SAN JOSE, Calif., Oct. 24, 2019 (GLOBE NEWSWIRE) -- Heritage Commerce Corp (Nasdaq: HTBK), the holding company (the “Company”) for Heritage Bank of Commerce (the “Bank”), today announced net income was $11.3 million, or $0.26 per average diluted common share, for the third quarter of 2019, compared to $12.4 million, or $0.28 per average diluted common share, for the third quarter of 2018, and $11.4 million, or $0.26 per average diluted common share, for the second quarter of 2019. For the nine months ended September 30, 2019, net income was $34.8 million, or $0.80 per average diluted common share, compared to $22.1 million, or $0.53 per average diluted common share, for the nine months ended September 30, 2018. All results are unaudited.

Earnings for the second quarter of 2019, the third quarter of 2019, and the first nine months of 2019 were reduced by merger-related costs of $540,000, $661,000, and $1.2 million, respectively, related to the merger with Presidio Bank (“Presidio”) which was completed on October 11, 2019. Earnings for the third quarter of 2018 and for the first nine months of 2018 were reduced by merger-related costs of $199,000 and $9.0 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.

“Our solid third quarter of 2019 financial results continue to demonstrate the strength of our franchise, generating record earnings for the first nine months of 2019,” said Keith A. Wilton, President and Chief Executive Officer. “We delivered improved credit quality metrics, with noteworthy reductions in nonperforming loans and classified assets. Despite a very challenging interest rate environment, our loan and deposit trends were stable with noninterest-bearing deposits increasing 10% on a linked quarter basis and representing 41% of total deposits as of September 30, 2019.

“We completed the acquisition of Presidio Bank on October 11, 2019, and are pleased to welcome their employees, customers and shareholders to the Heritage Bank of Commerce family,” added Mr. Wilton. “This continuation of our strategic growth offers our new customers a broad array of new product offerings, increased lending limits and an expanded branch delivery system that stretches throughout the Greater San Francisco Bay Area. We remain focused on creating value for all of our customers – new and old – our communities, shareholders, and our many employees who support our customers each and every day.”

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

Operating Results:

♦ Diluted earnings per share were $0.26 for the third quarter of 2019, compared to $0.28 for the third quarter of 2018, and $0.26 for the second quarter of 2019.  Diluted earnings per share were $0.80 for the first nine months of 2019, compared to $0.53 for the first nine months of 2018.  

• Earnings for the third quarter of 2019, second quarter of 2019, and first nine months of 2019 were reduced by merger-related costs for the merger with Presidio, and earnings for the third quarter of 2018, and first nine months of 2018 were reduced by merger-related costs for the acquisitions of Tri-Valley and United American, as follows:
               

		For the Quarter Ended									For the Nine Months Ended
MERGER-RELATED COSTS		September 30,			June 30,			September 30,			September 30,			September 30,
(in $000’s, unaudited)		2019			2019			2018			2019			2018
Salaries and employee benefits		$	—		$	—		$	183		$	—		$	3,576
Other			661			540			16			1,201			5,452
Total merger-related costs		$	661		$	540		$	199		$	1,201		$	9,028

♦ 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 Nine Months Ended
		September 30,				June 30,				September 30,				September 30,				September 30,
		2019				2019				2018				2019				2018
Return on average tangible assets		1.49	%			1.53	%			1.59	%			1.55	%			1.01	%
Return on average tangible equity		15.08	%			15.94	%			19.36	%			16.26	%			12.33	%

♦ Net interest income, before provision for loan losses, decreased 6% to $30.6 million for the third quarter of 2019, compared to $32.5 million for the third quarter of 2018, and decreased 1% from $30.9 million for the second quarter of 2019. Net interest income increased 4% to $92.6 million for the first nine months of 2019, compared to $89.0 million for the first nine months of 2018. 

• The fully tax equivalent (“FTE”) net interest margin contracted 12 basis points to 4.24% for the third quarter of 2019, from 4.36% for the third quarter of 2018, primarily due to a decline in the average balance of loans and a higher cost of deposits. The net interest margin contracted 14 basis points for the third quarter of 2019 from 4.38% for the second quarter of 2019, primarily due to a decrease in the average yield on loans, securities and overnight funds, partially offset by a higher average balance of loans.
               
  
• For the first nine months of 2019, the net interest margin expanded 6 basis points to 4.33%, compared to 4.27% for the first nine months of 2018, primarily due to a higher average balance of loans and securities, the impact of increases in the yields on loans, investment securities, and overnight funds, and an increase in the accretion of the loan purchase discount into loan interest income from the acquisitions, partially offset by an increase in the cost of deposits, and a decrease in the average balance of Bay View Funding’s factored receivables.

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

		For the Quarter Ended									For the Quarter Ended
		September 30, 2019									September 30, 2018
		Average				Interest			Average		Average				Interest			Average
(in $000’s, unaudited)		Balance				Income			Yield		Balance				Income			Yield
Loans, core bank and asset-based lending		$	1,748,379			$	23,401		5.31	%	$	1,780,025			$	23,374		5.21	%
Bay View Funding factored receivables			47,614				2,879		23.99	%		69,740				4,185		23.81	%
Residential mortgages			34,639				229		2.62	%		40,277				272		2.68	%
Purchased commercial real estate ("CRE")  loans			30,567				284		3.69	%		36,167				295		3.24	%
Loan credit mark / accretion			(5,359	)			471		0.11	%		(7,418	)			506		0.11	%
Total loans		$	1,855,840			$	27,264		5.83	%	$	1,918,791			$	28,632		5.92	%

• The average yield on the total loan portfolio decreased to 5.83% for the third quarter of 2019, compared to 5.92% for the third quarter of 2018, primarily due to a decrease in the average balance of Bay View Funding’s factored receivables.

		For the Quarter Ended									For the Quarter Ended
		September 30, 2019									June 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		$	1,748,379			$	23,401		5.31	%	$	1,727,988			$	23,342		5.42	%
Bay View Funding factored receivables			47,614				2,879		23.99	%		45,708				2,967		26.04	%
Residential mortgages			34,639				229		2.62	%		36,136				234		2.60	%
Purchased CRE loans			30,567				284		3.69	%		31,484				290		3.69	%
Loan credit mark / accretion			(5,359	)			471		0.11	%		(5,842	)			418		0.10	%
Total loans		$	1,855,840			$	27,264		5.83	%	$	1,835,474			$	27,251		5.96	%

• The average yield on the total loan portfolio decreased to 5.83% for the third quarter of 2019, compared to 5.96% for the second quarter of 2019, primarily due to decreases in the prime rate on loans.

		For the Nine Months Ended									For the Nine Months Ended
		September 30, 2019									September 30, 2018
		Average				Interest			Average		Average				Interest			Average
(in $000’s, unaudited)		Balance				Income			Yield		Balance				Income			Yield
Loans, core bank and asset-based lending		$	1,733,784			$	69,594		5.37	%	$	1,645,615			$	63,556		5.16	%
Bay View Funding factored receivables			47,271				8,800		24.89	%		57,096				10,687		25.03	%
Residential mortgages			35,840				714		2.66	%		41,959				850		2.71	%
Purchased CRE loans			31,788				869		3.65	%		36,740				947		3.45	%
Loan credit mark / accretion			(5,813	)			1,344		0.10	%		(4,864	)			1,232		0.10	%
Total loans		$	1,842,870			$	81,321		5.90	%	$	1,776,546			$	77,272		5.82	%

• The average yield on the total loan portfolio increased to 5.90% for the nine months ended September 30, 2019, compared to 5.82% for the nine months ended September 30, 2018, primarily due to increases in the prime rate, and an increase in the accretion of the loan purchase discount into loan interest income from the acquisitions.
               
  
• The total purchase discount on loans from Focus Business Bank (“Focus”) loan portfolio was $5.4 million on the acquisition date of August 20, 2015, of which $437,000 remains outstanding as of September 30, 2019. The total purchase discount on loans from Tri-Valley loan portfolio was $2.6 million on the acquisition date of April 6, 2018, of which $1.8 million remains outstanding as of September 30, 2019. The total purchase discount on loans from United American loan portfolio was $4.7 million on the acquisition date of May 4, 2018, of which $2.9 million remains outstanding as of September 30, 2019.

♦ The cost of total deposits was 0.31% for the third quarter of 2019, compared to 0.23% for the third quarter of 2018 and 0.31% for the second quarter of 2019. The cost of total deposits was 0.30% for the nine months ended September 30, 2019, compared to 0.19% for the nine months ended September 30, 2018.

♦ There was a $576,000 credit to the provision for loan losses for the third quarter of 2019, compared to a $425,000 credit to the provision for loan losses for the third quarter of 2018, and a $740,000 credit to the provision for loan losses for the second quarter of 2019. There was a $2.4 million credit to the provision for loan losses for the nine months ended September 30, 2019, compared to a $7.3 million provision for loan losses for the nine months ended September 30, 2018. The higher provision for loan losses for the nine months ended September 30, 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 increased to $2.6 million for the third quarter of 2019, compared to $2.2 million the third quarter of 2018, primarily due to a $330,000 gain on sales of securities for the third quarter of 2019. Noninterest income declined to $2.6 million for the third quarter of 2019 from $2.8 million for the second quarter of 2019, primarily due to a higher gain on the sales of securities for the second quarter of 2019. 

• For the nine months ended September 30, 2019, noninterest income increased to $7.9 million, compared to $7.2 million for the nine months ended September 30, 2018. The increase in noninterest income for the first nine months of 2019, was primarily due to higher service charges and fees on deposit accounts, and a higher gain on sales of securities for the first nine months of 2019, partially offset by lower gain on sales of Small Business Administration (“SBA”) loans for the first nine months of 2019, and proceeds from a legal settlement in the first nine months of 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 third quarter of 2019 increased to $17.9 million, compared to $17.7 million for the third quarter of 2018, primarily due to higher merger-related costs for the third quarter of 2019. Noninterest expense for the third quarter of 2019 included total merger-related costs of $661,000 for the Presidio acquisition (all included in other noninterest expense), compared to total merger-related costs of $199,000 for the third quarter of 2018 for the Tri-Valley and United American acquisitions. The merger-related costs of $199,000 for the third quarter of 2018 consisted of $183,000 included in salaries and employee benefits expense and $16,000 included in other noninterest expense. Total noninterest expense for the third quarter of 2019 decreased to $17.9 million, compared to $18.4 million for the second quarter of 2019, primarily due to lower salaries and employee benefits and lower other noninterest expense. 

• Total noninterest expense for the nine months ended September 30, 2019 decreased to $54.3 million, compared to $58.6 million for the nine months ended September 30, 2018, primarily due to lower merger-related costs, partially offset by higher professional fees. Noninterest expense for the nine months ended September 30, 2019 included total merger-related costs of $1.2 million for the Presidio acquisition (all included in other noninterest expense), compared to total merger-related costs of $9.0 million for the nine months ended September 30, 2018 for the Tri-Valley and United American acquisitions. The merger-related costs of $9.0 million for the nine months ended September 30, 2018 consisted of $3.6 million included in salaries and employee benefits and $5.4 million in other noninterest expense. Professional fees for the nine months ended September 30, 2018 included a recovery of $922,000 from a legal settlement. 
  
  
•  Full time equivalent employees were 308 at September 30, 2019, 296 at September 30, 2018, and 309 at June 30, 2019.

♦ The efficiency ratio was 53.87% for the third quarter of 2019, compared to 51.15% for the third quarter of 2018, and 54.76% for the second quarter of 2019. The efficiency ratio for the nine months ended September 30, 2019 was 54.04%, compared to 60.93% for the nine months ended September 30, 2018.   

♦ Income tax expense was $4.6 million for the third quarter of 2019, compared to $5.0 million for the third quarter of 2018, and $4.6 million for the second quarter of 2019. Income tax expense for the nine months ended September 30, 2019 was $13.8 million, compared to $8.2 million for the nine months ended September 30, 2018. The effective tax rate for the third quarter of 2019 was 29.1%, compared to 28.7% for the third quarter of 2018, and 28.9% for the second quarter of 2019. The effective tax rate for the nine months ended September 30, 2019 was 28.4%, compared to 27.0% for the nine months ended September 30, 2018.

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

Balance Sheet Review, Capital Management and Credit Quality:

♦ Total assets remained relatively flat at $3.18 billion at September 30, 2019, compared to $3.19 billion at September 30, 2018 and increased 2% from $3.11 billion at June 30, 2019. 

♦ Securities available-for-sale, at fair value, totaled $333.1 million at September 30, 2019, compared to $319.1 million at September 30, 2018, and $383.1 million at June 30, 2019. At September 30, 2019, the Company’s securities available-for-sale portfolio comprised $212.7 million of agency mortgage-backed securities (all issued by U.S. Government sponsored entities), and $120.4 million of U.S. Treasury. The pre-tax unrealized gain on securities available-for-sale at September 30, 2019 was $1.7 million, compared to a pre-tax unrealized loss on securities available-for-sale of ($12.7) million at September 30, 2018, and a pre-tax unrealized gain on securities available-for-sale of $915,000 at June 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.    

• During the third quarter of 2019, the Company sold $38.9 million of securities available-for-sale for a net gain of $330,000. The securities sold consisted of $18.6 million of agency mortgage-backed securities and $20.3 million of U.S. Treasury securities.        

♦ At September 30, 2019, securities held-to-maturity, at amortized cost, totaled $342.0 million, compared to $375.7 million at September 30, 2018, and $351.4 million at June 30, 2019. At September 30, 2019, the Company’s securities held-to-maturity portfolio was comprised of $259.3 million of agency mortgage-backed securities, and $82.7 million of tax-exempt municipal bonds.    

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

LOANS		September 30, 2019						June 30, 2019						September 30, 2018
(in $000’s, unaudited)		Balance				% to Total		Balance				% to Total		Balance				% to Total
Commercial		$	528,060			28	%	$	567,529			30	%	$	600,594			32	%
Real estate:
CRE			1,080,235			58	%		1,037,885			55	%		988,491			52	%
Land and construction			96,610			5	%		97,297			5	%		131,548			7	%
Home equity			111,610			6	%		116,057			6	%		116,657			6	%
Residential mortgages			47,276			2	%		48,944			3	%		52,441			2	%
Consumer			11,701			1	%		10,279			1	%		9,932			1	%
Total Loans			1,875,492			100	%		1,877,991			100	%		1,899,663			100	%
Deferred loan fees, net			(105	)		-			(224	)		—			(276	)		—
Loans, net of deferred fees		$	1,875,387			100	%	$	1,877,767			100	%	$	1,899,387			100	%

• Loans, excluding loans held-for-sale, decreased $24.0 million or (1%), to $1.88 billion at September 30, 2019, compared to $1.90 billion at September 30, 2018, primarily due to a decline of $72.5 million in commercial loans (“C&I”), $34.9 million in land and construction loans, $5.0 million in home equity loans, $4.8 million in purchased residential mortgages, and $3.8 million in purchased CRE loans, partially offset by an increase of $95.5 million in CRE loans. Loans, excluding loans held-for-sale, remained flat at $1.88 billion at September 30, 2019, compared to $1.88 billion June 30, 2019.
  
  
• C&I line usage was 35% at September 30, 2019, compared to 40% at June 30, 2019, and 36% at September 30, 2018.
  
  
• At September 30, 2019, 38% of the CRE loan portfolio was secured by owner-occupied real estate.

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

		For the Quarter Ended												For the Nine Months Ended
ALLOWANCE FOR LOAN LOSSES		September 30,				June 30,				September 30,				September 30,				September 30,
(in $000’s, unaudited)		2019				2019				2018				2019				2018
Balance at beginning of period		$	26,631			$	27,318			$	26,664			$	27,848			$	19,658
Charge-offs during the period			(318	)			(76	)			(744	)			(620	)			(1,860	)
Recoveries during the period			158				129				1,931				1,044				2,349
Net recoveries (charge-offs) during the period			(160	)			53				1,187				424				489
Provision (credit) for loan losses during the period			(576	)			(740	)			(425	)			(2,377	)			7,279
Balance at end of period		$	25,895			$	26,631			$	27,426			$	25,895			$	27,426
Total loans, net of deferred fees		$	1,875,387			$	1,877,767			$	1,899,387			$	1,875,387			$	1,899,387
Total nonperforming loans		$	14,247			$	17,018			$	24,715			$	14,247			$	24,715
Allowance for loan losses to total loans			1.38		%		1.42		%		1.44		%		1.38		%		1.44		%
Allowance for loan losses to total nonperforming loans			181.76		%		156.49		%		110.97		%		181.76		%		110.97		%

• The ALLL was 1.38% of total loans at September 30, 2019, compared to 1.44% at September 30, 2018, and 1.42% at June 30, 2019.  The ALLL to total nonperforming loans was 181.76% at September 30, 2019, compared to 110.97% at September 30, 2018, and 156.49% at June 30, 2019.
  
  
• Net charge-offs totaled $160,000 for the third quarter of 2019, compared to net recoveries of $1.2 million for the third quarter of 2018, and net recoveries of $53,000 for the second quarter of 2019.        

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

		End of Period:
NONPERFORMING ASSETS		September 30, 2019					June 30, 2019					September 30, 2018
(in $000’s, unaudited)		Balance			% of Total		Balance			% of Total		Balance			% of Total
Commercial loans		$	7,390		52	%	$	6,583		39	%	$	17,134		69	%
CRE loans			5,094		36	%		8,442		49	%		5,639		23	%
SBA loans			1,007		7	%		513		3	%		227		1	%
Restructured and loans over 90 days past due and still accruing			609		4	%		1,323		8	%		1,373		6	%
Home equity and consumer loans			147		1	%		157		1	%		342		1	%
Total nonperforming assets		$	14,247		100	%	$	17,018		100	%	$	24,715		100	%

• NPAs totaled $14.2 million, or 0.45% of total assets, at September 30, 2019, compared to $24.7 million, or 0.77% of total assets, at September 30, 2018, and $17.0 million, or 0.55% of total assets, at June 30, 2019.
  
  • A large lending relationship was placed on nonaccrual during the second quarter of 2018. At September 30, 2019, the recorded investment of this lending relationship was $10.8 million, and the Company had a $6.0 million specific loan loss reserve allocated for this lending relationship, compared to a recorded investment of $21.8 million, and a $7.0 million specific loan loss reserve allocated for this lending relationship at September 30, 2018, and a recorded investment of $10.8 million, and a $5.9 million specific loan loss reserve allocated for this lending relationship at June 30, 2019.
  
  • The decrease in nonperforming assets at September 30, 2019 from June 30, 2019 was primarily due to the payoff of two secured CRE loans to entities affiliated with DC Solar Solutions, Inc. (“DC Solar”), which were placed on nonaccrual during the first quarter of 2019.
  
  • There were no foreclosed assets at September 30, 2019, September 30, 2018, or June 30, 2019.
  
  
• Classified assets decreased to $20.2 million, or 0.64% of total assets, at September 30, 2019, compared to $30.5 million, or 0.95% of total assets, at September 30, 2018, and $31.2 million, or 1.00% of total assets, at June 30, 2019, primarily due to the payoff of classified loans. 

♦ 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 $7.1 million on its consolidated statement of financial condition at September 30, 2019, as a result of recognizing right-of-use assets, included in other assets, and lease liabilities, included in other liabilities, related to non-cancelable operating lease agreements for office space.

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

DEPOSITS		September 30, 2019					June 30, 2019					September 30, 2018
(in $000’s, unaudited)		Balance			% to Total		Balance			% to Total		Balance			% to Total
Demand, noninterest-bearing		$	1,094,953		41	%	$	994,082		38	%	$	1,081,846		39	%
Demand, interest-bearing			666,054		25	%		682,114		26	%		670,624		24	%
Savings and money market			761,471		28	%		788,832		30	%		828,297		30	%
Time deposits — under $250			53,560		2	%		53,351		2	%		68,194		3	%
Time deposits — $250 and over			95,543		3	%		88,519		3	%		84,763		3	%
CDARS — interest-bearing demand,
money market and time deposits			17,409		1	%		15,575		1	%		11,575		1	%
Total deposits		$	2,688,990		100	%	$	2,622,473		100	%	$	2,745,299		100	%

• Total deposits decreased $56.3 million, or (2)%, to $2.69 billion at September 30, 2019, compared to $2.75 billion at September 30, 2018, and increased $66.5 million or 3% from $2.62 billion at June 30, 2019. 
  
  
•  Deposits, excluding all time deposits and CDARS deposits, decreased $58.3 million, or (2%), to $2.52 billion at September 30, 2019, compared to $2.58 billion at September 30, 2018, and increased $57.5 million or 2% at June 30, 2019, compared to $2.47 billion at June 30, 2019.             

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

								Well-capitalized
								Financial
								Institution			Basel III
		Heritage			Heritage			Basel III PCA			Minimum
		Commerce			Bank of			Regulatory			Regulatory
CAPITAL RATIOS		Corp			Commerce			Guidelines			Requirement (1)
Total Risk-Based		16.2	%		15.2	%		10.0	%		10.5	%
Tier 1 Risk-Based		13.3	%		14.1	%		8.0	%		8.5	%
Common Equity Tier 1 Risk-Based		13.3	%		14.1	%		6.5	%		7.0	%
Leverage		10.0	%		10.6	%		5.0	%		4.0	%

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

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

ACCUMULATED OTHER COMPREHENSIVE LOSS		September 30,				June 30,				September 30,
(in $000’s, unaudited)		2019				2019				2018
Unrealized gain (loss) on securities available-for-sale		$	1,202			$	675			$	(8,980	)
Remaining unamortized unrealized gain on securities
available-for-sale transferred to held-to-maturity			306				316				350
Split dollar insurance contracts liability			(3,794	)			(3,770	)			(3,740	)
Supplemental executive retirement plan liability			(3,898	)			(3,931	)			(5,417	)
Unrealized gain on interest-only strip from SBA loans			386				408				614
Total accumulated other comprehensive loss		$	(5,798	)		$	(6,302	)		$	(17,173	)

♦ Tangible equity increased to $301.2 million at September 30, 2019, compared to $257.2 million at September 30, 2018, and $293.5 million at June 30, 2019. Tangible book value per share was $6.92 at September 30, 2019, compared to $5.94 at September 30, 2018, and $6.75 at June 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 are borrowers are located, including related asset and market prices; (10) other than temporary impairment charges to our securities portfolio; (11) changes in the level of nonperforming assets and charge offs and other credit quality measures, and their impact on the adequacy of the Company’s allowance for loan losses and the Company’s provision for loan losses; (12) increased capital requirements for our continual growth or as imposed by banking regulators, which may require us to raise capital at a time when capital is not available on favorable terms or at all; (13) regulatory limits on Heritage Bank of Commerce’s ability to pay dividends to the Company; (14) changes in our capital management policies, including those regarding business combinations, dividends, and share repurchases; (15) operational issues stemming from, and/or capital spending necessitated by, the potential need to adapt to industry changes in information technology systems, on which we are highly dependent; (16) our inability to attract, recruit, and retain qualified officers and other personnel could harm our ability to implement our strategic plan, impair our relationships with customers and adversely affect our business, results of operations and growth prospects; (17) the potential increase in reserves and allowance for loan loss as a result of the transition to the current expected credit loss standard (“CECL”) established by the Financial Accounting Standards Board to account for expected credit losses; (18) possible impairment of our goodwill and other intangible assets; (19) possible adjustment of the valuation of our deferred tax assets; (20) expected cost savings in connection with the consolidation of recent acquisitions may not be fully realized or realized within the expected time frames, deposit attrition, customer loss; (21) our ability to keep pace with technological changes, including our ability to identify and address cyber-security risks such as data security breaches, “denial of service” attacks, “hacking” and identity theft; (22) inability of our framework to manage risks associated with our business, including operational risk and credit risk; (23) risks of loss of funding of Small Business Administration or SBA loan programs, or changes in those programs; (24) compliance with governmental and regulatory requirements, including the Dodd-Frank Act and others relating to banking, consumer protection, securities , accounting and tax matters; (25) significant changes in applicable laws and regulations, including those concerning taxes, banking and securities; (26) effect of changes in accounting policies and practices, as may be adopted by the regulatory agencies, as well as the Public Company Accounting Oversight Board, the Financial Accounting Standards Board and other accounting standard setters; (27) costs and effects of legal and regulatory developments, including resolution of legal proceedings or regulatory or other governmental inquiries, and the results of regulatory examinations or reviews; (28) availability of and competition for acquisition opportunities; (29) risks resulting from domestic terrorism; (30) risks of natural disasters (including earthquakes) and other events beyond our control; (31) the expected cost savings, synergies and other financial benefits from the Presidio Bank acquisition might not be realized within the expected time frames or at all; and (32) 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 Nine Months Ended:
CONSOLIDATED INCOME STATEMENTS		September 30,				June 30,				September 30,				June 30,			September 30,				September 30,				September 30,			Percent
(in $000’s, unaudited)		2019				2019				2018				2019			2018				2019				2018			Change
Interest income		$	33,250			$	33,489			$	34,610			(1	)	%	(4	)	%		$	100,188			$	94,467		6		%
Interest expense			2,625				2,573				2,159			2		%	22		%			7,605				5,504		38		%
Net interest income before provision
for loan losses			30,625				30,916				32,451			(1	)	%	(6	)	%			92,583				88,963		4		%
Provision (credit) for loan losses			(576	)			(740	)			(425	)		22		%	(36	)	%			(2,377	)			7,279		(133	)	%
Net interest income after provision
for loan losses			31,201				31,656				32,876			(1	)	%	(5	)	%			94,960				81,684		16		%
Noninterest income:
Service charges and fees on deposit accounts			1,032				1,177				1,107			(12	)	%	(7	)	%			3,370				2,981		13		%
Increase in cash surrender value of
life insurance			336				333				216			1		%	56		%			999				816		22		%
Gain on sales of securities			330				548				—			(40	)	%	N/A					878				266		230		%
Gain on sales of SBA loans			156				36				236			333		%	(34	)	%			331				551		(40	)	%
Servicing income			139				150				163			(7	)	%	(15	)	%			480				533		(10	)	%
Other			625				521				484			20		%	29		%			1,793				2,034		(12	)	%
Total noninterest income			2,618				2,765				2,206			(5	)	%	19		%			7,851				7,181		9		%
Noninterest expense:
Salaries and employee benefits			10,467				10,698				10,719			(2	)	%	(2	)	%			31,935				35,302		(10	)	%
Occupancy and equipment			1,550				1,578				1,559			(2	)	%	(1	)	%			4,634				3,927		18		%
Professional fees			789				753				721			5		%	(9	)	%			2,360				1,116		111		%
Other			5,103				5,416				4,729			(6	)	%	8		%			15,343				18,235		(16	)	%
Total noninterest expense			17,909				18,445				17,728			(3	)	%	1		%			54,272				58,580		(7	)	%
Income before income taxes			15,910				15,976				17,354			0		%	(8	)	%			48,539				30,285		60		%
Income tax expense			4,633				4,623				4,979			0		%	7		%			13,763				8,186		68		%
Net income		$	11,277			$	11,353			$	12,375			(1	)	%	(9	)	%		$	34,776			$	22,099		57		%
PER COMMON SHARE DATA
(unaudited)
Basic earnings per share		$	0.26			$	0.26			$	0.29			0		%	(10	)	%		$	0.81			$	0.54		50		%
Diluted earnings per share		$	0.26			$	0.26			$	0.28			(1	)	%	(8	)	%		$	0.80			$	0.53		51		%
Weighted average shares outstanding - basic			43,258,983				43,202,562				43,230,016			0		%	0		%			43,189,710				41,132,043		5		%
Weighted average shares outstanding - diluted			43,796,904				43,721,451				43,731,370			0		%	0		%			43,728,085				41,683,044		5		%
Common shares outstanding at period-end			43,509,406				43,498,406				43,271,676			0		%	1		%			43,509,406				43,271,676		1		%
Dividend per share		$	0.12			$	0.12			$	0.11			0		%	9		%		$	0.36			$	0.33		9		%
Book value per share		$	9.09			$	8.92			$	8.17			2		%	11		%		$	9.09			$	8.17		11		%
Tangible book value per share		$	6.92			$	6.75			$	5.94			3		%	16		%		$	6.92			$	5.94		16		%
KEY FINANCIAL RATIOS
(unaudited)
Annualized return on average equity			11.44		%		11.96		%		14.03		%	(4	)	%	(18	)	%			12.21		%		9.31	%	31		%
Annualized return on average tangible equity			15.08		%		15.94		%		19.36		%	(5	)	%	(22	)	%			16.26		%		12.33	%	32		%
Annualized return on average assets			1.44		%		1.48		%		1.54		%	(3	)	%	(6	)	%			1.50		%		0.98	%	53		%
Annualized return on average tangible assets			1.49		%		1.53		%		1.59		%	(3	)	%	(6	)	%			1.55		%		1.01	%	53		%
Net interest margin (fully tax equivalent)			4.24		%		4.38		%		4.36		%	(3	)	%	(3	)	%			4.33		%		4.27	%	1		%
Efficiency ratio			53.87		%		54.76		%		51.15		%	(2	)	%	5		%			54.04		%		60.93	%	(11	)	%
AVERAGE BALANCES
(in $000’s, unaudited)
Average assets		$	3,103,043			$	3,070,043			$	3,193,139			1		%	(3	)	%		$	3,094,199			$	3,004,230		3		%
Average tangible assets		$	3,008,602			$	2,975,096			$	3,096,703			1		%	(3	)	%		$	2,999,223			$	2,926,453		2		%
Average earning assets		$	2,878,590			$	2,844,677			$	2,965,926			1		%	(3	)	%		$	2,869,594			$	2,798,567		3		%
Average loans held-for-sale		$	4,171			$	4,256			$	7,076			(2	)	%	(41	)	%		$	3,854			$	4,591		(16	)	%
Average total loans		$	1,851,669			$	1,831,218			$	1,911,715			1		%	(3	)	%		$	1,839,016			$	1,771,955		4		%
Average deposits		$	2,612,252			$	2,590,933			$	2,749,026			1		%	(5	)	%		$	2,613,406			$	2,593,240		1		%
Average demand deposits - noninterest-bearing		$	1,041,712			$	1,001,914			$	1,071,638			4		%	(3	)	%		$	1,022,654			$	1,003,590		2		%
Average interest-bearing deposits		$	1,570,540			$	1,589,019			$	1,677,388			(1	)	%	(6	)	%		$	1,590,752			$	1,589,650		0		%
Average interest-bearing liabilities		$	1,610,168			$	1,628,554			$	1,716,813			(1	)	%	(6	)	%		$	1,630,286			$	1,628,972		0		%
Average equity		$	391,086			$	380,605			$	349,971			3		%	12		%		$	380,919			$	317,464		20		%
Average tangible equity		$	296,645			$	285,658			$	253,535			4		%	17		%		$	285,943			$	239,687		19		%

		For the Quarter Ended:
CONSOLIDATED INCOME STATEMENTS		September 30,				June 30,				March 31,				December 31,			September 30,
(in $000’s, unaudited)		2019				2019				2019				2018			2018
Interest income		$	33,250			$	33,489			$	33,449			$	35,378		$	34,610
Interest expense			2,625				2,573				2,407				2,318			2,159
Net interest income before provision
for loan losses			30,625				30,916				31,042				33,060			32,451
Provision (credit) for loan losses			(576	)			(740	)			(1,061	)			142			(425	)
Net interest income after provision
for loan losses			31,201				31,656				32,103				32,918			32,876
Noninterest income:
Service charges and fees on deposit accounts			1,032				1,177				1,161				1,132			1,107
Increase in cash surrender value of
life insurance			336				333				330				229			216
Gain on sales of securities			330				548				—				—			—
Gain on sales of SBA loans			156				36				139				147			236
Servicing income			139				150				191				176			163
Other			625				521				647				709			484
Total noninterest income			2,618				2,765				2,468				2,393			2,206
Noninterest expense:
Salaries and employee benefits			10,467				10,698				10,770				9,699			10,719
Occupancy and equipment			1,550				1,578				1,506				1,484			1,559
Professional fees			789				753				818				853			721
Other			5,103				5,416				4,824				4,905			4,729
Total noninterest expense			17,909				18,445				17,918				16,941			17,728
Income before income taxes			15,910				15,976				16,653				18,370			17,354
Income tax expense			4,633				4,623				4,507				5,138			4,979
Net income		$	11,277			$	11,353			$	12,146			$	13,232		$	12,375
PER COMMON SHARE DATA
(unaudited)
Basic earnings per share		$	0.26			$	0.26			$	0.28			$	0.31		$	0.29
Diluted earnings per share		$	0.26			$	0.26			$	0.28			$	0.30		$	0.28
Weighted average shares outstanding - basic			43,258,983				43,202,562				43,108,208				43,079,470			43,230,016
Weighted average shares outstanding - diluted			43,796,904				43,721,451				43,670,341				43,691,222			43,731,370
Common shares outstanding at period-end			43,509,406				43,498,406				43,323,753				43,288,750			43,271,676
Dividend per share		$	0.12			$	0.12			$	0.12			$	0.11		$	0.11
Book value per share		$	9.09			$	8.92			$	8.74			$	8.49		$	8.17
Tangible book value per share		$	6.92			$	6.75			$	6.54			$	6.28		$	5.94
KEY FINANCIAL RATIOS
(unaudited)
Annualized return on average equity			11.44		%		11.96		%		13.28		%		14.68	%		14.03		%
Annualized return on average tangible equity			15.08		%		15.94		%		17.90		%		20.08	%		19.36		%
Annualized return on average assets			1.44		%		1.48		%		1.58		%		1.64	%		1.54		%
Annualized return on average tangible assets			1.49		%		1.53		%		1.63		%		1.69	%		1.59		%
Net interest margin (fully tax equivalent)			4.24		%		4.38		%		4.38		%		4.42	%		4.36		%
Efficiency ratio			53.87		%		54.76		%		53.47		%		47.78	%		51.15		%
AVERAGE BALANCES
(in $000’s, unaudited)
Average assets		$	3,103,043			$	3,070,043			$	3,109,583			$	3,208,177		$	3,193,139
Average tangible assets		$	3,008,602			$	2,975,096			$	3,014,029			$	3,112,065		$	3,096,703
Average earning assets		$	2,878,590			$	2,844,677			$	2,885,591			$	2,980,207		$	2,965,926
Average loans held-for-sale		$	4,171			$	4,256			$	3,125			$	5,435		$	7,076
Average total loans		$	1,851,669			$	1,831,218			$	1,833,965			$	1,868,186		$	1,911,715
Average deposits		$	2,612,252			$	2,590,933			$	2,637,308			$	2,752,120		$	2,749,026
Average demand deposits - noninterest-bearing		$	1,041,712			$	1,001,914			$	1,024,142			$	1,107,813		$	1,071,638
Average interest-bearing deposits		$	1,570,540			$	1,589,019			$	1,613,166			$	1,644,307		$	1,677,388
Average interest-bearing liabilities		$	1,610,168			$	1,628,554			$	1,652,658			$	1,683,790		$	1,716,813
Average equity		$	391,086			$	380,605			$	370,792			$	357,505		$	349,971
Average tangible equity		$	296,645			$	285,658			$	275,238			$	261,393		$	253,535

		End of Period:												Percent Change From:
CONSOLIDATED BALANCE SHEETS		September 30,				June 30,				September 30,				June 30,			September 30,
(in $000’s, unaudited)		2019				2019				2018				2019			2018
ASSETS
Cash and due from banks		$	48,121			$	36,302			$	40,831			33		%	18		%
Other investments and interest-bearing deposits
in other financial institutions			367,662				239,710				340,198			53		%	8		%
Securities available-for-sale, at fair value			333,101				383,156				319,071			(13	)	%	4		%
Securities held-to-maturity, at amortized cost			342,033				351,399				375,732			(3	)	%	(9	)	%
Loans held-for-sale - SBA, including deferred costs			3,571				5,202				6,344			(31	)	%	(44	)	%
Loans:
Commercial			528,060				567,529				600,594			(7	)	%	(12	)	%
Real estate:
CRE			1,080,235				1,037,885				988,491			4		%	9		%
Land and construction			96,610				97,297				131,548			(1	)	%	(27	)	%
Home equity			111,610				116,057				116,657			(4	)	%	(4	)	%
Residential mortgages			47,276				48,944				52,441			(3	)	%	(10	)	%
Consumer			11,701				10,279				9,932			14		%	18		%
Loans			1,875,492				1,877,991				1,899,663			0		%	(1	)	%
Deferred loan fees, net			(105	)			(224	)			(276	)		(53	)	%	(62	)	%
Total loans, net of deferred fees			1,875,387				1,877,767				1,899,387			0		%	(1	)	%
Allowance for loan losses			(25,895	)			(26,631	)			(27,426	)		(3	)	%	(6	)	%
Loans, net			1,849,492				1,851,136				1,871,961			0		%	(1	)	%
Company-owned life insurance			62,858				62,522				61,630			1		%	2		%
Premises and equipment, net			6,849				6,975				7,246			(2	)	%	(5	)	%
Goodwill			83,753				83,753				83,752			0		%	0		%
Other intangible assets			10,346				10,900				12,614			(5	)	%	(18	)	%
Accrued interest receivable and other assets			74,685				76,976				73,531			(3	)	%	2		%
Total assets		$	3,182,471			$	3,108,031			$	3,192,910			2		%	0		%
LIABILITIES AND SHAREHOLDERS’ EQUITY
Liabilities:
Deposits:
Demand, noninterest-bearing		$	1,094,953			$	994,082			$	1,081,846			10		%	1		%
Demand, interest-bearing			666,054				682,114				670,624			(2	)	%	(1	)	%
Savings and money market			761,471				788,832				828,297			(3	)	%	(8	)	%
Time deposits-under $250			53,560				53,351				68,194			0		%	(21	)	%
Time deposits-$250 and over			95,543				88,519				84,763			8		%	13		%
CDARS - money market and time deposits			17,409				15,575				11,575			12		%	50		%
Total deposits			2,688,990				2,622,473				2,745,299			3		%	(2	)	%
Subordinated debt, net of issuance costs			39,507				39,461				39,322			0		%	0		%
Accrued interest payable and other liabilities			58,628				57,989				54,723			1		%	7		%
Total liabilities			2,787,125				2,719,923				2,839,344			2		%	(2	)	%
Shareholders’ Equity:
Common stock			302,983				302,305				300,208			0		%	1		%
Retained earnings			98,161				92,105				70,531			7		%	39		%
Accumulated other comprehensive loss			(5,798	)			(6,302	)			(17,173	)		8		%	66		%
Total Shareholders' Equity			395,346				388,108				353,566			2		%	12		%
Total liabilities and shareholders’ equity		$	3,182,471			$	3,108,031			$	3,192,910			2		%	0		%

		End of Period:
CONSOLIDATED BALANCE SHEETS		September 30,				June 30,				March 31,				December 31,				September 30,
(in $000’s, unaudited)		2019				2019				2019				2018				2018
ASSETS
Cash and due from banks		$	48,121			$	36,302			$	38,699			$	30,273			$	40,831
Other investments and interest-bearing deposits
in other financial institutions			367,662				239,710				196,278				134,295				340,198
Securities available-for-sale, at fair value			333,101				383,156				452,521				459,043				319,071
Securities held-to-maturity, at amortized cost			342,033				351,399				367,023				377,198				375,732
Loans held-for-sale - SBA, including deferred costs			3,571				5,202				3,216				2,649				6,344
Loans:
Commercial			528,060				567,529				559,718				597,763				600,594
Real estate:
CRE			1,080,235				1,037,885				1,012,641				994,067				988,491
Land and construction			96,610				97,297				98,222				122,358				131,548
Home equity			111,610				116,057				118,448				109,112				116,657
Residential mortgages			47,276				48,944				49,786				50,979				52,441
Consumer			11,701				10,279				9,690				12,453				9,932
Loans			1,875,492				1,877,991				1,848,505				1,886,732				1,899,663
Deferred loan fees, net			(105	)			(224	)			(187	)			(327	)			(276	)
Total loans, net of deferred fees			1,875,387				1,877,767				1,848,318				1,886,405				1,899,387
Allowance for loan losses			(25,895	)			(26,631	)			(27,318	)			(27,848	)			(27,426	)
Loans, net			1,849,492				1,851,136				1,821,000				1,858,557				1,871,961
Company-owned life insurance			62,858				62,522				62,189				61,859				61,630
Premises and equipment, net			6,849				6,975				6,998				7,137				7,246
Goodwill			83,753				83,753				83,753				83,753				83,752
Other intangible assets			10,346				10,900				11,454				12,007				12,614
Accrued interest receivable and other assets			74,685				76,976				72,746				69,791				73,531
Total assets		$	3,182,471			$	3,108,031			$	3,115,877			$	3,096,562			$	3,192,910
LIABILITIES AND SHAREHOLDERS’ EQUITY
Liabilities:
Deposits:
Demand, noninterest-bearing		$	1,094,953			$	994,082			$	1,016,770			$	1,021,582			$	1,081,846
Demand, interest-bearing			666,054				682,114				704,996				702,000				670,624
Savings and money market			761,471				788,832				759,306				754,277				828,297
Time deposits-under $250			53,560				53,351				56,385				58,661				68,194
Time deposits-$250 and over			95,543				88,519				90,042				86,114				84,763
CDARS - money market and time deposits			17,409				15,575				12,745				14,898				11,575
Total deposits			2,688,990				2,622,473				2,640,244				2,637,532				2,745,299
Subordinated debt, net of issuance costs			39,507				39,461				39,414				39,369				39,322
Accrued interest payable and other liabilities			58,628				57,989				57,703				52,195				54,723
Total liabilities			2,787,125				2,719,923				2,737,361				2,729,096				2,839,344
Shareholders’ Equity:
Common stock			302,983				302,305				301,550				300,844				300,208
Retained earnings			98,161				92,105				85,953				79,003				70,531
Accumulated other comprehensive loss			(5,798	)			(6,302	)			(8,987	)			(12,381	)			(17,173	)
Total Shareholders' Equity			395,346				388,108				378,516				367,466				353,566
Total liabilities and shareholders’ equity		$	3,182,471			$	3,108,031			$	3,115,877			$	3,096,562			$	3,192,910

		End of Period:												Percent Change From:
CREDIT QUALITY DATA		September 30,				June 30,				September 30,				June 30,			September 30,
(in $000’s, unaudited)		2019				2019				2018				2019			2018
Nonaccrual loans - held-for-investment		$	13,638			$	15,695			$	23,342			(13	)	%	(42	)	%
Restructured and loans over 90 days past due
and still accruing			609				1,323				1,373			(54	)	%	(56	)	%
Total nonperforming loans			14,247				17,018				24,715			(16	)	%	(42	)	%
Foreclosed assets			—				—				—			N/A			N/A
Total nonperforming assets		$	14,247			$	17,018			$	24,715			(16	)	%	(42	)	%
Other restructured loans still accruing		$	247			$	175			$	334			41		%	(26	)	%
Net charge-offs (recoveries) during the quarter		$	160			$	(53	)		$	(1,187	)		402		%	113		%
Provision (credit) for loan losses during the quarter		$	(576	)		$	(740	)		$	(425	)		22		%	(36	)	%
Allowance for loan losses		$	25,895			$	26,631			$	27,426			(3	)	%	(6	)	%
Classified assets		$	20,225			$	31,176			$	30,456			(35	)	%	(34	)	%
Allowance for loan losses to total loans			1.38		%		1.42		%		1.44		%	(3	)	%	(4	)	%
Allowance for loan losses to total nonperforming loans			181.76		%		156.49		%		110.97		%	16		%	64		%
Nonperforming assets to total assets			0.45		%		0.55		%		0.77		%	(18	)	%	(42	)	%
Nonperforming loans to total loans			0.76		%		0.91		%		1.30		%	(16	)	%	(42	)	%
Classified assets to Heritage Commerce Corp
Tier 1 capital plus allowance for loan losses			6		%		10		%		10		%	(40	)	%	(40	)	%
Classified assets to Heritage Bank of Commerce
Tier 1capital plus allowance for loan losses			6		%		9		%		10		%	(33	)	%	(40	)	%
OTHER PERIOD-END STATISTICS
(in $000’s, unaudited)
Heritage Commerce Corp:
Tangible common equity (1)		$	301,247			$	293,455			$	257,200			3		%	17		%
Shareholders’ equity / total assets			12.42		%		12.49		%		11.07		%	(1	)	%	12		%
Tangible common equity / tangible assets (2)			9.75		%		9.74		%		8.31		%	0		%	17		%
Loan to deposit ratio			69.74		%		71.60		%		69.19		%	(3	)	%	1		%
Noninterest-bearing deposits / total deposits			40.72		%		37.91		%		39.41		%	7		%	3		%
Total risk-based capital ratio			16.2		%		15.9		%		14.4		%	2		%	13		%
Tier 1 risk-based capital ratio			13.3		%		13.0		%		11.5		%	2		%	16		%
Common Equity Tier 1 risk-based capital ratio			13.3		%		13.0		%		11.5		%	2		%	16		%
Leverage ratio			10.0		%		9.9		%		8.6		%	1		%	16		%
Heritage Bank of Commerce:
Total risk-based capital ratio			15.2		%		14.9		%		13.4		%	2		%	13		%
Tier 1 risk-based capital ratio			14.1		%		13.7		%		12.2		%	3		%	16		%
Common Equity Tier 1 risk-based capital ratio			14.1		%		13.7		%		12.2		%	3		%	16		%
Leverage ratio			10.6		%		10.5		%		9.1		%	1		%	16		%

---

(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		September 30,				June 30,				March 31,				December 31,				September 30,
(in $000’s, unaudited)		2019				2019				2019				2018				2018
Nonaccrual loans - held-for-investment		$	13,638			$	15,695			$	15,958			$	13,699			$	23,342
Restructured and loans over 90 days past due
and still accruing			609				1,323				1,357				1,188				1,373
Total nonperforming loans			14,247				17,018				17,315				14,887				24,715
Foreclosed assets			—				—				—				—				—
Total nonperforming assets		$	14,247			$	17,018			$	17,315			$	14,887			$	24,715
Other restructured loans still accruing		$	247			$	175			$	201			$	253			$	334
Net charge-offs (recoveries) during the quarter		$	160			$	(53	)		$	(531	)		$	(280	)		$	(1,187	)
Provision (credit) for loan losses during the quarter		$	(576	)		$	(740	)		$	(1,061	)		$	142			$	(425	)
Allowance for loan losses		$	25,895			$	26,631			$	27,318			$	27,848			$	27,426
Classified assets		$	20,225			$	31,176			$	25,176			$	23,409			$	30,546
Allowance for loan losses to total loans			1.38		%		1.42		%		1.48		%		1.48		%		1.44		%
Allowance for loan losses to total nonperforming loans			181.76		%		156.49		%		157.77		%		187.06		%		110.97		%
Nonperforming assets to total assets			0.45		%		0.55		%		0.56		%		0.48		%		0.77		%
Nonperforming loans to total loans			0.76		%		0.91		%		0.94		%		0.79		%		1.30		%
Classified assets to Heritage Commerce Corp
Tier 1 capital plus allowance for loan losses			6		%		10		%		8		%		8		%		10		%
Classified assets to Heritage Bank of Commerce
Tier 1capital plus allowance for loan losses			6		%		9		%		8		%		7		%		10		%
OTHER PERIOD-END STATISTICS
(in $000’s, unaudited)
Heritage Commerce Corp:
Tangible common equity (1)		$	301,247			$	293,455			$	283,309			$	271,706			$	257,200
Shareholders’ equity / total assets			12.42		%		12.49		%		12.15		%		11.87		%		11.07		%
Tangible common equity / tangible assets (2)			9.75		%		9.74		%		9.38		%		9.05		%		8.31		%
Loan to deposit ratio			69.74		%		71.60		%		70.01		%		71.52		%		69.19		%
Noninterest-bearing deposits / total deposits			40.72		%		37.91		%		38.51		%		38.73		%		39.41		%
Total risk-based capital ratio			16.2		%		15.9		%		15.6		%		15.0		%		14.4		%
Tier 1 risk-based capital ratio			13.3		%		13.0		%		12.6		%		12.0		%		11.5		%
Common Equity Tier 1 risk-based capital ratio			13.3		%		13.0		%		12.6		%		12.0		%		11.5		%
Leverage ratio			10.0		%		9.9		%		9.5		%		8.9		%		8.6		%
Heritage Bank of Commerce:
Total risk-based capital ratio			15.2		%		14.9		%		14.6		%		14.0		%		13.4		%
Tier 1 risk-based capital ratio			14.1		%		13.7		%		13.4		%		12.8		%		12.2		%
Common Equity Tier 1 risk-based capital ratio			14.1		%		13.7		%		13.4		%		12.8		%		12.2		%
Leverage ratio			10.6		%		10.5		%		10.1		%		9.4		%		9.1		%

---

(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
		September 30, 2019									September 30, 2018
					Interest				Average					Interest				Average
NET INTEREST INCOME AND NET INTEREST MARGIN		Average			Income/				Yield/		Average			Income/				Yield/
(in $000’s, unaudited)		Balance			Expense				Rate		Balance			Expense				Rate
Assets:
Loans, gross (1)(2)		$	1,855,840			27,264			5.83	%	$	1,918,791		$	28,632			5.92	%
Securities - taxable			629,339			3,504			2.21	%		624,352			3,483			2.21	%
Securities - exempt from Federal tax (3)			83,403			671			3.19	%		87,410			702			3.19	%
Other investments and interest-bearing deposits
in other financial institutions			310,008			1,952			2.50	%		335,373			1,940			2.29	%
Total interest earning assets (3)			2,878,590			33,391			4.60	%		2,965,926			34,757			4.65	%
Cash and due from banks			37,615									40,704
Premises and equipment, net			6,933									7,320
Goodwill and other intangible assets			94,441									96,436
Other assets			85,464									82,753
Total assets		$	3,103,043								$	3,193,139
Liabilities and shareholders’ equity:
Deposits:
Demand, noninterest-bearing		$	1,041,712								$	1,071,638
Demand, interest-bearing			670,203			571			0.34	%		682,694			551			0.32	%
Savings and money market			737,484			1,073			0.58	%		823,762			761			0.37	%
Time deposits - under $100			18,549			23			0.49	%		23,699			23			0.39	%
Time deposits - $100 and over			127,314			373			1.16	%		131,262			237			0.72	%
CDARS - money market and time deposits			16,990			2			0.05	%		15,971			3			0.07	%
Total interest-bearing deposits			1,570,540			2,042			0.52	%		1,677,388			1,575			0.37	%
Total deposits			2,612,252			2,042			0.31	%		2,749,026			1,575			0.23	%
Subordinated debt, net of issuance costs			39,477			583			5.86	%		39,292			583			5.89	%
Short-term borrowings			151			—			0.00	%		133			1			2.98	%
Total interest-bearing liabilities			1,610,168			2,625			0.65	%		1,716,813			2,159			0.50	%
Total interest-bearing liabilities and demand,
noninterest-bearing / cost of funds			2,651,880			2,625			0.39	%		2,788,451			2,159			0.31	%
Other liabilities			60,077									54,717
Total liabilities			2,711,957									2,843,168
Shareholders’ equity			391,086									349,971
Total liabilities and shareholders’ equity		$	3,103,043								$	3,193,139
Net interest income (3) / margin						30,766			4.24	%					32,598			4.36	%
Less tax equivalent adjustment (3)						(141	)								(147	)
Net interest income					$	30,625								$	32,451

 

---

(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 $189,000 for the third quarter of 2019, compared to $73,000 for the third 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
		September 30, 2019									June 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)		$	1,855,840		$	27,264			5.83	%	$	1,835,474		$	27,251			5.96	%
Securities - taxable			629,339			3,504			2.21	%		707,710			4,136			2.34	%
Securities - exempt from Federal tax (3)			83,403			671			3.19	%		85,329			692			3.25	%
Other investments and interest-bearing deposits
in other financial institutions			310,008			1,952			2.50	%		216,164			1,556			2.89	%
Total interest earning assets (3)			2,878,590			33,391			4.60	%		2,844,677			33,635			4.74	%
Cash and due from banks			37,615									37,051
Premises and equipment, net			6,933									7,050
Goodwill and other intangible assets			94,441									94,947
Other assets			85,464									86,318
Total assets		$	3,103,043								$	3,070,043
Liabilities and shareholders’ equity:
Deposits:
Demand, noninterest-bearing		$	1,041,712								$	1,001,914
Demand, interest-bearing			670,203			571			0.34	%		686,872			612			0.36	%
Savings and money market			737,484			1,073			0.58	%		744,475			1,034			0.56	%
Time deposits - under $100			18,549			23			0.49	%		19,267			22			0.46	%
Time deposits - $100 and over			127,314			373			1.16	%		126,303			326			1.04	%
CDARS - money market and time deposits			16,990			2			0.05	%		12,102			1			0.03	%
Total interest-bearing deposits			1,570,540			2,042			0.52	%		1,589,019			1,995			0.50	%
Total deposits			2,612,252			2,042			0.31	%		2,590,933			1,995			0.31	%
Subordinated debt, net of issuance costs			39,477			583			5.86	%		39,431			577			5.87	%
Short-term borrowings			151			—			0.00	%		104			1			3.86	%
Total interest-bearing liabilities			1,610,168			2,625			0.65	%		1,628,554			2,573			0.63	%
Total interest-bearing liabilities and demand,
noninterest-bearing / cost of funds			2,651,880			2,625			0.39	%		2,630,468			2,573			0.39	%
Other liabilities			60,077									58,970
Total liabilities			2,711,957									2,689,438
Shareholders’ equity			391,086									380,605
Total liabilities and shareholders’ equity		$	3,103,043								$	3,070,043
Net interest income (3) / margin						30,766			4.24	%					31,062			4.38	%
Less tax equivalent adjustment (3)						(141	)								(146	)
Net interest income					$	30,625								$	30,916

---

(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 $189,000 for the third quarter of 2019, compared to $210,000 for the second quarter of 2019.

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

		For the Nine Months Ended									For the Nine Months Ended
		September 30, 2019									September 30, 2018
					Interest				Average					Interest				Average
NET INTEREST INCOME AND NET INTEREST MARGIN		Average			Income/				Yield/		Average			Income/				Yield/
(in $000’s, unaudited)		Balance			Expense				Rate		Balance			Expense				Rate
Assets:
Loans, gross (1)(2)		$	1,842,870		$	81,321			5.90	%	$	1,776,546		$	77,272			5.82	%
Securities - taxable			692,369			12,149			2.35	%		662,274			11,112			2.24	%
Securities - exempt from Federal tax (3)			84,882			2,057			3.24	%		87,990			2,120			3.22	%
Other investments, interest-bearing deposits in other
financial institutions and Federal funds sold			249,473			5,094			2.73	%		271,757			4,408			2.17	%
Total interest earning assets (3)			2,869,594			100,621			4.69	%		2,798,567			94,912			4.53	%
Cash and due from banks			37,293									37,890
Premises and equipment, net			7,024									7,330
Goodwill and other intangible assets			94,976									77,777
Other assets			85,312									82,666
Total assets		$	3,094,199								$	3,004,230
Liabilities and shareholders’ equity:
Deposits:
Demand, noninterest-bearing		$	1,022,654								$	1,003,590
Demand, interest-bearing			686,144			1,801			0.35	%		651,445			1,319			0.27	%
Savings and money market			744,333			3,015			0.54	%		769,448			1,823			0.32	%
Time deposits - under $100			19,392			66			0.46	%		21,235			58			0.37	%
Time deposits - $100 and over			126,732			986			1.04	%		131,436			564			0.57	%
CDARS - money market and time deposits			14,151			5			0.05	%		16,086			8			0.07	%
Total interest-bearing deposits			1,590,752			5,873			0.49	%		1,589,650			3,772			0.32	%
Total deposits			2,613,406			5,873			0.30	%		2,593,240			3,772			0.19	%
Subordinated debt, net of issuance costs			39,414			1,731			5.87	%		39,246			1,731			5.90	%
Short-term borrowings			120			1			1.11	%		76			1			1.76	%
Total interest-bearing liabilities			1,630,286			7,605			0.62	%		1,628,972			5,504			0.45	%
Total interest-bearing liabilities and demand,
noninterest-bearing / cost of funds			2,652,940			7,605			0.38	%		2,632,562			5,504			0.28	%
Other liabilities			60,340									54,204
Total liabilities			2,713,280									2,686,766
Shareholders’ equity			380,919									317,464
Total liabilities and shareholders’ equity		$	3,094,199								$	3,004,230
Net interest income (3) / margin						93,016			4.33	%					89,408			4.27	%
Less tax equivalent adjustment (3)						(433	)								(445	)
Net interest income					$	92,583								$	88,963

 

---

(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 $490,000 for the first nine months ended September 30, 2019, compared to $322,000 for the first nine months ended September 30, 2018.

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

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