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CST: 26/08/2019 03:14:20   

Heritage Commerce Corp Earns $11.4 Million for the Second Quarter of 2019 and $23.5 Million for the Six Months Ended June 30, 2019

31 Days ago

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

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

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

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

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

Operating Results:

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Balance Sheet Review, Capital Management and Credit Quality:

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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


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

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

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

Proposed Acquisition of Presidio Bank Update :

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

Heritage Commerce Corp , a bank holding company established in February 1998, is the parent company of Heritage Bank of Commerce, established in 1994 and headquartered in San Jose, CA with full-service branches in Danville, Fremont, Gilroy, Hollister, Livermore, Los Altos, Los Gatos, Morgan Hill, Pleasanton, Redwood City, San Jose, San Mateo, Sunnyvale, and Walnut Creek.  Heritage Bank of Commerce is an SBA Preferred Lender.  Bay View Funding, a subsidiary of Heritage Bank of Commerce, is based in Santa Clara, CA and provides business-essential working capital factoring financing to various industries throughout the United States.  For more information, please visit www.heritagecommercecorp.com.

Forward-Looking Statement Disclaimer

These forward-looking statements are subject to various risks and uncertainties that may be outside our control and our actual results could differ materially from our projected results.  Risks and uncertainties that could cause our financial performance to differ materially from our goals, plans, expectations and projections expressed in forward-looking statements include those set forth in our filings with the Securities and Exchange Commission (“SEC”), Item 1A of the Company’s Annual Report on Form 10-K for the year ended December 31, 2018, and the following: (1) current and future economic and market conditions in the United States generally or in the communities we serve, including the effects of declines in property values and overall slowdowns in economic growth should these events occur; (2) effects of and changes in trade, monetary and fiscal policies and laws, including the interest rate policies of the Federal Open Market Committee of the Federal Reserve Board; (3) our ability to anticipate interest rate changes and manage interest rate risk; (4) changes in inflation, interest rates, and market liquidity which may impact interest margins and impact funding sources; (5) volatility in credit and equity markets and its effect on the global economy; (6) our ability to effectively compete with other banks and financial services companies and the effects of competition in the financial services industry on our business; (7) our ability to achieve loan growth and attract deposits; (8) risks associated with concentrations in real estate related loans; (9) the relative strength or weakness of the commercial and real estate markets where are borrowers are located, including related asset and market prices; (10) other than temporary impairment charges to our securities portfolio; (11) changes in the level of nonperforming assets and charge offs and other credit quality measures, and their impact on the adequacy of the Company’s allowance for loan losses and the Company’s provision for loan losses; (12) increased capital requirements  for our continual growth or as imposed by banking regulators, which may require us to raise capital at a time when capital is not available on favorable terms or at all; (13) regulatory limits on Heritage Bank of Commerce’s ability to pay dividends to the Company; (14) changes in our capital management policies, including those regarding business combinations, dividends, and share repurchases; (15) operational issues stemming from, and/or capital spending necessitated by, the potential need to adapt to industry changes in information technology systems, on which we are highly dependent; (16) our inability to attract, recruit,  and retain qualified officers and other personnel could harm our ability to implement our strategic plan, impair our relationships with customers and adversely affect our business, results of operations and growth prospects; (17) the potential increase in reserves and allowance for loan loss as a result of the transition to the current expected credit loss standard (“CECL”) established by the Financial Accounting Standards Board to account for expected credit losses; (18) possible impairment of our goodwill and other intangible assets; (19) possible  adjustment of the valuation of our deferred tax assets; (20) expected cost savings in connection with the consolidation of recent acquisitions may not be fully realized or realized within the expected time frames, deposit attrition, customer loss; (21) our ability to keep pace with technological changes, including our ability to identify and address cyber-security risks such as data security breaches, “denial of service” attacks, “hacking” and identity theft; (22) inability of our framework to manage risks associated with our business, including operational risk and credit risk; (23) risks of loss of funding of Small Business Administration or SBA loan programs, or changes in those programs; (24) compliance with governmental and regulatory requirements, including the Dodd-Frank Act and others relating to banking, consumer protection, securities , accounting and tax matters; (25) significant changes in applicable laws and regulations, including those concerning taxes, banking and securities; (26) effect of changes in accounting policies and practices, as may be adopted by the regulatory agencies, as well as the Public Company Accounting Oversight Board, the Financial Accounting Standards Board and other accounting standard setters; (27) costs and effects of legal and regulatory developments, including resolution of legal proceedings or regulatory or other governmental inquiries, and the results of regulatory examinations or reviews; (28) availability of and competition for acquisition opportunities; (29) risks resulting from domestic terrorism; (30) risks of natural disasters (including earthquakes) and other events beyond our control; (31) the expected cost savings, synergies and other financial benefits from the Presidio Bank acquisition  might not be realized within the expected time frames or at all; governmental approval of the Presidio Bank acquisition may not be obtained or adverse regulatory conditions may be imposed in connection with governmental approvals of the acquisition; conditions to the closing of the Presidio Bank acquisition may not be satisfied; Presidio’s shareholders may fail to provide the requisite consents to approve the consummation of the acquisition; the Company’s shareholders may fail to approve the issuance of the Company’s common stock in connection with the proposed Presidio Bank acquisition; and (32) our success in managing the risks involved in the foregoing factors.

Additional Information About the Proposed Acquisition of Presidio Bank:

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

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

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

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

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

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

Member FDIC

                                               
    For the Quarter Ended:   Percent Change From:     For the Six Months Ended:
CONSOLIDATED INCOME STATEMENTS   June 30,    March 31,    June 30,    March 31,    June 30,      June 30,    June 30,    Percent  
(in $000’s, unaudited)   2019   2019   2018   2019   2018     2019   2018   Change  
Interest income   $  33,489     $  33,449     $  31,980     0   5   %   $  66,938     $  59,857   12   %
Interest expense      2,573        2,407        1,816     7   42   %      4,980        3,345   49   %
Net interest income before provision for loan losses      30,916        31,042        30,164     0   2   %      61,958        56,512   10   %
Provision (credit) for loan losses      (740 )      (1,061 )      7,198     30   (110 ) %      (1,801 )      7,704   (123 ) %
Net interest income after provision for loan losses      31,656        32,103        22,966     (1 ) 38   %      63,759        48,808   31   %
Noninterest income:                                              
Service charges and fees on deposit accounts      1,177        1,161        972     1   21   %      2,338        1,874   25   %
Gain on sales of securities      548        —        179     N/A   206   %      548        266   106   %
Increase in cash surrender value of life insurance      333        330        237     1   41   %      663        600   11   %
Servicing income      150        191        189     (21 ) (21 ) %      341        370   (8 ) %
Gain on sales of SBA loans      36        139        80     (74 ) (55 ) %      175        315   (44 ) %
Other      521        647        1,123     (19 ) (54 ) %      1,168        1,550   (25 ) %
Total noninterest income      2,765        2,468        2,780     12   (1 ) %      5,233        4,975   5   %
Noninterest expense:                                              
Salaries and employee benefits      10,698        10,770        14,806     (1 ) (28 ) %      21,468        24,583   (13 ) %
Occupancy and equipment      1,578        1,506        1,262     5   25   %      3,084        2,368   30   %
Professional fees      753        818        (289 )   (8 ) 361   %      1,571        395   298   %
Other      5,416        4,824        9,083     12   (40 ) %      10,240        13,506   (24 ) %
Total noninterest expense      18,445        17,918        24,862     3   (26 ) %      36,363        40,852   (11 ) %
Income before income taxes      15,976        16,653        884     (4 ) 1707   %      32,629        12,931   152   %
Income tax expense      4,623        4,507        (31 )   3   15013   %      9,130        3,207   185   %
Net income   $  11,353     $  12,146     $  915     (7 ) 1141   %   $  23,499     $  9,724   142   %
                                               
PER COMMON SHARE DATA                                              
(unaudited)                                              
Basic earnings per share   $  0.26     $  0.28     $  0.02     (7 ) 1200   %   $  0.54     $  0.24   125   %
Diluted earnings per share   $  0.26     $  0.28     $  0.02     (7 ) 1200   %   $  0.54     $  0.24   125   %
Weighted average shares outstanding - basic      43,202,562        43,108,208        41,925,616     0   3   %      43,155,360        40,083,056   8   %
Weighted average shares outstanding - diluted      43,721,451        43,670,341        42,508,674     0   3   %      43,695,117        40,660,083   7   %
Common shares outstanding at period-end      43,498,406        43,323,753        43,222,184     0   1   %      43,498,406        43,222,184   1   %
Dividend per share   $  0.12     $  0.12     $  0.11     0   9   %   $  0.24     $  0.22   9   %
Book value per share   $  8.92     $  8.74     $  8.01     2   11   %   $  8.92     $  8.01   11   %
Tangible book value per share   $  6.75     $  6.54     $  5.77     3   17   %   $  6.75     $  5.77   17   %
                                               
KEY FINANCIAL RATIOS                                              
(unaudited)                                              
Annualized return on average equity      11.96      13.28      1.11   (10 ) 977   %      12.61      6.52 93   %
Annualized return on average tangible equity      15.94      17.90      1.49   (11 ) 970   %      16.89      8.43 100   %
Annualized return on average assets      1.48      1.58      0.12   (6 ) 1133   %      1.53      0.67 128   %
Annualized return on average tangible assets      1.53      1.63      0.12   (6 ) 1175   %      1.58      0.69 129   %
Net interest margin (fully tax equivalent)      4.38      4.38      4.30   0   2   %      4.38      4.22 4   %
Efficiency ratio      54.76      53.47      75.47   2   (27 ) %      54.12      66.44 (19 ) %
                                               
AVERAGE BALANCES                                              
(in $000’s, unaudited)                                              
Average assets   $  3,070,043     $  3,109,583     $  3,046,566     (1 ) 1   %   $  3,089,704     $  2,908,210   6   %
Average tangible assets   $  2,975,096     $  3,014,029     $  2,961,335     (1 ) 0   %   $  2,994,455     $  2,839,917   5   %
Average earning assets   $  2,844,677     $  2,885,591     $  2,826,786     (1 ) 1   %   $  2,865,021     $  2,713,500   6   %
Average loans held-for-sale   $  4,256     $  3,125     $  3,410     36   25   %   $  3,693     $  3,328   11   %
Average total loans   $  1,831,218     $  1,833,965     $  1,835,001     0   0   %   $  1,832,584     $  1,700,918   8   %
Average deposits   $  2,590,933     $  2,637,308     $  2,622,580     (2 ) (1 ) %   $  2,613,993     $  2,514,057   4   %
Average demand deposits - noninterest-bearing   $  1,001,914     $  1,024,142     $  991,902     (2 ) 1   %   $  1,012,967     $  969,002   5   %
Average interest-bearing deposits   $  1,589,019     $  1,613,166     $  1,630,678     (1 ) (3 ) %   $  1,601,026     $  1,545,055   4   %
Average interest-bearing liabilities   $  1,628,554     $  1,652,658     $  1,670,033     (1 ) (2 ) %   $  1,640,539     $  1,584,344   4   %
Average equity   $  380,605     $  370,792     $  331,210     3   15   %   $  375,751     $  300,943   25   %
Average tangible equity   $  285,658     $  275,238     $  245,979     4   16   %   $  280,502     $  232,650   21   %


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


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


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


                             
    End of Period:   Percent Change From:  
CREDIT QUALITY DATA   June 30,    March 31,    June 30,    March 31,    June 30,   
(in $000’s, unaudited)   2019
  2019
  2018   2019     2018    
Nonaccrual loans - held-for-investment   $  15,695   $  15,958   $  26,034   (2 ) (40 ) %
Restructured and loans over 90 days past due and still accruing      1,323      1,357      511   (3 ) 159   %
Total nonperforming loans      17,018      17,315      26,545   (2 ) (36 ) %
Foreclosed assets      —      —      —   N/A   N/A  
Total nonperforming assets   $  17,018   $  17,315   $  26,545   (2 ) (36 ) %
Other restructured loans still accruing   $  175   $  201   $  265   (13 ) (34 ) %
Net charge-offs (recoveries) during the quarter   $  (53 ) $  (531 ) $  673   90   (108 ) %
Provision (credit) for loan losses during the quarter   $  (740 ) $  (1,061 ) $  7,198   30   (110 ) %
Allowance for loan losses   $  26,631   $  27,318   $  26,664   (3 ) 0   %
Classified assets   $  31,176   $  25,176   $  32,264   24   (3 ) %
Allowance for loan losses to total loans      1.42    1.48    1.36 (4 ) 4   %
Allowance for loan losses to total nonperforming loans      156.49    157.77    100.45 (1 ) 56   %
Nonperforming assets to total assets      0.55    0.56    0.85 (2 ) (35 ) %
Nonperforming loans to total loans      0.91    0.94    1.36 (3 ) (33 ) %
Classified assets to Heritage Commerce Corp                            
Tier 1 capital plus allowance for loan losses      10    8    11 25   (9 ) %
Classified assets to Heritage Bank of Commerce                            
Tier 1capital plus allowance for loan losses      9    8    11 13   (18 ) %
                             
OTHER PERIOD-END STATISTICS                            
(in $000’s, unaudited)                            
Heritage Commerce Corp:                            
Tangible common equity (1)   $  293,455   $  283,309   $  249,559   4   18   %
Shareholders’ equity / total assets      12.49    12.15    11.09 3   13   %
Tangible common equity / tangible assets (2)      9.74    9.38    8.25 4   18   %
Loan to deposit ratio      71.60    70.01    72.91 2   (2 ) %
Noninterest-bearing deposits / total deposits      37.91    38.51    37.34 (2 ) 2   %
Total risk-based capital ratio      15.9    15.6    13.5 2   18   %
Tier 1 risk-based capital ratio      13.0    12.6    10.7 3   21   %
Common Equity Tier 1 risk-based capital ratio      13.0    12.6    10.7 3   21   %
Leverage ratio      9.9    9.5    8.7 4   14   %
Heritage Bank of Commerce:                            
Total risk-based capital ratio      14.9    14.6    12.5 2   19   %
Tier 1 risk-based capital ratio      13.7    13.4    11.4 2   20   %
Common Equity Tier 1 risk-based capital ratio      13.7    13.4    11.4 2   20   %
Leverage ratio      10.5    10.1    9.3 4   13   %

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

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

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

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

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



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

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

                                   
    For the Quarter Ended   For the Quarter Ended  
    June 30, 2019   March 31, 2019  
          Interest   Average         Interest   Average  
NET INTEREST INCOME AND NET INTEREST MARGIN   Average   Income/   Yield/   Average   Income/   Yield/  
(in $000’s, unaudited)   Balance   Expense   Rate   Balance   Expense   Rate  
Assets:                                  
Loans, gross (1)(2)   $  1,835,474   $  27,251      5.96 $  1,837,090   $  26,807      5.92
Securities - taxable      707,710      4,136      2.34    741,288      4,509      2.47
Securities - exempt from Federal tax (3)      85,329      692      3.25    85,943      694      3.27
Other investments and interest-bearing deposits in other financial institutions      216,164      1,556      2.89    221,270      1,585      2.91
Total interest earning assets (3)      2,844,677      33,635      4.74    2,885,591      33,595      4.72
Cash and due from banks