrease of (10%) from $388.6 million at June 30, 2018, and a decrease of (7%) from $377.2 million at December 31, 2018. Total 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 C&I, $31.5 million in land and construction loans, $6.1 million in purchased 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. Loans, excluding loans held-for-sale, remained relatively flat compared to $1.89 billion at December 31, 2018.

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 $15.1 million or (1%) from $2.64 billion at December 31, 2018.  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.  Deposits, excluding all time deposits and CDARS deposits, at June 30, 2019 decreased $12.8 million, or (1%) from $2.48 billion at December 31, 2018.

Securities Portfolio

The following table reflects the balances for each category of securities at the dates indicated:

	June 30,				December 31,
	2019		2018		2018
	(Dollars in thousands)
Securities available-for-sale (at fair value):
Agency mortgage-backed securities	$	242,647	$	328,505	$	302,854
U.S. Treasury		140,509		—		148,753
U.S. Government sponsored entities		—		7,418		7,436
Total	$	383,156	$	335,923	$	459,043
Securities held-to-maturity (at amortized cost):
Agency mortgage-backed securities	$	267,514	$	300,690	$	291,241
Municipals — exempt from Federal tax		83,885		87,913		85,957
	$	351,399	$	388,603	$	377,198

63

The following table summarizes the weighted average life and weighted average yields of securities at June 30, 2019:

	Weighted Average Life
					After One and				After Five and
	Within One				Within Five				Within Ten				After Ten
	Year or Less				Years				Years				Years				Total
	Amount		Yield		Amount		Yield		Amount		Yield		Amount		Yield		Amount		Yield
	(Dollars in thousands)
Securities available-for-sale (at fair value):
Agency mortgage-backed securities	$	—	N/A		$	220,973	2.22	%	$	21,674	2.42	%	$	—	N/A		$	242,647	2.24	%
U.S. Treasury		14,956	2.77	%		125,553	2.82	%		—	N/A			—	N/A			140,509	2.82	%
Total	$	14,956	2.77	%	$	346,526	2.44	%	$	21,674	2.42	%	$	—	N/A		$	383,156	2.45	%
Securities held-to-maturity (at amortized cost):
Agency mortgage-backed securities	$	—	N/A		$	231,069	2.17	%	$	7,030	2.64	%	$	29,415	3.16	%	$	267,514	2.29	%
Municipals — exempt from Federal tax (1)		16,164	3.27	%		59,710	3.22	%		3,011	3.39	%		5,000	3.10	%		83,885	3.23	%
Total	$	16,164	3.27	%	$	290,779	2.38	%	$	10,041	2.86	%	$	34,415	3.15	%	$	351,399	2.51	%

(1) Reflects tax equivalent adjustment for Federal tax exempt income based on a 21% tax rate.

The securities portfolio is the second largest component of the Company’s interest‑earning assets, and the structure and composition of this portfolio is important to an analysis of the financial condition of the Company. The portfolio serves the following purposes: (i) it provides a source of pledged assets for securing certain deposits and borrowed funds, as may be required by law or by specific agreement with a depositor or lender; (ii) it provides liquidity to even out cash flows from the loan and deposit activities of customers; (iii) it can be used as an interest rate risk management tool, since it provides a large base of assets, the maturity and interest rate characteristics of which can be changed more readily than the loan portfolio to better match changes in the deposit base and other funding sources of the Company; and (iv) it is an alternative interest‑earning use of funds when loan demand is weak or when deposits grow more rapidly than loans.

The Company’s portfolio may include: (i) U.S. Treasury securities and U.S. Government sponsored entities’ debt securities for liquidity and pledging; (ii) mortgage‑backed securities, which in many instances can also be used for pledging, and which generally enhance the yield of the portfolio; (iii) municipal obligations, which provide tax free income and limited pledging potential; (iv) single entity issue trust preferred securities, which generally enhance the yield on the portfolio; (v) corporate bonds, which also enhance the yield on the portfolio; (vi) money market mutual funds; (vii) certificates of deposit; (viii) commercial paper; (ix) bankers acceptances; (x) repurchase agreements; (xi) collateralized mortgage obligations; and (xii) asset-backed securities.

The Company classifies its securities as either available‑for‑sale or held‑to‑maturity at the time of purchase. Accounting guidance requires available‑for‑sale securities to be marked to fair value with an offset to accumulated other comprehensive income (loss), a component of shareholders’ equity. Monthly adjustments are made to reflect changes in the fair value of the Company’s available‑for‑sale securities.

The investment securities available‑for‑sale portfolio, at fair value, totaled $383.1 million at June 30, 2019, an increase of 14% from $335.9 million at June 30, 2018, and a decrease of (17%) from $459.0 million at December 31, 2018. At June 30, 2019, the Company’s securities available-for-sale portfolio was comprised of $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 ($7.7) million at December 31, 2018.  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.

64

At June 30, 2019, investment securities held‑to‑maturity, at amortized cost, totaled $351.4 million, a decrease of (10%) from $388.6 million at June 30, 2018, and a decrease of (7%) from $377.2 million at December 31, 2018. At June 30, 2019, the Company’s securities held-to-maturity portfolio was comprised of $267.5 million of agency mortgage-backed securities, and $83.9 million of tax-exempt municipal bonds.  

The Company has not used interest rate swaps or other derivative instruments to hedge fixed rate loans or securities.

Loans

The Company’s loans represent the largest portion of invested assets, substantially greater than the securities portfolio or any other asset category, and the quality and diversification of the loan portfolio is an important consideration when reviewing the Company’s financial condition. Gross loans, excluding loans held‑for‑sale, represented 60% of total assets at June 30, 2019, represented 63% at June 30, 2018, and represented 61% at December 31, 2018. The ratio of loans to deposits was 71.60% at June 30, 2019, compared to 72.91% at June 30, 2018, and 71.52% at December 31, 2018.

Loan Distribution

The Loan Distribution table that follows sets forth the Company’s gross loans, excluding loans held‑for‑sale, outstanding and the percentage distribution in each category at the dates indicated:

	June 30, 2019			June 30, 2018			December 31, 2018
	Balance		% to Total	Balance		% to Total	Balance		% to Total
	(Dollars in thousands)
Commercial	$	567,529	30%	$	609,468	31%	$	597,763	32%
Real estate:
CRE		1,037,885	55%		1,030,884	53%		994,067	52%
Land and construction		97,297	5%		128,891	6%		122,358	6%
Home equity		116,057	6%		121,278	6%		109,112	6%
Residential mortgages		48,944	3%		54,367	3%		50,979	3%
Consumer		10,279	1%		12,060	1%		12,453	1%
Total Loans		1,877,991	100%		1,956,948	100%		1,886,732	100%
Deferred loan fees, net		(224)	—		(315)	—		(327)	—
Loans, net of deferred fees		1,877,767	100%		1,956,633	100%		1,886,405	100%
Allowance for loan losses		(26,631)			(26,664)			(27,848)
Loans, net	$	1,851,136		$	1,929,969		$	1,858,557

The Company’s loan portfolio is concentrated in commercial loans, (primarily manufacturing, wholesale, and services oriented entities), and commercial real estate, with the remaining balance in land development and construction, home equity, purchased residential mortgages, and consumer loans. The Company does not have any concentrations by industry or group of industries in its loan portfolio, however, 69% of its gross loans were secured by real property at June 30, 2019, compared to 68% at June 30, 2018 and 67% at December 31, 2018. While no specific industry concentration is considered significant, the Company’s bank lending operations are substantially located in areas that are dependent on the technology and real estate industries and their supporting companies.

The Company has established concentration limits in its loan portfolio for commercial real estate loans, commercial loans, construction loans and unsecured lending, among others. All loan types are within established limits. The Company uses underwriting guidelines to assess the borrower’s historical cash flow to determine debt service, and we further stress test the debt service under higher interest rate scenarios. Financial and performance covenants are used in commercial lending to allow the Company to react to a borrower’s deteriorating financial condition should that occur.

The Company’s commercial loans are made for working capital, financing the purchase of equipment or for other business purposes. Commercial loans include loans with maturities ranging from thirty days to one year and “term loans” with maturities normally ranging from one to five years. Short‑term business loans are generally intended to finance current transactions and typically provide for periodic principal payments, with interest payable monthly. Term loans normally provide for floating interest rates, with monthly payments of both principal and interest.

The Company is an active participant in the SBA and U.S. Department of Agriculture guaranteed lending programs, and has been approved by the SBA as a lender under the Preferred Lender Program. The Company regularly makes such guaranteed loans (collectively referred to as “SBA loans”). The guaranteed portion of these loans is typically

65

sold in the secondary market depending on market conditions. When the guaranteed portion of an SBA loan is sold the Company retains the servicing rights for the sold portion. During the second quarter and six months ended June 30, 2019, loans were sold resulting in a gain on sales of SBA loans of $36,000, and $175,000, respectively.

The Company’s factoring receivables are from the operations of Bay View Funding whose primary business is purchasing and collecting factored receivables. Factored receivables are receivables that have been transferred by the originating organization and typically have not been subject to previous collection efforts. These receivables are acquired from a variety of companies, including but not limited to service providers, transportation companies, manufacturers, distributors, wholesalers, apparel companies, advertisers, and temporary staffing companies. The portfolio of factored receivables is included in the Company’s commercial loan portfolio. The average life of the factored receivables was 37 days for the first six months of 2019, compared to 34 days for the first six months of 2018. The increase in the average life of factored receivables was primarily due to more customers with selling terms greater than 30 days during the first six months 2019, compared to the first six months of 2018. The balance of the purchased receivables was $49.8 million at June 30, 2019, compared to $63.5 million at June 30, 2018 and $53.6 million at December 31, 2018.

The commercial loan portfolio decreased $41.9 million, or (7%), to $567.5 million at June 30, 2019 from $609.5 million at June 30, 2018 and decreased $30.2 million, or (5%), from $597.8 million at December 31, 2018.  C&I line usage was 40% at June 30, 2019, compared to 37% at June 30, 2018 and 36% at December 31, 2018.

The Company’s CRE loans consist primarily of loans based on the borrower’s cash flow and are secured by deeds of trust on commercial property to provide a secondary source of repayment. The Company generally restricts real estate term loans to no more than 75% of the property’s appraised value or the purchase price of the property depending on the type of property and its utilization. The Company offers both fixed and floating rate loans. Maturities for CRE loans are generally between five and ten years (with amortization ranging from fifteen to twenty five years and a balloon payment due at maturity), however, SBA and certain other real estate loans that can be sold in the secondary market may be granted for longer maturities.

The CRE loan portfolio increased $7.0 million, or 1%, to $1.04 billion at June 30, 2019, compared to $1.03 billion at June 30, 2018, and increased $43.8 million, or 4%, from $994.1 million at December 31, 2018.  At June 30, 2019, there was 38% of the CRE loan portfolio secured by owner-occupied real estate.

The Company’s land and construction loans are primarily to finance the development/construction of commercial and single family residential properties. The Company utilizes underwriting guidelines to assess the likelihood of repayment from sources such as sale of the property or availability of permanent mortgage financing prior to making the construction loan. Construction loans are provided only in our market area, and the Company has extensive controls for the disbursement process. Land and construction loans decreased $31.6 million, or (25%), to $97.3 million at June 30, 2019, compared to $128.9 million at June 30, 2018, and decreased $25.1 million, or (20%), from $122.4 million at December 31, 2018.

The Company makes home equity lines of credit available to its existing customers. Home equity lines of credit are underwritten initially with a maximum 75% loan to value ratio. Home equity lines of credit decreased $5.2 million, or (4%), to $116.1 million at June 30, 2019, compared to $121.3 million at June 30, 2018, and increased $7.0 million, or 6%, from $109.1 million at December 31, 2018.

Residential mortgage loans decreased $5.4 million, or (10%), to $48.9 million at June 30, 2019, compared to $54.4 million at June 30, 2018, and decreased $2.1 milion, or (4%) from $51.0 million at December 31, 2018.

Additionally, the Company makes consumer loans for the purpose of financing automobiles, various types of consumer goods, and other personal purposes. Consumer loans generally provide for the monthly payment of principal and interest. Most of the Company’s consumer loans are secured by the personal property being purchased or, in the instances of home equity loans or lines, real property.

With certain exceptions, state chartered banks are permitted to make extensions of credit to any one borrowing entity up to 15% of the bank’s capital and reserves for unsecured loans and up to 25% of the bank’s capital and reserves for secured loans. For HBC, these lending limits were $64.8 million and $108.1 million at June 30, 2019, respectively.

66

Loan Maturities

The following table presents the maturity distribution of the Company’s loans (excluding loans held‑for‑sale) as of June 30, 2019. The table shows the distribution of such loans between those loans with predetermined (fixed) interest rates and those with variable (floating) interest rates. Floating rates generally fluctuate with changes in the prime rate as reflected in the Western Edition of The Wall Street Journal. As of June 30, 2019, approximately 50% of the Company’s loan portfolio consisted of floating interest rate loans.

			Over One
	Due in		Year But
	One Year		Less than		Over
	or Less		Five Years		Five Years		Total
	(Dollars in thousands)
Commercial	$	447,646		99,281		20,602	$	567,529
Real estate:
CRE		146,084		461,088		430,713		1,037,885
Land and construction		95,492		1,805		—		97,297
Home equity		108,408		3,154		4,495		116,057
Residential mortgages		439		10,231		38,274		48,944
Consumer		10,151		125		3		10,279
Loans	$	808,220	$	575,684	$	494,087	$	1,877,991
Loans with variable interest rates	$	720,654		146,111		65,767	$	932,532
Loans with fixed interest rates		87,566		429,573		428,320		945,459
Loans	$	808,220	$	575,684	$	494,087	$	1,877,991

Loan Servicing

As of June 30, 2019 and 2018, $94.0 million and $118.8 million, respectively, in SBA loans were serviced by the Company for others. Activity for loan servicing rights was as follows:

	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2019		2018		2019		2018
	(Dollars in thousands)
Beginning of period balance	$	807	$	1,224	$	871	$	1,373
Additions		9		20		40		76
Amortization		(139)		(179)		(234)		(384)
End of period balance	$	677	$	1,065	$	677	$	1,065

Loan servicing rights are included in accrued interest receivable and other assets on the unaudited consolidated balance sheets and reported net of amortization. There was no valuation allowance as of June 30, 2019 and 2018, as the fair value of the assets was greater than the carrying value.

Activity for the I/O strip receivable was as follows:

	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2019		2018		2019		2018
	(Dollars in thousands)
Beginning of period balance	$	571	$	945	$	568	$	968
Unrealized holding gain (loss)		1		(26)		4		(49)
End of period balance	$	572	$	919	$	572	$	919

Credit Quality

Financial institutions generally have a certain level of exposure to credit quality risk, and could potentially receive less than a full return of principal and interest if a debtor becomes unable or unwilling to repay. Since loans are the most significant assets of the Company and generate the largest portion of its revenues, the Company’s management

67

of credit quality risk is focused primarily on loan quality. Banks have generally suffered their most severe earnings declines as a result of customers’ inability to generate sufficient cash flow to service their debts and/or downturns in national and regional economies and declines in overall asset values including real estate. In addition, certain debt securities that the Company may purchase have the potential of declining in value if the obligor’s financial capacity to repay deteriorates.

The Company’s policies and procedures identify market segments, set goals for portfolio growth or contraction, and establish limits on industry and geographic credit concentrations. In addition, these policies establish the Company’s underwriting standards and the methods of monitoring ongoing credit quality. The Company’s internal credit risk controls are centered in underwriting practices, credit granting procedures, training, risk management techniques, and familiarity with loan customers as well as the relative diversity and geographic concentration of our loan portfolio.

The Company’s credit risk may also be affected by external factors such as the level of interest rates, employment, general economic conditions, real estate values, and trends in particular industries or geographic markets. As an independent community bank serving a specific geographic area, the Company must contend with the unpredictable changes in the general California market and, particularly, primary local markets. The Company’s asset quality has suffered in the past from the impact of national and regional economic recessions, consumer bankruptcies, and depressed real estate values.

Nonperforming assets are comprised of the following: loans for which the Company is no longer accruing interest; restructured loans which have been current under six months; loans 90 days or more past due and still accruing interest (although they are generally placed on nonaccrual when they become 90 days past due, unless they are both well‑secured and in the process of collection); and foreclosed assets. Past due loans 30 days or greater totaled $21.5 million and $8.9 million at June 30, 2019 and December 31, 2018, respectively, of which $15.0 million and $430,000 were on nonaccrual, respectively. At June 30, 2019, there were also $694,000 loans less than 30 days past due included in nonaccrual loans held‑for‑investment. At December 31, 2018, there were also $13.3 million loans less than 30 days past due included in nonaccrual loans held‑for‑investment.

Management’s classification of a loan as “nonaccrual” is an indication that there is reasonable doubt as to the full recovery of principal or interest on the loan. At that point, the Company stops accruing interest income, and reverses any uncollected interest that had been accrued as income. The Company begins recognizing interest income only as cash interest payments are received and it has been determined the collection of all outstanding principal is not in doubt. The loans may or may not be collateralized, and collection efforts are pursued. Loans may be restructured by management when a borrower has experienced some change in financial status causing an inability to meet the original repayment terms and where the Company believes the borrower will eventually overcome those circumstances and make full restitution. Foreclosed assets consist of properties acquired by foreclosure or similar means that management is offering or will offer for sale.

The following table summarizes the Company’s nonperforming assets at the dates indicated:

	June 30,						December 31,
	2019			2018			2018
	(Dollars in thousands)
Nonaccrual loans — held-for-investment	$	15,695		$	26,034		$	13,699
Restructured and loans 90 days past due and
still accruing		1,323			511			1,188
Total nonperforming loans		17,018			26,545			14,887
Foreclosed assets		—			—			—
Total nonperforming assets	$	17,018		$	26,545		$	14,887
Nonperforming assets as a percentage of loans
plus foreclosed assets		0.91	%		1.36	%		0.79	%
Nonperforming assets as a percentage of total assets		0.55	%		0.85	%		0.48	%

Nonperforming assets were $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 $14.9 million, or 0.48% of total assets, at December 31, 2018.

68

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 allocated for this lending relationship, compared to a recorded investment of $12.0 million, and a $6.7 million specific loan loss reserve allocated for this lending relationship at December 31, 2018. 

The following table presents nonperforming loans by class at the dates indicated:

	June 30, 2019						December 31, 2018
				Restructured						Restructured
				and Loans						and Loans
				over 90 Days						over 90 Days
				Past Due						Past Due
				and Still						and Still
	Nonaccrual			Accruing	Total		Nonaccrual			Accruing	Total
	(Dollars in thousands)
Commercial	$	7,096	$	1,099	$	8,195	$	8,279	$	963	$	9,242
Real estate:
CRE		8,442		—		8,442		5,094		—		5,094
Home equity		157		224		381		326		225		551
Total	$	15,695	$	1,323	$	17,018	$	13,699	$	1,188	$	14,887

Loans with a well‑defined weakness, which are characterized by the distinct possibility that the Company will sustain a loss if the deficiencies are not corrected, are categorized as “classified.” Classified loans include all loans considered as substandard, substandard‑nonaccrual, and doubtful and may result from problems specific to a borrower’s business or from economic downturns that affect the borrower’s ability to repay or that cause a decline in the value of the underlying collateral (particularly real estate). Loans held‑for‑sale are carried at the lower of cost or estimated fair value, and are not allocated an allowance for loan losses.

The following table provides a summary of the loan portfolio by loan type and credit quality classification at the dates indicated:

	June 30, 2019						June 30, 2018						December 31, 2018
	Nonclassified		Classified		Total		Nonclassified		Classified		Total		Nonclassified		Classified		Total
	(Dollars in thousands)
Commercial	$	553,618	$	13,911	$	567,529	$	583,809	$	25,659	$	609,468	$	584,845	$	12,918	$	597,763
Real estate:
CRE		1,024,822		13,063		1,037,885		1,024,855		6,029		1,030,884		985,193		8,874		994,067
Land and construction		94,810		2,487		97,297		128,891		—		128,891		122,358		—		122,358
Home equity		114,342		1,715		116,057		120,702		576		121,278		107,495		1,617		109,112
Residential mortgages		48,944		—		48,944		54,367		—		54,367		50,979		—		50,979
Consumer		10,279		—		10,279		12,060		—		12,060		12,453		—		12,453
Total	$	1,846,815	$	31,176	$	1,877,991	$	1,924,684	$	32,264	$	1,956,948	$	1,863,323	$	23,409	$	1,886,732

Classified loans 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 $23.4 million, or 0.76% of total assests at December 31, 2018. The increase in classified assets at June 30, 2019, compared to December 31, 2018, 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 interest, during the second quarter of 2019.

In order to determine whether a borrower is experiencing financial difficulty, an evaluation is performed of the probability that the borrower will be in payment default on any of its debt in the foreseeable future without the modification. This evaluation is performed in accordance with the Company’s underwriting policy.

69

The following provides a rollforward of troubled debt restructurings (“TDRs”):

	Six Months Ended June 30, 2019
	Performing		Nonperforming
	TDRs		TDRs		Total
	(Dollars in thousands)
Balance at January 1, 2019	$	613	$	36	$	649
Additions		11		17		28
Principal repayments		(73)		(36)		(109)
Balance at June 30, 2019	$	551	$	17	$	568

	Six Months Ended June 30, 2018
	Performing		Nonperforming
	TDRs		TDRs		Total
	(Dollars in thousands)
Balance at January 1, 2018	$	309	$	16	$	325
Additions		350		99		449
Principal repayments		(8)		(16)		(24)
Balance at June 30, 2018	$	651	$	99	$	750

Allowance for Loan Losses

The allowance for loan losses is an estimate of probable incurred losses in the loan portfolio. Loans are charged‑off against the allowance when management believes the uncollectibility of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance for loan losses. Management’s methodology for estimating the allowance balance consists of several key elements, which include specific allowances on individual impaired loans and the formula driven allowances on pools of loans with similar risk characteristics. Allocations of the allowance may be made for specific loans, but the entire allowance is available for any loan that, in management’s judgment, should be charged‑off.

Specific allowances are established for impaired loans. Management considers a loan to be impaired when it is probable that the Company will be unable to collect all amounts due according to the original contractual terms of the loan agreement, including scheduled interest payments. Loans for which the terms have been modified with a concession granted, and for which the borrower is experiencing financial difficulties, are considered troubled debt restructurings and classified as impaired. When a loan is considered to be impaired, the amount of impairment is measured based on the fair value of the collateral less costs to sell if the loan is collateral dependent, or on the present value of expected future cash flows or values that are observable in the secondary market. If the measure of the impaired loans is less than the investment in the loan, the deficiency will be charged‑off against the allowance for loan losses if the amount is a confirmed loss, or, alternatively, a specific allocation within the allowance will be established. Loans that are considered impaired are specifically excluded from the formula portion of the allowance for loan losses analysis.

The estimated loss factors for pools of loans that are not impaired are based on determining the probability of default and loss given default for loans within each segment of the portfolio, adjusted for significant factors that, in management’s judgment, affect collectability as of the evaluation date. The Company’s historical delinquency experience and loss experience are utilized to determine the probability of default and loss given default for segments of the portfolio where the Company has experienced losses in the past. For segments of the portfolio where the Company has no significant prior loss experience, the Company uses quantifiable observable industry data to determine the probability of default and loss given default.

The following provides a summary of the risks associated with various segments of the Company’s loan portfolio, which are factors management regularly considers when evaluating the adequacy of the allowance:

· Commercial loans consist primarily of commercial and industrial loans (business lines of credit), and other commercial purpose loans. Repayment of commercial and industrial loans is generally provided from the cash flows of the related business to which the loan was made. Adverse changes in economic conditions may result in a decline in business activity, which may impact a borrower’s ability to continue to make scheduled payments. The factored receivables at Bay View Funding are included in the Company’s commercial loan portfolio; however, they are evaluated for risk primarily based on the agings of the receivables. Faster turning receivables imply less risk and therefore warrant a lower associated allowance.

70

Should the overall aging for the portfolio increase, this structure will by formula increase the allowance to reflect the increasing risk. Should the portfolio turn more quickly, it would reduce the associated allowance to reflect the reducing risk.

· Real estate loans consist primarily of loans secured by commercial and residential real estate. Also included in this segment are land and construction loans and home equity lines of credit secured by real estate. As the majority of this segment is comprised of commercial real estate loans, risks associated with this segment lay primarily within these loan types. Adverse economic conditions may result in a decline in business activity and increased vacancy rates for commercial properties. These factors, in conjunction with a decline in real estate prices, may expose the Company to the potential for losses if a borrower cannot continue to service the loan with operating revenues, and the value of the property has declined to a level such that it no longer fully covers the Company’s recorded investment in the loan.

· Consumer loans consist primarily of a large number of small loans and lines of credit. The majority of installment loans are made for consumer and business purchases. Weakened economic conditions may result in an increased level of delinquencies within this segment, as economic pressures may impact the capacity of such borrowers to repay their obligations.

As a result of the matters mentioned above, changes in the financial condition of individual borrowers, economic conditions, historical loss experience and the condition of the various markets in which collateral may be sold may all affect the required level of the allowance for loan losses and the associated provision for loan losses.

It is the policy of management to maintain the allowance for loan losses at a level adequate for risks inherent in the loan portfolio. On an ongoing basis, we have engaged an outside firm to perform independent credit reviews of our loan portfolio. The Federal Reserve Board and the California Department of Business Oversight—Division of Financial Institutions also review the allowance for loan losses as an integral part of the examination process. Based on information currently available, management believes that the allowance for loan losses is adequate. However, the loan portfolio can be adversely affected if California economic conditions and the real estate market in the Company’s market area were to weaken. Also, any weakness of a prolonged nature in the technology industry would have a negative impact on the local market. The effect of such events, although uncertain at this time, could result in an increase in the level of nonperforming loans and increased loan losses, which could adversely affect the Company’s future growth and profitability. No assurance of the ultimate level of credit losses can be given with any certainty.

The following tables summarize the Company’s loan loss experience, as well as provisions and charges to the allowance for loan losses and certain pertinent ratios for the periods indicated:

	Three Months Ended June 30, 2019
	Commercial		Real Estate		Consumer		Total
	(Dollars in thousands)
Beginning of period balance	$	15,557	$	11,671	$	90	$	27,318
Charge-offs		(76)		—		—		(76)
Recoveries		87		42		—		129
Net recoveries		11		42		—		53
Provision (credit) for loan losses		(334)		(406)		—		(740)
End of period balance	$	15,234	$	11,307	$	90	$	26,631

(1)   Average loans and total loans exclude loans held‑for‑sale.

71

	Three Months Ended June 30, 2018
	Commercial		Real Estate		Consumer		Total
	(Dollars in thousands)
Beginning of period balance	$	11,165	$	8,858	$	116	$	20,139
Charge-offs		(870)		—		—		(870)
Recoveries		175		22		—		197
Net (charge-offs) recoveries		(695)		22		—		(673)
Provision for loan losses		7,052		140		6		7,198
End of period balance	$	17,522	$	9,020	$	122	$	26,664

	Six Months Ended June 30, 2019
	Commercial		Real Estate		Consumer		Total
	(Dollars in thousands)
Beginning of period balance	$	17,061	$	10,671	$	116	$	27,848
Charge-offs		(302)		—		—		(302)
Recoveries		802		84		—		886
Net recoveries		500		84		—		584
Provision (credit) for loan losses		(2,327)		552		(26)		(1,801)
End of period balance	$	15,234	$	11,307	$	90	$	26,631

	Six Months Ended June 30, 2018
	Commercial		Real Estate		Consumer		Total
	(Dollars in thousands)
Beginning of period balance	$	10,608	$	8,950	$	100	$	19,658
Charge-offs		(1,115)		—		—		(1,115)
Recoveries		332		85		—		417
Net (charge-offs) recoveries		(783)		85		—		(698)
Provision (credit) for loan losses		7,697		(15)		22		7,704
End of period balance	$	17,522	$	9,020	$	122	$	26,664

(1)   Average loans and total loans exclude loans held‑for‑sale.

The following table provides a summary of the allocation of the allowance for loan losses by class at the dates indicated. The allocation presented should not be interpreted as an indication that charges to the allowance for loan losses will be incurred in these amounts or proportions, or that the portion of the allowance allocated to each category represents the total amount available for charge‑offs that may occur within these classes.

72

Allocation of Allowance for Loan Losses

	June 30,
	2019			2018			December 31, 2018
			Percent			Percent			Percent
			of Loans			of Loans			of Loans
			in each			in each			in each
			category			category			category
			to total			to total			to total
	Allowance		loans	Allowance		loans	Allowance		loans
	(Dollars in thousands)
Commercial	$	15,234	30%	$	17,522	31%	$	17,061	32%
Real estate:
CRE		7,642	55%		5,826	53%		6,737	52%
Land and construction		1,725	5%		1,743	6%		2,008	6%
Home equity		1,697	6%		1,271	6%		1,609	6%
Residential mortgages		243	3%		180	3%		317	3%
Consumer		90	1%		122	1%		116	1%
Total	$	26,631	100%	$	26,664	100%	$	27,848	100%

The allowance for loan losses totaled $26.6 million, or 1.42% of total loans at June 30, 2019, compared to $26.7 million, or 1.36% of total loans at June 30, 2018, and $27.8 million, or 1.48% of total loans at December 31, 2018. The allowance for loan losses was 156.49% of nonperforming loans at June 30, 2019, compared to 100.45% of nonperforming loans at June 30, 2018, and 187.06% of nonperforming loans at December 31, 2018. The Company had net recoveries of $53,000, or (0.01%) of average loans, for the second quarter of 2019, compared to net charge-offs of $673,000, or 0.15% of average loans, for the second quarter of 2018, and net recoveries of $280,000, or (0.06%) of average loans, for the fourth quarter of 2018.

The allowance for loan losses related to the commercial portfolio decreased $1.8 million, at June 30, 2019 from December 31, 2018, largely due to the reduction of a specific loan loss reserve allocated for a single large lending relationship that was placed on nonaccrual during the second quarter of 2018. The allowance for loan losses related to the real estate portfolio increased $636,000 at June 30, 2019 from December 31, 2018, primarily due to an increase in CRE loans.

Leases

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. 

Goodwill and Other Intangible Assets

Goodwill represents the excess of the purchase price over the fair value of acquired tangible assets and liabilities and identifiable intangible assets. The fair values of assets acquired and liabilities assumed are subject to adjustment during the first twelve months after the acquisition date if additional information becomes available to indicate a more accurate or appropriate value for an asset or liability. Total goodwill was $83.7 million at both June 30, 2019 and December 31, 2018, which consisted of $13.0 million related to the Bay View Funding acquisition, $32.6 million related to the Focus acquisition, $13.8 million related to the Tri-Valley acquisition, and $24.3 million related to the United American acquisition. 

73

On April 6, 2018, the Company completed its acquisition of Tri-Valley for a transaction value of $32.3 million. At closing the Company issued 1,889,613 shares of the Company’s common stock with an aggregate market value of $30.7 million on the date of closing.  The number of shares issued was based on a fixed exchange ratio of 0.0489 of a share of the Company’s common stock for each outstanding share of Tri-Valley common stock. In addition, at closing the Company paid cash to the holder of a stock warrant and holders of outstanding stock options and related fees and fractional shares totaling $1.6 million. The Company recorded goodwill of $13.8 million for the Tri-Valley acquisition.

On May 4, 2018, the Company completed its acquisition of United American for a transaction value of $56.4 million.  At closing the Company issued 2,826,032 shares of the Company’s common stock with an aggregate market value of $47.3 million on the date of closing.  The number of shares issued was based on a fixed exchange ratio of 2.1644 of a share of the Company’s common stock for each outstanding share of United American common stock and each common stock equivalent underlying the United American Series D Preferred Stock and Series E Preferred Stock. The shareholders of the United American Series A Preferred Stock and the Series B Preferred Stock received $1,000 cash for each share totaling $8.7 million and $435,000, respectively.  In addition, the Company paid $2,000 in cash for fractional shares, for total cash consideration of $9.1 million.  The Company recorded goodwill of $24.3 million for the United American acquisition.

The Company completed its annual goodwill impairment analysis as of November 30, 2018 with the assistance of an independent valuation firm.  No events or circumstances since the November 30, 2018 annual impairment test were noted that would indicate it was more likely than not a goodwill impairment exists.

Other intangible assets were $10.9 million at June 30, 2019, compared to $12.0 million at December 31, 2018.  A customer relationship and brokered relationship, and intangible assets arising from the acquisition of Bay View Funding were $1.0 million at June 30, 2019 and $1.1 million December 31, 2018, net of accumulated amortization.  The core deposit intangible assets arising from the acquisition of Focus was $3.1 million at June 30, 2019 and $3.5 million at December 31, 2018, net of accumulated amortization.  The core deposit intangible and below market lease intangible assets arising from the Tri-Valley acquisition were $1.6 million at June 30, 2019 and $1.8 million at December 31, 2018, net of accumulated amortization.  The core deposit intangible and below market lease intangible assets arising from the United American acquisition were $5.1 million at June 30, 2019 and $5.6 million at December 31, 2018, net of accumulated amortization.

Deposits

The composition and cost of the Company’s deposit base are important components in analyzing the Company’s net interest margin and balance sheet liquidity characteristics, both of which are discussed in greater detail in other sections herein. The Company’s liquidity is impacted by the volatility of deposits from the propensity of that money to leave the institution for rate‑related or other reasons. Deposits can be adversely affected if economic conditions weaken in California, and the Company’s market area in particular. Potentially, the most volatile deposits in a financial institution are jumbo certificates of deposit, meaning time deposits with balances that equal or exceed $250,000, as customers with balances of that magnitude are typically more rate‑sensitive than customers with smaller balances.

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

	June 30, 2019			June 30, 2018			December 31, 2018
	Balance		% to Total	Balance		% to Total	Balance		% to Total
	(Dollars in thousands)
Demand, noninterest-bearing	$	994,082	38%	$	1,002,053	37%	$	1,021,582	39%
Demand, interest-bearing		682,114	26%		683,805	25%		702,000	27%
Savings and money market		788,832	30%		827,304	31%		754,277	28%
Time deposits — under $250		53,351	2%		72,030	3%		58,661	2%
Time deposits — $250 and over		88,519	3%		81,379	3%		86,114	3%
CDARS — interest-bearing demand,
money market and time deposits		15,575	1%		17,048	1%		14,898	1%
Total deposits	$	2,622,473	100%	$	2,683,619	100%	$	2,637,532	100%

74

The Company obtains deposits from a cross‑section of the communities it serves. The Company’s business is not generally seasonal in nature. There were no public funds at June 30, 2019. Public funds were less than 1% of deposits and June 30, 2019, and at December 31, 2018.

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.  Total deposits decreased $15.1 million, or (1%), from $2.64 billion at December 31, 2018.  Deposits, excluding all time deposits and CDARS deposits, decreased $48.1million, or (2%), to $2.47 billion at June 30, 2019, compared to $2.51 billion at June 30, 2018.  Deposits, excluding all time deposits and CDARS deposits, at June 30, 2019 decreased $12.8 million, or (1%), compared to $2.48 billion at December 31, 2018.

At June 30, 2019, the $15.6 million CDARS deposits comprised $10.2 million of interest-bearing demand deposits, $3.5 million of money market accounts and $1.9 million of time deposits. At June 30, 2018, the $17.0 million CDARS deposits comprised $11.8 of million of interest-bearing demand deposits, $1.6 million of money market accounts and $3.6 million of time deposits. At December 31, 2018, the $14.9 million CDARS deposits comprised $8.7 million of interest-bearing demand deposits, $3.4 million of money market accounts and $2.8 million of time deposits.

The following table indicates the contractual maturity schedule of the Company’s time deposits of $250,000 and over, and all CDARS time deposits as of June 30, 2019:

	Balance		% of Total
	(Dollars in thousands)
Three months or less	$	32,013	35	%
Over three months through six months		24,396	27	%
Over six months through twelve months		24,376	27	%
Over twelve months		9,671	11	%
Total	$	90,456	100	%

The Company focuses primarily on providing and servicing business deposit accounts that are frequently over $250,000 in average balance per account. As a result, certain types of business clients that the Company serves typically carry average deposits in excess of $250,000. The account activity for some account types and client types necessitates appropriate liquidity management practices by the Company to help ensure its ability to fund deposit withdrawals.

Return on Equity and Assets

The following table indicates the ratios for return on average assets and average equity, and average equity to average assets for the periods indicated:

	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2019		2018		2019		2018
Return on average assets	1.48	%	0.12	%	1.53	%	0.67	%
Return on average tangible assets	1.53	%	0.12	%	1.58	%	0.69	%
Return on average equity	11.96	%	1.11	%	12.61	%	6.52	%
Return on average tangible equity	15.94	%	1.49	%	16.89	%	8.43	%
Average equity to average assets ratio	12.40	%	10.87	%	12.16	%	10.35	%

Off‑Balance Sheet Arrangements

In the normal course of business the Company makes commitments to extend credit to its customers as long as there are no violations of any conditions established in the contractual arrangements. These commitments are obligations that represent a potential credit risk to the Company, but are not reflected on the Company’s consolidated balance sheets. Total unused commitments to extend credit were $714.5 million at June 30, 2019, compared to $775.3 million at June 30, 2018, and $740.4 million at December 31, 2018. Unused commitments represented 38% outstanding gross loans at June 30, 2019, 40% at June 30, 2018, and 39% at December 31, 2018.

75

The effect on the Company’s revenues, expenses, cash flows and liquidity from the unused portion of the commitments to provide credit cannot be reasonably predicted because there is no certainty that lines of credit and letters of credit will ever be fully utilized. The following table presents the Company’s commitments to extend credit for the periods indicated:

		June 30,
	2019				2018				December 31, 2018
	Fixed Rate		Variable Rate		Fixed Rate		Variable Rate		Fixed Rate		Variable Rate
	(Dollars in thousands)
Unused lines of credit and commitments
to make loans	$	146,955	$	551,963	$	140,845	$	619,896	$	130,871	$	593,839
Standby letters of credit		2,245		13,381		3,693		10,901		2,770		12,899
	$	149,200	$	565,344	$	144,538	$	630,797	$	133,641	$	606,738

Liquidity and Asset/Liability Management

Liquidity refers to the Company’s ability to maintain cash flows sufficient to fund operations and to meet obligations and other commitments in a timely and cost effective fashion. At various times the Company requires funds to meet short‑term cash requirements brought about by loan growth or deposit outflows, the purchase of assets, or liability repayments. An integral part of the Company’s ability to manage its liquidity position appropriately is the Company’s large base of core deposits, which are generated by offering traditional banking services in its service area and which have historically been a stable source of funds. To manage liquidity needs cash inflows must be properly timed to coincide with anticipated outflows or sufficient liquidity resources must be available to meet varying demands. The Company manages liquidity to be able to meet unexpected sudden changes in levels of its assets or deposit liabilities without maintaining excessive amounts of balance sheet liquidity. Excess balance sheet liquidity can negatively impact the Company’s interest margin. In order to meet short‑term liquidity needs the Company utilizes overnight Federal funds purchase arrangements and other borrowing arrangements with correspondent banks, solicits brokered deposits if cost effective deposits are not available from local sources, and maintains collateralized lines of credit with the FHLB and FRB. In addition, the Company can raise cash for temporary needs by selling securities under agreements to repurchase and selling securities available‑for‑sale.

One of the measures of liquidity is our loan to deposit ratio. Our loan to deposit ratio was 71.60% at June 30, 2019, compared to 72.91% at June 30, 2018, and 71.52% at December 31, 2018.

FHLB and FRB Borrowings and Available Lines of Credit

HBC has off‑balance sheet liquidity in the form of Federal funds purchase arrangements with correspondent banks, including the FHLB and FRB. HBC can borrow from the FHLB on a short‑term (typically overnight) or long‑term (over one year) basis. HBC had no overnight borrowings from the FHLB at June 30, 2019, June 30, 2018, and December 31, 2018. HBC had $244.5 million of loans pledged to the FHLB as collateral on an available line of credit of $196.7 million at June 30, 2019, none of which was outstanding.

HBC can also borrow from the FRB’s discount window. HBC had $743.6 million of loans pledged to the FRB as collateral on an available line of credit of $426.7 million at June 30, 2019, none of which was outstanding.

At June 30, 2019, HBC had Federal funds purchase arrangements available of $80.0 million. There were no Federal funds purchased outstanding at June 30, 2019, June 30, 2018, and December 31, 2018.

The Company has a $5.0 million line of credit with a correspondent bank, of which none was outstanding at June 30, 2019.

HBC may also utilize securities sold under repurchase agreements to manage its liquidity position. There were no securities sold under agreements to repurchase at June 30, 2019, June 30, 2018, and December 31, 2018.

Subordinated Debt

On May 26, 2017, the Company completed an underwritten public offering of $40,000,000 aggregate principal amount of its fixed-to-floating rate subordinated notes (“Subordinated Debt”) due June 1, 2027. The Subordinated Debt initially bears a fixed interest rate of 5.25% per year. Commencing on June 1, 2022, the interest rate on the Subordinated

76

Debt resets quarterly to the three-month LIBOR rate plus a spread of 336.5 basis points, payable quarterly in arrears.  Interest on the Subordinated Debt is payable semi-annually on June 1st and December 1st of each year through June 1, 2022 and quarterly thereafter on March 1st, June 1st, September 1st and December 1st of each year through the maturity date or early redemption date.  The Company at its option may redeem the Subordinated Debt, in whole or in part, on any interest payment date on or after June 1, 2022 without a premium. 

Capital Resources

The Company uses a variety of measures to evaluate capital adequacy. Management reviews various capital measurements on a regular basis and takes appropriate action to ensure that such measurements are within established internal and external guidelines. The external guidelines, which are issued by the Federal Reserve and the FDIC, establish a risk‑adjusted ratio relating capital to different categories of assets and off‑balance sheet exposures.

The following table summarizes risk‑based capital, risk‑weighted assets, and risk‑based capital ratios of the consolidated Company under the Basel III requirements for the periods indicated:

	June 30,				June 30,			December 31,
	2019				2018			2018
	(Dollars in thousands)
Capital components:
Common equity Tier 1 capital	$	293,492		$	257,349		$	276,675
Additional Tier 1 capital		—			—			—
Tier 1 Capital		293,492			257,349			276,675
Tier 2 Capital		66,750			66,639			67,922
Total risk-based capital	$	360,242		$	323,988		$	344,597
Risk-weighted assets	$	2,266,336		$	2,405,712		$	2,303,941
Average assets for capital purposes	$	2,971,636		$	2,952,694		$	3,118,150
Capital ratios:
Total risk-based capital		15.9	%		13.5	%		15.0	%
Tier 1 risk-based capital		13.0	%		10.7	%		12.0	%
Common equity Tier 1 risk-based capital		13.0	%		10.7	%		12.0	%
Leverage(1)		9.9	%		8.7	%		8.9	%

The following table summarizes risk based capital, risk-weighted assets, and risk-based capital ratios of HBC under the Basel III requirements for the periods indicated:

	June 30,			June 30,			December 31,
	2019			2018			2018
	(Dollars in thousands)
Capital components:
Common equity Tier 1 capital	$	311,055		$	273,271		$	293,730
Additional Tier 1 capital		—			—			—
Tier 1 Capital		311,055			273,271			293,730
Tier 2 Capital		27,289			27,364			28,553
Total risk-based capital	$	338,344		$	300,635		$	322,283
Risk-weighted assets	$	2,264,771		$	2,404,511		$	2,302,751
Average assets for capital purposes	$	2,970,101		$	2,951,362		$	3,116,645
Capital ratios:
Total risk-based capital		14.9	%		12.5	%		14.0	%
Tier 1 risk-based capital		13.7	%		11.4	%		12.8	%
Common equity Tier 1 risk-based capital		13.7	%		11.4	%		12.8	%
Leverage(1)		10.5	%		9.3	%		9.4	%

(1) Tier 1 capital divided by quarterly average assets (excluding intangible assets and disallowed deferred tax assets).

77

The following table presents the applicable well‑capitalized regulatory guidelines and the standards for minimum capital adequacy requirements under Basel III and the regulatory guidelines for a “well–capitalized” financial institution under Prompt Corrective Action (“PCA”):

			Well-capitalized
			Financial
	Minimum		Institution PCA
	Regulatory		Regulatory
	Requirement(1)		Guidelines
Capital ratios:
Total risk-based capital	10.5	%	10.0	%
Tier 1 risk-based capital	8.5	%	8.0	%
Common equity Tier 1 risk-based capital	7.0	%	6.5	%
Leverage	4.0	%	5.0	%

(1) Includes 2.5% capital conservation buffer, except the leverage capital ratio.

The Basel III capital rules introduce a new “capital conservation buffer,” for banking organizations to maintain a common equity Tier 1 ratio more than 2.5% above these minimum risk‑weighted asset ratios. The capital conservation buffer is designed to absorb losses during periods of economic stress. Banking institutions with a ratio of common equity Tier 1 to risk‑weighted assets above the minimum but below the capital conservation buffer will face constraints on dividends, equity repurchases and compensation based on the amount of the shortfall.

At June 30, 2019, the Company’s consolidated capital ratio exceeded regulatory guidelines and HBC’s capital ratios exceed the highest regulatory capital requirement of “well‑capitalized” under Basel III prompt corrective action provisions. Quantitative measures established by regulation to help ensure capital adequacy require the Company and HBC to maintain minimum amounts and ratios of total risk‑based capital, Tier 1 capital, and common equity Tier 1 (as defined in the regulations) to risk‑weighted assets (as defined), and of Tier 1 capital to average assets (as defined). Management believes that, as of June 30, 2019, June 30, 2018, and December 31, 2018, the Company and HBC met all capital adequacy guidelines to which they were subject. There are no conditions or events since June 30, 2019, that management believes have changed the categorization of the Company or HBC as well‑capitalized.

At June 30, 2019, the Company had total shareholders’ equity of $388.1 million, compared to $346.3 million at June 30, 2018, and $367.5 million at December 31, 2018. At June 30, 2019, total shareholders’ equity included $302.3 million in common stock, $92.1 million in retained earnings, and ($6.3) million of accumulated other comprehensive loss. The book value per share was $8.92 at June 30, 2019, compared to $8.01 at June 30, 2018, and $8.49 at December 31, 2018. The tangible book value per share was $6.75 at June 30, 2019, compared to $5.77 at June 30, 2018, and $6.28 at December 31, 2018.

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

ACCUMULATED OTHER COMPREHENSIVE LOSS	June 30,		June 30,		December 31,
(in $000's, unaudited)	2019		2018		2018
Unrealized loss on securities available-for-sale	$	675	$	(7,684)	$	(5,412)
Remaining unamortized unrealized gain on securities
available-for-sale transferred to held-to-maturity		316		358		343
Split dollar insurance contracts liability		(3,770)		(3,724)		(3,722)
Supplemental executive retirement plan liability		(3,931)		(5,469)		(3,995)
Unrealized gain on interest-only strip from SBA loans		408		653		405
Total accumulated other comprehensive loss	$	(6,302)	$	(15,866)	$	(12,381)

Market Risk

Market risk is the risk of loss of future earnings, fair values, or future cash flows that may result from changes in the price of a financial instrument. The value of a financial instrument may change as a result of changes in interest rates, foreign currency exchange rates, commodity prices, equity prices and other market changes that affect market risk

78

sensitive instruments. Market risk is attributed to all market risk sensitive financial instruments, including securities, loans, deposits and borrowings, as well as the Company’s role as a financial intermediary in customer‑related transactions. The objective of market risk management is to avoid excessive exposure of the Company’s earnings and equity to loss and to reduce the volatility inherent in certain financial instruments.

Interest Rate Management

Market risk arises from changes in interest rates, exchange rates, commodity prices and equity prices. The Company’s market risk exposure is primarily that of interest rate risk, and it has established policies and procedures to monitor and limit earnings and balance sheet exposure to changes in interest rates. The Company does not engage in the trading of financial instruments, nor does the Company have exposure to currency exchange rates.

The principal objective of interest rate risk management (often referred to as “asset/liability management”) is to manage the financial components of the Company in a manner that will optimize the risk/reward equation for earnings and capital in relation to changing interest rates. The Company’s exposure to market risk is reviewed on a regular basis by the Managemnent’s Asset/Liability Committee and the Director’s Finance and Investment Committee. Interest rate risk is the potential of 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 manage the risks. Management uses two methodologies to manage interest rate risk: (i) a standard GAP analysis; and (ii) an interest rate shock simulation model.

The planning of asset and liability maturities is an integral part of the management of an institution’s net interest margin. To the extent maturities of assets and liabilities do not match in a changing interest rate environment, the net interest margin may change over time. Even with perfectly matched repricing of assets and liabilities, risks remain in the form of prepayment of loans or securities or in the form of delays in the adjustment of rates of interest applying to either earning assets with floating rates or to interest‑bearing liabilities. The Company has generally been able to control its exposure to changing interest rates by maintaining primarily floating interest rate loans and a majority of its time certificates with relatively short maturities.

Interest rate changes do not affect all categories of assets and liabilities equally or at the same time. Varying interest rate environments can create unexpected changes in prepayment levels of assets and liabilities, which may have a significant effect on the net interest margin and are not reflected in the interest sensitivity analysis table. Because of these factors, an interest sensitivity GAP report may not provide a complete assessment of the exposure to changes in interest rates.

The Company uses modeling software for asset/liability management in order to simulate the effects of potential interest rate changes on the Company’s net interest margin, and to calculate the estimated fair values of the Company’s financial instruments under different interest rate scenarios. The program imports current balances, interest rates, maturity dates and repricing information for individual financial instruments, and incorporates assumptions on the characteristics of embedded options along with pricing and duration for new volumes to project the effects of a given interest rate change on the Company’s interest income and interest expense. Rate scenarios consisting of key rate and yield curve projections are run against the Company’s investment, loan, deposit and borrowed funds’ portfolios. These rate projections can be shocked (an immediate and parallel change in all base rates, up or down) and ramped (an incremental increase or decrease in rates over a specified time period), based on current trends and econometric models or stable economic conditions (unchanged from current actual levels).

79

The following table sets forth the estimated changes in the Company’s annual net interest income that would result from the designated instantaneous parallel shift in interest rates noted, as of June 30, 2019. Computations of prospective effects of hypothetical interest rate changes are based on numerous assumptions including relative levels of market interest rates, loan prepayments and deposit decay, and should not be relied upon as indicative of actual results.

	Increase/(Decrease) in
	Estimated Net
	Interest Income
	Amount		Percent
	(Dollars in thousands)
Change in Interest Rates (basis points)
+400	$	24,842	19.6	%
+300	$	18,729	14.8	%
+200	$	12,570	9.9	%
+100	$	6,293	5.0	%
0	$	—	—	%
−100	$	(9,322)	(7.4)	%
−200	$	(21,757)	(17.2)	%

This data does not reflect any actions that we may undertake in response to changes in interest rates such as changes in rates paid on certain deposit accounts based on local competitive factors, which could reduce the actual impact on net interest income.

As with any method of gauging interest rate risk, there are certain shortcomings inherent to the methodology noted above. The model assumes interest rate changes are instantaneous parallel shifts in the yield curve. In reality, rate changes are rarely instantaneous. The use of the simplifying assumption that short‑term and long‑term rates change by the same degree may also misstate historic rate patterns, which rarely show parallel yield curve shifts. Further, the model assumes that certain assets and liabilities of similar maturity or period to repricing will react in the same way to changes in rates. In reality, certain types of financial instruments may react in advance of changes in market rates, while the reaction of other types of financial instruments may lag behind the change in general market rates. Additionally, the methodology noted above does not reflect the full impact of annual and lifetime restrictions on changes in rates for certain assets, such as adjustable rate loans. When interest rates change, actual loan prepayments and actual early withdrawals from certificates may deviate significantly from the assumptions used in the model. Finally, this methodology does not measure or reflect the impact that higher rates may have on adjustable‑rate loan clients’ ability to service their debt. All of these factors are considered in monitoring the Company’s exposure to interest rate risk.

ITEM 3—QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The information concerning quantitative and qualitative disclosure or market risk called for by Item 305 of Regulation S‑K is included as part of Item 2 above.

ITEM 4—CONTROLS AND PROCEDURES

Disclosure Control and Procedures

The Company has carried out an evaluation, under the supervision and with the participation of the Company’s management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures as of June 30, 2019. As defined in Rule 13a‑15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), disclosure controls and procedures are controls and procedures designed to reasonably assure that information required to be disclosed in our reports filed or submitted under the Exchange Act are recorded, processed, summarized and reported on a timely basis. Disclosure controls are also designed to reasonably assure that such information is accumulated and communicated to our management, including the Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. Based upon their evaluation, our Chief Executive Officer and Chief Financial Officer concluded the Company’s disclosure controls were effective at June 30, 2019, the period covered by this report on Form 10‑Q.

During the three and six months ended June 30, 2019, there were no changes in our internal controls over financial reporting that materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.

80

Part II—OTHER INFORMATION

ITEM 1—LEGAL PROCEEDINGS

The Company is involved in certain legal actions arising from normal business activities. Management, based upon the advice of legal counsel, 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 Report, you should carefully consider the other factors discussed in Part I, “Item 1A. Risk Factors” in our Annual Report on Form 10‑K for the year ended December 31, 2018, which could materially affect our business, financial condition and/or operating results. There were no material changes from risk factors previously disclosed in our 2018 Annual Report on Form 10‑K. The risk factors identified are in addition to those contained in any other cautionary statements, written or oral, which may be or otherwise addressed in connection with a forward‑looking statement or contained in any of our subsequent filings with the Securities and Exchange Commission.

ITEM 2—UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

None

ITEM 3—DEFAULTS UPON SENIOR SECURITIES

None

ITEM 4—MINE SAFETY DISCLOSURES

None

ITEM 5—OTHER INFORMATION

None

ITEM 6—EXHIBITS

Exhibit	Description
3.1	Heritage Commerce Corp Restated Articles of Incorporation, (incorporated by reference to Exhibit 3.1 to the Registrant’s Annual Report on Form 10‑K filed on March 16, 2009)
3.2	Certificate of Amendment of Articles of Incorporation of Heritage Commerce Corp as filed with the California Secretary of State on June 1, 2010 (incorporated by reference to Exhibit 3.2 to the Registrant’s Registration Statement on Form S‑1 filed July 23, 2010).
3.3	Heritage Commerce Corp Bylaws, as amended (incorporated by reference to the Registrant’s Current Report on Form 8‑K filed on June 28, 2013)
31.1	Certification of Registrant’s Chief Executive Officer Pursuant To Section 302 of the Sarbanes‑Oxley Act of 2002
31.2	Certification of Registrant’s Chief Financial Officer Pursuant To Section 302 of the Sarbanes‑Oxley Act of 2002
32.1	Certification of Registrant’s Chief Executive Officer Pursuant To 18 U.S.C. Section 1350
32.2	Certification of Registrant’s Chief Financial Officer Pursuant To 18 U.S.C. Section 1350
101.INS	XBRL Instance Document, filed herewith
101.SCH	XBRL Taxonomy Extension Schema Document, filed herewith
101.CAL	XBRL Taxonomy Extension Calculation Linkbase Document, filed herewith
101.DEF	XBRL Taxonomy Extension Definition Linkbase Document, filed herewith
101.LAB	XBRL Taxonomy Extension Label Linkbase Document, filed herewith
101.PRE	XBRL Taxonomy Extension Presentation Linkbase Document, filed herewith

81

SIGNATURES

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

	Heritage Commerce Corp (Registrant)
Date: August 6, 2019	/s/ WALTER T. KACZMAREK
	Waletr T. Kaczmarek
	Chief Executive Officer
Date: August 6, 2019	/s/ Lawrence D. McGovern
	Lawrence D. McGovern
	Chief Financial Officer

82

EX-31.1

Exhibit 31.1

CERTIFICATION UNDER SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

REGARDING THE QUARTERLY REPORT ON FORM 10-Q

FOR THE QUARTER ENDED JUNE 30, 2019

I, Walter T. Kaczmarek, certify that:

1. I have reviewed this Quarterly Report on Form 10‑Q for the Quarter Ended June 30, 2019 of Heritage Commerce Corp;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a‑15(e) and 15d‑15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a‑15(f) and 15d‑15(f)) for the registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: August 6, 2019

/s/ WALTER T. KACZMAREK

Walter T. Kaczmarek

Chief Executive Officer

EX-31.2

Exhibit 31.2

CERTIFICATION UNDER SECTION 302 OF THE SARBANES‑OXLEY ACT OF 2002

REGARDING THE QUARTERLY REPORT ON FORM 10‑Q

FOR THE QUARTER ENDED JUNE 30, 2019

I, Lawrence D. McGovern, certify that:

1. I have reviewed this Quarterly Report on Form 10‑Q for the Quarter Ended June 30, 2019 of Heritage Commerce Corp;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a‑15(e) and 15d‑15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a‑15(f) and 15d‑15(f)) for the registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: August 6, 2019

/s/ LAWRENCE D. MCGOVERN

Lawrence D. McGovern

Chief Financial Officer

EX-32.1

Exhibit 32.1

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES‑OXLEY ACT OF 2002

REGARDING THE QUARTERLY REPORT ON FORM 10‑Q

FOR THE QUARTER ENDED JUNE 30, 2019

In connection with the Quarterly Report of Heritage Commerce Corp (the “Company”) on Form 10‑Q for the period ended June 30, 2019 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I,  Walter T. Kaczmarek, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes‑Oxley Act of 2002, that:

(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Date: August 6, 2019

/s/ WALTER T. KACZMAREK

Walter T. Kaczmarek 

Chief Executive Officer

EX-32.2

Exhibit 32.2

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES‑OXLEY ACT OF 2002

REGARDING THE QUARTERLY REPORT ON FORM 10‑Q

FOR THE QUARTER ENDED JUNE 30, 2019

In connection with the Quarterly Report of Heritage Commerce Corp (the “Company”) on Form 10‑Q for the period ended June 30, 2019 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Lawrence D. McGovern, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes‑Oxley Act of 2002, that:

(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Date: August 6, 2019

/s/ LAWRENCE D. MCGOVERN

Lawrence D. McGovern

Chief Financial Officer

XML

Document and Entity Information - shares	6 Months Ended
	Jun. 30, 2019	Jul. 30, 2019
Document and Entity Information [Abstract]
Document Type	10-Q
Document Period End Date	Jun. 30, 2019
Entity Registrant Name	HERITAGE COMMERCE CORP
Entity Current Reporting Status	Yes
Entity Filer Category	Accelerated Filer
Entity Small Business	false
Entity Emerging Growth Company	false
Entity Shell Company	false
Entity Common Stock, Shares Outstanding		43,498,606
Entity Central Index Key	0001053352
Current Fiscal Year End Date	--12-31
Document Fiscal Year Focus	2019
Document Fiscal Period Focus	Q2
Amendment Flag	false

XML

CONSOLIDATED BALANCE SHEETS - USD ($) $ in Thousands	Jun. 30, 2019	Dec. 31, 2018
Assets
Cash and due from banks	$ 36,302	$ 30,273
Other investments and interest-bearing deposits in other financial institutions	239,710	134,295
Total cash and cash equivalents	276,012	164,568
Securities available-for-sale, at fair value	383,156	459,043
Securities held-to-maturity, at amortized cost (fair value of $351,467 at June 30, 2019 and $366,175 at December 31, 2018)	351,399	377,198
Loans held-for-sale - SBA, at lower of cost or fair value, including deferred costs	5,202	2,649
Loans, net of deferred fees	1,877,767	1,886,405
Allowance for loan losses	(26,631)	(27,848)
Loans, net	1,851,136	1,858,557
Federal Home Loan Bank and Federal Reserve Bank stock and other investments, at cost	25,226	25,216
Company-owned life insurance	62,522	61,859
Premises and equipment, net	6,975	7,137
Goodwill	83,753	83,753
Other intangible assets	10,900	12,007
Accrued interest receivable and other assets	51,750	44,575
Total assets	3,108,031	3,096,562
Deposits:
Demand, noninterest-bearing	994,082	1,021,582
Demand, interest-bearing	682,114	702,000
Savings and money market	788,832	754,277
Time deposits - under $250	53,351	58,661
Time deposits - $250 and over	88,519	86,114
CDARS - interest-bearing demand, money market and time deposits	15,575	14,898
Total deposits	2,622,473	2,637,532
Subordinated debt, net of issuance costs	39,461	39,369
Accrued interest payable and other liabilities	57,989	52,195
Total liabilities	2,719,923	2,729,096
Shareholders' equity:
Preferred stock, no par value; 10,000,000 shares authorized; none issued and outstanding at June 30, 2019 and December 31, 2018
Common stock, no par value; 60,000,000 shares authorized; 43,498,406 shares issued and outstanding at June 30, 2019 and 43,288,750 shares issued and outstanding at December 31, 2018	302,305	300,844
Retained earnings	92,105	79,003
Accumulated other comprehensive loss	(6,302)	(12,381)
Total shareholders' equity	388,108	367,466
Total liabilities and shareholders' equity	$ 3,108,031	$ 3,096,562

XML

CONSOLIDATED BALANCE SHEETS (Parenthetical) - USD ($) $ in Thousands	Jun. 30, 2019	Dec. 31, 2018
Securities held-to-maturity
Securities held-to-maturity, fair value (in dollars)	$ 351,467	$ 366,175
Preferred stock
Preferred stock, par value (in dollars per share)	$ 0	$ 0
Preferred stock, shares authorized	10,000,000	10,000,000
Preferred stock, shares issued	0	0
Preferred stock, outstanding (in shares)	0	0
Common stock
Common stock, par value (in dollars per share)	$ 0	$ 0
Common stock, shares authorized	60,000,000	60,000,000
Common stock, shares issued	43,498,406	43,288,750
Common stock, shares outstanding	43,498,406	43,288,750

XML

CONSOLIDATED STATEMENTS OF INCOME - USD ($) $ in Thousands	3 Months Ended		6 Months Ended
	Jun. 30, 2019	Jun. 30, 2018	Jun. 30, 2019	Jun. 30, 2018
Interest income:
Loans, including fees	$ 27,251	$ 26,355	$ 54,058	$ 48,639
Securities, taxable	4,136	3,767	8,645	7,629
Securities, exempt from Federal tax	546	560	1,094	1,120
Other investments, interest-bearing deposits in other financial institutions and Federal funds sold	1,556	1,298	3,141	2,469
Total interest income	33,489	31,980	66,938	59,857
Interest expense:
Deposits	1,995	1,239	3,831	2,197
Subordinated debt	577	577	1,148	1,148
Other borrowings	1		1
Total interest expense	2,573	1,816	4,980	3,345
Net interest income after provision for loan losses	30,916	30,164	61,958	56,512
Provision (credit) for loan losses	(740)	7,198	(1,801)	7,704
Net interest income after provision for loan losses	31,656	22,966	63,759	48,808
Noninterest income:
Service charges and fees on deposit accounts	1,177	972	2,338	1,874
Gain on sales of securities	548	179	548	266
Increase in cash surrender value of life insurance	333	237	663	600
Servicing income	150	189	341	370
Gain on sales of SBA loans	36	80	175	315
Other	521	1,123	1,168	1,550
Total noninterest income	2,765	2,780	5,233	4,975
Noninterest expense:
Salaries and employee benefits	10,698	14,496	21,468	23,963
Occupancy and equipment	1,578	1,262	3,084	2,368
Professional fees	753		1,571	395
Professional fees		(289)
Other	5,416	9,393	10,240	14,126
Total noninterest expense	18,445	24,862	36,363	40,852
Income before income taxes	15,976	884	32,629	12,931
Income tax expense	4,623	(31)	9,130	3,207
Net income	$ 11,353	$ 915	$ 23,499	$ 9,724
Earnings per common share:
Basic (in dollars per share)	$ 0.26	$ 0.02	$ 0.54	$ 0.24
Diluted (in dollars per share)	$ 0.26	$ 0.02	$ 0.54	$ 0.24

XML

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME - USD ($) $ in Thousands	3 Months Ended		6 Months Ended
	Jun. 30, 2019	Jun. 30, 2018	Jun. 30, 2019	Jun. 30, 2018
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Net income	$ 11,353	$ 915	$ 23,499	$ 9,724
Other comprehensive income:
Change in net unrealized holding (losses) gains on available-for-sale securities and I/O strips	4,333	(1,144)	9,204	(9,129)
Deferred income taxes	(1,261)	332	(2,728)	2,647
Change in net unamortized unrealized gain on securities available-for-sale that were reclassified to securities held-to-maturity	(13)	(11)	(39)	(22)
Deferred income taxes	4	3	12	6
Reclassification adjustment for gains realized in income	(548)	(179)	(548)	(266)
Deferred income taxes	162	53	162	79
Change in unrealized (losses) gains on securities and I/O strips, net of deferred income taxes	2,677	(946)	6,063	(6,685)
Change in net pension and other benefit plan liability adjustment	11	51	23	101
Deferred income taxes	(3)	(15)	(7)	(30)
Change in pension and other benefit plan liability, net of deferred income taxes	8	36	16	71
Other comprehensive income (loss)	2,685	(910)	6,079	(6,614)
Total comprehensive income	$ 14,038	$ 5	$ 29,578	$ 3,110

XML

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY - USD ($) $ in Thousands	Common Stock Tri Valley Bank	Common Stock United American Bank	Common Stock	Retained Earnings	Accumulated Other Comprehensive Income / (Loss)	Tri Valley Bank	Total
Balance at Dec. 31, 2017			$ 218,355	$ 62,136	$ (9,252)		$ 271,239
Balance (in shares) at Dec. 31, 2017			38,200,883
Increase (Decrease) in Shareholders' Equity
Net income				8,809			8,809
Other comprehensive income (loss)					(5,704)		(5,704)
Stock option expense, net of forfeitures and taxes			$ 228				228
Cash dividend declared				(4,206)			(4,206)
Stock option expense, net of forfeitures and taxes			176				176
Stock options exercised			$ 449				449
Stock options exercised (in shares)			68,906
Balance at Mar. 31, 2018			$ 219,208	66,739	(14,956)		270,991
Balance (in shares) at Mar. 31, 2018			38,269,789
Balance at Dec. 31, 2017			$ 218,355	62,136	(9,252)		271,239
Balance (in shares) at Dec. 31, 2017			38,200,883
Increase (Decrease) in Shareholders' Equity
Net income							9,724
Other comprehensive income (loss)					(6,614)		(6,614)
Balance at Jun. 30, 2018			$ 299,224	62,911	(15,866)		346,269
Balance (in shares) at Jun. 30, 2018			43,222,184
Balance at Mar. 31, 2018			$ 219,208	66,739	(14,956)		270,991
Balance (in shares) at Mar. 31, 2018			38,269,789
Increase (Decrease) in Shareholders' Equity
Net income				915			915
Other comprehensive income (loss)					(910)		(910)
Issuance of common shares to acquire Business	$ 30,725	$ 47,280				$ 30,725
Issuance of common shares to acquire Business (in shares)	1,889,613	2,826,032
Issuance of restricted stock awards, net							47,280
Issuance of restricted stock awards, net (in shares)			97,818
Stock option expense, net of forfeitures and taxes			$ 283				283
Cash dividend declared				(4,743)			(4,743)
Stock option expense, net of forfeitures and taxes			175				175
Stock options exercised			$ 1,553				1,553
Stock options exercised (in shares)			138,932
Balance at Jun. 30, 2018			$ 299,224	62,911	(15,866)		346,269
Balance (in shares) at Jun. 30, 2018			43,222,184
Balance at Dec. 31, 2018			$ 300,844	79,003	(12,381)		367,466
Balance (in shares) at Dec. 31, 2018			43,288,750
Increase (Decrease) in Shareholders' Equity
Net income				12,146			12,146
Other comprehensive income (loss)					3,394		3,394
Stock option expense, net of forfeitures and taxes			$ 271				271
Cash dividend declared				(5,196)			(5,196)
Stock option expense, net of forfeitures and taxes			166				166
Stock options exercised			$ 269				269
Stock options exercised (in shares)			35,003
Balance at Mar. 31, 2019			$ 301,550	85,953	(8,987)		378,516
Balance (in shares) at Mar. 31, 2019			43,323,753
Balance at Dec. 31, 2018			$ 300,844	79,003	(12,381)		367,466
Balance (in shares) at Dec. 31, 2018			43,288,750
Increase (Decrease) in Shareholders' Equity
Net income							23,499
Other comprehensive income (loss)					6,079		6,079
Balance at Jun. 30, 2019			$ 302,305	92,105	(6,302)		388,108
Balance (in shares) at Jun. 30, 2019			43,498,406
Balance at Mar. 31, 2019			$ 301,550	85,953	(8,987)		378,516
Balance (in shares) at Mar. 31, 2019			43,323,753
Increase (Decrease) in Shareholders' Equity
Net income				11,353			11,353
Other comprehensive income (loss)					2,685		2,685
Issuance of restricted stock awards, net (in shares)			134,653
Stock option expense, net of forfeitures and taxes			$ 303				303
Cash dividend declared				(5,201)			(5,201)
Stock option expense, net of forfeitures and taxes			155				155
Stock options exercised			$ 297				297
Stock options exercised (in shares)			40,000
Balance at Jun. 30, 2019			$ 302,305	$ 92,105	$ (6,302)		$ 388,108
Balance (in shares) at Jun. 30, 2019			43,498,406

XML

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (Parenthetical) - $ / shares	3 Months Ended
	Jun. 30, 2019	Mar. 31, 2019	Jun. 30, 2018	Mar. 31, 2018
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
Cash dividend declared per share (in dollars per share)	$ 0.12	$ 0.12	$ 0.11	$ 0.11

XML

CONSOLIDATED STATEMENTS OF CASH FLOWS - USD ($) $ in Thousands	6 Months Ended
	Jun. 30, 2019	Jun. 30, 2018
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$ 23,499	$ 9,724
Adjustments to reconcile net income to net cash provided by operating activities:
Amortization of discounts and premiums on securities	1,132	2,120
(Gain) on sale of securities available-for-sale	(548)	(266)
(Gain) on sale of SBA loans	(175)	(315)
Proceeds from sale of SBA loans originated for sale	2,528	4,139
SBA loans originated for sale	(4,906)	(6,150)
Provision (credit) for loan losses	(1,801)	7,704
Increase in cash surrender value of life insurance	(663)	(600)
Depreciation and amortization	401	380
Amortization of other intangible assets	1,107	705
Stock option expense, net	321	351
Amortization of restricted stock awards, net	574	511
Amortization of subordinated debt issuance costs	92	92
Effect of changes in:
Accrued interest receivable and other assets	(186)	(2,724)
Accrued interest payable and other liabilities	(3,767)	1,004
Net cash provided by operating activities	17,608	16,675
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of securities available-for-sale		(15,193)
Purchase of securities held-to-maturity		(16,906)
Maturities/paydowns/calls of securities available-for-sale	24,868	30,343
Maturities/paydowns/calls of securities held-to-maturity	25,007	25,655
Proceeds from sales of securities available-for-sale	59,878	94,291
Net change in loans	9,222	(38,218)
Changes in Federal Home Loan Bank stock and other investments	(10)	(2,132)
Purchase of premises and equipment	(239)	(32)
Cash received in bank acquisition, net of cash paid		36,028
Net cash provided by investing activities	118,726	113,836
CASH FLOWS FROM FINANCING ACTIVITIES:
Net change in deposits	(15,059)	(215,998)
Exercise of stock options	566	2,002
Payment of cash dividends	(10,397)	(8,949)
Net cash used in financing activities	(24,890)	(222,945)
Net increase in cash and cash equivalents	111,444	(92,434)
Cash and cash equivalents, beginning of period	164,568	316,222
Cash and cash equivalents, end of period	276,012	223,788
Supplemental disclosures of cash flow information:
Interest paid	4,733	3,306
Income taxes paid	10,891	$ 8,663
Supplemental schedule of non-cash activity:
Recording of right to use assets in exchange for lease obligations	$ 9,566

XML

CONSOLIDATED STATEMENTS OF CASH FLOWS - Summary of Assets Acquired and Liabilities Assumed Through Acquisition (Parenthetical) $ in Thousands	6 Months Ended
	Jun. 30, 2018 USD ($)
Summary of assets acquired and liabilities assumed through acquisitions:
Cash and cash equivalents, net of cash paid	$ 36,028
Securities available-for-sale	63,723
Net loans	336,446
Premises and equipment, net	350
Goodwill	38,089
Other intangible assets	8,361
Other assets, net	14,736
Deposits	(416,628)
Other borrowings	(62)
Other liabilities	$ (3,038)

XML

CONSOLIDATED STATEMENTS OF CASH FLOWS - Common Stock Issued to Acquire Tri-Valley and United American Bank (Parenthetical) $ in Thousands	6 Months Ended
	Jun. 30, 2018 USD ($)
Supplemental schedule of non-cash activity:
Common stock issued to acquire Tri-Valley Bank and United American Bank	$ 78,005

XML

Basis of Presentation

6 Months Ended

Jun. 30, 2019

Basis of Presentation

Basis of Presentation

1) Basis of Presentation

The unaudited consolidated financial statements of Heritage Commerce Corp (the “Company” or “HCC”) and its wholly owned subsidiary, Heritage Bank of Commerce (“HBC”), have been prepared pursuant to the rules and regulations for reporting on Form 10-Q. Accordingly, certain information and notes required by accounting principles generally accepted in the United States of America (“GAAP”) for annual financial statements are not included herein. The interim statements should be read in conjunction with the consolidated financial statements and notes that were included in the Company’s Form 10-K for the year ended December 31, 2018.

HBC is a commercial bank serving customers primarily located in Santa Clara, Alameda, Contra Costa, San Benito, and San Mateo counties of California. CSNK Working Capital Finance Corp. a California corporation, dba Bay View Funding (“Bay View Funding”) is a wholly owned subsidiary of HBC, and provides business-essential working capital factoring financing to various industries throughout the United States. No customer accounts for more than 10% of revenue for HBC or the Company. The Company reports its results for two segments: banking and factoring. The Company’s management uses segment results in its operating and strategic planning.

In management’s opinion, all adjustments necessary for a fair presentation of these consolidated financial statements have been included and are of a normal and recurring nature. All intercompany transactions and balances have been eliminated.

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ significantly from these estimates.

The results for the three and six months ended June 30, 2019 are not necessarily indicative of the results expected for any subsequent period or for the entire year ending December 31, 2019.

Business Combinations

The Company accounts for acquisitions of businesses using the acquisition method of accounting. Under the acquisition method, assets acquired and liabilities assumed are recorded at their estimated fair values at the date of acquisition. Management utilizes various valuation techniques including discounted cash flow analyses to determine these fair values. Any excess of the purchase price over amounts allocated to the acquired assets, including identifiable intangible assets, and liabilities assumed is recorded as goodwill.

Goodwill and Other Intangible Assets

Goodwill resulted from the acquisition of Tri-Valley Bank (“Tri-Valley”) on April 6, 2018 and United American Bank (“United American”) on May 4, 2018, and from acquisitions in prior years. Goodwill represents the excess of the purchase price over the fair value of acquired tangible assets and liabilities and identifiable intangible assets. Goodwill is assessed at least annually for impairment and any such impairment is recognized in the period identified.

Other intangible assets consist of core deposit intangible assets and a below market value lease intangible asset, arising from the United American and Tri-Valley acquisitions. They are initially measured at fair value and then are amortized over their estimated useful lives. The core deposit intangible assets from the acquisitions of United American and Tri-Valley are being amortized on an accelerated method over ten years. The below market value lease intangible assets are being amortized on the straight line method over three years for United American and eleven years for Tri-Valley. 

Reclassifications

              Certain reclassifications of prior year balances have been made to conform to the current year presentation. These reclassifications had no impact on the Company’s consolidated financial position, results of operations or net change in cash and cash equivalents.

Adoption of New Accounting Standards

In February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016-02, “Leases (Topic 842)”. The pronouncement affects all entities that are participants to leasing agreements. From a lessee accounting perspective, the ASU requires a lessee to recognize assets and liabilities on the balance sheet for operating leases and changes many key definitions, including the definition of a lease. The ASU includes a short-term lease exception for leases with a term of twelve months or less, in which a lessee can make an accounting policy election not to recognize lease assets and lease liabilities. The Company has elected this short-term lease exception.  Lessees will continue to differentiate between finance leases (previously referred to as capital leases) and operating leases, using classification criteria that are substantially similar to the previous guidance. For lessees, the recognition, measurement, and presentation of expenses and cash flows arising from a lease have not significantly changed from previous GAAP. From a lessor accounting perspective, the guidance is largely unchanged, except for targeted improvements to align with new terminology under lessee accounting and with the updated revenue recognition guidance in Topic 606.  The ASU includes additional quantitative and qualitative disclosures required by lessees and lessors to help users better understand the amount, timing, and uncertainty of cash flows arising from leases. ASU No. 2016-02 is effective for fiscal years beginning after December 31, 2018, and interim periods within those fiscal years. Lessees and lessors are required to recognize and measure leases at the beginning of the earliest period presented using a modified retrospective approach.

In July 2018, the FASB issued ASU No. 2018-11, “Leases (Topic 842) - Targeted Improvements” to provide entities with relief from the costs of implementing certain aspects of the new leasing standard. Specifically, under the amendments in ASU No. 2018-11 entities may elect not to recast the comparative periods presented when transitioning to the new leasing standard, and lessors may elect not to separate lease and non-lease components when certain conditions are met. As the Company elected the transition option provided in ASU No. 2018-11, the modified retrospective approach was applied on January 1, 2019 (as opposed to January 1, 2017). The Company also elected certain practical expedients provided under ASU No. 2016-02 whereby we will not reassess (i) whether any expired or existing contracts are or contain leases, (ii) the lease classification for any expired or existing leases and (iii) initial direct costs for any existing leases. In December 2018, the FASB issued ASU No. 2018-20, “Leases (Topic 842): Narrow-Scope Improvements for Lessors,” which provides targeted improvements and clarification to guidance with FASB ASC Topic 842 specific to lessors. The amendments of ASU No. 2018-20 have the same effective date as ASU 2016-02 and may be applied either retrospectively or prospectively to all new and existing leases. The Company obtained a third-party software application which provides lease accounting under the guidelines of FASB ASC Topic 842.

The amendments of ASU No. 2016-02 and subsequently issued ASUs, which provided additional guidance and clarifications to various aspects of FASB ASC Topic 842, became effective for the Company on January 1, 2019.  At the adoption date, the Company reported increase assets and liabilities of approximately $9.6 million on its consolidated balance sheet as a result of recognizing right-of-use assets and lease liabilities related to non-cancellable operating lease agreements for office space. The adoption of this guidance did not have a material impact to its Consolidated Statetements of Income or Cash Flows. See Note 17 – Leases for more information.

In March 2017, the FASB issued ASU 2017-08, Premium Amortization on Purchased Callable Debt Securities. This update shortens the amortization period of certain callable debt securities held at a premium to the earliest call date.  The amendments in this update were effective for the Company on January 1, 2019.  The amendments are applied on a modified retrospective basis through a cumulative-effect adjustment to retained earnings as of the beginning of the period of adoption and the Company is required to provide change in accounting principle disclosures. The Company adopted the new guidance on January 1, 2019, and there was no material impact to the financial statements and no cumulative adjustments were made.

Newly Issued, but not yet Effective Accounting Standards

In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments – Credit Losses: Measurement of Credit Losses on Financial Instruments. The standard is the final guidance on the new current expected credit loss (“CECL”) model. The amendments in this update replace the incurred loss impairment methodology in current GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to estimate future credit loss estimates. As CECL encompasses all financial assets carried at amortized cost, the requirement that reserves be established based on an organization’s reasonable and supportable estimate of expected credit losses extends to held-to-maturity debt securities.  The guidance allows for a modified retrospective approach with a cumulative effect adjustment to the balance sheet upon adoption (charge to retained earnings instead of the income statement). The new guidance is effective for public business entities for fiscal years, and interim periods within those years, beginning after December 15, 2019. While early application is permitted for fiscal years beginning after December 15, 2018, the Company plans to adopt this standard on January 1, 2020. The Company has established a company-wide, cross-functional governance structure, which oversees overall strategy for implementation of CECL. We are currently evaluating various loss methodologies to determine their correlation to our various loan categories historical performance. The Company has completed the data validation and is currently parallel processing during the third and fourth quarters of 2019 our existing allowance for loan loss model with CECL prior to implementation. The Company is focused on completing model validation, refining assumptions and continued review of the models. The Company also continues to focus on researching and resolving interpretive accounting issues in the ASU, contemplating various related accounting policies, developing processes and related controls and considering various reporting disclosures. The magnitude of the change in the Company’s allowance for loan losses at the adoption date will depend upon the nature and characteristics of the portfolio at the adoption date, as well as macroeconomic conditions and forecasts at that time.

In January 2017, the FASB issued accounting standards ASU No. 2017-04, Simplifying the Test for Goodwill Impairment. The provisions of the update eliminate the existing second step of the goodwill impairment test which provides for the allocation of reporting unit fair value among existing assets and liabilities, with the net remaining amount representing the implied fair value of goodwill. In replacement of the existing goodwill impairment rule, the update will provide that impairment should be recognized as the excess of any of the reporting unit’s goodwill over the fair value of the reporting unit. Under the provisions of this update, the amount of the impairment is limited to the carrying value of the reporting unit’s goodwill. For public business entities that are SEC filers, the amendments of the update will become effective in fiscal years beginning after December 15, 2019. Management does not expect the requirements of this update to have a material impact on the Company’s financial position, results of operations or cash flows.

XML

Shareholders' Equity and Earnings Per Share

6 Months Ended

Jun. 30, 2019

Shareholders' Equity and Earnings Per Share.

Shareholders' Equity and Earnings Per Share

2) Shareholders’ Equity and Earnings Per Share

Basic earnings per common share is computed by dividing net income by the weighted average common shares outstanding. Diluted earnings per share reflect potential dilution from outstanding stock options using the treasury stock method. There were 826,445 and 305,500 stock options for the three months ended June 30, 2019 and 2018, and 826,445, and 318,606 for the six months ended June 30, 2019 and 2018, respectively, considered to be antidilutive and excluded from the computation of diluted earnings per share. A reconciliation of these factors used in computing basic and diluted earnings per common share is as follows:

	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2019		2018		2019		2018
	(Dollars in thousands, except per share amounts)
Net income	$	11,353	$	915	$	23,499	$	9,724
Weighted average common shares outstanding for basic
earnings per common share		43,202,562		41,925,616		43,155,360		40,083,056
Dilutive potential common shares		518,889		583,058		539,757		577,027
Shares used in computing diluted earnings per common share		43,721,451		42,508,674		43,695,117		40,660,083
Basic earnings per share	$	0.26	$	0.02	$	0.54	$	0.24
Diluted earnings per share	$	0.26	$	0.02	$	0.54	$	0.24

XML

Accumulated Other Comprehensive Income (Loss) (“AOCI”)

6 Months Ended

Jun. 30, 2019

Accumulated Other Comprehensive Income (Loss) (“AOCI”)

Accumulated Other Comprehensive Income (“AOCI”)

3) Accumulated Other Comprehensive Income (Loss) (“AOCI”)

The following table reflects the changes in AOCI by component for the periods indicated:

	Three Months Ended June 30, 2019 and 2018
			Unamortized
			Unrealized
	Unrealized		Gain on
	Gains (Losses) on		Available-
	Available-		for-Sale		Defined
	for-Sale		Securities		Benefit
	Securities		Reclassified		Pension
	and I/O		to Held-to-		Plan
	Strips(1)		Maturity		Items		Total
	(Dollars in thousands)
Beginning balance April 1, 2019, net of taxes	$	(1,603)	$	326	$	(7,710)	$	(8,987)
Other comprehensive income (loss) before reclassification,
net of taxes		3,072		—		(7)		3,065
Amounts reclassified from other comprehensive income (loss),
net of taxes		(386)		(9)		15		(380)
Net current period other comprehensive income (loss),
net of taxes		2,686		(9)		8		2,685
Ending balance June 30, 2019, net of taxes	$	1,083	$	317	$	(7,702)	$	(6,302)
Beginning balance April 1, 2018, net of taxes	$	(6,093)	$	367	$	(9,230)	$	(14,956)
Other comprehensive (loss) before reclassification,		(812)		—		(4)		(816)
net of taxes
Amounts reclassified from other comprehensive income (loss),		(126)		(8)		40		(94)
net of taxes
Net current period other comprehensive income (loss),
net of taxes		(938)		(8)		36		(910)
Ending balance June 30, 2018, net of taxes	$	(7,031)	$	359	$	(9,194)	$	(15,866)

(1) This AOCI component is included in the computation of net periodic benefit cost (see Note 9—Benefit Plans) and includes split-dollar life insurance benefit plan.

	Six Months Ended June 30, 2019 and 2018
			Unamortized
			Unrealized
	Unrealized		Gain on
	Gains (Losses) on		Available-
	Available-		for-Sale		Defined
	for-Sale		Securities		Benefit
	Securities		Reclassified		Pension
	and I/O		to Held-to-		Plan
	Strips		Maturity		Items		Total
	(Dollars in thousands)
Beginning balance January 1, 2019, net of taxes	$	(5,007)	$	344	$	(7,718)	$	(12,381)
Other comprehensive income (loss) before reclassification,
net of taxes		6,476		—		(14)		6,462
Amounts reclassified from other comprehensive income (loss),
net of taxes		(386)		(27)		30		(383)
Net current period other comprehensive income (loss),
net of taxes		6,090		(27)		16		6,079
Ending balance June 30, 2019, net of taxes	$	1,083	$	317	$	(7,702)	$	(6,302)
Beginning balance January 1, 2018, net of taxes	$	(362)	$	375	$	(9,265)	$	(9,252)
Other comprehensive (loss) before reclassification,
net of taxes		(6,482)		—		(9)		(6,491)
Amounts reclassified from other comprehensive income (loss),
net of taxes		(187)		(16)		80		(123)
Net current period other comprehensive income (loss),
net of taxes		(6,669)		(16)		71		(6,614)
Ending balance June 30, 2018, net of taxes	$	(7,031)	$	359	$	(9,194)	$	(15,866)

(1) This AOCI component is included in the computation of net periodic benefit cost (see Note 9—Benefit Plans) and includes split-dollar life insurance benefit plan.

	Amounts Reclassified from
	AOCI(1)
	Three Months Ended
	June 30,				Affected Line Item Where
Details About AOCI Components	2019		2018		Net Income is Presented
	(Dollars in thousands)
Unrealized gains on available-for-sale securities
and I/O strips	$	548	$	179	Gain on sales of securities
		(162)		(53)	Income tax expense
		386		126	Net of tax
Amortization of unrealized gain on securities available-
for-sale that were reclassified to securities
held-to-maturity		13		11	Interest income on taxable securities
		(4)		(3)	Income tax expense
		9		8	Net of tax
Amortization of defined benefit pension plan items (1)
Prior transition obligation		24		16
Actuarial losses		(46)		(73)
		(22)		(57)	Other noninterest expense
		7		17	Income tax benefit
		(15)		(40)	Net of tax
Total reclassification for the period	$	380	$	94

	Amounts Reclassified from
	AOCI(1)
	Six Months Ended
	June 30,				Affected Line Item Where
Details About AOCI Components	2019		2018		Net Income is Presented
	(Dollars in thousands)
Unrealized gains on available-for-sale securities
and I/O strips	$	548	$	266	Gain on sales of securities
		(162)		(79)	Income tax expense
		386		187	Net of tax
Amortization of unrealized gain on securities
available-for-sale that were reclassified to securities
held-to-maturity		39		22	Interest income on taxable securities
		(12)		(6)	Income tax expense
		27		16	Net of tax
Amortization of defined benefit pension plan items (1)
Prior transition obligation		49		32
Actuarial losses		(92)		(146)
		(43)		(114)	Other noninterest expense
		13		34	Income tax benefit
		(30)		(80)	Net of tax
Total reclassification from AOCI for the period	$	383	$	123

(1) This AOCI component is included in the computation of net periodic benefit cost (see Note 9—Benefit Plans) and includes split-dollar life insurance benefit plan.

XML

Securities

6 Months Ended

Jun. 30, 2019

Securities

Securities

4) Securities

The amortized cost and estimated fair value of securities at June 30, 2019 and December 31, 2018 were as follows:

			Gross		Gross		Estimated
	Amortized		Unrealized		Unrealized		Fair
June 30, 2019	Cost		Gains		(Losses)		Value
	(Dollars in thousands)
Securities available-for-sale:
Agency mortgage-backed securities	$	243,861	$	327	$	(1,541)	$	242,647
U.S. Treasury		138,379		2,130		—		140,509
Total	$	382,240	$	2,457	$	(1,541)	$	383,156
Securities held-to-maturity:
Agency mortgage-backed securities	$	267,514	$	694	$	(1,673)	$	266,535
Municipals - exempt from Federal tax		83,885		1,105		(58)		84,932
Total	$	351,399	$	1,799	$	(1,731)	$	351,467

			Gross		Gross		Estimated
	Amortized		Unrealized		Unrealized		Fair
December 31, 2018	Cost		Gains		(Losses)		Value
	(Dollars in thousands)
Securities available-for-sale:
Agency mortgage-backed securities	$	311,523	$	98	$	(8,767)	$	302,854
U.S. Treasury		147,823		930		—		148,753
U.S. Government sponsored entities		7,433		4		(1)		7,436
Total	$	466,779	$	1,032	$	(8,768)	$	459,043
Securities held-to-maturity:
Agency mortgage-backed securities	$	291,241	$	59	$	(9,153)	$	282,147
Municipals - exempt from Federal tax		85,957		312		(2,241)		84,028
Total	$	377,198	$	371	$	(11,394)	$	366,175

Securities with unrealized losses at June 30, 2019 and December 31, 2018, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position are as follows:

	Less Than 12 Months				12 Months or More				Total
	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
June 30, 2019	Value		(Losses)		Value		(Losses)		Value		(Losses)
	(Dollars in thousands)
Securities available-for-sale:
Agency mortgage-backed securities	$	—	$	—	$	198,443	$	(1,541)	$	198,443	$	(1,541)
Total	$	—	$	—	$	198,443	$	(1,541)	$	198,443	$	(1,541)
Securities held-to-maturity:
Agency mortgage-backed securities	$	—	$	—	$	174,138	$	(1,673)	$	174,138	$	(1,673)
Municipals - exempt from Federal tax		150		(1)		7,790		(57)		7,940		(58)
Total	$	150	$	(1)	$	181,928	$	(1,730)	$	182,078	$	(1,731)

	Less Than 12 Months				12 Months or More				Total
	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
December 31, 2018	Value		(Losses)		Value		(Losses)		Value		(Losses)
	(Dollars in thousands)
Securities available-for-sale:
Agency mortgage-backed securities	$	3,868	$	(21)	$	281,082	$	(8,746)	$	284,950	$	(8,767)
U.S. Government sponsored entities		3,974		(1)		—		—		3,974		(1)
Total	$	7,842	$	(22)	$	281,082	$	(8,746)	$	288,924	$	(8,768)
Securities held-to-maturity:
Agency mortgage-backed securities	$	16,088	$	(103)	$	255,917	$	(9,050)	$	272,005	$	(9,153)
Municipals - exempt from Federal tax		5,019		(27)		57,301		(2,214)		62,320		(2,241)
Total	$	21,107	$	(130)	$	313,218	$	(11,264)	$	334,325	$	(11,394)

There were no holdings of securities of any one issuer, other than the U.S. Government and its sponsored entities, in an amount greater than 10% of shareholders’ equity. At June 30, 2019, the Company held 471 securities (151 available-for-sale and 320 held‑to‑maturity), of which 170 had fair values below amortized cost. At June 30, 2019, there were $198,443,000 of agency mortgage-back securities available-for-sale, $174,138,000 of agency mortgage-backed securities held-to-maturity, and $7,790,000 of municipal bonds held-to-maturity, carried with an unrealized loss for 12 months or more. The total unrealized loss for securities 12 months or more was $3,271,000 at June 30, 2019. The unrealized losses were due to higher interest rates. The issuers are of high credit quality and all principal amounts are expected to be paid when securities mature. The fair value is expected to recover as the securities approach their maturity date and/or market rates decline. The Company does not believe that it is more likely than not that the Company will be required to sell a security in an unrealized loss position prior to recovery in value. The Company does not consider these securities to be other than temporarily impaired at June 30, 2019.

The proceeds from sales of securities and the resulting gains and losses were as follows for the periods indicated:

	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2019		2018		2019		2018
	(Dollars in thousands)
Proceeds	$	59,878	$	55,537	$	59,878	$	94,291
Gross gains		608		193		608		1,243
Gross losses		(60)		(14)		(60)		(977)

The amortized cost and estimated fair values of securities as of June 30, 2019  are shown by contractual maturity below. The expected maturities will differ from contractual maturities if borrowers have the right to call or pre‑pay obligations with or without call or pre‑payment penalties. Securities not due at a single maturity date are shown separately.

	Available-for-sale
	Amortized		Estimated
	Cost		Fair Value
	(Dollars in thousands)
Due after 3 months through one year	$	14,858	$	14,956
Due after one through five years		123,521		125,553
Agency mortgage-backed securities		243,861		242,647
Total	$	382,240	$	383,156

	Held-to-maturity
	Amortized		Estimated
	Cost		Fair Value
	(Dollars in thousands)
Due 3 months or less	$	281		281
Due after 3 months through one year		487		488
Due after one through five years		5,193		5,306
Due after five through ten years		28,561		29,087
Due after ten years		49,363		49,770
Agency mortgage-backed securities		267,514		266,535
Total	$	351,399	$	351,467

Securities with amortized cost of $32,884,000 and $44,730,000 as of  June 30, 2019 and December 31, 2018 were pledged to secure public deposits and for other purposes as required or permitted by law or contract.

XML

Loans

6 Months Ended

Jun. 30, 2019

Loans

Loans

5) Loans

Loans were as follows for the periods indicated:

	June 30,		December 31,
	2019		2018
	(Dollars in thousands)
Loans held-for-investment:
Commercial	$	567,529	$	597,763
Real estate:
CRE		1,037,885		994,067
Land and construction		97,297		122,358
Home equity		116,057		109,112
Residential mortgages		48,944		50,979
Consumer		10,279		12,453
Loans		1,877,991		1,886,732
Deferred loan fees, net		(224)		(327)
Loans, net of deferred fees		1,877,767		1,886,405
Allowance for loan losses		(26,631)		(27,848)
Loans, net	$	1,851,136	$	1,858,557

At June 30, 2019, total net loans included in the table above include $27,015,000,  $96,222,000 and $160,480,000, of the loans acquired in the Focus Business Bank (“Focus”), Tri-Valley, and United American acquisitions that were not purchased credit impaired loans, respectively. At December 31, 2018, total net loans included in the table above include $36,958,000,  $111,952,000 and $181,453,000, of the loans acquired in the Focus, Tri-Valley, and United American acquisitions, respectively, that were not purchased credit impaired loans.

There was a $740,000 credit to the provision for loan losses for the second quarter of 2019, and a $1,801,000 credit to the provision for loan losses for the first six months of 2019,  compared to a provision for loan losses of $7,198,000 for the second quarter of 2018, and $7,704,000 for the first six months of 2018. Net recoveries totaled $53,000 for the second quarter of 2019,  and $584,000 for the first six months of 2019, compared to net charge-offs of $673,000 for the second quarter of 2018, and $698,000 for the first six months of 2018.

Changes in the allowance for loan losses were as follows for the periods indicated:

	Three Months Ended June 30, 2019
	Commercial		Real Estate		Consumer		Total
	(Dollars in thousands)
Beginning of period balance	$	15,557	$	11,671	$	90	$	27,318
Charge-offs		(76)		—		—		(76)
Recoveries		87		42		—		129
Net recoveries		11		42		—		53
Provision (credit) for loan losses		(334)		(406)		—		(740)
End of period balance	$	15,234	$	11,307	$	90	$	26,631

	Three Months Ended June 30, 2018
	Commercial		Real Estate		Consumer		Total
	(Dollars in thousands)
Beginning of period balance	$	11,165	$	8,858	$	116	$	20,139
Charge-offs		(870)		—		—		(870)
Recoveries		175		22		—		197
Net (charge-offs) recoveries		(695)		22		—		(673)
Provision for loan losses		7,052		140		6		7,198
End of period balance	$	17,522	$	9,020	$	122	$	26,664

	Six Months Ended June 30, 2019
	Commercial		Real Estate		Consumer		Total
	(Dollars in thousands)
Beginning of period balance	$	17,061	$	10,671	$	116	$	27,848
Charge-offs		(302)		—				(302)
Recoveries		802		84		—		886
Net recoveries		500		84		—		584
Provision (credit) for loan losses		(2,327)		552		(26)		(1,801)
End of period balance	$	15,234	$	11,307	$	90	$	26,631

	Six Months Ended June 30, 2018
	Commercial		Real Estate		Consumer		Total
	(Dollars in thousands)
Beginning of period balance	$	10,608	$	8,950	$	100	$	19,658
Charge-offs		(1,115)		—		—		(1,115)
Recoveries		332		85		—		417
Net (charge-offs) recoveries		(783)		85		—		(698)
Provision (credit) for loan losses		7,697		(15)		22		7,704
End of period balance	$	17,522	$	9,020	$	122	$	26,664

The following table presents the balance in the allowance for loan losses and the recorded investment in loans by portfolio segment, based on the impairment method at the following period‑ends:

	June 30, 2019
	Commercial		Real Estate		Consumer		Total
	(Dollars in thousands)
Allowance for loan losses:
Ending allowance balance attributable to loans:
Individually evaluated for impairment	$	6,351	$	186	$	—	$	6,537
Collectively evaluated for impairment		8,883		11,121		90		20,094
Total allowance balance	$	15,234	$	11,307	$	90	$	26,631
Loans:
Individually evaluated for impairment	$	8,370	$	8,823	$	—	$	17,193
Collectively evaluated for impairment		559,159		1,291,360		10,279		1,860,798
Total loan balance	$	567,529	$	1,300,183	$	10,279	$	1,877,991

	December 31, 2018
	Commercial		Real Estate		Consumer		Total
	(Dollars in thousands)
Allowance for loan losses:
Ending allowance balance attributable to loans:
Individually evaluated for impairment	$	6,944	$	—	$	—	$	6,944
Collectively evaluated for impairment		10,117		10,671		116		20,904
Total allowance balance	$	17,061	$	10,671	$	116	$	27,848
Loans:
Individually evaluated for impairment	$	9,495	$	5,645	$	—	$	15,140
Collectively evaluated for impairment		588,268		1,270,871		12,453		1,871,592
Total loan balance	$	597,763	$	1,276,516	$	12,453	$	1,886,732

The following table presents loans held-for-investment individually evaluated for impairment by class of loans as of June 30, 2019 and December 31, 2018. The recorded investment included in the following table represents loan principal net of any partial charge-offs recognized on the loans. The unpaid principal balance represents the recorded balance prior to any partial charge-offs. The recorded investment in consumer loans collateralized by residential real estate property that are in process of foreclosure according to local requirements of the applicable jurisdiction are not material as of the periods indicated:

	June 30, 2019						December 31, 2018
					Allowance						Allowance
	Unpaid				for Loan		Unpaid				for Loan
	Principal		Recorded		Losses		Principal		Recorded		Losses
	Balance		Investment		Allocated		Balance		Investment		Allocated
	(Dollars in thousands)
With no related allowance recorded:
Commercial	$	1,504	$	1,504	$	—	$	1,849	$	1,849	$	—
Real estate:
CRE		3,349		3,349		—		5,094		5,094		—
Land and construction		—		—		—		—		—		—
Home Equity		381		381		—		551		551		—
Total with no related allowance recorded		5,234		5,234		—		7,494		7,494		—
With an allowance recorded:
Commercial		6,866		6,866		6,351		7,646		7,646		6,944
Real estate:
Commercial		5,093		5,093		186		—		—		—
Total with an allowance recorded		11,959		11,959		6,537		7,646		7,646		6,944
Total	$	17,193	$	17,193	$	6,537	$	15,140	$	15,140	$	6,944

The following tables present interest recognized and cash‑basis interest earned on impaired loans for the periods indicated:

	Three Months Ended June 30, 2019
			Real Estate
					Land and		Home
	Commercial		CRE		Construction		Equity		Consumer		Total
	(Dollars in thousands)
Average of impaired loans during the period	$	8,453	$	8,442	$	—	$	460	$	—	$	17,355
Interest income during impairment	$	—	$	—	$	—	$	—	$	—	$	—
Cash-basis interest recognized	$	—	$	—	$	—	$	—	$	—	$	—

	Three Months Ended June 30, 2018
			Real Estate
					Land and		Home
	Commercial		CRE		Construction		Equity		Consumer		Total
	(Dollars in thousands)
Average of impaired loans during the period	$	11,803	$	3,151	$	—	$	470	$	—	$	15,424
Interest income during impairment	$	—	$	—	$	—	$	—	$	—	$	—
Cash-basis interest recognized	$	—	$	—	$	—	$	—	$	—	$	—

	Six Months Ended June 30, 2019
			Real Estate
					Land and		Home
	Commercial		CRE		Construction		Equity		Consumer		Total
	(Dollars in thousands)
Average of impaired loans during the period	$	8,800	$	7,326	$	—	$	490	$	—	$	16,616
Interest income during impairment	$	—	$	—	$	—	$	—	$	—	$	—
Cash-basis interest recognized	$	—	$	—	$	—	$	—	$	—	$	—

	Six Months Ended June 30, 2018
			Real Estate
					Land and		Home
	Commercial		CRE		Construction		Equity		Consumer		Total
	(Dollars in thousands)
Average of impaired loans during the period	$	8,460	$	2,268	$	40	$	439	$	—	$	11,207
Interest income during impairment	$	—	$	—	$	—	$	—	$	—	$	—
Cash-basis interest recognized	$	—	$	—	$	—	$	—	$	—	$	—

Nonperforming loans include both smaller dollar balance homogenous loans that are collectively evaluated for impairment and individually classified loans. Nonperforming loans were as follows at period‑end:

	June 30,				December 31,
	2019		2018		2018
	(Dollars in thousands)
Nonaccrual loans - held-for-investment	$	15,695	$	26,034	$	13,699
Restructured and loans over 90 days past due and still accruing		1,323		511		1,188
Total nonperforming loans		17,018		26,545		14,887
Other restructured loans		175		265		253
Total impaired loans	$	17,193	$	26,810	$	15,140

The following table presents the nonperforming loans by class for the periods indicated:

	June 30, 2019						December 31, 2018
				Restructured						Restructured
				and Loans						and Loans
				over 90 Days						over 90 Days
				Past Due						Past Due
				and Still						and Still
	Nonaccrual			Accruing	Total		Nonaccrual			Accruing	Total
	(Dollars in thousands)
Commercial	$	7,096	$	1,099	$	8,195	$	8,279	$	963	$	9,242
Real estate:
CRE		8,442		—		8,442		5,094		—		5,094
Home equity		157		224		381		326		225		551
Total	$	15,695	$	1,323	$	17,018	$	13,699	$	1,188	$	14,887

The following tables present the aging of past due loans by class for the periods indicated:

	June 30, 2019
	30 - 59		60 - 89		90 Days or
	Days		Days		Greater		Total		Loans Not
	Past Due		Past Due		Past Due		Past Due		Past Due		Total
	(Dollars in thousands)
Commercial	$	4,251	$	1,342	$	7,349	$	12,942	$	554,587	$	567,529
Real estate:
CRE		—		—		8,442		8,442		1,029,443		1,037,885
Land and construction		—		—		—		—		97,297		97,297
Home equity		157		—		—		157		115,900		116,057
Residential mortgages		—		—		—		—		48,944		48,944
Consumer		—		—		—		—		10,279		10,279
Total	$	4,408	$	1,342	$	15,791	$	21,541	$	1,856,450	$	1,877,991

	December 31, 2018
	30 - 59		60 - 89		90 Days or
	Days		Days		Greater		Total		Loans Not
	Past Due		Past Due		Past Due		Past Due		Past Due		Total
	(Dollars in thousands)
Commercial	$	5,698	$	1,916	$	1,258	$	8,872	$	588,891	$	597,763
Real estate:
CRE		—		—		—		—		994,067		994,067
Land and construction		—		—		—		—		122,358		122,358
Home equity				—		—		—		109,112		109,112
Residential mortgages		—		—		—		—		50,979		50,979
Consumer		1		—		—		1		12,452		12,453
Total	$	5,699	$	1,916	$	1,258	$	8,873	$	1,877,859	$	1,886,732

Past due loans 30 days or greater totaled $21,541,000 and $8,873,000 at June 30, 2019 and December 31, 2018, respectively, of which $15,001,000 and $430,000 were on nonaccrual, respectively. At June 30, 2019, there were also $694,000 of loans less than 30 days past due included in nonaccrual loans held-for-investment. At December 31, 2018, there were also $13,269,000 loans less than 30 days past due included in nonaccrual loans held-for-investment. Management’s classification of a loan as “nonaccrual” is an indication that there is reasonable doubt as to the full recovery of principal or interest on the loan. At that point, the Company stops accruing interest income, and reverses any uncollected interest that had been accrued as income. The Company begins recognizing interest income only as cash interest payments are received and it has been determined the collection of all outstanding principal is not in doubt. The loans may or may not be collateralized, and collection efforts are pursued.

Credit Quality Indicators

Concentrations of credit risk arise when a number of customers are engaged in similar business activities, or activities in the same geographic region, or have similar features that would cause their ability to meet contractual obligations to be similarly affected by changes in economic conditions. The Company’s loan portfolio is concentrated in commercial (primarily manufacturing, wholesale, and service) and real estate lending, with the remaining balance in consumer loans. While no specific industry concentration is considered significant, the Company’s lending operations are located in the Company’s market areas that are dependent on the technology and real estate industries and their supporting companies. Thus, the Company’s borrowers could be adversely impacted by a downturn in these sectors of the economy which could reduce the demand for loans and adversely impact the borrowers’ ability to repay their loans.

The Company categorizes loans into risk categories based on relevant information about the ability of borrowers to service their debt such as: current financial information, historical payment experience, credit documentation, public information, and current economic trends, among other factors. The Company analyzes loans individually by classifying the loans as to credit risk. This analysis is performed on a quarterly basis. Nonclassified loans generally include those loans that are expected to be repaid in accordance with contractual loans terms. Classified loans are those loans that are assigned a substandard, substandard-nonaccrual, or doubtful risk rating using the following definitions:

Substandard.  Loans classified as substandard are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans so classified have a well‑defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected.

Substandard‑Nonaccrual.  Loans classified as substandard‑nonaccrual are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any, and it is probable that the Company will not receive payment of the full contractual principal and interest. Loans so classified have a well‑defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected. In addition, the Company no longer accrues interest on the loan because of the underlying weaknesses.

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

Loss.  Loans classified as loss are considered uncollectable or of so little value that their continuance as assets is not warranted. This classification does not necessarily mean that a loan has no recovery or salvage value; but rather, there is much doubt about whether, how much, or when the recovery would occur. Loans classified as loss are immediately charged off against the allowance for loan losses. Therefore, there is no balance to report as of June 30, 2019 and December 31, 2018.

The following table provides a summary of the loan portfolio by loan type and credit quality classification at period end:

	June 30, 2019						December 31, 2018
	Nonclassified		Classified		Total		Nonclassified		Classified		Total
	(Dollars in thousands)
Commercial	$	553,618		13,911	$	567,529	$	584,845	$	12,918	$	597,763
Real estate:
CRE		1,024,822		13,063		1,037,885		985,193		8,874		994,067
Land and construction		94,810		2,487		97,297		122,358		—		122,358
Home equity		114,342		1,715		116,057		107,495		1,617		109,112
Residential mortgages		48,944		—		48,944		50,979		—		50,979
Consumer		10,279		—		10,279		12,453		—		12,453
Total	$	1,846,815	$	31,176	$	1,877,991	$	1,863,323	$	23,409	$	1,886,732

Classified loans were $31,176,000, or 1.00% of total assets, at June 30, 2019, compared to $32,264,000, or 1.03% of total assets, at June 30, 2018 and $23,409,000, or 0.76% of total assets, at December 31, 2018. The increase in classified assets at June 30, 2019, compared to December 31, 2018, was primarily due to one CRE lending relationship that was moved to classified assets, but still accruing, during the second quarter of 2019. In order to determine whether a borrower is experiencing financial difficulty, an evaluation is performed of the probability that the borrower will be in payment default on any of its debt in the foreseeable future without the modification. This evaluation is performed in accordance with the Company’s underwriting policy.

The book balance of troubled debt restructurings at June 30, 2019 was $568,000, which included $17,000 of nonaccrual loans and $551,000 of accruing loans. The book balance of troubled debt restructurings at December 31, 2018 was $649,000, which included $36,000 of nonaccrual loans and $613,000 of accruing loans. Approximately $18,000 and $38,000 of specific reserves were established with respect to these loans as of June 30, 2019 and December 31, 2018, respectively.

The following table presents loans by class modified as troubled debt restructurings for the periods indicated:

	During the Three Months Ended
	June 30, 2019
				Pre-modification		Post-modification
		Number		Outstanding		Outstanding
		of		Recorded		Recorded
Troubled Debt Restructurings:		Contracts		Investment		Investment
	(Dollars in thousands)
Commercial		1	$	17	$	17
Total		1	$	17	$	17

	During the Six Months Ended
		June 30, 2019
				Pre-modification		Post-modification
		Number		Outstanding		Outstanding
		of		Recorded		Recorded
Troubled Debt Restructurings:		Contracts		Investment		Investment
	(Dollars in thousands)
Commercial		2	$	28	$	28
Total		2	$	28	$	28

	During the Three and Six Months Ended
		June 30, 2018
				Pre-modification		Post-modification
		Number		Outstanding		Outstanding
		of		Recorded		Recorded
Troubled Debt Restructurings:		Contracts		Investment		Investment
	(Dollars in thousands)
Commercial		2	$	224	$	224
Equity		1		225		225
Total		3	$	449	$	449

During the three and six months ended June 30, 2019, there were no new loans modified as troubled debt restructurings in which the amount of principal or accrued interest owed from the borrower was forgiven or which resulted in a charge-off or change to the allowance for loan losses.

A loan is considered to be in payment default when it is 30 days contractually past due under the modified terms. There were no defaults on troubled debt restructurings, within twelve months following the modification, during the three and six months ended June 30, 2019 and 2018.

A loan that is a troubled debt restructuring on nonaccrual status may return to accruing status after a period of at least six months of consecutive payments in accordance with the modified terms.

XML

Business Combinations

6 Months Ended

Jun. 30, 2019

Business Combinations

Business Combinations

6) Business Combinations

On May 16, 2019, the Company and HBC entered into an Agreement and Plan of Merger and Reorganization (the “Merger Agreement”) with Presidio Bank, a California state-chartered commercial bank (“Presidio”), pursuant to which the Company will acquire Presidio in an all stock merger by merging Presidio with and into HBC (the “Merger”). HBC will survive the Merger and will continue the commercial banking operations of the combined bank following the Merger. The consideration payable to Presidio shareholders upon completion of the Merger (“Merger Consideration”) will consist of whole shares of the Company’s common stock, and cash in lieu of fractional shares of the Company’s common stock. Upon consummation of the Merger, each share of Presidio common stock outstanding immediately prior to the effective time of the Merger will be canceled and converted into the right to receive s fixed exchange ratio of  2.47 shares of the Company’s common stock (the “per share exchange ratio”). Presidio stock options will vest and the Company will assume the stock options which will then be adjusted for the per share exchange ratio. Each Presidio restricted stock unit will vest and be converted into shares of the Company’s common stock in accordance with the per share exchange ratio. Heritage and Presidio will hold their respective special shareholder meetings on August 27, 2019 for shareholders of record as July 10, 2019.

On April 6, 2018, the Company completed its acquisition of Tri-Valley for a transaction value of $32,320,000. At closing the Company issued 1,889,613 shares of the Company’s common stock with an aggregate market value of $30,725,000 on the date of closing.  The number of shares issued was based on a fixed exchange ratio of 0.0489 of a share of the Company’s common stock for each outstanding share of Tri-Valley common stock. In addition, at closing the Company paid cash to the holder of a stock warrant and holders of outstanding stock options and related fees and fractional shares totaling $1,595,000.  The following table summarizes the consideration paid for Tri-Valley:

	(Dollars in thousands)
Cash paid for:
Warrant	$	889
Options		615
Other		91
Total cash paid		1,595
Issuance of 1,889,613 shares of common stock to Tri-
Valley shareholders at $16.26 per share at Closing		30,725
Total consideration	$	32,320

The following table summarizes the estimated fair values of the assets acquired and liabilities assumed at the date of acquisition.

		As					As
		Recorded		Fair			Recorded
		by		Value			at
		Tri-Valley		Adjustments			Acquisition
		(Dollars in thousands)
Assets acquired:
Cash and cash equivalents	$	21,757	$	1,153	(a)	$	22,910
Loans		123,532		(2,563)	(b)		120,969
Allowance for loan losses		(1,969)		1,969	(c)		—
Other intangible assets		—		1,978	(d)		1,978
Other assets, net		9,939		(2,894)	(e)		7,045
Total assets acquired	$	153,259	$	(357)			152,902
Liabilities assumed:
Deposits	$	135,351	$	37	(f)		135,388
Other liabilities		608		—			608
Total liabilities assumed	$	135,959	$	37			135,996
Net assets acquired							16,906
Purchase price							30,725
Goodwill recorded in the merger						$	13,819

Explanation of certain fair value related adjustments for the Tri-Valley acquisition:

(a)  Represents the cash acquired in the merger, the disposition of other real estate owned of $1,132,000, a gain on the sale of securities of $53,000, partially offset by invoices paid after closing for services prior to closing of $29,000, and cash paid for fractional shares in the transaction of $3,000. The remaining $1,592,000 of cash paid for the transaction is an adjustment to prepaid assets included in other assets, net.

(b)Represents the fair value adjustment to the net book value of loans, which includes an interest rate mark and credit mark adjustment.

(c)Represents the elimination of Tri-Valley’s allowance for loan losses.

(d)Represents intangible assets recorded to reflect the fair value of core deposits and a below market lease. The core deposit intangible asset was recorded as an identifiable intangible asset and is amortized on an accelerated basis over the estimated average life of the deposit base.  The below market lease intangible assets are amortized on the straight line method over eleven years.

(e)Represents an adjustment to net deferred tax assets resulting from the fair value adjustments related to the acquired assets, liabilities assumed and identifiable intangible assets recorded,and the disposition of other real estate owned.

(f)  Represents the fair value adjustment on time deposits, which was be accreted as a reduction of 

     interest expense.

Tri-Valley’s results of operations have been included in the Company’s results of operations beginning April 7, 2018.

On May 4, 2018, the Company completed its acquisition of United American for a transaction value of $56,417,000.  At closing the Company issued 2,826,032 shares of the Company’s common stock with an aggregate market value of $47,280,000 on the date of closing.  The number of shares issued was based on a fixed exchange ratio of 2.1644 of a share of the Company’s common stock for each outstanding share of United American common stock and each common stock equivalent underlying the United American Series D Preferred Stock and Series E Preferred Stock. The shareholders of the United American Series A Preferred Stock and Series B Preferred Stock received $1,000 cash for each share totaling $8,700,000 and $435,000, respectively.  In addition, the Company paid $2,000 in cash for fractional shares, for total cash consideration of $9,137,000.  The following table summarizes the consideration paid for United American:

	(Dollars in thousands)
Consideration paid:
Cash paid for:
Series A Preferred Stock	$	8,700
Series B Preferred Stock		435
Other		2
Total cash paid		9,137
Issuance of 2,826,032 shares of common stock to United
American shareholders at $16.73 per share at Closing		47,280
Total consideration	$	56,417

The following table summarizes the estimated fair values of the assets acquired and liabilities assumed at the date of acquisition.

		As					As
		Recorded		Fair			Recorded
		By		Value			at
		United American		Adjustments			Acquisition
		(Dollars in thousands)
Assets acquired:
Cash and cash equivalents	$	45,638	$	(32,520)	(a)	$	13,118
Securities available-for-sale		64,144		(421)	(b)		63,723
Loans		196,694		18,783	(c)		215,477
Allowance for loan losses		(2,952)		2,952	(d)		—
Other intangible assets		—		6,383	(e)		6,383
Other assets, net		9,119		(1,078)	(f)		8,041
Total assets acquired	$	312,643	$	(5,901)			306,742
Liabilities assumed:
Deposits	$	281,189	$	51	(g)		281,240
Other borrowings		62		—			62
Other liabilities		2,617		(187)	(h)		2,430
Total liabilities	$	283,868	$	(136)			283,732
Net assets acquired							23,010
Purchase price							47,280
Goodwill recorded in the merger						$	24,270

Explanation of certain fair value related adjustments for the United American acquisition:

(a) Represents the cash acquired in the merger, net of cash paid for the transaction of $9,137,000, the repurchase of $23,732,000 loan participations from ATBancorp, and $51,000 for invoices paid after closing for services prior to closing, partially offset by a tax refund of $400,000.

(b) Represents the fair value adjustment on investment securities available-for-sale.

(c) Represents the repurchase of $23,732,000 loan participations from ATBancorp, partially offset by the fair value adjustment to the net book value of loans of $4,680,000, which includes an interest rate mark and credit mark adjustment, and net charge-offs of $269,000 subsequent to closing.

(d) Represents the elimination of United American’s allowance for loan losses.

(e) Represents intangible assets recorded to reflect the fair value of core deposits and a below market lease. The core deposit intangible asset was recorded as an identifiable intangible asset and is amortized on an accelerated basis over the estimated average life of the deposit base.  The below market lease intangible assets are amortized on the straight line method over three years.

(f) Represents an adjustment to net deferred tax assets resulting from the fair value adjustments related to the acquired assets, liabilities assumed and identifiable intangible assets recorded.

(g) Represents the fair value adjustment on time deposits, which was be accreted as a reduction of interest expense.

(h) Represents the reversal of accrued accounts payable.

United American’s results of operations have been included in the Company’s results of operations beginning May 5, 2018.

The mergers provided the opportunity to combine three independent business banking franchises with similar philosophies and cultures into a combined $3.1 billion business bank based in San Jose, California. The pooling of the three banks’ resources and knowledge enhanced the Company’s capabilities, operational efficiencies, and community outreach. The Company also believes the combined bank is much better positioned to meet the needs of the Company’s customers, shareholders and the community.  The one time pre-tax severance, retention, acquisition and integration costs totaled $8,214,000 and $8,829,000 for the three months and six months ended June 30, 2018, respectively.

The fair value of net assets acquired includes fair value adjustments to certain receivables of which some were considered impaired and some were not considered impaired as of the acquisition date. The fair value adjustments were determined using discounted contractual cash flows, adjusted for expected losses and prepayments, where appropriate. The receivables that were not considered impaired at the acquisition date were not subject to the guidance relating to purchased credit impaired loans, which have shown evidence of credit deterioration since origination. There were no PCI loans at June 30, 2019 and December 31, 2018.

Goodwill of $13,819,000 arising from the Tri-Valley acquisition and $24,270,000 from the United American acquisition is largely attributable to synergies and cost savings resulting from combining the operations of the companies. As these transactions were structured as a tax-free exchange, the goodwill will not be deductible for tax purposes. As of April 6, 2019 and May 4, 2019 the Company finalized its valuation of all assets acquired and liabilities assumed in its acquisition of Tri-Valley and United American, respectively, resulting in no material changes to acquisition accounting adjustments.

XML

Goodwill and Other Intangible Assets

6 Months Ended

Jun. 30, 2019

Goodwill and Other Intangible Assets

Goodwill and Other Intangible Assets

7) Goodwill and Other Intangible Assets

Goodwill

At June 30, 2019, the carrying value of goodwill was $83,753,000, which included $13,044,000 of goodwill related to its acquisition of Bay View Funding, $32,620,000 from its acquisition of Focus, $13,819,000 from its acquisition of Tri-Valley and $24,270,000 from its acquisition of United American.

Goodwill impairment exists when a reporting unit’s carrying value exceeds its fair value, which is determined through a qualitative assessment whether it is more likely than not that the fair value of equity of the reporting unit exceeds the carrying value (“Step Zero”). If the qualitative assessment indicates it is more likely than not that the fair value of equity of a reporting unit is less than book value, then a quantitative two-step impairment test is required. Step 1 includes the determination of the carrying value of the Company’s single reporting unit, including the existing goodwill and intangible assets, and estimating the fair value of the reporting unit. If the carrying amount of a reporting unit exceeds its fair value, the Company is required to perform a second step to the impairment test. Step 2 requires that the implied fair value of the reporting unit goodwill be compared to the carrying amount of that goodwill. If the carrying amount of the reporting unit goodwill exceeds the implied fair value of that goodwill, an impairment loss shall be recognized in an amount equal to that excess.

The Company completed its annual goodwill impairment analysis as of November 30, 2018 with the assistance of an independent valuation firm.  No events or circumstances since the November 30, 2018 annual impairment test were noted that would indicate it was more likely than not a goodwill impairment exists.

Other Intangible Assets

Other intangible assets acquired in the acquisition of United American in May 2018 included a core deposit intangible asset of $5,723,000, amortized on an accelerated method over its estimated useful life of 10 years, and a below market value lease intangible asset of $660,000,  amortized over its estimated useful life of 3 years. Accumulated amortization of the core deposit intangible and below market lease was $1,272,000 and $756,000 at June 30, 2019 and December 31, 2018, respectively.

Other intangible assets acquired in the acquisition of Tri-Valley in April 2018 include a core deposit intangible asset of $1,768,000, amortized on an accelerated method over its estimated useful life of 10 years, and a below market value lease intangible asset of $210,000,  amortized over its estimated useful life of 11 years. Accumulated amortization of the core deposit intangible and below market lease was $351,000 and $222,000 at June 30, 2019 and December 31, 2018, respectively.

The core deposit intangible asset acquired in the acquisition of Focus in August 2015 was $6,285,000. This asset is amortized on an accelerated method over its estimated useful life of 10 years. Accumulated amortization of this intangible asset was $3,137,000 and $2,770,000 at June 30, 2019 and December 31, 2018, respectively.

Other intangible assets acquired in the acquisition of Bay View Funding in November 2014 included a below market value lease intangible assets of $109,000, a non-compete agreement intangible asset of $250,000, and a customer relationship and brokered relationship intangible assets of $1,900,000, amortized over the 10 year estimated useful lives. Accumulated amortization of the customer relationship and brokered relationship intangible assets was $886,000 and $791,000 at June 30, 2019 and December 31, 2018, respectively.

Estimated amortization expense for 2019, the next five years and thereafter is as follows:

	United		United								Bay View Funding
	American		American		Tri-Valley		Tri-Valley		Focus		Customer&
	Core		Below		Core		Below		Core		Brokered		Total
	Deposit		Market		Deposit		Market		Deposit		Relationship		Amortization
Year	Intangible		Lease		Intangible		Lease		Intangible		Intangible		Expense
		(Dollars in thousands)
2019	$	777	$	255	$	240	$	18	$	734	$	190	$	2,214
2020		665		235		208		18		716		190		2,032
2021		602		—		184		18		596		190		1,590
2022		553		—		167		18		502		190		1,430
2023		521		—		158		18		420		190		1,307
2024		499		—		152		18		346		159		1,174
Thereafter		1,520		—		451		88		201		—		2,260
	$	5,137	$	490	$	1,560	$	196	$	3,515	$	1,109	$	12,007

Impairment testing of the intangible assets is performed at the individual asset level. Impairment exists if the carrying amount of the asset is not recoverable and exceeds its fair value at the date of the impairment test. For intangible assets, estimates of expected future cash flows (cash inflows less cash outflows) that are directly associated with an intangible asset are used to determine the fair value of that asset. Management makes certain estimates and assumptions in determining the expected future cash flows from core deposit and customer relationship intangibles including account attrition, expected lives, discount rates, interest rates, servicing costs and other factors. Significant changes in these estimates and assumptions could adversely impact the valuation of these intangible assets. If an impairment loss exists, the carrying amount of the intangible asset is adjusted to a new cost basis. The new cost basis is then amortized over the remaining useful life of the asset. Based on its assessment, management concluded that there was no impairment of intangible assets at June 30, 2019 and December 31, 2018.

XML

Income Taxes

6 Months Ended

Jun. 30, 2019

Income Taxes

Income Taxes

8) Income Taxes

Some items of income and expense are recognized in one year for tax purposes, and another when applying generally accepted accounting principles, which leads to timing differences between the Company’s actual current tax liability and the amount accrued for this liability based on book income. These temporary differences comprise the “deferred” portion of the Company’s tax expense or benefit, which is accumulated on the Company’s books as a deferred tax asset or deferred tax liability until such time as they reverse.

Under generally accepted accounting principles, a valuation allowance is required if it is “more likely than not” that a deferred tax asset will not be realized. The determination of the realizability of the deferred tax assets is highly subjective and dependent upon judgment concerning management’s evaluation of both positive and negative evidence, including forecasts of future income, cumulative losses, applicable tax planning strategies, and assessments of current and future economic and business conditions.

The Company had net deferred tax assets of $22,813,000, and $27,089,000, at June 30, 2019 and December 31, 2018, respectively. After consideration of the matters in the preceding paragraph, the Company determined that it is more likely than not that the net deferred tax assets at June 30, 2019 and December 31, 2018 will be fully realized in future years.

The following table reflects the carrying amounts of the low income housing investments included in accrued interest receivable and other assets, and the future commitments included in accrued interest payable and other liabilities for the periods indicated:

	June 30,		December 31,
	2019		2018
	(Dollars in thousands)
Low income housing investments	$	3,144	$	3,172
Future commitments	$	273	$	273

The Company expects $14,000 of the future commitments to be paid in 2019,  $14,000 in 2020, and $245,000 in 2021 through 2023.

For tax purposes, the Company had low income housing tax credits of $106,000 for the three months ended June 30, 2019 and June 30, 2018, and low income housing investment expense of $106,000 and $119,000, respectively.  For tax purposes, the Company had low income housing tax credits of $213,000 for the six months ended June 30, 2019 and June 30, 2018, and low income housing investment expense of $211,000 and $238,000, respectively.  The Company recognized low income housing investment expense as a component of income tax expense.

XML

Benefit Plans

6 Months Ended

Jun. 30, 2019

Benefit Plans

Benefit Plans

9) Benefit Plans

Supplemental Retirement Plan

The Company has a supplemental retirement plan (the “Plan”) covering some current and some former key employees and directors. The Plan is a nonqualified defined benefit plan. Benefits are unsecured as there are no Plan assets. The following table presents the amount of periodic cost recognized for the periods indicated:

	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2019		2018		2019		2018
	(Dollars in thousands)
Components of net periodic benefit cost:
Service cost	$	55	$	62	$	110	$	124
Interest cost		264		237		528		474
Amortization of net actuarial loss		46		73		92		146
Net periodic benefit cost	$	365	$	372	$	730	$	744

The components of net periodic benefit cost other than the service cost component are included in the line item “other noninterest expense” in the Consolidated Statements of Income. 

Split‑Dollar Life Insurance Benefit Plan

The Company maintains life insurance policies for some current and some former directors and officers that are subject to split‑dollar life insurance agreements. The following table sets forth the funded status of the split‑dollar life insurance benefits for the periods indicated:

	June 30,		December 31,
	2019		2018
	(Dollars in thousands)
Change in projected benefit obligation:
Projected benefit obligation at beginning of year	$	6,903	$	6,711
Interest cost		140		227
Actuarial loss (gain)		—		(35)
Projected benefit obligation at end of period	$	7,043	$	6,903

	June 30,		December 31,
	2019		2018
	(Dollars in thousands)
Net actuarial loss	$	2,666	$	2,573
Prior transition obligation		1,104		1,149
Accumulated other comprehensive loss	$	3,770	$	3,722

	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2019		2018		2019		2018
	(Dollars in thousands)
Amortization of prior transition obligation	$	(24)	$	(16)	$	(49)	$	(32)
Interest cost		70		56		140		113
Net periodic benefit cost	$	46	$	40	$	91	$	81

XML

Fair Value

6 Months Ended

Jun. 30, 2019

Fair Value

Fair Value

10) Fair Value

Accounting guidance establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard describes three levels of inputs that may be used to measure fair value:

Level 1: Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date.

Level 2: Significant other observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities in active markets; quoted prices for identical assets or liabilities in markets that are not active; or other inputs that are observable or can be corroborated by observable market data (for example, interest rates and yield curves observable at commonly quoted intervals, prepayment speeds, credit risks, and default rates).

Level 3: Significant unobservable inputs that reflect a reporting entity’s own assumptions about the assumptions that market participants would use in pricing an asset or liability.

Financial Assets and Liabilities Measured on a Recurring Basis

The fair values of securities available-for sale-are determined by obtaining quoted prices on nationally recognized securities exchanges (Level 1 inputs) or matrix pricing, which is a mathematical technique widely used in the 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 (Level 2 inputs).

The fair value of interest‑only (“I/O”) strip receivable assets is based on a valuation model used by a third party. The Company is able to compare the valuation model inputs and results to widely available published industry data for reasonableness (Level 2 inputs).

			Fair Value Measurements Using
					Significant
			Quoted Prices in		Other		Significant
			Active Markets for		Observable		Unobservable
			Identical Assets		Inputs		Inputs
	Balance		(Level 1)		(Level 2)		(Level 3)
	(Dollars in thousands)
Assets at June 30, 2019
Available-for-sale securities:
Agency mortgage-backed securities	$	242,647		—	$	242,647		—
U.S. Treasury		140,509		140,509		—		—
I/O strip receivables		572		—		572		—
Assets at December 31, 2018
Available-for-sale securities:
Agency mortgage-backed securities	$	302,854		—	$	302,854		—
U.S. Treasury		148,753		148,753		—		—
U.S. Government sponsored entities		7,436		—		7,436		—
I/O strip receivables		568		—		568		—

There were no transfers between Level 1 and Level 2 during the period for assets measured at fair value on a recurring basis.

Assets and Liabilities Measured on a Non‑Recurring Basis

The fair value of impaired loans with specific allocations of the allowance for loan losses is generally based on recent real estate appraisals. The 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 usually significant and typically result in a Level 3 classification of the inputs for determining fair value.

Foreclosed assets are valued at the time the loan is foreclosed upon and the asset is transferred to foreclosed assets. The fair value is based primarily on third party appraisals, less costs to sell. The appraisals may utilize a single valuation approach or a combination of approaches including the comparable sales and 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 and result in a Level 3 classification of the inputs for determining fair value.

			Fair Value Measurements Using
				Significant
			Quoted Prices in	Other	Significant
			Active Markets for	Observable	Unobservable
			Identical Assets	Inputs	Inputs
	Balance		(Level 1)	(Level 2)	(Level 3)
	(Dollars in thousands)
Assets at June 30, 2019
Impaired loans - held-for-investment:
Commercial	$	515	—	—	$	515
Real estate:
CRE		4,907	—	—		4,907
	$	5,422	—	—	$	5,422
Assets at December 31, 2018
Impaired loans - held-for-investment:
Commercial	$	702	—	—	$	702
	$	702	—	—	$	702

The following table shows the detail of the impaired loans held-for-investment and the impaired loans held‑for‑investment carried at fair value for the periods indicated:

	June 30, 2019		December 31, 2018
	(Dollars in thousands)
Impaired loans held-for-investment:
Book value of impaired loans held-for-investment carried at fair value	$	11,959	$	7,646
Book value of impaired loans held-for-investment carried at cost		5,234		7,494
Total impaired loans held-for-investment	$	17,193	$	15,140
Impaired loans held-for-investment carried at fair value:
Book value of impaired loans held-for-investment carried at fair value	$	11,959	$	7,646
Specific valuation allowance		(6,537)		(6,944)
Impaired loans held-for-investment carried at fair value, net	$	5,422	$	702

Impaired loans held‑for‑investment which are measured primarily for impairment using the fair value of the collateral were $17,193,000 at June 30, 2019.  In addition, these loans had a specific valuation allowance of $6,537,000 at June 30, 2019. Impaired loans held‑for‑investment totaling $11,959,000 at June 30, 2019, were carried at fair value as a result of partial charge‑offs and specific valuation allowances at period‑end. The remaining $5,234,000 of impaired loans were carried at cost at June 30, 2019, as the fair value of the collateral exceeded the cost basis of each respective loan. Partial charge‑offs and changes in specific valuation allowances during the first six months of 2019 on impaired loans held‑for‑investment carried at fair value at June 30, 2019 resulted in an additional credit to the provision for loan losses of $339,000.  

At June 30, 2019, there were no foreclosed assets.

Impaired loans held‑for‑investment were $15,140,000 at December 31, 2018. In addition, these loans had a specific valuation allowance of $6,944,000 at December 31, 2018. Impaired loans held‑for‑investment totaling $7,646,000 at December 31, 2018 were carried at fair value as a result of partial charge‑offs and specific valuation allowances at year‑end. The remaining $7,494,000 of impaired loans were carried at cost at December 31, 2018, as the fair value of the collateral exceeded the cost basis of each respective loan. Partial charge‑offs and changes in specific valuation allowances during 2018 on impaired loans held‑for‑investment carried at fair value at December 31, 2018 resulted in an additional provision for loan losses of $7,042,000.

At December 31, 2018, there were no foreclosed assets.

The following table presents quantitative information about Level 3 fair value measurements for financial instruments measured at fair value on a non‑recurring basis at the periods indicated:

	June 30, 2019
			Valuation	Unobservable	Range
	Fair Value		Techniques	Inputs	(Weighted Average)
	(Dollars in thousands)
Impaired loans - held-for-investment:
Commercial	$	515	Market Approach	Discount adjustment for differences between comparable sales	Less than 1%
Real estate:
CRE		4,907	Market Approach	Discount adjustment for differences between comparable sales	Less than 1%

	December 31, 2018
			Valuation	Unobservable	Range
	Fair Value		Techniques	Inputs	(Weighted Average)
	(Dollars in thousands)
Impaired loans - held-for-investment:
Commercial	$	702	Market Approach	Discount adjustment for differences between comparable sales	0% to 1%

The Company obtains third party appraisals on its impaired loans held-for-investment and foreclosed assets to determine fair value. Generally, the third party appraisals apply the “market approach,” which is a valuation technique that uses prices and other relevant information generated by market transactions involving identical or comparable (that is, similar) assets, liabilities, or a group of assets and liabilities, such as a business. Adjustments are then made based on the type of property, age of appraisal, current status of property and other related factors to estimate the current value of collateral.

The carrying amounts and estimated fair values of financial instruments at June 30, 2019 are as follows:

			Estimated Fair Value
					Significant
			Quoted Prices in		Other		Significant
			Active Markets for		Observable		Unobservable
	Carrying		Identical Assets		Inputs		Inputs
	Amounts		(Level 1)		(Level 2)		(Level 3)		Total
	(Dollars in thousands)
Assets:
Cash and cash equivalents	$	276,012	$	276,012	$	—	$	—	$	276,012
Securities available-for-sale		383,156		140,509		242,647		—		383,156
Securities held-to-maturity		351,399		—		351,467		—		351,467
Loans (including loans held-for-sale), net		1,856,338		—		5,202		1,851,281		1,856,483
FHLB stock, FRB stock, and other
investments		25,226		—		—		—		N/A
Accrued interest receivable		9,248		553		2,045		6,650		9,248
I/O strips receivables		572		—		572		—		572
Liabilities:
Time deposits	$	143,807	$	—	$	144,242	$	—	$	144,242
Other deposits		2,478,666		—		2,478,666		—		2,478,666
Subordinated debt		39,461		—		40,361		—		40,361
Accrued interest payable		653		—		653		—		653

The carrying amounts and estimated fair values of the Company’s financial instruments at December 31, 2018:

			Estimated Fair Value
					Significant
			Quoted Prices in		Other		Significant
			Active Markets for		Observable		Unobservable
	Carrying		Identical Assets		Inputs		Inputs
	Amounts		(Level 1)		(Level 2)		(Level 3)		Total
	(Dollars in thousands)
Assets:
Cash and cash equivalents	$	164,568	$	164,568	$	—	$	—	$	164,568
Securities available-for-sale		459,043		148,753		310,290		—		459,043
Securities held-to-maturity		377,198		—		366,175		—		366,175
Loans (including loans held-for-sale), net		1,861,206		—		2,649		1,826,654		1,829,303
FHLB stock, FRB stock, and other
investments		25,216		—		—		—		N/A
Accrued interest receivable		9,577		597		2,274		6,706		9,577
I/O strips receivables		568		—		568		—		568
Liabilities:
Time deposits	$	147,560	$	—	$	147,916	$	—	$	147,916
Other deposits		2,489,972		—		2,489,972		—		2,489,972
Subordinated debt		39,369		—		38,969		—		38,969
Accrued interest payable		497		—		497		—		497

In accordance with our adoption of ASU 2016-01 in 2018, the methods utilized to measure the fair value of financial instruments at June 30, 2019 and December 31, 2018 represent an approximation of exit price, however, an actual exit price may differ.

XML

Equity Plan

6 Months Ended

Jun. 30, 2019

Equity Plan

Equity Plan

11) Equity Plan

The Company maintained an Amended and Restated 2004 Equity Plan (the “2004 Plan”) for directors, officers, and key employees. The 2004 Plan was terminated on May 23, 2013. On May 23, 2013, the Company’s shareholders approved the 2013 Equity Incentive Plan (the “2013 Plan”). On May 25, 2017, the shareholders approved an amendment to the Heritage Commerce Corp 2013 Equity Incentive Plan to increase the number of shares available from 1,750,000 to 3,000,000 shares. The equity plans provide for the grant of incentive and nonqualified stock options and restricted stock. The equity plans provide that the option price for both incentive and nonqualified stock options will be determined by the Board of Directors at no less than the fair value at the date of grant. Options granted vest on a schedule determined by the Board of Directors at the time of grant. Generally options vest over four years. All options expire no later than ten years from the date of grant. Restricted stock is subject to time vesting. For the six months months ended June 30, 2019, the Company granted 296,500 shares of nonqualified stock options and 134,653 shares of restricted stock. There were 750,030 shares available for the issuance of equity awards under the 2013 Plan as of June 30, 2019.

Stock option activity under the equity plans is as follows:

				Weighted
		Weighted		Average
		Average		Remaining	Aggregate
	Number	Exercise		Contractual	Intrinsic
Total Stock Options	of Shares	Price		Life (Years)	Value
Outstanding at January 1, 2019	1,570,603	$	10.76
Granted	296,500	$	12.16
Exercised	(75,003)	$	7.55
Forfeited or expired	(18,677)	$	15.57
Outstanding at June 30, 2019	1,773,423	$	11.08	6.75	$	3,910,541
Vested or expected to vest	1,667,018			6.75	$	3,675,908
Exercisable at June 30, 2019	1,101,432			5.38	$	3,784,995

Information related to the equity plans for the periods indicated:

	Six Months Ended
	June 30,
	2019			2018
Intrinsic value of options exercised	$	392,127	$	1,466,731
Cash received from option exercise	$	566,197	$	2,001,837
Tax benefit realized from option exercises	$	102,786	$	430,357
Weighted average fair value of options granted	$	1.91	$	3.07

As of June 30, 2019, there was $1,582,000 of total unrecognized compensation cost related to nonvested stock options granted under the equity plans. That cost is expected to be recognized over a weighted‑average period of approximately 3.0 years.

The fair value of each option grant is estimated on the date of grant using the Black Scholes option pricing model that uses the assumptions noted in the following table, including the weighted average assumptions for the option grants for the periods indicated:

	Six Months Ended
	June 30,
	2019		2018
Expected life in months(1)	72		72
Volatility(1)	24	%	21	%
Weighted average risk-free interest rate(2)	2.24	%	2.87	%
Expected dividends(3)	3.95	%	2.62	%

(1) The expected life of employee stock options represents the weighted average period the stock options are expected to remain outstanding based on historical experience. Volatility is based on the historical volatility of the stock price over the same period of the expected life of the option.

(2) Based on the U.S. Treasury constant maturity interest rate with a term consistent with the expected life of the option granted.

(3) Each grant’s dividend yield is calculated by annualizing the most recent quarterly cash dividend and dividing that amount by the market price of the Company’s common stock as of the grant date

Restricted stock activity under the equity plans is as follows:

		Weighted
		AverageGrant
	Number	DateFair
Total Restricted Stock Award	of Shares	Value
Nonvested shares at January 1, 2019	193,298	$	11.04
Granted	134,653	$	12.16
Vested	(74,998)	$	12.43
Nonvested shares at June 30, 2019	252,953	$	11.23

As of June 30, 2019, there was $3,153,000 of total unrecognized compensation cost related to nonvested restricted stock awards granted under the equity plans. The cost is expected to be recognized over a weighted‑average period of approximately 2.49 years.

XML

Subordinated Debt

6 Months Ended

Jun. 30, 2019

Subordinated Debt

Subordinated Debt

12) Subordinated Debt

On May 26, 2017, the Company completed an underwritten public offering of $40,000,000 aggregate principal amount of its fixed-to-floating rate subordinated notes (“Subordinated Debt”) due June 1, 2027. The Subordinated Debt initially bears a fixed interest rate of 5.25% per year. Commencing on June 1, 2022, the interest rate on the Subordinated Debt resets quarterly to the three-month LIBOR rate plus a spread of 336.5 basis points, payable quarterly in arrears.  Interest on the Subordinated Debt is payable semi-annually on June 1st and December 1st of each year through June 1, 2022 and quarterly thereafter on March 1st, June 1st, September 1st and December 1st of each year through the maturity date or early redemption date.  The Company at its option may redeem the Subordinated Debt, in whole or in part, on any interest payment date on or after June 1, 2022 without a premium.

XML

Capital Requirements

6 Months Ended

Jun. 30, 2019

Capital Requirements

Capital Requirements

13) Capital Requirements

The Company and its subsidiary bank are subject to various regulatory capital requirements administered by the banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory—and possibly additional discretionary—actions by regulators that, if undertaken, could have a direct material effect on the Company’s financial statements and operations. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and HBC must meet specific capital guidelines that involve quantitative measures of assets, liabilities, and certain off balance sheet items as calculated under regulatory accounting practices. Capital amounts and classifications are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. There are no conditions or events since June 30, 2019, that management believes have changed the categorization of the Company or HBC as “well-capitalized.” 

As of January 1, 2015, HCC and HBC along with other community banking organizations became subject to new capital requirements and certain provisions of the new rules will be phased in from 2015 through 2019. The Federal Banking regulators approved the new rules to implement the revised capital adequacy standards of the Basel Committee on Banking Supervision, commonly called Basel III, and address relevant provisions of The Dodd Frank Wall Street Reform and Consumer Protection Act of 2010, as amended. The new capital rules establish a “capital conservation buffer,” which must consist entirely of common equity Tier 1 capital. The capital conservation buffer is 2.5% of risk-weighted assets. The Company and HBC must maintain a capital conservation buffer above the minimum risk-based capital requirements in order to avoid certain limitations on capital distributions, stock repurchases and discretionary bonus payments to executive officers. The Company’s consolidated capital ratios and the Bank’s capital ratios exceeded the regulatory guidelines for a well-capitalized financial institution under the Basel III regulatory requirements at June 30, 2019.

Quantitative measures established by regulation to help ensure capital adequacy require the Company and HBC to maintain minimum amounts and ratios (set forth in the tables below) of total, Tier 1 capital, and common equity Tier 1 capital (as defined in the regulations) to risk weighted assets (as defined), and of Tier 1 capital to average assets (as defined). Management believes that, as of June 30, 2019 and December 31, 2018, the Company and HBC met all capital adequacy guidelines to which they were subject.

The Company’s consolidated capital amounts and ratios are presented in the following table, together with capital adequacy requirements, under the Basel III regulatory requirements as of June 30, 2019 and December 31, 2018.

						Required For
						Capital
						Adequacy
						Purposes
			Actual			Under Basel III
	Amount			Ratio		Amount		Ratio (1)
			(Dollars in thousands)
As of June 30, 2019
Total Capital	$	360,242		15.9	%	$	237,965	10.5	%
(to risk-weighted assets)
Tier 1 Capital	$	293,492		13.0	%	$	192,639	8.5	%
(to risk-weighted assets)
Common Equity Tier 1 Capital	$	293,492		13.0	%	$	158,644	7.0	%
(to risk-weighted assets)
Tier 1 Capital	$	293,492		9.9	%	$	118,865	4.0	%
(to average assets)

(1) Includes 2.5% capital conservation buffer, effective January 1, 2019, except the Tier 1 Capital to average assets ratio.

					Required For
					Capital
					Adequacy
					Purposes
	Actual				Under Basel III
	Amount		Ratio		Amount		Ratio (1)
		(Dollars in thousands)
As of December 31, 2018
Total Capital	$	344,597	15.0	%	$	227,514	9.875	%
(to risk-weighted assets)
Tier 1 Capital	$	276,675	12.0	%	$	181,435	7.875	%
(to risk-weighted assets)
Common Equity Tier 1 Capital	$	276,675	12.0	%	$	146,876	6.375	%
(to risk-weighted assets)
Tier 1 Capital	$	276,675	8.9	%	$	124,726	4.000	%
(to average assets)

(1) Includes 1.875% capital conservation buffer, effective January 1, 2018 except the Tier 1 Capital to average assets ratio.

HBC’s actual capital amounts and ratios are presented in the following table, together with capital adequacy requirements, under the Basel III regulatory requirements as of June 30, 2019, and December 31, 2018.

									Required For
									Capital
					To Be Well-Capitalized				Adequacy
					Under Basel III PCA Regulatory				Purposes
	Actual				Requirements				Under Basel III
	Amount		Ratio		Amount		Ratio		Amount		Ratio (1)
	(Dollars in thousands)
As of June 30, 2019
Total Capital	$	338,344	14.9	%	$	226,477	10.0	%	$	237,801	10.5	%
(to risk-weighted assets)
Tier 1 Capital	$	311,055	13.7	%	$	181,182	8.0	%	$	192,506	8.5	%
(to risk-weighted assets)
Common Equity Tier 1 Capital	$	311,055	13.7	%	$	147,210	6.5	%	$	158,534	7.0	%
(to risk-weighted assets)
Tier 1 Capital	$	311,055	10.5	%	$	148,505	5.0	%	$	118,804	4.0	%
(to average assets)

(1) Includes 2.5% capital conservation buffer, effective January 1, 2019, except the Tier 1 Capital to average assets ratio.

									Required For
									Capital
					To Be Well-Capitalized				Adequacy
					Under Basel III PCA Regulatory				Purposes
	Actual				Requirements				Under Basel III
	Amount		Ratio		Amount		Ratio		Amount		Ratio (1)
		(Dollars in thousands)
As of December 31, 2018
Total Capital	$	322,283	14.0	%	$	230,275	10.0	%	$	227,397	9.875	%
(to risk-weighted assets)
Tier 1 Capital	$	293,730	12.8	%	$	184,220	8.0	%	$	181,342	7.875	%
(to risk-weighted assets)
Common Equity Tier 1 Capital	$	293,730	12.8	%	$	149,679	6.5	%	$	146,800	6.375	%
(to risk-weighted assets)
Tier 1 Capital	$	293,730	9.4	%	$	155,832	5.0	%	$	124,666	4.000	%
(to average assets)

(1) Includes 1.875% capital conservation buffer, effective January 1, 2018, except the Tier 1 Capital to average assets ratio.

The Subordinated Debt, net of unamortized issuance costs, totaled $39,461,000 at June 30, 2019, and qualifies as Tier 2 capital for the Company under the guidelines established by the Federal Reserve Bank. 

Under California General Corporation Law, the holders of common stock are entitled to receive dividends when and as declared by the Board of Directors, out of funds legally available. The California Financial Code provides that a state licensed bank may not make a cash distribution to its shareholders in excess of the lesser of the following: (i) the bank’s retained earnings; or (ii) the bank’s net income for its last three fiscal years, less the amount of any distributions made by the bank to its shareholders during such period. However, a bank, with the prior approval of the Commissioner of the California Department of Business Oversight—Division of Financial Institutions (“DBO”) may make a distribution to its shareholders of an amount not to exceed the greater of (i) a bank’s retained earnings; (ii) its net income for its last fiscal year; or (iii) its net income for the current fiscal year. Also with the prior approval of the Commissioner of the DBO and the shareholders of the bank, the bank may make a distribution to its shareholders, as a reduction in capital of the bank. In the event that the Commissioner determines that the shareholders’ equity of a bank is inadequate or that the making of a distribution by a bank would be unsafe or unsound, the Commissioner may order a bank to refrain from making such a proposed distribution. As of June 30, 2019, HBC would not be required to obtain regulatory approval, and the amount available for cash dividends is $32,636,000. Similar restrictions applied to the amount and sum of loan advances and other transfers of funds from HBC to the parent company. During the second and first quarter of 2019, HBC distributed to HCC dividends of $5,500,000 and $5,000,000, respectively, for a total of $10,500,000 for the first six months of 2019.  

XML

Loss Contingencies

6 Months Ended

Jun. 30, 2019

Loss Contingencies

Loss Contingencies

14) Loss Contingencies

The Company is involved in certain legal actions arising from normal business activities. Management, based upon the advice of legal counsel, believes the ultimate resolution of all pending legal actions will not have a material effect on the financial statements of the Company.

XML

Revenue Recognition

6 Months Ended

Jun. 30, 2019

Revenue Recognition

Revenue Recognition

15) Revenue Recognition

On January 1, 2018, the Company adopted ASU No. 2014-09 (Topic 606) and all subsequent ASUs that modified Topic 606. Topic 606 does not apply to revenue associated with financial instruments, including revenue from loans and securities. In addition, certain noninterest income streams such as fees associated with mortgage servicing rights, financial guarantees, gain on sale of securities, bank-owned life insurance, gain on sales of SBA loans, and certain credit card fees are also not in scope of the new guidance. Topic 606 is applicable to noninterest revenue streams such as deposit related fees, interchange fees, and merchant income. However, the recognition of these revenue streams did not change significantly upon adoption of Topic 606. Substantially all of the Company’s revenue is generated from contracts with customers. The following noninterest income revenue streams are in-scope of Topic 606:

Service charges and fees on deposit accounts consist of account analysis fees (i.e., net fees earned on analyzed business and public checking accounts), monthly service fees, check orders, and other deposit account related fees. We sometimes charge customers fees that are not specifically related to the customer accessing its funds, such as account maintenance or dormancy fees. The amount of deposit fees assessed varies based on a number of factors, such as the type of customer and account, the quantity of transactions, and the size of the deposit balance. We charge, and in some circumstances do not charge, fees to earn additional revenue and influence certain customer behavior. An example would be where we do not charge a monthly service fee, or do not charge for certain transactions, for customers that have a high deposit balance. Deposit fees are considered either transactional in nature (such as wire transfers, nonsufficient fund fees, and stop payment orders) or non-transactional (such as account maintenance and dormancy fees). These fees are recognized as earned or as transactions occur and services are provided. Check orders and other deposit account related fees are largely transactional based and, therefore, the Company’s performance obligation is satisfied, and related revenue recognized, at a point in time. Payment for service charges on deposit accounts is primarily received immediately or in the following month through a direct charge to customers’ accounts.

The following presents noninterest income, segregated by revenue streams in-scope and out-of-scope of Topic 606, for the periods indicated:

	Three Months Ended
	June 30,
	2019		2018
	(Dollars in thousands)
Noninterest Income In-scope of Topic 606:
Service charges and fees on deposit accounts	$	1,177	$	972
Noninterest Income Out-of-scope of Topic 606		1,588		1,808
Total noninterest income	$	2,765	$	2,780

	Six Months Ended
	June 30,
	2019		2018
	(Dollars in thousands)
Noninterest Income In-scope of Topic 606:
Service charges and fees on deposit accounts	$	2,338	$	1,874
Noninterest Income Out-of-scope of Topic 606		2,895		3,101
Total noninterest income	$	5,233	$	4,975

XML

Noninterest Expense

6 Months Ended

Jun. 30, 2019

Noninterest Expense

Noninterest Expense

16) Noninterest Expense

The following table sets forth the various components of the Company’s noninterest expense for the periods indicated:

	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2019		2018		2019		2018
	(Dollars in thousands)
Salaries and employee benefits	$	10,698	$	11,103	$	21,468	$	20,570
Occupancy and equipment		1,578		1,262		3,084		2,368
Professional fees		753		633		1,571		1,317
Data processing		732		622		1,411		976
Software subscriptions		556		599		1,145		1,192
Amortization of intangible assets		554		464		1,107		705
Merger-related costs (1)		540		8,214		540		8,829
Insurance expense		439		399		875		806
Recovery of legal fees (2)		—		(922)		—		(922)
Other		2,595		2,488		5,162		5,011
Total	$	18,445	$	24,862	$	36,363	$	40,852

(1) Severance and retention expense of $3,393,000 for both the second quarter and first six months of 2018 is included in Salaries and employee benefits in the Consolidated Statements of Income. Other acquisition and integration costs of $540,000 and $4,821,000 for the second quarter of 2019 and the second quarter of 2018, respectively, is included in Other noninterest expense in the Consolidated Statements of Income.  Other acquisition and integration costs of $540,000 and $5,436,000 for the first six months of 2019 and the first six months of 2018, respectively, is included in Other noninterest expense in the Consolidated Statements of Income.

(2) Included in Professional fees in the the Consolidated Statements of Income.

XML

Lease

6 Months Ended

Jun. 30, 2019

Leases

Leases

17) Leases

On January 1, 2019, the Company adopted 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. As of June 30, 2019, operating lease ROU assets, included in other assets, and lease liabilities, included in other liabilities, totaled $7,425,000. 

The following table presents the quantitative information for the Company’s leases:

		June 30,
		2019
	(Dollars in thousands)
Operating Lease Cost (Cost resulting from lease payments)	$	1,044
Operating Lease - Operating Cash Flows (Fixed Payments)	$	1,012
Operating Lease - ROU assets	$	7,425
Operating Lease - Liabilities	$	7,425
Weighted Average Lease Term - Operating Leases		3.40 years
Weighted Average Discount Rate - Operating Leases		5.25%

The following maturity analysis shows the undiscounted cash flows due on the Company’s operating lease abilities:

	(Dollars in thousands)
2019	$	2,020
2020		2,175
2021		1,403
2022		1,198
2023		660
Thereafter		703
Total undiscounted cash flows		8,159
Discount on cash flows		(734)
Total lease liability	$	7,425

In June of 2019, the Company entered in to a lease agreement for 54,910 square feet of office space in San Jose, California, commencing on February 1, 2020.  The Company intends to move its Bay View Funding office during the first quarter of 2020, and move the main office of HBC during the second quarter of 2020, to this new location.

XML

Business Segment Information

6 Months Ended

Jun. 30, 2019

Business Segment Information

Business Segment Information

18) Business Segment Information

The following presents the Company’s operating segments. The Company operates through two business segments: Banking segment and Factoring segment. Transactions between segments consist primarily of borrowed funds. Intersegment interest expense is allocated to the Factoring segment based on the Company’s prime rate and funding costs. The provision for loan loss is allocated based on the segment’s allowance for loan loss determination which considers the effects of charge-offs. Noninterest income and expense directly attributable to a segment are assigned to it. Taxes are paid on a consolidated basis and allocated for segment purposes. The Factoring segment includes only factoring originated by Bay View Funding.

	Three Months Ended June 30, 2019
	Banking(1)		Factoring		Consolidated
	(Dollars in thousands)
Interest income	$	30,521		2,968	$	33,489
Intersegment interest allocations		292		(292)		—
Total interest expense		2,573		—		2,573
Net interest income		28,240		2,676		30,916
Provision (credit) for loan losses		(744)		4		(740)
Net interest income after provision		28,984		2,672		31,656
Noninterest income		2,641		124		2,765
Noninterest expense		16,784		1,661		18,445
Intersegment expense allocations		132		(132)		—
Income before income taxes		14,973		1,003		15,976
Income tax (benefit) expense		4,327		296		4,623
Net income	$	10,646	$	707	$	11,353
Total assets	$	3,045,378	$	62,653	$	3,108,031
Loans, net of deferred fees	$	1,827,936	$	49,831	$	1,877,767
Goodwill	$	70,709	$	13,044	$	83,753

	Three Months Ended June 30, 2018
	Banking(1)		Factoring		Consolidated
	(Dollars in thousands)
Interest income	$	28,625		3,355	$	31,980
Intersegment interest allocations		376		(376)		—
Total interest expense		1,816		—		1,816
Net interest income		27,185		2,979		30,164
Provision for loan losses		7,141		57		7,198
Net interest income after provision		20,044		2,922		22,966
Noninterest income		2,531		249		2,780
Noninterest expense (2)		23,301		1,561		24,862
Intersegment expense allocations		227		(227)		—
Income before income taxes		(499)		1,383		884
Income tax expense		(440)		409		(31)
Net income	$	(59)	$	974	$	915
Total assets	$	3,044,221	$	78,986	$	3,123,207
Loans, net of deferred fees	$	1,893,147	$	63,486	$	1,956,633
Goodwill	$	71,373	$	13,044	$	84,417

(1) Includes the holding company’s results of operations

(2) The banking segment’s noninterest expense includes merger-related costs of $540,000 and $8,214,000, for the second quarter of 2019 and the second quarter of 2018, respectively

	Six Months Ended June 30, 2019
	Banking(1)		Factoring		Consolidated
	(Dollars in thousands)
Interest income	$	61,017	$	5,921	$	66,938
Intersegment interest allocations		606		(606)		—
Total interest expense		4,980		—		4,980
Net interest income		56,643		5,315		61,958
Provision for loan losses		(1,636)		(165)		(1,801)
Net interest income after provision		58,279		5,480		63,759
Noninterest income		4,873		360		5,233
Noninterest expense		32,985		3,378		36,363
Intersegment expense allocations		253		(253)		—
Income before income taxes		30,420		2,209		32,629
Income tax expense		8,477		653		9,130
Net income	$	21,943	$	1,556	$	23,499
Total assets	$	3,045,378	$	62,653	$	3,108,031
Loans, net of deferred fees	$	1,827,936	$	49,831	$	1,877,767
Goodwill	$	70,709	$	13,044	$	83,753

	Six Months Ended June 30, 2018
	Banking(1)		Factoring		Consolidated
	(Dollars in thousands)
Interest income	$	53,356	$	6,501	$	59,857
Intersegment interest allocations		703		(703)		—
Total interest expense		3,345		—		3,345
Net interest income		50,714		5,798		56,512
Provision for loan losses		7,629		75		7,704
Net interest income after provision		43,085		5,723		48,808
Noninterest income		4,617		358		4,975
Noninterest expense (2)		37,768		3,084		40,852
Intersegment expense allocations		402		(402)		—
Income before income taxes		10,336		2,595		12,931
Income tax expense		2,440		767		3,207
Net income	$	7,896	$	1,828	$	9,724
Total assets	$	3,044,221		78,986	$	3,123,207
Loans, net of deferred fees	$	1,893,147		63,486	$	1,956,633
Goodwill	$	71,373		13,044	$	84,417

(1) Includes the holding company’s results of operations

(2) The banking segment’s noninterest expense includes merger-related costs of $540,000 and $8,829,000, for the first six months of 2019 and the first six months of 2018, respectively

XML

Subsequent Events

6 Months Ended

Jun. 30, 2019

Subsequent Events

Subsequent Events

19) Subsequent Events

On July 25, 2019, the Company announced that its Board of Directors declared a $0.12 per share quarterly cash dividend to holders of common stock. The dividend will be paid on August 22, 2019  to shareholders of record on August 8, 2019.

XML

Basis of Presentation (Policies)

6 Months Ended

Jun. 30, 2019

Basis of Presentation

Basis of Presentation

1) Basis of Presentation

The unaudited consolidated financial statements of Heritage Commerce Corp (the “Company” or “HCC”) and its wholly owned subsidiary, Heritage Bank of Commerce (“HBC”), have been prepared pursuant to the rules and regulations for reporting on Form 10-Q. Accordingly, certain information and notes required by accounting principles generally accepted in the United States of America (“GAAP”) for annual financial statements are not included herein. The interim statements should be read in conjunction with the consolidated financial statements and notes that were included in the Company’s Form 10-K for the year ended December 31, 2018.

HBC is a commercial bank serving customers primarily located in Santa Clara, Alameda, Contra Costa, San Benito, and San Mateo counties of California. CSNK Working Capital Finance Corp. a California corporation, dba Bay View Funding (“Bay View Funding”) is a wholly owned subsidiary of HBC, and provides business-essential working capital factoring financing to various industries throughout the United States. No customer accounts for more than 10% of revenue for HBC or the Company. The Company reports its results for two segments: banking and factoring. The Company’s management uses segment results in its operating and strategic planning.

In management’s opinion, all adjustments necessary for a fair presentation of these consolidated financial statements have been included and are of a normal and recurring nature. All intercompany transactions and balances have been eliminated.

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ significantly from these estimates.

The results for the three and six months ended June 30, 2019 are not necessarily indicative of the results expected for any subsequent period or for the entire year ending December 31, 2019.

Business Combinations

Business Combinations

The Company accounts for acquisitions of businesses using the acquisition method of accounting. Under the acquisition method, assets acquired and liabilities assumed are recorded at their estimated fair values at the date of acquisition. Management utilizes various valuation techniques including discounted cash flow analyses to determine these fair values. Any excess of the purchase price over amounts allocated to the acquired assets, including identifiable intangible assets, and liabilities assumed is recorded as goodwill.

Goodwill and Other Intangible Assets

Goodwill and Other Intangible Assets

Goodwill resulted from the acquisition of Tri-Valley Bank (“Tri-Valley”) on April 6, 2018 and United American Bank (“United American”) on May 4, 2018, and from acquisitions in prior years. Goodwill represents the excess of the purchase price over the fair value of acquired tangible assets and liabilities and identifiable intangible assets. Goodwill is assessed at least annually for impairment and any such impairment is recognized in the period identified.

Other intangible assets consist of core deposit intangible assets and a below market value lease intangible asset, arising from the United American and Tri-Valley acquisitions. They are initially measured at fair value and then are amortized over their estimated useful lives. The core deposit intangible assets from the acquisitions of United American and Tri-Valley are being amortized on an accelerated method over ten years. The below market value lease intangible assets are being amortized on the straight line method over three years for United American and eleven years for Tri-Valley. 

Reclassifications

Reclassifications

              Certain reclassifications of prior year balances have been made to conform to the current year presentation. These reclassifications had no impact on the Company’s consolidated financial position, results of operations or net change in cash and cash equivalents.

Adoption of New Accounting Standards

Adoption of New Accounting Standards

In February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016-02, “Leases (Topic 842)”. The pronouncement affects all entities that are participants to leasing agreements. From a lessee accounting perspective, the ASU requires a lessee to recognize assets and liabilities on the balance sheet for operating leases and changes many key definitions, including the definition of a lease. The ASU includes a short-term lease exception for leases with a term of twelve months or less, in which a lessee can make an accounting policy election not to recognize lease assets and lease liabilities. The Company has elected this short-term lease exception.  Lessees will continue to differentiate between finance leases (previously referred to as capital leases) and operating leases, using classification criteria that are substantially similar to the previous guidance. For lessees, the recognition, measurement, and presentation of expenses and cash flows arising from a lease have not significantly changed from previous GAAP. From a lessor accounting perspective, the guidance is largely unchanged, except for targeted improvements to align with new terminology under lessee accounting and with the updated revenue recognition guidance in Topic 606.  The ASU includes additional quantitative and qualitative disclosures required by lessees and lessors to help users better understand the amount, timing, and uncertainty of cash flows arising from leases. ASU No. 2016-02 is effective for fiscal years beginning after December 31, 2018, and interim periods within those fiscal years. Lessees and lessors are required to recognize and measure leases at the beginning of the earliest period presented using a modified retrospective approach.

In July 2018, the FASB issued ASU No. 2018-11, “Leases (Topic 842) - Targeted Improvements” to provide entities with relief from the costs of implementing certain aspects of the new leasing standard. Specifically, under the amendments in ASU No. 2018-11 entities may elect not to recast the comparative periods presented when transitioning to the new leasing standard, and lessors may elect not to separate lease and non-lease components when certain conditions are met. As the Company elected the transition option provided in ASU No. 2018-11, the modified retrospective approach was applied on January 1, 2019 (as opposed to January 1, 2017). The Company also elected certain practical expedients provided under ASU No. 2016-02 whereby we will not reassess (i) whether any expired or existing contracts are or contain leases, (ii) the lease classification for any expired or existing leases and (iii) initial direct costs for any existing leases. In December 2018, the FASB issued ASU No. 2018-20, “Leases (Topic 842): Narrow-Scope Improvements for Lessors,” which provides targeted improvements and clarification to guidance with FASB ASC Topic 842 specific to lessors. The amendments of ASU No. 2018-20 have the same effective date as ASU 2016-02 and may be applied either retrospectively or prospectively to all new and existing leases. The Company obtained a third-party software application which provides lease accounting under the guidelines of FASB ASC Topic 842.

The amendments of ASU No. 2016-02 and subsequently issued ASUs, which provided additional guidance and clarifications to various aspects of FASB ASC Topic 842, became effective for the Company on January 1, 2019.  At the adoption date, the Company reported increase assets and liabilities of approximately $9.6 million on its consolidated balance sheet as a result of recognizing right-of-use assets and lease liabilities related to non-cancellable operating lease agreements for office space. The adoption of this guidance did not have a material impact to its Consolidated Statetements of Income or Cash Flows. See Note 17 – Leases for more information.

In March 2017, the FASB issued ASU 2017-08, Premium Amortization on Purchased Callable Debt Securities. This update shortens the amortization period of certain callable debt securities held at a premium to the earliest call date.  The amendments in this update were effective for the Company on January 1, 2019.  The amendments are applied on a modified retrospective basis through a cumulative-effect adjustment to retained earnings as of the beginning of the period of adoption and the Company is required to provide change in accounting principle disclosures. The Company adopted the new guidance on January 1, 2019, and there was no material impact to the financial statements and no cumulative adjustments were made.

Newly Issued, but not yet Effective Accounting Standards

In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments – Credit Losses: Measurement of Credit Losses on Financial Instruments. The standard is the final guidance on the new current expected credit loss (“CECL”) model. The amendments in this update replace the incurred loss impairment methodology in current GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to estimate future credit loss estimates. As CECL encompasses all financial assets carried at amortized cost, the requirement that reserves be established based on an organization’s reasonable and supportable estimate of expected credit losses extends to held-to-maturity debt securities.  The guidance allows for a modified retrospective approach with a cumulative effect adjustment to the balance sheet upon adoption (charge to retained earnings instead of the income statement). The new guidance is effective for public business entities for fiscal years, and interim periods within those years, beginning after December 15, 2019. While early application is permitted for fiscal years beginning after December 15, 2018, the Company plans to adopt this standard on January 1, 2020. The Company has established a company-wide, cross-functional governance structure, which oversees overall strategy for implementation of CECL. We are currently evaluating various loss methodologies to determine their correlation to our various loan categories historical performance. The Company has completed the data validation and is currently parallel processing during the third and fourth quarters of 2019 our existing allowance for loan loss model with CECL prior to implementation. The Company is focused on completing model validation, refining assumptions and continued review of the models. The Company also continues to focus on researching and resolving interpretive accounting issues in the ASU, contemplating various related accounting policies, developing processes and related controls and considering various reporting disclosures. The magnitude of the change in the Company’s allowance for loan losses at the adoption date will depend upon the nature and characteristics of the portfolio at the adoption date, as well as macroeconomic conditions and forecasts at that time.

In January 2017, the FASB issued accounting standards ASU No. 2017-04, Simplifying the Test for Goodwill Impairment. The provisions of the update eliminate the existing second step of the goodwill impairment test which provides for the allocation of reporting unit fair value among existing assets and liabilities, with the net remaining amount representing the implied fair value of goodwill. In replacement of the existing goodwill impairment rule, the update will provide that impairment should be recognized as the excess of any of the reporting unit’s goodwill over the fair value of the reporting unit. Under the provisions of this update, the amount of the impairment is limited to the carrying value of the reporting unit’s goodwill. For public business entities that are SEC filers, the amendments of the update will become effective in fiscal years beginning after December 15, 2019. Management does not expect the requirements of this update to have a material impact on the Company’s financial position, results of operations or cash flows.

XML

Shareholders' Equity and Earnings Per Share (Tables)

6 Months Ended

Jun. 30, 2019

Shareholders' Equity and Earnings Per Share.

Schedule of reconciliation of factors used in computing basic and diluted earnings per common share

	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2019		2018		2019		2018
	(Dollars in thousands, except per share amounts)
Net income	$	11,353	$	915	$	23,499	$	9,724
Weighted average common shares outstanding for basic
earnings per common share		43,202,562		41,925,616		43,155,360		40,083,056
Dilutive potential common shares		518,889		583,058		539,757		577,027
Shares used in computing diluted earnings per common share		43,721,451		42,508,674		43,695,117		40,660,083
Basic earnings per share	$	0.26	$	0.02	$	0.54	$	0.24
Diluted earnings per share	$	0.26	$	0.02	$	0.54	$	0.24

XML

Accumulated Other Comprehensive Income (Loss) (“AOCI”) (Tables)

6 Months Ended

Jun. 30, 2019

Accumulated Other Comprehensive Income (Loss) (“AOCI”)

Schedule of changes in AOCI by component

	Three Months Ended June 30, 2019 and 2018
			Unamortized
			Unrealized
	Unrealized		Gain on
	Gains (Losses) on		Available-
	Available-		for-Sale		Defined
	for-Sale		Securities		Benefit
	Securities		Reclassified		Pension
	and I/O		to Held-to-		Plan
	Strips(1)		Maturity		Items		Total
	(Dollars in thousands)
Beginning balance April 1, 2019, net of taxes	$	(1,603)	$	326	$	(7,710)	$	(8,987)
Other comprehensive income (loss) before reclassification,
net of taxes		3,072		—		(7)		3,065
Amounts reclassified from other comprehensive income (loss),
net of taxes		(386)		(9)		15		(380)
Net current period other comprehensive income (loss),
net of taxes		2,686		(9)		8		2,685
Ending balance June 30, 2019, net of taxes	$	1,083	$	317	$	(7,702)	$	(6,302)
Beginning balance April 1, 2018, net of taxes	$	(6,093)	$	367	$	(9,230)	$	(14,956)
Other comprehensive (loss) before reclassification,		(812)		—		(4)		(816)
net of taxes
Amounts reclassified from other comprehensive income (loss),		(126)		(8)		40		(94)
net of taxes
Net current period other comprehensive income (loss),
net of taxes		(938)		(8)		36		(910)
Ending balance June 30, 2018, net of taxes	$	(7,031)	$	359	$	(9,194)	$	(15,866)

(1) This AOCI component is included in the computation of net periodic benefit cost (see Note 9—Benefit Plans) and includes split-dollar life insurance benefit plan.

	Six Months Ended June 30, 2019 and 2018
			Unamortized
			Unrealized
	Unrealized		Gain on
	Gains (Losses) on		Available-
	Available-		for-Sale		Defined
	for-Sale		Securities		Benefit
	Securities		Reclassified		Pension
	and I/O		to Held-to-		Plan
	Strips		Maturity		Items		Total
	(Dollars in thousands)
Beginning balance January 1, 2019, net of taxes	$	(5,007)	$	344	$	(7,718)	$	(12,381)
Other comprehensive income (loss) before reclassification,
net of taxes		6,476		—		(14)		6,462
Amounts reclassified from other comprehensive income (loss),
net of taxes		(386)		(27)		30		(383)
Net current period other comprehensive income (loss),
net of taxes		6,090		(27)		16		6,079
Ending balance June 30, 2019, net of taxes	$	1,083	$	317	$	(7,702)	$	(6,302)
Beginning balance January 1, 2018, net of taxes	$	(362)	$	375	$	(9,265)	$	(9,252)
Other comprehensive (loss) before reclassification,
net of taxes		(6,482)		—		(9)		(6,491)
Amounts reclassified from other comprehensive income (loss),
net of taxes		(187)		(16)		80		(123)
Net current period other comprehensive income (loss),
net of taxes		(6,669)		(16)		71		(6,614)
Ending balance June 30, 2018, net of taxes	$	(7,031)	$	359	$	(9,194)	$	(15,866)

(1) This AOCI component is included in the computation of net periodic benefit cost (see Note 9—Benefit Plans) and includes split-dollar life insurance benefit plan.

Schedule of reclassifications out of AOCI into net income

	Amounts Reclassified from
	AOCI(1)
	Three Months Ended
	June 30,				Affected Line Item Where
Details About AOCI Components	2019		2018		Net Income is Presented
	(Dollars in thousands)
Unrealized gains on available-for-sale securities
and I/O strips	$	548	$	179	Gain on sales of securities
		(162)		(53)	Income tax expense
		386		126	Net of tax
Amortization of unrealized gain on securities available-
for-sale that were reclassified to securities
held-to-maturity		13		11	Interest income on taxable securities
		(4)		(3)	Income tax expense
		9		8	Net of tax
Amortization of defined benefit pension plan items (1)
Prior transition obligation		24		16
Actuarial losses		(46)		(73)
		(22)		(57)	Other noninterest expense
		7		17	Income tax benefit
		(15)		(40)	Net of tax
Total reclassification for the period	$	380	$	94

	Amounts Reclassified from
	AOCI(1)
	Six Months Ended
	June 30,				Affected Line Item Where
Details About AOCI Components	2019		2018		Net Income is Presented
	(Dollars in thousands)
Unrealized gains on available-for-sale securities
and I/O strips	$	548	$	266	Gain on sales of securities
		(162)		(79)	Income tax expense
		386		187	Net of tax
Amortization of unrealized gain on securities
available-for-sale that were reclassified to securities
held-to-maturity		39		22	Interest income on taxable securities
		(12)		(6)	Income tax expense
		27		16	Net of tax
Amortization of defined benefit pension plan items (1)
Prior transition obligation		49		32
Actuarial losses		(92)		(146)
		(43)		(114)	Other noninterest expense
		13		34	Income tax benefit
		(30)		(80)	Net of tax
Total reclassification from AOCI for the period	$	383	$	123

(1) This AOCI component is included in the computation of net periodic benefit cost (see Note 9—Benefit Plans) and includes split-dollar life insurance benefit plan.

XML

Securities (Tables)

6 Months Ended

Jun. 30, 2019

Securities

Schedule of amortized cost and estimated fair value of securities

			Gross		Gross		Estimated
	Amortized		Unrealized		Unrealized		Fair
June 30, 2019	Cost		Gains		(Losses)		Value
	(Dollars in thousands)
Securities available-for-sale:
Agency mortgage-backed securities	$	243,861	$	327	$	(1,541)	$	242,647
U.S. Treasury		138,379		2,130		—		140,509
Total	$	382,240	$	2,457	$	(1,541)	$	383,156
Securities held-to-maturity:
Agency mortgage-backed securities	$	267,514	$	694	$	(1,673)	$	266,535
Municipals - exempt from Federal tax		83,885		1,105		(58)		84,932
Total	$	351,399	$	1,799	$	(1,731)	$	351,467

			Gross		Gross		Estimated
	Amortized		Unrealized		Unrealized		Fair
December 31, 2018	Cost		Gains		(Losses)		Value
	(Dollars in thousands)
Securities available-for-sale:
Agency mortgage-backed securities	$	311,523	$	98	$	(8,767)	$	302,854
U.S. Treasury		147,823		930		—		148,753
U.S. Government sponsored entities		7,433		4		(1)		7,436
Total	$	466,779	$	1,032	$	(8,768)	$	459,043
Securities held-to-maturity:
Agency mortgage-backed securities	$	291,241	$	59	$	(9,153)	$	282,147
Municipals - exempt from Federal tax		85,957		312		(2,241)		84,028
Total	$	377,198	$	371	$	(11,394)	$	366,175

Schedule of securities with unrealized losses

	Less Than 12 Months				12 Months or More				Total
	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
June 30, 2019	Value		(Losses)		Value		(Losses)		Value		(Losses)
	(Dollars in thousands)
Securities available-for-sale:
Agency mortgage-backed securities	$	—	$	—	$	198,443	$	(1,541)	$	198,443	$	(1,541)
Total	$	—	$	—	$	198,443	$	(1,541)	$	198,443	$	(1,541)
Securities held-to-maturity:
Agency mortgage-backed securities	$	—	$	—	$	174,138	$	(1,673)	$	174,138	$	(1,673)
Municipals - exempt from Federal tax		150		(1)		7,790		(57)		7,940		(58)
Total	$	150	$	(1)	$	181,928	$	(1,730)	$	182,078	$	(1,731)

	Less Than 12 Months				12 Months or More				Total
	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
December 31, 2018	Value		(Losses)		Value		(Losses)		Value		(Losses)
	(Dollars in thousands)
Securities available-for-sale:
Agency mortgage-backed securities	$	3,868	$	(21)	$	281,082	$	(8,746)	$	284,950	$	(8,767)
U.S. Government sponsored entities		3,974		(1)		—		—		3,974		(1)
Total	$	7,842	$	(22)	$	281,082	$	(8,746)	$	288,924	$	(8,768)
Securities held-to-maturity:
Agency mortgage-backed securities	$	16,088	$	(103)	$	255,917	$	(9,050)	$	272,005	$	(9,153)
Municipals - exempt from Federal tax		5,019		(27)		57,301		(2,214)		62,320		(2,241)
Total	$	21,107	$	(130)	$	313,218	$	(11,264)	$	334,325	$	(11,394)

Schedule of proceeds from sales of securities and the resulting gains and losses

	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2019		2018		2019		2018
	(Dollars in thousands)
Proceeds	$	59,878	$	55,537	$	59,878	$	94,291
Gross gains		608		193		608		1,243
Gross losses		(60)		(14)		(60)		(977)

Schedule of amortized cost and estimated fair values of securities, by contractual maturity

	Available-for-sale
	Amortized		Estimated
	Cost		Fair Value
	(Dollars in thousands)
Due after 3 months through one year	$	14,858	$	14,956
Due after one through five years		123,521		125,553
Agency mortgage-backed securities		243,861		242,647
Total	$	382,240	$	383,156

	Held-to-maturity
	Amortized		Estimated
	Cost		Fair Value
	(Dollars in thousands)
Due 3 months or less	$	281		281
Due after 3 months through one year		487		488
Due after one through five years		5,193		5,306
Due after five through ten years		28,561		29,087
Due after ten years		49,363		49,770
Agency mortgage-backed securities		267,514		266,535
Total	$	351,399	$	351,467

XML

Loans (Tables)

6 Months Ended

Jun. 30, 2019

Loans

Schedule of loans

	June 30,		December 31,
	2019		2018
	(Dollars in thousands)
Loans held-for-investment:
Commercial	$	567,529	$	597,763
Real estate:
CRE		1,037,885		994,067
Land and construction		97,297		122,358
Home equity		116,057		109,112
Residential mortgages		48,944		50,979
Consumer		10,279		12,453
Loans		1,877,991		1,886,732
Deferred loan fees, net		(224)		(327)
Loans, net of deferred fees		1,877,767		1,886,405
Allowance for loan losses		(26,631)		(27,848)
Loans, net	$	1,851,136	$	1,858,557

Schedule of changes in allowance for loan losses

	Three Months Ended June 30, 2019
	Commercial		Real Estate		Consumer		Total
	(Dollars in thousands)
Beginning of period balance	$	15,557	$	11,671	$	90	$	27,318
Charge-offs		(76)		—		—		(76)
Recoveries		87		42		—		129
Net recoveries		11		42		—		53
Provision (credit) for loan losses		(334)		(406)		—		(740)
End of period balance	$	15,234	$	11,307	$	90	$	26,631

	Three Months Ended June 30, 2018
	Commercial		Real Estate		Consumer		Total
	(Dollars in thousands)
Beginning of period balance	$	11,165	$	8,858	$	116	$	20,139
Charge-offs		(870)		—		—		(870)
Recoveries		175		22		—		197
Net (charge-offs) recoveries		(695)		22		—		(673)
Provision for loan losses		7,052		140		6		7,198
End of period balance	$	17,522	$	9,020	$	122	$	26,664

	Six Months Ended June 30, 2019
	Commercial		Real Estate		Consumer		Total
	(Dollars in thousands)
Beginning of period balance	$	17,061	$	10,671	$	116	$	27,848
Charge-offs		(302)		—				(302)
Recoveries		802		84		—		886
Net recoveries		500		84		—		584
Provision (credit) for loan losses		(2,327)		552		(26)		(1,801)
End of period balance	$	15,234	$	11,307	$	90	$	26,631

	Six Months Ended June 30, 2018
	Commercial		Real Estate		Consumer		Total
	(Dollars in thousands)
Beginning of period balance	$	10,608	$	8,950	$	100	$	19,658
Charge-offs		(1,115)		—		—		(1,115)
Recoveries		332		85		—		417
Net (charge-offs) recoveries		(783)		85		—		(698)
Provision (credit) for loan losses		7,697		(15)		22		7,704
End of period balance	$	17,522	$	9,020	$	122	$	26,664

Schedule of balance in allowance for loan losses and recorded investment in loans by portfolio segment, based on impairment method

	June 30, 2019
	Commercial		Real Estate		Consumer		Total
	(Dollars in thousands)
Allowance for loan losses:
Ending allowance balance attributable to loans:
Individually evaluated for impairment	$	6,351	$	186	$	—	$	6,537
Collectively evaluated for impairment		8,883		11,121		90		20,094
Total allowance balance	$	15,234	$	11,307	$	90	$	26,631
Loans:
Individually evaluated for impairment	$	8,370	$	8,823	$	—	$	17,193
Collectively evaluated for impairment		559,159		1,291,360		10,279		1,860,798
Total loan balance	$	567,529	$	1,300,183	$	10,279	$	1,877,991

	December 31, 2018
	Commercial		Real Estate		Consumer		Total
	(Dollars in thousands)
Allowance for loan losses:
Ending allowance balance attributable to loans:
Individually evaluated for impairment	$	6,944	$	—	$	—	$	6,944
Collectively evaluated for impairment		10,117		10,671		116		20,904
Total allowance balance	$	17,061	$	10,671	$	116	$	27,848
Loans:
Individually evaluated for impairment	$	9,495	$	5,645	$	—	$	15,140
Collectively evaluated for impairment		588,268		1,270,871		12,453		1,871,592
Total loan balance	$	597,763	$	1,276,516	$	12,453	$	1,886,732

Schedule of loans held-for-investment individually evaluated for impairment by class of loans

	June 30, 2019						December 31, 2018
					Allowance						Allowance
	Unpaid				for Loan		Unpaid				for Loan
	Principal		Recorded		Losses		Principal		Recorded		Losses
	Balance		Investment		Allocated		Balance		Investment		Allocated
	(Dollars in thousands)
With no related allowance recorded:
Commercial	$	1,504	$	1,504	$	—	$	1,849	$	1,849	$	—
Real estate:
CRE		3,349		3,349		—		5,094		5,094		—
Land and construction		—		—		—		—		—		—
Home Equity		381		381		—		551		551		—
Total with no related allowance recorded		5,234		5,234		—		7,494		7,494		—
With an allowance recorded:
Commercial		6,866		6,866		6,351		7,646		7,646		6,944
Real estate:
Commercial		5,093		5,093		186		—		—		—
Total with an allowance recorded		11,959		11,959		6,537		7,646		7,646		6,944
Total	$	17,193	$	17,193	$	6,537	$	15,140	$	15,140	$	6,944

Schedule of average impaired loans with interest recognized and cash-basis interest earned on impaired loans

	Three Months Ended June 30, 2019
			Real Estate
					Land and		Home
	Commercial		CRE		Construction		Equity		Consumer		Total
	(Dollars in thousands)
Average of impaired loans during the period	$	8,453	$	8,442	$	—	$	460	$	—	$	17,355
Interest income during impairment	$	—	$	—	$	—	$	—	$	—	$	—
Cash-basis interest recognized	$	—	$	—	$	—	$	—	$	—	$	—

	Three Months Ended June 30, 2018
			Real Estate
					Land and		Home
	Commercial		CRE		Construction		Equity		Consumer		Total
	(Dollars in thousands)
Average of impaired loans during the period	$	11,803	$	3,151	$	—	$	470	$	—	$	15,424
Interest income during impairment	$	—	$	—	$	—	$	—	$	—	$	—
Cash-basis interest recognized	$	—	$	—	$	—	$	—	$	—	$	—

	Six Months Ended June 30, 2019
			Real Estate
					Land and		Home
	Commercial		CRE		Construction		Equity		Consumer		Total
	(Dollars in thousands)
Average of impaired loans during the period	$	8,800	$	7,326	$	—	$	490	$	—	$	16,616
Interest income during impairment	$	—	$	—	$	—	$	—	$	—	$	—
Cash-basis interest recognized	$	—	$	—	$	—	$	—	$	—	$	—

	Six Months Ended June 30, 2018
			Real Estate
					Land and		Home
	Commercial		CRE		Construction		Equity		Consumer		Total
	(Dollars in thousands)
Average of impaired loans during the period	$	8,460	$	2,268	$	40	$	439	$	—	$	11,207
Interest income during impairment	$	—	$	—	$	—	$	—	$	—	$	—
Cash-basis interest recognized	$	—	$	—	$	—	$	—	$	—	$	—

Schedule of nonperforming loans

	June 30,				December 31,
	2019		2018		2018
	(Dollars in thousands)
Nonaccrual loans - held-for-investment	$	15,695	$	26,034	$	13,699
Restructured and loans over 90 days past due and still accruing		1,323		511		1,188
Total nonperforming loans		17,018		26,545		14,887
Other restructured loans		175		265		253
Total impaired loans	$	17,193	$	26,810	$	15,140

Schedule of nonperforming loans by class

	June 30, 2019						December 31, 2018
				Restructured						Restructured
				and Loans						and Loans
				over 90 Days						over 90 Days
				Past Due						Past Due
				and Still						and Still
	Nonaccrual			Accruing	Total		Nonaccrual			Accruing	Total
	(Dollars in thousands)
Commercial	$	7,096	$	1,099	$	8,195	$	8,279	$	963	$	9,242
Real estate:
CRE		8,442		—		8,442		5,094		—		5,094
Home equity		157		224		381		326		225		551
Total	$	15,695	$	1,323	$	17,018	$	13,699	$	1,188	$	14,887

Schedule of aging of past due loans by class of loans

	June 30, 2019
	30 - 59		60 - 89		90 Days or
	Days		Days		Greater		Total		Loans Not
	Past Due		Past Due		Past Due		Past Due		Past Due		Total
	(Dollars in thousands)
Commercial	$	4,251	$	1,342	$	7,349	$	12,942	$	554,587	$	567,529
Real estate:
CRE		—		—		8,442		8,442		1,029,443		1,037,885
Land and construction		—		—		—		—		97,297		97,297
Home equity		157		—		—		157		115,900		116,057
Residential mortgages		—		—		—		—		48,944		48,944
Consumer		—		—		—		—		10,279		10,279
Total	$	4,408	$	1,342	$	15,791	$	21,541	$	1,856,450	$	1,877,991

	December 31, 2018
	30 - 59		60 - 89		90 Days or
	Days		Days		Greater		Total		Loans Not
	Past Due		Past Due		Past Due		Past Due		Past Due		Total
	(Dollars in thousands)
Commercial	$	5,698	$	1,916	$	1,258	$	8,872	$	588,891	$	597,763
Real estate:
CRE		—		—		—		—		994,067		994,067
Land and construction		—		—		—		—		122,358		122,358
Home equity				—		—		—		109,112		109,112
Residential mortgages		—		—		—		—		50,979		50,979
Consumer		1		—		—		1		12,452		12,453
Total	$	5,699	$	1,916	$	1,258	$	8,873	$	1,877,859	$	1,886,732

Summary of loan portfolio by loan type and credit quality classification

	June 30, 2019						December 31, 2018
	Nonclassified		Classified		Total		Nonclassified		Classified		Total
	(Dollars in thousands)
Commercial	$	553,618		13,911	$	567,529	$	584,845	$	12,918	$	597,763
Real estate:
CRE		1,024,822		13,063		1,037,885		985,193		8,874		994,067
Land and construction		94,810		2,487		97,297		122,358		—		122,358
Home equity		114,342		1,715		116,057		107,495		1,617		109,112
Residential mortgages		48,944		—		48,944		50,979		—		50,979
Consumer		10,279		—		10,279		12,453		—		12,453
Total	$	1,846,815	$	31,176	$	1,877,991	$	1,863,323	$	23,409	$	1,886,732

Schedule of loans by class modified as troubled debt restructurings

	During the Three Months Ended
	June 30, 2019
				Pre-modification		Post-modification
		Number		Outstanding		Outstanding
		of		Recorded		Recorded
Troubled Debt Restructurings:		Contracts		Investment		Investment
	(Dollars in thousands)
Commercial		1	$	17	$	17
Total		1	$	17	$	17

	During the Six Months Ended
		June 30, 2019
				Pre-modification		Post-modification
		Number		Outstanding		Outstanding
		of		Recorded		Recorded
Troubled Debt Restructurings:		Contracts		Investment		Investment
	(Dollars in thousands)
Commercial		2	$	28	$	28
Total		2	$	28	$	28

	During the Three and Six Months Ended
		June 30, 2018
				Pre-modification		Post-modification
		Number		Outstanding		Outstanding
		of		Recorded		Recorded
Troubled Debt Restructurings:		Contracts		Investment		Investment
	(Dollars in thousands)
Commercial		2	$	224	$	224
Equity		1		225		225
Total		3	$	449	$	449

XML

Business Combinations (Tables)

6 Months Ended

Jun. 30, 2019

Tri Valley Bank

Business Acquisition [Line Items]

Summary of consideration paid

	(Dollars in thousands)
Cash paid for:
Warrant	$	889
Options		615
Other		91
Total cash paid		1,595
Issuance of 1,889,613 shares of common stock to Tri-
Valley shareholders at $16.26 per share at Closing		30,725
Total consideration	$	32,320

Schedule of recognized identified assets acquired and liabilities assumed

		As					As
		Recorded		Fair			Recorded
		by		Value			at
		Tri-Valley		Adjustments			Acquisition
		(Dollars in thousands)
Assets acquired:
Cash and cash equivalents	$	21,757	$	1,153	(a)	$	22,910
Loans		123,532		(2,563)	(b)		120,969
Allowance for loan losses		(1,969)		1,969	(c)		—
Other intangible assets		—		1,978	(d)		1,978
Other assets, net		9,939		(2,894)	(e)		7,045
Total assets acquired	$	153,259	$	(357)			152,902
Liabilities assumed:
Deposits	$	135,351	$	37	(f)		135,388
Other liabilities		608		—			608
Total liabilities assumed	$	135,959	$	37			135,996
Net assets acquired							16,906
Purchase price							30,725
Goodwill recorded in the merger						$	13,819

Explanation of certain fair value related adjustments for the Tri-Valley acquisition:

(a)  Represents the cash acquired in the merger, the disposition of other real estate owned of $1,132,000, a gain on the sale of securities of $53,000, partially offset by invoices paid after closing for services prior to closing of $29,000, and cash paid for fractional shares in the transaction of $3,000. The remaining $1,592,000 of cash paid for the transaction is an adjustment to prepaid assets included in other assets, net.

(b)Represents the fair value adjustment to the net book value of loans, which includes an interest rate mark and credit mark adjustment.

(c)Represents the elimination of Tri-Valley’s allowance for loan losses.

(d)Represents intangible assets recorded to reflect the fair value of core deposits and a below market lease. The core deposit intangible asset was recorded as an identifiable intangible asset and is amortized on an accelerated basis over the estimated average life of the deposit base.  The below market lease intangible assets are amortized on the straight line method over eleven years.

(e)Represents an adjustment to net deferred tax assets resulting from the fair value adjustments related to the acquired assets, liabilities assumed and identifiable intangible assets recorded,and the disposition of other real estate owned.

(f)  Represents the fair value adjustment on time deposits, which was be accreted as a reduction of 

     interest expense.

United American Bank

Business Acquisition [Line Items]

Summary of consideration paid

	(Dollars in thousands)
Consideration paid:
Cash paid for:
Series A Preferred Stock	$	8,700
Series B Preferred Stock		435
Other		2
Total cash paid		9,137
Issuance of 2,826,032 shares of common stock to United
American shareholders at $16.73 per share at Closing		47,280
Total consideration	$	56,417

Schedule of recognized identified assets acquired and liabilities assumed

		As					As
		Recorded		Fair			Recorded
		By		Value			at
		United American		Adjustments			Acquisition
		(Dollars in thousands)
Assets acquired:
Cash and cash equivalents	$	45,638	$	(32,520)	(a)	$	13,118
Securities available-for-sale		64,144		(421)	(b)		63,723
Loans		196,694		18,783	(c)		215,477
Allowance for loan losses		(2,952)		2,952	(d)		—
Other intangible assets		—		6,383	(e)		6,383
Other assets, net		9,119		(1,078)	(f)		8,041
Total assets acquired	$	312,643	$	(5,901)			306,742
Liabilities assumed:
Deposits	$	281,189	$	51	(g)		281,240
Other borrowings		62		—			62
Other liabilities		2,617		(187)	(h)		2,430
Total liabilities	$	283,868	$	(136)			283,732
Net assets acquired							23,010
Purchase price							47,280
Goodwill recorded in the merger						$	24,270

Explanation of certain fair value related adjustments for the United American acquisition:

(a) Represents the cash acquired in the merger, net of cash paid for the transaction of $9,137,000, the repurchase of $23,732,000 loan participations from ATBancorp, and $51,000 for invoices paid after closing for services prior to closing, partially offset by a tax refund of $400,000.

(b) Represents the fair value adjustment on investment securities available-for-sale.

(c) Represents the repurchase of $23,732,000 loan participations from ATBancorp, partially offset by the fair value adjustment to the net book value of loans of $4,680,000, which includes an interest rate mark and credit mark adjustment, and net charge-offs of $269,000 subsequent to closing.

(d) Represents the elimination of United American’s allowance for loan losses.

(e) Represents intangible assets recorded to reflect the fair value of core deposits and a below market lease. The core deposit intangible asset was recorded as an identifiable intangible asset and is amortized on an accelerated basis over the estimated average life of the deposit base.  The below market lease intangible assets are amortized on the straight line method over three years.

(f) Represents an adjustment to net deferred tax assets resulting from the fair value adjustments related to the acquired assets, liabilities assumed and identifiable intangible assets recorded.

(g) Represents the fair value adjustment on time deposits, which was be accreted as a reduction of interest expense.

(h) Represents the reversal of accrued accounts payable.

XML

Goodwill and Other Intangible Assets (Tables)

6 Months Ended

Jun. 30, 2019

Goodwill and Other Intangible Assets

Schedule of estimated amortization expense

	United		United								Bay View Funding
	American		American		Tri-Valley		Tri-Valley		Focus		Customer&
	Core		Below		Core		Below		Core		Brokered		Total
	Deposit		Market		Deposit		Market		Deposit		Relationship		Amortization
Year	Intangible		Lease		Intangible		Lease		Intangible		Intangible		Expense
		(Dollars in thousands)
2019	$	777	$	255	$	240	$	18	$	734	$	190	$	2,214
2020		665		235		208		18		716		190		2,032
2021		602		—		184		18		596		190		1,590
2022		553		—		167		18		502		190		1,430
2023		521		—		158		18		420		190		1,307
2024		499		—		152		18		346		159		1,174
Thereafter		1,520		—		451		88		201		—		2,260
	$	5,137	$	490	$	1,560	$	196	$	3,515	$	1,109	$	12,007

XML

Income Taxes (Tables)

6 Months Ended

Jun. 30, 2019

Income Taxes

Summary of carrying amount of low income tax housing investment

	June 30,		December 31,
	2019		2018
	(Dollars in thousands)
Low income housing investments	$	3,144	$	3,172
Future commitments	$	273	$	273

XML

Benefit Plans (Tables)

6 Months Ended

Jun. 30, 2019

Supplemental Retirement Plan

Benefit plans

Schedule of components of net periodic benefit cost

	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2019		2018		2019		2018
	(Dollars in thousands)
Components of net periodic benefit cost:
Service cost	$	55	$	62	$	110	$	124
Interest cost		264		237		528		474
Amortization of net actuarial loss		46		73		92		146
Net periodic benefit cost	$	365	$	372	$	730	$	744

Split-Dollar Life Insurance Benefit Plan

Benefit plans

Schedule of change in projected benefit obligation

	June 30,		December 31,
	2019		2018
	(Dollars in thousands)
Change in projected benefit obligation:
Projected benefit obligation at beginning of year	$	6,903	$	6,711
Interest cost		140		227
Actuarial loss (gain)		—		(35)
Projected benefit obligation at end of period	$	7,043	$	6,903

Schedule of amounts recognized in accumulated other comprehensive loss

	June 30,		December 31,
	2019		2018
	(Dollars in thousands)
Net actuarial loss	$	2,666	$	2,573
Prior transition obligation		1,104		1,149
Accumulated other comprehensive loss	$	3,770	$	3,722

Schedule of components of net periodic benefit cost

	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2019		2018		2019		2018
	(Dollars in thousands)
Amortization of prior transition obligation	$	(24)	$	(16)	$	(49)	$	(32)
Interest cost		70		56		140		113
Net periodic benefit cost	$	46	$	40	$	91	$	81

XML

Fair Value (Tables)

6 Months Ended

Jun. 30, 2019

Fair Value

Schedule of financial assets and liabilities measured on a recurring basis

			Fair Value Measurements Using
					Significant
			Quoted Prices in		Other		Significant
			Active Markets for		Observable		Unobservable
			Identical Assets		Inputs		Inputs
	Balance		(Level 1)		(Level 2)		(Level 3)
	(Dollars in thousands)
Assets at June 30, 2019
Available-for-sale securities:
Agency mortgage-backed securities	$	242,647		—	$	242,647		—
U.S. Treasury		140,509		140,509		—		—
I/O strip receivables		572		—		572		—
Assets at December 31, 2018
Available-for-sale securities:
Agency mortgage-backed securities	$	302,854		—	$	302,854		—
U.S. Treasury		148,753		148,753		—		—
U.S. Government sponsored entities		7,436		—		7,436		—
I/O strip receivables		568		—		568		—

Schedule of assets and liabilities measured on a non-recurring basis

			Fair Value Measurements Using
				Significant
			Quoted Prices in	Other	Significant
			Active Markets for	Observable	Unobservable
			Identical Assets	Inputs	Inputs
	Balance		(Level 1)	(Level 2)	(Level 3)
	(Dollars in thousands)
Assets at June 30, 2019
Impaired loans - held-for-investment:
Commercial	$	515	—	—	$	515
Real estate:
CRE		4,907	—	—		4,907
	$	5,422	—	—	$	5,422
Assets at December 31, 2018
Impaired loans - held-for-investment:
Commercial	$	702	—	—	$	702
	$	702	—	—	$	702

Schedule of impaired loans held-for-investment and impaired loans held-for-investment carried at fair value

	June 30, 2019		December 31, 2018
	(Dollars in thousands)
Impaired loans held-for-investment:
Book value of impaired loans held-for-investment carried at fair value	$	11,959	$	7,646
Book value of impaired loans held-for-investment carried at cost		5,234		7,494
Total impaired loans held-for-investment	$	17,193	$	15,140
Impaired loans held-for-investment carried at fair value:
Book value of impaired loans held-for-investment carried at fair value	$	11,959	$	7,646
Specific valuation allowance		(6,537)		(6,944)
Impaired loans held-for-investment carried at fair value, net	$	5,422	$	702

Schedule of quantitative information about level 3 fair value measurements for financial instruments measured at fair value on a non-recurring basis

	June 30, 2019
			Valuation	Unobservable	Range
	Fair Value		Techniques	Inputs	(Weighted Average)
	(Dollars in thousands)
Impaired loans - held-for-investment:
Commercial	$	515	Market Approach	Discount adjustment for differences between comparable sales	Less than 1%
Real estate:
CRE		4,907	Market Approach	Discount adjustment for differences between comparable sales	Less than 1%

	December 31, 2018
			Valuation	Unobservable	Range
	Fair Value		Techniques	Inputs	(Weighted Average)
	(Dollars in thousands)
Impaired loans - held-for-investment:
Commercial	$	702	Market Approach	Discount adjustment for differences between comparable sales	0% to 1%

Schedule of carrying amounts and estimated fair values of financial instruments

The carrying amounts and estimated fair values of financial instruments at June 30, 2019 are as follows:

			Estimated Fair Value
					Significant
			Quoted Prices in		Other		Significant
			Active Markets for		Observable		Unobservable
	Carrying		Identical Assets		Inputs		Inputs
	Amounts		(Level 1)		(Level 2)		(Level 3)		Total
	(Dollars in thousands)
Assets:
Cash and cash equivalents	$	276,012	$	276,012	$	—	$	—	$	276,012
Securities available-for-sale		383,156		140,509		242,647		—		383,156
Securities held-to-maturity		351,399		—		351,467		—		351,467
Loans (including loans held-for-sale), net		1,856,338		—		5,202		1,851,281		1,856,483
FHLB stock, FRB stock, and other
investments		25,226		—		—		—		N/A
Accrued interest receivable		9,248		553		2,045		6,650		9,248
I/O strips receivables		572		—		572		—		572
Liabilities:
Time deposits	$	143,807	$	—	$	144,242	$	—	$	144,242
Other deposits		2,478,666		—		2,478,666		—		2,478,666
Subordinated debt		39,461		—		40,361		—		40,361
Accrued interest payable		653		—		653		—		653

The carrying amounts and estimated fair values of the Company’s financial instruments at December 31, 2018:

			Estimated Fair Value
					Significant
			Quoted Prices in		Other		Significant
			Active Markets for		Observable		Unobservable
	Carrying		Identical Assets		Inputs		Inputs
	Amounts		(Level 1)		(Level 2)		(Level 3)		Total
	(Dollars in thousands)
Assets:
Cash and cash equivalents	$	164,568	$	164,568	$	—	$	—	$	164,568
Securities available-for-sale		459,043		148,753		310,290		—		459,043
Securities held-to-maturity		377,198		—		366,175		—		366,175
Loans (including loans held-for-sale), net		1,861,206		—		2,649		1,826,654		1,829,303
FHLB stock, FRB stock, and other
investments		25,216		—		—		—		N/A
Accrued interest receivable		9,577		597		2,274		6,706		9,577
I/O strips receivables		568		—		568		—		568
Liabilities:
Time deposits	$	147,560	$	—	$	147,916	$	—	$	147,916
Other deposits		2,489,972		—		2,489,972		—		2,489,972
Subordinated debt		39,369		—		38,969		—		38,969
Accrued interest payable		497		—		497		—		497

XML

Equity Plan (Tables)

6 Months Ended

Jun. 30, 2019

Equity Plan

Schedule of stock option activity under the equity plans

				Weighted
		Weighted		Average
		Average		Remaining	Aggregate
	Number	Exercise		Contractual	Intrinsic
Total Stock Options	of Shares	Price		Life (Years)	Value
Outstanding at January 1, 2019	1,570,603	$	10.76
Granted	296,500	$	12.16
Exercised	(75,003)	$	7.55
Forfeited or expired	(18,677)	$	15.57
Outstanding at June 30, 2019	1,773,423	$	11.08	6.75	$	3,910,541
Vested or expected to vest	1,667,018			6.75	$	3,675,908
Exercisable at June 30, 2019	1,101,432			5.38	$	3,784,995

Schedule of information related to the equity Plan

	Six Months Ended
	June 30,
	2019			2018
Intrinsic value of options exercised	$	392,127	$	1,466,731
Cash received from option exercise	$	566,197	$	2,001,837
Tax benefit realized from option exercises	$	102,786	$	430,357
Weighted average fair value of options granted	$	1.91	$	3.07

Schedule of assumptions used to estimate the fair value of each option grant on the date of grant

	Six Months Ended
	June 30,
	2019		2018
Expected life in months(1)	72		72
Volatility(1)	24	%	21	%
Weighted average risk-free interest rate(2)	2.24	%	2.87	%
Expected dividends(3)	3.95	%	2.62	%

(1) The expected life of employee stock options represents the weighted average period the stock options are expected to remain outstanding based on historical experience. Volatility is based on the historical volatility of the stock price over the same period of the expected life of the option.

(2) Based on the U.S. Treasury constant maturity interest rate with a term consistent with the expected life of the option granted.

(3) Each grant’s dividend yield is calculated by annualizing the most recent quarterly cash dividend and dividing that amount by the market price of the Company’s common stock as of the grant date

Schedule of restricted stock activity under the equity plans

		Weighted
		AverageGrant
	Number	DateFair
Total Restricted Stock Award	of Shares	Value
Nonvested shares at January 1, 2019	193,298	$	11.04
Granted	134,653	$	12.16
Vested	(74,998)	$	12.43
Nonvested shares at June 30, 2019	252,953	$	11.23

XML

Capital Requirements (Tables)

6 Months Ended

Jun. 30, 2019

Capital Requirements

Schedule of actual capital and required amounts and ratios

						Required For
						Capital
						Adequacy
						Purposes
			Actual			Under Basel III
	Amount			Ratio		Amount		Ratio (1)
			(Dollars in thousands)
As of June 30, 2019
Total Capital	$	360,242		15.9	%	$	237,965	10.5	%
(to risk-weighted assets)
Tier 1 Capital	$	293,492		13.0	%	$	192,639	8.5	%
(to risk-weighted assets)
Common Equity Tier 1 Capital	$	293,492		13.0	%	$	158,644	7.0	%
(to risk-weighted assets)
Tier 1 Capital	$	293,492		9.9	%	$	118,865	4.0	%
(to average assets)

(1) Includes 2.5% capital conservation buffer, effective January 1, 2019, except the Tier 1 Capital to average assets ratio.

					Required For
					Capital
					Adequacy
					Purposes
	Actual				Under Basel III
	Amount		Ratio		Amount		Ratio (1)
		(Dollars in thousands)
As of December 31, 2018
Total Capital	$	344,597	15.0	%	$	227,514	9.875	%
(to risk-weighted assets)
Tier 1 Capital	$	276,675	12.0	%	$	181,435	7.875	%
(to risk-weighted assets)
Common Equity Tier 1 Capital	$	276,675	12.0	%	$	146,876	6.375	%
(to risk-weighted assets)
Tier 1 Capital	$	276,675	8.9	%	$	124,726	4.000	%
(to average assets)

(1) Includes 1.875% capital conservation buffer, effective January 1, 2018 except the Tier 1 Capital to average assets ratio.

HBC (Wholly-owned Subsidiary)

Capital Requirements

Schedule of actual capital and required amounts and ratios

									Required For
									Capital
					To Be Well-Capitalized				Adequacy
					Under Basel III PCA Regulatory				Purposes
	Actual				Requirements				Under Basel III
	Amount		Ratio		Amount		Ratio		Amount		Ratio (1)
	(Dollars in thousands)
As of June 30, 2019
Total Capital	$	338,344	14.9	%	$	226,477	10.0	%	$	237,801	10.5	%
(to risk-weighted assets)
Tier 1 Capital	$	311,055	13.7	%	$	181,182	8.0	%	$	192,506	8.5	%
(to risk-weighted assets)
Common Equity Tier 1 Capital	$	311,055	13.7	%	$	147,210	6.5	%	$	158,534	7.0	%
(to risk-weighted assets)
Tier 1 Capital	$	311,055	10.5	%	$	148,505	5.0	%	$	118,804	4.0	%
(to average assets)

(1) Includes 2.5% capital conservation buffer, effective January 1, 2019, except the Tier 1 Capital to average assets ratio.

									Required For
									Capital
					To Be Well-Capitalized				Adequacy
					Under Basel III PCA Regulatory				Purposes
	Actual				Requirements				Under Basel III
	Amount		Ratio		Amount		Ratio		Amount		Ratio (1)
		(Dollars in thousands)
As of December 31, 2018
Total Capital	$	322,283	14.0	%	$	230,275	10.0	%	$	227,397	9.875	%
(to risk-weighted assets)
Tier 1 Capital	$	293,730	12.8	%	$	184,220	8.0	%	$	181,342	7.875	%
(to risk-weighted assets)
Common Equity Tier 1 Capital	$	293,730	12.8	%	$	149,679	6.5	%	$	146,800	6.375	%
(to risk-weighted assets)
Tier 1 Capital	$	293,730	9.4	%	$	155,832	5.0	%	$	124,666	4.000	%
(to average assets)

(1) Includes 1.875% capital conservation buffer, effective January 1, 2018, except the Tier 1 Capital to average assets ratio.

XML

Revenue Recognition (Tables)

6 Months Ended

Jun. 30, 2019

Revenue Recognition

Schedule of noninterest income, segregated by revenue streams in-scope and out-of-scope of Topic 606

	Three Months Ended
	June 30,
	2019		2018
	(Dollars in thousands)
Noninterest Income In-scope of Topic 606:
Service charges and fees on deposit accounts	$	1,177	$	972
Noninterest Income Out-of-scope of Topic 606		1,588		1,808
Total noninterest income	$	2,765	$	2,780

	Six Months Ended
	June 30,
	2019		2018
	(Dollars in thousands)
Noninterest Income In-scope of Topic 606:
Service charges and fees on deposit accounts	$	2,338	$	1,874
Noninterest Income Out-of-scope of Topic 606		2,895		3,101
Total noninterest income	$	5,233	$	4,975

XML

Noninterest Expense (Tables)

6 Months Ended

Jun. 30, 2019

Noninterest Expense

Schedule of noninterest expense

	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2019		2018		2019		2018
	(Dollars in thousands)
Salaries and employee benefits	$	10,698	$	11,103	$	21,468	$	20,570
Occupancy and equipment		1,578		1,262		3,084		2,368
Professional fees		753		633		1,571		1,317
Data processing		732		622		1,411		976
Software subscriptions		556		599		1,145		1,192
Amortization of intangible assets		554		464		1,107		705
Merger-related costs (1)		540		8,214		540		8,829
Insurance expense		439		399		875		806
Recovery of legal fees (2)		—		(922)		—		(922)
Other		2,595		2,488		5,162		5,011
Total	$	18,445	$	24,862	$	36,363	$	40,852

(1) Severance and retention expense of $3,393,000 for both the second quarter and first six months of 2018 is included in Salaries and employee benefits in the Consolidated Statements of Income. Other acquisition and integration costs of $540,000 and $4,821,000 for the second quarter of 2019 and the second quarter of 2018, respectively, is included in Other noninterest expense in the Consolidated Statements of Income.  Other acquisition and integration costs of $540,000 and $5,436,000 for the first six months of 2019 and the first six months of 2018, respectively, is included in Other noninterest expense in the Consolidated Statements of Income.

(2) Included in Professional fees in the the Consolidated Statements of Income.

XML

Lease (Tables)

6 Months Ended

Jun. 30, 2019

Leases

Schedule of leases

		June 30,
		2019
	(Dollars in thousands)
Operating Lease Cost (Cost resulting from lease payments)	$	1,044
Operating Lease - Operating Cash Flows (Fixed Payments)	$	1,012
Operating Lease - ROU assets	$	7,425
Operating Lease - Liabilities	$	7,425
Weighted Average Lease Term - Operating Leases		3.40 years
Weighted Average Discount Rate - Operating Leases		5.25%

Schedule of maturity analysis shows the undiscounted cash flows due on the Company’s operating lease liabilities

	(Dollars in thousands)
2019	$	2,020
2020		2,175
2021		1,403
2022		1,198
2023		660
Thereafter		703
Total undiscounted cash flows		8,159
Discount on cash flows		(734)
Total lease liability	$	7,425

XML

Business Segment Information (Tables)

6 Months Ended

Jun. 30, 2019

Business Segment Information

Schedule of information by operating segment

	Three Months Ended June 30, 2019
	Banking(1)		Factoring		Consolidated
	(Dollars in thousands)
Interest income	$	30,521		2,968	$	33,489
Intersegment interest allocations		292		(292)		—
Total interest expense		2,573		—		2,573
Net interest income		28,240		2,676		30,916
Provision (credit) for loan losses		(744)		4		(740)
Net interest income after provision		28,984		2,672		31,656
Noninterest income		2,641		124		2,765
Noninterest expense		16,784		1,661		18,445
Intersegment expense allocations		132		(132)		—
Income before income taxes		14,973		1,003		15,976
Income tax (benefit) expense		4,327		296		4,623
Net income	$	10,646	$	707	$	11,353
Total assets	$	3,045,378	$	62,653	$	3,108,031
Loans, net of deferred fees	$	1,827,936	$	49,831	$	1,877,767
Goodwill	$	70,709	$	13,044	$	83,753

	Three Months Ended June 30, 2018
	Banking(1)		Factoring		Consolidated
	(Dollars in thousands)
Interest income	$	28,625		3,355	$	31,980
Intersegment interest allocations		376		(376)		—
Total interest expense		1,816		—		1,816
Net interest income		27,185		2,979		30,164
Provision for loan losses		7,141		57		7,198
Net interest income after provision		20,044		2,922		22,966
Noninterest income		2,531		249		2,780
Noninterest expense (2)		23,301		1,561		24,862
Intersegment expense allocations		227		(227)		—
Income before income taxes		(499)		1,383		884
Income tax expense		(440)		409		(31)
Net income	$	(59)	$	974	$	915
Total assets	$	3,044,221	$	78,986	$	3,123,207
Loans, net of deferred fees	$	1,893,147	$	63,486	$	1,956,633
Goodwill	$	71,373	$	13,044	$	84,417

(1) Includes the holding company’s results of operations

(2) The banking segment’s noninterest expense includes merger-related costs of $540,000 and $8,214,000, for the second quarter of 2019 and the second quarter of 2018, respectively

	Six Months Ended June 30, 2019
	Banking(1)		Factoring		Consolidated
	(Dollars in thousands)
Interest income	$	61,017	$	5,921	$	66,938
Intersegment interest allocations		606		(606)		—
Total interest expense		4,980		—		4,980
Net interest income		56,643		5,315		61,958
Provision for loan losses		(1,636)		(165)		(1,801)
Net interest income after provision		58,279		5,480		63,759
Noninterest income		4,873		360		5,233
Noninterest expense		32,985		3,378		36,363
Intersegment expense allocations		253		(253)		—
Income before income taxes		30,420		2,209		32,629
Income tax expense		8,477		653		9,130
Net income	$	21,943	$	1,556	$	23,499
Total assets	$	3,045,378	$	62,653	$	3,108,031
Loans, net of deferred fees	$	1,827,936	$	49,831	$	1,877,767
Goodwill	$	70,709	$	13,044	$	83,753

	Six Months Ended June 30, 2018
	Banking(1)		Factoring		Consolidated
	(Dollars in thousands)
Interest income	$	53,356	$	6,501	$	59,857
Intersegment interest allocations		703		(703)		—
Total interest expense		3,345		—		3,345
Net interest income		50,714		5,798		56,512
Provision for loan losses		7,629		75		7,704
Net interest income after provision		43,085		5,723		48,808
Noninterest income		4,617		358		4,975
Noninterest expense (2)		37,768		3,084		40,852
Intersegment expense allocations		402		(402)		—
Income before income taxes		10,336		2,595		12,931
Income tax expense		2,440		767		3,207
Net income	$	7,896	$	1,828	$	9,724
Total assets	$	3,044,221		78,986	$	3,123,207
Loans, net of deferred fees	$	1,893,147		63,486	$	1,956,633
Goodwill	$	71,373		13,044	$	84,417

(1) Includes the holding company’s results of operations

(2) The banking segment’s noninterest expense includes merger-related costs of $540,000 and $8,829,000, for the first six months of 2019 and the first six months of 2018, respectively

XML

Basis of Presentation (Details)			1 Months Ended		6 Months Ended
	May 04, 2018	Apr. 06, 2018	May 31, 2018	Apr. 30, 2018	Jun. 30, 2019 USD ($) segment	Jan. 01, 2019 USD ($)
Segment Reporting
Number of customers accounting for more than 10 percent of revenue for HBC or the Company					0
Number of operating segments | segment					2
Operating lease, right-of-use asset					$ 7,425,000
Operating lease liability					$ 7,425,000
Tri Valley Bank and United American Bank | Core deposit
Segment Reporting
Finite-Lived Intangible Asset, Useful Life					10 years
Tri Valley Bank
Segment Reporting
Finite-Lived Intangible Asset, Useful Life		11 years
Tri Valley Bank | Core deposit
Segment Reporting
Finite-Lived Intangible Asset, Useful Life				10 years
Tri Valley Bank | Below market-value lease
Segment Reporting
Finite-Lived Intangible Asset, Useful Life				11 years	11 years
United American Bank
Segment Reporting
Finite-Lived Intangible Asset, Useful Life	3 years
United American Bank | Core deposit
Segment Reporting
Finite-Lived Intangible Asset, Useful Life			10 years
United American Bank | Below market-value lease
Segment Reporting
Finite-Lived Intangible Asset, Useful Life			3 years		3 years
ASU 2016-02
Segment Reporting
Operating lease, right-of-use asset						$ 9,600,000
Operating lease liability						$ 9,600,000

XML

Shareholders' Equity and Earnings Per Share - Earnings Per Share (Details) - USD ($) $ / shares in Units, $ in Thousands	3 Months Ended				6 Months Ended
	Jun. 30, 2019	Mar. 31, 2019	Jun. 30, 2018	Mar. 31, 2018	Jun. 30, 2019	Jun. 30, 2018
Reconciliation of factors used in computing basic and diluted earnings per common share
Net income	$ 11,353	$ 12,146	$ 915	$ 8,809	$ 23,499	$ 9,724
Weighted average common shares outstanding for basic earnings per common share (in shares)	43,202,562		41,925,616		43,155,360	40,083,056
Dilutive potential common shares	518,889		583,058		539,757	577,027
Shares used in computing diluted earnings per common share (in shares)	43,721,451		42,508,674		43,695,117	40,660,083
Basic earnings per share (in dollars per share)	$ 0.26		$ 0.02		$ 0.54	$ 0.24
Diluted earnings per share (in dollars per share)	$ 0.26		$ 0.02		$ 0.54	$ 0.24
Number of shares not in computing diluted earnings per common share	826,445		305,500		826,445	318,606

XML

Accumulated Other Comprehensive Income (Loss) (''AOCI'') - Changes in AOCI by Component (Details) - USD ($) $ in Thousands	3 Months Ended				6 Months Ended
	Jun. 30, 2019	Mar. 31, 2019	Jun. 30, 2018	Mar. 31, 2018	Jun. 30, 2019	Jun. 30, 2018
Changes in AOCI by Component
Balance at the beginning of the period, net of taxes		$ (12,381)			$ (12,381)
Net current period other comprehensive income (loss), net of taxes	$ 2,685	3,394	$ (910)	$ (5,704)	6,079	$ (6,614)
Balance at the end of the period, net of taxes	(6,302)				(6,302)
Accumulated Other Comprehensive Income / (Loss)
Changes in AOCI by Component
Balance at the beginning of the period, net of taxes	(8,987)	(12,381)	(14,956)	(9,252)	(12,381)	(9,252)
Other comprehensive income (loss) before reclassification, net of taxes	3,065		(816)		6,462	(6,491)
Amounts reclassified from other comprehensive income (loss), net of taxes	(380)		(94)		(383)	(123)
Net current period other comprehensive income (loss), net of taxes	2,685	3,394	(910)	(5,704)	6,079	(6,614)
Balance at the end of the period, net of taxes	(6,302)	(8,987)	(15,866)	(14,956)	(6,302)	(15,866)
Unrealized Gains (Losses) on Available-for-Sale Securities and I/O Strips
Changes in AOCI by Component
Balance at the beginning of the period, net of taxes	(1,603)	(5,007)	(6,093)	(362)	(5,007)	(362)
Other comprehensive income (loss) before reclassification, net of taxes	3,072		(812)		6,476	(6,482)
Amounts reclassified from other comprehensive income (loss), net of taxes	(386)		(126)		(386)	(187)
Net current period other comprehensive income (loss), net of taxes	2,686		(938)		6,090	(6,669)
Balance at the end of the period, net of taxes	1,083	(1,603)	(7,031)	(6,093)	1,083	(7,031)
Unamortized Unrealized Gain on Available-for-Sale Securities Reclassified to Held-to-Maturity
Changes in AOCI by Component
Balance at the beginning of the period, net of taxes	326	344	367	375	344	375
Amounts reclassified from other comprehensive income (loss), net of taxes	(9)		(8)		(27)	(16)
Net current period other comprehensive income (loss), net of taxes	(9)		(8)		(27)	(16)
Balance at the end of the period, net of taxes	317	326	359	367	317	359
Defined Benefit Pension Plan Items
Changes in AOCI by Component
Balance at the beginning of the period, net of taxes	(7,710)	(7,718)	(9,230)	(9,265)	(7,718)	(9,265)
Other comprehensive income (loss) before reclassification, net of taxes	(7)		(4)		(14)	(9)
Amounts reclassified from other comprehensive income (loss), net of taxes	15		40		30	80
Net current period other comprehensive income (loss), net of taxes	8		36		16	71
Balance at the end of the period, net of taxes	$ (7,702)	$ (7,710)	$ (9,194)	$ (9,230)	$ (7,702)	$ (9,194)

XML

Accumulated Other Comprehensive Income (Loss) (''AOCI'') - Amount Reclassified from AOCI (Details) - USD ($) $ in Thousands	3 Months Ended				6 Months Ended
	Jun. 30, 2019	Mar. 31, 2019	Jun. 30, 2018	Mar. 31, 2018	Jun. 30, 2019	Jun. 30, 2018
Amount Reclassified from AOCI
Gain on sales of securities	$ 548		$ 179		$ 548	$ 266
Interest income on taxable securities	4,136		3,767		8,645	7,629
Income tax expense	(4,623)		31		(9,130)	(3,207)
Net income	11,353	$ 12,146	915	$ 8,809	23,499	9,724
Income before income tax	15,976		884		32,629	12,931
Unrealized Gains (Losses) on Available-for-Sale Securities and I/O Strips
Amount Reclassified from AOCI
Net of tax	386		126		386	187
Unrealized Gains (Losses) on Available-for-Sale Securities and I/O Strips | Amount Reclassified from AOCI
Amount Reclassified from AOCI
Gain on sales of securities	548		179		548	266
Income tax expense	(162)		(53)		(162)	(79)
Net income	386		126		386	187
Unamortized Unrealized Gain on Available-for-Sale Securities Reclassified to Held-to-Maturity
Amount Reclassified from AOCI
Net of tax	9		8		27	16
Unamortized Unrealized Gain on Available-for-Sale Securities Reclassified to Held-to-Maturity | Amount Reclassified from AOCI
Amount Reclassified from AOCI
Interest income on taxable securities	13		11		39	22
Income tax expense	(4)		(3)		(12)	(6)
Net income	9		8		27	16
Defined Benefit Pension Plan Items
Amount Reclassified from AOCI
Net of tax	(15)		(40)		(30)	(80)
Defined Benefit Pension Plan Items | Amount Reclassified from AOCI
Amount Reclassified from AOCI
Other noninterest expense	(22)		(57)		(43)	(114)
Income tax benefit	7		17		13	34
Net of tax	(15)		(40)		(30)	(80)
Prior transition obligation | Amount Reclassified from AOCI
Amount Reclassified from AOCI
Other noninterest expense	24		16		49	32
Actuarial losses | Amount Reclassified from AOCI
Amount Reclassified from AOCI
Other noninterest expense	(46)		(73)		(92)	(146)
Accumulated Other Comprehensive Income / (Loss)
Amount Reclassified from AOCI
Net of tax	380		94		383	123
Accumulated Other Comprehensive Income / (Loss) | Amount Reclassified from AOCI
Amount Reclassified from AOCI
Net of tax	$ 380		$ 94		$ 383	$ 123

XML

Securities - Amortized Cost and Estimated Fair Value of Securities - Securities Available-for-sale (Details) - USD ($) $ in Thousands	Jun. 30, 2019	Dec. 31, 2018
Securities available-for-sale:
Amortized Cost	$ 382,240	$ 466,779
Gross Unrealized Gains	2,457	1,032
Gross Unrealized (Losses)	(1,541)	(8,768)
Total	383,156	459,043
Agency mortgage-backed securities
Securities available-for-sale:
Amortized Cost	243,861	311,523
Gross Unrealized Gains	327	98
Gross Unrealized (Losses)	(1,541)	(8,767)
Total	242,647	302,854
U.S. Treasury
Securities available-for-sale:
Amortized Cost	138,379	147,823
Gross Unrealized Gains	2,130	930
Total	$ 140,509	148,753
U.S. Government sponsored entities
Securities available-for-sale:
Amortized Cost		7,433
Gross Unrealized Gains		4
Gross Unrealized (Losses)		(1)
Total		$ 7,436

XML

Securities - Amortized Cost and Estimated Fair Value of Securities - Securities Held-to-maturity (Details) - USD ($) $ in Thousands	Jun. 30, 2019	Dec. 31, 2018
Securities held-to-maturity:
Amortized Cost	$ 351,399	$ 377,198
Gross Unrealized Gains	1,799	371
Gross Unrealized (Losses)	(1,731)	(11,394)
Estimated Fair Value	351,467	366,175
Agency mortgage-backed securities
Securities held-to-maturity:
Amortized Cost	267,514	291,241
Gross Unrealized Gains	694	59
Gross Unrealized (Losses)	(1,673)	(9,153)
Estimated Fair Value	266,535	282,147
Municipals - exempt from Federal tax
Securities held-to-maturity:
Amortized Cost	83,885	85,957
Gross Unrealized Gains	1,105	312
Gross Unrealized (Losses)	(58)	(2,241)
Estimated Fair Value	$ 84,932	$ 84,028

XML

Securities - Securities with Unrealized Losses - Securities Available-for-sale (Details) - USD ($) $ in Thousands	Jun. 30, 2019	Dec. 31, 2018
Available-for-sale, Fair Value
Less Than 12 Months		$ 7,842
12 Months or More	$ 198,443	281,082
Total	198,443	288,924
Available-for-sale, Unrealized (Losses)
Less Than 12 Months		(22)
12 Months or More	(1,541)	(8,746)
Total	(1,541)	(8,768)
Agency mortgage-backed securities
Available-for-sale, Fair Value
Less Than 12 Months		3,868
12 Months or More	198,443	281,082
Total	198,443	284,950
Available-for-sale, Unrealized (Losses)
Less Than 12 Months		(21)
12 Months or More	(1,541)	(8,746)
Total	$ (1,541)	(8,767)
U.S. Government sponsored entities
Available-for-sale, Fair Value
Less Than 12 Months		3,974
Total		3,974
Available-for-sale, Unrealized (Losses)
Less Than 12 Months		(1)
Total		$ (1)

XML

Securities - Securities with Unrealized Losses - Securities Held-to-maturity (Details) - USD ($) $ in Thousands	Jun. 30, 2019	Dec. 31, 2018
Held-to-maturity, Fair Value
Less Than 12 Months	$ 150	$ 21,107
12 Months or More	181,928	313,218
Total	182,078	334,325
Held-to-maturity, Unrealized (Losses)
Less Than 12 Months	(1)	(130)
12 Months or More	(1,730)	(11,264)
Total	(1,731)	(11,394)
Agency mortgage-backed securities
Held-to-maturity, Fair Value
Less Than 12 Months		16,088
12 Months or More	174,138	255,917
Total	174,138	272,005
Held-to-maturity, Unrealized (Losses)
Less Than 12 Months		(103)
12 Months or More	(1,673)	(9,050)
Total	(1,673)	(9,153)
Municipals - exempt from Federal tax
Held-to-maturity, Fair Value
Less Than 12 Months	150	5,019
12 Months or More	7,790	57,301
Total	7,940	62,320
Held-to-maturity, Unrealized (Losses)
Less Than 12 Months	(1)	(27)
12 Months or More	(57)	(2,214)
Total	$ (58)	$ (2,241)

XML

Securities - Additional Information (Details) $ in Thousands	6 Months Ended
	Jun. 30, 2019 USD ($) security item	Dec. 31, 2018 USD ($)
Additional Information
The number of holdings of securities of any one issuer other than the U.S. Government and its sponsored entities | security	0
Holdings of securities as percentage of shareholders' equity, considered as threshold for disclosure purpose	10.00%
Number of securities held	471
Number of available for sale securities held	151
Number of held to maturity securities held	320
Number of securities with fair values below amortized cost	170
Total unrealized loss for securities 12 months or more | $	$ 3,271
12 Months or More | $	181,928	$ 313,218
Municipals - exempt from Federal tax
Additional Information
12 Months or More | $	$ 7,790	$ 57,301

XML

Securities - Proceeds from Sales of Securities and the Resulting Gains and Losses (Details) - USD ($) $ in Thousands	3 Months Ended		6 Months Ended
	Jun. 30, 2019	Jun. 30, 2018	Jun. 30, 2019	Jun. 30, 2018
Proceeds from Sales of Securities and the Resulting Gains and Losses
Proceeds	$ 59,878	$ 55,537	$ 59,878	$ 94,291
Gross gains	608	193	608	1,243
Gross losses	$ (60)	$ (14)	$ (60)	$ (977)

XML

Securities - Amortized Cost and Fair Value of Debt Securities by Contractual Maturity – Securities Available-for-sale (Details) - USD ($) $ in Thousands	Jun. 30, 2019	Dec. 31, 2018
Available-for-sale, Amortized Cost
Due after 3 months through one year	$ 14,858
Due after one year through five years	123,521
Agency mortgage-backed securities	243,861
Total	382,240	$ 466,779
Available-for-sale, Estimated Fair Value
Due after 3 months through one year	14,956
Due after one year through five years	125,553
Agency mortgage-backed securities	242,647
Total	$ 383,156	$ 459,043

XML

Securities - Amortized Cost and Fair Value of Debt Securities by Contractual Maturity – Securities Held-to-maturity (Details) - USD ($) $ in Thousands	Jun. 30, 2019	Dec. 31, 2018
Held-to-maturity, Amortized Cost
Due 3 months or less	$ 281
Due after 3 months through one year	487
Due after one year through five years	5,193
Due after five years through ten years	28,561
Due after ten years	49,363
Agency mortgage-backed securities	267,514
Total	351,399	$ 377,198
Held-to-maturity, Estimated Fair Value
Due 3 months or less	281
Due after 3 months through one year	488
Due after one year through five years	5,306
Due after five years through ten years	29,087
Due after ten years	49,770
Agency mortgage-backed securities	266,535
Total	$ 351,467	$ 366,175

XML

Securities - Securities Pledged to Secure Public Deposits and for Other Purposes (Details) - USD ($) $ in Thousands	Jun. 30, 2019	Dec. 31, 2018
Securities Pledged to Secure Public Deposits and for Other Purposes
Amortized cost of securities pledged to secure public deposits and for other purposes as required or permitted by law or contract	$ 32,884	$ 44,730

XML

Loans -Loans Balance (Details) - USD ($) $ in Thousands	Jun. 30, 2019	Mar. 31, 2019	Dec. 31, 2018	Jun. 30, 2018	Mar. 31, 2018	Dec. 31, 2017
Loans held-for-investment:
Total loan balance	$ 1,877,991		$ 1,886,732
Deferred loan fees, net	(224)		(327)
Loans, net of deferred fees	1,877,767		1,886,405	$ 1,956,633
Allowance for loan losses	(26,631)	$ (27,318)	(27,848)	(26,664)	$ (20,139)	$ (19,658)
Loans, net	1,851,136		1,858,557
Commercial
Loans held-for-investment:
Total loan balance	567,529		597,763
Allowance for loan losses	(15,234)	(15,557)	(17,061)	(17,522)	(11,165)	(10,608)
Real estate
Loans held-for-investment:
Total loan balance	1,300,183		1,276,516
Allowance for loan losses	(11,307)	(11,671)	(10,671)	(9,020)	(8,858)	(8,950)
Real estate | CRE
Loans held-for-investment:
Total loan balance	1,037,885		994,067
Real estate | Land and construction
Loans held-for-investment:
Total loan balance	97,297		122,358
Real estate | Equity
Loans held-for-investment:
Total loan balance	116,057		109,112
Real estate | Residential mortgages
Loans held-for-investment:
Total loan balance	48,944		50,979
Consumer
Loans held-for-investment:
Total loan balance	10,279		12,453
Allowance for loan losses	(90)	$ (90)	(116)	$ (122)	$ (116)	$ (100)
Focus
Loans held-for-investment:
Non-PCI loans acquired	27,015		36,958
Tri Valley Bank
Loans held-for-investment:
Non-PCI loans acquired	96,222		111,952
United American Bank
Loans held-for-investment:
Non-PCI loans acquired	$ 160,480		$ 181,453

XML

Loans - Additional Information (Details) - USD ($) $ in Thousands	3 Months Ended		6 Months Ended
	Jun. 30, 2019	Jun. 30, 2018	Jun. 30, 2019	Jun. 30, 2018	Dec. 31, 2018
Loans
Nonaccrual loans - held-for-investment	$ 15,695	$ 26,034	$ 15,695	$ 26,034	$ 13,699
Provision (credit) for loan losses	(740)	7,198	(1,801)	7,704
Net (charge-offs) recoveries	$ 53	$ (673)	$ 584	$ (698)

XML

Loans - Changes in the Allowance for Loan Losses (Details) - USD ($) $ in Thousands	3 Months Ended		6 Months Ended
	Jun. 30, 2019	Jun. 30, 2018	Jun. 30, 2019	Jun. 30, 2018
Changes in the Allowance for Loan Losses
Beginning of period balance	$ 27,318	$ 20,139	$ 27,848	$ 19,658
Charge-offs	(76)	(870)	(302)	(1,115)
Recoveries	129	197	886	417
Net (charge-offs) recoveries	53	(673)	584	(698)
Provision (credit) for loan losses	(740)	7,198	(1,801)	7,704
End of period balance	26,631	26,664	26,631	26,664
Commercial
Changes in the Allowance for Loan Losses
Beginning of period balance	15,557	11,165	17,061	10,608
Charge-offs	(76)	(870)	(302)	(1,115)
Recoveries	87	175	802	332
Net (charge-offs) recoveries	11	(695)	500	(783)
Provision (credit) for loan losses	(334)	7,052	(2,327)	7,697
End of period balance	15,234	17,522	15,234	17,522
Real estate
Changes in the Allowance for Loan Losses
Beginning of period balance	11,671	8,858	10,671	8,950
Recoveries	42	22	84	85
Net (charge-offs) recoveries	42	22	84	85
Provision (credit) for loan losses	(406)	140	552	(15)
End of period balance	11,307	9,020	11,307	9,020
Consumer
Changes in the Allowance for Loan Losses
Beginning of period balance	90	116	116	100
Provision (credit) for loan losses		6	(26)	22
End of period balance	$ 90	$ 122	$ 90	$ 122

XML

Loans - Balance in the Allowance for Loan Losses and the Recorded Investment in Loans by Portfolio Segment, Based on the Impairment Method (Details) - USD ($) $ in Thousands	Jun. 30, 2019	Mar. 31, 2019	Dec. 31, 2018	Jun. 30, 2018	Mar. 31, 2018	Dec. 31, 2017
Balance in the Allowance for Loan Losses and the Recorded Investment in Loans by Portfolio Segment, Based on the Impairment Method
Allowance for loan losses, Individually evaluated for impairment	$ 6,537		$ 6,944
Allowance for loan losses, Collectively evaluated for impairment	20,094		20,904
Total allowance balance	26,631	$ 27,318	27,848	$ 26,664	$ 20,139	$ 19,658
Loans, Individually evaluated for impairment	17,193		15,140
Loans, Collectively evaluated for impairment	1,860,798		1,871,592
Total loan balance	1,877,991		1,886,732
Commercial
Balance in the Allowance for Loan Losses and the Recorded Investment in Loans by Portfolio Segment, Based on the Impairment Method
Allowance for loan losses, Individually evaluated for impairment	6,351		6,944
Allowance for loan losses, Collectively evaluated for impairment	8,883		10,117
Total allowance balance	15,234	15,557	17,061	17,522	11,165	10,608
Loans, Individually evaluated for impairment	8,370		9,495
Loans, Collectively evaluated for impairment	559,159		588,268
Total loan balance	567,529		597,763
Real estate
Balance in the Allowance for Loan Losses and the Recorded Investment in Loans by Portfolio Segment, Based on the Impairment Method
Allowance for loan losses, Individually evaluated for impairment	186
Allowance for loan losses, Collectively evaluated for impairment	11,121		10,671
Total allowance balance	11,307	11,671	10,671	9,020	8,858	8,950
Loans, Individually evaluated for impairment	8,823		5,645
Loans, Collectively evaluated for impairment	1,291,360		1,270,871
Total loan balance	1,300,183		1,276,516
Consumer
Balance in the Allowance for Loan Losses and the Recorded Investment in Loans by Portfolio Segment, Based on the Impairment Method
Allowance for loan losses, Collectively evaluated for impairment	90		116
Total allowance balance	90	$ 90	116	$ 122	$ 116	$ 100
Loans, Collectively evaluated for impairment	10,279		12,453
Total loan balance	$ 10,279		$ 12,453

XML

Loans - Loans Held for Investment Individually Evaluated for Impairment by Class of Loans (Details) - USD ($) $ in Thousands	Jun. 30, 2019	Dec. 31, 2018	Jun. 30, 2018
Unpaid Principal Balance
Total with no related allowance recorded	$ 5,234	$ 7,494
Total with an allowance recorded	11,959	7,646
Total	17,193	15,140
Recorded Investment
Total with no related allowance recorded	5,234	7,494
Total with an allowance recorded	11,959	7,646
Total	17,193	15,140	$ 26,810
Total with an allowance recorded, Allowance for Loan Losses Allocated	6,537	6,944
Commercial
Unpaid Principal Balance
Total with no related allowance recorded	1,504	1,849
Total with an allowance recorded	6,866	7,646
Recorded Investment
Total with no related allowance recorded	1,504	1,849
Total with an allowance recorded	6,866	7,646
Total with an allowance recorded, Allowance for Loan Losses Allocated	6,351	6,944
Commercial | Real estate
Unpaid Principal Balance
Total with an allowance recorded	5,093
Recorded Investment
Total with an allowance recorded	5,093
Total with an allowance recorded, Allowance for Loan Losses Allocated	186
Equity | Real estate
Unpaid Principal Balance
Total with no related allowance recorded	381	551
Recorded Investment
Total with no related allowance recorded	381	551
CRE | Real estate
Unpaid Principal Balance
Total with no related allowance recorded	3,349	5,094
Recorded Investment
Total with no related allowance recorded	$ 3,349	$ 5,094

XML

Loans - Interest Recognized and Cash Basis Interest Earned on Impaired Loans (Details) - USD ($) $ in Thousands	3 Months Ended		6 Months Ended
	Jun. 30, 2019	Jun. 30, 2018	Jun. 30, 2019	Jun. 30, 2018
Interest Recognized and Cash Basis Interest Earned on Impaired Loans
Average of impaired loans during the period	$ 17,355	$ 15,424	$ 16,616	$ 11,207
Commercial
Interest Recognized and Cash Basis Interest Earned on Impaired Loans
Average of impaired loans during the period	8,453	11,803	8,800	8,460
CRE | Real estate
Interest Recognized and Cash Basis Interest Earned on Impaired Loans
Average of impaired loans during the period	8,442	3,151	7,326	2,268
Land and construction | Real estate
Interest Recognized and Cash Basis Interest Earned on Impaired Loans
Average of impaired loans during the period				40
Equity | Real estate
Interest Recognized and Cash Basis Interest Earned on Impaired Loans
Average of impaired loans during the period	$ 460	$ 470	$ 490	$ 439

XML

Loans - Nonperforming Loans (Details) - USD ($) $ in Thousands	Jun. 30, 2019	Dec. 31, 2018	Jun. 30, 2018
Nonaccrual loans - held-for-investment	$ 15,695	$ 13,699	$ 26,034
Restructured and loans over 90 days past due and still accruing	1,323	1,188	511
Total nonperforming loans	17,018	14,887	26,545
Other restructured loans	175	253	265
Total	$ 17,193	$ 15,140	$ 26,810

XML

Loans - Nonperforming Loans by Class (Details) - USD ($) $ in Thousands	Jun. 30, 2019	Dec. 31, 2018	Jun. 30, 2018
Nonperforming Loans by Class
Nonaccrual loans - held-for-investment	$ 15,695	$ 13,699	$ 26,034
Restructured and Loans Over 90 Days Past Due and Still Accruing	1,323	1,188	511
Total	17,018	14,887	$ 26,545
Commercial
Nonperforming Loans by Class
Nonaccrual loans - held-for-investment	7,096	8,279
Restructured and Loans Over 90 Days Past Due and Still Accruing	1,099	963
Total	8,195	9,242
CRE | Real estate
Nonperforming Loans by Class
Nonaccrual loans - held-for-investment	8,442	5,094
Total	8,442	5,094
Equity | Real estate
Nonperforming Loans by Class
Nonaccrual loans - held-for-investment	157	326
Restructured and Loans Over 90 Days Past Due and Still Accruing	224	225
Total	$ 381	$ 551

XML

Loans - Aging of Past Due Loans by Class of Loans - Tabular Disclosure (Details) - USD ($) $ in Thousands	Jun. 30, 2019	Dec. 31, 2018
Aging of Past Due Loans by Class of Loans
Total Past Due	$ 21,541	$ 8,873
Loans Not Past Due	1,856,450	1,877,859
Total loan balance	1,877,991	1,886,732
30-59 Days Past Due
Aging of Past Due Loans by Class of Loans
Total Past Due	4,408	5,699
60-89 Days Past Due
Aging of Past Due Loans by Class of Loans
Total Past Due	1,342	1,916
90 Days or Greater Past Due
Aging of Past Due Loans by Class of Loans
Total Past Due	15,791	1,258
Commercial
Aging of Past Due Loans by Class of Loans
Total Past Due	12,942	8,872
Loans Not Past Due	554,587	588,891
Total loan balance	567,529	597,763
Commercial | 30-59 Days Past Due
Aging of Past Due Loans by Class of Loans
Total Past Due	4,251	5,698
Commercial | 60-89 Days Past Due
Aging of Past Due Loans by Class of Loans
Total Past Due	1,342	1,916
Commercial | 90 Days or Greater Past Due
Aging of Past Due Loans by Class of Loans
Total Past Due	7,349	1,258
Real estate
Aging of Past Due Loans by Class of Loans
Total loan balance	1,300,183	1,276,516
Consumer
Aging of Past Due Loans by Class of Loans
Total Past Due		1
Loans Not Past Due	10,279	12,452
Total loan balance	10,279	12,453
Consumer | 30-59 Days Past Due
Aging of Past Due Loans by Class of Loans
Total Past Due		1
CRE | Real estate
Aging of Past Due Loans by Class of Loans
Total Past Due	8,442
Loans Not Past Due	1,029,443	994,067
Total loan balance	1,037,885	994,067
CRE | Real estate | 90 Days or Greater Past Due
Aging of Past Due Loans by Class of Loans
Total Past Due	8,442
Land and construction | Real estate
Aging of Past Due Loans by Class of Loans
Loans Not Past Due	97,297	122,358
Total loan balance	97,297	122,358
Equity | Real estate
Aging of Past Due Loans by Class of Loans
Total Past Due	157
Loans Not Past Due	115,900	109,112
Total loan balance	116,057	109,112
Equity | Real estate | 30-59 Days Past Due
Aging of Past Due Loans by Class of Loans
Total Past Due	157
Residential mortgages | Real estate
Aging of Past Due Loans by Class of Loans
Loans Not Past Due	48,944	50,979
Total loan balance	$ 48,944	$ 50,979

XML

Loans - Aging of Past Due Loans by Class of Loans - Additional Information (Details) - USD ($) $ in Thousands	Jun. 30, 2019	Dec. 31, 2018	Jun. 30, 2018
Aging of Past Due Loans by Class of Loans
Past due loans 30 day or greater	$ 21,541	$ 8,873
Nonaccrual loans - held-for-investment	15,695	13,699	$ 26,034
30 days or greater past due
Aging of Past Due Loans by Class of Loans
Nonaccrual loans - held-for-investment	15,001	430
Less than 30 days past due
Aging of Past Due Loans by Class of Loans
Nonaccrual loans - held-for-investment	$ 694
Less than 30 days past due nonaccrual loans held-for-investment		$ 13,269

XML

Loans - Credit Quality Indicators (Details) - USD ($) $ in Thousands	Jun. 30, 2019	Dec. 31, 2018
Loans
Balance to report	$ 1,851,136	$ 1,858,557
Loan classified as loss
Loans
Balance to report	$ 0	$ 0

XML

Loans - Summary of the Loan Portfolio by Loan Type and Credit Quality Classification (Details) - USD ($) $ in Thousands	3 Months Ended	6 Months Ended	12 Months Ended
	Jun. 30, 2018	Jun. 30, 2019	Dec. 31, 2018
Loans
Total		$ 1,877,991	$ 1,886,732
Nonclassified
Loans
Total		1,846,815	1,863,323
Classified
Loans
Total	$ 32,264	$ 31,176	$ 23,409
Percentage of financing receivable balance over total assets	1.03%	1.00%	0.76%
Commercial
Loans
Total		$ 567,529	$ 597,763
Commercial | Nonclassified
Loans
Total		553,618	584,845
Commercial | Classified
Loans
Total		13,911	12,918
Real estate
Loans
Total		1,300,183	1,276,516
Real estate | CRE
Loans
Total		1,037,885	994,067
Real estate | CRE | Nonclassified
Loans
Total		1,024,822	985,193
Real estate | CRE | Classified
Loans
Total		13,063	8,874
Real estate | Land and construction
Loans
Total		97,297	122,358
Real estate | Land and construction | Nonclassified
Loans
Total		94,810	122,358
Real estate | Land and construction | Classified
Loans
Total		2,487
Real estate | Equity
Loans
Total		116,057	109,112
Real estate | Equity | Nonclassified
Loans
Total		114,342	107,495
Real estate | Equity | Classified
Loans
Total		1,715	1,617
Real estate | Residential mortgages
Loans
Total		48,944	50,979
Real estate | Residential mortgages | Nonclassified
Loans
Total		48,944	50,979
Consumer
Loans
Total		10,279	12,453
Consumer | Nonclassified
Loans
Total		$ 10,279	$ 12,453

XML

Loans - Troubled Debt Restructurings (Details) - USD ($)	Jun. 30, 2019	Dec. 31, 2018
Loans
Recorded investment of troubled debt restructurings	$ 568,000	$ 649,000
Allowance for Credit Losses, Change in Method of Calculating Impairment	18,000
Troubled debt restructurings, nonaccrual loans	17,000	36,000
Troubled debt restructurings, accruing loans	551,000	613,000
Specific reserves	$ 18,000	$ 38,000

XML

Loans - Troubled Debt Restructurings by Class (Details) - USD ($)	3 Months Ended	6 Months Ended
	Jun. 30, 2019	Jun. 30, 2019	Jun. 30, 2018
Troubled Debt Restructurings by Class
Number of loans modified as troubled debt restructurings during the period	1	2	3
Pre-modification Outstanding Recorded Investment	$ 17,000	$ 28,000	$ 449,000
Post-modification Outstanding Recorded Investment	$ 17,000	$ 28,000	$ 449,000
Commercial
Troubled Debt Restructurings by Class
Number of loans modified as troubled debt restructurings during the period	1	2	2
Pre-modification Outstanding Recorded Investment	$ 17,000	$ 28,000	$ 224,000
Post-modification Outstanding Recorded Investment	$ 17,000	$ 28,000	$ 224,000
Equity
Troubled Debt Restructurings by Class
Number of loans modified as troubled debt restructurings during the period			1
Pre-modification Outstanding Recorded Investment			$ 225,000
Post-modification Outstanding Recorded Investment			$ 225,000

XML

Loans - Defaults on Troubled Debt Restructurings (Details)	3 Months Ended		6 Months Ended
	Jun. 30, 2019 loan item USD ($)	Jun. 30, 2018 item	Jun. 30, 2019 loan item USD ($)	Jun. 30, 2018 item USD ($)
Loans
Number of troubled debt restructurings in which the amount of principal or accrued interest owed from the borrower was forgiven | loan	0		0
Number of loans modified as troubled debt restructurings during the period | $	1		2	3
Default period contractually past due under modified terms (in days)			30 days
Number of defaults on troubled debt restructurings | item	0	0	0	0
Period of consecutive payments (in months)			6 months

XML

Business Combinations - Tri-Valley (Details)			3 Months Ended		6 Months Ended
	May 16, 2019	Apr. 06, 2018 USD ($) $ / shares shares	Jun. 30, 2019 USD ($)	Jun. 30, 2018 USD ($)	Jun. 30, 2019 USD ($)	Jun. 30, 2018 USD ($)	Dec. 31, 2018 USD ($)	May 04, 2018 $ / shares
Business Combinations
Gain on sales of securities			$ 548,000	$ 179,000	$ 548,000	$ 266,000
Stock price at Closing (in dollars per share) | $ / shares								$ 16.73
Assets acquired:
Loans				336,446,000		336,446,000
Other assets, net				14,736,000		14,736,000
Liabilities assumed:
Deposits				416,628,000		416,628,000
Other liabilities				3,038,000		3,038,000
Other borrowings				62,000		62,000
Goodwill recorded in the merger			$ 83,753,000	$ 84,417,000	$ 83,753,000	$ 84,417,000	$ 83,753,000
Tri Valley Bank
Business Combinations
Disposition of other real estate owned		$ 1,132,000
Gain on sales of securities		53,000
Cash paid for invoices after closing for services prior to closing		29,000
Cash paid for fractional shares		3,000
Cash paid for transaction adjustment to prepaid assets included in other assets		1,592,000
Aggregate transaction value		$ 32,320,000
Shares issued in acquisition | shares		1,889,613
Fixed exchange ratio of company's common stock		0.0489
Stock price at Closing (in dollars per share) | $ / shares		$ 16.26
Total cash paid		$ 1,595,000
Issuance of 1,889,613 shares of common stock to Tri-Valley shareholders at $16.26 per share at Closing		30,725,000
Total Consideration Paid		$ 32,320,000
Amortized intangible assets		11 years
Assets acquired:
Cash and cash equivalents		$ 22,910,000
Loans		120,969,000
Other intangible assets		1,978,000
Other assets, net		7,045,000
Total assets acquired		152,902,000
Liabilities assumed:
Deposits		135,388,000
Other liabilities		608,000
Total liabilities assumed		135,996,000
Net assets acquired		16,906,000
Purchase price		30,725,000
Goodwill recorded in the merger		13,819,000
Tri Valley Bank | As Recorded
Assets acquired:
Cash and cash equivalents		21,757,000
Loans		123,532,000
Allowance for loan losses		(1,969,000)
Other assets, net		9,939,000
Total assets acquired		153,259,000
Liabilities assumed:
Deposits		135,351,000
Other liabilities		608,000
Total liabilities assumed		135,959,000
Tri Valley Bank | Fair Value Adjustments
Assets acquired:
Cash and cash equivalents		1,153,000
Loans		(2,563,000)
Allowance for loan losses		1,969,000
Other intangible assets		1,978,000
Other assets, net		(2,894,000)
Total assets acquired		(357,000)
Liabilities assumed:
Deposits		37,000
Total liabilities assumed		37,000
Warrant | Tri Valley Bank
Business Combinations
Total cash paid		889,000
Options | Tri Valley Bank
Business Combinations
Total cash paid		615,000
Other | Tri Valley Bank
Business Combinations
Total cash paid		$ 91,000
HBC | Merger agreement | Presidio bank
Business Combinations
Fixed conversion ratio	2.47

XML

Business Combinations - United American (Details)	May 04, 2018 USD ($) $ / shares shares	Jun. 30, 2019 USD ($)	Dec. 31, 2018 USD ($)	Jun. 30, 2018 USD ($)
Business Combinations
Stock price at Closing (in dollars per share) | $ / shares	$ 16.73
Assets acquired:
Securities available-for-sale				$ 63,723,000
Net loans				336,446,000
Premises and equipment, net				350,000
Other assets, net				14,736,000
Liabilities assumed:
Deposits				416,628,000
Other borrowings				62,000
Other liabilities				3,038,000
Goodwill recorded in the merger		$ 83,753,000	$ 83,753,000	$ 84,417,000
United American Bank
Business Combinations
Aggregate transaction value	$ 56,417,000
Fixed exchange ratio of company's common stock	2.1644
Shares issued in acquisition | shares	2,826,032
Total cash paid	$ 9,137,000
Issuance of 2,826,032 shares of common stock to United American shareholders at $16.73 per share at Closing	47,280,000
Total Consideration Paid	56,417,000
Loan participations repurchase	23,732,000
Cash paid for invoices after closing for services prior to closing	51,000
Tax refund	$ 400,000
Amortized intangible assets	3 years
Assets acquired:
Cash and cash equivalents	$ 13,118,000
Securities available-for-sale	63,723,000
Net loans	215,477,000
Other intangible assets	6,383,000
Other assets, net	8,041,000
Total assets acquired	306,742,000
Liabilities assumed:
Deposits	281,240,000
Other borrowings	62,000
Other liabilities	2,430,000
Total liabilities assumed	283,732,000
Net assets acquired	23,010,000
Purchase price	47,280,000
Goodwill recorded in the merger	24,270,000
Fair value adjustments:
Loans receivable fair value adjustment	4,680,000
Charge-off	269,000
United American Bank | As Recorded
Assets acquired:
Cash and cash equivalents	45,638,000
Securities available-for-sale	64,144,000
Net loans	196,694,000
Allowance for loan losses	(2,952,000)
Other assets, net	9,119,000
Total assets acquired	312,643,000
Liabilities assumed:
Deposits	281,189,000
Other borrowings	62,000
Other liabilities	2,617,000
Total liabilities assumed	283,868,000
Series A Preferred Stock | United American Bank
Business Combinations
Total cash paid	8,700,000
Series B Preferred Stock | United American Bank
Business Combinations
Total cash paid	$ 435,000
Series A and Series B Preferred Stock | United American Bank
Business Combinations
Cash issued per share | $ / shares	$ 1,000
Other | United American Bank
Business Combinations
Total cash paid	$ 2,000
Fair Value Adjustments | United American Bank
Assets acquired:
Cash and cash equivalents	(32,520,000)
Securities available-for-sale	(421,000)
Net loans	18,783,000
Allowance for loan losses	2,952,000
Other intangible assets	6,383,000
Other assets, net	(1,078,000)
Total assets acquired	(5,901,000)
Liabilities assumed:
Deposits	51,000
Other liabilities	(187,000)
Total liabilities assumed	$ (136,000)

XML

Business Combinations (Details) $ in Thousands	3 Months Ended		6 Months Ended
	Jun. 30, 2019 USD ($) company loan	Jun. 30, 2018 USD ($)	Jun. 30, 2019 USD ($) company loan	Jun. 30, 2018 USD ($)	Dec. 31, 2018 company loan
Business Combinations
Number of business banking franchises acquired | company	3		3		3
Combined business value after business combination	$ 3,100,000		$ 3,100,000
Other acquisition and integration related costs	540	$ 4,821	540	$ 5,436
Severance and retention acquisition costs		3,393		3,393
Merger-related costs	$ 540	$ 8,214	$ 540	$ 8,829
Number of loan classified as PCI loan | loan	0		0		0

XML

Goodwill and Other Intangible Assets - Goodwill (Details) - USD ($) $ in Thousands	6 Months Ended
	Jun. 30, 2019	Jun. 30, 2018	Dec. 31, 2018	May 04, 2018	Apr. 06, 2018
Goodwill
Goodwill	$ 83,753	$ 84,417	$ 83,753
Goodwill acquired		$ 38,089
BVF/CSNK
Goodwill
Goodwill acquired	13,044
Focus
Goodwill
Goodwill acquired	32,620
Tri Valley Bank
Goodwill
Goodwill					$ 13,819
Goodwill acquired	13,819
United American Bank
Goodwill
Goodwill				$ 24,270
Goodwill acquired	$ 24,270

XML

Goodwill and Other Intangible Assets - Other Intangible Assets (Details) - USD ($) $ in Thousands			1 Months Ended				6 Months Ended
	May 04, 2018	Apr. 06, 2018	May 31, 2018	Apr. 30, 2018	Aug. 31, 2015	Nov. 30, 2014	Jun. 30, 2019	Dec. 31, 2018
Other Intangible Assets
Accumulated amortization							$ 3,137	$ 2,770
United American Bank
Other Intangible Assets
Accumulated amortization							$ 1,272	756
Useful life, amortization period	3 years
United American Bank | Core deposit
Other Intangible Assets
Intangible assets acquired			$ 5,723
Useful life, amortization period			10 years
United American Bank | Below market-value lease
Other Intangible Assets
Intangible assets acquired			$ 660
Useful life, amortization period			3 years				3 years
Tri Valley Bank
Other Intangible Assets
Accumulated amortization							$ 351	222
Useful life, amortization period		11 years
Tri Valley Bank | Core deposit
Other Intangible Assets
Intangible assets acquired				$ 1,768
Useful life, amortization period				10 years
Tri Valley Bank | Below market-value lease
Other Intangible Assets
Intangible assets acquired				$ 210
Useful life, amortization period				11 years			11 years
Focus | Core deposit
Other Intangible Assets
Intangible assets acquired					$ 6,285
Useful life, amortization period					10 years
BVF/CSNK
Other Intangible Assets
Accumulated amortization							$ 886	$ 791
BVF/CSNK | Below market-value lease
Other Intangible Assets
Intangible assets acquired						$ 109
BVF/CSNK | Non-compete agreement
Other Intangible Assets
Intangible assets acquired						250
BVF/CSNK | Customer relationship and brokered relationship
Other Intangible Assets
Intangible assets acquired						$ 1,900
Useful life, amortization period						10 years

XML

Goodwill and Other Intangible Assets - Estimated Amortization Expense (Details) $ in Thousands	Jun. 30, 2019 USD ($)
Estimated Amortization Expense
2019	$ 2,214
2020	2,032
2021	1,590
2022	1,430
2023	1,307
2024	1,174
Thereafter	2,260
Total	12,007
United American Bank | Core deposit
Estimated Amortization Expense
2019	777
2020	665
2021	602
2022	553
2023	521
2024	499
Thereafter	1,520
Total	5,137
United American Bank | Below market-value lease
Estimated Amortization Expense
2019	255
2020	235
Total	490
Tri Valley Bank | Core deposit
Estimated Amortization Expense
2019	240
2020	208
2021	184
2022	167
2023	158
2024	152
Thereafter	451
Total	1,560
Tri Valley Bank | Below market-value lease
Estimated Amortization Expense
2019	18
2020	18
2021	18
2022	18
2023	18
2024	18
Thereafter	88
Total	196
Focus | Core deposit
Estimated Amortization Expense
2019	734
2020	716
2021	596
2022	502
2023	420
2024	346
Thereafter	201
Total	3,515
BVF/CSNK | Customer relationship and brokered relationship
Estimated Amortization Expense
2019	190
2020	190
2021	190
2022	190
2023	190
2024	159
Total	$ 1,109

XML

Goodwill and Other Intangible Assets - Impairment of Intangible Assets (Details) - USD ($) $ in Thousands	6 Months Ended	12 Months Ended
	Jun. 30, 2019	Dec. 31, 2018
Impairment of Intangible Assets
Impairment of intangible assets	$ 0	$ 0

XML

Income Taxes - Net Deferred Tax Assets (Details) - USD ($) $ in Thousands	Jun. 30, 2019	Dec. 31, 2018
Net deferred tax assets
Net deferred tax assets	$ 22,813	$ 27,089
Valuation allowance for deferred tax assets	$ 0	$ 0

XML

Income Taxes - Carry Amounts of the Low Income Housing Investments (Details) - USD ($) $ in Thousands	Jun. 30, 2019	Dec. 31, 2018
Income Taxes
Low income housing investments	$ 3,144	$ 3,172
Future commitments	$ 273	$ 273

XML

Income Taxes - Future Commitments of the Low Income Housing Investments (Details) - Low income housing investments $ in Thousands	Jun. 30, 2019 USD ($)
Future Commitments
2019	$ 14
2020	14
2021 through 2023	$ 245

XML

Income Taxes - Components of Low Income Housing Investment (Details) - USD ($) $ in Thousands	3 Months Ended		6 Months Ended
	Jun. 30, 2019	Jun. 30, 2018	Jun. 30, 2019	Jun. 30, 2018
Income Taxes
Low income housing tax credits	$ 106	$ 106	$ 213	$ 213
Low income housing investment expense	$ 106	$ 119	$ 211	$ 238

XML

Benefit Plans - Defined Benefit Plans - Nonqualified Defined Benefit Pension Plan (Details) $ in Thousands	Jun. 30, 2019 USD ($)
Supplemental Retirement Plan
Supplemental Retirement Plan
Plan assets associated with the plan	$ 0

XML

Benefit Plans - Defined Benefit Plans - Components of Pension Cost (Details) - USD ($) $ in Thousands	3 Months Ended		6 Months Ended		12 Months Ended
	Jun. 30, 2019	Jun. 30, 2018	Jun. 30, 2019	Jun. 30, 2018	Dec. 31, 2018
Supplemental Retirement Plan
Components of net periodic benefit cost:
Service cost	$ 55	$ 62	$ 110	$ 124
Interest cost	264	237	528	474
Amortization of net actuarial loss	46	73	92	146
Net periodic benefit cost	365	372	730	744
Split-Dollar Life Insurance Benefit Plan
Components of net periodic benefit cost:
Interest cost	70	56	140	113	$ 227
Amortization of prior transition obligation	(24)	(16)	(49)	(32)
Net periodic benefit cost	$ 46	$ 40	$ 91	$ 81

XML

Benefit Plans - Defined Benefit Plans - Change in Projected Benefit Obligation (Details) - Split-Dollar Life Insurance Benefit Plan - USD ($) $ in Thousands	3 Months Ended		6 Months Ended		12 Months Ended
	Jun. 30, 2019	Jun. 30, 2018	Jun. 30, 2019	Jun. 30, 2018	Dec. 31, 2018
Change in projected benefit obligation:
Projected benefit obligation at beginning of year			$ 6,903	$ 6,711	$ 6,711
Interest cost	$ 70	$ 56	140	$ 113	227
Actuarial loss (gain)					(35)
Projected benefit obligation at end of period	$ 7,043		$ 7,043		$ 6,903

XML

Benefit Plans - Defined Benefit Plans - Amounts Recognized in Accumulated Other Comprehensive Loss (Details) - Split-Dollar Life Insurance Benefit Plan - USD ($) $ in Thousands	Jun. 30, 2019	Dec. 31, 2018
Amounts Recognized in Accumulated Other Comprehensive Loss
Net actuarial loss	$ 2,666	$ 2,573
Prior transition obligation	1,104	1,149
Accumulated other comprehensive loss	$ 3,770	$ 3,722

XML

Fair Value - Financial Assets and Liabilities Measured on a Recurring Basis (Details) - USD ($) $ in Thousands	Jun. 30, 2019	Dec. 31, 2018
Financial Assets and Liabilities Measured on a Recurring Basis
Securities available-for-sale	$ 383,156	$ 459,043
I/O strip receivables	572	568
Agency mortgage-backed securities
Financial Assets and Liabilities Measured on a Recurring Basis
Securities available-for-sale	242,647	302,854
U.S. Treasury
Financial Assets and Liabilities Measured on a Recurring Basis
Securities available-for-sale	140,509	148,753
U.S. Government sponsored entities
Financial Assets and Liabilities Measured on a Recurring Basis
Securities available-for-sale		7,436
Quoted Prices in Active Markets for Identical Assets (Level 1) | U.S. Treasury
Financial Assets and Liabilities Measured on a Recurring Basis
Securities available-for-sale	140,509	148,753
Significant Other Observable Inputs (Level 2)
Financial Assets and Liabilities Measured on a Recurring Basis
I/O strip receivables	572	568
Significant Other Observable Inputs (Level 2) | Agency mortgage-backed securities
Financial Assets and Liabilities Measured on a Recurring Basis
Securities available-for-sale	242,647	302,854
Significant Other Observable Inputs (Level 2) | U.S. Government sponsored entities
Financial Assets and Liabilities Measured on a Recurring Basis
Securities available-for-sale		7,436
Recurring basis
Transfers between Level 1 and Level 2
Transfers between Level 1 and Level 2	0	0
Transfers between Level 2 and Level 1	$ 0	$ 0

XML

Fair Value - Financial Assets and Liabilities Measured on a Non-Recurring Basis (Details) - Non-recurring basis - USD ($) $ in Thousands	Jun. 30, 2019	Dec. 31, 2018
Financial Assets and Liabilities Measured on a Non-Recurring Basis
Impaired loans - held-for-investment:	$ 5,422	$ 702
Significant Unobservable Inputs (Level 3)
Financial Assets and Liabilities Measured on a Non-Recurring Basis
Impaired loans - held-for-investment:	5,422	702
Commercial | Commercial
Financial Assets and Liabilities Measured on a Non-Recurring Basis
Impaired loans - held-for-investment:	515	702
Commercial | Commercial | Significant Unobservable Inputs (Level 3)
Financial Assets and Liabilities Measured on a Non-Recurring Basis
Impaired loans - held-for-investment:	515	$ 702
CRE | Real estate
Financial Assets and Liabilities Measured on a Non-Recurring Basis
Impaired loans - held-for-investment:	4,907
CRE | Real estate | Significant Unobservable Inputs (Level 3)
Financial Assets and Liabilities Measured on a Non-Recurring Basis
Impaired loans - held-for-investment:	$ 4,907

XML

Fair Value - Impaired Loans Held-for-investment - Tabular Disclosure (Details) - USD ($) $ in Thousands	Jun. 30, 2019	Dec. 31, 2018
Impaired Loans Held-for-investment
Impaired loans held-for-investment	$ 17,193	$ 15,140
Carried at fair value
Impaired Loans Held-for-investment
Impaired loans held-for-investment	11,959	7,646
Specific valuation allowance	(6,537)	(6,944)
Impaired loans held-for-investment carried at fair value, net	5,422	702
Portion carried at cost
Impaired Loans Held-for-investment
Impaired loans held-for-investment	$ 5,234	$ 7,494

XML

Fair Value - Impaired Loans Held-for-investment - Additional Disclosures (Details) - USD ($) $ in Thousands	6 Months Ended	12 Months Ended
	Jun. 30, 2019	Dec. 31, 2018
Impaired Loans Held-for-investment
Impaired loans held-for-investment	$ 17,193	$ 15,140
Additional provision (credit) for loan losses	339	7,042
Carrying amount
Impaired Loans Held-for-investment
Foreclosed assets	0	0
Carried at fair value
Impaired Loans Held-for-investment
Impaired loans held-for-investment	11,959	7,646
Specific valuation allowance	6,537	6,944
Portion carried at cost
Impaired Loans Held-for-investment
Impaired loans held-for-investment	$ 5,234	$ 7,494

XML

Fair Value - Quantitative Information about Level 3 Fair Value Measurements (Details) - Non-recurring basis $ in Thousands	Jun. 30, 2019 USD ($) item	Dec. 31, 2018 USD ($) item
Quantitative information about level 3 fair value measurements for financial instruments measured at fair value on a non-recurring basis
Impaired loans - held-for-investment, Fair Value	$ 5,422	$ 702
Significant Unobservable Inputs (Level 3)
Quantitative information about level 3 fair value measurements for financial instruments measured at fair value on a non-recurring basis
Impaired loans - held-for-investment, Fair Value	5,422	702
Commercial | Commercial
Quantitative information about level 3 fair value measurements for financial instruments measured at fair value on a non-recurring basis
Impaired loans - held-for-investment, Fair Value	515	702
Commercial | Commercial | Significant Unobservable Inputs (Level 3)
Quantitative information about level 3 fair value measurements for financial instruments measured at fair value on a non-recurring basis
Impaired loans - held-for-investment, Fair Value	$ 515	$ 702
Commercial | Commercial | Significant Unobservable Inputs (Level 3) | Minimum
Quantitative information about level 3 fair value measurements for financial instruments measured at fair value on a non-recurring basis
Discount adjustment for differences between comparable sales - Impaired loan held for investment (as a percent) | item		0.00
Commercial | Commercial | Significant Unobservable Inputs (Level 3) | Maximum
Quantitative information about level 3 fair value measurements for financial instruments measured at fair value on a non-recurring basis
Discount adjustment for differences between comparable sales - Impaired loan held for investment (as a percent) | item	0.01	0.01
CRE | Real estate
Quantitative information about level 3 fair value measurements for financial instruments measured at fair value on a non-recurring basis
Impaired loans - held-for-investment, Fair Value	$ 4,907
CRE | Real estate | Significant Unobservable Inputs (Level 3)
Quantitative information about level 3 fair value measurements for financial instruments measured at fair value on a non-recurring basis
Impaired loans - held-for-investment, Fair Value	$ 4,907
CRE | Real estate | Significant Unobservable Inputs (Level 3) | Maximum
Quantitative information about level 3 fair value measurements for financial instruments measured at fair value on a non-recurring basis
Discount adjustment for differences between comparable sales - Real Estate (as a percent) | item	0.01

XML

Fair Value - Carrying Amounts and Estimated Fair Values of Financial Instruments (Details) - USD ($) $ in Thousands	Jun. 30, 2019	Dec. 31, 2018
Assets
Securities available-for-sale	$ 383,156	$ 459,043
Securities held-to-maturity	351,467	366,175
Federal Home Loan Bank and Federal Reserve Bank stock and other investments, at cost	25,226	25,216
I/O strips receivables	572	568
Liabilities
Subordinated Debt.	39,461	39,369
Significant Other Observable Inputs (Level 2)
Assets
I/O strips receivables	572	568
Carrying amount
Assets
Cash and cash equivalents	276,012	164,568
Securities available-for-sale	383,156	459,043
Securities held-to-maturity	351,399	377,198
Loans (including loans held-for-sale), net	1,856,338	1,861,206
Federal Home Loan Bank and Federal Reserve Bank stock and other investments, at cost	25,226	25,216
Accrued interest receivable	9,248	9,577
I/O strips receivables	572	568
Liabilities
Time deposits	143,807	147,560
Other deposits	2,478,666	2,489,972
Subordinated Debt.	39,461	39,369
Accrued interest payable	653	497
Carried at fair value
Assets
Cash and cash equivalents	276,012	164,568
Securities available-for-sale	383,156	459,043
Securities held-to-maturity	351,467	366,175
Loans (including loans held-for-sale), net	1,856,483	1,829,303
Accrued interest receivable	9,248	9,577
I/O strips receivables	572	568
Liabilities
Time deposits	144,242	147,916
Other deposits	2,478,666	2,489,972
Subordinated Debt.	40,361	38,969
Accrued interest payable	653	497
Carried at fair value | Quoted Prices in Active Markets for Identical Assets (Level 1)
Assets
Cash and cash equivalents	276,012	164,568
Securities available-for-sale	140,509	148,753
Accrued interest receivable	553	597
Carried at fair value | Significant Other Observable Inputs (Level 2)
Assets
Securities available-for-sale	242,647	310,290
Securities held-to-maturity	351,467	366,175
Loans (including loans held-for-sale), net	5,202	2,649
Accrued interest receivable	2,045	2,274
I/O strips receivables	572	568
Liabilities
Time deposits	144,242	147,916
Other deposits	2,478,666	2,489,972
Subordinated Debt.	40,361	38,969
Accrued interest payable	653	497
Carried at fair value | Significant Unobservable Inputs (Level 3)
Assets
Loans (including loans held-for-sale), net	1,851,281	1,826,654
Accrued interest receivable	$ 6,650	$ 6,706

XML

Equity Plan - General Disclosures (Details) - shares	6 Months Ended
	Jun. 30, 2019	May 25, 2017	May 24, 2017
2013 Plan
Equity Plan
Number of shares authorized for equity plan		3,000,000	1,750,000
Number of shares available for future grants	750,030
Options
Equity Plan
Vesting period	4 years
Options | Maximum
Equity Plan
Expiration term	10 years
Restricted stock
Equity Plan
Number of equity awards issued (in shares)	134,653
Nonqualified stock options
Equity Plan
Number of equity awards issued (in shares)	296,500

XML

Equity Plan - Stock Option Activity (Details) - Options - USD ($)	6 Months Ended
	Jun. 30, 2019
Number of Shares
Outstanding at the beginning of the period (in shares)	1,570,603
Granted (in shares)	296,500
Exercised (in shares)	(75,003)
Forfeited or expired (in shares)	(18,677)
Outstanding at the end of the period (in shares)	1,773,423
Vested or expected to vest (in shares)	1,667,018
Exercisable at the end of the period (in shares)	1,101,432
Weighted Average Exercise Price
Outstanding at the beginning of the period (in dollars per share)	$ 10.76
Granted (in dollars per share)	12.16
Exercised (in dollars per share)	7.55
Forfeited or expired (in dollars per share)	15.57
Outstanding at the end of the period (in dollars per share)	$ 11.08
Additional Information
Weighted Average Remaining Contractual Life - Outstanding at the end of the period (in years)	6 years 9 months
Weighted Average Remaining Contractual Life - Vested or expected to vest (in years)	6 years 9 months
Weighted Average Remaining Contractual Life - Exercisable at the end of the period (in years)	5 years 4 months 17 days
Aggregate Intrinsic Value - Outstanding at the end of the period (in dollars)	$ 3,910,541
Aggregate Intrinsic Value - Vested or expected to vest (in dollars)	3,675,908
Aggregate Intrinsic Value - Exercisable at the end of the period (in dollars)	$ 3,784,995

XML

Equity Plan - Information Related to the Equity Plans for each of the Last Three Years (Details) - USD ($) $ / shares in Units, $ in Thousands	6 Months Ended
	Jun. 30, 2019	Jun. 30, 2018
Information Related to the Equity Plans
Cash received from option exercise	$ 566	$ 2,002
Options
Information Related to the Equity Plans
Intrinsic value of options exercised	392,127	1,466,731
Cash received from option exercise	566,197	2,001,837
Tax benefit realized from option exercises	$ 102,786	$ 430,357
Weighted average fair value of options granted (in dollars per share)	$ 1.91	$ 3.07

XML

Equity Plan - Unrecognized Compensation Cost - Nonvested Stock Options (Details) - Options $ in Thousands	6 Months Ended
	Jun. 30, 2019 USD ($)
Unrecognized Compensation Cost
Total unrecognized compensation cost related to nonvested stock options granted	$ 1,582
Expected weighted-average period for recognition of compensation costs related to nonvested stock options	3 years

XML

Equity Plan - Assumptions Used to Estimate Fair Value (Details)	6 Months Ended
	Jun. 30, 2019	Jun. 30, 2018
Assumptions Used to Estimate Fair Value
Expected life in months	72 months	72 months
Options
Assumptions Used to Estimate Fair Value
Volatility (as a percent)	24.00%	21.00%
Weighted average risk-free interest rate (as a percent)	2.24%	2.87%
Expected dividends (as a percent)	3.95%	2.62%

XML

Equity Plan - Restricted Stock Activity (Details) - Restricted stock	6 Months Ended
	Jun. 30, 2019 $ / shares shares
Number of Shares
Nonvested shares at the beginning of the period (in shares) | shares	193,298
Granted (in shares) | shares	134,653
Vested (in shares) | shares	(74,998)
Nonvested shares at the end of the period (in shares) | shares	252,953
Weighted Average Grant Date Fair Value
Nonvested shares at the beginning of the period (in dollars per share) | $ / shares	$ 11.04
Granted (in dollars per share) | $ / shares	12.16
Vested (in dollars per share) | $ / shares	12.43
Nonvested shares at the end of the period (in dollars per share) | $ / shares	$ 11.23

XML

Equity Plan - Unrecognized Compensation Cost - Nonvested Restricted Stock Awards (Details) - Restricted stock $ in Thousands	6 Months Ended
	Jun. 30, 2019 USD ($)
Unrecognized Compensation Cost
Total unrecognized compensation cost related to nonvested restricted stock awards	$ 3,153
Expected weighted-average period for recognition of compensation costs related to nonvested restricted stock awards	2 years 5 months 27 days

XML

Subordinate Debt (Details) - USD ($)	Jun. 01, 2022	Jun. 30, 2019	May 26, 2017
Debt Instrument [Line Items]
Principal amount			$ 40,000,000
Fixed interest rate (as a percent)		5.25%
LIBOR
Debt Instrument [Line Items]
Base rate	three-month LIBOR
Rate of interest added to base rate	3.365%

XML

Capital Requirements - General Information (Details)	6 Months Ended	12 Months Ended
	Jun. 30, 2019	Dec. 31, 2019	Dec. 31, 2018
Capital Requirements
Capital conservation buffer (as a percent)	2.50%		1.875%
Forecast
Capital Requirements
Capital conservation buffer (as a percent)		2.50%
HBC (Wholly-owned Subsidiary)
Capital Requirements
Capital conservation buffer (as a percent)	2.50%		1.875%

XML

Capital Requirements - Tabular Disclosure (Details) - USD ($) $ in Thousands	Jun. 30, 2019	Dec. 31, 2018
Total Capital (to risk-weighted assets)
Actual, Amount	$ 360,242	$ 344,597
Required For Capital Adequacy Purposes, Amount	$ 237,965	$ 227,514
Actual, Ratio (as a percent)	15.90%	15.00%
Required For Capital Adequacy Purposes, Ratio (as a percent)	10.50%	9.875%
Tier 1 Capital (to risk-weighted assets)
Actual, Amount	$ 293,492	$ 276,675
Required For Capital Adequacy Purposes, Amount	$ 192,639	$ 181,435
Actual, Ratio (as a percent)	13.00%	12.00%
Required For Capital Adequacy Purposes, Ratio (as a percent)	8.50%	7.875%
Common Equity Tier 1 Capital (to risk-weighted assets)
Actual, Amount	$ 293,492	$ 276,675
Required For Capital Adequacy Purposes, Amount	$ 158,644	$ 146,876
Actual, Ratio (as a percent)	13.00%	12.00%
Required For Capital Adequacy Purposes, Ratio (as a percent)	7.00%	6.375%
Tier 1 Capital (to average assets)
Actual, Amount	$ 293,492	$ 276,675
Required For Capital Adequacy Purposes, Amount	$ 118,865	$ 124,726
Actual, Ratio (as a percent)	9.90%	8.90%
Required For Capital Adequacy Purposes, Ratio (as a percent)	4.00%	4.00%
HBC (Wholly-owned Subsidiary)
Total Capital (to risk-weighted assets)
Actual, Amount	$ 338,344	$ 322,283
To Be Well Capitalized Under Regulatory Requirements, Amount	226,477	230,275
Required For Capital Adequacy Purposes, Amount	$ 237,801	$ 227,397
Actual, Ratio (as a percent)	14.90%	14.00%
To Be Well Capitalized Under Regulatory Requirements, Ratio (as a percent)	10.00%	10.00%
Required For Capital Adequacy Purposes, Ratio (as a percent)	10.50%	9.875%
Tier 1 Capital (to risk-weighted assets)
Actual, Amount	$ 311,055	$ 293,730
To Be Well Capitalized Under Regulatory Requirements, Amount	181,182	184,220
Required For Capital Adequacy Purposes, Amount	$ 192,506	$ 181,342
Actual, Ratio (as a percent)	13.70%	12.80%
To Be Well Capitalized Under Regulatory Requirements, Ratio (as a percent)	8.00%	8.00%
Required For Capital Adequacy Purposes, Ratio (as a percent)	8.50%	7.875%
Common Equity Tier 1 Capital (to risk-weighted assets)
Actual, Amount	$ 311,055	$ 293,730
To Be Well Capitalized Under Regulatory Requirements, Amount	147,210	149,679
Required For Capital Adequacy Purposes, Amount	$ 158,534	$ 146,800
Actual, Ratio (as a percent)	13.70%	12.80%
To Be Well Capitalized Under Regulatory Requirements, Ratio (as a percent)	6.50%	6.50%
Required For Capital Adequacy Purposes, Ratio (as a percent)	7.00%	6.375%
Tier 1 Capital (to average assets)
Actual, Amount	$ 311,055	$ 293,730
To Be Well Capitalized Under Regulatory Requirements, Amount	148,505	155,832
Required For Capital Adequacy Purposes, Amount	$ 118,804	$ 124,666
Actual, Ratio (as a percent)	10.50%	9.40%
To Be Well Capitalized Under Regulatory Requirements, Ratio (as a percent)	5.00%	5.00%
Required For Capital Adequacy Purposes, Ratio (as a percent)	4.00%	4.00%

XML

Capital Requirements - Dividends to Parent (Details) - USD ($) $ in Thousands	3 Months Ended		6 Months Ended
	Jun. 30, 2019	Mar. 31, 2019	Jun. 30, 2019	Dec. 31, 2018
Cash dividend
Subordinated Debt.	$ 39,461		$ 39,461	$ 39,369
HBC (Wholly-owned Subsidiary)
Cash dividend
Cash dividend available	32,636		32,636
Dividends paid to parent company	$ 5,500	$ 5,000	$ 10,500

XML

Revenue Recognition (Details) - USD ($) $ in Thousands	3 Months Ended		6 Months Ended
	Jun. 30, 2019	Jun. 30, 2018	Jun. 30, 2019	Jun. 30, 2018
Revenue Recognition
Non-interest Income In-scope of Topic 606	$ 1,177	$ 972	$ 2,338	$ 1,874
Non-interest Income Out-of-scope of Topic 606	1,588	1,808	2,895	3,101
Total noninterest income	$ 2,765	$ 2,780	$ 5,233	$ 4,975

XML

Noninterest Expense (Details) - USD ($) $ in Thousands	3 Months Ended		6 Months Ended
	Jun. 30, 2019	Jun. 30, 2018	Jun. 30, 2019	Jun. 30, 2018
Noninterest Expense
Salaries and employee benefits	$ 10,698	$ 11,103	$ 21,468	$ 20,570
Occupancy and equipment	1,578	1,262	3,084	2,368
Professional fees	753	633	1,571	1,317
Data processing	732	622	1,411	976
Software subscriptions	556	599	1,145	1,192
Amortization of intangible assets	554	464	1,107	705
Merger-related costs	540	8,214	540	8,829
Insurance expense	439	399	875	806
Recovery of legal fees		(922)		(922)
Other	2,595	2,488	5,162	5,011
Total noninterest expense	18,445	24,862	36,363	40,852
Severance and retention expense		3,393		3,393
Other acquisition and integration related costs	$ 540	$ 4,821	$ 540	$ 5,436

XML

Lease (Details) $ in Thousands	6 Months Ended
	Jun. 30, 2019 USD ($) ft²
Lessee, Lease, Description [Line Items]
Lessee, Operating Lease, Option to renew	true
Operating Lease Cost (Cost resulting from lease payments)	$ 1,044
Operating Lease - Operating Cash Flows (Fixed Payments)	1,012
Operating Lease - Liabilities	7,425
Operating Lease - ROU assets	$ 7,425
Weighted Average Lease Term - Operating Leases	3 years 4 months 24 days
Weighted Average Discount Rate - Operating Leases	5.25%
Area of office space | ft²	54,910
ASU 2018-11
Lessee, Lease, Description [Line Items]
Operating Lease - Liabilities	$ 7,425
Operating Lease - ROU assets	$ 7,425

XML

Lease - Maturity Analysis (Details) $ in Thousands	Jun. 30, 2019 USD ($)
Operating Lease Payments Due
2019	$ 2,020
2020	2,175
2021	1,403
2022	1,198
2023	660
Thereafter	703
Total undiscounted cash flows	8,159
Discount on cash flows	(734)
Total lease liability	$ 7,425

XML

Business Segment Information - Business Segments (Details)	6 Months Ended
	Jun. 30, 2019 segment item
Business Segment Information
Number of business segments | segment	2
Focus
Business Segment Information
Number of business segments | item	2

XML

Business Segment Information - Operating Statements (Details) - USD ($) $ in Thousands	3 Months Ended				6 Months Ended
	Jun. 30, 2019	Mar. 31, 2019	Jun. 30, 2018	Mar. 31, 2018	Jun. 30, 2019	Jun. 30, 2018	Dec. 31, 2018
Operating Income
Interest income	$ 33,489		$ 31,980		$ 66,938	$ 59,857
Total interest expense	2,573		1,816		4,980	3,345
Net interest income	30,916		30,164		61,958	56,512
Provision (credit) for loan losses	(740)		7,198		(1,801)	7,704
Net interest income after provision	31,656		22,966		63,759	48,808
Noninterest income	2,765		2,780		5,233	4,975
Noninterest expense	18,445		24,862		36,363	40,852
Income before income taxes	15,976		884		32,629	12,931
Income tax (benefit) expense	4,623		(31)		9,130	3,207
Net income	11,353	$ 12,146	915	$ 8,809	23,499	9,724
Total assets	3,108,031		3,123,207		3,108,031	3,123,207	$ 3,096,562
Loans, net of deferred fees	1,877,767		1,956,633		1,877,767	1,956,633	1,886,405
Goodwill	83,753		84,417		83,753	84,417	$ 83,753
Noncash Merger Related Costs	540		8,214		540	8,829
Banking
Operating Income
Interest income	30,521		28,625		61,017	53,356
Intersegment interest allocations	292		376		606	703
Total interest expense	2,573		1,816		4,980	3,345
Net interest income	28,240		27,185		56,643	50,714
Provision (credit) for loan losses	(744)		7,141		(1,636)	7,629
Net interest income after provision	28,984		20,044		58,279	43,085
Noninterest income	2,641		2,531		4,873	4,617
Noninterest expense	16,784		23,301		32,985	37,768
Intersegment expense allocations	132		227		253	402
Income before income taxes	14,973		(499)		30,420	10,336
Income tax (benefit) expense	4,327		(440)		8,477	2,440
Net income	10,646		(59)		21,943	7,896
Total assets	3,045,378		3,044,221		3,045,378	3,044,221
Loans, net of deferred fees	1,827,936		1,893,147		1,827,936	1,893,147
Goodwill	70,709		71,373		70,709	71,373
Noncash Merger Related Costs	540		8,214		540	8,829
Factoring
Operating Income
Interest income	2,968		3,355		5,921	6,501
Intersegment interest allocations	(292)		(376)		(606)	(703)
Net interest income	2,676		2,979		5,315	5,798
Provision (credit) for loan losses	4		57		(165)	75
Net interest income after provision	2,672		2,922		5,480	5,723
Noninterest income	124		249		360	358
Noninterest expense	1,661		1,561		3,378	3,084
Intersegment expense allocations	(132)		(227)		(253)	(402)
Income before income taxes	1,003		1,383		2,209	2,595
Income tax (benefit) expense	296		409		653	767
Net income	707		974		1,556	1,828
Total assets	62,653		78,986		62,653	78,986
Loans, net of deferred fees	49,831		63,486		49,831	63,486
Goodwill	$ 13,044		$ 13,044		$ 13,044	$ 13,044

XML

Subsequent Events (Details) - $ / shares		3 Months Ended
	Jul. 25, 2019	Jun. 30, 2019	Mar. 31, 2019	Jun. 30, 2018	Mar. 31, 2018
Subsequent Event [Line Items]
Quarterly cash dividends declared to holders of common stock		$ 0.12	$ 0.12	$ 0.11	$ 0.11
Subsequent Event
Subsequent Event [Line Items]
Quarterly cash dividends declared to holders of common stock	$ 0.12