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

Nachrichtenquelle: globenewswire
24.01.2020, 01:02  |  120   |   |   

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:  (408) 494-4542

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




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




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




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



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

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

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

                                 
    End of Period:  
CREDIT QUALITY DATA   December 31,    September 30,    June 30,   March 31,   December 31,   
(in $000’s, unaudited)   2019   2019     2019     2019     2018    
Nonaccrual loans - held-for-investment   $  8,675   $  13,638     $  15,695     $  15,958     $  13,699    
Restructured and loans over 90 days past due                                
  and still accruing      1,153      609        1,323        1,357        1,188    
  Total nonperforming loans      9,828      14,247        17,018        17,315        14,887    
Foreclosed assets      —      —        —        —        —    
Total nonperforming assets   $  9,828   $  14,247     $  17,018     $  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 <