Heritage Commerce Corp Reports Earnings of $5.7 Million for the Fourth Quarter of 2019 and Record Earnings of $40.5 Million for the Full Year of 2019; Merger with Presidio Bank Completed

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SAN JOSE, Calif., Jan. 23, 2020 (GLOBE NEWSWIRE) -- Heritage Commerce Corp (HTBK), the holding company (the “Company”) for Heritage Bank of Commerce (the “Bank”), today announced fourth quarter 2019 net income of $5.7 million, or $0.10 per average diluted common share, compared to $13.2 million, or $0.30 per average diluted common share, for the fourth quarter of 2018, and $11.3 million, or $0.26 per average diluted common share, for the third quarter of 2019. For the year ended December 31, 2019, the Company reported record net income of $40.5 million, or $0.84 per average diluted common share, compared to $35.3 million, or $0.84 per average diluted common share, for the year ended December 31, 2018. All results are unaudited.

Earnings for the third and fourth quarters of 2019, and for the year ended December 31, 2019 were reduced by pre-tax merger-related costs of $661,000, $9.9 million, and $11.1 million, respectively, related to the merger with Presidio Bank (“Presidio”) which was completed on October 11, 2019 (the “Presidio merger date”). Pre-tax earnings for the fourth quarter of 2019 were further reduced by an additional $2.0 million of provision for loan losses for certain non-impaired loans acquired at a premium from Presidio. Earnings for the fourth quarter of 2018 and for the year ended December 31, 2018 were reduced by pre-tax merger-related costs of $139,000 and $9.2 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. The effective tax rate for the year ended December 31, 2019 was 28.1%, compared to an effective tax rate of 27.4% for the year ended December 31, 2018.

“The fourth quarter of 2019 saw a significant accomplishment for Heritage Bank of Commerce with the completion of the Presidio Bank merger thereby creating the San Francisco Bay Area’s premier community business bank with a strong depth of banking talent and an extensive and diverse customer base,” said Keith A. Wilton, President and Chief Executive Officer. “Credit quality remains strong and the Bank continued to generate solid earnings for the fourth quarter and the full year of 2019, though these were partially reduced by anticipated merger-related costs from the Presidio merger.”

“We ended 2019 with over $4.1 billion in total assets, $2.5 billion in total loans and $3.4 billion in total deposits, with noninterest-bearing deposits increasing 42% from a year ago to 42% of total deposits,” added Mr. Wilton. “Net interest income was up 19% for the fourth quarter of 2019, over a year ago, and increased 8% for the full year. Also, in spite of the linked quarter margin compression, and the lower interest rate environment in general, our net interest margin remained strong at 4.15% for the fourth quarter and 4.28% for the full year. Credit quality continues to improve, with nonperforming assets declining 34% from a year ago to $9.8 million, or 0.24% of total assets. In the fourth quarter of 2019 we booked an elevated provision for loan losses of $3.2 million, of which $2.0 million was a provision for certain non-impaired loans acquired at a premium from Presidio.”

“We remain focused on the long-term success of our Company and will continue to invest in the future of our franchise. To that end, we are planning our systems conversion and integration of Presidio during the first quarter of 2020, for which we will incur anticipated additional merger-related costs,” said Mr. Wilton. “I would also like to thank our many dedicated legacy employees and new employees from Presidio Bank for all that they do to create value, each and every day, for our customers, communities and shareholders.”

2019 Highlights (as of, or for the periods ended December 31, 2019, compared to December 31, 2018, and September 30, 2019, except as noted):

Operating Results:

♦ Diluted earnings per share were $0.10 for the fourth quarter of 2019, compared to $0.30 for the fourth quarter of 2018, and $0.26 for the third quarter of 2019. Diluted earnings per share were $0.84 for the years ended December 31, 2019 and 2018.

  • Earnings for the fourth quarter of 2019, third quarter of 2019, and the year ended December 31, 2019 were reduced by merger-related costs for the transaction with Presidio, and earnings for the fourth quarter of 2018, and for the year ended December 31, 2018 were reduced by merger-related costs for the acquisitions of Tri-Valley and United American, as follows:

For the Quarter Ended

For the Year Ended

MERGER-RELATED COSTS

December 31,

September 30,

December 31,

December 31,

December 31,

(in $000’s, unaudited)

2019

2019

2018

2019

2018

Salaries and employee benefits

$

6,580

$

$

(7

)

$

6,580

$

3,569

Other

3,299

661

146

4,500

5,598

Total merger-related costs

$

9,879

$

661

$

139

$

11,080

$

9,167





  • The Company acquired $10.0 million of subordinated debt from the Presidio transaction, which was redeemed on December 19, 2019. As a result of the redemption of the subordinated debt, the Company paid a pre-payment penalty of $300,000 during the fourth quarter of 2019.

♦ On October 11, 2019, the Company completed its merger with Presidio for an aggregate transaction value of $185.6 million. Shareholders of Presidio received a fixed exchange ratio at closing of 2.47 shares of the Company’s common stock for each share of Presidio common stock. Upon closing of the transaction, the Company issued 15,684,064 shares of the Company’s common stock to Presidio shareholders and holders of restricted stock units for a total value of $178.2 million based on the Company’s closing stock price of $11.36 on the closing date of October 11, 2019. In addition, the consideration for Presidio stock options exchanged for the Company’s stock options totaled $7.4 million and cash-in-lieu of fractional shares totaled $1,000 on October 11, 2019. The Company recorded goodwill of $83.7 million for the Presidio merger, which represents the excess of consideration paid for the net assets acquired marked to their market values, as follows:

GOODWILL

October 11,

(in $000’s, unaudited)

2019

Consideration paid:

Issuance of 15,684,064 shares of common stock

to Presidio shareholders and holders of restricted stock

(stock price = $11.36 on October 11, 2019)

$

178,171

Consideration for Presidio stock options exchanged for

Heritage Commerce Corp stock options

7,426

Cash paid for fractional shares

1

Total Consideration Paid

$

185,598

Net assets pre-merger

$

96,119

Fair value adjustments:

Investment securities

422

Loans receivable

(12,529

)

Allowance for loan losses

7,463

Core deposit intangible

11,247

Above market lease

(100

)

Time Deposits - Under $100

3

Time Deposits - $100 and Over

(2

)

Total fair value adjustments

6,504

Deferred taxes on fair value adjustments

(1,378

)

Other adjustments to goodwill

686

Fair value of net assets acquired

101,931

Excess of consideration paid over fair value of

net assets acquired = goodwill

$

83,667











  • Presidio’s results of operations have been included in the Company’s results of operations beginning October 12, 2019.

♦ 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 Year Ended

December 31,

September 30,

December 31,

December 31,

December 31,

2019

2019

2018

2019

2018

Return on average tangible assets

0.57

%

1.49

%

1.69

%

1.25

%

1.19

%

Return on average tangible equity

5.96

%

15.08

%

20.08

%

13.09

%

14.41

%






♦ Net interest income, before provision for loan losses, increased 19% to $39.2 million for the fourth quarter of 2019, compared to $33.1 million for the fourth quarter of 2018, and increased 28% from $30.6 million for the third quarter of 2019. Net interest income increased 8% to $131.8 million for the year ended December 31, 2019, compared to $122.0 million for the year ended December 31, 2018. The decrease in the return on average tangible assets and average tangible equity for the fourth quarter of 2019 and the year ended 2019 was primarily due to higher merger-related costs.

  • The fully tax equivalent (“FTE”) net interest margin contracted 27 basis points to 4.15% for the fourth quarter of 2019, from 4.42% for the fourth quarter of 2018, primarily due to a decline in the average yield of loans, investment securities, and overnight funds, a decrease in the average balance of Bay View Funding’s factored receivables, partially offset by an increase in the average balance of loans, and an increase in the accretion of the loan discount into loan interest income from a merger during the fourth quarter of 2019. The net interest margin contracted nine basis points for the fourth quarter of 2019 from 4.24% for the third quarter of 2019, primarily due to a decline in the average yield of loans and overnight funds, partially offset by a higher average balance of loans, and an increase in the accretion of the loan discount into loan interest income from a merger during the fourth quarter of 2019.

  • For the year ended December 31, 2019, the net interest margin contracted three basis points to 4.28%, compared to 4.31% for the year ended December 31, 2018, primarily due to a higher cost of deposits, a decrease in the average balance of Bay View Funding’s factored receivables, partially offset by an increase in the average balance of loans and securities, and an increase in the accretion of the loan purchase discount into loan interest income from a merger during the year ended December 31, 2019.

♦ 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

December 31, 2019

December 31, 2018

Average

Interest

Average

Average

Interest

Average

(in $000’s, unaudited)

Balance

Income

Yield

Balance

Income

Yield

Loans, core bank and asset-based lending

$

2,353,871

$

30,786

5.19

%

$

1,742,614

$

23,053

5.25

%

Bay View Funding factored receivables

45,045

2,888

25.44

%

65,521

4,012

24.29

%

Residential mortgages

33,867

237

2.78

%

38,148

268

2.79

%

Purchased commercial real estate

("CRE") loans

28,407

238

3.32

%

34,121

311

3.62

%

Loan fair value mark / accretion

(15,089

)

1,338

0.23

%

(6,783

)

720

0.16

%

Total loans

$

2,446,101

$

35,487

5.76

%

$

1,873,621

$

28,364

6.01

%









  • The average yield on the total loan portfolio decreased to 5.76% for the fourth quarter of 2019, compared to 6.01% for the fourth quarter of 2018, primarily due to decreases in the prime rate on loans during the latter part of 2019, and a decrease in the average balance of Bay View Funding’s factored receivables, partially offset by an increase in the accretion of the loan purchase discount into loan interest income from the acquisitions.

For the Quarter Ended

For the Quarter Ended

December 31, 2019

September 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

$

2,353,871

$

30,786

5.19

%

$

1,748,379

$

23,401

5.31

%

Bay View Funding factored receivables

45,045

2,888

25.44

%

47,614

2,879

23.99

%

Residential mortgages

33,867

237

2.78

%

34,639

229

2.62

%

Purchased CRE loans

28,407

238

3.32

%

30,567

284

3.69

%

Loan fair value mark / accretion

(15,089

)

1,338

0.23

%

(5,359

)

471

0.11

%

Total loans

$

2,446,101

$

35,487

5.76

%

$

1,855,840

$

27,264

5.83

%








  • The average yield on the total loan portfolio decreased to 5.76% for the fourth quarter of 2019, compared to 5.83% for the third quarter of 2019, primarily due to decreases in the prime rate on loans during the latter part of 2019, partially offset by an increase in the accretion of the loan purchase discount into loan interest income from the acquisitions.

For the Year Ended

For the Year Ended

December 31, 2019

December 31, 2018

Average

Interest

Average

Average

Interest

Average

(in $000’s, unaudited)

Balance

Income

Yield

Balance

Income

Yield

Loans, core bank and asset-based lending

$

1,890,079

$

100,380

5.31

%

$

1,670,065

$

86,610

5.19

%

Bay View Funding factored receivables

46,710

11,688

25.02

%

59,220

14,698

24.82

%

Residential mortgages

35,343

951

2.69

%

40,998

1,118

2.73

%

Purchased CRE loans

30,936

1,107

3.58

%

36,080

1,257

3.48

%

Loan fair value mark / accretion

(8,151

)

2,682

0.14

%

(5,348

)

1,952

0.12

%

Total loans

$

1,994,917

$

116,808

5.86

%

$

1,801,015

$

105,635

5.87

%








  • The average yield on the total loan portfolio decreased to 5.86% for the year ended December 31, 2019, compared to 5.87% for the year ended December 31, 2018, primarily due to a decrease in the average balance of Bay View Funding’s factored receivables, partially offset by the impact of the increasing prime rate on loans over the course of 2018 (prior to the prime rate decreasing in the latter part of 2019), and an increase in the accretion of the loan purchase discount into loan interest income from the acquisitions.

  • The total net purchase discount on loans from the Focus Business Bank (“Focus”) loan portfolio was $5.4 million on the acquisition date of August 20, 2015, of which $418,000 remains outstanding as of December 31, 2019. The total net purchase discount on loans from the Tri-Valley loan portfolio was $2.6 million on the acquisition date of April 6, 2018, of which $1.6 million remains outstanding as of December 31, 2019. The total net purchase discount on loans from the United American loan portfolio was $4.7 million on the acquisition date of May 4, 2018, of which $2.7 million remains outstanding as of December 31, 2019. The total net purchase discount on loans from Presidio loan portfolio was $12.5 million on the Presidio merger date, of which $11.6 million remains outstanding as of December 31, 2019.

♦ The cost of total deposits was 0.26% for the fourth quarter of 2019, compared to 0.25% for the fourth quarter of 2018 and 0.31% for the third quarter of 2019. The cost of total deposits was 0.29% for the year ended December 31, 2019, compared to 0.21% for the year ended December 31, 2018.

♦ There was a $3.2 million provision for loan losses for the fourth quarter of 2019, compared to a $142,000 provision for loan losses for the fourth quarter of 2018, and a $576,000 credit to the provision for loan losses for the third quarter of 2019. The provision for loan losses for the fourth quarter of 2019 included $2.0 million related to certain non-impaired loans acquired at a premium from Presidio. This premium was due to higher interest rates on the loans versus market interest rates at the time of the merger. Due to the net premium on these loans, a provision for loan losses was required and it was not due to credit deterioration since the Presidio merger date. There was an $846,000 provision for loan losses for the year ended December 31, 2019, compared to a $7.4 million provision for loan losses for the year ended December 31, 2018. The higher provision for loan losses for the year ended December 31, 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 was $2.4 million for the fourth quarters of 2019 and 2018. An increase in the gain on sales of Small Business Administration (“SBA”) loans, and an increase in the cash surrender value of life insurance, was offset by a loss on sale of securities for the fourth quarter of 2019. Total noninterest income for the fourth quarter of 2019 decreased from $2.6 million for the third quarter of 2019, primarily due to a loss on sale of securities, partially offset by an increase in the gain on sale of SBA loans, an increase in the cash surrender value of life insurance, and higher service charges and fees on deposits accounts.

  • For the year ended December 31, 2019, total noninterest income increased to $10.2 million, compared to $9.6 million for the year ended December 31, 2018. The increase in noninterest income for the year ended December 31, 2019, was primarily due to higher service charges and fees on deposit accounts, and an increase in the cash surrender value of life insurance, partially offset by an increase in the gain on sale of securities, and proceeds from a legal settlement in the year ended December 31, 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 fourth quarter of 2019 increased to $30.6 million, compared to $16.9 million for the fourth quarter of 2018, and $17.9 million for the third quarter of 2019, primarily due to higher merger-related costs. Total noninterest expense for the fourth quarter of 2019 included total merger-related costs of $9.9 million for the Presidio merger, of which $6.6 million was included in salaries and employee benefits, and $3.3 million was included in other noninterest expense. Total merger-related costs were $139,000 for the fourth quarter of 2018 for the Tri-Valley and United American acquisitions. Total merger-related costs were $661,000 for the third quarter of 2019 for the Presidio merger.

  • Total noninterest expense for the year ended December 31, 2019 increased to $84.9 million, compared to $75.5 million for the year ended December 31, 2018, primarily due to higher merger-related costs, and a full year of additional operating costs of Tri-Valley and United American, in addition to the operating costs of Presidio for the fourth quarter of 2019. Total noninterest expense for the year ended December 31, 2019 included total merger-related costs of $11.1 million for the Presidio merger of which $6.6 million was included in salaries and employee benefits, and $4.5 million was included in other noninterest expense. Total merger-related costs were $9.2 million for the year ended December 31, 2018 for the Tri-Valley and United American acquisitions, of which $3.6 million was included in salaries and employee benefits and $5.6 million was included in other noninterest expense. Professional fees for the year ended December 31, 2018 included a recovery of $922,000 from a legal settlement.

  • Full time equivalent employees were 357 at December 31, 2019, 302 at December 31, 2018, and 308 at September 30, 2019.

♦ The efficiency ratio was 73.58% for the fourth quarter of 2019, compared to 47.78% for the fourth quarter of 2018, and 53.87% for the third quarter of 2019. The efficiency ratio for the year ended December 31, 2019 was 59.76%, compared to 57.39% for the year ended December 31, 2018. The increase in the efficiency ratio for the fourth quarter of 2019 and the year ended December 31, 2019 was primarily due to higher merger-related costs.

♦ Income tax expense was $2.1 million for the fourth quarter of 2019, compared to $5.1 million for the fourth quarter of 2018, and $4.6 million for the third quarter of 2019. Income tax expense for the year ended December 31, 2019 was $15.9 million, compared to $13.3 million for the year ended December 31, 2018. The effective tax rate for the fourth quarter of 2019 was 26.9%, compared to 28.0% for the fourth quarter of 2018, and 29.1% for the third quarter of 2019. The effective tax rate for the year ended December 31, 2019 was 28.1%, compared to 27.4% for the year ended December 31, 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 increased 33% to $4.11 billion at December 31, 2019, compared to $3.10 billion at December 31, 2018 and increased 29% from $3.18 billion at September 30, 2019, primarily due to the Presidio merger.

♦ Securities available-for-sale, at fair value, totaled $404.8 million at December 31, 2019, compared to $459.0 million at December 31, 2018, and $333.1 million at September 30, 2019. At December 31, 2019, the Company’s securities available-for-sale portfolio comprised $284.4 million of agency mortgage-backed securities (all issued by U.S. Government sponsored entities), and $120.4 million of U.S. Treasury securities. The pre-tax unrealized gain on securities available-for-sale at December 31, 2019 was $2.3 million, compared to a pre-tax unrealized loss on securities available-for-sale of ($7.7) million at December 31, 2018, and a pre-tax unrealized gain on securities available-for-sale of $1.7 million at September 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.

  • Investment securities available-for-sale from Presidio totaled $45.1 million, at fair value, at the Presidio merger date. During the fourth quarter of 2019, the Company sold $68.8 million of securities available-for-sale for a net loss of ($217,000). During the fourth quarter of 2019, the Company purchased $112.0 million of securities available-for-sale, with a book yield of 2.40%, and an average life of 5.26 years.

♦ At December 31, 2019, securities held-to-maturity, at amortized cost, totaled $366.6 million, compared to $377.2 million at December 31, 2018, and $342.0 million at September 30, 2019. At December 31, 2019, the Company’s securities held-to-maturity portfolio was comprised of $285.4 million of agency mortgage-backed securities, and $81.2 million of tax-exempt municipal bonds.

  • Investment securities held-to-maturity from Presidio totaled $463,000, at fair value, at the Presidio merger date. During the fourth quarter of 2019, the Company purchased $41.7 million of securities held-to-maturity, with a book yield of 2.53%, and an average life of 6.02 years.

♦ The loan portfolio remains well-diversified as reflected in the following table which summarizes the distribution of loans, excluding loans held-for-sale, and the percentage of distribution in each category for the periods indicated:

LOANS

December 31, 2019

September 30, 2019

December 31, 2018

(in $000’s, unaudited)

Balance

% to Total

Balance

% to Total

Balance

% to Total

Commercial

$

678,696

27

%

$

528,060

28

%

$

597,763

32

%

Real estate:

CRE

1,495,903

59

%

1,080,235

58

%

994,067

52

%

Land and construction

147,109

6

%

96,610

5

%

122,358

6

%

Home equity

136,259

5

%

111,610

6

%

109,112

6

%

Residential mortgages

55,128

2

%

47,276

3

%

50,979

3

%

Consumer

21,068

1

%

11,701

1

%

12,453

1

%

Total Loans

2,534,163

100

%

1,875,492

100

%

1,886,732

100

%

Deferred loan fees, net

(319

)

-

(105

)

(327

)

Loans, net of deferred fees

$

2,533,844

100

%

$

1,875,387

100

%

$

1,886,405

100

%










  • Loans, excluding loans held-for-sale, increased $647.4 million or 34%, to $2.53 billion at December 31, 2019, compared to $1.89 billion at December 31, 2018, which included $669.5 million in loans from Presidio, at fair value, a decrease of $11.3 million in the Company’s legacy portfolio, a decrease of $6.5 million in purchased CRE loans, and a decrease of $4.3 million in purchased residential loans. Loans, excluding loans held-for-sale, increased $658.5 million or 35%, to $2.53 billion at December 31, 2019, compared to $1.88 billion September 30, 2019, which included $669.5 million in loans from Presidio, at fair value, a decrease of $7.1 million in the Company’s legacy portfolio, and a decrease of $3.2 million in purchased CRE loans.

  • Commercial and Industrial (“C&I”) line usage was 35% at December 31, 2019, compared to 36% at December 31, 2018, and 35% at September 30, 2019.

  • At December 31, 2019, 34% 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 Year Ended

ALLOWANCE FOR LOAN LOSSES

December 31,

September 30,

December 31,

December 31,

December 31,

(in $000’s, unaudited)

2019

2019

2018

2019

2018

Balance at beginning of period

$

25,895

$

26,631

$

27,426

$

27,848

$

19,658

Charge-offs during the period

(6,003

)

(318

)

(166

)

(6,623

)

(2,026

)

Recoveries during the period

170

158

446

1,214

2,795

Net recoveries (charge-offs) during the period

(5,833

)

(160

)

280

(5,409

)

769

Provision (credit) for loan losses during the period

3,223

(576

)

142

846

7,421

Balance at end of period

$

23,285

$

25,895

$

27,848

$

23,285

$

27,848

Total loans, net of deferred fees

$

2,533,844

$

1,875,387

$

1,886,405

$

2,533,844

$

1,886,405

Total nonperforming loans

$

9,828

$

14,247

$

14,887

$

9,828

$

14,887

Allowance for loan losses to total loans

0.92

%

1.38

%

1.48

%

0.92

%

1.48

%

Allowance for loan losses to total nonperforming loans

236.93

%

181.76

%

187.06

%

236.93

%

187.06

%











  • The ALLL was 0.92% of total loans at December 31, 2019, compared to 1.48% at December 31, 2018, and 1.38% at September 30, 2019. The ALLL to total nonperforming loans was 236.93% at December 31, 2019, compared to 187.06% at December 31, 2018, and 181.76% at September 30, 2019. The loans acquired from Presidio are included in total loans. Due to the addition of the Presidio loans at fair value with no allowance, the ALLL to total loans decreased at December 31, 2019. However, the Company provided an additional $2.0 million in provision for loan losses to increase the ALLL at December 31, 2019 for certain non-impaired loans acquired at a premium from Presidio.

  • Net charge-offs totaled $5.8 million for the fourth quarter of 2019, compared to net recoveries of $280,000 for the fourth quarter of 2018, and net charge-offs of $160,000 for the third quarter of 2019. Net charge-offs of $5.8 million for the fourth quarter of 2019 primarily consisted of three lending relationships totaling $5.5 million, including one large relationship which was previously disclosed and specifically reserved for during the second and third quarters of 2018. The three lending relationships totaling $5.5 million in net charge-offs had a total of $4.7 million in specific reserves.

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

End of Period:

NONPERFORMING ASSETS

December 31, 2019

September 30, 2019

December 31, 2018

(in $000’s, unaudited)

Balance

% of Total

Balance

% of Total

Balance

% of Total

CRE loans

$

5,094

52

%

$

5,094

36

%

$

5,094

34

%

Commercial loans

2,657

27

%

7,390

52

%

8,062

54

%

Restructured and loans over 90 days past due and still accruing

1,153

12

%

609

4

%

1,188

8

%

SBA loans

787

8

%

1,007

7

%

326

2

%

Home equity and consumer loans

137

1

%

147

1

%

217

2

%

Total nonperforming assets

$

9,828

100

%

$

14,247

100

%

$

14,887

100

%








  • NPAs totaled $9.8 million, or 0.24% of total assets, at December 31, 2019, compared to $14.9 million, or 0.48% of total assets, at December 31, 2018, and $14.2 million, or 0.45% of total assets, at September 30, 2019.

    • There were no foreclosed assets at December 31, 2019, December 31, 2018, or September 30, 2019.

  • Classified assets increased to $32.6 million, or 0.79% of total assets, at December 31, 2019, compared to $23.4 million, or 0.76% of total assets, at December 31, 2018, and $20.2 million, or 0.64% of total assets, at September 30, 2019. The increase in classified assets for the fourth quarter of 2019 was primarily due to classified assets acquired from Presidio.

♦ 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 $12.2 million on its consolidated statement of financial condition at December 31, 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

December 31, 2019

September 30, 2019

December 31, 2018

(in $000’s, unaudited)

Balance

% to Total

Balance

% to Total

Balance

% to Total

Demand, noninterest-bearing

$

1,450,873

42

%

$

1,094,953

41

%

$

1,021,582

39

%

Demand, interest-bearing

798,375

23

%

666,054

25

%

702,000

27

%

Savings and money market

982,430

29

%

761,471

28

%

754,277

28

%

Time deposits — under $250

54,361

2

%

53,560

2

%

58,661

2

%

Time deposits — $250 and over

99,882

3

%

95,543

3

%

86,114

3

%

CDARS — interest-bearing demand,

money market and time deposits

28,847

1

%

17,409

1

%

14,898

1

%

Total deposits

$

3,414,768

100

%

$

2,688,990

100

%

$

2,637,532

100

%








  • Total deposits increased $777.2 million, or 29%, to $3.41 billion at December 31, 2019, compared to $2.64 billion at December 31, 2018, which included $723.0 million in deposits from Presidio, at fair value, and an increase of $54.2 million in the Company’s legacy deposits. Total Deposits increased $725.8 million or 27% from $2.69 billion at September 30, 2019, which included $723.0 million in deposits from Presidio, at fair value, and an increase of $2.8 million in the Company’s legacy deposits.

  • Deposits, excluding all time deposits and CDARS deposits, increased $753.8 million, or 30%, to $3.23 billion at December 31, 2019, compared to $2.48 billion at December 31, 2018, which included $699.4 million in deposits from Presidio, at fair value, and an increase of $54.4 million in the Company’s legacy deposits. Deposits, excluding all time deposits and CDARS deposits increased $709.2 million or 28%, compared to $2.52 billion at September 30, 2019, which included $669.4 million in deposits from Presidio, at fair value, and an increase of $9.8 million in the Company’s legacy deposits.

♦ 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 December 31, 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 (unaudited)

Corp

Commerce

Guidelines

Requirement (1)

Total Risk-Based

14.6

%

13.9

%

10.0

%

10.5

%

Tier 1 Risk-Based

12.5

%

13.1

%

8.0

%

8.5

%

Common Equity Tier 1 Risk-Based

12.5

%

13.1

%

6.5

%

7.0

%

Leverage

9.8

%

10.2

%

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

December 31,

September 30,

December 31,

(in $000’s, unaudited)

2019

2019

2018

Unrealized gain (loss) on securities available-for-sale

$

1,242

$

1,202

$

(5,412

)

Remaining unamortized unrealized gain on securities

available-for-sale transferred to held-to-maturity

297

306

343

Split dollar insurance contracts liability

(4,835

)

(3,794

)

(3,722

)

Supplemental executive retirement plan liability

(6,842

)

(3,898

)

(3,995

)

Unrealized gain on interest-only strip from SBA loans

360

386

405

Total accumulated other comprehensive loss

$

(9,778

)

$

(5,798

)

$

(12,381

)








  • The increase in the negative balance of the supplemental executive retirement plan liability at December 31, 2019 was primarily due to a decrease in interest rates.

♦ Tangible equity increased to $388.9 million at December 31, 2019, compared to $271.7 million at December 31, 2018, and $301.2 million at September 30, 2019. Tangible book value per share was $6.55 at December 31, 2019, compared to $6.28 at December 31, 2018, and $6.92 at September 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 our 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) 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; (21) inability of our framework to manage risks associated with our business, including operational risk and credit risk; (22) risks of loss of funding of Small Business Administration or SBA loan programs, or changes in those programs; (23) compliance with governmental and regulatory requirements, including the Dodd-Frank Act and others relating to banking, consumer protection, securities , accounting and tax matters; (24) significant changes in applicable laws and regulations, including those concerning taxes, banking and securities; (25) 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; (26) 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; (27) availability of and competition for acquisition opportunities; (28) risks resulting from domestic terrorism; (29) risks of natural disasters (including earthquakes) and other events beyond our control; (30) the expected cost savings, synergies and other financial benefits from the Presidio Bank merger might not be realized within the expected time frames or at all; and (31) 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 Year Ended:

CONSOLIDATED INCOME STATEMENTS

December 31,

September 30,

December 31,

September 30,

December 31,

December 31,

December 31,

Percent

(in $000’s, unaudited)

2019

2019

2018

2019

2018

2019

2018

Change

Interest income

$

42,471

$

33,250

$

35,378

28

%

20

%

$

142,659

$

129,845

10

%

Interest expense

3,242

2,625

2,318

24

%

40

%

10,847

7,822

39

%

Net interest income before provision

for loan losses

39,229

30,625

33,060

28

%

19

%

131,812

122,023

8

%

Provision (credit) for loan losses

3,223

(576

)

142

660

%

2170

%

846

7,421

(89

)

%

Net interest income after provision

for loan losses

36,006

31,201

32,918

15

%

9

%

130,966

114,602

14

%

Noninterest income:

Service charges and fees on deposit accounts

1,140

1,032

1,132

10

%

1

%

4,510

4,113

10

%

Increase in cash surrender value of

life insurance

405

336

229

21

%

77

%

1,404

1,045

34

%

(Loss) gain on sales of securities

(217

)

330

(166

)

%

N/A

%

661

266

148

%

Gain on sales of SBA loans

358

156

147

129

%

144

%

689

698

(1

)

%

Servicing income

156

139

176

12

%

(11

)

%

636

709

(10

)

%

Other

551

625

709

(12

)

%

(22

)

%

2,344

2,743

(15

)

%

Total noninterest income

2,393

2,618

2,393

(9

)

%

0

%

10,244

9,574

7

%

Noninterest expense:

Salaries and employee benefits

18,819

10,467

9,699

80

%

94

%

50,754

45,001

13

%

Occupancy and equipment

2,013

1,550

1,484

30

%

36

%

6,647

5,411

23

%

Professional fees

899

789

853

14

%

(5

)

%

3,259

1,969

66

%

Other

8,895

5,103

4,905

74

%

81

%

24,238

23,140

5

%

Total noninterest expense

30,626

17,909

16,941

71

%

81

%

84,898

75,521

12

%

Income before income taxes

7,773

15,910

18,370

(51

)

%

(58

)

%

56,312

48,655

16

%

Income tax expense

2,088

4,633

5,138

(55

)

%

59

%

15,851

13,324

19

%

Net income

$

5,685

$

11,277

$

13,232

(50

)

%

(57

)

%

$

40,461

$

35,331

15

%

PER COMMON SHARE DATA

(unaudited)

Basic earnings per share

$

0.10

$

0.26

$

0.31

(62

)

%

(68

)

%

$

0.87

$

0.85

2

%

Diluted earnings per share

$

0.10

$

0.26

$

0.30

(61

)

%

(67

)

%

$

0.84

$

0.84

0

%

Weighted average shares outstanding - basic

57,168,605

43,258,983

43,079,470

32

%

33

%

46,684,384

41,469,211

13

%

Weighted average shares outstanding - diluted

58,361,976

43,796,904

43,691,222

33

%

34

%

47,906,229

42,182,939

14

%

Common shares outstanding at period-end

59,368,156

43,509,406

43,288,750

36

%

37

%

59,368,156

43,288,750

37

%

Dividend per share

$

0.12

$

0.12

$

0.11

0

%

9

%

$

0.48

$

0.44

9

%

Book value per share

$

9.71

$

9.09

$

8.49

7

%

14

%

$

9.71

$

8.49

14

%

Tangible book value per share

$

6.55

$

6.92

$

6.28

(5

)

%

4

%

$

6.55

$

6.28

4

%

KEY FINANCIAL RATIOS

(unaudited)

Annualized return on average equity

4.04

%

11.44

%

14.68

%

(65

)

%

(72

)

%

9.51

%

10.79

%

(12

)

%

Annualized return on average tangible equity

5.96

%

15.08

%

20.08

%

(60

)

%

(70

)

%

13.09

%

14.41

%

(9

)

%

Annualized return on average assets

0.55

%

1.44

%

1.64

%

(62

)

%

(66

)

%

1.21

%

1.16

%

4

%

Annualized return on average tangible assets

0.57

%

1.49

%

1.69

%

(62

)

%

(66

)

%

1.25

%

1.19

%

5

%

Net interest margin (fully tax equivalent)

4.15

%

4.24

%

4.42

%

(2

)

%

(6

)

%

4.28

%

4.31

%

(1

)

%

Efficiency ratio

73.58

%

53.87

%

47.78

%

37

%

54

%

59.76

%

57.39

%

4

%

AVERAGE BALANCES

(in $000’s, unaudited)

Average assets

$

4,124,018

$

3,103,043

$

3,208,177

33

%

29

%

$

3,353,770

$

3,055,636

10

%

Average tangible assets

$

3,943,725

$

3,008,602

$

3,112,065

31

%

27

%

$

3,237,289

$

2,973,238

9

%

Average earning assets

$

3,762,239

$

2,878,590

$

2,980,207

31

%

26

%

$

3,094,589

$

2,844,350

9

%

Average loans held-for-sale

$

3,299

$

4,171

$

5,435

(21

)

%

(39

)

%

$

3,714

$

4,084

(9

)

%

Average total loans

$

2,442,802

$

1,851,669

$

1,868,186

32

%

31

%

$

1,991,203

$

1,796,931

11

%

Average deposits

$

3,432,771

$

2,612,252

$

2,752,120

31

%

25

%

$

2,819,932

$

2,633,287

7

%

Average demand deposits - noninterest-bearing

$

1,452,893

$

1,041,712

$

1,107,813

39

%

31

%

$

1,131,098

$

1,029,860

10

%

Average interest-bearing deposits

$

1,979,878

$

1,570,540

$

1,644,307

26

%

20

%

$

1,688,834

$

1,603,427

5

%

Average interest-bearing liabilities

$

2,027,106

$

1,610,168

$

1,683,790

26

%

20

%

$

1,730,320

$

1,642,803

5

%

Average equity

$

558,478

$

391,086

$

357,505

43

%

56

%

$

425,674

$

327,557

30

%

Average tangible equity

$

378,185

$

296,645

$

261,393

27

%

45

%

$

309,193

$

245,159

26

%




For the Quarter Ended:

CONSOLIDATED INCOME STATEMENTS

December 31,

September 30,

June 30,

March 31,

December 31,

(in $000’s, unaudited)

2019

2019

2019

2019

2018

Interest income

$

42,471

$

33,250

$

33,489

$

33,449

$

35,378

Interest expense

3,242

2,625

2,573

2,407

2,318

Net interest income before provision

for loan losses

39,229

30,625

30,916

31,042

33,060

Provision (credit) for loan losses

3,223

(576

)

(740

)

(1,061

)

142

Net interest income after provision

for loan losses

36,006

31,201

31,656

32,103

32,918

Noninterest income:

Service charges and fees on deposit accounts

1,140

1,032

1,177

1,161

1,132

Increase in cash surrender value of

life insurance

405

336

333

330

229

(Loss) gain on sales of securities

(217

)

330

548

Gain on sales of SBA loans

358

156

36

139

147

Servicing income

156

139

150

191

176

Other

551

625

521

647

709

Total noninterest income

2,393

2,618

2,765

2,468

2,393

Noninterest expense:

Salaries and employee benefits

18,819

10,467

10,698

10,770

9,699

Occupancy and equipment

2,013

1,550

1,578

1,506

1,484

Professional fees

899

789

753

818

853

Other

8,895

5,103

5,416

4,824

4,905

Total noninterest expense

30,626

17,909

18,445

17,918

16,941

Income before income taxes

7,773

15,910

15,976

16,653

18,370

Income tax expense

2,088

4,633

4,623

4,507

5,138

Net income

$

5,685

$

11,277

$

11,353

$

12,146

$

13,232

PER COMMON SHARE DATA

(unaudited)

Basic earnings per share

$

0.10

$

0.26

$

0.26

$

0.28

$

0.31

Diluted earnings per share

$

0.10

$

0.26

$

0.26

$

0.28

$

0.30

Weighted average shares outstanding - basic

57,168,605

43,258,983

43,202,562

43,108,208

43,079,470

Weighted average shares outstanding - diluted

58,361,976

43,796,904

43,721,451

43,670,341

43,691,222

Common shares outstanding at period-end

59,368,156

43,509,406

43,498,406

43,323,753

43,288,750

Dividend per share

$

0.12

$

0.12

$

0.12

$

0.12

$

0.11

Book value per share

$

9.71

$

9.09

$

8.92

$

8.74

$

8.49

Tangible book value per share

$

6.55

$

6.92

$

6.75

$

6.54

$

6.28

KEY FINANCIAL RATIOS

(unaudited)

Annualized return on average equity

4.04

%

11.44

%

11.96

%

13.28

%

14.68

%

Annualized return on average tangible equity

5.96

%

15.08

%

15.94

%

17.90

%

20.08

%

Annualized return on average assets

0.55

%

1.44

%

1.48

%

1.58

%

1.64

%

Annualized return on average tangible assets

0.57

%

1.49

%

1.53

%

1.63

%

1.69

%

Net interest margin (fully tax equivalent)

4.15

%

4.24

%

4.38

%

4.38

%

4.42

%

Efficiency ratio

73.58

%

53.87

%

54.76

%

53.47

%

47.78

%

AVERAGE BALANCES

(in $000’s, unaudited)

Average assets

$

4,124,018

$

3,103,043

$

3,070,043

$

3,109,583

$

3,208,177

Average tangible assets

$

3,943,725

$

3,008,602

$

2,975,096

$

3,014,029

$

3,112,065

Average earning assets

$

3,762,239

$

2,878,590

$

2,844,677

$

2,885,591

$

2,980,207

Average loans held-for-sale

$

3,299

$

4,171

$

4,256

$

3,125

$

5,435

Average total loans

$

2,442,802

$

1,851,669

$

1,831,218

$

1,833,965

$

1,868,186

Average deposits

$

3,432,771

$

2,612,252

$

2,590,933

$

2,637,308

$

2,752,120

Average demand deposits - noninterest-bearing

$

1,452,893

$

1,041,712

$

1,001,914

$

1,024,142

$

1,107,813

Average interest-bearing deposits

$

1,979,878

$

1,570,540

$

1,589,019

$

1,613,166

$

1,644,307

Average interest-bearing liabilities

$

2,027,106

$

1,610,168

$

1,628,554

$

1,652,658

$

1,683,790

Average equity

$

558,478

$

391,086

$

380,605

$

370,792

$

357,505

Average tangible equity

$

378,185

$

296,645

$

285,658

$

275,238

$

261,393




End of Period:

Percent Change From:

CONSOLIDATED BALANCE SHEETS

December 31,

September 30,

December 31,

September 30,

December 31,

(in $000’s, unaudited)

2019

2019

2018

2019

2018

ASSETS

Cash and due from banks

$

49,447

$

48,121

$

30,273

3

%

63

%

Other investments and interest-bearing deposits

in other financial institutions

407,923

367,662

134,295

11

%

204

%

Securities available-for-sale, at fair value

404,825

333,101

459,043

22

%

(12

)

%

Securities held-to-maturity, at amortized cost

366,560

342,033

377,198

7

%

(3

)

%

Loans held-for-sale - SBA, including deferred costs

1,052

3,571

2,649

(71

)

%

(60

)

%

Loans:

Commercial

678,696

528,060

597,763

29

%

14

%

Real estate:

CRE

1,495,903

1,080,235

994,067

38

%

50

%

Land and construction

147,109

96,610

122,358

52

%

20

%

Home equity

136,259

111,610

109,112

22

%

25

%

Residential mortgages

55,128

47,276

50,979

17

%

8

%

Consumer

21,068

11,701

12,453

80

%

69

%

Loans

2,534,163

1,875,492

1,886,732

35

%

34

%

Deferred loan fees, net

(319

)

(105

)

(327

)

204

%

(2

)

%

Total loans, net of deferred fees

2,533,844

1,875,387

1,886,405

35

%

34

%

Allowance for loan losses

(23,285

)

(25,895

)

(27,848

)

(10

)

%

(16

)

%

Loans, net

2,510,559

1,849,492

1,858,557

36

%

35

%

Company-owned life insurance

76,027

62,858

61,859

21

%

23

%

Premises and equipment, net

8,250

6,849

7,137

20

%

16

%

Goodwill

167,420

83,753

83,753

100

%

100

%

Other intangible assets

20,415

10,346

12,007

97

%

70

%

Accrued interest receivable and other assets

96,985

74,685

69,791

30

%

39

%

Total assets

$

4,109,463

$

3,182,471

$

3,096,562

29

%

33

%

LIABILITIES AND SHAREHOLDERS’ EQUITY

Liabilities:

Deposits:

Demand, noninterest-bearing

$

1,450,873

$

1,094,953

$

1,021,582

33

%

42

%

Demand, interest-bearing

798,375

666,054

702,000

20

%

14

%

Savings and money market

982,430

761,471

754,277

29

%

30

%

Time deposits-under $250

54,361

53,560

58,661

1

%

(7

)

%

Time deposits-$250 and over

99,882

95,543

86,114

5

%

16

%

CDARS - money market and time deposits

28,847

17,409

14,898

66

%

94

%

Total deposits

3,414,768

2,688,990

2,637,532

27

%

29

%

Subordinated debt, net of issuance costs

39,554

39,507

39,369

0

%

0

%

Other short-term borrowings

328

N/A

N/A

Accrued interest payable and other liabilities

78,105

58,628

52,195

33

%

50

%

Total liabilities

3,532,755

2,787,125

2,729,096

27

%

29

%

Shareholders’ Equity:

Common stock

489,745

302,983

300,844

62

%

63

%

Retained earnings

96,741

98,161

79,003

(1

)

%

22

%

Accumulated other comprehensive loss

(9,778

)

(5,798

)

(12,381

)

(69

)

%

21

%

Total Shareholders' Equity

576,708

395,346

367,466

46

%

57

%

Total liabilities and shareholders’ equity

$

4,109,463

$

3,182,471

$

3,096,562

29

%

33

%




End of Period:

CONSOLIDATED BALANCE SHEETS

December 31,

September 30,

June 30,

March 31,

December 31,

(in $000’s, unaudited)

2019

2019

2019

2019

2018

ASSETS

Cash and due from banks

$

49,447

$

48,121

$

36,302

$

38,699

$

30,273

Other investments and interest-bearing deposits

in other financial institutions

407,923

367,662

239,710

196,278

134,295

Securities available-for-sale, at fair value

404,825

333,101

383,156

452,521

459,043

Securities held-to-maturity, at amortized cost

366,560

342,033

351,399

367,023

377,198

Loans held-for-sale - SBA, including deferred costs

1,052

3,571

5,202

3,216

2,649

Loans:

Commercial

678,696

528,060

567,529

559,718

597,763

Real estate:

CRE

1,495,903

1,080,235

1,037,885

1,012,641

994,067

Land and construction

147,109

96,610

97,297

98,222

122,358

Home equity

136,259

111,610

116,057

118,448

109,112

Residential mortgages

55,128

47,276

48,944

49,786

50,979

Consumer

21,068

11,701

10,279

9,690

12,453

Loans

2,534,163

1,875,492

1,877,991

1,848,505

1,886,732

Deferred loan fees, net

(319

)

(105

)

(224

)

(187

)

(327

)

Total loans, net of deferred fees

2,533,844

1,875,387

1,877,767

1,848,318

1,886,405

Allowance for loan losses

(23,285

)

(25,895

)

(26,631

)

(27,318

)

(27,848

)

Loans, net

2,510,559

1,849,492

1,851,136

1,821,000

1,858,557

Company-owned life insurance

76,027

62,858

62,522

62,189

61,859

Premises and equipment, net

8,250

6,849

6,975

6,998

7,137

Goodwill

167,420

83,753

83,753

83,753

83,753

Other intangible assets

20,415

10,346

10,900

11,454

12,007

Accrued interest receivable and other assets

96,985

74,685

76,976

72,746

69,791

Total assets

$

4,109,463

$

3,182,471

$

3,108,031

$

3,115,877

$

3,096,562

LIABILITIES AND SHAREHOLDERS’ EQUITY

Liabilities:

Deposits:

Demand, noninterest-bearing

$

1,450,873

$

1,094,953

$

994,082

$

1,016,770

$

1,021,582

Demand, interest-bearing

798,375

666,054

682,114

704,996

702,000

Savings and money market

982,430

761,471

788,832

759,306

754,277

Time deposits-under $250

54,361

53,560

53,351

56,385

58,661

Time deposits-$250 and over

99,882

95,543

88,519

90,042

86,114

CDARS - money market and time deposits

28,847

17,409

15,575

12,745

14,898

Total deposits

3,414,768

2,688,990

2,622,473

2,640,244

2,637,532

Subordinated debt, net of issuance costs

39,554

39,507

39,461

39,414

39,369

Other short-term borrowings

328

Accrued interest payable and other liabilities

78,105

58,628

57,989

57,703

52,195

Total liabilities

3,532,755

2,787,125

2,719,923

2,737,361

2,729,096

Shareholders’ Equity:

Common stock

489,745

302,983

302,305

301,550

300,844

Retained earnings

96,741

98,161

92,105

85,953

79,003

Accumulated other comprehensive loss

(9,778

)

(5,798

)

(6,302

)

(8,987

)

(12,381

)

Total Shareholders' Equity

576,708

395,346

388,108

378,516

367,466

Total liabilities and shareholders’ equity

$

4,109,463

$

3,182,471

$

3,108,031

$

3,115,877

$

3,096,562



End of Period:

Percent Change From:

CREDIT QUALITY DATA

December 31,

September 30,

December 31,

September 30,

December 31,

(in $000’s, unaudited)

2019

2019

2018

2019

2018

Nonaccrual loans - held-for-investment

$

8,675

$

13,638

$

13,699

(36

)

%

(37

)

%

Restructured and loans over 90 days past due

and still accruing

1,153

609

1,188

89

%

(3

)

%

Total nonperforming loans

9,828

14,247

14,887

(31

)

%

(34

)

%

Foreclosed assets

N/A

N/A

Total nonperforming assets

$

9,828

$

14,247

$

14,887

(31

)

%

(34

)

%

Other restructured loans still accruing

$

436

$

247

$

253

77

%

72

%

Net charge-offs (recoveries) during the quarter

$

5,833

$

160

$

(280

)

3546

%

2183

%

Provision (credit) for loan losses during the quarter

$

3,223

$

(576

)

$

142

660

%

2170

%

Allowance for loan losses

$

23,285

$

25,895

$

27,848

(10

)

%

(16

)

%

Classified assets

$

32,579

$

20,225

$

23,409

61

%

39

%

Allowance for loan losses to total loans

0.92

%

1.38

%

1.48

%

(33

)

%

(38

)

%

Allowance for loan losses to total nonperforming loans

236.93

%

181.76

%

187.06

%

30

%

27

%

Nonperforming assets to total assets

0.24

%

0.45

%

0.48

%

(47

)

%

(50

)

%

Nonperforming loans to total loans

0.39

%

0.76

%

0.79

%

(49

)

%

(51

)

%

Classified assets to Heritage Commerce Corp

Tier 1 capital plus allowance for loan losses

8

%

6

%

8

%

33

%

0

%

Classified assets to Heritage Bank of Commerce

Tier 1 capital plus allowance for loan losses

7

%

6

%

7

%

17

%

0

%

OTHER PERIOD-END STATISTICS

(in $000’s, unaudited)

Heritage Commerce Corp:

Tangible common equity (1)

$

388,873

$

301,247

$

271,706

29

%

43

%

Shareholders’ equity / total assets

14.03

%

12.42

%

11.87

%

13

%

18

%

Tangible common equity / tangible assets (2)

9.92

%

9.75

%

9.05

%

2

%

10

%

Loan to deposit ratio

74.20

%

69.74

%

71.52

%

6

%

4

%

Noninterest-bearing deposits / total deposits

42.49

%

40.72

%

38.73

%

4

%

10

%

Total risk-based capital ratio

14.6

%

16.2

%

15.0

%

(10

)

%

(3

)

%

Tier 1 risk-based capital ratio

12.5

%

13.3

%

12.0

%

(6

)

%

4

%

Common Equity Tier 1 risk-based capital ratio

12.5

%

13.3

%

12.0

%

(6

)

%

4

%

Leverage ratio

9.8

%

10.0

%

8.9

%

(2

)

%

10

%

Heritage Bank of Commerce:

Total risk-based capital ratio

13.9

%

15.2

%

14.0

%

(9

)

%

(1

)

%

Tier 1 risk-based capital ratio

13.1

%

14.1

%

12.8

%

(7

)

%

2

%

Common Equity Tier 1 risk-based capital ratio

13.1

%

14.1

%

12.8

%

(7

)

%

2

%

Leverage ratio

10.2

%

10.6

%

9.4

%

(4

)

%

9

%

(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

December 31,

September 30,

June 30,

March 31,

December 31,

(in $000’s, unaudited)

2019

2019

2019

2019

2018

Nonaccrual loans - held-for-investment

$

8,675

$

13,638

$

15,695

$

15,958

$

13,699

Restructured and loans over 90 days past due

and still accruing

1,153

609

1,323

1,357

1,188

Total nonperforming loans

9,828

14,247

17,018

17,315

14,887

Foreclosed assets

Total nonperforming assets

$

9,828

$

14,247

$

17,018