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

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

Earnings for the third and fourth quarters of 2019, and for the year ended December 31, 2019 were reduced by pre-tax merger-related costs of $661,000, $9.9 million, and $11.1 million, respectively, related to the merger with Presidio Bank (“Presidio”) which was completed on October 11, 2019 (the “Presidio merger date”). Pre-tax earnings for the fourth quarter of 2019 were further reduced by an additional $2.0 million of provision for loan losses for certain non-impaired loans acquired at a premium from Presidio.  Earnings for the fourth quarter of 2018 and for the year ended December 31, 2018 were reduced by pre-tax merger-related costs of $139,000 and $9.2 million, respectively, for the acquisitions of Tri-Valley Bank (“Tri-Valley”) and United American Bank (“United American”) which were completed on April 6, 2018 and May 4, 2018, respectively.  The effective tax rate for the year ended December 31, 2019 was 28.1%, compared to an effective tax rate of 27.4% for the year ended December 31, 2018.

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

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

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

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

Operating Results:

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

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

		For the Quarter Ended										For the Year Ended
MERGER-RELATED COSTS		December 31,			September 30,			December 31,				December 31,			December 31,
(in $000’s, unaudited)		2019			2019			2018				2019			2018
Salaries and employee benefits		$	6,580		$	—		$	(7	)		$	6,580		$	3,569
Other			3,299			661			146				4,500			5,598
Total merger-related costs		$	9,879		$	661		$	139			$	11,080		$	9,167

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

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

GOODWILL			October 11,
(in $000’s, unaudited)			2019
Consideration paid:
Issuance of 15,684,064 shares of common stock
to Presidio shareholders and holders of restricted stock
(stock price = $11.36 on October 11, 2019)		$	178,171
Consideration for Presidio stock options exchanged for
Heritage Commerce Corp stock options			7,426
Cash paid for fractional shares			1
Total Consideration Paid		$	185,598
Net assets pre-merger		$	96,119
Fair value adjustments:
Investment securities			422
Loans receivable			(12,529	)
Allowance for loan losses			7,463
Core deposit intangible			11,247
Above market lease			(100	)
Time Deposits - Under $100			3
Time Deposits - $100 and Over			(2	)
Total fair value adjustments			6,504
Deferred taxes on fair value adjustments			(1,378	)
Other adjustments to goodwill			686
Fair value of net assets acquired			101,931
Excess of consideration paid over fair value of
net assets acquired = goodwill		$	83,667

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

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

		For the Quarter Ended												For the Year Ended
		December 31,				September 30,				December 31,				December 31,				December 31,
		2019				2019				2018				2019				2018
Return on average tangible assets		0.57	%			1.49	%			1.69	%			1.25	%			1.19	%
Return on average tangible equity		5.96	%			15.08	%			20.08	%			13.09	%			14.41	%

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

• The fully tax equivalent (“FTE”) net interest margin contracted 27 basis points to 4.15% for the fourth quarter of 2019, from 4.42% for the fourth quarter of 2018, primarily due to a decline in the average yield of loans, investment securities, and overnight funds, a decrease in the average balance of Bay View Funding’s factored receivables, partially offset by an increase in the average balance of loans, and an increase in the accretion of the loan discount into loan interest income from a merger during the fourth quarter of 2019.  The net interest margin contracted nine basis points for the fourth quarter of 2019 from 4.24% for the third quarter of 2019, primarily due to a decline in the average yield of loans and overnight funds, partially offset by a higher average balance of loans, and an increase in the accretion of the loan discount into loan interest income from a merger during the fourth quarter of 2019.
  
  
• For the year ended December 31, 2019, the net interest margin contracted three basis points to 4.28%, compared to 4.31% for the year ended December 31, 2018, primarily due to a higher cost of deposits, a decrease in the average balance of Bay View Funding’s factored receivables, partially offset by an increase in the average balance of loans and securities, and an increase in the accretion of the loan purchase discount into loan interest income from a merger during the year ended December 31, 2019.

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

		For the Quarter Ended									For the Quarter Ended
		December 31, 2019									December 31, 2018
		Average				Interest			Average		Average				Interest			Average
(in $000’s, unaudited)		Balance				Income			Yield		Balance				Income			Yield
Loans, core bank and asset-based lending		$	2,353,871			$	30,786		5.19	%	$	1,742,614			$	23,053		5.25	%
Bay View Funding factored receivables			45,045				2,888		25.44	%		65,521				4,012		24.29	%
Residential mortgages			33,867				237		2.78	%		38,148				268		2.79	%
Purchased commercial real estate
("CRE") loans			28,407				238		3.32	%		34,121				311		3.62	%
Loan fair value mark / accretion			(15,089	)			1,338		0.23	%		(6,783	)			720		0.16	%
Total loans		$	2,446,101			$	35,487		5.76	%	$	1,873,621			$	28,364		6.01	%

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

		For the Quarter Ended									For the Quarter Ended
		December 31, 2019									September 30, 2019
		Average				Interest			Average		Average				Interest			Average
(in $000’s, unaudited)		Balance				Income			Yield		Balance				Income			Yield
Loans, core bank and asset-based lending		$	2,353,871			$	30,786		5.19	%	$	1,748,379			$	23,401		5.31	%
Bay View Funding factored receivables			45,045				2,888		25.44	%		47,614				2,879		23.99	%
Residential mortgages			33,867				237		2.78	%		34,639				229		2.62	%
Purchased CRE loans			28,407				238		3.32	%		30,567				284		3.69	%
Loan fair value mark / accretion			(15,089	)			1,338		0.23	%		(5,359	)			471		0.11	%
Total loans		$	2,446,101			$	35,487		5.76	%	$	1,855,840			$	27,264		5.83	%

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

		For the Year Ended									For the Year Ended
		December 31, 2019									December 31, 2018
		Average				Interest			Average		Average				Interest			Average
(in $000’s, unaudited)		Balance				Income			Yield		Balance				Income			Yield
Loans, core bank and asset-based lending		$	1,890,079			$	100,380		5.31	%	$	1,670,065			$	86,610		5.19	%
Bay View Funding factored receivables			46,710				11,688		25.02	%		59,220				14,698		24.82	%
Residential mortgages			35,343				951		2.69	%		40,998				1,118		2.73	%
Purchased CRE loans			30,936				1,107		3.58	%		36,080				1,257		3.48	%
Loan fair value mark / accretion			(8,151	)			2,682		0.14	%		(5,348	)			1,952		0.12	%
Total loans		$	1,994,917			$	116,808		5.86	%	$	1,801,015			$	105,635		5.87	%

• The average yield on the total loan portfolio decreased to 5.86% for the year ended December 31, 2019, compared to 5.87% for the year ended December 31, 2018, primarily due to a decrease in the average balance of Bay View Funding’s factored receivables, partially offset by the impact of the increasing prime rate on loans over the course of 2018 (prior to the prime rate decreasing in the latter part of 2019), and an increase in the accretion of the loan purchase discount into loan interest income from the acquisitions.
  
  
• The total net purchase discount on loans from the Focus Business Bank (“Focus”) loan portfolio was $5.4 million on the acquisition date of August 20, 2015, of which $418,000 remains outstanding as of December 31, 2019.  The total net purchase discount on loans from the Tri-Valley loan portfolio was $2.6 million on the acquisition date of April 6, 2018, of which $1.6 million remains outstanding as of December 31, 2019.  The total net purchase discount on loans from the United American loan portfolio was $4.7 million on the acquisition date of May 4, 2018, of which $2.7 million remains outstanding as of December 31, 2019.  The total net purchase discount on loans from Presidio loan portfolio was $12.5 million on the Presidio merger date, of which $11.6 million remains outstanding as of December 31, 2019.

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

There was a $3.2 million provision for loan losses for the fourth quarter of 2019, compared to a $142,000 provision for loan losses for the fourth quarter of 2018, and a $576,000 credit to the provision for loan losses for the third quarter of 2019.  The provision for loan losses for the fourth quarter of 2019 included $2.0 million related to certain non-impaired loans acquired at a premium from Presidio. This premium was due to higher interest rates on the loans versus market interest rates at the time of the merger. Due to the net premium on these loans, a provision for loan losses was required and it was not due to credit deterioration since the Presidio merger date. There was an $846,000 provision for loan losses for the year ended December 31, 2019, compared to a $7.4 million provision for loan losses for the year ended December 31, 2018.  The higher provision for loan losses for the year ended December 31, 2018 included a $7.0 million specific reserve for a lending relationship that was placed on nonaccrual during the second quarter of 2018.

Total noninterest income was $2.4 million for the fourth quarters of 2019 and 2018.  An increase in the gain on sales of Small Business Administration (“SBA”) loans, and an increase in the cash surrender value of life insurance, was offset by a loss on sale of securities for the fourth quarter of 2019.  Total noninterest income for the fourth quarter of 2019 decreased from $2.6 million for the third quarter of 2019, primarily due to a loss on sale of securities, partially offset by an increase in the gain on sale of SBA loans, an increase in the cash surrender value of life insurance, and higher service charges and fees on deposits accounts.

• For the year ended December 31, 2019, total noninterest income increased to $10.2 million, compared to $9.6 million for the year ended December 31, 2018. The increase in noninterest income for the year ended December 31, 2019, was primarily due to higher service charges and fees on deposit accounts, and an increase in the cash surrender value of life insurance, partially offset by an increase in the gain on sale of securities, and proceeds from a legal settlement in the year ended December 31, 2018.
  
  
• The Company received $1.3 million in proceeds from a legal settlement during the second quarter of 2018, of which $377,000 was recorded in other noninterest income, and $922,000 was credited to professional fees for recaptured legal fees previously paid by the Company.

Total noninterest expense for the fourth quarter of 2019 increased to $30.6 million, compared to $16.9 million for the fourth quarter of 2018, and $17.9 million for the third quarter of 2019, primarily due to higher merger-related costs.  Total noninterest expense for the fourth quarter of 2019 included total merger-related costs of $9.9 million for the Presidio merger, of which $6.6 million was included in salaries and employee benefits, and $3.3 million was included in other noninterest expense.  Total merger-related costs were $139,000 for the fourth quarter of 2018 for the Tri-Valley and United American acquisitions.  Total merger-related costs were $661,000 for the third quarter of 2019 for the Presidio merger.

• Total noninterest expense for the year ended December 31, 2019 increased to $84.9 million, compared to $75.5 million for the year ended December 31, 2018, primarily due to higher merger-related costs, and a full year of additional operating costs of Tri-Valley and United American, in addition to the operating costs of Presidio for the fourth quarter of 2019.  Total noninterest expense for the year ended December 31, 2019 included total merger-related costs of $11.1 million for the Presidio merger of which $6.6 million was included in salaries and employee benefits, and $4.5 million was included in other noninterest expense.  Total merger-related costs were $9.2 million for the year ended December 31, 2018 for the Tri-Valley and United American acquisitions, of which $3.6 million was included in salaries and employee benefits and $5.6 million was included in other noninterest expense. Professional fees for the year ended December 31, 2018 included a recovery of $922,000 from a legal settlement.
  
  
• Full time equivalent employees were 357 at December 31, 2019, 302 at December 31, 2018, and 308 at September 30, 2019.

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

Income tax expense was $2.1 million for the fourth quarter of 2019, compared to $5.1 million for the fourth quarter of 2018, and $4.6 million for the third quarter of 2019.  Income tax expense for the year ended December 31, 2019 was $15.9 million, compared to $13.3 million for the year ended December 31, 2018. The effective tax rate for the fourth quarter of 2019 was 26.9%, compared to 28.0% for the fourth quarter of 2018, and 29.1% for the third quarter of 2019.  The effective tax rate for the year ended December 31, 2019 was 28.1%, compared to 27.4% for the year ended December 31, 2018.

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

Balance Sheet Review, Capital Management and Credit Quality:

Total assets increased 33% to $4.11 billion at December 31, 2019, compared to $3.10 billion at December 31, 2018 and increased 29% from $3.18 billion at September 30, 2019, primarily due to the Presidio merger. 

Securities available-for-sale, at fair value, totaled $404.8 million at December 31, 2019, compared to $459.0 million at December 31, 2018, and $333.1 million at September 30, 2019.  At December 31, 2019, the Company’s securities available-for-sale portfolio comprised $284.4 million of agency mortgage-backed securities (all issued by U.S. Government sponsored entities), and $120.4 million of U.S. Treasury securities. The pre-tax unrealized gain on securities available-for-sale at December 31, 2019 was $2.3 million, compared to a pre-tax unrealized loss on securities available-for-sale of ($7.7) million at December 31, 2018, and a pre-tax unrealized gain on securities available-for-sale of $1.7 million at September 30, 2019.  All other factors remaining the same, when market interest rates are rising, the Company will experience a lower unrealized gain (or a higher unrealized loss) on the securities portfolio.

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

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

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

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

LOANS		December 31, 2019						September 30, 2019						December 31, 2018
(in $000’s, unaudited)		Balance				% to Total		Balance				% to Total		Balance				% to Total
Commercial		$	678,696			27	%	$	528,060			28	%	$	597,763			32	%
Real estate:
CRE			1,495,903			59	%		1,080,235			58	%		994,067			52	%
Land and construction			147,109			6	%		96,610			5	%		122,358			6	%
Home equity			136,259			5	%		111,610			6	%		109,112			6	%
Residential mortgages			55,128			2	%		47,276			3	%		50,979			3	%
Consumer			21,068			1	%		11,701			1	%		12,453			1	%
Total Loans			2,534,163			100	%		1,875,492			100	%		1,886,732			100	%
Deferred loan fees, net			(319	)		-			(105	)		—			(327	)		—
Loans, net of deferred fees		$	2,533,844			100	%	$	1,875,387			100	%	$	1,886,405			100	%

• Loans, excluding loans held-for-sale, increased $647.4 million or 34%, to $2.53 billion at December 31, 2019, compared to $1.89 billion at December 31, 2018, which included $669.5 million in loans from Presidio, at fair value, a decrease of $11.3 million in the Company’s legacy portfolio, a decrease of $6.5 million in purchased CRE loans, and a decrease of $4.3 million in purchased residential loans. Loans, excluding loans held-for-sale, increased $658.5 million or 35%, to $2.53 billion at December 31, 2019, compared to $1.88 billion September 30, 2019, which included $669.5 million in loans from Presidio, at fair value, a decrease of $7.1 million in the Company’s legacy portfolio, and a decrease of $3.2 million in purchased CRE loans.
  
  
• Commercial and Industrial (“C&I”) line usage was 35% at December 31, 2019, compared to 36% at December 31, 2018, and 35% at September 30, 2019.
  
  
• At December 31, 2019, 34% of the CRE loan portfolio was secured by owner-occupied real estate.

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

		For the Quarter Ended												For the Year Ended
ALLOWANCE FOR LOAN LOSSES		December 31,				September 30,				December 31,				December 31,				December 31,
(in $000’s, unaudited)		2019				2019				2018				2019				2018
Balance at beginning of period		$	25,895			$	26,631			$	27,426			$	27,848			$	19,658
Charge-offs during the period			(6,003	)			(318	)			(166	)			(6,623	)			(2,026	)
Recoveries during the period			170				158				446				1,214				2,795
Net recoveries (charge-offs) during the period			(5,833	)			(160	)			280				(5,409	)			769
Provision (credit) for loan losses during the period			3,223				(576	)			142				846				7,421
Balance at end of period		$	23,285			$	25,895			$	27,848			$	23,285			$	27,848
Total loans, net of deferred fees		$	2,533,844			$	1,875,387			$	1,886,405			$	2,533,844			$	1,886,405
Total nonperforming loans		$	9,828			$	14,247			$	14,887			$	9,828			$	14,887
Allowance for loan losses to total loans			0.92		%		1.38		%		1.48		%		0.92		%		1.48		%
Allowance for loan losses to total nonperforming loans			236.93		%		181.76		%		187.06		%		236.93		%		187.06		%

• The ALLL was 0.92% of total loans at December 31, 2019, compared to 1.48% at December 31, 2018, and 1.38% at September 30, 2019.  The ALLL to total nonperforming loans was 236.93% at December 31, 2019, compared to 187.06% at December 31, 2018, and 181.76% at September 30, 2019.  The loans acquired from Presidio are included in total loans.  Due to the addition of the Presidio loans at fair value with no allowance, the ALLL to total loans decreased at December 31, 2019.  However, the Company provided an additional $2.0 million in provision for loan losses to increase the ALLL at December 31, 2019 for certain non-impaired loans acquired at a premium from Presidio.
  
  
• Net charge-offs totaled $5.8 million for the fourth quarter of 2019, compared to net recoveries of $280,000 for the fourth quarter of 2018, and net charge-offs of $160,000 for the third quarter of 2019.   Net charge-offs of $5.8 million for the fourth quarter of 2019 primarily consisted of three lending relationships totaling $5.5 million, including one large relationship which was previously disclosed and specifically reserved for during the second and third quarters of 2018. The three lending relationships totaling $5.5 million in net charge-offs had a total of $4.7 million in specific reserves.

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

		End of Period:
NONPERFORMING ASSETS		December 31, 2019					September 30, 2019					December 31, 2018
(in $000’s, unaudited)		Balance			% of Total		Balance			% of Total		Balance			% of Total
CRE loans		$	5,094		52	%	$	5,094		36	%	$	5,094		34	%
Commercial loans			2,657		27	%		7,390		52	%		8,062		54	%
Restructured and loans over 90 days past due and still accruing			1,153		12	%		609		4	%		1,188		8	%
SBA loans			787		8	%		1,007		7	%		326		2	%
Home equity and consumer loans			137		1	%		147		1	%		217		2	%
Total nonperforming assets		$	9,828		100	%	$	14,247		100	%	$	14,887		100	%

• NPAs totaled $9.8 million, or 0.24% of total assets, at December 31, 2019, compared to $14.9 million, or 0.48% of total assets, at December 31, 2018, and $14.2 million, or 0.45% of total assets, at September 30, 2019.
  
  
  • There were no foreclosed assets at December 31, 2019, December 31, 2018, or September 30, 2019.
    
    
• Classified assets increased to $32.6 million, or 0.79% of total assets, at December 31, 2019, compared to $23.4 million, or 0.76% of total assets, at December 31, 2018, and $20.2 million, or 0.64% of total assets, at September 30, 2019.  The increase in classified assets for the fourth quarter of 2019 was primarily due to classified assets acquired from Presidio.

On January 1, 2019, the Company adopted Accounting Standards Update (“ASU”) No. 2016-02, Leases (Topic 842).  Under the new guidance, the Company recognizes the following for all leases, at the commencement date: (1) a lease liability, which is a lessee’s obligation to make lease payments arising from a lease, measured on a discounted basis; and (2) a right-of-use (“ROU”) asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term. While the new standard impacts lessors, the Company is impacted as a lessee of the offices and real estate used for operations.  The Company's lease agreements include options to renew at the Company's discretion. The extensions are not reasonably certain to be exercised, therefore they are not considered in the calculation of the ROU asset and lease liability. Total assets and total liabilities were $12.2 million on its consolidated statement of financial condition at December 31, 2019, as a result of recognizing right-of-use assets, included in other assets, and lease liabilities, included in other liabilities, related to non-cancelable operating lease agreements for office space. 

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

DEPOSITS		December 31, 2019					September 30, 2019					December 31, 2018
(in $000’s, unaudited)		Balance			% to Total		Balance			% to Total		Balance			% to Total
Demand, noninterest-bearing		$	1,450,873		42	%	$	1,094,953		41	%	$	1,021,582		39	%
Demand, interest-bearing			798,375		23	%		666,054		25	%		702,000		27	%
Savings and money market			982,430		29	%		761,471		28	%		754,277		28	%
Time deposits — under $250			54,361		2	%		53,560		2	%		58,661		2	%
Time deposits — $250 and over			99,882		3	%		95,543		3	%		86,114		3	%
CDARS — interest-bearing demand,
money market and time deposits			28,847		1	%		17,409		1	%		14,898		1	%
Total deposits		$	3,414,768		100	%	$	2,688,990		100	%	$	2,637,532		100	%

• Total deposits increased $777.2 million, or 29%, to $3.41 billion at December 31, 2019, compared to $2.64 billion at December 31, 2018, which included $723.0 million in deposits from Presidio, at fair value, and an increase of $54.2 million in the Company’s legacy deposits.  Total Deposits increased $725.8 million or 27% from $2.69 billion at September 30, 2019, which included $723.0 million in deposits from Presidio, at fair value, and an increase of $2.8 million in the Company’s legacy deposits.   
  
  
• Deposits, excluding all time deposits and CDARS deposits, increased $753.8 million, or 30%, to $3.23 billion at December 31, 2019, compared to $2.48 billion at December 31, 2018, which included $699.4 million in deposits from Presidio, at fair value, and an increase of $54.4 million in the Company’s legacy deposits.  Deposits, excluding all time deposits and CDARS deposits increased $709.2 million or 28%, compared to $2.52 billion at September 30, 2019, which included $669.4 million in deposits from Presidio, at fair value, and an increase of $9.8 million in the Company’s legacy deposits.

The Company’s consolidated capital ratios exceeded regulatory guidelines and the Bank’s capital ratios exceeded the regulatory guidelines under the Basel III prompt corrective action (“PCA”) regulatory guidelines for a well-capitalized financial institution, and the Basel III minimum regulatory requirements at December 31, 2019, as reflected in the following table:

								Well-capitalized
								Financial
								Institution			Basel III
		Heritage			Heritage			Basel III PCA			Minimum
		Commerce			Bank of			Regulatory			Regulatory
CAPITAL RATIOS (unaudited)		Corp			Commerce			Guidelines			Requirement (1)
Total Risk-Based		14.6	%		13.9	%		10.0	%		10.5	%
Tier 1 Risk-Based		12.5	%		13.1	%		8.0	%		8.5	%
Common Equity Tier 1 Risk-Based		12.5	%		13.1	%		6.5	%		7.0	%
Leverage		9.8	%		10.2	%		5.0	%		4.0	%

---

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

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

ACCUMULATED OTHER COMPREHENSIVE LOSS		December 31,				September 30,				December 31,
(in $000’s, unaudited)		2019				2019				2018
Unrealized gain (loss) on securities available-for-sale		$	1,242			$	1,202			$	(5,412	)
Remaining unamortized unrealized gain on securities
available-for-sale transferred to held-to-maturity			297				306				343
Split dollar insurance contracts liability			(4,835	)			(3,794	)			(3,722	)
Supplemental executive retirement plan liability			(6,842	)			(3,898	)			(3,995	)
Unrealized gain on interest-only strip from SBA loans			360				386				405
Total accumulated other comprehensive loss		$	(9,778	)		$	(5,798	)		$	(12,381	)

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

Tangible equity increased to $388.9 million at December 31, 2019, compared to $271.7 million at December 31, 2018, and $301.2 million at September 30, 2019.  Tangible book value per share was $6.55 at December 31, 2019, compared to $6.28 at December 31, 2018, and $6.92 at September 30, 2019.

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

Forward-Looking Statement Disclaimer

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

Member FDIC

For additional information, contact:

Debbie Reuter
EVP, Corporate Secretary
Direct:  [phone]

		For the Quarter Ended:											Percent Change From:							For the Year Ended:
CONSOLIDATED INCOME STATEMENTS		December 31,				September 30,				December 31,			September 30,			December 31,				December 31,			December 31,			Percent
(in $000’s, unaudited)		2019				2019				2018			2019			2018				2019			2018			Change
Interest income		$	42,471			$	33,250			$	35,378		28		%	20		%		$	142,659		$	129,845		10		%
Interest expense			3,242				2,625				2,318		24		%	40		%			10,847			7,822		39		%
Net interest income before provision
for loan losses			39,229				30,625				33,060		28		%	19		%			131,812			122,023		8		%
Provision (credit) for loan losses			3,223				(576	)			142		660		%	2170		%			846			7,421		(89	)	%
Net interest income after provision
for loan losses			36,006				31,201				32,918		15		%	9		%			130,966			114,602		14		%
Noninterest income:
Service charges and fees on deposit accounts			1,140				1,032				1,132		10		%	1		%			4,510			4,113		10		%
Increase in cash surrender value of
life insurance			405				336				229		21		%	77		%			1,404			1,045		34		%
(Loss) gain on sales of securities			(217	)			330				—		(166	)	%	N/A		%			661			266		148		%
Gain on sales of SBA loans			358				156				147		129		%	144		%			689			698		(1	)	%
Servicing income			156				139				176		12		%	(11	)	%			636			709		(10	)	%
Other			551				625				709		(12	)	%	(22	)	%			2,344			2,743		(15	)	%
Total noninterest income			2,393				2,618				2,393		(9	)	%	0		%			10,244			9,574		7		%
Noninterest expense:
Salaries and employee benefits			18,819				10,467				9,699		80		%	94		%			50,754			45,001		13		%
Occupancy and equipment			2,013				1,550				1,484		30		%	36		%			6,647			5,411		23		%
Professional fees			899				789				853		14		%	(5	)	%			3,259			1,969		66		%
Other			8,895				5,103				4,905		74		%	81		%			24,238			23,140		5		%
Total noninterest expense			30,626				17,909				16,941		71		%	81		%			84,898			75,521		12		%
Income before income taxes			7,773				15,910				18,370		(51	)	%	(58	)	%			56,312			48,655		16		%
Income tax expense			2,088				4,633				5,138		(55	)	%	59		%			15,851			13,324		19		%
Net income		$	5,685			$	11,277			$	13,232		(50	)	%	(57	)	%		$	40,461		$	35,331		15		%
PER COMMON SHARE DATA
(unaudited)
Basic earnings per share		$	0.10			$	0.26			$	0.31		(62	)	%	(68	)	%		$	0.87		$	0.85		2		%
Diluted earnings per share		$	0.10			$	0.26			$	0.30		(61	)	%	(67	)	%		$	0.84		$	0.84		0		%
Weighted average shares outstanding - basic			57,168,605				43,258,983				43,079,470		32		%	33		%			46,684,384			41,469,211		13		%
Weighted average shares outstanding - diluted			58,361,976				43,796,904				43,691,222		33		%	34		%			47,906,229			42,182,939		14		%
Common shares outstanding at period-end			59,368,156				43,509,406				43,288,750		36		%	37		%			59,368,156			43,288,750		37		%
Dividend per share		$	0.12			$	0.12			$	0.11		0		%	9		%		$	0.48		$	0.44		9		%
Book value per share		$	9.71			$	9.09			$	8.49		7		%	14		%		$	9.71		$	8.49		14		%
Tangible book value per share		$	6.55			$	6.92			$	6.28		(5	)	%	4		%		$	6.55		$	6.28		4		%
KEY FINANCIAL RATIOS
(unaudited)
Annualized return on average equity			4.04		%		11.44		%		14.68	%	(65	)	%	(72	)	%			9.51	%		10.79	%	(12	)	%
Annualized return on average tangible equity			5.96		%		15.08		%		20.08	%	(60	)	%	(70	)	%			13.09	%		14.41	%	(9	)	%
Annualized return on average assets			0.55		%		1.44		%		1.64	%	(62	)	%	(66	)	%			1.21	%		1.16	%	4		%
Annualized return on average tangible assets			0.57		%		1.49		%		1.69	%	(62	)	%	(66	)	%			1.25	%		1.19	%	5		%
Net interest margin (fully tax equivalent)			4.15		%		4.24		%		4.42	%	(2	)	%	(6	)	%			4.28	%		4.31	%	(1	)	%
Efficiency ratio			73.58		%		53.87		%		47.78	%	37		%	54		%			59.76	%		57.39	%	4		%
AVERAGE BALANCES
(in $000’s, unaudited)
Average assets		$	4,124,018			$	3,103,043			$	3,208,177		33		%	29		%		$	3,353,770		$	3,055,636		10		%
Average tangible assets		$	3,943,725			$	3,008,602			$	3,112,065		31		%	27		%		$	3,237,289		$	2,973,238		9		%
Average earning assets		$	3,762,239			$	2,878,590			$	2,980,207		31		%	26		%		$	3,094,589		$	2,844,350		9		%
Average loans held-for-sale		$	3,299			$	4,171			$	5,435		(21	)	%	(39	)	%		$	3,714		$	4,084		(9	)	%
Average total loans		$	2,442,802			$	1,851,669			$	1,868,186		32		%	31		%		$	1,991,203		$	1,796,931		11		%
Average deposits		$	3,432,771			$	2,612,252			$	2,752,120		31		%	25		%		$	2,819,932		$	2,633,287		7		%
Average demand deposits - noninterest-bearing		$	1,452,893			$	1,041,712			$	1,107,813		39		%	31		%		$	1,131,098		$	1,029,860		10		%
Average interest-bearing deposits		$	1,979,878			$	1,570,540			$	1,644,307		26		%	20		%		$	1,688,834		$	1,603,427		5		%
Average interest-bearing liabilities		$	2,027,106			$	1,610,168			$	1,683,790		26		%	20		%		$	1,730,320		$	1,642,803		5		%
Average equity		$	558,478			$	391,086			$	357,505		43		%	56		%		$	425,674		$	327,557		30		%
Average tangible equity		$	378,185			$	296,645			$	261,393		27		%	45		%		$	309,193		$	245,159		26		%

		For the Quarter Ended:
CONSOLIDATED INCOME STATEMENTS		December 31,				September 30,				June 30,				March 31,				December 31,
(in $000’s, unaudited)		2019				2019				2019				2019				2018
Interest income		$	42,471			$	33,250			$	33,489			$	33,449			$	35,378
Interest expense			3,242				2,625				2,573				2,407				2,318
Net interest income before provision
for loan losses			39,229				30,625				30,916				31,042				33,060
Provision (credit) for loan losses			3,223				(576	)			(740	)			(1,061	)			142
Net interest income after provision
for loan losses			36,006				31,201				31,656				32,103				32,918
Noninterest income:
Service charges and fees on deposit accounts			1,140				1,032				1,177				1,161				1,132
Increase in cash surrender value of
life insurance			405				336				333				330				229
(Loss) gain on sales of securities			(217	)			330				548				—				—
Gain on sales of SBA loans			358				156				36				139				147
Servicing income			156				139				150				191				176
Other			551				625				521				647				709
Total noninterest income			2,393				2,618				2,765				2,468				2,393
Noninterest expense:
Salaries and employee benefits			18,819				10,467				10,698				10,770				9,699
Occupancy and equipment			2,013				1,550				1,578				1,506				1,484
Professional fees			899				789				753				818				853
Other			8,895				5,103				5,416				4,824				4,905
Total noninterest expense			30,626				17,909				18,445				17,918				16,941
Income before income taxes			7,773				15,910				15,976				16,653				18,370
Income tax expense			2,088				4,633				4,623				4,507				5,138
Net income		$	5,685			$	11,277			$	11,353			$	12,146			$	13,232
PER COMMON SHARE DATA
(unaudited)
Basic earnings per share		$	0.10			$	0.26			$	0.26			$	0.28			$	0.31
Diluted earnings per share		$	0.10			$	0.26			$	0.26			$	0.28			$	0.30
Weighted average shares outstanding - basic			57,168,605				43,258,983				43,202,562				43,108,208				43,079,470
Weighted average shares outstanding - diluted			58,361,976				43,796,904				43,721,451				43,670,341				43,691,222
Common shares outstanding at period-end			59,368,156				43,509,406				43,498,406				43,323,753				43,288,750
Dividend per share		$	0.12			$	0.12			$	0.12			$	0.12			$	0.11
Book value per share		$	9.71			$	9.09			$	8.92			$	8.74			$	8.49
Tangible book value per share		$	6.55			$	6.92			$	6.75			$	6.54			$	6.28
KEY FINANCIAL RATIOS
(unaudited)
Annualized return on average equity			4.04		%		11.44		%		11.96		%		13.28		%		14.68	%
Annualized return on average tangible equity			5.96		%		15.08		%		15.94		%		17.90		%		20.08	%
Annualized return on average assets			0.55		%		1.44		%		1.48		%		1.58		%		1.64	%
Annualized return on average tangible assets			0.57		%		1.49		%		1.53		%		1.63		%		1.69	%
Net interest margin (fully tax equivalent)			4.15		%		4.24		%		4.38		%		4.38		%		4.42	%
Efficiency ratio			73.58		%		53.87		%		54.76		%		53.47		%		47.78	%
AVERAGE BALANCES
(in $000’s, unaudited)
Average assets		$	4,124,018			$	3,103,043			$	3,070,043			$	3,109,583			$	3,208,177
Average tangible assets		$	3,943,725			$	3,008,602			$	2,975,096			$	3,014,029			$	3,112,065
Average earning assets		$	3,762,239			$	2,878,590			$	2,844,677			$	2,885,591			$	2,980,207
Average loans held-for-sale		$	3,299			$	4,171			$	4,256			$	3,125			$	5,435
Average total loans		$	2,442,802			$	1,851,669			$	1,831,218			$	1,833,965			$	1,868,186
Average deposits		$	3,432,771			$	2,612,252			$	2,590,933			$	2,637,308			$	2,752,120
Average demand deposits - noninterest-bearing		$	1,452,893			$	1,041,712			$	1,001,914			$	1,024,142			$	1,107,813
Average interest-bearing deposits		$	1,979,878			$	1,570,540			$	1,589,019			$	1,613,166			$	1,644,307
Average interest-bearing liabilities		$	2,027,106			$	1,610,168			$	1,628,554			$	1,652,658			$	1,683,790
Average equity		$	558,478			$	391,086			$	380,605			$	370,792			$	357,505
Average tangible equity		$	378,185			$	296,645			$	285,658			$	275,238			$	261,393

		End of Period:												Percent Change From:
CONSOLIDATED BALANCE SHEETS		December 31,				September 30,				December 31,				September 30,			December 31,
(in $000’s, unaudited)		2019				2019				2018				2019			2018
ASSETS
Cash and due from banks		$	49,447			$	48,121			$	30,273			3		%	63		%
Other investments and interest-bearing deposits
in other financial institutions			407,923				367,662				134,295			11		%	204		%
Securities available-for-sale, at fair value			404,825				333,101				459,043			22		%	(12	)	%
Securities held-to-maturity, at amortized cost			366,560				342,033				377,198			7		%	(3	)	%
Loans held-for-sale - SBA, including deferred costs			1,052				3,571				2,649			(71	)	%	(60	)	%
Loans:
Commercial			678,696				528,060				597,763			29		%	14		%
Real estate:
CRE			1,495,903				1,080,235				994,067			38		%	50		%
Land and construction			147,109				96,610				122,358			52		%	20		%
Home equity			136,259				111,610				109,112			22		%	25		%
Residential mortgages			55,128				47,276				50,979			17		%	8		%
Consumer			21,068				11,701				12,453			80		%	69		%
Loans			2,534,163				1,875,492				1,886,732			35		%	34		%
Deferred loan fees, net			(319	)			(105	)			(327	)		204		%	(2	)	%
Total loans, net of deferred fees			2,533,844				1,875,387				1,886,405			35		%	34		%
Allowance for loan losses			(23,285	)			(25,895	)			(27,848	)		(10	)	%	(16	)	%
Loans, net			2,510,559				1,849,492				1,858,557			36		%	35		%
Company-owned life insurance			76,027				62,858				61,859			21		%	23		%
Premises and equipment, net			8,250				6,849				7,137			20		%	16		%
Goodwill			167,420				83,753				83,753			100		%	100		%
Other intangible assets			20,415				10,346				12,007			97		%	70		%
Accrued interest receivable and other assets			96,985				74,685				69,791			30		%	39		%
Total assets		$	4,109,463			$	3,182,471			$	3,096,562			29		%	33		%
LIABILITIES AND SHAREHOLDERS’ EQUITY
Liabilities:
Deposits:
Demand, noninterest-bearing		$	1,450,873			$	1,094,953			$	1,021,582			33		%	42		%
Demand, interest-bearing			798,375				666,054				702,000			20		%	14		%
Savings and money market			982,430				761,471				754,277			29		%	30		%
Time deposits-under $250			54,361				53,560				58,661			1		%	(7	)	%
Time deposits-$250 and over			99,882				95,543				86,114			5		%	16		%
CDARS - money market and time deposits			28,847				17,409				14,898			66		%	94		%
Total deposits			3,414,768				2,688,990				2,637,532			27		%	29		%
Subordinated debt, net of issuance costs			39,554				39,507				39,369			0		%	0		%
Other short-term borrowings			328				—				—			N/A			N/A
Accrued interest payable and other liabilities			78,105				58,628				52,195			33		%	50		%
Total liabilities			3,532,755				2,787,125				2,729,096			27		%	29		%
Shareholders’ Equity:
Common stock			489,745				302,983				300,844			62		%	63		%
Retained earnings			96,741				98,161				79,003			(1	)	%	22		%
Accumulated other comprehensive loss			(9,778	)			(5,798	)			(12,381	)		(69	)	%	21		%
Total Shareholders' Equity			576,708				395,346				367,466			46		%	57		%
Total liabilities and shareholders’ equity		$	4,109,463			$	3,182,471			$	3,096,562			29		%	33		%

		End of Period:
CONSOLIDATED BALANCE SHEETS		December 31,				September 30,				June 30,				March 31,				December 31,
(in $000’s, unaudited)		2019				2019				2019				2019				2018
ASSETS
Cash and due from banks		$	49,447			$	48,121			$	36,302			$	38,699			$	30,273
Other investments and interest-bearing deposits
in other financial institutions			407,923				367,662				239,710				196,278				134,295
Securities available-for-sale, at fair value			404,825				333,101				383,156				452,521				459,043
Securities held-to-maturity, at amortized cost			366,560				342,033				351,399				367,023				377,198
Loans held-for-sale - SBA, including deferred costs			1,052				3,571				5,202				3,216				2,649
Loans:
Commercial			678,696				528,060				567,529				559,718				597,763
Real estate:
CRE			1,495,903				1,080,235				1,037,885				1,012,641				994,067
Land and construction			147,109				96,610				97,297				98,222				122,358
Home equity			136,259				111,610				116,057				118,448				109,112
Residential mortgages			55,128				47,276				48,944				49,786				50,979
Consumer			21,068				11,701				10,279				9,690				12,453
Loans			2,534,163				1,875,492				1,877,991				1,848,505				1,886,732
Deferred loan fees, net			(319	)			(105	)			(224	)			(187	)			(327	)
Total loans, net of deferred fees			2,533,844				1,875,387				1,877,767				1,848,318				1,886,405
Allowance for loan losses			(23,285	)			(25,895	)			(26,631	)			(27,318	)			(27,848	)
Loans, net			2,510,559				1,849,492				1,851,136				1,821,000				1,858,557
Company-owned life insurance			76,027				62,858				62,522				62,189				61,859
Premises and equipment, net			8,250				6,849				6,975				6,998				7,137
Goodwill			167,420				83,753				83,753				83,753				83,753
Other intangible assets			20,415				10,346				10,900				11,454				12,007
Accrued interest receivable and other assets			96,985				74,685				76,976				72,746				69,791
Total assets		$	4,109,463			$	3,182,471			$	3,108,031			$	3,115,877			$	3,096,562
LIABILITIES AND SHAREHOLDERS’ EQUITY
Liabilities:
Deposits:
Demand, noninterest-bearing		$	1,450,873			$	1,094,953			$	994,082			$	1,016,770			$	1,021,582
Demand, interest-bearing			798,375				666,054				682,114				704,996				702,000
Savings and money market			982,430				761,471				788,832				759,306				754,277
Time deposits-under $250			54,361				53,560				53,351				56,385				58,661
Time deposits-$250 and over			99,882				95,543				88,519				90,042				86,114
CDARS - money market and time deposits			28,847				17,409				15,575				12,745				14,898
Total deposits			3,414,768				2,688,990				2,622,473				2,640,244				2,637,532
Subordinated debt, net of issuance costs			39,554				39,507				39,461				39,414				39,369
Other short-term borrowings			328				—				—				—				—
Accrued interest payable and other liabilities			78,105				58,628				57,989				57,703				52,195
Total liabilities			3,532,755				2,787,125				2,719,923				2,737,361				2,729,096
Shareholders’ Equity:
Common stock			489,745				302,983				302,305				301,550				300,844
Retained earnings			96,741				98,161				92,105				85,953				79,003
Accumulated other comprehensive loss			(9,778	)			(5,798	)			(6,302	)			(8,987	)			(12,381	)
Total Shareholders' Equity			576,708				395,346				388,108				378,516				367,466
Total liabilities and shareholders’ equity		$	4,109,463			$	3,182,471			$	3,108,031			$	3,115,877			$	3,096,562

		End of Period:											Percent Change From:
CREDIT QUALITY DATA		December 31,			September 30,				December 31,				September 30,			December 31,
(in $000’s, unaudited)		2019			2019				2018				2019			2018
Nonaccrual loans - held-for-investment		$	8,675		$	13,638			$	13,699			(36	)	%	(37	)	%
Restructured and loans over 90 days past due
and still accruing			1,153			609				1,188			89		%	(3	)	%
Total nonperforming loans			9,828			14,247				14,887			(31	)	%	(34	)	%
Foreclosed assets			—			—				—			N/A			N/A
Total nonperforming assets		$	9,828		$	14,247			$	14,887			(31	)	%	(34	)	%
Other restructured loans still accruing		$	436		$	247			$	253			77		%	72		%
Net charge-offs (recoveries) during the quarter		$	5,833		$	160			$	(280	)		3546		%	2183		%
Provision (credit) for loan losses during the quarter		$	3,223		$	(576	)		$	142			660		%	2170		%
Allowance for loan losses		$	23,285		$	25,895			$	27,848			(10	)	%	(16	)	%
Classified assets		$	32,579		$	20,225			$	23,409			61		%	39		%
Allowance for loan losses to total loans			0.92	%		1.38		%		1.48		%	(33	)	%	(38	)	%
Allowance for loan losses to total nonperforming loans			236.93	%		181.76		%		187.06		%	30		%	27		%
Nonperforming assets to total assets			0.24	%		0.45		%		0.48		%	(47	)	%	(50	)	%
Nonperforming loans to total loans			0.39	%		0.76		%		0.79		%	(49	)	%	(51	)	%
Classified assets to Heritage Commerce Corp
Tier 1 capital plus allowance for loan losses			8	%		6		%		8		%	33		%	0		%
Classified assets to Heritage Bank of Commerce
Tier 1 capital plus allowance for loan losses			7	%		6		%		7		%	17		%	0		%
OTHER PERIOD-END STATISTICS
(in $000’s, unaudited)
Heritage Commerce Corp:
Tangible common equity (1)		$	388,873		$	301,247			$	271,706			29		%	43		%
Shareholders’ equity / total assets			14.03	%		12.42		%		11.87		%	13		%	18		%
Tangible common equity / tangible assets (2)			9.92	%		9.75		%		9.05		%	2		%	10		%
Loan to deposit ratio			74.20	%		69.74		%		71.52		%	6		%	4		%
Noninterest-bearing deposits / total deposits			42.49	%		40.72		%		38.73		%	4		%	10		%
Total risk-based capital ratio			14.6	%		16.2		%		15.0		%	(10	)	%	(3	)	%
Tier 1 risk-based capital ratio			12.5	%		13.3		%		12.0		%	(6	)	%	4		%
Common Equity Tier 1 risk-based capital ratio			12.5	%		13.3		%		12.0		%	(6	)	%	4		%
Leverage ratio			9.8	%		10.0		%		8.9		%	(2	)	%	10		%
Heritage Bank of Commerce:
Total risk-based capital ratio			13.9	%		15.2		%		14.0		%	(9	)	%	(1	)	%
Tier 1 risk-based capital ratio			13.1	%		14.1		%		12.8		%	(7	)	%	2		%
Common Equity Tier 1 risk-based capital ratio			13.1	%		14.1		%		12.8		%	(7	)	%	2		%
Leverage ratio			10.2	%		10.6		%		9.4		%	(4	)	%	9		%

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

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

		End of Period:
CREDIT QUALITY DATA		December 31,			September 30,				June 30,				March 31,				December 31,
(in $000’s, unaudited)		2019			2019				2019				2019				2018
Nonaccrual loans - held-for-investment		$	8,675		$	13,638			$	15,695			$	15,958			$	13,699
Restructured and loans over 90 days past due
and still accruing			1,153			609				1,323				1,357				1,188
Total nonperforming loans			9,828			14,247				17,018				17,315				14,887
Foreclosed assets			—			—				—				—				—
Total nonperforming assets		$	9,828		$	14,247			$	17,018			$	17,315			$	14,887
Other restructured loans still accruing		$	436		$	247			$	175			$	201			$	253
Net charge-offs (recoveries) during the quarter		$	5,833		$	160			$	(53	)		$	(531	)		$	(280	)
Provision (credit) for loan losses during the quarter		$	3,223		$	(576	)		$	(740	)		$	(1,061	)		$	142
Allowance for loan losses		$	23,285		$	25,895			$	26,631			$	27,318			$	27,848
Classified assets		$	32,579		$	20,225			$	31,176			$	25,176			$	23,409
Allowance for loan losses to total loans			0.92	%		1.38		%		1.42		%		1.48		%		1.48		%
Allowance for loan losses to total nonperforming loans			236.93	%		181.76		%		156.49		%		157.77		%		187.06		%
Nonperforming assets to total assets			0.24	%		0.45		%		0.55		%		0.56		%		0.48		%
Nonperforming loans to total loans			0.39	%		0.76		%		0.91		%		0.94		%		0.79		%
Classified assets to Heritage Commerce Corp
Tier 1 capital plus allowance for loan losses			8	%		6		%		10		%		8		%		8		%
Classified assets to Heritage Bank of Commerce
Tier 1 capital plus allowance for loan losses			7	%		6		%		9		%		8		%		7		%
OTHER PERIOD-END STATISTICS
(in $000’s, unaudited)
Heritage Commerce Corp:
Tangible common equity (1)		$	388,873		$	301,247			$	293,455			$	283,309			$	271,706
Shareholders’ equity / total assets			14.03	%		12.42		%		12.49		%		12.15		%		11.87		%
Tangible common equity / tangible assets (2)			9.92	%		9.75		%		9.74		%		9.38		%		9.05		%
Loan to deposit ratio			74.20	%		69.74		%		71.60		%		70.01		%		71.52		%
Noninterest-bearing deposits / total deposits			42.49	%		40.72		%		37.91		%		38.51		%		38.73		%
Total risk-based capital ratio			14.6	%		16.2		%		15.9		%		15.6		%		15.0		%
Tier 1 risk-based capital ratio			12.5	%		13.3		%		13.0		%		12.6		%		12.0		%
Common Equity Tier 1 risk-based capital ratio			12.5	%		13.3		%		13.0		%		12.6		%		12.0		%
Leverage ratio			9.8	%		10.0		%		9.9		%		9.5		%		8.9		%
Heritage Bank of Commerce:
Total risk-based capital ratio			13.9	%		15.2		%		14.9		%		14.6		%		14.0		%
Tier 1 risk-based capital ratio			13.1	%		14.1		%		13.7		%		13.4		%		12.8		%
Common Equity Tier 1 risk-based capital ratio			13.1	%		14.1		%		13.7		%		13.4		%		12.8		%
Leverage ratio			10.2	%		10.6		%		10.5		%		10.1		%		9.4		%

(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, 2019									December 31, 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)		$	2,446,101			35,487			5.76	%	$	1,873,621		$	28,364			6.01	%
Securities - taxable			653,623			3,687			2.24	%		692,903			4,099			2.35	%
Securities - exempt from Federal tax (3)			82,034			663			3.21	%		86,597			697			3.19	%
Other investments and interest-bearing deposits
in other financial institutions			580,481			2,773			1.90	%		327,086			2,365			2.87	%
Total interest earning assets (3)			3,762,239			42,610			4.49	%		2,980,207			35,525			4.73	%
Cash and due from banks			48,313									40,963
Premises and equipment, net			8,497									7,201
Goodwill and other intangible assets			180,293									96,112
Other assets			124,676									83,694
Total assets		$	4,124,018								$	3,208,177
Liabilities and shareholders’ equity:
Deposits:
Demand, noninterest-bearing		$	1,452,893								$	1,107,813
Demand, interest-bearing			789,465			600			0.30	%		678,983			566			0.33	%
Savings and money market			1,009,880			1,283			0.50	%		802,384			878			0.43	%
Time deposits - under $100			19,613			28			0.57	%		21,787			22			0.40	%
Time deposits - $100 and over			143,095			373			1.03	%		127,911			266			0.83	%
CDARS - money market and time deposits			17,825			2			0.04	%		13,242			2			0.06	%
Total interest-bearing deposits			1,979,878			2,286			0.46	%		1,644,307			1,734			0.42	%
Total deposits			3,432,771			2,286			0.26	%		2,752,120			1,734			0.25	%
Subordinated debt, net of issuance costs			46,758			955			8.10	%		39,341			583			5.88	%
Short-term borrowings			470			1			0.84	%		142			1			2.79	%
Total interest-bearing liabilities			2,027,106			3,242			0.63	%		1,683,790			2,318			0.55	%
Total interest-bearing liabilities and demand,
noninterest-bearing / cost of funds			3,479,999			3,242			0.37	%		2,791,603			2,318			0.33	%
Other liabilities			85,541									59,069
Total liabilities			3,565,540									2,850,672
Shareholders’ equity			558,478									357,505
Total liabilities and shareholders’ equity		$	4,124,018								$	3,208,177
Net interest income (3) / margin						39,368			4.15	%					33,207			4.42	%
Less tax equivalent adjustment (3)						(139	)								(147	)
Net interest income					$	39,229								$	33,060

(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 $90,000 for the fourth quarter of 2019, compared to $53,000 for the fourth 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
		December 31, 2019									September 30, 2019
					Interest				Average					Interest				Average
NET INTEREST INCOME AND NET INTEREST MARGIN		Average			Income/				Yield/		Average			Income/				Yield/
(in $000’s, unaudited)		Balance			Expense				Rate		Balance			Expense				Rate
Assets:
Loans, gross (1)(2)		$	2,446,101		$	35,487			5.76	%	$	1,855,840			27,264			5.83	%
Securities - taxable			653,623			3,687			2.24	%		629,339			3,504			2.21	%
Securities - exempt from Federal tax (3)			82,034			663			3.21	%		83,403			671			3.19	%
Other investments and interest-bearing deposits
in other financial institutions			580,481			2,773			1.90	%		310,008			1,952			2.50	%
Total interest earning assets (3)			3,762,239			42,610			4.49	%		2,878,590			33,391			4.60	%
Cash and due from banks			48,313									37,615
Premises and equipment, net			8,497									6,933
Goodwill and other intangible assets			180,293									94,441
Other assets			124,676									85,464
Total assets		$	4,124,018								$	3,103,043
Liabilities and shareholders’ equity:
Deposits:
Demand, noninterest-bearing		$	1,452,893								$	1,041,712
Demand, interest-bearing			789,465			600			0.30	%		670,203			571			0.34	%
Savings and money market			1,009,880			1,283			0.50	%		737,484			1,073			0.58	%
Time deposits - under $100			19,613			28			0.57	%		18,549			23			0.49	%
Time deposits - $100 and over			143,095			373			1.03	%		127,314			373			1.16	%
CDARS - money market and time deposits			17,825			2			0.04	%		16,990			2			0.05	%
Total interest-bearing deposits			1,979,878			2,286			0.46	%		1,570,540			2,042			0.52	%
Total deposits			3,432,771			2,286			0.26	%		2,612,252			2,042			0.31	%
Subordinated debt, net of issuance costs			46,758			955			8.10	%		39,477			583			5.86	%
Short-term borrowings			470			1			0.84	%		151			—			0.00	%
Total interest-bearing liabilities			2,027,106			3,242			0.63	%		1,610,168			2,625			0.65	%
Total interest-bearing liabilities and demand,
noninterest-bearing / cost of funds			3,479,999			3,242			0.37	%		2,651,880			2,625			0.39	%
Other liabilities			85,541									60,077
Total liabilities			3,565,540									2,711,957
Shareholders’ equity			558,478									391,086
Total liabilities and shareholders’ equity		$	4,124,018								$	3,103,043
Net interest income (3) / margin						39,368			4.15	%					30,766			4.24	%
Less tax equivalent adjustment (3)						(139	)								(141	)
Net interest income					$	39,229								$	30,625

(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 $90,000 for the fourth quarter of 2019, compared to $189,000 for the third quarter of 2019.

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

		For the Year Ended									For the Year Ended
		December 31, 2019									December 31, 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)		$	1,994,917		$	116,808			5.86	%	$	1,801,015		$	105,635			5.87	%
Securities - taxable			682,602			15,836			2.32	%		669,994			15,211			2.27	%
Securities - exempt from Federal tax (3)			84,165			2,720			3.23	%		87,639			2,817			3.21	%
Other investments, interest-bearing deposits in other
financial institutions and Federal funds sold			332,905			7,867			2.36	%		285,702			6,774			2.37	%
Total interest earning assets (3)			3,094,589			143,231			4.63	%		2,844,350			130,437			4.59	%
Cash and due from banks			40,070									38,665
Premises and equipment, net			7,395									7,298
Goodwill and other intangible assets			116,481									82,398
Other assets			95,235									82,925
Total assets		$	3,353,770								$	3,055,636
Liabilities and shareholders’ equity:
Deposits:
Demand, noninterest-bearing		$	1,131,098								$	1,029,860
Demand, interest-bearing			712,186			2,401			0.34	%		658,386			1,885			0.29	%
Savings and money market			811,266			4,298			0.53	%		777,749			2,701			0.35	%
Time deposits - under $100			19,448			94			0.48	%		21,375			80			0.37	%
Time deposits - $100 and over			130,856			1,359			1.04	%		130,548			830			0.64	%
CDARS - money market and time deposits			15,078			7			0.05	%		15,369			10			0.07	%
Total interest-bearing deposits			1,688,834			8,159			0.48	%		1,603,427			5,506			0.34	%
Total deposits			2,819,932			8,159			0.29	%		2,633,287			5,506			0.21	%
Subordinated debt, net of issuance costs			41,278			2,686			6.51	%		39,270			2,314			5.89	%
Short-term borrowings			208			2			0.96	%		106			2			1.89	%
Total interest-bearing liabilities			1,730,320			10,847			0.63	%		1,642,803			7,822			0.48	%
Total interest-bearing liabilities and demand,
noninterest-bearing / cost of funds			2,861,418			10,847			0.38	%		2,672,663			7,822			0.29	%
Other liabilities			66,678									55,416
Total liabilities			2,928,096									2,728,079
Shareholders’ equity			425,674									327,557
Total liabilities and shareholders’ equity		$	3,353,770								$	3,055,636
Net interest income (3) / margin						132,384			4.28	%					122,615			4.31	%
Less tax equivalent adjustment (3)						(572	)								(592	)
Net interest income					$	131,812								$	122,023

(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 $580,000 for the year ended December 31, 2019, compared to $375,000 for the year ended December 31, 2018.

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