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CST: 05/12/2020 11:56:09   

Heritage Commerce Corp Reports Record Earnings of $13.2 Million for the Fourth Quarter of 2018 and $35.3 Million for the Full Year of 2018

680 Days ago

SAN JOSE, Calif., Jan. 24, 2019 (GLOBE NEWSWIRE) -- Heritage Commerce Corp (Nasdaq: HTBK), the holding company (the “Company”) for Heritage Bank of Commerce (the “Bank” or “HBC”), today reported record profits for both the fourth quarter of 2018 and the full year of 2018, boosted by positive operating leverage from the acquisitions made in the second quarter of 2018, lower federal income taxes, a strong net interest margin, and solid credit quality.  Net income was $13.2 million, or $0.30 per average diluted common share for the fourth quarter of 2018, compared to $1.3 million, or $0.03 per average diluted common share for the fourth quarter of 2017, and $12.4 million, or $0.28 per average diluted common share for the third quarter of 2018.  For the year ended December 31, 2018, net income was $35.3 million, or $0.84 per average diluted common share, compared to $23.8 million, or $0.62 per average diluted common share, for the year ended December 31, 2017. 

The Company acquired Tri-Valley Bank (“Tri-Valley”) and United American Bank (“United American”) in the second quarter of 2018.  Merger-related costs for the fourth quarter of 2018 and the year ended December 31, 2018 totaled $139,000 and $9.2 million, respectively, compared to $671,000 for both the fourth quarter of 2017 and the year ended December 31, 2017.  Earnings for both the fourth quarter of 2017 and the year ended December 31, 2017 were also impacted by a $7.1 million income tax expense adjustment due to the remeasurement of the Company’s net deferred tax assets (“DTA”). All results are unaudited. 

“We generated excellent fourth quarter and full year 2018 financial results, fueled by an increase in net interest income of 25% for the fourth quarter of 2018, compared to the fourth quarter of 2017, and 20% for the full year of 2018, compared to the full year of 2017. For the fourth quarter of 2018, we also experienced a strong net interest margin of 4.42%, a return on average tangible equity of 20.08%, and an improved efficiency ratio of 47.78%,” said Walter Kaczmarek, President and Chief Executive Officer.  “The tax reform legislation enacted late last year has provided us with a lower corporate tax rate, which will continue to benefit us as we grow our franchise.” 

“In 2018, total loans increased 19% and total deposits increased 6%, year-over-year,” added Mr. Kaczmarek.  “Credit quality is sound with nonperforming assets declining substantially from the preceding quarter. A single large lending relationship paid down almost half of the outstanding loan balances which had been placed on nonaccrual, reducing the recorded investment of this lending relationship from $21.8 million at September 30, 2018 to $12.0 million at December 31, 2018.  This lending relationship accounts for 81% of the nonperforming loans at December 31, 2018.” 

2018 Highlights (as of, or for the periods ended December 31, 2018, compared to December 31, 2017 and September 30, 2018, except as noted):

Operating Results:

♦  Diluted earnings per share were $0.30 for the fourth quarter of 2018, compared to $0.03 for the fourth quarter of 2017, and $0.28 for the third quarter of 2018.  Diluted earnings per share totaled $0.84 for the year ended December 31, 2018, compared to $0.62 per diluted share for the year ended December 31, 2017. 

♦  For the fourth quarter of 2018, the return on average tangible assets increased to 1.69%, and the return on average tangible equity increased to 20.08%, compared to 0.17% and 2.21%, respectively, for the fourth quarter of 2017, and 1.59% and 19.36%, respectively, for the third quarter of 2018.  The return on average tangible assets was 1.19%, and the return on average tangible equity was 14.41%, for the year ended December 31, 2018, compared to 0.88% and 10.98%, respectively, for the year ended December 31, 2017.

♦  Net interest income, before provision for loan losses, increased 25% to $33.1 million for the fourth quarter of 2018, compared to $26.4 million for the fourth quarter of 2017, and increased 2% from $32.5 million for the third quarter of 2018. For the year ended December 31, 2018, net interest income increased 20% to $122.0 million, compared to $101.5 million for the year ended December 31, 2017.

  •  For the fourth quarter of 2018, the fully tax equivalent (“FTE”) net interest margin improved 55 basis points to 4.42% from 3.87% for the fourth quarter of 2017, and improved 6 basis points from 4.36% for the third quarter of 2018, primarily due to a higher average balance of loans, an increase in the accretion of the loan purchase discount into loan interest income from the Tri-Valley and United American acquisitions, and the impact of increases in the prime rate and the rate on overnight funds.  The increase in the fourth quarter of 2018 compared to the third quarter of 2018 also benefited from an increase in the average balance of securities.

  • For the year ended December 31, 2018, the net interest margin increased 32­­ basis points to 4.31%, compared to 3.99% for the year ended December 31, 2017, primarily due to a higher average balance of loans and securities, an increase in the accretion of the loan purchase discount into loan interest income from the Tri-Valley and United American acquisitions, and the impact of increases in the prime rate and the rate on overnight funds.

♦  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, 2018   December 31, 2017  
    Average   Interest   Average   Average   Interest   Average  
(in $000’s, unaudited)   Balance   Income   Yield   Balance   Income   Yield  
Loans, core bank and asset-based lending   $  1,742,614     $  23,053    5.25 $  1,430,666     $  18,197    5.05 %
Bay View Funding factored receivables      65,521        4,012    24.29    50,827        3,271    25.53 %
Residential mortgages      38,148        268    2.79    45,277        310    2.72 %
Purchased CRE loans      34,121        311    3.62    37,465        332    3.52
Loan credit mark / accretion      (6,783 )      720    0.16    (1,229 )      124    0.03 %
Total loans   $  1,873,621     $  28,364    6.01 $  1,563,006     $  22,234    5.64 %
                                   
  • The average yield on the total loan portfolio increased to 6.01% for the fourth quarter of 2018, compared to 5.64% for the fourth quarter of 2017, 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.         
                                   
    For the Quarter Ended   For the Quarter Ended  
    December 31, 2018   September 30, 2018  
    Average   Interest   Average   Average   Interest   Average  
(in $000’s, unaudited)   Balance   Income   Yield   Balance   Income   Yield  
Loans, core bank and asset-based lending   $  1,742,614     $  23,053    5.25 $  1,780,025     $  23,374    5.21 %
Bay View Funding factored receivables      65,521        4,012    24.29    69,740        4,185    23.81 %
Residential mortgages      38,148        268    2.79    40,277        272    2.68 %
Purchased CRE loans      34,121        311    3.62    36,167        295    3.24 %
Loan credit mark / accretion      (6,783 )      720    0.16    (7,418 )      506    0.11 %
Total loans   $  1,873,621     $  28,364    6.01 $  1,918,791     $  28,632    5.92 %
                                   
  • The average yield on the total loan portfolio increased to 6.01% for the fourth quarter of 2018, compared to 5.92% for the third quarter of 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.       
                                   
    For the Year Ended   For the Year Ended  
    December 31, 2018   December 31, 2017  
    Average   Interest   Average   Average   Interest   Average  
(in $000’s, unaudited)   Balance   Income   Yield   Balance   Income   Yield  
Loans, core bank and asset-based lending   $  1,670,065     $  86,610    5.19 $  1,402,628     $  71,011    5.06 %
Bay View Funding factored receivables      59,220        14,698    24.82    45,794        11,884    25.95 %
Residential mortgages      40,998        1,118    2.73    48,266        1,294    2.68 %
Purchased CRE loans      36,080        1,257    3.48    36,807        1,292    3.51
Loan credit mark / accretion      (5,348 )      1,952    0.12    (1,573 )      865    0.06 %
Total loans   $  1,801,015     $  105,635    5.87 $  1,531,922     $  86,346    5.64 %
  • The average yield on the total loan portfolio increased to 5.87% for the year ended December 31, 2018, compared to 5.64% for the year ended December 31, 2017, primarily due to increases in the prime rate, and an increase in 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 $657,000 remains outstanding as of December 31, 2018.  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 $2.2 million remains outstanding as of December 31, 2018.  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 $3.6 million remains outstanding as of December 31, 2018.

♦  The cost of total deposits was 0.25% for the fourth quarter of 2018, compared to 0.17% for the fourth quarter of 2017 and 0.23% for the third quarter of 2018. The total cost of deposits was 0.21% for the year ended December 31, 2018, compared to 0.17% for the year ended December 31, 2017.

♦  There was a $142,000 provision for loan losses for the fourth quarter of 2018, compared to a credit to the provision for loan losses of ($291,000) for the fourth quarter of 2017, and a credit to the provision for loan losses of ($425,000) for the third quarter of 2018.  There was a $7.4 million provision for loan losses for the year ended December 31, 2018, compared to a provision for loan losses of $99,000 for the year ended December 31, 2017.  The increase in the provision for loan losses for the year ended December 31, 2018, compared to the year ended December 31, 2017, was primarily due to a single large lending relationship that was placed on nonaccrual during the second quarter of 2018.

♦  Total noninterest income decreased to $2.4 million for the fourth quarter of 2018, compared to $2.6 million for the fourth quarter of 2017, primarily due to a lower gain on sales of Small Business Administration (“SBA”) loans, a lower increase in cash surrender value of life insurance, and lower servicing income, partially offset by higher service charges and fees on deposit accounts.  Noninterest income increased from $2.2 million for the third quarter of 2018, primarily due to higher termination fees at Bay View Funding and asset-based lending fees included in other noninterest income during the fourth quarter of 2018. 

  • For the year ended December 31, 2018, noninterest income remained relatively flat at $9.6 million, compared to the year ended December 31, 2017.  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.  The proceeds from a legal settlement during the second quarter of 2018, higher service charges and fees on deposit accounts and gain on sales of securities, were offset by a lower increase in cash surrender value of life insurance proceeds, servicing income, and gain on sale of SBA loans for the year ended December 31, 2018, compared to the year ended December 31, 2017. 

♦  Total noninterest expense for the fourth quarter of 2018 was $16.9 million, compared to $15.3 million for the fourth quarter of 2017 and $17.7 million the third quarter of 2018.  Noninterest expense for the year ended December 31, 2018 was $75.5 million, compared to $60.7 million for the year ended December 31, 2017. The increase in noninterest expense for the year ended December 31, 2018, compared to the year ended December 31, 2017, was primarily due to costs related to the merger transactions and higher salaries and employee benefits as a result of annual salary increases, and additional employees and operating costs of the Tri-Valley and United American acquisitions, partially offset by lower professional fees.  The decrease in noninterest expense for the fourth quarter of 2018, compared to the third quarter of 2018, was primarily due to lower employee benefits expense.

  • Professional fees decreased to $2.0 million for the year ended December 31, 2018, compared to $3.0 million for the year ended December 31, 2017, primarily due to the recovery of $922,000 of professional fees from a legal settlement in the second quarter of 2018. 
     
  • Full time equivalent employees were 302 at December 31, 2018, 278 at December 31, 2017, and 296 at September 30, 2018.        

♦  The efficiency ratio for the fourth quarter of 2018 was 47.78%, compared to 52.82% for the fourth quarter of 2017, and 51.15% for the third quarter of 2018.  The efficiency ratio for the year ended December 31, 2018 was 57.39%, compared to 54.65% for the year ended December 31, 2017.   

♦  The Tax Cuts and Jobs Act (the “Tax Act”) was signed into law on December 22, 2017, which among other items reduced the federal corporate tax rate to 21% from 35%, effective January 1, 2018.  The enactment of the Tax Act caused our net DTA to be revalued at the new lower tax rate with resulting tax effects accounted for in the reporting period of enactment. The Company performed an analysis and determined the value of the net DTA was reduced by $7.1 million, which was recognized as a one-time, non-cash, incremental income tax expense for the fourth quarter of 2017.

  • The income tax expense for the fourth quarter of 2018 was $5.1 million, compared to income tax expense of $12.7 million for the fourth quarter of 2017, and an income tax expense of $5.0 million for the third quarter of 2018.  The effective tax rate for the fourth quarter of 2018 decreased to 28.0%, compared to 91.0% for the fourth quarter of 2017, primarily due to a lower federal corporate tax rate for the fourth quarter of 2018 and the $7.1 million DTA adjustment in the fourth quarter of 2017.  The effective tax rate for the third quarter of 2018 was 28.7%.

  • Income tax expense for the year ended December 31, 2018 was $13.3 million, compared to $26.5 million for the year ended December 31, 2017. The effective tax rate for the year ended December 31, 2018 was 27.4%, compared to 52.6% for the year ended December 31, 2017, primarily due to a lower federal corporate tax rate for the year ended December 31, 2018 and the $7.1 million DTA adjustment in the fourth quarter of 2017.

  • The difference in the effective tax rate for the periods reported compared to the combined Federal and state statutory tax rate of 29.6% for the fourth quarter of 2018 and the year ended December 31, 2018, and 42% for the fourth quarter of 2017 and the year ended December 31, 2017, 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 9% to $3.10 billion at December 31, 2018, compared to $2.84 billion at December 31, 2017, primarily due to the Tri-Valley and United American acquisitions.  As of December 31, 2018, Tri-Valley added $112.1 million in loans and $82.6 million in deposits.  As of December 31, 2018, United American added $199.1 million in loans and $217.6 million in deposits.  Total assets decreased 3% from $3.19 billion at September 30, 2018. 

♦  Securities available-for-sale, at fair value, totaled $459.0 million at December 31, 2018, compared to $391.9 million at December 31, 2017, and $319.1 million at September 30, 2018.  At December 31, 2018, the Company’s securities available-for-sale portfolio was comprised of $302.9 million agency mortgage-backed securities (all issued by U.S. Government sponsored entities), $148.7 million U.S. Treasury, and $7.4 million U.S. Government sponsored entities debt securities. The pre-tax unrealized loss on securities available-for-sale at December 31, 2018 was ($7.7) million, compared to a pre-tax unrealized loss on securities available-for-sale of ($1.5) million at December 31, 2017, and a pre-tax unrealized loss on securities available-for-sale of ($12.7) million at September 30, 2018.  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 fourth quarter of 2018, the Company purchased $147.6 million of US Treasury securities available-for-sale, with a weighted average book yield of 2.82%, and a weighted average duration of 2.25 years.  
             
♦  At December 31, 2018, securities held-to-maturity, at amortized cost, totaled $377.2 million, compared to $398.3 million at December 31, 2017, and $375.7 million at September 30, 2018.  At December 31, 2018, the Company’s securities held-to-maturity portfolio was comprised of $291.2 million agency mortgage-backed securities, and $86.0 million tax-exempt municipal bonds. During the fourth quarter of 2018, the Company purchased $14.6 million of agency mortgage-backed securities held-to-maturity, with a weighted average book yield of 3.74%, and a weighted average duration of 6.58 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, 2018   September 30, 2018   December 31, 2017  
(in $000’s, unaudited)   Balance   % to Total   Balance   % to Total   Balance   % to Total  
Commercial   $  597,763      32 $  600,594      31 $  573,296      36
Real estate:                                
CRE      994,067      52    988,491      52    772,867      49
Land and construction      122,358      6    131,548      7    100,882      6
Home equity      109,112      6    116,657      6    79,176      5
Residential mortgages      50,979      3    52,441      3    44,561      3
Consumer      12,453      1    9,932      1    12,395      1
Total Loans      1,886,732      100    1,899,663      100    1,583,177      100
Deferred loan fees, net      (327 )    —      (276 )    —      (510 )    —  
Loans, net of deferred fees    $  1,886,405      100 $  1,899,387      100 $  1,582,667      100
  • Loans, excluding loans held-for-sale, increased $303.7 million, or 19%, to $1.89 billion at December 31, 2018, compared to $1.58 billion at December 31, 2017, which included $199.1 million in loans from United American, $112.1 million in loans from Tri-Valley, and an increase of $3.1 million in the Company’s legacy portfolio, partially offset by a decrease of $7.0 million in purchased residential mortgage loans, and a decrease of $3.6 million of purchased commercial real estate (“CRE”) loans. Loans, excluding loans held-for-sale, declined (1%) to $1.89 billion at December 31, 2018, compared to $1.90 billion September 30, 2018, primarily due to payoffs in the land and construction and home equity loan portfolios.

  • The commercial loan portfolio increased $24.5 million to $597.8 million at December 31, 2018, from $573.3 million at December 31, 2017, which included $17.8 million of loans added from United American, and $9.2 million of loans added from Tri-Valley, partially offset by a decrease of $2.6 million in the Company’s legacy portfolio.  The commercial loan portfolio decreased $2.8 million from $600.6 million at September 30, 2018.  C&I line usage was 36% at December 31, 2018, compared to 37% at December 31, 2017, and 36% at September 30, 2018.

  • The CRE loan portfolio increased $221.2 million, or 29%, to $994.1 million at December 31, 2018, compared to $772.9 million at December 31, 2017, which included $133.8 million of loans added from United American, $90.7 million of loans added from Tri-Valley, partially offset by a decrease of $3.6 million in purchased CRE loans.  The CRE loan portfolio increased $5.6 million from $988.5 million at September 30, 2018.  At December 31, 2018, 40% of the CRE loan portfolio was secured by owner-occupied real estate.

  • Land and construction loans increased $21.5 million, or 21%, to $122.4 million at December 31, 2018, compared to $100.9 million at December 31, 2017, primarily due to organic growth of $17.5 million, and $4.0 million of loans added from United American.  Land and construction loans decreased $9.2 million, or (7%), from $131.5 million at September 30, 2018.

  • Home equity lines of credit increased $29.9 million, or 38%, to $109.1 million at December 31, 2018, compared to $79.2 million at December 31, 2017, which included $29.5 million of loans added from United American, and $12.2 million of loans added from Tri-Valley, partially offset by a decrease of $11.7 million in the Company’s legacy portfolio.  Home equity lines of credit decreased $7.5 million, from $116.7 million at September 30, 2018.

  • Residential mortgage loans increased $6.4 million, or 14%, to $51.0 million at December 31, 2018, compared to $44.6 million at December 31, 2017, primarily due to $13.4 million of loans added from United American, partially offset by a $7.0 million decrease in purchased residential mortgage loans.  Residential mortgage loans decreased $1.5 million, from $52.4 million at September 30, 2018.

♦  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)   2018     2018     2017     2018     2017    
Balance at beginning of period   $  27,426     $  26,664     $  19,748     $  19,658     $  19,089    
Charge-offs during the period      (166 )      (744 )      (60 )      (2,026 )      (2,239 )  
Recoveries during the period      446        1,931        261        2,795        2,709    
Net recoveries during the period      280        1,187        201        769        470    
Provision (credit) for loan losses during the period      142        (425 )      (291 )      7,421        99    
Balance at end of period   $  27,848     $  27,426     $  19,658     $  27,848     $  19,658    
                                 
Total loans, net of deferred fees   $  1,886,405     $  1,899,387     $  1,582,667     $  1,886,405     $  1,582,667    
Total nonperforming loans   $  14,887     $  24,715     $  2,485     $  14,887     $  2,485    
Allowance for loan losses to total loans      1.48      1.44      1.24   %    1.48      1.24   %
Allowance for loan losses to total nonperforming loans      187.06      110.97      791.07   %    187.06      791.07   %
  • The ALLL was 1.48% of total loans at December 31, 2018, compared to 1.24% at December 31, 2017, and 1.44% at September 30, 2018.  The ALLL to total nonperforming loans decreased to 187.06% at December 31, 2018, compared to 791.07% at December 31, 2017, primarily due to a single large lending relationship that was placed on nonaccrual during the second quarter of 2018.  The ALLL to total nonperforming loans was 110.97% at September 30, 2018.

  • Net recoveries totaled $280,000 for the fourth quarter of 2018, compared to net recoveries of $201,000 for the fourth quarter of 2017, and net recoveries of $1.2 million for the third quarter of 2018. 

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

                                 
    End of Period:  
NONPERFORMING ASSETS   December 31, 2018   September 30, 2018   December 31, 2017  
(in $000’s, unaudited)   Balance   % of Total   Balance   % of Total   Balance   % of Total  
Commercial and industrial loans   $  8,062    54 $  17,134    69 $  1,084    44 %
CRE loans      5,094    34    5,639    23    501    20 %
Restructured and loans over 90 days past due and still accruing      1,188    8    1,373    6    235    9 %
Home equity and consumer loans      326    2    342    1    380    15 %
SBA loans      217    2    227    1    166    7 %
Land and construction loans      —    —      —    —      119    5 %
Total nonperforming assets   $  14,887    100 $  24,715    100 $  2,485    100 %
  • Total NPAs were $14.9 million, or 0.48% of total assets, at December 31, 2018, compared to $2.5 million, or 0.09% of total assets, at December 31, 2017, and $24.7 million, or 0.77% of total assets, at September 30, 2018.  The increase in NPAs at December 31, 2018, compared to December 31, 2017, was primarily due to a single large lending relationship that was placed on nonaccrual during the second quarter of 2018.  The decrease in NPAs at December 31, 2018, compared to September 30, 2018, was primarily due to a reduction in loans outstanding of the single large lending relationship.  At December 31, 2018, the recorded investment of this lending relationship was $12.0 million, compared to $21.8 million at September 30, 2018.  The Company had a $6.7 million specific loan loss reserve allocated for this lending relationship at December 31, 2018, compared to a $7.0 million specific loan loss reserve at September 30, 2018. There were no foreclosed assets at December 31, 2018, December 31, 2017, or September 30, 2018.

  • Classified assets were $23.4 million, or 0.76% of total assets, at December 31, 2018, compared to $25.1 million, or 0.88% of total assets, at December 31, 2017, and $30.5 million, 0.96% of total assets, at September 30, 2018. 

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

                                 
DEPOSITS   December 31, 2018   September 30, 2018   December 31, 2017  
(in $000’s, unaudited)   Balance   % to Total   Balance   % to Total   Balance   % to Total  
Demand, noninterest-bearing   $  1,021,582    39 $  1,081,846    39 $  989,753    40 %
Demand, interest-bearing      702,000    27    670,624    24    601,929    24 %
Savings and money market      754,277    28    828,297    30    684,131    27 %
Time deposits — under $250      58,661    2    68,194    3    51,710    2 %
Time deposits — $250 and over      86,114    3    84,763    3    138,634    6 %
CDARS — interest-bearing demand,                                
  money market and time deposits      14,898    1    11,575    1    16,832    1
Total deposits   $  2,637,532    100 $  2,745,299    100 $  2,482,989    100 %
                                 
  • Total deposits increased $154.5 million, or 6%, to $2.64 billion at December 31, 2018, compared to $2.48 billion at December 31, 2017, which included $217.6 million in deposits from United American, $82.6 million in deposits from Tri-Valley, a decrease of $65.1 million in State of California certificates of deposit due to maturity, and a decrease of $80.5 million, or (3%), in the Company’s legacy deposits, which was principally attributable to three deposit-only relationships totaling approximately $95 million.  Total deposits decreased $107.8 million, or (4%), from $2.75 billion at September 30, 2018, which was primarily due to the same reason referenced above.

  • Deposits, excluding all time deposits and CDARS deposits, increased $202.0 million, or 9%, to $2.48 billion at December 31, 2018, compared to $2.28 billion at December 31, 2017, which included $195.8 million of deposits added from United American, $75.5 million of deposits added from Tri-Valley, partially offset by a decrease of $69.3 million, or (3%), in the Company’s legacy deposits.  Deposits, excluding all time deposits and CDARS deposits, at December 31, 2018 decreased $102.9 million, or (4%), compared to $2.58 billion at September 30, 2018.

  • Time deposits of $250,000 and over decreased $52.5 million, or (38%), to $86.1 million at December 31, 2018, compared to $138.6 million at December 31, 2017, which included the maturity of $65.1 million of State of California certificates of deposits, partially offset by $9.6 million of deposits added from United American, and $2.8 million of deposits added from Tri-Valley.  Time deposits of $250,000 and over at December 31, 2018 increased $1.4 million, or 2%, compared to $84.8 million at September 30, 2018.

♦  The Company’s consolidated capital ratios exceeded regulatory guidelines and the Bank’s capital ratios exceeded the regulatory guidelines for a well-capitalized financial institution under the Basel III regulatory requirements at December 31, 2018, as reflected in the following table:

                         
                Well-capitalized   Fully Phased-in
                Financial   Basel III
                Institution   Minimum
    Heritage   Heritage   Basel III   Requirement (1)
    Commerce   Bank of   Regulatory   Effective
CAPITAL RATIOS   Corp   Commerce   Guidelines   January 1, 2019
Total Risk-Based    15.0    14.0    10.0    10.5 %
Tier 1 Risk-Based    12.0    12.8    8.0    8.5 %
Common Equity Tier 1 Risk-Based    12.0    12.8    6.5    7.0 %
Leverage    8.9    9.4    5.0    4.0 %

______________

(1) Fully phased in Basel III 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)   2018     2018     2017  
Unrealized loss on securities available-for-sale   $  (5,412 )   $  (8,980 )   $  (857 )
Remaining unamortized unrealized gain on securities                  
  available-for-sale transferred to held-to-maturity      343        350        305  
Split dollar insurance contracts liability      (3,722 )      (3,740 )      (3,691 )
Supplemental executive retirement plan liability      (3,995 )      (5,417 )      (4,552 )
Reclassification due to the effects of the Tax Act      —        —        (1,019 )
Unrealized gain on interest-only strip from SBA loans      405        614        562  
  Total accumulated other comprehensive loss   $  (12,381 )   $  (17,173 )   $  (9,252 )
                   

♦  Tangible equity increased to $271.7 million at December 31, 2018, compared to $220.0 million at December 31, 2017, primarily due to the Tri-Valley and United American acquisitions.  Tangible equity was $257.2 million at September 30, 2018.  Tangible book value per share was $6.28 at December 31, 2018, compared to $5.76 at December 31, 2017, and $5.94 at September 30, 2018.
             
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, Item 1A of the Company’s Annual Report on Form 10-K for the year ended December 31, 2017, 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 effect 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) effect of the recent federal government shutdown on our SBA program; and (32) our success in managing the risks involved in the foregoing factors.

Member FDIC


                                               
    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)   2018   2018     2017     2018     2017       2018   2017     Change  
Interest income   $  35,378   $  34,610     $  28,152     2   26   %   $  129,845   $  106,911     21   %
Interest expense      2,318      2,159        1,708     7   36   %      7,822      5,387     45   %
  Net interest income before provision                                              
  for loan losses      33,060      32,451        26,444     2   25   %      122,023      101,524     20   %
Provision (credit) for loan losses      142      (425 )      (291 )   133   149   %      7,421      99     7396   %
Net interest income after provision                                              
  for loan losses      32,918      32,876        26,735     0   23   %      114,602      101,425     13   %
Noninterest income:                                              
Service charges and fees on deposit accounts      1,132      1,107        821     2   38   %      4,113      3,231     27   %
Increase in cash surrender value of                                              
  life insurance      229      216        407     6   (44 ) %      1,045      1,666     (37 ) %
Servicing income      176      163        237     8   (26 ) %      709      973     (27 ) %
Gain on sales of SBA loans      147      236        473     (38 ) (69 ) %      698      1,108     (37 ) %
Gain (loss) on sales of securities      —      —        —     N/A   N/A        266      (6 )   4533   %
Other      709      484        626     46   13   %      2,743      2,640     4   %
Total noninterest income      2,393      2,206        2,564     8   (7 ) %      9,574      9,612     0   %
Noninterest expense:                                              
Salaries and employee benefits      9,699      10,719        9,263     (10 ) 5   %      45,001      37,029     22   %
Occupancy and equipment      1,484      1,559        1,152     (5 ) 29   %      5,411      4,578     18   %
Professional fees      853      721        543     18   57   %      1,969      2,982     (34 ) %
Other      4,905      4,729        4,364     4   12   %      23,140      16,149     43   %
Total noninterest expense      16,941      17,728        15,322     (4 ) 11   %      75,521      60,738     24   %
Income before income taxes      18,370      17,354        13,977     6   31   %      48,655      50,299     (3 ) %
Income tax expense      5,138      4,979        12,719     3   (60 ) %      13,324      26,471     (50 ) %
  Net income   $  13,232   $  12,375     $  1,258     7   952   %   $  35,331   $  23,828     48   %
                                               
PER COMMON SHARE DATA                                              
(unaudited)                                              
Basic earnings per share   $  0.31   $  0.29     $  0.03     7   933   %   $  0.85   $  0.63     35   %
Diluted earnings per share   $  0.30   $  0.28     $  0.03     7   900   %   $  0.84   $  0.62     35   %
Weighted average shares outstanding - basic      43,079,470      43,230,016        38,200,325     0   13   %      41,469,211      38,095,250     9   %
Weighted average shares outstanding - diluted      43,691,222      43,731,370        38,742,454     0   13   %      42,182,939      38,610,815     9   %
Common shares outstanding at period-end      43,288,750      43,271,676        38,200,883     0   13   %      43,288,750      38,200,883     13   %
Dividend per share   $  0.11   $  0.11     $  0.10     0   10   %   $  0.44   $  0.40     10   %
Book value per share   $  8.49   $  8.17     $  7.10     4   20   %   $  8.49   $  7.10     20   %
Tangible book value per share   $  6.28   $  5.94     $  5.76     6   9   %   $  6.28   $  5.76     9   %
                                               
KEY FINANCIAL RATIOS                                              
(unaudited)                                              
Annualized return on average equity      14.68    14.03      1.80   5   716   %      10.79    8.86   22   %
Annualized return on average tangible equity      20.08    19.36      2.21   4   809   %      14.41    10.98   31   %
Annualized return on average assets      1.64    1.54      0.17   6   865   %      1.16    0.86   35   %
Annualized return on average tangible assets      1.69    1.59      0.17   6   894   %      1.19    0.88   35   %
Net interest margin (fully tax equivalent)      4.42    4.36      3.87   1   14   %      4.31    3.99   8   %
Efficiency ratio      47.78    51.15      52.82   (7 ) (10 ) %      57.39    54.65   5   %
                                               
AVERAGE BALANCES                                              
(in $000’s, unaudited)                                              
Average assets   $  3,208,177   $  3,193,139     $  2,925,001     0   10   %   $  3,055,636   $  2,755,618     11   %
Average tangible assets   $  3,112,065   $  3,096,703     $  2,873,576     0   8   %   $  2,973,238   $  2,703,686     10   %
Average earning assets   $  2,980,207   $  2,965,926     $  2,743,706     0   9   %   $  2,844,350   $  2,575,869     10   %
Average loans held-for-sale   $  5,435   $  7,076     $  4,030     (23 ) 35   %   $  4,084   $  4,634     (12 ) %
Average total loans   $  1,868,186   $  1,911,715     $  1,558,976     (2 ) 20   %   $  1,796,931   $  1,527,288     18   %
Average deposits   $  2,752,120   $  2,749,026     $  2,550,500     0   8   %   $  2,633,287   $  2,405,717     9   %
Average demand deposits - noninterest-bearing   $  1,107,813   $  1,071,638     $  1,002,808     3   10   %   $  1,029,860   $  944,275     9   %
Average interest-bearing deposits   $  1,644,307   $  1,677,388     $  1,547,692     (2 ) 6   %   $  1,603,427   $  1,461,442     10   %
Average interest-bearing liabilities   $  1,683,790   $  1,716,813     $  1,586,940     (2 ) 6   %   $  1,642,803   $  1,484,783     11   %
Average equity   $  357,505   $  349,971     $  277,535     2   29   %   $  327,557   $  268,890     22   %
Average tangible equity   $  261,393   $  253,535     $  226,110     3   16   %   $  245,159   $  216,958     13   %


                                 
    For the Quarter Ended:  
CONSOLIDATED INCOME STATEMENTS   December 31,    September 30,    June 30,   March 31,   December 31,   
(in $000’s, unaudited)   2018   2018     2018     2018   2017    
Interest income   $  35,378   $  34,610     $  31,980     $  27,877   $  28,152    
Interest expense      2,318      2,159        1,816        1,529      1,708    
  Net interest income before provision                                
  for loan losses      33,060      32,451        30,164        26,348      26,444    
Provision (credit) for loan losses      142      (425 )      7,198        506      (291 )  
Net interest income after provision                                
  for loan losses      32,918      32,876        22,966        25,842      26,735    
Noninterest income:                                
Service charges and fees on deposit accounts      1,132      1,107        972        902      821    
Increase in cash surrender value of                                
  life insurance      229      216        237        363      407    
Servicing income      176      163        189        181      237    
Gain on sales of SBA loans      147      236        80        235      473    
Gain (loss) on sales of securities      —      —        179        87      —    
Other      709      484        1,123        427      626    
Total noninterest income      2,393      2,206        2,780        2,195      2,564    
Noninterest expense:                                
Salaries and employee benefits      9,699      10,719        14,806        9,777      9,263    
Occupancy and equipment      1,484      1,559        1,262        1,106      1,152    
Professional fees      853      721        (289 )      684      543    
Other      4,905      4,729        9,083        4,423      4,364    
Total noninterest expense      16,941      17,728        24,862        15,990      15,322    
Income before income taxes      18,370      17,354        884        12,047      13,977    
Income tax expense (benefit)      5,138      4,979        (31 )      3,238      12,719    
  Net income   $  13,232   $  12,375     $  915     $  8,809   $  1,258    
                                 
PER COMMON SHARE DATA                                
(unaudited)                                
Basic earnings per share   $  0.31   $  0.29     $  0.02     $  0.23   $  0.03    
Diluted earnings per share   $  0.30   $  0.28     $  0.02     $  0.23   $  0.03    
Weighted average shares outstanding - basic      43,079,470      43,230,016        41,925,616        38,240,495      38,200,325    
Weighted average shares outstanding - diluted      43,691,222      43,731,370        42,508,674        38,814,722      38,742,454    
Common shares outstanding at period-end      43,288,750      43,271,676        43,222,184        38,269,789      38,200,883    
Dividend per share   $  0.11   $  0.11     $  0.11     $  0.11   $  0.10    
Book value per share   $  8.49   $  8.17     $  8.01     $  7.08   $  7.10    
Tangible book value per share   $  6.28   $  5.94     $  5.77     $  5.75   $  5.76    
                                 
KEY FINANCIAL RATIOS                                
(unaudited)                                
Annualized return on average equity      14.68    14.03      1.11      13.22    1.80  
Annualized return on average tangible equity      20.08    19.36      1.49      16.30    2.21  
Annualized return on average assets      1.64    1.54      0.12      1.29    0.17  
Annualized return on average tangible assets      1.69    1.59      0.12      1.31    0.17  
Net interest margin (fully tax equivalent)      4.42    4.36      4.30      4.13    3.87  
Efficiency ratio      47.78    51.15      75.47      56.02    52.82  
                                 
AVERAGE BALANCES                                
(in $000’s, unaudited)                                
Average assets   $  3,208,177   $  3,193,139     $  3,046,566     $  2,768,318   $  2,925,001    
Average tangible assets   $  3,112,065   $  3,096,703     $  2,961,335     $  2,717,152   $  2,873,576    
Average earning assets   $  2,980,207   $  2,965,926     $  2,826,786     $  2,598,954   $  2,743,706    
Average loans held-for-sale   $  5,435   $  7,076     $  3,410     $  3,246   $  4,030    
Average total loans   $  1,868,186   $  1,911,715     $  1,835,001     $  1,565,343   $  1,558,976    
Average deposits   $  2,752,120   $  2,749,026     $  2,622,580     $  2,404,327   $  2,550,500    
Average demand deposits - noninterest-bearing   $  1,107,813   $  1,071,638     $  991,902     $  945,848   $  1,002,808    
Average interest-bearing deposits   $  1,644,307   $  1,677,388     $  1,630,678     $  1,458,479   $  1,547,692    
Average interest-bearing liabilities   $  1,683,790   $  1,716,813     $  1,670,033     $  1,497,717   $  1,586,940    
Average equity   $  357,505   $  349,971     $  331,210     $  270,339   $  277,535    
Average tangible equity   $  261,393   $  253,535     $  245,979     $  219,173   $  226,110    


                             
    End of Period:   Percent Change From:  
CONSOLIDATED BALANCE SHEETS   December 31,    September 30,    December 31,    September 30,    December 31,   
(in $000’s, unaudited)   2018     2018     2017     2018     2017    
ASSETS                            
Cash and due from banks   $  30,273     $  40,831     $  31,681     (26 ) (4 ) %
Other investments and interest-bearing deposits                            
  in other financial institutions      134,295        340,198        284,541     (61 ) (53 ) %
Securities available-for-sale, at fair value      459,043        319,071        391,852     44   17   %
Securities held-to-maturity, at amortized cost      377,198        375,732        398,341     0   (5 ) %
Loans held-for-sale - SBA, including deferred costs      2,649        6,344        3,419     (58 ) (23 ) %
Loans:                            
Commercial      597,763        600,594        573,296     0   4   %
Real estate:                            
CRE      994,067        988,491        772,867     1   29   %
Land and construction      122,358        131,548        100,882     (7 ) 21   %
Home equity      109,112        116,657        79,176     (6 ) 38   %
Residential mortgages      50,979        52,441        44,561     (3 ) 14   %
Consumer      12,453        9,932        12,395     25   0   %
Loans      1,886,732        1,899,663        1,583,177     (1 ) 19   %
Deferred loan fees, net      (327 )      (276 )      (510 )   18   (36 ) %
Total loans, net of deferred fees      1,886,405        1,899,387        1,582,667     (1 ) 19   %
Allowance for loan losses      (27,848 )      (27,426 )      (19,658 )   2   42   %
Loans, net      1,858,557        1,871,961        1,563,009     (1 ) 19   %
Company-owned life insurance      61,859        61,630        60,814     0   2   %
Premises and equipment, net      7,137        7,246        7,353     (2 ) (3 ) %
Goodwill      83,753        83,752        45,664     0   83   %
Other intangible assets      12,007        12,614        5,589     (5 ) 115   %
Accrued interest receivable and other assets      69,791        73,531        51,189     (5 ) 36   %
Total assets   $  3,096,562     $  3,192,910     $  2,843,452     (3 ) 9   %
                             
LIABILITIES AND SHAREHOLDERS’ EQUITY                            
Liabilities:                            
Deposits:                            
Demand, noninterest-bearing   $  1,021,582     $  1,081,846     $  989,753     (6 ) 3   %
Demand, interest-bearing      702,000        670,624        601,929     5   17   %
Savings and money market      754,277        828,297        684,131     (9 ) 10   %
Time deposits-under $250      58,661        68,194        51,710     (14 ) 13   %
Time deposits-$250 and over      86,114        84,763        138,634     2   (38 ) %
CDARS - money market and time deposits      14,898        11,575        16,832     29   (11 ) %
Total deposits      2,637,532        2,745,299        2,482,989     (4 ) 6   %
Subordinated debt, net of issuance costs      39,369        39,322        39,183     0   0   %
Accrued interest payable and other liabilities      52,195        54,723        50,041     (5 ) 4   %
Total liabilities      2,729,096        2,839,344        2,572,213     (4 ) 6   %
                             
Shareholders’ Equity:                            
Common stock      300,844        300,208        218,355     0   38   %
Retained earnings      79,003        70,531        62,136     12   27   %
Accumulated other comprehensive loss      (12,381 )      (17,173 )      (9,252 )   28   (34 ) %
  Total Shareholders' Equity      367,466        353,566        271,239     4   35   %
  Total liabilities and shareholders’ equity   $  3,096,562     $  3,192,910     $  2,843,452     (3 ) 9   %


                               
    End of Period:
CONSOLIDATED BALANCE SHEETS   December 31,    September 30,    June 30,   March 31,   December 31, 
(in $000’s, unaudited)   2018     2018     2018     2018     2017  
ASSETS                              
Cash and due from banks   $  30,273     $  40,831     $  46,340     $  30,454     $  31,681  
Other investments and interest-bearing deposits                              
  in other financial institutions      134,295        340,198        177,448        271,535        284,541  
Securities available-for-sale, at fair value      459,043        319,071        335,923        344,766        391,852  
Securities held-to-maturity, at amortized cost      377,198        375,732        388,603        395,274        398,341  
Loans held-for-sale - SBA, including deferred costs      2,649        6,344        5,745        2,859        3,419  
Loans:                              
Commercial      597,763        600,594        609,468        572,790        573,296  
Real estate:                              
CRE      994,067        988,491        1,030,884        775,547        772,867  
Land and construction      122,358        131,548        128,891        113,470        100,882  
Home equity      109,112        116,657        121,278        76,087        79,176  
Residential mortgages      50,979        52,441        54,367        42,868        44,561  
Consumer      12,453        9,932        12,060        10,958        12,395  
Loans      1,886,732        1,899,663        1,956,948        1,591,720        1,583,177  
Deferred loan fees, net      (327 )      (276 )      (315 )      (519 )      (510 )
Total loans, net of deferred fees      1,886,405        1,899,387        1,956,633        1,591,201        1,582,667  
Allowance for loan losses      (27,848 )      (27,426 )      (26,664 )      (20,139 )      (19,658 )
Loans, net      1,858,557        1,871,961        1,929,969        1,571,062        1,563,009  
Company-owned life insurance      61,859        61,630        61,414        61,177        60,814  
Premises and equipment, net      7,137        7,246        7,355        7,203        7,353  
Goodwill      83,753        83,752        84,417        45,664        45,664  
Other intangible assets      12,007        12,614        12,293        5,348        5,589  
Accrued interest receivable and other assets      69,791        73,531        73,700        50,206        51,189  
Total assets   $  3,096,562     $  3,192,910     $  3,123,207     $  2,785,548     $  2,843,452  
                               
LIABILITIES AND SHAREHOLDERS’ EQUITY                              
Liabilities:                              
Deposits:                              
Demand, noninterest-bearing   $  1,021,582     $  1,081,846     $  1,002,053     $  975,846     $  989,753  
Demand, interest-bearing      702,000        670,624        683,805        621,402        601,929  
Savings and money market      754,277        828,297        827,304        688,217        684,131  
Time deposits-under $250      58,661        68,194        72,030        49,861        51,710  
Time deposits-$250 and over      86,114        84,763        81,379        71,446        138,634  
CDARS - money market and time deposits      14,898        11,575        17,048        15,420        16,832  
Total deposits      2,637,532        2,745,299        2,683,619        2,422,192        2,482,989  
Subordinated debt, net of issuance costs      39,369        39,322        39,275        39,229        39,183  
Accrued interest payable and other liabilities      52,195        54,723        54,044        53,136        50,041  
Total liabilities      2,729,096        2,839,344        2,776,938        2,514,557        2,572,213  
                               
Shareholders’ Equity:                              
Common stock      300,844        300,208        299,224        219,208        218,355  
Retained earnings      79,003        70,531        62,911        66,739        62,136  
Accumulated other comprehensive loss      (12,381 )      (17,173 )      (15,866 )      (14,956 )      (9,252 )
  Total Shareholders' Equity      367,466        353,566        346,269        270,991        271,239  
  Total liabilities and shareholders’ equity   $  3,096,562     $  3,192,910     $  3,123,207     $  2,785,548     $  2,843,452  
                               


                             
    End of Period:   Percent Change From:  
CREDIT QUALITY DATA   December 31,    September 30,    December 31,    September 30,    December 31,   
(in $000’s, unaudited)   2018     2018     2017     2018     2017    
Nonaccrual loans - held-for-investment   $  13,699     $  23,342     $  2,250     (41 ) 509   %
Restructured and loans over 90 days past due                            
  and still accruing      1,188        1,373        235     (13 ) 406   %
  Total nonperforming loans      14,887        24,715        2,485     (40 ) 499   %
Foreclosed assets      —        —        —     N/A   N/A  
Total nonperforming assets   $  14,887     $  24,715     $  2,485     (40 ) 499   %
Other restructured loans still accruing   $  253     $  334     $  289     (24 ) (12 ) %
Net charge-offs (recoveries) during the quarter   $  (280 )   $  (1,187 )   $  (201 )   76   (39 ) %
Provision (credit) for loan losses during the quarter   $  142     $  (425 )   $  (291 )   133   149   %
Allowance for loan losses   $  27,848     $  27,426     $  19,658     2   42   %
Classified assets   $  23,409     $  30,546     $  25,072     (23 ) (7 ) %
Allowance for loan losses to total loans      1.48      1.44      1.24   3   19   %
Allowance for loan losses to total nonperforming loans      187.06      110.97      791.07   69   (76 ) %
Nonperforming assets to total assets      0.48      0.77      0.09   (38 ) 433   %
Nonperforming loans to total loans      0.79      1.30      0.16   (39 ) 394   %
Classified assets to Heritage Commerce Corp                            
  Tier 1 capital plus allowance for loan losses      8      10      10   (20 ) (20 ) %
Classified assets to Heritage Bank of Commerce                            
  Tier 1capital plus allowance for loan losses      7      10      10   (30 ) (30 ) %
                             
OTHER PERIOD-END STATISTICS                            
(in $000’s, unaudited)                            
Heritage Commerce Corp:                            
Tangible common equity (1)   $  271,706     $  257,200     $  219,986     6   24   %
Shareholders’ equity / total assets      11.87      11.07      9.54   7   24   %
Tangible common equity / tangible assets (2)      9.05      8.31      7.88   9   15   %
Loan to deposit ratio      71.52      69.19      63.74   3   12   %
Noninterest-bearing deposits / total deposits      38.73      39.41      39.86   (2 ) (3 ) %
Total risk-based capital ratio     15.0
     14.4      14.4   4
  4
  %
Tier 1 risk-based capital ratio      12.0      11.5      11.4   4   5   %
Common Equity Tier 1 risk-based capital ratio      12.0      11.5      11.4   4   6   %
Leverage ratio      8.9      8.6      8.0   3   11   %
Heritage Bank of Commerce:                            
Total risk-based capital ratio      14.0      13.4      13.2   4   6   %
Tier 1 risk-based capital ratio      12.8      12.2      12.2   5
  5
  %
Common Equity Tier 1 risk-based capital ratio      12.8      12.2      12.2   5
  5
  %
Leverage ratio      9.4      9.1      8.5   3   11   %

_______________________

(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)   2018     2018     2018   2018   2017    
Nonaccrual loans - held-for-investment   $  13,699     $  23,342     $  26,034   $  3,637   $  2,250    
Restructured and loans over 90 days past due                                
  and still accruing      1,188        1,373        511      158      235    
  Total nonperforming loans      14,887        24,715        26,545      3,795      2,485    
Foreclosed assets      —        —        —      —      —    
Total nonperforming assets   $  14,887     $  24,715     $  26,545   $  3,795   $  2,485    
Other restructured loans still accruing   $  253     $  334     $  265   $  241   $  289    
Net charge-offs (recoveries) during the quarter   $  (280 )   $  (1,187 )   $  673   $  25   $  (201 )  
Provision (credit) for loan losses during the quarter   $  142     $  (425 )   $  7,198   $  506   $  (291 )  
Allowance for loan losses   $  27,848     $  27,426     $  26,664   $  20,139   $  19,658    
Classified assets   $  23,409     $  30,546     $  32,264   $  30,763   $  25,072    
Allowance for loan losses to total loans      1.48      1.44      1.36    1.27    1.24  
Allowance for loan losses to total nonperforming loans      187.06      110.97      100.45    530.67    791.07  
Nonperforming assets to total assets      0.48      0.77      0.85    0.14    0.09  
Nonperforming loans to total loans      0.79      1.30      1.36    0.24    0.16  
Classified assets to Heritage Commerce Corp                                
  Tier 1 capital plus allowance for loan losses      8      10      11    12    10  
Classified assets to Heritage Bank of Commerce                                
  Tier 1capital plus allowance for loan losses      7      10      11    11    10  
                                 
OTHER PERIOD-END STATISTICS                                
(in $000’s, unaudited)                                
Heritage Commerce Corp:                                
Tangible common equity (1)   $  271,706     $  257,200     $  249,559   $  219,979   $  219,986    
Shareholders’ equity / total assets      11.87      11.07      11.09    9.73    9.54  
Tangible common equity / tangible assets (2)      9.05      8.31      8.25    8.04    7.88  
Loan to deposit ratio      71.52      69.19      72.91    65.69    63.74  
Noninterest-bearing deposits / total deposits      38.73      39.41      37.34    40.29    39.86  
Total risk-based capital ratio     15.0
     14.4      13.5    14.7    14.4  
Tier 1 risk-based capital ratio      12.0      11.5      10.7    11.7    11.4  
Common Equity Tier 1 risk-based capital ratio      12.0      11.5      10.7    11.7    11.4  
Leverage ratio      8.9      8.6      8.7    8.6    8.0  
Heritage Bank of Commerce:                                
Total risk-based capital ratio      14.0      13.4      12.5    13.5    13.2  
Tier 1 risk-based capital ratio      12.8      12.2      11.4    12.5    12.2  
Common Equity Tier 1 risk-based capital ratio      12.8      12.2      11.4    12.5    12.2  
Leverage ratio      9.4      9.1      9.3    9.1    8.5  

_______________________

(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  
    December 31, 2018   December 31, 2017  
          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)   $  1,873,621   $  28,364      6.01 $  1,563,006   $  22,234      5.64 %
Securities - taxable     692,903     4,099      2.35    694,061      3,808      2.18 %
Securities - exempt from Federal tax (3)      86,597     697      3.19    89,082      865      3.85 %
Other investments and interest-bearing deposits                                  
  in other financial institutions     327,086     2,365      2.87    397,557      1,548      1.54 %
Total interest earning assets (3)      2,980,207      35,525      4.73    2,743,706      28,455      4.11 %
Cash and due from banks      40,963                35,716            
Premises and equipment, net      7,201                7,470            
Goodwill and other intangible assets      96,112                51,425            
Other assets      83,694                86,684            
Total assets   $  3,208,177             $  2,925,001            
                                   
Liabilities and shareholders’ equity:                                  
Deposits:                                  
Demand, noninterest-bearing   $  1,107,813             $  1,002,808            
                                   
Demand, interest-bearing      678,983      566      0.33    621,830      328      0.21 %
Savings and money market      802,384      878      0.43    715,148      452      0.25 %
Time deposits - under $100      21,787      22      0.40    18,745      13      0.28 %
Time deposits - $100 and over      127,911      266      0.83    175,416      329      0.74 %
CDARS - money market and time deposits      13,242      2      0.06    16,553      2      0.05 %
Total interest-bearing deposits      1,644,307      1,734      0.42    1,547,692      1,124      0.29 %
Total deposits      2,752,120      1,734      0.25    2,550,500      1,124      0.17 %
                                   
Subordinated debt, net of issuance costs      39,341      583      5.88