SAN JOSE, Calif., July 25, 2019 (GLOBE NEWSWIRE) -- Heritage Commerce Corp (Nasdaq: HTBK), the holding company (the “Company”) for Heritage Bank of Commerce (the “Bank”), today announced net income was $11.4 million, or $0.26 per average diluted common share, for the second quarter of 2019, compared to $915,000, or $0.02 per average diluted common share, for the second quarter of 2018, and $12.1 million, or $0.28 per average diluted common share, for the first quarter 2019.  For the six months ended June 30, 2019, net income was $23.5 million, or $0.54 per average diluted common share, compared to $9.7 million, or $0.24 per average diluted common share, for the six months ended June 30, 2018.  All results are unaudited.

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

“The highlight of the quarter was our announced signing of a merger agreement in May 2019 with Presidio, a high-quality business bank headquartered in San Francisco,” said Walter Kaczmarek, President and Chief Executive Officer.  “We are excited about the combination of our two franchises, which we believe will create the greater San Francisco Bay Area’s premier community business bank, driving our total assets to over $4.0 billion. With the Presidio merger, we also expect to achieve revenue synergies, as well as cost savings, adding to deal-related earnings accretion.  Over the past four years, we acquired three banks, all of which were accretive to earnings in the first year following the closing of the transactions.”

“At the same time, we delivered solid earnings for the second quarter of 2019, highlighted by a $29.4 million increase in total loans at June 30, 2019 from the end of last quarter, solid credit quality and disciplined approach to cost controls,” said Mr. Kaczmarek.  “We delivered strong performance metrics with a net interest margin of 4.38%, a return on average tangible equity of 15.94%, return on average tangible assets of 1.53%, and an efficiency ratio of 54.76% for the second quarter of 2019.  We are well positioned to continue to build on our momentum as we head into the second half of the year.”

Second Quarter 2019 Highlights (as of, or for the periods ended June 30, 2019, compared to June 30, 2018, and March 31, 2019, except as noted):

Operating Results:

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

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

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

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

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

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

                  
  For the Quarter Ended For the Quarter Ended 
  June 30, 2019 June 30, 2018 
  Average Interest Average Average Interest Average 
(in $000’s, unaudited) Balance Income Yield Balance Income Yield 
Loans, core bank and asset-based lending $ 1,727,988  $ 23,342  5.42$ 1,713,141  $ 21,717  5.08%
Bay View Funding factored receivables   45,708    2,967  26.04  52,251    3,355  25.75%
Residential mortgages   36,136    234  2.60  42,117    285  2.71%
Purchased CRE loans   31,484    290  3.69  36,885    329  3.58
Loan credit mark / accretion   (5,842)   418  0.10  (5,983)   669  0.16%
Total loans $ 1,835,474  $ 27,251  5.96$ 1,838,411  $ 26,355  5.75%
                  

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

                  
  For the Quarter Ended For the Quarter Ended 
  June 30, 2019 March 31, 2019 
  Average Interest Average Average Interest Average 
(in $000’s, unaudited) Balance Income Yield Balance Income Yield 
Loans, core bank and asset-based lending $ 1,727,988  $ 23,342  5.42$ 1,724,723  $ 22,854  5.37%
Bay View Funding factored receivables   45,708    2,967  26.04  48,502    2,953  24.69%
Residential mortgages   36,136    234  2.60  36,770    251  2.77%
Purchased CRE loans   31,484    290  3.69  33,344    294  3.58%
Loan credit mark / accretion   (5,842)   418  0.10  (6,249)   455  0.10%
Total loans $ 1,835,474  $ 27,251  5.96$ 1,837,090  $ 26,807  5.92%
                  

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

                  
  For the Six Months Ended  For the Six Months Ended  
  June 30, 2019 June 30, 2018 
  Average Interest Average Average Interest Average 
(in $000’s, unaudited) Balance Income Yield Balance Income Yield 
Loans, core bank and asset-based lending $ 1,726,364  $ 46,195  5.40$ 1,577,297  $ 40,182  5.14%
Bay View Funding factored receivables   47,097    5,921  25.35  50,670    6,501  25.87%
Residential mortgages   36,451    485  2.68  42,814    578  2.72%
Purchased CRE loans   32,409    584  3.63  37,032    652  3.55
Loan credit mark / accretion   (6,044)   873  0.10  (3,567)   726  0.09%
Total loans $ 1,836,277  $ 54,058  5.94$ 1,704,246  $ 48,639  5.76%

             
♦ The average yield on the total loan portfolio increased to 5.94% for the six months ended June 30, 2019, compared to 5.76% for the six months ended June 30, 2018, primarily due to increases in the prime rate, and an increase in the accretion of the loan purchase discount into loan interest income from the acquisitions.
             
♦ The total purchase discount on loans from Focus Business Bank (“Focus”) loan portfolio was $5.4 million on the acquisition date of August 20, 2015, of which $486,000 remains outstanding as of June 30, 2019.  The total purchase discount on loans from Tri-Valley loan portfolio was $2.6 million on the acquisition date of April 6, 2018, of which $1.9 million remains outstanding as of June 30, 2019.  The total purchase discount on loans from United American loan portfolio was $4.7 million on the acquisition date of May 4, 2018, of which $3.2 million remains outstanding as of June 30, 2019.

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

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

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

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

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

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

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

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

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

♦ The efficiency ratio was 54.76% for the second quarter of 2019, compared to 75.47% for the second quarter of 2018, and 53.47% for the first quarter of 2019.  The efficiency ratio for the six months ended June 30, 2019 was 54.12%, compared to 66.44% for the six months ended June 30, 2018.  The efficiency ratio was higher in the second quarter and first six months of 2018 primarily due to costs related to the merger transactions with Tri-Valley and United American.

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

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

Balance Sheet Review, Capital Management and Credit Quality:

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

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

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

♦ At June 30, 2019, securities held-to-maturity, at amortized cost, totaled $351.4 million, compared to $388.6 million at June 30, 2018, and $367.0 million at March 31, 2019.  At June 30, 2019, the Company’s securities held-to-maturity portfolio comprised $267.5 million of agency mortgage-backed securities, and $83.9 million of tax-exempt municipal bonds.
             
♦ The loan portfolio remains well-diversified as reflected in the following table which summarizes the distribution of loans, excluding loans held-for-sale, and the percentage of distribution in each category for the periods indicated:

                 
LOANS  June 30, 2019 March 31, 2019 June 30, 2018 
(in $000’s, unaudited) Balance  % to Total Balance  % to Total Balance  % to Total 
Commercial $ 567,529   30$ 559,718   30$ 609,468   31
Real estate:                
CRE   1,037,885   55  1,012,641   55  1,030,884   53
Land and construction   97,297   5  98,222   5  128,891   6
Home equity   116,057   6  118,448   6  121,278   6
Residential mortgages   48,944   3  49,786   3  54,367   3
Consumer   10,279   1  9,690   1  12,060   1
Total Loans   1,877,991   100  1,848,505   100  1,956,948   100
Deferred loan fees, net   (224)  —   (187)  —   (315)  — 
Loans, net of deferred fees  $ 1,877,767   100$ 1,848,318   100$ 1,956,633   100
  • Loans, excluding loans held-for-sale, increased 2% to $1.88 billion at June 30, 2019, compared to $1.85 billion March 31, 2019.  Loans, excluding loans held-for-sale, decreased $78.9 million, or (4%), to $1.88 billion at June 30, 2019, compared to $1.96 billion at June 30, 2018, primarily due to a decline of $41.9 million in commercial loans (“C&I”), $31.6 million in land and construction loans, $6.1 million in purchased commercial real estate (“CRE”) loans,  $5.2 million in home equity loans, and $5.1 million in purchased residential mortgages, partially offset by an increase of $13.1 million in CRE loans.

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

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

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

                 
  For the Quarter Ended For the Six Months Ended  
ALLOWANCE FOR LOAN LOSSES June 30,  March 31,  June 30,  June 30,  June 30,  
(in $000’s, unaudited) 2019 2019 2018 2019 2018 
Balance at beginning of period $ 27,318  $ 27,848  $ 20,139  $ 27,848  $ 19,658  
Charge-offs during the period   (76)   (226)   (870)   (302)   (1,115) 
Recoveries during the period   129    757    197    886    417  
Net recoveries (charge-offs) during the period   53    531    (673)   584    (698) 
Provision (credit) for loan losses during the period   (740)   (1,061)   7,198    (1,801)   7,704  
Balance at end of period $ 26,631  $ 27,318  $ 26,664  $ 26,631  $ 26,664  
                 
Total loans, net of deferred fees $ 1,877,767  $ 1,848,318  $ 1,956,633  $ 1,877,767  $ 1,956,633  
Total nonperforming loans $ 17,018  $ 17,315  $ 26,545  $ 17,018  $ 26,545  
Allowance for loan losses to total loans   1.42   1.48   1.36 %  1.42   1.36 %
Allowance for loan losses to total nonperforming loans   156.49   157.77   100.45 %  156.49   100.45 %
  • The ALLL was 1.42% of total loans at June 30, 2019, compared to 1.36% at June 30, 2018, and 1.48% at March 31, 2019.  The ALLL to total nonperforming loans was 156.49% at June 30, 2019, compared to 100.45% at June 30, 2018, and 157.77% at March 31, 2019.

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

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

                 
  End of Period: 
NONPERFORMING ASSETS June 30, 2019 March 31, 2019 June 30, 2018 
(in $000’s, unaudited) Balance % of Total Balance % of Total Balance % of Total 
Commercial and industrial loans $ 6,583  39$ 6,633  38$ 19,545  74%
CRE loans   8,442  49  8,442  49  5,801  22%
Restructured and loans over 90 days past due and still accruing   1,323  8  1,357  8  511  2%
SBA loans   513  3  570  3  337  1%
Home equity and consumer loans   157  1  313  2  351  1%
Total nonperforming assets $ 17,018  100$ 17,315  100$ 26,545  100%
  • NPAs totaled $17.0 million, or 0.55% of total assets, at June 30, 2019, compared to $26.5 million, or 0.85% of total assets, at June 30, 2018, and $17.3 million, or 0.56% of total assets, at March 31, 2019. 

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

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

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

♦ On January 1, 2019, the Company adopted Accounting Standards Update (“ASU”) No. 2016-02, Leases (Topic 842).  Under the new guidance, the Company recognizes the following for all leases, at the commencement date: (1) a lease liability, which is a lessee’s obligation to make lease payments arising from a lease, measured on a discounted basis; and (2) a right-of-use (“ROU”) asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term. While the new standard impacts lessors and lessees, the Company is impacted as a lessee of the offices and real estate used for operations.  The Company's lease agreements include options to renew at the Company's discretion. The extensions are not reasonably certain to be exercised, therefore it was not considered in the calculation of the ROU asset and lease liability. Total assets and total liabilities were $7.4 million on its consolidated statement of financial condition at June 30, 2019, as a result of recognizing right-of-use assets, included in other assets, and lease liabilities, included in other liabilities, related to non-cancelable operating lease agreements for office space. 

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

                 
DEPOSITS June 30, 2019 March 31, 2019 June 30, 2018 
(in $000’s, unaudited) Balance % to Total Balance % to Total Balance % to Total 
Demand, noninterest-bearing $ 994,082  38$ 1,016,770  38$ 1,002,053  37%
Demand, interest-bearing   682,114  26  704,996  27  683,805  25%
Savings and money market   788,832  30  759,306  29  827,304  31%
Time deposits — under $250   53,351  2  56,385  2  72,030  3%
Time deposits — $250 and over   88,519  3  90,042  3  81,379  3%
CDARS — interest-bearing demand, money market and time deposits   15,575  1  12,745  1  17,048  1
Total deposits $ 2,622,473  100$ 2,640,244  100$ 2,683,619  100%
                 
  • Total deposits decreased $61.1 million, or (2)%, to $2.62 billion at June 30, 2019, compared to $2.68 billion at June 30, 2018, and decreased $17.8 million or (1%) from $2.64 billion at March 31, 2019. 

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

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

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

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


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

          
ACCUMULATED OTHER COMPREHENSIVE LOSS June 30,  March 31,  June 30, 
(in $000’s, unaudited) 2019 2019 2018
Unrealized gain (loss) on securities available-for-sale $ 675  $ (2,010) $ (7,684)
Remaining unamortized unrealized gain on securities available-for-sale transferred to held-to-maturity   316    325    358 
Split dollar insurance contracts liability   (3,770)   (3,746)   (3,724)
Supplemental executive retirement plan liability   (3,931)   (3,963)   (5,469)
Unrealized gain on interest-only strip from SBA loans   408    407    653 
Total accumulated other comprehensive loss $ (6,302) $ (8,987) $ (15,866)
          

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

Proposed Acquisition of Presidio Bank Update:

A special meeting of shareholders of Heritage Commerce Corp will be held at its principal offices located at 150 Almaden Boulevard, San Jose, California 95113 on August 27, 2019 at 1:00 PM Pacific Daylight Time (PDT).  Shareholders will be asked to approve the principal terms of the Agreement and Plan of Merger and Reorganization, dated as of May 16, 2019, by and among Heritage Commerce Corp, Heritage Bank of Commerce and Presidio Bank (the "merger agreement") and the transactions contemplated by the merger agreement, including the merger of Presidio Bank  with and  into Heritage Bank of  Commerce  (the "merger"), with Heritage Bank of Commerce surviving the merger, and the issuance of Heritage Commerce Corp common stock to the Presidio Bank shareholders in connection with the merger (the "Heritage share issuance"),  as described in the joint proxy statement/prospectus.  The record date for the meeting is July 10, 2019.

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 (“SEC”), Item 1A of the Company’s Annual Report on Form 10-K for the year ended December 31, 2018, 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 affect 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) the expected cost savings, synergies and other financial benefits from the Presidio Bank acquisition  might not be realized within the expected time frames or at all; governmental approval of the Presidio Bank acquisition may not be obtained or adverse regulatory conditions may be imposed in connection with governmental approvals of the acquisition; conditions to the closing of the Presidio Bank acquisition may not be satisfied; Presidio’s shareholders may fail to provide the requisite consents to approve the consummation of the acquisition; the Company’s shareholders may fail to approve the issuance of the Company’s common stock in connection with the proposed Presidio Bank acquisition; and (32) our success in managing the risks involved in the foregoing factors.

Additional Information About the Proposed Acquisition of Presidio Bank:

This press release does not constitute an offer to sell or the solicitation of an offer to buy any securities or a solicitation of any vote or approval. In connection with the proposed acquisition transaction, Heritage Commerce Corp has filed a registration statement on Form S-4 (the "Registration Statement") with the SEC. The Registration Statement was declared by the SEC to be effective on July 15, 2019, and a  joint  proxy statement and prospectus  was distributed to the shareholders of  Presidio Bank in connection with their vote on the proposed acquisition and to the shareholders of Heritage Commerce Corp in connection with their vote on the issuance of shares of Heritage Commerce Corp common stock in connection with the proposed acquisition.

SHAREHOLDERS OF PRESIDIO BANK AND HERITAGE COMMERCE CORP ARE ENCOURAGED TO READ THE REGISTRATION STATEMENT AND ANY OTHER RELEVANT DOCUMENTS FILED WITH THE SEC, AS WELL AS SUPPLEMENTS TO THOSE DOCUMENTS, BECAUSE THEY WILL CONTAIN IMPORTANT INFORMATION ABOUT THE PROPOSED ACQUISITION.

The  joint proxy statement and prospectus and other relevant materials (when they become available), and any other documents filed by Heritage Commerce Corp with the SEC, can be obtained free of charge on the SEC’s website, www.sec.gov, or on HTBK’s website, www.heritagecommercecorp.com, under the “2019 Proxy Materials” link or the “SEC Filings” link, or by mail to Heritage Commerce Corp at 150 Almaden, San Jose, CA 95113, Attention: Debbie Reuter, Corporate Secretary, or by telephone at (408) 947-6900, or on Presidio Banks’s website, www.presidiobank.com, under the “Media & Investor” link and then the “Investor Relations” link and then the “Documents & Financial Statements” link and then the “Documents” link, or by mail to Presidio Bank at 1 Montgomery, Suite 2300, San Francisco, CA 94104, Attention: Cheryl Whiteside, Corporate Secretary, or by telephone at (415) 229-8405.

The directors, executive officers and certain other members of management and employees of Heritage Commerce Corp may be deemed to be participants in the solicitation of proxies in favor of the acquisition of Presidio Bank from the shareholders of Heritage Commerce Corp. Information about the directors and executive officers of Heritage Commerce Corp is included in the proxy statement for its 2019 Annual Meeting of Heritage Commerce Corp  shareholders, which was filed with the SEC on April 15, 2019.

The directors, executive officers and certain other members of management and employees of Presidio Bank may be deemed to be participants in the solicitation of proxies in respect of the proposed acquisition. Information about the directors and executive officers of Presidio Bank is included in the joint proxy statement and prospectus provided to Presidio Bank shareholders in connection with the approval of the acquisition.

Additional information regarding the interests of those participants and other persons who may be deemed participants in the transaction may be obtained by reading the joint proxy statement/prospectus regarding the proposed acquisition. Free copies of this document may be obtained as described in the preceding paragraph.

Member FDIC

                        
  For the Quarter Ended: Percent Change From:  For the Six Months Ended:
CONSOLIDATED INCOME STATEMENTS June 30,  March 31,  June 30,  March 31,  June 30,   June 30,  June 30,  Percent 
(in $000’s, unaudited) 2019 2019 2018 2019 2018  2019 2018 Change 
Interest income $ 33,489  $ 33,449  $ 31,980  0 5 % $ 66,938  $ 59,857 12 %
Interest expense   2,573    2,407    1,816  7 42 %   4,980    3,345 49 %
Net interest income before provision for loan losses   30,916    31,042    30,164  0 2 %   61,958    56,512 10 %
Provision (credit) for loan losses   (740)   (1,061)   7,198  30 (110)%   (1,801)   7,704 (123)%
Net interest income after provision for loan losses   31,656    32,103    22,966  (1)38 %   63,759    48,808 31 %
Noninterest income:                       
Service charges and fees on deposit accounts   1,177    1,161    972  1 21 %   2,338    1,874 25 %
Gain on sales of securities   548    —    179  N/A 206 %   548    266 106 %
Increase in cash surrender value of life insurance   333    330    237  1 41 %   663    600 11 %
Servicing income   150    191    189  (21)(21)%   341    370 (8)%
Gain on sales of SBA loans   36    139    80  (74)(55)%   175    315 (44)%
Other   521    647    1,123  (19)(54)%   1,168    1,550 (25)%
Total noninterest income   2,765    2,468    2,780  12 (1)%   5,233    4,975 5 %
Noninterest expense:                       
Salaries and employee benefits   10,698    10,770    14,806  (1)(28)%   21,468    24,583 (13)%
Occupancy and equipment   1,578    1,506    1,262  5 25 %   3,084    2,368 30 %
Professional fees   753    818    (289) (8)361 %   1,571    395 298 %
Other   5,416    4,824    9,083  12 (40)%   10,240    13,506 (24)%
Total noninterest expense   18,445    17,918    24,862  3 (26)%   36,363    40,852 (11)%
Income before income taxes   15,976    16,653    884  (4)1707 %   32,629    12,931 152 %
Income tax expense   4,623    4,507    (31) 3 15013 %   9,130    3,207 185 %
Net income $ 11,353  $ 12,146  $ 915  (7)1141 % $ 23,499  $ 9,724 142 %
                        
PER COMMON SHARE DATA                       
(unaudited)                       
Basic earnings per share $ 0.26  $ 0.28  $ 0.02  (7)1200 % $ 0.54  $ 0.24 125 %
Diluted earnings per share $ 0.26  $ 0.28  $ 0.02  (7)1200 % $ 0.54  $ 0.24 125 %
Weighted average shares outstanding - basic   43,202,562    43,108,208    41,925,616  0 3 %   43,155,360    40,083,056 8 %
Weighted average shares outstanding - diluted   43,721,451    43,670,341    42,508,674  0 3 %   43,695,117    40,660,083 7 %
Common shares outstanding at period-end   43,498,406    43,323,753    43,222,184  0 1 %   43,498,406    43,222,184 1 %
Dividend per share $ 0.12  $ 0.12  $ 0.11  0 9 % $ 0.24  $ 0.22 9 %
Book value per share $ 8.92  $ 8.74  $ 8.01  2 11 % $ 8.92  $ 8.01 11 %
Tangible book value per share $ 6.75  $ 6.54  $ 5.77  3 17 % $ 6.75  $ 5.77 17 %
                        
KEY FINANCIAL RATIOS                       
(unaudited)                       
Annualized return on average equity   11.96   13.28   1.11 (10)977 %   12.61   6.5293 %
Annualized return on average tangible equity   15.94   17.90   1.49 (11)970 %   16.89   8.43100 %
Annualized return on average assets   1.48   1.58   0.12 (6)1133 %   1.53   0.67128 %
Annualized return on average tangible assets   1.53   1.63   0.12 (6)1175 %   1.58   0.69129 %
Net interest margin (fully tax equivalent)   4.38   4.38   4.30 0 2 %   4.38   4.224 %
Efficiency ratio   54.76   53.47   75.47 2 (27)%   54.12   66.44(19)%
                        
AVERAGE BALANCES                       
(in $000’s, unaudited)                       
Average assets $ 3,070,043  $ 3,109,583  $ 3,046,566  (1)1 % $ 3,089,704  $ 2,908,210 6 %
Average tangible assets $ 2,975,096  $ 3,014,029  $ 2,961,335  (1)0 % $ 2,994,455  $ 2,839,917 5 %
Average earning assets $ 2,844,677  $ 2,885,591  $ 2,826,786  (1)1 % $ 2,865,021  $ 2,713,500 6 %
Average loans held-for-sale $ 4,256  $ 3,125  $ 3,410  36 25 % $ 3,693  $ 3,328 11 %
Average total loans $ 1,831,218  $ 1,833,965  $ 1,835,001  0 0 % $ 1,832,584  $ 1,700,918 8 %
Average deposits $ 2,590,933  $ 2,637,308  $ 2,622,580  (2)(1)% $ 2,613,993  $ 2,514,057 4 %
Average demand deposits - noninterest-bearing $ 1,001,914  $ 1,024,142  $ 991,902  (2)1 % $ 1,012,967  $ 969,002 5 %
Average interest-bearing deposits $ 1,589,019  $ 1,613,166  $ 1,630,678  (1)(3)% $ 1,601,026  $ 1,545,055 4 %
Average interest-bearing liabilities $ 1,628,554  $ 1,652,658  $ 1,670,033  (1)(2)% $ 1,640,539  $ 1,584,344 4 %
Average equity $ 380,605  $ 370,792  $ 331,210  3 15 % $ 375,751  $ 300,943 25 %
Average tangible equity $ 285,658  $ 275,238  $ 245,979  4 16 % $ 280,502  $ 232,650 21 %


                 
  For the Quarter Ended: 
CONSOLIDATED INCOME STATEMENTS June 30,  March 31,  December 31, September 30, June 30,  
(in $000’s, unaudited) 2019 2019 2018 2018 2018 
Interest income $ 33,489 $ 33,449 $ 35,378 $ 34,610 $ 31,980 
Interest expense   2,573   2,407   2,318   2,159   1,816 
Net interest income before provision for loan losses   30,916   31,042   33,060   32,451   30,164 
Provision (credit) for loan losses   (740  (1,061  142   (425  7,198 
Net interest income after provision for loan losses   31,656   32,103   32,918   32,876   22,966  
Noninterest income:                
Service charges and fees on deposit accounts   1,177   1,161   1,132   1,107   972 
Gain on sales of securities   548   —   —   —   179 
Increase in cash surrender value of life insurance   333   330   229   216   237 
Servicing income   150   191   176   163   189 
Gain on sales of SBA loans   36   139   147   236   80 
Other   521   647   709   484   1,123 
Total noninterest income   2,765   2,468   2,393   2,206   2,780 
Noninterest expense:                
Salaries and employee benefits   10,698   10,770   9,699   10,719   14,806 
Occupancy and equipment   1,578   1,506   1,484   1,559   1,262 
Professional fees   753   818   853   721   (289)
Other   5,416   4,824   4,905   4,729   9,083 
Total noninterest expense   18,445   17,918   16,941   17,728   24,862 
Income before income taxes   15,976   16,653   18,370   17,354   884 
Income tax expense (benefit)   4,623   4,507   5,138   4,979   (31)
Net income $ 11,353 $ 12,146 $ 13,232 $ 12,375 $ 915 
                 
PER COMMON SHARE DATA                
(unaudited)                
Basic earnings per share $ 0.26 $ 0.28 $ 0.31 $ 0.29 $ 0.02 
Diluted earnings per share $ 0.26 $ 0.28 $ 0.30 $ 0.28 $ 0.02 
Weighted average shares outstanding - basic   43,202,562   43,108,208   43,079,470   43,230,016   41,925,616 
Weighted average shares outstanding - diluted   43,721,451   43,670,341   43,691,222   43,731,370   42,508,674 
Common shares outstanding at period-end   43,498,406   43,323,753   43,288,750   43,271,676   43,222,184 
Dividend per share $ 0.12 $ 0.12 $ 0.11 $ 0.11 $ 0.11 
Book value per share $ 8.92 $ 8.74 $ 8.49 $ 8.17 $ 8.01 
Tangible book value per share $ 6.75 $ 6.54 $ 6.28 $ 5.94 $ 5.77 
                 
KEY FINANCIAL RATIOS                
(unaudited)                
Annualized return on average equity   11.96  13.28  14.68  14.03  1.11
Annualized return on average tangible equity   15.94  17.90  20.08  19.36  1.49
Annualized return on average assets   1.48  1.58  1.64  1.54  0.12
Annualized return on average tangible assets   1.53  1.63  1.69  1.59  0.12
Net interest margin (fully tax equivalent)   4.38  4.38  4.42  4.36  4.30
Efficiency ratio   54.76  53.47  47.78  51.15  75.47
                 
AVERAGE BALANCES                
(in $000’s, unaudited)                
Average assets $ 3,070,043 $ 3,109,583 $ 3,208,177 $ 3,193,139 $ 3,046,566 
Average tangible assets $ 2,975,096 $ 3,014,029 $ 3,112,065 $ 3,096,703 $ 2,961,335 
Average earning assets $ 2,844,677 $ 2,885,591 $ 2,980,207 $ 2,965,926 $ 2,826,786 
Average loans held-for-sale $ 4,256 $ 3,125 $ 5,435 $ 7,076 $ 3,410 
Average total loans $ 1,831,218 $ 1,833,965 $ 1,868,186 $ 1,911,715 $ 1,835,001 
Average deposits $ 2,590,933 $ 2,637,308 $ 2,752,120 $ 2,749,026 $ 2,622,580 
Average demand deposits - noninterest-bearing $ 1,001,914 $ 1,024,142 $ 1,107,813 $ 1,071,638 $ 991,902 
Average interest-bearing deposits $ 1,589,019 $ 1,613,166 $ 1,644,307 $ 1,677,388 $ 1,630,678 
Average interest-bearing liabilities $ 1,628,554 $ 1,652,658 $ 1,683,790 $ 1,716,813 $ 1,670,033 
Average equity $ 380,605 $ 370,792 $ 357,505 $ 349,971 $ 331,210 
Average tangible equity $ 285,658 $ 275,238 $ 261,393 $ 253,535 $ 245,979 


               
  End of Period: Percent Change From: 
CONSOLIDATED BALANCE SHEETS June 30,  March 31,  June 30,  March 31,  June 30,  
(in $000’s, unaudited) 2019 2019
 2018 2019 2018 
ASSETS              
Cash and due from banks $ 36,302  $ 38,699  $ 46,340  (6)(22)%
Other investments and interest-bearing deposits in other financial institutions   239,710    196,278    177,448  22 35 %
Securities available-for-sale, at fair value   383,156    452,521    335,923  (15)14 %
Securities held-to-maturity, at amortized cost   351,399    367,023    388,603  (4)(10)%
Loans held-for-sale - SBA, including deferred costs   5,202    3,216    5,745  62 (9)%
Loans:              
Commercial   567,529    559,718    609,468  1 (7)%
Real estate:              
CRE   1,037,885    1,012,641    1,030,884  2 1 %
Land and construction   97,297    98,222    128,891  (1)(25)%
Home equity   116,057    118,448    121,278  (2)(4)%
Residential mortgages   48,944    49,786    54,367  (2)(10)%
Consumer   10,279    9,690    12,060  6 (15)%
Loans   1,877,991    1,848,505    1,956,948  2 (4)%
Deferred loan fees, net   (224)   (187)   (315) 20 (29)%
Total loans, net of deferred fees   1,877,767    1,848,318    1,956,633  2 (4)%
Allowance for loan losses   (26,631)   (27,318)   (26,664) (3)0 %
Loans, net   1,851,136    1,821,000    1,929,969  2 (4)%
Company-owned life insurance   62,522    62,189    61,414  1 2 %
Premises and equipment, net   6,975    6,998    7,355  0 (5)%
Goodwill   83,753    83,753    84,417  0 (1)%
Other intangible assets   10,900    11,454    12,293  (5)(11)%
Accrued interest receivable and other assets   76,976    72,746    73,700  6 4 %
Total assets $ 3,108,031  $ 3,115,877  $ 3,123,207  0 0 %
               
LIABILITIES AND SHAREHOLDERS’ EQUITY              
Liabilities:              
Deposits:              
Demand, noninterest-bearing $ 994,082  $ 1,016,770  $ 1,002,053  (2)(1)%
Demand, interest-bearing   682,114    704,996    683,805  (3)0 %
Savings and money market   788,832    759,306    827,304  4 (5)%
Time deposits-under $250   53,351    56,385    72,030  (5)(26)%
Time deposits-$250 and over   88,519    90,042    81,379  (2)9 %
CDARS - money market and time deposits   15,575    12,745    17,048  22 (9)%
Total deposits   2,622,473    2,640,244    2,683,619  (1)(2)%
Subordinated debt, net of issuance costs   39,461    39,414    39,275  0 0 %
Accrued interest payable and other liabilities   57,989    57,703    54,044  0 7 %
Total liabilities   2,719,923    2,737,361    2,776,938  (1)(2)%
               
Shareholders’ Equity:              
Common stock   302,305    301,550    299,224  0 1 %
Retained earnings   92,105    85,953    62,911  7 46 %
Accumulated other comprehensive loss   (6,302)   (8,987)   (15,866) 30 60 %
Total Shareholders' Equity   388,108    378,516    346,269  3 12 %
Total liabilities and shareholders’ equity $ 3,108,031  $ 3,115,877  $ 3,123,207  0 0 %


                
  End of Period:
CONSOLIDATED BALANCE SHEETS June 30,  March 31,  December 31, September 30, June 30, 
(in $000’s, unaudited) 2019 2019 2018 2018 2018
ASSETS               
Cash and due from banks $ 36,302  $ 38,699  $ 30,273  $ 40,831  $ 46,340 
Other investments and interest-bearing deposits in other financial institutions   239,710    196,278    134,295    340,198    177,448 
Securities available-for-sale, at fair value   383,156    452,521    459,043    319,071    335,923 
Securities held-to-maturity, at amortized cost   351,399    367,023    377,198    375,732    388,603 
Loans held-for-sale - SBA, including deferred costs   5,202    3,216    2,649    6,344    5,745 
Loans:               
Commercial   567,529    559,718    597,763    600,594    609,468 
Real estate:               
CRE   1,037,885    1,012,641    994,067    988,491    1,030,884 
Land and construction   97,297    98,222    122,358    131,548    128,891 
Home equity   116,057    118,448    109,112    116,657    121,278 
Residential mortgages   48,944    49,786    50,979    52,441    54,367 
Consumer   10,279    9,690    12,453    9,932    12,060 
Loans   1,877,991    1,848,505    1,886,732    1,899,663    1,956,948 
Deferred loan fees, net   (224)   (187)   (327)   (276)   (315)
Total loans, net of deferred fees   1,877,767    1,848,318    1,886,405    1,899,387    1,956,633 
Allowance for loan losses   (26,631)   (27,318)   (27,848)   (27,426)   (26,664)
Loans, net   1,851,136    1,821,000    1,858,557    1,871,961    1,929,969 
Company-owned life insurance   62,522    62,189    61,859    61,630    61,414 
Premises and equipment, net   6,975    6,998    7,137    7,246    7,355 
Goodwill   83,753    83,753    83,753    83,752    84,417 
Other intangible assets   10,900    11,454    12,007    12,614    12,293 
Accrued interest receivable and other assets   76,976    72,746    69,791    73,531    73,700 
Total assets $ 3,108,031  $ 3,115,877  $ 3,096,562  $ 3,192,910  $ 3,123,207 
                
LIABILITIES AND SHAREHOLDERS’ EQUITY               
Liabilities:               
Deposits:               
Demand, noninterest-bearing $ 994,082  $ 1,016,770  $ 1,021,582  $ 1,081,846  $ 1,002,053 
Demand, interest-bearing   682,114    704,996    702,000    670,624    683,805 
Savings and money market   788,832    759,306    754,277    828,297    827,304 
Time deposits-under $250   53,351    56,385    58,661    68,194    72,030 
Time deposits-$250 and over   88,519    90,042    86,114    84,763    81,379 
CDARS - money market and time deposits   15,575    12,745    14,898    11,575    17,048 
Total deposits   2,622,473    2,640,244    2,637,532    2,745,299    2,683,619 
Subordinated debt, net of issuance costs   39,461    39,414    39,369    39,322    39,275 
Accrued interest payable and other liabilities   57,989    57,703    52,195    54,723    54,044 
Total liabilities   2,719,923    2,737,361    2,729,096    2,839,344    2,776,938 
                
Shareholders’ Equity:               
Common stock   302,305    301,550    300,844    300,208    299,224 
Retained earnings   92,105    85,953    79,003    70,531    62,911 
Accumulated other comprehensive loss   (6,302)   (8,987)   (12,381)   (17,173)   (15,866)
Total Shareholders' Equity   388,108    378,516    367,466    353,566    346,269 
Total liabilities and shareholders’ equity $ 3,108,031  $ 3,115,877  $ 3,096,562  $ 3,192,910  $ 3,123,207 
                


               
  End of Period: Percent Change From: 
CREDIT QUALITY DATA June 30,  March 31,  June 30,  March 31,  June 30,  
(in $000’s, unaudited) 2019
 2019
 2018 2019  2018  
Nonaccrual loans - held-for-investment $ 15,695 $ 15,958 $ 26,034 (2)(40)%
Restructured and loans over 90 days past due and still accruing   1,323   1,357   511 (3)159 %
Total nonperforming loans   17,018   17,315   26,545 (2)(36)%
Foreclosed assets   —   —   — N/A N/A 
Total nonperforming assets $ 17,018 $ 17,315 $ 26,545 (2)(36)%
Other restructured loans still accruing $ 175 $ 201 $ 265 (13)(34)%
Net charge-offs (recoveries) during the quarter $ (53)$ (531)$ 673 90 (108)%
Provision (credit) for loan losses during the quarter $ (740)$ (1,061)$ 7,198 30 (110)%
Allowance for loan losses $ 26,631 $ 27,318 $ 26,664 (3)0 %
Classified assets $ 31,176 $ 25,176 $ 32,264 24 (3)%
Allowance for loan losses to total loans   1.42  1.48  1.36(4)4 %
Allowance for loan losses to total nonperforming loans   156.49  157.77  100.45(1)56 %
Nonperforming assets to total assets   0.55  0.56  0.85(2)(35)%
Nonperforming loans to total loans   0.91  0.94  1.36(3)(33)%
Classified assets to Heritage Commerce Corp              
Tier 1 capital plus allowance for loan losses   10  8  1125 (9)%
Classified assets to Heritage Bank of Commerce              
Tier 1capital plus allowance for loan losses   9  8  1113 (18)%
               
OTHER PERIOD-END STATISTICS              
(in $000’s, unaudited)              
Heritage Commerce Corp:              
Tangible common equity (1) $ 293,455 $ 283,309 $ 249,559 4 18 %
Shareholders’ equity / total assets   12.49  12.15  11.093 13 %
Tangible common equity / tangible assets (2)   9.74  9.38  8.254 18 %
Loan to deposit ratio   71.60  70.01  72.912 (2)%
Noninterest-bearing deposits / total deposits   37.91  38.51  37.34(2)2 %
Total risk-based capital ratio   15.9  15.6  13.52 18 %
Tier 1 risk-based capital ratio   13.0  12.6  10.73 21 %
Common Equity Tier 1 risk-based capital ratio   13.0  12.6  10.73 21 %
Leverage ratio   9.9  9.5  8.74 14 %
Heritage Bank of Commerce:              
Total risk-based capital ratio   14.9  14.6  12.52 19 %
Tier 1 risk-based capital ratio   13.7  13.4  11.42 20 %
Common Equity Tier 1 risk-based capital ratio   13.7  13.4  11.42 20 %
Leverage ratio   10.5  10.1  9.34 13 %

(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

                 
  End of Period: 
CREDIT QUALITY DATA June 30,  March 31,  December 31, September 30, June 30,  
(in $000’s, unaudited) 2019  2019 2018 2018 2018 
Nonaccrual loans - held-for-investment $ 15,695 $ 15,958 $ 13,699 $ 23,342 $ 26,034 
Restructured and loans over 90 days past due and still accruing   1,323   1,357   1,188   1,373   511 
Total nonperforming loans   17,018   17,315   14,887   24,715   26,545 
Foreclosed assets   —   —   —   —   — 
Total nonperforming assets $ 17,018 $ 17,315 $ 14,887 $ 24,715 $ 26,545 
Other restructured loans still accruing $ 175 $ 201 $ 253 $ 334 $ 265 
Net charge-offs (recoveries) during the quarter $ (53)$ (531$ (280)$ (1,187$ 673 
Provision (credit) for loan losses during the quarter $ (740)$ (1,061)$ 142 $ (425)$ 7,198 
Allowance for loan losses $ 26,631 $ 27,318 $ 27,848 $ 27,426 $ 26,664 
Classified assets $ 31,176 $ 25,176 $ 23,409 $ 30,546 $ 32,264 
Allowance for loan losses to total loans   1.42  1.48  1.48  1.44  1.36
Allowance for loan losses to total nonperforming loans   156.49  157.77  187.06  110.97  100.45
Nonperforming assets to total assets   0.55  0.56  0.48  0.77  0.85
Nonperforming loans to total loans   0.91  0.94  0.79  1.30  1.36
Classified assets to Heritage Commerce Corp                
Tier 1 capital plus allowance for loan losses   10  8  8  10  11
Classified assets to Heritage Bank of Commerce                
Tier 1capital plus allowance for loan losses   9  8  7  10  11
                 
OTHER PERIOD-END STATISTICS                
(in $000’s, unaudited)                
Heritage Commerce Corp:                
Tangible common equity (1) $ 293,455 $ 283,309 $ 271,706 $ 257,200 $ 249,559 
Shareholders’ equity / total assets   12.49  12.15  11.87  11.07  11.09
Tangible common equity / tangible assets (2)   9.74  9.38  9.05  8.31  8.25
Loan to deposit ratio   71.60  70.01  71.52  69.19  72.91
Noninterest-bearing deposits / total deposits   37.91  38.51  38.73  39.41  37.34
Total risk-based capital ratio   15.9  15.6  15.0  14.4  13.5
Tier 1 risk-based capital ratio   13.0  12.6  12.0  11.5  10.7
Common Equity Tier 1 risk-based capital ratio   13.0  12.6  12.0  11.5  10.7
Leverage ratio   9.9  9.5  8.9  8.6  8.7
Heritage Bank of Commerce:                
Total risk-based capital ratio   14.9  14.6  14.0  13.4  12.5
Tier 1 risk-based capital ratio   13.7  13.4  12.8  12.2  11.4
Common Equity Tier 1 risk-based capital ratio   13.7  13.4  12.8  12.2  11.4
Leverage ratio   10.5  10.1  9.4  9.1  9.3

(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

                  
  For the Quarter Ended For the Quarter Ended 
  June 30, 2019 June 30, 2018 
     Interest Average    Interest Average 
NET INTEREST INCOME AND NET INTEREST MARGIN Average Income/ Yield/ Average Income/ Yield/ 
(in $000’s, unaudited) Balance Expense Rate Balance Expense Rate 
Assets:                 
Loans, gross (1)(2) $ 1,835,474 $ 27,251   5.96$ 1,838,411 $ 26,355   5.75%
Securities - taxable  707,710  4,136   2.34  668,243   3,767   2.26%
Securities - exempt from Federal tax (3)   85,329  692   3.25  88,102   708   3.22%
Other investments and interest-bearing deposits in other financial institutions  216,164  1,556   2.89  232,030   1,298   2.24%
Total interest earning assets (3)   2,844,677   33,635   4.74  2,826,786   32,128   4.56%
Cash and due from banks   37,051        38,949      
Premises and equipment, net   7,050        7,368      
Goodwill and other intangible assets   94,947        85,231      
Other assets   86,318        88,232      
Total assets $ 3,070,043      $ 3,046,566      
                  
Liabilities and shareholders’ equity:                 
Deposits:                 
Demand, noninterest-bearing $ 1,001,914      $ 991,902      
                  
Demand, interest-bearing   686,872   612   0.36  662,303   465   0.28%
Savings and money market   744,475   1,034   0.56  793,846   619   0.31%
Time deposits - under $100   19,267   22   0.46  22,650   23   0.41%
Time deposits - $100 and over   126,303   326   1.04  136,048   129   0.38%
CDARS - money market and time deposits   12,102   1   0.03  15,831   3   0.08%
Total interest-bearing deposits   1,589,019   1,995   0.50  1,630,678   1,239   0.30%
Total deposits   2,590,933   1,995   0.31  2,622,580   1,239   0.19%
                  
Subordinated debt, net of issuance costs   39,431   577   5.87  39,245   577  5.90%
Short-term borrowings   104   1  3.86  110   —  0.00%
Total interest-bearing liabilities   1,628,554   2,573   0.63  1,670,033   1,816   0.44%
Total interest-bearing liabilities and demand, noninterest-bearing / cost of funds   2,630,468   2,573   0.39  2,661,935   1,816   0.27%
Other liabilities   58,970        53,421      
Total liabilities   2,689,438        2,715,356      
Shareholders’ equity   380,605        331,210      
Total liabilities and shareholders’ equity $ 3,070,043      $ 3,046,566      
                  
Net interest income (3) / margin      31,062   4.38     30,312   4.30%
Less tax equivalent adjustment (3)      (146)        (148)   
Net interest income    $ 30,916       $ 30,164    



(1) Includes loans held-for-sale.  Nonaccrual loans are included in average balance.
       
(2) Yield amounts earned on loans include fees and costs. The accretion of net deferred loan fees into loan interest income was $210,000 for the second quarter of 2019, compared to $32,000 for the second quarter of 2018.

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

                  
  For the Quarter Ended For the Quarter Ended 
  June 30, 2019 March 31, 2019 
     Interest Average    Interest Average 
NET INTEREST INCOME AND NET INTEREST MARGIN Average Income/ Yield/ Average Income/ Yield/ 
(in $000’s, unaudited) Balance Expense Rate Balance Expense Rate 
Assets:                 
Loans, gross (1)(2) $ 1,835,474 $ 27,251   5.96$ 1,837,090 $ 26,807   5.92
Securities - taxable   707,710   4,136   2.34  741,288   4,509   2.47
Securities - exempt from Federal tax (3)   85,329   692   3.25  85,943   694   3.27
Other investments and interest-bearing deposits in other financial institutions   216,164   1,556   2.89  221,270   1,585   2.91
Total interest earning assets (3)   2,844,677   33,635   4.74  2,885,591   33,595   4.72
Cash and due from banks   37,051        37,207      
Premises and equipment, net   7,050        7,090      
Goodwill and other intangible assets   94,947        95,554      
Other assets   86,318        84,141      
Total assets $ 3,070,043      $ 3,109,583      
                  
Liabilities and shareholders’ equity:                 
Deposits:                 
Demand, noninterest-bearing $ 1,001,914      $ 1,024,142      
                  
Demand, interest-bearing   686,872   612   0.36  701,702   618   0.36
Savings and money market   744,475   1,034   0.56  751,191   907   0.49
Time deposits - under $100   19,267   22   0.46  20,380   21   0.42
Time deposits - $100 and over   126,303   326   1.04  126,571   288   0.92
CDARS - money market and time deposits   12,102   1   0.03  13,322   2   0.06
Total interest-bearing deposits   1,589,019   1,995   0.50  1,613,166   1,836   0.46
Total deposits   2,590,933   1,995   0.31  2,637,308   1,836   0.28
                  
Subordinated debt, net of issuance costs   39,431   577   5.87  39,386   571  5.88
Short-term borrowings   104   1  3.86  106   —  0.00
Total interest-bearing liabilities   1,628,554   2,573   0.63  1,652,658   2,407   0.59
Total interest-bearing liabilities and demand, noninterest-bearing / cost of funds   2,630,468   2,573   0.39  2,676,800   2,407   0.36
Other liabilities   58,970        61,991      
Total liabilities   2,689,438        2,738,791      
Shareholders’ equity   380,605        370,792      
Total liabilities and shareholders’ equity $ 3,070,043      $ 3,109,583      
                  
Net interest income (3) / margin      31,062   4.38     31,188   4.38
Less tax equivalent adjustment (3)      (146)        (146)   
Net interest income    $ 30,916       $ 31,042    
                  

(1)  Includes loans held-for-sale.  Nonaccrual loans are included in average balance.
       
(2) Yield amounts earned on loans include fees and costs. The accretion of net deferred loan fees into loan interest income was $210,000 for the second quarter of 2019, compared to $91,000 for the first quarter of 2019.

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

                  
  For the Six Months Ended  For the Six Months Ended  
  June 30, 2019 June 30, 2018 
     Interest Average    Interest Average 
NET INTEREST INCOME AND NET INTEREST MARGIN Average Income/ Yield/ Average Income/ Yield/ 
(in $000’s, unaudited) Balance Expense Rate Balance Expense Rate 
Assets:                 
Loans, gross (1)(2) $ 1,836,277 $ 54,058   5.94$ 1,704,246 $ 48,639   5.76%
Securities - taxable   724,406   8,645   2.41  681,549   7,629   2.26%
Securities - exempt from Federal tax (3)   85,634   1,386   3.26  88,285   1,418   3.24%
Other investments, interest-bearing deposits in other financial institutions and Federal funds sold   218,704   3,141   2.90  239,420   2,469   2.08%
Total interest earning assets (3)   2,865,021   67,230   4.73  2,713,500   60,155   4.47%
Cash and due from banks   37,129        36,460      
Premises and equipment, net   7,070        7,336      
Goodwill and other intangible assets   95,249        68,293      
Other assets   85,235        82,621      
Total assets $ 3,089,704      $ 2,908,210      
                  
Liabilities and shareholders’ equity:                 
Deposits:                 
Demand, noninterest-bearing $ 1,012,967      $ 969,002      
                  
Demand, interest-bearing   694,246   1,230   0.36  635,562   768   0.24%
Savings and money market   747,815   1,941   0.52  741,841   1,062   0.29%
Time deposits - under $100   19,820   44   0.45  19,983   35   0.35%
Time deposits - $100 and over   126,436   613   0.98  131,525   327   0.50%
CDARS - money market and time deposits   12,709   3   0.05  16,144   5   0.06%
Total interest-bearing deposits   1,601,026   3,831   0.48  1,545,055   2,197   0.29%
Total deposits   2,613,993   3,831   0.30  2,514,057   2,197   0.18%
                  
Subordinated debt, net of issuance costs   39,408   1,148   5.87  39,215   1,148  5.90%
Short-term borrowings   105   1  1.92  74   —  0.00%
Total interest-bearing liabilities   1,640,539   4,980   0.61  1,584,344   3,345   0.43%
Total interest-bearing liabilities and demand, noninterest-bearing / cost of funds   2,653,506   4,980   0.38  2,553,346   3,345   0.26%
Other liabilities   60,447        53,921      
Total liabilities   2,713,953        2,607,267      
Shareholders’ equity   375,751        300,943      
Total liabilities and shareholders’ equity $ 3,089,704      $ 2,908,210      
                  
Net interest income (3) / margin      62,250   4.38     56,810   4.22%
Less tax equivalent adjustment (3)      (292)        (298)   
Net interest income    $ 61,958       $ 56,512    



(1) Includes loans held-for-sale.  Nonaccrual loans are included in average balance.
       
(2) Yield amounts earned on loans include fees and costs. The accretion of net deferred loan fees into loan interest income was $301,000 for the first six months ended June 30, 2019, compared to $249,000 for the first six months ended June 30, 2018.

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

CONTACT:
Debbie Reuter
EVP, Corporate Secretary
Heritage Commerce Corp
Direct: (408) 494-4542