Heritage Commerce Corp Earns $11.3 Million for the Third Quarter of 2019 and $34.8 Million for the Nine Months Ended September 30, 2019

San Jose, California, UNITED STATES


SAN JOSE, Calif., Oct. 24, 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 $11.3 million, or $0.26 per average diluted common share, for the third quarter of 2019, compared to $12.4 million, or $0.28 per average diluted common share, for the third quarter of 2018, and $11.4 million, or $0.26 per average diluted common share, for the second quarter of 2019. For the nine months ended September 30, 2019, net income was $34.8 million, or $0.80 per average diluted common share, compared to $22.1 million, or $0.53 per average diluted common share, for the nine months ended September 30, 2018. All results are unaudited.

Earnings for the second quarter of 2019, the third quarter of 2019, and the first nine months of 2019 were reduced by merger-related costs of $540,000, $661,000, and $1.2 million, respectively, related to the merger with Presidio Bank (“Presidio”) which was completed on October 11, 2019. Earnings for the third quarter of 2018 and for the first nine months of 2018 were reduced by merger-related costs of $199,000 and $9.0 million, respectively, for the acquisitions of Tri-Valley Bank (“Tri-Valley”) and United American Bank (“United American”) which were completed on April 6, 2018 and May 4, 2018, respectively.

“Our solid third quarter of 2019 financial results continue to demonstrate the strength of our franchise, generating record earnings for the first nine months of 2019,” said Keith A. Wilton, President and Chief Executive Officer. “We delivered improved credit quality metrics, with noteworthy reductions in nonperforming loans and classified assets. Despite a very challenging interest rate environment, our loan and deposit trends were stable with noninterest-bearing deposits increasing 10% on a linked quarter basis and representing 41% of total deposits as of September 30, 2019.

“We completed the acquisition of Presidio Bank on October 11, 2019, and are pleased to welcome their employees, customers and shareholders to the Heritage Bank of Commerce family,” added Mr. Wilton. “This continuation of our strategic growth offers our new customers a broad array of new product offerings, increased lending limits and an expanded branch delivery system that stretches throughout the Greater San Francisco Bay Area. We remain focused on creating value for all of our customers – new and old – our communities, shareholders, and our many employees who support our customers each and every day.”

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

Operating Results:

♦ Diluted earnings per share were $0.26 for the third quarter of 2019, compared to $0.28 for the third quarter of 2018, and $0.26 for the second quarter of 2019.  Diluted earnings per share were $0.80 for the first nine months of 2019, compared to $0.53 for the first nine months of 2018.  

  • Earnings for the third quarter of 2019, second quarter of 2019, and first nine months of 2019 were reduced by merger-related costs for the merger with Presidio, and earnings for the third quarter of 2018, and first nine months of 2018 were reduced by merger-related costs for the acquisitions of Tri-Valley and United American, as follows:
                 
  For the Quarter Ended For the Nine Months Ended
MERGER-RELATED COSTS September 30,  June 30,  September 30,  September 30,  September 30, 
(in $000’s, unaudited) 2019 2019 2018 2019 2018
Salaries and employee benefits $ — $ — $ 183 $ — $ 3,576
Other   661   540   16   1,201   5,452
Total merger-related costs $ 661 $ 540 $ 199 $ 1,201 $ 9,028
                

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

  For the Quarter Ended For the Nine Months Ended  
  September 30,  June 30,  September 30,  September 30,  September 30,  
  2019 2019 2018 2019 2018 
Return on average tangible assets 1.49%  1.53%  1.59%  1.55%  1.01%  
Return on average tangible equity 15.08%  15.94%  19.36%  16.26%  12.33%  
                 

♦ Net interest income, before provision for loan losses, decreased 6% to $30.6 million for the third quarter of 2019, compared to $32.5 million for the third quarter of 2018, and decreased 1% from $30.9 million for the second quarter of 2019. Net interest income increased 4% to $92.6 million for the first nine months of 2019, compared to $89.0 million for the first nine months of 2018. 

  • The fully tax equivalent (“FTE”) net interest margin contracted 12 basis points to 4.24% for the third quarter of 2019, from 4.36% for the third quarter of 2018, primarily due to a decline in the average balance of loans and a higher cost of deposits. The net interest margin contracted 14 basis points for the third quarter of 2019 from 4.38% for the second quarter of 2019, primarily due to a decrease in the average yield on loans, securities and overnight funds, partially offset by a higher average balance of loans.
                 
  • For the first nine months of 2019, the net interest margin expanded 6 basis points to 4.33%, compared to 4.27% for the first nine 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 
  September 30, 2019 September 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 $ 1,748,379  $ 23,401  5.31$ 1,780,025  $ 23,374  5.21%
Bay View Funding factored receivables   47,614    2,879  23.99  69,740    4,185  23.81%
Residential mortgages   34,639    229  2.62  40,277    272  2.68%
Purchased commercial real estate ("CRE")  loans   30,567    284  3.69  36,167    295  3.24
Loan credit mark / accretion   (5,359)   471  0.11  (7,418)   506  0.11%
Total loans $ 1,855,840  $ 27,264  5.83$ 1,918,791  $ 28,632  5.92%
                  
  • The average yield on the total loan portfolio decreased to 5.83% for the third quarter of 2019, compared to 5.92% for the third quarter of 2018, primarily due to a decrease in the average balance of Bay View Funding’s factored receivables.
  For the Quarter Ended For the Quarter Ended 
  September 30, 2019 June 30, 2019 
  Average Interest Average Average Interest Average 
(in $000’s, unaudited) Balance Income Yield Balance Income Yield 
Loans, core bank and asset-based lending $ 1,748,379  $ 23,401  5.31$ 1,727,988  $ 23,342  5.42%
Bay View Funding factored receivables   47,614    2,879  23.99  45,708    2,967  26.04%
Residential mortgages   34,639    229  2.62  36,136    234  2.60%
Purchased CRE loans   30,567    284  3.69  31,484    290  3.69%
Loan credit mark / accretion   (5,359)   471  0.11  (5,842)   418  0.10%
Total loans $ 1,855,840  $ 27,264  5.83$ 1,835,474  $ 27,251  5.96%
                  
  • The average yield on the total loan portfolio decreased to 5.83% for the third quarter of 2019, compared to 5.96% for the second quarter of 2019, primarily due to decreases in the prime rate on loans.
  For the Nine Months Ended  For the Nine Months Ended  
  September 30, 2019 September 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 $ 1,733,784  $ 69,594  5.37$ 1,645,615  $ 63,556  5.16%
Bay View Funding factored receivables   47,271    8,800  24.89  57,096    10,687  25.03%
Residential mortgages   35,840    714  2.66  41,959    850  2.71%
Purchased CRE loans   31,788    869  3.65  36,740    947  3.45
Loan credit mark / accretion   (5,813)   1,344  0.10  (4,864)   1,232  0.10%
Total loans $ 1,842,870  $ 81,321  5.90$ 1,776,546  $ 77,272  5.82%
  • The average yield on the total loan portfolio increased to 5.90% for the nine months ended September 30, 2019, compared to 5.82% for the nine months ended September 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 $437,000 remains outstanding as of September 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 $1.8 million remains outstanding as of September 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 $2.9 million remains outstanding as of September 30, 2019.

♦ The cost of total deposits was 0.31% for the third quarter of 2019, compared to 0.23% for the third quarter of 2018 and 0.31% for the second quarter of 2019. The cost of total deposits was 0.30% for the nine months ended September 30, 2019, compared to 0.19% for the nine months ended September 30, 2018.

♦ There was a $576,000 credit to the provision for loan losses for the third quarter of 2019, compared to a $425,000 credit to the provision for loan losses for the third quarter of 2018, and a $740,000 credit to the provision for loan losses for the second quarter of 2019. There was a $2.4 million credit to the provision for loan losses for the nine months ended September 30, 2019, compared to a $7.3 million provision for loan losses for the nine months ended September 30, 2018. The higher provision for loan losses for the nine months ended September 30, 2018 included a $7.0 million specific reserve for a lending relationship that was placed on nonaccrual during the second quarter of 2018.

♦ Total noninterest income increased to $2.6 million for the third quarter of 2019, compared to $2.2 million the third quarter of 2018, primarily due to a $330,000 gain on sales of securities for the third quarter of 2019. Noninterest income declined to $2.6 million for the third quarter of 2019 from $2.8 million for the second quarter of 2019, primarily due to a higher gain on the sales of securities for the second quarter of 2019. 

  • For the nine months ended September 30, 2019, noninterest income increased to $7.9 million, compared to $7.2 million for the nine months ended September 30, 2018. The increase in noninterest income for the first nine 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 nine months of 2019, partially offset by lower gain on sales of Small Business Administration (“SBA”) loans for the first nine months of 2019, and proceeds from a legal settlement in the first nine months of 2018.

  • 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.   

♦ Total noninterest expense for the third quarter of 2019 increased to $17.9 million, compared to $17.7 million for the third quarter of 2018, primarily due to higher merger-related costs for the third quarter of 2019. Noninterest expense for the third quarter of 2019 included total merger-related costs of $661,000 for the Presidio acquisition (all included in other noninterest expense), compared to total merger-related costs of $199,000 for the third quarter of 2018 for the Tri-Valley and United American acquisitions. The merger-related costs of $199,000 for the third quarter of 2018 consisted of $183,000 included in salaries and employee benefits expense and $16,000 included in other noninterest expense. Total noninterest expense for the third quarter of 2019 decreased to $17.9 million, compared to $18.4 million for the second quarter of 2019, primarily due to lower salaries and employee benefits and lower other noninterest expense. 

  • Total noninterest expense for the nine months ended September 30, 2019 decreased to $54.3 million, compared to $58.6 million for the nine months ended September 30, 2018, primarily due to lower merger-related costs, partially offset by higher professional fees. Noninterest expense for the nine months ended September 30, 2019 included total merger-related costs of $1.2 million for the Presidio acquisition (all included in other noninterest expense), compared to total merger-related costs of $9.0 million for the nine months ended September 30, 2018 for the Tri-Valley and United American acquisitions. The merger-related costs of $9.0 million for the nine months ended September 30, 2018 consisted of $3.6 million included in salaries and employee benefits and $5.4 million in other noninterest expense. Professional fees for the nine months ended September 30, 2018 included a recovery of $922,000 from a legal settlement. 

  •  Full time equivalent employees were 308 at September 30, 2019, 296 at September 30, 2018, and 309 at June 30, 2019.

♦ The efficiency ratio was 53.87% for the third quarter of 2019, compared to 51.15% for the third quarter of 2018, and 54.76% for the second quarter of 2019. The efficiency ratio for the nine months ended September 30, 2019 was 54.04%, compared to 60.93% for the nine months ended September 30, 2018.   

♦ Income tax expense was $4.6 million for the third quarter of 2019, compared to $5.0 million for the third quarter of 2018, and $4.6 million for the second quarter of 2019. Income tax expense for the nine months ended September 30, 2019 was $13.8 million, compared to $8.2 million for the nine months ended September 30, 2018. The effective tax rate for the third quarter of 2019 was 29.1%, compared to 28.7% for the third quarter of 2018, and 28.9% for the second quarter of 2019. The effective tax rate for the nine months ended September 30, 2019 was 28.4%, compared to 27.0% for the nine months ended September 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 $3.18 billion at September 30, 2019, compared to $3.19 billion at September 30, 2018 and increased 2% from $3.11 billion at June 30, 2019. 

♦ Securities available-for-sale, at fair value, totaled $333.1 million at September 30, 2019, compared to $319.1 million at September 30, 2018, and $383.1 million at June 30, 2019. At September 30, 2019, the Company’s securities available-for-sale portfolio comprised $212.7 million of agency mortgage-backed securities (all issued by U.S. Government sponsored entities), and $120.4 million of U.S. Treasury. The pre-tax unrealized gain on securities available-for-sale at September 30, 2019 was $1.7 million, compared to a pre-tax unrealized loss on securities available-for-sale of ($12.7) million at September 30, 2018, and a pre-tax unrealized gain on securities available-for-sale of $915,000 at June 30, 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 third quarter of 2019, the Company sold $38.9 million of securities available-for-sale for a net gain of $330,000. The securities sold consisted of $18.6 million of agency mortgage-backed securities and $20.3 million of U.S. Treasury securities.        

♦ At September 30, 2019, securities held-to-maturity, at amortized cost, totaled $342.0 million, compared to $375.7 million at September 30, 2018, and $351.4 million at June 30, 2019. At September 30, 2019, the Company’s securities held-to-maturity portfolio was comprised of $259.3 million of agency mortgage-backed securities, and $82.7 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  September 30, 2019 June 30, 2019 September 30, 2018 
(in $000’s, unaudited) Balance  % to Total Balance  % to Total Balance  % to Total 
Commercial $ 528,060   28$ 567,529   30$ 600,594   32
Real estate:                
CRE   1,080,235   58  1,037,885   55  988,491   52
Land and construction   96,610   5  97,297   5  131,548   7
Home equity   111,610   6  116,057   6  116,657   6
Residential mortgages   47,276   2  48,944   3  52,441   2
Consumer   11,701   1  10,279   1  9,932   1
Total Loans   1,875,492   100  1,877,991   100  1,899,663   100
Deferred loan fees, net   (105)  -   (224)  —   (276)  — 
Loans, net of deferred fees  $ 1,875,387   100$ 1,877,767   100$ 1,899,387   100
  • Loans, excluding loans held-for-sale, decreased $24.0 million or (1%), to $1.88 billion at September 30, 2019, compared to $1.90 billion at September 30, 2018, primarily due to a decline of $72.5 million in commercial loans (“C&I”), $34.9 million in land and construction loans, $5.0 million in home equity loans, $4.8 million in purchased residential mortgages, and $3.8 million in purchased CRE loans, partially offset by an increase of $95.5 million in CRE loans. Loans, excluding loans held-for-sale, remained flat at $1.88 billion at September 30, 2019, compared to $1.88 billion June 30, 2019.

  • C&I line usage was 35% at September 30, 2019, compared to 40% at June 30, 2019, and 36% at September 30, 2018.

  • At September 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 Nine Months Ended  
ALLOWANCE FOR LOAN LOSSES September 30,  June 30,  September 30,  September 30,  September 30,  
(in $000’s, unaudited) 2019  2019  2018  2019  2018  
Balance at beginning of period $ 26,631  $ 27,318  $ 26,664  $ 27,848  $ 19,658  
Charge-offs during the period   (318)   (76)   (744)   (620)   (1,860) 
Recoveries during the period   158    129    1,931    1,044    2,349  
Net recoveries (charge-offs) during the period   (160)   53    1,187    424    489  
Provision (credit) for loan losses during the period   (576)   (740)   (425)   (2,377)   7,279  
Balance at end of period $ 25,895  $ 26,631  $ 27,426  $ 25,895  $ 27,426  
                 
Total loans, net of deferred fees $ 1,875,387  $ 1,877,767  $ 1,899,387  $ 1,875,387  $ 1,899,387  
Total nonperforming loans $ 14,247  $ 17,018  $ 24,715  $ 14,247  $ 24,715  
Allowance for loan losses to total loans   1.38   1.42   1.44 %  1.38   1.44 %
Allowance for loan losses to total nonperforming loans   181.76   156.49   110.97 %  181.76   110.97 %
  • The ALLL was 1.38% of total loans at September 30, 2019, compared to 1.44% at September 30, 2018, and 1.42% at June 30, 2019.  The ALLL to total nonperforming loans was 181.76% at September 30, 2019, compared to 110.97% at September 30, 2018, and 156.49% at June 30, 2019.

  • Net charge-offs totaled $160,000 for the third quarter of 2019, compared to net recoveries of $1.2 million for the third quarter of 2018, and net recoveries of $53,000 for the second quarter of 2019.        

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

  End of Period: 
NONPERFORMING ASSETS September 30, 2019 June 30, 2019 September 30, 2018 
(in $000’s, unaudited) Balance % of Total Balance % of Total Balance % of Total 
Commercial loans $ 7,390  52$ 6,583  39$ 17,134  69%
CRE loans   5,094  36  8,442  49  5,639  23%
SBA loans   1,007  7  513  3  227  1%
Restructured and loans over 90 days past due and still accruing   609  4  1,323  8  1,373  6%
Home equity and consumer loans   147  1  157  1  342  1%
Total nonperforming assets $ 14,247  100$ 17,018  100$ 24,715  100%
  • NPAs totaled $14.2 million, or 0.45% of total assets, at September 30, 2019, compared to $24.7 million, or 0.77% of total assets, at September 30, 2018, and $17.0 million, or 0.55% of total assets, at June 30, 2019.

    • A large lending relationship was placed on nonaccrual during the second quarter of 2018. At September 30, 2019, the recorded investment of this lending relationship was $10.8 million, and the Company had a $6.0 million specific loan loss reserve allocated for this lending relationship, compared to a recorded investment of $21.8 million, and a $7.0 million specific loan loss reserve allocated for this lending relationship at September 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 June 30, 2019.

    • The decrease in nonperforming assets at September 30, 2019 from June 30, 2019 was primarily due to the payoff of two secured CRE loans to entities affiliated with DC Solar Solutions, Inc. (“DC Solar”), which were placed on nonaccrual during the first quarter of 2019.

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

  • Classified assets decreased to $20.2 million, or 0.64% of total assets, at September 30, 2019, compared to $30.5 million, or 0.95% of total assets, at September 30, 2018, and $31.2 million, or 1.00% of total assets, at June 30, 2019, primarily due to the payoff of classified loans. 

♦ 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, 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 they are not considered in the calculation of the ROU asset and lease liability. Total assets and total liabilities were $7.1 million on its consolidated statement of financial condition at September 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 September 30, 2019 June 30, 2019 September 30, 2018 
(in $000’s, unaudited) Balance % to Total Balance % to Total Balance % to Total 
Demand, noninterest-bearing $ 1,094,953  41$ 994,082  38$ 1,081,846  39%
Demand, interest-bearing   666,054  25  682,114  26  670,624  24%
Savings and money market   761,471  28  788,832  30  828,297  30%
Time deposits — under $250   53,560  2  53,351  2  68,194  3%
Time deposits — $250 and over   95,543  3  88,519  3  84,763  3%
CDARS — interest-bearing demand,                
  money market and time deposits   17,409  1  15,575  1  11,575  1
Total deposits $ 2,688,990  100$ 2,622,473  100$ 2,745,299  100%
                 
  • Total deposits decreased $56.3 million, or (2)%, to $2.69 billion at September 30, 2019, compared to $2.75 billion at September 30, 2018, and increased $66.5 million or 3% from $2.62 billion at June 30, 2019. 

  •  Deposits, excluding all time deposits and CDARS deposits, decreased $58.3 million, or (2%), to $2.52 billion at September 30, 2019, compared to $2.58 billion at September 30, 2018, and increased $57.5 million or 2% at June 30, 2019, compared to $2.47 billion at June 30, 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 September 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  16.2  15.2  10.0  10.5%
Tier 1 Risk-Based  13.3  14.1  8.0  8.5%
Common Equity Tier 1 Risk-Based  13.3  14.1  6.5  7.0%
Leverage  10.0  10.6  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 September 30,  June 30,  September 30, 
(in $000’s, unaudited) 2019  2019  2018 
Unrealized gain (loss) on securities available-for-sale $ 1,202  $ 675  $ (8,980)
Remaining unamortized unrealized gain on securities         
  available-for-sale transferred to held-to-maturity   306    316    350 
Split dollar insurance contracts liability   (3,794)   (3,770)   (3,740)
Supplemental executive retirement plan liability   (3,898)   (3,931)   (5,417)
Unrealized gain on interest-only strip from SBA loans   386    408    614 
  Total accumulated other comprehensive loss $ (5,798) $ (6,302) $ (17,173)
          

♦ Tangible equity increased to $301.2 million at September 30, 2019, compared to $257.2 million at September 30, 2018, and $293.5 million at June 30, 2019. Tangible book value per share was $6.92 at September 30, 2019, compared to $5.94 at September 30, 2018, and $6.75 at June 30, 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, Palo Alto, Pleasanton, Redwood City, San Francisco, San Jose, San Mateo, San Rafael, 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; and (32) our success in managing the risks involved in the foregoing factors.

Member FDIC

For additional information, contact:
Debbie Reuter
EVP, Corporate Secretary
Direct: (408) 494-4542

                        
                        
                        
  For the Quarter Ended: Percent Change From:  For the Nine Months Ended:
CONSOLIDATED INCOME STATEMENTS September 30,  June 30,  September 30,  June 30,  September 30,   September 30,  September 30,  Percent 
(in $000’s, unaudited) 2019  2019  2018  2019  2018   2019  2018 Change 
Interest income $ 33,250  $ 33,489  $ 34,610  (1)(4)% $ 100,188  $ 94,467 6 %
Interest expense   2,625    2,573    2,159  2 22 %   7,605    5,504 38 %
Net interest income before provision                       
  for loan losses   30,625    30,916    32,451  (1)(6)%   92,583    88,963 4 %
Provision (credit) for loan losses   (576)   (740)   (425) 22 (36)%   (2,377)   7,279 (133)%
Net interest income after provision                       
  for loan losses   31,201    31,656    32,876  (1)(5)%   94,960    81,684 16 %
Noninterest income:                       
Service charges and fees on deposit accounts   1,032    1,177    1,107  (12)(7)%   3,370    2,981 13 %
Increase in cash surrender value of                       
  life insurance   336    333    216  1 56 %   999    816 22 %
Gain on sales of securities   330    548    —  (40)N/A    878    266 230 %
Gain on sales of SBA loans   156    36    236  333 (34)%   331    551 (40)%
Servicing income   139    150    163  (7)(15)%   480    533 (10)%
Other   625    521    484  20 29 %   1,793    2,034 (12)%
Total noninterest income   2,618    2,765    2,206  (5)19 %   7,851    7,181 9 %
Noninterest expense:                       
Salaries and employee benefits   10,467    10,698    10,719  (2)(2)%   31,935    35,302 (10)%
Occupancy and equipment   1,550    1,578    1,559  (2)(1)%   4,634    3,927 18 %
Professional fees   789    753    721  5 (9)%   2,360    1,116 111 %
Other   5,103    5,416    4,729  (6)8 %   15,343    18,235 (16)%
Total noninterest expense   17,909    18,445    17,728  (3)1 %   54,272    58,580 (7)%
Income before income taxes   15,910    15,976    17,354  0 (8)%   48,539    30,285 60 %
Income tax expense   4,633    4,623    4,979  0 7 %   13,763    8,186 68 %
  Net income $ 11,277  $ 11,353  $ 12,375  (1)(9)% $ 34,776  $ 22,099 57 %
                        
PER COMMON SHARE DATA                       
(unaudited)                       
Basic earnings per share $ 0.26  $ 0.26  $ 0.29  0 (10)% $ 0.81  $ 0.54 50 %
Diluted earnings per share $ 0.26  $ 0.26  $ 0.28  (1)(8)% $ 0.80  $ 0.53 51 %
Weighted average shares outstanding - basic   43,258,983    43,202,562    43,230,016  0 0 %   43,189,710    41,132,043 5 %
Weighted average shares outstanding - diluted   43,796,904    43,721,451    43,731,370  0 0 %   43,728,085    41,683,044 5 %
Common shares outstanding at period-end   43,509,406    43,498,406    43,271,676  0 1 %   43,509,406    43,271,676 1 %
Dividend per share $ 0.12  $ 0.12  $ 0.11  0 9 % $ 0.36  $ 0.33 9 %
Book value per share $ 9.09  $ 8.92  $ 8.17  2 11 % $ 9.09  $ 8.17 11 %
Tangible book value per share $ 6.92  $ 6.75  $ 5.94  3 16 % $ 6.92  $ 5.94 16 %
                        
KEY FINANCIAL RATIOS                       
(unaudited)                       
Annualized return on average equity   11.44   11.96   14.03 (4)(18)%   12.21   9.3131 %
Annualized return on average tangible equity   15.08   15.94   19.36 (5)(22)%   16.26   12.3332 %
Annualized return on average assets   1.44   1.48   1.54 (3)(6)%   1.50   0.9853 %
Annualized return on average tangible assets   1.49   1.53   1.59 (3)(6)%   1.55   1.0153 %
Net interest margin (fully tax equivalent)   4.24   4.38   4.36 (3)(3)%   4.33   4.271 %
Efficiency ratio   53.87   54.76   51.15 (2)5 %   54.04   60.93(11)%
                        
AVERAGE BALANCES                       
(in $000’s, unaudited)                       
Average assets $ 3,103,043  $ 3,070,043  $ 3,193,139  1 (3)% $ 3,094,199  $ 3,004,230 3 %
Average tangible assets $ 3,008,602  $ 2,975,096  $ 3,096,703  1 (3)% $ 2,999,223  $ 2,926,453 2 %
Average earning assets $ 2,878,590  $ 2,844,677  $ 2,965,926  1 (3)% $ 2,869,594  $ 2,798,567 3 %
Average loans held-for-sale $ 4,171  $ 4,256  $ 7,076  (2)(41)% $ 3,854  $ 4,591 (16)%
Average total loans $ 1,851,669  $ 1,831,218  $ 1,911,715  1 (3)% $ 1,839,016  $ 1,771,955 4 %
Average deposits $ 2,612,252  $ 2,590,933  $ 2,749,026  1 (5)% $ 2,613,406  $ 2,593,240 1 %
Average demand deposits - noninterest-bearing $ 1,041,712  $ 1,001,914  $ 1,071,638  4 (3)% $ 1,022,654  $ 1,003,590 2 %
Average interest-bearing deposits $ 1,570,540  $ 1,589,019  $ 1,677,388  (1)(6)% $ 1,590,752  $ 1,589,650 0 %
Average interest-bearing liabilities $ 1,610,168  $ 1,628,554  $ 1,716,813  (1)(6)% $ 1,630,286  $ 1,628,972 0 %
Average equity $ 391,086  $ 380,605  $ 349,971  3 12 % $ 380,919  $ 317,464 20 %
Average tangible equity $ 296,645  $ 285,658  $ 253,535  4 17 % $ 285,943  $ 239,687 19 %


                 
  For the Quarter Ended: 
CONSOLIDATED INCOME STATEMENTS September 30,  June 30,  March 31, December 31, September 30,  
(in $000’s, unaudited) 2019 2019 2019
 2018 2018  
Interest income $ 33,250  $ 33,489  $ 33,449  $ 35,378 $ 34,610  
Interest expense   2,625    2,573    2,407    2,318   2,159  
Net interest income before provision                
  for loan losses   30,625    30,916    31,042    33,060   32,451  
Provision (credit) for loan losses   (576)   (740)   (1,061)   142   (425) 
Net interest income after provision                
  for loan losses   31,201    31,656    32,103    32,918   32,876  
Noninterest income:                
Service charges and fees on deposit accounts   1,032    1,177    1,161    1,132   1,107  
Increase in cash surrender value of                
  life insurance   336    333    330    229   216  
Gain on sales of securities   330    548    —    —   —  
Gain on sales of SBA loans   156    36    139    147   236  
Servicing income   139    150    191    176   163  
Other   625    521    647    709   484  
Total noninterest income   2,618    2,765    2,468    2,393   2,206  
Noninterest expense:                
Salaries and employee benefits   10,467    10,698    10,770    9,699   10,719  
Occupancy and equipment   1,550    1,578    1,506    1,484   1,559  
Professional fees   789    753    818    853   721  
Other   5,103    5,416    4,824    4,905   4,729  
Total noninterest expense   17,909    18,445    17,918    16,941   17,728  
Income before income taxes   15,910    15,976    16,653    18,370   17,354  
Income tax expense    4,633    4,623    4,507    5,138   4,979  
  Net income $ 11,277  $ 11,353  $ 12,146  $ 13,232 $ 12,375  
                 
PER COMMON SHARE DATA                
(unaudited)                
Basic earnings per share $ 0.26  $ 0.26  $ 0.28  $ 0.31 $ 0.29  
Diluted earnings per share $ 0.26  $ 0.26  $ 0.28  $ 0.30 $ 0.28  
Weighted average shares outstanding - basic   43,258,983    43,202,562    43,108,208    43,079,470   43,230,016  
Weighted average shares outstanding - diluted   43,796,904    43,721,451    43,670,341    43,691,222   43,731,370  
Common shares outstanding at period-end   43,509,406    43,498,406    43,323,753    43,288,750   43,271,676  
Dividend per share $ 0.12  $ 0.12  $ 0.12  $ 0.11 $ 0.11  
Book value per share $ 9.09  $ 8.92  $ 8.74  $ 8.49 $ 8.17  
Tangible book value per share $ 6.92  $ 6.75  $ 6.54  $ 6.28 $ 5.94  
                 
KEY FINANCIAL RATIOS                
(unaudited)                
Annualized return on average equity   11.44   11.96   13.28   14.68  14.03 
Annualized return on average tangible equity   15.08   15.94   17.90   20.08  19.36 
Annualized return on average assets   1.44   1.48   1.58   1.64  1.54 
Annualized return on average tangible assets   1.49   1.53   1.63   1.69  1.59 
Net interest margin (fully tax equivalent)   4.24   4.38   4.38   4.42  4.36 
Efficiency ratio   53.87   54.76   53.47   47.78  51.15 
                 
AVERAGE BALANCES                
(in $000’s, unaudited)                
Average assets $ 3,103,043  $ 3,070,043  $ 3,109,583  $ 3,208,177 $ 3,193,139  
Average tangible assets $ 3,008,602  $ 2,975,096  $ 3,014,029  $ 3,112,065 $ 3,096,703  
Average earning assets $ 2,878,590  $ 2,844,677  $ 2,885,591  $ 2,980,207 $ 2,965,926  
Average loans held-for-sale $ 4,171  $ 4,256  $ 3,125  $ 5,435 $ 7,076  
Average total loans $ 1,851,669  $ 1,831,218  $ 1,833,965  $ 1,868,186 $ 1,911,715  
Average deposits $ 2,612,252  $ 2,590,933  $ 2,637,308  $ 2,752,120 $ 2,749,026  
Average demand deposits - noninterest-bearing $ 1,041,712  $ 1,001,914  $ 1,024,142  $ 1,107,813 $ 1,071,638  
Average interest-bearing deposits $ 1,570,540  $ 1,589,019  $ 1,613,166  $ 1,644,307 $ 1,677,388  
Average interest-bearing liabilities $ 1,610,168  $ 1,628,554  $ 1,652,658  $ 1,683,790 $ 1,716,813  
Average equity $ 391,086  $ 380,605  $ 370,792  $ 357,505 $ 349,971  
Average tangible equity $ 296,645  $ 285,658  $ 275,238  $ 261,393 $ 253,535  
                     


               
  End of Period: Percent Change From: 
CONSOLIDATED BALANCE SHEETS September 30,  June 30,  September 30,  June 30,  September 30,  
(in $000’s, unaudited) 2019 2019 2018 2019 2018 
ASSETS              
Cash and due from banks $ 48,121  $ 36,302  $ 40,831  33 18 %
Other investments and interest-bearing deposits              
  in other financial institutions   367,662    239,710    340,198  53 8 %
Securities available-for-sale, at fair value   333,101    383,156    319,071  (13)4 %
Securities held-to-maturity, at amortized cost   342,033    351,399    375,732  (3)(9)%
Loans held-for-sale - SBA, including deferred costs   3,571    5,202    6,344  (31)(44)%
Loans:              
Commercial   528,060    567,529    600,594  (7)(12)%
Real estate:              
CRE   1,080,235    1,037,885    988,491  4 9 %
Land and construction   96,610    97,297    131,548  (1)(27)%
Home equity   111,610    116,057    116,657  (4)(4)%
Residential mortgages   47,276    48,944    52,441  (3)(10)%
Consumer   11,701    10,279    9,932  14 18 %
Loans   1,875,492    1,877,991    1,899,663  0 (1)%
Deferred loan fees, net   (105)   (224)   (276) (53)(62)%
Total loans, net of deferred fees   1,875,387    1,877,767    1,899,387  0 (1)%
Allowance for loan losses   (25,895)   (26,631)   (27,426) (3)(6)%
Loans, net   1,849,492    1,851,136    1,871,961  0 (1)%
Company-owned life insurance   62,858    62,522    61,630  1 2 %
Premises and equipment, net   6,849    6,975    7,246  (2)(5)%
Goodwill   83,753    83,753    83,752  0 0 %
Other intangible assets   10,346    10,900    12,614  (5)(18)%
Accrued interest receivable and other assets   74,685    76,976    73,531  (3)2 %
Total assets $ 3,182,471  $ 3,108,031  $ 3,192,910  2 0 %
               
LIABILITIES AND SHAREHOLDERS’ EQUITY              
Liabilities:              
Deposits:              
Demand, noninterest-bearing $ 1,094,953  $ 994,082  $ 1,081,846  10 1 %
Demand, interest-bearing   666,054    682,114    670,624  (2)(1)%
Savings and money market   761,471    788,832    828,297  (3)(8)%
Time deposits-under $250   53,560    53,351    68,194  0 (21)%
Time deposits-$250 and over   95,543    88,519    84,763  8 13 %
CDARS - money market and time deposits   17,409    15,575    11,575  12 50 %
Total deposits   2,688,990    2,622,473    2,745,299  3 (2)%
Subordinated debt, net of issuance costs   39,507    39,461    39,322  0 0 %
Accrued interest payable and other liabilities   58,628    57,989    54,723  1 7 %
Total liabilities   2,787,125    2,719,923    2,839,344  2 (2)%
               
Shareholders’ Equity:              
Common stock   302,983    302,305    300,208  0 1 %
Retained earnings   98,161    92,105    70,531  7 39 %
Accumulated other comprehensive loss   (5,798)   (6,302)   (17,173) 8 66 %
 Total Shareholders' Equity   395,346    388,108    353,566  2 12 %
  Total liabilities and shareholders’ equity $ 3,182,471  $ 3,108,031  $ 3,192,910  2 0 %
                    




                
  End of Period:
CONSOLIDATED BALANCE SHEETS September 30,  June 30,  March 31, December 31, September 30, 
(in $000’s, unaudited) 2019 2019 2019 2018 2018
ASSETS               
Cash and due from banks $ 48,121  $ 36,302  $ 38,699  $ 30,273  $ 40,831 
Other investments and interest-bearing deposits               
  in other financial institutions   367,662    239,710    196,278    134,295    340,198 
Securities available-for-sale, at fair value   333,101    383,156    452,521    459,043    319,071 
Securities held-to-maturity, at amortized cost   342,033    351,399    367,023    377,198    375,732 
Loans held-for-sale - SBA, including deferred costs   3,571    5,202    3,216    2,649    6,344 
Loans:               
Commercial   528,060    567,529    559,718    597,763    600,594 
Real estate:               
CRE   1,080,235    1,037,885    1,012,641    994,067    988,491 
Land and construction   96,610    97,297    98,222    122,358    131,548 
Home equity   111,610    116,057    118,448    109,112    116,657 
Residential mortgages   47,276    48,944    49,786    50,979    52,441 
Consumer   11,701    10,279    9,690    12,453    9,932 
Loans   1,875,492    1,877,991    1,848,505    1,886,732    1,899,663 
Deferred loan fees, net   (105)   (224)   (187)   (327)   (276)
Total loans, net of deferred fees   1,875,387    1,877,767    1,848,318    1,886,405    1,899,387 
Allowance for loan losses   (25,895)   (26,631)   (27,318)   (27,848)   (27,426)
Loans, net   1,849,492    1,851,136    1,821,000    1,858,557    1,871,961 
Company-owned life insurance   62,858    62,522    62,189    61,859    61,630 
Premises and equipment, net   6,849    6,975    6,998    7,137    7,246 
Goodwill   83,753    83,753    83,753    83,753    83,752 
Other intangible assets   10,346    10,900    11,454    12,007    12,614 
Accrued interest receivable and other assets   74,685    76,976    72,746    69,791    73,531 
Total assets $ 3,182,471  $ 3,108,031  $ 3,115,877  $ 3,096,562  $ 3,192,910 
                
LIABILITIES AND SHAREHOLDERS’ EQUITY               
Liabilities:               
Deposits:               
Demand, noninterest-bearing $ 1,094,953  $ 994,082  $ 1,016,770  $ 1,021,582  $ 1,081,846 
Demand, interest-bearing   666,054    682,114    704,996    702,000    670,624 
Savings and money market   761,471    788,832    759,306    754,277    828,297 
Time deposits-under $250   53,560    53,351    56,385    58,661    68,194 
Time deposits-$250 and over   95,543    88,519    90,042    86,114    84,763 
CDARS - money market and time deposits   17,409    15,575    12,745    14,898    11,575 
Total deposits   2,688,990    2,622,473    2,640,244    2,637,532    2,745,299 
Subordinated debt, net of issuance costs   39,507    39,461    39,414    39,369    39,322 
Accrued interest payable and other liabilities   58,628    57,989    57,703    52,195    54,723 
Total liabilities   2,787,125    2,719,923    2,737,361    2,729,096    2,839,344 
                
Shareholders’ Equity:               
Common stock   302,983    302,305    301,550    300,844    300,208 
Retained earnings   98,161    92,105    85,953    79,003    70,531 
Accumulated other comprehensive loss   (5,798)   (6,302)   (8,987)   (12,381)   (17,173)
     Total Shareholders' Equity   395,346    388,108    378,516    367,466    353,566 
  Total liabilities and shareholders’ equity $ 3,182,471  $ 3,108,031  $ 3,115,877  $ 3,096,562  $ 3,192,910 
                



               
  End of Period: Percent Change From: 
CREDIT QUALITY DATA September 30,  June 30,  September 30,  June 30,  September 30,  
(in $000’s, unaudited) 2019 2019 2018 2019 2018 
Nonaccrual loans - held-for-investment $ 13,638  $ 15,695  $ 23,342  (13)(42)%
Restructured and loans over 90 days past due              
  and still accruing   609    1,323    1,373  (54)(56)%
  Total nonperforming loans   14,247    17,018    24,715  (16)(42)%
Foreclosed assets   —    —    —  N/A N/A 
Total nonperforming assets $ 14,247  $ 17,018  $ 24,715  (16)(42)%
Other restructured loans still accruing $ 247  $ 175  $ 334  41 (26)%
Net charge-offs (recoveries) during the quarter $ 160  $ (53) $ (1,187) 402 113 %
Provision (credit) for loan losses during the quarter $ (576) $ (740) $ (425) 22 (36)%
Allowance for loan losses $ 25,895  $ 26,631  $ 27,426  (3)(6)%
Classified assets $ 20,225  $ 31,176  $ 30,456  (35)(34)%
Allowance for loan losses to total loans   1.38   1.42   1.44 (3)(4)%
Allowance for loan losses to total nonperforming loans   181.76   156.49   110.97 16 64 %
Nonperforming assets to total assets   0.45   0.55   0.77 (18)(42)%
Nonperforming loans to total loans   0.76   0.91   1.30 (16)(42)%
Classified assets to Heritage Commerce Corp              
  Tier 1 capital plus allowance for loan losses   6   10   10 (40)(40)%
Classified assets to Heritage Bank of Commerce              
  Tier 1capital plus allowance for loan losses   6   9   10 (33)(40)%
               
OTHER PERIOD-END STATISTICS              
(in $000’s, unaudited)              
Heritage Commerce Corp:              
Tangible common equity (1) $ 301,247  $ 293,455  $ 257,200  3 17 %
Shareholders’ equity / total assets   12.42   12.49   11.07 (1)12 %
Tangible common equity / tangible assets (2)   9.75   9.74   8.31 0 17 %
Loan to deposit ratio   69.74   71.60   69.19 (3)1 %
Noninterest-bearing deposits / total deposits   40.72   37.91   39.41 7 3 %
Total risk-based capital ratio   16.2   15.9   14.4 2 13 %
Tier 1 risk-based capital ratio   13.3   13.0   11.5 2 16 %
Common Equity Tier 1 risk-based capital ratio   13.3   13.0   11.5 2 16 %
Leverage ratio   10.0   9.9   8.6 1 16 %
Heritage Bank of Commerce:              
Total risk-based capital ratio   15.2   14.9   13.4 2 13 %
Tier 1 risk-based capital ratio   14.1   13.7   12.2 3 16 %
Common Equity Tier 1 risk-based capital ratio   14.1   13.7   12.2 3 16 %
Leverage ratio   10.6   10.5   9.1 1 16 %

(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 September 30,  June 30,  March 31, December 31, September 30,  
(in $000’s, unaudited) 2019 2019 2019 2018 2018 
Nonaccrual loans - held-for-investment $ 13,638  $ 15,695  $ 15,958  $ 13,699  $ 23,342  
Restructured and loans over 90 days past due                
  and still accruing   609    1,323    1,357    1,188    1,373  
  Total nonperforming loans   14,247    17,018    17,315    14,887    24,715  
Foreclosed assets   —    —    —    —    —  
Total nonperforming assets $ 14,247  $ 17,018  $ 17,315  $ 14,887  $ 24,715  
Other restructured loans still accruing $ 247  $ 175  $ 201  $ 253  $ 334  
Net charge-offs (recoveries) during the quarter $ 160  $ (53) $ (531) $ (280) $ (1,187) 
Provision (credit) for loan losses during the quarter $ (576) $ (740) $ (1,061) $ 142  $ (425) 
Allowance for loan losses $ 25,895  $ 26,631  $ 27,318  $ 27,848  $ 27,426  
Classified assets $ 20,225  $ 31,176  $ 25,176  $ 23,409  $ 30,546  
Allowance for loan losses to total loans   1.38   1.42   1.48   1.48   1.44 
Allowance for loan losses to total nonperforming loans   181.76   156.49   157.77   187.06   110.97 
Nonperforming assets to total assets   0.45   0.55   0.56   0.48   0.77 
Nonperforming loans to total loans   0.76   0.91   0.94   0.79   1.30 
Classified assets to Heritage Commerce Corp                
  Tier 1 capital plus allowance for loan losses   6   10   8   8   10 
Classified assets to Heritage Bank of Commerce                
  Tier 1capital plus allowance for loan losses   6   9   8   7   10 
                 
OTHER PERIOD-END STATISTICS                
(in $000’s, unaudited)                
Heritage Commerce Corp:                
Tangible common equity (1) $ 301,247  $ 293,455  $ 283,309  $ 271,706  $ 257,200  
Shareholders’ equity / total assets   12.42   12.49   12.15   11.87   11.07 
Tangible common equity / tangible assets (2)   9.75   9.74   9.38   9.05   8.31 
Loan to deposit ratio   69.74   71.60   70.01   71.52   69.19 
Noninterest-bearing deposits / total deposits   40.72   37.91   38.51   38.73   39.41 
Total risk-based capital ratio   16.2   15.9   15.6   15.0   14.4 
Tier 1 risk-based capital ratio   13.3   13.0   12.6   12.0   11.5 
Common Equity Tier 1 risk-based capital ratio   13.3   13.0   12.6   12.0   11.5 
Leverage ratio   10.0   9.9   9.5   8.9   8.6 
Heritage Bank of Commerce:                
Total risk-based capital ratio   15.2   14.9   14.6   14.0   13.4 
Tier 1 risk-based capital ratio   14.1   13.7   13.4   12.8   12.2 
Common Equity Tier 1 risk-based capital ratio   14.1   13.7   13.4   12.8   12.2 
Leverage ratio   10.6   10.5   10.1   9.4   9.1 

(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 
  September 30, 2019 September 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) $ 1,855,840   27,264   5.83$ 1,918,791 $ 28,632   5.92%
Securities - taxable  629,339  3,504   2.21  624,352   3,483   2.21%
Securities - exempt from Federal tax (3)   83,403  671   3.19  87,410   702   3.19%
Other investments and interest-bearing deposits                 
  in other financial institutions  310,008  1,952   2.50  335,373   1,940   2.29%
Total interest earning assets (3)   2,878,590   33,391   4.60  2,965,926   34,757   4.65%
Cash and due from banks   37,615        40,704      
Premises and equipment, net   6,933        7,320      
Goodwill and other intangible assets   94,441        96,436      
Other assets   85,464        82,753      
Total assets $ 3,103,043      $ 3,193,139      
                  
Liabilities and shareholders’ equity:                 
Deposits:                 
Demand, noninterest-bearing $ 1,041,712      $ 1,071,638      
                  
Demand, interest-bearing   670,203   571   0.34  682,694   551   0.32%
Savings and money market   737,484   1,073   0.58  823,762   761   0.37%
Time deposits - under $100   18,549   23   0.49  23,699   23   0.39%
Time deposits - $100 and over   127,314   373   1.16  131,262   237   0.72%
CDARS - money market and time deposits   16,990   2   0.05  15,971   3   0.07%
Total interest-bearing deposits   1,570,540   2,042   0.52  1,677,388   1,575   0.37%
Total deposits   2,612,252   2,042   0.31  2,749,026   1,575   0.23%
                  
Subordinated debt, net of issuance costs   39,477   583   5.86  39,292   583  5.89%
Short-term borrowings   151   —  0.00  133   1  2.98%
Total interest-bearing liabilities   1,610,168   2,625   0.65  1,716,813   2,159   0.50%
Total interest-bearing liabilities and demand,                  
  noninterest-bearing / cost of funds   2,651,880   2,625   0.39  2,788,451   2,159   0.31%
Other liabilities   60,077        54,717      
Total liabilities   2,711,957        2,843,168      
Shareholders’ equity   391,086        349,971      
Total liabilities and shareholders’ equity $ 3,103,043      $ 3,193,139      
                  
Net interest income (3) / margin      30,766   4.24     32,598   4.36%
Less tax equivalent adjustment (3)      (141)        (147)   
Net interest income    $ 30,625       $ 32,451    

 


(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 $189,000 for the third quarter of 2019, 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 Quarter Ended For the Quarter Ended 
  September 30, 2019 June 30, 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) $ 1,855,840 $ 27,264   5.83$ 1,835,474 $ 27,251   5.96
Securities - taxable   629,339   3,504   2.21  707,710   4,136   2.34
Securities - exempt from Federal tax (3)   83,403   671   3.19  85,329   692   3.25
Other investments and interest-bearing deposits                 
  in other financial institutions   310,008   1,952   2.50  216,164   1,556   2.89
Total interest earning assets (3)   2,878,590   33,391   4.60  2,844,677   33,635   4.74
Cash and due from banks   37,615        37,051      
Premises and equipment, net   6,933        7,050      
Goodwill and other intangible assets   94,441        94,947      
Other assets   85,464        86,318      
Total assets $ 3,103,043      $ 3,070,043      
                  
Liabilities and shareholders’ equity:                 
Deposits:                 
Demand, noninterest-bearing $ 1,041,712      $ 1,001,914      
                  
Demand, interest-bearing   670,203   571   0.34  686,872   612   0.36
Savings and money market   737,484   1,073   0.58  744,475   1,034   0.56
Time deposits - under $100   18,549   23   0.49  19,267   22   0.46
Time deposits - $100 and over   127,314   373   1.16  126,303   326   1.04
CDARS - money market and time deposits   16,990   2   0.05  12,102   1   0.03
Total interest-bearing deposits   1,570,540   2,042   0.52  1,589,019   1,995   0.50
Total deposits   2,612,252   2,042   0.31  2,590,933   1,995   0.31
                  
Subordinated debt, net of issuance costs   39,477   583   5.86  39,431   577  5.87
Short-term borrowings   151   —  0.00  104   1  3.86
Total interest-bearing liabilities   1,610,168   2,625   0.65  1,628,554   2,573   0.63
Total interest-bearing liabilities and demand,                  
  noninterest-bearing / cost of funds   2,651,880   2,625   0.39  2,630,468   2,573   0.39
Other liabilities   60,077        58,970      
Total liabilities   2,711,957        2,689,438      
Shareholders’ equity   391,086        380,605      
Total liabilities and shareholders’ equity $ 3,103,043      $ 3,070,043      
                  
Net interest income (3) / margin      30,766   4.24     31,062   4.38
Less tax equivalent adjustment (3)      (141)        (146)   
Net interest income    $ 30,625       $ 30,916    
                  

(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 $189,000 for the third quarter of 2019, compared to $210,000 for the second quarter of 2019.

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

                  
  For the Nine Months Ended  For the Nine Months Ended  
  September 30, 2019 September 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) $ 1,842,870 $ 81,321   5.90$ 1,776,546 $ 77,272   5.82%
Securities - taxable   692,369   12,149   2.35  662,274   11,112   2.24%
Securities - exempt from Federal tax (3)   84,882   2,057   3.24  87,990   2,120   3.22%
Other investments, interest-bearing deposits in other                 
  financial institutions and Federal funds sold   249,473   5,094   2.73  271,757   4,408   2.17%
Total interest earning assets (3)   2,869,594   100,621   4.69  2,798,567   94,912   4.53%
Cash and due from banks   37,293        37,890      
Premises and equipment, net   7,024        7,330      
Goodwill and other intangible assets   94,976        77,777      
Other assets   85,312        82,666      
Total assets $ 3,094,199      $ 3,004,230      
                  
Liabilities and shareholders’ equity:                 
Deposits:                 
Demand, noninterest-bearing $ 1,022,654      $ 1,003,590      
                  
Demand, interest-bearing   686,144   1,801   0.35  651,445   1,319   0.27%
Savings and money market   744,333   3,015   0.54  769,448   1,823   0.32%
Time deposits - under $100   19,392   66   0.46  21,235   58   0.37%
Time deposits - $100 and over   126,732   986   1.04  131,436   564   0.57%
CDARS - money market and time deposits   14,151   5   0.05  16,086   8   0.07%
Total interest-bearing deposits   1,590,752   5,873   0.49  1,589,650   3,772   0.32%
Total deposits   2,613,406   5,873   0.30  2,593,240   3,772   0.19%
                  
Subordinated debt, net of issuance costs   39,414   1,731   5.87  39,246   1,731  5.90%
Short-term borrowings   120   1  1.11  76   1  1.76%
Total interest-bearing liabilities   1,630,286   7,605   0.62  1,628,972   5,504   0.45%
Total interest-bearing liabilities and demand,                  
  noninterest-bearing / cost of funds   2,652,940   7,605   0.38  2,632,562   5,504   0.28%
Other liabilities   60,340        54,204      
Total liabilities   2,713,280        2,686,766      
Shareholders’ equity   380,919        317,464      
Total liabilities and shareholders’ equity $ 3,094,199      $ 3,004,230      
                  
Net interest income (3) / margin      93,016   4.33     89,408   4.27%
Less tax equivalent adjustment (3)      (433)        (445)   
Net interest income    $ 92,583       $ 88,963    

 


(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 $490,000 for the first nine months ended September 30, 2019, compared to $322,000 for the first nine months ended September 30, 2018.

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