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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, Calif., Oct. 24, 2019 (GLOBE NEWSWIRE) -- Heritage Commerce Corp (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