HTBK - Heritage Commerce Corp Reports Record Earnings of $13.2 Million for the Fourth Quarter of 2018 and $35.3 Million for the Full Year of 2018

SAN JOSE, Calif., Jan. 24, 2019 (GLOBE NEWSWIRE) -- Heritage Commerce Corp (Nasdaq: HTBK), the holding company (the “Company”) for Heritage Bank of Commerce (the “Bank” or “HBC”), today reported record profits for both the fourth quarter of 2018 and the full year of 2018, boosted by positive operating leverage from the acquisitions made in the second quarter of 2018, lower federal income taxes, a strong net interest margin, and solid credit quality.  Net income was $13.2 million, or $0.30 per average diluted common share for the fourth quarter of 2018, compared to $1.3 million, or $0.03 per average diluted common share for the fourth quarter of 2017, and $12.4 million, or $0.28 per average diluted common share for the third quarter of 2018.  For the year ended December 31, 2018, net income was $35.3 million, or $0.84 per average diluted common share, compared to $23.8 million, or $0.62 per average diluted common share, for the year ended December 31, 2017. 

The Company acquired Tri-Valley Bank (“Tri-Valley”) and United American Bank (“United American”) in the second quarter of 2018.  Merger-related costs for the fourth quarter of 2018 and the year ended December 31, 2018 totaled $139,000 and $9.2 million, respectively, compared to $671,000 for both the fourth quarter of 2017 and the year ended December 31, 2017.  Earnings for both the fourth quarter of 2017 and the year ended December 31, 2017 were also impacted by a $7.1 million income tax expense adjustment due to the remeasurement of the Company’s net deferred tax assets (“DTA”). All results are unaudited. 

“We generated excellent fourth quarter and full year 2018 financial results, fueled by an increase in net interest income of 25% for the fourth quarter of 2018, compared to the fourth quarter of 2017, and 20% for the full year of 2018, compared to the full year of 2017. For the fourth quarter of 2018, we also experienced a strong net interest margin of 4.42%, a return on average tangible equity of 20.08%, and an improved efficiency ratio of 47.78%,” said Walter Kaczmarek, President and Chief Executive Officer.  “The tax reform legislation enacted late last year has provided us with a lower corporate tax rate, which will continue to benefit us as we grow our franchise.” 

“In 2018, total loans increased 19% and total deposits increased 6%, year-over-year,” added Mr. Kaczmarek.  “Credit quality is sound with nonperforming assets declining substantially from the preceding quarter. A single large lending relationship paid down almost half of the outstanding loan balances which had been placed on nonaccrual, reducing the recorded investment of this lending relationship from $21.8 million at September 30, 2018 to $12.0 million at December 31, 2018.  This lending relationship accounts for 81% of the nonperforming loans at December 31, 2018.” 

2018 Highlights (as of, or for the periods ended December 31, 2018, compared to December 31, 2017 and September 30, 2018, except as noted):

Operating Results:

♦  Diluted earnings per share were $0.30 for the fourth quarter of 2018, compared to $0.03 for the fourth quarter of 2017, and $0.28 for the third quarter of 2018.  Diluted earnings per share totaled $0.84 for the year ended December 31, 2018, compared to $0.62 per diluted share for the year ended December 31, 2017. 

♦  For the fourth quarter of 2018, the return on average tangible assets increased to 1.69%, and the return on average tangible equity increased to 20.08%, compared to 0.17% and 2.21%, respectively, for the fourth quarter of 2017, and 1.59% and 19.36%, respectively, for the third quarter of 2018.  The return on average tangible assets was 1.19%, and the return on average tangible equity was 14.41%, for the year ended December 31, 2018, compared to 0.88% and 10.98%, respectively, for the year ended December 31, 2017.

♦  Net interest income, before provision for loan losses, increased 25% to $33.1 million for the fourth quarter of 2018, compared to $26.4 million for the fourth quarter of 2017, and increased 2% from $32.5 million for the third quarter of 2018. For the year ended December 31, 2018, net interest income increased 20% to $122.0 million, compared to $101.5 million for the year ended December 31, 2017.

  -  For the fourth quarter of 2018, the fully tax equivalent (“FTE”) net interest margin improved 55 basis points to 4.42% from 3.87% for the fourth quarter of 2017, and improved 6 basis points from 4.36% for the third quarter of 2018, 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 United American acquisitions, and the impact of increases in the prime rate and the rate on overnight funds.  The increase in the fourth quarter of 2018 compared to the third quarter of 2018 also benefited from an increase in the average balance of securities.

  - For the year ended December 31, 2018, the net interest margin increased 32­­ basis points to 4.31%, compared to 3.99% for the year ended December 31, 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, and the impact of increases in the prime rate and the rate on overnight funds.

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

• The average yield on the total loan portfolio increased to 6.01% for the fourth quarter of 2018, compared to 5.64% for the fourth quarter of 2017, primarily due to increases in the prime rate, and an increase in the accretion of the loan purchase discount into loan interest income from the acquisitions.         

• The average yield on the total loan portfolio increased to 6.01% for the fourth quarter of 2018, compared to 5.92% for the third quarter of 2018, primarily due to increases in the prime rate, and an increase in the accretion of the loan purchase discount into loan interest income from the acquisitions.       

• The average yield on the total loan portfolio increased to 5.87% for the year ended December 31, 2018, compared to 5.64% for the year ended December 31, 2017, primarily due to increases in the prime rate, and an increase in accretion of the loan purchase discount into loan interest income from the acquisitions.
  
  
• The total purchase discount on loans from Focus Business Bank (“Focus”) loan portfolio was $5.4 million on the acquisition date of August 20, 2015, of which $657,000 remains outstanding as of December 31, 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 $2.2 million remains outstanding as of December 31, 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 $3.6 million remains outstanding as of December 31, 2018.
  

♦  The cost of total deposits was 0.25% for the fourth quarter of 2018, compared to 0.17% for the fourth quarter of 2017 and 0.23% for the third quarter of 2018. The total cost of deposits was 0.21% for the year ended December 31, 2018, compared to 0.17% for the year ended December 31, 2017.

♦  There was a $142,000 provision for loan losses for the fourth quarter of 2018, compared to a credit to the provision for loan losses of ($291,000) for the fourth quarter of 2017, and a credit to the provision for loan losses of ($425,000) for the third quarter of 2018.  There was a $7.4 million provision for loan losses for the year ended December 31, 2018, compared to a provision for loan losses of $99,000 for the year ended December 31, 2017.  The increase in the provision for loan losses for the year ended December 31, 2018, compared to the year ended December 31, 2017, was primarily due to a single large lending relationship that was placed on nonaccrual during the second quarter of 2018.

♦  Total noninterest income decreased to $2.4 million for the fourth quarter of 2018, compared to $2.6 million for the fourth quarter of 2017, primarily due to a lower gain on sales of Small Business Administration (“SBA”) loans, a lower increase in cash surrender value of life insurance, and lower servicing income, partially offset by higher service charges and fees on deposit accounts.  Noninterest income increased from $2.2 million for the third quarter of 2018, primarily due to higher termination fees at Bay View Funding and asset-based lending fees included in other noninterest income during the fourth quarter of 2018. 

• For the year ended December 31, 2018, noninterest income remained relatively flat at $9.6 million, compared to the year ended December 31, 2017.  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.  The 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, were offset by a lower increase in cash surrender value of life insurance proceeds, servicing income, and gain on sale of SBA loans for the year ended December 31, 2018, compared to the year ended December 31, 2017. 

♦  Total noninterest expense for the fourth quarter of 2018 was $16.9 million, compared to $15.3 million for the fourth quarter of 2017 and $17.7 million the third quarter of 2018.  Noninterest expense for the year ended December 31, 2018 was $75.5 million, compared to $60.7 million for the year ended December 31, 2017. The increase in noninterest expense for the year ended December 31, 2018, compared to the year ended December 31, 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 employees and operating costs of the Tri-Valley and United American acquisitions, partially offset by lower professional fees.  The decrease in noninterest expense for the fourth quarter of 2018, compared to the third quarter of 2018, was primarily due to lower employee benefits expense.

• Professional fees decreased to $2.0 million for the year ended December 31, 2018, compared to $3.0 million for the year ended December 31, 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 302 at December 31, 2018, 278 at December 31, 2017, and 296 at September 30, 2018.        
  

♦  The efficiency ratio for the fourth quarter of 2018 was 47.78%, compared to 52.82% for the fourth quarter of 2017, and 51.15% for the third quarter of 2018.  The efficiency ratio for the year ended December 31, 2018 was 57.39%, compared to 54.65% for the year ended December 31, 2017.   

♦  The Tax Cuts and Jobs Act (the “Tax Act”) was signed into law on December 22, 2017, which among other items reduced the federal corporate tax rate to 21% from 35%, effective January 1, 2018.  The enactment of the Tax Act caused our net DTA to be revalued at the new lower tax rate with resulting tax effects accounted for in the reporting period of enactment. The Company performed an analysis and determined the value of the net DTA was reduced by $7.1 million, which was recognized as a one-time, non-cash, incremental income tax expense for the fourth quarter of 2017.

• The income tax expense for the fourth quarter of 2018 was $5.1 million, compared to income tax expense of $12.7 million for the fourth quarter of 2017, and an income tax expense of $5.0 million for the third quarter of 2018.  The effective tax rate for the fourth quarter of 2018 decreased to 28.0%, compared to 91.0% for the fourth quarter of 2017, primarily due to a lower federal corporate tax rate for the fourth quarter of 2018 and the $7.1 million DTA adjustment in the fourth quarter of 2017.  The effective tax rate for the third quarter of 2018 was 28.7%.
  
  
• Income tax expense for the year ended December 31, 2018 was $13.3 million, compared to $26.5 million for the year ended December 31, 2017. The effective tax rate for the year ended December 31, 2018 was 27.4%, compared to 52.6% for the year ended December 31, 2017, primarily due to a lower federal corporate tax rate for the year ended December 31, 2018 and the $7.1 million DTA adjustment in the fourth quarter of 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 fourth quarter of 2018 and the year ended December 31, 2018, and 42% for the fourth quarter of 2017 and the year ended December 31, 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.

Balance Sheet Review, Capital Management and Credit Quality:

♦  Total assets increased 9% to $3.10 billion at December 31, 2018, compared to $2.84 billion at December 31, 2017, primarily due to the Tri-Valley and United American acquisitions.  As of December 31, 2018, Tri-Valley added $112.1 million in loans and $82.6 million in deposits.  As of December 31, 2018, United American added $199.1 million in loans and $217.6 million in deposits.  Total assets decreased 3% from $3.19 billion at September 30, 2018. 

♦  Securities available-for-sale, at fair value, totaled $459.0 million at December 31, 2018, compared to $391.9 million at December 31, 2017, and $319.1 million at September 30, 2018.  At December 31, 2018, the Company’s securities available-for-sale portfolio was comprised of $302.9 million agency mortgage-backed securities (all issued by U.S. Government sponsored entities), $148.7 million U.S. Treasury, and $7.4 million U.S. Government sponsored entities debt securities. The pre-tax unrealized loss on securities available-for-sale at December 31, 2018 was ($7.7) million, compared to a pre-tax unrealized loss on securities available-for-sale of ($1.5) million at December 31, 2017, and a pre-tax unrealized loss on securities available-for-sale of ($12.7) million at September 30, 2018.  All other factors remaining the same, when market interest rates are rising, the Company will experience a lower unrealized gain (or a higher unrealized loss) on the securities portfolio. During the fourth quarter of 2018, the Company purchased $147.6 million of US Treasury securities available-for-sale, with a weighted average book yield of 2.82%, and a weighted average duration of 2.25 years.  
             
♦  At December 31, 2018, securities held-to-maturity, at amortized cost, totaled $377.2 million, compared to $398.3 million at December 31, 2017, and $375.7 million at September 30, 2018.  At December 31, 2018, the Company’s securities held-to-maturity portfolio was comprised of $291.2 million agency mortgage-backed securities, and $86.0 million tax-exempt municipal bonds. During the fourth quarter of 2018, the Company purchased $14.6 million of agency mortgage-backed securities held-to-maturity, with a weighted average book yield of 3.74%, and a weighted average duration of 6.58 years.  
             
♦  The loan portfolio remains well-diversified as reflected in the following table which summarizes the distribution of loans, excluding loans held-for-sale, and the percentage of distribution in each category for the periods indicated:

• Loans, excluding loans held-for-sale, increased $303.7 million, or 19%, to $1.89 billion at December 31, 2018, compared to $1.58 billion at December 31, 2017, which included $199.1 million in loans from United American, $112.1 million in loans from Tri-Valley, and an increase of $3.1 million in the Company’s legacy portfolio, partially offset by a decrease of $7.0 million in purchased residential mortgage loans, and a decrease of $3.6 million of purchased commercial real estate (“CRE”) loans. Loans, excluding loans held-for-sale, declined (1%) to $1.89 billion at December 31, 2018, compared to $1.90 billion September 30, 2018, primarily due to payoffs in the land and construction and home equity loan portfolios.
  
  
• The commercial loan portfolio increased $24.5 million to $597.8 million at December 31, 2018, from $573.3 million at December 31, 2017, which included $17.8 million of loans added from United American, and $9.2 million of loans added from Tri-Valley, partially offset by a decrease of $2.6 million in the Company’s legacy portfolio.  The commercial loan portfolio decreased $2.8 million from $600.6 million at September 30, 2018.  C&I line usage was 36% at December 31, 2018, compared to 37% at December 31, 2017, and 36% at September 30, 2018.
  
  
• The CRE loan portfolio increased $221.2 million, or 29%, to $994.1 million at December 31, 2018, compared to $772.9 million at December 31, 2017, which included $133.8 million of loans added from United American, $90.7 million of loans added from Tri-Valley, partially offset by a decrease of $3.6 million in purchased CRE loans.  The CRE loan portfolio increased $5.6 million from $988.5 million at September 30, 2018.  At December 31, 2018, 40% of the CRE loan portfolio was secured by owner-occupied real estate.
  
  
• Land and construction loans increased $21.5 million, or 21%, to $122.4 million at December 31, 2018, compared to $100.9 million at December 31, 2017, primarily due to organic growth of $17.5 million, and $4.0 million of loans added from United American.  Land and construction loans decreased $9.2 million, or (7%), from $131.5 million at September 30, 2018.
  
  
• Home equity lines of credit increased $29.9 million, or 38%, to $109.1 million at December 31, 2018, compared to $79.2 million at December 31, 2017, which included $29.5 million of loans added from United American, and $12.2 million of loans added from Tri-Valley, partially offset by a decrease of $11.7 million in the Company’s legacy portfolio.  Home equity lines of credit decreased $7.5 million, from $116.7 million at September 30, 2018.
  
  
• Residential mortgage loans increased $6.4 million, or 14%, to $51.0 million at December 31, 2018, compared to $44.6 million at December 31, 2017, primarily due to $13.4 million of loans added from United American, partially offset by a $7.0 million decrease in purchased residential mortgage loans.  Residential mortgage loans decreased $1.5 million, from $52.4 million at September 30, 2018.

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

• The ALLL was 1.48% of total loans at December 31, 2018, compared to 1.24% at December 31, 2017, and 1.44% at September 30, 2018.  The ALLL to total nonperforming loans decreased to 187.06% at December 31, 2018, compared to 791.07% at December 31, 2017, primarily due to a single large lending relationship that was placed on nonaccrual during the second quarter of 2018.  The ALLL to total nonperforming loans was 110.97% at September 30, 2018.
  
  
• Net recoveries totaled $280,000 for the fourth quarter of 2018, compared to net recoveries of $201,000 for the fourth quarter of 2017, and net recoveries of $1.2 million for the third quarter of 2018. 

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

• Total NPAs were $14.9 million, or 0.48% of total assets, at December 31, 2018, compared to $2.5 million, or 0.09% of total assets, at December 31, 2017, and $24.7 million, or 0.77% of total assets, at September 30, 2018.  The increase in NPAs at December 31, 2018, compared to December 31, 2017, was primarily due to a single large lending relationship that was placed on nonaccrual during the second quarter of 2018.  The decrease in NPAs at December 31, 2018, compared to September 30, 2018, was primarily due to a reduction in loans outstanding of the single large lending relationship.  At December 31, 2018, the recorded investment of this lending relationship was $12.0 million, compared to $21.8 million at September 30, 2018.  The Company had a $6.7 million specific loan loss reserve allocated for this lending relationship at December 31, 2018, compared to a $7.0 million specific loan loss reserve at September 30, 2018. There were no foreclosed assets at December 31, 2018, December 31, 2017, or September 30, 2018.
  
  
• Classified assets were $23.4 million, or 0.76% of total assets, at December 31, 2018, compared to $25.1 million, or 0.88% of total assets, at December 31, 2017, and $30.5 million, 0.96% of total assets, at September 30, 2018. 

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

• Total deposits increased $154.5 million, or 6%, to $2.64 billion at December 31, 2018, compared to $2.48 billion at December 31, 2017, which included $217.6 million in deposits from United American, $82.6 million in deposits from Tri-Valley, a decrease of $65.1 million in State of California certificates of deposit due to maturity, and a decrease of $80.5 million, or (3%), in the Company’s legacy deposits, which was principally attributable to three deposit-only relationships totaling approximately $95 million.  Total deposits decreased $107.8 million, or (4%), from $2.75 billion at September 30, 2018, which was primarily due to the same reason referenced above.
  
  
• Deposits, excluding all time deposits and CDARS deposits, increased $202.0 million, or 9%, to $2.48 billion at December 31, 2018, compared to $2.28 billion at December 31, 2017, which included $195.8 million of deposits added from United American, $75.5 million of deposits added from Tri-Valley, partially offset by a decrease of $69.3 million, or (3%), in the Company’s legacy deposits.  Deposits, excluding all time deposits and CDARS deposits, at December 31, 2018 decreased $102.9 million, or (4%), compared to $2.58 billion at September 30, 2018.
  
  
• Time deposits of $250,000 and over decreased $52.5 million, or (38%), to $86.1 million at December 31, 2018, compared to $138.6 million at December 31, 2017, which included the maturity of $65.1 million of State of California certificates of deposits, partially offset by $9.6 million of deposits added from United American, and $2.8 million of deposits added from Tri-Valley.  Time deposits of $250,000 and over at December 31, 2018 increased $1.4 million, or 2%, compared to $84.8 million at September 30, 2018.

♦  The Company’s consolidated capital ratios exceeded regulatory guidelines and the Bank’s capital ratios exceeded the regulatory guidelines for a well-capitalized financial institution under the Basel III regulatory requirements at December 31, 2018, as reflected in the following table:

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(1) Fully phased in Basel III requirements for both the Company and the Bank include a 2.5% capital conservation buffer, except the leverage ratio.
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♦  The following table reflects the components of accumulated other comprehensive loss, net of taxes, for the periods indicated:

♦  Tangible equity increased to $271.7 million at December 31, 2018, compared to $220.0 million at December 31, 2017, primarily due to the Tri-Valley and United American acquisitions.  Tangible equity was $257.2 million at September 30, 2018.  Tangible book value per share was $6.28 at December 31, 2018, compared to $5.76 at December 31, 2017, and $5.94 at September 30, 2018.
             
Heritage Commerce Corp, a bank holding company established in February 1998, is the parent company of Heritage Bank of Commerce, established in 1994 and headquartered in San Jose, CA with full-service branches in Danville, Fremont, Gilroy, Hollister, Livermore, Los Altos, Los Gatos, Morgan Hill, Pleasanton, Redwood City, San Jose, San Mateo, Sunnyvale, and Walnut Creek.  Heritage Bank of Commerce is an SBA Preferred Lender.  Bay View Funding, a subsidiary of Heritage Bank of Commerce, is based in Santa Clara, CA and provides business-essential working capital factoring financing to various industries throughout the United States.  For more information, please visit www.heritagecommercecorp.com.

Forward-Looking Statement Disclaimer

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.  Risks and uncertainties that could cause our financial performance to differ materially from our goals, plans, expectations and projections expressed in forward-looking statements include those set forth in our filings with the Securities and Exchange Commission, Item 1A of the Company’s Annual Report on Form 10-K for the year ended December 31, 2017, and the following: (1) current and future economic and market conditions in the United States generally or in the communities we serve, including the effects of declines in property values and overall slowdowns in economic growth should these events occur; (2) 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; (3) our ability to anticipate interest rate changes and manage interest rate risk; (4) changes in inflation, interest rates, and market liquidity which may impact interest margins and impact funding sources; (5) volatility in credit and equity markets and its effect on the global economy; (6) our ability to effectively compete with other banks and financial services companies and the effects of competition in the financial services industry on our business; (7) our ability to achieve loan growth and attract deposits; (8) risks associated with concentrations in real estate related loans; (9) the relative strength or weakness of the commercial and real estate markets where are borrowers are located, including related asset and market prices; (10) other than temporary impairment charges to our securities portfolio; (11) changes in the level of nonperforming assets and charge offs and other credit quality measures, and their impact on the adequacy of the Company’s allowance for loan losses and the Company’s provision for loan losses; (12) 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 on favorable terms or at all; (13) regulatory limits on Heritage Bank of Commerce’s ability to pay dividends to the Company; (14) changes in our capital management policies, including those regarding business combinations, dividends, and share repurchases; (15) 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; (16) 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 effect our business, results of operations and growth prospects; (17) 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; (18) possible impairment of our goodwill and other intangible assets; (19) possible  adjustment of the valuation of our deferred tax assets; (20) expected cost savings in connection with the consolidation of recent acquisitions may not be fully realized or realized within the expected time frames, deposit attrition, customer loss; (21) 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; (22) inability of our framework to manage risks associated with our business, including operational risk and credit risk; (23) risks of loss of funding of Small Business Administration or SBA loan programs, or changes in those programs; (24) compliance with governmental and regulatory requirements, including the Dodd-Frank Act and others relating to banking, consumer protection, securities , accounting and tax matters; (25) significant changes in applicable laws and regulations, including those concerning taxes, banking and securities; (26) 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; (27) 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; (28) availability of and competition for acquisition opportunities; (29) risks resulting from domestic terrorism; (30) risks of natural disasters (including earthquakes) and other events beyond our control; (31) effect of the recent federal government shutdown on our SBA program; and (32) our success in managing the risks involved in the foregoing factors.

Member FDIC

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(1) Represents shareholders’ equity minus goodwill and other intangible assets

(2) Represents shareholders’ equity minus goodwill and other intangible assets divided by total assets minus goodwill and other intangible assets
             

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(1)  Represents shareholders’ equity minus goodwill and other intangible assets
       
(2) Represents shareholders’ equity minus goodwill and other intangible assets divided by total assets minus goodwill and other intangible assets

        

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(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 $53,000 for the fourth quarter of 2018, compared to $162,000 for the fourth quarter of 2017.

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

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(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 $53,000 for the fourth quarter of 2018, compared to $73,000 for the third quarter of 2018.

(3) Reflects the fully tax equivalent adjustment for Federal tax-exempt income based on a 21% for the fourth and third quarters of 2018.

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(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 $375,000 for the year ended December 31, 2018, compared to $533,000 for the year ended December 31, 2017.

(3) Reflects the fully tax equivalent adjustment for Federal tax-exempt income based on a 21% for the year ended December 31, 2018, and a 35% tax rate for the year ended December 31, 2017.

Contact:
Debbie Reuter
EVP Corporate Secretary 
408.494.4542