• Heritage Commerce Corp
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  • Heritage Commerce Corp Reports Record Earnings of $7.4 Million for the Second Quarter 2017
    Company Release - 07/27/2017 18:21

    SAN JOSE, Calif., July 27, 2017 (GLOBE NEWSWIRE) -- Heritage Commerce Corp(Nasdaq:HTBK), the holding company (the “Company”) for Heritage Bank of Commerce (the “Bank”), today reported net income increased 2% to $7.4 million, or $0.19 per average diluted common share for the second quarter of 2017, compared to $7.3 million, or $0.19 per average diluted common share for the second quarter of 2016, and increased 14% from $6.5 million, or $0.17 per average diluted common share for the first quarter of 2017. For the six months ended June 30, 2017, net income increased 4% to $14.0 million, or $0.36 per average diluted common share, from $13.4 million, or $0.35 per average diluted common share, for the six months ended June 30, 2016.

    “We again demonstrated the effectiveness of our business strategy as we delivered record profits in the second quarter, up 14% on a linked quarter basis,” said Walter Kaczmarek, President and Chief Executive Officer.  “Steady loan grown, with continued strength in commercial real estate (“CRE”) loans, generated increased net interest income.  Deposit growth was robust increasing 15% with core deposits, excluding all time deposits and CDARS deposits, increasing 19% over the second quarter a year ago.”

    “Asset quality continued to be excellent with nonperforming assets (“NPAs”) declining 29% from a year ago, and 40% on a linked quarter basis.  Classified assets declined 67% over the second quarter a year ago, and 28% from the preceding quarter,” said Mr. Kaczmarek. 

    “We continue to deliver solid financial results through the dedication of our employees and an unwavering focus  on our customers and shareholders,” added Mr. Kaczmarek. 

    Second Quarter 2017 Highlights (as of, or for the periods ended June 30, 2017, compared to March 31, 2017, and June 30, 2016, except as noted):

    ♦  Diluted earnings per share totaled $0.19 for the second quarter of 2017, compared to $0.19 for the second quarter of 2016, and $0.17 for the first quarter of 2017. The second quarter of 2016 included a $1.0 million gain on proceeds from company-owned life insurance. Diluted earnings per share totaled $0.36 for the first six months of 2017, compared to $0.35 per diluted share for the first six months of 2016.

    ♦  For the second quarter of 2017, the return on average tangible assets was 1.14%, and the return on average tangible equity was 14.00%, compared to 1.28% and 14.68%, respectively, for the second quarter of 2016, and 1.05% and 12.69%, respectively, for the first quarter of 2017. The return on average tangible assets was 1.10%, and the return on average tangible equity was 13.41%, for the first six months of 2017, compared to 1.17% and 13.66%, respectively, for the first six months of 2016.

    ♦  During the second quarter of 2017, the Company completed an underwritten public offering of $40.0 million aggregate principal amount of its fixed-to-floating rate subordinated notes (“Subordinated Debt”) due June 1, 2027. The Subordinated Debt initially bears a fixed interest rate of 5.25% per year for five years and converts to floating rate of three month LIBOR plus 3.365% thereafter. The Subordinated Debt, net of unamortized issuance costs, totaled $39.1 million at June 30, 2017, and qualifies as Tier 2 capital for the Company under the guidelines established by the Federal Reserve Bank.

    ♦  Net interest income increased 10% to $24.9 million for the second quarter of 2017, compared to $22.7 million for the second quarter of 2016, and increased 5% from $23.8 million for the first quarter of 2017. For the first six months of 2017, net interest income increased 8% to $48.8 million, compared to $45.0 million for the first six months of 2016. 

    • For the second quarter of 2017, the fully tax equivalent (“FTE”) net interest margin contracted 20 basis points to 4.07% from 4.27% for the second quarter of 2016.  The contraction was primarily due to a higher average balance of lower yielding excess funds at the Federal Reserve Bank, and the issuance of the Subordinated Debt.  This was partially offset by higher average balances of loans and securities, and the impact of increases in the prime rate on loan yields and overnight funds. 
        
    • The net interest margin improved one basis point to 4.07% for the second quarter of 2017, from 4.06% for the first quarter of 2017.  The improvement was primarily due to higher average balances and yields on loans and securities, partially offset by the issuance of the Subordinated Debt. 
        
    • For the first six months of 2017, the net interest margin contracted 18 basis points to 4.06%, compared to 4.24% for the first six months of 2016.  The contraction was primarily due to a higher average balance of lower yielding excess funds at the Federal Reserve Bank, the issuance of the Subordinated Debt, and a decrease in the accretion of the loan purchase discount into loan interest income from the Focus Business Bank (“Focus”) acquisition.  This was partially offset by an increase in the average balances of loans and securities, and the impact of increases in the prime rate on loan yields and overnight funds. 
        
    • The impact of the Subordinated Debt and the related investment in excess funds at the Federal Reserve Bank resulted in a five basis points reduction to the net interest margin for the second quarter of 2017, and a three basis points reduction to the net interest margin for the first six months of 2017.             

    ♦  The total purchase discount on non-impaired loans from the Focus loan portfolio was $4.6 million at August 20, 2015 (“the acquisition date”), of which $3.4 million has been accreted into loan interest income from the acquisition date through June 30, 2017.

    • The accretion of the loan purchase discount into loan interest income from the Focus transaction was $257,000 for the second quarter of 2017, compared to $276,000 for the second quarter of 2016, and $213,000 for the first quarter of 2017.  
        
    • The accretion of the loan purchase discount into loan interest income from the Focus transaction was $470,000 for the first six months of 2017, compared to $794,000 for the first six months of 2016.

    ♦  Loans, excluding loans held-for-sale, increased $102.2 million, or 7%, to $1.57 billion at June 30, 2017, compared to $1.46 billion at June 30, 2016, which included an increase of $57.8 million, or 4% in the Company’s legacy portfolio, $37.9 million of purchased CRE loans, and an increase of  $15.9 million of purchased residential mortgage loans, partially offset by a decrease of $9.4 million in the factored receivables portfolio.

    • Loans increased $53.0 million, or 4%, to $1.57 billion at June 30, 2017, compared to $1.51 billion at March 31, 2017.

    ♦  The allowance for loan losses (“ALLL”) was 1.24% of total loans at June 30, 2017, compared to 1.36% at June 30, 2016, and 1.26% at March 31, 2017.  The ALLL to total nonperforming loans was 614.22% at June 30, 2017, compared to 456.90% at June 30, 2016, and 353.89% at March 31, 2017.

    • NPAs decreased to $3.3 million, or 0.12% of total assets, at June 30, 2017, compared to $4.7 million, or 0.20% of total assets, at June 30, 2016, and $5.6 million, or 0.21% of total assets, at March 31, 2017. 
        
    • Classified assets declined to $7.5 million, or 0.27% of total assets, at June 30, 2017, compared to $22.8 million, or 0.96% of total assets, at June 30, 2016, and $10.4 million, or 0.39% of total assets, at March 31, 2017.
        
    • Net recoveries totaled $308,000 for the second quarter of 2017, compared to net recoveries of $112,000 for the second quarter of 2016, and net charge-offs of $275,000 for the first quarter of 2017. 
        
    • There was a ($46,000) credit to the provision for loan losses for the second quarter of 2017, compared to a $351,000 provision for loan losses for the second quarter of 2016, and $321,000 provision for loan losses for the first quarter of 2017.  There was a $275,000 provision for loan losses for the six months ended June 30, 2017, compared to a $752,000 provision for loan losses for the six months ended June 30, 2016.

    ♦  Total deposits increased $300.9 million, or 15%, to $2.37 billion at June 30, 2017, compared to $2.07 billion at June 30, 2016, and increased $44.6 million, or 2%, from $2.33 billion at March 31, 2017. 

    ♦  The Company’s consolidated capital ratios exceeded regulatory guidelines and the Bank’s capital ratios exceeded the regulatory guidelines for a well-capitalized financial institution under the Basel III regulatory requirements at June 30, 2017.

                 
            Well-capitalized Fully Phased-in
            Financial Basel III
            Institution Minimal
      Heritage Heritage Basel III Requirement (1)
      Commerce Bank of Regulatory Effective
    CAPITAL RATIOS Corp Commerce Guidelines January 1, 2019
    Total Risk-Based  14.4  13.2  10.0  10.5%
    Tier 1 Risk-Based  11.4  12.2  8.0  8.5%
    Common Equity Tier 1 Risk-Based  11.4  12.2  6.5  7.0%
    Leverage  8.5  9.1  5.0  4.0%
     
    (1) Requirements for both the Company and the Bank include a 2.5% capital conservation buffer, except the leverage ratio.

    Operating Results

    Net interest income increased 10% to $24.9 million for the second quarter of 2017, compared to $22.7 million for the second quarter of 2016, and increased 5% from $23.8 million for the first quarter of 2017. Net interest income increased 8% to $48.8 million for the six months ended June 30, 2017, compared to $45.0 million for the six months ended June 30, 2016. Net interest income increased for the second quarter of 2017 and the first six months of 2017, compared to the respective periods in 2016, primarily due to the impact of loan growth, and an increase in the average balance of investment securities.

    For the second quarter of 2017, the net interest margin (FTE) contracted 20 basis points to 4.07% from 4.27% for the second quarter of 2016.  The contraction was primarily due to a higher average balance of lower yielding excess funds at the Federal Reserve Bank, and the issuance of the Subordinated Debt.  This was partially offset by higher average balances of loans and securities, and the impact of increases in the prime rate on loan yields and overnight funds.  The net interest margin improved one basis point for the second quarter of 2017, from 4.06% for the first quarter of 2017.  The improvement was primarily due to higher average balances and yields on loans and securities, partially offset by the issuance of the Subordinated Debt. 

    For the first six months of 2017, the net interest margin contracted 18 basis points to 4.06%, compared to 4.24% for the first six months of 2016.  The contraction was primarily due to a higher average balance of lower yielding excess funds at the Federal Reserve Bank, the issuance of the Subordinated Debt, and a decrease in the accretion of the loan purchase discount into loan interest income from the Focus acquisition.  This was partially offset by an increase in the average balances of loans and securities, and the impact of increases in the prime rate on loan yields and overnight funds.

    There was a ($46,000) credit to the provision for loan losses for the second quarter of 2017, compared to a provision for loan losses of $351,000 for the second quarter of 2016, and a provision for loan losses of $321,000 for the first quarter of 2017. There was a $275,000 provision for loan losses for the six months ended June 30, 2017, compared to a $752,000 provision for loan losses for the six months ended June 30, 2016.

    Noninterest income was $2.3 million for the second quarter of 2017, compared to $3.7 million for the second quarter of 2016, and $2.3 million for the first quarter of 2017.  For the six months ended June 30, 2017, noninterest income was $4.6 million, compared to $6.3 million for the six months ended June 30, 2016. The decrease in noninterest income for the second quarter of 2017 and first six months of 2017, compared to the same periods in 2016, was primarily due to a $1.0 million gain on proceeds from company-owned life insurance in the second quarter of 2016, and gains on sales of investment securities of $347,000 and $527,000 in the second quarter of 2016 and first six months of 2016, respectively. The decrease was partially offset by a $200,000 termination fee received from one customer of Bay View Funding, which was included in other noninterest income in the second quarter of 2017.

    Total noninterest expense for the second quarter of 2017 was $15.3 million, compared to $14.4 million for the second quarter of 2016, and $15.3 million for the first quarter of 2017.  Noninterest expense for the six months ended June 30, 2017 was $30.6 million, compared to $29.1 million for the six months ended June 30, 2016. The increase in noninterest expense in the second quarter of 2017 and the first six months of 2017, compared to the respective periods in 2016, was primarily due to higher salaries and employee benefits as a result of annual salary increases.  Noninterest expense was lower for the second quarter of 2017, compared to the first quarter of 2017, primarily due to lower salary and employee benefits and professional fees consistent with the cylical nature of these expenses.  Full time equivalent employees were 269 at June 30, 2017, 268 at June 30, 2016, and 269 at March 31, 2017. 

    The efficiency ratio for the second quarter of 2017 was 56.03%, compared to 54.47% for the second quarter of 2016, and 58.68% for the first quarter of 2017. The efficiency ratio for the six months ended June 30, 2017 was 57.33%, compared to 56.63% for the six months ended June 30, 2016.   

    Income tax expense for the second quarter of 2017 was $4.6 million, compared to $4.4 million for the second quarter of 2016, and $3.9 million for the first quarter of 2017. The effective tax rate for the second quarter of 2017 was 38.0%, compared to 37.5% for the second quarter of 2016, and 37.6% for the first quarter of 2017.  Income tax expense for the six months ended June 30, 2017 was $8.5 million, compared to $8.1 million for the six months ended June 30, 2016. The effective tax rate for the six months ended June 30, 2017 was 37.8%, compared to 37.7% for the six months ended June 30, 2016. The difference in the effective tax rate for the periods reported, compared to the combined Federal and state statutory tax rate of 42%, 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 15% to $2.73 billion at June 30, 2017, compared to $2.38 billion at June 30, 2016, and increased 3% from $2.64 billion at March 31, 2017. 

    The investment securities available-for-sale portfolio totaled $369.9 million at June 30, 2017, compared to $390.4 million at June 30, 2016, and $341.6 million at March 31, 2017.  At June 30, 2017, the Company’s securities available-for-sale portfolio was comprised of $353.0 million agency mortgage-backed securities (all issued by U.S. Government sponsored entities), and $16.9 million of single entity issue trust preferred securities. The pre-tax unrealized gain on securities available-for-sale at June 30, 2017 was $472,000, compared to a pre-tax unrealized gain on securities available-for-sale of $7.7 million at June 30, 2016, and a pre-tax unrealized loss on securities available-for-sale of ($1.1) million at March 31, 2017.  All other factors remaining the same, when market interest rates are rising, the Company will experience a lower unrealized gain (or a higher unrealized loss) on the securities portfolio. During the second quarter of 2017, the Company purchased $40.3 million of agency mortgage-backed investment securities available-for-sale, with a weighted average book yield of 2.33%, and an average duration of 4.78 years.

    At June 30, 2017, investment securities held-to-maturity totaled $368.3 million, compared to $210.2 million at June 30, 2016, and $341.4 million at March 31, 2017.  At June 30, 2017, the Company’s securities held-to-maturity portfolio, at amortized cost, was comprised of $278.4 million tax-exempt municipal bonds, and $89.9 million agency mortgage-backed securities.   During the second quarter of 2017, the Company purchased $37.2 million of agency mortgage-backed securities held-to-maturity, with a weighted average book yield of 2.38%, and an average duration of 4.96 years.

    Loans, excluding loans held-for-sale, increased $102.2 million, or 7%, to $1.57 billion at June 30, 2017, compared to $1.46 billion at June 30, 2016, which included an increase of $57.8 million, or 4% in the Company’s legacy portfolio, $37.9 million of purchased CRE loans, and an increase of $15.9 million of purchased residential mortgage loans, partially offset by a decrease of $9.4 million in the factored receivables portfolio.  Loans increased $53.0 million, or 4%, to $1.57 billion at June 30, 2017, compared to $1.51 billion at March 31, 2017.

    The loan portfolio remains well-diversified with commercial and industrial (“C&I”) loans accounting for 39% of the loan portfolio at June 30, 2017, which included $42.4 million of factored receivables. CRE loans accounted for 47% of the total loan portfolio, of which 42% were occupied by businesses that own them.  Consumer and home equity loans accounted for 6% of total loans, land and construction loans accounted for 5% of total loans, and residential mortgage loans accounted for the remaining 3% of total loans at June 30, 2017.  

    The commercial loan portfolio of $610.7 million at June 30, 2017 remained relatively consistent at $610.4 million at June 30, 2016.  The commercial loan portfolio increased $1.3 million from $609.4 million at March 31, 2017.  C&I line usage was 40% at June 30, 2017, compared to 42% at June 30, 2016, and 40% at March 31, 2017.

    The CRE loan portfolio increased $112.0 million, or 18%, to $731.5 million at June 30, 2017, compared to $619.5 million at June 30, 2016, which included an increase of $74.1 million, or 12%, in the Company’s legacy portfolio, and $37.9 million of purchased CRE loans.  There were no purchased CRE loans at June 30, 2017.  The CRE loan portfolio increased $51.5 million, or 8%, from $680.0 million at March 31, 2017, primarily due to an increase in the Company’s legacy portfolio. 

    The yield on the loan portfolio increased to 5.64% for the second quarter of 2017, compared to 5.60% for the second quarter of 2016, primarily due to increases in the prime rate, partially offset by the impact of lower yielding purchased residential mortgage loans and purchased CRE loans.  The yield on the loan portfolio also increased from 5.53% for the first quarter of 2017. The yield on the Company’s legacy loan portfolio (excluding the purchased residential loans, purchased CRE loans, factored receivables portfolio, and accretion of the loan purchase discount from the Focus transaction) increased 33 basis points for the second quarter of 2017, compared to the second quarter of 2016, and increased 10 basis points from the first quarter of 2017. The yield on the purchased residential loans was 2.82% for the second quarter of 2017, compared to 3.43% for the second quarter of 2016, and 2.52% for the first quarter of 2017.  The yield on the purchased CRE loans was 3.51% for the second quarter of 2017, compared to 3.49% for the first quarter of 2017.

    The yield on the loan portfolio decreased to 5.59% for the first six months of 2017, compared to 5.60% for the first six months of 2016, primarily due to the impact of the lower yielding purchased residential mortgage loans and purchased CRE loans, a lower yield on the factored receivables portfolio, and a decrease in the accretion of the loan purchase discount into loan interest income from the Focus transaction, partially offset by the impact of increases in the prime rate. The yield on the Company’s legacy loan portfolio (excluding the purchased residential loans, purchased CRE loans, factored receivables portfolio, and accretion of the loan purchase discount from the Focus transaction) increased 28 basis points for the first six months of 2017, compared to the first six months of 2016. The yield on the purchased residential loans was 2.66% for the first six months of 2017, compared to 3.43% for the first six months of 2016.  The yield on the purchased CRE loans was 3.50% for the first six months of 2017.

    The accretion of the loan purchase discount in loan interest income from the Focus transaction was $257,000 for the second quarter of 2017, compared to $276,000 for the second quarter of 2016, and $213,000 for the first quarter of 2017.  The accretion of the loan purchase discount into loan interest income from the Focus transaction was $470,000 for the first six months of 2017, compared to $794,000 for the first six months of 2016.  The total purchase discount on non-impaired loans from the Focus loan portfolio was $4.6 million at the acquisition date, of which $3.4 million has been accreted to loan interest income from the acquisition date through June 30, 2017. 

    At June 30, 2017, NPAs decreased to $3.3 million, or 0.12% of total assets, compared to $4.7 million, or 0.20% of total assets, at June 30, 2016, and $5.6 million, or 0.21% of total assets, at March 31, 2017.  Foreclosed assets were $183,000 at June 30, 2017, compared to $313,000 at June 30, 2016, and $183,000 at March 31, 2017.  The following is a breakout of NPAs at the periods indicated:

                     
      End of Period: 
    NONPERFORMING ASSETS June 30, 2017 March 31, 2017 June 30, 2016 
    (in $000’s, unaudited) Balance % of Total Balance % of Total Balance % of Total 
    Commercial and industrial loans $ 1,512  45$ 3,704  66$ 504  11%
    CRE loans   501  15  912  16  2,849  61%
    Home equity and consumer loans   401  12  252  5  760  16%
    SBA loans   384  11  137  2  40  1%
    Land and construction loans   189  6  195  4  207  4%
    Foreclosed assets   183  6  183  3  313  7%
    Restructured and loans over 90 days past due and still accruing   171  5  207  4  —  —%
    Total nonperforming assets $ 3,341  100$ 5,590  100$ 4,673  100%

    Classified assets declined to $7.5 million at June 30, 2017, compared to $22.8 million at June 30, 2016, and $10.4 million at March 31, 2017. 

    The following table summarizes the allowance for loan losses:

                     
      For the Quarter Ended For the Six Months Ended  
    ALLOWANCE FOR LOAN LOSSES June 30,  March 31,  June 30,  June 30,  June 30,  
    (in $000’s, unaudited) 2017 2017 2016 2017 2016 
    Balance at beginning of period $ 19,135  $ 19,089  $ 19,458 $ 19,089 $ 18,926 
    Provision (credit) for loan losses during the period   (46)   321    351   275   752 
    Net recoveries (charge-offs) during the period   308    (275)   112   33   243 
    Balance at end of period $ 19,397  $ 19,135  $ 19,921 $ 19,397 $ 19,921 
                     
    Total loans, net of deferred fees $ 1,566,324  $ 1,513,287  $ 1,464,114 $ 1,566,324 $ 1,464,114 
    Total nonperforming loans $ 3,158  $ 5,407  $ 4,360 $ 3,158 $ 4,360 
    Allowance for loan losses to total loans   1.24   1.26   1.36%  1.24  1.36%
    Allowance for loan losses to total nonperforming loans   614.22   353.89   456.90%  614.22  456.90%

    The ALLL at June 30, 2017 was 1.24% of total loans, compared to 1.36% at June 30, 2016, and 1.26% at March 31, 2017.  The ALLL to total nonperforming loans was 614.22% at June 30, 2017, compared to 456.90% at June 30 2016, and 353.89% at March 31, 2017.

    Total deposits increased $300.9 million, or 15%, to $2.37 billion at June 30, 2017, compared to $2.07 billion at June 30, 2016, and increased $44.6 million, or 2%, from $2.33 billion at March 31, 2017.  Deposits, excluding all time deposits and CDARS deposits, increased $342.5 million, or 19%, to $2.16 billion at June 30, 2017, from $1.81 billion at June 30, 2016, and increased $58.5 million, or 3%, from $2.10 billion at March 31, 2017. 

    The total cost of deposits increased one basis point to 0.16% for the second quarter of 2017, compared to 0.15% for the second quarter of 2016, and remained the same as the first quarter of 2017. The total cost of deposits was 0.16% for the six months ended June 30, 2017, and 0.15% for the six months ended June 30, 2016.

    On May 26, 2017, the Company completed an underwritten public offering of $40.0 million aggregate principal Subordinated Debt due June 1, 2027. The Subordinated Debt initially bears a fixed interest rate of 5.25% per year.  Commencing on June 1, 2022, the interest rate on the Subordinated Debt resets quarterly to the three-month LIBOR rate plus a spread of 336.5 basis points, payable quarterly in arrears.   Interest on the Subordinated Debt is payable semi-annually on June 1 and December 1 of each year through June 1, 2022 and quarterly thereafter on March 1, June 1, September 1 and December 1 of each year through the maturity date or early redemption date. The first interest payment will be made on December 1, 2017.  The Company at its option may redeem the Subordinated Debt, in whole or in part, on any interest payment date on or after June 1, 2022 without a premium.

    The Subordinated Debt, net of unamortized issuance costs, totaled $39.1 million at June 30, 2017, and qualifies as Tier 2 capital for the Company under the guidelines established by the Federal Reserve Bank.  The issuance of Subordinated Debt resulted in an increase in the Company’s total risk‑based capital ratio at June 30, 2017, compared to March 31, 2017, and June 30, 2016, but had no effect on the other regulatory capital ratios of the Company.  All of the Bank’s regulatory capital ratios increased at June 30, 2017, compared to March 31, 2017, and June 30, 2016, primarily due to the downstream of $20.0 million of the proceeds of the Subordinated Debt from the Company to the Bank, partially offset by distributed dividends totaling $8.0 million from the Bank to the Company during the first six months of 2017.

    The Company’s common equity Tier 1 risk‑based capital ratio increased at June 30, 2017, compared to June 30, 2016, primarily due to the exchange of 21,004 shares of the Company’s Series C convertible perpetual preferred stock, no par value (“Series C Preferred Stock”) for 5,601,000 shares of the Company’s common stock during the third quarter of 2016. The exchange of the Company’s Series C Preferred Stock for common stock had no effect on the Bank’s common equity Tier 1 risk‑based capital ratio.

    Tangible equity was $217.4 million at June 30, 2017, compared to $204.1 million at June 30, 2016, and $211.6 million at March 31, 2017.  Tangible book value per common share was $5.70 at June 30, 2017, compared to $5.72 at June 30, 2016, and $5.57 at March 31, 2017.  There was no Series C Preferred Stock outstanding at June 30, 2017, and March 31, 2017, compared to 21,004 shares of Series C Preferred Stock outstanding at June 30, 2016.  The exchange of 21,004 shares of Series C Preferred Stock for 5,601,000 shares of the Company's common stock during the third quarter of 2016, resulted in a lower tangible book value per common share at June 30, 2017 and March 31, 2017, compared to June 30, 2016.  Pro forma tangible book value per common share, assuming the outstanding Series C Preferred Stock was converted into common stock, was $5.39 at June 30, 2016.

    Accumulated other comprehensive loss was ($6.5) million at June 30, 2017, compared to ($2.1) million at June 30, 2016, and ($7.4) million at March 31, 2017. The unrealized gain (loss) on securities available-for-sale, net of taxes, included in accumulated other comprehensive loss was an unrealized gain of $280,000 at June 30, 2017, compared to an unrealized gain of $4.5 millionJune 30, 2016, and an unrealized loss of ($653,000) at March 31, 2017.  The components of accumulated other comprehensive loss, net of taxes, at June 30, 2017 include the following: an unrealized gain on available-for-sale securities of $280,000; the remaining unamortized unrealized gain on securities available-for-sale transferred to held-to-maturity of $320,000; a split dollar insurance contracts liability of ($3.5) million; a supplemental executive retirement plan liability of ($4.2) million; and an unrealized gain on interest-only strip from SBA loans of $597,000.

    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, Los Altos, Los Gatos, Morgan Hill, Pleasanton, San Jose, Sunnyvale, and Walnut Creek.  Heritage Bank of Commerce is an SBA Preferred Lender.  Bay View Funding, a subsidiary of Heritage Bank of Commerce, is based in Santa Clara, CA and provides business-essential working capital factoring financing to various industries throughout the United States.  For more information, please visit www.heritagecommercecorp.com

    Forward-Looking Statement Disclaimer

    These forward-looking statements are subject to various risks and uncertainties that may be outside our control and our actual results could differ materially from our projected results.  Risks and uncertainties that could cause our financial performance to differ materially from our goals, plans, expectations and projections expressed in forward-looking statements include those set forth in our filings with the Securities and Exchange Commission, Item 1A of the Company’s Annual Report on Form 10-K, 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, high unemployment rates 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) changes in inflation, interest rates, and market liquidity which may impact interest margins and impact funding sources; (4) volatility in credit and equity markets and its effect on the global economy; (5) changes in the competitive environment among financial or bank holding companies and other financial service providers; (6) changes in consumer and business spending and saving habits and the related effect on our ability to increase assets and to attract deposits; (7) our ability to develop and promote customer acceptance of new products and services in a timely manner; (8) risks associated with concentrations in real estate related loans; (9) an oversupply of inventory and deterioration in values of California commercial real estate; (10) a prolonged slowdown in construction activity; (11) other than temporary impairment charges to our securities portfolio; (12) 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; (13) our ability to raise capital or incur debt on reasonable terms; (14) regulatory limits on Heritage Bank of Commerce’s ability to pay dividends to the Company; (15) changes in our capital management policies, including those regarding business combinations, dividends, and share repurchases, among others; (16) 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; (17) 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; (18) inability of our framework to manage risks associated with our business, including operational risk and credit risk; (19) risks of loss of funding of Small Business Administration or SBA loan programs, or changes in those programs; (20) effect and uncertain impact on the Company of the enactment of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 and the rules and regulations promulgated by supervisory and oversight agencies implementing the new legislation; (21) effect of lower corporate tax rates if enacted on the Company’s deferred tax asset; (22) significant changes in applicable laws and regulations, including those concerning taxes, banking and securities; (23) 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; (24) 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; (25) availability of and competition for acquisition opportunities; (26) risks associated with merger and acquisition integration; (27) risks resulting from domestic terrorism; (28) risks of natural disasters and other events beyond our control; and (29) our success in managing the risks involved in the foregoing factors.

    Member FDIC

                            
      For the Quarter Ended: Percent Change From:  For the Six Months Ended :
    CONSOLIDATED INCOME STATEMENTS June 30,  March 31,  June 30,  March 31,  June 30,   June 30,  June 30,  Percent 
    (in $000’s, unaudited) 2017 2017 2016 2017  2016   2017 2016 Change 
    Interest income $ 26,107  $ 24,697  $ 23,504  6 11  $ 50,804  $ 46,566  9 
    Interest expense   1,174    871    760  35 54    2,045    1,518  35 
    Net interest income before provision for loan losses   24,933    23,826    22,744  5 10    48,759    45,048  8 
    Provision (credit) for loan losses   (46)   321    351  (114)% (113)%    275    752  (63)% 
    Net interest income after provision for loan losses   24,979    23,505    22,393  6 12    48,484    44,296  9 
    Noninterest income:                       
    Service charges and fees on deposit accounts   801    740    783  8 2    1,541    1,550  (1)% 
    Increase in cash surrender value of life insurance   420    422    440  0 (5)%    842    889  (5)% 
    Servicing income   205    285    371  (28)% (45)%    490    742  (34)% 
    Gain on sales of SBA loans   164    324    279  (49)% (41)%    488    584  (16)% 
    Gain on proceeds from company-owned life insurance   —    —    1,019  N/A  (100)%    —    1,019  (100)% 
    Gain on sales of securities   —    (6)   347  100% (100)%    (6)   527  (101)% 
    Other   703    530    421  33 67    1,233    963  28 
    Total noninterest income   2,293    2,295    3,660  0 (37)%    4,588    6,274  (27)% 
    Noninterest expense:                       
    Salaries and employee benefits   9,209    9,486    8,742  (3)% 5    18,695    17,689  6 
    Occupancy and equipment   1,216    1,068    1,081  14 12    2,284    2,157  6 
    Professional fees   673    1,071    708  (37)% (5)%    1,744    1,533  14 
    Other   4,156    3,703    3,850  12 8    7,859    7,687  2 
    Total noninterest expense   15,254    15,328    14,381  0 6    30,582    29,066  5 
    Income before income taxes   12,018    10,472    11,672  15 3    22,490    21,504  5 
    Income tax expense   4,569    3,934    4,377  16 4    8,503    8,103  5 
    Net income   7,449    6,538    7,295  14 2    13,987    13,401  4 
    Dividends on preferred stock   —    —    (504) N/A  (100)%    —    (1,008) (100)% 
    Net income available to common shareholders   7,449    6,538    6,791  14 10    13,987    12,393  13 
    Undistributed earnings allocated to Series C preferred stock   —    —    (576) N/A  (100)%    —    (979) (100)% 
    Distributed and undistributed earnings allocated to common shareholders $ 7,449  $ 6,538  $ 6,215  14% 20  $ 13,987  $ 11,414  23 
                            
    PER COMMON SHARE DATA                       
    (unaudited)                       
    Basic earnings per share $ 0.20  $ 0.17  $ 0.19  18 5  $ 0.37  $ 0.35  6 
    Diluted earnings per share $ 0.19  $ 0.17  $ 0.19  12 0  $ 0.36  $ 0.35  3 
    Weighted average shares outstanding - basic   38,070,042    37,957,999    32,243,935  0 18    38,014,020    32,184,825  18 
    Weighted average shares outstanding - diluted   38,579,134    38,494,107    32,512,611  0 19    38,536,015    32,445,516  19 
    Common shares outstanding at period-end   38,120,263    37,995,085    32,294,063  0 18    38,120,263    32,294,063  18 
    Pro forma common shares outstanding at period-end, assuming Series C preferred stock was converted into common stock  N/A   N/A    37,895,063  N/A  N/A    N/A    37,714,479  N/A  
    Dividend per share $ 0.10  $ 0.10  $ 0.09  0 11  $ 0.20  $ 0.18  11 
    Book value per share $ 7.06  $ 6.95  $ 7.37  2 (4)%  $ 7.06  $ 7.37  (4)% 
    Tangible book value per share $ 5.70  $ 5.57  $ 5.72  2 0  $ 5.70  $ 5.72  0 
    Pro forma tangible book value per share, assuming assuming Series C preferred stock was converted into common stock  N/A   N/A  $ 5.39  N/A  N/A    N/A   $ 5.39  N/A  
                            
    KEY FINANCIAL RATIOS                       
    (unaudited)                       
    Annualized return on average equity   11.25   10.15   11.58 11 (3)%    10.74   10.73 0 
    Annualized return on average tangible equity   14.00   12.69   14.68 10 (5)%    13.41   13.66 (2)% 
    Annualized return on average assets   1.12   1.03   1.25 9 (10)%    1.07   1.15 (7)% 
    Annualized return on average tangible assets   1.14   1.05   1.28 9 (11)%    1.10   1.17 (6)% 
    Net interest margin (fully tax equivalent)   4.07   4.06   4.27 0 (5)%    4.06   4.24 (4)% 
    Efficiency ratio   56.03   58.68   54.47 (5)% 3    57.33   56.63 1 
                            
    AVERAGE BALANCES                       
    (in $000’s, unaudited)                       
    Average assets $ 2,671,476  $ 2,584,749  $ 2,345,874  3 14  $ 2,628,076  $ 2,347,549  12 
    Average tangible assets $ 2,619,351  $ 2,532,273  $ 2,292,248  3 14  $ 2,575,777  $ 2,293,715  12 
    Average earning assets $ 2,489,074  $ 2,409,043  $ 2,172,349  3 15  $ 2,449,280  $ 2,168,411  13 
    Average loans held-for-sale $ 4,238  $ 6,700  $ 2,951  (37)% 44  $ 5,461  $ 3,848  42 
    Average total loans $ 1,503,149  $ 1,489,123  $ 1,415,001  1 6  $ 1,496,176  $ 1,392,931  7 
    Average deposits $ 2,330,517  $ 2,269,554  $ 2,042,524  3 14  $ 2,300,204  $ 2,036,711  13 
    Average demand deposits - noninterest-bearing $ 906,570  $ 887,008  $ 780,116  2 16  $ 896,843  $ 778,558  15 
    Average interest-bearing deposits $ 1,423,947  $ 1,382,546  $ 1,262,408  3 13  $ 1,403,361  $ 1,258,153  12 
    Average interest-bearing liabilities $ 1,438,178  $ 1,382,622  $ 1,262,415  4 14  $ 1,410,553  $ 1,259,030  12 
    Average equity $ 265,566  $ 261,344  $ 253,430  2 5  $ 262,572  $ 251,065  5 
    Average tangible equity $ 213,441  $ 208,868  $ 199,804  2 7  $ 210,273  $ 197,231  7 


                   
      End of Period: Percent Change From: 
    CONSOLIDATED BALANCE SHEETS June 30,  March 31,  June 30,  March 31,  June 30,  
    (in $000’s, unaudited) 2017 2017 2016 2017  2016  
    ASSETS              
    Cash and due from banks $ 36,223  $ 31,724  $ 30,820  14 18 
    Other investments and interest-bearing deposits in other financial institutions   229,790    256,122    128,024  (10)% 79 
    Securities available-for-sale, at fair value   369,901    341,590    390,435  8 (5)% 
    Securities held-to-maturity, at amortized cost   368,266    341,383    210,170  8 75 
    Loans held-for-sale - SBA, including deferred costs   3,720    3,911    4,879  (5)% (24)% 
    Loans:              
    Commercial   610,658    609,353    610,385  0 0 
    Real estate:              
    CRE   731,537    679,989    619,539  8 18 
    Land and construction   82,873    81,101    103,710  2 (20)% 
    Home equity   79,930    80,360    78,332  (1)% 2% 
    Residential mortgages   48,732    49,569    32,852  (2)% 48 
    Consumer   13,360    13,807    20,037  (3)% (33)% 
    Loans   1,567,090    1,514,179    1,464,855  3 7 
    Deferred loan fees, net   (766)   (892)   (741) (14)% 3 
    Total loans, net of deferred fees   1,566,324    1,513,287    1,464,114  4 7 
    Allowance for loan losses   (19,397)   (19,135)   (19,921) 1 (3)% 
    Loans, net   1,546,927    1,494,152    1,444,193  4 7% 
    Company-owned life insurance   59,990    59,570    58,765  1 2 
    Premises and equipment, net   7,595    7,512    7,542  1 1 
    Goodwill   45,664    45,664    45,664  0 0 
    Other intangible assets   6,163    6,605    7,734  (7)% (20)% 
    Accrued interest receivable and other assets   58,661    53,558    50,066  10 17 
    Total assets $ 2,732,900  $ 2,641,791  $ 2,378,292  3 15 
                   
    LIABILITIES AND SHAREHOLDERS’ EQUITY              
    Liabilities:              
    Deposits:              
    Demand, noninterest-bearing $ 948,774  $ 917,037  $ 834,590  3 14 
    Demand, interest-bearing   573,699    575,637    499,512  0 15 
    Savings and money market   634,802    606,116    480,677  5 32 
    Time deposits-under $250   54,129    56,988    60,761  (5)% (11)% 
    Time deposits-$250 and over   147,242    164,824    182,591  (11)% (19)% 
    Time deposits - brokered   —    —    6,079  N/A  (100)% 
    CDARS - money market and time deposits   16,085    9,485    9,574  70 68 
    Total deposits   2,374,731    2,330,087    2,073,784  2 15 
    Subordinated debt, net of issuance costs   39,119    —    —  N/A  N/A  
    Accrued interest payable and other liabilities   49,819    47,800    46,995  4 6 
    Total liabilities   2,463,669    2,377,887    2,120,779  4 16 
                   
    Shareholders’ Equity:              
    Series C preferred stock, net   —    —    19,519  N/A  (100)% 
    Common stock   216,788    216,039    194,765  0 11 
    Retained earnings   58,910    55,270    45,371  7 30 
    Accumulated other comprehensive loss   (6,467)   (7,405)   (2,142) 13 (202)% 
    Total shareholders’ equity   269,231    263,904    257,513  2 5 
    Total liabilities and shareholders’ equity $ 2,732,900  $ 2,641,791  $ 2,378,292  3 15 


                   
      End of Period: Percent Change From: 
    CREDIT QUALITY DATA June 30,  March 31,  June 30,  March 31,  June 30,  
    (in $000’s, unaudited) 2017  2017 2016
     2017  2016  
    Nonaccrual loans - held-for-investment $ 2,987  $ 5,200 $ 4,360  (43)% (31)% 
    Restructured and loans over 90 days past due and still accruing   171    207   —  (17)% N/A  
    Total nonperforming loans   3,158    5,407   4,360  (42)% (28)% 
    Foreclosed assets   183    183   313  0 (42)% 
    Total nonperforming assets $ 3,341  $ 5,590 $ 4,673  (40)% (29)% 
    Other restructured loans still accruing $ 121  $ 126 $ 141  (4)% (14)% 
    Net charge-offs (recoveries) during the quarter $ (308) $ 275 $ (112) (212)% (175)% 
    Provision (credit) for loan losses during the quarter $ (46) $ 321 $ 351  (114)% (113)% 
    Allowance for loan losses $ 19,397  $ 19,135 $ 19,921  1 (3)% 
    Classified assets $ 7,485  $ 10,368 $ 22,811  (28)% (67)% 
    Allowance for loan losses to total loans   1.24   1.26  1.36 (2)% (9)% 
    Allowance for loan losses to total nonperforming loans   614.22   353.89  456.90 74 34 
    Nonperforming assets to total assets   0.12   0.21  0.20 (43)% (40)% 
    Nonperforming loans to total loans   0.20   0.36  0.30 (44)% (33)% 
    Classified assets to Heritage Commerce Corp Tier 1 capital plus allowance for loan losses   3   4  10 (25)% (70)% 
    Classified assets to Heritage Bank of Commerce Tier 1 capital plus allowance for loan losses   3   4  10 (25)% (70)% 
                   
    OTHER PERIOD-END STATISTICS              
    (in $000’s, unaudited)              
    Heritage Commerce Corp:              
    Tangible equity (1) $ 217,404  $ 211,635 $ 204,115  3% 7 
    Tangible common equity (2) $ 217,404  $ 211,635 $ 184,596  3 18 
    Shareholders’ equity / total assets   9.85%   9.99  10.83 (1)% (9)% 
    Tangible equity / tangible assets (3)   8.11   8.17  8.78 (1)% (8)% 
    Tangible common equity / tangible assets (4)   8.11   8.17  7.94 (1)% 2 
    Loan to deposit ratio   65.96   64.95  70.60 2 (7)% 
    Noninterest-bearing deposits / total deposits   39.95   39.36  40.24 1 (1)% 
    Total risk-based capital ratio   14.4   12.5  12.3 15 17 
    Tier 1 risk-based capital ratio   11.4   11.4  11.2 0 2 
    Common Equity Tier 1 risk-based capital ratio   11.4   11.4  10.2 0 12 
    Leverage ratio   8.5   8.6  9.0 (1)% (6)% 
    Heritage Bank of Commerce:              
    Total risk-based capital ratio   13.2   12.2  12.2 8 8 
    Tier 1 risk-based capital ratio   12.2   11.2  11.1 9 10 
    Common Equity Tier 1 risk-based capital ratio   12.2   11.2  11.1 9 10 
    Leverage ratio   9.1   8.4  8.9 8 2 
     
    (1) Represents shareholders’ equity minus goodwill and other intangible assets.
    (2) Represents shareholders’ equity minus preferred stock, minus goodwill and other intangible assets.
    (3) Represents shareholders’ equity minus goodwill and other intangible assets divided by total assets minus goodwill and other intangible assets.
    (4) Represents shareholders’ equity minus preferred stock, minus goodwill and other intangible assets divided by total assets minus goodwill and other intangible assets.


                      
      For the Quarter Ended For the Quarter Ended 
      June 30, 2017 June 30, 2016 
         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) $ 1,507,387 $ 21,207   5.64$ 1,417,952 $ 19,735   5.60%
    Securities - taxable   629,387   3,442   2.19  523,183   2,828   2.17%
    Securities - exempt from Federal tax (3)   90,144   869   3.87  92,230   885   3.86%
    Other investments and interest-bearing deposits in other financial institutions   262,156   893   1.37  138,984   366   1.06%
    Total interest earning assets (3)   2,489,074   26,411   4.26  2,172,349   23,814   4.41%
    Cash and due from banks   33,627        33,208      
    Premises and equipment, net   7,606        7,589      
    Goodwill and other intangible assets   52,125        53,626      
    Other assets   89,044        79,102      
    Total assets $ 2,671,476      $ 2,345,874      
                      
    Liabilities and shareholders’ equity:                 
    Deposits:                 
    Demand, noninterest-bearing $ 906,570      $ 780,116      
                      
    Demand, interest-bearing   582,024   302   0.21  498,970   236   0.19%
    Savings and money market   619,017   359   0.23  505,697   269   0.21%
    Time deposits - under $100   20,246   15   0.30  22,618   16   0.28%
    Time deposits - $100 and over   191,127   269   0.56  217,586   219   0.40%
    Time deposits - brokered   —   —   N/A   8,861   19   0.86%
    CDARS - money market and time deposits   11,533   1   0.03  8,676   1   0.05%
    Total interest-bearing deposits   1,423,947   946   0.27  1,262,408   760   0.24%
    Total deposits   2,330,517   946   0.16  2,042,524   760   0.15%
                      
    Subordinated debt, net of issuance costs   14,187   228   6.45  —   —   N/A 
    Short-term borrowings   44   —   0.00  7   —   0.00%
    Total interest-bearing liabilities   1,438,178   1,174   0.33  1,262,415   760   0.24%
    Total interest-bearing liabilities and demand, noninterest-bearing / cost of funds   2,344,748   1,174   0.20  2,042,531   760   0.15%
    Other liabilities   61,162        49,913      
    Total liabilities   2,405,910        2,092,444      
    Shareholders’ equity   265,566        253,430      
    Total liabilities and shareholders’ equity $ 2,671,476      $ 2,345,874      
                      
    Net interest income (3) / margin      25,237   4.07     23,054   4.27%
    Less tax equivalent adjustment (3)      (304)        (310)   
    Net interest income    $ 24,933       $ 22,744    
     
    (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 (amortization) of deferred loan fees (costs) into loan interest income was $59,000 for the second quarter of 2017, compared to $77,000 for the second quarter of 2016.
    (3) Reflects the fully tax equivalent adjustment for Federal tax exempt income based on a 35% tax rate.


                      
      For the Six Months Ended  For the Six Months Ended  
      June 30, 2017 June 30, 2016 
         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) $ 1,501,637 $ 41,605   5.59$ 1,396,779 $ 38,923   5.60%
    Securities - taxable   588,753   6,319   2.16  501,850   5,603   2.25%
    Securities - exempt from Federal tax (3)   90,278   1,740   3.89  92,675   1,776   3.85%
    Other investments and interest-bearing deposits in other financial institutions   268,612   1,749   1.31  177,107   886   1.01%
    Total interest earning assets (3)   2,449,280   51,413   4.23  2,168,411   47,188   4.38%
    Cash and due from banks   33,233        33,078      
    Premises and equipment, net   7,566        7,660      
    Goodwill and other intangible assets   52,299        53,834      
    Other assets   85,698        84,566      
    Total assets $ 2,628,076      $ 2,347,549      
                      
    Liabilities and shareholders’ equity:                 
    Deposits:                 
    Demand, noninterest-bearing $ 896,843      $ 778,558      
                      
    Demand, interest-bearing   570,697   590   0.21  500,461   472   0.19%
    Savings and money market   605,660   653   0.22  502,159   540   0.22%
    Time deposits - under $100   20,330   30   0.30  22,953   32   0.28%
    Time deposits - $100 and over   196,453   542   0.56  212,349   410   0.39%
    Time deposits - brokered   —   —  N/A   11,843   49   0.83%
    CDARS - money market and time deposits   10,221   2   0.04  8,388   4   0.10%
    Total interest-bearing deposits   1,403,361   1,817   0.26  1,258,153   1,507   0.24%
    Total deposits   2,300,204   1,817   0.16  2,036,711   1,507   0.15%
                      
    Subordinated debt   7,133   228   6.45  —   —   N/A 
    Short-term borrowings, net of issuance costs   59   —   0.00  877   11   2.52%
    Total interest-bearing liabilities   1,410,553   2,045   0.29  1,259,030   1,518   0.24%
    Total interest-bearing liabilities and demand, noninterest-bearing / cost of funds   2,307,396   2,045   0.18  2,037,588   1,518   0.15%
    Other liabilities   58,108        58,896      
    Total liabilities   2,365,504        2,096,484      
    Shareholders’ equity   262,572        251,065      
    Total liabilities and shareholders’ equity $ 2,628,076      $ 2,347,549      
                      
    Net interest income (3) / margin      49,368   4.06     45,670   4.24%
    Less tax equivalent adjustment (3)      (609)        (622)   
    Net interest income    $ 48,759       $ 45,048    
     
    (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 (amortization) of deferred loan fees (costs) into loan interest income was $170,000 for the six months ended June 30, 2017, compared to $108,000 for the six months ended June 30, 2016.
    (3) Reflects the fully tax equivalent adjustment for Federal tax exempt income based on a 35% tax rate.
    Contact: Debbie Reuter/ EVP Corporate Secretary
    408.494.4542

    Source: Heritage Commerce Corp