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 September 30, 2018
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)

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 and post 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 43,279,185 shares of Common Stock outstanding on October 30, 2018.

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	82
Item 4.	Controls and Procedures	82
PART II. OTHER INFORMATION
Item 1.	Legal Proceedings	82
Item 1A.	Risk Factors	82
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	82
Item 3.	Defaults Upon Senior Securities	82
Item 4.	Mine Safety Disclosures	82
Item 5.	Other Information	82
Item 6.	Exhibits	83
SIGNATURES		84

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, high unemployment rates 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;

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;

changes in the competitive environment among financial or bank holding companies and other financial service providers;

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

our ability to develop and promote customer acceptance of new products and services in a timely manner;

risks associated with concentrations in real estate related loans;

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 Heritage Commerce Corp’s (the “Company”) allowance for loan losses and the Company’s provision for loan losses;

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

regulatory limits on Heritage Bank of Commerce’s ability to pay dividends to the Company;

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

3

· 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, results of operations and growth prospects;

· 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 expected credit losses;

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 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 of and competition for acquisition opportunities;

risks resulting from domestic terrorism;

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

· fully realizing cost savings and other benefits, and/or business disruption following the mergers of Tri-Valley Bank and United American Bank; 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)

	September 30,		December 31,
	2018		2017
	(Dollars in thousands)
Assets
Cash and due from banks	$	40,831	$	31,681
Other investments and interest-bearing deposits in other financial institutions		340,198		284,541
Total cash and cash equivalents		381,029		316,222
Securities available-for-sale, at fair value		319,071		391,852
Securities held-to-maturity, at amortized cost (fair value of $359,698 at
September 30, 2018 and $394,292 at December 31, 2017)		375,732		398,341
Loans held-for-sale - SBA, at lower of cost or fair value, including deferred costs		6,344		3,419
Loans, net of deferred fees		1,899,387		1,582,667
Allowance for loan losses		(27,426)		(19,658)
Loans, net		1,871,961		1,563,009
Federal Home Loan Bank and Federal Reserve Bank stock and other investments, at cost		25,210		17,911
Company-owned life insurance		61,630		60,814
Premises and equipment, net		7,246		7,353
Goodwill		83,752		45,664
Other intangible assets		12,614		5,589
Accrued interest receivable and other assets		48,321		33,278
Total assets	$	3,192,910	$	2,843,452
Liabilities and Shareholders' Equity
Liabilities:
Deposits:
Demand, noninterest-bearing	$	1,081,846	$	989,753
Demand, interest-bearing		670,624		601,929
Savings and money market		828,297		684,131
Time deposits - under $250		68,194		51,710
Time deposits - $250 and over		84,763		138,634
CDARS - interest-bearing demand, money market and time deposits		11,575		16,832
Total deposits		2,745,299		2,482,989
Subordinated debt, net of issuance costs		39,322		39,183
Accrued interest payable and other liabilities		54,723		50,041
Total liabilities		2,839,344		2,572,213
Shareholders' equity:
Preferred stock, no par value; 10,000,000 shares authorized; none issued and outstanding
at September 30, 2018 and December 31, 2017		—		—
Common stock, no par value; 60,000,000 shares authorized; 43,271,676 shares issued
and outstanding at September 30, 2018 and 38,200,883 shares issued and
outstanding at December 31, 2017		300,208		218,355
Retained earnings		70,531		62,136
Accumulated other comprehensive loss		(17,173)		(9,252)
Total shareholders' equity		353,566		271,239
Total liabilities and shareholders' equity	$	3,192,910	$	2,843,452

See notes to unaudited consolidated financial statements

5

HERITAGE COMMERCE CORP

CONSOLIDATED STATEMENTS OF INCOME (Unaudited)

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2018		2017		2018		2017
	(Dollars in thousands, except per share amounts)
Interest income:
Loans, including fees	$	28,632	$	22,507	$	77,271	$	64,112
Securities, taxable		3,483		3,596		11,112		9,916
Securities, exempt from Federal tax		555		563		1,675		1,694
Other investments, interest-bearing deposits
in other financial institutions and Federal funds sold		1,940		1,289		4,409		3,037
Total interest income		34,610		27,955		94,467		78,759
Interest expense:
Deposits		1,575		1,051		3,772		2,867
Subordinated debt		583		583		1,731		811
Short-term borrowings		1		—		1		1
Total interest expense		2,159		1,634		5,504		3,679
Net interest income before provision for loan losses		32,451		26,321		88,963		75,080
Provision (credit) for loan losses		(425)		115		7,279		390
Net interest income after provision for loan losses		32,876		26,206		81,684		74,690
Noninterest income:
Service charges and fees on deposit accounts		1,107		869		2,981		2,410
Gain on sales of SBA loans		236		147		551		635
Increase in cash surrender value of life insurance		216		417		816		1,259
Servicing income		163		246		533		736
Gain (loss) on sales of securities		—		—		266		(6)
Other		484		781		2,034		2,014
Total noninterest income		2,206		2,460		7,181		7,048
Noninterest expense:
Salaries and employee benefits		10,719		9,071		35,302		27,766
Occupancy and equipment		1,559		1,142		3,927		3,426
Professional fees		721		695		1,116		2,439
Other		4,729		3,926		18,235		11,785
Total noninterest expense		17,728		14,834		58,580		45,416
Income before income taxes		17,354		13,832		30,285		36,322
Income tax expense		4,979		5,249		8,186		13,752
Net income	$	12,375	$	8,583	$	22,099	$	22,570
Earnings per common share:
Basic	$	0.29	$	0.22	$	0.54	$	0.59
Diluted	$	0.28	$	0.22	$	0.53	$	0.59

See notes to unaudited consolidated financial statements

6

HERITAGE COMMERCE CORP

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2018		2017		2018		2017
		(Dollars in thousands)
Net income	$	12,375	$	8,583	$	22,099	$	22,570
Other comprehensive income:
Change in net unrealized holding (losses) gains on available-for-sale
securities and I/O strips		(1,880)		539		(11,009)		2,975
Deferred income taxes		545		(227)		3,192		(1,250)
Change in net unamortized unrealized gain on securities available-for-
sale that were reclassified to securities held-to-maturity		(11)		(12)		(33)		(38)
Deferred income taxes		3		5		9		16
Reclassification adjustment for losses (gains) realized in income		—		—		(266)		6
Deferred income taxes		—		—		79		(2)
Change in unrealized (losses) gains on securities and I/O strips, net of
deferred income taxes		(1,343)		305		(8,028)		1,707
Change in net pension and other benefit plan liability adjustment		51		39		152		116
Deferred income taxes		(15)		(17)		(45)		(49)
Change in pension and other benefit plan liability, net of
deferred income taxes		36		22		107		67
Other comprehensive (loss) income		(1,307)		327		(7,921)		1,774
Total comprehensive income	$	11,068	$	8,910	$	14,178	$	24,344

See notes to unaudited consolidated financial statements

7

HERITAGE COMMERCE CORP

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY (Unaudited)

	Nine Months Ended September 30, 2018 and 2017
						Accumulated
						Other		Total
	Common Stock			Retained		Comprehensive		Shareholders’
	Shares	Amount		Earnings		Loss		Equity
	(Dollars in thousands)
Balance, January 1, 2017	37,941,007	$	215,237	$	52,527	$	(7,914)	$	259,850
Net income	—		—		22,570		—		22,570
Other comprehensive income	—		—		—		1,774		1,774
Issuance of restricted stock awards, net	64,136		—		—		—		—
Amortization of restricted stock awards,
net of forfeitures and taxes	—		678		—		—		678
Cash dividend declared $0.30 per share	—		—		(11,418)		—		(11,418)
Stock option expense, net of forfeitures and taxes	—		639		—		—		639
Stock options exercised	193,863		1,352		—		—		1,352
Balance, September 30, 2017	38,199,006	$	217,906	$	63,679	$	(6,140)	$	275,445
Balance, January 1, 2018	38,200,883	$	218,355	$	62,136	$	(9,252)	$	271,239
Net income	—		—		22,099		—		22,099
Other comprehensive loss	—		—		—		(7,921)		(7,921)
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		—		—		47,280
Issuance of restricted stock awards, net	95,378		—		—		—		—
Amortization of restricted stock awards,
net of forfeitures and taxes	—		814		—		—		814
Cash dividend declared $0.33 per share	—		—		(13,704)		—		(13,704)
Stock option expense, net of forfeitures and taxes	—		535		—		—		535
Stock options exercised	259,770		2,499		—		—		2,499
Balance, September 30, 2018	43,271,676	$	300,208	$	70,531	$	(17,173)	$	353,566

See notes to unaudited consolidated financial statements

8

HERITAGE COMMERCE CORP

CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

	Nine Months Ended
	September 30,
	2018		2017
	(Dollars in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	22,099	$	22,570
Adjustments to reconcile net income to net cash provided by operating activities:
Amortization of discounts and premiums on securities		3,093		3,218
(Gain) loss on sale of securities available-for-sale		(266)		6
Gain on sale of SBA loans		(551)		(635)
Proceeds from sale of SBA loans originated for sale		9,315		8,304
SBA loans originated for sale		(11,689)		(8,957)
Provision for loan losses		7,279		390
Increase in cash surrender value of life insurance		(816)		(1,259)
Depreciation and amortization		566		586
Amortization of other intangible assets		1,336		1,083
Stock option expense, net		535		639
Amortization of restricted stock awards, net		814		678
Amortization of subordinated debt issuance costs		139		64
Effect of changes in:
Accrued interest receivable and other assets		(19)		2,428
Accrued interest payable and other liabilities		1,723		(12)
Net cash provided by operating activities		33,558		29,103
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of securities available-for-sale		(15,193)		(123,561)
Purchase of securities held-to-maturity		(16,906)		(89,470)
Maturities/paydowns/calls of securities available-for-sale		44,832		41,463
Maturities/paydowns/calls of securities held-to-maturity		38,091		32,502
Proceeds from sales of securities available-for-sale		94,291		6,536
Net change in loans		20,215		(60,683)
Changes in Federal Home Loan Bank stock and other investments		(4,478)		(2,709)
Purchase of premises and equipment		(108)		(635)
Cash received in bank acquisition, net of cash paid		36,028		—
Net cash provided (used in) by investing activities		196,772		(196,557)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net change in deposits		(154,318)		218,464
Issuance of subordinated debt, net of issuance costs		—		39,073
Exercise of stock options		2,499		1,352
Payment of cash dividends		(13,704)		(11,418)
Net cash (used in) provided by financing activities		(165,523)		247,471
Net increase in cash and cash equivalents		64,807		80,017
Cash and cash equivalents, beginning of period		316,222		266,103
Cash and cash equivalents, end of period	$	381,029	$	346,120
Supplemental disclosures of cash flow information:
Interest paid	$	4,728	$	2,912
Income taxes paid		8,671		11,731
Supplemental schedule of non-cash investing activity:
Transfer of loans held-for-sale to loan portfolio		—		2,391
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		38,088		—
Other intangible assets		8,361
Other assets, net		14,736		—
Deposits		(416,628)		—
Other borrowings		(62)		—
Other liabilities		(3,037)		—
Common stock issued to acquire Tri-Valley and United American Bank		78,005		—

See notes to unaudited consolidated financial statements

9

HERITAGE COMMERCE CORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2018

(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, 2017.

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 nine months ended September 30, 2018 are not necessarily indicative of the results expected for any subsequent period or for the entire year ending December 31, 2018.

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 May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-09, “Revenue from Contracts with Customers”, which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. The standard replaces most existing revenue recognition guidance in GAAP. The new standard was effective for the Company on January 1, 2018. Adoption of the standard did not have a material impact on the Company’s consolidated financial statements and related disclosures as the Company’s primary sources of revenues are derived from interest and dividends earned on loans, investment securities, and other financial instruments that are not within the scope of the standard. The Company’s revenue recognition pattern for revenue streams within the scope of the standard, including but not limited to service charges on deposit accounts and gains/losses on the sale of other real estate owned (“OREO”), did not change significantly from current practice. The standard permits the use of either the full retrospective or modified retrospective transition method. The Company elected to use the modified retrospective transition method which requires application of the standard to uncompleted contracts at the date of adoption however, periods prior to the date of adoption were not retrospectively revised as the impact of the standard on uncompleted contracts at the date of adoption was not material. See Note 15 – Revenue Recognition for more information.

In January 2016, the FASB issued ASU No. 2016-01, “Financial Instruments – Overall: Recognition and Measurement of Financial Assets and Financial Liabilities.” The guidance affects the accounting for equity investments, financial liabilities under the fair value option and the presentation and disclosure requirements of financial instruments. The standard was effective for the Company on January 1, 2018 and resulted in the use of an exit price rather than an entrance price to determine the fair value of financial instruments not measured at fair value on a non-recurring basis in the consolidated balance sheets. See Note 10 – Fair Value regarding the valuation of the loan portfolio.

In March 2017, the FASB issued ASU 2017-07, Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost. The standard amended existing guidance to improve the presentation of net periodic pension cost and net periodic postretirement benefit cost. The amendments require that an employer report the service cost component in the same line item or items as other compensation costs arising from services rendered by the pertinent employees during the period. The other components of net benefit costs are required to be presented in the income statement separately from the service cost component and outside a subtotal of income from operations, if one is presented. The amendments allow only the service cost component to be eligible for capitalization. The Company adopted the new guidance on January 1, 2018, and there was no material impact to the financial statements.

Newly Issued, but not yet Effective Accounting Standards

In February 2016, the FASB issued ASU No. 2016-02, Leases. The standard requires a lessee to recognize assets and liabilities on the balance sheet for leases with lease terms greater than 12 months. A lessee should recognize in the statement of financial position a liability to make lease payments (the lease liability) and a right of use asset representing its right to use the underlying asset for the lease term. When measuring assets and liabilities arising from a lease, a lessee (and a lessor) should include payments to be made in optional periods only if the lessee is reasonably certain to exercise an option to extend the lease or not to exercise an option to terminate the lease. Similarly, optional payments to purchase the underlying asset should be included in the measurement of lease assets and lease liabilities only if the lessee is reasonably certain to exercise that purchase option. Reasonably certain is a high threshold that is consistent with and intended to be applied in the same way as the reasonably assured threshold in the previous leases guidance. In addition, also consistent with the previous leases guidance, a lessee (and a lessor) should exclude most variable lease payments in measuring lease assets and lease liabilities, other than those that depend on an index or a rate or are in substance fixed payments. For leases with a term of 12 months or less, a lessee is permitted to make an accounting policy election by class of underlying asset not to recognize lease assets and lease liabilities. If a lessee makes this election, it should recognize lease expense for such leases generally on a straight line basis over the lease term. The new guidance is effective for fiscal years, and interim periods within those years, beginning after December 15, 2018, and early adoption is permitted. We are

11

currently evaluating the provisions of this ASU and have determined that the provisions of ASU No. 2016-02 will result in an increase in assets to recognize the present value of the lease obligations with a corresponding increase in liabilities; however, we do not expect this to have a material impact to the Company’s results of operations or cash flows.

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 update amends the accounting for credit losses on available for sale securities, whereby credit losses will be presented as an allowance as opposed to a write down. In addition, CECL will modify the accounting for purchased loans with credit deterioration since origination, so that reserves are established at the date of acquisition for purchased loans. Lastly, the amendment requires enhanced disclosures on the significant estimates and judgments used to estimate credit losses, as well as on the credit quality and underwriting standards of an organization’s portfolio. These disclosures require organizations to present the currently required credit quality disclosures disaggregated by the year of origination or vintage. 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, and early adoption is permitted. We have formed a committee that has assessed our data needs and is in the process of implementing a system to comply with the new guidance. The committee has also selected a vendor to assist in generating loan level cash flows and disclosures.  We expect to recognize a one-time cumulative effect adjustment to the allowance for loan losses and a charge to equity as of the beginning of the first reporting period in which the new standard is effective, but cannot yet determine the magnitude of any such one-time adjustment or the overall impact of the new guidance on the consolidated financial statements.

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.

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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 512,261 and 227,409 stock options for the three months ended September 30, 2018 and 2017, and   505,686 and 140,659 for the nine months ended September 30, 2018 and 2017, 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				Nine Months Ended
	September 30,				September 30,
	2018		2017		2018		2017
		(Dollars in thousands, except per share amounts)
Net income	$	12,375	$	8,583	$	22,099	$	22,570
Weighted average common shares outstanding for basic
earnings per common share		43,230,016		38,152,633		41,132,043		38,060,224
Dilutive effect of stock options outstanding, using
the treasury stock method		501,354		428,665		551,001		504,910
Shares used in computing diluted earnings per common share		43,731,370		38,581,298		41,683,044		38,565,134
Basic earnings per share	$	0.29	$	0.22	$	0.54	$	0.59
Diluted earnings per share	$	0.28	$	0.22	$	0.53	$	0.59

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

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

	Three Months Ended September 30, 2018 and 2017
			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 July 1, 2018, net of taxes	$	(7,031)	$	359	$	(9,194)	$	(15,866)
Other comprehensive income (loss) before reclassification, net of taxes		(1,335)		—		(4)		(1,339)
Amounts reclassified from other comprehensive income (loss), net of taxes		—		(8)		40		32
Net current period other comprehensive income (loss), net of taxes		(1,335)		(8)		36		(1,307)
Ending balance September 30, 2018, net of taxes	$	(8,366)	$	351	$	(9,158)	$	(17,173)
Beginning balance July 1, 2017, net of taxes	$	877	$	321	$	(7,665)	$	(6,467)
Other comprehensive income (loss) before reclassification, net of taxes		312		—		(7)		305
Amounts reclassified from other comprehensive income (loss), net of taxes		—		(7)		29		22
Net current period other comprehensive income (loss), net of taxes		312		(7)		22		327
Ending balance September 30, 2017, net of taxes	$	1,189	$	314	$	(7,643)	$	(6,140)

Nine Months Ended September 30, 2018 and 2017
	Unamortized
	Unrealized

13

	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, 2018, net of taxes	$	(362)	$	375	$	(9,265)	$	(9,252)
Other comprehensive (loss) before reclassification, net of taxes		(7,817)		—		(13)		(7,830)
Amounts reclassified from other comprehensive (loss) income, net of taxes		(187)		(24)		120		(91)
Net current period other comprehensive (loss) income, net of taxes		(8,004)		(24)		107		(7,921)
Ending balance September 30, 2018, net of taxes	$	(8,366)	$	351	$	(9,158)	$	(17,173)
Beginning balance January 1, 2017, net of taxes	$	(540)	$	336	$	(7,710)	$	(7,914)
Other comprehensive income (loss) before reclassification, net of taxes		1,725		—		(22)		1,703
Amounts reclassified from other comprehensive income (loss), net of taxes		4		(22)		89		71
Net current period other comprehensive income (loss), net of taxes		1,729		(22)		67		1,774
Ending balance September 30, 2017, net of taxes	$	1,189	$	314	$	(7,643)	$	(6,140)

	Amounts Reclassified from
	AOCI(1)
	Three Months Ended
	September 30,				Affected Line Item Where
Details About AOCI Components	2018		2017		Net Income is Presented
	(Dollars in thousands)
Unrealized gains on available-for-sale securities
and I/O strips	$	—	$	—	Gain (loss) on sales of securities
		—		—	Income tax expense
		—		—	Net of tax
Amortization of unrealized gain on securities available-
for-sale that were reclassified to securities
held-to-maturity		11		12	Interest income on taxable securities
		(3)		(5)	Income tax expense
		8		7	Net of tax
Amortization of defined benefit pension plan items (1)
Prior transition obligation		16		18
Actuarial losses		(73)		(69)
		(57)		(51)	Salaries and employee benefits
		17		22	Income tax benefit
		(40)		(29)	Net of tax
Total reclassification for the year	$	(32)	$	(22)

(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)

14

	Nine Months Ended
Details About AOCI Components	2018		2017		Net Income is Presented
	(Dollars in thousands)
Unrealized gains on available-for-sale securities and I/O strips	$	266	$	(6)	Gain (loss) on sales of securities
		(79)		2	Income tax expense
		187		(4)	Net of tax
Amortization of unrealized gain on securities available-for-
sale that were reclassified to securities held-to-maturity		33		38	Interest income on taxable securities
		(9)		(16)	Income tax expense
		24		22	Net of tax
Amortization of defined benefit pension plan items (1)
Prior transition obligation		48		53
Actuarial losses		(219)		(207)
		(171)		(154)	Salaries and employee benefits
		51		65	Income tax benefit
		(120)		(89)	Net of tax
Total reclassification from AOCI for the year	$	91	$	(71)

(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.

4) Securities

The amortized cost and estimated fair value of securities at September 30, 2018 and December 31, 2017 were as follows:

			Gross		Gross		Estimated
	Amortized		Unrealized		Unrealized		Fair
September 30, 2018	Cost		Gains		(Losses)		Value
	(Dollars in thousands)
Securities available-for-sale:
Agency mortgage-backed securities	$	324,309	$	18	$	(12,662)	$	311,665
U.S. Government sponsored entities		7,419		—		(13)		7,406
Total	$	331,728	$	18	$	(12,675)	$	319,071
Securities held-to-maturity:
Agency mortgage-backed securities	$	288,594	$	—	$	(12,778)	$	275,816
Municipals - exempt from Federal tax		87,138		242		(3,498)		83,882
Total	$	375,732	$	242	$	(16,276)	$	359,698

			Gross		Gross		Estimated
	Amortized		Unrealized		Unrealized		Fair
December 31, 2017	Cost		Gains		(Losses)		Value
	(Dollars in thousands)
Securities available-for-sale:
Agency mortgage-backed securities	$	378,339	$	786	$	(4,392)	$	374,733
Trust preferred securities		15,000		2,119		—		17,119
Total	$	393,339	$	2,905	$	(4,392)	$	391,852
Securities held-to-maturity:
Agency mortgage-backed securities	$	309,616	$	6	$	(4,394)	$	305,228
Municipals - exempt from Federal tax		88,725		946		(607)		89,064
Total	$	398,341	$	952	$	(5,001)	$	394,292

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Securities with unrealized losses at September 30, 2018 and December 31, 2017, 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
September 30, 2018	Value		(Losses)		Value		(Losses)		Value		(Losses)
	(Dollars in thousands)
Securities available-for-sale:
Agency mortgage-backed securities	$	76,522	$	(2,290)	$	231,110	$	(10,372)	$	307,632	$	(12,662)
U.S. Government sponsored entities		7,405		(13)		—		—		7,405		(13)
Total	$	83,927	$	(2,303)	$	231,110	$	(10,372)	$	315,037	$	(12,675)
Securities held-to-maturity:
Agency mortgage-backed securities	$	71,766	$	(2,639)	$	203,293	$	(10,139)	$	275,059	$	(12,778)
Municipals - exempt from Federal tax		33,027		(996)		33,211		(2,502)		66,238		(3,498)
Total	$	104,793	$	(3,635)	$	236,504	$	(12,641)	$	341,297	$	(16,276)

	Less Than 12 Months				12 Months or More				Total
	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
December 31, 2017	Value		(Losses)		Value		(Losses)		Value		(Losses)
	(Dollars in thousands)
Securities available-for-sale:
Agency mortgage-backed securities	$	185,824	$	(1,623)	$	146,670	$	(2,769)	$	332,494	$	(4,392)
Total	$	185,824	$	(1,623)	$	146,670	$	(2,769)	$	332,494	$	(4,392)
Securities held-to-maturity:
Agency mortgage-backed securities	$	168,439	$	(1,368)	$	130,759	$	(3,026)	$	299,198	$	(4,394)
Municipals - exempt from Federal tax		18,159		(182)		19,240		(425)		37,399		(607)
Total	$	186,598	$	(1,550)	$	149,999	$	(3,451)	$	336,597	$	(5,001)

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 September 30, 2018, the Company held 495 securities (172  available-for-sale and 323 held‑to‑maturity), of which 428 had fair values below amortized cost. At September 30, 2018, there were $231,110,000 of agency mortgage-back securities available-for-sale, $203,293,000 of agency mortgage-backed securities held-to-maturity, and $33,211,000 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 $23,013,000 at September 30, 2018. 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 September 30, 2018.

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

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2018		2017		2018		2017
	(Dollars in thousands)				(Dollars in thousands)
Proceeds	$	—	$	—	$	94,291	$	6,536
Gross gains		—		—		1,243		—
Gross losses		—		—		(977)		(6)

The amortized cost and estimated fair values of securities as of September 30, 2018 are shown by contractual maturity below. The expected maturities will differ from contractual maturities if borrowers have the right to call or

16

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 one through five years	$	7,419	$	7,406
Agency mortgage-backed securities		324,309		311,665
Total	$	331,728	$	319,071

	Held-to-maturity
	Amortized		Estimated
	Cost		Fair Value
	(Dollars in thousands)
Due 3 months or less	$	503	$	503
Due after 3 months through one year		286		286
Due after one through five years		4,558		4,587
Due after five through ten years		23,713		23,417
Due after ten years		58,078		55,089
Agency mortgage-backed securities		288,594		275,816
Total	$	375,732	$	359,698

Securities with amortized cost of $44,595,000 and $110,874,000 as of  September 30, 2018 and December 31, 2017 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:

	September 30,		December 31,
	2018		2017
	(Dollars in thousands)
Loans held-for-investment:
Commercial	$	600,594	$	573,296
Real estate:
CRE		988,491		772,867
Land and construction		131,548		100,882
Home equity		116,657		79,176
Residential mortgages		52,441		44,561
Consumer		9,932		12,395
Loans		1,899,663		1,583,177
Deferred loan fees, net		(276)		(510)
Loans, net of deferred fees		1,899,387		1,582,667
Allowance for loan losses		(27,426)		(19,658)
Loans, net	$	1,871,961	$	1,563,009

At September 30, 2018, total net loans included in the table above include $43,311,000, $115,158,000 and $193,787,000, 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, 2017, total net loans included in the table above include $58,551,000, of the loans acquired in the Focus transaction that were not purchased credit impaired loans.

There was a ($425,000) credit to the provision for loan losses for the third quarter of 2018, compared to a provision for loan losses of $115,000 for the third quarter of 2017. The credit to the provision for loan losses for the third quarter of 2018 was primarily due to net recoveries of $1,187,000. For the nine months ended September 30, 2018, there was a $7,279,000 provision for loan losses compared to a $390,000 provision for loan losses for the nine months ended September 30, 2017. The increase in the provision for loan losses for the first nine months of 2018 compared to the first nine months of 2017 was primarily due to a single large lending relationship that was placed on nonaccrual during the second quarter of 2018.  At September 30, 2018, the recorded investment of this lending relationship was $21,764,000,

17

and the Company had a $7,000,000 specific loan loss reserve allocated for this lending relationship.  Additionally, subsequent to the end of the third quarter of 2018, the recorded investment of this lending relationship was reduced to $17,384,000.  Net recoveries totaled $1,187,000 for the third quarter of 2018, and $489,000 for the first nine months of 2018, compared to net recoveries of $236,000 for the third quarter of 2017, and net recoveries of $269,000 for the first nine months of 2017.

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

	Three Months Ended September 30, 2018
	Commercial		Real Estate		Consumer		Total
	(Dollars in thousands)
Beginning of period balance	$	17,522	$	9,020	$	122	$	26,664
Charge-offs		(719)		—		(25)		(744)
Recoveries		1,897		34		—		1,931
Net (charge-offs) recoveries		1,178		34		(25)		1,187
Provision (credit) for loan losses		(1,427)		1,022		(20)		(425)
End of period balance	$	17,273	$	10,076	$	77	$	27,426

	Three Months Ended September 30, 2017
	Commercial		Real Estate		Consumer		Total
	(Dollars in thousands)
Beginning of period balance	$	11,259	$	7,982	$	156	$	19,397
Charge-offs		(111)		—		—		(111)
Recoveries		281		66		—		347
Net recoveries		170		66		—		236
Provision (credit) for loan losses		(441)		592		(36)		115
End of period balance	$	10,988	$	8,640	$	120	$	19,748

	Nine Months Ended September 30, 2018
	Commercial		Real Estate		Consumer		Total
	(Dollars in thousands)
Beginning of period balance	$	10,608	$	8,950	$	100	$	19,658
Charge-offs		(1,835)		—		(25)		(1,860)
Recoveries		2,229		120		—		2,349
Net (charge-offs) recoveries		394		120		(25)		489
Provision for loan losses		6,271		1,006		2		7,279
End of period balance	$	17,273	$	10,076	$	77	$	27,426

	Nine Months Ended September 30, 2017
	Commercial		Real Estate		Consumer		Total
	(Dollars in thousands)
Beginning of period balance	$	10,656	$	8,327	$	106	$	19,089
Charge-offs		(2,179)		—		—		(2,179)
Recoveries		1,453		995		—		2,448
Net (charge-offs) recoveries		(726)		995		—		269
Provision (credit) for loan losses		1,058		(682)		14		390
End of period balance	$	10,988	$	8,640	$	120	$	19,748

18

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:

	September 30, 2018
	Commercial		Real Estate		Consumer		Total
	(Dollars in thousands)
Allowance for loan losses:
Ending allowance balance attributable to loans:
Individually evaluated for impairment	$	7,089	$	—	$	—	$	7,089
Collectively evaluated for impairment		10,184		10,076		77		20,337
Acquired with deteriorated credit quality		—		—		—		—
Total allowance balance	$	17,273	$	10,076	$	77	$	27,426
Loans:						—
Individually evaluated for impairment	$	18,843	$	6,206	$	—	$	25,049
Collectively evaluated for impairment		581,751		1,282,931		9,932		1,874,614
Acquired with deteriorated credit quality		—		—		—		—
Total loan balance	$	600,594	$	1,289,137	$	9,932	$	1,899,663

	December 31, 2017
	Commercial		Real Estate		Consumer		Total
	(Dollars in thousands)
Allowance for loan losses:
Ending allowance balance attributable to loans:
Individually evaluated for impairment	$	290	$	—	$	—	$	290
Collectively evaluated for impairment		10,318		8,950		100		19,368
Acquired with deteriorated credit quality		—		—		—		—
Total allowance balance	$	10,608	$	8,950	$	100	$	19,658
Loans:
Individually evaluated for impairment	$	1,775	$	998	$	1	$	2,774
Collectively evaluated for impairment		571,521		996,488		12,394		1,580,403
Acquired with deteriorated credit quality		—		—		—		—
Total loan balance	$	573,296	$	997,486	$	12,395	$	1,583,177

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The following table presents loans held-for-investment individually evaluated for impairment by class of loans as of September 30, 2018 and December 31, 2017. 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:

	September 30, 2018						December 31, 2017
					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	$	6,246	$	6,246	$	—	$	1,243	$	1,243	$	—
Real estate:
CRE		5,639		5,639		—		500		500		—
Land and construction		—		—		—		138		119		—
Home Equity		567		567		—		379		379		—
Consumer		—		—		—		1		1		—
Total with no related allowance recorded		12,452		12,452		—		2,261		2,242		—
With an allowance recorded:
Commercial		12,597		12,597		7,089		589		532		290
Total with an allowance recorded		12,597		12,597		7,089		589		532		290
Total	$	25,049	$	25,049	$	7,089	$	2,850	$	2,774	$	290

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

	Three Months Ended September 30, 2018
			Real Estate
					Land and		Home
	Commercial		CRE		Construction		Equity		Consumer		Total
	(Dollars in thousands)
Average of impaired loans during the period	$	19,638	$	5,720	$	—	$	572	$	—	$	25,930
Interest income during impairment	$	—	$	—	$	—	$	—	$	—	$	—
Cash-basis interest recognized	$	—	$	—	$	—	$	—	$	—	$	—

	Three Months Ended September 30, 2017
			Real Estate
					Land and		Home
	Commercial		CRE		Construction		Equity		Consumer		Total
	(Dollars in thousands)
Average of impaired loans during the period	$	2,010	$	501	$	641	$	394	$	1	$	3,547
Interest income during impairment	$	—	$	—	$	3	$	—	$	—	$	3
Cash-basis interest recognized	$	—	$	—	$	—	$	—	$	—	$	—

	Nine Months Ended September 30, 2018
			Real Estate
					Land and		Home
	Commercial		CRE		Construction		Equity		Consumer		Total
	(Dollars in thousands)
Average of impaired loans during the period	$	11,056	$	3,110	$	30	$	472	$	—	$	14,668
Interest income during impairment	$	—	$	—	$		$	—	$	—	$	—
Cash-basis interest recognized	$	—	$	—	$	—	$	—	$	—	$	—

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	Nine Months Ended September 30, 2017
			Real Estate
					Land and		Home
	Commercial		CRE		Construction		Equity		Consumer		Total
	(Dollars in thousands)
Average of impaired loans during the period	$	2,625	$	583	$	419	$	326	$	2	$	3,955
Interest income during impairment	$	—	$	—	$	3	$	—	$	—	$	3
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:

	September 30,				December 31,
	2018		2017		2017
	(Dollars in thousands)
Nonaccrual loans - held-for-investment	$	23,342	$	2,560	$	2,250
Restructured and loans over 90 days past due and still accruing		1,373		931		235
Total nonperforming loans		24,715		3,491		2,485
Other restructured loans		334		325		289
Total impaired loans	$	25,049	$	3,816	$	2,774

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

	September 30, 2018						December 31, 2017
				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	$	17,361	$	1,148	$	18,509	$	1,250	$	235	$	1,485
Real estate:
CRE		5,639		—		5,639		501		—		501
Land and construction		—		—		—		119		—		119
Home equity		342		225		567		379		—		379
Consumer		—		—		—		1		—		1
Total	$	23,342	$	1,373	$	24,715	$	2,250	$	235	$	2,485

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

	September 30, 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	$	6,430	$	2,098	$	1,456	$	9,984	$	590,610	$	600,594
Real estate:
CRE		—		—		—		—		988,491		988,491
Land and construction		—		—		—		—		131,548		131,548
Home equity		967		—		—		967		115,690		116,657
Residential mortgages		—		—		—		—		52,441		52,441
Consumer		—		—		—		—		9,932		9,932
Total	$	7,397	$	2,098	$	1,456	$	10,951	$	1,888,712	$	1,899,663

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	December 31, 2017
	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	$	4,288	$	1,224	$	589	$	6,101	$	567,195	$	573,296
Real estate:
CRE		—		—		500		500		772,367		772,867
Land and construction		—		—		119		119		100,763		100,882
Home equity		223		—		—		223		78,953		79,176
Residential mortgages		—		—		—		—		44,561		44,561
Consumer		—		—		—		—		12,395		12,395
Total	$	4,511	$	1,224	$	1,208	$	6,943	$	1,576,234	$	1,583,177

Past due loans 30 days or greater totaled $10,951,000 and $6,943,000 at September 30, 2018 and December 31, 2017, respectively, of which $617,000 and $1,410,000 were on nonaccrual, respectively. At September 30, 2018, there were also $22,725,000 of loans less than 30 days past due included in nonaccrual loans held-for-investment, which included $21,764,000 of loans related to a single lending relationship. At December 31, 2017, there were also $840,000 of 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 being 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.

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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 September 30, 2018 and December 31, 2017.

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

	September 30, 2018						December 31, 2017
	Nonclassified		Classified		Total		Nonclassified		Classified		Total
Commercial	$	577,325	$	23,269	$	600,594	$	554,913	$	18,383	$	573,296
Real estate:
CRE		982,852		5,639		988,491		766,988		5,879		772,867
Land and construction		131,548		—		131,548		100,763		119		100,882
Home equity		115,019		1,638		116,657		78,486		690		79,176
Residential mortgages		52,441		—		52,441		44,561		—		44,561
Consumer		9,932		—		9,932		12,394		1		12,395
Total	$	1,869,117	$	30,546	$	1,899,663	$	1,558,105	$	25,072	$	1,583,177

The increase in classified assets at September 30, 2018 was primarily due to seasonal advances on a line of credit associated with a single large lending relationship that was moved to classified loans in the fourth quarter of 2017, which totaled $21,764,000 at September 30, 2018, compared to $12,500,000 at December 31, 2017. 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 balance of troubled debt restructurings at September 30, 2018 was $676,000, which are all accrual loans. The balance of troubled debt restructurings at December 31, 2017 was $325,000, which included $16,000 of nonaccrual loans and $309,000 of accruing loans. Approximately $46,000 and $1,000 of specific reserves were established with respect to these loans as of September 30, 2018 and December 31, 2017.

The following table presents loans by class modified as troubled debt restructurings:

	During the Nine Months Ended
		September 30, 2018
				Pre-modification		Post-modification
		Number		Outstanding		Outstanding
		of		Recorded		Recorded
Troubled Debt Restructurings:		Contracts		Investment		Investment
	(Dollars in thousands)
Commercial		2	$	159	$	159
Home equity		1		225		225
Total		3	$	384	$	384

The following table presents loans by class modified as troubled debt restructurings:

	During the Three and Nine Months Ended
		September 30, 2017
				Pre-modification		Post-modification
		Number		Outstanding		Outstanding
		of		Recorded		Recorded
Troubled Debt Restructurings:		Contracts		Investment		Investment
	(Dollars in thousands)
Commercial		3	$	318	$	318
Total		3	$	318	$	318

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During the three months ended September 30, 2018, 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. The Company has committed to lend no additional amounts to customers with outstanding loans that are classified as troubled debt restructurings as of September 30, 2018.

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 nine months ended September 30, 2018 and 2017.

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 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		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.

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		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
Liabililities 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 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 will be 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:

25

	(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		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 avaiable-for-sale		64,144		(421)	(b)		63,723
Loans		196,694		18,783	(c)		215,477
Allowance for loan lossess		(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
Liabililities assumed:
Deposits	$	281,189	$	51	(g)		281,240
Other borrowings		62		—			62
Other liabilities		2,617		(188)	(h)		2,429
Total liabilities	$	283,868	$	(137)			283,731
Net assets acquired							23,011
Purchase price							47,280
Goodwill recorded in the merger						$	24,269

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 ofsset 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 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 will be 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.

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

(h)Represents the reversal of over accrued accounts payable.

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

The Company believes the merger provides the opportunity to combine three independent business banking franchises with similar philosophies and cultures into a combined $3.2 billion business bank based in San Jose, California. The pooling of the three banks’ resources and knowledge enhance our capabilities, operational efficiencies, and community outreach. The Company also believes the combined bank will be much better positioned to meet the needs of our customers, shareholders and the community.  The one-time pre-tax acquisition and integration costs of $16,000 and $5,452,000 for the three months and nine months ended September 30, 2018, respectively, were included in other noninterest expense. In addition, salaries and employee benefits included severance and retention expense of $183,000 and $3,576,000 for the three months and nine months ended September 30, 2018, respectively, related to the Tri-Valley and United American acquisitions.  Total severance, retention, acquisition and integration costs were $199,000 and $9,028,000 for the three months and nine months ended September 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.

Goodwill of $13,819,000 arising from the Tri-Valley acquisition and $24,269,000 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. Management’s preliminary valuation of the tangible and intangible assets acquired and liabilities assumed, which are based on assumptions that are subject to change, and the resulting allocation of the consideration paid for the allocation is reflected in the tables above. Prior to the end of the one-year measurement period for finalizing the consideration paid allocation, if information becomes available which would indicate adjustments are required to the allocation, such adjustments will be included in the allocation in the reporting period in which the adjustment amounts are determined. Loan valuations may be adjusted based on new information obtained by the Company in future periods that may reflect conditions or events that existed on the acquisition date. Deferred tax assets may be adjusted for purchase accounting adjustments on open areas such as loans or upon filing final “stub” period tax returns for April 6, 2018 for Tri-Valley, and May 4, 2018 for United American. The closing equity balance for Tri-Valley and United American are also subject to adjustments for invoices received after the close of the transaction that were attributable to their operations through closing.

7) Goodwill and Other Intangible Assets

Goodwill

At September 30, 2018, the carrying value of goodwill was $83,752,000, which included $13,045,000 of goodwill related to its acquisition of Bay View Funding, $32,619,000 from its acquisition of Focus, $13,819,000 from its acquisition of Tri-Valley and $24,269,000 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.

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The Company completed its annual goodwill impairment analysis as of November 30, 2017 with the assistance of an independent valuation firm.  No events or circumstances since the November 30, 2017 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 $469,000 at September 30, 2018.

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 $143,000 at September 30, 2018.

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 $2,576,000 and $1,995,000 at September 30, 2018 and December 31, 2017, respectively.

Other intangible assets acquired in the acquisition of Bay View Funding in November 2014 included: a below market value lease intangible asset of $109,000 (amortized over 3 years), customer relationship and brokered relationship intangible assets of $1,900,000, (amortized over the 10 year estimated useful lives), and a non-compete agreement intangible asset of $250,000 (amortized over 3 years). Accumulated amortization of the customer relationship and brokered relationship intangible assets was $743,000 and $601,000 at September 30, 2018 and December 31, 2017, respectively. The below market lease and non-compete agreement intangible assets were fully amortized at December 31, 2017.

Estimated amortization expense for 2018, 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)
2018	$	585	$	170	$	208	$	14	$	775	$	190	$	1,942
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
Thereafter		2,020		—		603		106		549		159		3,437
	$	5,723	$	660	$	1,768	$	210	$	4,292	$	1,299	$	13,952

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 September 30, 2018 and December 31, 2017.

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8) Income Taxes

Some items of income and expense are recognized in different years for tax purposes than when applying generally accepted accounting principles, leading 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.

On December 22, 2017, the Tax Cuts and Jobs Act (the “Tax Act”), was signed into law, which among other items reduces the federal corporate tax rate to 21% from 35%, effective January 1, 2018.

The Company had net deferred tax assets of $28,143,000, and $16,247,000, at September 30, 2018, and December 31, 2017, 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 September 30, 2018 and December 31, 2017 will be fully realized in future years.

The following table reflects the carry 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:

	September 30,		Decemebr 31,
	2018		2017
	(Dollars in thousands)
Low income housing investments	$	3,139	$	3,411
Future commitments	$	287	$	302

The Company expects future commitments of $15,000 to be paid in 2018, and $272,000 in 2019 through 2023.

For tax purposes, the Company had low income housing tax credits of $106,000 and $110,000 for the three months ended September 30, 2018 and September 30, 2017, respectively, and low income housing investment losses of $117,000 and $115,000, respectively.  For tax purposes, the Company had low income housing tax credits of $319,000 and $329,000 for the nine months ended September 30, 2018 and September 30, 2017, respectively, and low income housing investment losses of $351,000 and $345,000, respectively.  The Company recognized low income housing investment expense as a component of income tax expense.

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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				Nine Months Ended
	September 30,				September 30,
	2018		2017		2018		2017
	(Dollars in thousands)
Components of net periodic benefit cost:
Service cost	$	62	$	81	$	186	$	243
Interest cost		237		259		711		777
Amortization of net actuarial loss		73		69		219		207
Net periodic benefit cost	$	372	$	409	$	1,116	$	1,227

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:

	September 30,		December 31,
	2018		2017
	(Dollars in thousands)
Change in projected benefit obligation:
Projected benefit obligation at beginning of year	$	6,711	$	6,301
Interest cost		170		243
Actuarial loss		—		167
Projected benefit obligation at end of period	$	6,881	$	6,711

	September 30,		December 31,
	2018		2017
	(Dollars in thousands)
Net actuarial loss	$	2,569	$	2,453
Prior transition obligation		1,171		1,238
Accumulated other comprehensive loss	$	3,740	$	3,691

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2018		2017		2018		2017
	(Dollars in thousands)
Amortization of prior transition obligation	$	(16)	$	(18)	$	(48)	$	(53)
Interest cost		56		61		170		182
Net periodic benefit cost	$	40	$	43	$	122	$	129

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.

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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 September 30, 2018
Available-for-sale securities:
Agency mortgage-backed securities	$	311,665		—	$	311,665		—
U.S. Government sponsored entities		7,406		—		7,406		—
I/O strip receivables		863		—		863		—
Assets at December 31, 2017
Available-for-sale securities:
Agency mortgage-backed securities	$	374,733		—	$	374,733		—
Trust preferred securities		17,119		—		17,119		—
I/O strip receivables		968		—		968		—

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.

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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 September 30, 2018
Impaired loans - held-for-investment:
Commercial	$	5,508	—	—	$	5,508
	$	5,508	—	—	$	5,508
Assets at December 31, 2017
Impaired loans - held-for-investment:
Commercial	$	242	—	—	$	242
Real estate:
Land and construction		119	—	—		119
	$	361	—	—	$	361

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:

	September 30, 2018		December 31, 2017
	(Dollars in thousands)
Impaired loans held-for-investment:
Book value of impaired loans held-for-investment carried at fair value	$	12,597	$	651
Book value of impaired loans held-for-investment carried at cost		12,452		2,123
Total impaired loans held-for-investment	$	25,049	$	2,774
Impaired loans held-for-investment carried at fair value:
Book value of impaired loans held-for-investment carried at fair value	$	12,597	$	651
Specific valuation allowance		(7,089)		(290)
Impaired loans held-for-investment carried at fair value, net	$	5,508	$	361

Impaired loans held‑for‑investment which are measured primarily for impairment using the fair value of the collateral were $25,049,000 at September 30, 2018.  In addition, these loans had a specific valuation allowance of $7,089,000 at September 30, 2018. Impaired loans held‑for‑investment totaling $12,597,000 at September 30, 2018, were carried at fair value as a result of the aforementioned partial charge‑offs and specific valuation allowances at period‑end. The remaining $12,452,000 of impaired loans were carried at cost at September 30, 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 the first nine months of 2018 on impaired loans held‑for‑investment carried at fair value at September 30, 2018 resulted in an additional provision for loan losses of $7,042,000.

At September 30, 2018, there were no foreclosed assets.

Impaired loans held‑for‑investment were $2,774,000 at December 31, 2017. There were no partial charge‑offs at December 31, 2017.  In addition, these loans had a specific valuation allowance of $290,000 at December 31, 2017. Impaired loans held‑for‑investment totaling $651,000 at December 31, 2017 were carried at fair value as a result of the aforementioned partial charge‑offs and specific valuation allowances at year‑end. The remaining $2,123,000 of impaired loans were carried at cost at December 31, 2017, 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 2017 on impaired loans

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held‑for‑investment carried at fair value at December 31, 2017 resulted in an additional provision for loan losses of $254,000.

At December 31, 2017, 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:

	September 30, 2018
			Valuation	Unobservable	Range
	Fair Value		Techniques	Inputs	(Weighted Average)
	(Dollars in thousands)
Impaired loans - held-for-investment:
Commercial	$	5,508	Market Approach	Discount adjustment for differences between comparable sales	Less than 1 %

	December 31, 2017
			Valuation	Unobservable	Range
	Fair Value		Techniques	Inputs	(Weighted Average)
	(Dollars in thousands)
Impaired loans - held-for-investment:
Commercial	$	242	Market Approach	Discount adjustment for differences between comparable sales	Less than 1%
Real estate:
Land and construction		119	Market Approach	Discount adjustment for differences between comparable sales	Less than 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.

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The carrying amounts and estimated fair values of financial instruments at September 30, 2018 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	$	381,029	$	381,029	$	—	$	—	$	381,029
Securities available-for-sale		319,071		—		319,071		—		319,071
Securities held-to-maturity		375,732		—		359,698		—		359,698
Loans (including loans held-for-sale), net		1,878,305		—		6,344		1,840,231		1,846,575
FHLB stock, FRB stock, and other
investments		25,210		—		—		—		N/A
Accrued interest receivable		9,213		—		2,327		6,886		9,213
I/O strips receivables		863		—		863		—		863
Liabilities:
Time deposits	$	155,879	$	—	$	156,206	$	—	$	156,206
Other deposits		2,589,420		—		2,589,420		—		2,589,420
Subordinated debt		39,322		—		39,322		—		39,322
Accrued interest payable		1,026		—		1,026		—		1,026

The carrying amounts and estimated fair values of the Company’s financial instruments at December 31, 2017:

			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	$	316,222	$	316,222	$	—	$	—	$	316,222
Securities available-for-sale		391,852		—		391,852		—		391,852
Securities held-to-maturity		398,341		—		394,292		—		394,292
Loans (including loans held-for-sale), net		1,566,428		—		3,419		1,507,967		1,511,386
FHLB stock, FRB stock, and other
investments		17,911		—		—		—		N/A
Accrued interest receivable		7,985		—		2,423		5,562		7,985
I/O strips receivables		968		—		968		—		968
Liabilities:
Time deposits	$	194,561	$	—	$	194,844	$	—	$	194,844
Other deposits		2,288,428		—		2,288,428		—		2,288,428
Subordinated debt		39,183		—		40,384		—		40,384
Accrued interest payable		389		—		389		—		389

The methods and assumptions, not previously discussed, used to estimate the fair value of loans, including loans held-for-sale, are described as follows:

The fair value of loans held‑for‑sale is estimated based upon binding contracts and quotes from third parties resulting in a Level 2 classification.

The Company adopted ASU No. 2016-01, effective January 1, 2018. Adoption of the standard resulted in the use of an exit price rather than an entrance price to determine the fair value of loans, excluding loans held-for-sale, using discounted cash flow analyses as of September 30, 2018.  The discount rates used to determine fair value use interest rate spreads that reflect factors such as liquidity, credit, and nonperformance risk of the loans, resulting in a level 3 classification. 

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Fair values of loans, excluding loans held-for-sale, were estimated as follows as of December 31, 2017: For variable rate loans that reprice frequently and with no significant change in credit risk, fair values are based on carrying values resulting in a Level 3 classification. Fair values for other loans are estimated using discounted cash flow analyses, using interest rates currently being offered for loans with similar terms to borrowers of similar credit quality resulting in a Level 3 classification. The methods utilized to estimate the fair value of loans as of December 31, 2017 do not necessarily represent an exit price.

Impaired loans as of September 30, 2018 and December 31, 2017 are valued at the lower of cost or fair value as described previously.

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 nine months ended September 30, 2018, the Company granted 305,500 shares of nonqualified stock options and 97,818 shares of restricted stock. There were 1,186,800 shares available for the issuance of equity awards under the 2013 Plan as of September 30, 2018.

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, 2018	1,602,732	$	9.54
Granted	305,500	$	16.82
Exercised	(259,770)	$	9.62
Forfeited or expired	(84,079)	$	14.20
Outstanding at September 30, 2018	1,564,383	$	10.69	6.64	$	7,176,631
Vested or expected to vest	1,470,520			6.64	$	6,746,033
Exercisable at September 30, 2018	1,011,193			5.46	$	6,475,976

Information related to the equity plans for the periods indicated:

	Nine Months Ended
	September 30,
	2018		2017
Intrinsic value of options exercised	$	1,767,884	$	1,331,528
Cash received from option exercise	$	2,499,481	$	1,352,236
Tax benefit realized from option exercises	$	513,901	$	543,654
Weighted average fair value of options granted	$	3.07	$	2.66

As of September 30, 2018, there was $1,499,000 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 2.80 years.

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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:

	Nine Months Ended
	September 30,
	2018		2017
Expected life in months(1)	72		72
Volatility(1)	21	%	24	%
Weighted average risk-free interest rate(2)	2.87	%	1.94	%
Expected dividends(3)	2.62	%	2.78	%

(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, 2018	181,185	$	11.66
Granted	97,818	$	16.83
Vested	(67,015)	$	16.69
Forfeited or expired	(2,440)	$	12.65
Nonvested shares at September 30, 2018	209,548	$	11.04

As of September 30, 2018, there was $2,386,000 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 2.67 years.

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.

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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 September 30, 2018, 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 to be phased-in over four years beginning on January 1, 2016. The buffer was 0.625% of risk-weighted assets for 2016, 1.25% for 2017, and is 1.875% for 2018, and will be 2.5% for 2019 and thereafter. 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 September 30, 2018.

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 September 30, 2018 and December 31, 2017, 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 September 30, 2018, and December 31, 2017.

					Required For
					Capital
					Adequacy
					Purposes
	Actual				Under Basel III
	Amount		Ratio		Amount		Ratio (1)
	(Dollars in thousands)
As of September 30, 2018
Total Capital	$	334,152	14.4	%	$	228,973	9.875	%
(to risk-weighted assets)
Tier 1 Capital	$	266,654	11.5	%	$	182,599	7.875	%
(to risk-weighted assets)
Common Equity Tier 1 Capital	$	266,654	11.5	%	$	147,818	6.375	%
(to risk-weighted assets)
Tier 1 Capital	$	266,654	8.6	%	$	124,005	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.

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					Required For
					Capital
					Adequacy
					Purposes
	Actual				Under Basel III
	Amount		Ratio		Amount		Ratio (1)
		(Dollars in thousands)
As of December 31, 2017
Total Capital	$	288,754	14.4	%	$	185,338	9.250	%
(to risk-weighted assets)
Tier 1 Capital	$	229,258	11.4	%	$	145,265	7.250	%
(to risk-weighted assets)
Common Equity Tier 1 Capital	$	229,258	11.4	%	$	115,210	5.750	%
(to risk-weighted assets)
Tier 1 Capital	$	229,258	8.0	%	$	114,959	4.000	%
(to average assets)

(1) Includes 1.25% capital conservation buffer, effective January 1, 2017, 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 September 30, 2018, and December 31, 2017.

									Required For
									Capital
					To Be Well-Capitalized				Adequacy
					Under Basel III Regulatory				Purposes
	Actual				Requirements				Under Basel III
	Amount		Ratio		Amount		Ratio		Amount		Ratio (1)
	(Dollars in thousands)
As of September 30, 2018
Total Capital	$	310,636	13.4	%	$	231,696	10.0	%	$	228,800	9.875	%
(to risk-weighted assets)
Tier 1 Capital	$	282,460	12.2	%	$	185,357	8.0	%	$	182,461	7.875	%
(to risk-weighted assets)
Common Equity Tier 1 Capital	$	282,460	12.2	%	$	150,602	6.5	%	$	147,706	6.375	%
(to risk-weighted assets)
Tier 1 Capital	$	282,460	9.1	%	$	154,920	5.0	%	$	123,936	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.

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									Required For
									Capital
					To Be Well-Capitalized				Adequacy
					Under Basel III Regulatory				Purposes
	Actual				Requirements				Under Basel III
	Amount		Ratio		Amount		Ratio		Amount		Ratio (1)
		(Dollars in thousands)
As of December 31, 2017
Total Capital	$	265,102	13.2	%	$	200,274	10.0	%	$	185,253	9.250	%
(to risk-weighted assets)
Tier 1 Capital	$	244,790	12.2	%	$	160,219	8.0	%	$	145,198	7.250	%
(to risk-weighted assets)
Common Equity Tier 1 Capital	$	244,790	12.2	%	$	130,178	6.5	%	$	115,157	5.750	%
(to risk-weighted assets)
Tier 1 Capital	$	244,790	8.5	%	$	143,655	5.0	%	$	114,924	4.000	%
(to average assets)

(1) Includes 1.25% capital conservation buffer, effective January 1, 2017, except the Tier 1 Capital to average assets ratio.

The Subordinated Debt, net of unamortized issuance costs, totaled $39,322,000 at September 30, 2018, 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 September 30, 2018, HBC would not be required to obtain regulatory approval, and the amount available for cash dividends is $26,057,000. Similar restrictions applied to the amount and sum of loan advances and other transfers of funds from HBC to the parent company. During the third quarter of 2018, HBC distributed dividends of $5,000,000 for a total of $13,000,000 for the first nine months of 2018.

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. As stated in Note 1 Basis of Presentation, the implementation of the new standard did not have a material impact on the measurement or recognition of revenue; as such, a cumulative effect adjustment to opening retained earnings was not deemed necessary.  Results for reporting periods beginning after January 1, 2018 are presented under Topic 606, while prior period amounts were not adjusted and continue to be reported in accordance with our historic accounting under 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

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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 on Deposit Accounts

Service charges 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.

Interchange Revenue

Interchange revenue primarily consists of interchange fees, volume-related incentives and ATM charges. As the card-issuing bank, interchange fees represent our portion of discount fees paid by merchants for credit / debit card transactions processed through the interchange network. The levels and structure of interchange rates are set by the credit card companies and are based on cardholder purchase volumes. The Company earns interchange income as cardholder transactions occur and interchange fees are settled on a daily basis.  Since interchange fees are settled on a daily basis, the Company believes the application of Topic 606 to interchange fees would likely not lead to significantly different recognition and measurement outcomes when compared to our current accounting practice. In addition, the Company will continue to consider any constraint on the variability of consideration due to returns, refunds and chargebacks.  ATM charges consist of fees received from non-customers using a bank-owned ATM and fees received for customers using a nonbank-owned ATM. These fees are earned when these types of ATM transactions occur.

Merchant Services Revenue

Revenue from the Company’s merchant services business consists principally of transaction and account management fees charged to merchants for the electronic processing of transactions. These fees are net of interchange fees paid to the credit card issuing bank, card company assessments, and revenue sharing amounts.

Based on the insignificant level of merchant services revenue, the Company has concluded that the application of Topic 606 to merchant services account management fees would likely not lead to significantly different recognition and measurement outcomes when compared to our current accounting practice. As a result, revenue from account management fees will continue to be recognized by the Company at the end of each month since the end of this measurement period allows us to reliably measure our progress towards completion of our performance obligation.

Other

Noninterest miscellaneous fees consist of charges for various other services including safe deposit box rentals, wire transfers, check cashing, telephone transfers, and online business banking. Given the insignificance of these amounts individually and in total, further consideration of these revenue streams under Topic 606 is not considered necessary.

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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
	September 30,
	2018		2017
	(Dollars in thousands)
Noninterest Income In-scope of Topic 606:
Service charges and fees on deposit accounts	$	551	$	510
Interchange fees		83		75
Merchant services revenue		39		44
Other		179		166
Total noninterest income in-scope of Topic 606		852		795
Noninterest Income Out-of-scope of Topic 606		1,354		1,665
Total noninterest income	$	2,206	$	2,460

	Nine Months Ended
	September 30,
	2018		2017
	(Dollars in thousands)
Noninterest Income In-scope of Topic 606:
Service charges and fees on deposit accounts	$	1,524	$	1,449
Interchange fees		239		208
Merchant services revenue		122		129
Other		479		498
Total noninterest income in-scope of Topic 606		2,364		2,284
Noninterest Income Out-of-scope of Topic 606		4,817		4,764
Total noninterest income	$	7,181	$	7,048

16) Noninterest Expense

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

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2018		2017		2018		2017
	(Dollars in thousands)
Salaries and employee benefits (1)	$	10,719	$	9,071	$	35,302	$	27,766
Occupancy and equipment		1,559		1,142		3,927		3,426
Professional fees		721		695		1,116		2,439
Amortization of intangible assets		631		296		1,336		1,083
Software subscriptions		555		475		1,747		1,333
Data processing		525		411		1,501		1,080
Insurance expense		430		401		1,236		1,123
Acquisition and integration related costs		16		—		5,452		—
Other		2,572		2,343		6,963		7,166
Total	$	17,728	$	14,834	$	58,580	$	45,416

(1) Includes severance and retention retention expense related to the Tri-Valley and United American acquistions of $183,000 and $3,576,000 for third quarter of 2018 and the first nine months of 2018, respectively

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17) 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 September 30, 2018
	Banking(1)		Factoring		Consolidated
	(Dollars in thousands)
Interest income	$	30,425		4,185	$	34,610
Intersegment interest allocations		601		(601)		—
Total interest expense		2,159		—		2,159
Net interest income		28,867		3,584		32,451
Provision (credit) for loan losses		(671)		246		(425)
Net interest income after provision		29,538		3,338		32,876
Noninterest income		2,011		195		2,206
Noninterest expense (2)		16,045		1,683		17,728
Intersegment expense allocations		172		(172)		—
Income before income taxes		15,676		1,678		17,354
Income tax (benefit) expense		4,483		496		4,979
Net income	$	11,193	$	1,182	$	12,375
Total assets	$	3,107,897	$	85,013	$	3,192,910
Loans, net of deferred fees	$	1,828,379	$	71,008	$	1,899,387
Goodwill	$	70,708	$	13,044	$	83,752

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

(2) The banking segment’s noninterest expense includes acquisition cost of $199,000

	Three Months Ended September 30, 2017
	Banking(1)		Factoring		Consolidated
	(Dollars in thousands)
Interest income	$	24,805	$	3,150	$	27,955
Intersegment interest allocations		284		(284)		—
Total interest expense		1,634		—		1,634
Net interest income		23,455		2,866		26,321
Provision for loan losses		107		8		115
Net interest income after provision		23,348		2,858		26,206
Noninterest income		2,101		359		2,460
Noninterest expense		13,149		1,685		14,834
Intersegment expense allocations		130		(130)		—
Income before income taxes		12,430		1,402		13,832
Income tax expense		4,660		589		5,249
Net income	$	7,770	$	813	$	8,583
Total assets	$	2,776,262	$	67,686	$	2,843,948
Loans, net of deferred fees	$	1,517,186	$	48,764	$	1,565,950
Goodwill	$	32,620	$	13,044	$	45,664

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

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	Nine Months Ended September 30, 2018
	Banking(1)		Factoring		Consolidated
	(Dollars in thousands)
Interest income	$	83,781	$	10,686	$	94,467
Intersegment interest allocations		1,304		(1,304)		—
Total interest expense		5,504		—		5,504
Net interest income		79,581		9,382		88,963
Provision for loan losses		6,958		321		7,279
Net interest income after provision		72,623		9,061		81,684
Noninterest income		6,628		553		7,181
Noninterest expense (2)		53,813		4,767		58,580
Intersegment expense allocations		574		(574)		—
Income before income taxes		26,012		4,273		30,285
Income tax expense		6,923		1,263		8,186
Net income	$	19,089	$	3,010	$	22,099
Total assets	$	3,107,897		85,013	$	3,192,910
Loans, net of deferred fees	$	1,828,379		71,008	$	1,899,387
Goodwill	$	70,708		13,044	$	83,752

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

(2) The banking segment’s noninterest expense includes acquisition costs of $9,028,000

	Nine Months Ended September 30, 2017
	Banking(1)		Factoring		Consolidated
	(Dollars in thousands)
Interest income	$	70,146	$	8,613	$	78,759
Intersegment interest allocations		786		(786)		—
Total interest expense		3,679		—		3,679
Net interest income		67,253		7,827		75,080
Provision for loan losses		372		18		390
Net interest income after provision		66,881		7,809		74,690
Noninterest income		6,153		895		7,048
Noninterest expense		40,152		5,264		45,416
Intersegment expense allocations		392		(392)		—
Income before income taxes		33,274		3,048		36,322
Income tax expense		12,472		1,280		13,752
Net income	$	20,802	$	1,768	$	22,570
Total assets	$	2,776,262	$	67,686	$	2,843,948
Loans, net of deferred fees	$	1,517,186	$	48,764	$	1,565,950
Goodwill	$	32,620	$	13,044	$	45,664

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

18) Subsequent Events

On October 25, 2018, the Company announced that its Board of Directors declared a $0.11 per share quarterly cash dividend to holders of common stock. The dividend will be paid on November 20, 2018 to shareholders of record on November 6, 2018.

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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, 2017. There are no changes to these policies as of September 30, 2018.

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 southern and eastern regions of 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 September 30, 2018, net income was $12.4 million, or $0.28 per average diluted common share, compared to $8.6 million, or $0.22 per average diluted common share, for the three months ended September 30, 2017. The Company’s annualized return on average tangible assets was 1.54% and annualized return on average tangible equity was 19.36% for the three months ended September 30, 2018, compared to 1.22% and 15.41%, respectively, for the three months ended September 30, 2017.

For the nine months ended September 30, 2018, net income was $22.1 million, or $0.53 per average diluted common share, compared to $22.6 million, or $0.59 per average diluted common share, for the nine months ended September 30, 2017. The Company’s annualized return on average tangible assets was 1.01% and annualized return on average tangible equity was 12.33% for the nine months ended September 30, 2018 compared to 1.14% and 14.11%, respectively, for the nine months ended September 30, 2017.

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 have been 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.

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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 have been 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. 

Tri-Valley added $115.2 million in loans, at fair value, and $91.4 million in deposits, at fair value, at September 30, 2018.  United American added $208.8 million in loans, at fair value, and $266.6 million in deposits, at fair value, at September 30, 2018.  Severance, retention, acquisition, and integration costs related to the two mergers totaled $199,000 for the third quarter of 2018, and $9.0 million for the first nine months of 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:

	September 30,		September 30,
	2018		2017
	(Dollars in thousands)
Total factored receivables	$	71,008	$	48,764
Average factored receivables
For the three months ended	$	69,740	$	45,323
for the nine months ended	$	57,096	$	44,097
Total full time equivalent employees		37		40

Third Quarter 2018 Highlights

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

· Net interest income, before provision for loan losses, increased 23% to $32.5 million for the third quarter of 2018, compared to $26.3 million for the third quarter of 2017. For the first nine months of 2018, net interest income increased 18% to $89.0 million, compared to $75.1 million for the first nine months of 2017.  Net interest income increased for the third quarter of 2018 and the first nine months of 2018, compared to the respective periods in 2017, primarily due to the impact of the increase in loans and deposits from the Tri-Valley and United American acquisitions, in addition to organic loan growth and the positive impact of rising interest rates.

· For the third quarter of 2018, the fully tax equivalent (“FTE”) net interest margin increased 38 basis points to 4.36% from 3.98% for the third quarter of 2017.  The improvement was primarily due to a higher average balance of loans, an increase in the accretion of the loan purchase discount into loan interest income from the Tri-Valley and the United American acquisitions in the second quarter of 2018, the impact of increases in the prime rate, and the rate on overnight funds.

· For the first nine months of 2018, the net interest margin increased 24 basis points to 4.27%, compared to 4.03% for the first nine months of 2017, primarily due to a higher average balance of loans and securities, an increase in the accretion of the loan purchase discount into loan interest income from the acquisitions, the impact of increases in the prime rate, and the rate on overnight funds.

· The average yield on the loan portfolio increased to 5.92% for the third quarter of 2018, compared to 5.72% for the third quarter of 2017, primarily due to an increase in the accretion of the loan purchase discount into loan interest income from the acquisitions, and increases in the prime rate.  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 10 basis points for the third quarter of 2018, compared to the third quarter of 2017.

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The average yield on the purchased residential loans was 2.68% for the third quarter of 2018, compared to 2.67% for the third quarter of 2017. The average yield on the purchased CRE loans was 3.24% for the third quarter of 2018, compared to 3.52% the third quarter of 2017.

· The yield on the loan portfolio increased to 5.82% for the first nine months of 2018, compared to 5.63% for the first nine months of 2017, primarily due to an increase in accretion of the loan purchase discount into loan interest income from the acquisitions and increases in the prime rate.  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 9 basis points for the first nine months of 2018, compared to the first nine months of 2017.  The yield on the purchased residential loans was 2.71% for the first nine months of 2018, compared to 2.67% for the first nine months of 2017.  The yield on the purchased CRE loans was 3.45% for the first nine months of 2018, compared to 3.51% for the first nine months of 2017.

· The accretion of the loan purchase discount into loan interest income from the three acquisitions was $506,000 for the third quarter of 2018, compared to $270,000 for the third quarter of 2017.  The accretion of the loan purchase discount into loan interest income from the three acquisitions was $1.2 million for the first nine months of 2018, compared to $741,000 for the first nine months of 2017.  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 $790,000 remains outstanding as of September 30, 2018.  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 $2.4 million remains outstanding as of September 30, 2018.  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 $4.0 million remains outstanding as of September 30, 2018.

· There was a ($425,000) credit to the provision for loan losses for the third quarter of 2018, compared to a $115,000 provision for loan losses for the third quarter of 2017. The credit to the provision for loan losses for the third quarter of 2018 was primarily due to net recoveries of $1.2 million. For the nine months ended September 30, 2018, there was a $7.3 million provision for loan losses, compared to a $390,000 provision for loan loan losses for the nine months ended September 30, 2017.  The increase in the provision for loan losses for the first nine months of 2018 compared to the first nine months of 2017 was primarily due to a single large lending relationship that was placed on nonaccrual during the second quarter of 2018.

· Total noninterest income was $2.2 million for the third quarter of 2018, compared to $2.5 million for the third quarter of 2017. For the nine months ended September 30, 2018, total noninterest income was $7.2 million, compared to $7.0 million for the nine months ended September 30, 2017. The increase in noninterest income for first nine months of 2018, compared to the first nine months of 2017, was primarily due to proceeds from a legal settlement during the second quarter of 2018, higher service charges and fees on deposit accounts and gain on sales of securities for the first nine months of 2018, partially offset by a lower increase in cash surrender value of life insurance proceeds, servicing income, and gain on sale of SBA loans for the first nine months of 2018.  The first nine months of 2017 also included a higher fee income from Bay View Funding compared to the first nine months of 2018, which was included in other noninterest income. 

· Total noninterest expense for the third quarter of 2018 was $17.7 million, compared to $14.8 million for the third quarter of 2017.  Noninterest expense for the nine months ended September 30, 2018 was $58.6 million, compared to $45.4 million for the nine months ended September 30, 2017. The increase in noninterest expense in the first nine months of 2018, compared to first nine months of 2017, was primarily due to costs related to the merger transactions and higher salaries and employee benefits as a result of annual salary increases, and additional operating costs of Tri-Valley and United American, partially offset by lower professional fees.

· The efficiency ratio for the third quarter of 2018 was 51.15%, compared to 51.54% for the third quarter of 2017. The efficiency ratio for the nine months ended September 30, 2018 was 60.93%, compared to 55.30% for the nine months ended September 30, 2017.

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· The income tax expense for the third quarter of 2018 was $5.0 million, compared income tax expense of $5.2 million for the third quarter of 2017.  The effective tax rate for the third quarter of 2018 decreased to 28.7%, compared to 37.9% for the third quarter of 2017, primarily due to a lower federal corporate tax rate for the third quarter of 2018.  On December 22, 2017 the Tax Cuts and Jobs Act (the “Tax Act”), was signed into law, which among other items reduced the federal corporate tax rate to 21% from 35%, effective January 1, 2018.  Income tax expense for the nine months ended September 30, 2018 was $8.2 million, compared to $13.8 million for the nine months ended September 30, 2017. The effective tax rate for the nine months ended September 30, 2018 was 27.0%, compared to 37.9% for the nine months ended September 30, 2017.

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,  decreased (5%) to $700.1 million at September 30, 2018, from $736.2 million at September 30, 2017, and decreased (1%) from $708.1 million at December 31, 2017.

· At September 30, 2018, securities held‑to‑maturity, at amortized cost, totaled $375.7 million, compared to $379.5 million at September 30, 2017, and $398.3 million at December 31, 2017.

· Loans, excluding loans held-for-sale, increased $333.4 million, or 21%, to $1.90 billion at September 30, 2018, compared to $1.57 billion at September 30, 2017, which included $208.8 million in loans from United American, $115.2 million in loans from Tri-Valley, and an increase of $20.3 million, or 1% in the Company’s legacy portfolio, partially offset by a decrease of $7.5 million in purchased residential mortgage loans, and a decrease of $3.4 million of purchased CRE loans. Loans increased $316.7 million, or 20%, to $1.90 billion at September 30, 2018, compared to $1.58 billion at December 31, 2017, which included $208.8 million in loans from United American, $115.2 million in loans from Tri-Valley, and an increase of $1.4 million in the Company’s legacy portfolio, and partially offset by a decrease of $5.6 million in purchased residential mortgage loans, and $3.1 million in purchased CRE loans. 

· Nonperforming assets (“NPAs”) increased to $24.7 million, or 0.77% of total assets, at September 30, 2018, compared to $3.5 million, or 0.12% of total assets, at September 30, 2017, and $2.5 million, or 0.09% of total assets, at December 31, 2017, primarily due to a single large lending relationship that was placed on nonaccrual during the second quarter of 2018.  

· Classified assets increased to $30.5 million, at September 30, 2018, compared to $10.9 million, at September 30, 2017, primarily due to a single large lending relationship that was moved to classified assets during the fourth quarter of 2017.  Classified assets were $25.1 million at December 31, 2017. There were no foreclosed assets at September 30, 2018, September 30, 2017, and December 31, 2017.

· Net recoveries totaled $1.2 million for the third quarter of 2018, compared to net recoveries of $236,000 for the third quarter of 2017, and net recoveries of $201,000 for the fourth quarter of 2017.

· The allowance for loan losses (“ALLL”) at September 30, 2018 was $27.4 million, or 1.44% of total loans, representing 110.97% of total nonperforming loans. The allowance for loan losses at September 30, 2017 was $19.7 million, or 1.26% of total loans, representing 565.68% of total nonperforming loans. The allowance for loan losses at December 31, 2017 was $19.7 million, or 1.24% of total loans, representing 791.07% of total nonperforming loans. The ALLL to total nonperforming loans decreased at September 30, 2018, compared to September 30, 2017 and December 31, 2017, primarily due to a single large lending relationship that was placed on nonaccrual during the second quarter of 2018.

· Total deposits increased $264.7 million, or 11%, to $2.75 billion at September 30, 2018, compared to $2.48 billion at September 30, 2017, which included $266.6 million, at fair value, in deposits from United American, $91.4 million, at fair value, in deposits from Tri-Valley, partially offset by decrease of $28.2 million, or (1%), in the Company’s legacy deposits.  Total deposits increased $262.3 million or 11% from $2.48 billion at December 31, 2017, which included $266.6 million, at fair value, in deposits from United American, $91.4 million, at fair value, in deposits from Tri-Valley, partially offset by the maturity of $65.1

47

million State of California certificates of deposits, and a decrease of $30.6 million in the Company’s legacy deposits. 

· Deposits, excluding all time deposits and CDARS deposits, increased $318.1 million, or 14%, to $2.58 billion at September 30, 2018, compared to $2.26 billion at September 30, 2017, which included $231.9 million of deposits added from United American, $83.0 million of deposits added from Tri-Valley, and an increase of $3.1 million in the Company’s legacy deposits.  Deposits, excluding all time deposits and CDARS deposits, increased $305.0 million, or 13%, compared to $2.28 billion at December 31, 2017, which included $231.9 million of deposits added from United American, $83.0 million of deposits added from Tri-Valley, partially offset by a decrease of $10.0 million, in the Company’s legacy deposits.

· 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 4.25% at September 30, 2018, compared to 7.16% at September 30, 2017, and 6.85% at December 31, 2017.

· The loan to deposit ratio was 69.19% at September 30, 2018, compared to 63.13% at September 30, 2017, and 63.74% at December 31, 2017.

· 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 September 30, 2018.

										Fully Phased-in
							Well-capitalized			Basel III Minimum
	Heritage			Heritage			Financial Institution			Requirement(1)
	Commerce			Bank of			Basel III Regulatory			Effective
Capital Ratios	Corp			Commerce			Guidelines			January 1, 2019
Total Risk-Based		14.4	%		13.4	%		10.0	%		10.5	%
Tier 1 Risk-Based		11.5	%		12.2	%		8.0	%		8.5	%
Common Equity Tier 1 Risk-based		11.5	%		12.2	%		6.5	%		7.0	%
Leverage		8.6	%		9.1	%		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.

Total deposits increased $264.7 million, or 11%, to $2.75 billion at September 30, 2018, compared to $2.48 billion at September 30, 2017, which included $266.6 million, at fair value, in deposits from United American, $91.4 million, at fair value, in deposits from Tri-Valley, partially offset by decrease of $28.2 million, or (1%), in the Company’s legacy deposits balances.  Total deposits increased $262.3 million or 11% from $2.48 billion at December 31, 2017, which included $266.6 million in deposits from United American, $91.4 million in deposits from Tri-Valley, partially offset by the maturity of $65.1 million State of California certificates of deposits, and a decrease of $30.6 million in the Company’s legacy deposits. 

Deposits, excluding all time deposits and CDARS deposits, increased $318.1 million, or 14%, to $2.58 billion at September 30, 2018, compared to $2.26 billion at September 30, 2017, which included $231.9 million of deposits added

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from United American, $83.0 million of deposits added from Tri-Valley, and an increase of $3.1 million in the Company’s legacy deposits.  Deposits, excluding all time deposits and CDARS deposits, increased $305.0 million, or 13%, compared to $2.28 billion at December 31, 2017, which included $231.9 million of deposits added from United American, $83.0 million of deposits added from Tri-Valley, partially offset by a decrease of $10.0 million, in the Company’s legacy deposits.

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 September 30, 2018, we had $381.0 million in cash and cash equivalents and approximately $635.9 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 $636.6 million at fair value in unpledged securities available at September 30, 2018. Our loan to deposit ratio was 69.19% at September 30, 2018, compared to 63.13% at September 30, 2017, and 63.74% at December 31, 2017.

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, increased $333.4 million, or 21%, to $1.90 billion at September 30, 2018, compared to $1.57 billion at September 30, 2017, which included $208.8 million in loans from United American, $115.2 million in loans from Tri-Valley, and an increase of $20.3 million, or 1% in the Company’s legacy portfolio, partially offset by a decrease of $7.5 million in purchased residential mortgage loans, and a decrease of $3.4 million of purchased CRE loans. Loans increased $316.7 million, or 20%, to $1.90 billion at September 30, 2018, compared to $1.58 billion at December 31, 2017, which included $208.8 million in loans from United American, $115.2 million in loans from Tri-Valley, and an increase of $1.4 million, or 1%, in the Company’s legacy portfolio, partially offset by a decrease of $5.6 million in purchased residential mortgage loans, and $3.1 million in purchased CRE loans.  The loan portfolio remains well-diversified with commercial and industrial (“C&I”) loans accounting for 31% of the loan portfolio at September 30, 2018, which included $71.0 million of factored receivables. CRE loans accounted for 52% of the total loan portfolio, of which 39% were occupied by businesses that own them.  Land and construction loans accounted for 7% 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 September 30, 2018.  

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 23% to $32.5 million for the third quarter of 2018, compared to $26.3 million for the third quarter of 2017. For the first nine months of 2018, net interest income increased 18% to $89.0 million, compared to $75.1 million for the first nine months of 2017.  Net interest income increased for the first nine months of 2018, compared to the first nine months of 2017, primarily due to the impact of the increase in loans and deposits from the Tri-Valley and United American acquisitions, in addition to organic loan growth 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.

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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 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.  Management is currently evaluating the impact of adopting CECL, which becomes effective for the Company on January 1, 2020.  The effect of the adoption of CECL is currently unknown and could result in an increase to the allowance for loan losses and a charge to equity.  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 third quarter of 2018 was $17.7 million, compared to $14.8 million for the third quarter of 2017. Noninterest expense for the nine months ended September 30, 2018 was $58.5 million, compared to $45.4 million for the nine months ended September 30, 2017. The increase in noninterest expense in the first nine months of 2018, compared to first nine months of 2017, was primarily due to costs related to the merger transactions and higher salaries and employee benefits as a result of annual salary increases, and additional operating costs of Tri-Valley and United American, partially offset by lower professional fees.

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.

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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.

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Distribution, Rate and Yield

	Three Months Ended						Three Months Ended
	September 30, 2018						September 30, 2017
			Interest		Average				Interest		Average
	Average		Income /		Yield /		Average		Income /		Yield /
	Balance		Expense		Rate		Balance		Expense		Rate
	(Dollars in thousands)
Assets:
Loans, gross (1)(2)	$	1,918,791		28,632	5.92	%	$	1,560,421		22,507	5.72	%
Securities — taxable		624,352		3,483	2.21	%		671,528		3,596	2.12	%
Securities — exempt from Federal tax (3)		87,410		702	3.19	%		89,426		866	3.84	%
Other investments, interest-bearing deposits
in other financial institutions and Federal funds sold		335,373		1,940	2.29	%		335,706		1,289	1.52	%
Total interest earning assets (3)		2,965,926		34,757	4.65	%		2,657,081		28,258	4.22	%
Cash and due from banks		40,704						35,173
Premises and equipment, net		7,320						7,609
Goodwill and other intangible assets		96,436						51,715
Other assets		82,753						85,229
Total assets	$	3,193,139					$	2,836,807
Liabilities and shareholders’ equity:
Deposits:
Demand, noninterest-bearing	$	1,071,638					$	980,554
Demand, interest-bearing		682,694		551	0.32	%		583,363		290	0.20	%
Savings and money market		823,762		761	0.37	%		686,511		429	0.25	%
Time deposits — under $100		23,699		23	0.39	%		19,770		14	0.28	%
Time deposits — $100 and over		131,262		237	0.72	%		181,167		317	0.69	%
CDARS — interest-bearing demand, money
market and time deposits		15,971		3	0.07	%		18,650		1	0.02	%
Total interest-bearing deposits		1,677,388		1,575	0.37	%		1,489,461		1,051	0.28	%
Total deposits		2,749,026		1,575	0.23	%		2,470,015		1,051	0.17	%
Subordinated debt, net of issuance costs		39,292		583	5.89	%		39,120		583	5.91	%
Short-term borrowings		133		1	2.98	%		84		—	0.00	%
Total interest-bearing liabilities		1,716,813		2,159	0.50	%		1,528,665		1,634	0.42	%
Total interest-bearing liabilities and demand,
noninterest-bearing / cost of funds		2,788,451		2,159	0.31	%		2,509,219		1,634	0.26	%
Other liabilities		54,717						54,922
Total liabilities		2,843,168						2,564,141
Shareholders’ equity		349,971						272,666
Total liabilities and shareholders’ equity	$	3,193,139					$	2,836,807
Net interest income (3) / margin				32,598	4.36	%				26,624	3.98	%
Less tax equivalent adjustment (3)				(147)						(303)
Net interest income			$	32,451					$	26,321

(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 (amortization) of deferred loan fees (costs) into loan interest income was $73,000 for the third quarter of 2018, compared to $200,000 for the third quarter of 2017.

(3) Reflects tax equivalent adjustment for Federal tax exempt income based on a 21% tax rate for the third quarter of 2018, and a 35% tax rate for the third quarter of 2017.

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	Nine Months Ended						Nine Months Ended
	September 30, 2018						September 30, 2017
			Interest		Average				Interest		Average
	Average		Income /		Yield /		Average		Income /		Yield /
	Balance		Expense		Rate		Balance		Expense		Rate
Assets:
Loans, gross (1)(2)	$	1,776,546		77,272	5.82	%	$	1,521,447	$	64,112	5.63	%
Securities — taxable		662,274		11,112	2.24	%		616,648		9,916	2.15	%
Securities — exempt from Federal tax (3)		87,990		2,120	3.22	%		89,991		2,606	3.87	%
Other investments, interest-bearing deposits
in other financial institutions and Federal funds sold		271,757		4,408	2.17	%		291,222		3,037	1.39	%
Total interest earning assets (3)		2,798,567		94,912	4.53	%		2,519,308		79,671	4.23	%
Cash and due from banks		37,890						33,656
Premises and equipment, net		7,330						7,581
Goodwill and other intangible assets		77,777						52,103
Other assets		82,666						85,901
Total assets	$	3,004,230					$	2,698,549
Liabilities and shareholders’ equity:
Deposits:
Demand, noninterest-bearing	$	1,003,590					$	924,841
Demand, interest-bearing		651,445		1,319	0.27	%		574,966		880	0.20	%
Savings and money market		769,448		1,823	0.32	%		632,907		1,081	0.23	%
Time deposits — under $100		21,235		58	0.37	%		20,141		44	0.29	%
Time deposits — $100 and over		131,436		564	0.57	%		191,301		859	0.60	%
CDARS — interest-bearing demand, money
market and time deposits		16,086		8	0.07	%		13,061		3	0.03	%
Total interest-bearing deposits		1,589,650		3,772	0.32	%		1,432,376		2,867	0.27	%
Total deposits		2,593,240		3,772	0.19	%		2,357,217		2,867	0.16	%
Subordinated debt, net of issuance costs		39,246		1,731	5.90	%		17,912		811	6.05	%
Short-term borrowings		76		1	1.76	%		68		1	1.97	%
Total interest-bearing liabilities		1,628,972		5,504	0.45	%		1,450,356		3,679	0.34	%
Total interest-bearing liabilities and demand,
noninterest-bearing / cost of funds		2,632,562		5,504	0.28	%		2,375,197		3,679	0.21	%
Other liabilities		54,204						57,377
Total liabilities		2,686,766						2,432,574
Shareholders’ equity		317,464						265,975
Total liabilities and shareholders’ equity	$	3,004,230					$	2,698,549
Net interest income (3) / margin				89,408	4.27	%				75,992	4.03	%
Less tax equivalent adjustment (3)				(445)						(912)
Net interest income			$	88,963					$	75,080

(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 (amortization) of deferred loan fees (costs) into loan interest income was $322,000 for the nine months ended September 30, 2018, compared to $370,000 for the nine months ended September 30, 2017.

(3) Reflects tax equivalent adjustment for Federal tax exempt income based on a 21% tax rate for 2018, and a 35% tax rate for 2017.

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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 September 30,
	2018 vs. 2017
	Increase (Decrease)
	Due to Change in:
	Average		Average		Net
	Volume		Rate		Change
	(Dollars in thousands)
Income from the interest earning assets:
Loans, gross	$	5,348	$	777	$	6,125
Securities — taxable		(258)		145		(113)
Securities — exempt from Federal tax (1)		(17)		(147)		(164)
Other investments, interest-bearing deposits
in other financial institutions and Federal funds sold		2		649		651
Total interest income on interest earning assets (1)		5,075		1,424		6,499
Expense from the interest-bearing liabilities:
Demand, interest-bearing		80		181		261
Savings and money market		121		211		332
Time deposits — under $100		4		5		9
Time deposits — $100 and over		(92)		12		(80)
CDARS — interest-bearing demand, money market and time deposits		—		2		2
Subordinated debt, net of issuance costs		2		(2)		—
Short-term borrowings		1		—		1
Total interest expense on interest-bearing liabilities		116		409		525
Net interest income (1)	$	4,959	$	1,015		5,974
Less tax equivalent adjustment (1)						156
Net interest income					$	6,130

(1) Reflects tax equivalent adjustment for Federal tax exempt income based on a 21% tax rate for the third quarter of 2018, and a 35% tax rate for the third quarter of 2017.

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	Nine Months Ended September 30,
	2018 vs. 2017
	Increase (Decrease)
	Due to Change in:
	Average		Average		Net
	Volume		Rate		Change
	(Dollars in thousands)
Income from the interest earning assets:
Loans, gross	$	11,042	$	2,117	$	13,159
Securities — taxable		781		415		1,196
Securities — exempt from Federal tax (1)		(47)		(439)		(486)
Other investments, interest-bearing deposits
in other financial institutions and Federal funds sold		(318)		1,690		1,372
Total interest income on interest-earning assets (1)		11,458		3,783		15,241
Expense from the interest-bearing liabilities:
Demand, interest-bearing		158		281		439
Savings and money market		308		434		742
Time deposits — under $100		2		12		14
Time deposits — $100 and over		(252)		(43)		(295)
CDARS — interest-bearing demand, money market
and time deposits		1		4		5
Subordinated debt, net of issuance costs		941		(21)		920
Short-term borrowings		—		—		—
Total interest expense on interest-bearing liabilities		1,158		667		1,825
Net interest income (1)	$	10,300	$	3,116		13,416
Less tax equivalent adjustment (1)						467
Net interest income					$	13,883

(1) Reflects tax equivalent adjustment for Federal tax exempt income based on a 21% tax rate for 2018, and a 35% tax rate for 2017.

The Company’s net interest margin (FTE), expressed as a percentage of average earning assets, increased 38 basis points to 4.36% for the third quarter of 2018, from 3.98% for the third quarter of 2017. The improvement was primarily due to a higher average balance of loans, an increase in the accretion of the loan purchase discount into loan interest income from the Tri-Valley Bank and the United American Bank acquisitions in the second quarter of 2018, the impact of increases in the prime rate, and the rate on overnight funds. 

For the first nine months of 2018, the net interest margin increased 24 basis points to 4.27%, compared to 4.03% for the first nine months of 2017, primarily due to a higher average balance of loans and securities, an increase in the accretion of the loan purchase discount into loan interest income from the Tri-Valley and United American acquisitions in the second quarter of 2018, the impact of increases in the prime rate, and the rate on overnight funds.

The average yield on the loan portfolio increased to 5.92% for the third quarter of 2018, compared to 5.72% for the third quarter of 2017, primarily due to an increase in the accretion of the loan purchase discount into loan interest income from the acquisitions, and increases in the prime rate.  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 10 basis points for the third quarter of 2018, compared to the third quarter of 2017. The average yield on the purchased residential loans was 2.68% for the third quarter of 2018, compared to 2.67% for the third quarter of 2017. The average yield on the purchased CRE loans was 3.24% for the third quarter of 2018, compared to 3.52% the third quarter of 2017.

The yield on the loan portfolio increased to 5.82% for the first nine months of 2018, compared to 5.63% for the first nine months of 2017, primarily due to to an increase in accretion of the loan purchase discount into loan interest income from the acquisitions and increases in the prime rate.  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

55

purchase discount from the acquisitions) increased 9 basis points for the first nine months of 2018, compared to the first nine months of 2017.  The yield on the purchased residential loans was 2.71% for the first nine months of 2018, compared to 2.67% for the first nine months of 2017.  The yield on the purchased CRE loans was 3.45% for the first nine months of 2018, compared to 3.51% for the first nine months of 2017.

Net interest income, before the provision for loan losses, increased 23% to $32.5 million for the third quarter of 2018, compared to $26.3 million for the third quarter of 2017. Net interest income increased 18% to $89.0 million for the nine months ended September 30, 2018, compared to $75.1 million for the nine months ended September 30, 2017. Net interest income increased for the third quarter of 2018 and the first nine months of 2018, compared to the respective periods in 2017, primarily due to the impact of the increase in loans and deposits from the Tri-Valley and United American acquisitions, in addition to organic loan growth 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 ($425,000) credit to the provision for loan losses for the third quarter of 2018, compared to a provision for loan losses of $115,000 for the third quarter of 2017. The credit to the provision for loan losses for the third quarter of 2018 was primarily due to net recoveries of $1.2 million. For the nine months ended September 30, 2018, there was a $7.3 million provision for loan losses compared to a $390,000 provision for loan losses for the nine months ended September 30, 2017. The increase in the provision for loan losses for the first nine months of 2018 compared to the first nine months of 2017 was primarily due to a single large lending relationship that was placed on nonaccrual during the second quarter of 2018.  At September 30, 2018, the recorded investment of this lending relationship was $21.8 million, and the Company had a $7.0 million specific loan loss reserve allocated for this lending relationship.  Additionally, subsequent to the end of the third quarter of 2018, the recorded investment of this lending relationship was reduced to $17.4 million.  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 $27.4 million, or 1.44% of total loans at September 30, 2018, compared to $19.7 million, or 1.26% of total loans at September 30, 2017, and $19.7 million, or 1.24% of total loans at December 31, 2017. Net recoveries totaled $1.2 million for the third quarter of 2018, compared to net recoveries of $236,000 for the third quarter of 2017, and net recoveries of $201,000 for the fourth quarter of 2017. The allowance for loan losses to total nonperforming loans decreased to110.97% at September 30, 2018, compared to 565.68% at September 30, 2017, and 791.07% at December 31, 2017, primarily due to the single lending relationship that was placed on nonaccrual during the second quarter of 2018.  The loans acquired from Tri-Valley and United American are included in total loans; however, there was minimal allowance for loan losses attributed to these loans at September 30, 2018 because upon acquisition they were marked to fair value.

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Noninterest Income										Increase
		Three Months Ended								(decrease)
		September 30,								2018 versus 2017
		2018				2017				Amount				Percent
		(Dollars in thousands)
Service charges and fees on deposit accounts		$		1,107		$		869		$		238		27		%
Gain on sales of SBA loans				236				147				89		61		%
Increase in cash surrender value of life insurance				216				417				(201)		(48)		%
Servicing income				163				246				(83)		(34)		%
Other				484				781				(297)		(38)		%
Total		$		2,206		$		2,460		$		(254)		(10)		%
									Increase
	Nine Months Ended								(decrease)
	September 30,								2018 versus 2017
	2018				2017				Amount				Percent
	(Dollars in thousands)
Service charges and fees on deposit accounts	$		2,981		$		2,410		$		571		24		%
Gain on sales of SBA loans			551				635				(84)		(13)		%
Increase in cash surrender value of life insurance			816				1,259				(443)		(35)		%
Servicing income			533				736				(203)		(28)		%
Gain (loss) on sales of securities			266				(6)				272		4,533		%
Other			2,034				2,014				20		1		%
Total	$		7,181		$		7,048		$		133		2		%

Total noninterest income decreased to $2.2 million for the third quarter of 2018, compared to $2.5 million for the third quarter of 2017.  For the nine months ended September 30, 2018, noninterest income increased to $7.2 million, compared to $7.0 million for the nine months ended September 30, 2017, primarily due to proceeds from a legal settlement during the second quarter of 2018, higher service charges and fees on deposit accounts and gain on sales of securities for the first nine months of 2018, partially offset by a lower increase in cash surrender value of life insurance proceeds, servicing income, and gain on sale of SBA loans for the first nine months of 2018.  The first nine months of 2017 also included a higher fee income from Bay View Funding which was included in other noninterest income. The Company received $1.3 million in 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.

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 three months ended September 30, 2018, SBA loan sales resulted in a $236,000 gain, compared to a $147,000 gain on sales of SBA loans for the three months ended September 30, 2017. For the nine months ended September 30, 2018, SBA loan sales resulted in a $551,000 gain, compared to a $635,000 gain on sale of SBA loans for the nine months ended September 30, 2017.

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.

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Noninterest Expense

					Increase
	Three Months Ended				(Decrease)
	September 30,				2018 versus 2017
	2018		2017		Amount		Percent
	(Dollars in thousands)
Salaries and employee benefits (1)	$	10,719	$	9,071	$	1,648	18	%
Occupancy and equipment		1,559		1,142		417	37	%
Professional fees		721		695		26	4	%
Amortization of intangible assets		631		296		335	113	%
Software subscriptions		555		475		80	17	%
Data processing		525		411		114	28	%
Insurance expense		430		401		29	7	%
Acquisition and integration related costs		16		—		16	N	/A
Other		2,572		2,343		229	10	%
Total	$	17,728	$	14,834	$	2,894	20	%

(1) Salaries and employee benefits included severance and retention expense of $183,000 related to the Tri-Valley and United American acquisitions for the third quarter 2018.

					Increase
	Nine Months Ended				(Decrease)
	September 30,				2018 versus 2017
	2018		2017		Amount		Percent
	(Dollars in thousands)
Salaries and employee benefits (1)	$	35,302	$	27,766	$	7,536	27	%
Occupancy and equipment		3,927		3,426		501	15	%
Professional fees		1,116		2,439		(1,323)	(54)	%
Amortization of intangible assets		1,336		1,083		253	23	%
Software subscriptions		1,747		1,333		414	31	%
Data processing		1,501		1,080		421	39	%
Insurance expense		1,236		1,123		113	10	%
Acquisition and integration related costs		5,452		—		5,452	N	/A
Other		6,963		7,166		(203)	(3)	%
Total	$	58,580	$	45,416	$	13,164	29	%

(1) Salaries and employee benefits included severance and retention expense of $3.6 million related to the Tri-Valley and United American acquisitions for the nine months of 2018.

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

Noninterest Expense by Category

	Three Months Ended September 30,
			Percent of				Percent of
	2018		Total		2017		Total
	(Dollars in thousands)
Salaries and employee benefits (1)	$	10,719	60	%	$	9,071	61	%
Occupancy and equipment		1,559	9	%		1,142	8	%
Professional fees		721	4	%		695	4	%
Amortization of intangible assets		631	4	%		296	2	%
Software subscriptions		555	3	%		475	3	%
Data processing		525	3	%		411	3	%
Insurance expense		430	2	%		401	3	%
Acquisition and integration related costs		16	0	%		—	0	%
Other		2,572	15	%		2,343	16	%
Total	$	17,728	100	%	$	14,834	100	%

(1) Salaries and employee benefits included severance and retention expense of $183,000 related to the Tri-Valley and United American acquisitions for the third quarter of 2018.

	Nine Months Ended September 30,
	2018				2017
			Percent				Percent
	Amount		of Total		Amount		of Total
	(Dollars in thousands)
Salaries and employee benefits (1)	$	35,302	60	%	$	27,766	61	%
Occupancy and equipment		3,927	7	%		3,426	8	%
Professional fees		1,116	2	%		2,439	5	%
Amortization of intangible assets		1,336	2	%		1,083	2	%
Software subscriptions		1,747	3	%		1,333	3	%
Data processing		1,501	3	%		1,080	2	%
Insurance expense		1,236	2	%		1,123	3	%
Acquisition and integration related costs		5,452	9	%		—	0	%
Other		6,963	12	%		7,166	16	%
Total	$	58,580	100	%	$	45,416	100	%

(1) Salaries and employee benefits included severance and retention expense of $3.6 million related to the Tri-Valley and United American acquisitions for the nine months of 2018.

Total noninterest expense for the third quarter of 2018 was $17.7 million, compared to $14.8 million for the third quarter of 2017.  Noninterest expense for the nine months ended September 30, 2018 was $58.5 million, compared to $45.4 million for the nine months ended September 30, 2017. The increase in noninterest expense in the first nine months of 2018, compared to first nine months of 2017, was primarily due to costs related to the merger transactions and higher salaries and employee benefits as a result of annual salary increases, and additional operating costs of Tri-Valley and United American, partially offset by lower professional fees.  Other noninterest expense included pre-tax acquisition and integration costs of $16,000 and $5.5 million for the third quarter of 2018, and the first nine months of 2018, respectively. In addition, salaries and employee benefits included severance and retention expense of $183,000, and $3.6 million for the third quarter of 2018, and the first nine months of 2018, respectively, related to the Tri-Valley and United American acquisitions.  Total severance, retention, acquisition and integration costs were $199,000 and $9.0 million for the third quarter of 2018, and the first nine months of 2018, respectively. Professional fees totaled $1.1 million for the first nine months of 2018, compared to $2.4 million for the first nine months of 2017, primarily due to the recovery of $922,000 of professional fees from a legal settlement in the second quarter of 2018.  Full time equivalent employees were 296, 282, and 278 at September 30, 2018, September 30, 2017, and December 31, 2017, respectively 

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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:

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2018		2017		2018		2017
Effective income tax rate	28.7	%	37.9	%	27.0	%	37.9	%

The Company’s income tax expense for the third quarter of 2018 was $5.0 million, compared to income tax expense of $5.2 million for the third quarter of 2017.  The effective tax rate for the third quarter of 2018 decreased compared to the third quarter of 2017, primarily due to lower federal corporate tax rate for the third quarter of 2018.  On December 22, 2017, the Tax Act, was signed into law, which among other things reduced the federal corporate tax rate to 21% from 35%, effective January 1, 2018.  Income tax expense for the nine months ended September 30, 2018 was $8.2 million, compared to $13.8 million for the nine months ended September 30, 2017.

The difference in the effective tax rate for the periods reported compared to the combined Federal and state statutory tax rate of 29.6% for the third quarter of 2018 and the first nine months of 2018, and 42% for the the third quarter of 2017 and first nine months of 2017, is primarily the result of the Company’s investment in life insurance policies whose earnings are not subject to taxes, tax credits related to investments in low income housing limited partnerships (net of low income housing investment losses), and tax-exempt interest income earned on municipal bonds. 

In March 2016, the FASB issued new guidance intended to simplify several areas of accounting for share-based compensation programs, including the income tax impact, classification on the statement of cash flows, and forfeitures.  The Company adopted the new guidance on share-based compensation during the first quarter of 2017.  All excess tax benefits and tax deficiencies (including tax benefits of dividends on share‑based payment awards) are recognized as income tax expense or benefit on the income statement. The tax effects of exercised or vested awards are treated as discrete items in the reporting period in which they occur.  The adoption of this guidance resulted in a reduction to income tax expense of ($58,000) for the third quarter of 2018, compared to a reduction of ($106,000) for the third quarter of 2017, and a reduction to income tax expense of ($351,000) for the first nine months of 2018, compared to a reduction of ($158,000) for the first nine months of 2017.

Some items of income and expense are recognized in different years for tax purposes than when applying generally accepted accounting principles leading 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 $28.1 million at September 30, 2018, $22.4 million at September 30, 2017, and $16.2 million at December 31, 2017. After consideration of the matters in the preceding paragraph, the

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Company determined that it is more likely than not that the net deferred tax assets September 30, 2018, September 30, 2017, and December 31, 2017 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 September 30, 2018
	Banking(1)		Factoring		Consolidated
	(Dollars in thousands)
Interest income	$	30,425	$	4,185	$	34,610
Intersegment interest allocations		601		(601)		—
Total interest expense		2,159		—		2,159
Net interest income		28,867		3,584		32,451
Provision (credit) for loan losses		(671)		246		(425)
Net interest income after provision		29,538		3,338		32,876
Noninterest income		2,011		195		2,206
Noninterest expense (2)		16,045		1,683		17,728
Intersegment expense allocations		172		(172)		—
Income before income taxes		15,676		1,678		17,354
Income tax expense		4,483		496		4,979
Net income	$	11,193	$	1,182	$	12,375
Total assets	$	3,107,897	$	85,013	$	3,192,910
Loans, net of deferred fees	$	1,828,379	$	71,008	$	1,899,387
Goodwill	$	70,708	$	13,044	$	83,752

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

(2) The banking segment’s noninterest expense includes acquisition costs of $199,000

	Three Months Ended September 30, 2017
	Banking(1)		Factoring		Consolidated
	(Dollars in thousands)
Interest income	$	24,805	$	3,150	$	27,955
Intersegment interest allocations		284		(284)		—
Total interest expense		1,634		—		1,634
Net interest income		23,455		2,866		26,321
Provision for loan losses		107		8		115
Net interest income after provision		23,348		2,858		26,206
Noninterest income		2,101		359		2,460
Noninterest expense		13,149		1,685		14,834
Intersegment expense allocations		130		(130)		—
Income before income taxes		12,430		1,402		13,832
Income tax expense		4,660		589		5,249
Net income	$	7,770	$	813	$	8,583
Total assets	$	2,776,262	$	67,686	$	2,843,948
Loans, net of deferred fees	$	1,517,186	$	48,764	$	1,565,950
Goodwill	$	32,620	$	13,044	$	45,664

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

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	Nine Months Ended September 30, 2018
	Banking(1)		Factoring		Consolidated
	(Dollars in thousands)
Interest income	$	83,781	$	10,686	$	94,467
Intersegment interest allocations		1,304		(1,304)		—
Total interest expense		5,504		—		5,504
Net interest income		79,581		9,382		88,963
Provision for loan losses		6,958		321		7,279
Net interest income after provision		72,623		9,061		81,684
Noninterest income		6,628		553		7,181
Noninterest expense (2)		53,813		4,767		58,580
Intersegment expense allocations		574		(574)		—
Income before income taxes		26,012		4,273		30,285
Income tax expense		6,923		1,263		8,186
Net income	$	19,089	$	3,010	$	22,099
Total assets	$	3,107,897	$	85,013	$	3,192,910
Loans, net of deferred fees	$	1,828,379	$	71,008	$	1,899,387
Goodwill	$	70,708	$	13,044	$	83,752

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

(2)The banking segment’s noninterest expense includes acquisition costs of $9.0 million

	Nine Months Ended September 30, 2017
	Banking(1)		Factoring		Consolidated
	(Dollars in thousands)
Interest income	$	70,146	$	8,613	$	78,759
Intersegment interest allocations		786		(786)		—
Total interest expense		3,679		—		3,679
Net interest income		67,253		7,827		75,080
Provision for loan losses		372		18		390
Net interest income after provision		66,881		7,809		74,690
Noninterest income		6,153		895		7,048
Noninterest expense		40,152		5,264		45,416
Intersegment expense allocations		392		(392)		—
Income before income taxes		33,274		3,048		36,322
Income tax expense		12,472		1,280		13,752
Net income	$	20,802	$	1,768	$	22,570
Total assets	$	2,776,262	$	67,686	$	2,843,948
Loans, net of deferred fees	$	1,517,186	$	48,764	$	1,565,950
Goodwill	$	32,620	$	13,044	$	45,664

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

Banking.  Our banking segment’s net income was $11.2 million for the three months ended September 30, 2018, compared to net income of $7.8 million for the three months ended September 30, 2017. The banking segment’s earnings for the first nine months of 2018 was $19.1 million, compared to $20.8 million for the first nine months of 2017. Net interest income increased to $28.9 million for the three months ended September 30, 2018, compared to $23.5 million for the three months ended September 30, 2017. For the nine months ended September 30, 2018, net interest income increased to $79.6 million, compared to $67.3 million for the nine months ended September 30, 2017. The increase in net interest income for the three and nine months ended September 30, 2018, compared to the comparable periods in 2017, was primarily due to the impact of the increase in loans and deposits from the Tri-Valley and United American acquisitions, in addition to organic loan growth and the positive impact of rising interest rates. The credit to the provision for loan losses was ($671,000) for the three months ended September 30, 2018, compared to a provision for loan losses of $107,000 for the three months ended September 30, 2017. The credit to the provision for loan losses for the third quarter

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of 2018 was primarily due to net recoveries of $1.2 million. For the nine months ended September 30, 2018, the provision for loan losses was $7.0 million, compared to a provision for loan losses of $372,000 for the nine months ended September 30, 2017. The increase in the provision for loan losses for the first nine months of 2018 compared to the first nine months of 2017 was primarily due to a single large lending relationship that was placed on nonaccrual during the second quarter of 2018. Noninterest income was $2.0 million for the three months ended September 30, 2018, compared to $2.1 million for the three months ended September 30, 2017. Noninterest income increased to $6.6 million for the nine months ended September 30, 2018, compared to $6.2 million for the nine months ended September 30, 2017, primarily due to proceeds from a legal settlement during the second quarter of 2018, higher service charges and fees on deposit accounts and gain on sales of securities for the first nine months of 2018. Noninterest expense increased to $16.0 million for the three months ended September 30, 2018, compared to $13.1 million for the three months ended September 30, 2017. For the nine months ended September 30, 2018, noninterest expense was $53.8 million, compared to $40.2 million for the nine months ended September 30, 2017. The increase in noninterest expense in the first nine months of 2018, compared to first nine months of 2017, was primarily due to costs related to the merger transactions and higher salaries and employee benefits as a result of annual salary increases, and additional operating costs of Tri-Valley and United American, partially offset by lower professional fees.    

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 35 days for the nine months ended September 30, 2018, compared to 36 days for the nine months ended September 30, 2017. Net interest income for the three months and nine months ended September 30, 2018, increased compared to the three months and nine months ended September 30, 2017, primarily due to an increase in the average balance of factored receivables outstanding, partially offset by a decrease in the average yield on the factored receivables portfolio.

FINANCIAL CONDITION

As of September 30, 2018, total assets increased to $3.19 billion, compared to $2.84 billion at September 30, 2017, and December 31, 2017. The increase in total assets at September 30, 2018 was primarily due to the Tri-Valley and United American acquisitions.  Tri-Valley added $115.2 million in loans, at fair value, and $91.4 million in deposits, at fair value at September 30, 2018. United American added $208.8 million in loans, at fair value, and $266.6 million in deposits, at fair value, at September 30, 2018.

Securities available‑for‑sale, at fair value, were $319.1 million at September 30, 2018, a decrease of (18%) from $390.1 million at September 30, 2017, and a decrease of (19%) from $391.9 million at December 31, 2017. Securities held‑to‑maturity, at amortized cost, were $375.7 million at September 30, 2018, a decrease of (1%) from $379.5 million at September 30, 2017, and a decrease of (6% )from $398.3 million at December 31, 2017. Total loans, excluding loans held‑for‑sale, increased $333.4 million, or 21%, to $1.90 billion at September 30, 2018, compared to $1.57 billion at September 30, 2017, which included $208.8 million in loans from United American, $115.2 million in loans from Tri-Valley, and an increase of $20.3 million, or 1% in the Company’s legacy portfolio, partially offset by a decrease of $7.5  million in purchased residential mortgage loans and a decrease of $3.4 million in purchased CRE loans. Loans increased 20% at September 30, 2018, compared to $1.58 billion at December 31, 2017, which included $208.8 million in loans from United American, $115.2 million in loans from Tri-Valley, and an increase of $1.4 million in the Company’s legacy portfolio, partially offset by a decrease of $5.6 million in purchased residential mortgages, and a decrease of $3.1 million in purchased CRE loans. 

Total deposits increased $264.7 million, or 11%, to $2.75 billion at September 30, 2018, compared to $2.48 billion at September 30, 2017, which included $266.6 million in deposits from United American, $91.4 million in deposits from Tri-Valley, a decrease of $65.1 million in State of California certificates of deposits due to maturity, and a decrease of $28.2 million, or (1%), in the Company’s legacy deposits.  Total deposits increased $262.3 million, or 11%, at September 30, 2018 from $2.48 billion at December 31, 2017, which included $266.6 million in deposits from United American, $91.4 million in deposits from Tri-Valley, the maturity of $65.1 million in State of California certificates of deposits, and a decrease of $30.6 million in the Company’s legacy deposits.

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Deposits, excluding all time deposits and CDARS deposits, increased $318.1 million, or 14%, to $2.58 billion at September 30, 2018, compared to $2.26 billion at September 30, 2017, which included $231.9 million of deposits added from United American, $83.0 million of deposits added from Tri-Valley, and an increase of $3.1 million in the Company’s legacy deposits.  Deposits, excluding all time deposits and CDARS deposits, increased $305.0 million, or 13%, compared to $2.28 billion at December 31, 2017, which included $231.9 million of deposits added from United American, $83.0 million of deposits added from Tri-Valley, partially offset by a decrease of $10.0 million in the Company’s legacy deposits.

Securities Portfolio

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

	September 30,				December 31,
	2018		2017		2017
	(Dollars in thousands)
Securities available-for-sale (at fair value):
Agency mortgage-backed securities	$	311,665	$	373,167	$	374,733
U.S. Government sponsored entities		7,406		—		—
Trust preferred securities		—		16,940		17,119
Total	$	319,071	$	390,107	$	391,852
Securities held-to-maturity (at amortized cost):
Agency mortgage-backed securities	$	288,594	$	290,418	$	309,616
Municipals — exempt from Federal tax		87,138		89,132		88,725
	$	375,732	$	379,550	$	398,341

The following table summarizes the weighted average life and weighted average yields of securities at September 30, 2018:

	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	$	—	—		$	238,391	2.22	%	$	73,274	2.52	%	$	—	—		$	311,665	2.29	%
U.S. Government sponsored entities		—	—			7,406	2.65	%		—	—			—	—			7,406	2.65	%
Total	$	—	—		$	245,797	2.24	%	$	73,274	2.52	%	$	—	—		$	319,071	2.30	%
Securities held-to-maturity (at amortized cost):
Agency mortgage-backed securities	$	—	—		$	204,487	2.04	%	$	43,486	2.43	%	$	40,621	3.17	%	$	288,594	2.26	%
Municipals — exempt from Federal tax (1)		4,297	3.22	%		21,107	3.38	%		12,289	3.04	%		49,445	3.20	%		87,138	3.22	%
Total	$	4,297	3.22	%	$	225,594	2.16	%	$	55,775	2.56	%	$	90,066	3.19	%	$	375,732	2.48	%

(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

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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 $319.1 million at September 30, 2018, a decrease of (18%) from $390.1 million at September 30, 2017, and a decrease of (19%) from $391.9 million at December 31, 2017. At September 30, 2018, the Company’s securities available-for-sale portfolio was comprised of $311.7 million agency mortgage-backed securities (all issued by U.S. Government sponsored entities) and $7.4 million U.S. Government sponsored entities debt securities. The pre-tax unrealized loss on securities available-for-sale at September 30, 2018 was ($12.7) million, compared to a pre-tax unrealized gain on securities available-for-sale of $1.0 million at September 30, 2017, and a pre-tax unrealized loss on securities available-for-sale of ($1.5) million at December 31, 2017.  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. Investment securities available-for-sale acquired from United American totaled $63.7 million, at fair value, on May 4, 2018.  Subsequent to closing, the Company sold $55.4 million of these securities, for a gain on sale of securities of $179,000 in the second quarter of 2018.

At September 30, 2018, investment securities held‑to‑maturity, at amortized cost, totaled $375.7 million, a decrease of (1%) from $379.5 million at September 30, 2017, and a decrease of (6%) from $398.3 million at December 31, 2017. At September 30, 2018, the Company’s securities held-to-maturity portfolio was comprised of $288.6 million agency mortgage-backed securities, and $87.1 million 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 59% of total assets at September 30, 2018, represented 55% at September 30, 2017, and represented 56% at December 31, 2017. The ratio of loans to deposits was 69.19% at September 30, 2018, compared to 63.13% at September 30, 2017, and 63.74% at December 31, 2017.

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:

	September 30, 2018				September 30, 2017				December 31, 2017
	Balance		% to Total		Balance		% to Total		Balance		% to Total
	(Dollars in thousands)
Commercial	$	600,594	31	%	$	587,276	38	%	$	573,296	36	%
Real estate:
CRE		988,491	52	%		754,856	48	%		772,867	49	%
Land and construction		131,548	7	%		92,310	6	%		100,882	6	%
Home equity		116,657	6	%		74,171	4	%		79,176	5	%
Residential mortgages		52,441	3	%		46,489	3	%		44,561	3	%
Consumer		9,932	1	%		11,749	1	%		12,395	1	%
Total Loans		1,899,663	100	%		1,566,851	100	%		1,583,177	100	%
Deferred loan fees, net		(276)	—			(901)	—			(510)	—
Loans, net of deferred fees		1,899,387	100	%		1,565,950	100	%		1,582,667	100	%
Allowance for loan losses		(27,426)				(19,748)				(19,658)
Loans, net	$	1,871,961			$	1,546,202			$	1,563,009

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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, 68% of its gross loans were secured by real property at September 30, 2018, compared to 60% at September 30, 2017 and 63% at December 31, 2017. 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 borrowers’ 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 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 third quarter and nine months ended September 30, 2018, loans were sold resulting in a gain on sales of SBA loans of $236,000, and $551,000, 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 35 days for the first nine months of 2018, compared to 36 days for the first nine months of 2017. The average life of the factored receivables was 36 days for the year ended December 31, 2017. The balance of the purchased receivables was $71.0 million at September 30, 2018, compared to $48.8 million at both September 30, 2017 and at December 31, 2017.

The commercial loan portfolio increased $13.3 million to $600.6 million at September 30, 2018, from $587.3 million at September 30, 2017, which included $21.7 million of loans added from United American, and $10.2 million of loans added from Tri-Valley, partially offset by a decrease of $18.6 million, or (3%), the Company’s legacy portfolio.  The commercial loan portfolio increased $27.3 million from $573.3 million at December 31, 2017, which included $21.7 million of loans added from United American, $10.2 million of loans added from Tri-Valley, partially offset by a decrease of $4.6 million, or (1%), in the Company’s legacy portfolio. C&I usage was 36% at September 30, 2018, compared to 37% at September 30, 2017 and December 31, 2017.

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 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 $233.6 million, or 31%, to $988.5 million at September 30, 2018, compared to $754.9 million at September 30, 2017, which included $135.9 million of loans added from United American, $93.7 million of loans added from Tri-Valley, and an increase of $7.3 million, or 1%, in the Company’s legacy portfolio, partially offset by a decrease of $3.3 million in purchased CRE loans.  The CRE loan portfolio increased $215.6, or 28%,

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from $772.9 million at December 31, 2017, which included $135.9 million of loans added from United American, $93.7 million of loans added from Tri-Valley, partially offset by a decrease of $11.0 million, or (1%) in the Company’s legacy portfolio, and $3.1 million in purchased CRE loans.

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 increased $39.2 million, or 43%, to $131.5 million at September 30, 2018, compared to $92.3 million at September 30, 2017, and increased $30.7 million, or 30%, from $100.9 million at December 31, 2017, primarily due to organic growth of $26.6 million and $4.1 million of loans added from United American. 

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 increased $42.5 million, or 57%, to $116.7 million at September 30, 2018, compared to $74.2 million at September 30, 2017, which included $32.9 million of loans added from United American, and $11.4 million of loans added from Tri-Valley, partially offset by a decrease of $1.8 million in the Company’s legacy portfolio.  Home equity lines of credit increased $37.5 million, or 47%, compared to $79.2 million at December 31, 2017, which included $32.9 million of loans added from United American, and $11.4 million of loans added from Tri-Valley, partially offset by a decrease of $6.8 million in the Company’s legacy portfolio.

Residential mortgage loans increased $5.9 million, 13%, to $52.4 million at September 30, 2018, compared to $46.5 million at September 30, 2017, primarily due to $13.4 million of loans added from United American, partially offset by a $7.5 million decrease in purchased residential mortgage loans.  Residential mortgage loans increased $7.8 million, from $44.6 million at December 31, 2017 primarily due to $13.4 million of loans added from United American, partially offset by a $5.6 million decrease in purchased residential mortgage loans.

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 $59.5 million and $99.2 million at September 30, 2018, respectively.

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Loan Maturities

The following table presents the maturity distribution of the Company’s loans (excluding loans held‑for‑sale) as of September 30, 2018. 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 September 30, 2018, approximately 52% 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	$	478,040		100,660		21,894	$	600,594
Real estate:
CRE		115,730		443,557		429,204		988,491
Land and construction		128,571		1,705		1,272		131,548
Home equity		107,716		4,361		4,580		116,657
Residential mortgages		1,460		5,764		45,217		52,441
Consumer		9,729		199		4		9,932
Loans	$	841,246	$	556,246	$	502,171	$	1,899,663
Loans with variable interest rates	$	749,126		169,428		77,556	$	996,110
Loans with fixed interest rates		92,120		386,819		424,614		903,553
Loans	$	841,246	$	556,247	$	502,170	$	1,899,663

Loan Servicing

As of September 30, 2018 and 2017, $113.1 million and $141.9 million, respectively, in SBA loans were serviced by the Company for others. Activity for loan servicing rights was as follows:

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2018		2017		2018		2017
	(Dollars in thousands)
Beginning of period balance	$	1,065	$	1,554	$	1,373	$	1,854
Additions		84		40		160		158
Amortization		(170)		(175)		(554)		(593)
End of period balance	$	979	$	1,419	$	979	$	1,419

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 September 30, 2018 and 2017, 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				Nine Months Ended
	September 30,				September 30,
	2018		2017		2018		2017
	(Dollars in thousands)
Beginning of period balance	$	919	$	1,028	$	968	$	1,067
Unrealized holding loss		(56)		(39)		(105)		(78)
End of period balance	$	863	$	989	$	863	$	989

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

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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 $10.9 million and $6.9 million at September 30, 2018 and December 31, 2017, respectively, of which $617,000 and $1.4 million were on nonaccrual. At September 30, 2018, there were also $22.7 million loans less than 30 days past due included in nonaccrual loans held‑for‑investment. At December 31, 2017, there were also $840,000 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. 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:

	September 30,						December 31,
	2018			2017			2017
	(Dollars in thousands)
Nonaccrual loans — held-for-investment	$	23,342		$	2,560		$	2,250
Restructured and loans 90 days past due and
still accruing		1,373			931			235
Total nonperforming loans		24,715			3,491			2,485
Foreclosed assets		—			—			—
Total nonperforming assets	$	24,715		$	3,491		$	2,485
Nonperforming assets as a percentage of loans
plus foreclosed assets		1.30	%		0.22	%		0.16	%
Nonperforming assets as a percentage of total assets		0.77	%		0.12	%		0.09	%

Nonperforming assets were $24.7 million, or 0.77% of total assets, at September 30, 2018, compared to $3.5 million, or 0.12% of total assets, at September 30, 2017, and $2.5 million, or 0.09% of total assets, at December 31, 2017. The increase in nonperforming assets at September 30, 2018, compared to September 30, 2017 and December 31, 2017, was primarily due to a single large lending relationship that was place on nonaccrual during the second quarter of

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2018.  At September 30, 2018, the recorded investment of this lending relationship was $21.8 million, and the Company had a $7.0 million specific loan loss reserve allocated for this lending relationship.  Additionally, subsequent to the end of the third quarter of 2018, the recorded investment of this lending relationship was reduced to $17.4 million. 

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

	September 30, 2018						December 31, 2017
				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	$	17,361	$	1,148	$	18,509	$	1,250	$	235	$	1,485
Real estate:
CRE		5,639		—		5,639		501		—		501
Land and construction		—		—		—		119		—		119
Home equity		342		225		567		379		—		379
Consumer		—		—		—		1		—		1
Total	$	23,342	$	1,373	$	24,715	$	2,250	$	235	$	2,485

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). The principal balance of classified loans, was $30.5 million at September 30, 2018, $10.9 million at September 30, 2017, and $25.1 million at December 31, 2017. The increase in classified loans at September 30, 2018 was primarily due to loans associated with the lending relationship discussed above that was moved to classified loans, which totaled $21.8 million at September 30, 2018, compared to $12.5 million at December 31, 2017.  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:

	September 30, 2018						September 30, 2017						December 31, 2017
	Nonclassified		Classified		Total		Nonclassified		Classified		Total		Nonclassified		Classified		Total
	(Dollars in thousands)
Commercial	$	577,325	$	23,269	$	600,594	$	578,867	$	8,409	$	587,276	$	554,913	$	18,383	$	573,296
Real estate:
CRE		982,852		5,639		988,491		754,152		704		754,856		766,988		5,879		772,867
Land and construction		131,548		—		131,548		91,217		1,093		92,310		100,763		119		100,882
Home equity		115,019		1,638		116,657		73,469		702		74,171		78,486		690		79,176
Residential mortgages		52,441		—		52,441		46,489		—		46,489		44,561		—		44,561
Consumer		9,932		—		9,932		11,748		1		11,749		12,394		1		12,395
Total	$	1,869,117	$	30,546	$	1,899,663	$	1,555,942	$	10,909	$	1,566,851	$	1,558,105	$	25,072	$	1,583,177

Classified assets were $30.5 million, or 0.95% of total assets, at September 30, 2018, compared to $10.9 million, or 0.38% of total assets, at September 30, 2017 and $25.1 million, or 0.88% of total assests at December 31, 2017. The increase in classified assets at September 30, 2018 was primarily due to seasonal advances on lines of credit associated with a single large lending relationship that was moved to classified loans in the fourth quarter of 2017, which totaled $21.8 million at September 30, 2018, compared to $12.5 million at December 31, 2017. 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.

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

	Nine Months Ended September 30, 2018
	Performing		Nonperforming
	TDRs		TDRs		Total
	(Dollars in thousands)
Balance at January 1, 2018	$	309	$	16	$	325
Additions		384		—		384
Principal repayments		(17)		(16)		(33)
Balance at September 30, 2018	$	676	$	—	$	676

	Nine Months Ended September 30, 2017
	Performing		Nonperforming
	TDRs		TDRs		Total
	(Dollars in thousands)
Balance at January 1, 2017	$	131	$	2	$	133
Additions		228		90		318
Principal repayments		(16)		(1)		(17)
Balance at September 30, 2017	$	343	$	91	$	434

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.

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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 September 30, 2018
	Commercial			Real Estate			Consumer			Total
	(Dollars in thousands)
Beginning of period balance	$	17,522		$	9,020		$	122		$	26,664
Charge-offs		(719)			—			(25)			(744)
Recoveries		1,897			34			—			1,931
Net (charge-offs) recoveries		1,178			34			(25)			1,187
Provision (credit) for loan losses		(1,427)			1,022			(20)			(425)
End of period balance	$	17,273		$	10,076		$	77		$	27,426
RATIOS:
Annualized net charge-offs (recoveries) to average loans (1)		(0.24)	%		(0.01)	%		0.01	%		(0.24)	%
Allowance for loan losses to total loans (1)		0.91	%		0.53	%		0.00	%		1.44	%
Allowance for loan losses to nonperforming loans		69.89	%		40.77	%		0.31	%		110.97	%

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

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	Three Months Ended September 30, 2017
	Commercial			Real Estate			Consumer			Total
	(Dollars in thousands)
Beginning of period balance	$	11,259		$	7,982		$	156		$	19,397
Charge-offs		(111)			—			—			(111)
Recoveries		281			66			—			347
Net recoveries		170			66			—			236
Provision (credit) for loan losses		(441)			592			(36)			115
End of period balance	$	10,988		$	8,640		$	120		$	19,748
RATIOS:
Annualized net charge-offs (recoveries) to average loans (1)		(0.04)	%		(0.02)	%		0.00	%		(0.06)	%
Allowance for loan losses to total loans (1)		0.70	%		0.55	%		0.01	%		1.26	%
Allowance for loan losses to nonperforming loans		314.75	%		247.49	%		3.44	%		565.68	%

	Nine Months Ended September 30, 2018
	Commercial			Real Estate			Consumer			Total
	(Dollars in thousands)
Beginning of period balance	$	10,608		$	8,950		$	100		$	19,658
Charge-offs		(1,835)			—			(25)			(1,860)
Recoveries		2,229			120			—			2,349
Net (charge-offs) recoveries		394			120			(25)			489
Provision for loan losses		6,271			1,006			2			7,279
End of period balance	$	17,273		$	10,076		$	77		$	27,426
RATIOS:
Annualized net charge-offs (recoveries) to average loans (1)		(0.03)	%		(0.01)	%		0.00	%		(0.04)	%
Allowance for loan losses to total loans (1)		0.91	%		0.53	%		0.00	%		1.44	%
Allowance for loan losses to nonperforming loans		69.89	%		40.77	%		0.31	%		110.97	%

	Nine Months Ended September 30, 2017
	Commercial			Real Estate			Consumer			Total
	(Dollars in thousands)
Beginning of period balance	$	10,656		$	8,327		$	106		$	19,089
Charge-offs		(2,179)			—			—			(2,179)
Recoveries		1,453			995			—			2,448
Net (charge-offs) recoveries		(726)			995			—			269
Provision (credit) for loan losses		1,058			(682)			14			390
End of period balance	$	10,988		$	8,640		$	120		$	19,748
RATIOS:
Annualized net charge-offs (recoveries) to average loans (1)		0.07	%		(0.09)	%		0.00	%		(0.02)	%
Allowance for loan losses to total loans (1)		0.70	%		0.55	%		0.01	%		1.26	%
Allowance for loan losses to nonperforming loans		314.75	%		247.49	%		3.44	%		565.68	%

(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.

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Allocation of Allowance for Loan Losses

	September 30,
	2018				2017				December 31, 2017
			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	$	17,273	31	%	$	10,988	38	%	$	10,608	36	%
Real estate:
CRE		6,053	52	%		5,598	48	%		5,909	49	%
Land and construction		1,987	7	%		1,381	6	%		1,441	6	%
Home equity		1,826	6	%		1,435	4	%		1,390	5	%
Residential mortgages		210	3	%		226	3	%		210	3	%
Consumer		77	1	%		120	1	%		100	1	%
Total	$	27,426	100	%	$	19,748	100	%	$	19,658	100	%

The allowance for loan losses totaled $27.4 million, or 1.44% of total loans at September 30, 2018, compared to $19.7 million, or 1.26% of total loans at at September 30, 2017, and $19.7 million, or 1.24% of total loans at December 31, 2017. The Company had net recoveries of $1.2 million, or (0.24%) of average loans, for the third quarter of 2018, compared to net recoveries of ($236,000), or (0.06%) of average loans, for the third quarter of 2017, and net recoveries of ($201,000), or (0.05)% of average loans, for the fourth quarter of 2017.

The allowance for loan losses related to the commercial portfolio increased $6.7 million, at September 30, 2018 from December 31, 2017, primarily due to a provision for loan losses of $6.3 million resulting from the $7.0 million specific loan loss reserve allocated for the single large lending relationship discussed above, and net recoveries of $394,000. The allowance for loan losses related to the real estate portfolio increased $1.1 million at September 30, 2018 from December 31, 2017, primarily due to increasing market risk associated with risk factors for real estate loans, resulting in a $1.0 million provision for loan losses and net recoveries of $120,000.

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 September 30, 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.  Total goodwill was $45.6 million at December 31, 2017, which consisted of $13.0 million related to the Bay View Funding acquisition, and $32.6 million related to the Focus acquisition.

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

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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, 2017 with the assistance of an independent valuation firm.  No events or circumstances since the November 30, 2017 annual impairment test were noted that would indicate it was more likely than not a goodwill impairment exists.

Other intangible assets were $12.6 million at September 30, 2018, compared to $5.6 million at December 31, 2017.  A customer relationship and brokered relationship, and intangible assets arising from the acquisition of Bay View Funding were $1.2 million at September 30, 2018 and $1.3 million at December 31, 2017, net of accumulated amortization. The below market lease and non-compete intangible assets were fully amortized at December 31, 2017.  The core deposit intangible assets arising from the acquisition of Focus was $3.7 million at September 30, 2018 and $4.3 million at December 31, 2017, net of accumulated amortization.  The core deposit intangible and below market lease intangible assets arising from the Tri-Valley acquisition were $1.8 million at September 30, 2018, net of accumulated amortization.  The core deposit intangible and below market lease intangible assets arising from the United American acquisition were $5.9 million at September 30, 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:

	September 30, 2018				September 30, 2017				December 31, 2017
	Balance		% to Total		Balance		% to Total		Balance		% to Total
	(Dollars in thousands)
Demand, noninterest-bearing	$	1,081,846	39	%	$	943,723	38	%	$	989,753	40	%
Demand, interest-bearing		670,624	24	%		605,301	24	%		601,929	24	%
Savings and money market		828,297	30	%		713,693	29	%		684,131	27	%
Time deposits — under $250		68,194	3	%		53,479	2	%		51,710	2	%
Time deposits — $250 and over		84,763	3	%		147,422	6	%		138,634	6	%
CDARS — interest-bearing demand,
money market and time deposits		11,575	1	%		16,986	1	%		16,832	1	%
Total deposits	$	2,745,299	100	%	$	2,480,604	100	%	$	2,482,989	100	%

The Company obtains deposits from a cross‑section of the communities it serves. The Company’s business is not generally seasonal in nature. Public funds were less than 1% of deposits at September 30, 2018, and 3% at September 30, 2017, and December 31, 2017.

Total deposits increased $264.7 million, or 11%, to $2.75 billion at September 30, 2018, compared to $2.48 billion at September 30, 2017, which included $266.6 million, at fair value, in deposits from United American, $91.4 million, at fair value, in deposits from Tri-Valley, partially offset by decrease of $28.2 million, or (1%), in the Company’s legacy deposits.  Total deposits increased $262.3 million or 11% from $2.48 billion at December 31, 2017, which included $266.6 million in deposits from United American, $91.4 million in deposits from Tri-Valley, partially offset by the maturity of $65.1 million State of California certificates of deposits, and a decrease of $30.6 million, or (1%), in the Company’s legacy deposits. 

Deposits, excluding all time deposits and CDARS deposits, increased $318.1 million, or 14%, to $2.58 billion at September 30, 2018, compared to $2.26 billion at September 30, 2017, which included $231.9 million of deposits added from United American, $83.0 million of deposits added from Tri-Valley, and an increase of $3.1 million in the Company’s legacy deposits.  Deposits, excluding all time deposits and CDARS deposits, increased $305.0 million, or

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13%, compared to $2.28 billion at December 31, 2017, which included $231.9 million of deposits added from United American, $83.0 million of deposits added from Tri-Valley, partially offset by a decrease of $10.0 million in the Company’s legacy deposits.

Time deposits of $250,000 and over decreased $62.7 million, or (43%), to $84.8 million at September 30, 2018, compared to $147.4 million at September 30, 2017, which included the maturity of $65.1 million State of California certificates of deposits, and a decrease of $17.6 million, or (21%), in the Company’s legacy deposits, partially offset by $16.2 million of deposits added from United American, and $3.8 million of deposits added from Tri-Valley.  Time deposits of $250,000 and over decreased $53.9 million, or (39%), compared to $138.6 million at December 31, 2017, which included the maturity of $65.1 million State of California certificates of deposits, and a decrease of $8.8 million, or (12%), in the Company’s legacy deposits, partially offset by $16.2 million of deposits added from United American, and $3.8 million of deposits added from Tri-Valley. 

At September 30, 2018, the Company had  no certificates of deposits from the State of California. At September 30, 2017, the Company had $71.5 million, at fair value, of securities pledged for $65.1 million in certificates of deposits from the State of California. At December 31, 2017, the Company had $72.5 million, at fair value, of securities pledged for $65.1 million in certificates of deposits from the State of California.

At September 30, 2018, the $11.6 million CDARS deposits were comprised of $7.3 million of interest-bearing demand deposits, $1.4 million of money market accounts and $2.9 million of time deposits. At September 30, 2017, the $17.0 million CDARS deposits were comprised of $11.8 million of interest-bearing demand deposits, $1.8 million of money market accounts and $3.4 million of time deposits. At December 31, 2017, the $16.8 million CDARS deposits were comprised of $10.9 million of interest-bearing demand deposits, $1.7 million of money market accounts and $4.2 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 September 30, 2018:

	Balance		% of Total
	(Dollars in thousands)
Three months or less	$	35,717	41	%
Over three months through six months		11,413	13	%
Over six months through twelve months		32,457	37	%
Over twelve months		8,098	9	%
Total	$	87,685	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				Nine Months Ended
	September 30,				September 30,
	2018		2017		2018		2017
Return on average assets	1.54	%	1.20	%	0.98	%	1.12	%
Return on average tangible assets	1.59	%	1.22	%	1.01	%	1.14	%
Return on average equity	14.03	%	12.49	%	9.31	%	11.35	%
Return on average tangible equity	19.36	%	15.41	%	12.33	%	14.11	%
Average equity to average assets ratio	10.96	%	9.61	%	10.57	%	9.86	%

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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 $721.0 million at September 30, 2018, compared to $684.0 million at September 30, 2017, and $687.4 million at December 31, 2017. Unused commitments represented 38% outstanding gross loans at September 30, 2018, 44% at September 30, 2017, and 43% at December 31, 2017.

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:

		September 30,
	2018				2017				December 31, 2017
	Fixed Rate		Variable Rate		Fixed Rate		Variable Rate		Fixed Rate		Variable Rate
	(Dollars in thousands)
Unused lines of credit and commitments to
make loans	$	120,286	$	584,141	$	17,024	$	652,105	$	102,505	$	570,190
Standby letters of credit		4,125		12,468		4,400		10,492		3,972		10,715
	$	124,411	$	596,609	$	21,424	$	662,597	$	106,477	$	580,905

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 69.19% at September 30, 2018, compared to 63.13% at September 30, 2017, and 63.74% at December 31, 2017.

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 September 30, 2018, September 30, 2017, and December 31, 2017. HBC had $233.0 million of loans pledged to the FHLB as collateral on an available line of credit of $183.2 million at September 30, 2018, none of which was outstanding.

HBC can also borrow from the FRB’s discount window. HBC had $660.4 million of loans pledged to the FRB as collateral on an available line of credit of $392.7 million at September 30, 2018, none of which was outstanding.

At September 30, 2018, HBC had Federal funds purchase arrangements available of $55.0 million. There were no Federal funds purchased outstanding at September 30, 2018, September 30, 2017, and December 31, 2017.

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The Company has a $5.0 million line of credit with a correspondent bank, of which none was outstanding at September 30, 2018.

HBC may also utilize securities sold under repurchase agreements to manage our liquidity position. There were no securities sold under agreements to repurchase at September 30, 2018, September 30, 2017, and December 31, 2017.

Subordinated Debt

On May 26, 2017, the Company completed an underwritten public offering of $40.0 million 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. 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. The Subordinated Debt, net of unamortized costs totaled $39.3 million at September 30, 2018 and $39.2 million at December 31, 2017, and qualifies as Tier 2 capital for the Company under the guidelines established by the Federal Reserve Bank. The Company down streamed $20.0 million of the proceeds to HBC during the second quarter of 2017.  

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:

	September 30,				September 30,			December 31,
	2018				2017			2017
	(Dollars in thousands)
Capital components:
Common equity Tier 1 capital	$	266,654		$	229,656		$	229,258
Additional Tier 1 capital		—			—			—
Tier 1 Capital		266,654			229,656			229,258
Tier 2 Capital		67,498			59,575			59,496
Total risk-based capital	$	334,152		$	289,231		$	288,754
Risk-weighted assets	$	2,318,713		$	1,986,488		$	2,003,652
Average assets for capital purposes	$	3,100,135		$	2,783,219		$	2,873,978
Capital ratios:
Total risk-based capital		14.4	%		14.6	%		14.4	%
Tier 1 risk-based capital		11.5	%		11.6	%		11.4	%
Common equity Tier 1 risk-based capital		11.5	%		11.6	%		11.4	%
Leverage(1)		8.6	%		8.3	%		8.0	%

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

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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:

	September 30,			September 30,			December 31,
	2018			2017			2017
	(Dollars in thousands)
Capital components:
Common equity Tier 1 capital	$	282,460		$	244,831		$	244,790
Additional Tier 1 capital		—			—			—
Tier 1 Capital		282,460			244,831			244,790
Tier 2 Capital		28,176			20,438			20,312
Total risk-based capital	$	310,636		$	265,269		$	265,102
Risk-weighted assets	$	2,316,959		$	1,985,132		$	2,002,736
Average assets for capital purposes	$	3,098,391		$	2,782,021		$	2,873,102
Capital ratios:
Total risk-based capital		13.4	%		13.4	%		13.2	%
Tier 1 risk-based capital		12.2	%		12.3	%		12.2	%
Common equity Tier 1 risk-based capital		12.2	%		12.3	%		12.2	%
Leverage(1)		9.1	%		8.8	%		8.5	%

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

The following table presents the applicable well‑capitalized regulatory guidelines and the standards for minimum capital adequacy requirements under Basel III:

	Transitional		Fully Phased-in
	Minimum		Minimum		Well-capitalized
	Regulatory		Regulatory		Financial
	Requirement(1)		Requirement(2)		Institution
	Effective		Effective		Regulatory
	January 1, 2018		January 1, 2019		Guidelines
Capital ratios:
Total risk-based capital	9.875	%	10.5	%	10.0	%
Tier 1 risk-based capital	7.875	%	8.5	%	8.0	%
Common equity Tier 1 risk-based capital	6.375	%	7.0	%	6.5	%
Leverage	4.000	%	4.0	%	5.0	%

(1) Includes 1.875% capital conservation buffer, except the leverage capital ratio.

(2) 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. The implementation of the capital conservation buffer was phased in beginning on January 1, 2016 at 0.625% and will be phased in over a four‑year period (increasing by that amount on each subsequent January 1, until it reaches 2.5% on January 1, 2019). The capital conservation buffer increased to 1.875% beginning on January 1, 2018.

At September 30, 2018, 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

79

(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 September 30, 2018, September 30, 2017, and December 31, 2017, the Company and HBC met all capital adequacy guidelines to which they were subject. There are no conditions or events since September 30, 2018, that management believes have changed the categorization of the Company or HBC as well‑capitalized.

At September 30, 2018, the Company had total shareholders’ equity of $353.5 million, compared to $275.4 million at September 30, 2017, and $271.2 million at December 31, 2017. At September 30, 2018, total shareholders’ equity included $300.2 million in common stock, $70.5 million in retained earnings, and ($17.2) million of accumulated other comprehensive loss.

The accumulated other comprehensive loss was ($17.2) million at September 30, 2018, compared to ($6.1) million at September 30, 2017, and ($9.3) million at December 31, 2017. The unrealized gain loss on securities available‑for‑sale, net of taxes, included in accumulated other comprehensive loss was an unrealized loss of ($9.0) million at September 30, 2018, compared to an unrealized gain of $614,000 at September 30, 2017, and an unrealized loss ($1.1) million at December 31, 2017. The components of accumulated other comprehensive loss, net of taxes, at September 30, 2018 include the following: an unrealized loss on available‑for‑sale securities of ($9.0) million; the remaining unamortized unrealized gain on securities available‑for‑sale transferred to held‑to‑maturity of $351,000; a split dollar insurance contracts liability of ($3.7) million; a supplemental executive retirement plan liability of ($5.4) million; and an unrealized gain on interest‑only strip from SBA loans of $613,000.

The book value per share was $8.17 at September 30, 2018, compared to $7.21 at September 30, 2017, and $7.10 at December 31, 2017. The tangible book value per share was $5.94 at September 30, 2018, compared to $5.86 at September 30, 2017, and $5.76 at December 31, 2017.

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 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

80

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).

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 September 30, 2018. 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	$	29,678	22.8	%
+300	$	22,441	17.3	%
+200	$	15,244	11.7	%
+100	$	7,836	6.0	%
0	$	—	—	%
−100	$	(12,013)	(9.2)	%
−200	$	(25,463)	(19.6)	%

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.

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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 September 30, 2018. 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 September 30, 2018, the period covered by this report on Form 10‑Q.

During the three and nine months ended September 30, 2018, 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.

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, 2017, which could materially affect our business, financial condition and/or operating results. There were no material changes from risk factors previously disclosed in our 2017 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

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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

83

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: November 6, 2018	/s/ WALTER T. KACZMAREK
	Waletr T. Kaczmarek
	Chief Executive Officer
Date: November 6, 2018	/s/ Lawrence D. McGovern
	Lawrence D. McGovern
	Chief Financial Officer

84

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 SEPTEMBER  30, 2018

I, Walter T. Kaczmarek, certify that:

1. I have reviewed this Quarterly Report on Form 10‑Q for the Quarter Ended September  30, 2018 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: November 6, 2018

/s/ WALTER T. KACMAREK

Walter T. Kaczmarek

Chief Operating 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 SEPTEMBER 30, 2018

I, Lawrence D. McGovern, certify that:

1. I have reviewed this Quarterly Report on Form 10‑Q for the Quarter Ended September 30, 2018 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: November 6, 2018

/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 SEPTEMBER 30, 2018

In connection with the Quarterly Report of Heritage Commerce Corp (the “Company”) on Form 10‑Q for the period ended September 30, 2018 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: November 6, 2018

/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 SEPTEMBER 30, 2018

In connection with the Quarterly Report of Heritage Commerce Corp (the “Company”) on Form 10‑Q for the period ended September 30, 2018 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: November 6, 2018

/s/ LAWRENCE D. MCGOVERN

Lawrence D. McGovern

Chief Financial Officer

XML

Document and Entity Information - shares	9 Months Ended
	Sep. 30, 2018	Oct. 30, 2018
Document and Entity Information [Abstract]
Entity Registrant Name	HERITAGE COMMERCE CORP
Entity Central Index Key	0001053352
Document Type	10-Q
Document Period End Date	Sep. 30, 2018
Amendment Flag	false
Current Fiscal Year End Date	--12-31
Entity Current Reporting Status	Yes
Entity Filer Category	Accelerated Filer
Entity Small Business	false
Entity Emerging Growth Company	false
Entity Common Stock, Shares Outstanding		43,279,185
Document Fiscal Year Focus	2018
Document Fiscal Period Focus	Q3

XML

CONSOLIDATED BALANCE SHEETS - USD ($) $ in Thousands	Sep. 30, 2018	Dec. 31, 2017
Assets
Cash and due from banks	$ 40,831	$ 31,681
Other investments and interest-bearing deposits in other financial institutions	340,198	284,541
Total cash and cash equivalents	381,029	316,222
Securities available-for-sale, at fair value	319,071	391,852
Securities held-to-maturity, at amortized cost (fair value of $359,698 at September 30, 2018 and $394,292 at December 31, 2017)	375,732	398,341
Loans held-for-sale - SBA, at lower of cost or fair value, including deferred costs	6,344	3,419
Loans, net of deferred fees	1,899,387	1,582,667
Allowance for loan losses	(27,426)	(19,658)
Loans, net	1,871,961	1,563,009
Federal Home Loan Bank and Federal Reserve Bank stock and other investments, at cost	25,210	17,911
Company-owned life insurance	61,630	60,814
Premises and equipment, net	7,246	7,353
Goodwill	83,752	45,664
Other intangible assets	12,614	5,589
Accrued interest receivable and other assets	48,321	33,278
Total assets	3,192,910	2,843,452
Deposits:
Demand, noninterest-bearing	1,081,846	989,753
Demand, interest-bearing	670,624	601,929
Savings and money market	828,297	684,131
Time deposits - under $250	68,194	51,710
Time deposits - $250 and over	84,763	138,634
CDARS - interest-bearing demand, money market and time deposits	11,575	16,832
Total deposits	2,745,299	2,482,989
Subordinated debt, net of issuance costs	39,322	39,183
Accrued interest payable and other liabilities	54,723	50,041
Total liabilities	2,839,344	2,572,213
Shareholders' equity:
Preferred stock, no par value; 10,000,000 shares authorized; none issued and outstanding at September 30, 2018 and December 31, 2017
Common stock, no par value; 60,000,000 shares authorized; 43,271,676 shares issued and outstanding at September 30, 2018 and 38,200,883 shares issued and outstanding at December 31, 2017	300,208	218,355
Retained earnings	70,531	62,136
Accumulated other comprehensive loss	(17,173)	(9,252)
Total shareholders' equity	353,566	271,239
Total liabilities and shareholders' equity	$ 3,192,910	$ 2,843,452

XML

CONSOLIDATED BALANCE SHEETS (Parenthetical) - USD ($) $ in Thousands	Sep. 30, 2018	Dec. 31, 2017
Securities held-to-maturity
Securities held-to-maturity, fair value (in dollars)	$ 359,698	$ 394,292
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	43,271,676	38,200,883
Common stock, shares outstanding	43,271,676	38,200,883

XML

CONSOLIDATED STATEMENTS OF INCOME - USD ($) $ in Thousands	3 Months Ended		9 Months Ended
	Sep. 30, 2018	Sep. 30, 2017	Sep. 30, 2018	Sep. 30, 2017
Interest income:
Loans, including fees	$ 28,632	$ 22,507	$ 77,271	$ 64,112
Securities, taxable	3,483	3,596	11,112	9,916
Securities, exempt from Federal tax	555	563	1,675	1,694
Other investments, interest-bearing deposits in other financial institutions and Federal funds sold	1,940	1,289	4,409	3,037
Total interest income	34,610	27,955	94,467	78,759
Interest expense:
Deposits	1,575	1,051	3,772	2,867
Subordinated debt	583	583	1,731	811
Short-term borrowings	1		1	1
Total interest expense	2,159	1,634	5,504	3,679
Net interest income before provision for loan losses	32,451	26,321	88,963	75,080
Provision (credit) for loan losses	(425)	115	7,279	390
Net interest income after provision for loan losses	32,876	26,206	81,684	74,690
Noninterest income:
Service charges and fees on deposit accounts	1,107	869	2,981	2,410
Gain on sales of SBA loans	236	147	551	635
Increase in cash surrender value of life insurance	216	417	816	1,259
Servicing income	163	246	533	736
Gain (loss) on sales of securities			266	(6)
Other	484	781	2,034	2,014
Total noninterest income	2,206	2,460	7,181	7,048
Noninterest expense:
Salaries and employee benefits	10,719	9,071	35,302	27,766
Occupancy and equipment	1,559	1,142	3,927	3,426
Professional fees	721	695	1,116	2,439
Other	4,729	3,926	18,235	11,785
Total noninterest expense	17,728	14,834	58,580	45,416
Income before income taxes	17,354	13,832	30,285	36,322
Income tax expense	4,979	5,249	8,186	13,752
Net income	$ 12,375	$ 8,583	$ 22,099	$ 22,570
Earnings per common share:
Basic (in dollars per share)	$ 0.29	$ 0.22	$ 0.54	$ 0.59
Diluted (in dollars per share)	$ 0.28	$ 0.22	$ 0.53	$ 0.59

XML

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME - USD ($) $ in Thousands	3 Months Ended		9 Months Ended
	Sep. 30, 2018	Sep. 30, 2017	Sep. 30, 2018	Sep. 30, 2017
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Net income	$ 12,375	$ 8,583	$ 22,099	$ 22,570
Other comprehensive income:
Change in net unrealized holding (losses) gains on available-for-sale securities and I/O strips	(1,880)	539	(11,009)	2,975
Deferred income taxes	545	(227)	3,192	(1,250)
Change in net unamortized unrealized gain on securities available-for-sale that were reclassified to securities held-to-maturity	(11)	(12)	(33)	(38)
Deferred income taxes	3	5	9	16
Reclassification adjustment for losses (gains) realized in income			(266)	6
Deferred income taxes			79	(2)
Change in unrealized (losses) gains on securities and I/O strips, net of deferred income taxes	(1,343)	305	(8,028)	1,707
Change in net pension and other benefit plan liability adjustment	51	39	152	116
Deferred income taxes	(15)	(17)	(45)	(49)
Change in pension and other benefit plan liability, net of deferred income taxes	36	22	107	67
Other comprehensive (loss) income	(1,307)	327	(7,921)	1,774
Total comprehensive income	$ 11,068	$ 8,910	$ 14,178	$ 24,344

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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	United American Bank	Total
Balance at Dec. 31, 2016			$ 215,237	$ 52,527	$ (7,914)			$ 259,850
Balance (in shares) at Dec. 31, 2016			37,941,007
Increase (Decrease) in Shareholders' Equity
Net income				22,570				22,570
Other comprehensive income (loss)					1,774			1,774
Issuance of restricted stock awards, net (in shares)			64,136
Amortization of restricted stock awards, net of forfeitures and taxes			$ 678					678
Cash dividend declared				(11,418)				(11,418)
Stock option expense, net of forfeitures and taxes			639					639
Stock options exercised			$ 1,352					1,352
Stock options exercised (in shares)			193,863
Balance at Sep. 30, 2017			$ 217,906	63,679	(6,140)			275,445
Balance (in shares) at Sep. 30, 2017			38,199,006
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				22,099				22,099
Other comprehensive income (loss)					(7,921)			(7,921)
Issuance of common shares to acquire Business	$ 30,725	$ 47,280				$ 30,725	$ 47,280
Issuance of common shares to acquire Business (in shares)	1,889,613	2,826,032
Issuance of restricted stock awards, net (in shares)			95,378
Amortization of restricted stock awards, net of forfeitures and taxes			$ 814					814
Cash dividend declared				(13,704)				(13,704)
Stock option expense, net of forfeitures and taxes			535					535
Stock options exercised			$ 2,499					2,499
Stock options exercised (in shares)			259,770
Balance at Sep. 30, 2018			$ 300,208	$ 70,531	$ (17,173)			$ 353,566
Balance (in shares) at Sep. 30, 2018			43,271,676

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CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (Parenthetical) - $ / shares	9 Months Ended
	Sep. 30, 2018	Sep. 30, 2017
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
Cash dividend declared per share (in dollars per share)	$ 0.33	$ 0.30

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CONSOLIDATED STATEMENTS OF CASH FLOWS - USD ($) $ in Thousands	9 Months Ended
	Sep. 30, 2018	Sep. 30, 2017
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$ 22,099	$ 22,570
Adjustments to reconcile net income to net cash provided by operating activities:
Amortization of discounts and premiums on securities	3,093	3,218
(Gain) loss on sale of securities available-for-sale	(266)	6
Gain on sale of SBA loans	(551)	(635)
Proceeds from sale of SBA loans originated for sale	9,315	8,304
SBA loans originated for sale	(11,689)	(8,957)
Provision for loan losses	7,279	390
Increase in cash surrender value of life insurance	(816)	(1,259)
Depreciation and amortization	566	586
Amortization of other intangible assets	1,336	1,083
Stock option expense, net	535	639
Amortization of restricted stock awards, net	814	678
Amortization of subordinated debt issuance costs	139	64
Effect of changes in:
Accrued interest receivable and other assets	(19)	2,428
Accrued interest payable and other liabilities	1,723	(12)
Net cash provided by operating activities	33,558	29,103
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of securities available-for-sale	(15,193)	(123,561)
Purchase of securities held-to-maturity	(16,906)	(89,470)
Maturities/paydowns/calls of securities available-for-sale	44,832	41,463
Maturities/paydowns/calls of securities held-to-maturity	38,091	32,502
Proceeds from sales of securities available-for-sale	94,291	6,536
Net change in loans	20,215	(60,683)
Changes in Federal Home Loan Bank stock and other investments	(4,478)	(2,709)
Purchase of premises and equipment	(108)	(635)
Cash received in bank acquisition, net of cash paid	36,028
Net cash provided by (used in) investing activities	196,772	(196,557)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net change in deposits	(154,318)	218,464
Issuance of subordinated debt, net of issuance costs		39,073
Exercise of stock options	2,499	1,352
Payment of cash dividends	(13,704)	(11,418)
Net cash (used in) provided by financing activities	(165,523)	247,471
Net increase in cash and cash equivalents	64,807	80,017
Cash and cash equivalents, beginning of period	316,222	266,103
Cash and cash equivalents, end of period	381,029	346,120
Supplemental disclosures of cash flow information:
Interest paid	4,728	2,912
Income taxes paid	$ 8,671	11,731
Supplemental schedule of non-cash investing activity:
Transfer of loans held-for-sale to loan portfolio		$ 2,391

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CONSOLIDATED STATEMENTS OF CASH FLOWS - Summary of Assets Acquired and Liabilities Assumed Through Acquisition (Parenthetical) $ in Thousands	9 Months Ended
	Sep. 30, 2018 USD ($)
Summary of assets acquired and liabilities assumed through acquisition:
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	38,088
Other intangible assets	8,361
Other assets, net	14,736
Deposits	(416,628)
Other borrowings	(62)
Other liabilities	$ (3,037)

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CONSOLIDATED STATEMENTS OF CASH FLOWS - Common Stock Issued to Acquire Tri-Valley and United American Bank (Parenthetical) $ in Thousands	9 Months Ended
	Sep. 30, 2018 USD ($)
Supplemental schedule of non-cash investing activity:
Common stock issued to acquire Tri-Valley and United American Bank	$ 78,005

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Basis of Presentation

9 Months Ended

Sep. 30, 2018

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, 2017.

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 nine months ended September 30, 2018 are not necessarily indicative of the results expected for any subsequent period or for the entire year ending December 31, 2018.

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 May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-09, “Revenue from Contracts with Customers”, which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. The standard replaces most existing revenue recognition guidance in GAAP. The new standard was effective for the Company on January 1, 2018. Adoption of the standard did not have a material impact on the Company’s consolidated financial statements and related disclosures as the Company’s primary sources of revenues are derived from interest and dividends earned on loans, investment securities, and other financial instruments that are not within the scope of the standard. The Company’s revenue recognition pattern for revenue streams within the scope of the standard, including but not limited to service charges on deposit accounts and gains/losses on the sale of other real estate owned (“OREO”), did not change significantly from current practice. The standard permits the use of either the full retrospective or modified retrospective transition method. The Company elected to use the modified retrospective transition method which requires application of the standard to uncompleted contracts at the date of adoption however, periods prior to the date of adoption were not retrospectively revised as the impact of the standard on uncompleted contracts at the date of adoption was not material. See Note 15 – Revenue Recognition for more information.

In January 2016, the FASB issued ASU No. 2016-01, “Financial Instruments – Overall: Recognition and Measurement of Financial Assets and Financial Liabilities.” The guidance affects the accounting for equity investments, financial liabilities under the fair value option and the presentation and disclosure requirements of financial instruments. The standard was effective for the Company on January 1, 2018 and resulted in the use of an exit price rather than an entrance price to determine the fair value of financial instruments not measured at fair value on a non-recurring basis in the consolidated balance sheets. See Note 10 – Fair Value regarding the valuation of the loan portfolio.

In March 2017, the FASB issued ASU 2017-07, Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost. The standard amended existing guidance to improve the presentation of net periodic pension cost and net periodic postretirement benefit cost. The amendments require that an employer report the service cost component in the same line item or items as other compensation costs arising from services rendered by the pertinent employees during the period. The other components of net benefit costs are required to be presented in the income statement separately from the service cost component and outside a subtotal of income from operations, if one is presented. The amendments allow only the service cost component to be eligible for capitalization. The Company adopted the new guidance on January 1, 2018, and there was no material impact to the financial statements.

Newly Issued, but not yet Effective Accounting Standards

In February 2016, the FASB issued ASU No. 2016-02, Leases. The standard requires a lessee to recognize assets and liabilities on the balance sheet for leases with lease terms greater than 12 months. A lessee should recognize in the statement of financial position a liability to make lease payments (the lease liability) and a right of use asset representing its right to use the underlying asset for the lease term. When measuring assets and liabilities arising from a lease, a lessee (and a lessor) should include payments to be made in optional periods only if the lessee is reasonably certain to exercise an option to extend the lease or not to exercise an option to terminate the lease. Similarly, optional payments to purchase the underlying asset should be included in the measurement of lease assets and lease liabilities only if the lessee is reasonably certain to exercise that purchase option. Reasonably certain is a high threshold that is consistent with and intended to be applied in the same way as the reasonably assured threshold in the previous leases guidance. In addition, also consistent with the previous leases guidance, a lessee (and a lessor) should exclude most variable lease payments in measuring lease assets and lease liabilities, other than those that depend on an index or a rate or are in substance fixed payments. For leases with a term of 12 months or less, a lessee is permitted to make an accounting policy election by class of underlying asset not to recognize lease assets and lease liabilities. If a lessee makes this election, it should recognize lease expense for such leases generally on a straight line basis over the lease term. The new guidance is effective for fiscal years, and interim periods within those years, beginning after December 15, 2018, and early adoption is permitted. We are currently evaluating the provisions of this ASU and have determined that the provisions of ASU No. 2016-02 will result in an increase in assets to recognize the present value of the lease obligations with a corresponding increase in liabilities; however, we do not expect this to have a material impact to the Company’s results of operations or cash flows.

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 update amends the accounting for credit losses on available for sale securities, whereby credit losses will be presented as an allowance as opposed to a write down. In addition, CECL will modify the accounting for purchased loans with credit deterioration since origination, so that reserves are established at the date of acquisition for purchased loans. Lastly, the amendment requires enhanced disclosures on the significant estimates and judgments used to estimate credit losses, as well as on the credit quality and underwriting standards of an organization’s portfolio. These disclosures require organizations to present the currently required credit quality disclosures disaggregated by the year of origination or vintage. 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, and early adoption is permitted. We have formed a committee that has assessed our data needs and is in the process of implementing a system to comply with the new guidance. The committee has also selected a vendor to assist in generating loan level cash flows and disclosures.  We expect to recognize a one-time cumulative effect adjustment to the allowance for loan losses and a charge to equity as of the beginning of the first reporting period in which the new standard is effective, but cannot yet determine the magnitude of any such one-time adjustment or the overall impact of the new guidance on the consolidated financial statements.

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.

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Shareholders' Equity and Earnings Per Share

9 Months Ended

Sep. 30, 2018

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 512,261 and 227,409 stock options for the three months ended September 30, 2018 and 2017, and  505,686 and 140,659 for the nine months ended September 30, 2018 and 2017, 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				Nine Months Ended
	September 30,				September 30,
	2018		2017		2018		2017
		(Dollars in thousands, except per share amounts)
Net income	$	12,375	$	8,583	$	22,099	$	22,570
Weighted average common shares outstanding for basic
earnings per common share		43,230,016		38,152,633		41,132,043		38,060,224
Dilutive effect of stock options outstanding, using
the treasury stock method		501,354		428,665		551,001		504,910
Shares used in computing diluted earnings per common share		43,731,370		38,581,298		41,683,044		38,565,134
Basic earnings per share	$	0.29	$	0.22	$	0.54	$	0.59
Diluted earnings per share	$	0.28	$	0.22	$	0.53	$	0.59

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Accumulated Other Comprehensive Income (Loss) (''AOCI'')

9 Months Ended

Sep. 30, 2018

Accumulated Other Comprehensive Income (Loss) ("AOCI")

Accumulated Other Comprehensive Income (Loss) ("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 September 30, 2018 and 2017
			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 July 1, 2018, net of taxes	$	(7,031)	$	359	$	(9,194)	$	(15,866)
Other comprehensive income (loss) before reclassification, net of taxes		(1,335)		—		(4)		(1,339)
Amounts reclassified from other comprehensive income (loss), net of taxes		—		(8)		40		32
Net current period other comprehensive income (loss), net of taxes		(1,335)		(8)		36		(1,307)
Ending balance September 30, 2018, net of taxes	$	(8,366)	$	351	$	(9,158)	$	(17,173)
Beginning balance July 1, 2017, net of taxes	$	877	$	321	$	(7,665)	$	(6,467)
Other comprehensive income (loss) before reclassification, net of taxes		312		—		(7)		305
Amounts reclassified from other comprehensive income (loss), net of taxes		—		(7)		29		22
Net current period other comprehensive income (loss), net of taxes		312		(7)		22		327
Ending balance September 30, 2017, net of taxes	$	1,189	$	314	$	(7,643)	$	(6,140)

	Nine Months Ended September 30, 2018 and 2017
			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, 2018, net of taxes	$	(362)	$	375	$	(9,265)	$	(9,252)
Other comprehensive (loss) before reclassification, net of taxes		(7,817)		—		(13)		(7,830)
Amounts reclassified from other comprehensive (loss) income, net of taxes		(187)		(24)		120		(91)
Net current period other comprehensive (loss) income, net of taxes		(8,004)		(24)		107		(7,921)
Ending balance September 30, 2018, net of taxes	$	(8,366)	$	351	$	(9,158)	$	(17,173)
Beginning balance January 1, 2017, net of taxes	$	(540)	$	336	$	(7,710)	$	(7,914)
Other comprehensive income (loss) before reclassification, net of taxes		1,725		—		(22)		1,703
Amounts reclassified from other comprehensive income (loss), net of taxes		4		(22)		89		71
Net current period other comprehensive income (loss), net of taxes		1,729		(22)		67		1,774
Ending balance September 30, 2017, net of taxes	$	1,189	$	314	$	(7,643)	$	(6,140)

	Amounts Reclassified from
	AOCI(1)
	Three Months Ended
	September 30,				Affected Line Item Where
Details About AOCI Components	2018		2017		Net Income is Presented
	(Dollars in thousands)
Unrealized gains on available-for-sale securities
and I/O strips	$	—	$	—	Gain (loss) on sales of securities
		—		—	Income tax expense
		—		—	Net of tax
Amortization of unrealized gain on securities available-
for-sale that were reclassified to securities
held-to-maturity		11		12	Interest income on taxable securities
		(3)		(5)	Income tax expense
		8		7	Net of tax
Amortization of defined benefit pension plan items (1)
Prior transition obligation		16		18
Actuarial losses		(73)		(69)
		(57)		(51)	Salaries and employee benefits
		17		22	Income tax benefit
		(40)		(29)	Net of tax
Total reclassification for the year	$	(32)	$	(22)

(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)
	Nine Months Ended
Details About AOCI Components	2018		2017		Net Income is Presented
	(Dollars in thousands)
Unrealized gains on available-for-sale securities and I/O strips	$	266	$	(6)	Gain (loss) on sales of securities
		(79)		2	Income tax expense
		187		(4)	Net of tax
Amortization of unrealized gain on securities available-for-
sale that were reclassified to securities held-to-maturity		33		38	Interest income on taxable securities
		(9)		(16)	Income tax expense
		24		22	Net of tax
Amortization of defined benefit pension plan items (1)
Prior transition obligation		48		53
Actuarial losses		(219)		(207)
		(171)		(154)	Salaries and employee benefits
		51		65	Income tax benefit
		(120)		(89)	Net of tax
Total reclassification from AOCI for the year	$	91	$	(71)

(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.

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Securities

9 Months Ended

Sep. 30, 2018

Securities

Securities

4) Securities

The amortized cost and estimated fair value of securities at September 30, 2018 and December 31, 2017 were as follows:

			Gross		Gross		Estimated
	Amortized		Unrealized		Unrealized		Fair
September 30, 2018	Cost		Gains		(Losses)		Value
	(Dollars in thousands)
Securities available-for-sale:
Agency mortgage-backed securities	$	324,309	$	18	$	(12,662)	$	311,665
U.S. Government sponsored entities		7,419		—		(13)		7,406
Total	$	331,728	$	18	$	(12,675)	$	319,071
Securities held-to-maturity:
Agency mortgage-backed securities	$	288,594	$	—	$	(12,778)	$	275,816
Municipals - exempt from Federal tax		87,138		242		(3,498)		83,882
Total	$	375,732	$	242	$	(16,276)	$	359,698

			Gross		Gross		Estimated
	Amortized		Unrealized		Unrealized		Fair
December 31, 2017	Cost		Gains		(Losses)		Value
	(Dollars in thousands)
Securities available-for-sale:
Agency mortgage-backed securities	$	378,339	$	786	$	(4,392)	$	374,733
Trust preferred securities		15,000		2,119		—		17,119
Total	$	393,339	$	2,905	$	(4,392)	$	391,852
Securities held-to-maturity:
Agency mortgage-backed securities	$	309,616	$	6	$	(4,394)	$	305,228
Municipals - exempt from Federal tax		88,725		946		(607)		89,064
Total	$	398,341	$	952	$	(5,001)	$	394,292

Securities with unrealized losses at September 30, 2018 and December 31, 2017, 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
September 30, 2018	Value		(Losses)		Value		(Losses)		Value		(Losses)
	(Dollars in thousands)
Securities available-for-sale:
Agency mortgage-backed securities	$	76,522	$	(2,290)	$	231,110	$	(10,372)	$	307,632	$	(12,662)
U.S. Government sponsored entities		7,405		(13)		—		—		7,405		(13)
Total	$	83,927	$	(2,303)	$	231,110	$	(10,372)	$	315,037	$	(12,675)
Securities held-to-maturity:
Agency mortgage-backed securities	$	71,766	$	(2,639)	$	203,293	$	(10,139)	$	275,059	$	(12,778)
Municipals - exempt from Federal tax		33,027		(996)		33,211		(2,502)		66,238		(3,498)
Total	$	104,793	$	(3,635)	$	236,504	$	(12,641)	$	341,297	$	(16,276)

	Less Than 12 Months				12 Months or More				Total
	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
December 31, 2017	Value		(Losses)		Value		(Losses)		Value		(Losses)
	(Dollars in thousands)
Securities available-for-sale:
Agency mortgage-backed securities	$	185,824	$	(1,623)	$	146,670	$	(2,769)	$	332,494	$	(4,392)
Total	$	185,824	$	(1,623)	$	146,670	$	(2,769)	$	332,494	$	(4,392)
Securities held-to-maturity:
Agency mortgage-backed securities	$	168,439	$	(1,368)	$	130,759	$	(3,026)	$	299,198	$	(4,394)
Municipals - exempt from Federal tax		18,159		(182)		19,240		(425)		37,399		(607)
Total	$	186,598	$	(1,550)	$	149,999	$	(3,451)	$	336,597	$	(5,001)

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 September 30, 2018, the Company held 495 securities (172 available-for-sale and 323 held‑to‑maturity), of which 428 had fair values below amortized cost. At September 30, 2018, there were $231,110,000 of agency mortgage-back securities available-for-sale, $203,293,000 of agency mortgage-backed securities held-to-maturity, and $33,211,000 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 $23,013,000 at September 30, 2018. 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 September 30, 2018.

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

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2018		2017		2018		2017
	(Dollars in thousands)				(Dollars in thousands)
Proceeds	$	—	$	—	$	94,291	$	6,536
Gross gains		—		—		1,243		—
Gross losses		—		—		(977)		(6)

The amortized cost and estimated fair values of securities as of September 30, 2018 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 one through five years	$	7,419	$	7,406
Agency mortgage-backed securities		324,309		311,665
Total	$	331,728	$	319,071

	Held-to-maturity
	Amortized		Estimated
	Cost		Fair Value
	(Dollars in thousands)
Due 3 months or less	$	503	$	503
Due after 3 months through one year		286		286
Due after one through five years		4,558		4,587
Due after five through ten years		23,713		23,417
Due after ten years		58,078		55,089
Agency mortgage-backed securities		288,594		275,816
Total	$	375,732	$	359,698

Securities with amortized cost of $44,595,000 and $110,874,000 as of  September 30, 2018 and December 31, 2017 were pledged to secure public deposits and for other purposes as required or permitted by law or contract.

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Loans

9 Months Ended

Sep. 30, 2018

Loans

Loans

5) Loans

Loans were as follows for the periods indicated:

	September 30,		December 31,
	2018		2017
	(Dollars in thousands)
Loans held-for-investment:
Commercial	$	600,594	$	573,296
Real estate:
CRE		988,491		772,867
Land and construction		131,548		100,882
Home equity		116,657		79,176
Residential mortgages		52,441		44,561
Consumer		9,932		12,395
Loans		1,899,663		1,583,177
Deferred loan fees, net		(276)		(510)
Loans, net of deferred fees		1,899,387		1,582,667
Allowance for loan losses		(27,426)		(19,658)
Loans, net	$	1,871,961	$	1,563,009

At September 30, 2018, total net loans included in the table above include $43,311,000,  $115,158,000 and $193,787,000, 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, 2017, total net loans included in the table above include $58,551,000, of the loans acquired in the Focus transaction that were not purchased credit impaired loans.

There was a ($425,000) credit to the provision for loan losses for the third quarter of 2018, compared to a provision for loan losses of $115,000 for the third quarter of 2017. The credit to the provision for loan losses for the third quarter of 2018 was primarily due to net recoveries of $1,187,000. For the nine months ended September 30, 2018, there was a $7,279,000 provision for loan losses compared to a $390,000 provision for loan losses for the nine months ended September 30, 2017. The increase in the provision for loan losses for the first nine months of 2018 compared to the first nine months of 2017 was primarily due to a single large lending relationship that was placed on nonaccrual during the second quarter of 2018.  At September 30, 2018, the recorded investment of this lending relationship was $21,764,000, and the Company had a $7,000,000 specific loan loss reserve allocated for this lending relationship.  Additionally, subsequent to the end of the third quarter of 2018, the recorded investment of this lending relationship was reduced to $17,384,000.  Net recoveries totaled $1,187,000 for the third quarter of 2018, and $489,000 for the first nine months of 2018, compared to net recoveries of $236,000 for the third quarter of 2017, and net recoveries of $269,000 for the first nine months of 2017.

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

	Three Months Ended September 30, 2018
	Commercial		Real Estate		Consumer		Total
	(Dollars in thousands)
Beginning of period balance	$	17,522	$	9,020	$	122	$	26,664
Charge-offs		(719)		—		(25)		(744)
Recoveries		1,897		34		—		1,931
Net (charge-offs) recoveries		1,178		34		(25)		1,187
Provision (credit) for loan losses		(1,427)		1,022		(20)		(425)
End of period balance	$	17,273	$	10,076	$	77	$	27,426

	Three Months Ended September 30, 2017
	Commercial		Real Estate		Consumer		Total
	(Dollars in thousands)
Beginning of period balance	$	11,259	$	7,982	$	156	$	19,397
Charge-offs		(111)		—		—		(111)
Recoveries		281		66		—		347
Net recoveries		170		66		—		236
Provision (credit) for loan losses		(441)		592		(36)		115
End of period balance	$	10,988	$	8,640	$	120	$	19,748

	Nine Months Ended September 30, 2018
	Commercial		Real Estate		Consumer		Total
	(Dollars in thousands)
Beginning of period balance	$	10,608	$	8,950	$	100	$	19,658
Charge-offs		(1,835)		—		(25)		(1,860)
Recoveries		2,229		120		—		2,349
Net (charge-offs) recoveries		394		120		(25)		489
Provision for loan losses		6,271		1,006		2		7,279
End of period balance	$	17,273	$	10,076	$	77	$	27,426

	Nine Months Ended September 30, 2017
	Commercial		Real Estate		Consumer		Total
	(Dollars in thousands)
Beginning of period balance	$	10,656	$	8,327	$	106	$	19,089
Charge-offs		(2,179)		—		—		(2,179)
Recoveries		1,453		995		—		2,448
Net (charge-offs) recoveries		(726)		995		—		269
Provision (credit) for loan losses		1,058		(682)		14		390
End of period balance	$	10,988	$	8,640	$	120	$	19,748

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:

	September 30, 2018
	Commercial		Real Estate		Consumer		Total
	(Dollars in thousands)
Allowance for loan losses:
Ending allowance balance attributable to loans:
Individually evaluated for impairment	$	7,089	$	—	$	—	$	7,089
Collectively evaluated for impairment		10,184		10,076		77		20,337
Acquired with deteriorated credit quality		—		—		—		—
Total allowance balance	$	17,273	$	10,076	$	77	$	27,426
Loans:						—
Individually evaluated for impairment	$	18,843	$	6,206	$	—	$	25,049
Collectively evaluated for impairment		581,751		1,282,931		9,932		1,874,614
Acquired with deteriorated credit quality		—		—		—		—
Total loan balance	$	600,594	$	1,289,137	$	9,932	$	1,899,663

	December 31, 2017
	Commercial		Real Estate		Consumer		Total
	(Dollars in thousands)
Allowance for loan losses:
Ending allowance balance attributable to loans:
Individually evaluated for impairment	$	290	$	—	$	—	$	290
Collectively evaluated for impairment		10,318		8,950		100		19,368
Acquired with deteriorated credit quality		—		—		—		—
Total allowance balance	$	10,608	$	8,950	$	100	$	19,658
Loans:
Individually evaluated for impairment	$	1,775	$	998	$	1	$	2,774
Collectively evaluated for impairment		571,521		996,488		12,394		1,580,403
Acquired with deteriorated credit quality		—		—		—		—
Total loan balance	$	573,296	$	997,486	$	12,395	$	1,583,177

The following table presents loans held-for-investment individually evaluated for impairment by class of loans as of September 30, 2018 and December 31, 2017. 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:

	September 30, 2018						December 31, 2017
					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	$	6,246	$	6,246	$	—	$	1,243	$	1,243	$	—
Real estate:
CRE		5,639		5,639		—		500		500		—
Land and construction		—		—		—		138		119		—
Home Equity		567		567		—		379		379		—
Consumer		—		—		—		1		1		—
Total with no related allowance recorded		12,452		12,452		—		2,261		2,242		—
With an allowance recorded:
Commercial		12,597		12,597		7,089		589		532		290
Total with an allowance recorded		12,597		12,597		7,089		589		532		290
Total	$	25,049	$	25,049	$	7,089	$	2,850	$	2,774	$	290

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

	Three Months Ended September 30, 2018
			Real Estate
					Land and		Home
	Commercial		CRE		Construction		Equity		Consumer		Total
	(Dollars in thousands)
Average of impaired loans during the period	$	19,638	$	5,720	$	—	$	572	$	—	$	25,930
Interest income during impairment	$	—	$	—	$	—	$	—	$	—	$	—
Cash-basis interest recognized	$	—	$	—	$	—	$	—	$	—	$	—

	Three Months Ended September 30, 2017
			Real Estate
					Land and		Home
	Commercial		CRE		Construction		Equity		Consumer		Total
	(Dollars in thousands)
Average of impaired loans during the period	$	2,010	$	501	$	641	$	394	$	1	$	3,547
Interest income during impairment	$	—	$	—	$	3	$	—	$	—	$	3
Cash-basis interest recognized	$	—	$	—	$	—	$	—	$	—	$	—

	Nine Months Ended September 30, 2018
			Real Estate
					Land and		Home
	Commercial		CRE		Construction		Equity		Consumer		Total
	(Dollars in thousands)
Average of impaired loans during the period	$	11,056	$	3,110	$	30	$	472	$	—	$	14,668
Interest income during impairment	$	—	$	—	$		$	—	$	—	$	—
Cash-basis interest recognized	$	—	$	—	$	—	$	—	$	—	$	—

	Nine Months Ended September 30, 2017
			Real Estate
					Land and		Home
	Commercial		CRE		Construction		Equity		Consumer		Total
	(Dollars in thousands)
Average of impaired loans during the period	$	2,625	$	583	$	419	$	326	$	2	$	3,955
Interest income during impairment	$	—	$	—	$	3	$	—	$	—	$	3
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:

	September 30,				December 31,
	2018		2017		2017
	(Dollars in thousands)
Nonaccrual loans - held-for-investment	$	23,342	$	2,560	$	2,250
Restructured and loans over 90 days past due and still accruing		1,373		931		235
Total nonperforming loans		24,715		3,491		2,485
Other restructured loans		334		325		289
Total impaired loans	$	25,049	$	3,816	$	2,774

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

	September 30, 2018						December 31, 2017
				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	$	17,361	$	1,148	$	18,509	$	1,250	$	235	$	1,485
Real estate:
CRE		5,639		—		5,639		501		—		501
Land and construction		—		—		—		119		—		119
Home equity		342		225		567		379		—		379
Consumer		—		—		—		1		—		1
Total	$	23,342	$	1,373	$	24,715	$	2,250	$	235	$	2,485

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

	September 30, 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	$	6,430	$	2,098	$	1,456	$	9,984	$	590,610	$	600,594
Real estate:
CRE		—		—		—		—		988,491		988,491
Land and construction		—		—		—		—		131,548		131,548
Home equity		967		—		—		967		115,690		116,657
Residential mortgages		—		—		—		—		52,441		52,441
Consumer		—		—		—		—		9,932		9,932
Total	$	7,397	$	2,098	$	1,456	$	10,951	$	1,888,712	$	1,899,663

	December 31, 2017
	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	$	4,288	$	1,224	$	589	$	6,101	$	567,195	$	573,296
Real estate:
CRE		—		—		500		500		772,367		772,867
Land and construction		—		—		119		119		100,763		100,882
Home equity		223		—		—		223		78,953		79,176
Residential mortgages		—		—		—		—		44,561		44,561
Consumer		—		—		—		—		12,395		12,395
Total	$	4,511	$	1,224	$	1,208	$	6,943	$	1,576,234	$	1,583,177

Past due loans 30 days or greater totaled $10,951,000 and $6,943,000 at September 30, 2018 and December 31, 2017, respectively, of which $617,000 and $1,410,000 were on nonaccrual, respectively. At September 30, 2018, there were also $22,725,000 of loans less than 30 days past due included in nonaccrual loans held-for-investment, which included $21,764,000 of loans related to a single lending relationship. At December 31, 2017, there were also $840,000 of 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 being 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 September 30, 2018 and December 31, 2017.

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

	September 30, 2018						December 31, 2017
	Nonclassified		Classified		Total		Nonclassified		Classified		Total
Commercial	$	577,325	$	23,269	$	600,594	$	554,913	$	18,383	$	573,296
Real estate:
CRE		982,852		5,639		988,491		766,988		5,879		772,867
Land and construction		131,548		—		131,548		100,763		119		100,882
Home equity		115,019		1,638		116,657		78,486		690		79,176
Residential mortgages		52,441		—		52,441		44,561		—		44,561
Consumer		9,932		—		9,932		12,394		1		12,395
Total	$	1,869,117	$	30,546	$	1,899,663	$	1,558,105	$	25,072	$	1,583,177

The increase in classified assets at September 30, 2018 was primarily due to seasonal advances on a line of credit associated with a single large lending relationship that was moved to classified loans in the fourth quarter of 2017, which totaled $21,764,000 at September 30, 2018, compared to $12,500,000 at December 31, 2017. 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 balance of troubled debt restructurings at September 30, 2018 was $676,000, which are all accrual loans. The balance of troubled debt restructurings at December 31, 2017 was $325,000, which included $16,000 of nonaccrual loans and $309,000 of accruing loans. Approximately $46,000 and $1,000 of specific reserves were established with respect to these loans as of September 30, 2018 and December 31, 2017.

The following table presents loans by class modified as troubled debt restructurings:

	During the Nine Months Ended
		September 30, 2018
				Pre-modification		Post-modification
		Number		Outstanding		Outstanding
		of		Recorded		Recorded
Troubled Debt Restructurings:		Contracts		Investment		Investment
	(Dollars in thousands)
Commercial		2	$	159	$	159
Home equity		1		225		225
Total		3	$	384	$	384

The following table presents loans by class modified as troubled debt restructurings:

	During the Three and Nine Months Ended
		September 30, 2017
				Pre-modification		Post-modification
		Number		Outstanding		Outstanding
		of		Recorded		Recorded
Troubled Debt Restructurings:		Contracts		Investment		Investment
	(Dollars in thousands)
Commercial		3	$	318	$	318
Total		3	$	318	$	318

During the three months ended September 30, 2018, 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. The Company has committed to lend no additional amounts to customers with outstanding loans that are classified as troubled debt restructurings as of September 30, 2018.

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 nine months ended September 30, 2018 and 2017.

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.

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Business Combinations

9 Months Ended

Sep. 30, 2018

Business Combinations

Business Combinations

6) Business Combinations

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		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
Liabililities 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 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 will be 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		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 avaiable-for-sale		64,144		(421)	(b)		63,723
Loans		196,694		18,783	(c)		215,477
Allowance for loan lossess		(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
Liabililities assumed:
Deposits	$	281,189	$	51	(g)		281,240
Other borrowings		62		—			62
Other liabilities		2,617		(188)	(h)		2,429
Total liabilities	$	283,868	$	(137)			283,731
Net assets acquired							23,011
Purchase price							47,280
Goodwill recorded in the merger						$	24,269

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 ofsset 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 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 will be 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 over accrued accounts payable.

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

The Company believes the merger provides the opportunity to combine three independent business banking franchises with similar philosophies and cultures into a combined $3.2 billion business bank based in San Jose, California. The pooling of the three banks’ resources and knowledge enhance our capabilities, operational efficiencies, and community outreach. The Company also believes the combined bank will be much better positioned to meet the needs of our customers, shareholders and the community.  The one-time pre-tax acquisition and integration costs of $16,000 and $5,452,000 for the three months and nine months ended September 30, 2018, respectively, were included in other noninterest expense. In addition, salaries and employee benefits included severance and retention expense of $183,000 and $3,576,000 for the three months and nine months ended September 30, 2018, respectively, related to the Tri-Valley and United American acquisitions.  Total severance, retention, acquisition and integration costs were $199,000 and $9,028,000 for the three months and nine months ended September 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.

Goodwill of $13,819,000 arising from the Tri-Valley acquisition and $24,269,000 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. Management’s preliminary valuation of the tangible and intangible assets acquired and liabilities assumed, which are based on assumptions that are subject to change, and the resulting allocation of the consideration paid for the allocation is reflected in the tables above. Prior to the end of the one-year measurement period for finalizing the consideration paid allocation, if information becomes available which would indicate adjustments are required to the allocation, such adjustments will be included in the allocation in the reporting period in which the adjustment amounts are determined. Loan valuations may be adjusted based on new information obtained by the Company in future periods that may reflect conditions or events that existed on the acquisition date. Deferred tax assets may be adjusted for purchase accounting adjustments on open areas such as loans or upon filing final “stub” period tax returns for April 6, 2018 for Tri-Valley, and May 4, 2018 for United American. The closing equity balance for Tri-Valley and United American are also subject to adjustments for invoices received after the close of the transaction that were attributable to their operations through closing.

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Goodwill and Other Intangible Assets

9 Months Ended

Sep. 30, 2018

Goodwill and Other Intangible Assets

Goodwill and Other Intangible Assets

7) Goodwill and Other Intangible Assets

Goodwill

At September 30, 2018, the carrying value of goodwill was $83,752,000, which included $13,045,000 of goodwill related to its acquisition of Bay View Funding, $32,619,000 from its acquisition of Focus, $13,819,000 from its acquisition of Tri-Valley and $24,269,000 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, 2017 with the assistance of an independent valuation firm.  No events or circumstances since the November 30, 2017 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 $469,000 at September 30, 2018.

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 $143,000 at September 30, 2018.

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 $2,576,000 and $1,995,000 at September 30, 2018 and December 31, 2017, respectively.

Other intangible assets acquired in the acquisition of Bay View Funding in November 2014 included: a below market value lease intangible asset of $109,000 (amortized over 3 years), customer relationship and brokered relationship intangible assets of $1,900,000, (amortized over the 10 year estimated useful lives), and a non-compete agreement intangible asset of $250,000 (amortized over 3 years). Accumulated amortization of the customer relationship and brokered relationship intangible assets was $743,000 and $601,000 at September 30, 2018 and December 31, 2017, respectively. The below market lease and non-compete agreement intangible assets were fully amortized at December 31, 2017.

Estimated amortization expense for 2018, 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)
2018	$	585	$	170	$	208	$	14	$	775	$	190	$	1,942
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
Thereafter		2,020		—		603		106		549		159		3,437
	$	5,723	$	660	$	1,768	$	210	$	4,292	$	1,299	$	13,952

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 September 30, 2018 and December 31, 2017.

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Income Taxes

9 Months Ended

Sep. 30, 2018

Income Taxes

Income Taxes

8) Income Taxes

Some items of income and expense are recognized in different years for tax purposes than when applying generally accepted accounting principles, leading 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.

On December 22, 2017, the Tax Cuts and Jobs Act (the “Tax Act”), was signed into law, which among other items reduces the federal corporate tax rate to 21% from 35%, effective January 1, 2018.

The Company had net deferred tax assets of $28,143,000, and $16,247,000, at September 30, 2018, and December 31, 2017, 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 September 30, 2018 and December 31, 2017 will be fully realized in future years.

The following table reflects the carry 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:

	September 30,		Decemebr 31,
	2018		2017
	(Dollars in thousands)
Low income housing investments	$	3,139	$	3,411
Future commitments	$	287	$	302

The Company expects future commitments of $15,000 to be paid in 2018, and $272,000 in 2019 through 2023.

For tax purposes, the Company had low income housing tax credits of $106,000 and $110,000 for the three months ended September 30, 2018 and September 30, 2017, respectively, and low income housing investment losses of $117,000 and $115,000, respectively.  For tax purposes, the Company had low income housing tax credits of $319,000 and $329,000 for the nine months ended September 30, 2018 and September 30, 2017, respectively, and low income housing investment losses of $351,000 and $345,000, respectively.  The Company recognized low income housing investment expense as a component of income tax expense.

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Benefit Plans

9 Months Ended

Sep. 30, 2018

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				Nine Months Ended
	September 30,				September 30,
	2018		2017		2018		2017
	(Dollars in thousands)
Components of net periodic benefit cost:
Service cost	$	62	$	81	$	186	$	243
Interest cost		237		259		711		777
Amortization of net actuarial loss		73		69		219		207
Net periodic benefit cost	$	372	$	409	$	1,116	$	1,227

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:

	September 30,		December 31,
	2018		2017
	(Dollars in thousands)
Change in projected benefit obligation:
Projected benefit obligation at beginning of year	$	6,711	$	6,301
Interest cost		170		243
Actuarial loss		—		167
Projected benefit obligation at end of period	$	6,881	$	6,711

	September 30,		December 31,
	2018		2017
	(Dollars in thousands)
Net actuarial loss	$	2,569	$	2,453
Prior transition obligation		1,171		1,238
Accumulated other comprehensive loss	$	3,740	$	3,691

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2018		2017		2018		2017
	(Dollars in thousands)
Amortization of prior transition obligation	$	(16)	$	(18)	$	(48)	$	(53)
Interest cost		56		61		170		182
Net periodic benefit cost	$	40	$	43	$	122	$	129

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Fair Value

9 Months Ended

Sep. 30, 2018

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 September 30, 2018
Available-for-sale securities:
Agency mortgage-backed securities	$	311,665		—	$	311,665		—
U.S. Government sponsored entities		7,406		—		7,406		—
I/O strip receivables		863		—		863		—
Assets at December 31, 2017
Available-for-sale securities:
Agency mortgage-backed securities	$	374,733		—	$	374,733		—
Trust preferred securities		17,119		—		17,119		—
I/O strip receivables		968		—		968		—

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 September 30, 2018
Impaired loans - held-for-investment:
Commercial	$	5,508	—	—	$	5,508
	$	5,508	—	—	$	5,508
Assets at December 31, 2017
Impaired loans - held-for-investment:
Commercial	$	242	—	—	$	242
Real estate:
Land and construction		119	—	—		119
	$	361	—	—	$	361

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:

	September 30, 2018		December 31, 2017
	(Dollars in thousands)
Impaired loans held-for-investment:
Book value of impaired loans held-for-investment carried at fair value	$	12,597	$	651
Book value of impaired loans held-for-investment carried at cost		12,452		2,123
Total impaired loans held-for-investment	$	25,049	$	2,774
Impaired loans held-for-investment carried at fair value:
Book value of impaired loans held-for-investment carried at fair value	$	12,597	$	651
Specific valuation allowance		(7,089)		(290)
Impaired loans held-for-investment carried at fair value, net	$	5,508	$	361

Impaired loans held‑for‑investment which are measured primarily for impairment using the fair value of the collateral were $25,049,000 at September 30, 2018.  In addition, these loans had a specific valuation allowance of $7,089,000 at September 30, 2018. Impaired loans held‑for‑investment totaling $12,597,000 at September 30, 2018, were carried at fair value as a result of the aforementioned partial charge‑offs and specific valuation allowances at period‑end. The remaining $12,452,000 of impaired loans were carried at cost at September 30, 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 the first nine months of 2018 on impaired loans held‑for‑investment carried at fair value at September 30, 2018 resulted in an additional provision for loan losses of $7,042,000.  

At September 30, 2018, there were no foreclosed assets.

Impaired loans held‑for‑investment were $2,774,000 at December 31, 2017. There were no partial charge‑offs at December 31, 2017.  In addition, these loans had a specific valuation allowance of $290,000 at December 31, 2017. Impaired loans held‑for‑investment totaling $651,000 at December 31, 2017 were carried at fair value as a result of the aforementioned partial charge‑offs and specific valuation allowances at year‑end. The remaining $2,123,000 of impaired loans were carried at cost at December 31, 2017, 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 2017 on impaired loans held‑for‑investment carried at fair value at December 31, 2017 resulted in an additional provision for loan losses of $254,000.

At December 31, 2017, 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:

	September 30, 2018
			Valuation	Unobservable	Range
	Fair Value		Techniques	Inputs	(Weighted Average)
	(Dollars in thousands)
Impaired loans - held-for-investment:
Commercial	$	5,508	Market Approach	Discount adjustment for differences between comparable sales	Less than 1  %

	December 31, 2017
			Valuation	Unobservable	Range
	Fair Value		Techniques	Inputs	(Weighted Average)
	(Dollars in thousands)
Impaired loans - held-for-investment:
Commercial	$	242	Market Approach	Discount adjustment for differences between comparable sales	Less than 1%
Real estate:
Land and construction		119	Market Approach	Discount adjustment for differences between comparable sales	Less than 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 September 30, 2018 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	$	381,029	$	381,029	$	—	$	—	$	381,029
Securities available-for-sale		319,071		—		319,071		—		319,071
Securities held-to-maturity		375,732		—		359,698		—		359,698
Loans (including loans held-for-sale), net		1,878,305		—		6,344		1,840,231		1,846,575
FHLB stock, FRB stock, and other
investments		25,210		—		—		—		N/A
Accrued interest receivable		9,213		—		2,327		6,886		9,213
I/O strips receivables		863		—		863		—		863
Liabilities:
Time deposits	$	155,879	$	—	$	156,206	$	—	$	156,206
Other deposits		2,589,420		—		2,589,420		—		2,589,420
Subordinated debt		39,322		—		39,322		—		39,322
Accrued interest payable		1,026		—		1,026		—		1,026

The carrying amounts and estimated fair values of the Company’s financial instruments at December 31, 2017:

			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	$	316,222	$	316,222	$	—	$	—	$	316,222
Securities available-for-sale		391,852		—		391,852		—		391,852
Securities held-to-maturity		398,341		—		394,292		—		394,292
Loans (including loans held-for-sale), net		1,566,428		—		3,419		1,507,967		1,511,386
FHLB stock, FRB stock, and other
investments		17,911		—		—		—		N/A
Accrued interest receivable		7,985		—		2,423		5,562		7,985
I/O strips receivables		968		—		968		—		968
Liabilities:
Time deposits	$	194,561	$	—	$	194,844	$	—	$	194,844
Other deposits		2,288,428		—		2,288,428		—		2,288,428
Subordinated debt		39,183		—		40,384		—		40,384
Accrued interest payable		389		—		389		—		389

The methods and assumptions, not previously discussed, used to estimate the fair value of loans, including loans held-for-sale, are described as follows:

The fair value of loans held‑for‑sale is estimated based upon binding contracts and quotes from third parties resulting in a Level 2 classification.

The Company adopted ASU No. 2016-01, effective January 1, 2018. Adoption of the standard resulted in the use of an exit price rather than an entrance price to determine the fair value of loans, excluding loans held-for-sale, using discounted cash flow analyses as of September 30, 2018.  The discount rates used to determine fair value use interest rate spreads that reflect factors such as liquidity, credit, and nonperformance risk of the loans, resulting in a level 3 classification. 

Fair values of loans, excluding loans held-for-sale, were estimated as follows as of December 31, 2017: For variable rate loans that reprice frequently and with no significant change in credit risk, fair values are based on carrying values resulting in a Level 3 classification. Fair values for other loans are estimated using discounted cash flow analyses, using interest rates currently being offered for loans with similar terms to borrowers of similar credit quality resulting in a Level 3 classification. The methods utilized to estimate the fair value of loans as of December 31, 2017 do not necessarily represent an exit price.

Impaired loans as of September 30, 2018 and December 31, 2017 are valued at the lower of cost or fair value as described previously.

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Equity Plan

9 Months Ended

Sep. 30, 2018

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 nine months ended September 30, 2018, the Company granted 305,500 shares of nonqualified stock options and 97,818 shares of restricted stock. There were 1,186,800 shares available for the issuance of equity awards under the 2013 Plan as of September 30, 2018.

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, 2018	1,602,732	$	9.54
Granted	305,500	$	16.82
Exercised	(259,770)	$	9.62
Forfeited or expired	(84,079)	$	14.20
Outstanding at September 30, 2018	1,564,383	$	10.69	6.64	$	7,176,631
Vested or expected to vest	1,470,520			6.64	$	6,746,033
Exercisable at September 30, 2018	1,011,193			5.46	$	6,475,976

Information related to the equity plans for the periods indicated:

	Nine Months Ended
	September 30,
	2018		2017
Intrinsic value of options exercised	$	1,767,884	$	1,331,528
Cash received from option exercise	$	2,499,481	$	1,352,236
Tax benefit realized from option exercises	$	513,901	$	543,654
Weighted average fair value of options granted	$	3.07	$	2.66

As of September 30, 2018, there was $1,499,000 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 2.80 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:

	Nine Months Ended
	September 30,
	2018		2017
Expected life in months(1)	72		72
Volatility(1)	21	%	24	%
Weighted average risk-free interest rate(2)	2.87	%	1.94	%
Expected dividends(3)	2.62	%	2.78	%

(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, 2018	181,185	$	11.66
Granted	97,818	$	16.83
Vested	(67,015)	$	16.69
Forfeited or expired	(2,440)	$	12.65
Nonvested shares at September 30, 2018	209,548	$	11.04

As of September 30, 2018, there was $2,386,000 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 2.67 years.

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Subordinated Debt

9 Months Ended

Sep. 30, 2018

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.

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Capital Requirements

9 Months Ended

Sep. 30, 2018

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 September 30, 2018, 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 to be phased-in over four years beginning on January 1, 2016. The buffer was 0.625% of risk-weighted assets for 2016, 1.25% for 2017, and is 1.875% for 2018, and will be 2.5% for 2019 and thereafter. 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 September 30, 2018.

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 September 30, 2018 and December 31, 2017, 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 September 30, 2018, and December 31, 2017.

					Required For
					Capital
					Adequacy
					Purposes
	Actual				Under Basel III
	Amount		Ratio		Amount		Ratio (1)
	(Dollars in thousands)
As of September 30, 2018
Total Capital	$	334,152	14.4	%	$	228,973	9.875	%
(to risk-weighted assets)
Tier 1 Capital	$	266,654	11.5	%	$	182,599	7.875	%
(to risk-weighted assets)
Common Equity Tier 1 Capital	$	266,654	11.5	%	$	147,818	6.375	%
(to risk-weighted assets)
Tier 1 Capital	$	266,654	8.6	%	$	124,005	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.

					Required For
					Capital
					Adequacy
					Purposes
	Actual				Under Basel III
	Amount		Ratio		Amount		Ratio (1)
		(Dollars in thousands)
As of December 31, 2017
Total Capital	$	288,754	14.4	%	$	185,338	9.250	%
(to risk-weighted assets)
Tier 1 Capital	$	229,258	11.4	%	$	145,265	7.250	%
(to risk-weighted assets)
Common Equity Tier 1 Capital	$	229,258	11.4	%	$	115,210	5.750	%
(to risk-weighted assets)
Tier 1 Capital	$	229,258	8.0	%	$	114,959	4.000	%
(to average assets)

(1) Includes 1.25% capital conservation buffer, effective January 1, 2017, 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 September 30, 2018, and December 31, 2017.

									Required For
									Capital
					To Be Well-Capitalized				Adequacy
					Under Basel III Regulatory				Purposes
	Actual				Requirements				Under Basel III
	Amount		Ratio		Amount		Ratio		Amount		Ratio (1)
	(Dollars in thousands)
As of September 30, 2018
Total Capital	$	310,636	13.4	%	$	231,696	10.0	%	$	228,800	9.875	%
(to risk-weighted assets)
Tier 1 Capital	$	282,460	12.2	%	$	185,357	8.0	%	$	182,461	7.875	%
(to risk-weighted assets)
Common Equity Tier 1 Capital	$	282,460	12.2	%	$	150,602	6.5	%	$	147,706	6.375	%
(to risk-weighted assets)
Tier 1 Capital	$	282,460	9.1	%	$	154,920	5.0	%	$	123,936	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.

									Required For
									Capital
					To Be Well-Capitalized				Adequacy
					Under Basel III Regulatory				Purposes
	Actual				Requirements				Under Basel III
	Amount		Ratio		Amount		Ratio		Amount		Ratio (1)
		(Dollars in thousands)
As of December 31, 2017
Total Capital	$	265,102	13.2	%	$	200,274	10.0	%	$	185,253	9.250	%
(to risk-weighted assets)
Tier 1 Capital	$	244,790	12.2	%	$	160,219	8.0	%	$	145,198	7.250	%
(to risk-weighted assets)
Common Equity Tier 1 Capital	$	244,790	12.2	%	$	130,178	6.5	%	$	115,157	5.750	%
(to risk-weighted assets)
Tier 1 Capital	$	244,790	8.5	%	$	143,655	5.0	%	$	114,924	4.000	%
(to average assets)

(1) Includes 1.25% capital conservation buffer, effective January 1, 2017, except the Tier 1 Capital to average assets ratio.

The Subordinated Debt, net of unamortized issuance costs, totaled $39,322,000 at September 30, 2018, 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 September 30, 2018, HBC would not be required to obtain regulatory approval, and the amount available for cash dividends is $26,057,000. Similar restrictions applied to the amount and sum of loan advances and other transfers of funds from HBC to the parent company. During the third quarter of 2018, HBC distributed dividends of $5,000,000 for a total of $13,000,000 for the first nine months of 2018.

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Loss Contingencies

9 Months Ended

Sep. 30, 2018

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.

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Revenue Recognition

9 Months Ended

Sep. 30, 2018

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. As stated in Note 1 Basis of Presentation, the implementation of the new standard did not have a material impact on the measurement or recognition of revenue; as such, a cumulative effect adjustment to opening retained earnings was not deemed necessary.  Results for reporting periods beginning after January 1, 2018 are presented under Topic 606, while prior period amounts were not adjusted and continue to be reported in accordance with our historic accounting under 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 on Deposit Accounts

Service charges 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.

Interchange Revenue

Interchange revenue primarily consists of interchange fees, volume-related incentives and ATM charges. As the card-issuing bank, interchange fees represent our portion of discount fees paid by merchants for credit / debit card transactions processed through the interchange network. The levels and structure of interchange rates are set by the credit card companies and are based on cardholder purchase volumes. The Company earns interchange income as cardholder transactions occur and interchange fees are settled on a daily basis.  Since interchange fees are settled on a daily basis, the Company believes the application of Topic 606 to interchange fees would likely not lead to significantly different recognition and measurement outcomes when compared to our current accounting practice. In addition, the Company will continue to consider any constraint on the variability of consideration due to returns, refunds and chargebacks.  ATM charges consist of fees received from non-customers using a bank-owned ATM and fees received for customers using a nonbank-owned ATM. These fees are earned when these types of ATM transactions occur.

Merchant Services Revenue

Revenue from the Company’s merchant services business consists principally of transaction and account management fees charged to merchants for the electronic processing of transactions. These fees are net of interchange fees paid to the credit card issuing bank, card company assessments, and revenue sharing amounts.

Based on the insignificant level of merchant services revenue, the Company has concluded that the application of Topic 606 to merchant services account management fees would likely not lead to significantly different recognition and measurement outcomes when compared to our current accounting practice. As a result, revenue from account management fees will continue to be recognized by the Company at the end of each month since the end of this measurement period allows us to reliably measure our progress towards completion of our performance obligation.

Other

Noninterest miscellaneous fees consist of charges for various other services including safe deposit box rentals, wire transfers, check cashing, telephone transfers, and online business banking. Given the insignificance of these amounts individually and in total, further consideration of these revenue streams under Topic 606 is not considered necessary.

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
	September 30,
	2018		2017
	(Dollars in thousands)
Noninterest Income In-scope of Topic 606:
Service charges and fees on deposit accounts	$	551	$	510
Interchange fees		83		75
Merchant services revenue		39		44
Other		179		166
Total noninterest income in-scope of Topic 606		852		795
Noninterest Income Out-of-scope of Topic 606		1,354		1,665
Total noninterest income	$	2,206	$	2,460

	Nine Months Ended
	September 30,
	2018		2017
	(Dollars in thousands)
Noninterest Income In-scope of Topic 606:
Service charges and fees on deposit accounts	$	1,524	$	1,449
Interchange fees		239		208
Merchant services revenue		122		129
Other		479		498
Total noninterest income in-scope of Topic 606		2,364		2,284
Noninterest Income Out-of-scope of Topic 606		4,817		4,764
Total noninterest income	$	7,181	$	7,048

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Noninterest Expense

9 Months Ended

Sep. 30, 2018

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				Nine Months Ended
	September 30,				September 30,
	2018		2017		2018		2017
	(Dollars in thousands)
Salaries and employee benefits (1)	$	10,719	$	9,071	$	35,302	$	27,766
Occupancy and equipment		1,559		1,142		3,927		3,426
Professional fees		721		695		1,116		2,439
Amortization of intangible assets		631		296		1,336		1,083
Software subscriptions		555		475		1,747		1,333
Data processing		525		411		1,501		1,080
Insurance expense		430		401		1,236		1,123
Acquisition and integration related costs		16		—		5,452		—
Other		2,572		2,343		6,963		7,166
Total	$	17,728	$	14,834	$	58,580	$	45,416

(1) Includes severance and retention retention expense related to the Tri-Valley and United American acquistions of $183,000 and $3,576,000 for third quarter of 2018 and the first nine months of 2018, respectively

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Business Segment Information

9 Months Ended

Sep. 30, 2018

Business Segment Information

Business Segment Information

17) 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 September 30, 2018
	Banking(1)		Factoring		Consolidated
	(Dollars in thousands)
Interest income	$	30,425		4,185	$	34,610
Intersegment interest allocations		601		(601)		—
Total interest expense		2,159		—		2,159
Net interest income		28,867		3,584		32,451
Provision (credit) for loan losses		(671)		246		(425)
Net interest income after provision		29,538		3,338		32,876
Noninterest income		2,011		195		2,206
Noninterest expense (2)		16,045		1,683		17,728
Intersegment expense allocations		172		(172)		—
Income before income taxes		15,676		1,678		17,354
Income tax (benefit) expense		4,483		496		4,979
Net income	$	11,193	$	1,182	$	12,375
Total assets	$	3,107,897	$	85,013	$	3,192,910
Loans, net of deferred fees	$	1,828,379	$	71,008	$	1,899,387
Goodwill	$	70,708	$	13,044	$	83,752

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

(2) The banking segment’s noninterest expense includes acquisition cost of $199,000

	Three Months Ended September 30, 2017
	Banking(1)		Factoring		Consolidated
	(Dollars in thousands)
Interest income	$	24,805	$	3,150	$	27,955
Intersegment interest allocations		284		(284)		—
Total interest expense		1,634		—		1,634
Net interest income		23,455		2,866		26,321
Provision for loan losses		107		8		115
Net interest income after provision		23,348		2,858		26,206
Noninterest income		2,101		359		2,460
Noninterest expense		13,149		1,685		14,834
Intersegment expense allocations		130		(130)		—
Income before income taxes		12,430		1,402		13,832
Income tax expense		4,660		589		5,249
Net income	$	7,770	$	813	$	8,583
Total assets	$	2,776,262	$	67,686	$	2,843,948
Loans, net of deferred fees	$	1,517,186	$	48,764	$	1,565,950
Goodwill	$	32,620	$	13,044	$	45,664

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

	Nine Months Ended September 30, 2018
	Banking(1)		Factoring		Consolidated
	(Dollars in thousands)
Interest income	$	83,781	$	10,686	$	94,467
Intersegment interest allocations		1,304		(1,304)		—
Total interest expense		5,504		—		5,504
Net interest income		79,581		9,382		88,963
Provision for loan losses		6,958		321		7,279
Net interest income after provision		72,623		9,061		81,684
Noninterest income		6,628		553		7,181
Noninterest expense (2)		53,813		4,767		58,580
Intersegment expense allocations		574		(574)		—
Income before income taxes		26,012		4,273		30,285
Income tax expense		6,923		1,263		8,186
Net income	$	19,089	$	3,010	$	22,099
Total assets	$	3,107,897		85,013	$	3,192,910
Loans, net of deferred fees	$	1,828,379		71,008	$	1,899,387
Goodwill	$	70,708		13,044	$	83,752

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

(2) The banking segment’s noninterest expense includes acquisition costs of $9,028,000 

	Nine Months Ended September 30, 2017
	Banking(1)		Factoring		Consolidated
	(Dollars in thousands)
Interest income	$	70,146	$	8,613	$	78,759
Intersegment interest allocations		786		(786)		—
Total interest expense		3,679		—		3,679
Net interest income		67,253		7,827		75,080
Provision for loan losses		372		18		390
Net interest income after provision		66,881		7,809		74,690
Noninterest income		6,153		895		7,048
Noninterest expense		40,152		5,264		45,416
Intersegment expense allocations		392		(392)		—
Income before income taxes		33,274		3,048		36,322
Income tax expense		12,472		1,280		13,752
Net income	$	20,802	$	1,768	$	22,570
Total assets	$	2,776,262	$	67,686	$	2,843,948
Loans, net of deferred fees	$	1,517,186	$	48,764	$	1,565,950
Goodwill	$	32,620	$	13,044	$	45,664

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

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Subsequent Events

9 Months Ended

Sep. 30, 2018

Subsequent Events

Subsequent Events

18) Subsequent Events

On October 25, 2018, the Company announced that its Board of Directors declared a $0.11 per share quarterly cash dividend to holders of common stock. The dividend will be paid on November 20, 2018  to shareholders of record on November 6, 2018.

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Basis of Presentation (Policies)

9 Months Ended

Sep. 30, 2018

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, 2017.

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 nine months ended September 30, 2018 are not necessarily indicative of the results expected for any subsequent period or for the entire year ending December 31, 2018.

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 May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-09, “Revenue from Contracts with Customers”, which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. The standard replaces most existing revenue recognition guidance in GAAP. The new standard was effective for the Company on January 1, 2018. Adoption of the standard did not have a material impact on the Company’s consolidated financial statements and related disclosures as the Company’s primary sources of revenues are derived from interest and dividends earned on loans, investment securities, and other financial instruments that are not within the scope of the standard. The Company’s revenue recognition pattern for revenue streams within the scope of the standard, including but not limited to service charges on deposit accounts and gains/losses on the sale of other real estate owned (“OREO”), did not change significantly from current practice. The standard permits the use of either the full retrospective or modified retrospective transition method. The Company elected to use the modified retrospective transition method which requires application of the standard to uncompleted contracts at the date of adoption however, periods prior to the date of adoption were not retrospectively revised as the impact of the standard on uncompleted contracts at the date of adoption was not material. See Note 15 – Revenue Recognition for more information.

In January 2016, the FASB issued ASU No. 2016-01, “Financial Instruments – Overall: Recognition and Measurement of Financial Assets and Financial Liabilities.” The guidance affects the accounting for equity investments, financial liabilities under the fair value option and the presentation and disclosure requirements of financial instruments. The standard was effective for the Company on January 1, 2018 and resulted in the use of an exit price rather than an entrance price to determine the fair value of financial instruments not measured at fair value on a non-recurring basis in the consolidated balance sheets. See Note 10 – Fair Value regarding the valuation of the loan portfolio.

In March 2017, the FASB issued ASU 2017-07, Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost. The standard amended existing guidance to improve the presentation of net periodic pension cost and net periodic postretirement benefit cost. The amendments require that an employer report the service cost component in the same line item or items as other compensation costs arising from services rendered by the pertinent employees during the period. The other components of net benefit costs are required to be presented in the income statement separately from the service cost component and outside a subtotal of income from operations, if one is presented. The amendments allow only the service cost component to be eligible for capitalization. The Company adopted the new guidance on January 1, 2018, and there was no material impact to the financial statements.

Newly Issued, but not yet Effective Accounting Standards

In February 2016, the FASB issued ASU No. 2016-02, Leases. The standard requires a lessee to recognize assets and liabilities on the balance sheet for leases with lease terms greater than 12 months. A lessee should recognize in the statement of financial position a liability to make lease payments (the lease liability) and a right of use asset representing its right to use the underlying asset for the lease term. When measuring assets and liabilities arising from a lease, a lessee (and a lessor) should include payments to be made in optional periods only if the lessee is reasonably certain to exercise an option to extend the lease or not to exercise an option to terminate the lease. Similarly, optional payments to purchase the underlying asset should be included in the measurement of lease assets and lease liabilities only if the lessee is reasonably certain to exercise that purchase option. Reasonably certain is a high threshold that is consistent with and intended to be applied in the same way as the reasonably assured threshold in the previous leases guidance. In addition, also consistent with the previous leases guidance, a lessee (and a lessor) should exclude most variable lease payments in measuring lease assets and lease liabilities, other than those that depend on an index or a rate or are in substance fixed payments. For leases with a term of 12 months or less, a lessee is permitted to make an accounting policy election by class of underlying asset not to recognize lease assets and lease liabilities. If a lessee makes this election, it should recognize lease expense for such leases generally on a straight line basis over the lease term. The new guidance is effective for fiscal years, and interim periods within those years, beginning after December 15, 2018, and early adoption is permitted. We are currently evaluating the provisions of this ASU and have determined that the provisions of ASU No. 2016-02 will result in an increase in assets to recognize the present value of the lease obligations with a corresponding increase in liabilities; however, we do not expect this to have a material impact to the Company’s results of operations or cash flows.

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 update amends the accounting for credit losses on available for sale securities, whereby credit losses will be presented as an allowance as opposed to a write down. In addition, CECL will modify the accounting for purchased loans with credit deterioration since origination, so that reserves are established at the date of acquisition for purchased loans. Lastly, the amendment requires enhanced disclosures on the significant estimates and judgments used to estimate credit losses, as well as on the credit quality and underwriting standards of an organization’s portfolio. These disclosures require organizations to present the currently required credit quality disclosures disaggregated by the year of origination or vintage. 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, and early adoption is permitted. We have formed a committee that has assessed our data needs and is in the process of implementing a system to comply with the new guidance. The committee has also selected a vendor to assist in generating loan level cash flows and disclosures.  We expect to recognize a one-time cumulative effect adjustment to the allowance for loan losses and a charge to equity as of the beginning of the first reporting period in which the new standard is effective, but cannot yet determine the magnitude of any such one-time adjustment or the overall impact of the new guidance on the consolidated financial statements.

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.

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Shareholders' Equity and Earnings Per Share (Tables)

9 Months Ended

Sep. 30, 2018

Shareholders' Equity and Earnings Per Share.

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

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2018		2017		2018		2017
		(Dollars in thousands, except per share amounts)
Net income	$	12,375	$	8,583	$	22,099	$	22,570
Weighted average common shares outstanding for basic
earnings per common share		43,230,016		38,152,633		41,132,043		38,060,224
Dilutive effect of stock options outstanding, using
the treasury stock method		501,354		428,665		551,001		504,910
Shares used in computing diluted earnings per common share		43,731,370		38,581,298		41,683,044		38,565,134
Basic earnings per share	$	0.29	$	0.22	$	0.54	$	0.59
Diluted earnings per share	$	0.28	$	0.22	$	0.53	$	0.59

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Accumulated Other Comprehensive Income (Loss) (''AOCI'') (Tables)

9 Months Ended

Sep. 30, 2018

Accumulated Other Comprehensive Income (Loss) ("AOCI")

Schedule of changes in AOCI by component

	Three Months Ended September 30, 2018 and 2017
			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 July 1, 2018, net of taxes	$	(7,031)	$	359	$	(9,194)	$	(15,866)
Other comprehensive income (loss) before reclassification, net of taxes		(1,335)		—		(4)		(1,339)
Amounts reclassified from other comprehensive income (loss), net of taxes		—		(8)		40		32
Net current period other comprehensive income (loss), net of taxes		(1,335)		(8)		36		(1,307)
Ending balance September 30, 2018, net of taxes	$	(8,366)	$	351	$	(9,158)	$	(17,173)
Beginning balance July 1, 2017, net of taxes	$	877	$	321	$	(7,665)	$	(6,467)
Other comprehensive income (loss) before reclassification, net of taxes		312		—		(7)		305
Amounts reclassified from other comprehensive income (loss), net of taxes		—		(7)		29		22
Net current period other comprehensive income (loss), net of taxes		312		(7)		22		327
Ending balance September 30, 2017, net of taxes	$	1,189	$	314	$	(7,643)	$	(6,140)

	Nine Months Ended September 30, 2018 and 2017
			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, 2018, net of taxes	$	(362)	$	375	$	(9,265)	$	(9,252)
Other comprehensive (loss) before reclassification, net of taxes		(7,817)		—		(13)		(7,830)
Amounts reclassified from other comprehensive (loss) income, net of taxes		(187)		(24)		120		(91)
Net current period other comprehensive (loss) income, net of taxes		(8,004)		(24)		107		(7,921)
Ending balance September 30, 2018, net of taxes	$	(8,366)	$	351	$	(9,158)	$	(17,173)
Beginning balance January 1, 2017, net of taxes	$	(540)	$	336	$	(7,710)	$	(7,914)
Other comprehensive income (loss) before reclassification, net of taxes		1,725		—		(22)		1,703
Amounts reclassified from other comprehensive income (loss), net of taxes		4		(22)		89		71
Net current period other comprehensive income (loss), net of taxes		1,729		(22)		67		1,774
Ending balance September 30, 2017, net of taxes	$	1,189	$	314	$	(7,643)	$	(6,140)

Schedule of reclassifications out of AOCI into net income

	Amounts Reclassified from
	AOCI(1)
	Three Months Ended
	September 30,				Affected Line Item Where
Details About AOCI Components	2018		2017		Net Income is Presented
	(Dollars in thousands)
Unrealized gains on available-for-sale securities
and I/O strips	$	—	$	—	Gain (loss) on sales of securities
		—		—	Income tax expense
		—		—	Net of tax
Amortization of unrealized gain on securities available-
for-sale that were reclassified to securities
held-to-maturity		11		12	Interest income on taxable securities
		(3)		(5)	Income tax expense
		8		7	Net of tax
Amortization of defined benefit pension plan items (1)
Prior transition obligation		16		18
Actuarial losses		(73)		(69)
		(57)		(51)	Salaries and employee benefits
		17		22	Income tax benefit
		(40)		(29)	Net of tax
Total reclassification for the year	$	(32)	$	(22)

(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)
	Nine Months Ended
Details About AOCI Components	2018		2017		Net Income is Presented
	(Dollars in thousands)
Unrealized gains on available-for-sale securities and I/O strips	$	266	$	(6)	Gain (loss) on sales of securities
		(79)		2	Income tax expense
		187		(4)	Net of tax
Amortization of unrealized gain on securities available-for-
sale that were reclassified to securities held-to-maturity		33		38	Interest income on taxable securities
		(9)		(16)	Income tax expense
		24		22	Net of tax
Amortization of defined benefit pension plan items (1)
Prior transition obligation		48		53
Actuarial losses		(219)		(207)
		(171)		(154)	Salaries and employee benefits
		51		65	Income tax benefit
		(120)		(89)	Net of tax
Total reclassification from AOCI for the year	$	91	$	(71)

(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.

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Securities (Tables)

9 Months Ended

Sep. 30, 2018

Securities

Schedule of amortized cost and estimated fair value of securities

			Gross		Gross		Estimated
	Amortized		Unrealized		Unrealized		Fair
September 30, 2018	Cost		Gains		(Losses)		Value
	(Dollars in thousands)
Securities available-for-sale:
Agency mortgage-backed securities	$	324,309	$	18	$	(12,662)	$	311,665
U.S. Government sponsored entities		7,419		—		(13)		7,406
Total	$	331,728	$	18	$	(12,675)	$	319,071
Securities held-to-maturity:
Agency mortgage-backed securities	$	288,594	$	—	$	(12,778)	$	275,816
Municipals - exempt from Federal tax		87,138		242		(3,498)		83,882
Total	$	375,732	$	242	$	(16,276)	$	359,698

			Gross		Gross		Estimated
	Amortized		Unrealized		Unrealized		Fair
December 31, 2017	Cost		Gains		(Losses)		Value
	(Dollars in thousands)
Securities available-for-sale:
Agency mortgage-backed securities	$	378,339	$	786	$	(4,392)	$	374,733
Trust preferred securities		15,000		2,119		—		17,119
Total	$	393,339	$	2,905	$	(4,392)	$	391,852
Securities held-to-maturity:
Agency mortgage-backed securities	$	309,616	$	6	$	(4,394)	$	305,228
Municipals - exempt from Federal tax		88,725		946		(607)		89,064
Total	$	398,341	$	952	$	(5,001)	$	394,292

Schedule of securities with unrealized losses

	Less Than 12 Months				12 Months or More				Total
	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
September 30, 2018	Value		(Losses)		Value		(Losses)		Value		(Losses)
	(Dollars in thousands)
Securities available-for-sale:
Agency mortgage-backed securities	$	76,522	$	(2,290)	$	231,110	$	(10,372)	$	307,632	$	(12,662)
U.S. Government sponsored entities		7,405		(13)		—		—		7,405		(13)
Total	$	83,927	$	(2,303)	$	231,110	$	(10,372)	$	315,037	$	(12,675)
Securities held-to-maturity:
Agency mortgage-backed securities	$	71,766	$	(2,639)	$	203,293	$	(10,139)	$	275,059	$	(12,778)
Municipals - exempt from Federal tax		33,027		(996)		33,211		(2,502)		66,238		(3,498)
Total	$	104,793	$	(3,635)	$	236,504	$	(12,641)	$	341,297	$	(16,276)

	Less Than 12 Months				12 Months or More				Total
	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
December 31, 2017	Value		(Losses)		Value		(Losses)		Value		(Losses)
	(Dollars in thousands)
Securities available-for-sale:
Agency mortgage-backed securities	$	185,824	$	(1,623)	$	146,670	$	(2,769)	$	332,494	$	(4,392)
Total	$	185,824	$	(1,623)	$	146,670	$	(2,769)	$	332,494	$	(4,392)
Securities held-to-maturity:
Agency mortgage-backed securities	$	168,439	$	(1,368)	$	130,759	$	(3,026)	$	299,198	$	(4,394)
Municipals - exempt from Federal tax		18,159		(182)		19,240		(425)		37,399		(607)
Total	$	186,598	$	(1,550)	$	149,999	$	(3,451)	$	336,597	$	(5,001)

Schedule of proceeds from sales of securities and the resulting gains and losses

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2018		2017		2018		2017
	(Dollars in thousands)				(Dollars in thousands)
Proceeds	$	—	$	—	$	94,291	$	6,536
Gross gains		—		—		1,243		—
Gross losses		—		—		(977)		(6)

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 one through five years	$	7,419	$	7,406
Agency mortgage-backed securities		324,309		311,665
Total	$	331,728	$	319,071

	Held-to-maturity
	Amortized		Estimated
	Cost		Fair Value
	(Dollars in thousands)
Due 3 months or less	$	503	$	503
Due after 3 months through one year		286		286
Due after one through five years		4,558		4,587
Due after five through ten years		23,713		23,417
Due after ten years		58,078		55,089
Agency mortgage-backed securities		288,594		275,816
Total	$	375,732	$	359,698

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Loans (Tables)

9 Months Ended

Sep. 30, 2018

Loans

Schedule of loans

	September 30,		December 31,
	2018		2017
	(Dollars in thousands)
Loans held-for-investment:
Commercial	$	600,594	$	573,296
Real estate:
CRE		988,491		772,867
Land and construction		131,548		100,882
Home equity		116,657		79,176
Residential mortgages		52,441		44,561
Consumer		9,932		12,395
Loans		1,899,663		1,583,177
Deferred loan fees, net		(276)		(510)
Loans, net of deferred fees		1,899,387		1,582,667
Allowance for loan losses		(27,426)		(19,658)
Loans, net	$	1,871,961	$	1,563,009

Schedule of changes in allowance for loan losses

	Three Months Ended September 30, 2018
	Commercial		Real Estate		Consumer		Total
	(Dollars in thousands)
Beginning of period balance	$	17,522	$	9,020	$	122	$	26,664
Charge-offs		(719)		—		(25)		(744)
Recoveries		1,897		34		—		1,931
Net (charge-offs) recoveries		1,178		34		(25)		1,187
Provision (credit) for loan losses		(1,427)		1,022		(20)		(425)
End of period balance	$	17,273	$	10,076	$	77	$	27,426

	Three Months Ended September 30, 2017
	Commercial		Real Estate		Consumer		Total
	(Dollars in thousands)
Beginning of period balance	$	11,259	$	7,982	$	156	$	19,397
Charge-offs		(111)		—		—		(111)
Recoveries		281		66		—		347
Net recoveries		170		66		—		236
Provision (credit) for loan losses		(441)		592		(36)		115
End of period balance	$	10,988	$	8,640	$	120	$	19,748

	Nine Months Ended September 30, 2018
	Commercial		Real Estate		Consumer		Total
	(Dollars in thousands)
Beginning of period balance	$	10,608	$	8,950	$	100	$	19,658
Charge-offs		(1,835)		—		(25)		(1,860)
Recoveries		2,229		120		—		2,349
Net (charge-offs) recoveries		394		120		(25)		489
Provision for loan losses		6,271		1,006		2		7,279
End of period balance	$	17,273	$	10,076	$	77	$	27,426

	Nine Months Ended September 30, 2017
	Commercial		Real Estate		Consumer		Total
	(Dollars in thousands)
Beginning of period balance	$	10,656	$	8,327	$	106	$	19,089
Charge-offs		(2,179)		—		—		(2,179)
Recoveries		1,453		995		—		2,448
Net (charge-offs) recoveries		(726)		995		—		269
Provision (credit) for loan losses		1,058		(682)		14		390
End of period balance	$	10,988	$	8,640	$	120	$	19,748

Schedule of balance in allowance for loan losses and recorded investment in loans by portfolio segment, based on impairment method

	September 30, 2018
	Commercial		Real Estate		Consumer		Total
	(Dollars in thousands)
Allowance for loan losses:
Ending allowance balance attributable to loans:
Individually evaluated for impairment	$	7,089	$	—	$	—	$	7,089
Collectively evaluated for impairment		10,184		10,076		77		20,337
Acquired with deteriorated credit quality		—		—		—		—
Total allowance balance	$	17,273	$	10,076	$	77	$	27,426
Loans:						—
Individually evaluated for impairment	$	18,843	$	6,206	$	—	$	25,049
Collectively evaluated for impairment		581,751		1,282,931		9,932		1,874,614
Acquired with deteriorated credit quality		—		—		—		—
Total loan balance	$	600,594	$	1,289,137	$	9,932	$	1,899,663

	December 31, 2017
	Commercial		Real Estate		Consumer		Total
	(Dollars in thousands)
Allowance for loan losses:
Ending allowance balance attributable to loans:
Individually evaluated for impairment	$	290	$	—	$	—	$	290
Collectively evaluated for impairment		10,318		8,950		100		19,368
Acquired with deteriorated credit quality		—		—		—		—
Total allowance balance	$	10,608	$	8,950	$	100	$	19,658
Loans:
Individually evaluated for impairment	$	1,775	$	998	$	1	$	2,774
Collectively evaluated for impairment		571,521		996,488		12,394		1,580,403
Acquired with deteriorated credit quality		—		—		—		—
Total loan balance	$	573,296	$	997,486	$	12,395	$	1,583,177

Schedule of loans held-for-investment individually evaluated for impairment by class of loans

	September 30, 2018						December 31, 2017
					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	$	6,246	$	6,246	$	—	$	1,243	$	1,243	$	—
Real estate:
CRE		5,639		5,639		—		500		500		—
Land and construction		—		—		—		138		119		—
Home Equity		567		567		—		379		379		—
Consumer		—		—		—		1		1		—
Total with no related allowance recorded		12,452		12,452		—		2,261		2,242		—
With an allowance recorded:
Commercial		12,597		12,597		7,089		589		532		290
Total with an allowance recorded		12,597		12,597		7,089		589		532		290
Total	$	25,049	$	25,049	$	7,089	$	2,850	$	2,774	$	290

Schedule of average impaired loans with interest recognized and cash-basis interest earned on impaired loans

	Three Months Ended September 30, 2018
			Real Estate
					Land and		Home
	Commercial		CRE		Construction		Equity		Consumer		Total
	(Dollars in thousands)
Average of impaired loans during the period	$	19,638	$	5,720	$	—	$	572	$	—	$	25,930
Interest income during impairment	$	—	$	—	$	—	$	—	$	—	$	—
Cash-basis interest recognized	$	—	$	—	$	—	$	—	$	—	$	—

	Three Months Ended September 30, 2017
			Real Estate
					Land and		Home
	Commercial		CRE		Construction		Equity		Consumer		Total
	(Dollars in thousands)
Average of impaired loans during the period	$	2,010	$	501	$	641	$	394	$	1	$	3,547
Interest income during impairment	$	—	$	—	$	3	$	—	$	—	$	3
Cash-basis interest recognized	$	—	$	—	$	—	$	—	$	—	$	—

	Nine Months Ended September 30, 2018
			Real Estate
					Land and		Home
	Commercial		CRE		Construction		Equity		Consumer		Total
	(Dollars in thousands)
Average of impaired loans during the period	$	11,056	$	3,110	$	30	$	472	$	—	$	14,668
Interest income during impairment	$	—	$	—	$		$	—	$	—	$	—
Cash-basis interest recognized	$	—	$	—	$	—	$	—	$	—	$	—

	Nine Months Ended September 30, 2017
			Real Estate
					Land and		Home
	Commercial		CRE		Construction		Equity		Consumer		Total
	(Dollars in thousands)
Average of impaired loans during the period	$	2,625	$	583	$	419	$	326	$	2	$	3,955
Interest income during impairment	$	—	$	—	$	3	$	—	$	—	$	3
Cash-basis interest recognized	$	—	$	—	$	—	$	—	$	—	$	—

Schedule of nonperforming loans

	September 30,				December 31,
	2018		2017		2017
	(Dollars in thousands)
Nonaccrual loans - held-for-investment	$	23,342	$	2,560	$	2,250
Restructured and loans over 90 days past due and still accruing		1,373		931		235
Total nonperforming loans		24,715		3,491		2,485
Other restructured loans		334		325		289
Total impaired loans	$	25,049	$	3,816	$	2,774

Schedule of nonperforming loans by class

	September 30, 2018						December 31, 2017
				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	$	17,361	$	1,148	$	18,509	$	1,250	$	235	$	1,485
Real estate:
CRE		5,639		—		5,639		501		—		501
Land and construction		—		—		—		119		—		119
Home equity		342		225		567		379		—		379
Consumer		—		—		—		1		—		1
Total	$	23,342	$	1,373	$	24,715	$	2,250	$	235	$	2,485

Schedule of aging of past due loans by class of loans

	September 30, 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	$	6,430	$	2,098	$	1,456	$	9,984	$	590,610	$	600,594
Real estate:
CRE		—		—		—		—		988,491		988,491
Land and construction		—		—		—		—		131,548		131,548
Home equity		967		—		—		967		115,690		116,657
Residential mortgages		—		—		—		—		52,441		52,441
Consumer		—		—		—		—		9,932		9,932
Total	$	7,397	$	2,098	$	1,456	$	10,951	$	1,888,712	$	1,899,663

	December 31, 2017
	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	$	4,288	$	1,224	$	589	$	6,101	$	567,195	$	573,296
Real estate:
CRE		—		—		500		500		772,367		772,867
Land and construction		—		—		119		119		100,763		100,882
Home equity		223		—		—		223		78,953		79,176
Residential mortgages		—		—		—		—		44,561		44,561
Consumer		—		—		—		—		12,395		12,395
Total	$	4,511	$	1,224	$	1,208	$	6,943	$	1,576,234	$	1,583,177

Summary of loan portfolio by loan type and credit quality classification

	September 30, 2018						December 31, 2017
	Nonclassified		Classified		Total		Nonclassified		Classified		Total
Commercial	$	577,325	$	23,269	$	600,594	$	554,913	$	18,383	$	573,296
Real estate:
CRE		982,852		5,639		988,491		766,988		5,879		772,867
Land and construction		131,548		—		131,548		100,763		119		100,882
Home equity		115,019		1,638		116,657		78,486		690		79,176
Residential mortgages		52,441		—		52,441		44,561		—		44,561
Consumer		9,932		—		9,932		12,394		1		12,395
Total	$	1,869,117	$	30,546	$	1,899,663	$	1,558,105	$	25,072	$	1,583,177

Schedule of loans by class modified as troubled debt restructurings

The following table presents loans by class modified as troubled debt restructurings:

	During the Nine Months Ended
		September 30, 2018
				Pre-modification		Post-modification
		Number		Outstanding		Outstanding
		of		Recorded		Recorded
Troubled Debt Restructurings:		Contracts		Investment		Investment
	(Dollars in thousands)
Commercial		2	$	159	$	159
Home equity		1		225		225
Total		3	$	384	$	384

The following table presents loans by class modified as troubled debt restructurings:

	During the Three and Nine Months Ended
		September 30, 2017
				Pre-modification		Post-modification
		Number		Outstanding		Outstanding
		of		Recorded		Recorded
Troubled Debt Restructurings:		Contracts		Investment		Investment
	(Dollars in thousands)
Commercial		3	$	318	$	318
Total		3	$	318	$	318

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Business Combinations (Tables)

9 Months Ended

Sep. 30, 2018

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		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
Liabililities 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 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 will be 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		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 avaiable-for-sale		64,144		(421)	(b)		63,723
Loans		196,694		18,783	(c)		215,477
Allowance for loan lossess		(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
Liabililities assumed:
Deposits	$	281,189	$	51	(g)		281,240
Other borrowings		62		—			62
Other liabilities		2,617		(188)	(h)		2,429
Total liabilities	$	283,868	$	(137)			283,731
Net assets acquired							23,011
Purchase price							47,280
Goodwill recorded in the merger						$	24,269

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 ofsset 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 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 will be 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 over accrued accounts payable.

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Goodwill and Other Intangible Assets (Tables)

9 Months Ended

Sep. 30, 2018

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)
2018	$	585	$	170	$	208	$	14	$	775	$	190	$	1,942
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
Thereafter		2,020		—		603		106		549		159		3,437
	$	5,723	$	660	$	1,768	$	210	$	4,292	$	1,299	$	13,952

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Income Taxes (Tables)

9 Months Ended

Sep. 30, 2018

Income Taxes

Summary of carrying amount of low income tax housing investment

	September 30,		Decemebr 31,
	2018		2017
	(Dollars in thousands)
Low income housing investments	$	3,139	$	3,411
Future commitments	$	287	$	302

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Benefit Plans (Tables)

9 Months Ended

Sep. 30, 2018

Supplemental Retirement Plan

Benefit plans

Schedule of components of net periodic benefit cost

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2018		2017		2018		2017
	(Dollars in thousands)
Components of net periodic benefit cost:
Service cost	$	62	$	81	$	186	$	243
Interest cost		237		259		711		777
Amortization of net actuarial loss		73		69		219		207
Net periodic benefit cost	$	372	$	409	$	1,116	$	1,227

Split-Dollar Life Insurance Benefit Plan

Benefit plans

Schedule of change in projected benefit obligation

	September 30,		December 31,
	2018		2017
	(Dollars in thousands)
Change in projected benefit obligation:
Projected benefit obligation at beginning of year	$	6,711	$	6,301
Interest cost		170		243
Actuarial loss		—		167
Projected benefit obligation at end of period	$	6,881	$	6,711

Schedule of amounts recognized in accumulated other comprehensive loss

	September 30,		December 31,
	2018		2017
	(Dollars in thousands)
Net actuarial loss	$	2,569	$	2,453
Prior transition obligation		1,171		1,238
Accumulated other comprehensive loss	$	3,740	$	3,691

Schedule of components of net periodic benefit cost

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2018		2017		2018		2017
	(Dollars in thousands)
Amortization of prior transition obligation	$	(16)	$	(18)	$	(48)	$	(53)
Interest cost		56		61		170		182
Net periodic benefit cost	$	40	$	43	$	122	$	129

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Fair Value (Tables)

9 Months Ended

Sep. 30, 2018

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 September 30, 2018
Available-for-sale securities:
Agency mortgage-backed securities	$	311,665		—	$	311,665		—
U.S. Government sponsored entities		7,406		—		7,406		—
I/O strip receivables		863		—		863		—
Assets at December 31, 2017
Available-for-sale securities:
Agency mortgage-backed securities	$	374,733		—	$	374,733		—
Trust preferred securities		17,119		—		17,119		—
I/O strip receivables		968		—		968		—

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 September 30, 2018
Impaired loans - held-for-investment:
Commercial	$	5,508	—	—	$	5,508
	$	5,508	—	—	$	5,508
Assets at December 31, 2017
Impaired loans - held-for-investment:
Commercial	$	242	—	—	$	242
Real estate:
Land and construction		119	—	—		119
	$	361	—	—	$	361

Schedule of impaired loans held-for-investment and impaired loans held-for-investment carried at fair value

	September 30, 2018		December 31, 2017
	(Dollars in thousands)
Impaired loans held-for-investment:
Book value of impaired loans held-for-investment carried at fair value	$	12,597	$	651
Book value of impaired loans held-for-investment carried at cost		12,452		2,123
Total impaired loans held-for-investment	$	25,049	$	2,774
Impaired loans held-for-investment carried at fair value:
Book value of impaired loans held-for-investment carried at fair value	$	12,597	$	651
Specific valuation allowance		(7,089)		(290)
Impaired loans held-for-investment carried at fair value, net	$	5,508	$	361

Schedule of quantitative information about level 3 fair value measurements for financial instruments measured at fair value on a non-recurring basis

	September 30, 2018
			Valuation	Unobservable	Range
	Fair Value		Techniques	Inputs	(Weighted Average)
	(Dollars in thousands)
Impaired loans - held-for-investment:
Commercial	$	5,508	Market Approach	Discount adjustment for differences between comparable sales	Less than 1  %

	December 31, 2017
			Valuation	Unobservable	Range
	Fair Value		Techniques	Inputs	(Weighted Average)
	(Dollars in thousands)
Impaired loans - held-for-investment:
Commercial	$	242	Market Approach	Discount adjustment for differences between comparable sales	Less than 1%
Real estate:
Land and construction		119	Market Approach	Discount adjustment for differences between comparable sales	Less than 1%

Schedule of carrying amounts and estimated fair values of financial instruments

The carrying amounts and estimated fair values of financial instruments at September 30, 2018 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	$	381,029	$	381,029	$	—	$	—	$	381,029
Securities available-for-sale		319,071		—		319,071		—		319,071
Securities held-to-maturity		375,732		—		359,698		—		359,698
Loans (including loans held-for-sale), net		1,878,305		—		6,344		1,840,231		1,846,575
FHLB stock, FRB stock, and other
investments		25,210		—		—		—		N/A
Accrued interest receivable		9,213		—		2,327		6,886		9,213
I/O strips receivables		863		—		863		—		863
Liabilities:
Time deposits	$	155,879	$	—	$	156,206	$	—	$	156,206
Other deposits		2,589,420		—		2,589,420		—		2,589,420
Subordinated debt		39,322		—		39,322		—		39,322
Accrued interest payable		1,026		—		1,026		—		1,026

The carrying amounts and estimated fair values of the Company’s financial instruments at December 31, 2017:

			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	$	316,222	$	316,222	$	—	$	—	$	316,222
Securities available-for-sale		391,852		—		391,852		—		391,852
Securities held-to-maturity		398,341		—		394,292		—		394,292
Loans (including loans held-for-sale), net		1,566,428		—		3,419		1,507,967		1,511,386
FHLB stock, FRB stock, and other
investments		17,911		—		—		—		N/A
Accrued interest receivable		7,985		—		2,423		5,562		7,985
I/O strips receivables		968		—		968		—		968
Liabilities:
Time deposits	$	194,561	$	—	$	194,844	$	—	$	194,844
Other deposits		2,288,428		—		2,288,428		—		2,288,428
Subordinated debt		39,183		—		40,384		—		40,384
Accrued interest payable		389		—		389		—		389

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Equity Plan (Tables)

9 Months Ended

Sep. 30, 2018

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, 2018	1,602,732	$	9.54
Granted	305,500	$	16.82
Exercised	(259,770)	$	9.62
Forfeited or expired	(84,079)	$	14.20
Outstanding at September 30, 2018	1,564,383	$	10.69	6.64	$	7,176,631
Vested or expected to vest	1,470,520			6.64	$	6,746,033
Exercisable at September 30, 2018	1,011,193			5.46	$	6,475,976

Schedule of information related to the equity Plan

	Nine Months Ended
	September 30,
	2018		2017
Intrinsic value of options exercised	$	1,767,884	$	1,331,528
Cash received from option exercise	$	2,499,481	$	1,352,236
Tax benefit realized from option exercises	$	513,901	$	543,654
Weighted average fair value of options granted	$	3.07	$	2.66

Schedule of assumptions used to estimate the fair value of each option grant on the date of grant

	Nine Months Ended
	September 30,
	2018		2017
Expected life in months(1)	72		72
Volatility(1)	21	%	24	%
Weighted average risk-free interest rate(2)	2.87	%	1.94	%
Expected dividends(3)	2.62	%	2.78	%

(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, 2018	181,185	$	11.66
Granted	97,818	$	16.83
Vested	(67,015)	$	16.69
Forfeited or expired	(2,440)	$	12.65
Nonvested shares at September 30, 2018	209,548	$	11.04

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Capital Requirements (Tables)

9 Months Ended

Sep. 30, 2018

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 September 30, 2018
Total Capital	$	334,152	14.4	%	$	228,973	9.875	%
(to risk-weighted assets)
Tier 1 Capital	$	266,654	11.5	%	$	182,599	7.875	%
(to risk-weighted assets)
Common Equity Tier 1 Capital	$	266,654	11.5	%	$	147,818	6.375	%
(to risk-weighted assets)
Tier 1 Capital	$	266,654	8.6	%	$	124,005	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.

					Required For
					Capital
					Adequacy
					Purposes
	Actual				Under Basel III
	Amount		Ratio		Amount		Ratio (1)
		(Dollars in thousands)
As of December 31, 2017
Total Capital	$	288,754	14.4	%	$	185,338	9.250	%
(to risk-weighted assets)
Tier 1 Capital	$	229,258	11.4	%	$	145,265	7.250	%
(to risk-weighted assets)
Common Equity Tier 1 Capital	$	229,258	11.4	%	$	115,210	5.750	%
(to risk-weighted assets)
Tier 1 Capital	$	229,258	8.0	%	$	114,959	4.000	%
(to average assets)

(1) Includes 1.25% capital conservation buffer, effective January 1, 2017, 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 Regulatory				Purposes
	Actual				Requirements				Under Basel III
	Amount		Ratio		Amount		Ratio		Amount		Ratio (1)
	(Dollars in thousands)
As of September 30, 2018
Total Capital	$	310,636	13.4	%	$	231,696	10.0	%	$	228,800	9.875	%
(to risk-weighted assets)
Tier 1 Capital	$	282,460	12.2	%	$	185,357	8.0	%	$	182,461	7.875	%
(to risk-weighted assets)
Common Equity Tier 1 Capital	$	282,460	12.2	%	$	150,602	6.5	%	$	147,706	6.375	%
(to risk-weighted assets)
Tier 1 Capital	$	282,460	9.1	%	$	154,920	5.0	%	$	123,936	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.

									Required For
									Capital
					To Be Well-Capitalized				Adequacy
					Under Basel III Regulatory				Purposes
	Actual				Requirements				Under Basel III
	Amount		Ratio		Amount		Ratio		Amount		Ratio (1)
		(Dollars in thousands)
As of December 31, 2017
Total Capital	$	265,102	13.2	%	$	200,274	10.0	%	$	185,253	9.250	%
(to risk-weighted assets)
Tier 1 Capital	$	244,790	12.2	%	$	160,219	8.0	%	$	145,198	7.250	%
(to risk-weighted assets)
Common Equity Tier 1 Capital	$	244,790	12.2	%	$	130,178	6.5	%	$	115,157	5.750	%
(to risk-weighted assets)
Tier 1 Capital	$	244,790	8.5	%	$	143,655	5.0	%	$	114,924	4.000	%
(to average assets)

(1) Includes 1.25% capital conservation buffer, effective January 1, 2017, except the Tier 1 Capital to average assets ratio.

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Revenue Recognition (Tables)

9 Months Ended

Sep. 30, 2018

Revenue Recognition

Schedule of noninterest income, segregated by revenue streams in-scope and out-of-scope of Topic 606

	Three Months Ended
	September 30,
	2018		2017
	(Dollars in thousands)
Noninterest Income In-scope of Topic 606:
Service charges and fees on deposit accounts	$	551	$	510
Interchange fees		83		75
Merchant services revenue		39		44
Other		179		166
Total noninterest income in-scope of Topic 606		852		795
Noninterest Income Out-of-scope of Topic 606		1,354		1,665
Total noninterest income	$	2,206	$	2,460

	Nine Months Ended
	September 30,
	2018		2017
	(Dollars in thousands)
Noninterest Income In-scope of Topic 606:
Service charges and fees on deposit accounts	$	1,524	$	1,449
Interchange fees		239		208
Merchant services revenue		122		129
Other		479		498
Total noninterest income in-scope of Topic 606		2,364		2,284
Noninterest Income Out-of-scope of Topic 606		4,817		4,764
Total noninterest income	$	7,181	$	7,048

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Noninterest Expense (Tables)

9 Months Ended

Sep. 30, 2018

Noninterest Expense

Schedule of noninterest expense

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2018		2017		2018		2017
	(Dollars in thousands)
Salaries and employee benefits (1)	$	10,719	$	9,071	$	35,302	$	27,766
Occupancy and equipment		1,559		1,142		3,927		3,426
Professional fees		721		695		1,116		2,439
Amortization of intangible assets		631		296		1,336		1,083
Software subscriptions		555		475		1,747		1,333
Data processing		525		411		1,501		1,080
Insurance expense		430		401		1,236		1,123
Acquisition and integration related costs		16		—		5,452		—
Other		2,572		2,343		6,963		7,166
Total	$	17,728	$	14,834	$	58,580	$	45,416

(1) Includes severance and retention retention expense related to the Tri-Valley and United American acquistions of $183,000 and $3,576,000 for third quarter of 2018 and the first nine months of 2018, respectively

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Business Segment Information (Tables)

9 Months Ended

Sep. 30, 2018

Business Segment Information

Schedule of information by operating segment

	Three Months Ended September 30, 2018
	Banking(1)		Factoring		Consolidated
	(Dollars in thousands)
Interest income	$	30,425		4,185	$	34,610
Intersegment interest allocations		601		(601)		—
Total interest expense		2,159		—		2,159
Net interest income		28,867		3,584		32,451
Provision (credit) for loan losses		(671)		246		(425)
Net interest income after provision		29,538		3,338		32,876
Noninterest income		2,011		195		2,206
Noninterest expense (2)		16,045		1,683		17,728
Intersegment expense allocations		172		(172)		—
Income before income taxes		15,676		1,678		17,354
Income tax (benefit) expense		4,483		496		4,979
Net income	$	11,193	$	1,182	$	12,375
Total assets	$	3,107,897	$	85,013	$	3,192,910
Loans, net of deferred fees	$	1,828,379	$	71,008	$	1,899,387
Goodwill	$	70,708	$	13,044	$	83,752

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

(2) The banking segment’s noninterest expense includes acquisition cost of $199,000

	Three Months Ended September 30, 2017
	Banking(1)		Factoring		Consolidated
	(Dollars in thousands)
Interest income	$	24,805	$	3,150	$	27,955
Intersegment interest allocations		284		(284)		—
Total interest expense		1,634		—		1,634
Net interest income		23,455		2,866		26,321
Provision for loan losses		107		8		115
Net interest income after provision		23,348		2,858		26,206
Noninterest income		2,101		359		2,460
Noninterest expense		13,149		1,685		14,834
Intersegment expense allocations		130		(130)		—
Income before income taxes		12,430		1,402		13,832
Income tax expense		4,660		589		5,249
Net income	$	7,770	$	813	$	8,583
Total assets	$	2,776,262	$	67,686	$	2,843,948
Loans, net of deferred fees	$	1,517,186	$	48,764	$	1,565,950
Goodwill	$	32,620	$	13,044	$	45,664

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

	Nine Months Ended September 30, 2018
	Banking(1)		Factoring		Consolidated
	(Dollars in thousands)
Interest income	$	83,781	$	10,686	$	94,467
Intersegment interest allocations		1,304		(1,304)		—
Total interest expense		5,504		—		5,504
Net interest income		79,581		9,382		88,963
Provision for loan losses		6,958		321		7,279
Net interest income after provision		72,623		9,061		81,684
Noninterest income		6,628		553		7,181
Noninterest expense (2)		53,813		4,767		58,580
Intersegment expense allocations		574		(574)		—
Income before income taxes		26,012		4,273		30,285
Income tax expense		6,923		1,263		8,186
Net income	$	19,089	$	3,010	$	22,099
Total assets	$	3,107,897		85,013	$	3,192,910
Loans, net of deferred fees	$	1,828,379		71,008	$	1,899,387
Goodwill	$	70,708		13,044	$	83,752

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

(2) The banking segment’s noninterest expense includes acquisition costs of $9,028,000 

	Nine Months Ended September 30, 2017
	Banking(1)		Factoring		Consolidated
	(Dollars in thousands)
Interest income	$	70,146	$	8,613	$	78,759
Intersegment interest allocations		786		(786)		—
Total interest expense		3,679		—		3,679
Net interest income		67,253		7,827		75,080
Provision for loan losses		372		18		390
Net interest income after provision		66,881		7,809		74,690
Noninterest income		6,153		895		7,048
Noninterest expense		40,152		5,264		45,416
Intersegment expense allocations		392		(392)		—
Income before income taxes		33,274		3,048		36,322
Income tax expense		12,472		1,280		13,752
Net income	$	20,802	$	1,768	$	22,570
Total assets	$	2,776,262	$	67,686	$	2,843,948
Loans, net of deferred fees	$	1,517,186	$	48,764	$	1,565,950
Goodwill	$	32,620	$	13,044	$	45,664

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

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Basis of Presentation (Details)			1 Months Ended		9 Months Ended
	May 04, 2018	Apr. 06, 2018	May 31, 2018	Apr. 30, 2018	Sep. 30, 2018 segment customer
Segment Reporting
Number of customers accounting for more than 10 percent of revenue for HBC or the Company | customer					0
Number of operating segments | segment					2
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

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Shareholders' Equity and Earnings Per Share - Earnings Per Share (Details) - USD ($) $ / shares in Units, $ in Thousands	3 Months Ended		9 Months Ended
	Sep. 30, 2018	Sep. 30, 2017	Sep. 30, 2018	Sep. 30, 2017
Reconciliation of factors used in computing basic and diluted earnings per common share
Net income	$ 12,375	$ 8,583	$ 22,099	$ 22,570
Weighted average common shares outstanding for basic earnings per common share (in shares)	43,230,016	38,152,633	41,132,043	38,060,224
Dilutive effect of stock options outstanding, using the treasury stock method (in shares)	501,354	428,665	551,001	504,910
Shares used in computing diluted earnings per common share (in shares)	43,731,370	38,581,298	41,683,044	38,565,134
Basic earnings per share (in dollars per share)	$ 0.29	$ 0.22	$ 0.54	$ 0.59
Diluted earnings per share (in dollars per share)	$ 0.28	$ 0.22	$ 0.53	$ 0.59
Number of shares not in computing diluted earnings per common share	512,261	227,409	505,686	140,659

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Accumulated Other Comprehensive Income (Loss) (''AOCI'') - Changes in AOCI by Component (Details) - USD ($) $ in Thousands	3 Months Ended		9 Months Ended
	Sep. 30, 2018	Sep. 30, 2017	Sep. 30, 2018	Sep. 30, 2017
Changes in AOCI by Component
Balance at the beginning of the period, net of taxes			$ (9,252)
Amounts reclassified from other comprehensive income (loss), net of taxes	$ 32	$ 22	(91)	$ 71
Net current period other comprehensive income (loss), net of taxes	(1,307)	327	(7,921)	1,774
Balance at the end of the period, net of taxes	(17,173)		(17,173)
Accumulated Other Comprehensive Income / (Loss)
Changes in AOCI by Component
Balance at the beginning of the period, net of taxes	(15,866)	(6,467)	(9,252)	(7,914)
Other comprehensive income (loss) before reclassification, net of taxes	(1,339)	305	(7,830)	1,703
Amounts reclassified from other comprehensive income (loss), net of taxes	32	22	(91)	71
Net current period other comprehensive income (loss), net of taxes	(1,307)	327	(7,921)	1,774
Balance at the end of the period, net of taxes	(17,173)	(6,140)	(17,173)	(6,140)
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	(7,031)	877	(362)	(540)
Other comprehensive income (loss) before reclassification, net of taxes	(1,335)	312	(7,817)	1,725
Amounts reclassified from other comprehensive income (loss), net of taxes			(187)	4
Net current period other comprehensive income (loss), net of taxes	(1,335)	312	(8,004)	1,729
Balance at the end of the period, net of taxes	(8,366)	1,189	(8,366)	1,189
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	359	321	375	336
Amounts reclassified from other comprehensive income (loss), net of taxes	(8)	(7)	(24)	(22)
Net current period other comprehensive income (loss), net of taxes	(8)	(7)	(24)	(22)
Balance at the end of the period, net of taxes	351	314	351	314
Defined Benefit Pension Plan Items
Changes in AOCI by Component
Balance at the beginning of the period, net of taxes	(9,194)	(7,665)	(9,265)	(7,710)
Other comprehensive income (loss) before reclassification, net of taxes	(4)	(7)	(13)	(22)
Amounts reclassified from other comprehensive income (loss), net of taxes	40	29	120	89
Net current period other comprehensive income (loss), net of taxes	36	22	107	67
Balance at the end of the period, net of taxes	$ (9,158)	$ (7,643)	$ (9,158)	$ (7,643)

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Accumulated Other Comprehensive Income (Loss) (''AOCI'') - Amount Reclassified from AOCI (Details) - USD ($) $ in Thousands	3 Months Ended		9 Months Ended
	Sep. 30, 2018	Sep. 30, 2017	Sep. 30, 2018	Sep. 30, 2017
Amount Reclassified from AOCI
Gain (loss) on sales of securities			$ 266	$ (6)
Interest income on taxable securities	$ 3,483	$ 3,596	11,112	9,916
Income tax expense	(4,979)	(5,249)	(8,186)	(13,752)
Net income	12,375	8,583	22,099	22,570
Income before income tax	17,354	13,832	30,285	36,322
Net of tax	(32)	(22)	91	(71)
Unrealized Gains (Losses) on Available-for-Sale Securities and I/O Strips
Amount Reclassified from AOCI
Net of tax			187	(4)
Unrealized Gains (Losses) on Available-for-Sale Securities and I/O Strips | Amount Reclassified from AOCI
Amount Reclassified from AOCI
Gain (loss) on sales of securities			266	(6)
Income tax expense			(79)	2
Net of tax			187	(4)
Unamortized Unrealized Gain on Available-for-Sale Securities Reclassified to Held-to-Maturity
Amount Reclassified from AOCI
Net of tax	8	7	24	22
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	11	12	33	38
Income tax expense	(3)	(5)	(9)	(16)
Net of tax	8	7	24	22
Defined Benefit Pension Plan Items
Amount Reclassified from AOCI
Net of tax	(40)	(29)	(120)	(89)
Defined Benefit Pension Plan Items | Amount Reclassified from AOCI
Amount Reclassified from AOCI
Salaries and employee benefits	(57)	(51)	(171)	(154)
Income tax benefit	17	22	51	65
Net of tax	(40)	(29)	(120)	(89)
Prior transition obligation | Amount Reclassified from AOCI
Amount Reclassified from AOCI
Salaries and employee benefits	16	18	48	53
Actuarial losses | Amount Reclassified from AOCI
Amount Reclassified from AOCI
Salaries and employee benefits	(73)	(69)	(219)	(207)
Accumulated Other Comprehensive Income / (Loss)
Amount Reclassified from AOCI
Net of tax	$ (32)	$ (22)	$ 91	$ (71)

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Securities - Amortized Cost and Estimated Fair Value of Securities - Securities Available-for-sale (Details) - USD ($) $ in Thousands	Sep. 30, 2018	Dec. 31, 2017
Securities available-for-sale:
Amortized Cost	$ 331,728	$ 393,339
Gross Unrealized Gains	18	2,905
Gross Unrealized (Losses)	(12,675)	(4,392)
Total	319,071	391,852
Agency mortgage-backed securities
Securities available-for-sale:
Amortized Cost	324,309	378,339
Gross Unrealized Gains	18	786
Gross Unrealized (Losses)	(12,662)	(4,392)
Total	311,665	374,733
Trust preferred securities
Securities available-for-sale:
Amortized Cost		15,000
Gross Unrealized Gains		2,119
Total		$ 17,119
U.S. Government sponsored entities
Securities available-for-sale:
Amortized Cost	7,419
Gross Unrealized (Losses)	(13)
Total	$ 7,406

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Securities - Amortized Cost and Estimated Fair Value of Securities - Securities Held-to-maturity (Details) - USD ($) $ in Thousands	Sep. 30, 2018	Dec. 31, 2017
Securities held-to-maturity:
Amortized Cost	$ 375,732	$ 398,341
Gross Unrealized Gains	242	952
Gross Unrealized (Losses)	(16,276)	(5,001)
Estimated Fair Value	359,698	394,292
Agency mortgage-backed securities
Securities held-to-maturity:
Amortized Cost	288,594	309,616
Gross Unrealized Gains		6
Gross Unrealized (Losses)	(12,778)	(4,394)
Estimated Fair Value	275,816	305,228
U.S. Government sponsored entities
Securities held-to-maturity:
Gross Unrealized (Losses)	(13)
Municipals - exempt from Federal tax
Securities held-to-maturity:
Amortized Cost	87,138	88,725
Gross Unrealized Gains	242	946
Gross Unrealized (Losses)	(3,498)	(607)
Estimated Fair Value	$ 83,882	$ 89,064

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Securities - Securities with Unrealized Losses - Securities Available-for-sale (Details) - USD ($) $ in Thousands	Sep. 30, 2018	Dec. 31, 2017
Available-for-sale, Fair Value
Less Than 12 Months	$ 83,927	$ 185,824
12 Months or More	231,110	146,670
Total	315,037	332,494
Available-for-sale, Unrealized (Losses)
Less Than 12 Months	(2,303)	(1,623)
12 Months or More	(10,372)	(2,769)
Total	(12,675)	(4,392)
Agency mortgage-backed securities
Available-for-sale, Fair Value
Less Than 12 Months	76,522	185,824
12 Months or More	231,110	146,670
Total	307,632	332,494
Available-for-sale, Unrealized (Losses)
Less Than 12 Months	(2,290)	(1,623)
12 Months or More	(10,372)	(2,769)
Total	$ (12,662)	$ (4,392)

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Securities - Securities with Unrealized Losses - Securities Held-to-maturity (Details) - USD ($) $ in Thousands	Sep. 30, 2018	Dec. 31, 2017
Held-to-maturity, Fair Value
Less Than 12 Months	$ 104,793	$ 186,598
12 Months or More	236,504	149,999
Total	341,297	336,597
Held-to-maturity, Unrealized (Losses)
Less Than 12 Months	(3,635)	(1,550)
12 Months or More	(12,641)	(3,451)
Total	(16,276)	(5,001)
Agency mortgage-backed securities
Held-to-maturity, Fair Value
Less Than 12 Months	71,766	168,439
12 Months or More	203,293	130,759
Total	275,059	299,198
Held-to-maturity, Unrealized (Losses)
Less Than 12 Months	(2,639)	(1,368)
12 Months or More	(10,139)	(3,026)
Total	(12,778)	(4,394)
U.S. Government sponsored entities
Held-to-maturity, Fair Value
Less Than 12 Months	7,405
Total	7,405
Held-to-maturity, Unrealized (Losses)
Less Than 12 Months	(13)
Total	(13)
Municipals - exempt from Federal tax
Held-to-maturity, Fair Value
Less Than 12 Months	33,027	18,159
12 Months or More	33,211	19,240
Total	66,238	37,399
Held-to-maturity, Unrealized (Losses)
Less Than 12 Months	(996)	(182)
12 Months or More	(2,502)	(425)
Total	$ (3,498)	$ (607)

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Securities - Additional Information (Details) $ in Thousands	9 Months Ended
	Sep. 30, 2018 USD ($) security item	Dec. 31, 2017 USD ($)
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	495
Number of available for sale securities held	172
Number of held to maturity securities held	323
Number of securities with fair values below amortized cost	428
Total unrealized loss for securities 12 months or more | $	$ 23,013
12 Months or More | $	236,504	$ 149,999
Municipals - exempt from Federal tax
Additional Information
12 Months or More | $	$ 33,211	$ 19,240

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Securities - Proceeds from Sales of Securities and the Resulting Gains and Losses (Details) - USD ($) $ in Thousands	9 Months Ended
	Sep. 30, 2018	Sep. 30, 2017
Proceeds from Sales of Securities and the Resulting Gains and Losses
Proceeds	$ 94,291	$ 6,536
Gross gains	1,243
Gross losses	$ (977)	$ (6)

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Securities - Amortized Cost and Fair Value of Debt Securities by Contractual Maturity – Securities Available-for-sale (Details) - USD ($) $ in Thousands	Sep. 30, 2018	Dec. 31, 2017
Available-for-sale, Amortized Cost
Due after one year through five years	$ 7,419
Total	331,728	$ 393,339
Available-for-sale, Estimated Fair Value
Due after one year through five years	7,406
Total	319,071	391,852
U.S. Government sponsored entities
Available-for-sale, Amortized Cost
Total	7,419
Available-for-sale, Estimated Fair Value
Total	7,406
Agency mortgage-backed securities
Available-for-sale, Amortized Cost
Available-for-sale Amortized Cost	324,309
Total	324,309	378,339
Available-for-sale, Estimated Fair Value
Available-for-sale Estimated Fair value	311,665
Total	$ 311,665	$ 374,733

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Securities - Amortized Cost and Fair Value of Debt Securities by Contractual Maturity – Securities Held-to-maturity (Details) - USD ($) $ in Thousands	Sep. 30, 2018	Dec. 31, 2017
Held-to-maturity, Amortized Cost
Due 3 months or less	$ 503
Due after 3 months through one year	286
Due after one year through five years	4,558
Due after five years through ten years	23,713
Due after ten years	58,078
Agency mortgage-backed securities	288,594
Total	375,732	$ 398,341
Held-to-maturity, Estimated Fair Value
Due 3 months or less	503
Due after 3 months through one year	286
Due after one year through five years	4,587
Due after five years through ten years	23,417
Due after ten years	55,089
Agency mortgage-backed securities	275,816
Total	$ 359,698	$ 394,292

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Securities - Securities Pledged to Secure Public Deposits and for Other Purposes (Details) - USD ($) $ in Thousands	Sep. 30, 2018	Dec. 31, 2017
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	$ 44,595	$ 110,874

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Loans -Loans Balance (Details) - USD ($) $ in Thousands	Sep. 30, 2018	Jun. 30, 2018	Dec. 31, 2017	Sep. 30, 2017	Jun. 30, 2017	Dec. 31, 2016
Loans held-for-investment:
Total loan balance	$ 1,899,663		$ 1,583,177
Deferred loan fees, net	(276)		(510)
Loans, net of deferred fees	1,899,387		1,582,667	$ 1,565,950
Allowance for loan losses	(27,426)	$ (26,664)	(19,658)	(19,748)	$ (19,397)	$ (19,089)
Loans, net	1,871,961		1,563,009
Commercial
Loans held-for-investment:
Total loan balance	600,594		573,296
Allowance for loan losses	(17,273)	(17,522)	(10,608)	(10,988)	(11,259)	(10,656)
Real estate
Loans held-for-investment:
Total loan balance	1,289,137		997,486
Allowance for loan losses	(10,076)	(9,020)	(8,950)	(8,640)	(7,982)	(8,327)
Real estate | Commercial
Loans held-for-investment:
Total loan balance	988,491		772,867
Real estate | Land and construction
Loans held-for-investment:
Total loan balance	131,548		100,882
Real estate | Home equity
Loans held-for-investment:
Total loan balance	116,657		79,176
Real estate | Residential mortgages
Loans held-for-investment:
Total loan balance	52,441		44,561
Consumer
Loans held-for-investment:
Total loan balance	9,932		12,395
Allowance for loan losses	(77)	$ (122)	(100)	$ (120)	$ (156)	$ (106)
Focus Business Bank
Loans held-for-investment:
Non-PCI loans acquired	43,311		$ 58,551
Tri Valley Bank
Loans held-for-investment:
Non-PCI loans acquired	115,158
United American Bank
Loans held-for-investment:
Non-PCI loans acquired	$ 193,787

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Loans - Additional Information (Details) - USD ($)	3 Months Ended		9 Months Ended
	Sep. 30, 2018	Sep. 30, 2017	Sep. 30, 2018	Sep. 30, 2017	Oct. 31, 2018	Dec. 31, 2017
Loans and Leases Receivable Disclosure [Line Items]
Nonaccrual loans - held-for-investment	$ 23,342,000	$ 2,560,000	$ 23,342,000	$ 2,560,000		$ 2,250,000
Provision (credit) for loan losses	(425,000)	115,000	7,279,000	390,000
Net (charge-offs) recoveries	1,187,000	$ 236,000	489,000	269,000
Less than 30 days past due
Loans and Leases Receivable Disclosure [Line Items]
Nonaccrual loans - held-for-investment	22,725,000		22,725,000			$ 840,000
Borrower
Loans and Leases Receivable Disclosure [Line Items]
Specific reserve				$ 7,000,000
Borrower | Less than 30 days past due
Loans and Leases Receivable Disclosure [Line Items]
Nonaccrual loans - held-for-investment	$ 21,764,000		$ 21,764,000
Borrower | Subsequent Event | Less than 30 days past due
Loans and Leases Receivable Disclosure [Line Items]
30 days or greater past due nonaccrual loans					$ 17,384,000

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Loans - Changes in the Allowance for Loan Losses (Details) - USD ($) $ in Thousands	3 Months Ended		9 Months Ended
	Sep. 30, 2018	Sep. 30, 2017	Sep. 30, 2018	Sep. 30, 2017
Changes in the Allowance for Loan Losses
Beginning of period balance	$ 26,664	$ 19,397	$ 19,658	$ 19,089
Charge-offs	(744)	(111)	(1,860)	(2,179)
Recoveries	1,931	347	2,349	2,448
Net (charge-offs) recoveries	1,187	236	489	269
Provision (credit) for loan losses	(425)	115	7,279	390
End of year balance	27,426	19,748	27,426	19,748
Commercial
Changes in the Allowance for Loan Losses
Beginning of period balance	17,522	11,259	10,608	10,656
Charge-offs	(719)	(111)	(1,835)	(2,179)
Recoveries	1,897	281	2,229	1,453
Net (charge-offs) recoveries	1,178	170	394	(726)
Provision (credit) for loan losses	(1,427)	(441)	6,271	1,058
End of year balance	17,273	10,988	17,273	10,988
Real estate
Changes in the Allowance for Loan Losses
Beginning of period balance	9,020	7,982	8,950	8,327
Recoveries	34	66	120	995
Net (charge-offs) recoveries	34	66	120	995
Provision (credit) for loan losses	1,022	592	1,006	(682)
End of year balance	10,076	8,640	10,076	8,640
Consumer
Changes in the Allowance for Loan Losses
Beginning of period balance	122	156	100	106
Charge-offs	(25)		(25)
Net (charge-offs) recoveries	(25)		(25)
Provision (credit) for loan losses	(20)	(36)	2	14
End of year balance	$ 77	$ 120	$ 77	$ 120

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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	Sep. 30, 2018	Jun. 30, 2018	Dec. 31, 2017	Sep. 30, 2017	Jun. 30, 2017	Dec. 31, 2016
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	$ 7,089		$ 290
Allowance for loan losses, Collectively evaluated for impairment	20,337		19,368
Total allowance balance	27,426	$ 26,664	19,658	$ 19,748	$ 19,397	$ 19,089
Loans, Individually evaluated for impairment	25,049		2,774
Loans, Collectively evaluated for impairment	1,874,614		1,580,403
Total loan balance	1,899,663		1,583,177
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	7,089		290
Allowance for loan losses, Collectively evaluated for impairment	10,184		10,318
Total allowance balance	17,273	17,522	10,608	10,988	11,259	10,656
Loans, Individually evaluated for impairment	18,843		1,775
Loans, Collectively evaluated for impairment	581,751		571,521
Total loan balance	600,594		573,296
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, Collectively evaluated for impairment	10,076		8,950
Total allowance balance	10,076	9,020	8,950	8,640	7,982	8,327
Loans, Individually evaluated for impairment	6,206		998
Loans, Collectively evaluated for impairment	1,282,931		996,488
Total loan balance	1,289,137		997,486
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	77		100
Total allowance balance	77	$ 122	100	$ 120	$ 156	$ 106
Loans, Individually evaluated for impairment			1
Loans, Collectively evaluated for impairment	9,932		12,394
Total loan balance	$ 9,932		$ 12,395

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Loans - Loans Held for Investment Individually Evaluated for Impairment by Class of Loans (Details) - USD ($) $ in Thousands	Sep. 30, 2018	Dec. 31, 2017	Sep. 30, 2017
Unpaid Principal Balance
Total with no related allowance recorded	$ 12,452	$ 2,261
Total with an allowance recorded	12,597	589
Total	25,049	2,850
Recorded Investment
Total with no related allowance recorded	12,452	2,242
Total with an allowance recorded	12,597	532
Total	25,049	2,774	$ 3,816
Total with an allowance recorded, Allowance for Loan Losses Allocated	7,089	290
Commercial
Unpaid Principal Balance
Total with no related allowance recorded	6,246	1,243
Total with an allowance recorded	12,597	589
Recorded Investment
Total with no related allowance recorded	6,246	1,243
Total with an allowance recorded	12,597	532
Total with an allowance recorded, Allowance for Loan Losses Allocated	7,089	290
Consumer
Unpaid Principal Balance
Total with no related allowance recorded		1
Recorded Investment
Total with no related allowance recorded		1
Commercial | Real estate
Unpaid Principal Balance
Total with no related allowance recorded	5,639	500
Recorded Investment
Total with no related allowance recorded	5,639	500
Land and construction | Real estate
Unpaid Principal Balance
Total with no related allowance recorded		138
Recorded Investment
Total with no related allowance recorded		119
Home equity | Real estate
Unpaid Principal Balance
Total with no related allowance recorded	567	379
Recorded Investment
Total with no related allowance recorded	$ 567	$ 379

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Loans - Interest Recognized and Cash Basis Interest Earned on Impaired Loans (Details) - USD ($) $ in Thousands	3 Months Ended		9 Months Ended
	Sep. 30, 2018	Sep. 30, 2017	Sep. 30, 2018	Sep. 30, 2017
Interest Recognized and Cash Basis Interest Earned on Impaired Loans
Average of impaired loans during the period	$ 25,930	$ 3,547	$ 14,668	$ 3,955
Interest income during impairment		3		3
Commercial
Interest Recognized and Cash Basis Interest Earned on Impaired Loans
Average of impaired loans during the period	19,638	2,010		2,625
Consumer
Interest Recognized and Cash Basis Interest Earned on Impaired Loans
Average of impaired loans during the period		1		2
Commercial | Commercial
Interest Recognized and Cash Basis Interest Earned on Impaired Loans
Average of impaired loans during the period			11,056
CRE | Real estate
Interest Recognized and Cash Basis Interest Earned on Impaired Loans
Average of impaired loans during the period	5,720	501	3,110	583
Land and construction | Real estate
Interest Recognized and Cash Basis Interest Earned on Impaired Loans
Average of impaired loans during the period		641	30	419
Interest income during impairment		3		3
Home equity | Real estate
Interest Recognized and Cash Basis Interest Earned on Impaired Loans
Average of impaired loans during the period	$ 572	$ 394	$ 472	$ 326

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Loans - Nonperforming Loans (Details) - USD ($) $ in Thousands	Sep. 30, 2018	Dec. 31, 2017	Sep. 30, 2017
Nonaccrual loans - held-for-investment	$ 23,342	$ 2,250	$ 2,560
Restructured and loans over 90 days past due and still accruing	1,373	235	931
Total nonperforming loans	24,715	2,485	3,491
Other restructured loans	334	289	325
Total	$ 25,049	$ 2,774	$ 3,816

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Loans - Nonperforming Loans by Class (Details) - USD ($) $ in Thousands	Sep. 30, 2018	Dec. 31, 2017	Sep. 30, 2017
Nonperforming Loans by Class
Nonaccrual loans - held-for-investment	$ 23,342	$ 2,250	$ 2,560
Restructured and Loans Over 90 Days Past Due and Still Accruing	1,373	235	931
Total	24,715	2,485	$ 3,491
Commercial
Nonperforming Loans by Class
Nonaccrual loans - held-for-investment	17,361	1,250
Restructured and Loans Over 90 Days Past Due and Still Accruing	1,148	235
Total	18,509	1,485
Consumer
Nonperforming Loans by Class
Nonaccrual loans - held-for-investment		1
Total		1
CRE | Real estate
Nonperforming Loans by Class
Nonaccrual loans - held-for-investment	5,639	501
Total	5,639	501
Land and construction | Real estate
Nonperforming Loans by Class
Nonaccrual loans - held-for-investment		119
Total		119
Home equity | Real estate
Nonperforming Loans by Class
Nonaccrual loans - held-for-investment	342	379
Restructured and Loans Over 90 Days Past Due and Still Accruing	225
Total	$ 567	$ 379

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Loans - Aging of Past Due Loans by Class of Loans - Tabular Disclosure (Details) - USD ($) $ in Thousands	Sep. 30, 2018	Dec. 31, 2017
Aging of Past Due Loans by Class of Loans
Total Past Due	$ 10,951	$ 6,943
Loans Not Past Due	1,888,712	1,576,234
Total loan balance	1,899,663	1,583,177
30-59 Days Past Due
Aging of Past Due Loans by Class of Loans
Total Past Due	7,397	4,511
60-89 Days Past Due
Aging of Past Due Loans by Class of Loans
Total Past Due	2,098	1,224
90 Days or Greater Past Due
Aging of Past Due Loans by Class of Loans
Total Past Due	1,456	1,208
Commercial
Aging of Past Due Loans by Class of Loans
Total Past Due	9,984	6,101
Loans Not Past Due	590,610	567,195
Total loan balance	600,594	573,296
Commercial | 30-59 Days Past Due
Aging of Past Due Loans by Class of Loans
Total Past Due	6,430	4,288
Commercial | 60-89 Days Past Due
Aging of Past Due Loans by Class of Loans
Total Past Due	2,098	1,224
Commercial | 90 Days or Greater Past Due
Aging of Past Due Loans by Class of Loans
Total Past Due	1,456	589
Real estate
Aging of Past Due Loans by Class of Loans
Total loan balance	1,289,137	997,486
Consumer
Aging of Past Due Loans by Class of Loans
Loans Not Past Due	9,932	12,395
Total loan balance	9,932	12,395
Commercial | Real estate
Aging of Past Due Loans by Class of Loans
Total Past Due		500
Loans Not Past Due		772,367
Total loan balance	988,491	772,867
Commercial | Real estate | 90 Days or Greater Past Due
Aging of Past Due Loans by Class of Loans
Total Past Due		500
CRE | Real estate
Aging of Past Due Loans by Class of Loans
Loans Not Past Due	988,491
Total loan balance	988,491	772,867
Land and construction | Real estate
Aging of Past Due Loans by Class of Loans
Total Past Due		119
Loans Not Past Due	131,548	100,763
Total loan balance	131,548	100,882
Land and construction | Real estate | 90 Days or Greater Past Due
Aging of Past Due Loans by Class of Loans
Total Past Due		119
Home equity | Real estate
Aging of Past Due Loans by Class of Loans
Total Past Due	967	223
Loans Not Past Due	115,690	78,953
Total loan balance	116,657	79,176
Home equity | Real estate | 30-59 Days Past Due
Aging of Past Due Loans by Class of Loans
Total Past Due	967	223
Residential mortgages | Real estate
Aging of Past Due Loans by Class of Loans
Loans Not Past Due	52,441	44,561
Total loan balance	$ 52,441	$ 44,561

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Loans - Aging of Past Due Loans by Class of Loans - Additional Information (Details) - USD ($) $ in Thousands	Sep. 30, 2018	Dec. 31, 2017	Sep. 30, 2017
Aging of Past Due Loans by Class of Loans
Past due loans 30 day or greater	$ 10,951	$ 6,943
Nonaccrual loans - held-for-investment	23,342	2,250	$ 2,560
30 days or greater past due
Aging of Past Due Loans by Class of Loans
Nonaccrual loans - held-for-investment	617	1,410
Less than 30 days past due
Aging of Past Due Loans by Class of Loans
Nonaccrual loans - held-for-investment	22,725	$ 840
Borrower | Less than 30 days past due
Aging of Past Due Loans by Class of Loans
Nonaccrual loans - held-for-investment	$ 21,764

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Loans - Credit Quality Indicators (Details) - USD ($) $ in Thousands	Sep. 30, 2018	Dec. 31, 2017
Loans
Balance to report	$ 1,871,961	$ 1,563,009
Loan classified as loss
Loans
Balance to report	$ 0	$ 0

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Loans - Summary of the Loan Portfolio by Loan Type and Credit Quality Classification (Details) - USD ($) $ in Thousands	Sep. 30, 2018	Dec. 31, 2017
Loans
Total	$ 1,899,663	$ 1,583,177
Borrower
Loans
Lending relationship loans	21,764	12,500
Nonclassified
Loans
Total	1,869,117	1,558,105
Classified
Loans
Total	30,546	25,072
Commercial
Loans
Total	600,594	573,296
Commercial | Nonclassified
Loans
Total	577,325	554,913
Commercial | Classified
Loans
Total	23,269	18,383
Real estate
Loans
Total	1,289,137	997,486
Real estate | Commercial
Loans
Total	988,491	772,867
Real estate | CRE
Loans
Total	988,491	772,867
Real estate | CRE | Nonclassified
Loans
Total	982,852	766,988
Real estate | CRE | Classified
Loans
Total	5,639	5,879
Real estate | Land and construction
Loans
Total	131,548	100,882
Real estate | Land and construction | Nonclassified
Loans
Total	131,548	100,763
Real estate | Land and construction | Classified
Loans
Total		119
Real estate | Home equity
Loans
Total	116,657	79,176
Real estate | Home equity | Nonclassified
Loans
Total	115,019	78,486
Real estate | Home equity | Classified
Loans
Total	1,638	690
Real estate | Residential mortgages
Loans
Total	52,441	44,561
Real estate | Residential mortgages | Nonclassified
Loans
Total	52,441	44,561
Consumer
Loans
Total	9,932	12,395
Consumer | Nonclassified
Loans
Total	$ 9,932	12,394
Consumer | Classified
Loans
Total		$ 1

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Loans - Troubled Debt Restructurings (Details) - USD ($)	Sep. 30, 2018	Dec. 31, 2017
Loans
Recorded investment of troubled debt restructurings	$ 676,000	$ 325,000
Troubled debt restructurings, nonaccrual loans		16,000
Troubled debt restructurings, accruing loans		309,000
Specific reserves	$ 46,000	$ 1,000

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Loans - Troubled Debt Restructurings by Class (Details) $ in Thousands	9 Months Ended
	Sep. 30, 2018 USD ($) contract	Sep. 30, 2017 USD ($) contract
Troubled Debt Restructurings by Class
Number of loans modified as troubled debt restructurings during the period | contract	3	3
Pre-modification Outstanding Recorded Investment	$ 384	$ 318
Post-modification Outstanding Recorded Investment	$ 384	$ 318
Commercial
Troubled Debt Restructurings by Class
Number of loans modified as troubled debt restructurings during the period | contract	2	3
Pre-modification Outstanding Recorded Investment	$ 159	$ 318
Post-modification Outstanding Recorded Investment	$ 159	$ 318
Home equity
Troubled Debt Restructurings by Class
Number of loans modified as troubled debt restructurings during the period | contract	1
Pre-modification Outstanding Recorded Investment	$ 225
Post-modification Outstanding Recorded Investment	$ 225

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Loans - Defaults on Troubled Debt Restructurings (Details)	3 Months Ended		9 Months Ended
	Sep. 30, 2018 loan item	Sep. 30, 2017 item	Sep. 30, 2018 USD ($) contract item	Sep. 30, 2017 contract item
Loans
Number of troubled debt restructurings in which the amount of principal or accrued interest owed from the borrower was forgiven | loan	0
Amounts that the company commits to lend customers with outstanding loans that are classified as troubled debt restructurings | $			$ 0
Number of loans modified as troubled debt restructurings during the period | contract			3	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

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Business Combinations - Tri-Valley (Details)		9 Months Ended
	Apr. 06, 2018 USD ($) $ / shares shares	Sep. 30, 2018 USD ($)	Sep. 30, 2017 USD ($)	May 04, 2018 $ / shares	Dec. 31, 2017 USD ($)
Business Combinations
Gain (loss) on sales of securities		$ 266,000	$ (6,000)
Stock price (in dollars per share) | $ / shares				$ 16.73
Assets acquired:
Loans		336,446,000
Other assets, net		14,736,000
Liabilities assumed:
Deposits		416,628,000
Other liabilities		3,037,000
Other borrowings		62,000
Goodwill recorded in the merger		$ 83,752,000	$ 45,664,000		$ 45,664,000
Tri Valley Bank
Business Combinations
Disposition of other real estate owned	$ 1,132,000
Gain (loss) 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 (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	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

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Business Combinations - United American (Details)	May 04, 2018 USD ($) $ / shares shares	Sep. 30, 2018 USD ($)	Dec. 31, 2017 USD ($)	Sep. 30, 2017 USD ($)
Business Combinations
Stock price (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		3,037,000
Goodwill recorded in the merger		$ 83,752,000	$ 45,664,000	$ 45,664,000
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	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	2,429,000
Total liabilities assumed	283,731,000
Net assets acquired	23,011,000
Purchase price	47,280,000
Goodwill recorded in the merger	24,269,000
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	(188,000)
Total liabilities assumed	$ (137,000)

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Business Combinations (Details) $ in Thousands	3 Months Ended	9 Months Ended
	Sep. 30, 2018 USD ($) company	Sep. 30, 2018 USD ($) company
Business Combinations
Number of business banking franchises acquired | company	3	3
Combined business value after business combination	$ 3,200,000	$ 3,200,000
Acquisition and integration related costs	16	5,452
Severance and retention expense	183	3,576
Business combination one time pre-tax severance, retention, acquisition and integration costs	$ 199	$ 9,028

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Goodwill and Other Intangible Assets - Goodwill (Details) - USD ($) $ in Thousands	9 Months Ended
	Sep. 30, 2018	May 04, 2018	Apr. 06, 2018	Dec. 31, 2017	Sep. 30, 2017
Goodwill
Goodwill	$ 83,752			$ 45,664	$ 45,664
Goodwill acquired	38,088
BVF/CSNK
Goodwill
Goodwill acquired	13,045
Focus Business Bank
Goodwill
Goodwill acquired	32,619
Tri Valley Bank
Goodwill
Goodwill			$ 13,819
Goodwill acquired	13,819
United American Bank
Goodwill
Goodwill		$ 24,269
Goodwill acquired	$ 24,269

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Goodwill and Other Intangible Assets - Other Intangible Assets (Details) - USD ($) $ in Thousands			1 Months Ended				9 Months Ended
	May 04, 2018	Apr. 06, 2018	May 31, 2018	Apr. 30, 2018	Aug. 31, 2015	Nov. 30, 2014	Sep. 30, 2018	Dec. 31, 2017
Other Intangible Assets
Accumulated amortization							$ 2,576	$ 1,995
United American Bank
Other Intangible Assets
Accumulated amortization							$ 469
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							$ 143
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 Business Bank | Core deposit
Other Intangible Assets
Intangible assets acquired					$ 6,285
Useful life, amortization period					10 years
BVF/CSNK
Other Intangible Assets
Accumulated amortization							$ 743	$ 601
BVF/CSNK | Below market-value lease
Other Intangible Assets
Intangible assets acquired						$ 109
Useful life, amortization period						3 years
BVF/CSNK | Customer relationship and brokered relationship
Other Intangible Assets
Intangible assets acquired						$ 1,900
Useful life, amortization period						10 years
BVF/CSNK | Non-compete agreement
Other Intangible Assets
Intangible assets acquired						$ 250
Useful life, amortization period						3 years

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Goodwill and Other Intangible Assets - Estimated Amortization Expense (Details) $ in Thousands	Sep. 30, 2018 USD ($)
Estimated Amortization Expense
2018	$ 1,942
2019	2,214
2020	2,032
2021	1,590
2022	1,430
2023	1,307
Thereafter	3,437
Total	13,952
United American Bank | Core deposit
Estimated Amortization Expense
2018	585
2019	777
2020	665
2021	602
2022	553
2023	521
Thereafter	2,020
Total	5,723
United American Bank | Below market-value lease
Estimated Amortization Expense
2018	170
2019	255
2020	235
Total	660
Tri Valley Bank | Core deposit
Estimated Amortization Expense
2018	208
2019	240
2020	208
2021	184
2022	167
2023	158
Thereafter	603
Total	1,768
Tri Valley Bank | Below market-value lease
Estimated Amortization Expense
2018	14
2019	18
2020	18
2021	18
2022	18
2023	18
Thereafter	106
Total	210
Focus Business Bank | Core deposit
Estimated Amortization Expense
2018	775
2019	734
2020	716
2021	596
2022	502
2023	420
Thereafter	549
Total	4,292
BVF/CSNK | Customer relationship and brokered relationship
Estimated Amortization Expense
2018	190
2019	190
2020	190
2021	190
2022	190
2023	190
Thereafter	159
Total	$ 1,299

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Goodwill and Other Intangible Assets - Impairment of Intangible Assets (Details) - USD ($) $ in Thousands	9 Months Ended	12 Months Ended
	Sep. 30, 2018	Dec. 31, 2017
Impairment of Intangible Assets
Impairment of intangible assets	$ 0	$ 0

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Income Taxes - Net Deferred Tax Assets (Details) - USD ($) $ in Thousands	9 Months Ended	12 Months Ended
	Sep. 30, 2018	Dec. 31, 2017
Income Taxes
Statutory Federal income tax rate (as a percent)	21.00%	35.00%
Net deferred tax assets
Net deferred tax assets	$ 28,143	$ 16,247
Valuation allowance for deferred tax assets	$ 0	$ 0

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Income Taxes - Carry Amounts of the Low Income Housing Investments (Details) - USD ($) $ in Thousands	Sep. 30, 2018	Dec. 31, 2017
Income Taxes
Low income housing investments	$ 3,139	$ 3,411
Future commitments	$ 287	$ 302

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Income Taxes - Future Commitments of the Low Income Housing Investments (Details) - Low income housing investments $ in Thousands	Sep. 30, 2018 USD ($)
Future Commitments
2018	$ 15
2019 through 2023	$ 272

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Income Taxes - Components of Low Income Housing Investment (Details) - USD ($) $ in Thousands	3 Months Ended		9 Months Ended
	Sep. 30, 2018	Sep. 30, 2017	Sep. 30, 2018	Sep. 30, 2017
Income Taxes
Low income housing tax credits	$ 106	$ 110	$ 319	$ 329
Low income housing investment losses	$ 117	$ 115	$ 351	$ 345

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Benefit Plans - Defined Benefit Plans - Nonqualified Defined Benefit Pension Plan (Details) $ in Thousands	Sep. 30, 2018 USD ($)
Supplemental Retirement Plan
Supplemental Retirement Plan
Plan assets associated with the plan	$ 0

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Benefit Plans - Defined Benefit Plans - Components of Pension Cost (Details) - USD ($) $ in Thousands	3 Months Ended		9 Months Ended		12 Months Ended
	Sep. 30, 2018	Sep. 30, 2017	Sep. 30, 2018	Sep. 30, 2017	Dec. 31, 2017
Supplemental Retirement Plan
Components of net periodic benefit cost:
Service cost	$ 62	$ 81	$ 186	$ 243
Interest cost	237	259	711	777
Amortization of net actuarial loss	73	69	219	207
Net periodic benefit cost	372	409	1,116	1,227
Split-Dollar Life Insurance Benefit Plan
Components of net periodic benefit cost:
Interest cost	56	61	170	182	$ 243
Amortization of prior transition obligation	(16)	(18)	(48)	(53)
Net periodic benefit cost	$ 40	$ 43	$ 122	$ 129

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Benefit Plans - Defined Benefit Plans - Change in Projected Benefit Obligation (Details) - Split-Dollar Life Insurance Benefit Plan - USD ($) $ in Thousands	3 Months Ended		9 Months Ended		12 Months Ended
	Sep. 30, 2018	Sep. 30, 2017	Sep. 30, 2018	Sep. 30, 2017	Dec. 31, 2017
Change in projected benefit obligation:
Projected benefit obligation at beginning of year			$ 6,711	$ 6,301	$ 6,301
Interest cost	$ 56	$ 61	170	$ 182	243
Actuarial (gain) loss					167
Projected benefit obligation at end of period	$ 6,881		$ 6,881		$ 6,711

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Benefit Plans - Defined Benefit Plans - Amounts Recognized in Accumulated Other Comprehensive Loss (Details) - Split-Dollar Life Insurance Benefit Plan - USD ($) $ in Thousands	Sep. 30, 2018	Dec. 31, 2017
Amounts Recognized in Accumulated Other Comprehensive Loss
Net actuarial loss	$ 2,569	$ 2,453
Prior transition obligation	1,171	1,238
Accumulated other comprehensive loss	$ 3,740	$ 3,691

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Fair Value - Financial Assets and Liabilities Measured on a Recurring Basis (Details) - USD ($) $ in Thousands	Sep. 30, 2018	Dec. 31, 2017
Financial Assets and Liabilities Measured on a Recurring Basis
Securities available-for-sale	$ 319,071	$ 391,852
I/O strip receivables	863	968
Agency mortgage-backed securities
Financial Assets and Liabilities Measured on a Recurring Basis
Securities available-for-sale	311,665	374,733
Trust preferred securities
Financial Assets and Liabilities Measured on a Recurring Basis
Securities available-for-sale		17,119
U.S. Government sponsored entities
Financial Assets and Liabilities Measured on a Recurring Basis
Securities available-for-sale	7,406
Significant Other Observable Inputs (Level 2)
Financial Assets and Liabilities Measured on a Recurring Basis
I/O strip receivables	863	968
Significant Other Observable Inputs (Level 2) | Agency mortgage-backed securities
Financial Assets and Liabilities Measured on a Recurring Basis
Securities available-for-sale	311,665	374,733
Significant Other Observable Inputs (Level 2) | Trust preferred securities
Financial Assets and Liabilities Measured on a Recurring Basis
Securities available-for-sale		17,119
Significant Other Observable Inputs (Level 2) | U.S. Government sponsored entities
Financial Assets and Liabilities Measured on a Recurring Basis
Securities available-for-sale	7,406
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

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Fair Value - Financial Assets and Liabilities Measured on a Non-Recurring Basis (Details) - Non-recurring basis - USD ($) $ in Thousands	Sep. 30, 2018	Dec. 31, 2017
Financial Assets and Liabilities Measured on a Non-Recurring Basis
Impaired loans - held-for-investment:	$ 5,508	$ 361
Significant Unobservable Inputs (Level 3)
Financial Assets and Liabilities Measured on a Non-Recurring Basis
Impaired loans - held-for-investment:	5,508	361
Commercial | Commercial
Financial Assets and Liabilities Measured on a Non-Recurring Basis
Impaired loans - held-for-investment:	5,508	242
Commercial | Commercial | Significant Unobservable Inputs (Level 3)
Financial Assets and Liabilities Measured on a Non-Recurring Basis
Impaired loans - held-for-investment:	$ 5,508	242
Land and construction | Real estate
Financial Assets and Liabilities Measured on a Non-Recurring Basis
Impaired loans - held-for-investment:		119
Land and construction | Real estate | Significant Unobservable Inputs (Level 3)
Financial Assets and Liabilities Measured on a Non-Recurring Basis
Impaired loans - held-for-investment:		$ 119

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Fair Value - Impaired Loans Held-for-investment - Tabular Disclosure (Details) - USD ($) $ in Thousands	Sep. 30, 2018	Dec. 31, 2017
Impaired Loans Held-for-investment
Impaired loans held-for-investment	$ 25,049	$ 2,774
Carried at fair value
Impaired Loans Held-for-investment
Impaired loans held-for-investment	12,597	651
Specific valuation allowance	(7,089)	(290)
Impaired loans held-for-investment carried at fair value, net	5,508	361
Portion carried at cost
Impaired Loans Held-for-investment
Impaired loans held-for-investment	$ 12,452	$ 2,123

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Fair Value - Impaired Loans Held-for-investment - Additional Disclosures (Details) - USD ($) $ in Thousands	9 Months Ended	12 Months Ended
	Sep. 30, 2018	Dec. 31, 2017
Impaired Loans Held-for-investment
Impaired loans held-for-investment	$ 25,049	$ 2,774
Additional provision (credit) for loan losses	7,042	254
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	12,597	651
Specific valuation allowance	7,089	290
Portion carried at cost
Impaired Loans Held-for-investment
Impaired loans held-for-investment	$ 12,452	$ 2,123

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Fair Value - Quantitative Information about Level 3 Fair Value Measurements (Details) - Non-recurring basis $ in Thousands	Sep. 30, 2018 USD ($) item	Dec. 31, 2017 USD ($) 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	$ 5,508	$ 361
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	$ 5,508	$ 361
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
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	$ 5,508	$ 242
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	$ 5,508	242
Land and construction | 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		119
Land and construction | 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		119
Real estate, Fair value		$ 119
Measurement input for real estate		us-gaap:MeasurementInputDiscountRateMember
Valuation technique for measuring real estate		us-gaap:MarketApproachValuationTechniqueMember
Land and construction | 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

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Fair Value - Carrying Amounts and Estimated Fair Values of Financial Instruments (Details) - USD ($) $ in Thousands	Sep. 30, 2018	Dec. 31, 2017
Assets
Securities available-for-sale	$ 319,071	$ 391,852
Securities held-to-maturity	359,698	394,292
Federal Home Loan Bank and Federal Reserve Bank stock and other investments, at cost	25,210	17,911
I/O strips receivables	863	968
Liabilities
Subordinated Debt.	39,322	39,183
Significant Other Observable Inputs (Level 2)
Assets
I/O strips receivables	863	968
Carrying amount
Assets
Cash and cash equivalents	381,029	316,222
Securities available-for-sale	319,071	391,852
Securities held-to-maturity	375,732	398,341
Loans (including loans held-for-sale), net	1,878,305	1,566,428
Federal Home Loan Bank and Federal Reserve Bank stock and other investments, at cost	25,210	17,911
Accrued interest receivable	9,213	7,985
I/O strips receivables	863	968
Liabilities
Time deposits	155,879	194,561
Other deposits	2,589,420	2,288,428
Subordinated Debt.	39,322	39,183
Accrued interest payable	1,026	389
Carried at fair value
Assets
Cash and cash equivalents	381,029	316,222
Securities available-for-sale	319,071	391,852
Securities held-to-maturity	359,698	394,292
Loans (including loans held-for-sale), net	1,846,575	1,511,386
Accrued interest receivable	9,213	7,985
I/O strips receivables	863	968
Liabilities
Time deposits	156,206	194,844
Other deposits	2,589,420	2,288,428
Subordinated Debt.	39,322	40,384
Accrued interest payable	1,026	389
Carried at fair value | Quoted Prices in Active Markets for Identical Assets (Level 1)
Assets
Cash and cash equivalents	381,029	316,222
Carried at fair value | Significant Other Observable Inputs (Level 2)
Assets
Securities available-for-sale	319,071	391,852
Securities held-to-maturity	359,698	394,292
Loans (including loans held-for-sale), net	6,344	3,419
Accrued interest receivable	2,327	2,423
I/O strips receivables	863	968
Liabilities
Time deposits	156,206	194,844
Other deposits	2,589,420	2,288,428
Subordinated Debt.	39,322	40,384
Accrued interest payable	1,026	389
Carried at fair value | Significant Unobservable Inputs (Level 3)
Assets
Loans (including loans held-for-sale), net	1,840,231	1,507,967
Accrued interest receivable	$ 6,886	$ 5,562

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Equity Plan - General Disclosures (Details) - shares	9 Months Ended
	Sep. 30, 2018	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	1,186,800
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)	97,818
Nonqualified stock options
Equity Plan
Number of equity awards issued (in shares)	305,500

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Equity Plan - Stock Option Activity (Details) - Options	9 Months Ended
	Sep. 30, 2018 USD ($) $ / shares shares
Number of Shares
Outstanding at the beginning of the period (in shares)	1,602,732
Granted (in shares)	305,500
Exercised (in shares)	(259,770)
Forfeited or expired (in shares)	(84,079)
Outstanding at the end of the period (in shares)	1,564,383
Vested or expected to vest (in shares)	1,470,520
Exercisable at the end of the period (in shares)	1,011,193
Weighted Average Exercise Price
Outstanding at the beginning of the period (in dollars per share) | $ / shares	$ 9.54
Granted (in dollars per share) | $ / shares	16.82
Exercised (in dollars per share) | $ / shares	9.62
Forfeited or expired (in dollars per share) | $ / shares	14.20
Outstanding at the end of the period (in dollars per share) | $ / shares	$ 10.69
Additional Information
Weighted Average Remaining Contractual Life - Outstanding at the end of the period (in years)	6 years 7 months 21 days
Weighted Average Remaining Contractual Life - Vested or expected to vest (in years)	6 years 7 months 21 days
Weighted Average Remaining Contractual Life - Exercisable at the end of the period (in years)	5 years 5 months 16 days
Aggregate Intrinsic Value - Outstanding at the end of the period (in dollars) | $	$ 7,176,631
Aggregate Intrinsic Value - Vested or expected to vest (in dollars) | $	6,746,033
Aggregate Intrinsic Value - Exercisable at the end of the period (in dollars) | $	$ 6,475,976

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Equity Plan - Information Related to the Equity Plans for each of the Last Three Years (Details) - USD ($) $ / shares in Units, $ in Thousands	9 Months Ended
	Sep. 30, 2018	Sep. 30, 2017
Information Related to the Equity Plans
Cash received from option exercise	$ 2,499	$ 1,352
Options
Information Related to the Equity Plans
Intrinsic value of options exercised	1,767,884	1,331,528
Cash received from option exercise	2,499,481	1,352,236
Tax benefit realized from option exercises	$ 513,901	$ 543,654
Weighted average fair value of options granted (in dollars per share)	$ 3.07	$ 2.66

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Equity Plan - Unrecognized Compensation Cost - Nonvested Stock Options (Details) - Options $ in Thousands	9 Months Ended
	Sep. 30, 2018 USD ($)
Unrecognized Compensation Cost
Total unrecognized compensation cost related to nonvested stock options granted	$ 1,499
Expected weighted-average period for recognition of compensation costs related to nonvested stock options	2 years 9 months 18 days

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Equity Plan - Assumptions Used to Estimate Fair Value (Details)	9 Months Ended
	Sep. 30, 2018	Sep. 30, 2017
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)	21.00%	24.00%
Weighted average risk-free interest rate (as a percent)	2.87%	1.94%
Expected dividends (as a percent)	2.62%	2.78%

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Equity Plan - Restricted Stock Activity (Details) - Restricted stock	9 Months Ended
	Sep. 30, 2018 $ / shares shares
Number of Shares
Nonvested shares at the beginning of the period (in shares) | shares	181,185
Granted (in shares) | shares	97,818
Vested (in shares) | shares	(67,015)
Forfeited or expired (in shares) | shares	(2,440)
Nonvested shares at the end of the period (in shares) | shares	209,548
Weighted Average Grant Date Fair Value
Nonvested shares at the beginning of the period (in dollars per share) | $ / shares	$ 11.66
Granted (in dollars per share) | $ / shares	16.83
Vested (in dollars per share) | $ / shares	16.69
Forfeited or expired (in dollars per share) | $ / shares	12.65
Nonvested shares at the end of the period (in dollars per share) | $ / shares	$ 11.04

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Equity Plan - Unrecognized Compensation Cost - Nonvested Restricted Stock Awards (Details) - Restricted stock $ in Thousands	9 Months Ended
	Sep. 30, 2018 USD ($)
Unrecognized Compensation Cost
Total unrecognized compensation cost related to nonvested restricted stock awards	$ 2,386
Expected weighted-average period for recognition of compensation costs related to nonvested restricted stock awards	2 years 8 months 1 day

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Subordinated Debt (Details) - USD ($)	Jun. 01, 2022	Sep. 30, 2018	May 26, 2017
Principal amount			$ 40,000,000
Fixed interest rate (as a percent)		5.25%
LIBOR
Base rate	three-month LIBOR
Rate of interest added to base rate	3.365%

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Capital Requirements - General Information (Details)	9 Months Ended	12 Months Ended
	Sep. 30, 2018	Dec. 31, 2019	Dec. 31, 2018	Dec. 31, 2017	Dec. 31, 2016
Capital Requirements
Phase-in period (in years)	4 years
Capital conservation buffer (as a percent)	1.875%			1.25%	0.625%
Forecast
Capital Requirements
Capital conservation buffer (as a percent)		2.50%	1.875%
HBC (Wholly-owned Subsidiary)
Capital Requirements
Capital conservation buffer (as a percent)	1.875%			1.25%

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Capital Requirements - Tabular Disclosure (Details) - USD ($) $ in Thousands	Sep. 30, 2018	Dec. 31, 2017
Total Capital (to risk-weighted assets)
Actual, Amount	$ 334,152	$ 288,754
Required For Capital Adequacy Purposes, Amount	$ 228,973	$ 185,338
Actual, Ratio (as a percent)	14.40%	14.40%
Required For Capital Adequacy Purposes, Ratio (as a percent)	9.875%	9.25%
Tier 1 Capital (to risk-weighted assets)
Actual, Amount	$ 266,654	$ 229,258
Required For Capital Adequacy Purposes, Amount	$ 182,599	$ 145,265
Actual, Ratio (as a percent)	11.50%	11.40%
Required For Capital Adequacy Purposes, Ratio (as a percent)	7.875%	7.25%
Common Equity Tier 1 Capital (to risk-weighted assets)
Actual, Amount	$ 266,654	$ 229,258
Required For Capital Adequacy Purposes, Amount	$ 147,818	$ 115,210
Actual, Ratio (as a percent)	11.50%	11.40%
Required For Capital Adequacy Purposes, Ratio (as a percent)	6.375%	5.75%
Tier 1 Capital (to average assets)
Actual, Amount	$ 266,654	$ 229,258
Required For Capital Adequacy Purposes, Amount	$ 124,005	$ 114,959
Actual, Ratio (as a percent)	8.60%	8.00%
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	$ 310,636	$ 265,102
To Be Well Capitalized Under Regulatory Requirements, Amount	231,696	200,274
Required For Capital Adequacy Purposes, Amount	$ 228,800	$ 185,253
Actual, Ratio (as a percent)	13.40%	13.20%
To Be Well Capitalized Under Regulatory Requirements, Ratio (as a percent)	10.00%	10.00%
Required For Capital Adequacy Purposes, Ratio (as a percent)	9.875%	9.25%
Tier 1 Capital (to risk-weighted assets)
Actual, Amount	$ 282,460	$ 244,790
To Be Well Capitalized Under Regulatory Requirements, Amount	185,357	160,219
Required For Capital Adequacy Purposes, Amount	$ 182,461	$ 145,198
Actual, Ratio (as a percent)	12.20%	12.20%
To Be Well Capitalized Under Regulatory Requirements, Ratio (as a percent)	8.00%	8.00%
Required For Capital Adequacy Purposes, Ratio (as a percent)	7.875%	7.25%
Common Equity Tier 1 Capital (to risk-weighted assets)
Actual, Amount	$ 282,460	$ 244,790
To Be Well Capitalized Under Regulatory Requirements, Amount	150,602	130,178
Required For Capital Adequacy Purposes, Amount	$ 147,706	$ 115,157
Actual, Ratio (as a percent)	12.20%	12.20%
To Be Well Capitalized Under Regulatory Requirements, Ratio (as a percent)	6.50%	6.50%
Required For Capital Adequacy Purposes, Ratio (as a percent)	6.375%	5.75%
Tier 1 Capital (to average assets)
Actual, Amount	$ 282,460	$ 244,790
To Be Well Capitalized Under Regulatory Requirements, Amount	154,920	143,655
Required For Capital Adequacy Purposes, Amount	$ 123,936	$ 114,924
Actual, Ratio (as a percent)	9.10%	8.50%
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%

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Capital Requirements - Dividends to Parent (Details) - USD ($)	3 Months Ended	9 Months Ended
	Sep. 30, 2018	Sep. 30, 2018	Dec. 31, 2017
Cash dividend
Subordinated Debt.	$ 39,322,000	$ 39,322,000	$ 39,183,000
HBC (Wholly-owned Subsidiary)
Cash dividend
Cash dividend available	26,057,000	26,057,000
Dividends paid to parent company	$ 5,000,000	$ 13,000,000

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Revenue Recognition (Details) - USD ($) $ in Thousands	3 Months Ended		9 Months Ended
	Sep. 30, 2018	Sep. 30, 2017	Sep. 30, 2018	Sep. 30, 2017
Disaggregation of Revenue [Line Items]
Non-interest Income In-scope of Topic 606	$ 852		$ 2,364
Non-interest Income Out-of-scope of Topic 606	1,354		4,817
Total noninterest income	2,206	$ 2,460	7,181	$ 7,048
Calculated under Revenue Guidance in Effect before Topic 606 [Member]
Disaggregation of Revenue [Line Items]
Non-interest Income In-scope of Topic 606		795		2,284
Non-interest Income Out-of-scope of Topic 606		1,665		4,764
Total noninterest income		2,460		7,048
Service charges and fees on deposit accounts
Disaggregation of Revenue [Line Items]
Non-interest Income In-scope of Topic 606	551		1,524
Service charges and fees on deposit accounts | Calculated under Revenue Guidance in Effect before Topic 606 [Member]
Disaggregation of Revenue [Line Items]
Non-interest Income In-scope of Topic 606		510		1,449
Interchange fees
Disaggregation of Revenue [Line Items]
Non-interest Income In-scope of Topic 606	83		239
Interchange fees | Calculated under Revenue Guidance in Effect before Topic 606 [Member]
Disaggregation of Revenue [Line Items]
Non-interest Income In-scope of Topic 606		75		208
Merchant services revenue
Disaggregation of Revenue [Line Items]
Non-interest Income In-scope of Topic 606	39		122
Merchant services revenue | Calculated under Revenue Guidance in Effect before Topic 606 [Member]
Disaggregation of Revenue [Line Items]
Non-interest Income In-scope of Topic 606		44		129
Other
Disaggregation of Revenue [Line Items]
Non-interest Income In-scope of Topic 606	$ 179		$ 479
Other | Calculated under Revenue Guidance in Effect before Topic 606 [Member]
Disaggregation of Revenue [Line Items]
Non-interest Income In-scope of Topic 606		$ 166		$ 498

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Noninterest Expense (Details) - USD ($)	3 Months Ended		9 Months Ended
	Sep. 30, 2018	Sep. 30, 2017	Sep. 30, 2018	Sep. 30, 2017
Salaries and employee benefits	$ 10,719,000	$ 9,071,000	$ 35,302,000	$ 27,766,000
Occupancy and equipment	1,559,000	1,142,000	3,927,000	3,426,000
Professional fees	721,000	695,000	1,116,000	2,439,000
Amortization of intangible assets	631,000	296,000	1,336,000	1,083,000
Software subscriptions	555,000	475,000	1,747,000	1,333,000
Data processing	525,000	411,000	1,501,000	1,080,000
Insurance expense	430,000	401,000	1,236,000	1,123,000
Acquisition and integration related costs	16,000		5,452,000
Other	2,572,000	2,343,000	6,963,000	7,166,000
Total noninterest expense	17,728,000	$ 14,834,000	58,580,000	$ 45,416,000
Severance and retention expense	183,000		3,576,000
Tri Valley and United American
Severance and retention expense	$ 183,000		$ 3,576,000

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Business Segment Information - Business Segments (Details)	9 Months Ended
	Sep. 30, 2018 segment item
Business Segment Information
Number of business segments | segment	2
Focus Business Bank
Business Segment Information
Number of business segments | item	2

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Business Segment Information - Operating Statements (Details) - USD ($) $ in Thousands	3 Months Ended		9 Months Ended
	Sep. 30, 2018	Sep. 30, 2017	Sep. 30, 2018	Sep. 30, 2017	Dec. 31, 2017
Operating Income
Interest income	$ 34,610	$ 27,955	$ 94,467	$ 78,759
Total interest expense	2,159	1,634	5,504	3,679
Net interest income	32,451	26,321	88,963	75,080
Provision (credit) for loan losses	(425)	115	7,279	390
Net interest income after provision	32,876	26,206	81,684	74,690
Noninterest income	2,206	2,460	7,181	7,048
Noninterest expense	17,728	14,834	58,580	45,416
Income before income taxes	17,354	13,832	30,285	36,322
Income tax expense	4,979	5,249	8,186	13,752
Net income	12,375	8,583	22,099	22,570
Total assets	3,192,910	2,843,948	3,192,910	2,843,948	$ 2,843,452
Loans, net of deferred fees	1,899,387	1,565,950	1,899,387	1,565,950	1,582,667
Goodwill	83,752	45,664	83,752	45,664	$ 45,664
Business Combination One time pre-tax severance, retention, acquisition and integration costs	199		9,028
Banking
Operating Income
Interest income	30,425	24,805	83,781	70,146
Intersegment interest allocations	601	284	1,304	786
Total interest expense	2,159	1,634	5,504	3,679
Net interest income	28,867	23,455	79,581	67,253
Provision (credit) for loan losses	(671)	107	6,958	372
Net interest income after provision	29,538	23,348	72,623	66,881
Noninterest income	2,011	2,101	6,628	6,153
Noninterest expense	16,045	13,149	53,813	40,152
Intersegment expense allocations	172	130	574	392
Income before income taxes	15,676	12,430	26,012	33,274
Income tax expense	4,483	4,660	6,923	12,472
Net income	11,193	7,770	19,089	20,802
Total assets	3,107,897	2,776,262	3,107,897	2,776,262
Loans, net of deferred fees	1,828,379	1,517,186	1,828,379	1,517,186
Goodwill	70,708	32,620	70,708	32,620
Business Combination One time pre-tax severance, retention, acquisition and integration costs	199,000		9,028
Factoring
Operating Income
Interest income	4,185	3,150	10,686	8,613
Intersegment interest allocations	(601)	(284)	(1,304)	(786)
Net interest income	3,584	2,866	9,382	7,827
Provision (credit) for loan losses	246	8	321	18
Net interest income after provision	3,338	2,858	9,061	7,809
Noninterest income	195	359	553	895
Noninterest expense	1,683	1,685	4,767	5,264
Intersegment expense allocations	(172)	(130)	(574)	(392)
Income before income taxes	1,678	1,402	4,273	3,048
Income tax expense	496	589	1,263	1,280
Net income	1,182	813	3,010	1,768
Total assets	85,013	67,686	85,013	67,686
Loans, net of deferred fees	71,008	48,764	71,008	48,764
Goodwill	$ 13,044	$ 13,044	$ 13,044	$ 13,044

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Subsequent Events (Details) - $ / shares		9 Months Ended
	Oct. 25, 2018	Sep. 30, 2018	Sep. 30, 2017
Subsequent Event [Line Items]
Quarterly cash dividends declared to holders of common stock		$ 0.33	$ 0.30
Subsequent Event
Subsequent Event [Line Items]
Quarterly cash dividends declared to holders of common stock	$ 0.11