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

January 24, 2019

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

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

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

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

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

Operating Results:

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

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

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

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

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

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


	For the Quarter Ended							For the Quarter Ended
	December 31, 2018							December 31, 2017
	Average			Interest		Average		Average			Interest		Average
(in $000’s, unaudited)	Balance			Income		Yield		Balance			Income		Yield
Loans, core bank and asset-based lending	$	1,742,614		$	23,053	5.25	%	$	1,430,666		$	18,197	5.05	%
Bay View Funding factored receivables		65,521			4,012	24.29	%		50,827			3,271	25.53	%
Residential mortgages		38,148			268	2.79	%		45,277			310	2.72	%
Purchased CRE loans		34,121			311	3.62	%		37,465			332	3.52	%
Loan credit mark / accretion		(6,783	)		720	0.16	%		(1,229	)		124	0.03	%
Total loans	$	1,873,621		$	28,364	6.01	%	$	1,563,006		$	22,234	5.64	%

The average yield on the total loan portfolio increased to 6.01% for the fourth quarter of 2018, compared to 5.64% for the fourth quarter of 2017, primarily due to increases in the prime rate, and an increase in the accretion of the loan purchase discount into loan interest income from the acquisitions.


	For the Quarter Ended							For the Quarter Ended
	December 31, 2018							September 30, 2018
	Average			Interest		Average		Average			Interest		Average
(in $000’s, unaudited)	Balance			Income		Yield		Balance			Income		Yield
Loans, core bank and asset-based lending	$	1,742,614		$	23,053	5.25	%	$	1,780,025		$	23,374	5.21	%
Bay View Funding factored receivables		65,521			4,012	24.29	%		69,740			4,185	23.81	%
Residential mortgages		38,148			268	2.79	%		40,277			272	2.68	%
Purchased CRE loans		34,121			311	3.62	%		36,167			295	3.24	%
Loan credit mark / accretion		(6,783	)		720	0.16	%		(7,418	)		506	0.11	%
Total loans	$	1,873,621		$	28,364	6.01	%	$	1,918,791		$	28,632	5.92	%

The average yield on the total loan portfolio increased to 6.01% for the fourth quarter of 2018, compared to 5.92% for the third quarter of 2018, primarily due to increases in the prime rate, and an increase in the accretion of the loan purchase discount into loan interest income from the acquisitions.


	For the Year Ended							For the Year Ended
	December 31, 2018							December 31, 2017
	Average			Interest		Average		Average			Interest		Average
(in $000’s, unaudited)	Balance			Income		Yield		Balance			Income		Yield
Loans, core bank and asset-based lending	$	1,670,065		$	86,610	5.19	%	$	1,402,628		$	71,011	5.06	%
Bay View Funding factored receivables		59,220			14,698	24.82	%		45,794			11,884	25.95	%
Residential mortgages		40,998			1,118	2.73	%		48,266			1,294	2.68	%
Purchased CRE loans		36,080			1,257	3.48	%		36,807			1,292	3.51	%
Loan credit mark / accretion		(5,348	)		1,952	0.12	%		(1,573	)		865	0.06	%
Total loans	$	1,801,015		$	105,635	5.87	%	$	1,531,922		$	86,346	5.64	%

The average yield on the total loan portfolio increased to 5.87% for the year ended December 31, 2018, compared to 5.64% for the year ended December 31, 2017, primarily due to increases in the prime rate, and an increase in accretion of the loan purchase discount into loan interest income from the acquisitions.
The total purchase discount on loans from Focus Business Bank (“Focus”) loan portfolio was $5.4 million on the acquisition date of August 20, 2015, of which $657,000 remains outstanding as of December 31, 2018. The total purchase discount on loans from Tri-Valley loan portfolio was $2.6 million on the acquisition date of April 6, 2018, of which $2.2 million remains outstanding as of December 31, 2018. The total purchase discount on loans from United American loan portfolio was $4.7 million on the acquisition date of May 4, 2018, of which $3.6 million remains outstanding as of December 31, 2018.

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

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

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

For the year ended December 31, 2018, noninterest income remained relatively flat at $9.6 million, compared to the year ended December 31, 2017. The Company received $1.3 million in proceeds from a legal settlement during the second quarter of 2018, of which $377,000 was recorded in other noninterest income, and $922,000 was credited to professional fees for recaptured legal fees previously paid by the Company. The proceeds from a legal settlement during the second quarter of 2018, higher service charges and fees on deposit accounts and gain on sales of securities, were offset by a lower increase in cash surrender value of life insurance proceeds, servicing income, and gain on sale of SBA loans for the year ended December 31, 2018, compared to the year ended December 31, 2017.

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

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

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

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

The income tax expense for the fourth quarter of 2018 was $5.1 million, compared to income tax expense of $12.7 million for the fourth quarter of 2017, and an income tax expense of $5.0 million for the third quarter of 2018. The effective tax rate for the fourth quarter of 2018 decreased to 28.0%, compared to 91.0% for the fourth quarter of 2017, primarily due to a lower federal corporate tax rate for the fourth quarter of 2018 and the $7.1 million DTA adjustment in the fourth quarter of 2017. The effective tax rate for the third quarter of 2018 was 28.7%.
Income tax expense for the year ended December 31, 2018 was $13.3 million, compared to $26.5 million for the year ended December 31, 2017. The effective tax rate for the year ended December 31, 2018 was 27.4%, compared to 52.6% for the year ended December 31, 2017, primarily due to a lower federal corporate tax rate for the year ended December 31, 2018 and the $7.1 million DTA adjustment in the fourth quarter of 2017.
The difference in the effective tax rate for the periods reported compared to the combined Federal and state statutory tax rate of 29.6% for the fourth quarter of 2018 and the year ended December 31, 2018, and 42% for the fourth quarter of 2017 and the year ended December 31, 2017, is primarily the result of the Company’s investment in life insurance policies whose earnings are not subject to taxes, tax credits related to investments in low income housing limited partnerships (net of low income housing investment losses), and tax-exempt interest income earned on municipal bonds.

Balance Sheet Review, Capital Management and Credit Quality:

♦ Total assets increased 9% to $3.10 billion at December 31, 2018, compared to $2.84 billion at December 31, 2017, primarily due to the Tri-Valley and United American acquisitions. As of December 31, 2018, Tri-Valley added $112.1 million in loans and $82.6 million in deposits. As of December 31, 2018, United American added $199.1 million in loans and $217.6 million in deposits. Total assets decreased 3% from $3.19 billion at September 30, 2018.

♦  Securities available-for-sale, at fair value, totaled $459.0 million at December 31, 2018, compared to $391.9 million at December 31, 2017, and $319.1 million at September 30, 2018. At December 31, 2018, the Company’s securities available-for-sale portfolio was comprised of $302.9 million agency mortgage-backed securities (all issued by U.S. Government sponsored entities), $148.7 million U.S. Treasury, and $7.4 million U.S. Government sponsored entities debt securities. The pre-tax unrealized loss on securities available-for-sale at December 31, 2018 was ($7.7) million, compared to a pre-tax unrealized loss on securities available-for-sale of ($1.5) million at December 31, 2017, and a pre-tax unrealized loss on securities available-for-sale of ($12.7) million at September 30, 2018. All other factors remaining the same, when market interest rates are rising, the Company will experience a lower unrealized gain (or a higher unrealized loss) on the securities portfolio. During the fourth quarter of 2018, the Company purchased $147.6 million of US Treasury securities available-for-sale, with a weighted average book yield of 2.82%, and a weighted average duration of 2.25 years.

♦  At December 31, 2018, securities held-to-maturity, at amortized cost, totaled $377.2 million, compared to $398.3 million at December 31, 2017, and $375.7 million at September 30, 2018. At December 31, 2018, the Company’s securities held-to-maturity portfolio was comprised of $291.2 million agency mortgage-backed securities, and $86.0 million tax-exempt municipal bonds. During the fourth quarter of 2018, the Company purchased $14.6 million of agency mortgage-backed securities held-to-maturity, with a weighted average book yield of 3.74%, and a weighted average duration of 6.58 years.

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


LOANS	December 31, 2018					September 30, 2018					December 31, 2017
(in $000’s, unaudited)	Balance			% to Total		Balance			% to Total		Balance			% to Total
Commercial	$	597,763		32	%	$	600,594		31	%	$	573,296		36	%
Real estate:
CRE		994,067		52	%		988,491		52	%		772,867		49	%
Land and construction		122,358		6	%		131,548		7	%		100,882		6	%
Home equity		109,112		6	%		116,657		6	%		79,176		5	%
Residential mortgages		50,979		3	%		52,441		3	%		44,561		3	%
Consumer		12,453		1	%		9,932		1	%		12,395		1	%
Total Loans		1,886,732		100	%		1,899,663		100	%		1,583,177		100	%
Deferred loan fees, net		(327	)	—			(276	)	—			(510	)	—
Loans, net of deferred fees	$	1,886,405		100	%	$	1,899,387		100	%	$	1,582,667		100	%

Loans, excluding loans held-for-sale, increased $303.7 million, or 19%, to $1.89 billion at December 31, 2018, compared to $1.58 billion at December 31, 2017, which included $199.1 million in loans from United American, $112.1 million in loans from Tri-Valley, and an increase of $3.1 million in the Company’s legacy portfolio, partially offset by a decrease of $7.0 million in purchased residential mortgage loans, and a decrease of $3.6 million of purchased commercial real estate (“CRE”) loans. Loans, excluding loans held-for-sale, declined (1%) to $1.89 billion at December 31, 2018, compared to $1.90 billion September 30, 2018, primarily due to payoffs in the land and construction and home equity loan portfolios.
The commercial loan portfolio increased $24.5 million to $597.8 million at December 31, 2018, from $573.3 million at December 31, 2017, which included $17.8 million of loans added from United American, and $9.2 million of loans added from Tri-Valley, partially offset by a decrease of $2.6 million in the Company’s legacy portfolio. The commercial loan portfolio decreased $2.8 million from $600.6 million at September 30, 2018. C&I line usage was 36% at December 31, 2018, compared to 37% at December 31, 2017, and 36% at September 30, 2018.
The CRE loan portfolio increased $221.2 million, or 29%, to $994.1 million at December 31, 2018, compared to $772.9 million at December 31, 2017, which included $133.8 million of loans added from United American, $90.7 million of loans added from Tri-Valley, partially offset by a decrease of $3.6 million in purchased CRE loans. The CRE loan portfolio increased $5.6 million from $988.5 million at September 30, 2018. At December 31, 2018, 40% of the CRE loan portfolio was secured by owner-occupied real estate.
Land and construction loans increased $21.5 million, or 21%, to $122.4 million at December 31, 2018, compared to $100.9 million at December 31, 2017, primarily due to organic growth of $17.5 million, and $4.0 million of loans added from United American. Land and construction loans decreased $9.2 million, or (7%), from $131.5 million at September 30, 2018.
Home equity lines of credit increased $29.9 million, or 38%, to $109.1 million at December 31, 2018, compared to $79.2 million at December 31, 2017, which included $29.5 million of loans added from United American, and $12.2 million of loans added from Tri-Valley, partially offset by a decrease of $11.7 million in the Company’s legacy portfolio. Home equity lines of credit decreased $7.5 million, from $116.7 million at September 30, 2018.
Residential mortgage loans increased $6.4 million, or 14%, to $51.0 million at December 31, 2018, compared to $44.6 million at December 31, 2017, primarily due to $13.4 million of loans added from United American, partially offset by a $7.0 million decrease in purchased residential mortgage loans. Residential mortgage loans decreased $1.5 million, from $52.4 million at September 30, 2018.

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


	For the Quarter Ended												For the Year Ended
ALLOWANCE FOR LOAN LOSSES	December 31,				September 30,				December 31,				December 31,				December 31,
(in $000’s, unaudited)	2018				2018				2017				2018				2017
Balance at beginning of period	$	27,426			$	26,664			$	19,748			$	19,658			$	19,089
Charge-offs during the period		(166	)			(744	)			(60	)			(2,026	)			(2,239	)
Recoveries during the period		446				1,931				261				2,795				2,709
Net recoveries during the period		280				1,187				201				769				470
Provision (credit) for loan losses during the period		142				(425	)			(291	)			7,421				99
Balance at end of period	$	27,848			$	27,426			$	19,658			$	27,848			$	19,658

Total loans, net of deferred fees	$	1,886,405			$	1,899,387			$	1,582,667			$	1,886,405			$	1,582,667
Total nonperforming loans	$	14,887			$	24,715			$	2,485			$	14,887			$	2,485
Allowance for loan losses to total loans		1.48		%		1.44		%		1.24		%		1.48		%		1.24		%
Allowance for loan losses to total nonperforming loans		187.06		%		110.97		%		791.07		%		187.06		%		791.07		%

The ALLL was 1.48% of total loans at December 31, 2018, compared to 1.24% at December 31, 2017, and 1.44% at September 30, 2018. The ALLL to total nonperforming loans decreased to 187.06% at December 31, 2018, compared to 791.07% at December 31, 2017, primarily due to a single large lending relationship that was placed on nonaccrual during the second quarter of 2018. The ALLL to total nonperforming loans was 110.97% at September 30, 2018.
Net recoveries totaled $280,000 for the fourth quarter of 2018, compared to net recoveries of $201,000 for the fourth quarter of 2017, and net recoveries of $1.2 million for the third quarter of 2018.

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


	End of Period:
NONPERFORMING ASSETS	December 31, 2018				September 30, 2018				December 31, 2017
(in $000’s, unaudited)	Balance		% of Total		Balance		% of Total		Balance		% of Total
Commercial and industrial loans	$	8,062	54	%	$	17,134	69	%	$	1,084	44	%
CRE loans		5,094	34	%		5,639	23	%		501	20	%
Restructured and loans over 90 days past due and still accruing		1,188	8	%		1,373	6	%		235	9	%
Home equity and consumer loans		326	2	%		342	1	%		380	15	%
SBA loans		217	2	%		227	1	%		166	7	%
Land and construction loans		—	—			—	—			119	5	%
Total nonperforming assets	$	14,887	100	%	$	24,715	100	%	$	2,485	100	%

Total NPAs were $14.9 million, or 0.48% of total assets, at December 31, 2018, compared to $2.5 million, or 0.09% of total assets, at December 31, 2017, and $24.7 million, or 0.77% of total assets, at September 30, 2018. The increase in NPAs at December 31, 2018, compared to December 31, 2017, was primarily due to a single large lending relationship that was placed on nonaccrual during the second quarter of 2018. The decrease in NPAs at December 31, 2018, compared to September 30, 2018, was primarily due to a reduction in loans outstanding of the single large lending relationship. At December 31, 2018, the recorded investment of this lending relationship was $12.0 million, compared to $21.8 million at September 30, 2018. The Company had a $6.7 million specific loan loss reserve allocated for this lending relationship at December 31, 2018, compared to a $7.0 million specific loan loss reserve at September 30, 2018. There were no foreclosed assets at December 31, 2018, December 31, 2017, or September 30, 2018.
Classified assets were $23.4 million, or 0.76% of total assets, at December 31, 2018, compared to $25.1 million, or 0.88% of total assets, at December 31, 2017, and $30.5 million, 0.96% of total assets, at September 30, 2018.

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


DEPOSITS	December 31, 2018				September 30, 2018				December 31, 2017
(in $000’s, unaudited)	Balance		% to Total		Balance		% to Total		Balance		% to Total
Demand, noninterest-bearing	$	1,021,582	39	%	$	1,081,846	39	%	$	989,753	40	%
Demand, interest-bearing		702,000	27	%		670,624	24	%		601,929	24	%
Savings and money market		754,277	28	%		828,297	30	%		684,131	27	%
Time deposits — under $250		58,661	2	%		68,194	3	%		51,710	2	%
Time deposits — $250 and over		86,114	3	%		84,763	3	%		138,634	6	%
CDARS — interest-bearing demand,
money market and time deposits		14,898	1	%		11,575	1	%		16,832	1	%
Total deposits	$	2,637,532	100	%	$	2,745,299	100	%	$	2,482,989	100	%

Total deposits increased $154.5 million, or 6%, to $2.64 billion at December 31, 2018, compared to $2.48 billion at December 31, 2017, which included $217.6 million in deposits from United American, $82.6 million in deposits from Tri-Valley, a decrease of $65.1 million in State of California certificates of deposit due to maturity, and a decrease of $80.5 million, or (3%), in the Company’s legacy deposits, which was principally attributable to three deposit-only relationships totaling approximately $95 million. Total deposits decreased $107.8 million, or (4%), from $2.75 billion at September 30, 2018, which was primarily due to the same reason referenced above.
Deposits, excluding all time deposits and CDARS deposits, increased $202.0 million, or 9%, to $2.48 billion at December 31, 2018, compared to $2.28 billion at December 31, 2017, which included $195.8 million of deposits added from United American, $75.5 million of deposits added from Tri-Valley, partially offset by a decrease of $69.3 million, or (3%), in the Company’s legacy deposits. Deposits, excluding all time deposits and CDARS deposits, at December 31, 2018 decreased $102.9 million, or (4%), compared to $2.58 billion at September 30, 2018.
Time deposits of $250,000 and over decreased $52.5 million, or (38%), to $86.1 million at December 31, 2018, compared to $138.6 million at December 31, 2017, which included the maturity of $65.1 million of State of California certificates of deposits, partially offset by $9.6 million of deposits added from United American, and $2.8 million of deposits added from Tri-Valley. Time deposits of $250,000 and over at December 31, 2018 increased $1.4 million, or 2%, compared to $84.8 million at September 30, 2018.

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


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

______________

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

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


ACCUMULATED OTHER COMPREHENSIVE LOSS	December 31,			September 30,			December 31,
(in $000’s, unaudited)	2018			2018			2017
Unrealized loss on securities available-for-sale	$	(5,412	)	$	(8,980	)	$	(857	)
Remaining unamortized unrealized gain on securities
available-for-sale transferred to held-to-maturity		343			350			305
Split dollar insurance contracts liability		(3,722	)		(3,740	)		(3,691	)
Supplemental executive retirement plan liability		(3,995	)		(5,417	)		(4,552	)
Reclassification due to the effects of the Tax Act		—			—			(1,019	)
Unrealized gain on interest-only strip from SBA loans		405			614			562
Total accumulated other comprehensive loss	$	(12,381	)	$	(17,173	)	$	(9,252	)

♦ Tangible equity increased to $271.7 million at December 31, 2018, compared to $220.0 million at December 31, 2017, primarily due to the Tri-Valley and United American acquisitions. Tangible equity was $257.2 million at September 30, 2018. Tangible book value per share was $6.28 at December 31, 2018, compared to $5.76 at December 31, 2017, and $5.94 at September 30, 2018.

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

Forward-Looking Statement Disclaimer

These forward-looking statements are subject to various risks and uncertainties that may be outside our control and our actual results could differ materially from our projected results. Risks and uncertainties that could cause our financial performance to differ materially from our goals, plans, expectations and projections expressed in forward-looking statements include those set forth in our filings with the Securities and Exchange Commission, Item 1A of the Company’s Annual Report on Form 10-K for the year ended December 31, 2017, and the following: (1) current and future economic and market conditions in the United States generally or in the communities we serve, including the effects of declines in property values and overall slowdowns in economic growth should these events occur; (2) effects of and changes in trade, monetary and fiscal policies and laws, including the interest rate policies of the Federal Open Market Committee of the Federal Reserve Board; (3) our ability to anticipate interest rate changes and manage interest rate risk; (4) changes in inflation, interest rates, and market liquidity which may impact interest margins and impact funding sources; (5) volatility in credit and equity markets and its effect on the global economy; (6) our ability to effectively compete with other banks and financial services companies and the effects of competition in the financial services industry on our business; (7) our ability to achieve loan growth and attract deposits; (8) risks associated with concentrations in real estate related loans; (9) the relative strength or weakness of the commercial and real estate markets where are borrowers are located, including related asset and market prices; (10) other than temporary impairment charges to our securities portfolio; (11) changes in the level of nonperforming assets and charge offs and other credit quality measures, and their impact on the adequacy of the Company’s allowance for loan losses and the Company’s provision for loan losses; (12) increased capital requirements for our continual growth or as imposed by banking regulators, which may require us to raise capital at a time when capital is not available on favorable terms or at all; (13) regulatory limits on Heritage Bank of Commerce’s ability to pay dividends to the Company; (14) changes in our capital management policies, including those regarding business combinations, dividends, and share repurchases; (15) operational issues stemming from, and/or capital spending necessitated by, the potential need to adapt to industry changes in information technology systems, on which we are highly dependent; (16) our inability to attract, recruit, and retain qualified officers and other personnel could harm our ability to implement our strategic plan, impair our relationships with customers and adversely effect our business, results of operations and growth prospects; (17) the potential increase in reserves and allowance for loan loss as a result of the transition to the current expected credit loss standard (“CECL”) established by the Financial Accounting Standards Board to account for expected credit losses; (18) possible impairment of our goodwill and other intangible assets; (19) possible adjustment of the valuation of our deferred tax assets; (20) expected cost savings in connection with the consolidation of recent acquisitions may not be fully realized or realized within the expected time frames, deposit attrition, customer loss; (21) our ability to keep pace with technological changes, including our ability to identify and address cyber-security risks such as data security breaches, “denial of service” attacks, “hacking” and identity theft; (22) inability of our framework to manage risks associated with our business, including operational risk and credit risk; (23) risks of loss of funding of Small Business Administration or SBA loan programs, or changes in those programs; (24) compliance with governmental and regulatory requirements, including the Dodd-Frank Act and others relating to banking, consumer protection, securities , accounting and tax matters; (25) significant changes in applicable laws and regulations, including those concerning taxes, banking and securities; (26) effect of changes in accounting policies and practices, as may be adopted by the regulatory agencies, as well as the Public Company Accounting Oversight Board, the Financial Accounting Standards Board and other accounting standard setters; (27) costs and effects of legal and regulatory developments, including resolution of legal proceedings or regulatory or other governmental inquiries, and the results of regulatory examinations or reviews; (28) availability of and competition for acquisition opportunities; (29) risks resulting from domestic terrorism; (30) risks of natural disasters (including earthquakes) and other events beyond our control; (31) effect of the recent federal government shutdown on our SBA program; and (32) our success in managing the risks involved in the foregoing factors.

Member FDIC


	For the Quarter Ended:											Percent Change From:						For the Year Ended:
CONSOLIDATED INCOME STATEMENTS	December 31,			September 30,				December 31,				September 30,			December 31,			December 31,			December 31,				Percent
(in $000’s, unaudited)	2018			2018				2017				2018			2017			2018			2017				Change
Interest income	$	35,378		$	34,610			$	28,152			2		%	26		%	$	129,845		$	106,911			21		%
Interest expense		2,318			2,159				1,708			7		%	36		%		7,822			5,387			45		%
Net interest income before provision
for loan losses		33,060			32,451				26,444			2		%	25		%		122,023			101,524			20		%
Provision (credit) for loan losses		142			(425	)			(291	)		133		%	149		%		7,421			99			7396		%
Net interest income after provision
for loan losses		32,918			32,876				26,735			0		%	23		%		114,602			101,425			13		%
Noninterest income:
Service charges and fees on deposit accounts		1,132			1,107				821			2		%	38		%		4,113			3,231			27		%
Increase in cash surrender value of
life insurance		229			216				407			6		%	(44	)	%		1,045			1,666			(37	)	%
Servicing income		176			163				237			8		%	(26	)	%		709			973			(27	)	%
Gain on sales of SBA loans		147			236				473			(38	)	%	(69	)	%		698			1,108			(37	)	%
Gain (loss) on sales of securities		—			—				—			N/A			N/A				266			(6	)		4533		%
Other		709			484				626			46		%	13		%		2,743			2,640			4		%
Total noninterest income		2,393			2,206				2,564			8		%	(7	)	%		9,574			9,612			0		%
Noninterest expense:
Salaries and employee benefits		9,699			10,719				9,263			(10	)	%	5		%		45,001			37,029			22		%
Occupancy and equipment		1,484			1,559				1,152			(5	)	%	29		%		5,411			4,578			18		%
Professional fees		853			721				543			18		%	57		%		1,969			2,982			(34	)	%
Other		4,905			4,729				4,364			4		%	12		%		23,140			16,149			43		%
Total noninterest expense		16,941			17,728				15,322			(4	)	%	11		%		75,521			60,738			24		%
Income before income taxes		18,370			17,354				13,977			6		%	31		%		48,655			50,299			(3	)	%
Income tax expense		5,138			4,979				12,719			3		%	(60	)	%		13,324			26,471			(50	)	%
Net income	$	13,232		$	12,375			$	1,258			7		%	952		%	$	35,331		$	23,828			48		%

PER COMMON SHARE DATA
(unaudited)
Basic earnings per share	$	0.31		$	0.29			$	0.03			7		%	933		%	$	0.85		$	0.63			35		%
Diluted earnings per share	$	0.30		$	0.28			$	0.03			7		%	900		%	$	0.84		$	0.62			35		%
Weighted average shares outstanding – basic		43,079,470			43,230,016				38,200,325			0		%	13		%		41,469,211			38,095,250			9		%
Weighted average shares outstanding – diluted		43,691,222			43,731,370				38,742,454			0		%	13		%		42,182,939			38,610,815			9		%
Common shares outstanding at period-end		43,288,750			43,271,676				38,200,883			0		%	13		%		43,288,750			38,200,883			13		%
Dividend per share	$	0.11		$	0.11			$	0.10			0		%	10		%	$	0.44		$	0.40			10		%
Book value per share	$	8.49		$	8.17			$	7.10			4		%	20		%	$	8.49		$	7.10			20		%
Tangible book value per share	$	6.28		$	5.94			$	5.76			6		%	9		%	$	6.28		$	5.76			9		%

KEY FINANCIAL RATIOS
(unaudited)
Annualized return on average equity		14.68	%		14.03		%		1.80		%	5		%	716		%		10.79	%		8.86		%	22		%
Annualized return on average tangible equity		20.08	%		19.36		%		2.21		%	4		%	809		%		14.41	%		10.98		%	31		%
Annualized return on average assets		1.64	%		1.54		%		0.17		%	6		%	865		%		1.16	%		0.86		%	35		%
Annualized return on average tangible assets		1.69	%		1.59		%		0.17		%	6		%	894		%		1.19	%		0.88		%	35		%
Net interest margin (fully tax equivalent)		4.42	%		4.36		%		3.87		%	1		%	14		%		4.31	%		3.99		%	8		%
Efficiency ratio		47.78	%		51.15		%		52.82		%	(7	)	%	(10	)	%		57.39	%		54.65		%	5		%

AVERAGE BALANCES
(in $000’s, unaudited)
Average assets	$	3,208,177		$	3,193,139			$	2,925,001			0		%	10		%	$	3,055,636		$	2,755,618			11		%
Average tangible assets	$	3,112,065		$	3,096,703			$	2,873,576			0		%	8		%	$	2,973,238		$	2,703,686			10		%
Average earning assets	$	2,980,207		$	2,965,926			$	2,743,706			0		%	9		%	$	2,844,350		$	2,575,869			10		%
Average loans held-for-sale	$	5,435		$	7,076			$	4,030			(23	)	%	35		%	$	4,084		$	4,634			(12	)	%
Average total loans	$	1,868,186		$	1,911,715			$	1,558,976			(2	)	%	20		%	$	1,796,931		$	1,527,288			18		%
Average deposits	$	2,752,120		$	2,749,026			$	2,550,500			0		%	8		%	$	2,633,287		$	2,405,717			9		%
Average demand deposits – noninterest-bearing	$	1,107,813		$	1,071,638			$	1,002,808			3		%	10		%	$	1,029,860		$	944,275			9		%
Average interest-bearing deposits	$	1,644,307		$	1,677,388			$	1,547,692			(2	)	%	6		%	$	1,603,427		$	1,461,442			10		%
Average interest-bearing liabilities	$	1,683,790		$	1,716,813			$	1,586,940			(2	)	%	6		%	$	1,642,803		$	1,484,783			11		%
Average equity	$	357,505		$	349,971			$	277,535			2		%	29		%	$	327,557		$	268,890			22		%
Average tangible equity	$	261,393		$	253,535			$	226,110			3		%	16		%	$	245,159		$	216,958			13		%


	For the Quarter Ended:
CONSOLIDATED INCOME STATEMENTS	December 31,			September 30,				June 30,				March 31,			December 31,
(in $000’s, unaudited)	2018			2018				2018				2018			2017
Interest income	$	35,378		$	34,610			$	31,980			$	27,877		$	28,152
Interest expense		2,318			2,159				1,816				1,529			1,708
Net interest income before provision
for loan losses		33,060			32,451				30,164				26,348			26,444
Provision (credit) for loan losses		142			(425	)			7,198				506			(291	)
Net interest income after provision
for loan losses		32,918			32,876				22,966				25,842			26,735
Noninterest income:
Service charges and fees on deposit accounts		1,132			1,107				972				902			821
Increase in cash surrender value of
life insurance		229			216				237				363			407
Servicing income		176			163				189				181			237
Gain on sales of SBA loans		147			236				80				235			473
Gain (loss) on sales of securities		—			—				179				87			—
Other		709			484				1,123				427			626
Total noninterest income		2,393			2,206				2,780				2,195			2,564
Noninterest expense:
Salaries and employee benefits		9,699			10,719				14,806				9,777			9,263
Occupancy and equipment		1,484			1,559				1,262				1,106			1,152
Professional fees		853			721				(289	)			684			543
Other		4,905			4,729				9,083				4,423			4,364
Total noninterest expense		16,941			17,728				24,862				15,990			15,322
Income before income taxes		18,370			17,354				884				12,047			13,977
Income tax expense (benefit)		5,138			4,979				(31	)			3,238			12,719
Net income	$	13,232		$	12,375			$	915			$	8,809		$	1,258

PER COMMON SHARE DATA
(unaudited)
Basic earnings per share	$	0.31		$	0.29			$	0.02			$	0.23		$	0.03
Diluted earnings per share	$	0.30		$	0.28			$	0.02			$	0.23		$	0.03
Weighted average shares outstanding – basic		43,079,470			43,230,016				41,925,616				38,240,495			38,200,325
Weighted average shares outstanding – diluted		43,691,222			43,731,370				42,508,674				38,814,722			38,742,454
Common shares outstanding at period-end		43,288,750			43,271,676				43,222,184				38,269,789			38,200,883
Dividend per share	$	0.11		$	0.11			$	0.11			$	0.11		$	0.10
Book value per share	$	8.49		$	8.17			$	8.01			$	7.08		$	7.10
Tangible book value per share	$	6.28		$	5.94			$	5.77			$	5.75		$	5.76

KEY FINANCIAL RATIOS
(unaudited)
Annualized return on average equity		14.68	%		14.03		%		1.11		%		13.22	%		1.80		%
Annualized return on average tangible equity		20.08	%		19.36		%		1.49		%		16.30	%		2.21		%
Annualized return on average assets		1.64	%		1.54		%		0.12		%		1.29	%		0.17		%
Annualized return on average tangible assets		1.69	%		1.59		%		0.12		%		1.31	%		0.17		%
Net interest margin (fully tax equivalent)		4.42	%		4.36		%		4.30		%		4.13	%		3.87		%
Efficiency ratio		47.78	%		51.15		%		75.47		%		56.02	%		52.82		%

AVERAGE BALANCES
(in $000’s, unaudited)
Average assets	$	3,208,177		$	3,193,139			$	3,046,566			$	2,768,318		$	2,925,001
Average tangible assets	$	3,112,065		$	3,096,703			$	2,961,335			$	2,717,152		$	2,873,576
Average earning assets	$	2,980,207		$	2,965,926			$	2,826,786			$	2,598,954		$	2,743,706
Average loans held-for-sale	$	5,435		$	7,076			$	3,410			$	3,246		$	4,030
Average total loans	$	1,868,186		$	1,911,715			$	1,835,001			$	1,565,343		$	1,558,976
Average deposits	$	2,752,120		$	2,749,026			$	2,622,580			$	2,404,327		$	2,550,500
Average demand deposits – noninterest-bearing	$	1,107,813		$	1,071,638			$	991,902			$	945,848		$	1,002,808
Average interest-bearing deposits	$	1,644,307		$	1,677,388			$	1,630,678			$	1,458,479		$	1,547,692
Average interest-bearing liabilities	$	1,683,790		$	1,716,813			$	1,670,033			$	1,497,717		$	1,586,940
Average equity	$	357,505		$	349,971			$	331,210			$	270,339		$	277,535
Average tangible equity	$	261,393		$	253,535			$	245,979			$	219,173		$	226,110


	End of Period:									Percent Change From:
CONSOLIDATED BALANCE SHEETS	December 31,			September 30,			December 31,			September 30,			December 31,
(in $000’s, unaudited)	2018			2018			2017			2018			2017
ASSETS
Cash and due from banks	$	30,273		$	40,831		$	31,681		(26	)	%	(4	)	%
Other investments and interest-bearing deposits
in other financial institutions		134,295			340,198			284,541		(61	)	%	(53	)	%
Securities available-for-sale, at fair value		459,043			319,071			391,852		44		%	17		%
Securities held-to-maturity, at amortized cost		377,198			375,732			398,341		0		%	(5	)	%
Loans held-for-sale – SBA, including deferred costs		2,649			6,344			3,419		(58	)	%	(23	)	%
Loans:
Commercial		597,763			600,594			573,296		0		%	4		%
Real estate:
CRE		994,067			988,491			772,867		1		%	29		%
Land and construction		122,358			131,548			100,882		(7	)	%	21		%
Home equity		109,112			116,657			79,176		(6	)	%	38		%
Residential mortgages		50,979			52,441			44,561		(3	)	%	14		%
Consumer		12,453			9,932			12,395		25		%	0		%
Loans		1,886,732			1,899,663			1,583,177		(1	)	%	19		%
Deferred loan fees, net		(327	)		(276	)		(510	)	18		%	(36	)	%
Total loans, net of deferred fees		1,886,405			1,899,387			1,582,667		(1	)	%	19		%
Allowance for loan losses		(27,848	)		(27,426	)		(19,658	)	2		%	42		%
Loans, net		1,858,557			1,871,961			1,563,009		(1	)	%	19		%
Company-owned life insurance		61,859			61,630			60,814		0		%	2		%
Premises and equipment, net		7,137			7,246			7,353		(2	)	%	(3	)	%
Goodwill		83,753			83,752			45,664		0		%	83		%
Other intangible assets		12,007			12,614			5,589		(5	)	%	115		%
Accrued interest receivable and other assets		69,791			73,531			51,189		(5	)	%	36		%
Total assets	$	3,096,562		$	3,192,910		$	2,843,452		(3	)	%	9		%

LIABILITIES AND SHAREHOLDERS’ EQUITY
Liabilities:
Deposits:
Demand, noninterest-bearing	$	1,021,582		$	1,081,846		$	989,753		(6	)	%	3		%
Demand, interest-bearing		702,000			670,624			601,929		5		%	17		%
Savings and money market		754,277			828,297			684,131		(9	)	%	10		%
Time deposits-under $250		58,661			68,194			51,710		(14	)	%	13		%
Time deposits-$250 and over		86,114			84,763			138,634		2		%	(38	)	%
CDARS – money market and time deposits		14,898			11,575			16,832		29		%	(11	)	%
Total deposits		2,637,532			2,745,299			2,482,989		(4	)	%	6		%
Subordinated debt, net of issuance costs		39,369			39,322			39,183		0		%	0		%
Accrued interest payable and other liabilities		52,195			54,723			50,041		(5	)	%	4		%
Total liabilities		2,729,096			2,839,344			2,572,213		(4	)	%	6		%

Shareholders’ Equity:
Common stock		300,844			300,208			218,355		0		%	38		%
Retained earnings		79,003			70,531			62,136		12		%	27		%
Accumulated other comprehensive loss		(12,381	)		(17,173	)		(9,252	)	28		%	(34	)	%
Total Shareholders’ Equity		367,466			353,566			271,239		4		%	35		%
Total liabilities and shareholders’ equity	$	3,096,562		$	3,192,910		$	2,843,452		(3	)	%	9		%


	End of Period:
CONSOLIDATED BALANCE SHEETS	December 31,			September 30,			June 30,			March 31,			December 31,
(in $000’s, unaudited)	2018			2018			2018			2018			2017
ASSETS
Cash and due from banks	$	30,273		$	40,831		$	46,340		$	30,454		$	31,681
Other investments and interest-bearing deposits
in other financial institutions		134,295			340,198			177,448			271,535			284,541
Securities available-for-sale, at fair value		459,043			319,071			335,923			344,766			391,852
Securities held-to-maturity, at amortized cost		377,198			375,732			388,603			395,274			398,341
Loans held-for-sale – SBA, including deferred costs		2,649			6,344			5,745			2,859			3,419
Loans:
Commercial		597,763			600,594			609,468			572,790			573,296
Real estate:
CRE		994,067			988,491			1,030,884			775,547			772,867
Land and construction		122,358			131,548			128,891			113,470			100,882
Home equity		109,112			116,657			121,278			76,087			79,176
Residential mortgages		50,979			52,441			54,367			42,868			44,561
Consumer		12,453			9,932			12,060			10,958			12,395
Loans		1,886,732			1,899,663			1,956,948			1,591,720			1,583,177
Deferred loan fees, net		(327	)		(276	)		(315	)		(519	)		(510	)
Total loans, net of deferred fees		1,886,405			1,899,387			1,956,633			1,591,201			1,582,667
Allowance for loan losses		(27,848	)		(27,426	)		(26,664	)		(20,139	)		(19,658	)
Loans, net		1,858,557			1,871,961			1,929,969			1,571,062			1,563,009
Company-owned life insurance		61,859			61,630			61,414			61,177			60,814
Premises and equipment, net		7,137			7,246			7,355			7,203			7,353
Goodwill		83,753			83,752			84,417			45,664			45,664
Other intangible assets		12,007			12,614			12,293			5,348			5,589
Accrued interest receivable and other assets		69,791			73,531			73,700			50,206			51,189
Total assets	$	3,096,562		$	3,192,910		$	3,123,207		$	2,785,548		$	2,843,452

LIABILITIES AND SHAREHOLDERS’ EQUITY
Liabilities:
Deposits:
Demand, noninterest-bearing	$	1,021,582		$	1,081,846		$	1,002,053		$	975,846		$	989,753
Demand, interest-bearing		702,000			670,624			683,805			621,402			601,929
Savings and money market		754,277			828,297			827,304			688,217			684,131
Time deposits-under $250		58,661			68,194			72,030			49,861			51,710
Time deposits-$250 and over		86,114			84,763			81,379			71,446			138,634
CDARS – money market and time deposits		14,898			11,575			17,048			15,420			16,832
Total deposits		2,637,532			2,745,299			2,683,619			2,422,192			2,482,989
Subordinated debt, net of issuance costs		39,369			39,322			39,275			39,229			39,183
Accrued interest payable and other liabilities		52,195			54,723			54,044			53,136			50,041
Total liabilities		2,729,096			2,839,344			2,776,938			2,514,557			2,572,213

Shareholders’ Equity:
Common stock		300,844			300,208			299,224			219,208			218,355
Retained earnings		79,003			70,531			62,911			66,739			62,136
Accumulated other comprehensive loss		(12,381	)		(17,173	)		(15,866	)		(14,956	)		(9,252	)
Total Shareholders’ Equity		367,466			353,566			346,269			270,991			271,239
Total liabilities and shareholders’ equity	$	3,096,562		$	3,192,910		$	3,123,207		$	2,785,548		$	2,843,452


	End of Period:												Percent Change From:
CREDIT QUALITY DATA	December 31,				September 30,				December 31,				September 30,			December 31,
(in $000’s, unaudited)	2018				2018				2017				2018			2017
Nonaccrual loans – held-for-investment	$	13,699			$	23,342			$	2,250			(41	)	%	509		%
Restructured and loans over 90 days past due
and still accruing		1,188				1,373				235			(13	)	%	406		%
Total nonperforming loans		14,887				24,715				2,485			(40	)	%	499		%
Foreclosed assets		—				—				—			N/A			N/A
Total nonperforming assets	$	14,887			$	24,715			$	2,485			(40	)	%	499		%
Other restructured loans still accruing	$	253			$	334			$	289			(24	)	%	(12	)	%
Net charge-offs (recoveries) during the quarter	$	(280	)		$	(1,187	)		$	(201	)		76		%	(39	)	%
Provision (credit) for loan losses during the quarter	$	142			$	(425	)		$	(291	)		133		%	149		%
Allowance for loan losses	$	27,848			$	27,426			$	19,658			2		%	42		%
Classified assets	$	23,409			$	30,546			$	25,072			(23	)	%	(7	)	%
Allowance for loan losses to total loans		1.48		%		1.44		%		1.24		%	3		%	19		%
Allowance for loan losses to total nonperforming loans		187.06		%		110.97		%		791.07		%	69		%	(76	)	%
Nonperforming assets to total assets		0.48		%		0.77		%		0.09		%	(38	)	%	433		%
Nonperforming loans to total loans		0.79		%		1.30		%		0.16		%	(39	)	%	394		%
Classified assets to Heritage Commerce Corp
Tier 1 capital plus allowance for loan losses		8		%		10		%		10		%	(20	)	%	(20	)	%
Classified assets to Heritage Bank of Commerce
Tier 1capital plus allowance for loan losses		7		%		10		%		10		%	(30	)	%	(30	)	%

OTHER PERIOD-END STATISTICS
(in $000’s, unaudited)
Heritage Commerce Corp:
Tangible common equity ⁽¹⁾	$	271,706			$	257,200			$	219,986			6		%	24		%
Shareholders’ equity / total assets		11.87		%		11.07		%		9.54		%	7		%	24		%
Tangible common equity / tangible assets ⁽²⁾		9.05		%		8.31		%		7.88		%	9		%	15		%
Loan to deposit ratio		71.52		%		69.19		%		63.74		%	3		%	12		%
Noninterest-bearing deposits / total deposits		38.73		%		39.41		%		39.86		%	(2	)	%	(3	)	%
Total risk-based capital ratio		15.0		%		14.4		%		14.4		%	4		%	4		%
Tier 1 risk-based capital ratio		12.0		%		11.5		%		11.4		%	4		%	5		%
Common Equity Tier 1 risk-based capital ratio		12.0		%		11.5		%		11.4		%	4		%	6		%
Leverage ratio		8.9		%		8.6		%		8.0		%	3		%	11		%
Heritage Bank of Commerce:
Total risk-based capital ratio		14.0		%		13.4		%		13.2		%	4		%	6		%
Tier 1 risk-based capital ratio		12.8		%		12.2		%		12.2		%	5		%	5		%
Common Equity Tier 1 risk-based capital ratio		12.8		%		12.2		%		12.2		%	5		%	5		%
Leverage ratio		9.4		%		9.1		%		8.5		%	3		%	11		%

_______________________

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

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


	End of Period:
CREDIT QUALITY DATA	December 31,				September 30,				June 30,			March 31,			December 31,
(in $000’s, unaudited)	2018				2018				2018			2018			2017
Nonaccrual loans – held-for-investment	$	13,699			$	23,342			$	26,034		$	3,637		$	2,250
Restructured and loans over 90 days past due
and still accruing		1,188				1,373				511			158			235
Total nonperforming loans		14,887				24,715				26,545			3,795			2,485
Foreclosed assets		—				—				—			—			—
Total nonperforming assets	$	14,887			$	24,715			$	26,545		$	3,795		$	2,485
Other restructured loans still accruing	$	253			$	334			$	265		$	241		$	289
Net charge-offs (recoveries) during the quarter	$	(280	)		$	(1,187	)		$	673		$	25		$	(201	)
Provision (credit) for loan losses during the quarter	$	142			$	(425	)		$	7,198		$	506		$	(291	)
Allowance for loan losses	$	27,848			$	27,426			$	26,664		$	20,139		$	19,658
Classified assets	$	23,409			$	30,546			$	32,264		$	30,763		$	25,072
Allowance for loan losses to total loans		1.48		%		1.44		%		1.36	%		1.27	%		1.24		%
Allowance for loan losses to total nonperforming loans		187.06		%		110.97		%		100.45	%		530.67	%		791.07		%
Nonperforming assets to total assets		0.48		%		0.77		%		0.85	%		0.14	%		0.09		%
Nonperforming loans to total loans		0.79		%		1.30		%		1.36	%		0.24	%		0.16		%
Classified assets to Heritage Commerce Corp
Tier 1 capital plus allowance for loan losses		8		%		10		%		11	%		12	%		10		%
Classified assets to Heritage Bank of Commerce
Tier 1capital plus allowance for loan losses		7		%		10		%		11	%		11	%		10		%

OTHER PERIOD-END STATISTICS
(in $000’s, unaudited)
Heritage Commerce Corp:
Tangible common equity ⁽¹⁾	$	271,706			$	257,200			$	249,559		$	219,979		$	219,986
Shareholders’ equity / total assets		11.87		%		11.07		%		11.09	%		9.73	%		9.54		%
Tangible common equity / tangible assets ⁽²⁾		9.05		%		8.31		%		8.25	%		8.04	%		7.88		%
Loan to deposit ratio		71.52		%		69.19		%		72.91	%		65.69	%		63.74		%
Noninterest-bearing deposits / total deposits		38.73		%		39.41		%		37.34	%		40.29	%		39.86		%
Total risk-based capital ratio		15.0		%		14.4		%		13.5	%		14.7	%		14.4		%
Tier 1 risk-based capital ratio		12.0		%		11.5		%		10.7	%		11.7	%		11.4		%
Common Equity Tier 1 risk-based capital ratio		12.0		%		11.5		%		10.7	%		11.7	%		11.4		%
Leverage ratio		8.9		%		8.6		%		8.7	%		8.6	%		8.0		%
Heritage Bank of Commerce:
Total risk-based capital ratio		14.0		%		13.4		%		12.5	%		13.5	%		13.2		%
Tier 1 risk-based capital ratio		12.8		%		12.2		%		11.4	%		12.5	%		12.2		%
Common Equity Tier 1 risk-based capital ratio		12.8		%		12.2		%		11.4	%		12.5	%		12.2		%
Leverage ratio		9.4		%		9.1		%		9.3	%		9.1	%		8.5		%

_______________________

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

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


	For the Quarter Ended							For the Quarter Ended
	December 31, 2018							December 31, 2017
			Interest			Average				Interest			Average
NET INTEREST INCOME AND NET INTEREST MARGIN	Average		Income/			Yield/		Average		Income/			Yield/
(in $000’s, unaudited)	Balance		Expense			Rate		Balance		Expense			Rate
Assets:
Loans, gross⁽¹⁾⁽²⁾	$	1,873,621	$	28,364		6.01	%	$	1,563,006	$	22,234		5.64	%
Securities – taxable		692,903		4,099		2.35	%		694,061		3,808		2.18	%
Securities – exempt from Federal tax ⁽³⁾		86,597		697		3.19	%		89,082		865		3.85	%
Other investments and interest-bearing deposits
in other financial institutions		327,086		2,365		2.87	%		397,557		1,548		1.54	%
Total interest earning assets⁽³⁾		2,980,207		35,525		4.73	%		2,743,706		28,455		4.11	%
Cash and due from banks		40,963							35,716
Premises and equipment, net		7,201							7,470
Goodwill and other intangible assets		96,112							51,425
Other assets		83,694							86,684
Total assets	$	3,208,177						$	2,925,001

Liabilities and shareholders’ equity:
Deposits:
Demand, noninterest-bearing	$	1,107,813						$	1,002,808

Demand, interest-bearing		678,983		566		0.33	%		621,830		328		0.21	%
Savings and money market		802,384		878		0.43	%		715,148		452		0.25	%
Time deposits – under $100		21,787		22		0.40	%		18,745		13		0.28	%
Time deposits – $100 and over		127,911		266		0.83	%		175,416		329		0.74	%
CDARS – money market and time deposits		13,242		2		0.06	%		16,553		2		0.05	%
Total interest-bearing deposits		1,644,307		1,734		0.42	%		1,547,692		1,124		0.29	%
Total deposits		2,752,120		1,734		0.25	%		2,550,500		1,124		0.17	%

Subordinated debt, net of issuance costs		39,341		583		5.88	%		39,153		583		5.91	%
Short-term borrowings		142		1		2.79	%		95		1		4.18	%
Total interest-bearing liabilities		1,683,790		2,318		0.55	%		1,586,940		1,708		0.43	%
Total interest-bearing liabilities and demand,
noninterest-bearing / cost of funds		2,791,603		2,318		0.33	%		2,589,748		1,708		0.26	%
Other liabilities		59,069							57,718
Total liabilities		2,850,672							2,647,466
Shareholders’ equity		357,505							277,535
Total liabilities and shareholders’ equity	$	3,208,177						$	2,925,001

Net interest income ⁽³⁾ / margin				33,207		4.42	%				26,747		3.87	%
Less tax equivalent adjustment⁽³⁾				(147	)						(303	)
Net interest income			$	33,060						$	26,444

_______________________

(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 $53,000 for the fourth quarter of 2018, compared to $162,000 for the fourth quarter of 2017.

(3) Reflects the fully tax equivalent adjustment for Federal tax-exempt income based on a 21% for the fourth quarter of 2018, and a 35% tax rate for the fourth quarter of 2017.


	For the Quarter Ended							For the Quarter Ended
	December 31, 2018							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⁾	$	1,873,621	$	28,364		6.01	%	$	1,918,791	$	28,632		5.92	%
Securities – taxable		692,903		4,099		2.35	%		624,352		3,483		2.21	%
Securities – exempt from Federal tax ⁽³⁾		86,597		697		3.19	%		87,410		702		3.19	%
Other investments and interest-bearing deposits
in other financial institutions		327,086		2,365		2.87	%		335,373		1,940		2.29	%
Total interest earning assets⁽³⁾		2,980,207		35,525		4.73	%		2,965,926		34,757		4.65	%
Cash and due from banks		40,963							40,704
Premises and equipment, net		7,201							7,320
Goodwill and other intangible assets		96,112							96,436
Other assets		83,694							82,753
Total assets	$	3,208,177						$	3,193,139

Liabilities and shareholders’ equity:
Deposits:
Demand, noninterest-bearing	$	1,107,813						$	1,071,638

Demand, interest-bearing		678,983		566		0.33	%		682,694		551		0.32	%
Savings and money market		802,384		878		0.43	%		823,762		761		0.37	%
Time deposits – under $100		21,787		22		0.40	%		23,699		23		0.39	%
Time deposits – $100 and over		127,911		266		0.83	%		131,262		237		0.72	%
CDARS – money market and time deposits		13,242		2		0.06	%		15,971		3		0.07	%
Total interest-bearing deposits		1,644,307		1,734		0.42	%		1,677,388		1,575		0.37	%
Total deposits		2,752,120		1,734		0.25	%		2,749,026		1,575		0.23	%

Subordinated debt, net of issuance costs		39,341		583		5.88	%		39,292		583		5.89	%
Short-term borrowings		142		1		2.79	%		133		1		2.98	%
Total interest-bearing liabilities		1,683,790		2,318		0.55	%		1,716,813		2,159		0.50	%
Total interest-bearing liabilities and demand,
noninterest-bearing / cost of funds		2,791,603		2,318		0.33	%		2,788,451		2,159		0.31	%
Other liabilities		59,069							54,717
Total liabilities		2,850,672							2,843,168
Shareholders’ equity		357,505							349,971
Total liabilities and shareholders’ equity	$	3,208,177						$	3,193,139

Net interest income ⁽³⁾ / margin				33,207		4.42	%				32,598		4.36	%
Less tax equivalent adjustment⁽³⁾				(147	)						(147	)
Net interest income			$	33,060						$	32,451

_______________________

(3) Reflects the fully tax equivalent adjustment for Federal tax-exempt income based on a 21% for the fourth and third quarters of 2018.


	For the Year Ended							For the Year Ended
	December 31, 2018							December 31, 2017
			Interest			Average				Interest			Average
NET INTEREST INCOME AND NET INTEREST MARGIN	Average		Income/			Yield/		Average		Income/			Yield/
(in $000’s, unaudited)	Balance		Expense			Rate		Balance		Expense			Rate
Assets:
Loans, gross⁽¹⁾⁽²⁾	$	1,801,015	$	105,635		5.87	%	$	1,531,922	$	86,346		5.64	%
Securities – taxable		669,994		15,211		2.27	%		636,160		13,724		2.16	%
Securities – exempt from Federal tax ⁽³⁾		87,639		2,817		3.21	%		89,762		3,471		3.87	%
Other investments, interest-bearing deposits in other
financial institutions and Federal funds sold		285,702		6,774		2.37	%		318,025		4,585		1.44	%
Total interest earning assets⁽³⁾		2,844,350		130,437		4.59	%		2,575,869		108,126		4.20	%
Cash and due from banks		38,665							33,542
Premises and equipment, net		7,298							7,553
Goodwill and other intangible assets		82,398							51,932
Other assets		82,925							86,722
Total assets	$	3,055,636						$	2,755,618

Liabilities and shareholders’ equity:
Deposits:
Demand, noninterest-bearing	$	1,029,860						$	944,275

Demand, interest-bearing		658,386		1,885		0.29	%		586,778		1,208		0.21	%
Savings and money market		777,749		2,701		0.35	%		653,636		1,534		0.23	%
Time deposits – under $100		21,375		80		0.37	%		19,789		57		0.29	%
Time deposits – $100 and over		130,548		830		0.64	%		187,298		1,188		0.63	%
CDARS – money market and time deposits		15,369		10		0.07	%		13,941		4		0.03	%
Total interest-bearing deposits		1,603,427		5,506		0.34	%		1,461,442		3,991		0.27	%
Total deposits		2,633,287		5,506		0.21	%		2,405,717		3,991		0.17	%

Subordinated debt, net of issuance costs		39,270		2,314		5.89	%		23,266		1,394		5.99	%
Short-term borrowings		106		2		1.89	%		75		2		2.67	%
Total interest-bearing liabilities		1,642,803		7,822		0.48	%		1,484,783		5,387		0.36	%
Total interest-bearing liabilities and demand,
noninterest-bearing / cost of funds		2,672,663		7,822		0.29	%		2,429,058		5,387		0.22	%
Other liabilities		55,416							57,670
Total liabilities		2,728,079							2,486,728
Shareholders’ equity		327,557							268,890
Total liabilities and shareholders’ equity	$	3,055,636						$	2,755,618

Net interest income ⁽³⁾ / margin				122,615		4.31	%				102,739		3.99	%
Less tax equivalent adjustment⁽³⁾				(592	)						(1,215	)
Net interest income			$	122,023						$	101,524

_______________________

(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 $375,000 for the year ended December 31, 2018, compared to $533,000 for the year ended December 31, 2017.

(3) Reflects the fully tax equivalent adjustment for Federal tax-exempt income based on a 21% for the year ended December 31, 2018, and a 35% tax rate for the year ended December 31, 2017.

Contact:
Debbie Reuter
EVP Corporate Secretary
408.494.4542

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